PHILLIP SECURITIES

RESEARCH
Equities
Initiating Coverage

Chan Wai Chee Singapore

 65-6531-1232
FAX 65-6536 4435
yebo@phillip.com.sg

Recommendation:

HOLD Yongnam Holdings Limited

Previous call: Nil (SGX – MAS Research Incentive Scheme)

Price 10 May 2005

Previous close S$0.03
Target NA

Share Statistics Yongnam is a multi-disciplinary engineering and construction group with

Shares 558m three core business activities: structural steelwork, specialist civil
Market Cap. S$16.75m engineering, and mechanical engineering. The group is a subcontractor
P/Sales 0.30x focusing on public projects and commercial projects that require steel
Trailing PER 2.1x
construction. It has steel fabrication capacity of 45,000 tonnes per year.
Forward PER NM
52-week Price S$0.045 –
Range S$0.015 Steel construction offers numerous benefits over conventional construction such as
P/BV NM reinforced concrete. These benefits include faster construction, superior material
Listing Bourse Singapore strength to volume ratio, flexibility in design, and aesthetics. The disadvantage is
1. Yongnam
Private Ltd
that steel construction is more expensive than conventional construction. With
2. United higher steel price recently, the cost of steel construction has become a bigger issue
Engineers in recent construction projects.
(Singapore)
3. Tan Tin
Major Shareholders
Nam
The construction industry is highly cyclical. During economic downturn, new
4. Citibank projects are postponed or disappear entirely. Even public projects sponsored by
Nominees government entities failed to alleviate the cyclicality of the industry. As a niche
Singapore player in the industry, Yongnam cannot escape this fate. During economic
5. Seow
Soon Hee
downturn, competition becomes so fierce that companies would bid at such low
Source: Bloomberg; Phillip Securities prices that they lose money on the project.
Research
Yongnam also faces numerous challenges including credit risk, weak bargaining
Price Chart
power, long project life cycle which brings uncertainties, and poor pricing due to
bidding war. All these negative business fundamentals are reflected in the
company’s financial results. Debt has been sky high, cash flow has been mostly
negative in the past several years, and the company had lost money for four
straight years prior to FY2004. At this point, we are recommending investors not to
buy Yongnam’s shares until management shows more success in turning around
the company.

