(Translation) Opinion of the Independent Financial Advisor Regarding Acquisition of Assets
of
WAVE Entertainment Public Company Limited
Prepared by
Advisory Plus Company Limited March 18, 2014 Table of Contents Page
Executive Summary 3 1 Nature and details of the transaction 5 1.1 Type and size of the transaction 5 1.2 Value of consideration 7 2 Details of assets being acquired 8 2.1 Nature of business operation 8 2.2 Capital structure 9 2.3 Board of Directors 9 2.4 Operating results and financial position 10 2.5 Summary of material agreements 16 2.6 Industry and competition overview 22 3 Company profile 26 3.1 Background 26 3.2 Description of business 26 3.3 Revenue structure of the Company and its subsidiaries 28 3.4 Shareholders 28 3.5 Board of Directors 28 3.6 Operating results and financial position of the Company 29 3.7 Overview of industry relating to the Company’s business 37 4 Reasonableness of the transaction 39 4.1 Objective and necessity of the transaction 39 4.2 Advantages and disadvantages of entering into the transaction 40 4.3 Advantages and disadvantages of not entering into the transaction 44 4.4 Potential risks from entering into the transaction 45 5 Fairness of price and conditions for the transaction 47 5.1 Fairness of price 47 5.2 Fairness of conditions for the transaction 66 6 Conclusion of the Independent Financial Advisor’s opinion 67
AP. 029/2557
March 19, 2014
To Board of Directors and Shareholders WAVE Entertainment Plc.
Subject Opinion of the Independent Financial Advisor on the acquisition of assets
The Board of Directors’ meeting of WAVE Entertainment Plc. (“the Company” or “WAVE”) No. 3/2014, held on March 10, 2014, resolved to grant approval for the Company to acquire the entire shares of Efficient English Services Ltd. (“EES”) from WSI (Thailand) Holding Ltd., Siam Intervest Co., Ltd., and Thailand Prosperity Fund 2, collectively called “the Sellers,” and approval for the Company to sign the Share Sale and Purchase Agreement with the Sellers. After completion of share acquisition under the said agreement, the Company will become a shareholder of EES, owning the entire 1,656,600 shares or 100% of the total number of issued and paid-up shares of EES. The total acquisition price is not more than Baht 800 million. The entering into the above transaction is considered as an acquisition of assets of listed companies under the Notification of the Capital Market Supervisory Board No. ThorChor. 20/2551 Re: Rules on Entering into Material Transactions Deemed as Acquisition or Disposal of Assets and the Notification of the Stock Exchange of Thailand (“SET”) Re: Disclosure of Information and Other Acts of Listed Companies Concerning the Acquisition and Disposition of Assets B.E. 2547 (the “Acquisition or Disposal Notification”). The transaction size, calculated by net profit method, is equal to 1,193.55% and thus is deemed as Class 4 Transaction in accordance with the Acquisition or Disposal Notification. Therefore, the Company is obligated to disclose information on the transaction to the SET and to seek approval from the shareholders’ meeting with a required affirmative vote of not less than three-fourths of the total votes of shareholders attending the meeting and having the right to vote, excluding votes of shareholders who have an interest in the transaction. The Company must submit a notice of the shareholders’ meeting together with opinion of an independent financial advisor to the shareholders at least 14 days ahead of the meeting date. The Board of Directors’ meeting resolved to propose the 2014 Annual General Meeting of Shareholders, scheduled for April 25, 2014, to consider and approve the entering into the transaction. Opinion of the Independent Financial Advisor on asset acquisition
However, the entry into this transaction qualifies for exemption under Section 24 of the Notification of the SET Board of Governors Re: Disclosure of Information and Other Acts of Listed Companies Concerning the Acquisition and Disposition of Assets B.E. 2547, and the Company is therefore not required to submit a relisting application to the SET. This is because the acquired business is in a similar line of business or a mutually supporting business to the ongoing business of the Company. The Company has no policy to materially change its core activities and its group of companies, which results from the acquisition of shares in EES, remains qualified for listing on the SET. The Company will not make material change in the composition of its Board of Directors and in the power to control the Company or in its controlling shareholders. Moreover, the transaction is not performed with a connected person of the Company and, thus, is not regarded as a connected transaction under the Notification of the Capital Market Supervisory Board No. ThorChor. 21/2551 Re: Rules for Connected Transactions and the Notification of Board of Governors of the SET Re: Disclosure of Information and Other Acts of Listed Companies Concerning the Connected Transactions B.E. 2546. The notice of the shareholders’ meeting is required to be accompanied by opinion from an independent financial advisor regarding (1) reasonableness and benefits of the transaction to the listed company, (2) fairness of price and conditions for the transaction, and (3) recommendation as to whether the shareholders should vote for or against the transaction together with reasons thereof. In this respect, the Company has appointed Advisory Plus Co., Ltd. as the independent financial advisor (“IFA”) to render opinion to the Company’s shareholders. In providing opinion herein, IFA has considered and analyzed information obtained from the Company’ management, including resolution of the Board of Directors’ meeting No. 3/2014 held on March 10, 2014, the Information Memorandum notified to the SET on March 10, 2014 and its amendments, the Company’s audited consolidated financial statements for the years ended December 31, 2010-2013, EES’s audited financial statements for the years ended December 31, 2007-2013, EES’s financial projection, the Company’s annual registration statement (Form 56-1) ended December 31, 2012, draft Share Sale and Purchase Agreement between the Company and the Sellers, information disclosed on websites of the Stock Exchange of Thailand (“SET”) and the Securities and Exchange Commission (“SEC”), relevant information and documents obtained from the Company and from interviews with its management, together with publicly available information. The opinion rendered herein is based on the assumption that all information and documents available from the Company and the information derived from the interviews with its management are true and correct. IFA has considered such information in a thorough and reasonable manner in accordance with professional best practices. Our rendering of opinion is, moreover, based on the economic environment and the information prevailing at the time of preparing this study only. As such, if there is any significant change in these factors, it will likely have a material impact on our opinion. Our opinion on the acquisition of assets by the Company can be summed up as follows:
Page 2 Opinion of the Independent Financial Advisor on asset acquisition
Executive Summary The Board of Directors’ meeting of the Company resolved to grant approval for the Company to acquire the entire shares of Efficient English Services Ltd. (“EES”) from WSI (Thailand) Holding Ltd., Siam Intervest Co., Ltd., and Thailand Prosperity Fund 2, collectively called “the Sellers,” and approval for the Company to sign the Share Sale and Purchase Agreement with the Sellers. After completion of share acquisition under the said agreement, the Company will become a shareholder of EES, owning the entire 1,656,600 shares or 100% of the total number of issued and paid-up shares of EES. The total acquisition price is not more than Baht 800 million. The entering into the above transaction is considered as an acquisition of assets under the notification of the Securities and Exchange Commission regarding acquisition or disposal of assets and the Notification of the Stock Exchange of Thailand Re: Disclosure of Information and Other Acts of Listed Companies Concerning the Acquisition and Disposition of Assets B.E. 2547 (the “Acquisition or Disposal Notification”). The transaction size, calculated by net profit method, is equal to 1,193.55% and thus is deemed as Class 4 Transaction in accordance with the Acquisition or Disposal Notification. Therefore, the Company is obligated to disclose information on the transaction to the SET and to seek approval from the shareholders’ meeting with a required affirmative vote of not less than three-fourths of the total votes of shareholders attending the meeting and having the right to vote, excluding votes of shareholders who have an interest in the transaction. However, in entering into the transaction, the Company is not required to seek approval from the SET for relisting of its securities because the said asset acquisition qualifies for exemption from submitting a relisting application in accordance with the Acquisition or Disposal Notification. WAVE engages in the production and distribution of television programs and related services to Thai TV Color Channel 3 (“Thai TV Channel 3”). Currently, the television broadcasting in Thailand is on the verge of migration from an analog broadcasting system to a digital technology which provides greater sound and picture quality. The National Broadcasting and Telecommunications Commission (“NBTC”) organized an auction for licenses to operate commercial service digital television broadcasting on 24 channels and announced names of the bid winners in January 2014. At such auction, Thai TV Channel 3 won the bid for three channels. Amid the said broadcasting industry development, the Company, as a television program provider for Thai TV Channel 3, has devised a strategy and plan to produce new television programs for the three digital TV channels that Thai TV Channel 3 won the bid for. Among these will be an English language teaching program. While the Company was implementing such plan, the existing shareholders of EES, which is the exclusive franchisee to operate the “Wall Street English” institute in Thailand, had expressed an intention to sell their shares in EES. The existing shareholders of EES intended to sell shares to only a party which has strong potential and interest in operating an English language institute business, and had invited prospective candidates to participate in an auction for the shares. The Company was among those candidates that were approached to join in the bidding. After consideration, the Company has envisaged that to invest in this business will create a synergy as it will be able to produce an English language teaching program for broadcasting on such digital TV channels. Therefore, the Company participated in the auction for all shares in EES and was selected as the bid winner.
Page 3 Opinion of the Independent Financial Advisor on asset acquisition
IFA is of the opinion that the acquisition of the entire shares in EES by the Company from the Sellers is reasonable and beneficial to the Company because the acquisition of such assets, which are the English language institute, is consistent with the Company’s plan to produce more new programs for the forthcoming digital TV channels. A synergy will thereby be achieved since the Company can leverage its existing skills in television program production to create an English language teaching program, by employing English instructors of EES to teach English on such television program. At the same time, it can help promote the English language institute of EES through television programs or drama shows produced by the Company, thus optimizing the use of personnel of both parties. In addition, the transaction will provide a business opportunity for the group. The English language instruction service is a promising business with high growth potential, fueled by the target groups’ growing demand for English proficiency improvement in preparation for the upcoming advent of Asean Economic Community (AEC) in 2015. EES itself is the operator of an English language institute in the name of “Wall Street English,” which is a secure business having been in operation for more than a decade. Standing at the forefront of the English teaching field in Thailand, EES has operated at a profit with a sound cash flow position. Acquiring this business will therefore provide a business opportunity for the Company in the future and help to expand its business scale and diversity, thus diversifying its business risk. The group’s overall revenues can also be boosted and profitability be strengthened, leading to long-term benefits for the Company and its shareholders. However, the entry into this transaction could adversely affect the Company’s financial position because the Company will have to raise additional loans from financial institutions which will further increase its debt and interest expenses. However, considering the promising and profitable business of EES, it is expected that the Company will be able to pay such loans and interest. The shareholders should also ponder on risks to which the English language institute is exposed such as risk from failure to renew the franchise agreement and the retail space rental agreement. Nonetheless, EES has all along been awarded a renewal of both agreements. As regards the acquisition price set at not more than Baht 800 million, IFA views that it is an appropriate price since it is lower than the fair value measured herein by the discounted cash flow approach in the base case of Baht 1,080.81 million in total or Baht 652.42 per share. From a sensitivity analysis on the appraised business value and share value of EES to identify potential impacts from changes in the cost of equity (Ke) by 10% increase and decrease from the base case, the business value will be in a range of Baht 978.02 million - 1,201.99 million and the share value of Baht 590.38 – 725.58 per share. The acquisition price set at not more than Baht 800 million is lower than such appraised value by Baht 178.02 million – 401.99 million or 22.25% – 50.25% in total and by Baht 107.46 – 242.66 per share or 22.25% – 50.25%. The conditions for the transaction as specified in the Share Sale and Purchase Agreement are the general terms and conditions applicable to share sale and purchase transactions and, thus, are considered reasonable. The IFA accordingly recommends that the shareholders should approve the proposed acquisition of assets. However, the decision whether to approve or not approve the transaction depends primarily on the individual shareholders’ judgment.
Page 4 Opinion of the Independent Financial Advisor on asset acquisition
1. Nature and details of the transaction WAVE agrees to acquire the entire issued and paid-up shares of Efficient English Services Co., Ltd. (“EES”) from the Sellers as follows: (1) WSI (Thailand) Holding Ltd. holding 472,500 ordinary shares; (2) Siam Intervest Co., Ltd. holding 770,000 preferred shares; and (3) Thailand Prosperity Fund 2 holding 157,500 ordinary shares and 256,600 preferred shares, making up a total of 630,000 ordinary shares and 1,026,600 preferred shares, representing 100% of total share capital of EES, at a total acquisition price not more than Baht 800 million or not more than Baht 428.92 per share. However, shareholder no. (1) has Navis (“Navis Fund”) as its shareholder; shareholder no. (2) has individual investors as its shareholders who are unrelated to the Company; and shareholder no. (3) has Government Pension Fund as its shareholder. 1.1 Type and size of the transaction The transaction size calculated under the Acquisition or Disposal Notification according to WAVE’s consolidated financial statements as at December 31, 2013 and EES’s financial statements as at December 31, 2013 is as follows: Unit: Baht million WAVE1/ EES2/ Total assets 528.22 434.66 Less Intangible assets - 3/(50.88) Deferred tax (7.60) - Total liabilities (65.81) (281.62) Non-controlling interests - - Net tangible assets (NTA) 454.81 102.16 Net profit (loss) attributable to owners of the parent 7.75 - (4 most recent quarters) Net profit (loss) - 92.50 Note: 1/ WAVE’s consolidated financial statements as at December 31, 2013 were audited by Mr. Kajornkiet Aroonpirodkul, CPA Registration No. 3445, of PricewaterhouseCoopers ABAS Ltd., an SEC-approved auditor. 2/ EES’s financial statements as at December 31, 2013 were audited by Mrs. Sumalee Chokdeeanan, CPA Registration No. 3322, of Grant Thornton Ltd., an SEC-approved auditor. 3/ Intangible assets are computer program-net and deferred royalty-net. The transaction size calculated under the Acquisition or Disposal Notification according to WAVE’s consolidated financial statements as at December 31, 2013 and EES’s financial statements as at December 31, 2013 by four calculation methods is as follows: Transaction size calculation method Percentage 1. Asset value 22.46 2. Net profit 1,193.55 3. Value of consideration 151.45 4. Share value - No issuance of new shares -
Page 5า Opinion of the Independent Financial Advisor on asset acquisition
The entering into the above transaction is considered as an acquisition of assets of listed companies under the Notification of the Capital Market Supervisory Board No. ThorChor. 20/2551 Re: Rules on Entering into Material Transactions Deemed as Acquisition or Disposal of Assets and the Notification of the SET Re: Disclosure of Information and Other Acts of Listed Companies Concerning the Acquisition and Disposition of Assets B.E. 2547 (the “Acquisition or Disposal Notification”). The transaction size, calculated by net profit method, is equal to 1,193.55%, which is higher than 100% and thus is deemed as Class 4 Transaction in accordance with the Acquisition or Disposal Notification. Therefore, the Company is obligated to disclose information on the transaction to the SET and to seek approval from the shareholders’ meeting with a required affirmative vote of not less than three-fourths of the total votes of shareholders attending the meeting and having the right to vote, excluding votes of shareholders who have an interest in the transaction. However, in entering into the transaction, the Company is not required to seek approval from the SET for relisting of its securities because the said asset acquisition qualifies for exemption from submitting a relisting application in accordance with the Acquisition or Disposal Notification based on the following reasons: 1. The acquired business is in a similar line of business or a mutually supporting business to the Company’s ongoing business. The National Broadcasting and Telecommunications Commission organized an auction for licenses to use allocated frequencies for digital terrestrial television broadcasting (digital TV) on 24 new channels. The Company has thus envisaged an opportunity to grow and expand its business as a content provider. It has the main objective to capitalize on the content and brand power of EES’s business, likely including the brand of Pearson Group which is the world-class franchisor of publications such as Penguin Book, Financial Times and The Economist that are internationally accepted for quality, to enhance confidence and credibility among its customers and general consumers as well as to expand its existing business. The Company plans to develop new television programs in preparation for the upcoming new channels in both the analog terrestrial system (free TV) and the digital terrestrial system (digital TV) to address consumer needs and gear up for the forthcoming advent of Asean Economic Community (AEC). Before the said use of the brands of EES and Pearson Group, the franchisor, for development of a television program for commercial purpose, the Company will need to hold discussions with the franchisor in the future. At this stage, the Company has already held unofficial talks with the franchisor and the latter has agreed in principle. They will have to further negotiate in details. 2. The Company has no policy to materially change its core activity. WAVE Group has a definite target to engage in entertainment business. One of its objectives is to produce television programs for broadcast on the free TV and the digital TV. Although revenues from its core activity are lower when compared with revenues from EES, representing a percentage of about 30:70, the Company expects that, after entry into this transaction, revenues from its core activity and revenues from EES will be at about the same level in the next 3-5 years.
Page 6า Opinion of the Independent Financial Advisor on asset acquisition
3. Its group of companies, which results from the acquisition of shares in EES, remains qualified for listing on the SET. • The Company can leverage on the content of EES to expand its core business, hence a benefit for the Company. Moreover, EES has a sound and effective management system with strong financial position and profitable performance. As such, the group will be able to pay dividend to its shareholders. • The education business such as that of EES is not contradictory to the public or state policy and does not cause any negative impact to credibility of Thai capital market, nor any damage or unfair treatment to investors in general. 4. The Company will not make material change in the composition of its Board of Directors and in the power to control the Company or in its controlling shareholders. • None of the directors or existing shareholders of EES, i.e. WSI (Thailand) Holding Ltd., Siam Intervest Co., Ltd. and Thailand Prosperity Fund 2, will serve as controlling directors or controlling shareholders of the Company. • After entering into the transaction, the Company may change the directors who are due to retire by rotation. The new-coming directors will still be representatives of its existing shareholders and none of them will come from shareholders of the target company.
1.2 Value of consideration The Company will pay for the share purchase price in cash to the Sellers upon fulfillment of all conditions specified in the Share Sale and Purchase Agreement. The total value of consideration is not more than Baht 800 million. Wall Street Institute (“WSI”), the franchisor and owner of such exclusive right, has given written consent to the Company’s acquisition of shares in EES and has renounced its right to purchase EES shares. The said consent and renunciation of right are part of the conditions to be fulfilled under the Share Sale and Purchase Agreement. However, the share payment will not be made until the Company has duly obtained approval from its shareholders’ meeting to enter into this transaction to acquire the entire shares in EES. The conditions under the Share Sale and Purchase Agreement will be completely fulfilled when such shareholders’ approval is granted.
