What’s next for Sapphire if HKICIM becomes a substantial shareholder (19 Oct 17)
- Original Post from ERNEST LIM'S INVESTING BLOG

$Sapphire(BRD.SI) Sapphire surged 11.5% this morning to touch an intraday high of $0.340 today on an announcement posted on SGX late last night. It closed +$0.01 to $0.315.
 
What happened yesterday?
Two of Sapphire Corp’s largest shareholders, namely Best Feast Limited and Ou Rui Limited are swaping a combined 27.96% stake in the company with new shares to be issued by Hong Kong-listed Hong Kong International Construction Investment Management Group (“HKICIM”). According to an announcement by Sapphire, the above share swap represents Sapphire’s share price of approximately  S$0.51[1] per share.
 
Why Sapphire?
I have been following up on Sapphire’s corporate transformation plans over the last few years. Personally, I believe potential investors and possibly, HKICIM was attracted to the post-turnaround Sapphire due mainly to its existing core infrastrcuture business operated under its principal subsidiary, Ranken Infrastructure Limited (“Ranken”).
It is worth noting that
a) Sapphire’s successful transformation bears fruits
For those who have followed Sapphire, under the stewardship of the Group CEO and Managing Director, Mr Teh, since his appointment in Oct 2013, Sapphire has divested its legacy steel business in 2014 and disposed of its 81% stake in its mining services in early 2017. Mr. Teh has successfully turned around the company from a loss-making position to a company which posted RMB 47.2m (converted from S$) and RMB20.5m net profit for FY2016 and 1HFY17 respectively.
Such transformation has not gone unnoticed as Sapphire announced on 28 Nov 2016 that it has received Hong Kong-based Capital Weekly (資本壹週) “Listed Enterprise Excellence Award 2016” – the first public listed company not quoted on the Hong Kong Stock Exchange to secure the prestigious accolade. This acknowledges the success of Sapphire’s corporate turnaround strategies under the leadership of Mr Teh. Readers can refer to my earlier write-up (click HERE) on the significance of this award.
b) Acquisition underscores the intrinsic value in Ranken’s licences and track records
Sapphire has always mentioned in their press release that their wholly owned subsidiary Ranken is one of China’s largest privately-owned integrated rail transport infrastructure construction groups and the only privately-owned operator in China which has obtained the prestigious full AAA-certification for design, construction and project consultation in the rail sector. The acquisition by Sapphire underscores the intrinsic value in the licences held and track records achieved by Ranken.
c) Significant synergies may be reaped
It appears that HKICIM believes that Ranken’s capability in rail and infrastructure engineering procurement and construction could complement that of HKICIM. Furthermore, with this acquisition, it will facilitate HKICIM in taking advantage of the industrial development opportunities bought forth by the “One Belt, One Road” development strategy of the PRC.
 
My personal view on this transaction
This acquisition gives a strong vote of confidence to Ranken’s capability under Sapphire’s capital market platform, its track records and licenses; and obviosuly, the industrial prospects. In addition, there may be other commercial points to note:
a) Possible larger pipeline of projects
Looking at HKICIM’s profile and its networks, it is likely to have a larger portfolio of projects which may bode well for Sapphire/Ranken over the medium to long term, further strengthening its existing good business fundamental.
b) Financial target of RMB64.75m in the 12 months ending 30 Jun 2018
Although Sapphire mentioned that it has not done any independent review on the above financial target for the HKICIM deal, I find it encouraging that the financial target is around RMB64.75m for the 12 months ending 30 Jun 2018. To put this into perspective, 1HFY17 net profit which ends 30 Jun 2017 was only RMB20.5m.
c) More stake in Sapphire – perhaps in the long term
I am making a wild guess here, if HKICIM and Sapphire/Ranken can work well together with significant synergies, HKICIM could further up its stake in future – as the current interest of about 28% under the deal is very close to trigger the 30% threshold for a general takeover offer.
 
If I were to play devil’s advocate…
With (almost) all announcements pertaining to such nature, we can view it positively or negatively. Some readers may have the following questions which I have put in my personal views:
a) Are the substantial shareholders Ou Rui and Best Feast are cashing out of Sapphire?
In my opinion, after this transaction, Best Feast will still have 17.33% of Sapphire, thus it still has a significant stake in Sapphire.
Ou Rui which is 100% owned by Mr Li Xiaobo is a private and sophisticated investor, thus it is natural for him to exit if he deems fit. However, HKICIM will replace him as a substantial and, more importantly, a strategic shareholder.
Overall, I would think this is still a positive outcome on a net basis.
b) Controversy around HKICIM
Although there may be some controversial news surrounding HKICIM and its related companies, I am focusing more into the potential significant synergies which Sapphire/Ranken could gain given HKICIM’s profile and its networks.
 
