Polyplex (Thailand) Thailand Company Focus. Packing a big punch in 2011

Transcription

1 Thailand Company Focus Bloomberg: PTL TB Reuters: PTL.BK DBS Group Research. Equity 5 Jan 211 BUY Bt38. SET : 1,42.41 (Initiating Coverage) Price Target : 12-Month Bt 55. Reason for Report : Initiating coverage Potential Catalyst: Growing demand from optical/photovoltaic (PV) industries, delay in start-up of new capacity Analyst Naphat Chantaraserekul naphatc@th.dbsvickers.com Price Relative Bt Relative Index Polyplex ( Thailand ) ( LHS ) Relative SET INDEX ( RHS ) Forecasts and Valuation FY Mar (Bt m) 21A 211F 212F 213F Turnover 7,125 1,599 12,94 14,653 EBITDA 1,465 3,575 3,842 4,553 Pre-tax Profit 1,56 3,5 3,12 3,778 Net Profit 1,39 2,73 2,835 3,434 Net Pft (Pre Ex.) 977 2,73 2,835 3,434 EPS (Bt) EPS Pre Ex. (Bt) EPS Gth Pre Ex (%) Diluted EPS (Bt) Net DPS (Bt) BV Per Share (Bt) PE (X) PE Pre Ex. (X) P/Cash Flow (X) EV/EBITDA (X) Net Div Yield (%) P/Book Value (X) Net Debt/Equity (X) ROAE (%) Consensus EPS (Bt): ICB Industry : Materials ICB Sector: Paper Packaging Principal Business: PTL is the world s 4th largest PET film producer with 7% market share. The company has operations in Thailand and Turkey. Source of all data: Company, DBS Vickers, Bloomberg Packing a big punch in 211 FY11F earnings is expected to grow almost 3-folds, pacifying doubts of sustainability of high spreads Tight supply due to structural change in applications, lag of start-up new capacity, and benefiting from weakness in feedstock (MEG) prices Thailand s small cap proxy (added to FTSE Global Small Cap in Dec 21); recommend BUY with Bt55/sh TP Earnings growth supported by backward, forward expansion. This will be the key earnings driver that will support further run-up in PTL share price. Backward integration would improve efficiency, while forward expansion would allow PTL to command at least US$5/ton higher margin than for plain film. PTL, the world s 4 th largest film producer, will benefit from a structural change in film applications as well as demand growth (9% CAGR from ). Tight supply will not be solved in 211. This would be due to 3 main factors: (i) increase in global demand for non-packaging applications, such as electronic and photovoltaic/solar components, (ii) delay in start-up of new film capacity due to 28-9 recession, (iii) anti-dumping measures against producers in China, Taiwan, S. Korea, India, and Brazil, forcing them to exit the US market. The US is one of two major net importers of PET film. BUY, DCF-based TP of Bt55/sh. Applying the DCF valuation on a cyclical business is challenging, but in PTL s case, it is necessary because of the capacity expansion (completion in 2H FY12). Our TP implies 15x FY12F and 13x FY13F PER, and.3x PEG based on fully diluted PE vs 3-year EPS CAGR. PTL is a component of the FTSE Global Small Cap. Key risk is further divestment by its parent company. We would recommend buying PTL at below Bt4/sh. At A Glance Issued Capital (m shrs) 8 Mkt. Cap (Btm/US$m) 3,4 / 1,11 Major Shareholders Polyplex (Asia) Pte. Ltd. (%) 43.5 Polyplex Corp. Ltd. (%) 16.5 Mr. Paiwan Chartpitan (%) 4.8 Free Float (%) 4. Avg. Daily Vol.( ) 26,582 In Singapore, this research report or research analyses may only be distributed to Institutional Investors, Expert Investors or Accredited Investors as defined in the Securities and Futures Act, Chapter 289 of Singapore. Recipients of this report, received from DBS Vickers Research (Singapore) Pte Ltd ( DBSVR ), are to contact DBSVR at in respect of any matters arising from or in connection with this report. Refer to important disclosures at the end of this report ed: SGC / sa: CS

2 SWOT Analysis Strengths PET film demand is resilient to economic cycles Packaging, industrial, and electronic segments (PTL s key products) account for 92% of global PET film consumption Strong economies of scale through capacity expansion (world s 4 th largest PET film producer) Fully integrated PET film production lines (from PET resin to PET film) Low effective tax rate due to tax privilege for new plants 2 facilities in major regions (Thailand and Turkey) Weakness Exposure to weak European economy Opportunities Structural shift in PET film industry (some thin film capacities shifted to produce thick film) Strong 9% CAGR for packaging from Declining key feedstock, MEG, prices due to oversupply situation Anti-dumping measures imposed by the US on producers in China, Taiwan, S. Korea, India, and Brazil Threats Increase in crude oil price would drive up feedstock cost Supply turning to surplus in 212 Source: DBS Vickers Glossary: BOPET = Biaxially Oriented Polyethylene Terephthalate. CPP = Cast Polypropylene MEG = Mono Ethylene Glycol PET = Polyethylene Terephthalate PTA = Purified Terephthalic Acid PP = Polypropylene Page 2

