INITIATING COVERAGE Eastern Polymer Group PLCepg-th.listedcompany.com/misc/analyst-research/... ·...

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The information in this report has been obtained from sources believed to be reliable. However, its accuracy or completeness is not guaranteed. Any opinions expressed herein reflect our judgment at this date and are subject to change without notice. This report is for information only. It is not to be construed as an offer, or solicitation of an offer to sell or buy any securities. We accept no liability for any loss arising from the use of this document. We or our associates may have an interest in the companies mentioned therein.

Premier plastic converter and innovator We initiate coverage of EPG as BUY. Earnings growth in FY2016F will be outstanding, doubling YoY on higher sales revenue and a markedly better margin, largely thanks to its automotive accessories business. This line offers high margin, is co-developed with leading automakers, and is being vertically expanded to the retail parts business. Margin will also be aided by lower plastic resin cost. We derive a target price of Bt10/share using sum-of-the-parts based on P/E multiple for each business. Despite a 40% jump from the IPO price, the current share price still offers 23% upside to our TP.

Automotive accessories key for FY2016F revenue. Of EPG’s three lines of business, we see automotive accessories under Aeroklas (ARK) as taking the driver’s seat for the next three years, supplying more than half of the 26% revenue growth YoY in FY2016F. After years of co-designing with a global automaker, this will begin pay off with new product lines: side-step, canopy and deck cover, each at a premium margin vs. bed liners for commercial vehicles. The acquisition of a distribution network in Australia will channel ARK’s products into a market with great potential.

Margin lifted by high-margin products and retail business. The automotive accessories business involves production of high-margin products and this will lift EPG’s profit margin and will also boost economies of scale for its plants. The acquisition of the TJM network in Australia gets it solidly into retail where margin is also higher. We estimate TJM’s gross margin at as high as 40%, though this is still far below its closest peer in the Australian aftermarket segment. We expect the lower feedstock cost for its packaging business to be another driver for blended margin in FY2016F to end the year at 33% from 27% in FY2015F. We expect this good margin to be sustained to FY2017F.

Profit to double in FY2016F. We expect EPG’s profit to double in FY2016F from the combination of higher sales revenue (+26% YoY) and wider margin (+55% YoY). Also contributing will be lower interest after it used IPO proceeds to pay down its loans. This cut net D/E to only 0.2-0.3x and upped credit availability for future investment, for which it has budgeted Bt2bn over FY2016-17F.

TP of Bt10/share on sum-of-the-parts. We derive a TP (end-2015) of Bt10/share based on sum-of-the-parts, implying blended P/E of 17.6x for its three key businesses plus distribution network. Since its debut in late Dec 2014, EPG’s share price has risen by 40% from its IPO price. We believe this reflects investor appetite for innovative companies and confidence in its earnings outlook. Note that the IPO shares were 6.5x oversubscribed. We view that the current valuation of 14.4x is undemanding against strong earnings growth in FY2016F. Key risks are lower demand for its products due to economic slowdown and more volatile feedstock cost and FX.

Forecasts and valuation Year to 31 Mar Unit 2013 2014 2015F 2016F 2017F Revenue (Btmn) 6,750 6,594 7,058 8,915 10,012 EBITDA (Btmn) 1,027 1,079 1,308 1,977 2,237 Core profit (Btmn) 701 534 780 1,581 1,824 Reported profit (Btmn) 787 631 765 1,581 1,824 Core EPS (Bt) 0.33 0.25 0.28 0.56 0.65 DPS (Bt) 0.00 0.00 0.09 0.17 0.20 P/E, core (x) 24.2 31.9 29.1 14.3 12.4 EPS growth, core (%) 65.4 (23.9) 9.6 102.6 15.4 P/BV, core (x) 5.4 4.5 2.7 2.3 2.0 ROE (%) 18.1 15.5 12.7 17.2 17.3 Dividend yield (%) 0.0 0.0 1.1 2.1 2.5 EV/EBITDA (x) 22.9 21.4 19.1 12.5 10.9 Source: SCBS Investment Research

INITIATING COVERAGE

Eastern Polymer Group PLC

Monday, March 09, 2015

BUY Stock Data Last close (Mar 6) (Bt) 8.10 12-m target price (Bt) 10.00 Upside (Downside) to TP (%) 23.46 Mkt cap (Btbn) 22.68 Mkt cap (US$mn) 700 Bloomberg code EPG TB Reuters code EPG.BK Risk rating M Mkt cap (%) SET 0.16 Sector % SET 6.53 Shares issued (mn) 2,800 Par value (Bt) 1 12-m high / low (Bt) 8.9 / 6.2 Avg. daily 6m (US$mn) 12.68 Foreign limit / actual (%) 49 / 1 Free float (%) 25.0 Dividend policy (%) ≥ 30 Price Performance

4.04.55.05.56.06.57.07.58.08.59.0

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14

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14

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5

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5

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5

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5

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-15

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-15

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-15

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-15

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15

EPG — Stock Price

EPG — Rel. to SET (rebased)

Stock Price (Bt)

Source: SET, SCBS Investment Research

Share performance 1M 3M 12M Absolute (4.1) -- -- Relative to SET (1.4) -- -- Source: SET, SCBS Investment Research

Chaipat Thanawattano Securities Fundamental

Investment Analyst (66-2) 949-1005

[email protected]

Eastern Polymer Group PLC Monday, March 09, 2015

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Financial statement Profit and Loss Statement (Btmn) FY March 31 2013 2014 2015F 2016F 2017F

Total revenue 6,750 6,594 7,058 8,915 10,012 Cost of goods sold 4,928 4,873 5,152 5,970 6,708

Gross profit 1,822 1,721 1,906 2,945 3,304 SG&A 1,202 1,146 1,108 1,512 1,641

Other income 50 63 40 40 40 Interest expense 240 356 243 145 145 Pre-tax profit 428 282 596 1,328 1,558

Corporate tax 64 54 16 23 45 Equity a/c profits 337 306 200 275 310

Minority interests 0 0 0 0 0 Core profit 701 534 780 1,581 1,824 Extra-ordinary items 86 97 (15) 0 0

