CFA Institute Research Challenge Hosted by CFA Society Taiwan National Chengchi University This report is published for educational purposes only by students competing in The CFA Institute National Chengchi University Equity Research Research Challenge. Equity｜Taiwan｜Materials 18 January 2017
Recommendation: Super Dragon Technology Co., Ltd. (9955 TT)
SELL When Super Dragon Becomes Super Dragger
We initiate coverage of Super Dragon Technology Co., Ltd. with a SELL rating and Target Price NT$13.5 NT$ 13.5 target price, implying an 18.4% downside from its January 18th closing Current Price (18 Jan.) NT$16.6 price of NT$ 16.6, based on P/B multiple valuation. Upside/Downside -18.4% Shrinking Domestic E-waste Disposal Industry Diminishes Revenue The domestic E-waste supply has been diminishing because electronic
manufacturers in Taiwan keep transferring their production lines to China. The strict Market Profile electronic waste import regulations further constrain the E-waste supply for NT$ 19.85 52-Weeks Price Range domestic disposal companies. As a result, the amount of E-waste is decreasing at an NT$ 11.45 annual rate of 3.99% and worsens Super Dragon’s revenue. Shares Outstanding 103.2M Market Cap. NT$1,700M Intense Competition and Weak Gold Price Keep the Gross Margin Low Dividend Yield 0.00% Super Dragon’s gross margin will remain low due to intense competition. The players P/B 0.78x in the industry has been increasing and experiencing excess capacity. In addition, EV/Sales 0.74x Super Dragon is lack of advanced technology and is suffering from limited bargaining power to suppliers. Plus, the expected interest rate hike in 2017, leading to strong Source: Bloomberg US dollar, will weigh on gold price and will hence hurt both Super Dragon gross margin and revenue. We believe that the company would continue to suffer in Red Valuation Method Price (NT$) Ocean in the future. P/B Multiple 13.5 The Contribution of the New Plant Will Fall Short of Management Guidance Bull Case 16.1 Although the company’s new plant is expected to launch in 2017, the contribution may not meet its guidance and will even hurt the company's profitability. The Bear Case 11.3 company's new plant has already delayed opening for 2 years, however, while EV/GCI Multiple 13.8 E-waste and gold price has decreased during this period, the guidance has not been DCF Method 11.3 updated. Furthermore, we found out that the guided gross margin of the new plant is even lower than the company's recent level, implying the fact that there is no Target Price 13.5 breakthrough technology. What's worse, after the new plant is launched, the Source: Team estimates company’s cash position will face shortage because of an increasing net working capital due to revenue jump. Therefore, the bottom line would not be benefited by the new plant, but will even be hurt in the short term.
Stock Price Movement Recommendation of SELL rating with NT$ 13.5 P/B-derived Target Price We set Super Dragon’s one-year target price at NT$ 13.5 by P/B valuation, indicating 9955 TT TWSE 25.5 10,500 an 18.4% downside. Even in our bullish scenario, where the price of gold rises and 10,000 9,500 gross margin increases, the target price of NT$ 16.1 is still less than the current 22.5 9,000 8,500 market price. Furthermore, the result is also bolstered up by DCF-derived price of 19.5 8,000 7,500 NT$ 11.3. 7,000 16.5 6,500 6,000 Super Dragon’s Key Financial Ratios and Valuation Metrics 13.5 5,500 5,000 Year 2014 2015 2016E 2017E 2018E 2019E 2020E 2021E 4,500 10.5 4,000 Gross Profit Margin 6.05% -0.60% 4.00% 2.57% 2.92% 3.32% 3.77% 4.27% 2013/12/31 2014/12/31 2015/12/31 2016/12/31 EBITDA Margin 2.78% -4.04% 1.02% 0.92% 0.93% 1.22% 1.91% 2.43% Net Profit Margin 1.64% -5.40% -0.36% -0.78% -0.43% -0.03% 0.66% 1.16% Source: TEJ Return on Assets 1.30% -5.49% -0.67% -1.08% -0.67% -0.27% 0.32% 0.73% Return on Equity 1.00% -3.58% -0.43% -1.18% -0.90% -0.39% 0.48% 1.07% Cash Conversion Cycle 184.2 201.2 176.3 182.0 162.0 155.0 144.0 140.0 Current Ratio 3.43 2.68 2.01 1.78 1.61 1.50 1.42 1.38 Total Liabilities/Total Assets 37.3% 37.7% 41.6% 54.7% 56.4% 56.9% 55.9% 54.2% Earnings Per Share 0.36 -1.23 -0.16 -0.13 -0.10 -0.04 0.05 0.11 Book Value per Share 22.73 21.48 21.32 20.78 20.36 20.17 20.39 20.88 Source: Company data, Team estimates
National Chengchi University Equity Research Team 1 Figure 1: Sales Breakdown by Products Business Description Unit: % of Total Revenue Super Dragon Technology Co., Ltd. (9955 TT) was founded in 1996 and is currently headquartered in Taoyuan. Super Dragon is a leading recycling company in Taiwan 3.28% that specializes in 2 main functions: recycling of industrial electronic waste, Gold Potassium production of applied materials. The company continuously promotes the concept Cyanide of environment protection. 25.95%
Gold Business Functions 70.76% Super Dragon’s revenue can be broken down into 2 major parts:
Others Industrial Electronic Waste Recycling: The company offers waste disposal services to
the electronics industry and uses chemical treatments to recover precious metals
from the waste stream. Source: Company data
Applied Material Producing: The company purchases higher purity of gold to
Figure 2: Sales Breakdown by Geography produce gold potassium cyanide, an applied material for electronic industry to further electroplate or chemical plate. Unit: % of Total Revenue
Sales Breakdown Gold is Super Dragon's main product, which represents 71% of its revenue in 2015.
29.24% Taiwan 26% of its revenue comes from sales of applied materials, and the other 3% comes from disposal of mixed metal scrap & sales of single metal (Figure 1). The high Asia 70.76% proportion of gold and gold potassium cyanide makes gold price a key factor to Super Dragon’s revenue. Win Semiconductor is Super Dragon's major E-waste supplier, contributing 55% of net purchase. And almost all of the company's gold is sold to Sun Yip Hong Gold Dealers Limited. The highly contribution of the company's Source: Company data suppliers and sellers has posed a high potential risk of order transferring.
Geographic Units Figure 3: Plant Capacity Super Dragon sells gold to Sun Yip Hong Gold Dealers Limited in Hong Kong and sells Unit: Tons/Month gold potassium cyanide to electronic companies in Taiwan, contributing sales of 71% 3500 4000 3200 and 29% respectively (Figure 2). 3000 Capacity Overview 2000 Super Dragon provides an integrated model, offering an overall recycle, clearance 1000 375 and disposal service, over a wide variety of waste. It has two operating plants, one in 0 Guan Yin and the other in Su Zhou. The third plant located in Huan Ke is currently Guan Yin Huan Ke Su Zhou being brought on line. Guan Yin and Huan Ke plants both have Grade A qualified Plant Plant Plant certificate, enabling them to dispose of industrial hazardous waste. The types of Source: Executive Yuan Environmental Protection electronic waste that Huan Ke Plant is permitted to dispose of are the same as what Administration Guanyin Plant does (Appendix 10, 11). The capacity of Guan Yin Plant, Huan Ke Plant, Su Zhou Plant is 3200, 3500, and 375 tons of E-waste per month respectively. (Figure 3) Figure 4: Shareholder Structure Unit: % of shares Shareholder Structure The company was founded in 1996, listed on the Taiwan OTC Exchange in 2003, and Insider began trading on the Taiwan Stock Exchange in 2008. With 46.2% of the share 46.20% outstanding held by family members, this company is a family business without any Institutional equity pledge agreement (Figure 4). In 2009, the company had a 280 million private placement to repay debt for factory expansion and equipment purchase, from 47.16% Wistron Corporation (NT$ 243 million), China Development Industrial Bank (NT$ Public 6.64% 22.5 million) and the chairman of Super Dragon Wu, Yao-Hsun (NT$ 22.5 million)
Source: Company data Company Strategies Increase Revenue Proportion of Gold Potassium Cyanide: The company plans to increase the sales proportion of gold potassium cyanide to stabilize the revenue.
Expand Clients base: Through the improved technology of Huan Ke Plant, the company plans to develop prospective domestic and international clients to expand new waste resources, especially in semi-conductor industry.
National Chengchi University Equity Research Team 2 Figure 5: Super Dragon’s Industry Position No gold or currency derivatives: Although gold contributes 70% of sales, the company doesn’t have any derivative position in gold or US dollar to hedge price and currency risk. This may expose the company’s revenue to the fluctuations of gold price and US dollar.
Social Responsibility Super Dragon aims at preserving the sustainability of the environment and has dedicated itself to environmental protection for more than 2 decades. Green Art Solution implements the spirit of “environment sustainability” into real action by turning non-metal E-waste into eco-friendly artwork. Green Art Solution is also Source: Company data another way to educate the market to care more about the environment and to take action preserving it.
Figure 6: Waste Reported Amount by Corporate Governance Category From following chart, we can clearly see the comparison of Super Dragon and its Unit: Ton peers and there are three major differences between Super Dragon and its peers. 350,000 (1) A smaller management team with shorter tenure. 300,000 (2) Shares held by employee directors are extremely higher than that of non-employee directors. 250,000 (3) All board members are also board directors of other companies leading to lower 200,000 attendance rate. 150,000 Company Management Super Dragon Peer Companies 100,000 Executives
Number of Executives 5 8 50,000 Average Tenure (Years) 4.4 6.7 0 Board Members 2010 2011 2012 2013 2014 2015 Number of Board Members 8 8 Type 3 Type 2 Type 1 Employee Directors 2 1.5 Source: Executive Yuan Environmental Protection Shares Hold % 32.4 14.5 Administration Non-employee Directors 6 6.5
Shares Hold % 0.2 8.89
Average Meeting Attendance % 70 80.5 Figure 7: Types 3 Waste Declared Amount On Board of Other Companies 8 6 Unit: Ton
120,000 Industry Overview and Competitive Positioning
100,000 The waste disposal industry has been struggling with a price war due to limited
80,000 waste supply, strict import regulation and the decrease of gold content. As for
applied material, the rising offshore manufacturing rate keeps local gold potassium 60,000 cyanide demand in low single digit growth. 40,000 CAGR: -4.7%
20,000 Decreasing waste supply
0 The waste disposal industry in Taiwan could be divided by two-dimension according
2010 2011 2012 2013 2014 2015 to “sources” and “toxic” of the waste: general and industrial, hazardous and
nonhazardous. As we look closely at industrial hazardous waste, which Super Dragon Source: Executive Yuan Environmental Protection focuses on (Figure 5), the reported waste is decreasing at CAGR 1.48% from 2010 to Administration 2015 (Figure 6). To be more accurate, the "type 3” waste that contains the largest
percentage Super Dragon disposes of, is also reducing at CAGR 4.7% during the six
year period (Figure 7). The reasons are as follows.
