Assumption University of Thailand

Martin De School of Management

FIN3711 Investment

Semester 2/2011

Term Project

Industry: Property and Construction

(Construction Materials)

Company: TPI POLENE PUBLIC COMPANY LIMITED

Submit to A. Marisa

Section: 402

Tongxin Li 513-5710

Patcharapol W. 521-0001

Nathasak N. 521-0121

Nguyen Hong Ngoc 521-5151

Jian Li 521-5518

MD. Asjad Hussain 521-5803

1

Executive Summary

This coursework is a part of our FIN3711 Investment subject for the semester 2/2011.

The purpose of this project is to be able to analyze on a company’s attractiveness by

starting with finding information about the economic outlook, followed by analyzing the

industry level to the analysis of the company and its stock valuation to determine the fair

value.

In this case, we’ve been assigned TPI Polene Public Company Limited (TPIPL) from the

Construction materials sector. TPIPL is Thailand’s third largest cement manufacturer and

hence we would be analyzing its performance to determine if we should buy or sell its

stock.

1. Review the macro economy and forecast the interest and inflation rate for the next

period.

2. Analyze the profitability of the construction and materials sector via Porter’s Five

Forces model. These five forces of competition include competition from

substitutes, competition from entrants, competition from established rivals and the

bargaining power of suppliers and buyers.

3. Construct qualitative analysis of the company based on the information found by

using SWOT analysis.

4. Perform quantitative analysis from the 3-year financial statements (times-series

analysis) of the company to find the appropriate ratios needed to analyze the

firm’s performance.

5. Obtain the required rate of return by using information of the market index and

stock price from the last 60 months and their percentage change to get the beta,

the real risk free rate from 10 years real GDP growth rate and forecasted interest

rate from the economic outlook.

6. Find the intrinsic value of the company’s stock through Discounted Cash Flow

models and Relative Valuation Techniques.

7. Include recommendations for TPI Polene.

8. Apply Technical Analysis to help determine whether to buy/sell the company’s

stock.

2

Table of Contents

Part I: Economic Outlook 5

Part II: Industry (Sector) Analysis 14

- Five Competitive Forces

Part III: Company Analysis and Stock Valuation 21

3.1 Company Analysis

- Qualitative analysis on a company (SWOT analysis) 21

- Quantitative analysis on a company (Financial statement and ratio analysis) 25

3.2 Stock valuation 37

- Required rate of return (CAPM) 37

- Valuation of stock 39

- Recommendation 41

3.3 Technical analysis 42

Supplementary 46

- References

3

Page

Page

FIGURE 1.1: GDP forecasting 2012-2013 5

FIGURE 1.2: Detailed Summary of Forecasts 6

FIGURE 1.3 Production Index 7

FIGURE 1.4 Government spending details 8

FIGURE 1.5 Foreign book orders vs. Export condition (3-mth expected) 9

FIGURE 1.6 Thailand Imports 10

FIGURE 1.7: Headline Inflation Projection 2012 10

FIGURE 1.8: Core Inflation Projection 2012 11

FIGURE 1.9: Thailand Interest Rate 12

FIGURE 3.1: Balance Sheet 25

FIGURE 3.2: Income Statement 27

FIGURE 3.3: TPIPL Income Statement 35

FIGURE 3.4: SCCC Income Statement 35

FIGURE 3.5: TPIPL Long-term Trend 43

FIGURE 3.6: TPIPL Medium Trend 44

FIGURE 3.7: TPIPL Short-term Trend 45

FIGURE 3.8: Looking Closely into Short-term Trend Using 46

Moving Average Lines

TABLE 2.1: Companies’ Total Assets 15

TABLE 2.2: Market Share of Industry 18

TABLE 3.1: LIQUIDITY RATIO 27

TABLE 3.2: EFFICIENCY RATIO 28

TABLE 3.3: FINANCIAL LEVERAGE RATIO 30

TABLE 3.4: FINANCIAL LEVERAGE RATIO –ADJUSTED 31

TABLE 3.5: PROFITABILITY RATIO 31

TABLE 3.6: PROFITABILITY RATIO—ADJUSTED 32

TABLE 3.7: DUPONT ANALYSIS 33

TABLE 3.8: Standard deviation of TPIPL 35

TABLE 3.9: Table Standard Deviation of SCCC 36

TABLE 3.10: Financial Risk Analysis 37

TABLE 3.11: Percentage Change in Index 37

TABLE 3.12: Percentage change in Thailand real GDP 39

4

Part I: Economic Forecasting

FIGURE 1.1: GDP forecasting 2012-2013

(Source: Bank of Thailand)

Under the baseline scenario, the Thai economy is likely to grow at low rate in 2011 due

to the severe impact of the flood. The economy is then projected to rebound in 2012, as

domestic demand picks up with reconstruction efforts, before external demand steps up

its contribution in 2013.

Office of the National Economic and Social Development Board (NESDB) reported that

Thailand’s 3Q11 GDP expanded by 3.5% year on year, and 0.5% quarter on quarter.

Growth was lower than the market’s expectation of 4.5% year on year. GDP is expected

to contract 1.9% year on year in 4Q11. NESDB forecast Thailand’s economy to grow

1.5% this year, revised down from its previous forecast of 3.5-4.0%. However, it kept its

2012 growth forecast at 4.5–5.5%.

Thailand's central bank slashed its 2011 economic growth forecast to 2.6% from 4.1%

because of flooding while still keep the growth in the year 2012 at 4.1%, as recovery

from the preceding years low level of output will likely offset with the global economic

slowdown.

5

Forecasting of GDP’s Components

The Thai economy in 2011 Q4 is poised to contract from the previous quarter, largely

owing to the flood incidents starting late in the third quarter. The widespread floods have

disrupted not only agricultural production in the Northern and the Central Region, but

also activity in major industrial estates in Phra Nakhon Si Ayutthaya and Pathum Thani.

These industrial areas, in particular, serve as major production bases for automobiles and

parts, electronics products, and hard disk drives.

FIGURE 1.2: Detailed Summary of Forecasts

(Source: Bank of Thailand)

The Thai economy in 2012 will recover from the flood on the back of domestic demand,

while external demand is likely to soften with global growth prospect.

- Economic activity is projected to return to normal condition in 2012 Q3

- Economic recovery will be supported by reconstruction and replacement spending,

improved investors’ confidence, quick rebound on private consumption, and fiscal

stimulus.

Consumption [C]

 The Democrat Party has promised to raise farmers' income by 25 per cent through an

income guarantee scheme. Pheu Thai Party has promised farmers a hefty Bt15,000 a

tonne for paddy if it wins. That is 40 per cent higher than the Bt11,000 farmers obtain

currently from the income guarantee program, a scheme implemented for two years by

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the Democrat-led coalition. Higher income will stimulate higher consumption of

household.

(Source: http://www.nationmultimedia.com/2011/05/30/opinion/Policies-to-woo-farmers-

will-hurt-them-the-country-30156523.html)

Private consumption expanded 1.7 percent month on month, after contracting for three

straight months in 2012. These improvements were due mainly to recovery work and the

government's post-flood rehabilitation initiatives that have led to higher automobile sales

and fuel consumption, while imports of capital and consumer goods also rose

substantially, along with cement sales and value-added-tax collections.

