Deutsche Bank Markets Research
Asia Industry Date ASEAN Thailand Industrial Estates 05 January 2012 Property Coverage Change
Nash Shivaruchiwong Tisco Securities Co, Ltd Auto-fuelled growth Research Analyst (+66) 2 633 6469
Initiating coverage with Overweight rating: HEMRAJ is our top pick
We initiate coverage of the industrial estates sector with an Overweight rating. Although the sector was badly hurt by floods in 4Q11, we view this as a short- Top Picks term event that will have little impact on long-term growth. Hence, we expect Hemaraj Development Buy continued investment by Japanese automakers which are shifting production (HEMR.BK),THB2.24 to Thailand to take advantage of lower costs. Our top pick is HEMRAJ due to Ticon Industrial Connection Buy its diversified income stream and the start of profit contributions from its 35%- (TICN.BK),THB10.90 owned Gheco-One power plant in early 2012. We also have Buy ratings on Amata Corp PCL (AMAT.BK),THB13.00 Buy AMATA and TICON. Companies Featured Benefiting from increased Japanese investment in auto production Hemaraj Development Buy Major Japanese manufacturers forced to suspend production because of (HEMR.BK),THB2.24 flooding said they are unlikely to relocate for two major reasons: 1) the cost of 2010A 2011E 2012E relocation would outweigh the cost of flood prevention measures at their P/E(x) 11.0 51.6 12.3 existing facilities; and 2) supply chains in Thailand, particularly in the auto EV/EBITDA(x) 11.6 19.8 14.4 industry, have been developed over decades and are not easy to quickly Price/book(x) 2.0 2.4 2.3 replace. Also the two largest listed industrial estate operators, HEMRAJ and Ticon Industrial Connection Buy AMATA, are based on the Eastern Seaboard. This area is well above mean sea (TICN.BK),THB10.90 levels and was not affected by flooding. 2010A 2011E 2012E P/E(x) 12.8 19.6 12.0 We expect earnings recovery for industrial estate operators in 2012 EV/EBITDA(x) 4.6 6.9 4.9 In addition to the adverse impact of floods, the sector has been hurt by a Price/book(x) 1.7 1.5 1.7 slowdown in FDI due to the tsunami and earthquake in Japan, political Amata Corp PCL (AMAT.BK),THB13.00 Buy uncertainty ahead of Thailand’s July 3 general election and accounting 2010A 2011E 2012E changes (from % of construction completed to actual transfers). This should P/E (x) 11.9 18.6 11.4 result in negative earnings growth for HEMRAJ, AMATA and TICON in 2011. EV/EBITDA (x) 8.7 10.6 7.6 However, we expect a recovery in FDI in 2012, aided by government-led post- Price/book (x) 2.8 2.5 2.3 flood reconstruction programs. Hence, we forecast an earnings recovery next year for HEMRAJ, AMATA and TICON, with projected EPS growth of 319%, 64% and 50% respectively. Valuations/Risks For HEMRAJ, we derive a TP of Bt2.80 based on the SOTP method. We valued its recurring operations at Bt1.85/shr and GHECO-One at Bt0.93/shr. For AMATA, our TP of Bt18 is based on a 5-year historic PER of 16x and a base case of land sales revenue recognition of 1,000 rai in 2012F. For TICON, our TP of Bt13.40 is based on the DCF method and assumes a risk-free rate of 2.1%, market risk premium of 7.1%, beta of 0.9x and WACC of 7.1% (9% retention rate and 17% long term RoE calculated from 4-year average). Key risks include a sharp downturn in the global economy, renewed political uncertainty, regulatory changes, prolonged flooding and longer than expected delays in the transfer of land title deeds.
______Deutsche Bank AG/Hong Kong This research has been prepared in association with Tisco Securities Co. Ltd and has been issued within the last 24 hours, unless otherwise indicated, directly by Tisco Research. The opinions contained in this report are those of Tisco Securities Co. Ltd. All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MICA(P) 146/04/2011.
Deutsche Bank 05 January 2012 Property Industrial Estates
Markets Research
Table Of Contents
Investment thesis ...... 3 Valuation and risks ...... 5 Industry Structure ...... 9 FDI poised for a quick recovery ...... 17 Key competitive advantages ...... 21 Auto sector is the main driver of industrial land sales ...... 26 Flooding in Thailand ...... 30 Earnings forecasts ...... 32 Hemaraj Development ...... 35 Amata Corp PCL ...... 44 Ticon Industrial Connection ...... 54
Page 2 Deutsche Bank AG/Hong Kong
Deutsche Bank 05 January 2012 Property Industrial Estates
Markets Research
Investment thesis
Initiating coverage of industrial estate sector with Overweight rating We initiate coverage of the industrial estates sector with an Overweight rating. Our top pick is HEMRAJ due its diversified income stream, the start of contributions from its 35%-owned Gheco-One power plant early next year and our EPS growth estimate of 319% in 2012. We also have Buy ratings on AMATA and TICON based on a recovery in EPS growth of 64% and 50% respectively in 2012F. Note that on our estimates HEMRAJ offers lower upside potential than AMATA, but has limited downside and is supported by its diversification into the utilities business.
Although the industrial estates sector was badly hurt by Thailand’s worst flooding in more than 50 years, we believe this is a short-term phenomenon that will have little impact on long-term earnings growth. Major Japanese manufacturers forced to suspend production because of flooding have said they are unlikely to relocate for two major reasons: 1) the cost of relocation would outweigh the cost of flood prevention measures at their existing facilities; and 2) supply chains in Thailand, particularly in the auto industry, have been developed over decades and are not easy to quickly replace. Note that the two largest industrial estate operators on the SET, HEMRAJ and AMATA, are based on the Eastern Seaboard. This area is well above mean sea levels and was not affected by flooding.
We expect industrial land sales to accelerate in 2012 based on a recovery in the auto industry following supply chain disruptions caused by the Japan disaster last March and floods in Thailand in 4Q11. In addition to damage caused by the earthquake and tsunami, we believe Japanese manufacturers have a greater incentive to relocate to overseas production bases such as Thailand due to: 1) increased taxes to pay for earthquake damage; 2) appreciation of the yen; and 3) electricity shortages as a result of the closure of quake-damaged power stations.
The auto sector is the main driver of domestic industrial land sales and prospects for this industry look bright in Thailand, particularly given automakers’ plans to boost production of more fuel-efficient vehicles. The Thai Automotive Institute (TAI) forecasts production of vehicles to reach 2.5m units by 2015, with 60% destined for the export market. We estimate that tier 1 auto producers would need 2,000 rai of new land in order to expand capacity to meet the TAI’s target of an additional 900,000 units.
Combined land sales for HEMRAJ and AMATA accounted for 62% of the market in 2010. For 2011, HEMRAJ and AMATA are maintaining their land presales target of 1,700 rai and 1,500 rai respectively. We are more conservative and forecast land presales for HEMRAJ at 1,500 rai and AMATA at 1,350 rai.
Deutsche Bank AG/Hong Kong Page 3
Deutsche Bank 05 January 2012 Property Industrial Estates
Markets Research
Valuation
HEMRAJ: Our TP of Bt2.80 is based on the SOTP method whereby we value HEMRAJ’s recurring operations at Bt1.85/shr and GHECO-One at Bt0.93/shr.
AMATA: Our TP of Bt18 is based on 5yr historic PER of 17x and a base case of land sales recognition of 1,000 rai for revenue in 2012F.
TICON: Our TP of Bt13.40 is based on the DCF method and assumes a risk-free rate of 2.1%, market risk premium of 7.1%, beta of 0.9x, WACC of 7.1% and terminal growth of 1.5% (9% retention rate and 17% long term RoE calculated from average of 4 years).
Risks Key risks to our forecasts include a sharp downturn in the global economy, FX fluctuations, renewed political uncertainty, regulatory changes and longer than expected delays in the transfer of land title deeds.
Figure 1: Stock profile summary
HEMRAJ AMATA TICON Company description Hemaraj Land and Development Plc is Amata Corporation Public Company Ticon Industrial Connection builds, the developer and operator of six Limited develops industrial estates rents and sells factories to industrial estates located primarily primarily served for manufacturing manufacturers. It bridges the gap along Thailand’s Eastern Seaboard. Its plants and factories. The company between industrial estates that provide business activities include provision of acquires land and develops essential plots of land and utility services, and infrastructure services including the infrastructure and facilities ready for the turnkey factories and facilities that supply of water , electricity supply, gas industrialized operations. It has foreign investors need to start pipelines, and residential property projects in Vietnam. operations in Thailand. development.
Market cap (Bt, bn) 680 445 286 Share price (Bt) 2.24 13.0 10.9 12 month chg (%) 25% -13% -19% Target price (Bt) 2.8 18 13.4 Upside (%) 24% 38% 23% Valuation method SOTP PER DCF Land available (rai) 7,736 8,000 N.A. Market share 2010 (%) 26% 36% N.A. Revenue Breakdown Landsales 37% 57% 0% Utilities 46% 22% 2% Rental 0% 12% 36% Sales of assets 12% 5% 54% Others 5% 3% 8% Customers Breakdown - Sector Automotive 28% 36% 23% Steel / Metal 33% 9% N.A. Electronics 11% 7% 46% Chemical 7% 11% 2% Consumer goods 11% 15% 3% Food 4% N.A. 9% Others 7% 22% 17% Customers Breakdown - Countries Japan 33% 46% 55% Europe 13% 8% 14% Thai 21% 14% 9% US 11% 7% N.A. Taiwan 4% 5% N.A. Others 18% 20% 22% Source: Company data, Deutsche Bank, CBRE, SET
Page 4 Deutsche Bank AG/Hong Kong
Deutsche Bank 05 January 2012 Property Industrial Estates
Markets Research
Valuation and risks
Due to their dissimilar business structures, we have valued the three companies by using different valuation methods. We value HEMRAJ based on the sum-of-the-parts method to reflect its diversified business structure. For HEMRAJ’s land sales business, we used the PER method while valuing its utilities operations on a DCF basis. For AMATA we used the stock’s historical average PER to reflect the sporadic nature of land sales. We valued TICON on a DCF basis as it generates steady cash flow from its rentals of factories and warehouses.
Our top pick is HEMRAJ due to its diversified income stream, the start of earnings contributions from its 35%-owned Gheco-One power plant in early 2012 and potential upside of 24% to our TP of Bt2.80. We also have Buy ratings on AMATA and TICON given their encouraging outlook and significant upside to our target prices.
HEMRAJ – Sum-of-the-parts Our TP of Bt2.80 is based on the SOTP method whereby we valued HEMRAJ’s recurring operations at Bt1.8/shr and GHECO-One at Bt0.93/shr.
Land sales – Bt0.74/share (26% of TP): This is proxied from the 16x average cross-cycle multiple for AMATA which we consider to be a pure land sales business.
Utilities and services – Bt1.16/share (41% of TP); For utilities and rental income from GHECO-One, we used the DCF approach. Our cash inflow estimates assume that all HEMRAJ’s depreciation and amortization expenses are related to this segment as developed properties and are ready for sale with fast turnover and negligible depreciation.
GHECO-One – Bt0.93/share (33% of TP); We separately valued the dividend stream from GHECO-One Co. Ltd. given the accounting treatment as an investment in an associated company and HEMRAJ’s delegation of management. HEMRAJ owns 35% of the power plant project, with the remainder owned by GDF Suez’s Thai subsidiary, Glow Energy.
Figure 2: SOTP Statement Value % Assumptions PER Equivalent Industrial land 0.74 26 16x 2012F PER 16x 2012F PER Utilities 1.16 41 Company-wide D/E = 0.9x, CoD ~ 25x 2012F PER = 5.6%, WACC = 8.1%, terminal growth rate 3% GHECO-One 0.93 33 35% stake, 6% project finance ~ 13x 2013F PER rate (inclusive of hedging costs), 65:35 D/E ratio, Bt13bn equity (Bt6.5bn injection each in 2011 and 2012, PV(FCFE) for HEMRAJ using WACC of 9% Rounding (0.03) Total 2.8 100 Source: Deutsche Bank
AMATA – Historical PER Our TP of Bt18 for AMATA is based on its 5-year historic PER of 16x and a base case of land sales recognition of 1,350 rai in 2012F. AMATA has tended to trade in a PER range of 10x-18x over the past five years. The share price normally reacts to any new land
Deutsche Bank AG/Hong Kong Page 5
Deutsche Bank 05 January 2012 Property Industrial Estates
Markets Research sales announcement in the market, with AMATA usually reporting strong pre-sales in the second half of the year.
Figure 3: Weekly historic PER – AMATA (X) 35 30 25 +1 std, 22.7 20 Avg, 16.0 15 10 5 -1 std, 9.0 0 Apr-07 Jan-05 Feb-06 Jun-08 Jan-09 Aug-05 Sep-06 Aug-09 Oct-10 Sep-11 Oct-11 Mar-10 Dec-11 Nov-07 May-11
Source: SET
TICON – DCF As TICON generates a large chunk of its income from rentals and regular sales of its investments to its property fund we value the stock on a DCF basis. Our target price of Bt13.40 assumes an Rf of 2.1%, beta of 0.8x, 4.9% market-risk premium, overall WACC of 7.1% and terminal growth of 1.5% (9% retention rate and 17% long-term RoE). We expect TICON to pay a 2012 DPS of Bt1.01, implying a yield of 9.2% at current levels.
Figure 4: DCF - TICON 2011F 2012F 2013F 2014F 2015F 2016F 2017F 2018F
EBIT 973 1,414 1,569 1,694 1,860 1,956 2,045 2,019 Cash tax rate 20% 24% 20% 24% 24% 24% 24% 24% NOPLAT 779 1,076 1,255 1,289 1,413 1,488 1,554 1,536
Δ NOWC 45 38 0 -4 4 -30 4 -13 CAPEX -1,432 -318 -615 -802 -579 -262 -291 -220 Depreciation 295 282 283 287 284 260 237 216 Free cash flow to firm -313 1,078 924 770 1,122 1,457 1,503 1,520
NPV 16,233 Net Debt 5,606 Equity value 10,628 No of Shares 791 Per Share 13.4
Terminal value 19,753 WACC 7.1%
Cost of debt 4.6% Cost of Equity 9% Rf 2.1 Beta 1.0 Risk premium 7.1
Long-term growth 1.5%
Current price 10.9 Target price 13.4 Upside 22.9% Yield 9.2% Total return 32.1%
Long-term ROE 17% Retention rate 9% Source: Deutsche Bank
Page 6 Deutsche Bank AG/Hong Kong
Deutsche Bank 05 January 2012 Property Industrial Estates
Markets Research
RNAV approach We decided against adopting the RNAV valuation approach for two main reasons:
1) Thai accounting standards do not specifically indicate set periods for land revaluations. The book value of land could be revalued over different periods.
2) Large land sales are unpredictable and could involve hefty discounting to land previously sold depending on the size of the deal.
Cheap versus regional peers Below is a table showing relative valuations of listed industrial estate companies in the region;
Figure 5: Peers comparison
Ticker Upside Mkt cap PER (x) EPS grow th (%) ROE (%) PBV (x) EV/EBITDA (x) Div. Yield (%) (%) Recom. (US$, m) 11F 12F 11F 12F 11F 12F 11F 11F 12F 11F HEMRAJ Thailand 24 BUY 680 51.6 12.3 (60.6) 319.0 4.6 18.5 2.4 19.9 14.5 2.3 AMATA Thailand 38 BUY 445 19.6 12.0 (22.2) 63.8 11.9 18.1 2.2 6.9 4.8 4.5 TICON Thailand 23 BUY 286 18.6 11.4 (38.2) 63.4 10.0 16.1 1.3 10.6 7.6 4.4 ROJNA Thailand N.A . N.A . 207 24.5 15.7 (59.1) 44.8 3.2 11.4 1.0 15.0 13.4 5.3 BSDE Indonesia N.A. N.A. 1,855 22.6 16.8 37.4 34.5 10.8 12.6 2.4 14.0 11.4 0.6 LPKR Indonesia N.A. N.A. 1,665 23.5 19.0 7.2 23.7 7.5 8.3 1.6 16.4 17.7 0.9 CTRA Indones ia N.A . N.A . 912 28.9 21.9 41.1 32.2 5.7 6.8 1.6 16.5 11.9 0.6 KIJA Indonesia N.A. HOLD 403 34.3 27.5 N.A. 24.9 4.6 5.5 1.5 9.2 8.0 0.0 KBC Vietnam N.A. N.A. 146 28.9 21.9 N.A. N.A. 5.7 6.8 1.6 16.5 11.9 0.6 SJS V ietnam N.A . N.A . 92 8.7 N.A. (73.2) N.A. 16.0 N.A. 0.8 N.A. N.A. N.A. NTL V ietnam N.A . N.A . 35 2.5 N.A. (46.1) N.A. 18.0 N.A. 0.6 0.2 N.A. 16.9 BCI V ietnam N.A . N.A . 51 3.5 N.A. 8.4 N.A. 17.0 N.A. 0.5 N.A. N.A. 6.8 ULHB Malay s ia 1.7 BUY 3,316 46.7 37.6 (1.6) 24.2 6.6 6.3 2.2 38.7 35.0 0.6 Average 24.2 19.6 (18.8) 70.1 9.3 11.0 1.5 14.9 13.6 3.6 Source: Bloombergฒ Deutsche Bank
Deutsche Bank AG/Hong Kong Page 7
Deutsche Bank 05 January 2012 Property Industrial Estates
Markets Research
Key risk - Company 1. Land sales assumptions: Our land sales assumptions for industrial estates are based on management guidance. We used land sales assumptions as a benchmark to forecast revenue and utilities. 2. Accounting changes: The recent change in accounting standards from % of construction completed to revenue recognition on land transfers could result in weaker than expected transfers. Land transfers generally take 9-12 months but could take longer due to changes in government regulations. 3. Global risk factors: Our model is linked to global economic assumptions. There is downside risk to our forecasts if Europe enters a new recession as a result of its ongoing debt crisis. 4. Exchange rate fluctuations: Payments for land sales are made in Thai baht. However, FX fluctuations could result in delays or slowdown of payments, especially if buyers failed to hedge their positions. Key risk - Industry 1. Processing delays: The transfer of land title deeds is a government-related process and could take longer than expected. Industrial estate developers say that transfers take an average of six to 15 months once the land is developed. 2. Regulatory changes remain a key concern for investors. In 2007, several petrochemical companies were forced to delay the start-up of operations by a few years after inspections revealed high pollution levels at the Map Ta Phut estate. Another risk is changes in foreign ownership levels. 3. Government intervention: Uncertainty over the new government’s populist policies or risks to the government’s stability could result in delays in industrial and purchases. 4. Political uncertainty: Thailand has endured several years of political turbulence that included a military coup in September 2006 and the red shirt riots in May 2010. The landslide win by the Puea Thai Party in the July 2011 general election has helped improve Thailand’s political climate. 5. Competition: There are several industrial estates operating near the estates owned by AMATA, HEMRAJ and TICON. Investors also have the option of locating their own plants outside these estates. 6. Natural disasters: The floods crisis has underlined the vulnerability of large industrial estates to natural disasters. Although the government has promised to spend heavily on flood prevention measures in an effort to restore foreign investor confidence, there is a risk that Thailand could see similar disasters in the future due to global climate change.
