Alpha POWER Shares (Lions) Portfolio - January 2009
Lion Comments on Major Out-performers
Sime Darby – Sime (+5.77%)
Sime Darby outperformed on the back of rising palm oil prices in January. Palm oil prices bottomed in Nov 08 and in recent weeks have risen on tightening supply of competing oils (especially soybeans) due to dry weather in South America and restocking by China. Apart from its palm oil business, Sime has recently been in the news regarding a proposed low cost carrier terminal (RM$2 billion) tie-up with AirAsia. Sime Darby has also indicated plans to invest RM$1.2 billion over the next two years in a project to supply groundwater from Perak to the Klang Valley. Currently, Sime (through a 75% joint venture with the Perak State government) has an agreement to explore the sustainable utilization of groundwater resources in the Batang Padang district and to build a pilot project. Sime is still in the midst of negotiations with the federal and state government authorities on this project.
HongKong Electric – HKE (+5.06%)
HKE announced its intention to acquire Cheung Kong Infrastructure’s (CKI) 45% interest in three power plants in Guangdong and Jilin for a cash consideration of HK$5.68 billion in early February. This transaction markets HKE’s first major investment in China and is expected to boost its FY09-10F earnings by 12-14%. HKE will receive a profit guarantee from CKI of HK$740.4 million for the first year. The generating capacity of the three power plants is Zhuhai (1,400 MW), Jinwan (1,200 MW) and Siping (200 MW). Upon completion of the transaction, HKE’s total generating capacity
will increase to 8,457 MW. The sale price implies a 1.8x P/B and a 8.3x recurrent P/E. This compares favourably with HKE’s P/E of 15.2x and is below market expectations of HK$6 – 9 billion. As of June 2008, HKE has a cash position of HK$12.8 billion. We expect to see more M&A activities for HKE as the company seeks overseas investment opportunities. HKE offers relative out-performance due to its defensive earnings quality.
KT&G Corp. – KT&G (+4.93%)
KT&G has defensive earnings and a growing export business that works as a natural hedge against a declining won. KT&G reported very strong 4Q08 results, with net profit rising 82% YoY and revenues up 17% YoY on strong export sales. Management is guiding for a decline of 9% in net profit in 2009 on the assumption that the won will appreciate. Operating margins are expected to remain stable in the core cigarette business, supported by higher margins on exports, rise in average selling prices and shift in leaf mix. The company’s stable balance sheet and ability to sustain dividend payouts make it attractive as a long term investment. Tax hikes may be a concern in 2009. The last tax increase was in early 2005 and another tax hike widely expected by the industry in 2008. In the end, the tobacco tax and duty was capped in 2008 due to inflation concerns.
Lion Comments on Major Under-performers
Taiwan Semiconductor Manufacturing – TSMC (-9.46%)
TSMC underperformed on the back of 1Q09 guidance for a 50% QoQ revenue drop, which was worse than market expectations. In an earlier forecast, management guided for mid-to-high single-digit decline for the industry in 2009. Management now believes that the global semiconductor industry will decline by 30% YoY in 2009. TSMC reported poor 4Q08 results with revenue at NT$64.6 bn and net income at NT$12.5 billion, down 32.9% QoQ and 63.9% YoY. Gross margin slid to 31.3% in 4Q08 from 46.3% in 3Q08 due to lower wafer loading. Among the three main application segments, the consumer segment experienced the sharpest decline, down 39% QoQ due to end of the peak season and weaker consumer spending. TSMC reported sales in January of NT$13.1 billion, down 9% MoM and 58% YoY. This was better than market expectations. Capacity utilization should hit trough levels in 1Q09. Although order visibility is still low, TSMC dominance is expected to increase in the coming years as weaker competitors fail to invest for the next cycle.
Singapore Press Holding – SPH (-9.65%)
SPH surprised the market when it announced 1Q09 net profits of S$73 million, down 36.1% YoY due mainly to marked-to-market loss from investments of S$34 million. Stripping out the investment losses, recurring profits rose 1% YoY to S$128 million. Newspaper and magazine revenues declined 4.6% YoY to S$249 million due to a 7.3% fall in print ad revenue, corresponding to a weak recruitment ad market. Group operating revenue grew 9% YoY to S$340.2 million, due mainly to contributions from an 86.3% rise in property recognition which made up for the decline in newspaper and magazine revenues. SPH remains attractive with a prospective 7.5% yield. SPH is still in a healthy position to return excess cash to shareholders given that its core business remains robust.
Hongkong Land Holdings Ltd – HKL (-13.71%)
HKL share price has underperformed due to worsening office market outlook arising from the global financial crisis. HKL’s Central office portfolio vacancy rate is currently at 2%. However, given sluggish demand from financial and banking institutions due to retrenchments, HKL office vacancy rates are expected to rise going forward. According to property agency DTZ, prime office rents in
the Central and Admiralty districts fell 14% QoQ in 4Q08. Fortunately, no new office building is expected to be completed in Central before 2011. Despite deteriorating outlook for its core business, net profits should benefit from the recognition of substantial development profits from two residential joint ventures in Macau and Singapore. Rental earnings should register slower growth momentum in 2009. HKL is trading at 59% discount to NAV of US$5.45.
13 February 2009
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