3 Company Background (PTL) was established in April 22 by Polyplex Corporation of India. The company commenced operation in April 23 with 15k tons annual capacity for Polyethylene Terephthalate (PET) film in Thailand, and expanded capacity to 39K tons via a de-bottlenecking in 25. But with utilization constantly exceeding 1%, PTL raised nameplate capacity for PET film to 42k tons in 21. PTL set up operations in Turkey in 25 with 24k tons annual capacity of PET film to serve demand in the Middle East and Europe. The company has been expanding upstream and downstream in Thailand and Turkey, including expanding into extrusion coating film, and cast polypropylene plain and metallized film. PTL will be completing the silicone coating line in 2H FY211-12, and expansion of PET resin, PET film and metallized film line in Turkey in 4Q FY PTL s PET films are used in 3 market segments - packaging, industrial, and electrical - which together represent 92% of global PET film consumption. PTL was listed on the SET in December 24 with an IPO price of Bt6.9/sh. PTL: Capacity breakdown (unit: tons) Location Stake (%) Product F 211F 212F Note Thailand 1% PET resin 52,5 52,5 52,5 52,5 52,5 52,5 PET film 39, 39, 42, 42, 42, 42, Metallized film 4,8 1,5 11, 11, 11, 11, Extrusion coating film (mil sqm) Cast Polypropylene (CPP) film 1, 1, 1, 1, Cast Polypropylene (CPP) Metallized film 4,2 4,2 4,2 4,2 Silicone coating NEW (mil sqm) Expansion to complete in 2H FY Turkey 1% PET resin 57,6 57,6 57,6 79,2 79,2 Expansion to complete in 1H FY PET film 24, 29, 58, 58, 89, 89, Expansion to complete in 4Q FY Metallized film 5, 5, 11, 11, 19,6 19,6 Expansion to complete in 4Q FY Source: Company Sales Trend Bt m % 16, 6 14, 5 12, 1, 4 8, 3 6, 2 4, 2, 1 28A 29A 21A 211F 212F 213F Total Revenue Revenue Growth (%) (YoY) 4, 3,5 3, 2,5 2, 1,5 1, 5 Bt m Profitability Trend 28A 29A 21A 211F 212F 213F Oper profit Pretax profit Net profit Page 3

4 Shareholding structure. PTL is 6%-owned by Polyplex Corporation of India (PCL India), and the remaining 4% is owned by the public. The company also has 1% stake in distribution companies in China, and 8% stake in the US operations. The company has had a paid-up capital of Bt8m (Par Bt1) since IPO in December 24. In Nov 21, PCL India divested 1% stake in PTL (through Polyplex (Asia) Pte. Ltd.). PTL said that this was to improve liquidity of the stock and PCL India wanted to use the proceeds to reduce debt in the parent company. PCL India has no plans to sell down its stake further. PTL Corporate Structure Polyplex Corporation Limited INDIA 9.88% 16.5% 1% Polyplex (Asia) Pte. Ltd. SINGAPORE 43.5% Private Investor 9.88% Polyplex (America) USA 8.24% THAILAND 1% 4% Public Institutional Shareholders Outside Interest Polyplex (Singapore) Pte. Ltd. SINGAPORE 1% Polyplex Trading (Shenzhen) Co. Ltd. CHINA Investment Company 1% Manufacturing Company Distribution Company Polyplex Europa Polyester Film Sanayi Ve Ticaret Anonim Sirketi TURKEY Page 4

