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Page | 1 | PHILLIP SECURITIES RESEARCH (SINGAPORE) MCI (P) 118/10/2015 Ref. No.: SG2016_0137

GKE Corporation Limited Strategic investments to contribute positively SINGAPORE | INFRASTRUCTURE | COMPANY VISIT

We made a site visit to GKE Corporation Limited’s newly constructed ready-mix cement plant in Wuzhou, China. We were briefed by Management on insights to its key businesses and strategic investments to drive growth. Company Background GKE Corporation Limited (GKE) was listed on the Catalist board of the Singapore Exchange on 20 January 2003. The Group has three primary business divisions, namely Warehousing & Logistics, Marine & Shipping Logistics and Infrastructural Materials & Services. As at FY15, more than 95% of revenue was contributed from Singapore and the remaining was contributed from operations in the People’s Republic of China (PRC). Industry Background The urban development plan for Wuzhou city in China aims to urbanise and revitalise the commercial landscape of the city. The plan is envisaged to take between eight and 15 years to be completed. This will create a sustained demand for ready-mix concrete (RMC), since the material is one of the primary materials used in building and infrastructure construction. According to the Wuzhou municipal government, demand for RMC in 2016 is expected to grow 21% YoY to 5 million cubic metres from 4.1 million cubic metres.

In addition, the Chinese government has enacted a regulation where property developers as well as infrastructure contractors are required to purchase their required grades of pre-mixed cement from certified plants in a total of 127 provincial cities which includes Wuzhou. They are not allowed to create their own RMC at the construction sites, and thereby boosting the demand for the construction material. 5 Takeaways from GKE’s Site Visit and Corporate Presentation 1) New ready mix cement plant in Wuzhou is expected to generate the highest annual production capacity among other competitors GKE invested RMB50 million to construct a RMC plant in Wuzhou, China, via its wholly-owned subsidiary, Wuzhou Xing Jian Readymix Co. Ltd. (WXJ). WXJ has obtained the required certifications and permits to commence commercialisation from June 2016. The plant’s development consists of two phases, and WXJ has already completed the construction of Phase 1. Phase 1 of the plant’s development contains two supply lines where the total annual production capacity is expected to reach 800,000 cubic metres and will be the single largest plant in terms of annual production capacity. The proximity of the RMC plant to raw materials required for the mixing process could potentially generate cost savings and production efficiency. Phase 2 of the RMC plant is expected to add another 400,000 cubic metres (via the construction of another supply line) to the plant’s current annual production capacity, and the construction for Phase 2 is likely to begin Phase 1’s annual production capacity stabilises.

13 July 2016

Non-ratedLAST DONE PRICE FORECAST DIVTARGET PRICETOTAL RETURN

COMPANY DATA

O/S SHARES (MN) : 633

MARKET CAP (USD mn / SGD mn) : 49 / 66

52 - WK HI/LO (SGD) : 0.11 / 0.07

3M Average Daily T/O (mn) : 2.10

MAJOR SHAREHOLDERS (%)

10.6%

HUA QIAN WEN 9.0%

JIAN WEN WANG 6.3%

NEO KOK CHING 5.4%

LIU JI CHUN 5.4%

PRICE PERFORMANCE (%)

1MTH 3MTH 1YR

COMPANY 22.093 26.506 17.978

STI RETURN 2.793 4.636 -8.309

PRICE VS. STI

Source: Bloomberg, PSR

KEY FINANCIALS

Y/E Mar FY13 FY14 FY15

Gross Rev. (SGD mn) 26.5 31.4 36.2

Gross Profit (SGD mn) 7.8 6.4 9.2

PATMI (SGD mn) 10.1 (5.9) (3.8)

P/NAV (x) 0.89 0.84 0.58

P/E (x) 6.6 N.A. N.A.

EV/EBITDA (x) 29.3 154.1 20.5

Source: Company Data, PSR est.

Peter Ng (+65 6212-1850)

[email protected]

N/AN/A

CHEN YONG HUA

SGD 0.105N/A

0.06

0.07

0.08

0.09

0.10

Jul-15 Oct-15 Jan-16 Apr-16GKEC SP Equity FSSTI index

Page | 2 | PHILLIP SECURITIES RESEARCH (SINGAPORE)

GKE COPORATION LIMITED COMPANY VISIT

Comparison of annual production capacity with other RMC plants

Company Name

Annual production capacity

('000 cubic metres)

Actual output in 2015

('000 cubic metres) Market Share based on 2015 (%)

Wuzhou Xing Jian 800 0 0

Chinney Alliance Group 600 600 14.6

Ao Chuang 600 560 13.6

Guangzhou Wuzhou Zhong Heng Group 600 530 12.9

Tong Feng 500 470 11.4

China Resources (Wuzhou) 500 450 10.9

Sheng Wang 500 450 10.9

Xing Wu 400 360 8.7

Xi Tou 400 370 9

Jian Tong 400 330 8

Total: 5300 4120 100

Source: Company Data, Phillip Securities Research (Singapore) Proximity to raw materials between the 3 largest RMC manufacturers

Company name Ao Chuang Chinney Alliance Group Wuzhou Xing Jian

Sand 9 12 0.5

Gravel 18 8 3

Cement 9 16 4

Powdered limestone 9 16 4

Coal dust 9 16 4

Source: Company Data, Phillip Securities Research (Singapore)

