Research Note

26 October 2007
2007 VC Brokerage Ltd. Opinions, projections and other information contained in this report are based upon sources believed to be accurate,
but no responsibility is accepted for any loss occasioned by reliance placed upon the contents hereof.
Further information on the companies mentioned here available upon request.
VC Research 1

Tradelink (536.HK) BUY

Ben Leung (852) 2913 6329
benleung@vcgroup.com.hk


Price (24/10/2007)
(HK$) 1.14
12-month Target
(HK$) 1.65
Market Cap. (HK$
m) 887
52-week high 1.05
52-week low 1.65

Historical P/E (x) 10.65
Forward P/E (x) 16.5
Dividend Yield (%) 6.0
Source: VC
estimates, Bloomberg




Recommendation. We initiate coverage on Tradelink with a BUY
recommendation. TP is set at HK$1.65, representing a FY08 PE of 16.5x.

Solid core business. Government Electronic Trading Services (GETS) is
Tradelinks core business. The company enjoys a natural monopoly in this
business and has over 90% of market share.

High dividend yield. With zero gearing and a high level of net cash, Tradelink is
expected to be able to maintain dividend payout ratio at relatively high levels and
therefore support attractive yields.

DTTN: The Growth Driver. This operation was still in the red in 1H07. We
believe DTTN is of huge market potential and will become the growth driver for
Tradelink going forward.


Company Profile

Incorporated in 1988, Tradelink is the leading e-commerce services provider in HK. It
has become a publicly listed company since 28 October 2005. As of 30 J une 2007, the
HKSAR Government and HSBC the major shareholder of Tradelink with 12.30% stake
and 8.11% stake respectively.

GETS. Government Electronic Trading Services (GETS) is Tradelinks core business,
which includes a total of six specified Government-related trade transactions:




















Tradelink's core business - Government Electronic Trading Services (" GETS" )
Services Details Competition
Import or Export Declaration ("TDEC") e-lodgement of import or export declaration with Customs

Production Notification("PN")
e-lodgement of notification to the Trade & Industry Department
about cut-and -sewn garments manufactured in HK

Certification of Origin("CO")
e-application for CO to the Trade & Industry Department or
other government approved organizations

Dutiable Commodities Permit("DCP")

e-application for DCP to Customs for import, export,
manufacturing or storage of dutiable commodities

Electronic Cargo Manifest ("EMAN")
1) e-submission of manifests for air, rail, water cargo to the
Census Department and the Trade & Industry Department. 2)
E-receipt of notice / voucher from Customs and e-
communication with other government departments

Notifications under Textiles Trader Registration Scheme
("TTRS")
e-submission of notification to the Trade & Industry Department
for textile trading under TTRS

Source: Company
Traadelink (536 HK) 26 October 2007

2007 VC Brokerage Ltd. Opinions, projections and other information contained in this report are based upon sources believed to be accurate,
but no responsibility is accepted for any loss occasioned by reliance placed upon the contents hereof.
Further information on the companies mentioned here available upon request.
VC Research 2


Natural Monopoly. Tradelink has over 90% market share in the GETS market.
Although the GETS licence was due for renewal by the end of 2008, the HKSAR
government and Tradelink have recently entered into an agreement to extend the
current licence by one year to the end of 2009. According to the company, Tradelink
has started to discuss with the government about the renewal of the post 2009 GETS
licence. We think an agreement will soon be reached on license renewal ibecause:

Tradelink currently has over 90% market share in the GETS market.

The HKSAR Government is one of the major shareholders of Tradelink,
holding approximately 12.30% of the companys issued share capital.




Stable transactions volume and revenue. According to the company, the
transaction volume from GETS is over 9.5m in 1H07, compared with 19m in FY06,
which accounted for around 50% of FY06 total transaction volume. We expect
transaction volume of FY07 will be very close to FY06 level and transaction and
handling fees income in FY07 will edge down 0.12% yoy to around HK$225m. We
anticipate that transaction and handling fees income will grow at a faster pace at
2%yoy for FY08.

