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17 August 2016

RHB Planet Series

Vietnam: Strong Growth Momentum To Continue

Our 3-day trip to HCMC reaffirms Vietnam’s significant potential from a top down perspective. However, more structural reforms, M&A deals and privatisation are needed to further improve transparency and efficiency. Delays in infrastructure, high public debt to GDP, uncertainty about TPP trade pact are among the obstacles. Property, construction materials, import/export, infrastructure related, consumer and retail look to be the stars. Our Top Buys are Berli Jucker, Sembcorp and Amata VN.

Table Of Contents

Xin Chào – Good Morning, Vietnam 2 Five Things to Know About Vietnam 3 Vietnam vs Its Peers 5 RHB Economist’s Viewpoint 6 Economic Overview 7 Our Visits -Stock Exchange of Ho Chi Minh 14 -Central Bank of Vietnam, Ho Chi Minh branch 16 -Banks at their growth stage 16 -IFC under World Bank group 17 -Booming Property sector 18 -Retail and consumer sector 21 -FDI, another bright spot 23 SWOT Analysis-Vietnam 24 Company Picks for Vietnam play 25 Company Briefs Amata VN (AMATAV TB)-Initiation 29 Berli Jucker (BJC TB)-Initiation 48 CapitaLand (CAPL SP) 64 Gamuda (GAM MK) 68 Sembcorp Industries (SCI SP) 71 SP Setia (SPSB MK) 75 Tan Chong (TCM MK) 79 Texhong Textile (2678 HK) 82

Ho Chi Minh City (HCMC) – the economic centre of Vietnam. We spent three days exploring Vietnam’s economic centre. The country is one of Asia’s fastest growing economies, a Top 10 investment hotspot and emerging market standout. Our visit included the HCMC Stock Exchange, Central Bank of Vietnam (HCMC branch), IFC under World Bank, listed Vietnamese bank (Vietinbank) and consumer companies like Masan and VinaMilk. We also visited SP Setia’s Ecoxuan housing project, Amata VN’s industrial park and Hong Kong-listed Texhong Textile Group’s (Texhong) textile factory. Great top down story. Vietnam’s GDP has been growing rapidly over the past 20 years and we expect the strong momentum to continue, given robust export growth, massive foreign direct investment (FDI), huge public investments and rising private spending. The authorities have been supportive of the private sector. It has also been trying to encourage more overseas investments as seen from the new sets of investment privileges, tax reforms, foreign ownership of property, privatisation of state enterprises and new trade pacts. The country’s banks are at their growth stage, while the high-end property sector is booming after foreigners and overseas Vietnamese were allowed to own more property locally. Meanwhile, a cheap and large young labour force and new trade pacts will continue drawing in massive FDI into Vietnam. Huge opportunity in the retail/commerce business from fast urbanisation and rising middle-income group.

Issues to look out for: i. Serious structural reforms to ease bureaucratic red tape, and improve

transparency and efficiency; ii. Consolidation and privatisation of state-owned enterprises; iii. Delay in infrastructure plans; iv. A new round of property bubble; v. High public debt to GDP may ignite inflation and forex problems; vi. Tough competition in the retail sector; vii. Lack of skilled labour.

Our take. Big ASEAN corporates have had a presence in Vietnam for >20 years. Amata VN and Sembcorp Industries – industrial estates operators – are beneficiaries of the potential massive FDI. Texhong plans to have a fully integrated textile and garment factory in Vietnam to reap the benefits of cheap labour and the Trans-Pacific Partnership (TPP) pact. Berli Jucker and parent company, TCC Group, are expanding aggressively in the retail/commerce business. Big property plays like CapitaLand, Gamuda and SP Setia see only small contributions from their businesses in this country but Vietnam will continue to be one of their key focus markets in ASEAN. Tan Chong on the other hand, is benefiting from the country’s fast-growing motorcycle and auto businesses.

RHB Regional Research ASEAN Economic Research

Source: Company data, RHB

Analyst Wanida Geisler +66 2862 9748 [email protected]

P/E (x) P/B (x) Yield (%)Company Name Price Target Dec-17F Dec-17F Dec-17F RatingAmata VN THB8.50 THB10.50 14.8 3.1 1.3 BUYCapitaLand SGD3.05 SGD3.15 12.1 0.7 NEUTRALGamuda Bhd MYR4.82 MYR5.19 15.7 1.6 2.5 NEUTRALSembcorp Industries SGD2.91 SGD4.00 7.8 0.8 4.5 BUYSP Setia MYR2.98 MYR2.91 10.2 1.1 6.7 NEUTRALTan Chong Motor Holdings MYR1.93 MYR2.40 23.1 0.5 2.1 NEUTRALTexhong Textile Group na na 5.6 1.2 5.4 na

http://www.efa.biz/

mailto:[email protected]


17 August 2016


Xin Chào – Good Morning, Vietnam Geography Vietnam is located on the eastern margin of the Indochinese Peninsula and occupies about 331,211.6 square kilometres, of which about 35% was under cultivation in 2013. It borders the Gulf of Thailand, Gulf of Tonkin, and Pacific Sea, alongside China, Laos, and Cambodia. With a coastline of 3,260 kilometres, excluding islands, Vietnam claims 22.2 km as the limit of its territorial waters, an additional 22.2 km as a contiguous customs and security zone and 370.4 km as an exclusive economic zone. Vietnam is rich in natural resources such as phosphates, coal, manganese, rare earth elements, bauxite, offshore oil and gas deposits, timber and hydropower.

HCMC is the largest city in Vietnam, followed by Hanoi, Haiphong and Da Nang. Although its total population of around 8m represents 8% of the country’s population, the city generates 20% of the country’s GDP and accounts for 35% of total FDI. HCMC is divided into 19 urban districts and five rural districts. The urban districts are numbered from 1 to 12 with seven additional districts namely Binh Thanh, Phu Nhuan, Tan Binh, Thu Duc, Go Vap, Binh Tan and Tan Phu. Most activities are centred around its CBD (aka District 1), expatriate residential area (District 2), District 7 and a new township, Phu My Hung.

Figure 1: Vietnam on the map

Source: www.sciencekids.co.nz

Figure 2: HCMC’s attractions include Notre Dame, Ben Thanh market, Central Post Office

Source: RHB

http://www.sciencekids.co.nz/


17 August 2016


First impression of HCMC My first impression of HCMC was that it is similar to Bangkok ten years ago, before the Skytrain was built. Traffic was busy, with millions of motorcycles whizzing madly along small 2-lane local roads. It is hard to communicate on the street because Vietnamese rarely speak English even though the language is a compulsory subject in secondary school.

Drinking coffee during the day and beer during the night seems to be the two most common Vietnamese pastimes. Local coffee is cheap and tastes good (better than some of the Western coffee franchises to me). As for beer, 333 (Ba Ba Ba), Saigon and Heineken were found in all restaurants that we visited. Vietnamese food is healthy and light, comprising lots of vegetables. Hence I rarely came across a chubby Vietnamese! We spotted some fast food chains like McDonalds, KFC and Starbucks along with local restaurant chains like Trung Nguyen Coffee, Highlands Coffee and Pho Hung noodles. Beauty and health trends are also becoming popular, as I spotted many gyms and beauty clinics. Japanese brands (automotive, motorcycle and electrical appliances) are regarded as high-quality products compared to those from Korea and China. Benh Thanh market (a local market) is a must-go for every tourist.

Five Things To Know About Vietnam Beer Among ASEAN countries, Vietnam is the largest market with the highest consumption level per capita as well as annual growth. It also ranked among the top 25 countries that consume the highest amount of beer in the world. This alcoholic beverage, first introduced to the country in 1900s, has become part of the country’s culture. Saigon Alcohol Beer and Beverages Corporation (Sabeco) is Vietnam's leading beer producer. It is owned and under the authority of Vietnam's Ministry of Trade and Industry. In 2015, Sabeco remained the biggest player in beer with a total volume share of 46%. Its main brands are Saigon Beer and 333 Beer.

Popular international breweries include Tiger, Carlsberg, and Heineken. Heineken and Tiger together dominate the Vietnam premium beer segment with approximately 85% of the market share. Vietnam is the largest market in the world for Tiger and Heineken Asia Pacific. The country aims to raise beer output by 18% to 25%, up from 3.4bn litres in 2015 to between 4bn and 4.25bn litres by 2020.

Figure 3: Top Vietnamese beers Figure 4: Top Vietnamese coffees

Source: Brandvietnam.com Source: Brandvietnam.com

Coffee Vietnam is among the top five countries famous for coffee along with Brazil, Costa Rica, Columbia and Ethiopia. It is one of the world’s largest exporters of coffee with a market share of close to 20%. Trung Nguyen is the largest and domestic coffee brand within Vietnam, and exports its products to more than 60 countries. The group is involved in the production, processing and distribution of coffee. Its chairman and CEO is Dang Le Nguyen Vu, who is known as Vietnam's Coffee King. Along with producing and processing coffee beans, Trung Nguyên operates a nationwide chain of over 1,000 coffee shops in Vietnam to distribute its products, the first of which opened in October 1998 in HCMC.

Rice Rice production in Vietnam centres around the Mekong and Red River deltas. Vietnam is one of world's richest agricultural regions. It is also among the top five largest rice exporters worldwide and the world's fifth-largest consumer of rice.


17 August 2016


Figure 5: Rice terrace Figure 6: 2015 top five rice exports by US$ value

Source: RHB Source: www.worldtopexport.com

Motorcycles Vietnam is the capital city of "The World of Motorcycles". Each year, about 3m new motorcycles come onto Vietnamese roads. At the beginning of 2014, official figures showed that, in a country with a population of nearly 90m, registered motorcycles totalled 43m – meaning close to one in every two Vietnamese owns a motorcycle. In HCMC alone, there are over 6.8m registered motorcycles. Foreign investors account for 90% of the domestic market for motorcycles. The top two largest brands are Honda (60% market share) and Yamaha. Tan Chong Motor (TCM MK) is the distributor of Kawasaki motorcycles and Nissan cars in Vietnam.

Figure 7: Motorcycle is part of life

Source: RHB

Ho Chi Minh, The Great leader of Vietnam, once stayed in Thailand Ho Chi Minh (1890-1969) was a Vietnamese Communist and revolutionary leader who, throughout much of the twentieth century, sought to free his nation from colonial influence. He led Vietnamese insurgents against Japanese, French, and American occupying forces, as well as against Vietnamese rival factions. Ho Chi Minh is still referred to as "Uncle Ho" in Vietnam. Ho's image appears on the front of every Vietnamese currency note, and featured prominently in many of Vietnam's public buildings. “Uncle Ho” is no stranger to the Thai society, as he used to spend his life here in the late 1920s while struggling for Vietnam's independence. He had a safe house in Nakhon Phanom's Ban Na Chok, one of North Eastern provinces in Thailand, and lived there from 1928-1929. The Ho Chi Minh Memorial Complex opened recently in Nakhon Phanom province and is the world's largest overseas memorial to honour the Vietnamese leader. It not only another tourist attraction but a historical site as well.

Figure 8: Ho Chi Minh statue, Ho Chi Minh’s House and Ho Chi Minh Memorial Complex

Source: RHB, Medias


17 August 2016


Vietnam vs Its Peers Figure 9: Peer comparison

Note: All latest available data (2012-2015) Source: World Bank


17 August 2016


RHB Economist’s Viewpoint Summary: Vietnam has significant potential Vietnam has seen rapid economic growth since 1990. The country has improved the lives of 35m people, rising out of poverty with the achievement of lower middle-income status in 2010. The economy is transitioning from being largely agricultural-based to one that is industrialised, and from a centrally planned to market-based economy. This is paired with a young and increasingly wealthy population of around 90m, with a high labour participation rate. Vietnam is the world’s second largest coffee producer and third largest rice exporter (source: www.worldtoexport.com), and agriculture remains a key source of national income employing half of the total workforce.

It shares borders with the second largest economy in the world, ie China, along with Cambodia and Laos. Vietnam has gained access into the World Trade Organisation (WTO), is a member country of the TPP agreement and has forged closer economic ties with the US and EU. As a result, the inflow of FDI into the country has risen in recent years. This, along with continuous government support in developing infrastructure and offering tax incentives – including the greenfield advantage where corporations can leverage on technology and synergies – will likely lead to more opportunities for foreign market access, as well as increased investments and economic expansion.

Its current account recorded a smaller surplus in 2015 compared with 2014. This was due mainly to stronger growth in imports which outpaced export growth. On the flip side, exports will increase in the coming years following its participation in the TPP and improvements in logistics infrastructure.

In general, Vietnam’s youthful demographic (persons aged 15-29 make up around one-quarter of the population), and low dependency ratio (at 42.3 in 2014) implies that each economically active person is sustaining fewer dependents. This demographic profile suggests a prolonged period of high savings and investments, which also translates to rapidly rising affluence amongst the masses.

Meanwhile, tax collection has improved with the Government implementing a VAT and corporate income tax to ensure that it is:

i. Less reliant on natural resources for revenue; ii. Moving towards a more stable form of income.

At the same time, government expenditure has been high. We think this is still appropriate, given that the majority is spent on much-needed…

i. Infrastructure development; ii. Education; iii. Social security; iv. Economic development.

…,which will likely drive the economy towards a sustainable rate of growth in the long term. However, the ratio of expenditure for investment is falling, while recurrent expenditures are on the rise. As a low-middle income country, public spending on investment is vital for promoting economic development in Vietnam.

Risks to our view include the rapidly rising ratio of public debt to 62.2% of GDP in 2015 from 38% in 2011, which may become uncontrollable. While it is still within the National Assembly’s 65% cap, it has risen sharply, ie by as much as 20% pa in 2010-2014. This has been due to ineffective investments that incurred huge losses. Similarly, the VND is being devalued several times in a year – after previously being kept unchanged for long periods of time – to promote the country’s exports and lower inflationary pressures. This may lead to a risk of a significant devaluation of the currency when the economy dips, causing a loss for investors who are pumping money into Vietnam.

Figure 10: Vietnam is set to see double-digit export/import growth Figure 11: Consistently high GDP growth ----Export growth (%)----- ---Import growth (%)---- 2014 2015 2016F 2017F 2014 2015 2016F 2017F Indonesia 1.0 -2.0 0.9 3.6 2.2 -5.8 0.2 2.8 Malaysia 6.4 1.8 2.3 3.4 5.3 0.4 0.1 3.0 Philippines 11.8 9.1 5.6 5.5 9.6 14.0 6.5 7.1 Singapore 0.8 -7.3 -8.0 1.6 -0.6 -12.1 1.4 1.0 Thailand -0.4 -5.8 0.3 1.8 -9.0 -10.7 1.0 2.0 Vietnam 13.7 7.9 8.0 10.9 12.0 12.0 13.0 11.0

--------------GDP growth (%)---------- 2014 2015 2016F 2017F Indonesia 5.0 4.8 5.1 5.3 Malaysia 6.0 5.0 3.9 4.0 Philippines 6.2 5.9 6.6 6.8 Singapore 3.3 2.0 1.6 2.0 Thailand 0.8 2.8 3.2 3.5 Vietnam 6.0 6.7 6.0 5.9

Source: RHB Source: RHB


17 August 2016


Economic Overview GDP eased slightly, but remains impressive

Figure 12: Sector contributions to real GDP growth

Source: World Bank, CEIC, RHB

Vietnam’s real GDP growth slowed to 5.5% YoY in 1H16. This was down from the fastest pace recorded in a 7-year period of +6.7% YoY, which was for the whole of 2015. As a direct YoY comparison, 1H15 booked a growth rate of 6.3% YoY.

This slowdown was due to a decline in agriculture and mining activities following Vietnam’s worst drought in three decades as a result of the El Niño effect, while construction and utilities output also eased during the period. These were, however, mitigated by a pick-up in manufacturing and services activities. On a quarterly basis, economic growth improved marginally to 5.6% YoY in 2Q16 from +5.5% in the previous quarter, but this was lower than the +7.2% recorded in 4Q15.

The nation’s current account surplus eased to 1.4% of GDP in 2015, at USD906m, from 5.1% the year before. This was in tandem with strong import growth of 12% YoY, which outpaced export growth of 7.9% YoY in 2015. Gross international reserves held by the State Bank of Vietnam (SBV) increased to USD35bn at the end of 2015, which was sufficient to finance about three months of imports.

Economic outlook GDP expected to grow by 6% in 2016. Looking ahead, we anticipate Vietnam’s economy to maintain its positive trend and economic strengths in 2016 on the back of growing exports and private investments. This will likely be bolstered by the Government’s initiative to actively engage in free-trade agreements (FTA) with its trading partners – thereby improving not only trade creation but also attracting foreign firms to bring in greenfield investments into the economy. This, in turn, will boost local manufacturing activities.

Indeed, FDI inflows into Vietnam have been picking up in recent years. The effect of aforementioned FTAs signed by the country earlier on is set to materialise on a larger scale in 2016, as administrative barriers are further eliminated. A total of three FTAs were signed this year, ie with South Korea, the Eurasian Economic Union (EEU) and the EU, as well as the TPP agreement in Oct 2015, Although the details have yet to be concluded, this has caused an influx of capital investments into industries such as textiles, garments and footwear. Based on a study conducted by the Peterson Institute for International Economics, Vietnam’s membership in the TPP is envisaged to expand its exports by an additional 37.3% by 2025 from 2010 levels.

The Government is also making efforts to spur private investment by streamlining regulatory requirements on licensing applications and expanding the list of projects entitled for investment incentives. Such efforts augur well for South-East Asia’s sixth-largest economy’s ability to ride on its fast-growing investment activities. The SBV recently decided to delay tightening its lending rules. It is also anticipated that the central bank will maintain its accommodative stance in 2016 to provide preferential loans and a loan disbursement programme (such as the lender-borrower matching programme undertaken previously) to spur business activities. Loan growth at end-2016 is expected to reach 18-20%, up from +17.2% in 2015. This will likely be driven by high-tech manufacturing, agricultural and rural development loans.

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At the same time, the Government is increasing its focus on the country’s infrastructure needs. A countrywide modernisation of the railway system is currently underway in order to revive resource mobility within the economy. At an estimated cost of USD5.1bn – funded by the private and public sectors – Phase 1 of the North-South railway is slated for completion in 2020.

According to the Ministry of Transportation (MOT), a total of 40 projects were scheduled for completion by 2015 and 15 more are under construction via private-public partnerships (PPP). As the MOT is expected to kick-start its infrastructure investment cycle, we believe this will trigger a spill-over effect into the private sector and further lift demand for capital equipment and construction activities.

On top of that, the announcement of a 12.4% hike in minimum wage for 2016 will likely boost domestic consumption. This is amidst an improved labour market as a result of a rise in FDIs. Fundamentally, Vietnam’s relatively low-cost labour force, reduced corporate tax rate, stable government and favourable geographic location will continue to make it an attractive destination for companies looking to relocate to lower-cost export manufacturing facilities, away from China. A modest and stable growth outlook for the US, Vietnam’s largest export destination, will also likely anchor external demand for the country’s products and services.

Nevertheless, growth will likely be capped by low crude oil prices, which pose a risk to the Government’s oil revenue, as it accounts for about 10% of state income. The fiscal deficit continues to be a concern too, as it was at 6.1% of GDP for 2015 vs 4.4% in 2014.

Such weaknesses, amidst the regional currency slump, will likely pressure the VND, which has stabilised since recovering by 2% YTD after a 4.9% depreciation in 2015. Economic reforms, such as the privatisation of the banking and textile sectors involving mostly state-owned entities, are also slowly taking place. Meanwhile, the country faces geopolitical risks like territorial disputes in the South China Sea.

Nevertheless, Vietnam’s agricultural and mining output declined for a second straight quarter in 2Q16. This suggests that it has not recovered fully from earlier adverse weather conditions, which resulted in a drought in its rice-growing areas and salinization in the Mekong Delta food basket. As Vietnam produces one-fifth of the world’s rice, this might lead to a slower growth in the country’s international trade and create a drag on its economic growth.

On balance, we expect the country’s real GDP growth to moderate to 6% YoY in 2016 from +6.7% YoY in 2015, and matching the pace set in 2014. This is premised on relatively weaker agriculture and mining growth in 1H16 and the trade sector’s economic prospects.

Figure 13: Vietnam’s principal exports in 2015 Figure 14: Vietnam’s principal imports in 2015

Source: General Statistics Office of Vietnam Source: General Statistics Office of Vietnam

At the moment, the dynamics of Vietnam’s trade mainly involve the manufacture and export of apparel and clothing accessories, which made up 14.1% of total exports last year. This is followed closely by electrical and electronic (E&E) products such as telephone and parts, electronics and computer parts and machinery that accounted for 9.6% of total exports in 2015.

Other exports include footwear, aquatic products, vegetables and fruits, and crude oil. It is also the world’s second largest exporter of coffee and the third largest exporter of rice – although the value of each commodity only constitutes less than 2% of total exports. In the case of imports, about 13.9% of total Vietnam’s imports are made up of E&E products

Crude Oil (2.3%)

Electronics (9.6%)

Footwear

(7.4%)

Apparel and Clothing

Accessories (14.1%)

Vegetable & Fruits (2.3%)

Coffee & Rice (3.4%)

Others (56.9%)

Motor Vehicles (1.8%)

Electronics (13.9%)

Refined

Petroleum Oil (3.2%)

Iron and

Steel (4.5%)

Chemicals (1.9%)

Plastic (3.6%)

Textile Fabrics (6.1%)

Others (57.9%)


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such as machinery and computers & parts in 2015, followed by fabrics (6.1%) and steel & other metals (4.5%) and other imports such as automobiles, plastics and petrol.

Despite the rapid rise in trade growing to account for 80% of the economy, the country’s trade potential is still hampered by poor infrastructure. According to the World Bank, Vietnam recorded a score of 2.7 and 3.6 for the quality of roads and ports infrastructure respectively, compared to the average of 4.0 and 4.3.

As of 2015, Vietnam’s main trading partners are the US (21%), followed by China (12%), and Japan (11%).

Exports in 2015 grew 7.9% YoY, slightly slower than the 13.7% YoY recorded in the previous year, mainly due to tepid mining and agriculture exports amid a slump in commodity prices. Meanwhile, import growth remained unchanged in 2015 from 12% YoY in 2014. This outpaced exports, however, and resulted in a trade deficit. The lack of change in imports was mainly due to the decline in the import of petroleum.

Sector breakdown Vietnam’s economy has been dominated by services and industrial activities, which account for 38.3% and 34.2% of GDP respectively. Meanwhile, the agricultural portion of output has been diminishing since 1999. It stood at 16.1% as at the end of 2015.

Agriculture Vietnam’s agricultural sector constitutes 16.1% of the nation’s total GDP, or about 15% of its export earnings, and accounts for 47% of employment. The outsized gap between employment and output highlights the glaring decrease in productivity issues that translate to low agricultural incomes of about USD490 per year.

Having said this, there is great potential for improvement in the agriculture sector, with 103,000 sq km of arable land that is mainly allocated to produce crops for profitable exports and to meet the rising demand for agriculture products. This, with Vietnam participating in the Trans Pacific Partnership Agreement (TPPA) between the US and 10 other states would boost agricultural activities to produce export crops. Similarly, the inflow of export-driven FDI into Vietnam’s agriculture sector is increasing, with Japan and South Korea leading the way. This will further improve competitiveness, infrastructure and labour in the country.

Manufacturing The multi-sectorial economy is one of the central components of economic reform in Vietnam. A number of policies promote the development of non state-owned enterprises (SOEs). As it stands, non-SOEs currently play a big role in Vietnam’s economy – and represent 31.9% out of total ownership structure.

Vietnam’s manufacturing sector continues to be robust, growing 10.6% YoY in 2015, vs +8.5% in 2014. The sector also contributed 1.6ppts out of the 6.7% growth in GDP last year. This was further assisted by a pick-up in FDI in recent years, on account of funds going into large-scaled manufacturing projects (with China being the largest investor).

The current manufacturing landscape is dominated by the textile and clothing industry, as well as the electronics sector. With significantly lower wages, Vietnam has managed to become the largest exporter of clothing and textile to the US, after China. Similarly, electronics played a major role in production, being the second largest sector in 2015 in terms of exports, with electronics production zones being set up in the country by foreign electronics manufacturers.

The Vietnamese Government divided the country into three key economic zones (KEZs) for which former Prime Minister Phan Van Khai launched economic development plans in 2004 to:

i. Achieve economic growth of 6.5-7.0%; and ii. Gain status as an advanced industrial country by 2020.

The KEZs are geographically delimited areas under a decentralised administration, which aims to put industrial players in a cluster to benefit from collective efficiency gains – such as the availability of a specialised labour force, machinery and input suppliers, improved logistics through the supply chain, and the stronger collective pull of buyers. They are proven to be the key economic engine for the country. Over the past five years, the southern key economic zone (SKEZ) accounted for more than 70% of the country’s export revenue, growing at 21.4% pa. Similarly, the economic zone accounts for 60% of total industrial production and 40% of GDP.


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Figure 15: Key economic zones

Northern Key Economic

Zone

Central Key Economic

Zone Southern Key Economic Zone

Access to cities

Hanoi City, Hung Yen

Province, Hai Phong City, Quang Ninh Province,

Hai Duong Province, Ha Tay Province, Bac Ninh Province

and Vinh Phuc Province.

Thua Thien Hue Province,

Quang Nam Province, Quang Ngai Province, Binh Dinh Province and Da Nang

City

HCMC, Binh Duong Province, Ba Ria

– Vung Tau Province, Dong Nai

Province, Tay Ninh Province, Binh Phuoc Province and Long An

Province.