in M S$ 2005F 2004 2003 2002

Revenues 75.000 64.265 65.341 61.660

Company Profile Gross Profit 18.750 16.182 4.021 (3.490)
Yongnam is a steel subcontractor Operating Income 3.750 11.265 (9.181) (22.205)
focusing on public works and Net Income 0.750 7.826 (15.546) (29.885)
commercial projects that require
steel construction. With steel Diluted EPS (cents) 0.134 1.402 (7.104) (17.498)
fabrication capacity of 45,000
tonnes per year, the group has Diluted Shares 558.121 558.121 218.843 170.791
three main business activities:
structural steelwork, specialist civil
engineering, and mechanical Source: Company, Phillip Securities Research
Yongnam Holdings
Brief history prior to public
listing
3 Core Business Activities
Revenue Breakdown by
Segment
10 May 2005
Company Background
Yongnam was founded in 1971 as a Mechanical Engineering Services company.
Over the years, the company acquired steel fabrication facilities in Singapore and
Malaysia, and evolved into a muti-disciplinary engineering and construction group
that focuses on projects that involve steel. Yongnam consolidated its business
operation at Tuas South Street 5 in 1998, and it went public on 11 October 1999.
Year Milestones
1971 Yongnam was founded as a mechanical engineering services company
1994 Incorporated as Yong Nam Holdings (Pte) Ltd
1995 Changed its name to Yongnam Holdings (Pte) Ltd
1996 Acquired Polifond to expand fabrication facility in Malaysia
1998 Consolidated business operation at Tuas South Street 5
1999 Listed on the mainboard of the Singapore Exchange Securities Trading
Ltd on 11 October, 1999
Source: Company
Business Activities
Yongnam has three core business activities:
1. Structural Steel
2. Specialist Civil Engineering
3. Mechanical Engineering
From revenue contribution standpoint, the Structural Steel division is the primary
revenue driver for the group. In FY2004, however, revenues from the division
declined substantially compared to other segments because the exclusion of steel
as raw material for a project lowered contract values for the division. In the
construction of National Library Board Building, Yongnam’s client decided to obtain
steel from other sources and asked Yongnam to install them. The contract value
for the project, therefore, was much smaller than normal.
Revenue Breakdown by Segment
Mechanical
Engineering
5%
Steel Structure
Civil Engineering
53%
42%
Source: Company
Phillip Securities Research
2
Yongnam Holdings
Structural Steel division has
45,000 tonnes of steel
capacity
Strutting Steel
Specialist Civil Engineering
division is an expert in
cofferdam construction
10 May 2005
Hence, FY2003 revenue breakdown by segment is more representative of the
normal business operation going forward for Yongnam. Steel Structures
contributes over half of the group’s revenues, Civil Engineering contributes over
40%, while Mechanical Engineering contributes the remainder.
Structural Steel
Yongnam Structural Steel division designs, fabricates, and builds steel structures in
the construction of building or project frames. The division owns several fabrication
facilities in Singapore and Malaysia with a total combined capacity of 45,000
tonnes of steel annually. Recently, the factory is running on 8 hour - 10 hour shift
out of total maximum 24 hour shift. The division also supplies steel to Yongnam’s
other division namely Mechanical Engineering.
The real gem of the division is the inventory of 30,000 tonnes strutting steel that is
re-usable from project to project. As the re-usable steel has a life span of about 20
years, the company does not have to fabricate a new set of strutting steel for each
project. Therefore, revenues generated from using this strutting steel is almost
entirely translated to profit. With the recent steep increase of steel price, Yongnam
is able to generate ample profit margin on the use of its strutting steel.
In the past, the structural steel division has participated in projects including:
− Suntec City / Singapore Int’l Convention & Exhibition Centre (1991-1996)
− Pontiac Marina Development (1993-1996)
− Brunei Hangar II (1995-1996)
− Bank of China Building (1995-1997)
− Kuala Lumpur International Airport (1995-1997)
− Brunei Conference Centre (1996-1997)
− Singapore Post Centre (1996-1998)
− Cuppage Centre (1997-1998)
− Kranji Racecourse (1996-1998)
− Springleaf Tower (1996-1999)
− Capital Tower (1997-1999)
− Terminal 1, Changi Airport extension & refurbishment (1997-1999)
− Polyethylene Plant at Jurong Island (1999-2000)
− Expo MRT Station roof
− Changi MRT Station Mezzanine Bridge
− Atrium Structures
− Woodlands Wafer Fab
− Parkview Office Building
− Manjung Power Station in Malaysia
− Shipyard Complex at Benoi Road
− Paragon Shopping Complex
− Prai Power Plant in Malaysia
− Putrajaya Project in Malaysia
− Second Bangkok International Airport (Suvarnabhumi Airport)
− National Library Board Building
− One Raffles Quay
Specialist Civil Engineering
The division is a niche player in the civil engineering services industry. It has
expertise in the cofferdam construction – a technique that excludes soil or water
from a working area below ground level to ensure safe working environment. With
the collapse of part of Nicoll highway in 2004, the division’s expertise has been
Phillip Securities Research
3
Yongnam Holdings
Mechanical Engineering
division helps build various
industrial and commercial
projects
10 May 2005
brought to the limelight. Soft soil condition such as marine clay is very common in
Singapore, and after the Nicoll highway collapse, the use of a special bracing
system in construction projects is more important than ever.
The division’s projects include:
− Choa Chu Kang Lot 1 Shopping Entertainment Centre (1995)
− Pasir Ris White Sands Shopping & Entertainment Centre (1995)
− Singapore Post Centre (1995-1996)
− Orchard Entertainment Centre (1995-1996)
− Nicoll Highway Extension (1997-1998)
− Ministry of Education headquarter building (1997-1998)
− Balestier Road Complex (1997-1998)
− Haig Road Condominium (1997-1998)
− Esplanade Theatre on the Bay (1997-1998)
− 28 Scotts Road Condominium (1997-1998)
− Crawford Street Underpass (1998-1999)
− Orchard Cineplex Entertainment Centre
− Tiong Bahru MRT
− Central Expressway tunnels
− OUB Centre
− Various works for MRT stations along North-East MRT line
− Various works for Mass Transit Railway and Guangzhou Railway Company in
Hong Kong
− Various works for Kallang – Paya Lebar Expressway
− Various works for MRTC Circle Line
− Changi Airport Terminal 3
− Kaki Bukit Ave 2 – Bedok GDP Project
Mechanical Engineering
The mechanical engineering division is the oldest division in the group. It was the
first core business activity when Yongnam was founded in 1971. Mechanical
engineering division helps construct various industrial and commercial projects
including power plants, refinery and petrochemical plants, shipyard facilities, and
incineration plants.
Notable projects accomplished by the division include:
− Senoko Incineration Plant (1992-1997)
− Paka / Pasir Gudang YTL Power Station (1994-1995)
− Senoko EP (1994-1996)
− Phu My Power Plant in Vietnam
− Santa Rita Power Plant in Philippines
− Wind Tunnel Project in Singapore
− Teluk Gong Panglima Project in Malaysia
− Perlis Power Plant Station in Malaysia
− Steam Turbine at Pulau Seraya
− Coal-Fired Power Plant at Tanjung Bin in Johor, Malaysia
Industry
The construction industry is highly competitive. It is highly cyclical and is
influenced by the ups and downs of the economy. During the Asian financial crisis,
Phillip Securities Research
4
Yongnam Holdings 10 May 2005

