thailand industry focus thailand construction...18.1 12.5 12.3 12.03 8.6 02468 101214161820...

ed-CK / sa- TP

Connecting ASEAN through the AMPC master plan

Huge investments needed to complete AMPC missing link in order to enhance country’s infrastructure competitiveness

The bidding of MRT orange, pink and yellow lines should bring back the investors’ confidence

Stock prices are driven by positive newsflows

Maintain OVERWEIGHT call; Top pick – CK with TP of Bt35

AMPC-driven transport spending. The ASEAN Master Plan for Connectivity (AMPC) is a core infrastructure project with an action plan to link Southeast Asian countries via a system of rails, roads and ports as well as a call for the upgrading of existing infrastructure. Thailand’s execution on AMPC has kicked off with the first railway connectivity plan, linking Thailand and Cambodia, which its construction has been completed recently. The railway network upgrade plan from single to double tracking railway in Thailand has been included in the ”Thailand Transport Infrastructure Development Strategy 2015-2022” and the first two upgrade projects are now under construction.

Here comes the bidding of MRT orange, pink and yellow line projects . The government has announced the official “Term of References” (TORs) of the MRT orange, pink and yellow lines, which worth Bt124bn in total. The bid for the MRT orange line, needs to be submitted on 31 October 2016, while that of the MRT pink and yellow lines, which will be bided under the Public-Private Partnership fast track scheme, need to be submitted on 7 November 2016. We believe that this will lead to a re-rating to the sector after being punished by the lack of positive news flow since the two dual track railway projects were awarded on December 2015.

Positive newsflow on infrastructure spending is the key catalyst. Consensus earnings for FY16F and FY17F are revised down by 3% and 17% respectively because of the delay in the bidding of infrastructure projects. However, we have seen low correlation between contractors’ share price performance and their earnings delivery, but there is a strong correlation between their share price performance and the positive newsflow over infrastructure spending such as announcements of the official bidding period. Hence, we believe that a number of mega infrastructure projects to be rolled out this year should act as the main catalyst to drive up the share price of contractors.

Stock picks. Our top picks with potential for cross-border opportunities and Thai MRT theme is CK. CK has a strong track record in in MRT works, especially for underground-based MRT like the orange line while its subsidiaries, BEM and CKP,* could supply the infrastructure works (expressway and MRT works) and dam construction works in Laos to CK respectively.

SET : 1,444.99

Analyst Apichaya KETRUTTANABORVORN +66 2657 7823 [email protected]

STOCKS

Source: DBS Vickers Ch. Karnchang : Leading engineering and construction company

Sino-Thai Engineering & Con. : Thailand's leading construction contractor

Unique Engineering and Construction : UNIQ is one of Thailand's top four contractor. It focuses on medium-to-large government construction projects.

Italian-Thai Development : Leading engineering and construction company

Thailand and the ASEAN Master plan for connectivity

Source: ASEAN(2013), DBS Vickers

DBS Group Research . Equity 4 Jul 2016

Thailand Industry Focus

Thailand Construction

Refer to important disclosures at the end of this report

Price Mkt Cap Target Price Performance (%)

Bt US$m Bt 3 mth 12 mth Rating

Ch. Karnchang 29.00 1,400 35.00 13.7 7.4 BUYSino-Thai Engineering & Con. 23.80 1,034 26.00 5.3 2.1 BUYUnique Engineering and Construction 17.10 527 NR -6.6 1.8 NRItalian-Thai Development 6.65 1,001 NR -7.5 -17.8 NR

Industry Focus


ASEAN MASTER PLAN FOR CONNECTIVITY AND THAILAND’S INFRASTRUCTURE PLANS APMC-Regional Connectivity and Emphasis on Transport-based infrastructure

The Master Plan on ASEAN Connectivity is envisaged to connect ASEAN through enhanced physical infrastructure development in order to enhance regional cooperation and global competitiveness. The plan aims to link Southeast Asian countries via a system of rail, roads and ports. This is crucial because the transport system has been recognised as a basis of the integration within the region in terms of the movement of goods, services, capital and people. Additionally, the transportation network would also support the development of trade and tourism. Rail system – to complete the missing link of Singapore Kunming Rail Link (SKRL)

The Singapore Kunming Rail Link (SKRL) project is a flagship project in ASEAN transport cooperation and the political pressure to complete SKRL is high. Given that the rail system provides much higher logistics efficiency, compared to road transportation. According to the ASEAN transport strategic plan 2016-2025, its key action is to complete the missing link section of SKRL as follows: (i) Thailand: Aranyaprathet – Klongluk (6km)

- Construction is completed - Expected to start operating by 2016

(ii) Cambodia: Poipet – Sisophon (48km) - Under construction - The construction is delayed from the original target date in 2013 - Expected to be completed by 2016

(iii) Cambodia: Phnom Penh – Loc Ninh (254km) - Seeking funds for project implementation - Delayed from the original target date in 2015

(iv) Vietnam: Loc Ninh – Ho Chi Minh (129km) - Seeking funds for project implementation - Expected to be completed by 2020

(v) Vietnam: Mu Gia – Tan Ap – Vung Ang (119km) - Approved feasibility study for this development - Expected to be completed by 2020

(vi) Lao PDR: Vientiane – Thakek – Mu Gia (466km) - Approved feasibility study for this development - Expected to be completed by 2020

(vii) Myanmar: Thanbyuzayat – Three Pagoda Pass (110km) - Feasibility study was conducted in 2007

- The project has been replaced with the new route from Dawei port to Kanchanaburi, which is in the feasibility study phase

(viii) Thailand: Three Pagoda Pass – Name Tok (153km) - Feasibility study was conducted in 2007 - The project has been replaced with the new route

from Dawei port to Kanchanaburi, which is in the feasibility study phase

SKRL networks and the missing links

Source: ASEAN Transport Strategic Plan 2011-2015 – Midterm Report, ERIA and Nippon Koei 2010

Thailand and the missing links for AMPC

For the Aranyaprathet – Klongluk route (route I), including the railway bridge between Cambodia and Thailand, the construction has been completed with funding from the Thai government. We expect this route to start operating by 2016.

Industry Focus


Progress on railway route I and II, connecting Thailand and Cambodia border as of March 2015

Source: ASEAN The replacing of an existing unserviceable rail bridge at the border-crossing point of Poipet (Cambodia) – Klongluk(Thailand) route on Jan 2016

Source: Thairath, Asian Development bank(ADB) , DBS Vickers For the Thanbyuzayat – Three Pagoda Pass – Name Tok routes (no. vii and viii), connecting Thailand and Myanmar’s border, the project’s feasibility study was conducted in 2007. Due to the project’s low IRR, the State Railway of Thailand (SRT) and Myanmar government decided to replace the project with the railway line linking Dawei port (Myanmar) with Kanchanaburi (Thailand), which is included in the Thai-Japan railway project and currently in the feasibility study phase. Thailand and the upgrade works of rail system to support SKRL

networks

Currently, the upgrade of the domestic railway network in Thailand, as a part of the SKRL project, is included in the Thailand Transport Infrastructure Development Strategy 2015-2022 (Master Plan) and the first two routes, including Chachoengsao – Klong 19 – Kangkoi and Jira junction Khonkaen, are currently under construction.

Thailand – rail system upgrade

Double tra ck ra i lwa y

1st pha seChachoengsao - Klong 19 - Kangkoi 11 0.3 Contractor: STECJira Junction - Khonkaen 22 0.6 Contractor: CKPrachuapkirikhan - Chumpon

Mapkabao - Nakornratchasrima

Lopburi - Paknampo

Nakornpathom - Nongpraduk - Huahin

Huahin - Prachuapkirikhan

Tota l 1st pha se 33 0.9

2nd pha sePaknampo - Denchai

Jira Junction - Ubonratchathani

Khonkaen - Nongkhai

Chumpon - Suratthani

Suratthani - Songkla

Hadyai - Padangbesa

Denchai - Chiangmai

Tota l 2nd pha se

Pro je c t RouteVa lue (Btbn)

Re ma rkVa lue

(US$bn)

Source: Ministry of Transport, DBS Vickers Thailand and the need to invest in transport-related infrastructure

Based on the Global Competitiveness Index,* Thailand’s overall infrastructure ranking for 2015/16 fell to 76 (vs 71 in 2014/15). This shows an urgent need for Thailand to invest in infrastructure in order to become the ASEAN regional hub, given Thailand’s strategic location. Thailand’s infrastructure ranking

71

51

78

52

38

76

50

74

54

37

0

10

20

30

40

50

60

70

80

90

Overall Roads Railway Ports Airport

2015/16 2014/15

*The global competitiveness Index (GCI) results for 2015/2016 are based on 140 countries while 2014/15 encapsulates 144 countries

Source: GCI, AllianceDBS, DBS Vickers The survey also revealed that Thailand’s inadequate infrastructure is among the top 5 obstacles for doing business in the country. Additionally, the government aims to reduce logistics costs, which now account for c.15% of Thailand’s GDP, through the upgrade of infrastructure.

Industry Focus


Thailand’s infrastructure ranking

18.1

12.5

12.3

12.03

8.6

0 2 4 6 8 10 12 14 16 18 20

Government instability/coups

Corruption

Inefficient government bureaucracy

Policy instability

Inadequate supply of infrastructure

Source: GCI, AllianceDBS, DBS Vickers Thus, the government has launched the Bt1.7tr (US$48.6 bn) spending plan to upgrade rail, air and water transportation under the “Thailand Transport Infrastructure Development Strategy 2015-2022” framework (a topic which we will look at later on).

Industry Focus


TRANSPORT-BASED INFRASTRUCTURE – THAILAND Thailand – transportation-based infrastructure projects

Project s Potent ial w inners

Balance of work s to be awarded in 2H16(Btbn)

Balance of work s to be awarded in 2H16(US$bn)

(1) MRT projects CK, STEC, ITD, UNIQ 274 7.8

(2) Double track railway

CK, STEC, ITD, UNIQ, Ch.Tawee construction Co Ltd., A.S. Associated Engineering Co., Ltd. 89 2.5

(3) High speed railway CK, STEC, ITD, UNIQ 847* 24.2*

(4) Motorway Various 126 3.6

(5) Airport expansion Various 49 1.4

(6) Water and irrigation Various n/a n/a

Total 449 12.8 *in the negotiation phase; Low probability to take place at least in the next few years

Source: DBS Vickers

According to the Thailand Transport Infrastructure Development Strategy 2015-2022 (Master Plan), whose details are outlined on page 9, the government’s investment spending on infrastructure projects will focus on transportation-based infrastructure.

The government is continually finding ways to accelerate the process, either via the streamlining of Environmental Impact Assessment (EIA) approvals or dividing large projects into different phases. This suggests the strong intention of the government in accelerating the bidding process of the infrastructure projects.

(1)MRT projects

Over the past decade, the priority for infrastructure development has been led by the MRT projects, given the government’s efforts to alleviate the critical traffic jam problems in Bangkok. Currently, there are five MRT routes operating in Bangkok, with the upcoming purple line to start operation in August 2016.