Strict control of E-waste recycling process and import The industry players in the waste disposal industry are regulated strictly by the Environmental Protection Administration of Taiwan. The regulations are as follow (1) each company must apply for disposal certificate which limit the sources of waste to general waste, general industrial waste, or hazardous industrial waste (Appendix 7), (2) each plant must receive proper permits before operation and are limited to only treating the waste stream permitted (Appendix 10, 11), (3) each plant must report the amount in each type of waste it disposes of each year, and (4) each recycling plant has limited disposal amount that has to be approved by the authority
National Chengchi University Equity Research Team 3 Figure 8: Offshore Manufacturing Rate (or “approved disposal amount”). Unlike Japan or China which permits full import of Unit: % hazardous industrial waste, owing to a consistent opposing voice in Taiwan, the 100 Environmental Protection Administration still restricts the importation of E-waste. That is, PCB and IC chips waste are still excluded. 80
60 Soaring offshore manufacturing rate leads to decreasing amount of E-waste 40 As aforementioned, Super Dragon purchases E-waste supply from electronic manufacturing industry. However, with the relocation of manufacturing activities, 20 the total E-waste stream is reduced (Appendix 19, 20, 21). Furthermore, the 0 offshore manufacturing rates are soaring in the past decade (Figure 8). This leads to 2003 2005 2007 2009 2011 2013 2015 a continually decrease in E-waste supply. (Appendix 15, 18)
Electronic Products
Electrical Products Decrease of gold content lowers the efficiency of metal refinement Wire Bonding is one of the most important material of the IC packaging which IT & Communication provides interconnection between the chip and the lead frame. Since 2009, as the Engineering Products development of technology and the soaring prices of gold, copper bonding wires has Source: Department of Statistics, Ministry of had becoming a suitable substitute. According to BCG's survey, gold made up 90% of Economic Affairs, Executive Yuan bonding wires in 2008, and it constitutes just 50% in 2015, leading to a 40% fall in gold content in PCB. Compared to gold bonding, copper bonding featuring strong, lower cost, slower intermetallic growth, provides superior reliability in packaging. Figure 9: Grade A Waste Disposal and The changes of the processing process reduce the gold content in each ton of waste Clearance Organizations and in turn decrease the amount of gold refined from the waste. Unit: Number of firms 500 Intense competition in both domestic and overseas players
400 As we look across the industry, although only Grade A organizations are permitted to dispose of hazardous industrial waste, the number of these organizations nearly 300 tripled from 43 to 112 in the past decade (Figure 9). Plus, there is no significant 200 difference among the peers in both capacity and refining technology, which led to 100 price competition and dragged the gross margin of domestic players. 0
What’s more, waste disposal organizations overseas with advanced refining
2008 2006 2007 2009 2010 2011 2012 2013 2014 2015 2005 technology. The organizations in Japan, for example, are more likely to discover the Grade A Waste intrinsic value of waste and bid for a higher price, resulting in an 174% CAGR Clearance Organizations increasing waste exports for disposal, and in turn aggravating the severity of Grade A Waste Disposal common excess capacity across local waste disposal organizations (Figure 10) Organizations Source: Executive Yuan Environmental Protection Decelerating growth of Applied Material due to lack of demand Administration The demand of gold potassium cyanide is highly correlated to the economic activity of its downstream, PCB and IC manufacturing industry. According to Prismark’s survey, from 2010 to 2015, the worldwide PCB industry is plateaued at CAGR 1.06% Figure 10: Mixed Metal Scrap Export due to the slowdown in demand for the industry’s largest customer segment, Amount (Japan) smartphone and feature phone (Appendix 20). Looking ahead from 2016 to 2020, as Unit: Ton the consumption resumes in China and Europe economy recovers, Prismark expects
6000 a 4% annual growth. However, as aforementioned, the demand of gold bonding in PCB industry is decreasing, the growth may not boost gold potassium cyanide 4000 demand.
2000 As for the IC industry, according to Gartner, the worldwide IC industry from 2010 to 0 2015 is lingering at CAGR 2.05% due to the low single digit growth of end-product 2011 2012 2013 2014 2015 demand, and in turn causes a slowdown in local manufacturing supply, especially Source: Executive Yuan Environmental Protection memories and IC packaging. From 2016 to 2020, Gartner expected a 4.5% CAGR Administration growth (Appendix 21). In Taiwan, although it is optimistic about potential drivers of display and battery management IC, as well as future internet of things (IoT), industrial electronics, wearable devices and automobile electronics, the increasing impact of offshore manufacturing situation would decrease the growth of gold potassium cyanide demand in Taiwan.
National Chengchi University Equity Research Team 4 Figure 11: Waste Commissioned for Investment Summary Disposal Weighted Amount Recommendation: sell Unit: Ton Sell-off pressure: E-waste amount, gold price, contribution of Huan Ke Plant, intense competition 60000 We issue a SELL recommendation on Super Dragon with a target price of NT$13.5 50000 based on P/B multiple method. This offers an 18.4% downside from its closing price 40000 NT$16.6 on January 18th, 2017. 30000 Decline at 3.99% in 2017 20000 E-waste supply has been decreasing 10000 Company view: Super Dragon assumes that the E-waste supply will increase in the 0 future because they still believe that the electronic companies in Taiwan would 2010 2011 2012 2013 2014 2015 maintain high growth rate. Source: Executive Yuan Environmental Protection Our view: Although the electronic industry is still growing and the total waste Administration amount is increasing at 1.46%, the E-waste that Super Dragon is able to dispose of is actually decreasing at 3.99%. This downtrend of E-waste supply in Taiwan resulted Figure 12: Relationship Between Fed Fund from more and more domestic manufacturers have been moving their plants out of Rate and USD (DXY Index) Taiwan. Plus, the strict import regulations block the oversea E-waste. Unit: % 140 7 To better reflect the exact amount, we follow four steps to get the number. 120 6 1. As electronic companies produce waste, this total waste can be divided into 100 5 four categories: reuse, self-disposal, commissioned-disposal, and oversea 80 4 disposal. We focus on commissioned-disposal one, which is the only waste that 60 3 goes to waste disposal organizations in Taiwan, like Super Dragon. 40 2 2. In the commissioned-disposal category, there are nearly 400 waste items, and 20 1 Super Dragon is only permitted to dispose of 27 items. 0 0 3. The 27 items could be separated into three types. However, Super Dragon’s
approved disposal amount in each type is different from that of the industry.
1997/7/1 1999/1/1 2000/7/1 2002/1/1 2003/7/1 2005/1/1 2006/7/1 2008/1/1 2009/7/1 2011/1/1 2012/7/1 2014/1/1 2015/7/1 1996/1/1 That’s why we weighted the total waste amount of type 1, type 2, type 3 in the Source: Bloomberg industry with the percentage of Super Dragon’s approved disposal amount, to get the exact number. Figure 13: Relationship Between DXY Index (RHS) and Gold Price (LHS) Gold price is under pressure amid US interest rate hike and strong US dollar Unit: US$/t oz Our view: As aforementioned, the revenue of Super Dragon has a strong correlation 2000 140 to gold price. The steady improvement of US economy and the expectation of Fed 1800 120 1600 interest rate hike would lead to strong US dollar, and would weigh on gold price. As 1400 100 the historical data, (see Figure 12 and 13), we can see the negative correlation 1200 80 between the interest rate and USD and negative correlation between USD and the 1000 60 gold price. 800 600 40 400 20 In 2017, the recovery trend of US economy can be seen in following economic trails. 200 0 0 The unemployment rate is 4.8% in December 2016, diminishing 6% YoY
1997/9/1 1999/5/1 2001/1/1 2002/9/1 2004/5/1 2006/1/1 2007/9/1 2009/5/1 2011/1/1 2012/9/1 2014/5/1 2016/1/1 1996/1/1 basis, indicating an improvement in US labor market. Source: Bloomberg The expected Consumer Price Index (CPI) is 1.7% in December 2016, recovering from December 2015 CPI of 0.7%. The Fed expected the 2018 Figure 14: Total Revenue Forecast CPI to reach 2%. For 1Q17, the Fed predicted a GDP growth of 2.1% and a similar pace in Unit: NT$, mn later years. Plus, the FOMC announces 3 projected fed fund rate hike.
10000 8000 6000 Gross margin fell due to the intense competition
4000 Company view: The management plans to enter new markets and expects its gross 2000 0 margin to raise.
Our view: The company’s gross margin has been dropping since its peak in 2007
2011 2012 2013 2014 2015
2010
2020E 2017E 2018E 2019E 2021E 2016E resulting from the intensive competition. The intense competition could be
Guan Yin Plant Huan Ke Plant supported by the following facts: The capacity utilization of Guan Yin Plant
constantly stands at a low level and even decreased from 46.3% in 2014 to 34.19% Source: Company Data, Team Estimates in 2015. Also, we figure out that the net purchase drops from NT$ 7.4 billion in 2010 to NT$ 2.07 billion in 2015 (Figure 15). Although the gold price is steadily increase during the past decade, the gross margin keeps dropping due to the competition. National Chengchi University Equity Research Team 5 Figure 15: Net purchase The company’s margin would be hurt even more due to the lack of advanced technology, low bargaining power to suppliers, and price competition. Plus, the Unit: NT$ amount of E-waste is expected to shrink at a rate of 3.99%, and Super Dragon would 8000000 be lack of materials to produce gold. We, therefore expect the long-term gross 7000000 6000000 margin to remain at the current low level. 5000000
4000000 3000000 Worsen market share and more competitive environment
2000000 Company view: Super Dragon set a market share of 16%, calculated by the full 1000000 0 capacity utilization (3,200 Tons) divided by their prediction of waste amount (20,000 2010 2011 2012 2013 2014 2015 Tons). The management also considers that the E-waste supply far exceeds the total
permitted disposal amount. Thus, Super Dragon is the leading company in the Source: Company data industry.