"To keep pace with the market competition, the bank decides to slash interest rates for

loans and deposits in line with the Bank of Thailand's monetary policy," said SCB

President Kannikar Chalitaporn. Then people would like to borrow more and spend more.

(Source: http://www.nationmultimedia.com/business/Siam-Commercial-Bank-cuts-rates-

30176444.html)

Private Investment [I]

FIGURE 1.3 Production Index

(Source: Bank of Thailand)

Improved confidence will support investment recovery and help bring manufacturing

back to normal levels. After October of 2011 that the flood had happened, the production

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index increased to 53.1. It shows high confidence of investors that would like to go back

and invest to recovery their business. In particular, investment momentum will benefit

from reconstruction and repair of production bases damaged by the floods, and also from

businesses, preparation to accommodate the anticipated pick-up in demand after the

floods recede.

Government Spending [G]

Government spending plays a crucial role on economic recovery in 2012.

FIGURE 1.4 Government spending details

(Source: Bank of Thailand)

Government will spend 400 billion Baht budget deficit in the fiscal year 2012, as the

graph showed the consumption will expand by 10.4% year on year. General government

final consumption expenditure (formerly general government consumption) includes all

government current expenditures for purchases of goods and services (including

compensation of employees). It also includes most expenditure on national defense and

security, but excludes government military expenditures that are part of government

capital formation. A new project of water management scheme that could improve on

levee and drainage system, develop database and warning system, and develop flood

prevention and mitigation system in critical and flood-prone areas will be introduced over

3years and expense 350 billion Baht. The project contributes 1.8% direct expenditure to

help economic recovery in 2012. Moreover, Government’s stimulus both through direct

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spending and measures – including the rice pledging scheme, the minimum wage raise,

and the reduction in corporate income tax.

Net Export [X-M]

Exports will gradually resume their pre-flood trend in Q3 in line with manufacturing

production, though global demand remains weak.

FIGURE 1.5 Foreign book orders vs. Export condition (3-month expected)

(Source: Bank of Thailand)

Exports will improve with the revival of manufacturing production after the flood

receded, especially for the high-tech sector, with its production bases yet to recover fully

from the floods and advanced economies, demand expected to soften with the global

economic slowdown, but will be partially offset by the slowdown in trading partners’

demand. As the data showed, the order of export has increased to 54.3 and export has

increased to 55.6 that have much more capacity to fulfill the demand on December after

flooding. With the production ability is recovering at this moment, the export ability will

increased as a trend.

9

FIGURE 1.6 Thailand Imports

(Source: www.tradingeconomics.com/ Bank of Thailand)

Imports contains machinery and parts, vehicles, electronic integrated circuits, chemicals,

crude oil and fuels, iron and steel are among Thailand's principal imports. Its main import

partners are: Japan, China, European Union, United States and Malaysia. Imports has

decline at end of year 2011 due to the flood situation that less consumption or demand in

domestic. At beginning of 2012, the data shows increased the demand of imports due to

the recovery of economic situation by post-flood stimulates formulated by government to

increased high consumption and high demand of goods and services. With the trend the

imports will increase.

Inflation forecastingFIGURE 1.7: Headline Inflation Projection 2012

10

(Source: Bank of Thailand)

Downside risk:

- Lower demand pressure if economic growth turns out lower than expected

Upside risk:

- Elevated crude oil price due to the conflict in the Middle East

- Accelerated spending and rising inflation expectations due to government measures

FIGURE 1.8: Core Inflation Projection 2012

(Source: Bank of Thailand)

Downside risk:

- Softer oil commodity prices in the world market

- Weak demand pressure in case of slowdown in trading partners’ growth

Upside risks:

- Greater pass-through of production costs to consumers during recovery

- Accelerated spending and rising inflation expectations due to government measures

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Inflation pressures in 2011 Q4 are likely to lessen thanks to the government’s reduction

on oil fund levy and the extension of cost-of-living subsidy measures beyond the

scheduled termination at the end of October. Under the baseline scenario, the Bank of

Thailand projects headline inflation to be 3.8% in 2011, slightly lower than the previous

projection. Core inflation forecast – which excludes energy and fresh food prices – stays

unrevised at 2.4%, as pass-through of food prices from costs to inflation in 2011 Q3 was

greater than expected.

Inflation pressures in 2012 will remain elevated at 3.5% for headline inflation and 2.5%

for core inflation despite the fact that pressures from oil and commodity prices should

subside with the global demand slowdown. Pressures from rising input costs are bound to

rise due to a number of factors.

First, domestic labor costs will rise with the minimum wage hike at the rate of 39.5

percent starting in April 2012. Second, rice prices will rise due to the rice pledging

scheme. And third, transportation costs should also rise if the government reintroduces

the oil fund levy on gasoline and gasohol, as well as the excise tax on diesel fuel

(terminated in August 2011).

Besides these cost-side factors, demand pressures are also likely to build up amid

recovery from the flood, pressuring inflation in 2012 further to the upside.

Interest forecasting

FIGURE 1.9: Thailand Interest Rate

(Source: www.tradingeconomics.com/ Bank of Thailand)

The benchmark interest rate in Thailand was last reported at 3 percent. In Thailand,

interest rate decisions are taken by The Bank of Thailand’s Monetary Policy Committee.

12

The Monetary Policy Committee (MPC) assessed that the risk of a global economic

slowdown has increased while consumer and business confidence remained weak. With

upside inflation risks expected to be limited, the current accommodative monetary policy

can provide further support to economic restoration and investment. The MPC therefore

voted 5 to 2 to reduce the policy rate by 0.25%, from 3.50% to 3.25% per annum, with 2

votes in favor of a 0.50% reduction. But when the Thai economy is restored, the upside

risk of inflation in 2012 could make the MPC to impose a higher policy rate according to

the rise in inflation itself.

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Part II: Industry (Sector) Analysis

Porter’s Five Forces Model

The industry/sector intended to analyze is the construction materials (CONMAT). The

firms in this industry are producers and distributors of materials used in building, both in

private and government sector. In this construction materials segment, the dominating

players are Siam Cement Plc (SCC – mostly known as SCG), Siam City Cement Plc

(SCCC), TPI Polene Plc (TPIPL), and Tisco Asphalt Plc (TASCO)

Now the framework implemented to analyze the sector is Porter’s Five Forces model.

This framework is divided into 5 parts as below.

Threat of New Entrants/ New Competitors (Low)

Profitable markets that yield high returns will attract new firms, which eventually will

decrease profitability for all firms in the industry except some kinds of barriers to entry

exist. However we’ve concluded that there are fewer chances for new entrants to

penetrate the construction materials sector due to the existing high entry barriers.

Below are some major factors of barriers to entry;

1. Economies of scale (high) – With their dominance in the construction materials

segment, big players such as SCC enjoy superior cost advantages as they operate on a

large scale basis with economies of scale in utilization of assets that proves to be

intimidating and unavailable to new entrants. Without economies of scale new firms are

deterred to enter because they would be forced to come in on a large scale or to accept a

cost disadvantage.

