First Myanmar Investment (FMI) Company Report Non‐rated (03/17E TP Kyat 22,300) Close Kyat 35,000 (OTC) Diversified Conglomerate (Financial Services, Real Estate and Healthcare) March 25, 2016 A lot of low‐cost land, a good bank and much more First veteran to debut on the YSX FMI will be the first stock to debut in the YSX on March 25. Its core businesses have high growth potential, although real estate associates should take a few more quarters to boost profit; meanwhile, the bank and hospital are in the early stage of profit ramp up/turnaround. We project core profit CAGR of 239% in 03/17E‐03/18E and have a 03/17E TP of 22,300 Kyat from sum of the parts, with more than half embedded in real estate associates. Our TP implies forward PE descending to a justified level at 15x in 03/18E. We think that the OTC price shooting up one fold in recent months Share data looks unjustified and hence put non‐rated on the counter, believing that the Paid‐up Shares (mn) 23.48 price calibration after listing will reflect a more efficient market mechanism. Par (USD/Kyat) 0.8333 / 1,000 Real estate should bring a good return in the long term Market cap (US$ mn /Kyat bn) 684.8 /821,800 Real estate projects that FMI jointly develops with its sister companies are in URL www.fmi.com.mm prime locations. Many have low land costs and we believe they will bring a good return in the future. Although profit from this business will slow down in 03/16E due to concern during the political transition, we believe the recent enactment of a law allowing foreigners to buy condos and improving political sentiment will be catalysts for this business beginning in 03/17E. Strong growth in banking business Major Shareholders (30Sep’15 ) Holding Yoma Bank, the biggest investment in terms of asset size, is a high‐ U Theim Wai @ Serge Pun 33.8% potential business that should significantly increase its weighting with Yangon Land 31.0% respect to the FMI’s net profit in the next few years. It ranks sixth in terms U Phyo Phyu Noep 4.7% of asset size among private banks in Myanmar despite just resuming its lending for the first full year in FY03/15. SPA Assets Management 4.6% Yoma Myittar Development 4.3% Healthcare: revitalizing business to capture the growing demand The core operation of PHSH should turn profitable at the EBITDA level in 03/16E. Based on management’s guidance, we expect the hospital’s revitalized operation and network expansion to enable PHSH to deliver net profit CAGR of 41% during 03/18E‐03/21E. Risks & Concerns Improving sentiment after the establishment of the new government should ease concern over political risk that might affect the real estate and tourism businesses. Regarding banks, concerns relate to capital adequacy due to rapid lending expansion and success in obtaining approvals for the full launch of mobile banking service. Financials and Valuation FY Ended 31 Dec 03/14 03/15 03/16E 03/17E 03/18E Revenues (Kyat mn) 11,128 33,319 112,334 157,543 213,906 Net profit (Kyat mn) 12,499 74,655 10,103 16,619 35,735 Core profit (Kyat mn) 12,499 14,165 3,103 16,619 35,735 EPS (Kyat) 678.64 3,320.97 430.27 707.78 1,521.94 EPS growth (%) n.a. 389.4% ‐87.0% 64.5% 115.0% Dividend (Kyat) 200 120 120 210 450 BV (Kyat) 4,432 7,808 7,791 8,379 9,691 FY Ended 31 Dec 03/14 03/15 03/16E 03/17E 03/18E PER (x) 16.21 3.91 81.34 49.45 23.00 Pornsawat Jirajarus EV/EBITDA (x) 112.01 1,583.96 178.83 105.81 79.98 Analyst no. 18228 PBV (x) 2.48 1.66 4.49 4.18 3.61 [email protected] Dividend yield (%) 1.82 0.92 0.34 0.60 1.29 ROE (%) 17.8% 48.6% 4.5% 7.0% 13.4% 66 (0) 2624 6257 Net gearing (%) Cash 327.1% 483.9% 598.1% 659.3% REFER TO DISCLOSURE SECTION AT THE END OF THE NOTES page 1 of 29 Investment Highlights First veteran to debut on the YSX FMI is the only stock to be listed on the Yangon Stock Exchange on March 25. We believe the core businesses of FMI have high growth potential, although real estate associates should begin recovering in 03/17E; meanwhile, the bank and hospital are in the early stage of profit ramp up/turnaround. We project core net profit CAGR of 239% in 03/17E‐03/18E and have a 03/17E TP of 22,300 Kyat from sum of the parts (figure 22), with around half embedded in real estate associates. We think that the OTC price shooting up one fold in recent months (to 35,000 Kyat on 15 February 2016, +184% YoY (source: http://fmi.com.mm/share‐information) looks unjustified as limited