Excerpts from latest analyst reports…

CIMB upgrades Ziwo from ‘hold’ to ‘buy’ with 35-cent target price

Analyst: Leong Weihao

Image Upgraded to BUY (from HOLD); target price of S$0.35 unchanged. Ziwo’s 2Q10 net profit of Rmb32.4m (+12.2% yoy) was in line with our expectation, forming 30% of our FY10 forecast. 1H10 net profit of Rmb51.9m (+0% yoy) represents 48% of our full year estimate.

• We have upgraded the stock to a BUY (previously HOLD) rating, as we believe that prospects have improved, as seen from its 2Q results.

The stock trades at a mere 3x CY11 P/E, which in our view is unjustified, considering the improvement seen in 2Q and the expectations of a better showing in 2H10.

Moreover, nearly half (47%) of its market capitalization is backed by its net cash per share of 12.2 scts (no gearing). No change to our EPS estimates, while our target price remains at S$0.35, still pegged at 4x CY11 P/E.

• After a less than convincing 1Q10 performance, 2Q10 result calmed nerves with a positive showing that lifted 1H10 profits on par with 1H09 levels.

The positive in our view, came from the expansion of both output volumes and ASPs on a yoy basis. With a positive outlook for demand in 2H10 coupled with the gradual ramp up of production capacity, we believe that 2H10 could better the first half’s showing.

Positive about 2H10. With the expanding market demand for Ziwo’s products coupled with its gradual ramp up of additional production capacity, we believe that the Group’s performance in 2H10 could better the first half’s showing. Moving forward, the Group will continue to focus on its strategy of developing its proprietary technology and know-how to develop new products and to improve its production process to enhance product quality and reduce production costs.

Stabilising margins a key challenge. After the sharp rise in key raw material prices in 1Q10 against 1Q09 prices (when raw material prices were rock bottom), raw material prices have showed signs of stabilising in 2Q10.

We continue to expect raw material prices to remain volatile as competition for raw materials may further raise
current price levels. Nevertheless, we see indications that Ziwo has been able to gradually pass on the burden of higher raw material costs to its customers. We believe that it could continue to do so in the second half of the year, hence elevating some pressure on its margins.

Recent story: ZIWO HOLDINGS: Bullet-proof business in bullet-proof vests?

CIMB raises target price of SERIAL to 17.5 c

Derek Goh, chairman & CEO, Serial System, speaking to analysts. Photo: Cheng Siew Hooi

Analyst: William Tng

Second half should be exciting still

• Maintain BUY. Target price raised to S$0.175 still based on 20% discount to sector CY11 average P/E of 9.7x.

• 1H results strong with sales driven by North Asia, especially industrial products. 1H net profit of S$6.5m is almost 87% of FY09 profit. Management expects demand into 2H10 to remain strong with 3Q bettering 2Q performance.

• Interim DPS of 0.28cts is more than doubled that of 1H09. The dividends will be payable on 1st September 2010. Shares go ex-dividend on 17th August.

What’s worth watching

• Management’s plan is to payout 40-50% of profit with interim dividends representing one third of full year dividend payout. This would suggest still attractive prospective yields 6-8%.

• Taiwan is only 4% of Group sales. Given the scale of the electronics sector in Taiwan, Serial will likely step up efforts to increase revenue contribution from Taiwan. Don’t expect fire works though as Serial will be sensible and target second/third tier suppliers instead of head on competition with established peers such as WPG.

• In line with plans to grow the Taiwanese business, management may consider a TDR listing to raise funds. In addition, a TDR listing could give greater comfort to Taiwanese banks and make it easier for Serial to partially fund its growth via bank borrowings from Taiwanese banks.

Potential pitfalls

• Serial System is in the distribution business; as such it should not be a surprise to see net gearing rising to 0.6x in 1H10 given the 62% increase in sales. Net gearing in FY09 was 0.3x and in was 0.2x 1H09.

We know the risk of high gearing and so does Serial’s CEO. Proceeds from conversion of its outstanding warrants by end CY10 and a possible TDR listing should be able to bring the gearing level down again.

• The other risks to watch out for in 2H10 continue to be risk from bad debts, inventory provisioning and the strong Singapore dollar versus the US dollar.

Recent story: SERIAL SYSTEM: 448% surge in 1H profit to $6.5 m

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