Current MRT lines

Source: Office of Transport and Traffic Policy and Planning (OTP)

MRT purple line on test-run ride and Bangkok rush hour traffic

Source: The Nation Additionally, there are another three lines of MRT under construction, as follows:

Under construction MRT lines

Proje c tConstruc tionVa lue (B tbn)

Construc tionVa lue

(US$bn) Contra c tors

Construc tion comme nc e me nt

ye a r

Ye a r to sta rt

ope ra tingRe d l ineBangsue-Rangsit 78 2.2 STEC/UNIQ JV, ITD 2013 2020Blue l ineBangsue-TaphraHualumpong-BangkaeDa rk gre e n l ineBearing -Samutprakarn 26 0.7 CK 2013 2019Morchit-Kukod 59 1.7 ITD, UNIQ, STEC 2015 2020Tota l 242 6.9

80 ITD, CK, UNIQ JV, STEC

2011 20192.3

Source: CK, STEC, ITD, BEM, DBS Vickers

MRT projects to be bided in 2016.

There are three MRT projects that their official “Term of References” (TORs) and its official bidding dates has been announced , as follows:

(i) MRT orange line, which links Thai Cultural Center with Minburi, will be open for bidding on 31 October 2016. This Bt76bn (US$2.2bn) project will be funded by the government via public debt.

There are three underground contracts, worth c.Bt20bn (US$0.6bn) each, on the MRT orange line project. There are only two Thai contractors, i.e. CK and ITD, with a track record for underground works and, thus, they have a good chance of winning at least one contract. MRT orange line construction contracts

Cont ract DetailsReference price (Btbn)

Reference price

(US$bn)

Underground Civ il works IThailand Cultural center - Ramkhamhaeng 12 19.8 0.6

Underground Civ il works II Ramkhamhaeng 12 - Hua Mak 20.7 0.6

Underground Civ il works III Hua Mak - Khlong Ban Ma 17.8 0.5

Elevated Civ il worksKhlong Ban Ma - Suwinthawong 9.6 0.3

Depot Park and Ride Facilities 4.7 0.1

Track Work 3.6 0.1

Total 76.2 2.2 Source: Ministry of Transport, CK, DBS Vickers

Industry Focus


(ii) MRT pink line (monorail). This Bt23.1bn (US$0.7bn) project is under the public-private partnership (PPP) fast track scheme and will be open for bidding on 7 November 2016 and the winning bidder will be announced on 17 November 2016. Note that only the civil work portion that relevant to the sector. The MRT pink line will connect Kaerai and Minburi, which is a plus point for both existing MRT operators, i.e. Bangkok Expressway and Metro PCL (BEM TB) and BTS Group Holdings PCL (BTS). The two main reasons behind this decision are: (i) The area along this route is a residential area with a

high population density, which means a higher number of passengers and, hence, a higher project IRR

(ii) The MRT pink line route will connect the MRT purple line and orange line, which is a plus point for BEM

MRT pink line contracts under PPP scheme

Contract Reference price

(Btbn) Reference price

(Btbn)

Civil works 23.1 0.7

System works 25.1 0.7

Total 48.2 1.4

Source: Ministry of Transport, CK, DBS Vickers

(iii) MRT yellow line (monorail), the Bt24.4bn (US$0.7bn) project links Latproa with Samrong, will be open for bidding on 7 November 2016 and the winning bidder will be announced on 17 November 2016. Like the MRT pink line, the MRT yellow line project will be under the PPP fast track scheme. Compared to the MRT pink line, the MRT yellow line project seems to attract lower interest from the two current MRT operators because of its less attractive route. MRT yellow line contracts under PPP scheme

Contract Reference price

(Btbn) Reference price

(US$bn)

Civil works 24.4 0.7

System works 22.7 0.6

Total 47.1 1.3

Source: Ministry of Transport, CK, DBS Vickers Potential participants for MRT pink and yellow line

bidding. The PPP scheme requires the bidder to have the capability to construct, operate and supply the rolling stock. According to our channel checks and media sources, the following are the three potential candidates:

(i) JV between CK, BEM (both subsidiaries of CK) and an undisclosed rolling stock producer

(ii) JV between STEC, BTS and an undisclosed rolling stock producer

(iii) JV between ITD, Transdev* Co., Ltd. and a Japanese rolling stock producer

*Transdev Co., Ltd. is a French-based international public transport operator.

However, these three candidates are in the feasibility study process before making a final decision on whether they will invest in the MRT pink and yellow lines.

MRT projects to be open for bidding in 2H16 (TORs announced)

Project Description ConstructionValue (Btbn) Progress

Mass Rapid Transit Authority of Thailand : MRTA Orange line

Thailand Cultural Centre - Min Buri 76

To be bided on 31 October 2016

Pink line (Monorail)

Khae Rai - Min Buri 23 To be bided on 7

November 2016 Yellow line (Monorail)

Lat proa - Samrong 24

Total 124

Source: Ministry of Transport, DBS Vickers

(2)Double track railway projects

The public investment on double track railway projects is another key flagship framework for the Thailand Transport Infrastructure Development Strategy 2015-2022. As the government plans to make Thailand a regional hub in ASEAN, there is a pressing need to upgrade the existing single track rail network to a double track railway that connects with neighbouring countries.

This was on the back of the poor performance of Thailand’s current railway network. The average speed of its passenger trains is 60km/hr, compared with 39km/hr for freight trains. The much slower rate for freight trains is due to the fact that most of them travel on single track lines. After the completion of the double track railway projects, these single track lines will be upgraded into double or triple track lines, enabling the trains to travel at 100-120km/hr.

This project will not only create opportunities for contractors but also create new transportation routes, urbanise transit areas and create new investment opportunities for related industries.

Industry Focus


Railway network development plan

Source: OTP, DBS Vickers Existing metre gauge dual track development

Source: Ministry of Transport

First two double track railway projects kicked off last

year. The government kicked off the first two double track projects, worth Bt33.2bn (US$0.9bn), in December 2015. These two projects were awarded to CK and STEC. Currently, the construction progress is still limited, given that the projects are still at the initial phase of construction. There are no significant cost overruns or potential delays for these projects.

Dual track railway project under construction

Pro je c t RouteConstruc tionVa lue (Btbn)

Construc tionVa lue

(US$bn) Contra c tors

Klong 19 - Kaeng Koy

11 0.3STEC secured Bt9.8bn contract,

Right Tunnelling Co., Ltd. Secured Bt407m contract

Jira Junction - Khonkaen

22 0.6JV between CK and Ch. Tawee

construction

Tota l 33 0.9

Dual track railway

Source: Ministry of Transport, STEC, CK, DBS Vickers

Another four routes of double track railway worth

Bt89bn (US$2.5bn) to be rolled out for bidding by 2016. We have assigned a high probability that the remaining four routes of double track railway projects in the 1st phase will be open for bidding by 2016. This was on the back of the availability of a clear source of funding for these projects – which will be funded by the government through debt.

Dual track railway projects to be open for bidding

Pro je c t De sc ript ionConstruc tionVa lue (Btbn)

Construc tionVa lue

(US$bn) Progre ssSta te Ra i lwa y of Tha i la nd : SRT

Prachuab Khiri Khan - Chumpon 17 0.5Map Kabao - Thanon Chira 29 0.8Nakhon Pathom - Hua Hin 19 0.5Lopburi - Paknampo 24 0.7

Tota l 89 2.5

Double-track railCabinet approved

Waiting for the cabinet approval

Source: Ministry of Transport, STEC, CK, DBS Vickers

(3) High Speed railway projects

We assign only a low probability for the high speed railway project to happen at least for the upcoming few years, given its huge investment amount with low IRR and impact by the G-to-G negotiations. The details are outlined on page 13.

High Speed Railway project in the pipeline

Route

kmValue* (Btbn)

Value* (US$bn) Remark Total

distance

Thai - China Railway (Nong Khai - Kaeng Koi - Map Ta Phut)

734 n/a n/a Pending

Thai - China Railway (Bangkok - Kaeng Koi - Nakhon Ratchasima)

133 170 4.9

Thai government will provide the funding

Thai - Japan Railway (Bangkok - Chiang Mai)

672 427 12.2 In the feasibility study phase

Bangkok - Huahin 180 152 4.3 To include in PPP fast track scheme Bangkok - Rayong 194 98 2.8

Total 1046 847 24.2

Industry Focus


(4)Motorway projects

All three routes of motorway projects value Bt161bn (US$4.6bn) in the master plan are now in the bidding process, with details outlined in the following table. The operating concession of Bang Pa In – Nakhon Ratchasima and Bang Yai – Karnchanaburi routes are included in the PPP fast track scheme while all the civil works of these three projects are funded by the government.

The contracts for the motorway projects were awarded to various contractors, given the simplicity of the civil project.

Motorway projects under construction

Motorway routes

Awarded contract

(Btbn)

Contract to be awarded

(Btbn)

Tota l project va lue (Btbn)

Tota l project va lue

(US$bn) Remark

Pattaya - Map Ta Phut17.7 2.5 20 0.6 CK secured Bt785m

contract

Bang Pa In - Nakhon Ratchasima 10 75 85 2.4ITD secured Bt1.5bn contract

Bang Yai - Karnchanaburi 7 49 56 1.6

Tota l 35 127 161 4.6

Source: Ministry of Transport, CK, DBS Vickers

It is also worth noting that CK is likely to secure the remaining contract for the toll collection system packages of the Pattaya – Map Ta Phut route, worth c.Bt2.5bn (US$72m). This is because there are only two qualified Thai contractors, including CK and See Sang Karnyotha (1979) Co., Ltd., that has the necessary track record in toll booth construction.

(5)Airport expansion projects

Airport of Thailand PCL (AOT) has kicked off the bidding process for the first two contracts, worth Bt14bn (US$0.4bn), with regard to Suvarnabhumi Airport Phase II. We also expect the bidding for other contracts worth Bt35bn (US$1bn) from this project to follow. AOT has announced the lowest bidders for the first two contracts, as follows: (i) The lowest bidder for the first package for the ground and

underground floors of the structure is ITD, with a bidding price of Bt12bn(vs Bt13.4bn reference price)

(ii) For the second package involving utility system works, the lowest one is the JV between Interlink Communication (ILINK TB) and Samprasit Construction Co., Ltd. with a bidding price of Bt1.9bn (vs Bt2.3bn reference price)

AOT expects to sign the official contracts with the lowest bidders in July 2016 (vs August 2016 initially). CK and STEC commented that the reference price for these two projects do not match their GPM targets. Thus, they have decided not to participate in the bidding process.

