utilities sector (water) - listed...

*The Company may be issuer of Derivative Warrants on these securities. http://research.kgi.com; Bloomberg: KGIT <GO> Please see back page for disclaimer November 30, 2011 1

Utilities sector (Water)

November 30, 2011 Thailand Overweight

Companies covered in the report

TH Eastern Water Resources

Development and Management

(EAST.BK/EASTW TB)

TH Thai Tap Water Supply (TTW.BK/TTW TB)*

1 Piyathida Vongvivathchai

2 66.2658.8888 Ext. 8856

3 [email protected]

Oasis amid the storm

Most defensive sector among the dividend plays

We see Thailand’s water sector as the most defensive among the dividend plays, even

compared to power developers. This is due to a sustainable strong dividend from

continuously increasing earnings secured under long-term concessions with the government.

The sector is an oligopoly dominated by a small number of players, namely Eastern Water

Resources Development and Management (EASTW) and Thai Tap Water Supply (TTW). The

stocks have more than ten years of concessions remaining and attractive dividend yields of

6-9% on our FY12-13F. In our view, this is a high risk adjusted return given their low market

volatility, which may be what investors need to shore up their portfolios in these market

conditions.

EASTW – Good dividend yield of 7-9% supported by secured earnings

We initiate coverage on EASTW with a rating of Outperform and a DCF based target price of

Bt8.80. It is our top pick due to its strong dividend yield of 7-9% on our FY12-13F supported

by strong earnings growth of 11-23% for FY12-13F from its concession business, increasing

net profit margin driven by its effective cost control program (from 28% in 2010 to 33% on

our 2013 forecast), and its focus on growth in its existing business. We see potential share

price catalyst from winning new major tap water concessions, which will add another

Bt0.2/share to its fair value for every new contract of 20K cum/day.

TTW – Misconception provides opportunity

We initiate coverage on TTW with a rating of Outperform and a DCF based target price of

Bt7.00. We like TTW for its undemanding valuation with a deep discount to our target price,

secured cash flow generation protected by long-term concession, good dividend yield of

6-7% on our FY12-13F, and potential upside of Bt0.5/share from increased in investment in

CK Power. TTW has underperformed the SET by 12% YTD due to what we see as a market

misconception of the threat from new competition. We believe that weaker sales volume

earlier this year was mainly caused by seasonally colder weather as per previous years. The

YTD share price weakness should provide a good investment opportunity for investors.

Target price Current Price Upside 10 EPS 11F EPS 12F EPS 11F EPS 12F EPS 11F PER 12F PER 11F PBV 12F PBV 11F Div 11F ROAERating (Bt) (Bt) (%) (Bt) (Bt) (Bt) growth (%) growth (%) (x) (x) (x) (x) Yield (%) (%)

TTW OP 7.00 5.30 32.08 0.52 0.52 0.53 (0.26) 3.29 10.3 10.0 2.4 2.3 6.3 22.5EASTW OP 8.80 6.05 45.45 0.51 0.54 0.67 6.35 23.21 11.2 9.1 1.5 1.4 6.3 13.5Sector 1.03 1.06 1.20 3.03 13.50 10.7 9.5 1.9 1.9 6.3 18.0

Thailand Utilities sector (Water)


EASTW TTWRating Outperform OutperformTarget price (Bt) 8.8 7.0Market capitalization (US$mn) 310 653Average daily turnover (US$mn) 0.13 0.93Historical dividend yield (2008-2010 average) 6.5% 4.2%Dividend pay out ratio (2008-2010 average) ~70% ~65%Historical EPS growth - Three year CAGR (2008-2010) 13.70% 22.90%Forecast EPS growth – Three year CAGR (2011-2013) 13.8% 2.3%Key business Raw water Tap water Key area of service Eastern seaboard Nakonpathom, Samutsakorn, and Pathumthani

province (vicinities of Bangkok)

Remaining years of key concessions 12 years 13, 18 yearsRaw water: 245m cumTap water: 59m cum

Growth strategy Domestic water business Power business, renewable energy, wastewater management, and tap water

Key catalyst Winning new tap water concession

Resolution of outstanding dispute on sales agreement in TTW’s favour

Key risk Government intervention in capping tariff

Renegotiation of sales contract to less favourable terms

Good secured earnings growth with strong dividend of 7-9% on

our FY12-13F

Prefer less than EASTW due to its lower growth prospects

A natural monopoly in the eastern seaboard, Thailand’s

industrial hub

Share price overhang from outstanding dispute…

Protected by more than ten years of concession

…but hard to ignore its good dividend of 6-7% on our FY12-13F, secured earnings protected by

concession over the next ten years, and undemanding valuation

Increasing net profit margin and ROCE

Focus on growth in its core business

The share price has fallen 17% YTD vs. SET 5% and EASTW 6%

Inexpensive valuation

2010 sales volume Tap water: 245m cum

Comments

EASTW Is Our Top Pick

We initiate coverage on EASTW and TTW with ratings of Outperform. EASTW is our top pick due to its good dividend, strong earnings growth,

improving margin, and focus on growth in its existing business rather than diversifying into virgin areas.

Figure 1: Company comparison

Source: Company data; KGI Securities (Thailand) estimates



PTW(98% owned by

TTW)

Type of water Raw water Tap water Tap waterService Area Eastern seaboard

(namely Rayong, Chonburi, and Chacheongsao

province)

Three districts in Nakonpathom province

and two districts in Samutsakorn province

Six districts in Pathumtani Province

Concession granted by Ministry of Finance Ministry of Natural Resource and Environment

Ministry of Interior

Commencement date 01-Jan-94 11-Mar-05 13-Jan-00Duration (Years) 30 25 25Years remaining 12 18 13

Company TTWEASTW

Rate The Sector Overweight

We initiate coverage on the sector with a rating of Overweight with

EASTW as our top pick. We see Thailand’s water sector as the most

defensive among the dividend plays, even compared to power

developers. This is due to a sustainable strong dividend from

continuously increasing earnings secured under long-term

concessions with the government.

Our bullish case on EASTW is based on its strong EPS growth on our

2012 full year forecast of 23%, a high dividend yield of 7-9% from

its secured and increasing cash flow, its focus on growth in water

business, and its potential to benefit from the opening of new tap

water concession as well as the relocation of industrial customers to

its service area in the eastern seaboard following the flooding in the

central region.

Attractive Dividend With Secured Earnings

At current prices, we forecast an attractive dividend yield of 6-9%

for the two stocks on our FY12-13F. This is based on i) our forecast

EPS three-year (2011-2013) CAGR of 14% for EASTW and 2% for

TTW; and ii) dividend pay out ratio of 70% for EASTW and 65% for

TTW, based on their three year historical average (2008-2010).

Figure 2: Rising yield on rising DPS

DPS, Bt/share (LHS); dividend yield, percent (RHS)

Source: Company data; KGI Securities (Thailand) estimate

Thailand’s water sector is favored for its good dividend from secured

earnings protected by long-term concession. Both stocks

historically provided high yields of 3-9% over the past three years

(2008-2010), which provides a yield gap of 1-7% compared to

one-year Thai T-bill over the same period. Over the past three

years (2008-2010), EASTW’s average dividend yield was 6.5% (vs.

TTW’s 4.2%).

Figure 3: EASTW and TTW’s dividend yields provided a yield

gap of 1-7% to one year Thai T-bill

Dividend yield, percent

*TTW was listed in 2008

Source: SET; KGI Securities (Thailand) estimates

Protected By Long-Term Concessions

Tap water concession and raw water pipeline management

concessions are provided by the government to operators like

EASTW and TTW on a long term basis with a level of exclusivity. As

such, both of the water companies effectively have a certain level of

monopoly in their service area with no direct competition over the

life of the concession.

EASTW and TTW key concessions have more than ten years

remaining, which means that both companies’ cash inflows should

be fairly secured for at least the next ten years.

Figure 4: Key concessions granted to EASTW and TTW group

Source: Company data

Growth Potential From New Concessions

According to a study commissioned by TTW in 2006 on

Nakonpathom and Samutsakorn, (provinces served by TTW), tap

water only accounts for 19% of water consumption (vs. 81%

groundwater). Considering that these two provinces are in the more

developed areas of Thailand given their proximity to Bangkok and

higher than average income per capita, it leads us to believe that a

0.01.02.03.04.05.06.07.08.09.0

10.0

2005 2006 2007 2008 2009 2010

TTW dividend yield EASTW dividend yield One-year Thai T-bill

0.0

2.0

4.0

6.0

8.0

10.0

0.0

0.2

0.4

0.6

0.8

2009 2010 2011F 2012F 2013F

TTW DPS EASTW DPS TTW dividend yield EASTW dividend yield



large proportion of the population in other parts of Thailand still

relies on underground water, which provides good potential growth

opportunities for water companies.

Figure 5: Income per capita in TTW’s service area is much

higher than Thailand’s average

Income per capita, Bt ‘000/annum

Source: Office of National Economic and Social Development Board

Catalyst

Opening of new water concession contract

We expect to see more concessions being award by PWA to private

companies to meet fast growing water demand from i) low

penetration in tap water; ii) worsening quality of groundwater from

increasing industrialization and seawater penetration; iii) stricter

industrial standards, especially in the food industry, which may

impede the use of groundwater; and iv) more foreign direct

investment (FDI) across the region on the back of the establishment

of the Asian Economic Community (AEC) in 2015.

Under PWA’s Strategic Plan (Volume 2) for 2012-2016, PWA aims to

increase its annual sales volume by 36% from 960mn cum in 2010

to 1,310mn cum in 2016. The planned increase of 350mn cum is

almost twice the amount of tap water sold in 2010 by EASTW and

TTW combined. We believe that PWA may require new joint

ventures with private companies, as it did in the past with TTW and

EASTW, in order to meet its growth target. For further details,

please refer to “Appendix I: Industry Overview”.

Over the past five years (2006-2010), EASTW and TTW have shown

higher tap sales volume CAGR of 22% and 12%, respectively, than

PWA’s 7%. We believe that this is due to the private companies’

ability to more efficiently respond to increased demand in the

absence of bureaucratic limitations, which may be what PWA needs.

Based on our sensitivity analysis, for every new 20K cum/day

concession, we estimate a fair value increase of Bt0.2/share (+2%)

for EASTW and Bt0.2/share (+3%) for TTW. We believe that EASTW

is more likely to win a new water concession contract with PWA as

it is 40% owned by the government and is not part of a regulatory

dispute with the PWA labour union, unlike TTW. We note that

EASTW has won two new tap water concessions over the past three

years while TTW has won none.

Figure 6: EASTW share price reacted positively to new

concessions

Share price, Bt


Valuation

EASTW and TTW trade at attractive valuations compared to their

regional peers and Thai utilities peers. On a 2012 PE basis, EASTW

and TTW trade at 9.1x and 10.0x, respectively (vs. peers average of

10.0x). EASTW is particularly attractive in this respect as its PE is at a

6% discount to its peers despite higher two year EPS CAGR of 13%

(vs. average of 11%).

Figure 7 EASTW has the best PE-EPS growth profile among its

regional peers

PE, times (x-axis); EPS 2-year CAGR, percent (y-axis)

*Stocks other than EASTW and TTW are based on Bloomberg consensus

Source: Bloomberg; KGI Securities (Thailand) estimates

Although TTW’s 2012 PBV of 2.4x is higher than the average of 1.5x,

but this is justified by its higher ROE of 24%, which is 47% above the

regional average of 16%.

0.0

2.0

4.0

6.0

8.0

Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11

Commencing date of major new concessions (>20k cum/day)

RayongChonburi

Chacheongsao and Bangpakong

0

200

400

600

800

Countrywide Nakhonpathom (TTW servicearea)

Samutsakorn (TTW servicearea)

HYF

MWC

RATCH

GLOW

EGCO TTW

EASTW

(10)

0

10

20

30

40

7 8 9 10 11 12

Best quadrant:High growth and low P/E



Figure 8: TTW’s high PBV is justified by its high ROE

ROE, times (x-axis); PBV, times (y-axis)


Please refer to regional comparison table on the next page.

EASTW Is Our Top Pick

In our view, EASTW is more attractive than TTW on various

measures. We forecast a higher EPS growth, higher dividend, less

expensive valuation, and less regulatory risk for EASTW compared to

TTW given the unresolved allegations against TTW’s sales contract

by PWA’s labour union.

