Overweight Fair Value RM1.80 (+17.6%) Guan Chong Berhad. Company Visit. SJ Securities Sdn. Bhd. Strictly for internal reference only.

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1 Company Visit 13 January 2014 Guan Chong Berhad Venturing Downstream, Industrial Chocolate SJ Securities Sdn. Bhd. Strictly for internal reference only Overweight Fair Value RM1.80 (+17.6%) Stock Data Price (RM) 1.53 Stock code 5102 Bloomberg Ticker GUAN MK Listing Main Market Cap (RM mn) Shares outstanding (mn) Free Float (%) Par value (RM) wk high (RM) wk low (RM) 1.35 Financial Data 12 month trailing PER (x) BV per share (RM) 0.71 P/BV (x) 2.16 ROE (%) Beta (x) 0.40 Dividend yield (%) 3.27 Major shareholders Guan Chong Res Sdn Bhd 52.42% LTAT 6.11% Share Price Performance (%) KLCI GCB 1-month month month month YTD Our reports are available for download on SJenie website as stated below. SJ Securities Sdn Bhd A Participating Organisation of Bursa Malaysia Securities Bhd Tel: Fax: Investment Highlights We recently visited Guan Chong Berhad (GCB) s new industrial chocolate factory located in Port of Tanjung Pelapas (PTP) in conjunction with the official opening ceremony. Source: SJ Research Starting Small. The PTP plant commenced operations in July 2013 with an initial capacity of 2,400mt per annum. Currently, the production capacity has increased to 5,000mt per annum. For the first phase, GCB aims to achieve 10,000mt annual capacity by early next year (FY15). For the record, the facility is designed to achieve capacity of up to 50,000mt per annum for future expansion. Investing in Quality. GCB has invested a capital expenditure (CAPEX) of RM55 million for the production facilities, which includes land acquisition, building construction and acquisition of chocolate machinery from Switzerland and Germany. The machineries were sourced internationally for being more economical and effective. The Group has also invested in a Research & Development (R&D) laboratory to undertake product innovation and application training for customers. Strategic Location. PTP has been identified as one of the key components to form an integrated logistics hub within Iskandar Malaysia. Located in PTP, GCB s new facility provides an avenue to tap into global cocoa-based F&B manufacturers who are setting up regional hubs in Iskandar Malaysia. Hershey, one of the global chocolate manufacturers, has invested RM816 million in a new confectionery manufacturing plant in Senai, Johor, which is expected to complete in year We expect the demand for cocoa products and industrial chocolate in Johor to surge in the future.

2 Capturing Additional Value. The expansion of downstream capacity will help the Group to capture additional value of its existing products. Up to 50% of the raw materials for the industrial chocolate factory would be sourced internally from both Pasir Gudang and Batam plant. In light of recent concerns of excess capacity in cocoa powder, the PTP plant could help ease the pressure by consuming a portion of the inventory. Stabilizing Margins. At current growth rate, the PTP plant is expected to contribute about RM100 million of revenue for FY14. The Group aims to achieve 40% revenue contribution from the industrial chocolate segment within 5 years. Compared to the cocoa ingredients segment, the industrial chocolate segment contributes a more stable stream of revenue and the profit margins are expected to be higher. Therefore, the new downstream capacity will help stabilize GCB s margins and earnings. Source: Company, SJ Research Growing Asian Demand. According to Euromonitor International, the global chocolate sales are expected to gain by 2% annually for the next two years. The Asian market particularly presents highest growth potential, with China expected to grow 11% per annum to year Demand in Brazil is expected to grow at 13% and India 22% in the same timeframe. By year 2020, Asia is set to become the world s largest chocolate consuming region. Future Prospects. As a result of price competition in cocoa powder that has led to the historical lost in 3Q13, GCB is expected to conclude FY2013 with weaker revenue and sluggish profit. However, the demand of cocoa powder has improved in 4Q13, indicating recovery of cocoa powder prices. We also expect the industrial chocolate segment to be profitable for the year. Therefore, we expect the Group to yield better margins in FY14. Valuation. We revise our recommendation for GCB from neutral to overweight with a fair value of RM1.80 at the time writing. The fair value is derived from FY14 EPS of 22.5sen with a PE of 8x. GCB has an upside potential of 17.6% from the current price of RM1.53. We expect the industrial chocolate segment to contribute significantly within 5 years. We anticipate that the share price might gain positive momentum ahead of 4Q13 results which is scheduled to be released in end-february, on the expectation of its financials returning to black. 2

