utilities sector (water) - listed...
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*The Company may be issuer of Derivative Warrants on these securities. http://research.kgi.com; Bloomberg: KGIT <GO> Please see back page for disclaimer November 30, 2011 1
Utilities sector (Water)
November 30, 2011 Thailand Overweight
Companies covered in the report
TH Eastern Water Resources
Development and Management
(EAST.BK/EASTW TB)
TH Thai Tap Water Supply (TTW.BK/TTW TB)*
1 Piyathida Vongvivathchai
2 66.2658.8888 Ext. 8856
Oasis amid the storm
Most defensive sector among the dividend plays
We see Thailand’s water sector as the most defensive among the dividend plays, even
compared to power developers. This is due to a sustainable strong dividend from
continuously increasing earnings secured under long-term concessions with the government.
The sector is an oligopoly dominated by a small number of players, namely Eastern Water
Resources Development and Management (EASTW) and Thai Tap Water Supply (TTW). The
stocks have more than ten years of concessions remaining and attractive dividend yields of
6-9% on our FY12-13F. In our view, this is a high risk adjusted return given their low market
volatility, which may be what investors need to shore up their portfolios in these market
conditions.
EASTW – Good dividend yield of 7-9% supported by secured earnings
We initiate coverage on EASTW with a rating of Outperform and a DCF based target price of
Bt8.80. It is our top pick due to its strong dividend yield of 7-9% on our FY12-13F supported
by strong earnings growth of 11-23% for FY12-13F from its concession business, increasing
net profit margin driven by its effective cost control program (from 28% in 2010 to 33% on
our 2013 forecast), and its focus on growth in its existing business. We see potential share
price catalyst from winning new major tap water concessions, which will add another
Bt0.2/share to its fair value for every new contract of 20K cum/day.
TTW – Misconception provides opportunity
We initiate coverage on TTW with a rating of Outperform and a DCF based target price of
Bt7.00. We like TTW for its undemanding valuation with a deep discount to our target price,
secured cash flow generation protected by long-term concession, good dividend yield of
6-7% on our FY12-13F, and potential upside of Bt0.5/share from increased in investment in
CK Power. TTW has underperformed the SET by 12% YTD due to what we see as a market
misconception of the threat from new competition. We believe that weaker sales volume
earlier this year was mainly caused by seasonally colder weather as per previous years. The
YTD share price weakness should provide a good investment opportunity for investors.
Target price Current Price Upside 10 EPS 11F EPS 12F EPS 11F EPS 12F EPS 11F PER 12F PER 11F PBV 12F PBV 11F Div 11F ROAERating (Bt) (Bt) (%) (Bt) (Bt) (Bt) growth (%) growth (%) (x) (x) (x) (x) Yield (%) (%)
TTW OP 7.00 5.30 32.08 0.52 0.52 0.53 (0.26) 3.29 10.3 10.0 2.4 2.3 6.3 22.5EASTW OP 8.80 6.05 45.45 0.51 0.54 0.67 6.35 23.21 11.2 9.1 1.5 1.4 6.3 13.5Sector 1.03 1.06 1.20 3.03 13.50 10.7 9.5 1.9 1.9 6.3 18.0
Thailand Utilities sector (Water)
*The Company may be issuer of Derivative Warrants on these securities. http://research.kgi.com; Bloomberg: KGIT <GO> Please see back page for disclaimer November 30, 2011 2
EASTW TTWRating Outperform OutperformTarget price (Bt) 8.8 7.0Market capitalization (US$mn) 310 653Average daily turnover (US$mn) 0.13 0.93Historical dividend yield (2008-2010 average) 6.5% 4.2%Dividend pay out ratio (2008-2010 average) ~70% ~65%Historical EPS growth - Three year CAGR (2008-2010) 13.70% 22.90%Forecast EPS growth – Three year CAGR (2011-2013) 13.8% 2.3%Key business Raw water Tap water Key area of service Eastern seaboard Nakonpathom, Samutsakorn, and Pathumthani
province (vicinities of Bangkok)
Remaining years of key concessions 12 years 13, 18 yearsRaw water: 245m cumTap water: 59m cum
Growth strategy Domestic water business Power business, renewable energy, wastewater management, and tap water
Key catalyst Winning new tap water concession
Resolution of outstanding dispute on sales agreement in TTW’s favour
Key risk Government intervention in capping tariff
Renegotiation of sales contract to less favourable terms
Good secured earnings growth with strong dividend of 7-9% on
our FY12-13F
Prefer less than EASTW due to its lower growth prospects
A natural monopoly in the eastern seaboard, Thailand’s
industrial hub
Share price overhang from outstanding dispute…
Protected by more than ten years of concession
…but hard to ignore its good dividend of 6-7% on our FY12-13F, secured earnings protected by
concession over the next ten years, and undemanding valuation
Increasing net profit margin and ROCE
Focus on growth in its core business
The share price has fallen 17% YTD vs. SET 5% and EASTW 6%
Inexpensive valuation
2010 sales volume Tap water: 245m cum
Comments
EASTW Is Our Top Pick
We initiate coverage on EASTW and TTW with ratings of Outperform. EASTW is our top pick due to its good dividend, strong earnings growth,
improving margin, and focus on growth in its existing business rather than diversifying into virgin areas.
Figure 1: Company comparison
Source: Company data; KGI Securities (Thailand) estimates
Thailand Utilities sector (Water)
*The Company may be issuer of Derivative Warrants on these securities. http://research.kgi.com; Bloomberg: KGIT <GO> Please see back page for disclaimer November 30, 2011 3
PTW(98% owned by
TTW)
Type of water Raw water Tap water Tap waterService Area Eastern seaboard
(namely Rayong, Chonburi, and Chacheongsao
province)
Three districts in Nakonpathom province
and two districts in Samutsakorn province
Six districts in Pathumtani Province
Concession granted by Ministry of Finance Ministry of Natural Resource and Environment
Ministry of Interior
Commencement date 01-Jan-94 11-Mar-05 13-Jan-00Duration (Years) 30 25 25Years remaining 12 18 13
Company TTWEASTW
Rate The Sector Overweight
We initiate coverage on the sector with a rating of Overweight with
EASTW as our top pick. We see Thailand’s water sector as the most
defensive among the dividend plays, even compared to power
developers. This is due to a sustainable strong dividend from
continuously increasing earnings secured under long-term
concessions with the government.
Our bullish case on EASTW is based on its strong EPS growth on our
2012 full year forecast of 23%, a high dividend yield of 7-9% from
its secured and increasing cash flow, its focus on growth in water
business, and its potential to benefit from the opening of new tap
water concession as well as the relocation of industrial customers to
its service area in the eastern seaboard following the flooding in the
central region.
Attractive Dividend With Secured Earnings
At current prices, we forecast an attractive dividend yield of 6-9%
for the two stocks on our FY12-13F. This is based on i) our forecast
EPS three-year (2011-2013) CAGR of 14% for EASTW and 2% for
TTW; and ii) dividend pay out ratio of 70% for EASTW and 65% for
TTW, based on their three year historical average (2008-2010).
Figure 2: Rising yield on rising DPS
DPS, Bt/share (LHS); dividend yield, percent (RHS)
Source: Company data; KGI Securities (Thailand) estimate
Thailand’s water sector is favored for its good dividend from secured
earnings protected by long-term concession. Both stocks
historically provided high yields of 3-9% over the past three years
(2008-2010), which provides a yield gap of 1-7% compared to
one-year Thai T-bill over the same period. Over the past three
years (2008-2010), EASTW’s average dividend yield was 6.5% (vs.
TTW’s 4.2%).
Figure 3: EASTW and TTW’s dividend yields provided a yield
gap of 1-7% to one year Thai T-bill
Dividend yield, percent
*TTW was listed in 2008
Source: SET; KGI Securities (Thailand) estimates
Protected By Long-Term Concessions
Tap water concession and raw water pipeline management
concessions are provided by the government to operators like
EASTW and TTW on a long term basis with a level of exclusivity. As
such, both of the water companies effectively have a certain level of
monopoly in their service area with no direct competition over the
life of the concession.
EASTW and TTW key concessions have more than ten years
remaining, which means that both companies’ cash inflows should
be fairly secured for at least the next ten years.
Figure 4: Key concessions granted to EASTW and TTW group
Source: Company data
Growth Potential From New Concessions
According to a study commissioned by TTW in 2006 on
Nakonpathom and Samutsakorn, (provinces served by TTW), tap
water only accounts for 19% of water consumption (vs. 81%
groundwater). Considering that these two provinces are in the more
developed areas of Thailand given their proximity to Bangkok and
higher than average income per capita, it leads us to believe that a
0.01.02.03.04.05.06.07.08.09.0
10.0
2005 2006 2007 2008 2009 2010
TTW dividend yield EASTW dividend yield One-year Thai T-bill
0.0
2.0
4.0
6.0
8.0
10.0
0.0
0.2
0.4
0.6
0.8
2009 2010 2011F 2012F 2013F
TTW DPS EASTW DPS TTW dividend yield EASTW dividend yield
Thailand Utilities sector (Water)
*The Company may be issuer of Derivative Warrants on these securities. http://research.kgi.com; Bloomberg: KGIT <GO> Please see back page for disclaimer November 30, 2011 4
large proportion of the population in other parts of Thailand still
relies on underground water, which provides good potential growth
opportunities for water companies.
Figure 5: Income per capita in TTW’s service area is much
higher than Thailand’s average
Income per capita, Bt ‘000/annum
Source: Office of National Economic and Social Development Board
Catalyst
Opening of new water concession contract
We expect to see more concessions being award by PWA to private
companies to meet fast growing water demand from i) low
penetration in tap water; ii) worsening quality of groundwater from
increasing industrialization and seawater penetration; iii) stricter
industrial standards, especially in the food industry, which may
impede the use of groundwater; and iv) more foreign direct
investment (FDI) across the region on the back of the establishment
of the Asian Economic Community (AEC) in 2015.
Under PWA’s Strategic Plan (Volume 2) for 2012-2016, PWA aims to
increase its annual sales volume by 36% from 960mn cum in 2010
to 1,310mn cum in 2016. The planned increase of 350mn cum is
almost twice the amount of tap water sold in 2010 by EASTW and
TTW combined. We believe that PWA may require new joint
ventures with private companies, as it did in the past with TTW and
EASTW, in order to meet its growth target. For further details,
please refer to “Appendix I: Industry Overview”.
Over the past five years (2006-2010), EASTW and TTW have shown
higher tap sales volume CAGR of 22% and 12%, respectively, than
PWA’s 7%. We believe that this is due to the private companies’
ability to more efficiently respond to increased demand in the
absence of bureaucratic limitations, which may be what PWA needs.
Based on our sensitivity analysis, for every new 20K cum/day
concession, we estimate a fair value increase of Bt0.2/share (+2%)
for EASTW and Bt0.2/share (+3%) for TTW. We believe that EASTW
is more likely to win a new water concession contract with PWA as
it is 40% owned by the government and is not part of a regulatory
dispute with the PWA labour union, unlike TTW. We note that
EASTW has won two new tap water concessions over the past three
years while TTW has won none.
Figure 6: EASTW share price reacted positively to new
concessions
Share price, Bt
Source: SET; KGI Securities (Thailand) estimates
Valuation
EASTW and TTW trade at attractive valuations compared to their
regional peers and Thai utilities peers. On a 2012 PE basis, EASTW
and TTW trade at 9.1x and 10.0x, respectively (vs. peers average of
10.0x). EASTW is particularly attractive in this respect as its PE is at a
6% discount to its peers despite higher two year EPS CAGR of 13%
(vs. average of 11%).
Figure 7 EASTW has the best PE-EPS growth profile among its
regional peers
PE, times (x-axis); EPS 2-year CAGR, percent (y-axis)
*Stocks other than EASTW and TTW are based on Bloomberg consensus
Source: Bloomberg; KGI Securities (Thailand) estimates
Although TTW’s 2012 PBV of 2.4x is higher than the average of 1.5x,
but this is justified by its higher ROE of 24%, which is 47% above the
regional average of 16%.
0.0
2.0
4.0
6.0
8.0
Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11
Commencing date of major new concessions (>20k cum/day)
RayongChonburi
Chacheongsao and Bangpakong
0
200
400
600
800
Countrywide Nakhonpathom (TTW servicearea)
Samutsakorn (TTW servicearea)
HYF
MWC
RATCH
GLOW
EGCO TTW
EASTW
(10)
0
10
20
30
40
7 8 9 10 11 12
Best quadrant:High growth and low P/E
Thailand Utilities sector (Water)
*The Company may be issuer of Derivative Warrants on these securities. http://research.kgi.com; Bloomberg: KGIT <GO> Please see back page for disclaimer November 30, 2011 5
Figure 8: TTW’s high PBV is justified by its high ROE
ROE, times (x-axis); PBV, times (y-axis)
Source: Bloomberg; KGI Securities (Thailand) estimates
Please refer to regional comparison table on the next page.
EASTW Is Our Top Pick
In our view, EASTW is more attractive than TTW on various
measures. We forecast a higher EPS growth, higher dividend, less
expensive valuation, and less regulatory risk for EASTW compared to
TTW given the unresolved allegations against TTW’s sales contract
by PWA’s labour union.
We expect EASTW’s FY12F EPS growth of 23% (vs. TTW’s 3%) from i)
raw water tariff hike of 8%; ii) increase in tap water sales volume of 4%
and raw water sales volume of 3%; and iii) a decrease in corporate tax
rate to 23% (vs. EASTW’s current effective tax rate of 30%).