We expect EASTW’s FY12F EPS growth of 23% (vs. TTW’s 3%) from i)

raw water tariff hike of 8%; ii) increase in tap water sales volume of 4%

and raw water sales volume of 3%; and iii) a decrease in corporate tax

rate to 23% (vs. EASTW’s current effective tax rate of 30%).

On a 3-year CAGR basis (2011-2013), we forecast EASTW EPS CAGR

of 14% (vs. TTW’s 2%). This is because i) EASTW’s tax rate is set to

decrease from the corporate tax rate reduction from 30% gradually to

23% in 2012 and to 20% in 2013 while TTW’s tax rate is set to

increase from the expiration of tax benefit in 2012; and ii) TTW’s

additional sales volume attracts a lower tariff than its first 300K

cum/day as per the two tier pricing system under the contract.

Figure 9: EASTW EPS is growing at a faster rate than TTW

EPS, Bt


In our view, EASTW is trading at a more attractive valuation than TTW.

Despite EASTW’s higher EPS growth, it is trading at a 9% discount to

TTW on FY12F PE basis. Nevertheless, we see TTW’s undemanding

valuation as hard to ignore. It has fallen 17% YTD (vs. SET decline of

5%) based on what we see as a market misconception and is

currently trading below its average forward PE and PBV (since its

listing in 2008) while providing a good dividend yield of 6-7% on

our FY12-13F.

Figure 10: TTW forward PE –below its average (since its listing)

Forward PE, times


Figure 11: TTW forward PBV –below its average (since its listing)

Forward PBV, times


Risk

Government intervention is key

We believe that government intervention in keeping the tariff low in

favour of the public is the key risk to the sector. For instance, the

previous government asked for cooperation from EASTW to not

increase the 2011 raw water tariff, which may be a result of trying

to win public support in the run up to the election in June 2011.

Nevertheless, although EASTW agreed to keep the tariff flat for

2011, it is able to increase its 2012 raw tariff by 8% (vs. Thailand’s

2011 headline inflation of 3.9% on our forecast) to compensate for

the lack of increase in the prior year.

0.00

0.20

0.40

0.60

0.80

2009 2010 2011F 2012F 2013FTTW EASTW

HYFMWCRATCH

GLOW

EGCO

TTW

EASTW

0.0

0.5

1.0

1.5

2.0

2.5

7.0 9.0 11.0 13.0 15.0 17.0 19.0 21.0 23.0 25.0

High ROE, high PBV

6.0

7.0

8.0

9.0

10.0

11.0

12.0

13.0

14.0

15.0

16.0

Jul-08 Dec-08 May-09 Oct-09 Mar-10 Aug-10 Jan-11 Jun-11 Nov-11

+2 SD = 13.20

+1 SD = 11.89

Average = 10.58

-1 SD = 9.27

-2 SD = 7.96

1.0

1.5

2.0

2.5

3.0

3.5


+2 SD = 2.65

+1 SD = 2.40

Average = 2.15

-1 SD = 1.90

-2 SD = 1.64



2012F 2013F 2012F 2013F 2012F 2013FEASTERN WATER RESOURCES DEV EASTW TB 9.05 8.09 1.38 1.28 7.73 8.65THAI TAP WATER SUPPLY PCL TTW TB 9.34 8.94 1.91 1.75 6.96 7.27HYFLUX LTD HYF SP 9.87 8.96 1.20 1.10 4.03 4.29MANILA WATER COMPANY MWC PM 9.03 9.12 1.54 1.31 3.36 3.49RATCHABURI ELEC GEN HODG PUB RATCH TB 10.28 11.38 1.21 1.13 5.51 5.67GLOW ENERGY PCL GLOW TB 11.18 9.43 1.99 1.78 4.60 5.18ELECTRICITY GENERATING PCL EGCO TB 7.80 7.77 0.77 0.72 5.98 6.09Average 9.51 9.10 1.43 1.29 5.46 5.81TTW premium/(discount) to average (2%) (2%) 34% 35% 28% 25%EASTW premium/(discount) to average (5%) (11%) (3%) (1%) 42% 49%

PE (x) PBV (x) Dividend Yield (%)

Figure 12: Regional comparison (closing prices as of 29 November 2011)


Source: Bloomberg, KGI Securities (Thailand) estimates


Eastern Water Resources

Development and Management (EAST.BK/EASTW TB)

November 24, 2011 Utilities (Water)

http://research.kgi.com; Bloomberg: KGIT <GO> Thailand

Outperform Initiate coverage


2 66.2658.8888 Ext. 8856

3 [email protected]

Return L Price as of Nov 29, 2011

2012 target price (Bt shr)

Upside/downside (%)

The percentile of excess return (%)

Dividend yield-11E (%)

6.05

8.80

45.5

88.7

5.4

Balance Sheet M Book value/shr-11E (Bt)

P/B-11E (x) Net debt/equity-11E (%)

4.06

1.5

0.48

Trading N 52-week trading range (Bt)

Mkt cap-Bt mn/US$mn

Outstanding shares (mn)

Free floating shares (mn)

Foreign ownership (mn)

3M avg. daily trading (mn)

Abs. performance (3,6,12M) (%)

Rel. performance (3,6,12M) (%)

5.1-6.8

Bt10,066/US$310

1,664

513

499

0.2

-1.6;0;-10.4

6.6;7.9;-8.9

Company Description O Eastern Water Resources Development and

Management (EASTW) is the only major supplier

of raw water in the eastern seaboard, Thailand’s

industrial hub. It supplies to industrial users as well

as the state agency to be further processed as tap

water. EASTW also operates tap water business in

five provinces in Thailand. Both of its businesses

are protected by long-term concession granted by

the government with more than ten years

remaining.

Hidden gem Strong dividend yield of 7-9%

We forecast an attractive dividend yield of 7-9% for EASTW on our FY12-13F, backed by i)

our forecast EPS 3-year CAGR of 14% (2011-2013); ii) dividend pay out ratio of 70%, as

per its 3-year historical; and iii) limited CAPEX requirement over the next 2-3 years. EASTW’s

dividend yield is at a 40-50% premium to its regional peers average dividend yield of 5-6%.

Secured earnings growth protected by concession

We forecast EPS 3-year CAGR of 14% for 2011-13 on the back of i) an increase in sales

volume from continued economic growth; ii) an increase in inflation adjusted tariff; and iii)

corporate tax cuts from 30% to 23% in 2012 and further to 20% in 2013. We see its EPS

growth continuing over the longer term given its stable cash flow protected by concessions

with more than ten years remaining.

Initiate coverage with a rating of Outperform and a target price of Bt8.80

We initiate coverage on EASTW with a rating of Outperform and DCF based target price of

Bt8.80 per share based on a 25% discount to its DCF valuation due to its limited liquidity.

The key catalysts in our view are winning new major tap water concessions. In our view, we

see EASTW as the most attractive among regional peers as it is trading at a PE of 9.1x on

our FY12F, which is a 6% discount to its regional peers despite EASTW’s higher two year

CAGR of 14% (vs. average of 11%) for 2012-2013.

Eastern Water Resources Development and Management (EASTW) price chart Share price, Bt (LHS); price performance relative to SET, percent (RHS)

Source: SET

Year to Dec Sales Sales growth EBITDA NP EPS EPS growth(Bt mn) (%) (Bt mn) (Bt mn) (Bt) (%)

2009 2,826 16.6 1,556 807 0.49 33.12010 3,066 8.5 1,690 909 0.51 5.12011F 3,168 3.3 1,790 903 0.54 6.42012F 3,527 11.3 2,083 1,112 0.67 23.22013F 3,730 5.7 2,204 1,244 0.75 11.9Year to Dec GM EV/EBITDA PBV PER Dividend ROAE

(%) (X) (X) (X) Yield (%) (%)2009 55.4 6.8 1.2 8.5 7.2 13.02010 53.6 6.8 1.7 12.6 5.9 14.02011F 55.9 6.7 1.5 11.2 6.3 13.52012F 56.3 5.6 1.4 9.1 7.7 15.82013F 56.4 5.0 1.3 8.1 8.7 16.4

0 .01 .02 .03 .04 .05 .06 .07 .08 .09 .0

10 .0

N o v-09 M a r-10 A u g -10 N o v-10 M a r-11 Ju l-11 N o v-11(50.0 )(40 .0 )(30 .0 )(20 .0 )(10 .0 )-10 .020 .030 .040 .0

E A S T W P ric e Ind ex p erfo rm a n c e rela tive to S E T

Thailand Eastern Water Resources Development and Management


2010 2011F 2012F 2013FAverage tariff (Bt/cum) Raw water 9.25 9.25 9.62 9.94 Tap water 10.48 10.83 11.25 11.62Sales volume (mn cum) Raw water 245 257 265 273 Tap water 59 64 67 69Effective tax rate 30% 30% 23% 20%Growth rates YoYAverage tariff Raw water 7.3% 0.0% 4.0% 3.3% Tap water 3.9% 3.3% 3.9% 3.3%Sales volume Raw water 12.3% 5.0% 3.0% 3.0% Tap water 11.0% 9.0% 4.0% 4.0%Key economic assumptionsCPI (Headline inflation) 3.3% 3.9% 3.3% 3.3%Real GDP growth 7.8% 3.0% 3.2% 3.5%

-5% -1% Base case +1% +5%Raw waterChange in tariff

FY12F tariff (8.8) (1.8) 0.0 1.8 8.8 FY13F tariff (8.4) (1.5) 0.0 2.0 9.0Change in volume

FY12F volume (5.6) (1.1) 0.0 1.1 5.6 FY13F volume (5.5) (1.1) 0.0 1.1 5.5Tap waterChange in tariff

FY12F tariff (2.6) (0.5) 0.0 0.5 2.6 FY13F tariff (2.6) (0.5) 0.0 0.5 2.6Change in volume

FY12F volume (1.3) (0.3) 0.0 0.3 1.3 FY13F volume (1.3) (0.3) 0.0 0.3 1.3

Why We Like The Stock

Strong dividend yield of 7-9%

We forecast an attractive dividend yield of 7-9% for EASTW on our

FY12-13F on the back of i) our forecast EPS 3-year CAGR of 14%

(2011-2013); ii) dividend pay out ratio of 70%, as per its 3-year

historical; and iii) limited CAPEX requirement over the next 2-3 years.

EASTW’s dividend yield of 7-9% is at a 40-50% premium to its

regional peers average dividend yield of 5-6%.

EASTW has historically provided a high yield of 4-9% over the past

four years (2007-2010) with a DPS 3-year CAGR of 15%. We

forecast its DPS CAGR of 11% over the next three years

(2011-2013) and expect its DPS growth to continue over the long

term given its stable cash flow protected by concessions with more

than ten years remaining.

Figure 13: Good dividend yield expected

Dividend per share and EPS, Bt (LHS); dividend yield, percent (RHS)


Good EPS growth of 12-23% on our FY12-13F We forecast an EPS growth of 23% for 2012, and 12% for 2013

propelled by i) a raw water tariff hike; ii) increase in sales volume;

and iii) corporate tax cut from 30% to 23% in 2012 and further to

20% in 2013.

EASTW plans to raise its raw water tariff by 8% in the beginning of

2012 to reflect inflation over the past year as well as its recent

investment cost in pipeline extension (i.e. Map Ta Phut pipeline #3).

The increase is expected to be gradually applied to all customer

groups in 2012. Hence, we conservatively forecast an average 2012

increase in tariff of 4%.

The sales volume growth for raw water and tap water comes from

continuous increase in demand from both industrial and residential

users on the back of continued economic growth. In addition to its increasing top line, EASTW’s net profit margin has

also continuously improved since 2007, rising from 23% to 28% in

2010 (excluding one-off disposal gain) which shows the

effectiveness of its cost control program. This constitutes a decrease

in electricity cost in water distribution by shifting more activity to

off-peak hours, reduction in interest expense from more active

finance management, and decrease in SG&A from tighter control

on employees’ expense budgets. We expect net profit margin to

continue to increase from 28% in 2010 to 33% in 2013 due to the

decrease in tax rate from 30% to 23% in 2012 and to 20% in 2013. We note that the increasing net profit also resulted in an increasing

return on capital employed (ROCE), from 10% in 2007 to 16% in

2010, which shows increasing efficiency in capital utilisation. We

expect ROCE to increase further to 18% in 2013 on the back of the

tax cut.

