S-Chips down 19% in the last six months, DMG suggests a time to buy

Although we believe the cautious sentiment towards S-Chips will continue, and valuation, at trailing 1.05x P/B currently, is near its next support at 1.0x P/B, or -1SD to its historical mean of 1.5x. Despite recent spate of accounting irregularities and slowing growth concerns, we witnessed encouraging interests in S-Chips with some 90 meeting requests during OSK|DMG ASEAN Corporate Day (ACD) that was held early this month.

In particular, we observed good turnout for China Minzhong (MINZ SP, BUY, TP S$2.28), Sino Grandness (SFGI SP, BUY, TP S$0.68) and Midas (MIDAS SP, BUY, TP S$0.98). While investors acknowledged the high risks associated with the sector, they also believed that there are hidden gems to be uncovered, as evidenced by recent proposed Nestle-HsuFuChi transaction.

In this update, we identify some S-Chips with dominant market share and market access that could appeal to potential suitors, and reproduce ACD key takeaways.

S-Chips with competitive edge. At 25x FY11F P/E and 5.5x P/B, Hsu Fu Chi (HFCI SP, UNRATED) has one of the highest valuation among the S-Chips. We note that its investment merits include a dominant market share of ~6% in China’s candy market and an extensive sales channel of > 17,000 retail points.

Other S-Chips that command substantial market share in their respective fields include China Aviation Oil (CAO SP, UNRATED), HL Asia (HLA SP, BUY, TP S$2.98), MIDAS and Sunvic Chemical (SVC SP, UNRATED), while those that have established distribution network include China Animal Healthcare (CAL SP, BUY, TP S$0.42) and C&O Pharmaceutical (COPT SP, BUY, TP S$0.45).

OSK|DMG ACD key takeaways. Among the S-Chips that we hosted for OSK|DMG ACD, MINZ, SFGI and MIDAS stood out with ~20 meeting requests each. They updated investors with their recent developments i.e. MINZ builds in 3-5% buffer in its ASP in anticipation of a higher RMB, SFGI’s canned mushroom export to Australia will no longer be subjected to anti-dumping tariff and MIDAS is currently in talks with customers for eight to ten metro projects.

2QCY11 momentum ideas. We note that a number of S-Chips under our coverage will be releasing their quarterly results tentatively between 10th and 15th Aug (for CAL, CFE, FUXC, MIDAS, SFGI and YGR), and yearly results from 25th onwards (for MINZ). We reproduce quarterly earnings estimates for some of them to identify growth momentum ideas for the coming results season.