4 April 2014

Page | 1 MCI(P) 046/11/2013 Ref. No.: TH2014_0129

BJC Heavy Industries - BJCHI

Stellar long-term growth story absent

THAILAND | CONSTRUCTION SERVICES | COMPANY UPDATE

BLOOMBERG BJCHI TB │ REUTERS BJCHI.BK

Earnings momentum appears to lose steam in the long run and BJCHI is necessary to seek new large-scale projects to provide consistent revenue.

Backlog carried forward to CY14 is approximately Bt2,700mn. BJCHI has been in bidding process of more than Bt5,900mn this year. Net profit is projected to grow 9.5%.

Shares of BJCI looks overvalued, trading on high P/BV when compared to its historical mean. Given estimated dividend yield of 5%, we however weigh in a ‘NEUTRAL’ rating on the stock with a Bt41.72 price target.

At the start of 2014, BJCHI carried forward revenue backlog of more than Bt2,700mn. The projects in bidding process are approximately Bt5,900mn that the results are expected to unveil in mid-April. How we view this BJCHI registered a rapid earnings growth in CY13 on the back of its constructive strategy that shifted focus to high-margin yielded modularization project. Despite this, the future growth looks uncertain unless the company wins large-scales projects that will provide consistent revenue after the modularization projects, representing 80% of total projects, had been delivered. Besides this, the company’s earnings performance can be exposed to weak revenue momentum, cost overrun, a shortage of skilled labor, fluctuation of currency exchanges and a lack of space at sea port. On valuation side, we forecast revenue to grow 16% to Bt4,530mn, potentially propelling net profit growth of 9.5% to Bt1,320mn in CY14. Investment Action We compute price target, based on P/BV of 2.7x, arriving at Bt41.72. At current share price, we have a ‘NEUTRAL’ call for BJCHI.

Analyst

Phillip Research Team

+65 65311240 research@phillip.com.sg

Key Financial Summary

FYE Dec FY10 FY11 FY12 FY13 FY14F FY15F

Revenue (Btmn) 556 71 3,614 3,910 4,534 4,907

NPAT, adj. (Btmn) 122 62 783 1,262 1,321 1,422

EPS, adj. (Bt) 0.89 0.36 3.49 5.16 4.13 4.44

P/E (X),adj. 47.3 n.m. 12.1 8.2 10.2 9.5

BVPS (Bt) 3.66 2.51 5.78 13.72 15.45 17.83

P/B (X) 11.6 16.9 7.3 3.1 2.7 2.4

DPS (Bt) 0.68 0.33 1.99 2.40 2.06 2.22

Div. Yield (%) 1.6% 0.8% 4.7% 5.7% 4.9% 5.3%

Source: Bloomberg, PSR est.

**Multiples and yields are based on latest closing price

BJC Heavy Industries - BJCHI 4 April 2014

Page | 2

Vague long-term growth A lack of long-term growth story cast long shadow on BJCHI earnings performance and thus the company is necessary to seek new large-scale projects to provide consistent revenue. BJCHI had enjoyed the rapid growth over the past three years after the company shifted focus to high-margin yielded modularization projects, accounting for 84.46% of total projects. According to guidance, the company continues to bid for modularization projects, while its key clients (Australia and countries in South America) have had long-term plans for power development given strong demand for renewable energy, implying more projects to be opened for bids. Note that China is major importer of renewable energy from Australia. Despite bright renewable energy outlook, it appears to be tough time ahead for BJCHI and the stellar growth the company previously registered isn’t likely in the near future as there are also several exposures to earnings performance:-

Shortage of skilled labor

Lack of enough space at sea ports: A delivery of its modularization project literally requires a large enough space that becomes a key constraint.

Cost overrun: Revenue generally is fixed but raw material costs, steel in particularly, are quite fluctuating, posing higher cost risk.

Fluctuation of currency exchanges: Most raw materials are imported and revenue is largely in foreign currency terms.

