PhillipCapital Regional Corporate Day Key Takeaways 23 March 2015 We organized PhillipCapital Regional Corporate Day on March 10th in Singapore. In the day-long event we hosted 17 leading corporates across Asia. An action packed day! Participants INDIA Aarti Industries Can Fin Homes Container Corporation of India Finolex Industries JK Cement Kaveri Seeds (no summary) Tata Communications Ultratech Cement (no summary) Va Tech Wabag INDONESIA Garuda Indonesia Sawit Sumbermas Sarana Tiga Pilar Sejahtera Food SINGAPORE OSIM International Raffles Medical Group Sheng Siong Group THAILAND Beauty Community Inter Far East Engineering Page | 1 | PHILLIP SECURITIES RESEARCH (SINGAPORE) MCI (P) 019/11/2014 Ref. No.: SG2015_0103 REGIONAL CONFERENCE KEY TAKEAWAYS Aarti industries We have hosted Mr Rajendra Gogri – Chairman & Managing Director, Aarti Industries (Aarti) in our Regional conference in Singapore. The key takeaways from the conference are as follow: Aarti operates under three segments like - specialty chemical (~85% of sales), bulk pharmaceuticals (~ 10%) and personal care (~ 5%). The key target industries for its specialty chemical business are – Polymers (composite materials), agro chemicals and pigments/dyes with almost equal revenue share for the company. It expects relatively stronger growth 10-12% growth in the demand from polymer and agro chemical segment. In addition, capacity expansion should boost Aarti’s overall growth in near future. Hence, the company guides for 15% annual volume growth with margin expansion of about 200bps over next two years. Aarti’s German based competitor for benzene derivatives - Lanxess has stopped manufacturing Para Nitro Chloro Benzene (PNCB) and Ortho Nitro Chloro Benzene (ONCB) due to lower captive demand. These two are important products of Aarti. This coupled with an ongoing capacity expansion in Nitro Chloro benzene should benefit the company in near future. Aarti believes rising scale, customized product delivery and balancing of coproducts is the key to successful growth in specialty chemical business. In order to achieve scale, it has added processes like hydrogenation, ethylenation, etc. Simultaneously, it generated demand for customized products in various target industries in order to balance the co-products (isomers) which is important for scale up. Aarti has a large basket of >155 products under specialty chemical and about 45 products in the pharmaceuticals space. Agro chemical is the leading target industry for Aarti’s specialty chemical business with 30% share followed by polymers 27%, pigments 19%, dyes 5%, etc. BASF is the largest customer with 8% of Aarti’s sales. Aarti is currently on track with capex worth about Rs 5000mn over FY15 and FY16, which should be the capex cycle apex. It doesn’t expect any major capex till FY20. Currency fluctuations in the emerging markets would have no implication on Aarti as 95% of its exports are dollar denominated. However, the long term growth projects for the company could be – 1) CRAMS in Agro Chemical business or 2) JV with global chemical player in the field of polymer or 3) new chemistry based product. Can Fin Homes We have hosted Mr. C Ilango –Managing Director of CanFin Homes (CANF) in our Regional conference in Singapore. The key takeaways from the conference are as follow: CANF expects loan book to grow over 30% CAGR through FY14 -20 taking the loan book to Rs350bn from Rs76bn currently. The incremental branch additions would play a pivotal role in contributing higher loan growth. Non housing proportion of the loan book which was at 1% of loan book in FY11 has increased 13%. CANF is targeting to increase it further to 20% of the book by FY16, and eventually to 25%, this would be NIM accretive. Incremental borrowing is largely done through NCD & Commercial paper at 8.5%. The proportion of NCD in overall borrowings to increase to 50% by FY16 from 24% currently. Change in the borrowing mix coupled with higher non housing loan and proceeds from right issue are expected to drive margin from 2.5% currently to +2.8% by FY16. CANF plan to increase branch network to 150 by FY16 and to 250 branches in FY20. With the maturity of the newly opened branch, the cost to income ratio is Page | 2 | PHILLIP SECURITIES RESEARCH (SINGAPORE) REGIONAL CONFERENCE KEY TAKEAWAYS expected to moderate. The new branches would