Sapphire’s existing business remains very promising
Notwithstanding the above transaction, Sapphire’s existing business looks very promising. Last Thurs, it announced it clinched RMB856m contracts and lifted its order book to a record RMB3.4b!
These RMB856m new railway contracts came from Dalian and Urumqi. In my opinion, there are 5 noteworthy points in this contract announcement namely,
a) Sapphire has clinched RMB1.132b of contracts from 12 Sep to 12 Oct 2017. To put this in perspective, Sapphire’s order book was RMB2.6b before this string of contract wins in the past one month;
b) 2017 year to date contract wins amount to RMB1.9b which already surpasses the RMB1.7b contracts won for the calendar year 2016;
c) Since the acquisition of Ranken, this is the first time that Sapphire’s order book has risen above RMB3.0b. This is indeed a significant milestone;
d) On 12 Sep 2017, Sapphire mentioned that its order book has increased to RMB2.8b. With the new contract RMB856m contracts announced on 12 Oct 2017, Sapphire’s order book has increased to RMB3.4b and not RMB3.6b. Based on my personal interpretation, this may mean that RMB200m has been “digested” in just one month. Although some of these RMB200m may not translate immediately to revenue (for example, it may be recorded first as “contracts work in progress”), it does show that things seem to be moving faster in 3Q and beyond vis-à-vis 1HFY17à based on my personal view;
e) Contract momentum remains very strong as there are various opportunities such as the Taiyuan City Metro Line which Sapphire highlighted in Section 10 of their 2QFY17 financial statements. Furthermore, according to the 12 Sep 2017 press release, Sapphire is evaluating a potential consultancy contract for a metro rail project in Bangladesh. Sapphire has been operating in Bangladesh for some time, thus I hope it can clinch this potential consultancy contract in time to come…
 
Chart analysis
Based on Chart 1 below, Sapphire has to first make a sustained close above $0.310 with volume to negate the bearish feel in the chart. For the chart to turn bullish, Sapphire has to make a sustained close above its downtrend line established since Nov 2014 (currently around $0.340) with volume. Meanwhile, there are some tentative positive signs such as
a) Sapphire has breached its 3.5-month trading range of $0.285 – 0.310 by making an upside breakout. However, it remains to be seen whether it can make a sustained close above $0.310;
b) 20D and 50D exponential moving average (“EMA”) have stopped declining and have turned higher. In fact, 20D is on the verge of doing a golden cross with 50D EMA;
c) Indicators such as RSI, MACD, OBV are strengthening. For example, OBV is near a 10 year high.
Near term supports: $0.310 / 0.300 / 0.285
Near term resistances: $0.340 / 0.350 / 0.365
Chart 1: Possibility of golden cross formation; $0.340 still a key resistance 

Source: Chartnexus 19 Oct 17
 
Conclusion
In a nutshell, with the emergence of HKICIM as a potential substantial shareholder, coupled with record order book and strong order momentum for the Sapphire Group, Sapphire seems to have completed its turnaround story from a loss-making firm to an up and coming infrastructure player of significant scale. Let’s stay tune to its upcoming 3QFY17F result, scheduled for release on or around mid Nov.
 
P.S: As with all investments (most investments carry at least some degree of risk), readers should carefully evaluate each investment decision with care.  Readers who wish to know more about Sapphire can refer to their informative website HERE.
 
Disclaimer
Please refer to the disclaimer here
[1]              Sapphire’s implied share swap price without any premium to HKICIM share price is around $0.39-0.40.

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16 likes 7 comments
OngEric

HNA shareholder behind HKICIM in the latest Sapphire announcement
http://infopub.sgx.com/Apps?A=COW_CorpAnno...

kyliu1

Sapphire Corp - Big Boy buying. Forestar Assets Ltd bought 91.19m shares of Sapphire Corp in off-market transaction ytd

kyliu1

Big Boy buying. Forestar Assets Ltd bought 91.19m shares in off-market transaction ytd

richardtengch

NAV for Sapphire by mid-2017 was $0.30 not accounting to the bookvalue contracts that it has secured. If we were to account to those I’ll say by end of 2018, Sapphire NAV should increase to at least $0.35?

economist_12b

possible for yesterday's episode to be an opportunistic pump-and-dump move by BBs?


