UBS Investment Research Sansiri PCL

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1 ab UBS Investment Research Sansiri PCL Demand continues to drive growth Initiate coverage with a Buy rating We initiate coverage of Sansiri, Thailand s largest residential property developer in terms of presales, with a Buy rating and a 12-month price target of Bt5.50. Based on its solid presales and development pipeline, we forecast a net profit CAGR of 22%. We expect housing demand to remain strong We believe housing demand in Thailand will remain strong in 2013 and into 2014, based on increasing household affordability, a continued low policy rate environment, growing consumer confidence, and UBS s real GDP growth forecast of 4.7% for As we expect Sansiri to gain market share and benefit from strong demand, we forecast revenue growth of 15% in Brand recognition supports provincial expansion Sansiri has the highest upcountry exposure among Thai residential property companies under our coverage. We think strong brand recognition and the experience it has gained in the provincial markets have enabled it to generate approximately 30% of annual revenue from markets outside Bangkok in the past few years. Valuation: price target of Bt5.50 We derive our price target from a DCF-based methodology and explicitly forecast long-term valuation drivers using UBS s VCAM tool. Our price target assumes a WACC of 8.9% and implies a 2013E PE of 13.1x, compared with the average of 14.5x for other Thai property companies under our coverage. Highlights (Btm) 12/11 12/12 12/13E 12/14E 12/15E Revenues 20,542 29,821 34,300 39,778 46,760 EBIT (UBS) 2,978 4,118 4,933 5,960 7,236 Net Income (UBS) 2,007 2,964 3,670 4,465 5,446 EPS (UBS, Bt) Net DPS (UBS, Bt) Profitability & Valuation 5-yr hist av. 12/12 12/13E 12/14E 12/15E EBIT margin % ROIC (EBIT) % EV/EBITDA (core) x PE (UBS) x Net dividend yield % Source: Company accounts, Thomson Reuters, UBS estimates. (UBS) valuations are stated before goodwill, exceptionals and other special items. Valuations: based on an average share price that year, (E): based on a share price of Bt4.18 on 23 May :36 HKT Thomas Philippson, CA Associate Analyst thomas.philippson@ubs.com Global Equity Research Thailand Real Estate 12-month rating 12m price target Price RIC: SIRI.BK BBG: SIRI TB Buy Prior: Not Rated Bt5.50/US$ Bt4.18/US$ May 2013 Trading data (local/us$) 52-wk range Bt /US$ Market cap. Bt38.0bn/US$1.27bn Shares o/s 9,099m (ORD) Free float 62% Avg. daily volume ('000) 18,105,580 Avg. daily value (m) Bt79,978.7 Balance sheet data 12/13E Shareholders' equity Bt18.2bn P/BV (UBS) 2.0x Net Cash (debt) (Bt24.3bn) Forecast returns Forecast price appreciation +31.6% Forecast dividend yield 3.7% Forecast stock return +35.3% Market return assumption 8.5% Forecast excess return +26.8% EPS (UBS, Bt) 12/13E 12/12 From To Cons. Actual Q1 - (0.01) Q2E Q3E Q4E /13E /14E Performance (Bt) /10 Stock Price (Bt) 07/10 Source: UBS 10/10 01/11 04/11 07/11 Stock Price (Bt) (LHS) 10/11 01/12 04/12 07/12 Rel. Bangkok S.E.T. 10/12 01/13 Rel. Bangkok S.E.T. (RHS) 04/ This report has been prepared by UBS Securities (Thailand) Ltd. ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 27. UBS does and seeks to do business with companies covered in its research reports. As a result, 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.

2 Contents page Investment Thesis 3 Key catalysts...4 Thomas Philippson, CA Associate Analyst thomas.philippson@ubs.com Risks...4 Valuation and basis for our price target...4 Upside/downside scenarios...5 Sensitivity analysis...5 UBS versus consensus...6 Risk analysis 7 Competitive analysis 8 Assessment of industry attractiveness...8 Management strategy...11 Competitive strengths...11 Financials 17 Profit and loss...17 Balance sheet...17 Cash flow...18 Return on capital...18 Valuation 21 Price target derivation...21 Comparables...21 Appendix 24 Company background...24 UBS 2

3 Investment Thesis We initiate coverage of Sansiri with a Buy rating and a price target of Bt5.50. Sansiri, one of the largest property developers in Thailand, has been steadily increasing its market share in the single detached, townhouse and condominium segments over the past two years. In 2012, its revenue grew 45% and net profit rose 50% YoY due to its increasing market share and strong housing demand. We forecast revenue to increase 15% and net profit to grow 20% in We base our positive view on: (1) Increased housing demand. We expect housing demand to remain strong in 2013 and into 2014, based on rising consumer confidence, increasing household affordability, a continued low policy rate environment and UBS s forecast real GDP growth of 4.7% for With its increasing market share, we expect robust growth for Sansiri as it benefits from strong demand. (2) Increased presales generation and market share. Sansiri s Q113 presales increased 91%, benefiting from continued strong housing demand in Thailand. Sansiri plans to increase project launches in 2013 to Bt60.6bn, a 7% increase from the 2012 launch value. We therefore expect it to post record presales this year. (3) Strong brand recognition. Sansiri owns one of most recognised property brands in Thailand. As a result we think it has increased its market share in the single-detached, townhouse and condominium segments. Due to the strong recognition of its brand, we expect the company to capture more of the growing housing demand in Thailand and exercise more pricing power than its competitors; pricing power has been absent in the property market over the past decade. (4) Upcountry success. Sansiri has increased project launches outside Bangkok aggressively, and as a result derived approximately one-third of its 2012 revenue from upcountry (provinces outside Bangkok) sales. With its market research and experience in the provinces, we believe the company is better prepared to capture upcountry market growth than other developers that have limited exposure in these markets. Valuation: Sansiri is trading at 9.95x 2013E earnings with a forecast 22% net profit CAGR. We think Sansiri is one of the more attractive Thai property stocks at current levels. UBS 3