Page 7า Opinion of the Independent Financial Advisor on asset acquisition
2. Details of assets being acquired 2.1 Nature of business operation Efficient English Services Co., Ltd. (“EES”) was incorporated on March 19, 2003 to operate an English language institute in the name of “Wall Street English,” headquartered at No. 317 Kamol Sukosol Building, Silom Road, Silom, Bang Rak, Bangkok. In 2003, EES signed a franchise agreement with Wall Street Institute (“WSI”) as WSI’s exclusive franchisee to operate an English language institute in the name of “Wall Street English” in Thailand for a term of 10 years. In December 2012, EES and WSI mutually agreed to renew the agreement for another 10 years, ended April 29, 2022. WSI was incorporated in 1972 in Italy. It opened the first English language center in that year, which received tremendous response, and could open 24 more centers two years later. It offered a flexible teaching program that could well match students’ particular needs and with close attention to all learners. WSI began to expand business to other countries in 1983 by launching its English language training centers in Europe. After 1990, new centers were opened in Mexico, Chile and Venezuela and further expanded to the Middle East and Asia. In 2010, Pearson, a world-class leader in education, business information and media businesses, made a venture in WSI. Today, WSI has approximately 190,000 students at its 450 centers in 27 countries in Africa, Asia, Europe, Latin America and the Middle East. EES located its Wall Street English centers in strategic community areas based on factors such as population density, number of residential buildings, transportation, government buildings, department stores, etc. Currently, EES is operating nine registered English language instruction centers with more than 14,000 students, as detailed below: No. Wall Street English Center Start of Operation Area (sq. m.) Contract expiry date 4/ 1 Silom1/ April 2004 662.66 May 2016 2 Lat Phrao1/ May 2006 891.14 May 2015 3 Siam Square1/ July 2007 1,081.00 July 2016 4 Pinklao1/ August 2007 757.00 August 2016 5 Seacon Square1/ June 2008 847.70 May 2014 5/ 6 Fashion Island2/ March 2011 552.00 January 2014 6/ 7 Rangsit2/ June 2011 612.80 June 2014 8 Eastern Seaboard3/ August 2011 208.00 April 2014 9 Mega Bangna2/ May 2012 390.00 April 2015 Source: EES Note: EES operates a total of 10 centers, nine of which are opened to service. The 10th center at Central World does not offer training programs, but only sells course curriculum because it is still applying for a license to operate an English language teaching business. If upon expiry of the rental contract on April 30, 2015 the license is not yet obtained, EES will cancel such center. 1/ Under a license to establish and operate a school in accordance with Section 18 of the Private School Act B.E. 2525.
Page 8า Opinion of the Independent Financial Advisor on asset acquisition
2/ Under a license to establish and operate a school in accordance with Section 120 of the Private School Act B.E. 2550. 3/ Under a license to establish and operate a school in accordance with Section 120 and Section 166 of the Private School Act B.E. 2550. 4/ Each contract is valid for three years 5/ The contract for Seacon Square center has already been renewed for another three years, ended May 2017. 6/ The contract for Fashion Island center is under renewal process. EES also provides English language training for eight private and public organizations and state enterprises, namely Siam Commercial Bank Plc., TOT Plc., Ministry of Commerce, Port Authority of Thailand, Eastern Seaboard Industrial Estate, Bumrungrad International Hospital, College of Management Mahidol University, and Ministry of Justice. 2.2 Capital structure (a) Issued and fully-paid share capital Registered capital of Baht 16,566,000, divided into 630,000 ordinary shares with a par value of Baht 10 per share and 1,026,600 preferred shares with a par value of Baht 10 per share, fully paid-up. (b) Shareholders Name Type of shares (shares) Shareholding Ordinary Preferred Total (%) 1. Siam Intervest Co., Ltd. - 770,000 770,000 46.48 2. WSI (Thailand) Holding Ltd. 472,500 - 472,500 28.52 3. Thailand Prosperity Fund 2 157,500 256,600 414,100 25.00 Total 630,000 1,026,600 1,656,600 100.00 However, shareholder no. 1 has Navis (“Navis Fund”) as its shareholder; shareholder no. 2 has individual investors as its shareholders who are unrelated to the Company; and shareholder no. 3 has Government Pension Fund as its shareholder. 2.3 Board of Directors EES Board of Directors is composed of: No. Name Position 1 Mr. Michel Le Quellec Director 2 Mr. Kriengsak Niratpattanasai Director 3 Mr. Jean-Christophe Michel Marti Director 4 Mr. David Eric Padgham Director 5 Miss Jaithip Kanjanapoo Director 6 Mr. Uttama Savanayana Director 7 Miss Kawinya Buntornvorapun Director
Page 9า Opinion of the Independent Financial Advisor on asset acquisition
After completion of the share acquisition, the Company will appoint its representatives to serve as directors of EES in replacement of the whole existing board members. However, the Company has no policy to change EES’s management in a two-year period in accordance with the conditions under the Share Sale and Purchase Agreement. 2.4 EES’s operating performance and financial position in 2011-2013 Statements of income 2011 2012 2013 Items Baht 000’s % Baht 000’s % Baht 000’s % Revenues from tuition fees 588,845.60 98.96 682,825.46 99.36 796,267.76 99.55 Costs of services (370,394.35) (62.25) (455,558.41) (66.29) (498,073.05) (62.27) Gross profit 218,451.25 36.71 227,267.06 33.07 298,194.71 37.28 Interest income 2,205.95 0.37 2,616.23 0.38 2,168.76 0.27 Other income 3,960.49 0.67 1,781.82 0.26 1,411.71 0.18 Profit before expenses 224,617.70 37.75 231,665.11 33.71 301,775.18 37.73 Selling expenses (43,543.57) (7.32) (47,588.80) (6.92) (42,218.59) (5.28) Administrative expenses (110,078.27) (18.50) (145,396.00) (21.16) (166,395.33) (20.80) Total operating expenses (153,621.83) (25.82) (192,984.80) (28.08) (208,613.92) (26.08) Profit (Loss) before income tax 70,995.87 11.93 38,680.31 5.63 93,161.26 11.65 Income tax (663.14) (0.11) (851.70) (0.12) (665.08) (0.08) Net profit (loss) for the year 70,332.73 11.82 37,828.61 5.50 92,496.18 11.56 Earnings (Loss) per share (Baht) 111.64 60.05 146.82 Weighted average number of 630,000 630,000 630,000 ordinary shares Note: EES’s financial statements as of December 31, 2011-2013 were audited by Mrs. Sumalee Chokdeeanan, CPA Registration No. 3322, of Grant Thornton Ltd., an SEC-approved auditor.
Page 10า Opinion of the Independent Financial Advisor on asset acquisition
Statements of financial position 2011 2012 2013 Items Baht 000’s % Baht 000’s % Baht 000’s % Assets Current assets Cash and cash equivalents 197,981.06 46.40 129,879.72 28.48 127,759.84 29.39 Trade accounts receivable 5,775.85 1.35 6,457.44 1.42 16,884.03 3.88 Amount due from related companies - - - 18.55 0.00 18.55 0.00 net Investments in overseas companies - - 11,243.97 2.47 - - Short-term investments 40,000.00 9.37 40,000.00 8.77 40,000.00 9.20 Inventories - net 12,715.27 2.98 17,830.76 3.91 10,549.40 2.43 Prepaid expenses 17,039.23 3.99 18,382.27 4.03 15,751.94 3.62 Other current assets 16,475.71 3.86 30,698.10 6.73 23,429.99 5.39 Total current assets 289,987.12 67.96 254,510.81 55.81 234,393.75 53.93 Non-current assets Restricted bank deposits 10,524.47 2.46 10,895.58 2.39 11,398.00 2.62 Long-term investments 11,243.97 2.63 - - - - Equipment-net 71,722.18 16.81 113,030.42 24.78 111,229.32 25.59 Computer program-net 17,123.04 4.01 28,829.13 6.32 28,174.57 6.48 Deferred license fee-net 8,600.88 2.02 26,374.61 5.78 22,711.27 5.23 Other non-current assets 17,516.65 4.10 22,444.48 4.92 26,753.81 6.16 Total non-current assets 136,731.19 32.04 201,574.22 44.19 200,266.97 46.07 Total assets 426,718.31 100.00 456,085.03 100.00 434,660.72 100.00 Liabilities and shareholders’ equity Current liabilities Trade accounts payable 32,143.34 7.53 34,878.77 7.65 25,483.76 5.86 Amount due to related companies 13.11 0.0031 13.11 0.0029 13.02 0.0030 Revenue received in advance 246,447.66 57.75 291,592.23 63.93 201,076.15 46.26 Accrued expenses 46,196.86 10.83 52,446.94 11.50 40,507.33 9.32 Other current liabilities 9,172.37 2.15 16,147.41 3.54 14,129.59 3.25 Income tax payable 182.61 0.04 483.27 0.11 406.74 0.09 Total current liabilities 334,155.94 78.31 395,561.73 86.72 281,616.59 64.79 Non-current liabilities - Other non-current liabilities - - 132.33 0.03 156.98 0.04 Total non-current liabilities - - 132.33 0.03 156.98 0.04 Total liabilities 334,155.94 78.31 395,694.06 86.76 281,773.57 64.83
Page 11า Opinion of the Independent Financial Advisor on asset acquisition
2011 2012 2013 Items Baht 000’s % Baht 000’s % Baht 000’s % Shareholders’ equity Issued and fully-paid share capital Preferred shares 10,266.00 2.41 10,266.00 2.25 10,266.00 2.36 Ordinary shares 6,300.00 1.48 6,300.00 1.38 6,300.00 1.45 Retained earnings - - - Legal reserve 1,485.55 0.35 1,656.60 0.36 1,656.60 0.38 Unappropriated 74,510.82 17.46 42,168.37 9.25 134,664.55 30.98 Total shareholders’ equity 92,562.37 21.69 60,390.97 13.24 152,887.15 35.17 Total liabilities and shareholders’ 426,718.31 100.00 456,085.03 100.00 434,660.72 100.00 equity Note: EES’s financial statements as of December 31, 2011-2013 were audited by Mrs. Sumalee Chokdeeanan, CPA Registration No. 3322, of Grant Thornton Ltd., an SEC-approved auditor.
Key financial ratios Financial ratios 2011 2012 2013
Liquidity ratios
Current ratio (time) 0.87 0.64 0.83 Quick ratio (time) 0.61 0.34 0.51 Receivable turnover ratio (time) 172.16 111.63 68.23 Average collection period (day) 3 4 6 Payable turnover ratio (time) 14.84 13.59 16.50 Repayment period (day) 25 27 22 Profitability ratios
Gross profit margin % 37.10 33.28 37.45 Operating profit margin % 11.01 5.02 11.25 Other profit margin % 0.67 0.26 0.18 Net profit to total revenues % 11.82 5.50 11.56 Return on equity % 124.39 49.46 86.74 Efficiency ratios
Return on assets (time) 18.99 8.57 20.77 Return on fixed assets (time) 153.87 75.95 113.79 Asset turnover (time) 1.61 1.56 1.80 Financial policy ratios
Debt to equity ratio (time) 3.61 6.55 1.84 Payout ratio % 1.00 - 1.08
Page 12า Opinion of the Independent Financial Advisor on asset acquisition
Analysis of operating results and financial position Operating results in 2011-2013 In 2011-2013, EES recorded revenues from tuition fees of Baht 588.85 million, Baht 682.83 million and Baht 796.27 million, respectively, soaring by Baht 93.98 million or 15.96% in 2012 and Baht 113.44 million or 16.61% in 2013. Such revenue growth was driven by opening of two more Wall Street English centers in Bangkok in 2011 at Ram Inthra and Rangsit. Besides, in 2011 EES provided corporate English language training for two additional organizations: Eastern Seaboard Industrial Estate and Bumrungrad International Hospital. In 2012, one more center was opened at Mega Bangna which became operative in May 2012. As a result, such revenues further grew in 2013 due to full-year operation of Mega Bangna center and an increase in revenues from Pinklao, Fashion Island and Rangsit centers. Costs of services totaled Baht 370.39 million in 2011, Baht 455.56 million in 2012 and Baht 498.07 million in 2013, rising year-on-year by Baht 85.16 million or 22.99% and Baht 42.51 million or 9.33% respectively. Administrative expenses were Baht 110.08 million in 2011, up by Baht 35.32 million or 32.08% to Baht 145.40 million in 2012 and by Baht 21.00 million or 14.44% to Baht 166.40 million in 2013. The increases in costs of services and administrative expenses were due partly to increases in costs and expenses in tandem with revenues and partly to the opening of new Wall Street English centers, primarily consisting of salaries and other fringe benefits of employees, royalty fees, office rentals, depreciation and amortization, and finance costs. EES posted a net profit (loss) of Baht 70.33 million, Baht 37.83 million and Baht 92.50 million in 2011-2013 respectively, an increase (decrease) of Baht (32.50) million or (46.21)% in 2012 and Baht 54.67 million or 144.51% in 2013. The drop in profit in 2012 was caused by impacts from the late-2011 flood crisis which posed a continuing adverse impact on EES’s performance in Q1/2012. Moreover, an increase in royalty fees in 2012 as agreed with the Franchisor also led to such decrease in profit in 2012. For 2013, the profit growth was contributed by recognition of full-year operating results of Mega Bangna center. Financial position as of December 31, 2011-2013 EES’s total assets as of December 31, 2011-2013 amounted to Baht 426.72 million, Baht 456.09 million and Baht 434.66 million respectively, growing by Baht 29.37 million or 6.88% in 2012 and contracting by Baht (21.42) million or (4.70)% in 2013. In 2012, the asset growth primarily comprised an increase in other current assets of Baht 14.22 million, computer programs and equipment of Baht 53.01 million, and deferred royalty of Baht 17.77 million. The increase in current assets and computer programs and equipment stemmed from a higher number of retail customers from additional branch opening. Meanwhile, EES renewed the franchise agreement with WSI in December 2012, leading to an increase in deferred royalty.
Page 13า Opinion of the Independent Financial Advisor on asset acquisition
In 2013, the decrease in assets was mainly caused by a drop in investments in overseas companies of Baht 11.24 million, inventories-net of Baht 7.28 million and other current assets of Baht 7.27 million. The key asset items of EES are as follows: Trade accounts receivable consisted of receivables from individual customers and receivable from corporate customers. In 2011-2013, trade accounts receivable amounted to Baht 5.78 million, Baht 6.46 million and Baht 16.68 million respectively, an increase of Baht 0.68 million in 2012 and Baht 10.43 million in 2013. In 2012, such increase came from corporate customers receivable, while in 2013 it was ascribed to individual customers receivable. Since these receivables were deemed as regular debts, no allowance for doubtful accounts was set aside. Amount due from related companies were loans to related companies of EES. In 2011-2013, EES had receivables from related companies of Baht 0.30 million, Baht 0.32 million and Baht 0.32 million respectively. Since such loans were unsecured, EES set aside allowance for doubtful accounts in the amount of Baht 0.30 million in each year. Investments in overseas companies were investments by EES in preferred shares of WSI JAP Holding Ltd. for 99.97% of total shares at a total cost of Baht 11.24 million, which were classified as long-term investments in 2011. In 2012 and 2013, such investments were reclassified as current assets because WSI JAP Holding Ltd. in 2012 notified its intention to redeem all of those shares from EES and made such redemption in 2013. Inventories consisted of textbooks. In 2011-2013, EES had total inventories of Baht 12.72 million, Baht 17.83 million and Baht 10.55 million respectively, an increase (decrease) of Baht 5.12 million and Baht (7.28) million respectively. The increase in inventories resulted from procurement of textbooks for the newly opened centers. The decrease in inventories was in line with the growing number of students at each level. During 2011-2013, EES set aside allowance for obsolete goods in the amount of Baht 0.19 million per year. Other current assets were composed of deposits in transit, accrued revenues, other prepaid expenses, prepaid deposits and others. In 2011-2013, other current assets totaled Baht 16.48 million, Baht 30.70 million and Baht 23.43 million respectively, up by Baht 14.22 million in 2012 and down by Baht 7.27 million in 2013. Such change was mainly caused by deposits in transit, comprising collection of tuition fee payment via credit cards and personal loans and accrued revenues due to invoicing to corporate customers, which increased by Baht 12.96 million in 2012 and decreased by Baht 9.97 million in 2013. Deferred license fee-net was the royalty obtained by EES for branch expansion and operation of each center under the term set forth in the agreement. In 2011-2013, deferred license fee-net amounted to Baht 8.60 million, Baht 26.37 million and Baht 22.71 million respectively, increasing (decreasing) by Baht 17.77 million in 2012 and Baht (3.66) million in 2013. In 2012, deferred license fee-net went up because in December 2012 EES renewed the Center Development and Expansion Agreement. For
Page 14า Opinion of the Independent Financial Advisor on asset acquisition
2013, deferred license fee-net decreased due to amortization of royalty based on the agreement term (please see details in ‘Summary of the Center Development and Expansion Agreement and the Franchise Agreement’). Total liabilities as at December 31, 2011-2013 stood at Baht 334.16 million, Baht 395.69 million and Baht 281.77 million respectively, rising (decreasing) by Baht 61.54 million or 18.42% in 2012 and Baht (113.92) million or (28.79)% in 2013. The major item was Revenue received in advance. Revenue received in advance were tuition fees from individual and corporate customers paid before beginning of a program. In 2011-2013, Revenue received in advance totaled Baht 246.45 million, Baht 291.59 million and Baht 201.08 million respectively. In 2012, Revenue received in advance grew by Baht 45.14 million and in 2013 dropped by Baht 90.52 million, due to an increase in number of customers from new branch opening and recognition as income under the agreement. Shareholders’ equity as at December 31, 2011-2013 was Baht 92.56 million, Baht 60.39 million and Baht 152.89 million respectively, up (down) by Baht (32.17) million and Baht 92.50 million or (34.76)% and 153.16% respectively in line with EES’s performance in each year. However, in 2012 the shareholders’ meeting of EES resolved to approve dividend payment from the 2011 net profit in the amount of Baht 70 million. In January 2014, the Board of Directors of EES approved dividend payment from unappropriated retained earnings as at December 31, 2013 of Baht 100 million.
