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Yongn(SGX – MAS R 10 May 2005 Yongnam is athree core bengineering, afocusing on construction. Steel constructireinforced concstrength to voluthat steel conshigher steel pricin recent constr The constructioprojects are pogovernment enplayer in the downturn, comprices that they Yongnam also power, long probidding war. company’s finanegative in thestraight years pbuy Yongnam’sthe company.

focusing on public works and commercial projects that require steel construction. With steel fabrication capacity of 45,000 tonnes per year, the group has three main business activities: structural steelwork, specialist civil engineering, and mechanical

in M S$

RevenuesGross ProOperatingNet Incom

Diluted E

Diluted Sh

Source: C

PHILLIP SECURITIESRESEARCH Equities

Initiating Coverage Singapore

am Holdings Limited esearch Incentive Scheme)

multi-disciplinary engineering and construction group with usiness activities: structural steelwork, specialist civil nd mechanical engineering. The group is a subcontractor

public projects and commercial projects that require steel It has steel fabrication capacity of 45,000 tonnes per year.

on offers numerous benefits over conventional construction such as rete. These benefits include faster construction, superior material me ratio, flexibility in design, and aesthetics. The disadvantage is truction is more expensive than conventional construction. With e recently, the cost of steel construction has become a bigger issue uction projects.

n industry is highly cyclical. During economic downturn, new stponed or disappear entirely. Even public projects sponsored by tities failed to alleviate the cyclicality of the industry. As a niche industry, Yongnam cannot escape this fate. During economic petition becomes so fierce that companies would bid at such low lose money on the project.

faces numerous challenges including credit risk, weak bargaining ject life cycle which brings uncertainties, and poor pricing due to All these negative business fundamentals are reflected in the ncial results. Debt has been sky high, cash flow has been mostly past several years, and the company had lost money for four rior to FY2004. At this point, we are recommending investors not to shares until management shows more success in turning around

2005F 2004 2003 2002

75.000 64.265 65.341 61.660 fit 18.750 16.182 4.021 (3.490) Income 3.750 11.265 (9.181) (22.205)

Chan Wai Chee

65-6531-1232 FAX 65-6536 4435

[email protected] Recommendation:

HOLD Previous call: Nil

Price Previous close S$0.03 Target NA

Share Statistics Shares 558m Market Cap. S$16.75m P/Sales 0.30x Trailing PER 2.1x Forward PER NM 52-week Price Range

S$0.045 – S$0.015

P/BV NM Listing Bourse Singapore

Major Shareholders

1. Yongnam Private Ltd 2. United Engineers (Singapore) 3. Tan Tin Nam 4. Citibank Nominees Singapore 5. Seow Soon Hee

Source: Bloomberg; Phillip Securities Research

Price Chart

Company Profile Yongnam is a steel subcontractor

e 0.750 7.826 (15.546) (29.885)

PS (cents) 0.134 1.402 (7.104) (17.498)

ares 558.121 558.121 218.843 170.791

ompany, Phillip Securities Research

Yongnam Holdings 10 May 2005

Phillip Securities Research 2

Brief history prior to public listing 3 Core Business Activities Revenue Breakdown by Segment

Company Background Yongnam was founded in 1971 as a Mechanical Engineering Services company. Over the years, the company acquired steel fabrication facilities in Singapore and Malaysia, and evolved into a muti-disciplinary engineering and construction group that focuses on projects that involve steel. Yongnam consolidated its business operation at Tuas South Street 5 in 1998, and it went public on 11 October 1999.

Year Milestones 1971 Yongnam was founded as a mechanical engineering services company 1994 Incorporated as Yong Nam Holdings (Pte) Ltd 1995 Changed its name to Yongnam Holdings (Pte) Ltd 1996 Acquired Polifond to expand fabrication facility in Malaysia 1998 Consolidated business operation at Tuas South Street 5 1999 Listed on the mainboard of the Singapore Exchange Securities Trading

Ltd on 11 October, 1999 Source: Company Business Activities Yongnam has three core business activities: 1. Structural Steel 2. Specialist Civil Engineering 3. Mechanical Engineering From revenue contribution standpoint, the Structural Steel division is the primary revenue driver for the group. In FY2004, however, revenues from the division declined substantially compared to other segments because the exclusion of steel as raw material for a project lowered contract values for the division. In the construction of National Library Board Building, Yongnam’s client decided to obtain steel from other sources and asked Yongnam to install them. The contract value for the project, therefore, was much smaller than normal.

