Money Talk

Singapore
11 July 2013

Halcyon Agri Corp (HACL SP)

Stretching Rubber Capacity For More Upside
Halcyon Agri Corp (HACL) operates in the midstream segment of the natural rubber (NR) supply chain. This involves: a) procuring raw NR, b) processing raw NR into technically specified rubber (TSR), and c) selling to vehicle tyre manufacturers. It owns and operates two processing facilities in Palembang, Sumatra, and is in the process of acquiring another two in Ipoh, Malaysia. These factories are capable of producing two variants of TSR Standard Indonesian Rubber (SIR) and Standard Malaysian Rubber (SMR) in various grades. Initiate coverage with a BUY; target price of S$1.00 represents 29% price upside. Our target price is pegged at peers average of 10x 2014F PE. A medium- to long-term catalyst is its successful venture into upstream operations, which could lead to better margins. Internal and external growth strategies to triple capacity and earnings by 2015. HACL has a current production capacity of 102,880 tonnes. It is set to add 180,000 tonnes in 2014 and 50,000 tonnes in 2015. We conservatively forecast the expansion will boost its earnings to US$30m by 2015, which translates to a 3-year (2012-15) CAGR of 44%. Its country diversification will also reduce the negative seasonality effects. The wintering period, which cuts NR production by as much as 50%, lasts from September to December in South Indonesia and from March to May in Malaysia. Margin and NR price volatility protection under a robust risk model. Management uses a risk model that allows for a resilient profitability structure. In a month-long cycle, HACL buys raw materials (at a discount) and sells processed NR (at a premium) that is pegged to market NR prices. In doing so, it is able to secure a gross profit of at least US$350/tonne regardless of NR price movements. Sound credit profile from a blue-chip customer base. HACL supplies only to companies that have a strong credit track record. Currently, it is a qualified supplier to seven of the top 20 global tyre vendors. Payment terms are kept within two weeks while long-term contracts of 3-12 months provide demand visibility. Over 70% of HACLs sales are from long-term contracts. Positive 2013 outlook on strong volume. Despite falling NR prices ytd, we estimate a 20% yoy increase in HACLs 2013 earnings, driven by committed orders of 78,819 tonnes (+18% vs 2012 delivery) so far with an option to increase by 9,374 tonnes. The total committed orders translate to a utilisation rate of 77% of current capacity but management sees the optimal range at 80-85%.
2011 231.4 5.6 4.9 4.4 1.8 33.9 8.8 1.9 131.7 3.1 36.2 2012 222.0 14.3 13.6 9.9 4.0 15.1 5.7 1.3 4.4 62.3 6.4 37.8 2013F 243.7 17.3 16.1 11.9 3.6 16.8 2.9 1.5 4.9 (31.3) 7.6 25.2 2014F 580.1 38.6 35.1 25.5 7.7 7.9 2.2 3.2 4.4 14.5 7.5 27.9 2015F 844.0 46.2 42.2 29.6 9.0 6.8 1.7 3.7 3.5 18.3 6.2 28.8

BUY
Share Price Target Price Upside
Company Description
Halcyon Agri Corporation is a midstream natural rubber producer, specialising in the production and marketing of natural rubber for the global tyre manufacturing industry. The company is headquartered in Singapore and owns several rubber processing facilities in Indonesia. GICS sector Bloomberg ticker: Shares issued (m): Market cap (S$m): Market cap (US$m): 3-mth avg t'over (US$m): Price Chart
(lcy) 1.20 1.00 0.80 0.60 0.40 0.20 150 Volume (m) 100 50 0 Feb 13 Mar 13 Apr 13 May 13 Jun 13 Jul 13
HALCYON AGRI CORP LTD Halcyon Agri Corp Ltd/FSSTI Index

S$0.775 S$1.00 +29.0%

Industrials HACL SP 330.0 255.8 200.6 5.2

(%) 220 190 160 130 100 70 40

Source: Bloomberg

Analyst Andrea Isabel Co, CFA +65 6590 6624 andreaisabel@uobkayhian.com

Key Financials
Year to 31 Dec (US$m) Net Turnover EBITDA EBIT Net Profit EPS (cent) PE (x) P/B (x) Dividend Yield (%) Net Margin (%) Net Debt to Equity (%) Interest cover (x) ROE (%)

Source: HACL, Bloomberg, UOB Kay Hian

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Investment Highlights
Initiate coverage with a BUY and target price of S$1.00, based on peers average PE of 10x to our 2014F EPS estimate of 9.9 S cents. We see room for valuation expansion if HACL is able to ramp up its utilisation more quickly as new production capacity comes on stream in 2014. A medium- to long-term catalyst is the successful diversification into upstream operations, which would expand HACLs earnings potential and margins. At our target PE of 10x, the implied PEG is an undemanding 0.23x. Midstream capacity expansion of 260% to triple HACLs earnings. On 31 May 13, HACL entered into a conditional sale-and-purchase agreement with Chip Lam Seng Sdn Bhd (CLS) to buy two NR processing facilities in Ipoh, Malaysia, and the four plots of land on which these assets are located. This RM63m deal is targeted to be completed in 4Q13 and will add 180,000 tonnes in capacity by 2014. Management is also looking to expand its existing capacity in Indonesia by 50,000 tonnes in 2015 through an asset enhancement programme. These will drive our 2012-15 net profit CAGR of 44%. Figure 1: Capacity Expansion
350,000 50,000 300,000

