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Company Update, 15 January 2014

CH Karnchang (CK TB) Buy (from Trading Buy) Construction & Engineering - Construction Target Price: THB18.30

Market Cap: USD725m Price: THB14.50

A Bounce After Political Impasse

Macro

3.00

Risks

2.00

Growth

2.00

Value

3.00

90

99

108

117

126

134

143

152

161

170

12

14

16

18

20

22

24

26

28

30

CH Karnchang (CK TB)Price Close Relative to Stock Exchange of Thailand Index (RHS)

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80

100

120

140

160

180

Ja

n-1

3

Ma

r-1

3

Ma

y-1

3

Ju

l-1

3

Se

p-1

3

No

v-1

3

Vo

l m

Source: Bloomberg

Avg Turnover (THB/USD) 402m/12.7m

Cons. Upside (%) 85.5

Upside (%) 26.2

52-wk Price low/high (THB) 13.9 - 29.0

Free float (%) 58

Shareholders (%)

Trivisvavet family 39.8

Bangkok Bank 2.3

State Street Bank Europe 2.1

Shariah compliant

Kannika Siamwalla, CFA 66 2862 9744

Licence No.23517

[email protected]

Chun Phokaisawan +66 2862 2029

[email protected]

Forecasts and Valuations Dec-10 Dec-11 Dec-12 Dec-13F Dec-14F

Total turnover (THBm) 8,587 10,960 20,824 32,338 37,047

Reported net profit (THBm) (335) 927 568 8,239 905

Recurring net profit (THBm) (1,166) (1,356) 58 727 905

Recurring net profit growth (%) 152.4 16.3 na 1153.5 24.5

Recurring EPS (THB) (0.75) (0.82) 0.04 0.44 0.55

DPS (THB) 0.10 0.20 0.25 1.50 0.16

Recurring P/E (x) na na 413 33 26

P/B (x) 4.01 3.75 2.80 1.53 1.47

P/CF (x) na na 50.6 na na

Dividend Yield (%) 0.7 1.4 1.7 10.3 1.1

EV/EBITDA (x) na na 4.9 11.3 10.6

Return on average equity (%) (5.9) 15.0 7.6 68.0 5.7

Net debt to equity (%) 253.5 270.5 258.7 172.7 178.7

Our vs consensus EPS (%) 0.0 0.0

Source: Company data, RHB estimates

We expect CK’s orders to hit a new high of THB132bn at end-FY14, supported by its bids for jobs for the MRTA dark green line and Phase II of Suvarnabhumi airport. Sales and core earnings are expected to jump 14.5% and 24% respectively for FY14. We reinitiate coverage on CK with our SOP-based TP at THB18.30 reflecting a 1.9x P/BV and offering a 35% upside from the current price. Upgrade to BUY from Trading Buy.

Approaching distressed level. Amid the current political turmoil, CK’s share price could potentially decline to THB12.50, which reflects our valuation at distressed levels (-1 SD from its 8-year average P/BV). At the current price, we believe that most of the downside from the potential delay in government projects has been priced in. We expect CK to trade at a premium again after the political situation stabilises. However, we do not anticipate it to trade at the same level as previously in view of the slowdown in infrastructure spending due to the possible transfer of allocation under the THB2trn infrastructure bill to the annual budget.

Minimal impact from current political impasse. The Cabinet’s approval of MRTA’s pink and orange lines could be potentially postponed to end-FY14. However, given CK’s THB118bn-strong orderbook as of Sept 2013, the company has already secured most of its FY14 revenue target. Our FY14 revenue forecast of THB37bn is based on realised revenue from projects related to the Xayaburi and MRTA blue, purple, green lines, which have already been awarded. Moreover, the Cabinet has approved the dark green line project, which will be up for bidding in April this year. As such, we believe the downside risk to our earnings forecast is limited.

Moderate earnings growth for FY14. We expect CK to register strong performance for FY14, boosted by realization of revenue from the Xayaburi and MRTA’s purple and blue line projects. Construction revenue and core earnings are expected to rise 14.5% and 5% respectively while recurring profit is expected to surge 24% y-o-y to THB905m.

SOP-based TP of THB18.30. Our THB18.3 TP, premised on 1.9x P/BV, and +0.5 SD above the stock’s average 8-year mean, offers a 35% upside to the current share price. CK is trading at 1.4x P/BV, which is 8% below the average 8-year mean P/BV of 1.69x and 40% below its peers. Hence, we upgrade the stock to BUY from Trading Buy.

CH Karnchang (CK TB)

14 January 2014

See important disclosures at the end of this report 2

Table Of Contents

Introduction 3

The 2 trn Infrastructure Bill 5

Valuation And Recommendation 6

Shareholder Structure 8

Core Business 9

Construction Industry 10

Current And Future Projects 11

Financial Analysis 14

Appendix 16


14 January 2014


Introduction The THB2trn Infrastructure Bill has been passed by the Lower and Upper House but the opposition has taken the case to the Constitutional Court for a ruling on its legality. In view of current political conditions, we believe that the Bill would most likely be ruled as illegal. This may be negative in the short term and could possibly dampen next year’s economic growth. However, in the longer run (as shown by the charts below), the funds allocated under the Bill can be transferred to the normal annual budget. The last government has forecast that the annual budget deficit would gradually decline from THB400bn and balance by 2017, while spending on infrastructure would increase to THB506bn in 2017 from THB103bn this year. Thus, we hold the view that the start of infrastructure spending may be delayed from 2014 to 2015 as a result of the current political impasse, but would eventually take off in earnest next year, with financing coming from the annual budget.

