THAILAND EQUITY

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Initiation Report
Thailand Research Team
+66 (2) 862 9999 ext. 2030

Toyo-Thai Corporation (TTCL)

Leading Contractor With Regional Presence

BUY
Fair Value

THB15.90

Price

THB14.00

CONSTRUCTION
Toyo-Thai Corporation PCL builds petroleum
factories and also constructs chemical,
power, and biodiesel plants. It has
subsidiaries in Vietnam, Malaysia, Myanmar,
US, Abu Dhabi and the Philippines.
Stock Statistics
Bloomberg Ticker
Share Capital (m)
Market Cap (US$m)
52 week HL Price (RM)
3mth Avg Vol (000)
YTD Returns
Beta (x)

TTCL TB
480.00
224
15.50
8.00
1,689.78
18.64
1.05

Major Shareholders (%)

Toyo Engineering Corp.
Thai NVDR
Chiyoda Corp.

26.0
10.5
7.0

Share Performance (%)

Month
Absolute
1m
-0.7
3m
-2.1
6m
7.9
12m
68.4

Relative
-4.5
-10.3
-6.2
46.5

Share Price Performance

We initiate our coverage on TTCL with a BUY rating and TP of THB15.93, based on a
FY12 PER of 13.5x. The prospects of TTCL, which has maintained a strong track
record since its IPO, look brighter than ever. The companys competitive advantage
lies in its solid engineering team that has completed construction projects worldwide
at relatively low cost. Its strong alliances with construction giants from Japan and
South Korea should greatly enhance its overseas operations going forward.
Bright prospects ahead. Toyo-Thai Corporation PCL (TTCL) is currently the only one in
Thailand that is able to independently provide integrated engineering, procurement,
construction (integrated EPC) services for petroleum and petrochemical projects worth
USD300m-USD500m. Unlike most Thai contractors, TTCL has a lot of room to grow in the
foreign markets since making its name regionally, especially in Vietnam and Malaysia. In
1Q12, the company earned THB2.2bn (+21.9% y-o-y) in revenue and a net profit of
THB111.5m (+5.5% y-o-y). At the end of the first quarter, its backlog was at a record high of
THB17.5bn, 55%-60% of which should be realized this year. Thus our FY12 projected
revenue of THB11.9bn is largely secured.
Quality engineers and cost management leaders. TTCLs engineers have lived up to
global standards. One of the companys most outstanding milestones was building the
worlds largest hydrogen peroxide (HP) plant for a joint venture between Dow Chemical
Company (USA) and Solvay (Belgium), both of which are among the worlds largest
international chemical firms. The projects EPC was implemented by TTCL under Solvays
supervision. The plant successfully kicked off production on 21 Aug 2011. TTCLs track
record in the EPC business is strong evidence that the company is entering the global stage,
where most competitors are from developed countries. This gives the company some
competitive advantage in terms of cost leadership since Thai engineers and staff command
lower salaries than their counterparts in developed countries.
Recommend BUY with TP of THB15.90 (+13.6% upside). We initiate coverage on TTCL
with a BUY recommendation and TP of THB15.90, which is based on an EPS of 1.18
(+41.8% y-o-y) and FY12 PER of 13.5x, which is close to its average trailing PER since
2009. As one of the countrys leading EPC contractors with strong alliances in Japan and
South Korea, the firm should be able to grow its construction business in both the domestic
and foreign markets, and stabilize its revenue by building and investing more in power plant
projects with its partners.

16.00
14.00
12.00
10.00
8.00
6.00
4.00
2.00
0.00
Feb-10

Aug-10

Feb-11

Aug-11

Feb-12

FYE Dec (THBm)

Revenue
Net Profit
% chg y-o-y
Consensus
EPS (THB)
DPS (THB)
Dividend yield (%)
ROAE (%)
ROAA (%)
PER (x)
BV/share (THB)
P/BV (x)
EV/ EBITDA (x)

