Oil & Gas cycle

We are in the high oil price era. Due to increasing world demand on oil and emerging economies like China and India, the oil price has risen from $30 to $80 now. The significant increase of oil price prompt the oil companies to speed up their oil exploration activities. Exploration is only the initial phase. Once the field is being confirmed and contract signed with the government, oil company would have to prepare to extract the oil.

In South East Asia, majority of the oil site is situated in the middle of sea. We need to build many drilling rig to drill and pump out the oil. Keppel Corp and Semcorp Marine have been building so many rigs for the driller. Progressively, these rigs would be delivered and the oil production starts.

Beside rig building, there are many offshore related activities involve. Swiber is a niche service provider tot he oil and gas sector. The services provided include setting up production platform, pipelines, mooring of FSO/FPSO on sea bed etc. As the SEA or middle east region exploration activities grow, it provide ample opportunity for them to expand the business.

Once the rig is installed and production starts, the oil has to be transported to the shore. This job is being carried out by FPSO. A Floating Production, Storage and Offloading vessel (FPSO; also called a "unit" and a "system") is a type of floating tank system used by the offshore oil and gas industry and designed to take all of the oil or gas produced from a nearby platform (s), process it, and store it until the oil or gas can be offloaded onto waiting tankers, or sent through a pipeline.

Links below show the demand for rig and FPSO remain robust in the next few years.
http://uk.reuters.com/article/oilRpt/idUKSIN17435320070109
http://www.energyme.com/energy/2006/200600759.htm

They are many FPSO builder. Keppel Corp is one of them which is capable of building a FPSO. Since the FPSO process and store the oil on the vessel before the tanker comes, it would need facilities to perform these activities. Technics Oil & Gas designs and develops process modules and equipment that are integrated to form the operating systems and storage facilities for oil and gas exploration and production. Their key expansion plan is to explore more opportunities in the FPSO space.

Technics is not the only one to be involved in this space. Hiap Seng start up as a engineering sub contractor, now they are moving into the compression and offshore fabrication business. It is involved in gas compressors and FPSO topside fabrication. At the same time, it still provide the mechanical construction work in Jurong Island. Both would serve as diverse revenue stream. Technics seems to be involved in the production system design and construction, while Hiap Seng only produce the gas compressor sub module.

With favourable industry environment, these 3 companies should do well in the coming years.

* Part of material were extracted from company website, broker report and internet.

China Oilfield Tech IPO

There is a new IPO coming up next week. Some of the points were taken from the web or prospectus.

SINGAPORE (Thomson Financial) - China Oilfield Technology Services Group Ltd, which provides engineering services to oil exploration companies in China, said it is launching its Singapore initial public offering (IPO) of 211.61 million new and vendor shares at 60 Singapore cents each on Monday.

Invitation in respect of 211,607,000 Shares of HK$0.50 each comprising 127,500,000 New
Shares and 84,107,000 Vendor Shares as follows:-
(i) 3,228,000 Offer Shares at $0.60 each by way of public offer; and
(ii) 208,379,000 Placement Shares at $0.60 each by way of placement,
payable in full on application.

>> There are 3228 lots up for grab. A small offering.

We have a wide range of tertiary oil recovery products, which can
be divided into three segments:
(i) Enhanced Oil Recovery;
(ii) Environmental Protection; and
(iii) Energy Saving and Others

>> In summary, the oil extraction consists of 3 phases. Their product operate in the tertiary phase which allow the additional 20 to 30% of oil to be extracted.

Favourable development trend for tertiary oil recovery technology

• Daqing Oilfield Co., Ltd. plans to extend the use of tertiary oil recovery technique in more than 80% of its oil extraction sites in Daqing oilfield in the next 15 to 20 years
• Other PRC oilfields, such as Shengli, Changqing and Xinjiang, have gradually expanded the scale of their tertiary oil recovery processes as their oilfields approach maturity

>> If this trend is right, not distorted by the news, this would be a powerful trend. Looking at every kind of cycle, people enter at the first phase would enjoy good growth going forward.

Future Plans

• Enhance our R&D capabilities
• Expand our production capacity
• Expand our sales and marketing network in the PRC and overseas markets

>> I guess the expansion plan is quite standard. Most of the new IPO plan to do similar things. The pity thing is there is no discussion on the company position in the industry. How do they rank compared to the competitor?

IPO price
60.00 cents (equivalent to 299.34 RMB cents)
NAV
after adjusting for the estimated net proceeds of the Invitation and based 91.36 RMB cents
on the post-Invitation enlarged share capital of 728,595,000 Shares
PE
Historical PER based on the historical EPS of our Group for FY2006 assuming 18.69 times
that the Service Agreements had been in place from the beginning of FY2006

>> It is a bit pricey. Consider they didn't take the share dilution into the PE calculation. However, if they can achieve the earning growth as past few years CAGR 135%. This should not be a problem.