A number of industry experts think that the developments in the construction project of Suvarnabhumi Phase II bode well for infrastructure spending, thus alleviating investor concerns over potential delays in infrastructure spending. However, the progress for the other airport expansion projects outlined in the master plan is still limited. Progress for Suvarnabhumi Airport phase II project

Project Descript ionConstruct ionValue (Btbn)

Construct ionValue

(US$bn) ProgressAirports of Thai land Public Company Limited : AOT

The ground and underground floors of the structure (Package I)

12 0.3 ITD (lowest bidder)

Utility system (Package II)

2 0.1

JV between Interlink Communication PCL (ILINK TB) and Samprasit Construction Co.,Ltd. (lowest bidder)

Expect the remaining contracts to be opened for bidding by 2017

Total 49 1.4

Extension of building, terminal and utilities

35 1.0

Suvarnabhumi Airport : Phase II

Source: AOT, DBS Vickers

(6)Water transport network projects

The first two projects, worth Bt4bn, of the water transport network infrastructure under the master plan were awarded to a number of contractors (whose details are shown in the table below). We also expect the bidding for other 4 water transport network projects from the master plan value to follow.

Water transport network projects under construction

Project sConst ruct ionV alue (Btbn)

Const ruct ionV alue (US$m) Cont ractor

Seaport Laemchabang A 2 54Nawarat Patanakarn PCL

(NWR TB)

Single Rail Transfer Operator at Laem Chabang Port (Phase I)

2 55JV between ITD and Henan Weihua Heavy Machinery

Co.,Ltd.

Total 4 109 Source: Laemchabangport, DBS Vickers

Industry Focus


Thailand – master plan of Thailand’s transport infrastructure development strategy 2015-2022

Tota l d i s ta nce

MRT l ine s ; 10 route s 464 km (a l l route s a re in Ba ngkok borde r)

Dark Red Thammasart - Mahachai81

78 2.2Contractor : JV between STEC and

UNIQLight Red Salaya - Huamark 54

Airport Link Don Muang - Suvarnabhumi50

30 0.9Value for Suvarnabhumi -

Makkasan routes

Contractor: STEC

Dark Green Lamlukka - Samutprakarn 67 85 2.4 Contractor: CK,STEC , ITD, UNIQ

Light Green Yodsae - Bangwa 16 37 1.0 Contractor: STEC, ITD, UNIQ

Blue Bang Sue - Puttamonthon 455

80 2.3Value excluding extension phase;

Hualumpong-BangkaeContractor: CK,STEC,ITD, UNIQ JV

Purple Bang Yai - Ratburana 43 60 1.7 Contractor: CK, STEC, PAR JV

Orange Thai Cultural Centre - Minburi 33 76 2.2Pink (PPP fast track) Kaerai - Minburi 36 23 0.7Yellow (PPP fast track) Ladprao-Samrong 30 24 0.7

Tota l 464 493 14.1

Double tra ck ra i lwa y

1st pha seChachoengsao - Klong 19 - Kangkoi 106 11 0.3 Contractor: STECJira Junction - Khonkaen 185 22 0.6 Contractor: CKPrachuapkirikhan - Chumpon 167Mapkabao - Nakornratchasrima 132Lopburi - Paknampo 148Nakornpathom - Nongpraduk - Huahin 165Huahin - Prachuapkirikhan

Tota l 1s t pha se 903 33.2 0.9

2nd pha sePaknampo - Denchai 285Jira Junction - Ubonratchathani 309Khonkaen - Nongkhai 174Chumpon - Suratthani 167Suratthani - Songkla 339Hadyai - Padangbesa 45Denchai - Chiangmai 217

Tota l 2nd pha se 1536Thai - Japan Railway (Kanchanaburi - Bangkok - Chachoengsao - Aranyaprathet) 574

Tota l Tha i -Ja pa n double tra ck ra i lwa y 574

High Spe e d Ra i lwa yThai - China Railway (Nong Khai - Kaeng Koi - Map Ta Phut)

734 n/a n/a Pending

Thai - China Railway (Bangkok - Kaeng Koi - Nakhon Ratchasima)

133 170 4.9Thai government will provide the funding

Thai - Japan Railway (Bangkok - Chiang Mai)

672 427 12.2 In the feasibility study phase

Bangkok - Huahin 180 152 4.3

Bangkok - Rayong 194 98 2.8

Tota l Tota l 1046 847 24.2

Motorwa y

Pattaya - Map Ta Phut 89 20 0.6 Various contractorsBang Pa In - Nakhon Ratchasima (PPP fast track) 199 85 2.4 Various contractorsBang Yai - Karnchanaburi (PPP fast track) 98 56 1.6 Various contractors

Tota l 386 161 4.6

Wa te r tra nsport ne twork pro je c t

Laemchabang A 2 0.1 Nawarat Patanakarn PCL (NWR TB)

Songkla II

Chumporn

Pak Bara stage IWater transportation station

Angthong

Transport improvementSingle Rail Transfer Operator at Laem Chabang Port (Phase I) 2 0.1

JV between ITD and Henan Weihua Heavy Machinery Co.,Ltd.

Tota l 4 0.1

Avia tion

Suvarnabhumi airport phase II 49 1.4

Don Muang airport phase 3

U-Tapao airport

Phuket airport phase 2

Maesod, Tak province

Baetong, Yala province

Tota l 49 1.4

Gra nd Tota l 1586 45.3

Va lue * (Btbn)

Re ma rkkm

Sea port

Airport expansion project

RoutePro je c tVa lue * (US$bn)

To include in PPP fast track scheme

*The project values are presented in terms of construction value Source: Ministry of Transport, Mass Rapid Transit Authority of Thailand, SRT Electrified Train Co., Ltd., CK, STEC, Laemchabangport, DBS Vickers

Industry Focus


CROSS-BORDER OPPORTUNITIES

Investing abroad not attractive due to payment risk. Thai contractors have low exposure to overseas construction work despite their ability to tap into opportunities arising from the increasing infrastructure spending in ASEAN. This is mainly due to concerns over their clients’ promptness in payment. Additionally, the abundant domestic opportunities, especially from the public sector, have led to reduced pressure on the contractors to expand their business overseas. CK and ITD; the first two contractors to venture overseas

Thai contractors have more exposure to investing abroad, rather than conducting overseas construction activities. Almost all of their overseas works on hand originate from their respective subsidiaries.

CK is the contractor with the largest exposure overseas. Currently, the Xayaburi project that makes up 50% of its backlog is worth Bt48.5bn (US$1.3bn). The Xayaburi is a hydroelectric dam construction project in Laos. The project owner is Xayaburi power Co., Ltd., a subsidiary of CK.

CK: Xayaburi dam

Source: Xayaburi Power Co., Ltd., DBS Vickers

ITD has 40% of its backlog originating from overseas worth Bt30bn (US$0.9bn). The largest portion (85%) of its overseas backlog comes from Hongsa Power Company Limited’s Hongsa Mine project in Laos. However, a large part of the funding for this project comes from Thailand, as the major shareholders of Hongsa Power Company Limited are Banpu Power Limited, Ratcburi Electricity Generating Holding PCL (RATCH TB), and Lao Holding State Enterprise. Thus, this should alleviate any ITD concerns over potential payment risk from the foreign clients.

For the works in India, Mozambique and Bangladesh, ITD seems to have secured these works through its subsidiaries, ITD Cementation India PCL (ITCE IN), an India-based construction company engaged in a number of infrastructure projects in India for eight decades. In 2005, ITD has entered

into a share purchase and sale agreement with the Cementation Company Limited and Skansha AB and ,then, changed the company name to ITD Cementation India PCL (ITCE IN).

Apart from its backlog, ITD also has other foreign concessions: (i) the Dhaka Elevated Expressway in Bangladesh, worth Bt98bn(US$2.8bn), and (ii) the railway line and infrastructure of port terminal in Mozambique, worth Bt111bn(US$3.2bn). Currently, ITD still in the negotiation process to find a partner to invest in these projects. ITD plans to keep the partnership stakes at less than 10%.

Additionally, ITD has secured the concession to develop the Dawei project, involving the development of industrial estates and infrastructure projects under phase I (27 sq km) in Myanmar. This Bt10bn(US$0.3bn) project has already passed the EIA process and is now awaiting the Myanmar government’s order to start construction. The remaining phases of the Dawei project, worth US$6bn, are expected to be open for bidding by 2020.

CK: Hongsa Mine Mouth power plant

Source: The Nation., DBS Vickers

STEC just took its first step to venturing overseas last year. Currently, it is working on the road construction project in Laos, worth Bt800m (US$23m), but the funding for this project is subsidised by the Thai government. Thus, this could alleviate any payment risk coming from its customers. However, STEC’s management has commented that it still prefers to focus on domestic projects, as it believes that there should be ample opportunities in the country over the next 10 years.

For UNIQ, the company has no interest in venturing overseas as of now, due to concerns over client payment risks and the availability of abundant domestic opportunities.

Industry Focus


Overseas exposure of Thailand’s top four contractors (overseas backlog / total backlog)

50%

2% 0%

40%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

CK STEC UNIQ ITD*

Percentage to total backlog

*Excluding its Bt149bn concession in Bangladesh and Mozambique

Source: CK, ITD, DBS Vickers

Overseas exposure of Thailand’s top four contractors by country

India, Bt1.1bn

Laos, Bt75bn

Myanmar, 0.00%

Mozambique, Bt3.2bn

Bangalore, Bt0.2bn

Source: CK, STEC, ITD, DBS Vickers

Industry Focus


PUBLIC INVESTMENT REMAINS A CORE DRIVER FOR THAI ECONOMY

Government investment spending remains a GDP driver

for Thai economy. We reiterate our view that public investments will accelerate and become the lone pillar of growth for the Thai economy this year. This is on the back of (i) the slowing growth rate of private consumption and investments, given the fall in loan growth and low wage growth (ii) strong growth in public consumption and investment growth, in view of the fact that a number of government policies are intended to help accelerate public spending on infrastructure projects.

GDP growth expected at 3.4% (vs 2.8% in 2015). DBS bank economist remains convinced that the Thai GDP will grow at 3.4% in 2016. Growth will be driven by gross fixed capital formation, which is expected to surge 6.1%, and the increase in government consumption of 4.4%. GDP growth to improve, spurred by public investment

0.1%

6.4%

2.8%

0.7%

2.8%3.4%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

2011 2012 2013 2014 2015 2016

Source: NESDB, DBS Vickers

Private sector remains soft. We remain concerned about the slowdown in private consumption, which accounted for 49.9% of GDP in 1Q16 – the lowest level since 1996. According to DBS bank economist, the soft private consumption growth is attributed to the fall in household borrowing and low wage growth, given the weak agriculture and manufacturing sectors. The recovery in private consumption is unlikely for now, amid sluggish crop production as well as still weak external demand.

Private consumption remains soft (% of GDP)

57.8%

51.9%

49.9%

40%

45%

50%

55%

60%

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

1Q16

2016

F

Source: NESDB, DBS Vickers Consumer Confident Index

Source: UTCC, DBS V ickers

40

50

60

70

80

90

100

110

120

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

CCI o f Overall economy

CCI o f fu ture employment

CCI o f fu ture income

Government investment spending: A key engine for Thai

economic growth. Although private sector demand is 3x the size of the public sector but the latter has now contributed more to overall GDP growth for four consecutive quarters, as shown in the graph below. Thus, the robust public investment growth, at 12.4% y-o-y in 1Q16, has reaffirmed our belief that public spending on infrastructure projects will stay robust. Another 10-12% public investment growth is likely this year, which is remarkable considering that public investment already grew 30% in 2015.