Page 15า Opinion of the Independent Financial Advisor on asset acquisition
2.5 Summary of material agreements 2.5.1 Franchise Agreement on English Language Institute under “Wall Street English” Trade Name “Wall Street Institute” or “WSI,” as the Franchisor, agrees to grant the exclusive right to “Efficient English Services Co., Ltd.” or “EES,” as the Franchisee, to operate an English language instruction institute under the “Wall Street English” trade name in Thailand. The Franchisee shall comply with the Franchise Agreement and the Center Development and Expansion Agreement. Details of the Franchise Agreement can be summed up as follows: 1) Franchising terms and conditions 1.1) The Franchisee is granted the exclusive right to operate, on a comprehensive basis, an English language institute under the “Wall Street English” trade name by establishing an English language instruction and training center for the general public aged 17 years and higher, comprising both individual students and corporate organizations. Such right is valid for 10 years, ended April 29, 2022. Throughout such agreement term, EES shall have the exclusive right to open additional centers in Thailand. Moreover, the Franchisee is granted the renewal option for three consecutive terms of five years each. Before each renewal, the Franchisee must so notify WSI in writing. After the acquisition of entire shares in EES, the remaining franchise period under which the Company will have the exclusive right to operate the “Wall Street English” institute in Thailand, classified by branch, will be as follows: Branch Location Franchise period (years) (including the renewed period in case of exercise of renewal option)* 1 Silom G Floor, Kamol Sukosol Building, 22 years 11 months Silom Road, Bangkok 2 Seacon Square 3rd Floor, Seacon Square Shopping 22 years 11 months Mall, Si Nakharin, Bangkok 3 Lat Phrao 5th Floor, Union Mall, Lat Phrao, 22 years 11 months Bangkok 4 Siam Square 16th Floor, Siam Tower, 22 years 11 months Pathumwan, Bangkok 5 Pinklao G Floor, Major Cineplex Pinklao, 22 years 11 months Bang Phlat, Bangkok 6 Fashion Island B Floor, Fashion Island Shopping 22 years 11 months Mall, Khanna Yao, Bangkok
Page 16า Opinion of the Independent Financial Advisor on asset acquisition
Branch Location Franchise period (years) (including the renewed period in case of exercise of renewal option)* 7 Future Park Future Park Rangsit Shopping 22 years 11 months Rangsit Center, Thanyaburi, Pathum Thani 8 Eastern 2nd Floor, ESIE Plaza 1, Eastern 22 years 11 months Seaboard Seaboard Industrial Estate, Pluak Industrial Estate Daeng, Rayong 9 Central World 3rd Floor, Central World Plaza, 22 years 11 months Pathumwan, Bangkok 10 Mega Bangna Mega Bangna Shopping Mall, Bang 22 years 11 months Phli, Samut Prakan Note: * The franchise period is calculated based on the remaining agreement period starting on the effective date of December 1, 2012 and ending on April 29, 2022, including the renewal option for three consecutive terms of five years each, assuming that the Company obtains approval from the Annual General Meeting of Shareholders No. 21/2014 to be held on April 25, 2014 and that the Company acquires EES shares by May 31, 2014. 1.2) The Franchisee shall be entitled to use computer software developed by WSI for English language instruction and to use and sell didactic materials & products, the copyright on which is owned by WSI. 1.3) The Franchisee shall be entitled to use the intellectual property rights, including trade name, trademark, service mark and know-how for English language instruction developed in the format of WSI, as well as any other computer programs developed for English language teaching. After entering into the Sale and Purchase Agreement for EES Shares, the Company will negotiate with the Franchisor to grant right to the Company to use the brands of EES and Pearson Group for developing television programs for commercial purpose and to offer English language teaching services to young children aged below 17 years. 2) Fees There are two types of fees payable under the Franchise Agreement. (1) Initial fee is fee that enables the Company to obtain right to operate this franchised business, payable in one lump sum as specified in the agreement. (2) On-going fees are chargeable for the right to use intellectual property, the right to use computer software developed by WSI, and the right to use and sell teaching equipment and media, payable at the specified rate in installments throughout the agreement term.
Page 17า Opinion of the Independent Financial Advisor on asset acquisition
3) Termination of the agreement Early termination of the Franchise Agreement may take place in the event of (a) material default and non-curable breach by the Franchisee, (b) the Franchisee becoming insolvent or entering a receivership process, or (c) default by the Franchisee on any provision under the agreement and failure to remedy such default within the period of time specified in the notice or as deemed fit. 4) Assignment of rights under the agreement WSI, as the Franchisor, may assign, without consent from the Franchisee, rights granted under the Franchise Agreement to a third party who agrees to accept the assigned rights and duties under the agreement. (Under the Area Development Agreement, the Franchiser is not allowed to open new centers or to grant the right to any third party to open additional centers in Thailand, as specified in Clause 1.1 of the Summary of the Area Development Agreement.) Nonetheless, in granting such rights under the Franchise Agreement, WSI as the Franchisor has considered and paid regard to the ability to operate business and the financial soundness of the Franchisee. Therefore, the Franchisee under such Franchise Agreement may not assign its rights without prior consent from WSI.
2.5.2 Area Development Agreement WSI, as the Franchisor, agrees to grant an exclusive right to EES, as the Franchisee, to open three additional centers in Thailand. Details of the Area Development Agreement can be summed up as follows; 1) Terms and conditions The Franchisee is granted an exclusive right to open three additional centers in Thailand, provided that the details and conditions on branch expansion shall be as determined by WSI, as follows: Location No. of centers Target opening date* Current status 1 Bangkok 1 Before the last date of In the process of applying September 2014 for a license to establish a school; scheduled for start of operation in Quarter 3-4 of 2014 2 Chiang Mai 1 Before the last date of Opened already on March September 2015 23, 2014 3 Bangkok 1 Before the last date of - September 2016 Note: * The target opening date may be extended for not more than three months on a reasonable ground with proof of inability to open the branch by the said timeline.
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1.1) WSI agrees not to open, or allow a third party to open, additional centers in Thailand throughout the term of this agreement, subject to the condition that, after the last center has completed the first year of its operation, (a) the Franchisee shall maintain the number of centers at not less than eight and the combined revenues of all centers shall not be less than those specified in this agreement; and (b) the Franchisee does not have any overdue royalty payment under this agreement and the Franchise Agreement; and (c) there is not any Franchise Agreement and any other agreements between WSI and the Franchisee or the Franchisee’s subsidiary being terminated due to the fault of the Franchisee or the Franchisee’s subsidiary. 1.2) The Franchisee shall have the right to open additional centers other than those specified in this agreement, provided that the average revenue of the existing centers per year shall not be less than those specified in this agreement. WSI agrees to change the effective date of the Franchise Agreements for all 10 centers to be the same date, i.e. December 31, 2012, which will result in the Franchise Agreements for all 10 centers becoming expired on the same date. 2) Termination of the agreement Early termination of the Area Development Agreement may take place in the event of (a) failure by the Franchisee to open the additional centers within the specified period of time, (b) the Franchisee having assigned rights under this agreement without consent from WSI, or (c) default by the Franchisee on any provision under the Franchise Agreement and failure to remedy such default within the period of time specified in the notice or as deemed fit. 3) Assignment of rights under the agreement The Franchisee may not assign rights under the Area Development Agreement without prior consent from WSI, except for an assignment of rights to the Franchisee’s subsidiary in accordance with the conditions set forth herein and subject to a prior written notice thereof to WSI. Nonetheless, the existing shareholders of EES have already notified WSI in writing of their intention to sell EES shares to the Company and have received written consent thereto from WSI in accordance with the Franchise Agreement and the Area Development Agreement. At the same time, WSI, as the Franchisor, has renounced the right to purchase the entire shares in EES from the existing shareholders. Therefore, the sale and purchase of EES shares between the existing shareholders of EES and the Company under this transaction is not deemed as an event that will lead to termination of the agreement.
Page 19า Opinion of the Independent Financial Advisor on asset acquisition
2.5.3 Summary of Share Sale and Purchase Agreement Parties Purchaser: WAVE Entertainment Plc. and/or affiliate Sellers: 1. WSI (Thailand) Holding Ltd. (“WSIT”) (WSIT has been authorized by Siam Intervest Co., Ltd. (“SI”) to sell shares held by SI in EES under this transaction.) 2. Thailand Prosperity Fund 2 Purchase price Not more than Baht 800,000,000 Such purchase price may be revised down in case net cash of Baht 100,000,000 as shown on financial statements of EES decreases from such level. Conditions • The Sellers obtain written consent from WSI under the Franchise precedent Agreement and the Center Development and Expansion Agreement allowing the Purchaser to acquire the entire shares of the Sellers after completion of the transaction. • WSI, as the Franchisor, renounces the right to purchase the entire shares of the Sellers in respect of the shares to be sold and purchased by the Purchaser and the Sellers under this agreement. • The Purchaser duly obtains approval from its shareholders’ meeting to enter into the transaction to acquire the entire shares in EES. Pre-completion The Sellers shall arrange for EES to continue its business as usual and shall conditions not act as follows: • Not to make any investment or agreement other than those executed under budget spending for the current year. • Not to sell or give any consent or right to the core assets other than those executed under terms and conditions in the usual course of business. • Not to borrow any loan or incur any debt unless such debt is not more than Baht 5,000,000 and is executed in the usual course of business and in conformity with past practices of EES. • Not to make any material change to employment period and conditions for senior-level employees, chief executive officer, chief financial officer, instructors, advisors or tutors of EES.
• Not to pay dividend or any benefit to shareholders of EES unless such dividend payment is not more than Baht 100,000,000 and payable to existing shareholders before the date on which the share sale and purchase transaction takes full force and effect. (EES Board of Directors on January 6, 2014 approved dividend payment totaling Baht 100,000,000.) • Not to execute a new agreement or amend or cancel the Franchise Agreement and the Area Development Agreement.
Page 20า Opinion of the Independent Financial Advisor on asset acquisition
Completion After fulfillment of the conditions precedent, the Purchaser and the Sellers conditions shall execute the transfer of shares and payment of purchase price as specified in this agreement. Details of the shares to be sold and purchased are as follows: Name Type of shares 1/, 2/, 3 /Preferred shares 1/, 2/, 3 /Ordinary shares Total WSI (Thailand) Holding 4/770,000 472,500 1,242,500 Ltd. Thailand Prosperity 256,600 157,500 414,100 Fund 2 Total 1,026,600 630,000 1,656,600 Note: 1/ Voting right shall be as follows: 10 preferred shares for 1 vote and 1 ordinary share for 1 vote 2/ Share of profit in the form of dividend shall be as follows: Preferred shareholders shall receive dividend before ordinary shareholders at a rate of 10% per year of value of each preferred share and only in the year that dividend payment is announced. They are not entitled to receive accumulative dividend for the year that dividend payment is not announced, nor to receive additional dividend in the case where in any year the announced dividend is paid in the amount less than 10% of value of each preferred share. Such announced dividend shall be distributed equally among the preferred shareholders. The dividend remaining from distribution to the preferred shareholders shall be shared equally among the ordinary shareholders. 3/ Return of investment funds and fund allocation when the company is liquidated or dissolved The preferred shareholders shall receive the return of capital for the paid-up shares before the ordinary shareholders and shall not be entitled to receive any other sharing of funds. The ordinary shareholders shall receive the return of capital for the paid-up shares and other sharing of funds (if any). 4/ Siam Intervest Co., Ltd. has authorized WSIT to sell shares under the Share Sale and Purchase Agreement. Non-competition Within two years from the date on which the share transfer is duly condition completed, the Sellers agree not to conduct business in competition with EES in Thailand and shall not (a) perform any act that may cause or has caused the instructors, tutors, chief executive officer, chief financial officer, top executive officers or senior-level employees of EES to resign as employees of EES, or (b) employ those persons to work for the Sellers or for the Sellers’ group of companies in any other country in Southeast Asian Region where EES has operated a business.
Page 21า Opinion of the Independent Financial Advisor on asset acquisition
2.6 Industry and competition overview In view of the borderless access to news and information available in different languages through communication technology that has been developed and ever-changing, skills in foreign languages have thus become increasingly crucial in our daily life, education and work. Particularly in 2015, Thailand will join the Asean Economic Community (AEC) which will open up a liberalized market for investments, businesses and professions among Asean member countries, with English agreed to be used as the official language for business. Accordingly, a higher degree of importance is being attached to the improvement of English language skills. However, from the EF English Proficiency Index 2012 launched by Education First and the Test and Score Data Summary for TOEFL iBT Test 2012 by Education Testing, Thai people’s English testing scores were 44.36 and 76 respectively, indicating Thai people’s poor skills in English compared with other Asean members.1
Figure: Test of English proficiency for Asean countries in 2013
Score TOEFL iBT Test 2012 EF English Proficiency Index 2012 120 98 100 89 89 79 79 77 76 80 71 68 59 58 60 53 52 44 40
20 N/A 0 Singapore Malaysia Philippines Indonesia Myanmar Vietnam Thailand Lao PDR Cambodia Brunei
Source: EF English Proficiency Index 2012 by Education First Test and Score Data Summary for TOEFL iBT Test 2012 by Education Testing According to foreign investment statistics of the Board of Investment (“BOI”), there were 1,029 projects applying for investment promotion in 2003 and 2,582 projects in 2012, representing an average growth rate of 11.55% per year. Of those applications, 841 projects were approved by BOI in 2003 and 2,262 projects in 2012, growing by an average 89% per year. Such records bear testimony to an active role increasingly played by foreign investors in Thai business sector and, hence, suggest that Thai labor with skills in foreign languages will be among the preferable candidates for job opportunities and will have better career advancement. Upon the advent of AEC in 2015, eight professions will be liberalized, comprising engineers, architects, surveyors, accountants, nurses, dentists, physicians and tourism professionals. This will lead to freer movement of labor among Asean member states and keener competition in employment, with foreign language proficiency as one of the preferable qualifications.
1 Asean is composed of 10 member states: Thailand, Myanmar, Lao PDR, Vietnam, Malaysia, Singapore, Indonesia, the Philippines, Cambodia and Brunei.
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Figure: Foreign direct investment projects during 2003-2012
3,000 Number of applying projects Number of approved projects 2,582 2,500 2,112 2,000 1,573 1,591 1,500 1,268 1,358 1,357 1,317 1,262 1,029 2,262 1,000 1,566 1,653 1,227 1,254 1,220 1,342 1,253 500 841 1,003 - 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Source: Board of Investment (www.boi.go.th) The above mentioned factor is a major drive for Thai people’s increased demand for English skill development as a means of upgrading their education and career path. As a consequence, foreign language training services will have an opportunity to grow. Based on Kasikorn Research Center’s Report Vol. 19 No. 2372, ‘Fierce Competition among Language Institutes before AEC: Key Players to Grab Market Share,’ it is forecast that number of foreign language students for skill development will soar from 432,000 persons in 2012 to 746,500 persons in 2015, representing an average increase rate of 20% per year. Market value of foreign language training institutes for skill development will similarly increase from Baht 6,044 million in 2012 to Baht 11,023 million in 2015, up by an average of 22% per year. Figure: Forecast of market value of language institutes and number of students
Baht million 000's persons Market value of large language institutes 12,000 746 800 Market value of medium to small language institutes 700 10,000 Number of students 622 7,606 518 600 8,000 6,395 432 500 6,000 5,456 400 4,593 300 4,000 200 2,000 2,612 3,417 100 1,451 1,917 - - 2012 e 2013 f 2014 f 2015 f Source: Kasikorn Research Center’s Report Vol. 19 No. 2372, ‘Fierce Competition among Language Institutes before AEC: Key Players to Grab Market Share’
Page 23า Opinion of the Independent Financial Advisor on asset acquisition
Figure: Percentage of forecast market value of language institutes
Market value of large language institutes Market value of medium to small language institutes 100% 76 74 71 69 80% 60% 40% 20% 24 26 29 31 0% 2012 e 2013 f 2014 f 2015 f
Source: Kasikorn Research Center’s Report Vol. 19 No. 2372, ‘Fierce Competition among Language Institutes before AEC: Key Players to Grab Market Share’ Taking into account the revenues earned by EES in 2013 compared with total market value of language institutes as shown in Kasikorn Research Center’s report, Wall Street English could capture a market share of 11% of total language institute market value. Compared with its peers in the large-sized language institute segment since Wall Street English is a well-known and popular institution with several centers, Wall Street English occupied a market share of 42% of large-sized language institute market value. Figure: Market value of Wall Street English
11% 42% 58% 89%
Market value of Wall Street English Market value of Wall Street English Market value of other institutes Market value of large institutes Source: Kasikorn Research Center’s Report Vol. 19 No. 2372, ‘Fierce Competition among Language Institutes before AEC: Key Players to Grab Market Share’
Page 24า Opinion of the Independent Financial Advisor on asset acquisition
Language institutes that are in the same class as EES are as follows: Commercial Number of branches Name operation date Bangkok Provincial Total 1. Wall Street English 2003 8 1 9 2. British Council 1952 5 1 6 3. AUA 1952 8 10 18 4. inlingua 1988 16 2 18 5. Berlitz 1970 3 0 3 6. ECC 1983 22 14 36 Source: Data as of March 10, 2014 from www.britishcouncil.or.th, www.auathailand.org, www.inlinguabangkok.com, www.berlitz.co.th and www.ecc.ac.th Therefore, amid growing awareness and demand for foreign language skill development among Thai people, this is a good opportunity for language institutes to compete in capturing market share. As evident from Kasikorn Research Center’s data on forecast of language institute market value, percentage of large institutes’ market value will expand from 24% in 2012 to 31% in 2015, while that of medium to small institutes will decline from 76% to 69% over the same period, due to keen competition in this business. In view of the readiness and potential of EES, it is an English language training school under the trade name of ‘Wall Street English,’ which is a large reputable language institute. EES is capable of making technological investment for English skill development and has recruited instructors who are native speakers. It operates several branches in Bangkok. These advantages could encourage prospective students to decide to improve their English proficiency with Wall Street English. EES also provides English language training for corporate organizations, thereby helping to strengthen name recognition and credibility of Wall Street English. However, such growing demand for foreign language training will at the same time draw new entrants into this business and prompt the existing players to expand their market and customer base. Competition will therefore become more intense. Each institute has to adjust its competition strategy in order to capture the market share by, for instance, revising tuition fee per program, improving convenience in class participation and learning/teaching format, etc.
