Regional Member Companies Phillip Securities Research

MICA (P) 146/01/2009

Sinotel Technologies Limited

ADR gains momentum

10 September 2009

Since our previous report in August, a couple of developments have taken place.

First and foremost there was a new contract win worth RMB15.3 million to provide 3G

Distribution & Management System to China Unicom. At first glance, the figure

seems small relative to its order book but it serves as a significant milestone in our

opinion. The 3G Distribution & Management System basically keeps track and assist

in managing China Unicom’s 3G sales and distribution channels between them, the

distributors and exclusive third-party vendors across 31 provinces. This opens doors

for Sinotel in terms of the opportunity to work with China Unicom’s 31 branches

nationwide when deploying the system.

A second significant news update is the submission of American Depository Receipt

(“ADR”) application to the US Securities Exchange Commission. ADRs represent

ownership in the shares of a non-US company and trades in the US financial markets.

It enables US investors to buy shares in foreign companies without undertaking

cross-border transactions as ADRs carry prices in US dollars, pay dividends in US

dollars and can be traded like the shares of US-based companies. Each ADR issued

by the depository bank (The Bank of New York Mellon in this case) represents a

fraction of a share, a single share or multiple shares of a foreign stock. For example,

if the ratio is 1 ADR to 10 Sinotel shares in SGX, for each ADR a US investor

purchases, 10 Sinotel shares will be delivered to the investor by buying from the

open market of the Singapore Stock Exchange without a need to issue new shares.

We are very bullish on this event as ADRs provide increased liquidity to its shares,

attract foreign investors and allow the company to carry out future fund raising

activities when required. This greatly complements the Group’s participation in the

prestigious Rodman & Renshaw Annual Global Investment Conference on 11

September 2009. This conference is expected to draw more than 2,500 investment

professionals from around the world and Sinotel will have the opportunity to

participate in the corporate presentation and daily networking sessions. We do not

see any difficulty in the application of ADR to US SEC as, at this level, it is relatively

straightforward and mainly requires that the company be listed in one or more stock

exchanges in a foreign jurisdiction. We believe that with the approval of the ADR and

the increased awareness derived from its roadshow in the US would give significant

upside to Sinotel’s current share price.

Lastly, the Company has recently (4 September 2009) announced a placement of up

to 28m new ordinary shares at a placement price of S$0.5052 per share. The

placement will be placed to interested investors of which Providence SOGF Limited is

one. The placement shares at full subscription represent 10% of Sinotel’s existing

issued and paid up share capital of 280m ordinary shares. When completed, the

placement will increase the issued and paid up capital to 308m. This has reduced our

EPS forecast for FY09 from 10.72 SG cents to 9.27 SG cents.

Maintain BUY call at fair value estimate of S$0.93.

issued our report in August was only S$0.275, it has run up to S$0.585 since and we

attribute the main reason to the announcement of the ADR. WithSinotel’s share price when we

Singapore • Technology Sector • Update

Recommendation:

BUY

Previous call: S$0.33

Price

Previous close S$0.585

Fair value S$0.93

Share price return 59%

Share Statistics

Shares 280.00 mil

Market Cap. S$163.8 mil

Trailing PER 7.31x

Forward PER 6.31x

P/BV 2.08x

52-week Price Range S$0.065 -

S$0.655

52-week PER Range 0.76x – 6.8x

Listing Bourse SGXMainboard

Major Shareholder

Jia Yue Ting

(32.17%),

Worden

Andrew

Barron

(4.33%)

Price Chart

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0.75

0.9

8/11/08

9/11/08

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1/11/09

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8/11/09

Company Profile

The Group is a wireless connectivity

innovator that provides a wide range of

customised wireless telecommunication

applications and solutions to participants

across the telecommunication value

chain in China.