Distance

(km)

2) RMC plant’s operating performance requires time to stabilise and could lift revenue contribution from the PRC According to the management’s forecast, operating performance of the pre-mix plant is expected to grow significantly for the next two years into 2018, driven by higher volume of RMC sales (FY17E: 150,000 cubic metres, FY18E: 350,000 cubic metres and FY19E: 420,000 cubic metres). This is in line with a higher demand for RMC which is in tandem with the growing pace of urbanisation in Wuzhou. Being the most technologically advanced RMC plant in Wuzhou till date, automation of WXJ’s RMC plant ensures product quality to be met for RMC produced in the facility, where RMC used for the development of buildings and infrastructure needs to adhere with national standards in China. Furthermore, WXJ will be able to leverage on the network of GKE’s Executive Chairman and Executive Director, Mr Chen Yong Hua, in order to clinch new supply contracts for RMC from Chinese property developers who have already won land tenders in Wuzhou. Revenue contribution from China formed 4% of the Group’s total revenue in FY15. According to the management’s projection, revenue contribution from the newly constructed RMC factory is expected to lift revenue contribution from the PRC to c.21% in FY17 after the factory contributes its maiden full-year earnings.



Revenue breakdown in terms of geographic

Singapore, 96%

PRC, 4%

FY15 revenue breakdown

Singapore79%

PRC21%

FY17E revenue breakdown

Source: Company Data, Phillip Securities Research (Singapore)

3) Acquisition of Marquis Services and the redevelopment of 39 Benoi Road warehouse property provides entry into new markets The Group acquired a 70% stake in Marquis Services Pte Ltd (Marquis Services), a marine logistics service provider and chemical warehouse operator, for S$2.9 million on 15 December 2015, where the acquisition comes with a profit guarantee of S$2.8 million for two years from 1 December 2015 to 30 November 2017. The acquisition will potentially broaden GKE’s third party warehousing and logistics capabilities to include marine logistics services and chemical warehousing. The group is investing a total of S$45 million to redevelop its warehouse facility at 39 Benoi Road which will double the property’s net leasable area warehousing space to 400,000 square feet, and allows the Group to expand into chemical warehousing with the allocation of one level for special chemicals storage and inventory management. Marquis Services facilitates GKE’s expansion into chemical warehousing as it owns licenses and permits to handle Class 2 (gases) and Class 3 (flammable liquids) dangerous goods. The management is expecting a return on investments of 7% to 8% per annum for the capital expenditure on the expanded standard warehousing space, and a slightly higher rate of return on chemical warehousing space.

4) Intention of securing longer term contract to generate recurrent income on the back of a brighter natural gas market in China GKE constructed an 83,000 cubic metres liquefied petroleum gas (LPG) carrier vessel with a deadweight tonnage of 53,800 tonnes for US$67 million. The vessel is owned through a 50:50 joint venture between GKE’s subsidiary, Gas Aries Ltd., and Sunrise Marine Ltd. The Company has entered into a short-term bareboat chartering contract with a Very Large Gas Carrier operator, Sinogas Carriers Limited, which started from mid-April for six months at a gross rate of US$33,000 per day. Additionally, the contract comes with an option to extend for an additional six months upon expiration. GKE intends to secure a longer term contract in due course in order to generate a steady stream of income, either with the same or different carrier, and remain optimistic to do so on the back of a brighter outlook in China’s natural gas market which could potentially boost the demand for LPG and logistic services.



Source: Sinogas Carriers Limited’s Presentation Slides

5) Possibility of a turnaround fueled by strategic investments We view that GKE’s strategic investments in three areas, RMC plant in Wuzhou, LPG carrier vessel and the acquisition of Marquis Services Ltd, are likely to contribute positively to earnings moving forward. We note that the Group’s losses have been narrowing (FY14: S$5.9 million, FY15: S$3.7 million) where net losses as at 9M16 came in at S$410,000. Having said that, on a conservative front, the Group is likely able to turn the corner and book in a net profit of at least c.S$700,000 in FY17, even if we were to only include contributions from Marquis Services Ltd while adopting a 50% haircut to the profit guarantee (S$1.4 million). Investment Actions We do not have coverage on GKE but opine that the Group’s losses are demonstrating signs of bottoming out as strategic investments in the three areas, Wuzhou RMC plant, LPG vessel and Marquis Services are beginning to take shape. However, these investments require more time before earnings can be materialised, in particular to the Wuzhou RMC plant which requires time for operations to stabilise. Key Risks

Unexpected weakening of demand for RMC Prolonged period of oversupply in domestic warehousing space, resulting in

negative rent reversions for warehouse facilities Unable to renew existing lease contract or find a new client to take up the lease of

LPG vessel



Appendix Exhibit 1. WXJ’s Wuzhou RMC plant

Source: Phillip Securities Research (Singapore)

Exhibit 2. Unlike traditional RMC plants, processes in WXJ’s RMC plant are mostly automated




Exhibit 3. Raw materials for the manufacturing of RMC

Source: Phillip Securities Research (Singapore) Exhibit 4. Space set aside for the construction of a facility to automate the transport of raw materials into RMC plant




Exhibit 5. There are currently two supply lines running in Phase 1 of the RMC plant, with one new line slated to be constructed in Phase 2




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