Success Transformer Corp - BUY - 16 May 2008

Success Transformer Corp - Moving upstream with China JV (Company Update)



Price: RM1.10

Target Price: RM1.43

Recommendation: BUY



· Success announced that it is setting up a joint venture with Ninghai Zhenye Luminaries Manufacturing Co. Ltd (Zhenye) of China to jointly design and manufacture industrial lighting fixtures in China under a new company - Ningbo Success Zhenye Luminaries Limited Liabilities Company (JV Co) with Success taking a 60% stake with the remainder by Zhenye. The JV company will be incorporated in Zhejiang Province with an initial capital of RMB10m or RM4.7m.

· Zhenye has its core competencies in design, manufacturing and customization of aluminium die cast lighting fixtures and fittings. With a solid 15 years track record, the company has also an established network of customers including multi-nationals.

· Fast track. To reduce gestation, the JV will be assuming the existing production facility of Zhenye with all the established infrastructures while the vendor - Mr. Gu Zhenwu which holds the remaining 40% of the JV will assume the post of Chief Executive Officer.

· Moving up the value chain. By doing so, Success is not only able to control the costing but also leverage upon the network of customers many of which are MNCs via the new JV. In fact, Success has been a customer of Zhenye for their industrial lighting component requirements for the past 7 - 8 years and had become both comfortable and confident with its quality and execution capabilities.

· Success is guaranteed. Profit guarantee of RMB3b for the first 12 months upon incorporation with RMB4m for the subsequent 12 month period will be provided by the vendor.

· Investment is undemanding. With a mere RMB10m (RM4.7m) investment, profit guarantee of RM7m profit guarantee for the two years will reduce risk, if any, substantially.

· Growing confidence after fruitful venture into process equipment. The company is shedding its conservative image and moving aggressively to grow its business via the M&A route. The successful acquisition of Seremban Engineering had paved the way for more of such deals to augment its growth prospect. Amazing still is the ability of top management to seek out such M&A prospects which the market has yet to price in.

· Forecast and recommendation is maintained. Before we are able to fully assess the prospects of the above deal, we are therefore maintaining our forecast and recommendation with a positive bias. A long ignored gem of a company which is trading at a lowly 6.6x current year's earnings despite the bright outlook for all its key businesses. A capable management team that is turning increasingly aggressive in the M&A space should we believe not be taken lightly by investors. Our target price of RM1.43 based on 8.3x 2008F is conservative we believe.





KENANGA INVESTMENT BANK BERHAD (15678-H)