Results Note Analyst: Andy Ong

andy.ong@affininvestmentbank.com.my

Date: 1st July 2010

Hiap Teck Ventures Price: RM1.29
Headwinds in sight? Market Capitalisation: RM422.3m
Board: Main Market
Sector: Industrial products
Stock Code: 5072
Recommendation: ADD (under review)
Index Component/Constituent: FBM Emas

Key Stock Statistics

Share price chart
FYE Jul 2009 2010E
2.50
EPS (sen) 13.3 18.6
P/E on EPS 2.30
9.7 6.9
Dividend/Share (sen) 1.5 1.5 2.10
NTA/Share (RM) 1.86 2.04 1.90
Book Value/Share (RM) 1.86 2.04 1.70
Issued Capital (m shares) 327.4 1.50
52-weeks Share Price Range 1.57 / 0.88 1.30
Major Shareholders (%)
1.10
Kua Hock Lai 18.1%
0.90
Per Share Data 0.70
FYE Jul 2008 2009 2010E 2011E 2012E 0.50
Book Value (sen) Jun-06 Jun-07 Jun-08 Jun-09 Jun-10
1.77 1.86 2.04 2.26 2.51
Cash Flow (sen) 53.3 19.6 26.3 30.9 33.3
Earnings (sen) Source: Bloomberg
47.9 13.3 18.6 23.5 26.1
Dividend (sen) 4.5 1.5 1.5 1.5 1.5
Payout Ratio 9% 11% 8% 6% 6% 3QFY10 RESULTS HIGHLIGHTS
PER (x) 2.7 9.7 6.9 5.5 4.9
P/Cash Flow (x) 2.4 6.6 4.9 4.2 3.9 FYE July qoq yoy
P/Book Value (x) RMm 3Q09 2Q10 3Q10 % Chg % Chg
0.7 0.7 0.6 0.6 0.5
Dividend Yield (%) Revenue 273.7 251.4 289.6 15% 6%
3.5 1.2 1.2 1.2 1.2
EBIT -12.7 8.5 25.1 195% n.m.
ROE (%) 31% 7% 10% 11% 11%
Net int inc/(exp) (4.3) (3.2) (3.4) 7% -22%
Net Gearing (x) 91% 51% 39% 31% 25% Pretax Profit -17.6 7.1 22.6 218% n.m.
Net Profit -2.0 4.0 16.9 326% n.m.
P&L
FYE Jul (RMm) 2008 2009 2010E 2011E 2012E Operating Margin -4.6% 3.4% 8.7%
Pre-Tax Margin -6.4% 2.8% 7.8%
Revenue 1662.0 1159.3 1199.7 1415.3 1557.3
Net Margin -0.7% 1.6% 5.8%
EBITDA 221.6 57.2 108.2 129.3 139.5
Dep. & Amort. (17.4) (20.3) (24.5) (23.8) (23.2) YTDFY10 RESULTS HIGHLIGHTS
Net int inc./(exp) (4.8) 1.3 (2.5) (3.3) (2.6)
Exceptional items 0.0 (5.3) 0.0 0.0 0.0 FYEJuly
Pre-tax Profit RMm FY09 FY10 % Chg
199.4 32.9 81.1 102.1 113.7
Taxation Revenue 856.7 820.7 -4%
(45.1) 9.8 (21.1) (26.5) (29.6)
EBIT 19.1 58.4 206%
Effective tax rate -23% 30% -26% -26% -26%
Net Interest exp (9.3) (3.3) 64%
Net Profit 154.3 42.7 60.0 75.5 84.1
Pretax Profit -11.4 53.2 n.m.
Core net profit 154.3 25.4 60.0 75.5 84.1 Net Profit -4.4 38.0 n.m.
EBITDA Margin 13.3% 4.9% 9.0% 9.1% 9.0% Operating Margin 2.2% 7.1%
Pre-tax Margin 12.0% 2.8% 6.8% 7.2% 7.3% Pre-Tax Margin -1.3% 6.5%
Net-Margin 9.3% 3.7% 5.0% 5.3% 5.4% Net Margin -0.5% 4.6%

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RESULTS REVIEW & EARNINGS OUTLOOK

Records 9MFY07/10 net profit of RM38m.

Cumulatively, Hiap Teck’s earnings recorded a vast
improvement with 9MFY07/10 core net profit of
RM38.0m. This compares to a dismissal 9MFY07/09
core net loss of RM4.4m. In essence, earnings were
mainly driven by a lower cost base as revenue declined
by a slight 4% yoy to RM820.7m - due to lower sales
volume. This is also reflected in an improvement in
EBIT margin (9MFY07/10: 6.3% vs 9MFY07/09: 5.5%).

3QFY07/10 earnings surged 3 fold qoq to RM16.9m.

The Group chalked up a core net profit of RM16.9m in
3QFY07/10 vs a net loss of RM2.0m in 3QFY07/09. Key
earnings driver were: (1) a 40% yoy increase in HRC
prices; (2) likely higher volume; and (3) economies of
scale. Sequentially, Hiap Teck’s 3QFY07/10 net profit
picked up by 3x with topline surging 15% qoq to
RM289.6m. Earnings were mainly driven by higher
sales volume and improved selling prices (+14% qoq).

Results are below expectations. Hiap Teck’s

9MFY07/10 net profit only accounted for 63% and 64%
of our and consensus full-year estimates. We are
however keeping our forecast unchanged, pending a
management update.

RECOMMENDATION

ADD call and RM1.76 PT, based on 8.5x CY10 PER

is currently under review. Stepping forward, we are
likely turning cautious on the steel sector as a whole.
Outlook for the steel industry is expected to be a
challenge from hereon due to four key reasons: (1)
Limited upside for average selling prices (ASP) of steel
due to ongoing concern on sovereign default risk in
Europe and China’s restraint on its property market
leading to a slowdown in steel consumption; (ii) Higher
raw material prices, as prices of scrap metal are sticky
and iron ore are escalating – especially with potentially
higher mining taxes to be introduced by the Australian
government in the longer term; and (iii) Proposed cut in
subsidy on power and natural gas will increase the
production cost of steel.

Inline with our view, The Malaysian Iron and Steel

Industry Federation (Misif) has also revised downward
Malaysia’s average steel consumption growth to 5% for
2010, from 10%-12%.

We are currently reviewing our ADD rating and RM1.76

PT (based on 8.5x CY10 PER) pending a management
update.

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 Equity Rating Structure and Definitions

BUY Total return is expected to exceed +15% over a 12-month period

TRADING BUY Total return is expected to exceed +15% over a 3-month period due to short-term positive development, but fundamentals
(TR BUY) are not strong enough to warrant a Buy call. This is to cater to investors who are willing to take on higher risks
ADD Total return is expected to be between 0% to +15% over a 12-month period
REDUCE Total return is expected to be between 0% to -15% over a 12-month period
TRADING SELL Total return is expected to exceed -15% over a 3-month period due to short-term negative development, but fundamentals
(TR SELL) are strong enough to avoid a Sell call. This is to cater to investors who are willing to take on higher risks
SELL Total return is expected to be below -15% over a 12-month period
NOT RATED Affin Investment Bank does not provide research coverage or rating for this company. Report is intended as information only
and not as a recommendation

OVERWEIGHT Industry, as defined by the analyst’s coverage universe, is expected to outperform the KLCI benchmark over the next 12
months
NEUTRAL Industry, as defined by the analyst’s coverage universe, is expected to perform inline with the KLCI benchmark over the next
12 months
UNDERWEIGHT Industry, as defined by the analyst’s coverage universe is expected to under-perform the KLCI benchmark over the next 12
months

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