DYNASTY CERAMIC PCL Date: 21/12/2014 Current Price: THB 55.75 Target Price: THB 41.50 Ticker: DCC (SET) USD 1.00: THB 32.85 Recommendation: SELL (25.6% Downside)

CFA Institute Research Challenge Hosted by CFA Society of Thailand Thammasat University

Industry: Property Construction Thammasat University Student Research Sector: Construction Material This report is published for educational purposes only by students competing on the CFA Institute Research Challenge. DYNASTY CERAMIC PCL Date: 21/12/2014 Current Price: THB 55.75 Target Price: THB 41.50 Ticker: DCC (SET) USD 1.00: THB 32.85 Recommendation: SELL (25.6% Downside)

Company Overview Investment Highlights Founded in 1989, Dynasty Ceramic PCL We place a “SELL” recommendation. Despite the high Return on Equity (“ROE”) and solid financial (“DCC” or the “Company”) is one of the position, the absence of future growth opportunities as well as the intensifying competition largest tile manufacturers and distributors implies that past stellar performance is unlikely to repeat again. With our valuation using of ceramic tiles in Thailand. Listed on the Stock Exchange of Thailand in 1992. As of Dividend Discount Model (“DDM”) and Free Cash Flow to Firm (“FCFF”) model, the one-year December 2014, DCC operates 195 outlets target price is THB 41.50, which leads to our final recommendation. nationwide targeting low-to middle-income Limited ability to drive sales through store expansion leads to greater reliance on same store customer segments mainly in provincial areas. sales growth: With 195 stores covering almost all 77 provinces throughout Thailand, the Company is likely to experience difficulties in expanding its branch network. The declining trend DCC Relative to SET Index in the number of new stores opened annually from 10 stores in 2012 to only 4 stores in 2013 15% indicates deteriorating expansion opportunity. In fact, in year-to-date 2014, 1 store was closed 10% 5% while no stores were opened. This reflects management’s failure to meet the initially set 5 new 0% stores. Even in the scenario in which the company successfully achieves the expansion target, the -5% -10% impact on top line would be immaterial because of the current large store network. Going -15% forward, DCC is unlikely to achieve substantial growth of its existing business purely through

-20% opening new stores as it used to experience in the past.

Jul-14

Jan-14

Jun-14

Oct-13 Oct-14

Sep-13 Sep-14

Feb-14

Dec-13

Apr-14

Aug-13 Aug-14

Nov-13 Nov-14 Mar-14 May-14 Weak economic outlook implies low potential to boost same store sales: DCC’s main target DCC SET market is in upcountry areas, where the demand is closely tied to the agricultural products. With Source: Bloomberg the continuous declining in both farm income and agricultural price index by -7.7% YoY and -7.2% YoY in 3Q2014, the recovery of sales growth appears difficult. In addition, the level of DCC VS. SET Holding Period Return household debt has reached the record high of 84% of Thailand’s GDP, as of June 30, 2014. This Time horizon SET DCC can potentially slowdown house renovation market which is DCC’s key market. Combining these 1-year 26.63% 21.23% unfavorable macroeconomic indicators, the turnaround of same store sales growth is unlikely to 3-year 71.08% 9.36% take place in the near future. 5-year 160.02% 145.57% Intensifying competition adds risk to future growth prospect: The lower cost of imported tiles, Source: Bloomberg especially from China and Vietnam, has incentivized both local tile manufacturers and other home improvement retailers to outsource the production activities. It allows importers to sell their High ROE is offset by high P/BV products at 10-15% below market Average Selling Price (“ASP”). As a result, tiles imported value ROE has been increasing with the CAGR of 28% during 2009 to 2013. In addition, other competing (%) DCC TB 50.00 Average home improvement retailers, namely Global House and Thai Watsadu, have aggressively expanded their stores in both urban and provincial areas with number of stores increasing from 40.00

12 to 66 stores within last 5 years. The competitive advantage of DCC as being a low-cost 30.00 manufacturer and having the extensive store network is now being threatened. This changing competitive landscape reflects in a gradual decrease in DCC market share from 24% in 2009 to TTC VN SCC TB Average 20.00 21% in 2013. DCC’s sales volume continues declining from -4.9% in 2013 and -5.2% in 2014. TGCI TB 10.00 GLOBAL TB Future plan to grow remains questionable: After domestic sales saturates, the clarity of the 0.00 next growth strategies is crucial to drive DCC forward. At the moment, international expansion 0.00 2.00 4.00 6.00 8.00 10.00 seems to be very attractive. However, the management has decided to put the expansion strategy P/BV (Times) Note: The label represents Bloomberg ticker on hold due to many uncertainties and risks involved. Therefore, the international expansion is Source: Bloomberg expected not to happen in the near future. An absence of the next growth engine makes DCC become less attractive.

Relative Peers Relative Valuations also indicate overprice for no growth company: The indicative valuation DCC Multiples Average multiples obtained from the relative valuation, covering both local and regional comparable P/E 18.90 14.51 companies further confirms that DCC’s stock price is not justified by its growth outlook. Although PEG 7.43 3.00 DCC’s P/E ratio of 18.9x is considered in line with peers’ average P/E ratio at 14.5x, when the P/B 8.58 2.30 Company’s growth is incorporated into multiple analysis, DCC’s PEG ratio of over 7.4x is, in fact, EV/EBITDA 13.68 10.17 significantly higher than peers’, which is only 3.0x. With the expected growth rate of 2-3% per Source: Bloomberg and Team’s Estimates annum, the results from all valuation methods confirm that the current price of THB 55.75 per share is overvalued. Market Profile 52 weeks price range Key Financial Ratios 2012 2013 2014F 2015F 2016F 2017F 2018F 2019F (THB/share) 48-61 Sales Growth 5.5% -0.7% -4.4% 2.4% 2.8% 2.4% 2.4% 2.3% Average daily volume (Shares) 306,100 Beta 0.57 Earning per Share Growth 1.8% 2.6% -7.9% 3.6% -2.8% -8.9% 21.5% 22.6% Dividend yield 5.76% Gross Profit Margin 39.2% 41.1% 40.5% 40.5% 40.5% 40.5% 40.4% 40.3% Market capitalization (Mn THB) 23,358 Net Profit Margin 16.7% 17.2% 16.6% 16.6% 16.5% 16.4% 16.3% 16.2% Share outstanding (Mn Shares) 408 Free float 36.07% Return on Equity 45.8% 46.8% 43.1% 43.5% 44.4% 45.0% 45.7% 46.3% Foreign limit 35.00% Debt-to-Equity Ratio 0.30 0.43 0.47 0.54 0.61 0.63 0.65 0.65 Source: Bloomberg Earning per Share (THB) 3.08 3.18 2.93 2.99 3.06 3.12 3.18 3.23 1 Figure 1: Sales by distribution channels Business Description Export Franchise 2% Real Estate 3% Founded in 1989, Dynasty Ceramic Public Company Limited (“DCC” or the “Company”) is one Developers 10% of the largest ceramic tile manufacturers in Thailand. The Company manufactures and sells a great variety of ceramic wall/floor tiles as well as other tile-related products under its own brands (Appendix 1 & 2). DCC targets low to lower-middle income customer segments mainly in Home Improvemen provincial areas. The Company distributes its products through various sales channels; however, t Centers Outlet Stores 67% the main sales channel is DCC’s own outlet stores (Figure 1). As of December 2014, DCC has 195 18% outlet stores located nationwide and 2 factories in Saraburi with total annual production capacity of 69 Mn sq.m.

In June 2014, DCC has conducted a group restructuring by Entire Business Transfer of three of the Source: Company Data and Team’s Estimates, Company’s subsidiaries, with an intention to reduce interrelated work process and general and Average 9M2014 administrative expenses, leaving Tile Top Industry Public Co., Ltd as DCC’s only subsidiary company with 97% controlling stake (Appendix 3). Product Types Description Low-price 16x16” tiles and smaller Company Strategies products High-price Hybrid and rectified products 16x16” tiles and larger Product line extension: Aiming to capture the higher market segment, DCC has recently launched the high-price products, i.e. Digital and larger-sized tiles. And to further ensure the success of new Figure 2: Average selling price and market penetration, DCC has been renovating its outlet stores hand-in-hand with the launch of sales contribution by product types new products. THB/Sq.m 225 88% 12% Distribution channel expansion: DCC has been continuously expanding through its new outlet 200 stores. This allows the Company to further reduce its reliance on other distributors. However, after the slowdown in sales from outlet stores, it also aims to expand the distribution channels by 187.7 175 focusing on other markets such as; new home market, wholesale, and construction projects in 150 Overall ASP order to expand its customer base. Nevertheless, this might still be questionable whether it is 136.9 125 going to benefit DCC enough because it may lead to the decrease in margin and increase in 128.2 accounts receivable days. 100 Low-price products High-price products Cost reduction: In order to achieve gross margin target of 43% in 2014, DCC has been trying to ASP Sales Contribution reduce the cost of production. Both natural gas and chemicals, the main cost components (Figure Source: Company data and Team’s estimates, As of September 2014 3), were reduced through the production process adjustments. In addition, the company also improves kilns in order to increase the production efficiency and capability. Figure 3: Cost structure Shareholders Structure

The Saengsastra family and some of the Board of Directors (“BOD”) own and control 47% of total Others Gas 27% 30% common shares. Other major shareholders are institutional and individual investors who own 17% (Figure 4). As of December 19, 2014, free float is accounted for 36% with the daily turnover rate of 0.075% or 306,100 shares per day. Labor 7% Corporate Management Materials Chemicals 20% 16% Mr. Roongroj Saengsastra became the Chairman of DCC since 2001 (Appendix 4). Under his leadership, the Company has been going through many strategic changes, expanding its own Source: Company data, As of September 2014 outlet stores, and has built up its scale to become the leader in tiles manufacturing business. Figure 4: Shareholders structure DCC’s operating performance has improved significantly with earning growth stands at approximately 14% CAGR since year 2008. Despite well-planned business strategy, the management has failed to achieve their plan. This can be proved by the under-targeted number of new outlet stores opened over the past years.

Public Saengsastra 36% Family & Board of directors Corporate Governance and Social Responsibility 47% Corporate Governance Other major shareholders 17% DCC has been implementing good corporate governance practices by organizing its Code of Conduct to fight against corruptions as well as verifying its working procedure to be in Source: Company data, As of November 2014 accordance with established corporate governance policies. Apart from the Annual General Meeting, the Company regularly holds the Opportunity Day and company presentation, in order Figure 5: Corporate governance score to keep investors and other concerned parties being updated. However, we observe that recently ranking among listed companies the Company provides less information in detail than before causing more difficulty for investors No. of Cumulative to analyze the company data. DCC is a family-run company, with 3 out of 9 seats in BOD come Rating companies ranking from Saengsastra family aligning with the management positions and shareholders structure. The Excellent 29 29 rest of BOD are professionals and independent directors. In terms of CG rating, DCC has been Very good 108 137 evaluated as “Good” by Thai Institute of Directors Association (Appendix 5). This rating Good 171 308 Satisfactory & below 242 550 represents the average CG rating score of all companies listed on SET index (Figure 5). Total 550 550 Source: Thai Institute of Directors Association (IOD), As of December 2014

2 Figure 6: Quarterly GDP and Growth Corporate Social Responsibility

GDP Growth DCC has been actively seeking opportunities to give back to the society. The Company has (Bn THB) (% YoY) 1,300 30 organized the official committee and set rigorous policy towards becoming a socially responsible 1,250 19.1 20 company. DCC initiated various CSR activities aiming to improve the local community such as 1,200 1,150 2.9 2.7 10 donating tiles to rural schools and sponsoring vocational training session to prisoners. 1,100 0.6 -0.5 0.4 0.6 3.1 5.4 0 1,050 1,000 -10 Industry Overview and Competitive Positioning Quaterly GDP GDP Growth (YoY) Macro-economic Analysis Source: National Economic and Development Board The overall Thai economy is still under pressure Figure 7: Debt Service Ratio by Income

DSR (%) The GDP growth is forecasted to be 1.5%-2% in 2014 and 3.5%-4.5% in 2015 resulted from a 60 49 slower-than-expected economic recovery. In order to achieve the forecast of 2014, it will require 50 a substantial growth of approximately 7% in 4Q2014, which tends to be unachievable by many 40 29 25 23 23 Average 30 DSR constraints (Figure 6). First, Thai exports is experiencing a low growth due to vulnerable global 20 28 economy. Manufacturing Production Index (MPI) is still at low level indicating by -3.9 in 10 0 3Q2014. Moreover, government policy to stimulate economy has still not been taken into action as much as targeted. Currently, there is only THB 55 Bn from the total budget of THB 365 Bn

Household being injected into the system. Income (THB/month) Source: SCB Economic Intelligence Center, As of Vigorous recovery of household consumption is unlikely October 2014 Household debt is already at high: Household debt has been continuously expanding in terms of F igure 8: Change in Farm Income Index both absolute and relative. In 2Q2014, the most recent updates, household debt had increased to and Agricultural Price Index 84% of GDP which is accumulated up to the all-time-high of THB 10bn with a growth of 8.1% YoY. (Appendix6). At this level, low-income people are crucially in concern, due to lower debt % YoY 5 3.3 repayment ability indicated by high debt service ratio (Figure 7). 1.2 2.9 -0.8 0 Agricultural prices remain at low level: Thailand is now facing low agricultural product prices, 0.9 -3 -4.6 particularly the main products: such as rice, rubber, and palm oil. Each contributed to a drop in -0.9 overall agricultural price index. This has caused an effect to more than 30% of Thai labor that are -5 -4 -7.2 farmers. The problem is crucially driven by market mechanism, an oversupply, and the -7.1 -6.9 -6.9 -7.7 -10 competition from other countries. This low price level has caused a direct effect to farm income 1Q2013 2Q2013 3Q2013 4Q2013 1Q2014 2Q2014 3Q2014 that had experienced a slump of -7.7% YoY in 3Q2014 (Figure 8). Farm Income Index Agricultural Price Index Stagnant Consumer Confidence Index (“CCI”) signals weak purchasing demand: After a Source: Office of Agricultural Economic continuous increase in CCI, it has ceased in 3Q2014 and remains at around 80. This number below 100, the 125th consecutive month, indicates outlook of overall economic directions that has Figure 9: Stable Consumer Price Index not yet been fully recovered (Figure9). 90 85 80.1 79.2 These unfavorable economic indicators are expected to lessen the purchasing power of low- 80 71.5 80.1 income people who are DCC’s main target customers. This could also pass on the pressure to 75 69.9 68.8 78.2 78.9 70 75.1 home renovation market, since it is not a daily necessary cost. Thus, the sales turnaround 70.7 65 67.8 will be difficult to achieve (Appendix 7). 60 55 50 Industry Analysis

In the ceramic tile industry, there are six key domestic players including DCC competing head-to- Source: University of Thai Chamber of Commerce head with one another in terms of design, brand presence, and price (Appendix 8). DCC, however, positions itself as the leader in low-price market and is able to gain the largest share based on Figure 10: Increasing in imported tiles domestic sales. The barrier to entry is relatively high, as the business requires large amount of market value capital investment (Appendix9). Also, the industry seems to be matured with slightly growth and Bn THB 10 8.7 limited demand. On the other hand, the competition within the industry itself has become more intense after a coming of imported tiles, mainly from China and Vietnam. These tiles are being 8 7.3 sold at highly competitive selling price. 5.3 6 4.8

4 3.3 Industry Highlights 2 Low demand for tiles resulted from a slowdown in property sector: The property sector is - expected to encounter a downward trend reflected by the decline in number of approved 2009 2010 2011 2012 2013 construction areas by 1.5% YoY in 9M2014. This is caused by the massive amount of unsold Source: The Customs Department and Team’s properties from real estate boom in 2012-2013. Also, slow recovery of overall economy will likely Estimates to pass on pressure to new project developments. Hence, we see a direct negative effect on DCC’s sales to developers.

