Kimeng_ 2008 Research Report Full

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WBL CorporationThe Giant Awakens Initiate coverage with BUY and $7.64 price target We are initiating coverage on WBL with BUY and a 12-month price target of $7.64. We see long term value in its vast property development landbank in China, where good progress on redevelopment is being made. Management is also closely examining its property assets in other countries, such as the automotive tools of trade in Singapore and investment properties in Malaysia, with a view to redeveloping them if possible; if not, they will be sold. Now possible to confidently value WBL Despite the failure to merge its two PCB subsidiaries, WBL has not been sitting still. Instead, it has accelerated the streamlining process. In the last 12 months, solid progress has been made in reducing its hotch-potch mix of businesses, to the point where it is now possible to clearly identify each part and attribute a value. Our RNAV model values WBL at $8.49, while our price target factors in a 10% conglomerate discount. Converting China landbank to cash WBL has declared that it intends to make property development its long term core business. It has substantial landbank in China, Malaysia, Australia and Singapore. Arguably, the value case for WBL revolves around its property business, although it does not at present make up the bulk of its profits. By our estimates, the long term redevelopment value of the landbank is worth S$5.51 a share or 63% of our gross RNAV. Long term value in Tools of Trade Other than the development properties in China, WBL also has some hidden gems in its fixed assets, specifically 25,677 sqm of land in Singapore and almost 10 million sqm of freehold land in Australia that are now being used by going concerns of the group. The Singapore land could potentially be redeveloped into high-yielding projects within 3-4 years, while there is longer term potential for the Australian land as well. Speculative appeal to WBL as well Fundamentals aside, there is speculative appeal in WBL as well. Tecity, which owns nearly 14% of WBL, recently took over Straits Trading after failing to prevent Raffles Hotel and Robinsons from falling into outside hands. All four entities are ex-OCBC-related companies Tecity CEO Chew Gek Khims grandfather Tan Chin Tuan invested in when he headed OCBC, as well as F&N, GE, APB, UE and Bukit Sembawang Estates. Tecity may eventually try to take over WBL as well.Year End Sep 30 (S$'m) Revenue Pre-tax profit Net profit incl exceptionals Net profit excl exceptionals EPS (cents) incl exceptionals EPS (cents) excl exceptionals PER (x) EV/EBITDA (x) 2006 2103.5 150.1 58.9 54.4 28.3 26.1 20.2 5.7 2007 2063.7 3.2 -20.2 12.9 -9.6 6.1 86.1 14.0 2008F 2097.6 136.9 75.8 44.2 36.1 21.1 25.1 5.4 2009F 2267.9 138.1 66.8 66.8 31.8 31.8 16.6 5.6 2010F 2518.8 176.4 88.2 88.2 42.0 42.0 12.6 4.4SingaporeConglomerates 26 May 2008BUYInitiating Coverage Analyst:Gregory YAP (65) 6432 1450Price Target ST Index Historical ChartPrice ($) 6.00 5.50 5.00 4.50 4.00 3.50 28-May-07 20-Aug-07 10-Dec-07 17-Sep-07$5.28 $7.64 3,122.15Vol ('000) 1,000 800 600 400 200 0 26-May-08 03-Mar-08 12-Nov-07 04-Feb-08 25-Jun-07 31-Mar-08 07-Jan-08 28-Apr-08 15-Oct-07 23-Jul-07Performance Absolute (%) Relative (%)1m 3.1 5.33m 23.9 22.26m 31.3 42.3Stock InformationTicker code Market Cap (US$m) 52-week high ($) 52-week low ($) Shares issued (m) 6m avg. daily vol (US$m) Free float (%) Major Shareholders (%) OCBC (25.8), Third Avenue (17.4) Straits Trading (10.7), Aberdeen (6.3) WEAS.SI WBL SP 803 5.56 3.79 210 0.3 34Key IndicatorsROE (%) Net gearing (%) NTA ($) Interest cover (x) 6.7 9.4 2.93 8.6Co. Reg No. : 198700034E MICA (P) : 056/11/ Corporation26 May 2008Ready to goWe are initiating coverage on WBL Corporation with a BUY recommendation and a 12-month price target of S$6.79. Despite the aborted merger of the two PCB subsidiaries MFS (Singapore) and MFI (USA) in 2006-2007 (due mainly to a downturn in the handset industry which made the terms of the merger unrealistic), WBL has not been sitting still. Backed by a supportive turnaround by the PCB segment, which currently chips in the bulk of revenue and earnings, management has accelerated the streamlining process. In the last 12 months, solid progress has been made in cutting down its hotchpotch businesses, with at least one announcement related to operational streamlining every other month, to the point where it is now possible to separate each part and attribute a value. We also see tremendous long term value in WBLs vast property development landbank in China, Singapore, Malaysia and Australia, which management is in the process of converting into cash through the timely launches of high-end residential projects, starting with China. Management is also re-examining its longheld investment assets in other countries, with a view to redeveloping them if possible, such as the automotive tools of trade in Singapore and investment properties in Malaysia.Wobbly startThe first initiative by WBLs management under CEO Tan Choon Seng after he came onboard in Dec 2004, was to privatise Wearnes International (WIL), the automotive distribution business of the group (for marques such as Jaguar, Bentley, Volvo and Renault). WIL is important to WBL for its strong cashflow (as it is primarily a trading company with high turnover and little capex) which enabled it to pay consistent dividends. Following that move, the next low-hanging fruit was quite obviously the merger of two substantial but redundant businesses MFI (or Multi-Fineline Interconnect), its US-listed flexible PCB business (but with manufacturing operations in China), and MFS, a similar business listed in Singapore (also with significant operations in China). That attempt was derailed because of a downturn in PCB industry fundamentals that made it no longer sensible to proceed on the terms offered.But WBL has cleaned up nicelySince then however, WBL has cleaned up and sold off the majority of its other non-core businesses that it did not see any future in, such as biomedical, Wearnes Technology