Our view: We find out the exact market share is actually 1.25% by calculating the
exact waste amount of 1,000 tons divided by the amount of 27 items Super Dragon Figure 16: Revenue (LHS) and revenue growth rate (RHS) could dispose of, which is 80,000 tons.
Unit: NT$, mn The contribution of the New Plant may fall short of company’s guidance
10000 150.0% Company view: According to the spokesman, the new plant possesses advanced 8000 technology, enabling the company to seek prospective clients, especially in IC 100.0% 6000 industry. Super Dragon has made a 3-year expectation of the new plant in 2014, the 50.0% 4000 expected sales of precious metal in the following 3 year is 3,240, 4,680, 5,400 kg. 2000 0.0% And after the delayed opening, the company remained mostly the original guidance
0 -50.0% and only made little adjustment.
2011 2012 2013 2014 2015
2010 Our view: The guidance did not update the ASP and sales of precious metal
2017E 2018E 2019E 2020E 2021E 2016E assumption after the delayed operation of the new plant. Plus, the company doesn’t Source: Company data, Team Estimates take depreciation expense into consideration. We therefore adjust the ASP with the
current gold price and the revised precious metal ASP to be NT$ 1073.65/kg (calculated by 99.86% gold and 0.14% silver, see Appendix 4). Furthermore, the Figure 17: Gross margin depreciation expense of the new plant will be recognized as soon as it begins Unit: NT$, mn operation. And we expect the revenue contribution will be more-than-offset by the 12.0% negative impact of depreciation expense, dragging the company’s margin, and will 10.0% further hurt its bottom-line. In addition, the company guidance indicated that Huan 8.0% 6.0% Ke plant’s gross margin is 2%, which is even lower than the old plants. Also, the R&D 4.0% expense remains low with about 0.1% of its revenue (Appendix 35). To sum, we 2.0% doubt the existence of technology breakthrough of new plant and its attractiveness 0.0% -2.0%
to prospective clients. We consider the estimated contribution of Huan Ke Plant will
2008 2009 2010 2011 2012 2013 2014 2015
2007 only be NT$ 3.2 billion in 2017, which is significantly lower than company’s guidance
2017E 2018E 2019E 2020E 2021E 2016E of NT$ 4.5 billion. Source: Company data, team estimates
Figure 18: EPS Financial results review and outlook As the E-waste supply continues to decrease, gold price is weighed on by strong US Unit: NT$ dollar, gross margin and market share remains low due to the price competition, and 3 the contribution of the new plant falls short of the company’s guidance, we made
2 our assumptions on its revenue, gross margin and EPS for the following years as
1 follow.
0 -1 2014 2015 2016E 2017F 2018F 2019F 2020F 2021F -2 Revenue(NT$mn) 2,882 2,317 2,421 5,677 7,425 8,364 8,304 8,007
Gross margin 6.05% -0.6% 4% 2.7% 2.7% 3% 3% 3%
2010 2011 2012 2013 2014 2015
2021E 2017E 2018E 2019E 2020E 2016E EPS 0.37 -1.23 -0.16 -0.13 -0.10 -0.04 0.05 0.11 Source: Company data, Team estimates
National Chengchi University Equity Research Team 6 Figure 19: Peers Gross Margin Comparison Financial Analysis Unit: % Poorer gross margin compared to the waste disposal peers
80 Among the waste disposal peers, Super Dragon suffers from lower gross margin due
to difference in (1) the kind of waste, (2) disposal treatment: 60 Unlike Sunny Friend Environmental (8341 TT) that focuses on medical waste, and 40 could charge disposal service fee from medical organizations, Super Dragon focuses
20 on E-waste, which have to bid from electronic companies. This would lead to price
competition over E-waste source a low level of gross margin (Figure 19). For the 0 9955 8390 1785 6803 8341 8422 disposal treatment, Jiin Yeeh Ding (8390 TT), the company also dispose of E-waste,
TT TT TT TT TT TT utilize Thermal Treatment to dissolute more kinds and more amount of precious
metals than Super Dragon. The method results to higher recycling rate and higher Source: Company data, Team estimates gross margin.
Figure 20: ROE ROE is deteriorating Unit: % Super Dragon used to see 10% above return on equity (ROE) before 2010. However,
5.00% ROE has dropped sharply from 9.10% in 2010 to -5.58% in 2015 and -0.91% in 3Q16,
0.00% mainly due to increasing price competition and decreasing E-waste supply. Looking into the future, we expect the company’s profitability is unlikely to see great -5.00% improvement in the short run as price competition continues. Also, Depreciation -10.00% expense generated from the new plant will also weigh on Super Dragon’s profitability.
Source: Company data, Team estimates Cash shortage to be seen due to the hop in working capital Under the assumption that the new plant will be launched in 2017, the new plant Figure 21: Cash Shortage will generate doubled revenue and create a huge working capital need. The abrupt Unit: NT$, mn working capital demand will cause a cash shortage of NT$ 364mn for Super Dragon in 2017.
700
200 Debt ratio will reach historical high To solve the cash shortage, the company has to either try to manage its working -300 capital or raise capital. We have noticed that its new plant has already pledged to
-800 borrow its current long-term debt and therefore has less debt capacity. We assume
Super Dragon will raise its remaining short-term debt credit line of NT$ 400mn as
2010 2011 2012 2013 2014 2015
2017E 2018E 2016E well as issuing convertible bond of NT$ 600mn to resolve its cash shortage problem, Source: Company data, Team estimates which will boost company’s total-debt-to-assets ratio to a historical-high level of 54.7%. The highly leveraged capital structure may derive concern of financial risks. Figure 22: Total Debt and D/A Ratio FINANCIAL RATIOS 2014 2015 2016E 2017E 2018E 2019E 2020E Unit: % Unit: NT$,mn Profitability
Total Debt Debt/Assets Gross Margin 6.05% -0.60% 4.00% 2.57% 2.92% 3.32% 3.77% 3000 60% Net Profit Margin 1.30% -5.49% -0.67% -1.08% -0.67% -0.27% 0.32% 2500 50% 2000 40% Return on Equity 1.60% -5.74% -0.73% -2.61% -2.08% -0.92% 1.09% 1500 30% Operation 1000 20% Days Receivable Outstanding 9.9 7.0 10.2 19.0 21.0 20.0 25.0 500 10% Days Inventory Outstanding 165.2 185.1 155.5 151.0 120.0 110.0 94.0 0 0% Days Payable Outstanding 9.1 9.1 10.6 15.0 21.0 25.0 25.0
Cash Conversion Cycle 184.2 201.2 176.3 182.0 162.0 155.0 144.0
2010 2011 2012 2013 2014 2015
2017E 2018E 2016E Liquidity Source: Company data, Team estimates Current Ratio 343.37% 267.97% 200.79% 199.13% 177.53% 165.50% 161.40%
Quick Ratio 90.81% 57.18% 76.72% 37.83% 38.33% 36.36% 51.74% Cash Ratio 75.54% 42.66% 65.29% 15.16% 11.64% 10.58% 19.94% Solvency Total Debt/Total Assets 37.3% 37.7% 41.6% 54.7% 56.4% 56.9% 55.9% Long Debt/Total Assets 23.1% 22.2% 19.0% 26.3% 24.3% 22.7% 21.4% Per share data Earnings Per Share 0.36 -1.23 -0.16 -0.13 -0.10 -0.04 0.05 Book Value per Share 22.73 21.48 21.32 20.78 20.36 20.17 20.39
National Chengchi University Equity Research Team 7 Figure 23: Peers PB multiples vs GPM Valuation
We initiate Super Dragon’s one-year target price of NT$ 13.5 by applying price-to-book multiple valuation. The target price is based on 0.65x 2017E book
value per share of common equity, indicating an 18.4 % downside potential.
Multiple Method
Prefer P/B multiple method as it is the most representative
We do not adopt discounted free cash flow method, as Super Dragon’s free cash flows are highly volatile mainly due to company’s low single-digit gross margin. The
poor profitability makes it hard for Super Dragon to maintain steady and sustainable Source: Bloomberg, as of 3Q16 positive earnings. Therefore, we regard multiple method as a more proper valuation metric for Super Dragon. Among the multiples, we choose P/B ratio as the most Figure 24: P/B Band representative multiple because of Super Dragon’s volatile and negative earnings,
80 which makes profit-based multiples such as EV/EBITDA and P/E ratios inapplicable. 70
60 Inapplicable to use relative valuation due to lack of comparatives. 50 While we apply P/B multiple method, we do not prefer to use comparable 40 companies multiple method. The reason is mainly due to the lack of comparatives. 30 In the industry of waste recycling, Super Dragon is the only public-listed company 20 10 who focuses on refining gold from E-waste (Jiin Yee Ding focuses on cooper refining),
0 while the others mostly focus on disposing of other kind of waste and enjoy much
higher profitability margins. (Figure 23)
Jul-11 Jul-16
Jan-14
Jun-14
Oct-12
Apr-15
Feb-11 Sep-15 Feb-16
Dec-11 Dec-16
Aug-13
Nov-14 Mar-13 May-12 The peers who we consider similar to Super Dragon are not listed and are not 0.5X 1X applicable to multiple methods since we are not able to acquire their public market 2X 3X 4X Closed Price data. Therefore, we believe it is more appropriate to refer to Super Dragon’s
historical P/B multiple and apply a reasonable 2017E P/B ratio to calculate our target Source: Bloomberg price for the company.