More intense competition highlighted by imported tiles and house brand: The industry can observe the growing trend of imported tiles from low-cost producers in China and Vietnam. The tiles are imported and sold by local manufacturers and modern trades under house brand. With an average selling price of THB 125 per sq. m. compared to those local ones of THB 137 per sq. m., these imports have been gaining the market share from 13% in 2009 to 24% in 2013 (Figure10). This implies that the overall domestic tile market has been growing on an expense of the local 3 manufacturers including DCC. Moreover, modern trade, especially specialty store, has been continuously growing by 4.5% in 1H2014 despite the economic slowdown. This is considered as a threat to DCC due to a change in competitive landscape and a difficulty to attract customers to shop at DCC outlet stores (Appendix 10).

Figure 11: Domestic Manufacturers Competitors Analysis Market Share by Sales Local Tiles Manufacturers RCI-Rci TGCI- 4% Campana The Siam Cement (SCC): SCC has introduced its tiles into the market under the brand “Cotto” Casa 9% with premium quality aiming to capture middle-to-high income people. After an investment in DCC- Dynasty Prime Group Ceramic, the production capacity could reach over 100 Mn sq.m. per year, UMI- 28% Dulagres comparing to 69 Mn sq.m. of DCC. With the leading position of premium tiles of SCC, the strategy 14% of DCC to expand product line to capture high-price is crucially hardened.

SCC-Cotto Sosuco Ceramics: Sosuco is one of the leading tiles manufacturers with a strategy to retain its top 28% SOSUCO 17% 3 domestic market shares and increase proportion of exports. Currently, the company has an annual production capacity of 58 Mn sq.m. Sosuco offers wide range of product to broad customer segments, which could potentially be a threat to DCC. Source: Company Data Union Mosaic Industry (UMI): UMI is one of the key players in local tiles manufacturer market with the tiles product being sold under the brand “Duragres”. The company can produce up to 16.8 Mn sq.m. per year. For the distribution, it is mainly focusing on agents. Even though UMI does not own any outlet stores, the threat to DCC could be in terms of targeted customers. Previously, UMI has bought a stake in TT Ceramic, allowing the company to expand its product lines to cover all segments including low-price market. With an active strategy, UMI could share the pie and pass on pressure on future DCC’s sales. Thai-German Ceramic Industry (TGCI): TGCI is considered a direct competitor to DCC since both their product offerings and target customer segment are exactly the same. The only difference is that TGCI distributes the tiles mainly to agents under the brand “Casa” and “Campana”; whereas DCC mainly distributed via its own outlet stores. For the capacity, the tiles could be produced up to 20 Mn sq.m per year. Royal Ceramic Industry (RCI): The tiles product of RCI includes glazed tiles, clayed tiles and porcelains with an aim to capture middle-income people. Currently, the company distributes the tiles through agents and own only 2 outlet stores. For the production side, it could reach the maximum level of only 6.8 Mn sq.m. per year. By combining low capacity and different target customer, RCI could pass on a minimal effect on DCC.

High Note: size represents the COTTO production capacity and (SCC) color represents the level DCC of threat to DCC Target UMI SOSUCO Aiming to capture RCI

Market middle-to-high High Low segment

TGCI Low DCC

Own retail stores Dealer / modern trade Concentration of Distribution Channel Source: Team’s Estimates

Figure 12: Number of stores and sales Local home improvement retailers growth (2014F) Siam Global House (GLOBAL): Global House operates as a building materials and home Number of Sales Growth

Stores (2014F) improvement retailer, with 27 branches located most in North-East of Thailand. The company DCC 195 -4.40% mainly targets home contractors and homeowners. The growth of GLOBAL would adversely affect DCC as the Company is planning to increase sales from developers. GLOBAL 27 16% Thai 39 15-20% Thai Watsadu: The company offers wide variety of products relate to construction materials. It Watsadu targets a range of customers such as real estate contractors and homeowners with total of 39 Source: Company Data, Team’s Estimates, branches concentrate largely in Central and North-East of Thailand. The company also imports Finansia Syrus Research tiles and sells under its own house brand. Both store expansion and house brand would be a threat to DCC that mainly sell the products through its own outlet stores.

Figure 13: DCC failed to meet target Investment Summary expansion plan # Stores We place a “SELL” recommendation. Despite the high Return on Equity (“ROE”) and solid financial 20 15 15 position, the absence of future growth opportunities as well as the intensifying competition 15 13 12 10 10 implies that past stellar performance is unlikely to repeat again. With our valuation methods of 10 7 7 Dividend Discount Model (“DDM”) and Free Cash Flow to Firm (“FCFF”) model, the one-year 5 4 5 5 0 target price is THB 41.50, which leads to our final recommendation. 0 2009 2010 2011 2012 2013 2014F Limited ability to drive sales through store expansion leads to greater reliance on same store Target Actual sales growth: With 195 stores covering almost all 77 provinces throughout Thailand, the Source: Company Data and Team’s Estimates Company is likely to experience difficulties in expanding its branch network. The declining trend in the number of new stores opened annually from 10 stores in 2012 to only 4 stores in 2013 Figure 14: Declining sales volume and indicates deteriorating expansion opportunity. In fact, in year-to-date 2014, 1 store was closed growth (In Thousands Sq.m.) while no stores were opened. This reflects management’s failure to meet the initially set 5 new 60,000 20.0% stores (Figure13). Even in the scenario in which the company successfully achieves the expansion 58,000 target, the impact on top line would be immaterial because of the current large store network. 10.0% 56,000 Going forward, DCC is unlikely to achieve substantial growth of its existing business purely 54,000 0.0% through opening new stores as it used to experience in the past. 52,000 50,000 -10.0% Weak economic outlook implies low potential to boost same store sales: DCC’s main target 2011 2012 2013 2014E market is in upcountry area, where the demand is closely tied to the agricultural products. With Total Sales volume (LHS) the continuous declining in both farm income and agricultural price index by -7.7% YoY and - YoY Volume growth (RHS) 7.2% YoY in 3Q2014, the recovery of sales growth appears difficult. In addition, the level of Source: Company Data household debt has reached the record high of 84% of Thailand’s GDP as of June 30, 2014. This can potentially slowdown house renovation market which is DCC’s key market. Combining these unfavorable macroeconomic indicators, the turnaround of same store sales growth is unlikely to Figure 15: Higher sales contribution from high-price product take place in the near future (Figure 14). 30 140 137 138 135 136 Product line extension has little impact on profit: The launch of high-price products confirms 134 133 136 20 the weak market conditions in low-price market segment. Despite higher contribution of high- 13 14 132 price product sales from 9% in 1Q2014 to 14% in 3Q2014, the ASP of the Company has not 9 7 128 picked up as expected to reflect the higher contribution of such product sales. In addition, during 10 4.3 4.7 124 the same period, overall gross margin remained flat at 40%. Thus, we believe that DCC’s ongoing efforts in promoting its high-price products are unlikely to have immaterial impact on overall 0 120 profitability of the Company (Figure 15). ASP (RHS)

Sales contribution from high-end product (LHS) Intensifying competition adds risk to future growth prospect: The lower cost of imported tiles, especially from China and Vietnam, has incentivized both local tile manufacturers and other home Source: Company Data improvement retailers to outsource the production activities. It allows importers to sell their products at 10-15% below market Average Selling Price (“ASP”). As a result, tiles imported value has been increasing with the CAGR of 28% during 2009 to 2013 (Appendix 11). In addition, other Figure 16: Declining DCC market share competing home improvement retailers, namely Global House and Thai Watsadu, have through 2019 aggressively expanded their stores in both urban and provincial areas with number of stores % 22 increasing from 12 to 66 stores within last 5 years. The competitive advantage of DCC as being a 21 low-cost manufacturer and having the extensive store network is now being threatened 20 (Appendix 12-14). This changing competitive landscape reflects in a gradual decrease in DCC 18 -2.2 markets share from 24% in 2009 to 21% in 2013 (Figure 16). DCC’s sales volume also continues -0.5 -0.6 16 -0.7 15.2 declining from -4.9% in 2013 and -5.2% in 2014. -0.8 14 Future plan to grow remains questionable: After domestic sales saturates, the clarity of the 12 next growth strategies is crucial to drive DCC forward. At the moment, international expansion 10 seems to be very attractive. However, the management has decided to put the expansion strategy 2013 2014F 2015F 2016F 2017F 2018F 2019F on hold due to many uncertainties and risks involved. Therefore, the international expansion is Source: Kasikorn Research Center, Team’s Estimates expected not to happen in the near future. An absence of the next growth engine makes DCC become less attractive

Figure 17: Market recovery from Relative Valuations also indicate overprice for no growth company: The indicative valuation Thailand’s political unrest multiples obtained from the relative valuation covering selected comparable companies further 15% confirms that DCC’s stock price is not justified by its growth outlook. Although DCC’s P/E ratio of 10% 5% 18.9x is considered in line with peers’ whose average P/E ratio currently stands at 17.0x, when 0% the Company’s growth is incorporated into multiple analysis, DCC’s PEG ratio of over 7.5x is, in -5% fact, significantly higher than peers’ whose average PEG ratio is only 3.5x. With the expected -10% -15% growth rate of 2-3% per annum, the results from all valuation methods confirm that the current

-20% price of THB 55.75 per share is overvalued.

Jul-14

Jan-14

Jun-14

Oct-13 Oct-14

Sep-13 Sep-14

Feb-14

Dec-13

Apr-14

Aug-13 Aug-14

Nov-13 Nov-14 Mar-14 May-14 Low beta does not lead to expected diversification benefit: Despite DCC’s low beta of 0.57 DCC SET Source: Bloomberg relative to SET Index, we found the high discrepancy between the beta during the bullish market 5 (0.48) and that during the bearish one (0.73). This indicates that DCC has limited upside during the bullish period and yields low diversification benefit in the bearish market (Figure 17), just simply the time when the investors need such benefit most. Thus, DCC might not be a good investment choice for investors who want to reduce their portfolio risk through diversification (Appendix 15).

Event Analysis

Share Price (THB) 80 Household debt reached to 84% of GDP 70 First announced 100% dividend payout 60 50

50% Decrease in natural 40 gas price during Continuous drop 30 Sept 08- May 09 in agricultural Thailand Great product price 20 Flood

0 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14

DCC stock price significantly skyrocketed in year 2008-2011 due to the huge drop in natural gas price, the continuous store expansion, and the announcement of 100% dividend payout. The great flood in Thailand was also a big event that drove the demand in home improvement market in 2011. However, in recent years the stock price has been sideway reflecting the impact from consumption problem in low-price segment e.g. household debt and the huge drop in agricultural product price.

Valuation

As a single business company with stable cash flow streams, we use Discounted Cash Flow (DCF) method in arriving the target price for DCC. The Company is perceived as a dividend stock from investor perspectives since it has been consistently paying stable and high dividend with the payout ratio of 100%. Hence, Dividend Discount Model (DDM) is used for the valuation of DCC. However, to better reflect intrinsic value of the Company, we also include Free Cash Flow to Firm (FCFF) method in our valuation in order to capture the controlling aspect of the largest group of shareholders, the family owner and the board of directors. Five-Year Projected Cash Flow Assumptions Figure 18: Sales growth drops during the forecast period Expected decline in sales growth: Sales for DCC is forecasted by distribution channel, with ASP Mn THB and volume as the key drivers. 12,000  Outlet Sales: DCC’s main revenues are from sales through its own outlet stores, CAGR 10,000 1.29% approximately 70% of total revenue, which are driven by expected number of stores 8,000 8.20% and same store sales for each region. The assumptions are estimated based on economic 6,000 outlook and store coverage in the areas. As the store expansion opportunity becomes 4,000 limited and higher competition is expected, we estimate the SSS to slightly decline. 2,000  Other distribution channels: Selling prices are discounted by 3-5% from the outlet - selling prices. We expect 1-4% growth of sales volume for wholesale customers such as 2008 2013 2019F home improvement retailers and real estate contractors. Source: Company Data and Team’s Estimates With all factors combined, sales growth is estimated to drop to 1.29% CAGR during the forecast period, compared to 8.20% in the past five years (Figure 18). Figure 19: COGS driven by Gas price Costs of production driven by natural gas price: Cost of goods sold (COGS) consists of three Millions THB/M THB MBTU main components: Natural gas cost, other variable costs and fixed costs. Natural gas is the main 6,000 500 cost of production with approximately 30% contribution to the total cost. It is calculated from (1)

5,000 400 Natural gas usage per unit, which is expected to remain constant at 0.06 MMBTU per sq.m. and 4,000 (2) Natural gas price per MMBTU, expected to increase by 3.5% annually (Figure 19). 300 3,000 200 2,000 Net profit grows slower than sales: Other income and SG&A expenses are expected to increase 1,000 100 proportionately to sales. Cost of financing for DCC is based on the Company’s historical short- 0 0 term borrowing rate of 2.85%. With the increase in COGS and SG&A, which are driven by higher depreciation and expected natural gas price, DCC’s net profit margin is estimated to decline from 17.25% in 2013 to 16.24% in 2019. Gas cost Variable costs Fixed costs Gas Price Capital Expenditures on store expansion and production capacity maximization: The annual Source: Company Data and Team’s Estimates CAPEX is forecasted to range between THB 336Mn to 441Mn during 2014 to 2019 and invested in 6 Figure 20: DCC Cost of Capital Estimates 3 main activities: (1) Store expansion and relocation, expected at 10 relocations with 1-3 new stores each year; (2) Store renovation, to maintain the quality and meet customers’ need; (3) WACC Computation Production capacity maximization, targeted at 2 kilns modification per year. The assumptions are Risk-Free Rate 2.86% estimated based on management’s target announcement and past achievements. Market Return 11.98% Country Risk Premium 2.50% Unsustainable high dividend payout: DCC can maintain its dividend payout ratio at 100% for Beta 0.57 the past years and it is expected continue throughout the forecast period, in accordance with the Cost of Equity 9.48% management’s intention to be a high dividend payout stock. However, to maintain the debt level Cost of Debt 3.38% in long run, the Company is likely to retain the earnings at a level that is sufficient for operation. Marginal Tax Rate 20.00% Terminal growth assumption determined by target earning retention: The sustainable Cost of Debt, post tax 2.71% retention rate is estimated to be 5%, which is the level that the Company will be able to maintain Effective WACC 8.99% its capital structure. Using the sustainable growth formula, the perpetual growth rates are Source: Bloomberg and Team’s Estimates derived in 2 stages, 2.32% and 1.31%, with the assumption that the Company will be able to maintain ROE at 46.32% in the first stage, and reduce down to 26.24% as profit margin will Figure 21: Target Price converge to industry average in the long run (Appendix 16).

