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Jul.03, 2009
Event: Signed MOU with its Saudi Arabia subsidiary for another 20 years(Positive.)
Primasia Comment
Taiwan Fertilizer signed a MOU with its Saudi Arabian subsidiary Al-Jubail, extending the contract for another 20 years from 2013 to 2033. Al-Jubail has been a cash cow for the Taiwan Fertilizer, contributing more than 90% of pre-tax profit over the past few years.
In our sum-of-the-parts valuation, the market value of Taiwan Fertilizer’s property holdings make up 55% of its NAV. Therefore, we conducted a scenario analysis in order to justify our assessment to possible property price fluctuations (Exhibit 3). Taiwan Fertilizer currently trades at an 8.5% discount to its NAV of NT$118.
Jul.03, 2009
Event: Everlight (2393 TT) is filling up Tekcore’s HB LED chip capacity(Positive.)
Primasia Comment
As Everlight (2393 TT/NR/NT$88.80) recently acquired a 16% stake in Tekcore (3339 TT/NR/NT$27.75) in a strategic investment it began to release LED chip orders to Tekcore. According to local media, Tekcore plans to add another three MOCVD systems and to increase its high-brightness (HB) blue LED chip capacity by 50% in order to handle the increased demand. With the newly added orders and improving product mix to higher-margin HB LED chips, the street is expecting Tekcore to achieve monthly sales of NT$100mn in July (NT$91mn in May) and gross margin to return to 20% or above in 3Q09 (-40% in 1Q09).
We are positive on both Everlight and Tekcore. Earlier, Everlight announced it would subscribe to 20mn shares, or 16%, of Tekcore at NT$14/share through a private placement and became Tekcore’s biggest shareholder. The move paid off immediately as Everlight gained more supplies of HB blue LED chips while other downstream packagers are struggling to find an adequate supply of chips. During our recent talk to Tekcore its management indicated that its latest development allows for mass producing LED chips with 2,000 mcd or above, which makes it Taiwan’s third LED chipmaker capable of supplying chips for large-size NBs and TV backlights.
Everlight is currently trading at 28x street consensus 2009 EPS of NT$3.2. Compared to local peers Bright LED (3031 TT/NR/NT$35.4) and Harvatek (6168 TT/NR/NT$25.45), which both trade at 2009E PE of 31x, Everlight is relatively undemanding given its superior upstream chip supply and higher growth potential.
Source: Primasia Investment Consultancy Co., Ltd.
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Jun. 12, 2009
Its Land Assets Speak for Themselves
- Disappointing 1Q09 results. Taiwan Fertilizer reported 1Q09 after-tax profit of NT$403mn or EPS of NT$0.41, down 58% YoY. The company attributed the disappointing 1Q09 results to a significant earnings slump from subsidiary Al-Jubail. In 1Q09, investment income booked from Al-Jubail totaled just NT$296mn, down 71% YoY from NT$1.02bn in 1Q08.
- Commercial property poised to catch the eyes of PRC investors. Taiwan Fertilizer owns massive land assets island-wide, with a book value of NT$26.4bn compared to their market value of some NT$62bn. Of these properties, commercial land parcels in the Nangang District of Taipei City account for 61.5% of the total property market value. As current available floor area for commercial-use office space only totals 25,751 pings (84,978 sqm) in Taipei City, we believe that once PRC capital begins coming to look for investment opportunities, Taiwan Fertilizer is well-positioned to catch PRC investors’ eyes.
- Residential projects add fuel to the bottom line. Taiwan Fertilizer launched its first residential project in Taipei’s Nangang District in September 2008. The sell-through-ratio was slow until February 2009. Fortunately, improving macroeconomic data and positive cross-strait policies helped potential homebuyers regain confidence in the property market. As a result, Taiwan Fertilizer reports a pre-sale ratio of 70% as of today. Although the earnings contribution from this project is expected at NT$240mn, it will account for only 7.6% of the company’s 2009E pre-tax profit. We expect the upcoming residential projects named R13 and R4-1 to add fuel to the company’s bottom line over the next three years.