Target Clusters

• Agriculture • Industrial • Technology

• Marine economy • Oil and gas • Shipbuilding • Logistics • Coastal tourism

• Exports • Manufacturing • Tourism • Oil and gas • Finance, banking • Technology • Culture • Infrastructure

Figure 16: Map of Vietnam’s key economic zones

Source: Vietnam Briefing Services With the agricultural and industrial sectors envisaged to continue growing robustly following further market liberalisation, it can be argued that the services sector is set to benefit the most from their reforms. Rising agricultural and manufacturing yields will boost the incomes of the majority of the population and lift demand for services and non-agricultural products, including imported consumer products. This will support growth in the wholesale & retail trade, transportation, logistics and financial & banking sectors. Currently the services segment is dominated by wholesale and retail trade (24%), financial intermediation (15%), and real estate (14%). The lifting of trade sanctions and the upgrading of the country’s transport networks will bring direct benefits to the retail trade and transportation businesses. In fact, tourism has been on the rise in recent years, with a roughly 100% increase to 7.9m tourists entering the country in 2015 compared to the preceding year – mostly travellers from the US, Singapore and Taiwan. Meanwhile, in the financial and banking sector, state banks still dominate. Private banking, on the other hand, has been benefiting from a strong demand for loans from the private sector. Indeed, credit to the private sector registered a reading of 100% of GDP in 2015, in line with the rapid growth of the country. Loan growth, which rose by 17.2% in 2015, is expected to remain robust at 18-20% for 2016.


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Meanwhile, the wholesale and retail trade sectors in Vietnam continue to grow robustly, amid rapid urbanisation, low trade barriers and a relatively young population, in addition to rising income levels in the country. This follows Vietnam’s entry into the World Trade Organisation, which opened the doors for foreign investors to operate in the domestic market independently. This in turn led to an abundance of retail groups with vast experience and structured operating methods entering the country, and provided productive competition for domestic firms. Retail sales rose 9.5% YoY in 1H16, matching the pace for the whole of 2015 and compared to +10.6% YoY in 2014.

Figure 17: Loan growth

Source: CEIC, RHB

Fiscal and monetary policies

Figure 18: Expenditure breakdown

Source: CEIC

Vietnam’s Socio-Economic Development Strategy (SEDS) 2011-2020 focuses on structural reforms, environmental sustainability, social equity, and emerging issues of macroeconomic stability. The five-year Socio-Economic Development Plan 2011-2015 focused on three critical restructuring areas:

i. The banking sector;

ii. SOEs; and

iii. Public investment

– which are vital to achieve these objectives.

Vietnam opted to have expansionary Budgets and has been in a fiscal deficit of 4.4-6.1% over the past three years. Adopting tax reforms, government revenue in Vietnam is mostly contributed from VAT and corporate income tax, which accounted for 28% and 21% of total government revenue respectively. In addition, businesses with income from agriculture and projects that have impact on job creation and economic structure are accorded preferential tax rates. Education, social security, and economic development are the major three beneficiaries of government spending. Similarly, in 2013, the Government initiated the Vietnam Asset Management Company (VAMC) – an SOE – to buy and rehabilitate bad debt, reduce the ratio of non-performing loans to total outstanding loans

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and increase efforts to privatise SOEs (which account for more than half of Vietnam’s bad debt). Inflation recorded low growth, with the consumer price index (CPI) rising 0.58% through 2015, the lowest in 14 years – which led to growing concerns. However, inflation has started to rise and the central bank has not opted for any monetary policies.

FDI into Vietnam has surged since 2015

Figure 19: Rising interest from foreign firms

Foreign Direct Investment

Intra-ASEAN (USD m)

Extra-ASEAN (USD m)

Total Net Inflow

2013 2,078.6 6,821.4 8,900.0

2014 1,547.1 7,653.0 9,200.1

2015 2,153.5 9,646.5 11,800.0

1H 2016 - - 11,200.0

Source: ASEAN

Figure 20: FDI breakdown by country (2015)

USDm % of total

South Korea 2,678.5 17.2

Malaysia 2,447.5 15.7

Japan 1,285.0 8.2

UK 1,265.7 8.1

Singapore 1,035.0 6.6

Source: CEIC

Figure 21: FDI breakdown by industry (2015)

USDm % of total

Manufacturing 8,927.8 57.3

Wholesale, retail trade, motor repair 375.2 2.4

Accommodation, food services 97.2 0.6

Real estate activities 2,146.4 13.8

Professional, scientific, technology 228.8 1.5

Information, communication 65.5 0.4

Transportation, storage 67.2 0.4

Agriculture, forestry & fishery 160.0 1.0

Mining & quarrying 10.4 0.1

Electricity, gas, air-conditioning supply 2,795.3 17.9

Water supply, sewerage, remediation 2.2 0.0

Construction 573.6 3.7

Source: CEIC

FDI has been a significant contributor to Vietnam’s growth. With Vietnam’s high growth potential and its introduction of investment reforms and trade agreements, FDI has risen significantly in recent years. In 2015, it recorded FDI inflows of USD11.8bn (+28.3% YoY). In 1H16, FDI surged 105% to USD11.2bn.

Of the total, USD7.5bn came from 1,145 newly licensed projects, representing a capital growth of 95% YoY and a 56% YoY increase in the number of projects.


17 August 2016


The remainder was contributed by 535 already-operating projects that have raised their capital by more than USD3bn, or 129% YoY. Disbursement of FDI surged to an estimated USD7.3bn in 1H (+15% YoY).

Manufacturing and processing industries continue to be the top sectors, receiving FDI of USD8.1bn, which is equivalent to 71% of the total registered FDI. The sector attracted 488 newly registered projects, while 405 existing projects increased their capital.

This was followed by the real estate sector, which received FDI into 25 projects with a total capital of USD604.8m, accounting for 5.3% of the total FDI. The science & technology sector took third place, with USD562.3m, or 5% of the total FDI.

From January through June, 61 countries and territories invested in Vietnam. South Korea remained the leading investor, with USD4.0bn (35% of total), while Japan was the runner-up, with USD1.2bn (10% of total).

Singapore followed with USD1.1bn, accounting for another 10% of the total FDI.


17 August 2016


Our Visits Ho Chi Minh Stock Exchange aims to be on the MSCI over the next five years According to Ho Chi Minh Stock Exchange’s (HOSE) 2015 annual report, its plan for 2016 is to continue encouraging new listings, auctions, and seek solutions to increase market scale and liquidity. At the same time, new products will also be launched, such as covered warrants and environmental, social and governance (ESG) indices. Developing corporate bonds and exchange-traded funds (ETFs) markets will also continue to be its main tasks. In improving international economic integration, with many free trade agreements as the bridge to connect businesses, HOSE will promote activities that:

i. Provide information;

ii. Increase competitiveness and connect companies between markets;

iii. Support capital mobilisation for Vietnamese enterprises in international markets and foreign enterprises in the Vietnam market.

Vietnam hopes that over the next 3-5 years, its stock exchange will be promoted to emerging market status on the MSCI. However, its main obstacles are:

i. The size of stock market capitalisation is very small, at USD64bn;

ii. Limits placed on foreign ownership;

iii. Ease of capital flows; and

iv. Its minimum levels of liquidity and market value.

According to Mr Nguyen Son, the head of market development at the State Securities Commission, the merger of the Hanoi and HCMC stock exchanges (which was first announced in 2012) is expected to be completed by early 2017. The Government would like to partially float the merged bourse, probably after 2020.

Figure 22: HOSE in brief

About HOSE The Ho Chi Minh City Securities Trading Center was established on July 20, 2000. After 7 years, the government transferred the Ho Chi Minh City Securities Trading Center to Hochiminh Stock Exchange (HOSE) and it was officially launched on 8th August 2007.

HOSE introduced continuous order matching since 30th July 2007 and the introduction of online trading at the beginning of 2009.

Regulators Ministry of Finance (MOF)

The State Securities Commission (SSC)

Products & Services Stock, Corporate Bond, Municipal Bond, Fund Certificated, ETFs

Indices VN Index

Number of listed companies 349 listed companies, 39 bonds, 1 ETFs

www.hsx.vn

Information for foreign investors Taxation and regulations affecting foreign investors

Individual Investor

Capital gain tax: Gains from a capital assignment and /or securities trading are subject to 0.1% tax on the gross sale

Dividends: 5% withholding tax

Juristic Investor

Capital gain tax: Gains from a capital assignment and /or securities trading are subject to 0.1% tax on the gross sale

Dividends: No tax for dividend of shares

Foreigners can buy up to 49% of listed stocks except banks. For banks the limit on foreign ownership is 30% with a maximum individual investor limit of 10%.

Source: SET

http://www.mof.gov.vn/portal/page/portal/mof_en

http://www.ssc.gov.vn/ubck/faces/en/enmenu/enpages_home

http://www.hsx.vn/


17 August 2016


Figure 23: Number of listed companies in HOSE Figure 24: Average trading volume and value

Source: HOSE Source: HOSE

Figure 25: Investor base Figure 26: Average trading volume and value

Source: HOSE Source: HOSE

Figure 27: Sectors by market cap Figure 28: Number of listed companies by sectors

Source: HOSE Source: RHB


17 August 2016


Central Bank of Vietnam is supportive of the private sector Although there were communication problems given the language barrier, we sensed that the Vietnamese authorities have been quite supportive of the private sector. It has been trying to encourage more and more overseas investments. New sets of investment privileges, tax reforms, foreign ownership of property, privatisation of state enterprises, new trade pacts (TPP, EU-Vietnam free trade agreement, ASEAN, etc), and the stabilisation of the dong (VND) were among the policies/measures that were always mentioned in our discussions with companies that we visited.

Figure 29: On the Road with RHB to The State Bank of Vietnam, HCMC branch

Source: RHB

According to recent press reports, The State Bank of Vietnam (SBV) has reaffirmed its commitment to keep the bad debt ratio at less than 3% of outstanding loans in 2016. Le Minh Hung, the bank's governor, has approved an action plan asking the banking sector to help improve Vietnam's business environment, enhance national competitiveness and support businesses during 2016-2017 (with a vision to 2020), according to the Central Bank's online portal. The governor encouraged improvements to be made on credit information transparency, as well as reviewing and finalising a legal framework on lending. The plan also emphasises the urgent need to restructure the banking system, with a focus on handling bad debt over the next four years. Bad debts in Vietnam’s banking system stood at 2.9% in 2015, significantly down from 3.7% the year before, according to an annual financial report published by the National Financial Supervisory Commission.

Banks in a growth stage With 98 banks nationwide (50% of which are state-owned), the industry seriously needs a consolidation. However, its performance in terms of loan and deposit growth has been impressive, ie at a double-digit rate over the past decade. At VietinBank’s (one of Vietnam’s leading banks) HCMC branch, we discovered that the bank expects its loans to grow 30% YoY (2015: 25% YoY) in 2016, while non-performing loans (NPLs) seem to be well under control, ie at c.1%.

NPLs are mainly due to borrowers in the agricultural sector, eg companies involved in growing and processing cashew nuts and coffee. The trend is the same as what Vietcombank, another major listed bank, is seeing. Amid favourable demographics (increasing urbanisation, a young population and rising GDP per capita), high growth in this sector is likely to continue – for only 25% of the country’s population has a personal bank account.

♦ Back in 2014, Fitch and Moody estimated Vietnam’s total NPL was equivalent to at least 15% of total assets. SBV quickly released a statement to re-affirm that its NPL ratio during that period was 4.7%, and the number published by international agencies might have used a different basis

♦ The top three Vietnamese banks (VietinBank, Vietcombank and BIDV) are among the world’s 2,000 largest companies, according to Forbes magazine


17 August 2016


Figure 30: Banking sector’s performance

Source: Vietcombank

Figure 31: Performances of top three Vietnamese banks

VietinBank Vietcombank BIDV

('000 VNDbn) 2014 2015 % chg YoY 2014 2015 % chg

YoY 2014 2015 % chg YoY

Total asset 661 779 17.9 577 674 16.8 650 851 30.9 Gross loans 543 677 24.7 424 503 18.6 446 598 34.1 Equity 55 56 1.8 43 45 4.7 33 42 27.3 Profit before tax 7.3 7.35 0.7 5.85 6.83 16.8 6.3 7.5 19.0 ROAA 1.2 1.02

0.87 0.85

0.83 0.79

ROAE 10.5 10.3

10.66 12.03

15.3 15.5 NPL ratio 0.9 0.73

2.31 1.84

2.03 1.68

Capital adequacy ratio (CAR) 10.35 10.58

11.6 11.04

9.47 9.81

Source: Company data

Figure 32: The top three Vietnamese banks

Source: Companies, RHB

IFC: Seeing high potential in the agricultural sector International Finance Corporation (IFC), under the World Bank Group, was established in Vietnam in 1997. It focuses on financial institutions, manufacturing/agricultural/services, and infrastructure. 90% of its activities centre around the development and structural reforms of the financial sector, aiming to raise it to the global standard over the next decade. IFC also supports the development of the agricultural sector. 5-10 years ago, it encouraged overseas companies to invest in Vietnam. Recently, however, it has shifted its focus to promoting local businesses. It sees high potential for vertical/horizontal integration within the agricultural sector as well as the development of more value-added products such as processed foods, medicines and vaccines for animals, etc. More big corporations have also stepped in to help improve this sector. Note that the efficiency and yield of Vietnamese agricultural products remain much less than that of Thailand – so there is still room to improve.


17 August 2016


Brief history of IFC in Vietnam. Although IFC opened offices in Hanoi and HCMC in 1997, its first investment was made back in 1994. IFC has invested about USD4.5bn in 123 projects in Vietnam (excluding mobilisation) since then. Its outstanding portfolio as at end-2014 was valued at USD721m.

Figure 33: IFC’s long-term financial products Equity Corporate and JV Typically 5-15% shareholding (not to exceed 20% of total equity) Long-term investor, typically 6-8 year holding period Not just financial investor, adding to shareholder value Private equity and venture capital Mezzanine/Quasi Equity Subordinated loans Income participating loans Convertibles Other hybrid instruments Senior debt & equivalents Senior debt (corporate finance, project finance) Fixed/floating rates, USD, EUR and local currencies available Commercial rates, repayment tailored to project/company needs Long maturity periods: 8-20 years, appropriate grace periods Range of security packages suited to project/country

Mobilisation of funds from other lenders and investors, through co-financing, syndication, underwriting and guarantees

Source: IFC, World Bank Group

Booming property sector After almost five years of a housing slump, Vietnam’s property market is now riding on an upcycle. This comes after new housing laws that relaxed the limits on ownership for foreigners and overseas Vietnamese – to a maximum of 30% in any condominium, or 250 houses in a ward – took effect in mid-2015. Previously, this segment could buy only one property under very strict conditions. Under Vietnam’s constitution, all land belongs to the state. Land lease certificates that are valid for a maximum of 50 years are granted in real estate purchases.

Vietnam’s Real Estate Association estimated that there are 4m Vietnamese overseas and 30,000 foreign executives. According to Colliers, sales of condominiums doubled to 36,000 units in 2015 from around 17,000 units in 2014. Most new supply last year was in the high-end and luxurious segment, with projects located mostly in District 2 with around a 70% take-up rate.

Figure 34: Artist’s impression of a luxurious Vinhomes project on the bank of the Saigon River

Source: Vinhomes website

Given the massive new supply due to come out over the next few years, this sector seems risky – particularly when most buyers are set be investors or speculators rather than buyers purchasing on real demand. From a hotel room on the 17th floor of Sheraton Saigon (in HCMC’s CBD), we saw more than 30 cranes around the hotel. We also noted major residential developments in District 2, which is on another side of the Saigon River. These are mainly high-end residential projects.


17 August 2016


Figure 35: Condominiums – net take up rate Figure 36: Condominium sales

Source: Colliers International Source: Colliers International

Singapore’s CapitaLand is a pioneer in Vietnam real estate market CapitaLand has a solid 22-year track record of operating in Vietnam. It is present in six major cities – HCMC, Hanoi, Hai Phong, Da Nang, Binh Duong and Nha Trang, and operates in the residential and serviced residences sectors.

Its operation in Vietnam has a pipeline of about 4,300 units from eight residential projects across HCMC and Hanoi. The residential projects are in the mid-premium segment, mainly targeting first-time home-buyers and those seeking to upgrade. Demand has remained strong for its recent launches, as it sold about 1,321 apartment units in 2015 (2014: 1,125 units) at a sales value of SGD226.5m (2014: SGD151.5m).

CapitaLand’s wholly-owned serviced residence arm, The Ascott Limited, has a portfolio of more than 3,000 apartment units in 17 properties (eight of these are under construction) across six major cities, making it the largest international serviced residence owner-operator.

A visit to SP Setia’s township project, EcoXuan We visited SP Setia’s township project, EcoXuan, in Bin Duong (an hour’s drive from HCMC), near the Vietnam Singapore Industrial Park (VSIP). The first few phases of Ecoxuan comprise affordable homes. Most of its landed property units have been taken up. SP Setia is now selling three condominium buildings. Major problems for developers include difficulty in securing land and construction permits, the rapid rise in land prices and slow selling pace of affordable homes aimed to fulfil real demand. SP Setia started this project in 2010. Presently, it is just about to complete the first phase and start the second phase. It expects to complete the full project in the next decade. Feedback from SP Setia is in line with the survey by Colliers, ie that sales of mid-range to low-end homes are slow, with only a 40% take-up rate. Its operation in Vietnam has yet to turn profitable.

Figure 37: Affordable home project – EcoXuan by SP Setia

Source: RHB


17 August 2016


Mass transit line – the game changer HCMC’s Urban Railway Line 1, which connects the Ben Thanh and Suoi Tien sections, spans 19.7km (2.6km underground, 17.1km elevated).

It also has 14 stations (three underground stations and 11 elevated stations), as well as a depot at Long Binh Ward in District 9 that has an area of 20.9ha. The source of funds to construct it is from a Japan International Cooperation Agency (JICA) loan and funds from HCMC’s city council. The contractor is a consortium comprising Sumitomo Corp and Civil Engineering Construction Corp no. 6 (Cienco6).

Overall, as of Dec 2015, 47.56% has been built, according to the project’s website. HCMC’s first metro system is due to start operating in 2020, after several delays.

Figure 38: Urban Railway Line 1 under construction

Source: RHB

Figure 39: Map of Urban Railway Line 1

Source: www.saigonmetromap.com

The Urban Railway Line 2 is being constructed on a large scale. Construction works began in 2015. The line stretches nearly 20km, and has 11 stations from Ben Thanh market in downtown HCMC to Tham Luong Depot in District 12. The total investment for Line No. 2 is expected to be USD2.1bn (Figure 40). The test run for the railway is planned for 2016, to be finished in 2019 and official operation is targeted for 2020.

Figure 40: Urban Railway Line 2 MRT map

Source: www.saigonmetromap.com


17 August 2016


Figure 41: HCMC Urban Railway System -------------No. of stations------------- Investment

Line Completion Underground Elevated Ground US$ bn Route Financial supports Status

1 2020-21 3 11 0 2.5 Ben Thanh to Suoi Tien Park JICA Under construction

2 2020 10 1 0 2.1 Ben Thanh to Tham Luong, District 12 ADB, EIB, KFW Under construction

3A n.a. 10 0 0 1.8 Ben Thanh to Tan Kien, Binh Chanh n.a.

Seeking financial support

3B n.a. 8 2 0 1.9

Cong Hoa, District 3 to Hiep Binh Phuoc, Thu Duc n.a.


4 n.a. 15 16 2 4.45

Nguyen Van Linh Avenue (District 7) – Ben Cat Bridge (District 12), n.a. Unclear

5 n.a. n.a. n.a. n.a. 4.5

Saigon Bridge (Binh Thanh District) to the Can Giuoc Coach Station in (Binh Chanh District) n.a.

Proposal to National Assembly

6 n.a. 6 0 0 1.25 Ba Queo, Tan Binh to Phu Lam, District 6 n.a.


Source: www.saigonmetromap.com, www.saigoneer.com

Not all roses in the retail sector A global research report from Cushman & Wakefield named downtown HCMC as one of the most expensive retail locations in the world in 2015. Locations on a “prime high street” in the city, such as Le Loi, Nguyen Hue or Dong Khoi, cost an average of USD1,594 per sq m a year. This is comparable to USD1,329 in Bangkok, USD1,179 in Kuala Lumpur and USD598 in Metro Manila.

We note that major retail space in HCMC is concentrated in Districts 1, 2 and 7.

Despite a report from Colliers about the healthy occupancy rate of retail space (at 90-95%), top high-end shopping centres that we visited like Vincom Center and Parkson in District 1, and Robinson in District 7 – seemed unable to draw shoppers. They are quiet, with more salespersons than shoppers. A representative of Robinson’s top management – Mr Phoom Chirathivat, who is also from the family that controls Central Group – told us that there is an oversupply of retail space. There is too much retail space in areas that are not proper shopping complexes and department stores, and these are also unprofessionally managed. He foresees a gradual consolidation moving forward. Nevertheless, he is more upbeat on the potential for mid-range to low-end retail spaces. Therefore, the group sees bright prospects for BigC stores. During a window shopping excursion, we also noticed that items are much more expensive than in Bangkok and Kuala Lumpur.

There are two Robinson department stores in Vietnam, ie one in Hanoi and one in HCMC. The Central group, Thailand’s top retail operator, has accelerated its investment in Vietnam over the past few years. It now has BigC, Robinson, Centera hotels, three e-commerce websites and more than 10 international brands under the group’s umbrella. A Robinson representative claimed that employees of Central Group have increased in number to 15,000 from 700 a few years ago.

Figure 42: A Robins mall in District 7 looking a little empty

Source: RHB

http://www.saigonmetromap.com/


17 August 2016


Figure 43: Vincom Center in District 1 is busy around the dining areas and on Levels 1 and 2

Source: RHB

Figure 44: Parkson in District 1 is much quieter than its neighbour, Vincom Center

Source: RHB

Figure 45: Modern shops and premium shops in District 1

Source: RHB

More Thai investments in the Vietnamese retail and commerce sector Thailand’s major conglomerates have penetrated the Vietnamese market in a big way. Singha Corp (owner of Singha brand beer) plans to increase its holdings in Masan Group, a listed consumer products company in Vietnam, to 25% from 14% within this year. Mr Charoen Sirivadhanabhakdi, the Thai billionaire who is the owner of Thai Beverage Group and Berli Jucker (BJC TB, BUY, TP:THB62.50), also acquired METRO Cash and Carry stores in Vietnam in the last few years. He also owns a 11% stake in VinaMilk via Fraser & Neave (F&N). The Central Group has two Robinson department stores, Big C stores and three e-commerce websites (Nguyenkim, Zalora and Cdiscount). Siam Cement Group (SCG) (SCC TB, NR) has been in Vietnam for over the past two decades. SCG advertisement boards are seen all over HCMC.

A visit to Masan Group. Masan Group is one of Vietnam’s largest private companies focusing on domestic consumption. It produces branded food and beverage items (it is No.1 in the seasoning and No.2 in the instant coffee segments). Moreover, it is also involved in the animal feed and minerals industries. Its revenue last year was USD1.37bn (+90% YoY), while its EBITDA was at USD0.3bn (+70% YoY). Masan Group’s growth over the past few years has been through M&A deals.


17 August 2016


Figure 46: A Masan Group presentation and the products it manufactures

Source: RHB

A visit to VinaMilk. VinaMilk is Vietnam’s largest listed stock by market cap. The company is a fully-integrated dairy business. 85% of its milk products are sold locally and the remainder is exported (it is the market leader in Vietnam). In 2015, it booked revenue of USD1.8bn and earnings of USD0.35bn (+14% YoY and +28% YoY respectively).

In the near future, State Capital Investment Corp (which owns 45% of VinaMilk) may reduce its stake, paving the way for foreign investors to increase their maximum holdings in Vietnam companies to up to 100%.

Figure 47: Visiting VinaMilk’s office and taking a look at its retail displays

Source: RHB

FDI, another bright spot

Vietnam has attracted FDI of around USD11bn in 1H16, almost on par with the entire year of 2015, which recorded FDI of USD11.8bn. Major industries are labour-intensive in nature like textiles garments, footwear, electronics/electrical appliances, food and agricultural products. The biggest investors last year were South Korea, Malaysia, Japan and Singapore.

Cost of labour is a key positive. The minimum monthly wage in Vietnam is around USD100-150, which is much cheaper than that of other neighbouring countries. Texhong Textile Group (Texhong), the Hong Kong-listed textile company, commented that the labour cost in Vietnam has increased around 6-7% pa on average. However, it may take another 8-10 years before the gap of labour costs between Vietnam and other countries can narrow.

The TPP was another hot topic. This pact is likely to draw massive FDI as products that benefit from the tax exemption under the TPP must use raw materials from countries that are also a part of the TPP. Therefore, Vietnam expects upstream, intermediate and downstream industries to come in over the next few years.

Vietnam may be the biggest winner from the TPP. The Peterson Institute for International Economics estimated that – compared to a baseline with no TPP – Vietnam’s income gains in 2025 with a comprehensive TPP would be over 13% higher, while its exports in 2025 would increase by over 37%. Much of these gains would come from its growing production and the export of apparel and footwear, resulting from the phase-out of high duties in TPP partner countries, especially the United States.


17 August 2016


According to the Eurasia Group, a leading global political risk research and consulting firm, reduced import duties in the US and Japan will benefit the country’s apparel manufacturers whose low labour costs have enabled them to grab business from China. Vietnam may see a 50% increase in apparel and footwear exports in 10 years.

A visit to Amata Bien Hoa industrial estate. Amata VN (AMATAV TB, BUY, TP: THB11.00) is a Thai-listed company operating industrial estates in Dongnai province, located one hour’s drive from HCMC. It was established in Vietnam 20 years ago as the developer of the Bien Hoa industrial estate. Its second industrial estate, Long Thann, will commence operations by end-2016, while its third industrial estate in Halong, North Vietnam, should kick off over the next five years. Currently, the total sellable area of Bien Hoa and Long Thann are around 90ha and 400ha respectively.

