Regional Industry Focus Oil and Gas - DBS Bank Oil & Gas Page 3 Theme #1: Oil recovery Oil prices...

ed-JS, CK / sa- JC, PY

2017 : A Turning Point Oil prices are off the bottom and inching closer to

US$60 per barrel – a critical level that stimulates

oil and gas activities

Government support measures to tide stronger

offshore and marine players over

Corporate failings and M&As set to rise

Top picks: Medco Energi, Bumi Armada, Sembcorp

Industries, Ezion and POSH. Introducing CNOOC

(Not rated)

Theme #1: Oil price recovery. We are upgrading our Brent forecast for 2017 by US$5 per barrel (bbl) to US$55-60/bbl. Promises from OPEC and non-OPEC producers of supply reductions will accelerate oil rebalancing (achieving equilibrium in 1Q17) and price recovery. Confidence has also been boosted by Saudi Arabia’s tone for deeper cuts. For now, we are keeping our longer term price assumption intact at US$60-65/bbl. We will be monitoring the response from US shale drillers if prices move towards more lucrative levels of US$60/bbl, and energy policy of US President-elect Donald Trump. The US dollar appreciation and interest rate hikes may add to pressure on oil prices as well. The wildcard remains the shift in geopolitics under US President-elect Donald Trump.

Beneficiaries: E&P companies – we have BUY on Medco Energi (Medco) and PTT. We are issuing a not-rated note on CNOOC.

Theme #2: Government intervention. The Singapore government announced enhanced support measures for marine and offshore engineering companies on 25 Nov 2016, comprising: i) bridging loan facility of up to S$15m per group, and ii) enlarged Internationalisation Finance Scheme (IFS, an increase from S$30m to S$70m) for asset acquisitions. Singapore is not the only country doling out assistance; South Korea recently announced plans to establish a state-backed ship financing company to assist struggling shipping firms and shipbuilders with potential newbuild orders of 250 vessels or more by 2020.

Beneficiaries: Small-mid-cap oil and gas (O&G) players in Singapore –Ezion (BUY), PACC Offshore (POSH, BUY), Pacific Radiance (PACRA, HOLD), Ezra (FV).

Theme #3: Merger & Acquisitions. In the Asia Pacific region, O&G M&A activities were lacklustre in 2016, but there could be a slight pickup in 2017. The O&G-focused private equity (PE) funds have focused on upstream acreage with cheap valuations and this trend will likely continue. The appetite for asset owners (i.e. drillers and offshore supply vessel (OSV) players) remain lukewarm given the massive oversupply that will take years to clear, though some distressed asset sales are possible. In addition, we expect privatisation of companies with strong controlling shareholders to take place in view of undemanding valuations and consolidation of shipyards in order to stay competitive.

Proxies: Privatisation candidates – POSH (BUY); Mermaid (HOLD); Merger - Singapore rigbuilders.

STI : 2,930.77

Analysts Suvro SARKAR +65 6682 3720 [email protected]

HO Pei Hwa +65 6682 3714 [email protected]

Singapore Research Team

Chaipat THANAWATTANO +66 2657 7827 [email protected]

William SIMADIPUTRA +62 2130 034 939 [email protected]

.

DBS Group Research . Equity 16 Dec 2016

Regional Industry Focus

Oil and GasRefer to important disclosures at the end of this report

STOCKS

Price Mkt Cap 12-mth Target

Price Performance (%)

LCT US$m S$ 3 mth 12 mth Rating

S$ Sembcorp Marine 1.50 2,173 1.55 18.2 (10.5) HOLD Sembcorp Industries 2.94 3,654 3.10 13.5 (1.3) BUY Yangzijiang 0.85 2,253 0.95 12.7 (21.4) BUY Cosco Corporation 0.29 452 0.27 7.4 (4.9) HOLD Ezion Holdings 0.40 577 0.56 45.5 (20.3) BUY Ezra Holdings 0.05 110 0.04 0.0 (43.8) FV Mermaid Maritime 0.16 158 0.14 75.0 8.1 HOLD Nam Cheong Ltd 0.07 94.8 0.04 30.0 (44.9) FV Pacific Radiance 0.15 73.0 0.16 2.1 (51.8) HOLD POSH 0.32 403 0.41 1.6 (1.5) BUY Vard Holdings Ltd 0.24 197 0.18 63.3 0.0 ACCEPT

OFFER

RM Bumi Armada 0.61 805 0.85 (17.2) (41.2) BUY Coastal Contracts 1.32 158 1.40 (12.0) (29.8) HOLD Dayang Entreprise 0.88 173 0.88 (11.7) (33.5) FV Deleum 0.94 84 1.02 (11.0) (13.4) HOLD Dialog Group 1.53 1,840 1.70 (0.7) (1.3) HOLD MMHE 0.89 318 0.98 (13.4) (6.4) FV Pantech 0.56 77 0.64 2.8 (8.1) BUY SapuraKencana 1.61 2,170 1.16 4.6 (13.4) FV UMW OG 0.78 370 0.80 (15.1) (30.3) FV Bt Bangchak Petroleum 32.75 1,264 39.00 5.7 3.2 BUY IRPC PCL 4.84 2,772 5.30 1.7 25.4 HOLD PTT 366 29,301 370.00 14.0 63.4 BUYPTTEP 92.75 10,321 86.00 21.2 59.9 HOLD PTT Global Chemical 63.50 7,938 70.00 10.4 28.3 BUY Thai Oil PCL 71.50 4,088 65.00 8.8 24.9 HOLD IDR Elnusa 448 244 420 (1.8) 82.9 HOLD Logindo 115 22 110 3.7 (18.4) FV Medco Energi 1,385 110 2,000 (3.9) 75.8 BUY Wintermar Offshore 230 344 231 (5.1) 31.8 HOLD

Closing price as of 14 Dec 2016 Source: DBS Bank, DBS Vickers, Bloomberg Finance L.P


Oil & Gas

Table of Contents

Theme #1: Oil recovery 3

Theme #2: Government Intervention 6

Theme #3: Merger & Acquisitions 9

Valuation 12

Equity Explorer

CNOOC Ltd 14

Company Guides

Cosco Corporation 21

Ezion Holdings 28

Mermaid Maritime 36

Pacific Radiance 43

PACC Offshore Services Holdings 49

Sembcorp Industries 55

Sembcorp Marine 62

Yangzijiang Shipbuilding 68

Bumi Armada 76

Bangchak Petroleum 79

PTT 86

PPT Global Petroleum 100

Medco Energi Internasional 108

Analysts Suvro SARKAR +65 6682 3720

[email protected] HO Pei Hwa +65 6682 3714

[email protected] Chaipat THANAWATTANO +66 2657 7827

[email protected] William SIMADIPUTRA +62 2130 034 939

[email protected] Singapore Research Team +65 6327 2288

[email protected]

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Oil & Gas

Theme #1: Oil recovery Oil prices boosted as supply-side pressures abate on OPEC deal. YTD in 2016, Brent crude oil price has averaged around US$45/bbl. With the successful conclusion of OPEC’s meeting on 30th November, which saw the group agreeing to cut output by c.1.2mmbpd beginning in January 2017 for six months (extendable by another six months, depending on the market), the global crude oil demand-supply rebalancing could be brought forward to as early as 1Q17, and oil prices have thus received a welcome boost to around US$53/bbl at the time of writing. On the flipside, the US Presidential election outcome and consequent US dollar appreciation have added some uncertainty to the market. Meanwhile, US shale production levels have revived in recent months with investments in the Permian Basin leading to higher rig counts, and the decline in shale production seen in 2016 may very well be stalled in 2017, especially if oil prices continue to rise towards US$60/bbl levels. We upgrade our forecast of Brent crude oil prices, and now expect it to remain above US$50/bbl for the rest of 2016, which would translate to somewhere between c.US$45-50/bbl for the full-year’s average. Depending on the actual extent of output cuts in 2017, we believe oil prices could average between US$55-60/bbl in 2017, so we are definitely off the bottom, and this OPEC agreement could be the key trend changer for oil price in this cycle. The key hiccup in long term trajectory would be the response from the US shale drillers if prices move towards more lucrative levels of US$60/bbl. We are already seeing US rig counts increasing and output starting to inch up over the last two months, as price optimism mounts. That could lead to oil prices capping off around US$60-65/bbl in the medium to long term. Oil price trend – rebounded from the lows

Source: Bloomberg Finance L.P., DBS Bank Successful OPEC deal a boon for oil prices... OPEC reached a landmark consensus on the 30th of November to reduce output

by about 1.2mmbpd, effective 1 Jan 2017. The duration of the agreement is six months, and is extendable for another six months (depending on market conditions). This would reduce OPEC’s output ceiling to 32.5mmbpd. The allocation was generally done on a percentage of current output basis, with participating members reducing output by an almost uniform c.4.5-4.6% from current levels. A monitoring committee chaired by Kuwait will oversee the implementation. …and Non-OPEC promises sweeten the deal. An understanding has also been reached with various non-OPEC countries, including Russia, that they would also contribute towards a reduction of 600,000bpd – bringing the total potential supply curtailment to about 1.8mmbpd. Russia’s Energy Minister has been quoted by the press saying that Russia would account for half (i.e. 300,000bpd) of the non-OPEC output cut, though he also said that any cut will only be gradual owing to technical constraints and will also depend on OPEC’s implementation. A few caveats may be handy at this stage though. Firstly, the OPEC output cut will be from Sept-Oct 2016 levels and not from average 2016 levels. For example, OPEC oil production as of October 2016 was around 33.7mmbpd while average OPEC production in 2016 has been around 33.0mmbpd. So the y-o-y cut in 2017 will not be as drastic as it seems at first glance. With respect to non-OPEC cuts, the Russian oil minister has responded by saying that any cut from Russia will only be gradual owing to technical constraints and will also depend on OPEC’s implementation. Thus, it may be wise to treat the extent of cuts with caution, especially with OPEC’s track record at implementing quotas in the past being poor. Moreover, if Libya and Nigeria increase production by 0.3mmbpd each in 2017, given their exemption from this agreement, it would nullify some of the output cuts by other OPEC countries. But supply-demand rebalancing likely to be hastened nonetheless. As a result of the aforementioned planned output cuts, and based on adjustments to the International Energy Agency’s (IEA) latest forecasts, we think the global crude oil rebalancing process could be brought forward to 1Q17, ceteris paribus, if implementation of the deal is smooth. This augments our view that Brent crude oil price could average between US$55-60 per barrel (bbl) in 2017, depending on the implementation of the cuts. Higher output from US tight oil producers should cap oil prices at the US$60-65/bbl range in the medium-to-long term, as these players are likely to ramp-up production quickly as oil prices approach US$60/bbl.

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Oil & Gas

Rebalancing should be brought forward on supply cuts

Source: IEA, DBS Bank Estimates

OPEC production levels have been rising, but should now

be curtailed

Note: Includes Indonesia numbers wef from Dec 2015 Source: Bloomberg, DBS Bank Inventory drawdowns will start in 2018, supporting oil price increase. Inventory build ups (gap between supply and demand) have declined from the elevated levels of 1.8mmbpd seen in 2015, but is still expected to average around 0.8mmbpd in 2016, as demand growth has outpaced supply growth in 2016 but not enough to wipe out the gap. However, with the OPEC cuts set to come in, supported by non-OPEC producers like Russia, we expect inventory drawdowns of around 0.8mmbpd in 2018. This is assuming a smooth implementation of the proposed production cuts. The cuts will likely be offset to an extent by the fact that US supply has started to show signs of holding up well since 3Q16, and other non-OPEC producers like Canada and Kazakhstan will likely still see increase in production in 2018. As the inventory drawdowns are not sharp enough to offset the

effect of the last two years of surplus, we expect a gradual increase in Brent crude oil price average in 2017 towards the US$60/bbl levels in our base case scenario, with further upside towards US$65/bbls likely to be curtailed by a consequent rise in US shale production, where producers will rally quickly to lock in prices (hedge) at higher price levels for their output. In any case, US oil inventories are near all-time highs and normalization could take a couple of years, even if shale oil output does not increase again US crude oil inventory levels have picked up again

Source: Bloomberg Finance L.P., DBS Bank In the medium to long term, US policies need to be watched. There is uncertainty regarding the energy policy of the new US President, which could add more pressure on supply side in the medium to long term, given his policy to boost employment in the energy sector, revive investments in fossil fuel businesses, and lower incentives to promote green energy and renewable energy businesses. President-elect Donald Trump has vowed to “cancel job-killing restrictions on the production of American energy, including shale energy and clean coal, creating many millions of high-paying jobs.” US shale oil producers have been cautiously redeploying cash, rigs and workers and US shale rig count has gone up by 40% from the lows of 262 rigs in May 2016 to 367 rigs currently. Boom time in the Permian Basin demonstrates shale oil resilience. Close to two-thirds of the new rigs have been deployed in the Permian Basin alone, where production is booming in 2016 despite declines in almost all the other key shale areas in the US, including Bakken and Eagle Ford. Productivity improvements mean that some projects are viable even at the US$40-45/bbl range and increased production from the Permian Basin area in 2017 is likely to keep US production largely stable in 2017, stemming the decline seen in 2016. If oil prices move up towards the US$55-60/bbl range in