Figure 14: Continuous improvement in net profit margin and ROCE

Net profit margin and ROCE, percent

*Removed one-off disposal gain


Figure 15: Key assumptions


Figure 16: Sensitivity – Impact on 2012/2013 EPS (%)

*For instance, an increase in 2012 raw water tariff by 1% will lead to an increase in 2012

EPS of 1.8%

Source: KGI Securities (Thailand) estimates

0.0

0.2

0.4

0.6

0.8

2007 2008 2009 2010* 2011F 2012F 2013F0

2

4

6

8

10

DPS EPS Dividend yield

0

10

20

30

40

2007 2008 2009 2010* 2011F 2012F 2013F

Net profit margin Return on Capital Employed



Upside risk to our FY12-13F EPS We see an upside risk of 13-19% to our FY12-13F EPS from i) EASTW’s application for a BOI tax benefit for its new pipeline expansion (Map Ta Phut pipeline #3) with a capacity of 100m cum/year; and ii) conclusion of three new industrial estate contracts under negotiation. Based on our discussion with management, positive developments have been made in regards to tax benefit negotiations and a conclusion should be reached by the end of this year. If the tax benefit is granted, our FY12-13F EPS could increase by 5-7% (Bt0.04-0.05/share). EASTW also expects a positive conclusion to the negotiation of clarified water contracts with three new industrial estates (Rojana Industrial Park (ROJN.BK/ROJNA TB), Charoen Pokphand Foods (CPF.BK/CPF TB)*, and IRPC (IRPC.BK/IRPC TB)*) totaling 30mn cum pa (11% of our FY12F raw water sales volume). A conclusion is expected to be reached this year end. The industrial estates are expected to start operations in 2013 and could increase our FY13F EPS by 8-12% (Bt0.06-0.09/share). Positive longer-term outlook We expect earnings to continue to increase in the longer term on the back of i) an increase in average water tariff from annual adjustment to account for inflation; ii) an increase in substitution of tap water in place of underground water; iii) a steady increase in industrial activity following a jump in BOI application from the petrochemical industry (+225% YoY in 9M11); and iv) potential windfall from relocation by industrial plants in the central region to the eastern region following the flood. At the 2Q11 analyst meeting, EASTW’s management said that it was focusing on growth opportunities in water supply projects with a minimum equity IRR of 15%. Given the cost of equity of 8% on our estimate, we expect future projects that EASTW invests in to be value accretive. Strong balance sheet EASTW’s balance sheet is strong with a low net D/E ratio of 0.5x (as of 3Q11) which would allow it to take advantage of good investment opportunities when they arise. Based on its net D/E target of not exceeding 1x, we expect EASTW to be able to raise additional debt of Bt3.7bn. Figure 17: Low net D/E

Net debt to equity, times

Source: SETSMART

Catalyst New tap water concession In our view, the key catalyst would be winning new major tap water concessions. Based on our discussion with management, EASTW is actively looking for new concession opportunities from both the PWA and the local government. Under PWA’s Strategic Plan (Volume 2) for 2012-2016, PWA aims to increase its annual sales volume by 36% from 960mn cum in 2010 to 1,310mn cum in 2016. The planned increase of 350mn cum is six times the amount of tap water sold in 2010 by EASTW. We believe that PWA may require new joint ventures with private companies in order to meet its growth target. We see EASTW as the key beneficiary if PWA were to open any new concessions given that i) EASTW already has eight joint venture projects with PWA (67% of the 12 JV projects granted by PWA); ii) there has been no known dispute between EASTW and PWA; and iii) PWA owns a 40% stake in EASTW. EASTW is also actively looking to win new concessions from local governments, namely in the eastern region, which produce their own tap water or where groundwater is still being heavily used, as the company is likely to be able to produce tap water at a lower cost due to economies of scale. One of EASTW’s key performance indicators (KPI) is to win one new tap water concession per year. Over the past two years, it won two new concessions in Chonburi, one in June 2009 from PWA and one in December 2010 from the local government. The capacity from the two new contracts added 10% to EASTW’s total capacity (from 244K cum/day to 269K cum/day). Share price has historically reacted positively 2-3 months prior to the commencement of major new concessions.

Figure 18: Share price reacted positively to new concession

Share price, Bt


We estimate a fair value increase of Bt0.2/share (+2% to our target

price) for every additional new concession of 20K cum/day

0.94

1.151.02

0.510.42

0.42

2005 2006 2007 2008 2009 2010

0.0

2.0

4.0

6.0

8.0

Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11

Commencing date of major new concessions (>20k cum/day)

RayongChonburi

Chacheongsao and Bangpakong



E nterpris e value 22,173.6C a lc u la tion of ne t de bt:S hort te rm de bt (659.4)L ong te rm de bt (2,875.0)Minority in te re s t (2.8)L e s s : C as h 1,062.3N e t de bt (2,474.9)E quity value 19,698.7S ha re s outs tanding 1,663.7E quity value / s hare (before dis c ount) 11.8

L ac k of liqu id ity d is c ount 25% (3.0)E quity value / s hare (after dis c ount) 8.8

Weighted average cost of capital: 7.0%Cost of debtCost of debt 5.5%Marginal tax rate 20.0%Cost of debt after tax shield 4.4%Cost of equityRisk-Free Rate (rf) 4.0%Market Risk Premium (rm-rf) 8.0%Raw (observed) beta 0.47Cost of equity using raw beta 7.8%

0.0% 0.5% 1.0% 1.5% 2.0%9.0% 5.9 6.2 6.5 7.0 7.48.0% 6.7 7.1 7.6 8.2 8.87.0% 7.8 8.4 9.0 9.8 10.76.0% 9.2 10.0 11.0 12.1 13.65.0% 11.3 12.5 13.9 15.9 18.4

Perpetual growth rate

WA

CC

Valuation & Action

Rate Outperform with DCF target price of Bt8.80

We initiate coverage on EASTW with a rating of Outperform on a

two stage DCF based target price of Bt8.80, suggesting a 45%

potential upside.

In our view, DCF is the best valuation method for a utility company

with a secured stream of cash flow like EASTW because it best

captures the increase in tariff and volume growth over the life of the

concessions in comparison to other valuation methodologies. We

applied a WACC of 7.0% based on a CoD of 4.4% and CoE 7.7%.

We have applied a 25% discount to the DCF derived target price of

Bt11.80/share for its limited liquidity with an average daily trading

volume of US$0.13mn/day (Bt4.04mn).

We see EASTW as the most attractively valued stock among regional

peers as it is trading at a PE of 9.1x on our FY12F, which is a 6%

discount to its regional peers average despite its higher 2-year EPS

CAGR of 14% (vs. peers average of 11%) for 2012-2013.

The key catalysts in our view are i) winning new tap water

concessions; and ii) relocation by industrial users in Central Thailand

to Eastern Thailand following the flood.

The key risks to our target price are i) government intervention in

capping water tariffs; ii) disruption to water distribution; iii) lower

than expected demand (due to slower than expected economic

growth, cold weather, etc).

Figure 19: EASTW’s WACC


Figure 20: Equity value calculation


Figure 21: Sensitivity of our DCF based fair value (Bt/share)


Figure 22: EASTW has the best PE-EPS growth profile among its

regional peers

PE, times (x-axis); EPS 2-year CAGR, percent (y-axis)



Not only is EASTW’s FY12F PE a discount to its regional peers, it is

also at a discount to its 5-year historical average. Figure 23: Trading below its 5-year average forward PE

Forward PE, times


Please refer to Appendix II EASTW at a glance for the company’s background.

0.0

5.0

10.0

15.0

20.0

Dec-06 Jul-07 Feb-08 Sep-08 Apr-09 Nov-09 Jun-10 Jan-11 Aug-11

+2 SD = 16.35

+1 SD =13.46

Average = 10.57

-1 SD = 7.69

-2 SD = 4.80

HYF

MWC

RATCH

GLOW

EGCO TTW

EASTW

(10)

0

10

20

30

40

7 8 9 10 11 12

Best quadrant:High growth and low P/E



COGS Depreciation Operating Exp. OperatingRevenue Revenue Revenue Margin

2009 44.6% 10.8% 11.6% 33.0%2010 46.4% 12.1% 10.8% 30.8%2011F 44.1% 12.4% 10.7% 32.7%2012F 43.7% 13.6% 10.0% 32.7%2013F 43.6% 13.5% 10.0% 32.9%

Working Capital Net PPE Other Assets CapitalRevenue Revenue Revenue Turnover

2009 0.05 2.40 0.40 0.352010 -0.21 2.54 0.36 0.372011F 0.09 2.61 0.35 0.332012F 0.22 2.35 0.32 0.352013F 0.36 2.23 0.30 0.35

Operating Capital Cash After-tax ReturnMargin Turnover Tax Rate on Inv. Capital

2009 33.0% 0.4 71.4 8.32010 30.8% 0.4 70.4 8.02011F 32.7% 0.3 69.5 7.52012F 32.7% 0.3 77.0 8.72013F 32.9% 0.3 77.0 8.8

Year 1- + +

Year x x =

=

Year 1/ + + =

Year to 31 Dec (Bt mn) 2009 2010 2011F 2012F 2013FOperating Cash Flow 532 1,936 1,270 1,565 1,732 Net Profit 807 909 903 1,112 1,244 Depreciation & Amortization 306 370 394 480 503 Change in Working Capital (581) 658 (27) (27) (16) Others 0 0 0 0 0Investment Cash Flow 605 (1,383) (858) (519) (534) Net CAPEX 605 (1,383) (858) (519) (534) Change in LT Investment 0 0 0 0 0 Change in Other Assets 0 0 0 0 0Free Cash Flow 1,137 553 412 1,046 1,197Financing Cash Flow (1,114) (235) 208 (663) (623) Change in Share Capital 0 0 0 0 0 Net Change in Debt (529) 400 971 (94) 44 Change in Other LT Liab. (585) (635) (763) (569) (667)Net Cash Flow 23 318 619 384 574

Year to 31 Dec (Bt mn) 2009 2010 2011F 2012F 2013FSales 2,826 3,066 3,168 3,527 3,730 Cost of Goods Sold 1,260 1,422 1,397 1,542 1,627Gross Profit 1,566 1,644 1,771 1,985 2,103 Operating Expenses 329 330 340 352 373Operating Profit 1,237 1,314 1,431 1,633 1,731Net Interest (100) (90) (86) (137) (124) Interest Income 21 0 11 21 21 Interest Expense 120 90 97 158 145Net Investment Income/(Loss) 0 0 0 0 0Net other Non-op. Income/(Loss) (7) 7 (46) (51) (51)Net Extraordinaries (0) 59 (0) (0) (0)Pretax Income 1,130 1,290 1,299 1,445 1,556Income Taxes 323 382 396 332 311Net Profit 807 909 903 1,112 1,244EBITDA 1,556 1,690 1,790 2,083 2,204EPS (Bt) 0.49 0.51 0.54 0.67 0.75

As of 31 Dec (Bt mn) 2009 2010 2011F 2012F 2013FTotal Assets 9,148 9,871 10,963 11,422 12,048Current Assets 1,165 875 1,503 1,923 2,519 Cash & ST Investments 125 443 1,062 1,446 2,020 Inventories 9 10 9 10 11 Accounts Receivable 238 311 320 356 376 Others 793 112 112 112 112Non-current Assets 7,983 8,996 9,460 9,498 9,529 LT Investments 85 91 91 91 91 Net fixed Assets 6,775 7,791 8,255 8,293 8,324 Others 1,122 1,113 1,113 1,113 1,113Total Liabilities 2,804 3,254 4,313 4,122 4,171Current Liabilities 1,034 1,512 1,225 1,140 1,189 Accounts Payable 66 101 83 92 97 ST Borrowings 500 929 659 565 610 Others 468 482 482 482 482Long-term Liabilities 1,770 1,742 3,089 2,982 2,982 Long-term Debts 1,729 1,635 2,982 2,875 2,875 Others 41 107 107 107 107Shareholders' Equity 6,344 6,617 6,757 7,300 7,877 Common Stock 1,664 1,664 1,664 1,664 1,664 Capital Surplus 2,183 2,180 2,433 2,990 3,569 Retained Earnings 2,497 2,773 2,660 2,646 2,645 Preferred Stock 0 0 0 0 0