Solutions and water treatment, as well as major nonperforming operations such as the precision engineering business in Thailand and the technology solutions group (eg Bluetooth, IC design, etc). All non-recurring charges related to the diposals have already been recognised as at 2Q08.2WBL Corporation26 May 2008Figure 1: Significant corporate actions in last 24 monthsDate Mar 2008 Feb 2008 Dec 2007 Nov 2007 Oct 2007 Aug 2007 Aug 2007 Aug 2007 Aug 2007 Aug 2007 Action Details Liquidation/dissolution of Wearnes Technology Sdn Bhd, Wealco Malaysia, Wearnes Healthnet and Summer Palace Development Appointed KPMG as judicial manager of Wearnes Precision Thailand Sold for HK$223m against valuation of HK$168m, Completed sale of Kowloon property realised gain of S$21.4m WBL Peking University Biotech and Wearnes Biotech Completed sale of biomedical businesses & Medicals Took asset impairment charge of $26.6m in 3Q07, Ceased operations of Wearnes Precision Thailand retrenchment cost of $2.1m in 4Q07 Dissolved FIA Ltd, a dormant subsidiary Acquired 7% stake for US$1.4m; acquisition to Made Shenyang Huaxin Int'l Realty a 100% subsidiary facilitate development of Mumashan site Sold 80% stake in EPD Puretronics and EPD USA's Sold non-core water treatment businesses water assets for US$2.5m Sold for HK$223m against valuation of HK$168m, Announced sale of Kowloon property realised gain of S$26.3m Sold off non-core agricultural businesses in China Sold 51% stake in Wuhan Speedling for RMB3m Sold 50% stake in Tongcheng Medicinal Plants for RMB0.6m Entered JV with GIC Real Estate to develop Shenyang New Summer WBL will own 40% of the JV Palace site Disposed 100% stake in Wearnes Biotech & Announced sale of Wearnes Biotech & Medical Medicals for $2.1m Disposed 43% stake in WBL Peking University Announced sale of WBL Peking University Biotech Biotech (aka Wearnes Beida) for S$19.9m Made Summer Palace Management a 100% subsidiary Acquired 51% remaining stake for $11.8m Dissolved EdgePoint Networks, a dormant subsidiary Sold SW Parts & Service Sdn Bhd Sold venture capital business OCBC, Wearnes & Walden Closed down loss-making electronics component subsidiary in China Dissolved Wearnes Computer Systems Europe, a dormant subsidiary Announced cash or shares general offer by Mflex for MFS Announced voluntary delisting of automotive trading subsidiary Wearnes International Cash offer of S$1.15, or 0.0145 new Mflex shares for each MFS share Cash offer price of S$1.35 a share Hollingsworth Electronics Anqing; closure impact of $2.6m in 2Q06 Disposed 30% stake for RM0.7mJun 2007 May 2007 Apr 2007 Apr 2007 Mar 2007 Feb 2007 Oct 2006 Aug 2006 Mar 2006 Mar 2006 Jan 2006Source: CompanyWhile there are some non-core businesses within the group that we believe management will want to rationalise eventually, we believe it is not in any hurry at the moment. First, WBL is more likely than not to realise extraordinary gains than losses as these are profitable concerns. Second, they are currently benefiting from an upcycle in their industries, as well as internal improvements. In our view, these parts include: - The oil & gas group under Applied Engineering and 50/50 joint venture SPC Wearnes, and - The construction and building materials group under Polytek, Wealco and Welmate Lastly, WBL still have some investments in Speedling (100%), Chrontel (38%), GIH (22%) and RFNet (20%) assets that are still being reviewed, either because they are still in a start-up phase but not scaling up or loss-making. At some point, they may be sold or written down but we believe the carrying value is minimal. The latest carrying value (end-Mar 2008) of associate company investments is about $60m but we believe the bulk is related to 45%-owned Shanghai Olympic Gardens and GIH (probably more than 80%), both of which are profitable. Investments in Chrontel and RFNet combined are likely to be only about $12-15m.3WBL Corporation26 May 2008Notes: - Applied Engineering (100% equity) is a fabricator of steel pressure vessels, heat exchangers and other equipment supporting the petrochemical, oil and gas industries in Singapore and Malaysia. - SPC Wearnes (50%) distributes bottled and bulk LPG to companies, households and factories in Singapore. - Polytek (100%) distributes laundry and boiler equipment, toilet compartments and washroom accessories. Benefiting from boom in construction activities ahead of IR. - Wealco (100%) and Welmate (100%) distribute construction and industrial equipment, and consumable building materials, respectively. - Speedling (100%) is basically a producer of agricultural transplants, such as ornamental flowers and vegetables, and horticultural products. - Chrontel is a San Jose-based IC chip designer supplying TV-Out interface solutions. - Global Investment Holdings is a Taiwan financial services company. - RFNet is a Singapore-based ODM house specialising in radio frequency wireless products. In addition, WBL has been patiently obtaining land use rights to more than 1 million sq meters of land in China that had prevented it from converting the land to more profitable use. We understand from the management that such rights have been obtained, with the exception of one remaining site in Suzhou near Lake Taihu. The acquisition of the rights primes WBL as a beneficiary of the favourable demand & supply economics that will continue to drive the Chinese property market in the long term, despite near-term ups-and-downs. WBL currently has three high-end residential projects under development in Suzhou, Shanghai and Chongqing. While most are nearing completion, it has identified and prepared at least two more high-end residential projects that should be launched this year and next year, depending on market conditions. Maiden contributions are expected by 2009.Now converting China landbank to $$$WBL has declared that it intends to make property development its long term core business. It has substantial landbank in China, Malaysia, Australia and Singapore (more than 11m sq m) that management has said is not for sale, unless there is little redevelopment potential, such as the