See disclaimer at the end of report

SECTOR UPDATE
CONSTRUCTION

3 June 2014
Clearer visibility

Sector: Construction Overweight



Valuation
Investment thesis
Since the National Council for Peace and Order (NCPO) announced
accelerated budget disbursements and the resumption of infrastructure
projects, the Construction sectors PBV has re-rated to its long-term
average from 1SD below its mean (a similar pattern as after the 2006
coup). Based on historical data, contractors should continue trading at this
level until the setting of the tender schedule for mega projects, probably 3-6
months after the next govt takes office. As such, it may be a good time for
short-term traders to take profits. But players with longer investment
horizons should hold positionsdownside risk is limited and the sector
could re-rate again with the unveiling of the tender schedule.
Trading on events
Contractors tend to trade on news flows and speculation rather than
fundamentals. During the past 12 years, the sector has re-rated and de-
rated on major events, such as political changes, announcements of mega
projects and fluctuations in the prices of materials. During periods of
political stability with steady raw material prices, contractors may trade at
PBVs that exceed their historical means, but during periods of political
turmoil, the stocks de-rate to below their long-term averages. We have
listed the major events since 2003 that have triggered sector re-ratings and
de-ratings in Figure 1.
Near-term catalysts
A double-track railway (Chacheongsao-Kangkoi) worth Bt11bn could be
the first big-ticket project to open to tender, as the sources of finance have
already been secured. Bidders are required to submit tender documents for
the second package worth Bt621m on June 19, while the first package
worth Bt10bn will be tendered shortly thereafter. Suvarnabhumi Airport
phase II, worth Bt62bn, should come next. AOT expects to sell tender
documents to bidders in July and should award a contract in 4Q14. For the
MRT Dark Green Line (Mochit-Kukot) worth Bt26.5bn, the MRTA is
revising its TOR and will sell the tender documents within the next three
months. The winner should be announced in 1H15.
CK and STEC upgraded to BUY ratings; sector to OVERWEIGHT
Due to the improved outlook, we have raised our PBV targets for CK and
STEC by 1.5SD above their respective long-term averages, pushing up our
YE14 target prices to Bt25.25 from Bt15.80 for CK and to Bt24 from
Bt17.60 for STEC. We believe that both firms deserve to trade above their
historical means, as they are best-positioned to win new infrastructure
projects. CKs short-term earnings profile may look better than STECs, as
we expect STECs profit to peak in 2Q14 then decline gradually QoQ until
2Q15, due to backlog depletion during the past four quarters. But in
valuation terms, STEC is much cheaper at an FY14 PER of only 20.9x. Our
sector rating rises to OVERWEIGHT from NEUTRAL.



Recom. Target Core EPS
Price CAGR (%)
(Bt) FY14E FY15E (FY14-16) FY14E FY15E
CK BUY 25.25 36.0 28.5 3.0 2.2 2.1
STEC BUY 24.00 19.7 20.7 5.1 3.9 3.6
Average 27.8 24.6 4.0 3.0 2.8
(x) (x)
PBV PER


Sector PBV band


0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
J
a
n
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5
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6
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7
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7
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8
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9
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0
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1
1
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1
1
J
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1
2
J
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-
1
2
J
a
n
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1
3
J
u
l
-
1
3
J
a
n
-
1
4
J
u
l
-
1
4
-2.0 STD = 0.6x
-1.0 STD = 1.2x
A
+1.0 STD = 2.5x
+2.0 STD = 3.1x
x
+3.0 STD = 3.8x
Average = 1.8x




Backlogs

0
20
40
60
80
100
120
140
160
1
Q
1
0
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1
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2
Q
1
3
3
Q
1
3
4
Q
1
3
1
Q
1
4
STEC CK ITD Btbn





Chaiyatorn Sricharoen, CFA
Securities Fundamental Investment Analyst
chaiyatorn@bualuang.co.th
+66 2 618 1344



