Mutually-beneficial arrangement for all parties. For Tat Hong, the opening up of the prosperous southern PRC market by partnering with an experienced hand excites us. Mr Yuan will inject relevant assets comprising tower cranes (valued at about RMB90m) and finance leases into the JV for a 30% stake. He benefits with Tat Hong’s injection of nearly RMB70m of fresh funds in 2 tranches into a bigger entity and the possibility of further expansion if the venture takes off. The third partner, Yong Mao, holds a 16.2% stake and is the exclusive tower crane supplier to the JV.
Adequate supervision through Board of Directors and Supervisory Committee. Following the establishment of the JV, the Company will have 3 directors on the Board and 1 member to the supervisory committee .
Big market in China. The JV increases Tat Hong’s tower crane fleet, which stands at 262 units as at 31 Mar 09, by nearly 50%. Even with this enhanced fleet, we expect them to be just a blip amidst strong demand for tower cranes from infrastructure and power sector projects in China. A financially-strong venture with established and well-connected people paving the way gets a healthy share of the rapidly expanding pie.
We raise our FV to S$1.39 and recommend to ACCUMULATE. Since yesterday’s announcement, we have been waiting for the trigger to revise our fair value upwards. We believe the JV is that trigger. Tat Hong did not achieve major headway in China for the past one year without a strong local partner and, from our chats with Management, we could feel they were still feeling their way around then. The JV potentially marks the start of the next phase in the Company’s venture into the huge China market. Furthermore, their investment in the JV of about S$15m is a small proportion of the S$50m the Company stated they would spend on expansion from AIF’s investment, suggesting perhaps more initiatives to come. In view of the above, we increase our growth assumption for the tower crane segment and overall gross margins to reflect a changing product mix that is more focused on the rental business. We arrive at a FV of S$1.39 vs our previous FV of S$1.07 and recommend investors to ACCUMULATE.
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Any investment can be overpriced no matter how great its fundamental value or how secure its prospects. In the absence of a more thorough analysis, it's reasonable to suspect that investments in a market that has been rising for a long time are overpriced. In itself that guideline isn't a signal to sell, it is a signal to make a closer examination.
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