Figure 25: EV/GCI vs CROCI Target price of NT$ 13.5 based on 0.65x P/B multiple Super Dragon is currently trading at P/B ratio of 0.78x, and its historical P/B band EV/GCI CROCI was 0.55-1.9x. As we see industry downtrend continues and that we do not expect the new plant to turn the company’s bottom line positive. We therefore expect the 1.2x 4% 1.0x stock’s P/B ratio to remain at a relatively low level between 0.6-0.7x in 2017, which 2% 0.8x is the range when SD generated similar ROE in recent years. Finally, we derive Super 0.6x 0% Dragon’s target price based on 0.65x 2017E book value per share. 0.4x -2% 0.2x R² = 0.68 EV/GCI-CROCI Method Target Price of NT$ 14.3 supports SELL recommendation 0.0x -4% In addition to P/B multiple method, EV/GCI-CROCI method is further applied to
support our SELL rating. EV/GCI (enterprise value/gross cash invested) is a valuation
2014 2011 2012 2013 2015
2017E 2018E 2016E multiple used to compare a company's book value of its assets to their current Source: Company data, Team estimates market value. The ratio is similar to P/B ratio, but EV/GCI is calculated on an EV-basis, taking into account of all the company's security-holders, and is a useful way to measure a company’s ability to generate cash returns on its investments. We see a Figure 26: WACC Assumption positive correlation between EV/GCI and CROCI (cash return on cash invested) and conduct a regression analysis to derive a computable relationship. (Appendix 34) WACC Assumption
Wd 55%
We 45% Tax Rate 17% Cost of Debt Rd 1.30% Cost of Equity We can then estimate 2017E EV/GCI multiple of 0.9x based on our forecasted CROCI Beta 0.83 to generate enterprise value, and derive the target price of NT$ 13.8. (Figure 25) Rm 10.46% Rf 1.07% DCF Valuation Cost of Equity 8.84% Although we do not prefer DCF method, we still calculate Super Dragon’s intrinsic WACC 4.56% value of NT$ 11.3 derived from free cash flow to firm (FCFF) model to echo our SELL Source: Company data recommendation. A two-stage DCF model is used and the WACC assumptions are as Figure 26. We partially agree with the contribution of the new plant but adjust
National Chengchi University Equity Research Team 8 Figure 27: Stock Price Calculation management’s sales volume guidance in 2015 by our view, which we believe is more reasonable. We then factored a negative trend of revenue and low but slightly Stock Price Calculation improving gross margin. With Super Dragon’s WACC of 4.58%, we derived the NT$, mn intrinsic value (Figure 27) to be NT$ 11.3, which supports our SELL rating even more. EV 2031.5 See Appendix 27 for DCF assumptions and calculation. Add: Cash and Equ. 521.1 Less: Debt 1391.4 Investment Risks – Upside Risks to Our Call Less: Pref. Stock 0.0 Less: Minority Interest 0.0 Market Risks Equity Value 1161.3 Better demand for electronic devices will increase E-waste amount (MR1) Common Shares Outstanding 103.2 According to the waste declining trend and rising offshore manufacturing rate, we Stock Price (NT$) 11.3 therefore expect E-waste will continue to decline at the rate of 3.99%. However, we Source: Company data concern that better-than-expected demand for electronic devices such as smart phone may drive the growth of E-waste supply and may thus benefit the revenue of Figure 28: 12 possible import waste items the company.
Code Waste Item Economic Risks E-0201 Scrap Wire and Cable Unexpected events results to the hedging needs and hike up the gold price (ER1) E-0202 Oil Containing Waste Cable Unexpected events such as the election of Germany president, the situation in Syria, E-0207 Oil Containing less than 50 ppm and the negotiation of Brexit create hedging needs. Gold, which served as the Polychlorinated Biphenyl Waste subject for hedging, will directly respond the needs by increasing price. In the Transformers and Waste Capacitors business model of Super Dragon, the revenue and stock price highly related to the E-0213 Waste Plastics from Metal Plating gold price and may thus increase. E-0214 Waste Computers (other than waste-good and -container category) Weaker NTD relative to USD hikes up revenue (ER2) E-0215 Waste Home Appliance Since Taiwan is an export-oriented based country, the Central Bank of Taiwan may E-0216 Waste Telephone Exchange stimulate the economy by depreciating the currency. The depreciation of the NTD E-0217 Waste Electronics Parts and may cause a short term hike in revenue because the main revenue of the Super Components, Substandard Items, and Dragon is through selling gold to Hong Kong in USD. Defective Items E-0218 Waste Optoelectronics Parts and Operational Risks Components, Substandard Items, and Breakthrough technology of Huan Ke plant will attract new clients (OR1) Defective Items The newly established plant, Huan Ke plant, which owns new technologies may E-0220 Waste Communication Apparatus provide advanced process for the company and thus increase its gross margin and (machinery excluded) successfully develop new promising clients. According to the spokesman of Super E-0221 Printed Circuit Boards Waste, Powder, Dragon Technology Co., Ltd., myriads of companies have visited the new plant and and Scraps Containing Metal gave positive evaluations. The company expects their waste resource may widen and E-0222 Waste Printed Circuit increase because of completion of new plant no matter the down trend of total Boards Containing Components reported amount of waste. Source: Executive Yuan Environmental Protection Administration Establish new products line to improve gross margin (OR2) Compared to its peers Jiin Yeeh Ding, which mainly focus on copper refining, most of Figure 29: Risk Matrix Super Dragon’ revenue earns from sales of gold. However, the E-waste that Super Dragon disposes of not only contains of gold but also contains high proportion of copper. If Super Dragon could establish a new products line of copper refining, the overall recycling rate will be higher and thus improve the low gross margin.
Regulatory Upside Risks Loosening import regulations for Mixed Metal Scraps (RR1) The amendment of “Standards for Defining Hazardous Waste” has triggered heated debates for many years. The argument over 12 waste items, which is the main source for Super Dragon, is categorized whether into general industrial waste or hazardous industrial waste results to the permission of import. (Figure 28) Nowadays, these 12 items are categorized as hazardous industrial waste and Source: Company data, Team estimates prohibited from importing. Although the society and lots of environmental protection organizations opposed to some of the waste items disposal organizations highly support and promote the relax restrictions. The spokesman of Super Dragon Technology Co., Ltd. said that the import of hazardous industrial waste, they expected the regulation may loosen in a short time and the action may thus increase the waste Super Dragon received.
National Chengchi University Equity Research Team 9 Appendix 1: Financial statements
Income Statement (NT$, mn) For the Fiscal Period Ending 2014 2015 2016E 2017E 2018E 2019E 2020E 2021E Total Revenue 2,882 2,317 2,421 5,190 6,520 7,094 7,063 6,960 Cost Of Goods Sold 2,707.9 2,331.2 2,324.1 5,056.5 6,329.3 6,858.0 6,796.3 6,662.3 Gross Profit 174.5 -14.0 96.9 133.5 190.5 235.7 266.4 297.3 Selling General & Admin Exp. 124.8 108.0 103.8 168.3 211.4 230.0 211.9 208.8 R & D Exp. 2.4 3.1 2.6 5.7 7.1 7.7 7.7 7.6 Operating Expense 127.1 111.2 105.5 173.9 218.5 237.7 219.6 216.4 Operating Income (EBIT) 47.3 -125.2 -8.7 -40.4 -28.0 -2.1 46.8 80.9 Interest and other expense -2.8 6.0 7.5 20.7 19.8 18.8 17.9 16.9 Pretax Profit 50.2 -131.2 -16.2 -61.2 -47.8 -20.9 29.0 64.0 Taxes 12.7 -3.9 0.0 -5.3 -4.1 -1.8 6.1 13.5 Earnings from Cont. Ops. 37.5 -127.3 -16.2 -55.9 -43.6 -19.1 22.9 50.6 Extraord. Item & Account. Change -0.3 -81.2 0.0 0.0 0.0 0.0 0.0 0.0 Net Income 247.1 -27.5 49.6 -63.0 37.5 -127.3 -16.2 -55.9 Weighted Avg. Basic Shares Out. 109.7 109.0 106.6 103.2 103.2 103.2 103.2 103.2 Basic EPS (NT$) 2.25 -0.25 0.47 -0.61 0.36 -1.23 -0.16 -0.13 Balance Sheet (NT$, mn) For the Fiscal Period Ending 2014 2015 2016E 2017E 2018E 2019E 2020E 2021E Cash And Equivalents 377.3 223.2 521.1 196.6 174.0 169.3 318.3 312.5 Accounts Receivable 60.7 48.4 70.4 273.2 378.1 391.7 486.7 460.6 Inventory 1,261.6 1,103.0 990.3 2,091.9 2,080.9 2,066.8 1,750.3 1,697.5 Other Current Assets 453.6 299.2 612.4 490.7 572.9 581.9 825.9 793.9 Total Current Assets 1,715.1 1,402.2 1,602.7 2,582.5 2,653.8 2,648.7 2,576.2 2,491.4 Net Property, Plant & Equipment 1,917.0 2,030.3 2,041.3 2,030.8 2,040.2 2,058.2 2,075.7 2,091.7 Long-term Investments 4.0 5.0 6.0 7.0 8.0 9.0 10.0 11.0 Other Intangibles 10.6 10.1 10.1 10.1 10.1 10.1 10.1 10.1 Other Long-Term Assets 93.3 109.9 108.9 107.9 106.9 105.9 104.9 103.9 Total Assets 3,740.0 3,557.5 3,769.0 4,738.3 4,819.0 4,831.9 4,776.9 4,708.2 Accounts Payable 46.7 69.8 67.5 166.2 364.1 469.7 465.5 419.8 Accrued Exp. 32.5 23.4 23.4 23.4 23.4 23.4 23.4 23.4 Short-term Borrowings 300.0 350.0 600.0 1,000.0 1,000.0 1,000.0 1,000.0 1,000.0 Curr. Port. of LT Debt 73.6 73.6 73.6 73.6 73.6 73.6 73.6 73.6 Other Current Liabilities 46.6 6.5 33.6 33.6 33.6 33.6 33.6 33.6 total current liability 499.5 523.3 798.2 1,296.9 1,494.8 1,600.4 1,596.2 1,550.5 Long-Term Debt 865.0 791.4 717.8 1,244.1 1,170.5 1,096.9 1,023.3 949.7 Other Non-Current Liabilities 29.6 26.3 52.7 52.7 52.7 52.7 52.7 52.7 Total Liabilities 1,394.1 1,340.9 1,568.6 2,593.7 2,718.0 2,750.0 2,672.2 2,552.9 Common Stock 1,032.1 1,032.1 1,032.1 1,032.1 1,032.1 1,032.1 1,032.1 1,032.1 Additional Paid In Capital 1,109.4 1,109.4 1,109.4 1,109.4 1,109.4 1,109.4 1,109.4 1,109.4 Retained Earnings 188.4 64.0 47.8 (8.1) (51.7) (70.7) (47.9) 2.7
