Saturday, September 7, 2013

Small caps: OSIM, Midas, Eu Yan Sang among OSK-DMG’s top 30 picks for 2013

Small caps: OSIM, Midas, Eu Yan Sang among OSK-DMG’s top 30 picks for 2013

Written by Frankie Ho  
Monday, 19 August 2013 20:36
One thing that Terence Wong claims he developed over the years as an equity analyst is an ability to detect — or “smell”, as he puts it — if a company is good or bad the moment he comes into contact with it. For that, the head of research at OSK-DMG has Singapore’s former “IPO King” to thank.

“In the year 2000, Choo Chee Kong said something to me that left an indelible mark in my memory. He told me ‘Terence, I walk into a room, I smell and I’d know whether it’s a good company or not.’ I was thinking ‘This guy is a bit hao lian [proud in Hokkien]. I was wondering how can this be possible?’ But having been in the industry for 14 years, seeing some 400 listed companies, having had a lot of hard knocks and painful lessons, I now think it is possible. In fact, I think I have inherited the sense of smell from him.”

This knack for picking out the good from the bad has mostly served Wong well. For one thing, a list of 30 small-cap Singapore stocks compiled by OSK-DMG last year delivered a value-weighted average return of 63% in the 15 months ended April 2013, with 22 of those stocks in the black. The top performers were Super Group, Ezion Holdings, Silverlake Axis, Petra Foods and OSIM International.

While clearly pleased with the performance, Wong turns apologetic for some of the counters that failed to deliver. Among them, Leader Environmental Technologies stood out. “I screwed up. I screwed up not only one year but two years in a row. In 2011, when I promoted the stock, it was trading at 25 cents. Last year, when I looked at its book, it was 14 cents a share. I went ‘Oh my gosh. 14 cents is a buy.’

“The company is involved in the environmental sector in the second most polluted region in China, which is the most polluted country in the world. How wrong can you go? Very wrong, apparently. People were pulling out orders. It was a very, very painful experience for me.” Shares of Leader Environmental have been trading at seven to 10 cents this year. Its book value at end-June was about 15 cents a share.

Undeterred by the experience, Wong and his team have just put together a new line-up of 30 small-cap stocks that they think will do well in the quarters ahead. This is the third compilation of their top 30 picks since 2011. They include companies that have consistently done well over the past few years (OSIM and Ezion), turnaround plays (Midas Holdings and Eu Yan Sang), established players in their own fields but not covered by any analysts (Sinarmas Land), and yield plays (UMS Holdings).

In terms of sectors, oil and gas, construction, and consumer feature prominently, with five to six companies from each sector making the list. Overall, about half of the counters are new entries. OSK-DMG has no rating on five of the companies — Mencast Holdings, Pan-United Corp, Sinarmas Land, Tiong Woon Corp and Yongnam Holdings. Ezion, which is on the list for the third year, is the biggest of the 30 by market value, at about $2.3 billion. BBR Holdings is at the opposite end, with a market cap of about $80 million.

OSIM, another repeat entry, should continue to shine even after a strong run-up in the last couple of years, according to Wong. “Some people say ‘Nobody goes to their shops. How can they make money?’ But OSIM has managed its expenses so well that as long as they sell one massage chair a day per store, they will make money, and these guys have been doing it.”

In particular, sales in the China market are expected to continue increasing, he adds. “[OSIM CEO] Ron Sim believes so much in brands. He is bringing TWG Tea to China. That’s why he set up a very posh outlet in IFC Mall [in Hong Kong], which is a springboard for OSIM to China. I think that’s going to yield dividends for the company.” OSIM owns 45% of TWG. (See table for OSK-DMG’s top 30 picks.)

As for stocks with a recovery theme, Wong tips Eu Yan Sang as one to watch. A company in Australia it invested in two years ago ran into cash-flow problems and eventually came under receivership. Eu Yan Sang took it over but has lost more than $8 million trying to turn the business around. As part of efforts to get it back on its feet, the traditional Chinese medicine maker expects to run more outlets on its own in Australia than award franchises to third parties. Of its 82 stores Down Under, 51 are run by franchisees.

