SMC Monthly - DBS Research 2016-07-15: Jul-16 Top Conviction Picks

JAPFA LTD UD2.SI CITYNEON HOLDINGS LIMITED 5HJ.SI MM2 ASIA LTD 43D.SI CHINA AVIATION OIL(S) CORP LTD G92.SI ARA ASSET MANAGEMENT LIMITED D1R.SI

SMC Monthly - Jul-16 Top Conviction Picks

For July, we focus on names with promising company-driven initiatives and/or clear catalysts for growth, and keep most of our picks – ARA Asset Management, Cityneon, Japfa and mm2 Asia.
Our new pick for July, China Aviation Oil, is poised to benefit from the long-term growth of China’s international air travel market given its monopoly in the supply of imported jet fuel in China, and could potentially tap into its strong net cash position of c.US$230m to grow the scale and reach of its business through value-accretive acquisitions.

We believe that ARA is now poised to take the next quantum leap in the fund management business. Following its growth into one of the largest real estate managers in Asia with close to S$30bn in AUM, the manager is seeing opportunities to deploy capital into key cities of Australia, China and Korea.
The group’s focus will be to leverage on the expertise and on- the-ground knowledge of the heads at their various countries of focus. This will enable ARA to tap on any opportunities to acquire assets and also to develop relationships with Capital Partners whom it can work together with to co-invest out of its home country.
ARA-managed REITs have also the debt capacity to acquire given current low gearing levels. Assuming a target gearing level of close to 40%, we estimate that in aggregate, the REITs have a firepower of close to S$5bn.
Our TP of S$1.76 is based on
1. 18x PE multiple on its fee- income business,
2. market value of its stakes in listed REITs, and
3. investments in its private funds.

We like CAO given its unique proposition on two fronts. First, its monopoly in the supply of jet fuel in China should allow the Group to benefit from the long-term growth in the Chinese international air travel market, which in our opinion, carries fairly low risk (owing to the cost-plus pricing model CAO enjoys for its domestic business).
Its domestic scale and strong backing from its parent have also been instrumental in the Group’s ability to secure jet fuel supply contracts outside of China thus far. The Group has successfully increased its total non-PRC supply locations to 41 other international airports, and is expected to increase ahead.
Secondly, we also like CAO for its unique exposure to Shanghai Pudong International Airport through its 33% stake in SPIA, the sole suppier of jet fuel at the airport.
In addition, with net cash of almost US$230m as at 1Q16, we believe that CAO could be on the lookout for acquisitions to further grow the scale and reach of its business and profits.
Our target price of S$1.62 based on 12x FY17F PE, which we believe is reasonable against the projected 15% EPS CAGR over FY15-17F.

Cityneon has evolved to become a creator of innovative and interactive exhibits revolving around Marvel’s The Avengers and Hasbro’s Transformers franchises, with the acquisition of Victory Hill Exhibitions (VHE) in September 2015.
While it will operate its Las Vegas exhibits, VHE primarily develops travelling exhibits which will be operated by local partners, and upfront licensing fees should account for a large portion of VHE’s takings; execution risk is thus minimal, while the business model is scalable. We now expect VHE to have a total of seven sets by end-2017 (from six sets previously) and eight by end-2018; Cityneon earnings are forecasted to ramp up rapidly from ~S$1m in FY15 to S$7.4m and S$19.3m in FY16F and FY17F respectively. Earnings for FY18F have been adjusted by +11%. Further upside could stem from securing a third IP (Star Wars or Jurassic World, for example), which we have not factored into our earnings.
Our revised target price of S$1.20 is pegged to peer average of 15x FY17F earnings, and represents an upside of about 30% over the current share price of S$0.920.

Japfa’s 1Q results were ahead of expectations, contributing to 23% of our full-year target vs its two-year average of 12%.
Its strong performance was largely driven by growth outside Indonesia as the Animal Protein (outside Indonesia) and Dairy segments expanded 8% and 10% y-o-y respectively.
Looking forward, we believe the growth drivers are still intact and forecast a 23% EBITDA CAGR over the next three years – mainly driven by higher dairy volumes as Japfa intends to double its dairy farm production capacity in China by constructing another five farm hubs in Inner Mongolia. While we expect Japfa’s combined regional DOC output to expand less aggressively by 6% CAGR over the same period, given
the curbs on DOC capacity, we think that demand ahead should continue to be driven by population growth and rising per capita income.
While our post-1Q forecasts remain unchanged, we roll forward our earnings base to FY17F, thus raising our SOP- based TP to S$1.10 from S$0.90 previously, and continue to believe that the counter lags its subsidiary’s market value and our assigned value.

As a leading producer of films and TV/online content in Asia, mm2 provides a full suite of services spanning the entire filmmaking process.
Riding on growing demand and support for local production, mm2 will continue to grow its presence in Singapore, Taiwan, and Hong Kong, by offering localised content. In addition, its venture into the lucrative Chinese movie market provides further support for growth as Chinese films are generally characterised by their bigger budgets and higher margins. To strengthen its competitive edge, mm2 has acquired five cineplexes in Malaysia, which serve as a source of recurring income to the Group. mm2 Asia has also previously acquired a 51% stake in entertainment company, UnUsUal Group, at PE of 10.2x, which will further enhance mm2’s position in Asia.
On 10th Jun, the Group announced the potential listing of UnUsUal, which would enable mm2 to crystallise gains and to unlock value.
Using peers’ average of 22x, we derive our target price of S$0.83 on FYMar17F EPS. The stock trades at an attractive PEG of 0.43x.

Paul YONG CFA DBS Vickers | Singapore Research Team DBS Vickers | http://www.dbsvickers.com/ 2016-07-15

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