Analyst

Mark Chow

�� +65-6531 1229

�� markchowck@phillip.com.sg

FAX +65-6536 4435

WEB www.phillipresearch.com

Sinotel Technologies Limited 10 September 2009

2

the ADR just round the corner, we are pricing Sinotel closer to its US listed peers

such as China Grentech Corp Limited and Telestone Technologies Corporation (Fig

2), which are currently trading at a PE of 13.53x and 6.66x respectively. With US

investors likely to come in, the view that Sinotel is priced at a discount versus its

peers is not unlikely. We thus move our PE to 10x FY09 forecasted earnings. This

gives us a fair value of S$0.93, maintaining our BUY call. From the last traded price

of $0.585, this represents an upside potential of 59%. As mentioned earlier, we view

the ADR as a significant catalyst to the recent run up in share price, approval of

which provides US investors a channel to purchase Sinotel shares that is still trading

at a significant discount versus its peers.

Exhibit 1: Key Financial Data

Key Financial Data

(Financial Year Ended 31 December)

1H08 1H09 % chg 2009E 2010E

Turnover (RMB mil) 182.27 238.67 30.9 470.71 541.31

Gross profit (RMB mil) 79.79 96.41 20.8 188.28 211.11

Gross profit margin (%) 43.77 40.39 -3.38ppts 40.00 39.00

Net profit (RMB mil) 60.64 70.39 16.1 136.75 141.71

Net profit margin (%) 33.27 29.49 -2.39ppts 29.05 26.18

EPS (SG cents) 4.52 5.25 16.1 9.27 9.61

Book value per share (SG cents) 25.54 30.30 18.7 35.77 45.38

P/E (x) 12.93 11.14 N.M. 6.31 6.09

P/Book 2.29 1.93 N.M. 1.64 1.29

Source: Company, Phillip Securities Research N.M. = Not Meaningful

(1 SGD = 4.78849 RMB)

Exhibit 2: Peer Comparison

Company Ticker Curr Market

Cap ('mil)

Last

price

Current

P/E

Forward

P/E P/B ROE ROC

Comba Telecom Systems

Limited 2342 HK HKD 6674.94 6.98 16.86 16.98 - 12.389 12.753

Centron Telecom International

Holdings Limited 1155 HK HKD 1983.39 2.84 14.81 10.42 1.70 11.7881 11.788

China Grentech Corp Limited GRRF US USD 110.76 4.60 13.53 115.00 0.52 -2.7437 -

Telestone Technologies

Corporation TSTC US USD 50.57 4.86 6.66 - 0.91 14.7173 14.242

Average 12.96 35.60 0.78

Average - US 10.09 - 0.71

Sinotel STEL SP SGD 163.8 0.585 7.31 6.31 2.08 32.98 28.02

Source: Bloomberg, Phillip Securities Estimate

Sinotel Technologies Limited 10 September 2009

3

Financials

Income Statement (RMB m) 2007 2008 2009E 2010E Balance Sheet (RMB m) 2007 2008 2009E 2010E

Revenue 266.48 362.08 470.71 541.31 Non-current assets:

Cost of sales (147.18) (215.58) (282.42) (330.20) Plant and equipment 8.32 88.23 109.98 132.54

Gross profit 119.30 146.50 188.28 211.11 Intangible assets 0.76 8.01 15.67 23.84

Other operating income 0.66 5.09 0.16 0.18

Distribution and selling expenses (9.43) (16.73) (15.44) (17.75) Current assets

General and administrative expenses (18.52) (25.43) (33.06) (38.01) Inventories 33.23 151.08 196.40 225.86

Finance costs (6.63) (1.50) (2.47) (2.47) Trade and bills receivables 187.02 181.76 235.35 270.66

Profit before income tax 85.38 107.93 137.47 153.05 Other receivables 12.51 5.68 7.38 8.49

Income tax 0.00 (0.57) (0.72) (11.34) Due from related parties (non-trade) 0.00 0.00 0.00 0.00

Profit after income tax 85.38 107.36 136.75 141.71 Cash and cash equivalents 144.60 36.83 86.57 137.41

EPS (basic, post-except) (RMB cents) 30.50 38.34 44.40 46.01 Current liabilities

EPS (basic, post-except) (SG cents) 6.37 8.01 9.27 9.61 Trade payables 26.40 14.49 14.25 15.63

Bills payables 0.00 0.00 0.00 0.00

Growth & margins (%) 2007 2008 2009E 2010E

Sales growth 21.46 35.88 30.00 15.00 Borrowing 53.44 33.70 65.00 65.00

EBITDA growth 46.08 24.03 24.82 11.19 Due to related parties (non-trade) 0.00 0.00 0.00 0.00