Page 25า Opinion of the Independent Financial Advisor on asset acquisition
3. Company profile 3.1 Background Wave Entertainment Plc. (“the Company” or “WAVE”) was incorporated on September 19, 1988 originally in the name of Thai Magnetic Co., Ltd. to manufacture blank video tape cassettes (V-O) and video tape cassettes with magnetic tapes (V-cassettes). It transformed into a public limited company in 1993, and listed its shares on the Stock Exchange of Thailand in 1994. It was renamed to CVD Entertainment Plc. in 1996. In September 2002, the Company discontinued the operation of its Chon Buri plant, which mainly produced video tape cassettes, in accordance with resolution of the Extraordinary General Meeting of Shareholders No. 1/2002, held on September 12, 2002, due to a slump in demand as consumers were shifting away to VCD and DVD products. It was also resolved that assets at Chon Buri plant be sold, mostly comprising machinery and equipment for manufacturing video tape cassettes and plastic packaging. In December 2007, the Company dissolved its movies and copyrights procurement and distribution section due to failure to obtain rights to distribute VCD and DVD for Sony Pictures Home Entertainment and other Major group members. The dissolved operations included the core activities relating to distribution of copyrighted video CDs and DVDs, procurement and distribution of copyrighted movies, and packaging & warehousing services. In April 2009, CVD Entertainment Plc. registered a name change to Wave Entertainment Plc. In December 2010, the Company invested in Thai Solar Energy Co., Ltd., a producer of electricity from solar energy for distribution to public and private sectors, by acquiring 3.2 million shares at a par value of Baht 10 per share totaling Baht 32 million, representing 10% of registered capital. In 2011, the Company made additional investment in Thai Solar Energy Co., Ltd. under the latter’s recapitalization plan, by acquiring 30.93 million newly issued shares at a par value of Baht 10 per share, and fully paid for the shares in advance in the amount of Baht 117.52 million. In 2012, the Company’s shareholding in Thai Solar Energy Co., Ltd. increased from 10% to 25% as a result of the latter’s registration of capital increase under the said recapitalization plan. 3.2 Description of business Details of business operations of WAVE and its subsidiaries are as follows: Name Nature of business The Company Wave Entertainment Plc. (WAVE) 1. Licensee and distributor of Thai drama series from Thai TV Color Channel 3
Page 26า Opinion of the Independent Financial Advisor on asset acquisition
Name Nature of business 2. Sublease of space at Central Plaza Pinklao and Central Plaza Ratchada-Rama III, according to leasehold right of the Company 3. Operations of concerts, music business and artist management 4. Production and distribution of movies The subsidiaries Wave TV&Movie Studios Co., Ltd. 1. Television program production and distribution 2. Studios for rent business for production of television programs, news programs and movies Wave Pictures Co., Ltd. 1. Television program production and distribution 2. Movies production Wave TV Co., Ltd. 1. Television program production and distribution 2. Television program advertising sales CVD Organizer Co., Ltd. Marketing event services; temporarily suspended operation
Shareholding structure of WAVE in its subsidiaries is as follows: Shareholding structure before the transaction
Shareholding structure after the transaction
Page 27า Opinion of the Independent Financial Advisor on asset acquisition
3.3 Revenue structure of WAVE and its subsidiaries Revenue structure of WAVE and its subsidiaries in 2011 - 2013 is as follows: 2011 2012 2013 Products/Services Baht million % Baht million % Baht million % Total revenues Movies production and distribution - - - - 40 13.84 Television program production and distribution 160 83.33 103 56.90 179 61.93 Operations of concerts and events 0 - 35 19.34 57 19.72 Sales of copyrighted video CDs and DVDs 15 7.81 7 3.87 1 0.35 Income from sublease of space 6 3.13 5 2.76 6 2.08 Other income 11 5.73 31 17.13 6 2.08 Total revenues 192 100.00 181 100.00 289 100.00 3.4 Shareholders As of April 9, 2013, the Company’s top 10 shareholders are as follows: Name No. of shares % 1. Maleenont Group 12,968,558 40.03 1.1 BEC World Plc. 5,825,000 17.98 1.2 Ms. Cathleen Maleenont 4,143,558 12.79 1.3 Mr. Pracha Maleenont 3,000,000 9.26 2. Mr. Weerasak Boonvornmethee 2,260,200 6.98 3. Mr. Pinai Jinaphan 1,400,000 4.32 4. Ms. Nattawan Piyamahachoti 1,259,800 3.89 5. Ms. Orayaporn Karnchanachari 1,200,000 3.70 6. Ms. Lakkana Jirakal 1,087,200 3.36 7. Mrs. Suwimol Hleesuwan 984,200 3.04 8. Air Marshal Apichart Kuoysukho 845,400 2.61 9. Mr. Virat Udomsinwattana 785,300 2.42 10. Mr. Pornprasert Karnchanachari 589,100 1.82 Total 23,379,758 72.17 Source: www.set.or.th 3.5 Board of Directors WAVE Board of Directors is composed of 11 members as follows: No. Name Position 1 Mr. Matthew Kichodhan Chairman and Chief Executive Officer 2 Mr. Soonthorn Pokachaiyapat Vice Chairman 3 Ms. Cathleen Maleenont Director 4 Ms. Tracy Ann Maleenont Director
Page 28า Opinion of the Independent Financial Advisor on asset acquisition
No. Name Position 5 Ms. Piyawadee Maleenont Director 6 Ms. Manida Zinmerman Director 7 Mr. Tee Seeumpornroj Director 8 Mr. Chansak Fuangfu Director and Independent Director 9 Mrs. Tipawan Wuttisarn Director, Independent Director and Chairman of the Audit Committee 10 M.L. Nalinee Hastintra Director and Member of the Audit Committee 11 Mr. Somsak Phayapdacharchai Director, Independent Director and Member of the Audit Committee Source: www.set.or.th 3.6 Operating results and financial position of the Company in 2011-2013 Statements of comprehensive income 20111/ 2012 2013 Consolidated Baht 000’s % Baht 000’s % Baht 000’s % Revenues Sales 14,954.44 7.80 7,237.78 4.00 1,726.70 0.60 Revenue from rendering of services 166,039.64 86.57 142,954.11 79.09 281,965.44 97.48 Total revenues 180,994.08 94.37 150,191.89 83.09 283,692.14 98.08 Costs Costs of sales (8,048.71) (4.20) (5,157.68) (2.85) (986.36) (0.34) Costs of rendering of services (134,353.39) (70.05) (102,517.79) (56.72) (199,818.50) (69.08) Total costs (142,402.10) (74.25) (107,675.46) (59.57) (200,804.86) (69.42) Gross profit 38,591.98 20.12 42,516.43 23.52 82,887.27 28.66 Other income 10,794.22 5.63 30,562.09 16.91 5,551.21 1.92 Selling expenses (3,893.95) (2.03) (17,884.30) (9.89) (30,433.23) (10.52) Administrative expenses (56,918.04) (29.68) (44,993.07) (24.89) (45,387.51) (15.69) Share of loss from associate (813.00) (0.42) (23,116.41) (12.79) (3,905.41) (1.35) Profit (Loss) before income tax (12,238.79) (6.38) (12,915.25) (7.15) 8,712.33 3.01 expense Income tax expense (722.20) (0.38) 8,560.00 4.74 (960.00) (0.33) Net profit (loss) for the year (12,960.99) (6.76) (4,355.25) (2.41) 7,752.33 2.68 Other comprehensive income ------Total comprehensive income (12,960.99) (6.76) (4,355.25) (2.41) 7,752.33 2.68 (expense) for the year
Page 29า Opinion of the Independent Financial Advisor on asset acquisition
20111/ 2012 2013 Consolidated Baht 000’s % Baht 000’s % Baht 000’s % Profit (Loss) and comprehensive income (expense) attributable to: Owners of the parent (12,960.99) (6.76) (4,355.25) (2.41) 7,752.33 2.68 Non-controlling interests - - - - - (12,960.99) (6.76) (4,355.25) (2.41) 7,752.33 2.68 Basic earnings (loss) per share Attributable to owners of the parent Profit (Loss) for the year (0.40) (0.13) 0.24 Note: Financial statements for 2011 were audited by Mr. Pisit Cheewaruengroj, CPA Registration No. 2803, of M.R. & Associates Co., Ltd., an SEC-approved auditor. Financial statements for 2012-2013 were audited and reviewed by Mr. Kajornkiet Arroonpirodkul, CPA Registration No. 3445, of PricewaterhouseCoopers ABAS Ltd., an SEC-approved auditor. 1/ Being restated based on the 2012 financial statements for comparison and analysis purpose.
Statements of financial position 2011 2012 2013 Consolidated Baht 000’s % Baht 000’s % Baht 000’s % Assets Current assets Cash and cash equivalents 92,119.98 18.49 50,467.40 9.89 82,836.56 15.68 Short-term investments 124,524.81 25.00 129,324.62 25.34 10,403.72 1.97 Trade and other receivables 15,049.51 3.02 22,808.58 4.47 66,055.82 12.51 Inventories 25.94 0.01 147.98 0.03 36.83 0.01 Television programs, movies and 42,506.99 8.53 50,668.78 9.93 2,692.02 0.51 concerts production in progress Other current assets 12,987.28 2.61 13,772.41 2.70 15,828.15 3.00 Assets held for sale 36,457.71 7.32 - - - - Total current assets 323,672.22 64.98 267,189.77 52.36 177,853.11 33.67 Non-current assets Investments in associate 31,187.00 6.26 212,585.59 41.66 313,415.18 59.33 Advance for subscription in associate 117,515.00 23.59 - - - - Equipment 6,184.07 1.24 3,516.11 0.69 12,503.61 2.37 Prepaid rent 8,666.31 1.74 7,280.89 1.43 5,895.47 1.12 Deferred tax assets - - 8,560.00 1.68 7,600.00 1.44 Other non-current assets 10,883.52 2.18 11,172.79 2.19 10,953.56 2.07 Total non-current assets 174,435.90 35.02 243,115.39 47.64 350,367.82 66.33 Total assets 498,108.12 100.00 510,305.16 100.00 528,220.92 100.00
Page 30า Opinion of the Independent Financial Advisor on asset acquisition
2011 2012 2013 Consolidated Baht 000’s % Baht 000’s % Baht 000’s % Liabilities and shareholders’ equity Current liabilities Trade and other payables 9,093.88 1.83 19,987.51 3.92 30,973.83 5.87 Advance received for production of 5,200.00 1.04 10,000.00 1.96 - - television programs Unearned revenue - - 30.22 0.01 - - Accrued expenses 1,410.39 0.28 1,337.74 0.26 3,309.39 0.63 Other current liabilities 1,524.73 0.31 2,369.76 0.46 7,181.01 1.36 Current portion of financial lease - - - - 1,534.03 0.29 liabilities Total current liabilities 17,229.00 3.46 33,725.23 6.61 42,998.25 8.15 Non-current liabilities Long-term financial lease liabilities - - - - 6,833.38 1.30 Employee benefit obligations 9,621.55 1.93 9,250.58 1.81 3,307.61 0.63 Deposits 2,843.29 0.57 3,270.33 0.64 3,270.33 0.62 Other non-current liabilities 9,396.91 1.89 9,396.91 1.84 9,396.91 1.78 Total non-current liabilities 21,861.76 4.39 21,917.82 4.30 22,808.23 4.32 Total liabilities 39,090.76 7.85 55,643.05 10.90 65,806.48 12.48 Shareholders’ equity Share capital Authorized share capital Ordinary shares, 32,400,00 shares of 324,000.00 65.05 324,000.00 63.49 324,000.00 61.34 par Baht 10 each Issued and paid-up share capital Ordinary shares, 32,400,00 shares of 324,000.00 65.05 324,000.00 63.49 324,000.00 61.34 paid-up Baht 10 each Share premium 370,773.74 74.44 370,773.74 72.66 370,773.74 70.19 Discount from increment of investment (1,063.24) (0.21) (1,063.24) (0.21) (1,063.24) (0.20) in subsidiary Retained earnings Appropriated – legal reserve 16,726.35 3.36 16,726.35 3.28 16,726.35 3.17 Deficits (251,419.49) (50.47) (255,774.74) (50.12) (248,022.41) (46.95) Equity attributable to owners of the 459,017.36 92.15 454,662.11 89.10 462,414.44 87.54 parent Non-controlling interest - - - - - Total shareholders’ equity 459,017.36 92.15 454,662.11 89.10 462,414.44 87.54 Total liabilities and shareholders’ 498,108.12 100.00 510,305.16 100.00 528,220.92 100.00 equity Note: Financial statements for 2011 were audited by Mr. Pisit Cheewaruengroj, CPA Registration No. 2803, of M.R. & Associates Co., Ltd., an SEC-approved auditor. Financial statements for 2012-2013 were audited and reviewed by Mr. Kajornkiet Arroonpirodkul, CPA Registration No. 3445, of PricewaterhouseCoopers ABAS Ltd., an SEC-approved auditor.
Page 31า Opinion of the Independent Financial Advisor on asset acquisition
Cash flow Unit: Baht 000’s Statements of cash flow 2011 2012 2013 Net cash provided by (used in) operating activities (17,097.04) (14,174.68) 16,791.93 Net cash provided by (used in) investing activities (66,322.93) (27,477.90) 15,577.23 Net cash provided by (used in) financing activities - - - Net increase (decrease) in cash and cash equivalents (83,419.97) (41,652.58) 32,369.16 Opening balance of cash and cash equivalents 175,539.96 92,119.98 50,467.40 Closing balance of cash and cash equivalents 92,119.98 50,467.40 82,836.56
Key financial ratios Financial ratios 2011 2012 2013 Liquidity ratios
Current ratio time 18.79 7.92 4.14
Quick ratio time 13.45 6.01 3.70
Cash flow liquidity ratio time (0.56) (0.56) 0.44
Account receivable turnover ratio time 9.39 8.80 6.63
Average collection period day 38.34 40.90 54.26
Inventory turnover ratio1/ time 4.92 3.27 0.84
Average age of inventories day 73.12 110.09 426.80
Account payable turnover ratio time 8.27 7.41 7.88
Repayment period day 43.52 48.62 45.68
Cash cycle day 67.94 102.37 435.39
Profitability ratios
Gross profit margin % 21.32 28.31 29.22
Operating profit margin2/ % (12.28) (13.56) 2.49
Cash to earnings ratio2/ % 76.94 69.62 237.63
Net profit margin (loss) % (6.76) (2.41) 2.68
ROE % (2.78) (0.95) 1.69
Efficiency ratios
Return on assets % (2.50) (0.86) 1.49 Return on fixed assets % (100.74) (24.56) 107.94 Asset turnover time 0.35 0.30 0.55
Financial policy ratios
Debt to equity ratio time 0.09 0.12 0.14 Interest coverage ratio time 0 0 0 Commitment coverage ratio time (0.15) (0.16) 0.16 Payout ratio % 0 0 0
Note: 1/ Calculated from inventories before impairment of products. 2/ Operating profit calculated from revenue from sales plus revenue from rendering of services less costs of sales, costs of rendering of services, selling expenses and administrative expenses.
Page 32า Opinion of the Independent Financial Advisor on asset acquisition
Analysis of operating results and financial position Operating results in 2011-2013 Revenues from sales and rendering of services The Company and its subsidiaries in 2011-2013 generated revenues primarily from revenues from rendering of services-television program production and distribution, sales of goods-DVDs, sublease of space, and operations of concerts and events which is a new line of business introduced in 2012. These main revenues amounted to Baht 180.99 million, Baht 150.19 million and Baht 283.69 million in 2011-2013 respectively and could be broken down as follows: 1. Television program production and distribution generated revenues of Baht 160.47 million in 2011, Baht 103.05 million in 2012 and Baht 179.21 million in 2013. In 2012, such revenues plunged by Baht 57.42 million or 35.78% from a year earlier due to impacts from rescheduling of some television programs to be more appropriate. In 2013, such revenues grew strongly by Baht 76.16 million or 73.91% year on year, driven by production of two drama series, namely Porn Phrom Onlaweng and Rak Sud Rit, which obtained high ratings and thus prompted the employer to instruct the Company to increase episodes of these two drama series from those originally agreed. Moreover, the Company could earn more income from sales of advertising for a television sitcom program, Jud Nat Phop the Series. 2. Management of movie copyrights and wholesale and retail sale of DVDs recorded total revenues of Baht 14.95 million in 2011, Baht 7.23 million in 2012 and Baht 1.09 million in 2013. Revenues from sales of copyrighted Thai drama series of Thai TV Color Channel 3 dropped by Baht 7.72 million or 51.64% in 2012 due to a year-on-year decline in distribution quantity of new TV drama series in copyrighted DVD format. For 2013, such revenues plummeted by Baht 6.14 million or 84.92% compared with 2012, stemming from consumers’ lowered demand for drama series in DVD format. 3. Sublease of space brought in total revenues of Baht 5.57 million, Baht 4.82 million and Baht 6.34 million in 2011-2013 respectively down by Baht 0.75 million or 13.46% in 2012 and up by Baht 1.52 million or 31.54% in 2013. The drop in such revenues in 2012 resulted from the fact that the Company was in such year looking for new sub-lessees to replace the old ones whose contracts had expired, whereas the revenue growth in 2013 was attributed to an upward revision of sublease fees as agreed and specified in the contracts. 4. Operations of concerts and events recorded total revenues of Baht 35.07 million in 2012, growing by Baht 22.39 million or 63.84% to Baht 57.46 million in 2013 due to an increase from two concerts organized in 2012 to five concerts from the full-year operation in 2013. The Company could also earn income from distribution of music and videos of those concerts. 5. Movies production and distribution, a new line of business launched in 2013, generated revenues of Baht 39.59 million from the movie, Thong Suk 13. Other income The Company and its subsidiaries recorded other income of Baht 10.79 million, Baht 30.56 million and Baht 5.55 million in 2011-2013 respectively. In 2012, such income surged year on year by Baht 19.77 million or 183.23%, stemming from gains on disposal of assets held for sale-Chon Buri plant of Baht 18.5
Page 33า Opinion of the Independent Financial Advisor on asset acquisition
million. For 2013, other income declined by Baht 25.01 million, primarily because there was no extraordinary item such as the assets held for sale as in the previous year. Costs of sales and rendering of services Costs of sales were Baht 8.05 million, Baht 5.15 million and Baht 0.99 million in 2011-2013 respectively, plunging by Baht 2.89 million or 35.90% in 2012 and by Baht 4.17 million or 80.97% in 2013. Costs of rendering of services totaled Baht 134.35 million, Baht 102.52 million and Baht 199.82 million in 2011-2013 respectively, dropping by Baht 31.38 million or 23.70% in 2012 and then increasing by Baht 97.30 million or 94.90% in 2013. Costs of sales and rendering of services made up 78.69%, 71.69% and 70.78% of revenues from sales and rendering of services in 2011-2013 respectively. Such rise and fall in costs of sales and rendering of services were in tandem with revenues from sales and rendering of services. Selling and administrative expenses Selling and administrative expenses in 2011-2013 totaled Baht 60.81 million, Baht 62.88 million and Baht 75.82 million respectively, increasing by 2.07 Baht million or 3.40% in 2012 and Baht 12.94 million or 20.58% in 2013. The increase in such expenses in 2012 came from costs of artist creation and album production and in 2013 resulted from advertisements and campaigns for concerts. Share of loss from associate In 2011-2013, share of loss from associate amounted to Baht 0.81 million, Baht 23.11 million and Baht 3.91 million respectively, jumping by Baht 22.29 million or 2,751.85% in 2012 and then decreasing Baht 19.21 million or 83.12% in 2013. The dramatic increase in 2012 resulted from recognition of the share of loss from a full-year operation, while in 2011 the Company just began recognition of such loss in the middle of the year. For 2013, the associate could increase its production and distribution of electricity, leading to a decline in loss from operation. Income tax Income tax amounted to Baht 0.72 million, Baht 8.56 million and Baht 0.96 million in 2011-2013 respectively, dropping by Baht 9.28 million or 1,288.00% in 2012 and then increasing by Baht 9.52 million or 111.21% in 2013. The substantial decrease in 2012 was ascribed to the record of deferred tax assets in such period. For 2013, the increase in income tax stemmed from profit earned by the Company from operation, but, due to the tax loss carried forward and deferred tax assets, the income tax did not increase significantly. Net profit (loss) The Company posted a net loss of Baht (12.96) million in 2011 and Baht (4.35) million in 2012 and a net profit of Baht 7.75 million respectively, representing a decrease of Baht (8.60) million or (66.36)% in 2012 and an increase of Baht 12.11 million or 278.16% in 2013. Loss incurred in 2012 was a result of recognition of share of loss from associate of Baht 23.12 million, whereas a profit could be generated from usual operation in the amount of Baht 10.20 million. For 2013, the Company reported a net profit increase
Page 34า Opinion of the Independent Financial Advisor on asset acquisition
with partly to a decline in loss from associate and partly to growth in profit from usual operation to Baht 12.62 million.