2. Capital requirements (high) – The need to invest substantial financial resources

in Construction materials segment in order to compete creates a barrier to entry. Capital

is necessary not only for fixed facilities but also for customer credit, inventories, and

absorbing start-up losses. Thus new firms could be discouraged to enter due to the big

financial investment.

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TABLE 2.1: Companies’ Total Assets

Company Total Assets (Million Baht)SCG (excluding chemicals and paper product line) 85,814SCCC 25,934TPIPL 71,874TASCO 14,065Source: www.set.or.th

The capital more than 1,000 million baht is almost impossible for normal firms to

raise fund. On the other hand, it is not much the problem for very large multinational

firms.

3. Product differentiation (medium to low) – Construction materials offer low-

differentiated products such as steel, cement and concrete to consumers so there can be

indifferent views when selecting the firms to purchase for those basic products. For sure,

the quality and specific characteristics of each material may be different, but it is possible

and easy to substitute when technological development(e.g. synthetic materials). For

example, not too long time ago, lumbers are one of the most important construction

materials. Today, many kinds of new materials (mostly synthetic) can replace lumbers as

Thai regulation is stricter in deforestation activities.

4. Brand Loyalty (high) – Brand identification creates a barrier by forcing entrants

to spend heavily to overcome customer loyalty because established brand is perceived

with quality provided. It would be a long way to go for new entrants to be able to develop

a trusted brand among customers who have become too acquainted to Siam Cement

Group.

Hence the threat of new entrants is low for the construction materials sector

because of high capital requirement and economies of scale, high brand loyalty and

moderate to low product differentiation.

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Threat of Substitute Products or Services (Low)

The existence of products and services outside of the boundaries of the industry

analyzed can increase the customer’s tendency to switch to such alternatives. For

example, the substitutes for Coke and Pepsi are water, tea, or coffee.

The presence of substitute products can lower industry attractiveness and

profitability because they limit price levels. The Construction material sector faces less or

very unlikely competition from substituting products. It is like drinking water;

homogeneous but difficult to substitute due to specific uses. Nevertheless it should be

noted that construction materials’ threat of substitutes can be triggered by developments

in technology advancement. The emergence of communication technologies with the

likes of hot-decking and teleworking could replace the needs or influence the demands of

infrastructure and buildings as a substitute.

Moreover, another common construction material is wood. Cement and wood

have the same function. Nowadays, a use of wood are more and more limited due to the

regulation of deforestation. Synthetic wood is also another substitute. Fortunately,

manufacturing of synthetic wood need some cement (e.g. Conwood). So we implies that

the demand of cement will gradually increase.

Bargaining Power of Customers/ Buyers (Medium to High)

This is the ability of customers to put the firms under pressure, which also affects

the customer’s sensitivity to price changes. Customers have obstacles from changing

brand, such as high customer switching costs (It is very difficult to replace steel and

concrete with other materials when building a property).

There are only few big main players and it seems that they have enough power to

dominate the price of products. According to the last flood, they help Thai people by not

raising the price of their own goods. In order to do that, you really have to be a big player

otherwise the price war will occur as the demand for construction material increases.

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The quality of various products is outstanding. As a result, local customers have

not changed their loyalty for a long time according to annual reports of leading

companies (i.e. TPIPL, SCC, SCCC,). Customers (mostly well-known corporations like

LANNA, CONWOOD, etc.) do not seem to be sensitive to price. They emphasize on

quality instead and these companies focus on the quality of products for a long time

(more than 10 years). Besides, these companies also have good corporate social

responsibility (e.g. local social development, environment friendliness, green

manufacturing process, etc.) so they all have strong brand images. However, these

leading companies in construction materials export in large amount so their international

risks (for example; political risk, shipping risk, currency risk, commodity price risk, etc.)

increases as the international sale increases.

Hence the bargaining power of buyers is medium to high because of a number of large

volume buyers and customer’s high switching costs.

Bargaining Power of Suppliers (High)

Suppliers of raw materials, components, labor, and services to the firms can be a source

of bargaining pressure over the firms, e.g. suppliers can refuse to work with the firm or

change excessively high prices for unique resources.

Most leading companies, such as SCCC, purchase raw materials from various local and

international suppliers (e.g. Chemical substances form U.S. for SCC). Eventually, these

companies focus on international suppliers, mostly no substitute inputs according to

contractual constraints and specific qualification of materials. Before purchasing

materials, the companies carefully select the source of materials in order to maximize

quality of products. So it is quite obvious that if the main international suppliers have

some problems in supplying inputs, companies will face a shortage. These companies

cope with this problem by inventory management. Degree of differentiation of inputs

differs amongst each company. Fluctuation in material prices always happens, such as

crude oil for TASCO, coal for TPIPL, SCCC, and SCC, petroleum products like

naphthalene, olefins, etc. In conclusion, the whole industry depends on these suppliers to

provide quality and standardized materials and most companies do not have much

bargaining power to manage supplies.

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Rivalry of Existing Firms (High)

TABLE 2.2: Market Share of Industry

Company Market SharesSCC 38%SCCC 27%TPIPL 18%ASIA Cements 9%

Source: http://www.siamturakij.com/home/news/display_news.php?news_id=1497

http://www.scb.co.th/LIB/th/article/ktb/data/k8-38.html

In some industries, firms compete aggressively – sometimes to the extent that prices are

pushed below the level of costs and industry-wide losses are incurred. In others, price

competition is muted and rivalry focuses on advertising, innovation, and other non-price

dimensions.

1. Concentration and Diversity of Competitors (high) – Seller concentration refers

to the number and size distribution of firms competing within a market. It is most

commonly measured by the concentration ratio: the combined market share of the leading

producers. The more number of leading players there are, the more the intensity of

competition.

There are only few firms that have the leading market shares. It means that the

competition type is Oligopoly which competition within an industry is high.

The extent to which a group of firms can avoid price competition in favor of collusive

pricing practices depends upon how similar they are in terms of origins, objectives, costs,

and strategies. If the firms with different origins (i.e. different countries) are gathered to

compete with each other, some are clearly having absolute cost advantage and making the

competition more intense.

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2. Product Differentiation (low) – The more similar the offerings among rival

firms, the more willing customers are to substitute and the greater the incentive for firms

to cut prices to increase sales.

The main types of construction materials are concrete, cement, metals, wood, and

plastics. Each one is very homogenous in nature but its specification for usage is

somewhat different, for example, different types of structural steel cannot be easily

replaced. However, the format of the material’s specification is universal so two firms in

different countries can produce the same construction materials, for instance, the same I-

beam steel bars. This means customers are relatively easy to switch between producers if

the same specification of materials is available and firms are relatively easy to cut prices

to boost sales.

3. Exit Barriers (high) – Barriers to exit are costs associated with capacity leaving

an industry. Barriers to exit may be substantial where resources are durable and

specialized, and where employees are entitled to job protection.