Figure 48: Our visit to Amata VN

Source: Company, RHB

Sembcorp Industries (SCI SP, BUY, TP: SGD4.00) established in 1996, is one of the biggest developers and operators of integrated townships and industrial parks in Vietnam. The first project developed by the company was the Vietnam Singapore Industrial Park (VSIP) of Binh Duong. The company currently has six townships and industrial parks in Vietnam, with a seventh one currently underway. Vietnam accounts for 63% of Sembcorp Industries’ remaining saleable land, or 2,287ha out of a total of 3,589ha. The company’s land in Vietnam is evenly mixed between industrial land and commercial & residential land.

A visit to Texhong’s factory. Hong Kong-listed Texhong Textile (2678 HK, NON-RATED) has operations in China and Vietnam. This year, it plans to increase total production capacity in both countries by 28% YoY to 2.8m spindles. While its capacity in China is likely to surge by 30% YoY, its Vietnam factory could see a 25% capacity increase in the same period.

In April, it acquired land in Quang Ninh for constructing a textile dyeing and finishing factory (with estimated annual capacity of 40m meters of woven dyed fabrics) to be completed in 2017. The dyeing plant is part of Texhong’s ambition to build a vertically-integrated platform in Vietnam, from yarn spinning to garment manufacturing.

Figure 49: Photos of our visit to Amata VN’s facility

Source: Company, RHB


17 August 2016


Figure 50: Top Picks for playing on the Vietnam theme Part I

Amata VN (AMATAV TB) Berli Jucker (BJC TB) CapitaLand (CAPL SP) Share price performance

Market cap (USDm)

210 4,844 10,118

Current price* THB 7.80 THB49.25 SGD 3.21

Rating BUY, TP: THB11.00 Buy, TP: THB62.50 NEUTRAL, TP:SGD3.15

Subsector Industrial estate Retail Real estate

Exposure in Vietnam

Amata VN was established in Vietnam 20 years ago. It develops and operates Amata City (Bien Hoa) industrial park and other related businesses in this estate. The majority of revenue comes from industrial, commercial and residential land leases, ready-built factories and office rental services, and infrastructure services. The business exposure in Vietnam is 100%.

Berli Jucker operates three key businesses in Vietnam:

i. Packaging (glass bottles and aluminium cans);

ii. Manufacturing and distribution of consumer products;

iii. Retail store management (MM Mega Market stores and B’smart convenient store chain).

CapitaLand has 22 years of operating experience in Vietnam operating in the residential and serviced residence sector.

Proportion of revenue derived from Vietnam

100% for 2015 18.6% as of 2015, or 4.8% after a consolidation of Big C financial statements

3% for 2015

Proportion of assets in Vietnam to total assets

As of 2015, all assets are based in Vietnam. Total assets can be segmented into each location as follows:

i. Bien Hoa (70%) ii. Long Thanh (30%) iii. Haiphong (0%)

About 10-15% or less than 3.5%, after a consolidation of Big C financial statements

2% as of 2015

Earnings prospects of its Vietnam business

Growth prospects are at 145%YoY in FY16, 75% in FY17, and 101%YoY in FY18. Amata City (Bien Hoa) is set to boost growth in FY16 while Amata City Long Thanh will start to contribute from FY17 onwards.

Expect revenue to grow by an average 10% pa over the next three years

No specific targets mentioned.

Moving forward, how significant would Vietnam’s presence be to the company

Currently, the company is in the process of acquiring land for its new industrial estate near HCMC. In the near future, the company will expand to new location in Haiphong, near Hanoi. Therefore, total exposure of company remains in Vietnam.

Vietnam will continue to be the company’s biggest source of international income, given potential expansion plans for packaging production facilities and owned retail store operations. It looks to acquire MM Mega Market (Metro Cash and Carry) stores from its parent company, TCC group.

Vietnam will be one of the key focus markets in Asia for CapitaLand after China and Singapore.

Source: RHB


17 August 2016


Figure 50: Top Picks for playing on the Vietnam theme Part II

Gamuda (GAM MK) Sembcorp Industries (SCI SP) SP Setia (SPSB MK) Share price performance

Market cap (USDm)

2,908 3,642 2,239

Current price* MYR4.84 SGD2.74 MYR3.20

Rating NEUTRAL, TP: MYR5.19 BUY, TP:SGD3.90 NEUTRAL, TP: MYR2.91

Subsector Construction Diversified Real estate

Exposure in Vietnam

Gamuda is involved in two large-scale township developments in Vietnam, namely Celedon City at Ho Chi Minh and Gamuda City at Hanoi.

Sembcorp has had a presence in Vietnam since 1996, developing integrated townships and industrial parks. It now owns seven industrial parks across Vietnam.

SP Setia started in Vietnam since 2009. It currently has two property projects near HCMC.


<5% 7% of revenue from utilities, 63% of remaining saleable landbank

<3%


<5% 63% as of 2015 of remaining saleable landbank. 7% of total generating capability

<3%

Earnings prospects of its Vietnam business

The outlook is mixed as Celadon City has shown much improvement but Gamuda City’s overall sales remain weak.

A seventh VSIP is being developed. One power plant is scheduled to go online in 2020-2021.

No specific targets mentioned


Management did not announce any other plan to expand its property development unit in Vietnam. Its focus remains very much on Malaysia.

Urban development segment will be banking on Vietnam and China.

5-10% over the next five years, as key markets are still in Malaysia and London.

Source: RHB


17 August 2016


Figure 50: Top Picks for playing on the Vietnam theme Part III

Texhong Textile (2678 HK) Tan Chong (TCM MK) Share price performance

Market cap (USDm)

1,321 314

Current price* HKD11.58 MYR 1.94

Rating NON-RATED NEUTRAL, TP:MYR2.35

Subsector Textile & Garment Auto & Autoparts

Exposure in Vietnam

Texhong Textile has a textile factory with 1.2m spindles design capacity in Vietnam.

Tan Chong’s operations in Vietnam mainly involve the manufacturing, assembly, importation and distribution of busses, trucks, automobiles and auto parts. The company has six subsidiaries incorporated in Vietnam.


21% of gross revenue (before inter-segment) but 1% of consolidated revenue

for 2015

6.9% as of 2015


33% of 2015 total assets N/A

Earnings prospects of Vietnam business segment

Less than 1% Currently loss making. Expected to break even in 2-3 years.


Texhong plans to develop textile dyeing and finishing factory with estimated annual capacity of 40m metres of woven dyed fabrics to be completed in 2017. The dying plant is part of Texhong’s ambition to build a vertically-integrated platform in Vietnam, from yarn spinning to garment manufacturing.

In the medium to longer term, Vietnam operations would become increasingly important as the main driver for Tan Chong’s Indo-China businesses. Vietnam operations are the largest revenue contributor among other Indo-China countries.

Source: RHB

79

95

110

126

141

4.3

5.3

6.3

7.3

8.3

Texhong (2678 HK)Price Close Relative to Hang Seng Index (RHS)

2468

1012141618

Jun-

15

Aug

-15

Oct

-15

Dec

-15

Mar

-16

May

-16

Vol

m


17 August 2016


SWOT Analysis – Vietnam

• Stable political environment under the Socialist Republic of Vietnam

• Cheap labour costs

• Rich natural resources • Consistent strong growth of exports, private/public

investments and income from the services sector

• High public debt to GDP

• Inflation and currency exchange issues

• Highly dependent on China

• Bureaucratic, red tape and lack of transparency under the control of a socialist government

• Regulatory risk

• Infrastructure projects are under development

• Room to improve skilled labour

• New trade pacts to draw massive FDI

• State agencies plan to reduce its holdings in big corporations

• Rising urbanisation and middle income group

• Delay in infrastructure plans

• Seriously needs a structural reform

• Low ranking in terms of ease of doing business

Thailand Initiating Coverage



17 August 2016 Property | Real Estate

Amata VN Buy

Target Price: THB11.00 Price: THB7.80

Legendary Growth Stock Market Cap: USD210m Bloomberg Ticker: AMATAV TB

Investors looking for a proxy to the property market in Vietnam should take a look at Amata VN. Based on its sole revenue from industrial estate in Vietnam, 3-year EPS CAGR of 83% will be driven by stellar Vietnamese economy and its timely project expansion near Ho Chi Minh City. We initiate coverage with BUY and DCF-based TP of THB11.00 (41% upside).

Share Data Avg Daily Turnover (THB/USD) 4.17m/0.12m 52-wk Price low/high (THB) 7.50 - 10.2 Free Float (%) 25 Shares outstanding (m) 935 Estimated Return 41% Shareholders (%) Amata Corporation 37.0 Amata Asia Limited 36.2 Thai NVDR 4.1 Share Performance (%) YTD 1m 3m 6m 12m Absolute (12.9) (8.8) (12.9) (15.2) Relative (33.4) (14.5) (25.2) (36.4) Source: Bloomberg

Source: Bloomberg

Table Of Contents Valuation 3 Investment Theme 4 Core Business’ Strong Base 5 Key Differentiating Strategy 7 A Bright Yellow Star In South-East Asia 9 Progress After The IPO 11 Earnings To Surge For The Next Three Years 12 Risks 14 Company Background 15

Two engines in motion... There are two factors that bode well for Amata VN’s operations. First is Vietnam’s macroeconomic fundamentals and potential for stronger growth vs other ASEAN members. There is also additional growth opportunity from the country’s international trade agreements with key trade partners. Secondly, strong country-level fundamentals have helped boost long-term foreign direct investment (FDI) inflow into Vietnam, and Amata VN’s timely business expansion is allowing it to ride on this FDI inflow up-cycle. …results in superb earnings growth. Based on these two growth factors, we expect Amata VN to post a 3-year EPS CAGR of 83%, which is even higher than the SET average. Our assumptions include performances generated from its two projects in the Southern Key Economic Region (SKER), ie long-time project Amata City Bien Hoa and new generation development Amata City Long Thanh, and a higher earnings proportion from non-industrial zones. Perfect Smart City. The key unique success factor Amata VN has over its competitors is its Perfect Smart City concept, where land developed for factories with a full range of top infrastructure comes with commercial and residential zones to create a “perfect” city. This concept was successful for parent Amata Corp’s (AMATA TB, BUY, TP: THB21.00) two industrial estates in Thailand and its own Bien Hoa project (100ha still available). The objective is to enhance the livelihood of communities within its projects and provide opportunity to command an industrial land price premium. For Amata City Long Thanh (1,285ha in total), the concept will not only create a lively community, but also a stronger earnings momentum. This is as the two non-industrial zones (Service and Mega Townships) will commence operations from FY18 onwards. “Go north” strategy in the pipeline. Amata VN plans to develop a new 709ha project near Hanoi under the “Smart City” concept, which will be more advanced than its Bien Hoa and Long Thanh projects. This is in order to focus on Japanese customers that plan to diversify their production bases away from China. As the industrial estate business in Vietnam normally takes a long time before the development process commences, to be conservative, we have not factored in this new project into our earnings forecasts and valuations. One of the SET’s best growth stocks. We classify Amata VN as one of the best growth stocks amongst SET-listed firms on its expected strong growth for at least three consecutive years ahead. Although P/E looks demanding for FY16, it will decline to lower than a regional counter average in FY17-18. We recommend Amata VN to investors seeking growth stocks with solid earnings prospects. Key risks to our call include a high inflation rate, the VND’s devaluation and a rising public debt to GDP ratio.


Forecasts and Valuations Dec-14 Dec-15 Dec-16F Dec-17F Dec-18FTotal turnover (THBm) 549 728 1,019 1,851 3,496Reported net profit (THBm) 124 121 326 545 1,094Recurring net profit (THBm) 111 126 308 538 1,084Recurring net profit growth (%) (35.9) 13.4 145.0 74.6 101.4Recurring EPS (THB) 0.14 0.15 0.33 0.58 1.16DPS (THB) 0.04 na 0.15 0.11 0.17Recurring P/E (x) 54.0 52.8 23.7 13.5 6.7P/B (x) 9.37 3.72 3.39 2.82 2.07Dividend Yield (%) 0.5 na 1.9 1.4 2.2Return on average equity (%) 21.0 9.3 15.9 23.0 35.8Return on average assets (%) 4.7 3.2 6.0 7.2 11.5Net debt to equity (%) (61.4) (27.3) 3.0 61.0 31.7Our vs consensus EPS (adjusted) (%) (35.3) (37.4) 0.0

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Amata VN (AMATAV TB)Price Close Relative to Stock Exchange of Thailand Index (RHS)

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Analysts Chatree Srismaicharoen +66 2862 9743 [email protected]

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Financial Exhibits

Financial model updated on : 2016-08-15.

Asia Thailand Property Amata VN Bloomberg AMATAV TB Buy Valuation basis DCF. Key drivers

i) Successful expansion of Amata VN's second industrial estate in Ho Chi Minh City;

ii) Trans-Pacific Partnership to promote Vietnam as an ASEAN FDI destination.

Key risks

i) High inflation risk in Vietnam eroding the purchasing power;

ii) VND currency risk; iii) Delays in Ho Chi Minh City's public

infrastructure plan. Company Profile Amata Corp (Amata) is the holding company that holds an 89.99% stake in Amata VN as its core company. The latter currently develops and operates industrial estates and other related businesses in the Amata City Bien Hoa Industrial Estate in Vietnam. It derives revenue from:

i) Industrial, commercial and residential land leases;

ii) Ready-built factories and office rental services; iii) Infrastructure services.


Financial summary Dec-14 Dec-15 Dec-16F Dec-17F Dec-18FRecurring EPS (THB) 0.14 0.15 0.33 0.58 1.16EPS (THB) 0.16 0.14 0.35 0.58 1.17DPS (THB) 0.04 0.00 0.15 0.11 0.17BVPS (THB) 0.83 2.10 2.30 2.77 3.77Weighted avg adjusted shares (m) 769 852 935 935 935

Valuation metrics Dec-14 Dec-15 Dec-16F Dec-17F Dec-18FRecurring P/E (x) 54.0 52.8 23.7 13.5 6.7P/E (x) 48.2 54.7 22.3 13.4 6.7P/B (x) 9.37 3.72 3.39 2.82 2.07FCF Yield (%) (0.0) (21.4) (11.6) (31.2) 13.8Dividend Yield (%) 0.5 0.0 1.9 1.4 2.2EV/EBITDA (x) 21.4 16.8 13.3 10.0 5.0EV/EBIT (x) 33.9 23.2 16.5 11.6 5.4

Income statement (THBm) Dec-14 Dec-15 Dec-16F Dec-17F Dec-18FTotal turnover 549 728 1,019 1,851 3,496Gross profit 226 339 571 1,085 2,055EBITDA 219 328 535 950 1,763Depreciation and amortisation (81) (91) (105) (125) (141)Operating profit 138 237 429 824 1,622Net interest 81 17 (6) (78) (135)Exceptional income - net (9) (47) 0 0 0Pre-tax profit 236 248 448 756 1,503Taxation (49) (68) (85) (151) (288)Minority interests (62) (59) (36) (60) (121)Recurring net profit 111 126 308 538 1,084

Cash flow (THBm) Dec-14 Dec-15 Dec-16F Dec-17F Dec-18FChange in working capital (40) 109 178 481 67Cash flow from operations 123 361 727 1,524 1,516Capex (124) (1,784) (1,575) (3,800) (506)Cash flow from investing activities (158) (946) (1,499) (3,815) (575)Proceeds from issue of shares 0 1,201 0 0 0Dividends paid (31) 0 (140) (103) (159)Cash flow from financing activities (81) 1,897 338 1,597 (859)

Balance sheet (THBm) Dec-14 Dec-15 Dec-16F Dec-17F Dec-18FTotal cash and equivalents 1,349 1,921 1,395 696 847Tangible fixed assets 171 1,853 3,316 6,983 7,278Total investments 595 585 593 600 670Total other assets 4 6 8 10 15Total assets 2,713 4,915 5,989 9,129 9,873Short-term debt 0 772 0 0 0Other liabilities 92 94 216 465 558Total liabilities 517 1,625 2,447 5,023 4,665Shareholders' equity 640 1,962 2,148 2,590 3,525Minority interests 639 243 279 340 461Total equity 2,196 3,290 3,543 4,106 5,208Net debt (1,349) (899) 105 2,504 1,653Total liabilities & equity 2,713 4,915 5,989 9,129 9,873

Key metrics Dec-14 Dec-15 Dec-16F Dec-17F Dec-18FRevenue growth (%) (14.1) 32.6 40.0 81.5 88.9Recurrent EPS growth (%) (35.9) 2.4 123.2 74.6 101.4Gross margin (%) 41.2 46.6 56.0 58.6 58.8Operating EBITDA margin (%) 40.0 45.1 52.4 51.3 50.4Net profit margin (%) 22.7 16.7 32.0 29.4 31.3Dividend payout ratio (%) 24.7 0.0 43.0 18.9 14.5Capex/sales (%) 22.7 245.1 154.5 205.3 14.5Interest cover (x) 496 10 7 6 10

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Valuation DCF method to value Amata VN We used DCF valuation methodology to value the stock as we expect the company to generate strong growth from the industrial land sale business and sustainable earnings momentum from the leased space of factory and office within the industrial estate for the next nine years (FY16F-24F). Strong growth is intact when Amata VN accelerates efforts to sell off the remaining available industrial land in Amata City Bien Hoa and start up the new Long Thanh project from FY17 onwards. Solid FDI in Vietnam will ensure the demand for Amata’s leased space of factory and office in the long term. The two projects mentioned above are included in the valuations, and both are located in the SKER, Vietnam’s major financial and economic hub.

Plugging in conservative assumptions Our valuation assumptions seem conservative as we use 12.3% WACC, which is higher than an assumption for a company with business exposure in Thailand. This was done to reflect Vietnam’s higher inflation rate and a 2.5% terminal growth rate, which is lower than the country’s GDP growth of 6-7%. We derive a DCF-based TP of THB11.00 for Amata VN.

Figure 1: Amata VN’s DCF valuation YTD (Unit: THBm) 2016F 2017F 2018F 2019F 2020F 2021F 2022F 2023F 2024F

Operating EBIT (1-t) 347 660 1,310 1,588 1,643 1,771 1,931 2,009 2,161

Depreciation & amortisation 105 125 141 161 171 183 205 228 261

Net working capital 178 481 67 121 185 54 75 78 55

FCF from operation 631 1,266 1,518 1,871 1,999 2,009 2,212 2,315 2,478

Normal investment + capex (1,499) (3,815) (575) (712) (598) (641) (587) (485) (451)

Net FCFF (869) (2,549) 943 1,158 1,401 1,368 1,625 1,830 2,026

PV of net FCFF 2,492

Terminal value 8,346 Implicit growth rate 2.50% WACC 12.3%

Firm value 10,838 Net debt (271) Minority interest (279) Equity value 10,287 Equity value per share (THB) 11.00

Source: RHB

Figure 2: Valuation comparisons amongst regional peers EPS Growth (%) P/E (x) P/BV (x) Dividend Yield (%) Ticker FY16F FY17F FY18F FY16F FY17F FY18F FY16F FY17F FY18F FY16F FY17F FY18F Singapore

CapitaLand CAPL SP -15.6 8.3 8.5 19.6 18.1 16.7 0.8 0.7 0.7 2.9 3.0 3.1 Keppel Corp KEP SP -23.8 -1.5 2.6 8.3 8.4 8.2 0.8 0.8 0.7 4.8 4.9 4.8 Sembcorp Industries SCI SP 1.2 7.0 9.4 9.3 8.7 8.0 0.8 0.7 0.7 4.0 4.2 4.6 Malaysia Gamuda GAM MK -12.9 15.2 9.5 19.2 16.7 15.2 1.8 1.7 1.5 2.4 2.6 2.6 SP Setia SPSB MK -5.0 11.4 -14.7 12.0 10.8 12.6 1.1 1.0 1.0 4.8 5.5 4.5

Average -11.2 8.1 3.0 13.7 12.5 12.1 1.0 1.0 0.9 3.8 4.0 3.9

Note: Share prices as of 12 Aug Source: Bloomberg consensus

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Investment Theme Optimistic view over the Vietnamese economy Our expectations for full-year GDP growth for Vietnam of +6.9% YoY (FY16) and +5.9% YoY (FY17) remain robust. This is boosted by a fast-growing services sector and double-digit growth in FDI, especially in the country’s industry champions. In addition, growing exports and private investments will be boosted by three free trade agreements (FTAs) already signed with South Korea, the Eurasian Economic Union (EEU) and the EU, and one multilateral agreement with 12 countries in the Pacific Rim under Trans-Pacific Partnership (TPP) agreement.

Amata VN’s 100% business exposure in Vietnam Based on Amata VN’s 100% business exposure in Vietnam, the company should be the one to benefit the most from the growing FDI inflow into the country. It is already the operator of an industrial estate in Vietnam’s most robust economic region. It is also acquiring raw land for a new industrial estate. This will assure that it rides firmly on the FDI wave in the coming years, given that the new larger-sized project is in in a strategic location, ie Ho Chi Minh City.

Growth from business expansion When compared to regional industrial estate developer Sembcorp Industries (SCI SP, NR), Amata VN is much smaller in term of business size, with only 532ha in Amata City Bien Hoa and 1,285ha at future development Amata City Long Thanh. By comparison, Sembcorp Industries has seven industrial parks (6,865ha in total), which are located in all three of Vietnam’s economic regions. Sembcorp Industries’ seven industrial parks are:

i. VSIP Binh Duong I;

ii. VSIP Binh Duong II;

iii. VSIP Bac Ninh;

iv. VSIP Hai Phong;

v. VSIP Hai Duong;

vi. VSIP Quang Ngai;

vii. VSIP Nghe An.

However, this is an opportunity for Amata VN to scale up to a regional level by adding new projects from time to time. Amata City Long Thanh is at the pre-opening stage and is set to commence operations in 1H17. The next in line is Amata City Halong in Northern Vietnam, which is in the early stages of establishment. As soon as Amata VN operates all of three of its projects – covering the country’s southern and northern regions – its attractiveness will accelerate.

Outstanding global customers in hand Two drivers within the company – ie the long-time experience of its management team and the Perfect Smart City concept – have empowered Amata VN to gain a diversified base of multi-national corporation (MNC) customers. Such customers have strong expansion potential in terms of the larger domestic market and also Vietnam’s growing export market.

Contrary to other industrial estates in the country – where the major proportion of customers are from South Korea and Taiwan – Japanese manufacturers make up the bulk of Amata City Bien Hoa’s client base at 46%. This proportion is far ahead of its Taiwanese (12%) and South Korean (9%) customers. Furthermore, most of Japanese manufacturers are repeat customers, ie firms that are expanding their production facilities beyond parent Amata Corp’s industrial estates in Thailand.

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Figure 3: Examples of global brand names based in Amata City Bien Hoa

Source: Company

Strong growth stock hidden on the SET Compared to the SET’s average EPS growth of 31% YoY for FY16, our estimate of 123.2%YoY for Amata VN is even stronger. This is driven by the sales momentum of the industrial land zone and commercial complex in Amata City Bien Hoa.

The starting up a new “high-tech industrial park” in Amata City Long Thanh will be the key factor to boost earnings further in FY17, while the Service and Mega Townships will start to generate revenue from FY18 onwards. Therefore, Amata VN’s FY16F-18F earnings are intact in terms of a strong growth momentum, which cannot be found in other Thai industrial estate developer counters.

Core Business’ Strong Base Several services within the estate The core businesses of its subsidiary company, Amata Vietnam JSC, can be subdivided into five categories:

i. Long-term leasing of industrial estate land;

ii. Ready-built factories for rental;

iii. Long-term leasing of commercial and residential projects;

iv. Office buildings for rental;

v. Utility services.

Long-term leasing business in industrial land and commercial zones Based on total land area of 700ha, the company has already been granted an investment certificate from the Dong Nai Industrial Zone Authority (DIZA) on a 532ha area, of which 513ha is for industrial estate purposes. Note that the lease term is normally 50 years, starting after the approval of the investment certificate.

In addition, Amata VN has allocated a 19.1ha land plot for the development of the Amata Commercial Complex project. This development combines both commercial and residential projects at the entrance of industrial estate for the purpose of enhancing the lives of those working within the estate.

Recurring income from leasing factory space The company also offers factory space for rental, with high-quality and full utility systems installed in each building. For standard specifications, a normal size ranges between 1,000 and 5,000 sq m. Each unit includes one high-floor factory space attached with a 2-floor office space at the front.

Normally, the lease contract between Amata VN and a lessor is a 5-year term with quarterly lease payments. The company also has a policy of increasing the rental fee by 5% pa. The objective is to provide a quality service for small and medium enterprises (SMEs) or start-up companies with limited investment budgets to commence operations in a strategic location in Vietnam.

This business provides a strong earnings base for Amata Vietnam JSC, allowing the company to yield long-term recurring income and help it to utilise the project layout more efficiently. Currently, there are 76 standardised factory units in the estate, of which 21 have been sold to customers.