agricultural land under Speedling in the USA and China. Arguably, the bulk of the value case for investing in WBL revolves around its property development and investment activities, although it does not at the present point in time make up the bulk of its profits. By our estimates, the long term redevelopment value of WBLs property landbank is worth S$5.51 a share or 63% of our gross RNAV for the group. We like managements conservative approach in China. WBL focuses on areas where there are no runaway price bubbles, such as Liaoning, Shenyang, Sichuan, Suzhou and Shanghai, places where it also has strong connections with the local authorities. Financial criteria includes a project IRR of over 18%. If management considers a project to be of high risk or too big for it to take on alone, it will also take on partners.4WBL Corporation26 May 2008Figure 2: Projects under developmentProject Shanghai Olympic Garden Ph 3 Shenyang Orchard Manor Ph 2 Chongqing Lakeside Garden Ph B3-2 Suzhou Horizon Resort Ph 3 TotalSource: Company, KE estimatesSite area (sqm) 116,760 47,607 20,153 44,000 228,520Stake (%) 45 55 50 47Eff book value (S$'m) 13.7 5.2 4.2 16.9 40.0Dev surplus (S$'m) 3.8 0.8 1.2 3.1 8.8WBL currently has four high-end residential projects under development in China. - Shanghai Olympic Garden (condominium), - Orchard Manor in Shenyang (villas), - Lakeside Garden in Chongqing (landed housing) and - Horizon Resort in Suzhou (landed housing). Shanghai Olympic Garden is a high-end condominium project that WBL first launched in 2000, with a total of about 5,800 units and 45% equity in the project. Currently in the third and final phase, WBL sold about 400 units in 2007, a number that it has already equalled this year. It is benefiting from strong demand and property prices in Shanghai, achieving an average price of RMB12,000 psm. Orchard Manor in Shenyang consisted of 40 villas in Phase 1 and 30 villas in the current Phase 2, with an average unit size of 350-400 sqm. Phase 1 is fully sold while Phase 2 is half sold at an average price of RMB13,000-14,000 psm. Although WBL only has 55% equity in the project, we understand that 11 of the remaining 15 units is fully owned (due to conversion of shareholders loans). Lakeside Garden in Chongqing is a high-end landed residential project (eg semi-detached, terrace housing, etc) about 30 minutes from downtown Chongqing via a new highway, targeted at city dwellers. The project is expected to be completed by 2009. According to management, half the units have already been sold. Originally launched at RMB7,000 psm (our assumption for the RNAV), a recent relaunch has achieved RMB10,000 psm. Horizon Resort in Suzhou is also a high-end landed residential project first launched in 2003. Currently in Phase 3, about 1,800 units have been built to-date. We have assumed RMB13,000 psm.Figure 3: Projects to be launched soonProject Chengdu Mumashan (former Theme Park) Shenyang New Summer Palace TotalSource: Company, KE estimatesSite area (sqm) 364,000 33,473 397,473Stake (%) 100 40Eff book value (S$'m) 8.0 30.0 38.0Dev surplus (S$'m) 57.0 19.9 76.9Within the next 12 months, WBL intends to launch two more projects in Chengdu and Shenyang. - Chengdu, Mumashan, on site of former theme park (landed housing) - Shenyang New Summer Palace (landed housing) Mumashan in Chengdu is currently a 364,000 sqm plot of land located 14km from downtown Chengdu, equivalent to Upper Bukit Timah in Singapore. The completion of a new 8-lane highway to the city has cut travel time from 45 minutes to just 20 minutes, so WBL can market the project to city dwellers. The plan calls for 1,300-1,400 units of semi-detached and terrace housing, as well as walk-up apartments. Government approval for land use conversion has been approved,5WBL Corporation26 May 2008but WBL will need to pay a conversion fee. In our projections, we have modelled a an average selling price of RMB8,000 psm and revenue recognition over FY09-12. This project is likely to be launched in 2H 2008. New Summer Palace in Shenyang is currently a 33,473 sqm site located along the primest street in Shenyang, opposite the Sheraton Hotel. WBL has partnered with GIC Real Estate in a 40% JV to develop a high-density residential project. With an approved plot ratio of 7-8x, total GFA could be more 2.5m sf. Further, an MRT station is being constructed just up the road. The project will include condominium units, a shopping centre and serviced apartments. We have assumed the project to be launched only in 2009.Figure 4: Landbank in ChinaShenyang (Orchard Manor future phases) Chongqing (Lakeside Garden future phases) Chongqing (City Garden) Suzhou (Horizon Resort commercial component) Suzhou (Lake Taihu) Portion A Suzhou (Lake Taihu) Portion B (incl in Tools of Trade) TotalSource: Company, KE estimatesSite area (sqm) 66,359 82,638 42,536 6,225 333,018 432,800 963,576Stake (%) 55 50 29 47 33 100Eff book value (S$'m) 3.7 3.2 4.8 2.1 12.8 4.3 30.9Eff market value (S$'m) 28.5 40.4 12.1 4.0 150.4 592.2 827.5Land price assumed (RMB psm) 4,000 5,000 5,000 7,000 7,000 7,000Other than the projects discussed above, WBL also has access to almost a million sqm of land elsewhere in China, namely Chongqing, Shenyang and Suzhou. However, note that WBL cannot redevelop a third of the landbank at the moment, specifically a 766,000 sqm combined site near Lake Taihu in Suzhou, which is currently used by subsidiary Suzhou Future Agriworld (83-owned). Existing assets on the land, which is zoned for tourism use, include an agrotech theme park. The theme park is not breaking even at the moment. While WBL has technically obtained approval for residential conversion, it has not yet received a building permit. In addition, WBL has sold part of its interest in another portion of the site but it has an buyback option, which would inflate the total China not yet commenced landbank by another 433,000 sqm. For our RNAV, we have separated the two portions and valued them accordingly.Long term value in Tools of TradeOther than the development properties in China, WBL also has some hidden gems in its fixed assets, specifically 