Industry Focus


Private sector demand lagging behind public sector

Source: CEIC Data, Bloomberg L.P., DBS Group Research Thailand Economic Indicators

THAILAND 2015 2016f 2007f 1Q16 2Q16f 3Q16f 4Q16f 1Q17f 2Q17f

Real output and demand

GDP growth (02T) 2.8 3.4 3.6 3.2 3.5 3.6 3.0 3.0 3.6

Private consumption 2.1 2.4 2.6 2.3 2.0 2.3 2.4 2.3 2.6

Government consumption 2.2 5.3 4.5 8.0 6.4 4.7 2.4 1.6 3.1

Gross fixed capital formation 4.7 5.6 6.8 4.7 8.2 9.0 0.8 5.6 5.9

Net exports (THBbn) 709 1113 1223 353 207 254 299 330 248

Exports 0.2 4.2 4.2 5.1 3.7 4.6 3.8 0.7 3.9

Imports -0.4 -1.5 3.2 -4.8 -0.3 -0.3 -0.7 2.3 1.8

External

Merch exports (USDbn) 214 213 218 54 51 55 54 51 53

- % YoY -6 0 2 1 -5 0 2 -6 4

Merch imports (USDbn) 203 187 191 47 45 48 48 46 47

- % YoY -11 -8 2 -10 -12 -5 -2 -2 4

Trade balance (USD bn) 12 26 18 8 6 7 6 5 5 Current account balance (USD bn) 32 33 20 16 6 6 5 5 4

% of GDP 8.0 8.4 4.9 n.a. n.a. n.a. n.a. n.a. n.a.

Inflation

CPI inflation -0.9 0.7 1.9 -0.5 4.0 1.0 1.7 2.0 2.0

Other

Nominal GDP (USDbn) 396 392 410 n.a. n.a. n.a. n.a. n.a. n.a.

Unemployment rate, % 0.8 1.1 1.0 n.a. n.a. n.a. n.a. n.a. n.a. Fiscal balance (% of GDP)** -1.9 -2.8 -2.8 n.a. n.a. n.a. n.a. n.a. n.a.

* % change, year-on-year, unless otherwise specified ** Central govt cash balance for fiscal year ending September of the calendar year Source: CEIC Data, Bloomberg L.P., DBS Group Research

Industry Focus


THAI INFRASTRUCTURE FINANCING

Right mixture of financing could lead to sustainable

GDP growth. Given the Thai government’s Bt1.7tn (US$48.6bn) investment spending plan on infrastructure projects, it is crucial for the government to raise adequate financing with the right mixture. By nature, government financing seems to be the most significant source among others. However, government financing has a number of constraints, i.e. political and regulatory risks. Thus, private financing will play a major role going forward. Thailand's infrastructure investment plan by source of fund for fiscal year 2015-2022

SOEs borrowing/on lending, 45%

Government Budget, 20%

Public-Private Partnership,

20%

SOEs revenue, 10%

Infrastructure Fund, 5%

Source: Public Debt Management Office (PDMO), DBS Vickers Expect government spending to become less

dominance. Traditionally, government spending should play a major role in infrastructure spending, given the huge investments with high perceived risks and long payback periods for infrastructure projects. However, government financing has a number of constraints. In Thailand, the public debt/GDP borrowing ceiling is at 60%, comparing to the current level of 44%. This means limited room to borrow for infrastructure project funding, given the long-term duration of such projects. Although the current funding of infrastructure projects is highly dependent on public funding, we believe that government financing should become less dominance in fulfilling Thailand’s infrastructure needs. Currently, there are five infrastructure projects in the pipeline value Bt89bn (US$2.5bn) that will be funded by government borrowing, as follows:

Infrastructure projects that will be funded by government financing

Project Description Construction Value (Btbn)

Construction Value (US$bn)

Mass Rapid Transit Authority of Thailand : MRTA

Orange line Thailand Cultural Centre - Min Buri 76 2.2

State Railway of Thailand : SRT

Double-track rail

Prachuab Khiri Khan - Chumpon 17 0.5 Map Kabao - Thanon Chira 29 0.8 Nakhon Pathom - Hua Hin 19 0.5

Lopburi - Paknampo 24 0.7

Total 89 2.5

Source: PDMO, DBS Vickers Currently, the official TORs of the MRT orange line has been announced. Thus, we see a high potential for another four projects to be open for bidding this year, given their clear source of funding. Infrastructure loans from Japanese government for

funding the Thai-Japanese railway cooperation. The Japanese government has played an important role in the Thai government’s public funding through Japanese funds. For example, in 2015, the Japanese government funded Bt11bn of the MRT red line through Japan International Cooperation Agency (JICA); the Bang Sue – Rungsit route, which is now under construction by Unique Engineering and Construction (UNIQ TB). However, for projects to get funding by the Japanese government, they are required to have Japanese participation, e.g. Japanese rolling stock producers to be involved in the projects. Going forward, financial help from the Japanese government is expected to continue. On 27 May 2015, the Thai and Japanese governments signed a memorandum of cooperation (MOC) for investing in a high-speed train project, on the Bangkok-Chiang Mai route that is worth Bt546bn (US$15.6bn). Currently, this project is still in the feasibility study phase given the huge investment amount with low IRR. Additionally, according to the MOC, the Japanese government is also interested in investing in a 575-km East-West corridor dual track rail project in Thailand, consisting of the Karnchanaburi – Laem Chabung* route and the Bangkok – Aranyaprathet route( which will link to Dawei project in Myanmar), which is still in the feasibility study phase. This route would link Bangkok with eastern and western provinces, which means that this rail project will play a crucial role in the provision of logistics services for ASEAN. *where Thailand’s main container port is located

Industry Focus


Japan to construct an 874-km railway linking Cambodia and Myanmar through Thailand

Source: Nation Graphics, DBS Vickers Cancellation on Thai-China railway cooperation. The Chinese government also offers infrastructure loans to the Thai government as well. The Chinese government is interested in a high-speed train project connecting southern China through landlocked Laos to Thailand’s industrial east coast; Bangkok- Kaeng Koi – Map Ta Phut – Nakhon Ratchasima – Nong Kai. However, given the lack of a final deal, General Prayuth Chan-ocha, the Thai prime minister, has announced the cancellation of this cooperation between Thai and China, given the disagreement on the investment-sharing and loan structure.

The Thai government has decided to pursue the high-speed train project for the Bangkok-Kaeng Koi – Nakhon Ratchasima route, which will be funded by the Thai government while the remaining routes will be postponed.

Routes for Thai-Japanese and Thai-China cooperation

Source: Nation Graphics, DBS Vickers

Public-private partnership (PPP) scheme to become more

crucial. Private financing will need to play a bigger role going forward, together with financing support from the government, to help keep the public debt ratio below the 60% threshold set by the Finance Ministry. Currently, the government has put five projects, worth Bt334bn (US$9.5bn), under the PPP scheme since November 2015. The five projects are: (i) MRT pink line, (ii) MRT yellow line, (iii) MRT blue line extension, (iv) Motorway project: Bang Pa In** – Nakhon Ratchasima, and (v) Motorway project: Bangyai – Kanchanaburi**.

Additionally, there would be a proposal to include two high-speed rail projects, the Bangkok-Rayong, worth Bt98m (US$2.8m), and Bangkok-Huahin routes, worth Bt152m(US$4.3m) into the public-private partnership scheme in July 2016. ** PPP contract covers only the right to manage the motorway and share of toll fee while the government funds civil construction costs

Current PPP term seems to be not that charming. Given the ambiguous support from the government, the private sector seems reluctant to invest in infrastructure, given the low IRR for such projects. According to our channel checks, the contractors are now studying the announced Term of References (TORs) of the PPP projects, MRT pink and yellow lines, before deciding whether they will participate in the bidding process.

Industry Focus


We think that the PPP terms of these two projects should be the master reference PPP terms of the subsequent projects. Additionally, if the bidding process for these two projects is a success, this could lower the private sector’s concern over the return on investment through PPP projects. Infrastructure fund; another new source of government

funding. “Thailand Future Fund (TFF)” may be launched this year after getting the cabinet’s approval in 2015. This Bt100bn (US$2.9bn) infrastructure fund is to be raised by the private sector, targeting the overseas source of funding. Note that such infrastructure funds are allowed to invest in greenfield projects.

Industry Focus


EARNINGS MOMENTUM AND CONSENSUS CHANGE

Consensus earnings for FY16F and FY17F are revised down by 3% and 17% respectively because of the delay in the bidding of infrastructure projects, over the past one year. The details are as below; CK’s consensus earnings for FY16F were revised up by 4% while the consensus lowered FY17F earnings by 23% over the past one year. The main reason for the upward revision in FY16F earnings is the company’s announcement on the Bt19bn additional work for its Xayaburi project. However, the correlation between CK’s share price with its FY16F and FY17F consensus earnings is low with a correlation coefficient of 0.13 and 0.19 respectively. Our earnings forecasts for CK are significantly higher than consensus, which seems to have ignored equity income contribution from BEM (its subsidiary). Stripping out the effects of equity income from BEM, our FY16F earnings forecast would be higher than consensus by 10%. STEC’s consensus earnings for FY16F and FY17F were lowered by 21% and 29%, respectively, over the past one year. The earnings cuts are due to the disappointment arising from a loss-making new parliament building project. However, STEC’s stock price rose 2% over the corresponding period. Unsurprisingly, like CK, we found only a weak positive relationship between STEC’s share price and its FY16F and FY17F consensus earnings, with a correlation coefficient of 0.29 and 0.31 respectively. Our earnings forecasts for STEC are lower than consensus, given that we have imputed lower revenue. However, we believe that there could be more downward revisions for STEC’s consensus earnings, given the lower-than-expected revenue recognition this year – due to the low revenue recognition from the initial stages of the dual track railway project and delays for the new parliament project. High correlation between share price and newsflow, rather than earnings. The low correlation between the stock prices and consensus earnings affirms our belief that contractor sector stock prices have been driven by positive news flow, rather than earnings delivery. For example, in March 2016,

there was a lack of newsflow in the sector and rumours on the cabinet reshuffle. In this period, we saw a significant drop in the share prices of both stocks. CK’s consensus EPS trend vs share price

15

17

19

21

23

25

27

29

0.50.60.70.80.91.01.11.21.31.41.5

Jan-

15

Feb-

15

Mar

-15

Apr-

15

May

-15

Jun-

15

Jul-1

5

Aug-

15

Sep-

15

Oct

-15

Nov

-15

Dec-

15

Jan-

16

Feb-

16

Mar

-16

Apr-

16

May

-16

Jun-

16

BtBt

FY16 EPS (LHS) FY17 EPS (LHS) Price (RHS)