Year to 31 Dec (Bt mn) 2009 2010 2011F 2012F 2013FForecast DriversSales volumes (M cum) 218.1 244.9 257.1 264.8 272.8Avg raw water tariff (Cum/Bt) 8.6 9.3 9.3 9.6 9.9Growth (% YoY)Sales 16.6 8.5 3.3 11.3 5.7OP 35.6 6.2 8.9 14.1 6.0EBITDA 22.3 8.6 5.9 16.4 5.8NP 33.1 12.5 (0.7) 23.2 11.9EPS 33.1 5.1 6.4 23.2 11.9Profitability (%)Gross Margin 55.4 53.6 55.9 56.3 56.4Operating Margin 43.8 42.8 45.2 46.3 46.4EBITDA Margin 55.1 55.1 56.5 59.1 59.1Net Profit Margin 28.6 27.7 28.5 31.5 33.4ROAA 8.7 9.6 8.7 9.9 10.6ROAE 13.0 14.0 13.5 15.8 16.4StabilityGross Debt/Equity (%) 44.2 49.2 63.8 56.5 52.9Net Debt/Equity (%) 42.2 42.5 48.1 36.7 27.3Interest Coverage (x) 10.4 15.4 14.4 10.2 11.8Interest & ST Debt Coverage (x) 2.0 1.4 1.8 2.2 2.3Cash Flow Interest Coverage (x) 4.4 21.6 13.1 9.9 12.0Cash Flow/Interest & ST Debt (x) 0.9 1.9 1.7 2.2 2.3Current Ratio (x) 1.1 0.6 1.2 1.7 2.1Quick Ratio (x) 1.1 0.6 1.2 1.7 2.1Net Debt (Bt mn) 2,679 2,811 3,251 2,676 2,150Per Share Data (Bt)EPS 0.5 0.5 0.5 0.7 0.7CFPS 0.3 1.2 0.8 0.9 1.0BVPS 3.8 4.0 4.1 4.4 4.7SPS N.A. N.A. N.A. N.A. N.A.EBITDA/Share 0.9 1.0 1.1 1.3 1.3DPS 0.4 0.4 0.4 0.5 0.5ActivityAsset Turnover (x) 0.3 0.3 0.3 0.3 0.3Days Receivables 30.8 37.0 36.9 36.8 36.8Days Inventory 2.7 2.5 2.4 2.4 2.4Days Payable 5.2 7.1 5.9 6.0 6.0Cash Cycle 28.2 32.4 33.4 33.3 33.3

Balance Sheet


Key Ratios


Profit & Loss


Cash Flow


Rates of Return on Invested Capital



Thai Tap Water Supply (TTW.BK/TTW TB)*

November 30, 2011 Utilities (Water)

http://research.kgi.com; Bloomberg: KGIT <GO> Thailand

Outperform Initiate coverage


2 66.2658.8888 Ext. 8856

3 [email protected]

Return L Price as of Nov 29, 2011

2012 target price (Bt shr)

Upside/downside (%)

The percentile of excess return (%)

Dividend yield-11E (%)

5.30

7.00

32.1

67.7

6.5

Balance Sheet Book value/shr-11E (Bt)

P/B-11E (x) Net debt/equity-11E (%)

2.21

2.35

126

Trading N 52-week trading range (Bt)

Mkt cap-Bt bn/US$bn

Outstanding shares (mn)

Free floating shares (mn)

Foreign ownership (mn)

3M avg. daily trading (mn)

Abs. performance (3,6,12M) (%)

Rel. performance (3,6,12M) (%)

4.8-6.5

1,147mn/US$653mn

3,990

1,367

136

3

2.9;-7.8;-14.5

11.5;-0.5;-13

Company Description O Thai Tap Water Supply (TTW) is Thailand’s largest

private tap water provider. It provides tap water

under long-term concession with a minimum

take or pay contract to provinces in the vicinities

of Bangkok, including Nakonpathom,

Samutsakorn, and Pathumthani.

Turn on the tap

Misconception provides investment opportunity

TTW has underperformed the SET by 12% ytd (TTW’s 17% vs. SET 5%)due to what we see as

a market misconception of the threat to its sales volume from Provincial Waterworks

Authority’s (PWA) new pumping station located in proximity to TTW’s service area. In our

view, the key reason behind the subdued sales growth in the first two months of this year is

seasonal cold weather in line with the temporary dip in the previous years rather than

competition from PWA. TTW’s YTD share price weakness should provide a good entry point

for investors.

Earnings protected by take or pay contract

TTW earnings are very resilient with take or pay agreements for almost 80% of its total

production capacity, on top of its inflation adjusted sales tariff. Even if it only manages to

sell at its minimum off-take capacity, we estimate fair value to be Bt6.1/share, which implies

a 15% upside from current share price and suggests a total return (including dividend) in

excess of 20% for 2012.

Rate Outperform with a DCF based target price of Bt7.00

We initiate coverage on TTW with a rating of Outperform for its secured earnings,

inexpensive valuation, and good dividend yield of 6-7% (which is a 20-30% premium to its

regional peers). We see a potential fair value upside from an increase in investment in CK

Power which could add another Bt0.5/share. The key catalyst to the stock should be a

positive resolution on the allegations against TTW’s sales contract with PWA.

Thai Tap Water Supply (TTW) price chart Share price, Bt (LHS); price performance relative to SET, percent (RHS)

Source: SET

Year to Dec Sales Sales growth EBITDA NP EPS EPS growth(Bt mn) (%) (Bt mn) (Bt mn) (Bt) (%)

2009 4,048 12.3 3,055 1,594 0.40 17.32010 4,395 8.6 3,342 2,063 0.52 29.42011F 4,602 4.7 3,741 2,058 0.52 (0.3)2012F 4,936 7.2 3,975 2,125 0.53 3.32013F 5,228 5.9 4,195 2,207 0.55 3.8Year to Dec GM EV/EBITDA PBV PER Dividend ROAE

(%) (X) (X) (X) Yield (%) (%)2009 70.4 8.1 2.2 11.3 6.3 18.72010 70.6 7.8 2.8 12.9 6.6 22.72011F 68.8 8.3 2.4 10.3 6.3 22.52012F 68.7 7.8 2.3 10.0 6.5 23.82013F 68.6 6.5 2.3 9.6 6.8 24.4

0 .01 .02 .03 .04 .05 .06 .07 .08 .09 .0

10 .0

N o v-09 M a r-10 A u g -10 N o v-10 M a r-11 Ju l-11 N o v-11(50.0 )(40 .0 )(30 .0 )(20 .0 )(10 .0 )-10 .020 .030 .040 .0

T T W P ric e In d ex p erfo rm a n c e rela tive to S E T

Thailand Thai Tap Water Supply


Why We Like The Stock

Rate Outperform with a target price of Bt7.00

We initiate coverage on TTW with a rating of Outperform due to its

secured earnings, and hence dividend, for the next ten years under

long-term concessions with the government.

TTW has underperformed the SET by 12% YTD (TTW’s 17% vs. SET

5%) due to what we see as a market misconception of the threat to

the company’s sales volume from PWA’s new pumping station

located in proximity to TTW’s service area.

In our view, the key reason behind the subdued sales volume in the

first two months of this year was seasonal winter effect rather than

the commencement of the new water station which coincidentally

happened around the same time.

TTW’s sales volume has resumed its growth path since March. We

note that in six out of the past seven years, there have been

temporary seasonal dips in demand in the first 1-2 months of each

year. We see the YTD share price weakness as a good entry point

for investors.

Figure 24: Annual dip in January/February sales volume

Sales volume, mn cum


Good dividend yield of 6-7%

TTW provides a good dividend from secured earnings protected by

long-term concession and a strong balance sheet.

Our FY12-13F dividend yield of 6-7% is on the back of i) EPS

3-year CAGR of 2% on our FY11-13F; and ii) dividend payout

ratio of 65% as per its 3-year historical average. TTW’s dividend

yield is at a 20-30% premium to its regional peers average

dividend yield of 5-6%.

Figure 25: Good dividend expected

Dividend per share and EPS, Bt (LHS); dividend yield, percent (RHS)

Source: SET, KGI Securities (Thailand) Estimates

Over the past two years (2009-2010), TTW’s EPS CAGR was 19% while its DPS CAGR was a stellar 32%. We forecast a more modest growth for DPS and EPS 3-year CAGR of 2% (2011-2013) due to the expiration of tax benefits in mid-June 2012. If the tax benefit expiration is removed, TTW’s EPS growth would increase to 7-10% on our FY12-13F. We expect its DPS and EPS growth to continue in the longer term given its stable cash flow protected by inflation adjusted tariff and concessions with more than ten years remaining. Protection against downside risk from minimum off take The agreements by TTW and PTW with PWA include a minimum order quantity (MOQ), which would limit downside risk to the group’s cash flow. On our estimate, even if TTW group only manages to sell at its MOQ, the fair value per share would still be Bt6.10, which still suggests a 15% upside from the current share price. TTW group’s (including PTW) 2011 MOQ of 638K cum/day accounts for 92% of its 3Q11 average daily sales of 692K cum/day. As per the contract with PWA in 2008 to support TTW’s capacity expansion from 320K cum/day to 440K cum/day (completed in 2010) to serve growing demand for tap water, PWA agreed to annually increase the MOQ by 9K cum/day for the next five years until MOQ reaches 354K cum/day in 2015. PTW’s MOQ of 320K cum/day is fixed until the end of its contract in 2023.

Figure 26: TTW’s MOQ accounts for ~100% of FY12F average

sales volume

Sales volume, ‘000 cum per day


0.0

0.2

0.4

0.6

0.8

2008 2009 2010 2011F 2012F 2013F0

2

4

6

8

DPS EPS Dividend yield

0

200

400

600

800

Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11

0

100

200

300

400

500

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Avg daily sales MOQ Capacity



2010 2011F 2012F 2013FAverage tariff (Bt/cum) TTW - below 300k cum/day 24.46 25.11 26.09 26.83 TTW - above 300k cum/day 9.78 11.02 10.44 10.73 PTW 10.99 11.37 11.81 12.15Sales volume (m cum) TTW 120 120 126 131 PTW 125 130 135 140Total 245 251 261 271Effective tax rate (%) 8.0 9.0 14.0 17.0Growth rateAverage tariff (Bt/cum) TTW (%) 3.9 3.3 4.9 3.8 PTW (%) (4.4) 3.3 3.9 2.8Sales volume (m cum) TTW (%) 10.1 (0.6) 5.0 4.0 PTW (%) 7.1 4.1 3.5 3.5Total (%) 8.6 1.8 4.2 3.7Key economic indicatorsCPI (Headline inflation) - YoY (%) 3.3 3.9 2.8 3.3Real GDP growth - YoY (%) 7.8 1.8 3.5 3.5

-5% -1% Base case +1% +5%TTWChange in tariff (B/m3) FY12 sales tariff (%) (5.8) (1.2) 0.0 1.2 5.8 FY13 sales tariff (%) (4.4) 0.3 0.0 2.6 7.2Change in sales volume FY12 volume (%) (2.1) (0.4) 0.0 0.4 2.1 FY13 volume (%) (2.3) 0.5 0.0 0.5 2.3PTWChange in tariff (B/m3) FY12 sales tariff (%) (3.0) (0.6) 0.0 0.6 3.0 FY13 sales tariff (%) (3.0) (0.6) 0.0 0.6 3.0Change in sales volume FY12 volume (%) (2.3) (0.5) 0.0 0.5 2.3 FY13 volume (2.3) (0.5) 0.0 0.5 2.3

Figure 27: PTW MOQ accounts for ~90% of FY12F average sales

volume

Sales volume, ‘000 cum per day


Limited impact from flooding in service areas

We expect a limited impact from the flooding in October/November

on TTW group’s earnings despite the fact that the provinces served

by the group (Nakonpathom, Samutsakorn, and Pathumthani) have

been affected by the flood because of the minimum off take contract

(as mentioned above) and the fact that none of TTW’s pumping

stations have been severely affected.