Construction - 2


Figure 1 : Events that triggered re-ratings and de-ratings since 2003

0
200
400
600
800
1000
1200
1400
J
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-
1
4
-2SD = 0.6x
-1 SD= 1.2x
Average = 1.8x
+1SD = 2.5x
+2 SD = 3.1x
PBV
Started talking
about mega
projects
Rising materials costs/
market sell-off after
over-speculation
Announced
master plan for
mega projects
Political turmoil/
House dissolution
coup
Capital
controls
Rising commodity
prices/ political turmoil
End of Red shirt rally/
many mega project
biddings kick off
Landslide
election
Announced
projects under
Bt2.2trn
borrowing bill
Warning that
Bt2.2bn borrowing
bill may be
unconstitutional
Political
turmoil/
House
dissolution
Coup/ Junta
to resume
infra projects
Sources: Company data, Bualuang Research estimates




Figure 2 : Valuation comparison




Recom. Target PER Core EPS PBV ROE Div yield
Price (x) CAGR (%) (x) (%) (%)
(Bt) FY13 FY14E FY15E (FY14-16) FY14E FY15E FY14E FY15E FY14E FY15E
CK BUY 25.25 29.5 36.0 28.5 3.0 2.2 2.1 6.2 7.6 1.7 2.1
STEC BUY 24.00 23.0 19.7 20.7 5.1 3.9 3.6 20.9 18.0 2.5 2.4
Average 26.2 27.8 24.6 4.0 3.0 2.8 13.6 12.8 2.1 2.3
Sources: Company data, Bualuang Research estimates







Construction - 3





CK : Financial Tables Year

PROFIT & LOSS (Btm) 2012 2013 2014E 2015E 2016E
Revenue 20,764 32,627 33,951 38,969 40,471
Cost of sales and services (18,457) (29,233) (30,224) (34,893) (36,281)
Gross profit 2,307 3,394 3,726 4,076 4,190
SG&A (1,571) (1,505) (1,686) (1,866) (1,913)
EBIT 736 1,889 2,041 2,210 2,278
Interest expense (1,421) (1,538) (1,694) (1,726) (1,834)
Other income/exp. 820 1,637 1,381 1,459 1,470
EBT 135 1,988 1,727 1,944 1,914
Corporate tax (201) (190) (335) (379) (373)
After-tax net profit (loss) (66) 1,797 1,392 1,565 1,542
Minority interest (32) (38) (40) (40) (40)
Equity earnings from affiliates 268 (489) (311) (211) (115)
Extra items 399 6,403 0 0 0
Net profit (loss) 568 7,674 1,041 1,314 1,387
Reported EPS 0.34 4.53 0.61 0.78 0.82
Fully diluted EPS 0.34 4.53 0.61 0.78 0.82
Core net profit 170 1,271 1,041 1,314 1,387
Core EPS 0.10 0.75 0.61 0.78 0.82
EBITDA 1,201 2,606 2,855 3,092 3,221
KEY RATIOS
Revenue growth (%) 90.7 57.1 4.1 14.8 3.9
Gross margin (%) 11.1 10.4 11.0 10.5 10.4
EBITDA margin (%) 5.8 8.0 8.4 7.9 8.0
Operating margin (%) 3.5 5.8 6.0 5.7 5.6
Net margin (%) 2.7 23.5 3.1 3.4 3.4
Core profit margin (%) 0.8 3.9 3.1 3.4 3.4
ROA (%) 1.3 12.5 1.4 1.8 1.8
ROCE (%) 1.7 16.8 1.9 2.4 2.4
Asset turnover (x) 0.5 0.5 0.5 0.5 0.5
Current ratio (x) 1.3 1.4 1.6 1.7 1.8
Gearing ratio (x) 3.3 2.2 2.2 2.2 2.1
Interest coverage (x) 0.5 1.2 1.2 1.3 1.2
BALANCE SHEET (Btm)
Cash & Equivalent 5,553 5,393 3,501 3,366 3,582
Accounts receivable 5,324 4,288 5,412 5,722 5,841
Inventory 11,293 17,894 17,595 18,414 18,791
PP&E-net 4,700 7,518 7,825 8,083 8,297
Other assets 24,350 36,941 38,421 39,971 40,821
Total assets 51,221 72,034 72,755 75,556 77,333
Accounts payable 5,462 6,846 6,587 6,833 6,858
ST debts & current portion 10,528 13,696 7,567 6,578 5,566
Long-term debt 17,947 23,636 29,433 32,036 34,047
Other liabilities 8,776 11,016 11,971 12,183 12,297
Total liabilities 42,712 55,194 55,558 57,630 58,769
Paid-up capital 1,653 1,653 1,653 1,653 1,653
Share premium 4,869 4,869 4,869 4,869 4,869
Retained earnings 479 7,182 7,499 8,188 8,786
Shareholders equity 8,221 16,551 16,867 17,556 18,155
Minority interests 287 290 330 370 410
Total Liab.&Shareholders' equity 51,221 72,034 72,755 75,556 77,333
CASH FLOW (Btm)
Net income 568 7,674 1,041 1,314 1,387
Depreciation and amortization 465 717 814 881 944
Change in working capital (3,208) (10,033) (1,608) (1,634) (529)
FX, non-cash adjustment & others (1,262) (6,767) (353) (520) (622)
Cash flows from operating activities (3,435) (8,409) (106) 41 1,180
Capex (Invest)/Divest (7,233) (8,253) (1,920) (1,936) (1,952)
Others 5,034 9,102 1,933 771 776
Cash flows from investing activities (2,199) 849 13 (1,165) (1,176)
Debt financing (repayment) 6,029 8,380 405 1,613 1,000
Equity financing 0 0 (0) 0 0
Dividend payment (427) (936) (725) (625) (788)
Others 5,034 9,102 1,933 771 776
Cash flows from financing activities 5,603 7,446 (317) 993 217
Net change in cash (45) (58) (409) (131) 221
Free cash flow (Btm) (10,668) (16,663) (2,026) (1,895) (772)
FCF per share (Bt) (6.3) (9.8) (1.2) (1.1) (0.5)
Key Assumptions
New contract signed 100,494 22,967 10,000 32,100 30,000
Backlog 118,424 112,473 90,038 85,259 76,938
Gross margin (%) 11.1 10.4 11.0 10.5 10.4


