HLG: Breakfast Brief: Kian Joo Can, MISC, Asiatic (14 August 2008)

Good morning

We recently visited Kian Joo Can Factory (KJC) at its manufacturing plant in Batu Caves, Kuala Lumpur. Key takeaways: (1) Operating environment is challenging, and it may have to absorb some of the rise in utility and transportation cost. On top of a 5-8% ASP hike in Q208, management is introducing a further 18-20% hike to compensate for higher raw material costs. (2) Vietnam operations are profitable, but its new co-packing JV will only bear fruit in 2009. (3) Tussle for the See family’s 35% controlling stake may not be resolved in the short term. 22% underperformance to the KLCI is overdone, we value KJC at 13x FY08PE, in-line with the average KLCI PE.

We are negative on the manufacturing sector due to: (1) Slowing consumer demand affected by higher inflationary pressure. (2) Margin compressions due to abnormal escalation of raw material prices.



Newsbreak

MISC secures offshore production contract in Sarawak worth RM1bn

Asiatic enters into Indonesian JV to develop 15,800ha of land

GM still interested in cooperating with Proton

CIMB selling RM1.1bn of NPL to Standard Merchant

Scomi Group posts H108 profit of RM56m

Sarawak Oil Palms H108 profit surges 194% to RM88m yoy





Economics

US: Retail sales decreased by 0.1% in July for the first time in five months mainly due to sagging demand for motor vehicles; import prices soared 1.7% for a fifth-straight month in July. MBA mortgage application fell 1.2% for the week ended 9 Aug, indicating that the housing sector is still unable to shrug off recessionary trend.

UK: Jobless claims change rose by 20,100 in July, marking the sixth consecutive monthly increase, while ILO Jobless Rate in Jun upped by two percentage points to 5.4% compared to forecast of 5.2%, revealing signs of weakening labor market in UK.

EU: IPI in June was unchanged after falling the most in almost 16 years in May, prompting views that euro-area economy probably contracted in 2Q for the first time since the single currency was established almost a decade ago.

China: Retail sales rose 23.3% in July, close to June's 23% increase, as the economy surged forward in preparation of the Beijing Olympics.

Japan: GDP shrank an annualized 2.4% in 2Q, pushing the economy to the first recession in six years as domestic consumption and exports declined.