1

31 Oct 2014

Initiate Coverage: BCP

The Bangchak Petroleum PCL (BCP)

Buy for diversification benefits

We initiate our coverage of BCP with a BUY recommendation and target price

of Bt38.10. We believe BCP’s strategy to diversify into E&P petroleum and

renewable energy businesses should help reduce the fluctuation of and

dependency on its traditional refinery & petroleum business. As a result, the

outlook for its EBITDA from 2014 onward is bright. Our target price offers an

implied upside of 14.6% and estimated dividend yields of 3.7% for 2014 and

4.2% for 2015. We have not factored in the potential benefits from the E&P

business in our valuation.

Business diversification to reduce dependency on traditional business

BCP has set a long-term strategy to diversify into other energy businesses, particularly

green energy, in order to reduce its dependency on, and fluctuations in, its traditional

oil business. BCP started investing in biofuel to promote the alternative energy theme

in its retail business, subsequently invested in a solar farm to secure high stream

income, and recently invested in an upstream E&P business. The benefits of its biofuel

and solar businesses have already been seen and are expected to continue, while the

E&P business will strengthen crude supply for its refinery operations and smooth out

its highly fluctuating profit margin in the longer term.

Foresee EBITDA remaining at a high level from this year onward

We forecast adjusted EBITDA to increase by 39.6% YoY to Bt9.2bn in 2014, primarily

due to the start-up of the last-phase of its 48-MW solar farm project in April 2014. For

2015, its first full-year of operations for all 118-MW solar power generation units should

help drive EBITDA up 8.0% YoY to Bt9.9bn. Moreover, the company will benefit from

the recovery in the utilization rate of its refineries after the annual turnaround

maintenance in 2014. Looking ahead, the benefits of the 3E Project should begin

having a positive effect on BCP’s refinery efficiency and utilization in 2016, which would

also increase the refining margin and EBITDA.

Initiate with a BUY recommendation and 2015 fair value at Bt38.10

We derived our target price for BCP using EV/adjusted EBITDA multiple at 7.5x, which

is the arithmetic mean of the last three years. We believe BCP deserves to trade at a

premium to its refiner peers thanks to the diversification strategy. Our 2015 target price

of Bt38.10 offers an upside of 12.9% from the current price and a dividend yield of

4.2%. Meanwhile, there is potential upside from E&P benefits which we have not

factored in our valuation. BUY.

BUY

Current Price Bt33.25

Target Price 2015 Bt38.10

Upside/(Downside) +14.6%

Consensus Bt37.80

Sector Energy

Paid-up Shares (mn.shares) 1,377

Market Capitalization (Btmn) 45,783

Free Float (%) 62.76

Major Shareholders (%)

1. PTT PCL 27.22

2. Ministry of Finance 9.98

Financial Highlights

Source: SET, AWS estimates

Mr. Napat Siworapongpun License No: 49234

Tel: 02 680 5094

E-mail: Napat.Si@asiawealth.co.th

2013 2014E 2015E 2016E

Revenue (Btmn) 186,514 191,258 202,688 212,531

EBITDA 9,348 8,992 9,913 11,631

Adj. EBITDA 6,574 9,179 9,913 11,631

Net Profit (Btmn) 4,653 4,179 4,844 6,064

EPS (Bt) 3.38 3.04 3.52 4.40

EPS Grow th (%) 8.9 -10.2 15.9 25.2

P/E (x) 9.8 11.0 9.5 7.5

P/BV (x) 1.3 1.2 1.1 1.0

DPS (Bt) 1.35 1.21 1.41 1.76

Div. Yield (%) 4.1 3.7 4.2 5.3

2

31 Oct 2014

Initiate Coverage: BCP

Diversifying to green energy and upstream petroleum business line

Apart from its traditional core businesses of 120KBD complex refineries and more-

than-1,000 oil service stations in Thailand, BCP has been interested in alternative

investments related to energy, especially green energy, to reduce its dependency on,

and fluctuations in, the oil business. In 2010, BCP invested in biodiesel and ethanol to

expand its sales proportion of green alternative fuels, such as B5, Gasohol 91,

Gasohol 95, E20 and E85 through its nationwide network of service stations. In 2011-

2013, the company invested in solar power plants, with total capacity of 118 MW. This

was to secure cash flow income in the long run. All of the power generation units have

been commercially operational since April 2014. More recently, BCP invested in an

E&P petroleum offshore project located near the Philippines and Indonesia, which we

believe would help strengthen the crude oil supply for its refinery in the long term and

smooth the fluctuating margin in its product line chain.

