Regional Member Com Phillip Securities...

Regional Member Companies Phillip Securities ResearchMICA (P) 146/01/2009

China Kunda Technology Holdings Ltd Riding on China’s strong automobile sector

30 October 2009

China Kunda Technology Holdings Limited (“Kunda”) manufactures and sells plastic injection moulds (mainly large-scale moulds for the automobile industry), In-Mould-Decoration (“IMD”) Products and other plastic injection related products. The Company’s products are manufactured in Shenzhen, China.

Initiate coverage with a BUY at a fair value estimate of S$0.39. China Kunda has shown its resilience even during tough times. It was listed in October last year when the global financial crisis toppled many companies. The Company’s focus on the automobile sector as well as IMD products looks like the way to go. The Chinese government, through its stimulus package and tax cuts for the automobile industry this year, has boosted its growth and domestic demand to the extent China has taken over USA as the world’s top auto sales market. We believe Kunda is in a strong position to leverage from this growth given its strong technological focus, strategic acquisitions of Shenzhen Precision and SXD, good relationships with their customers, many of whom are large international brands, and the strong demand for high precision moulds. From the last traded price of S$0.255, our target price gives a potential upside of 52.9%.

China’s strong automotive industry growth. China has taken over the US to be the world’s top auto market. September sales of automobiles surged by 78% with passenger cars climbing 84%, as reported by the China Association of Automobile Manufacturers (“CAAM”). With such growth in the domestic automobile industry we believe Kunda is well positioned to benefit from this given its acquisition of Shenzhen Precision and SXD as well as its initial contract with BYD, a domestic brand automaker.

China’s Precision Mould Industry. China is currently a net importer of high precision moulds being that the domestic supply of high precision moulds is inadequate to meet demand. There is a wide gap between the technical standard of PRC mould manufacturers and international mould manufacturers as the technical capability of PRC mould manufacturers is generally low. Kunda is able to manufacture high precision moulds that satisfy even the stringent requirements of well-known international brands customers, giving them an edge over other domestic mould manufacturers.

Exhibit 1: Key Financial Data

Key Financial Data (Financial Year Ended 31 March) FY08 FY09 % chg 2010E 2011E Turnover (HKD mil) 100.57 99.77 -0.8 253.20 303.84 Gross profit (HKD mil) 31.56 33.98 7.7 93.68 112.42 Gross profit margin (%) 31.38 34.06 -3.38ppts 37.00 37.00

Singapore • ManufacturingSector • Initiating Coverage Recommendation:

BUY Previous call: Nil

Price Previous close S$0.255 Fair value S$0.39 Share price return 52.9%

Share Statistics Shares 352.0 mil Market Cap. S$89.76 mil Trailing PER 10.47x P/BV 3.18x 52-week Price Range S$0.1211 -

S$0.345 52-week PER Range 3.69x –

14.07x Listing Bourse SGX-

Mainboard Major Shareholder Kaoqun Cai

(36.39%), Worden Andrew Barron (9.52%)

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Company Profile The Group manufactures and sells plastic injection moulds, In-Mould-Decoration products and other plastic injection related products. The Company’s products are manufactured in Shenzhen, China. Analyst Mark Chow

+65-6531 1229 [email protected]

FAX +65-6536 4435 WEB www.phillipresearch.com

Ref: No: SG2009_0029

China Kunda Technology Holdings Limited 30 October 2009

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Net profit (HKD mil) 51.90 38.49 -25.9 63.74 72.47 Net profit margin (%) 51.61 38.57 -2.39 ppts 25.17 23.85 EPS (SG cents) 3.70 2.43 -34.1 3.27 3.71 Book value per share (SG cents) 6.27 8.01 27.7 12.48 15.69 P/E (x) 6.90 10.47 N.M. 7.81 6.87 P/Book 4.06 3.18 N.M. 2.04 1.63

Source: Company, Phillip Securities Research N.M = Not meaningful (1SGD = 5.5444 HKD)

Company Profile Overview. China Kunda, which was listed in October 2008, manufactures and sells mould and IMD products. The products are manufactured in 2 factories in Shenzhen, China. Kunda has its origins in 1998 when current executive chairman Cai Kaoqun started a business providing mould fabrication, modifications and repair services. In 2002, Mr Cai reviewed Kunda’s business strategy and decided to focus on the R&D of large-scale precision mould, in particular automobile mould, and IMD products. Over time, the business expanded to include the manufacture of mould and IMD products. Following the Company’s IPO which raised net proceeds of S$11.6 million, Mr Cai now owns a 42.68% through China Hongda Holdings Limited. Mr Cai Kaobing (Executive Director and brother of Mr Cai) and Mr Yang Jinbiao (Executive Director and COO) collectively owns another 6.0% stake through Good Moral Technology Limited.