On a 3-year CAGR basis (2011-2013), we forecast EASTW EPS CAGR
of 14% (vs. TTW’s 2%). This is because i) EASTW’s tax rate is set to
decrease from the corporate tax rate reduction from 30% gradually to
23% in 2012 and to 20% in 2013 while TTW’s tax rate is set to
increase from the expiration of tax benefit in 2012; and ii) TTW’s
additional sales volume attracts a lower tariff than its first 300K
cum/day as per the two tier pricing system under the contract.
Figure 9: EASTW EPS is growing at a faster rate than TTW
EPS, Bt
Source: SET; KGI Securities (Thailand) estimates
In our view, EASTW is trading at a more attractive valuation than TTW.
Despite EASTW’s higher EPS growth, it is trading at a 9% discount to
TTW on FY12F PE basis. Nevertheless, we see TTW’s undemanding
valuation as hard to ignore. It has fallen 17% YTD (vs. SET decline of
5%) based on what we see as a market misconception and is
currently trading below its average forward PE and PBV (since its
listing in 2008) while providing a good dividend yield of 6-7% on
our FY12-13F.
Figure 10: TTW forward PE –below its average (since its listing)
Forward PE, times
Source: SET; KGI Securities (Thailand) estimates
Figure 11: TTW forward PBV –below its average (since its listing)
Forward PBV, times
Source: SET; KGI Securities (Thailand) estimates
Risk
Government intervention is key
We believe that government intervention in keeping the tariff low in
favour of the public is the key risk to the sector. For instance, the
previous government asked for cooperation from EASTW to not
increase the 2011 raw water tariff, which may be a result of trying
to win public support in the run up to the election in June 2011.
Nevertheless, although EASTW agreed to keep the tariff flat for
2011, it is able to increase its 2012 raw tariff by 8% (vs. Thailand’s
2011 headline inflation of 3.9% on our forecast) to compensate for
the lack of increase in the prior year.
0.00
0.20
0.40
0.60
0.80
2009 2010 2011F 2012F 2013FTTW EASTW
HYFMWCRATCH
GLOW
EGCO
TTW
EASTW
0.0
0.5
1.0
1.5
2.0
2.5
7.0 9.0 11.0 13.0 15.0 17.0 19.0 21.0 23.0 25.0
High ROE, high PBV
6.0
7.0
8.0
9.0
10.0
11.0
12.0
13.0
14.0
15.0
16.0
Jul-08 Dec-08 May-09 Oct-09 Mar-10 Aug-10 Jan-11 Jun-11 Nov-11
+2 SD = 13.20
+1 SD = 11.89
Average = 10.58
-1 SD = 9.27
-2 SD = 7.96
1.0
1.5
2.0
2.5
3.0
3.5
Jul-08 Dec-08 May-09 Oct-09 Mar-10 Aug-10 Jan-11 Jun-11 Nov-11
+2 SD = 2.65
+1 SD = 2.40
Average = 2.15
-1 SD = 1.90
-2 SD = 1.64
Thailand Utilities sector (Water)
*The Company may be issuer of Derivative Warrants on these securities. http://research.kgi.com; Bloomberg: KGIT <GO> Please see back page for disclaimer November 30, 2011 6
2012F 2013F 2012F 2013F 2012F 2013FEASTERN WATER RESOURCES DEV EASTW TB 9.05 8.09 1.38 1.28 7.73 8.65THAI TAP WATER SUPPLY PCL TTW TB 9.34 8.94 1.91 1.75 6.96 7.27HYFLUX LTD HYF SP 9.87 8.96 1.20 1.10 4.03 4.29MANILA WATER COMPANY MWC PM 9.03 9.12 1.54 1.31 3.36 3.49RATCHABURI ELEC GEN HODG PUB RATCH TB 10.28 11.38 1.21 1.13 5.51 5.67GLOW ENERGY PCL GLOW TB 11.18 9.43 1.99 1.78 4.60 5.18ELECTRICITY GENERATING PCL EGCO TB 7.80 7.77 0.77 0.72 5.98 6.09Average 9.51 9.10 1.43 1.29 5.46 5.81TTW premium/(discount) to average (2%) (2%) 34% 35% 28% 25%EASTW premium/(discount) to average (5%) (11%) (3%) (1%) 42% 49%
PE (x) PBV (x) Dividend Yield (%)
Figure 12: Regional comparison (closing prices as of 29 November 2011)
*Stocks other than EASTW and TTW are based on Bloomberg consensus
Source: Bloomberg, KGI Securities (Thailand) estimates
*The Company may be issuer of Derivative Warrants on these securities. http://research.kgi.com; Bloomberg: KGIT <GO> Please see back page for disclaimer November 30, 2011 7
Eastern Water Resources
Development and Management (EAST.BK/EASTW TB)
November 24, 2011 Utilities (Water)
http://research.kgi.com; Bloomberg: KGIT <GO> Thailand
Outperform Initiate coverage
1 Piyathida Vongvivathchai
2 66.2658.8888 Ext. 8856
Return L Price as of Nov 29, 2011
2012 target price (Bt shr)
Upside/downside (%)
The percentile of excess return (%)
Dividend yield-11E (%)
6.05
8.80
45.5
88.7
5.4
Balance Sheet M Book value/shr-11E (Bt)
P/B-11E (x) Net debt/equity-11E (%)
4.06
1.5
0.48
Trading N 52-week trading range (Bt)
Mkt cap-Bt mn/US$mn
Outstanding shares (mn)
Free floating shares (mn)
Foreign ownership (mn)
3M avg. daily trading (mn)
Abs. performance (3,6,12M) (%)
Rel. performance (3,6,12M) (%)
5.1-6.8
Bt10,066/US$310
1,664
513
499
0.2
-1.6;0;-10.4
6.6;7.9;-8.9
Company Description O Eastern Water Resources Development and
Management (EASTW) is the only major supplier
of raw water in the eastern seaboard, Thailand’s
industrial hub. It supplies to industrial users as well
as the state agency to be further processed as tap
water. EASTW also operates tap water business in
five provinces in Thailand. Both of its businesses
are protected by long-term concession granted by
the government with more than ten years
remaining.
Hidden gem Strong dividend yield of 7-9%
We forecast an attractive dividend yield of 7-9% for EASTW on our FY12-13F, backed by i)
our forecast EPS 3-year CAGR of 14% (2011-2013); ii) dividend pay out ratio of 70%, as
per its 3-year historical; and iii) limited CAPEX requirement over the next 2-3 years. EASTW’s
dividend yield is at a 40-50% premium to its regional peers average dividend yield of 5-6%.
Secured earnings growth protected by concession
We forecast EPS 3-year CAGR of 14% for 2011-13 on the back of i) an increase in sales
volume from continued economic growth; ii) an increase in inflation adjusted tariff; and iii)
corporate tax cuts from 30% to 23% in 2012 and further to 20% in 2013. We see its EPS
growth continuing over the longer term given its stable cash flow protected by concessions
with more than ten years remaining.
Initiate coverage with a rating of Outperform and a target price of Bt8.80
We initiate coverage on EASTW with a rating of Outperform and DCF based target price of
Bt8.80 per share based on a 25% discount to its DCF valuation due to its limited liquidity.
The key catalysts in our view are winning new major tap water concessions. In our view, we
see EASTW as the most attractive among regional peers as it is trading at a PE of 9.1x on
our FY12F, which is a 6% discount to its regional peers despite EASTW’s higher two year
CAGR of 14% (vs. average of 11%) for 2012-2013.
Eastern Water Resources Development and Management (EASTW) price chart Share price, Bt (LHS); price performance relative to SET, percent (RHS)
Source: SET
Year to Dec Sales Sales growth EBITDA NP EPS EPS growth(Bt mn) (%) (Bt mn) (Bt mn) (Bt) (%)
2009 2,826 16.6 1,556 807 0.49 33.12010 3,066 8.5 1,690 909 0.51 5.12011F 3,168 3.3 1,790 903 0.54 6.42012F 3,527 11.3 2,083 1,112 0.67 23.22013F 3,730 5.7 2,204 1,244 0.75 11.9Year to Dec GM EV/EBITDA PBV PER Dividend ROAE
(%) (X) (X) (X) Yield (%) (%)2009 55.4 6.8 1.2 8.5 7.2 13.02010 53.6 6.8 1.7 12.6 5.9 14.02011F 55.9 6.7 1.5 11.2 6.3 13.52012F 56.3 5.6 1.4 9.1 7.7 15.82013F 56.4 5.0 1.3 8.1 8.7 16.4
0 .01 .02 .03 .04 .05 .06 .07 .08 .09 .0
10 .0
N o v-09 M a r-10 A u g -10 N o v-10 M a r-11 Ju l-11 N o v-11(50.0 )(40 .0 )(30 .0 )(20 .0 )(10 .0 )-10 .020 .030 .040 .0
E A S T W P ric e Ind ex p erfo rm a n c e rela tive to S E T
Thailand Eastern Water Resources Development and Management
*The Company may be issuer of Derivative Warrants on these securities. http://research.kgi.com; Bloomberg: KGIT <GO> Please see back page for disclaimer November 30, 2011 8
2010 2011F 2012F 2013FAverage tariff (Bt/cum) Raw water 9.25 9.25 9.62 9.94 Tap water 10.48 10.83 11.25 11.62Sales volume (mn cum) Raw water 245 257 265 273 Tap water 59 64 67 69Effective tax rate 30% 30% 23% 20%Growth rates YoYAverage tariff Raw water 7.3% 0.0% 4.0% 3.3% Tap water 3.9% 3.3% 3.9% 3.3%Sales volume Raw water 12.3% 5.0% 3.0% 3.0% Tap water 11.0% 9.0% 4.0% 4.0%Key economic assumptionsCPI (Headline inflation) 3.3% 3.9% 3.3% 3.3%Real GDP growth 7.8% 3.0% 3.2% 3.5%
-5% -1% Base case +1% +5%Raw waterChange in tariff
FY12F tariff (8.8) (1.8) 0.0 1.8 8.8 FY13F tariff (8.4) (1.5) 0.0 2.0 9.0Change in volume
FY12F volume (5.6) (1.1) 0.0 1.1 5.6 FY13F volume (5.5) (1.1) 0.0 1.1 5.5Tap waterChange in tariff
FY12F tariff (2.6) (0.5) 0.0 0.5 2.6 FY13F tariff (2.6) (0.5) 0.0 0.5 2.6Change in volume
FY12F volume (1.3) (0.3) 0.0 0.3 1.3 FY13F volume (1.3) (0.3) 0.0 0.3 1.3
Why We Like The Stock
Strong dividend yield of 7-9%
We forecast an attractive dividend yield of 7-9% for EASTW on our
FY12-13F on the back of i) our forecast EPS 3-year CAGR of 14%
(2011-2013); ii) dividend pay out ratio of 70%, as per its 3-year
historical; and iii) limited CAPEX requirement over the next 2-3 years.
EASTW’s dividend yield of 7-9% is at a 40-50% premium to its
regional peers average dividend yield of 5-6%.
EASTW has historically provided a high yield of 4-9% over the past
four years (2007-2010) with a DPS 3-year CAGR of 15%. We
forecast its DPS CAGR of 11% over the next three years
(2011-2013) and expect its DPS growth to continue over the long
term given its stable cash flow protected by concessions with more
than ten years remaining.
Figure 13: Good dividend yield expected
Dividend per share and EPS, Bt (LHS); dividend yield, percent (RHS)
Source: SET; KGI Securities (Thailand) estimates
Good EPS growth of 12-23% on our FY12-13F We forecast an EPS growth of 23% for 2012, and 12% for 2013
propelled by i) a raw water tariff hike; ii) increase in sales volume;
and iii) corporate tax cut from 30% to 23% in 2012 and further to
20% in 2013.
EASTW plans to raise its raw water tariff by 8% in the beginning of
2012 to reflect inflation over the past year as well as its recent
investment cost in pipeline extension (i.e. Map Ta Phut pipeline #3).
The increase is expected to be gradually applied to all customer
groups in 2012. Hence, we conservatively forecast an average 2012
increase in tariff of 4%.
The sales volume growth for raw water and tap water comes from
continuous increase in demand from both industrial and residential
users on the back of continued economic growth. In addition to its increasing top line, EASTW’s net profit margin has
also continuously improved since 2007, rising from 23% to 28% in
2010 (excluding one-off disposal gain) which shows the
effectiveness of its cost control program. This constitutes a decrease
in electricity cost in water distribution by shifting more activity to
off-peak hours, reduction in interest expense from more active
finance management, and decrease in SG&A from tighter control
on employees’ expense budgets. We expect net profit margin to
continue to increase from 28% in 2010 to 33% in 2013 due to the
decrease in tax rate from 30% to 23% in 2012 and to 20% in 2013. We note that the increasing net profit also resulted in an increasing
return on capital employed (ROCE), from 10% in 2007 to 16% in
2010, which shows increasing efficiency in capital utilisation. We
expect ROCE to increase further to 18% in 2013 on the back of the
tax cut.