5 PTL s products BOPET: Thick film application PTL produces biaxially oriented Polyethylene Terephthalate (BOPET), which is mainly split into thin and thick films. Thin film is 5 microns or less, while thick film is over 5 microns. Industry capacity is identified by film thickness. The major end uses of BOPET can be categorised into five segments - packaging, industrial, electrical, imaging, and magnetic media. Thin film accounts for almost 75% of total global PET film consumption, and the balance thick film. PTL produces thin film ranging from 12 to 5 micron. These are used in three market segments - packaging, industrial, and electronics. PTL: PET film application Application Products 1) Packaging Thin film is used in the packaging of consumer products e.g. coffee, snacks, fabric softener, detergents. 2) Industrial Foil wrap is used to cover air conditioning pipes. 3) Electrical Wire/cable wrap, membrane switches, flexible printed circuits, capacitors, motor insulation BOPET: Thin film application The value chain PTL uses Purified Terephthalic Acid (PTA) and Mono Ethylene Glycol (MEG) as main feedstock to produce PET resin. The resin is then processed into base film. To produce one ton of PET resin, it would require 87% of 1-ton PTA and 35% of 1- ton MEG. 76% of PTL s 29 group sales were for the packaging application. Packaging accounts for more than 5% of global thin film consumption. PTL produces a variety of thin films that feature high clarity and gloss, temperature control, and oxygen resistance. PTL: Production value chain P PTA Supplier MEG Supplier E T R E S I N B A S E F I L M S Coating Metallizing Converters Industrial Buyers FMCG Companies Page 5

6 PTL also uses polypropylene (PP) resin to produce cast polypropylene (CPP) plain film, which has feature of twist grade, metallized grade. PTL buys PP from external suppliers. PTL: Cast Polypropylene (CPP) value chain PP resin Copolymer Hamopolymer Terpolymer Lamination Grade film Metallisable Grade film Expansion into high value-added products PTL recently diversified into higher value-added silicone coating at its Thailand facilities. This product is used for label liners, graphic art, medical liners, and shingle tapes. The company has also received approval to expand capacities for PET resin, PET film, and metallized film at its Turkey plant. Both these projects would require a total of US$98.4m investment, which will be funded by debt and internal cash flow. The silicone coating line and expansion in Turkey are scheduled to be completed in 1H FY11-12 and 4Q FY11-12, respectively. PTL: Expansion projects Project Silicone coating Capacity expansion Location Thailand Turkey Amount (US$m) Capacity 1k tons 28k tons - PET resin 31k tons - thin film 8.6k tons - metallized film Target market Europe, US, and Asia Europe, Asia Completion 1H FY Q FY11-12 Metallizing Converters For Lamination. Printing, Pouch Making Coating, Size & Cutting etc. End Customers Value-added products command about US$5-1,6/ton more than normal plain film. Revenue contribution from value-added products has increased to 42% in 1H FY11, from 25% in FY6-7. Post expansion, we expect this to rise to 44% in FY12. PTL: Increasing value added products 8% 7% 6% 5% 4% 3% 2% 1% % 75% 71% 63% 62% FY6-7 57% 56% 56% 25% 29% 37% 38% 43% 44% 44% FY7-8 Plain film FY8-9 Value added spread US$/ton FY9-1 FY1-11 FY11-12 FY12-13 Value added film E 211E 212E Growth opportunities PET spreads reached a record high of US$2,5/ton at end 21 driven by three main factors: (i) increase in global demand for non-packaging applications such as in electronics and photovoltaic / solar components, (ii) limited new film capacity due to 28-9 recession, (iii) anti-dumping measures against producers in China, Taiwan, S. Korea, India, and Brazil, forcing these suppliers to exit the US market. 1) Structural shift in applications This has resulted from growing demand for thick films, which are used in flat screen TVs and touch screen panels, and for new applications such as in the optical industry / photovoltaic / solar components. This has prompted the conversion of thin film production lines into thick film lines to cater for the new applications. But it has also caused a severe shortage of thin film for packaging, industrial, and electrical applications. This structural change has driven PET film spreads to current US$2,5/ton, from US$1,158/ton in 29. Page 6

7 PET film prices and spread 3,5 3, 2,5 2, 1,5 1, 5 US$/ton 1,61 1,229 1,3181,42 1,92 1,96 1, ,789 2,1672, E 211E 212E PET film price PTA & MEG cost PET film spread 2) Limited new film capacity in 211 We estimate there will be 21k tons net capacity addition in 211 but supply remains short of 55k tons. Hence, supply will remain tight in the next 12 months, as it normally takes years to install new capacity while demand for thin film is expected to grow at 9% CAGR from 29 to 214. PET film demand vs. supply (unit: k tons) F 212F 213F Demand 1,81 1,975 2,155 2,35 Supply 1,81 1,89 2,1 2,39 Demand growth Net capacity addition Supply - demand situation (85) (55) 4 1 Shortage Shortage Excess Balanced Source: Company Note: Calendar year 3) Anti-dumping measures by the US The US government has imposed anti-dumping duties on PET film imported from China, Taiwan, S. Korea, India, and Brazil. This has substantially raised import duties to 7%-1%+ depending on film grade and country of origin. However, this has been enforced for several years now, and it is unclear when it would be lifted. The import duty for PTL s products is at the normal rate of 4.2%, making its products competitive. Currently, the US and Japan are the two major net PET film importers. Western Europe is balanced. Going forward, PET film demand should be mainly driven by developing countries in Asia, the US, and Japan. Industry outlook Film demand to grow at 9% CAGR from 29 to 214 The packaging, industrial and electric segments (PTL s main products) accounted for 92% of global PET film consumption in 29, against 83% in 24. We expect this to increase to 96% in the next 4 years or by 214. PET Demand for each segment K tons 4, 3,5 3, 2,5 2, 1,5 1, 5-5% 12% 12% 28% 43% 1% 7% 14% 26% 52% 4% 17% 24% 55% E Packaging Other Industrial Electrical Imaging Magnetic Tape The Electrical segment is expected to register the highest CAGR of 13%, driven by demand for flat screen TVs and touch screen panels. The packaging segment should grow at 1% CAGR during the same period. Overall, thin film consumption should grow at 9% CAGR. PET film demand is resilient to the economic cycle, as reflected in the growth in during the global crisis. Demand growth for PET film k tons 4, 3, 2, 1, % CAGR E 211F 212F Packaging Other Industrial Electrical Imaging Magnetic Tape Expected 9% CAGR 213F 214F Page 7