take around nine months to breakeven. NPAs are currently at ~0.25% lower compare to the Industry average which is about 0.7%. CANF follows prudential lending and targeting mainly to salaried middle class. Will look to also lend to non salaried where interest rates higher CANF just completed a Rs. 2.7 bn rights issue which should take care of its capital needs till 2017. The stock trades at approx 2X FY17 P/B, and generates ROE around 17%. Container Corporation Tariff hike in container in December was a shocker for Concor and totally unexpected. Overall the haulage charges were increased by 18-20%. Concor decided not to pass this on completely to end consumer since a) did not want to show the railways that it is easy for Concor to pass on hikes, b) did not want to lose market share to roads Domestic volumes have suffered on account of the hike Can further increase utilization by reducing the empty wagons by 3-4% and by using double stacking Are looking at 14-15% growth in volumes ex the DFCC but are having rolling stock issues as wagons are being diverted towards imports In Q415, domestic growth is 2-3% post strong growth earlier on sudden increase in imports and rate increases There has not been any significant change with the new railway minister coming on board Looking at acquiring surplus rail land for leasing as mentioned in the rail budget; however not much available since they want land of 200-300acres to house storage facilities as well for customers Finolex Industries We have hosted Finolex Industries (FI) in our Regional conference in Singapore and Mr Anil Whabi – President Finance has represented the company. The key takeaways from our conference was as follows: FI is the pioneer of PVC pipes and fittings industry in India with 25% market share in the organised market of PVC pipes in India. It has current capacity of PVC pipes 2.5lakh MTs p.a. It has infrastructure to increase by another 1lakh MTs at a marginal incremental capex. It is the only PVC pipes manufacturer in India which is backward integrated in the production of PVC resin (capacity of 2.72lakh MT p.a) with the advantage of a consistent quality of raw material at a lower cost, than the prevailing import parity of PVC resin. Though FI is the leader of PVC pipes in India, its business presence is concentrated around western and southern India. It is currently taking further steps to aggressively grow in East India and North-East India. Union Budget 2015 has emphasized on increasing irrigated area and initiated a campaign of “housing for All” by 2022, which provides huge growth visibility for the industry leader of PVC pipes like FI. FI distributes its PVC pipes through 600 dealers across India. Its focus on branding of its pipes helps it distribute to its products on its Cash-n-carry (purely on cash) model. Leveraging its strong brand equity position, the company wants to distribute few third party products under Finolex brand. Implementation of GST would benefit the company indirectly as the unorganized play (accounting 40% of total PVC pipe market of India) would face a hard hit. FI has a freehold land of 78 acres at Chinchwad (near Pune) and it is evaluating for monetization, which should benefit the company in near future. Currently FI has gross debt of Rs 7.0bn and it has plans to make it a zero debt company in next 3 years time. Page | 3 | PHILLIP SECURITIES RESEARCH (SINGAPORE) REGIONAL CONFERENCE KEY TAKEAWAYS JK Cement Volume ramp-up will be immediate; volume guidance remains robust: JKCE continues to give a robust volume guidance of +8mn tns of grey cement for FY16. 9MFY15 grey cement volumes at JKCE have seen a robust growth of ~20%. JKCE expects to easily sustain this robust double digit volume growth in FY16. JKCE also firmly believes there will be no operating bottlenecks which will delay the ramp up of utilisation levels of the expansions. The capacities will see healthy utilization levels in FY16E. Over FY16, while all of the North capacities of JKCE are expected to operate at par with the industry utilisation levels; utilisation guidance for south is at 65%. The utilization level expected at Fujairah plant in CY15 is at minimum of 50-60%. Efficiencies with the new expansion will help curtail costs: JKCE has been a consistent sufferer on operating front due to operating inefficiencies at its Nimbahera plant in