Revenue Breakdown by Segment

Mechanical Engineering

5%

Civil Engineering42%

Steel Structure53%

Source: Company



Structural Steel division has 45,000 tonnes of steel capacity Strutting Steel Specialist Civil Engineering division is an expert in cofferdam construction

Hence, FY2003 revenue breakdown by segment is more representative of the normal business operation going forward for Yongnam. Steel Structures contributes over half of the group’s revenues, Civil Engineering contributes over 40%, while Mechanical Engineering contributes the remainder. Structural Steel Yongnam Structural Steel division designs, fabricates, and builds steel structures in the construction of building or project frames. The division owns several fabrication facilities in Singapore and Malaysia with a total combined capacity of 45,000 tonnes of steel annually. Recently, the factory is running on 8 hour - 10 hour shift out of total maximum 24 hour shift. The division also supplies steel to Yongnam’s other division namely Mechanical Engineering. The real gem of the division is the inventory of 30,000 tonnes strutting steel that is re-usable from project to project. As the re-usable steel has a life span of about 20 years, the company does not have to fabricate a new set of strutting steel for each project. Therefore, revenues generated from using this strutting steel is almost entirely translated to profit. With the recent steep increase of steel price, Yongnam is able to generate ample profit margin on the use of its strutting steel. In the past, the structural steel division has participated in projects including: − Suntec City / Singapore Int’l Convention & Exhibition Centre (1991-1996) − Pontiac Marina Development (1993-1996) − Brunei Hangar II (1995-1996) − Bank of China Building (1995-1997) − Kuala Lumpur International Airport (1995-1997) − Brunei Conference Centre (1996-1997) − Singapore Post Centre (1996-1998) − Cuppage Centre (1997-1998) − Kranji Racecourse (1996-1998) − Springleaf Tower (1996-1999) − Capital Tower (1997-1999) − Terminal 1, Changi Airport extension & refurbishment (1997-1999) − Polyethylene Plant at Jurong Island (1999-2000) − Expo MRT Station roof − Changi MRT Station Mezzanine Bridge − Atrium Structures − Woodlands Wafer Fab − Parkview Office Building − Manjung Power Station in Malaysia − Shipyard Complex at Benoi Road − Paragon Shopping Complex − Prai Power Plant in Malaysia − Putrajaya Project in Malaysia − Second Bangkok International Airport (Suvarnabhumi Airport) − National Library Board Building − One Raffles Quay Specialist Civil Engineering The division is a niche player in the civil engineering services industry. It has expertise in the cofferdam construction – a technique that excludes soil or water from a working area below ground level to ensure safe working environment. With the collapse of part of Nicoll highway in 2004, the division’s expertise has been



Mechanical Engineering division helps build various industrial and commercial projects

brought to the limelight. Soft soil condition such as marine clay is very common in Singapore, and after the Nicoll highway collapse, the use of a special bracing system in construction projects is more important than ever. The division’s projects include: − Choa Chu Kang Lot 1 Shopping Entertainment Centre (1995) − Pasir Ris White Sands Shopping & Entertainment Centre (1995) − Singapore Post Centre (1995-1996) − Orchard Entertainment Centre (1995-1996) − Nicoll Highway Extension (1997-1998) − Ministry of Education headquarter building (1997-1998) − Balestier Road Complex (1997-1998) − Haig Road Condominium (1997-1998) − Esplanade Theatre on the Bay (1997-1998) − 28 Scotts Road Condominium (1997-1998) − Crawford Street Underpass (1998-1999) − Orchard Cineplex Entertainment Centre − Tiong Bahru MRT − Central Expressway tunnels − OUB Centre − Various works for MRT stations along North-East MRT line − Various works for Mass Transit Railway and Guangzhou Railway Company in