Lack of consistent revenue: Revenue largely relies on winning projects. Revenue backlog approximately Bt2,700mn, potentially propelling net profit growth of 9.5% in CY14 At the start of 2014, BJCHI brought forward revenue backlog of approximately Bt2,700mn. Of this Bt2,200mn will be recognized this year. The company is expected to win the bidding projects with a combined worth of more than Bt5,900mn. Bidding results are expected in mid-April and revenue would be partially recognized from 3QCY14. We forecast revenue to grow 16% to Bt4,530mn in CY14, while gross margin would narrow slightly to 38% from the prior year’s 40% as up to 50% of total revenue will likely derive from low-margin yielded projects, unlike the previous year that most revenue came from additional works, offering high margin. In sum, pre-ex profits would increase moderately 4.7% while net profit would grow at faster pace by 9.5% to Bt1,320mn this year. Shares overvalued but dividend quite attractive We are revisiting our STPI earnings estimate and thus assigning P/BV valuation that uses for valuation reassessment for the contractors. Our price target for BJCHI is Bt41.72, pegged at 2.7x P/BV (instead of P/E that previously pegged at a similar level to STPI of 11x). Although shares are overvalued, BJCHI is expected to offer an attractive dividend at similar level of Bt2.40 (yielding 5.65%) it provided for CY13 performance. We thus weigh in a ‘NEUTRAL’ rating on the stock. Note that the stock will trade ex-dividend on 6 May.

BJC Heavy Industries - BJCHI 4 April 2014

Page | 3

FYE Dec FY09 FY10 FY11 FY12 FY13 FY14F FY15F FYE Dec FY09 FY10 FY11 FY12 FY13 FY14F FY15F

Revenue 1,815 556 813 3,614 3,910 4,534 4,907 Cash 131 147 26 2,336 1,903 2,994

EBITDA 219 180 91 800 1,305 1,378 1,503 Investments 0 0 0 0 0 0

Depreciation & Amortisation 49 34 40 50 61 85 Accounts Receivables 63 245 663 994 1,923 658

EBIT 170 131 58 760 1,255 1,317 1,419 Inventories 45 211 499 385 569 198

Net Finance (Expense)/Inc (0) (0) (1) (1) (0) (0) Others 47 57 218 56 56 56

Other i tems 8 17 29 19 18 18 Total current assets 287 660 1,406 3,771 4,451 3,906

Associates & JVs 0 0 0 0 0 0 PPE 249 301 447 777 1,516 1,831

Exceptional i tems (22) 8 10 (56) 0 0 Intangibles 2 2 4 4 4 4

Profit Before Tax 116 83 798 1,217 1,335 1,437 Associates & JVs 3 0 0 0 0 0

Taxation 16 12 5 11 13 14 Investments 15 0 0 0 0 0

Profit After Tax 100 71 793 1,206 1,321 1,422 Others 8 20 24 284 284 284

Non-control l ing Interest 0 0 0 0 0 0 Total non-current assets 277 324 474 1,065 1,804 2,120

Net Income, reported 100 71 793 1,206 1,321 1,422 Total Assets 921 563 984 1,881 4,836 6,255 6,025

Net Income, adj. 152 122 62 783 1,262 1,321 1,422 Short term loans 28 3 6 6 6 6

Accounts Payables 12 321 531 374 1,242 252

Others 14 87 29 46 46 46

FYE Dec FY09 FY10 FY11 FY12 FY13 FY14F FY15F Total current liabilities 54 411 565 427 1,295 305

Long term loans 2 8 10 7 3 0

EPS, reported 0.73 0.41 3.53 4.93 4.13 4.44 Others 10 3 9 11 12 14

EPS, adj. 0.89 0.36 3.49 5.16 4.13 4.44 Total non-current liabilities 12 10 19 18 15 14

DPS 0.68 0.33 1.99 2.40 2.06 2.22 Non-control l ing interest 0 0 0 0 0 0

BVPS 3.66 2.51 5.78 13.72 15.45 17.83 Shareholder Equity 410 497 562 1,297 4,392 4,945 5,707

FYE Dec FY09 FY10 FY11 FY12 FY13 FY14F FY15F FYE Dec FY09 FY10 FY11 FY12 FY13 FY14F FY15F

CFO P/E (X), adj.** 47.3 n.m. 12.1 8.2 10.2 9.5

PBT 100 71 792 1,206 1,335 1,437 P/B (X), adj.** 11.6 16.9 7.3 3.1 2.7 2.4

Adjustments 51 39 62 83 63 86 EV/EBITDA (X), adj. - - - ###### 8.4 7.0

WC changes (8) 4 (744) (467) (245) 646 Dividend Yield (%) 1.6% 0.8% 4.7% 5.7% 4.9% 5.3%

Cash generated from ops 143 113 109 822 1,152 2,169 Growth & Margins (%)

Others (31) (12) (10) (5) (14) (15) Growth

Cashflow from ops 112 101 99 817 1,139 2,154 Revenue -69.3% 46.1% 344.6% 8.2% 16.0% 8.2%