Figure 1: BCP’s alternative investment timeline

Source: Company data

Figure 2: 2009 EBITDA breakdown by business Figure 3: 20013 EBITDA breakdown by business

Source: Company data Source: Company data

Refinery & biofuel

business86%

Marketing business

14%

EBITDA breakdown

Refinery & biofuel

business70%

Marketing business

15%

Solar farm business

15%

EBITDA breakdown

Invested in Biodiesel plants, 360,000 litres per day capacity

2009 2010 2011 2012 2013 2014

Invested in solar power plants, 118 MW total capacity

Invested in Ethanol plants, 400,000 litres per day capacity

Invested in additional Ethanol plants, 150,000 litres per day capacity

Invested in E&P business

To reduce dependency on traditional business.

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31 Oct 2014

Initiate Coverage: BCP

Green fuels to increase profit in marketing business

BCP has promoted alternative energy in order to stand out in the competitive market.

The company blends ethanol and biodiesel with its gasoline and diesel product,

respectively, to obtain 91-octane gasohol, 95-octane gasohol, E20 and E85, together

with Super Power D, a B5 product. To enhance the security of ethanol and biodiesel

supplies to accommodate its sales expansion plan, BCP invested in biodiesel plants,

360,000 litres per day installed capacity, and acquired common shares in Ubon Bio-

Ethanol (UBE), 400,000 litres a day capacity of ethanol production.

In 2012-2013, the company achieved its goal as total sales revenue from all marketing

channels increased, and the market share for E85 gasohol ranked first in 2013 while

maintaining the No. 2 share of all gasoline sales and the No. 3 share of all fuels

through service stations. The high marketing margins of gasohol & gasoline products

along with higher sales volume from continual sales expansion of E20 and E85 kept

profits at a high level throughout 1H14.

We believe BCP’s sales volume growth through marketing channels would continue

on an uptrend going forward. We estimate growth at 4.1% p.a. supported by its

promotion of the green energy theme and increased crude run for its refineries.

Meanwhile, the retail marketing margin should conservatively stand at around Bt1.0

per litre, recovering from the low margin in 2013.

Figure 4: Retail sales volume per month (M.litres) Figure 5: Retail marketing margin (Baht/litre)

Source: Company data, AWS estimate Source: Company data, AWS estimate

201 205223

245 238260 254 263

276

0

50

100

150

200

250

300

2010 2011 2012 2013 1Q14 2Q14 2014F 2015F 2016F

Retail sales volume per month (MMlitres)

0.800.75

0.87

0.73

0.95

1.041.00 1.00 1.00

0.00

0.20

0.40

0.60

0.80

1.00

1.20

2010 2011 2012 2013 1Q14 2Q14 2014F 2015F 2016F

Retail marketing margin (Baht/litre)

As the government requested, BCP used ethanol from cassava instead of cheaper molasses.

4

31 Oct 2014

Initiate Coverage: BCP

Enhanced refinery performance to sustain the growth

In order to serve its expanding retail business and to increase its competitiveness,

BCP has implemented “3E Project: Efficiency, Energy, and Environment” to increase

the efficiency of its refinery, with a total investment cost of Bt7.0bn through 2018. The

project can raise the level of crude run and also improve BCP’s gross refining margin.

Details and benefits of the project can be seen in Figure 8.