Rajasthan. While the other North and South units of JKCE remain state of art in terms of technology, Nimbahera unit has inherent inefficiencies with regards operating cost. JKCE expects immediate cost efficiencies of ~Rs100/tonne in its overall operating matrix with the commissioning of its Brownfield expansion at Mangrol. Moreover, in times of lower than optimum capacity utilization levels, this new unit gives more flexibility to JKCE of shifting operations to a more cost efficient production platform and help maximize profitability at the company. JKCE has guided for operating cost efficiencies of ~Rs350/tn at the new site. Concerns at UAE to be addressed by Q1FY16: JKCE’s UAE operations have already commenced operations but however these operations are yet to be EBITDA positive. Absence of power supplies from local authorities is the major concern area for JKCE here. The management believes all of these issues have now been sorted out and they expect power supply problems to get solved very soon. Notably, the entire required infrastructure for supply of the requisite power is already in place at the UAE site and hence it will not take much time for JKCE to capitalize on the benefits. JKCE expect to turn EBITDA positive as and when this issue gets resolved. Buy with price target of Rs836 (+18%): JKCE is the only mid-cap which is completely out of the capex mode now. While other peers will have an excuse of gradual volume ramp-up at the expansion sites, JKCE will have a competitive advantage to deliver immediate volume growth and gain possibly gain a few points on market share vis-àvis mid-tier peers. Structurally, JKCE remains best placed to gain the maximum with volume growth (amongst mid-caps) in FY16 and FY17. Moreover a largely diversified capacity portfolio of the company de-risks the business model both, regionally and also on business segments. It was also clarified by the Management that the next phase of capex is unlikely to be announced before 12-15 months of times and all energies of the senior management will remain focused on stabilizing operations at all the existing sites. The priority will be to gain on efficiencies with new capex and see a structural change in the operating matrix of the company. Page | 4 | PHILLIP SECURITIES RESEARCH (SINGAPORE) REGIONAL CONFERENCE KEY TAKEAWAYS Tata Communications Tata Communications discussed the various business verticals and stressed on the improving metrics in the enterprise data services business. The following are the key points: Whole sale voice is growing globally at 2% annually according to Telegeography. Tata Communications focuses on quality of minutes and the business focus is to improve cash flows from the business. The voice business segment generates around US$ 90mn cash and it has very limited requirements of capex. Focus of the company will be to grow the cash flows sustainably with market share gains. Enterprise data services will be key growth driver for the company and Tata Communications focuses on providing complete suite of data products catering enterprise requirements. Tata Communications is in the leader quadrant of Gartner’s magic quadrant and it has consistently improved its position. The company focuses on managed and cloud based services which are the primary growth drivers in the enterprise domain. New product launches like IZO are seeing good acceptance and client addition rate is improving. Improvement in operating metrics is significantly ahead of the financial results. Revenue traction comes with a lag in enterprise data services and Tata communications is seeing consistent deal wins which will help in future revenue growth. Capex guidance for the company continues to US$ 250 – US$300mn but depending on the market opportunities the capex could is likely to be at the top end of band in the near term. Overall the company sees voice as stable business generating cash flows and enterprise data to be the growth driver with significant improvement in traction. VA Tech Wabag No change in guidance for revenues and orders for FY15. Guidance maintained on orders for FY15e at Rs32-34bn and revenues at Rs26-27bn. The sharp depreciation in the euro remains one of the key risks to the guidance, in our view. Note that ~40-45% of VA Tech Wabag’s revenue comes from overseas with Europe being one of the key contributors to