Treasury Stock 0 0 0 0 0 0 0 0 Other equities 15.9 11.0 11.0 11.0 11.0 11.0 11.0 11.0 Total Equity 2,345.9 2,216.5 2,200.4 2,144.5 2,100.9 2,081.8 2,104.7 2,155.3 Total Liabilities And Equity 3,740.0 3,557.5 3,769.0 4,738.3 4,819.0 4,831.9 4,776.9 4,708.2 Cash Flow Statement (NT$, mn) For the Fiscal Period Ending 2014 2015 2016E 2017E 2018E 2019E 2020E 2021E Net Income 37.5 (127.3) (16.2) (55.9) (43.6) (19.1) 22.9 50.6 Depreciation & Amort. 32.9 31.6 33.4 88.4 88.4 88.4 88.4 88.4 (Gain) Loss From Sale Of Assets 2.9 0.0 0 0 0 0 0 0 Other Operating Activities 6.6 (17.0) 6.7 0 0 0 0 0 Change in Acc. Receivable 61.1 8.5 (22.0) (202.7) (104.9) (13.6) (95.0) 26.1 Change In Inventories (71.3) 158.5 112.7 (1,101.5) 11.0 14.0 316.5 52.7 Change in Acc. Payable (51.0) 35.2 (2.2) 98.7 197.9 105.6 (4.2) (45.7) Change in Other Net Operating Assets 20.7 (25.6) 53.6 (0.0) 0 0 0 0 Cash from Ops. 39.4 64.0 165.9 (1,173.0) 148.7 175.4 328.5 172.2 Capital Expenditure (463.4) (191.1) (44.4) (77.8) (97.8) (106.4) (105.9) (104.4) Other Investing Activities (6.8) 0.2 0 0 0 0 0 0 Cash from Investing (470.2) (190.9) (44.4) (77.8) (97.8) (106.4) (105.9) (104.4) Short Term Debt Issued (Repaid) 0 50.0 250.0 400.0 0 0 0 0 Long-Term Debt Issued (Repaid) 432.6 (73.6) (73.6) 526.4 (73.6) (73.6) (73.6) (73.6) Repurchase of Common Stock 0 0 0 0 0 0 0 0 Total Dividends Paid 0 0 0 0 0 0 0 0 Other Financing Activities 0.0 0 0 0 0 0 0 0 Cash from Financing 432.6 (23.6) 176.4 926.4 (73.6) (73.6) (73.6) (73.6)
Appendix 2: Financial Statement Forecast Assumptions
FINANCIAL STATEMENTS FORECAST ASSUMPTIONS Income Statement Accounts Assumptions Revenue According to revenue breakdown sheet Cost of Good Sold 97.3%, the average of the past 5 years COGS/Rev Gross Profit 2.7%, the average of the past 5 years Gross profit/Rev Research & Development 0.11%, the average of the past 5 years R&D/Rev Selling, General & Administrative 3.24%, the average of the past 5 years Sg&A/Rev Interest Expense 1.3%, the average of the past 5 years interest expense/total debt Interest & invest income 0.51%, the average of the past 5 years 8.69% when the net loss occurs, according to the average of 2013&2015, Income Taxes 21.01% when the net income occurs, acording to the other years average Shares Outstanding 103.2, according to 2015 Currency Exchange Gain/Loss 0.0 Gain (Loss) On Sale Of Assets 0.0 Balance Sheet Accounts Assumptions
AR days 10, according to the past 3 years average Inventory days 156, according to the past 3 years average AP days 11, according to the past 3 years average Other receivables 3, according to the item was falling in these years Prepaid expense 10.8, according to the past 5 years average Long Term Securities Investments 4.3, according to 2015 1.5%, according to the average in 2010-2012, the time before Huan Ke Capex/rev Plant start to build 33, according to the past 3 years average, before the new plant started to Depreciation build. Other Long-Term Assets 98.4, according to 2015 Other intangibles 10.1, according to 2015
Other Non-current Assets (inc. Deferred tax assets) 61.7, according to the past 5 years average Short Term Borrowings 600, according to 2015 Curr. Port. of LT Debt 73.6, according to 2015 Curr. Income Taxes Payable 0.6, according to 2015 Unearned Revenue, non current 3, according to 2015 Accrued Expenses & Other CL 0.77%, according to the past 5 years average
Common stock / additional paid in capital 1032, according to 2015 Dividends No divident payout Other equity, comprehensive income 11.5, according to the past 5 years average Cash Flow Statement Accounts Assumptions 33 in 2016, according to the average between 2013-2015, 87.6 in 2017, Depreciation&Amortization according to Huan Ke Plant book value divide by 25 years Other Accounts Assumptions We assume Huan Ke Plant will start to operate in 2017, and we use the company's guidance on the sales amount, but we adjust the overall ASP, Huan Ke Plant which is calculated by 70.49% of gold, 29.37% of gold potassium syanide, 0.14% of silver.
Potassium gold cyanide price/gold price 0.65, according to the historical data
Appendix 3 Business Model Flow Chart
Appendix 4: Sales Breakdown by Product
2013 2014 2015 Gold 63.73% 65.16% 70.76% Gold Potassium Cyanide 17.23% 31.05% 25.95% Silver 16.70% 0.61% 0.37% Disposal and Sales of Mixed Metal Scrap 1.85% 3.19% 1.28% Clearance and Disposal of E-waste 0.01% 0.00% 0.02% Others 0.48% 0.00% 1.61%
Appendix 5: Sales Breakdown by Geography
2012 2013 2014 2015 Taiwan 55.27% 37.23% 35.05% 29.24% Asia 44.73% 62.77% 64.95% 70.76%
Appendix 6: Affiliated Company Operating Condition
Shareholding Ratio Chang Pwu Industrial Co., Ltd. 99.97% Ron Pwu Applied Materials Technology Co., Ltd. 100% Super Dragon international Co., Ltd 100% Super Dragon Environmental Technology (Suzhou) Co., Ltd. 100% Big Data Co., Ltd. 23.33%
Unit: NT$ Paid in Total Total Net Operating Operating Net Earnings thousand Capital Asset Liability Value Revenue Profit Income Per Share Chang Pwu 180,000 198,683 2,232 196,451 10,280 1,164 1,702 0.09 Ron Pwu 300,100 280,745 0 280,745 0 0 -32,223 Super Dragon 328,250 293910 12032 281,878 160,915 -38,058 -38,297 Super Dragon 10,000 10,063 0 10,063 0 -1 84 0.08 (Suzhou)
Appendix 7: Waste Category
Category A Manufactured Hazardous Industrial Waste Category B Toxic Hazardous Industrial Waste Category C Hazardous Characteristics Determined Waste Category D General Industrial Waste Category E Mixed Metal Scrap Category R Announced Recycled or Reused Waste Category G Recycled Resources
Appendix 8: Total Revenue of Disposal and Clearance Industry
Unit: NT$ thousand 2010 2011 2012 2013 2014 2015 Waste Disposal Industry 46,117,383 54,832,099 49,865,597 44,046,001 44,400,055 40,824,149 Waste Clearance Industry 49,912,641 56,777,695 52,100,594 49,419,283 50,909,753 45,376,017
Total Revenue of Disposal and Clearance Industry
Appendix 9: Waste Amount the company disposal Category
Waste Reported Amount (Unit: tons) 2010 2011 2012 2013 2014 2015 Type 1 10,382 3,287 3,429 3,970 4,722 3,698 Type 2 224,861 220,571 210,957 190,036 227,245 235,509 Type 3 101,410 90307 96720 83031 83896 73198 Total 336,653 314,165 311,106 277,037 315,863 312,405
Waste Commissioned for Disposal 2010 2011 2012 2013 2014 2015 (Unit: tons) Type 1 1,029 1,132 1,428 1,866 2,057 1,592 Type 2 15,881 19,007 18,065 16,541 22,590 31,780 Type 3 64,913 56,540 63,660 54,465 54,115 51,012 Total 81,823 76,679 83,153 72,872 78,762 84,384
Appendix 10: Guanyin Plant Approved Disposal Waste Item
Type Waste Waste Item Disposal Method Code 1 A-9001 Inoperable Cyanide Plating Solution Chemical Disposal 1 A-9101 Remaining Cyanide Solution within Plating Bath Chemical Disposal 1 A-9201 Remaining Cyanide Solution within Chemical Disposal 1 B-0214 Potassium Cyanide Chemical Disposal 1 B-0215 Silver Cyanide Chemical Disposal 1 B-0216 Sodium Cyanide Chemical Disposal 2 C-0202 Remaining Solution with pH less than 2.0 Chemical Disposal 2 D-1502 Remaining Solution with pH less than 12.5 Chemical Disposal 2 D-1503 Remaining Solution with pH greater than 2.0 Chemical Disposal 3 D-2507 Non-PCB Liquids Chemical Disposal 3 D-2527 Other Mixed Metal Scraps for Physical Treatment Chemical Disposal 3 D-2601 Waste Cable (after physical treatment) Chemical Disposal 3 D-2612 Waste Metals for Electroplating Chemical Disposal 3 D-2623 Waste Lead Frame (containing gold, silver or palladium) Chemical Disposal
3 D-2624 Spent Catalyst (containing precious metal) Chemical Disposal 3 D-2625 Ion-exchange Resin (containing precious metal) Chemical Disposal 3 D-2626 Catalytic Converters for Motors Chemical Disposal 3 D-2627 Other Mixed Metal Scraps for Chemical Treatment (thermal treatment Chemical Disposal excluded) 3 E-0213 Waste Plastics from Metal Plating Chemical Disposal 3 E-0214 Waste Computers (other than waste-good and -container category) Chemical Disposal 3 E-0216 Waste Telephone Exchange Chemical Disposal 3 E-0217 Waste Electronics Parts and Components, Substandard Items, and Defective Chemical Disposal Items 3 E-0218 Waste Optoelectronics Parts and Components, Substandard Items, and Chemical Disposal Defective Items 3 E-0220 Waste Communication Apparatus (machinery excluded) Chemical Disposal 3 E-0221 Printed Circuit Boards Waste, Powder, and Scraps Containing Metal Chemical Disposal 3 E-0222 Waste Printed Circuit Boards Containing Components Chemical Disposal 3 E-0301 Light Emitting Diode Waste, Powder, and Scraps Chemical Disposal