8 Key Risks Excess supply in 212 There is a total of 1.8m tons of PET film capacity globally, while demand is at similar levels. We estimate demand will grow by 18k tons in 211, slightly below the 21k tons of net new capacity. But due to the lead-time to ramp up new capacity, we believe the market should remain tight for 211. Stake divestment by major shareholder. Polyplex Corporation of India (PCL India) divested 1% stake in PTL (through Polyplex (Asia) Pte. Ltd.) in Nov 21, reducing its holding to 6%. PCL India has no plans to sell down further, but if PTL s share price continues to do well, PCL India may decide to raise liquidity by divesting more. We believe it will not dilute its shareholding to below 5% in order to retain control of PTL. However, in 212, an estimated 29k tons of net new capacity will enter the market. This would outpace demand growth by 4k tons. Hence, we expect PET film spreads to soften but remain high at US$2,1/ton levels, compared to US$1,158 in 29. The more balanced demand-supply dynamics should support spreads at current levels until 213. PET film demand vs. supply (unit: k tons) F 212F 213F Demand 1,81 1,975 2,155 2,35 Supply 1,81 1,89 2,1 2,39 Demand growth Net capacity addition Supply - demand situation (85) (55) 4 1 Shortage Shortage Excess Balanced Source: Company Note: Calendar year Page 8

9 Segmental Analysis Rising contribution from value-added products. These value-added products include chemically coated film, metallized film (PET, CPP), and thermal laminated film. They command higher selling prices than plain film. PTL is expanding the silicone coating film capacity at its Thailand facilities, and is expanding capacity (upstream and downstream) at its Turkey plant. We forecast revenue contribution from value-added products will increase to 44% in FY12 from 37% last year. We assumed PET film price of US$3,3/ton for FY12-13 and spreads of about US$2,1/ton for both years. Operating profit margin should soften in FY12 and FY13 to 26.3% and 26%, respectively (from 29.3% in 211), premised on anticipated higher feedstock prices (PTA, MEG). Segmental Analysis FY Mar 21A 211F 212F 213F Revenues (Bt m) PET film 4,489 6,74 6,725 8,275 Value added film 2,636 4,525 5,369 6,379 Total 7,125 1,599 12,94 14,653 Sales breakdown (%) PET film Value added film Total Margins (%) Cash profit margin Gross profit margin Operating profit margin Net profit margin EBITDA margin Key Assumptions FY Mar (Bt m) 21A 211F 212F 213F FX (Bt/US$) Utilization rate (%) PET film price (US$/ton) 2,43 2,13 3, 3,3 Valued added: Metallized film (US$/ton) 2,73 3,8 4,1 4,1 PTA (US$/ton) MEG (US$/ton) , 1,1 PP resin (US$/ton) 1,15 1,17 1,25 PET film spread (US$/ton) 1,158 1,989 2,167 2,132 CAPEX (US$m) Page 9

