WSJ.com - For Singapore Plastics Makers, Price Contracts Mute Oil Costs
WSJ.com - For Singapore Plastics Makers, Price Contracts Mute Oil Costs
By CRIS PRYSTAY
Staff Reporter of THE WALL STREET JOURNAL
September 1, 2005
SINGAPORE -- Soaring oil prices have spurred many investors to sell their shares of Singapore manufacturers that make plastic components for the world's biggest electronics companies. The surge in oil prices has nearly doubled the price of plastic resin, the key raw material in plastic components, in the past year.
But some analysts contend investors have oversold some of the sturdier component makers. The stronger Singapore companies, whose clients include Hewlett-Packard, Seagate Technology and Maxtor, can weather the impact of pricey oil better than most people think, the analysts argue.
The reason: Some of these companies are able to pass along much of their higher resin costs to their multinational clients. The multinational companies often negotiate resin prices with big petrochemical companies on behalf of their contract manufacturers, who agree to the price with the proviso that they can pass back a good chunk of future price increases.
Analysts suggest that most investors are unaware that some Singapore component makers can use this loophole to avoid taking a beating from high resin prices.
Since about mid-July, the share prices of Singapore's biggest publicly traded plastics companies, in some cases, have fallen more than 10%. The resulting prices, some analysts say, create fine buying opportunities. "There is cost-pressure, but it's not as bad as everyone imagines it to be," says David Mok, head of research at DBS Vickers Securities. "We think it's worth looking at this sector again."
DBS Vickers particularly likes First Engineering and Hi-P International. First Engineering makes precision components for hard-disk drives and plastic gearing mechanisms for printers, as well as plastic parts for automotive companies. Hi-P International produces plastic parts for mobile phones and components for hard-disk drives.
In the view of DBS Vickers and some other brokerage houses, First Engineering is best-positioned to withstand higher oil and resin prices. One reason is that the company makes precision parts that require less raw material than do products made by other Singapore component makers, such as Fu Yu, which makes casings for printers. First Engineering had a 15.7% net profit margin in its fiscal year ended March 31, down slightly from 17.5% a year earlier. DBS forecasts that Fu Yu's net profit margin for its current year, which will end Dec. 31, will be 6.8%, compared with 18% in 2004.
Last week, an investment concern owned by the family of First Engineering's late founder Ong Sin Seng sold its 28% stake in the company to Affinity Equity Partners, a fund manager. But one of the founder's sons and key managers are staying on with the company, an arrangement analysts welcome.
First Engineering is trading at a price-to-earnings multiple of about nine times current earnings, near the bottom of a historic range for Singapore's plastic-component makers of eight to 12.5 times earnings.
DBS Vickers has a 12-month price target for First Engineering of S$1.71 ($1.01). Yesterday, the company's shares fell two Singapore cents to close at S$1.34, 22% below that target. For the year ending in March, DSB Vickers expects the company to post a net profit of S$29.2 million, 27% above fiscal 2005's results.
Hi-P International, which makes parts for disk drives as well as household products for brands such as Gillette and Oral-B, has been able to maintain its 15% net profit margin despite higher resin prices. Raw materials account for about 70% of Hi-P's costs, but the company says it can pass on increased costs to its customers.
"When you're doing branded, high-precision products, you're in a better bargaining position when it comes to renegotiating with your customers," says Jonathan Koh, a technology analyst at UOB Kay Hian. Mr. Koh has a buy rating on Hi-P, which closed yesterday at S$1.42, and a 12-month price target of S$1.74.
Not all analysts are bullish on plastic manufacturers. The bears say that while many contract manufacturers can renegotiate price contracts with their clients several times a year, the companies can't pass along all the higher resin costs.
"In theory, the 'cost-plus' arrangements allows these companies to pass on higher resin costs to the multinationals, but in actual fact, those customers can come right back and squeeze them, and ask for a cost reduction," says Bryan Yeong, an analyst at OCBC Securities. "They wind up sharing" the higher resin prices, he adds.
Several analysts have downgraded some plastic-component makers in recent months. Kim Eng Securities, has a hold rating on Fu Yu, and a sell recommendation on Huan Hsin Holdings, which makes printer casings and notebook-computer casings.
Most of Singapore's plastics companies invested in new plant capacity last year, just before resin prices took off, a move which has also contributed to an erosion in profit margins.
Mr. Yeong, one of the sector's most bearish analysts, has a buy recommendation on just one company: First Engineering. It raised its capacity at factories in China last year and at one point was operating at just 60% capacity.
But, he says, First Engineering has plenty of new orders from hard-disk manufacturers, and he expects it will be using 80% of its manufacturing capability within a few months. "They're diversified and have a pretty good project pipeline over the next year," Mr. Yeong says.