Figure 14: Continuous improvement in net profit margin and ROCE
Net profit margin and ROCE, percent
*Removed one-off disposal gain
Source: Company data; KGI Securities (Thailand) estimates
Figure 15: Key assumptions
Source: Company data; KGI Securities (Thailand) estimates
Figure 16: Sensitivity – Impact on 2012/2013 EPS (%)
*For instance, an increase in 2012 raw water tariff by 1% will lead to an increase in 2012
EPS of 1.8%
Source: KGI Securities (Thailand) estimates
0.0
0.2
0.4
0.6
0.8
2007 2008 2009 2010* 2011F 2012F 2013F0
2
4
6
8
10
DPS EPS Dividend yield
0
10
20
30
40
2007 2008 2009 2010* 2011F 2012F 2013F
Net profit margin Return on Capital Employed
Thailand Eastern Water Resources Development and Management
*The Company may be issuer of Derivative Warrants on these securities. http://research.kgi.com; Bloomberg: KGIT <GO> Please see back page for disclaimer November 30, 2011 9
Upside risk to our FY12-13F EPS We see an upside risk of 13-19% to our FY12-13F EPS from i) EASTW’s application for a BOI tax benefit for its new pipeline expansion (Map Ta Phut pipeline #3) with a capacity of 100m cum/year; and ii) conclusion of three new industrial estate contracts under negotiation. Based on our discussion with management, positive developments have been made in regards to tax benefit negotiations and a conclusion should be reached by the end of this year. If the tax benefit is granted, our FY12-13F EPS could increase by 5-7% (Bt0.04-0.05/share). EASTW also expects a positive conclusion to the negotiation of clarified water contracts with three new industrial estates (Rojana Industrial Park (ROJN.BK/ROJNA TB), Charoen Pokphand Foods (CPF.BK/CPF TB)*, and IRPC (IRPC.BK/IRPC TB)*) totaling 30mn cum pa (11% of our FY12F raw water sales volume). A conclusion is expected to be reached this year end. The industrial estates are expected to start operations in 2013 and could increase our FY13F EPS by 8-12% (Bt0.06-0.09/share). Positive longer-term outlook We expect earnings to continue to increase in the longer term on the back of i) an increase in average water tariff from annual adjustment to account for inflation; ii) an increase in substitution of tap water in place of underground water; iii) a steady increase in industrial activity following a jump in BOI application from the petrochemical industry (+225% YoY in 9M11); and iv) potential windfall from relocation by industrial plants in the central region to the eastern region following the flood. At the 2Q11 analyst meeting, EASTW’s management said that it was focusing on growth opportunities in water supply projects with a minimum equity IRR of 15%. Given the cost of equity of 8% on our estimate, we expect future projects that EASTW invests in to be value accretive. Strong balance sheet EASTW’s balance sheet is strong with a low net D/E ratio of 0.5x (as of 3Q11) which would allow it to take advantage of good investment opportunities when they arise. Based on its net D/E target of not exceeding 1x, we expect EASTW to be able to raise additional debt of Bt3.7bn. Figure 17: Low net D/E
Net debt to equity, times
Source: SETSMART
Catalyst New tap water concession In our view, the key catalyst would be winning new major tap water concessions. Based on our discussion with management, EASTW is actively looking for new concession opportunities from both the PWA and the local government. Under PWA’s Strategic Plan (Volume 2) for 2012-2016, PWA aims to increase its annual sales volume by 36% from 960mn cum in 2010 to 1,310mn cum in 2016. The planned increase of 350mn cum is six times the amount of tap water sold in 2010 by EASTW. We believe that PWA may require new joint ventures with private companies in order to meet its growth target. We see EASTW as the key beneficiary if PWA were to open any new concessions given that i) EASTW already has eight joint venture projects with PWA (67% of the 12 JV projects granted by PWA); ii) there has been no known dispute between EASTW and PWA; and iii) PWA owns a 40% stake in EASTW. EASTW is also actively looking to win new concessions from local governments, namely in the eastern region, which produce their own tap water or where groundwater is still being heavily used, as the company is likely to be able to produce tap water at a lower cost due to economies of scale. One of EASTW’s key performance indicators (KPI) is to win one new tap water concession per year. Over the past two years, it won two new concessions in Chonburi, one in June 2009 from PWA and one in December 2010 from the local government. The capacity from the two new contracts added 10% to EASTW’s total capacity (from 244K cum/day to 269K cum/day). Share price has historically reacted positively 2-3 months prior to the commencement of major new concessions.
Figure 18: Share price reacted positively to new concession
Share price, Bt
Source: SET; KGI Securities (Thailand) estimates
We estimate a fair value increase of Bt0.2/share (+2% to our target
price) for every additional new concession of 20K cum/day
0.94
1.151.02
0.510.42
0.42
2005 2006 2007 2008 2009 2010
0.0
2.0
4.0
6.0
8.0
Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11
Commencing date of major new concessions (>20k cum/day)
RayongChonburi
Chacheongsao and Bangpakong
Thailand Eastern Water Resources Development and Management
*The Company may be issuer of Derivative Warrants on these securities. http://research.kgi.com; Bloomberg: KGIT <GO> Please see back page for disclaimer November 30, 2011 10
E nterpris e value 22,173.6C a lc u la tion of ne t de bt:S hort te rm de bt (659.4)L ong te rm de bt (2,875.0)Minority in te re s t (2.8)L e s s : C as h 1,062.3N e t de bt (2,474.9)E quity value 19,698.7S ha re s outs tanding 1,663.7E quity value / s hare (before dis c ount) 11.8
L ac k of liqu id ity d is c ount 25% (3.0)E quity value / s hare (after dis c ount) 8.8
Weighted average cost of capital: 7.0%Cost of debtCost of debt 5.5%Marginal tax rate 20.0%Cost of debt after tax shield 4.4%Cost of equityRisk-Free Rate (rf) 4.0%Market Risk Premium (rm-rf) 8.0%Raw (observed) beta 0.47Cost of equity using raw beta 7.8%
0.0% 0.5% 1.0% 1.5% 2.0%9.0% 5.9 6.2 6.5 7.0 7.48.0% 6.7 7.1 7.6 8.2 8.87.0% 7.8 8.4 9.0 9.8 10.76.0% 9.2 10.0 11.0 12.1 13.65.0% 11.3 12.5 13.9 15.9 18.4
Perpetual growth rate
WA
CC
Valuation & Action
Rate Outperform with DCF target price of Bt8.80
We initiate coverage on EASTW with a rating of Outperform on a
two stage DCF based target price of Bt8.80, suggesting a 45%
potential upside.
In our view, DCF is the best valuation method for a utility company
with a secured stream of cash flow like EASTW because it best
captures the increase in tariff and volume growth over the life of the
concessions in comparison to other valuation methodologies. We
applied a WACC of 7.0% based on a CoD of 4.4% and CoE 7.7%.
We have applied a 25% discount to the DCF derived target price of
Bt11.80/share for its limited liquidity with an average daily trading
volume of US$0.13mn/day (Bt4.04mn).
We see EASTW as the most attractively valued stock among regional
peers as it is trading at a PE of 9.1x on our FY12F, which is a 6%
discount to its regional peers average despite its higher 2-year EPS
CAGR of 14% (vs. peers average of 11%) for 2012-2013.
The key catalysts in our view are i) winning new tap water
concessions; and ii) relocation by industrial users in Central Thailand
to Eastern Thailand following the flood.
The key risks to our target price are i) government intervention in
capping water tariffs; ii) disruption to water distribution; iii) lower
than expected demand (due to slower than expected economic
growth, cold weather, etc).
Figure 19: EASTW’s WACC
Source: KGI Securities (Thailand) estimates
Figure 20: Equity value calculation
Source: Company data; KGI Securities (Thailand) estimates
Figure 21: Sensitivity of our DCF based fair value (Bt/share)
Source: Company data; KGI Securities (Thailand) estimates
Figure 22: EASTW has the best PE-EPS growth profile among its
regional peers
PE, times (x-axis); EPS 2-year CAGR, percent (y-axis)
*Stocks other than EASTW and TTW are based on Bloomberg consensus
Source: Bloomberg; KGI Securities (Thailand) estimates
Not only is EASTW’s FY12F PE a discount to its regional peers, it is
also at a discount to its 5-year historical average. Figure 23: Trading below its 5-year average forward PE
Forward PE, times
Source: KGI Securities (Thailand) estimates
Please refer to Appendix II EASTW at a glance for the company’s background.
0.0
5.0
10.0
15.0
20.0
Dec-06 Jul-07 Feb-08 Sep-08 Apr-09 Nov-09 Jun-10 Jan-11 Aug-11
+2 SD = 16.35
+1 SD =13.46
Average = 10.57
-1 SD = 7.69
-2 SD = 4.80
HYF
MWC
RATCH
GLOW
EGCO TTW
EASTW
(10)
0
10
20
30
40
7 8 9 10 11 12
Best quadrant:High growth and low P/E
Thailand Eastern Water Resources Development and Management
*The Company may be issuer of Derivative Warrants on these securities. http://research.kgi.com; Bloomberg: KGIT <GO> Please see back page for disclaimer November 30, 2011 11
COGS Depreciation Operating Exp. OperatingRevenue Revenue Revenue Margin
2009 44.6% 10.8% 11.6% 33.0%2010 46.4% 12.1% 10.8% 30.8%2011F 44.1% 12.4% 10.7% 32.7%2012F 43.7% 13.6% 10.0% 32.7%2013F 43.6% 13.5% 10.0% 32.9%
Working Capital Net PPE Other Assets CapitalRevenue Revenue Revenue Turnover
2009 0.05 2.40 0.40 0.352010 -0.21 2.54 0.36 0.372011F 0.09 2.61 0.35 0.332012F 0.22 2.35 0.32 0.352013F 0.36 2.23 0.30 0.35
Operating Capital Cash After-tax ReturnMargin Turnover Tax Rate on Inv. Capital
2009 33.0% 0.4 71.4 8.32010 30.8% 0.4 70.4 8.02011F 32.7% 0.3 69.5 7.52012F 32.7% 0.3 77.0 8.72013F 32.9% 0.3 77.0 8.8
Year 1- + +
Year x x =
=
Year 1/ + + =
Year to 31 Dec (Bt mn) 2009 2010 2011F 2012F 2013FOperating Cash Flow 532 1,936 1,270 1,565 1,732 Net Profit 807 909 903 1,112 1,244 Depreciation & Amortization 306 370 394 480 503 Change in Working Capital (581) 658 (27) (27) (16) Others 0 0 0 0 0Investment Cash Flow 605 (1,383) (858) (519) (534) Net CAPEX 605 (1,383) (858) (519) (534) Change in LT Investment 0 0 0 0 0 Change in Other Assets 0 0 0 0 0Free Cash Flow 1,137 553 412 1,046 1,197Financing Cash Flow (1,114) (235) 208 (663) (623) Change in Share Capital 0 0 0 0 0 Net Change in Debt (529) 400 971 (94) 44 Change in Other LT Liab. (585) (635) (763) (569) (667)Net Cash Flow 23 318 619 384 574
Year to 31 Dec (Bt mn) 2009 2010 2011F 2012F 2013FSales 2,826 3,066 3,168 3,527 3,730 Cost of Goods Sold 1,260 1,422 1,397 1,542 1,627Gross Profit 1,566 1,644 1,771 1,985 2,103 Operating Expenses 329 330 340 352 373Operating Profit 1,237 1,314 1,431 1,633 1,731Net Interest (100) (90) (86) (137) (124) Interest Income 21 0 11 21 21 Interest Expense 120 90 97 158 145Net Investment Income/(Loss) 0 0 0 0 0Net other Non-op. Income/(Loss) (7) 7 (46) (51) (51)Net Extraordinaries (0) 59 (0) (0) (0)Pretax Income 1,130 1,290 1,299 1,445 1,556Income Taxes 323 382 396 332 311Net Profit 807 909 903 1,112 1,244EBITDA 1,556 1,690 1,790 2,083 2,204EPS (Bt) 0.49 0.51 0.54 0.67 0.75
As of 31 Dec (Bt mn) 2009 2010 2011F 2012F 2013FTotal Assets 9,148 9,871 10,963 11,422 12,048Current Assets 1,165 875 1,503 1,923 2,519 Cash & ST Investments 125 443 1,062 1,446 2,020 Inventories 9 10 9 10 11 Accounts Receivable 238 311 320 356 376 Others 793 112 112 112 112Non-current Assets 7,983 8,996 9,460 9,498 9,529 LT Investments 85 91 91 91 91 Net fixed Assets 6,775 7,791 8,255 8,293 8,324 Others 1,122 1,113 1,113 1,113 1,113Total Liabilities 2,804 3,254 4,313 4,122 4,171Current Liabilities 1,034 1,512 1,225 1,140 1,189 Accounts Payable 66 101 83 92 97 ST Borrowings 500 929 659 565 610 Others 468 482 482 482 482Long-term Liabilities 1,770 1,742 3,089 2,982 2,982 Long-term Debts 1,729 1,635 2,982 2,875 2,875 Others 41 107 107 107 107Shareholders' Equity 6,344 6,617 6,757 7,300 7,877 Common Stock 1,664 1,664 1,664 1,664 1,664 Capital Surplus 2,183 2,180 2,433 2,990 3,569 Retained Earnings 2,497 2,773 2,660 2,646 2,645 Preferred Stock 0 0 0 0 0
Year to 31 Dec (Bt mn) 2009 2010 2011F 2012F 2013FForecast DriversSales volumes (M cum) 218.1 244.9 257.1 264.8 272.8Avg raw water tariff (Cum/Bt) 8.6 9.3 9.3 9.6 9.9Growth (% YoY)Sales 16.6 8.5 3.3 11.3 5.7OP 35.6 6.2 8.9 14.1 6.0EBITDA 22.3 8.6 5.9 16.4 5.8NP 33.1 12.5 (0.7) 23.2 11.9EPS 33.1 5.1 6.4 23.2 11.9Profitability (%)Gross Margin 55.4 53.6 55.9 56.3 56.4Operating Margin 43.8 42.8 45.2 46.3 46.4EBITDA Margin 55.1 55.1 56.5 59.1 59.1Net Profit Margin 28.6 27.7 28.5 31.5 33.4ROAA 8.7 9.6 8.7 9.9 10.6ROAE 13.0 14.0 13.5 15.8 16.4StabilityGross Debt/Equity (%) 44.2 49.2 63.8 56.5 52.9Net Debt/Equity (%) 42.2 42.5 48.1 36.7 27.3Interest Coverage (x) 10.4 15.4 14.4 10.2 11.8Interest & ST Debt Coverage (x) 2.0 1.4 1.8 2.2 2.3Cash Flow Interest Coverage (x) 4.4 21.6 13.1 9.9 12.0Cash Flow/Interest & ST Debt (x) 0.9 1.9 1.7 2.2 2.3Current Ratio (x) 1.1 0.6 1.2 1.7 2.1Quick Ratio (x) 1.1 0.6 1.2 1.7 2.1Net Debt (Bt mn) 2,679 2,811 3,251 2,676 2,150Per Share Data (Bt)EPS 0.5 0.5 0.5 0.7 0.7CFPS 0.3 1.2 0.8 0.9 1.0BVPS 3.8 4.0 4.1 4.4 4.7SPS N.A. N.A. N.A. N.A. N.A.EBITDA/Share 0.9 1.0 1.1 1.3 1.3DPS 0.4 0.4 0.4 0.5 0.5ActivityAsset Turnover (x) 0.3 0.3 0.3 0.3 0.3Days Receivables 30.8 37.0 36.9 36.8 36.8Days Inventory 2.7 2.5 2.4 2.4 2.4Days Payable 5.2 7.1 5.9 6.0 6.0Cash Cycle 28.2 32.4 33.4 33.3 33.3
Balance Sheet
Source: Company data; KGI Securities (Thailand) estimates
Key Ratios
Source: Company data; KGI Securities (Thailand) estimate
Profit & Loss
Source: Company data; KGI Securities (Thailand) estimates
Cash Flow
Source: Company data; KGI Securities (Thailand) estimates
Rates of Return on Invested Capital
Source: Company data; KGI Securities (Thailand) estimates
*The Company may be issuer of Derivative Warrants on these securities. http://research.kgi.com; Bloomberg: KGIT <GO> Please see back page for disclaimer November 30, 2011 12
Thai Tap Water Supply (TTW.BK/TTW TB)*
November 30, 2011 Utilities (Water)
http://research.kgi.com; Bloomberg: KGIT <GO> Thailand
Outperform Initiate coverage
1 Piyathida Vongvivathchai
2 66.2658.8888 Ext. 8856
Return L Price as of Nov 29, 2011
2012 target price (Bt shr)
Upside/downside (%)
The percentile of excess return (%)
Dividend yield-11E (%)
5.30
7.00
32.1
67.7
6.5
Balance Sheet Book value/shr-11E (Bt)
P/B-11E (x) Net debt/equity-11E (%)
2.21
2.35
126
Trading N 52-week trading range (Bt)
Mkt cap-Bt bn/US$bn
Outstanding shares (mn)
Free floating shares (mn)
Foreign ownership (mn)
3M avg. daily trading (mn)
Abs. performance (3,6,12M) (%)
Rel. performance (3,6,12M) (%)
4.8-6.5
1,147mn/US$653mn
3,990
1,367
136
3
2.9;-7.8;-14.5
11.5;-0.5;-13
Company Description O Thai Tap Water Supply (TTW) is Thailand’s largest
private tap water provider. It provides tap water
under long-term concession with a minimum
take or pay contract to provinces in the vicinities
of Bangkok, including Nakonpathom,
Samutsakorn, and Pathumthani.
