The - Ch. Karnchang Company Update Earnings upgrade/earnings downgrade/overview unchanged Buy (17E TP Bt38.00) Close Bt27.50 Construction Services March 8, 2017 Temporary hiccup Price Performance (%) Maintain BUY; lower SOTP based target price to Bt38 In our view, the decline of CK s share price has factored in the negative impact (to a certain degree) from the potential delay of the public project tendering process due to the setting up of a super board to monitor public projects. Meanwhile, we lower CK s earnings in 2017 18E, resulting in a lower SOTP based target price to Bt38, vs. Bt40 previously, implying P/BV of 3.5x, +1.5SD. We maintain our BUY call for CK. Backlog on hand will support revenue over the next two years Currently, CK s backlog on hand stands at Bt83bn, which will support revenue over the next two years. The largest part of the backlog (43%) is mass transit projects, followed by the Xayaburi Hydropower plant in Lao PDR (33%), and double track railways (16%). Around Bt30 32bn of the backlog is targeted to be realized as revenue in 2017. Source: SET Smart FY17 FY18 Consensus EPS (Bt) 0.969 1.123 KT ZMICO vs. consensus 21.6% 19.9% Share data Reuters / Bloomberg CK.BK/CK TB Paid up Shares (m) 1,693.90 Par (Bt) 1.00 Market cap (Bt bn / US$ m) 47.00/1,328.00 Foreign limit / actual (%) 25.00/6.77 52 week High / Low (Bt) 34.50/23.50 Avg. daily T/O (shares 000) 15,442.00 NVDR (%) 3.98 Estimated free float (%) 61.34 Beta 1.33 URL www.ch karnchang.co.th CGR Anti corruption n.a. Raenoo Bhandasukdi Analyst no. 17989 Raenoob@ktzmico.com 66 (0) 2695 5836 Super board to consider TOR of SRT s five double track railway projects On 23/2/17, the Thai government issued an order under the powerful Section 44 of the interim charter to set up a super board to oversee public projects with a value of at least Bt5bn, starting with SRT s seven doubletrack railway projects (five projects are in the bidding process, i.e., sold TOR to bidders; two projects have already started construction). According to CK, the scrutiny board will have a meeting on 10/3/17 in regard to continuing the bidding contest for the five double track projects with either a new TOR or a revision of the current TOR. CK still believes that there will only be a revised TOR and the bidding results will likely be concluded by 1Q17 (delayed from early Mar 17). Downgrade earnings projections in 2017 18E Based on a potential delay of new projects signed in 2017, low additional orders in 2016 (of only Bt4bn) and CK s guidance, we revise down CK s revenue in 2017 18E by 18% and 10% to Bt36bn and Bt42bn, resulting in lower net profit estimates in 2017 18E by 6% and 8% to Bt1.3bn and Bt1.7bn, respectively. Our assumptions are based on revised additional orders in 2017 to Bt55bn, vs. Bt77bn previously, consisting of Bt30bn from regular projects (down from Bt50bn previously, mainly from the bidding contest of the five double track railways, coupled with the Purple and Green Line mass transit extension projects, with combined value of Bt280bn), and Bt25bn from the M&E concession of the Blue Line extension projects (which is likely to be concluded soon). Financials and Valuation FY Ended 31 Dec 2015 2016 2017E 2018E 2019E