4 Key catalysts Strong presales momentum: Sansiri s presales growth has been strong over the past year, with Q113 presales increasing 91% YoY and 29% QoQ. Presales, which are reported on a monthly basis, provide transparency in the company s project launches and therefore are an indication of its future revenue-generation capability. We expect industry-leading presale results to act as a catalyst and support a re-rating of the stock. Monthly presales results provide transparency and could be a catalyst Low rate environment: Bank of Thailand (BOT) might cut rates to support growth. UBS expects a 25bp rate cut on 29 May A further reduction in Thailand s policy rate should support strong housing demand, which would act as a share price catalyst. UBS expects a 25bp rate cut on 29 May 2013 Further growth along planned mass transit railway expansion routes and upcountry: We expect developments along expanding mass transit lines and upcountry to continue to generate demand and drive earnings in 2013 and The expansion of the mass transit railway and the consequent increase in demand for property could be another catalyst for the stock. Risks We believe Sansiri faces the following company-specific and sector risks: Gearing: Sansiri s gearing at the end of Q113 was 1.75x, the highest for Thai property companies under our coverage. Speculative buying: Due to higher condominium prices in 2012 and into 2013, there is risk of increasing speculative buying in the market. Political instability: Any political instability could adversely affect the Thai property market and the stock market too. Labour shortage: Thailand s unemployment rate is 0.7%, and labour is scarce. Policy implementation: The BOT might implement further policy measures to cool the property market. Valuation and basis for our price target We derive our price target from a DCF-based methodology and explicitly forecast long-term valuation drivers using UBS s VCAM tool, assuming a WACC of 8.9%. Our price target implies a 2013E PE of 13.1x versus our forecast average for the UBS Thai property universe of 14.5x. While our forecasts imply historically high multiples for Sansiri, we believe this is justified as we expect ROE of above 22% through to 2015 one of the highest for property companies under our coverage and a three-year net profit CAGR of 22%. While our forecasts imply historically high multiples for Sansiri, we believe this is justified, as we forecast a net profit CAGR of 22% over UBS 4

5 Chart 1: Forward PE bands Chart 2: Forward P/BV bands (Bt) Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Share price 15x 12x 8x 5x 2x Dec Dec-04 (Bt) Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Share price 2.1x 1.7x 1.2x 0.7x 0.3x ROE 25% 20% 15% 10% 5% 0% Source: Reuters, UBS estimates Source: Reuters, UBS estimates Upside/downside scenarios Upside scenario: valuation of Bt6.03/share In our upside scenario, we assume housing demand growth to be 10% above our base-case assumption. If greater demand results in Sansiri s project revenue increasing 10% above our base-case expectation for 2013, we estimate EPS will rise to Bt0.46 in 2013 versus a base-case forecast of Bt0.42. Downside scenario: valuation of Bt4.59/share In our downside scenario, we assume housing demand falls 10% in 2013 and consequently Sansiri s project sales also fall 10%. With the fall in demand, we assume the company will increase promotions to sustain sales, and this would impact the gross margin we assume a 100bp decline in the gross margin for A 10% decrease in revenue, coupled with a 100bp decrease in the gross margin, yields an EPS of Bt0.35 for the year. Sensitivity analysis To determine how demand impacts our earnings forecasts we have undertaken a sensitivity analysis (see table below) that looks at how our 2013 EPS forecast will respond to fluctuating project sales versus our base-case 2013 project sales assumption of Bt33.3bn. Table 1: Sensitivity analysis Change in project sales EPS (Bt) Change in project sales EPS (Bt) Base case Bt33.3bn 0.42 Base case Bt33.3bn 0.42 Source: UBS estimates +10% % % % % % % % % % 0.38 UBS 5

6 UBS versus consensus Our net profit estimate is slightly below consensus, as we are more conservative about the company s ability to reduce SG&A costs. While we forecast SG&A/sales to fall from 20.3% in 2012 to 19.7% by end-2014 due to economies of scale, we believe the company will not be able to reduce expenses further as it will probably spend to maintain brand recognition. Our net profit estimate is slightly below consensus, as we are more conservative on SG&A cost reduction Table 2: UBS vs consensus UBS Consensus Diff. UBS Consensus Diff. UBS Consensus Diff. Sales (Bt m) 34,300 35, % 39,778 40, % 46,760 46,737 0% Gross margin (%) bp bp bp Net income (Bt m) 3,670 3,948-7% 4,465 4,766-6% 5,446 5, % ROE (%) bp bp bp Source: Bloomberg, UBS estimates UBS 6

7 Risk analysis Gearing: Sansiri s gearing levels are higher than most other Thai property companies due to aggressive project launches and land acquisition. Its gearing levels have raised concerns over the possibility of capital raising. While management has stated that this is not in its plans, the current debt levels make capital raising a higher risk for Sansiri than less geared property companies. We believe the company s current backlog should be sufficient to lower gearing to industry-average levels over the next three years, thereby reducing this risk. Speculative buying: Concerns have been rising over the potential for increased speculative condominium purchases in With the majority of Sansiri s presales derived from the condominium segment, there is a risk that a proportion of its sales will not represent end-user demand. This could raise doubts about the company s ability to transfer the units and thus generate revenue. High gearing could lead to capital raising Speculation in the property market could result in doubts about the company s ability to transfer the units and generate revenue Political instability: Political turmoil could negatively affect Thailand s property market as well as the stock market. While we believe the government is stable, we would not rule out the potential for uncertainty. Labour shortage: Thailand s unemployment is currently 0.7%, thereby creating the potential for labour shortages in Hence, we prefer companies that have prefabrication facilities and strong relationships with established construction companies as this might help mitigate the impact of labour shortages in the sector. Potential policy implementation: With the escalation of property prices in 2012 and thus far in 2013 there has been increased debate on BOT implementing further policy measures to cool the property market. In our report, Potential tightening of the policy screw, published on 9 April 2013, we stated that any further policy implementation would have a limited affect on the property market as a whole. Nonetheless, the risk of new policy measures adversely affecting property demand remains. UBS 7