To sum it up, all companies cannot safely exit easily due to many factors, such as a large

number of expensive capital goods (e.g. high technological machines) which makes the

liquidation process very difficult. Moreover, those goods are used specifically, so the

liquidity natures of those assets are very low. The debt issue is also another immense

setback. Long-term debt is paramount and also the most familiar one that we can

obviously see from the financial statement of the leading companies. If the firms want to

exit the market, they would have to settle all short-term and long-term debt immediately.

The high barrier to exit places a high cost on abandoning a product and hence firms are

unable to leave the industry when the situation is not profitable anymore. If this happens,

the competitive rivalry will increase enormously as firms have no other choices but to

fight vigorously.

4. Cost Conditions: Scale Economies and the Ratio of Fixed to Variable Costs

(high) – When excess capacity causes price competition, how low will prices go? The

key factor is cost structure. Where fixed costs are high relative to variable costs, firms

will take on marginal business at any price that covers variable costs.

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As mentioned above, the firms in construction material industry have very high fixed

costs in their cost structure. We can divide these costs into two categories: operating

leverage costs and financial leverage costs. The operating leverage results from high

investment in long-term fixed assets and the financial leverage comes from the heavy use

of debt financing. Most firms in this industry have both in an extreme way especially for

the financial leverage (the average firms have more than 2.0 in debt to equity ratio).

When firms have excess capacity and high fixed to variable cost ratio, they tend to

produce more as much as possible to lower their cost per unit. If many firms do this

simultaneously, they are making a price war. This means that even though firms in the

industry now are competing for quality of products, there is a considerable chance that

devastating price war can occur throughout the industry, destroying the profitability of all

firms.

In conclusion the rivalry among existing firms is high due to high concentration of

players, high fixed costs and exit barriers and low product differentiation.

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Part III : Company Analysis and Stock Valuation

3.1 Company Analysis

Qualitative Analysis: SWOT Analysis

1. Strengths

They are one of the most important internal factors that a company possesses and

they pave the way for the company’s success over the long-term. Strengths

generally give a company a competitive edge over its rivals in its respective

industry. TPI Polene possesses a number of strengths that play a crucial role in its

successes:

High Product Quality that Meet Global Standards

All the Company’s cement products meet the ISO/TIS certifications of industrial

standards, ASTM Industrial Standards and EU Industrial Standards. Besides, TPI Polene

(TPIPL) is the first cement manufacturer in Thailand, to have been awarded ISO 9002

Certification from the International Standard Institute for surpassing industrial and

environmental protection standards. This enables TPIPL to export cement to California

State, where surrounding communities are highly aware of the importance of

environmental conservation.

High Operation Efficiency

With technologically advanced machinery, TPIPL operates three cement production

plants in a single and strategic location, adjacent to a limestone quarry, and an efficient

transportation distribution network throughout the country. This gives TPIPL its low-cost

competitive advantage over its competitors.

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Market Share and Production

TPI Polene is the third largest cement manufacturer in Thailand and maintains the highest

market share for mortar cement in the domestic market. In addition, TPIPL are the second

largest ready-mixed concrete manufacturer in the country.

As for TPIPL’s plastic resin business, the Company has strengthened its

position as a leading player, with the largest market share for LDPE and EVA

in Thailand. In addition, the Company is the sole producer of EVA in Thailand-and one

of the few producers of EVA in the world who can develop proprietary EVA production

technology.

2. Weaknesses

Weaknesses are the internal factors that inhibit a company’s operations and

adversely affect their chances of being successful in its industry. Weaknesses

place a firm at a relative disadvantage to the competition. TPIPL possesses a few

weaknesses:

Low Financial Flexibility

Financial flexibility refers to a firm's ability to take advantage of unforeseen opportunities

or their ability to deal with unexpected events depending on the firm's financial policies

and financial structure. TPIPL has a history of low financial flexibility, and concerns

raised in the 2003 auditor's report about the total amount of outstanding debt, and several

unresolved lawsuits and contingent liabilities, have caused the company's financial

position to deteriorate in the event of adverse rulings by the court, negatively affecting

the company's rating.

Window Dressing Issues

Due to its vast amounts of outstanding debt and high accounts payable, TPIPL have

supposedly relied on unethical actions through window dressing, where they have

deceitfully altered information in their financial statements to better appeal to investors,

resulting in intransparency in the information conveyed to the public. This has negatively

affected the company’s rating.

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3. Opportunities

Opportunities are crucial to firms because they are the external situations and

probabilities that can give the firm a chance to capitalize on either favorable

economic conditions by increasing sales and earnings or take advantage of other

company’s weaknesses and setbacks. TPIPL can take advantage of a few

opportunities:

Thai Economic Recovery

As the Thai economy slowly looks to recover from its flood-related ordeal last year, the

increasing demand for concrete and cement in the domestic market as a result of

prospective demand in real-estate products could give TPIPL an opportunity to expand its

production and thereby significantly increase its sales and earnings revenue.

Barriers to Entry

Due to the risky nature of the business coupled with a very high initial outlay

requirement, TPIPL don’t have to worry much about future competitive threats and can

use its reputation in terms of sustainable market share to attract future investors giving it

the opportunity to raise funds to financially support its day to day operations. Also the

low threat level probability could help sustain TPIPL’s monopoly of being the sole

manufacturers of EVA in Thailand.

4. Threats

These are the external factors that could inhibit a company’s success by forcing

the company to face tremendous losses, lose market share or even go out of

business. Every company looks to overcome and prepare for threats in order to

“stay alive” in its field of business. A few threats could significantly hamper

TPIPL’s operations and profitability:

Industry Cycle Threats

The cyclical nature of both the cement and petrochemical industries is a major threat

factor to TPIPL. The volatility of the industry life cycle poses risk in terms of sales and

profitability declines whenever the Thai economy slips into a recession and could also

cause the company’s operating performance to fluctuate.

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Competitors

Although TPI Polene is the third largest cement manufacturer in Thailand and maintains

the highest market share for cement in the domestic market, there are a number of

competitors in the market. They are a competitive threat to TPIPL. In addition, price

competition among cement producers due to excess supply and relatively high raw

material costs will cause the profit margin of TPIPL to remain unsatisfactory.

Adverse Exchange Rate Fluctuations

Besides domestic production, TPIPL is noted for being one of the largest Thai exporters

of concrete, cement and EVA with the primary importers being the USA, Canada and

Europe. Adverse fluctuations in the exchange rate, particularly the appreciation of Thai

baht could hamper TPIPL’s exports and thus its revenues from these exports. In fact,

TRIS Rating reported that the flotation of the Thai baht, which resulted in the de facto

devaluation, coupled with the contraction in demand for cement since the onset of the

Asian financial crisis in 1997, badly hurt TPIPL's financial profile.

Recent European Crisis and Slow Growing US Economy

Outside problems such as the recent European crisis and slow growing U.S. economy

could threaten TPIPL’s exports of cement, EVA and LDPE and thus its export earnings.