Page 8 Deutsche Bank AG/Hong Kong
Deutsche Bank 05 January 2012 Property Industrial Estates
Markets Research
Industry Structure
Key players and market share
There are approximately 50 industrial estates in Thailand with 10 locations supplied by 10 major locations supplied the five industrial developers listed on the SET. Of these companies, HEMRAJ has the by 5 listed developers largest land area of 31k rai followed by AMATA with industrial estates covering a total area of 13k rai. HEMRAJ also has a large land bank with diversified locations.
Figure 6: Major industrial estates in Thailand
Source: Thailand Board of Investment (BOI)
Over the past five years, land presales of HEMRAJ and AMATA accounted for 56% of total industrial land presales made in the market.
Figure 7: Market share based on average land sales over 5 years AMATA Other 30% 28%
ROJNA 16% HEMRAJ 26%
Source: Hemaraj Development
Deutsche Bank AG/Hong Kong Page 9
Deutsche Bank 05 January 2012 Property Industrial Estates
Markets Research
Figure 8: Market share of HEMRAJ and AMATA based on annual land sales
(rai) HEMRAJ (LHS) AMATA (LHS) (%)
2,000 HEMRAJ mkt share (RHS) AMATA mkt share (RHS) 60
1,600 40 1,200
800 20 400
0 0 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10
Source: Hemaraj Development
We expect the market share of HEMRAJ and AMATA to increase based on our view Market share of large players that large manufacturers and suppliers are likely to invest in land provided at large likely to increase industrial estates which are home to many related companies. There are several non- listed industrial estates in Thailand, particularly in the Eastern Seaboard. However, we expect competition to be limited given high entry barrier requirements for new entrants including the huge funds needed for the initial start-up of a site and basic facilities.
Revenue structure Although land sales are the main earnings driver for industrial estate operators, we expect income from investment in utilities (possibility in the form of joint ventures) to play an increasingly important role. From January 2011 companies have been required to book revenue only on transfers (not % of infrastructure works completed). Accounting changes will cause uneven booking of revenue which will result in quarterly earnings volatility (see page 32 for changes in restating of 9M10 financials).
AMATA is more heavily dependent on land sales than HEMRAJ. Land sales account for Land sales account for 64% about 64% of its total revenue, with the remainder coming from utilities (20%), factory of AMATA’s revenue… rentals (10%) and others.
Figure 9: Revenue breakdown – AMATA Bt, bn Land sales Utlities Rental Other 7 6 5 21% 4 20% 15% 19% 25% 3 18% 20% 24% 2 31% 75% 75% 71% 1 61% 52% 47% 64% 57% 62% 0 2006 2007 2008 2009 2010 2011F 2012F 2013F 2014F
Source: Company data, Deutsche Bank
HEMRAJ has a more diversified revenue stream, with land sales only accounting for … while HEMRAJ has a more 35% of its total revenue. The remainder comes from water and electricity utilities and diversified income stream factory leasing (combined 43%), condo sales (12%) and others. We expect the utilities portion to increase to 58% of HEMRAJ’s total revenue by 2014.
Page 10 Deutsche Bank AG/Hong Kong
Deutsche Bank 05 January 2012 Property Industrial Estates
Markets Research
Figure 10: Revenue breakdown – HEMRAJ Bt, bn Land sales Condominium sales Utilities Other 8 7 6 53% 5 20% 4 6% 58% 28% 51% 3 24% 34% 43% 42% 2 45% 63% 42% 62% 1 41% 35% 38% 29% 37% 0 26% 30% 2006 2007 2008 2009 2010 2011F 2012F 2013F 2014F
Source: Company data, Deutsche Bank
TICON focuses on factory and warehouse rentals which account for 29% of its total TICON relies on rental income sales. A large portion of its income is generated from sales of its assets to its two from factories and property funds. warehouses
Figure 11: Revenue breakdown – TICON Bt, bn Rental and Service Sale of assets Utility and Construction Other 4
3
2 64% 73% 68% 67% 66% 74% 62% 65% 72% 1 29% 21% 21% 24% 33% 29% 22% 27% 28% 0 2006 2007 2008 2009 2010 2011F 2012F 2013F 2014F
Source: Company data, Deutsche Bank
Land presales analysis – HEMRAJ, AMATA
Over the past five years land presales in the second half of the year have been stronger AMATA normally records than 1H. This is especially true for AMATA which has recorded better 2H land sales in stronger land presales in 2H each year since 2006. We expect a similar trend for AMATA in 2011 given that management maintains its 2011 target of 1,500 rai. YTD presales were 954 rai (land sales were only 434 rai in 1H11). HEMRAJ also maintains its target of 1,700 rai (vs. 1,400 rai previously). HEMRAJ recorded presales of 1,212 rai in 9M11(1H presales of 769 rai). For 2011, we forecast land presales for HEMRAJ at 1,500 rai and AMATA at 1,350 rai. However, we do not anticipate land sales in 2H11 to be booked in 2011 as title deed transfers could take longer than expected.
Deutsche Bank AG/Hong Kong Page 11
Deutsche Bank 05 January 2012 Property Industrial Estates
Markets Research
Figure 12: Land sales – half yearly Rai AMATA HEMRAJ 1,600 1,400 1,200 1,000 800 600 400 200 0 1H06 2H06 1H07 2H07 1H08 2H08 1H09 2H09 1H10 2H10 1H11 2H11F
Source: Company data, Deutsche Bank
Of HEMRAJ’s total land sales in 2010, 35% of customers were from the automotive Auto industry is major part of industry, 11% from chemicals and petrochemicals and 9% each from building materials HEMRAJ’s client base…. and commodities i.e. steel, metal and plastic. About 33% of HEMRAJ’s client base is Japanese followed by Thais (21%) and Europeans (13%).
Figure 13: HEMRAJ – Land sales by industry Figure 14: HEMRAJ – Nationality of client base
South Taiwan Others Electronics Korea Logistics 4% 10% Japan 7% Automotive 2% 3% 33% 35% SEA Consumer 6% 15%
Building US Material 11% 9% Others Steel/ Europe Thai 11% Chemical / Metal / Petrochem Plastic 13% 21% 11% 9% Source: Company data, Deutsche Bank Source: Company data, DB TISCO research
Of AMATA’s land sales in 2010, 32% came from the automotive industry with 28% from AMATA also targets Japanese commodities and 11% from the electronics industry. AMATA’s clients are mainly auto companies Japanese (46%) followed by Thais (14%) and Europeans (8%).
Page 12 Deutsche Bank AG/Hong Kong
Deutsche Bank 05 January 2012 Property Industrial Estates
Markets Research
Figure 15: AMATA – Land sales by industry Figure 16: AMATA – – Nationality of client base
Chemical South Others 9% Service Taiwan Korea and Infra 5% 9% Food Automotive 5% 9% 2% 32% SEA Japan Consumer 6% 46% goods, US Health 7% 9% Steel/ Electronics Europe Metal / Thai 11% Plastic 8% 14% 28% Source: Company data, Deutsche Bank Source: Company data, Deutsche Bank
Land sales at AMATA’s industrial estate in Vietnam contribute 10% of the company’s 10% of AMATA’s revenue total revenue and 20% to EPS (tax-free). Land sales income for its Vietnamese comes from Vietnam estate subsidiary is received in US$ but infrastructure development and labour are paid in dong. AMATA has remaining inventory of 160 hectares, with 1,500 hectares under negotiation. Customers at its Vietnam estate are mainly engaged in production of labour-intensive goods (textiles and food), cosmetics and household products.
Deutsche Bank AG/Hong Kong Page 13
Deutsche Bank 05 January 2012 Property Industrial Estates
Markets Research
Factory, warehouse leases – TICON
TICON operates ready-built assets (factories and warehouses) and leases them to Rental demand expected to manufacturers. The company does not restrict itself to any specific estates, which decline in 2011 due to Japan allows TICON to diversify to any existing estates where it sees demand. We anticipate disaster and floods in strong demand for rental factories in the near future and forecast rental income to grow Thailand by 15% p.a. after 2012. However, we expect TICON’s revenue to fall by 33% in 2011 due to a drop in rental demand and fewer sales to its property fund. This is mainly the result of delays in leases by Japanese companies following the earthquake and tsunami last March and floods in Thailand during 4Q11.
Figure 17: Rental and service income Bt, m % Rental and service income (LHS) Growth % (RHS) 1,200 20
1,000 10 800
600 0
400 (10) 200
0 (20) 2007 2008 2009 2010 2011F 2012F 2013F 2014F
Source: Company data, Deutsche Bank
About 46% of TICON’s factory lease portfolio comes from the electronics-related Nearly half of TICON’s segment followed by automotive (23%) and food (9%). Japanese make up the largest factories are leased by portion of clients (55%) followed by clients from Europe (14%) and Singapore (8%). electronics firms
Figure 18: TICON factory sales by industry Figure 19: TICON factory sales by nationality
Others Others Canada Plastic 17% Electronics 7% 7% 2% / Electrical 46% Singapore Logistics 8% 3% Japan Thai Food 55% 9% 9%
Europe Automotive 14% 23%
Source: Company data, Deutsche Bank Source: Company data, Deutsche Bank
For TICON’s warehousing business, 33% of its client base is Japanese. Most of the Japanese are also major warehouses are custom-built, unlike the factories which are ready-built with standard clients for TICON’s sizes. Automotives and electronics are the two major industries that use TICON’s warehouses warehouse leasing services.
Page 14 Deutsche Bank AG/Hong Kong
Deutsche Bank 05 January 2012 Property Industrial Estates
Markets Research
Figure 20: TICON warehouse sales by industry Figure 21: TICON warehouse sales by nationality
Others Others Food 7% Automotive Thailand 10% Japan 7% 33% 8% 33% Consumer Australia 8% 8% Wholesalers / Retailers France 10% 8%
General Netherlands Electronics Germany Logistics 10% 23% 11% 24%
Source: Company data, Deutsche Bank Source: Company data, Deutsche Bank
Deutsche Bank AG/Hong Kong Page 15
Deutsche Bank 05 January 2012 Property Industrial Estates
Markets Research
Utilities and service income
Over the past few years, industrial estate developers have focused on growth in their Increased emphasis on utilities services as a result of their expanded client bases and incremental rises in per utilities and services... unit prices (particularly water). Growth of these businesses is also highly correlated with improving land sales prospects.
Recurring revenue from utilities also helps smooth out fluctuations in land sales income. …leading to smoother HEMRAJ and AMATA predicted that their recurring revenue stream from electricity and income stream water sales would grow significantly over the next few years and eventually become larger than their existing land sales revenue. Note that TICON has the least exposure to utilities and service income.
HEMRAJ has the most diversified income stream and is least affected during HEMRAJ has the most slowdowns in land sales. Thanks to improvements in its recurring income base, diversified revenue base earnings tend to be less volatile than those of competitors. Most of its utilities revenue comes from the Map Ta Phut Industrial Estate which mainly services petrochem firms. With greater capacity, we expect HEMRAJ’s utility income to increase by 43% to Bt2bn in FY12.
Next year its earnings will be boosted by the start-up of the 600MW Gheco One Gheco-One power plant to electricity generating plant, Gheco-One. We expect this project, in which HEMRAJ has a start operations in early 2012 35% stake, to double its revenue next year and make it less susceptible to uneven land sales recognition. HEMRAJ also plans to invest in six Small Power Producer (SPP) projects over the next 3-4 years, with a Capex budget of Bt2.7bn for this program.
Figure 22: GHECO-One project summary Project details Hemaraj commitments (35%) Net output 660 MW Equity injection Agreement with EGAT 25 years 2010 Bt0.3bn 2010 Bt3.3bn Construction start 2008 2011 Bt1.1bn Commercial operation Nov 2011 Total Bt4.7bn
Project cost Bt40bn Funding source Project financing USD460m & Bt9.96bn Existing deposits Bt2.1bn Currency hedging Partial External sources Bt2.6bn Bt270m forex gain for every 1 THB:US$ appreciation Total Bt4.7bn Project financing rate (assumed, inclusive of hedging costs) 6% Equity contribution Bt13.5bn Source: Glow Energy, Deutsche Bank
For AMATA, we expect utilities revenue to increase by 21% to Bt1bn over the next two AMATA aims to expand years. AMATA owns 13.77% of AMATA Power, which has two power plants with total investment in power plants capacity of 330MW. The company plans to participate in bidding for five SPP plants with 120MW each which it aims to operate by 2015.
AMATA also owns 49% in a ready-built factories business. It has total factory rental 49% stake in ready-built space of 86,000/sq.m.and plans to add about 20,000 sq.m. each year. The company factories business plans to sell this business to a property fund eventually.
We expect AMATA’s earnings from utilities to increase by 10% p.a over the next few years, in line with the average increase over the past five years. We also expect its gross margin from utilities to remain stable at 15%, the average margin since 2006.
Page 16 Deutsche Bank AG/Hong Kong
Deutsche Bank 05 January 2012 Property Industrial Estates
Markets Research
FDI poised for a quick recovery
We view 3Q11 decline in FDI as a blip
Approvals for Board of Investment (BoI) privileges provide a indicator for land presales, BoI approvals are an indicator with a correlation of 80% based on the past 10 years. For 11M11 the number of of land presales approved projects rose by 5% YoY to 1,494 but the investment value of these projects fell by 14% YoY to Bt393bn. Most of the companies applying for BoI privileges in 11M11 came from the service, infrastructure and metal processing sectors. Metal processing, which is part of the automotive industry, is likely to see further BoI applications in 2012 due to an increase in auto investments.
Figure 23: BoI applications and land presales
Bt, bn Approved applications (LHS) Total land demand (RHS) rai 800 5,000 700 4,000 600 500 3,000 400 300 2,000 200 1,000 100 0 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Source: Thailand Board of Investment (BOI), CB Richard Ellis
We also expect the value of BoI applications to increase in 4Q11 based on a projected pickup in Japanese investment in Thailand. Note that there was no flooding at the estates of AMATA and HEMRA which tend to be major beneficiaries of Japanese FDI.
Figure 24: Quarterly BoI applications
Total investment (RHS) Bt, bn No of projects (LHS) 500 160
450 120 400
350 80
300 40 250
200 0 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 Oct-Nov
Source: Thailand Board of Investment (BOI)
Deutsche Bank AG/Hong Kong Page 17
Deutsche Bank 05 January 2012 Property Industrial Estates
Markets Research
In 3Q11 the BoI approved 101 projects worth Bt21bn (down 86% YoY, 85% QoQ). The We believe slowdown was value of August applications was the lowest monthly total in three years. Leading the due to political uncertainty decline in quarterly BoI approvals was the minerals and ceramics segment, which ahead of July general election plunged 98% YoY and 90% QoQ. and delays in appointing BoI directors Figure 25: BoI investments by sector
Agricultural products Minerals & ceramics Light industry Metal processing Electronics & electrical C hemical plastic paper Serv ice & infrastruture 100%
80%
60%
40%
20%
0% Nov Oct- 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11
Source: Thailand Board of Investment (BOI)
We believe the slump in FDI in 3Q11 was due to political uncertainty ahead of the July 3 FDI should see recovery in general election and the fact that the new government was formed only in mid-August. 4Q11 and 2012 Investment approvals were also delayed by the late formation of the BoI board of directors which was not finalized until late 3Q11. We expect FDI to recover in 2012 due to: 1) a more stable political environment; 2) an anticipated increase in Japanese investment as more Japanese companies relocate to or expand production bases in Thailand; and 3) the resumption of supply chain networks that were disrupted by the Thai and Japanese disasters.
In order to restore foreign investor confidence and prevent a repetition of the floods Government to spend heavily disaster, we expect the government to spend heavily on water management systems on reconstruction and flood and flood prevention projects. Details of these are likely to be announced in 1Q12 after defences floodwaters completely recede and damage at industrial estates can be more accurately assessed.
During 1H11, Japanese investors accounted for 34% of the total of projects approved Japanese continue to make by the BoI and 56% of total foreign investments. Projects seeking BoI privileges by the largest contribution to FDI Japanese investors as a % of total projects also have increased over the past few months. In July and August the number of projects submitted to the BoI by Japanese investors rose by 10% YoY (note that September data for Japanese investments has not yet been released).
Page 18 Deutsche Bank AG/Hong Kong
Deutsche Bank 05 January 2012 Property Industrial Estates
Markets Research
Figure 26: BoI investments – Japanese investments (data based on value)
% Approved applications Japanese % of total
60 Approved applications Japanese % of total foreign
50 40
30 20
10 0 2003 2004 2005 2006 2007 2008 2009 2010 1H11
Source: Thailand Board of Investment (BOI)
The approved project applications by Japanese investors were mainly for capacity expansion. In 2010 new projects accounted for only 11% of total BoI applications by Japanese investors based on value.