Business Segments The Group’s main products include Mould and IMD products. The Group is in the midst of gradually pushing out its plastic injection parts business. Mould. The Group specializes in the production of large-scale precision moulds. About 70% of Kunda’s mould are supplied to the automobile industry while the balance are for electronics and specialized devices industries such as medical devices, gaming machines, munitions boxes etc. About 50% to 60% of these moulds are exported to countries such as America and Europe. For FY2009, average gross margin is about 38.3%. Kunda produces a wide range of automobile component mould for leading automobile component manufacturer around the world. Many of these moulds are highly sophisticated and are used to produce automobile plastic air-intake manifold and automobile low-pressure interior component. These components are eventually used in automobile brands such as Volkswagen, Audi, BMW, Mercedes and other makes. The Group also recently announced the signing of a first mould contract with BYD, China’s largest domestic brand manufacturer to-date for 2009.

CONTENTS Company Profile 2 Business Segments 2 Industry Outlook 4 Investment Merits 5 Risk Exposure 8 Future Outlook 8 Porter’s 5 Forces 10 SWOT 11 Management Profile 12 Financial Analysis 13

Valuation 15

Recommendation 15

Industry Peers 16

Financials 17

Rating History 18

General Disclaimer 19 Regional Member Companies

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Exhibit 2: Example of Moulds used in Automobile Components

Source: Company IMD (In-Mould Decoration) Products. A new form of plastic injection technology with several inherent advantages over traditional plastic injection parts. In IMD, the decorative features of a product is first printed onto a thin paper-like plastic film by silk-screen printing. The plastic film is then subsequently moulded into the plastic part itself thus enclosing the graphics between the plastic film and the plastic part. This gives IMD product several key advantages over traditional plastic parts 1) scratch-resistance and durability 2) better aesthetics 3) environmentally-friendly as the paint is enclosed within the product.

The IMD products are mainly sold to electronics and electrical applicances OEM and are used in products from Walt Disney, Toshiba, LG, Philips, Gree, 清华同方，方正 etc. The gross margin for IMD products in FY2009 is about 42.5%.

IMD is a relatively new form of product and were initially used in digital products such as handphones and MP3 players but application has been increasing over recent years and can now be found in products such as desktops, laptops and household applicances. Kunda products are now used in a wide range of products such as handphone, MP3 players, desktop, laptop, air conditioner, water heater, portable hard disk etc.


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Exhibit 3: Usage of IMD Technology of various products

Source: Company

Industry Outlook China Mould Industry Market. In 2008, the mould industry in China generated about RMB89.2 billion of revenue and worldwide demand for mould is estimated at about US$70 billion per annum. Generally, one model of car requires approximately 4,000 sets of mould to produce, valued at about RMB200 million to RMB300 million while a refrigerator requires 150 sets of mould with a value of about RMB4 million. It is estimated that 60% to 80% of electrical, telecommunication,military, automobile, instruments are made from mould. We can thus see that there is huge potential in China’s mould industry given increased affluence as well as urbanization. Technological backwardness in China Mould makers. The China mould industry suffers from weak innovative capabilities, outdated technologies and low industry efficiencies. These cause China mould makers to have longer production times as compared to those in developed countries. Not only that, the useful life of moulds made in China is only 10% to 50% of developed countries. According to Forward & Intelligence Co Ltd., only 10% of China manufacturers use Computer-Aided Design (“CAD”) designers for the design stage and engineers/technicians comprise of only 8% to 12% of the mould workforce. In developed countries, about 50% of mould makers produce large-scale precision moulds, in China; only 20% of mould makers are involved in producing these large-scale precision moulds.