Deep Cyclical Industry
for example, there was very little new project coming onto the market that can be
bid upon. Private construction projects from non-governmental companies usually
dry up during times of difficulties. Therefore, during this period construction
companies such as Yongnam have to depend on earning a living from projects that
are assigned before a crisis strikes.

Public projects do not reduce
cylicality
The fact that companies like Yongnam derives part of its revenues from public
sector does not alleviate its cyclicality. Infrastructure development and other public
projects can easily be cancelled or postponed during financial crisis. Again, a
perfect example of this is during the Asian financial crisis whereby governments in
South East Asia withdrew public works or postponed them. Unlike countries in the
West whose governments usually increase public projects during recession or
economic difficulties, the governments in South East Asian countries tend to do the
opposite to preserve their own financial health.

More pronounced economic
cyclicality
This is a risk that construction companies in the region have to face. In the West,
governments are willing to go deeply into budget deficits to spark a new life into
receding economy. Governments in the South East Asian regions historically show
less willingness to run into budget deficits and act as a counter-force in a slowing
or shrinking economy. Therefore, economic downturns in South East Asia tend to
be more pronounced and take longer to turnaround.

Most companies in the construction industry are relatively small, and they usually
Small companies work on several projects simultaneously thereby spreading out their already thin
resources. When a big project comes into the market, usually several companies
form a consortium, or a general contractor would hire several subcontractors, in
order to win the bid for the project.

The bidding process itself carries several implications. First, the project usually
Bidding process goes to the lowest bidder. So the winning group usually has the thinnest margin
compares to its competitors who submit higher bids. Pricing is highly unfavorable,
and in the heat of war to win the project, construction companies may be too
optimistic in its cost estimation. The winner, therefore, may win an unprofitable
assignment. Yongnam is no exception in this matter. Many of the projects that the
company won in 2001 and 2002 turned out to be unprofitable.

Because of the multi-tier nature of the bidding group, the money has to be spread
Credit risk out among many companies. It is extremely common in the construction industry
to default or renege on promises made if the financial situation turns sour.
Lawsuits and legal wrangling typically ensue and these take away management’s
time, energy and financial resources. An example of this is the Springleaf Tower
saga that has plagued Yongnam for several years. The Springleaf Tower incident
will be discussed in more detail below. Because the practice is so prevalent in the
construction industry, the Singapore government passed the Building and
Construction Industry Security Payment Act that is effective for all projects starting
April 2005. The new law should reduce credit risk, and therefore, should be
tremendously beneficial for subcontractors like Yongnam.

Risks

• Yongnam is a niche subcontractor whose lifelihood depends on work

Niche player assignment from main contractors. There are numerous companies - local,
regional or international, who compete with Yongnam for steel construction
projects. The company has to maintain its relationship with main contractors;
or may risk losing businesses to its competitors.