The projects that may be cancelled are likely to be the high-speed train lines worth about THB780bn. However, ongoing projects such as Bangkok’s mass transit lines, the dual track along the entire country, state highways, rural highways and motorways will continue to roll, with or without the Infrastructure Bill. As these projects have undergone feasibility studies and received environmental impact assessment (EIA) approval, we are not overly worried about the potential fate of the Bill. The size of infrastructure spending – excluding the high-speed train lines - will come to about THB1.2-1.3trn, which is still a substantial sum to support economic growth over the next 7-10 years.

Figure 1: Transport infrastructure investment plan Figure 2: THB 2.2trn infrastructure budget in brief

(Unit: THB mn) Railway Amount

High-Speed Train 783,552 State Railway Double track 143,015 Of Thailand Urgent Investment Plan (State Railway of Thailand) 140,271 Double track (New route) 122,839 Suburb Railway 85,996 BTS 8 new routes 370,665 Road State Highways 241,080 MRTA Rural Highways 34,309 Department of Land transport 14,093 Sea Marine Department Marine Department 29,580 Total 1,965,400

Year Amount (THBm)

2014 103,116 2015 309,704 2016 459,218 2017 506,439 2018 349,278 2019 186,690 2020 64,502 Total 1,978,947

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

Figure 3: Balancing the budget

Source: FPO , Comptroller General’s Department


14 January 2014


Thailand has come a long way in developing its mass transit systems and motor ways. Over the past 10 years, we have seen these systems and infrastructure develop and serve the public with ever-increasing efficiency. The state agencies are now more professionally-managed (except the State Railway of Thailand, which is one of the oldest state enterprises and is prone to inefficiency), rather than run in a bureaucratic manner. Such developments in these state agencies are crucial to what we believe will be Thailand’s next phase of growth.

Thailand is currently entering into the peak of its infrastructure spending cycle. Over the next 5-10 years, we expect about THB2trn to be spent on its infrastructure. We believe that most of the THB2trn worth of projects will still go on, regardless of which party comes to power, as each project has been delegated to the various state agencies to implement. This is despite the fact that the fate of the Infrastructure Bill is currently in the hands of the courts. We believe that most of the state agencies responsible for the mass transit and motorway systems are now in a position to plan and develop their own projects, with final approval coming from the Cabinet. As such, projects worth THB2trn will be up for grabs. As there are only 3-4 major contractors in Thailand that can take on works of a large scale, these players will benefit the most over the course of the next 7-10 years.

We believe that the current political turmoil presents a great opportunity for investors to accumulate infrastructure stocks, since we are certain that these counters will outperform the market when the political instability settles. In this report, we elaborate on the infrastructure projects worth THB2trn that will roll out, as well as re-initiate coverage on Ch Karnchang, with a BUY and THB 18.30 TP.


14 January 2014


THB2trn Worth Of Jobs Up For Grabs Government infrastructure spending is crucial in boosting the earnings of construction companies. In preparing the country’s infrastructure for the Asean Economic Community (AEC), the Government has formulated a THB2trn Infrastructure Bill that will bolster construction spending in the country for the next five years.

Note that as the bidding of government infrastructure projects can proceed without Cabinet approval, the dissolution of the House will not make any impact on the project tenders. However, it takes around 1-2 months after submission of a tender for the winner to be announced, and another 3-4 months to obtain Cabinet approval. Thus, a new Government needs to be formed in order for these projects to proceed.

In view of the current political turmoil and dissolution of the government, we expect the new government to be formed in 2H14. As such, we expect Cabinet approval of major government projects such as the MRTA’s orange and pink lines to be postponed until 2H14 or 1H15. However, we believe the delays would have a minimal impact on CK’s performance as the company has already secured most of its FY14 target revenue from the Xayaburi project and MRTA purple and blue lines.

As the Thai economy has slowed down substantially and is expected to grow by just 3% in 2013, we expect the new Government will likely speed up the approval process for government spending to stimulate the economy in 2H14.

We believe the key events that will trigger a rally in construction stocks under our coverage are: i) the bidding for the MRTA dark green line (Mo Chit-Saphan Mai-Ku Kott) in April, and ii) easing of the current political situation, which could pave the way for the formation of a new and more stable government.