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China is the world’s largest importer of moulds, despite the fact that they are the 3rd largest manufacturer of moulds, China is still importing about RMB10 billion to RMB15 billion of mould each year. This is due mainly to its low technological base. China also relies heavily on foreign imports for the tooling requirements of the automobile industry. We believe that Kunda is in a strong position to benefit from these ‘inadequacies’ in most of China’s mould manufacturers given its strong technical capabilities. They have already been exporting their moulds to top auto component manufacturers of the world thus showing they are in good position to compete for orders that China currently have to order from overseas.

Shifting of mould production to China. Japan is currently the world’s largest mould producer, followed by America and China. Mould manufacturing is a highly capital and labour intensive industry requiring a large pool of skilled engineers. The Company believes that with the shift of manufacturing activities to China and the high cost of labour in developed countries, production of mould will shift towards China over the next decade. It is estimated that the average mould labour cost of America is 40 times that of China.

China’s automobile industry growth. The China automobile industry had registered very strong growth in 2009, recovering from falls in the 2nd half of 2008. In the first 8 months of 2009, China vehicle sales rose about 29% to hit 8.33 million units. The China National Development and Reform Commission forecasted automobile sales to reach 12.5 million units in 2009. The sharp rise in sales is largely attributed to strong support measures from the central government to support automobile sales.

According to the China Association of Automobile Manufacturers (“CAAM”), China’s automobile sales totaled 1.33 million vehicles last month with passenger cars increasing 84%, the seventh month that China’s auto sales exceeded 1.1 million vehicles. This has effectively widened its gap with US as the world’s top auto market, spurred by tax cuts and government stimulus spending. China now leads the world in auto sales with 9.66 million vehicles sold over the first nine months of this year, the US comes second with 7.8 million, according to Autodata Corp.

Investment Merits Strong R&D capabilities. Kunda has a strong R&D team comprising of 8 foreign technical experts, 16 professors & Phds, 4 staff with advanced professional credentials, 18 staff with intermediate professional credentials and 68 inaugural batch of nationally-certified Mould Designers. The Chairman and CEO, Cai Kaoqun, has been the Technical Advisor to National Key Laboratory of Material Forming and Mould Technology since 2007. Kunda also has joint-research base with Huazhong University, which is also the sole China National Key Laboratory for Plastic Injection and Moulding. In addition, Kunda has a Post-doctoral R&D base with South China University of Technology and Science. The engineering faculties of these two universities are among the top in China. The Group, as a result of their R&D efforts, have successfully developed their own in-house tooling techniques that enable Kunda to produce high precision moulds for Plastic Injection technologies such as double-shot injection moulding, low pressure


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injection moulding, air assisted injection moulding and glass encapsulation injection moulding.

Strong demand for mould. Given the potential for import substitution for China’s mould industry mentioned above, we believe that the Group is in a strong position to leverage from a rise in the demand for mould due to a shift in the production of moulds from Japan and US to China. Well-established business relationships with customers. Kunda has been involved in the provision of moulds and plastic injection parts for over five years and IMD products for over two years. They have thus established a good track record and reputation of providing high quality products and services to their customers. The Group’s major customers with whom they have forged a strong relationship with include OEMs and ODMs, as well as owners of well-established international brands as shown. We believe that Kunda is in a better position to secure new and/or more technology type of projects from existing and/or new customers. Exhibit 4: Major Customers for Automobile Moulds

Direct customer

Description Moulds supplied Final product

Mecaplast Group

German manufacturer

Interior & exterior parts, engine parts, air-intake manifold, low pressure mould for A,B,C,D pillars

BMW, GM, Renault

FAW-Peguform JV

Sino-German JV Low-pressure mould, air-intake manifold, door panels, pillars

Audi, VW, BMW

Venture Grp World’s largest bumper manufacturer

Bumper, exterior parts Mercedes, GM

Roechling Grp

Supply to Italy, Changchun, Suzhou

Grilles, air inlets/outlets Audi, VW, Ford

Mahle Grp World’s largest engine component maker

Air-intake manifold, Filter system

JAC, VW

Magna Donnelly Grp

World’s 3rd largest auto component maker

Glass encapsulation mould, interior/exterior parts, rear view mirror

VW, Audi, GM, Ford, Chrysler

Source: Company


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Exhibit 5: Major Customers for IMD