Phillip Securities Research

5
Yongnam Holdings
Competitors
Steel-project focus
Long-cycle project
Raw material price fluctuation
Credit risk
Poor industry fundamentals
10 May 2005
• There are not many players in Yongnam’s niche that are publicly traded in
Singapore. However, the company faces competition from local private firms,
as well as construction companies based regionally or even internationally.
• Yongnam is a niche subcontractor in a huge construction industry. Yongnam
only competes for those projects that require steel construction. There are a
lot of projects that do not require steel; for example most residential buildings,
some commercial buildings and even major portions of public projects.
Yongnam does not compete in these projects, and therefore limits its revenue
potential. Furthermore, as steel price shot up higher, there are less projects
that require steel. Project sponsors usually try to contain costs by shifting steel
construction to another type of construction like reinforced concrete.
• Projects are typically long-cycle. They take many months or even years to
complete; thus, tying up construction companies’ resources for a long period of
time. The longer the projects, the more uncertainties they carry. Construction
companies typically borrow from finance companies or banks to fund their
working capital. The potential mismatch of duration between assets (work-in-
progress) and liabilities (bank borrowing) poses significant risk for construction
companies. In case of rising interest rates, the companies’ borrowing costs will
be significantly higher. Their potential revenues, however, are tied up
according to agreed-upon price when they submit their bids.
• Raw material prices tend to fluctuate more over longer period of time, and thus,
it is more difficult to estimate costs for longer cycle projects. In case of rising
steel prices, Yongnam will not be able to pass along the price increases
immediately because of the agreed-upon price. Only when they bid for new
projects could they pass along the steel price increases and generate higher
revenues. Therefore, there is a lag effect between rising raw material prices
and higher revenues. If steel price declines, Yongnam’s future revenues will
be impacted.
• Bad Debt and Uncollectible Receivables run very high in the construction
industry. It is common for players to refuse to make payments to
subcontractors even if the work has already been completed. In the Springleaf
Tower saga, Yongnam was refused payment for work already finished. In
1999, the company entered into an agreement to receive the 23rd floor of
Springleaf Tower for construction work. The project was completed in 2001,
and yet the company has not received the 23rd floor. Yongnam borrowed from
a finance company to fund the construction work. Now Yongnam is involved in
multiple legal disputes to prevent the property from being foreclosed. At the
close of FY2004, there is no end in sight relating to the Springleaf Tower saga.
• The construction industry has many poor fundamentals including deep
cyclicality and poor pricing due to bidding process that favors the lowest bid.
Industry characteristic is discussed in more details above.
Revenue Growth, Profit Margin and Expense Ratio
The construction industry has been in the doldrums in the past several years.
Revenues have been stagnant and even declining in some years. Many of the
projects that the company won in the past several years turned out to be
unprofitable. The company had focused on revenues at the expense of profits, and
underestimated the cost of the projects. FY2001 and FY2002, a period when there
Phillip Securities Research
6
Yongnam Holdings 10 May 2005

Stagnant industry
was barely any new project coming onto the market, was the worst period in recent
memory for the construction industry. Companies were thirsty for new project
assignment and lowered their bids, even to unprofitable levels, to win new projects.
As a result, revenues from these projects failed to cover its costs, let alone the
company’s general and administrative expenses.

In FY2003 and FY2004, the situation improved, and construction companies were
Gross margin
more discerning in submitting bids for new projects. Competition was not as
intense as during the FY2001 and FY2002 period, and profitability outlook began to
look brighter. Gross margin improved from negative in FY2002 to 6% in FY2003
and 25% in FY2004.

In the past three years, general and administrative expense ratio actually hovered
Operating and net margins around 20%. Interest expense has improved over the years because of decreasing
net debt balance. The company did not make any profit during FY2000 to FY2003,
and only in FY2004 did the company turn a corner. Gains from Exceptional Items
(debt forgiveness) and Other Operating Income (sales of assets, scrap materials,
rental income) actually made up the majority of profit in FY2004. Without these
gains, FY2004 would have shown only break-even. Diluted shares outstanding
increased significantly in the past several years because the company actively
issued new shares in exchange for debt to reduce its debt level.