Net Profit 787 631 765 1,581 1,824 EBITDA 1,027 1,079 1,308 1,977 2,237

Core EPS (Bt) 0.33 0.25 0.28 0.56 0.65 Net EPS (Bt) 0.37 0.30 0.27 0.56 0.65

DPS (Bt) 0.00 0.00 0.09 0.17 0.20

Profit and Loss Statement (Btmn) FY March 31 3Q13 4Q13 1Q14 2Q14 3Q14

Total revenue 1,635 1,599 1,790 1,676 1,669 Cost of goods sold 1,257 1,164 1,348 1,230 1,244

Gross profit 378 435 442 446 425 SG&A 260 322 280 249 281

Other income 1 11 9 7 9 Interest expense 108 59 65 57 66 Pre-tax profit 6 68 105 141 89

Corporate tax 3 26 11 21 (15) Equity a/c profits 74 61 57 43 45

Minority interests 0 0 0 0 0 Core profit 76 104 152 162 149 Extra-ordinary items 40 (5) 8 (21) (1)

Net Profit 116 99 160 142 148 EBITDA 238 244 290 311 286

Core EPS (Bt) 0.04 0.05 0.07 0.08 0.07 Net EPS (Bt) 0.06 0.05 0.08 0.07 0.07

Balance Sheet (Btmn) FY March 31 2013 2014 2015F 2016F 2017F

Total current assets 3,364 3,094 3,491 4,216 5,102 Total fixed assets 7,323 7,805 8,917 9,655 10,238 Total assets 10,687 10,899 12,408 13,871 15,340

Total loans 6,580 6,216 2,885 2,885 2,885 Total current liabilities 6,075 5,665 2,435 2,570 2,691

Total long-term liabilities 1,489 1,451 1,451 1,451 1,451 Total liabilities 7,563 7,116 3,886 4,021 4,142 Paid-up capital 2,100 2,100 2,800 2,800 2,800

Total equity 3,123 3,782 8,521 9,850 11,197 BVPS (Bt) 1.49 1.80 3.04 3.52 4.00

Balance Sheet (Btmn) FY March 31 3Q13 4Q13 1Q14 2Q14 3Q14

Total current assets n.a. 3,094 3,266 3,289 4,730 Total fixed assets n.a. 7,805 7,850 7,808 7,939 Total assets n.a. 10,899 11,116 11,097 12,668

Total loans n.a. 6,216 6,160 6,159 3,727 Total current liabilities n.a. 5,665 5,692 4,367 3,341

Total long-term liabilities n.a. 1,451 1,462 2,806 1,263 Total liabilities n.a. 7,116 7,154 7,173 4,604 Paid-up capital n.a. 2,100 2,100 2,100 2,800

Total equity n.a. 3,782 3,961 3,922 8,062 BVPS (Bt) n.a. 1.80 1.89 1.87 2.88

Cash Flow Statement (Btmn) FY March 31 2013 2014 2015F 2016F 2017F

Core Profit 701 534 780 1,581 1,824

Depreciation and amortization 359 441 469 504 534 Operating cash flow 521 915 820 1,644 2,056

Investing cash flow (409) (540) (990) (1,243) (1,117) Financing cash flow (1,208) (360) 641 (252) (476) Net cash flow (1,096) 15 472 149 463

Main Assumptions

2013 2014 2015F 2016F 2017F

Sales growth (YoY%)

- Insulation rubber 5.0% 4.4% 13.7% 16.9% 8.5% - Auto accessories 32.0% -11.9% -1.3% 53.9% 18.2%

- Packaging 23.1% 2.9% 9.3% 9.9% 8.7% - TJM -- -- -- -- 15.0%Gross profit margin 27.0% 26.1% 27.0% 33.0% 33.0%

Key Financial Ratios 2013 2014 2015F 2016F 2017F

Gross margin(%) 27.0 26.1 27.0 33.0 33.0

Operating margin(%) 9.2 8.7 11.3 16.1 16.6

EBITDA margin(%) 15.2 16.4 18.5 22.2 22.3

EBIT margin(%) 9.9 9.7 11.9 16.5 17.0

Net profit margin(%) 11.7 9.6 10.8 17.7 18.2

ROE (%) 18.1 15.5 12.7 17.2 17.3

ROA (%) 6.4 4.9 6.7 12.0 12.5

Net D/E (x) 2.1 1.6 0.3 0.2 0.1

Interest coverage (x) 4.3 3.0 5.4 13.7 15.5

Debt service coverage (x) 0.2 0.2 0.3 1.2 1.3

Payout Ratio (%) 0.0 0.0 32.9 30.1 30.7

PE Band Chart

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PE Band — EPGPrice (Bt)

18.0x20.4x22.8x25.2x27.6x30.0x

12-Month Cumulative directors trade 12 Month cumulative chg in foreign ownership versus cumulative chg in SET index

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Cumulative SET (LHS)

Cumulative EPG (RHS)

Cumulative Change in SET index Cumulative Change in Foreign Ownership

Source: SET, SCBS Investment Research


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1. Automotive accessories key for FY2016F revenue

EPG is involved in three lines of business: insulation rubber (under Aeroflex – AFC), non-drilled bed liners and other accessories for pickup trucks (under Aeroklas – ARK) and plastic packaging (under Eastern Polypack – EPP), all of which contribute nearly equally to sales revenue. Growth in all three is undergirded by its innovations for materials, designs and production processes, giving it a premium to peers and translating into a sharper competitive edge and profit margin. Behind these innovations is an in-house R&D center. Each one is protected by patents. In addition to innovative materials and production processes, it has another key to success - co-development with customers. Although this is time-consuming and requires pre-investment for R&D, in the end it ensures a superior profit margin and certain flow of orders that give economies of scale. The company will begin to harvest this time-consuming process from FY2016F onwards, and it is this that backs our projection of 26% revenue growth.

