On Bloomberg, Sapphire Holdings is still classified as being part of the “Metals & Mining” industry. However, Sapphire has completed its acquisition of China-based Engineering, Procurement and Construction (“EPC”) business, Ranken Infrastructure Limited (“Ranken”), on 1 Oct 2015.

tehwingkwan.arTeh Wing Kwan, Group CEO & MD of Sapphire.
According to Sapphire’s press release, Ranken is China’s second largest privately-owned integrated rail transport infrastructure construction group and the only privately-owned operator in China which has obtained the prestigious full AAA-certification for design, construction and project consultation in the rail sector.

Ranken’s clients are mostly state owned enterprises (“SOE”) and Fortune-500 companies in China. Going forward, Ranken will be Sapphire’s largest revenue contributor. 

It seems to me that Sapphire, through Ranken, may be in an industry with bright prospects. I managed to contact Mr. Teh Wing Kwan, Group CEO and Managing Director of Sapphire, and I was pleasantly surprised that he promptly agreed to an exclusive meeting (despite his busy schedule).

Here are the key takeaways


Ranken – Niche player in a promising industry

It is worth reiterating that Ranken is China’s second largest privately-owned integrated rail transport infrastructure construction group and the only privately-owned operator in China which has obtained the prestigious full AAA-certification for design, construction and project consultation in the rail sector. In this industry, certification and track record for quality and timely project completion are key. The recent rapid pace of contracts announced amounting to RMB1.3b over the past two months underscores Ranken’s track record and capability.

Reuters (27 Nov 2015) reported that China intends to spend RMB2.8 trillion on railway development from 2016 to 2020. This was the same budget allocated for 2010-2015 but the actual spending was around RMB3.5 trillion.

Thus, Ranken seems to be in the right industry with bright prospects.

Ranken – Sapphire’s key growth driver

Ranken’s order book was RMB2.1b as at 31 Dec 2014. Based on a 10 Dec 2015 Straits Times article, Sapphire is “in talks to bid for RMB2.5 – 3b worth of railway projects”. In addition, based on its 3QFY15 results, the company mentioned that it would start to recognise revenue from Ranken in 4QFY15 and Ranken is expected to be its largest revenue contributor by 4QFY15. Therefore, Ranken is likely to be Sapphire’s key growth driver in the years ahead.

Readers can refer to the circular here for more information on Ranken.


ernest newphoto
Ranken – Scalable business with limited capex. Ranken’s annual production capacity is around RMB1.0b worth of projects. However, Ranken can scale up its business with limited capex. The most important component of its production capacity increase stems from being able to recruit engineers. This is different from manufacturing firms which need to set up factories and install production lines, incurring fixed costs and longer turnaround times."

-- Ernest Lim CFA, CA (photo)

New substantial shareholder bought 100.8m Sapphire shares at $0.097 last month

According to the company’s press release dated 22 Jan 2016, Ou Rui Group Limited, a company incorporated in Hong Kong and wholly owned by Mr Li Xiaobo, bought 100.8m Sapphire shares at $0.097 via an off market transaction. Mr Li is ranked among the Top 400 Forbes China Rich List in 2014 and he is a veteran investor in private equity investments, as well as public listed companies. Investors can take some comfort in a veteran investor being vested in Sapphire.

Noteworthy points

Possible execution risks

For Ranken, there may be execution risks, especially when it has not made any contribution to Sapphire yet (at the time of this write-up). It will be reassuring if we can see the following in their upcoming results (i.e. 4QFY15F or FY16F):

1. Ranken’s meaningful contribution in 4QFY15 and its margins. It is noteworthy that the company cited Ranken’s gross margins of 18 – 26% in the 10 Dec 2015 Straits Times’ article;

2. Company to indicate its latest order book. They only released the order book figures of RMB2.1b as at 31 Dec 2014;

3. How Ranken can scale up to capitalise on the growth in the infrastructure space.

No rated analyst coverage

According to Bloomberg, there is no rated analyst coverage of Sapphire. The drawback to this is that investors and fund managers are still not familiar with Sapphire’s business and prospects, thus it may take some time for Mr Market to get to know this company.

Illiquid and small market cap of S$98m

Sapphire is a small company with a market capitalisation of S$98m. Average 30D and 100D volume amount to 1.0m shares and 1.3m shares, respectively. This is not a liquid company where investors with meaningful positions can enter or exit quickly.

Chart analysis

Based on Chart 1 below, Sapphire’s chart seems to be turning a tad positive as 21D exponential moving average (“21D EMA”) has started to turn higher. 50D and 100D EMA have stopped sliding and converged. Indicators such as RSI and MACD are strengthening. Overall, the chart looks a tad positive to me with strong support established at $0.095 – 0.096. However, a clearer bullish sign will emerge if I can see

1. Whether the 50D and 100D EMA can rise and pull apart from each other;

2. Whether the 21D EMA can form golden crosses with the other EMAs;

3. ADX to strengthen above 20.

Last close (5 Feb 2016): $0.100

Near term supports: $0.096 / 0.095 / 0.091 – 0.093

Near term resistances: $0.103 / 0.110 – 0.111 / 0.120

A break below S$0.089 on a sustained basis with volume expansion negates the bullish tinge in the chart.

Chart 1: Sapphire’s key support at $0.095-0.096




Source: CIMB complimentary chart as of 5 Feb 16

 

Conclusion

The above write-up is merely a brief introduction on Sapphire. In short, Sapphire may be a proxy to infrastructure growth through its acquisition of Ranken whose maiden contribution would commence in 4QFY15F. However, there may be execution risks on Ranken, coupled with low liquidity and no rated analyst coverage. Readers who are keen to know more about Sapphire should refer to Sapphire’s company website. 

Disclaimer

Please refer to the disclaimer here

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