FY09

FY10

FY11

FY12f

FY13f

10330.5
325.5
4.2%
0.68
0.42
3.0
31.7
5.7
20.6
2.9
4.9
16.68

5318.1
337.1
3.6%
0.70
0.34
2.5
23.2
8.1
19.9
3.2
4.4
16.43

8995.1
399.7
18.6%
0.83
0.40
2.9
25.0
7.6
16.8
3.5
4.0
16.23

11846.8
566.7
41.8%
567.0
1.18
0.59
4.2
31.1
7.9
11.9
4.1
3.4
13.39

17497.8
734.0
29.5%
755.7
1.53
0.76
5.5
34.0
8.6
9.2
4.9
2.9
12.79

OSK Research See important disclosures at the end of this report

OSK Research

COMPANY BACKGROUND
Only EPC contractor in Thailand with regional presence. Toyo-Thai Corp (TTCL), Thailands first allround engineering company, was incorporated in 1985 as a joint venture between Italian-Thai
Development Public Company Ltd, one of the largest contractors in Thailand, and Toyo Engineering Corp
(TEC), a leading international engineering company in Japan. TTCL is an integrated contractor that
provides engineering design, procurement of machines and equipment, and construction (integrated EPC)
for turnkey projects mainly in the petroleum, petrochemical, chemical and energy industries. In 27 years,
TTCL has undertaken over 190 projects building process plants and facilities in both domestic and foreign
markets. It expanded its international business in 1997, and has built plants in the United States, China,
Bangladesh, Vietnam and Malaysia. In 2009, the company was listed on the Stock Exchange of Thailand
with a registered capital of THB480m. Today, TEC holds about 26% of TTCL shares while the Ital-Thai
group owns a stake of about 8.85%.
Growing profit through peaks and troughs. As an integrated EPC contractor, TTCL focuses on
medium-sized projects valued from USD300m to USD500m. In FY11, revenue from petrochemical and
chemical projects accounted for 66.6% of total revenue while the remainder came from energy projects.
The company saw a substantial drop in revenue in FY10 (see Figure 1) as it was then heavily reliant on
clients that wanted to have their plants built in Map Ta Phut Industrial Estate (see Figure 6). Toward the
end of 4Q09, the Central Administrative Court ordered government agencies to suspend operation and
construction of 76 projects in Map Ta Phut, 59 of which are in petrochemical, oil, gas, refinery and metals.
Ongoing construction was put on hold, with no new orders until September 2010 when the court allowed
most of the 76 industrial projects to resume. As a result, TTCLs FY10 revenue plunged 48.6% y-o-y,
although its net profit grew at a 30.3% CAGR from FY08 to FY11 (see Figure 1). To reduce the volatility in
its revenue, the company diversified its EPC business to foreign markets and started investing in power
plant projects, all of which TTCL has to be the main EPC contractor (see Figure 5: Evolution of TTCLs
Revenue). Apart from investing in power plants, the company also aims to add more power plant owners
to its list of clients, as evidenced by the composition of the potential projects, of which the value of six
power projects account for 44% (see Figure 8).

Figure 1: Revenue, gross profit and net profit

Figure 2: Profitability

Source : OSK, TTCL

Source : OSK, TTCL

Figure 3: Revenue breakdown 2011

Figure 4: EBIT breakdown 2011

Source : Bloomberg

Source : Bloomberg

We estimate FY12 gross

margin at 10.8% and
FY12 net margin at
4.8%.

OSK Research See important disclosures at the end of this report

OSK Research

Figure 5: Evolution of TTCLs revenue

Investments will be
power projects, all
which TTCL has to
the EPC contractor
well.

in
of
be
as

Source: Bloomberg, TTCL

Figure 6: Sample of projects done in the past

Heavy
reliance
on
projects in Map Ta Phut
is expected to become
the thing of the past.

Note; Number of clients are in red, locations are in light purple, and project descriptions are in black.
Source: OSK, TTCL

INVESTMENT HIGHLIGHTS
Bright prospects ahead. For petroleum and petrochemical projects worth USD300m-USD500m, TTCL is
unique in that it can provide integrated EPC services to clients without relying on other companies to work
jointly with. Unlike other Thai contractors, TTCL has a lot more room to grow in the foreign markets since
becoming well-known in the region. The firms backlog of THB17.5bn as of 31 March, 2012 is a record
high, with THB10.8bn (61.4%) from foreign markets, mostly from Vietnam and Malaysia. We expect about
THB9.6bn (55%) of the total backlog to be realized this year, bringing the FY12 revenue to THB11.9bn
(+31.7% y-o-y). Currently, the company has new proposed project worth THB80.6bn collectively. As such,
it should see strong growth in EPC services demand for the next two years as its backlog keeps growing
and the company begins bidding for bigger projects next year.
Stabilizing income via investment in power plant projects. The company has also started investing in
power plants, such as Navanakorn Electrics 110MW power plant and Siam Solar Powers 8MW
photovoltaic electrical plant for which it carried out the EPC. As of 31 March 2012, the company had
invested some THB750m in Navanakorns preferred shares. The eventual investment will be about
THB1.09bn by 1Q13 when it becomes operational, while the dividend to be paid (10.5% fixed rate) to
TTCL should come in by the middle of FY13. Siam Solars plant, 25%-owned by TTCL, should start
production by 4Q12. The company is currently in talks with investing partners to invest an additional
THB1bn to THB2bn in four power projects. This type of investment is aimed at bringing in a stable income
stream in the long term.
OSK Research See important disclosures at the end of this report

OSK Research

Figure 7: Backlog as of 31 March 2012

Figure 8: Potential project proposals

Source : TTCL

Source : TTCL

For potential proposals,

there are 6 power, 12
petrochemical and 1
utilities projects.