10 Quarterly / Interim Performance Best quarter yet to come. Despite record profit of Bt762m (EPS Bt.95) in 2QFY11, we expect stronger quarterly earnings in 3Q and 4Q FY11 led by a surge in demand and tight supply. This demand-supply imbalance had driven PET film prices to US$3,5-4,/ton currently, from US$2,1 last year (FY9-1). PTL will benefit as raw material prices have increased only marginally. Stellar earnings in 2HFY11. For 2HFY11, we expect PTL to register Bt1.6bn profit (EPS: Bt1.98), up 36% h-o-h. This would take full-year earnings growth to 165%. Quarterly / Interim Income Statement (Bt m) FY Mar 3Q21 4Q21 1Q211 2Q211 Turnover 1,84 1,821 2,4 2,546 Cost of Goods Sold (1,377) (1,354) (1,488) (1,532) Gross Profit ,15 Other Oper. (Exp)/Inc (194) (198) (191) (192) Operating Profit Other Non Oper. (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc (27) (23) (22) (22) Exceptional Gain/(Loss) (24) Pre-tax Profit Tax 6 (9) (14) (22) Minority Interest 3 (3) (5) (7) Net Profit Net profit bef Except EBITDA Sales Gth (%) EBITDA Gth (%) Operating Profit Gth (%) Net Profit Gth (%) Gross Margins (%) Operating Margins (%) Net Profit Margins (%) Page 1

11 Financials Income Statement Earnings growth through to FY13F. We forecast earnings growth will ease to 4% in FY12 premised on forecast higher raw material prices. But earnings should grow by 21% following year when value-added projects in Thailand and expanded capacity in Turkey commence operations (2HFY12). Low effective tax rate. We expect PTL s effective tax rate to rise to 9% in FY11-13F, from 1% in the past 5 years. This is because the tax privilege for plain film line 1 will expire in April 211, and for plain film line 2 and PET resin, it will expire in Nov 211. As a result, PTL s tax rate will rise to an estimated 15% for these projects in the following 5 years, raising its effective tax to 9%. Healthy margins. We forecast operating margins will peak at 29% in FY11 before softening to 26% in FY12-13F, due to improving balance of demand and supply and our expectation that raw material prices would increase once the oversupply situation for MEG eases. Sales Trend Operating Cost Trend Profitability Trend 16, 14, 12, 1, 8, 6, 4, 2, Bt m 28A 29A 21A 211F 212F 213F Total Revenue Revenue Growth (%) (YoY) % Bt m 12, 1, 8, 6, 4, 2, 28A 29A 21A 211F 212F 213F Cost of Goods Sold Other Operating Expenses Bt m 4, 3, 2, 1, 28A 29A 21A 211F 212F 213F Net Profit (After extraordinaries) Net Profit Growth (%) (YoY) % (5) FY Mar (Bt m) 28A 29A 21A 211F 212F 213F Turnover 6,399 6,86 7,125 1,599 12,94 14,653 Cost of Goods Sold (4,95) (5,79) (5,394) (6,435) (7,698) (9,38) Gross Profit 1,449 1,781 1,731 4,164 4,396 5,273 Other Opg (Exp)/Inc (598) (74) (734) (1,6) (1,29) (1,465) Operating Profit 851 1, ,14 3,187 3,88 Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc (91) (219) (115) (15) (147) (11) Exceptional Gain/(Loss) (46) Pre-tax Profit 826 1,61 1,56 3,5 3,12 3,778 Tax (9) (14) (12) (27) (281) (34) Minority Interest (3) (5) (4) (4) (4) (4) Preference Dividend Net Profit 814 1,42 1,39 2,73 2,835 3,434 Net profit before Except ,73 2,835 3,434 EBITDA 1,187 1,495 1,465 3,575 3,842 4,552.9 Sales Gth (%) EBITDA Gth (%) (2.) Operating Profit Gth (%) (7.4) Net Profit Gth (%) (.2) Effective Tax Rate (%) Page 11

12 Financials Balance Sheet Deleveraging B/S. This would be the result of strong operations in FY11-13F. Assuming CAPEX does not exceed what PTL had announced, the company could turn net cash by FY14..4x net debt/equity. This would give PTL substantial flexibility to acquire more assets if it needs to. We estimate PTL can invest up to US$2m in new projects annually over the next three years while capping its net debt/equity at.5x. If there are no new investments, PTL s net debt/equity will drop to.3x next year and.1x in FY13F. Note that PTL s debt service coverage ratio (DSCR) was at 6.8x at end Sep 21. Breakdown of Assets (211) Breakdown of Capital (211) Financial Leverage & Net Debt to Equity Net Fixed Assets 8 % Debtors 9% Inventory 8% Bank Cash and Liquid Assets 3% LT Debt 3% ST Debt 3% Sharehol ders' Equity 67% Bt m 3,5 3, 2,5 2, 1,5 1, 5 28A 29A 21A 211F 212F 213F Net Debt (Cash) Net Debt to Equity (x) (RHS) Financial Leverage (x) (RHS) % FY Mar (Bt m) 28A 29A 21A 211F 212F 213F Net Fixed Assets 5,899 5,599 5,618 9,825 11,49.6 1,684 Invts in Assocs & JVs Other LT Assets Cash & ST Invts ,859 Inventory ,116 1,153 1,366 1,671 Debtors 1,442 1,386 1,167 1,273 1,394 1,541 Other Current Assets Total Assets 8,299 8,881 8,867 13,37 15, 16,125 ST Debt Other Current Liab ,237 1,453 1,774 LT Debt 2,653 2,886 2,353 3,5 3,5 2, Other LT Liabilities Shareholder s Equity 4,315 4,576 4,993 7,971 9,714 12,14 Minority Interests Total Cap. & Liab. 8,299 8,881 8,867 13,37 15, 16,125 Leverage Analysis (x) Net Interest Cover EBITDA Gross Interest Cover Total Debt to EBITDA Total Debt to Total Assets Total Debt to Capital Net Debt to Equity Net Debt to Equity ex MI Capex to Debt Liquidity Analysis (x) Cash Ratio Current Ratio Quick Ratio Page 12