Weight Price Additional country risk premium added to reflect political instability: The cost of equity is FCFF 47% 40.64 calculated using CAPM with 10-year Thai government bond risk-free rate of 2.86%. Market return DDM 53% 42.14 of 11.98% and beta of 0.57 are derived from 10-year weekly data. With additional country risk Target Price 41.50 premium to reflect the higher risk during political and economic instability, the final cost of equity is 9.48% (Figure 20). Source: Team’s Estimates Weighted average cost of capital: The cost of debt of 3.38% is derived from company’s historical short-term borrowing rate, and 20% tax rate is applied. As the capital structure changes during the forecast period, we calculate different WACC for each forecasted year to include the effect of Figure 22: Valuation Range DCC higher leverage (Appendix 17 & 18). With all components combined, we arrive the effective WACC of 8.99% (Figure 20). DDM FCFF Weighting of Valuation Models PE The shareholder structure serves as a good proxy for the allocated weights to the models. 47% is PE Band assigned to FCFF representing the portion owned by the family and board of directors whereas EV/EBIT… the remaining 53% reflects the minor shareholders. The long-term holding period reflects the investment for dividend purpose. Hence, DDM is used to value DCC for this group of investors, 20 30 40 50 60 Price (THB) representing 53% of the firm’s value. By combining both valuation methods, the fair price for DCC Target Price THB 41.50 is THB 41.50 (Figure 21). Current Price THB 55.75 Target Price Relative valuation also confirms: Apart from DCF methods, we also consider relative valuation Relative Valuation (THB/share) by using P/E, P/E Band and EV/EBITDA multiple analyses in order to reflect better market view P/E Band 39.13 on DCC. DCC fundamentally has exposure in both manufacturing and retailing businesses. Since P/E 43.33 there are no perfect comparable companies, cross-sectional peers were chosen for better comparison. All the chosen comparable companies can be classified into 3 tiers based on their EV/EBITDA 45.64 business fundamentals: (1) local construction material manufactures (2) local home Source: Team’s Estimates improvement retailers (3) regional tile manufacturers (Appendix 19 - 22).

Valuation confirms stock overvalued: Both DCF and relative valuation give the target price estimates that are in line with each other (Figure 22). However, we choose DDM and FCFF for our Figure 23: High ROE is offset by high P/BV valuation of DCC as it best suits the nature of Company’s stock. At the current price of THB 55.75, ROE (%) DCC TB DCC is overvalued with the potential downside of 25.56% by the end of 2015. Hence, we ground 50.00 Average for the “SELL” recommendation with the target price of THB 41.50. 40.00

In addition, the indicative valuation multiples obtained from PEG further confirms that DCC’s 30.00 stock price is not justified by its growth outlook. After incorporate the Company’s growth, DCC SCC TB has PEG ratio of 7.4x, which significantly higher than peer’s average of 3.0x. Hence, with the 20.00 TTC VN Average expected growth rate of 2-3% per annum, the results from all valuation methods confirm that the TGCI TB 10.00 current price of THB 55.75 per share is overvalued. GLOBAL TB P/BV 0.00 (Times) Current price implies unobtainable growth rate 0.00 2.00 4.00 6.00 8.00 10.00 PBV Based on the current market price of THB 55.75, it implied the sustainable growth rate of 4.12%. Note: The label is Bloomberg ticker This data reflects an over-expectation from the market since DCC is a matured company, and Source: Bloomberg expected to be threatened by many external factors. With the changing competitive landscape and having no clear growth drivers, achieving such ambitious growth expectation might be Figure 24: DCC P/E Band challenging for DCC. PER (Times) 25 +2.0 SD 20 Market view on DCC +1.0 SD 15 +0.5 SD LT average As of December 2014, DCC is trading at current P/E Ratio of 18.9x, which is higher than historical 10 -0.5 SD -1 SD long-term average P/E Ratio +1 SD, and higher than current PER of SET which is 16.9x (Figure 5 24). Therefore, current trading price of DCC is quite expensive while the Company is in mature 0 stage with slowing down trend leading to less attractive in terms of current valuation. In addition,

recently DCC’s daily trading volume is only 17 million Baht indicating the low daily turnover of

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Source: Bloomberg 0.075%. Furthermore, comparing DCC to SET in the bullish trend in the past, DCC tends to underperform SET (Appendix 23 & 24). 7 Financial Analysis

2012 2013 2014 F 2015 F 2016 F 2017 F 2018 F 2019 F LIQUIDITY RATIOS Current Ratio 1.01 0.89 0.87 0.82 0.79 0.78 0.78 0.78 Quick Ratio 0.17 0.13 0.13 0.12 0.12 0.12 0.12 0.12 Cash Ratio 0.10 0.08 0.08 0.07 0.07 0.07 0.07 0.07 PROFITABILITY RATIOS Gross Profit Margin 39.17% 41.06% 40.51% 40.49% 40.51% 40.46% 40.39% 40.29% Operating Profit Margin 21.89% 22.00% 21.28% 21.21% 21.20% 21.13% 21.05% 20.95% Net Profit Margin 16.70% 17.25% 16.65% 16.57% 16.50% 16.40% 16.33% 16.24% Return on Equity 45.79% 46.83% 43.12% 43.52% 44.40% 45.03% 45.71% 46.32% Return on Assets 27.42% 25.99% 22.90% 22.41% 21.93% 21.61% 21.54% 21.57% LEVERAGE RATIOS Debt-to-Equity Ratio 0.30 0.43 0.47 0.54 0.61 0.63 0.65 0.65 Interest Coverage Ratio 105.34 69.54 45.43 41.91 37.16 33.70 33.02 32.17 Cash Flow to Debt Ratio 1.35 1.22 1.08 0.94 0.87 0.88 0.83 0.89 Debt-to-EBITDA Ratio 0.46 0.63 0.74 0.83 0.91 0.92 0.94 0.92 EFFICIENCY ACTIVITY RATIOS Assets Turnover 1.64 1.51 1.38 1.35 1.33 1.32 1.32 1.33 Inventory Days 111.13 129.45 138.50 139.50 142.00 143.00 143.50 144.00 Accounts Receivable Days 6.43 5.87 5.90 6.30 6.50 6.70 6.90 7.00 Accounts Payable Days 53.68 52.41 52.41 53.00 53.00 53.50 53.50 54.00 Cash Conversion Cycle 63.88 82.91 91.99 92.80 95.50 96.20 96.90 97.00 Earnings per Share (THB) 3.10 3.18 2.93 2.99 3.06 3.12 3.18 3.23 Dividend per Share (THB) 3.08 3.18 2.93 2.99 3.06 3.12 3.18 3.23

Figure 25: Decreasing in sale growth Earnings: With the slower-than-expected Thai economic recovery as well as the increasing in Mn THB % YoY 10,000 8.0 competition in the tile market, we expect DCC’s earnings growth to slow down with the revenue 8,000 4.0 and net income CAGR of 1.29% and 0.27% during 2013-2019, respectively (Figure 25). 6,000 0.0 Slowdown in store expansion: From past aggressive store expansion, we are convinced that the 4,000 -4.0 Company has already captured the opportunity both in Bangkok and provincial areas. An 2,000 -8.0 international expansion is also unlikely to take place, thus, the decreasing trend in store - -12.0 expansion is expected to continue. In year 2014, we expect number of stores to remain unchanged, at 195 stores, due to weak demand in upcountry area. Afterward, the number of new Sales(LHS) Net Income(LHS) stores open is expected to decline; from 3 new stores in 2015 to only 1 store by 2019, with the Sales growth(RHS) NI growth(RHS) total of 206 stores by the end of 2019 (Figure 26). Source: Company Data and Team’s Estimates Unsustainable same store sales growth: Looking forward, there will be less opportunity to capture new market since DCC has already had an extensive store coverage throughout Thailand. Figure 26: Slowdown in store expansion Moreover, the weak economic condition is expected to pressure SSS growth down to -5.75% in Stores 210 2014 due to lower purchasing power of DCC’s target customers. With a slow effect from 1 2 government continuous attempt to boost the economy, we expect the recovery to start in 2015 2 200 3 and 2016. This will lead to a slight SSS growth of 1.31% YoY. However, the increasing SSS growth -1 3 4 is unlikely to remain throughout the forecast period due to cannibalization from store expansion 190 as well as the change in competitive landscape of tile market. We expect a slowdown in SSS 192 198 195 195 201 203 205 growth from 1.56% in 2016 to 0.91% in 2019. 180 Slight decrease in profit margin: DCC has already enjoyed the benefits from the reduction in Existing stores New stores amount of natural gas used in production. However, the further improvement might be limited. Source: Company Data and Team’s Estimates According to Ministry of Energy, looking forward natural gas supply will be lower which will lead to the increase in imported natural gas that is sold at higher price. Hence, we expect the gross Figure 27: Increasing in Cash Conversion profit margin to slightly decrease from 41.06% in 2013 to 40.29% in 2019 due to the increase in Cycle natural gas price. Also, operating profit margin and net profit margin are expected to slightly 2019F drop. 2018F Cash Flows: The Company has planned to expand sales by capturing more wholesales customers: 2017F such as real estate contractors and home improvement retailers, and increasing the product lines 2016F offered. These ongoing strategies are expected to result in the longer accounts receivable and 2015F inventory days. Cash conversion cycle is expected to increase from 83 days in 2013 to 97 days in 2014F 2019 (Figure 27). 2013 2012 High potential of increasing in debt financing: In previous years, the Company has financed its Days operation mainly through equity and short-term debt. As the cash conversion cycle increases, -40 10 60 110 160 Account Payable Days more funding is needed. We expect the incurring of short-term debt to support company Operating Cycle (Days) Cash Conversion Cycle (Days) operation. Debt-to-equity ratio is expected to increase from 0.43 in 2013 to 0.65 times in 2019 Source: Company Data and Team’s Estimates (Figure 28). The ability to pay interest will decline as interest expense increases, supported by 8 Figure 28: Rise in Debt-to-Equity ratio the decrease in interest coverage ratio from 69.54 in 2013 to 32.17 times at the end of forecast 0.80 0.65 period, 2019. 0.61 0.63 0.65 0.54 0.60 0.47 0.43 Du Pont Analysis: DCC has historically been able to maintain its ROE within the range of 40- 0.40 0.30 46%. Throughout our forecast period, DCC is expected to retain its ROE at around the same level, 0.20 with a slight decline from 46.8% in year 2013 to 46.3% in year 2019. However, our Du Pont - analysis indicates that the key drivers for such high ROE is an increase in leverage, as reflected by a higher equity multiplier (“EQM”) of 1.80 in 2013 to 2.15 times in 2019 (Figure 29). Hence, the Source: Company Data and Team’s Estimates higher return on equity doesn’t necessarily caused by the margin improvements. (Appendix 25). Figure 29: Du Pont Analysis indicates rise in ROE Investment Risks Regulatory Risks

RR1: Increase in rule and regulations for imported tiles Tax charged and regulation for imported tiles still remain a key factor to prevent Thai companies to outsource from low cost tile manufacturers oversea. The success of Quality Assurance introduced by Thai government will help decrease the amount of imported tile due to higher quality control. This will reduce competition in local tile market and enhance DCC’s future growth opportunity. Source: Team’s Estimates Figure 30: Risk Analysis Matrix RR2: Success on government stimulus packages Thai government has been trying to reduce the effect on household debt from the past policy of first car, first house, as well as rice subsidy scheme. The success of reducing household debt will help enhance purchasing power of Thai people, mainly low-to-middle income segment who are DCC’s main target customers. Macro Risks (Market Risks)

MR1: Early economic recovery results in increase in DCC sales DCC’s sales are highly correlated with Thai GDP at the correlation of 0.97. The faster-than- expected economic recovery and stable political situation will help enhance overall sales. The rise in volume to 58.73 million sq.m. will increase our target price to THB 47.39 and change our Regulatory Macro Operational risks risks risks recommendation to hold, while, further increase to 72.90 million sq.m. will change our recommendation to buy. Source: Team’s Estimates Figure 31: Impact-Recovery Matrix MR2: Possibility of foreign fund flow coming into Thai equity market Given the current global economy, we believe that there might be some foreign funds flowing into Thailand’s equity market. Despite the high possibility of equity market booming, we believe that the fund flow will likely to be a selective buy due to the high valuation of SET. In addition, DCC tends to receive less benefit from fund flows because it has just been taken out of SET100 Index, which represents the top 100 listed companies on SET in terms of large market capitalization with high liquidity. This indicates characteristics of DCC that will be some fund limitations: small market capitalization and low trading liquidity. Hence, the impact from fund flows on DCC stock price may be very limited. Operational Risks Regulatory Macro Operational risks risks risks OR1: Decrease in gas price results in better profit Note: Time to recover is the time we expect One of the main manufacturing costs is coming from natural gas, with contribution of 30% to the effect from risk factors to last. Source: Team’s Estimates overall cost of production. Natural gas price has been fluctuating and unpredictable (Figure 32); however, the decrease in gas price will help reduce cost of product. The reduction in natural gas Figure 32: Company’s historical Natural price to THB 354.6 will change our recommendation from sell to hold and further fall to THB Gas cost 227.7 for a buy recommendation. THB/MM BTU 500 OR2: Success on the introduction of digital and larger-sized tiles 400 By successfully increasing larger-sized and digital tile sales, it will help increase Company average

300 selling price (ASP) since these tiles are sold at 40-50% higher than normal tile price. Instead of seeing an increase in sales contribution, we would like to see more effect on average selling price 200 since the contribution can be misleading if there is any sales promotion. The ASP needs to 100 increase to THB 142.7 to change our recommendation to hold and increase to THB 154.8 to result - in buy recommendation. Valuation Risk Source: Company data To test the effect of the macro and operational risks on our recommendation, we perform Figure 33: Scenario Analysis scenario analysis of changes in sales volume, ASP, and natural gas price. The better and best cases will change our target price to THB 51.25 and THB 60.50 respectively and result in hold Scenario Analysis recommendation. Please see Appendix 28 for more detail on the analysis (Figure 33). In addition, Base Better Best we run Monte Carlo Simulation to further examine the probability of changing our 41.50 51.25 60.50 recommendation. Using 5-year historical standard deviation, the simulation analysis shows that there is only a 4% chance that would trigger a change in our recommendation from sell to buy Source: Team’s estimates and 28% to hold. On the other hands, the possibility of a downside is as high as 68% (Figure 34). 9 Sensitivity Analysis Since Terminal value accounts for the major part of the DCF model, we perform sensitivity Figure 34: Monte Carlo Simulation analysis of changes in perpetual growth rates to our target price. Dividend payout ratio and ROE 68% 28% 4% are used as the sensitive variables as they are the main components of the terminal growth SELL HOLD BUY (Appendix 29). The upper and lower bounds of long-term ROE are the forecast ratio of last period and WACC respectively, while the range of dividend payout ratio is estimated based on the ability to payback debt of the company.