8 Competitive analysis Assessment of industry attractiveness Property demand has rebounded strongly in Thailand after the lows caused by the 2011 floods. We expect demand to remain strong throughout 2013 and into 2014 due to the following factors: (1) Increasing affordability: Household affordability in Thailand has increased recently due to higher minimum wages in 2012 and 2013, the government s populist policies such as the rice-pledging scheme, and increased government infrastructure spending. Higher household affordability has led to increased housing demand, which we expect to continue in 2013 and into Higher affordability due to government policies Chart 3: Household affordability Q03 3Q03 1Q04 3Q04 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 Affordability Ratio (%) 10-yr avg Source: NSO, AREA, BOT, UBS estimates (2) Upcountry expansion: Provinces outside Bangkok have been increasing their contribution to Thailand s GDP over the past decade. Fuelled by the government s policies and planned infrastructure spending, housing demand in these areas has also increased. Traditionally, Bangkok has been the sole source of revenue for listed property developers but with the emergence of demand from the provinces, launches outside Bangkok have been increasing and creating a new source of top-line growth for property companies. Rising demand and expanding market in the provinces a new source of topline growth UBS 8

9 Chart 4: Contribution to Thai GDP from Bangkok and upcountry Bangkok Kingdom except BKK Source: CEIC, Haver (3) Mass transit expansion: Bangkok s mass transit system plans to expand its track length by over 100% by The expansion of BTS lines should directly increase the amount of developable land around Bangkok and support strong property demand. As the development of mass transit routes continues, we expect property companies to develop projects along the planned new routes. Increase in developable land around Bangkok, due to BTS expansion, should support strong property demand Figure 1: Current BTS in Bangkok Figure 2: Planned BTS expansion by 2029 Mo Chit Saphan Khwai Ari Sanam Pao Victory Monument Phaya Thai Ratchathewi Siam Phloen Chit Asok National Stadium Phrom Phong Chit Lom Nana Ratchadamri Thong Lo Ekkamai On Nut Phra Khanong Sala Daeng Bangchak Punnawithi Chong Nonsi Bang Wa Ratchadapisek Wutthakat Phothinimit Wongwian Yai Surasak Saphan Taksin Krung Thon Buri Udom Suk Bang Na Bearing Source: BTS Source: BTS (4) Consumer confidence: Consumer confidence was near an all-time low after the 2011 floods and bottomed at 71.0 in November Since then, there has been a steady rebound, reaching 84.8 at the end of March 2013, well above the five-year average of As there is a strong correlation between housing demand in Thailand and consumer confidence, we expect rising confidence to support strong property demand in Rising consumer confidence, well above the five-year average UBS 9

10 Chart 5: Five-year history of the Thai consumer confidence index /31/2008 9/30/2008 3/31/2009 9/30/2009 3/31/2010 9/30/2010 3/31/2011 9/30/2011 3/31/2012 9/30/2012 Consumer Confidence Index 5-yr historical average Source: CEIC, University of Thai Chamber of Commerce (5) Low rate environment: Currently, Thailand s interest policy rate is 2.75%, which has supported Thai property demand for most of 2012 and into UBS forecasts a further 25bp decrease in the policy rate on 29 May We believe any further rate cuts by the Bank of Thailand will act as a catalyst for further re-ratings of property stocks and housing demand in Thailand. Low policy rate supports property demand and stock re-ratings Chart 6: Thailand s historical interest policy rate 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% 23-May Apr Dec Oct Jun Apr-04 2-Mar Jan Dec Oct Aug Jul-09 2-Jun Apr Mar-12 9-Jan-13 Source: BOT UBS 10

11 Management strategy Sansiri was initially a condominium developer and we expect condominium sales to continue to drive the bulk of the company s revenue. However, we expect Sansiri to maintain a strong presence in the low-rise segment from where it has generated approximately 40% of revenue in the past few years. We expect it to continue to gain market share in the low-end market with the completion of its prefabrication factory in The factory should also enable Sansiri to aggressively launch projects upcountry from where it expects to derive 30% of 2013 revenue. Management expects to continue to launch upcountry projects, following its success outside Bangkok in 2011 and Competitive strengths We believe Sansiri has positioned itself as one of the leading Thai property developers and has gained market share in all property segments by leveraging its strong brand and through aggressive marketing campaigns. Initially, an exclusively condominium developer in the mid-range price segment, it has since expanded its operations and is now a significant operator in the low-rise housing market. In 2012, Sansiri opened a prefabrication factory in Thailand, one of only two property developers to operate such a facility. This has enabled it to expand aggressively into the low-end housing sector. Targeting the upcountry market to replicate 2011 and 2012 success Gaining market share in all property segments by leveraging its strong brand and through aggressive marketing campaigns Chart 7: 2012 market share based on project sales Chart 8: 2011 market share based on project sales Sansiri, 16% Sansiri, 14% 21 Others, 27% 20 Others, 25% Pruksa, 15% Pruksa, 16% Supalai, 6% LPN, 7% Quality Houses, 7% Land & Houses, 12% Asian Property, 10% Supalai, 9% LPN, 8% Quality Houses, 6% Land & Houses, 13% Asian Property, 9% Source: Company data Source: Company data Strong brand recognition Sansiri appears to have recognised the benefits of a strong brand and therefore spends more on SG&A, as a percentage of its operating income, than any other Thai property developer under our coverage. We think the benefits of the brand are pricing power and greater sales in Bangkok and upcountry. This is evident in Sansiri s annual three-day Life comes Home event, where it launches a number of residential projects. In the 2013 event, the company attracted a record number of customers and sold just under Bt8bn worth of units. We expect the brand to continue to support strong revenue generation and increased pricing power, as the company continues to enhance its brand, especially in the provinces. Figure 3: Sansiri logo Source: Company data UBS 11