88.00

90.00

92.00

94.00

96.00

98.00

100.00

World production - previous IEA forecastWorld production - adjusted forecast assuming 12-month OPEC cutsWorld consumption

Rebalancing could be broughtforward from 3Q17 to 1Q17

25

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35

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14

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4

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mmbpd200

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mmbbls US crude inventory (mmbbl)

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Oil & Gas

response to the OPEC cut, we could see shale oil production increasing again in 2018, and capping the recovery in oil prices. US production up as rig counts rise

Source: EIA, Bloomberg Finance L.P., DBS Bank US dollar appreciation and interest rate hikes will add to pressure on oil prices. The policies expected to be pursued by the Republican Party in the US are also geared towards generating a stronger US dollar and higher interest rates, none of which are positive for the oil price, since oil demand in developing countries will be adversely affected. Wildcard remains shift in geopolitics under new US President. Possibility of a change in international relations under the new Republican government could be an unaccounted silver lining for oil prices as Trump and Congressional Republicans are both fierce critics of the deal reached by the US and five other world powers to lift sanctions on Iran earlier in 2016. Republican control of the White House and Congress makes it more likely

that Iran could face renewed sanctions, and that could discourage foreign investors from pumping in more capital to help Iran boost production, thus boosting the oil price recovery process. We have to wait and watch how this pans out. E&P players are key beneficiaries of oil price rebound. CNOOC, one of the three Chinese oil majors, is a direct beneficiary of rising oil prices, as it is essentially an upstream pure-play. It derives c.76% of its topline from sales of crude oil produced, with realised selling prices pegged to market rates. We like that the company’s cost saving initiatives amid the downturn has borne fruit; CNOOC all-in cost per boe has declined to US$34.8/bbl in 1H16, down from the high of US$47.7/bbl in 2H13. Its aggressive expansion overseas should continue to boost production levels, though reasonable valuations for acquisitions and farm-in deals must be prioritised going forward. Continued investments in key offshore Chinese operating areas will also bolster output levels. Our DCF-based valuation (assuming long-term Brent price of US$65/bbl) pegs the stock’s TP at HK$11.63, representing c.16% upside from current price levels. We believe Medco’s low cost structure will ensure its survival, following the bottoming of crude oil prices. Medco will also focus on its most profitable blocks, mainly the onshore blocks such as Rimau – given its low cost structure. Our DCF-based TP of Rp2,000 (WACC 9.4%; terminal growth rate 0%) implies 5.5x FY17F EV/EBITDA. We maintain our positive view on PTT’s earnings outlook. This would be driven by the deregulation of fuel prices in domestic market which could also reduce PTT’s burden in subsidising energy costs for the public. We reaffirm our BUY rating.

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Oil & Gas

Theme #2: SG O&M – more support measures to come? Enhanced government support announced for Singapore-based offshore marine companies. The Singapore government (Ministry of Trade and Industry) announced on 25 November 2016 enhanced support measures for the marine and offshore engineering (M&OE) companies based in Singapore, in view of the intensifying financial challenges for the sector amid a prolonged industry downturn. The support is in the form of new incremental loan facilities from SPRING Singapore and IE Singapore available to Singapore-based M&OE industry players, and comprises: i) the Bridging

Loan facility, which provides up to S$15m in borrowings to M&OE companies/groups for working capital purposes, and ii) the Internationalisation Finance Scheme (IFS), which was already in place, but its maximum quantum has been increased from S$30m to S$70m. The IFS can only be utilised though for purchasing fixed assets, project financing, and M&A financing. The government will take on 70% of the risk-share for both the Bridging Loan and the expanded IFS programme. According to the IE Singapore news release, the Bridging Loan and IFS measures could catalyse about S$1.6bn of loans over one year.

New support measures announced in November 2016

Source: Ministry of Trade and Industry, SPRING Singapore, IE Singapore Bridging Loan – much needed working capital buffer, though facility size could have been larger. As the Bridging Loan programme was briefly introduced in 2008/2009 during the Global Financial Crisis, this represents a re-introduction of sorts, with broadly similar terms as the previous version, albeit a more targeted one. This is precisely the kind of facility that beleaguered O&G players require (i.e. for working capital purposes). However, the loan quantum available – of S$5m per company (or S$15m per borrower group) – is not exactly huge for small-mid-cap names under our coverage, and we believe this is more useful in ensuring that the industry value chain keeps moving, and small suppliers and contractors do not go bust. Just for comparison sake, the S$15m per borrower group would represent only around 4% of all the SGX-listed small-mid

cap O&G players’ short-term debts by our estimates. IFS facility is larger, but meant more for industry consolidation rather than survival. While the IFS facility’s size has been increased substantially from S$30m previously to S$70m, we think the required use of funds – for the purchase of fixed assets, project financing, and M&A financing – is a limitation, as most small-mid-cap O&G service players/shipyards are not planning on expansion amid the protracted downturn, and day-to-day operations are unlikely to qualify for ‘project financing’ (based on our channel checks with SPRING Singapore). However, as balance sheet stress situations increasingly present themselves, the IFS facility could help to spark more M&A activity, which we think could be a theme for 2017. It seems the government believes that industry consolidation is inevitable as companies restructure and adapt to the challenging environment.

Bridging Loan Internat ional isat ion Finance Scheme (IFS)Max Loan Quantum • S$15m per borrower group (HoldCo+ subsidiary companies) Max Loan Quantum • S$70m per borrower group (HoldCo+ subsidiary companies)

[increased from previous max quantum of S$30m]

Loan Tenure • Up to 6 years Loan Tenure Varies

Use of Funds • Working Capital Use of Funds • Asset-based financing to purchase fixed assets• Project financing (Bid Bonds, Bankers Guarantee, Structured Loans)• Merger and Acquisition financing

Government risk-share %:

70% Government risk-share %:

70%

Eligibility Criteria • Is registered and operating in Singapore• Has at least 30% local shareholding

Sub-categories listed:- Shipyards- Contractors to shipyards- Offshore services providers- Exploration & Production Companies- Oil and gas equipment and services companies- Suppliers to oil and gas equipment and services companies

Eligibility Criteria • Singapore-based companies with Global HQ anchored in Singapore• Singapore-based companies with meaningful business operations and at least 3 strategic business functions in Singapore

[They have removed the criteria for applicant annual revenues to be below S$300m or have workforce <200 workers]

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Oil & Gas

Ezion, Pacific Radiance (PACRA), Ezra/EMAS Offshore are key beneficiaries within our coverage; some others may not qualify. Within our coverage of SGX-listed OSV players and shipbuilders, we think Ezion, PACRA and Ezra (including subsidiary EMAS Offshore) qualify for, and would benefit the most from, the S$15m Bridging Loan facility. PACRA is 68%-owned by Mr. Pang Yoke Min, a Singaporean, and has its headquarters in Singapore, thereby qualifying as a candidate. Ezion and Ezra also have their headquarters in Singapore, and including its management's stake, we think the 30% local shareholding criteria should be met. PACRA and Ezra have been seeing negative cash flows and have relatively low cash balances; thus the Bridging Loan should make a positive impact, at least for a while. Others such as POSH (c.81% held by the Kuok Group from Malaysia), Nam Cheong (majority Malaysian-entity held), Vard (majority Italian-owned and no operations in Singapore), Mermaid Maritime (c.76% held by the Thoresen group and related promoters based in Thailand) do not seem to meet the eligibility criteria. Diving deeper: impact is not large, but every bit helps. PACRA has seen an average of US$12m (S$17.2m) in negative operating cash flows (OCF) over the last four quarters. Thus, if that trend persists, the Bridging Loan amount would theoretically only provide buffer for another one quarter of negative OCF. For Ezra, OCF has been on average c.US$50m (S$70m) for the last two quarters (though it was positive before that), thus the Bridging Loan’s relative size is not huge compared to this as well. However, the Bridging Loan does help boost short-term unencumbered cash balances (i.e. liquidity positions). PACRA had US$19.6m (~S$27m) in unencumbered cash as of 3Q16, so the S$15m facility is relatively sizeable in comparison. Ezra and subsidiary EMAS Offshore had US$43m (S$60m) and US$11.6m (~S$16m) in unencumbered cash, respectively, as of 3QFY16, so again the facility represents a decent boost to their liquidity positions. In summary, the Bridging Loan provides some very short-term respite and a boost to liquidity, but is far from being a rescue package if the challenging conditions persist. What could catalyse even greater government intervention? We would argue that the risk of a pronounced contagion effect on the other sectors of the economy (e.g. banking sector, unemployment) would spur greater government intervention going forward. The core issue is that the government needs to weigh the moral hazard of a perceived ‘bailout’ (particularly if additional measures are O&M sector-specific) against the repercussions of a protracted downturn in the O&M sector on the broader economy. It makes sense then, that the greater the ripple effect, the greater the impetus for intervention. O&M sector represents 5-6% of Singapore’s GDP, and c.4-5% of the total labour force. Our colleagues within DBS Group Research have estimated that the O&M sector roughly accounts for

c.SGD20.8bn of gross value added, or c.5.5% of Singapore’s total value added (which is GDP excluding taxes) in 2015. The sector’s contribution is captured both via the manufacturing and services segments (as part of transportation and storage). In terms of employment, the O&M sector is estimated to employ c.172.4k people in 2015, accounting for c.4.7% of Singapore’s total labour force. Finally, based on the 2012 EDB data, for every dollar of direct output by the O&M sector, there is a direct and indirect output of c.$1.57 which is higher than the mean across sectors of c.$1.51 and also median across sectors of c.$1.49. The point here is that the O&M sector has close links with the broader economy; the contagion effect should not be dismissed. Singapore not the only country doling out assistance: South Korea recently announced plans to establish a state-backed ship financing company with an initial capital of c.US$872m and total eventual financing of c.US$5.67bn to assist struggling shipping firms in acquiring new vessels; this is expected to help support the Korean shipbuilders as well, potentially catalysing orders of 250 vessels or more by 2020. The announcement comes on the back of the IMF suggesting that the cost of restructuring the South Korean shipping industry’s debts will approach US$30bn, and affect about 1% of the workforce. O&M represents 5.5% of Gross Value Added

Source: SingStats, EDB, DBS Bank

Gross Value Added at Basic Prices (SGDm) 2015

2005-2015

CAGR% of

Total VAGoods Producing Indus tries 100,045.0 4.3% 26.4% Manufacturing 74,961.1 2.9% 19.8% Construction 19,534.4 12.5% 5.2% Utilities 5,407.1 5.2% 1.4% Other Goods Industries 142.4 2.0% 0.0%Services Producing Indus tries 261,953.8 7.2% 69.2% Wholesale & Retail Trade 59,046.8 5.5% 15.6% Transportation & Storage 27,923.5 3.0% 7.4% Accommodation & Food Services 8,126.2 7.3% 2.1% Information & Communications 16,011.6 7.3% 4.2% Finance & Insurance 47,768.7 9.2% 12.6% Business Services 58,696.1 10.0% 15.5% Other Services Industries 44,380.9 7.8% 11.7%Owners hip Of Dwell ings 16,405.5 10.0% 4.3%Subtota l, excluding Taxes 378,404.3 6.4% 100.0%

Offs hore and Marine (Manufacturing) 11,363.7 Offs hore and Marine (Services ) 9,431.7

O&M Combined 20,795.4 5.5%

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Oil & Gas

O&M constituted c.4.7% of Singapore’s labour force in 2015

Source: SingStats, EDB, Ministry of Manpower, DBS Bank

Pre-Nov 2016 schemes in place mainly benefit the smaller non-listed players. In addition to the new O&M-targeted measures announced in November, there are some other facilities/policies in place that O&M players can avail of, but we find that these are mainly available to the small non-listed players due to

revenue/workforce constraints. The deferment of foreign worker levy hikes for the Marine sector should help the listed players, especially shipyards, marginally, saving companies between S$600 and S$1,200 per foreign worker in 2016, though the deferment is officially only for one year.

Other schemes available to Singapore SMEs

Source: IE Singapore, SPRING Singapore, DBS Bank

Name of fac ility/scheme

Supporting Entity Purpose Eligibility requirements*

Max quantum

(S$m)SME Equipment and Fac tory Loans

SPRING Singapore • Automating and upgrading factory and equipment• Purchasing JTC Corporation or Housing & Development Board factory and business premises• SPRING shares the risk of loan defaults with Financial Institutions

• Registered and operating in SG• 30% local shareholding• Annual revenues <S$100m OR Group workforce < 200 workers

S$15m

SME Working Capital Loan

SPRING Singapore • Working capital• SPRING shares the risk of loan defaults with Financial Institutions


S$300,000

Loan Insurance Scheme (LIS) and LIS+

SPRING Singapore / IE Singapore

• Mainly for working capital/trade financing purposes• Provides insurance to participating banks against insolvency risks of the company availing of the loans• Government provides loans beyond the underwriting capacity of commercial insurers (LIS+)


N/A for LISS$5m for LIS+

Politic al Risk Insurance Scheme (PRIS)

IE Singapore • International Enterprise (IE) Singapore will support 50% of the premium for up to the first three years of each PRI policy. • Covers risks such as expropriation, currency inconvertibility, political violence, breach of contract by host government, non-honouring of sovereign financial obligations

• Annual revenues <S$500m• Business spending of >S$250k in Singapore for the last three years• Global HQ in Singapore

S$500,000

Trade Credit Insurance Scheme (TCIS)

IE Singapore • International Enterprise (IE) Singapore will support up to 50% of the minimum premium for Trade Credit Insurance (TCI) policies held with Singapore-registered credit insurers.