We also note that TTW group’s average daily sales volume in October

had even increased slightly by 1% in comparison to its 9M11

average daily sales volume. We believe that this is because of milder

flooding in the districts served by TTW relative to other provinces.

We believe that TTW’s sales volume could potentially increase after

the water recedes and the cleaning process begins. Based on our

sensitivity analysis, we expect a 10% increase in TTW group’s sales

volume to increase our FY12F EPS by 5%. The smaller percentage

change in EPS is due to the fact that TTW‘s sales volume in excess of

300K cum/day is sold at a 60% discount to its full tariff.

Modest EPS growth in 2012-2013

On our forecast, TTW’s modest EPS growth of 3-4% on our

FY12-13F is subdued by the expiration of tax benefit in June 2012 for

TTW’s initial capacity of 320K cum/day. Our 2012/2013 forecast is in

line with the Bloomberg consensus.

The key drivers for our FY12-13F EPS growth are i) 4% increase in

tap water sales volume to 251mn cum from continuous growth in

economic activity and adoption of tap water; and ii) 5% increase in

tariff for TTW (from its pricing formula of CPI % change + 1%) and

4% for PTW in line with our headline inflation forecast of 4%.

We note that the positive factors would be partially offset by the

increase in FY12F effective tax rate to 14% (from 9% in FY11F) due

to the expiration of the Board of Investment (BOI) tax benefit in June

2012 for the company’s initial distribution capacity of 320K cum/day.

Figure 28: Key assumptions


Figure 29: Sensitivities – impact on 2012/2013 EPS (%)

*For instance, an increase in 2012 TTW tariff by 1% will lead to an increase in 2012 EPS

by 1.2%


Upside risk to our FY12-13F EPS

We see an upside risk of 5-10% to our FY12-13F EPS from

potential increase in investment in CK Power, Ch Karnchang

(CK.BK/CK TB)’s power holding company and 30% owned by

TTW. It is likely to increase its registered capital from Bt100mn to

Bt9.2bn. TTW is set to maintain its stake of 30% hence TTW is

looking to increase its investment in CK Power by Bt2.73bn (=

30% x capital increase of Bt9.1bn). As per our discussion with

management, this amount would be 100% debt financed.

CK Power currently holds 38% of SEAN, the developer and

operator of the 615 megawatt Nam Ngum II hydropower plant in

Laos. The power plant has secured earnings from power purchase

agreements with both the Thai and Laos government with 25 years

remaining on the contract.

The planned capital increase of Bt9.1bn by CK Power is for i)

acquiring an additional 17% stake in SEAN from Bangkok

Expressway (BECL.BK/BECL TB) for ~Bt6bn; and ii) settling an

outstanding amount owed to CK for the acquisition of SEAN for

~Bt3bn. The increase in investment by TTW is subject to

shareholders approval in the Extraordinary General Meeting on 20

December 2011.

0

100

200

300

400

500

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Avg daily sales MOQ Capacity



We expect an earning contribution of around Bt0.025-0.050/share

in FY12-13 from this investment. We have not yet included this

into our forecast and view it to be value accretive given our

estimate equity IRR of 15% (= TTW’s minimum IRR threshold) and

TTW’s CoE of 7.4%. We estimate the investment in CK Power to

add Bt0.5/share (+7% to our fair value of Bt7.00). Potential earnings upside from low penetration Based on a study commissioned by TTW, only 19% of water consumption in Nakonpathom and Samutsakorn province is tap water (vs. 81% groundwater). Moreover, according to a study by Thai CDI, an engineering consultancy firm, there is still a large untapped demand in the two provinces and they estimated that groundwater users would switch to tap water at an average of 10% annually over the next five years. Hence, we believe there is considerable growth opportunity in tap water sales in provinces served by TTW for at least the next five years.

Figure 30: Big gap between TTW’s current sales and potential

demand

TTW’s sales and potential demand, ‘000 cum/day

Source: Thai CDI; Company data; KGI Securities (Thailand) estimates

Future Growth

Tap water continues to play a key role

TTW has budgeted Bt20bn for investment during 2011-2015. Half

of that (Bt10bn) is allocated for renewable energy projects, namely

solar power, with the remainder divided between wastewater

project (Bt5.5bn) and tap water business (Bt4.5bn). In addition to

the Bt20bn budget, TTW also plans to invest Bt2.73bn in CK Power,

its 30% subsidiary

We believe that the most visible source of growth for TTW

continues to be from tap water business and we see wastewater

management as a potential growth area following the flood.

We are least optimistic about investment in solar power as our

channel check suggested there are a large number of bidders

pursuing a limited number of solar power contracts (with adder)

from the original bid winners. Hence it may be difficult for TTW to

find attractively priced contracts that are value accretive.

PTW – Soon to exceed maximum capacity

The most likely source of growth for TTW is in tap water expansion

in PTW’s area, as PTW’s average daily sales of 357K cum/day (on

our 2011 forecast) is fast approaching its capacity of 388K cum/day.

We expect PTW’s sales volume to exceed its capacity by 2014.

Figure 31: Average daily sales volume vs. maximum capacity

Average daily sales and capacity, ‘000 cum/day


Management has said that they plan to spend Bt600-800mn to

increase the capacity by 60K cum/day (to 448K cum/day), in

2012/2013, to meet the growing demand.

The expansion is still subject to negotiation with the government to

either increase the tariff or extend the concession to make the

investment feasible, as PTW under a build-own-operate transfer

agreement due to expire in 2023. Management expects the

negotiations to be completed by next year.

New tap water concession potentially underway According to PWA’s Strategic Plan for 2012-2016 (Volume 2), PWA

aims to increase its countrywide annual sales volume by 36% from

960mn cum in 2010 to 1,310mn cum by 2016. The planned

increase of 350mn cum is about 1.4 times the amount of tap water

sold in 2010 by TTW. We believe that PWA may require new joint

ventures with private companies, like TTW, in order to meet its

growth target.

Wastewater treatment – Still room for growth The importance of wastewater management has been highlighted

by the recent flood. Standing water in a number of flooded areas is

foul as it has been mixed with a large amount of untreated

wastewater that has made a number of flooded areas inhabitable.

According to management, only 30% of wastewater in Bangkok is

treated by the municipal authority. The remaining 70% is left

untreated. We believe that this provides room for the involvement

of private companies, like PWA did in order to increase tap water

coverage.

0

200

400

600

800

1,000

2006 2007 2008 2009 2010 2011F 2012F 2013F 2014F 2015F

TTW's sales Potential demand

0

100

200

300

400

500

2004 2005 2006 2007 2008 2009 2010 2011F 2012F 2013F 2014F 2015F

Avg daily sales Capacity

Reached maximum capacity...

...capacity expansion within two years

Soon to reach maximum capacity again



Weighted average cost of capital: 6.5%Cost of debtCost of debt 6.0%Marginal tax rate 20.0%Cost of debt after tax shield 4.8%Cost of equityRisk-Free Rate (rf) 4.0%Market Risk Premium (rm-rf) 8.0%Raw (observed) beta 0.42Cost of equity using raw beta 7.4%

Enterprise value 47,633Calculation of net debt:Short term debt (3,495.0)Long term debt (8,282.7)Minority interest 21.6Less: Cash 1,009.6Net debt (10,747)Equity value 36,887Shares outstanding 3,990Equity value / share (before discount) 9.24

Overhang from regulatory risk 25% (2.31)Equity value / share (after discount) 7.00

0.0% 0.5% 1.0% 1.5% 2.0%9.0% 3.7 3.9 4.2 4.5 4.98.0% 4.4 4.7 5.1 5.5 6.07.0% 5.2 5.7 6.2 6.8 7.56.0% 6.4 7.0 7.8 8.7 9.85.0% 8.0 8.9 10.1 11.6 13.7

Perpetual growth rate

WA

CC

Catalyst & Risk

Potential overhang from outstanding dispute

We see a potential overhang to the share price from the

outstanding allegation by the PWA labour union against PWA in

regards to its sales contract with TTW. A resolution to this case in

TTW’s favour should be a major share price catalyst.

In 2009, the PWA labour union demanded a renegotiation of the

30-year agreement between PWA and TTW as they claimed that

the terms violated the Public Private Joint Venture Act (PPJVA) 1992,

which states that a private company can not operate a business

that incurs loss for the public. The case stems from the high tariff

PWA paid to TTW (~Bt25 per cum) compared to the tariff PWA

charges the end users (~Bt15 per cum).

TTW is confident that the contract is legitimate because the

company was solely responsible for the investment in the

production and distribution system investment and hence factored

the investment cost into the selling price.

The case has been under review by the Anti-Corruption

Commission since 2009 and has yet to be resolved. We believe that

the risk of renegotiation of the contract is limited as there has not

been much progress for more than two years and there has been

no report of PWA’s intention to renegotiate the contract. A more

major threat is that the outstanding allegation may hamper TTW’s

chance of winning new concessions with PWA.

Valuation & Action Given its stable cash inflow stream, we value the company using a

two-staged DCF and derived a value of Bt7.00 after applying a 25%

discount for its regulatory risk from the outstanding dispute between

the PWA labour union and PWA in regards to TTW’s highly profitable

sales contract with PWA.

Our target price implies a 32% upside. The stock is trading at an

inexpensive valuation at a PE of 10.0x and a PBV of 2.4x on our

FY12F, which are one standard deviation below its historical

average. In our view, DCF is the best valuation method for a utility

company with a secured stream of cash flow like TTW because it

best captures the increase in tariff and volume growth over the life

of the concessions in comparison to other valuation methodologies.

We applied a WACC of 6.5% based on a CoD of 4.8% and a CoE

of 7.4%.

Figure 32: TTW’s WACC


Figure 33: Equity value calculation


We applied a 25% discount to the DCF derived target price of

Bt9.2/share due to the overhang from the outstanding dispute.

Figure 34: Sensitivity of our DCF based fair value (Bt/share)


Undemanding valuation

Despite the potential overhang from the outstanding dispute raised

by PWA’s labour union, we see TTW’s undemanding valuation,

good dividend yield, and secured earnings, at least over the next

ten years, as hard to ignore. TTW is trading at a PE of 10.0x and a

PBV of 2.4x on our FY12F, which is below its historical average since

its listing in 2008 on both measures.



Figure 35: TTW’s forward PE is discounted to its average since

its listing

Forward PE, times


Figure 36: TTW’s forward PBV is discounted to its average since

its listing

Forward PBV, times


TTW’s PBV of 2.4x (vs peers average of 1.5x) is explained by its high

ROE of 24% (vs peers average of 16%).

Figure 37: High ROE compensates for high PBV

ROE, times (x-axis); PBV, times (y-axis)

Source: Bloomberg, KGI Securities (Thailand) Estimates

Its dividend yield of 6-7% on our FY12-13F is also at a 20-30%

premium to its peers’ average of 5-6%.

Please refer to Appendix III TTW at a glance for the company’s background.

