Company Update, 20 August 2014

Nam Cheong (NCL SP)

Buy (Maintained)

Energy & Petrochemicals - Oil & Gas Services Market Cap: USD792m

Target Price: Price:

SGD0.58 SGD0.47 Macro Risks

Another Step In The Right Direction

Growth Value

Nam Cheong (NCL SP) Price Close

Relative to Straits Times Index (RHS)

0.54

179

0.49

164

0.44

149

0.39

134

0.34

119

0.29

104

0.24 70

89



50 40

 Jun-14

Apr-14

Feb-14

Dec-13

Oct-13

10 Aug-13

Vol m

20

Source: Bloomberg



Avg Turnover (SGD/USD) Cons. Upside (%) Upside (%) 52-wk Price low/high (SGD) Free float (%) Share outstanding (m) Shareholders (%) SK Tiong Enterprise Sdn Bhd Hung Yung Enterprise Sdn Bhd Su Kouk Tiong

3.44m/2.76m -19.1 22.6 0.27 - 0.50 42 2,098 27.3 15.2 7.8

Share Performance (%)



Solid JV with 5+2+2 year contract secured. Nam Cheong will co-own an AWV with Marco Polo Marine (MPM SP, BUY, TP: SGD0.65), bareboat chartering it in Malaysia for a five-year firm contract worth more than USD27m with a 2+2 year option, which could bring the total charter contract value to almost USD50m. The charter value works out to a daily rate of c.USD15,000. Assuming 20-year depreciation, 75-25% debtequity and 4% interest, we estimate that the JV can earn USD3.1m per year, or about USD1.5m for each partner annually. While this is not large relative to Nam Cheong’s shipbuilding earnings, it is another step towards building a recurring income base. Happy builder, happy customer. We also like the bareboat charter method, in which Nam Cheong enjoys some of the benefits of vessel ownership, while simultaneously supporting its customer in providing an asset plus financing to earn the spread between time- and bareboatcharters. Record orderbook bolstered by four more vessels sold. Nam Cheong also sold four vessels worth a total of USD90m: i) a 5,000deadweight-ton platform supply vessel (PSV) to Bumi Armada, ii) an AWV to the JV, iii) a 6,000 brake-horse-power (bhp) anchor handling tug supply (AHTS) vessel to a new Vietnamese client, and iv) a 5,000bhp AHTS to Time Marine Services SB, a repeat customer in Malaysia. Together, these propel Nam Cheong’s gross orderbook to MYR2.0bn, of which c.MYR1.7bn remain unrecognised. Vessel-owning may provide long-tem growth. While Nam Cheong continues to grow its shipbuilding business, we view the vessel-owning space as a source of growing recurrent income. The stock is trading at merely 9x FY14F P/E on 45% earnings growth. Our SGD0.58 TP is based on a 10x blended FY14/15F P/E.

YTD

1m

3m

6m

12m

Forecasts and Valuations

Dec-12

Dec-13

Dec-14F

Dec-15F

Dec-16F

Absolute

49.2

1.1

25.3

40.3

67.9

Total turnover (MYRm)

877

1,257

1,835

2,450

2,768

Relative

44.5

1.0

23.7

32.4

64.2

Reported net profit (MYRm)

137

206

280

346

387

Recurring net profit (MYRm)

137

193

280

346

387

Recurring net profit growth (%)

46.6

41.6

44.8

23.7

11.8

Recurring EPS (MYR)

0.07

0.09

0.13

0.16

0.18

DPS (MYR)

0.01

0.03

0.03

0.04

0.06

Recurring P/E (x)

16.7

12.9

9.0

7.2

6.5

P/B (x)

3.85

2.67

2.15

1.74

1.44

P/CF (x)

31.0

Shariah compliant

Lee Yue Jer, CFA +65 6232 3898 [email protected]

14.0

12.1

1.1

2.2

2.8

3.5

4.7

EV/EBITDA (x)

17.4

14.1

10.7

8.3

7.3

Return on average equity (%)

25.6

26.9

26.6

26.6

24.4

Net debt to equity (%)

39.4

52.1

54.5

38.6

26.8

6.3

13.2

19.0

Dividend Yield (%)

Our vs consensus EPS (adjusted) (%)

na

na

Source: Company data, OSK-DMG

See important disclosures at the end of this report

  2  . 2 0 . 3

0 0 . 3 0 0 Nam Cheong announced that it has entered into a JV to bareboat . 0 charter and accommodation work vessel (AWV) in Malaysia with Marco 0 Polo Marine (MPM). At the same time, it announced sales of four 0 vessels worth a total of USD90m, bringing its gross orderbook to a record MYR2.0bn. We like its move towards building a recurring charter income base. Maintain BUY and SGD0.58 TP.

