overseas union enterprise ltd – ample opportunities...

Overseas Union Enterprise Ltd – ample opportunities awaiting

Phillip Securities Research Pte Ltd

17 January 2011

Market Singapore Stock Exchange Sector Property Reuters OVES.SI Bloomberg OUE SP POEMS OUES.SG

BUY (Initiation)

Closing Price S$3.60

Target Price S$4.28 (+18.89%)

Major Shareholders % 1 OUE Realty Pte Ltd 51.19 2 Golden Concord Asia Ltd 15.88 3 JP Morgan Chase & Co 1.02 Source: Bloomberg Analyst Bryan Go

� 65 6531 1792 FAX 65 6536 4435

� [email protected] Web: www.poems.com.sg MICA (P) 004/01/2011 Ref No: SG2011_0011

Overseas Union Enterprise Ltd (OUE) is a hotel and office landlord with 93% of its GAV derives from assets in Singapore. Since 2006, OUE has been undertaking asset enhancements proactively and is determined to diversify from predominantly hotel operations into office, retail and residential. Growth potential: Revenue of OUE is strengthened with the acquisition of DBS Towers in August 2010. FY11E earnings will be further reinforced by the completion of two Grade-A office buildings – OUE Bayfront in 1Q2011 and One Raffles Place Tower Two in 2H2011, and recognition of sales from residential development Twin Peaks. Revenue growth in FY10E and FY11E are estimated at 46% and 83% y-y respectively. Investment merits � Riding on the buoyant office and hospitality sectors with 48% and 23% of its GAV derive

from office and hotel properties. These sectors are expected to remain positive in 2011 supported by sound economic fundamentals in the region. The management indicates interest in growing the present hotel management business from the current 6 to 30 hotels in 5 years time.

� Asset enhancement potential in DBS Towers with options of redevelopment into residential or mixed-use development. Remaining status quo is also a viable option as the current average rental is relatively low at $5.20 psf, any lease renewal will see rental upside revision of at least 30%.

� Spinning off assets into real estate investment trust (REIT) is another excellent option available to OUE as a move to crystallize its investment value while retaining a controlling stake over the properties. This option will be possible after the completion of OUE Bayfront and One Raffles Place Tower Two. Hospitality trust for the hotel portfolio is another viable option to OUE.

� Experienced management team lead by Executive Chairman Stephen T. Riady from Lippo Group.

Key Risks � Short remaining tenure in leasehold properties such as Mandarin Orchard and DBS

Towers warrant a discount in assets valuation. Lease renewal is another uncertainty. � Asset-heavy balance sheet exposes OUE to extensive revaluation risk in volatile

market. � Higher than expected vacancy rate in office buildings. � Susceptible to tourist arrivals trend. We initial coverage on OUE with Buy recommendation at fair value of $4.28 with zero premium/discount applied to its RNAV, representing an upside of 18.89% over the latest closing price of $3.60. Conso' Profits EPS DPS BV ROE P/E Yield P/BVEnding (S$m) (S$) (S$) (S$) (%) (X) (%) (x)

12/09 A (92.2) -0.470 0.000 10.370 -0.04 -7.66 0.00 0.35

12/10 E 350.5 0.595 0.044 2.411 0.16 6.05 1.23 1.49

12/11 E 121.6 0.124 0.062 2.491 0.05 29.06 1.72 1.45

12/12 E 147.5 0.150 0.075 2.579 0.06 23.95 2.09 1.4012/13 E 148.6 0.151 0.076 2.655 0.06 23.78 2.10 1.36

Last Price 3.60

52wk High (5/11/2010) 4.00

52wk Low (2/1/2010) 1.77

Shares Outstanding (mil) 981.6019

Market Cap (S$ mil) 3533.77

Avg. Daily Turnover (mil) 5.30

Free float (%) 32.93

PE (X) 13.24

PB (X) 1.51

1M 3M 6M

Absolute 6.8% 21.2% 43.4%

Relative 4.7% 19.6% 33.5%

Price performance %

Price

1.5

2

2.5

3

3.5

4

4.5

1/15/10 5/15/10 9/15/10

OUE SP STI (rebased)