Figure 4: Construction investment in Thailand

0

100

200

300

400

500

600

Private Public

(THB bn)

Source: National Economic and Social Development Board (NESDB)

Figure 5: Infrastructure investment plan (THBm)

Section 2013F 2014F 2015F 2016F 2017F 2018F 2019F 2020F Total

Spending

Railway Transportation 18,270 138,058 262,141

294,484

261,176

175,218

36,345

1,185,692

Land Transportation 15,262 44,776 71,332

71,548

222,150

80

929

3,716

429,793

Water Transportation 2,376 9,224 10,029

12,856

13,768

13,249

13,735

51,196

126,433

Air Transportation 3,302 3,280 15,349

19,571

19,354

6,133

3,082

70,071

Others * 8,217 45,462 80,355

87,470

117,048

41,277

9,874

389,703

Total Investment 47,427 240,800 439,206

485,929

633,496

235,957

60,883

57,994

2,201,692

“Others*” refers to projects during consideration

Source: Public Debt Management Office (PDMO)

Bidding for MRTA orange and pink lines could be delayed to 2H14 as a result of dissolution of the House

However, CK’s performance should not be materially affected as it has secured most of its target revenue for FY14


14 January 2014


Valuation And Recommendation

The current political impasse has resulted in CK’s share price falling close to our distressed valuation of THB12.50 (around -1SD P/BV). At this price, we believe the share would have already factored in most of the downside from the potential delays in government projects.

We believe CK can trade at a premium again after the political situation stabilizes. However, we do not expect the stock to trade at the same level as it did previously due to the slower pace of infrastructure spending resulting from the transfer of the THB2trn allocated for the Infrastructure Bill to the normal annual budget.

We value CK at THB18.30 based on SOP valuation. We value CK’s core business at THB4.05 per share based on a 10X P/E, which is a 30% discount to the sector’s average P/E, but value its associate companies and subsidiaries at THB14.30 based on Bloomberg consensus target. Our THB18.3 TP implies a P/BV of 1.9x, which is +0.5 SD above the stock’s average 8-year mean. We deem this a reasonable multiple as CK will enter into what we believe will be a peak in Thailand’s construction/investment cycle over the next five years.

The Government’s Infrastructure Bill and the current political impasse have had more bearing on sentiment rather than the company’s valuation. Our earnings forecasts include only the projects in hand, which will be CK’s key earnings driver over the next 2-3 years.

Given CK’s current strong orderbook and numerous potential projects we recommend that investors accumulate the stock on any share price weakness. We maintain our BUY recommendation, with our TP revised to THB18.30.

Figure 6: Valuation of CK’s core business

THB/share

CK (based on 10x P/E) 4.1

Affiliates and subsidairies 14.3

Target price 18.4

Source: RHB estimates

Figure 7: Valuation of CK’s investment in subsidiaries and associate companies

% CK holding Share outstanding

(unit m) Target price

Total entity value (THB m)

Total shares outstanding (CK)

Total entity contribution

CKP * 32% 1,100 15.0 5,247 1,653 3.2

TTW 19% 3,990 12.4 9,382 1,653 5.7

BECL 15% 770 47.3 5,515 1,653 3.3

BMCL 17% 20,500 1.0 3,479 1,653 2.1

Valuation 14.3

Source: RHB estimates, Bloomberg

*CKP uses RHB’s target price in the valuation

Our TP of THB18.30, based on SOP, is equivalent to 1.9x PB/V and offers a potential upside of 35%


14 January 2014


Figure 8: CK’s P/BV band

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

Aug-05 Aug-06 Aug-07 Aug-08 Aug-09 Aug-10 Aug-11 Aug-12 Aug-13

+2sd: 2.7x

+1sd: 2.2x

Mean: 1.6x

-1sd: 1.1x

-2sd: 0.5x

Source: Bloomberg

Figure 9: Peer comparison

P/E P/BV EV/EBITDA Div yield (%) ROE (%) Company 2014F 2015F 2014F 2015F 2014F 2015F 2014F 2015F 2014F 2015F

CK 19.2 14.4 1.4 1.3 15.0 13.3 2.4 3.1 7.6 9.1

STEC 10.8 9.2 2.2 1.9 3.9 3.4 5.0 5.7 21.1 22.8 ITD 20.2 14.8 1.4 1.4 8.5 8.5 1.4 2.3 6.9 8.5

TTCL 16.4 11.4 3.3 2.7 10.7 8.5 3.0 4.1 25.6 25.2 SRICHA 7.4 6.9 2.8 2.5 5.3 4.9 9.4 9.7 45.1 41.8 DEMCO 7.9 7.7 1.3 1.2 9.4 9.3 5.3 5.2 17.5 15.6

sector's average 14.5 11.8 2.3 2.0 8.4 7.7 3.7 4.4 20.7 20.6

Source: Bloomberg

CK is trading at higher P/E and EV/EBITDA than its peers within the sector. It offers a dividend yield of 2.4% - which is lower than the sector average of 3.0% - while its ROE is at 7.6% vs the sector’s 1.9% average. However, the stock is trading at a lower P/BV.

Figure 10: P/BV vs orderbook

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14 January 2014


Shareholder Structure CK’s major shareholders are the Trivisvavet family (39.7%), which founded the company, and Bangkok Bank (BBL TB, NEUTRAL, TP: THB193.0), which owns a 2.3% stake. We believe that the Trivisavavet family’s close ties with the Royal Thai Army, Royal Thai Air Force and various political parties enable CK to win government- and military-related projects. Currently, more than 90% of the company’s customers are government agencies and state enterprises, while the remaining 10% are from the private sector. CK’s past jobs include the development of Bangkok international airport, Chulachomklao Royal Military Academy and the initial systems for the MRT.