Figure 1: Revenue breakdown by business (9MFY15)

Insulation rubber

32.3%

Automotive accessories28.7%

Plastic packaging24.3%

Others14.8%

Source: EPG, SCBS Investment Research

1.1 More orders from ODM business. EPG’s unceasing R&D for automotive accessories has started to bear fruit. We believe this will be in the driver’s seat for the next three years, supplying more than half of the 26% revenue growth YoY in FY2016F. This is based on EPG’s high product quality that has attracted the attention of global automakers like Ford and Toyota, who are signing EPG on to undertake joint design for accessories for their new vehicle models. A new product line, “side step” is the first example of this product development trend, and is expected to be the key earnings driver for the next three years. This will be the first plastic-based side step for pickup trucks and sport utility vehicles or suburban utility vehicles (SUV), made from polypropylene alloy. We expect the combined proportion of three new-generation products – canopy, deck cover and side step – to increase from 12.6% during 2012-2014 to 34.8% in 2015-2018.

Figure 2: Revenue breakdown by product (2012-14) Figure 3: Expected revenue breakdown in 2016-18F

Canopy

8.4%

Other

Passenger

Cars

Accessories

19.3%

Plastic Sheet

4.4%

Deck Cover

4.2%Bed Liner

63.6%

Canopy

19.0%

Side Step

6.7%

Plastic Sheet

3.1%

Other

Passenger

Cars

Accessories

15.3%

Bed Liner

46.7%

Deck Cover

9.1%


1.2 Vertical expansion to retail distribution will improve sales and margin. To secure a market for ARK’s products EPG has expanded the distribution channel for its automotive accessories business in Australia, a primary destination for Thailand’s vehicle exports. ARK is acquiring one of Australia’s major automotive accessories


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distributors, TJM Products Pty Ltd (TJM), at a cost of Bt566.1mn, above the net asset value of Bt524.28mn, mainly for TJM’s inventory and brand and two subsidiaries in the US and China.

Why TJM. In 2011 ARK set up a representative office in Australia (Aeroklas Australia) to market ARK products manufactured in Thailand and at least nine TJM stores (out of 21 distributors) were already distributing ARK products across Australia before the purchase of TJM, according to Aeroklas Australia’s website. Introducing a new brand in Australia, where brand loyalty is traditionally high, has proved to be difficult despite the premium quality of the products. Thus, leveraging off the market’s familiarity with TJM gained over 42 years, offered the best solution to penetrating this high-potential market. ARK had earlier entered into negotiations with TJM’s former management to become one of its suppliers for accessories for commercial vehicles, i.e. canopies and deck covers, but the talks ended without resolution when TJM’s shareholder, CMI Limited, came in, restructured TJM’s management and reviewed its business strategy. At the same time, this opened the way for ARK to approach the new management for an acquisition. We view that this move begins a new chapter for ARK’s business, not only in Australia but in the global market given the strong brand recognition for TJM, particularly in western countries.

Figure 4: Key players in Australian automotive aftermarket industry


Figure 5: TJM’s distribution network

Source: TJM website, SCBS Investment Research

This acquisition will facilitate the expansion of Aeroklas’ network in Australia via the 58 TJM distributor outlets and 27 licensed stores across the country. As ARK becomes the owner of the TJM brand, its expansion to global distribution will be more easily achieved, giving it access to high-yield markets in the West. ARK will also be able to build on TJM’s relationship with global partners to expand the market for ARK’s products internationally. Figure 6 shows current distributors of TJM products, ranging from the US, Europe and the Middle East.


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Figure 6: TJM’s global partners

Source: TJM website, SCBS Investment Research

Financially, this acquisition will add more than Bt1bn p.a. to sales revenue, according to management guidance. At the same time, the near-term impact on the bottom line may be little, given the low profitability of the business under the former owner. ARK will have to replace old products with its high-quality, strong margin products to gain market share. It will also need to rationalize marketing expenses. This will take time but will lay a strong foundation for EPG’s automotive accessories business for the long haul. We expect ARK’s products to fill about 20% of TJM’s current product line with the remainder sourced from ARK’s alliances in Thailand and existing suppliers for TJM in China. This last will be gradually replaced by ARK’s new products or other sources in Thailand to avoid paying import duty since Thailand has a Free Trade Agreement with Australia and China does not. Sourcing from Thailand could in addition boost TJM’s competitive advantage in terms of more up-to-date products for the aftermarket segment as Thailand is also an export hub for automobiles sold in Australia.


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2. Margin lifted by high-margin products and retail business

The automotive accessories business involves production of high-margin products and TJM’s retail business will lift EPG’s profit margin and also boost economies of scale for its plants. We expect the lower feedstock cost for its packaging business to be another driver for blended margin in FY2016F to end the year at 33% from 27% in FY2015F. We expect this good margin to be sustained to FY2017F.

2.1 ODM business model ensures superior margin. ARK’s gross margin of 21-22% for the past two years was below EPG’s overall margin of 26-27%. This reflected weak demand in the domestic market, mainly for commercial vehicles, with a fall in sales of 9% YoY in 2013 and 30% in 2014. Adding to the cost burden was the fact it shoulders the development cost for new products designed in concert with automakers. These products are classified as ODM (original design manufacturing) parts, and give a better margin than ARK’s original products such as the bed liner. Unfortunately, weak sentiment in the auto market led automakers to delay new product launches from 2014 to 2015 but their orders from ARK thus far in 2015 suggest they may be introducing their new models in summer 2015. This would mean positive impact from the new products will materialize from FY2016F. According to management the margin of these ODM products is as high as 30%, far better than the below-25% for ARK’s other products in the aftermarket segment. The high margin of ODM products also includes reimbursement of the cost of R&D during the product development phase.

2.2 Higher margin from retail business in Australia. The acquisition of the TJM network in Australia gets it solidly into retail where margin is also higher. We estimate TJM’s gross margin at a high 40%, though this is still far below its closest peer in the Australian aftermarket segment.