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Quantitative Analysis: Ratio analysis

FIGURE 3.1: Balance Sheet

http://www.setsmart.com/ism/financialstatement.html

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FIGURE 3.2: Income Statement

http://www.setsmart.com/ism/financialstatement.html

TABLE 3.1: LIQUIDITY RATIO

Liquidity Ratio 2011* 2010 2009

Current 1.59 0.63 0.52

Quick (Acid test) 0.43 0.26 0.22

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Managers and creditors must closely monitor the firm's ability to meet short-term

obligations in the near future by using the current sources of funds. The current and quick

ratios are used to measure the firm’s internal liquidity.

The result of the time-series analysis show that TPIPL‘s liquidity status has been

increasing over the past three years. For the Current Ratio, the year 2010 saw that the

firm’s ability to pay short term debt rose slightly over 2009 while 2011 has shown a

significant improvement to 1.59, indicating that for every baht in current liabilities, the

firm has 1.59฿ in current assets that can be converted to cash in the short term. Another

indicator of a firm’s short term liquidity position is its Quick or Acid test ratio. The quick

ratio takes only the most liquid assets of the firm into account (cash, marketable

securities and net receivables) to pay immediate debt without using inventory(the least

liquid asset). It can be seen that the firm has rising numbers of quick ratio, following the

increasing trend of the current ratio. However it must be noted that the firm’s current

ratio is significantly higher than its quick ratio, which is a clear indication that the

company’s current assets are dependent on sales of inventory. Additionally, the firm’s

quick ratio in 2011 still hasn’t reached 1.0 which further clarifies that the firm might have

to issue stock or bond if the company’s sales decline as they have insufficient liquid

assets to meet short term needs. This proves to be a weakness of the firm. Thus we can

conclude that although the TPIPL firm’s current ratio has improved significantly, its

ability to meet short term obligations is still limited by the slow-growing quick ratio (the

firm has built up too much inventory) and hence would need to convert inventories to

cash or account receivables to improve its liquidity position.

2011* Data obtained from TPIPL’s financial statements

http://www.tpipolene.co.th/ENG/investment_2.html

TABLE 3.2: EFFICIENCY RATIO

Efficiency Ratio 2011 2010 2009

Accounts Receivable Turnover 13.13 12.94 12.82

Average Collection Period 27.42 27.82 28.09

Inventory Turnover 2.29 3.66 3.59

27

Inventory Processing Period 157.37 98.45 100.15

Accounts Payable Turnover 8.82 8.86 8.74

Accounts Payable Payment Period 40.83 40.62 41.18

Cash Conversion Cycle 143.95 85.65 87.06

Fixed Asset Turnover 0.40 0.38 0.35

Total Asset Turnover 0.34 0.34 0.31

Efficiency ratio measures the firm’s efficiency in using its resources (investments, assets)

to generate sales. The Accounts Receivable Turnover ratio measures the number of times

the firm can collect cash from accounts receivable within a year. The figures from the

past three years data show that accounts receivables increase slightly in 2010 and rose

considerably in 2011, indicating that the firm is more efficient in collecting its accounts

receivables in the past year. This is further illustrated in the Average Collection Period

ratio which represents the average number of days the firm uses to collect accounts

receivables; 2011 saw a small drop in the average collection period ratio showing the

firm takes lesser time to collect cash from credit sales of accounts receivables. Thus these

two ratios confirm that TPIPL is quite efficient in generating sales from accounts

receivables showing that the firm has a good accounts receivables monitoring system in

terms of billing clients and receiving prompt payments. This is considered as strength of

the firm.

The Inventory Turnover ratio represents the number of times inventories are turned-over

or replaced during a year. Not surprisingly, the ability of TPIPL to convert inventory into

sales has declined significantly which conforms to the above analysis of the quick ratio

where we’ve concluded that the firm held too much inventory (there is a decrease in the

number of times inventories are being replaced). It should also be noted that the firm

would need to spend heavily on the cost of carrying inventory, namely storage cost.

Correspondingly, the Inventory Processing Period ratio shows amplification in the

processing time of inventories, implying that TPIPL had to keep inventories on hand

twice the time it did in 2009 and 2010. This is considered as a weakness of the firm.

The Accounts Payable Turnover ratio shows investors how often payables are turned over

during a year and also demonstrates how the firm handles its outgoing payments. The

ratio exhibits a stable trend which means that the firm is making prompt payments to pay

28

off its supplier’s overtime which enhances the credit worthiness of the firm. This is

further shown in Accounts Payable Payment period ratio which shows that TPIPL take

approximately the same number of days as it did in 2009 and 2010 to pay its trade

creditors. Thus the firm is paying its bills at about the same speed. This is considered as

strength of the firm.

The Cash Conversion Cycle (CCC) combines information from the receivables turnover,

inventory turnover, and accounts payable turnover. This ratio can be used to measure the

management effectiveness and illustrates the duration of time it takes a firm to convert its

activities requiring cash back into cash returns.

CCC = Average Collection Period + Inventory Processing Period - Payables Payment Period

The figures show that the length of the cycle remained stable for 2009 and 2010 but

increased dramatically in 2011 to nearly twice the number of days. In this case the firm

has cash tied up for 144 days within the operations. Thus CCC further proves that TPIPL

have too much inventory built up (possibly outdated ones) that cannot be sold. This is

considered as a weakness of the firm.

The Fixed Asset Turnover ratio measures the firm’s ability to utilize its investment in

fixed assets to generate sales. For TPIPL, the ratios fluctuate very little with the final

increase in 2011. This implies that the firm is slightly more efficient is using its fixed

assets to generate sales but is yet to improve on its overall efficiency. Another ratio, the

Total Asset Turnover ratio realizes the dollar amount of sales generated from each dollar

invested. This is similar to the fixed asset turnover ratio but incorporates the total assets

of the firms to generate sales. Despite being relatively stable from 2010 to 2011, the total

asset turnover ratios are extremely low (.34 < ideal 1) showing that the firm has still has

some difficulty in using its total assets due to poor assets management. This could be

attributed to unproductive assets that the firm has been storing without generating any

revenue for the firm. This is considered as a weakness of the firm.

TABLE 3.3: FINANCIAL LEVERAGE RATIO

Leverage Ratio 2011 2010 2009

Debt Ratio 0.14 0.23 0.23

Interest Coverage 45.85 18.77 21.54

29

The Financial Leverage ratio provides an overview to a company’s method of financing

and its long-term solvency. The Debt ratio indicates the extent to which the total assets of

the firm have been financed using borrowed funds. From the first look, the firm’s debt

financing has decreased in 2011 compared to the previous two years, implying that the

firm uses lesser leverage to finance its total assets. However much of the reduction in the

total liabilities is due to a lower provision for fine in 2011, a constitution of current

liabilities. Hence this cannot be considered as a strength or weakness because it is

unclear.

The Interest Coverage ratio measures the ability of the firm to meet its interest payments

from its operating earnings. For TPIPL, a triple increase in ratio implies that the firm has

better ability to make its interest payments. However this is not due to the firm’s lesser

reliance on long-term debt financing which subsequently reduced its financing costs.

From the company’s balance sheet we can see that the amount of long-term borrowings

actually increased from 2010 together with TPIPL. In fact, the reason for higher interest

coverage is the result of the company able to book reversal of provision for fine of B

6,900.3 M as nonrecurring profit after the Appeal Court dismissed a lower court verdict,

making TPIPL wins the case.