Figure 11: Shareholder structure as of Sept 2013

Trivisvavet40%

Bangkok Bank2%

State Street Bank Europe

2%

Other investors56%


The Trivisvavet family, CK’s major shareholder, is well-connected. This will allow the company win more projects in the future


14 January 2014


The Core Business

CK is a general construction company with expertise in large-scale infrastructure projects such as roads, highways and industrial factories. The company acts as the main contractor, sub-contractor, or consortium member to both public and private sector customers. It also invests in infrastructure and utility businesses that are involved in areas like transportation, water work and energy. The company’s two major sources of income are:

i. Construction income:

The four construction divisions are:

Building construction: The company constructs medium-high rise

buildings of 15 floors and higher. These include structural construction, internal and external designs, and internal systems such as electrical and plumbing systems. As construction projects are often turnkey projects, the company is responsible for both the design and construction of buildings.

Road construction: Projects under this division include the construction of

highways and basic public utilities such as expressways, elevated highways and road expansion. Its major clients are government agencies.

Infrastructure construction: Projects undertaken by this division include

the construction of transportation, water management and telecommunication systems. CK has niche expertise and a good track record in infrastructure construction (eg MRTA initial system, Nakorn Pathom-Samut Sakorn water supply project)

Other construction & other income: Other construction jobs include small-

to mid-sized projects such as ground improvement for the first midfield satellite apron at the third runway project Suvarnabhumi airport. Its other income comprises rent, transportation income and interest income.

ii. Infrastructure investment

One of CK’s major sources of income is the dividend it receives from its investments in infrastructure and utilities businesses. Currently, it is invested in five companies: i) Bangkok Express Company Limited (BECL TB, NR), ii) Bangkok Metro Public Company Limited (BMCL TB, NR), iii) Thai Tap Water (TTW, SELL, TP: THB7.45), iv) CK Power (CKP, NR) and v) Xayaburi Power Company. Revenue from infrastructure spending accounts for around 90% of the company’s total turnover.

Figure 12: Revenue breakdown

Construction and other

services, 93.9%

Infrastructure investment,

6.1%

Figure 13: EBITDA breakdown

Construction and other

services, 69.3%

Infrastructure investment,

30.7%

Source: Company data Source: Company data, RHB estimates

Building roads and infrastructure is CK’s core business and accounts for 90% of its total revenue


14 January 2014


Construction Industry At a Glance

Currently, Thailand’s construction sector is worth an estimated THB1trn. Competition remains relatively modest as we expect infrastructure spending to grow continuously at 7% annually. Most construction projects are awarded via contract bids and project owners often select contractors based on: i) experience, ii) quality of work, iii) financial capability, and iv) the bidding price.

There are currently only three qualified bidders for large-scale domestic construction projects, namely Italian Thai Development (ITD TB, NR) Limited, Sino Thai Engineering (STEC TB, BUY, TP: THB39.60), and CK. CK commands about 20-25% of the market while ITD and STEC hold 28% and 15% shares respectively. The international competitors are construction companies from Japan, China, and Europe such as Kajima Corp (1812 JP, NR), Obayashi Corp (1802 JP, NR), Siemens (SIE GR, NR) and Bilfinger (GBF GR, NR), which are more likely to enter the fray via joint ventures with local partners and will be technology providers.

Figure 14: Market shares of industry players

CK23%

ITD28%STEC

15%

Others34%


Figure 15: Major competitors in the industry

Company Total Revenue (THB bn) Total Asset (THB bn)

CK 25.0 67.7

ITD 30.2 61.9 STEC 16.3 24.6


Competition remains modest as infrastructure spending continues to grow


14 January 2014


Current And Future Projects

Current orderbook

As at end-3Q13, CK’s orderbook stood at a record high THB118bn, buoyed by the Xayaburi and MRTA projects, which together account for 78% of its orderbook.

As the company records sales revenue by percentage of completion, these two projects should allow it to book sales totaling THB100bn over the next three years. We forecast a FY14 revenue of THB37bn, with the Xayaburi and MRTA projects contributing 33% and 40% respectively.

Figure 16: Two mainstay projects buoy CK’s orderbook

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1912 14

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44

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3Q13

(THB m)

Source: Company data

Figure 17: Breakdown of orderbook as of Sept 2013

Hydro Power44%

Building2%

Road, Bridge18%

Water work1%

Energy (other)0%

Other projects1%

MRT34%


MRTA projects awarded so far

Of the MRTA projects awarded so far, CK has won six jobs with a total of THB66bn - ITD won three projects worth THB36bn and STEC won four worth THB67bn. STEC and CK have the highest market share of MRTA projects - at approximately 40% and 39% respectively. All said, we believe CK has an advantage over STEC in terms of experience as it has won a variety of MRTA projects including elevated structures, trace work, and mechanical and electrical projects, while STEC has only won projects involving elevated structures.

Xayaburi and MRTA projects account for 80% of CK’s current orderbook

CK won around 39% of MRTA’s total projects awarded


14 January 2014


The MRTA projects awarded are already included in the company’s orderbook and our earnings forecasts. We estimate CK will recognise THB37bn of revenue from these projects over the next three years.