2.3 Benefits from lower petrochemical prices. We expect EPG to benefit from the currently lower oil prices which have sent prices of plastic resin, EPG’s main raw material, into a 15-21% nosedive over the past six months. This will begin to show up in the costs for the packaging business from late FY3QF-early 4QFY2015 (Dec-Mar 2015) given average inventory days of 30-45, followed by automotive accessories (60-75 days) and insulation rubber (90-100 days). We estimate the gross margin of the packaging business will expand to 28-29% in FY2016F from 21% in 3QFY15, assuming the company also passes 20% of the fall in feedstock cost to customers. According to management, EPG’s total annual feedstock requirement is 40ktpa. With each US$10/t fall in raw material cost and 20% passed through to customers, cost savings will add Bt11mn more to earnings. Based on the current price of plastic resins, which has fallen by US$500/t on average, FY2016F earnings could be boosted by at least Bt550mn from FY2015F. This is already accounted for in our earnings estimate for FY2016F.


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Figure 7: Petrochemical price movement

800

900

1,000

1,100

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1,300

1,400

1,500

1,600

1,700

Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15

PolypropyleneUS$/t

800

900

1,000

1,100

1,200

1,300

1,400

1,500

1,600


PETUS$/t

800

1,000

1,200

1,400

1,600

1,800

2,000


Polystyrene (PS)US$/t

800

900

1,000

1,100

1,200

1,300

1,400

1,500

1,600

1,700


High-Density Polyethylene (HDPE)US$/t

Source: Datastream, SCBS Investment Research


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3. Profit to double in FY2016F

Earnings to leap in FY2016F. We expect net profit to double in FY2016F mainly on revenue growth (+29% YoY), driven by automotive accessories and better profit margin. This is due to the commercialization of high-margin products that it has been developing over the past two years, including the side step and canopy for commercial vehicles. The new distribution network in Australia will also boost this business line’s revenue. We view that this acquisition may not have much impact on ARK’s sales volume since we assume only 20% of TJM will be sold via TJM. Nonetheless, since retail by nature offers a higher margin, it could widen the overall margin in FY2016F, helping offset the higher SG&A expenses, mainly marketing expenses at TJM.

We expect equity income, largely from Tokai Eastern Rubber (TER), to take a back seat in terms of supporting earnings as core businesses begin to take center stage. We estimate equity income, mainly from TER, to improve gradually in FY2016F after a hiccup in FY2015F due to higher expenses caused by business expansion in India.

9MFY15 earnings review. EPG’s net profit in 9MFY15 fell 15.4% YoY to Bt449mn (EPS=Bt0.21) due to lower profit sharing from associated companies, mainly TER, which had to take on losses from its new investment in India plus an FX loss of Bt14mn in the period against an FX gain of Bt102mn in 9MFY14. Still, operating profit improved 8.6% YoY on a slight increase in gross margin, mainly from insulation rubber, where gross margin increased to 32.9% from 28.3% in 9MFY14. This offset the slip in packaging business margin to 19.2% in 9MFY15 from 22.9% in 9MFY14, despite the fact that the company started to benefit from lower feedstock cost in Dec 2014. The company also managed to trim its SG&A expenses in 9MFY15 by 1.8% YoY to only 15.7% of sales revenue from 16.5%.

Sales revenue inched up 2.8% YoY, dragged down by a 15% decline in domestic sales of automotive accessories due to lower domestic commercial car sales (-27% YoY) in the period. Its two other key businesses, insulation rubber and plastic packaging, displayed sales growth of 12% and 9% YoY, respectively.

Figure 8: Quarterly financial statement FY (end March) 3Q14 4Q14 1Q15 2Q15 3Q15 QoQ% YoY% 9M14 9M15 YoY%

Income Statement (Btmn)

Revenue 1,635 1,599 1,790 1,676 1,669 (0.4) 2.1 4,995 5,136 2.8 Gross profit 377 434 442 446 425 (4.7) 12.6 1,288 1,313 1.9

EBITDA 241 230 282 310 277 (10.8) 14.7 788 869 10.4 Core profit 76 104 152 162 149 (8.3) 95.1 430 463 7.8

Net profit 116 99 160 142 148 4.0 27.3 531 449 (15.4) EPS (Bt/share) 0.06 0.05 0.08 0.07 0.07 3.0 26.1 0.25 0.21 (16.2)

Balance Sheet (Btmn) Total Assets 0 10,899 11,116 11,097 12,668 14.2 n.a. 0 12,668 n.a. Total Liabilities 0 7,116 7,154 7,173 4,604 (35.8) n.a. 0 4,604 n.a.

Total Equity 0 3,782 3,962 3,923 8,064 105.6 n.a. 0 8,064 n.a. BVPS (Bt/share) n.a. 1.80 1.89 1.87 2.88 54.2 n.a. n.a. 2.88 n.a.

Financial Ratios Gross Margin (%) 23.1 27.1 24.7 26.6 25.5 (1.1) 2.4 25.6 25.8 0.2

EBITDA margin (%) 14.8 14.4 15.8 18.5 16.6 (1.9) 1.8 16.9 15.8 (1.2) Net Profit Margin (%) 7.1 6.2 8.9 8.5 8.8 0.4 1.7 8.8 10.6 1.9 ROA (%) n.a. n.a. 5.8 5.5 5.1 (0.4) n.a. n.a. 5.1 n.a.

ROE (%) n.a. n.a. 16.5 15.7 10.1 (5.6) n.a. n.a. 10.1 n.a. D/E (X) n.a. 1.9 1.8 1.8 0.6 (125.8) n.a. n.a. 0.6 n.a.


4QFY15 outlook. We expect its profit to leap QoQ in 4QFY15, benefiting from lower feedstock cost, mainly for the packaging business (EPP) which normally holds inventory of 30-45 days compared with 60-75 days for ARK and 90-100 days for AFC. The latter two companies should begin to benefit from FY2016 onwards. Another driver for 4QFY15 earnings is lower interest expense after using IPO proceeds to pay down debt. The impact of lower interest expense should be fully seen in FY2016.

For FY2015F, we estimate full-year net profit of Bt765mn, up 21% YoY on margin improvement, lower SG&A to sales and lower interest expense. Its gross margin will be driven by the packaging business, accounting for 27% of total sales, aided by lower feedstock cost. Note that the average price for key feedstock, i.e. PP, PS and PET, has fallen by 15-21% in the past six months. However, this will be offset by lower


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contribution from associated companies (-35% YoY), mainly TER, which is shouldering losses from its investment to establish a production base in India.

