Chip Eng Seng

[Sumeria]

Three areas of concerns:

1. The company redeemed two bonds earlier as there was a change of control in ownership. The two bonds carried a coupon rae of 4.75% and 4.9% respectively. Then, the company issued another bond to raise $100 m with a coupon rate of 6%. In other words, the borrowing cost is higher.

2. Diversifying into education sector may be a risk as it's a pretty crowded market. The chairman statement also alludes that further diversification into other sectors is on the cards.

3. The assumption of $2.2 k ASP for Kg Java project looks aggressive given the market today.

1. The higher interest rate was a surprise to me, but the impact is accounted for in my calculation. I think perhaps CES' venture into education as well as the new shareholders could have led to the higher rate for the bonds. The response to the bond issue, according to my banker, was supposedly rather enthusiastic, so the 6% rate that was finalized did take me by surprise.

2. I have a neutral view on CES' diversification into education, as data flow is still in its infancy stage. I would allocate a discount to CES' share price for this risk, at the moment.

3. The assumption of $2.2k ASP for Kg Java is in my view, conservative, noting that it is rather near to the Newton MRT and Orchard vicinity. If you look at recent launches around Meyer Road, you will notice that prices for freehold projects there have selling prices at about $2,500 psf. Elsewhere, 99 year projects even not near to town are being launched and sold at $1,700-1,900 psf (Park Colonial already fetches about $1,800 psf for a relatively outskirt location). Also, en bloc sites around Newton MRT are bought at prices that will see prices being launched at or above $2,500 psf. So $2,200 psf for the 99 year project is reasonable, especially if the units are of smaller sizes.