Figure 18: MRTA contracts already awarded

CK Line Value (THBm)

Elevated structure Bangsue-Sapan pra nung kloa Purple 14,842

M&E system and O&M services Purple 20,011

Underground Civil Sanam Chai-Tha Phra Blue 10,687

Trace work Blue 5,153

Elevated Structure and Depot Barring-Samutprakarn Green 13,167

Trackwork Barring-Samutprakarn Green 2,242

Total 66,102

ITD Line Value (THBm)

Tracework Purple 3,585

Underground Civil Hualumpong-Sanam Chai Blue 11,441

Civil work Bangsue-Rangsit Red 21,235

Total 36,261

STEC Line Value (THBm)

Elevated structure Sapan pra nung kloa- Bang pai Purple 13,050

Elevated structure Tao pun-Tha Phra Blue 11,284

Elevated structure Tha Phra- Blue 13,334

Civil work (station) Red 29,826

Total 67,494

Source: RHB estimates

Future projects

Potential projects in 2014

In 2014, CK plans to bid for six MRTA projects worth THB197bn and 10 double-tracking projects valued at THB222bn. Given its track record, we believe it will win at least 30% or ~THB59bn worth of MRTA projects up for bids in 2014. This will in turn support its earnings growth in 2015-18.

Currently, works relating to the dark green line from Mo Chit to Saphan Mai-Ku Kott have been approved and will be open for bids in April, regardless of the country’s political situation.

The projects that have not been approved by the Cabinet will most likely be delayed by some six months, or until the new government is formed.

CK’s orderbook will continue to breach record highs, supported by potential wins of new MRTA projects. We believe CK will win at least 30% of total projects up for grabs in 2014


14 January 2014


Figure 19: Projects up for bidding in 2014

Project Bidding in 2014 Value (THBm)

MRT

Red Line (Rangsit-Thammasat University) 6,000

Red Line (Bang Sue-Taling Chan) 7,000

Red Line (Taling Chan-Sala Ya) 8,000

Dark Green Line (Mo Chit - Saphan Mai- Ku Kott) 26,569

Pink Line (Khae Rai - Min Buri) 50,000

Orange Line (Thailand National Culture-Min Buri) 100,000

Double Track

Klong 19-Keang Koy 11,000

Map Kabao-Thanon Chira 26,000

Thanon Chira-Khon Kaen 33,000

Khon Kaen-Nong Khai 20,000

Nakhon Pathom-Nong Pladuk-Hua Hin 21,000

Hua Hin-Prachuap Khiri Khan 10,000

Lopburi-Paknampo 25,000

Nakhon Ratchasrima-Khon Kaen 28,000

Pak Nam Pho-Den Chai 30,000

Prachuap Khiri Khan-Chumphon 18,000

Motorway Bang Pa In-Saraburi-Nakorn Ratchasrima 68,780

Bang Yai-Ban Pong-Kanchanaburi 55,600

High Speed Train Bangkok-Korat-Nong Khai 180,000

Bangkok-Chiang Mai 400,000

Other Airport Rail Link (Extension) 30,000

Suvarnabhumi Airport (Phase II) 62,503

Total Value 1,216,452



14 January 2014


Financial Analysis We expect CK to report construction revenue of THB32bn (+55% y-o-y) in 2013, THB37bn (+14.5% y-o-y) in 2014, and THB40bn (+10% y-o-y) in 2015. The significant jump in revenue will be driven mainly by revenue realised from Xayaburi and the MRTA (purple, green and red lines) projects, which will make up 73% and 65% of our total turnover forecasts for FY14 and FY15 respectively.

Figure 20: CK’s sales growth

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2013F 2014F

Revenue EBITDA Net income (Before EI)

(THB bn)


CK’s gross profit margin is expected to remain relatively stable at 10.5% in FY14 and 10.6% in FY15 as it realizes revenue from the same projects as in FY13. In addition, cement and steel prices are expected to remain stable in FY14 as construction materials remain in oversupply owing to earlier expectations of the smooth passing of the infrastructure Bill in FY13.

However, the company’s net profit margin is expected to dip slightly to 1.9% in FY14 and FY15 from 2.1% in FY13 as income from associates will be lower going forward due to the disposal of its 11% stake in TTW at THB7.55 per share in 1Q13. After the sale, which resulted in an extraordinary gain of THB6bn in FY13, TTW was reclassified as a related company from associate previously. CK also sold its 7.9% stake in Bangkok Metro Company Limited (BMCL TB, NR) shares at THB1.15 apiece, from which it booked an exceptional gain of THB1bn in 2Q13. However, BMCL remains an associate company as CK has an outstanding balance of loans to BMCL and still has significant influence over the former.

Figure 21: CK’s associate and related companies

Company %holding Classification Revenue realization

BMCL 16.6 Associate company Equity account Xayaburi 30.0

CKP 31.7

BECL 15.1 Related company Mark-to-market

TTW 19.0


Core earnings are expected to come in at THB727m, THB 905m, and THB1,099m in FY13, FY14 and FY15 respectively. We believe the current political conflict has a minimal impact on our earnings forecasts since CK has already signed and secured most of its revenue from the Xayaburi and MRTA projects in FY14. Hence the limited downside risk to our earnings forecasts.