Overseas Union Enterprise Limited 17 January 2011

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Company Profile and History

Overseas Union Enterprise Limited (OUE) was incorporated in Singapore on 8 February 1964 and is listed on the Singapore Stock Exchange Main Board. It has key business activities in hospitality, retail, commercial and residential development. The hospitality segment comprises six 5-star hotels, located in Singapore, Malaysia and China, and is managed by Meritus Hotels & Resorts. From a stable of predominantly hotel properties, OUE is diversifying its business into the retail, commercial and residential sectors. The company aims to build a strong recurrent income base and deliver world-class projects to enhance shareholder value. Previously owned by UOB Ltd, OUE was bought over by a consortium comprising Indonesia’s Lippo Group and a private company owned by Malaysian tycoon Ananda Krishnan in 2006, and has since undergone major asset revamps in its portfolio. In March 2010, Chairman of Lippo Dr. Stephen T. Riady, acquired Ananda Krishnan’s stake in the company and become the major shareholder now. Operating segments

Hotels and resorts Meritus Hotels & Resorts is managing six hotels namely: Mandarin Orchard Singapore, Marina Mandarin Singapore, Meritus Pelangi Beach Resort & Spa Langkawi, Shanghai JC Mandarin, Meritus Mandarin Haikou and Maritus Shantou China. This segment recovered strongly in 2010 from the depressed demand seen in 2009 due to global economy slowdown. In 3Q2010, revenue per available room (RevPar) for Mandarin Orchard Singapore increased by 35.8% to $216 from $159 in 3Q2009. The completion of refurbishment works at Mandarin Orchard Singapore and Mandarin Gallery also lead to higher contribution to the group turnover in 2010. Figure 1: From left: Mandarin Orchard Singapore, Marina Mandarin and Meritus Mandarin Haikou (China)

Source: Company

Commercial OUE owns three prime commercial properties within CBD of Singapore. OUE Bayfront, formerly Overseas Union House, is currently undergoing redevelopment into a new 18-storey office tower slated for completion in 1Q2011. The Grade-A office tower, together with a conserved Change Alley Aerial Plaza Tower, possesses an unblock view of the Marina Bay, and is connected to Raffles City MRT Station by an aerial mall bridge, the Change Alley Linkbridge. As of December 2010, 60% of the 394,253 sq ft net lettable area has been pre-committed by tenants including Merrill Lynch International Bank Ltd (Merchant Bank), Allen & Overy LLP, Skandinaviska Enskilda Banken AB (PUBL) Singapore Brand and Citrix Systems Singapore. The second commercial property is One Raffles Place (formerly OUB Centre), comprises two Grade A office towers and a 5-storey shopping centre right next to Raffles Place MRT Station. Tower 1 is a 63-storey skyscraper with the top 3 storeys newly added in 2010. Tower 2 is currently under construction and the 38-storey office tower will be ready by 2H2011. Altogether One Raffles Place offers 860,000 sq sf of lettable office and retail space. The third is DBS Tower 1 and 2 which OUE acquired in August 2010 with $870.5mil. The property is situated along Shenton Way and is within 5 minutes walk from Tanjong Pagar MRT Station. The management is planning to refurbish the ground floor of the property into a retail podium to increase its lettable area.


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Figure 4: Twin Peaks

Source: Company

Figure 2: From left: OUE Bayfront, One Raffles Place, DBS Tower One and Two

Source: Company

Retail OUE completed in 1Q2010 the transformation of Mandarin Orchard Singapore Hotel by converting the hotel lower floors into a 4-storey retail mall, Mandarin Gallery, which has a prime 152-metre street frontage along Orchard Road. The new mall offers five unique flagship duplexes clad with glass façade, maximizing the visibility from outside the mall. Some of the prominent tenants include Emporio Armani, D&G, Marc by Marc Jacobs and Y-3. Figure 3: Mandarin Gallery

Source: Company

Residential OUE is currently developing its high-end residential project Twin Peaks, at 33 Leonie Hill Road. The development offers 462 units of 1 to 3 bedroom apartments, fully furnished with designer furniture and fittings. OUE paid $625mil in 2007 for the former The Grangeford site in addition to the upgrading premium that OUE has to pay for topping up the lease to 99-year lease. Since its official launch in September 2010, there have been 28 units sold at an average price of $2,820 psf based on caveat records in Realis. Figure 5: Selling price of comparables in the vicinity

Average selling price (S$psf)

0

500

1000

1500

2000

2500

3000

3500

4000

4500

Twin Peaks(99-yr LH)

The OrchardResidences

(99-yr LH)

Illuminaire(FH)

The Marq onPaterson Hill

(FH)

Boulevard Vue(FH)

Grange Infinite(FH)

The Laurels(FH)

Source: Realis, Phillip Securities Research Industry Outlook

Positive office sector supported by economic fundamentals After a relatively dull period through 2004, both price and rental of office space experienced an uptrend and sturdy run-up during the period of 2006 to 2008, before a sharp correction by mid 2008. The recent price and rental trends show an upturn again since 1Q2010.