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Figure 4: Master plan of Amata City Bien Hoa

Source: Company

Figure 5: Total size of Amata City Bien Hoa Unit: hectares Total area Efficiency (%) Net leasable area

Developed area 423 72.8 308 Not yet developed area 90 54.6 49.1

Total 513 69.6 357.1


Figure 6: Projects inside the developed area Unit: hectares Total area Proportion (%)

Industrial land for lease 265.2 86.1 Ready-built factory for rent 19.9 6.5 Reserved 6.2 2.0 Non-leasable area 5.9 1.9 Area available for lease 10.8 3.5 Net leasable area 308 100


Figure 7: Ready-built factory portfolio Unit: sq m Total area Usable area No. of units

Ready-built factory for rent 198,872 109,822 55 Rented 189,711 103,727 51 Reserved 2,290 1,524 1 Vacant 6,871 4,571 3 Ready-built factory sold to customers 107,319 48,754 21

Total 306,191 158,576 76


Figure 8: Amata Commercial Complex Unit: sq m Total area Leasable area Available for lease

Commercial and Office 66,648 23,558 43,090 Residential 43,660 - 43,660 School 8,062 - 8,062 Medical services 6,900 - 6,900 Sport complex 5,460 - 5,460 Total 130,730 23,558 107,172 Common area 38,410 Infrastructure 14,420 Green area 7,100

Total 190,660


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Key Differentiating Strategy Lively industrial community in Amata estate A lively community is the key concept that Amata Corp adopted successfully in operating its two industrial estates in the eastern region of Thailand, ie Amata Nakorn Chonburi and Amata City Rayong. In addition to their strategic locations, the one-stop service concept for its core services related to the industrial estate business has allowed Amata Corp to differentiate its estates from its competitors. It has also enhanced the lives of those working within these estates. Amata Nakorn still maintains its status as the most populated industrial estate in Thailand with 160,000 people. Meanwhile, Amata City Rayong boasts around 45,000 people.

Figure 9: Examples of concepts adopted in Amata industrial estates in Thailand

Accommodation • Amata Mansion • Amata Spring Fairway Villas Executive Residences

Education • Thai-German Institute as a technical training centre • YWCA (Young Women’s Christian Association) services, ie kindergarten, day care centre and language courses • Satit Kaset Multi-lingual Laboratory School for students from Grades 1 to 12

Recreation

• Amata Spring Country Club • YWCA (gym, swimming pool and badminton courts) • Plus Mall, Tesco Lotus store, food centre and movie theatre • Ebisu Park Japanese restaurant • Almost all major Thai commercial banks have branches at “Financial Street”

Healthcare • 130-bed Vibharam Amata Nakorn Hospital that comes well-equipped with an emergency room and operation room

Source: Amata Corporation

Another successful lively community in Amata City Bien Hoa This successful concept has also been adopted in its first industrial estate in Vietnam. The company has allocated a 19.1ha land plot out of 700ha it holds for the development of the Amata Commercial Complex project. This development combines both commercial and residential projects at the entrance of the industrial estate to service people both within and outside the estate. We note that there are currently about 43,000 people working in Amata City Bien Hoa. The company aims to develop a commercial zone (shophouses, showrooms and restaurants) and residential zone (apartments, home villas for expatriates, home offices, hotel, hospital, and sports complex).

Currently, two customers – ie a Honda showroom and Lotte Mart hypermarket – are running their operations at the complex. In Dec 2015, Amata Square, a 2.2ha green park area, was open for service at the centre of the development. This was on the occasion of the 20th anniversary celebration of Amata Vietnam JSC. It was also designed to benefit the people living nearby by providing a place for outdoor recreational activities. The commercial zone should provide another source of recurring earnings for the company on a long-term basis. However, all the industrial land plots available will be sold out within the next three to four years.

Figure 10: Master plan of Amata Commercial Complex Figure 11: Amata Service Centre

Source: Company Source: Company

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Figure 12: Lotte Mart is the major tenant at Amata Commercial Complex

Figure 13: The Honda car showroom is another major tenant at Amata Commercial Complex

Source: Company Source: Company

Concept extended to Amata City Long Thanh Mega-sized facility complexes can be found at Amata VN’s new project Amata City Long Thanh, as the company is planning to establish two non-industrial zones. These are the Service (122ha) and Mega (753ha) Townships. These two zones are designed to add extra value to the company’s 410ha “high-tech industrial park” industrial zone. Although these three zones are not inter-connected physically, people can spend their working hours at the high-tech industrial park and their non-working hours at the Service and Mega Townships, which provide a diverse range of recreational activities. The project size of the two combined non-industrial zones is more than 2x that of the industrial zone. This implies that the company aims to utilise the Perfect Smart City concept more aggressively than before.

Figure 14: Project location with proximity to Ho Chi Minh City on the opposite side of the Dong Nai River

Note: HTIE = high-tech industrial estate, STS = Service Township, MGTS = Mega Township Source: Company

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A Bright Yellow Star In South-East Asia Fertile country with a stable political system Vietnam is located in South-East Asia. It has a total land area of 331,150 sq km with a 3,444km coast line. Hanoi in the north is the capital city while Ho Chi Minh City in the south is the country’s largest urban area with a population of 7.8m. The latter represents an economic centre for Vietnam in terms of:

i. Trade and services;

ii. Imports and exports;

iii. Investment.

The country is governed by only one political party, the Communist Party of Vietnam, under a socialist administration. It has a total population of 91m, making it ASEAN’s third most populous country after Indonesia (252m) and the Philippines (102m). Vietnam is also the 13th most populous country in the world.

Strong economic outlook + FDI attractiveness Our RHB economics team has maintained its strong view over the Vietnamese economy. Although the country’s real GDP was sustained at its slowest pace in almost three years at a cumulative growth of 5.5% YoY in 6M16 – this was lower than 6M15’s +6.3% YoY – the expectations of positive FY16-17 GDP growth for Vietnam remains robust, ie +6.9% YoY and +5.9% YoY respectively.

There were two key sectors that showed disappointing results during 1H16:

i. Agriculture – having been hit hard by unfavourable weather following the country’s worst drought in three decades;

ii. Mining – it posted a cumulative decline of 2.2% YoY in 6M16.

Contrarily, the service sector outperformed in 6M16, posting a 6.4% YoY growth that was higher than the 5.9% YoY growth booked 6M15. This was mainly due to the faster progress in some services businesses, such as wholesale & retail, information technology (IT), financial institutions, and more.

Interestingly, FDI started to post double-digit growth again, with 15.5% YoY recorded in 1H16. FDI targets remained Vietnam’s industry champions, which include:

i. Textiles;

ii. Footwear;

iii. Electronics.

Our economists also anticipated the Vietnamese economy to sustain its clout in FY16 on the back of growing exports and private investments. These have been boosted by the three FTAs that the country has already signed with South Korea, the EEU and the EU. The most important one is TPP agreement. This is the largest global trade agreement in 20 years. It includes 12 countries that are mostly in the Pacific Rim:

i. The US;

ii. Australia;

iii. Brunei;

iv. Canada;

v. Chile;

vi. Japan;

vii. Malaysia;

viii. Mexico;

ix. New Zealand;

x. Peru;

xi. Singapore

xii. Vietnam.

Source: Geoatlas.com

Source: Getty Images

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These nations – with a total population of 800m – account for 40% of the world’s economy. This will be a great opportunity for Vietnam to expand its exports by 37% by FY25 vis-à-vis the levels booked in FY10 according to a study by the Peterson Institute for the International Economics journal. Whether the agreement will be reconsidered by the new US President or not – when he or she takes office – Vietnam remains the top gainer amongst member countries in this agreement.

Figure 15: Vietnam’s GDP by economic activity % YoY 2013 2014 3M15 6M15 9M15 2015 3M16 6M16 2016F

GDP 5.4 6.0 6.0 6.3 6.5 6.7 5.5 5.5 6.0 Agricultural, forestry, fishery 2.7 3.5 2.1 2.4 2.1 2.4 -1.2 -0.2 0.9 Agricultural 2.2 2.6 1.5 1.9 1.8 2.0 -2.7 -0.8 0.4 Forestry 5.8 6.9 6.0 8.1 7.9 7.7 6.2 5.8 6.0 Fishery 4.0 6.5 3.4 3.3 2.1 2.8 2.1 1.3 1.9 Industry & construction 5.4 7.1 8.4 9.1 9.6 9.6 6.7 7.1 10.9 Industry 5.4 7.2 9.0 9.5 9.7 9.4 6.2 6.8 8.2

Mining -0.2 2.4 6.7 8.2 8.2 6.5 -1.2 -2.2 -0.3 Manufacturing 7.4 8.5 9.5 10.0 10.2 10.6 7.9 10.1 11.8

Electricity & gas 8.5 12.1 11.9 11.2 11.3 11.4 13.1 11.7 12.2 Water supply 9.1 6.4 7.4 6.4 7.2 7.4 9.4 8.1 9.0

Construction 5.8 7.1 4.4 6.6 9.0 10.8 9.9 8.8 9.1 Services 6.6 6.0 5.8 5.9 6.2 6.3 6.1 6.4 6.7

Source: RHB

Figure 16: Rising FDI into Vietnam Unit: USDm 2013 2014 2015 1H16

Intra-ASEAN 2,079 1,547 2,154 N/A Extra-ASEAN 6,821 7,653 9,646 N/A Total Net Inflow 8,900 9,200 11,800 11,200

Source: ASEAN

Figure 17: ASEAN + China economic indicator forecasts by RHB’s economics team GDP Growth (%) Inflation (%) Policy rate (end period, %) Exchange rate (end period vs

USD)

Country 2014 2015 2016F 2017F 2014 2015 2016F 2017F 2014 2015 2016F 2017F 2014 2015 2016F 2017F

Indonesia 5.0 4.8 5.1 5.3 6.4 6.4 5.0 4.8 7.75 7.50 6.50 6.00 12430 13856 13200 13500 Malaysia 6.0 5.0 3.9 4.0 3.1 2.1 2.0-2.5 2.5 3.25 3.25 3.25 3.00 3.55 4.29 3.90 3.75 Philippines 6.2 5.9 6.6 6.8 4.2 1.4 2.3 2.5 4.00 4.00 3.00 3.00 44.72 46.86 45.00 46.25 Singapore 3.3 2.0 1.6 2.0 1.0 -1.0 -0.2 0.9 - - - - 1.32 1.41 1.42 1.37 Thailand 0.8 2.8 3.2 3.5 1.9 -1.2 0.3 0.9 2.00 1.50 1.50 1.50 32.91 36.02 35.90 35.30 Vietnam* 6.0 6.7 6.0 5.9 4.1 0.6 2.5 3.5 6.50 6.50 6.50 6.50 22500 22485 22600 23000 China** 7.3 6.9 6.6 6.4 2.0 1.4 2.4 2.6 5.60 4.35 4.35 4.35 6.21 6.49 6.80 7.00 *Prime rate; **1-year lending rate

Exports growth (%) Imports growth (%) Industrial production growth (%)

Unemployment rate (% labour force)

Country 2014 2015 2016F 2017F 2014 2015 2016F 2017F 2014 2015 2016F 2017F 2014 2015 2016F 2017F

Indonesia 1.0 -2.0 0.9 3.6 2.2 -5.8 0.2 2.8 4.8 4.6 5.0 5.2 5.9 6.2 5.7 5.8 Malaysia 6.4 1.8 2.3 3.4 5.3 0.4 0.1 3.0 5.1 4.5 3.1 3.9 3.0 3.2 3.5 3.5 Philippines 11.8 9.1 5.6 5.5 9.6 14.0 6.5 7.1 6.3 -4.4 0.6 0.8 6.8 6.3 6.2 6.0 Singapore 0.8 -7.3 -8.0 1.6 -0.6 -12.1 1.4 1.0 2.7 -5.1 -1.5 1.0 2.0 2.0 2.1 2.2 Thailand -0.4 -5.8 0.3 1.8 -9.0 -10.7 1.0 2.0 -5.2 0.3 1.1 1.8 0.6 0.9 0.9 1.0 Vietnam 13.7 7.9 8.0 10.9 12.0 12.0 13.0 11.0 7.6 9.8 7.9 7.7 3.4 3.4 3.3 3.5 China 6.1 -2.8 1.1 4.7 0.5 -14.1 5.8 6.2 8.3 6.1 5.8 5.6 4.1 4.1 4.1 4.1

Source: International Monetary Fund (IMF), Various central banks, RHB

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Figure 18: Pacific Rim locations of the 12 member countries of the TPP agreement

Source: The New York Times

Progress After The IPO Long Thanh project progressing as planned Amata VN recorded a successful IPO listing in Dec 2015. The major objective of the exercise was to use the cash proceeds to fund land acquisitions and project developments at its second industrial estate in a new strategic location near Ho Chi Minh City. This is the Amata City Long Thanh project. Progress of this second estate has been on track, as per Amata VN’s plans.

In the meantime, the company is looking to secure an investment certificate for a high-tech park and service township within 3Q16. The land acquisition process for this project is still on-going, with progress at the 70% mark vs only 40% at the time of its IPO.

A portion of the IPO funds already spent Cash received from the IPO process has been already invested to acquire raw land, and the development process of the industrial estate is likely to begin in 4Q16. The THB5bn capex anticipated for FY16 should be a new high record for the company in terms of business investments. This is because Amata VN has adopted a process of acquiring all land plots at once – or at a fast pace – rather than acquire it on a phase by phase basis. This is in order to ensure that sufficient landbank can be sold without disruption. It is also to limit the inflation risk on the compensation amount advanced by the company.

From FY17 onwards, major capex will be earmarked for construction purposes, especially for public utilities systems and structures within the estate. Cash proceeds from Amata VN’s IPO provided an initial fund for land acquisition while its post IPO net cash position (as at 1Q16) will provide room for higher financial debt gearing in the future. The gearing level will not surpass the company’s long-term target of 1x. This is because a portion of its capex will be financed by cash inflow from the selling of industrial land plots in Amata City Bien Hoa.

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Figure 19: Timetable of new project developments in Long Thanh

Source: Company

Figure 20: Three zones of new Long Thanh project Zone Land area (ha) Shareholding Structure

High-tech industrial park 410.3 Amata City Long Thanh Joint Stock Company • Amata VN 35% • Amata Vietnam JSC 65%

Service Township 122.4 Amata City Long Thanh Joint Stock Company • Amata VN 35% • Amata Vietnam JSC 65%

Mega Township 753.1 Newly-established entity (100% held by Amata VN)


Earnings To Surge For The Next Three Years Transition period to trigger the growth The key factor behind our strong growth expectations for Amata VN is the coincidental occurrence of two events:

i. This year is the time for the company to complete the development of Amata City Bien Hoa as soon as possible, given that this estate has been in operation for more than 20 years now;

ii. Amata VN has to move forward to a larger project, namely Amata City Long Thanh, which will top up the earnings from Amata City (Bien Hoa) after it commences operations from FY17 onwards.

This will result in recurring net profit growing a strong 145%YoY to a new high in FY16, continuing to a strong growth of 75% in FY17, and then 101% in FY18.

Strong cushion from recurring assets Service income would expand consistently in relation to an increase in customers in these two projects. Although the growth rate of earnings generated from these recurring assets will not jump significantly, these assets would be a strong cushion for revenue.

We forecast a moderate YoY growth of 4% for FY16 and a stronger growth rate of 22-28%YoY for FY17-18. This is boosted by higher demand for utilities services from new customers at the initial phase of the Long Thanh project. Rental revenue from leased factory space, coupled with utilities service revenue, should provide a solid base for recurring income in the long term.

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Figure 21: Revenue to surge YoY Figure 22: Net profit to surge in parallel with revenue


Time to level up in FY16 FY16 should be the company’s first step on the growth path, as it plans to sell all of the remaining industrial land plots in Amata City Bien Hoa within FY20. Based on our conservative assumption of industrial land sale of 20ha in Amata City Bien Hoa for FY16, this is likely to be achievable. This is because the company has already sold 8.5ha of industrial land in 1H16.

In terms of industrial land sale revenue, we expect FY16 revenue from this business to grow a strong 86%YoY to THB595m. This is based on our assumption of 15ha of industrial land area to be transferred within this year.

We expect the 2H16 transferred land area to be greater than the 5ha already transferred in 1H16, as most of the land sold in 1Q16 is planned for transfer in 4Q16. We are of the view that there is stronger demand for industrial land in Dong Nai under the current circumstances. This is due to the migration of investments looking to enjoy Vietnam’s competitive advantages. This will result in record high earnings in FY16F of THB326m, or a superb growth of 169% YoY.

Amata City Long Thanh to play a major role in FY17 The start-up of Amata City Long Thanh will boost earnings from FY17 onwards, starting from the launch of the “high-tech industrial park”, which totals 410ha in area. Land acquisition is currently 70% complete. We expect the likely time for launching this industrial zone will be in 1H17, after the land acquisition is completed and the development of utility facilities starts.

Our industrial land sale assumption for the first year of operations is 20ha of land area, strengthening to land sales of 36ha pa afterwards. The core revenue of industrial land sales will start to include this new industrial estate and, therefore, jump again in FY17 to THB1.3bn, or 124% YoY growth. This is the key factor to boost overall earnings in FY17, with a continuous strong net profit growth of 67% YoY.

Perfect Smart City concept in Long Thanh project to bear fruit in FY18 Non-industrial zones, including the Service and Mega Townships, will be a key catalyst for earnings from FY18 onwards. We assume that the Service and Mega Townships will be sold in the starting year at 2.5ha and 20ha respectively. These two zones will account for a high proportion of 27% of total revenue in FY18 and even higher – at 45% – in FY19.

In addition to the land plots being sold directly to customers like:

i. High-income expatriates;

ii. Residential project developers;

iii. Commercial project developers;

iv. Others…

…there should be an opportunity for Amata VN to co-invest with such developers to reap additional investment returns rather than only profit margins from selling raw land.

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However, we expect the company to sell as much raw land as possible at the early stage of the Mega Township zone. This is to redeem cash proceedings after it earmarked FY17 for intensive investments, with about THB3.8bn anticipated for developing the Long Thanh project.

Figure 23: Land size to be recognised as revenue in each zone

Figure 24: Average price charged for the industrial estate zone


Figure 25: Leased space portfolio assumptions Figure 26: Average rental rate charged for leasing space at factories and offices


Risks Macroeconomic level

i. High inflation rate. Although Vietnam is widely known as one of the strongest countries in the world in terms of GDP growth, this has tapered off thanks to a high inflation rate and the VND being devaluated from time to time. This inflation risk leading to the currency devaluation has been a major concern for foreign investors in Vietnam, as their investment returns have been eroded by a lower purchasing power and the weaker currency.

However, both International Monetary Fund (IMF) and the World Bank have an optimistic view over the Vietnamese economy. The IMF predicts that the inflation rate will stabilise within the range of 2-4% from 2016 onwards, while the World Bank predicts that real GDP growth will be strong at 6.2-6.3% pa. This places Vietnam in the Top 5 in terms of growth amongst 14 countries in the East Asia and Pacific regions;

ii. Devaluation of the VND. If the Government cannot stabilise Vietnam’s inflation rate, the VND is likely to devalue further against major currencies and THB. This may affect our THB-denominated forecasts for Amata VN, especially in areas of earnings performance, dividend returns and financial position;

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Figure 30: VND/USD exchange rate Figure 31: VND/THB exchange rate

Source: Bloomberg Source: Bloomberg

iii. Rising public debt to GDP ratio. The ratio of public debt to GDP has risen rapidly to 62.2% in 2015 from 38% in 2011. Although the ratio remains within the National Assembly’s 65% cap, this may limit the ability of the Government spend public funds on investments. The latter is vital for promoting future economic developments.

Microeconomic level i. Delays in the transferring of industrial land plots sold to customers. The

provincial authorities have imposed a change in regulations that prohibits industrial estate developers from transferring land use rights to their customers before such customers get their investment certificate approvals. This action was aimed at preventing land price speculations in the country. Although this is a long-term benefit to Vietnam, the new regulation has resulted in the transfer period taking longer than before. This is due to the waiting time for the investment certificate approval;

ii. Delays in the acquisition of raw land and development of the Long Thanh project. The Long Thanh project is the key driving factor for Amata VN’s earnings performance from FY17 onwards. It is slated to replace Amata City Bien Hoa in terms of revenue proportion after the industrial estate and commercial zones in the latter are fully constructed in 2019. The Long Thanh project’s delay is a major risk for the company’s future business. However, management is confident that the project will go through all processes as planned. It also said that the land acquisition progress was currently at a 70% level. By comparison, the latter stood at the 40% mark as at end-2015.

Company Background More than two decades in Vietnam Amata Vietnam JSC was registered as a joint-venture (JV) company on 31 Dec 1994 with an initial capital of USD17m. Amata Corp holds a 55.3% stake, while its partners and Sonadezi Corp (Sonadezi) hold 14.7% and 30% respectively.

Amata Vietnam JSC has been operating the Amata City Bien Hoa Industrial Estate in Bien Hoa City, Dong Nai Province. Note that co-investor Sonadezi is a state agency established by People’s Committee of Dong Nai Province. Its key objectives are:

i. To invest – on behalf of the Dong Nai Committee – in property developments such as residential projects and industrial estates within the province;

ii. To provide utility services within the Dong Nai area – these services include water distribution, sea ports, waste management and more.

As Amata Vietnam JSC had planned to expand its business into developing commercial and residential projects on land plots located in front of its industrial estates, its capital was increased to USD20.4m. Following the restructuring of the JV firm’s shareholdings in Sep 2012, Amata VN emerged as the largest shareholder with a 69.99% stake.

Amata Corp, along with its Amata Asia Ltd subsidiary, became one of the largest shareholders in Amata VN. Together, they held an 88.33% stake in the company. In May 2015, this holding stake was increased to 89.99%.

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Amata VN was registered as a holding company on 30 Aug 2012 and was listed on the SET in Dec 2015. The company is tasked with investing and operating industrial estates and other related businesses in Vietnam. Currently, the registered and the paid-up capitals are equal at THB467.5m (par = THB0.50 per share).

Figure 27: Amata VN’s board of directors

Source: Company

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Figure 28: Amata VN’s key milestones Key events Dec 1994 Amata Vietnam registered as a JV corporation for the development of the Long Binh Modern Industrial Estate, with reference to the

investment certificate dated 31 Dec 1994. The company is certified to operate an industrial estate development business on a 100ha land area (excluding the common road and infrastructure).

Sep 1996 Amata Vietnam invested in Amata Power (Bien Hoa) Ltd, holding 10% equity, to operate an electricity generation business with focused customers being factories in the Amata City Bien Hoa Industrial Estate.

May 2007 Amata Vietnam is reformed into a LLC to operate under Enterprise and Investment Laws and changed its name to Amata (Vietnam) Co Ltd. Amata City Bien Hoa was granted additional areas to operate Phases 1 and 2 of the project with a total area of 361.98ha.

Aug 2007 Amata Vietnam was granted an investment certificate for the Amata Commercial Complex project on a total land area of 19.07ha. It increased its paid-up capital by USD3.4m to USD20.4m.

Feb 2008 Amata City (Bien Hoa) was granted an additional area for the second phase of industrial estate development, making up 494.68ha of total granted area.

Apr 2009 Amata Vietnam transformed into a joint stock company (JSC) and changed the name to Amata (Vietnam) JSC.

Sep 2011 Amata City Bien Hoa was granted additional area for industrial estate development Phase 3, making up 513.01ha of total granted area.

Aug 2012 Amata VN was registered on 30 Aug 2012 as a public company limited with initial registered capital of THB15,000.

Sep 2012 Amata Vietnam performed a shareholding restructuring exercise by having Amata VN acquire almost 69.99% shares of Amata Vietnam from Amata Corp and subsidiaries as well as other Thai investors via a share swap. This increased the company’s paid up capital to THB384.32m, which is divided into 38.43m shares with a par value of THB10 per share.

Dec 2012 The company increased registered capital to THB460m (from THB384.32m) and split par to THB0.5 per share (from THB10) for the purpose of public offerings, registering onto the SET, and selling to the group’s directors, employees, and a particular group of people. Amata Corp’s board of directors approved the spinning off of Amata VN by listing the company on the SET on 26 Dec 2012.

Jan 2013 Amata Corp’s board of directors cancelled the plan to sell 11.54m shares to group’s directors, employees and particular group of people, but decided to let Amata Asia sell its 11.54m shares of Amata VN at a par value of THB0.5 (totalling THB 5.77m) to a particular group of people, and the directors of Amata Corp, Amata VN and Amata Vietnam.

Nov 2014 The company reduced its registered capital to cancel the registered capital that had not yet been paid to THB384.32m (from THB460m) and increased paid-up capital by THB83.19m to THB464.5m in order to facilitate the IPO. The company’s directors approved the move to proceed with the bidding for Amata Vietnam shares from Sonadezi. At the time, the latter held a 30% stake in Amata Vietnam.

May 2015 The company bought 20% of Amata Vietnam’s total share from Sonadezi, after which it effectively held a 90% stake in Amata Vietnam.

Jul 2015 Amata City Long Thanh JSC was founded on 10 Jul 2015 with an initial paid-up capital of VND1.21trn at a par value of VND10,000 per share. This is a JV between Amata VN (35% stake) and Amata Vietnam (65% stake). The purpose behind the establishing this firm is the development of industrial estates under the “Amata City Long Thanh” and “Amata Service City Long Thanh” projects in Dong Nai Province.

Oct 2015 Amata VN approved to increase the paid-up capital of Amata City Long Thanh JSC for the purpose of executing the Amata Service City Long Thanh project. The paid-up capital increased to VND1.5trn.

Dec 2015 Amata VN PCL has been listed on the SET since 16 Dec 2015.

May 2016 The board of directors approved the JV agreement between Amata VN (70%) and the Tuan Chau Group (29%) on 11 May 2016 and allowed the JV to apply for an investment certificate under the name “Amata City Halong JSC”. The latter is to invest in the Amata City Halong project in Quang Ninh province with initial phase of 709ha at Song Khoai.