11 July 2013

Figure 2: Wintering Period By Region S Indonesia Malaysia Jan P Feb P Mar W Apr W May W Jun P Jul P Aug P Sep W Oct W Nov W Dec W P *P Peak, W - Winter Source: Sri Trang Agro-Industry, UOB Kay Hian Figure 3: Net Profit (US$m)
35.0 30.0 25.0 20.0 15.0 10.0 5.0 0.0 2011 2012 2013 2014 2015

250,000

+260%
180,000

Source: HACL, UOB Kay Hian Figure 4: Revenue (US$/tonne)

250 200

200,000

(US$m)

And

GMP
400 390

150,000 10,500 100,000 50,000 82,460 150

380 370 360 350

92,380

100

340 330

0 2011 2012 2013 2014 2015

50

320 310

Source: HACL, UOB Kay Hian Managing seasonality effects with strategic M&A. The acquisition of assets in Ipoh, Malaysia, helps reduce the negative seasonality effects felt by HACL every wintering period. NR tree yields in South Sumatra are typically lowest in 4Q12 (Figure 2). The additional source of NR from Ipoh will alleviate this exposure and protect HACLs revenue and margins during the wintering months. Furthermore, CLS two facilities were built in 2004 and 2008 and are capable of producing numerous grades of SMR. This allows HACL to diversify its revenue base and to offer its clients a second origin of TSR of various grades. Risk model protects against gross profit erosion and rubber price volatility. HACL touts a robust risk management model that allows it to reference its raw material prices to market movements. In a typical cycle, HACL buys the amount of raw materials needed one month in advance at a cost (discounted) pegged to current market NR prices. The US$/Rp rate is also fixed simultaneously. At month-end, HACL locks in the selling prices (at a premium) and prepares for delivery. This approach allows it to consistently secure its target gross material profit (GMP) of at least US$350/tonne and to effectively manage its forex exposure.

0 2011 2012 GMP 1Q12 Revenue 1Q13

300

Source: HACL

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Investment Highlights (contd)
In 2012, HACLs revenue dropped 4% yoy due to lower NR prices but gross profit still doubled on strong volume and higher GMP of US$391/tonne (2011: US$371/tonne). Similarly, in 1Q13, revenue fell 4% yoy but gross profit rose 30% yoy on a GMP of US$375/tonne (1Q12: US$331/tonne). GMP is the profit arising from total revenue less cost of raw materials, excluding processing costs. For 2013-15, we forecast GMP of US$365-388/tonne. Better margins from a specialised product. The SIR20-VK (Viskositas Konstanta) is a premium variant of processed NR. Its technical properties lowers tyre manufacturers cost of production (lower energy costs, higher throughput), which makes it highly in demand. This product commands an extra margin of 1.25% to HACLs other products, and comprised 65% of total delivery in 1Q13. Management intends to maximise its production of SIR20-VK and increase its sales in absolute terms. Sound credit profile due to concentrated blue-chip customer base. To manage credit risk, HACL supplies only to companies that have a strong credit track record. Its top three customers are Cooper Tire & Rubber, Bridgestone and Sri Trang Agro-Industry, which contributed a combined 65% of 9M12 revenue. In spite of this concentration, HACLs credit profile remains sound as it is able to keep payment terms within two weeks. Contracts span 3-12 months, providing visibility on demand. HACL is a qualified supplier to seven of the top 20 global tyre vendors (Figure 5). Strong early momentum points to a positive 2013 outlook. For 2013, HACL has received committed orders for 78,819 tonnes with customers options to increase by another 9,374 tonnes. This compares to a total delivery of 67,046 tonnes in 2012. The total committed orders so far translate to a utilisation rate of 77% based on its current capacity. Management targets to achieve an optimal utilisation of 80-85%. On the lookout for upstream opportunities. Management is looking to partially supporting its midstream factory production with upstream operations. HACL will seek opportunities to expand upstream to enhance its position in the NR supply chain, expand its earnings potential and capture better margins. Upstream operations include the management and development of rubber tree plantations, rubber tapping and farm-to-factory logistics.
Figure 5: Top 20 Global Tyre Vendors 2012 Revenue (US$b) 1 Bridgestone 30.4 2 Michelin 27.6 3 Goodyear 21.0 4 Continental 12.4 5 Pirelli 7.7 6 Sumitomo 7.5 7 Hankook 6.2 8 Yokohama 5.4 9 ChengShin 4.9 10 Zhongce 4.9 11 Giti Tire 4.5 12 Cooper 4.2 13 Kumho 3.6 14 Toyo 3.1 15 Triangle 2.7 16 Linlong 2.7 17 MRF 2.5 18 Apollo Tires 2.4 19 Nokian 2.1 20 Double Coin 1.9 *In bold are tyre producers for which HACL is an approved supplier. Source: researchinchina.com, Global and China Tire Industry Report, 2012-2013 Figure 6: NR Supply Chain

11 July 2013

Source: HACL

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Valuation
Initiate coverage with a BUY and a target price of S$1.00, implying a price upside of 29%. We apply peers average PE of 10x to our 2014F EPS of 9.9 S cents. There is no listed company that is a pure midstream player like HACL. While Sri Trang Agro-Industry and GMG Global have direct exposure to NR, they are also involved in upstream and downstream operations, which affect their business models. Due to the lack of direct comparables, we chose midstream processors within the commodities space as peers. Midstream players share more similar characteristics, such as higher asset turnover and the greater need for working capital. Figure 7: Peer Comparison
Ticker Price @ 10 Jul 13 Mkt Cap (US$m) PE (x) P/B (x) Asset Net Debt/ ROA ROE FY12 FY13F FY14F FY12 FY13F FY14F Turnover (x) Margin* (%) Assets (%) (%) (%)

11 July 2013

China Agri-Industries Mewah International Thai Vegetable Oil Average Halcyon Agri

606 HK MII SP TVO TB HACL SP

3.26 0.445 18.00 0.775

2,206 526 465 201

11.4 21.7 8.1 13.7 15.5

9.2 21.2 9.5 13.3 n.a.