Construction revenue to jump 17% in FY14, supported by revenue from Xayaburi and the MRTA purple and blue line projects

Gross profit margin stable at 10% while net profit margin will dip slightly due to the divestment of some of its associates in FY13


14 January 2014


Figure 22: Earnings outlook


As a result of the disposal of its shares in TTW and BMCL, CK’s net D/E declined significantly to 1.5x in 3Q13 from 2.5x in FY12. This has allowed the company to build up a war chest for future construction projects and make new investments. Moreover, CK’s interest coverage ratio stood at 2.3x in 3Q13 compared with 1.1x in FY12. Thus, we are confident that the company will be able to repay its debts and stand ready to take on new projects.

Meanwhile, cash flow from its operations is expected to remain negative in the next 3-4 years as the company’s orderbook continues to hit fresh records. We expect CK to invest heavily in working capital, but believe that it can finance its projects via borrowings as its 1.5x D/E ratio is still significantly below its bank’s covenant requirement of 3x.

Figure 23: CK’s cash flow

2010 2011 2012 2013F 2014F 2015F

CFO (2,810) (6,148) 474 (4,892) (523) (1,483) CFI (340) 4,387 (5,228) 2,718 (1,295) (557) FCF (2,862) (7,229) (1,713) (6,692) (624) (1,637) CFF 1,528 2,154 5,348 2,921 1,079 2,020 Ending cash 4,566 4,959 5,553 6,301 5,561 5,541


Figure 24: Net debt to equity ratio

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2010 2011 2012 2013F 2014F

Net D/E Net D/E ratio

(THB bn) (X)



14 January 2014


Appendix Figure 25: CK’s current orderbook


(*) K-Factor projects: Escalation Factor

Figure 26: Map of MRTA projects

Source: Mass Rapid Transit Authority of Thailand


14 January 2014


Figure 27: Coverage of MRTA projects

Line Route (Km) Owner Cost Civil Constr. Start Complete

(THBbn) (THBbn) period

Dark red line Ransit-Thammasart 10.0 SRT 5.4 2.2 3 2014 2016

Light red line Talingchan-Salaya 14.0 SRT 7.5 5.8 5 2014 2017

Dark green line Morchit-Kukod 19.0 MRTA 58.6 29.2 5 2014 2018

Pink line Kaerai-Minburi 34.5 MRTA 58.6 26.7 4 2014 2017

Dark red line Bangsue-Hualumpong 25.9 SRT 38.5 22.2 4 2014 2017

Airport Rail Link Donmueng-Phyathai 21.8 SRT 28.6 15.4 5 2014 2018

Orange line Culture Centre-Minburi 21.8 MRTA 115.1 90.7 6 2015 2020

Yellow line Ladproa-Sumromg 30.4 MRTA 57.3 31.7 4 2016 2019

Dark green line Samutprakarn-Bangpoo 7.0 MRTA 13.3 8.7 5 2016 2020

Light red line Bangsue-Talingchan 15.3 SRT 6.2 - - - 2017

Blue line Bangsue-Tapra 27.0 MRTA 50.6 27.0 6 2011 2017

Dark green line Baring-Samutprakarn 13.0 MRTA 20.5 10.7 6 2012 2017

Purple line Bangsue-Bangyai 23.0 MRTA 12.2 12.2 8 2010 2017

Source: Mass Rapid Transit Authority of Thailand


14 January 2014


Financial Exhibits

Profit & Loss (THBm) Dec-10 Dec-11 Dec-12 Dec-13F Dec-14F

Total turnover 8,587 10,960 20,824 32,338 37,047

Cost of sales (8,338) (10,368) (18,457) (28,975) (33,157)

Gross profit 249 592 2,367 3,363 3,890

Gen & admin expenses (1,258) (1,461) (1,571) (1,617) (1,778)

Operating profit (1,009) (869) 796 1,746 2,112

Operating EBITDA (663) (434) 1,262 2,247 2,568

Depreciation of fixed assets (346) (435) (466) (501) (457)

Operating EBIT (1,009) (869) 796 1,746 2,112

Net income from investments 384 570 268 (390) (390)

Other recurring income 474 596 760 1,314 1,372

Interest expense (943) (1,079) (1,421) (1,714) (1,831)

Other non-recurring income 831 2,283 510 7,512 -

Pre-tax profit (263) 1,501 913 8,468 1,263

Taxation (56) (564) (313) (202) (331)

Minority interests (16) (10) (32) (27) (28)

Profit after tax & minorities (335) 927 568 8,239 905

Reported net profit (335) 927 568 8,239 905

Recurring net profit (1,166) (1,356) 58 727 905


Cash flow (THBm) Dec-10 Dec-11 Dec-12 Dec-13F Dec-14F

Operating profit (1,009) (869) 796 1,746 2,112

Depreciation & amortisation 346 435 466 501 457

Change in working capital (1,371) (4,276) (1,849) (7,846) (2,274)

Other operating cash flow 223 205 2,795 2,623 1,345

Operating cash flow (1,811) (4,505) 2,208 (2,976) 1,639

Interest paid (943) (1,079) (1,421) (1,714) (1,831)

Tax paid (56) (564) (313) (202) (331)

Cash flow from operations (2,810) (6,148) 474 (4,892) (523)

Capex (52) (1,081) (2,187) (1,800) (101)

Other investing cash flow (288) 5,468 (3,041) 4,518 (1,194)

Cash flow from investing activities (340) 4,387 (5,228) 2,718 (1,295)