Source: Company

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Figure 29: Structure of Amata group

Source: Company

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SWOT Analysis

• 100% exposure in one of the strongest countries in the world in terms of GDP growth

• Long-time experience in doing business in Vietnam • Strategic location of Amata VN’s industrial estates in

Ho Chi Minh City

• Changes in laws and regulations that adversely affects FDIs

• Vietnamese economy to be negatively impacted by high inflation coupled with slow GDP growth

• Business expansion to the northern region of Vietnam and possibly to other regions in the future

• Full scheme of Amata’s concept “Perfect Smart City” to be utilised in Long Thanh and Quang Ninh

• Low diversification in terms of location in Ho Chi Minh City

Recommendation Chart

Source: RHB, Bloomberg


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Price CloseDate Recommendation Target Price Price

2016-08-15

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17 August 2016 Consumer Cyclical | Retail

Berli Jucker Buy (from Neutral)

Target Price: THB62.50 Price: THB45.75

The Big Tree Is Growing Market Cap: USD5,263m Bloomberg Ticker: BJC TB

Berli Jucker is now a retailer after acquiring Big C. We expect to see greater synergies that will unlock growth opportunities in the retail business and balance long-term earnings growth. We re-initiate coverage with BUY and a DCF-based FY17F TP of THB62.50 (37% upside). Its financial deleveraging programme will also help lift EPS, which we expect to jump 84% YoY in FY17 from consolidated earnings. The stock currently trades below its 5-year historical mean P/E and we expect it to trade at a premium.

Share Data Avg Daily Turnover (THB/USD) 489m/13.7m 52-wk Price low/high (THB) 28.0 - 49.3 Free Float (%) 21 Shares outstanding (m) 3,982 Estimated Return 37% Shareholders (%) TCC Corporation Co., Ltd. 73.8 DBS Bank Ltd. 5.4 BBL Bualuang Long-Term Equity Fund 2.8 Share Performance (%) YTD 1m 3m 6m 12m Absolute 37.8 4.6 34.0 29.5 50.7 Relative 18.4 1.5 24.0 10.3 42.0 Source: Bloomberg

Source: Bloomberg

Rife with potential synergies. Berli Jucker’s key business changed from product manufacturer and distributor to a modern retailer (which accounts for two-thirds of total sales) after its THB204bn acquisition of Big C Supercenter (Big C) (BIGC TB, NEUTRAL, TP: THB250.00) in March. It is now involved in the entire supply chain, from up- to downstream. Greater synergy from this new pairing, and from parent firm TCC Group (Thailand’s biggest conglomerate) will provide a further upside of THB1.7bn to our forecasts in the next three years.

Superior earnings growth. We expect Berli Jucker’s modern retail business to be the key driver in doubling its core profit this year. We estimate core earnings to jump 84% YoY in FY17. Supportive factors include:

i. Thailand’s consumption recovery which may first benefit staple retailers;

ii. Big C’s earnings consolidation into group numbers and aggressive plans to enlarge its branch network (for hypermarkets and small-format stores);

iii. Its packaging supply chain (PSC) – growing its capacity to produce aluminium cans by 40% due to a spike in orders stemming from Chang Beer’s successful rebranding;

iv. Its consumer supply chain (CSC) – strong operations in Vietnam and selective launches of new products that lead to efficient opex control;

The company’s well-balanced financial deleveraging plan should help limit its interest expense, solidify EPS growth in 2017 and strengthen its balance sheet for further investments

Re-initiating with a BUY call. Berli Jucker is our retail/consumer Top Pick for Thailand. Its earnings outlook is promising for FY16F-17F, as it is generating the strongest earnings growth among peers. Big C’s business will also bolster its bottomline in the longer term, for which we expect resilient growth of 10-13% pa from 2018 onwards. In the short term, its 2H16 performance may be stronger than in 1H, while the dilution impact from a recent cash call to EPS may occur and is expected to be completed by 3Q16. Its FY17F valuations remain attractive. It is trading below its 5-year historical mean P/E, although we believe it should be at a premium. Downside risks are consumption potentially turning sluggish and higher-than-expected opex related to the Big C purchase.


Forecasts and Valuations Dec-14 Dec-15 Dec-16F Dec-17F Dec-18FTotal turnover (THBm) 41,695 42,893 154,871 194,674 208,493Reported net profit (THBm) 1,680 2,792 3,921 7,225 7,939Recurring net profit (THBm) 1,670 2,045 3,921 7,225 7,939Recurring net profit growth (%) (28.7) 22.5 91.8 84.2 9.9Recurring EPS (THB) 1.05 1.28 0.98 1.81 1.99DPS (THB) 0.60 0.84 0.49 0.90 0.99Recurring P/E (x) 43.6 35.6 46.6 25.3 23.0P/B (x) 4.62 4.14 1.78 1.71 1.64P/CF (x) 17.3 15.7 11.7 9.8 10.8Dividend Yield (%) 1.3 1.8 1.1 2.0 2.2EV/EBITDA (x) 20.2 18.2 19.3 14.6 13.1Return on average equity (%) 10.8 16.7 6.5 6.9 7.3Net debt to equity (%) 83.9 66.7 105.6 98.9 93.7Our vs consensus EPS (adjusted) (%) 3.2 8.2 (1.7)

8799110122134145157

25303540455055

Berli Jucker (BJC TB)Price Close Relative to Stock Exchange of Thailand Index (RHS)

5101520253035404550

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Analyst Vatcharut Vacharawongsith +662 862 9736 [email protected]

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Berli Jucker Thailand



Financial Exhibits


Asia Thailand Consumer Cyclical Berli Jucker Bloomberg BJC TB Buy Valuation basis DCF Key drivers

i. Overseas business expansion; ii. Production capacity increases; iii. Aggressive new Big C stores opening

Key risks

i. Domestic consumption that remains weak; ii. Raw material price volatility; iii. Intense competition from hypermarkets that

may squeeze profit margins. Company Profile Berli Jucker is a Thai consumer conglomerate. It operates four business lines including packaging products (glass bottles and aluminium cans), consumer products (tissue paper, snacks, and personal products), technical & healthcare products, and modern retailers. The company also has presence in CLMV nations particularly Vietnam. It is an integral part of Thai Beverage's (THBEV SP, NR) operations.


Financial summary Dec-14 Dec-15 Dec-16F Dec-17F Dec-18FRecurring EPS (THB) 1.05 1.28 0.98 1.81 1.99EPS (THB) 1.06 1.75 0.98 1.81 1.99DPS (THB) 0.60 0.84 0.49 0.90 0.99BVPS (THB) 9.9 11.1 25.7 26.8 27.9Weighted avg adjusted shares (m) 1,591 1,592 3,992 3,992 3,992

Valuation metrics Dec-14 Dec-15 Dec-16F Dec-17F Dec-18FRecurring P/E (x) 43.6 35.6 46.6 25.3 23.0P/E (x) 43.3 26.1 46.6 25.3 23.0P/B (x) 4.62 4.14 1.78 1.71 1.64FCF Yield (%) 1.4 2.6 (122.4) 4.1 3.1Dividend Yield (%) 1.3 1.8 1.1 2.0 2.2EV/EBITDA (x) 20.2 18.2 19.3 14.6 13.1EV/EBIT (x) 37.6 32.9 29.3 21.8 19.4

Income statement (THBm) Dec-14 Dec-15 Dec-16F Dec-17F Dec-18FTotal turnover 41,695 42,893 154,871 194,674 208,493Gross profit 9,333 9,822 35,558 45,265 48,745EBITDA 4,324 4,784 16,530 21,665 23,985Depreciation and amortisation (2,003) (2,141) (5,645) (7,170) (7,776)Operating profit 2,321 2,642 10,885 14,496 16,209Net interest (556) (493) (4,414) (5,194) (5,886)Income from associates & JVs (26) 87 96 105 116Exceptional income - net 12 833 0 0 0Pre-tax profit 2,444 3,853 7,429 10,355 11,481Taxation (398) (400) (1,486) (2,071) (2,296)Minority interests (367) (661) (2,022) (1,059) (1,246)Recurring net profit 1,670 2,045 3,921 7,225 7,939

Cash flow (THBm) Dec-14 Dec-15 Dec-16F Dec-17F Dec-18FChange in working capital (105) (832) 5,908 4,504 1,275Cash flow from operations 4,203 4,647 15,669 18,670 16,947Capex (3,147) (2,766) (239,247) (11,244) (11,334)Cash flow from investing activities (3,185) (2,708) (242,004) (11,190) (11,476)Proceeds from issue of shares 89 0 84,000 0 0Dividends paid (1,193) (955) (2,936) (2,786) (3,791)Cash flow from financing activities (1,273) (1,932) 228,882 (7,598) (5,302)

Balance sheet (THBm) Dec-14 Dec-15 Dec-16F Dec-17F Dec-18FTotal cash and equivalents 1,123 1,130 3,677 3,559 3,728Tangible fixed assets 18,518 19,046 53,032 57,745 61,922Intangible assets 2,795 2,902 186,515 185,877 185,259Total investments 3,657 3,533 19,536 19,536 19,536Total other assets 695 839 3,596 3,541 3,683Total assets 43,428 44,701 301,632 306,504 312,547Short-term debt 10,181 7,521 80,000 0 0Other liabilities 703 719 7,606 7,069 6,969Total liabilities 25,411 23,950 176,380 176,613 177,827Shareholders' equity 15,774 17,610 102,660 107,098 111,246Minority interests 3,020 3,688 23,800 24,000 24,681Total equity 18,017 20,750 125,252 129,890 134,720Net debt 15,109 13,845 132,298 128,441 126,272Total liabilities & equity 43,428 44,701 301,632 306,504 312,547

Key metrics Dec-14 Dec-15 Dec-16F Dec-17F Dec-18FRevenue growth (%) (1.3) 2.9 261.1 25.7 7.1Recurrent EPS growth (%) (28.8) 22.4 (23.5) 84.2 9.9Gross margin (%) 22.4 22.9 23.0 23.3 23.4Operating EBITDA margin (%) 10.4 11.2 10.7 11.1 11.5Net profit margin (%) 4.0 6.5 2.5 3.7 3.8Dividend payout ratio (%) 71.0 34.2 34.2 34.2 34.2Capex/sales (%) 7.5 6.4 154.5 5.8 5.4Interest cover (x) 4.18 5.36 2.47 2.79 2.75




Valuation And Recommendation We re-initiate coverage on Berli Jucker with a BUY rating. We expect it to post the strongest EPS growth of 84% YoY in 2017, among the Thai retailers. This would be delivered by Big C (which it recently purchased), which will account for a major part of its consolidated financials. With the acquisition, Berli Jucker also becomes a fully-integrated consumer company with a modern retail segment as its leading business – which may help sustain earnings in the long term.

We believe that Berli Jucker’s investment in Big C will be more rational than what happened in 2012, and the market anticipated that the latter will gain strong synergies from the acquisition of Singapore-based food and beverage manufacturer Fraser & Neave by subsidiaries under its parent company, the TCC Group – although the actual benefits were eventually not significant enough to meet valuations.

Berli Jucker’s current valuations are still attractive vis-à-vis its peers. The stock is trading at 25x FY17F P/E vs the sector average of 26x and the stock’s 5-year historical average of 27x. We believe Berli Jucker deserves to trade at a premium to its domestic peers, given that its EPS growth and long-term prospects are much sturdier compared to the competition. It also offers the cheapest P/BV of 1.7x-1.8x. Our TP of THB62.50 is derived from a DCF approach (WACC: 7.5%, TG: 2%).

Our TP implies 35x FY17F P/E, which is equivalent to +1SD from its mean P/E, and offers an upside of 37%.

We also expect mild dividend yields of 1.1-2.2% over FY16-18, assuming a payout ratio of 50% based on its payment record of 57% for FY14 and 48% for its FY15 performance (vs the company’s policy of less than 50% of net profit after tax).

Figure 1: Berli Jucker’s DCF valuation

Source: RHB

Figure 2: Peer comparison

Note: Data as of 16 Aug 2016. Valuations in red and with asterisks are from RHB. Consensus valuations are in black. Source: Bloomberg, RHB

THBm 2017F 2018F 2019F 2020F 2021F 2022F 2023F 2024F 2025F 2026FEBIT (1-t) 12,439 13,894 15,008 16,251 17,362 18,461 19,607 20,779 21,979 23,232 Depreciation & Amortization 7,170 7,776 8,305 8,822 9,150 9,479 9,808 10,052 10,296 10,540 Net working capital 4,275 1,233 1,975 1,587 1,406 1,295 1,082 391 367 304 Capex (9,655) (9,579) (8,165) (7,968) (5,143) (5,154) (5,154) (3,886) (3,885) (3,880) Net free cash flow to firm 5,678 10,858 13,173 15,518 19,963 21,491 23,180 26,553 28,023 29,589

Terminal value 576,517

PV 5,281 9,393 10,598 11,612 13,894 13,911 13,955 14,868 14,594 293,582

Terminal growth 2.0%

WACC 7.5%Total discounted firm value 401,688 Less: Net debt 128,441 Less: Minority interest 24,000Equity value 249,247 Number of shares (m) 3,992 Equity value per share (THB) 62.50

Thailand retailers Ticker Mkt. Cap.(USDm) 2016F 2017F 2016F 2017F 2016F 2017F 2016F 2017F 2016F 2017F

BIG C SUPERCENTER BIGC TB 5,245 19.2 11.8 21.8 19.5 3.4 3.1 1.4 1.5 15.7 15.6BERLI JUCKER BJC TB 5,263 -44.0 84.3 46.6 25.3 1.8 1.7 1.1 2.0 5.4 5.7CENTRAL PATTANA CPN TB 7,198 16.7 14.7 26.3 22.9 4.7 4.1 1.5 1.7 17.7 17.9CP ALL CPALL TB 15,640 10.1 22.1 35.9 29.4 12.3 10.0 1.5 1.5 34.2 34.0SIAM GLOBAL HOUSE GLOBAL TB 1,470 57.0 15.8 37.0 31.8 3.2 2.9 0.9 1.0 8.8 9.5HOME PRODUCT CENTER HMPRO TB 4,104 9.3 13.4 33.5 29.6 7.6 7.4 2.8 3.2 22.7 25.3SIAM MAKRO MAKRO TB 4,994 2.0 16.2 30.7 26.5 10.9 9.6 2.5 2.8 37.6 38.9ROBINSON DEP'T STORE ROBINS TB 2,078 15.5 15.1 28.9 25.1 4.9 4.4 1.7 2.0 16.8 17.4Average 10.5 17.5 32.6 26.3 6.1 5.4 1.7 2.0 19.8 20.5

ROE (%)Dividend yield (%)P/BV (x)EPS growth (%) Net P/E (x)




Figure 3: Berli Jucker’s P/E band (adjusted EPS) Figure 4: Berli Jucker’s P/E and SD levels

Source: RHB Source: Bloomberg, RHB

Risks Risks to our call include:

i. Raw material price volatility. This includes raw materials like aluminium, flint cutlet and soda ash for the packaging business as well as palm oil, potatoes and eucalyptus pulp for its CSC business.

ii. Clients deciding to change packaging suppliers. Clients could also decide to distribute products themselves instead of assigning Berli Jucker as a dealer or distributor.

iii. Government campaigns and policies implemented to control and reduce consumption of alcoholic beverages.

iv. Competition among consumer product manufacturers and modern trade retailers to snatch market share, which could affect the company’s sales and profit margins.

v. Successful new business units and acquired entities. It is possible for the company to realise negative earnings at the beginning of operations, due to higher fixed costs and depreciation expense.

Financial Analysis Berli Jucker’s combined sales rose 3% YoY in 2015 due to weak consumption, which led to sluggish sales for its CSC and HSC. However, we expect sales to skyrocket 234% YoY in 2016 and jump by another 25% YoY in 2017 following;

i. The consolidation of Big C earnings from late March 2016 onwards, and a full-year consolidation in 2017.

ii. Berli Jucker’s traditional businesses may see sales growth of 9% YoY this year, driven by the improved performance of both its CSC and HSC. Sales is also expected to continue growing at 6% YoY in 2017, thanks to the increase in the production capacity for aluminium cans.

Previously, its packaging business and CSC contributed a significant c.40% and c.35% to total sales respectively. Going forward, we expect the group’s modern retail supply chain to account for the biggest proportion of its topline (67%) in 2016. We expect this percentage to rise to 73% by 2018 while the remaining 27-33% will come from other supply chains.

Berli Jucker’s overall gross profit margin may decline to 16.6-16.8% in 2016-2018 (2015: 22.9%), as the volume-driven modern retail business offers a lower GPM of 14%. However, the addition of leasable retail space and manageable opex of both Big C and its CSC will help sustain its EBITDA margin at 12% this year before bringing it back to the pre-acquisition level of 13% by 2018.

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Figure 5: Berli Jucker’s total sales revenue (THBm) Figure 6: Profit margin trend

Source: Company data, RHB Source: Company data, RHB

The Big C transaction of THB204.3bn has resulted in Berli Jucker having to restructure its financial leverage:

i. Short-term debt financing of THB120bn. Of this, THB50bn will be re-financed into debentures by 3Q16. The remaining loans may be equally converted into the fixed income debt instruments in 1Q17 and 3Q17. As a result, we estimate the net interest expense will soar to THB4.4bn this year (2015: THB492m) and peak at THB5.9bn in 2018.

ii. Equity financing involving the issuance of 2.4bn new common shares allocated to existing stockholders at THB35.00 per share. The subscription process is scheduled to complete by the first week of August, and the company may receive THB84bn cash from the transaction. It will also result in a 60% dilution to EPS.

We expect core profit to increase by 100% to THB3.92bn this year from the impact of Big C consolidation. Despite the cash call, adjusted core EPS will continue to increase by 23% to THB1.51 (assuming adjusted outstanding shares of 2.60bn in 2016), while the fully-diluted core EPS will be THB0.98 (-20% YoY).

2017 would be a good year for Berli Jucker as its profits and fully-diluted core EPS should see a strong growth of 84% YoY. This suggests that earnings generated from Big C will be sufficient to cover Berli Jucker’s debt financing expenses.

From 2018, we expect the earnings to grow at a resilient 10-13% pa. Conservatively, we have not included the company’s guidance on Big C’s synergy target of THB1.7bn (ie upside to its recurring EBITDA) in our estimates, which will be implemented over the next three years.

Figure 7: Core EPS and growth Figure 8: Interest-bearing debt


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After the financial deleveraging scheme, its balance sheet will still be in a good shape, with a net interest-bearing debt-to-equity ratio of 1.1x in 2016F (2015: 0.7x) which is below its debt covenant of 1.75x. This implies extensive room for the company to draw additional loans – as much as THB80bn for further investments. We think the ratio will gradually decline to 0.9x in 2018. Its strong operating cash flow of THB15.7bn-18.7bn pa may be sufficient to support the combined capital expenditures of THB11.3bn in 2016 and THB9.5bn in 2017 and 2018 respectively.

The Big Tree Is Growing Strong business synergies within the group Berli Jucker, a 134-year old company, has evolved from a supply chain and distribution powerhouse to a leading integrated retail platform with a presence in ASEAN countries, thanks to its strong manufacturing and distribution capability. It currently operates four business units:

i. Packaging supply chain (PSC), which includes the production of glass containers, aluminium cans, and a minimal portion of plastic packaging;

ii. Consumer supply chain (CSC), which involves the production of tissue paper, snacks & drinks, personal care & household products, and provides distribution & logistics services;

iii. Healthcare supply chain and technical supply chain (HSC & TSC), ie trading units of extensive product ranges. Examples are healthcare merchandise, medical and pharmaceutical equipment, specialised chemicals, stationery and electrical appliances. It also offers galvanised steel structure construction services.

iv. Modern retail supply chain (MSC), which mainly consists of Big C. The rest occupy a minor proportion, eg Asia Books (Thailand’s biggest international bookstore chain), Ogenki beauty and wellness shops, and the franchisor of B’Smart convenience stores in Vietnam’s Ho Chi Minh City and M-Point Mart convenience stores in Laos.

The company was acquired by the Thai Charoen Corporation (TCC) Group, one of the country’s largest conglomerates owned by Thai tycoon Charoen Sirivadhanabhakdi, in 2001. TCC is a holding company with investments in five key industries:

i. Retail and distribution, led by Berli Jucker;

ii. Food & beverage, led by Thai Beverage (THBEV SP, NR);

iii. Real estate (TCC land);

iv. Insurance and finance (Southeast Group); and

v. Agriculture (Plantheon).

As TCC’s flagship retail and distribution vehicle, Berli Jucker should continue to benefit from its major shareholder’s expansive empire – especially TCC’s food & beverage, retail and property businesses. For example, an improvement in Thai Beverage’s sales may result in a rise in packaging orders and product logistics services, or the possible opening of new retail stores in attractive locations. This is premised on the fact that the TCC owner is considered one of the biggest landlords in the country.




Figure 9: Berli Jucker’s fully-integrated consumer business platform

Note: (1) Through Plantheon, a TCC group company engaging in plantation, sugar, agro processing and trading businesses Source: Company data

Figure 10: Thai Charoen Corporation (TCC) Group’s business empire





Packaging Supply Chain Thailand’s top glass container and beverage can player Berli Jucker will become the largest glass container manufacturer in South-East Asia by 2018, when it increases its production capacity by 9% to 1.40m tonnes pa (capex: THB2bn). It operates four facilities in Thailand, Malaysia and Vietnam with a current total production capacity of 1.29m tonnes pa, equivalent to one-third of the region’s c.3m tonnes pa production capacity. The company is also a leader in the beverage can industry in Thailand. Local competition is low, due to the industry’s capital-intensive nature, as there are only a handful of players that have attained economies of scale from mass production.

There are four major glass container firms in Thailand – Berli Jucker (via Thai Glass Industry PCL and Thai Malaya Glass Ltd), Bangkok Glass, Siam Glass and Wellgrow Glass. Most operate at full capacity, mainly to serve key clients that are their major shareholders – this is so in the case of Berli Jucker (Thai Beverage) and Bangkok Glass (Singha Corporation). Berli Jucker has the second largest share of the Thai market, at 42% (9.98m tonnes pa capacity) and also runs glass container facilities in Malaysia (186,150 tonnes pa) and in Vietnam (102,200 tonnes pa) with the highest market share of c.75% and c.60% respectively.

For Thailand’s beverage can segment, key suppliers are Berli Jucker (via Thai Beverage Can Ltd), Carnaud Metal Box, Bangkok Can Manufacturing and NCI Packaging. The company has the highest market share (of 44%), due to its maximum production capacity of 2.2bn units pa. This is expected to grow by 40% to 3.1bn units pa, when it expands the capacity with an investment of THB400m in 2017.

Figure 11: Berli Jucker’s glass packaging production capacity and utilisation rate

Figure 12: Berli Jucker’s aluminium can production capacity and utilisation rate


Main supplier to TCC Group’s F&B business Berli Jucker has a glass production facility in eastern Bangkok that is operated by Thai Glass Industry, with a total capacity of 637,000 tonnes pa. Another three facilities – in Saraburi province, Malaysia and Vietnam – are operated by Thai Malaya Glass with capacity of 649,700 tonnes pa. They brought the average utilisation rate for Berli Jucker to a high 88% at end-2015. Products include glass containers for beer, spirits, wine, soft drinks, energy drinks, and food and drugs .

For can packaging, Berli Jucker has a 50% stake in Thai Beverage Can, which produces aluminium cans for beer, soft drinks and energy drinks. Its recent capacity utilisation rate was also as high as 94%. Thai Beverage Can is the sole supplier of cans for Chang Beer. It also supplies 50% of Red Bull’s packaging for the Thai market and ships beverage cans to clients in Malaysia (for F&N), Laos (for Beer Lao), and Cambodia (for Cambrew).

Currently, half of the company’s total sales are generated from companies under the TCC Group – mainly made up by orders from Thai Beverage (THBEV SP, NR), Thailand’s largest beverage manufacturer. We believe that this is the key factor that will help to sustain its packaging business in the long run.

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Growing beverage consumption to drive container demand. The markets for alcoholic beverages and soft drinks in Asia grew by an annualised 1.6% and 4.5%, respectively in 2010-2015, which was faster than the global annual growth of 1.3% and 1.9%. We expect beverage consumption in Asia to continue expanding more rapidly by 5% in 2016-2018, in line with that of rising economies (particularly in emerging markets like Vietnam, where the beverage industry is forecasted to expand by 10.5-12% pa by 2018F, according to BMI Research). This should benefit Berli Jucker, as glass container and aluminium can usage increases.

Figure 13: Alcoholic beverage consumption Figure 14: Soft drink consumption

Source: Bloomberg, RHB Source: Bloomberg, RHB

Chang Beer rebranding to boost packaging segment’s performance. The rebranding of Chang Beer since mid-2015 was successful, mainly due to taste development and strong marketing campaigns that focused on the younger generation. As such, Thai Beverage’s beer sales jumped by 71% YoY in 1Q16 and the growth is likely continue to be strong throughout this year and the next. We expect the boom to result in a spike in purchase orders for both glass bottles and aluminium cans – which will help to drive Berli Jucker’s packaging sales to grow 6% YoY in 2016. Meanwhile, its increased production capacity may accelerate the topline growth of its packaging division to 7-9% in 2017-2018.

Meanwhile, the high utilisation rate of c.90% of its glass container and aluminium can production facilities (since end-2015) has compelled the company to outsource its production. Still, we expect increased efficiency, the declining price of flint cullet and lower energy costs to help maintain its packaging business’ GPM at 20.3% this year, before gradually improving by 0.2ppt and 0.5ppt in 2017 and 2018 respectively.

Figure 15: Chang Beer re-branding with new green bottle packaging

Figure 16: Sales and gross margin forecasts for packaging supply chain

Source: Company Source: Company data, RHB

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Consumer Supply Chain Grows in tandem with consumption. We are positive to the outlook of Berli Jucker’s consumer supply chain (CSC) business based on:

i. Domestic consumption, where a recovery may boost sales of food and non-food necessities that are frequently purchased by households;

ii. Strong brand leadership in its key products. The company is ranked no. 1 in sweet extruded snacks (like Party and Campus) and the bar soap market (with Parrot). It is ranked second in potato chips (with Tasto) and tissue paper (with Cellox, Zilk and Maxmo).

iii. Market expansion opportunities in neighbouring countries like Vietnam, Laos, Cambodia and Myanmar. Overseas sales currently account for 30% of its CSC segment’s revenue – which in turn make up 3% of Berli Jucker’s total topline (post-consolidation of Big C’s financial statements).

