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PP 7767/09/2010(025354)

Malaysia
RHB 6Research
May 2010
Corporate Highlights Institute Sdn Bhd
A member of the
RHB Banking Group
Company No: 233327 -M

V is it Note
6 May 2010
MARKET DATELINE

Hiap Teck Venture Share Price


Fair Value
:
:
RM1.38
RM1.68
Focus Remains On Domestic Demand Recom : Outperform
(Maintained)

Table 1 : Investment Statistics (HIAPTEK; Code: 5072) Bloomberg: HTVB MK


Net Core EPS Net
FYE Turnover Profit EPS EPS Growth PER# C.EPS* P/NTA Gearing ROE GDY
Jul (RMm) (RMm) (sen) (sen) (%) (x) (sen) (x) (x) (%) (%)
2009a 1,159.3 42.7 13.0 5.3 -88.7 26.1 - 0.8 0.7 -0.2 0.7
2010f 1,591.6 58.3 17.8 17.8 >100 7.8 19.4 0.7 1.2 9.4 1.4
2011f 1,806.7 64.9 19.8 19.8 11.3 7.0 21.3 0.7 1.2 9.6 1.8
2012f 1,890.8 67.4 20.6 20.6 3.7 6.8 27.0 0.6 1.1 9.1 1.8
Main Market Listing / Trustee Stock / Syariah-Approved Stock By The SC * Consensus Based On IBES Estimates

♦ Domestic demand improved, but capacity utilisation capped by Issued Capital (m shares) 327.4
inconsistent HRC supply. Despite demand and margins for pipes in the Market Cap (RMm) 455.1
domestic market have improved significantly since Feb 10, Hiap Teck’s Daily Trading Vol (m shs) 0.8
capacity utilisation is currently constrained by inconsistent HRC supply 52wk Price Range (RM) 0.785-1.57
domestically. To ensure consistent HRC supply (and hence its ability in Major Shareholders: (%)
raising capacity utilisation to match the improving domestic demand), Hiap KHL Sdn Bhd 18.1
Teck is now planning to secure local HRC by giving advance payment to the TS Law Investments 16.8
Megasteel, the sole domestic HRC producer.
Lembaga Tabung Haji 6.7
♦ Export demand remains weak. Management indicates that export demand
is likely to remain weak in the near term, as: (1) Demand in the US market FYE Jul FY10 FY11 FY12
has yet to gain traction; and (2) The ongoing investigation by the Australian EPS chg (%) -6.7 -6.6 -5.5
government into the imports of structural hollow sections from Malaysia has Var to C.EPS (%) -10.9 -12.2 -23.8
not concluded and this will result in Australian stockists to refrain from
importing pipes from Malaysia. PE Band Chart

♦ Potential deal with MITCO may take a long time before it can realise. PER = 10x
We understand that Hiap Teck is required to undergo for at least another PER = 8x
PER = 6x
technical audit (cum trial run) this month, to prove its capability in producing PER = 4x
high-grade ERW pipes. Management believes that the entire process will
likely take another few months (which likely to involve a few more rounds of
technical audits) before it can become the approved vendor of high-grade
ERW pipes of MITCO, given the stringent quality control required in these
high-grade ERW pipes as well as Hiap Teck’s absence of experience in
producing these high-grade ERW pipes.
♦ Update on blast furnace investment. Management indicated that Relative Performance To FBM KLCI
construction of the blast furnace (with an investment cost of RM600m) would
take place by end-2010 and complete by 2013.
♦ Risks. These include: (1) Oversupply in China that results in dumping
activities by Chinese steel producers in the international market; (2) Steep
contraction in global steel consumption that will weigh down on international
steel prices; and (3) Inability to source sufficient input (in particular, HRC) Hiap Teck Venture
domestically, which will in turn result in Hiap Teck having to source HRC at
higher cost from overseas.
FBM KLCI
♦ Earnings forecasts. We are lowering our FY07/10-12 net profit forecasts by
5.5-6.7%, to reflect higher interest expense arising from its RM110m
investment into a 55% stake in Eastern Steel.
♦ Investment case. Correspondingly, indicative fair value is lowered by 6.7%
from RM1.80 to RM1.68 based on 9x revised CY2010 EPS of 18.7 sen. We
remain positive on Hiap Teck’s near-term earnings outlook, underpinnned by
the favourable flat steel products’ near-term price outlook, arising from the
rising flat steel product prices that will sustain inventory replenishing
Chye Wen Fei
activities by steel stockists; and (2) The roll-out of large scale projects as (603) 92802172
well as a pick-up in property development activities, which will boost demand chye.wen.fei@rhb.com.my
for pipes. Maintain Outperform.

Please read important disclosures at the end of this report.