Terminal ROE 41.43 9.48% 17.86% 26.24% 36.28% 46.32% Terminal 90.0% 43.45 46.19 49.64 55.13 63.03 Dividend 92.5% 41.27 43.05 45.15 48.20 52.04 Source: Team’s Estimates Payout 95.0% 39.25 40.29 41.50 42.98 44.75 Ratio 97.5% 37.39 37.84 38.31 38.91 39.55 100.0% 35.66 35.66 35.66 35.66 35.66

Figure 35: Real Option Valuation Other Upside Potentials Summary Announcement of international expansion plan Real Option Summary (In Mn THB) The opening of AEC will present an opportunity for DCC to expand its business oversea. This can Spot Value 1,459 be done by both expanding the production base and establishing Company’s own outlet stores. However, from the statement made by DCC’s management team, the most likely case is to open its Strike Value 1,614 own outlet stores. We see this opportunity as an option to expand internationally whose Volatility (%) 50% characteristic is similar to call option. This can be valued using Black-Scholes option pricing 3-Y Risk free rate (%) 2.3% model (Appendix 30). The real option value is THB 473.1 million or THB 1.16 on per share basis (Figure 35). The option is currently out-of-the-money due to the riskiness of entering into new Real Option Value 473 market that has no prove of success. Number of shares outstanding (Mn) 408 DCC as a potential target acquisition company Real Option Value/share (THB) 1.16 Construction material industry in Thailand has been growing toward the consolidation trend. SCC, the largest cement-building material company in Thailand, has been acquiring various Source: Team’s estimates companies in the industry. It partially staked in TGCI, a tile manufacturer, in 2008 and also in GLOBAL, a one-stop shopping home center, in 2012. Those target companies help enhance and strengthen business of SCC. By looking at both side of the acquisition, being an acquirer as well as being a target company, we believe that there is low chance for DCC to be an acquirer due to its excess production capacity throughout the forecast period (Appendix 31). On the other hand, as one of the leader in tile market with a large production capacity and strong brand reputation in particular market; DCC can potentially be a target company for acquisition. Observing from past transactions, the company is likely to be bought at premium of around 6.70% to 26.44% at a price range of 60.12 to 70.10 Baht per share (Appendix 32).

Additional Downside Risk

Probable increase in Value-Added Tax will slow down the consumption The government is considering increasing the Value-Added Tax or VAT, which is planned to be lifted from current 7% to 8% next year and to 10% in following years. This could potentially slowdown the recovery of economy as observed from Japan. Especially in low-price segment, DCC’s main customers, tend to have less incentive to spend because they are more sensitive to the change in VAT. Given the increase in VAT take place, we expect the money to be spent mostly on daily necessities with a small leftover spared for home renovation as necessary.

10 Appendix Index

Financial Statements Page Appendix A: Income Statement 13 Appendix B: Income Statement (Common-Size) 13 Appendix C: Balance Sheet 14 Appendix D: Balance Sheet (Common-Size) 15 Appendix E: Statement of Cash Flow 16

Business Description Appendix 1: Brands under DCC 17 Appendix 2: Product Types 18 Appendix 3: Business Structure and Subsidiaries 19 Appendix 4: Key Management Personnel 21 Corporate Governance Appendix 5: Corporate Governance 27

Industry analysis Appendix 6: Absolute and Relative Increase in Household Debt 28 Appendix 7: Growth of Renovation Market 28 Appendix 8: Domestic Manufacturers Market 29 Appendix 9: DCC’s Five Forces Analysis 30 Appendix 10: Growth of Specialty Store and Overall Modern Trade 31 Investment summary Appendix 11: Imported Tiles 32 Appendix 12: Home improvement centers (modern trade) 33 Appendix 13: Comparison among DCC and other improvement centers 34 Appendix 14: Home Improvement Centers store footprint 34 Appendix 15: Calculations of upside and downside beta between DCC stock price and SET 100 index 35 Valuation Appendix 16: DCF Assumptions 36 Appendix 17: WACC Assumptions 41 Appendix 18: DCF Analysis 42 Appendix 19: Relative Valuation 43 Appendix 20: DCC Expected Return-to-Beta comparison 45 Appendix 21: DCC Price-to-Earnings Ratio to Earning Growth Comparison 46 Appendix 22: DCC Return on Equity to Price-to-Book Value Comparison 47 Appendix 23: PE Band 48 Appendix 24: DCC underperforms SET over the past 3 years 48

Financial Analysis Appendix 25: Du Pont Analysis 49

Investment Risks

11 Appendix 26: Impact-Probability Risk Analysis Matrix 50 Appendix 27: Impact-Time to recover Risk Analysis Matrix 50 Appendix 28: Scenario Analysis 51 Appendix 29: Sensitivity Analysis 51 Appendix 30: Real Option Valuation 52 Appendix 31: Production Capacity Analysis 53 Appendix 32: Comparable M&A Transaction 55

Others Appendix 33: Management Structure 56 Appendix 34: Tile manufacturing factories 57 Appendix 35: Major shareholders structure 58

12 Appendix A: Income Statement

Income Statement (Mn THB) 2012 2013 2014F 2015F 2016F 2017F 2018F 2019F Revenue from sales 7,603 7,546 7,211 7,388 7,595 7,779 7,963 8,148

Costs of goods sold (4,625) (4,447) (4,290) (4,396) (4,518) (4,632) (4,747) (4,865) Gross income 2,978 3,099 2,921 2,991 3,077 3,148 3,216 3,283 Other income 35 18 21 22 22 23 24 24 Selling expenses (761) (755) (721) (739) (760) (778) (796) (815) Administrative expenses (588) (701) (687) (707) (729) (749) (767) (785) Income before finance costs income tax 1,664 1,661 1,534 1,567 1,610 1,644 1,676 1,707 Finance costs (16) (24) (34) (37) (43) (49) (51) (53) Income before income tax 1,648 1,637 1,500 1,530 1,567 1,595 1,625 1,654 Income tax (379) (335) (300) (306) (313) (319) (325) (331) Net Income 1,270 1,302 1,200 1,224 1,253 1,276 1,300 1,323

Appendix B: Income Statement (Common-Size)

Income Statement (Common-Size) 2012 2013 2014F 2015F 2016F 2017F 2018F 2019F Revenue from sales 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Costs of goods sold 61% 59% 59% 60% 59% 60% 60% 60% Gross income 39.2% 41.1% 40.5% 40.5% 40.5% 40.5% 40.4% 40.3% Other income 0.5% 0.2% 0.3% 0.3% 0.3% 0.3% 0.3% 0.3% Selling expenses 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% Administrative expenses 7.7% 9.3% 9.5% 9.6% 9.6% 9.6% 9.6% 9.6% Income before finance costs income tax 21.9% 22.0% 21.3% 21.2% 21.2% 21.1% 21.1% 20.9% Finance costs 0.2% 0.3% 0.5% 0.5% 0.6% 0.6% 0.6% 0.7% Income before income tax 21.7% 21.7% 20.8% 20.7% 20.6% 20.5% 20.4% 20.3% Income tax 5.0% 4.4% 4.2% 4.1% 4.1% 4.1% 4.1% 4.1% Net Income 16.7% 17.2% 16.6% 16.6% 16.5% 16.4% 16.3% 16.2%

13 Appendix C: Balance Sheet

Balance Sheet (Mn THB) 2012 2013 2014F 2015F 2016F 2017F 2018F 2019F ASSETS Cash and cash equivalents 189 169 180 185 190 194 199 204 Trade accounts and notes receivable - net 137 106 127 128 143 143 158 154 Inventories - net 1,550 1,605 1,651 1,709 1,806 1,823 1,910 1,929 Other current assets 36 35 35 36 37 38 39 40 Total Current Assets 1,911 1,915 1,994 2,058 2,176 2,198 2,306 2,326 Other investment - net Property, plant and equipment - net 2,701 2,942 3,073 3,238 3,392 3,472 3,512 3,529 Goodwill 104 104 104 104 104 104 104 104 Intangible assets - net 7 15 16 16 17 17 17 17 Deferred income tax - asset 119 127 122 125 128 131 134 137 Other non - current assets 37 38 35 36 37 38 39 40 Total Non - Current Assets 2,967 3,226 3,350 3,519 3,678 3,762 3,807 3,827

TOTAL ASSETS 4,877 5,141 5,343 5,577 5,854 5,960 6,112 6,154

LIABILITIES AND SHAREHOLDERS' EQUITY LIABILITIES Short - term loans from financial institutions 840 1,185 1,312 1,520 1,712 1,781 1,861 1,852 Trade accounts and notes payable 689 588 644 633 679 678 713 726 Accrued income tax 183 148 141 145 149 153 156 160 Other current liabilities 176 236 201 206 212 217 222 227 Total Current Liabilities 1,887 2,157 2,298 2,504 2,752 2,829 2,953 2,965 Unfunded provident fund 51 53 55 57 59 61 63 65 Employee benefits obligation 118 136 151 166 181 196 211 226 Deferred income tax - liability 23 33 32 33 34 34 35 36 Total Non - Current Liabilities 193 222 238 255 273 291 309 327

TOTAL LIABILITIES 2,080 2,379 2,536 2,760 3,025 3,120 3,262 3,292

SHAREHOLDERS’ EQUITY Issued and paid - up - 408,000,000 shares 408 408 408 408 408 408 408 408 Premium on share capital 506 506 506 506 506 506 506 506 Retained earnings - Appropriated for legal reserve 41 41 41 41 41 41 41 41 - Unappropriated 1,797 1,757 1,799 1,804 1,812 1,817 1,823 1,829 Shareholders' equity of the Company 2,752 2,711 2,753 2,759 2,767 2,772 2,778 2,784 Non-controlling interests in subsidiaries 46 50 54 58 62 67 72 78 TOTAL SHAREHOLDERS' EQUITY 2,798 2,761 2,807 2,817 2,829 2,839 2,851 2,862

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 4,877 5,141 5,343 5,577 5,854 5,960 6,112 6,154

14 Appendix D: Balance Sheet (Common-Size)

Balance Sheet (Common-Size) 2012 2013 2014F 2015F 2016F 2017F 2018F 2019F ASSETS

Cash and cash equivalents 3.9% 3.3% 3.4% 3.3% 3.2% 3.3% 3.3% 3.3% Trade accounts and notes receivable - net 2.8% 2.1% 2.4% 2.3% 2.4% 2.4% 2.6% 2.5% Inventories - net 31.8% 31.2% 30.9% 30.7% 30.9% 30.6% 31.2% 31.3% Other current assets 0.7% 0.7% 0.7% 0.6% 0.6% 0.6% 0.6% 0.6% Total Current Assets 39.2% 37.3% 37.3% 36.9% 37.2% 36.9% 37.7% 37.8% Other investment - net Property, plant and equipment - net 55.4% 57.2% 57.5% 58.1% 58.0% 58.3% 57.5% 57.3% Goodwill 2.1% 2.0% 1.9% 1.9% 1.8% 1.7% 1.7% 1.7% Intangible assets - net 0.1% 0.3% 0.3% 0.3% 0.3% 0.3% 0.3% 0.3% Deferred income tax - asset 2.4% 2.5% 2.3% 2.2% 2.2% 2.2% 2.2% 2.2% Other non - current assets 0.7% 0.7% 0.7% 0.6% 0.6% 0.6% 0.6% 0.6% Total Non - Current Assets 60.8% 62.7% 62.7% 63.1% 62.8% 63.1% 62.3% 62.2%

100.0 TOTAL ASSETS 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% %

LIABILITIES AND SHAREHOLDERS' EQUITY

LIABILITIES Short - term loans from financial institutions 17.2% 23.1% 24.6% 27.3% 29.2% 29.9% 30.5% 30.1% Trade accounts and notes payable 14.1% 11.4% 12.1% 11.3% 11.6% 11.4% 11.7% 11.8% Accrued income tax 3.7% 2.9% 2.6% 2.6% 2.5% 2.6% 2.6% 2.6% Other current liabilities 3.6% 4.6% 3.8% 3.7% 3.6% 3.6% 3.6% 3.7% Total Current Liabilities 38.7% 42.0% 43.0% 44.9% 47.0% 47.5% 48.3% 48.2% Unfunded provident fund 1.1% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.1% Employee benefits obligation 2.4% 2.6% 2.8% 3.0% 3.1% 3.3% 3.4% 3.7% Deferred income tax - liability 0.5% 0.6% 0.6% 0.6% 0.6% 0.6% 0.6% 0.6% Total Non - Current Liabilities 4.0% 4.3% 4.4% 4.6% 4.7% 4.9% 5.1% 5.3%

TOTAL LIABILITIES 42.6% 46.3% 47.5% 49.5% 51.7% 52.4% 53.4% 53.5%

SHAREHOLDERS’ EQUITY Issued and paid - up - 408,000,000 shares 8.4% 7.9% 7.6% 7.3% 7.0% 6.8% 6.7% 6.6% Premium on share capital 10.4% 9.8% 9.5% 9.1% 8.6% 8.5% 8.3% 8.2% Retained earnings - Appropriated for legal reserve 0.8% 0.8% 0.8% 0.7% 0.7% 0.7% 0.7% 0.7% - Unappropriated 36.8% 34.2% 33.7% 32.4% 31.0% 30.5% 29.8% 29.7% Shareholders' equity of the Company 56.4% 52.7% 51.5% 49.5% 47.3% 46.5% 45.5% 45.2% Non-controlling interests in subsidiaries 0.9% 1.0% 1.0% 1.0% 1.1% 1.1% 1.2% 1.3% TOTAL SHAREHOLDERS' EQUITY 57.4% 53.7% 52.5% 50.5% 48.3% 47.6% 46.6% 46.5%