Appendix 11: Huan ke Plant Approved Disposal Waste Item
Waste Type Waste Item Disposal Method Code 1 D-2507 Non-PCB Liquids Physical treatment 1 D-2527 Other Mixed Metal Scraps for Physical Treatment Physical treatment 1 D-2601 Waste Cable (after physical treatment) Physical treatment 1 D-2612 Waste Metals for Electroplating Physical treatment 1 D-2623 Waste Lead Frame (containing gold, silver or palladium) Physical treatment 1 D-2624 Spent Catalyst (containing precious metal) Physical treatment 1 D-2625 Ion-exchange Resin (containing precious metal) Physical treatment 1 D-2626 Catalytic Converters for Motors Physical treatment Other Mixed Metal Scraps for Chemical Treatment (thermal 1 D-2627 Physical treatment treatment excluded) 1 E-0213 Waste Plastics from Metal Plating Physical treatment 1 E-0214 Waste Computers (other than waste-good and -container category) Physical treatment 1 E-0216 Waste Telephone Exchange Physical treatment Waste Electronics Parts and Components, Substandard Items, and 1 E-0217 Physical treatment Defective Items Waste Optoelectronics Parts and Components, Substandard Items, 1 E-0218 Physical treatment and Defective Items 1 E-0220 Waste Communication Apparatus (machinery excluded) Physical treatment 1 E-0221 Printed Circuit Boards Waste, Powder, and Scraps Containing Metal Physical treatment 1 E-0222 Waste Printed Circuit Boards Containing Components Physical treatment 1 E-0301 Light Emitting Diode Waste, Powder, and Scraps Physical treatment 2 A-9001 Inoperable Cyanide Plating Solution Oxidative Decomposition Treatment 2 A-9101 Remaining Cyanide Solution within Plating Bath Oxidative Decomposition Treatment
2 A-9201 Remaining Cyanide Solution within Oxidative Decomposition Treatment 2 B-0214 Potassium Cyanide Oxidative Decomposition Treatment 2 B-0215 Silver Cyanide Oxidative Decomposition Treatment 2 B-0216 Sodium Cyanide Oxidative Decomposition Treatment 2 D-1502 Remaining Solution with pH less than 12.5 Oxidative Decomposition Treatment 3 C-0202 Remaining Solution with pH less than 2.0 Oxidative Decomposition Treatment 3 D-1503 Remaining Solution with pH greater than 2.0 Oxidative Decomposition Treatment
Appendix 12: Waste Reported Amount
Waste Waste Item (Unit: tons) 2010 2011 2012 2013 2014 2015 Code A-9001 Inoperable Cyanide Plating Solution 1,440 1,600 1,777 1,986 2,136 1,681 A-9101 Remaining Cyanide Solution within Plating Bath 0 0 0 0 0 0 A-9201 Remaining Cyanide Solution within 8,942 1,686 1,533 1948 2,584 2,017 B-0214 Potassium Cyanide 0 1 119 36 2 0 B-0215 Silver Cyanide 0 0 0 0 0 0 B-0216 Sodium Cyanide 0 0 0 0 0 0 C-0202 Remaining Solution with pH less than 2.0 96,754 117,727 152,517 177,353 216,325 224,733 D-1502 Remaining Solution with pH less than 12.5 2,709 2,509 3,159 6,664 4,927 4,669 D-1503 Remaining Solution with pH greater than 2.0 125,398 100,335 55,281 6,019 5,993 6,107 D-2507 Non-PCB Liquids 1,564 598 509 591 461 724 D-2527 Other Mixed Metal Scraps for Physical 11,187 10,296 8,842 7,427 7,714 7,324 Treatment D-2601 Waste Cable (after physical treatment) 31,470 28,500 25,449 25,128 22,218 19,705 D-2612 Waste Metals for Electroplating 271 254 173 127 171 179 D-2623 Waste Lead Frame (containing gold, silver or 213 228 261 274 265 314 palladium) D-2624 Spent Catalyst (containing precious metal) 211 276 245 1,005 540 698 D-2625 Ion-exchange Resin (containing precious metal) 40 41 49 64 61 54 D-2626 Catalytic Converters for Motors 0 0 0 0 0 0 D-2627 Other Mixed Metal Scraps for Chemical 13 15 18 7 5 3 Treatment (thermal treatment excluded) E-0213 Waste Plastics from Metal Plating 4,739 2,504 3,563 2,261 2,581 1,893 E-0214 Waste Computers (other than waste-good and 14 6 0 4 2 6 -container category) E-0216 Waste Telephone Exchange 147 68 107 65 105 132 E-0217 Waste Electronics Parts and Components, 9,212 7,840 18,076 7,638 8,137 8,032 Substandard Items, and Defective Items E-0218 Waste Optoelectronics Parts and Components, 854 892 823 778 953 686 Substandard Items, and Defective Items E-0220 Waste Communication Apparatus (machinery 680 1,098 646 1,011 833 546 excluded) E-0221 Printed Circuit Boards Waste, Powder, and 39,480 36,380 35,914 34,066 37,541 30,911 Scraps Containing Metal E-0222 Waste Printed Circuit Boards Containing 1,305 1,291 2,024 2,558 2,275 1,964 Components E-0301 Light Emitting Diode Waste, Powder, and Scraps 10 20 21 27 34 27
Appendix 13: Waste Commissioned for Disposal
Waste Waste Item (Unit: tons) 2010 2011 2012 2013 2014 2015 Code A-9001 Inoperable Cyanide Plating Solution 1,029 1,131 1,428 1,866 2,057 1,592 A-9101 Remaining Cyanide Solution within Plating 0 0 0 0 0 0 Bath A-9201 Remaining Cyanide Solution within 0 0 0 0 0 0 B-0214 Potassium Cyanide 0 1 0 0 0 0 B-0215 Silver Cyanide 0 0 0 0 0 0 B-0216 Sodium Cyanide 0 0 0 0 0 0 C-0202 Remaining Solution with pH less than 2.0 13,638 17,410 16,277 12,685 18,299 27,787 D-1502 Remaining Solution with pH less than 12.5 1,087 624 812 2,404 2,499 2,248 D-1503 Remaining Solution with pH greater than 2.0 1,156 973 976 1,452 1,792 1,745 D-2507 Non-PCB Liquids 1,458 522 422 497 357 609 D-2527 Other Mixed Metal Scraps for Physical 8,127 8,067 6,544 5,914 6,366 6,241 Treatment D-2601 Waste Cable (after physical treatment) 20,724 20,192 17,232 18,898 15,109 14,090 D-2612 Waste Metals for Electroplating 207 238 140 111 160 175 D-2623 Waste Lead Frame (containing gold, silver or 213 228 261 274 265 314 palladium) D-2624 Spent Catalyst (containing precious metal) 192 276 200 331 304 168 D-2625 Ion-exchange Resin (containing precious 35 37 44 59 55 47 metal) D-2626 Catalytic Converters for Motors 0 0 0 0 0 0 D-2627 Other Mixed Metal Scraps for Chemical 13 15 18 7 5 3 Treatment (thermal treatment excluded) E-0213 Waste Plastics from Metal Plating 4,719 2,104 2,876 1,923 2,342 1,391 E-0214 Waste Computers (other than waste-good and 14 6 0 4 2 6 -container category) E-0216 Waste Telephone Exchange 147 68 107 65 105 247 E-0217 Waste Electronics Parts and Components, 8,617 7,092 17,548 6,609 7,547 6,519 Substandard Items, and Defective Items E-0218 Waste Optoelectronics Parts and 853 882 803 744 941 681 Components, Substandard Items, and Defective Items E-0220 Waste Communication Apparatus (machinery 680 1,098 646 1,011 833 546 excluded) E-0221 Printed Circuit Boards Waste, Powder, and 18,110 15,078 15,261 16,105 17,789 18,209 Scraps Containing Metal E-0222 Waste Printed Circuit Boards Containing 794 617 1,537 1,887 1,901 1,739 Components E-0301 Light Emitting Diode Waste, Powder, and 10 20 21 26 34 27 Scraps
Appendix 14: Waste Amount by Category Weighted Proportion
Guan Yin Plant
Amount Approved (Unit: tons) Weighted Proportion Type 1 375 0.117188 Type 2 250 0.078125 Type 3 2575 0.804688 Total 3200
Huan Ke Plant
Amount Approved (Unit: tons) Weighted Proportion Type 1 2800 0.8 Type 2 500 0.142857 Type 3 200 0.057143 Total 3500
Waste Reported Amount 2010 2011 2012 2013 2014 2015 (Unit: tons) Type 1 1,216.641 385.1953 401.8359 465.2344 553.3594 433.3594 Type 2 17,567.27 17,232.11 16,481.02 14,846.56 17,753.52 18,399.14 Type 3 81,603.36 72,668.91 77,829.38 66,814.01 67,510.06 58,901.52 Weighted Total 100,387.3 90,286.22 94,712.23 82,125.8 85,816.94 77,734.02
Waste Commissioned 2010 2011 2012 2013 2014 2015 for Disposal (Unit: tons) Type 1 120.5859375 132.65625 167.34375 218.471875 241.0546875 186.5625 Type 2 1,240.703125 1,484.921875 1,411.328125 1,292.265625 1,764.84375 2,482.8125 Type 3 52,234.67969 45,497.03125 51,226.40625 43,827.30469 43,545.66406 41,048.71875 Weighted Total 53,595.96875 47,114.60938 52,805.07813 45,338.24219 45,551.5625 43,718.09375
Appendix 15: Offshore Manufacturing Rate
(Unit: %) 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Electronic Products 20.11 29.55 37.05 36.02 43.6 47.05 44.5 49.46 52.27 52.36 50.66 51.67 50.78 Electrical Products 34.93 39.81 48.1 52.65 52.27 49.74 53.42 58.6 62.36 67.84 69.03 67.9 66.99 IT & Communication 45.41 60.71 73.01 76.48 84.29 85.05 81.85 84.82 83.57 84.56 87.33 90.92 92.56 Engineering Products
Appendix 16: Numbers of Grade A Waste Disposal and Clearance Organizations
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Grade A Waste Clearance Organizations 197 213 252 282 304 305 329 337 383 408 408 Grade A Waste Disposal Organizations 43 47 49 58 64 67 75 80 105 112 112
Appendix 17: Numbers of Waste Items Disposal Organizations
Waste Code Waste Category Approved Disposal Company A-9001 Inoperable Cyanide Plating Solution 16 A-9101 Remaining Cyanide Solution within Plating Bath 8 A-9201 Remaining Cyanide Solution within 9 B-0214 Potassium Cyanide 2 B-0215 Silver Cyanide 2 B-0216 Sodium Cyanide 2 C-0202 Remaining Solution with pH less than 2.0 21 D-1502 Remaining Solution with pH less than 12.5 17 D-1503 Remaining Solution with pH greater than 2.0 16 D-2507 Non-PCB Liquids 47 D-2527 Other Mixed Metal Scraps for Physical Treatment 56 D-2601 Waste Cable (after physical treatment) 59 D-2612 Waste Metals for Electroplating 44 D-2623 Waste Lead Frame (containing gold, silver or palladium) 31 D-2624 Spent Catalyst (containing precious metal) 23 D-2625 Ion-exchange Resin (containing precious metal) 26