For further analysis we need to recalculate by subtracting the nonrecurring profit from

earnings before interest and taxes to derive at the real interest coverage ratio.

TABLE 3.4: FINANCIAL LEVERAGE RATIO --ADJUSTED

Leverage Ratio 2011 2010 2009

Debt Ratio 0.14 0.23 0.23

Interest Coverage 16.27 18.77 21.54

This adjusted Interest Coverage ratio shows that TPIPL ability to meet its interest

payments has actually exhibited declining trend overtime. This means that the company

is generating lesser revenues to cover its interest payments. This is considered as a

weakness of the firm.

TABLE 3.5: PROFITABILITY RATIO

30

Profitability Ratio 2011 2010 2009

Gross profit Margin 0.27 0.23 0.22

Operating Profit Margin 0.44 0.12 0.25

Net Profit Margin 0.40 0.10 0.22

Return on Assets (ROA) 0.14 0.03 0.07

Equity Multiplier 1.17 1.29 1.31

Profitability ratios show a firm’s overall efficiency and performance. It measures how

well a company is performing by analyzing how profit was earned relative to sales, total

assets and net worth.

Gross Profit Margin ratio shows the management and ability of firm to minimize the

firm’s cost of goods sold. It is represented by gross profit to net sales. There has been an

increase in gross profit margin over time for TPIPL. This means that the firm has a

greater ability to control its cost of goods sold and can generate more gross profit from

sales. This is considered as strength of the firm.

Operating Profit Margin ratio measures the overall operating effectiveness which reflects

both cost of goods sold and operating expenses. The firm’s operating profit margin ratios

exhibited a fluctuating trend, with a decline in 2010 and soaring in 2011. The final

increase shows that the firm can control its cost of goods sold and operating expenses

well. At the same time it implies that the company has an improvement in ability to

generate operating profit from sales. This is considered as strength of the firm.

Net Profit Margin reflects the remaining portion of revenues after paying all expenses

together with the amount of net profit that can be generated from each baht of sales. The

ratio has increased significantly to 0.4 in 2011 after declining in 2010, showing a great

deal of improvement in the firm’s ability to generate net profit from sales. This means the

firm has stronger ability to control its overall expenses (cost of goods sold, operating

expenses, interest expenses and taxes). This is considered as strength of the firm.

Note: We can see that TPIPL profitability ratios have been favorable for 2011. However

since quality-financial statements must only reflect repeatable earnings, we should

exclude the reversal of provision for fine which the company realized in 2011 from total

31

earnings in the income statement. The following table reflects the firm’s real profitability

status after the reduction of gain from the nonrecurring items.

TABLE 3.6: PROFITABILITY RATIO--ADJUSTED

Profitability Ratio 2011 2010 2009

Gross profit Margin 0.27 0.23 0.22

Operating Profit Margin 0.15 0.12 0.25

Net Profit Margin 0.12 0.10 0.22

Return on Assets (ROA) 0.04 0.03 0.07

Equity Multiplier 1.17 1.29 1.31

The recalculated figures show that TPIPL’s operating profit margin, net profit margin and

its return on assets indeed improved in 2011, but not to the great extent as before

deducting the reversal of provision for fine. Hence the firm has overstated its profitability

status with the nonrecurring profit.

DuPont Analysis

DuPont Analysis is a technique that breaks down Return on Assets (ROA) and Return on

Equity (ROE) into their component parts.

Return on Assets (ROA) shows the after tax earnings of assets and is an indicator of how

profitable a company is. Return on assets ratio is the key indicator of the profitability of a

company. It matches net profits after taxes with the assets used to earn such profits.

The calculation of ROE can be derived from

1. Net Profit Margin which measures the overall profitability

2. Total Assets Turnover which indicates the level of firm’s efficiency

3. Equity Multiplier which represents the amount of debt used to finance the assets

ROE= Net Profit Margin x Total Assets Turnover x Equity Multiplier

TABLE 3.7: DUPONT ANALYSIS

DuPont Analysis 2011 2010 2009

32

ROA

Net Profit Margin 0.12 0.10 0.22

Total Assets Turnover 0.34 0.34 0.31

Equity Multiplier 1.17 1.29 1.31

Return on Equity (ROE) 0.05 0.04 0.09

Return on Equity (ROE) measures the rate of return (%) that investors earn from net

income from being shareholders of the firm. The small growth in TPIPL’s ROE can

be attributed to the following factors:

1. One of the factors that contributed to the growth of the firm’s ROE is the

slight growth in Net Profit Margin

2. The firm was able to maintain the same Total Assets Turnover ratio as 2010

but hasn’t shown improvement in utilizing its assets to generate sales.

3. The firm financed its assets with lesser proportion of debt, hence the decline

in equity multiplier for 2011.

As a result, the growth of TPIPL’s ROE is reflected mainly in its ability to

generate marginally higher profits and not from its continued low efficiency and

lower debt financing. This also implies that the firm is not necessarily performing

very well which could be attributed to the recent flood crisis in the late 2011 that

has hampered the firm’s sales. The firm needs to improve strongly in its operating

efficiency to help generate a higher return on equity for shareholders.

Quantitative Analysis: Risk analysis

Business Risk

A business risk is a circumstance or factor that may have a negative impact on the

operation or profitability of a given company, or put simply as uncertainty in a firm’s

operating income. It can be measured by standard deviation of sales revenue or the

coefficient of variation (C.V.). The two primary determinants of business risk are sales

variability and fixed costs of production. Here we will use sales variability to determine

the business risk. For this part, we will compare TPIPL risk analysis with competitor

through cross-sectional analysis.

33

FIGURE 3.3: TPIPL Income Statement

Average (X) = 22,080.28+24015.55+23257.94+23654.53

4

= 23,252.0758 Million Baht

FIGURE 3.4: SCCC Income Statement

http://www.setsmart.com/ism/financialstatement.html

Average (X) = 17,988.46+17,399.92+18,603.47+20,369.65

4

= 18,590.3745 Million Baht

TABLE 3.8: Standard deviation of TPIPL

Year (xn-X) Million Baht (xn-X)2 Million Baht

2007 402,458.25 161,972,642,993.06

34

2008 5,865.25 34,401,157.56

2009 763,473.25 582,891,403,465.56

2010 -1,171,796.75 1,373,107,623,310.56

∑ (xn-X) 2,118,006,070,926.75

n 4

n-1 3

Variance (σ2) 706,002,023,642.25

Standard Deviation (σ ) 840,239.27

TABLE 3.9: Table Standard Deviation of SCCC

Year (xn-X) Million Baht (xn-X)2 Million Baht

2007 1,779,277.50 3,165,828,422,006.25

2008 13,098.50 171,570,702.25

2009 -1,190,459.50 1,417,193,821,140.25

2010 -601,916.50 362,303,472,972.25

∑ (xn-X) 4,945,497,286,821.00

n 4

n-1 3

Variance (σ2) 1,648,499,095,607.00

Standard Deviation (σ ) 1,283,938.90

 

The coefficient of variation represents the ratio of the standard deviation to the mean.

