國建 / 長虹 / 台肥 / 國產 / 遠雄 / 資產股與營建業

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Taiwan Company Reports

Cathay Real Estate Development (2501 國建) – Underperform – Citigroup

Chong Hong Construction (5534 長虹) – Underperform – Citigroup

 

Taiwan Fertilizer (1722 台肥) – Outperform– Citigroup

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Taiwan Fertilizer 1722 台肥 ---------------------------------------------------------------Maintain OUTPERFORM

Investors are concerned about a reversal of global fertilizer prices amid a falling oil price environment. While there was a high correlation between urea and oil price in the past, we see low correlation since April this year on the divergence in demand/supply of energy and fertilizer. The most notable is the fertilizer supply shock caused by the Chinese government’s high export tax policy in 2Q08.

Urea price continued to move up, reaching US$850/ton last week. We expect the price hike to sustain in 2H08 given tight supply
(China likely has higher export tax rate). Together with shipment recovery, we expect strong profits growth at Jubail in 3Q08.

We believe recent concern on political scandal investigation on previous Taiwan president should have little to do with TF as he
failed to intervene in TF’s land asset transaction in the past. On the property side, our checks indicate sale-through at TF’s residential project is decent at 20% before official launch in September. We believe it’s a good entry point into TF, which is trading at 50% discount to NAV.

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Taiwan Fertilizer (1722.TW 台肥 ) 花旗
Buy: Slightly Weak 2Q08, but Key Is Urea Price and Property

Taiwan Fertilizer (1722 台肥 - TWD 97.50) 3-Underweight 雷曼兄弟
Operating Results
1H08 results broadly in line

Taiwan Fertilizer Co Ltd 台肥 1722 Morgan Stanley
Weak Property Market a Drag; Downgrade to EW

Taiwan Fertilizer Reuters: 1722.TW Bloomberg: 1722 TT Exchange: TAI Ticker: 1722 台肥 德銀
ST upside risks emerging ; upgrade to Hold

Taiwan Fertilizer (1722 台肥) 高盛
Neutral
Not strong but will get stronger in 3Q, maintain Neutral

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Goldsun Development and Construction 2504 國產
Neutral
Margin improvement in 2Q; expect to see sequential growth in 3Q

What's changed
Goldsun announced 2Q08 results that were slightly better than our expectations. 2Q08 sales of NT$2.9 bn were down 2% qoq, GP of NT$226 mn was up 33% qoq, OP of NT$87 mn was up 92% qoq, and net earnings of NT$207 mn were up 2% qoq. 1H08 net earnings of NT$410 mn reached 49% of our full-year net earnings estimate. We attribute the 2 ppt gross margin improvement in 2Q08 to the ASP increase. We expect the current ASP to be sustainable into 3Q08, with sequential growth in sales volume leading to
improvement in the net earnings level. We maintain our Neutral rating given our belief that only if the government strongly increased infrastructure spending would we expect more share price upside. 2009E EPS changed slightly to reflect new shares outstanding after the recent stock dividend.

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Taiwan Fertilizer (1722 台肥)
PRC Announced to Hike and
Extend Fertilizer Export Tariff

PRC announced to raise special
export tariff on urea and ammonia to 150% effective
from September 1, 2008 to December 31, 2008. For
other fertilizers, the special export tariff remains at 100%.
The special tariff of 100% announced in April was
supposed to expire by the end of September. However,
following this announcement, the new export tariff on
urea/ammonia will be raised to 175% (35% original 3Q
tariff + 150% special tariff) in September and 185%
(25% original 4Q tariff +150% special tariff) in 4Q08. For
other fertilizers, the new export tariff is 125% (25%
original 4Q tariff + 100% special tariff) in 4Q08.

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Farglory Land Development 5522 遠雄

2Q08 earnings up 103% YoY

 

Event
We maintain our Outperform rating but lower our TP to NT$78 from NT$103 to reflect a slow selling pace and higher net gearing.

 

Action and recommendation
We maintain an Outperform rating on Farglory but lower our TP to NT$78 from NT$103 by imposing a 15% target NAV discount to reflect its higherthan- average net gearings and concerns on the slow selling pace of its projects.

Farglory is now trading at a 40% discount to its RNAV after the recent fall in the share price, which we believe mainly reflects the slowdown in the selling pace of its projects and, hence, the higher net gearing. We see long-term investment value at this level.

 

Chong Hong Construction 長虹 5534

Attractive dividend yield

Event
Chong Hong reported its 2Q08 earnings, up by 27% YoY and 5% better than our expectation.

 

Action and recommendation
We maintain Outperform on Chong Hong but lower our TP from NT$100 to NT$64.5, to reflect the NT$4.8/sh cash dividend and 2% stock dividend (wentex-dividend on 22 August) as well as imposing a 20% small cap discount. We lowered our RNAV to NT$80.5 from NT$85.0 to reflect slower cash inflows. 

 

Chong Hong is now trading at a 42% discount to its RNAV, 5x 2008E PER and 1.5x PBR, with 32% ROE and a 14% dividend yield. We see good investment value at the current level.

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Taiwan Fertilizer (1722 台肥)
Upgrade to 1-OW on deep value

We are upgrading Taiwan Fertilizer (TaiFer) from 3-UW to 1-OW, as we see value emerging. We expect cost pressure at the core fertilizer business to ease from 2009. Also, the company's property value in Nangang (Taipei) should hold up relatively well given the prime location. Our 12-month price target of TWD124, suggests 41% upside potential.