D-2626 Catalytic Converters for Motors 21 D-2627 Other Mixed Metal Scraps for Chemical Treatment (thermal treatment excluded) 15 E-0213 Waste Plastics from Metal Plating 27 E-0214 Waste Computers (other than waste-good and -container category) 34 E-0216 Waste Telephone Exchange 46 E-0217 Waste Electronics Parts and Components, Substandard Items, and Defective 43 Items E-0218 Waste Optoelectronics Parts and Components, Substandard Items, and 43 Defective Items E-0220 Waste Communication Apparatus (machinery excluded) 48 E-0221 Printed Circuit Boards Waste, Powder, and Scraps Containing Metal 41 E-0222 Waste Printed Circuit Boards Containing Components 40 E-0301 Light Emitting Diode Waste, Powder, and Scraps 18
Appendix 18: Numbers of Electronics Companies
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Semi-conductors 644 616 584 569 540 519 498 489 478 475 468 446 Manufacturing Electronic Passive Devices 416 407 397 381 370 353 346 334 326 317 307 301 Manufacturing Bare Printed Circuit Boards 304 297 282 255 252 252 303 300 307 296 297 291 Manufacturing Optoelectronic Materials and 100 93 113 109 109 110 113 119 118 Components Manufacturing Other Electronic Parts and 2,622 2,771 2,947 3,172 3,307 3,568 4,086 4,269 4,474 4,612 4,672 4,660 Components Manufacturing
Appendix 19: Revenue of Electronics Industry
(Unit: NT$ 2010 2011 2012 2013 2014 2015 thousand) Semi-conductors 1,470,757,768 1,349,947,435 1,327,712,851 1,516,353,289 1,746,333,862 1,817,406,612 Manufacturing Electronic Passive 132,961,375 127,451,028 113,206,564 101,457,651 102,557,953 104,229,206 Devices Manufacturing Bare Printed 102,268,686 106,787,156 99,341,840 99,066,575 104,332,349 90,800,834 Circuit Boards Manufacturing Optoelectronic 660,131,315 528,858,643 675,274,349 414,210,094 372,457,330 342,834,718 Materials and Components Manufacturing Other Electronic 948,871,620 966,167,966 1,024,922,34 1,186,500,490 1,180,370,792 1,107,206,502 Parts and Components Manufacturing
2005 2006 2007 2008 2009 Semi-conductors 1,138,727,757 1,355,956,604 1,366,504,977 1,295,146,367 1,130,227,629 Manufacturing Electronic Passive 98,797,192 104,552,451 98,648,580 116,285,742 109,146,503 Devices Manufacturing
Bare Printed 85,606,460 109,918,447 106,936,330 86,654,518 70,754,876 Circuit Boards Manufacturing Optoelectronic 687,147,253 514,543,270 Materials and Components Manufacturing Other Electronic 1,018,096,438 1,155,262,661 1,465,664,181 792,953,918 689,898,921 Parts and Components Manufacturing
Appendix 20: World PCB Industry Revenue
(Unit: 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E US$ mn) Revenue 52,468 55,409 55,039 56,151 57,437 55,325 52,922 54,503 56,675 58,731 60,988 YoY 27.30% 5.60% -0.70% 2.00% 2.30% -3.70% -4.30% 3.00% 4.00% 3.60% 3.80%
Appendix 21: World IC Industry Revenue
(Unit: 2010 2011 2012 2013 2014 2015 2016(E) 2017(E) 2018(E) 2019(E) US100 mn) Revenue 301.5 307.9 299.8 315.3 340.3 333.8 340.1 358.4 370 388.5
Appendix 22: Grade A Disposal Organizations Capacity Category
1000- 1000+ 2000+ 3000+
Number of Grade A Waste Disposal Organizations 28 45 24 8
Appendix 23: Grade A Disposal Organizations Capacity Category
Unit: mn Smartphone Feature Tablet Notebook Desktop Server Wearable Video Digital still Automotive pieces phone Device game camera 2015 1,438 543 207 163 113 10 79 34 40 88 2016 1,483 468 195 152 103 10 102 35 34 90
Appendix 24: Waste Items Allowed to Import After Relax Regulation
E-0201 Scrap Wire and Cable E-0202 Oil Containing Waste Cable E-0207 Oil Containing less than 50 ppm Polychlorinated Biphenyl Waste Transformers and Waste Capacitors E-0213 Waste Plastics from Metal Plating E-0214 Waste Computers (other than waste-good and -container category) E-0215 Waste Home Appliance E-0216 Waste Telephone Exchange E-0217 Waste Electronics Parts and Components, Substandard Items, and Defective Items E-0218 Waste Optoelectronics Parts and Components, Substandard Items, and Defective Items E-0220 Waste Communication Apparatus (machinery excluded) E-0221 Printed Circuit Boards Waste, Powder, and Scraps Containing Metal E-0222 Waste Printed Circuit Boards Containing Components
Appendix 25: Grade A Disposal Organizations Capacity Category
Year GDP per capita (current US$) GDP per capita grow rate
1960 3,007.123 1961 3,066.563 0.019766 1962 3,243.843 0.057811 1963 3,374.515 0.040283 1964 3,573.941 0.059098 1965 3,827.527 0.070954 1966 4,146.317 0.083289 1967 4,336.427 0.04585 1968 4,695.923 0.082902 1969 5,032.145 0.071599 1970 5,246.884 0.042673 1971 5,623.444 0.071768 1972 6,109.926 0.08651 1973 6,741.332 0.103341 1974 7,242.441 0.074334 1975 7,820.065 0.079755 1976 8,611.402 0.101193 1977 9,471.306 0.099856 1978 10,587.29 0.117827 1979 11,695.55 0.104679 1980 12,597.67 0.077133 1981 13,993.17 0.110774 1982 14,438.98 0.031859 1983 15,561.43 0.077738 1984 17,134.29 0.101074 1985 18,269.42 0.066249 1986 19,115.05 0.046287 1987 20,100.86 0.051572 1988 21,483.23 0.068772 1989 22,922.44 0.066992 1990 23,954.48 0.045023 1991 24,405.16 0.018814 1992 25,492.95 0.044572 1993 26,464.85 0.038124 1994 27,776.64 0.049567 1995 28,782.18 0.036201 1996 30,068.23 0.044682 1997 31,572.69 0.050035 1998 32,949.2 0.043598 1999 34,620.93 0.050737 2000 36,449.86 0.052827 2001 37,273.62 0.0226 2002 38,166.04 0.023942
2003 39677.2 0.039594 2004 41,921.81 0.056572 2005 44,307.92 0.056918 2006 46,437.07 0.048053 2007 48,061.54 0.034982 2008 48,401.43 0.007072 2009 47,001.56 -0.02892 2010 48,374.09 0.029202 2011 49,781.8 0.029101 2012 51,433.05 0.03317 2013 52,749.91 0.025603 2014 54,539.67 0.033929 2015 56,115.72 0.028897 2016F 57,294 0.020997
Appendix 26: US Unemployment Rate
(Unit: %) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2006 4.7 4.8 4.7 4.7 4.6 4.6 4.7 4.7 4.5 4.4 4.5 4.4 2007 4.6 4.5 4.4 4.5 4.4 4.6 4.7 4.6 4.7 4.7 4.7 5 2008 5 4.9 5.1 5 5.4 5.6 5.8 6.1 6.1 6.5 6.8 7.3 2009 7.8 8.3 8.7 9 9.4 9.5 9.5 9.6 9.8 10 9.9 9.9 2010 9.8 9.8 9.9 9.9 9.6 9.4 9.4 9.5 9.5 9.4 9.8 9.3 2011 9.1 9 9 9.1 9 9.1 9 9 9 8.8 8.6 8.5 2012 8.3 8.3 8.2 8.2 8.2 8.2 8.2 8.1 7.8 7.8 7.7 7.9 2013 8 7.7 7.5 7.6 7.5 7.5 7.3 7.3 7.2 7.2 6.9 6.7 2014 6.6 6.7 6.7 6.2 6.3 6.1 6.2 6.2 5.9 5.7 5.8 5.6 2015 5.7 5.5 5.4 5.4 5.5 5.3 5.2 5.1 5 5 5 5 2016 4.9 4.9 5 5 4.7 4.9 4.9 4.9 4.9 4.8 4.6 4.7
Appendix 27: DCF assumptions and calculations
DCF Valuation 2016E 2017E 2018E 2019E 2020E 2021E TV NT$, mn Revenue 2421.0 5190.0 6519.8 7093.7 7062.7 6959.6 Less: COGS 2324.1 5056.5 6329.3 6858.0 6796.3 6662.3 Gross Profit 96.9 133.5 190.5 235.7 266.4 297.3 Less: OPEX 105.5 173.9 218.5 237.7 219.6 216.4 Operating Income -8.7 -40.4 -28.0 -2.1 46.8 80.9 Less: Tax Expense 0.0 -5.3 -4.1 -1.8 6.1 13.5 After-tax Operating Income -8.6 -35.1 -23.8 -0.3 40.7 67.5 Add: Depreciation & Amortization 33.4 88.4 88.4 88.4 88.4 88.4 Less: Change in NWC -122.3 1205.6 -104.0 -106.0 -217.3 -33.2 Operating Cash Flow 147.1 -1152.3 168.5 194.2 346.4 189.1 Less: CAPEX 44.4 77.8 97.8 106.4 105.9 104.4 FCFF 102.7 -1230.1 70.7 87.8 240.4 84.7 3368.6 Discount Period 0 1 2 3 4 5 5 PV of FCFF and Terminal Value (TV) 102.7 -1176.5 64.7 76.8 201.1 67.7 2695.0
Stock Price Calculation
NT$, mn EV 2031.5 Add: Cash and Equ. 521.1 Less: Debt 1391.4 Less: Pref. Stock 0.0 Less: Minority Interest 0.0 Equity Value 1161.3 Common Shares Outstanding 103.2 Stock Price (NT$) 11.3
Appendix 28: Gold price and Super Dragon’s ASP forecasts
Spot Q1 17 Q2 17 Q3 17 Q4 17 2017 2018 2019 2020 2021 Gold NT$/t kg 1074.8 1067.9 1073.5 1077.7 1081.4 1075.1 1110.2 1135.5 1156.1 1177.1 Forecast (Median) 1082.8 1116.3 1116.3 1138.6 1127.9 1190.7 1179.3 1179.3 1179.3 Diff (Median - Curr) 14.9 42.8 38.5 57.2 52.7 80.5 43.9 23.3 2.3 Silver NT$/t kg 15.1 15.0 15.1 15.2 15.3 15.1 15.7 16.0 16.3 16.7 Forecast (Median) 15.4 15.6 15.6 15.9 16.3 17.5 17.7 18.0 18.3 Diff (Median - Curr) 0.4 0.5 0.4 0.6 1.2 1.9 1.7 1.7 1.6 Super Dragon ASP NT$/t kg 962.8 956.6 961.6 965.5 968.7 963.1 994.5 1017.2 1035.7 1054.5 Source: Bloomberg, Team Estimates
Appendix 29: Waste Disposal Industry Among the listed peers in waste disposal industry, we regard only Jiin Yeeh Ding (8390 TT), a Taiwan-based recycling company located in Hsin-chu specializing industrial E-waste recycling and precious metal refining, as a similar peer to Super Dragon. The waste items it disposes of highly overlap with what Super Dragon does, which makes these two companies wild competitors. In 2015, sales of copper and precious metal contribute to 52% and 29% of revenue, respectively, which is largely different from Super Dragon (precious metal: 97%). The introduction and comparison among the industry players are as following tables.