Recommended & Related Posts

Sapphire – profit taking likely to taper off (17 Oct 2016)
- Original Post from ERNEST LIM'S INVESTING BLOG

$Sapphire(BRD) reached $0.365 on 10 Oct 2016, one bid below my measured eventual technical target of $0.370. Since then, it has fallen 14% to $0.315 on 17 Oct 2016. Will it continue to slide further?
 
Chart outlook
Sapphire has largely been trading within the range of $0.240 – $0.305 since 25 Jan 2016 before it broke out on 6 Oct 2016 above $0.305 on heavy volume. As previously mentioned on my 19 Sep 2016 Sapphire’s write-up (click HERE), the upside breakout above $0.305 points to an eventual measured technical target of $0.370. This was attained when Sapphire reached $0.365 on 10 Oct 2016 before profit taking sets in amid low volume.
Based on Chart 1 below, all the exponential moving averages (“EMAs”) are trending higher with multiple golden crosses formed. Amid positively placed direction indicators, ADX closed at 41 which is indicative of a trend. RSI has slid from 82 on 10 Oct 2016 to 53 on 17 Oct 2016, thus it is no longer overbought. Although OBV has come off from a multi-year high set on 10 Oct 2016, OBV is still at elevated level which bodes well for Sapphire.
Near term supports: $0.315 / 0.310 / 0.305
Near term resistances: $0.330 / 0.365 / 0.385
Chart 1: Profit taking likely to taper off

Source: Chartnexus chart as of 17 Oct 2016
 
Personal view / conclusion on the chart
Based on the above chart, my personal view is that Sapphire’s chart seems to be a classic, or “textbook” example. It illustrates the following:
a) How Sapphire’s price breaks out of $0.305 with volume expansion;
b) Attains the measured technical target price around $0.365-0.370;
c) Pulls back on low volume to resistance – turned support area around $0.305 – 0.315;
d) Before staging the next “higher high”.
 
 
Important caveat
Notwithstanding my personal view on the chart above, I wish to emphasise the following:
a) There is definitely a possibility that Sapphire may have some negative reasons (unknown to me, but known to the market) which cause the price decline. For now, my view is that this is a healthy consolidation phrase;
b) A sustained break below $0.300 with volume expansion is negative for the chart.
 
Readers who wish to know more about Sapphire can refer to their informative website HERE. You can also refer to my write-ups on Sapphire below
a) Sapphire’s substantial shareholders increase stake in Sapphire at $0.265 (19 Sep 2016) (click HERE);
b) Key takeaways from Sapphire’s 2QFY16 results briefing (12 Aug 16) (click HERE);
c) Sapphire’s order book hits a record high (15 Jul 2016) (click HERE);
d) Sapphire’s chart strengthens (5 May 2016) (click HERE);
e) Sapphire – proxy to infrastructure growth (5 Feb 2016) (click HERE).
 
Disclaimer
Please refer to the disclaimer HERE

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Sapphire – proxy to infrastructure growth (5 Feb 2016)
- Original Post from ERNEST LIM'S INVESTING BLOG

$Sapphire(BRD) Looking at Bloomberg’s classification, Sapphire is still classified in the “Metals & Mining” industry. However, Sapphire has completed its acquisition of China-based Engineering, Procurement and Construction (“EPC”) business, Ranken Infrastructure Limited (“Ranken”) on 1 Oct 2015. According to Sapphire’s press release, Ranken is China’s second largest privately-owned integrated rail transport infrastructure construction group and the only privately-owned operator in China which has obtained the prestigious full AAA-certification for design, construction and project consultation in the rail sector. Ranken’s clients are mostly state owned enterprises (“SOE”) and Fortune-500 companies in China. Going forward, Ranken will be Sapphire’s largest revenue contributor.
It seems to me that Sapphire, through Ranken, may be in a promising industry with bright prospects. I managed to contact Mr. Teh Wing Kwan, Group CEO and Managing Director of Sapphire and I was pleasantly surprised that he promptly agreed for an exclusive meeting (despite his busy schedule).
 