Hong Kong − Various works for Kallang – Paya Lebar Expressway − Various works for MRTC Circle Line − Changi Airport Terminal 3 − Kaki Bukit Ave 2 – Bedok GDP Project Mechanical Engineering The mechanical engineering division is the oldest division in the group. It was the first core business activity when Yongnam was founded in 1971. Mechanical engineering division helps construct various industrial and commercial projects including power plants, refinery and petrochemical plants, shipyard facilities, and incineration plants. Notable projects accomplished by the division include: − Senoko Incineration Plant (1992-1997) − Paka / Pasir Gudang YTL Power Station (1994-1995) − Senoko EP (1994-1996) − Phu My Power Plant in Vietnam − Santa Rita Power Plant in Philippines − Wind Tunnel Project in Singapore − Teluk Gong Panglima Project in Malaysia − Perlis Power Plant Station in Malaysia − Steam Turbine at Pulau Seraya − Coal-Fired Power Plant at Tanjung Bin in Johor, Malaysia Industry The construction industry is highly competitive. It is highly cyclical and is influenced by the ups and downs of the economy. During the Asian financial crisis,



Deep Cyclical Industry Public projects do not reduce cylicality

More pronounced economic cyclicality

Small companies Bidding process Credit risk Niche player

for example, there was very little new project coming onto the market that can be bid upon. Private construction projects from non-governmental companies usually dry up during times of difficulties. Therefore, during this period construction companies such as Yongnam have to depend on earning a living from projects that are assigned before a crisis strikes. The fact that companies like Yongnam derives part of its revenues from public sector does not alleviate its cyclicality. Infrastructure development and other public projects can easily be cancelled or postponed during financial crisis. Again, a perfect example of this is during the Asian financial crisis whereby governments in South East Asia withdrew public works or postponed them. Unlike countries in the West whose governments usually increase public projects during recession or economic difficulties, the governments in South East Asian countries tend to do the opposite to preserve their own financial health. This is a risk that construction companies in the region have to face. In the West, governments are willing to go deeply into budget deficits to spark a new life into receding economy. Governments in the South East Asian regions historically show less willingness to run into budget deficits and act as a counter-force in a slowing or shrinking economy. Therefore, economic downturns in South East Asia tend to be more pronounced and take longer to turnaround. Most companies in the construction industry are relatively small, and they usually work on several projects simultaneously thereby spreading out their already thin resources. When a big project comes into the market, usually several companies form a consortium, or a general contractor would hire several subcontractors, in order to win the bid for the project. The bidding process itself carries several implications. First, the project usually goes to the lowest bidder. So the winning group usually has the thinnest margin compares to its competitors who submit higher bids. Pricing is highly unfavorable, and in the heat of war to win the project, construction companies may be too optimistic in its cost estimation. The winner, therefore, may win an unprofitable assignment. Yongnam is no exception in this matter. Many of the projects that the company won in 2001 and 2002 turned out to be unprofitable. Because of the multi-tier nature of the bidding group, the money has to be spread out among many companies. It is extremely common in the construction industry to default or renege on promises made if the financial situation turns sour. Lawsuits and legal wrangling typically ensue and these take away management’s time, energy and financial resources. An example of this is the Springleaf Tower saga that has plagued Yongnam for several years. The Springleaf Tower incident will be discussed in more detail below. Because the practice is so prevalent in the construction industry, the Singapore government passed the Building and Construction Industry Security Payment Act that is effective for all projects starting April 2005. The new law should reduce credit risk, and therefore, should be tremendously beneficial for subcontractors like Yongnam. Risks • Yongnam is a niche subcontractor whose lifelihood depends on work

assignment from main contractors. There are numerous companies - local, regional or international, who compete with Yongnam for steel construction projects. The company has to maintain its relationship with main contractors; or may risk losing businesses to its competitors.