in M S$ 2004 2003 2002 2001

Revenues 64.265 65.341 61.660 67.827

Direct Cost (47.172) (59.354) (62.888) (73.015)
Prod'n Overhead (0.911) (1.966) (2.262) (2.777)
Gross Profit 16.182 4.021 (3.490) (7.964)
Other Operating Inc 1.124 2.455 0.654 1.264
G&A Expenses (12.746) (14.204) (13.827) (20.967)
Exceptional Items 6.705 (1.453) (5.542) -
Operating Income 11.265 (9.181) (22.205) (27.667)
Interest Income 0.052 0.012 - 1.516
Interest Expense (3.289) (4.740) (7.624) (5.406)
Pre-Tax Income 8.028 (13.909) (29.829) (31.557)
Tax (0.202) (1.638) (0.056) 1.143
Net Income 7.826 (15.546) (29.885) (30.415)

Diluted EPS 0.0140 (0.0710) (0.1750) (0.1781)

Diluted Shares 558.121 218.843 170.791 170.791

Revenue Growth -1.65% 5.97% -9.09% -33.19%

Gross Margin 25.18% 6.15% -5.66% -11.74%
G&A Expense Ratio -19.83% -21.74% -22.42% -30.91%
Operating Margin 17.53% -14.05% -36.01% -40.79%
Net Margin 12.18% -23.79% -48.47% -44.84%

Source: Company

Net Cash (Debt) and Current Ratio

Yongnam has been reducing its net debt level since it peaked in FY2001. The
reduction in debt, however, was more attributable to asset sales than to cash flow

Phillip Securities Research

7
Yongnam Holdings 10 May 2005

Debt reduction does not come
from internally generated
cash flow
from operations. As discussed below under “Cash Flow” heading, cash flow from
operation was volatile at best; whereas asset sales were very constant in the past
several years. In addition, the company has been converting some of its debt into
equity recently. While this may make the balance sheet look stronger, the dilution
effect to its shareholders could be disastrous. On its FY2004 annual report (and
also FY2003, FY2002, and FY2001), the company’s auditor has brought up the
issue of the company’s ability to continue as an ongoing concern. If the company
is unable to continue as an ongoing concern, the shares could be deemed
worthless. Those creditors who agreed to exchange Yongnam’s debt for shares
would eventually realize they would never get their money back. In some cases,
the creditors may not have any choice. In other words, Yongnam probably did not
have any cash to make payments anyway, and the creditors had the unpleasant
choice of receiving nothing or receiving Yongnam’s shares.

Another reason why debt level has improved in FY2004 was because the
Debt forgiveness company’s main banker forgave several millions of Yongnam’s debt. The banker
will not be as generous as forgiving loans every year or forgiving the entire loan.
Therefore, the company has to find other ways to reduce debt level in FY2005 and
beyond – preferrably from cash generated from operation.

Current ratio is less than 0.5x
Current ratio shows that Yongnam may run into liquidity crisis. In the past four
years, current ratio has been less than 0.5x, which means that there is only 50
cents of current assets for every $1 of current liabilities. The situation is even more
precarious if we take into account that the majority of its current assets is in the
form of work-in-progress while the majority of its current liabilities is short-term
bank borrowing. For example, at the end of FY2004, $31m out of $42m current
assets, or 73%, is work in progress; while $63m out of $92m current liabilities, or
69%, is bank borrowing. The duration of work-in-progress may not match the
duration of bank borrowing. After the debt restructuring in FY04, the company is
required to pay $300,000 every month to the bank, while cash inflow from work-in-
progress is not as predictable.

in M S$ 2004 2003 2002 2001

Cash 0.875 4.545 0.643 0.705

Liquid Investment 1.003 0.132 0.037 0.039
ST Debt (63.847) (77.997) (80.022) (61.167)
LT Debt (6.158) (1.449) (1.695) (25.288)
Net Cash (Debt) (68.127) (74.769) (81.037) (85.711)

Sale of PPE 3.964 2.435 5.131 2.274

Current Assets 43.202 38.884 37.267 53.354

Current Liabilities 92.277 116.756 131.484 107.003
CA : CL Ratio 0.468 0.333 0.283 0.499

Source: Company

Cash Flow

Negative free cash flow on Despite achiving profitability in FY2004, the company’s cash flow actually did not
most years improve. In fact, it ran a negative cash flow from operation in the year. If capital
expenditure is deducted from cash flow from operation, the picture looked even
worse. In the past seven years (FY1998 – FY2004), the company achieved

Phillip Securities Research

8
Yongnam Holdings 10 May 2005

positive free cash flow (cash flow from operations less capital expenditures) only
twice - in FY2001 and FY2003.

