DBSVickers - 12 Nov 2007

Man Wah Holdings

Good results, but target price cut on proposed rights with warrants issue

Story: Man Wah delivered a stronger than expected set of 1H08 results, as net profit rose 79% y-o-y to HK$87.0m. This was better than our net profit estimate of HK$76.2m in 1H08, which is above street’s projection.

Point: We believe that Man Wah’s quality performance in 1H08 has quashed two lingering concerns: 1) the 3.9ppt y-o-y increase in gross profit margins to its normalised level of 30.4% indicated that cost pressure on treated leather has been relatively muted since 2Q07, and 2) the 137.9% y-o-y 1H08 revenue growth in North America has provided further empirical evidence that the slowing US housing market will not reverse the outsourcing to Asia-based furniture manufacturers like Man Wah, with the latter gaining market share as a cost-efficient and valued-added partner.

Relevance: We have raised our net profit estimates by 3.5% to HK$176.7m in FY08 and 10.5% to HK$243.6m in FY09, to reflect stronger sales projection and margin assumptions in our FY08-10 forecast periods. However, we have cut our target price to S$0.95, using a similar 10x blended FY08/09 PER but adjusting for the maximum potential 25% dilutive effect from the proposed warrant issue.

Global Testing

Growth interrupted by push-outs

Story: Results were slightly below expectations as headline net profit of US$3.8m (+38% q-o-q) was boosted by US$1.1m of other income mainly comprising forex adjustment gain. We were expecting core profit of US$4m on sales of US$17.3m.

Point: Looking forward, business momentum has improved as capacity utilization is rising at the moment on stronger ramp of PC-related chips and the long-awaited commencement of testing for Marvell’s Xscale communication chips. However, management’s guidance of 10-15% q-o-q sales growth in Q4 is still a tad weaker than our expected 20% growth.

Relevance: Notwithstanding our earnings downgrade and lower PEG, stock is inexpensive at only 0.8x P/B and 8.5x FY08 PER. Maintain Buy for mid-term investors with revised target price of S$0.34 based on 1.2x P/B or 12x PER. Near term, we see the definite ramp-up of Xscale or a formal announcement of M&A as being a catalyst for the stock.

Nera Telecom Exciting times     

Story: Subsequent to posting a good set of numbers in 3Q07, we expect a strong 4Q07, benefiting from higher influx of orders secured in the first ten months of the year (estimated S$180m worth of orders).

Point: We have introduced FY09 estimates and revised our FY07 and FY08 earning estimates by 8% and 6% respectively, on the back of higher margin assumptions. Our FY08 forecast could be revised upwards if management continues to execute well.

Relevance: Based on 15x FY08 earnings, our revised one-year target price is S$0.58. We forecast dividend yield of 8% (3 cents) with full-year results and see a potential upside of 50% from the current stock price level.

Bright World (BWPM SP)

Facing higher material cost
Buy S$0.54; Price Target : S$ 0.78 (Prev: S$0.82)

BWPM’s 3Q07 results were largely in line with our expectation. The Group has delivered its sales target of c.30% y-o-y growth, recording RMB167.1m in the quarter.

Bottomline, however, grew at a slower pace. Net earnings rose by a smaller 7% y-o-y to RMB42.8m due to higher steel (+10% y-o-y) and iron prices (+20% y-o-y).

Gross margin improved 1.8ppt q-o-q but declined 4.3ppt y-o-y to 35.8%. The overall 15-20% y-o-y rise in material cost eroded the ASP increase during the quarter and margins.

Looking into 4Q07, the slowdown in earnings growth is likely to extend with continued rising iron and steel. The Group intends to revise its ASP in 4Q07 to pass on part of the additional material cost to customers.