Big C as an owned retail channel. Big C will become a vital distribution channel for Berli Jucker’s CSC unit. A wide range of consumer staple merchandise may be strongly promoted, with some cross-selling of products from other companies under the TCC Group via the expansive network of modern trade stores countrywide. We think the company would be expedient in gaining favourable trade terms from Big C. Apart of this, the CSC may win orders to supply collections of private label items to Big C – which would boost the efficiency of its manufacturing plants. These could be considered as upsides to the division’s sales and profit margin.

Figure 17: Sales breakdown for Berli Jucker’s consumer supply chain business (2015)

Figure 18: Cross-selling promotion of Berli Jucker and TCC Group products at a Big C hypermarket


Distribution companies as solid foundation for its retail unit in Vietnam. Vietnam is the second largest business location for Berli Jucker, as it accounted for 84% of international sales and 18% of total sales in 2015. The company has paved a solid foundation for its retail business by expanding its trading and distribution networks for fast-moving consumer goods (FCMG) throughout Vietnam via two main subsidiaries, Thai Corp International (in which it has a 75% stake) and Thai Anh Vietnam (where it owns a 65% stake). These two companies account for a significant two-thirds of total sales recorded by the group in Vietnam (the remaining 33% is from packaging business).

As such, its volume-driven business in Vietnam’s retail market still heavily depends on traditional trade channels – much more so than modern trade channels (where the penetration rate is just 4%). It also helps to facilitate Berli Jucker and other TCC Group businesses in Thailand with product exports.

Food 30%

Non-food35%

International trading30%

Logistics5%




As urbanisation occurs, TCC Group’s Metro Cash and Carry modern retail business and Berli Jucker’s B’s Mart convenience stores in Vietnam may also boost the growth of Berli Jucker’s trading and distribution businesses in the longer term.

We expect revenue from its overall Vietnamese operation to continue increasing by 10-15% pa from 2016, with Big C contributing 5-7% of total sales after the consolidation of the former’s financials into group numbers.

Controllable cost a key earnings driver Thailand’s weakened consumption levels over the past few years have caused Berli Jucker to review its plan for the operation of its CSC. It has become more selective in launching new products, and now pays greater attention to budget allocations for advertising and promotional expenditures. Meanwhile, costs for raw materials such as potatoes and paper pulp are lowering, together with energy costs. The two factors would be key in lifting the profit margin of its supply chain. As such, we expect its CSC revenue to grow 12% YoY in 2016 and a more conservative 5% YoY in 2017-2018. We also estimate its GPM to increase 0.7ppts to 18.5% this year and 0.5-1.0ppts over the next two years.

Healthcare And Technical Supply Chains Catching the wellness trend Key customers of Berli Jucker’s healthcare and technical supply chain trading businesses (HSC&TSC) are mainly public health agencies and private hospitals. Earnings drivers for the business unit are:

i. Growing health and wellness concerns;

ii. The Government’s budget spending on public health;

iii. Thailand becoming an increasingly popular regional medical care hub. Healthcare stocks under our coverage are estimated to record revenue growth of 15% pa and earnings growth of 11% pa in 2016-2017.

We expect HSC&TSC to record annualised revenue growth of 7% in 2016-2018. The solid sales of its high-margin healthcare equipment should keep this division’s GPM high, at 32.0%, over the next three years (2015: 31.6%).

Figure 19: Sales and gross margin forecasts for CSC Figure 20: Sales and gross margin forecasts for HSC&TSC


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Modern Retail Supply Chain Reasonable Big C acquisition. Berli Jucker’s purchase of Big C shares worth THB204.33bn (done from March to May) may be considered the biggest acquisition of a retailer company in the country. The once-in-a-lifetime deal also made Berli Jucker the third largest grocery retail group in South-East Asia.

We believe it is reasonable, as the transaction price reflects a FY16F P/E of 25x and EV/EBITDA of 14.36x, which is cheaper than the previous major deal of CP All (CPALL TB, SELL, TP: THB40.00) acquiring Siam Makro (MAKRO TB, NR) for more than 40x P/E and 30x EV/EBITDA. The addition of the downstream retail business is a key strategic move that will propel Berli Jucker to become a leading fully-integrated consumer product company in Thailand.

Improving consumption to benefit retailers. Consumption in Thailand may turn around from 2H16 onwards, supported by:

i. A series of government economic stimulus measures ranging from short-term tax break schemes to large-scale mega-project infrastructure investments.

ii. 1.1m vehicle owners countrywide who applied for 5-year auto loans under the Government’s first car tax rebate campaign held in Sep 2011 to Dec 2012 may complete their instalments and will be allowed to sell their used vehicles from 2H16 onwards. It is likely that the car owners will use the cash to purchase other items.

iii. The passing of the severe drought period in March-April, which affected agricultural activities. We also note the gradual increase in the prices of key farm products, including that of white rice and natural rubber.

We consequently expect to see Thailand’s household debt-to-GDP ratio start to decline in 2017. Retailers of staple products may benefit from the improving consumption (from a low base) particularly in the upcountry areas where their same-store sales growth (SSSG) have been under pressure for two consecutive years (2014-2015). Apart from strong sales of food necessities, sales of non-food products, eg soft line and household merchandise, may also escalate then.

Figure 21: Sales of retail groups in South-East Asia (USDbn) (2015)

Figure 22: Improving farm prices and farm income growth


Source: Bank of Thailand, RHB

Unlocking growth opportunities Big C’s previous major shareholder, French retailer Casino Group, limited its investments in subsidiaries worldwide to strengthen its financial health. This resulted in a low capex for Big C of THB3-4bn over the past few years.

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Staying under the TCC umbrella (TCC is considered one of the biggest landlords in Thailand) may benefit Big C in accelerating the expansion of its store network (for both large and small formats) as it would be able to utilise TCC’s landbank and existing property development projects throughout the kingdom, eg shopping malls, office buildings, hotels and condominiums.

Big C may apply its aggressive plans to ramp up the opening of new stores to 10 hypermarkets, 10 supermarkets, and 200 convenience stores with a total capex of THB6.5bn in 2017F, compared to six hypermarkets, three supermarkets and 75 convenience stores for 2016. We expect the rapid increase in the number of new stores to continue for another three years, with locations in both big cities and second-tier provinces. It may help accelerate Big C’s total sales to grow 8% pa in 2018-2020, from 3% in 2016F and 4% in 2017F.

Figure 23: Number of Big C stores Figure 24: Big C’s total leasable area


Recurring income portfolio strengthens earnings Big C also has leasable shopping areas in its hypermarkets and supermarkets which average 2,000 sqm and 250 sqm respectively. The leasing business is a successful one, with an occupancy rate of over 95% as it matches the catchment of middle income earners and primary income earners in the provinces. It also helps to improve store traffic and fulfil customer demand, being a 1-stop shopping terminal. Most of its tenants are quick-service restaurants, banks, mobile phone operators, specialty stores and small-scale miscellaneous goods vendors. Although Big C has constructed new hypermarkets at a smaller size of 3,500 sqm vs c.5,000 sqm previously, the company may enhance its proportion of rental area to 60% of total space from 50% in order to secure recurring income. Following the new store opening plan, we expect Big C’s leasable income to expand at a 7% CAGR over 2016-2018 and contribute 5-7% of Berli Jucker’s total revenue.

Stronghold for the group’s retail expansion Acquiring Big C gives Berli Jucker a competent retail platform. As such, it may apply Big C’s know-how in areas like inventory management, information systems and retail operations to help improve the operations of its other retail entities (in Thailand and abroad) like Asia Books, Ogenki beauty and wellness shops and its B’s Mart Vietnamese convenience store franchise. This may help improve these business units in terms of sales and profit margins.

Berli Jucker provides management services for TCC Group’s MM Mega Market – a self-developed hypermarket brand with two stores at Thailand’s borders – and the recently-acquired (for THB28.37bn) Metro Cash and Carry franchise, which has 19 stores across Vietnam. These business units have the potential to be grouped under Berli Jucker to enlarge and strengthen its retail empire – and it may happen after the company gets its balance sheet in healthier shape and Metro Cash and Carry becomes profitable in the next 3-5 years. Big C also possesses an operating license for modern trade stores in Laos, which may be utilised if an investment there becomes feasible.

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Product development synergies. Big C may work together with Berli Jucker’s CSC and other food & beverage entities under the TCC Group, such as Thai Beverage, Oishi Group (OISHI TB, NR), and Sermsuk (SSC TB, NR), to develop private label products for both the food and non-food categories. Possible launches of private brand fresh food items may strengthen the competitiveness of its small stores (ie supermarkets, and convenience stores). This will also help to increase the contributions of its house brand merchandise to total sales (it contributed 7% of total sales in 2015) as well as to its gross profit margin in the longer term.

Asset monetisation boosts financial leverage As an alternative to lower its debt and finance new investments, Berli Jucker could also establish a real estate investment trust (REIT) with a portfolio of Big C stores as underlying properties. Of its 125 hypermarkets, 40% are freehold properties while the rest are leasehold ones. The sales of assets may allow the company to book one-time gains and a stream of amortised gains throughout a period.

Big C’s earnings to grow 10% CAGR over the next three years. We forecast Big C to record earnings of THB7.44bn (+8% YoY) in 2016, THB8.42bn (+13% YoY) in 2017 and THB9.21bn (+9% YoY) in 2018.

Earnings this year will be mainly driven by its rental business and profit margin enhancement. Despite strong competition in Thailand’s hypermarket segment, Big C has confirmed that it will maintain its stance to not involve itself too much in the price war as other hypermarket and cash & carry operators have done recently in order to attain sales volume. As such, the anticipated recovery in consumption in 2H will partially support its SSSG to remain at a lesser -1% YoY (2015: -3%).

It will focus on profit margin improvement by paying more attention to small-end user-customers than big-basket clients like retail distributors, and enhance its usage of three owned distribution centres - fresh food distribution centres, convenience store distribution centres and cross-docking distribution (opened in 2014-2015 in tandem with its cost centralisation programme). As such, we expect Big C’s EBITDA margin and net profit margin to expand to 11.2% (2015: 10.8%) and 6.0% (2015: 5.8%).

In 2017-2018, we conservatively assume a mild SSSG of 0-2% while the aggressive opening of new stores will boost total sales and boost its economies of scale in operation. This should enhance its EBITDA margin and net profit margin next year by 0.6ppt and 0.5ppt respectively.

Figure 25: Big C’s total revenue forecast Figure 26: Sales contribution breakdown by store format


91% 91% 90% 90% 90% 89% 89% 89%

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2011 2012 2013 2014 2015 2016F 2017F 2018F

Hypermarkets Small store formats




Figure 27: Annualised SSSG – Big C vs retail sector Figure 28: Quarterly SSSG – Big C vs retail sector


-8%

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4Q11: Mega-flooding

4Q12: Low base effect

1Q12: Pent-up demand after flooding

1Q13:High base effect

4Q13: High base effect

1Q14: Sluggish consumption begins

6.9

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3.6

(0.9)(1.7)

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0

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6

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10

2011 2012 2013 2014 2015 2016F 2017F 2018F

Sector BIGC(%)




SWOT Analysis

• A retail arm of the Thai Charoen Corporation (TCC) Group, one of Thailand’s largest conglomerates

• Strong business foundations in Thailand & Vietnam

• Fully-integrated supply chain for consumer products with its own distribution, logistics & retail networks and leading market share in several categories

• Weak Thailand consumption & intense competition among FMCG manufacturers

• Vietnam’s economy can fluctuate greatly

• Regulations of each country may obstruct foreign investments

• New product substitution to glass bottles and aluminium cans

• Business expansion and diversification overseas

• Further M&As of consumer product companies

• Low penetration rate of modern retail business in Vietnam

• Unlocking business opportunities of recently-acquired Big C Supercenter

• Operations of certain acquired businesses have remained inefficient

• No expertise in managing retail business

• Volatility in raw material prices and in purchase orders of technical & healthcare businesses




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22

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42

52

62

72

82

92

Aug-11 Nov-12 Feb-14 May-15

Price Close

na

50.0

57.0

57

.0

31.0

46.0

Recommendations & Target Price

Buy Neutral Sell Trading Buy Take Profit Not Rated

Date Recommendation Target Price Price

2014-10-03 Neutral 46.0 42.9

2014-05-21 Sell 31.0 42.0

2013-11-13 Sell 31.0 42.9

2013-05-20 Neutral 57.0 61.7

2013-04-02 Buy 57.0 69.0

2012-11-12 57.0 56.7

2012-08-01 Buy 50.0 38.0

Singapore Company Update




CapitaLand Neutral (Maintained)

Target Price: SGD3.15 Price: SGD3.21

Vietnam – A Key Future Growth Engine Market Cap: USD10,118m Bloomberg Ticker: CAPL SP

Although Vietnam accounts for just 2% of total assets, it is still the third major market for CapitaLand in Asia. It has a solid 22 years of real estate experience in Vietnam with a pipeline of 4,300 residential homes and 3,000 serviced residences across six cities. With the growing economy and strong market potential from the rising middle class population, it plans to further deepen its presence to make it one of the key engines for its future growth. Maintain NEUTRAL with of a SGD3.15 TP (2% downside).

Share Data Avg Daily Turnover (SGD/USD) 27.2m/20.1m 52-wk Price low/high (SGD) 2.68 - 3.38 Free Float (%) 60 Shares outstanding (m) 4,237 Estimated Return -2% Shareholders (%) Temasek Holdings Pte Ltd 39.5 Blackrock 6.0 Vanguard PLC 1.0 Share Performance (%) YTD 1m 3m 6m 12m Absolute (4.2) 5.2 6.6 13.8 5.2 Relative (3.7) 6.4 2.2 0.9 11.5 Source: Bloomberg

Source: Bloomberg

Pioneer in Vietnam real estate market. Vietnam is the third largest market for CapitaLand in Asia after China and Singapore. It accounts for about 2% of its total assets and 3% of its revenue in 2015. The Group has a solid 22 year track record of operating in Vietnam and has its presence in six major cities – Ho Chi Minh City, Hanoi, Hai Phong, Da Nang, Binh Duong, and Nha Trang operating in the residential and serviced residences sectors. Management regards Vietnam as one of the key future overseas growth markets and aims to leverage on its experience to further strengthen its presence in the key cities. A quality residential portfolio in Hanoi and Ho Chi Minh City. CapitaLand Vietnam has a pipeline of about 4,300units from eight residential projects across Ho Chi Minh City and Hanoi. The Group’s residential projects are in the mid-premium segment mainly targeting first time home-buyers and upgrade segment. Demand has remained strong for its recent launches, with CapitaLand selling about 1,321 apartment units in 2015 (2014: 1,125 units) and a sales value of SGD 226.5m (2014: SGD 151.5m). We understand that margins for the new launches also remain healthy in the 15-20% range. We expect demand for its projects to get a further boost from the recent legislative change (Jun 2015), which allows foreign ownership of real estate in Vietnam due its strong brand recognition in the region. In order to capitalise on this growing demand CapitaLand acquired two new plots of land in Ho Chi Minh City in 2H15 at a total cost of USD205m. Ascott – The biggest serviced residence operator in Vietnam. CapitaLand’s wholly owned serviced residence arm – The Ascott Limited – has a portfolio of more than 3,000 apartment units in 17 properties (8 under construction) across the six major cities, making it the largest international serviced residence owner-operator. Except for the upcoming Ascott Waterfront Saigon (3Q16) the remaining properties are operated under its Somerset and Citadines brand targeting young and savvy business travellers. Demand for serviced residences in Vietnam is expected to remain strong with the World Bank forecasting an average GDP growth of 6.3% pa over next three years compared to the global average GDP growth of 2.7%p.a. Maintain NEUTRAL TP SGD3.15. Despite our optimism on the long-term real-estate fundamentals in Vietnam the contribution to CapitaLand’s bottomline currently remains extremely small. With tough market conditions in its core operating markets of China and Singapore, we see limited catalysts to its share price. Maintain NEUTRAL with TP of SGD3.15.


Forecasts and Valuations Dec-14 Dec-15 Dec-16F Dec-17F Dec-18FTotal turnover (SGDm) 3,925 4,762 4,185 4,112 4,199Reported net profit (SGDm) 1,132 1,066 874 1,070 1,161Recurring net profit (SGDm) 1,132 1,066 874 1,070 1,161Recurring net profit growth (%) 40.3 (5.8) (18.0) 22.5 8.5Recurring EPS (SGD) 0.27 0.25 0.21 0.25 0.27DPS (SGD) 0.09 0.09 0.09 0.09 0.09Recurring P/E (x) 12.0 12.8 15.6 12.7 11.7P/B (x) 0.81 0.76 0.73 0.70 0.67Dividend Yield (%) 2.8 2.8 2.8 2.8 2.8Return on average equity (%) 6.9 6.1 4.8 5.6 5.8Return on average assets (%) 2.5 2.3 1.9 2.4 2.6Net debt to equity (%) 57.0 47.7 35.2 22.7 19.4Our vs consensus EPS (adjusted)

93

99

104

110

115

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CapitaLand (CAPL SP)Price Close Relative to Straits Times Index (RHS)

51015202530354045

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-15

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16

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16

Vol m

Analysts Vijay Natarajan +65 6232 3872 [email protected]

http://www.efa.biz/


CapitaLand Singapore Company Update



Financial Exhibits


Asia Singapore Property CapitaLand Bloomberg CAPL SP Neutral Valuation basis RNAV methodology Key drivers Removal of cooling measures in its core markets and Pick up in global macro-economic conditions. Key risks Prolonged real-estate downturn in core markets Company Profile Capitaland limited and its subsidiaries operate in residential and commercial properties, property fund management, and serviced residences. The company also manages other properties Valuation chart Any one valuation chart that the analyst wishes to show investors.


Financial summary Dec-14 Dec-15 Dec-16F Dec-17F Dec-18FRecurring EPS (SGD) 0.27 0.25 0.21 0.25 0.27EPS (SGD) 0.27 0.25 0.21 0.25 0.27DPS (SGD) 0.09 0.09 0.09 0.09 0.09BVPS (SGD) 3.94 4.22 4.38 4.59 4.80Weighted avg adjusted shares (m) 4,248 4,248 4,248 4,248 4,248

Valuation metrics Dec-14 Dec-15 Dec-16F Dec-17F Dec-18FRecurring P/E (x) 12.0 12.8 15.6 12.7 11.7P/E (x) 12.0 12.8 15.6 12.7 11.7P/B (x) 0.81 0.76 0.73 0.70 0.67FCF Yield (%) (0.3) 11.2 23.2 27.9 10.7Dividend Yield (%) 2.8 2.8 2.8 2.8 2.8EV/EBITDA (x) 2.22 0.16 (1.27) (2.41) (2.83)EV/EBIT (x) 2.31 0.17 (1.31) (2.48) (2.91)

Income statement (SGDm) Dec-14 Dec-15 Dec-16F Dec-17F Dec-18FTotal turnover 3,925 4,762 4,185 4,112 4,199Gross profit 1,382 1,475 1,475 1,449 1,480EBITDA 1,532 1,663 1,911 2,168 2,061Depreciation and amortisation (65) (73) (56) (57) (58)Operating profit 1,467 1,590 1,855 2,111 2,003Net interest (439) (477) (451) (377) (324)Income from associates & JVs 970 726 307 265 251Pre-tax profit 1,997 1,839 1,711 1,999 1,930Taxation (267) (344) (355) (371) (393)Minority interests (599) (430) (482) (558) (376)Recurring net profit 1,132 1,066 874 1,070 1,161

Cash flow (SGDm) Dec-14 Dec-15 Dec-16F Dec-17F Dec-18FChange in working capital 52 1,548 1,284 1,928 (287)Cash flow from operations 999 2,467 2,928 3,817 1,472Capex (1,046) (941) 241 (8) (8)Cash flow from investing activities (339) 154 708 409 394Proceeds from issue of shares 1 5 0 0 0Dividends paid (705) (727) (593) (582) (506)Cash flow from financing activities (4,272) (1,213) (2,869) (3,262) (2,210)

Balance sheet (SGDm) Dec-14 Dec-15 Dec-16F Dec-17F Dec-18FTotal cash and equivalents 2,749 4,173 4,936 5,899 5,555Tangible fixed assets 1,047 808 816 825 833Total investments 29,930 32,286 32,486 32,687 32,890Total other assets 1,556 1,332 1,345 1,359 1,372Total assets 44,113 47,053 43,796 45,195 43,347Short-term debt 3,469 2,246 2,246 2,246 2,246Other liabilities 1,386 1,373 1,386 1,400 1,414Total liabilities 20,905 22,115 17,885 18,039 15,036Shareholders' equity 16,758 17,905 18,608 19,495 20,397Minority interests 6,451 7,032 7,303 7,662 7,914Total equity 23,209 24,938 25,911 27,156 28,311Net debt 13,236 11,885 9,122 6,159 5,503Total liabilities & equity 44,113 47,053 43,796 45,195 43,347

Key metrics Dec-14 Dec-15 Dec-16F Dec-17F Dec-18FRevenue growth (%) 11.8 21.3 (12.1) (1.8) 2.1Recurrent EPS growth (%) 40.3 (5.8) (18.0) 22.5 8.5Gross margin (%) 35.2 31.0 35.2 35.2 35.2Operating EBITDA margin (%) 39.0 34.9 45.7 52.7 49.1Net profit margin (%) 28.8 22.4 20.9 26.0 27.7Dividend payout ratio (%) 33.9 35.9 43.8 35.7 32.9Capex/sales (%) 26.7 19.8 (5.8) 0.2 0.2Interest cover (x) 3.34 3.33 3.73 4.90 5.25




Selected Residential Projects in Vietnam

Figure 1: Seasons Avenue, Hanoi Figure 2: Mulberry Lane, Hanoi

Source: CapitaLand Source: CapitaLand

Figure 3: The Vista, Ho Chi Minh Figure 4: Vista Verde, Ho Chi Minh

Source: CapitaLand Source: CapitaLand

Figure 5: The Krista, Ho Chi Minh Figure 6: PARCSpring, Ho Chi Minh

Source: Capitaland Source: CapitaLand




SWOT Analysis

• One of Asia’s largest real estate companies, with strong corporate branding

• Established asset management expertise with a proven track record

• Diverse operations bring about economies of scale

Regulatory risks • Increasing competition, especially in Singapore and China • Economic downturn and fluctuating markets

• Strong development pipeline as seed assets for future REITs

• Participation in government-led investments and developments projects

• Deep corporate structure potentially gives rise to “conglomerate discount”

• More focus on Singapore and China implies limited global perspective compared to market leaders




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Price Close

na

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3.15




2016-08-04 Neutral 3.15 3.18

2016-02-18 Neutral 3.15 2.91

2015-07-15 Buy 4.22 3.40

2015-05-04 Buy 4.20 3.76

2015-02-17 Buy 3.96 3.63

2014-11-10 Buy 3.54 3.19

Malaysia Company Update



17 August 2016 Construction & Engineering | Construction

Gamuda Neutral (Maintained)

Target Price: MYR5.19 Price: MYR4.84

Vietnam Property Unit Making a Comeback? Market Cap: USD2,908m Bloomberg Ticker: GAM MK

Gamuda is the best proxy to the buoyant construction sector, given its dominant role in the MRT and PTMP projects. Nonetheless, the company is in need of catalysts beyond MRT2 on the back of a still-challenging property market. Together with the limited upside to our SOP-based MYR5.19 TP (7% upside), we stay NEUTRAL on the stock.

Share Data Avg Daily Turnover (MYR/USD) 11.4m/2.81m 52-wk Price low/high (MYR) 3.85 - 4.99 Free Float (%) 50 Shares outstanding (m) 2,420 Estimated Return 7% Shareholders (%) Employees Provident Fund Board 10.6 Skim Amanah Saham Bumiputera 7.8 Kumpulan Wang Persaraan 5.8 Share Performance (%) YTD 1m 3m 6m 12m Absolute 3.9 (0.6) 2.1 9.3 12.0 Relative 4.4 (2.4) 0.0 6.8 7.4 Source: Bloomberg

Source: Bloomberg

Construction division in need of catalyst beyond the Mass Rapid Transit Line 2 (MRT2) project. Gamuda is a strong proxy to the buoyant domestic construction sector. This is given its dominant role in the Mass Rapid Transit (MRT) and Penang Transport Master Plan (PTMP) projects. Note that the MRT Line 1 (MRT1) initiative has reached an overall completion level of 87%. Gamuda, via a 50%-owned joint-venture (JV), has also been appointed the project delivery partner (PDP) and contractor for MRT2’s underground portion. Unfortunately, management guides that the PTMP project will only kick off from FY19 (Jul) at the earliest, and there are no other mega projects in the interim. Some light from overseas property developments, but… As a conglomerate, Gamuda is also involved in property development. Hence, it is not spared from the fast-deteriorating property market, particularly developments in Malaysia. Management had – during a recent analysts briefing – guided for some pick up in property sales, driven mainly by new launches in Singapore and Vietnam, but at lower margins. Meanwhile, Its Toa Payoh project in Singapore is via a 50%-owned JV, thus, the impact to its bottomline is not substantial. …there is a mixed outlook for the Vietnam property segment. Gamuda is involved in two big-scale township developments in Vietnam. Post its takeover of the management of the Celadon City project in Jul 2015, the company has witnessed property sales improvements. There is much excitement over upcoming developments at this city, such as the sports centre, which is slated to be ready in 2016, and the upcoming arrival of one of the world’s most famous fast food chains. Gamuda City is another development located in the centre of Greater Hanoi, which has been in operation with full amenities and facilities. This includes Hanoi’s largest recreation park, Yen So Park, at its centre. However, overall sales for this project remain weak, no thanks to intensified competition from new supply within the vicinity. Maintain NEUTRAL. While we continue to like Gamuda for its dominant role in the MRT and PTMP projects, it is in need of catalysts beyond MRT2. This is on the back of a still challenging property market, Furthermore, the share price is near our SOP-based MYR5.19 TP, the latter implying 20.2x/18x FY16F-17F P/Es respectively. This suggests stretched valuations with limited upside potential. As a result, we keep our NEUTRAL recommendation. Key upside risks to our call are the landing a mega project in the near term or the earlier-than-expected implementation of the PTMP. Any delays or cost overruns in its construction jobs would be the key downside risks.


