Why I Like TAS Offshore

I like the fact that the company recently had its IPO. I like the fact that the price went down below IPO as that shows no collusion, just allowing the fringe players to sell if they want to. The IPO was at 90 sen, now its hovering at 77-78 sen. I like the buying build up in volume. Is there something wrong with the company? Doesn't look like it at all. In fact, the more I look at it the better it gets.

Its even on a more solid standing than its older listed peers like Sealink and Coastal. TAS Offshore Berhad (TAS) is involved in shipbuilding and ship repairing of vessels to the oil and gas players. TAS’s shipyards located in Sibu, Sarawak have the capacity to manufacture up to 23 vessels per annum. TAS intends to establish a new shipbuilding yard covering an area of at least 60 acres to cater for future growth. Typically construction period for a vessel range between six to eighteen months, depending on the type and specification.

However, due to the booming offshore support vessels activities, the construction period could stretch longer due to limited availability of engines. Based on TAS IPO prospectus, the group intend to move up the value chain from largely building vessels to owning and chartering offshore vessels. Apart from being a vessel owner, TAS has commenced its build, own and sale operations. Based on TAS IPO prospectus there are 6 vessels built under this concept. Theoretically, margins expansion arises in an upcycle as TAS’s raw material like steel and engines are locked in at today’s cost, while vessels are sold at tomorrow’s prices.

Datuk Lau Nai Hoh, the founder and the managing director of TAS Offshore, is also the largest shareholder of the group, with a stake of approximately 50.3% post-IPO. With about 20 years of experience in the marine industry, Datuk Lau has been instrumental in the development of TAS Offshore and is primarily responsible for the company’s planning and development of its strategic business direction. Its Non-Executive Chairman, Datu Haji Mohamed Sepuan Bin Anu, was the Agriculture Adviser in the Ministry of Modernisation of Agriculture up to April 2007.

Over the past 3 years, the Group has been growing at an impressive CAGR of 32.8%, and a bottom line growth of 43%. Its revenue, which is mainly derived from shipbuilding, has grown significantly mainly due to the Group’s endeavours to develop markets overseas. The Group has been able to secure orders from local customers, particularly from East Malaysia. Its currently running at just 7x FY09 earnings, a slight discount to Sealink and Coastal, which is really unjustified. Considering that TAS Offshore will be in a net cash position post-IPO whereas its peers are in net debt. It has a strong order book and is an established name. The recovery in oil and gas industry bodes well for the company.

Net Profit: 7.8m (06) / 14.7m (07) / 16.0m (08) / estd 20.om (09)

Issued Shares: 180m

I see no reason why it should not trade between RM1.05-RM1.10 as a fairer value range.


p/s photos: Meisa Kuroki

China's Growth Story Too Dependent On Easy Credit?

Just how dependent is the China growth over the last 6 months on the easy credit conditions? This blog has been harping on the liquidity trap that is almost inevitable. The flip side is that the markets in China and HK will continue to benefit as Beijing would continue to "allow and encourage" more state firms to list in Shanghai and/or do a H-share listing - both very effective ways to drain some of the liquidity from the system, or at least keep it within a sphere where it could be 'controlled' somewhat.

Bank lending surged in H1 2009 to RMB7.37 trillion (US$1.08 trillion), more than three times higher than H1 2008. The figure, totaling 25% of China's annual GDP in 2008, is 47% higher than the government's RMB5 trillion target for 2009. There is significant monthly variation, however. Available data suggests that lending slowed in July 2009 even more than in April and May 2009, but June loans surged to RMB1.53 trillion (US$224 billion), a return to Q1 levels. New loans could surpass the revised RMB10 trillion benchmark for 2009. The scale of loan extension has sparked sustainability concerns, raised the risk of non-performing loans (NPLs) and helped to fuel asset-price inflation (property and equities). However, concerns that the government might rein in loans contributed to a weakening of equity markets in early August.

Will Lending Growth Continue?