Source: Company China’s automobile industry’s strong growth. As explained under “Industrial Outlook” we believe that the automobile industry in China will be seeing strong growth in the near future and statistics have been testament to this surge in automobile demand. The automobile industry is shifting towards replacing traditional steel parts with plastic injection parts to achieve (i) weight reduction (ii) improve fuel consumption and (iii) being more environmentally friendly. China is lagging behind USA and Europe in this aspect and we foresee greater demand and business opportunities for Kunda’s products; the award winning in-house developed (1) Plastic Air Intake Manifold and (2) Automotive Low Pressure Moulds. Entering into the automobile component market and domestic brand automaker. As mentioned, the automobile component market is still facing inefficiency and insufficient supply of high quality products thus the import requirement for China’s automobile industry. By acquiring SXD recently, a supplier of metal automobile and electronics components to BYD for more than two years, Kunda has shown its focus towards China’s robust automobile industry. BYD Company Limited is a domestic brand automaker ranked 6th in market share, with their F3 model being a top selling model for at least three months this year (CAAM). BYD has backing from billionaire investor Warren Buffet’s MidAmerican Energy Holdings Co since September last year. This downstream integration gives Kunda a ready channel into the automobile component business of BYD, automobile component business being a natural extension of the Group’s core automobile mould business. With the initial contract with BYD to supply an in-house developed double-shot plastic injection mould to produce an automotive component, we believe Kunda is able to capitalize and introduce more advanced technology and their accompanying systems to BYD and are currently in the process of negotiating for more automobile mould contracts.


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Risk Exposures Short term contracts. Kunda is generally not protected by long-term exclusive contracts with their customers. There is no guarantee that these customers will continue to make orders with the Group or that they will maintain their level of orders. It is thus important for the Group to maintain its quality standards as well as price competitiveness. Due to contracts not being long-term, selling prices for existing products may be subjected to downward revisions due to either price competition from other approved suppliers, rapid technological changes and short product life cycles. Reliant on intellectual property rights. The Group relies heavily on their technologies and intellectual property rights which concerns proprietary technologies and processes relating to Moulds, IMD products and Plastic Injection Parts. Patents for these technologies and intellectual property rights have been granted to or have been applied for in the names of Shenzhen Precision, executive chairman and CEO, Cai Kaoqun or Cai Junhua. Breaching of these obligations by the parties mentioned, could lead to considerable difficulties and litigation costs thus affecting the Group’s finances as well as reputation. Requires continued investment in R&D to maintain competitive advantage. The Group operates in a highly competitive industry with some competitors being bigger players in their industries and possibly have larger R&D resources to keep them competitive. While the Group does invest substantial time, effort and resources to the R&D of new products and technologies, there is no guarantee that they will achieve the desired results. Overcapacity of automobiles in China. There is a possibility that China’s auto industry might be slower in following years and a possible over-capacity given the growth pace witnessed recently. Chen Bin, director of the Department of Industry under the National Development and Reform Commission (NDRC), highlighted this during the 2009 International Forum on Chinese Automotive Industry Development and suggested that domestic auto makers should focus R&D on energy-saving, environment-friendly new energy vehicles for enterprises’ sustainable development.

Future Outlook China’s Precision Mould Industry. China is currently a net importer of high precision moulds being that the domestic supply of high precision moulds is inadequate to meet demand. There is a wide gap between the technical standard of PRC mould manufacturers and international mould manufacturers as the technical capability of PRC mould manufacturers is generally low. Kunda is able to manufacturer high precision moulds that satisfy even the stringent requirements of well-known international brands customers giving them an edge over other domestic mould manufacturers. China Electronics and Electrical Industries. China should still remain as an important outsourcing centre for OEMs and ODMs as well as owners of well-known international brands for electronics and household appliances due to its generally lower overheads. Most of these electronics or household products are usually fast moving consumer goods (“FMCGs”) that require frequent model updates which in turn require frequent changes in the necessary moulds. An example would be a particular model of a refrigerator generally requires approximately 350 sets of moulds.