• Annual revenues <S$100m• Global HQ in Singapore

S$100,000

Deferment of foreign worker levy inc reases

Government • Levy increases for Work Permit holders will be deferred for one year (in 2016) for workers in Marine and Process Sectors• For O&G sector, this translates into savings of S$600/1200 per worker annually

Sector-specific S$600-1200 savings per

Marine sector foreign worker

annually*Key requirements are listed; we have excluded some for the sake of brevity

Employment (# people) 2005 2012 2013 2014 2015

2005-2015

CAGR

% of Tot al

(2015) YoY Chg

(2015)

% of Tot al

(2012)

% of Tot al

(2014) Singapore Labour Force 2,319,900 3,357,600 3,493,800 3,623,900 3,656,200 4.7% 100.0% 32,300 100.0% 100.0%- Residents 1,647,300 2,040,600 2,056,100 2,103,500 2,147,800 2.7% 58.7% 44,300 60.8% 58.0%- Non-residents 672,600 1,317,000 1,437,700 1,520,400 1,508,400 8.4% 41.3% (12,000) 39.2% 42.0%1. Manufacturing 475,900 535,000 540,300 536,000 513,800 0.8% 14.1% (22,200) 15.9% 14.8%2. Construction 235,000 441,800 477,100 491,400 500,000 7.8% 13.7% 8,600 13.2% 13.6%3. Services 1,593,800 2,355,900 2,450,000 2,569,700 2,615,200 5.1% 71.5% 45,500 70.2% 70.9%4. Others 15,200 24,900 26,400 26,800 27,200 6.0% 0.7% 400 0.7% 0.7%

Offs hore and Marine 177,128 182,343 184,429 172,421 4.7% (12,008) 5.3% 5.1%

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Oil & Gas

Theme #3: Merger & Acquisitions – higher activity expected in 2017 2016 in review: global asset sales up sharply; company M&A also up, but Asia-Pacific lagging behind. Based on data obtained from Bloomberg as of early December, we observe several trends that stand out in terms of oil & gas transaction activity seen in 2016: [Note: data based on transactions with disclosed values only] i) First, upstream asset sale values have rebounded briskly to

c.US$49bn from 2015 levels of c.US$25m, with the lion’s share of the incremental transaction values coming from North America. This has been due to oil companies, and lately private equity firms as well, having been actively purchasing tight oil assets in the US and Canada this year. These assets are attractive due to their lower breakeven costs as well as their potential for productivity improvements as fracking technology advances further.

ii) Second, despite not have rebounded as sharply as asset sales,

company M&A activity has picked up in 2016 as well. Excluding mega-deals (which we define as >US$1bn in value), global oil & gas M&A deal values YTD in 2016 have already shown a 29% y-o-y increase to US$25.6bn versus 2015’s full-year amount of US$19.9bn. Again, much of this has been due to higher M&A volumes in the US and Canada related to shale oil company buyouts.

iii) Third, and most central to our thesis, is that despite global oil

& gas M&A volumes having recovered y-o-y so far, Asia-Pacific M&A volumes have bucked the trend and are still down y-o-y, making it the only region to show lower deal value when comparing YTD2016 against 2015. This conclusion remains the same whether or not you include mega-deals. We address Asia-Pacific specifically in a later section.

Global upstream asset sales (in US$m)

Source: Bloomberg Finance L.P., DBS Bank

Global oil & gas M&A deal value (in US$m)

Source: Bloomberg Finance L.P., DBS Bank calculations Higher and more stable oil prices have helped reduce price gapping, spurring asset sales/M&A. In our view, the heftier transaction values seen in 2016 (ex-Asia Pacific) so far have been largely attributable to higher and more stable oil prices, which have rebounded steadily from their January lows. This has served to reduce the price gapping in the market for assets – situations wherein the buyer assumes a pessimistic long-term scenario and a lower asset price, but the seller anticipates an imminent recovery, thus seeking a higher asset price – as buyers and sellers have adjusted their expectations to reflect the higher and more narrow US$40-55/bbl range that Brent has traded at for most of the year. This is in contrast to the higher oil price volatility seen in 2015, where Brent prices gyrated in the range of US$35-65/bbl. 2017 should see a further uptick in transaction values. Given that we expect a higher y-o-y average oil price in 2017 of US$50-60/bbl on the back of the OPEC supply cut agreement, and the global crude oil demand-supply rebalancing looks increasingly certain, we think further convergence of expectations between buyers and sellers should spur incremental asset sales and M&A activity, which should help drive another y-o-y rise in oil & gas transactions. However, deal values (barring unexpectedly large mega-deals such as the Shell-BG acquisition in 2015) should remain well below peak levels as oil companies continue to conserve cash, prioritising balance sheet repairs over expansion/exploration & development programmes. Asia-Pacific M&A – a lacklustre 2016, but 2017 could see a slight pick-up. Asia-Pacific was the only region to buck the uptrend in 2016; both the region’s deal count and deal value are down y-o-y. While the exact reasons remain elusive, we think lower liquidity circumstances could have played a major role. Despite being less leveraged on a net debt-to-equity basis, Asia-Pacific oil & gas firms have significantly tighter liquidity situations when compared to their peers in EMEA and the Americas, with average

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

Asia Pacific North America Middle East & Africa

Western Europe Eastern Europe Latin America

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

Asia Pacific North America Middle East & Africa

Western Europe Eastern Europe Latin America

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Oil & Gas

current ratios of 0.30x, versus a global average of 0.38x. Cash as a proportion of short-term liabilities is also lower at c.31%, as opposed to a global average of c.42%. Thus, it all boils down to cash conservation.

Oil & gas companies’ liquidity/gearing by region

Source: Bloomberg Finance L.P DBS Bank calculations In 2017, we expect Asia-Pacific oil & gas companies to continue conserving cash and de-leveraging where possible. However, higher oil prices and a more stable outlook should give a boost to M&A and asset sale activity in the region, which would drive a y-o-y increase in both volumes and values. Asia-Pacific O&G M&A trend – a moribund 2016

*Excluding mega-deals >US$1bn in value

Source: Bloomberg Finance L.P., DBS Bank Asia-Pacific: Private Equity (PE) involvement has been largely confined to acreage purchases. We note that while PE funds such as KKR and The Carlyle Group have set up O&G-focused funds within the Asia-Pacific region, these funds have focused on upstream acreage with cheap valuations. One example is Mandala Energy’s US$180m farm-in investment in the Lemang PSC in Indonesia, alongside partner Ramba Energy. We think this is logical; upstream investments are the first beneficiaries of rising oil prices. PE firms would also avoid buying asset owning companies in general, since given the typical exit horizon of 3-7 years for investments for PE funds, coupled with increasingly stringent age requirements for offshore assets (e.g. operators

seeking OSVs below 15 years of age only), the risk of a relatively older fleet at the time of exit skews the risk-reward balance of investing in such companies towards the downside. Asia-Pacific – 2016 M&A activity from various sub-sectors; OSV deals remain elusive. Excluding individual asset sales, a more balanced picture of M&A emerges. YTD in 2016, upstream companies still account for the largest proportion of M&A deals by deal count, at 24% of total deals. However, asset-light service players, petrochemical companies, marketing/distribution companies, asset owners (though these are generally non-OSV owners) and technology companies also account for a substantial c.52% of the pie – based on deal count. We also note that there have been several offshore shipyard acquisitions (buyout of ABG Shipyard, privatisation of Otto Marine, privatisation of Vard Holdings), as well as one debt-to-equity swap deal of a distressed offshore shipbuilder SPP Shipbuilding. However, in contrast, aside from Vallianz Holdings’ c.US$6m purchase of Holmen Heavylift Offshore, which owns one AHTS vessel and several semisubmersible launch barges, there has not been any pure-play OSV (AHTS, PSV, subsea) M&A activity in the Asia-Pacific region this year, at least to our knowledge. Asia-Pacific O&G – YTD M&A deals by sub-sector

*Proportions are based on deal count

Source: Bloomberg Finance L.P., DBS Bank SGX names - More M than A expected; shipyards the prime candidates. Anecdotally, SGX-listed oil & gas service firms are all in cash conservation mode in an effort to ride out the downturn; capex plans have been suspended and vessels have been stacked where necessary. Thus, we think intra-sector acquisitions are less likely given the heavy emphasis placed on conserving cash. The alternative seems more plausible – a merging of assets in either i) an all-stock deal that avoids a cash outlay, or ii) a mixed offering in which the cash portion would be smaller than an otherwise gross amount under an all-cash scenario. However, there must be synergies for mergers to make sense for the acquirer, especially given the c.20-30% premium generally expected over the target’s VWAP. Thus, we would argue that shipyards – especially those with differing building capabilities – would be the likely candidates for mergers. Asset-light players with

Upstream

Services (asset-light)

Downstream-petrochemDownstream -

marketing/distribution

Asset-owner

Technology/components

Downstream -refineries

Manufacturing/ equipment supplier

Shipyard

Trading

OthersProduct distribution Midstream -

pipelines

EPC contractor

24%

12%

11%11%

10%

8%

6%

5%

4%4%

4%1%1%

1%

Largely tugs & barges, accommodation vessels, onshore rigs, product tankers, FPS/FPSO0

10

20

30

40

50

60

70

80

90

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

Deal value (US$m) - LHS Deal count - RHS

0.93x

1.41x1.30x

1.23x

0.30x 0.34x

0.47x0.38x31.4%

48.6% 43.6% 41.8%

0.00x

0.20x

0.40x

0.60x

0.80x

1.00x

1.20x

1.40x

1.60x

Asia Pacific EMEA Americas World

Current Ratio Net Debt/NTA Cash/ST Liabilities

Page 10


Oil & Gas

differentiated positioning could also see M&A activity. Service asset owners generally possess the more commoditised vessels such as AHTS and PSVs, therefore it is hard to envision significant revenue synergies achieved; some cost synergies may materialise but given the focus on cost-cutting over the last two years, these are unlikely to be significant as well. OSV stocks – privatisation possible for the stronger names. While M&A may be lacking in the OSV space, and the asset market for vessels is also very thin, we continue to tout Pacc Offshore (POSH) and Mermaid Maritime as prime privatisation candidates. Mermaid Maritime (MMT SP Equity): Mermaid is c.87.3% held by the Thoresen group and its related management, leaving only S$28.4m in free-float market capitalisation on the table. With c.S$230m in cash on hand, the Thoresen group has the necessary ammunition to take Mermaid private. Additionally, Mermaid has very low debt levels versus peers, and with a net gearing of only 0.11x as of 3Q16, this adds to its attractiveness as a privatisation candidate. Pacc Offshore (POSH SP Equity): POSH is 81.89%-owned by the Kuok group, and is a more stable long-term bet versus peers with no immediate debt concerns (as committed undrawn bank lines cover capex requirements) and positive operating cash flows YTD. The company has also demonstrated an ability to secure work for its vessels amid an anaemic market (e.g. long-term contracts recently inked for work in the Middle- East for 13 vessels). Global shipyard consolidations The shipping superboom in 2006-2008 gave rise to thousands of shipyards particularly in China, many of which eventually closed down after the 2008 global financial crisis (GFC). The number of yards in China has shrunk from over 3,000 to 400 in mid-2014, and is less than 100 currently. Further consolidation is underway, and we may end up with 20-30 survivors, in view of the structural downturn. Cosco and China Shipping to merge shipbuilding units in early 2017. Following phase 1 of the restructuring of SGX-listed Cosco Corp’s parent, Cosco Group, and China Shipping Group (China Shipping) in Dec 2015 which involved the shipping fleet and port operations, we believe phase 2 of the exercise is already underway. The two largest Chinese shipping giants are reportedly merging their 11 shipyards (six from Cosco Corp and five from China Shipping) into one entity by early 2017. It is unclear if the consolidation involves the two JV yards with Japanese Kawasaki Heavy Industries (under Cosco Group) as Kawasaki has reportedly indicated an intention to exit the shipbuilding business.