EBIT growth 44.43 18.93 27.88 11.13

Net income growth 52.22 25.74 27.37 3.63 Other payables and accruals 32.25 46.21 44.59 48.93Non Current Liabilities

EPS growth 14.19 25.72 15.79 3.63 Deferred tax liabilities 0.00 0.57 0.57 0.57

Gross margin 44.77 40.46 40.00 39.00

EBITDA margin 35.33 32.25 30.97 29.94 Shareholders' equity

EBIT margin 34.53 30.22 29.73 28.73 Share capital 190.85 190.85 204.43 204.43

Net margin 32.04 29.65 29.05 26.18 Translation reserves (1.89) (6.98) (6.98) (6.98)

Merger reserve 0.00 0.00 0.00 0.00

Cash flow statement (RMB m) 2007 2008 2009E 2010E

Net income pre-preferred dividends 85.38 107.93 137.47 153.05 Accumulated profits 85.38 192.74 329.49 471.20

D&A add-back 2.14 7.35 5.82 6.55

Net (inc)/dec working capital (43.02) (102.28) (102.48) (60.14) BVPS (SG cents) 20.46 28.13 35.77 45.38

Other operating cash flow 7.73 (1.72) 1.68 (8.94) NTAPS (SG cents) 20.41 27.53 34.70 43.76

Cash flow from operations 52.24 11.28 42.49 90.52Capital reserves 0.00 0.00 0.00 0.00

Key Ratios 2007 2008 2009E 2010E

Capital expenditures (4.02) (94.88) (35.23) (37.28) ROE (%) 37.83 32.98 30.27 23.71

Acquisitions 0.00 0.00 0.00 0.00 ROA (%) 21.53 25.02 24.36 19.54

Divestitures 0.00 0.00 0.00 0.00 Receivables days 182.91 185.88 161.72 170.60

Others 0.29 0.06 0.00 0.00 Payable days 45.68 22.38 16.00 15.16

Cash flow from investments (3.73) (94.83) (35.23) (37.28) Net debt(cash)/equity (%) (0.33) (0.01) (0.04) (0.11)

Dividends paid (common & pref) 0.00 0.00 0.00 0.00 Valuation 2007 2008 2009E 2010E

Inc/(dec) in debt (61.56) (19.74) 31.30 0.00 P/E basic (X) 9.18 7.31 6.31 6.09

Common stock issuance 190.85 0.00 13.58 0.00 P/B (X) 2.86 2.08 1.64 1.29

Other financing cash flows (39.32) (8.81) (2.40) (2.40)

Cash flow from financing 89.98 (28.55) 42.48 (2.40)

Net increase in cash & cash equivalents 138.49 (112.09) 49.74 50.84

Cash at beginning of year 1.68 137.37 22.14 71.88

Effects of currency translation (2.80) (3.13) 0.00 0.00

Cash and cash equivalents at end

Deposits pledged with Bank 7.23 14.688 14.688 14.688

Cash at Bank (In bal Sheet) 144.60 36.83 86.57 137.41137.37 22.14 71.88 122.72

Source: Company, Phillip Securities Research

Sinotel Technologies Limited 10 September 2009

4

Ratings History

Sinotel Technologies Limited

Legend Rating Date Closing

price (S$)

Fair

value (S$) Remarks

B BUY 10 September

2009

0.585 0.93 Update

B BUY 04 August

2009

0.275 0.33 Results Update

B BUY 07 July 2009 0.220 0.270 Plant Visit

B BUY 25 February

2009

0.125 0.23 Results Update

B BUY 22 August

2008

0.175 0.270 Initiating Coverage

BUY >15% upside from the current price

HOLD Trade within ± 15% from the current price

SELL >15% downside from the current price

Phillip Research

Stock Selection

Systems

We do not base our recommendations entirely on the above quantitative return

bands. We consider qualitative factors like (but not limited to) a stock's risk

reward profile, market sentiment, recent rate of share price appreciation,

presence or absence of stock price catalysts, and speculative undertones

surrounding the stock, before making our final recommendation

5

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