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Higher cost of car ownership and rising tourist arrivals positive for land transport operators

COE prices surged in the latest tender, rising by 36.5 to 52.2% for motorcars and 21.8% for commercial vehicles. While the sharp jump is due to motor traders snapping up COEs before the introduction of a new and significantly smaller quota starting next month, prices could remain firm and even trend up due to a 28% reduction in supply from April till July. The SGD42001 price tag for an Open category COE, which is the highest, compared to the other 2 motorcar categories could be a sign of things to come.

Potential car buyers looking to the 2nd hand car market will also find that prices there have risen as well. According to the Straits Times, used car traders, sensing a spike in demand for 2nd hand cars have jacked up prices by SGD5000 to SGD7000.

We think that the higher cost of car ownership is positive for public land transport operators SMRT (Buy, TP: $2.08) and ComfortDelgro (Buy, TP: $1.83) as some potential buyers will decide to stick to public transport. This trend should continue if COE prices continue to trend up in the months ahead.

More significantly, land transport operators should benefit from an anticipated increase in tourist arrivals in the months ahead as operations from the 2 integrated resorts pick up momentum. Visitor arrivals for the month of February had risen 24.2% y-o-y to reach 857,000 visitors, which is the highest ever recorded in the month of February and the 3rd consecutive month of record visitors arrivals.

Currently, shares of SMRT are trading a mere 2% from our target price of $2.08 while that for ComfortDelgro remains at 15% below fair value. We favour ComfortDelgro given its higher upside potential to fair value and technical factors.

Shares of ComfortDelgro have been range bound for 8 months between $1.48-1.68 even as the trend for higher tourist arrivals is expected to continue and now higher car ownership could put off some potential car buyers. We think investors may have overlooked this stock. Technically, the stock has based out at $1.55 and we see upside bias to $1.73. If $1.73 clears as well, the next upside level is $1.84.

Parkway – Sell into Strength

Conviction sells using the following criterions: 1) Hold of Fully Valued recommendation 2) Trading >15% above fair value 3) Outperformed STI by more than 15% on both a 1-wk and 1-mth basis, which makes the stock technically overbought and finally 4) Technical analysis supports the sell view.

Shares of Parkway stick out like a sore thumb. The stock currently trades at 22% above our fair value of $2.71 and is expensive at 27.2X (30.4X ex-Novena sales) FY10 and 16.7X (28.3X ex-Novena sales) FY11 earnings. The stock had gained 9.5% last week and 23% on a m-o-m basis after Indian healthcare group Fortis became a major investor with a 23.9% stake and on news that Parkway had sold its medical suites located at Novena at SGD3588 - 3828psf during the recent phase 1 launch. Our analyst believes that positives for Parkway are more than priced in.

Shares of Parkway have a weekly stochastics reading of 81 (above 80 considered overbought) and the 8-wk RSI meter registers 82.4 (above 70 considered overbought). In addition, negative divergences have appeared on the weekly MACD and 8-wk RSI, which hint of a potential downward reversal ahead. Shares of Parkway are not just looking overbought; they are becoming ‘obese’.

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Hang Seng Index to pull back to cover gap?

Hong Kong Hang Seng Index is now 20,882, resistance at 50DMA. It is expecting a pullback to 20,728 to covered gap.

Technical analysis on Keppel Land

Keppeland has been respecting the current trendline illustrated on the chart. It is currently on the 5th test of this trendline and Keppeland has formed an engulfing candle off it. This is the market signaling that buying pressure is picking up and had sufficient strength to push higher than the range of the past 2 days after trading below them.

We recommend entry around the yesterday’s close at S$3.34 or better. Recommended stop is below the day’s low at S$3.19.

The first target is S$3.45 the recent minor swing high. We are betting that the positive US session last night will push the STI higher and Keppeland with it.

The second target is in the S$3.55 to S$3.60 region where there is resistance.

China Milk - Tainted Milk Despite Heightened Checks

The China Daily reported that the Ningxia provincial government has ordered 2 dairy companies (Ningxia Tiantian Dairy and Ningxia Panda Dairy Co) to close last Saturday for selling tainted milk powder and candies made with melamine-tainted raw materials. And it will recall 170 tons of milk powder.

The above comes 1 year after China’s largest dairy company Sanlu was declared bankrupt and 2 top officials in the company were sentenced to death as a result of the melamine-tainted milk products scandal.

China Milk, which sells bull semen, cow embryos as well as raw milk, was negatively impacted by the scandal as consumers in China switched to overseas milk products from locally produced products as a result of the scandal. This resulted in the latest quarter to Sept ’09 top and bottom-lines plunging 73-75% yoy.

The latest milk scandal despite the execution of 2 top officials in Sanlu a year ago and heightened checks of milk products in China will likely cause China consumers to continue to stay away from locally produced milk which will continue to negatively impact China Milk.

It has been slightly more than a month now after China Milk requested for money to be transferred out of China to meet the redemption requests of their bond-holders and there is no news yet. And its CFO Choi Ho Yan’s abrupt resignation last week to pursue other career interests is bad news as he is the main point of contact for investors and has been the only representative in Singapore for results briefings as well as investor conferences.