Turn on the tap
Misconception provides investment opportunity
TTW has underperformed the SET by 12% ytd (TTW’s 17% vs. SET 5%)due to what we see as
a market misconception of the threat to its sales volume from Provincial Waterworks
Authority’s (PWA) new pumping station located in proximity to TTW’s service area. In our
view, the key reason behind the subdued sales growth in the first two months of this year is
seasonal cold weather in line with the temporary dip in the previous years rather than
competition from PWA. TTW’s YTD share price weakness should provide a good entry point
for investors.
Earnings protected by take or pay contract
TTW earnings are very resilient with take or pay agreements for almost 80% of its total
production capacity, on top of its inflation adjusted sales tariff. Even if it only manages to
sell at its minimum off-take capacity, we estimate fair value to be Bt6.1/share, which implies
a 15% upside from current share price and suggests a total return (including dividend) in
excess of 20% for 2012.
Rate Outperform with a DCF based target price of Bt7.00
We initiate coverage on TTW with a rating of Outperform for its secured earnings,
inexpensive valuation, and good dividend yield of 6-7% (which is a 20-30% premium to its
regional peers). We see a potential fair value upside from an increase in investment in CK
Power which could add another Bt0.5/share. The key catalyst to the stock should be a
positive resolution on the allegations against TTW’s sales contract with PWA.
Thai Tap Water Supply (TTW) price chart Share price, Bt (LHS); price performance relative to SET, percent (RHS)
Source: SET
Year to Dec Sales Sales growth EBITDA NP EPS EPS growth(Bt mn) (%) (Bt mn) (Bt mn) (Bt) (%)
2009 4,048 12.3 3,055 1,594 0.40 17.32010 4,395 8.6 3,342 2,063 0.52 29.42011F 4,602 4.7 3,741 2,058 0.52 (0.3)2012F 4,936 7.2 3,975 2,125 0.53 3.32013F 5,228 5.9 4,195 2,207 0.55 3.8Year to Dec GM EV/EBITDA PBV PER Dividend ROAE
(%) (X) (X) (X) Yield (%) (%)2009 70.4 8.1 2.2 11.3 6.3 18.72010 70.6 7.8 2.8 12.9 6.6 22.72011F 68.8 8.3 2.4 10.3 6.3 22.52012F 68.7 7.8 2.3 10.0 6.5 23.82013F 68.6 6.5 2.3 9.6 6.8 24.4
0 .01 .02 .03 .04 .05 .06 .07 .08 .09 .0
10 .0
N o v-09 M a r-10 A u g -10 N o v-10 M a r-11 Ju l-11 N o v-11(50.0 )(40 .0 )(30 .0 )(20 .0 )(10 .0 )-10 .020 .030 .040 .0
T T W P ric e In d ex p erfo rm a n c e rela tive to S E T
Thailand Thai Tap Water Supply
*The Company may be issuer of Derivative Warrants on these securities. http://research.kgi.com; Bloomberg: KGIT <GO> Please see back page for disclaimer November 30, 2011 13
Why We Like The Stock
Rate Outperform with a target price of Bt7.00
We initiate coverage on TTW with a rating of Outperform due to its
secured earnings, and hence dividend, for the next ten years under
long-term concessions with the government.
TTW has underperformed the SET by 12% YTD (TTW’s 17% vs. SET
5%) due to what we see as a market misconception of the threat to
the company’s sales volume from PWA’s new pumping station
located in proximity to TTW’s service area.
In our view, the key reason behind the subdued sales volume in the
first two months of this year was seasonal winter effect rather than
the commencement of the new water station which coincidentally
happened around the same time.
TTW’s sales volume has resumed its growth path since March. We
note that in six out of the past seven years, there have been
temporary seasonal dips in demand in the first 1-2 months of each
year. We see the YTD share price weakness as a good entry point
for investors.
Figure 24: Annual dip in January/February sales volume
Sales volume, mn cum
Source: Company data; KGI Securities (Thailand) estimate
Good dividend yield of 6-7%
TTW provides a good dividend from secured earnings protected by
long-term concession and a strong balance sheet.
Our FY12-13F dividend yield of 6-7% is on the back of i) EPS
3-year CAGR of 2% on our FY11-13F; and ii) dividend payout
ratio of 65% as per its 3-year historical average. TTW’s dividend
yield is at a 20-30% premium to its regional peers average
dividend yield of 5-6%.
Figure 25: Good dividend expected
Dividend per share and EPS, Bt (LHS); dividend yield, percent (RHS)
Source: SET, KGI Securities (Thailand) Estimates
Over the past two years (2009-2010), TTW’s EPS CAGR was 19% while its DPS CAGR was a stellar 32%. We forecast a more modest growth for DPS and EPS 3-year CAGR of 2% (2011-2013) due to the expiration of tax benefits in mid-June 2012. If the tax benefit expiration is removed, TTW’s EPS growth would increase to 7-10% on our FY12-13F. We expect its DPS and EPS growth to continue in the longer term given its stable cash flow protected by inflation adjusted tariff and concessions with more than ten years remaining. Protection against downside risk from minimum off take The agreements by TTW and PTW with PWA include a minimum order quantity (MOQ), which would limit downside risk to the group’s cash flow. On our estimate, even if TTW group only manages to sell at its MOQ, the fair value per share would still be Bt6.10, which still suggests a 15% upside from the current share price. TTW group’s (including PTW) 2011 MOQ of 638K cum/day accounts for 92% of its 3Q11 average daily sales of 692K cum/day. As per the contract with PWA in 2008 to support TTW’s capacity expansion from 320K cum/day to 440K cum/day (completed in 2010) to serve growing demand for tap water, PWA agreed to annually increase the MOQ by 9K cum/day for the next five years until MOQ reaches 354K cum/day in 2015. PTW’s MOQ of 320K cum/day is fixed until the end of its contract in 2023.
Figure 26: TTW’s MOQ accounts for ~100% of FY12F average
sales volume
Sales volume, ‘000 cum per day
Source: Company data; KGI Securities (Thailand) estimate
0.0
0.2
0.4
0.6
0.8
2008 2009 2010 2011F 2012F 2013F0
2
4
6
8
DPS EPS Dividend yield
0
200
400
600
800
Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11
0
100
200
300
400
500
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Avg daily sales MOQ Capacity
Thailand Thai Tap Water Supply
*The Company may be issuer of Derivative Warrants on these securities. http://research.kgi.com; Bloomberg: KGIT <GO> Please see back page for disclaimer November 30, 2011 14
2010 2011F 2012F 2013FAverage tariff (Bt/cum) TTW - below 300k cum/day 24.46 25.11 26.09 26.83 TTW - above 300k cum/day 9.78 11.02 10.44 10.73 PTW 10.99 11.37 11.81 12.15Sales volume (m cum) TTW 120 120 126 131 PTW 125 130 135 140Total 245 251 261 271Effective tax rate (%) 8.0 9.0 14.0 17.0Growth rateAverage tariff (Bt/cum) TTW (%) 3.9 3.3 4.9 3.8 PTW (%) (4.4) 3.3 3.9 2.8Sales volume (m cum) TTW (%) 10.1 (0.6) 5.0 4.0 PTW (%) 7.1 4.1 3.5 3.5Total (%) 8.6 1.8 4.2 3.7Key economic indicatorsCPI (Headline inflation) - YoY (%) 3.3 3.9 2.8 3.3Real GDP growth - YoY (%) 7.8 1.8 3.5 3.5
-5% -1% Base case +1% +5%TTWChange in tariff (B/m3) FY12 sales tariff (%) (5.8) (1.2) 0.0 1.2 5.8 FY13 sales tariff (%) (4.4) 0.3 0.0 2.6 7.2Change in sales volume FY12 volume (%) (2.1) (0.4) 0.0 0.4 2.1 FY13 volume (%) (2.3) 0.5 0.0 0.5 2.3PTWChange in tariff (B/m3) FY12 sales tariff (%) (3.0) (0.6) 0.0 0.6 3.0 FY13 sales tariff (%) (3.0) (0.6) 0.0 0.6 3.0Change in sales volume FY12 volume (%) (2.3) (0.5) 0.0 0.5 2.3 FY13 volume (2.3) (0.5) 0.0 0.5 2.3
Figure 27: PTW MOQ accounts for ~90% of FY12F average sales
volume
Sales volume, ‘000 cum per day
Source: Company data; KGI Securities (Thailand) estimate
Limited impact from flooding in service areas
We expect a limited impact from the flooding in October/November
on TTW group’s earnings despite the fact that the provinces served
by the group (Nakonpathom, Samutsakorn, and Pathumthani) have
been affected by the flood because of the minimum off take contract
(as mentioned above) and the fact that none of TTW’s pumping
stations have been severely affected.
We also note that TTW group’s average daily sales volume in October
had even increased slightly by 1% in comparison to its 9M11
average daily sales volume. We believe that this is because of milder
flooding in the districts served by TTW relative to other provinces.
We believe that TTW’s sales volume could potentially increase after
the water recedes and the cleaning process begins. Based on our
sensitivity analysis, we expect a 10% increase in TTW group’s sales
volume to increase our FY12F EPS by 5%. The smaller percentage
change in EPS is due to the fact that TTW‘s sales volume in excess of
300K cum/day is sold at a 60% discount to its full tariff.
Modest EPS growth in 2012-2013
On our forecast, TTW’s modest EPS growth of 3-4% on our
FY12-13F is subdued by the expiration of tax benefit in June 2012 for
TTW’s initial capacity of 320K cum/day. Our 2012/2013 forecast is in
line with the Bloomberg consensus.
The key drivers for our FY12-13F EPS growth are i) 4% increase in
tap water sales volume to 251mn cum from continuous growth in
economic activity and adoption of tap water; and ii) 5% increase in
tariff for TTW (from its pricing formula of CPI % change + 1%) and
4% for PTW in line with our headline inflation forecast of 4%.
We note that the positive factors would be partially offset by the
increase in FY12F effective tax rate to 14% (from 9% in FY11F) due
to the expiration of the Board of Investment (BOI) tax benefit in June
2012 for the company’s initial distribution capacity of 320K cum/day.
Figure 28: Key assumptions
Source: Company data; KGI Securities (Thailand) estimates
Figure 29: Sensitivities – impact on 2012/2013 EPS (%)
*For instance, an increase in 2012 TTW tariff by 1% will lead to an increase in 2012 EPS
by 1.2%
Source: Company data; KGI Securities (Thailand) estimates
Upside risk to our FY12-13F EPS
We see an upside risk of 5-10% to our FY12-13F EPS from
potential increase in investment in CK Power, Ch Karnchang
(CK.BK/CK TB)’s power holding company and 30% owned by
TTW. It is likely to increase its registered capital from Bt100mn to
Bt9.2bn. TTW is set to maintain its stake of 30% hence TTW is
looking to increase its investment in CK Power by Bt2.73bn (=
30% x capital increase of Bt9.1bn). As per our discussion with
management, this amount would be 100% debt financed.