Source: Bloomberg Finance LP., DBS Vickers

STEC’s consensus EPS trend vs share price

15

17

19

21

23

25

27

29

0.50.60.70.80.91.01.11.21.31.41.5

Jan-

15

Feb-

15

Mar

-15

Apr-

15

May

-15

Jun-

15

Jul-1

5

Aug-

15

Sep-

15

Oct

-15

Nov

-15

Dec-

15

Jan-

16

Feb-

16

Mar

-16

Apr-

16

May

-16

Jun-

16

BtBt

FY16 EPS (LHS) FY17 EPS (LHS) Price (RHS)


Summary of EPS revisions and DBSV vs consensus for 1-year

CK STEC

FY16 EPS Revision 17% -23%

FY17 EPS Revision -6% -27%

DBSV vs consensus (FY16) 46% -11%

DBSV vs consensus (FY17) 21% -8%


Industry Focus


VALUATION AND SECTOR COMPARISON Sector Comparison

Market PE P/BV EV/EBITDA Div Yield ROE Share Price Performance

Cap (x) (x) (x) (%) (%) (%)

BB Ticker Name US$m 16F 17F 16F 17F 16F 17F 16F 16F 1M 3M YTD

CK TB Equity CH. KARNCHANG PUBLIC CO LTD 1,400 19.8 26.0 2.2 2.1 21.9 19.4 1.5 11.5 13.7 13.7 - ITD TB Equity ITALIAN-THAI DEVELOPMENT PCL 1,013 116.4 73.4 2.5 2.4 14.1 12.5 0.0 2.8 0.7 (7.5) (10.0) STEC TB Equity SINO THAI ENGR & CONSTR PCL 1,034 33.2 27.5 3.7 3.5 18.8 15.3 1.5 11.5 3.9 5.3 (4.4) TTCL TB Equity TTCL PCL 350 23.6 17.3 2.2 2.0 18.5 12.1 2.3 8.2 20.2 35.8 41.0 UNIQ TB Equity UNIQUE ENGINEERING & CON PCL 526 21.3 17.6 2.8 2.5 11.5 10.1 1.8 13.4 (1.7) (6.6) (22.3)

Average (simple) 43.7 33.0 2.7 2.5 19.0 16.8 1.4 9.1

Source: Bloomberg Finance LP., DBS Vickers DBSV TH Construction – PE trading ranges

-

5.0

10.0

15.0

20.0

25.0

30.0

35.0

11 12 13 14 15 16

(x)

-2 sd

-1 sd

Mean

+1 sd

+2 sd


DBSV TH Construction – P/BV trading ranges

-

0.5

1.0

1.5

2.0

2.5

3.0

3.5

11 12 13 14 15 16

(x)

-2 sd

-1 sd

Mean

+1 sd

+2 sd


Our infrastructure-related construction universe is now trading at a 1-year forward PE of 24x and P/BV of 2.7x. This is equivalent to +1SD levels. Given the high fluctuation in earnings for CK’s investment, we prefer to use the P/BV basis for our analysis. The contractor stocks normally command premium valuations in periods of high positive newsflows. For example, the sector traded at the +2SD level when the cabinet announced the Bt2tr (US$57bn) infrastructure spending bill in 2013. However, it subsequently de-rated to -0.5SD level when the bill was ruled unconstitutional by the charter court in 2014.

Given the upcoming supercycle of infrastructure spending in Thailand, we believe that the sector will be able to trade at +2SD levels again. However, it needs to be supported by strong positive newsflows in the sector, such as contract awards of the MRT orange, pink and yellow line projects as well as another four routes of dual track railway. Additionally, the potential jump in earnings for Thai contractors next year, driven by the strong growth in revenue recognition from projects awarded this year, should lead to the further re-rating of the sector. Thailand – revenue visibility (orderbook/historical construction revenue)

2.8 2.9

2.3

1.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

CK STEC UNIQ ITD

Source: CK, STEC, UNIQ, ITD, DBS Vickers Based on the chart above, STEC has the best earnings visibility at 2.9x, followed closely by CK at 2.8x. We believe that these two companies have lower earnings volatility, compared to

Industry Focus


the other two major contractors, thanks to their expertise and strong track records for project execution. CK’s orderbook stands at Bt97bn (US$2.8bn), mainly comprising the construction contract for the Xayaburi dam and Sirat expressway (both projects come from its subsidiaries), and the Jira Junction-Khon Kaen section of the double track railway. We believe that CK could maintain its gross profit margin (GPM) within its target range of 8-10%, given its project mixt and its hedging policy for construction materials. STEC’s orderbook of Bt53bn (US$1.5bn) comprises mainly the construction of 12 small power plants, new parliament building and double track railway; Chachoengsao – Klong 19 –Kaengkoi. We expect STEC to maintain its GPM within its target range of 8-9%, thanks to contributions from the power plant project, which offers higher profitability, and its net cash position, which allows STEC to enjoy better trading and hedging terms for its construction materials.

Industry Focus


Thailand Stock Picks

CK (BUY, TP Bt35.0) – A well-diversified infrastructure play

Ch. Karnchang PCL (CK) is our top pick in the sector, as it is the prime beneficiary on the upcoming supercycle of public transport-related infrastructure projects. This is on the back of (i) CK’s strong reputation in MRT construction, especially in underground works, which should allow CK to secure at least one underground construction contract from the upcoming MRT orange line project, and (ii) its transport-related subsidiary, BEM,* could supply transportation-related construction works to CK in the long run. *The current operator of MRT blue line and purple line and expressway in Bangkok

STEC (BUY, TP Bt26.0) – Thailand’s largest pure

construction play

Sino-Thai Engineering & Construction PCL (STEC) is Thailand’s largest pure construction play with a net cash position. Thus, STEC stands a good chance of benefiting from government infrastructure spending in the upcoming cycle. Given its strong track record in constructing, good relationship with the public sector and its net cash position, we are convinced that STEC has low earnings volatility, compared to the other contractors. STEC has also established itself as a power plant construction specialist. Power plants could boost STEC’s GPM as such projects normally offer higher profitability.

Industry Focus


DBS Vickers recommendations are based an Absolute Total Return* Rating system, defined as follows:

STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)

BUY (>15% total return over the next 12 months for small caps, >10% for large caps)

HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)

FULLY VALUED (negative total return i.e. > -10% over the next 12 months)

SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)

Share price appreciation + dividends GENERAL DISCLOSURE/DISCLAIMER This report is prepared by DBS Vickers Securities (Thailand) Co, Ltd. This report is solely intended for the clients of DBS Bank Ltd and DBS Vickers Securities (Singapore) Pte Ltd, its respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBS Vickers Securities (Thailand) Co, Ltd. The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS Bank Ltd., its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively, the “DBS Group”)) do not make any representation or warranty as to its accuracy, completeness or correctness. Opinions expressed are subject to change without notice. This document is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate independent legal or financial advice. The DBS Group accepts no liability whatsoever for any direct, indirect and/or consequential loss (including any claims for loss of profit) arising from any use of and/or reliance upon this document and/or further communication given in relation to this document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. The DBS Group, along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this document. The DBS Group may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies. Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments. The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed and it may not contain all material information concerning the company (or companies) referred to in this report. This publication has not been reviewed or authorized by any regulatory authority in Singapore, Hong Kong or elsewhere. The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and assumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates on which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly from actual results. Therefore, the inclusion of the valuations, opinions, estimates, forecasts, ratings or risk assessments described herein IS NOT TO BE RELIED UPON as a representation and/or warranty by the DBS Group (and/or any persons associated with the aforesaid entities), that: (a) such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and (b) there is any assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk

assessments stated therein. Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies) mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the commodity referred to in this report. DBS Vickers Securities (USA) Inc ("DBSVUSA")"), a U.S.-registered broker-dealer, does not have its own investment banking or research department, has not participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months and does not engage in market-making. ANALYST CERTIFICATION The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst(s) also certifies that no part of his/her compensation was, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in this report. As of 4 Jul 2016, the analyst(s) and his/her spouse and/or relatives who are financially dependent on the analyst(s), do not hold interests in the securities recommended in this report (“interest” includes direct or indirect ownership of securities). COMPANY-SPECIFIC / REGULATORY DISCLOSURES 1. DBS Vickers Securities (Thailand) Co, Ltd and its subsidiaries do not have a proprietary position in the securities recommended in this report

as of 30 Jun 2016

2. Compensation for investment banking services: DBSVUSA does not have its own investment banking or research department, nor has it participated in any public offering of securities as a

manager or co-manager or in any other investment banking transaction in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively.

Industry Focus


RESTRICTIONS ON DISTRIBUTION

General This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation.

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Malaysia This report is distributed in Malaysia by AllianceDBS Research Sdn Bhd ("ADBSR"). Recipients of this report, received from ADBSR are to contact the undersigned at 603-2604 3333 in respect of any matters arising from or in connection with this report. In addition to the General Disclosure/Disclaimer found at the preceding page, recipients of this report are advised that ADBSR (the preparer of this report), its holding company Alliance Investment Bank Berhad, their respective connected and associated corporations, affiliates, their directors, officers, employees, agents and parties related or associated with any of them may have positions in, and may effect transactions in the securities mentioned herein and may also perform or seek to perform broking, investment banking/corporate advisory and other services for the subject companies. They may also have received compensation and/or seek to obtain compensation for broking, investment banking/corporate advisory and other services from the subject companies.

Wong Ming Tek, Executive Director, ADBSR

Singapore This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) or DBSVS (Company Regn No. 198600294G), both of which are Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd and/or DBSVS, may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, DBS Bank Ltd accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact DBS Bank Ltd at 6327 2288 for matters arising from, or in connection with the report.

Thailand This report is being distributed in Thailand by DBS Vickers Securities (Thailand) Co Ltd. Research reports distributed are only intended for institutional clients only and no other person may act upon it.

United Kingdom This report is being distributed in the UK by DBS Vickers Securities (UK) Ltd, who is an authorised person in the meaning of the Financial Services and Markets Act and is regulated by The Financial Conduct Authority. Research distributed in the UK is intended only for institutional clients.

Dubai

This research report is being distributed in The Dubai International Financial Centre (“DIFC”) by DBS Bank Ltd., (DIFC Branch) having its office at PO Box 506538, 3rd Floor, Building 3, East Wing, Gate Precinct, Dubai International Financial Centre (DIFC), Dubai, United Arab Emirates. DBS Bank Ltd., (DIFC Branch) is regulated by The Dubai Financial Services Authority. This research report is intended only for professional clients (as defined in the DFSA rulebook) and no other person may act upon it.

United States This report was prepared by DBS Vickers Securities (Thailand) Co, Ltd. DBSVUSA did not participate in its preparation. The research analyst(s) named on this report are not registered as research analysts with FINRA and are not associated persons of DBSVUSA. The research analyst(s) are not subject to FINRA Rule 2241 restrictions on analyst compensation, communications with a subject company, public appearances and trading securities held by a research analyst. This report is being distributed in the United States by DBSVUSA, which accepts responsibility for its contents. This report may only be distributed to Major U.S. Institutional Investors (as defined in SEC Rule 15a-6) and to such other institutional investors and qualified persons as DBSVUSA may authorize. Any U.S. person receiving this report who wishes to effect transactions in any securities referred to herein should contact DBSVUSA directly and not its affiliate.