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

15 Appendix E: Statement of Cash Flow

Statement of Cash Flow (Mn THB) 2012 2013 2014F 2015F 2016F 2017F 2018F 2019F Cash Flows From Operating Activities Net income 1,270 1,302 1,200 1,224 1,253 1,276 1,300 1,323 Adjustments Depreciation and amortization 179 232 251 264 276 287 297 308 Others (5) (4) (4) (5) (5) (5) (5) (5) Increase (Decrease) in Operating Assets &

Liabilities Trade accounts and notes receivable (6) 31 (21) (1) (15) (0) (15) 4 Inventories (283) (55) (46) (58) (97) (16) (87) (19) Other current assets (1) 1 0 (1) (1) (1) (1) (1) Other non - current assets (22) (10) 8 (4) (5) (4) (4) (4) Trade accounts and notes payable 18 (101) 56 (11) 46 (1) 35 13 Other current liabilities (51) 26 (41) 8 10 9 9 9 Other non - current liabilities 37 30 15 18 18 18 18 18 Net Cash Provided from Operating Activities 1,136 1,451 1,417 1,434 1,482 1,563 1,547 1,646

Cash Flows from Investing Activities Acquisitions of assets (371) (485) (392) (439) (441) (378) (350) (336) Acquisitions of intangible assets (1) (12) (5) (5) (5) (6) (6) (6) Proceed from disposal of fixed assets 3 17 14 15 16 17 17 18 Other investment 3 4 4 4 4 5 5 6 Net Cash Used in Investing Activities (366) (477) (379) (425) (426) (362) (333) (319)

Cash Flows from Financing Activities Increase (decrease) in overdraft & short-term 440 345 127 208 191 70 80 (10) loans

Dividend payment (1,154) (1,213) (1,241) (1,266) (1,290) (1,312) (1,212) (1,338)

Net Cash Used in Financing Activities (772) (993) (1,027) (1,005) (1,050) (1,196) (1,210) (1,322)

Net Decrease in Cash and Cash Equivalents (2) (19) 11 4 5 5 5 5 Cash and Cash Equivalents at Beginning of Year 190 189 169 180 185 190 194 199 Cash and Cash Equivalents at End of Year 189 169 180 185 190 194 199 204

16 Appendix 1: Brands under DCC

The Ceramic tiles produced by the Company and its subsidiaries comprised of the following:

• Floor and wall ceramic tiles under the “Dynasty” trademark

• Floor and wall ceramic tiles under the “Tile Top” trademark

• Floor and wall ceramic tiles under the “Tomahawk” trademark

• Floor and wall ceramic tiles under the “Jaguar” trademark

• Floor and wall ceramic tiles under the “Anna” trademark

• Floor and wall ceramic tiles under the “Value” trademark

• Floor and wall ceramic tiles under the “Mustang” trademark

17 Appendix 2: Product types

Product Types Sales Contribution

Floor 16x16 29%

Floor 12x12 41%

Floor 8x8 3%

Low-price Products Wall 8x12 7% Wall 8x10 5% Wall 8x8 0% Other 3%

Total Low-price Products 88%

Granito 0%

Floor 24x24 (Rectified) 3%

Floor 16x16 Hybrid 5%

High-price Products Floor 16x16 Hybrid (Rectified) 1%

Floor 16x16 (Rectified) 3%

Floor 12x24 Hybrid (Rectified) 0%

Floor 12x24 (Rectified) 0% Total High-price Products 12%

We classify 16x16 inch tiles and below as low-price products while hybrid and rectified 16x16 and 24x24 inch tiles and up as high-price products, the low-price products will contribute 88% of total sales while the high-price products contribute only 12% of total sales.

18 Appendix 3: Business Structure and Subsidiaries

Before restructuring (Before June, 2014)

Dynasty Ceramic PCL. (DCC)

Produces Ceramic Floor Tiles, Grout and Distributed all Products

DCC Subsidiary, which DCC hold 96.83%

Tile Top Industry PCL Produces Ceramic Floor and Wall Tiles sold to DCC

Sells to Factory Wholesales-Local Export Outlets

Muangthong Ceramic Co., Ltd DCC holds 99.98%

Pick & Pay Co., Ltd DCC holds 97.99%

World Wide Ceramic Co., Ltd DCC holds 99.93%

Source: Company Data

19 After restructuring (After June, 2014)

Dynasty Ceramic PCL. (DCC)

Produces Ceramic Floor Tiles, Grout and Distributed all Products

DCC Subsidiary which DCC hold 96.83%

Tile Top Industry PCL Produces Ceramic Floor and Wall Tiles sold to DCC

Sells to Own Factory Wholesales-Local Export Outlets

Source: Company Data

20 Appendix 4: Key Management Personnel

Board of Directors

Name / Position Highest Education % of Share Family Other Current Position Experience / Date of Birth Holding relationship among executives 1. Mr. Roongroj Bachelor of Accounting, 100,000,000 Miss Cattleya Listed Company - None 2005-Present Saengsastra Chulalongkorn shares Saengsastra’s Chairman of Pick and Pay Co., Ltd University (24.51%) Non Listed Company 4 Chairman of Muang Thong Ceramic Co., Ltd Chairman at November, brother Companies Chairman of World Wide Ceramic Co., Ltd 2014 1. Chairman of TileTop Industry 5 March 1950 Public Co., Ltd 2000-2007 2. Chairman of Pick and Pay Co., President of Dynasty Ceramic Public Co., Ltd Ltd President of TileTop Industry Public Co., Ltd 3. Chairman of Muang Thong Ceramic Co., Ltd. 4. Chairman of World Wide Ceramic Co., Ltd

2. Mr. Sanchai Janejarat Bachelor of Engineering, 342,000 shares None Listed Company - None 2008 – Present Chulalongkorn President of Dynasty Ceramic Co., Ltd President University (0.08%) Non Listed Company 4 President of TileTop Industry Public Co., Ltd Companies 10 October 1949 Directors Accreditation at November, 1. President of TileTop Industry 2002 – 2007 Program (DAP) 2014 Public Co., Ltd Executive Director (Production) at Dynasty No.54/2006 2. Director at Pick and Pay Co., Ceramic Public Co., Ltd Ltd Executive Director (Production) at TileTop 3. Director at Muang Thong Industry Public Co., Ltd Ceramic Co., Ltd 4. Director at World Wide Ceramic Co., Ltd

3. Mr. Yothin Bachelor of Accounting, None None Listed Company 1 Company Head of Management System Development - Juangbhanich Chulalongkorn 1. Independent Director & Revenue Department University Chairman of Audit Committee at Regional 12 Revenue Chief Independent Director & Tanasiri Group Public Co., Ltd MBA, University of Chairman of Audit Non Listed Company 2 Committee Santa Clara, USA Companies 1.Sub-committee to strengthen good governance in the public sector, the Senate. 2. Part-time Faculty at

21 22 September 1949 Director Accreditation Assumption University: Tax Accounting Program (DAP) 79/2009

4. Mr. Chaiyasith Bachelor of Engineering, 20,460,000 None Listed Company 1 Company Viriyametakul Chulalongkorn shares 1. President at Vibhavadee University Hospital Director (5.02%) National Defense College Non Listed Company 2 22 July 1949 (NDC.4414) at November, Companies 2014 1. Vice Chairman of BOD at Director Accreditation Chao Paya Hospital Public Co., Program (DAP) 20/2004 Ltd - Increasing Your 2. Executive Director at Corporate Value through Vibharam Co., Ltd and its Effective Subsidiaries Communication Year 2003 - Risk Management

5. Mr. Suvit Smarnpanchai High-School, Charnvit 10,000,000 None Listed Company - None Present Wittaya School shares Advisor of the Audit Committee and Director Non Listed Company 1 Monitoring The Police Administration of Director Accreditation (2.45%) Company Ratchburana police Station 17 April 1947 Program (DAP) 54/2006 1. Managing Director at at November, Ekasithpun Co., Ltd 2000 – Present Managing Director at 2014 Ekasithpun Co., Ltd

6. Mr. Surasak Bachelor of Law, None None Listed Company 1 Company 1969 – Present Kosiyajinda Thammasart University 1. Director at AJ Plast Public Co., Ltd Own office at Jutturatham Law Office Independent Director & Director Accreditation Audit Committee Program (DAP) 48/2005 Non Listed Company 1 Company 19 January 1943 1. Director at United Food Co., Ltd

7. Mr. Phachon Bachelor of Arts in None None None 1975 – 2005 Khachitsarn Economic, Kasetsart Administration Department Manager, Fuel University Advanced Administration and Finance Division EGAT Independent Director & /Public Utility Audit Committee Certificate of Administration, National Institute of

22 24 September 1948 Development Administration (Nida)

Advanced Mini- MBA, Chulalongkorn University

Director Accreditation Program (DAP) 99/2012

8. Miss Cattleya Bachelor degree 11,000,000 Mr. Roongroj Listed Company 1 Company 1995 – Present Saengsastra Accounting (Honor), shares Saengsastra’s 1. Independent Director and Director at TileTop Industry Public Co., Ltd Chulalongkorn Sister Chairman of Audit Committee Executive Director and University (2.7%) S&P Syndicated Public Co., Ltd 2005 – Present Company Secretary Director at Pick and Pay Co., Ltd Management at November, Non Listed Company 4 Director at Muang Thong Ceramic Co., Ltd 25 January 1948 Development Program- 2014 Companies Director at World Wide Ceramic Co., Ltd J.J.Kellogg North 1. Executive Director and Western University Company Secretary at TileTop 1990 – 1995 Industry Public Co., Ltd Executive Director (Accounting) at S&P Directors Accreditation 2. Director at Muang Thong Syndicated Public Co., Ltd Program (DAP) Ceramic Co., Ltd No.47/2005 3. Director at World Wide 1971 – 1990 Ceramic Co., Ltd Vice President Accounting System at Siam Cement Public Co., Ltd

9. .Mr. Monrak Master of Business 30,000,000 Mr. Roongroj Listed Company - None 2013 – Present Saengsastra Administration, shares Saengsastra’s Executive Director (Administration) at Kasetsart University Son Non Listed Company 4 Dynasty Ceramic Public Co., Ltd and TileTop Executive Director (7.35%) Companies Industry Public Co., Ltd (Administration) Master of Art in 1. Executive Director at TileTop International at November, Industry Public Co., Ltd Feb 2012 - Jan 2013 3 November 1975 Economics, Southern 2014 2. Director at Pick and Pay Co., Senior Executive Vice President Methodist University, Ltd (Administration) at Dynasty Ceramic Public USA 3. Director at Muang Thong Co., Ltd and TileTop Industry Public Co., Ltd Ceramic Co., Ltd Bachelor of Science in 4. Director at World Wide 2010 - Feb 2012 Business Computer Ceramic Co., Ltd Senior Executive Vice President (Production) Information Systems, at Dynasty Ceramic Public Co., Ltd and Tile- University of North Top Industry Public Co., Ltd Texas, USA 2004 - Mar 2013

23 Vice President (Administration) at Dynasty Ceramic Public Co., Ltd and TileTop Industry Public Co., Ltd

2000 – 2004 Senior System Analyst, PepsiCo Business Solutions Group. Plano, Texas. USA. MIS Assistance / Network Administrator, Westin Park Central/ Sheraton Park. Dallas, Texas. USA. System Analyst, Chapal Zenray Inc. Dallas, Texas. USA.

Corporate Officers

Name / Position Highest Education % of Share Family relationship Other Current Position Experience / Age Holding among executives Mr. Monrak Master of Business Administration, 7.35% at Mr. Roongroj Listed Company - None 2013 - Present Saengsastra Kasetsart University November, Saengsastra’s Son Non Listed Company 4 Executive Director (Administration) at Executive Director 2014 Companies Dynasty (Administration) Master of Art in International 1. Executive Director at Ceramic Public Co., Ltd and TileTop 39 years old Economics, TileTop Industry Industry Public Co., Ltd Southern Methodist Public Co., Ltd University, USA 2. Director at Pick and Feb 2012 - Jan 2013 Pay Co., Ltd Senior Executive Vice President Bachelor of Science 3. Director at Muang (Administration) in Business Computer Thong Ceramic at Dynasty Ceramic Public Co., Ltd and Information Systems, Co., Ltd TileTop Industry Public Co., Ltd University of North 4. Director at World Texas, USA Wide Ceramic Co., 2010 - Feb 2012 Ltd Senior Executive Vice President (Production) at Dynasty Ceramic Public Co., Ltd and Tile- Top Industry Public Co., Ltd

2004 - Mar 2013 Vice President (Administration) at Dynasty Ceramic Public Co., Ltd and TileTop Industry Public Co., Ltd

2000 - 2004 Senior System Analyst, PepsiCo Business Solutions Group. Plano, Texas. USA. MIS Assistance / Network Administrator, Westin Park Central/ Sheraton Park. Dallas, Texas. USA. System Analyst, Chapal Zenray Inc. Dallas, Texas. USA. Miss Sontaya Bachelor of Accounting, 0.07% at None None 2010 - Present Yaowalee Thammasat University November, Senior Executive VP Outlets and Support Senior Executive VP 2014 at Dynasty Outlets and Support Ceramic Public Co., Ltd 53 years old 2007 – Feb 2012 Secretary of Audit Committee at Dynasty Ceramic Public Co., Ltd

2007 – 2010 Executive Vice President (Outlet Marketing) at DynastyCeramic Public Co., Ltd

2005 – Present Director at Pick and Pay Co., Ltd, Muang Thong Ceramic Co., Ltd, and World Wide Ceramic Co., Ltd

Mr. Suthee Boonnag Bachelor of Science Program in None None None 2010 - Present Senior VP Technical Materials Science, Chulalongkorn Senior VP technical at Dynasty Ceramic 58 years old University Public Co., Ltd

2005 - Present VP Technical (Acting)

Mr. Jaruwat Traithavil Engineering / Information 0.12% at None None 2010 – Present Senior VP Production Technology, Australian National November, VP Production at Dynasty Ceramic Public 33 years old University 2014 Co., Ltd

Engineering Project Management, 2009 – 2010 University of Melbourne VP Production at TileTop Industry Public Co., Ltd

2008 – 2010

25 Senior Engineer at at TileTop Industry Public Co., Ltd

Miss Supaporn MBA in Accounting, University of None None None 2012 – Present Meephatra the Thai Chamber of Commerce VP Accounting at Dynasty Ceramic Public VP Accounting Co., Ltd 42 years old Bachelor of Accounting. Bangkok University 2010 – 2012 Accounting Manager at Dynasty Ceramic Public Co., Ltd

2007 – 2012 Head of Accounting Department at Dynasty Ceramic Public Co., Ltd Mr. Maruth Master of Science in Computer 7.35% at Mr. Roongroj Listed Company Sep 2013 – Present Saengsastra Science, Southern Methodist November, Saengsastra’s Son Senior Executive Vice Senior Executive Vice President Executive Director at University, USA 2014 President (Marketing) at Dynasty Ceramic Public TileTop Industry Co., (Marketing) at Dynasty Co., Ltd and TileTop Industry Public Co., Ltd (Subsidiary) Director Accreditation Program Ceramic Public Co., Ltd Ltd 37 years old (DAP) 107/2014 Non Listed Company 4 Nov 2010 – Present Companies Assistant Company Secretary and 1. Senior Executive Vice Investor Relation at Dynasty Ceramic President (Marketing) at Public Co., Ltd TileTop Industry Public Co., Ltd 2006 – Present 2. Director at Pick and Vice President Information Officer at Pay Co., Ltd Dynasty Ceramic Public Co., Ltd 3. Director at Muang Thong Ceramic Co., Ltd Aug 2001 – May 2005 4. Director at World Teaching Assistant at University of North Wide Ceramic Co., Ltd Texas, USA

26 Appendix 5: Corporate Governance

The quality of corporate governance based on the principles of good corporate governance by Thai Institute of Directors Association (IOD) in 2014, which are comprehensive and comparable to the Principles of Corporate Governance of the Organization for Economic Co-operation and Development (OECD). The criteria can be classified to main 5 perspectives:

Rights of Shareholders: Basic shareholder rights and mechanism for shareholders to participate and informed on decisions concerning fundamental corporate changes

Equitable Treatment of Shareholders: All shareholders should have the opportunity to obtain their rights and be treated equally.

