We recently hosted an NDR with CBIP in Tokyo. Most of the clients were receptive  to  CBIP’s  technological  advantage,  patented  processes  and orderbook  strength.  Key  questions  revolved  around  the  company’s likely  key competitors,  recognition of contract revenue,  and  main risks. We downgrade CBIP to  NEUTRAL  (from Buy), with  a  MYR5.00  FV,  due to limited upside following its  strong share price performance last year. upside is limited.

• Tokyo  NDR.  We  recently  hosted  a  non-deal roadshow (NDR)  with CB Industrial  Product  Holding  (CBIP)  in  Tokyo.  CBIP  was  represented  by managing director Mr Lim Chai Beng  and  head of investor relations Mr Lim Zee Yang. Most of the clients were receptive to CBIP’s technological advantage  over  its  competitors,  as  well  as  its  patented  processes  and orderbook  strength.  Clients’  key  questions  revolved  around  CBIP’s potential main competitors, the way it recognises its contract revenue, as well as its main risks.
• Who  are  CBIP’s  competitors?  Currently,  CBIP  does  not  have  any major  competitors.  Its  closest  competitor  is  a  small  Malaysian  unlisted company  called  EcoScience,  which  manufactures  conventional  CPO mills  for  two  main  customers  –  Cargill  and  Olam.  EcoScience  only manufactures 5-6 mills a year, generating about 25% of CBIP’s revenue.
• How  does  CBIP  recognise  its  revenue?  Upon  award  of  a  contract, CBIP receives 10% of the contract amount as downpayment. After the equipment  has  been  manufactured  (approximately  nine  months  lead time),  CBIP  delivers  the  machinery  and  receives  another  40%.  The remaining 50% is then recognised progressively, upon completion.
• What are CBIP’s main risks? This include: i)  the risk of non-renewal of its pioneer tax status which will expire at end-2015. Without a pioneer tax status, CBIP would have to pay about MYR20m in taxes,  which would reduce  net profit by 20%  This could be avoided if  CBIP gets  the  patent approval  for  its  zero-discharge  modipalm  mill  before  end-2015,  and  ii) the risk of newer and better technology being  introduced by competitors, although  a  long  gestation  period  would  be  required  for  any  new technology to be widely accepted by plantation players.    
• Downgrade  to  NEUTRAL.  We  maintain  our  SOP-based  FV  of MYR5.00,  based  on  a  9x  CY14F  P/E  for  CBIP’s  associate  plantation business and a 13x CY14F target P/E for its oil mill engineering division. However, given CBIP’s strong share price performance last year (+85%), we  believe  upside  is  relatively  limited  from  hereon,  prompting  us  to downgrade the stock to NEUTRAL (from Buy).

Financial Exhibits

SWOT Analysis

• CBIP  enjoys  pioneer  tax  status  for  its modipalm mill operations, which will expire in 2015. It is currently awaiting patent approval for  its  new  technology  –  zero-discharge modipalm  oil  mill  –  which,  if  obtained,  will result  in  a  new  pioneer  tax  status  being granted. This will extend its tax-free status for another 10 years past 2015

Company Profile
CB Industrial Product Holding (CBIP)  manufactures and markets its patented palm oil mills and related products. It is also involved in retrofitting special vehicles and cultivation of palm oil plantations.

Recommendation Chart

Source: RHB