6.0

7.0

8.0

9.0

10.0

11.0

12.0

13.0

14.0

15.0

16.0


+2 SD = 13.20

+1 SD = 11.89

Average = 10.58

-1 SD = 9.27

-2 SD = 7.96

1.0

1.5

2.0

2.5

3.0

3.5


+2 SD = 2.65

+1 SD = 2.40

Average = 2.15

-1 SD = 1.90

-2 SD = 1.64

HYFMWCRATCH

GLOW

EGCO

TTW

EASTW

0.0

0.5

1.0

1.5

2.0

2.5

7.0 9.0 11.0 13.0 15.0 17.0 19.0 21.0 23.0 25.0

High ROE, high PBV



COGS Depreciation Operating Exp. OperatingRevenue Revenue Revenue Margin

2009 29.6% 19.6% 5.1% 45.7%2010 29.4% 19.1% 4.5% 47.0%2011F 31.2% 21.1% 4.8% 42.9%2012F 31.3% 20.3% 4.8% 43.6%2013F 31.4% 19.7% 4.7% 44.2%

Working Capital Net PPE Other Assets CapitalRevenue Revenue Revenue Turnover

2009 0.73 2.25 1.97 0.202010 0.77 2.16 1.71 0.222011F 0.13 2.03 1.56 0.272012F 0.87 1.89 1.45 0.242013F 0.93 1.78 1.37 0.24

Operating Capital Cash After-tax ReturnMargin Turnover Tax Rate on Inv. Capital

2009 45.7% 0.2 89.4 8.22010 47.0% 0.2 91.9 9.32011F 42.9% 0.3 90.9 10.52012F 43.6% 0.2 85.7 8.92013F 44.2% 0.2 85.7 9.3

Year x x =

=

Year 1/ + + =

Year 1- + +

Year to 31 Dec (Bt mn) 2009 2010 2011F 2012F 2013FOperating Cash Flow 2,679 3,041 2,661 3,087 3,197 Net Profit 1,594 2,063 2,058 2,125 2,207 Depreciation & Amortization 794 839 972 1,001 1,031 Change in Working Capital 292 140 (368) (39) (41) Others 0 0 0 0 0Investment Cash Flow (2,484) (1,563) (1,487) (1,001) (1,031) Net CAPEX (2,484) (1,563) (1,487) (1,001) (1,031) Change in LT Investment 0 0 0 0 0 Change in Other Assets 0 0 0 0 0Free Cash Flow 195 1,479 1,174 2,086 2,166Financing Cash Flow 1,240 (1,690) (2,238) (1,489) (1,565) Change in Share Capital 0 0 0 0 0 Net Change in Debt 2,475 (416) 465 469 539 Change in Other LT Liab. (1,235) (1,274) (2,703) (1,959) (2,104)Net Cash Flow 1,435 (212) (1,064) 597 601

Year to 31 Dec (Bt mn) 2009 2010 2011F 2012F 2013FSales 4,048 4,395 4,602 4,936 5,228 Cost of Goods Sold 1,199 1,294 1,437 1,544 1,640Gross Profit 2,850 3,101 3,166 3,391 3,589 Operating Expenses 208 197 219 236 244Operating Profit 2,642 2,904 2,947 3,155 3,344Net Interest (652) (424) (473) (462) (480) Interest Income 15 18 21 18 19 Interest Expense 667 442 495 481 500Net Investment Income/(Loss) 0 0 0 0 0Net other Non-op. Income/(Loss) (201) (225) (199) (199) (199)Net Extraordinaries (8) (11) (12) (12) (12)Pretax Income 1,782 2,245 2,262 2,481 2,653Income Taxes 188 182 205 356 446Net Profit 1,594 2,063 2,058 2,125 2,207EBITDA 3,055 3,342 3,741 3,975 4,195EPS (Bt) 0.40 0.52 0.52 0.53 0.55

Year to 31 Dec (Bt mn) 2009 2010 2011F 2012F 2013FForecast DriversSales volumes (M cum) 226.0 245.4 250.6 261.2 270.9Avg TTW Tariff (Cum/Bt) 23.6 24.5 25.1 26.3 27.4Growth (% YoY)Sales 12.3 8.6 4.7 7.2 5.9OP 16.9 9.9 1.5 7.1 6.0EBITDA 14.0 9.4 11.9 6.3 5.5NP 17.3 29.4 (0.3) 3.3 3.8EPS 17.3 29.4 (0.3) 3.3 3.8Profitability (%)Gross Margin 70.4 70.6 68.8 68.7 68.6Operating Margin 65.3 66.1 64.0 63.9 64.0EBITDA Margin 75.5 76.0 81.3 80.5 80.2Net Profit Margin 39.4 46.9 44.7 43.1 42.2ROAA 8.2 9.7 9.7 10.0 10.1ROAE 18.7 22.7 22.5 23.8 24.4StabilityGross Debt/Equity (%) 142.3 126.6 137.5 140.2 144.5Net Debt/Equity (%) 116.0 104.7 126.1 122.3 120.2Interest Coverage (x) 3.7 6.1 5.6 6.2 6.3Interest & ST Debt Coverage (x) 2.3 3.0 0.7 3.2 3.3Cash Flow Interest Coverage (x) 4.0 6.9 5.4 6.4 6.4Cash Flow/Interest & ST Debt (x) 2.5 3.4 0.7 3.3 3.4Current Ratio (x) 3.9 4.1 1.2 6.2 6.6Quick Ratio (x) 3.9 4.1 1.2 6.2 6.6Net Debt (Bt mn) 10,084 9,931 11,141 11,014 10,951Per Share Data (Bt)EPS 0.4 0.5 0.5 0.5 0.6CFPS 0.7 0.8 0.7 0.8 0.8BVPS 2.2 2.4 2.2 2.3 2.3SPS -- -- -- -- --EBITDA/Share 0.8 0.8 0.9 1.0 1.1DPS 0.3 0.4 0.3 0.3 0.4ActivityAsset Turnover (x) 0.2 0.2 0.2 0.2 0.2Days Receivables 34.6 33.3 36.4 36.9 37.7Days Inventory 6.9 6.7 5.5 5.1 4.8Days Payable 3.4 2.5 5.4 5.9 7.9Cash Cycle 38.1 37.5 36.6 36.1 34.6

As of 31 Dec (Bt mn) 2009 2010 2011F 2012F 2013FTotal Assets 21,064 21,488 20,989 21,625 22,267Current Assets 3,947 4,472 4,471 5,108 5,750 Cash & ST Investments 2,286 2,074 1,010 1,607 2,207 Inventories 23 24 22 22 22 Accounts Receivable 384 401 460 499 540 Others 1,255 1,973 2,981 2,981 2,981Non-current Assets 17,117 17,016 16,517 16,517 16,517 LT Investments 0 0 36 36 36 Net fixed Assets 9,125 9,504 9,320 9,320 9,320 Others 7,991 7,512 7,161 7,161 7,161Total Liabilities 12,370 12,005 12,151 12,620 13,159Current Liabilities 1,005 1,086 3,857 826 865 Accounts Payable 41 33 77 91 129 ST Borrowings 420 450 3,495 450 451 Others 544 604 285 285 285Long-term Liabilities 11,364 10,918 8,294 11,794 12,294 Long-term Debts 11,150 10,918 8,283 11,783 12,283 Others 214 0 11 11 11Shareholders' Equity 8,695 9,484 8,838 9,005 9,108 Common Stock 3,990 3,990 3,990 3,990 3,990 Capital Surplus 2,065 2,067 2,065 2,065 2,065 Retained Earnings 2,639 3,427 2,783 2,950 3,053 Preferred Stock 0 0 0 0 0

Balance Sheet


Key Ratios


Profit & Loss


Cash Flow


Rates of Return on Invested Capital




Household & Business

Industrial 2.4

Agricultural

Electricity generation

65.8

24.4

65.8

7.5

TTW group

EASTW group

Others

72.0

5.0

23.0

Company ProjectType of contract

Capacity (cu m/day)

1 Thai Tap Water Nakornpathom-Samutsakorn Water Supply BOO 440,0002 Pathum Thani Water Pathumthani Rangsit Water Supply BOOT 388,0003 UU Group Rayong Water Supply BTO 86,4004 East Water Koh Samui Water Supply BOO 3,0005 East Water Sattahip Water Supply Lease contract 31,2006 East Water Pattaya Water Supply Lease contract 15,9727 Nakorn Sawan Water Nakornsawan Water Supply BOOT 14,4008 Chacheongsao Water Chachoengsao Water Supply BOOT 37,2009 Bangpakong Water Bangpakong Water Supply BOOT 43,20010 Egcom Tara Ratchburi-Samuisongkran Water Supply BOO 36,00011 R.E.Q. Water Services Phuket Water Supply BOO 28,00012 Industrial Water Resource Management Panasnikhom-Banbueng Water Supply BOO 30,000

Total 1,153,372

Part of EASTW group (total of 267k cum/day)

Part of TTW group (total of 828k cum/day)

Appendix I: Thai Water Industry - At A Glance

Supply and demand

The key sources of water include reservoirs, rivers, lakes, and aquifers.

Thailand has a total water storage capacity of 73,642mn cum.

The total water demand was 98,755mn cum in 2010 and agriculture

accounts for the majority of the water demand.

Figure 38: Agriculture accounts for the largest share of demand

Thailand’s water demand breakdown, percent

Source: Provincial Waterworks Authority

Key authorities

The Royal Irrigation Department, under the Department of Agriculture,

is responsible for the management of the country’s water and

ensuring sufficient water for agricultural purposes.

The Provincial Waterworks Authority (PWA) is responsible for tap

water supply and raw water sourcing across the country, except for

Bangkok, Nonthaburi, and Samutprakan, which are served by the

Metropolitan Waterworks Authority (MWA). Both of the state

agencies are under the Department of Interior.

Tap water in Thailand is provided to end users by PWA, MWA, or the

local government in areas not currently covered by PWA or MWA.

Joint Ventures With Private Companies

Background The main source of water for residential and industrial use is aquifers,

located mainly in the central region of Thailand. However, over

utilization of groundwater has caused serious land subsidence which

could cause damage to buildings, roads, bridges, as well as

underground tap water and waste water pipelines. According to a

report by PWA, Bangkok and vicinities (including Nakonpathom,

Samutsakorn, and Pathumthani) sank more than one meter from

1978 to 2000 due to over-utilization of groundwater.

The government’s responded by increasing groundwater fees (from

Bt3.5/cum in 2000 to Bt8.5/cum in 2003), closing groundwater wells,

promoting usage of tap water sourced from the surface (e.g. rivers

and reservoirs), and prohibited the use of groundwater in areas with a

land subsidence crisis where tap water is available.

To expedite the expansion of the tap water system, the government

encouraged private sector involvement in distribution and production,

mainly through the cooperation with PWA.

Projects with private companies There are currently 12 joint venture projects between PWA and

private companies. The private companies sell tap water to PWA to be

distributed to the end users.

TTW group is the largest private tap water provider, followed by

EASTW group. TTW accounts for 72% of the total JV projects based

on capacity and about 20% of PWA’s sales volume in 2010.

Figure 39: TTW’s group capacity accounts for 72% of JV projects

Breakdown of PWA’s joint venture capacity, percent

Source: Provincial Waterworks Authority; KGI Securities (Thailand) estimates

Figure 40: Joint venture projects between PWA and private companies




2010 2011F 2012F 2013F 2014FChange in CPI (%) 3.3 3.9 2.8 3.3 5.0

Benefits from inflation

Tap water operators benefit from inflation as the tariff pricing

formula in the tap water sales agreement with PWA is linked to the

Consumer Price Index (CPI).

We note that depreciation and amortization, which is relatively

unaffected by inflation, accounts for a large portion of water

providers’ expenses (e.g. around 20% of EASTW’s and 30% of

TTW’s total cost before tax). This means that water providers’

inflation linked revenue should increase at a higher rate than cost.

KGI’s economist, expects Thailand’s CPI to increase 3.9% for 2011.

As such, we expect tap water tariff to be adjust upward based on

this rate for 2012.

Figure 41: CPI forecast

Source: Bank of Thailand; KGI Securities (Thailand) estimates

We expect inflation to remain around 3% in 2012 from an increase

in food price and consumer goods following the flooding in 4Q11.

We see further upside to our 2012-14 inflation forecast from the

gradual easing of price cap on liquefied petroleum gas (LPG), and

compressed natural gas (CNG, also known in Thailand as NGV)

which has kept energy prices artificially lower than the global price. Figure 42: CPI has been increasing…

Consumer Price Index, points

Source: Bank of Thailand

Figure 43: …so has the water tariff

EASTW and TTW Group water tariff, Bt/cum


Figure 44: Water tariff on the rise

Water tariff two-year CAGR (2009-2010), percent


The average annual tap water tariff increase over the past two years

(2009-2010) is 3.9%, in line with inflation over the period. We note

that the raw water tariff increase is higher as raw water tariff is

adjusted in accordance to cost and economic conditions rather than

being limited to inflation like tap water.

Continuous increase in demand is expected

We expect a continuous increase in both tap water and raw water

demand driven by increasing income per capita, higher standard of

living, increasing population, worsening quality of groundwater (a

key substitute to tap water) and increasing industrialization.

This is reflected by the sales volume of PWA, the state agency which

is Thailand’s main retail distributor of water, which showed CAGR of

7% over the past five years (2006-2010) in tandem with the factors

mentioned above.