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Figure 6: Rental index and median rental of private sector office space in central region

50

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2000Q12001Q12002Q12003Q12004Q12005Q12006Q12007Q12008Q12009Q12010Q1

Property Price Index of Office Space in Central Area

Rental Index of Private Sector Office Space in Central Region

Source: Realis, Phillip Securities Research

The price and rental trend could be attributed to the demand and supply of office space as shown below. Annual net demand turned positive for consecutive 5 years from 2004 to 2008. However, annual net supply was relatively low during the same period except 2008 that lead to an increase in occupancy rate from 82% in 2003 to 92% in 2007. That could reasonably explain the price run-up prior to 2008 peak. Since then the supply increased with approximately 1.4 mil sq ft and 2.4 mil sq ft in 2008 and 2009 respectively while net demand dropped to near-zero during global financial crisis. As of September 2010, the demand starts to pickup again along with economy recovery in the region. Net demand for office space turned positive to 893k sf as of 3Q2010 compared to negative 237k sf in 2009. Occupancy rate is now declining at a decreasing rate as of 3Q2010. Figure 7: Island wide office supply and demand and occupancy rate

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%Net Supply (LHS) Net Demand (LHS) Occupancy Rate (RHS)

10-yr avg D

= 1.1 mil sf


We now take a closer look by examining the supply of office space in the pipeline, it shows that between 3Q2010 and 2014 there will be approximately 7.1 mil sf of supply in the pipeline (under construction) or on average 1.7mil sf per annum. It is also noted that the bulk of the supply, approximately 3.7 mil sf, will be completed in 2011. The supply in the pipeline seems enormous comparing to the 10-year average absorption of 1.1mil sf per annum. With that, we expect occupancy rate for older office buildings in CBD area to trend down in 2011 and 2012 as tenants will be relocating to newer Grade A office towers. The landlords of older office towers can either plug the vacated spaces with new tenants at a compromised rental, or refurbish the office tower, or opt to redevelop into residential development. Moderate growth of 0% to 5% As the economic fundamental continues to look positive in 2011, new Grade A office spaces will continue to be in demand and could see a zero to moderate 5% p.a. rental growth in 2011, with upside capped by the amount of new supply coming on-stream. We feel that it is unlikely to see a repeat of sharp rental spike as what happened between 2006 and 2008. Notably, there has been a considerable amount of Grade A office space in CBD pre-committed before their completion of construction, such as the 845k sq ft Ocean Financial Centre is over 60% pre-committed by 1H2010. As of September 2010, 60% of 394,253 sq ft NLA of OUE Bayfront has been pre-committed prior to its completion in 1Q2011.


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Figure 8: Supply of Office Space in the Pipeline (whole island) by Sector, Development Status and Expected Year of Completion as at End of 3rd Quarter 2010

0 500 1000 1500 2000 2500 3000 3500 4000

2010

2011

2012

2013

2014

>2014

'000 sf

Under Construction

Planned


Tourism Upbeats in 2010 to continue in 2011 Singapore tourism sector sees strong improvement in visitor arrivals (VA) in 2010 amid economy recovery in the Asia Pacific and the opening of two integrated resorts (IRs), Resorts World Sentosa (RWS) and Marina Bay Sands (MBS). November’s VA hit 963k, or 16.1% y-y increase and a positive growth for the thirteenth consecutive month. The cumulative VA of 10.5 mil as of November 2010 shows total VA in 2010 is on track to achieve 11.5 mil to 12.5 mil visitors as forecasted by Singapore Tourism Board (STB), which means 2010 is going to be a record year in terms of total VA. Figure 9: Monthly visitor arrivals and y-y growth

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Jan-05Jul-05Jan-06Jul-06Jan-07Jul-07Jan-08Jul-08Jan-09Jul-09Jan-10Jul-10

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35%Visitor Arrivals: Total (LHS) Visitors arrivals y-y growth

Source: CEIC, Phillip Securities Research

Figure 10: Annual visitor arrivals and tourism revenue

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Tourism Revenue Forecast tourism revenue

In the hospitality sector, occupancy rate hovering above 80% since October 2009. As a result, hotel revenue per available room (RevPar) increases for an eleventh consecutive month with 15.3% y-y growth in November, moderated since the peak of 47.9% in May 2010. The strong growth in RevPar in 2010 is mainly attributable to the lull 2009 as a backdrop when the service sector was struggling to cope with the impact of global financial crisis.