25,677 sqm of land along Leng Kee Road (16,362 sqm) and Alexandra Road (9,315 sqm) currently used by two subsidiaries, SM Motors and Malayan Motors, as automotive showrooms and service workshops for Jaguar, Bentley, Bugatti and Volvo. The land is currently zoned light industrial with a plot ratio of 2.5x. However, there is the possibility of government rezoning with a subsequent rise in plot ratio to at least 4.0x (which is the plot ratios of current surrounding properties), which would yield a GFA of 700,000 sf and 400,000 sf, respectively. Assuming an average of 1,200 sf per unit, WBL could potentially build more than 900 condominium units on both sites. But until a rezoning actually happens, we have assumed only the open market value of these sites (as appraised by Knight Frank in Feb 2006) and not potential redevelopment surplus. Also, Pacific Silica, WBLs 75%-owned sand mining subsidiary in Australia, operates the largest approved reserve (23 million tons) of fine to medium silica sand in southeast Queensland. Currently, the mine is still in operation, yielding WBL S$2-3m of dividends annually, hence management is perfectly content to own this asset. Most significantly, the mine sits on almost 10 million sqm of freehold land near Brisbane, including 750 meters of private beach. There are6WBL Corporation26 May 2008long term plans to redevelop it into private residential property but only when the sand is exhausted, likely to be sometime in the next decade. Still, a valuation done by KPMG and Jones Lang LaSalle in Mar 2006 put the present value of the sand resources and underlying real estate at A$57-62 million. We have incorporated the average (A$59.5m) in our RNAV.Technology poised to do betterOther than property, Technology (mainly the flexible PCB manufacturing businesses under MFI and MFS, but also includes precision engineering in China and system integrator OConnors) is likely to remain one of WBLs core businesses for the foreseeable future. We expect the Technology division to do better in FY08 on (1) lack of impairment charges related to business closure and (2) improved performance of the flexible PCB operations. MFI was hit badly in 2006 and 2007 by the market share troubles of its thenbiggest customer Motorola. At that time, Motorola accounted for more than 90% of revenue. MFI turned around in 2007 after it diversified its customer base. Today, 95% of its revenue now comes from four major customers - Sony Ericsson, Research In Motion (the maker of the BlackBerry smartphone), Apple and Motorola. While Motorola is still the largest customer, the other three combined should be at least 30% of sales, as MFIs policy is to announce its customers identities only after it contributes more than 10% of sales. Notably, MFI has not lost any share of Motorolas business but simply experienced less volume when Motorolas sales dropped. MFI staged a strong recovery in 1H08. Sales surged 36% YoY to almost S$500m while net profit more than tripled. While 3Q is expected to be flat sequentially, MFI management was optimistic 4Q would be better due to new programs ramping up and gross margin expected to be at the high end of 10-15%. MFI is currently the largest supplier of FPCs to Sony Ericsson and the sole supplier to RIM. MFS will continue to see margin compression and the adverse impact of a poor current product mix (ie lack of new products, lack of high volume programs) which has led to underutilised capacity. Forward performance is uncertain at this point, and we understand there may be a management restructuring soon. However, MFSs underperformance should not prevent the Technology division as a whole from doing better than last year. In 2007, the division was affected by losses and impairment charges related to the closure of the Thailand precision engineering business. That business ceased operations in Sep 2007.7WBL Corporation26 May 2008We value WBL at S$7.64Figure 5: WBL valuation modelEffective Stake (%) Listed subsidiaries, associates & equity investments MFS MFI UE Unlisted major businesses Automotive Precision Engineering EMS O'Connor's Trading - Welmate, Wealco, Polytek, Applied Engineering, etc Pacific Silica (sand mining operation in Australia) Non-core biz - Speedling - Chrontel - GIH - RFNet Total Non-property Interests Property interests Development property surplus - Projects under dev/To be launched Effective market value of undeveloped landbank Effective market value of "Tools of Trade" Development property book - excl projects under dev/to be launched Investment property book - excl "Tools of Trade" Property RNAV Gross RNAV Less Net Debt Net RNAV Conglomerate discount (10%) Target Price 55.8% 59.6% 9.8% 100% 99% 99% 100% 100% 75% 100% 38% 22% 20% Valuation mtd Mkt value Mkt value M value 6x PE 6x PE 6x PE 6x PE 6X PE Valuation Nominal Nominal Nominal Nominal Currency S$ US$ S$ Share px 0.30 19.56 3.93 Market value of Effective stake ($'m) 109.3 289.8 85.5 52.9 10.0 6.2 6.7 63.0 58.7 0.0 0.0 0.0 0.0 682.3 85.8 827.5 85.4 78.0 79.0 1,155.7 1,838.0 (57.6) 1,780.4 (178.0) 1,602.4 Market value Per share ($) 0.52 1.38 0.41 0.25 0.05 0.03 0.03 0.30 0.28 0.00 0.00 0.00 0.00 3.25 0.41 3.94 0.41 0.37 0.38 5.51 8.76 (0.27) 8.49 (0.85) 7.64 % of RNAV 5.9 15.8 4.7 2.9 0.5 0.3 0.4 3.4 3.2 0.0 0.0 0.0 0.0 37.1 4.7 45.0 4.6 4.2 4.3 62.9 100.0NOTE: Land average prices are from Kim Eng HK property analyst, and do not take into account built-up area, tenure of land or plot ratio. Source: KE estimatesSpeculative side to WBL as wellOther than the fundamental improvements, there could be some speculative appeal as well in WBL. While Tecity, the family investment company of the late Tan Sri Dr Tan Chin Tuan (Chairman of WBL in 1974-1983), was bidding for tin mining company Straits Trading earlier this year, Kambau Pte Ltd, a company affiliated to Tecity and the Tan Foundation, emerged as a shareholder of WBL, with 6.5m WBL shares or 3.1%. By itself, that would not have been very interesting but the web of crossholdings between Tecity, Straits Trading, Kambau, WBL and United Engineers raises the speculative appeal several notches. WBL