Risk

• We are dependent on our major customers, which are the operating units of Daqing Oilfield Co., Ltd., a wholly-owned subsidiary of PetroChina
• Our growth and prospects are dependent on our research and development capability
• We are dependent on our patents
• We are dependent on the protection of our proprietary technical know-how
• We are dependent on our management team
• We are dependent on qualified professional staff
• We are dependent on the PRC oil industry
• ...
• We may be required to pay penalties or liquidated damages for failure to meet delivery deadlines

>> The major risk here is dependent on single customer. Having said that, once they can get more customer on board. The market should re-rate them with higher PE.

Summary

The company business do sounds interesting and poses for strong growth in the coming years. Forget about the initial valuation. Base on small offer size, current strong oil and gas sector play and good IPO sentiment. The new listing should do well on the first day. Subscribe! Although we all know that it would be very hard to get, but the chance should be higher than strike toto.

Oil and gas update Oct 07

Some news on the oil and gas sector play these two days.

CIMB

Hiap Seng Still cheap. HSE is trading at 10x CY08 P/E vs. peers 15x. We believe HSE
share-price weakness (-23% in the past 14 days) has discounted investors
concerns over delays and margin compression and presents another opportunity
to accumulate for the strong FPSO market outlook and heightened activities on
Jurong Island. Following our earnings reduction, our target price has been trimmed
to S$1.20 from S$1.25, still based on 15x CY08 earnings, in line with peers.

>> According to the SGX filing, one of the fund manager is pulling out. This contribute to the share price decline of Hiap Seng. At the current price, without any significant fundamental deteriotion, I would say it is a good buy.

Kim Eng

Swiber Holdings – Has stepped up its fleet expansion programme with the acquisition of four new vessels for US$108m. The marine group said that wholly owned subsidiary Kreuz Engineering has acquired two sub-sea support vessels and two deepwater anchor handling tug/supply (AHTS) vessels from Thaumas Marine. The purchase amount does not include the cost of equipment that Swiber will retrofit or purchase for the vessels. Swiber said that the acquisition of the vessels would extend its capabilities in sub-sea and deepwater activities. This would enable it to take on more offshore oil and gas projects and broaden its revenue streams. The company expects revenue synergies and growth potential from these acquisitions. The acquisition will be financed by proceeds raised from the successful completion of the group's recent bond offering and sale and leaseback arrangement.

>> Management continue to execute their expansion plan. It would be interesting to see what Swiber would become in the next two years. Looking at the current price, it is a bit pricey, waiting for share price weakness for accumulation.

Technics Oil & Gas – A wholly owned subsidiary has secured a contract worth $17m for two modules of gas compression systems and one unit of gas treatment and processing module.

>> An interesting oil and gas play beside Hiap Seng, there are many corporate development that support their push into the new growth market. Yet to access the management plan and future direction. But this could be a potential winner also.

Stock watch list Oct 07

I think it is time to review the stock watch list I have. Keep this list updated and handy, when correction comes, we know what to buy.

Offshore/marine/oil
BH Global - Outlook remains bright
Hiap Seng - Due to fund manager sell down, it is trading at attractive price
Swiber - Management is doing all the good jobs to keep growth momentum
*Tiong Woon - Recent result is fantastic. Management has put in many growth driver.

Properties and hotel
Guthrie GTS - Very often, undervalued play would remain undervalued for a very long time. Patient is required and wait for the catalyst

China
Ching Hongxing - Growth plan on track
MIDAS - Despite one of the promising JV is out, China railway industry outlook remains robust
Sino Env - Poses unique technology. Potential attracting QDII fund
*Hongguo - Slow and steady. I feel this might be the safer counter to own.
*Synear - One of the leader in China food industry. QDII fund might have strong interest
*Sihuan - China pharma play. Analyst projected a strong growth.

Big/Mid Cap
Guoco Land - Good to keep for long term

High risk
Guangzhao IFB - Tree starts keep chopping down start of next year, cash flow would improve

Others
FJ Benjamin - Singapore retail and trourist outlook remain bright

* - New addition

New STI 2008

It was announced that STI component stocks would be changed next year 2008. From the 48 stocks trim to 30 stocks. By then, it would become a big cap index. SIA Eng, Wilmar, Yangzijiang, Yanlord would be added to STI while some of the stocks relegated to mid cap index or being removed.

The implication for those new addition is the share price would likely go up. This is without consider the company specific news which could affect the share price. The fundamental argument is very simple. Once the stock is added to the index, those index fund would have to buy it, and push up the share price. Another possibility is once the stock is added to STI, it would be more prominent to the institutional investor.

Of the 4 new additions, Yanlord looks most interesting to me. It has appreciated a lot this year. At the current valuation, it would be quite pricey. However, in the long run, it is like betting China consumer would want to buy a house. The demand is definitely there. It is better to wait on the sideline and collect the share, if a meaningful correction happens.

Corporate drama

According to CIMB today,

Bio-Treat Technology's former chairman Wing Hak Man has denied claims that he sold
his entire stake to a third party, deepening the controversy surrounding the waste
management company. Singapore-listed Bio-Treat said last Monday that Precious Wise
Group had bought 262.5 million Bio-Treat shares at 87.4 cents apiece in an off-market
deal the Friday before, giving it a 29.6% direct stake.