In mid-Nov 2016, Sembcorp Marine (SMM) announced the disposal of its 30% stake in Cosco Corp’s 51%-owned Cosco Shipyard Group (CSG, which hold the six shipyards) to Cosco Group, lifting Cosco Group’s stake in CSG to 49%. This reinforces our belief that the merger is taking place as the action is perceived to be “cleaning up” the structure to pave the way for subsequent corporate exercise. We believe privatisation of Cosco Corp could be the next step in the merger process. In terms of valuation, Cosco Group paid c.1.3x of the carrying value of SMM’s stake in CSG. This translates to close to 1x CSG’s book value based on our back-of-the envelope calculation. Taking the cue from this, the potential takeover valuation of Cosco Corp could be in the range of 1.0-1.3x PB, implying 27-35 Scts. Merger between China’s two largest shipbuilding SOEs – CSIC and CSSC? State-owned shipbuilding conglomerates, China State Shipbuilding Corporation (CSSC or 南船) and China Shipbuilding Industry Corporation (CSIC or 北船), have swapped top management in Mar-2015. Former CSSC president Hu Wenming moved to CSIC as the new President, while former vice general manager of CSIC, Dong Qiang, has become the new President of CSSC. The move is seen as a harbinger of a merger between the two groups, paving the way for a smoother integration later on. While both CSSC and CSIC had subsequently denied ongoing talks, rumours continue to run rife. We believe such a major consolidation, if it happens, like the merger of the world's two largest train makers - China CNR Corp and CSR Corp, requires the push from top government. The Korean trio have also undergone restructuring. The big three, Hyundai Heavy Industries (HHI), Samsung Heavy Industries (SHI) and Daewoo Shipbuilding & Marine Engineering (DSME), have all implemented self-rescue restructuring plans as urged by their creditors. The austerity measures include massive staff lay-offs, pay cuts, and disposing of non-core assets / businesses. Consolidation is perhaps the ticket to surviving the current industry storm, as attested by the recent merger of container alliances forging new partnerships, and the consolidation of shipyards and shipping conglomerates in China. Do we really need two shipbuilding giants in Singapore? Probably not. We believe merging the two Singapore rigbuilders could bring about cost synergies and strengthened competitiveness, which are much needed in this cycle. (Please refer to our report “Sea of Change: Does consolidation make sense?” dated 6-Aug-2015).

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Oil & Gas

VALUATION & STOCK PICKs Time to revisit the sector; pick up some oil & gas stocks to ride oil bounce. While a rising tide lifts all boats, we prefer to stay safe. The operational improvement will lag oil recovery by 2-3 quarters, thus, insolvency concerns remain for companies with high burn rate. The next indicator to watch will be the actual production decline by both OPEC and non-OPEC producers, and rebalancing in 1Q17. Upstream E&P players are the best proxies to a rising oil price – we have BUY on Medco and PTT.We reaffirm our BUY rating. CNOOC is the best proxy to the upstream sector among the Chinese oil majors.

Service providers could also see a rebound off their low valuation base – we have BUYs on Ezion, POSH and Bumi Armada, which have higher survivability among peers, in our view. Shipyards will likely lag the oil price recovery as they are near the bottom of the supply chain but risk premium should be reduced with improved macro backdrop. We upgraded Sembcorp Marine (SMM) to HOLD recently; reiterate Buy on Sembcorp Industries (SCI) as a safer proxy and undemanding valuation.

.Peer comparisons

Source: Companies, Bloomberg Finance L.P., DBS Bank

Name Price

12-mth

Mkt Cap PE Div Yield EV/EBITDA P/B ROE

Net Pft CAGR

14 Dec TP Rec (US$m) FY16F FY17F FY16F FY17F FY16F FY17F FY16 FY16 15-17

Singapore

SMM 1.50 1.55 Hold 2,173 42.5 25.5 1.3 1.3 17.7 13.6 1.3 3.0 nm

SCI 2.94 3.10 Buy 3,654 13.2 13.6 2.3 2.3 10.6 10.7 0.8 5.5 76.8

Yangzijiang 0.85 0.95 Buy 2,253 8.6 9.2 4.7 4.7 2.7 2.8 0.7 7.7 -5.7

COSCO Corp 0.29 0.27 Hold 452 nm nm 0.0 0.0 nm 18.5 1.0 -27.8 -70.8

Ezion Holdings 0.400 0.6 Buy 577.2 25.7 15.7 0.0 0.0 9.2 8.2 0.5 3.2 -38.0

Ezra Holdings 0.054 0.04 FV 110 nm nm 0.0 0.0 nm nm 0.5 -132.8 61.2

Mermaid 0.161 0.14 Hold 158 10.6 56.0 0.0 0.0 3.4 13.5 0.5 4.5 -24.7

Nam Cheong 0.065 0.04 FV 95 nm nm 0.0 0.0 nm nm 0.3 -4.4 nm

Pacific Radiance 0.147 0.16 Hold 73 nm nm 0.0 0.0 nm nm 0.2 -27.2 nm

POSH 0.320 0.41 Buy 403 nm nm 0.0 0.0 20.7 13.8 0.4 -3.3 nm

Vard Holdings 0.240 0.18 Hold 197 nm nm 0.0 0.0 78.8 47.5 0.5 -3.2 -81.7

Average 20.1 24.0 0.8 0.8 20.4 16.1 0.6 -15.9

Malaysia

Bumi Armada 0.61 0.85 Buy 805 21.5 9.7 1.2 2.6 10.3 7.1 0.5 2.3 6.0

Coastal Contracts 1.32 1.40 Hold 158 6.6 6.8 2.4 2.3 3.3 2.6 0.4 6.2 -21.7

Dayang 0.88 0.88 FV 173 33.5 9.9 0.0 0.0 8.3 6.1 0.7 2.2 -22.3

Dialog Group 1.53 1.70 Hold 1,840 30.1 25.4 1.5 1.6 19.3 15.9 3.6 14.3 15.2

MMHE 0.89 0.98 FV 318 20.5 18.3 0.0 0.0 3.5 3.0 0.5 2.5 -5.5

SapuraKencana 1.61 1.16 FV 2,170 67.1 67.1 0.1 0.1 12.7 12.7 0.8 1.2 -55.2

UMW OG 0.78 0.80 FV 370 -6.1 -9.2 0.0 0.0 46.0 22.6 0.6 -9.0 95.3

Deleum 0.94 1.02 Hold 84 14.1 9.2 3.6 5.4 4.4 3.4 1.2 8.9 -4.1

Pantech 0.56 0.64 Buy 77 10.0 8.7 4.8 5.1 6.0 5.5 0.7 7.8 1.0

Average 19.8 14.6 1.4 1.7 12.0 7.9 0.9 4.3

Thailand

Bangchak Petrlm. 32.75 39.00 Buy 1,264 8.4 7.3 4.9 5.5 4.6 3.9 1.2 14.5 15.9

IRPC PCL 4.84 5.30 Hold 2,772 8.7 10.2 3.9 3.9 7.8 7.6 1.2 12.46 nm

PTT PCL 366.00 370.00 Buy 29,301 12.1 11.3 3.6 3.6 5.6 5.5 1.4 12.5 -3.9

PTTEP 92.75 86.00 Hold 10,321 18.1 23.5 1.4 1.8 3.4 3.4 0.9 4.0 -0.3

PTT Global Chem 63.50 70.00 Buy 7,938 12.8 10.8 4.4 4.4 7.5 6.4 1.2 9.46 8.20

Thai Oil PCL 71.50 65.00 Hold 4,088 9.4 10.0 5.3 4.6 5.6 5.1 1.4 17.2 nm

Average 11.6 12.2 3.9 4.0 5.7 5.3 1.2 11.7

Indonesia

Logindo 115 110 FV 22 nm nm 0.0 0.0 20.0 26.3 0.2 -19.0 nm

Wintermar 230 231 Hold 69 14.1 nm 0.0 0.0 6.0 5.2 0.3 -4.0 -18.3

Elnusa 448 420 Hold 244 7.4 8.4 3.9 3.5 3.1 3.3 1.1 16.0 2.0

Medco Energi 1,385 2,000 Buy 344 16.3 6.4 1.2 1.6 5.1 3.9 0.4 2.9 nm

Average 12.6 7.4 1.3 1.3 8.5 9.7 0.5 -1.0

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Oil & Gas

Equity Explorer

Page 13

*This Equity Explorer report represents a preliminary assessment of the subject company, and does not represent initiation into DBSV’s coverage universe. As such DBSV does not commit to regular updates on an ongoing basis. The rating system is distinct from stocks in our regular coverage universe and is explained further on the back page of this report.

ed: CK / sa: JC, PY

NOT RATED HKD10.02 HSI : 22,059.40 Closing price as of 15 Dec 2016 Return *: 2 Risk: Moderate Potential Target 12-mth* : 12-Month HKD 11.63 (16% upside) Analyst Regional Research Team

Price Relative

Forecasts and Valuation FY Dec (RMBm) 2014A 2015A 2016F 2017F Revenue 274,634 171,437 136,348 169,670 EBITDA 144,500 95,814 64,261 99,506 Pre-tax Profit 82,513 17,130 (8,442) 25,392 Net Profit 60,199 20,246 (6,331) 19,044 Net Pft (Pre Ex.) 60,199 20,246 (6,331) 19,044 EPS (RMB cts) 135 45.3 (14.2) 42.7 EPS Pre Ex. (RMB cts) 135 45.3 (14.2) 42.7 EPS Gth (%) 7 (66) nm nm EPS Gth Pre Ex (%) 7 (66) nm nm Diluted EPS (RMB cts) 135 45.3 (14.2) 42.7 Net DPS (RMB cts) 45.3 45.7 31.4 35.8 BV Per Share (RMB cts) 850 865 819 826 PE (X) 6.7 19.8 nm 21.1 PE Pre Ex. (X) 6.7 19.8 nm 21.1 P/Cash Flow (X) 4.5 6.3 6.5 5.5 EV/EBITDA (X) 3.8 6.1 9.2 5.8 Net Div Yield (%) 5.0 5.1 3.5 4.0 P/Book Value (X) 1.1 1.1 1.1 1.1 Net Debt/Equity (X) 0.1 0.3 0.4 0.4 ROAE (%) 16.7 5.3 (1.7) 5.2 Consensus EPS (RMB (17.0) (58.1) Other Broker Recs: B: 18 S: 3 H: 9 ICB Industry : Oil & Gas ICB Sector: Oil & Gas Producers Principal Business: CNOOC Ltd is primarily engaged in the upstream exploration, and production of crude oil and natural gas in the offshore space, both in China and overseas. Source of all data on this page: Company, DBS Vickers, Bloomberg Finance L.P.

Chinese proxy to rising oil prices Pure upstream play to benefit from rising oil prices

Cost-saving initiatives have reduced all-in cost per

barrel of oil equivalent (boe)

Overseas expansion a growth driver, if reasonable

valuations can be obtained

The Business

Pure upstream play with focus on offshore China. CNOOC Ltd is engaged in the exploration, development and production of crude oil and natural gas resources, primarily within offshore China, which accounted for c.66% of 9M16 production during 9M16. Production is also increasingly coming from diversified overseas assets.

Overseas expansion should drive growth. Aggressive expansion overseas has and should continue to boost production levels, though reasonable valuations for acquisitions and farm-in deals must be prioritised going forward. Continued investment in key offshore Chinese operating areas will also bolster output levels.

Monopolistic access to offshore Chinese assets. CNOOC Ltd has the exclusive rights to engage in oil and gas exploration in offshore China either independently or in co-operation with foreign parties under PSC agreements. Thus, China’s untapped offshore acreage provides growth opportunities as well as a stronghold for the company.

The Stock

Some upside left on the table. We utilise a DCF valuation (WACC 10%; terminal growth 2%; long-term oil price assumption of US$65/bbl) to derive our TP of HK$11.63, representing an upside of c.16% from the current price.

Higher-than-expected oil prices are an upside catalyst. Oil prices reaching levels higher than US$60-65/bbl would likely boost the share price. Disciplined implementation of the OPEC deal, strong global demand growth, a lack of US shale resurgence, and resumption of sanctions on Iran under Donald Trump could be drivers of such a price movement, among other possibilities.

Risks: lower oil prices, impairments/revisions on overseas projects. Lower oil prices a key risk to our revenue and earnings forecasts. Further impairments taken on overseas assets such as the c.RMB10.4bn taken in 1H16 is another risk, which could materialise not only from lower oil prices but also on cost overruns on operational hiccups.