12 Chart 9: SG&A as a % of operating income as of end % 20.00% 15.00% 10.00% 5.00% 0.00% Sansiri Quality Houses Asian Property Pruksa LH Supalai LPN Source: Company data Pricing power Property developers in Thailand have historically priced units on a cost plus model with little pricing competition. Because of this, prices of residential property have been relatively stagnant over the past five years compared with other countries in Asia. However, with increasing demand, property developers have stated that they now have greater ability to raise prices and expect this to continue in 2013 and into Given Sansiri s strong brand, we believe it has the ability to increase unit prices more aggressively than other property developers, which should further help drive bottom-line growth. Given Sansiri s strong brand, we believe it has the ability to raise unit prices more aggressively than other property developers Chart 10: Residential property price increase % Beijing HK Shanghai Taipei Singapore PRC (35 city avg) Taiwan Malaysia Korea Seoul Indo Thailand Japan Residential property price increase since 2006 Residential property price increase since 2009 Note: Japan is urban land prices. Source: CEIC, UBS estimates UBS 12

13 Presence in all segments Due to an aggressive launch campaign that began in 2010, Sansiri now has exposure in all segments of the Thai property sector, which includes condominiums, townhouses and single detached units in the low, medium and high-end priced segments of the market. This exposure allows the company to capture property demand regardless of the sector that is most active at any given time. Additionally, low-rise sales in the company s portfolio smooth earnings and generate steady cash inflow from the shorter construction time and thereby enhance transfer frequency. Additionally, the steady cash inflow associated with low-rise sales enables the company to manage its debt levels more efficiently. Exposure to all segments enables Sansiri to capture property demand, regardless of the sector that is most active at any given time Chart 11: 2013 presales target by segment Single Detached 29% Townhouse 9% Condo 62% Source: Company data Prefabrication factory With its prefabrication facility commencing operations, Sansiri has been able to compete aggressively in low-end housing and take market share from other property developers in this segment. The factory allows the company to reduce the construction time for low-end single detached houses from nine months to three months, while maintaining the housing quality it is known for. This reduction in construction time and labour dependence has allowed Sansiri to increase its asset turnover (we forecast 0.72x in 2015) to one of the highest under our coverage. Shorter construction time + lower labour dependency = higher turnover Table 3: Asset turnover (x) E 2014E 2015E Pruksa Asian Property Quality House LPN Development Land & Houses Sansiri Source: Company data, UBS estimates UBS 13

14 Chart 12: Forecast 2013 asset turnover Reliance on precast factories LPN Sansiri Pruksa Asian Property Land & Houses Quality House Source: UBS estimates Upcountry exposure Sansiri had identified the potential in Thailand s provincial market before most other developers and subsequently has entrenched itself in most of the viable provinces outside Bangkok. Through trial-and-error, as well as extensive research, Sansiri has developed a system to grade the provincial property market. This has resulted in the company deriving over 30% of its revenue from markets outside Bangkok in Generated over 30% of 2012 revenue from markets outside Bangkok Sansiri breaks down Thailand s provinces into three tiers based on population, affordability, and other real estate-sensitive metrics, with tier 1 being able to support immediate project launches and tier-3 provinces being classified as under study, signifying they are still too remote to support current developments. Through its research and experience, we believe Sansiri has been able establish itself and have the highest upcountry exposure among the property developers under our coverage. This has also enabled it to further diversify its revenue stream and position itself ahead of the competition to capture further upcountry demand as it emerges. Chart 13: Thai property developers revenue from upcountry 40% 35% 30% 25% 20% 15% 10% 5% 0% E Siri Supalai LH QH LPN Pruksa Source: Company data, UBS estimates UBS 14

15 Industry-leading presales Sansiri s strong presales growth in 2012 benefited from an aggressive launch schedule of 51 projects with a combined value of Bt56.9bn. This was a significant increase over the 14 projects launched in 2011 at a total value of Bt16.8bn. Sansiri plans to continue to build on the 2012 project launches by launching 45 projects in 2013 with a total value of Bt60.6bn. Based on the company s planned launch schedule, we expect it to post record presales in Benefitting from the launch of 51 projects with a combined value of Bt56.9bn in 2012 Chart 14: Sansiri s presales Chart 15: 2012 full-year presales by company Btm 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5, Q13 Condo TH SDH Btm 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 Siri PS LH AP LPN QH Condo Low rise Source: Company data Source: Company data lead to largest backlog in the sector As of 13 March 2013, the company had a backlog of Bt60.7bn which is the largest in the residential property sector. Sansiri s backlog benefited from exceptionally strong presales in 2012 and at the beginning of Since the majority of these sales were in the condominium segment, we expect these presales to be recognised as revenue in 2014 and 2015 once construction is completed. Chart 16: Sansiri s backlog, the largest in the residential segment Btm 60,000 50,000 Siri 40,000 30,000 Pruksa Spali AP 20,000 LPN 10,000 LH QH 0 Backlog as of Dec 31, 2012 Source: Company data UBS 15

16 Q1 not an indication of full-year results Sansiri posted a net loss of Bt87m in Q113, due to a significant increase in SG&A expenses related to the large number of project launched in the quarter. We do not see this as an indicator of the company s inability to generate returns because the increase in SG&A was directly related to the increase in product launches in Q113. We do not view the Q113 loss as an indicator of full-year 2013 results Presales increased 91% in Q113 to Bt20bn, which will be translated and recognised as revenue starting in 2014; thus creating a mismatch between expenses and revenue generation. We expect Sansiri s project launches for the remainder of 2013 to slow, reducing SG&A expenses as the year progresses. Additionally, we also expect revenue to increase considerably in 2013, as the company has realised only 15% of our full-year revenue forecast thus far. Based on this, we believe the first quarter loss will be insignificant on a full-year basis and in the long-term viability of the company. UBS 16