This news come as a shock to me. Although I have long unloaded the share in company when the chairman controversy erupted. However, I am not prepared to see some news like this. Something somewhere must be seriously wrong for this kind of events to happen.

After I sold off the holdings at a loss, the share did rebound back, follow by market re-rating of the water treatment stock. It went pass the price I let go. Despite the cheap PE and price rebound, I have no regret. As a retail investor, the last thing you want to invest is in the company with boardroom instability. It might deflect the management focus on some other thing than the business. For trader, they would still follow the news and trade. For long term investor, stay away, you never know what would happen eventually.

The China money II

For the past few years, Asia stock market has been going up all the way. Driven by region booming economy, record earning and strong liquidity, many of the big companies command a rich valuation. In the low interest rate environment, people would seek better return for their cash, resulting in asset inflation. Too much money chasing too little asset. This is without consideration of all the China saving that is trapped inside the country.

The recent sub prime problem cause liquidity to suffer. Follow by America or Europe fund redemption, fund manager has to sell stocks for cash. Although I don't expect the market to come back so quickly. But time has told us that it is difficult to time the market. Now, the stock market seems to be back on where they were except the small caps. Recently, the news is anticipate the liquidity from different source, China.

Following is one of the news found in the forum. QDII fund might be interested in China company listed abroad. However, the China government fund might be interested to diversify their holdings. Gone with the days that they mainly buying US bond, they might start buying Asia growing companies. It might be interesting to watch the blue chips on SGX. Likely candidates to be banks, property company and conglomerate.

0045 GMT [Dow Jones] The recently launched Chinese state investment company could be interested in Singapore targets, says Credit Suisse. China Investment Corp., or CIC, started operations Sept. 29 with US$200 billion under management; "we believe it is worthwhile analyzing the potential investment targets of CIC - a new but extremely large investor." Says Temasek would welcome having its Chinese peer to take small, strategic stakes in Temasek-linked companies. Possible candidates include SIA (C6L.SG), SGX (S68.SG), DBS (D05.SG), SingTel (Z74.SG), SembCorp Marine (S51.SG), Neptune Orient (N03.SG), ST Engineering (S63.SG) and SPH (T39.SG). (KIG)

Loss aversion

One of my friend is risk adverse. He said he does not want to lose money because of my previous unpleasant experience. He would sell stock for some profits and waiting for another low point to entry. We can describe this behaviour as Loss aversion. People tends to feel more painful for $1 loss than feel joy in $1 gain.

However, for retail investor, it is unlikely to accumulate sizeable asset by this method. Frequent in and out of the market, would let the trading cost erode the return and let the recurring unexpected event cause you to lose more money.

My idea is to pick a good company with good people, wait for low entry point, hold for long term. If you have done the home work, in few years time, the pay back could be bigger than the frequent buy and sell. Forget about the economy and crises, stock would do well as long as the company is doing well.

Buy... China fund is coming, the QDII factor

If you don't know what does QDII means, it is actually short form of Qualified Domestic Institutional Investors. China is allowing the local fund house to invest money in overseas stock with QDII status. The purpose is to let part of the saving to go out of the country to ease RMB appreciation pressure.

Last Thu/Fri, Merrill Lynch has recommended investor to load up Singapore based China stock, citing undemanding valuation and the potential fund flow. Stocks suggested were Yangzijiang, Cosco, Synear, MIDAS, China Hongxing, Yanlord, Celestial, Hongguo, Capital Retail China Trust, China Energy, China Sky and Beauty China.

In the Saturday Business Times "Show Me The Money" column, the writer presented a table of China stock that could be the potential winner. From the list, my pick for the good stock which would benefit from the increase China consumption and also QDII fund flow are Fiberchem, Synear, China Sky, Chine Lifestyle, Celestial, Hongguo, China Hongxing, Sihuan Pharma, Sino-Env, China Energy and China Sports. Personally, I favour consumer stocks, consider them to be safer than the rest. In the list, other than consumer stocks, there are few companies with unique competitive advantage.

Today, CIMB also issues similar report citing their picks are Cosco, Synear, China Hongxing, China Energy, Fibrechem, Delong, China Sky, China Fishery, Hong Leong Asia, Sino Techfibre. From here it is not difficult to spot the trend. In order for the fund manager to load up the counter, the company must have substantial size or market cap. Many undervalued small cap remains under valued because the fund house has restriction on market cap of the stock that they can buy.

Ok, we got so many good stocks on the exchange, but which one to put your money in? Stock do well when your business is doing well. We need to pick those which offer unique value and growth potential. However, as a retail investor, the capital is limited. We can only affort to put that much.

My pick for this run,

Hongguo - Trading at significant discount relative to Hongkong listed woman shoe maker. With past 3 years annual growth of more than 20%, this is one of the "safer" stock you can get.
Synear - Consider the market leadership, bigger market cap (which would attract the institutional investor). This would also be a "safer" bet. Bigger size company recover better from any earning disappointment or business change.

Sentiment aside, after Fri and today's great run, the margin for error would be significant narrower. The room for upside is limited, but I do not see it peak as of now. Be careful... Invest at your own risk.