60

30

   

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1

Nam Cheong (NCL SP) 20 August 2014

Additional Notes Figure 1: S-Curve revenue recognition model for shipbuilding programme 1/3 ID

Delivery Status by year

Price (USD'000)

2013

1301 1302 1303 1304 1305 1306 1307 1308 1309 1310 1311 1312 1313 1314 1315 1316 1317 1318 1319 1320

2013 AHTS AHTS AHTS AHTS AHTS AHTS AHTS AHTS PSV PSV PSV PSV PSV PSV PSV PSV AWB AWB AWB AWB

Delivered Delivered Delivered Delivered Delivered Delivered Delivered Delivered Delivered Delivered Delivered Delivered Delivered Delivered Delivered Delivered Delivered Delivered Delivered Delivered

32,000 11,900 11,283 11,500 11,500 11,283 12,500 12,500 20,000 19,500 19,500 20,010 30,000 33,400 32,100 19,500 29,500 29,500 29,500 27,800

32,000

1401 1402 1403 1404 1405 1406 1407 1408 1409 1410 1411 1412 1413 1414 1415 1416 1417 1418 1419 1420 1421 1422 1423 1424 1425 1426 1427 1428 1429 1430

2014 AHTS AHTS AHTS AHTS AHTS AHTS AHTS AHTS PSV PSV PSV PSV PSV PSV PSV PSV PSV PSV AWB AWB MWV MWV MWV MWV ERRV ERRV ERRV AHTS AHTS AHTS

Order Book Order Book Order Book Order Book Order Book Stock Stock Stock Order Book Order Book Order Book Order Book Order Book Order Book Order Book Order Book Stock Order Book Order Book Order Book Order Book Delivered Stock Stock Order Book Order Book Order Book BNI Order BNI Order BNI Order

11,283 11,283 11,300 12,000 13,000 12,000 12,000 12,000 31,800 19,500 20,500 20,500 30,000 30,000 30,000 30,000 30,000 34,000 29,500 29,500 29,000 31,000 28,000 28,000 11,775 11,775 11,775 6,120 6,120 6,120

8,703 2,933

2014F

2015F

2016F

8,349 9,200 9,775 8,349 12,500 12,500 4,000 19,500 19,500 16,808 3,340 963 15,588 12,173 19,175 19,175

14,550 15,450 15,450 24,000 7,800 6,000 4,500

26,550 16,225 24,650

2,355 1,766 1,766 5,508 1,224 1,224

1,950 2,065

2,128 8,349 11,300 12,000 13,000 12,000 12,000 12,000 31,800 4,950 5,050 5,050 6,000 22,200 24,000 25,500 30,000 34,000 2,950 13,275 4,350 31,000 28,000 28,000 9,420 10,009 10,009 612 4,896 4,896

Source: OSK-DMG estimates

See important disclosures at the end of this report

2

Nam Cheong (NCL SP) 20 August 2014 Figure 2: S-Curve revenue recognition model for shipbuilding programme 2/3 ID

1501 1502 1503 1504 1505 1506 1507 1508 1509 1510 1511 1512 1513 1514 1515 1516 1517 1518 1519 1520 1521 1522 1523 1524 1525 1526 1527 1528 1529 1530 1531 1532 1533 1534 1535

Delivery Status by year 2015 AHTS AHTS AHTS AHTS AHTS AHTS AHTS AHTS AHTS AHTS AHTS AHTS AHTS AHTS AHTS AHTS AHTS PSV PSV PSV PSV PSV PSV PSV PSV PSV PSV WB WB WB WB AWB ERRV ERRV ERRV