the top line Are not witnessing any increase in competition from the Chinese in India – most of the European and Asian players are already present in India and there has not been any increase in the competitive intensity of late. There not been any significant on the ground improvement in the end markets (Industrial/municipal) since the new government has come into power – there has been a lot of talk but little action has happened till now. The Ganga cleanup programme is a very ambitious project which has been taken up by the new government in earnest. The management noted that currently the project is in the planning stage and actual ordering should start soon. Note that VA Tech has recently won a 140MLD sewerage treatment plant in Varanasi under the Ganga Action plan. Page | 5 | PHILLIP SECURITIES RESEARCH (SINGAPORE) REGIONAL CONFERENCE KEY TAKEAWAYS Garuda Indonesia Represented by: Mr. Ari Askhara, Chief Financial Officer Mr. Heri Akhyar, VP Investor Relation Undergoing major turnaround from restructuring phase to expansion phase Garuda presented revenue-generation and cost-saving plans for 2015. The airline has undergone “Survival Phase” until 2007, “Restructuring Phase” in 2008-2011, and is now undergoing expansion phase from 2012 onwards. Fleet size grew from 106 units in 2012 to 189 units in 2015, with average age of aircrafts reduced from 5.8 years in 2012 to 4.0 years in 2015. Airline business is highly dependent on GDP per capita and purchasing power. Garuda projected 12.5% revenue growth for FY15E - equal to more than 2x Indonesia’s expected GDP growth range (5.1% to 5.8%). Revenue generators for 2015 include: 1) Flight routes restructuring: to reduce flights on unprofitable routes, postpone opening new routes, and adjust flight schedules to various destination cities in Australia and Europe. 2) Developing routes in China: Charter flights to cities in China besides the 3 major cities currently served by Garuda (Beijing, Shanghai, Guangzhou), such as Chengdu, Chong Qin, Ningbo, Kunming, Jinan, Harbin, Xian, Shenyang, and Chengzhou. 3) Developing markets to the Middle East, especially expanding services for the Islamic pilgrimage destinations. Cost-saving plan include: Potential saving from lower fuel price: US$ 172.25 million; Potential saving from efficiency initiatives: US$ 146.94 million. Efficiency initiatives include using GPU generators, and conservation of fuel, which could contribute 25% to cost reduction. Operational Performance Garuda’s Available Seat Kilometers (ASK) grew 16.3% yoy in 2014, higher than Qantas (5.9%), Air New Zealand (2.2%), Singapore Airlines (-0.1%), and Tigerair (-4.7%). Revenue Passenger Kilometers (RPK) grew 12.7% in FY14. Load factor, however, shrank 2.3% in FY14, as fleet expansion pace exceeded revenue-passenger growth. Garuda’s Cost per Available Seat Kilometers (CASK) is one of the lowest among full service carriers in Asia Pacific: 7.5 in 2013, and 7.6 in 2014. Fuel comprises 40% of Garuda’s operating expense. The airline’s target for fuel hedging is 50% for this year. Up to date of the conference, around 25% has been hedged. Aircrews cost around 5% of operating expense. Garuda plans to increase crew service capacity from currently 1:50 (1 flight attendant servicing 50 passengers) to 1:55. As a comparison, SQ crew service capacity is 1:60. Spillovers due to recent AirAsia’s unfortunate accident and Lion Air’s delay incidents may boost Garuda’s February domestic market share to nearly 50%, from currently around 39%. Funding Plan: IPO of MRO subsidiary Garuda has no plan to add debt to fund its expansion. Current debt-to-equity is 1.1x. The company said it is considering the IPO of its Maintenance, Repair, and Operations subsidiary - Garuda Maintenance Facility Aero Asia (GMFAA). GMFAA is a profitmaking unit of Garuda, with FY14 (unaudited) net income of US$ 16.89 million. Page | 6 | PHILLIP SECURITIES RESEARCH (SINGAPORE) Gunawan Sutanto [email protected] REGIONAL CONFERENCE KEY TAKEAWAYS Sawit Sumbermas Sarana Represented by: 1. Mr. Hadi Susilo, Investor Relations How do you tackle the lower price of CPO All plantation companies, as price taker, could not dodge the bottoming CPO prices. Cost management is one of the differentiators between the planters. One of SSMS competitive advantages is cost efficiency. SSMS CPO production cost / MT in 2014 