Hiap Seng Engineering Ltd

28 November 2007

Still a Winning Bet

BUY

1. ♦
Buoyant prospects notwithstanding disappointment

Hiap Seng Engineering?s (HSE) prospects continue to look positive despite its recently disappointing 1H08 results. The Compression division?s supply procurement procedures which gave rise to the cost over-runs in 1H08 have been amended to ensure that the same issues will not recur. Meanwhile, order book remains strong at S$210m. HSE?s S$55m Shell project is due to commence in 2H08. Both divisions continue to receive strong enquiries; HSE expects the enquiries to translate into more orders. It is bidding for over S$200m worth of orders from the Jurong Island projects and is optimistic about securing a proportion of the bids.

2. ♦
Sector to see multi-billion dollar capex

The sector?s prospects continue to look bright: Shell is building a US$3bn petrochemical cracker in Singapore and ExxonMobil also plans to add another cracker unit to the current one. A total of US$6-8bn in capex is expected to be injected into the Singapore oil refinery sector over the next few years. Singapore?s Economic Development Board is revving up its Jurong Island initiatives which could see the island?s present 60-70 plants increase to 150 in the medium term.

3. ♦
Timely acquisition of new yard capacity

HSE?s timely acquisition of L&M?s former precast yard (600,000 sq ft) in late 2006 effectively doubles its domestic capacity. In addition, it has formed strategic alliances with Chinese oil majors CNOOC and CNPC to penetrate the Chinese market, where we expect to see downstream spending increase over the next couple of years. With its new added capacity, HSE believes it can handle up to S$400m worth of orders annually (compared to S$110m in revenue achieved in FY06). HSE?s re-activated unit serves upstream & downstream players and has been ramping up strongly with contributions of S$62m in FY07 (versus S$12m in the previous year).

4. ♦
Riding the boom-time

We believe that Hiap Seng, like Rotary, is a beneficiary of Singapore?s downstream oil & gas sector, which is expected to be one of Singapore?s key economic growth drivers over the next couple of years. Currently, it trades at earning multiples of 20.0x for FY08 and 12.3x for FY09. We are maintaining our target price of S$0.90 which is based on an ex-cash multiple of 15.0x FY09 PE (0.6x PEG). Reiterate BUY.

Company Visit Note

Analyst:

Sebastian HENG

sebastianheng@kimeng.com

(65) 6432 1858

Price

$0.515

Target

$0.90

ST Index

3,372.64

Historical Chart

Performance

1m

3m

6m

Absolute (%)

-35.2

-38.7

-39.1

Relative (%)

-10.6

0.9

-4.0

Stock Information

Ticker code

HSEN.SI

HSE.SP

Market Cap (US$m)

108.5

52-week high ($)

1.22

52-week low ($)

0.38

Shares issued (m)

303.8

6m avg. daily vol (US$m)

1.84

Free float (%)

43.6