Here are the key takeaways
Ranken – Niche player in a promising industry
It is worth to reiterate that Ranken is China’s second largest privately-owned integrated rail transport infrastructure construction group and the only privately-owned operator in China which has obtained the prestigious full AAA-certification for design, construction and project consultation in the rail sector. In this industry, certification and track record for quality and timely project completion are key. The recent rapid pace of contracts announced amounting to RMB1.3b over the past two months underscores Ranken’s track record and capability.
According to Reuters dated 27 Nov 2015, it was reported that China intends to spend RMB2.8 trillion for railway development for 2016 – 2020. This was the same budget allocated for 2010-2015 but the actual spending was around RMB3.5 trillion during that period.
Thus, Ranken seems to be in the right industry with bright prospects.
Ranken – Sapphire’s key growth driver
According to company, Ranken’s order book was RMB2.1b as at 31 Dec 2014. Based on a 10 Dec 2015 Straits Times’ article, Sapphire mentioned that it is “in talks to bid for RMB2.5 – 3b worth of railway projects”. In addition, based on 3QFY15 results, company mentioned that it will start to recognise revenue from Ranken in 4QFY15F and Ranken is expected to be its largest revenue contributor by 4QFY15. Therefore, Ranken is likely to be Sapphire’s key growth driver in the years ahead.
Readers can refer to the circular here for more information on Ranken.
Ranken – Scalable business with limited capex
Ranken’s annual production capacity is around RMB1.0b worth of projects. However, according to company, Ranken can scale up its business with limited capex. The most important component of its production capacity increase stems from being able to recruit enough engineers. This is different from those manufacturing firms which needs to set up factories and install production lines, incurring fixed costs and longer turnaround time.
New substantial shareholder bought 100.8m Sapphire shares at $0.097 last month
According to company’s press release dated 22 Jan 2016, Ou Rui Group Limited, a company incorporated in Hong Kong and wholly owned by Mr Li Xiaobo, bought 100.8m Sapphire shares at $0.097 via an off market transaction. Mr Li is ranked among the Top 400 Forbes China Rich List in 2014 and he is a veteran investor in private equity investments, as well as, public listed companies. Investors can take some comfort with such a veteran investor vested in Sapphire.
 
Noteworthy points
Possible execution risks with Ranken
For Ranken, there may be possible execution risks, especially when Ranken has not made any actual contribution to Sapphire yet (at the time of doing this write-up). It will be reassuring if we can see the following in their upcoming results (i.e. 4QFY15F or FY16F):
1. Ranken’s meaningful contribution in 4QFY15 and its margins. It is noteworthy that company cited Ranken’s gross margins of 18 – 26% in the above 10 Dec 2015 Straits Times’ article;
2. Company to indicate its latest order book. They only released the order book figures of RMB2.1b as at 31 Dec 2014;
3. How Ranken can scale up to capitalise on the burgeoning growth in the infrastructure space.
No rated analyst coverage
According to Bloomberg, there is no rated analyst coverage on Sapphire. The drawback to this is that investors and fund managers are still not familiar with Sapphire’s business and prospects, thus it may take some time for Mr Market to get to know this company.
Illiquid and small market cap of S$98m
Sapphire is a small company with an approximate market capitalisation of S$98m. Average 30D and 100D volume amount to 1.0m shares and 1.3m shares respectively. This is not a liquid company where investors with meaningful positions can enter or exit quickly.
 
Chart analysis
Based on Chart 1 below, Sapphire’s chart seems to be turning a tad positive as 21D exponential moving average (“21D EMA”) has started to turn higher. 50D and 100D EMA have stopped sliding and converged. Indicators such as RSI and MACD are strengthening. Overall, the chart looks a tad positive to me with strong support established at $0.095 – 0.096. However, a clearer bullish sign will emerge if I can see
1. Whether the 50D and 100D EMA can rise and pull apart from each other;
2. Whether the 21D EMA can form golden crosses with the other EMAs;
3. ADX to strengthen above 20.
Last close (5 Feb 2016): $0.100
Near term supports: $0.096 / 0.095 / 0.091 – 0.093
Near term resistances: $0.103 / 0.110 – 0.111 / 0.120
A break below S$0.089 on a sustained basis with volume expansion negates the bullish tinge in the chart.
Chart 1: Sapphire’s key support at $0.095-0.096

Source: CIMB complimentary chart as of 5 Feb 16
 
Conclusion
The above write-up is merely a brief introduction on Sapphire. In short, Sapphire may be a proxy to infrastructure growth through its acquisition of Ranken whose maiden contribution would commence in 4QFY15F. However, there may be execution risks on Ranken, coupled with low liquidity and no rated analyst coverage. Readers who are keen to know more about Sapphire should refer to Sapphire’s company website http://www.sapphirecorp.com.sg/.
 
Disclaimer
Please refer to the disclaimer here

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