was USD 224, much lower than average competitors of USD 300 – 400 / MT. That efficiency occurred as the plantation areas are concentrated in the same area and all operations such as mills, port, and refinery are located within 50 km radius. What to expect from current acquisition of Tanjung Sawit Abadi (“TSA”) and Sawit Multi Utama (“SMU”) TSA and SMU are palm plantations owned by CBI group – initially outside SSMS. Post acquisition, SSMS owns 59,386 ha planted area, increased from 34,046 ha previously. The plantation age profile adjusted from 8.7 years to 5.5 years, which allows SSMS to continue its strong growth profile. After the acquisition, the FFB production in 2015 is expected to increase more than 40% as compared to last year. The acquisition value was USD 8,593 / planted ha, which was very attractive as compared to other similar acquisition done recently which averages at USD 10,988 / planted ha. Total transaction of TSA and SMU is IDR 1.55 trillion. The financing sources come from combination of IPO proceed, internal cash and issuance of new loan. IDR depreciation’s effect on SSMS cost structured and why SG&A rose significantly in 2014 CPO price is quoted in US dollar, hence stronger USD will benefit SSMS. SSMS main cost is in IDR, but fertilizer cost, which contributes around 30%-35% of total plantation cost is in US dollar term. In 2014, post-IPO, SSMS opened a representative office in Jakarta. And, to comply with regulations, there were some additional positions, such as audit committee, remuneration committee, corporate secretary, etc. to join in the management level. There were also IPO fees that caused SG&A to increase significantly. Plan for upcoming years SSMS will keep focus on upstream production. Meanwhile, for the downstream line will be taken care of by its parent, CBI Group. SSMS focuses on its core competence, which is upstream palm oil production, because it provides higher margins as compared to downstream business. Previously, Sinarmas and Wilmar absorb 80% of SSMS production. In coming years, SSMS plans to distribute its CPO output to other refineries such as Salim Ivomas Pratama, Asiana Agri, and First Resources to minimize third party risk. As of now, SSMS owns four CPO mills and another CPO mill with 180,000 MT FFB processing capacity will start commencing in 2Q15. SSMS also plans to open another CPO mills in 2017. Page | 7 | PHILLIP SECURITIES RESEARCH (SINGAPORE) Martha Christina [email protected] REGIONAL CONFERENCE KEY TAKEAWAYS Tiga Pilar Sejahtera Food Represented by: 1. Mr. Sjambiri Lioe, Chief Financial Officer 2. Mrs. Desilina, Corporate Secretary Food Manufacturing business – Catering middle income classes through innovation TPS food shared with the “buy-side” on the new products launches especially for the snacks products. This year, the company is going to launch several new snacks products including the new net flavors and 3D new flavors of its flagship “Taro” snacks which they took over from Unilever and also other snacks such as biscuits, crackers, wafer sticks and other extruded snacks. The company also introduced new variances of its instant vermicelli “BihunKu”. To penetrate further into the middleincome classes, TPS food focuses on strong branding through TV commercials and better packaging quality to project its premium to the consumers. The new packaging will increase the packaging costs but at the same time selling prices will also increase significantly which will generates better profit margins to the company. TPS food also improves its distribution channels with 59% additional outlets in new cities to widen the distribution coverage area. The company also depends on retailers via motorists to introduce its products in the remote villages. The distribution coverage area has increased from 76 cities to 121 cities and 114,235 outlets to 181,977 outlets up until recently. Rice business – Aiming for 5% market share of Indonesia by 2020 Indonesian government policy that prohibits rice imports limits the supply of rice in the market. TPS food seizes this opportunity with their efficient production system of 7 to 8 MT/Ha paddy where national yield stays at 5.1 MT/Ha. Participants enquired what the strategies will be to capture the 5% market share by 2020. TPS food claimed to work with the government to increase the number of farmers and lands to