Roles of Stakeholders: The recognition of the rights of stakeholders established by law or through mutual agreements and encouragement of active co-operation between corporations and stakeholders in creating wealth and sustainability.

Disclosure and Transparency: Timely and accurate disclosure is made on all material matters regarding the corporation, including the financial situation, performance, ownership, and governance of the company.

Board Responsibilities: the strategic guidance of the company, the effective monitoring of management by the board, and the board’s accountability to the company and the shareholders.

After evaluating, DCC gets the score in good level congruent with the corporate governance rating of 3 out of 5 by Thai Institute of Directors Association

Organization for Economic Co-operation and Development (OECD) Principles of Corporate Governance – Thai Institute of Directors (IOD) criteria:

Rights of Shareholders (15%)

Equitable Treatment of Shareholders (10%)

Roles of Stakeholders (10%)

Disclosure and Transparency (20%)

Board Responsibilities (35%)

Total (100%)

Score range Number of Logo Description

90-100 Excellent

80-89 Very Good

70-79 Good

60-69 Satisfactory

50-59 No logo given Pass

Less than 50 No logo given N/A

Source- Team’s estimates, Thai Institute of Directors Association (IOD) and OECD Principles of Corporate Governance

27 Appendix 6: Absolute and Relative Increase in Household Debt

Household Debt Household Debt to (Mn THB) GDP (%)

10,000 90 82 82.6 84 80 9,000 79 76 76.5 77 80 74 8,000 72.5 70 7,000 60 6,000 5,000 50 1Q2012 2Q2012 3Q2012 4Q2012 1Q2013 2Q2013 3Q2013 4Q2013 1Q2014 2Q2014

Amount of Household Debt Household Debt to GDP (%)

Source: Bank of Thailand

Appendix 7: Growth of Renovation Market

Home Renovation Market Growth (%YoY) 25 4.7% 5.0%

20 4.0% 2.9% 2.8% 15 2.4% 3.0% 2.5% 2.3%

2.4% 2.4% 2.4% 10 2.2% 2.2% 2.0% 2.1%

5 1.0%

0 0.0% 2008 2009 2010 2011 2012 2013

Provincial area Bangkok Provincial area Bangkok

Source: Real Estate Information Center

28 Appendix 8: Domestic Manufacturers Market

RCI-Rci TGCI-Campana 4% Casa 9%

UMI- DCC-Dynasty Dulagres 28% 14%

SCC-Cotto SOUSUCO 28% 17%

Company Brand Sales (In Mn THB, as Gross profit Net profit of 2013) margin margin Dynasty Ceramic Dynasty, Tiletop, Tomahawk, 7,546 41.10% 17.20% Jaguar, Anna, Value, Mustang

The Union Mosaic Industry PCL Duragres, Duragres Lila, UMI 3,736 17.32% 0.21%

Thai-German Ceramics industry Campana, Casa 2,576 33.39% 7.65%

The Royal Ceramic Industry RCI, Modena 1,015 31.23% 6.31% PCL

29 Appendix 9: DCC’s Five Forces Analysis

Competitive Rivalry within industry 5

Threat of Substitute Bargaining Power of Products Customers 2 2.5

1 1

Threat of New Bargaining Power of Entrances Suppliers

1 = Low impact to DCC 5 = High impact to DCC

Source: Team’s Analysis

Threats of New Entrances The huge capital investment will provide a great barrier of entry for tiles industry. The production has to be done by large amount in order to benefit from economy of scales. Currently, the industry basically gives low margin without a concurrent increase in demand that seems to be less attractive in the eyes of new comers. Thus, the unfavorable impact from new entrances is low.

Threats of Substitute Products Both when building new house and renovating, tiles will always be one of materials required. Even though some has shifted away from using tiles, there is a specific area that tiles could not be substituted such as where there is humid. Without complete alternatives, substitute product does not really be a threat to DCC.

Bargaining Power of Customers DCC has been producing low price tiles in order to serve low-income people. The pricing for this targeted segment is more competitive comparing to the upper level. As a result, the company could not sharply increase the price. However, there is a small room for DCC to slightly increase the selling price since its tiles are currently priced below average. This bargaining power of customers could cause a medium impact to DCC.

Bargaining Power of Suppliers DCC orders raw materials including soils, minerals and grinded rocks from various sources, not limited to any suppliers. These materials have no such uniqueness that allows suppliers to demand for premiums. Thus, bargaining power of suppliers has left no effect to the company in terms of price risk and costs when switching from one to the other supplier.

Competitive Rivalry within Industry The competitive landscape has intensified by both domestic manufacturers and imported tiles. Some local manufacturers are expanding their product lines and increase distribution channels by joint venturing. Also, the coming imported tiles are priced at even lower than of DCC’s posting a highly competitive environment. These threats would pass on high impact to DCC’s ability to sustain their sales and market share.

30 Appendix 10: Growth of Specialty Store and Overall Modern Trade

Growth (% YoY) 20.0 18.0

16.0 10.8 10.7 13.6 12.0 10.6 10.0 8.5 7.1 8.0 4.5 4.3 4.0 0.0 2010 2011 2012 2013 1H14

Specialty store Modern trade Average

Source: Thai Retailers Association

31 Appendix 11: Imported Tiles

Increasing value of imported tiles from China and Vietnam

10,000 8,000 6,000 4,000 2,000 - 2014 (Jan- 2008 2009 2010 2011 2012 2013 Sept) China 2,579 3,022 4,379 4,571 5,162 7,580 4,596

Vietnam 222 251 453 716 1,176 1,126 787 Total 2,801 3,273 4,831 5,287 6,337 8,706 5,383

* In the end of 2013, The Thai Industrial Standard Institute (TISI) imposed the Quality Assurance Policy on imported ceramic tiles. Many importers were afraid that the implementation of the new policies will cause the delay in their future imports. As a result, many importers increased import volume up to 20-50%. The over-supply caused the import value to drop slightly in year 2014.

Thai Ceramic Tiles Market Size(In Mn THB) 40,000 4-year 10% CAGR (%) 35,000 28%

30,000 -1% 25,000 9% 20,000 13% 15,000 7% 10,000 2%

5,000 6% - 2009 2010 2011 2012 2013

DCC-Dynasty SOUSUCO SCC-Cotto UMI-Dulagres TGCI-Campana Casa RCI-Rci Import

Market Share by Value (%) 2009 2010 2011 2012 2013 DCC 24% 23% 25% 23% 21% SOUSUCO 18% 16% 16% 15% 13% SCC 24% 20% 19% 20% 21% UMI 9% 9% 9% 10% 10%

TGCI 7% 10% 9% 9% 7% RCI 4% 4% 4% 3% 3% Imported tiles (China/Vietnam) 13% 17% 18% 22% 24%

32 Appendix 12: Home improvement centers (modern trade)

Home Product Center PCL: Thailand’s largest home improvement retailer, retails products ranging from construction materials to home furniture. With 64 branches locating in Bangkok and provincial areas. HMPRO targets upper-middle to high-price customer segment in the modern trade channel.

Mega Home: Subsidiary company of Home Pro. First launched in 2013, Mega Home retails and wholesales wide range of products, ranging from construction materials to kitchen hardware, office suppliers and etc. Opposite to Home Pro, Mega Home aims to capture lower-end market segment. It is the Home Pro’s management intention to use Mega Home to penetrate into provincial markets.

Thai Watsadu: Founded in 2010, Thai Watsadu is one of Central Retail Corporation’s subsidiary companies. The company offers wide variety of products relate to construction materials. It targets a range of customers such as real estate contractors and homeowners with total of 39 branches concentrate largely in

Central and North-East of Thailand.

Siam Global House PCL: Positions itself as “one stop shopping home center”. Global House offers wide ranges of home improvement products (over 90,000 SKUs). Global House targets customers are home contractors and homeowners. Focusing on provincial areas, Global House currently has 27 stores concentrate largely in North-East of Thailand.

BoonThaVorn: Established in 1977, BoonThaVorn offers a great variety of tiles, kitchen and bathroom hardware. Not only providing quality products, BoonThaVorn also offers a seamless customer service. With this clear positioning, BoonThaVorn target customers are upper-middle to high-income segments. Currently it has total of 10 branches in Bangkok and vicinity.

33 Appendix 13: Comparison among DCC and other improvement centers

Number of branches (as of Name Average store size (sq. m.) SKUs Nov 2014)

Home Pro 12,000-18,000 60,000 64

Mega Home 20,000-30,000 80,000 2

Thai Watsadu 24,000 100,000 39

Global House 18,000-32,000 90,000 36

BoonThaVorn 20,000 50,000 10

DCC* 3,000-5,000 1,000 195

Source: Company’s data and Team’s estimates

Appendix 14: Home Improvement Centers store footprint

2013 2014F 2015F 2016F

Home Pro 62 64 74 80

Mega Home 1 4 7 10

Global House 27 36 44 54

Total 90 104 125 144

2014F 2015F 2016F

Home Pro 2 10 6

Mage Home 3 3 3

Global House 9 8 10

Total number of new stores 14 21 19

34 Appendix 15: Calculations of upside and downside beta between DCC stock price and SET Index DCC Downside Beta of 0.73 is calculated from 10-year weekly historical data, included only the day that SET index generate positive return in order to see how DCC stock price movement on those days. While Upside Beta of 0.48 is coming from the weekly return of DCC stock in the period that the market generates positive return.

DCC Downside Beta 0.00%

-15.00% -10.00% -5.00% 0.00% 5.00% 10.00%

-5.00%

-10.00%

-15.00%

DCC Upside Beta 10.00%

5.00%

0.00% -15.00% -10.00% -5.00% 0.00% 5.00% 10.00%

35 Appendix 16: DCF Assumptions

1. Sales

For year 2014, we use actual 3 quarters information from company’s announcement while the projections for year 2015 to 2109 are forecasted as followed:

Average Selling Price (ASP)

Average selling price is forecasted to grow 1%. We believe that the company will be able to slightly increase the price to capture the recovery in economy, though the ASP growth will not be as high as the historical period due to the intense competition. ASP for each distribution channel is derived from discounted margin and sales volume contribution based on forecasted company’s ASP.

푛

ASP = ∑ 푊푖 × [퐴푆푃1 × (1 − 퐷푀푖)] 푖=1 ASP for outlet sales can be derived from the above equation. Then, we multiply it with (1 – DM) to get the ASP for other distribution channels.

Discounted Sales Volume Contribution (W) 2014F 2015F 2016F 2017F 2018F 2019F Margin (DM)*

(1) Outlet 67.71% 67.08% 67.28% 67.15% 66.74% 66.12% - (2) Real Estate Developer 9.77% 9.99% 10.06% 10.22% 10.43% 10.71% 3.00% (3) Home Improvement Retailer 17.45% 18.04% 17.99% 18.10% 18.36% 18.75% 5.00% (4) Franchise 2.73% 2.60% 2.43% 2.32% 2.29% 2.26% 5.00% (5) Export 2.35% 2.28% 2.24% 2.21% 2.18% 2.15% - *The *The prices are discounted from outlet selling prices

ASP by Channels 2014F 2015F 2016F 2017F 2018F 2019F Outlet 138.75 140.12 141.51 142.93 144.38 145.87 Real Estate Developer 134.59 135.91 137.26 138.64 140.05 141.49 Home Improvement Retailer 131.81 133.11 134.43 135.78 137.16 138.57 Franchise 131.81 133.11 134.43 135.78 137.16 138.57 Export 138.75 140.12 141.51 142.93 144.38 145.87 Weighted Average 136.88 138.25 139.63 141.03 142.44 143.86

Outlet Stores Assumptions

Number of Stores

The number of stores in 2014 is forecasted to be 195 stores, according to the Company’s data as of December 2014, which are less than 196 stores in 2013. For the rest of forecast period, the assumptions are based on past achievement along with the limited expansion opportunity as following:

2014F 2015F 2016F 2017F 2018F 2019F No. of new stores 0 3 3 2 2 1

36 Same Store Sales Volume

Sales volume per store for DCC is forecasted to increase in 2015 from the economic recovery and slowdown to flat rate throughout the forecast period. As the company is going through the mature stage, sales growth tends to slowdown and the cannibalization from new stores opened will also reduce the sale volume per store. The forecast of year 2014 is based on actual information.

SSS Volume Growth VS. No. of New Stores

2.00% 4

1.50% 3

1.00% 2

0.50% 1

0.00% - 2015F 2016F 2017F 2018F 2019F

No. of New Stores (LHS) SSS Volume Growth (RHS)

Source: Team’s Estimates

Other Distribution Channels Assumptions

Volume Growth

We expect the sales through franchises to continuously decline as the management has shifted the focus to other channels and has no further plan on franchise expansion, while export sales remain flat. Sales through real estate developers and home improvement centers are estimated to grow at 2-3% per year from 2015 to 2019 due to management’s intention to focus more on these two channels.