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IMD Technology. IMD products hold many inherent advantages over traditional Plastic Injection Parts, including (i) better appearance and ability to incorporate complex designs; (ii) better durability; and (iii) environmentally-friendly to the user. IMD, however, is a technical intensive process and is difficult to ensure consistent production quality during mass production. This can lead to high wastage during mass production leading to high manufacturing cost. As such, IMD manufacturers usually face difficulties in meeting stringent delivery schedules. It is also technically difficult to incorporate more complex product shapes such as uneven surface contours or deep cavities during the production of IMD products. Kunda, having spent the last couple of years refining and developing the IMD production techniques and technology, puts them in a significantly advantageous position over their PRC competitors in the IMD industry. They are able to meet the stringent requirements of their customers as well as deal with IMD products with complex product shapes, steering away from traditional plastic injection parts. Business expansion through acquisitions, joint ventures or strategic alliances. The Group intends to expand its business or solidify their market position by way of acquisitions, joint ventures or strategic alliances. To date, they have acquired Shenzhen Precision, as well as SXD, a supplier of metal automobile and electronics components to BYD. They have also achieved a milestone contract with BYD to supply a set of double-shot plastic injection mould used to produce an automotive component. We believe the company will continue to seek out such opportunities that strengthen their position in the high precision moulds and IMD industry. We should also see more contracts from BYD with the Group’s intention to introduce more advanced moulding technology and their accompanying control systems.


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Porter’s 5 Forces

Exhibit 6: Porter’s 5 Forces Source: Phillip Securities Research

Competitive Rivalry in the Industry

Fragmented industry withseveral similar players.

Relatively high barriers ofentry due to reliance ontechnological know-how.

Bargaining Power of Buyers Fragmented industry with

several similar players. The Group has strong R&D

capabilities with awardwinning products.

Threat of Substitutes Many low end mould

producers Few high precision mould

manufacturers.

Bargaining Power of Sellers Direct materials prices

Threat of New Entrants High growth in China’s

automobile sector mightattract new entrants.

IMD might see threat fromnew entrants due torelatively high margins.


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S

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O

T

SWOT Analysis Exhibit 7: SWOT Analysis

Strengths Weaknesses Produce a wide range of automobile

component mould for leading automobile component manufacturers.

Strong R&D capabilities. Strong demand for high precision

moulds.

Lack of a long track record Funds required to enter into automobile

component business Continued investment in R&D to

maintain competitive advantage. Long production cycle time for large-

scale, precision mould.

Opportunities Threats China’s growing automobile sector

provides a robust market for the Group’s products.

Substitution of China’s mould imports. Automobile component market in China

registered revenue of about RMB860b in 2008 with the Government actively cultivating China local component manufacturers to compete with foreign manufacturers.

Rising labour costs. Rising raw materials cost. Rapid technological advancements.

Source: Company, Phillip Securities Research


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Management Profile

Exhibit 8: Management Personnel Name Description Cai Kaoqun (Executive Chairman and CEO)

Appointed as director on 26 December 2007. Responsible for overall strategic and business management

of the Group with 15 years of experience in the plastic and moulds industry.

Prior to setting up Yick Kwan Tat in 1998, Mr Cai worked as a freelance engineer providing maintenance and repair services in respect of Plastic Injection Moulds.

Mr Cai graduated from Aotearoa Business School in 2006, where he was awarded the Executive Master of Business Administration.

In December 2006 he was appointed as the vice-president at Guangdong Die & Mould Industry Association.

In 2007, he was appointed as the Technical Advisor to the National Key Laboratory of Material Forming and Mould Technology.

Yang Jinbiao (Executive Director and COO)

Appointed on 26 December 2007. Responsible for managing the overall operations of our

Group. He is also involved in the management of the Group’s human resources and R&D.

Prior to joining the Group in 2005, Mr Yang worked in several senior positions in various companies.

Cai Kaobing (Executive Director)

Appointed on 26 December 2007. Joined the Group in 1998 and is responsible for the

production and quality control of the Group. Mr Cai started his career as a woodworker in the renovation

industry in 1986. From 1994 to 1997, he assisted Cai Kaoqun in the provision of maintenance and repair services in respect of Plastic Injection Moulds.

Mr Cai graduated from Beijing University for Business Administration with a Diploma in Business Enterprise Management.

He obtained his Master of Business Administration from Newport University, USA in 2004.

Mr Cai is the brother of Cai Kaoqun. Hau Khee Wee (Executive Director and CFO)

Appointed on 26 December 2007. Responsible for overseeing and managing accounting,

finance, budgeting and taxation matters of the Group. Mr Hau has over 7 years of experience in the accounting and

finance industries. Prior to joining the Group, he was the finance manager and

company secretary of China Powerplus Limited. Mr Hau obtained a Bachelor of Accountancy from Nanyang

Technological University of Singapore in 2000. He is a non-practising member of Institute of Certified Public Accountants of Singapore.