For TPIPL, when using C.V. by comparing the average of total revenue of 2007 to 2010

with standard deviation, the result will be 3.6136% (840,239.27/23,252,075.75). Also,

the C.V of comparing the total revenue with the standard deviation, the result is 3.8054%

(840,239.27/22,080,279.00) which is not different from the average. Therefore it can be

concluded that the business risk of TPIPL is not high.

FOR SCCC, when using C.V. by comparing the average of total revenue of 2007 to 2010

with standard deviation, the result will be 6.9065% (1,283,938.9/18,590,374.5). This

means that SCCC has a higher coefficient variation compared to TPIPL. The lower the

ratio of standard deviation to the mean return is better so it can be concluded that TPIPL

has lower business risk than its competitors.

35

Financial Risk

Financial risk is risk that firm’s earnings available for shareholders may differ from

expected due to firm’s fixed financing costs.

TABLE 3.10: Financial Risk Analysis

Risk Analysis (TPIPL) 2011 2010 2009

Debt Ratio 0.14 0.23 0.23

Interest Coverage (Times Interest Earned Ratio)

16.27 18.77 21.54

Cash Flow to Long-Term Debt Ratio 0.71 1.43 5.43

Cash Flow to Total Debt Ratio 0.24 0.21 0.12

The Debt ratio shows a decline in number for 2011 because the firm had a massive

reduction in its provision for fine and hence it cannot be concluded that TPIPL uses more

proportion of equity than debt to finance its assets.

The Times Interest Earned ratio can show the ability of the firm to meet interest

payments from its annual operating earnings. For TPIPL the number decline to 16.27

times implying that the company has lesser ability to meet its interest payments than in

2009 and 2010.

Cash Flow to Long-Term Debt ratio is a coverage ratio that measures how much cash is

available to pay for long-term debt. Over three years, TPIPL has a decline in its ratios

from 5.43 in 2009 to 1.43 in 2010 and eventually 0.71 in 2011. This shows that the

company has lesser ability to meet its fixed financing costs (interest expenses) and pay

back to creditors due to a significant increase in long term debt financing. Additionally

the Cash Flow to Debt ratio provides an indication of a company's ability to cover total

debt with its yearly cash flow from operations. The company improved its ability to pay

its obligation in 2011 because of a significant reduction in current liabilities (provision

for fine set aside by the firm)

3.2 Stock Valuation

Required rate of return (CAPM method)

36

TABLE 3.11: Percentage Change in Index

Time PeriodMarket Index

(SET) %Change in SETStock Prices

(TPIPL)%Change in

TPIPLFebruary 28, 2007 1 677.13 12.2

March 30, 2007 2 673.71 -0.51% 12.2 0.00%April 30, 2007 3 699.16 3.78% 12.6 3.28%May 30, 2007 4 737.4 5.47% 13.7 8.73%June 29, 2007 5 776.79 5.34% 14.6 6.57%July 31, 2007 6 859.76 10.68% 16.7 14.38%

August 31, 2007 7 813.21 -5.41% 16.8 0.60%September 28, 2007 8 845.5 3.97% 16.2 -3.57%

October 31, 2007 9 907.28 7.31% 16 -1.23%November 30, 2007 10 846.44 -6.71% 13.3 -16.88%December 28, 2007 11 858.1 1.38% 7.45 -43.98%

January 31, 2008 12 784.23 -8.61% 6.4 -14.09%February 29, 2008 13 845.76 7.85% 7.3 14.06%

March 31, 2008 14 817.03 -3.40% 6.6 -9.59%April 30, 2008 15 832.45 1.89% 7.05 6.82%May 30, 2008 16 833.65 0.14% 6.8 -3.55%June 30, 2008 17 768.59 -7.80% 6 -11.76%July 31, 2008 18 676.32 -12.01% 5.35 -10.83%

August 29, 2008 19 684.44 1.20% 4.18 -21.87%September 30, 2008 20 596.54 -12.84% 3.2 -23.44%

October 31, 2008 21 416.53 -30.18% 2.28 -28.75%November 28, 2008 22 401.84 -3.53% 2.52 10.53%December 30, 2008 23 449.96 11.97% 3.16 25.40%

January 30, 2009 24 437.69 -2.73% 3.1 -1.90%February 27, 2009 25 431.52 -1.41% 2.88 -7.10%

March 31, 2009 26 431.5 0.00% 2.74 -4.86%April 30, 2009 27 491.69 13.95% 3.44 25.55%May 29, 2009 28 560.41 13.98% 5.1 48.26%June 30, 2009 29 597.48 6.61% 5.6 9.80%July 31, 2009 30 624 4.44% 7.1 26.79%

August 31, 2009 31 653.25 4.69% 7.75 9.15%September 30, 2009 32 717.07 9.77% 10.6 36.77%

October 30, 2009 33 685.24 -4.44% 9.6 -9.43%November 30, 2009 34 689.07 0.56% 8.65 -9.90%December 30, 2009 35 734.54 6.60% 8.85 2.31%

January 29, 2010 36 696.55 -5.17% 8.35 -5.65%February 26, 2010 37 721.37 3.56% 7.75 -7.19%

March 31, 2010 38 787.98 9.23% 8.7 12.26%April 30, 2010 39 763.51 -3.11% 8.2 -5.75%May 31, 2010 40 750.43 -1.71% 8.25 0.61%June 30, 2010 41 797.31 6.25% 10.4 26.06%July 30, 2010 42 855.83 7.34% 13.1 25.96%

August 31, 2010 43 913.19 6.70% 12.8 -2.29%September 30, 2010 44 975.3 6.80% 13 1.56%

October 29, 2010 45 984.46 0.94% 12.4 -4.62%November 30, 2010 46 1005.12 2.10% 12.2 -1.61%December 30, 2010 47 1032.76 2.75% 12.3 0.82%

January 31, 2011 48 964.1 -6.65% 10.8 -12.20%February 28, 2011 49 987.91 2.47% 11 1.85%

March 31, 2011 50 1047.48 6.03% 12 9.09%April 29, 2011 51 1093.56 4.40% 12.6 5.00%May 31, 2011 52 1073.83 -1.80% 13.1 3.97%June 30, 2011 53 1041.48 -3.01% 11.7 -10.69%July 29, 2011 54 1133.53 8.84% 13 11.11%

August 31, 2011 55 1070.05 -5.60% 12.9 -0.77%September 30, 2011 56 916.21 -14.38% 12.2 -5.43%

October 31, 2011 57 974.75 6.39% 12.9 5.74%November 30, 2011 58 995.33 2.11% 15.3 18.60%December 30, 2011 59 1025.32 3.01% 15.1 -1.31%

January 31, 2012 60 1083.97 5.72% 16.4 8.61%

Average monthly return 1.09% Beta 0.3381

Average annual return 13.85%

37

TABLE 3.12: Percentage change in Thailand real GDP

Year GDP at constant 1988 price (Billions Bt) %Change2000 3,008.42001 3,073.6 2.17%2002 3,237.0 5.32%2003 3,468.1 7.14%2004 3,688.1 6.34%2005 3,858.0 4.61%2006 4,054.5 5.09%2007 4,259.0 5.04%2008 4,364.8 2.48%2009 4,263.1 -2.33%2010 4,596.1 7.81%

2011* 3,513.5 3.10%Average 4.22%

*The average cumulative data from January - February. The rate of change is estimated by the Bank of Thailand.