Figure 8: Details of the 3E Project

Source: Company data

Detail Completion Target Benefits

New CDU - Higher level of crude run: 120+ KBD (+20%)

Replace the 80-KBD CDU w ith a Completed in 2Q14 - Enhancing GRM by US$1-2/bbl

new 100-KBD CDU - Cost and energy saving

- Low er emission

Cogeneration power plant - To reduce electricity cost

Build a Co-generation pow er plant 2016

(10-20 MW)

Debottlenecking - Higher level of crude run

Debottleneck HCU, VDU and KTU 2017

for the higher level of crude run

New CCR - To increase reformate liquid yield

Install a new Continuous Catalyst 2018 - To reduce LPG output

Regeneration unit

Figure 6: Gasoline retail market share as of 2013 Figure 7: All products retail market share, as of 2013

Source: EPPO, Company data Source: EPPO, Company data

38.9%

17.7%

12.7%

12.1%

18.6%

Gasoline Retail Market Share

PTT BCP ESSO Shell Others

38.2%

15.1%

14.8%

12.7%

19.2%

All product Retail Market Share

PTT ESSO BCP Shell Others

5

31 Oct 2014

Initiate Coverage: BCP

Solar farms help deliver more stable earnings than peers

BCP entered the solar power business in 2011 and invested in solar power plants

contracting PPA with EGAT for 118 MW of capacity. All of its solar power generation

units have been commercially operational since April 2014 and have consistently

generated stable electricity. All projects are subsidized with an incentive adder rate of

Bt8.0 per kWh for 10 years, which should secure high and stable cash flow income

through the next 10 years. As a result, BCP should generate more stable earnings

than other refinery companies as these certain earnings should help significantly

cushion against the volatility of its refinery business, especially the crude inventory

gains/losses, which should make the company more attractive than its peers. We

estimate BCP’s solar power business to contribute around 28% of its total EBITDA or

Bt2.7bn in 2015. Moreover, BCP is in the due diligence process for expanding its

investment in solar business. Solar farms in Japan and the new solar farm scheme of

the government are being looked at by BCP.

Figure 9: Solar power business

Source: Company data, AWS estimates

Diversifying into upstream E&P business

In July, BCP announced the acquisition of a 19.66% stake in Nido Petroleum, an

Australian-based E&P company which explores and produces oil and gas in South

East Asia with 2P reserves of 5.8mn barrels. Furthermore, BCP has undertaken the

tender offer process to purchase all of Nido’s remaining shares. The total deal under

the share purchase agreement and the offer are not expected to exceed AUD120.4mn

(around Bt3.6bn). Currently, BCP has obtained approval for the offer from Australia’s

Foreign Investment Review Board and achieved a relevant interest of 81.41% of

Nido’s total paid-up shares.

BCP’s investment in upstream oil makes sense as it should smooth the fluctuating

margin of its product line chain, as well as being a new source of future profit. It would

also help strengthen the long-term crude oil supply for BCP’s refineries. This should

be a good entry in the E&P business and allow BCP to study the business and

procedures of Nido so it can do future E&P projects by itself. However, we will not

Phase 1 Ayutthaya 2012 8.0 38 747

Phase 2 Ayutthaya, Chaiyaphum 2013 8.0 32 857

Phase 3 Eastern & North Eastern Apr-14 8.0 48 1,113

Total 118 2,717

Project Location CODAdder

(Bt/kw h)

PPA capacity

(MW)

2015F EBITDA

(Btmn)

6

31 Oct 2014

Initiate Coverage: BCP

factor any benefits from this new business in our projection unless the tender offer

deal is officially completed.

Strong financial position to support investment plan

Given BCP’s low debt-to-equity ratio of 0.60x and net-debt-to-equity ratio of 0.41x in

2013 along with the latest Bt10.0bn debenture issuance in early 2014, we believe that

the company can pursue its investment plans without the need for a fresh capital call

in the foreseeable future. Note that we still have not include the E&P investment in our

forecast.