7.7 13.4 8.8 10.0 n.a.

0.6 1.0 2.2 1.3 6.0

0.6 0.9 2.1 1.2 n.a.

0.6 0.9 1.9 1.1 n.a.

1.3 2.8 3.0 2.4 3.7

3.6 2.0 5.5 3.7 3.2

43.4 29.4 36.0 36.3 45.3

1.7 5.0 1.9 4.5 16.2 23.9 6.6 11.1 16.6 45.8

*5-year historical average except for HACL (2-year average). Source: Bloomberg

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Industry
NR Demand According to the International Rubber Study Group (IRSG), the tyre sector accounts for around 70% of total NR consumption. Due to its superior properties, NR is preferred over synthetic rubber, especially in the commercial vehicle tyre segment. NR represents 20-40% of the total input cost in tyre production. Demand for tyres comes from two sources: a) sales of new vehicles, and b) tyre replacement. The latter is a bigger contributor to demand as it relates to the existing world population of motor vehicles, which currently exceeds 1b units. Across this population, private cars, on average, require four new tyres every two years, while commercial and industrial vehicles require more frequent replacements. Over 2013-14, existing vehicles and vehicle sales (and hence, tyre sales) are expected to benefit from the build-up of pent-up demand from two sources: a) the stagnant growth in 2012, and b) the remnants from the sharp fall in consumption during 2008-09. Total vehicle production is forecast to increase 5.7% yoy and 9.3% yoy in 2013 and 2014 respectively. For vehicles in use, the respective growth rates are 3.7% and 3.9% (Figure 11). Total tyre production is forecast to grow 6.6% yoy and 6.9% yoy respectively, according to IRSG (Figure 12). Demand for tyres, and therefore the demand for NR, is commonly linked to global GDP growth. Accordingly, emerging markets are the largest contributors to growth in NR demand. NR consumption from emerging markets has grown from about 40% of the worlds NR consumption in 2000 to reach 60% in 2011. Nearly 90% of the growth in global consumption through to 2021 is expected to come from emerging markets. Global NR consumption is forecast to rise 5.9% yoy (to 11.6m tonnes) and 6.1% yoy (to 12.3m tonnes) in 2013 and 2014 respectively (Figure 13). A slowerthan-expected global growth poses downside risks to these levels. The top consumers of NR based on IRSGs 2012 figures were China (34% of world consumption), North America (10%) and India (9%). Figure 8: NR Consumption (m tonnes)
Figure 9: Long-term Correlation Between NR Consumption And Tyre Sales

11 July 2013

Source: IRSG, HACL Figure 10: Tyre Sales (m units)

Source: IRSG, HACL Figure 11: World Vehicles In Use And Output (m units) 2011 2012 2013F 2014F Production 80 85 90 99 - yoy % chg 3.2 6.4 5.7 9.3 In Use 1,075 1,113 1,154 1,200 - yoy % chg 3.5 3.5 3.7 3.9 Source: IRSG Figure 12: World Production Of Tyres (m 000 units) 2011 2012 2013F 2014F Total 1,602 1,613 1,719 1,838 % change 3.8 0.7 6.6 6.9 Source: IRSG Figure 13: NR Consumption 2011 2012 (000 tonnes)
N America 1,173 Brazil 354 Other L America 231 EU-27 1,222 Russia 57 Other Europe 176 Africa/Middle East 164 China 3,603 Japan 753 India 957 Korea 402 Indonesia 441 Malaysia 402 Thailand 480 Other Asia Pacific 514 Total 10,944 % change 1.3 1,092 318 251 1,058 61 157 143 3,765 740 1,001 406 492 439 502 516 10,947 0.0

2013F 1,138 335 259 1,128 62 175 160 4,035 748 1,062 426 520 475 528 529 11,592 5.9

2014F 1,187 361 274 1,226 67 187 180 4,294 770 1,147 443 548 508 551 543 12,300 6.1

Source: IRSG

Source: IRSG

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Industry (contd)
NR Supply NR production is derived from forecasts of supply potential based on, among others, planting policies and prices: high prices lead to intensive tapping of the rubber trees and vice-versa. Global NR production is forecast to increase 3.2% yoy (to 11.8m tonnes) and 5.8% yoy (to 12.5m tonnes) in 2013 and 2014 respectively (Figure 15). Figure 14: Forecast NR Production (m tonnes)
Figure 15: NR Production 2011 2012 (000 tonnes)
Asia Thailand Indonesia Malaysia India China Vietnam CAMAL Sri Lanka Philippines Papua New Guin Africa Cote dIvoire Liberia Nigeria Cameroon Other Latin America Brazil Guatemala Other Total % change 10,281 3,394 2,982 996 893 727 812 187 158 106 8 470 234 64 55 56 61 276 139 89 48 11,004 5.5 10,659 3,522 3,015 932 913 795 955 235 152 113 8 491 250 64 56 56 66 282 143 91 48 11,406 3.6 2013F 10,986 3,563 3,081 940 975 849 962 302 161 127 8 518 270 66 57 56 69 293 147 96 50 11,771 3.2 2014F 11,628 3,723 3,247 997 986 946 972 411 163 153 8 548 289 68 60 57 74 304 151 101 52 12,453 5.8

11 July 2013

*CAMAL Cambodia, Myanmar and Lao PDR Source: IRSG Figure 16: 2011 Global NR Production By Country/Region