Stock Stock Stock Stock Stock Stock Stock Stock Order Book Order Book Stock Stock Stock Stock Stock Stock Stock Stock Stock Stock Stock Stock Stock Build to Order Build to Order Stock Stock Stock Stock Stock Stock Stock Order Book Build to Order Build to Order

Price (USD'000)

13,000 13,000 13,000 13,000 14,500 14,500 14,500 14,500 14,500 14,500 14,500 14,500 14,500 14,500 14,500 14,500 14,500 21,000 21,000 21,000 21,000 30,000 30,000 32,500 32,500 30,000 30,000 30,000 30,000 30,000 30,000 30,000 13,500 13,500 13,500

2013

2014F

3,380 2,600

11,600 2,320 1,740 1,305

1,300

23,075 17,875 27,900 25,500

2,025 2,025

2015F

2016F

13,000 9,620 10,400 13,000 14,500 2,900 12,180 14,500 12,760 13,195 14,500 14,500 14,500 14,500 14,500 14,500 14,500 21,000 21,000 21,000 21,000 30,000 30,000 8,125 14,625 2,100 4,500 30,000 30,000 30,000 30,000 30,000 13,500 11,475 11,475

Source: OSK-DMG estimates

See important disclosures at the end of this report

3

Nam Cheong (NCL SP) 20 August 2014 Figure 3: S-Curve revenue recognition model for shipbuilding programme 3/3 ID

1601 1602 1603 1604 1605 1606 1607 1608 1609 1610 1611 1612 1613 1614 1615 1616 1617 1618 1619 1620 1621 1622 1623 1624 1625 1626 1627 1628 1629 1630 1631 1632 1633 1634 1635 1636 1637

Delivery Status by year 2016 AHTS AHTS AHTS AHTS AHTS AHTS AHTS AHTS AHTS AHTS AHTS AHTS AHTS PSV PSV PSV PSV PSV PSV PSV PSV PSV PSV AWB AWB AWB AWB AWB MWV MWV MWV AHTS ERRV ERRV ERRV AWB AWB

Stock Stock Stock Stock Stock Stock Stock Stock Stock Stock Stock Stock Stock Stock Stock Stock Stock Stock Stock Stock Build to Order Build to Order Stock Stock Stock Stock Stock Stock Stock Stock Stock BNI Stock Build to Order Build to Order Build to Order Build to Order Build to Order

Price (USD'000)

2013

12,000 12,000 12,000 12,000 12,000 12,000 12,000 12,000 12,000 12,000 12,000 31,000 31,000 20,000 20,000 30,000 30,000 30,000 30,000 30,000 32,500 32,500 32,000 29,500 29,500 29,500 29,500 29,500 28,000 28,000 28,000 5,712 13,500 13,500 13,500 42,000 42,000

2014F

2015F

2016F

10,800 3,120

540 540 1,680

11,610 11,610 29,820 23,100

1,200 8,880 12,000 12,000 8,880 2,400 10,080 10,080 12,000 12,000 12,000 31,000 31,000 16,800 16,800 30,000 30,000 30,000 30,000 2,100 32,500 32,500 32,000 24,780 24,780 25,960 29,500 29,500 23,520 24,640 25,480 5,712 13,500 1,350 1,350 10,500 18,900

3,120 9,600 1,920 1,920

3,200 3,200

27,900

4,720 4,720 3,540

4,480 3,360 2,520

Model Revenue (USD'000)

2013 404,850

2014F 546,864

2015F 741,615

2016F 839,616

USD-MYR

3.02

3.23

3.21

3.21

Model Revenue (MYR'000)

1,221,637

1,765,525

2,380,881

2,695,503

Source: OSK-DMG estimates

See important disclosures at the end of this report

4

Nam Cheong (NCL SP) 20 August 2014

Financial Exhibits Profit & Loss (MYRm)

Dec-12

Dec-13

Dec-14F

Dec-15F

Total turnover

877

1,257

1,835

2,450

2,768

Cost of sales

(688)

(993)

(1,476)

(1,993)

(2,263)

Gross profit

189

264

358

457

505

Gen & admin expenses

(50)

(66)

(79)