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Figure 11: Monthly RevPar and hotel occupancy rate

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RevPar (RHS) Hotel Room Occupancy Rate

Source: CEIC, Phillip Securities Research

Positive outlook in hotel segment Moving forward, we expect the RevPar growth rate to be positive and at a stable but slower pace compared to 2010. This is in anticipation of stronger demand for hotel rooms based on the target set by STB to achieve annual VA of 17 mil visitors and tourism receipts of $30 bil by 2015. On the supply side, the total supply in the pipeline (under construction) as of 3Q2010 is 8,302 units, or on average 1,953 hotel rooms p.a. completed between 3Q2010 and 2014. This is still slightly lesser than the peak of over 10,000 rooms of supply seen in 2008. We remain optimistic in this segment due to the positive economic outlook in the region. Figure 12: Supply of hotel rooms in the pipeline by development status and expected year of completion

0 500 1000 1500 2000 2500 3000 3500 4000

2010

2011

2012

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>2014

Hotel room

Under Construction

Planned


Financial Analysis / Earnings Outlook

Past performances of business segments Income from hospitality segment contributes to the bulk of OUE total revenue in the past, with close to 95% of its FY09 revenue derived from this segment. Due to the improved performance in Singapore tourism sector in 2010, we expect contribution from hospitality segment to increase from $130 mil in FY09 to $150.9 mil in FY10E. Rental income from investment properties is gaining significance by 4Q2010 following the recognition of income from their newly acquired DBS Tower One and Two. It is estimated to contribute slightly over $50mil p.a. based on average rental of $5.20 psf. The contribution is expected to remain stable till 2013 due to 77% lease expiry by NLA in 2013 and beyond. We expect at least 30% of rental upward revision by 2013 due to the current low rent base. In addition, contribution from OUE Bayfront, a new Grade-A office tower, is expected to set in from 1Q2011 onwards, with rental income estimated at $44mil p.a. assuming average rental of $10 psf at 90% occupancy.


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Figure 13: Contributions of business segments by revenue

0%

20%

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60%

80%

100%

FY04 FY05 FY06 FY07 FY08 FY09 FY10E FY11E FY12E FY13E

Property trading Property investment Dividend & others Hospitality

Source: Company, Phillip Securities Research

Revenue and profit estimates Overall revenue in FY10E is expected to increase 46% y-y to $201 mil compared to $138 mil in FY09 due to the improved performance in hospitality segment and new sources of income from investment properties, mainly Mandarin Gallery, DBS Tower One and Two. FY11E will see revenue grow further to $367 mil due to new contribution from OUE Bayfront and progress recognition from Twin Peaks. Gross margin however will drop from 63% in FY10E to 53% in FY12E due to higher cost recognition from property development. Figure 14: Revenue and gross margin

183 199 174 170 153 138201

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il

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70%Revenue (LHS) Gross margin


Profit before tax (PBT) excluding fair value adjustments shall see improvement to $94 mil in FY10E from a loss of $74 mil in FY09 due to the same reasons mentioned above. PBT will increase further in FY11E due to the completion of One Raffles Place Tower Two (41% owned) in 2H2011, which increases the contribution from associated companies. PBT margin (excluding fair value adjustment) shall be around 47% in FY10E and maintain above 22% thereafter. Figure 15: Profit before tax (PBT) and PBT margin excluding fair value adjustment

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PBT ex. fair value adj (LHS) PBT margin ex fair value adj.


Return to shareholders Earning per share (excluding fair value adjustment) shall turn positive to 14.6 cents in FY10E. Return on shareholder’s fund shall range from 3.7% to 5.7% per year from FY10E to FY13E while return on assets range from 2.1% to 3.4% per year from FY10E to FY13E.


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Figure 16: Earning per share and returns

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36.4

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14.8 12.4 15.0 15.1

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ROA


According to the management, OUE will maintain a payout ratio of 50% of earnings from 2010 onwards. Based on our earning estimates, the payout representing dividends of 4 cents and 6 cents for FY10E and FY11E and 8 cents for FY12E and FY13E. Figure 17: Dividend payout

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Payout ratio (RHS)


Financial position Gross and net gearing as of 3Q2010 are 0.67 and 0.59x respectively. In our view, there shall be debt headroom to raise another $300 mil to gear up to 0.8x gross. Recently OUE announced its establishment of S$1 bil Multicurrency Medium Term Notes Programme which is in time to refinance the existing debt of ~$460 mil maturing in April 2011 and will provide greater flexibility in their working capital. Figure 18: Financial leverage

0.48

0.590.630.65

0.58 0.57

0.420.32

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Gross gearing Net gearing

Source: Company, Phillip Securities Research Net tangible asset of the company shall increase 16% to $2.37 bil in FY10E from $2.04 bil in FY09. We expect slower organic growth from FY10E to FY13E due to the 50% payout policy committed by the management. However, we may expect more acquisitions or divestments by OUE in the next two years due to the buoyant commercial and hospitality sectors in Singapore. Following a 1 to 5 share-split in May 2010 to enhance liquidity of stock, NTA per share dropped from $10.37 in FY09 to $2.38 in 3Q2010.