access to the company’s information and FMI’s restructuring (without segment information in the pro‐forma financial statement) have resulted in the FY03/15 performance being difficult to compare to 03/16E. We hence put non‐rated on the counter, believing that the price calibration after listing will reflect a more efficient market mechanism. Figure 1: FMI’s historical share price (MM Kyat) (Shares) Vol. (shrs) Price (KYT) 40,000 250,000 35,000 200,000 30,000 25,000 150,000 20,000 15,000 100,000 10,000 50,000 5,000 ‐ ‐ 15 15 15 16 15 15 14 15 15 16 14 15 15 14 15 15 16 15 ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ Jul Jan Jan Jun Oct Oct Apr Sep Feb Feb Dec Dec Aug Nov Nov Mar Mar May Source: http://fmi.com.mm/share‐information No new shares and law still prohibits foreigners from buying shares The company does not yet plan to sell any new shares in the early stage of listing, but we believe FMI is highly likely to issue new shares to support its investments in the coming years. Note that at this point, Myanmar law does not yet allow foreign investors to trade shares of Myanmar companies (but it does allow foreign investors to jointly invest in the start‐up of projects upon the government’s approval). However, we expect the law to be amended to allow foreign investors to participate in stock trading. Streamlining its focus toward investments with good potential First Myanmar Investment Co., Ltd. (FMI) is a diversified conglomerate that has been investing in various key sectors in Myanmar for over 20 years. It is one of a few public companies in Myanmar that is involved in joint ventures with leading international firms such as Mitsubishi, the International Finance Corporation, the Asian Development Bank, Telenor, the Lippo Group of Indonesia and Parkson Retail Asia. The company has streamlined its businesses in FY03/15 and now has strategic investments in three key sectors, i.e., financial services, real estate and healthcare. REFER TO DISCLOSURE SECTION AT THE END OF THE NOTES page 2 of 29 Yoma Bank: to continue a strong loan growth Yoma Bank, the biggest investment in terms of asset size, is a high potential business that should significantly increase its weighting with respect to FMI’s net profit in the next few years. FMI consolidated Yoma Bank in 4Q03/15 and 03/16E will be the first full year that the company will recognize the bank’s full‐year performance. Yoma Bank’s strengths are: 1) experienced management (many from reputable international financial institutions), 2) strong and diverse loan book, 3) a stringent credit approval process, with support in the form of training and advice from the International Finance Corporation (IFC) and the German Government’s International Development Organization (GIZ), enabling it to maintain good asset quality (NPLs are far below the industry average), 4) emphasis on technology as a driver of growth and 5) long‐standing brand name in the local market. We expect continued loan growth at 30%‐40% p.a. and better balance sheet leverage with an increasing loan‐to‐deposit ratio to be the key profit drivers in the next 3‐4 years. Real estate associates: Embedded with a lot of low‐cost land The real estate business has been a key profit contributor for many years, despite the fact that the company holds only minority stakes in associated companies (majority owned by its sister companies) due to the highly capital intensive nature of the business. All projects are in prime locations and many have low land costs, and we thus believe these projects will bring a good return in the future. We expect profit from this business to slow down in 03/16E due to concern during the political transition, but believe the recent enactment of a law allowing foreigners to buy condos and improving political sentiment will be catalysts for this business going forward. Hospital: Revitalizing business to capture the growing demand We expect Pun Hlaing Siloam Hospital’s core operation to turn profitable at the EBITDA level in FY03/16 (from negative EBITDA of Kyat906mn in 2H03/15) due to strong growth in both patient volume and revenue per patient. Based on PHSH’s management guidance, we expect the hospital’s revitalized operation and network expansion to result in revenue CAGR of around 40% p.a. during FY03/16‐FY03/21, turning PHSH into net profit from FY 03/18 onward and delivering net profit CAGR of 41% during FY03/18‐03/21.