We present to you Shares Investment's stock picks for the fourth quarter of 2013.

CapitaRetail China Trust: Capitalising On Maturing Portfolio (*new)

Performance Despite talks about slowing growth, China is definitely the place to be doing business in. After all, it is the fastest growing economy worldwide. The latest gross domestic product data added to evidence that China can hold its ground. The main argument lies with the nation being the most populous and where rapid urbanisation is taking place. These two factors will underpin the country’s retail sales, which as seen in the chart below is in a strong uptrend.

Total Retail Sales In China

And it seems CapitaRetail China Trust (CRCT) is tracking this uptrend closely. Reflective of this, financial performance is looking up while operational metrics are healthy. The trust is now reaping the fruits of its asset enhancement initiatives (AEI) and renewal of tenant mix carried out over the years to improve its competitive edge. In the share price aspect, the decline since the start of the year presents an attractive entry point for the counter which is currently trading at a 5.1 percent discount to its net asset value. Not forgetting too, expectations that the Chinese yuan, in which CRCT’s income is denominated in, will continue appreciating is another plus factor.

Sponsor Network CRCT exercised its right of first refusal to acquire Grand Canyon Mall from its sponsor, CapitaMalls Asia (CMA). Located in Fengtai District, Beijing, the mall is in a region that is set to benefit from a Rmb130 billion investment programme that will help to boost retail growth prospects there. The trust sees huge potential in this acquisition which serves an established population catchment. This projection stemmed from opportunistic upgrades in the form of rental income, floor layout and tenancy mix.

AEIs According to the trust, the AEIs at CapitaMall Minzhongleyuan will set “the foundation for strong future growth”. Leasing activities have commenced with the trust securing commitments and advanced negotiations that account for nearly 60 percent of the total net lettable area. A target of 35 percent rise in average rental rate was also set by CRCT. The trust updated that, excluding anchor tenants, it has surpassed the target rent by 15.8 percent. With the effects of these two catalytic events projected to kick in as soon as FY14, investors may be greeted with a pleasant surprise down the road.

Eu Yan Sang: Festive Seasons Could Be Good Revenue Catalysts

Performance Comparing the initiation price where we first introduced Eu Yan Sang (EYS) into our picks on 28 June 2013, with the price it closed at on 30 September, ($0.76 versus $0.725), EYS is down some 4.6 percent thus far. Although under the same comparison, EYS has underperformed the Straits Times Index (STI) for this quarter, where the STI saw just a marginal gain of 0.6 percent, it is noteworthy that this quarter has been extremely volatile.

FY13 Results Financial performance wise, EYS reported its FY13 results with a 13 percent rise in revenue to $326.9 million, a gross profit increase of 12 percent to $165.6 million, and with a net profit increase of some 11 percent to $18.1 million. Pressure continues to ensue in operating expenses as revenue increases. That said, it is noteworthy that the gross profit margin (GPM) was still maintained at above 50 percent, reflecting management’s ability to keep a lid on its costs and charging a premium to its customers.

Operating Expenses

Australia Operations Previously, we expressed positivity on EYS’s Australia’s revenue segment as it has consistently showed quarter-on-quarter sales growth. Factoring its FY13 results, EYS would have clocked five consecutive quarters of sales growth from this geographic segment. Revenue contribution growth from Australia is just closely behind that of Hong Kong, the largest revenue contributor based on geographic region for 4Q12. And on a year-on-year basis, revenue contribution from Australia has clearly leapfrogged through the roof, stemming our positivity on this geographical segment.

Seasonal Sales As the year-end is coming soon, so are the festive seasons packed along with it. In the festive season pipeline for this year alone, we are seeing two major festivals such as Christmas and New Year, and for 2014, Chinese New Year. EYS is in a very good position to benefit from this season as sales are usually at the peak during these festive seasons. The revenue for the past five years during the March quarter has been consistently rising, with a compounded annual growth rate (CAGR) of 8.3 percent, and we are hopeful that revenue contribution for March 2014 is very likely to show another increase. Net operating cash flow was also consistently more than net income, which highlights that the cash conversion ability of the company during this quarter is encouragingly high, probably due to the fast rate of its products flying off its shelves. We are holding on to our reigns tight on this one and will want to position ourselves and ride the seasonal wave comfortably.

Swiber Holdings: Strong Cash Chest, Good Order Book Standing

Performance As at 30 September 2013, Swiber has negated some of its gains we saw in the previous quarters, in line with the volatility seen in the STI for this quarter. From the closing price of $0.715 we saw on 28 June 2013, Swiber’s price closed at $0.65, representing some 10 percent loss in share price. Nevertheless, comparing it to our initiate price at $0.61 on 31 December 2012, this still shows a 6.6 percent gain till date. Technical readings on its chart is showing encouraging signs with plausible momentum aiming for $0.688 in the medium short term.

1H13 Results Revenue was up 30.1 percent for 1H13 to US$551.8 million, with a gross profit increase of 22.4 percent to some US$87 million. Earnings were however weighed down heavily by higher operating expenses, admin expenses and finance expenses. As mentioned in the previous review (http://www.sharesinv.com/articles/2013/07/26/2013-stock-picks-second-quarter-review/), revenue contribution is already seen from Latin America. This quarter however, also saw significant increase in revenue contribution from South East Asia.

Higher Expenses

Sizable Cash Chest As a t 30 September 2013, the cash and bank balances position of Swiber reflected some US$256 million, a 97.5 percent increase from that of US$129.4 million seen in 1H12. The strong cash position gives Swiber a competitive advantage to do synergistic acquisitions, joint ventures, and further market penetration in its desired geographic region. This essentially also highlights a very good foundation to position itself for huge contract wins and sustaining a large scale project till delivery.

Cash Position

Long-Term Outlook We continue to be positive on Swiber’s intention to go into the deepwater market. As of 14 August 2013, Swiber reported that its current order book stands at approximately US$1.2 billion. There is a possibility that this figure could rise for 2013 if new contract wins are bagged, but with less than two months to run to the end of the year, we are taking a conservative approach and not hope for that. The realisation of such contracts into the following quarters will make revenue and earnings realisation an interesting thing to watch. At the time of writing, Swiber is trading at $0.655, representing a good discount to its book value per share of US$0.844.

Revenue Breakdown

Warren Buffet once said, “In the business world, the rearview mirror is always clearer than the windshield.” While all seems good now, the element of uncertainty always exists for the road ahead. In order to reduce panic attacks should things go South, it is paramount for investors to stay diversified and maintain a cash reserve.

With that said, be sure to stay tuned to our next quarterly review.

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About Shares Investment Shares Investment is an investment magazine that measures the pulse of the markets, and provides readers and the investment community with facts, figures, investment analysis and insights to allow them to make better informed investment choices. Shares Investment gives its readers a unique experience by knowing what investors really want to see, and need to see.