be planted. The government, through ministry of agriculture, supports the selected TPS food farmers by providing high quality fertilizer and seeds. TPS food also acts as a financer for these farmers to grow their planting capacity and capability which in turn, increase the soil area and high-yielding paddy output. The paddy production will then be processed and labeled by TPS food to be sold in premium to the market in forms of packed and bulk rice. The packed rice provides higher gross profit margin (± 40%) as compared to the bulk rice of only 15 – 20% gross margin. Palm oil – Spin-off plan in near future TPS food confirms its plan to spin-off the Palm oil business in near future; however the company did not disclose when exactly the plan will be realized. In 2014, Golden Plantation, TPS food’s palm oil pillar, managed around 20,000 hectares planted area with total land bank amounting to more than 53,000 hectares. This year, the company targets its planted area to increase to 33,000 hectares. Land bank is also targeted at 200,000 hectares in the next five years. Golden Plantation have agreed and signed MOU to acquire majority stake in 2 palm oil companies located in south Sumatra with total concession area of 19,100 hectares. TPS food hinted its spin-off plan once the mature area have grown to more than 30,000 hectares which we expect to be at the end of this year up to middle 2016. Page | 8 | PHILLIP SECURITIES RESEARCH (SINGAPORE) Edward Lowis [email protected] REGIONAL CONFERENCE KEY TAKEAWAYS OSIM International Limited Represented by: Mr. Peter Lee Hwai Kiat, Chief Financial Officer Mr. Juan Chow Yee, Corporate Development Manager Generate demand to drive core business growth The management has expressed that the slower revenue growth in FY14 was in the core OSIM business due to (1) the tougher operating environment with rising rental and payroll; (2) the newly launched uDiva chair did not perform as well as its predecessor uAngel and (3) weaker business environment in most markets, especially in the second half of the year. Moving forward, FY15 will still be a challenging year with soft performance expected in the first half of this year, but the team is optimistic that the new $5000 range chair, which is to be launched in next month, will drive the core business performance in the second half of this year. The management believe that there is still growth in the massage chair industry and more innovation will come with technology. At the same time, the company continue to emphasize strengthening the sale teams’ product knowledge and professional service to enhance the customers' buying experience. Customers usually upgrade their massage chairs in 3-5 years and OSIM has revealed that approximately 30-40% of premium massage chair purchases were from existing customers. OSIM believes that the product innovation and professional customer service will be the key determinants to the success of the business. TWG – sustainable business for profitability The management reiterates that the TWG business is doing well. It aims to open 1520 new stores this year. TWG revenue currently accounts for <10% of the group revenue. In Singapore, TWG has a presence in 80% of the luxurious hotels and has a strong positioning at the airport with a store each in the three terminals. Nearly all the stores in Singapore have high traffic flow and are profitable. Following the success in Singapore, OSIM is now replicating the business model in China, Taiwan and Hong Kong. With the change of the logo to TeaWG in Hong Kong and Macau, OSIM will engage hotels as it looks out for the second shop space in Hong Kong. In China, OSIM will extend to the four tier 1 cities – Shanghai, China, Guangzhou and Shenzhen. It will take about 2 years to recover the capital investment of a new store. OSIM expects the legal disputes to be resolved by this year and estimates the legal costs incurred to be same as last year. Moving towards online and digital marketing Management shares that a research study, done with a brand consultant last year, finds that marketing strategy should shift online. OSIM is accelerating advertising in the digital world and social media to drive traffic into the physical stores. Page | 9 | PHILLIP SECURITIES RESEARCH (SINGAPORE) Caroline Tay [email protected] REGIONAL CONFERENCE KEY TAKEAWAYS Raffles Medical