17 Financials Profit and loss Due to strong condominium sales in 2012, we forecast revenue growth of 15% in 2013 and 16% in 2014, as the sold units are transferred. Due to this, we forecast net profit to increase 22% in 2013 and 22% in 2014, due to revenue growth and cost controls. We forecast revenue to grow 15% in 2013 and 16% in 2014 Table 4: Sansiri earnings forecasts (Bt m) E 2014E 2015E Revenue 20,542 29,821 34,300 39,778 46,760 Gross profit 7,032 9,944 11,450 13,478 16,074 Operating income 2,867 3,885 4,658 5,642 6,862 Net income 2,015 3,018 3,670 4,465 5,446 YoY growth Revenue 10% 45% 15% 18% 12% Core net profit 3% 48% 24% 22% 22% Operating profit 4% 36% 20% 21% 21% Net Income 6% 50% 22% 22% 22% Margins Gross margin 34.2% 33.3% 33.4% 33.9% 34.4% Operating margin 14.0% 13.0% 13.6% 14.2% 14.7% Net margin 9.8% 10.1% 10.7% 11.2% 11.7% Source: Company data, UBS estimates Balance sheet Sansiri s gearing is higher than its peers due to the company s aggressive project launch schedule in 2011 and We forecast its debt levels to continue to fall, due to substantial project transfers and the continued exercising of warrants. We forecast the company s debt levels to continue to fall Chart 17: Sansiri gearing levels E 2014E 2015E Source: Company data, UBS estimates UBS 17

18 Table 5: Sansiri balance sheet key items (Bt m) E 2014E 2015E Assets Current assets 32,293 41,073 46,300 54,453 62,335 total fixed assets 1,881 2,356 2,499 2,624 2,734 intangible and other assets Total assets 36,238 46,106 51,468 59,745 67,740 Liability and equity Payables 975 1,800 1,330 2,273 1,931 Total current liabilities 14,868 18,173 17,620 18,979 19,559 Long term debt 9,274 12,419 14,974 18,000 21,636 Total liabilities 24,860 31,270 33,307 37,727 41,980 Total equity 11,377 14,835 18,160 22,017 25,759 Source: Company data, UBS estimates Cash flow We forecast Sansiri s free cash flow to improve in 2013 due to the completion of the company s prefabrication factory in 2012 and therefore expect capex to be lower in As Sansiri transfers its large backlog, the bulk of which will occur in 2014 and 2015, we expect the company s free cash flow to continue to improve but remain negative due to the large amount of construction and land capex which is recorded as working capital. We expect lower capex in 2013 Chart 18: Sansiri free cash flow E 2014E 2015E (1,000) (2,000) (3,000) (4,000) (5,000) Source: Company data, UBS estimates Return on capital We forecast ROE to remain above 22% through to 2015 due to increasing asset turnover associated with the prefabrication factory coming on-stream, high gearing in 2013 and 2014, as well as margin improvement through increased pricing power. We think it might be difficult for Sansiri to enhance ROE above the current high level, due to the company s plans to reduce gearing and the continued exercising of warrants until UBS 18

19 Chart 19: Improved asset turnover leads to higher ROE 24.0% 23.0% 22.0% 21.0% 20.0% 19.0% 18.0% 17.0% E 2014E 2015E Source: Company data, UBS estimates Chart 20: ROE vs P/BV (2013E) X LPN Development Land & Houses Pruksa Real Estate Quality Houses Sansiri Asian Property % Source: UBS estimates Outstanding warrants As of 28 February 2013 Sansiri had 2,138m warrants outstanding, all in-themoney, which when exercised will equate to 2,496m shares. To account for the impact of these warrants on Sansiri s balance sheet we assume that an equal amount is exercised each year until expiry. UBS 19

20 Table 6: Warrants Warrant ESOP 5 ESOP 6 Total Outstanding: Share 2,036,627,210 23,029,131 78,758,350 2,138,414,691 Exercise Ratio 1:1.67 1:1.67 1:1.67 1:1.67 Exercise Price Exercise Period Mar 12-Jan 15 Jun 09-Jan 15 Aug 10-Aug 15 Monthly share addition 69,904, ,917 1,531,850 # of new shares Warrant 629,138, ,850, ,850,807 69,904,234 ESOP 5 5,374,999 5,374,999 2,687,500 ESOP 6 18,382,199 18,382,199 18,382,199 12,254,799 Total 652,895, ,608, ,920,506 82,159,033 Source: Company data, UBS estimates Annual exercising of warrants will reduce the company s EPS and therefore we undertook a sensitivity analysis of our 2013 and 2014 EPS forecasts (see table below) to see the affects of an increase or decrease in the number of warrants exercised during the year. Table 7: Sensitivity analysis of our EPS forecasts 2013E EPS 2014E EPS 2013E EPS 2014E EPS Base-case EPS Base-case EPS % % % % % % % % % % % % % % % % % % % % Source: UBS estimates UBS 20