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Figure 19: Net tangible asset

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Investment Merits

Capitalized on buoyant office and hospitality sectors with 48% and 23% of its GAV from office and hotel properties which we think OUE is in a good position to grow. The management has indicated their interest in bidding for more hotel sites in Singapore both from Government Land Sales Programme and private treaty. In first-half of January 2011 alone, OUE participated in two hotel site tenders launched by URA, i.e. Robinson Road/Boon Tat Street (Ogilvy Centre) and Gopeng Street/Peck Seah Street, but were outbided in both cases. With the establishment of $1 bil MTN Programme recently, we see a stronger war chest in OUE to hunt for good assets in near term. Figure 20: Segments by GAV

47.5%

9.4%

23.3%

14.4%

3.4% 2.0%Sg Office

Sg Retail

Sg Hospitality

Sg Residential

China

Others

Source: Phillip Securities Research

Asset enhancement potential. DBS Towers: Option 1 – to undertake redevelopment into new office towers, residential or mixed development of office, residential and retail. Other than redevelopment cost, a premium has to be paid to top up the leasehold land to a new 99-year leasehold in order to be feasible for redevelopment, which is estimated to cost around $90 mil. Option 2 – to maintain status quo, a good choice as the current average rent is only $5.20 psf representing a great risk of upward revision in rental. Any lease renewal or change of tenants will easily see rental growth of at least 30%. At the same time, OUE is interested in increasing the total lettable area by converting the ground floor of the towers into retail podium. As the lease with anchor tenant DBS Bank will only be ending by 2013, OUE has the options opened till 2012. Spinning off assets into real estate investment trust (REIT) is another excellent option available to OUE as a move to crystallize its investment value while retaining a controlling stake over the properties. OUE would then be able to utilize the cash to undertake other real estate development projects or strategic acquisitions. The connection between the property development and the property management arms works in two directions which will allow OUE to recycle capital as a strategy for long term growth. This option will be feasible upon completion of One Raffles Place Tower Two in 2H2011, which can be combined with OUE Bayfront and DBS Towers to form a REIT. Other than commercial REIT, hospitality trust is another viable option for its hotel portfolio. Established exposure in service sector by the Meritus brand in both Singapore and China. OUE intends to grow the number of hotel under management from the current 6 to 30 hotels in 5 years time, via both undertaking hotel developments in Singapore and increasing


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the number of hotel management contracts overseas. Besides 5-star hotels, OUE is keen to venture into the 3 to 4-star hotel segment to capture greater market share. Experienced management team The Executive Chairman of OUE, Dr Stephen T. Riady, is an Executive Director of Lippo Ltd and has been its Chairman since 1991. His broad experience spans across industries of property investment and development, retail business, financial and telecommunication services. He is a graduate of the University of Southern California, USA and holds a Master of Business Administration degree from Golden Gate University, USA. He was conferred an Honorary Degree of Doctor of Business Administration from Napier University, Edinburgh, UK. Chief Executive Officer and Group Managing Director Mr Thio Gim Hock has extensive experience in engineering, real estate development and consultancy. Prior to joining OUE in November 2007, he was the Chief Executive Officer of Target Realty Ltd, and Executive Director for City Developments Ltd, and an Executive Director of Hotel Properties Ltd. Mr Thio holds a Bachelor of Engineering (Civil) from the University of Malaya and attended graduate school at the Massachusetts Institute of Technology, USA. Chief Financial Officer Mr Rudi Chuan Hwee Hiow joined OUE Group in July 2009, has more than 20 years of experience in financial management and hospitality management. He was formerly the Chief Financial Officer at Lippo-Mapletree Indonesia Retail Trust Management Ltd. Mr Chuan holds a Bachelor of Commerce degree from the University of Otago, New Zealand, and a Master’s degree in Business Administration from the State University of New York. He is a member of the Institute of Certified Public Accountants of Singapore. Key Risks

Short remaining tenure in leasehold properties in particular Orchard Mandarin, Mandarin Gallery and DBS Tower One and Two mean renewal of leases will be a concern to OUE. We estimate that to top up DBS Tower to a fresh 99-year lease will cost approximately $90mil and is subject to approval by the relevant authorities. The renewal cost works out to be 9 – 10% of its RNAV. In the case of Mandarin Orchard, we foresee greater difficulties in renewal as the lessor is a private entity – The Ngee Ann Kongsi. Figure 21: Remaining lease of leasehold properties