Figure 27: Japanese applications: expansion and new projects (data based on value)
Bt, bn Expansion project value New project value 200
150 28% 21% 15% 100 21% 34% 27% 11%
50 29% 85% 72% 66% 79% 73% 79% 71% 89% 0 2003 2004 2005 2006 2007 2008 2009 2010
Source: Thailand Board of Investment (BOI)
Before the March 11 tsunami in Japan, capacity utilization in Thailand’s auto industry Auto industry recorded high was running at 91%. It fell as low as 46% after the disaster but rebounded to 99% in utilization before disasters in September, just before severe flooding prompted the temporary closure of major vehicle plants located in Ayutthaya province. The crisis caused October and November Japan and Thailand auto production to plunge 66% YoY and 84% respectively, with a reported capacity utilization level of 28.5% in October and 13.3% in November. Now that floodwaters in the Central region have receded we expect auto capacity utilization to rebound and return to pre-flood levels by end-1Q12 or early 2Q12. Figure 28: CAPU motor vehicles
CAPU (LHS) MP I ( R H S ) 100 120%
80 80% 40% 60 0% 40 -40% 20 -80% 0 -120% Jul-10 Jul-11 Jan-10 Jun-10 Oct-10 Jan-11 Jun-11 Oct-11 Feb-10 Ma r - 10 Apr-10 Feb-11 Ma r - 11 Apr-11 Sep-10 Nov-10 Dec-10 Sep-11 Nov-11 Aug-10 Aug-11 Ma y - 10 Ma y - 11
Source: Bank of Thailand (BoT), TISCO Economic Strategy Unit (ESU)
Deutsche Bank AG/Hong Kong Page 19
Deutsche Bank 05 January 2012 Property Industrial Estates
Markets Research
Thailand has great appeal as an export hub
We believe foreign investors are increasingly viewing Thailand as a regional distribution Thailand offers easy access to hub due to its strategic geographical location and easy access to fast-growing markets markets in China and ASEAN in China and ASEAN. In recent years exporters based in Thailand have tended to focus on emerging markets in the Asia-Pacific and Middle East regions rather than markets that have seen slow growth such as the US and Europe.
Figure 29: Thai exports have become more diversified % of Total Exports 2000 2010 25 22.7 21.3 19.3 20 16.3 14.7 15 11.2 10.3 10.5 11.0 10 4.1 4.9 5 3.0
0 US EU Japan China ASEAN Middle East
Source: Bank of Thailand (BoT), TISCO Economic Strategy Unit (ESU)
Deutsche Bank economic data forecasts
Figure 30: Economic data summary 2010 2011F 2012F 2013F National Income Nominal GDP (USDbn) 318.8 350.4 378.7 626.2 Population (m) 63.9 64.2 64.5 64.8 GDP per capita (USD) 4,989 5,458 5,871 9,664
Real GDP (YoY%) 7.8 1.8 3.9 4.8 Private consumption 4.8 2.3 2.6 3.0 Government consumption 6.4 1.8 7.3 5.3 Gross fixed investment 9.4 4.0 8.5 5.7 Exports 14.7 8.3 5.5 11.0 Imports 21.5 8.6 7.5 11.8
External Accounts (USDbn) Merchandise exports 193.7 220.0 247.6 289.7 Merchandise imports 161.4 204.2 238.9 268.6 Trade balance 32.2 15.7 8.7 21.1 % of GDP 10.1 4.5 2.3 3.4 Current account balance 14.8 0.1 -7.3 -5.5 % of GDP 4.6 0 -1.9 0.9 FDI (net) 1.0 -4.5 3.1 2.2
General Industrial production (YoY%) 15.4 -7.0 10.0 7.0 Unemployment (%) 1.1 1.1 1.0 1.0 Source: Deutsche Bank, CEIC, DB Global Markets Research, National Sources
Page 20 Deutsche Bank AG/Hong Kong
Deutsche Bank 05 January 2012 Property Industrial Estates
Markets Research
Key competitive advantages
Thailand’s wage inflation has lagged that of regional competitors
A major attraction for manufacturers considering relocating their production base to Structural wage and price Thailand is the country’s low labour costs. Although labour costs have nearly doubled stability over the past 10 years, wage inflation in Thailand is well behind that of competitors such as China, Indonesia and Vietnam which have seen average salaries surge by 379%, 195% and 189% respectively in the same period.
Figure 31: Average yearly wage index based on US$
pts China Indonesia Philippines Taiwan Thailand Vietnam
600
500
400
300
200
100
0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Source: CEIC, Deutsche Bank
Coupled with its reputation for an efficient and educated workforce, the moderate Efficient and skilled workforce growth in wage expenses makes Thailand look an attractive destination for industries that require large pools of semi-skilled labour such as automotive and electronics.
Figure 32: Yearly wage growth based on US$
China Indonesia Phillippines Taiwan Thailand Vietnam
40%
30%
20%
10%
0%
-10%
-20% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Source: CEIC, Deutsche Bank
Deutsche Bank AG/Hong Kong Page 21
Deutsche Bank 05 January 2012 Property Industrial Estates
Markets Research
Minimum wage plan
As part of its plan to heal Thailand’s social divisions and encourage consumer spending, Increase in minimum wage is the Puea Thai-led government plans to increase the minimum wage to Bt300/day. still unclear However, we believe that such a policy will be implemented gradually and will not necessarily cover all provinces.
The government may be forced to adjust its plans given that many companies say they Govt may be forced to will speed up automation if labour costs are sharply increased, thereby causing a rise in backtrack on pre-election Thailand’s unemployment levels. promise
According to our calculations, an increase in the minimum wage from current levels to Wage inflation in Thailand is Bt300/day would increase Thailand labour costs by 18%. Even including this proposed well below that of regional hike, Thailand’s wage inflation remains well below the rates seen in China, Indonesia competitors and Vietnam over the past decade.
Corporate tax cut
A potential catalyst for corporate earnings and the Thai stock market is the Corporate tax cut will have government’s decision to reduce the corporate tax rate from 30% to 23% in 2012 and little impact on industrial 20% in 2013. If implemented, the projected increase in earnings of SET-listed estates companies is 9-12% on average with banks, telecoms, property, petrochems and retail being the major beneficiaries. Industrial estate operators currently pay corporate tax below the 30% statutory rate as they have BoI privileges. Therefore we see few benefits for this sector from the proposed tax changes.
Figure 33: Estimated changes in earnings from proposed corporate tax cuts FY10 effective Implied normalized new effective rate Implied level adjustment to earnings tax rate (%) 23% 20% 23% 20% TICON 24% 18% 16% 7% 10% AMATA 14% 14% 14% 4% 6% HEMRAJ 4% 4% 4% 0% 0% Source: Company reports, Deutsche Bank
Recent press reports indicated that some Cabinet ministers in the new administration BoI tax breaks unlikely to be wanted to cancel BoI tax privileges in order to pay for corporate tax cuts. We believe axed the option of withdrawing BoI privileges is unlikely as it would risk undermining Thailand's appeal as an FDI destination, especially for the auto and electronics industries. This would be a steep price to pay considering the tax revenue gain would amount to only an estimated Bt65bn. In fact the government has now introduced new tax relief measures in order to help industries hurt by the floods.
Page 22 Deutsche Bank AG/Hong Kong
Deutsche Bank 05 January 2012 Property Industrial Estates
Markets Research
Geographic and other country-specific advantages
Amongst the ASEAN countries, Thailand has the largest capacity for vehicle assembly, Thailand should remain a key with a strong reputation for the quality of auto parts manufacture. Due to its strategic player in the global auto geographical location and skilled but low cost labour force, we expect Thailand to industry remain a major player in the global auto industry sector for many years to come.
Major drivers of FDI in Thailand Rising domestic consumption and investment
Thailand posses a large pool of skilled and semi-skilled labour with relatively low wage costs
Thailand has no local content requirement for the auto industry but aims to improve competitiveness of parts suppliers
Large and expanding production capacity provides economies of scale
Improved political stability after July 3 general election
Investment promotion policies – tax breaks on machinery, raw materials etc
Figure 34: Asia – Thailand is well placed to serve growing demand in Asia-Pacific region
Japan
Korea
China
India
Thailand Australia
New Zealand ASEAN Source: Deutsche Bank
Continuous improvements in transport infrastructure should make Thailand an even High-speed rail network could more attractive location as a manufacturing base for the Asia-Pacific region, thereby provide catalyst for growth increasing the appeal of industrial estate stocks. The Thai and Chinese governments are currently discussing a JV high-speed rail project that would link Bangkok with Nong Khai province bordering Laos and the southeastern port of Rayong. There are also proposals to build a high-speed line that would connect Thailand and China to the Burmese port of Dawei.
Figure 35: Comparison of Southeast Asian countries - 2010 Thailand Malaysia Indonesia Philippines Vietnam Burma GDP per capita $ 4,989 8,438 2,939 2,158 1,190 702 GDP ($bn) 319 238 707 199.5 103.4 43 Wage rate /mth $ 309 666 144 175 184 n.a. Inflation (%) 4.2% 3.2% 6.0% 6.4% 11.8% 7.7% Unemployment 1.1% 3.3% 7.1% 8.1% 4.3% 4.9% Population 63.9 28.3 240.3 94.0 88.1 50.0 Popn below pov. < 2% 3.5% 13.3% n.a. 10.6% 32.7% Labor force 38.7 12.2 116.5 n.a. 46.21 31.68 Rating – S&P BBB+ A- BB+ BB BB- n.a. Source: Bank of Thailand (BoT), World Bank, IMF, Standard and Poors, Deutsche Bank, CEIC, DB Global Markets Research, National Sources
Deutsche Bank AG/Hong Kong Page 23
Deutsche Bank 05 January 2012 Property Industrial Estates
Markets Research
Current infrastructure; National highway system: connecting all provinces, with connections to Cambodia, Laos, Vietnam and southern China
Bangkok Mass Transit: Skytrain and Subway expansion plan for 137 km during 2006-2012
International airports: total capacity to support 8,500 arrivals and 9,300 departures passengers per hour
Shipping: 6 deep sea ports and 2 international river ports
Rail system: linking Malaysia and Singapore
Thailand’s southeastern region is the main hub of export-oriented industries with deep- Southeastern region is the sea ports and industrial estates to facilitate automotive producers. The region comprises main hub for auto producers Chon Buri, Chachoengsao, Samut Prakarn and Rayong provinces.
Figure 36: Thailand’s major airports, sea ports and river ports Most industrial estates are Chiang Rai airport Chiang sean riv er port close to airports and deep-sea Chiang Kong riv er port ports.
Udon Thani airport
Chiang Mai airport
Don Mueng airport
Suv arnabhumi airport
Ranong sea port Map Ta Phut sea port
Laem chabang sea port
Bangkok sea port
Hat Yai airport
Songkla sea port
Phuket air port
Phuket sea port
Commercial airport Sea port International airport River port Source: Office of Transport and Traffic Policy and Planning, Ministry of Transportation, Deutsche Bank
BoI Investment Zones BoI investment zones are based on proximity to Bangkok. There have been discussions on changing BoI privileges to support investment in industries by sector rather than by location. We don’t expect the government to amend BoI tax privileges for fear of a negative impact on FDI.
Page 24 Deutsche Bank AG/Hong Kong
Deutsche Bank 05 January 2012 Property Industrial Estates
Markets Research
Figure 37: BoI privileges granted by zones
Sources: Thailand Board of Investment (BOI)
Most auto producers are located to the east of Bangkok in provinces such as Chachoengsao, Chon Buri and Rayong. Meanwhile the north and central regions of Thailand host a number of electronics plants.
Figure 38: Major auto producers in Thailand Pathumthani Thai Suzuki Motor Siam Nissan Automobile Ayudhaya Honda Automobile (Thailand) Chachoengsao Toyota Motor Thailand Isuzu Motors (Thailand)
Samutprakarn Toyota Motor Thailand Bangkok Isuzu Motors (Thailand) Bangchan General Assembly Siam Nissan Automobile YMC assembly Siam V.M.C Automobile Thai Honda Manufacturing Thai Auto Work International Vehicals Thai Y amaha Motor Thai Swedish Assembly Hino Motors (Thailand) Samut Sakorn Thonburi Automotive Authority Thai Rung Union Car
Rayong Auto Alliance (Ford/Mazda) G eneral Motors (A lfa Romeo, Isuz u) B MW Manufacturing K awazaki Motors E nterprise (Thailand) MMC S ittipol (Mitsubishi) Suzuki Motor
Source: Industrial Estate Authority of Thailand
Of total production by auto makers, Toyota has the largest market share of 38% followed by Mitsubishi Motors (17%) and Honda (14%). Toyota’s major plant is not located in an industrial estate but is close to AMATA’s Nakorn site. Meanwhile HEMRAJ’s estate hosts Suzuki, Auto Alliance and some European car manufacturers.
Deutsche Bank AG/Hong Kong Page 25
Deutsche Bank 05 January 2012 Property Industrial Estates
Markets Research
Auto sector is the main driver of industrial land sales
Expansion of Thai auto industry will boost land sales
Over the past 10 years auto production in Thailand has risen by nearly four-fold driven Thai auto production mainly by exports. Apart from 2009 when the industry was hurt by the effects of the expected to grow by 56% by global financial crisis, production volumes have risen every year over the past decade, 2015 aided by growing domestic and regional demand. Asia is the biggest destination for Thai auto exports (39%), followed by Australia (21%) and the Middle East (20%).
We expect auto production in Thailand to grow slightly YoY to 1.64m units in 2011 vs. the earlier industry target of 1.8m units. For 2012, we expect production to reach a record 2m units. The Thai Automotive Institute (TAI) forecasts production of vehicles to reach 2.5m units by 2015, with 60% destined for the export market. We estimate that tier 1 auto producers would need 2,000 rai of new land in order to expand capacity to meet the institute’s target of an additional 900,000 units. Some auto parts suppliers would also need additional land although it is not possible to quantify this.
Figure 39: Auto production in Thailand continues to rise Apart from 2009, output has risen every year over last Units, m decade Production decrease 2.5 Export Domestic from flood 2.0 1.0 1.0 0.3 0.9 1.5 0.8 0.7 1.0 0.6 0.6 0.8 0.7 0.7 0.5 1.3 1.4 1.5 0.5 0.6 0.6 1.2 0.3 0.4 0.7 0.8 0.9 0.7 0.3 0.3 0.4 0.5 0.5 0.0 0.1 0.2 0.2 0.2 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011F 2012F 2013F 2014F 2015F
Source: Thai automotive institute, Somboon Advance Technology
The TAI also forecasts that Eco cars (fuel efficient cars with engine capacity below 1,200cc) will account for about 21% of total production in 2015 (vs. 4% last year) and that a third of the passenger car market by that time will comprise of Eco cars. In 2011, we expect car manufacturers to increase their Eco car capacity by 30% due mainly to strong demand in Asia.
Page 26 Deutsche Bank AG/Hong Kong
Deutsche Bank 05 January 2012 Property Industrial Estates
Markets Research
Figure 40: Thai auto exports - % of exports by region
2008 2009 2010 35% 30% 25% 20% 15% 10% 5% 0% Africa Europe Central & Middle East Australia, NZ Asia S.America and Oceania
Source: Thai automotive institute, Somboon Advance Technology
Figure 41: Thailand is the regional leader in auto production Units, m
1.8 2000 2005 2010 1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2 0.0 Malaysia Indonesia Philippines Thailand Vietnam
Source: International Organization of Motor Vehicle Manufacturers
Figure 42: Major automakers’ capacity in Thailand Units, 000 Toyota Auto Alliance, Mazda Nissan % Honda Isuzu Mitsubishi 2,400 GM Hino Daimler Chrysler 35 Suzuki Growth % (RHS) 2,100 30 1,800 25 1,500 20 15 1,200 10 900 5 600 0 300 (5) 0 (10) 2005 2006 2007 2008 2009 2010 2011
Source: Thailand Board of Investment (BOI)
Deutsche Bank AG/Hong Kong Page 27
Deutsche Bank 05 January 2012 Property Industrial Estates
Markets Research
Japanese automakers continue to expand capacity in Thailand
Thailand currently attracts the largest amount of Japanese FDI for the auto industry as Toyota and Isuzu plan to well as accounting for 60% of total production by Japanese automakers in Southeast boost Thai production Asia. Early 2011, Japanese automakers announced plans to further increase production capacity capacity in the country. Toyota Motors Thailand recently announced plans to invest US$100m to expand production at its Banpho plant (which builds the Fortuner and Hilux models) in Chachoengsao province from 140k units p.a. to 220k units. Toyota said that it would also concentrate on the one-ton pick-up segment, which continues to show strong growth. Nissan began production of its Eco car, the Nissan March, in Pathum Thani province, near Bangkok, last year while Isuzu plans to invest Bt6.5bn for a new factory at the Gateway industrial estate to increase production capacity to 400k vehicles a year.
Figure 43: Automakers’ expansion plans over next few years Brand 2010 2011 2012 2013 2014 Isuzu D-Max D-Max (RT50) D-Max (RT50- SUV), to replace MU7 Honda Jazz / City / Accord Brio / Civic (2HC) Jazz-Hybrid / CR-V Accord Jazz / City
Toyota Vios / Yaris / Vigo Prius-hybrid / Yaris / Ecocar Corolla Hilux (IMV2) Corolla, Camry Mitsubishi Lancer EX / Triton None Ecocar Triton (special edition) Nissan March (Ecocar) / March (Sedan) New compact Navara Navara / Venette sedan (to replace (NV200) Tida Latio)
Mazda Mazda2 (sedan), Mazda3 / BT50 Mazda3 (T6) Ford Fiesta (B229), Ranger (T6) / Focus/ Everest Focus Escape (Escape discontinued) Chevrolet Cruze (J300) Colorado Colorado (SUV) / (GMI700) / Aveo (T300) Captiva Suzuki Swift / SX4 Ecocar Source: Somboon Advance Technology
Figure 44: Japanese automakers’ production in Southeast Asia
Thailand Indonesia Malaysia Philippines Vietnam
100% - 4210 78 16 80% 12 16 19 26 17 34 60% 99 40% 77 75 70 60 60 52 20%
0% Mazda Isuzu Mitsubishi Nissan Honda Toyota Total
Source: International Organization of Motor Vehicle Manufacturers
Page 28 Deutsche Bank AG/Hong Kong
Deutsche Bank 05 January 2012 Property Industrial Estates
Markets Research
The tsunami and earthquake in Japan resulted in supply chain disruptions to the auto Japan disaster prompted auto industry (as well as many other industries). Production at most Japanese automakers companies to delay overseas had just recovered to levels before the disaster when the industry suffered a new blow investments in the shape of Thailand’s floods crisis. With floodwaters now receding and the government planning to spend heavily on flood defences to protect industrial areas, we expect Japanese auto companies to go ahead with plans to expand capacity in Thailand in 2012.