Source: IRSG More than 90% of the worlds rubber is produced in the Asia-Pacific. Thailand, Indonesia and Malaysia together account for about two-thirds of the worlds production of NR (Figure 16). Given the world NR production and consumption forecast, the surplus of 460,000 tonnes in 2012 is expected to narrow down to 179,000 tonnes in 2013 and further 153,000 tonnes in 2014 (Figure 17). However, stockpiles remain elevated and will continue to grow. The implied stocks increased to 1.6m tonnes as of Dec 12, based on an annual moving average, sharply increasing from Jun 12s (Figure 18). The surplus in 2012 was the largest since 2000. According to Gabungan Perusahaan Karet Indonesia (Gapkindo, or the Rubber Association of Indonesia), Indonesia produced about 3.3m tonnes of NR in 2012, based on some 3.5m planted hectares. More than 80% comes from smallholders and the rest are from commercial plantations. The average yield on a smallholder land is estimated at 900kg per ha per year, vs 1,200kg for managed estates and 1,500kg in other countries, such as Thailand. Technically Specified Rubber (TSR) While the International Standards Organisation (ISO) has laid down specifications for TSR, individual rubber-producing countries may form their own respective national standards as long as they are patterned after those laid down by the ISO. The variants from each country are designated according to their origin Standard Indonesian Rubber (SIR), Standard Malaysian Rubber (SMR), Standard Thai Rubber (STR) and Standard Vietnamese Rubber (SVR). Prices of these variants mirror the prices of TSR20 (Figure 20).

Source: IRSG Figure 17: NR Supply-Demand Balance 2011 2012 2013F 2014F (000 tonnes)
Production yoy % chg Consumption yoy % chg NR Balance 11,004 10,944 60 11,406 3.6 10,946 0.0 460 11,771 3.2 11,592 5.9 179 12,453 5.8 12,300 6.1 153

Source: IRSG Figure 18: Annual Moving Average Of NR Stocks

Source: IRSG

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Industry (contd)
NR Prices HACL views NR prices to be driven by different factors in the long term, vs the short term. Long-term NR prices are generally influenced by forecast supply and demand while the short-term NR prices are swayed by seasonal factors, government intervention and general market/economic news. These factors do not necessarily align with long-term fundamentals and thus give rise to volatility around the long-term trend. Figure 19: SGX TSR20 Futures Price (US$/tonne)
7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 7/9/2008
Figure 20: Prices Of TSR20, SIR20, SMR20, STR20
6,000 5,000 4,000 3,000 2,000 1,000 0 5/3/11 7/3/11 9/3/11 1/3/12 3/3/12 5/3/12 7/3/12 9/3/12 1/3/13 3/3/13 5/3/13 11/3/11 11/3/12 7/3/13

11 July 2013

TSR20

SIR20

SMR20

STR20

Source: Bloomberg Figure 21: Top 5 Indonesian NR Exporting Ports

Exporting port 2011 Volume (metric tonnes) Musi Riv/ Boom Baru South Sumatra 832,595 Belawan North Sumatra 681,213 Jambi Jambi 242,360 Padang/ T. Bayur West Sumatra 227,736 Pontianak West Kalimantan 216,233 Region

Source: Gapkindo

7/9/2009

7/9/2010

7/9/2011

7/9/2012

Source: Bloomberg TSR20 futures prices dropped 30% yoy in 2012 on the back of a worsened European debt crisis and subdued global growth. They have declined a further 25% since end-12 to hit US$2,230/tonne at end-Jun 13. In Oct 12, the three largest producers (Thailand, Indonesia and Malaysia) imposed export caps in an attempt to support NR prices but success was limited. Thailand has decided to let the measures expire on 31 May 13. The Economist Intelligence Unit (EIU) expects NR prices to remain weak due to high stock levels. However, a recovery could be seen in 2H13 as global economic conditions improve. The EIU projects SMR20 spot prices of US$2,646, US$3,058 and US$3,278/tonne for 2013-15 respectively. NR Processing The NR processing industry in Indonesia is well-established, with a large number of facilities operating across the various islands and feeding into a range of ports for the export of finished products. According to Gapkindo, the Boom Baru port in Palembang, the capital of South Sumatra, is the largest export port for processed NR in Indonesia, accounting for one-third of total processed NR exports. HACLs two facilities are located in this city. Rubber processing and exports are regulated in Indonesia and processors are required to hold various licences, including an export licence which specifies the maximum amount of processed rubber that can be exported per year.