Financial position as at December 31, 2011-2013 Total assets As regards financial position of the Company and its subsidiaries as at December 31, 2011-2013, they had total assets of Baht 498.11 million, Baht 510.31 million and Baht 528.22 million respectively, growing by Baht 12.20 million or 2.45% in 2012 and by Baht 17.91 million or 3.51% in 2013. Details of the major asset items are as follows: Cash and cash equivalents and short-term investments Assets primarily comprised cash and cash equivalents and short-term investments which were as liquid as cash. As of December 31, 2011-2013, these asset items amounted to Baht 216.64 million, Baht 179.79 million and Baht 93.24 million respectively, representing 43.49%, 35.23% and 17.65% of total assets over the same period respectively. In 2012 and 2013, the decrease in these items mainly resulted from the higher need for use as working capital in production of television programs and movies and operations of concerts and events, together with additional investment in associate engaging in energy business. However, the Company conducted liquidity management through various forms of investments expected to yield reasonable returns yet with low risk exposure, mostly consisting of deposits with financial institutions and investment in marketable securities. Trade accounts receivable-net As at the end of fiscal years 2011-2013, the Company’s trade accounts receivable-net amounted to Baht 13.13 million, Baht 20.93 million and Baht 64.59 million respectively, making up 2.64%, 4.10% and 12.23% of total assets respectively. In 2012-2013, trade accounts receivable increased in line with the operating performance, primarily coming from production and distribution of television programs and operations of concerts and events. Television programs, movies and concerts production in progress As at the end of fiscal years 2011-2013, television programs, movies and concerts production in progress accounted for Baht 42.51 million, Baht 50.67 million and Baht 2.69 million respectively, representing 8.53%, 9.93% and 0.51% of total assets respectively. In 2012, this item grew by Baht 8.16 million or 19.20% because the concerts operations business was newly launched in such year. For 2013, the decrease in this item resulted from two drama series being broadcast and concerts being organized as scheduled. Investments in associate and advance for subscription in associate As at the end of fiscal years 2011-2013, investments in associate and advance for subscription in associate amounted to Baht 148.70 million, Baht 212.59 million and Baht 313.42 million respectively, constituting 29.85%, 41.65% and 59.33% of total assets over the same period respectively. The increase in this item resulted from an increase in the Company’s shareholding in Thai Solar Energy Co., Ltd. from
Page 35า Opinion of the Independent Financial Advisor on asset acquisition
10% to 25% of registered capital of this associate in accordance with resolution of the Extraordinary General Meeting of Shareholders, held on July 8, 2011, and additional share payment called by this associate in 2013 in the amount of Baht 104.74 million. Liabilities As at December 31, 2011-2013, the Company had total liabilities of Baht 39.09 million, Baht 55.64 million and Baht 65.81 million respectively. In 2012, total liabilities soared by Baht 16.55 million or 42.34% from a year earlier, due to impacts from the operation of a new line of business, concerts organizing, in 2012. For 2013, total liabilities increased from 2012 by Baht 10.17 million or 18.27%, driven by an increase in trade accounts payable in line with business operation. Shareholders’ equity Shareholders’ equity amounted to Baht 459.02 million, Baht 454.66 million and Baht 462.41 million as at December 31, 2011-2013 respectively, dropping by Baht (4.36) million or (0.95)% and then increasing by Baht 7.75 million or 1.70% respectively. In 2012, the decrease in equity resulted from a share of loss from associate recognized in a greater amount than profit from normal operation of the Company. For 2013, profit from normal operation grew slightly from the previous year, while the share of loss from associate decreased considerably. The Company’s debt to equity ratio stood at 0.09, 0.12 and 0.14 time in 2011-2013 respectively. Liquidity As at the end of fiscal years 2011-2013, the Company and its subsidiaries had cash flow of Baht 92.12 million, Baht 50.47 million and Baht 82.84 million respectively. Cash provided from and used in each activity in 2013 was as follows: - Operating activities: Net cash was provided in the amount of Baht 16.79 million due to improvement in operating performance. - Investing activities: Net cash was provided in the amount of Baht 15.58 million subsequent to sales of some held-to-maturity securities of Baht 116.69 million, offset by investments in associate additionally paid in the amount of Baht 104.74 million. - Financing activities: -None- By aggregating the net increase in cash and cash equivalents of Baht 32.37 million with the beginning balance of cash of Baht 50.47 million, the Company had cash balance available as at the end of fiscal year 2013 in the amount of Baht 82.84 million.
Page 36า Opinion of the Independent Financial Advisor on asset acquisition
3.7 Overview of industry relating to the Company’s business Production and distribution of television programs Thai economy slowed down slightly in the past year, directly affecting advertising industry. Nonetheless, historical data show that television media has been the industry leader garnering the largest market share since it can reach the mass market and offer simultaneous broadcast of images and sounds to the audience. Production of television programs is currently faced with stiffer competition, triggered by ever- changing consumer preferences. Broadcasters must therefore always improve their programs to enhance their competitiveness. Television stations have modernized their programming format and introduced new programs in order to increase popularity among viewers. In the existing analog broadcast system, viewers in the low signal areas suffer from poor quality of pictures and sounds. Therefore, to allow the public’s access to radio and television broadcasting on a comprehensive basis and to develop the country’s broadcasting business, the National Broadcasting and Telecommunications Commission (“NBTC”) has devised a plan on migration into the digital terrestrial television broadcasting system. Then in late 2013, the NBTC organized an auction for digital TV licenses for a total of 24 new television channels divided into four categories as follows: 1) High Definition Variety Category (HDTV) with seven channels; 2) Standard Definition Variety Category (SDTV) with seven channels; 3) Standard Definition Kids and Family Category (SDTV) with three channels; and 4) Standard Definition News and Information Category (SDTV) with seven channels. At such auction, BEC-Multimedia Co., Ltd. (Thai TV Color Channel 3) won the bid for three digital TV licenses, comprising one HDTV variety channel, one SDTV variety channel and one SDTV kids and family channel. As such, WAVE will have an opportunity to expand its television program production and distribution for broadcasting on Thai TV Color Channel 3. WAVE also plans to produce additional television programs to support the new digital TV broadcasts. Since a total of 48 new digital TV channels will be made available, some of the licensed broadcasters of these channels may have no skills in program production. This will relatively provide an opportunity for WAVE to render television program production services for them. Still, despite the benefit from emergence of additional digital TV channels to the existing television program producers, competition in this business will become tougher as triggered by new-coming players.
Copyrights and distribution of Thai drama series of Thai TV Color Channel 3 Today, movies that are popular in domestic market include imported films from Hollywood and independent production houses, Hong Kong movies, Korean series, Thai drama series of Thai TV Color Channel 3, etc. Apart from WAVE, there are many other holders of those movies copyrights which are leading operators in the country.
Page 37า Opinion of the Independent Financial Advisor on asset acquisition
The trend of this business hinges on consumers’ preference for any movies, mainly driven by the movie producer’s production quality. Piracy is a crucial factor that has gravely affected copyright holders. The more popular a movie is, the more unauthorized copies of such movie will be produced and sold. Despite serious anti-piracy efforts between private operators and government sector, the outcome remains unsatisfactory since consumers themselves still prefer to buy illegal products which are cheaper because they are of lower quality and are not subject to copyright fees. This is a major hindrance to all copyright holders to grow their business. While striving against illegal products, the Company is also to cope with some uncontrollable factors such as consumers’ behaviors and the government policy on relevant anti-piracy laws and enforcement. Against this backcloth, the Company is making an attempt in product improvement and pricing strategy adjustment to best meet customer demand, as well as procuring movies that suit well with the market’s and customers’ preference. In overall, there is still growth potential in this business, helped by the government sector’s more serious and stricter control and suppression of copyright violation by implementing measures such as plan to designate CD as a controlled product, granting of rewards for any lead to illegal products, control over imports of CD production machines, production control, and distribution control. All distributors must register with Department of Business Development and must be certified by their copyright owners. Owners of buildings and shopping centers where illegal products are sold will also be penalized. State officials are assigned to visit and inspect buildings and shopping malls suspicious of allowing sales of pirated products, including Pantip Plaza, Mah Boonkrong Shopping Center, Tawanna Square, Zeer Rangsit Shopping Mall, Future Park Rangsit, Seacon Square, Seri Center, Baan Mor, Khlong Thom, etc. It has been assured by the government sector that such measures will help to reduce pirated products, that illegal product sales controlled by groups of powerful people will be eradicated, and that legitimate business conduct will be promoted. The fast-changing technology causes the forms of intellectual property violation to change as well. Over the past several years, the piracy of copyrighted music and movies in CD format had been intensified. When the digital technology is introduced, the violation of copyrights in CD format has decreased rapidly and will eventually disappear. This does not mean that the intellectual property violation has ended, but it continues in changing forms. Department of Intellectual Property accordingly has pushed for an amendment to the Copyright Act to cover the piracy of digital products. This law amendment has already been considered by the cabinet and currently under consideration of the Council of State. If consumers change their habits to buy only copyrighted products and copyright holders, as suppliers to serve consumers’ needs, concentrate on upgrading their product quality and diversity with fair pricing, the copyright violation problem could then be eliminated.
Page 38า Opinion of the Independent Financial Advisor on asset acquisition
4. Reasonableness of the transaction 4.1 Objective and necessity of the transaction The Company has engaged in production and distribution of television programs and is one of the licensees and distributors of Thai drama series from Thai TV Color Channel 3. It has also engaged in sublease of space at shopping malls and has diversified into a solar energy electricity production business. The Company generates income mainly from production and distribution of television programs and related businesses. Presently, Thailand’s television industry is undergoing a radical evolution through migration from the original analog broadcast system into the digital technology that provides better image and sound quality. The National Broadcasting and Telecommunications Commission (NBTC) organized an auction for digital TV licenses for 24 commercial service channels in December 2013 and January 6, 2014. The NBTC already announced names of all bid winners for those 24 digital TV channels, comprising seven HD variety channels, seven SD variety channels and three kids and family channels. In this regard, BEC World Plc., the owner of Thai TV Color Channel 3, won three licenses, one HD channel, one SD channel and one children channel. Prompted by such changing broadcast system, the Company, as a television program producer for Thai TV Color Channel 3, has mapped out a policy to produce new television programs for distribution to those three digital TV channels that Thai TV Color Channel 3 won the bid for. One of the new programs planned by the Company is an English language teaching program. While the Company was working on this new program, the shareholders of Efficient English Services Co., Ltd. (“EES”), an exclusive franchisee to operate an English language institute in the name of “Wall Street English” in Thailand, expressed an intention to sell their shares in EES. The existing shareholders of EES intended to sell shares to only a party which has strong potential and interest in operating an English language institute business, and had invited prospective candidates to participate in an auction for the shares. The Company was among those candidates that were approached to join in the bidding. Envisioning that investment in such language institute will help create synergy such that the Company can leverage on EES’s skilled personnel to produce the English language teaching program, the Company therefore decided to participate in bidding for EES shares and was finally selected by EES shareholders as the bid winner. Accordingly, the Board of Directors’ meeting of the Company No. 3/2014 on March 10, 2014 resolved to grant approval for the Company to acquire ordinary shares in EES from EES existing shareholders in the amount of 100% of EES’s paid-up registered capital at the total acquisition price not more than Baht 800 million. The Company views that EES has a strong financial position and profitable performance. It has operated an English language institute in the trade name, “Wall Street English,” in Thailand for more than a decade, having nine centers in various areas of Bangkok. Such investment will not only create business synergy for the Company, but also expand scope of its business in terms of both size and diversity, thus helping to diversify its business risk. This transaction will also enable the Company to generate more income and enhance its profitability which will benefit the Company and its shareholders in the long term.
Page 39า Opinion of the Independent Financial Advisor on asset acquisition
If the shareholders grant approval for the Company to acquire shares in EES, the Company will, after completion of the transaction, still have the definite policy to resume the core business in production of television programs for broadcast on the free TV and the digital TV. Although revenues of the Company when compared with revenues from EES are currently in the proportion of about 30:70, the Company expects that revenues from its core activity and revenues from the English language institute business will be at about the same level in the next 3-5 years.
4.2 Advantages and disadvantages of entering into the transaction 4.2.1 Advantages of entering into the transaction (1) Production of television programs for distribution to digital TV channels The Company currently is producer and distributor of television programs for Thai TV Color Channel 3. Subsequent to Thai TV Color Channel 3 winning the bid for new digital TV channels, the Company plans to produce new television programs, one of which will be an English language teaching program. As such, the acquisition of shares in EES, an operator of “Wall Street English” language institute, will create business synergy. That is, the Company can capitalize on its own expertise in television program production to produce the said English language teaching program or can help promote EES’s language institute through the drama series programs or other television programs broadcast on Thai TV Color Channel 3 or the new digital TV channels that can better reach the target groups or even expand the audience base. The Company will also be able to employ EES’s existing instructors to host such English language teaching program and utilize its own skilled personnel to produce such program, hence optimizing the use of personnel from both entities and thereby helping to boost total revenues and profit of the Company. (2) New business opportunity for the Company English language institute is a promising business with strong growth potential in Thailand. The target groups are students wishing to improve their English proficiency for English test required for continuing their higher education, or individual persons desiring to develop their English language skills useful for daily life and work, including corporate organizations that see the need to improve their staff’s English communication skills. As Thailand and other Southeast Asian member states will be united into Asean Economic Community (AEC) by 2015, with English to be used as an official language for business, those target groups accordingly intend to develop their English proficiency. Therefore, the acquisition of EES shares will not only contribute to expansion of television program production, but also provide an additional business opportunity for the Company. EES has operated “Wall Street English” language institute for more than 10 years with a strong position and reputation as a leader in this industry in Thailand. It has operated at a profit and maintained sufficient cash flow. This will provide the Company with a new business opportunity by expanding EES’s English language training centers in order to serve the growing demand, and further diversifying into other language institute business. The Company will negotiate with WSI for
Page 40า Opinion of the Independent Financial Advisor on asset acquisition
extension of the target groups to cover young children in the future (Wall Street English presently caters to students aged 17 years and over). (3) Stronger growth in total revenues and net profit of the Company The Company is a producer and distributor of television programs and a licensee and distributor of drama series from Thai TV Color Channel 3, and has also engaged in sublease of space at shopping malls. Its major income source is from the production and distribution of television programs and related businesses. In 2011-2013, the Company recorded total revenues of Baht 192 million, Baht 181 million and Baht 289 million. Its total revenues were not large because of the tough competition which came not only from television program producers in the same business but also operators of other media who would vie for advertising budgets. In late 2012, the Company invested in a solar energy power plant, by acquiring shares in Thai Solar Energy Co., Ltd. (“TSE”) in the amount of 25% of registered and paid-up capital. However, revenues from such power production business remain in a small percentage. The Company has a policy to grow its revenues and profits by investing in other businesses that yield favorable returns and could generate income and profits instantly. Therefore, it has decided to invest in 100% of shares in EES, which operates an English language institute in Thailand in the name, “Wall Street English.” EES has a solid financial position with profitable performance, having engaged in this business for more than 10 years. More importantly, this business has plentiful liquidity because tuition fees are collected in advance from the applicants for EES English learning programs and will be gradually recognized as income according to the duration of each course. After this transaction, EES will become a subsidiary of the Company. As such, EES’s revenues and profits will be consolidated into the Company’s total revenues and profits, thereby helping to increase the Company’s operating results. By comparing the Company’s audited consolidated financial statements ended December 31, 2012 and 2013 with EES’s audited financial statements as of December 31, 2012 and 2013, the total revenues and profits of the Company after the acquisition of EES shares will increase as follows: Total revenues for 2012 Before share acquisition After share acquisition Total revenues of WAVE EES WAVE + EES Total revenues 180.75 687.22 867.97 Total profit for 2012 Before share acquisition After share acquisition Total profit of WAVE EES WAVE + EES Total profit (4.36) 37.83 33.47 Note: Revenues and net profit of WAVE and EES are data as of December 31, 2012 derived from their respective audited financial statements.
Page 41า Opinion of the Independent Financial Advisor on asset acquisition
Total revenues for 2013 Before share acquisition After share acquisition Total revenues of WAVE EES WAVE + EES Total revenues 283.69 799.85 1,083.54 Total profit for 2013 Before share acquisition After share acquisition Total profit of WAVE EES WAVE + EES Total profit 7.75 92.50 100.25 Note: Total revenues and profit of WAVE and EES are data derived from the audited consolidated financial statements as of December 31, 2013 of the Company and EES. Therefore, the acquisition of shares in EES will provide an opportunity for the Company to continuously grow revenues and profits in the long run, as well as to have a larger business size and a more diverse revenue structure. This will help to diversify business risk and to stabilize and grow its revenue and profit earning, thus benefiting the Company and its shareholders in the long term. (4) Diversification of business risk The Company’s existing core business is highly competitive with a low expansion rate. To cope with this risk, the Company has expanded into a solar power generation business, which could earn a more stable income, but contribute a minimal percentage of total revenues. To boost the income size of its group of companies and diversify risk through a more diverse type of business, the Company has a policy to invest in related businesses that are more sustained and have potential for revenue and profit growth, strong liquidity and favorable returns as well as enable the Company to recognize income and profit instantly. The Company accordingly decided to invest in EES, which has operated the “Wall Street English” language institute in Thailand for more than a decade. Currently, EES operates a total of nine centers, eight of which cater to retail customers and one serves corporate organizations (at Laem Chabang industrial estate). English language institute is a business that earns income almost totally in cash, with a short payback period, and does not require huge investment funds for branch expansion, with average cost up to Baht 20 million – 30 million per branch (depending on area size), which could be funded by cash flow from business operation. Thus, the acquisition of EES shares can diversify the Company’s risk exposure and increase its business diversity, while enabling the Company to instantly recognize income and profit from operation. 4.2.2 Disadvantages of entering into the transaction (1) Increased debt burden The Company will raise loans from financial institutions to finance the acquisition of shares in EES in the amount not more than Baht 800 million, resulting in interest expenses of not more than Baht 39 million a year (based on loan interest rate of 4.875% p.a.). This will affect the Company’s liquidity as it will have to use cash from operation for paying such loans and interest expenses.