According to a Japanese Trade Ministry survey, 97% of manufacturers that used suppliers in northern Japan have found alternate sourcing since the March disaster. Of 123 companies surveyed, 42% said they will switch permanently to procuring parts and materials overseas. In addition to damage caused by the triple disaster, we believe Japanese companies have a greater incentive to relocate to production bases overseas due to: 1) increased taxes to pay for earthquake damage; 2) appreciation of the yen (which is trading at a 10-year high against the euro); and 3) electricity shortages as a result of the closure of quake-damaged power stations.
Deutsche Bank AG/Hong Kong Page 29
Deutsche Bank 05 January 2012 Property Industrial Estates
Markets Research
Flooding in Thailand
HEMRAJ and AMATA estates unaffected; TICON to recover in early 2012F
Most of the flood-hit industrial estates have now announced dates when they plan to Floods hit industrial estates in resume operations. They include Rojana (Dec 11), Hi-Tech (Dec 11), Bang Pa-In (Dec 15) Ayutthaya and northern and Saharat Nakorn (Dec 20). Of those listed on the SET, ROJNA, which operates a Bangkok 2,875 acre industrial estate in Ayutthaya, has been the worst affected. According to most of the companies located in these estates it would take about 45 days for operations to resume to normal.
Figure 45: Industrial estates hit by flooding Total Japanese Japanese Industrail Factories Investment Investment Investment Estates (Units) (Bt, m) (Bt, m) (%) Labor Major Business
Saharat Nakor 43 9,472 7,432 78% 90,000 Electronic, Auto parts Baan Hwa (Hi 143 65,312 32,656 50% 51,186 Electronic, electric appliances Bangpa-In 90 60,000 23,334 39% 60,000 Electronic, electric appliances Rojana 198 56,000 39,200 70% 90,000 Electronic, Auto parts Navanakorn 227 180,000 108,000 60% 128,311 Electronic, Auto parts Banggadee 44 25,000 21,250 85% 30,000 Electronic, electric appliances Source: Deutsche Bank
Figure 46: Ayutthaya and northern Bangkok estates were worst affected
Source: Deutsche Bank
The industrial estates of AMATA and HEMRAJ are mainly located on high ground on the HEMRAJ and AMATA estates Eastern Seaboard and were unaffected by flooding. They also have canal systems to drain are located on high ground any excess water. HEMRAJ has an estate in Saraburi, north of Bangkok, which is located on high ground and also remains dry. on the Eastern Seaboard
Page 30 Deutsche Bank AG/Hong Kong
Deutsche Bank 05 January 2012 Property Industrial Estates
Markets Research
TICON told us that almost 45% of its business was affected by floods (divided as 16% Nearly half of TICON’s warehouses and 29% factories). The repair cost of factories is estimated at Bt600,000 to business was affected by Bt1m per factory (167 factories damaged so far). TICON expects floodwaters to recede floods in early December. If repairs take two months, the factories should be ready to resume normal operations by February 2012.
Major Japanese manufacturers that were forced to suspend production because of Major Japanese companies flooding said that they unlikely to relocate for two major reasons: 1) the cost of unlikely to relocate factories relocation would outweigh the cost of flood prevention measures at their existing facilities; and 2) supply chains in Thailand, particularly in the auto industry, have been developed over decades and are not easy to quickly replace. Hondo Motors was the worst affected Japanese auto company due to severe flooding at its plants in Ayutthaya. However, the company said it would resume operations after a month once the floodwaters are drained from its complex.
Deutsche Bank AG/Hong Kong Page 31
Deutsche Bank 05 January 2012 Property Industrial Estates
Markets Research
Earnings forecasts
Expect strong earnings recovery in 2012
We forecast aggregate revenue growth 41% in 2012 for HEMRAJ, AMATA and TICON, HEMRAJ’s earnings forecast with growth of 14% in 2013F. In 2012 we expect aggregate net profit to rise by 109% to surge by 319% in 2012 mainly due to a projected 319% surge in earnings by HEMRAJ. The industry’s gross margin should dip by 52bps in 2011F on lower revenue recognition but we expect a margin recovery next year.
Figure 47: Aggregate revenue of industrial estate operators Bt, bn % Total revenue Growth (RHS) 18 60
15 40
12 20
9 0 6 (20)
3 (40)
0 (60) 2008 2009 2010 2011F 2012F 2013F
Source: Company data, Deutsche Bank
Figure 48: Aggregate earnings of ndustrial estate operators Bt, bn % Recurring profit Growth (RHS) 6,000 160
5,000 120
4,000 80
3,000 40
2,000 0
1,000 (40)
0 (80) 2008 2009 2010 2011F 2012F 2013F
Source: Company data, Deutsche Bank
Page 32 Deutsche Bank AG/Hong Kong
Deutsche Bank 05 January 2012 Property Industrial Estates
Markets Research
Figure 49: Aggregate P&L statements Year to Dec. 2007 2008 2009 2010 2011F 2012F 2013F Sales 6,288 6,553 2,607 4,778 4,290 6,158 8,237 Utlities 1,759 2,162 2,136 2,223 2,603 3,013 3,392 Other – biz 4,493 2,623 1,732 2,748 1,983 3,269 3,397 Total Revenue 12,541 11,338 6,475 9,749 8,875 12,439 15,026 Cost of sales, ex depr (6,286) (5,524) (3,230) (4,725) (4,263) (6,047) (7,432) Depreciation (320) (381) (465) (454) (478) (459) (454) Selling & Admn. Expenses (1,463) (1,284) (1,152) (1,415) (1,349) (1,733) (2,078) Operating Profit 4,472 4,149 1,628 3,155 2,785 4,200 5,061 Equity income 11 187 322 795 476 1,547 2,084 Other items 306 202 332 311 26 6 48 Interest expense (509) (653) (699) (785) (972) (932) (858) Profit Before Tax 4,281 3,884 1,583 3,477 2,315 4,821 6,336 Tax (808) (558) (33) (450) (354) (624) (717) Minorities (212) (276) (123) (177) (234) (297) (327) Net Profit before extra 3,260 3,050 1,428 2,849 1,727 3,901 5,292 Extra items – accounting 16 209 (106) 145 0 0 (0) Extraordinary items (0) (0) 226 0 0 0 0 Net Profit after extra 3,276 3,259 1,547 2,995 1,727 3,901 5,292 Source: Company data, Deutsche Bank
Figure 50: Aggregate ratios 2007 2008 2009 2010 2011F 2012F 2013F Gross margin 47.3 47.9 42.9 46.9 46.6 47.7 47.5 Operating margin 35.7 36.6 25.1 32.4 31.4 33.8 33.7 Net margin 26.0 26.9 22.0 29.2 19.5 31.4 35.2 SG&A/sales 11.7 11.3 17.8 14.5 15.2 13.9 13.8 Effective tax 18.9 14.4 2.1 12.9 15.3 12.9 11.3 Book value per share 1.5 1.6 1.6 1.7 1.7 1.8 2.0 Source: Company data, Deutsche Bank
Figure 51: Aggregate cashflow 2007 2008 2009 2010 2011F 2012F 2013F Net profit 3,281 3,259 1,547 2,995 1,727 3,901 5,292 Depreciation 449 552 647 672 715 721 739 Accounts receivable (2,375) 3,052 954 143 60 (88) (81) Inventory 374 (1,180) (250) (392) (196) (392) 1,201 Working capital 972 75 (1,008) (370) (278) 137 179 Operating cash flow 2,701 5,757 1,890 3,048 2,027 4,279 7,331 Fixed assets (2,927) (2,839) (1,063) (352) (3,026) (1,299) (1,236) Free cash flow (226) 2,918 826 2,696 (999) 2,979 6,094 Investments & others 16 (3,246) (205) (3,756) 450 (761) (735) Residual cash flow (210) (328) 621 (1,060) (549) 2,218 5,359 Capital increase 75 134 98 (78) 154 177 195 Dividend payments (945) (1,699) (603) (901) (1,521) (2,578) (2,856) Others (1,015) (453) (360) (424) (26) 120 132 Net change in cash flow (2,095) (2,346) (244) (2,463) (1,942) (62) 2,831 Net debt beg (8,134) (10,229) (12,575) (12,819) (15,282) (17,224) (17,286) Net debt end (10,229) (12,575) (12,819) (15,282) (17,224) (17,286) (14,455) Source: Company data, Deutsche Bank
Deutsche Bank AG/Hong Kong Page 33
Deutsche Bank 05 January 2012 Property Industrial Estates
Markets Research
Figure 52: Aggregate balance sheet Year to Dec. 2007 2008 2009 2010 2011F 2012F 2013F Cash & equivalent 1,588 2,180 2,061 5,647 3,368 2,415 3,179 Accounts receivable 4,867 1,800 851 708 648 736 817 Inventory 14,214 15,557 15,576 15,913 17,371 17,699 16,402 Other current assets 340 582 317 390 427 440 453 Fixed assets 7,736 9,295 9,280 7,990 8,909 8,973 9,020 Land bank & deposits 2,807 3,348 4,012 4,677 4,449 4,668 4,855 Investments 354 489 799 4,607 6,760 7,064 7,392 Associates 1,045 2,015 2,325 3,918 1,990 2,394 2,748 Other assets 384 2,541 2,551 1,711 1,301 1,657 2,013 Total assets 33,334 37,806 37,772 45,561 45,224 46,046 46,878
Working capital - liabilities 4,186 4,479 3,638 3,787 3,453 3,545 3,681 Debt 11,817 14,755 14,880 20,929 20,592 19,701 17,634 Minority interest 1,135 1,077 1,078 1,035 1,269 1,566 1,893 Shareholders' funds 16,196 17,495 18,176 19,810 19,910 21,233 23,670 Source: Company data, Deutsche Bank
Accounting changes
New accounting regulations took effect on January 1 2011 that forced industrial estate Accounting changes have operators to base their revenue recognition on actual transfers vs. the % of land increased earnings volatility infrastructure completion method previously used. The net effect of these changes is higher earnings volatility due to the uneven booking of land sales. We expect greater land sales recognition in 2H11 in line with sales patterns during the past two years.
The restatement of accounts has had a greater impact on the 9M10 earnings of HEMRAJ than the results of AMATA and TICON. We also expect large variations among different brokerages in the growth rates for industrial estate operators due to the adjustment in historic earnings.
Figure 53: 9M10 earnings before and after accounting changes Before Restate 9M10 9M10 Change AMATA (Btm) (Btm) (%) Revenue 1,199 1,130 -6% Cost 554 491 -11% EBT 759 825 9% NI 533 598 12%
Before Restate 9M10 9M10 Change HEMRAJ (Btm) (Btm) (%) Revenue 2,809 2,370 -16% Cost 1,672 1,510 -10% EBT 1,184 1,454 23% NI 878 1,183 35%
Before Restate 9M10 9M10 Change TICON (Btm) (Btm) (%) Revenue 651 651 0% Cost 145 145 0% EBT 625 625 0% NI 352 352 0% Source: Company data
Page 34 Deutsche Bank AG/Hong Kong
Deutsche Bank 05 January 2012 Property Industrial Estates
Markets Research
Rating Company Price at 4 Jan 2012 (THB) 2.24 Price target - 12mth (THB) 2.80 Buy Hemaraj 52-week range (THB) 2.60 - 1.63 SET 1,036
Asia Development Price/price relative ASEAN Thailand 2.8
Reuters Bloomberg 2.4 Property 2.0 Property HEMR.BK HEMRAJ TB 1.6 1.2 0.8 0.4
1/10 7/10 1/11 7/11 Diversification to boost earnings in Hemaraj Development SET (Rebased) 2012F Performance (%) 1m 3m 12m
Absolute 0.0 28.0 20.4 SET 0.7 21.1 -0.6 We initiate coverage of Hemaraj Land and Development with a Buy rating. The turning point for this industrial property developer should be February 2012 Stock Data when the GHECO-One power plant starts commercial operations. Income Market cap (THBm) 21,740 stream from this project (35% owned by HEMRAJ) should double the Market cap (USDm) 689 company's EPS and RoE in 2012F. Management maintains its FY11 land presales growth target of 83% to 1,700 rai. For the first 9 months HEMRAJ Shares outstanding (m) 9,705.2 achieved land presales of 1,212 rai, 71% of its full year target (in 2010 Major shareholders Horrungruang HEMRAJ recorded land presales of 930 rai). Family 15.01% We expect strong 2H11 earnings Free float (%) 62 HEMRAJ made a small net loss in 1H11 mainly due to accounting changes. Avg daily value traded 6.1 Management expects most of 2011’s earnings to be booked in 2H11 and we (USDm) forecast EPS will jump by 62% YoY in 2H11. HEMRAJ reported 3Q11 net profit Key Indicators (Fy1) of Bt154m, up 396% QoQ. ROE (%) 4.8 GHECO-One should begin operations in early 2012 Net debt/equity (%) 71.5 GHECO-One should double HEMRAJ’s revenue in 2012F. The power plant underwent a Health Impact Assessment (HIA) in November, 2011 and if it Book value/share (THB) 0.90 passes it should start operating by February 2012. However, there is a risk of a Price/book (x) 2.5 further hold-up to the project which was previously delayed from 4Q11 to Net interest cover(x) 2.1 1Q12. Operating profit margin (%) 25.9 TP of Bt2.80 is based on SOTP valuation Our TP of Bt2.80 is based on the SOTP method whereby we valued HEMRAJ’s recurring operations at Bt1.85/shr and GHECO-One at Bt0.93/shr. Key risks to our call include a sharp downturn in the global economy, renewed domestic political unrest, longer than expected delays in opening petrochemical plants at the company’s Map Ta Phut industrial estate, further construction delays for the GHECO-One power plant and/or if it fails to obtain appropriate licenses for commercial operation of the power plant.
Forecasts And Ratios Year End Dec 31 2009A 2010A 2011E 2012E 2013E Sales (THBm) 2,049.8 3,685.3 3,627.7 4,356.6 5,867.2 EBITDA(THBm) 790.2 1,237.5 1,142.7 1,577.4 2,064.4 Reported NPAT(THBm) 575.2 1,215.9 421.3 1,765.1 2,658.8 Reported EPS FD(THB) 0.06 0.13 0.04 0.18 0.27 DB EPS FD (THB) 0.06 0.13 0.04 0.18 0.27 DB EPS growth (%) – 111.4 -65.4 319.0 50.6 PER (x) 36.9 20.3 51.6 12.3 8.2 EV/EBITDA (x) 10.3 11.6 19.9 14.5 10.3 DPS (net) (THB) 0.03 0.06 0.03 0.11 0.13 Yield (net) (%) 1.3 2.5 1.3 4.9 5.6 Source: Deutsche Bank estimates, company data
1 DB EPS is fully diluted and excludes non-recurring items
2 Multiples and yields calculations use average historical prices
for past years and spot prices for current and future years,
Deutsche Bank AG/Hong Kong Page 35
Deutsche Bank 05 January 2012 Property Industrial Estates
Markets Research
Model updated:05 January 2012 Fiscal year end 31-Dec 2009 2010 2011E 2012E 2013E
Running the numbers Financial Summary Asia DB EPS (THB) 0.06 0.13 0.04 0.18 0.27 Reported EPS (THB) 0.06 0.13 0.04 0.18 0.27 ASEAN Thailand DPS (THB) 0.03 0.06 0.03 0.11 0.13 Property BVPS (THB) 0.8 0.9 0.9 1.0 1.1 Weighted average shares (m) 9,705 9,705 9,705 9,705 9,705 Hemaraj Development Average market cap (THBm) 6,453 13,359 21,740 21,740 21,740 Enterprise value (THBm) 8,171 14,395 22,593 22,741 21,030 Reuters: HEMR.BK Bloomberg: HEMRAJ TB Valuation Metrics Buy P/E (DB) (x) 11.2 11.0 51.6 12.3 8.2 P/E (Reported) (x) 11.2 11.0 51.6 12.3 8.2 Price (4 Jan 12) THB 2.24 P/BV (x) 0.92 2.05 2.44 2.26 1.97 Target Price THB 2.80 FCF Yield (%) 11.3 nm nm 4.2 13.4 Dividend Yield (%) 4.5 4.0 1.3 4.9 5.6 52 Week range THB 1.63 - 2.60 EV/Sales (x) 4.0 3.9 6.2 5.2 3.6 Market Cap (m) THBm 21,740 EV/EBITDA (x) 10.3 11.6 19.8 14.4 10.2 USDm 691 EV/EBIT (x) 13.3 13.7 24.1 16.9 11.6
Company Profile Income Statement (THBm) Hemaraj Land and Development Plc is the developer and Sales revenue 2,050 3,685 3,628 4,357 5,867 operator of six industrial estates located primarily along Gross profit 1,035 1,617 1,685 2,100 2,747 Thailand's Eastern Seaboard. Its business activities include EBITDA 790 1,237 1,143 1,5772,064 the provision of infrastructure services including the supply Depreciation 175 186 205 230253 of water and water treatment, electricity supply, gas Amortisation 000 00 pipelines, and residential property development. EBIT 615 1,051 938 1,3471,812 Net interest income(expense) -144 -284 -446 -452 -446 Price Performance Associates/affiliates 81 422 65 1,0791,562 Exceptionals/extraordinaries 0 145 0 00 2.8 2.4 Other pre-tax income/(expense) 0 0 0 0 0 2.0 Profit before tax 552 1,334 557 1,975 2,927 1.6 Income tax expense -47 47 56 90 137 1.2 Minorities 24 71 80 120132 0.8 Other post-tax income/(expense) 0 0 0 0 0 0.4 Net profit 575 1,216 421 1,765 2,659 Jan 10Apr 10Jul 10Oct 10Jan 11Apr 11Jul 11Oct 11 DB adjustments (including dilution) 0 0 0 0 0 DB Net profit 575 1,216 421 1,765 2,659 Hemaraj Development SET (Rebased)
Cash Flow (THBm) Margin Trends Cash flow from operations 997 175 275 1,507 3,521 40 Net Capex -268 -264 -580 -600 -610 36 Free cash flow 730 -89 -305 907 2,911 Equity raised/(bought back) 92 0 0 0 0 32 Dividends paid -330 -532 -291 -1,068 -1,213 28 Net inc/(dec) in borrowings -84 4,641 74 -452 -1,101 24 Other investing/financing cash flows -430 -1,412 -1,295 -171 -183 Net cash flow -22 2,607 -1,817 -784 413 09 10 11E 12E 13E Change in working capital 247 -1,228 -351 -488 609
EBITDA Margin EBIT Margin Balance Sheet (THBm)
Growth & Profitability Cash and other liquid assets 909 3,517 1,700 915 1,328 Tangible fixed assets 384 440 574 624 704 100 30 Goodwill/intangible assets 0 0 0 0 0 80 25 Associates/investments 1,079 3,795 5,949 6,2536,581 60 20 Other assets 11,309 10,964 10,265 11,083 10,821 40 15 Total assets 13,681 18,715 18,487 18,876 19,434 20 10 0 5 Interest bearing debt 3,340 7,981 8,055 7,603 6,501 -20 0 Other liabilities 1,882 1,596 1,083 1,107 1,188 Total liabilities 5,222 9,577 9,139 8,709 7,690 09 10 11E 12E 13E Shareholders' equity 8,092 8,772 8,902 9,600 11,046 Minorities 367 366 446 566698 Sales growth (LHS) ROE (RHS) Total shareholders' equity 8,459 9,139 9,349 10,166 11,744
Net debt 2,431 4,464 6,356 6,687 5,173 Solvency Key Company Metrics 80 5 Sales growth (%) nm 79.8 -1.6 20.1 34.7 60 4 3 DB EPS growth (%) na 111.4 -65.4 319.0 50.6 40 2 EBITDA Margin (%) 38.6 33.6 31.5 36.2 35.2 20 1 EBIT Margin (%) 30.0 28.5 25.9 30.9 30.9 0 0 Payout ratio (%) 50.6 43.9 69.1 60.5 45.6 ROE (%) 7.1 14.4 4.8 19.1 25.8 09 10 11E 12E 13E Capex/sales (%) 13.1 7.2 16.0 13.8 10.4 Capex/depreciation (x) 1.5 1.4 2.8 2.6 2.4 Net debt/equity (LHS) Net interes t cover (RHS Net debt/equity (%) 28.7 48.9 68.0 65.8 44.0
Net interest cover (x) 4.3 3.7 2.1 3.0 4.1
Source: Company data, Deutsche Bank estimates
Nash Shivaruchiwong +66 2 633 6469 [email protected]
Page 36 Deutsche Bank AG/Hong Kong
Deutsche Bank 05 January 2012 Property Industrial Estates
Markets Research
Strong EPS growth seen in 2012
Outlook We initiate coverage of Hemaraj Land and Development with a Buy rating. The turning point for this industrial land developer should be February 2012, when the GHECO-One power plant starts commercial operations. The income stream from this project (35% owned by HEMRAJ) could double the company's EPS and RoE in 2012F. Management recently revised up its land pre-sales target for 2011 by 42% to 1,700 rai. In the first half the company reported pre-sales of 769 rai or 45% of its full-year target (in 2010 it recorded pre-sales of 930 rai). Our TP of Bt2.80 is based on a SOTP valuation (Bt1.85/shr for its recurring business and Bt0.93 for GHECO-One).