Figure 10: Interest bearing debt and D/E ratio

Source: Company data, AWS estimates

Figure 11: BCP’s Investment Plan

Source: Company data

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

0.90

-

5,000

10,000

15,000

20,000

25,000

30,000

35,000

2011 2012 2013 2014F 2015F

Interest bearing debt and D/E ratio

Interset bearing debt IBD to equity ratio

Btmn x

Invesetment plan (Btmn) Total 2014F 2015F 2016F 2017F 2018F

Refinery business

1) Normal CAPEX 8,750 1,900 1,650 1,950 1,200 2,050

2) New CDU 400 400

3) 3E Project 7,000 280 1,550 1,890 2,460 820

Marketing business

1) Normal CAPEX 3,950 750 800 800 800 800

2) Netw ork Expansion 4,300 700 900 900 900 900

Solar Power Plant Phase 3 2,550 2,550

Biodiesel Plant Phase 2 1,800 840 960

Ethanol (BCP Bioethanol) 765 765

E&P Investment (NIDO) 3,600 3,600

Total 33,115 11,785 5,860 5,540 5,360 4,570

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31 Oct 2014

Initiate Coverage: BCP

Foresee EBITDA staying high from this year onward

We forecast adjusted EBITDA in 2014 to increase 39.6% YoY to Bt9.2bn, mostly due

to the start-up of the last-phase of the 48-MW solar farm project in April 2014. In 2015,

BCP will recognize full-year operations of all 118-MW of its solar power generation

units for the first time, and this should help drive EBITDA up 8.0% YoY to Bt9.9bn

Moreover, the company will benefit from the recovery in the utilization rate of its

refineries after the annual turnaround maintenance in 2014. Looking ahead, the

benefits from the 3E Project should begin having a positive effect on its refinery

efficiency and utilization in 2016, and would certainly increase the refining margin and

EBITDA as well.

Figure 12: BCP’s adjusted EBITDA

Source: Company data, AWS estimates

Recommend BUY with 2015 fair value of Bt38.10

We derived our target price for BCP using EV/adjusted EBITDA multiple at 7.5x, which

is the arithmetic mean of the last three years. We believe BCP deserves to trade at a

premium to its refiner peers thanks to the diversification strategy. Our 2015 target

price of Bt38.10 offers an upside of 14.6% from the current price and a dividend yield

of 4.2%. Meanwhile, there is potential upside from E&P benefits which we have not

factored in our valuation. We recommend BUY.