Source: Company, Phillip Securities Research


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Financial Analysis Income statement. The Group reported sales of HKD99.7m for the financial year ended 31st March 2009. As compared to FY2008, sales fell by 0.8% from HKD100.6m in FY2008 to HKD99.7m in FY2009. Gross profits, however, rose 7.7% from HKD31.6m in FY2008 to HKD33.98m in FY2009, as gross margins saw an improvement from 31.4% in FY2008 to 34.1% in FY2009. Net profit for FY2008 was reported at HKD51.9m and FY2009 was at HKD38.5m, a decrease of 25.9% due mainly to listing fees affecting its ‘General and Administrative fees’ as well as higher selling and distribution fees. In our forecast for FY2010, due to the acquisition of Shenzhen Precision, we should see a spike up in the revenue figure, with technical fees reducing substantially to only about HKD4m. Revenue for FY2010 is expected to be approximately HKD253.2m. Our forecast revenue figures for FY2011 and FY2012 are HKD303.8m and HKD364.6m respectively. Gross margins for the forecasted years are expected to maintain around the 37% region as we believe the acquisition of Shenzhen Precision as well as stronger focus on its IMD segment, which commands higher margins, should see better topline margins. Gross profit for FY2010 is at HKD93.7m whilst for FY2011 and FY2012 are forecasted to be about HKD112.4m and HKD134.9m respectively. Net profits for FY2010, FY2011 and FY2012 are forecasted to be at about HKD63.7m, HKD72.5m and HKD87m respectively. Net margins are at 25.2% for FY2010 and about 24% for both FY2011 and FY2012. This fall in net margins are mainly due to higher forecasted selling and distribution expenses, although general and administrative fees have reduced substantially after the listing, income tax expenses rose substantially to reflect the higher revenue figures.

Exhibit 9: Revenue, Gross Profit, Net Profit

-50,000

100,000150,000200,000250,000300,000350,000400,000

FY2005

FY2006

FY2007

FY2008

FY2009

FY2010

F

FY2011

F

FY2012

F

Revenue Gross Profit Net Profit

HKD '000

Source: Company, Phillip Securities Research Estimates


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Exhibit 10: Revenue, Gross Profit and Net Profit Growth

-50.0%

0.0%

50.0%

100.0%

150.0%

200.0%

250.0%

300.0%

FY2006

FY2007

FY2008

FY2009

FY2010

F

FY2011

F

FY2012

F

Revenue Grow th Gross Profit Grow th Net Profit Grow th


Balance sheet. For plant and equipment, there was a significant increase from HKD6.6m in FY2008 to HKD56.4m due to the acquisition of Shenzhen Precision. We believe that going forward capital expenditures will not be substantial and have thus forecasted additional capex of HKD8m for FY2010 and HKD4m each for FY2011 and FY2012. We do not expect significant additions to development cost and thus ending book value for FY2010, FY2011 and FY2012 are HKD22.6m, HKD18.9m and HKD14.9m respectively. We foresee an increase in trade receivables due to the acquisition increasing its revenue figures substantially. This also applies to our forecasted inventory figures. All in all, total assets for the forecasted years have increased from FY2009 of HKD207.4m to HKD290.5m in FY2010, HKD357.7m in FY2011 and HKD440.3m in FY2012. We do not see any huge changes in the Group’s finance lease figures as management has indicated that they are comfortable with the present arrangements. Share capital has increased from HKD100.96m to about HKD140.6m due to the placement performed earlier in the month. Total liabilities thus fell from HKD50.9m in FY2009 to HKD46.97m in FY2010 with FY2011 and FY2012 forecasted to be at HKD51.4m and HKD56.8m. Shareholder’s equity for the forecasted years FY2010 to FY2012 are HKD243.5m, HKD306.2m and HKD383.5m respectively. Cashflow statement. FY2009 cash flow from financing activities was mainly due to the proceeds from the IPO. We foresee operating activities to generate better cash flows due mainly to higher revenue figures and lower prepayments as can be seen by our forecast figures below. As we do not foresee significant capex going forward, the net cash used in investing activities remain relatively low compared to previous years. Net cash from or used in financing activities are relatively small as no new loans or finance leases are expected. This puts Kunda in a strong cash position compared to previous years. FY2010 is expected to have positive cash balance of HKD72.4m, FY2011 and FY2012 are forecasted to have about HKD127.5m and HKD195.5m respectively. Exhibit 11: Cashflow Statement

