Value play on industrial sector

Transcription

1 WEDNESDAY, 15 APRIL 2015 Crown Asia Chemicals Corporation: Value play on industrial sector Company Background. Crown Asia Chemicals Corp. was incorporated on February 1989 with the Villanueva and Perez families as its principal owners. The company s businesses are the production of plastic compounds, chiefly polyvinyl chloride (PVC) pellets (65% of FY14 revenues); and the manufacturing of industrial plastic pipes (35% of FY14 revenues). Construction and telecommunications companies are the main end-users of Crown s products. To benefit from growth of construction industry. The total value of new construction projects in FY14 grew by 37.7% y/y to Php344.2 Bil from Php249.9 Bil in FY13. This was largely driven by the 72.5% y/y growth in non-residential construction to Php75.3 Bil in FY14. Construction spending should continue to grow going forward given the government s plan to increase public infrastructure spending from ~3% of FY14 GDP to 5% of GDP by FY16. Crown Asia should be a major beneficiary given that around 80% of the PVC products produced locally are used by the construction sector. Among the largest industry players. As of FY13, D&L was the market leader in terms of revenue with a market share of 47.4%, while Crown Asia was the fourth largest with a market share of 16.6%. Other big players include Tosoh Polyvin Corp. and Elastobest Manufacturing Corp. Meanwhile, in the industrial pipes industry, Neltex was the market leader in terms of revenues with a share of 29.8%, while Crown Asia was the fifth largest with a market share of 14.5%. Other large players include Moldex Products Inc., Emerald Vinyl Corp., and Atlanta Industries Inc. Crown Asia s relatively large market share allows it to become more efficient compared to its competitors, improving its ability to win contracts. New product lines to be key growth driver. Crown intends to grow profits by manufacturing new products, specifically HDPE and PP-R pipes and fittings which are expected to contribute to revenues by 2H15. HDPE pipes are mainly used for gas pipelines. By expanding capacity for its HDPE line, the company hopes to be more competitive and to better respond to growing demand. Meanwhile, PP-R is an alternative to galvanized iron pipes used for plumbing, hot/cold water, and air conditioning lines. Crown Asia will be the first company to locally manufacture PP-R pipes and fittings. By producing PP-R pipes and fittings locally, Crown hopes improve its competitiveness as its products become more readily available. It will also be able to ensure quality control. Valued at a discount to peers and the PSEi. At Php1.41/sh, Crown Asia s shares are priced at a FY14 P/E of 13.6X. This is lower than the average FY14 P/E of Crown Asia s regional comparables of 20.2X, and the median of 16.3X. This is also lower than the FY14 P/E of the PSEi of 22.9X. FORECAST SUMMARY Key Financial Data (in Php Mil) Revenues % change y/y - (1.3)% 6.1% Gross profit % change y/y % 22.0% Gross margin (%) 19.3% 21.6% 24.8% EBITDA % change y/y % 30.7% EBITDA margin (%) 9.0% 11.2% 13.8% Net income % change y/y % 31.6% Net margin (%) 3.4% 6.2% 7.7% EPS % change y/y - (94.7)% 27.3% RELATIVE VALUE P/E (X) P/BV (X) ROE (%) 6.0% 9.9% 11.6% Dividend yield (%) 0.6% 1.3% 0.8% Garie Ouano garie.ouano@colfinancial.com

2 Company Background Crown Asia Chemicals Corp. was incorporated on February 1989 with the Villanueva and Perez families as its principal owners. The company s businesses are the production of plastic compounds, chiefly polyvinyl chloride (PVC) pellets (65% of FY14 revenues); and the manufacturing of industrial plastic pipes (35% of FY14 revenues). Construction and telecommunications companies are the main end-users of Crown s products. Exhibit 1: Revenue breakdown by product type (as of end-fy14) Compounds Pipes Source: Crown Asia Exhibit 2:Ownership structure (post-ipo) Shareholder % of ownership Public 25.1% Eugene Villanueva 15.0% Walter Villanueva 11.2% Christie Perez 7.5% Terms of offer and use of proceeds Crown Asia will be offering 158 Mil primary shares at a price of Php1.41/sh. This represents 25.1% of the company s outstanding shares post-ipo. The offer period will end on April 17, and the shares are expected to list on the PSE on April 27. The company expects to raise Php204 Mil in net proceeds from the offer. Of that amount, 32.5% or Php66.2 Mil will be used for the construction of the manufacturing plant for its HDPE and PP-R pipes; 21.5% or Php43.8 Mil for debt retirement; 12.3% or Php25 Mil for the modernization of its existing plants; and the balance will be used for working capital purposes. Exhibit 3: Use of proceeds Purpose Amount (Php Mil) % of total PP-R and HDPE plant, warehouse, and equipment % Debt retirement % Modernization of current plants % Working capital % Total % page 2