• Banks lent RMB1.53 trillion (US$224 billion) in June, more than double the RMB664.5 billion extended in May, sparking concerns that tightening may follow. M2 rose 28.5% in June, and outstanding loans were up 34.4% y/y in June (both record highs). The central bank may have already started to tighten, selling more bonds to soak up some of the liquidity.
• The reported lending figures from China's largest banks suggest that July's new lending should total around RMB400 billion (US$58.6 billion). Many of the commercial bills from earlier in the year will be refinanced in July through September, reducing new lending. Still, credit availability will likely remain relatively loose.
• The big four banks reportedly cut lending to RMB168 billion (US$24.6 billion) in July from RMB497 billion (US$72.7 billion) in June, though smaller banks have increased their share of lending in recent months from about half to two-thirds. As a result, lending may not have slowed as much as some estimate.
• If state-owned banks contributed one third of July new bank lending, like they did in Q2, then the July figure should come in around RMB500 billion (US$73.2 billion). Though if the trend of smaller commercial banks contributing a greater share continues, the actual figure could be higher.
• The narrowing spread between M1 (18.7% y/y in May, up from 17.5% in April) and M2 (25.7% y/y in May, down from 26% in April) suggests that economic growth is gaining momentum as corporations are increasingly confident and willing to embark on future investments.
• Loan growth shifted toward medium- and long-term loans in Q2. Commercial bills accounted for 21% in April, down from 32% in Q1, while other short-term loans declined by nearly RMB80 billion. Deposits again outpaced loans, reducing the loan-deposit ratio, which should marginally ease fears of bad debts, as firms are storing liquidity.
• Even if loan growth slows, the net increase in loans might be around RMB8-8.5 trillion, 26-28% above 2008 for loans outstanding.

Factors Behind Lending Expansion


• The People's Bank of China (PBoC) is unlikely to tighten monetary policy because the central bank is not accountable for regulating bank risk. Bank lending is playing an important role in the fiscal stimulus, and the central bank may plan to pump in money to fill holes in banks’ balance sheets from bad loans.
  
• The Banking Regulatory Committee is raising minimum capital adequacy requirements from 8% in 2008 to 12% by 2010, but the PBoC controls the reserve requirements, blunting the regulators’ ability to control loan growth.
• The China Banking Regulatory Commission may rule that subordinated debt held by another bank will no longer qualify as supplementary capital. Estimates suggest that as much as 51% of subordinated debt issued by banks (RMB210.0 billion in H1 2009, three times last year's total level) is held by other banks, which could lead banks to curtail new lending. That would be an easier path to better capital-adequacy ratios than finding buyers for the debt outside of the financial sector.
• The China Banking Regulatory Commission suggested that a concentration of credit in some industries and businesses may pose a threat to the financial system. Banks should rely more on syndication to share the risks from new lending, the secretary of the commission said.
• Loan growth is driven by monetary policy that encourages banks to expand loan portfolios. Banks make up for lower loan margins with expanded loan volumes and an assumption that stimulus-related credit losses will be covered by the central and/or local government. The increase in corporate loan portfolios and credit expansion may threaten the medium-term outlook for Chinese banks.
  
• Michael Pettis, Peking University: "Tighter monetary policy may be necessary to contain future inflationary pressures, but the unclear economic outlook and political priority of growth make this unlikely."
  
• Wu Xiaoling, PBoC Deputy Governor: The government's moral persuasion is declining. Banks should diversify, but not lend excessively in search of sustainable profits.
• Loan curbs postponed investment in H2 2006, while loans and investment reaccelerated in Q1 2007.
  

Risks from Lending Growth

• The efficiency of new loans is in doubt, as the economy does not have the capacity to turn these new loans into real activity. Potential tightening policies would further challenge the financing of small and medium sized enterprises.
• NPLs may not reach 1990s levels, as most of the current round of lending has gone to local-government-backed projects rather than unprofitable state-owned enterprises. Also, because Chinese banks are more dependent on deposits than wholesale markets for funding and China's capital account remains closed, there is little risk of a financial crisis.
• As much as 20% of the bank loans in the first five months of 2009 (US$170 billion) was invested in the stock market, while another 30% may have been used for discounted bill financing.
• China's National Audit Office found that six Chinese banks in 2008 had extended more than US$4.39 billion worth of irregular loans, an indication of inadequate management at some of the banks' local branches. The issues included improper land purchases, fraudulent mortgages and loans to non-qualifying property developers and non-approved mortgages.