2008 2009 2010E 2011E 2012E Net cash generated from 15,579 (3,730) 42,347 72,915 85,715


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operating activities Net cash used in investing activities (15,219) (47,513) (12,000) (8,000) (8,000)

Net cash from/(used in) financing activities (1,777) 68,920 23,354 (9,758) (9,758)

Net increase in cash and cash equivalents (1,417) 17,677 53,702 55,157 67,956


Valuation With the use of the free cash flow to equity (“FCFE”) discounted cash flow model, we arrive at a fair value estimate of S$0.39. Our model is based on a 3 years forecast with terminal growth rate of 1.00% (Exhibit 11). CAPM was used to derive the cost of equity in this case. Our risk free rate is 3.00% based on our forecasted 10-year Singapore Government Bond rate. The raw beta used is 1.5. This gives us a market premium rate of 7.00% and a cost of equity of 13.50%. Exhibit 12: Free Cash Flow to Equity

Parameters Rf Rate 3.00% Beta 1.5 Country Risk (Rm) 10.00% Market Premium (Rm - Rf) 7.00% Cost of Equity (Rf+Beta(Rm-Rf)) 13.50% Constant Growth Rate 1.00% Total PV of FCFE 770,464 Number of shares ('000) 352,000 Fair Value per Share (HKD) 2.19 Fair Value per Share (SGD) 0.39

Source: Bloomberg, Phillip Securities Research Estimate Our fair value estimate implies a forward P/E for FY2010 and FY2011 of 12.09x and 10.63x respectively. This price target gives us a price to book ratio of 3.16x and 2.52x for FY2010 and FY2011 respectively.

Recommendation China Kunda has shown its resilience even during tough times. It was listed in October last year when the global financial crisis toppled many companies. Although they did see a decrease in profit figures for FY2009, we believe that it will change for this financial year and thereafter given the direction it has taken ie. focus on the domestic automobile sector as well as IMD products. The Chinese government has, through its stimulus package and tax cuts, for the automobile industry this year boosted its growth and domestic demand. We believe Kunda is in a strong position to leverage from this growth given its strong technological focus, strategic acquisitions of Shenzhen Precision and SXD, good relationships with their customers, many of whom are large international brands, and the strong demand for high precision moulds. We initiate coverage on China Kunda with a BUY and a fair value


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estimate of S$0.39. From the last traded price of S$0.255, our target price gives a potential upside of 52.9%.

Industry Peers We have listed below a few other peers in the same industry as China Kunda. They are trading on an average P/E of 13.72x with P/B at an average of 1.33x. China Kunda is currently trading at a P/E of 10.47x. Exhibit 13: Industry Peers

Name Ticker Market Cap Last price Current

PE Forward

PE P/B Meiban Group Limited MEI SP 102.93 0.31 5.00 7.05 0.76 Brilliance China Automotive 1114 HK 5,582.05 1.12 #N/A N/A 493.41 0.79 Great Wall Motor Company-H 2333 HK 9,046.95 8.26 21.66 11.15 1.17 Minth Group Ltd 425 HK 8,080.48 8.46 15.76 11.42 2.08 Denway Motors Ltd 203 HK 28,796.62 3.83 12.45 10.51 1.85 Average 13.72 106.71 1.33 China Kunda KUNDA SP 89.76 0.255 10.47 7.81 3.18 Source: Bloomberg, Phillip Securities Research


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Financials

Income Statement (HKD m) 2009 2010E 2011E 2012E Balance Sheet (HKD m) 2009 2010E 2011E 2012E Revenue 99.77 253.20 303.84 364.61 Non-current assets: Cost of sales (65.79) (159.52) (191.42) (229.70) Plant and equipment 56.44 58.22 55.70 52.87 Gross profit 33.98 93.68 112.42 134.90 Development cost 24.97 22.26 18.91 14.92 Technical Fees 40.68 4.00 0.00 0.00 Other operating income 0.13 0.00 0.00 0.00 Current assets Distribution and selling expenses (2.02) (5.13) (6.16) (7.39) Inventories 7.85 19.91 23.90 28.68 General and administrative expenses

(27.14) (17.11) (20.54) (24.64) Trade and other receivables 37.64 61.35 73.62 88.35