Small contribution from TTRS. The new fee structure for the Notification
under Textiles Traders Registration Scheme (TTRS), which provide financial
incentives for users to use Tradelinks electronic TTRS service due to a
saving of HK$3.80 for each elcetronical submission compared to using paper
submission. In 1H07, the usage of electronic TTRS service through Tradelink
increased by 27% yoy. However, since TTRS only account for a very small
portion of total transaction and handling fees, we expect the increase in usage
for electronic TTRS service will only translate into 1-2% increase in total
transaction income for Tradelink.






























Transaction and handling fees
Source: Company data, VC estimates
218,000
220,000
222,000
224,000
226,000
228,000
230,000
232,000
234,000
236,000
238,000
240,000
05 06 07E 08E 09E 10E 11E
H
K
$

'
0
0
0
Traadelink (536 HK) 26 October 2007

2007 VC Brokerage Ltd. Opinions, projections and other information contained in this report are based upon sources believed to be accurate,
but no responsibility is accepted for any loss occasioned by reliance placed upon the contents hereof.
Further information on the companies mentioned here available upon request.
VC Research 3



High dividend payout ratio and high yield. In 1H07, Tradelink declared an interim
dividend of HK$0.0361/share, representing a 83% dividend payout ratio. Although the
dividend payout ratio has dropped since 2005, we believe Tradelink can still maintain a
relatively high dividend payout ratio (management guideline: not less than 60%, our
estimation: 70%) mainly due to:


Strong cash position. As of 30 J un07, Tradelinks cash on hand stood at
HK$348.5m, equivalent to HK$0.445/share. The company has no outstanding
debt as at 30 J un07.


Strong operating cash flows. In FY06, the net cash flow from operating
activities amounted to approximately HK$110m. In 1H07, the net operating cash
flow is about HK$49.9m, representing 45.36% of the FY06 figure. We estimate
that the net operating cash flow in FY07 will be about HK$100m.

























On the back of strong cash position, stable earnings and a high dividend payout ratio,
We believe Tradelink can provide a very attractive yield at current stock price. We
expect Tradelink to declare a DPS of HK$0.07 and HK$0.08 for FY07 and FY08,
respectively, translating into a 6% and 7% dividend yield at current price of HK$1.14.
















Dividend payout ratio
Source: Company data
0
20
40
60
80
100
120
140
FY05 FY06 1H07
(
%
)
Traadelink (536 HK) 26 October 2007

2007 VC Brokerage Ltd. Opinions, projections and other information contained in this report are based upon sources believed to be accurate,
but no responsibility is accepted for any loss occasioned by reliance placed upon the contents hereof.
Further information on the companies mentioned here available upon request.
VC Research 4



DTTN becoming a growth driver. Trade and Transportation Network (DTTN) is a
neutral e-platform to facilitate the data sharing amongst the trade and logistics industry
stakeholders. It is operated by DTTNCo, a subsidiary of Tradelink with 51% stake and
21% stake in HKSAR Government, under a 15 years licence granted by the government
from 2005.

Currently, DTTN is still under initial investment stage and losing money. In 1H07,
Tradelink incurred a loss of HK$11.9m from DTTN. Although management declined to
give any guidelines as to when DTTN would turnaround, we expect it can be the growth
driver for Tradelink going forward because:

Increasing client base. In 1H07, DTTN had a customer base of around 1,000
companies, compared with over 500 by the end of FY06. We expect the number
of customer can reach over 3,000 by the end of FY07 and 5,000 by FY08.

Large market potential. According to a Consultation Report from the
government, the number of electronic documents exchanged in Hong Kong is
about 220m per year. Assuming a transaction fee of HK$2.5 per document
(which is the highest fee per transaction approved for DTTN by the government
under the current licence), total market size is about HK$550m.