3,934

8,278

6,574

9,179 9,913

11,631

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

2011 2012 2013 2014F 2015F 2016F

Btm Adjusted EBITDA

8

31 Oct 2014

Initiate Coverage: BCP

Figure 13: BCP’s EV/adjusted EBITDA

Source: Compiled by AWS

Table 1: Financial projections

Source: AWS estimates

4.0

5.0

6.0

7.0

8.0

9.0

10.0

01/2

012

03/2

012

05/2

012

07/2

012

09/2

012

11/2

012

01/2

013

03/2

013

05/2

013

07/2

013

09/2

013

11/2

013

01/2

014

03/2

014

05/2

014

07/2

014

09/2

014

x

EV/EBITDA - 2 SD - 1 SD avg. + 1 SD + 2 SD

Income Statement

Unit: Btmn 2012A 2013A 2014E 2015E 2016E

Revenue from sales & services 165,246 186,514 191,258 202,688 212,531

Cost of sale of goods & services 158,083 177,472 182,011 191,465 199,769

Gross profit 7,163 9,041 9,247 11,222 12,762

Selling & administrative expenses 4,100 4,290 4,549 4,829 5,058

Finance costs 940 1,064 1,526 1,379 1,335

Income tax expense 715 932 697 549 685

Net profit 4,273 4,653 4,179 4,844 6,064

EPS (Bt) 3.10 3.38 3.04 3.52 4.40

Balance Sheet

Unit: Btmn 2012A 2013A 2014E 2015E 2016E

Assets

Cash and cash equivalents 8,006 6,527 13,183 10,934 11,397

Trade accounts receivable 7,737 8,660 9,563 10,134 10,627

Inventories 19,175 17,092 18,201 19,147 19,977

Property, plant and equipment 29,919 31,771 36,507 40,222 42,446

Intangible assets 1,196 1,392 1,261 1,131 1,000

Total assets 70,853 72,389 84,122 87,008 90,919

Liabilities

Trade accounts payable 13,700 11,534 12,240 12,876 13,434

LT loans from financial institutions 16,028 17,834 16,791 15,749 14,874

Debentures 2,995 2,996 13,000 13,000 13,000

Total liabilities 38,530 37,408 46,721 46,334 46,018

Shareholders' equity

Issued and paid-up share capital 1,377 1,377 1,377 1,377 1,377

Share premium 11,157 11,157 11,157 11,157 11,157

Retained earnings 19,400 21,988 24,308 27,481 31,608

Total equity 32,323 34,981 37,401 40,674 44,901

Total liabilities and equity 70,853 72,389 84,122 87,008 90,919

9

31 Oct 2014

Initiate Coverage: BCP

ADVANC BTS GRAMMY MCOT PTT SC SSI TMBAOT CIMBT HANA MINT PTTEP SCB SSSC TNITYASIMAR CK HEMRAJ NKI PTTGC SCC SVI TOPBAFS CPF ICC NOBLE QH SCSMG SYMC TRCBANPU CPN INTUCH PAP RATCH SE-ED TCAP TRUEBAY CSL IRPC PG ROBINS SIM THAI TTWBBL DRT IVL PHOL RS SIS THCOM TVOBCP DTAC KBANK PR S&J SITHAI THRE UVBECL EASTW KKP PRANDA SAMART SNC TIP VGIBKI EGCO KTB PS SAMTEL SPALI TISCO WACOALBROOK ERW LPN PSL SAT SPI TKT

2S ASP CHOW GBX JUBILE LRH NMG PPP SINGER TCP TOG UACACAP AYUD CM GC KBS LST NSI PREB SIRI TF TPC UMIAF BEC CNT GFPT KCE MACO NWR PRG SKR TFD TPCORP UMSAHC BFIT CPALL GL KGI MAJOR OCC PT SMT TFI TPIPL UPAIT BH CSC GLOW KKC MAKRO OFM PYLON SNP THANA TRT UPOICAKP BIGC DCC GOLD KSL MBK OGC QTC SPCG THANI TRU UTAMANAH BJC DELTA GSTEL KWC MBKET OISHI RASA SPPT THIP TSC VIBHAAMARIN BLA DTC GUNKUL L&E MFC PB SABINA SSF TICON TSTE VIHAMATA BMCL ECL HMPRO LANNA MFEC PDI SAMCO STANLY TIPCO TSTH VNGAP BWG EE HTC LH MODERN PE SCCC STEC TK TTA VNTAPCO CCET EIC IFEC LHBANK MTI PF SCG SUC TLUXE TTCL YUASAAPCS CENTEL ESSO INET LHK NBC PJW SEAFCO SUSCO TMILL TUF ZMICOASIA CFRESH FE ITD LIVE NCH PM SFP SYNTEC TMT TWFPASK CGS FORTH JAS LOXLEY NINE PPM SIAM TASCO TNL TYM

A ASIA CITY EASON HTECH KASET MJD PL SF SVOA TMI UOBKHAAV BAT-3K CMR EMC HYDRO KC MK POST SGP SWC TNDT UPFAEC BCH CNS EPCO IFS KCAR MOONG PRECHA SIMAT SYNEX TNPC UWCAEONTS BEAUTY CPL F&D IHL KDH MPIC PRIN SLC TBSP TOPP VAROAFC BGT CRANE FNS ILING KTC MSC Q-CON SMIT TCCC TPAC VTEAGE BLAND CSP FOCUS INOX KWH NC QLT SMK TEAM TPP WAVEAH BOL CSR FPI IRC LALIN NIPPON RCI SOLAR TGCI TR WGAI BROCK CTW FSS IRCP LEE NNCL RCL SPC TIC TTI WINAJ BSBM DEMCO GENCO IT MATCH NTV ROJNA SPG TIES TVD WORKAKR CHARAN DNA GFM JMART MATI OSK RPC SRICHA TIW TVIALUCON CHUO DRACO GJS JMT MBAX PAE SCBLIF SSC TKS TWZANAN CI EA GLOBAL JTS MDX PATO SCP STA TMC UBISARIP CIG EARTH HFT JUTHA PRINC PICO SENA SUPER TMD UEC