Figure 45 PWA’s sales volume grew 7.2% annually over the

past five years

PWA’s sales volume, mn cum


0

20

40

60

80

100

120

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

10 year CAGR of 2.6%

0

10

20

30

2008 2009 2010 2011F 2012F 2013FEASTW - raw water EASTW - tap waterTTW - TTW (<300k cum/day) TTW - TTW (>300k cum/day)TTW - PTW

0

200

400

600

800

1,000

2005 2006 2007 2008 2009 2010

FIve year CAGR of 7.2%

12.2

5.04.3 4.2

2.2

EASTW: rawwater

EASTW: tap water TTW: TTW(<300k cum/day)

TTW: TTW(>300k cum/day)

TTW: PTW



Figure 46: Number of water users has also been increasing

Water users in PWA service area, mn persons


Figure 47: Income per capita on the rise

Thailand’s income per capita, Bt ‘000/annum


Figure 48: MPI is increasing

Manufacturing Production Index (MPI), points

Source: The Office of Industrial Economics

Figure 49: Population growth – small increase

Thailand’s population, mn persons

Source: Department of Provincial Administration

Low penetration rate provides growth opportunity

According to a study commissioned by TTW in 2006 on

Nakonpathom and Samutsakorn (provinces served by TTW), tap

water only accounts for 19% of water consumption (vs. 81%

ground water). The study also predicted that ground water usage by

industrial users in those provinces would end in 2015.

Considering that those provinces are in the more developed areas of

Thailand, given their close proximity to Bangkok and higher income

per capita relative to the rest of the country, we believe that tap

water penetration rate in other parts of Thailand is likely to be even

lower than 19%.

Figure 50: Income per capita in TTW’s service area is much

higher than Thailand’s average

Income per capita, Bt ‘000/annum


Major Players In The Industry

EASTW – Eastern domination EASTW’s core business is the development and management of water

system by supplying raw water to industrial estates, factories, and

waterworks via five main raw water pipeline systems in the eastern

seaboard - Thailand’s most developed industrial area and home to a

number of heavy industries, including petrochemical, automotive, and

electronics.

It also operates tap water business and other water related business

through its wholly owned subsidiary Universal Utilities Group (UU).

EASTW group currently manages nine tap waterworks stations in

Chonburi, Rayong, Chacheongsao, Nakonsawan, and Suratthani.

EASTW was established in 1992 by PWA, as a result of the Cabinet

resolution that assigned PWA to establish a company to manage and

develop a raw water pipeline system in Thailand’s eastern seaboard to

serve the fast growing industrial demand in the region. The eastern

seaboard has been the focal point of economic development by the

Thai government over the past 25 years. EASTW was privatized in

1996 and was listed on the Stock Exchange of Thailand (SET) in 1997.

TTW – Largest private tap water operator TTW group is the largest tap water provider in Thailand. Together

60,000,000

61,000,000

62,000,000

63,000,000

64,000,000

2005 2006 2007 2008 2009 2010

Five year CAGR of 0.5%

0.0

1.0

2.0

3.0

4.0

2005 2006 2007 2008 2009 2010


0

50

100

150

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010


0

50

100

150

200

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

10-year CAGR of 3.5%

0

200

400

600

800

Countrywide Nakhonpathom (TTW servicearea)

Samutsakorn (TTW servicearea)



with its 98% subsidiary Pathumthani Tap Water (PTW), it has a total

capacity of 864K cum/day and provides tap water under concessions

to users in seven districts in Nakonpathom, Samutsakorn, and

Pathumthani.

TTW was established in 2000 by a group of companies, namely Ch

Karnchang Plc. (CK.BK/CK TB) and Thames Water (Thailand), with the

key purpose of selling tap water to the PWA in Nakhonpathom and

Samutsakorn. PWA was assigned by the Cabinet in 1995 to expand

tap water service in order to address the land subsidence due to

overutilisation of ground water in those provinces.

In 2007, TTW acquired 98% of PTW from its mutual major

shareholder, CK, to reduce any conflict of interest that may arise from

being in the same business. PTW supplies tap water to six districts in

Pathumthani province.

Figure 51: Provinces served by EASTW and TTW




Grant reservior concessionsGrant concession to management and operation of main water distribution system in the eastern region

Raw water Raw water

Clarified water Tap water Tap water Tap water

Royal Irrigation Department (RID)Responsibility: Development of water supply

EASTWResponsibility: Development and

management of raw water pipeline

Industrial Estate Authority of Thailand (IEAT) & private

industrial estates

Ministry of Finance

Household CommercialIndustrial plants and factories

Provincial Waterworks Authority (PWA) Responsibility: Main retail distributor of tap water (will

treat EASTW raw water into tap water)

Eastern Water Resources(EASTW)

Universal Utilities (UU Group)

EGCOM Tara

40%

15%

Provincial Waterworks Authority (PWA)

Electricity Generating Company (EGCO)

Norbex INC(UK investment co)

Industrial Estate Authority of Thailand

Institutional Investors

Retail Investors

16% 10% 5% 19% 10%

100%

Appendix II: EASTW at a glance

Company Overview EASTW supplies raw water and tap water under long-term concessions with more than ten years remaining. Its core business is in the development and management of water systems in the eastern seaboard, Thailand’s industrial hub, by supplying raw water to industrial estates, factories, and waterworks via five main raw water pipeline systems in Chonburi, Rayong, and Chachoengsao. Figure 52: EASTW’s pipeline


The eastern seaboard is Thailand’s most developed industrial area

and is the focal point of economic development by the Thai

government over the past 25 years. The area is home to 54% of

total industrial estates in Thailand and a number of heavy industries

including petrochemical, automotive, and electronics.

Over the past six years (2005-2010), 52% of the investment value of

the applications approved by Thailand’s Board of Investment (BOI)

was located in the eastern seaboard. The total projects in EASTW’s

service area that was approved were 2,268 projects with a total

investment value of Bt1.4tn (US$46bn).

Figure 53: EASTW’s raw water business


In our view, EASTW is a natural monopoly in its area given its

extensive pipeline network, difficulties in building new pipelines

(e.g. opposition from local communities and government approval

is needed), and the high investment cost involved for another player

to compete, which is likely to make the investment unfeasible.

EASTW established Universal Utilities (UU Group), a wholly owned

subsidiary, in 1998 for expansion into tap water business, seawater

desalination management, wastewater treatment, operation &

maintenance, and water quality analysis laboratory. EASTW group

currently manages ten tap waterworks stations in Chonburi,

Rayong, Chacheongsao, Nakonsawan, and Suratthani.

Over the past two years (2009-2010), raw water accounted for

around 75% of total revenue but 80% of gross profit as the raw

water business gross margin is higher than tap water business (65%

vs. 42%). We expect the raw water business to continue to

constitute around 75% of revenue and 80% of gross profit in

FY11-13F.

Group structure

Since its listing on the SET in 1997, EASTW group has expanded into

tap water business and other waterworks business mainly through

its wholly owned subsidiary UU Group.

Figure 54: EASTW group structure


EGCOM Tara operates tap water concession business in Ratchaburi

and Samutsongkram, and is part of Electricity Generating Company



Rank Major shareholders Type Number of shares % shares1 Provincial Waterworks Authority Local Juristic Person 668,800,000 40.22 Electricity Generating Company Local Juristic Person 311,443,190 18.723 Norbax Inc Foreign Juristic Person 169,324,700 10.184 Industrial Estate Authority of Thailand Local Juristic Person 76,000,000 4.575 Thai NVDR Local Juristic Person 43,272,680 2.6

IEAT

PWA

Private industrial estates

Other users

34.0

32.0

26.0

32.0

8.0

Rayong Chonburi

Chacheongsao 2.0

65.033.0

PetrochemicalConsumption &

tourism

Automobile Others

60.030.0

5.05.0

(EGCO.BK/EGCO TB)* group, one of the largest Thai power

developers, who is also the second biggest shareholder in EASTW.

Major shareholder

PWA, a government agency, is the country’s main retail distributor

of tap water, and is the biggest shareholder in EASTW since its

establishment in 1992. We believe that EASTW should be able to

leverage PWA for any future expansion.

Figure 55: Top shareholders in EASTW

Source: Stock Exchange of Thailand

Management

Praphant Asava-Aree (CEO)

Praphant Asava-Aree has served as Chief Executive Officer and

President of EASTW since 2007. He spearheaded the cost control

program that resulted in the net profit margin increasing to 28%

(+5ppts) over the past four years. He also implemented more

Corporate Social Responsibility (CSR) programs that led to a better

relationship with shareholders. Mr. Asava-Aree other current

positions includes Director of Seamico Securities Plc

(ZMIC.BK/ZMICO TB), KT Zeamico Securities Plc, Thai Listed

Companies Association, and Thai San Miguel Liquor Co.Ltd. He

received his MBA from Thammasat University and Bachelor’s degree

in Political Science from Ramkhamhaeng University, Thailand.

Namsak Wannavisute (CFO)

Namsak Wannavisute has been Chief Financial Officer of EASTW

since 2009 and has been with EASTW since 1997 in various roles

mainly in business development. Mr. Wannavisute holds Masters of

Finance from University of Colorado, USA.

Key Customers

Top two customers – also its major shareholders

EASTW’s top two customers, PWA and IEAT, accounted for 67% of

its 2010 raw water sales volume. They are also its major

shareholders, which should reduce the risk of switching.

Around 60% of EASTW’s raw water is sold to industrial customers

through IEAT and private industrial estates. The majority of the

industrial users are in the petrochemical industry. The remainder is

mostly sold to PWA, which processes the water further into tap

water before being sold to end users.

Figure 56: PWA and IEAT are the biggest customers

Breakdown of raw water customers (FY10), percent

Source: Company data (as of 1H11)

Figure 57: Petrochemical sector accounts for the majority of industrial users

Breakdown of raw water industrial users, percent


Figure 58: Rayong accounts for the biggest share of raw water usage by volume

Breakdown of raw water sales by province, percent

Source: Company data (as of 1H11)

Key Business

Stable growth from raw water sales

EASTW’s raw water sales volume CAGR is 4% over the past five

years (2005-2010) from the increase in industrial activities in the

eastern seaboard. This is in line with Thailand’s average GDP growth

of 4% over the same period.



Figure 59: Continuously increasing

EASTW’s raw water sales volume, mn cum


Thailand’s petrochemical industry is concentrated in the eastern

seaboard, which is EASTW’s main service area, and accounts for

60% of EASTW’s sales to industrial customers. As such, the

company’s raw water sales volume has a high correlation with

Thailand’s Chemical Sector Manufacturing Production Index (MPI)

with an R-squared of 0.96 (using data from 2001-2010).

Figure 60: Raw water sales volume is highly correlated to Chemical Industry MPI

Thailand’s Chemical Industry MPI vs. EASTW’s raw water sales volume

Source: Office of Industrial Economics; Company data; KGI Securities (Thailand) estimates

Given the 10-year CAGR of Chemical MPI of 5% (2001-2010) and a

225% YoY increase in BOI net applications by the chemical sector in

9M11, we see upside risk to our conservative sales growth forecast

of 3%.

Figure 61: Petrochemical sector showed high growth in 9M11 BOI net applications

BOI net applications, Bt bn

Source: Board of Investment; KGI Securities (Thailand)

EASTW has ample capacity to meet an increase in water demand.

Management said that the current capacity of 473mn cum should

be enough to support the potential increase in demand for the next

nine years.

Figure 62: Sufficient supply for future demand growth

Volume, m cum


Tap water – A potential wild card

EASTW’s tap water business has had impressive sales growth of

27% CAGR over the past five years (2006-2010) which we believe is

due to the low penetration in its service areas.

Figure 63: Strong growth in tap water sales volume

EASTW’s tap water sales volume, mn cum


The strong tap water revenue growth over the past five years

constitutes volume CAGR of 22% from continuous development of

rural areas and population growth, and an average tariff CAGR of

4%, which is in line with CPI CAGR of 3% over the same period.

EASTW group currently manages ten tap waterworks stations in five

provinces. We expect tap water sales to increase to Bt0.75bn in

2012 (up 4% YoY) from i) an increase in sales volume of 4% from

continued economic growth, in line with management guidance;

and ii) an increase in tariff of 4% based on the prior year change in

CPI as per contracted. The tariff increase is in line with the view of

KGI’s economist that headline inflation would be 3.9% for 2011.

We forecast a volume growth slowdown as we believe the tap

water penetration rate in EASTW’s service area is higher than in

2005. Management has said the tap water penetration rate in the

company’s service area is nearly 100%.