Finance (costs)/income (0.25) (0.28) (0.28) (0.28) Prepayments 13.64 8.21 9.85 11.82 Profit before income tax 45.37 75.15 85.44 102.58

Due from related parties (non-trade) 48.17 48.17 48.17 48.17

Income tax (6.89) (11.41) (12.97) (15.57) Cash and cash equivalents 18.65 72.35 127.51 195.46 Profit after income tax 38.49 63.74 72.47 87.01 Current liabilities EPS (basic, post-except) (HK cents) 13.50 18.11 20.59 24.72 Trade and other payables 26.32 22.34 26.81 32.18 EPS (basic, post-except) (SG cents) 2.43 3.27 3.71 4.46 Other Liabilities 11.32 11.32 11.32 11.32 Amount due to related 1.19 1.19 1.19 1.19

Growth & margins (%) 2009 2010E 2011E 2012E Finance Lease 2.10 2.10 2.10 2.10 Sales growth (0.79) 153.78 20.00 20.00 Provision for tax 8.61 8.61 8.61 8.61 EBITDA growth (12.51) 54.21 12.71 18.16 EBIT growth (22.11) 65.35 13.64 20.00 Non Current Liabilities Net income growth (25.85) 65.63 13.69 20.07 Finance lease 1.41 1.41 1.41 1.41 EPS growth (34.15) 34.14 13.69 20.07 Gross margin 34.06 37.00 37.00 37.00 Shareholders' equity EBITDA margin 57.44 34.90 32.78 32.28 Share capital 100.96 140.60 140.60 140.60 EBIT margin 45.72 29.79 28.21 28.21 Restructuring reserves (106.94) (106.94) (106.94) (106.94) Net margin 38.57 25.17 23.85 23.86 Statutory reserves 0.31 0.31 0.31 0.31 Foreign currency translation 7.57 7.57 7.57 7.57 Cash flow statement (HKD m) 2009 2010E 2011E 2012E Accumulated profits 154.51 201.96 264.67 341.92 Profit before tax 45.37 75.15 85.44 102.58 D&A add-back 11.68 12.93 13.87 14.82 BVPS (SG cents) 8.01 12.48 15.69 19.65 Net (inc)/dec working capital (54.59) (34.33) (13.43) (16.11) NTAPS (SG cents) 6.73 11.34 14.72 18.88 Other operating cash flow (6.20) (11.41) (12.97) (15.57) Cash flow from operations (3.73) 42.35 72.92 85.71 Key Ratios 2009 2010E 2011E 2012E ROE (%) 27.60 31.88 26.37 25.23 Capital expenditures (40.83) (12.00) (8.00) (8.00) ROA (%) 5.38 6.40 5.59 5.45 Others (6.69) 0.00 0.00 0.00 Receivables days 128 71 81 81 Cash flow from investments (47.51) (12.00) (8.00) (8.00) Payable days 46 52 46 46 Dividends paid (common & pref) 0.00 (16.29) (9.76) (9.76) Valuation 2009 2010E 2011E 2012E Inc/(dec) in debt (2.56) 0.00 0.00 0.00 P/E basic (X) 10.47 7.81 6.87 5.72 Common stock issuance 68.82 39.64 0.00 0.00 P/B (X) 3.18 2.04 1.63 1.30 Other financing cash flows 2.66 0.00 0.00 0.00 Cash flow from financing 68.92 23.35 (9.76) (9.76) Net increase in cash & cash equivalents 17.68 53.70 55.16 67.96 Cash at beginning of year 0.97 18.65 72.35 127.51 Effects of currency translation 0.00 0.00 0.00 0.00 Cash and cash equivalents at end 18.65 72.35 127.51 195.46 Source: Company, Phillip Securities Research


18

Ratings History

Epure International Limited

Legend Rating Date Closing price (S$)

Fair value (S$) Remarks

B BUY 30 October 2009

0.255 0.39 Initiating Coverage

BUY >15% upside from the current price HOLD Trade within ± 15% from the current price

SELL >15% downside from the current price

Phillip Research Stock Selection

Systems

We do not base our recommendations entirely on the above quantitative return bands. We consider qualitative factors like (but not limited to) a stock's risk reward profile, market sentiment, recent rate of share price appreciation, presence or absence of stock price catalysts, and speculative undertones surrounding the stock, before making our final recommendation

19

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