(104)

(113)

Operating profit

139

199

280

354

392

Operating EBITDA

144

212

295

371

411

(13)

(15)

(17)

(18)

139

199

280

354

392

Net income from investments

3

3

5

10

10

Other recurring income

5

9

23

23

25

(8)

(11)

(18)

(28)

(26)

Depreciation of fixed assets Operating EBIT

(6)

Interest expense Exceptional income - net

-

Pre-tax profit

139

Taxation

13 (2)

212

Dec-16F

-

-

-

291

359

401 (12)

(6)

(9)

(11)

(1)

(2)

(2)

Minority interests

-

Profit after tax & minorities

137

206

280

346

387

(2)

Reported net profit

137

206

280

346

387

Recurring net profit

137

193

280

346

387

Dec-12

Dec-13

Dec-14F

Dec-15F

Dec-16F

139

199

280

354

392

6

13

15

17

18

(60)

(419)

(344)

(186)

(201)

Source: Company data, OSK-DMG

Cash flow (MYRm) Operating profit Depreciation & amortisation Change in working capital Other operating cash flow

10

10

28

33

35

Operating cash flow

95

(197)

(21)

218

245 (26)

Interest paid

(17)

(34)

(18)

(28)

Tax paid

(5)

(0)

(9)

(11)

(12)

Cash flow from operations

74

(231)

(47)

179

206

Capex

2

(36)

(45)

(30)

(31)

Other investing cash flow

(8)

(81)

-

-

-

Cash flow from investing activities

(6)

(117)

(45)

(30)

(31)

Dividends paid

(9)

(26)

(55)

(70)

(87)

-

-

Proceeds from issue of shares

-

119

Increase in debt

145

401

Other financing cash flow Cash flow from financing activities Cash at beginning of period

(4)

(1)

132

493

50 -

50 -

(5)

(150) -

(20)

(237)

27

216

362

265

394

Total cash generated

199

145

(97)

129

(62)

Forex effects

(12)

-

-

-

Implied cash at end of period

215

265

394

332

5 366

Source: Company data, OSK-DMG

See important disclosures at the end of this report

5

Nam Cheong (NCL SP) 20 August 2014

Financial Exhibits Balance Sheet (MYRm)

Dec-12

Dec-13

Dec-14F

Dec-15F

Total cash and equivalents

216

362

265

394

332

Inventories

454

751

1,011

1,092

1,240

Accounts receivable

452

635

905

1,208

1,365

Other current assets

29

51

51

51

51

Total current assets

1,151

1,799

2,232

2,745

2,989

Tangible fixed assets

145

290

320

333

346

17

90

90

90

90

161

380

410

423

435

Total other assets Total non-current assets Total assets

Dec-16F

1,313

2,179

2,642

3,168

3,424

Short-term debt

155

242

292

342

192

Accounts payable

257

381

566

764

868

0

5

5

5

5

Total current liabilities

413

628

864

1,112

1,065

Total long-term debt

294

609

609

609

609

13

4

4

4

4

Total non-current liabilities

307

613

613

613

613

Total liabilities

720

1,241

1,476

1,724

1,678

Share capital

370

488

488

488

488

Retained earnings reserve

231

411

636

912

1,213

Other current liabilities

Other liabilities

Other reserves

(9)

39

39

39

39

938

1,163

1,439

1,739

-

1

3

5

7

-

0

0

0

0

592

939

1,166

1,444

1,746

1,313

2,179

2,642

3,168

3,424

Shareholders' equity

592

Minority interests Other equity Total equity Total liabilities & equity Source: Company data, OSK-DMG

Key Ratios (MYR)

Dec-12

Dec-13

Dec-14F

Dec-15F

Dec-16F

Revenue growth (%)

44.6

43.5

45.9

33.5

13.0

Operating profit growth (%)

36.7

43.5

40.7

26.4

10.9

Net profit growth (%)

46.6

50.5

36.1

23.7

11.8

EPS growth (%)

46.6

37.7

35.3

23.7

11.8

Bv per share growth (%)

24.9

44.1

24.0

23.7

20.9

Operating margin (%)

15.8

15.8

15.3

14.4

14.2

Net profit margin (%)