Property

Remaining

lease (year)

OUE Bayfront

Change Alley Aerial Plaza

One Raffles Place Twr 1 815

One Raffles Place Twr 2

One Raffles Place Retail

DBS Twr 1

DBS Twr 2

Mandarin Orchard Singapore

Mandarin Gallery

Marina Mandarin 69

95

71

56

45


Asset-heavy balance sheet exposes OUE to extensive revaluation risk in volatile market. It will substantially affect RNAV, balance sheet and leverage ratio of the company although has no impact in cash flow operationally. However, the prevailing office sector has greater upward revaluation potential capitalization rate compression. Higher than expected vacancy rate in office buildings, in particular the aging DBS Towers, may lead to lower rental income. A weaker demand in new office space could results in higher vacancy rate or lower rental rate for One Raffles Place Tower Two, which is due for completion in 2H2011. Hospitality segment is highly susceptible to fluctuation in tourist arrivals, which is in turn subject to various unforeseen circumstances such as natural disasters, political issues and pandemics.


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SWOT Analysis

We have identified the following attributes with regard to the company and its shares performances.

Strengths Opportunities � Assets located at excellent locations of

Singapore CBD � Stable recurring income from office rental � Experience management team � Supported by parent company – Lippo

Group � Minimal exposure to policy risks in

residential property market

� Rising office rental in Singapore to increase rental income and compress capitalization rate of investment properties

� Redevelopment potential in DBS towers � Spin-off assets into REIT or hospitality

trusts.

Weaknesses Threats � Vulnerable to tourists arrivals trend � Several leasehold properties in portfolio

with relatively short tenure.

� Demand for office space wanes due to economy slow down

� Bulk office space supply in the pipeline for the next 2 years

� Inability to renew land tenure

Valuation and recommendation

We value the stock based on gross asset value (GAV) of the company, less net debt including committed capital expenditure to derive its realizable net asset value (RNAV). A premium/discount is then applied to the RNAV to reflect the prevailing market situation. In the case of OUE, we do not apply any premium/discount to its RNAV in the view of the moderate growth in office sector and upticks in hospitality sector. The limited exposure in residential segment also makes it a favourable property stocks currently. We value the commercial properties using achievable rental rates and capitalization rates ranging from 4% to 6% based on various factors. We value the hotel properties based on revenue per available room achievable and the capitalization rates range from 5.5% to 8%. The hotel management business of Meritus Hotels and Resorts is pegged to 10x P/E. The 10% stake that OUE holds in Marina Centre Holdings, which owns Marina Square, is valued at book. We initiate our coverage on OUE with Buy recommendation at fair value of $4.28, representing an upside of 18.89% over the last closing price $3.60. OUE RNAV

Stake RNAV (S$'mil)

Office

OUE Bayfront 100% 864

One Raffles Place Twr 1 41% 410

One Raffles Place Twr 2 41% 309

DBS Twr 100% 1,041

Retail

Mandarin Gallery 100% 440

One Raffles Place Retail 41% 80

Hotel

Mandarin Orchard Singapore 100% 1,082

Marina Mandarin 30% 206

Meritus Mandarin Haikou 100% 105

Meritus Shantou 80% 84

Hotel management business 10x PE 70

Residential

Twin Peaks 100% 793

Others

Stake in MCH 10% 108

GAV 5,594

Less: FY11E net debt and committed Capex 1,393

RNAV 4,200

RNAV/share (S$) 4.28

Premium/discount to RNAV 0%

Fair value (S$) 4.28


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Parameter assumptions

Risk free rate 2.73%

Beta, b 0.53

Expected market return 9.04%

Risk Premium 6.31%

CAPM 6.07%

Cost of debt 2.35%

WACC 4.45% Peers Comparison

OUE is one of the mid-cap property/hotel company listed on SGX, the closest comparable would be UOL with similar exposures (in commercial, hotel and residential segments). Figure 23: Peers comparison

Counters

Last Price

(S$)

Market cap

(S$'mil)

Current

PE (x)

Current

P/BV (x)

Gross

Gear (%)

Hong Kong Land 7.39 16,817 4.8 1.2 28.3

Capitaland 3.71 15,814 9.6 1.2 61.1

CITYDEV 12.16 11,057 16.7 1.7 52.4

F&N 6.44 9,051 11.0 1.5 65.8

CapMallsAsia 1.92 7,457 9.6 1.4 9.1

KepLand 4.73 6,860 20.1 2.0 45.6

UOL 5.00 3,888 10.6 0.9 47.4

OUE 3.60 3,534 13.2 1.5 28.3

GuocoLand 2.77 3,278 18.2 1.3 122.2

Sp Land 7.71 3,180 29.4 0.9 13.6

Wheelock 1.93 2,309 6.1 0.9 9.5

Allgreen 1.15 1,829 11.0 0.8 43.2

WingTai 1.70 1,350 9.1 0.8 70.6

Average 6,648 13.0 1.2 45.9 Source: Bloomberg, Phillip Securities Research Figure 24: Historical trading price, volume and key events