 

Taiwan property

 

Value in the laggard market
Property prices in Taipei have been lagging those in the major cities in the region over the past 4–5 years, especially in the commercial property segment. While it can be partially explained by slower economic growth, we believe it is also due to lower capital inflow. While sentiment may remain weak for a while, influenced by concerns about the macroeconomy, we believe there is room for rental rates and property prices to catch up with the regional growth, on the back of more policies to attract the capital inflows back.

Commercial property rents are catching up
The rental rate of Grade A offices in Taipei grew by only 5% CAGR over 2003-07, compared with 42% in Hong Kong and 13% in Shanghai, according to Jones Lang LaSalle (JLL). On the back of limited supply, we saw the rental rates in Taipei grow by 12% YoY in 1H08 compared with 36% in HK and 14% in Shanghai. The capital value increased more by 27% YoY on anticipation of rising demand from returns of Taiwanese companies and potential new demand from Chinese companies.

Speculators leaving residential market
The recent slowdown in house transactions is due partially to the speculators leaving the market. Investment demand in Taipei has declined to 16% in 2Q08 from 32% in 1Q07, indicating a healthier market. We also believe house prices in Taipei should be relatively resilient vis-à-vis the region given the lagging growth (11% CAGR in Taipei vs 22% in HK and 13% in Shanghai for luxury residential
price over 2003-07). Inside Taiwan, we prefer Taipei players due to the supply shortage, while there is oversupply outside Taipei.

Asset plays could be a good proxy
We believe asset plays could be good proxies for the property theme given that many of them are land owners but are not exposed to margin erosion thanks to cheap land cost; they do not have leverage risk (net debt-to-equity ratios look sound); they can enjoy recurring income from exposure to commercial property.

 

Prefer Taipei commercial plays with low net gearing
The worries on the macro economies and financial risk of small companies may continue to curb the performance of the sector for a while. We thus prefer developers and asset plays with higher commercial exposure and healthy balance sheet, including Cathay RED, Radium, Taiwan Fertilizer and Teco.

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Taiwan Fertilizer (1722.TW 台肥 )
Distressed Valuation

We cut our 2008/09E EPS by 10/17% due to
1) a slower shipment assumption at Jubail and 2) the lower earnings
contribution from residential projects from slower sell-through
assumptions. On valuation, we trim our 12-month price target from
NT$162.1 to NT$130.3 as we apply lower valuation multiples for
fertilizer to match global peers and a 15% property price decline in
2009.

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以下為麥格里所出具有關於台灣資產股、營建股及相關原物料個股的研究報告。

Taiwan property & material

A tough year ahead

The Macquarie economics team has sharply reduced its Taiwan GDP growth forecasts to 2.8% and -2.0% in 2008–09E from 3.6% and 4.0% in anticipation of a severe impact from the financial turmoil and slowing growth in China. Although we expect some longer-term positives to emerge from improving cross-strait relationship, this is unlikely to be sufficient to offset the anticipated global economic decline. While we believe the decline in construction activity and property prices in Taiwan is likely to be less severe than in other regional cities on a lower base, the downward trend is inevitable.

 

Financial turmoil to hit both demand and developers
We expect the financial turmoil to deliver a double whammy. On the demand side, we are unlikely to see growth in mortgage lending given the mortgage loan balance in Taiwan is already high at 45% of GDP. On the supply side, we see rising financial risk on tighter liquidity and slowing sales. Taipei developers rely heavily on bank loans and cash from pre-sales. Net gearing of 83% in 2008E is high compared with 10–55% for the region. Our cashflow analysis shows that 60% of the developers we cover face a high degree of refinancing risk in 2009E.

 

Expect 10-20% declines in Taipei house prices in 2009
We now expect Taipei house prices to drop 10–20% in 2009E after falling 5% in 2008E. We also expect rental and commercial property prices to decline, especially for industrial-offices as manufacturers cut capex. We now think recovery will take 12–18 months vs our previous expectation of 6–9 months. We thus cut our average NAV (rolled over to 2009E) and target price by 45% and 64%, and reduce our earnings forecasts by 49% and 55% for 2009–10E to reflect more project delays, slower sales and lower housing prices.

 

Building material stocks to suffer
Around 42% of projects targeted for launch in 2008E have been delayed based on data from developers we cover. Construction permit GFA fell 30% YoY in July-August 2008 after declining 15% in 1H08. This large drop in the private sector is unlikely to be offset by a rise in government infrastructure spending. We reiterate our negative view on building material companies like Taiwan Cement (台泥 ; 1101)and Tong Ho Steel (東鋼 ; 2006 ).

 

Stay away from companies with high net gearing
We use three criteria to screen quality names: 1) low financial risk, 2) high earnings visibility, and 3) cheap valuations. Cathay RED(國建 ; 2501), Radium(日勝生 ; 2547)and CEC(大陸工程 ; 2526) stand out with healthy balance sheets and cheap valuations. On the other hand, we suggest staying away from highly net geared developers like Prince Housing(太子建設 ; 2511), Huang Hsiang(皇翔 ; 2545), Farglory Land(遠雄建設 ; 5522), and Rich(力麒 ; 5512). We also reiterate our negative view on building material companies Taiwan Cement(台泥 ; 1101) and Tong Ho Steel(東鋼 ; 2006).

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Taiwan Fertilizer (1722.TW 台肥 )
Successful government land auction marginally positive

 

We think the auction result confirms that life insurers remain interested in
expanding real estate investment and could be sustainable demand
drivers before the macro environment improves. For coverage stocks, we
think the news is marginally positive to Taiwan Fertilizer (1722.TW), which
has over 80% of idle land portfolio waiting to be developed into
commercial properties. We think implication for residential properties is
limited as inventory digestion remains slow. Our rating and target price
are unchanged.

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Taiwan Fertilizer 1722 台肥
Valuation still not attractive