13 Financials Cash Flow Rising FCF. PTL has budgeted US$98.4m to expand into high value-added products in Thailand and capacity expansion in Turkey. This CAPEX will be spent over FY Hence, FCF should be negative Bt1.4bn (operating CF less CAPEX) in FY11. But once the new projects start commercial production, we forecast FCF to increase to Bt1.5bn in FY12F and to Bt3.6bn in FY13F. Maintenance CAPEX of US$1m p.a. PTL expects to spend a total of US$6m p.a. in maintenance CAPEX for its Thailand and Turkey plants. We assume US$1m p.a. (Bt3m) once its expansion projects are up and running. Cash Flow Trend Free Cash Flow Per Share Free Cash Flow As At Year End Bt m 4, 3, 2, 1, (1,) (2,) (3,) (4,) (5,) 28A 29A 21A 211F 212F 213F CF from Op CF from Invt CF from Fin Bt/sh (2) 28A 29A 21A 211F 212F 213F Free Operating Cash Flow Per Share Free Cash Flow Per Share Bt m 4, 3, 2, 1, (1,) (2,) 28A 29A 21A 211F 212F 213F FY Mar (Bt m) 28A 29A 21A 211F 212F 213F Pre-Tax Profit 826 1,61 1,56 3,5 3,12 3,778 Dep. & Amort Tax Paid (37) (8) (47) (315) (325) (373) Assoc. & JV Inc/(loss) Chg in Wkg.Cap. (427) (122) (33) 65 (146) (18) Other Operating CF 154 (176) (34) 28 1 (1) Net Operating CF 74 1,27 1,299 3,23 3,225 3,88 Capital Exp.(net) (2,69) 14 (376) (4,61) (1,757) (257) Other Invts.(net) Invts in Assoc. & JV Div from Assoc & JV Other Investing CF Net Investing CF (2,69) 14 (376) (4,61) (1,757) (257) Div Paid (136) (64) (372) (14) (1,92) (1,134) Chg in Gross Debt 1, (429) 941 (1,5) Capital Issues Other Financing CF 8 (11) (193) 389 Net Financing CF 1,287 (346) (994) 1,19 (1,92) (2,634) Net Cashflow (43) 694 (7) (218) Opg CFPS (Bt) Free CFPS (Bt) (1.7) (1.8) Page 13

14 Financials ROE Drivers Volume growth, low conversion cost, low effective tax rate. All of PTL s existing capacities were greenfield projects. The average age of PTL s plants are less than 1 years old, with 5% of capacity built in the last 5 years. Therefore, PTL s conversion cost should be more competitive than peers. However, its tax privilege will start to expire in FY11, which would raise its effective tax rate to 9% in the next three years. ROE to exceed 3% through to FY13F. This is premised on 4% dividend payout. However, it is possible that ROE could beat our forecast if PTL raises its dividend payout and funds future investments, if any, with 1% debt. ROAE / ROAA Trend (%) Margin Trend (%) Total Debt & Gross Interest Cover % 5% 4% 3% 2% 1% % 28A 29A 21A 211F 212F 213F ROAE ROAA % 4% 35% 3% 25% 2% 15% 1% 5% % 28A 29A 21A 211F 212F 213F EBITDA Margin EBIT Margin Net Income Margin Bt m 4, 3, 2, 1, 28A 29A 21A 211F 212F 213F Total Debt (Btm) Gross Interest Cover (x) (YoY) % FY Mar 28A 29A 21A 211F 212F 213F Profitability Ratios Sales Growth (%) Gross Margin (%) Operating Margin (%) Net Profit Margin (%) ROAE (%) ROA (%) ROCE (%) Activity Ratios Debtors Turn (average days) Creditors Turn (average days) Inventory Turn (average days) Total Asset Turnover (x) Fixed Asset Turnover (x) Page 14