Internal cash should be sufficient to finance capital expenditure. The company plans to spend Bt2.55bn during 2015-17F to expand capacity of high margin products such as the canopy, deck cover and side step as well as the EPP PET production line. It will in addition expand its distribution network overseas to gain a higher market share for its new automotive accessory product lines. This will be financed partly by the IPO proceeds and partly from cash flow from operations, which are expected to be stronger from 2015F.

Figure 9: Investment plan (FY2015-17) Btmn FY2015F FY2016F FY2017F Total

AFC - 300 US production plant

300 Europe production plant

600

ARK 350 Distribution channel

350 Distribution channel

300 Deck cover/canopy production plant

100 Side step & others production plant

1,100

EPP 250 PET, GPPS production

plant

100 Sheet production plant

400-500 PET full automation

production plant

850

Total 600 1,050 900 2,550 Source: EPG, SCBS Investment Research

Net cash position strong despite new investment. The IPO proceeds have strengthened the company’s financial position, reducing net D/E from 1.8x at the end of 2QFY15 (Sep 2014) to only 0.4x at the end of 3QFY15 (Dec 2014) after EPG repaid Bt3bn in loans. By our estimates, net debt/equity will remain low for the next three years at 0.2-0.3x despite the planned new investment of Bt2.55bn. This will make it easier to take on new investments as opportunities come up. This excludes Bt477mn in fixed deposits at banks used as collateral for loans at the end of Dec 2014.


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4. TP of Bt10/share based on sum-of-the-parts valuation

We derive our end-2015 target price for EPG based on sum-of-the-parts to reflect its three key businesses as well as investment in associated companies. As the SET’s only innovative company, direct comparison with local peers may be unfair. A look at EPG’s industry peers in the world market is more justified in our view. We assign the industry’s P/E to each of EPG’s business lines, including its equity interest in Tokai Eastern Rubber (TER) and Zeon Advanced Polymix (ZAP), to derive a fair value of Bt10/share, implying P/E of 17.6x for 2016F and PEG of only 0.5x based on our EPS growth forecast of 34% p.a. for 2015-17F.

Figure 10: Sum-of parts valuation End-Dec 2015 Value (Btmn) Valuation method Reason

Insulation rubber (AFC) 10,280 Assigned P/E = 21x Industry average Auto accessories (ARK) 7,680 Assigned P/E = 15x Industry average Packaging (EPP) 5,450 Assigned P/E = 19x Industry average Equity income (TER &ZAP) 4,400 Assigned P/E = 16x Industry average Total 27,810 Number of shares 2,800 Fair value 9.93 Source: SCBS Investment Research

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Figure 11: Peer valuation (price as of 3 Mar 14) Company P/E (x) EPS Growth (%) P/BV (x) ROE (%) Div. Yield (%) EV/EBITDA (x)

14F 15F 16F 14F 15F 16F 14F 15F 16F 14F 15F 16F 14F 15F 16F 14F 15F 16F

Owens Corning 19.2 20.0 14.6 18.6 -4.3 37.1 1.2 1.2 1.1 5.3 6.3 8.6 1.6 1.7 1.8 9.3 8.6 7.7

Kingspan Group PLC 27.8 21.0 17.6 19.1 32.0 19.3 3.1 2.7 2.4 11.8 13.5 14.4 1.0 1.2 1.5 16.5 12.9 11.2 Average – AFC 23.5 20.5 16.1 18.9 13.8 28.2 2.2 1.9 1.8 8.5 9.9 11.5 1.3 1.5 1.6 12.9 10.7 9.4

ARB Corp Ltd 21.2 20.1 18.2 -3.7 5.5 10.4 4.3 4.0 3.7 21.2 20.9 21.0 6.1 6.2 2.8 14.8 13.4 12.0 PCS Machine Group Holding PCL 12.6 10.1 8.6 -41.3 24.9 17.0 2.4 2.2 2.2 26.9 21.0 21.2 4.6 5.3 5.9 8.8 7.3 6.9 Average – ARK 16.9 15.1 13.4 -22.5 15.2 13.7 3.4 3.1 2.9 24.0 20.9 21.1 5.4 5.8 4.3 11.8 10.3 9.4

Huhtamaki OYJ 21.2 17.5 16.0 36.5 20.7 9.4 3.2 2.9 2.6 14.7 17.0 16.8 2.2 2.6 2.9 11.6 9.8 9.1 Berry Plastics Group Inc 41.8 22.2 17.6 64.0 88.2 26.4 -49.9 54.4 14.7 n.m. 830.8 107.9 n.a n.a n.a 10.0 9.1 8.7

Daibochi Plastic & Packaging Industry 21.2 16.7 15.2 -11.1 27.0 9.9 3.0 2.8 2.6 14.8 19.4 19.9 3.0 3.9 4.2 12.7 10.0 9.1 Average – EPP 28.1 18.8 16.3 29.8 45.3 15.2 -14.6 20.0 6.6 14.7 289.0 48.2 2.6 3.3 3.5 11.5 9.7 9.0 Sumitomo Riko Co Ltd 32.7 20.3 14.2 -13.3 61.6 42.9 0.6 0.6 0.6 1.9 3.0 4.2 1.7 1.8 1.8 5.2 4.5 3.9

Zeon Corp 13.1 12.0 10.7 4.1 9.8 11.5 1.3 1.2 1.1 10.9 10.8 11.0 1.2 1.3 1.4 6.3 5.9 5.6 JSR Corp 17.7 15.9 14.3 5.6 11.3 10.7 1.5 1.4 1.3 8.7 9.1 9.4 1.8 1.9 2.0 7.3 6.6 6.0

Average – Equity income 21.2 16.0 13.1 -1.2 27.6 21.7 1.1 1.1 1.0 7.1 7.6 8.2 1.6 1.7 1.7 6.3 5.7 5.2

Note: The numbers are based on consensus forecast Source: Bloomberg Finance LP

We view that EPG should trade at a premium P/E to its industry peers as its products are premium, coming out of its own R&D. These are difficult to copy (insulation rubber) and are protected by patents (plastic packaging and automotive accessories). As an ODM for leading automakers, it is superior to OEM players. A strong platform provided by an expanding distribution network for insulation rubber and automotive accessories (via TJM) will be a key competitive strength for the long horizon.