Page 42า Opinion of the Independent Financial Advisor on asset acquisition
However, EES business could bring in a large amount of cash and has plentiful liquidity with profitable operation. It posted a net profit of Baht 37.83 million in 2012 and Baht 92.50 million in 2013. It is therefore expected that cash flow from EES’s operation will be sufficient for payment of such loans and interest. After entering into this transaction, the Company’s long-term loans will increase by Baht 800 million and, hence, its liabilities will mount from Baht 65.81 million in 2013 to Baht 865.81 million, thereby pushing the debt to equity ratio up from 0.14 to 1.87 times. Meanwhile, its long-term investments will increase as well by Baht 800 million and its total assets will grow from Baht 528.22 million in 2013 to Baht 1,328.22 million, leading return on assets to fall from 1.49 to 0.84 time and asset turnover from 0.55 to 0.31 time. (2) EES’s performance failing to meet the target After completion of this transaction, EES will become a subsidiary of the Company and its net profit will be incorporated into the Company’s consolidated financial statements. In 2012 and 2013, EES recorded a net profit of Baht 37.83 million and Baht 92.50 million respectively. If its performance fails to meet the target, the Company’s consolidated operating results could also be affected. EES has experienced strong performance with solid financial position. Through continued business operation with profitable results, EES reported retained earnings as at December 31, 2012 and 2013 in the amount of Baht 42.17 million and Baht 134.66 million respectively (in 2012, EES paid dividend from its 2011 performance to its shareholders in the amount of Baht 70 million). Thus, it is expected that after the acquisition of EES shares the Company will capitalize on EES’s business potential to further expand its businesses, which will help strengthen the financial status and performance of both EES and the Company.
Page 43า Opinion of the Independent Financial Advisor on asset acquisition
4.3 Advantages and disadvantages of not entering into the transaction 4.3.1 Advantages of not entering into the transaction (1) No additional burden from loans Given that the Company does not acquire shares in EES, it will not have to bear debts from new borrowing from financial institutions and to use funds available from operation for paying such loans and interest. Thus, the Company’s liquidity will not be affected. (2) No risk from performance of EES If the Company does not acquire shares in EES, it will not have to consolidate financial statements with EES. As such, any change in financial position and performance of EES will not have any impact on the Company’s consolidated financial statements. 4.3.2 Disadvantages of not entering into the transaction (1) Loss of opportunity of business expansion and recognition of additional income and profit If the Company does not acquire shares in EES, it will lose the opportunity to recognize additional income and profit obtained from the operation of “Wall Street English” language institute, which is a profitable business with strong liquidity and stability. Moreover, the Company will be unable to expand its business by both size and diversity in order to mitigate risk from reliance on revenues from television program production and distribution, its core activity. Hence, it will lose the opportunity of business expansion and additional income and profit earning. (2) Lack of stability in consistent income recognition The Company mainly engages in television program production and distribution, which is a highly competitive business with a low expansion rate. Despite its effort to cope with this risk by additionally investing in a solar power production business which could generate more stable income, revenues from this business are still in a small proportion. Therefore, by acquiring shares in EES, the Company will be able to strengthen its stability in consistent income generation. On the contrary, if it does not acquire EES shares under this transaction, its income earning stability could be shaken. Nonetheless, the Company will carry on its core business in television program production and distribution. One of its objectives is to produce content for broadcast on both free TV and digital TV. Although revenues from such core business remain lower than income from EES, the Company expects that, after entering into this transaction, the percentage of revenues from both businesses will be at about the same level. After negotiation with the Franchisor, the Company plans to capitalize on the content and brand power of EES to further expand the existing business by initiating new television programs to address consumer needs and gear up for the forthcoming advent of the AEC.
Page 44า Opinion of the Independent Financial Advisor on asset acquisition
4.4 Potential risks from entering into the transaction 4.4.1 Risk involved with liquidity and adequacy of working capital The acquisition cost of EES shares is not more than Baht 800 million, which will be totally financed by loans from financial institutions. The Company will therefore be burdened with interest payment and principal repayment to the lenders. However, after the acquisition of shares in EES, the Company will receive dividend from EES, which, combined with cash available from its operation, will be sufficient for servicing such debts to the financial institutions. If the performance of EES does not turn out as projected, the Company will then be prone to liquidity shortage or inadequacy of working capital for debt servicing to the lenders. To cushion against the said risk, the Company’s management has a policy to procure additional funding reserve by planning to sell existing shares held by the Company in Thai Solar Energy Co., Ltd. (“TSE”) together with the initial public offering that TSE plans to launch in the next 2-3 years.
4.4.2 Risk from failure to renew the Franchise Agreement EES operates an English language institute in Thailand in the name of “Wall Street English” under the 10-year Franchise Agreement made with an overseas franchisor. In the event that EES fails to honor the terms and conditions therein, including, for instance, default on debt payment to the franchisor, incurrence of overwhelming debts that finally plunges EES into bankruptcy, etc., EES could then risk facing termination of the Franchise Agreement or failing to be awarded agreement renewal. This will materially affect the operation of EES. However, the said Franchise Agreement reached the end of its original 10-year term in late 2012 and has been renewed already. The agreement is renewed for a second term of 10 years, ending April 29, 2022, with the renewal option granted for another three consecutive terms of five years each. As a result, the Company is confident that when the Franchise Agreement expires, EES will be able to have it renewed, as seen from the recent renewal. Besides, EES itself has had a strong financial status with successful and profitable operation in line with the established targets.
4.4.3 Risk associated with renewal of space rental contracts for Wall Street English centers EES operates nine Wall Street English centers on rented space at shopping malls and office buildings under rental contracts for an average term of about three years. Failure to renew the said contract for any of its centers could have an adverse impact of the future performance of EES. However, the Company is confident that EES’s Wall Street English centers have been widely accepted and reputable as a leading English language institute in Thailand. Rather, its brand power could help promote the image of the place where its center is located. After all, EES has been successful in renewing the expired rental contracts for all of its centers. No problem is thus anticipated in such contract renewal.
Page 45า Opinion of the Independent Financial Advisor on asset acquisition
4.4.4 Risk involved with the exclusivity for Wall Street English franchise in Thailand It is stipulated in the Area Development Agreement that EES shall have the exclusive right to operate Wall Street English language center in Thailand provided, however, that EES shall make available no fewer than eight centers and achieve total revenues of not less than USD 6.4 million per year, or equivalent to Baht 207.42 million per year (based on average exchange rate as of March 7, 2014 of Baht 32.4092/USD from www.bot.or.th). During 2010-2013, EES generated revenues from tuition fees totaling Baht 427.14 million, Baht 588.85 million, Baht 682.82 million and Baht 796.27 million respectively, apparently higher than the minimum requirement of USD 6.4 million per year, or equivalent to Baht 207.42 million per year (based on average exchange rate as of March 7, 2014 of Baht 32.4092/USD). In terms of number of branches, it is currently operating a total of nine centers. It is therefore believed that EES will be able to retain the exclusive right to the Wall Street English franchise.
Page 46า Opinion of the Independent Financial Advisor on asset acquisition
5. Fairness of price and conditions for the transaction 5.1 Appropriateness of price The Company intends to acquire 1,656,600 shares in EES with a par value of Baht 10 per share, divided into 630,000 ordinary shares and 1,026,600 preferred shares, at the total purchase price of not more than Baht 800 million or equivalent to not more than Baht 482.92 per share. IFA has measured a fair value of EES shares by various approaches to be a basis for rendering opinion on reasonableness of such acquisition price, as follows: (1) Market Price Approach (2) Book Value Approach (3) Adjusted Book Value Approach (4) Price-to-Book Value Ratio Approach (5) Price-to-Earnings Ratio Approach (6) EV/EBITDA Ratio Approach (7) Discounted Cash Flow Approach
Details of share valuation (1) Market Price Approach Since EES ordinary shares are not listed on the stock exchange, no market price of the shares is available. Therefore, this approach is not applicable for the share valuation.
(2) Book Value Approach By this approach, EES shares are appraised from the net book value of assets (total assets less total liabilities), or equivalent to shareholders’ equity of EES divided by number of shares to derive the book value of shares. According to EES’s financial statements as of December 31, 2013 audited by its auditor (Mrs. Sumalee Chokdeeanan, CPA Registration No. 3322, of Grant Thornton Ltd., an SEC-approved auditor), EES shares are valued as follows: Item Baht million Paid-up registered capital as of Dec 31, 2013 - Ordinary shares 6.30 - Preferred shares 10.27 Retained earnings (deficit) - Appropriated (legal reserve) 1.65 - Unappropriated 134.66 Shareholders’ equity (book value) 152.89
Page 47า Opinion of the Independent Financial Advisor on asset acquisition
Item Baht million No. of ordinary shares as at Dec 31, 2013 (million shares) 0.6300 No. of preferred shares as at Dec 31, 2013 (million shares) 1.0266 Total number of shares (million shares) 1.6566 Par value (Baht/share) 10.00 Book value (Baht/share) 92.29 The share valuation by this approach reflects EES’s financial position as of December 31, 2013 only, but could not reflect the present market value of its assets and its profitability in the future. Under the book value approach, EES shares are valued at Baht 92.29 per share or a total of Baht 152.89 million. The book value approach focuses on financial position at a certain point of time including the book value of assets, but takes no account of an entity’s future profitability and performance.
(3) Adjusted Book Value Approach Under this approach, the shares are valued from EES’s total assets less total liabilities as of December 31, 2013, adjusted by commitments and contingent liabilities and surplus/discount on market value of fixed assets as appraised by an independent valuer, and then divided by total number of shares of EES. EES makes no investment in land, construction and equipment which are of high value. It has invested only in computer system, software and office equipment, which depreciate over service time. These items have thus not been appraised. EES has set aside allowance for doubtful accounts in respect of the receivables from related companies and allowance for obsolescence of goods in respect of its inventories. As such, no book value adjustment is made to any items. However, in the Share Sale and Purchase Agreement between the Company and the Sellers, it has been made a condition that dividend payment can be made to existing shareholders of EES only in the case where cash available of EES is maintained at not less than Baht 100 million, and that if cash available is less than Baht 100 million, the shortfall of Baht 100 million shall be discounted from the purchase price of Baht 800 million. As EES Board of Directors announced dividend payment of Baht 100 million, IFA has adjusted total assets of EES down by Baht 100 million. Based on its financial statements for 2013, EES had cash balance of Baht 167.76 million, which, deducted by the dividend payment of Baht 100 million, will decrease to Baht 67.76 million, which is lower than Baht 100 million specified in the Share Sale and Purchase Agreement. Considering that EES has uninterruptedly operated its business and, in 2013, recorded total revenues of Baht 796 million and a net profit of Baht 92.5 million, it is therefore expected that in 2014, before the date of share sale and purchase transaction which will take place after the Annual General Meeting of Shareholders of the Company in April 2014, EES will be able to maintain cash balance at not lower than Baht 100 million.
Page 48า Opinion of the Independent Financial Advisor on asset acquisition
If on the share transaction date EES fails to maintain the cash balance of Baht 100 million, the Sellers agree to discount the selling price in order to offset the said shortfall of Baht 100 million. IFA has accordingly adjusted the book value by dividend payment of Baht 100 million, resulting in cash balance of Baht 67.76 million. Item Baht million Book value as of Dec 31, 2013 152.89 Downward adjustment of cash balance to Baht 67.76 million according (100.00) to EES’s board resolution on January 6, 2014 for dividend payment of Baht 100 million Book value after adjustment 52.89 Total number of shares (million shares) 1.6566 Adjusted book value (Baht/share) 31.93 This approach reflects EES’s financial position as of December 31, 2013, which is better than the book value approach because the book value is adjusted to reflect the contingent liabilities. However, this approach does not reflect the present market value of assets, nor EES’s future profitability. Under this approach, EES shares are valued at Baht 52.89 million in total or equivalent to Baht 31.93 per share. The adjusted book value approach focuses on financial position at a certain period of time as well as value of assets recorded in the account, but does not reflect an entity’s profitability and performance in the future.
(4) Price-to-Book Value Ratio Approach Under this approach, the shares are appraised from the book value of EES as of December 31, 2013 adjusted by dividend payment of Baht 100 million, equal to Baht 52.89 million in total or Baht 31.93 per share, multiplied by the average P/BV ratio of peer companies engaging in a similar business to EES. It appears that there are not any SET-listed entities operating a similar type of business to EES. However, for information of the shareholders, IFA has made a comparison with companies that have engaged in education business and are listed on other regional stock bourses, including nine peer companies as follows: Company name Country Type of business Assets Assets 1. iPeople Inc Philippines iPeople Inc, located in the Philippines, USD THB was founded in 1989 and listed on 94.5 3,039.69 Philippines stock exchange in 2000. It million million operates a private college business, with educational institutes under its group such as Mapua Institute of Technology, Malayan High School of Science, and
Page 49า Opinion of the Independent Financial Advisor on asset acquisition
Company name Country Type of business Assets Assets Malayan College Laguna. 2. Benesse Japan Benesse Holdings Inc, located in Japan, USD THB Holdings Inc was founded in 1955 and listed on Japan 4,427.7 142,421.40 stock exchange in 1995. It offers million million educational services and language training at elementary and secondary school levels. 3. Hong Kong Hong Kong Hong Kong Education (International) HKD THB Education Investments, located in Hong Kong, was 228.1 944.81 (International) incorporated in 1997 and listed on Hong million million Investments Kong stock market in 2011. It provides tutorial services at various educational levels, together with English language training and tutoring services for overseas college enrollment. Its services are divided into four major lines: tutorial service for secondary level, tutorial service for elementary level, a high school, and English language training. 4. SEG Malaysia SEG International, located in Malaysia, USD THB International was founded in 1977 and listed on 117.1 3,766.64 Malaysia stock market in 1995. It million million operates an educational institute and training service business under a university name of ‘SEGI,’ with one university in Kota Damansara and five colleges in Subang Jaya, Kuala Lumpur, Penang, Sarawak and Seri Kambangan. 5. Raffles Singapore Raffles Education, located in Singapore, USD THB Education was founded in 1990 and listed on 922.4 29,669.92 Singapore stock market in 2002. It million million operates an educational institute business in Asia-Pacific region, with 34 branches in 12 countries. It provides educational programs in design, business, technology and English language teaching. 6. Meiko Network Japan Meiko Network Japan, located in Japan, USD THB Japan was set up in 1984 and listed on Japan 158.1 5,085.44 stock market in 2003. It provides tutorial million million services for elementary to college levels. Tutorial schools under its management include Tokyo Ishin, a tutorial school in medical field; Meiko Soccer School, a soccer school for elementary and secondary students; and Meiko Kids, a tutorial school for elementary level.
Page 50า Opinion of the Independent Financial Advisor on asset acquisition
Company name Country Type of business Assets Assets 7. Riso Kyoiku Japan Riso Kyoiku, located in Japan, was set USD THB up in 1985 and listed on Japan stock 125.5 4,036.83 market in 2001. It offers tutorial services million million in several subjects, available person-to- person or at home or via the Internet and for entrance examination. 8. Far Eastern Philippines Far Eastern University, located in the USD THB University Philippines, was founded in 1928 and 158.3 5,091.88 listed on Philippines stock exchange in million million 1986. It is a private university offering programs in various fields such as arts and sciences, accounting, business, finance, tourism, fine arts, etc. 9. KIP McGrath Australia KIP McGrath Education Centers, located USD THB Education in Australia, was founded in 1974 and 11 353.83 Centers listed on Australian stock exchange in million million 2003. It provides tutorial services for kids aged up to 12 years, focusing on spelling, reading, communication, and mathematics. It presently operates more than 550 centers. Note: Exchange rate as of March 18, 2014: Baht 32.166/USD and Baht 4.142/HKD. IFA has considered information on all above peer companies and deemed that, among them, iPeople Inc of the Philippines, SEG International of Malaysia, Raffles Education of Singapore and Far Eastern University of the Philippines are private universities offering various fields of studies, which are different in nature from EES. Therefore, IFA has excluded these four companies from the calculation. In addition, Benesse Holdings Inc of Japan similarly operates a language training center like EES, but its total assets are as high as USD 4,427.7 million, or approximately Baht 142,421.40 million, which are much greater than those of EES. This company is thus not suitable for comparison with EES and is also deleted from the calculation. IFA has included in the share valuation only four entities, Hong Kong Education (International Investments) of Hong Kong, Meiko Network and Riso Kyoiku of Japan, and KIP McGrath Education Centers of Australia (“Peer Group”), all of which have engaged in language training business and have asset size close to EES. The average P/BV ratio of the Peer Group in the past one month, three months, six months, nine months and 12 months up to the cut-off date of March 7, 2014 can be concluded as follows:
Page 51า Opinion of the Independent Financial Advisor on asset acquisition
Average historical P/BV ratio Name 1 M 3 M 6 M 9 M 12 M Hong Kong Education 0.76 0.78 0.76 0.79 0.76 Meiko Network Japan 2.62 2.59 2.63 2.80 2.91 Riso Kyoiku 3.90 5.87 4.54 4.78 5.22 KIP McGrath Education n/a 0.75 0.86 0.77 0.70 Average (time) 2.43 2.50 2.20 2.28 2.40 Source: www. bloomberg.com Here is the calculation formula for share valuation:
EES share value = Avg. P/BV ratio of Peer Group × Book value of EES as of December 31, 2013
Conclusion of EES share valuation by P/BV ratio approach: P/BV of Before discount After 15% discount BV of EES Past Peer Dec 31, 13 Total acquisition Total acquisition period Group Share value Share value (Bt. mil) cost cost (time) (Bt. mil) (Bt./share) (Bt. mil) (Bt./share) 1 M 2.43 52.89 128.52 77.58 109.24 65.94 3 M 2.50 52.89 132.23 79.82 112.40 67.85 6 M 2.20 52.89 116.36 70.24 98.91 59.70 9 M 2.28 52.89 120.59 72.79 102.50 61.87 12 M 2.40 52.89 126.94 76.63 107.90 65.13 Note: Unlike the Peer Group, EES is not a listed entity and, therefore, its shares do not have trading liquidity. IFA has accordingly adjusted the share value derived from the calculation by discounting it by 15%. Such discount rate is based on the discount rate applicable in valuation of IPO shares that are generally discounted by 10% – 15% when compared with the securities that are listed on the stock market. This approach reflects EES’s performance and financial position at a certain period of time, but does not reflect the present market value of its assets, nor its future profitability. Under this approach, EES shares are valued in a range of Baht 70.24 – 79.82 per share. Thus, the acquisition of 1,656,600 shares in EES will cost a total of Baht 116.36 million – Baht 132.23 million. Since EES shares are not listed on the SET and, therefore, do not have trading liquidity, IFA has accordingly discounted the share value by 15%. After such discount, the value of EES shares will be in a range of Baht 59.70 – 67.85 per share, with total acquisition cost after discount ranging between Baht 98.91 million and Baht 112.40 million. The P/BV ratio approach focuses on financial position at a certain point in time in comparison with the average of such ratios of a peer group, but takes no account of future profitability and performance of the company.
