Singapore Stock Alpha Picks - UOB Kay Hian 2017-08-08: Refreshing Picks For August

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Singapore Stock Picks Singapore Stocks to buy now SATS LTD. S58.SI CITIC ENVIROTECH LTD. CEE.SI ISDN HOLDINGS LIMITED I07.SI TIANJIN ZHONG XIN PHARM GROUP T14.SI SATS LTD. S58.SI THAI BEVERAGE PUBLIC CO LTD Y92.SI

Alpha Picks - Refreshing Picks For August

• We have refreshed our alpha picks for August by adding SATS, Thai Bev and newly initiated Tianjin ZhongXin Pharmaceutical to our list. 
• Conversely, China Aviation Oil (CAO) and Singapore Airlines (SIA) have been removed from our list.

WHAT’S NEW

Reviewing our July picks. 

• Our alpha picks saw mixed performances in July. 
• Outstanding performers include Memtech (+13% mom) and ISDN (+7% mom). 
• Citic performed in line with the FSSTI’s rise in July despite underperforming since its inclusion into our list whereas our tactical short call for SIA did not work out (+3% mom) because 1QFY18 earnings surprised positively as the pace of pax yield decline narrowed.

ACTION 

Refreshing picks for August. 

• We remove China Aviation Oil (CAO) as the stock has returned 20% since its inclusion in 2 Sep 16. 
• SIA has also been removed as the tactical call did not work out. 
• Replacing these stocks are SATS, which had recently been upgraded to a BUY, Thai Bev which appears to be enjoying a pick-up in beer consumption and newly-initiated Tianjin ZhongXin Pharmaceutical.

SATS – BUY (K Ajith/Sophie Leong) 

• SIA’s pax yields have shown a sequential improvement for two quarters, with yield declining just 1.9% yoy in 1QFY18. 
• We believe SATS’ inflight catering ASP will likely stabilise in the coming quarters as pressure on airline yields abates and this should boost inflight catering revenue and margins.
• We expect SATS to benefit from higher gateway services revenue, driven by strong global cargo volumes. We think SATS is a better play compared with SIA on stabilising pax yields or higher cargo throughput given SIA’s exposure to volatile fuel prices.
• Our target price of S$5.40 implies 23.5x FY18F PE and a dividend yield of 3.5%.
• Share Price Catalyst Event: Higher cargo volumes, stabilising inflight catering ASP.
• Timeline: Release of 2QFY18 results in November and positive data points from Changi Airport in the fourth week of August.

Thai Beverage – BUY (Thai Wei Ying/Andrew Chow) 

• Signs of a beer sales recovery have emerged. June industry data points by the Bank of Thailand showed a stronger beer sales volume growth of 19% yoy vs that in May (+10% yoy) and April (+5% yoy).
• An excise tax hike is expected on 16 Sep 17. We expect sales volume to rise in 4Q17 as sales agents typically build up inventory ahead of an excise tax hike. Also, there could be margin expansion as THBEV is usually able to pass through 100% or more of an excise tax increase to customers through higher ASPs.
• We have a SOTP target price of S$1.09. The company is trading at 20.7x 2017F PE, which is still lower than the global average of 32.6x 2017F PE for spirits peers, 24.0x for beer companies and 27.7x for NAB companies.
• Share Price Catalyst Event: A recovery in alcohol consumption will likely enhance earnings in 3Q17. We also expect increased sales volume to rise in 4Q17 prior to the excise tax hike in September.
• Timeline: 3Q17 earnings release on 11 Aug 17.

Tianjin ZhongXin – BUY (Edison Chen/Yeo Hai Wei) 

• BUY with a target price of US$1.66, based on peers’ average FY18F PE of 15.5x.
• A renowned TCM pharmaceutical giant, TJZX presents a unique opportunity with a deep discount between its A- and S-shares.
• The latest reforms could unlock great value with a delisting on the cards while its strong brand equity and R&D efforts (851 patents) make it a winner in a growing TCM pie.
• We expect ASP hikes to lead to a 14.9% net profit CAGR in 2016-19 with 2018 net cash equivalent to US$0.17/share and a 3.3% yield.
• Share Price Catalyst Event: Earnings/dividend upside or M&A newsflow.
• Timeline: 2Q17 results release in the next 1-2 weeks.

Memtech – BUY (Nicholas Leow/Edison Chen) 

• Memtech’s R&D team specialising in material sciences has given the company a competitive edge in this industry. The company holds more than 120 patents.
• Its crown jewel is its manufacturing process for liquid silicone rubber (LSR) which allows it to break into the Beats by Dre supply chain. Our channel checks indicate Memtech is one of the world’s leading precision engineering manufacturers of LSR products.
• Maintain BUY and PE-based target price of S$1.15, pegged at the sector’s FY17F PE of 12.5x.
• Share Price Catalyst Event: Better-than-expected earnings and dividends.
• Timeline: 2Q17 results announcement in August.

Citic Envirotech – BUY (Edison Chen/Nicholas Leow) 

• We have a street-high DCF-based target price of S$1.10, implying a 43% upside.
• Citic Envirotech (CEL) is the best in class with superior technology know-how protected through a suite of intellectual property rights.
• Riding on favourable industry dynamics and the entry of a new strategic shareholder, investors can look forward to new areas of growth in river rehabilitation, sludge treatment and the circular economy.
• Share Price Catalyst Event: Potential contract wins that could underpin FY17-18 earnings growth.
• Timeline: 3-6 months as clean water remains a priority for the Chinese government. This would benefit CEL, which has the track record and technology 

ISDN – BUY (Edison Chen/Yeo Hai Wei) 

• BUY with a PE-based target price of S$0.35.
• The group is a market leader in motion control with high barriers of entry. ISDN has close to 30 years of experience as an integrated engineering solutions provider.
• ISDN is a beneficiary of China’s automated manufacturing drive and the Belt and Road Initiative, given its long standing relationship supplying customised locks and hinges to state-owned CRCC.
• Share Price Catalyst Event: Potential earnings upside surprise in 2Q17 results or positive newsflow from contract wins or accretive M&A.
• Timeline: 2Q17 results in mid-August.

Singapore Research UOB Kay Hian | http://research.uobkayhian.com/ 2017-08-08

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