Dividends paid (165) (331) (413) (2,472) (271)

Proceeds from issue of shares 207 - - - -

Increase in debt 1,593 2,483 5,675 5,393 1,350

Other financing cash flow (106) 2 86 - -

Cash flow from financing activities 1,528 2,154 5,348 2,921 1,079

Cash at beginning of period 6,188 4,566 4,959 5,553 6,301

Total cash generated (1,622) 393 594 748 (739)

Implied cash at end of period 4,566 4,959 5,553 6,301 5,561



14 January 2014


Financial Exhibits

Balance Sheet (THBm) Dec-10 Dec-11 Dec-12 Dec-13F Dec-14F

Total cash and equivalents 4,566 4,959 5,553 6,301 5,561

Inventories 5,611 9,093 11,294 15,037 17,227

Accounts receivable 2,089 4,453 5,324 8,085 9,188

Other current assets 1,723 3,604 8,506 11,958 13,559

Total current assets 13,989 22,109 30,677 41,381 45,535

Total investments 13,562 10,873 14,829 17,433 18,236

Tangible fixed assets 2,097 2,911 4,700 5,999 5,644

Total other assets 822 747 979 989 999

Total non-current assets 16,481 14,531 20,508 24,421 24,879

Total assets 30,470 36,640 51,185 65,801 70,414

Short-term debt 7,241 7,296 10,527 11,866 12,216

Accounts payable 1,626 2,513 5,462 7,823 9,616

Other current liabilities 2,237 4,652 8,221 7,980 8,817

Total current liabilities 11,104 14,461 24,210 27,669 30,648

Total long-term debt 13,074 15,502 17,946 22,000 23,000

Other liabilities 80 82 168 168 168

Total non-current liabilities 13,154 15,584 18,114 22,168 23,168

Total liabilities 24,258 30,045 42,324 49,837 53,816

Share capital 1,653 1,653 1,653 1,653 1,653

Retained earnings reserve (285) 311 466 6,233 6,867

Other reserves 4,602 4,420 6,439 7,775 7,775

Shareholders' equity 5,970 6,384 8,558 15,661 16,295

Minority interests 242 211 303 303 303

Total equity 6,212 6,595 8,861 15,964 16,598

Total liabilities & equity 30,470 36,640 51,185 65,801 70,414


Key Ratios (THB) Dec-10 Dec-11 Dec-12 Dec-13F Dec-14F

Revenue growth (%) (32.8) 27.6 90.0 55.3 14.6

Operating profit growth (%) 407.0 (13.9) 0.0 119.4 20.9

Net profit growth (%) (472.2) 0.0 (38.7) 1350.5 (89.0)

EPS growth (%) (447.4) 0.0 (38.7) 1350.5 (89.0)

Bv per share growth (%) (4.7) 6.9 34.1 83.0 4.0

Operating margin (%) (11.8) (7.9) 3.8 5.4 5.7

Net profit margin (%) (3.9) 8.5 2.7 25.5 2.4

Return on average assets (%) (1.1) 2.8 1.3 14.1 1.3

Return on average equity (%) (5.9) 15.0 7.6 68.0 5.7

Net debt to equity (%) 253.5 270.5 258.7 172.7 178.7

DPS 0.10 0.20 0.25 1.50 0.16

Recurrent cash flow per share (1.81) (3.72) 0.29 (2.96) (0.32)



14 January 2014


SWOT Analysis

One of the largest contractors in Thailand

Healthy orderbook of THB118bn

Political impasse could potentially delay construction projects

Competition from international contractors

Bidding of MRTA green line in 1QFY14 and orange line in 2HFY14.

Weak economy could slow down private spending

Fluctuating construction material prices

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

Company Profile Ch Karnchang is a general construction company with expertise in large-scale infrastructure projects. The company provides construction services to public and private sectors including building expressways, public utilities and industrial plants.


14 January 2014


Recommendation Chart

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NR

Recommendations & Target Price

Buy Neutral Sell Trading Buy Take Profit Not Rated

Source: RHB estimates, Bloomberg

Date Recommendation Target Price Price

2012-11-23 Trading Buy 10.8 9.0

Source : RHB estimates, Bloomberg

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RHB Guide to Investment Ratings Buy: Share price may exceed 10% over the next 12 months Trading Buy: Share price may exceed 15% over the next 3 months, however longer-term outlook remains uncertain Neutral: Share price may fall within the range of +/- 10% over the next 12 months Take Profit: Target price has been attained. Look to accumulate at lower levels Sell: Share price may fall by more than 10% over the next 12 months Not Rated: Stock is not within regular research coverage Disclosure & Disclaimer All research is based on material compiled from data considered to be reliable at the time of writing, but RHB does not make any representation or warranty, express or implied, as to its accuracy, completeness or correctness. No part of this report is to be construed as an offer or solicitation of an offer to transact any securities or financial instruments whether referred to herein or otherwise. This report is general in nature and has been prepared for information purposes only. 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23

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Thai Institute of Directors Association (IOD) – Corporate Governance Report Rating 2013