Page 52า Opinion of the Independent Financial Advisor on asset acquisition
(5) Price-to-Earnings Ratio Approach By this approach, the shares are appraised from EES’s earnings per share in 2013, which is Baht 55.83 per share (net profit in 2013 of Baht 92.50 million divided by 1.6566 million shares), multiplied by the average P/E ratio of the Peer Group in the past one month, three months, six months, nine months and 12 months. IFA adopts information of the nine peer companies engaging in educational services and listed on regional stock markets, as described in Item 4 Price-to-Book Value Ratio Approach, for comparison in share valuation by this approach. IFA has considered information on all above peer companies and deemed that, among them, iPeople Inc of the Philippines, SEG International of Malaysia, Raffles Education of Singapore and Far Eastern University of the Philippines are private universities offering various fields of studies, which are different in nature from EES. Therefore, IFA has excluded these four companies from the calculation. In addition, Benesse Holdings Inc of Japan similarly operates a language training center like EES, but its total assets are as high as USD 4,427.7 million, or approximately Baht 142,421.40 million, which are much greater than those of EES. This company is thus not suitable for comparison with EES and is also deleted from the calculation. IFA has included in the share valuation only four entities, Hong Kong Education (International Investments) of Hong Kong, Meiko Network and Riso Kyoiku of Japan, and KIP McGrath Education Centers of Australia (“Peer Group”), all of which have engaged in language training business and have asset size close to EES. The average P/E ratio of the Peer Group in the past one month, three months, six months, nine months and 12 months up to the cut-off date of March 7, 2014 can be concluded as follows: Average historical P/E ratio Name 1 M 3 M 6 M 9 M 12 M Hong Kong Education n/a n/a n/a 5.56 4.75 Meiko Network Japan 14.78 14.59 14.59 15.11 15.52 Riso Kyoiku 29.65 44.63 35.51 31.13 29.20 KIP McGrath Education 16.22 13.89 13.78 12.88 12.80 Average (time) 20.22 24.37 21.29 16.17 15.57 Source: www. bloomberg.com Here is the calculation formula for share valuation: EES share value = P/E ratio of Peer Group × EPS of EES in past 12 months
Page 53า Opinion of the Independent Financial Advisor on asset acquisition
Conclusion of EES share valuation by P/E ratio approach: P/E Before discount After 15% discount EPS of EES Past of Peer Total acquisition Total acquisition Dec 31, 13 Share value Share value period Group cost cost (Bt./share) (Bt./share) (Bt./share) (time) (Bt. mil) (Bt. mil) 1 M 20.22 55.84 1,870.44 1,129.08 1,589.87 959.72 3 M 24.37 55.84 2,254.34 1,360.82 1,916.19 1,156.70 6 M 21.29 55.84 1,969.42 1,188.83 1,674.01 1,010.51 9 M 16.17 55.84 1,495.80 902.93 1,271.43 767.49 12 M 15.57 55.84 1,440.30 869.43 1,224.26 739.02 Note: Unlike the Peer Group, EES is not a listed entity and, therefore, its shares do not have trading liquidity. IFA has accordingly adjusted the share value derived from the calculation by discounting it by 15%. Such discount rate is based on the discount rate applicable in valuation of IPO shares that are generally discounted by 10% – 15% when compared with the securities that are listed on the stock market. This approach focuses on EES’s profitability in the past 12 months, but takes no account of its long-term potential and profitability in the future. Besides, the comparison is made with the peer companies that are listed on a stock market and have a different financial structure from each other, resulting in variations on their performance and profitability. Therefore, this approach cannot fairly reflect the true value or price of EES shares. Under this approach, EES shares are valued in a range of Baht 869.43 – 1,360.82 per share, with total acquisition cost of Baht 1,440.30 million – Baht 2,254.34 million. Since EES shares are not listed on the SET and, therefore, do not have trading liquidity, IFA has accordingly discounted the share value by 15%. After such discount, the value of EES shares will be in a range of Baht 739.02 – 1,156.70 per share, with total acquisition cost after discount ranging between Baht 1,224.26 million and Baht 1,916.19 million. The P/E ratio approach focuses on the entity’s profitability by comparison with the average of such ratios of a peer group; though, the valuation is based on earnings in the past period only, without reflecting the entity’s profitability and performance in the future.
(6) EV/EBITDA Ratio Approach By this approach, the shares are appraised from the average EV/EBITDA of the Peer Group, multiplied by EBITDA of EES less interest-bearing debts and minority interests and added by cash of EES. EBITDA of EES in 2013, as shown on its audited financial statements in 2013, amounted to Baht 134.93 million. As at December 31, 2013, EES had cash and cash equivalents of Baht 167.76 million. After adjustment by dividend payment announced under board resolution of January 6, 2014 in the amount of Baht 100 million, the cash balance is equal to Baht 67.76 million. EES does not have any loan. Based on these data, EES shares are appraised as follows:
Page 54า Opinion of the Independent Financial Advisor on asset acquisition
EV of EES = Average EV/EBITDA of Peer Group × EBITDA Where: EV = Market cap + Minority interests + Interest-bearing debts – Cash Market cap = Share price × Total paid-up shares of EES EES share value = {(Average EV/EBITDA of Peer Group × EBITDA) – Minority interests – Interest-bearing debts + Cash (incl. short-term investments)} / Total paid-up shares IFA adopts information of the nine peer companies engaging in educational services and listed on regional stock markets, as described in Item 4 Price-to-Book Value Ratio Approach, for comparison in share valuation by this approach. IFA has considered information on all above peer companies and deemed that, among them, iPeople Inc of the Philippines, SEG International of Malaysia, Raffles Education of Singapore and Far Eastern University of the Philippines are private universities offering various fields of studies, which are different in nature from EES. Therefore, IFA has excluded these four companies from the calculation. In addition, Benesse Holdings Inc of Japan similarly operates a language training center like EES, but its total assets are as high as USD 4,427.7 million, or approximately Baht 142,421.40 million, which are much greater than those of EES. This company is thus not suitable for comparison with EES and is also deleted from the calculation. IFA has included in the share valuation only four entities, Hong Kong Education (International Investments) of Hong Kong, Meiko Network and Riso Kyoiku of Japan, and KIP McGrath Education Centers of Australia (“Peer Group”), all of which have engaged in language training business and have asset size close to EES. The average EV/EBITDA ratio of the Peer Group in the past one month, three months, six months, nine months and 12 months up to the cut-off date of March 7, 2014 can be concluded as follows: Average historical EV/EBITDA ratio Name 1 M 3 M 6 M 9 M 12 M Hong Kong Education n/a n/a n/a 3.82 2.74 Meiko Network Japan n/a n/a 6.93 7.42 7.63 Riso Kyoiku 16.86 25.34 19.28 17.33 16.46 KIP McGrath Education n/a 9.47 10.09 8.79 7.92 Average 16.86 17.40 12.10 9.34 8.68 Source: www. bloomberg.com
Page 55า Opinion of the Independent Financial Advisor on asset acquisition
Conclusion of EES share valuation by EV/EBITDA ratio approach EBITDA EV/EBITDA of Before discount After 15% discount EV/EBITDA of EES Peer Group x Cash after Total Total Past of Peer Dec 31, 13 EBITDA of adjustment acquisition Share value acquisition Share value period Group (Bt. mil) EES (Bt. mil) cost (Bt./share) cost (Bt./share) (time) (Bt. mil) (Bt. mil) 1 2 3 =1 x 2 4 5 = 3+4 6 = 5/no. of shares 1 M 16.86 134.93 2,274.92 67.76 2,342.68 1,414.15 1,991.28 1,202.03 3 M 17.40 134.93 2,347.78 67.76 2,415.54 1,458.13 2,053.21 1,239.41 6 M 12.10 134.93 1,632.65 67.76 1,700.41 1,026.45 1,445.35 872.48 9 M 9.34 134.93 1,260.25 67.76 1,328.01 801.65 1,128.81 681.40 12 M 8.68 134.93 1,171.19 67.76 1,238.95 747.89 1,053.11 635.71 Note: As at December 31, 2013, EES had cash balance of Baht 167.76 million. On January 6, 2014, its Board of Directors approved dividend payment of Baht 100 million. IFA has thus adjusted such cash down by dividend payment of Baht 100 million. Therefore, the cash balance used in the calculation is equal to Baht 67.76 million. Unlike the Peer Group, EES is not a listed entity and, therefore, its shares do not have trading liquidity. IFA has accordingly adjusted the share value derived from the calculation by discounting it by 15%. Such discount rate is based on the discount rate applicable in valuation of IPO shares that are generally discounted by 10% – 15% when compared with the securities that are listed on the stock market. The EV/EBITDA ratio approach focuses on EES’s profitability in the past 12 months, but takes no account of its potential and profitability in the future. Therefore, this approach cannot fairly reflect the true value of the shares. Under this approach, EES shares are valued in a range of Baht 747.89 – 1,458.13 per share, with total acquisition cost of Baht 1,238.95 million – Baht 2,415.54 million. Since EES shares are not listed on the SET and, therefore, do not have trading liquidity, IFA has accordingly discounted the share value by 15%. Such discount rate is based on the discount rate applicable in valuation of IPO shares that are generally discounted by 10% – 15% when compared with the securities that are listed on the stock market. After such discount, the value of EES shares will be in a range of Baht 635.71 – 1,239.41 per share, with total acquisition cost after discount ranging between Baht 1,053.11 million and Baht 2,053.21 million. The EV/EBITDA ratio approach focuses on the entity’s profitability by comparison with the average of such ratios of a peer group; though, the valuation is based on earnings in the past period only, without reflecting the entity’s profitability and performance in the future.
(7) Discounted Cash Flow Approach Share valuation by this approach is based on EES’s future performance. The shares are appraised by an estimation of net present value of free cash flow expected from future operation according to a financial projection of EES. The projection is based on the assumption that EES
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continues as a going concern without any material change taking place, and also based on the economic environment and present circumstances where the business operation is under oversight of the current management team, taking no account of business plan or any change that might be determined by the Company in the future. The financial projection and assumptions are prepared by the IFA with an estimation of cash flow made based on a forecast of EES’s future performance. The assumptions used for such projection are based on the historical financial data or ratios and the publicly available information of EES such as the auditor report and audited financial statements for 2010-2012 and the unaudited/unreviewed financial statements for 2013, including information obtained from the Company and from EES’s financial advisor, etc. EES is granted an exclusive right to operate the “Wall Street English” language center for a term of about 10 years, beginning November 2012, with the renewal option for another three consecutive terms of five years each, making up a total period of 24 years and 5 months (ending in late April 2037). Therefore, IFA has prepared the financial projection covering the said agreement period. The assumptions used for the financial projection are established under the present economic environment. If the economic condition or other external factors, which have an impact on EES’s operation, as well as EES’s status materially changes from the assumptions, the fair value of EES shares measured by this approach will change as well. The key assumptions used for the financial projection are as follows: 1. Revenues from tuition fees EES operates the Wall Street English language institute in Thailand, with eight centers catering to retail customers in Bangkok. It generates revenues from tuition fees from two major target groups, retail customers and corporate organizations. 1.1 Revenues from retail EES operates eight centers in Bangkok, offering English language training services to retail customers. In the past three years (2011-2013), its revenues from retail grew continuously, partly driven by the opening of two new centers in 2011, one at Fashion Island Ram Inthra and the other at Future Park Rangsit, and one more center in 2012 at Mega Bangna. (In 2012, EES opened two centers, at Future Park Rangsit and Central World, but Central World center later changed its role from a full training center to a marketing promotion center.) The opening of new centers helps to continually grow number of new students. Number of new retail customers rose from 5,150 persons in 2010 to 6,332 persons in 2011, 7,561 persons in 2012 and 6,910 persons in 2013. Meanwhile, revenues from retail increased from Baht 388.17 million in 2010 to Baht 546.52 million, Baht 630.06 million and Baht 726.38 million
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in 2011-2013 respectively, representing revenues per head of Baht 75,373, Baht 86,310, Baht 83,330 and Baht 105,120 in 2010-2013 respectively. Number of retail customers per center stood at 1,030 persons, 905 persons, 945 persons and 864 persons in 2010-2013 respectively, representing a four-year (2010-2013) average of 960 persons per center. In view of impacts from internal political chaos on growth rate of both number of students and tuition revenues in 2014, the IFA thus assumes that number of retail customers per center in 2014 does not change from 2013, equal to 864 persons per center, and will increase to 900 persons per center in 2015 and then remain constant at 900 persons per center over 2016-2037. Since it is likely that impacts from the internal political unrest could hinder EES from substantially increasing its tuition fees, the tuition revenues per head for 2014 are therefore projected to be Baht 100,000 per head, based on the 2013 level of Baht 105,120 per head, and to increase in line with the average inflation rate of 3% per year from 2015 onwards until 2037. EES’s management plans to open two more centers in 2014, one in Bangkok and the other one in the province, assuming both centers to start operation in early July 2014. In 2016, one more center will be opened in Bangkok, to begin operation in early July 2016. Thus, the number of centers of EES has increased from five in 2010 to 10 in 2014, or an average increase of one center per year. For conservative projection, however, IFA assumes that from 2019 onwards number of centers will increase by an average of one center every two years. The final year for new center opening will be 2032 because it will be approaching the end of the franchise period. Projection of revenues from retail is as follows: Projection for 2014-2018 Historical Projected 2010 2011 2012 2013 2014 2015 2016 2017 2018 Revenues from retail (Baht million) 388.17 546.52 630.06 726.38 777.37 927.00 1,002.55 1,081.80 1,114.25 Number of centers (centers) 5 7 8 8 10 10 11 11 11 Number of customers (persons) 5,150 6,332 7,561 6,910 1/ 7,774 9,000 9,450 9,900 9,900
Number of customers/center/year 1,030 905 945 864 864 900 900 900 900
Tuition revenues/head (Baht/head) 75,373 86,310 83,330 105,120, 100,000 103,000 106,090 109,273 112,551 Note: 1/ For 2014, it is assumed that the two new centers will begin operation in the latter half of the year. Thus, number of customers will be computed from [(864 persons x 8 centers x 1 year) + (864 persons x 2 centers x ½ year)]. Projection for 2019-2037 Projected 2019 2020 2021 - 2035 2036 2037 Revenues from retail (Baht million) 1,147.68 1,397.04 1,438.95 – 3,181.10 3,276.54 1,124.94 Number of centers (centers) 11 13 13 - 19 19 19 Number of customers (persons) 9,900 11,700 11,700 – 17,100 17,100 5,700
Number of customers/center/year 900 900 900 - 900 900 900
Tuition revenues/head (Baht/head) 115,927 119,405 112,987 – 186,029 191,610, 197,359 Note: For 2037, the Franchise Agreement will expire by the end of April.
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1.2 Revenues from corporate EES generated revenues from corporate of Baht 34.00 million, Baht 37.94 million, Baht 49.77 million and Baht 61.89 million in 2010-2013 respectively, representing 9.8%, 6.9%, 7.9% and 8.5% of revenues from retail over the same period respectively or a four-year average of 8.0%. With the opening of new centers, EES will have channels for making marketing promotion and have more space available for servicing an increased number of employees from corporate organizations. As a result, revenues from corporate for 2014-2037 are projected equal to the average rate of 2010-2013 at 8.0% of revenues from retail.
Projection for 2014-2018 Historical Projected 2010 2011 2012 2013 2014 2015 2016 2017 2018 Revenues from retail (Baht million) 388.17 546.52 630.06 726.38 777.37 927.00 1,002.55 1,081.80 1,114.25 Revenues from corporate (Baht million) 34.00 37.94 49.78 61.89 62.19 74.16 80.20 86.54 89.14 Revenues from corporate as % of 8.8 6.9 7.9 8.5 8.0 8.0 8.0 8.0 8.0 revenues from retail (%) Projection for 2019-2037 Projected 2019 2020 2021 - 2035 2036 2037* Revenues from retail (Baht million) 1,147.68 1,397.04 1,438.95 – 3,181.10 3,276.54 1,124.94 Revenues from corporate (Baht million) 91.81 111.76 115.12 - 254.49 262.12 90.00 Revenues from corporate as % of 8.0 8.0 8.0 – 8.0 8.0 8.0 revenues from retail (%) Note: For 2037, the Franchise Agreement will expire by the end of April.
2. Other income EES earned other income of Baht 5.30 million, Baht 8.35 million, Baht 4.78 million and Baht 9.41 million in 2010-2013 respectively, representing 1.2%, 1.4%, 0.7% and 1.2% of revenues from tuition fees over the same period respectively or a four-year average of 1.1%. Other income in 2014-2037 is thus estimated at 1.1% of revenues from tuition fees, based on the average percentage of other income to revenues from tuition fees in 2010-2013. 3. Costs of rendering of services (excluding depreciation) 3.1 Personnel-related expenses Personnel-related expenses accounted for 29.8%, 25.0%, 26.9% and 24.8% of revenues from tuition fees in 2010-2013 respectively, representing an average of 26.6% of revenues from tuition fees in 2010-2013. Personnel-related expenses increase in line with number of new centers. For instance, two new centers were opened in 2011 and one center in 2012. After that, number of employees will grow more sharply according to the center expansion plan, entailing two new centers in 2014 and one in 2016, making up three new centers, and eight
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additional centers during 2019-2037. Personnel-related expenses for 2014-2037 are thus projected at 26.6% of revenues from tuition fees, based on the average percentage in 2010- 2013. 3.2 Marketing and advertising expenses Marketing and advertising expenses were 3.3%, 1.80%, 3.0% and 2.7% of revenues from tuition fees in 2010-2013 respectively, representing an average of 2.7% of revenues from tuition fees in 2010-2013. For 2014-2037, marketing and advertising expenses are estimated at 2.7% of revenues from tuition fees, based on the average percentage in 2010-2013. 3.3 Costs of materials, equipment and textbooks Costs of materials, equipment and textbooks were 4.6%, 3.5%, 3.9% and 3.4% of revenues from tuition fees in 2010-2013 respectively, representing an average of 3.8% of revenues from tuition fees in 2010-2013. For 2014-2037, costs of materials, equipment and textbooks are estimated at 3.8% of revenues from tuition fees, based on the average percentage in 2010-2013. 3.4 Rentals and expenses on premises and equipment Rentals and expenses on premises and equipment were 8.9%, 7.8%, 8.3% and 8.0% of revenues from tuition fees in 2010-2013 respectively, representing an average of 8.3% of revenues from tuition fees in 2010-2013. For 2014-2037, rentals and expenses on premises and equipment are estimated at 8.2% of revenues from tuition fees, based on the average percentage in 2010-2013. 3.5 Financial costs Financial costs, mostly comprising fees collected by financial institutions from credit cards, were 5.9%, 5.7%, 5.7% and 5.3% of revenues from tuition fees in 2010-2013 respectively, representing an average of 5.6% of revenues from tuition fees in 2010-2013. For 2014-2037, financial costs are estimated at 5.6% of revenues from tuition fees, based on the average percentage in 2010-2013. 3.6 Royalty fees Royal fees were 5.4%, 7.3%, 7.6% and 7.9% of revenues from tuition fees and other income in 2010-2013 respectively. In 2011, EES and the Franchisor agreed to change the calculation of such fees. Hence, the percentage in 2010 is excluded from calculation of the average percentage over the past years. The average percentage of royalty fees to revenues from tuition fees and other income in 2011-2013 is equal to 7.7%. For 2014-2037, royalty fees are estimated at 7.7% of revenues from tuition fees and other income, based on the average percentage in 2011-2013. 3.7 Other expenses Other expenses were 7.5%, 6.4%, 6.6% and 6.0% of revenues from tuition fees in 2010- 2013 respectively, representing an average of 6.7% of revenues from tuition fees in 2010-2013.
