DMG and Partners is cautious on many S-chips amid the recent surge in valuations, but does see some diamonds in the rough that are worthy of more attention.
The Straits Times Index (STI) has risen some 27% year-to-date, putting several stocks outside the limits of affordability, but at least two companies still possess enough upside potential for DMG to classify them as “top picks” among listed firms.
Midas Holdings Ltd is a maker of aluminum alloy extrusion products and polyethylene pipes, primarily for the transportation and infrastructure sector in China.
The company’s Aluminum Alloy Division supplies the world largest train manufacturers, such as France’s ALSTOM SA, Germany’s Siemens and Chinese-Canadian venture Changchun Bombardier.
Midas also has a 32.5% equity stake in Sino-foreign metro train-making joint venture, Nanjing SR Puzhen Rail Transport Co Ltd.
The eastern China-based JV is only one of four rolling stock companies in the PRC licensed to manufacture and sell metro trains on a nationwide basis.
DMG is also bullish on Chinese mobile handset design house Longcheer Holdings.
The company, listed in Singapore since 2005, offers hardware design products and services including PCB design, selection of chipsets, antenna, USB, flash memory, camera, software protocol display and software design products and services such as MMI, SMS, games, Java, WAP, T9, MP3, and MPEG4.
Longcheer’s main competitors among Singapore-listed handset designers include China Techfaith Wireless and Z-Obee Holdings Ltd.
DMG had this two say about the two standout listcos: “We believe Midas will be a chief beneficiary of China's stimulus package, as two trln yuan is budgeted for the expansion of the railway system over the next three years.
"Longcheer, which has a healthy cash balance, is expected to get a boost from the rollout of China's 3G network. Moreover, both companies have consistently dished out dividends, which lend credibility to their financials.”
Meanwhile, DMG is cautioning investors to “be discerning” on most S-chips.
“The Singapore market has been on fire. The S-chips, despite its higher betas, have lagged behind the general market with a 23% growth over the same period. However, 21 out of the 133 stocks in the S-chip universe saw stock prices double.
" Plagued by corporate governance and transparency issues. S-chips are still hampered by corporate governance issues, no thanks to the shenanigans of firms like China Printing and Dyeing, Fibrechem Technologies and Oriental Century.”
It said that a few possible “red flags” include listed companiess with high gearing and convertible bonds.
“Firms which have been shoring cash and not returning to investors through dividends despite having little capex requirements are also looked upon suspiciously.”
The brokerage is maintaining a “still guarded” stance on other counters.
“We are still taking a cautious approach on the S-chip sector, and do not believe it is time to go aggressive yet. Our guarded stance is evidenced by our limited BUY calls among the S-chips under our coverage despite the improving market sentiments.”
The Singapore-based house said this outlook is also due to some of the counters in its coverage universe “shooting past our target prices,” such as agricultural plays China Fishery and China Milk.