Competitors Steel-project focus Long-cycle project Raw material price fluctuation Credit risk Poor industry fundamentals

• There are not many players in Yongnam’s niche that are publicly traded in

Singapore. However, the company faces competition from local private firms, as well as construction companies based regionally or even internationally.

• Yongnam is a niche subcontractor in a huge construction industry. Yongnam

only competes for those projects that require steel construction. There are a lot of projects that do not require steel; for example most residential buildings, some commercial buildings and even major portions of public projects. Yongnam does not compete in these projects, and therefore limits its revenue potential. Furthermore, as steel price shot up higher, there are less projects that require steel. Project sponsors usually try to contain costs by shifting steel construction to another type of construction like reinforced concrete.

• Projects are typically long-cycle. They take many months or even years to

complete; thus, tying up construction companies’ resources for a long period of time. The longer the projects, the more uncertainties they carry. Construction companies typically borrow from finance companies or banks to fund their working capital. The potential mismatch of duration between assets (work-in-progress) and liabilities (bank borrowing) poses significant risk for construction companies. In case of rising interest rates, the companies’ borrowing costs will be significantly higher. Their potential revenues, however, are tied up according to agreed-upon price when they submit their bids.

• Raw material prices tend to fluctuate more over longer period of time, and thus,

it is more difficult to estimate costs for longer cycle projects. In case of rising steel prices, Yongnam will not be able to pass along the price increases immediately because of the agreed-upon price. Only when they bid for new projects could they pass along the steel price increases and generate higher revenues. Therefore, there is a lag effect between rising raw material prices and higher revenues. If steel price declines, Yongnam’s future revenues will be impacted.

• Bad Debt and Uncollectible Receivables run very high in the construction

industry. It is common for players to refuse to make payments to subcontractors even if the work has already been completed. In the Springleaf Tower saga, Yongnam was refused payment for work already finished. In 1999, the company entered into an agreement to receive the 23rd floor of Springleaf Tower for construction work. The project was completed in 2001, and yet the company has not received the 23rd floor. Yongnam borrowed from a finance company to fund the construction work. Now Yongnam is involved in multiple legal disputes to prevent the property from being foreclosed. At the close of FY2004, there is no end in sight relating to the Springleaf Tower saga.

• The construction industry has many poor fundamentals including deep

cyclicality and poor pricing due to bidding process that favors the lowest bid. Industry characteristic is discussed in more details above.

Revenue Growth, Profit Margin and Expense Ratio The construction industry has been in the doldrums in the past several years. Revenues have been stagnant and even declining in some years. Many of the projects that the company won in the past several years turned out to be unprofitable. The company had focused on revenues at the expense of profits, and underestimated the cost of the projects. FY2001 and FY2002, a period when there



Stagnant industry Gross margin Operating and net margins

was barely any new project coming onto the market, was the worst period in recent memory for the construction industry. Companies were thirsty for new project assignment and lowered their bids, even to unprofitable levels, to win new projects. As a result, revenues from these projects failed to cover its costs, let alone the company’s general and administrative expenses. In FY2003 and FY2004, the situation improved, and construction companies were more discerning in submitting bids for new projects. Competition was not as intense as during the FY2001 and FY2002 period, and profitability outlook began to look brighter. Gross margin improved from negative in FY2002 to 6% in FY2003 and 25% in FY2004. In the past three years, general and administrative expense ratio actually hovered around 20%. Interest expense has improved over the years because of decreasing net debt balance. The company did not make any profit during FY2000 to FY2003, and only in FY2004 did the company turn a corner. Gains from Exceptional Items (debt forgiveness) and Other Operating Income (sales of assets, scrap materials, rental income) actually made up the majority of profit in FY2004. Without these gains, FY2004 would have shown only break-even. Diluted shares outstanding increased significantly in the past several years because the company actively issued new shares in exchange for debt to reduce its debt level.