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For 2014-2037, other expenses are estimated at 6.7% of revenues from tuition fees, based on the average percentage in 2010-2013. 4. Selling expenses Selling expenses were 9.2%, 7.3%, 7.0% and 5.3% of revenues from tuition fees in 2010-2013 respectively, representing an average of 7.2% of revenues from tuition fees in 2010-2013. For 2014- 2037, selling expenses are estimated at 7.3% of revenues from tuition fees, based on the average percentage in 2010-2013. 5. Administrative expenses (excluding depreciation) 5.1 Personnel-related expenses Personnel-related expenses were 12.6%, 10.1%, 11.8% and 11.5% of revenues from tuition fees in 2010-2013 respectively, representing an average of 11.5% of revenues from tuition fees in 2010-2013. For 2014-2037, personnel-related expenses are estimated at 11.5% of revenues from tuition fees, based on the average percentage in 2010-2013. 5.2 Rentals and expenses on premises and equipment Rentals and expenses on premises and equipment were 0.9%, 0.7%, 0.8% and 0.8% of revenues from tuition fees in 2010-2013 respectively, representing an average of 0.8% of revenues from tuition fees in 2010-2013. For 2014-2037, rentals and expenses on premises and equipment are estimated at 0.8% of revenues from tuition fees, based on the average percentage in 2010-2013. 6. Capital expenditure 6.1 Capital expenditure for opening of new centers in 2014 and 2016 EES plans to expand business by opening new centers in Bangkok and the provinces. In 2014, two new centers will be opened: one in Bangkok and one in the province, and in 2016, one more center in Bangkok. The investment cost is estimated to be as follows: (Unit: Baht million) 2014 2016 Equipment 43.00 25.00 - Bangkok 25.00 25.00 - Provincial 18.00 - Computer programs 12.00 6.00 Between 2020 and 2032, it is assumed that EES will open two new centers every four years and investment in equipment and computer programs is set to increase at the same rate as the average inflation rate of 3% per year. For all new centers opened, EES will pay an initial fee to WSI in the amount of USD 50,000 per center, which is assumed to increase 3% per year. 6.2 Capital expenditure for normal operation
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- Equipment Investment in equipment during 2014-2037 is estimated at Baht 1.2 million/center/year and to increase 3% per year, with depreciation for five years. - Computer programs Investment in computer programs during 2014-2037 is projected to be Baht 1.0 million/center/year and to increase 3% per year, with depreciation for 10 years. 6.3 Expenses on renewal of the Franchise Agreement EES is currently a franchisee holding the exclusive right to operate “Wall Street English” language institute for about 10 years from late 2012. It has to pay a fee for the 10-year agreement renewal at USD 450,000 and is granted a renewal option for another three consecutive terms of five years each. Thus, in every five years in 2023 (year 11), 2028 (year 16) and 2033 (year 21), EES will bear expenses on agreement renewal, which are estimated at half of the 10-year renewal fee, or equal to USD 225,000, and to increase 3% per year. 7. Corporate income tax EES was founded to operate an English language institute. All of its centers have obtained a license to establish and operate a school in accordance with the Private School Act B.E. 2525 and B.E. 2550. Pursuant to the Revenue Code on Tax Exemption (No. 284) B.E. 2538, Section 3, companies or juristic partnerships are exempted from income tax on net profit earned from a private school business established under the law on private schools or private higher education institutes set up under the law on private higher education institutes, but excluding income from sales of goods, production service or other services. Therefore, IFA assumes that taxable income will include other income and interest income and the calculable income tax rate will be 20% in accordance with the provisions under the Royal Decree, issued under the Revenue Code on Tax Exemption (No. 555) B.E. 2555, stipulating collection of corporate income tax rate at 20% for an accounting period starting on or after January 1, 2013 but not later than December 31, 2014. Moreover, the said corporate income tax rate of 20% will most likely remain in effect because it will help enhance the country’s competitiveness and support the forthcoming advent of Asean Economic Community in 2015. Since many of AEC member countries collect taxes at a rate lower than Thailand, it is unlikely for Thailand to levy a high tax rate so as to maintain domestic investment level and promote foreign direct investment. 8. Working capital Working capital is forecast based on the average of historical data in the past four years (2010- 2013) and is assumed to remain constant throughout the projection period of 2014-2037, with details as follows: - Credit sale about 3 days - Inventories about 11 days - Credit purchase about 71 days - Unearned revenue about 110 days
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Under the above assumptions for financial projection, IFA has estimated the net present value of free cash flow derived from the projected performance and financial position of EES over a period of 24 years and 5 months (2014-2037). Since EES does not have any financial liabilities, the discount rate used for the estimation is based on the cost of equity (Ke), which is equal to 12.30% per year calculated with the following formula: Ke = Rf + β(Rm - Rf) Where: Risk free rate Risk-free rate of return on investment as of March 7, 2014 of 4.34% per (Rf) year, based on average bid yield on the government bond with maturity of 25 years (available from www.thaibma.or.th). Beta (β) Since there are not any SET-listed entities operating a similar type of business to EES, IFA has used information of four companies engaging in education business in other Asian countries (excluding the entities that operate a private university and those having total asset value much higher than EES) as described in the ‘Price-to-Book-Value Ratio Approach.’ Such four companies have an average beta of 0.224. However, all of them are listed companies on regional stock markets and their shares accordingly have trading liquidity. The price index movement on those markets is different from the SET in the same given period. As such, the average beta of those four companies does not serve as a suitable benchmark to be used for valuation of EES. Based on the above rationale, coupled with the fact that after this transaction EES will become a subsidiary of WAVE, IFA has instead used the average beta of WAVE in the past two years for the calculation, which is equal to an average of 0.842 (from Bloomberg, as of March 7, 2014). Rm Average rate of return on the SET over the past 25 years (SET data during 1989-2013), equivalent to 13.79% per year. However, IFA havs discounted the estimated value of EES by 15% because EES is not listed on the SET and, hence, does not have trading liquidity, and arrived at a final value of Baht 1,080.81 million or Baht 652.42 per share in the base case. Details of the valuation of EES are tabulated below:
(Unit: Baht 000's) 2014 2015 2016 2017 2018 2019 EBIT 54,150 69,695 77,147 84,988 89,863 97,428 Add: Depreciation and write-off 45,172 48,744 50,945 53,230 52,501 49,206 Less: Income tax (615) (655) (828) (1,000) (1,200) (1,397) Changes in working capital 44,392 44,805 22,623 23,731 9,718 10,010 Investments in assets (79,000) (24,360) (64,004) (27,424) (27,857) (28,692) Free cash flow to firm 64,099 138,229 85,883 133,524 123,025 126,555
Discount Rate 0.8905 0.7930 0.7061 0.6288 0.5600 0.4986
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(Unit: Baht 000's) 2020 2021 2022 2023 2024 2025 EBIT 133,960 138,052 143,360 149,135 178,021 182,116 Add: Depreciation and write-off 44,410 45,673 45,880 45,787 53,659 56,518 Less: Income tax (1,623) (1,874) (2,130) (2,396) (2,695) (3,025) Changes in working capital 74,675 12,550 12,927 13,315 86,152 16,299 Investments in assets (92,890) (35,577) (36,644) (37,754) (110,162) (45,824) Free cash flow to firm 158,533 158,825 163,393 168,087 204,975 206,084 0.4440 0.3954 0.3521 0.3136 0.2792 0.2486 Discount Rate
(Unit: Baht 000's) 2026 2027 2028 2029 2030 2031 EBIT 192,269 197,972 230,455 235,041 247,242 254,569 Add: Depreciation and write-off 53,528 55,203 65,105 69,389 66,325 68,409 Less: Income tax (3,362) (3,711) (4,099) (4,524) (4,959) (5,409) Changes in working capital 16,788 17,291 99,339 20,790 21,414 22,056 Investments in assets (47,199) (48,615) (130,318) (58,083) (59,825) (61,620) Free cash flow to firm 212,024 218,140 260,482 262,613 270,196 278,004
Discount Rate 0.2214 0.1972 0.1756 0.1564 0.1392 0.1240
(Unit: Baht 000's) 2032 2033 2034 2035 2036 2037 EBIT 292,011 298,152 312,966 322,175 330,923 59,875 Add: Depreciation and write-off 79,812 84,830 81,509 84,138 87,583 83,730 Less: Income tax (5,905) (6,444) (6,997) (7,568) (8,158) (8,595) Changes in working capital 114,480 26,152 26,937 27,745 28,577 85,846 Investments in assets (153,772) (72,711) (74,878) (77,125) (79,438) (81,821) Free cash flow to firm 326,626 329,979 339,537 349,365 359,487 139,035 Discount Rate 0.1104 0.0983 0.0876 0.0780 0.0694 0.0618
(Unit: Baht 000's) 2014 PV - Total cash flow 1,203,778 Add: cash and cash equivalents/1 167,760 Less: Dividend payment to existing shareholders/2 (100,000) 1,271,538 Less: 15% discount (190,731) 1,080,807 Shareholders’ value Note: 1/ Cash as of December 31, 2013, according to EES’s financial statements, amounted to Baht 127.76 million and short-term investments were Baht 40 million, making up total cash and cash equivalents of Baht 167.76 million. 2/ Before entering into this transaction, EES announced dividend payment of Baht 100 million. 3/ Since EES does not raise any loans (interest-bearing debt), no discount is made accordingly. Unlike the Peer Group, EES is not a listed entity and, therefore, its shares do not have trading liquidity. IFA has accordingly adjusted the share value derived from the calculation by discounting it by 15%. Such discount rate is based on the discount rate applicable in valuation of IPO shares that are generally discounted by 10% – 15% when compared with the securities that are listed on the stock market. EES’s value is estimated at Baht 1,080.81 million, or equivalent to Baht 652.42 per share (EES has a total of 1,656,600 shares). IFA has additionally conducted a sensitivity analysis on the valuation of EES’s business and shares to cover impacts expected from changes in Ke by a 10% increase/decrease from the base case scenario. Here is the outcome:
Page 64า Opinion of the Independent Financial Advisor on asset acquisition
-10.00% Base Case 10.00% Ke 11.07% 12.30% 13.53% Business value (Baht million) 1,201.99 1,080.81 978.02 Share value (Baht/share) 725.58 652.42 590.38
Based on the above cash flow projection for 2014-2037, IFA has estimated the internal rate of return (IRR) and payback period of the said Baht 800 million investment, as follows: IRR = 20.26% Payback period = 7 years Table illustrating comparison of the acquisition price and the appraised fair value of EES shares Appraised value Business value Share value (Baht million) (Baht/share) 1. Market value approach - - 2. Book value approach 152.89 92.29 3. Adjusted book value approach 52.89 31.93 4. Price-to-book value ratio approach 116.36 – 132.23 70.24 – 79.82 5. Price-to-earnings ratio approach 1,440.30 – 2,254.34 869.43 – 1,360.82 6. EV/EBITDA ratio approach 1,238.95 – 2,415.54 747.89 – 1,458.13 7. Discounted cash flow approach 978.02 – 1,201.99 590.38 – 725.58
Summary of the IFA’s opinion on the valuation of EES shares sale and purchase transaction The above valuation approaches have different strengths and weaknesses in identifying a fair value of the shares, as described below: 1) The book value approach and the adjusted book value approach focus on EES’s financial position at a certain period of time as well as value of assets recorded in the account, but do not reflect its profitability and performance in the future.
2) The price to book value ratio approach focuses on financial position at a certain point in time in comparison with the average of such ratios of the peer group, but takes no account of EES’s future profitability and performance. 3) The price to earnings ratio approach focuses on EES’s profitability by comparison with the average of such ratios of the peer group; though, the valuation is based on earnings in the past period only, without reflecting its profitability and performance in the future. 4) The EV/EBITDA ratio approach focuses on EES’s profitability in the past 12 months, without reflecting its potential and profitability in the future.
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Moreover, the share valuation by the approaches in 2), 3) and 4) above is based on ratios of reference companies which are listed on foreign stock markets whose trading natures are different from the SET’s. Therefore, such share valuation may not reflect the true value of the shares. 5) The discounted cash flow approach reflects EES’s profitability and growth prospect based on the net present value of free cash flow expected from EES’s future operation. This approach can more accurately reflect the share value than all other approaches. In IFA’s opinion, the discounted cash flow approach is most suitable for determining fairness of the acquisition price of EES shares under this transaction. By this approach, EES’s business value is appraised at Baht 1,080.81 million in the base case or equivalent to Baht 652.42 per share. From the sensitivity analysis on the said valuation of EES’s business and shares to cover impacts expected from changes in Ke by a 10% increase/decrease from the base case scenario, the business value is appraised in a range of Baht 978.02 million – Baht 1,201.99 million or equal to Baht 590.38 – 725.58 per share. When comparing the appraised value with the acquisition price of EES business of not more than Baht 800 million or not more than Baht 482.92 per share, the acquisition price is lower than the appraised value of EES’s business by Baht 178.02 million – Baht 401.99 million or 22.25% – 50.25% and lower than the appraised share value by Baht 107.46 – 242.66 per share or 22.25% – 50.25%. To sum up, IFA is of the opinion that the acquisition price of EES’s business of not more than Baht 800 million is a reasonable price.
5.2 Fairness of conditions for the transaction The Company and EES shareholders have mutually signed the Share Sale and Purchase Agreement, which stipulates conditions precedent, pre-completion conditions, completion conditions, and representations. Salient points of the said conditions can be concluded as follows: 1. In the event that the Sellers wish to sell shares to a third party, they must obtain prior written consent from the Franchisor under the Franchise Agreement and the Area Development Agreement. If the existing shareholders of EES intend to sell shares to a third party, they must give the right of first refusal to the Franchisor. If the Franchisor renounces such right, they may then sell shares to other party. In this case, the existing shareholders of EES already notified the Franchisor in writing of the sale of shares to the Company and the Franchisor informed them of its renunciation of such right. Therefore, the sale and purchase of EES shares between the existing shareholders of EES and the Company under this transaction is not deemed as an event that will lead to termination of the agreement by the Franchisor and is in compliance with the conditions set forth in the Share Sale and Purchase Agreement. 2. The Company must obtain approval from its shareholders’ meeting to acquire the entire ordinary shares and preferred shares of EES. The Company will propose the entry into this transaction to the 2014 Annual General Meeting of Shareholders to be held on April 25, 2014.
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3. Pursuant to the pre-completion conditions stipulated in the Share Sale and Purchase Agreement, the Sellers must arrange for EES to continue its business as usual and not to perform any other acts that could affect the operation of EES, for instance, not to make any investment other than those executed under budget spending for the current year; not to sell or give any consent or right to the core assets; not to incur any debt or borrow any loan more than Baht 5,000,000; not to make any material change to employment of senior-level employees; not to pay dividend to shareholders of EES unless such dividend payment is not more than Baht 100,000,000 and payable to existing shareholders before the date on which the share sale and purchase transaction takes full force and effect; and not to execute a new agreement or amend or cancel the Franchise Agreement and the Area Development Agreement. These conditions are deemed as the arm’s-length conditions applicable in business sale and purchase transactions in general in order to protect interest of the buyer.
IFA has considered the said terms and conditions for the entry into the transaction under the Share Sale and Purchase Agreement and are of the opinion that the conditions such as approval from shareholders of each agreement party, changes of shareholders and directors, and so forth are in conformity with the general practice in shares sale and purchase transactions. These conditions are therefore considered reasonable.
6. Conclusion of the Independent Financial Advisor’s opinion IFA is of the opinion that the acquisition of the entire shares in EES by the Company is reasonable and beneficial to the Company because the acquisition of EES, which operates the English language institute, is consistent with the Company’s plan to produce more new programs for the forthcoming digital TV channels. A synergy will thereby be achieved by optimizing the use of personnel of both parties. In addition, the transaction will provide an opportunity for the Company to expand scope of business and invest in an entity that has a good growth potential. Upon the official implementation of Asean Economic Community (AEC) in 2015, all Asean member states will be united into a common economic bloc, with English to be used as the official language for business. This has resulted in growing demand from students and professional workers to improve their English language skills. EES has had a strong financial status and has engaged in this business for more than 10 years as a leading English language institute in Thailand with profitable operation and sound cash flow position. Acquiring this business will therefore provide a business opportunity for the Company in the future and help to expand its group’s business scale and diversity, thus diversifying its business risk and leading to long-term benefits for the Company and its shareholders. IFA views that the entry into this transaction is reasonable and will benefit the Company and its shareholders. The acquisition price set at not more than Baht 800 million, or not more than Baht 482.92 per share, is an appropriate price since it is lower than the fair value appraised by the IFA.
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All conditions for the transaction are deemed appropriate and consistent with the usual practice for this type of transaction. Therefore, IFA recommends that the shareholders should approve the acquisition of assets under the proposed transaction. In this respect, the shareholders can consider the rationale and opinion described above. However, the decision whether to approve the transaction depends primarily on the individual shareholders’ judgment. IFA hereby certifies that IFA has rendered opinion on the acquisition of assets by the Company with due care and under professional practices by paying regard to the interest of the shareholders.
Yours sincerely, Advisory Plus Company Limited
Prasert Patradhilok (Prasert Patradhilok) President
Vatcharin Lerdsuvankul
(Vatcharin Lerdsuvankul) Supervisor
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