Opportunities form overseas. According to the company, discussion of
interconnection between DTTN and other similar platforms from Asean
countries, France, Mexico and a number of logistics parks in China have been
started. Recently, a French delegation comprising the Minister of State for
Enterprise and Foreign Trade of France, his cabinet adviser for International
Affairs, Parliament members and representatives of the French business
community, visited DTTN. We believe DTTN will reach agreements with some of
these overseas platforms at a later stage.



Valuation

Basedon our DCF model with a discount rate of 11%, Beta 1.15, multi-stage growth with
a long-term growth rate of 2%, the fair value of the company is HK$1.65/share, or a
forward FY08 P/E of 16.5x. We have set our 12-month target price at HK$1.65/share/.
The target price provides a share upside of 44.7%, and together with a 6% dividend
yield, total return is near 50% in a 12-month investment horizon. BUY.






















Traadelink (536 HK) 26 October 2007

2007 VC Brokerage Ltd. Opinions, projections and other information contained in this report are based upon sources believed to be accurate,
but no responsibility is accepted for any loss occasioned by reliance placed upon the contents hereof.
Further information on the companies mentioned here available upon request.
VC Research 5

































































Income Statement
Y/E Dec (HK$ '000) 2005A 2006A 2007F 2008F 2009F
Transaction and handeling fees 225,724 225,944 225,673 230,186 232,488
Annual subscription and registration fees 19,120 18,216 17,429 16,732 16,397
Training income 170 139 271 271 325
Sales of software and related installation 42 84 92 92 92
Others 4,045 3,917 5,422 5,476 5,476
Total Turnover 249,101 248,300 248,887 252,758 254,779
interest income 8,064 7,600 9,500 9,500 9,500
Other income / (loss) (1,170) 0 0 0 0
Staff cost (80,084) (77,851) (80,000) (80,000) (85,000)
Depreciation (fixed asset) (15,559) (14,291) (11,999) (16,999) (18,945)
Depreciation (leasehold land) 0 0 (142) (142) (142)
Impairment of investment 0 0 0 0 0
Other operating expenses (50,059) (44,458) (47,289) (48,024) (48,408)
Profit from operations 110,293 119,300 118,958 117,093 111,784
Impairment loss on investment in unlisted equity
securities 0 (10,000) 0 0 0
Finance cost 0 0 0 0 0
Reversal of provision for termination cost and long
service payment 0 0 0 0 0
Loss on sale of assets and liabilities of a subsidiary 0 0 0 0 0
share of net loss of associates (787) (7,694) (20,000) (10,000) (5,000)
Gain on disposal of associate 0 622 0 0 0
Gain on disposal of subsidiary 347 0 0 0 0
Profit/(loss) before taxation 109,853 102,228 98,958 107,093 106,784
Taxation (18,456) (19,012) (17,318) (18,741) (18,687)
Profit/(loss) attributable to equity holders of the
company 91,397 83,216 81,640 88,352 88,097
Dividend paid 117,730 77,011 57,148 61,846 61,668
DPS (HK$) 0.16 0.10 0.07 0.08 0.08
Earnings per share (HK$)
Basic 0.13 0.11 0.10 0.11 0.11
Diluted 0.12 0.11 0.10 0.11 0.11
Source: Company data, VC estimates
Traadelink (536 HK) 26 October 2007

2007 VC Brokerage Ltd. Opinions, projections and other information contained in this report are based upon sources believed to be accurate,
but no responsibility is accepted for any loss occasioned by reliance placed upon the contents hereof.
Further information on the companies mentioned here available upon request.
VC Research 6






























