Revenues (Btmn) 34,912 45,864 36,442 41,988 41,814 Net profit (Btmn) 2,193 2,002 1,286 1,658 1,938 EPS (Bt) 1.29 1.18 0.76 0.98 1.14 Norm. profit (Btmn) 477 1,786 1,286 1,658 1,938 Norm. EPS (Bt) 0.28 1.05 0.76 0.98 1.14 Norm. EPS growth (%) (61.72) 274.42 (27.97) 28.95 16.87 Dividend (Bt) 0.65 0.50 0.32 0.41 0.48 BV (Bt) 12.08 12.68 13.12 13.68 14.34 FY Ended 31 Dec 2015 2016 2017E 2018E 2019E Norm. PER (x) 97.67 26.09 36.22 28.09 24.03 EV/EBITDA (x) 41.31 33.70 36.85 32.06 29.01 P/BV (x) 2.28 2.17 2.10 2.01 1.92 Dividend yield (%) 2.36 1.82 1.17 1.51 1.76 ROE (%) 2.41 8.52 5.89 7.31 8.17 Net gearing (%) 239.49 208.30 198.01 178.91 150.92 REFER TO DISCLOSURE SECTION AT THE END OF THE NOTES page 1 of 5
Figure 1: Summary of sum of the parts (SOTP) valuation for CK Company CK s stake (%) Valuation Method Value to CK (Bt) Construction business 2.3x (+0.5SD) of 17E adj. BVS of Bt8.60 19.8 CK s investment stake - BEM 30.62 KTZMICO s TP of Bt8.20 22.5 - CKP 28.77 KT ZMICO s TP of Bt3.70 4.7 - TTW 19.40 KT ZMICO s TP of Bt11.10 5.2 Minus: Net debt used for associates (14.7) Net value of CK s stake in associates 17.8 SOTP based TP 37.6 Source: KT ZMICO Research Figure 2: CK s P/BV band and sensitivity of market prices based on P/BV at different standard deviation levels (X) 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 Jan-03 Sep-03-0.5S.D. -1 S.D. Jun-04 Feb-05 Oct-05 Jul-06 Mar-07 Dec-07 Aug-08 May-09 +1 S.D. +0.5 S.D. Avg. Jan-10 Oct-10 Jun-11 Mar-12 Nov-12 Aug-13 Apr-14 Jan-15 Sep-15 Jun-16 Feb-17 Implied Upside/Downside 2016E P/BV (x) market price vs. current market (Bt) price (%) +1.5SD 3.3 42.93 56.10 +1.0SD 2.8 36.71 33.50 +0.5SD 2.3 30.50 10.90 average 1.8 24.28 (11.70) 0.5SD 1.4 18.07 (34.30) 1.0SD 0.9 11.85 (56.90) 1.5SD 0.4 5.64 (79.50) Source: Bloomberg, KT ZMICO Research Figure 3: CK s active projects Active major projects (as of 4Q16) Remaining Value % to total (Btmn) (%) Mass Transit 35,791 42.9 Railways 13,032 15.6 Xayaburi Hydropower Plant in Lao 27,076 32.5 Expressway 135 0.2 Others 7,345 8.8 Total Backlog 83,379 100.0 \\ Source: CK REFER TO DISCLOSURE SECTION AT THE END OF THE NOTES page 2 of 5
Figure 4: Progress of public infrastructure development projects (action plan) Projects Value Status 1H17 100,678 Double Track: Map Ka Boa Jira Junction, 132 km. 28,505 TOR under review by Super Board Double Track: Lopburi Pak Nam Pho, 148 km. 23,921 TOR under review by Super Board Double Track: Prachuap Khiri Khan Chumphon, 167 km. 16,234 TOR under review by Super Board Double Track: Nakorn Pathom Hua Hin 165 km. 19,270 TOR under review by Super Board Double Track: Hua Hin Prachuab Khiri Khan 90 km. 9,853 TOR under review by Super Board SBIA # 5: Automated people mover (APM) procure & install 2,895 Sell TOR (21 25Jan), proposed 3 Mar, announcement 15 2H17 181,281 SBIA # 3: 1st Midfield Satellite (2 4th floors), South Tunnel 17,462 Target to start tendering in 17E SBIA # 4: Main terminal expansion (East), Office Building 4,684 Target to start tendering in 17E SBIA # 6: Baggage Handling System (BHS) procure & install 6,182 Target to start tendering in 17E Mass Transit: South Purple (Taopoon Ratburana), 20 km. 131,004 EIA approved Mass Transit: Dark Green (Samut Prakan Bang Pu) 12,146 EIA approved Mass Transit: Dark Green (Khu Kot Lam Lookka) 9,803 EIA approved Next 849,926 Double Track: Chumpon Surat Thani 23,384 2017 action plan Double Track: Surat Thani Songkhla 51,823 2017 action plan Double Track: Had Yai Padang Besar 7,941 2017 action plan Double Track: Pak Nam Po Den Chai 56,066 2017 action plan Double Track: Den Chai Chiang Mai 59,924 2017 action plan Double Track: Den Chai Chiang Rai Chiang Khong 76,978 2017 action plan Double Track: Khon Kaen Nong Khai 26,065 2017 action plan Double Track: Jira Junction Ubon Ratchathani 35,839 2017 action plan Double Track: Ban Pai Nakhon Phanom 60,351 2017 action plan Mass Transit: Light & Dark Red (Bang Sue Hua Mak, Hualampong), 25.5 km. 44,157 2017 action plan Mass Transit: Blue Line (Bang Kae Phutthamonton 4) 21,197 2017 action plan Mass Transit: Orange (West, Taling Chan TCC) 123,354 2017 action plan Mass Transit: Phuket 23,499 2017 action plan Water: Ferry Jetty 981 2017 action plan Water: Laem Chabang Development Phase III 35,099 2017 action plan Road: Truck Stopping Area 550 2017 action plan Chiang Khong Transshipment Development, Chiang Rai 2,365 2017 action plan Border Goods Distribution Center, Nakhon Panom 1,053 2017 action plan Border Goods Distribution Center; 8 provinces 8,065 2017 action plan Capital Goods Distribution Center; 9 provinces 9,438 2017 action plan Electrical Bus (200 units) 2,272 2017 action plan Common ticketing system 1,355 2017 action plan Motorway: Nakhon Pathom Cha am 80,600 2017 action plan Motorway: Had Yai Padang Bezar 30,500 2017 action plan Motorway: Rama 3 Road Dow Kanong West Ring Road 31,244 2017 action plan 3rd expressway N2 & E W Corridor 14,382 2017 action plan Expressway: Kratu Pa Tong 10,496 2017 action plan Regional airport development 7,685 2017 action plan SBIA's Baggage Handling System improvement 3,263 2017 action plan High Speed Trains 1,065,822 Standard gauge: BKK Phitsanulok Chiang Mai 449,473 MOU: Thai Japan, Under study Standard gauge: BKK Hua Hin 94,673 Awaiting cabinet approval to start PPP process Standard gauge: BKK Rayong 152,528 Awaiting cabinet approval to start PPP process Standard gauge: BKK Nong Khai, Kang Koi Map Ta Phut 369,148 MOU: Thai China, Under study Source: AOT, CK, Newspaper sources, KT ZMICO Research estimates REFER TO DISCLOSURE SECTION AT THE END OF THE NOTES page 3 of 5
Financial tables PROFIT & LOSS (Btm) 2014 2015 2016 2017E 2018E 2019E Revenues 32,951 34,912 45,864 36,442 41,988 41,814 Cost of sales and service (29,827) (31,986) (42,530) (33,351) (38,440) (38,248) Gross profit 3,124 2,926 3,334 3,091 3,548 3,566 SG&A (1,475) (1,759) (1,781) (1,836) (2,115) (2,106) EBITDA 2,613 2,149 2,508 2,273 2,534 2,635 Depreciation & amortization (964) (981) (955) (1,018) (1,101) (1,175) EBIT 1,648 1,168 1,553 1,255 1,433 1,460 Interest expense (1,468) (1,545) (1,166) (1,779) (1,560) (1,354) Equity earnings 27 (19) 578 973 1,151 1,306 Other income / exp. 2,239 2,821 1,101 986 846 773 EBT 2,446 2,424 2,066 1,435 1,869 2,184 Corporate tax (89) (164) (23) (104) (162) (198) Minority interests (61) (68) (40) (45) (49) (48) Net profit 2,296 2,193 2,002 1,286 1,658 1,938 Reported EPS 1.36 1.29 1.18 0.76 0.98 1.14 