owns 9.8% of United Engineers, in which the Tan family also has a strong interest. In fact, Kambau owns 7.9% of UEs preference shares and Straits Trading owns 12.1% of UEs ordinary shares. So it appears that there is now stronger incentive for Tecity to keep WBL close to its chest. Adding Kambaus 3.1% stake to the 10.7% of WBL stock already owned by Straits Trading, Tecity now has control over nearly 14% of WBL. So what does Tecity intend with to do with WBL? We think she will eventually launch a takeover, plain and simple. The media has made much speculation and analysis into what Chew Gek Ghim, CEO of Tecity and the lawyer-granddaughter of Tan Chin Tuan, intends to do with Straits Trading and the other companies that8WBL Corporation26 May 2008her grandfather invested in and helped to build up into blue chip names during the 1980s-1990s when he headed OCBC. But one just has to look at Tecitys corporate moves in the past few years for a strong hint. Ever since OCBC began to divest its stakes in non-core associate companies this century, Tecity has attempted to gain control over Raffles Hotel and retailer Robinsons when it looked like those companies would end up in outside hands, as they eventually did (Raffles Holdings sold its hotel assets to Colony Capital LLC and Robinsons was taken over by the UAE-based conglomerate Al-Futaaim Group). By simple extension, one could conclude that Miss Chew is now trying to keep as much of her grandfathers legacy within family hands as possible. Other than Raffles and Robinsons, Tan Chin Tuan was also linked to Fraser & Neave, Malayan Breweries (now Asia Pacific Breweries), insurer Great Eastern, Straits Trading, United Engineers, WBL and Bukit Sembawang Estates.9WBL Corporation26 May 2008WBL In The Early YearsThe story of WBL in Singapore started in 1906 when a young Australian, Theodore James Benjamin Wearnes, opened a secondhand automotive dealership in Orchard Road. By 1911, it became the agent for Ford cars in the Straits Settlements and Malayan States. In 1912, the company was publicly listed as Wearne Brothers Ltd. In the ensuing years, Wearne acquired franchises for Morris, Renault, Buick, Daimler, Rover, Rolls Royce and Bentley, as well as property in Orchard Road. At one point, Wearne was even assembling Ford cars in Singapore and before World War Two, operated an air service between Singapore, KL and Penang. After WW2 (1960-70s), it diversified into heavy machinery and equipment for the industrial, agriculture and construction industries. The baton was passed into local hands in 1974 when Tan Sri Dr Tan Chin Tuan, the Chairman of OCBC Bank at the time, became Chairman. He found Wearne struggling due to the oil crisis and competition from Japanese carmakers. To save the company, he shut down the car assembly plant, cut borrowings and costs, and gave up the Ford franchise in 1981. By his retirement in 1983, Wearne was healthy again. In the 1980s and 1990s however, WBL (as renamed in 1994) accelerated its diversification activities. It was during this period that WBL embarked on a venture capital model, investing in many companies ranging from technology (personal computers, hard disk drives, Internet startups, wireless solutions, flexible PCBs, etc) to biomedicine to real estate in China and other parts of the region.WBL NowFollowing a restructuring program initiated in 2005 by present Group CEO Tan Choon Seng, an ex-Compaq and HP VP, WBLs interests are now classified in the following reporting categories: - Technology - Automotive - Real Estate and other Investments10WBL Corporation26 May 2008Figure 6: Major businesses & operating subsidiariesCategory Technology Business FPC Active subsidiaries MFS Technology Ltd Flex Solutions Singapore Multi-Fineline Electronix Aurora Optical Wearnes Precision Pte Ltd Wearnes Precision Shenyang Wearnes Cambion UK Wearnes Components Shenyang Wearnes Electronics Malaysia Wearnes Electronics Shenyang Wearnes Electronics Zhongshan Wearnes Global Co Wearnes Hollingsworth Shenyang O'Connor's Brunei O'Connor's Engineering O'Connor's Singapore SM Motors Starsauto Wearnes Automotive Pte Ltd Wearnes Automotive Sdn Bhd Wearnes Motors Chengdu Huaxin International Realty Shanghai Wearnes Property Development Shenyang Huaxin International Realty Shenyang Huaxin International City Shanghai Olympic Garden Property Dev Chengdu Wearnes Technology Qingdao Wearnes Technology Suzhou Wearnes Technology Wearnes Technology Shenyang Wearnes Technology Shenzhen Chongqing Property Management Shenyang Huaxin Property Management Suzhou Huaxin Int'l Property Management Applied Engineering Polytek Engineering Wearnes Brothers 1983 Wealco Welmate Pacific Silica Speedling Inc Guangdong Speedling Kunming Speedling Shanghai Speedling Shenyang Speedling Suzhou Speedling Yunnan Speedling Zibo Speedling Chrontel Global Investment Holdings (GIH) RFNet Technologies Stake (%) 56 55 60 55 99 99 99 99 97 67 95 85 80 100 100 100 100 50 100 100 100 100 100 100 55 45 99 99 99 80 99 60 71 79 100 100 100 100 100 75 100 100 90 51 51 99 100 51 38 22 20Precision Engineering EMSSystems Integration Volvo Chevrolet Renault Volvo in Malaysia Volvo in HK DevelopmentAutomotivePropertyInvestmentProperty management Oil & gas Industrial equipment Building materials Sand mining AgrotechnologyTradingOthersIntegrated circuits Financial services ODM houseSource: CompanyThe major difference between WBL of the present day and a few years back, when we last covered the stock, is that it is now much easier to understand the companys businesses. Despite the hiccups along the way, the present management has patiently unravelled the original hotch-potch mix of businesses and focused the group into a few core businesses that can now be separately tracked and valued by investors.TechnologyThe Technology Division comprises four businesses: - Flexible printed circuits (FPC), - Precision engineering (PE), - Electronic manufacturing services (EMS), and - Systems integration (SI)11WBL Corporation26 May 2008The FPC Group consists of Nasdaq-listed Multi-Fineline Electronix (MFI) and Singapore-listed MFS Technology (MFS). Both are