By CRIS PRYSTAY
Staff Reporter of THE WALL STREET JOURNAL
September 1, 2005
SINGAPORE -- Soaring oil prices have spurred many investors to sell their shares of Singapore manufacturers that make plastic components for the world's biggest electronics companies. The surge in oil prices has nearly doubled the price of plastic resin, the key raw material in plastic components, in the past year.
But some analysts contend investors have oversold some of the sturdier component makers. The stronger Singapore companies, whose clients include Hewlett-Packard, Seagate Technology and Maxtor, can weather the impact of pricey oil better than most people think, the analysts argue.
The reason: Some of these companies are able to pass along much of their higher resin costs to their multinational clients. The multinational companies often negotiate resin prices with big petrochemical companies on behalf of their contract manufacturers, who agree to the price with the proviso that they can pass back a good chunk of future price increases.
Analysts suggest that most investors are unaware that some Singapore component makers can use this loophole to avoid taking a beating from high resin prices.
Since about mid-July, the share prices of Singapore's biggest publicly traded plastics companies, in some cases, have fallen more than 10%. The resulting prices, some analysts say, create fine buying opportunities. "There is cost-pressure, but it's not as bad as everyone imagines it to be," says David Mok, head of research at DBS Vickers Securities. "We think it's worth looking at this sector again."
DBS Vickers particularly likes First Engineering and Hi-P International. First Engineering makes precision components for hard-disk drives and plastic gearing mechanisms for printers, as well as plastic parts for automotive companies. Hi-P International produces plastic parts for mobile phones and components for hard-disk drives.
In the view of DBS Vickers and some other brokerage houses, First Engineering is best-positioned to withstand higher oil and resin prices. One reason is that the company makes precision parts that require less raw material than do products made by other Singapore component makers, such as Fu Yu, which makes casings for printers. First Engineering had a 15.7% net profit margin in its fiscal year ended March 31, down slightly from 17.5% a year earlier. DBS forecasts that Fu Yu's net profit margin for its current year, which will end Dec. 31, will be 6.8%, compared with 18% in 2004.
Last week, an investment concern owned by the family of First Engineering's late founder Ong Sin Seng sold its 28% stake in the company to Affinity Equity Partners, a fund manager. But one of the founder's sons and key managers are staying on with the company, an arrangement analysts welcome.
First Engineering is trading at a price-to-earnings multiple of about nine times current earnings, near the bottom of a historic range for Singapore's plastic-component makers of eight to 12.5 times earnings.
DBS Vickers has a 12-month price target for First Engineering of S$1.71 ($1.01). Yesterday, the company's shares fell two Singapore cents to close at S$1.34, 22% below that target. For the year ending in March, DSB Vickers expects the company to post a net profit of S$29.2 million, 27% above fiscal 2005's results.
Hi-P International, which makes parts for disk drives as well as household products for brands such as Gillette and Oral-B, has been able to maintain its 15% net profit margin despite higher resin prices. Raw materials account for about 70% of Hi-P's costs, but the company says it can pass on increased costs to its customers.
"When you're doing branded, high-precision products, you're in a better bargaining position when it comes to renegotiating with your customers," says Jonathan Koh, a technology analyst at UOB Kay Hian. Mr. Koh has a buy rating on Hi-P, which closed yesterday at S$1.42, and a 12-month price target of S$1.74.
Not all analysts are bullish on plastic manufacturers. The bears say that while many contract manufacturers can renegotiate price contracts with their clients several times a year, the companies can't pass along all the higher resin costs.
"In theory, the 'cost-plus' arrangements allows these companies to pass on higher resin costs to the multinationals, but in actual fact, those customers can come right back and squeeze them, and ask for a cost reduction," says Bryan Yeong, an analyst at OCBC Securities. "They wind up sharing" the higher resin prices, he adds.
Several analysts have downgraded some plastic-component makers in recent months. Kim Eng Securities, has a hold rating on Fu Yu, and a sell recommendation on Huan Hsin Holdings, which makes printer casings and notebook-computer casings.
Most of Singapore's plastics companies invested in new plant capacity last year, just before resin prices took off, a move which has also contributed to an erosion in profit margins.
Mr. Yeong, one of the sector's most bearish analysts, has a buy recommendation on just one company: First Engineering. It raised its capacity at factories in China last year and at one point was operating at just 60% capacity.
But, he says, First Engineering has plenty of new orders from hard-disk manufacturers, and he expects it will be using 80% of its manufacturing capability within a few months. "They're diversified and have a pretty good project pipeline over the next year," Mr. Yeong says.
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