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6 May 2010

Visit Note

♦ Domestic demand improved, but capacity utilisation capped by inconsistent HRC supply. Both demand
and margins for pipes in the domestic market have improved significantly since Feb 10, driven mainly by: (1)
Steel stockists’ increased optimism towards steel prices (on the back of improved construction activities and cost-
push factors) that in turn boosted inventory replenishing activities; and (2) Improved pricing power on the back
of improved demand. Despite the improving domestic demand, Hiap Teck’s capacity utilisation is currently
constrained by inconsistent hot rolled coil (HRC) supply domestically. To ensure consistent HRC supply going
forward (and hence its ability in raising capacity utilisation to match the improving domestic demand), Hiap Teck
is now planning to secure local HRC by giving advance payment to the Megasteel, the sole domestic HRC
producer. Worst case, Hiap Teck will import HRC from overseas by seeking for import duty exemption from the
Ministry of International Trade and Industry (MITI).

♦ Export demand remains weak. Management indicates that export demand is likely to remain weak in the near
term, as: (1) Demand in the US market has yet to gain traction, despite the US Commerce Department’s move to
slap hefty anti-dumping duties (ranging from 32% to 98%) on steel pipes imported from China is supposed to
result in better demand for pipes imported from Malaysia; and (2) Inventory replenishing activities in the
Australian market is likely to remain weak in the near term, as Australian stockists will refrain from importing
pipes from Malaysia until and unless the investigation by the Australian government into the imports of steel
pipes is concluded.

♦ Potential deal with MITCO may take a long time before it can realise. We understand that Hiap Teck is
required to undergo for at least another technical audit (cum trial run) this month, to prove its capability in
producing high-grade electric resistance welded (ERW) pipes. Management believes that the entire process will
likely take another few months (which likely to involve a few more rounds of technical audits) before it can
become the approved vendors of high-grade ERW pipes of Malaysian International Trading Corporation (Japan)
Sdn Bhd (MITCO). This is mainly due to the stringent quality control required in these high-grade ERW pipes as
well as Hiap Teck’s lack of experience in producing these high-grade ERW pipes. Nevertheless, we note that Hiap
Teck’s future earnings could be boosted significantly upon becoming one of the approved vendors for MITCO, as:
(1) MITCO may switch the sourcing of API certified ERW pipes to Hiap Teck from overseas suppliers (of which
MITCO is currently importing with an import tariff of 25%); and (2) Petronas’ comitted capex of RM12bn in the oil
and gas development and production activities in FY10.

In our forecasts, we have yet to incorporate the potential demand (and earnings) from MITCO as: (1) It remains
to be seen if Hiap Teck is capable in producing these high-grade ERW pipes; and (2) We are unsure as to when,
Hiap Teck would become one of MITCO’s approved vendors for high-grade ERW pipes (even if it does prove its
capability).

♦ Update on blast furnace investment. Management indicated that construction of the blast furnace (with an
investment cost of RM600m) would take place by end-2010 and complete by 2013. While the commissioning of
blast furnace would turn Hiap Teck into an integrated steel player (which will in turn enable Hiap Teck to better
control both the quality and supply of HRC for the production of steel pipes) over the longer term, we believe this
may take a while before Hiap Teck can start utilising part of the output from the blast furnace in its pipe making
operations, given its lack of experience in the upstream operations may result in long gestation period in running
the blast furnace.

Earnings Forecasts & Assumptions

♦ FY07/10-12 net profit forecasts cut on higher interest expense. We are lowering our FY07/10-12 net profit
forecasts by 5.5-6.7%, to reflect higher interest expense arising from its RM110m investment into a 55% stake in
Eastern Steel. In our FY07/10-12 forecasts, we have yet to incorporate earnings potential arising from the its
potential deal with MITCO.

Risks

♦ Risks to our view. The risks include: (1) Oversupply in China that results in dumping activities by Chinese steel
producers in the international market; (2) Steep contraction in global steel consumption that will weigh down on
international steel prices; and (3) Inability to source sufficient input (in particular, HRC) domestically, which will
in turn result in Hiap teck having to source HRC at higher cost (as imported HRC is subject to a 25% import tariff)
from overseas.

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6 May 2010

Valuations And Recommendation

♦ Investment case. Following the downward revision in our earnings forecasts, indicative fair value is lowered by
6.7% from RM1.80 to RM1.68 based on 9x revised CY2010 EPS of 18.7 sen. We remain positive on Hiap Teck’s
near-term earnings outlook, underpinnned by the favourable flat steel products’ near-term price outlook, arising
from the rising flat steel product prices that will sustain inventory replenishing activities by steel stockists; and
(2) The roll-out of large scale projects as well as a pick-up in property development activities, which will boost
demand for pipes. Maintain Outperform.