Key risk factors

• Weaker than expected global economy. Our valuation hinges heavily on the gradual recovery of the world economy, which is vital to construction activity, auto sales and private consumption.

• Feedstock price volatility. The company’s key feedstock (plastic resins and EPDM rubber) are global commodities, which are subject to price cyclicality. At the same time, as a specialty plastic converter, we believe the product price fluctuation will be lower than for upstream products. Also, it has bargaining power with feedstock suppliers as well as customers if feedstock price volatility is excessive.

• Foreign exchange fluctuations. The company’s export sales are subject to FX exposure, mainly USD, as international sales of EPDM insulation rubber and automotive accessories businesses account for 45-69% of sales revenue for each product and for 38% of the company’s total sales revenue. Nonetheless, a natural hedge can be applied to this, as there is an offset provided by the importation of raw materials, mainly EPDM rubber, which is also in USD.


11

Appendix

Company overview

Eastern Polymer Group PLC (EPG) is a family-owned holding company with three key businesses: insulation rubber, automotive accessories and plastic packaging. The company was founded in 1978 by the Vitoorapakorn family, with in-house research for high-quality insulation rubber under the “Aeroflex” brand, holding patents around the world. In 1994 the company expanded into automotive accessories (bed liners for pickup trucks) seeing business opportunity provided by its research and development team. This led to the manufacture of pickup bed liners under the “Aeroklas” brand. This has a patented installation system, with no drilling required. The last business – plastic packaging – began in 2001 after it acquired a distressed asset from a local plastic packaging producer and turned the plant around to produce high-quality packaging products for global brands, including McDonalds and KFC, under the “EPP” brand. All three business lines are based on its expertise in converting petrochemical polymer into high-grade specialty products. These three businesses contributed almost equally to sales in FY2014 (ending March 2014). However, the insulation rubber business generated 45% of total gross profit in the same period.

In 1995 the company invested in two joint ventures: 20% in Tokai Eastern Rubber (Thailand) (TER) and 27% in Zeon Advanced Polymix (ZAP) to produce automotive parts (anti-vibration rubber) and supporting industry. Both are JVs with leading Japanese manufacturers Tokai Rubber Industries (under Sumitomo group) and Toyota Tsusho and Zeon Group. This gives EPG competitive advantage in terms of early access to information from auto industry development in Japan.

Figure 12: Group structure



12

Figure 13: EPG’s key milestones in pictures


Best-in-class innovation. Innovation has been a hallmark for EPG’s success since its birth 36 years ago. This has been supported by continuous in-house research and development to create breakthrough innovative products for daily life while focusing on environmental impact, health and safety. This translates into a premium margin to peers and lower earnings volatility from fluctuations in feedstock cost.

Figure 14: Innovation-oriented organization


13


Global distribution network. A far-reaching distribution network covering more than 100 countries around the globe is key to reaching an international market where demand for insulation rubber and bed liners is growing continuously, despite economic foibles. The approach to network expansion is conservative and asset-light to minimize both market and financial risks. This innovative production process also enables the company to minimize logistics cost and retain its confidential know-how within the home base in Thailand, protecting it from duplication by rivals.

Brand recognition by global customers. EPG’s products are well-recognized among its customers globally. Most of these are top-tier multinationals and include Ford, McDonald and KFC. The stature of these customers and their acceptance of its products means the sky is the limit for revenue growth.

Figure 15: Quality achievements and recognition


Innovative products protected by patents. EPG’s innovative products are fully protected by 239 patents around the world, that add heft to its eyes-only development technique, production process and design, and underscores long-term sustainability. The life of the patents ranges between 10 to 20 years, but is lengthened by continuous development by its dedicated R&D center, EPG Innovation Center (EIC) as it works to solidify its position as market leader for innovative products in each business segment.


14

Industry outlook

Insulation rubber

Demand for insulation rubber is highly correlated with the construction industry globally, with expected CAGR of 4.1% p.a. during 2013-18, based on analysis by Business Monitor International, an independent global industry research firm. The market value of construction is expected to rise from US$8.5trn in 2013 to US$10.4trn by 2018. The market value of insulation accounts for only 0.2% of this value meaning the value of the insulation industry could increase to US$21bn by 2018, working out to US$168mn for insulation rubber since it takes 8% of the total insulation market.

The market is dominated by three players, Amacell (USA), K-Flex (Italy) and Aeroflex (Thailand). Aeroflex stands out as the only one using EPDM rubber as feedstock. Aeroflex’s market share has risen over time, from 8% in 2007 to 10% in 2013.

Figure 16: Global construction market value

8.58.9 9.2 9.5

10.010.4

0

2

4

6

8

10

12

2013 2014 2015 2016 2017 2018

Cagr = 4.1% p.a.US$, trn

Source: Business Monitor International, EPG, SCBS Investment Research

The global market value of overall insulation was around US$17bn in 2013. This is expected to increase with a CAGR of 4.3% p.a. to US$21bn by 2018, compared with the 4.1% p.a. CAGR for global construction market value. Still, insulation rubber accounts for only 8% of the market, which is dominated by conventional materials such as fiberglass and plastic foam. The cost of an insulation system is estimated at only ~0.2% of construction cost, making in our view, investing in insulation is less price sensitive. Thus, to get better energy savings and safety than possible with conventional insulation rubber, the market for EPDM-based insulation rubber, we believe, will continue to grow at greater rate than the construction industry as a whole. We draw this conclusion by analyzing patterns for EPG’s customers around the world, including the Fukushima nuclear power plant.

Figure 17: Global market share of insulation rubber (2013)

Amacell (USA)

40%

Others

35%

K-Flex (Italy)

15%

Aeroflex

10%


Asia to provide great potential. Location-wise, Asia is the largest potential market for insulation as suggested by its share in 2013 at 40% and annual growth rate of 5% p.a. during 2013-18F. This should be a positive for insulation suppliers in Asia as logistics cost would be more competitive.