21 Valuation Price target derivation We derive our price target from a DCF-based methodology and explicitly forecast long-term valuation drivers using UBS s VCAM tool, assuming a WACC of 8.9%. Our price target of Bt5.50 implies a 2013E PE of 12.5x, which appears expensive compared with the historical valuation level. We believe the potential for strong net profit growth justifies the higher multiples. Its presales growth in 2012 and Q113 was robust as was revenue growth; hence, we forecast a 22% three-year core net profit CAGR for Chart 21: Forward PE band 2SD Chart 22: Forward P/BV band 2SD 30x 3.0x 25x 2.5x 20x 2.0x 15x 10x 5x 0x -5x +2 S.D. +1 S.D. -1 S.D. -2 S.D. 1.5x 1.0x 0.5x 0.0x -0.5x +2 S.D. +1 S.D. -1 S.D. -2 S.D. Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Source: Reuters, UBS estimates Source: Reuters, UBS estimates Comparables Table 8: Comparables PE (x) EPS growth Dividend yield ROE (%) EPS (Bt) Company Name 2013E 2014E 2015E 2013E 2014E 2015E 2013E 2014E 2015E 2013E 2014E 2015E 2013E 2014E 2015E Asian Property % 13.2% 10.3% 4.7% 5.5% 7.5% Land & Houses % 16.5% 15.5% 1.2% 3.6% 4.2% LPN Development % 15.3% 16.5% 2.9% 3.7% 4.3% Quality Houses % 9.1% 9.7% 3.1% 2.8% 3.1% Pruksa Real Estate % 14.1% 7.8% 1.9% 2.5% 2.9% Sansiri % 10.8% 19.9% 3.3% 3.7% 4.4% Simple average (excluding Siri) % 13.6% 12.0% 2.8% 3.6% 4.4% Note: Above data as at 23 May Source: UBS estimates VCAM is a DCF and an economic profit model VCAM is a discounted cash flow (DCF) and economic profit analysis (EPA) valuation methodology which calculates economic profit along with free cash flows each year. It assumes that a company s DCF Value = Current earnings [NOPAT] valued in perpetuity + present value of all future incremental economic profit. UBS 21

22 The accompanying economic profit forecast indicates whether or not free cash flow is value-added and it is economic profit growth that justifies an intrinsic value greater than the company s current earnings valued in perpetuity. A key assumption in the VCAM model is the value creation horizon (VCH), which refers to the number of future years a company is expected to generate incremental economic profits. At the end of the VCH, we value the NOPAT into perpetuity to calculate terminal value. The major subjective drivers of our VCAM price targets are long-term margin assumptions and the weighted average cost of capital (WACC). Our sensitivity and valuation tables come directly from VCAM and clients are free to modify the data and/or use their own assumptions on our website ( The site also has a number of tools including sensitivity analysis, long-term trends, and a goal seeker, and a extensive VCAM guide. Table 9: UBS VCAM inputs and valuation for Sansiri PCL (SIRI.BK) Relative year +1E +2E +3E +4E +5E +6E +7E +8E +9E +10E Fiscal year 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E EBIT 4,933 5,960 7,236 7,582 8,318 9,877 10,994 12,106 13,184 14,200 D&A* Capex (687) (778) (839) (827) (764) (823) (879) (928) (970) (1,002) Chg. in wkg. cap. (7,250) (6,961) (7,685) (5,200) (4,566) (5,192) (6,016) (5,690) (5,207) (4,570) Tax (operating) (987) (1,192) (1,447) (1,516) (1,664) (1,975) (2,199) (2,421) (2,637) (2,840) Other (134) (164) (209) (171) (153) (173) (169) (160) (147) (130) Free Cash Flow (3,724) (2,720) (2,517) 306 1,618 2,221 2,283 3,500 4,857 6,326 growth NM NM NM 427.9% 37.2% 2.8% 53.3% 38.7% 30.3% Valuation Long Term Assumptions WACC PV of explicit cash flow 18,611 Relative year +10E +15E +25E Risk free rate 3.50% PV of terminal value (yr. 15) 50,175 Sales growth 5.5% 4.5% 4.5% ERP 5.0% Enterprise Value 68,786 EBIT margin 17.0% 17.5% 18.3% Beta 1.50 % terminal 73% Capex/sales 1.2% 0.8% 0.8% Debt / equity*** 63.0% Associates & other 709 ROIC 12.0% 12.4% 13.3% Marg. tax rate 25.0% - Minority interests 1 Cost of equity 11.0% Surplus cash** 1,757 Cost of debt 6.9% - Debt*** 24,750 Valuation-Implied Metrics WACC 8.9% Equity value 46,501 Fiscal year 2013E 2014E 1-yr Fwd. Shares outstanding [m] 9,099.2 EV / EBITDA 12.9x 10.8x 12.0x Terminal Assumptions Equity per share (Bt/sh) 5.11 EV / EBIT 13.9x 11.5x 12.9x VCH (years) 15 Cost of equity 11.0% FCF Yield NM NM NM Impl. FCF gr. 3.0% Dividend yield 3.3% P / E (PV) 12.2x 11.0x 11.7x Incr. ROIC 15.1% 1-year Price Target (Bt/sh) 5.50 P / E (Target) 13.1x 11.8x 12.6x EV / EBITDA 8.6x Figures in Bt m, unless noted otherwise. * Depreciation and non-goodwill amortization ** The portion of cash not required to maintain operations *** Assumes market value of equity and includes market value/seasonal adjustments for debt and debt-deemed obligations. Source: UBS VCAM UBS 22