3 Quarter Results comparison 3Q FY12 2Q FY13 3Q FY13 Q-o-Q Y-o-Y FYE 31st Dec Units % % Revenue RM mn (5.8) Operating expenses RM mn (310.2) (286.8) (337.7) Profit from operations RM mn (9.4) (176.2) (124.5) Finance cost RM mn (1.9) (2.9) (3.4) Profit before tax RM mn (12.7) (235.0) (135.1) Taxation RM mn (8.7) (1.6) 0.9 (156.6) (110.2) Profit after tax RM mn (11.8) (250.7) (142.9) Minority interest RM mn (0.2) (0.4) 0.0 (100.7) (101.7) PATMI RM mn (11.8) (259.5) (143.2) EPS sen (2.5) (259.6) (143.2) Margins % (2.9) (169.5) (126.0) Operating margin % (3.9) (223.0) (137.2) PBT margin % (3.6) (245.3) (145.9) Net margin % (45.3) (78.0) Source: Quarterly Reports Cumulative results comparison FY12 FY13 Y-o-Y FYE 31st Dec % Revenue RM mn 1, (2.4) Operating expenses RM mn (888.8) (963.4) 8.4 Profit from operations RM mn (77.7) Finance cost RM mn (7.8) (8.9) 14.7 Profit before Tax RM mn (83.7) Taxation RM mn (24.8) (6.5) (73.6) Minority interest RM mn (0.3) (0.8) Net profit (att to shareholders) RM mn (87.1) EPS sen (87.1) Margins % (77.1) Operating margin % (83.3) PBT margin % (86.8) Net margin % (63.8) Source: Quarterly Reports 3

4 Financial Highlights FYE 31st Dec F 2014F Revenue RM mn , , , , ,565.6 Cost of Sales RM mn (607.6) (1,056.6) (1,183.3) (1,288.9) (1,172.6) (1,392.4) Gross profit RM mn Distribution Costs RM mn (8.4) (10.6) (14.4) (16.0) (20.5) (21.1) Administrative Expenses RM mn (8.0) (12.3) (18.1) (34.7) (32.2) (30.7) Other operating expenses RM mn (1.7) (9.5) (25.9) (9.7) (41.8) (10.6) Other operating income RM mn Operating profit RM mn Finance cost RM mn (5.8) (5.0) (6.6) (12.2) (16.4) (14.8) Profit before Tax RM mn Taxation RM mn (5.8) (10.1) (22.6) (30.4) (16.5) (25.4) Minority interest RM mn (0.7) (0.2) (1.6) (0.9) (1.3) (1.1) Profit att to shareholders RM mn Basic EPS sen Margin % Gross profit % Operating profit % PBT % PAT % Growth % Gross profit % (23.0) (17.0) (27.5) 45.4 Operating profit % (64.1) PBT % (72.1) PAT % (2.2) (79.7) Source: Annual Reports, Analyst estimates Peer Comparison Name P/E Forward P/E P/B Net Asset Dvd Yld Mkt Cap Beta Mn % Guan Chong Berhad (0.24) 3.27 Archer-Daniels-Midland , , Barry Callebout AG , , (0.00) 1.32 JB Foods Ltd 4.98 N/A Average , , Source: Bloomberg 4

5 Share Price Performance Source: Bloomberg Disclaimer SJ Securities shall not be liable for any direct or consequential loss arising from any use of material contained in this publication. The information contained in this report is based on data obtained from sources believed to be reliable and opinions formed are from belief of the individual author. SJ Securities has not verified this information and does not guarantee that the information is accurate, complete or verified. The publication should not form a basis to be relied upon. Any information or Research contained in the publication is subject to change without notice and SJ Securities shall not hold any responsibility to maintain, update the information and to correct the information. Any future outlook, forecasts or any other future interpretation are in no event guaranteed and are merely opinions and views of the author. We, our associates, directors or employees may from time to time have an interest in the securities and/or companies mentioned herein. In no event will SJ Securities or persons associated or connected to SJ Securities be liable for any consequences such as losses, damages or other direct and indirect consequences. Any action that the recipient/user takes from reading, analysis and other direct or indirect usage of the publication is solely and ultimately the responsibility of the recipient/user. We do not represent that this publication should be relied upon and the recipient/user s actions should be based on the user s own independent verification and judgment. Publications may include material which is not suitable for the recipient risk profile and does not take into account any specific investment objectives or financial situation if the user. The recipient/user should make his or hers own judgment and assessment on risk and suitability. The publication is prepared for information purpose only and shall not be considered as and offer or a solicitation to purchase, keep or sell contracts. The publication is strictly for SJ Securities internal reference only. SJ Securities does not hold any liability or responsibility for any material in the publication that is reproduced in any manner that has not been authorized. By using or reading this report, the recipient/user agrees that SJ Securities will not be held liable or responsible for any outcome, result or action taken by the recipient/user. Stock rating definitions Overweight The stock is expected to perform positively. Expected return including both capital appreciation and dividends is expected to exceed 15% over 12 months. Neutral The stock is expected to stay sidelined. Expected return including both capital appreciation and dividends is expected to range between negative 5% to positive 15% over 12 months. Underweight The stock is expected to perform negatively. Expected return including both capital appreciation and dividends is expected to be negative 5% or lower over 12 months. Not Rated The stock is not under research coverage and the reports serves for purely informational purposes only. Trading Idea The stock is expected to be volatile while providing for near term positive trading opportunities. This is under the high risk category with near term catalysts. 5