in M S$ 2004 2003 2002 2001

Revenues 64.265 65.341 61.660 67.827 Direct Cost (47.172) (59.354) (62.888) (73.015) Prod'n Overhead (0.911) (1.966) (2.262) (2.777) Gross Profit 16.182 4.021 (3.490) (7.964) Other Operating Inc 1.124 2.455 0.654 1.264 G&A Expenses (12.746) (14.204) (13.827) (20.967) Exceptional Items 6.705 (1.453) (5.542) - Operating Income 11.265 (9.181) (22.205) (27.667) Interest Income 0.052 0.012 - 1.516 Interest Expense (3.289) (4.740) (7.624) (5.406) Pre-Tax Income 8.028 (13.909) (29.829) (31.557) Tax (0.202) (1.638) (0.056) 1.143 Net Income 7.826 (15.546) (29.885) (30.415)

Diluted EPS 0.0140 (0.0710) (0.1750) (0.1781) Diluted Shares 558.121 218.843 170.791 170.791

Revenue Growth -1.65% 5.97% -9.09% -33.19%Gross Margin 25.18% 6.15% -5.66% -11.74%G&A Expense Ratio -19.83% -21.74% -22.42% -30.91%Operating Margin 17.53% -14.05% -36.01% -40.79%Net Margin 12.18% -23.79% -48.47% -44.84%

Source: Company Net Cash (Debt) and Current Ratio Yongnam has been reducing its net debt level since it peaked in FY2001. The reduction in debt, however, was more attributable to asset sales than to cash flow


from operations. As discussed below under “Cash Flow” heading, cash flow from operation was volatile at best; whereas asset sales were very constant in the past several years. In addition, the company has been converting some of its debt into equity recently. While this may make the balance sheet look stronger, the dilution effect to its shareholders could be disastrous. On its FY2004 annual report (and also FY2003, FY2002, and FY2001), the company’s auditor has brought up the issue of the company’s ability to continue as an ongoing concern. If the company is unable to continue as an ongoing concern, the shares could be deemed worthless. Those creditors who agreed to exchange Yongnam’s debt for shares would eventually realize they would never get their money back. In some cases, the creditors may not have any choice. In other words, Yongnam probably did not have any cash to make payments anyway, and the creditors had the unpleasant choice of receiving nothing or receiving Yongnam’s shares. Another reason why debt level has improved in FY2004 was because the company’s main banker forgave several millions of Yongnam’s debt. The banker will not be as generous as forgiving loans every year or forgiving the entire loan. Therefore, the company has to find other ways to reduce debt level in FY2005 and beyond – preferrably from cash generated from operation. Current ratio shows that Yongnam may run into liquidity crisis. In the past four years, current ratio has been less than 0.5x, which means that there is only 50 cents of current assets for every $1 of current liabilities. The situation is even more precarious if we take into account that the majority of its current assets is in the form of work-in-progress while the majority of its current liabilities is short-term bank borrowing. For example, at the end of FY2004, $31m out of $42m current assets, or 73%, is work in progress; while $63m out of $92m current liabilities, or 69%, is bank borrowing. The duration of work-in-progress may not match the duration of bank borrowing. After the debt restructuring in FY04, the company is required to pay $300,000 every month to the bank, while cash inflow from work-in-progress is not as predictable.

in M S$ 2004 2003 2002 2001

Cash 0.875 4.545 0.643 0.705 Liquid Investment 1.003 0.132 0.037 0.039 ST Debt (63.847) (77.997) (80.022) (61.167) LT Debt (6.158) (1.449) (1.695) (25.288) Net Cash (Debt) (68.127) (74.769) (81.037) (85.711)

Sale of PPE 3.964 2.435 5.131 2.274

Current Assets 43.202 38.884 37.267 53.354 Current Liabilities 92.277 116.756 131.484 107.003 CA : CL Ratio 0.468 0.333 0.283 0.499

Source: Company Cash Flow Despite achiving profitability in FY2004, the company’s cash flow actually did not improve. In fact, it ran a negative cash flow from operation in the year. If capital expenditure is deducted from cash flow from operation, the picture looked even worse. In the past seven years (FY1998 – FY2004), the company achieved