- Our scenario analysis suggests a NAV of NT$118. In our sum-of-the-parts valuation, the market value of Taiwan Fertilizer’s property holdings makes up 55% of its NAV. Therefore, we conducted a scenario analysis in order to justify our assessment to possible property price fluctuations. As TAIEX is due for a correction, we see share price support at NT$85 under our Scenario 2 sensitivity analysis. For a 12-month time horizon we suggest a NAV of NT$118; this figure offers a potential 25% upside to the latest closing share price.
Source: Primasia Investment Consultancy Co., Ltd.
Jun. 12, 2009
Double catalysts fuel its growth
- Domestic auto market should bottom out in 2H09. From May 2008 through January 2009, this market experienced average monthly YoY declines of over 30%. Over the last four months, however, these declines have slowed to 5%. We expect to see a mild recovery in 2H09 given that the comparison base of 2H08 was extremely low, oil prices are only half their peak in 2H08 and the consumer confidence index finally started to show recovery in April after declining for 11 consecutive months since April last year.
- Land asset development in Xindian (Taipei County) is likely to kick off in 1H10, to be converted into commercial and residential use. The company originally planned to find a land development partner in 1H08 and launch its residential project for pre-sales in 2H08. This was postponed, however, as both trading volumes and selling prices in the housing market dropped significantly in 2H08. Now with the property market gradually recovering, Yulon plans to launch a commercial building project comprising offices, a hotel and a shopping mall. According to the company and our estimates, the residential project could contribute NT$5-$6/share to Yulon's bottom line within 3 years after launch.
- Our NAV estimation shows upside. As domestic consumption remains weak, we applied a 20% discount to our land asset valuation. In our sum-of-the-parts valuation, land assets account for 32% of the NAV. After its share price shot up by over 100% this year, it is currently trading at 0.7x its NAV of NT$40, in its historical mid-cycle. Valuation is undemanding from a long-term perspective.
Source: Primasia Investment Consultancy Co., Ltd.
Jun. 12, 2009
Revisiting a Safe Haven
- Strong yield makes it a safe haven of choice. Based on our payout ratio and capital reduction projections for 2009, at 8.6% CHT currently offers the highest yield based on 2009E earnings when compared to its peers Taiwan Mobile (3045 TT/NR/NT$56.9) at 6.5% and FarEasTone (4904 TT/NR/NT$38.65) at 7.1%. As the TAIEX has surged 56% since February, CHT may become a safe haven of choice and receive strong market attention once again.
- Capital reduction close to NT$1.5 is likely in 2010. Based on historical trends and CHT’s intention to lower its return on equity to a level comparable to local peers, we believe another capital reduction is likely and project CHT to return 15%, or NT$1.5 cash per share, in 2010.
- Asset play is one step closer. CHT indicated that Taiwan’s Ministry of the Interior has approved some of its land usage conversion projects, allowing the rezoning of properties to residential or commercial use. It plans to develop the unused land (up to 10%-20% of its landbank) either with its affiliate, Light Era, or with an outside partner in the future.
- Potential PRC benefits in the longer term. CHT is teaming up with PRC telecom operators on undersea cable installation and a TD-SCDMA trial network. Such projects will facilitate more intense strategic alliances in procurement and R&D and create bigger scales of economy for CHT and its partners. Valuation is undemanding with good upside potentials. Our scenario analysis based on SOTP calculation showed that CHT has a fair value of NT$63.4 and offers 17% upside potential should the market goes bullish. We like its attractive yield and potential upsides in the upcoming events and suggest investors to overweight the stock.
Source: Primasia Investment Consultancy Co., Ltd.
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| TAIEX |
6667.53 |
| Electronics Index |
262.92 |
| Financials Index |
825.53 |
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