Strong EPC track record. TTCLs truly live up to global standards. One of the companys major
milestones was building the worlds largest hydrogen peroxide (HP) plant for a joint venture between Dow
Chemical Company (USA) and Solvay (Belgium), which are among the worlds largest international
chemical firms. The projects EPC was performed by TTCL under supervision by Solvay. The plant began
production on 21 Aug 2011. The EPC services for Phase 2 of this plant are also being conducted by
TTCL. Last year, the company was awarded EPC contracts by Lynas Malaysia SB in Malaysia and a
Vietnam National Chemical Groups subsidiary in Vietnam.
Competitive advantage = cost leadership. TTCLs EPC business track record is strong evidence that it
is entering the global stage dominated by competitors from the more developed countries. This gives it a
strong competitive advantage in terms of cost leadership since Thai engineers and employees command
much lower salaries than their counterparts in developed countries. According to the companys head of
finance, South Koreas wages in this industry are about one-half of the Japans, while Thai wages are only
one-third of South Koreas (over the last five years, TTCLs salaries, wages and other employee benefits
have, on average, accounted for 16.40% of total cost). Although wages around the globe are converging,
it will likely take quite a while (i.e. at least 10 years) before Thai wages rise to levels comparable to those
in Japan and South Korea. Having realized this, several companies in South Korea and Japan are looking
towards partnerships and alliances with TTCL, knowing that such a relationship will enable them to offer
more competitive rates when they bid for projects. For example, Chiyoda Corp - the second largest EPC
contractor in Japan - acquired 7% of TTCLs issued shares in FY10 with the aim of working with the latter
to bid for projects of global scale.
Figure 9: TTCLs founders and alliances
TTCL is equipped with
high quality and cost
leadership
causing
Japanese and Korean
firms to seek partnership
with the company.

OSK Research See important disclosures at the end of this report

OSK Research

Flush with liquidity. The companys enormous cash reserves and short-term investments, making up
58.4% of total assets as of 31 March, reflect its highly liquid position. However, most of the cash cannot
be deemed excess cash a proportion of it was from deferred revenue and customer advances for
construction contracts, implying that much of it will need to be utilized to cover operating working liabilities.
In calculating excess cash, we found a negative difference between operating working assets and
liabilities, with the former coming up THB3.5bn short. If TTCL uses cash to cover the shortfall, it would still
be left with THB934.2m in cash and short-term investments of THB1.95 per share (which is 13.9% of its
share price). In addition, it currently has no interest-bearing debt to pay off.
Figure 10: Excess cash at the end of 1Q12
The
excess
cash
accounts for 13.8% of
the current share price.

Backlog leads revenue upwards. We are optimistic on TTCLs outlook this year and the next. As of 31
March 2012, the company had a record high backlog of THB17.5bn, 55% of which we expect the
company to realize this year (as opposed to the 60% estimated by TTCL), boosting our projected FY12
revenue to THB11.9bn (+31.7% y-o-y) and FY12 earnings to THB567m (+41.8% y-o-y).
Figure 11: Backlog and revenue
After the Map Ta Phut
incident during 4Q094Q10 is over, TTCLs
backlog
has
risen
substantially.

Source: OSK, Bloomberg

OSK Research See important disclosures at the end of this report

OSK Research

Global slowdown to have limited impact on FY13 performance. We believe the impact of global
economic uncertainties, including the European debt crisis and Chinas slowdown, on TTCLs FY13
performance is likely to be limited. This is because the EPC projects on average take two-and-a-half years
to complete. Project owners, while planning their investments, consider economic conditions two to three
years forward when their plants become operational rather than on the prevailing economic situations.
However, a few project owners, especially those in the petrochemical industries, might postpone their
investment until the global economy is on more solid ground, and commodities prices start to pick up.
This leads us to the scenario analysis below.
Figure 12: FY13f revenue from construction and services
under different scenarios
Number of projects in
this table represents
those that would actually
go through auctions
during 2H12 or 1Q13.