Debt reduction does not come from internally generated cash flow Debt forgiveness Current ratio is less than 0.5x Negative free cash flow on most years




Free Cash Flow Revenue growth in FY2005 Rising steel price helps revenues and gross margin

positive free cash flow (cash flow from operations less capital expenditures) only twice - in FY2001 and FY2003.

in M S$ 2004 2003 2002 2001 2000 1999 1998

CFO (4.675) 6.131 1.700 7.692 2.014 (0.752) 20.762 Capex (1.236) (2.448) (1.744) (5.230) (25.183) (30.825) (34.685) FCF (5.911) 3.683 (0.044) 2.463 (23.170) (31.577) (13.923)

Source: Company Attaining earnings profitability is an important milestone; but without positive cash flow from operation, the company will never improve its financial position and will continue to be plagued by high debt level. There are only so many assets in the balance sheet that the company can sell off to raise cash; and there is a limit to how many shares the company can issue in exchange for debt. Eventually, the company will have to generate positive free cash flow in order to sustain itself. Forecast At the end of FY2004, the company’s order book was over $80m. This provides a good cushion for revenue outlook in FY2005. We think the company could realize revenues as much as $80m in FY2005, or about 25% growth from FY2004 level. This is entirely possible given the company’s order book balance at the end of FY2004, and several projects that are coming into the market including those associated with several MRT projects, airport projects in Dubai and in other cities, Harbourfront project, and Fusionpolis project. Projects like the opening up of casinos in Singapore provides potential revenue growth beyond FY2005.

in M S$ 2005F 2004 2003

Revenues 80.000 64.265 65.341 Gross Profit 26.000 16.182 4.021 Operating Income 10.000 11.265 (9.181) Net Income 6.800 7.826 (15.546)

Diluted EPS (cents) 1.218 1.402 (7.104)

Diluted Shares 558.121 558.121 218.843

Revenue Growth 24.49% -1.65% 5.97%Gross Margin 32.50% 25.18% 6.15%G&A Expense Ratio -20.00% -19.83% -21.74%Operating Margin 12.50% 17.53% -14.05%Net Margin 8.50% 12.18% -23.79%EPS Growth -13.11% NA NA

Source: Company, Phillip Securities Research In addition, steel price has gone up tremendously. Unfabricated steel price has risen from US$400/ton to about US$1000/ton in the past 12 months. Because the company owns about 30,000 tonnes of re-usable strutting (fabricated) steel, the price increase has been a big bonanza on the revenue line as well as on the gross profit line. The company can re-use its strutting steel from one project to the next without incurring significant cost of goods sold.


We think Yongnam is now more disciplined in submitting bids, and the industry is not as desperate as they were in FY2001 and FY2002 to win bids for new projects. In other words, the competition among construction companies in FY2005 should not be too intense as to eliminate profit potentials. This, combined with higher steel price, should produce gross margin of 35% or more. General and administrative expenses ratio should remain constant around 20% of revenues. We ignore potential gain from Other Operating Income and Exceptional Items in FY2005 because after the debt restructuring in FY04, we do not think the banks will forgive more significant portion of the company’s debt, and also because the company has less capability to convert its debt into shares now that the share price is selling at such depressed level. Without Exceptional Gains and Other Income, operating margin should approximte 12.5%. Interest expense and taxes should approximate last year’s level, which brings net margin to about 8.5%. There are still some risks that management will convert more debt into shares. However, because the stock price is trading around 3 pennies, the company has less capability to do so. We think diluted shares outstanding should not expand much more from current level. We estimate Yongnam should earn approximately 1.218 cents in FY2005 vs. 1.402 cents in FY2004. FY2005 EPS estimate excludes Other Operating Income and Exceptional Items. The upside to our estimate is if the bank decides to forgive more of Yongnam’s debt, and the company books Other Operating Income for the amount of debt forgiven. If the company decides to sell part of its assets to raise cash and bring down debt, the company may book exceptional gain that will further boost earnings. Of course, if steel price rise even higher, the company’s revenues and margins will benefit tremendously. Finally, if the company is able to win more profitable projects, revenues and profits will also turn out to be better than we currently expect. The downside to our earnings estimate is if management decides to issue more shares or exchange debt for shares, earnings will be diluted. A downturn in economy which reduces new projects or a slide in steel price will negatively affect revenues and earnings. Finally, if the company is unable to collect enough cash payments from customers and has to borrow more money to finance working capital, profits will suffer. Valuation We are unable to arrive at fair valuation for Yongnam because of the following uncertainties: − The auditor has brought up the issue of Yongnam’s ability to continue as an