37 2. Cost of Production

Cost of production for Dynasty Ceramic tiles composes of 3 main components: Natural gas costs, Variable costs and Fixed costs, including depreciation and labor costs. Natural gas and other variable costs are driven by forecasted volume, while fixed costs are forecasted based on data of previous period.

Cost of Production 2013

Natural Production Assumptions Gas Costs Costs 16% 30% Natural Gas Ministry of Energy's

Costs forecast Variable Costs Average of historical 48% 20% Variable Costs cost per unit

Fixed Costs Fixed 7% 4% 22% Depreciation Average usage life 1% Fixed Costs Labor Costs Inflation Sources: Bloomberg Data and Team's Estimates Materials Chemicals Power Packaging Supplies Used

Natural Gas Price Forecast (2013 - 2030) THB 800

600

400

200

0 2013 2017F 2022F 2027F 2030F Local Production Import from Myanmar Imported LNG Source: Ministry of Energy

3. Capital Expenditures

Capital expenditures are invested in 3 main activities: Store expansion and relocation, Store renovation, and Production capacity maximization. The assumptions are estimated based on management’s target and past performance.

CAPEX (in Mn THB) 2014F 2015F 2016F 2017F 2018F 2019F Assumptions No. of new stores 0 3 3 2 2 1 Team estimates No. of relocated stores 10 10 10 10 10 10 Store expansion & relocation costs 150 195 195 180 180 165 15Mn THB / Store No. of store renovation 45 45 45 20 5 5 Team estimates Store renovation costs 90 90 90 40 10 10 2Mn THB/ Store No. of kiln modification & maintenance 2 2 2 2 2 2 Team estimates Kiln modification & maintenance 80 80 80 80 80 80 40Mn THB / Store costs Other CAPEX 72 74 76 78 80 81 Percentage of sales Total CAPEX 392 439 441 378 350 336

38 4. Depreciation

The base annual depreciation represents the depreciation of existing assets, derived from company’s data. Depreciation on new fixed assets is calculated using straight-line method.

Depreciation (in Mn THB) 2014F 2015F 2016F 2017F 2018F 2019F Assumptions Base annual depreciation 227 218 209 200 192 184 Team's calculation Buildings (2014-2019) 7 15 23 29 34 39 30 years Machineries and others (2014-2019) 13 25 38 52 65 78 12 years Annual Depreciation 247 258 271 281 292 302

5. Working Capitals

Working capitals are forecasted based on assumptions as following:

Working Capitals 2014F 2015F 2016F 2017F 2018F 2019F Accounts receivable days 5.90 6.30 6.50 6.70 6.90 7.00 Inventories days 138.50 139.50 142.00 143.00 143.50 144.00 Accounts payable days 52.41 53.00 53.00 53.50 53.50 54.00

Accounts receivable days are expected to slightly increase as the company is trying to capture more sales through home real estate developers and home improvement centers that will require longer credit terms.

Inventory days are forecasted to increase due to the higher variety of products offered. This would require higher inventory level.

Accounts payable days are estimated based on the historical trend.

6. Income Statement

Accounts Assumptions Other income Percentage of sales Selling expenses Percentage of sales Administrative expenses Percentage of sales plus depreciation expenses Finance costs Company's interest rate on short-term loan from previous period Income tax Corporate income tax policy

39 7. Balance Sheet

Accounts Assumptions Cash and cash equivalents Minimum cash balance as percentage of total assets Trade accounts and notes receivable Accounts receivable days Inventories Inventories days Other assets Percentage of sales Short - term loans Funding required to maintain minimum cash balance Trade accounts and notes payable Accounts payable days Additions - Percentage of beginning balance Unfunded provident fund Subtractions - Average historical payment during the year Additions - Equal to 2013 increase in obligation and interest Employee benefits obligation Subtractions - Average historical obligation payment Other liabilities Percentage of sales Appropriate retained earnings Equal to 2013 nominal amount Additions - Net income attributed to company's shareholders Unappropriate retained earnings Subtractions - Dividend payment Dividends Percentage of income attributed to company's shareholders

8. Terminal Value

Terminal growth for DCC is derived from the formula: g = b x ROE

Where: g = Perpetual growth rate b = Long-term retention ratio ROE = Return on equity

There are 2 stages of perpetual growth rate in the valuation. In the first stage, we use the growth rate of 2.32%, derived from ROE forecast as of 2019 at 46.32% and expected retention ratio of 5%, which is sufficient for operation and debt repayment. The last stage reflects the target ROE of 26.24%, calculated from Du Pont analysis, using peers’ average profit margin of 9.20% and given other factors constant. The last perpetual growth rate is 1.31%.

40 Appendix 17: WACC Assumptions

Variables Values Sources Risk-Free Rate 2.86% 10-year Thai Government Bonds yield as of 8 December 2014 Market Return 11.98% 10-year historical SET weekly return Beta 0.57 Bloomberg data Country Risk Premium 2.50% Bloomberg data Cost of Equity 9.48% Team computations Pre-tax cost of Debt 3.38% Company disclosures Marginal Tax Rate 20.00% The Revenue Department Cost of Debt, post tax 2.71% Team computations Effective WACC 8.99% Team computations

1. Risk-Free Rate The risk-free rate is based on 10-year Thai Government Bonds with yield of 2.86% as of December 19, 2014.

2. Market Return The market return for Thailand is based on 10-year historical SET weekly return.

3. Beta The beta of 0.57 is derived from the regression of 10-year weekly DCC stock prices with SET Index.

4. Pre-tax Cost of Debt The Pre-tax cost of debt for DCC is based on the Company’s average short-term borrowing rate, mainly promissory notes, in previous periods.

5. Marginal Tax Rate The tax rate of 20% is based on the corporate income tax rate set by the Revenue Department of Thailand.

6. Capital Structure The capital structure for each period is forecasted as following:

Capital Structures 2014F 2015F 2016F 2017F 2018F 2019F Debt 5.45% 6.27% 7.00% 7.26% 7.56% 7.53% Equity 94.55% 93.73% 93.00% 92.74% 92.44% 92.47% WACC 9.11% 9.06% 9.01% 8.99% 8.97% 8.97%

41 Appendix 18: DCF Analysis

1. Dividend Discount Model (DDM)

DDM (THB) 2014F 2015F 2016F 2017F 2018F 2019F Dividend 2.93 2.99 3.06 3.12 3.18 3.23 Terminal Value 46.11 Cash Flow 2.93 2.99 3.06 3.12 3.18 49.34

By discounting the cash flows at 9.48% cost of equity, DDM reflects the fair price of THB 42.14 per share.

2. Free Cash Flow to Firm (FCFF)

FCFF (Mn THB) 2014F 2015F 2016F 2017F 2018F 2019F EBIT 1,534 1,567 1,610 1,644 1,676 1,707 - Tax (20%) (307) (313) (322) (329) (335) (341) + D & A 251 264 276 287 297 308 - CAPEX - Net (383) (429) (431) (367) (338) (325) - Change in NWC (12) (70) (65) (18) (68) (2) Free Cash Flow 1,084 1,018 1,068 1,218 1,233 1,346 Terminal Value 18,584 FCFF 1,084 1,018 1,068 1,218 1,233 19,931

Since the capital structure changes due to higher leverage, we discount the cash flows with different WACC for each period. The terminal value is discounted back in 2 stages with different perpetual growth rate, 2.32% and 1.31%.

2014F 2015F 2016F 2017F 2018F 2019F FCFF 1,084 1,018 1,068 1,218 1,233 1,346 Terminal Value 18,584 Total FCFF 1,084 1,018 1,068 1,218 1,233 19,931 + PV of next year's CF 16,598 17,083 17,554 17,915 18,290 PV of FCFF 17,682 18,102 18,622 19,133 19,522

WACC 9.11% 9.06% 9.01% 8.99% 8.97% 8.97%

We discount each cash flow back period by period using particular WACC for each year until 2015. The PV of FCFF in 2015 is the target firm value. Then we subtract with net borrowing to arrive in the target price of THB 43.84.

Target Price (In Millions) PV of FCFF 18,102 - Net Debt (1,520) Value of Equity 16,581 No. of Common shares 408 Price/Share 40.64

42 Appendix19: Relative Valuation Since there are no close peers for DCC in construction materials sector, cross-sector peers were chosen to better reflect DCC’s market sentiment.

Trailing Bloomberg 12-month Company Listed Exchange P/E P/B PEG EV/EBITDA Ticker Revenue (Mn USD)

Stock Exchange of DYNASTY CERAMIC PUB CO LTD DCC TB 225.55 18.90 8.58 7.43 13.68 Thailand

Stock Exchange of SIAM CEMENT PCL/THE SCC TB 14,748.43 16.77 3.27 7.15 13.76 Thailand

Stock Exchange of SIAM CITY CEMENT PUB CO LTD SCCC TB 982.76 18.67 4.77 2.58 13.67 Thailand

Stock Exchange of THAI-GERMAN CERAMIC INDUS PU TGCI TB 92.81 16.67 1.64 1.50 12.74 Thailand

Stock Exchange of SOUTHERN CONCRETE PILE PCL SCP TB 60.07 7.83 2.31 0.03 5.17 Thailand

Stock Exchange of SIAM GLOBAL HOUSE PCL GLOBAL TB 470.41 50.39 2.45 2.13 39.81 Thailand

YI-LAI BHD YLAI MK Bursa Malaysia 51.30 10.84 0.78 10.16 4.86

Hanoi Stock CHANG YIH CERAMIC JSC CYC VN 17.08 11.89 0.31 0.06 7.30 Exchange

Hanoi Stock THANH THANH CERAMIC JSC TTC VN 17.66 4.94 0.84 0.15 2.02 Exchange

Average excludes max. and min. 14.51 3.00 2.30 10.17

Source: Bloomberg Relative Valuation Target Price P/E Band 39.13 P/E 43.33 EV/EBITDA 45.64

Source: Team’s Estimates

Comparable company Description Tier 1: Local construction material manufacturer

Southern Concrete Pile PCL (SCP) is a subsidiary of Chinteik Brothers Group (CB Group), which consists of more than 20 companies in different industries. With more than 30 years of experiences in construction material business, SCP produces all types of pretressed concrete products and other related precast-pretresses concrete for construction industry. SCP is also the biggest supplier of electric poles for the Provincial Electricity Authority. Up to date, SCP has total of 6 large plants located nationwide, with annual production capacity of more than 300,000 cubic meters.

43 Thai-German Ceramic Industry PCL (TGCI) manufactures and distributes decorative glazed and unglazed floor tiles under T-GCi, Campana, and Casa brand names. TGCI targets low to lower-middle income customer segment. The company distributes its products mainly through agents or home improvement retailers. Currently, it has total production capacity of 20 Mn sq. m.

Siam Cement PCL (SCC) is one of the largest diversified industrial company and is the largest cement company in Thailand. The company’s operations include cement manufacturing, petrochemicals manufacturing, paper manufacturing, building materials manufacturing and distribution. SCC has a very well-established brand in both local and international markets. COTTO is one of the most well-known tile brand in Thailand under SCC’s business portfolio. The company produces a wide range of products that serve almost all target customers from high to low end. The company aims to become the largest tile manufacturer.

Siam City Cement PCL (SCC) is a manufacturer and seller of different types of cement for various applications. The products are sold under company’s own brand “Insee”.

Tier 2: Local home improvement retailer

Siam Global House PCL (GLOBAL) operates as a building materials and home improvement retailer, with over 31 branches located in the Northern, North Eastern and Western regions in Thailand. Global House store provides a wide range of products over 100,000 items, and positions itself as a provider of quality products at affordable price.

Tier 3: Regional tile manufacturer

Yi-Lai BHD (YLAI MK) is a Malaysia-based investment holding company. The company, through its subsidiaries, is engaged in the manufacture and sales of ceramic tiles. The company sells the products under the brand “Alpha Tiles”.

Chang Yih Ceramic JSC (CYC VN) is a manufacturer of floor and wall tiles with many designs and sizes based in Vietnam. Founded in 2000 and listed on Ho Chi Mihn City stock exchange in 2006, Chang Yih applies the best in class technology for its tile manufacturing business. The products are not only distributed though networks in Vietnam but also being exported to many different countries. Currently, the company is developing and marketing its products under “KIS” brand.

Thanh Thanh Ceraic JSC (TCC VN) is a Joint Stock Company based in Vietnam with more than 30 years of established experiences in ceramic tiles market. Its products have been selected by consumers to be the Vietnamese high-quality goods. Thanh Thanh’s market has been covering all provinces in Vietnam and exported to many countries including Thailand.

44 Appendix 20: DCC Expected Return-to-Beta comparison

18.0% GLOBAL TB 16.0% TGCI TB 14.0%

12.0% SCC TB Average 10.0% DCC E(R) 8.0% 6.0% TTC VN 4.0% Average

2.0%

0.0% 0.40 0.50 0.60 0.70 0.80 0.90 1.00 1.10 1.20 Beta

Company E(R) Beta

Tier 1

DYNASTY CERAMIC PUB CO LTD 8.6% 0.57

SIAM CEMENT PCL/THE 11.1% 0.98

SIAM CITY CEMENT PUB CO LTD 11.5% 0.94

THAI-GERMAN CERAMIC INDUS PU 14.6% 0.95

SOUTHERN CONCRETE PILE PCL 15.0% 0.90

Tier 2

SIAM GLOBAL HOUSE PCL 15.4% 1.12

Tier 3

YI-LAI BHD 8.4% 0.85

CHANG YIH CERAMIC JSC 7.2% 0.66

THANH THANH CERAMIC JSC 6.1% 0.99

Average 10.9% 0.89

Source: Bloomberg

45 Appendix 21: DCC Price-to-Earnings Ratio to Earning Growth Comparison

55.00 GLOBAL TB

45.00

35.00

PERDCC 25.00

TGCI TB Average

15.00SCC TB

Average TTC VN 5.00

-5.000.00 5.00 10.00 15.00 20.00 25.00 30.00 35.00 40.00 Earning Growth (%)

Earning Company PER PEG growth(%)

Tier 1

DYNASTY CERAMIC PUB CO LTD 18.90 2.54 7.43

SIAM CEMENT PCL/THE 16.77 2.34 7.15

SIAM CITY CEMENT PUB CO LTD 18.67 7.23 2.58

THAI-GERMAN CERAMIC INDUS PU 16.67 11.08 1.50

Tier 2

SIAM GLOBAL HOUSE PCL 50.39 23.64 2.13

Tier 3

YI-LAI BHD 10.84 1.07 10.16

THANH THANH CERAMIC JSC 4.94 32.00 0.15

Average 19.59 11.42 4.44

Source: Bloomberg

46 Appendix 22: DCC Return on Equity to Price-to-Book Value Comparison

50.00 DCC 45.00 40.00 35.00 30.00 ROE 25.00 (%) SCC TB Average TTC20.00 VN

15.00 TGCI TB 10.00 Average 5.00 GLOBAL TB 0.00 0.00 2.00 4.00 6.00 8.00 10.00 PBV

Company ROE(%) P/BV

Tier 1

DYNASTY CERAMIC PUB CO LTD 44.66 8.58

SIAM CEMENT PCL/THE 20.19 3.27

SIAM CITY CEMENT PUB CO LTD 26.76 4.77

THAI-GERMAN CERAMIC INDUS PU 8.89 1.64

SOUTHERN CONCRETE PILE PCL 40.19 2.31

Tier 2

SIAM GLOBAL HOUSE PCL 5.78 2.45

Tier 3

YI-LAI BHD 6.97 0.78

CHANG YIH CERAMIC JSC 2.61 0.31

THANH THANH CERAMIC JSC 17.93 0.84

Average 19.33 2.77

Source: Bloomberg

47 Appendix 23: PE Band

17x

15x

13x

11x 9x

Source: Company data and Team’s estimates

Appendix 24: DCC underperforms SET over the past 3 years

80%

60%

40%

20%

-20%

-40% DCC SET

Source: Bloomberg

48 Appendix 25: Du Pont Analysis

Source: Team’s analysis

49 Appendix 26: Impact-Probability Risk Analysis Matrix

Regulatory Operational Macro risks risks risks Impact

Significant

Moderate

Minor Probability

Low Medium High

Source: Team’s analysis

Appendix 27: Impact-Time to recover Risk Analysis Matrix

Regulatory Operational Macro risks risks risks

Source: Team’s analysis 50

Appendix 28: Scenario Analysis

From the macro and operation risk analysis, average selling price, volume and natural gas price are the main variables that will affect our recommendation. Hence, we perform scenario analysis to examine the impact of changes in these variables to our target price. Assumptions for each scenario are based on standard deviations, calculated from 5-year historical growth.