in M S$ 2004 2003 2002 2001 2000 1999 1998

CFO (4.675) 6.131 1.700 7.692 2.014 (0.752) 20.762

Capex (1.236) (2.448) (1.744) (5.230) (25.183) (30.825) (34.685)
FCF (5.911) 3.683 (0.044) 2.463 (23.170) (31.577) (13.923)

Source: Company

Attaining earnings profitability is an important milestone; but without positive cash

Free Cash Flow flow from operation, the company will never improve its financial position and will
continue to be plagued by high debt level. There are only so many assets in the
balance sheet that the company can sell off to raise cash; and there is a limit to
how many shares the company can issue in exchange for debt. Eventually, the
company will have to generate positive free cash flow in order to sustain itself.

Revenue growth in FY2005
Forecast
At the end of FY2004, the company’s order book was over $80m. This provides a
good cushion for revenue outlook in FY2005. We think the company could realize
revenues as much as $80m in FY2005, or about 25% growth from FY2004 level.
This is entirely possible given the company’s order book balance at the end of
FY2004, and several projects that are coming into the market including those
associated with several MRT projects, airport projects in Dubai and in other cities,
Harbourfront project, and Fusionpolis project. Projects like the opening up of
casinos in Singapore provides potential revenue growth beyond FY2005.
in M S$ 2005F 2004 2003

Revenues 80.000 64.265 65.341

Gross Profit 26.000 16.182 4.021
Operating Income 10.000 11.265 (9.181)
Net Income 6.800 7.826 (15.546)
Diluted EPS (cents) 1.218 1.402 (7.104)
Diluted Shares 558.121 558.121 218.843

Revenue Growth 24.49% -1.65% 5.97%

Gross Margin 32.50% 25.18% 6.15%
G&A Expense Ratio -20.00% -19.83% -21.74%
Operating Margin 12.50% 17.53% -14.05%
Net Margin 8.50% 12.18% -23.79%
EPS Growth -13.11% NA NA

Source: Company, Phillip Securities Research

Rising steel price helps revenues
and gross margin
In addition, steel price has gone up tremendously. Unfabricated steel price has
risen from US$400/ton to about US$1000/ton in the past 12 months. Because the
company owns about 30,000 tonnes of re-usable strutting (fabricated) steel, the
price increase has been a big bonanza on the revenue line as well as on the gross
profit line. The company can re-use its strutting steel from one project to the next
without incurring significant cost of goods sold.

Phillip Securities Research

9
Yongnam Holdings
Improving margins
Exclude Exceptional Gains
and Other Operating Income
in Forecast
Yongnam should earn 1.218
cents in FY2005
Earnings upside scenarios
Earnings downside scenarios
Unable to arrive at a fair
valuation
10 May 2005
We think Yongnam is now more disciplined in submitting bids, and the industry is
not as desperate as they were in FY2001 and FY2002 to win bids for new projects.
In other words, the competition among construction companies in FY2005 should
not be too intense as to eliminate profit potentials. This, combined with higher steel
price, should produce gross margin of 35% or more. General and administrative
expenses ratio should remain constant around 20% of revenues.
We ignore potential gain from Other Operating Income and Exceptional Items in
FY2005 because after the debt restructuring in FY04, we do not think the banks will
forgive more significant portion of the company’s debt, and also because the
company has less capability to convert its debt into shares now that the share
price is selling at such depressed level. Without Exceptional Gains and Other
Income, operating margin should approximte 12.5%. Interest expense and taxes
should approximate last year’s level, which brings net margin to about 8.5%.
There are still some risks that management will convert more debt into shares.
However, because the stock price is trading around 3 pennies, the company has
less capability to do so. We think diluted shares outstanding should not expand
much more from current level. We estimate Yongnam should earn approximately
1.218 cents in FY2005 vs. 1.402 cents in FY2004. FY2005 EPS estimate excludes
Other Operating Income and Exceptional Items.
The upside to our estimate is if the bank decides to forgive more of Yongnam’s
debt, and the company books Other Operating Income for the amount of debt
forgiven. If the company decides to sell part of its assets to raise cash and bring
down debt, the company may book exceptional gain that will further boost
earnings. Of course, if steel price rise even higher, the company’s revenues and
margins will benefit tremendously. Finally, if the company is able to win more
profitable projects, revenues and profits will also turn out to be better than we
currently expect.
The downside to our earnings estimate is if management decides to issue more
shares or exchange debt for shares, earnings will be diluted. A downturn in
economy which reduces new projects or a slide in steel price will negatively affect
revenues and earnings. Finally, if the company is unable to collect enough cash
payments from customers and has to borrow more money to finance working
capital, profits will suffer.
Valuation
We are unable to arrive at fair valuation for Yongnam because of the following
uncertainties:
− The auditor has brought up the issue of Yongnam’s ability to continue as an
ongoing concern.
− Assuming the company is able to achieve or exceed our EPS estimate for
FY05, it means the P/E multiple is very low. However, we caution investors
that the multiple is low for a good reason. The net debt level is so high that a
small profit may be meaningless if the company is unable to bring down debt to
a more comfortable level.
− Book value figure may be distorted given the fact that the company has $32m
of accumulated losses at the end of FY2004, and that as early as the end of
Phillip Securities Research
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Yongnam Holdings 10 May 2005