At A Glance Issued Capital (m shrs) 44,646 Mkt. Cap (RMBm/US$m) 447,353 / 64,516 Major Shareholders (%) China National Offshore Oil Corp 64.6 Free Float (%) 35.4 3m Avg. Daily Val (US$m) 93.7


Regional Equity Explorer

CNOOC Ltd Bloomberg: 883 HK | Reuters: 0883.HK Refer to important disclosures at the end of this repor

42

62

82

102

122

142

162

182

202

222

5.8

7.8

9.8

11.8

13.8

15.8

17.8

Dec-12 Dec-13 Dec-14 Dec-15 Dec-16

Relative IndexRMB

CNOOC Ltd (LHS) Relative HSI (RHS)

SMC Research

Equity Explorer

CNOOC Ltd

Page 2

REVENUE DRIVERS

Sale of crude oil drives top-line; oil prices are crucial. Oil and gas sales – arising from sales of CNOOC Ltd’s own produced hydrocarbons – account for the lion’s share of CNOOC Ltd’s top-line (c.82% as of 1H16), with the bulk of the remainder coming from marketing revenues – which involves CNOOC Ltd purchasing crude oil and products and on-selling that to other oil companies, essentially playing a distributor role. Sale of crude oil accounts for c.88% of oil and gas sales by our estimates, while natural gas accounts for the remainder. While natural gas realised sales prices involve long-term contracts with adjustment mechanisms, crude oil realised prices are market-driven, hence the movement in global oil prices has a significant impact on CNOOC Ltd’s top-line. With the recently inked OPEC and non-OPEC agreements to curtail supply and the associated rebalancing expected in early 2017, we think oil prices should trade within the US$55-60/bbl region in 2017, which should engender a rebound in CNOOC Ltd’s top-line. Exploration spend and reserve life drive medium-term growth. The low oil price environment resulted in negative revisions to reserve quantities in 2014 and 2015, which, coupled with stronger oil and gas production levels, has caused CNOOC Ltd’s proved reserve life to decline to a low of 9.08 years as of end-FY15, down from the high of c.11.3 years as of end-2013. Meanwhile capex spend in 2015/2016E has declined by c.38%/46% versus peak 2014 levels. Given that medium-term production levels should be at least partially influenced by reserve quantities, indications of higher exploration and development capex spend now that oil prices are off their lows would augur well for CNOOC Ltd’s medium-term production outlook.

COST STRUCTURE Cost control since the downturn has helped reduce breakeven level. High oil prices from 2010-2014 triggered cost-side inflation in the form of opex (e.g. rig, OSV day rates), SG&A, as well as dismantlement costs. However, amid the downturn, CNOOC Ltd has realised significant cost savings, particularly in cash costs such as opex and SG&A, which has helped reduce the all-in cost per barrel of oil equivalent (boe) to US$34.8/bbl as of 1H16, down from the high of US$47.7/bbl in 2H13. The delta between 1H16 and 1H10 all-in costs is now essentially over 90% attributable to higher DD&A expense (non-cash), reflecting the higher-cost resources exploited during the boom years. KEY OPERATING ASSETS - RESERVES Offshore China remains a crucial oil and gas producing area. Based on the latest disclosure as of 4Q15, roughly 54% of CNOOC Ltd’s net proved reserves totalling 4.32bn BOE are derived from offshore China, of which the Bohai Sea represents the largest contributor, accounting for c.22% of CNOOC LTD’s total net proved reserves, or c.55% of its net proved reserves just within offshore China. In terms of near-term untapped asset potential, as of 4Q15, approximately 54% of CNOOC LTD’s crude oil assets were developed – a relatively high proportion historically – while natural gas assets were 42% developed. Growth in reserves should come from CNOOC LTD’s international expansion drive, which has resulted in the company’s overseas net proved reserves almost tripling in the last five years (boosted by a US$15.1bn acquisition of Canadian upstream firm Nexen), as well as continued investments in key offshore China acreage.

Revenue Breakdown – oil & gas sales the major component

Cost savings initiatives have reduced all-in cost per boe

Capex spending has declined amid the oil price rout

Reserve life has taken a hit on negative revisions

Source: Company, DBS Bank estimates

-

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

1H10 2H10 1H11 2H11 1H12 2H12 1H13 2H13 1H14 2H14 1H15 2H15 1H16

Oil and gas sales Marketing revenues Other income

(in RMBm)

57

5 6 813 14

1826 26

3643

3442

58

92

107

67

0

20

40

60

80

100

120

Exploration Development Production Other

15.4 12.9

11.7 9.1

10.2 10.9 11.3 10.8 9.1

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

-

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

2007 2008 2009 2010 2011 2012 2013 2014 2015

Reserve life (years) Crude oil assets - % developed

Natural gas assets - % developed

23.9 25.6 26.1

35.0 34.636.8

42.4

47.743.2

41.4 41.338.4

34.8

0.00

10.00

20.00

30.00

40.00

50.00

60.00

1H10 2H10 1H11 2H11 1H12 2H12 1H13 2H13 1H14 2H14 1H15 2H15 1H16Opex DD&A Dismantlement SG&A Taxes other than income tax

(US$/boe)

Equity Explorer

CNOOC Ltd

Page 3

GROWTH PROSPECTS

Exploration program a bellwether for growth, backed by value-driven philosophy. CNOOC Ltd has prioritised exploration of mid-to-large-sized oil and gas fields, areas with high success rates overseas, and major operating areas in offshore China, while cutting back on high-risk and high-cost wells. During 1H16, 64 exploration wells were drilled worldwide, including Brazil, Algeria and Gabon, of which 56 were in Offshore China. Of the 56 wells, there were six new discoveries and 20 successfully appraised wells. Including 11 uncertain wells, success rate for these 56 wells range from 47% to 67%, similar to 2015’s success rate for the full year. A further new discovery and 10 successfully appraised wells were announced as of 3Q16. In the near term, the four oil field projects scheduled for start-up in 2016 have all commenced production, which are expected to add 29,100 boe/d at peak production, and another 16 projects in the pipeline are under construction. Overseas push could drive growth, but prudent deal-making and execution are key. Based on CNOOC Ltd’s rolling 3-year targets, we expect the company to gradually increase overseas production to hit its 38% target in 2018; as of 3Q16, overseas production was 36% of total production. Acquisitions of overseas assets could be a key growth driver, but reasonable valuations and solid operational execution remains paramount to avoid a repeat disappointment as in the Nexen case (wherein oil production levels have been lower than desired, and operational issues such as ruptured pipelines have also plagued the company). Nonetheless, we believe CNOOC Ltd holds the potential to transform itself into a global upstream powerhouse in the long term. MANAGEMENT & STRATEGY Deep industry expertise. CNOOC Ltd’s senior management has deep expertise in the China oil and gas industry. Individually, all senior management members each has more than 30 years of experience holding various positions across CNOOC or related entities, and most senior management members are either professor-level senior engineers or economists. Prudent financial policy amid low oil price environment. Cost-cutting initiatives continue to be a lynchpin of CNOOC Ltd’s strategy. Optimisation of service asset requirements, refining platform operations, improving project design, and reducing exploration expense on high-risk, high-cost wells are some examples of measures that have lowered costs. Efforts in technological innovation have also been embarked on as CNOOC Ltd hopes that technology breakthroughs in oilfields development can help to improve efficiency and bring costs down further. Dividends have been prudently cut – 1H16 interim dividend declared was HK$0.12/share, less than half of the HK$0.25/share level seen over the prior three interim periods, and final dividend for FY15 was also cut from the historical HK$0.32/share level to HK$0.25. Balancing short-term and long-term goals. In the last five years running till 2015, 20-23% of total capex has been allocated to exploration, which is higher than most of CNOOC Ltd’s international peers. However, CNOOC Ltd’s 2016 exploration capex budget has been trimmed back slightly, allocating only 19% of capex to exploration, though the company has indicated that sufficient exploration workload will still be kept to sustain development in the medium to long term. Co-operation with foreign partners via PSCs, especially on more complex deepwater projects, is also one strategy employed to lower capital requirements and exploration risk.

Fig. 4: New Projects in 2016 and New Discoveries as of 1H16

Source: Company, DBS Bank

Table 5: Key Management Team

Name Position Experience Yang Hua Chairman

of Board, Non-executive Director

B.S. degree in petroleum engineering, China University of Petroleum

MBA, Sloan Fellow, Sloan School of Management, MIT

Professor-level senior economist Joined CNOOC since 1982 holding various

offices in CNOOC Research Center, international businesses, M&A, corporate finance, capital markets, serving as Deputy Chief Geologist, amongst other positions

>30 years of petroleum exploration and production experience

Li

Fanrong

CEO,

President,

Executive

Director

B.S. degree in oil production, Yangtze University

MBA, Business School of Cardiff University Professor-level senior engineer Joined CNOOC since 1984, with experience

as Petroleum Engineer, Offshore Platform Supervisor, subsequently managing various joint operating groups for NOCs, among other positions

>30 years’ experience in China oil and gas industry

Wu

Guangqi

Executive

Director,

Compliance

Officer

B.S. degree in Marine Geology, Ocean University of China

Masters Degree in Management, China University of Petroleum

Doctor Degree in Management, Huazhong University of Science and Technology

Geologist, professor-level senior economist Certified Internal Auditor, Certified Senior

Enterprise Risk Manager Joined CNOOC since 1982


New Discoveries WZ6-13N Projects Weizhou 6-9/6-10 oil fields

comprehensive adjustment

New Discoveries HZ21-1S

Projects Panyu 11-5 oil field Enping 18-1 oil field

New Discoveries LD29-1 JZ25-1W CFD12-6 PL20-2

Projects Kenli 10-4 oil field

Equity Explorer

CNOOC Ltd

Page 4

Income Statement (RMBm)

FY Dec 2012A 2013A 2014A 2015A 2016F 2017F Revenue 247,627 285,857 274,634 171,437 136,348 169,670 Cost of Goods Sold (155,879) (196,289) (183,937) (145,126) (135,554) (133,593) Gross Profit 91,748 89,568 90,697 26,311 793 36,077 Other Opng (Exp)/Inc (4,607) (11,065) (9,782) (8,855) (6,136) (7,635) Operating Profit 87,141 78,503 80,915 17,456 (5,342) 28,442 Other Non Opg (Exp)/Inc 3,659 3,818 4,293 3,016 2,400 2,400 Associates & JV Inc (27.0) 895 1,006 1,903 458 500 Net Interest (Exp)/Inc (601) (2,365) (3,701) (5,245) (5,958) (5,950) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 90,172 80,851 82,513 17,130 (8,442) 25,392 Tax (26,481) (24,390) (22,314) 3,116 2,110 (6,348) Minority Interest 0.0 0.0 0.0 0.0 0.0 0.0 Preference Dividend 0.0 0.0 0.0 0.0 0.0 0.0 Net Profit 63,691 56,461 60,199 20,246 (6,331) 19,044 Net Profit before Except. 63,691 56,461 60,199 20,246 (6,331) 19,044 EBITDA 123,676 139,672 144,500 95,814 64,261 99,506 Growth Revenue Gth (%) 2.8 15.4 (3.9) (37.6) (20.5) 24.4 EBITDA Gth (%) 0.1 12.9 3.5 (33.7) (32.9) 54.8 Opg Profit Gth (%) (3.8) (9.9) 3.1 (78.4) nm nm Net Profit Gth (Pre-ex) (%) (9.3) (11.4) 6.6 (66.4) nm nm Margins & Ratio Gross Margins (%) 37.1 31.3 33.0 15.3 0.6 21.3 Opg Profit Margin (%) 35.2 27.5 29.5 10.2 (3.9) 16.8 Net Profit Margin (%) 25.7 19.8 21.9 11.8 (4.6) 11.2 ROAE (%) 22.2 17.3 16.7 5.3 (1.7) 5.2 ROA (%) 15.2 10.5 9.4 3.1 (1.0) 3.0 ROCE (%) 17.1 11.5 10.0 2.5 (2.0) 2.2 Div Payout Ratio (%) 24.5 35.8 33.6 100.9 N/A 84.0 Net Interest Cover (x) 145.0 33.2 21.9 3.3 (0.9) 4.8


Margins Trend

-5.0%

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2013A 2014A 2015F 2016F 2017F

Operating Margin % Net Income Margin %

Equity Explorer

CNOOC Ltd

Page 5

Quarterly / Interim Income Statement (RMBm)

FY Dec 2H2H 1H2014 2H2014 1H2015 2H2015 1H2016 Revenue 146,830 138,800 135,834 89,589 81,848 66,832 Cost of Goods Sold (107,458) (85,638) (98,299) (72,372) (72,754) (73,310) Gross Profit 39,372 53,162 37,535 17,217 9,094 (6,478) Other Oper. (Exp)/Inc (6,505) (4,713) (5,069) (3,543) (5,312) (4,318) Operating Profit 32,867 48,449 32,466 13,674 3,782 (10,796) Other Non Opg (Exp)/Inc 1,543 1,305 2,988 1,100 1,916 1,708 Associates & JV Inc 134 618 388 391 1,512 229 Net Interest (Exp)/Inc (1,460) (1,725) (1,976) (2,346) (2,899) (2,788) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 33,084 48,647 33,866 12,819 4,311 (11,647) Tax (11,006) (15,054) (7,260) 1,914 1,202 3,912 Minority Interest 0.0 0.0 0.0 0.0 0.0 0.0 Net Profit 22,078 33,593 26,606 14,733 5,513 (7,735) Net profit bef Except. 22,078 33,593 26,606 14,733 5,513 (7,735) EBITDA 34,544 50,372 35,842 15,165 7,210 (8,859) Growth Revenue Gth (%) 5.6 (5.5) (2.1) (34.0) (8.6) (18.3)EBITDA Gth (%) (29.0) 45.8 (28.8) (57.7) (52.5) nmOpg Profit Gth (%) (28.0) 47.4 (33.0) (57.9) (72.3) nmNet Profit Gth (%) (35.8) 52.2 (20.8) (44.6) (62.6) nm Margins Gross Margins (%) 26.8 38.3 27.6 19.2 11.1 (9.7)Opg Profit Margins (%) 22.4 34.9 23.9 15.3 4.6 (16.2)Net Profit Margins (%) 15.0 24.2 19.6 16.4 6.7 (11.6)