Robust 2H11 earnings expected: HEMRAJ made a small net loss of Bt2m in 1H11 mainly due to accounting changes. In 3Q11, however, HEMRAJ recorded a net profit of Bt154m and we anticipate another strong performance in the final quarter.
GHECO-One power plant on schedule: GHECO-One should double HEMRAJ’s revenue in 2012. The power plant underwent a Health Impact Assessment (HIA) in November, 2011 and if it passes it should start operating by February 2012. However, there is a risk of a further hold-up to the project which was previously delayed from 4Q11 to 1Q12. HEMRAJ also has options to take 25% stakes in three Small Power Producer (SPP) projects of 120MW each.
Autos should be the main driver: We have a positive view of the company’s core industrial land sales business. HEMRAJ operates six industrial estates, mostly along the Eastern Seaboard, and is involved in infrastructure and property projects. We anticipate strong FDI flows to the automotive sector and HEMRAJ has the potential to outperform by leveraging its already extensive automotive client list. The key auto clients for HEMRAJ are Ford and Mazda which are expected to attract more suppliers as they develop their eco-car models.
Revenue growth of 22% for 2012F: This is expected to come mainly from increased service income which should account for 44% of total revenue and grow by 18%. Recognized land sales which account for 38% of total revenue are projected to grow by 12% from 2010. We also expect HEMRAJ to recognize remaining revenue from its luxury condo project in Bangkok, The Park Chidlom, by next year.
Positive factors that are yet to be included: Projects announced but not yet included in our valuation due to a lack of details of impact on earnings are: 1) options for stakes of 25% each in seven Small Power Producer projects (120MW each); 2) a small detached residential housing project (pre-sales in early 2012); 3) another condominium project similar to The Park; and 4) serviced apartments in Sri Racha (located near Eastern Seaboard estates).
Deutsche Bank AG/Hong Kong Page 37
Deutsche Bank 05 January 2012 Property Industrial Estates
Markets Research
Valuation We derived our target price of Bt2.80 using a sum of the parts valuation in which we estimated the value of the company’s non-recurring sales (industrial land, factories and condominium) and recurring income from utilities and services before adjusting for costs. Together these businesses are valued at Bt1.85/share. Separately, we valued the dividend stream from GHECO-One associates at Bt0.93/share.
Land sales – Bt0.70/share (25% of TP); This is a proxy from the 16x average cross-cycle multiple for AMATA which we consider as primarily an industrial land sales business.
Utilities and services – Bt1.16/share (42% of TP); For utilities and rental income ex- GHECO-One, we used the DCF approach. Our cash inflow estimates assume that all HEMRAJ’s depreciation and amortization expenses are related to this segment as developed properties ready for sale have fast turnover and negligible depreciation.
GHECO-One – Bt0.93/share (33% of TP); We valued the dividend stream from GHECO- One by treating this as an investment in an associate company (HEMRAJ owns a 35% stake with the remaining 65% held by GDF Suez’s Thai subsidiary, Glow Energy.
Figure 54: SOTP Statement Value % Assumptions PER Equivalent Industrial land 0.74 26 16x 2012F PER 16x 2012F PER Utilities 1.16 41 Company-wide D/E = 0.9x, CoD ~ 25x 2012F PER = 5.6%, WACC = 8.1%, terminal growth rate 3% GHECO-One 0.93 33 35% stake, 6% project finance ~ 13x 2013F PER rate (inclusive of hedging costs), 65:35 D/E ratio, Bt13bn equity (Bt6.5bn injection each in 2011 and 2012, PV(FCFE) for HEMRAJ using WACC of 9% Rounding (0.03) Total 2.8 100
Source: Deutsche Bank
Risks Key risks include a sharp downturn in the global economy, further domestic political unrest, longer than expected delays in opening petrochemical plants at the company’s Map Ta Phut industrial estate, further construction delays for the GHECO-One power plant and/or if it fails to obtain appropriate licenses for commercial operation of the power plant.
Page 38 Deutsche Bank AG/Hong Kong
Deutsche Bank 05 January 2012 Property Industrial Estates
Markets Research
Earnings and Balance sheet
Diversifying income stream to offset earnings volatility We forecast sales growth of 13% and 22% for 2011 and 2012 respectively. We further expect normalized EPS growth to drop by 42% YoY in 2011 then increase by 319% in 2012. The key earnings drivers and assumptions for the company are as follows:
Land pre-sales: Our pre-sales target for 2011 of 1,530 rai reflects a 10% discount to management guidance of 1,700 rai, implying an increase of 64% YoY. However, we expect pre-sales to increase by just 15% in 2012F because of the high base effect. For 2013F our estimate is based on the 5-year average for land pre-sales or 930 rai. We then applied a 5% annual increase in pre-sales starting from that year.
Revenue: For 2011 and 2012 our assumptions for revenue recognition are based on management’s guidance and the historic backlog.
Utilities: We forecast utilities income to increase by 15% p.a, (the average over the past five years). In addition we assumed a GM for utilities of 15% (the average for the past five years).
In 2011, we assume GM to remain at its 2010 level of 40%. However, we expect the GM to rise significantly next year as HEMRAJ starts to transfer more land than it has pre-sold over the past two years.
Debt: As of 3Q11, HEMRAJ had a net D/E of 0.6x. We expect the ratio will rise slightly by the end of 2011 to 0.8x. In 2011, HEMRAJ has Capex plans of Bt7bn (Bt2bn for IE development, Bt2bn for utilities, Bt1.5bn for ready-built factory investments and Bt1.5bn for land purchases) financed partly by debt and internal cashflow. Next year the company plans to maintain Capex in the range of Bt6bn-7bn.
Deutsche Bank AG/Hong Kong Page 39
Deutsche Bank 05 January 2012 Property Industrial Estates
Markets Research
Company Profile
HEMRAJ Hemaraj Land and Development Plc is the developer and operator of six industrial estates located primarily along Thailand’s Eastern Seaboard. Its business activities include provision of infrastructure services including the supply of water and water treatment, electricity supply, gas pipelines, and residential property development.
Business Operations The six HEMRAJ estates cover a total area of 13,000 acres and have attracted a combined investment worth more than US$18bn. Its customers consist mainly of automotive (34%), consumer goods (15%), chemical/petrochemical (12%), building materials (9%), steel/metal (8%) and other clients (22%), with the main focus on ‘heavy industry. Factories for small and medium-sized enterprises are available for rent. After- sales and utilities services are provided to clients. In 2004, HEMRAJ developed its first residential project, The Park Chidlom in Bangkok. This luxurious 218-unit condominium should be fully transferred to buyers by next year. The company also provides rental space at a 30-storey office block in Bangkok which serves as its head office.
Strengths and Weaknesses HEMRAJ has an extensive list of chemical/petrochemical and automotive clients. The automotive client list is especially attractive as this could be leveraged during 2011-12F when we expect higher FDI inflows to support capacity expansion by car makers. The company’s main weakness is its reliance on non-recurring income from land sales. This is not problematic for now but could pose a business risk in future if land sales gradually dry up as foreign investors opt for countries with a lower cost base than Thailand. We believe that this could coincide with implementation of the ASEAN FTA treaty, at which point industrial estate developers may need to adopt a new strategy and become primarily utilities service providers for their customers.
Page 40 Deutsche Bank AG/Hong Kong
Deutsche Bank 05 January 2012 Property Industrial Estates
Markets Research
Figure 55: Location
Source: Company data
Figure 56: Utilities - Power Beneficial Hemraj Project Type Fuel Location Ownership mW mW Initial Status Operate GLOW IPP IPP Gas H-CIE 5% 713 36 1995 Operate 2001 Houay Ho SPP Hydroelectric Laos 12.75% 152 19 2009 Operate 1999 Gheco-One IPP Coal Maptaphut 35% 660 231 2006 Construction Mar-12 Glow Hemraj SPP Wind Chaiyapum 51% 100 51 2010 Under study 2016 Wind SPP1 SPP Cogen Gas H-RIL 25.01% 120 30 2009 Agreement 2013 SPP2 SPP Cogen Gas ESIE 25.01% 120 30 2010 Option 2014-2015 SPP3 SPP Cogen Gas ESIE 25.01% 120 30 2010 Option 2014-2015 SPP4 SPP Cogen Gas ESIE 25.01% 120 30 2010 Option 2014-2015 SPP5 SPP Cogen Gas H-ESIE 25.01% 120 30 2010 Option 2014-2015 SPP6 SPP Cogen Gas H-ESIE 25.01% 120 30 2010 Option 2014-2015 SPP7 SPP Cogen Gas H-CIE 25.01% 120 30 2010 Option 2014-2015 Source: Company data
Figure 57: Property Development – Ready Built Factories Total Sold Rental Avail Ready Built Factory (Medium) Units sqm Units sqm Units sqm Units sqm Eastern Seaboard IE 65 189,203 39 117,636 24 67,045 2 4,522 Hemaraj Eastern Seaboard IE 16 57,606 4 11,632 6 26,030 6 19,944 Hemaraj Chonburi IE 13 18,367 7 9,347 4 4,434 2 4,586 Hemaraj Eastern IE 2 2,220 2 2,220 Hemaraj Saraburi Industrial Land 2 3,860 2 3,860
Ready Built Factory (Small) Eastern Seaboard IE 30 27,888 23 20,528 7 7,360 Hemaraj Eastern Seaboard IE 4 5,616 4 5,616 Total 132 304,760 52 140,835 63 127,513 17 36,412 Source: Company data
Deutsche Bank AG/Hong Kong Page 41
Deutsche Bank 05 January 2012 Property Industrial Estates
Markets Research
Figure 58: Business Chart
Hemaraj Land and Development Plc.
Industrial Estates Utilities Property Others
Water Power Others
Eastern Seaboard Hemaraj Clean H-Construction SME Factory H-International (BVI) Industrial Estate Water 99.99% Management and 99.99% 100% (Rayong) Engineering 99.99% 60% 99.99%
Subsidiaries 25% Eastern Pipeline Hemaraj Eastern H-Phoenix Property Hemaraj Hemaraj Water Services Seaboard 99.99% International 100% 74.99% 99.99%
Eastern Industrial The Park Residence Estate 99.99% 99.99%
Hemaraj Saraburi Industrial Land 99.99%
99.99%
Hemaraj Rayong Industrial Land
Associates Cofely (Thailand) GHECO - One 35% 39.99%
25% Houay Ho Power Houay Ho Thai 51% (Lao P.D.R)
Sources: Company data, TISCO Research
Figure 59: List of major shareholders Name % Holdings 1 Horrungruang Family 15.01 2 Credit Agricole (Suisse) SA, Singapore Branch 8.76 3 Nomura Singapore Ltd-Customer Segregated Account 6.71 4 Thai NVDR Co Ltd 6.52 5 Kanokkarn Sirirattanaphan 4.81 6 EFG BANK AG 4.61 7 Chase Nominees Limited 15 3.86 8 Sombat Tepsatist 3.79 9 Kanda Korakochsakulwong 3.50 10 Quam Securities Company Limited A/C Client 3.47 Source: Company data, Set Smart
Page 42 Deutsche Bank AG/Hong Kong
Deutsche Bank 05 January 2012 Property Industrial Estates
Markets Research
Figure 60: Details of executives Name Position Age Educational Background Experience Mr. Chavalit Sethameteekul Chairman of the Board of 64 - M.B.S. (Political Science), – Director, Hemaraj Development Director Thammasart University, Bangkok – Chief Executive Officer Sriracha - Certificate class 40, National Harbour PCL. Defence College of Thailand - Barrister at Law, Institute of Legal Education of Thai BAR - LL.B..(Hons), Thammasart University, Bangkok - Thai Institute of Directors Association (IOD) Mr. Sudhipan Charumani Independent Director 67 – Institute of Chartered Accountants – Independent Director. Chairman or in England and Wales Audit committee and Chairman of the – DCP Re 2/2009, Thai Institute of Nomination and Remuneration Directors Association (IOD) committee – Director: Vasupak Associates Co., Ltd. Mr. Thongchai Director 58 – Junior High School, Rojseri- – Chairman and Director in 12 Subsidiary Srisomburananont Chairman of the Executive Anusorn School Companies of Non-ListedSET Committee – DAP 77/2009, Thai Institute of Companies Member of Nomination and Directors Association (IOD) – Director Live Smart Co., Ltd. Remuneration Committee – Director Ruamruedee Capital Co.,Ltd Mr. David Richard Director, President 55 – MBA, Northeastern University, – Present: Director and Executive Nardone Boston, USA Director, President – DCP 57/2005, Thai Institute of – Present: Chairman and Director in 14 Directors Association (IOD) Subsidiary Companies of Non-Listed SET Companies – Vice Chairman GHECO-One Co., Ltd. – Chairman Cofely (Thailand) Co.,Ltd. – Director Houay Ho Thai Co., Ltd. Mr. Vivat Jiratikarnsakul Director 55 – Bachelor of Sanitary, Faculty of – Present: Director and Executive Engineering, Chulalongkorn Director, President University – Present: Chairman and Director in 14 – DAP 2/2003 and DCP 38/2003, Thai Subsidiary Companies of Non-Listed Institute of Directors Association SET Companies (IOD) – Director GHECO-One Co., Ltd. – Director Cofely (Thailand) Co.,Ltd. – Director Houay Ho Thai Co., Ltd. Mr. Peter John Independent Director 61 – Bachelor of Science in Chemistry – Manager West Merchant Bank Edmondson Member of the Audit (Honor), University of Sheffield, Singapore Committee England – Director Standard Charter Merchant Bank Singapore – Senior Manager The Arab Investment Company, Riyadh and Bahrain – Manager Williams & Glyn’s Bank Mr. Vikit Horrungruang Director 40 – MBA, Finance, Northeastern – Managing Director Sriracha Harbour University, USA PCL. – DCP 64/2005, DCP Re 2/2009, Thai – Deputy Managing Director Institute of Directors Association T.C.Exhibition Co.,Ltd. (IOD) – Director Suntec Metal Co.,Ltd. – Director Flaming Property Co.,Ltd. – Director Eastern Enterprise Co.,Ltd. – Director CA-Post (Thailand) Co.,Ltd Sources: Company data
Deutsche Bank AG/Hong Kong Page 43
Deutsche Bank 05 January 2012 Property Industrial Estates
Markets Research
Rating Company Price at 4 Jan 2012 (THB) 13.00 Buy Amata Corp PCL Price target - 12mth (THB) 18.30
52-week range (THB) 16.30 - 8.15
Asia SET 1,036 ASEAN Thailand Price/price relative
Reuters Bloomberg 20 Property 16
AMAT.BK AMATA TB 12 8 4 Jan 10Apr 10Jul 10Oct 10Jan 11Apr 11Jul 11Oct 11 Robust land sales to drive growth next Amata Corp PCL SET (Rebased) year Performance (%) 1m 3m 12m Absolute 2.4 59.5 -12.2 We initiate coverage of Amata Corporation with a Buy rating. AMATA expects SET 0.7 21.1 -0.6 to finalize its new land sales to auto-related clients by 4Q11. Pre-sales for Stock Data 9M11 amounted to 954 rai, 63% of the company's annual target for land sales Market cap (THBm) 13,871 of 1,500 rai. Management is confident of achieving its land sales target for 2011 and says it has letters of intent covering 600-700rai. AMATA has yet to Market cap (USDm) 440 finalize details of its 1,000 rai JV with Holley but this could occur in 4Q11. The Shares outstanding (m) 1,067.0 1,000 rai sale of land is outside AMATA’s target for 2011. We have a TP of Major shareholders KromaditFamily Bt18 for 2012 based on the stock’s 5-year average PER of 16x. (30%) Land sales to be the main revenue driver Free float (%) 68 Revenue booked in 9M11 accounts for 42% of our 2011 estimate and only Avg daily value traded 3.0 29% of the Bloomberg consensus forecast. Land sales should contribute (USDm) around 66% of 2011F revenue, with 22% coming from utilities and 12% from Key Indicators (Fy1) rental income. Management guided us that 2011 based on the company’s new ROE (%) 13.6 accounting policy it plans to book land sales of 800 rai. We expect the consensus forecast of the full year target to be revised down to reflect the Net debt/equity (%) 84.2 slower pace of land sales recognition. Book value/share (THB) 5.20 Improved margins forecast for 2012 Price/book (x) 2.5 We forecast a reduced gross margin of 47% for 2011 compared with 48% in Net interest cover (x) 5.0 2010 due to a decline in land sales booking. However, the GM should recover Operating profit margin (%) 37.2 to around the 48% level in 2012F as more land is transferred, particularly small land plots of less than 100 rai. The GM increased by 49bp to 43.8% in 3Q11, with the operating margin down by 154bp to 26% mainly on higher SG&A expenses as a percentage of sales. The net margin of 15.9% was also down from 19% in 1Q11. TP of Bt18 implies an upside of 24% Our TP of Bt18 is based on the stock’s 5-year average PER of 16x and a base case for land sales recognition of 1,000 rai in 2012F.