23 Chart 23: UBS VCAM sensitivities for Sansiri PCL (SIRI.BK) Price versus WACC Price versus Sales Growth +30.0% 8.1% Bt % 10.0% Bt % 8.3% Bt % 8.9% Bt % 8.6% Bt % 7.6% Bt % 8.9% Bt % 8.4% 8.7% 9.0% 9.4% 9.7% 10.0% -10.0% 9.3% Bt % -20.0% 9.6% Bt % 6.2% Bt % 1.9% 3.5% 5.1% 6.8% 8.4% 10.0% -10.0% 4.6% Bt % -20.0% 2.7% Bt % Present Value for Given WACC Market Price rel. to VCAM Present 10.0% ValueBt % 0.3% Present Value for Given Sales Growth Market Price rel. to VCAM Present Bt3.58 Value Price versus EBIT Margin Price versus Capex / Sales [%] +30.0% 19.6% Bt % +30.0% Bt % 18.7% Bt % +20.0% Bt % 17.9% Bt % -0.2% Bt % 17.1% Bt % 15.5% 16.3% 17.1% 17.9% 18.7% 19.6% -10.0% 16.3% Bt % -20.0% 15.5% Bt % 1.1% Bt % -1.5% -0.2% 1.1% 2.4% 3.7% 5.0% -10.0% 2.4% Bt % -20.0% 3.7% Bt % 14.6% Present Value for Given EBIT Margin Market Price rel. to VCAM Present Value Bt3.58 Present Value -30.0% for Given Capex/Sales Market Price rel. to VCAM Present 5.0% Value Bt3.58 Notes: Sensitivities are derived from assuming Sales Growth, EBIT Margin, or Capex / Sales is flat annually for years 6 through the VCH (year 15). Explicit estimates in years 1 through 5 do not vary, and always represent the assumptions on the Inputs Page. For each chart, one parameter is varied while the others are held constant. Those held constant are set as they appear on the Inputs Page. Source: UBS VCAM UBS 23

24 Appendix Company background Founded in 1984 and listed in 1996, Sansiri established its residential property business in the mid-range condominium segment where it constructed buildings for sale and rent. In 1999 Sansiri expanded operations to include landed property and launched its first single detached housing project in Thailand. With the success of the single detached housing projects, the company further expanded operations in 2003 and entered the townhouse market which completed the company s exposure to all segments of the housing market in Thailand. Since then Sansiri has focused on the depth of products launched in each segment by expanding into the low-end category by constructing a prefabrication factory and in the high-end segment by increasing brand awareness and quality of products. The company remains mainly focused on the condominium segment, deriving 67% of 2012 presales from condominium sales. However, it has also gained market share in the low-rise segment, increasing presales in 2012 to Bt14bn from Bt13bn in UBS 24

25 Sansiri PCL Income statement (Btm) 12/08 12/09 12/10 12/11 12/12 12/13E % ch 12/14E % ch 12/15E % ch Revenues 15,037 17,349 18,596 20,542 29,821 34, , , Operating expenses (ex depn) (12,677) (14,298) (15,579) (17,362) (25,612) (29,240) 14.2 (33,720) 15.3 (39,471) 17.1 EBITDA (UBS) 2,461 3,177 3,146 3,291 4,442 5, , , Depreciation (217) (221) (254) (313) (324) (402) 23.9 (416) 3.5 (428) 2.9 Operating income (EBIT, UBS) 2,244 2,956 2,892 2,978 4,118 4, , , Other income & associates (112) 8 (8) Net interest (61) (110) (222) (197) (296) (345) 16.6 (380) 10.0 (428) 12.8 Abnormal items (pre-tax) Profit before tax 2,072 2,854 2,662 2,783 3,823 4, , , Tax (855) (1,039) (721) (775) (858) (918) 6.9 (1,116) 21.6 (1,362) 22.0 Profit after tax 1,217 1,815 1,941 2,008 2,965 3, , , Abnormal items (post-tax) (300) (205) (43) Minorities / pref dividends (3) (2) 0 (1) (1) (1) 0.0 (1) 0.0 (1) 0.0 Net income (local GAAP) 914 1,608 1,898 2,015 3,018 3, , , Net Income (UBS) 1,214 1,813 1,941 2,007 2,964 3, , , Tax rate (%) Pre-abnormal tax rate (%) Per share (Bt) 12/08 12/09 12/10 12/11 12/12 12/13E % ch 12/14E % ch 12/15E % ch EPS (local GAAP) EPS (UBS) Net DPS Cash EPS BVPS Balance sheet (Btm) 12/08 12/09 12/10 12/11 12/12 12/13E % ch 12/14E % ch 12/15E % ch Net tangible fixed assets 2,065 2,364 1,390 1,881 2,099 2, , , Net intangible fixed assets Net working capital (incl. other assets) 15,153 14,350 20,039 25,305 32,509 39, , , Other liabilities (1,648) (765) (739) (718) (678) (712) 5.0 (748) 5.0 (785) 5.0 Operating invested capital 15,865 16,241 21,538 27,033 34,479 41, , , Investments Total capital employed 16,039 16,457 22,044 27,866 35,175 42, , , Shareholders' equity 8,963 10,131 9,448 11,377 14,578 18, , , Minority interests (9) (6) Total equity 8,955 10,124 9,448 11,378 14,578 18, , , Net debt / (cash) 7,085 6,333 12,596 16,488 20,597 24, , , Other debt-deemed items Total capital employed 16,039 16,457 22,044 27,866 35,175 42, , , Cash flow (Btm) 12/08 12/09 12/10 12/11 12/12 12/13E % ch 12/14E % ch 12/15E % ch Operating income (EBIT, UBS) 2,244 2,956 2,892 2,978 4,118 4, , , Depreciation Net change in working capital (3,291) 511 (6,076) (3,506) (7,166) (6,794) -5.2 (6,496) -4.4 (7,106) 9.4 Other (operating) Operating cash flow (pre tax/interest) (310) 4,117 (2,929) (215) (2,723) (1,459) (119) Net interest received / (paid) (92) (124) (245) (222) (328) (345) 5.3 (380) 10.0 (428) 12.8 Dividends paid (339) (442) (766) (178) (1,001) (1,207) (1,468) (1,786) Tax paid (855) (1,039) (721) (775) (858) (918) 6.9 (1,116) 21.6 (1,362) 22.0 Capital expenditure (64) (1,314) 0 (2,294) (808) (687) (778) 13.3 (839) 7.8 Net (acquisitions) / disposals Other (32) - (34) 5.0 (36) 5.0 Share issues 0 0 (1,808) 93 1, Cash flow (inc)/dec in net debt (1,660) 1,198 (5,987) (3,591) (4,277) (3,726) (2,976) (3,717) 24.9 FX / non cash items (447) (447) (276) (300) Balance sheet (inc)/dec in net debt (2,106) 751 (6,263) (3,892) (4,109) (3,726) -9.3 (2,976) (3,717) 24.9 Core EBITDA 2,461 3,177 3,146 3,291 4,442 5, , , Maintenance capital expenditure Maintenance net working capital (83) (301) (95) (347) (56) (372) (75) (411) (84) (596) (100) (686) (105) (796) (109) (935) Operating free cash flow, pre-tax 2,078 2,735 2,719 2,805 3,762 4, , , Source: Company accounts, UBS estimates. (UBS) valuations are stated before goodwill, exceptionals and other special items. Note: For some companies, the data represents an extract of the full company accounts. UBS 25

