Tuesday, October 8, 2013

Singapore Discovery Series: Tat Hong (CS)

Singapore Discovery Series: Tat Hong
NOT RATED
Management expects regional macro conditions to drive near-term prospects

● We met with management of Tat Hong. Tat Hong mainly focusses on crane rental and distribution in ASEAN, China and Australia. As of June, it operates 677 crawler cranes with a total tonnage of 77,006 tonnes and 65% utilisation rate.

● While management is seeing some demand slowdown in key markets, some one-offs also contributed to the weak results in 1Q14. Australia (46% of revenues) is main source of weakness, but management expects some stabilisation post elections and commencement of some delayed project commitments.


● While Singapore business (23% of revenues) continues to be steady driven mainly by the new MRT line construction projects, the rest of ASEAN is seeing some softness. Malaysia is seeing completion of some major projects, Indonesia is seeing demand softness inline with commodity prices and Thailand is seeing slower demand.

● While overall the management expects revenues to stabilise in the next few quarters, it is focussed on improving cost efficiency and more discipline on capex requirements.

Crane rental business growing steadily
In terms of business activity, there are four key segments:
1. Distribution (43% of revenues) – Tat Hong distributes cranes and other related equipment in ASEAN and Australia – with a small proportion of second hand equipment as well. Tat Hong is the biggest distributor for Hitachi and Sumitomo. Management expects the slowdown in distribution to continue near term due to weak economic growth in Australia/ASEAN and falling commodity prices.

2. Crane rental (37% of revenues) – The strong performance in Singapore (LNG pipeline and MRT downtown line construction projects) and Hong Kong (large infrastructure projects) is being offset by the slowdown in Australia and the rest of ASEAN.

3. General equipment rental (11% of revenues) – Most of the business is in Australia. Axccording to Tat Hong, near-term prospects are expected to be muted in line with the overall macro environment

4. Tower crane rental (9% rental) – The typical price of a tower crane is one-third of that of a crawler crane, but margins are very similar. The main focus is on China, where Tat Hong is the second biggest player in a very fragmented market. Management expects growth momentum to continue in FY14.

Australia prospects key to near-term growth
1. Australia (46% of revenues) – In Tat Hong's view, the impact from overall slowdown was worsened in 1Q14 by the impending elections in September. While the distribution and general equipment hire businesses were affected by demand slowdown, the crane rental business was impacted by relocation of 14 cranes to new projects.

2. Singapore (23% of revenues) – According to the company, demand continues to be strong on the rental business driven by the new MRT line construction projects, but distribution revenues could see some softness on weaker ASEAN demand and overall macro weakness.

3. ASEAN & others (22% of revenues) – In Tat Hong's view, ASEAN ex-Singapore is expected to grow steady but slow – Malaysia is seeing completion of some major projects, Indonesia is seeing demand softness in line with commodity price weakness and Thailand is seeing slower demand.

4. China (9% of revenues) – According to management, demand continues to be strong for tower cranes. Most of the exposure is to power and infrastructure projects, with residential contributing only 10% of the overall business.

Near-term management focus on improving efficiency
1. Management plans to increase focus on cost efficiency and keep capex under control (but cannot avoid the refresh cycle) until there is more clarity on demand pick-up.

2. Management sees some scope for consolidating its investments – release some excess land capacity (could result in some P&L gains and bring down gearing) and invest in new warehousing space.

3. Management continues to be comfortable with the current gearing level of 0.6x. Of the total S$490 mn in bank loans, around S$220 mn are shorter term with tenure of less than one year.



Source/Extract/Excerpts/来源/转贴/摘录: Credit Suisse
Publish date: 26/09/13

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