Group Represented by: Dr. Jeremy Lai, Senior Manager, Investor Relations Mr. Andrew Aw, Investor Relations Strong Clinical Governance One key strength of Raffles Medical Group (RMG) is its group practice model, allowing sharing of case notes among its specialists and provision of better cost estimates to patients, as every specialist doctors are RMG’s employees. This leads to: cost effective care for patients integrated team-based care across medical disciplines better clinical outcomes. Attributing growth factors RMG’s FY14 strong revenue growth was bolstered by health insurance services and acquisition of major corporate clients, such as Resorts World Sentosa and Global Foundries. Other growth factors include its new Nuclear Medicine Centre which provides PET/CT scanning (previously outsourced) and clinical network expansion. Growth in healthcare services is mainly volume-driven while both volume and increasing bill size drove hospital services growth. Hospital extension offers runway for growth for next 8-10 years The extension to Raffles Hospital will provide additional space for expansion of its clinical and specialist centres. The expansion will be demand led and unutilised space in the hospital would be leased out to tenants to generate rental income. RMG will progressively take back the leased space over time as it expand its hospital operations. The hospital extension will also help to free up existing hospital space for more beds if necessary. Current bed utilisation rate is about 60-70%, below the rate of most public hospitals in the 80s. Private hospitals in China will offer excellent growth opportunities RMG sees strong growth prospects as affluent Chinese patients tend to seek medical treatments locally rather than travelling abroad. China government’s promoting of private hospitals development has also been encouraging as it seeks to wealthy patients away from overcrowded public hospitals. RMG intends to build two private hospitals – one in Shanghai and another in Shenzhen. It will leverage on the experiences learnt through its Shanghai medical centre, which has provided a platform to familiarise with China’s health regulations and cultural trends over the last few years. Page | 10 | PHILLIP SECURITIES RESEARCH (SINGAPORE) Colin Tan [email protected] REGIONAL CONFERENCE KEY TAKEAWAYS Sheng Siong Group Represented by: Mr. Wong Soong Kit, Finance Director Oligopolistic industry structure suggests stable margins Singapore’s modern grocery industry is made up of three players: Sheng Siong Group (SSG), NTUC Co-operative Ltd (NTUC) and Dairy Farm International Holding. The industry has strong pricing power as consumers tend to have few alternatives to meet their grocery needs. Traditional grocery players operate shorter hours, have a smaller range of produce and tend to be more expensive. This encourages consumers to shop at modern grocers instead. Although the barriers of entry are low, competitors need to attain a certain size before it’s able to enjoy economies of scale. Thus, Management does not view the “warehouse retail” concept introduced in 2014 through the opening of Big Box in Jurong East (owned by TT International Ltd, TTI SP, non-rated) and Warehouse Club (owned by NTUC) as an immediate threat. However, SSG is monitoring their progress to gauge if the concept will gain acceptance with the consumers. These factors have resulted in a sensible competition, led by NTUC that owns ~56% of the modern grocery industry. The last price war was seen in 4Q11 and 1Q12. This has helped widen SSG’s gross margin from 22.1% in FY11 to 24.2% in FY14. We expect gross margin to expand by 80 basis points to 25% by FY16F. Leasing preferred for new stores Management shared that it prefers to rent when opening new stores, compared to buying store space. This allows SSG to reduce its initial capital outlay and offers the flexibility of closing down the store if it does not perform up to expectations. However, we note that SSG has only closed two stores since inception. Both closures were due to factors out of their control, and not because of underperformance. Management shared that their rents range between SGD4-9/sqf. This is lower than SGD9-18/sqf rents at sub-urban malls. Moving forward, SSG shared that it will continue to watch rent cost closely when opening new stores. First China store expected