26 Global Equity Research Thailand Real Estate 12-month rating Buy Sansiri PCL 12m price target Company profile Bt5.50 Sansiri was listed on the Stock Exchange of Thailand in Exclusively a condominium developer initially, it has since expanded into the single detached and townhouse segments. Sansiri develops residential units in high population growth areas in Bangkok and the provinces, generating one-third of its annual revenue from developments outside Bangkok. With the completion of the prefabrication factory in 2012, it has expanded into the low-end housing segment. Value (EV/OpFCF & P/E) 14.0x 10.0x 12.0x 8.0x 10.0x 8.0x 6.0x 6.0x 4.0x 4.0x 2.0x 2.0x 0.0x 0.0x 12/11 12/12 12/13E 12/14E 12/15E EV/OpFCF (LHS) P/E (RHS) Profitability 15.50% 15.00% 14.50% 14.00% 13.50% 13.00% 12/11 12/12 12/13(E) 12/14(E) 12/15(E) EBIT margin (LHS) ROIC (RHS) ROE v Price to book value 23.00% 22.00% 21.00% 14.00% 13.50% 13.00% 12.50% 12.00% 11.50% 2.5x 2.0x 1.5x Valuation (x) 5Yr Avg 12/11 12/12 12/13E 12/14E 12/15E P/E (local GAAP) P/E (UBS) P/CEPS Net dividend yield (%) P/BV EV/revenue (core) EV/EBITDA (core) EV/EBIT (core) EV/OpFCF (core) EV/op. invested capital Enterprise value (Btm) 12/11 12/12 12/13E 12/14E 12/15E Average market cap 8,572 17,787 38,034 38,034 38,034 + minority interests average net debt (cash) 14,542 18,542 22,460 25,811 29,157 + pension obligations and other non-core asset value (833) (697) (729) (763) (798) Core enterprise value 22,282 35,634 59,766 63,083 66,394 Growth (%) 5Yr Avg 12/11 12/12 12/13E 12/14E 12/15E Revenue EBITDA (UBS) EBIT (UBS) EPS (UBS) Cash EPS Net DPS NM BVPS Margins (%) 5Yr Avg 12/11 12/12 12/13E 12/14E 12/15E EBITDA / revenue EBIT / revenue Net profit (UBS) / revenue Return on capital (%) 5Yr Avg 12/11 12/12 12/13E 12/14E 12/15E EBIT ROIC (UBS) ROIC post tax Net ROE Coverage ratios (x) 5Yr Avg 12/11 12/12 12/13E 12/14E 12/15E EBIT / net interest Dividend cover (UBS EPS) Div. payout ratio (%, UBS EPS) Net debt / EBITDA Efficiency ratios (x) 5Yr Avg 12/11 12/12 12/13E 12/14E 12/15E Revenue / op. invested capital Revenue / fixed assets Revenue / net working capital % 19.00% 18.00% 12/11 12/12 12/13(E) 12/14(E) 12/15(E) ROE (LHS) Price to book value (RHS) 1.0x 0.5x 0.0x Investment ratios (x) 5Yr Avg 12/11 12/12 12/13E 12/14E 12/15E OpFCF / EBIT Capex / revenue (%) Capex / depreciation Growth (UBS EPS) /11 12/12 12/13(E) 12/14(E) 12/15(E) Revenue (LHS) UBS EPS Growth (RHS) 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% -10.0% Capital structure (%) 5Yr Avg 12/11 12/12 12/13E 12/14E 12/15E Net debt / total equity NM NM NM NM NM NM Net debt / (net debt + equity) Net debt (core) / EV Source: Company accounts, UBS estimates. (UBS) valuations are stated before goodwill, exceptionals and other special items. Valuations: based on an average share price that year, (E): based on a share price of Bt4.18 on 23 May :36 HKT Market cap(e) may include forecast share issues/buybacks. Thomas Philippson, CA Associate Analyst thomas.philippson@ubs.com UBS 26

27 Sansiri PCL Sansiri was listed on the Stock Exchange of Thailand in Exclusively a condominium developer initially, it has since expanded into the single detached and townhouse segments. Sansiri develops residential units in high population growth areas in Bangkok and the provinces, generating one-third of its annual revenue from developments outside Bangkok. With the completion of the prefabrication factory in 2012, it has expanded into the low-end housing segment. Statement of Risk We believe the risks for Sansiri: 1) Gearing: Sansiri s gearing at the end of Q113 was 1.75x, the highest for Thai property companies under our coverage. 2) Speculative buying: Due to higher condominium prices in 2012 and into 2013, there is risk of increasing speculative buying in the market. 3) Political instability: Any political instability could adversely affect the Thai property market and the stock market too. 4) Labour shortage: Thailand s unemployment rate is 0.7%, and labour is scarce. 5) Policy implementation: The BOT might implement further policy measures to cool the property market. 6) Changes in regulations. Analyst Certification Each research analyst primarily responsible for the content of this research report, in whole or in part, certifies that with respect to each security or issuer that the analyst covered in this report: (1) all of the views expressed accurately reflect his or her personal views about those securities or issuers and were prepared in an independent manner, including with respect to UBS, and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by that research analyst in the research report. UBS 27