Advance SCT

Extending supply chain into China Expanding global footprint via JV in China. Advance SCT has entered into a joint venture with Shenyang Lian Li Non-Ferrous Metal Smelter (SYLL) to own and operate an existing copper smelter in Shenyang City, Liaoning Province. The copper smelter is currently in production and is capable of producing 50,000MT of copper anode per annum. Copper anodes produced by the JV will be further processed into Shanghai Futures Exchange (SHFE) grade copper cathodes by outsourcing to a SHFE accredited refinery. A special purpose vehicle SCT (China) Pte Ltd will be incorporated as a holding company for the JV. Advance SCT will contribute US$4m in cash for a 80% stake in SCT (China) Pte Ltd. SYLL will contribute its existing copper smelter comprising plant, buildings, mechanical equipment as well as operating approvals and industrial property rights for the remaining 20% stake. The JV plant is located near Shenyang, a major gateway city to the industrial and resource rich areas in north eastern China. This is a good deal. Advance SCT has extended its supply chain for recycling of copper to China. It will also sell at least 30,000MT of recycled scrap copper each year to the JV as part of the agreement. The JV plant is Advance SCT’s second operational copper smelting plant. It is currently under-utilised. Advance SCT will invest US$1-2m to upgrade the smelter to increase production output of copper anode to a minimum of 30,000 MT by end of 2008. Advance SCT previously acquired an 80% stake in TTM Industries (TTMI) for S$15.5m. TTMI owns a copper smelter with production capacity of 60,000MT/year in Port Klang, Malaysia. This works out to US$218/MT for cost of investment for smelting capacity. Comparatively, the cost of investment in China is only US$100/MT, which is less than half compared to the acquisition of TTMI in Malaysia. Reiterate BUY with target price at S$1.50 based on FY08 PE of 12.5x (Norddeutsche Affinerie 12.8x, Cumerio 14.9x). China accounts for 29% of sales in 1H07. Sales in China come from distribution activities, mainly for copper anode balls, and recycled scrap copper. The JV in China will further increase revenue contribution from China to above 50%. We will revise our earnings forecast after we get more financial details concerning the JV.