3 Key Investment Highlights: To benefit from growth of construction industry. The total value of new construction projects in FY14 grew by 37.7% y/y to Php344.2 Bil from Php249.9 Bil in FY13. This was largely driven by the 72.5% y/y growth in non-residential construction to Php75.3 Bil in FY14. Construction spending should continue to grow going forward given the government s plan to increase public infrastructure spending from ~3% of FY14 GDP to 5% of GDP by FY16. Crown Asia should be a major beneficiary given that around 80% of the PVC products produced locally are used by the construction sector. Among the largest industry players. Crown Asia is one of the larger players in the plastic compounds industry. As of FY13, D&L was the market leader in terms of revenue with a market share of 47.4%, while Crown Asia was the fourth largest with a market share of 16.6%. Other big players include Tosoh Polyvin Corp. and Elastobest Manufacturing Corp. Crown Asia is also one of the larger players in the industrial pipes industry. As of FY13, Neltex was the market leader in terms of revenues with a share of 29.8%, while Crown Asia was the fifth largest with a market share of 14.5%. Other large players include Moldex Products Inc., Emerald Vinyl Corp., and Atlanta Industries Inc. Crown Asia s large market share allows it to become more efficient compared to its competitors, improving its ability to win contracts. New product lines to be key growth driver. Crown intends to grow profits by manufacturing new products. These new products are HDPE and PP-R pipes and fittings which are expected to contribute to revenues starting 2H15. HDPE (High-density polyethylene) pipes are mainly used for gas pipelines. Crown Asia has been selling imported HDPE pipes since 2006, and only started manufacturing locally in November By expanding capacity for its HDPE product line, the company hopes to be more competitive and to better respond to growing demand. Meanwhile, PP-R (polypropylene random copolymer) is growing in terms of popularity as an alternative to galvanized iron pipes used in residential and commercial buildings for plumbing, hot/ cold water, and air conditioning lines. Once Crown Asia s manufacturing plant comes on line, it will be the first company to locally manufacture PP-R pipes and fittings. At present, all PP-R pipes and fittings available in the local market follow a private-label model (imported, then branded under the name of a local company). By producing PP-R pipes and fittings locally, Crown hopes improve its competitiveness as its products become more readily available. It will also be able to ensure quality control. Valued at a discount to peers and the PSEi. At Php1.41/sh, Crown Asia s shares are priced at a FY14 P/E of 13.6X. This is lower than the average FY14 P/E of Crown Asia s regional comparables of 20.2X, and the median of 16.3X. This is also lower than the FY14 P/E of the PSEi of 22.9X. page 3

4 Exhibit 4: Relative Valuation Company Name Ticker FY14 P/E Mabuhay Vinyl Corp. MVC PM 20.4 Asahi Kasei Corp JP 16.0 Formosa Plastics Corp TT 27.0 Nan Ya Plastics Corp TT 16.3 Lotte Chemical Corp KS 36.7 Tosoh Corp JP 8.1 LG Chem Ltd KS 15.3 Denki Kahaku Kogyo KK 4061 JP 12.2 Teijin Ltd 3401 JP 30.1 Crown Asia Chemicals Corp Average ex-crown Asia 20.2 Median ex-crown Asia 16.3 PSEi 22.9 Source: Bloomberg, Crown Asia Risks: Intense competition Despite being one of the larger industry players, Crown Asia s competitive position runs the risk of being constantly challenged due to the industry s price-competitive nature. Industry players compete mostly through price since the products they deal in are generally homogenous, apart from differences in product quality. This is likely the reason why management claimed that there is no consistent and clear market leader in the industry. Moreover, based on information gathered from Crown Asia, the prospective implementation of a zero-tariff environment by FY15 exposes the industry to further competitive pressure from regional players. Lastly, none of Crown Asia s products or processes are protected by patents, which makes the company s business highly replicable. Historical earnings growth largely driven by margin improvements Crown Asia s profits increased by a CAGR of 54% from Php28 Mil in FY12 to Php65 Mil in FY14. However, the growth in profit was largely driven by cost cutting efforts which led to margin improvement. Crown Asia s gross margin expanded to 24.8% in FY14 from 19.3% in FY12, while its net margin grew to 7.7% in FY14 from 3.4% in FY12. Revenue growth was flattish, increasing by a CAGR of only 2.4% from FY12 to Php851 Mil in FY14. NOTE: THIS DOCUMENT IS INTENDED AS INFORMATION ONLY AND NOT AS A RECOMMENDATION FOR ANY STOCK. IT CONTAINS FACTUAL INFORMATION, OBTAINED BY THE ANALYST DURING MEETINGS WITH MANAGEMENT. COL FINANCIAL DOES NOT COVER THIS COMPANY AND HAS NO RATING ON THE STOCK. page 4

5 Investment Rating Definitions BUY HOLD SELL Stocks that have a BUY rating have attractive fundamentals and valuations, based on our analysis. We expect the share price to outperform the market in the next six to twelve months. Stocks that have a HOLD rating have either 1.) attractive fundamentals but expensive valuations; 2.) attractive valuations but near term earnings outlook might be poor or vulnerable to numerous risks. Given the said factors, the share price of the stock may perform merely inline or underperform the market in the next six to twelve months. We dislike both the valuations and fundamentals of stocks with a SELL rating. We expect the share price to underperform in the next six to twelve months. Important Disclaimers Securities recommended, offered or sold by COL Financial Group, Inc.are subject to investment risks, including the possible loss of the principal amount invested. Although information has been obtained from and is based upon sources we believe to be reliable, we do not guarantee its accuracy and it may be incomplete or condensed. All opinions and estimates constitute the judgment of COL s Equity Research Department as of the date of the report and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of a security. COL Financial ans/or its employees not involved in the preparation of this report may have investments in securities or derivatives of securities of securities of the companies mentioned in this report, and may trade them in ways different from those discussed in this report B East Tower, Philippine Stock Exchange Centre, Exchange Road, Ortigas Center, Pasig City, 1605 Philippines Tel: Fax: Website: page 5