CK Power currently holds 38% of SEAN, the developer and
operator of the 615 megawatt Nam Ngum II hydropower plant in
Laos. The power plant has secured earnings from power purchase
agreements with both the Thai and Laos government with 25 years
remaining on the contract.
The planned capital increase of Bt9.1bn by CK Power is for i)
acquiring an additional 17% stake in SEAN from Bangkok
Expressway (BECL.BK/BECL TB) for ~Bt6bn; and ii) settling an
outstanding amount owed to CK for the acquisition of SEAN for
~Bt3bn. The increase in investment by TTW is subject to
shareholders approval in the Extraordinary General Meeting on 20
December 2011.
0
100
200
300
400
500
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Avg daily sales MOQ Capacity
Thailand Thai Tap Water Supply
*The Company may be issuer of Derivative Warrants on these securities. http://research.kgi.com; Bloomberg: KGIT <GO> Please see back page for disclaimer November 30, 2011 15
We expect an earning contribution of around Bt0.025-0.050/share
in FY12-13 from this investment. We have not yet included this
into our forecast and view it to be value accretive given our
estimate equity IRR of 15% (= TTW’s minimum IRR threshold) and
TTW’s CoE of 7.4%. We estimate the investment in CK Power to
add Bt0.5/share (+7% to our fair value of Bt7.00). Potential earnings upside from low penetration Based on a study commissioned by TTW, only 19% of water consumption in Nakonpathom and Samutsakorn province is tap water (vs. 81% groundwater). Moreover, according to a study by Thai CDI, an engineering consultancy firm, there is still a large untapped demand in the two provinces and they estimated that groundwater users would switch to tap water at an average of 10% annually over the next five years. Hence, we believe there is considerable growth opportunity in tap water sales in provinces served by TTW for at least the next five years.
Figure 30: Big gap between TTW’s current sales and potential
demand
TTW’s sales and potential demand, ‘000 cum/day
Source: Thai CDI; Company data; KGI Securities (Thailand) estimates
Future Growth
Tap water continues to play a key role
TTW has budgeted Bt20bn for investment during 2011-2015. Half
of that (Bt10bn) is allocated for renewable energy projects, namely
solar power, with the remainder divided between wastewater
project (Bt5.5bn) and tap water business (Bt4.5bn). In addition to
the Bt20bn budget, TTW also plans to invest Bt2.73bn in CK Power,
its 30% subsidiary
We believe that the most visible source of growth for TTW
continues to be from tap water business and we see wastewater
management as a potential growth area following the flood.
We are least optimistic about investment in solar power as our
channel check suggested there are a large number of bidders
pursuing a limited number of solar power contracts (with adder)
from the original bid winners. Hence it may be difficult for TTW to
find attractively priced contracts that are value accretive.
PTW – Soon to exceed maximum capacity
The most likely source of growth for TTW is in tap water expansion
in PTW’s area, as PTW’s average daily sales of 357K cum/day (on
our 2011 forecast) is fast approaching its capacity of 388K cum/day.
We expect PTW’s sales volume to exceed its capacity by 2014.
Figure 31: Average daily sales volume vs. maximum capacity
Average daily sales and capacity, ‘000 cum/day
Source: Company data; KGI Securities (Thailand) estimates
Management has said that they plan to spend Bt600-800mn to
increase the capacity by 60K cum/day (to 448K cum/day), in
2012/2013, to meet the growing demand.
The expansion is still subject to negotiation with the government to
either increase the tariff or extend the concession to make the
investment feasible, as PTW under a build-own-operate transfer
agreement due to expire in 2023. Management expects the
negotiations to be completed by next year.
New tap water concession potentially underway According to PWA’s Strategic Plan for 2012-2016 (Volume 2), PWA
aims to increase its countrywide annual sales volume by 36% from
960mn cum in 2010 to 1,310mn cum by 2016. The planned
increase of 350mn cum is about 1.4 times the amount of tap water
sold in 2010 by TTW. We believe that PWA may require new joint
ventures with private companies, like TTW, in order to meet its
growth target.
Wastewater treatment – Still room for growth The importance of wastewater management has been highlighted
by the recent flood. Standing water in a number of flooded areas is
foul as it has been mixed with a large amount of untreated
wastewater that has made a number of flooded areas inhabitable.
According to management, only 30% of wastewater in Bangkok is
treated by the municipal authority. The remaining 70% is left
untreated. We believe that this provides room for the involvement
of private companies, like PWA did in order to increase tap water
coverage.
0
200
400
600
800
1,000
2006 2007 2008 2009 2010 2011F 2012F 2013F 2014F 2015F
TTW's sales Potential demand
0
100
200
300
400
500
2004 2005 2006 2007 2008 2009 2010 2011F 2012F 2013F 2014F 2015F
Avg daily sales Capacity
Reached maximum capacity...
...capacity expansion within two years
Soon to reach maximum capacity again
Thailand Thai Tap Water Supply
*The Company may be issuer of Derivative Warrants on these securities. http://research.kgi.com; Bloomberg: KGIT <GO> Please see back page for disclaimer November 30, 2011 16
Weighted average cost of capital: 6.5%Cost of debtCost of debt 6.0%Marginal tax rate 20.0%Cost of debt after tax shield 4.8%Cost of equityRisk-Free Rate (rf) 4.0%Market Risk Premium (rm-rf) 8.0%Raw (observed) beta 0.42Cost of equity using raw beta 7.4%
Enterprise value 47,633Calculation of net debt:Short term debt (3,495.0)Long term debt (8,282.7)Minority interest 21.6Less: Cash 1,009.6Net debt (10,747)Equity value 36,887Shares outstanding 3,990Equity value / share (before discount) 9.24
Overhang from regulatory risk 25% (2.31)Equity value / share (after discount) 7.00
0.0% 0.5% 1.0% 1.5% 2.0%9.0% 3.7 3.9 4.2 4.5 4.98.0% 4.4 4.7 5.1 5.5 6.07.0% 5.2 5.7 6.2 6.8 7.56.0% 6.4 7.0 7.8 8.7 9.85.0% 8.0 8.9 10.1 11.6 13.7
Perpetual growth rate
WA
CC
Catalyst & Risk
Potential overhang from outstanding dispute
We see a potential overhang to the share price from the
outstanding allegation by the PWA labour union against PWA in
regards to its sales contract with TTW. A resolution to this case in
TTW’s favour should be a major share price catalyst.
In 2009, the PWA labour union demanded a renegotiation of the
30-year agreement between PWA and TTW as they claimed that
the terms violated the Public Private Joint Venture Act (PPJVA) 1992,
which states that a private company can not operate a business
that incurs loss for the public. The case stems from the high tariff
PWA paid to TTW (~Bt25 per cum) compared to the tariff PWA
charges the end users (~Bt15 per cum).
TTW is confident that the contract is legitimate because the
company was solely responsible for the investment in the
production and distribution system investment and hence factored
the investment cost into the selling price.
The case has been under review by the Anti-Corruption
Commission since 2009 and has yet to be resolved. We believe that
the risk of renegotiation of the contract is limited as there has not
been much progress for more than two years and there has been
no report of PWA’s intention to renegotiate the contract. A more
major threat is that the outstanding allegation may hamper TTW’s
chance of winning new concessions with PWA.
Valuation & Action Given its stable cash inflow stream, we value the company using a
two-staged DCF and derived a value of Bt7.00 after applying a 25%
discount for its regulatory risk from the outstanding dispute between
the PWA labour union and PWA in regards to TTW’s highly profitable
sales contract with PWA.
Our target price implies a 32% upside. The stock is trading at an
inexpensive valuation at a PE of 10.0x and a PBV of 2.4x on our
FY12F, which are one standard deviation below its historical
average. In our view, DCF is the best valuation method for a utility
company with a secured stream of cash flow like TTW because it
best captures the increase in tariff and volume growth over the life
of the concessions in comparison to other valuation methodologies.
We applied a WACC of 6.5% based on a CoD of 4.8% and a CoE
of 7.4%.
Figure 32: TTW’s WACC
Source: Company data; KGI Securities (Thailand) estimates
Figure 33: Equity value calculation
Source: Company data; KGI Securities (Thailand) estimates
We applied a 25% discount to the DCF derived target price of
Bt9.2/share due to the overhang from the outstanding dispute.
Figure 34: Sensitivity of our DCF based fair value (Bt/share)
Source: KGI Securities (Thailand) estimates
Undemanding valuation
Despite the potential overhang from the outstanding dispute raised
by PWA’s labour union, we see TTW’s undemanding valuation,
good dividend yield, and secured earnings, at least over the next
ten years, as hard to ignore. TTW is trading at a PE of 10.0x and a
PBV of 2.4x on our FY12F, which is below its historical average since
its listing in 2008 on both measures.
Thailand Thai Tap Water Supply
*The Company may be issuer of Derivative Warrants on these securities. http://research.kgi.com; Bloomberg: KGIT <GO> Please see back page for disclaimer November 30, 2011 17
Figure 35: TTW’s forward PE is discounted to its average since
its listing
Forward PE, times
Source: SET; KGI Securities (Thailand) estimates
Figure 36: TTW’s forward PBV is discounted to its average since
its listing
Forward PBV, times
Source: SET; KGI Securities (Thailand) estimates
TTW’s PBV of 2.4x (vs peers average of 1.5x) is explained by its high
ROE of 24% (vs peers average of 16%).
Figure 37: High ROE compensates for high PBV
ROE, times (x-axis); PBV, times (y-axis)
Source: Bloomberg, KGI Securities (Thailand) Estimates
Its dividend yield of 6-7% on our FY12-13F is also at a 20-30%
premium to its peers’ average of 5-6%.
Please refer to Appendix III TTW at a glance for the company’s background.