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Earnings and Financials
Revenue. Product sales comprised 94% and 99% of total revenue in 2011 and 2012 respectively. Product sales are driven by delivery volumes and selling prices, which is at a premium to market NR prices. For our 2013-15 forecasts, we use the EIUs projected SMR20 prices. We forecast revenue CAGR of 56% for 2012-15 on the back of a significantly expanding production capacity (53% CAGR) and improving NR prices. Cost of sales. The cost of raw materials forms the largest component of HACLs cost of sales. Processing and other direct costs account for about 4% of total cost of sales. HACL buys raw materials at a discount to market NR prices. We estimate the discount at 8-10% on average. This may vary from period to period, depending on factors such as seasonality. Gross material profit. Because of HACLs unique business model, we think using a gross margin performance metric is inappropriate. We instead look at absolute GMP/tonne, which is the profit arising from total revenue less cost of raw materials. This is an indication of the success of HACLs risk model and managements discipline. HACL has been able to achieve GMP of US$371-391/tonne in its two years of operations, which were well above its target GMP of at least US$350/tonne. For 2013-15, we forecast GMP of US$365-388/tonne. Net profit. We forecast HACLs net profit to triple (44% CAGR) as it also triples its production capacity in the next three years. Additionally, HACL will benefit from economies of scale as it ramps up its utilisation over time and maximises its output. We see more upside to our 2013 forecast should HACL be able to secure more orders or achieve better GMP. 1Q13 net profit was only US$1.5m (13% of our full-year forecast) but we expect better earnings in the coming quarters on the back of a pick-up in product delivery and the upcoming peak NR production season (June-August) in Indonesia. Working capital facilities and debt. HACL has working capital facilities with Standard Chartered Bank and CIMB Bank. Including a term loan from a hedge fund LH Asian TFF Pte Ltd, total banking facilities amount to US$73.5m, of which over US$30m is utilised. Working capital loans will increase as production volume increases. We project total loans to increase to US$62m and US$90m in 2014 and 2015 respectively. These translate to manageable gearing levels (debt/assets) of 37-40%, within the range of other commodity processors. Cash conversion cycle. HACL had a healthy cash conversion cycle of 12 months in 2011-12. While inventory turnover may fluctuate on seasonality, it is generally one month, which is the length of one cycle under its risk model. It has a credit policy of 2-15 days for its customers while raw material suppliers are paid in cash upon every purchase. We forecast a cash conversion cycle of 46 days for 2013-15. The recently completed placement will add about US$20m to its current cash balance of US$18m. Capital expenditure. We based HACLs capex needs on its asset enhancement programme and the proposed acquisition of CLS (for about US$20m, or RM63m). Some US$7m of its IPO proceeds has been allocated for the expansion and upgrading of its processing facilities.
Figure 22: Sales Volume And GMP
2011 2012 2013F 2014F 2015F (tonne) Sales Vol 46,634 67,046 88,193 183,872 249,660 Capacity 82,460 92,380 102,880 282,880 332,880 Utilisation 57% 73% 86% 65% 75% (US$/tonne) NR Price 4,516 3,155 2,646 3,058 3,278 GMP 371.0 390.8 381.8 387.7 364.6

11 July 2013

Source: HACL, Bloomberg, UOB Kay Hian Figure 23: Revenue (US$m)
900.0 800.0 700.0 600.0 500.0 400.0 300.0 200.0 100.0 0.0 2011 2012 2013 2014 2015

Source: HACL, UOB Kay Hian Figure 24: Net Profit (US$m)
35.0 30.0 25.0 20.0 15.0 10.0 5.0 0.0 2011 2012 2013 2014 2015

Source: HACL, UOB Kay Hian Figure 25: Cash Conversion Cycle (CCC)
2011 (days) Inventory 15 Receivables 14 Payables 0 CCC 29 2012 37 11 3 45 2013F 2014F 2015F 37 37 37 12 12 12 3 3 3 46 46 46

Source: HACL, UOB Kay Hian Figure 26: Cash Balance (US$m)
80.0 70.0 60.0 50.0 40.0 30.0 20.0 10.0 0.0 2011 2012 2013 2014 2015

Source: HACL, UOB Kay Hian

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Earnings and Financials (contd)
Dividend policy. Management intends to distribute at least 25% of its net profits in 2012 and 2013. The company paid out 1 S cent/share in 2012. There is no fixed policy thereafter but we assume it will maintain the 25% payout. We forecast dividend yields at 1.5-3.7%, based on the current share price. Sensitivity analysis. We conducted a sensitivity analysis on our 2013-15 net profit forecasts assuming market NR prices are 5-10% higher/lower than our estimates (Figure 27). We note, however, that our analysis assumes other variables are held constant. In actuality, the impact on HACLs earnings due to changes in NR prices will also depend on the discount it is able to secure for its raw material purchases, which will ultimately affect its GMP. Figure 27: Net profit Sensitivity To Changes In NR Price Assumptions
-10% -5% 0% +5% +10% 2013 -11.4% -5.7% +5.7% +11.4% 2014 -12.0% -6.0% +6.0% +12.0% 2015 -12.4% -6.2% +6.2% +12.4%

11 July 2013

Source: UOB Kay Hian Figure 28: Profit And Loss

Year to 31 Dec (US$m) Net Turnover EBITDA Deprec. & amort. EBIT Total other non-operating income Associate contributions Net interest income/(expense) Pre-tax profit Tax Net profit Net profit (adj.) 2011 231.4 5.6 0.7 4.9 2.1 0.0 (2.2) 4.8 (0.4) 4.4 4.4 2012 222.0 14.3 0.8 13.6 0.0 0.0 (2.1) 11.5 (1.4) 10.1 9.9 2013F 243.7 17.3 1.2 16.1 0.0 0.0 (2.1) 14.0 (1.4) 12.6 11.9 2014F 580.1 38.6 3.5 35.1 0.0 0.0 (4.6) 30.4 (3.7) 26.8 25.5 2015F 844.0 46.2 4.0 42.2 0.0 0.0 (6.8) 35.5 (4.3) 31.2 29.6

Source: HACL, UOB Kay Hian Figure 29: Balance Sheet

Year to 31 Dec (US$m) Fixed assets Other LT assets Cash/ST investment Other current assets Total assets ST debt Other current liabilities LT debt Other LT liabilities Shareholders' equity Total liabilities & equity 2011 12.0 10.3 8.4 26.4 57.1 22.3 8.8 8.5 0.4 17.0 57.1 2012 10.9 10.4 11.9 29.0 62.1 28.1 6.6 0.0 1.1 26.3 62.1 2013F 13.7 10.4 56.1 32.1 112.3 34.5 6.8 0.0 1.4 69.6 112.3 2014F 33.3 10.4 48.8 74.8 167.2 62.0 9.4 0.0 2.4 93.4 167.2 2015F 34.3 10.4 69.3 109.2 223.1 90.2 11.4 0.0 3.2 118.3 223.1