FY2003, the company actually has negative equity. The reason that
shareholders’ equity swung to positive at the end of FY2004 was because the
company issued new shares and exchanged debt for shares; thereby boosting
its share capital and share premium balances.

− The company’s credit facility with its bank has reached maximum level. Thus,
there maybe a risk that its customers may decide not to hire Yongnam because
the company does not have access to finance the working capital needed for
new projects. If this occurs, the company’s ability to generate revenues and
profits maybe severely damaged. Yongnam is a long-time player in the steel
construction industry, and has earned a strong reputation. Nevertheless, we
have to be aware of the fact that there is a risk the company may not be able to
achieve our target revenues and earnings in FY05 because it has no or little
access to finance working capital required to bid on big projects.

Given the above reasons, we are unable to reach a price target for Yongnam.

Recommendation
Given the company’s fundamentals, we do not recommend investors to purchase
Yongnam’s shares. The risk of dilution is still significant if the management
continues to issue new shares and/or convert debt into shares. The company,
however, appears to be turning around its situation, albeit very slowly. Revenues
Recommendation: HOLD are expected to grow in FY2005, and the company started to achieve profitability in
FY2004 albeit aided significantly by Other Operating Income and Exceptional
Gains. Competition in the industry is much less severe compared to FY2001-02
that players in the industry are now able to achieve normal profits. Steel price
increase has given the company a boost in financial result, and we estimate the
company may achieve profitability again in FY05.

This is a turn-around situation and the company is in the midst of an inflexion point.
Until we see that the company is successful in turning around its precarious
situation, we rate the company a HOLD.

Signed

Phillip Securities Research

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Yongnam Holdings 10 May 2005

Phillip Research Stock Selection Systems

BUY >15% upside from the current price
HOLD Trade within ± 15% from the current price
SELL >15% downside from the current price

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Yongnam Holdings
PhillipCapital – Regional Member Companies
SINGAPORE
Phillip Securities Pte Ltd
Raffles City Tower
250, North Bridge Road #06-00
Singapore 179101
Tel : (65) 6531 6001
Fax : (65) 6535 6631
Website : www.poems.com.sg
HONG KONG
Phillip Securities (HK) Ltd
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95 Queensway, Hong Kong
Tel : (852) 2277 6600
Fax : (852) 2868 5307
Website : www.poems.com.hk
JAPAN
The Naruse Securities Co Ltd
4-2, Nihonbashi Kabutocho
Chuo Ku, Tokyo
Japan 103-0026
Tel : (81) 03-3666-2101
Fax : (81) 03-3664-0141
Website : www.naruse-sec.co.jp
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10 May 2005
MALAYSIA
Phillip Capital Management Sdn Bhd
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12 Jln Yap Kwan Seng
50450 Kuala Lumpur
Tel : (603) 2166 8099
Fax : (603) 2166 5099
Website : www.poems.com.my
THAILAND
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849 Silom Road
Bangkok Thailand 10500
Tel : (622) 635 7100
Fax : (622) 635 1616
Website : www.poems.in.th
UNITED KINGDOM
Phillip Securities (UK) Ltd
3rd Floor Mansell Street
London E1 8AN
Tel : (44) 207 553 8280
Fax : (44) 207 954 9910
Website : www.phillip-uk.com
Phillip Securities Research