15 Valuation Recommend BUY with Bt55 TP. Applying the DCF method to value a cyclical business is challenging, but in PTL s case, it is necessary because of its capacity expansion. We also crosscheck against valuation derived from earnings-based valuation metric and against regional peers earnings. We concluded that valuation based on earnings in the next 12 months would underestimate PTL s intrinsic value as it does not capture the value-added expansion projects. Our model generated 9.6% WACC based on the following assumptions: 6% LT risk free rate, 12% required market return, 1.x beta, and projected debt and equity weightings for next year. We assumed 1.x beta because the.7x beta from Bloomberg is based on historical 6-year data (since its IPO), which is too short. We also assumed 3% terminal growth, comprising 2% inflation rate and 1% nominal terminal growth. We derive a fair value of Bt55/sh for PTL based on the DCF methodology, implying 15x FY12F and 13x FY13F PE. PTL s spread may be affected by crude price movement because its feedstock is naphtha, which price is highly correlated to crude price. Our sensitivity analysis shows that every US$1/ton change in PET film spread would affect FY12F EPS by 7% or Bt.25. PTL: DCF valuation Btm 211F 212F 213F 214F 215F Perpetuity Op. FCF 1,614 3,743 3,483 3,472 54,218 NPV 47,222 Btm Bt/sh Core operating assets 47, Cash & liquid assets Investments. Entity valuation 47, Debt 3,8 4.8 Minorities 24. Residual ordinary equity 43, Source: DBS Vickers PTL: Sensitivity analysis of DCF value (Bt/sh) WACC (%) Source: DBS Vickers Peers comparison 1FY ROE (%) Terminal growth rate (%) PTL TB 5191 KS DD US SCC TB TT 363 HK386 HK 655 TT HK RIL IN 858 JT 342 JT PTTCH TB DOW US JT FY P/BV (x) Source: Bloomberg, DBS Vickers Peers comparison 1FY PE (x) JT DOW US RIL IN JT KS PTTCH TB 338 HK 858 JT SCC TB 386 HK 655 TT DD US 363 HK 131 TT FY Dividend yield (%) Source: Bloomberg, DBS Vickers PTL TB Page 15

16 Peers comparison Market PE P/BV EV/EBITDA Divi Yield ROE Share Price Cap (x) (x) (x) (%) (%) Performance BB Ticker Name US$ 1F 11F 1F 11F 1F 11F 1F 1F 1M 3M 1Y YTD PTTCH TB Equity PTT CHEMICAL PCL 7, (5.1) PTL TB Equity POLYPLEX PCL 1, (1.3) SCC TB Equity SIAM CEMENT PUBLIC CO LTD 13, TT Equity FORMOSA PLASTICS CORP 2, (.8) 655 TT Equity FORMOSA PETROCHEMICAL CORP 31, (2.1) 363 HK Equity SHANGHAI INDUSTRIAL HLDG LTD 4, (.1)(16.7) HK Equity SINOPEC SHANGHAI PETROCHEM-H 7, HK Equity CHINA PETROLEUM & CHEMICAL-H 13, KS Equity LG CHEM LTD 23, DOW US Equity DOW CHEMICAL CO/THE 4, DD US Equity DU PONT (E.I.) DE NEMOURS 45, RIL IN Equity RELIANCE INDUSTRIES LTD 78, JT Equity TORAY INDUSTRIES INC 9, JT Equity MITSUBISHI CORP 47, JT Equity TEIJIN LTD 4, Average (simple) Source: Bloomberg, DBS Vickers Page 16