ADVANC BCP CPF ERW IVL NKI PS ROBINS SCB SNC TCAP TMB UV AOT BECL CPN GRAMMY KBANK NOBLE PSL RS SCC SPALI THAI TNITY VGI ASIMAR BKI CSL HANA KKP PAP PTT S&J SCSMG SPI THCOM TOP WACOAL BAFS BROOK DRT HEMRAJ KTB PG PTTEP SAMART SE-ED SSI THRE TRC BANPU BTS DTAC ICC LPN PHOL PTTGC SAMTEL SIM SSSC TIP TRUE BAY CIMB EASTW INTUCH MCOT PR QH SAT SIS SVI TASCO TTW BBL CK EGCO IRPC MINT PRANDA RATCH SC SITHAI SYMC TKT TVO

2S AYUD CNT GL KKC MBK OISHI SABINA STANLY TK TTCL zZMICO ACAP BEC CPALL GLOW KSL MBKET PB SAMCO STEC TLUXE TUF AF BFIT CSC GOLD KWC MFC PDI SCCC SUC TMILL TWFP AHC BH DCC GSTEL L&E MFEC PE SCG SUSCO TMT TYM AIT BIGC DELTA GUNKUL LANNA MODERN PF SEAFCO SYNTEC TNL UAC AKP BJC DTC HMPRO LH MTI PJW SFP TASCO TOG UMI AMANAH BLA ECL HTC LHBANK NBC PM SIAM TCP TPC UMS AMARIN BMCL EE IFEC LHK NCH PPM SINGER TF TPCORP UP AMATA BWG EIC INET LIVE NINE PPP SIRI TFD TPIPL UPOIC AP CCET ESSO ITD LOXLEY NMG PREB SKR TFI TRT UT APCO CENTEL FE JAS LRH NSI PRG SMT THANA TRU VIBHA APCS CFRESH FORTH JUBILE LST NWR PT SNP THANI TSC VIH ASIA CGS GBX KBS MACO OCC PYLON SPCG THIP TSTE VNG ASK CHOW GC KCE MAJOR OFM QTC SPPT TICON TSTH VNT ASP CM GFPT KGI MAKRO OGC RASA SSF TIPCO TTA YUASA *** PHATRA was voluntarily delisted from the Stock Exchange of Thailand effectively on September 25,2012

A BCH CRANE FPI IT MBAX PICO SGP TBSP TPP WIN AAV BEAUTY CSP FSS JMART MDX PL SIMAT TCCC TR WORK AEC BGI CSR GENCO JMT PRINC POST SLC TEAM TTI AEONTS BLAND CTW GFM JTS MJD PRECHA SMIT TGCI TVD AFC BOL DEMCO GJS JUTHA MK PRIN SMK TIC TVI AGE BROCK DNA GLOBAL KASET MOONG Q-CON SOLAR TIES TWZ AH BSBM DRACO HFT KC MPIC QLT SPC TIW UBIS AI CHARAN EA HTECH KCAR MSC RCI SPG TKS UEC AJ CHUO EARTH HYDRO KDH NC RCL SRICHA TMC UOBKH AKR CI EASON IFS KTC NIPPON ROJNA SSC TMD UPF ALUCON CIG EMC IHL KWH NNCL RPC STA TMI UWC ANAN CITY EPCO ILINK LALIN NTV SCBLIF SUPER TNDT VARO ARIP CMR F&D INOX LEE OSK SCP SVOA TNPC VTE AS CNS FNS IRC MATCH PAE SENA SWC TOPP WAVE BAT-3K CPL FOCUS IRPC MATI PATO SF SYNEX TPA WG *** CIMBI was voluntarily delisted from the Stock Exchange of Thailand effectively on September 25, 2012.

IOD (IOD Disclaimer)

การเปิดเผลผลการส ารวจของสมาคมส่งเสริมสถาบันกรรมการบรษิัทไทย (IOD) ในเรื่องการก ากับดูแลกิจการ (Corporate Governance) นี้เป็นการด าเนินการตามนโยบายของส านักงานคณะกรรมการก ากับหลักทรัพย์และตลาดหลักทรัพย์ โดยการส ารวจของ IOD เป็นการส ารวจและประเมินจากข้อมูลของบรษัทจดทะเบียนในตลาดหลักทรัพย์แห่งประเทศไทยและตลาดหลกัทรัพย์เอ็มเอไอ ที่มีการเปิดเผยต่อสาธารณะและเป็นข้อมูลที่ผูล้งทุนทั่วไปสามารถเข้าถงึได้ ดังนั้นผลส ารวจดังกล่าวจึงเป็นการน าเสนอในมุมมองของบุคคลภายนอกโดยไม่ได้เป็นการประเมินการปฏิบัติและมิได้มีการใช้ข้อมูลภายในในการประเมิน

อนึ่ง ผลการส ารวจดังกล่าว เป็นผลการส ารวจ ณ วนัที่ปรากฎในรายงานการก ากับดแูละกิจการบริษัทจดทะเบียนไทยเท่านั้น ดังนั้นผลการส ารวจจึงอาจเปลี่ยนแปลงได้ภายหลังวันดังกล่าว ทัง้นี้บริษัทหลักทรัพย์ อาร์เอสบี โอเอส เค จ ากัด (มหาชน) มิได้ยืนยันหรือรับรองถึงความถูกต้องของผลการส ารวจดงักล่าวแต่อย่างใด

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