Source: Company, DBS Bank Balance Sheet (RMBm)

FY Dec 2012A 2013A 2014A 2015F 2016F 2017F Net Fixed Assets 252,132 419,102 463,222 454,141 427,255 411,491 Invts in Associates & JVs 24,017 24,397 25,250 28,413 28,771 29,171 Other LT Assets 9,027 31,422 33,679 41,597 40,197 38,797 Cash & ST Invts 133,709 91,639 91,783 29,877 20,935 21,186 Inventory 5,247 9,153 10,608 9,263 7,658 7,841 Debtors 23,624 34,136 29,441 21,829 16,362 20,360 Other Current Assets 8,314 11,624 8,876 79,242 99,242 119,242 Total Assets 456,070 621,473 662,859 664,362 640,420 648,089 ST Debt 28,830 49,841 31,180 33,585 33,585 33,585 Creditor 23,989 48,558 52,192 32,614 27,518 30,613 Other Current Liab 29,618 30,549 20,126 18,181 18,181 18,181 LT Debt 29,056 82,011 105,383 131,060 131,060 131,060 Other LT Liabilities 34,797 68,894 74,368 62,881 64,366 65,896 Shareholder’s Equity 309,780 341,620 379,610 386,041 365,710 368,754 Minority Interests 0.0 0.0 0.0 0.0 0.0 0.0 Total Cap. & Liab. 456,070 621,473 662,859 664,362 640,420 648,089 Non-Cash Wkg. Capital (16,422) (24,194) (23,393) 59,539 77,563 98,649 Net Cash/(Debt) 75,823 (40,213) (44,780) (134,768) (143,710) (143,459) Debtors Turn (avg days) 32.6 36.9 42.2 54.6 51.1 39.5 Creditors Turn (avg days) 65.9 94.7 146.3 215.9 159.5 162.1 Inventory Turn (avg days) 14.3 18.8 28.7 50.6 44.9 43.2 Asset Turnover (x) 0.6 0.5 0.4 0.3 0.2 0.3 Current Ratio (x) 2.1 1.1 1.4 1.7 1.8 2.0 Quick Ratio (x) 1.9 1.0 1.2 0.6 0.5 0.5 Net Debt/Equity (X) CASH 0.1 0.1 0.3 0.4 0.4 Net Debt/Equity ex MI (X) CASH 0.1 0.1 0.3 0.4 0.4 Capex to Debt (%) 93.9 60.5 70.1 41.1 34.9 36.4


Revenue Trend

Asset Breakdown (2015)

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

1H

20

12

2H

20

12

1H

20

13

2H

20

13

1H

20

14

2H

20

14

1H

20

15

2H

20

15

1H

20

16

Revenue Revenue Growth % (YoY)

Equity Explorer

CNOOC Ltd

Page 6

Cash Flow Statement (RMBm)

FY Dec 2012A 2013A 2014A 2015A 2016F 2017F Pre-Tax Profit 90,172 80,851 82,513 17,130 (8,442) 25,392 Dep. & Amort. 32,903 56,456 58,286 73,439 66,746 68,164 Tax Paid (25,162) (32,648) (32,174) (16,000) 2,110 (6,348) Assoc. & JV Inc/(loss) 27.0 (895) (1,006) (1,903) (458) (500) Chg in Wkg.Cap. (5,567) 3,558 (456) (492) 1,976 (1,086) Other Operating CF 201 3,569 3,345 7,921 15,402 5,080 Net Operating CF 92,574 110,891 110,508 80,095 77,334 90,701 Capital Exp.(net) (54,331) (79,716) (95,673) (67,674) (57,433) (60,000) Other Invts.(net) (10,933) 10,320 (3,131) (17,366) (20,000) (20,000) Invts in Assoc. & JV (2,432) 0.0 0.0 (9.0) 0.0 0.0 Div from Assoc & JV 1,352 63.0 153 196 100 100 Other Investing CF 2,547 (100,699) 8,474 8,358 11,643 12,036 Net Investing CF (63,797) (170,032) (90,177) (76,495) (65,690) (67,864) Div Paid (15,635) (20,226) (20,216) (20,419) (14,000) (16,000) Chg in Gross Debt 20,055 42,656 4,844 18,809 0.0 0.0 Capital Issues 0.0 3.00 0.0 0.0 0.0 0.0 Other Financing CF (1,836) (3,832) (4,114) (5,283) (6,586) (6,586) Net Financing CF 2,584 18,601 (19,486) (6,893) (20,586) (22,586) Currency Adjustments (15.0) (166) (245) 242 0.0 0.0 Chg in Cash 31,346 (40,706) 600 (3,051) (8,942) 251 Opg CFPS (RMB cts) 220 240 249 180 169 206 Free CFPS (RMB cts) 85.7 69.8 33.2 27.8 44.6 68.8


Capital Expenditure

VALUATIONS

Some upside left on the table. We utilise a DCF valuation (WACC 10%; terminal growth 2%; long-term oil price of US$65/bbl assumed) to derive our TP of HK$11.63, representing an upside potential of c.16% from the current price. Relative valuation is a mixed bag: CNOOC is currently trading at 5.8x FY17 EV/EBITDA based on our estimates, in line with its upstream peer average of 5.9x and Chinese oil major average of 5.6x. However, our EBITDA forecasts are below consensus; using consensus FY17 EBITDA yields a 4.30x multiple, or -0.5SD below historical levels.

Risk Assessment: Moderate Category Risk Rating Wgt Wgtd Score

1 (Low) - 3 (High) Earnings 2 40% 0.8 Financials 1 20% 0.2 Shareholdings 1 40% 0.4 Overall 1.4

Expect a gradual earnings recovery on positive oil price outlook. As mentioned earlier, CNOOC’s top-line and earnings are largely driven by movements in global oil prices. With the recent agreements to cut supply by both OPEC and non-OPEC members, we think a rebalancing of global crude oil demand-supply could happen by early 2017, which should keep oil prices in the US$55-60/bbl range, though medium-term price levels are likely capped at the c.US$60-65/bbl level – with US shale drillers ramping up production as oil prices approach the US$60/bbl level. SOE parent provides strong implicit backing. Parent company CNOOC (not to be confused with CNOOC Ltd – the listed company) is a state-owned enterprise (SOE) and owns a controlling 64.44% stake in CNOOC Ltd. The remaining free float is held by public investors. We think having an SOE parent provides a certain degree of comfort in the form of implicit financial backing the bear-case of a low oil price scenario.

Historical 12 month forward EV/EBITDA ratio (x)

*Based on historical consensus forward EBITDA estimates Source: Bloomberg Finance L.P. , DBS Bank Table 6: Peers’ Comparisons

Company Mkt Cap (US$m)

EV/EBITDA FY17 (x)

PE FY17 (x)

P/B current (x) Net D/E (x)

Petrochina 192,503 6.3 19.9 0.8 0.3 Sinopec 93,450 4.9 12.6 0.9 0.2 ConocoPhillips 63,798 8.2 nm 1.8 0.6 Anadarko 39,503 8.4 nm 3.1 1.0 Inpex 15,714 3.5 27.3 0.7 CASH PTTEP 10,351 3.1 16.1 1.0 CASH Medco 346 6.4 6.9 0.5 1.3 CNOOC Ltd 58,030 5.8 21.1 1.1 0.35

*CNOOC multiples based on DBS forward estimates where applicable Source: Bloomberg Finance L.P. , DBS Bank

0.0

20,000.0

40,000.0

60,000.0

80,000.0

100,000.0

120,000.0

2013A 2014A 2015F 2016F 2017F

Capital Expenditure (-)

HK$m

0

2

4

6

8

10

12

Average since listing: 5.05x


Oil & Gas

Page 14

COMPANY GUIDES

ASIAN INSIGHTS VICKERS SECURITIES ed: JS / sa:JC, PY

HOLD Last Traded Price ( 11 Nov 2016): S$0.265 (STI : 2,814.60) Price Target 12-mth: S$0.27 (3% upside) (Prev S$0.30) Potential Catalyst: Privatisation, vessel deliveries Where we differ: We are pessimistic on earnings but potential M&A is a catalyst Analyst Pei Hwa HO +65 6682 3714 [email protected]

What’s New 3Q16 hit by huge provision for bad debt

Expect larger net losses c.S$200m this year

Alarmingly high net gearing; will parent co come

to the rescue via capital injection or restructuring?

Maintain HOLD; TP lowered to S$0.27

Price Relative

Forecasts and Valuation FY Dec (S$ m) 2014A 2015A 2016F 2017F Revenue 4,261 3,520 2,623 1,795 EBITDA 253 (619) (90.2) 290 Pre-tax Profit 17.3 (901) (451) (105) Net Profit 20.9 (570) (201) (48.5) Net Pft (Pre Ex.) 20.9 (570) (201) (48.5) Net Pft Gth (Pre-ex) (%) (31.8) nm 64.8 75.8 EPS (S cts) 0.93 (25.5) (9.0) (2.2) EPS Pre Ex. (S cts) 0.93 (25.5) (9.0) (2.2) EPS Gth Pre Ex (%) (32) nm 65 76 Diluted EPS (S cts) 0.93 (25.5) (9.0) (2.2) Net DPS (S cts) 0.50 0.0 0.0 0.0 BV Per Share (S cts) 61.1 36.7 27.7 25.6 PE (X) 28.4 nm nm nm PE Pre Ex. (X) 28.4 nm nm nm P/Cash Flow (X) 0.0 0.0 nm 0.6 EV/EBITDA (X) 19.3 nm nm 18.3 Net Div Yield (%) 1.9 0.0 0.0 0.0 P/Book Value (X) 0.4 0.7 1.0 1.0 Net Debt/Equity (X) 1.5 3.7 5.5 4.9 ROAE (%) 1.5 (52.1) (27.8) (8.1) Earnings Rev (%): 45 8 Consensus EPS (S cts): (2.2) (0.6) Other Broker Recs: B: 0 S: 4 H: 1

Source of all data on this page: Company, DBS Bank, Bloomberg Finance L.P

Widened losses Maintain HOLD; TP lowered to S$0.27, following earnings revision, still based on 1.0x FY16 P/BV. Cosco Corporation (Cosco)’s gross margin improved by 5.9ppts to 7.4% in 3Q16 but earnings were hit by a huge provision for bad debt of S$262m. While there are limited re-rating catalysts from the fundamental front in the near term, we see that there is a possibility of a privatisation of Cosco by its parent in subsequent phases of restructuring of the two shipping giants. The alarmingly high net gearing of 5.6x warrants immediate attention from its parent co, in our view. Watch for parent’s restructuring. Following the restructuring of its parent, Cosco Group, and China Shipping Group (China Shipping) in Dec-2015, Cosco Shipping is now the indirect controlling shareholder of Cosco. While the first phase of restructuring does not involve Cosco’s business segments, we do not rule out the possibility of further restructuring in the future as China Shipping also owns a small shipyard. In addition, Cosco’s bulk carrier fleet may be injected into the merged entity. This could be a re-rating catalyst for Cosco. Operating environment remains challenging. Cosco’s gross order book of US$6.8bn is a double-edged sword. The shipbuilding contracts in its order book are of low value while its offshore segment is still on a steep learning curve with its diversified product range. Making things worse, its O&G customers are delaying rig deliveries in view of the lacklustre chartering market and there could potentially be more cancellations given the prolonged downturn. Valuation:

Our TP of S$0.27 is based on 1.0x FY16 P/BV. P/BV is a more appropriate valuation metric than PE, given the low earnings visibility and expectation of losses ahead. Key Risks to Our View:

An earlier-than-expected recovery in oil prices could catalyse an industry recovery with Cosco securing more orders at attractive prices. Sharp improvements in productivity could also cause its share price to re-rate. Last but not least, the “bail-out” by its parent would be deemed positive as well. At A Glance Issued Capital (m shrs) 2,239 Mkt. Cap (S$m/US$m) 593 / 420 Major Shareholders (%) China Ocean Shipping 53.4

Free Float (%) 46.5 3m Avg. Daily Val (US$m) 0.54 ICB Industry : Industrials / Industrial Engineering

DBS Group Research . Equity 14 Nov 2016

Singapore Company Guide

Cosco Corporation Version 4 | Bloomberg: COS SP | Reuters: COSC.SI Refer to important disclosures at the end of this report

27

47

67

87

107

127

147

167

187

207

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0.9

1.0

1.1

Nov-12 Nov-13 Nov-14 Nov-15 Nov-16

Relative IndexS$

Cosco Corporation (LHS) Relative STI (RHS)

ASIAN INSIGHTS VICKERS SECURITIES

Company Guide

Cosco Corporation

WHAT’S NEW

Massive provisions for bad debt

Widened losses in 3Q16. Cosco posted net loss of S$102m in 3Q16, expanding from S$36.8m a quarter ago, blamed on a huge impairment made for trade receivables – S$262m. Otherwise, losses could have been narrowed as gross margins improved 5.9ppts to 7.4%. We remain wary of further provisions especially with the heightened risk of cancellations.