Forecasts And Ratios Year End Dec 31 2009A 2010A 2011E 2012E 2013E Sales (THBm) 2,094.7 3,552.5 3,390.0 5,010.1 5,873.0 EBITDA (THBm) 818.1 1,618.7 1,475.9 2,066.8 2,394.7 Reported NPAT (THBm) 318.5 957.5 744.5 1,219.2 1,525.9 Reported EPS FD(THB) 0.30 0.90 0.70 1.14 1.43 DB EPS FD (THB) 0.30 0.90 0.70 1.14 1.43 OLD DB EPS FD (THB) 0.30 0.76 1.14 1.09 – % Change 0.0% 18.0% -38.5% 5.3% – DB EPS growth (%) – 200.6 -22.2 63.8 25.2 PER (x) 18.9 11.9 18.6 11.4 9.1 EV/EBITDA (x) 10.5 8.7 10.6 7.6 6.0 DPS (net) (THB) 0.10 0.40 0.60 0.60 0.65 Yield (net) (%) 1.8 3.7 4.6 4.6 5.0 Source: Deutsche Bank estimates, company data 1 DB EPS is fully diluted and excludes non-recurring items 2 Multiples and yields calculations use average historical prices for past years and spot prices for current and future years, except P/B which uses the year end close
Page 44 Deutsche Bank AG/Hong Kong
Deutsche Bank 05 January 2012 Property Industrial Estates
Markets Research
Model updated:04 January 2012 Fiscal year end 31-Dec 2009 2010 2011E 2012E 2013E
Running the numbers Financial Summary Asia DB EPS (THB) 0.30 0.90 0.70 1.14 1.43 Reported EPS (THB) 0.30 0.90 0.70 1.14 1.43 ASEAN Thailand DPS (THB) 0.10 0.40 0.60 0.60 0.65 Property BVPS (THB) 4.8 5.1 5.2 5.7 6.5 Weighted average shares (m) 1,067 1,067 1,067 1,067 1,067 Amata Corp PCL Average market cap (THBm) 6,027 11,431 13,871 13,871 13,871 Enterprise value (THBm) 8,600 14,087 15,706 15,676 14,375 Reuters: AMAT.BK Bloomberg: AMATA TB Valuation Metrics Buy P/E (DB) (x) 18.9 11.9 18.6 11.4 9.1 P/E (Reported) (x) 18.9 11.9 18.6 11.4 9.1 Price (4 Jan 12) THB 13.00 P/BV (x) 1.54 2.82 2.50 2.26 1.99 Target Price THB 18.30 FCF Yield (%) nm 8.7 nm 7.2 13.5 Dividend Yield (%) 1.8 3.7 4.6 4.6 5.0 52 Week range THB 8.15 - 16.30 EV/Sales (x) 4.1 4.0 4.6 3.1 2.4 Market Cap (m) THBm 13,871 EV/EBITDA (x) 10.5 8.7 10.6 7.6 6.0 USDm 441 EV/EBIT (x) 14.2 10.1 12.5 8.4 6.6
Company Profile Income Statement (THBm) Amata Corporation Public Company Limited develops Sales revenue 2,095 3,553 3,390 5,010 5,873 industrial estates primarily serving manufacturing plants Gross profit 1,044 1,953 1,805 2,635 3,075 and factories. The company acquires land and develops EBITDA 818 1,619 1,476 2,0672,395 essential infrastructure and facilities ready for Depreciation 213 221 215 209203 industrialized operations. It has projects in Vietnam. Amortisation 000 00 EBIT 605 1,398 1,261 1,8582,191 Net interest income(expense) -262 -239 -254 -270 -228 Price Performance Associates/affiliates -1 50 50 5561 Exceptionals/extraordinaries 119 0 0 00 20 Other pre-tax income/(expense) 0 0 0 0 0 16 Profit before tax 462 1,209 1,057 1,643 2,024 12 Income tax expense 44 145 159 246 304 8 Minorities 99 106 154 177195 Other post-tax income/(expense) 0 0 0 0 0 4 Net profit 319 958 744 1,219 1,526 Jan 10Apr 10Jul 10Oct 10Jan 11Apr 11Jul 11Oct 11 DB adjustments (including dilution) 0 0 0 0 0 DB Net profit 319 958 744 1,219 1,526 Amata Corp PCL SET (Rebas ed)
Cash Flow (THBm) Margin Trends Cash flow from operations 460 1,620 899 1,576 2,422 48 Net Capex -965 -630 -1,936 -578 -547 44 Free cash flow -505 989 -1,037 998 1,876 40 Equity raised/(bought back) -12 -62 0 0 0 36 Dividends paid -107 -164 -640 -640 -694 32 Net inc/(dec) in borrowings 490 852 7 -422 -758 28 Other investing/financing cash flows -92 -834 464 612 1,472 Net cash flow -225 781 -1,206 549 1,895 09 10 11E 12E 13E Change in working capital -72 441 -60 148 693
EBITDA Margin EBIT Margin Balance Sheet (THBm)
Growth & Profitability Cash and other liquid assets 971 1,099 1,416 1,430 1,948 Tangible fixed assets 2,697 2,785 909 2,499 2,290 80 25 Goodwill/intangible assets 0 0 0 0 0 60 20 Associates/investments 3,088 3,685 4,351 4,1234,342 40 15 Other assets 6,227 6,792 8,132 7,127 6,887 20 10 Total assets 12,982 14,361 14,808 15,179 15,467 0 5 Interest bearing debt 5,920 6,772 6,779 6,358 5,599 -20 0 Other liabilities 1,261 1,479 1,661 1,697 1,717 Total liabilities 7,181 8,251 8,440 8,055 7,316 09 10 11E 12E 13E Shareholders' equity 5,091 5,441 5,545 6,124 6,956 Minorities 711 669 823 1,0001,195 Sales growth (LHS) ROE (RHS) Total shareholders' equity 5,802 6,110 6,368 7,124 8,151
Net debt 4,949 5,673 5,363 4,928 3,651 Solvency Key Company Metrics 100 12 80 10 Sales growth (%) nm 69.6 -4.6 47.8 17.2 60 8 DB EPS growth (%) na 200.6 -22.2 63.8 25.2 6 EBITDA Margin (%) 39.1 45.6 43.5 41.3 40.8 40 4 EBIT Margin (%) 28.9 39.4 37.2 37.1 37.3 20 2 0 0 Payout ratio (%) 33.5 44.6 86.0 52.5 45.5 ROE (%) 6.4 18.2 13.6 20.9 23.3 09 10 11E 12E 13E Capex/sales (%) 46.1 17.7 57.1 11.5 9.3 Capex/depreciation (x) 4.5 2.9 9.0 2.8 2.7 Net debt/equity (LHS) Net interes t cover (RHS Net debt/equity (%) 85.3 92.8 84.2 69.2 44.8
Net interest cover (x) 2.3 5.8 5.0 6.9 9.6
Source: Company data, Deutsche Bank estimates
Nash Shivaruchiwong +66 2 633 6469 [email protected]
Deutsche Bank AG/Hong Kong Page 45
Deutsche Bank 05 January 2012 Property Industrial Estates
Markets Research
Revenue to grow 47% in 2012F
Outlook With favourable locations for its estates and an already well-established network of auto-related companies, AMATA stands to benefit from higher land sales to the automotive industry over the next 1-2 years. YTD it has booked pre-sales of 648 rai or 36% of the full year land sales target of 1,500-1,800 rai. Management is confident of achieving its land sales target for 2011 and revealed that it currently holds letters of intent covering 600-700 rai. AMATA has yet to conclude a JV agreement with Holley (expected in 2H11) and the 1,000 rai of land involved is not included in 2011’s target. We have a TP of Bt18 for 2012F based on the stock’s 5-year average PER of 16x. We initiate coverage of Amata Corporation with a Buy rating.
Land sales to be the main revenue driver. We expect land sales to contribute 66% of total 2011 revenue, utility services 22% and rental income 12%. Management plans to book land sales of 800 rai 2011 under a new accounting policy. We forecast revenue of Bt3.5bn next year from land sales mainly from an increase in transfers from its completed backlog. We forecast FY12 revenue to jump by 47%.
Margin to improve in 2012F: We anticipate a slightly lower gross margin of 47% 2011 vs. 48% in 2010 due to the booking of fewer land sales. But the GM should recover to the 48% level in 2012F as more land is transferred. Note that the GM in 3Q11 was 43.8%, up 50bp. The net margin of 15.9% was also down from 19.1% in 1Q11. SG&A as a percentage of sales increased to 17.4% from 15.3% in 1Q11. AMATA paid an average tax rate of just 16% in 9M11 reflecting its BoI investment privileges.
Land sales supported by Toyota’s supply chain: AMATA should continue to be a direct beneficiary of capacity expansion and plant relocation by Japanese manufacturers (most of its current clients are Japanese). The AMATA Nakorn estate is located close to Thailand’s largest auto manufacturer, Toyota, and it should benefit from expansion of the supply chain as more tier 2-3 auto parts businesses are established.
Sound balance sheet supports land purchases: The net D/E ratio in 3Q11 of 1.3x slightly increased from 1.1x in 2Q11. Management expects to sustain an average net D/E of 1x. The company recently swapped part of its debt to fixed rate loans as it expects its interest rate to rise further in 2011. AMATA plans land purchases worth Bt1.5bn in 2011 which are expected to increase its land bank from the current 10k rai.
Positive factors that have yet to be included: Management advised us that the company plans to finalize the sale of a large block of land to the Chinese group Holley in the near future. This would be outside of its FY11 target for land sales of 1,700 rai. AMATA owns 51% of a JV with the Holley Group which is a large pharmaceutical producer in China with investments in Chinese industrial estates. The latter buys undeveloped land at AMATA industrial estates in Thailand for onward sale to its Chinese clients. Three years ago, the JV unit bought 600 rai from AMATA.
Page 46 Deutsche Bank AG/Hong Kong
Deutsche Bank 05 January 2012 Property Industrial Estates
Markets Research
Valuation AMATA stock has traded in a PER range of 4x-35x over the past five years. The share price generally reacts to any new land sales announcement and the company usually reports strong pre-sales in the 2H. We assumed the stock would trade at its historical PER average based on projected 2012F earning. Accordingly we derived a TP of Bt18 for 2012 based on a PER of 16x which is its average 5-year historical PER.
Figure 61: Weekly historic PER – AMATA (X) 35 30 25 +1 std, 22.7 20 Avg, 16.0 15 10 5 -1 std, 9.0 0 Apr-07 Jan-05 Feb-06 Jun-08 Jan-09 Aug-05 Sep-06 Aug-09 Oct-10 Sep-11 Oct-11 Nov-07 Mar-10 Dec-11 May-11
Source: SET
Risks The key risk to our call is worse than expected land sales. Our land sales forecast is based on a 10% discount to management guidance. Given that the company has achieved only 63% of expected presales for 2011 there is a strong possibility that it will miss its target. Note that in 2009 and 2010, AMATA missed its presales targets by 70% and 10% respectively. Any hold-ups to scheduled land transfers due to delays in investment decisions, construction work or documentation could put pressure on revenue recognition and exacerbate earnings volatility.
Deutsche Bank AG/Hong Kong Page 47
Deutsche Bank 05 January 2012 Property Industrial Estates
Markets Research
Earnings and Balance Sheet
Presales and backlog are the main drivers We forecast negative sales growth of 3% for 2011 followed by a 47% jump in 2012. We further assumed normalized EPS growth of -20% for 2011F and 62% for 2012F. The key earnings driver and assumptions are as follows:
Land presales: Our presales target for 2011F is based on a 10% discount to management’s lower range guidance (as previously mentioned AMATA has a track record of missing its presales target). Thus 90% of 1,500 = 1,350 rai, implying flat growth for presales YoY, However, we expect presales to jump by 15% in 2012 due to higher demand from the auto industry. For 2013 we assumed presales based on the 5-year average of 1,000 rai then applied a 5% increase from this base as of that year.
Revenue: We forecast revenue recognition based on management’s guidance for 2011-12F. From 2013F onwards we have assumed revenue recognition based on the historical average presales backlog.
Utilities: We forecast income from utilities would increase by 15% p.a, which matches the average increase over the past five years. We also forecast a GM for utilities of 15%, which was the average GM over the past five years.
Land sales gross margin: The company expects to sustain a gross margin of 49%, in line with that of previous years.
Tax rate: We assume AMATA’s tax rate would hover at around the 15% level for the next few years because of the company’s BoI tax privileges and the continued high priority given to foreign investment.
Debt: AMATA had a net D/E of 1.3x as of 3Q11. We assume the company will slowly pay off debt bringing its D/E level below 1x.
Page 48 Deutsche Bank AG/Hong Kong
Deutsche Bank 05 January 2012 Property Industrial Estates
Markets Research
Company Profile
AMATA AMATA is a developer of industrial estates that provides utility services and other infrastructure facilities to factory operators. It was established in March 1989 and was first known as Bangprakong Industrial Park 2 Plc, before the name was changed to Amata Corporation Plc in early 1998. AMATA was listed on the SET in 1997.
Business Operations AMATA operates large-scale industrial estates in Thailand and Vietnam where customers can choose to build or rent factories. Amata Nakorn, located in Chonburi province, falls under the BoI Zone 2 category, while Amata City in Rayong is in Zone 3. Established in 1994, 61%-owned Amata Vietnam operates an estate with 90 factories on more than 700 hectares (4,370 rai or 1,750 acres) of land in Dong Nai province near Ho Chi Minh City. Amata Vietnam has about 200 hectares (1,250 rai) of land available for sale at present (annual sales rate of 15-20 hectare). The next phase of development for this estate will include villas, apartments and lifestyle facilities to meet growing demand in this area.
AMATA’s estates in Thailand are strategically located on the Eastern Seaboard, the country’s biggest industrial zone and an area that is well served by land, sea and air transport. Amata Nakorn covers 15,000 rai (6,000 acres) of land of which 4,000 rai (1,600 acres) is available for sale. Located on the Bangna-Trad Road in Chonburi province, Amata Nakorn is 43 km from the Laem Chabang deep-sea port and 42 km from Suvarnabhumi Airport. Amata City is located along highway No. 331 in Rayong province and is 114 km from Bangkok and 48 km from the Map Ta Phut port. The estate covers 8,440 rai (3,380 acres) of land of which 3,000 rai is available for sale. Its clients come from various industries and include auto parts (32%), consumer products (16%), material (16%), machinery (12%), services (16%), electronics (4%) and others (4%). Japanese investors account for 43% of the company’s client base, followed by US/Canada (13%), China (13%), Taiwan (9%), EU (9%), Thailand (9%) and Singapore (4%).
In addition, AMATA has established spin-off businesses providing infrastructure and other services to estate tenants. For example, Amata Power Co is a joint venture providing electricity and steam power, Amata Quality Water Co was established to produce and distribute water for industrial purposes, and Amata Summit provides ready-built factories for rent at its estates.
Strengths and Weaknesses Amata Nakorn is located within a 50km radius of a cluster of auto assembly plants. Auto production capacity is growing significantly in Thailand especially for pick-up trucks, with Toyota, Isuzu and Mitsubishi all expanding. Production of small passenger cars is also being stepped up. Amata Nakorn is therefore in an excellent position to attract more investment from auto-related businesses. AMATA’s industrial estates have not experienced water supply problems unlike some other estates in eastern Thailand that cater for petrochemical facilities.