Other jurisdictions In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is intended only for qualified, professional, institutional or sophisticated investors as defined in the laws and regulations of such jurisdictions.

DBS Vickers Securities (Thailand) Co, Ltd 989 Siam Tower, 9th, 14th-15th Floor,

Rama 1 Road, Pathumwan, Bangkok Thailand 10330 Tel. 66 2 657 7831, Fax: 66 2 658 1269

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Company Guide

Ch. Karnchang

CRITICAL DATA POINTS TO WATCH

Earnings Drivers:

Strong exposure to Laos. CK is constructing a run-off river hydropower dam or the Xayaburi project, worth Bt76bn, in Laos, excluding the additional work portion. The project accounts for 38% of the company’s total backlog. Moreover, CK will be awarded the Bt19bn additional works (environmental related) for the Xayaburi project by end-2016. In addition, there are 13,000-MW hydro power plant and dam projects to bid for in Laos. We believe that this should present a huge opportunity to CK, given its strong track record in Laos. Bt19bn additional works from Xayaburi project; a key earnings driver in FY16F. The Xayaburi Power Co., Ltd, project owner of the Xayaburi project, will have to invest an additional Bt19bn for environmental purposes, as requested by the Laos government. This Bt19bn additional works will be awarded to CK and it expects to clinch the official contract in 2Q16. The areas for the additional works include (i) navigation lock, (ii) design change for sediment management, (iii) dam safety, and (iv) fish-passing facilities. Management has guided that the GPM of the additional works should be at the same level with the original work scope range of 8-10%. The method of funding for this additional investment of Xayaburi Power Co., Ltd. is to get the financial support through loans from its shareholders. However, the Laos government will subsidise this additional investment in the form of tax privileges, lower revenue sharing, concession period extension, etc. Management has also guided that this additional work will have a mild effect on the IRR of the Xayaburi project. The IRR of this project is expected to be c.13% (vs. 12-15% target range previously). High potential to secure at least one contract from the MRT Orange line. At least three mass transit lines will be opened for bidding this year. These include Orange, Pink, and Yellow lines. The MRT Orange line will comprise three underground contracts, one aboveground works contract, one depo & parking building contract and one rail system contract. These projects are worth Bt91bn in total. As there are three underground work contracts, there are only two Thai contractors, i.e. CK and ITD that have a track record for underground works, with a good chance of winning at least one such contract. Declining finance costs. CK has refinanced its debt (with c.4.85% cost of debt) with Bt5.5bn worth of debentures that carry 2.19% to 3.36% interest rates. Thus, CK‘s current average cost of funds drops to 4.15%.

Details on CK’s loan to Xayaburi Power Company Limited Loan amount Bt13.5bn (including the

additional loan of Bt2bn) Interest rate during construction

Not more than the MLR plus 0.25 percent per annum

Interest rate after the project's Commercial Operation Date (COD), by 2019

Not more than the MLR

Estimated total interest until 2031 Bt10bn

Projects to bid for in 2016

Project Description

Construc-tion

Value (Btbn) Progress

Mass Rapid Transit Authority of Thailand : MRTA Orange line Thailand Cultural Centre -

Min Buri 83 to be opened for

bidding in June 2016

Pink line (Monorail)

Khae Rai - Min Buri 27 To be opened for bidding in 2H16 Yellow line

(Monorail)Lat proa - Samrong 32

State Railway of Thailand : SRT

Double-track rail Prachuab Khiri Khan - Chumpon

17

Cabinet approvedMap Kabao - Thanon Chira

29

Nakhon Pathom - Hua Hin

19 Waiting for the cabinet approval process Lopburi - Paknampo 24

Department of Highway : DOH

Motorway Pattaya - Map Ta Phut 2.5

In bidding process Bang Pa In - Nakhon

Ratchasima 75

Bang Yai - Karnchanaburi

49

Airports of Thailand Public Company Limited : AOT

Suvarnabhumi Airport : Phase II

Extension of building, terminal and utilities

49 Bidding for Bt13.9bn contractssubmitted )

Total 406

Normal earnings vs extra gain (mainly from realizing gains from investments)

Source: Company, DBS Vickers

-2,000

-1,000

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

2011A 2012A 2013A 2014A 2015A 1Q16A

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Company Guide

Ch. Karnchang

Balance Sheet:

CK’s debt-to-equity ratio as at 1Q16 was 2.4x. We expect this ratio to rise to 2.9x in end-FY16, given its potentially high backlog growth in FY16. Currently, c.57% of its debt is for financing the company’s investments while the remaining 43% is for its working capital.

Share Price Drivers:

Acceleration of public infrastructure projects. Thailand’s construction sector has been supported by positive newsflows on infrastructure investments. The government’s concrete actions for its eight-year (2015-2022) infrastructure plan, which kicked off in 4Q15, could be a share price catalyst for CK. The short-term catalyst would be bidding for the MRT Orange line, worth Bt83bn, in July. We expect CK to secure at least one out of three underground works from MRT Orange line, worth c.Bt20bn, as there are only two Thai contractors who have experience in underground works, i.e. CK and Italian-Thai Development PCL.

Key Risks:

Political instability Political instability could cause further delays in the

government's infrastructure spending programme. Further delays in mega infrastructure projects

This would cap new contract wins. High earnings volatility

CK’s extraordinary earnings, mainly from gains on its investments, have played a major role in boosting its bottomline in the past years. Realising gains from investments have probably become the norm or life-saver for CK’s earnings after all.

High exposure to Lao project CK has done the additional work portion for the

Xayaburi project before clinching the official contract from Xayaburi Power Co., Ltd. We view this as significant risk for CK, especially if the project owner is unable to pay for the completed works.

Company Background

CH. Karnchang PCL (CK) is one of Thailand's leading general contractors and basic infrastructure developers. It is involved in the construction of large-scale infrastructure, building construction, and general civil works, and invests in government concession projects in order to expand operations and generate long-term recurring income.

Leverage & Asset Turnover (x)

Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


0.3

0.4

0.4

0.5

0.5

0.6

0.6

0.00

0.50

1.00

1.50

2.00

2.50

3.00

2013A 2014A 2015A 2016F 2017F

Gross Debt to Equity (LHS) Asset Turnover (RHS)

0.0

500.0

1,000.0

1,500.0

2,000.0

2,500.0

3,000.0

3,500.0

4,000.0

2013A 2014A 2015A 2016F 2017F

Capital Expenditure (-)

Btm

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

2013A 2014A 2015A 2016F 2017F

Avg: 32.6x

+1sd: 50.2x

+2sd: 67.8x

-1sd: 14.9x

-2.4

7.6

17.6

27.6

37.6

47.6

57.6

67.6

77.6

87.6

Jul-12 Jul-13 Jul-14 Jul-15

(x)

Avg: 2.3x

+1sd: 2.94x

+2sd: 3.58x

-1sd: 1.66x

-2sd: 1.02x0.9

1.4

1.9

2.4

2.9

3.4

3.9

4.4

4.9


(x)


Company Guide

Ch. Karnchang

Key Assumptions

FY Dec 2013A 2014A 2015A 2016F 2017F

Beginning backlog 109,087 95,300 95,530 83,551 77,725New projects signed (Btm) 19,001 33,181 22,933 45,785 40,000Realized (Btm) 32,788 32,951 34,912 51,611 40,478Ending backlog (Btm) 95,300 95,530 83,551 77,725 77,247

Income Statement (Btm)

FY Dec 2013A 2014A 2015A 2016F 2017F

Revenue 32,788 32,951 34,912 51,611 40,478Cost of Goods Sold (29,233) (29,827) (31,986) (47,298) (36,831)Gross Profit 3,555 3,124 2,926 4,313 3,647Other Opng (Exp)/Inc (609) (362) (710) (1,447) (780)Operating Profit 2,945 2,762 2,216 2,866 2,867Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0Associates & JV Inc (489) 26.8 (19.4) 1,174 1,326Net Interest (Exp)/Inc (958) (1,393) (1,488) (1,143) (2,160)Exceptional Gain/(Loss) 7,746 1,304 2,011 0.0 0.0Pre-tax Profit 9,245 2,700 2,719 2,896 2,033Tax (1,533) (342) (459) (344) (141)Minority Interest (38.1) (60.8) (67.8) (67.8) 0.0Preference Dividend 0.0 0.0 0.0 0.0 0.0Net Profit 7,674 2,296 2,193 2,484 1,891Net Profit before Except. (72.4) 992 182 2,484 1,891EBITDA 3,154 3,776 3,178 5,318 5,856Growth Revenue Gth (%) 56.9 0.5 6.0 47.8 (21.6)EBITDA Gth (%) 68.9 19.7 (15.8) 67.4 10.1Opg Profit Gth (%) 156.3 (6.2) (19.8) 29.3 0.0Net Profit Gth (Pre-ex) (%) nm nm (81.7) 1,267.4 (23.8)Margins & Ratio Gross Margins (%) 10.8 9.5 8.4 8.4 9.0Opg Profit Margin (%) 9.0 8.4 6.3 5.6 7.1Net Profit Margin (%) 23.4 7.0 6.3 4.8 4.7ROAE (%) 62.0 12.9 11.1 11.5 8.1ROA (%) 12.5 3.0 2.5 2.3 1.6ROCE (%) 6.0 4.6 2.9 3.2 3.0Div Payout Ratio (%) 8.7 25.8 30.9 30.0 30.0Net Interest Cover (x) 3.1 2.0 1.5 2.5 1.3



Company Guide

Ch. Karnchang

Quarterly / Interim Income Statement (Btm)

FY Dec 1Q2015 2Q2015 3Q2015 4Q2015 1Q2016

Revenue 8,544 8,511 8,752 9,105 9,003Cost of Goods Sold (7,835) (7,780) (8,014) (8,357) (8,204)Gross Profit 708 731 738 749 799Other Oper. (Exp)/Inc (91.4) (68.8) 4.71 (555) (394)Operating Profit 617 662 743 194 405Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0Associates & JV Inc 3.17 9.77 (27.2) (5.2) 149Net Interest (Exp)/Inc (360) (372) (395) (361) (230)Exceptional Gain/(Loss) 315 1,657 38.9 0.0 53.5Pre-tax Profit 575 1,957 359 (173) 377Tax (120) (281) (60.1) 1.93 (52.5)Minority Interest (18.3) (27.4) (15.3) (6.8) (20.2)Net Profit 437 1,649 284 (178) 305Net profit bef Except. 188 230 252 (178) 259EBITDA 871 921 980 441 787 Growth Revenue Gth (%) 14.0 (0.4) 2.8 4.0 (1.1)EBITDA Gth (%) 1.7 5.7 6.5 (55.0) 78.4Opg Profit Gth (%) 24.1 7.4 12.1 (73.9) 109.0Net Profit Gth (Pre-ex) (%) (6.0) 22.2 9.5 nm nmMargins Gross Margins (%) 8.3 8.6 8.4 8.2 8.9Opg Profit Margins (%) 7.2 7.8 8.5 2.1 4.5Net Profit Margins (%) 5.1 19.4 3.2 (2.0) 3.4