9 Mar 10: Stephen T.

Riady bought over stake of Ananda

Krishnan

30 Jun 10: Ex. Sub-division of share 1

into 5

15 Jun 10: Placement

of 18mil vender shares at $11.50 per ordinary share

11 Aug 10:

Acquire DBS Towers

27 Sep 10: announced syndicated loan facility

for amt up to S$750mil,

6 Oct 10: Announced

placement of 83.5 million ordinary shares

11 Jan 11:

Establishment of $1bil MTN Programme

Source: Bloomberg, SGX, Phillip Securities Research


13

Financials Profit & Loss statement (S$ m) 2009 2010E 2011E 2012E 2013E Balance sheet (S$ m) 2009 2010E 2011E 2012E 2013E

Revenue 137.5 200.8 366.7 642.8 739.6 Assets

Cost of sales (73.7) (74.6) (172.2) (412.1) (495.1) Non-current assets

Other operating income 4.5 2.0 1.6 1.6 1.6 Property, plant and equipment 212.6 216.1 242.5 300.5 363.6

Administrative expenses (20.6) (25.1) (25.7) (32.1) (37.0) Investment properties 1050.6 2366.4 2523.9 2523.9 2523.9

Other operating expenses (25.4) (36.2) (44.0) (57.8) (66.6) Associate 613.1 640.0 667.4 707.9 749.0

Profit from operations 22.3 67.0 126.4 142.3 142.6 Available-for-sale financial asset 108.0 108.0 108.0 108.0 108.0

Other gain/(losses) - net (44.4) 265.7 0.0 0.0 0.0 Deffered tax assets 0.1 0.1 0.1 0.1 0.1

Finance costs (0.0) (5.8) (26.4) (27.4) (27.1) Total non-current assets 1984.4 3330.6 3541.9 3640.4 3744.6

Share of results of associated companies (75.9) 31.0 31.6 44.6 45.3

Profit before income tax (98.0) 357.9 131.6 159.5 160.7 Current assets

Income tax 4.6 (6.6) (9.2) (11.2) (11.2) Inventories 0.6 0.7 0.7 0.7 0.7

Profit after tax (93.4) 351.3 122.4 148.4 149.5 Development properties 570.2 570.2 529.7 368.1 166.0

Minority interest (1.2) 0.8 0.8 0.8 0.9 Trade and other receivables 8.7 12.7 23.2 40.7 46.8

Profit attributable to equity holders (92.2) 350.5 121.6 147.5 148.6 Other current assets 10.0 10.0 10.0 10.0 10.0

Cash and bank balances 198.0 169.7 155.7 416.4 423.9

Growth & margins (%) 2009 2010E 2011E 2012E 2013E Total current assets 787.5 763.3 719.3 835.9 647.5

Sales growth (10.3) 46.1 82.6 75.3 15.1 Total assets 2772.0 4093.9 4261.2 4476.3 4392.1

Gross profit growth (22.5) 98.0 54.0 18.6 6.0

EBITDA growth (34.3) 118.2 67.9 11.7 2.3 Liabilities

EBIT growth (42.8) 200.0 88.8 12.5 0.2 Current liabilities

Net income growth (325.4) (480.1) (65.3) 21.3 0.7 Trade and other payables 58.9 60.0 138.0 330.9 397.1

EPS growth (325.4) (226.7) (79.2) 21.3 0.7 Bank borrowings 115.0 500.2 108.8 554.4 244.3

Gross margin 46.4 62.9 53.0 35.9 33.1 Current income tax liabilities 18.1 18.1 18.1 18.1 18.1

EBITDA margin 29.1 43.5 40.0 25.5 22.7 Total current liabilities 192.0 578.4 264.9 903.4 659.6

EBIT margin 16.2 33.3 34.5 22.1 19.3

Net profit margin (67.1) 174.5 33.2 23.0 20.1 Non-current liabilities

Bank borrowings 458.4 1042.8 1440.3 931.9 1019.6

Cash flow statement (S$ m) 2009 2010E 2011E 2012E 2013E Other non-current liabilities 14.1 34.3 39.3 37.3 34.3