major players that specialise in the design and manufacture of FPCs as well as the related assembly: parts that go into colour display modules used in handsets and other portable devices. MFI was hit badly in 2006 and 2007 by the market share troubles of its thenbiggest customer Motorola. At that time, Motorola accounted for more than 90% of revenue. MFI turned around in 2007 after it diversified its customer base. Today, 95% of its revenue now comes from four major customers - Sony Ericsson, Research In Motion (the maker of the BlackBerry smartphone), Apple and Motorola. While Motorola is still the largest customer (more than 25% of sales), the other three combined should be at least 30% of sales, as MFIs policy is to announce its customers identities only after it contributes at least 10% of sales. Notably, MFI has not lost any share of Motorolas business but simply experienced less volume when Motorolas sales dropped. MFS however continues to labour under the weight of margin compression and lack of high volume programs that resulted in capacity underutilisation. In 2Q08, it incurred a S$2.7m net loss despite breaking even in 1Q08. Forward performance is uncertain at this point, and we understand there may be a management restructuring soon. Precision Engineering now consists of only the Shenyang-based operation, following the closure of the Thailand plant late in 2007. The Shenyang factory, the largest precision manufacturing and die-casting facility in Liaoning province, services automotive customers such as Bosch and Visteon. It specialises in aluminum die-casting, extrusion and precision machining for personal computers, electronics and automobile industries, with supporting processes in electro-deposit paint, powder coat and chemical treatment. PE is now a profitable contributor following the closure of the Thai facility, albeit small. Electronic Manufacturing Services (under subsidiaries such as Wearnes Components, Wearnes Cambion, Wearnes Hollingsworth and Wearnes Electronics), provides PCB assembly services in China (Shenyang, Zhongshan), Malaysia and UK, on a consignment basis. EMS is profitable as a whole. It basically serves one major customer, Tyco International, which is a diversified global company involved in electronic security, alarm monitoring, fire-fighting equipment, water purification and flow control solutions. WBL does 90% of Tycos security tags and labels worldwide. In addition, WBL also assembles parts for EPCOS, a German-listed supplier of electronic components for cellular phones. Systems Integration. OConnors has a well-established brand for advanced content application and solutions for the following core areas: (1) Security & Surveillance, (2) Broadcasting & Multimedia, and (3) Communications and Information Technology. Life Sciences & Medical Laboratory is an area currently under development, and recently, OConnors was selected to provide laboratory furniture and fittings by a Singapore medical school. OConnors has an strong presence in Asia, with operations in Singapore, Malaysia, Thailand and representative offices in Vietnam and projects and partners in Bangladesh, Sri Lanka, Mongolia and other parts of Asia.AutomotiveThe Automotive business has long been a WBL mainstay. WBL started out as an automotive distributor in Singapore and Malaya a century ago. Since then, it has leveraged on its expertise and distribution network to add additional prestigious12WBL Corporation26 May 2008marques to the business while making significant inroads with its regional expansion strategy, to the point that it is now the largest distributor of Volvo vehicles (cars and trucks) in the region. Through distributorships in Singapore, Malaysia, Thailand and HK, WBL also markets, distributes and services marques such as Bentley, Jaguar, Renault, Chevrolet, Ford and Mazda.Figure 7: WBL represents the following marquesCountry Singapore Malaysia Thailand Hong Kong IndonesiaSource: CompanyDealerships/Agencies Bentley, Chevrolet, Jaguar, Renault, Volvo, Bugatti (Sales Agent) Volkswagen, Volvo Jaguar, Mazda, Volvo Renault, Volvo Bentley, Jaguar, MazdaFigure 8: Major automotive operating subsidiariesSubsidiary SM Motors Starsauto Malayan Motors Wearnes Automotive Pte Ltd Wearnes Automotive Sdn Bhd Wearnes Automotive HKSource: CompanyPrincipal activities Distribution and rental of Volvo vehicles Distribution and rental of Chevrolet vehicles Dealer for Bentley, Jaguar and Volvo trucks, sales agent for Bugatti Distribution and rental of Renault vehicles Distribution and rental of Volvo vehicles Distribution and rental of Volvo vehiclesCountry of operation Singapore Singapore Singapore Singapore Malaysia Hong KongEquity stake (%) 100 50 100 100 100 100The automotive distribution business operates on a low margin (1-2% at net level) but high turnover model, and is of interest to management because of its sentimental value as WBLs original business. In the long term, WBL will probably want to convert the business into cash. As it stands, WBL is already putting the business under the microscope with a view on how to improve the organic returns from the business as well as the tools of trade it utilises, namely the land that its showrooms and service centres sit on. This is where it could get interesting for investors. It recently sold its Volvo showroom in Hong Kong for a tidy gain and is leasing back the space it needs for the showroom from the buyer, as the building had no development potential. However, the Volvo and Jaguar operations in Singapore are operated on two large plots of land along Leng Kee and Alexandra Road, an area that is reasonably close to central Singapore and could conceivably be rezoned and redeveloped into residential or commercial projects that could net a better yield. Redeveloping the land would also introduce a different set of pressures on the auto divisions management as they would then have to think about how to keep the business viable while paying market rates for the space it uses. In the long run, this will have the desired effect of priming the business to be sold, minus the valuable land that it