Corporate Governance Report disclaimer

The disclosure of the survey result of the Thai Institute of Directors

Association (“IOD”) regarding corporate governance is made pursuant

to the policy of the Office of the Securities and Exchange Commission.

The survey of the IOD is based on the information of a company listed

on the Stock Exchange of Thailand and the Market for Alternative

Investment disclosed to the public and able to be accessed by a

general public investor. The result, therefore, is from the perspective of

a third party. It is not an evaluation of operation and is not based on

inside information.

The survey result is as of the date appearing in the Corporate

Governance Report of Thai Listed Companies. As a result, the survey

result may be changed after that date, Asia wealth Securities Company

Limited does not conform nor certify the accuracy of such survey result.

Score Range Number of Logo Description

90 - 100 Excellent

80 - 89 Very Good

70 - 79 Good

60 - 69 Satisfactory

50 - 59 Pass

Below 50 No logo given N/A

รายงานการประเมนิการก ากบัดแูลกจิการ (CGR) โดยสมาคมสง่เสรมิสถาบนักรรมการบรษิทัไทย 2556 Corporate Governance Report of Thai Listed Companies (CGR). CG Rating by the Thai Institute of Directors Association (IOD) in 2013.

10

31 Oct 2014

Initiate Coverage: BCP

Branch Address Phone Fax

Head Office 540 Floor 7,14,17 , Mercury Tower, Ploenchit Road,

Lumphini, Pathumwan Bangkok 10330

02-680-5000 02-680-5111

Silom 191 Silom Complex Building,21st Floor Room 2,3-1 Silom

Rd., Silom, Bangrak, Bangkok, 10500 Thailand

02-630-3500 02-630-3530-1

Asok 159 Sermmitr Tower, 17th FL. Room No.1703, Sukhumvit

21 Road, Klong Toey Nua, Wattana, Bangkok 10110

02-261-1314-

21

02-261-1328

Pinklao

7/3 Central Plaza Pinklao Office Building Tower B, 16th

Flr., Room No.1605-1606 Baromrajachonnanee Road,

Arunamarin, Bangkoknoi, Bangkok 10700

02-884-7333 02-884-7357,

02-884-7367

Chaengwattana

99/99 Moo 2 Central Plaza Chaengwattana Office Tower,

22nd Flr., Room 2204 Chaengwattana Road, Bang Talad,

Pakkred, Nonthaburi 11120

02-119-2300 02-8353006

Chaengwattana 2

9/99 Moo 2 Central Plaza Chaengwattana Office Tower,

22nd Flr.,

Room 2203 Chaengwattana Road, Bang Talad, Pakkred,

Nonthaburi 11120

02-119-2388 02-119-2399

Mega Bangna 39 Moo6 Megabangna, 1st Flr., Room 1632/7 Bangna-

Trad Road, Bangkaew Bangplee, Samutprakarn 10540

02-106-7345 02-105-2070

Rayong 356/18 Sukhumvit Road, Nuen-Phra Sub District, Muang

District, Rayong Province 21000

038-808200 038-807200

Khonkaen 26/9 Srijanmai Road, Tamboonnaimuang, Khon Khaen

40000

043-334-700 043-334-799

Chonburi 44 Vachiraprakarn Road, Bangplasoi, Muang Chonburi,

Chonburi 20000

038-274-533 038-275-168

Chaseongsao

233-233/2 Moo2 1st Flr., Sukprayoon Road, Na Meung

Sub-District, Meung District, Chachoengsao 24000

038-981-587 038-981-591