GKE Corp Ltd - CIMB Research 2016-07-12: A trip to GKE’s new cement mixing plant

GKE CORPORATION LIMITED 595.SI

GKE Corp Ltd - A trip to GKE’s new cement mixing plant

We visited GKE’s new cement mixing plant in the Wuzhou City on 4-6 July.
Facilitated with easy access to both land and water transport, the plant caters to the growing demand for cement products from the urbanization of the Wuzhou City.
GKE has also taken steps to revamp its core warehousing and logistic business in Singapore, including sale-and-leaseback, divestment and acquisitions.

Management expects positive profit contributions from
1. the cement mixing plant,
2. a new LPG vessel and
3. a newly acquired chemical logistic business, in FY5/17

We visited GKE’s new automated cement mixing plant in Wuzhou, Guangxi, China on 4- 6 July. The cement mixing plant is a strategic investment that GKE entered into as early as 2013. The phase I construction (two production lines, a total production capacity of 800,000 cubic metres per annum) was completed in late 2015. GKE has obtained the license for commercial run in May 2016.

The plant is geared to the continued urbanization of Wuzhou. According to Wuzhou Bulk Cement Office and Housing and Construction Committee, the city’s demand for cement products would reach 5,000,000 cubic metres in 2016, compared to the city’s total production capacity of 4,500,000 cubic metres in 2015. Hence, GKE’s new plant would help match the supply with Wuzhou’s fast-growing demand for cement products.

Sited at the outer rim of Wuzhou, GKE’s plant has not only easy access to transport but also close proximity to sources of raw materials. Due to the short time span (in hours) between mixing and solidification, premix cement products can only be employed by projects within limited travelling time from the plant; hence the easy transportation has effectively increased the supply radiance of the plant. In addition, the close proximity to sources of raw materials would reduce the production cost.

Through sale and leaseback of its 30 Pioneer Road property, GKE has recycled S$45m capital (with a S$12.7m net gain), which would be deployed into the redevelopment of its 39 Benoi Road property; once completed (due in late 2017), the storage space at 39 Benoi Road’s would double to 400k sqft.
GKE’s recent acquisition of Marquis Services (a chemical warehouse operator) is immediately earnings-accretive and GKE continues to seek to divest its 49% stake in GKE metal logistics to free up resources.

Besides the new cement mixing plant, management expects GKE’s strategic investment in the liquefied petroleum gas (LPG) vessel to also deliver positive earnings in FY5/17.
Held by a 50%-JV, the LPG vessel has entered into a chartering contract of six months (with an option of another six months), with a daily gross rate of US$33k/day.

GKE currently trades at 0.77x trailing P/BV (0.75 s.d. below its historical mean), vs peers averaging at 1.22x.
With core net loss narrowed to S$1.9m in 9M16 (9M15: S$2.6m loss), management is hopeful of a turnaround of GKE into core profitability in FY5/17.

Roy CHEN CFA CIMB Securities | William TNG CFA CIMB Securities | http://research.itradecimb.com/ 2016-07-12

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