Balance Sheet
Y/E Dec (HK$ '000) 2005A 2006A 2007F 2008F 2009F
Non-current assets
Fixed Assets 63,751 50,568 48,569 51,570 52,625
Interest in leasehold land held for own use 5,911 5,769 5,627 5,485 5,343
Capitalised development costs 0 0 0 0 0
Interest in associates 74,858 67,116 47,116 37,116 32,116
Interest in securities 10,000 69,587 69,587 69,587 69,587
Total non-current assets 154,520 193,040 170,899 163,758 159,671
Current assets
Trade receivables 18,947 23,969 18,411 19,590 20,201
Other receivables and prepayments 43,614 8,494 17,591 18,285 20,136
Amount due from an associate 777 1,415 1,415 1,415 1,415
Deposit with banks 0 0 0 0 0
Cash and cash equivalent 317,177 335,586 378,049 413,869 466,074
Total current assets 380,515 369,464 415,465 453,159 507,826
Current liabilities
Trade creditors,accounts payable and other payable 223,489 222,141 221,510 210,095 218,829
Tax payable 1,388 7,544 7,544 18,741 18,687
Total current liabilities 224,877 229,685 229,054 228,836 237,516
Net current assets 155,638 139,779 186,412 224,322 270,309
Total assets less current liabilities 310,158 332,819 357,311 388,080 429,980
Non-current liabilities
Deferred taxation 3,236 1,596 1,596 1,596 1,596
Provision for long service payments 3,303 2,000 2,000 2,000 2,000
Total non-current liabilities 6,539 3,596 3,596 3,596 3,596
Net assets 303,619 329,223 353,715 384,484 426,384
Capital and reserves
Share capital 155,527 155,615 155,615 155,615 155,615
Reserves 148,092 173,608 198,100 228,869 270,769
Source: Company data, VC estimates
Cash Flow Statement
Y/E Dec (HK$ '000) 2005A 2006A 2007F 2008F 2009F
Profit before tax 109,853 102,228 98,958 107,093 106,784
Cash generated from operating activities 119,738 127,968 121,599 124,734 121,371
Net cash flow from operating activities 118,667 109,604 100,111 92,705 108,956
Net cash flow from investing activities (277,330) (92,261) (57,648) (56,885) (56,751)
Net cash flow from financing activities 58,368 1,066 0 0 0
Net change in cash and cash equivalents (100,295) 18,409 42,463 35,820 52,205
Cash and cash equivalents at beginning of year 417,472 317,177 335,586 378,049 413,869
Cash and cash equivalents at end of year 317,177 335,586 378,049 413,869 466,074
Source: Company data, VC estimates
Traadelink (536 HK) 26 October 2007

2007 VC Brokerage Ltd. Opinions, projections and other information contained in this report are based upon sources believed to be accurate,
but no responsibility is accepted for any loss occasioned by reliance placed upon the contents hereof.
Further information on the companies mentioned here available upon request.
VC Research 7








































Traadelink (536 HK) 26 October 2007

2007 VC Brokerage Ltd. Opinions, projections and other information contained in this report are based upon sources believed to be accurate,
but no responsibility is accepted for any loss occasioned by reliance placed upon the contents hereof.
Further information on the companies mentioned here available upon request.
VC Research 8

























Traadelink (536 HK) 26 October 2007

2007 VC Brokerage Ltd. Opinions, projections and other information contained in this report are based upon sources believed to be accurate,
but no responsibility is accepted for any loss occasioned by reliance placed upon the contents hereof.
Further information on the companies mentioned here available upon request.
VC Research 9
















Traadelink (536 HK) 26 October 2007

2007 VC Brokerage Ltd. Opinions, projections and other information contained in this report are based upon sources believed to be accurate,
but no responsibility is accepted for any loss occasioned by reliance placed upon the contents hereof.
Further information on the companies mentioned here available upon request.
VC Research 10


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Each research analyst primarily responsible for the content of this research report, in whole or in part, certifies that
with respect to each security or issuer that the analyst covered in this report: (1) all of the views expressed
accurately reflect his or her personal views about those securities or issuers; and (2) no part of his or her
compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed
by that research analyst in the research report.