in 2H15 SSG intends to open its first store in Kunming, China, in 2H15. Management shared that the store could be ~20,000 sqf. It will only be a supermarket. The usual store in China is about 50,000 sqf. Apart from groceries, it sells other items such as clothes and electronics. Page | 11 | PHILLIP SECURITIES RESEARCH (SINGAPORE) Shane Goh [email protected] REGIONAL CONFERENCE KEY TAKEAWAYS Beauty Community BEAUTY is the third largest player in Thailand’s cosmetics and beauty market, capturing as much as 8% market shares after the local brands Oriental Princess and Cute Press. In 2014, same-store sales grew notably by 26.8%, due chiefly to a remarkable growth in a number of Chinese tourists entering into Thailand that pushed samestore sales sharply higher by 50% in the fourth quarter. Looking ahead, BEAUTY aims to add up to 50 stores per year in Thailand and 12 stores each in CLMV (Cambodia, Laos, Myanmar, and Vietnam) over the next three years. For overseas stores, BEAUTY will sign an one-year wholesale contract, similar to franchise terms, which will require its business partners to order not less than Bt12mn per year. Days inventory outstanding has been climbing over years but we have no concerns as BEAUTY has stocked up varieties of products in order to support an opening of new stores “Beauty Market” and the launches of new product items, and to prevent any shortages. Inter Far East Engineering IFEC tapped into renewable energy business recently and disposed its original business engaged in distribution and lease services for electronics equipment in 3QFY14. It foresees stellar growth prospect in alternative energy business on the back of the government’s subsidy programs. The company aims to increase power generating capacity from 11.5MW in 2014 to 271.3MW in 2015 and further to 551.3MW and 906.3MW in 2016-2017. Investment in power generating business in Cambodia is aimed at increasing revenue stream in overseas segment and reducing exposure to domestic business. It has also been in talks to generate power in Korea. There are plans to engage in a various kind of renewable energy such as, solar farm, wind turbine, biomass, and waste-to-energy. According to Thailand eight-year infrastructure development scheme, the government plans to build several mass rapid transit lines as well as a rapid transit that will collaborate with China, which should bode well for further growth to power industry in the country. Page | 12 | PHILLIP SECURITIES RESEARCH (SINGAPORE) REGIONAL CONFERENCE KEY TAKEAWAYS Contact Information (Singapore Research Team) Management Chan Wai Chee (CEO, Research - Special Opportunities) [email protected] Research Operations Officer Jaelyn Chin [email protected] Macro | Equities Soh Lin Sin [email protected] Bakhteyar [email protected] Osama Market Analyst | Equities Kenneth Koh [email protected] US Equities Wong Yong Kai Finance | Offshore Marine Benjamin Ong [email protected] Real Estate REITs Telecoms | Technology Transport & Logistics Richard Leow, [email protected] CFTe Contact Information (Regional Member Companies) MALAYSIA Phillip Capital Management Sdn Bhd B-3-6 Block B Level 3 Megan Avenue II, No. 12, Jalan Yap Kwan Seng, 50450 Kuala Lumpur Tel +603 2162 8841 Fax +603 2166 5099 Website: www.poems.com.my Colin Tan [email protected] SINGAPORE Phillip Securities Pte Ltd Raffles City Tower 250, North Bridge Road #06-00 Singapore 179101 Tel +65 6533 6001 Fax +65 6535 6631 Website: www.poems.com.sg Caroline Tay [email protected] Dehong Tan [email protected] [email protected] Consumer Shane Goh [email protected] HONG KONG Phillip Securities (HK) Ltd 11/F United Centre 95 Queensway Hong Kong Tel +852 2277 6600 Fax +852 2868 5307 Websites: www.phillip.com.hk JAPAN Phillip Securities Japan, Ltd. 4-2 Nihonbashi Kabuto-cho Chuo-ku, Tokyo 103-0026 Tel +81-3 3666 2101 Fax +81-3 3666 6090 Website: www.phillip.co.jp INDONESIA PT Phillip Securities Indonesia ANZ Tower Level 23B, Jl Jend Sudirman Kav 33A Jakarta 10220 – Indonesia Tel +62-21 5790 0800 Fax +62-21 5790 0809 Website: www.phillip.co.id CHINA Phillip Financial Advisory (Shanghai) Co Ltd No 550 Yan An East Road, Ocean Tower Unit 2318, Postal code 200001 Tel +86-21 5169 9200 Fax +86-21 6351 2940 Website: www.phillip.com.cn THAILAND Phillip Securities (Thailand) Public Co. 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