Forecasts and Valuations Jul-14 Jul-15 Jul-16F Jul-17F Jul-18FTotal turnover (MYRm) 2,230 2,400 2,118 2,581 3,005Reported net profit (MYRm) 719 682 619 694 797Recurring net profit (MYRm) 713 682 619 694 797Recurring net profit growth (%) 13.3 (4.4) (9.3) 12.3 14.8Recurring EPS (MYR) 0.31 0.28 0.26 0.29 0.33DPS (MYR) 0.12 0.12 0.12 0.12 0.12Recurring P/E (x) 15.8 17.1 18.8 16.8 14.6P/B (x) 2.05 1.84 1.75 1.65 1.54P/CF (x) na 51 445 54 30Dividend Yield (%) 2.5 2.5 2.5 2.5 2.5EV/EBITDA (x) 22.1 16.9 17.7 15.3 13.3Return on average equity (%) 13.9 11.6 9.5 10.1 10.9Net debt to equity (%) 10.0 40.3 48.6 47.7 44.5Our vs consensus EPS (adjusted) (%) 1.6 (1.5) 3.9

90

99

108

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Gamuda (GAM MK)Price Close Relative to FTSE Bursa Malaysia KLCI Index (RHS)

5

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Vol m

Analysts Ng Sem Guan, CFA +603 9207 7678 [email protected]

http://www.efa.biz/


Gamuda Malaysia Company Update



Financial Exhibits


Asia Malaysia Construction & Engineering Gamuda Bloomberg GAM MK Neutral Valuation basis Considering that Gamuda is a conglomerate, we value the group based on SOP, derived from a combination of P/E multiples, DCF and RNAV. We derived a TP of MYR5.19 – which implies 20.2x/18.0x FY16-17 P/Es respectively Key drivers Best proxy to Klang Valley Mass Rapid Transit (KVMRT) project. Its 50% owned JV was appointed Project Delivery Partner (PDP) and recently won an underground portion of MRT2, the project could keep the company busy for next five years. Key risks Key upside risks:

i. The company winning another mega project in the near future;

ii. The Penang Transport Master Plan (PTMP) project being implemented way ahead of its original schedule.

Key downside risks: i. Any delays and cost overruns in

construction jobs; ii. Weaker-than-expected property sales.

Company Profile Gamuda is primarily involved in construction, property development, operations of toll roads and production of treated water. It is the leading player in public infrastructure in Malaysia by virtue of its project delivery partner and tunnelling contractor roles in the construction of the Klang Valley MRT project. Valuation chart Any one valuation chart that the analyst wishes to show investors.


Financial summary Jul-14 Jul-15 Jul-16F Jul-17F Jul-18FRecurring EPS (MYR) 0.31 0.28 0.26 0.29 0.33EPS (MYR) 0.31 0.28 0.26 0.29 0.33DPS (MYR) 0.12 0.12 0.12 0.12 0.12BVPS (MYR) 2.36 2.63 2.77 2.94 3.15Weighted avg adjusted shares (m) 2,323 2,406 2,406 2,406 2,406

Valuation metrics Jul-14 Jul-15 Jul-16F Jul-17F Jul-18FRecurring P/E (x) 15.8 17.1 18.8 16.8 14.6P/E (x) 15.6 17.1 18.8 16.8 14.6P/B (x) 2.05 1.84 1.75 1.65 1.54FCF Yield (%) (2.6) 1.8 (3.4) 1.6 2.9Dividend Yield (%) 2.5 2.5 2.5 2.5 2.5EV/EBITDA (x) 22.1 16.9 17.7 15.3 13.3EV/EBIT (x) 23.3 19.8 21.1 18.4 15.8

Income statement (MYRm) Jul-14 Jul-15 Jul-16F Jul-17F Jul-18FTotal turnover 2,230 2,400 2,118 2,581 3,005Gross profit 658 698 705 807 918EBITDA 507 705 704 803 899Depreciation and amortisation (27) (103) (113) (134) (143)Operating profit 481 602 592 669 757Net interest (66) (124) (153) (163) (168)Income from associates & JVs 430 380 331 512 571Pre-tax profit 852 858 770 1,018 1,159Taxation (117) (133) (105) (244) (278)Minority interests (16) (43) (46) (79) (83)Recurring net profit 713 682 619 694 797

Cash flow (MYRm) Jul-14 Jul-15 Jul-16F Jul-17F Jul-18FChange in working capital (527) (179) (423) (192) (83)Cash flow from operations (273) 228 26 217 388Capex (17) (24) (422) (32) (50)Cash flow from investing activities (41) (1,394) (322) 68 50Proceeds from issue of shares 154 220 0 0 0Dividends paid (277) (495) (289) (289) (289)Cash flow from financing activities 235 1,286 9 (302) (307)

Balance sheet (MYRm) Jul-14 Jul-15 Jul-16F Jul-17F Jul-18FTotal cash and equivalents 1,914 1,438 1,151 1,133 1,265Tangible fixed assets 1,167 3,024 3,495 3,577 3,659Intangible assets 1,755 1,693 1,631 1,546 1,472Total investments 1,332 2,785 3,015 3,428 3,898Total other assets 388 590 590 590 590Total assets 10,353 13,326 13,805 14,694 15,713Short-term debt 792 777 827 877 927Other liabilities 262 395 395 395 395Total liabilities 4,191 6,632 6,736 7,140 7,568Shareholders' equity 5,474 6,337 6,667 7,073 7,581Minority interests 687 356 402 481 564Total equity 6,162 6,693 7,069 7,553 8,145Net debt 617 2,698 3,435 3,602 3,621Total liabilities & equity 10,353 13,326 13,805 14,694 15,713

Key metrics Jul-14 Jul-15 Jul-16F Jul-17F Jul-18FRevenue growth (%) (0.2) 7.6 (11.8) 21.8 16.4Recurrent EPS growth (%) 11.1 (7.6) (9.3) 12.3 14.8Gross margin (%) 29.5 29.1 33.3 31.3 30.5Operating EBITDA margin (%) 22.7 29.4 33.3 31.1 29.9Net profit margin (%) 32.3 28.4 29.2 26.9 26.5Capex/sales (%) 0.7 1.0 19.9 1.2 1.7Interest cover (x) 7.23 4.86 3.88 4.10 4.49

Gamuda Malaysia Company Update



SWOT Analysis

• First-mover advantage in Mass Rapid Transit (MRT) development in Malaysia

• Competitiveness against foreign contractors

• Inherent execution and policy risks of mega projects

• Prolonged downturn in the property market in Malaysia and Vietnam

• Approval of Penang Transport Master Plan (PTMP) by the Government may escalate group earnings

• Rail projects in Malaysia including the MRT, double tracking and Kuala Lumpur-Singapore high speed rail jobs

• Property development in Penang

• Reliance on just a few mega public projects

• Increased policy risk of concession assets




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2.9

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Price Close

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3.

79

3.41

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25

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2016-06-30 Neutral 5.19 4.86

2016-04-01 Neutral 5.21 4.85

2016-03-25 Neutral 5.15 4.93

2015-12-17 Buy 5.15 4.40

2015-09-29 Buy 5.26 4.45

2015-08-17 Buy 5.26 4.15

2015-07-29 Buy 5.26 4.80

2015-06-23 Neutral 5.26 4.94

2015-03-27 Neutral 5.35 5.15

2015-03-18 Neutral 5.35 5.16

Singapore Company Update



17 August 2016 Energy & Petrochemicals | Oil & Gas Services

Sembcorp Industries Buy (Maintained)

Target Price: SGD3.90 Price: SGD2.74

Established Presence In Vietnam Market Cap: USD3,642m Bloomberg Ticker: SCI SP

Sembcorp Industries’ involvement in Vietnam includes a 746MW power plant in the Ba Ria-Vung Tau province and six urban development projects nationwide. The company is also in the midst of developing a new 1,200MW power plant that is slated to come online in 2020-2021. Its seventh urban development project in Vietnam had its ground-breaking in 2015. Maintain BUY and SGD3.90 TP (42% upside), as we continue to like the firm’s stable and recurring income from its utilities business.

Share Data Avg Daily Turnover (SGD/USD) 14.1m/10.4m 52-wk Price low/high (SGD) 2.19 - 3.93 Free Float (%) 50 Shares outstanding (m) 1,787 Estimated Return 42% Shareholders (%) Temasek 49.7 Mondrian Investment 5.0 Norges 1.2 Share Performance (%) YTD 1m 3m 6m 12m Absolute (10.2) (4.5) 2.6 14.6 (23.7) Relative (9.7) (3.3) (1.8) 1.7 (17.4) Source: Bloomberg

Source: Bloomberg

Brand name in Vietnam. Sembcorp Industries has had a presence in Vietnam since 1996. The first project developed by the company was Binh Duong Province’s Vietnam-Singapore Industrial Park (VSIP). Since then, it has expanded its footprint in the country with six more industrial, commercial and residential developments. In 2004, the company commenced operations at its first power plant in Vietnam, marking its entry into the utilities segment there.

Utilities. Sembcorp Industries currently owns a 66.67% stake in Phu My 3 BOT Power Co Ltd, which operates a 746 megawatt (MW) power plant in the Ba Ria-Vung Tau province, south-east of Ho Chi Minh City. The plant has been in operation since 2004. It contributes about 7% to the company’s total generation capacity of 10,616MW. It will also develop a power plant under a build-operate-transfer (BOT) plan. Its new 1,200MW power plant is part of Vietnam’s power development strategy (2011-2020). This plant is expected to come online in 2020-2021 and will cost nearly USD2bn. We understand that the project will be a gas turbine combined-cycle power plant.

Urban development. Sembcorp Industries is a brand name in integrated townships and industrial parks in Vietnam. The company has developed six townships and industrial parks nationwide, with a seventh one currently underway. Vietnam accounts for 63% of its remaining saleable land, or 2,287ha out of a total of 3,589ha. Its land in the country is evenly mixed between industrial, commercial and residential land.

Maintain BUY with a TP SGD3.90. We maintain our BUY call on Sembcorp Industries with our SOP-based TP unchanged at SGD3.90. Its pipeline of utilities projects will drive earnings going forward, partially cushioning the current weakness in its marine business. The latter segment remains the key risk to its earnings, where Sembcorp Industries’ net orderbook is at SGD9.7bn. Of this, c.70% comprises drilling vessels. We would like to highlight that at its current share price, the market is valuing the company solely on the net present value (NPV) of its utilities business.

Risk. Lower-than-forecasted orderbook recognition for its Sembcorp Marine arm.


Forecasts and Valuations Dec-14 Dec-15 Dec-16F Dec-17F Dec-18FTotal turnover (SGDm) 10,895 9,545 9,680 10,847 11,627Reported net profit (SGDm) 828 549 579 614 662Recurring net profit (SGDm) 828 549 579 614 662Recurring net profit growth (%) 0.9 (33.7) 5.4 6.1 7.8Recurring EPS (SGD) 0.46 0.31 0.32 0.34 0.37DPS (SGD) 0.16 0.11 0.08 0.09 0.10Recurring P/E (x) 5.91 8.92 8.46 7.97 7.39P/B (x) 0.90 0.87 0.81 0.75 0.70P/CF (x) na na 3.57 5.85 5.06Dividend Yield (%) 5.8 4.0 2.9 3.3 3.6EV/EBITDA (x) 4.98 9.83 6.55 6.10 5.67Return on average equity (%) 15.9 9.9 9.9 9.8 9.8Net debt to equity (%) 42.5 70.5 60.2 55.5 49.3Our vs consensus EPS (adjusted) (%) (2.1) 0.0 7.8

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Analysts Wan Mohd Zahidi +603 9207 7609 [email protected]

http://www.efa.biz/


Sembcorp Industries Singapore Company Update



Financial Exhibits


Asia Singapore Energy & Petrochemicals Sembcorp Industries Bloomberg SCI SP Buy Valuation basis SOP-based TP of SGD3.90. Key drivers Starting up of utilities projects. Key risks Lower orderbook replenishments for its marine business. Company Profile Sembcorp Industries is a leading energy, water and marine group, which operates in five continents.


Financial summary Dec-14 Dec-15 Dec-16F Dec-17F Dec-18FRecurring EPS (SGD) 0.46 0.31 0.32 0.34 0.37EPS (SGD) 0.46 0.31 0.32 0.34 0.37DPS (SGD) 0.16 0.11 0.08 0.09 0.10BVPS (SGD) 3.03 3.15 3.40 3.65 3.92Weighted avg adjusted shares (m) 1,786 1,787 1,787 1,787 1,787

Valuation metrics Dec-14 Dec-15 Dec-16F Dec-17F Dec-18FRecurring P/E (x) 5.91 8.92 8.46 7.97 7.39P/E (x) 5.91 8.92 8.46 7.97 7.39P/B (x) 0.90 0.87 0.81 0.75 0.70FCF Yield (%) (27.1) (48.7) 12.7 7.9 11.6Dividend Yield (%) 5.8 4.0 2.9 3.3 3.6EV/EBITDA (x) 4.98 9.83 6.55 6.10 5.67EV/EBIT (x) 6.3 16.0 9.3 8.6 7.9

Income statement (SGDm) Dec-14 Dec-15 Dec-16F Dec-17F Dec-18FTotal turnover 10,895 9,545 9,680 10,847 11,627Gross profit 1,415 651 1,401 1,509 1,583EBITDA 1,481 1,050 1,500 1,569 1,617Depreciation and amortisation (315) (405) (449) (451) (454)Operating profit 1,166 645 1,051 1,117 1,163Net interest (51) (225) (372) (395) (372)Income from associates & JVs 158 6 100 100 100Pre-tax profit 1,273 426 779 822 891Taxation (162) 28 (101) (104) (114)Minority interests (283) 94 (99) (104) (115)Recurring net profit 828 549 579 614 662

Cash flow (SGDm) Dec-14 Dec-15 Dec-16F Dec-17F Dec-18FChange in working capital (1,414) (1,961) 368 (208) (139)Cash flow from operations (18) (1,002) 1,372 837 968Capex (1,306) (1,384) (750) (450) (400)Cash flow from investing activities (1,543) (1,258) (726) (426) (376)Proceeds from issue of shares (29) 5 0 0 0Dividends paid (393) (286) (143) (161) (179)Cash flow from financing activities 1,635 3,087 (1,043) (761) (479)

Balance sheet (SGDm) Dec-14 Dec-15 Dec-16F Dec-17F Dec-18FTotal cash and equivalents 1,661 1,606 1,208 859 973Tangible fixed assets 7,725 8,685 8,986 8,985 8,930Intangible assets 391 443 443 443 443Total investments 2,413 2,654 2,754 2,854 2,954Total other assets 517 526 526 526 526Total assets 17,176 19,915 19,688 20,108 20,716Short-term debt 1,086 1,982 1,275 1,175 1,135Other liabilities 419 256 256 256 256Total liabilities 9,944 11,872 11,109 11,073 11,183Shareholders' equity 5,414 5,630 6,066 6,519 7,003Minority interests 1,616 1,610 1,709 1,713 1,728Total equity 7,232 8,043 8,578 9,035 9,533Net debt 3,073 5,667 5,165 5,014 4,700Total liabilities & equity 17,176 19,915 19,688 20,108 20,716

Key metrics Dec-14 Dec-15 Dec-16F Dec-17F Dec-18FRevenue growth (%) 0.9 (12.4) 1.4 12.1 7.2Recurrent EPS growth (%) 0.9 (33.7) 5.4 6.1 7.8Gross margin (%) 13.0 6.8 14.5 13.9 13.6Operating EBITDA margin (%) 13.6 11.0 15.5 14.5 13.9Net profit margin (%) 7.6 5.8 6.0 5.7 5.7Capex/sales (%) 12.0 14.5 7.7 4.1 3.4Interest cover (x) 16.6 2.7 2.7 2.7 2.9




Figure 1: Sembcorp Industries’ SOP valuation

SGDm SGD/ share

Remarks

NPV of enterprise FCF 5,660 3.17 NPV of utilities enterprise FCF at 8% WACC Marine: shares in SMM 1,911 1.07 61% stake at RHB target price of SGD1.33 Urban development segment 600 0.34 15x P/E for the urban division, zero for future Property arm Investment: Gallant Venture 127 0.07 Stake in Gallant Venture at SGD0.22 Investment: Other assets 173 0.10 Hill Street office and assets for sale Residual net cash / (net debt) -1,038 -0.58 Excluding SMM net debt and project financing, but including SGD800m perpetuals Salalah listed value 379 0.21 40% stake in Oman Salalah Total equity value 7,812 4.37 Basic shares 1,787 TP 3.90 RHB TP @ 10% discount

Source: RHB




SWOT Analysis

• Diversified business ranging from oil & gas and infrastructure to property

• Lower oil price could continue to hurt Sembcorp Marine’s earnings prospects

• Presence in emerging property and infrastructure markets such as Vietnam and China

• Competing for global projects against larger infrastructure peers with longer track records and bigger balance sheets




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2016-08-03 Buy 3.90 2.74

2016-02-18 Buy 4.00 2.66

2016-01-03 Buy 3.80 3.05

2015-12-08 Buy 3.80 3.03

2015-10-30 Neutral 3.90 3.58

2015-09-21 Buy 4.20 3.57

2015-08-05 Buy 3.90 3.76

2015-07-01 Neutral 4.10 3.91

2015-05-08 Neutral 4.40 4.37

2015-02-23 Buy 4.90 4.22





SP Setia Neutral (Maintained)


Yet To Take Off In A Big Way Market Cap: USD2,239m Bloomberg Ticker: SPSB MK

We visited SP Setia’s EcoXuan in Ho Chi Minh City. Earnings contribution from projects in Vietnam is still insignificant, as its housing products are largely affordable. As such, the company is unable to benefit from the recent liberalisation of housing laws in the country. Current major concerns of the company are largely focused on the slowing London property market post Brexit. Maintain NEUTRAL, with a MYR2.91 TP (9% downside).

Share Data Avg Daily Turnover (MYR/USD) 2.98m/0.74m 52-wk Price low/high (MYR) 2.80 - 3.40 Free Float (%) 33 Shares outstanding (m) 2,818 Estimated Return -9% Shareholders (%) PNB 66.5 KWAP 9.0 EPF 5.0 Share Performance (%) YTD 1m 3m 6m 12m Absolute 0.0 13.5 0.0 13.5 7.0 Relative 0.5 11.7 (2.1) 11.0 2.4 Source: Bloomberg

Source: Bloomberg

Two projects in Vietnam. SP Setia has two property projects in Vietnam, namely EcoXuan and EcoLakes. We only visited EcoXuan. EcoXuan and EcoLakes are located 16km/40km north of Ho Chi Minh City, and have remaining GDVs of MYR444m/MYR2.3bn and remaining landbank of 11/521 acres respectively. Projects in Vietnam make up less than 3% of the company’s total portfolio GDV. The earnings contribution from Vietnam is still minimal due to its previously challenging economic environment – although the projects began in 2009-2010.

Local demand has not picked. New housing regulations in Vietnam now allow foreigners and overseas Vietnamese to own unlimited property in Vietnam. Previously, these people could only purchase one property under very strict conditions. Although the high-end and luxurious segments have seen significantly higher sales, SP Setia has not benefited much from the liberalisation. This is because the company’s products, thus far, mainly consist of affordable homes catering to local demand. Currently, it is just about to complete the first phase of EcoXuan and start building the second phase. Feedback from SP Setia is largely in line with the survey by Colliers, whereby sales of mid- to low-end homes are slow, with a take-up rate of only about 40%.

Long-term outlook could be positive. We are not entirely disappointed with the company’s performance in Vietnam, as we think the market has a long-term potential, given the improvement in its macroeconomic growth. As GDP per capita picks up, we expect the demand for housing to increase gradually in the coming years.

Still NEUTRAL. We maintain our NEUTRAL rating on SP Setia and MYR2.91 TP, based on a 40% discount to RNAV. Key risks to our rating are a significantly faster or slower recovery in the London and Malaysia property market and easing of banks mortgage lending. We believe its exposure to the London property market would be a bigger concern for now, given the recent Brexit referendum results which will lead to slowing demand for property there. Meanwhile, the local property market remains challenging.


Forecasts and Valuations Dec-14 Dec-15 Dec-16F Dec-17F Dec-18FTotal turnover (MYRm) 4,139 5,780 4,903 5,442 4,152Reported net profit (MYRm) 469 787 694 821 605Recurring net profit (MYRm) 437 787 694 821 605Recurring net profit growth (%) 6.4 80.1 (11.9) 18.4 (26.3)Recurring EPS (MYR) 0.17 0.30 0.26 0.29 0.21DPS (MYR) 0.11 0.20 0.18 0.20 0.16Recurring P/E (x) 18.5 10.6 12.5 11.0 15.4P/B (x) 1.34 1.15 1.17 1.17 1.19Dividend Yield (%) 3.6 6.2 5.6 6.3 5.0Return on average equity (%) 8.1 11.9 9.3 10.6 7.7Return on average assets (%) 3.6 5.3 4.2 4.8 3.5Net debt to equity (%) 26.9 17.2 29.0 30.2 27.5Our vs consensus EPS (adjusted) (%) (3.5) (4.9) (25.8)

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Analysts Loong Kok Wen, CFA +603 9207 7614 [email protected]

http://www.efa.biz/


SP Setia Malaysia Company Update



Financial Exhibits


Asia Malaysia Property SP Setia Bloomberg SPSB MK Neutral Valuation basis 35% discount to RNAV Key drivers New property sales, potential M&A plans Key risks Weaker/better-than-expected market conditions Company Profile SP Setia has been the property sector bellwether over the years. The company has a large presence in many key areas in Malaysia. Last year, it ventured into London via a joint MYR40bn project with the Employees Provident Fund and Sime Darby Berhad Valuation chart Any one valuation chart that the analyst wishes to show investors.


Financial summary Dec-14 Dec-15 Dec-16F Dec-17F Dec-18FRecurring EPS (MYR) 0.17 0.30 0.26 0.29 0.21EPS (MYR) 0.19 0.30 0.26 0.29 0.21DPS (MYR) 0.11 0.20 0.18 0.20 0.16BVPS (MYR) 2.38 2.78 2.75 2.74 2.69Weighted avg adjusted shares (m) 2,509 2,594 2,711 2,812 2,911

Valuation metrics Dec-14 Dec-15 Dec-16F Dec-17F Dec-18FRecurring P/E (x) 18.5 10.6 12.5 11.0 15.4P/E (x) 17.2 10.6 12.5 11.0 15.4P/B (x) 1.34 1.15 1.17 1.17 1.19FCF Yield (%) 0.4 6.3 (0.2) 11.8 21.2Dividend Yield (%) 3.6 6.2 5.6 6.3 5.0EV/EBITDA (x) 8.72 5.47 8.18 7.54 9.79EV/EBIT (x) 9.1 5.7 8.6 7.9 10.3

Income statement (MYRm) Dec-14 Dec-15 Dec-16F Dec-17F Dec-18FTotal turnover 4,139 5,780 4,903 5,442 4,152Gross profit 1,218 1,768 1,397 1,627 1,284EBITDA 989 1,453 1,148 1,321 1,033Depreciation and amortisation (38) (47) (52) (55) (55)Operating profit 952 1,407 1,096 1,266 979Net interest (66) (94) (106) (111) (116)Income from associates & JVs (80) (90) 92 211 185Pre-tax profit 806 1,222 1,082 1,365 1,047Taxation (231) (356) (308) (389) (298)Minority interests (73) (43) (38) (48) (37)Recurring net profit 437 787 694 821 605

Cash flow (MYRm) Dec-14 Dec-15 Dec-16F Dec-17F Dec-18FChange in working capital (643) (45) (648) (325) 777Cash flow from operations 118 1,021 662 1,074 1,974Capex (83) (497) (680) (10) 0Cash flow from investing activities (512) (1,098) (680) (10) 32Proceeds from issue of shares 342 1,053 0 0 0Dividends paid (256) (233) (611) (462) (547)Cash flow from financing activities 114 1,376 (1,267) (1,191) (1,177)

Balance sheet (MYRm) Dec-14 Dec-15 Dec-16F Dec-17F Dec-18FTotal cash and equivalents 2,604 3,752 2,946 3,004 3,446Tangible fixed assets 4,854 5,304 5,932 5,887 5,801Intangible assets 1 7 7 7 7Total investments 1,644 2,193 2,193 2,193 2,193Total other assets 178 127 141 350 1,190Total assets 13,582 16,423 16,788 17,556 17,445Short-term debt 1,053 1,783 1,783 1,783 1,783Other liabilities 23 94 94 94 94Total liabilities 6,561 8,030 8,161 8,633 8,353Shareholders' equity 6,079 7,395 7,591 7,840 7,971Minority interests 321 387 425 474 511Total equity 7,021 8,392 8,627 8,924 9,092Net debt 1,889 1,445 2,501 2,693 2,500Total liabilities & equity 13,582 16,423 16,788 17,556 17,445

Key metrics Dec-14 Dec-15 Dec-16F Dec-17F Dec-18FRevenue growth (%) 29.9 39.6 (15.2) 11.0 (23.7)Recurrent EPS growth (%) (5.4) 75.2 (15.6) 14.1 (28.8)Gross margin (%) 29.4 30.6 28.5 29.9 30.9Operating EBITDA margin (%) 23.9 25.1 23.4 24.3 24.9Net profit margin (%) 11.3 13.6 14.1 15.1 14.6Dividend payout ratio (%) 66.9 66.6 66.6 66.6 66.6Capex/sales (%) 2.0 8.6 13.9 0.2 0.0Interest cover (x) 14.5 14.9 10.3 11.4 8.4




Figure 1: SP Setia’s RNAV

Source: RHB

Projects Remaining landbank Remaining GDV Stake NPV (@ 11%)(acres) (MYR m)

Central RegionSetia Alam 853 5,327 100% 586.9 Setia City 114 9,316 100% 675.5 Setia Eco Park 317 2,850 50% 157.0 Setia Eco Glades 268 1,843 70% 121.8 Setia EcoHill 673 2,385 100% 205.8 Abaco Estate, Beranang 1,011 5,215 100% 412.5 Setia Eco Templer 195 1,976 100% 162.9 KL Eco City 20 3,856 100% 277.3 Setia Sky Tropika, Seputeh 5 805 100% 66.4 Setia Federal Hill 52 14,349 50% 467.7 British High Comm land 3 1,043 100% 82.1 Setia Sky Residences 0 340 100% 28.0 Setia Trio 4 437 70% 20.7 Kenny Hills Grande 6 174 100% 11.8 Putrajaya 135 456 60% 22.6

Southern RegionBukit Indah Johor 91 1,025 100% 101.4 Setia Indah Johor 19 125 100% 12.5 Setia Tropika 219 1,720 100% 156.0 Setia Eco Gardens 191 1,716 70% 122.9 Setia Eco Cascadia 116 1,694 100% 160.0 Setia Business Park II 92 495 100% 48.9 Setia Busienss Park I 38 218 70% 14.4

Northern RegionSetia Pearl Island 21 700 100% 63.5 Setia Vista 0 450 100% 40.8 Setia Raintree Residence 21 200 100% 12.3 Setia Greens - Ph 2 12 200 100% 17.3 Setia Sky Hill, Sg Nibong 4 341 100% 20.9 Seri Bayu, Bayan Lepas 13 240 100% 11.8 Setia Sky Ville 9 600 100% 44.8 Setia Eco Forest 35 960 100% 62.1 Setia Sky Cubes, Teluk Kumbar 3 80 100% 4.6

Eastern RegionAeropod @ Tg Aru 47 1,501 100% 118.1

Overseas18 Woodsville, Singapore 1 40 100% 3.9 Eco Sanctuary, Singapore 5 270 100% 26.6 Parque Melbourne 2 800 100% 68.2 Carnegie Melbourne 0.51 97 100% 8.0 Prahran Melbourne 114 100% 9.3 Exhibition Street Melbourne 1.02 1,920 100% 123.6 Battersea Power Station, UK 23 47,850 40% 1,175.8 EcoXuan, Lai Thieu 10 444 95% 8.6 EcoLakes, My Phuoc 287 2,287 55% 23.3

Total 5,758.5 Shareholders' funds (incl. RCPS-i) 8,445.6 Total RNAV 14,204.2 Share cap 2,928.4 RNAV/share 4.85 Discount 40%Target price 2.91




SWOT Analysis

• Anchor presence in key property hotspots in Malaysia

• Sufficient scale for overseas ventures.