Fully diluted EPS 1.36 1.29 1.18 0.76 0.98 1.14 Core net profit 1,246 477 1,786 1,286 1,658 1,938 Core EPS 0.74 0.28 1.05 0.76 0.98 1.14 Dividend (Bt) 0.55 0.65 0.50 0.32 0.41 0.48 BALANCE SHEET (Btm) 2014 2015 2016 2017E 2018E 2019E Cash and equivalents 5,949 4,738 12,537 9,188 4,974 5,187 Inventories 21,838 25,934 5,490 12,403 14,293 14,228 PP&E net 7,361 7,714 9,027 10,289 11,416 12,552 Other assets 45,725 54,681 67,874 64,614 66,271 66,214 Total assets 80,872 93,066 94,928 96,494 96,954 98,181 ST debt & current portion 13,070 15,485 16,170 36,552 35,825 29,532 Long term debt 29,027 38,247 41,111 16,640 10,620 12,327 Total liabilities 61,402 72,210 73,074 73,852 73,307 73,367 Minority interests 346 398 374 419 468 516 Shareholder equity 19,125 20,457 21,481 22,223 23,180 24,298 Total liab. & shareholder equity 80,872 93,066 94,928 96,494 96,955 98,181 CASH FLOW (Btm) 2014 2015 2016 2017E 2018E 2019E Net income 2,296 2,193 2,002 1,286 1,658 1,938 Depreciation & amortization 964 981 955 1,018 1,101 1,175 Change in working capital (6,145) (10,259) 17,246 1,215 2,655 4,768 FX, non cash adjustment & others (2,046) (2,898) (1,842) (973) (1,151) (1,306) Cash flow from operations (4,931) (9,983) 18,362 2,546 4,264 6,577 Capex (Invest)/Divest (946) (836) (834) (1,305) (1,235) (1,124) Others 2,261 (411) (13,089) 0 0 0 Cash flow from investing 1,315 (1,247) (13,922) (1,305) (1,235) (1,124) Debt financing (repayment) 5,541 11,579 3,571 (4,090) (6,747) (4,586) Equity financing 41 (0) 0 0 0 0 Dividend payment (674) (1,016) (1,101) (755) (544) (701) Others 61 68 40 45 49 48 Cash flow from financing 4,969 10,630 2,510 (4,800) (7,242) (5,240) Net change in cash 1,353 (599) 6,950 (3,559) (4,213) 213 Free cash flow (3,616) (11,229) 4,440 1,240 3,029 5,453 FCF per share (Bt) (2.13) 6.63 2.62 0.73 1.79 3.22 PROFITABILITY 2014 2015 2016 2017E 2018E 2019E Revenue growth (%) 0.5 6.0 31.4 (20.5) 15.2 (0.4) EBITDA growth (%) (4.2) (17.8) 16.7 (9.4) 11.5 4.0 Core EPS growth (%) 14.2 (61.7) 274.4 (28.0) 28.9 16.9 Gross margin (%) 9.5 8.4 7.3 8.5 8.5 8.5 EBITDA margin (%) 7.9 6.2 5.5 6.2 6.0 6.3 Operating margin (%) 5.0 3.3 3.4 3.4 3.4 3.5 Net margin (%) 7.0 6.3 4.4 3.5 3.9 4.6 Core profit margin (%) 3.8 1.4 3.9 3.5 3.9 4.6 Effective tax rate (%) 6.3 22.5 1.6 22.5 22.5 22.5 FINANCIAL QUALITY 2014 2015 2016 2017E 2018E 2019E Total debt to capital employed (x) 0.69 0.72 0.73 0.71 0.67 0.63 Net debt to equity (x) 1.89 2.39 2.08 1.98 1.79 1.51 Interest coverage (x) 1.72 1.29 2.13 1.22 1.52 1.80 Source: CK, KT ZMICO Research REFER TO DISCLOSURE SECTION AT THE END OF THE NOTES page 4 of 5
Note: KT ZMICO has two major shareholders, Krungthai Bank PLC (KTB) and Seamico Securities PLC (ZMICO). Therefore, prior to making investments in the securities of KTB and ZMICO, investors should consider the risk factors carefully. An executive of KT ZMICO Securities is also a board member of BCP, BTC, CI, CPI, KBS, MAJOR, MK, PACE, PSL, SVH, VNG, ZMICO, SAWAD, TFG. A management member of KT ZMICO Securities is also a board member of BTC and NFC. KT ZMICO is a financial advisor for U, LOXLEY, ZMICO, MAKRO, CPALL, SAFARI, M CHAI, POMPUI, TFD, THANI. Corporate Governance Report (CGR) Association (IOD) Source: Sec, Thai