Source: HACL, UOB Kay Hian

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Earnings and Financials (contd)
Figure 30: Cash Flow
Year to 31 Dec (US$m) Operating Pre-tax profit Tax Deprec. & amort. Associates Working capital changes Non-cash items Other operating cash flows Investing Capex (growth) Investments Proceeds from sale of assets Others Financing Issue of shares Proceeds from borrowings Loan repayment Others/dividends/interest paid Net cash inflow (outflow) Beginning cash & cash equivalent Forex Ending cash & cash equivalent 2011 (3.8) 4.8 (0.0) 0.7 0.0 (8.9) (1.1) 0.8 (20.0) (10.8) 0.0 0.0 (9.2) 24.0 5.5 26.2 (3.0) (4.7) 0.2 8.0 0.3 8.4 2012 7.5 11.5 (0.3) 0.8 0.0 (4.6) (1.0) 1.1 (0.5) (0.5) 0.0 0.0 0.0 (1.8) 0.0 2.5 (5.2) 0.9 5.1 6.9 (0.1) 11.9 2013F 11.0 14.0 (1.4) 1.2 0.0 (2.7) 0.0 0.0 (4.0) (4.0) 0.0 0.0 0.0 37.2 32.8 6.4 0.0 (2.0) 44.2 11.9 0.0 56.1 2014F (8.8) 30.4 (3.7) 3.5 0.0 (39.1) 0.0 0.0 (23.0) (23.0) 0.0 0.0 0.0 24.5 0.0 35.9 (8.5) (3.0) (7.4) 56.1 0.0 48.8 2015F 3.7 35.5 (4.3) 4.0 0.0 (31.5) 0.0 0.0 (5.0) (5.0) 0.0 0.0 0.0 21.8 0.0 28.2 0.0 (6.4) 20.5 48.8 0.0 69.3

11 July 2013

Source: HACL, UOB Kay Hian Figure 31: Ratios

Year to 31 Dec (%) Growth Turnover EBITDA Pre-tax profit Net profit Net profit (adj.) EPS Profitability EBITDA margin EBIT margin Pre-tax margin Net margin ROE ROA Leverage Debt to total capital Debt to equity Net debt/ (cash) to equity Interest cover (x) 2011 n.m. n.m. n.m. n.m. n.m. n.m. 2.4 2.1 2.1 1.9 36.2 10.5 54.0 181.1 131.7 2.1 2012 (4.0) 157.1 140.4 128.7 124.6 124.0 6.5 6.1 5.2 4.4 45.8 16.6 45.3 107.7 62.3 6.4 2013F 9.8 20.3 21.8 25.1 21.0 (9.8) 7.1 6.6 5.7 4.9 25.2 13.7 30.8 50.2 (31.3) 7.6 2014F 138.0 123.6 118.0 113.2 113.2 113.2 6.7 6.0 5.2 4.4 31.8 18.2 37.1 67.9 14.5 7.5 2015F 45.5 19.8 16.5 16.5 16.5 16.5 5.5 5.0 4.2 3.5 28.8 15.2 40.4 78.7 18.3 6.2

Source: HACL, UOB Kay Hian

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Money Talk
Singapore
Company Background
HACL operates in the midstream of the NR supply chain, specialising in the processing of NR and merchandising/marketing of processed NR. HACL sources raw materials from small and large suppliers and processes them into three types of TSR of Indonesian origin SIR20, SIR20-VK and SIR20-Compound all of which are used as essential inputs to the manufacture of vehicle tyres. The companys products are exported to an international customer base. The completion of the acquisition of two processing facilities in Malaysia will add a series of TSR of Malaysian origin, including SMR20, SMR10, SMR20CV, SMR10CV, compound and latex grades. Figure 32: Group Structure
Credence Capital Fund II (Cayman) Limited 12.1% Lynette Le Mercier ddd 16.7% Robert Meyer ddddddd 7.3% each Michael Tay Wee Jin 6.9%

11 July 2013

Figure 33: PT Hevea

Source: HACL
Pascal Demierre 6.2% Leonard Beschizza, Andrew Trevatt 5.9% each Valentin Schillo 5.7% Lakeway Pte. Ltd. 5.6% Others ssss 33.6%

Figure 34: Geographical Mix (As % of 2012 Revenue)

Europe, 4% China, 1% Singapore, 19%

Halcyon Agri Corporation Limited 100% Hevea Global - Commodities trading - Sales & marketing 100% Halcyon Plantations 50% 100% Hevea Processing 50% 95% PT Hevea - Natural rubber processing in Indonesia

USA, 40%

Halcyon Agri (Malaysia) - Natural rubber processing in Malaysia

Asia (ex-Singapore and China), 36%

Source: HACL, Bloomberg, UOB Kay Hian History. HACL began its NR trading operations in Apr 10. In Feb 11, it acquired two rubber processing facilities (HMK1 and HMK2) and the related operating assets, as well as the know-how of the technology and processes relating to SIR20-VK rubber, for US$20m. HMK1 and HMK2 have been in operations for about 50 years and 30 years respectively. The group undertook a range of investments to renovate and upgrade these facilities, as well as to add new capacity. In conjunction with the acquisitions, HACL implemented its own risk management and merchandising operations based in Singapore to provide the business model, working capital structure and professional systems to enable the efficient and profitable operation of the rubber processing facilities.