Eu Yan Sang’s chief financial officer Lam Chee Weng expects the Australian operation to break even in 2015. In the meantime, the group is looking to boost sales by introducing products with some elements of Western medicine. “The first wave of TCM products with an infusion of Western medicine will be introduced by early next year. At the same time, we will introduce some of the products we already have in Australia to markets in Singapore, Malaysia and Hong Kong,” Lam says.

Another recovery play OSK-DMG recommends is Midas Holdings. Its current share price is less than half of its 2010 peak of $1.16, plagued by poor global investor sentiment towards China’s rail sector as a result of fatal train collisions and corruption by senior government officials in recent years. Orders have started to pick up, though, and Midas CEO Patrick Chew is prepping up the company for new avenues of growth.

“We are still very much single-sector-focused, but we have formed a joint venture that manufactures aluminium alloy plates and sheets. We target to supply these products to Indonesia and to the whole transport spectrum, including aviation, automobile, railway and other engineering purposes,” says Chew.

Notably, prospects for the automotive market are promising, he adds. “Right now, cars in China are all made of steel. As part of the government’s initiatives to reduce emission, cars will change to aluminium bodies. This new plant is catered to the entire transportation segment. We do this to mitigate the risk of over-reliance on a single segment.”

Meanwhile, amid growing concerns about the health of China’s financial system, investors need not worry about how the country will fund its massive rail expansion, Chew adds. “We know investors are worried about funding. The former Ministry of Railways had debts of RMB2.8 trillion [$560 billion] on its books. It’s a big sum. We believe the Chinese government may take over all or part of the debt that is carried in the books of China Railway Corp so as to allow them to start from ground zero. CRC may also float its assets to raise funds from the market.” Previously part of the now-defunct Ministry of Railways, CRC is the country’s national railway operator.

Besides Ezion, another one of OSK-DMG’s favourite stocks in the oil and gas space is Nam Cheong, which builds offshore support vessels. “Before I hooked up with Nam Cheong, I had this really, really bad impression of the sector because what they do, to me, is speculative buying,” says Wong. “But after checking out the company, I realised that it’s actually something different. They know their clients so well that they’ve managed to preempt their orders.

“Half of Nam Cheong’s orders come from Petronas. When Petronas requires vessels, they will knock on their door asking if they have any and [Nam Cheong] will go ‘Of course, but I’ll just charge you a higher fee.’ This is what Nam Cheong has been doing and their margins are getting richer.”

Among the non-rated companies in the top- 30 list, Sinarmas Land could be worth watching, according to Wong. With a market value of about $2 billion, the company is the largest Singapore-listed property group that has no analyst coverage.

Sinarmas Land, formerly known as Asia Food & Properties, is a major property developer in Indonesia, which accounts for up to 90% of its revenue. Controlled by the Widjaya family, the company is involved in all segments of real estate — residential, townships, commercial, retail, industrial and hospitality, including golf resorts. The bulk of its assets in Indonesia are held by its 50%-owned Bumi Serpong Damai, which is listed in Jakarta, with a market value equivalent to about $3.5 billion.

Sinarmas Land also owns commercial, residential and hospitality properties in Singapore, Johor, Chengdu and Shenyang in China, as well as London. In Singapore, it owns about 21% of Orchard Towers, a strata-titled commercial building. It attempted to sell its stake in Orchard Towers early this year through a tender, but did not proceed as the bids did not meet its expectations.

“We will try to unlock value when the opportunity comes,” says Robin Ng, executive director at Sinarmas Land. “It’s almost 100% leased at the moment. We enjoy good rental income from Orchard Towers, so we are not in a rush to dispose of it.”

The group also intends to generate more recurring income and expand its presence outside Indonesia. “That means we will look at investment properties in international markets,” says Ng. Property development makes up 80% to 85% of overall revenue at present. The company plans to lower this to 75%, with the rest of its revenue coming from investment properties, he says.

“London isn’t the only location we are looking at. Countries that we think could offer opportunities include Australia and the US,” says Ng. “What’s important is that the property has to generate cash flows and offer a good yield. There must also be good liquidity in the market. That gives us an exit plan if we decide to rebalance our portfolio.” Sinarmas Land is in a net cash position, with $811 million in cash as at end-June.

Publish date: 19/08/13

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