Profit before income tax (93.4) 351.3 122.4 148.4 149.5 Deferred tax liabilities 78.4 78.4 78.4 78.4 78.4

Adjustments 130.3 (267.3) 20.9 12.0 14.6 Total non-current liabilities 550.9 1155.4 1557.9 1047.6 1132.2

Operating cash flow before working capital changes 36.9 84.0 143.3 160.4 164.1 Total liabilities 742.8 1733.8 1822.8 1951.0 1791.8

Changes in development properties (10.6) 0.0 40.4 161.7 202.1

Changes in inventories 0.2 (0.1) (0.0) 0.0 (0.0) Equity

Changes in trade receivables 0.6 (4.0) (10.5) (17.5) (6.1) Share capital 693.3 693.3 693.3 693.3 693.3

Changes in payables and accruals (1.4) 21.3 83.0 190.9 63.3 Reserves 107.2 107.2 107.2 107.2 107.2

Cash generated from operations 25.7 101.2 256.2 495.5 423.3 Retained earning 1235.2 1566.1 1644.2 1730.9 1805.7

Income tax (paid)/recovered (11.8) (6.6) (9.2) (11.2) (11.2) Shareholders' equity 2035.8 2366.6 2444.7 2531.4 2606.2

Net cash from operating activities 13.9 94.6 247.0 484.3 412.0 Minority interest (6.6) (6.5) (6.3) (6.1) (6.0)

Net cash from investing activities 28.8 (1066.4) (196.5) (71.9) (80.5) Total equity 2029.1 2360.2 2438.4 2525.3 2600.3

Net cash from financing activities (27.5) 943.6 (64.6) (151.6) (324.0) Total equity and liabilities 2772.0 4093.9 4261.2 4476.3 4392.1

Net change in cash 15.2 (28.3) (14.1) 260.8 7.5

Cash at beginning of the year 182.8 198.0 169.7 155.7 416.4 Per share data ($) 2009 2010E 2011E 2012E 2013E

Cash at end of the year 198.0 169.7 155.7 416.4 423.9 Basic EPS (cents) (47.0) 59.5 12.4 15.0 15.1

Diluted EPS (cents) (47.0) 59.5 12.4 15.0 15.1

Key Ratios 2009 2010E 2011E 2012E 2013E Dividend (cents) 0.0 4.4 6.2 7.5 7.6

ROE (%) (4.4) 15.9 5.1 5.9 5.8 Book value 10.4 2.4 2.5 2.6 2.7

ROA (%) (3.3) 10.2 2.9 3.4 3.4 Tangible book value 10.4 2.4 2.5 2.6 2.7

Current ratio (X) 4.1 1.3 2.7 0.9 1.0

Quick ratio (X) 1.1 0.3 0.7 0.5 0.7

Payout ratio (%) 0.0 12.4 50.0 50.0 50.0 Valuation 2009 2010E 2011E 2012E 2013E

Effective tax rate (%) 4.7 1.8 7.0 7.0 7.0 Current P/E (X) (7.7) 6.0 29.1 24.0 23.8

Receivables days 25.9 19.5 17.9 18.2 21.6 P/E at target price (X) (9.1) 7.2 34.5 28.5 28.3

Payable days 288.1 290.9 209.8 207.6 268.4 P/B (X) 0.3 1.5 1.4 1.4 1.4

Net debt/equity (X) 0.2 0.6 0.6 0.4 0.3 Dividend yield (%) 0.0 1.2 1.7 2.1 2.1

Net debt/Total assets (X) 0.1 0.3 0.3 0.2 0.2 P/FCFE (X) 107.9 3.4 17.1 10.3 34.8

Interest cover - EBIT (X) 1,240.4 11.6 4.8 5.2 5.3 P/NTA (X) 0.3 1.5 1.4 1.4 1.4



14

Ratings History Overseas Union Enterprise Limited

Rating Date Closing price (S$)

Fair value (S$)

Remarks

BUY 17 January 2011 3.60 4.28 Initiation

TRADING BUY Share price may exceed 10% on the upside over the next 3 months, however longer-term outlook remains uncertain

BUY >15% upside from the current price HOLD -10% to 15% from the current price SELL >10% downside from the current price TRADING SELL

Share price may exceed 10% on the downside over the next 3 months, however longer-term outlook remains uncertain

Phillip Research Stock Selection

Systems We do not base our recommendations entirely on the above quantitative return bands. We consider qualitative factors like (but not limited to) a stock's risk reward profile, market sentiment, recent rate of share price appreciation, presence or absence of stock price catalysts, and speculative undertones surrounding the stock, before making our final recommendation

15

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16

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FRANCE

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overseas union enterprise ltd – ample opportunities...

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