Balance Sheet (Btm) FY Dec 2013A 2014A 2015A 2016F 2017F

Net Fixed Assets 7,518 6,962 7,330 8,211 9,047Invts in Associates & JVs 19,177 21,205 25,267 26,441 27,766Other LT Assets 4,204 8,726 15,429 15,429 15,429Cash & ST Invts 3,913 5,265 4,667 475 2,690Inventory 2,496 8,562 12,787 18,979 16,504Debtors 4,288 5,337 6,174 8,754 10,778Other Current Assets 30,438 24,815 21,413 44,664 35,029Total Assets 72,034 80,872 93,066 122,952 117,244 ST Debt 13,353 12,844 15,291 22,605 19,729Creditor 6,846 5,904 6,602 9,799 7,489Other Current Liab 9,352 10,856 8,663 19,074 15,406LT Debt 22,886 29,027 38,247 45,000 47,000Other LT Liabilities 2,757 2,770 3,408 3,408 3,408Shareholder’s Equity 16,551 19,125 20,457 22,669 23,815Minority Interests 290 346 398 398 398Total Cap. & Liab. 72,034 80,872 93,066 122,952 117,244 Non-Cash Wkg. Capital 21,025 21,953 25,109 43,524 39,417Net Cash/(Debt) (32,326) (36,606) (48,871) (67,130) (64,039)Debtors Turn (avg days) 53.5 53.3 60.2 52.8 88.1Creditors Turn (avg days) 77.1 79.7 72.0 63.1 87.8Inventory Turn (avg days) 23.7 67.7 121.8 122.6 175.8Asset Turnover (x) 0.5 0.4 0.4 0.5 0.3Current Ratio (x) 1.4 1.5 1.5 1.4 1.5Quick Ratio (x) 1.3 1.2 1.1 1.0 1.1Net Debt/Equity (X) 1.9 1.9 2.3 2.9 2.6Net Debt/Equity ex MI (X) 2.0 1.9 2.4 3.0 2.7Capex to Debt (%) 9.7 1.0 2.5 3.2 3.7Z-Score (X) 1.4 1.3 1.2 1.2 1.2



Company Guide

Ch. Karnchang

Cash Flow Statement (Btm)

FY Dec 2013A 2014A 2015A 2016F 2017F

Pre-Tax Profit 9,245 2,700 2,719 2,896 2,033Dep. & Amort. 697 988 981 1,279 1,664Tax Paid (1,908) (772) (759) (576) (576)Assoc. & JV Inc/(loss) 489 (26.8) 19.4 (1,174) (1,326)Chg in Wkg.Cap. (13,143) (929) (12,175) (18,010) 4,107Other Operating CF 374 (1,375) (1,711) 232 435Net Operating CF (11,992) 1,085 (10,925) (15,354) 6,336Capital Exp.(net) (3,514) (432) (1,349) (2,160) (2,500)Other Invts.(net) 7,121 1,218 2,011 0.0 0.0Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0Other Investing CF 0.0 0.0 0.0 0.0 0.0Net Investing CF 3,606 786 662 (2,160) (2,500)Div Paid (578) (666) (593) (678) (745)Chg in Gross Debt 8,285 5,631 11,667 14,067 (876)Capital Issues 0.0 41.3 0.0 0.0 0.0Other Financing CF 1,591 (1,662) 122 (67.8) 0.0Net Financing CF 9,297 3,345 11,197 13,321 (1,621)Currency Adjustments 233 35.6 0.0 0.0 0.0Chg in Cash 1,144 5,252 934 (4,192) 2,215Opg CFPS (Bt) 0.70 1.19 0.74 1.57 1.32Free CFPS (Bt) (9.4) 0.39 (7.2) (10.3) 2.26


Target Price & Ratings History

Source: DBS Vickers Corporate Governance CG Rating

Score Range Number of Logo Description

90-100 Excellent

80-89 Very Good

70-79 Good

60-69 Satisfactory

50-59 Pass

<50 No logo given N/A

S.No. DateClosing

PriceTarget Price

Rat ing

1: 18 Aug 15 24.70 33.00 BUY

2: 21 Aug 15 26.25 33.00 BUY

3: 16 Nov 15 27.75 33.00 BUY

4: 25 Nov 15 28.00 33.00 BUY

5: 29 Feb 16 22.60 33.00 BUY

6: 09 Mar 16 24.60 33.00 BUY

7: 29 Mar 16 25.25 33.00 BUY

8: 17 May 16 24.70 33.00 BUY

9: 23 May 16 24.20 35.00 BUY

10: 27 Jun 16 27.50 35.00 BUY

Note : Share price and Target price are adjusted for corporate actions.

1

2 3

4

5

67

8

9

10

21.47

22.47

23.47

24.47

25.47

26.47

27.47

28.47

29.47

30.47

Jul-15 Nov-15 Mar-16

Bt


Company Guide

Ch. Karnchang









as of 30 Jun 2016 2. Compensation for investment banking services: DBSVUSA does not have its own investment banking or research department, nor has it participated in any public offering of securities as a



Company Guide

Ch. Karnchang











Dubai






ed: CK

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Co

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rice Relative

orecasts and VaY Dec (Btm) evenue BITDA re-tax Profit et Profit et Pft (Pre Ex.) et Pft Gth (Pre-ePS (Bt) PS Pre Ex. (Bt) PS Gth Pre Ex (%iluted EPS (Bt) et DPS (Bt) V Per Share (Bt) E (X) E Pre Ex. (X) /Cash Flow (X) V/EBITDA (X) et Div Yield (%) /Book Value (X) et Debt/Equity (XOAE (%)

arnings Rev (%):onsensus EPS (Bther Broker Recs

orporate Govern

nti-corruption Pr

ource of all data:

BS Group R

Thailand

Sino-ersion 4 | Bloom

8.3

13.3

18.3

23.3

28.3

Jun-12

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TANABORVORNsvickers.com

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: Company, DBS

Research . E

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Jun-13 Jun

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Relative Index

INDEX (RHS)

we

17F3170546453203200.7.87.8721

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ASH3.1

0.96

H: 2

P

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g Koy route wotain our bullishdditional workh potential to tng this year: (i)

mpon and Mapbn in total, (ii) Mine, worth Bt2

bn. Note that S40bn (vs our fongs to surge inng in 1H16 anday project due ngs should be ngs to surge 20nition from itsated Bt30bn co

ation:

maintain our BUx FY17F PE

Risks to Our V

er delays in gocts, cost overru

Glance

Capital (m shrs)Cap (Btm/US$m)Shareholders (%

nweerakul's FamNVDRAG Singapore Boat (%)

vg. Daily Val (US$dustry : Industria

l 2016

ng &Refer to impo

argest p

6.0 TP (PE valuaction contractostands a good

nfrastructure spged to 29x FYPE in 2013 wh

worth of infrastof rising const

dual-track railworth Bt9.83bn view that STE

k worth at leasthe following p Double-track Kabao – ThanMRT orange lin7bn, and (iv) M

STEC’s new proorecast of Bt30

n FY17. Given td limited progrto the initial stflat y-o-y. How0% y-o-y, give dual-track raiontracts signed

UY rating with

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VICKER

ure cons

ation). As one ors as well as hd chance of bepending over t

Y17 PE (+1SD ohen the governtructure projectruction activit

way project for in December 2

EC stands a gost Bt30bn. We projects to be rail; Prachuab

non Chira routne, worth Bt83MRT yellow linoject wins targ0bn). the delay in infress on STEC’stage of projectwever, we expeen the high revlway project ad in FY16.

a higher TP of

nding on megasteel/construct

n & Materials

n. sures at the e

RS SECURIT

struction

of Thailand’s having a net enefiting from the next few of mean). STECment ts. ties in Thailandthe Klong 19

2015, we od chance to have assignedopened for Khiri Khan – es, worth 3bn, (iii) MRT e, worth

get for FY16F is

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RITICAL DATA

arnings Drive

prime beneficeiterate our viewecome the loneear. This is on tonsumption anw wage growtvestment in inhai economic gTEC, as it is onhailand. STEC iompany to readfrastructure prso owns two pexecuting infr

osition in the in

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ower plant proas two power power plants anhat the averageompared to abrojects. This sh

ownside risk frrogress for theeached 20% berocess. As a reseriod to 2019 (reasonable to

ased on a progTEC has bookeQ15, which thehe total potenthat further prov

xpect more prostory, its succend 25%. Assumorth only Bt15

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ASIAN INSIG

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own. Based ont52.9bn as at 3ore than two yl be resilient enntry’s infrastru

oject to maintaplant projects

nd offsite worke GPM of powout 6-7% for ould help STEC

rom new parlia Bt11.5bn newecause of delasult, STEC expe(vs November expect the pro

gress rate of 20ed a Bt579m loe company beial losses from visions might b

ojects to be secess ratio in winming that the c50bn in 2016 ajects to be aw

17.5bn in 2014

GHTS

WATCH

nfrastructure sinvestments wwth for the Thae slowing grows, given the fallnment is therefrojects to provar. This shouldour constructioh position whice in the biddinghe governmentte factories an

orks, thus reinfoupcycle this tim

n our estimated31 Mar 2016, years’ worth ofnough to copeucture spendin

in STEC’s GPMin its backlog,

ks for power pler plant projecgovernment inC achieve its ta

ament project.w parliament pys in the land ects to extend 2016 currentlyoject to be com0% per year (boss provision frlieves to be lar this project. Hbe needed.

cured in 2016.nning projects icompany subm

and achieves a warded should b

4 and Bt21bn

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on contractors ch allows the g of new t. Note that STd has vast exporcing its stron

me around.

d backlog its backlog cof revenue. Thue with any furtg.

M. Currently, STcomprising 12ant projects. N

cts is much hignfrastructure arget GPM of 8

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8.3%

6.1%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

2011A

14,815

48,93

0

10,000

20,000

30,000

40,000

50,000

60,000

2011A

Btm

Sino-Th

Prof

Revenue

acklog breakdo

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y, DBS Vickers

8.4%9.5

5.5%

7.3

2012A 20

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19,74822,24

35

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VICKERS

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hai Engine

fitability

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s margin 6.1%

42 21,5521

1,08847,821

13A 2014AEnding backlog

S SECURITIEPag

ompany Guid

ering & Co

f work

nt

9.4% 9.1%

7.3%

6.0%

2015A 1Q16

18,238

4,472

56,07352,88

2015A 1Q16

ES e 3

de

n.

87


Company Guide

Sino-Thai Engineering & Con.

Balance Sheet:

STEC has the strongest balance sheet in the sector currently, with a net cash position of Bt0.45/sh at end-1Q16.