Deutsche Bank AG/Hong Kong Page 49
Deutsche Bank 05 January 2012 Property Industrial Estates
Markets Research
Figure 62: Location – Thailand
Source: Company data
Page 50 Deutsche Bank AG/Hong Kong
Deutsche Bank 05 January 2012 Property Industrial Estates
Markets Research
Figure 63: Location – Vietnam
Source: Company data
Figure 64: Business
Sources: Company data
Deutsche Bank AG/Hong Kong Page 51
Deutsche Bank 05 January 2012 Property Industrial Estates
Markets Research
Figure 65: List of major shareholders Name % Holdings 1 Mr. Vikrom Kromadit 24.72 2 Mr. Vithoon Kromadit 5.82 3 Thai NVDR 5.57 4 ITOCHU Management 4.69 5 State street bank and trust company 3.67 6 Pol.Major General Chawalit Yodmanee 3.57 7 Nortrust nominees 3.32 8 HSBC (Singapore) Nominees 2.28 9 State Street Bank Europe 2.01 10 Bangkok Insurance 1.22 Source: Company data, SetSmart
Page 52 Deutsche Bank AG/Hong Kong
Deutsche Bank 05 January 2012 Property Industrial Estates
Markets Research
Figure 66: Details of executives Name Position Age Educational Background Experience Wisanu Krea-Ngam Independent Director 60 – LLB Thamasart University – Present: Director of Amata – LL.M University of California, Corporation Berkeley – Chairman, Sikirin Public Company – J.S.D University of California, Limited Berkeley – Chairman, Bangkok First – LL.D. Chulalongkorn University Investment & Trust Public Company Limited – Director, Loxley Public Company Limited Mr. Keita Ishii Non-Executive Director 50 – Bachelor’s degree in law, Waseda – Director T.T.L Industries Public University, Japan Co.,Ltd – President ITOCHU (Thailand) Ltd. and ITOCHU Management (Thailand) Co., Ltd. – Director Japan Chamber of Commerce in Bangkok – Member of the Executive Committee of Thai-Japanese Association
Mr. Vikrom Kromadit Chairman of Executive Board 58 – B.E. (Mechanical Engineering), – Managing Director of V&K Corp. Chief Executive Officer National Taiwan, University, Taipei, Co., Ltd. Taiwan – President of Kromadit Co., Ltd, – Vice President of BIP Engineering Co., Ltd. – Chairman of the Board of Directors of Amata (Vietnam) Joint Stock Company General Yuthasak Sasiprapha Independent Director 74 – 10th Grade, ST. Gabriel’s College – Commanding General, 1st Military – Chulachomklao Royal Military Circle Academy – Permanent Secretary of Defence, – Army Command and General Staff Ministry of Defence College class 48 – Member of the Senate – The National Defence Course for – Deputy Minister of Defence Joint State - Private Sectors – Advisor to the Prime Minister for – USAIS Airborne and Ranger Security Courses, Fort Benning, Georgia, – Vice Minister for Defence U.S.A. – Independent Director, Member of – USAIS Infantry Officer Advance the Audit Committee, Course, Fort Benning, Georgia, – Dynasty Ceramic Pcl. U.S.A. – Advisor, PTT Chemical Pcl. Mr. Chackchai Panichapat Executive Director 72 – B.E. (Electrical Engineering), – Chairman, Amata (Vietnam) Joint Chulalongkorn University Stock Company – M.E. (Electrical Engineering), – Chairman, Amata Water Co., Ltd. University of Texas, Austin, U.S.A. – Chairman, Magnecomp Precision – Certificate, Defense College Technology Pcl. – Deputy Secretary General of the Board of Investment – Independent Director, , Central Pattana Pcl. – Independent Director, Saha Union Pcl. – Independent Director, City Sports and Recreation Pcl. – Independent Director, Kang Yong Electric Pcl. Mr. Dusit Nontanakorn Independent Director 64 – B.E. Civil Engineering, Youngstown – President, Cementhai Distribution State University, Ohio Co., Ltd. – M.S. Structural Engineering, Ohio – Secretary General, Board of Trade State University of Thailand and – M.B.A. Marketing, University of – Thai Chamber of Commerce California at Los Angeles – Advisor and Director, Government Savings Bank Mr. Viboon Kromadit Executive Director 50 – Bachelor Degree in Business – Director of Amata Water Co., Ltd. (Brother of Mr Vikrom Administration, Assumption – Director of Amata Facility Services Kromadit) University Co., Ltd. – Master of Arts (Public Affairs) – Director of Amata Summit Ready Thammasart University Built Co., Ltd. – Director of Amata City Co., Ltd. – Director of Amata (Vietnam) Joint Stock Company Sources: Company data
Deutsche Bank AG/Hong Kong Page 53
Deutsche Bank 05 January 2012 Property Industrial Estates
Markets Research
Rating Company Price at 4 Jan 2012 (THB) 10.90 Price target - 12mth (THB) 13.40 Buy Ticon Industrial 52-week range (THB) 15.00 - 9.40 SET 1,036
Asia Connection Price/price relative ASEAN Thailand 17 15 Reuters Bloomberg 14 Property 12 11 TICN.BK TICON TB 9 Property 8
Jan 10Apr 10Jul 10Oct 10Jan 11Apr 11Jul 11Oct 11
Ticon Industrial Connection SET (Rebased) A strong dividend play Performance (%) 1m 3m 12m Absolute -5.2 0.0 -19.9
SET 0.7 21.1 -0.6 Stock Data We initiate coverage of Ticon Industrial Connection with a Buy rating based on Market cap (THBm) 8,619 an assumed recovery in demand for its ready-built factories in 2012F. This Market cap (USDm) 273 should mainly reflect business expansion by auto suppliers as they recover Shares outstanding (m) 790.7 from supply chain disruptions caused by the Japanese earthquake in 1Q11 Major shareholders Rojana Industrial and Thai flooding in 4Q11. High capacity utilization in the Thai auto industry Park Plc 21.35% before the floods crisis indicates that some parts suppliers are likely to expand Free float (%) 50 output, partly through leasing of factories and warehouses. Another factor that should boost 2012F earnings is TICON’s plan to sell assets to its two property Avg daily value traded 1.0 (USDm) funds. Our TP of Bt13.40 is based on DCF. Key Indicators (Fy1) Asset sale to property funds to boost 2012 earnings Previously we had expected TICON to sell factory assets worth about Bt1.5bn ROE (%) 10.0 in 4Q11 but the sale has now been postponed to next year. Based on our Net debt/equity (%) 93.9 sensitivity analysis, every Bt1bn that TICON injects into its property funds, Book value/share (THB) 7.62 adds Bt250m to the company’s net profit. For 2012 we expect sales of Bt2bn to its property funds based on its historical average. Price/book (x) 1.4 Rental occupancy expected to recover after floods Net interest cover(x) 3.3 In 1H11 the occupancy rate for TICON’s factories increased to 88% from 82% Operating profit margin (%) 48.2 in 2010 while warehouse occupancy rose to 83% from 71%. However, Thailand’s flood crisis has affected almost 45% of TICON’s overall business and we anticipate very weak earnings in 4Q11. For 2011 TICON has set a lease target of 180k sq. m (split equally between factories and warehouses), an increase from the annual average of 120-150k sq. m over the past few years. We expect rental demand to recover once floodwaters recede and forecast EPS growth of 50% in 2012. TP of Bt13.40 implies upside of 15% plus dividend yield of 9.7%. Our target price of Bt13.40 assumes an Rf of 2.1%, beta of 0.8x, 4.9% market- risk premium, overall WACC of 7.1% and terminal growth of 1.5% (9% retention rate and 17% long-term RoE). Furthermore we forecast a dividend pay-out of Bt1.01/share in 2012, implying a yield of 9.2% at current levels.
Forecasts And Ratios Year End Dec 31 2009A 2010A 2011E 2012E 2013E Sales (THBm) 2,373.2 2,782.9 1,857.3 3,072.6 3,285.6 EBITDA(THBm) 1,171.3 1,617.2 1,191.0 1,735.6 1,860.7 Reported NPAT(THBm) 653.3 821.1 560.8 916.3 1,107.3 Reported EPS FD(THB) 0.99 0.88 0.56 0.91 1.10 DB EPS FD (THB) 0.99 0.88 0.56 0.91 1.10 DB EPS growth (%) – -11.5 -36.8 63.4 20.8 PER (x) 7.4 12.8 19.6 12.0 9.9 EV/EBITDA (x) 3.7 4.8 6.9 4.8 4.3 DPS (net) (THB) 0.80 1.00 0.50 0.86 0.86 Yield (net) (%) 7.3 9.2 4.6 9.2 8.5 Source: Deutsche Bank estimates, company data
1 DB EPS is fully diluted and excludes non-recurring items 2 Multiples and yields calculations use average historical prices for past years and spot prices for current and future years, except P/B which uses the year end close
Page 54 Deutsche Bank AG/Hong Kong
Deutsche Bank 05 January 2012 Property Industrial Estates
Markets Research
Model updated:05 January 2012 Fiscal year end 31-Dec 2009 2010 2011E 2012E 2013E
Running the numbers Financial Summary Asia DB EPS (THB) 0.99 0.88 0.56 0.91 1.10 Reported EPS (THB) 0.99 0.88 0.56 0.91 1.10 ASEAN Thailand DPS (THB) 0.80 1.00 0.50 1.01 0.93 Property BVPS (THB) 7.6 7.8 7.2 6.6 6.3 Weighted average shares (m) 658 715 791 864 937 Ticon Industrial Connection Average market cap (THBm) 4,861 8,060 8,619 8,619 8,619 Enterprise value (THBm) 4,354 7,496 8,182 8,553 8,342 Reuters: TICN.BK Bloomberg: TICON TB Valuation Metrics Buy P/E (DB) (x) 7.4 12.8 19.6 12.0 9.9 P/E (Reported) (x) 7.4 12.8 19.6 12.0 9.9 Price (4 Jan 12) THB 10.90 P/BV (x) 1.27 1.73 1.52 1.65 1.72 Target Price THB 13.40 FCF Yield (%) 5.4 6.6 4.0 11.4 12.8 Dividend Yield (%) 10.8 8.9 4.6 9.2 8.5 52 Week range THB 9.40 - 15.00 EV/Sales (x) 1.8 2.7 4.4 2.8 2.5 Market Cap (m) THBm 8,619 EV/EBITDA (x) 3.7 4.6 6.9 4.9 4.5 USDm 274 EV/EBIT (x) 4.8 5.5 9.1 5.9 5.3
Company Profile Income Statement (THBm) Ticon Industrial Connection builds, rents and sells factories Sales revenue 2,373 2,783 1,857 3,073 3,286 to manufacturers. It bridges the gap between industrial Gross profit 1,354 1,766 1,359 1,919 2,056 estates that provide plots of land and utility services, and EBITDA 1,171 1,617 1,191 1,7361,861 the turnkey factories and facilities that foreign investors Depreciation 259 265 295 282283 need to start operations in Thailand. The company holds a Amortisation 000 00 33% stake in TFUND and 19% of TLOGIS. Both of these EBIT 913 1,352 896 1,4541,577 real estate investment trusts invest in TICON's leasehold Net interest income(expense) -294 -261 -272 -210 -185 factories and warehouses. Associates/affiliates 70 -12 78 -40-8 Price Performance Exceptionals/extraordinaries 0 0 0 00 Other pre-tax income/(expense) 0 0 0 0 0 17 15 Profit before tax 689 1,079 701 1,204 1,384 14 Income tax expense 35 258 140 288 277 12 Minorities 000 00 11 Other post-tax income/(expense) 0 0 0 0 0 9 Net profit 653 821 561 916 1,107 8 Jan 10Apr 10Jul 10Oct 10Jan 11Apr 11Jul 11Oct 11 DB adjustments (including dilution) 0 0 0 0 0 DB Net profit 653 821 561 916 1,107
Ticon Industrial Connection SET (Rebased) Cash Flow (THBm)
Margin Trends Cash flow from operations 432 1,254 854 1,196 1,388 Net Capex -169 -718 -511 -122 -79 70 Free cash flow 263 536 343 1,074 1,308 60 Equity raised/(bought back) 17 320 -106 0 0 Dividends paid -167 -205 -395 -870 -870 50 Net inc/(dec) in borrowings -281 556 -419 -16 -207 40 Other investing/financing cash flows -649 -290 -8 -370 -320 30 Net cash flow -816 918 -586 -182 -89 Change in working capital -480 168 -3 -3 -3 09 10 11E 12E 13E Balance Sheet (THBm) EBITDA Margin EBIT Margin
Cash and other liquid assets 83 183 445 263 174 Growth & Profitability Tangible fixed assets 5,030 4,798 4,742 6,004 5,940 Goodwill/intangible assets 0 0 0 0 0 80 20 Associates/investments 6,043 6,554 5,747 5,5435,636 60 Other assets -47 950 1,188 376 500 15 40 Total assets 11,109 12,485 12,122 12,185 12,250 20 10 Interest bearing debt 5,619 6,173 5,756 5,740 5,533 0 5 -20 Other liabilities 497 714 709 742 776 -40 0 Total liabilities 6,116 6,888 6,465 6,482 6,309 Shareholders' equity 4,994 5,597 5,657 5,703 5,941 09 10 11E 12E 13E Minorities 000 00 Total shareholders' equity 4,994 5,597 5,657 5,703 5,941 Sales growth (LHS) ROE (RHS) Net debt 5,536 5,990 5,311 5,477 5,359
Solvency Key Company Metrics 120 10 Sales growth (%) nm 17.3 -33.3 65.4 6.9 100 8 DB EPS growth (%) na -11.5 -36.8 63.4 20.8 80 6 EBITDA Margin (%) 49.4 58.1 64.1 56.5 56.6 60 EBIT Margin (%) 38.5 48.6 48.2 47.3 48.0 40 4 Payout ratio (%) 80.6 87.1 70.5 94.9 78.6 20 2 0 0 ROE (%) 13.1 15.5 10.0 16.1 19.0 Capex/sales (%) 7.1 25.8 27.5 4.0 2.4 09 10 11E 12E 13E Capex/depreciation (x) 0.7 2.7 1.7 0.4 0.3 Net debt/equity (%) 110.9 107.0 93.9 96.0 90.2 Net debt/equity (LHS) Net interes t cover (RHS Net interest cover (x) 3.1 5.2 3.3 6.9 8.5
Source: Company data, Deutsche Bank estimates
Nash Shivaruchiwong +66 2 633 6469 [email protected]
Deutsche Bank AG/Hong Kong Page 55
Deutsche Bank 05 January 2012 Property Industrial Estates
Markets Research
Sale to property funds is key driver
Outlook Demand for rental factories should improve in 1H12F driven mainly by the expansion of auto suppliers. Auto parts makers and other related businesses were running at high utilization rates before the tsunami in Japan and severe flooding in Thailand. We expect some operators to expand production capacity partly through leasing of factories and warehouses. Our valuation for TICON using the DCF method suggests a TP of Bt13.40. We also expect the company to pay a DPS of Bt1.01 in 2012, implying a yield of 9.2% and total upside of 23%. Hence, we initiate coverage of the stock with a Buy rating.
9M rental income accounts for 96% of our FY11 forecast: Thailand’s floods crisis has affected almost 45% of TICON’s overall business (divided as 16% warehouses and 29% factories). However, this estimate does not include the Bangpoo and Lad Krabang districts which are considered risky areas (Bangpoo has one factory while Lad Krabang has more than 10 factories). Hence, we expect very weak earnings in 4Q11.
Sales of assets to property funds to resume next year: TICON postponed its assets sale to next year as half of its assets are now flooded. We expect TICON to inject more assets into its two property funds next year once its rental business recovers.
Flooding affects almost half of TICON’s business: TICON expects floodwaters to recede in early December. The repair cost of factories is estimated at Bt600,000 to Bt1m per factory (167 factories damaged so far). If repairs take two months, the factories should be ready to resume normal operations by February 2012.
Insurance mainly covers minor repairs: For warehouses, TICON expects only minor repairs, with insurance covering all losses (TPARK has 4 months coverage and TLOGIS is covered for 9 months of business disruptions). All factories can claim insurance for maintenance. However, business disruption insurance coverage is only Bt20m, starting three days after operations are suspended.
Debt burden to increase: TICON expects to receive loans and stimulus packages from the government following the floods. The company indicated that it would postpone sales of factory assets to TFUND from 4Q11 to next year. However, for TFUND, TICON does not require a loan since it already has allocated Bt200m in cash. TICON has a maximum D/E covenant of 2.5x but the current ratio is 1.25x. However, the company expects its D/E ratio to rise to 1.8x by mid-2012, with interest payments of about Bt22m a month.
Auto sector upturn seen as boosting rental demand: We expect auto suppliers to resume their capacity expansion plan and quickly increase utilization rates by mid-2012. This should boost TICON’s income from the leasing of factories and warehouses.
Page 56 Deutsche Bank AG/Hong Kong
Deutsche Bank 05 January 2012 Property Industrial Estates
Markets Research
Valuation Since a large proportion of TICON’s revenue is based on rental income and regular sales of investments to its property fund, we choose to value TICON on a DCF basis. Our target price of Bt13.40 assumes an Rf of 2.1%, beta of 0.8x, 4.9% market-risk premium, overall WACC of 7.1% and terminal growth of 1.5% (9% retention rate and 17% long- term RoE). In addition we expect TICON to pay a DPS of Bt1.01 in 2012, implying a yield of 9.2% at its current share price.
Figure 67: DCF
WACC 7.1% NPV 18,383
Cost of debt 4.6% Net Debt 5,606
Cost of Equity 9% Equity value 12,777
Rf 2.1 No of Shares 791
Beta 1.02 NPV per share 13.4
Risk premium 7.1 2011F DPS 1.01
Long-term growth 1.5% Yield 9.2%
Source: Deutsche Bank
Risks The main risks to our call include EPS dilution due to further issues of warrants, strong competition in the ready-built factory segment and higher interest rates.
Deutsche Bank AG/Hong Kong Page 57
Deutsche Bank 05 January 2012 Property Industrial Estates
Markets Research
Earnings and Balance sheet
Sale of rental assets to property funds should boost 2012F earnings We estimate sales growth and net profit to decline in 2011 by 33% and 38% respectively due mainly to the lack of sales of rental assets to its property funds. For 2012, we forecast a rebound in sales and earnings of 65% and 50% driven by projected sales of Bt2bn of assets to TFUND and TLOGIS.
Key earnings drivers and assumptions for the company are as follows:
We estimate total rental space (ex REITS) of 440k sqm for 2011 up from 399k sqm in 2010. We also assumed a factory occupancy rate of 90% and warehouse occupancy of 75% for next year.
We forecast rental rates to increase by 5% next year and 4% in following years.
We assumed that utility and construction revenue would be at similar levels as 2010 (note that these accounts for only 5% of total revenue). Our gross margin assumption is the same as in 2010.
We forecast a gross margin of 78% on its rental property, in line with 2010 levels.
Due to BoI investment privileges, TICON pays a below-average tax rate. We assumed that the tax rate for 2012 would be similar to last year i.e. around 20%.
TICON has the highest debt level amongst industrial estate developers. This is due to the nature of its business which requires that the factories it builds are partly financed through debt.
Page 58 Deutsche Bank AG/Hong Kong
Deutsche Bank 05 January 2012 Property Industrial Estates
Markets Research
Company Profile
TICON Ticon Industrial Connection builds, rents and sells factories to manufacturers. It bridges the gap between industrial estates that provide plots of land and utility services, and the turnkey factories and facilities that foreign investors need to start operations in Thailand. The company holds a 33% stake in TFUND and 19% of TLOGIS. Both of these real estate investment trusts invest in TICON’s leasehold factories and warehouses.