6.0
7.0
8.0
9.0
10.0
11.0
12.0
13.0
14.0
15.0
16.0
Jul-08 Dec-08 May-09 Oct-09 Mar-10 Aug-10 Jan-11 Jun-11 Nov-11
+2 SD = 13.20
+1 SD = 11.89
Average = 10.58
-1 SD = 9.27
-2 SD = 7.96
1.0
1.5
2.0
2.5
3.0
3.5
Jul-08 Dec-08 May-09 Oct-09 Mar-10 Aug-10 Jan-11 Jun-11 Nov-11
+2 SD = 2.65
+1 SD = 2.40
Average = 2.15
-1 SD = 1.90
-2 SD = 1.64
HYFMWCRATCH
GLOW
EGCO
TTW
EASTW
0.0
0.5
1.0
1.5
2.0
2.5
7.0 9.0 11.0 13.0 15.0 17.0 19.0 21.0 23.0 25.0
High ROE, high PBV
Thailand Thai Tap Water Supply
*The Company may be issuer of Derivative Warrants on these securities. http://research.kgi.com; Bloomberg: KGIT <GO> Please see back page for disclaimer November 30, 2011 18
COGS Depreciation Operating Exp. OperatingRevenue Revenue Revenue Margin
2009 29.6% 19.6% 5.1% 45.7%2010 29.4% 19.1% 4.5% 47.0%2011F 31.2% 21.1% 4.8% 42.9%2012F 31.3% 20.3% 4.8% 43.6%2013F 31.4% 19.7% 4.7% 44.2%
Working Capital Net PPE Other Assets CapitalRevenue Revenue Revenue Turnover
2009 0.73 2.25 1.97 0.202010 0.77 2.16 1.71 0.222011F 0.13 2.03 1.56 0.272012F 0.87 1.89 1.45 0.242013F 0.93 1.78 1.37 0.24
Operating Capital Cash After-tax ReturnMargin Turnover Tax Rate on Inv. Capital
2009 45.7% 0.2 89.4 8.22010 47.0% 0.2 91.9 9.32011F 42.9% 0.3 90.9 10.52012F 43.6% 0.2 85.7 8.92013F 44.2% 0.2 85.7 9.3
Year x x =
=
Year 1/ + + =
Year 1- + +
Year to 31 Dec (Bt mn) 2009 2010 2011F 2012F 2013FOperating Cash Flow 2,679 3,041 2,661 3,087 3,197 Net Profit 1,594 2,063 2,058 2,125 2,207 Depreciation & Amortization 794 839 972 1,001 1,031 Change in Working Capital 292 140 (368) (39) (41) Others 0 0 0 0 0Investment Cash Flow (2,484) (1,563) (1,487) (1,001) (1,031) Net CAPEX (2,484) (1,563) (1,487) (1,001) (1,031) Change in LT Investment 0 0 0 0 0 Change in Other Assets 0 0 0 0 0Free Cash Flow 195 1,479 1,174 2,086 2,166Financing Cash Flow 1,240 (1,690) (2,238) (1,489) (1,565) Change in Share Capital 0 0 0 0 0 Net Change in Debt 2,475 (416) 465 469 539 Change in Other LT Liab. (1,235) (1,274) (2,703) (1,959) (2,104)Net Cash Flow 1,435 (212) (1,064) 597 601
Year to 31 Dec (Bt mn) 2009 2010 2011F 2012F 2013FSales 4,048 4,395 4,602 4,936 5,228 Cost of Goods Sold 1,199 1,294 1,437 1,544 1,640Gross Profit 2,850 3,101 3,166 3,391 3,589 Operating Expenses 208 197 219 236 244Operating Profit 2,642 2,904 2,947 3,155 3,344Net Interest (652) (424) (473) (462) (480) Interest Income 15 18 21 18 19 Interest Expense 667 442 495 481 500Net Investment Income/(Loss) 0 0 0 0 0Net other Non-op. Income/(Loss) (201) (225) (199) (199) (199)Net Extraordinaries (8) (11) (12) (12) (12)Pretax Income 1,782 2,245 2,262 2,481 2,653Income Taxes 188 182 205 356 446Net Profit 1,594 2,063 2,058 2,125 2,207EBITDA 3,055 3,342 3,741 3,975 4,195EPS (Bt) 0.40 0.52 0.52 0.53 0.55
Year to 31 Dec (Bt mn) 2009 2010 2011F 2012F 2013FForecast DriversSales volumes (M cum) 226.0 245.4 250.6 261.2 270.9Avg TTW Tariff (Cum/Bt) 23.6 24.5 25.1 26.3 27.4Growth (% YoY)Sales 12.3 8.6 4.7 7.2 5.9OP 16.9 9.9 1.5 7.1 6.0EBITDA 14.0 9.4 11.9 6.3 5.5NP 17.3 29.4 (0.3) 3.3 3.8EPS 17.3 29.4 (0.3) 3.3 3.8Profitability (%)Gross Margin 70.4 70.6 68.8 68.7 68.6Operating Margin 65.3 66.1 64.0 63.9 64.0EBITDA Margin 75.5 76.0 81.3 80.5 80.2Net Profit Margin 39.4 46.9 44.7 43.1 42.2ROAA 8.2 9.7 9.7 10.0 10.1ROAE 18.7 22.7 22.5 23.8 24.4StabilityGross Debt/Equity (%) 142.3 126.6 137.5 140.2 144.5Net Debt/Equity (%) 116.0 104.7 126.1 122.3 120.2Interest Coverage (x) 3.7 6.1 5.6 6.2 6.3Interest & ST Debt Coverage (x) 2.3 3.0 0.7 3.2 3.3Cash Flow Interest Coverage (x) 4.0 6.9 5.4 6.4 6.4Cash Flow/Interest & ST Debt (x) 2.5 3.4 0.7 3.3 3.4Current Ratio (x) 3.9 4.1 1.2 6.2 6.6Quick Ratio (x) 3.9 4.1 1.2 6.2 6.6Net Debt (Bt mn) 10,084 9,931 11,141 11,014 10,951Per Share Data (Bt)EPS 0.4 0.5 0.5 0.5 0.6CFPS 0.7 0.8 0.7 0.8 0.8BVPS 2.2 2.4 2.2 2.3 2.3SPS -- -- -- -- --EBITDA/Share 0.8 0.8 0.9 1.0 1.1DPS 0.3 0.4 0.3 0.3 0.4ActivityAsset Turnover (x) 0.2 0.2 0.2 0.2 0.2Days Receivables 34.6 33.3 36.4 36.9 37.7Days Inventory 6.9 6.7 5.5 5.1 4.8Days Payable 3.4 2.5 5.4 5.9 7.9Cash Cycle 38.1 37.5 36.6 36.1 34.6
As of 31 Dec (Bt mn) 2009 2010 2011F 2012F 2013FTotal Assets 21,064 21,488 20,989 21,625 22,267Current Assets 3,947 4,472 4,471 5,108 5,750 Cash & ST Investments 2,286 2,074 1,010 1,607 2,207 Inventories 23 24 22 22 22 Accounts Receivable 384 401 460 499 540 Others 1,255 1,973 2,981 2,981 2,981Non-current Assets 17,117 17,016 16,517 16,517 16,517 LT Investments 0 0 36 36 36 Net fixed Assets 9,125 9,504 9,320 9,320 9,320 Others 7,991 7,512 7,161 7,161 7,161Total Liabilities 12,370 12,005 12,151 12,620 13,159Current Liabilities 1,005 1,086 3,857 826 865 Accounts Payable 41 33 77 91 129 ST Borrowings 420 450 3,495 450 451 Others 544 604 285 285 285Long-term Liabilities 11,364 10,918 8,294 11,794 12,294 Long-term Debts 11,150 10,918 8,283 11,783 12,283 Others 214 0 11 11 11Shareholders' Equity 8,695 9,484 8,838 9,005 9,108 Common Stock 3,990 3,990 3,990 3,990 3,990 Capital Surplus 2,065 2,067 2,065 2,065 2,065 Retained Earnings 2,639 3,427 2,783 2,950 3,053 Preferred Stock 0 0 0 0 0
Balance Sheet
Source: Company data; KGI Securities (Thailand) estimates
Key Ratios
Source: Company data; KGI Securities (Thailand) estimate
Profit & Loss
Source: Company data; KGI Securities (Thailand) estimates
Cash Flow
Source: Company data; KGI Securities (Thailand) estimates
Rates of Return on Invested Capital
Source: Company data; KGI Securities (Thailand) estimates
Thailand Utilities sector (Water)
*The Company may be issuer of Derivative Warrants on these securities. http://research.kgi.com; Bloomberg: KGIT <GO> Please see back page for disclaimer November 30, 2011 19
Household & Business
Industrial 2.4
Agricultural
Electricity generation
65.8
24.4
65.8
7.5
TTW group
EASTW group
Others
72.0
5.0
23.0
Company ProjectType of contract
Capacity (cu m/day)
1 Thai Tap Water Nakornpathom-Samutsakorn Water Supply BOO 440,0002 Pathum Thani Water Pathumthani Rangsit Water Supply BOOT 388,0003 UU Group Rayong Water Supply BTO 86,4004 East Water Koh Samui Water Supply BOO 3,0005 East Water Sattahip Water Supply Lease contract 31,2006 East Water Pattaya Water Supply Lease contract 15,9727 Nakorn Sawan Water Nakornsawan Water Supply BOOT 14,4008 Chacheongsao Water Chachoengsao Water Supply BOOT 37,2009 Bangpakong Water Bangpakong Water Supply BOOT 43,20010 Egcom Tara Ratchburi-Samuisongkran Water Supply BOO 36,00011 R.E.Q. Water Services Phuket Water Supply BOO 28,00012 Industrial Water Resource Management Panasnikhom-Banbueng Water Supply BOO 30,000
Total 1,153,372
Part of EASTW group (total of 267k cum/day)
Part of TTW group (total of 828k cum/day)
Appendix I: Thai Water Industry - At A Glance
Supply and demand
The key sources of water include reservoirs, rivers, lakes, and aquifers.
Thailand has a total water storage capacity of 73,642mn cum.
The total water demand was 98,755mn cum in 2010 and agriculture
accounts for the majority of the water demand.
Figure 38: Agriculture accounts for the largest share of demand
Thailand’s water demand breakdown, percent
Source: Provincial Waterworks Authority
Key authorities
The Royal Irrigation Department, under the Department of Agriculture,
is responsible for the management of the country’s water and
ensuring sufficient water for agricultural purposes.
The Provincial Waterworks Authority (PWA) is responsible for tap
water supply and raw water sourcing across the country, except for
Bangkok, Nonthaburi, and Samutprakan, which are served by the
Metropolitan Waterworks Authority (MWA). Both of the state
agencies are under the Department of Interior.
Tap water in Thailand is provided to end users by PWA, MWA, or the
local government in areas not currently covered by PWA or MWA.
Joint Ventures With Private Companies
Background The main source of water for residential and industrial use is aquifers,
located mainly in the central region of Thailand. However, over
utilization of groundwater has caused serious land subsidence which
could cause damage to buildings, roads, bridges, as well as
underground tap water and waste water pipelines. According to a
report by PWA, Bangkok and vicinities (including Nakonpathom,
Samutsakorn, and Pathumthani) sank more than one meter from
1978 to 2000 due to over-utilization of groundwater.
The government’s responded by increasing groundwater fees (from
Bt3.5/cum in 2000 to Bt8.5/cum in 2003), closing groundwater wells,
promoting usage of tap water sourced from the surface (e.g. rivers
and reservoirs), and prohibited the use of groundwater in areas with a
land subsidence crisis where tap water is available.
To expedite the expansion of the tap water system, the government
encouraged private sector involvement in distribution and production,
mainly through the cooperation with PWA.
Projects with private companies There are currently 12 joint venture projects between PWA and
private companies. The private companies sell tap water to PWA to be
distributed to the end users.
TTW group is the largest private tap water provider, followed by
EASTW group. TTW accounts for 72% of the total JV projects based
on capacity and about 20% of PWA’s sales volume in 2010.
Figure 39: TTW’s group capacity accounts for 72% of JV projects
Breakdown of PWA’s joint venture capacity, percent
Source: Provincial Waterworks Authority; KGI Securities (Thailand) estimates
Figure 40: Joint venture projects between PWA and private companies
Source: SET; KGI Securities (Thailand) estimates
Thailand Utilities sector (Water)
*The Company may be issuer of Derivative Warrants on these securities. http://research.kgi.com; Bloomberg: KGIT <GO> Please see back page for disclaimer November 30, 2011 20
2010 2011F 2012F 2013F 2014FChange in CPI (%) 3.3 3.9 2.8 3.3 5.0
Benefits from inflation
Tap water operators benefit from inflation as the tariff pricing
formula in the tap water sales agreement with PWA is linked to the
Consumer Price Index (CPI).
We note that depreciation and amortization, which is relatively
unaffected by inflation, accounts for a large portion of water
providers’ expenses (e.g. around 20% of EASTW’s and 30% of
TTW’s total cost before tax). This means that water providers’
inflation linked revenue should increase at a higher rate than cost.
KGI’s economist, expects Thailand’s CPI to increase 3.9% for 2011.
As such, we expect tap water tariff to be adjust upward based on
this rate for 2012.
Figure 41: CPI forecast
Source: Bank of Thailand; KGI Securities (Thailand) estimates
We expect inflation to remain around 3% in 2012 from an increase
in food price and consumer goods following the flooding in 4Q11.
We see further upside to our 2012-14 inflation forecast from the
gradual easing of price cap on liquefied petroleum gas (LPG), and
compressed natural gas (CNG, also known in Thailand as NGV)
which has kept energy prices artificially lower than the global price. Figure 42: CPI has been increasing…
Consumer Price Index, points
Source: Bank of Thailand
Figure 43: …so has the water tariff
EASTW and TTW Group water tariff, Bt/cum
Source: Company data; KGI Securities (Thailand) estimate
Figure 44: Water tariff on the rise
Water tariff two-year CAGR (2009-2010), percent
Source: Company data; KGI Securities (Thailand) estimates
The average annual tap water tariff increase over the past two years
(2009-2010) is 3.9%, in line with inflation over the period. We note
that the raw water tariff increase is higher as raw water tariff is
adjusted in accordance to cost and economic conditions rather than
being limited to inflation like tap water.
Continuous increase in demand is expected
We expect a continuous increase in both tap water and raw water
demand driven by increasing income per capita, higher standard of
living, increasing population, worsening quality of groundwater (a
key substitute to tap water) and increasing industrialization.
This is reflected by the sales volume of PWA, the state agency which
is Thailand’s main retail distributor of water, which showed CAGR of
7% over the past five years (2006-2010) in tandem with the factors
mentioned above.
Figure 45 PWA’s sales volume grew 7.2% annually over the
past five years
PWA’s sales volume, mn cum
Source: Provincial Waterworks Authority
0
20
40
60
80
100
120
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
10 year CAGR of 2.6%
0
10
20
30
2008 2009 2010 2011F 2012F 2013FEASTW - raw water EASTW - tap waterTTW - TTW (<300k cum/day) TTW - TTW (>300k cum/day)TTW - PTW
0
200
400
600
800
1,000
2005 2006 2007 2008 2009 2010
FIve year CAGR of 7.2%
12.2
5.04.3 4.2
2.2
EASTW: rawwater
EASTW: tap water TTW: TTW(<300k cum/day)
TTW: TTW(>300k cum/day)
TTW: PTW
Thailand Utilities sector (Water)
*The Company may be issuer of Derivative Warrants on these securities. http://research.kgi.com; Bloomberg: KGIT <GO> Please see back page for disclaimer November 30, 2011 21
Figure 46: Number of water users has also been increasing
Water users in PWA service area, mn persons
Source: Provincial Waterworks Authority
Figure 47: Income per capita on the rise
Thailand’s income per capita, Bt ‘000/annum
Source: Office of National Economic and Social Development Board
Figure 48: MPI is increasing
Manufacturing Production Index (MPI), points
Source: The Office of Industrial Economics
Figure 49: Population growth – small increase
Thailand’s population, mn persons
Source: Department of Provincial Administration
Low penetration rate provides growth opportunity
According to a study commissioned by TTW in 2006 on
Nakonpathom and Samutsakorn (provinces served by TTW), tap
water only accounts for 19% of water consumption (vs. 81%
ground water). The study also predicted that ground water usage by
industrial users in those provinces would end in 2015.
Considering that those provinces are in the more developed areas of
Thailand, given their close proximity to Bangkok and higher income
per capita relative to the rest of the country, we believe that tap
water penetration rate in other parts of Thailand is likely to be even
lower than 19%.
Figure 50: Income per capita in TTW’s service area is much
higher than Thailand’s average
Income per capita, Bt ‘000/annum
Source: Office of National Economic and Social Development Board
Major Players In The Industry
EASTW – Eastern domination EASTW’s core business is the development and management of water
system by supplying raw water to industrial estates, factories, and
waterworks via five main raw water pipeline systems in the eastern
seaboard - Thailand’s most developed industrial area and home to a
number of heavy industries, including petrochemical, automotive, and
electronics.
It also operates tap water business and other water related business
through its wholly owned subsidiary Universal Utilities Group (UU).
EASTW group currently manages nine tap waterworks stations in
Chonburi, Rayong, Chacheongsao, Nakonsawan, and Suratthani.
EASTW was established in 1992 by PWA, as a result of the Cabinet
resolution that assigned PWA to establish a company to manage and
develop a raw water pipeline system in Thailand’s eastern seaboard to
serve the fast growing industrial demand in the region. The eastern
seaboard has been the focal point of economic development by the
Thai government over the past 25 years. EASTW was privatized in
1996 and was listed on the Stock Exchange of Thailand (SET) in 1997.