15.6

16.4

15.3

14.1

14.0

Return on average assets (%)

12.0

11.8

11.6

11.9

11.8

Return on average equity (%)

25.6

26.9

26.6

26.6

24.4

Net debt to equity (%)

39.4

52.1

54.5

38.6

26.8

DPS

0.01

0.03

0.03

0.04

0.06

Recurrent cash flow per share

0.04

(0.11)

(0.02)

0.09

0.10

Source: Company data, OSK-DMG

See important disclosures at the end of this report

6

Nam Cheong (NCL SP) 20 August 2014

SWOT Analysis  The world’s largest offshore supply vessel (OSV) builder by vessels delivered

 New competition from China’s merchant vessel builders

 Partnerships with yards make for an asset-light and capacity-flexible model, helping it to weather lean times  The “letter of authorisation” system in Malaysia protects Nam Cheong’s key market

 Asean countries are rapidly boosting exploration and production (E&P) capex  The industry is currently in a major upswing due to massive rig orders

 The company’s build-to-stock model is deemed risky by investors, although this is mitigated by its record orders on hand, asset-light strategy and dominant industry position in Malaysia

P/E (x) vs EPS growth

P/BV (x) vs ROAE

22%

10

8%

5

-6%

P/E (x) (lhs)

EPS growth (rhs)

Source: Company data, OSK-DMG

Jan-16

Jan-15

Jan-14

Jan-13

-20%

Jan-12

0

24%

4

21%

3

18%

3

15%

2

12%

2

9%

1

6%

1

3%

0

0%

P/B (x) (lhs)

Jan-16

15

27%

4

Jan-15

36%

30%

5

Jan-14

20

5

Jan-13

50%

Jan-12

25

Return on average equity (rhs)

Source: Company data, OSK-DMG

Company Profile Nam Cheong (NCL) is the largest OSV builder in the world with a 12% share of the global shallow-water OSV market. It specialises in building small-mid AHTS, PSVs, workboats and accommodation barges. It also operates a fleet of standby vessels and a number of OSVs in conjunction with its partners.

See important disclosures at the end of this report

7

Nam Cheong (NCL SP) 20 August 2014

Recommendation Chart Price Close 0.41 0.45

0.48 0.48 0.52 0.53 0.58 0.45

0.37 0.38

0.34

3.00

0.39

3.50

0.35

0.33 0.33 0.35 0.35 0.34

0.30

Recommendations & Target Price

0.29

4.00

na

4.50

2.50 2.00 1.50 1.00 0.50 Buy 0.00 Aug-09

Neutral

Nov-10

Sell

Trading Buy

Mar-12

Take Profit

Not Rated

Jun-13

Note: Nam Cheong listed via RTO in May 2011. Previous stock prices pertain to Eagle Brand and are irrelevant Source: OSK-DMG, Bloomberg Date

Recommendation

2014-08-08

Buy

Target Price Price 0.58

0.47

2014-08-05

Buy

0.53

0.47

2014-07-01

Buy

0.53

0.41

2014-05-15

Buy

0.52

0.38

2014-03-31

Buy

0.48

0.34

2014-02-26

Buy

0.48

0.34

2014-02-20

Buy

0.45

0.34

2014-01-29

Buy

0.45

0.32

2013-12-31

Buy

0.45

0.32

2013-12-30

Buy

0.45

0.32

Source: OSK-DMG, Bloomberg

See important disclosures at the end of this report

8

RHB Guide to Investment Ratings DMG & Partners Research Guide to Investment Ratings Buy: Share price may exceed 10% over the next 12 months Trading Buy: Share may10% exceed over 12 themonths next 3 months, however longer-term outlook remains uncertain Buy: Share price mayprice exceed over15% the next Neutral: Buy: ShareShare price price may fall within the 15% rangeover of +/the next 12 months Trading may exceed the10% nextover 3 months, however longer-term outlook remains uncertain Take Profit: Target been attained. accumulate lower Neutral: Share priceprice may has fall within the rangeLook of +/-to10% over theatnext 12 levels months Sell: may fall has by more 10% over next 12 months Take Share Profit:price Target price beenthan attained. 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