CFI EBITDA -17.9% -49.2% n.m. 63.3% 5.5% 9.1%

CAPEX, net (52) (72) (150) (232) (800) (400) EBIT -23.1% -55.9% n.m. 65.2% 4.9% 7.7%

Others (0) 0 0 (155) 0 0 Net Income, adj. -20.3% -48.6% n.m. 61.2% 4.7% 7.6%

Cashflow from investments (52) (72) (150) (387) (800) (400) Margins

CFF EBITDA margin 32.4% 11.3% 22.1% 33.4% 30.4% 30.6%

Share i ssuance 0 78 0 2,335 0 0 EBIT margin 23.5% 7.1% 21.0% 32.1% 29.0% 28.9%

Loans , net of repayments (1) (4) (4) (6) (4) (3) Net Profi t Margin 18.0% 8.7% 21.9% 30.9% 29.1% 29.0%

Dividends (12) (92) (57) (449) (768) (661) Key Ratios

Others 0 0 0 0 0 0 ROE (%) 22.0% 13.4% 85.3% 42.4% 28.3% 26.7%

Cashflow from financing (13) (18) (61) 1,881 (772) (664) ROA (%) 13.5% 9.2% 55.3% 35.9% 23.8% 23.2%

Net change in cash 47 11 (112) 2,311 (433) 1,090

Effects of exchange rates 0 5 (9) (2) 0 0 Net Debt/(Cash) (101) (136) (11) (2,323) (1,894) (2,987)

CCE, end 118 147 26 2,336 1,903 2,994 Net Gearing (X) (0.12) 0.28 0.30 (0.39) (0.09) (0.44)

**Based on latest closing price

Source: Company Data, PSR est

Balance Sheet (Btmn)

Per share data (Bt)

Cashflow Statements (Btmn) Valuation Ratios

Income Statement (Btmn)

BJC Heavy Industries - BJCHI 4 April 2014

Page | 4

ผลตอบแทนรวม ค ำแนะน ำ เกรด

> +20% ซือ้ 1+5% to +20% ทยอยซือ้ / ซือ้เก็งก ำไร 2-5% to +5% ถอื 3-5% to -20% ทยอยขำย / ขำยท ำก ำไร 4<-20% ขำย 5

PSR ไม่ไดพ้จิำรณำค ำแนะน ำกำรลงทนุจำกเพยีงแคช่ว่งผลตอบแทนกำรลงทนุเชงิปรมิำณ แตย่งั

ค ำนงึถงึปัจจัยเชงิคณุภำพ เชน่ผลตอบแทนเทยีบกับควำมเสีย่งของหลักทรัพย,์ บรรยำกำศกำร

ลงทนุในตลำด, อัตรำกำรปรับตัวขึน้ของรำคำหุน้,ปัจจัยเร่งของรำคำหุน้ รวมถงึ แรงเก็งก ำไรใน

หลักทรัพย ์ก่อนค ำแนะน ำขัน้สดุทำ้ย

ค ำแนะน ำทีผ่ำ่นมำ

เกณฑใ์นกำรใหค้ ำแนะน ำ

หมำยเหตุ

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ทีม่ำ: Bloomberg, PSR

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รำคำตลำด

รำคำพืน้ฐำน

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Total ReturnTotal ReturnTotal ReturnTotal Return RecommendationRecommendationRecommendationRecommendation RatingRatingRatingRating RemarksRemarksRemarksRemarks >+20%>+20%>+20%>+20% BuyBuyBuyBuy 1111 >20% upside from the current price>20% upside from the current price>20% upside from the current price>20% upside from the current price

+5% to +20%+5% to +20%+5% to +20%+5% to +20% AccumulateAccumulateAccumulateAccumulate 2222 +5% to +20%upside from the curren+5% to +20%upside from the curren+5% to +20%upside from the curren+5% to +20%upside from the current pricet pricet pricet price ----5% to +5%5% to +5%5% to +5%5% to +5% NeutralNeutralNeutralNeutral 3333 Trade within ± 5% from the current priceTrade within ± 5% from the current priceTrade within ± 5% from the current priceTrade within ± 5% from the current price ----5% to 5% to 5% to 5% to ----20%20%20%20% ReduceReduceReduceReduce 4444 ----5% to 5% to 5% to 5% to ----20% downside from the current price20% downside from the current price20% downside from the current price20% downside from the current price

<<<<----20%20%20%20% SellSellSellSell 5555 >20%downside from the current price>20%downside from the current price>20%downside from the current price>20%downside from the current price

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