sits on, of course.Real Estate & Other InvestmentsThe Real Estate & Other Investments portfolio consists of the following: - Real Estate - Trading - Others Real Estate. WBL has substantial property investments in China and Malaysia that can be redeveloped in the medium term. In China, it has total accessible landbank of 1.2m sqm, including projects currently under development of 0.2m13WBL Corporation26 May 2008sqm, landbank not yet commenced of 0.9m sqm and investment properties. In Malaysia, it has some 50,700 sqm of land currently being used by WBL subsidiaries or rented out. In China, Singapore and Australia, it also has landbank that can be redeveloped in the long term, namely (1) a 432,000 sqm site near Lake Taihu in Suzhou currently occupied by tourism assets, (2) two plots of land (totalling 25,700 sqm) in central Singapore currently occupied by automotive assets and (3) a very large site of nearly 10m sqm in Queensland, Australia that can be redeveloped in 10-15 years time (currently occupied by a sand mining asset).Figure 9: Total accessible landbank (wholly and partially owned)China Landbank under development Shanghai Olympic Garden Ph 3 Shenyang Orchard Manor Ph 2 Chongqing Lakeside Garden Ph B3-2 Suzhou Horizon Resort Ph 3 Total Landbank have not commenced Chengdu Mumashan (former Theme Park) Shenyang New Summer Palace Shenyang (Orchard Manor future phases) Chongqing (Lakeside Garden future phases) Chongqing (City Garden) Suzhou (Horizon Resort commercial component) Suzhou (Lake Taihu) Total Investment properties Shenyang (Huaxin International Tower) Shenzhen (Wearnes Technology Building) China (Qingdao, Shenyang, Suzhou) Total China Total Malaysia (used by WBL or rented out) Malaysia (KL) Malaysia (PJ) Malaysia (Penang) Malaysia (Others) Malaysia Total Total LandbankSource: CompanySite area (sqm) 116,760 47,607 20,153 44,000 228,520 364,000 33,473 66,359 82,638 42,536 6,225 333,018 928,249 2,121 17,712 28,664 48,497 1,205,266 11,905 18,703 3,642 16,426 50,676 1,255,942% of total18%74%4% 96%4% 100%Figure 10: Landbank in tools of tradeSite China (Suzhou) Australia (Brisbane) Singapore (central) USA (Florida, Georgia, Texas, California) TotalSource: CompanySite area (sqm) 432,800 9,787,700 25,678 1,190,900 11,437,078Current land use Agricultural theme park Sand mine Automotive show rooms NurseriesCurrent land zoning Tourism Resource Light Industrial AgriculturalSubsidiary Suzhou Future Agriworld Pacific Silica Malayan Motor, SM Motors SpeedlingWe have not talked much about Speedlings landbank in the USA because there is little chance of redevelopment. Also, it is too far away from managements sphere of concentration for the property development business. Trading. WBL has also streamlined some of its more promising investments, which are basically involved in trading, distribution and engineering into a category known as Trading. They cover:14WBL Corporation26 May 2008-Applied Engineering in Singapore which is a process equipment fabrication shop for the O&G industry, and Distribution of equipment and construction materials under Polytek Engineering (industrial equipment), Wealco Equipment (supply of equipment for construction, marine, hospitality and transport industries) and Welmate (fire protection systems, prefab wall panels, etc) and SPC Wearnes (distribution of bottled gas).While the long term intention is likely to be there, WBL is not in any hurry to dispose of any of these assets at the moment. First, it is more likely than not to realise extraordinary gains than losses as these are profitable concerns. Second, they are currently benefiting from the present upcycle in the oil & gas and construction industries, as well as internal improvements. Others. This is likely to be a catch-all category for businesses and assets such as: - Sand mining operations under Pacific Silica in Australia, - Agrotechnology business under Speedling USA and China, - 10% equity stake in Singapore-listed United Engineers, - Stakes in Chrontel, GIH and RFNet WBLs investments in agrotechnology in the US are in Speedling, which is headquartered in Sun City, Florida, USA. Speedling produces vegetable transplants, ornamental products and horticultural products and supplies. Besides the nurseries in six locations in the US, Speedling also has greenhouse production facilities in China. Management personally does not like the business model, as it is asset intensive but generates little returns. We think they will try to dispose of this business eventually. As for the 10% stake in UE, management believes this to be a long term strategic asset, as long as UE continues to perform well and possibly because of Tecitys involvement in its destiny.15WBL Corporation26 May 2008Balance SheetYE Sep (S$'m) 2006 Total assets 1,916.8 Current assets 1,071.2 Cash & ST investment 222.6 Trade & other debtors 463.1 Inventory 220.5 Others 165.0 Other assets 845.6 Investment properties 63.0 Net fixed assets 566.3 Others 216.3 Total liabilities 949.0 Current liabilities 621.3 Trade & other creditors 449.5 ST borrowings 156.9 Others 14.9 Long-term liabilities 327.7 LT borrowings 290.7 Others 37.0 Shareholder's equity 678.0 Share capital 334.1 Reserves 344.0 289.7 Minority interests Source: Company data, Kim Eng estimates 2007 1,914.1 1,081.7 248.2 421.7 223.4 188.4 832.4 57.5 539.8 235.1 953.4 656.6 496.7 143.0 16.9 296.8 268.5 28.3 676.5 338.7 337.8 284.2 2008F 1,862.5 994.6 236.0 402.3 208.3 148.1 867.9 54.6 566.7 246.6 864.6 567.7 459.7 85.0 23.0 296.8 268.5 28.3 736.0 344.0 392.0 298.4 2009F 2010F 1,934.2 2,034.2 1,043.5 1,119.0 242.1 259.4 434.9 483.1 228.4 248.5 138.1 128.1 890.7 915.2 51.9 49.3 595.1 624.8 243.7 241.1 870.8 887.9 574.0 591.1 466.0 483.1 85.0 85.0 23.0 23.0 296.8 296.8 268.5 268.5 28.3 28.3 781.8 849.0 344.0 344.0 437.8 505.0 313.3 329.0Profit and lossYE Sep (S$'m) 2006 2007 2008F 2009F 2010F Sales 2,103.5 2,063.7 2,097.6 2,267.9 2,518.8 Cost of goods sold -1,741.4 -1,801.8 -1,689.3 -1,852.5 -2,015.7 Gross profit 362.1 261.9 408.3 415.3 503.1 Non-operating Income 46.7 39.9 31.6 25.0 25.0 Operating expenses -245.4 -285.4 -293.7 -306.2 -340.0 Operating