• Competition with other developers in Malaysia and London

• Potential M&A catalysts, possibly with PNB group of companies

• New senior management team to prove equivalent development growth prospects compared with the previous management team




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2016-06-26 Neutral 2.91 2.98

2016-06-05 Neutral 3.10 3.16

2016-05-02 Neutral 3.18 3.22

2016-02-26 Neutral 3.10 3.00

2015-12-11 Neutral 3.50 3.07

2015-09-11 Neutral 3.50 3.15

2015-06-15 Buy 4.08 3.38

2015-03-11 Buy 4.08 3.37

2014-12-17 Buy 4.08 3.24

2014-09-18 Buy 4.08 3.26




17 August 2016 Consumer Cyclical | Auto & Autoparts

Tan Chong Neutral (Maintained)


Vietnam Operations Yet To Pay Off Market Cap: USD314m Bloomberg Ticker: TCM MK

Despite an improvement in revenue, Tan Chong’s Vietnam businesses are still operating at a loss. We only expect a breakeven within three years. We believe Vietnam has significant growth potential in the medium to long term due to its sizeable population and growing middle class. The firm’s other businesses are Malaysia-centric. We believe the downside for the share price is limited, as the stock already trades at all-time trough valuations. Maintain NEUTRAL and MYR2.35 TP (21% upside) based on 0.56x FY16F P/BV.

Share Data Avg Daily Turnover (MYR/USD) 0.14m/0.03m 52-wk Price low/high (MYR) 1.88 - 2.92 Free Float (%) 45 Shares outstanding (m) 653 Estimated Return 21% Shareholders (%) Tan Chong Consolidated Sdn Bhd 40.4 Nissan Motor Co Ltd 5.7 Employees Provident Fund Board 8.7 Share Performance (%) YTD 1m 3m 6m 12m Absolute (25.1) 0.5 (5.4) (22.7) (23.3) Relative (24.6) (1.3) (7.5) (25.2) (27.9) Source: Bloomberg

Source: Bloomberg

Still in the gestational phase. Tan Chong Motor’s (Tan Chong) Vietnam contributions to total revenue improved to 6.9% in 2015 (MYR393m) from 2014’s 1.9% (MYR109m) post resolution of customs issues. We understand that its performance there was largely dragged by 100%-owned TCIE Vietnam Pte Ltd (TCIEV) and 74%-owned Nissan Vietnam Co Ltd (NVCL) – both remain loss-making. The losses were attributed to:

i. Start-up costs; ii. Higher expenses from promotional activities; iii. The lack of scale at its assembly plant.

The company incurred higher expenses to increase brand awareness and grow its customer base. According to management, 100%-owned TC Motorcycles (Vietnam) Co Ltd (TCMV) is the only profitable business in Vietnam as at 2Q16. TCMV is currently the exclusive distributor for completely built up (CBU) sports-type Kawasaki motorcycles and spare parts in the country. Vietnam businesses to break even in 2-3 years. According to the Vietnam Automobile Manufacturers’ Association (VAMA), YTD June total industry volume (TIV) rose 35% YoY to 123,661 units. In 2016, Tan Chong anticipates TIV to expand by 13% (2015: 208,568 units). While revenue will improve in line with TIV, we expect the Vietnam operations to only break even in 2-3 years, as its assembly plant requires higher production throughout to reach optimum utilisation. We expect Tan Chong to introduce new completely knocked down (CKD) models in Vietnam this year to improve production volume. Since TCIEV is fully owned by Tan Chong, it is also possible to land new assembly contracts from other marques besides Nissan. In the medium to longer term, the Vietnam operations will become increasingly important as the main driver for Tan Chong’s Indochina businesses, given the market’s growth potential. Risks. Risks to our recommendation and TP include a weaker MYR, less-than-expected consumer sentiment, and slower-than-expected economic growth in Vietnam and Malaysia. Maintain NEUTRAL. Despite the growth potential in Vietnam, earnings contribution will only be meaningful in the medium to long term, with continued gestational losses in the near term. We see few visible re-rating catalysts and expect the stock to remain range bound. Maintain NEUTRAL and MYR2.35 TP based on FY16F P/BV of 0.56x. We believe the downside is limited, as the stock is currently trading at trough valuations.


Forecasts and Valuations Dec-14 Dec-15 Dec-16F Dec-17F Dec-18FTotal turnover (MYRm) 4,761 5,717 5,544 5,888 6,240Reported net profit (MYRm) 106 75 (57) 8 40Recurring net profit (MYRm) 64.2 45.6 (56.7) 8.3 39.6Recurring net profit growth (%) (74.4) (29.0) (224.4) 0.0 377.1Recurring EPS (MYR) 0.10 0.07 (0.09) 0.01 0.06DPS (MYR) 0.06 0.05 0.04 0.04 0.04Recurring P/E (x) 20 28 na 153 32P/B (x) 0.46 0.45 0.47 0.47 0.47P/CF (x) 3.0 na 4.6 24.3 37.4Dividend Yield (%) 3.1 2.6 2.1 2.1 2.1EV/EBITDA (x) 7.2 9.4 26.9 13.1 10.6Return on average equity (%) 3.9 2.7 (2.1) 0.3 1.5Net debt to equity (%) 38.8 47.4 44.9 51.4 56.2Our vs consensus EPS (adjusted) (%) (173.3) (91.8) (69.8)

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Analysts Azman bin Mosli +603 9207 7663 [email protected] Alexander Chia +603 9207 7621 [email protected]

http://www.efa.biz/



Tan Chong Malaysia Company Update



Financial Exhibits


Asia Malaysia Consumer Cyclical Tan Chong Bloomberg TCM MK Neutral Valuation basis FY16F P/BV of 0.56x Key drivers i. Increase in consumer spending ii. Long term potential from Indo-China operations Key risks i. Stronger MYR ii. Improvement in consumer sentiment iii. Better-than-expected economic growth Company Profile Tan Chong owns and operates the distribution franchise for Nissan vehicles in Malaysia. This includes assembly, sales and distribution, after sales as well as financial products. Its assembly division also undertakes third party assembly work for Subaru and Mitsubishi vehicles. Tan Chong also operates the Nissan vehicle distribution franchise in Vietnam, Cambodia and Laos. Valuation chart Any one valuation chart that the analyst wishes to show investors.


Financial summary Dec-14 Dec-15 Dec-16F Dec-17F Dec-18FRecurring EPS (MYR) 0.10 0.07 (0.09) 0.01 0.06EPS (MYR) 0.16 0.11 (0.09) 0.01 0.06DPS (MYR) 0.06 0.05 0.04 0.04 0.04BVPS (MYR) 4.22 4.28 4.15 4.12 4.13Weighted avg adjusted shares (m) 653 653 653 654 655

Valuation metrics Dec-14 Dec-15 Dec-16F Dec-17F Dec-18FRecurring P/E (x) 20 28 na 153 32P/E (x) 12 17 na 153 32P/B (x) 0.46 0.45 0.47 0.47 0.47FCF Yield (%) 11.2 (14.6) 2.0 (15.6) (13.1)Dividend Yield (%) 3.1 2.6 2.1 2.1 2.1EV/EBITDA (x) 7.2 9.4 26.9 13.1 10.6EV/EBIT (x) 11.1 18.4 na 36.8 21.7

Income statement (MYRm) Dec-14 Dec-15 Dec-16F Dec-17F Dec-18FTotal turnover 4,761 5,717 5,544 5,888 6,240Gross profit 773 671 531 629 670EBITDA 322 273 91 199 259Depreciation and amortisation (112) (133) (124) (128) (132)Operating profit 210 140 (33) 71 127Net interest (42) (56) (63) (66) (73)Income from associates & JVs 3 2 2 2 2Exceptional income - net 0 29 0 0 0Pre-tax profit 171 115 (94) 7 56Taxation (51) (45) 27 (2) (16)Minority interests (14) 5 10 3 (1)Recurring net profit 64 46 (57) 8 40

Cash flow (MYRm) Dec-14 Dec-15 Dec-16F Dec-17F Dec-18FChange in working capital 213 (425) 345 (55) (95)Cash flow from operations 428 (206) 275 52 34Capex (285) 22 (250) (250) (200)Cash flow from investing activities (260) 39 (240) (240) (195)Dividends paid (59) (33) (26) (26) (26)Cash flow from financing activities (145) (8) 74 74 74

Balance sheet (MYRm) Dec-14 Dec-15 Dec-16F Dec-17F Dec-18FTotal cash and equivalents 341 166 275 161 74Tangible fixed assets 1,954 1,941 2,220 2,342 2,409Intangible assets 15 15 15 15 15Total investments 37 38 38 38 38Total other assets 380 414 414 414 414Total assets 5,010 5,169 5,188 5,283 5,400Short-term debt 507 671 670 720 770Other liabilities 44 51 51 51 51Total liabilities 2,250 2,377 2,488 2,603 2,705Shareholders' equity 2,755 2,794 2,712 2,695 2,709Minority interests 6 (2) (12) (15) (14)Total equity 2,761 2,792 2,700 2,680 2,695Net debt 1,072 1,324 1,213 1,377 1,514Total liabilities & equity 5,010 5,169 5,188 5,283 5,400

Key metrics Dec-14 Dec-15 Dec-16F Dec-17F Dec-18FRevenue growth (%) (8.4) 20.1 (3.0) 6.2 6.0Recurrent EPS growth (%) (74.4) (29.0) (224.3) 0.0 376.4Gross margin (%) 16.2 11.7 9.6 10.7 10.7Operating EBITDA margin (%) 6.8 4.8 1.6 3.4 4.2Net profit margin (%) 2.2 1.3 (1.0) 0.1 0.6Dividend payout ratio (%) 37.0 43.6 (46.1) 314.9 66.0Capex/sales (%) 6.0 (0.4) 4.5 4.2 3.2Interest cover (x) 3.74 1.95 (0.45) 0.94 1.62

Tan Chong Malaysia Company Update



SWOT Analysis

• Experienced management has a solid track record • Lack of clarity in government policies affecting the automotive sector

• Rising competitive pressure could result in lower margins

• Longstanding business relationship with Nissan could mean opportunities for greater cooperation in manufacturing and assembly

• Tan Chong’s early investment in the high growth potential emerging Indochina markets could bear fruit in the longer term

• Largely dependent on the domestic automotive market that has limited volume growth prospects




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2016-08-08 Neutral 2.35 1.95

2016-02-24 Neutral 2.40 2.38

2015-11-19 Sell 2.40 2.92

2015-08-31 Neutral 2.40 2.55

2015-05-13 Neutral 2.80 3.05

2015-02-26 Neutral 3.05 3.19

2014-12-29 Neutral 3.10 3.27

2014-11-27 Sell 3.55 3.97

2014-08-29 Sell 3.90 4.50

2014-08-25 Sell 4.30 5.02

Hong Kong Company Update



17 August 2016 Consumer Cyclical | Textile And Garment

Texhong Textile Group Non-Rated

Target Price: N.A. Price: HKD11.60

Vertically-Integrated Platform In Vietnam Market Cap: USD1,321m Bloomberg Ticker: 2678 HK

Texhong has been expanding aggressively in Vietnam. In addition to the new upstream yarn capacity coming online this year, it is building a vertically-integrated platform in the country by expanding into the downstream garment production. Exporters should benefit from lower costs and the Trans-Pacific Partnership (TPP) agreement in the long run.

Share Data Avg Daily Turnover (HKD/USD) 7.56m/0.97m 52-wk Price low/high (HKD) 4.75 - 11.8 Free Float (%) 30 Shares outstanding (m) 885 Estimated Return n.a. Shareholders (%) Mr Hong Tianzhu 63.8 Share Performance (%) YTD 1m 3m 6m 12m Absolute 97.6 31.7 44.0 143.8 47.5 Relative 93.7 24.4 29.7 119.5 52.3 Source: Bloomberg

Source: Bloomberg

Yarn capacity expansion driving volume growth. Texhong Textile Group (Texhong) has two new capacity expansion projects this year, including the first phases of the Vietnam Galaxy and China Xinjiang projects. With a 250,000 spindles design capacity, the former commenced production in April. The latter, with a design capacity of 360,000 spindles, targets to start production in 3Q16. These two projects will drive total upstream yarn annual capacity to 2.81m spindles by end-2016, of which 56% of total capacity will be in China while Vietnam will make up the 44% balance. All its capacity in Vietnam is allocated to cotton yarn production. And this new capacity will boost yarn volume by 14% YoY this year. Vertically-integrated platform in Vietnam. Texhong said in mid-April that it had acquired a land parcel in Quang Ninh Province, Vietnam. The land will be used for constructing a textile dyeing and finishing factory with an estimated annual capacity of 40m metres of woven dyed fabrics. The dyeing plant is part of Texhong’s ambition to build a vertically-integrated platform in Vietnam, from yarn spinning to garment manufacturing. Management expects the construction to be completed by year-end, with the factory set to start production in 2017. This vertically-integrated platform should improve Texhong’s operating and cost efficiencies, and act as a long-term earnings growth driver. Margins recovery on steady cotton prices. As cotton is a key raw material for Texhong, accounting for about half of its COGS, substantial price fluctuations will increase its earnings volatility. International and China cotton prices are steady YTD, fluctuating within a 10% range. The average price difference between US cotton (with expenses and VAT included) and China cotton also remains steady, at approximately CNY2,400/tonne YTD. The stable price gap between overseas and China cotton prices is favourable to Texhong, as it can maintain or even expand margins on product mix enhancements. Valuations. Texhong is currently trading at 7.5x FY17F recurring P/E (based on consensus estimates), which is close to its past 5-year mean. The valuation is also close to its P/BV’s 5-year mean and implies a 40% discount to its downstream peers. This reflects the company’s lower net margins and higher earnings volatility.


Forecasts and Valuations Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Total turnover (CNYm) 6,873 7,341 8,229 10,470 10,575Reported net profit (CNYm) 61 487 1,126 307 591Recurring net profit (CNYm) 51 481 861 337 882Recurring net profit growth (%) 0.0 842.2 79.2 (60.9) 161.8Recurring EPS (CNY) 0.06 0.54 0.97 0.38 1.00DPS (CNY) 0.08 0.22 0.37 0.10 0.19Recurring P/E (x) 164 17 10 25 9P/B (x) 4.03 3.27 2.47 2.42 2.14P/CF (x) na 10.6 13.9 10.6 6.6Dividend Yield (%) 0.9 2.3 3.9 1.1 2.1EV/EBITDA (x) 24.6 10.5 7.6 9.9 6.3Return on average equity (%) 0.0 21.0 37.9 9.0 16.0Net debt to equity (%) 65.7 47.6 54.1 54.3 45.8Our vs consensus EPS (adjusted)

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RHB Research Team

http://www.efa.biz/

Texhong Textile Group Hong Kong Company Update



Financial Exhibits


Asia Hong Kong Consumer Cyclical Texhong Textile Group Bloomberg 2678 HK Buy Valuation basis N.A Key drivers Capacity expansion driving volume growth Key risks Substantial fluctuations in cotton prices and CNY Company Profile Texhong Textile manufactures and sells spandex stretch yarn and spandex stretch grey fabrics mainly in China.

Texhong’s forward P/E band


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Financial summary Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Recurring EPS (CNY) 0.06 0.54 0.97 0.38 1.00EPS (CNY) 0.07 0.55 1.27 0.35 0.67DPS (CNY) 0.08 0.22 0.37 0.10 0.19BVPS (CNY) 2.34 2.89 3.82 3.90 4.42Weighted avg adjusted shares (m) 885 885 885 885 885

Valuation metrics Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Recurring P/E (x) 164 17 10 25 9P/E (x) 136 17 7 27 14P/B (x) 4.03 3.27 2.47 2.42 2.14FCF Yield (%) (7.0) 1.6 (4.4) 2.2 1.9Dividend Yield (%) 0.9 2.3 3.9 1.1 2.1EV/EBITDA (x) 24.6 10.5 7.6 9.9 6.3EV/EBIT (x) 44.6 13.6 9.5 16.2 8.8

Income statement (CNYm) Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Total turnover 6,873 7,341 8,229 10,470 10,575Gross profit 556 1,124 1,583 1,294 1,906EBITDA 393 904 1,340 1,028 1,605Depreciation and amortisation (176) (205) (268) (398) (455)Operating profit 217 699 1,072 630 1,150Net interest (78) (123) (122) (249) (419)Income from associates & JVs 3 4 5 4 4Pre-tax profit 83 557 1,240 355 736Taxation (22) (71) (114) (48) (147)Minority interests (0) 0 (0) 0 2Recurring net profit 51 481 861 337 882

Cash flow (CNYm) Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Change in working capital (292) 63 (531) 122 316Cash flow from operations (121) 786 600 792 1,265Capex (460) (656) (968) (607) (1,106)Cash flow from investing activities (441) (635) (946) (602) (1,322)Dividends paid (199) 0 (326) (232) (143)Cash flow from financing activities 494 (81) 770 (15) 706

Balance sheet (CNYm) Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Total cash and equivalents 495 552 959 1,138 2,249Tangible fixed assets 2,177 2,494 4,199 4,542 5,549Total investments 47 51 56 60 64Total other assets 50 57 135 152 161Total assets 4,930 5,625 8,944 9,139 11,401Short-term debt 144 206 166 236 1,548Other liabilities 0 0 179 338 236Total liabilities 2,858 3,067 5,564 5,684 7,463Shareholders' equity 2,072 2,558 3,380 3,455 3,911Minority interests 0 (0) 0 0 27Total equity 2,072 2,558 3,380 3,455 3,939Net debt 1,360 1,218 1,830 1,877 1,804Total liabilities & equity 4,930 5,625 8,944 9,139 11,401

Key metrics Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Revenue growth (%) 0.0 6.8 12.1 27.2 1.0Recurrent EPS growth (%) 0.0 842.2 79.2 (60.9) 161.8Gross margin (%) 8.1 15.3 19.2 12.4 18.0Operating EBITDA margin (%) 5.7 12.3 16.3 9.8 15.2Net profit margin (%) 0.9 6.6 13.7 2.9 5.6Dividend payout ratio (%) 118.0 39.5 29.2 29.7 29.1Capex/sales (%) 6.7 8.9 11.8 5.8 10.5Interest cover (x) 2.53 5.07 8.32 2.48 2.67

Texhong Textile Group Hong Kong Company Update



SWOT Analysis

• Diversified product mix, from cotton stretch yarn to grey fabric

• Diversified customer base

• Weaker-than-expected cotton prices could substantially pressure its selling prices and gross profits

• Weak downstream demand in China

• Exposure to Vietnam gives it access to cheaper sources of cotton

• Capacity expansion in Vietnam and Turkey to support its volume growth

• Its high exposure to raw material price fluctuations leads to lower earnings visibility




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2016-04-20 Buy 9.00 7.82

2016-03-09 Buy 9.00 6.09

2015-08-11 Neutral 8.60 8.34

2015-06-03 Neutral 9.20 8.75

2015-03-17 Buy 9.20 7.48

2015-02-08 Buy 8.80 5.82


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c. an individual, who because of his position or profession, or because of a business relationship with an Issuer or Public Company, has access to inside information; and

d. an individual who within the last six months was a Person defined in letters a, b or c, above.

Singapore RHB Research Institute Singapore Pte Ltd and/or its subsidiaries and/or associated companies do not make a market in any securities covered in this report, except for: (a) - The staff of RHB Research Institute Singapore Pte Ltd and its subsidiaries and/or its associated companies do not serve on any board or trustee positions of any issuer whose securities are covered in this report, except for: (a) - RHB Research Institute Singapore Pte Ltd and/or its subsidiaries and/or its associated companies do not have and have not within the last 12 months had any corporate finance advisory relationship with the issuer of the securities covered in this report or any other relationship (including a shareholding of 1% or more in the securities covered in this report) that may create a potential conflict of interest, except for: (a) - Hong Kong RHBSHK or any of its group companies may have financial interests in in relation to an issuer or a new listing applicant (as the case may be) the securities in respect of which are reviewed in the report, and such interests aggregate to an amount equal to or more than (a) 1% of the subject company’s market capitalization (in the case of an issuer as defined under paragraph 16 of the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (the “Code of Conduct”); and/or (b) an amount equal to or more than 1% of the subject company’s issued share capital, or issued units, as applicable (in the case of a new listing applicant as defined in the Code of Conduct). Further, the analysts named in this report or their associates may have financial interests in relation to an issuer or a new listing applicant (as the case may be) in the securities which are reviewed in the report.


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RHBSHK or any of its group companies may make a market in the securities covered by this report. RHBSHK or any of its group companies may have analysts or their associates, individual(s) employed by or associated with RHBSHK or any of its group companies serving as an officer of the company or any of the companies covered by this report. RHBSHK or any of its group companies may have received compensation or a mandate for investment banking services to the company or any of the companies covered by this report within the past 12 months. Note: The reference to “group companies” above refers to a group company of RHBSHK that carries on a business in Hong Kong in (a) investment banking; (b) proprietary trading or market making; or (c) agency broking, in relation to securities listed or traded on The Stock Exchange of Hong Kong Limited.

Kuala Lumpur Hong Kong Singapore

RHB Research Institute Sdn Bhd Level 11, Tower One, RHB Centre

Jalan Tun Razak Kuala Lumpur

Malaysia Tel : +(60) 3 9280 2185 Fax : +(60) 3 9284 8693

RHB Securities Hong Kong Ltd.

12th Floor World-Wide House 19 Des Voeux Road Central, Hong Kong

Tel : +(852) 2525 1118 Fax : +(852) 2810 0908

RHB Research Institute Singapore

Pte Ltd. 10 Collyer Quay

#09-08 Ocean Financial Centre Singapore 049315

Tel : +(65) 6533 1818 Fax : +(65) 6532 6211

Jakarta Shanghai Bangkok

PT RHB Securities Indonesia Wisma Mulia, 20th Floor

Jl. Jenderal Gatot Subroto No. 42 Jakarta 12710, Indonesia Tel : +(6221) 2783 0888 Fax : +(6221) 2783 0777

RHB (China) Investment Advisory Co. Ltd.

Suite 4005, CITIC Square 1168 Nanjing West Road

Shanghai 20041 China

Tel : +(8621) 6288 9611 Fax : +(8621) 6288 9633

RHB Securities (Thailand) PCL

10th Floor, Sathorn Square Office Tower 98, North Sathorn Road, Silom

Bangrak, Bangkok 10500 Thailand

Tel: +(66) 2 862 9999 Fax : +(66) 2 862 9799

17 august 2016 rhb planet series - osk188.co.th · 17 august 2016 rhb planet series ... swot...

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