0.0
0.1
0.2
0.3
0.4
0.5
0.6
(40)
(20)
0
20
40
60
80
100
10 11 12 13 14E 15E 16E
Revenue growth (%) (LHS)
Asset turnover (x) (RHS)
% x
0
30
60
90
120
150
180
10 11 12 13 14E 15E 16E
AR / Sales (days)
AP / Cost of Goods (days)
days
(15)
(10)
(5)
0
5
10
15
10 11 12 13 14E 15E 16E
Gross margin (%)
EBIT margin (%)
%
0
20
40
60
80
100
120
140
160
180
0.0
2.0
4.0
6.0
8.0
10.0
10 11 12 13 14E 15E 16E
Capex (Bt,bn)
Capex / Net PPE (%)
Bt,bn %
(60)
(40)
(20)
0
20
40
10 11 12 13 14E 15E 16E
(ST debt + Interest) / EBITDA
(Debt + Interest) / EBITDA
x
0.10
0.34 0.34
0.43
0.37
0.47
0.49
(100)
(50)
0
50
100
150
0.00
0.10
0.20
0.30
0.40
0.50
0.60
10 11 12 13 14E 15E 16E
Dividend (Bt)
Payout ratio (%)
Bt/Shr %
Revenue growth and asset turnover
A/C receivable & A/C payable days
Profit margins
Capital expenditure
Debt serviceability
Dividend payout