Ticker Company Name Company Discription 9955 TT Super Dragon An e-waste disposal company, whose main products are gold and gold potassium cyanide. 8390 TT Jiin Yeeh Ding An e-waste disposal company, whose main products are copper and preciosu metal. 1785 TT Solar Applied Materials Mainly focuses on sales of precious metal and applied material. 6803 TT KD Holdings Corp Mainly focuses on incinerators operation, waste disposal, and sales of electricity. 8341 TT Sunny Friend Environmental Mainly focuses on biomedical and healthcare waste and industrial waste. 8422 TT Cleanway Mainly focuses on waste bury, wate solidification, and plants remediation.
Ticker Company Name Market Cap (NT$,mn) P/B (x) GPM (%) NPM (%) Debt/Assets (%) 9955 TT Super Dragon 1677.13 0.77 2.2 -3.31 20.02 8390 TT Jiin Yee Ding 5610.59 0.79 5.2 -3.01 34.24 1785 TT Solar Applied Materials 1367.54 1.5 7 -5.27 49.05 6803 TT KD Holdings Corp 11526.54 2.56 28.8 16.85 26.73 8341 TT Sunny Friend Environmental 13101.25 5.95 58.1 31.61 4.76 8422 TT Cleanway 17694.30 3.53 73.5 44.92 7.69 Average 8496.23 2.52 29.13 13.63 23.75 *data as of 3Q16
Appendix 30: Stock price movement
160
Subprime mortgage 140 crisis shattered global market; Super Dragon fails to IPO 120
Launched the Bubble 100 Wrap Business; Management team guided that orders from The collapse of Foxconn and Acer Lehman’s Brothers; 80 Stock price tumbled Suzhou Plant was able to Interest rate hike Recovery of US 60 acknowledge in order to curb economy, gold orders; Begin the housing price fell the Silver Target bubble; gold Business price Waste supply 40 plummeted dropped due to an Gross Margin ComparisonWeak USD (%) increasing offshore boosted manufacturing rate gold price 20 20 15 0 10 5 0 -5 2009 2010 2011 2012 2013 2014 2015
9955 TT 8390 TT
Appendix 31: Five Force Model
Competition in the industry: Intensive Competition for limited local waste supply Facing the fierce challenge of diminishing waste supply and increasing numbers of waste disposal company, with a similar disposal process compared to competitors, Super Dragon, hence, is at the same time confronting a strict waste import regulation. Therefore, we give 1 points in “Competition in the Industry” of Super Dragon.
Threat of substitute products: Gold could be offered in different forms from various suppliers Though gold could be provided from a wide variety of suppliers (Waste Disposal Companies, trading exchange, mineral gold, gold ETF, etc.) and is traded in terms of purity and international price, we believe that because Super Dragon cannot directly sell its gold to others, the company has to pay extra margin to trading exchange dealers and lessen the profits, which results in 2 points in “Threat of Substitute products”.
Threat of new entrants: Strict application process offsets Entering competitors Although the barrier to waste disposal applicants is easy to cross, according to Environmental Protection Administration, either Grade A or B certificate would have to take at least 1-2 years to run the application process. However, concerning that once an organization have that certificate, it could start the waste disposal business without technology threshold, and so we estimate 3 points in “Threat of New Entrants”.
Bargaining power of customers: Gold is traded at international price to local channels while mark-up could be charged by dealers Super Dragon could sell its gold to either (1) local channels (e.g., Silver Chamber) or (2) trading exchange dealers. As for local channels, customers have no bargaining power since, as aforementioned, gold is traded at international price. And in terms of trading exchange dealers, they could charge service fee. “Bargaining Power of Customers” is expected to remain; hence 3 points is given.
Bargaining power of suppliers: Paying instead of charging due to a Price War and transparency of gold content The company’s long-term partnership, as we assume, is Win Semiconductor Corp., and as for gold potassium cyanide, the supplier may be Bank of Taiwan, both are stable supplier. Nevertheless, the industry is facing intense competition and a gradual transparency of gold content in the waste supply, instead of charging service fee from electronic companies, waste disposal companies often have to pay for the E-waste from suppliers; hence 2 points was given to “Bargaining Power of Suppliers”.
Appendix 32: Scenario analysis We conducted a scenario analysis to prove our accuracy on the sell recommendation, and to see how the stock price fluctuate as the assumptions change. Our two variances are the gross margin and the gold price. The gross margin implies the downtrend of E-waste amount, but the decreasing in gold content of E-waste, and the fluctuation of the gold price will also impact its profit. In bull case we suggest NT$16.09, the downside 3.1% from the current price, and the bear case we suggest NT$11.30, the downside 31.9% from the current price.
Case Factors Book value per share P/B Target Price
Gold price*105% 20.77 0.75 15.58 Bull Gross margin=4% 21.45 0.75 16.09
Base 20.78 0.65 13.51
Gold price*95% 20.80 0.55 11.44 Bear Gross margin=2% 20.55 0.55 11.30
3.1% downside at Bull Case
31.9% downside at Bear Case
Case Factors Book value per share P/B Target Price
Gold price*105% 20.77 0.75 15.58 Bull Gross margin=4% 21.45 0.75 16.09
Base 20.78 0.65 13.51
Gold price*95% 20.80 0.55 11.44 Bear Gross margin=2% 20.55 0.55 11.30
3.1% downside at Bull Case
31.9% downside at Bear Case
Appendix 33: Sensitivity Analysis for DCF valuation method
We also conduct a sensitivity analysis for our DCF valuation method. We can see that the intrinsic value are mostly below current price of NT$16.6, which more supports our recommendation of SELL rating.
Sensitivity Analysis: Stock Price (DCF) Terminal Growth Rate 11.3 1.5% 1.8% 2.0% 2.3% 2.5% 4.0% 12.5 15.6 19.5 24.6 31.2 4.2% 10.3 12.9 16.1 20.2 25.4
WACC 4.6% 6.9 8.9 11.3 14.2 17.8 4.8% 5.1 6.8 8.8 11.2 14.1 5.0% 3.8 5.2 7.0 9.0 11.5
Appendix 34: EV/GCI Multiple EV/GCI (enterprise value/gross cash invested) is a valuation multiple used to compare a company's book value of its assets to their current market value. The ratio is similar to P/B ratio and is calculated on an EV-basis, considering both debt and stock holders.
CROCI Cash return on cash invested, similar to ROE ratio, is an cash basis and EV basis, taking into account all the company’s security-holders DACF CROCI = GCI
DACF Debt Adjusted Cash Flow represents the after tax operating cash flow, ignoring working capital and excluding financial expenses after tax. Operating CF - Working Capital + After Tax Interest and Lease Debt Adjusted Cash Flow
GCI Gross Cash Invested is the amount a company invests in business assets that does not account for any depreciation.
Gross tangible and intangible assets + Investments associates + Working Capital Gross Cash Invested
Appendix 35: R&D Expense and R&D/Revenue
12.0 0.18% 10.1 0.16% 10.0 0.17% 0.14% 7.2 0.15% 8.0 0.14% 0.12% 0.09% 0.08% 0.10% 6.0 0.07% 4.0 4.1 0.08% 3.6 0.10% 3.6 0.08% 4.0 3.1 0.06% 2.5 2.1 2.4 0.04% 2.0 0.05% 0.04% 0.02%
0.0 0.00% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
R&D Expense
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 Taiwan, CFA Institute or the CFA Institute Research Challenge with regard to this company’s stock.
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