TTW – Largest private tap water operator TTW group is the largest tap water provider in Thailand. Together
60,000,000
61,000,000
62,000,000
63,000,000
64,000,000
2005 2006 2007 2008 2009 2010
Five year CAGR of 0.5%
0.0
1.0
2.0
3.0
4.0
2005 2006 2007 2008 2009 2010
Five year CAGR of 6.1%
0
50
100
150
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
10 year CAGR of 6.6%
0
50
100
150
200
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
10-year CAGR of 3.5%
0
200
400
600
800
Countrywide Nakhonpathom (TTW servicearea)
Samutsakorn (TTW servicearea)
Thailand Utilities sector (Water)
*The Company may be issuer of Derivative Warrants on these securities. http://research.kgi.com; Bloomberg: KGIT <GO> Please see back page for disclaimer November 30, 2011 22
with its 98% subsidiary Pathumthani Tap Water (PTW), it has a total
capacity of 864K cum/day and provides tap water under concessions
to users in seven districts in Nakonpathom, Samutsakorn, and
Pathumthani.
TTW was established in 2000 by a group of companies, namely Ch
Karnchang Plc. (CK.BK/CK TB) and Thames Water (Thailand), with the
key purpose of selling tap water to the PWA in Nakhonpathom and
Samutsakorn. PWA was assigned by the Cabinet in 1995 to expand
tap water service in order to address the land subsidence due to
overutilisation of ground water in those provinces.
In 2007, TTW acquired 98% of PTW from its mutual major
shareholder, CK, to reduce any conflict of interest that may arise from
being in the same business. PTW supplies tap water to six districts in
Pathumthani province.
Figure 51: Provinces served by EASTW and TTW
Source: Company data
Thailand Utilities sector (Water)
*The Company may be issuer of Derivative Warrants on these securities. http://research.kgi.com; Bloomberg: KGIT <GO> Please see back page for disclaimer November 30, 2011 23
Grant reservior concessionsGrant concession to management and operation of main water distribution system in the eastern region
Raw water Raw water
Clarified water Tap water Tap water Tap water
Royal Irrigation Department (RID)Responsibility: Development of water supply
EASTWResponsibility: Development and
management of raw water pipeline
Industrial Estate Authority of Thailand (IEAT) & private
industrial estates
Ministry of Finance
Household CommercialIndustrial plants and factories
Provincial Waterworks Authority (PWA) Responsibility: Main retail distributor of tap water (will
treat EASTW raw water into tap water)
Eastern Water Resources(EASTW)
Universal Utilities (UU Group)
EGCOM Tara
40%
15%
Provincial Waterworks Authority (PWA)
Electricity Generating Company (EGCO)
Norbex INC(UK investment co)
Industrial Estate Authority of Thailand
Institutional Investors
Retail Investors
16% 10% 5% 19% 10%
100%
Appendix II: EASTW at a glance
Company Overview EASTW supplies raw water and tap water under long-term concessions with more than ten years remaining. Its core business is in the development and management of water systems in the eastern seaboard, Thailand’s industrial hub, by supplying raw water to industrial estates, factories, and waterworks via five main raw water pipeline systems in Chonburi, Rayong, and Chachoengsao. Figure 52: EASTW’s pipeline
Source: Company data
The eastern seaboard is Thailand’s most developed industrial area
and is the focal point of economic development by the Thai
government over the past 25 years. The area is home to 54% of
total industrial estates in Thailand and a number of heavy industries
including petrochemical, automotive, and electronics.
Over the past six years (2005-2010), 52% of the investment value of
the applications approved by Thailand’s Board of Investment (BOI)
was located in the eastern seaboard. The total projects in EASTW’s
service area that was approved were 2,268 projects with a total
investment value of Bt1.4tn (US$46bn).
Figure 53: EASTW’s raw water business
Source: Company data; KGI Securities (Thailand) estimates
In our view, EASTW is a natural monopoly in its area given its
extensive pipeline network, difficulties in building new pipelines
(e.g. opposition from local communities and government approval
is needed), and the high investment cost involved for another player
to compete, which is likely to make the investment unfeasible.
EASTW established Universal Utilities (UU Group), a wholly owned
subsidiary, in 1998 for expansion into tap water business, seawater
desalination management, wastewater treatment, operation &
maintenance, and water quality analysis laboratory. EASTW group
currently manages ten tap waterworks stations in Chonburi,
Rayong, Chacheongsao, Nakonsawan, and Suratthani.
Over the past two years (2009-2010), raw water accounted for
around 75% of total revenue but 80% of gross profit as the raw
water business gross margin is higher than tap water business (65%
vs. 42%). We expect the raw water business to continue to
constitute around 75% of revenue and 80% of gross profit in
FY11-13F.
Group structure
Since its listing on the SET in 1997, EASTW group has expanded into
tap water business and other waterworks business mainly through
its wholly owned subsidiary UU Group.
Figure 54: EASTW group structure
Source: Company data
EGCOM Tara operates tap water concession business in Ratchaburi
and Samutsongkram, and is part of Electricity Generating Company
Thailand Utilities sector (Water)
*The Company may be issuer of Derivative Warrants on these securities. http://research.kgi.com; Bloomberg: KGIT <GO> Please see back page for disclaimer November 30, 2011 24
Rank Major shareholders Type Number of shares % shares1 Provincial Waterworks Authority Local Juristic Person 668,800,000 40.22 Electricity Generating Company Local Juristic Person 311,443,190 18.723 Norbax Inc Foreign Juristic Person 169,324,700 10.184 Industrial Estate Authority of Thailand Local Juristic Person 76,000,000 4.575 Thai NVDR Local Juristic Person 43,272,680 2.6
IEAT
PWA
Private industrial estates
Other users
34.0
32.0
26.0
32.0
8.0
Rayong Chonburi
Chacheongsao 2.0
65.033.0
PetrochemicalConsumption &
tourism
Automobile Others
60.030.0
5.05.0
(EGCO.BK/EGCO TB)* group, one of the largest Thai power
developers, who is also the second biggest shareholder in EASTW.
Major shareholder
PWA, a government agency, is the country’s main retail distributor
of tap water, and is the biggest shareholder in EASTW since its
establishment in 1992. We believe that EASTW should be able to
leverage PWA for any future expansion.
Figure 55: Top shareholders in EASTW
Source: Stock Exchange of Thailand
Management
Praphant Asava-Aree (CEO)
Praphant Asava-Aree has served as Chief Executive Officer and
President of EASTW since 2007. He spearheaded the cost control
program that resulted in the net profit margin increasing to 28%
(+5ppts) over the past four years. He also implemented more
Corporate Social Responsibility (CSR) programs that led to a better
relationship with shareholders. Mr. Asava-Aree other current
positions includes Director of Seamico Securities Plc
(ZMIC.BK/ZMICO TB), KT Zeamico Securities Plc, Thai Listed
Companies Association, and Thai San Miguel Liquor Co.Ltd. He
received his MBA from Thammasat University and Bachelor’s degree
in Political Science from Ramkhamhaeng University, Thailand.
Namsak Wannavisute (CFO)
Namsak Wannavisute has been Chief Financial Officer of EASTW
since 2009 and has been with EASTW since 1997 in various roles
mainly in business development. Mr. Wannavisute holds Masters of
Finance from University of Colorado, USA.
Key Customers
Top two customers – also its major shareholders
EASTW’s top two customers, PWA and IEAT, accounted for 67% of
its 2010 raw water sales volume. They are also its major
shareholders, which should reduce the risk of switching.
Around 60% of EASTW’s raw water is sold to industrial customers
through IEAT and private industrial estates. The majority of the
industrial users are in the petrochemical industry. The remainder is
mostly sold to PWA, which processes the water further into tap
water before being sold to end users.
Figure 56: PWA and IEAT are the biggest customers
Breakdown of raw water customers (FY10), percent
Source: Company data (as of 1H11)
Figure 57: Petrochemical sector accounts for the majority of industrial users
Breakdown of raw water industrial users, percent
Source: KGI Securities (Thailand) estimates
Figure 58: Rayong accounts for the biggest share of raw water usage by volume
Breakdown of raw water sales by province, percent
Source: Company data (as of 1H11)
Key Business
Stable growth from raw water sales
EASTW’s raw water sales volume CAGR is 4% over the past five
years (2005-2010) from the increase in industrial activities in the
eastern seaboard. This is in line with Thailand’s average GDP growth
of 4% over the same period.
Thailand Utilities sector (Water)
*The Company may be issuer of Derivative Warrants on these securities. http://research.kgi.com; Bloomberg: KGIT <GO> Please see back page for disclaimer November 30, 2011 25
Figure 59: Continuously increasing
EASTW’s raw water sales volume, mn cum
Source: Company data
Thailand’s petrochemical industry is concentrated in the eastern
seaboard, which is EASTW’s main service area, and accounts for
60% of EASTW’s sales to industrial customers. As such, the
company’s raw water sales volume has a high correlation with
Thailand’s Chemical Sector Manufacturing Production Index (MPI)
with an R-squared of 0.96 (using data from 2001-2010).
Figure 60: Raw water sales volume is highly correlated to Chemical Industry MPI
Thailand’s Chemical Industry MPI vs. EASTW’s raw water sales volume
Source: Office of Industrial Economics; Company data; KGI Securities (Thailand) estimates
Given the 10-year CAGR of Chemical MPI of 5% (2001-2010) and a
225% YoY increase in BOI net applications by the chemical sector in
9M11, we see upside risk to our conservative sales growth forecast
of 3%.
Figure 61: Petrochemical sector showed high growth in 9M11 BOI net applications
BOI net applications, Bt bn
Source: Board of Investment; KGI Securities (Thailand)
EASTW has ample capacity to meet an increase in water demand.
Management said that the current capacity of 473mn cum should
be enough to support the potential increase in demand for the next
nine years.
Figure 62: Sufficient supply for future demand growth
Volume, m cum
Source: Company data; KGI Securities (Thailand) estimates
Tap water – A potential wild card
EASTW’s tap water business has had impressive sales growth of
27% CAGR over the past five years (2006-2010) which we believe is
due to the low penetration in its service areas.
Figure 63: Strong growth in tap water sales volume
EASTW’s tap water sales volume, mn cum
Source: Company data; KGI Securities (Thailand) estimates
The strong tap water revenue growth over the past five years
constitutes volume CAGR of 22% from continuous development of
rural areas and population growth, and an average tariff CAGR of
4%, which is in line with CPI CAGR of 3% over the same period.
EASTW group currently manages ten tap waterworks stations in five
provinces. We expect tap water sales to increase to Bt0.75bn in
2012 (up 4% YoY) from i) an increase in sales volume of 4% from
continued economic growth, in line with management guidance;
and ii) an increase in tariff of 4% based on the prior year change in
CPI as per contracted. The tariff increase is in line with the view of
KGI’s economist that headline inflation would be 3.9% for 2011.
We forecast a volume growth slowdown as we believe the tap
water penetration rate in EASTW’s service area is higher than in
2005. Management has said the tap water penetration rate in the
company’s service area is nearly 100%.
0
100
200
300
400
500
2008 2009 2010 2011F 2012F 2013F 2014F 2015F
Raw water capacity Raw water demand
190 199 211228 218
245
2005 2006 2007 2008 2009 2010
Five year CAGR of 4.0%
233.9
375.820.0
65.0
0
100
200
300
400
500
9M10 9M11
Others Chemical
+225% YoY
2227
32
4853
59
2005 2006 2007 2008 2009 2010
Five year CAGR of 21.8%Y = 2.2266x - 128.08 R2 = 0.9573
80
110
140
170
200
230
260
80 110 140 170
Thailand Utilities sector (Water)
*The Company may be issuer of Derivative Warrants on these securities. http://research.kgi.com; Bloomberg: KGIT <GO> Please see back page for disclaimer November 30, 2011 26
Minimum Offtake CapacityName Province cum/day cum/day Remaining years of contract Contract typeChachoensao Water Supply Chachoengsao 27,000 51,600 14 BOOTBangpakong Water Supply Chachoengsao 27,000 43,200 14 BOOTNakhonsawan Water Supply Nakhonsawan 6,450 19,200 14 BOOTRayong Waterworks Rayong 36,000 86,400 20 BTOSattahip Waterworks Chonburi 18,000 31,200 23 Lease contractBorwin Waterworks Chonburi N.A. 9,600 18 BOOTChonburi Water Supply Chonburi N.A. 24,000 16 BOOOthers Varies 2,500 3,624 Varies VariesTotal 116,950 268,824
We see upside risk to our sales volume growth forecast from
winning new potential tap water concessions from fast growing
demand in other areas with lower tap water penetration rates.