Variables Base Case Better Case Best Case ASP Growth + 0.25 SD + 0.5 SD Volume Growth + 0.25 SD + 0.5 SD Natural Gas Price Growth - 0.25 SD - 0.5 SD Target Price 41.50 51.25 60.50

In both Better and Best case, the changes in the variables will change our recommendation from sell to hold at the target price of THB 51.25 and THB 60.50 respectively.

Appendix 29: Sensitivity Analysis

Since Terminal value accounts for the major part of the DCF model, we perform sensitivity analysis of changes in perpetual growth rates to our target price. In the analysis, we use terminal dividend payout ratio and ROE for sensitive variables, as they are the main components of terminal growth.

ROE 41.43 9.48% 17.86% 26.24% 36.28% 46.32% 90.0% 43.45 46.19 49.64 55.13 63.03 Dividend 92.5% 41.27 43.05 45.15 48.20 52.04 Payout Ratio 95.0% 39.25 40.29 41.50 42.98 44.75 97.5% 37.39 37.84 38.31 38.91 39.55 100.0% 35.66 35.66 35.66 35.66 35.66

Sensitivity Analysis Assumptions

 Dividend Payout Ratio: The maximum dividend payout ratio is estimated at 100% based on current performance, which implies the zero perpetual growth as the Company payout all earnings and has no retention for future investment. We believe 90% is an appropriate estimate of minimum payout since it covers all investment and debt repayment while having excess cash on hand.

 Return on Equity (ROE): The cost of equity of 9.48% is used to estimate the lower bound of ROE at terminal time for DCC, which is the minimum level for the company in order to sustain its business. The maximum of 46.32% represents ROE in the last forecast year, 2019. It is the optimistic estimate for sustainable ROE.

51 Appendix 30: Real Option Valuation

Real Option Valuation Assumptions Spot Value It is derived from the present value of expected incremental FCFFs. In case that the option is exercised, we expect DCC to open 2 stores each year. The effect will gradually increase from negative of -0.39% of net income to 2% increase by the end of forecast period. On the other hand, if the plan fails, the option will not exercise. The differences between the stream of FCFFs from implementing and not implementing the plan will be used to calculate incremental FCFFs. Terminal value of differences is also accounted. By discounting the stream of cash flows, we obtained the spot value of THB1,459 Million.

Strike Value We derived the strike value from additional capital expenditures. It is estimated to be approximately THB 30 million annually. It is calculated from the cost of establishing new store. Discounting additional CAPEX give us a strike value of THB 1,614 Million.

Volatility Though DCC stock volatility is low, expanding overseas will add risk to the company. Therefore, we adjust the volatility up to 50% to reflect this risk factor.

Risk-free 3 Year risk free rate of 2.27%

Option life Expected option life is 3 years from 2014-2016

Source: Team’s Analysis

52 Appendix 31: Production Capacity Analysis

In order to analyze whether DCC will need to increase its production capacity or not, we conduct scenario analysis on 4 cases including;

1. No kiln modification 2. Kiln modification 3. No kiln modification with international expansion 4. Kiln modification with international expansion

This will help we see the production capacity utilization in all possible scenarios. The underlying assumptions are listed below. Capacity As of 2013, the Company has an annual production capacity of 69 Mn sq.m. DCC has implemented strategy to increase production capacity by modifying 2 kilns per year. This strategy is expected to increase 5% of total production capacity. We expect the same effect of this strategy to continue throughout the forecast period for all cases with kiln modification.

Utilization DCC’s sales mainly come from domestic sales which is also expected to continue since there is no explicit plan for international expansion from management. However, we also consider international expansion as part of the possible cases since it will directly have an effect on production capacity. For international expansion cases, we assume that the Company will open 2 outlets per year from the year 2017-2019. The sales volume per outlet will be the average domestic outlet sales volume per branch. Since all products produced usually are not totally sold, we expect the stock keeping to be at the average 3-year rate.

Case1: No Kiln modification 2011 2012 2013 2014F 2015F 2016F 2017F 2018F 2019F

Full Capacity (Mn sq.m.) 61 69 69 69 69 69 69 69 69 Used Capacity (Mn sq.m.) 58 62 57 55 56 57 58 58 59 Utilization Rate 95% 90% 83% 80% 81% 82% 83% 84% 86% Domestic Sales only Total sales volume (Mn sq.m.) 56 58 55 53 53 54 55 56 57 Sales volume/Production volume 0.96 0.94 0.97 0.96 0.96 0.96 0.96 0.96 0.96

Case2: Kiln modification 2011 2012 2013 2014F 2015F 2016F 2017F 2018F 2019F

Full Capacity (Mn sq.m.) 61 69 69 72 76 79 83 86 90 Used Capacity (Mn sq.m.) 58 62 57 55 56 57 58 58 59 Utilization Rate 95% 90% 83% 76% 73% 71% 69% 68% 66% Kiln modification No. of Kiln 2 2 2 2 2 2 Capacity increase per kiln (Mn sq.m.) 1.73 1.73 1.73 1.73 1.73 1.73 Domestic Sales only Total sales volume (Mn sq.m.) 56 58 55 53 53 54 55 56 57 Sales volume/Production volume 0.96 0.94 0.97 0.96 0.96 0.96 0.96 0.96 0.96

53 Case3: No Kiln modification with 2011 2012 2013 2014F 2015F 2016F 2017F 2018F 2019F International Expansion

Full Capacity (Mn sq.m.) 61 69 69 69 69 69 69 69 69 Used Capacity (Mn sq.m.) 58 62 57 55 56 57 58 59 60 Utilization Rate 95% 90% 83% 80% 81% 82% 84% 86% 87% International Expansion Domestic sales volume (Mn sq.m.) 56 58 55 53 53 54 55 56 57 International sales volume (Mn sq.m.) 0.4 0.7 1.1 Total sales volume (Mn sq.m.) 56 58 55 53 53 54 56 57 58 Sales volume/Production volume 0.96 0.94 0.97 0.96 0.96 0.96 0.96 0.96 0.96

Case4: Kiln modification with 2011 2012 2013 2014F 2015F 2016F 2017F 2018F 2019F International Expansion

Full Capacity (Mn sq.m.) 61 69 69 72 76 79 83 86 90 Used Capacity (Mn sq.m.) 58 62 57 55 56 57 58 59 60 Utilization Rate 95% 90% 83% 76% 73% 71% 70% 68% 67% Kiln modification No. of Kiln 2 2 2 2 2 2 Capacity increase per kiln (Mn sq.m.) 1.73 1.73 1.73 1.73 1.73 1.73 International expansion Domestic sales volume (Mn sq.m.) 56 58 55 53 53 54 55 56 57 International sales volume (Mn sq.m.) 0.4 0.7 1.1 Total sales volume (Mn sq.m.) 56 58 55 53 53 54 56 57 58 Sales volume/Production volume 0.96 0.94 0.97 0.96 0.96 0.96 0.96 0.96 0.96

In all scenarios, there is an excess production capacity. Therefore, it is reasonable to expect that without any unexpected expansion plan, DCC will not increase its production capacity in the near future.

54 Appendix 32: Comparable M&A Transaction

GLOBAL (offered price = 14 Baht) TGCI (offered price = 1.45 Baht) Average Weighted Weighted average average Number of % of Number of % of % of closing price per closing price per retroactive days premium retroactive days premium premium share share (Baht/share) (Baht/share) 30 days 12.58 11.29% 30 days 1.42 2.11% 6.70% 60 days 12.09 15.80% 60 days 1.29 12.40% 14.10% 90 days 11.75 19.15% 90 days 1.13 28.32% 23.73% 180 days 11.48 21.95% 180 days 1.1 31.82% 26.88% 360 days 10.16 37.80% 360 days 1.26 15.08% 26.44%

DCC Weighted average Expected Number of retroactive closing price % of offered price per days per premium share (Baht/share) share (Baht/share)

30 days 56.35 6.70% 60.12 60 days 57.11 14.10% 65.17 90 days 57.57 23.73% 71.24 180 days 56.75 26.88% 72.00 360 days 55.44 26.44% 70.10

Source: GLOBAL & TGCI’s data and Team’s Analysis

We use GLOBAL and TGCI as the comparable target acquisition companies because they are in construction material industry and have partial similarity as DCC business. More importantly, they were also staked by SCC, the largest cement-building material company in Thailand that has highest possibility to acquire DCC. TGCI was staked by SCC 74.71% in 2008 and GLOBAL was staked by SCC 30.02% in 2012. Both deals also used Market Value Approach in order to finalize the tender offer price. Therefore, we also apply this method from the deals in order to estimate the premium and expected tender offer price of DCC.

55 Appendix 33: Management Structure Saengsastra Family member

Non- Saengsastra Family member

Board of Directors

Mr. Roongroj Saengsastra (Chairman)

The Company Secretary Office

Miss Cattleya Saengsastra (Company Secretary)

Audit Committee Nomination and remuneration Executive and Corporate Governance Risk Management and Business Committee Committee Continuity Committee Mr. Yothin Juangbhanich (Chairman) Mr. Roongroj Saengsastra (Chairman) Mr. Roongroj Saengsastra (Chairman) Mr. Sanchai Janejarat (Chairman)

President

Mr. Sanchai Janejarat (Chairman)

Executive Director Administartion Senior Executive VP Marketing Senior Executive VP Technical

Mr. Monrak Saengsastra Mr. Maruth Saengsastra Mr. Suthee Boonnak

Senior Executive VP Outlets and Senior Executive VP Production Support Mr. Jaruwat Traithavil Miss Sontaya Yaowalee

Source: Company data

56 Appendix 34: Tile manufacturing factories

DCC owns two tile manufacturing factories both directly and through its subsidiary located in Saraburi:

DCC Factory

Address: 54/8 Moo3, Suwannasorn Road, Koke Yae Sub-District, Nong Kae District, Saraburi Province 18230

Tile Top Factory

Address: 3/2 Moo 8, Paholyothin Road, Nong Khai Nam Sub district, Nong Khae District, Saraburi Province 18140

Source: Company Data

57 Appendix 35: Major shareholders structure as of November, 2014

Holder Name Position Insider Percent status Outstanding ROONGROJ SAENGSASTRA 100,000,000 Yes 24.51 VIBUL VADCHARASURANG 35,219,610 No 8.63 MONRAK SAENGSASTRA 30,000,000 Yes 7.35 MARUT SAENGSASTRA 30,000,000 Yes 7.35 CHAIYASITH VIRIYAMETAKUL 20,460,000 Yes 5.01 SUPANEE TONGPLENGSRI 18,000,000 No 4.41 CATTLEYA SAENGSASTRA 11,000,000 Yes 2.70 KRUNGSRI DIVIDEND STOCK LTF (KFLTFDIV) 10,142,300 No 2.49 SUVIT SMARNPHANCHAI 10,000,000 Yes 2.45 STATE STREET BANK EUROPE LIMITED 9,018,751 No 2.21 THAI NVDR CO LTD 7,421,222 No 1.82 CHASE NOMINEES LIMITED 6,398,800 No 1.57 KRUNGSRI DIVIDEND STOCK FUND (KFSDIV) 5,529,800 No 1.36 ABERDEEN SMALL CAP FUND 4,296,100 No 1.05 SUWIT PANYAWI 4,085,000 No 1.00 RAMKHAMHAENG HOSPITAL PCL 4,008,300 No 0.98 CHASE NOMINEES LIMITED 50 3,935,200 No 0.96 RACHAN TAYANUWAT 3,476,150 No 0.85 ABERDEEN GROWTH FUND 3,250,500 No 0.80 ABERDEEN LONG TERM EQUITY FUND 3,155,200 No 0.77 STATE STREET BANK AND TRUST COMPANY 2,700,566 No 0.66 SUPANNIKA VADCHARASURANG 2,042,500 No 0.50 ROSSUKON VADCHARASURANG 2,040,300 No 0.50

Source: SET

Disclosures:

Ownership and material conflicts of interest:

The author(s), or a member of their household, of this report does not hold a financial interest in the securities of this company. The author(s), or a member of their household, of this report does not know of the existence of any conflicts of interest that might bias the content or publication of this report.

Receipt of compensation: Compensation of the author(s) of this report is not based on investment banking revenue.

Position as a officer or director: The author(s), or a member of their household, does not serve as an officer, director or advisory board member of the subject company.

Market making: The author(s) does not act as a market maker in the subject company’s securities.

Disclaimer: The information set forth herein has been obtained or derived from sources generally available to the public and believed by the author(s) to be reliable, but the author(s) does not make any representation or warranty, express or implied, as to its accuracy or completeness. The information is not intended to be used as the basis of any investment decisions by any person or entity. This information does not constitute investment advice, nor is it an offer or a solicitation of an offer to buy or sell any security. This report should not be considered to be a recommendation by any individual affiliated with CFA Society of Thailand, CFA Institute or the CFA Institute Research Challenge with regard to this company’s stock.