Construction - 4

STEC : Financial Tables Year

PROFIT & LOSS (Btm) 2012 2013 2014E 2015E 2016E
Revenue 19,872 22,294 23,244 24,451 25,946
Cost of sales and services (18,198) (20,168) (20,995) (22,293) (23,700)
Gross profit 1,674 2,126 2,249 2,158 2,246
SG&A (561) (539) (572) (572) (573)
EBIT 1,112 1,587 1,677 1,586 1,673
Interest expense (18) (29) (15) (13) (14)
Other income/exp. 297 360 410 410 411
EBT 1,392 1,918 2,072 1,983 2,070
Corporate tax (253) (449) (399) (381) (399)
After-tax net profit (loss) 1,139 1,468 1,673 1,602 1,672
Minority interest (0) (7) (4) (5) (4)
Equity earnings from affiliates 27 (22) 12 0 1
Extra items 0 294 0 0 0
Net profit (loss) 1,165 1,733 1,681 1,597 1,669
Reported EPS 0.76 1.14 1.10 1.05 1.09
Fully diluted EPS 0.76 1.14 1.10 1.05 1.09
Core net profit 1,165 1,439 1,681 1,597 1,669
Core EPS 0.76 0.94 1.10 1.05 1.09
EBITDA 1,783 2,315 2,483 2,404 2,504
KEY RATIOS
Revenue growth (%) 33.8 12.2 4.3 5.2 6.1
Gross margin (%) 8.4 9.5 9.7 8.8 8.7
EBITDA margin (%) 9.0 10.4 10.7 9.8 9.7
Operating margin (%) 5.6 7.1 7.2 6.5 6.4
Net margin (%) 5.9 7.8 7.2 6.5 6.4
Core profit margin (%) 5.9 6.5 7.2 6.5 6.4
ROA (%) 6.4 7.7 6.8 6.4 6.5
ROCE (%) 18.4 23.7 19.8 17.2 16.5
Asset turnover (x) 1.1 1.0 0.9 1.0 1.0
Current ratio (x) 1.2 1.2 1.3 1.3 1.4
Gearing ratio (x) 0.1 0.0 0.0 0.0 0.0
Interest coverage (x) 62.7 54.3 109.5 120.0 121.8
BALANCE SHEET (Btm)
Cash & Equivalent 7,190 8,663 9,794 8,665 10,670
Accounts receivable 5,998 7,831 6,632 9,097 7,047
Inventory 322 1,118 562 925 655
PP&E-net 2,160 2,650 2,638 2,615 2,585
Other assets 4,626 4,748 4,549 4,701 4,598
Total assets 20,296 25,010 24,174 26,003 25,556
Accounts payable 3,096 2,966 2,826 4,252 3,272
ST debts & current portion 260 178 0 0 0
Long-term debt 153 121 185 193 200
Other liabilities 10,674 13,969 12,464 12,098 11,748
Total liabilities 14,184 17,233 15,475 16,542 15,221
Paid-up capital 1,186 1,525 1,525 1,525 1,525
Share premium 2,097 2,097 2,097 2,097 2,097
Retained earnings 2,647 4,003 4,922 5,678 6,549
Shareholders equity 5,930 7,588 8,507 9,263 10,133
Minority interests 181 189 193 198 202
Total Liab.&Shareholders' equity 20,296 25,010 24,174 26,003 25,556
CASH FLOW (Btm)
Net income 1,165 1,733 1,681 1,597 1,669
Depreciation and amortization 374 368 395 408 420
Change in working capital 3,412 433 62 (2,055) 943
FX, non-cash adjustment & others (368) (196) 144 139 155
Cash flows from operating activities 4,583 2,338 2,282 89 3,186
Capex (Invest)/Divest (167) (772) (384) (384) (390)
Others (3,064) (82) 0 0 0
Cash flows from investing activities (3,232) (854) (384) (384) (390)
Debt financing (repayment) (23) (144) (5) 7 7
Equity financing 0 0 0 0 0
Dividend payment (652) (38) (763) (841) (798)
Others (3,064) (82) 0 0 0
Cash flows from financing activities (675) (182) (768) (833) (791)
Net change in cash 676 1,302 1,131 (1,128) 2,005
Free cash flow (Btm) 4,416 1,566 1,898 (295) 2,796
FCF per share (Bt) 2.9 1.0 1.2 (0.2) 1.8
Key Assumptions
New contract signed 7,259 34,615 10,000 20,000 30,000
Backlog 38,401 50,775 32,921 33,867 45,600
Gross margin (%) 8.4 9.5 9.7 8.8 8.7