p/s photos: Meisa Kuroki

Can Asian Markets Continue To Outperform The Rest - Revisited

Asian equity markets have outperformed mature markets in 2009 thanks to continuous foreign institutional investor (FII) inflows amid diminishing risk-aversion among global investors and some signs of green shoots in Asia. As of July 8 2009, MSCI Asia Pacific gained 11.6% ytd with China and Sri Lanka as the best performers, and Australia and New Zealand as the worst performers. Despite impressive improvements, downside risks remain due to bleak corporate earnings outlook, worries over the real economy and revival of any global risk aversion.

Trends
# 2009 MSCI Asia Pacific performance in USD terms: 11.6% ytd as of July 8, up 38.7% during March 2-July 8
# 2009 MSCI Asia performance in USD terms: 11.3% ytd as of July 8, up 38.0% during March 2-July 8
# 2009 MSCI Asia (ex Japan) performance in USD terms: 29.8% ytd as of July 8, up 57.1% during March 2-July 8
# Best performers (ytd as of July 8, 2009): China: 71.5% | Sri Lanka: 56.2% | Indonesia: 53.8% | Taiwan: 47.0% | India: 42.6% | Viet Nam: 41.4%
# Worst performers (ytd as of July 8, 2009): the Philippines: 30.1% | Singapore: 31.0% | Thailand: 29.3% | South Korea: 27.3% | Pakistan: 26.7% | Hong Kong: 23.7% | Malaysia: 21.6% | Japan: 4.9% | Australia: 1.1% | New Zealand: 1.0%
# In 2009: Asia's equity market (ex Japan) have outperformed mature markets, up 29.8% ytd as of July 8 2009, while the S&P 500 Index and the U.S. Dow Jones Industrial Average fell 5.6% and 9.5% respectively during the same period. Continuous FII inflows to Asian equity markets have taken net flows to a positive US$14.4 billion as of June 24 2009, significantly up from US$10.8 billion in H1 and US$9.6 billion in H2 2008.
# Since March 2009, Asian equity markets have witnessed a rally following a surge in U.S. markets and began to benefit from the widening valuation gap on the back of relatively resilient macroeconomic fundamentals. During the March 2- July 8 period, MSCI Asia (ex Japan) rose by 57.1%, significantly higher than the S&P 500 Index and the Dow Jones Industrial Average which gained 25.5% and 20.9% respectively.
# Valuations: Taiwanese shares are the most expensive in the region, 64.6 times reported earnings, followed by New Zealand (38.0x), China (33.1x for A-shares) and South Korea (32.1x). On the other hand, Singapore (12.1x) and Pakistan (9.7x) are cheapest when compared to their regional peers.
# 2008 Review: The peak-to-trough decline in Asian equities in 2008 (more than 70% for some markets) surpassed the 60% fall in local currency terms during the 1998 Asian financial crisis. Sustained outflows from offshore Asian funds took total net redemptions in Jan-Oct 2008 to a record high such that all money that flowed in during 2007 flowed out.
# Market Integration: There is a noticeable upward trend in the Asia-U.S. correlation with the correlation parameter picking up sharply in H2 2008 (peaking during mid-Oct 2008). However, average correlations for emerging Asian equity markets are generally higher between the region's markets than with U.S. markets.
# Government intervention: Several countries including Taiwan, Pakistan, Vietnam, Thailand intervened in the stock market by narrowing the trading band, introducing stabilization fund to contain volatility, banning short-selling, directing government funds to buy share.