17 DBSV recommendations are based an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>2% total return over the next 3 months, with identifiable share price catalysts within this time frame) BUY (>15% total return over the next 12 months for small caps, >1% for large caps) HOLD (-1 to +15% total return over the next 12 months for small caps, -1% to +1% for large caps) FULLY VALUED (negative total return i.e. > -1% over the next 12 months) SELL (negative total return of > -2% over the next 3 months, with identifiable catalysts within this time frame) Share price appreciation + dividends DBS Vickers Research is available on the following electronic platforms: DBS Vickers ( Thomson ( Factset ( Reuters ( Capital IQ ( and Bloomberg (DBSR GO). For access, please contact your DBSV salesperson. GENERAL DISCLOSURE/DISCLAIMER This document is published by DBS Vickers Securities (Thailand) Co., Ltd. ( DBSVT ), a direct wholly-owned subsidiary of DBS Vickers Securities Holdings Pte Ltd ("DBSVH"). [This report is intended for clients of DBSV Group only and no part of this document may be (i) copied, photocopied or duplicated in any form by any means or (ii) redistributed without the prior written consent of DBSVT.] The research is based on information obtained from sources believed to be reliable, but we do not make any representation or warranty as to its accuracy, completeness or correctness. Opinions expressed are subject to change without notice. This document is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. DBSVT accepts no liability whatsoever for any direct or consequential loss arising from any use of this document or further communication given in relation to this document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. DBSVH is a whollyowned subsidiary of DBS Bank Ltd. DBS Bank Ltd. along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this document. DBS Vickers Research (Singapore) Pte Ltd ( DBSVR ), DBS Vickers Securities (Singapore) Pte Ltd ( DBSVS ), DBS Bank Ltd and their associates, their directors, and/or employees may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies. The assumptions on commodities used in this report are for the purpose of making forecasts for the companies mentioned herein. They are not to be construed as recommendations to trade in the physical commodities or in the futures contract relating to the commodities mentioned in the report. DBS Vickers Securities (USA) Inc ("DBSVUSA ), a U.S.-registered broker-dealer, does not have its own investment banking or research department, nor has it participated in any investment banking transaction as a manager or co-manager in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively. ANALYST CERTIFICATION The research analyst primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst also certifies that no part of his/her compensation was, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in this report. As of 5 January 211, the analyst and his / her spouse and/or relatives who are financially dependent on the analyst, do not hold interests in the securities recommended in this report ( interest includes direct or indirect ownership of securities, directorships and trustee positions). COMPANY-SPECIFIC / REGULATORY DISCLOSURES 1. DBS Vickers Securities (Thailand) Co., Ltd. and its subsidiaries do not have a proprietary position in the mentioned company as of 4 Jan DBSVT, DBSVR, DBSVS, DBS Bank Ltd and/or other affiliates of DBSVUSA, may beneficially own a total of 1% or more of any class of common equity securities of the mentioned company as of 4 Jan Compensation for investment banking services: i. DBSVT, DBSVR, DBSVS, DBS Bank Ltd and/or other affiliates of DBSVUSA may have received compensation, within the past 12 months, and within the next 3 months receive or intends to seek compensation for investment banking services from the mentioned company. ii. DBSVUSA does not have its own investment banking or research department, nor has it participated in any investment banking transaction as a manager or co-manager in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively. Page 17

18 RESTRICTIONS ON DISTRIBUTION General This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation. Australia Hong Kong Singapore United Kingdom Dubai/ United Arab Emirates United States Other jurisdictions This report is being distributed in Australia by DBSVR and DBSVS, which are exempted from the requirement to hold an Australian financial services licence under the Corporation Act 21 [ CA] in respect of financial services provided to the recipients. DBSVR and DBSVS are regulated by the Monetary Authority of Singapore [ MAS ] under the laws of Singapore, which differ from Australian laws. Distribution of this report is intended only for wholesale investors within the meaning of the CA. This report is being distributed in Hong Kong by DBS Vickers (Hong Kong) Limited which is licensed and regulated by the Hong Kong Securities and Futures Commission. This report is being distributed in Singapore by DBSVR, which holds a Financial Adviser s licence and is regulated by the MAS. This report may additionally be distributed in Singapore by DBSVS (Company Regn. No G), which is an Exempt Financial Adviser as defined under the Financial Advisers Act. Any research report produced by a foreign DBS Vickers entity, analyst or affiliate is distributed in Singapore only to Institutional Investors, Expert Investors or Accredited Investors as defined in the Securities and Futures Act, Chap. 289 of Singapore. Any distribution of research reports published by a foreign-related corporation of DBSVR/DBSVS to Accredited Investors is provided pursuant to the approval by MAS of research distribution arrangements under Paragraph 11 of the First Schedule to the FAA. This report is being distributed in the UK by DBS Vickers Securities (UK) Ltd, who is an authorised person in the meaning of the Financial Services and Markets Act and is regulated by The Financial Services Authority. Research distributed in the UK is intended only for institutional clients. This report is being distributed in Dubai/United Arab Emirates by DBS Bank Ltd, Dubai (PO Box 56538, 3 rd Floor, Building 3, Gate Precinct, DIFC, Dubai, United Arab Emirates) and is intended only for clients who meet the DFSA regulatory criteria to be a Professional Client. It should not be relied upon by or distributed to Retail Clients. DBS Bank Ltd, Dubai is regulated by the Dubai Financial Services Authority. Neither this report nor any copy hereof may be taken or distributed into the United States or to any U.S. person except in compliance with any applicable U.S. laws and regulations. In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is intended only for qualified, professional, institutional or sophisticated investors as defined in the laws and regulations of such jurisdictions. DBS Vickers Securities (Thailand) Co., Ltd. 989 Siam Tower, 9 th, 14 th -15 th Floor, Rama 1 Road, Pathumwan, Bangkok Thailand 133 Tel , Fax: Page 18