Business Operations TICON’s factories are located on 12 industrial estates that are operated by or in conjunction with the Industrial Estates Authority of Thailand (IEAT). Most of its leased factories are at Amata Nakorn (AMAT.BK), Laem Chabang, Hi-Tech and Rojana (ROJA.BK).
TICON offers factory designs of varying sizes, with the amount of usable space ranging from 1,000-2,000 sq. m to 3,500-6,250 sq. m for the largest factories. A free service to help customers obtain the necessary licenses and permits is provided. Two options are available for customers under leased contracts to purchase the factory during the term of the lease. For contracts without an option to buy, the customer has the right to renew a contract once it expires. The standard leasing contract is normally for three years. As of 2009, its customer breakdown was electronics and electrical equipment manufacturers (49%), auto parts makers (20%), logistics companies (7%), food (6%) and others (e.g. clothing, packaging, chemicals) at 18%. Most of its customers are Japanese companies (55%), followed by clients from Europe (14%), the US (5%), Canada (5%) and others (Thailand, Taiwan etc) who make up 21%.
On an annual basis, TICON has been selling its properties alternatively with its factories to TFUND and warehouses to TLOGIS. TICON owns a 33% stake in TFUND and 19% of TLOGIS. Hence, TICON has exposure to direct investment inflows to Thailand.
Strengths and Weaknesses TICON is the biggest supplier of rental factories for industrial estates in Thailand and this allows economies of scale whilst generating a high proportion of recurring income. Most of its profits come from annual property sales to TFUND and TLOGIS. The company provides guidance on the value of the properties to be sold each year but the decision on which factories/warehouses are sold is discretionary and somewhat opaque, in our view. The business logic of selling rental properties to REITs is obvious but conversely, TICON needs to consistently find new customers in order to replace the high quality ones whose factories and/or warehouses are now managed by the funds. We consider the stock as a dividend play (80%+ pay-out ratio, 9.7% yield for 2012F) but note that TICON is also one of the most leveraged industrial property developers.
Deutsche Bank AG/Hong Kong Page 59
Deutsche Bank 05 January 2012 Property Industrial Estates
Markets Research
Figure 68: TICON locations
Sources: Company data, TISCO Research
Figure 69: Business chart
Sources: Company data, TISCO Research
Page 60 Deutsche Bank AG/Hong Kong
Deutsche Bank 05 January 2012 Property Industrial Estates
Markets Research
Figure 70: List of major shareholders Name % Holdings 1 Rojana Industrial Park Plc 21.35 2 Thai NVDR Co Ltd 6.32 3 Pracha Kijvorametha 5.53 4 Yupadee Kuan 4.82 5 City Villa Co Ltd 3.66 6 Suchada Leesawattrakul 3.24 7 Nortrust Nominees Ltd 2.64 8 Jutharat Saekoo 2.31 9 Chali Sophonpanich 1.63 10 HSBC (Singapore) Nominees Pte Ltd 1.57 Source: Company data, SetSmart
Figure 71: Details of executives Name Position Age Educational Background Experience Mr. Chali Sophonpanich Chairman 55 - Master of Business Administration, – Present: Director, Ticon Industrial The University of Chicago connection - Director Certification Program, Thai – Director: Shanghai Ticon Institute of Directors Association investment management – President: Asian industrial estate (property) – President: City reality (property) Mr. Direk Vinichbutr Director 68 – Diploma: International business, – Present: Director, Ticon Industrial London school of foreign, London connection – Director accreditation program, – Present: Director eco industrial Thai institute of directors services (factories for rent) association – CEO, Rojana industrial park Mr. Jirapongs Vinichbutr Director 60 – Master of business administration, – Present: Director, Ticon Industrial George Washington university connection – Director accreditation program, – Present: Director, Shanghai Ticon Thai institute of directors investment management association – Chairman of board, Ticon logistics park (warehouse for rent) – Managing director rojana power – Managing director rojana industrial park
Mr. Wei Cheng Kuan Director 53 – Master of Business Administration, – Present: Director, Ticon Industrial The University of Chicago connection – Thai institute of directors – Present: Director, Shanghai Ticon association investment management – Present: Director, Ticon logistics park – Present: Managing Director, Eco industrial services
Mr. Pote Videtyontrakich Director 58 – Master of Business Administration, – Present: Director, Ticon Industrial Havard business school connection – Thai institute of directors – Present: Director, Ticon logistics association park – Present: Managing Director, Eco industrial services
Mr. Virapan Pulges Director & Managing Director 50 – Master of Engineering, University – Present: Director, Shanghai Ticon of Colorado investment management – Director Certification Program, Thai – Director of board, Ticon logistics Institute of Directors Association park (warehouse for rent) – Director, Eco industrial services Mr. David Desmond Tarrant Director & Chairman of the 68 – Fellow of the Institute of Chartered – Present: Director, Chairman of audit audit committee Accountants in England and Wales and compensation committees. – Director Accreditation Program, Golden land property Thai Institute of Directors – Director, Sakura ventures pte Association Sources: Company data
Deutsche Bank AG/Hong Kong Page 61
Deutsche Bank 05 January 2012 Property Industrial Estates Markets Research
Appendix 1
Important Disclosures
Additional information available upon request
Disclosure checklist Company Ticker Recent price* Disclosure Hemaraj Development HEMR.BK 2.24 (THB) 4 Jan 12 Ticon Industrial Connection TICN.BK 10.90 (THB) 4 Jan 12 Amata Corp PCL AMAT.BK 13.00 (THB) 4 Jan 12 *Prices are sourced from local exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies
For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr
Analyst Certification The views expressed in this report accurately reflect the personal views of the undersigned lead analyst about the subject issuers and the securities of those issuers. In addition, the undersigned lead analyst has not and will not receive any compensation for providing a specific recommendation or view in this report. Nash Shivaruchiwong
Page 62 Deutsche Bank AG/Hong Kong
Deutsche Bank 05 January 2012 Property Industrial Estates Markets Research
Historical recommendations and target price: Hemaraj Development (HEMR.BK) (as of 1/4/2012)
3.00 Previous Recommendations
Strong Buy 2.50 Buy Market Perform Underperform 2.00 Not Rated Suspended Rating
Current Recommendations 1.50 Buy Hold Security Price Security 1.00 Sell Not Rated Suspended Rating 0.50 *New Recommendation Structure
as of September 9,2002
0.00 Jan 10 Apr 10 Jul 10 Oct 10 Jan 11 Apr 11 Jul 11 Oct 11 Date
Historical recommendations and target price: Ticon Industrial Connection (TICN.BK) (as of 1/4/2012)
16.00 Previous Recommendations
Strong Buy 14.00 Buy Market Perform 12.00 Underperform Not Rated 10.00 Suspended Rating
Current Recommendations 8.00 Buy Hold
Security Price Security 6.00 Sell Not Rated 4.00 Suspended Rating
2.00 *New Recommendation Structure
as of September 9,2002
0.00 Jan 10 Apr 10 Jul 10 Oct 10 Jan 11 Apr 11 Jul 11 Oct 11 Date
Deutsche Bank AG/Hong Kong Page 63
Deutsche Bank 05 January 2012 Property Industrial Estates Markets Research
Historical recommendations and target price: Amata Corp PCL (AMAT.BK) (as of 1/4/2012)
18.00 Previous Recommendations
16.00 Strong Buy 23Buy 14.00 Market Perform Underperform 12.00 Not Rated Suspended Rating 1 10.00 Current Recommendations
8.00 Buy Hold Security Price Security 6.00 Sell Not Rated 4.00 Suspended Rating
*New Recommendation Structure 2.00
as of September 9,2002
0.00 Jan 10 Apr 10 Jul 10 Oct 10 Jan 11 Apr 11 Jul 11 Oct 11 Date
1. 07/07/2010: Upgrade to Buy, Target Price Change THB11.20 3. 11/08/2011: No Recommendation, Target Price Change THB0.00 2. 10/09/2010: Buy, Target Price Change THB17.00
Equity rating key Equity rating dispersion and banking relationships
Buy: Based on a current 12- month view of total share- 450 60 % 400 holder return (TSR = percentage change in share price 350 from current price to projected target price plus pro- 300 250 34 % jected dividend yield ) , we recommend that investors 200 150 buy the stock. 100 12 % 10 % 5 % Sell: Based on a current 12-month view of total share- 50 6 % 0 holder return, we recommend that investors sell the Buy Hold Sell stock Hold: We take a neutral view on the stock 12-months Companies Covered Cos. w/ Banking Relationship out and, based on this time horizon, do not Asia-Pacific Universe recommend either a Buy or Sell. Notes: 1. Newly issued research recommendations and target prices always supersede previously published research. 2. Ratings definitions prior to 27 January, 2007 were: Buy: Expected total return (including dividends) of 10% or more over a 12-month period Hold: Expected total return (including dividends) between -10% and 10% over a 12- month period Sell: Expected total return (including dividends)
of -10% or worse over a 12-month period
Page 64 Deutsche Bank AG/Hong Kong
Deutsche Bank 05 January 2012 Property Industrial Estates Markets Research
Regulatory Disclosures 1. Important Additional Conflict Disclosures Aside from within this report, important conflict disclosures can also be found at https://gm.db.com/equities under the "Disclosures Lookup" and "Legal" tabs. Investors are strongly encouraged to review this information before investing.
2. Short-Term Trade Ideas Deutsche Bank equity research analysts sometimes have shorter-term trade ideas (known as SOLAR ideas) that are consistent or inconsistent with Deutsche Bank's existing longer term ratings. These trade ideas can be found at the SOLAR link at http://gm.db.com.
3. Country-Specific Disclosures Australia and New Zealand: This research, and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act and New Zealand Financial Advisors Act respectively. Brazil: The views expressed above accurately reflect personal views of the authors about the subject company(ies) and its(their) securities, including in relation to Deutsche Bank. The compensation of the equity research analyst(s) is indirectly affected by revenues deriving from the business and financial transactions of Deutsche Bank. EU countries: Disclosures relating to our obligations under MiFiD can be found at http://www.globalmarkets.db.com/riskdisclosures. Japan: Disclosures under the Financial Instruments and Exchange Law: Company name - Deutsche Securities Inc. Registration number - Registered as a financial instruments dealer by the Head of the Kanto Local Finance Bureau (Kinsho) No. 117. Member of associations: JSDA, Type II Financial Instruments Firms Association, The Financial Futures Association of Japan, Japan Securities Investment Advisers Association. Commissions and risks involved in stock transactions - for stock transactions, we charge stock commissions and consumption tax by multiplying the transaction amount by the commission rate agreed with each customer. Stock transactions can lead to losses as a result of share price fluctuations and other factors. Transactions in foreign stocks can lead to additional losses stemming from foreign exchange fluctuations. "Moody's", "Standard & Poor's", and "Fitch" mentioned in this report are not registered credit rating agencies in Japan unless “Japan” is specifically designated in the name of the entity. Russia: This information, interpretation and opinions submitted herein are not in the context of, and do not constitute, any appraisal or evaluation activity requiring a license in the Russian Federation.
Deutsche Bank AG/Hong Kong Page 65
Deutsche Bank Markets Research
Deutsche Bank AG/Hong Kong
Asia-Pacific locations Deutsche Bank AG Deutsche Bank AG Deutsche Equities India Pte Ltd Deutsche Securities Inc. Deutsche Bank Place Filiale Hongkong 3rd Floor, Kodak House 2-11-1 Nagatacho Level 16 International Commerce Centre, 222, Dr D.N. Road Sanno Park Tower Corner of Hunter & Phillip Streets 1 Austin Road West,Kowloon, Fort, Mumbai 400 001 Chiyoda-ku, Tokyo 100-6171 Sydney, NSW 2000 Hong Kong SEBI Nos: INB231196834 Japan Australia tel: (852) 2203 8888 INB011196830, INF231196834 Tel: (81) 3 5156 6770 Tel: (61) 2 8258 1234 Tel: (91) 22 6658 4600
Deutsche Bank (Malaysia) In association with Deutsche Securities Korea Co. Deutsche Bank AG Berhad Deutsche Regis Partners, Inc. 17th Floor, YoungPoong Bldg., Singapore Level 18-20 Level 23, Tower One 33 SeoRin-Dong, One Raffles Quay Menara IMC Ayala Triangle, Ayala Avenue Chongro-Ku, Seoul (110-752) South Tower 8 Jalan Sultan Ismail Makati City, Philippines Republic of Korea Singapore 048583 Kuala Lumpur 50250 Tel: (63) 2 894 6600 Tel: (82) 2 316 8888 Tel: (65) 6423 8001 Malaysia Tel: (60) 3 2053 6760 Deutsche Securities Asia Ltd In association with In association with Deutsche Securities Inc. Taiwan Branch TISCO Securities Co., Ltd PT Deutsche Verdhana Indonesia 2-11-1 Nagatacho Level 6 TISCO Tower Deutsche Bank Building, Sanno Park Tower 296 Jen-Ai Road, Sec 4 48/8 North Sathorn Road 6th Floor, Jl. Imam Bonjol No.80, Chiyoda-ku, Tokyo 100-6171 Taipei 106 Bangkok 10500 Central Jakarta, Japan Taiwan Thailand Indonesia Tel: (81) 3 5156 6770 Tel: (886) 2 2192 2888 Tel: (66) 2 633 6470 Tel: (62 21) 318 9541
International locations Deutsche Securities Inc. Deutsche Bank Securities Inc. Deutsche Bank AG London Deutsche Bank AG 2-11-1 Nagatacho 60 Wall Street 1 Great Winchester Street Große Gallusstraße 10-14 Sanno Park Tower New York, NY 10005 London EC2N 2EQ 60272 Frankfurt am Main Chiyoda-ku, Tokyo 100-6171 United States of America United Kingdom Germany Japan Tel: (1) 212 250 2500 Tel: (44) 20 7545 8000 Tel: (49) 69 910 00 Tel: (81) 3 5156 6770 Deutsche Bank AG Deutsche Bank AG Deutsche Securities Inc. Deutsche Bank Place Filiale Hongkong 2-11-1 Nagatacho Level 16 International Commerce Centre, Sanno Park Tower Corner of Hunter & Phillip Streets 1 Austin Road West,Kowloon, Chiyoda-ku, Tokyo 100-6171 Sydney, NSW 2000 Hong Kong Japan Australia Tel: (852) 2203 8888 Tel: (81) 3 5156 6770 Tel: (61) 2 8258 1234
Global Disclaimer
The information and opinions in this report were prepared by Deutsche Bank AG or one of its affiliates (collectively "Deutsche Bank"). The information herein is believed to be reliable and has been obtained from public sources believed to be reliable. Deutsche Bank makes no representation as to the accuracy or completeness of such information. Deutsche Bank may engage in securities transactions, on a proprietary basis or otherwise, in a manner inconsistent with the view taken in this research report. In addition, others within Deutsche Bank, including strategists and sales staff, may take a view that is inconsistent with that taken in this research report. Opinions, estimates and projections in this report constitute the current judgement of the author as of the date of this report. They do not necessarily reflect the opinions of Deutsche Bank and are subject to change without notice. Deutsche Bank has no obligation to update, modify or amend this report or to otherwise notify a recipient thereof in the event that any opinion, forecast or estimate set forth herein, changes or subsequently becomes inaccurate. Prices and availability of financial instruments are subject to change without notice. This report is provided for informational purposes only. It is not an offer or a solicitation of an offer to buy or sell any financial instruments or to participate in any particular trading strategy. Target prices are inherently imprecise and a product of the analyst judgement. As a result of Deutsche Bank’s March 2010 acquisition of BHF-Bank AG, a security may be covered by more than one analyst within the Deutsche Bank group. Each of these analysts may use differing methodologies to value the security; as a result, the recommendations may differ and the price targets and estimates of each may vary widely. In August 2009, Deutsche Bank instituted a new policy whereby analysts may choose not to set or maintain a target price of certain issuers under coverage with a Hold rating. In particular, this will typically occur for "Hold" rated stocks having a market cap smaller than most other companies in its sector or region. We believe that such policy will allow us to make best use of our resources. Please visit our website at http://gm.db.com to determine the target price of any stock. The financial instruments discussed in this report may not be suitable for all investors and investors must make their own informed investment decisions. Stock transactions can lead to losses as a result of price fluctuations and other factors. If a financial instrument is denominated in a currency other than an investor's currency, a change in exchange rates may adversely affect the investment. Past performance is not necessarily indicative of future results. Deutsche Bank may with respect to securities covered by this report, sell to or buy from customers on a principal basis, and consider this report in deciding to trade on a proprietary basis. Unless governing law provides otherwise, all transactions should be executed through the Deutsche Bank entity in the investor's home jurisdiction. In the U.S. this report is approved and/or distributed by Deutsche Bank Securities Inc., a member of the NYSE, the NASD, NFA and SIPC. In Germany this report is approved and/or communicated by Deutsche Bank AG Frankfurt authorized by the BaFin. In the United Kingdom this report is approved and/or communicated by Deutsche Bank AG London, a member of the London Stock Exchange and regulated by the Financial Services Authority for the conduct of investment business in the UK and authorized by the BaFin. This report is distributed in Hong Kong by Deutsche Bank AG, Hong Kong Branch, in Korea by Deutsche Securities Korea Co. This report is distributed in Singapore by Deutsche Bank AG, Singapore Branch, and recipients in Singapore of this report are to contact Deutsche Bank AG, Singapore Branch in respect of any matters arising from, or in connection with, this report. Where this report is issued or promulgated in Singapore to a person who is not an accredited investor, expert investor or institutional investor (as defined in the applicable Singapore laws and regulations), Deutsche Bank AG, Singapore Branch accepts legal responsibility to such person for the contents of this report. In Japan this report is approved and/or distributed by Deutsche Securities Inc. The information contained in this report does not constitute the provision of investment advice. In Australia, retail clients should obtain a copy of a Product Disclosure Statement (PDS) relating to any financial product referred to in this report and consider the PDS before making any decision about whether to acquire the product. Deutsche Bank AG Johannesburg is incorporated in the Federal Republic of Germany (Branch Register Number in South Africa: 1998/003298/10). Additional information relative to securities, other financial products or issuers discussed in this report is available upon request. This report may not be reproduced, distributed or published by any person for any purpose without Deutsche Bank's prior written consent. Please cite source when quoting. Copyright © 2012 Deutsche Bank AG
GRCM2012PROD024406