Source: OSK

Base-case scenario: FY13f sales of THB17.435bn. Our worst-case scenario suggests FY13f sales of
THB15.13bn, and the best-case scenario suggests sales of THB18.62bn (see Figure 12 above). There
are two main assumptions: first, that the auctioning of all six power plants worth about THB36.6bn will go
ahead as planned since decisions to build power plants are not affected by current economic conditions,
as such facilities take at least two years to build. Second, we assume that TTCL will be able to garner
about a third of the projects it plans to bid for, based on the five-year average rate. Nevertheless, our
base-case scenario is that THB71.7bn worth of projects (out of THB80.6bn) will actually go through
auctions during this year and 1Q13, in which case the company will have FY13f sales of THB17.435, up
by 32.5% from FY12f.
Recommend BUY, TP THB15.90 (+13.6% upside). We initiate coverage on TTCL with a BUY
recommendation and TP of THB15.90, based on a FY12 PER of 13.5x and FY12 EPS of 1.18 (+41.8% yo-y). The estimated FY12f PER is almost identical to the companys average trailing PER since 2010
(13.4x) and close to the average of forward FY12f PER of comparable companies (13.3x), including those
of Samsung Engineering, Chiyoda, JGC, CTCI and PEC. All of these companies are integrated EPCs
which build projects similar to TTCL. With its global standards and cost advantage, the company is
prepared to grow as it has set up subsidiaries in a number of countries including Vietnam, Malaysia,
Myanmar, US, Abu Dhabi and Philippines. As Thailands only EPC contractor with a regional presence
and strong alliances in Japan and South Korea, the firm should be able to grow its construction business
in both domestic and foreign markets, as well as stabilize its revenue by building and increasing its
investment in power plant projects with its partners.

OSK Research See important disclosures at the end of this report

OSK Research

Figure 13: Regional EPC* contractors (as of 11 July, 2012)

Samsung Engineering,
Chiyoda, JGC, CTCI
and
PEC
are
comparable companies
as they build similar
types of projects as
TTCL does.

Note: Forward PER (2012) for regional contractors are supplied by Bloomberg and based on consensus of FY12 EPS.
Source: OSK, Bloomberg
*E= Engineering design, P = Procurement, C = Construction

Figure 14: Valuation (as of 11 July 2012)

Source: OSK, Bloomberg

Figure 15: Historical trailing PER (as of 11 July 2012)

Source: Bloomberg

Figure 16: Subsidiaries and new business development

The Philippines office

was just set up in May,
2012.

Source:TTCL

OSK Research See important disclosures at the end of this report

OSK Research

EARNINGS FORECAST

FYE Dec (THBm)

Turnover
EBITDA
PBT
Net Profit
EPS (THB)
DPS (THB)
Margin
EBITDA (%)
PBT (%)
Net Profit (%)
ROAE (%)
ROAA (%)
Balance Sheet
Fixed Assets
Current Assets
Total Assets
Current Liabilities
Net Current Assets
LT Liabilities
Shareholders Funds
Net Gearing (%)
Cash Flow
PBT
Other Operating Cash
Chg in Working Capital
Operating Cashflow
CAPEX
FCF

FY09

FY10

FY11

FY12f

FY13f

10330.5
497.0
475.7
325.5
0.68
0.42

5318.1
488.5
467.7
337.1
0.70
0.34

8995.1
585.3
563.8
399.7
0.83
0.40

11846.8
770.0
741.3
566.7
1.18
0.59

17497.8
957.3
924.1
734.0
1.53
0.76

4.8
4.6
3.2

9.2
8.8
6.3

6.5
6.3
4.4

6.5
6.3
4.8

5.5
5.3
4.2

31.7
5.7

23.2
8.1

25.0
7.6

31.1
7.9

34.0
8.6

59.3
4472.7
4607.5
3227.8
1245.0
0.16
1,379.5
Net Cash

98.3
3378.1
3675.0
2125.5
1252.6
13.59
1,535.9
Net Cash

127.1
6097.4
6903.6
5009.4
1088.0
212.05
1,682.2
Net Cash

187.2
5965.2
7440.5
5225.3
739.9
224.90
1,990.4
Net Cash

235.1
7214.3
9615.7
7024.8
189.4
228.93
2,361.9
Net Cash

475.7
1673.0
1200.8
57.7
-1382.4

467.7
833.5
-532.2
171.3
-646.2

563.8
-1774.0
2238.3
510.7
1688.5

741.3
235.9
340.8
695.6
-332.0

924.1
-419.1
1141.4
960.0
231.6

OSK Research See important disclosures at the end of this report

OSK Research

OSK Research See important disclosures at the end of this report