We now expect larger losses of c.S$200m this year factoring in the provision for bad debt. Cosco reported net losses of S$154m in 9M16.

Deferment and cancellation risks are high. Gross orderbook stood at US$6.8bn as of end Sept-2016. Cosco has received a number of deferment and order cancellation requests. The risks remain prevalent. Several fabrication contracts worth US$1.4bn for modules of drillships and FPSOs with certain Brazilian customers are deemed to be more at risk given the current situation in Brazil.

Net gearing stood at an alarmingly high 5.6x as at end Sept-2016, from 4.3x a quarter ago, arising from deferments and deteriorating payment terms. We believe this calls for corporate action in the very near term to address the gearing issue.

Quarterly / Interim Income Statement (S$m)

FY Dec 3Q2015 2Q2016 3Q2016 % chg yoy % chg qoq

Revenue 950 763 662 (30.2) (13.2)

Cost of Goods Sold (960) (751) (613) (36.2) (18.4)

Gross Profit (10.7) 11.5 49.3 nm 328.1

Other Oper. (Exp)/Inc (121) (26.3) (301) 149.5 1,045.5

Operating Profit (131) (14.8) (252) (91.7) nm

Other Non Opg (Exp)/Inc 0.0 0.0 0.0 nm nm

Associates & JV Inc 0.10 0.04 0.07 (30.8) 84.6

Net Interest (Exp)/Inc (37.0) (47.1) (50.1) (35.3) (6.4)

Exceptional Gain/(Loss) 0.0 0.0 0.0 nm nm

Pre-tax Profit (168) (61.8) (302) (79.4) (388.7)

Tax 16.5 8.96 47.9 191.2 434.5

Minority Interest 69.8 16.0 152 117.4 846.4

Net Profit (82.1) (36.8) (102) (24.6) (178.0)

Net profit bef Except. (82.1) (36.8) (102) (24.6) (178.0)

EBITDA (93.5) 21.7 (217) (131.9) nm

Margins (%)

Gross Margins (1.1) 1.5 7.4

Opg Profit Margins (13.8) (1.9) (38.1)

Net Profit Margins (8.6) (4.8) (15.5)

Source of all data: Company, DBS Bank


Company Guide

Cosco Corporation

CRITICAL DATA POINTS TO WATCH

Earnings Drivers:

Order book is a key driver of revenues. As at end-Sept 2016, Cosco had 77 vessels on its gross order book, of which 41 were from the offshore segment. Its US$6.8bn order book will contribute to revenues until 2018. However, offshore vessels are facing a clear oversupply situation on a global scale – which heightens the risk of delivery deferments in the quarters to come. Furthermore, its shipbuilding contracts are of low value while the higher-value offshore contracts face a steep learning curve resulting from a diversified product range. Order wins keep the order book going. In 2015, Cosco secured 17 orders (of which seven are lower-value 3,600 TEU container ships for MAERSK) totalling US$800m. This is substantially lower than the US$1.6bn secured in 2014. YTD-2016, Cosco has secured only US$355m worth of new contracts. Clinching high-value orders amid a lacklustre environment would be encouraging. Contract pricing impacts the bottom line. Chinese offshore yards have historically made low single-digit EBIT margins, considerably lower than the low teens earned by their Singaporean peers. Cosco, one of the pioneer offshore yards in China with a more established track record, also reported net losses of S$570m in FY15 and S$154m in 9M16. We believe this has been largely due to aggressive pricing of its contracts and execution hiccups, exacerbated by a wave of delivery deferments upon client requests. Conquering the learning curve quickly is essential. Labour is 30% cheaper in China than in Singapore but 50% less productive. As such, Chinese yards face higher labour costs that would exacerbate the downward pressure on margins. Cosco’s ability to quickly climb the learning curve is therefore important for improving its net margins in the longer term. However, the company's tendency to accept a very diverse range of product orders inherently makes swift improvements to productivity difficult. Industry recovery is the long-term driver of earnings. Cosco’s dry bulk fleet and its shipbuilding and repair segments have been hit by the downturn in the shipping industry, where supply of vessels continues to outstrip demand. Meanwhile, offshore oil & gas players’ capex budgets have taken deep cuts, on the back of languishing oil prices. This does not bode well for order wins for the offshore segment. A meaningful recovery in the shipping and offshore oil & gas markets would signal an earnings recovery for Cosco.

Order wins (US$ m)

Steel cost (RMB/t)


3013

1607

800

355

1000

0.0

434.7

869.5

1304.2

1738.9

2173.7

2608.4

3043.1

2013A 2014A 2015A 2016F 2017F

4000

47504590

41314338

0.0

969.0

1938.0

2907.0

3876.0

4845.0

2013A 2014A 2015A 2016F 2017F


Company Guide

Cosco Corporation

Balance Sheet:

Net gearing is alarmingly high at 5.6x as at end-Sept 2016. More aggressive payment terms have necessitated higher working capital investments by Cosco, which has led to more debt on its balance sheet. There is ~S$3.4bn of debt due within the year which, in the event of an inability to secure refinancing, would likely result in cash-flow issues, although Cosco’s strong parentage may help mitigate this risk. Share Price Drivers:

Rebound in oil prices would provide support to share price. Offshore & Marine stocks have tracked oil prices closely, as the market views the oil price as a proxy to the industry’s health. A recovery of oil prices to above the US$60 per barrel level should see Cosco’s share price rise in tandem. Visible margin improvement should boost the share price. Margin uplift from more favourable contract terms as well as productivity improvements in its workforce would send a positive signal to the market and likely cause Cosco’s share price to rise. Further Cosco Group restructuring. While the Cosco Group and China Shipping restructuring will not involve Cosco’s business segments for the time being, we do not rule out the possibility of further restructuring in the future. The rock-bottom share price could provide the impetus for privatisation by parent company Cosco Group, which may hold a longer-term view of Cosco’s potential. Key Risks:

Concerns remain over the drillship and cylindrical rig. The cancelled drillship unit, having been substantially completed and up for sale since 3Q13, has yet to find a buyer. Meanwhile, the fourth Sevan cylindrical rig unit has had its delivery date extended by 12 months with options on a maximum of an additional 36 months in place. However it remains at risk of being cancelled, as Sevan Drilling has yet to find a charterer for the asset. Competition risk from Chinese yards remains salient. Many of the leading Chinese shipbuilders jumped onto the offshore bandwagon amid shipbuilding overcapacity. As the offshore industry is facing headwinds as well, price wars among the Chinese yards remain a key risk. Cost overruns continue to plague the business. Provision for cost overruns has been a major swing factor on earnings, blamed on execution hiccups, longer-than-expected man-hours, and underestimation of project costs. Deferment and cancellation risk is heightened. Chinese offshore yards are more susceptible to deferments and cancellations in the light of a weaker customer profile of less established players/speculators, and balloon payment terms of at least 90% upon delivery.

Company Background

Cosco is among the leading offshore yards in China. Its business can be classified into four segments - offshore, shipbuilding, repair & conversion and shipping.

Leverage & Asset Turnover (x)

Capital Expenditure

ROE (%)

PB Band (x)


0.1

0.2

0.2

0.3

0.3

0.4

0.4

0.5

0.5

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

2013A 2014A 2015A 2016F 2017F

Gross Debt to Equity (LHS) Asset Turnover (RHS)

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

2013A 2014A 2015A 2016F 2017F


S$m

0.0%

0.5%

1.0%

1.5%

2.0%

2013A 2014A 2015A 2016F 2017F

Avg: 1.12x

+1sd: 1.35x

+2sd: 1.58x

‐1sd: 0.89x

‐2sd: 0.66x

0.5

0.7

0.9

1.1

1.3

1.5

1.7

1.9

Nov-12 Nov-13 Nov-14 Nov-15

(x)


Company Guide

Cosco Corporation

Key Assumptions

FY Dec 2013A 2014A 2015A 2016F 2017F Order wins (US$ m) 3,013 1,607 800 355 1,000 Steel cost (RMB/t) 4,000 4,750 4,590 4,131 4,338

Segmental Breakdown

FY Dec 2013A 2014A 2015A 2016F 2017F Revenues (S$m) Shipping and Agency 55.6 52.5 44.6 38.6 43.9 Shiprepair and 587 592 540 586 641 Shipbuilding* 449 412 645 581 639 Offshore* 2,417 3,204 2,289 1,417 471 Total 3,508 4,261 3,519 2,623 1,795 PATMI (S$m) Shipping and Agency 0.32 0.45 (7.6) (12.4) (7.9) Others 30.3 20.4 (562) (188) (40.6) Total 30.6 20.9 (570) (201) (48.5) PATMI Margins (%)

Shipping and Agency 0.6 0.9 (17.0) (32.1) (18.0) Others 0.9 0.5 (16.2) (7.3) (2.3) Total 0.9 0.5 (16.2) (7.7) (2.7)

Income Statement (S$m)

FY Dec 2013A 2014A 2015A 2016F 2017F Revenue 3,508 4,261 3,520 2,623 1,795 Cost of Goods Sold (3,187) (3,970) (3,735) (2,450) (1,580) Gross Profit 321 291 (215) 173 215 Other Opng (Exp)/Inc (195) (192) (554) (421) (90.7) Operating Profit 127 99.3 (769) (248) 124 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 0.41 (0.2) 0.03 0.50 0.50 Net Interest (Exp)/Inc (66.1) (81.9) (133) (204) (230) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 60.9 17.3 (901) (451) (105) Tax (8.2) 9.03 (13.7) 85.7 20.0 Minority Interest (22.2) (5.4) 345 165 36.6 Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit 30.6 20.9 (570) (201) (48.5) Net Profit before Except. 30.6 20.9 (570) (201) (48.5) EBITDA 311 253 (619) (90.2) 290 Growth Revenue Gth (%) (6.1) 21.5 (17.4) (25.5) (31.6) EBITDA Gth (%) (33.8) (18.7) nm 85.4 nm Opg Profit Gth (%) (56.3) (21.6) nm 67.7 nm Net Profit Gth (Pre-ex) (%) (71.0) (31.8) nm 64.8 75.8 Margins & Ratio Gross Margins (%) 9.2 6.8 (6.1) 6.6 12.0 Opg Profit Margin (%) 3.6 2.3 (21.8) (9.5) 6.9 Net Profit Margin (%) 0.9 0.5 (16.2) (7.7) (2.7) ROAE (%) 2.3 1.5 (52.1) (27.8) (8.1) ROA (%) 0.4 0.2 (5.6) (2.0) (0.5) ROCE (%) 2.0 1.5 (10.2) (3.2) 1.6 Div Payout Ratio (%) 73.1 53.6 N/A N/A N/A Net Interest Cover (x) 1.9 1.2 (5.8) (1.2) 0.5



Company Guide

Cosco Corporation


FY Dec 3Q2015 4Q2015 1Q2016 2Q2016 3Q2016 Revenue 950 726 722 763 662 Cost of Goods Sold (960) (1,062) (633) (751) (613) Gross Profit (10.7) (336) 89.3 11.5 49.3 Other Oper. (Exp)/Inc (121) (356) (48.1) (26.3) (301) Operating Profit (131) (692) 41.2 (14.8) (252) Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 0.10 (0.1) 0.02 0.04 0.07 Net Interest (Exp)/Inc (37.0) (36.3) (53.2) (47.1) (50.1) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit (168) (728) (12.0) (61.8) (302) Tax 16.5 (28.7) 0.30 8.96 47.9 Minority Interest 69.8 273 (2.7) 16.0 152 Net Profit (82.1) (484) (14.4) (36.8) (102) Net profit bef Except. (82.1) (484) (14.4) (36.8) (102) EBITDA (93.5) (653) 79.1 21.7 (217) Growth Revenue Gth (%) 11.3 (23.6) (0.4) 5.6 (13.2) EBITDA Gth (%) nm (598.8) nm (72.6) nm Opg Profit Gth (%) nm (426.2) nm nm (1,604.4) Net Profit Gth (Pre-ex) (%) (1,624.4) (489.2) 97.0 (155.7) (178.0) Margins Gross Margins (%) (1.1) (46.3) 12.4 1.5 7.4 Opg Profit Margins (%) (13.8) (95.4) 5.7 (1.9) (38.1) Net Profit Margins (%) (8.6) (66.7) (2.0) (4.8) (15.5)

Balance Sheet (S$m)