Figure 64: Tap water business – List of projects
Source: Company data
Thailand Utilities sector (Water)
*The Company may be issuer of Derivative Warrants on these securities. http://research.kgi.com; Bloomberg: KGIT <GO> Please see back page for disclaimer November 30, 2011 27
Rank Major shareholders Type Number of shares % shares
1 Ch Karnchang Pcl Local Juristic Person 1,198,777,400 30.042 Mitsui Water Holdings (Thailand) Local Juristic Person 1,036,500,000 25.983 Bangkok Expressway Pcl Local Juristic Person 368,750,000 9.244 Thai NVDR Local Juristic Person 135,895,749 3.415 Bangkok Life Assurance Pcl Local Juristic Person 98,916,800 2.48
PTW(98% owned by TTW)
Service Area Three districts in Nakonpathom and two districts in Samutsakorn
Six districts in Pathumtani
Tap water penetration rate 19% ~100%Sales growth expected High Low
- 50% industrial (mostly in food industry)
- 50% residential
- 27% residential - 30% industrial - 23% commercial - 20% commercial
Minimum offtake quantity (cum/d 318,000 330,000Capacity (cum/day) 440,000 388,000Sales volume (cum/day) 329,308 343,460
25.11 (<300k cum/day)11.02 (>300k cum/day)
Tariff adjustment Anually adjusted on 1st Jan based on prior year Dec CPI (central region) + K factor
Annually adjusted on 1st Jan using prior year July CPI
(nationwide)Revenue contribution 65% 31%Net profit contribution 71% 26%Water source Tachin River Chao Phraya RiverConcession granted by Ministry of Natural Resource
and EnvironmentMinistry of Interior
Sales agreement contract granted by
PWA PWA
Contract Type Build Own Operate Build Own Operate TransferRemaining years of contract 23 12
Contract duration (Years) 30 25Contract commencement 21-Jul-04 15-Oct-98
Tariff (Bt/cum) 11.16
TTW
Breakdown of end users
Appendix III: TTW at a glance
Company Profile Largest private tap water provider in Thailand TTW and its 98% subsidiary PTW, provide tap water in Central
Thailand under long-term concessions and minimum off-take
agreement and has more than ten years of the contract
remaining. Their service areas are in Nakonsawan, Samutsakorn,
and Pathumthani province. TTW has no direct competition in its
service area except from drilling of lower quality groundwater by
the local communities. TTW group is the largest private tap water provider in Thailand. The
company was established in 2000 with the key purpose of selling tap
water to the Provincial Waterworks Authority of Thailand (PWA) in
Nakhonpathom and Samutsakorn. PWA was assigned by the Cabinet in 1995 to expand tap water
service in order to address the land erosion crisis resulting from
overuse of ground water in six provinces – Nakonpathom,
Samutsakorn, and Pathumthani. PWA was unable to expand in a
timely manner due to insufficient funding and chose to work with
TTW to meet the assigned expansion. In 2007, TTW acquired 98% of Pathumthani Tap Water (PTW) from
its mutual major shareholder, Ch Karnchang Plc (CK BK/CK TB), to
reduce any conflict of interest that may arise from being in the
same business. PTW provides tap water service under concession to
Pathumthani province. The first full-year consolidation of PTW was
in 2008.
Figure 65: TTW’s key business
Source: Company data; KGI Securities (Thailand) estimates
Group structure
TTW is part of the CK group, one of Thailand’s largest contractors
and has been listed on the Stock Exchange of Thailand since 1995.
TTW owns 98% of PTW and 30% of CK Power, CK’s holding
company for its power business. CK Power currently holds 38% of
SEAN, the developer and operator of the 615 megawatt Nam
Ngum II hydropower plant in Laos.
Figure 66: TTW’s group structure
Source: SET; Company data
Major shareholders
CK has been the biggest shareholder in TTW since its establishment
in 2000. CK is also the biggest shareholder in Bangkok Expressway
(BECL.BK/BECL TB), TTW’s third largest shareholder.
CK has played an instrumental role in TTW’s growth, including
helping it acquire PTW, acquire 30% stake in CK Power, and win a
water management contract with Bang Pa-in Industrial Estate in
2009. CK’s Chief Executive Officer, Mr. Plew Trivisvavet, also serves
as the Vice Chairman of TTW.
The second biggest shareholder, Mitsui Water Holdings (Thailand), is
part of Mitsui Group, a large Japanese conglomerate involved in a
number of businesses around the globe, including mineral resources
& energy, global marketing networks, lifestyle business, and
infrastructure. We believe that TTW may be able to rely on Mitsui
Group’s overseas expertise if it looks to expand overseas.
Figure 67: Top shareholders in TTW
Source: SET; Company data
Management
Sompodh Sripoom (CEO)
Sompoh Sripoom has served as Chief Executive Officer of TTW since
2005, Mr. Sripoom’s other current positions include CEO of PTW and
Director of Thai Water Operations Ltd. He received his Masters in
Resource Planning and Management from Naval Postgraduate
School, USA, Masters in Structural Engineering and Structural
30%
98%
Mitsui Water Holdings (Thailand)
Bangkok Expressway Pcl (BECL)
Others
26% 9% 35%
Ch Karnchang Pcl(CK)
2%
15%
30%38%
Provincial Waterworks Authority (PWA)
Pathumtani Tap Water(PTW)
CK Power
Thai Tap Water(TTW)
Thailand Utilities sector (Water)
*The Company may be issuer of Derivative Warrants on these securities. http://research.kgi.com; Bloomberg: KGIT <GO> Please see back page for disclaimer November 30, 2011 28
Industrial
Commercial
Residential
40.0
38.0
22.0
Industrial
Commercial
Residential
25.0
24.0
52.0
Industrial
Commercial
Residential
20.0
28.0
52.0
Mechanics from University of California at Berkeley, USA and a
Bachelor of Science in Civil Engineering from Virginia Military
Institute, USA.
Somkiat Pattamamongkolchai (CFO)
Somkiat Pattamamongkolchai has been Chief Financial Officer of
TTW since 2005. Mr.Pattamamongkolchai’s other current positions
include Director of Thai Water Operations. He received his Master of
Accounting from Thammasart University, Thailand and Bachelor's
Degree Bachelor of Accounting from Chulalongkorn University,
Thailand.
Key Customer
PWA is the sole customer
TTW and PTW sell all tap water to PWA, which then resells it to end
users. Despite the risk of relying on only one customer, PWA is a
state agency so the risk of default is limited.
The end users in provinces served by TTW group (Nakonpathom,
Samutsakorn, and Pathumthani) can be divided into 40%
households, 38% industrial, and 22% commercial.
Figure 68: Industrial and residential users account for about 80% of TTW’s group sales volume Breakdown of end users for TTW group (including PTW), percent
Source: Provincial Waterworks Authority
More than half of TTW’s industrial end users are in the food industry,
namely frozen and canned seafood. The food industry’s peak
demand is in the fourth quarter of each year in the run up to
Christmas and New Year. TTW’s largest industrial users are Samut
Sakhon Industrial Estate and Thai Union Frozen Products (TUF BK/TUF
TB), one of Thailand’s largest exporters of frozen and canned
seafood.
Figure 69: Industrial users are the largest end user group in TTW’s service area Breakdown of end users in TTW’s service area, percent
Source: Provincial Waterworks Authority
Most of PTW’s service area is in residential, hence a higher proportion
of residential users. The industrial users in PTW’s area are mostly in
non-food industries.
Figure 70: Residential users are the largest end user group in PTW’s service area Breakdown of end users in PTW’s service area, percent
Source: Provincial Waterworks Authority Stable Growth Outlook
Good growth over the past five years
TTW and PTW’s sales volumes have grown at CAGR of 12% and 5%,
respectively, over the past five years (2005-2010).
Figure 71: TTW’s sales volume is catching up to PTW’s
Sales volume, mn cum
Source: Company data
We believe that TTW has a higher growth rate than PTW because the
tap water penetration rate at TTW’s service areas (Nakornpathom
and Samutsakorn) is lower than PTW (Pathumthani).
0
20
40
60
80
100
120
140
2005 2006 2007 2008 2009 2010TTW PTW
Thailand Utilities sector (Water)
*The Company may be issuer of Derivative Warrants on these securities. http://research.kgi.com; Bloomberg: KGIT <GO> Please see back page for disclaimer November 30, 2011 29
2010 2011F 2012F 2013F 2014FChange in CPI (%) 3.3 3.9 2.8 3.3 5.0
Benefits from inflation
TTW group benefits from inflation as the tariff pricing formula in the
tap water sales agreement with PWA is linked to the Consumer Price
Index (CPI).
We note that depreciation and amortization, which is relatively
unaffected by inflation, accounts for a large portion of water
providers’ expenses (e.g. around 30% of TTW’s total cost before tax).
This means that water providers’ inflation linked revenue should
increase at a higher rate than its cost.
KGI’s economist expects Thailand’s CPI to increase 3.9% for 2011. As
such, we expect the tap water tariff to be adjusted upward by the
same rate for 2012.
Figure 72: CPI forecast
Source: Bank of Thailand, KGI Securities (Thailand) Estimates
We expect inflation to remain around 3% in 2012 from increases in
food prices and consumer goods following the flooding in 4Q11. We
see further upside to 2012-14 inflation from the gradual easing of
the price cap on liquefied petroleum gas (LPG), and compressed
natural gas (CNG, also known in Thailand as NGV) which has kept
energy prices artificially low.
Figure 73: CPI is increasing
Consumer Price Index, points
Source: Bank of Thailand
0
20
40
60
80
100
120
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
10 year CAGR of 2.6%
Thailand KGI Securities Information
*The Company may be issuer of Derivative Warrants on these securities. http://research.kgi.com; Bloomberg: KGIT <GO> Please see back page for disclaimer November 30, 2011 30
Thailand Research Name Abbr. Sector Coverage Ext. Email
Itphong Saengtubtim IS Head of Research 8840 [email protected]
General line: Rakpong Chaisuparakul RC Strategist 8845 [email protected]
66.2658.8888 Pongtham Danwungderm PD Energy, petrochemical 8859 [email protected]
Adisak Kammool AK Strategist 8843 [email protected]
Phatipak Navawatana PN Telecom, media, healthcare, air transportation 8847 [email protected]
Nat Panassutrakorn NP Construction material, contractor 8849 [email protected]
Pragrom Pathomboorn PP Economist 8846 [email protected]
Urasri Phornwises UP Food, consumer 8857 [email protected]
Thaninee Satirareungchai, CFA TS Residential property, banking 8851 [email protected]
Pongpat Siripipat PS Derivatives 8844 [email protected]
Suchot Tirawannarat ST Ground transportation, shipping, automobile, small caps 8852 [email protected]
Piyathida Vongvivathchai PV Oil & Gas, coal mining, utilities 8856 [email protected]
Tareetip Wongsaegpaiboon TW Residential property, industrial estates 8855 [email protected]
ASEAN Sales Name Abbr. Sector Coverage Ext. Email
General line: Danny Komolrit DK Thailand sales 8090 [email protected]
66.2658.8888 Kannikar Pradiskesorn KP Thailand sales 8081 [email protected]
Datenusorn Rungruang DR Thailand sales 8082 [email protected]
The toll-free line for clients in HK and Singapore: 800.0800.5008
Thailand KGI Securities Information
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Locations China Taiwan
Shanghai
Room 2502-2504 No.317 Xian Xia Road,
Shanghai,PRC200051,
Shenzhen
Room 24D1, 24/F, A Unit, Zhen Ye Building, 2014
Bao’annan Road, Shenzhen
PRC 518008
KGI Securities
700 Mingshui Road,
Taipei, Taiwan
Telephone 886.2.2181.8888
Facsimile 886.2.8501.1691
Hong Kong Thailand
41/F Central Plaza, 18 Harbour Road,
Wanchai, Hong Kong
Telephone 852.2878.6888
Facsimile 852.2878.6800
KGI Securities (Thailand) Plc.
8th - 11th floors, Asia Centre Building
173 South Sathorn Road, Bangkok 10120, Thailand
Telephone 66.2658.8888
Facsimile 66.2658.8014
KGI's Ratings Rating Definition
Outperform (OP) The stock's excess return* over the next twelve months is ranked in the top 40% of
KGI's coverage universe in the related market (e.g. Thailand).
Neutral (N) The stock's excess return* over the next twelve months is ranked in the range
between the top 40% and the bottom 40% of KGI's coverage universe in the related
market (e.g. Thailand).
Underperform (U) The stock's excess return* over the next twelve months is ranked in the bottom 40%
of KGI's coverage universe in the related market (e.g. Thailand).
Not Rated (NR) The stock is not rated by KGI Securities.
Restricted (R) KGI policy and/or applicable law regulations preclude certain types of
communications, including an investment recommendation, during the course of
KGI's engagement in an investment banking transaction and in certain other
circumstances.
* Excess return = 12M target price/current price-1
Note When an analyst publishes a new report on a covered stock, we rank the stock's
excess return with those of other stocks in KGI's coverage universe in the related
market. We will assign a rating based on its ranking. If an analyst does not publish a
new report on a covered stock, its rating will not be changed automatically.
Source KGI Securities and its subsidiaries and affiliates.
Disclaimer
KGI Securities (Thailand) Plc. ( “The Company” ) disclaims all warranties with regards to all information contained
herein. In no event shall the Company be liable for any direct, indirect or any damages whatsoever resulting from
loss of income or profits, arising by utilization and reliance on the information herein. All information hereunder
does not constitute a solicitation to buy or sell any securities but constitutes our sole judgment as of this date and
are subject to change without notice.
Thailand KGI Securities Information
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of the securities mentioned in the report in the past 12 months.
iii) KGI Securities (Thailand) or its affiliates may have or have not received compensation for investment
banking services from the issuer of these securities in the past 12 months and do not expect to receive
compensation for investment banking services from the issuer of these securities within the next three
months.
iv) However, one or more of KGI Securities (Thailand) or its Affiliates may, from time to time, have a long or
short position in any of the securities mentioned herein and may buy or sell those securities or options
thereon either on their own account or on behalf of their clients.
v) As of the publication of this report KGI Securities (Thailand) does not make a market in the subject
securities.
vi) KGI Securities (Thailand) or its Affiliates may, to the extent permitted by law, act upon or use the above
material or the conclusions stated above or the research or analysis on which they are based before the
material is published to recipients and from time to time provide investment banking, investment
management or other services for or solicit to seek to obtain investment banking, or other securities
business from, any entity referred to in this report.
Enclave Capital LLC. is distributing this document in the United States of America. KGI Securities (Thailand) accepts
responsibility for its contents. Any US customer wishing to effect transactions in any securities referred to herein or
options thereon should do so only by contacting a representative of Enclave Capital LLC.