Institute of Directors Excellent (scores: 90 100) Satisfactory (scores: 60 69) Very Good (scores: 80 89) Pass (scores: 50 59) Anti corruption Progress Indicator Good (scores: 70 79) No Logo N/A (scores: below 50) Source: Sec, Thailand's Private Sector Collective Action Coalition Against Corruption programme (Thai CAC) Level 1 (Committed) : Organization s statement or board's resolution to work against corruption and to be in compliance with all relevant laws. Level 2 (Declared) : Public declaration statement to participate in Thailand's private sector Collective Action Coalition Against Corruption (CAC) or equivalent initiatives Level 3 (Established) : Public out preventive measures, risk assessment, communication and training for all employees, including consistent monitoring and review processes Level 4 (Certified) : Audit engagement by audit committee or auditors approved by the office of SEC, and receiving certification or assurance by independent external assurance providers (CAC etc.) Level 5 (Extended) : Extension of the anti corruption policy to business partners in the supply chain, and disclosure of any current investigations, prosecutions or closed cases Insufficient or not clearly defined policy Data not available / no policy DISCLAIMER This document is produced using open sources believed to be reliable. However, their accuracy and completeness cannot be guaranteed. The statements and opinions herein were formed after due and careful consideration for use as information for the purposes of investment. The opinions contained herein are subject to change without notice. This document is not, and should not be construed as, an offer or the solicitation of an offer to buy or sell any securities. The use of any information contained in this document shall be at the sole discretion and risk of the user. KT ZMICO RESEARCH RECOMMENDATION DEFINITIONS STOCK RECOMMENDATIONS BUY: Expecting positive total returns of 15% or more over the next 12 months OUTPERFORM: Expecting total returns between 10% to +15%; returns expected to exceed market returns over a six month period due to specific catalysts UNDERPERFORM: Expecting total returns between 10% to +15%; returns expected to be below market returns over a six month period due to specific catalysts SELL: Expecting negative total returns of 10% or more over the next 12 months SECTOR RECOMMENDATIONS OVERWEIGHT: The industry, as defined by the analyst's coverage universe, is expected to outperform the relevant primary market index by at least 10% over the next 12 months. NEUTRAL: The industry, as defined by the analyst's coverage universe, is expected to perform in line with the relevant primary market index over the next 12 months. UNDERWEIGHT: The industry, as defined by the analyst's coverage universe, is expected to underperform the relevant primary market index by 10% over the next 12 months. REFER TO DISCLOSURE SECTION AT THE END OF THE NOTES page 5 of 5