*Customers are classified according to the origin of their ultimate parent company. Source: HACL

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Money Talk
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Key Board Members and Management
Mr Robert Meyer, Executive Chairman and CEO, is in charge of formulating and executing the strategic business development of HACL. He left Kingfisher Automotive Pte Ltd in 2004, where he was in charge of business development, and co-founded the Halcyon Group in 2005. In 2010, he began charting the strategic direction of HACL beginning with NR trading and eventually expanding into rubber processing, sales and marketing. Mr Meyer is currently also the Executive Chairman of NH Ceramics Ltd (a company listed on the Catalist) and was appointed to the board on 9 Apr 12. He graduated with a Bachelor of Arts from the European Business School in Oestrich-Winkel, Germany, in 1999. Mr Pascal Demierre, Non-Executive Director of HACL and Chief Corporate Officer of the Halcyon Group, oversees all corporate infrastructure matters of the entities within the Halcyon Group. He commenced his career with the Kuok Group of companies in 1999 where he handled a wide range of corporate secretarial and legal matters. In 2005, Mr Demierre co-founded and started working full time in the Halcyon Group. He is an independent director of The Hour Glass Ltd (a company listed on the Main Board of the SGX-ST) since 1 Apr 11. Mr Demierre graduated with a Bachelor of Law (Second Upper) from Kings College London, UK, in 1998 and with a Graduate Diploma in Law from the National University of Singapore in 2002. Mr Leonard Beschizza, Managing Director and Director of Operations in Palembang, Indonesia, manages all industrial and human resource matters in Pelembang, including the daily procurement and monitoring of raw materials. His 40-year background in the NR and agricultural industry began with a long stint in Pacol Ltd, London, where he started as a trader and eventually became head of the NR trading desk. Thereafter, he held leadership positions in Centrotrade Singapore and PT PP London Sumatra Indonesia. Mr Beschizza joined HACL in 2010 and is currently based in Palembang. Mr Andrew Trevatt, Managing Director and Chief Commercial Officer, is responsible for the merchandising and risk management activities of HACL. He works closely with the CEO in identifying and evaluating potential M&As and other strategic business development opportunities. Mr Trevatt has 26 years of experience in the NR industry, of which 14 years in Lewis & Peat (Rubber) Ltd, London, where he began as a trader and eventually rose to assume the role of a trading director. In 2002, he went on to work in Sri Trang International Pte Ltd as its CEO. Mr Trevatt joined HACL in 2010. Mr Ng Eng Kiat, CFO, is responsible for overseeing the accounting and financial matters of HACL. Mr Ng previously worked in KPMG LLP in Kuala Lumpur, Malaysia, and Ernst & Young LLP in Leeds, UK, and Singapore. He has been a fellow member of the Association of Chartered Certified Accountants since 2005 and is a member of the Institute of Certified Public Accountants of Singapore. Mr Ng graduated from the Multimedia University in Malaysia in 2002 with a Bachelors Degree (First Class) in Accounting.
Figure 35: Key Board Members

11 July 2013

*L-R: Mr Robert Meyer and Mr Pascal Demierre Source: HACL Figure 36: Key Management

*L-R: Mr Leonard Beschizza, Mr Andrew Trevatt and Mr Ng Eng Kiat Source: HACL

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Money Talk
Singapore
Risks
Supplier and customer concentration risk. Over 50% of HACLs raw NR supply in 2012 came from two major suppliers. HACL also relies on more than 400 small suppliers to meet its raw materials need. Its five biggest customers accounted for close to 90% of its total revenue in 2012. Since HACL is not contractually tied to any of its suppliers, it is susceptible to the risk of insufficient supply and unfair pricing of raw materials. Customer orders are typically renewed every 6-12 months; there is no guarantee that HACL will be able to retain their major customers or sustain the volume of orders and terms of agreement. NR price volatility. NR prices are susceptible to several factors, which makes them difficult to predict. While HACL touts an effective risk management model, a drastic drop in NR prices could still prevent it from maintaining the margins assumed under its model. Daily discipline in NR trading is another key factor management must be cognizant of as it involves the close matching of purchases of raw materials with product sales. Hedging of unmatched volumes could pose additional price risk. Downturn in tyre manufacturing. Demand for the groups products mainly arises from demand for vehicle tyres. A slowdown in global tyre manufacturing activity, or general economic activity, may affect HACLs sales and profitability. Regulatory and country-related risks. HACL is subject to rubber-related government policies and regulations in Indonesia, Singapore and other countries where it exports its products. Its NR processing and export operations are carried out in Palembang, South Sumatra, Indonesia. As a developing country, Indonesias political, legal, social and regulatory climates are less certain than in other markets and may be subject to unforeseen changes. Policies with regard to licences, permits and taxation may also be less transparent. Foreign exchange. HACLs revenue inflow is in US$ while its operating costs are denominated in the rupiah and S$. While its risk model allows it to pin down the US$/Rp rate at the time of purchase of raw materials, the group is still exposed to volatility in foreign exchange arising from some payables that are denominated in Rp and S$. Based on HACLs sensitivity analysis in its 2012 annual report, a 10% appreciation of the Rp against the US$ would have resulted in a 2.8% increase in its 2012 net profit. Conversely, a 10% appreciation of the S$ to the US$ translated to a 0.4% decline in earnings. Key personnel. The success of HACLs business model lies on the experience and expertise of its key board members and management. The two managing directors of the group, Mr Leonard Beschizza and Mr Andrew Trevatt, bring 40 years and 26 years of industry experience respectively. We view their involvement in running HACLs rubber business as critical to the groups success. Furthermore, Mr Rachman Rachmadi (Head of Procurement) and Mr Alex Kurniawan Edy (Head of Production) have been involved in HACLs two Indonesian facilities since before they were acquired. Their local know-how makes them important assets to the group.