ongoing concern. − Assuming the company is able to achieve or exceed our EPS estimate for

FY05, it means the P/E multiple is very low. However, we caution investors that the multiple is low for a good reason. The net debt level is so high that a small profit may be meaningless if the company is unable to bring down debt to a more comfortable level.

− Book value figure may be distorted given the fact that the company has $32m

Improving margins Exclude Exceptional Gains and Other Operating Income in Forecast Yongnam should earn 1.218 cents in FY2005 Earnings upside scenarios Earnings downside scenarios Unable to arrive at a fair valuation


of accumulated losses at the end of FY2004, and that as early as the end of


FY2003, the company actually has negative equity. The reason that shareholders’ equity swung to positive at the end of FY2004 was because the company issued new shares and exchanged debt for shares; thereby boosting its share capital and share premium balances.

− The company’s credit facility with its bank has reached maximum level. Thus,

there maybe a risk that its customers may decide not to hire Yongnam because the company does not have access to finance the working capital needed for new projects. If this occurs, the company’s ability to generate revenues and profits maybe severely damaged. Yongnam is a long-time player in the steel construction industry, and has earned a strong reputation. Nevertheless, we have to be aware of the fact that there is a risk the company may not be able to achieve our target revenues and earnings in FY05 because it has no or little access to finance working capital required to bid on big projects.

Given the above reasons, we are unable to reach a price target for Yongnam. Recommendation Given the company’s fundamentals, we do not recommend investors to purchase Yongnam’s shares. The risk of dilution is still significant if the management continues to issue new shares and/or convert debt into shares. The company, however, appears to be turning around its situation, albeit very slowly. Revenues are expected to grow in FY2005, and the company started to achieve profitability in FY2004 albeit aided significantly by Other Operating Income and Exceptional Gains. Competition in the industry is much less severe compared to FY2001-02 that players in the industry are now able to achieve normal profits. Steel price increase has given the company a boost in financial result, and we estimate the company may achieve profitability again in FY05. This is a turn-around situation and the company is in the midst of an inflexion point. Until we see that the company is successful in turning around its precarious situation, we rate the company a HOLD.

Signed

Recommendation: HOLD




Phillip Research Stock Selection Systems

BUY >15% upside from the current price HOLD Trade within ± 15% from the current price SELL >15% downside from the current price

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HONG KONG Phillip Securities (HK) Ltd 11-12/F United Centre 95 Queensway, Hong Kong Tel : (852) 2277 6600 Fax : (852) 2868 5307 Website : www.poems.com.hk

THAILAND Phillip Securities (Thailand) Public Co Ltd 15/F, Vorawat Building 849 Silom Road Bangkok Thailand 10500 Tel : (622) 635 7100 Fax : (622) 635 1616 Website : www.poems.in.th

JAPAN The Naruse Securities Co Ltd 4-2, Nihonbashi Kabutocho Chuo Ku, Tokyo Japan 103-0026 Tel : (81) 03-3666-2101 Fax : (81) 03-3664-0141 Website : www.naruse-sec.co.jp

UNITED KINGDOM Phillip Securities (UK) Ltd 3rd Floor Mansell Street London E1 8AN Tel : (44) 207 553 8280 Fax : (44) 207 954 9910 Website : www.phillip-uk.com

http://www.poems.com.sg/

http://www.poems.com.my/

http://www.poems.com.hk/

http://www.poems.in.th/

http://www.naruse-sec.co.jp/

http://www.phillip-uk.com/

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