15

Figure 18: Construction value (2013-18F) by location Construction value breakdown

(2013)

Asia

40%

Europe

20%

Africa

8%

South America

7%

Middle East

16%

North America

9%

Growth of construction value by market (2013-18F)

5.0% 4.8%4.5% 4.5%

2.4%2.0%

0%

1%

2%

3%

4%

5%

6%

Asi

a

South

Am

eri

ca

Mid

dle

East

Afe

rica

Euro

pe

Nort

h

Am

eri

ca

Source: Business Monitor International, EPG, SCBS Investment Research

Growth in air-conditioning industry is supportive. The use of insulation for air conditioning and refrigeration systems is an important segment, though scale is smaller than the construction industry. Demand is growing steadily for air conditioning as a result of global warming. During 2009-2013, the number of households with air conditioners increased from 31.1% to 34.7% or a CAGR of 2.8%. This implies more room to grow, especially in Europe and Asia Pacific where CAGR is 3.0-6.4%, and these are the markets that EPG plans to focus on in the next 3-5 years.

Figure 19: Percent of households with air conditioners (2009-13) by region Region 2009 2010 2011 2012 2013 CAGR

North America 62.0 62.6 63.0 63.9 64.6 1.0 Western Europe 12.1 12.8 13.3 13.8 14.2 4.1

Australia 68.1 70.1 71.9 73.6 74.9 2.4 Eastern Europe 6.8 7.2 7.7 8.3 8.7 6.4 Latin America 11.4 11.8 12.2 12.5 12.8 2.9

Asia Pacific 39.5 41.2 42.6 43.7 44.5 3.0 Middle East and Africa 11.3 11.6 11.7 11.9 12.0 1.5

Total 31.1 32.2 33.2 34.1 34.7 2.8

Source: AFC research, EPG, SCBS Investment Research

Automotive industry

Auto sales continued to grow in most parts of the world for the past five years at a CAGR of 6.8%. The key drivers were the US and Asia where CAGR was stronger at 9.9% and 9.5%, respectively. Both regions are also the major markets for automakers around the globe, taking almost 70% of the world’s total auto sales in 2013, up from 62.7% five years ago. We expect this to continue for the next 3-5 years as both regions will continue to be the growth engine for the world economy. IMF forecast GDP growth for the US of an average 2.8% during 2014-16F and for emerging Asia at 6.5% in the same period (vs. 7.6% p.a. in 2009-13); world GDP is forecast to rise an average of 3.3-4%.

Higher growth of commercial vehicle sales. It is notable that the CAGR of commercial vehicle sales over 2009-13 outpaced passenger cars, although accounting for only 27% of total auto sales in 2013. What could explain this is a more attractive pickup design that makes a pickup more viable for leisure use rather than simply for commercial purposes – plus, they are less expensive and consume less fuel. This implies greater growth potential in this segment that could eat into the share of passenger cars in the long term. Product development will continue to gear to this segment.


16

Figure 20: World auto sales by region

2009-2013 CAGR

World 6.8%

Europe -0.5%

North America 9.9%

Central & South America 7.6%

Asia 9.5%

Africa 8.8%

2009 2010 2011 2012 2013

1.8

%1.7% 1.9% 1.9% 1.9%

43.1%47.0% 45.3% 46.5% 47.4%

7.1%

7.3% 7.6% 7.5%7.3%

19.6%

18.9% 20.0%21.3%

21.9%28.4%

25.1%25.3%

22.7%21.4%

65,959

75,007 78,149 82,181 85,489

Source: The International Organization of Motor Vehicle Manufacturers (OICA), EPG, SCBS Investment Research

Figure 21: World auto sales by type 2009-2013 CAGR

Total 6.8%

Passenger cars 6.2%

Commercial cars 8.7%

2009 2010 2011 2012 2013

24.8% 26.1% 26.6% 26.4% 26.6%

85,489

75.2%

73.9% 73.4% 73.6%73.4%

65,595

75,007 78,14982,181

Source: The International Organization of Motor Vehicle Manufacturers (OICA), EPG, SCBS Investment Research

More use of plastic parts for vehicles. High energy prices has led consumers to put energy efficiency at the top of the list when looking for a new car. This has led manufacturers to focus on the same thing when designing a new model. Plastic has been a lifesaver with its light weight and durability thanks to the innovative compounding and production process. In 1970, plastic auto parts accounted for only 6% of the total weight but this has risen steadily to reach 16% in 2010 and is expected to rise further to 18% by 2020. The total weight of a car is forecast to decline by 21% in 2020 from that in 2010. Innovative plastic products also help reduce injuries in an accident as mentioned earlier.

Figure 22: Percentage of plastic auto parts to total weight of a vehicle

1,1001,180

1,2601,340

1,400

1,100

6%

9%

13%14%

16%18%

0

200

400

600

800

1,000

1,200

1,400

1,600

1970 1980 1990 2000 2010 2020

0%

5%

10%

15%

20%

25%

30%Plastic parts Non-plastic parts % of plastic parts

Average weight of a car (Kg)

Source: AT Kearney, EPG, SCBS Investment Research


17

Packaging industry

Growth of food packaging industry. World demand for food packaging increased at a CAGR of 3.6% during the past 15 years (1999-2013), which is in line with world GDP growth of 3.9% in the same period. Again, Asia was drove the growth, with the role of Asian consumers for packaging rising to 39% in 2013 from only 28% in 1999. Based on the IMF’s forecast of GDP growth at 3.3-4% for the next three years, consumption of food packaging is likely to continue to growth at this pace.

Figure 23: Global food packaging trend

0

500

1,000

1,500

2,000

2,500

3,000

3,500

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

(billion units)

Source: SCBEIC, EPG, SCBS Investment Research

Urbanization trend to continue. Rising urbanization, especially in emerging economies, will be a boon for demand for the food packaging industry. Urban dwellers seem to have less time to prepare food at home and the changes in urban lifestyles is toward greater convenience. This has made room for steady growth of ready-to-eat meals and frozen food in microwaveable packages. According to a study by SCB-EIC, the use of packaged food per capita has risen by a CAGR of 3.9% over the past five years. Asia has even more potential as the number remains low but is rising. Supportive evidence is also found in the higher percentage of households with refrigerators and microwave ovens.