11 July 2013

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Money Talk
Singapore
Bloomberg Consensus
Recommendation 11/6/2013 Target Price Upside Income Statement (S$m) Revenue Gross Income Operating Income Pretax Income Net Income Adjusted* EPS Adjusted Dividends Per Share Payout Ratio (%) EBITDA Peer Comparison 12/11 291 13 9 6 0.00 0 10 Buy Sell Hold 12/14E Market Cap (US$m) 2,206 526 465 201 Valuation Ratios P/E EV/EBIT EV/EBITDA P/S P/B Div Yield Profitability Ratios % Gross Margin EBITDA Margin Operating Margin Profit Margin Return on Assets Return on Equity -----PE----FY12 FY13F (x) (x) 11.4 9.2 21.7 21.2 8.1 9.5 13.7 13.3 15.5 n.a. 12/11 12/12 12/13E 12/14E -

11 July 2013

12/12 277 25 17 14 12 0.05 0.01 24 18

12/13E Price @ 10 July 2013 3.26 0.445 18.00 0.775

4.3 3.4 3.1 1.9 -

9.0 6.4 6.1 4.4 16.6 45.8

Yield FY13F (%) 2.6 0.7 7.6 3.6 n.a.

Ticker

China Agri-Industries Hldgs Mewah International Inc Thai Vegetable Oil Pcl Average Halcyon Agri Corp Ltd

606 HK MII SP TVO TB HACL SP

-----P/B----FY12 FY13F (x) (x) 0.6 0.6 1.0 0.9 2.2 2.1 1.3 1.2 6.0 n.a.

Price Earnings Ratio (3 years average)

25.00
9.00 8.00

Price to Book Ratio (3 years average)

20.00

7.00 6.00

1 5.00
5.00 4.00

1 0.00
3.00

5.00

2.00 1 .00

0.00 J ul1 0 Se No p- v1 0 1 0 Ja M n- ar1 1 1 1 M ay1 1 J ul1 1 Se No p- v1 1 1 1 Ja n1 2 M ar1 2 M J ay- ul1 2 1 2 Se No p- v1 2 1 2 Ja n1 3 M ar1 3 M ay1 3

0.00 J ul1 0 Se No Ja M M J p- v- n- ar- ay- ul1 0 1 0 1 1 1 1 1 1 1 1 PB Rat io (x) Se No Ja M M J p- v- n- ar- ay- ul1 1 1 1 1 2 1 2 1 2 1 2 Se No Ja M M p- v- n- ar- ay1 2 1 2 1 3 1 3 1 3 3 Y r A verage

PE Rat io (x)

3 Y r A verage

Source: HACL, Bloomberg, UOB Kay Hian

Technical View Halcyon Agri Corp (HACL SP, 5VJ) Resistance: S$0.65 Support: S$0.89 The stock has previously rebounded from S$0.65 which is near to its prior resistance-turned-support line. Currently, it needs to break above S$0.85-0.89 to increase its odds of retesting its previous high of S$1.10. Its MACD indicator looks poised to form a bullish crossover near its centreline.

Source: Nextview

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Weekly Watch
Singapore
11 July 2013

Important Disclosure
We have based this document on information obtained from sources we believe to be reliable, but we do not make any representation or warranty nor accept any responsibility or liability as to its accuracy, completeness or correctness. Expressions of opinion contained herein are those of UOB Kay Hian Research Pte Ltd only and are subject to change without notice. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of the addressee only and is not to be taken as substitution for the exercise of judgement by the addressee. This document is not and should not be construed as an offer or a solicitation of an offer to purchase or subscribe or sell any securities. UOB Kay Hian and its affiliates, their Directors, officers and/or employees may own or have positions in any securities mentioned herein or any securities related thereto and may from time to time add to or dispose of any such securities. UOB Kay Hian and its affiliates may act as market maker or have assumed an underwriting position in the securities of companies discussed herein (or investments related thereto) and may sell them to or buy them from customers on a principal basis and may also perform or seek to perform investment banking or underwriting services for or relating to those companies. UOB Kay Hian (U.K.) Limited, a UOB Kay Hian subsidiary which distributes UOB Kay Hian research for only institutional clients, is an authorised person in the meaning of the Financial Services and Markets Act 2000 and is regulated by Financial Services Authority (FSA). In the United States of America, this research report is being distributed by UOB Kay Hian (U.S.) Inc (UOBKHUS) which accepts responsibility for the contents. UOBKHUS is a broker-dealer registered with the U.S. Securities and Exchange Commission and is an affiliate company of UOBKH. Any U.S. person receiving this report who wishes to effect transactions in any securities referred to herein should contact UOBKHUS, not its affiliate. The information herein has been obtained from, and any opinions herein are based upon sources believed reliable, but we do not represent that it is accurate or complete and it should not be relied upon as such. All opinions and estimates herein reflect our judgement on the date of this report and are subject to change without notice. This report is not intended to be an offer, or the solicitation of any offer, to buy or sell the securities referred to herein. From time to time, the firm preparing this report or its affiliates or the principals or employees of such firm or its affiliates may have a position in the securities referred to herein or hold options, warrants or rights with respect thereto or other securities of such issuers and may make a market or otherwise act as principal In transactions in any of these securities. Any such non-U.S. persons may have purchased securities referred to herein for their own account in advance of release of this report. Further information on the securities referred to herein may be obtained from UOBKHUS upon request. http://research.uobkayhian.com MCI (P) 122/03/2013 RCB Regn. No. 198700235E

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