0

100

200

300

400

500

2008 2009 2010 2011F 2012F 2013F 2014F 2015F

Raw water capacity Raw water demand

190 199 211228 218

245

2005 2006 2007 2008 2009 2010


233.9

375.820.0

65.0

0

100

200

300

400

500

9M10 9M11

Others Chemical

+225% YoY

2227

32

4853

59

2005 2006 2007 2008 2009 2010

Five year CAGR of 21.8%Y = 2.2266x - 128.08 R2 = 0.9573

80

110

140

170

200

230

260

80 110 140 170



Minimum Offtake CapacityName Province cum/day cum/day Remaining years of contract Contract typeChachoensao Water Supply Chachoengsao 27,000 51,600 14 BOOTBangpakong Water Supply Chachoengsao 27,000 43,200 14 BOOTNakhonsawan Water Supply Nakhonsawan 6,450 19,200 14 BOOTRayong Waterworks Rayong 36,000 86,400 20 BTOSattahip Waterworks Chonburi 18,000 31,200 23 Lease contractBorwin Waterworks Chonburi N.A. 9,600 18 BOOTChonburi Water Supply Chonburi N.A. 24,000 16 BOOOthers Varies 2,500 3,624 Varies VariesTotal 116,950 268,824

We see upside risk to our sales volume growth forecast from

winning new potential tap water concessions from fast growing

demand in other areas with lower tap water penetration rates.

Figure 64: Tap water business – List of projects




Rank Major shareholders Type Number of shares % shares

1 Ch Karnchang Pcl Local Juristic Person 1,198,777,400 30.042 Mitsui Water Holdings (Thailand) Local Juristic Person 1,036,500,000 25.983 Bangkok Expressway Pcl Local Juristic Person 368,750,000 9.244 Thai NVDR Local Juristic Person 135,895,749 3.415 Bangkok Life Assurance Pcl Local Juristic Person 98,916,800 2.48

PTW(98% owned by TTW)

Service Area Three districts in Nakonpathom and two districts in Samutsakorn

Six districts in Pathumtani

Tap water penetration rate 19% ~100%Sales growth expected High Low

- 50% industrial (mostly in food industry)

- 50% residential

- 27% residential - 30% industrial - 23% commercial - 20% commercial

Minimum offtake quantity (cum/d 318,000 330,000Capacity (cum/day) 440,000 388,000Sales volume (cum/day) 329,308 343,460

25.11 (<300k cum/day)11.02 (>300k cum/day)

Tariff adjustment Anually adjusted on 1st Jan based on prior year Dec CPI (central region) + K factor

Annually adjusted on 1st Jan using prior year July CPI

(nationwide)Revenue contribution 65% 31%Net profit contribution 71% 26%Water source Tachin River Chao Phraya RiverConcession granted by Ministry of Natural Resource

and EnvironmentMinistry of Interior

Sales agreement contract granted by

PWA PWA

Contract Type Build Own Operate Build Own Operate TransferRemaining years of contract 23 12

Contract duration (Years) 30 25Contract commencement 21-Jul-04 15-Oct-98

Tariff (Bt/cum) 11.16

TTW

Breakdown of end users

Appendix III: TTW at a glance

Company Profile Largest private tap water provider in Thailand TTW and its 98% subsidiary PTW, provide tap water in Central

Thailand under long-term concessions and minimum off-take

agreement and has more than ten years of the contract

remaining. Their service areas are in Nakonsawan, Samutsakorn,

and Pathumthani province. TTW has no direct competition in its

service area except from drilling of lower quality groundwater by

the local communities. TTW group is the largest private tap water provider in Thailand. The

company was established in 2000 with the key purpose of selling tap

water to the Provincial Waterworks Authority of Thailand (PWA) in

Nakhonpathom and Samutsakorn. PWA was assigned by the Cabinet in 1995 to expand tap water

service in order to address the land erosion crisis resulting from

overuse of ground water in six provinces – Nakonpathom,

Samutsakorn, and Pathumthani. PWA was unable to expand in a

timely manner due to insufficient funding and chose to work with

TTW to meet the assigned expansion. In 2007, TTW acquired 98% of Pathumthani Tap Water (PTW) from

its mutual major shareholder, Ch Karnchang Plc (CK BK/CK TB), to

reduce any conflict of interest that may arise from being in the

same business. PTW provides tap water service under concession to

Pathumthani province. The first full-year consolidation of PTW was

in 2008.

Figure 65: TTW’s key business


Group structure

TTW is part of the CK group, one of Thailand’s largest contractors

and has been listed on the Stock Exchange of Thailand since 1995.

TTW owns 98% of PTW and 30% of CK Power, CK’s holding

company for its power business. CK Power currently holds 38% of

SEAN, the developer and operator of the 615 megawatt Nam

Ngum II hydropower plant in Laos.

Figure 66: TTW’s group structure

Source: SET; Company data

Major shareholders

CK has been the biggest shareholder in TTW since its establishment

in 2000. CK is also the biggest shareholder in Bangkok Expressway

(BECL.BK/BECL TB), TTW’s third largest shareholder.

CK has played an instrumental role in TTW’s growth, including

helping it acquire PTW, acquire 30% stake in CK Power, and win a

water management contract with Bang Pa-in Industrial Estate in

2009. CK’s Chief Executive Officer, Mr. Plew Trivisvavet, also serves

as the Vice Chairman of TTW.

The second biggest shareholder, Mitsui Water Holdings (Thailand), is

part of Mitsui Group, a large Japanese conglomerate involved in a

number of businesses around the globe, including mineral resources

& energy, global marketing networks, lifestyle business, and

infrastructure. We believe that TTW may be able to rely on Mitsui

Group’s overseas expertise if it looks to expand overseas.

Figure 67: Top shareholders in TTW

Source: SET; Company data

Management

Sompodh Sripoom (CEO)

Sompoh Sripoom has served as Chief Executive Officer of TTW since

2005, Mr. Sripoom’s other current positions include CEO of PTW and

Director of Thai Water Operations Ltd. He received his Masters in

Resource Planning and Management from Naval Postgraduate

School, USA, Masters in Structural Engineering and Structural

30%

98%

Mitsui Water Holdings (Thailand)

Bangkok Expressway Pcl (BECL)

Others

26% 9% 35%

Ch Karnchang Pcl(CK)

2%

15%

30%38%

Provincial Waterworks Authority (PWA)

Pathumtani Tap Water(PTW)

CK Power

Thai Tap Water(TTW)



Industrial

Commercial

Residential

40.0

38.0

22.0

Industrial

Commercial

Residential

25.0

24.0

52.0

Industrial

Commercial

Residential

20.0

28.0

52.0

Mechanics from University of California at Berkeley, USA and a

Bachelor of Science in Civil Engineering from Virginia Military

Institute, USA.

Somkiat Pattamamongkolchai (CFO)

Somkiat Pattamamongkolchai has been Chief Financial Officer of

TTW since 2005. Mr.Pattamamongkolchai’s other current positions

include Director of Thai Water Operations. He received his Master of

Accounting from Thammasart University, Thailand and Bachelor's

Degree Bachelor of Accounting from Chulalongkorn University,

Thailand.

Key Customer

PWA is the sole customer

TTW and PTW sell all tap water to PWA, which then resells it to end

users. Despite the risk of relying on only one customer, PWA is a

state agency so the risk of default is limited.

The end users in provinces served by TTW group (Nakonpathom,

Samutsakorn, and Pathumthani) can be divided into 40%

households, 38% industrial, and 22% commercial.

Figure 68: Industrial and residential users account for about 80% of TTW’s group sales volume Breakdown of end users for TTW group (including PTW), percent


More than half of TTW’s industrial end users are in the food industry,

namely frozen and canned seafood. The food industry’s peak

demand is in the fourth quarter of each year in the run up to

Christmas and New Year. TTW’s largest industrial users are Samut

Sakhon Industrial Estate and Thai Union Frozen Products (TUF BK/TUF

TB), one of Thailand’s largest exporters of frozen and canned

seafood.

Figure 69: Industrial users are the largest end user group in TTW’s service area Breakdown of end users in TTW’s service area, percent


Most of PTW’s service area is in residential, hence a higher proportion

of residential users. The industrial users in PTW’s area are mostly in

non-food industries.

Figure 70: Residential users are the largest end user group in PTW’s service area Breakdown of end users in PTW’s service area, percent

Source: Provincial Waterworks Authority Stable Growth Outlook

Good growth over the past five years

TTW and PTW’s sales volumes have grown at CAGR of 12% and 5%,

respectively, over the past five years (2005-2010).

Figure 71: TTW’s sales volume is catching up to PTW’s

Sales volume, mn cum


We believe that TTW has a higher growth rate than PTW because the

tap water penetration rate at TTW’s service areas (Nakornpathom

and Samutsakorn) is lower than PTW (Pathumthani).

0

20

40

60

80

100

120

140

2005 2006 2007 2008 2009 2010TTW PTW



2010 2011F 2012F 2013F 2014FChange in CPI (%) 3.3 3.9 2.8 3.3 5.0

Benefits from inflation

TTW group benefits from inflation as the tariff pricing formula in the

tap water sales agreement with PWA is linked to the Consumer Price

Index (CPI).

We note that depreciation and amortization, which is relatively

unaffected by inflation, accounts for a large portion of water

providers’ expenses (e.g. around 30% of TTW’s total cost before tax).

This means that water providers’ inflation linked revenue should

increase at a higher rate than its cost.

KGI’s economist expects Thailand’s CPI to increase 3.9% for 2011. As

such, we expect the tap water tariff to be adjusted upward by the

same rate for 2012.

Figure 72: CPI forecast

Source: Bank of Thailand, KGI Securities (Thailand) Estimates

We expect inflation to remain around 3% in 2012 from increases in

food prices and consumer goods following the flooding in 4Q11. We

see further upside to 2012-14 inflation from the gradual easing of

the price cap on liquefied petroleum gas (LPG), and compressed

natural gas (CNG, also known in Thailand as NGV) which has kept

energy prices artificially low.

Figure 73: CPI is increasing

Consumer Price Index, points

Source: Bank of Thailand

0

20

40

60

80

100

120

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010


Thailand KGI Securities Information


Thailand Research Name Abbr. Sector Coverage Ext. Email

Itphong Saengtubtim IS Head of Research 8840 [email protected]

General line: Rakpong Chaisuparakul RC Strategist 8845 [email protected]

66.2658.8888 Pongtham Danwungderm PD Energy, petrochemical 8859 [email protected]

Adisak Kammool AK Strategist 8843 [email protected]

Phatipak Navawatana PN Telecom, media, healthcare, air transportation 8847 [email protected]

Nat Panassutrakorn NP Construction material, contractor 8849 [email protected]

Pragrom Pathomboorn PP Economist 8846 [email protected]

Urasri Phornwises UP Food, consumer 8857 [email protected]

Thaninee Satirareungchai, CFA TS Residential property, banking 8851 [email protected]

Pongpat Siripipat PS Derivatives 8844 [email protected]

Suchot Tirawannarat ST Ground transportation, shipping, automobile, small caps 8852 [email protected]

Piyathida Vongvivathchai PV Oil & Gas, coal mining, utilities 8856 [email protected]

Tareetip Wongsaegpaiboon TW Residential property, industrial estates 8855 [email protected]

ASEAN Sales Name Abbr. Sector Coverage Ext. Email

General line: Danny Komolrit DK Thailand sales 8090 [email protected]

66.2658.8888 Kannikar Pradiskesorn KP Thailand sales 8081 [email protected]

Datenusorn Rungruang DR Thailand sales 8082 [email protected]

The toll-free line for clients in HK and Singapore: 800.0800.5008



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Telephone 852.2878.6888

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KGI Securities (Thailand) Plc.

8th - 11th floors, Asia Centre Building

173 South Sathorn Road, Bangkok 10120, Thailand

Telephone 66.2658.8888

Facsimile 66.2658.8014

KGI's Ratings Rating Definition

Outperform (OP) The stock's excess return* over the next twelve months is ranked in the top 40% of

KGI's coverage universe in the related market (e.g. Thailand).

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between the top 40% and the bottom 40% of KGI's coverage universe in the related

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KGI's engagement in an investment banking transaction and in certain other

circumstances.

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Note When an analyst publishes a new report on a covered stock, we rank the stock's

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