Table 2: Earnings Forecasts Table 3: Forecast Assumptions

FYE Jul (RMm) FY09A FY10F FY11F FY12F FYE Jul FY10F FY11F FY12F

Turnover 1,159.3 1,591.6 1,806.7 1,890.8 Manufacturing Division


Turnover growth (%) -30.2 41.5 13.5 4.7 Total capacity ('000 mt) 660.0 660.0 660.0
Total production volume ('000 mt) 390.0 440.0 460.0
EBITDA 74.1 131.2 154.4 160.7 Total utilisation rate (%) 59.1 66.7 69.7
EBITDA margin (%) 6.4 8.2 8.5 8.5
Trading Division
Depreciation -23.8 -20.1 -20.1 -20.1 Revenue (RMm) 421.6 442.7 464.8
Net Interest -17.4 -25.0 -35.8 -38.1 EBIT margin 6.0% 6.5% 6.5%
Source: RHBRI
Pretax Profit 32.9 86.1 98.5 102.5
Tax 9.8 -27.8 -33.6 -35.2
Minorities 0.0 0.0 0.0 0.0
Net Profit 42.7 58.3 64.9 67.4
Extraordinary Items 25.3 0.0 0.0 0.0
Core Net Profit 17.4 58.3 64.9 67.4
Source: Company data; RHBRI

Chart 1: HiapTek Technical View Point


♦ The share price of Hiaptek broke out from an
important resistance level of RM1.10 in Sep 2009,
before blasting sharply higher and breached above
the RM1.36 critical resistance level.

♦ However, shortly after the successful penetration,


the stock began to trend sideways within a range
from RM1.36 to RM1.55 on consistent profit-taking
pressure.

♦ The stock retested the resistance level of


RM1.55 in early Apr 2010, but gave in to the
sellers as it continued to retreat in recent
trading.

♦ The stock registered a small positive candle


yesterday, and both the stochastic oscillators
and the 14-day RSI have ticked upward pointing
to a likely recovery leg ahead.

♦ But, the 10-day SMA has just fallen below the


40-day SMA. This indicates deterioration in
trading sentiment for the medium term.

♦ In our view, upside will be capped by the 10-day


and 40-day SMAs near RM1.40 – RM1.41, while
downside can be expanded to RM1.10, if it loses
RM1.36 soon.

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6 May 2010

IMPORTANT DISCLOSURES

This report has been prepared by RHB Research Institute Sdn Bhd (RHBRI) and is for private circulation only to clients of RHBRI and RHB Investment Bank Berhad
(previously known as RHB Sakura Merchant Bankers Berhad). It is for distribution only under such circumstances as may be permitted by applicable law. The
opinions and information contained herein are based on generally available data believed to be reliable and are subject to change without notice, and may differ or
be contrary to opinions expressed by other business units within the RHB Group as a result of using different assumptions and criteria. This report is not to be
construed as an offer, invitation or solicitation to buy or sell the securities covered herein. RHBRI does not warrant the accuracy of anything stated herein in any
manner whatsoever and no reliance upon such statement by anyone shall give rise to any claim whatsoever against RHBRI. RHBRI and/or its associated persons
may from time to time have an interest in the securities mentioned by this report.

This report does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives
of persons who receive it. The securities discussed in this report may not be suitable for all investors. RHBRI recommends that investors independently evaluate
particular investments and strategies, and encourages investors to seek the advice of a financial adviser. The appropriateness of a particular investment or
strategy will depend on an investor’s individual circumstances and objectives. Neither RHBRI, RHB Group nor any of its affiliates, employees or agents accepts
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RHBRI and the Connected Persons (the “RHB Group”) are engaged in securities trading, securities brokerage, banking and financing activities as well as providing
investment banking and financial advisory services. In the ordinary course of its trading, brokerage, banking and financing activities, any member of the RHB
Group may at any time hold positions, and may trade or otherwise effect transactions, for its own account or the accounts of customers, in debt or equity
securities or loans of any company that may be involved in this transaction.

“Connected Persons” means any holding company of RHBRI, the subsidiaries and subsidiary undertaking of such a holding company and the respective directors,
officers, employees and agents of each of them. Investors should assume that the “Connected Persons” are seeking or will seek investment banking or other
services from the companies in which the securities have been discussed/covered by RHBRI in this report or in RHBRI’s previous reports.

This report has been prepared by the research personnel of RHBRI. Facts and views presented in this report have not been reviewed by, and may not reflect
information known to, professionals in other business areas of the “Connected Persons,” including investment banking personnel.

The research analysts, economists or research associates principally responsible for the preparation of this research report have received compensation based
upon various factors, including quality of research, investor client feedback, stock picking, competitive factors and firm revenues.

The recommendation framework for stocks and sectors are as follows : -

Stock Ratings

Outperform = The stock return is expected to exceed the FBM KLCI benchmark by greater than five percentage points over the next 6-12 months.

Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price and translate into an absolute return of 15% or more
over a period of three months, but fundamentals are not strong enough to warrant an Outperform call. It is generally for investors who are willing to take on
higher risks.

Market Perform = The stock return is expected to be in line with the FBM KLCI benchmark (+/- five percentage points) over the next 6-12 months.

Underperform = The stock return is expected to underperform the FBM KLCI benchmark by more than five percentage points over the next 6-12 months.

Industry/Sector Ratings

Overweight = Industry expected to outperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Neutral = Industry expected to perform in line with the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Underweight = Industry expected to underperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

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securities, subject to the duties of confidentiality, will be made available upon request.

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actions of third parties in this respect.

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