0.9
0.9
1.0
1.0
1.1
1.1
1.2
(40)
(20)
0
20
40
60
80
10 11 12 13 14E 15E 16E
Revenue growth (%) (LHS)
Asset turnover (x) (RHS)
% x
0
30
60
90
120
150
10 11 12 13 14E 15E 16E
AR / Sales (days)
AP / Cost of Goods (days)
days
0
2
4
6
8
10
12
10 11 12 13 14E 15E 16E
Gross margin (%)
EBIT margin (%)
%
0
10
20
30
40
50
60
0.0
0.2
0.4
0.6
0.8
1.0
1.2
10 11 12 13 14E 15E 16E
Capex (Bt,bn)
Capex / Net PPE (%)
Bt,bn %
0.0
0.5
10 11 12 13 14E 15E 16E
(ST debt + Interest) / EBITDA
(Debt + Interest) / EBITDA
x
0.22
0.55
0.32
0.50
0.55
0.52
0.55
0
20
40
60
80
100
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
10 11 12 13 14E 15E 16E
Dividend (Bt)
Payout ratio (%)
Bt/Shr %
Revenue growth and asset turnover
A/C receivable & A/C payable days
Profit margins
Capital expenditure
Debt serviceability
Dividend payout













Construction - 5


Regional Comparisons
Bloomberg Price Market Cap
Code (local curr.)
(US$
equivalent) 2014E 2015E 2014E 2015E 2014E 2015E 2014E 2015E 2014E 2015E
Italian-Thai Development ITD TB THB4.84 716 31.6 27.2 -26.1 18.5 1.8 1.7 7.0 6.6 1.5 1.0
Nawarat Patanakarn NWR TB THB2.28 137 26.8 19.8 168.1 35.3 1.4 1.2 7.1 5.7 1.4 2.0
Toyo-Thai Corporation TTCL TB THB39.25 669 23.5 15.9 35.6 48.2 3.2 2.9 20.9 16.2 2.2 2.9
Sriracha Construction SRICHA TB THB35.75 333 11.0 10.4 5.9 -0.5 3.6 n.a. 39.3 40.5 6.3 6.6
STP&I STPI TB THB22.40 1,007 11.3 13.0 52.8 -12.8 3.4 n.a. 28.9 41.7 3.3 2.2
Unique Engineering&Cons. UNIQ TB THB8.95 212 11.9 9.7 -13.7 21.5 1.6 n.a. 19.5 n.a. 1.8 2.3
TRC Construction TRC TB THB3.42 85 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.
Syntec Construction SYNTEC TB THB1.72 84 13.2 12.3 160.0 7.7 1.0 n.a. 8.3 8.0 2.9 2.9
CH. Karnchang CK TB THB22.10 1,139 36.0 28.5 -86.4 26.2 2.2 2.1 6.2 7.6 1.7 2.1
Sino-Thai Engineering & Cons. STEC TB THB21.70 1,007 19.7 20.7 -3.0 -5.0 3.9 3.6 20.9 18.0 2.5 2.4
Simple average 20.6 17.5 32.6 15.5 2.5 2.3 17.6 18.0 2.6 2.7
PER (x) EPS Growth (%) PBV (x) ROE (%) Div Yield (%)



Construction - 6



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BUALUANG RESEARCH RECOMMENDATION FRAMEWORK

STOCK RECOMMENDATIONS

BUY: Expected positive total returns of 15% or more over the next 12
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HOLD: Expected total returns of between -15% and +15% over the next 12
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SELL: Expected negative total returns of 15% or more over the next 12
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TRADING BUY: Expected positive total returns of 15% or more over the next
3 months.

SECTOR RECOMMENDATIONS

OVERWEIGHT: The industry, as defined by the analyst's coverage universe, is
expected to outperform the relevant primary market index 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 over the next 12
months.

DISCLAIMER