OCBC Report - 18 Jan 2008

Bright World: Foundations laid for a bright future

We visited Bright World Precision Machinery (BWPM) new factory recently. According to management, the new plant will lay the foundation for the growth for the next five years. For this year, BWPM believes it is in a sweet spot due to the growing demand for higher tonnage and more sophisticated stamping machines as the Chinese government continues to encourage local companies to upgrade their manufacturing capabilities. However on the operations side, management admits that its biggest challenge is rising raw material prices, which has affected margins slightly in 4Q07, as its next planned hike in ASP is in early 2008. We are leaving our sales forecasts unchanged but will be paring back our earnings estimates for FY07 by 3.9% and FY08 by 3.1% to account for slight margin compression. And to reflect tighter credit conditions in China, our DCF-based fair value also drops slightly from S$0.80 to S$0.76, or an inexpensive 9.4x FY08F PER given the 20% bottom-line growth expected. We retain our BUY rating.

Foundations laid for a bright future. We visited Bright World Precision Machinery (BWPM) recently to have a look at its new factory which is the final stages of installation. When the new factory becomes fully operational by end 1H08, it will add another 100,000 sq metres (sqm) of production floor space, increasing the overall figure to 230,000 sqm. With the new factory’s 160-ton lifting capacity (versus 32 tonnes currently), this should enable BWPM to manufacture higher tonnage stamping machines which typically come with higher margins. According to management, the new plant will lay the foundation for the growth for the next five years.

FY08 outlook remains upbeat. For this year, BWPM believes it is in a sweet spot due to the growing demand for higher tonnage and more sophisticated stamping machines as the Chinese government continues to encourage local companies to upgrade their manufacturing capabilities. And because its products are used across diverse industries, management believes that BWPM has a viable long-term business with high barriers to entry, and should be able to ride out any short-term fluctuations with aplomb. Already, BWPM has started to invest for the future with the construction of another factory for its new cutting and bending machines, which it is already producing in small quantities in its existing factory. As the investment will be for new products, and not existing products, management believes it will not lead to excess capacity.

Raw material prices a bane. However on the operations side, management admits that its biggest challenge is rising raw material prices. Although BWPM already has plans to increase its ASP in early 2008 to help offset higher material costs, there was an unexpected increase of 5-10% in 4Q07 and this has affected margins for the quarter. On the bright side, BWPM notes that the higher raw material prices will affect the weaker competitors more and possibly weed some of them out. This will also present some M&A opportunities for BWMP to acquire technology and skilled labour at a cheap price.

New fair value at S$0.76. We are leaving our sales forecasts unchanged but will be paring back our earnings estimates for FY07 by 3.9% and FY08 by 3.1% to account for slight margin compression. And to reflect tighter credit conditions in China, our DCF-based fair value also drops slightly from S$0.80 to S$0.76, or an inexpensive 9.4x FY08F PER given the 20% bottom-line growth expected. We retain our BUY rating.

Source