Real risk-free rate = 4.42%

Expected headline inflation = 3.50%

Therefore, nominal real risk-free rate = 7.72%

CAPM=RFR+β ( Rm−RFR )

= 7.72% + 0.3381(13.85% - 7.72%)

= 9.79% (Cost of equity or ke)

Cost of Debt (kd)

We use implied cost of debt mentioned below as the firm does not issue any bonds.

TPIPL's long-term debt (including current portion) in 2011 4,600,088,000TPIPL's Interest Expense in 2011 233,331,000Implied cost of debt in 2011 5.07%Cost of Debt, after-tax (kd) 4.56%

Weighted Average Cost of Capital (WACC)

WACC = Weight of equity * ke + Weight of debt * kd

= (0.9229 * 9.79%) + (0.0771 * 4.56%)

= 9.39%

38

Valuation of stock

Discounted Cash Flow Techniques:

1.) Present Value of Dividend (DDM)

2.) Present Value of Free Cash Flow to Equity (FCFE)

3.) Present Value of Free Cash Flow to Firm (FCFF)

Required Rate of Return (CAPM)Risk-free rate 7.72%Beta 0.3381Market Return 13.85%Cost of Equity 9.79%

Weighted Average Cost of Capital (WACC)Weight of Debt 7.71%After-tax Cost of Debt 4.56%Weight of Equity 92.29%Cost of Equity 9.79%Cost of Capital (WACC) 9.39%

Growth Rate (Sustainable Growth Model)Retention Rate 52.00%Equity Reinvestment Rate 12.16%Reinvestment Rate -7.50%Return on Capital (ROC) 5.35%Return on Equity (ROE) 4.94%Growth Rate (FCFE method) 0.60%Growth Rate (FCFF method) -0.40%Growth rate (for DDM method) 3.14%Number of shares outstanding 2,019,000,000

39

Present Value of Dividend

Dividend Discounted Model (DDM)Dividend Per Share (DPS) 0.55Growth rate (for DDM method) 3.14%Cost of Equity 9.79%Intrinsic Value per share (2011) 8.30

Present Value of Free Cash Flow to Equity

Free Cash Flow to Equity (FCFE)Free Cash Flow to Equity per share 0.22Growth Rate (FCFE method) 0.60%Cost of Equity 9.79%Intrinsic Value per share (2011) 2.45

Present Value of Free Cash Flow to Firm

Free Cash Flow to Equity (FCFF)Free Cash Flow to Firm per share 1.38Growth Rate (FCFF method) -0.40%Cost of Capital 9.39%Market Value of Debt 2.28Intrinsic Value per share (2011) 11.81

Comparing Intrinsic Value of CPF to Current Market Price

MethodIntrinsic

ValueMarket Price Comparison

Present Value of Dividend (2011) 8.30 30.75 OvervaluedPresent Value of Free Cash Flow to Equity (2011) 2.45 30.75 OvervaluedPresent Value of Free Cash Flow to Firm (2011) 11.81 30.75 Overvalued

All of these values compared to the current market price of CPF, we got overvalued stock

as market price is higher than intrinsic value.

40

Relative Valuation Technique (P/E)

Relative Valuation Technique

Implied Price/Earning Ratio 4.70

Market P/E 3.26

Notes:

Market Price 15.90

Earning Per Share (2011) 4.88

Recommendations

- According to the result of using three methods of Discounted Cash Flow

Techniques:

- Dividend Discount Model (DDM)

- Free Cash Flow to Equity Model (FCFE)

- Free Cash Flow to Firm Model (FCFF)

- The result of those analyses is contradicted with Relative Valuation Technique.

- Most of those analyses indicated that Price of TPIPL Stock is OVERVALUED.

- As a result, you should sell TPIPL Stock. (Market Price > Intrinsic Value)

41

3.3 Technical Analysis

FIGURE 3.5: TPIPL Long-term Trend

If you are looking at long-term trend, in this case the 3-year period, stock price is

recently moving in the sideway even though the trend is upward for the whole 3 years. I

would suggest you to wait and see for a while because the trend can be either up or down.

Since you have already passed the buying point in October, 2011 already, the point at

which it reached resistant level, you should wait for the coming signal. But if you invest

with buy-and-hold strategy, it would have nothing to be afraid since the price will

appreciate as there has been an upward trend.

42

FIGURE 3.6: TPIPL Medium Trend

If you are considering medium-term (within a year), you can see that the current

trend is changing into bearish form. The downward trend can be substantial or the trend

will rebound and become the higher upward trend. The price itself is hitting the support

line drawn horizontally from December, 2011 so waiting to see the further movement of

prices is the best strategy for this time. We should not think that the price becomes cheap

so we should buy now because the price can become cheaper consistently.

43

FIGURE 3.7: TPIPL Short-term Trend

If focusing at the short-term trend (3-month period), it is quite obvious that the

trend is bearish now. And now it is reaching the support line as mentioned above. If we

invest at this point, the chance of loss will be large when there is a break-out of support

line. For speculation purpose, we should not buy now unless our strategy is to only look

at long-term trend.

44

FIGURE 3.8: Looking Closely into Short-term Trend Using Moving Average

Lines

Now we use moving average (MA) lines to support our technical analysis in

Short-term trend. MA line represents the average price over past period. When short-term

MA is above long-term MA, there is a bullish signal for buying stock. When short-term

MA is below long-term MA, there is a bearish signal for selling stock.

In this case, we apply MA10, MA20 and MA40. The blue line represents MA10,

the purple line represents MA20, and the red line represents MA40. From the figure, the

short-term lines (MA10 and MA20) now are below the MA40 line. This makes the

bearish signal very strong especially in short-term. If we buy TPIPL stock now, the loss

will possibly incur. But from the long-term trend mentioned earlier, this bearish signal

may or may not be strong enough to affect the bullish long-term trend.

To sum up, the technical analysis of TPIPL cannot be concluded as many signal

contradicted to each other. As the result, we focus the analysis mainly on fundamentals.

45

Supplementary

References

http://www.gotomanager.com/resources/?

menu=resources,company&m=profile&n=1&ph=1&id=788

http://www.blogth.com/blog/Financial/Marketing/8193.html

http://www.positioningmag.com/magazine/Details.aspx?id=66436

http://news.mjob.in.th/realestate/cat6/news546/

http://www.siamturakij.com/home/news/display_news.php?news_id=1497

http://www.tpipolene.co.th/Document/finance_mangement/2011-2554/LetterT/AR

%20TPIPL%202010%28t.%29S.pdf

http://www.dmr.go.th/news_dmr/data/0772.html

http://www.scb.co.th/LIB/th/article/ktb/data/k8-38.html

http://www.rmutphysics.com/charud/transparency/9/metal/4/4.files/frame.htm

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