Figure 24: Packaged food per capita (US$) Region 2009 2010 2011 2012 2013 CAGR

Australia 1,148 1,387 1,607 1,655 1,704 10.4% Western Europe 1,223 1,197 1,270 1,208 1,221 -0.0%

North America 1,087 1,104 1,138 1,152 1,171 1.9% Eastern Europe 459 500 562 567 615 7.6% Latin America 370 431 473 480 520 8.9%

Asia 114 124 139 145 145 6.2% Middle East and Africa 80 87 95 100 112 8.9%

Total 278 291 314 315 324 3.9%


Figure 25: Percentage of households with refrigerators Region 2009 2010 2011 2012 2013 CAGR

North America 99.9 99.9 99.9 99.9 99.9 0.0%

Western Europe 99.1 99.0 99.3 99.4 99.4 0.1% Australia 97.8 97.9 97.9 98.0 98.0 0.1% Eastern Europe 95.4 95.5 95.7 95.9 96.2 0.2%

Latin America 84.2 85.1 85.9 86.4 86.8 0.8% Asia 54.1 57.0 61.3 62.8 64.2 4.4%

Middle East and Africa 59.3 60.1 60.8 61.5 62.1 1.2%

Total 69.7 71.3 73.8 74.7 75.5 2.0%


Figure 26: Percentage of households with microwave ovens Region 2009 2010 2011 2012 2013 CAGR

North America 98.8 96.4 97.0 97.4 97.7 0.5% Western Europe 91.7 91.8 92.0 92.1 92.2 0.1% Australia 70.1 70.9 71.4 72.1 72.9 1.0%

Eastern Europe 47.5 53.1 56.0 58.1 59.8 5.9% Latin America 32.7 34.1 35.3 36.4 37.4 3.4%

Asia 25.5 26.5 27.3 28.1 28.8 3.1% Middle East and Africa 20.8 21.9 22.9 23.8 24.7 4.4%

Total 38.9 40.1 41.0 41.8 42.5 2.2%



18

Plastic containers will continue to replace traditional. Innovative plastic materials for packaging and competitive cost are luring food and beverage producers into shifting from traditional materials such as glass, paper and cans to plastics. The compounding and production process has improved the properties of plastic containers to lengthen product shelf life and increase consumer convenience. A study by EPG shows that market share of plastic packaging increased markedly to 63.6% in 2013 from 57.8% in 1999. This is expected to continue to expand to 64.4% by 2018 with a CAGR of 5.5% in the next five years vs. 5.2% for packaging overall.

Figure 27: Market share of various packaging products

14%

13%

13%3%

57%

Plastic

Paper

Glass

Metal

Others

1999

63%

16%

10%

9%2%

2013



19

Eastern Polymer Group PLC

Company background

Eastern Polymer Group PLC (EPG) is a holding company with three key businesses: insulation rubber, automotive accessories and plastic packaging. The company was founded in 1978 by the Vitoorapakorn family, with in-house research for high-quality insulation rubber under the “Aeroflex” brand, holding patents around the world. The second business, automotive accessories, was founded in 1994 to manufacture of pickup bed liners under the “Aeroklas” brand. This has a patented installation system, with no drilling required. The last business – plastic packaging – began in 2001 after it acquired a distressed asset from a local plastic packaging producer and turned the plant around to produce high-quality packaging products for global brands, including McDonalds and KFC, under the “EPP” brand. All three business lines are based on its expertise in converting petrochemical polymer into high-grade specialty products. These three businesses contributed almost equally to sales in FY2014 (ending March 2014). However, the insulation rubber business generated 45% of total gross profit in the same period. Recently, EPG, via its subsidiary, has acquired TJM, an Australia-based sales distribution network operator for aftermarket automotive accessories in Mar’15. This would be the channel for Aeroklas brand to the high potential markets in Australia and other western countries.

The company invested in two joint ventures: 20% in Tokai Eastern Rubber (Thailand) (TER) and 27% in Zeon Advanced Polymix (ZAP) to produce automotive parts (anti-vibration rubber) and supporting industry. Both are JVs with leading Japanese manufacturers, Tokai Rubber Industries (under Sumitomo group) and Toyota Tsusho and Zeon Group. This gives EPG competitive advantages in terms of early access to information from auto industry development in Japan.

Investment thesis

We expect EPG to deliver superior earnings growth in FY2016F, doubling YoY on higher sales revenue and markedly improving margin. Behind this is the automotive accessories business, Aeroklas (ARK), which is on the rise after years of co-development with global automakers that delayed launching new models due to unfavorable markets. The newly acquired distribution network in a premium market like Australia opens wider the window of opportunity for ARK to reach customers in the aftermarket for auto parts and accessories. The other two key businesses will continue to deliver superior margin than competitors’ on their premium products and continuous revenue growth alongside rising construction investment and consumer spending.

Valuation

We derive a TP (end-2015) of Bt10/share based on sum-of-the-parts, implying blended P/E of 17.6x for its three key businesses plus a distribution network. The current valuation of 14.4x looks undemanding when taken against a strong earnings growth for FY2016F. This also implies PEG of only 0.5x based on 3-year CAGR of 34%.

Risks

The key risk to our Buy call is lower than expected demand for EPG’s products, which normally is tied to the general economic condition, especially in Thailand. The volatility of feedstock prices, i.e. plastic resins, is also a risk to margin but this can be mostly passed through to customers given its specialty products where selling price is based on a cost-plus basis. Its overseas operation also gives rise to FX risk on translation.

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Corporate Governance Report disclaimer The disclosure of the survey result of the Thai Institute of Directors Association (“IOD”) regarding corporate governance is made pursuant to the policy of the Office of the Securities and Exchange Commission. The survey of the IOD is based on the information of a company listed on the Stock Exchange of Thailand and the Market for Alternative Investment disclosed to the public and able to be accessed by a general public investor. The result, therefore, is from the perspective of a third party. It is not an evaluation of operation and is not base on inside information. The survey result is as of the date appearing in the Corporate Governance Report of Thai Listed Companies. As a result, the survey result may be changed after that date. SCB Securities Company Limited does not conform nor certify the accuracy of such survey result.

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