Outlook
# Upsides: AXJ region is now attractively valued, and buying into most of the region's equity markets seems a better bet than bonds amid increasing bond issuance. Also, as of end April 2009, market capitalization of Asian Pacific markets ($10.2tn) has come ahead of that of European markets ($9.3tn, including Africa and the Middle East) as Asian stock prices sour at a faster pace than European ones.
# Downsides: Goomy earnings forecasts, worries over the U.S. economy, exit by local investors and also FIIs alarmed at greater than expected impact of global slowdown on Asia's growth, exports, fiscal deficits, slowing consumer spending and investment may have negative impacts. Investors may move money to bond markets from equity markets in an anticipation of slower global economy's recovery due to the spread of swine flu. High (external) debt exposure of corporate sector in some countries and risks of real estate correction and bank profitability are additional risks.
# Given decreasing inflationary pressures and relatively healthy fiscal positions, further fiscal and monetary stimulus policies by Asian governments will able to boost the region's equity markets in H2 2009.
# Prospects for further inflows into Asian equities remain substantial, as global portfolio continue to adjust from relatively underweight positions, and given cheap equity valuations relative to bonds.
# Asian stocks have yet to reflect expectations for a powerful, synchronized recovery in the global economy as markets are still bearish on global growth and on emerging markets growth.
# Markets would likely grind higher first, before dropping by 20-30%: Catalysts for a correction are (1) flattening improvements in second derivatives; (2) softer than expected data coming out of China and; (3) a US% rally, which takes liquidity out of Asia ex.
# The recent rally in Asian equity markets might not continue due to still-weak real economic condition in many countries and the region's ultimate reliance on exports to the U.S. and EU, which means that financial-investor sentiment will remain susceptible to economic setbacks in those markets.


p/s photos: Meisa Kuroki

Further Clarifications On IOI Corp

Gamelion said...

I dont understand why all the bad news can be contained in one shot only & expect good news in future (nobody will be able to predict the future)???
Even if the company has sold 80% of its sales forward there is no guarantee that its customers will not be defaulting on their contracts if the CPO price may plunge in future .

Gamelion, Thats a good point. I don't know what to say to that. You are right, I am not so right.

solomon said...

Like Cramer, I prefer a micro view on IOI.

The only thing catch my eyes are the lower FFB production. Will this trend continue, could it still have revenue growth at the plantation sector for the next few quarters?

I am also of concerned with the contract default, I don't know how serious is this? Can this be absorbed by the downstream activities?

Longer term, other continents are on the rise in growing palm oil. Should they succeed, could this threaten the company financials?

There had been defaults for sure, and every time when prices plunge, there are bound to be defaults, because the situation "allows" them to default. IOI has stated that it has required smaller buyers now to put up bankers guarantee. The company will lose some business because of that because smaller sellers may not require that. Sometimes companies can only operate alongside what the majority are doing, if not, they risk losing business. In CPO, you can have the edge in production and yield management, but after it becomes a finished product, its a commodity, your palm oil is no different from those bought from a competitor. Hence if you put up "safeguards", it will affect your business. Lower production may have to do with better yield management in light of weaker prices. You can delay "harvesting" somewhat and manage your plantations to some degree. Hence lower production should not be a major cause for concern.

There will always be new competitors. Its the same for all commodities. When oil prices shoot up, there are plenty of new drilling and exploration, and even new technologies being used. We have to be clear that palm oil is still much cheaper than most alternatives, and still being unfairly painted as it is certainly a healthier alternative to most substitutes. We also have to know that it need temperate climate, and we are really do not have vast tracts of land left. You need a huge land base to have strong economies of scale, what you don't want is many small plantations scattered everywhere. In many areas, oil palm favours large players and established players with upstream and downstream businesses.

11:59 AM

sam chong said...

If currency other than RM and Euro is used in the inter-co sales and purchases, by right one party's loss is another party's gain, so the group should be neutral. Combining the plantation and the resource-based, the margin dropped from 16% to 12 at a time when the CPO price realised was higher than last year 2900 vs 2700. ??

Currency losses can never be avoided, they can only be mitigated. IOI's losses is a concern as it speaks volumes on their hedging activity, registering those losses as a percentage of revenue basically implies that management takes a certain view on certain currencies. Investors do not want that. Investors want to buy a CPO producer and a good one at that, currency management expertise is not part of the deal. IOI management should eliminate that from their management purview.


p/s photo: Meisa Kuroki