profit 163.4 16.3 146.2 134.2 188.1 Net interest/Investment income -20.0 -20.1 -20.0 -20.0 -20.0 Share of associates/JVs 6.6 7.0 10.7 23.9 8.3 Exceptionals 0.0 0.0 0.0 0.0 0.0 Pretax income 150.1 3.2 136.9 138.1 176.4 Income taxes -49.6 -13.6 -41.1 -48.3 -61.7 Minority interest -41.7 -9.8 -20.0 -23.0 -26.5 Net income after exceptionals 58.9 -20.2 75.8 66.8 88.2 Net income bef exceptionals 54.4 12.9 44.2 66.8 88.2 28.3 -9.6 36.1 31.8 42.0 EPS (cents) after exceptionals EBITDA 235.2 91.0 225.5 217.5 275.6 Source: Company data, Kim Eng estimatesCashflowYE Sep (S$'m) 2006 Operating cash flow 129.3 Pretax profit 143.5 Depreciation & amortisation 71.8 Change in working capital -7.6 Others -78.3 Investment cash flow -111.7 Net capex -94.7 Change in LT investment -43.3 Change in other assets 26.2 Cash flow after invt. 17.6 Financing cash flow -53.3 Change in share capital 5.8 Net change in debt -21.5 Change in other LT liab. -37.6 Net cash flow -35.7 Source: Company data, Kim Eng estimates 2007 145.8 -3.8 74.7 86.6 -11.7 -76.2 -107.1 -4.5 35.4 69.5 -39.8 3.4 -34.8 -8.4 29.7 2008F 132.0 136.9 79.3 -2.4 -81.8 -27.0 -27.0 0.0 0.0 105.1 -79.0 0.0 -58.0 -21.0 26.0 2009F 50.7 138.1 83.3 -46.5 -124.2 -28.3 -28.3 0.0 0.0 22.4 -21.0 0.0 0.0 -21.0 1.4 2010F 68.0 176.4 87.5 -51.2 -144.7 -29.8 -29.8 0.0 0.0 38.2 -21.0 0.0 0.0 -21.0 17.2Key ratiosYE Sep (S$'m) 2006 Growth (% YoY) Sales 7.0 OP 32.5 EBITDA 23.1 NP 472.2 EPS 417.3 Profitability (%) Gross margin 17.2 Operating margin 7.8 EBITDA margin 11.2 Net profit margin 2.8 ROA 3.1 ROE 8.7 Stability Gross debt(cash)/equity (%) 66.0 Net debt(cash)/equity (%) 33.2 Int. coverage (x) 8.2 Int. & ST debt coverage (x) 11.0 Cash flow int. coverage (x) 6.5 Cash flow int. & ST debt cover (x) 0.7 Current ratio (x) 1.7 Quick ratio (x) 1.0 Net debt/(cash) (S$'m) 225.1 Per share data (cents) EPS 28.3 CFPS 103.4 BVPS 325.8 SPS 1,010.7 EBITDA/share 113.0 DPS 20.0 Source: Company data, Kim Eng estimates 2007 -1.9 -90.0 -61.3 NA NA 12.7 0.8 4.4 -1.0 -1.1 -3.0 60.8 24.1 0.8 1.0 7.2 0.9 1.6 1.0 163.3 -9.6 33.8 322.5 983.7 43.4 13.5 2008F 1.6 795.5 147.8 NA NA 19.5 7.0 10.8 3.6 4.1 10.3 48.0 16.0 7.3 6.4 6.6 1.3 1.8 1.0 117.5 36.1 103.1 350.8 999.9 107.5 10.0 2009F 8.1 -8.2 -3.6 -11.9 -11.9 18.3 5.9 9.6 2.9 3.5 8.5 45.2 14.2 6.7 5.8 2.5 0.5 1.8 1.1 111.3 2010F 11.1 40.2 26.7 32.1 32.1 20.0 7.5 10.9 3.5 4.3 10.4 41.6 11.1 9.4 8.2 3.4 0.6 1.9 1.1 94.131.8 42.0 105.6 125.8 372.7 404.7 1,081.0 1,200.6 103.7 131.4 10.0 10.016ANALYSTS COVERAGE / RESEARCH OFFICESSINGAPORE Stephanie WONG Head of Research Regional Head of Institutional Research +65 6432 1451 Consumer Industrial Small/Mid Caps Gregory YAP +65 6432 1450 Technology & Manufacturing Telcos Transport & Logistics China Consumer Rohan SUPPIAH +65 6432 1455 Oil & gas Conglomerates Pauline LEE +65 6432 1453 Bank & Finance Retail Consumer Wilson LIEW +65 6432 1454 Property & Construction Hotel & Resort Johnny TEO +65 6432 1431 Industrial Infrastructure David LOOMIS +65 6432 1417 Special Situations KELIVE Singapore ONG Seng Yeow Head of Research +65 6432 1832 TAN Chin Poh +65 6432 1859 GOH Han Peng +65 6432 1857 Geraldine EU +65 6432 1469 Ken TAI +65 6432 1412 HONG KONG / CHINA Edward FUNG +852 2268 0632 Power Construction Ivan CHEUNG +852 2268 0634 Property Ivan LI +852 2268 0641 Bank & Finance Larry GRACE +852 2268 0630 Oil & Gas Energy Shadow LAU +852 2268 0645 Small Caps TAM Tsz Wang +852 2268 0636 Small Caps Emily LEE +852 2268 0631 Small CapsMALAYSIA YEW Chee Yoon Head of Research +603 2141 1555 Strategy Banks Telcos Property Shipping Oil & gas Gaming Media Power Construction Food & Beverage Manufacturing Plantations Tobacco Electronics INDONESIA Katarina SETIAWAN Head of Research +6221 3983 1458 Consumer Infra Shipping Strategy Telcos Others Ricardo SILAEN +6281 3983 1455 Auto Energy Heavy Equipment Property Resources Teguh SUNYOTO +6221 3983 1455 Cement Construction Pharmaceutical Retail Adi N. WICAKSONO +6221 3983 1455 Generalist Arwani PRANADJAYA +6221 3983 1455 Technical analyst PHILIPPINES Ed BANCOD Head of Research +63 2 849 8848 Strategy Banking Laura DY-LIACCO +63 2 849 8843 Utilities Conglomerates Lovell SARREAL +63 2 849 8871 Consumer Cement Media Robin SARMIENTO +63 2 849 8831 Ports Mining Ricardo PUIG +63 2 849 8846 Property TelcosTAIWAN Kevin CHANG Head of Research +8862 2547 1512 Jack CHANG 8862 2546 4965 Non-Tech Jill HUANG 8862 2546 4171 PC / Notebook Eric LIN 8862 2546 0618 Optical Chialin LU 8862 2714 9840 Communications Tess WANG 8862 2719 8105 Financial THAILAND David BELLER +662 658 6300 x 4740 Banks Shipping Naphat CHANTARASEREKUL +662 658 6300 x 4770 Energy Piya ORANRIKSUPHAK +662 658 6300 x 4710 Property Supattra KHONGRUNGPHAKORN +662 6586300 ext 4800 Electronics Automotive Tourism Kanchan KHANIJOU + 662 658 6300 x 4750 ConstructionKELIVE Thailand (for retail clients) George HUEBSCH Head of Research +662 658 6300 ext 1400 VIETNAM LE Huy Hoang +84 8 838 6636 x 160 Luz LORENZO Economist +63 2 849 8836 EconomicsRecommendation definitions Our recommendation is based on the following expected price performance within 12 months: +15% and above: BUY -15% to +15%: HOLD -15% or worse: SELL17WBL Corporation26 May 2008TERMS FOR PROVISION OF REPORT AND DISCLAIMERS This report, and any electronic access to it, is restricted to and intended only for clients of Kim Eng Research Pte. 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Kim Eng Research Pte. Ltd. accepts no liability whatsoever for the actions of third parties in this respect.19SingaporeKim Eng Securities Pte Ltd Kim Eng Research Pte Ltd 9 Temasek Boulevard #39-00 Suntec Tower 2 Singapore 038989 Tel: +65 6336 9090 Fax: +65 6339 6003 LAU Wai Kwok (sales) Stephanie WONG (research) swong@kimeng.comLondonKim Eng Securities (London) Ltd 6/F, 20 St. Dunstans Hill London EC3R 8HY, UK Tel: +44 20 7621 9298 Dealers Tel: +44 20 7626 2828 Fax: +44 20 7283 6674 David PIRKIS (sales) Geoff HO (sales) James JOHNSTONE (sales) YorkKim Eng Securities USA Inc th 406, East 50 Street New York, NY 10022, U.S.A. Tel: +1 212 688 8886 Fax: +1 212 688 3500 Jeffrey S. 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