Technically, the stock remains well-entrenched in its downtrend channel established since hitting its peak of S$1.60 in mid-2007 and having just broken below its 29 cents level hit in Oct ’08 (which is right after the revelation of the Sanlu milk scandal and collapse of Lehman Brothers) it looks likely to re-test its all time low of 20 cents (hit in March ’09).

CH Offshore: New player on board

Falcon to acquire Scomi’s stake for S$0.70 per share. CHO’s largest shareholder, Scomi Marine, has announced that it has entered into a conditional share purchase agreement with Falcon Energy to dispose its entire 29.1% stake in CHO (205m shares) for a cash consideration of S$143.5m or S$0.70 per CHO share. Upon completion of the transaction, CHO will become an associate of Falcon Energy.

Who is Falcon Energy? Falcon Energy is a Singapore-listed oil and gas service provider, with an operational track record of 30 years. It focuses mainly on the production phase of oilfield activities, and owns and operates a fleet of vessels comprising mainly of work/accommodation vessels. It is helmed by Mr Tan Pong Tyea, Executive Chairman and CEO, who has over 20 years of experience in the industry, supported by a team of industry veterans.

A positive change for CHO? While it is not immediately clear to what extent Falcon will be involved in CHO’s daily operations, we believe that synergies such as enlarged business network, cross-selling of services, and broadened scope of services could be extracted from association with its new major shareholder, given the complementary businesses.

Deal underscores CHO’s attractive valuations, maintain BUY. We maintain our BUY recommendation on CHO as we believe this deal underscores CHO’s attractive valuations. Although the deal does not trigger a general offer, we believe the transacted price and our estimated asset breakup value of CHO’s AHTS fleet of S$0.67 should limited downside to its share price. Our TP is unchanged at S$0.87.

Market talk suggests that Genting has received casino license

While STI drops nearly 2% and everywhere in the world in deep red, Genting, be the top volume today, gaining 5% with highest 1.18. Market suggests that Genting may have received the casino license.

Despite Resorts World Sentosa’s (RWS) remarkable state of readiness, retail investors may “sell on news” as Genting Singapore’s (GENS) 1H10 earnings momentum may not be impressive enough amid an expanding share base on the back of bond conversion. Switch to Genting.

Available hotel rooms (about 600 of 1,350 units when fully opened by 1Q10) are booked solid through March (50:50 between local and foreign guests), and RWS could host up to 60 convention activities in 1H10.

We foresee a lull period for the shares without new near-term catalysts, and expect retail investors to accumulate only when RWS’ earnings momentum picks up significantly in 2H10.

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Genting, Wilmar are entering clear support levels

From the chart, we can observe that there is very strong support in the S$1.00 to S$1.05 region. We are watching for price to crack this level, retest it as resistance and begin trending downward in the short term. This scenario is depicted with white arrows on the chart. Target is the S$0.90 to S$0.87 region.

Wilmar is in a similar situation as Genting. There is a divergence present and price has pushed downward to key support in the S$6.50 to S$6.47 region where we also have a trendline present. Price pushing below this region should indicate that there is a decent amount of selling coming in. Support is also present at the S$6.00 level.

We are anticipating potential shorting opportunities if price retests S$6.47 and S$6.00 as resistance after trading below them. Target region is S$5.20 to S$5.12 if the correction in global equities continues to unfold.

Raffles Education minus 10%

The first half is only 27% of consensus full year estimates. 2Q ended Dec’09 sales decline 13% yoy to $47.15mln, accelerating from 1Q’s 3% yoy decline and represents 8.5% sequential decline.

Management explained that the reduction in sales was due to reduction in the allocation of National Education School Students, as well as negative impact of
the global economic crisis.

Looking ahead, management expects to set up another 5 new colleges this year (in Ahmedabad, Chandigarh, Chennai, Hyderabad and Phnom Penh) and another 3 next year. Each new college is expected to incur start up losses of about S$1mln in the first year and another S$0.5mln in the second year before breaking even in the 3rd year. This suggests that near term earnings would likely remain under pressure due to the start up costs.

However, even at this price the stock is not cheap with annualized forward PE of 26x and price to book of 2x against annualized ROE of only 8%. Technically, the stock remains in an entrenched downtrend channel established since hitting its peak in late 2007.

Asia Env drops 20%

Asia Environment drops 20% today, from 0.3 a few days ago to 0.23 today. Today lowest 0.215 and highest 0.27. This is mainly because Asia Environment guided that it would incur losses for 4Q09 due to doubtful debt provisions, impairment of investment in a project that is currently undergoing arbitration proceedings and increased associate losses.

We expect AENV’s BOT earnings to continue to grow as nine other water plants are expected to start operating by 4Q10. However, AENV, unlike SOE-backed or larger companies with stronger balance sheets with the financial muscle to secure capital intensive contracts, could see its growth challenged if there is a lack of funding.

Downgrade to Fully Valued, with target price 0.23.

Too soon to call China and Hong Kong into bear market?

China SSE Shanghai stock index A-Share is crawing back to 200DMA. So maybe it is too soon to call a bear market if China could held above 200DMA. Likewise for Hong Kong, the Hang Seng Index has a volatile trend ahead. Although trading could be choppy in the near term, led mainly by the volatile global market, its technical readings are showing sighs of improving.