WWW.KTZMICO.COM Central World Branch 999/9 The Offices at Central World, 16th Fl., Rama 1 Rd, Pathumwan, Bangkok 10330 Telephone: (66 2) 264 5888 Fax: (66 2) 264 5899 Phaholyothin Branch 1291/1, Shinnawatra Tower II, 3rd Floor, Phaholyothin Road, Phayathai, Bangkok 10400 Telephone: (66 2) 686 1500 Fax: (66 2) 686 1666 KT ZMICO Securities Company Limited Head Office 8th, 15th 17th,19th, 21st Floor, Liberty Square Bldg., 287 Silom Road, Bangrak, Bangkok, Thailand 10500 Telephone: (66 2) 695 5000 Fax: (66 2) 695 5173 KT ZMICO Connect 662 695 5555 Amarin Branch 22nd Floor, Amarin Building, 496 502 Ploenchit Road, Lumpini, Pathumwan, Bangkok 10330 Telephone: (66 2) 018 6200 Fax: (66 2) 018 6298, (66 2) 018 6299 Sindhorn Branch 2nd Floor, Sindhorn Tower 1, 130 132 Wireless Road, Lumpini, Pathumwan, Bangkok 10330 Telephone: (66 2) 627 3550 Fax: (66 2) 627 3582, 627 3600 Ploenchit Branch 8th Floor, Ton Son Tower, 900 Ploenchit Road, Lumpini, Pathumwan, Bangkok 10330 Telephone: (66 2) 626 6000 Fax: (66 2) 626 6111 Viphavadee Branch G Floor, Lao Peng Nguan 1 Bldg., 333 Soi Cheypuand, Viphavadee Rangsit Road, Ladyao, Jatujak, Bangkok 10900 Telephone: (66 2) 013 8600 Fax: (66 2) 618 8569 BangKhae Branch 518 The Mall Group Building Bangkhae Branch, 6th Floor, Petchkasem Road, North Bangkhae, Bangkhae, Bangkok 10160 Telephone: (66 2) 454 9979 Fax: (66 2) 454 9970 Korat Branch 624/9 Changphuek Road, T.Naimaung, A.Maung, Nakhon Ratchasima 30000 Telephone: (044) 247222 Fax: (044) 247171 Pattaya Branch Easy Point 2, 392/65 Moo.9, T.Nong Prue, A. Bang Lamung, Chonburi 20260 Telephone: (038) 420 965 Fax: (038) 420 968 Phuket Branch 22/61 63, Luang Por Wat Chalong Road, Talat Yai, Mueang Phuket, Phuket 83000 Telephone: (076) 222 811, (076) 222 683 Fax: (076) 222 861 Cyber Branch Ayutthaya KrungThai Bank, Rojana Branch 253 Moo 5, Rojana Road, Phai Ling, Phra Nakhon Si Ayutthaya, Phra Nakhonsi Ayutthaya, 13000 Telephone: 035 242 477 Fax: 035 242 476 Chiang Mai Branch 422/49 Changklan Road, Changklan Subdistrict, Amphoe Meuang, Chiang Mai 50100 Telephone: (053) 270 072 Fax: (053) 272 618 Khon Kaen Branch 5th Floor, Charoen Thani Princess Hotel, 260 Srichan Road, T. Naimuang, A. Muang, Khon Kaen 40000 Telephone: (043) 389 171 193 Fax: (043) 389 209 Chachoengsao Branch 108/34 36 Mahajakkrapad Road, T.Namuang, A.Muang, Chachoengsao 24000 Telephone: (038) 813 088 Fax: (038) 813 099 Phitsanulok Branch 227/171 Borom Trilokkanat Road, Muang, Phitsanulok 65000 Telephone: 055 219 255 to 8 Fax: 055 219 259 Cyber Branch @ North Nana Krung Thai Bank PCL, 2 Floor, North Nana Branch 35 Sukhumvit Rd., Klong Toey Nua Subdistrict, Wattana District, Bangkok 10110 Telephone: 083 490 2871 Pak Chong Branch 173 175, Mittapap Road, Nong Sarai, Pak Chong, Nakhon Ratchasima 30130 Telephone: (044) 279 511 Fax: (044) 279 574 Chonburi Branch 4th Floor, Forum Plaza Bldg., 870/52 Sukhumvit Road, T. Bangplasoy, A. Muang, Cholburi 20000 Telephone: (038) 287 635 Fax: (038) 287 637 Hat Yai Branch 200/301, 200/303 JULDIS HATYAI PLAZA Floor 3, Niphat Uthit 3 Rd, Hatyai Songkhla 90110 Telephone: (074) 355530 3 Fax: (074) 355534 Nakhon Pathom River Hotel (Building 3rd),1156 Petchakasem Road, Sanamchan Subdistrict, Amphoe Meuang, Nakhon Pathom Province 73000 Telephone: (034) 271300 Fax: (034) 271300 #100 Cyber Branch Chiangrai KrungThai Bank, Hayaek Phokhun Mengrai Branch 116/19 Moo 19, Highway 110 Road, Rop Wiang, Mueang Chiang Rai, Chiang Rai, 57000 Telephone: 053 715 067 Fax: 053 715 068