Share Price Drivers:

Benefiting hugely from mega infrastructure projects to be open for bidding in 2016. The concrete actions on the bidding process of the dual-track railway, motorway and Suvarnbhumi phase II projects fuel expectations for more projects to kick off this year. We assigned the high potential for the projects to be open for bidding in FY16 which are (i) double-track rail; Prachuab Khiri Khan – Chumpon and Map Kabao – Thanon Chira routes, worth Bt49bn, (ii) MRT orange line, worth Bt83bn, (iii) MRT pink line, worth Bt27bn, and (iv) MRT yellow line, worth Bt32bn. Based on STEC’s history, its success ratio in winning projects is between 20% and 25%. Assuming that the company submits bids for projects worth Bt150bn in 2016 and achieves a 20% success ratio, the value of projects to be awarded should be about Bt30bn, up sharply from Bt17.5bn in 2014 and Bt21bn in 2015.

Key Risks:

Further delays in mega infrastructure projects. This will cap new contract wins. Construction delay. This could result in cost overruns which could subsequently crimp profit margins. Increase building material cost. This could lead to lower profit margins.

Company Background

Sino-Thai Engineering and Construction Public Company Ltd. is a construction company providing both civil and mechanical works. Its services include infrastructure, buildings, energy and power generation plants, industrial and environment.

Leverage & Asset Turnover (x)

Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


0.7

0.8

0.8

0.9

0.9

1.0

1.0

0.00

0.02

0.04

0.06

0.08

0.10

0.12

0.14

2013A 2014A 2015A 2016F 2017F

Gross Debt to Equity (LHS) Asset Turnover (RHS)

0.0

100.0

200.0

300.0

400.0

500.0

600.0

700.0

800.0

900.0

1,000.0

2013A 2014A 2015A 2016F 2017F

Capital Expenditure (-)

Btm

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

2013A 2014A 2015A 2016F 2017F

Avg: 22.6x

+1sd: 29.6x

+2sd: 36.5x

-1sd: 15.7x

-2sd: 8.8x7.8

12.8

17.8

22.8

27.8

32.8

37.8


(x)

Avg: 3.51x

+1sd: 4.16x

+2sd: 4.82x

-1sd: 2.86x

-2sd: 2.2x

1.6

2.1

2.6

3.1

3.6

4.1

4.6

5.1

5.6

6.1


(x)


Company Guide


Key Assumptions

FY Dec 2013A 2014A 2015A 2016F 2017F

Beginning backlog 39,152 51,088 47,821 50,603 61,966New projects signed 34,178 18,285 21,020 30,000 30,000Realized for the year 22,242 21,552 18,238 18,637 22,217Ending backlog 51,088 47,821 50,603 61,966 69,749

Income Statement (Btm)

FY Dec 2013A 2014A 2015A 2016F 2017F

Revenue 22,294 21,652 18,331 18,737 22,317Cost of Goods Sold (20,168) (19,435) (16,599) (17,116) (20,327)Gross Profit 2,126 2,217 1,731 1,621 1,990Other Opng (Exp)/Inc (490) (529) (389) (422) (509)Operating Profit 1,636 1,688 1,342 1,199 1,481Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0Associates & JV Inc (21.5) 11.1 17.4 18.3 19.2Net Interest (Exp)/Inc 281 220 58.8 145 145Exceptional Gain/(Loss) 294 0.0 448 0.0 0.0Pre-tax Profit 2,190 1,919 1,866 1,363 1,645Tax (449) (389) (321) (269) (325)Minority Interest (7.3) (9.5) (18.2) 0.0 0.0Preference Dividend 0.0 0.0 0.0 0.0 0.0Net Profit 1,733 1,521 1,527 1,094 1,320Net Profit before Except. 1,500 1,521 1,079 1,094 1,320EBITDA 1,983 2,127 1,854 1,728 2,054Growth Revenue Gth (%) 12.2 (2.9) (15.3) 2.2 19.1EBITDA Gth (%) 22.5 7.3 (12.8) (6.8) 18.9Opg Profit Gth (%) 34.3 3.2 (20.5) (10.7) 23.5Net Profit Gth (Pre-ex) (%) 36.9 1.4 (29.0) 1.4 20.7Margins & Ratio Gross Margins (%) 9.5 10.2 9.4 8.7 8.9Opg Profit Margin (%) 7.3 7.8 7.3 6.4 6.6Net Profit Margin (%) 7.8 7.0 8.3 5.8 5.9ROAE (%) 25.6 19.1 17.3 11.5 13.1ROA (%) 7.7 6.1 6.4 4.6 4.9ROCE (%) 18.7 16.5 12.3 9.9 11.5Div Payout Ratio (%) 44.0 50.2 35.3 50.0 50.0Net Interest Cover (x) NM NM NM NM NM



Company Guide


Quarterly / Interim Income Statement (Btm)

FY Dec 1Q2015 2Q2015 3Q2015 4Q2015 1Q2016

Revenue 4,221 4,993 4,690 4,427 4,486Cost of Goods Sold (3,735) (4,520) (4,235) (4,109) (4,079)Gross Profit 486 473 454 319 407Other Oper. (Exp)/Inc (109) (99.1) (144) (36.7) (100)Operating Profit 376 373 311 282 306Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0Associates & JV Inc 1.87 0.39 6.72 8.43 7.54Net Interest (Exp)/Inc 23.7 15.9 14.4 4.76 10.1Exceptional Gain/(Loss) 0.0 0.0 0.0 448 0.0Pre-tax Profit 402 390 332 743 324Tax (80.5) (62.3) (60.1) (119) (53.8)Minority Interest (1.3) (1.7) (1.5) (13.7) (2.1)Net Profit 320 326 270 611 268Net profit bef Except. 320 326 270 163 268EBITDA 512 451 452 368 454 Growth Revenue Gth (%) (30.0) 18.3 (6.1) (5.6) 1.3EBITDA Gth (%) (8.1) (12.0) 0.1 (18.6) 23.4Opg Profit Gth (%) (15.1) (0.7) (16.8) (9.2) 8.7Net Profit Gth (Pre-ex) (%) (13.8) 1.8 (17.1) (39.7) 64.6Margins Gross Margins (%) 11.5 9.5 9.7 7.2 9.1Opg Profit Margins (%) 8.9 7.5 6.6 6.4 6.8Net Profit Margins (%) 7.6 6.5 5.8 13.8 6.0

Balance Sheet (Btm) FY Dec 2013A 2014A 2015A 2016F 2017F

Net Fixed Assets 2,650 3,166 3,197 3,498 3,598Invts in Associates & JVs 127 148 159 159 159Other LT Assets 2,363 3,128 3,733 3,733 3,733Cash & ST Invts 8,663 5,565 2,065 4,084 5,157Inventory 1,118 1,187 2,300 2,371 2,824Debtors 2,917 2,748 3,079 3,454 3,900Other Current Assets 7,172 9,061 8,128 7,841 9,340Total Assets 25,010 25,004 22,661 25,142 28,711 ST Debt 69.5 70.4 71.3 71.3 71.3Creditor 2,966 3,727 4,023 4,148 4,940Other Current Liab 13,659 12,129 8,554 10,508 12,513LT Debt 0.0 0.0 0.0 0.0 0.0Other LT Liabilities 539 528 505 505 505Shareholder’s Equity 7,588 8,351 9,292 9,694 10,467Minority Interests 189 198 216 216 216Total Cap. & Liab. 25,010 25,004 22,661 25,142 28,711 Non-Cash Wkg. Capital (5,418) (2,860) 930 (989) (1,389)Net Cash/(Debt) 8,594 5,495 1,993 4,013 5,086Debtors Turn (avg days) 38.8 47.8 58.0 63.6 60.1Creditors Turn (avg days) 54.5 62.5 85.8 87.6 81.8Inventory Turn (avg days) 13.0 21.6 38.3 49.8 46.6Asset Turnover (x) 1.0 0.9 0.8 0.8 0.8Current Ratio (x) 1.2 1.2 1.2 1.2 1.2Quick Ratio (x) 1.1 1.1 1.0 1.0 1.0Net Debt/Equity (X) CASH CASH CASH CASH CASHNet Debt/Equity ex MI (X) CASH CASH CASH CASH CASHCapex to Debt (%) 1,233.5 1,341.0 736.4 1,139.1 917.9Z-Score (X) 2.7 2.7 3.1 2.9 2.8



Company Guide


Cash Flow Statement (Btm)

FY Dec 2013A 2014A 2015A 2016F 2017F

Pre-Tax Profit 2,190 1,919 1,866 1,363 1,645Dep. & Amort. 368 427 494 510 554Tax Paid (412) (359) (315) (250) (306)Assoc. & JV Inc/(loss) 21.5 (11.1) (17.4) (18.3) (19.2)Chg in Wkg.Cap. 666 (2,558) (1,619) (264) 400Other Operating CF (104) (822) (618) (0.7) 0.25Net Operating CF 2,730 (1,404) (208) 1,340 2,274Capital Exp.(net) (857) (944) (525) (812) (654)Other Invts.(net) 0.0 0.0 0.0 0.0 0.0Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0Other Investing CF 0.0 0.0 0.0 0.0 0.0Net Investing CF (857) (944) (525) (812) (654)Div Paid (593) (763) (763) (539) (547)Chg in Gross Debt (108) 0.87 0.87 0.0 0.0Capital Issues 339 0.0 0.0 0.0 0.0Other Financing CF (37.5) 11.8 24.3 0.0 0.0Net Financing CF (399) (750) (737) (539) (547)Currency Adjustments 0.0 0.0 0.0 0.0 0.0Chg in Cash 1,473 (3,098) (1,470) (10.7) 1,073Opg CFPS (Bt) 1.35 0.76 0.92 1.05 1.23Free CFPS (Bt) 1.23 (1.5) (0.5) 0.35 1.06


Target Price & Ratings History

Source: DBS Vickers Corporate Governance CG Rating

Score Range Number of Logo Description

90-100 Excellent

80-89 Very Good

70-79 Good

60-69 Satisfactory

50-59 Pass

<50 No logo given N/A

S.No. DateClosing

PriceTarget Price

Rat ing

1: 11 Aug 15 22.20 22.00 HOLD

2: 16 Sep 15 25.25 30.00 BUY

3: 02 Nov 15 25.00 30.00 BUY

4: 12 Nov 15 24.90 30.00 BUY

5: 20 Nov 15 25.00 30.00 BUY

6: 25 Jan 16 22.30 30.00 BUY

7: 19 Feb 16 19.60 22.00 BUY

8: 29 Mar 16 21.60 22.00 BUY

9: 16 May 16 21.80 22.00 BUY

10: 22 Jun 16 22.40 26.00 BUY

Note : Share price and Target price are adjusted for corporate actions.

1

2

3

4

5

6

7

8

9

10

16.62

18.62

20.62

22.62

24.62

26.62

Jul-15 Nov-15 Mar-16

Bt


Company Guide










as of 30 Jun 2016 2. Compensation for investment banking services: DBSVUSA does not have its own investment banking or research department, nor has it participated in any public offering of securities as a



Company Guide












Dubai






thailand industry focus thailand construction...18.1 12.5 12.3 12.03 8.6 02468 101214161820...

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