FY Dec 2013A 2014A 2015A 2016F 2017F Net Fixed Assets 2,228 2,267 2,307 2,300 2,284 Invts in Associates & JVs 4.83 4.74 4.85 5.35 5.85 Other LT Assets 291 301 265 265 265 Cash & ST Invts 2,028 1,561 1,571 1,543 2,809 Inventory 1,047 1,042 780 874 598 Debtors 2,912 4,564 5,202 5,245 3,590 Other Current Assets 224 206 224 0.0 0.0 Total Assets 8,735 9,945 10,355 10,233 9,553 ST Debt 1,926 2,430 3,986 4,185 4,394 Creditor 2,696 2,632 2,417 2,384 1,381 Other Current Liab 80.7 110 64.2 14.7 80.5 LT Debt 1,856 2,542 2,547 2,674 2,808 Other LT Liabilities 0.53 0.84 0.29 0.29 0.29 Shareholder’s Equity 1,336 1,368 822 621 573 Minority Interests 839 862 518 353 317 Total Cap. & Liab. 8,735 9,945 10,355 10,233 9,553 Non-Cash Wkg. Capital 1,406 3,069 3,725 3,721 2,727 Net Cash/(Debt) (1,754) (3,412) (4,962) (5,316) (4,393) Debtors Turn (avg days) 294.0 320.2 506.4 727.0 898.3 Creditors Turn (avg days) 300.2 254.8 257.1 382.2 485.7 Inventory Turn (avg days) 90.7 99.9 92.8 131.7 189.9 Asset Turnover (x) 0.4 0.5 0.3 0.3 0.2 Current Ratio (x) 1.3 1.4 1.2 1.2 1.2 Quick Ratio (x) 1.1 1.2 1.0 1.0 1.1 Net Debt/Equity (X) 0.8 1.5 3.7 5.5 4.9 Net Debt/Equity ex MI (X) 1.3 2.5 6.0 8.6 7.7 Capex to Debt (%) 1.4 2.0 2.2 2.2 2.1 Z-Score (X) 0.9 0.9 0.4 0.5 0.6



Company Guide

Cosco Corporation

Cash Flow Statement (S$m)

FY Dec 2013A 2014A 2015A 2016F 2017F Pre-Tax Profit 60.9 17.3 (901) (451) (105) Dep. & Amort. 184 153 150 158 165 Tax Paid (11.6) (6.3) (26.6) (13.7) 85.7 Assoc. & JV Inc/(loss) (0.4) 0.20 0.0 (0.5) (0.5) Chg in Wkg.Cap. (543) (1,887) (1,336) 104 928 Other Operating CF 180 295 882 0.0 0.0 Net Operating CF (130) (1,428) (1,231) (204) 1,073 Capital Exp.(net) (51.2) (97.4) (143) (150) (150) Other Invts.(net) 0.0 0.0 0.0 0.0 0.0 Invts in Assoc. & JV 0.0 0.0 (0.7) 0.0 0.0 Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0 Other Investing CF 35.1 48.6 44.5 0.0 0.0 Net Investing CF (16.2) (48.8) (98.8) (150) (150) Div Paid (44.8) (22.4) (11.2) 0.0 0.0 Chg in Gross Debt 562 1,100 1,476 327 343 Capital Issues 0.0 0.0 0.0 0.0 0.0 Other Financing CF (111) (122) (176) 0.0 0.0 Net Financing CF 406 956 1,290 327 343 Currency Adjustments 76.6 53.2 50.6 0.0 0.0 Chg in Cash 336 (468) 10.1 (27.7) 1,266 Opg CFPS (S cts) 18.4 20.5 4.66 (13.8) 6.50 Free CFPS (S cts) (8.1) (68.1) (61.4) (15.8) 41.2


Target Price & Ratings History

Source: DBS Bank

Analyst: Pei Hwa HO

S.No.Date of Report

Closing Price

12-mth Target Price

Rat ing

1: 16 Nov 15 0.38 0.42 HOLD

2: 14 Dec 15 0.31 0.32 FULLY VALUED

3: 11 Jan 16 0.37 0.32 FULLY VALUED



6: 01 Feb 16 0.33 0.32 FULLY VALUED




10: 22 Feb 16 0.30 0.24 FULLY VALUED

11: 15 Mar 16 0.38 0.24 FULLY VALUED12: 03 May 16 0.34 0.24 FULLY VALUED13: 09 May 16 0.32 0.30 HOLD14: 23 May 16 0.33 0.30 HOLD

Note : Share price and Target price are adjusted for corporate actions. 15: 08 Aug 16 0.27 0.30 HOLD

1

23

4

5

6

7

8

9

10

11 12

13

14

150.23

0.28

0.33

0.38

0.43

0.48

0.53

Nov-15 Mar-16 Jul-16

S$

ASIAN INSIGHTS VICKERS SECURITIES ed: TH / sa: AS, PY

BUY Last Traded Price ( 24 Nov 2016): S$0.33 (STI : 2,843.72) Price Target 12-mth : S$0.56 (71% upside) (Prev S$0.58) Potential Catalyst: Oil price recovery, vessel delivery Where we differ: More conservative on revenue and margins Analyst Pei Hwa HO +65 6682 3714 [email protected]

What’s New Cut FY16-17 earnings by 32-37% after pushing

back deliveries and lowering margins

Recurring PATMI (excluding forex) made a new

low of US$5.9m

Positive OCF and lower gearing provide buffer to

weather through the downturn

BUY Ezion as one of the best proxies to ride oil

recovery; TP adjusted to S$0.56

Price Relative

Forecasts and Valuation FY Dec (US$ m) 2014A 2015A 2016F 2017F Revenue 387 351 328 378 EBITDA 309 267 213 239 Pre-tax Profit 226 38 48 46 Net Profit 224 37 45 44 Net Pft (Pre-Ex, Aft Pref Div)* 179 95 22 37 EPS (S cts) 20.3 3.3 3.1 3.0 EPS Pre Ex, Aft Pref Div (S cts) 16.2 8.6 1.5 2.5 EPS Gth (%) 26 (84) (6) (3) EPS Gth Pre Ex, Aft pref div 21 (47) (82) 63 Net DPS (S cts) 0.1 0.0 0.0 0.0 BV Per Share (S cts) 97.7 99.8 84.4 86.9 PE (X) 1.6 9.9 10.5 10.8 PE Pre Ex, Aft Pref Div (X) 2.0 3.8 21.3 13.0 P/Cash Flow (X) 1.7 1.7 3.3 2.9 EV/EBITDA (X) 5.6 7.0 8.7 7.8 Net Div Yield (%) 0.3 0.0 0.0 0.0 P/Book Value (X) 0.3 0.3 0.4 0.4 Net Debt/Equity (X) 0.9 1.1 0.9 0.9 ROAE (%) 24.5 2.1 3.2 3.0 Earnings Rev (%): (52) (37) Consensus EPS (S cts): 2.9 4.4 Other Broker Recs: B: 7 S: 2 H: 3

Source of all data on this page: Company, DBS Bank, Bloomberg Finance L.P.

Fortified balance sheet

Maintain BUY on Ezion; TP adjusted to S$0.56, following earnings revisions, still based on 0.6x FY16 P/BV. We trimmed FY16-17 forecasts by 32-37% after pushing back vessel deliveries and lowering margins. Nonetheless, we believe core earnings are near bottom and comforted by Ezion’s positive OCF and lower gearing which are much needed in this environment. Ezion is among the stronger players with good assets, positive operating cash flow and decent cash balances. Re-rating catalysts stem from oil price rebound, earnings recovery with the resumption of service rigs currently under repair/upgrades in 2017, and successful diversification of its customer base to win new charter contracts.

3Q16 earnings disappointed on lower revenue and margins. Revenue fell 4.7% q-o-q to US$79.8m and gross margin contracted to 17.5% in 3Q16 (vs 21.3% in 2Q16 and 29.0% in 3Q15). As a result, recurring PATMI (excluding forex) made a new low of US$5.9m. The lower revenue was due to the off hire of one service rig, which outweighed the commencement of a new service rig in September for windfarm. Depreciation expense crept up to US$38.1m, from US$36.9m (2Q16).

Windfarm venture shaping up. China had set a target of 5GW of installed offshore wind capacity by 2015 and 30GW by 2020 in its current 5-year plan. It is behind schedule with only approximately 2.5GW offshore wind capacity installed. A liftboat could facilitate installation of 200MW offshore wind capacity a year. Assuming 27.5GW wind capacity to be installed over the next five years or 5.5GW per year, 25-30 liftboats would be required in China. Ezion has signed an MOU with one of the top five IPPs in China – Huadian – and several partners to speed up the installation of offshore windfarms using liftboats. The first service rig for China windfarm is expected to commence in 1Q17.

Valuation:

We value Ezion based on 0.6x FY16 P/BV, arriving at a target price of S$0.56. This implies 71% upside potential.

Key Risks to Our View:

Rate reduction and contract terminations We estimate that every 1% decline in average day rates will reduce Ezion’s bottom line by 7% due to low-base effect. We have prudently assumed that rates will reduce by 15%/10% p.a. in FY16/17. Five service rigs are due for charter renewals in FY17. Besides, the Mexican contracts appear to be at risk of termination as these consist of the few units that are deployed for drilling and there have been several cancellations in that region. Competition may be keener ahead with more new entrants attracted to the growing liftboat market.

At A Glance Issued Capital (m shrs) 2,074 Mkt. Cap (S$m/US$m) 684 / 478 Major Shareholders (%) Thiam Keng Chew 13.4 Prudential Plc 9.1 Macarios Pte Ltd 6.9

Free Float (%) 70.6 3m Avg. Daily Val (US$m) 5.7 ICB Industry : Oil & Gas / Oil Equipment; Services & Dist



Ezion Holdings Version 10 | Bloomberg: EZI SP | Reuters: EZHL.SI Refer to important disclosures at the end of this report


Company Guide

Ezion Holdings

WHAT’S NEW

3Q16 earnings continued to slide

Results review: 3Q16 earnings disappointed on lower revenue and margins. Revenue fell 4.7% q-o-q to US$79.8m and gross margin contracted to 17.5% in 3Q16 (vs 21.3% in 2Q16 and 29.0% in 3Q15). As a result, recurring PATMI (excluding forex) made a new low of US$5.9m. The lower revenue was due to the off hire of one service rig, which outweighed the commencement of a new service rig in September for windfarm. Depreciation expense crept up to US$38.1m, from US$36.9m (2Q16) with the new delivery. Outlook: Expects recovery in 2H17. Oil majors have yet to feel the full impact of oil price recovery to US$50/bbl level due to a lag effect and continue to run on a very tight budget for OPEX. Management expects the situation to last for another 6-9 months before a meaningful recovery in activity level as the market awaits more indicators on oil price stability. Rate reduction pressure. Customers are pestering for a further reduction to charter rates for contract renewals. We have assumed a 15% rate cut in 2016 and a further 10% in 2017. Mexican units. Ezion is in the midst of redeploying the two 100%-owned service rigs for windfarm/MOPU. As for the three JV units with Swissco, Ezion’s contracts with PEMEX’s contractor remain valid though the contractor’s charter contract with PEMEX has ended. These units are likely to be redeployed as well. PEMEX has not been paying the contractors. Ezion is working with the other division of PEMEX to supply a customised vessel and is hoping that this PEMEX counterpart could help to accelerate PEMEX’s payments.

Acquisition of remaining stake in three drilling rigs (50:50 JV Ezion-Swissco). The purchase seems to be a bargain given Swissco is in financial distress and the charter will be off hire soon. Ezion will only be paying US$3.2m in cash to Swissco, as it will take over the outstanding borrowing for the units totalling US$60-70m. Both parties have sunk in loans to the JV, which Swissco announced that its portion was US$27.8m and has been written off. We estimate the carrying book value for the three units to be around US$180m. Ezion will also have the full rights on the outstanding receivables from PEMEX totalling c.US$60m, which we see as the sweetener of the deal. Possible impairment/provisions in 4Q16? In view of the prolonged downturn and possible downward revision in the cash flow projection for the vessels in the near-to-medium term, we believe service providers including Ezion might be under pressure to impair their assets in 4Q16. On average, the OSV owners under our coverage have marked down their asset values by c.10%. This is non-cash item, and current valuation at a steep discount to book has probably priced in the impairment risks. Deliveries pushed back. Ezion has pushed back six out of nine new vessels scheduled for deliveries by 2017-2018, in view of market conditions and the rising need for cash conservation. As for service rigs taken out for repair/upgrades, we expect 3-4 units to return to the operating fleet each year in 2017-2018. Rescheduling of repayment is still in progress, pending consent from the last of the five banks. The new repayment schedule will match the lowered cash flow generation for individual asset post rate reduction. The company hopes for the exercise to be completed by end of the year.


Company Guide

Ezion Holdings

Quarterly / Interim Income Statement (US$m)


Revenue 86.2 83.7 79.8 (7.4) (4.7)

Cost of Goods Sold (61.3) (65.9) (65.8) 7.4 (0.2)

Gross Profit 25.0 17.8 14.0 (43.9) (21.3)

Other Oper. (Exp)/Inc 2.68 (6.2) (1.8) (165.4) (71.6)

Operating Profit 27.6 11.6 12.3 (55.7) 5.5


Associates & JV Inc 9.03 2.54 5.32 (41.1) 109.1

Net Interest (Exp)/Inc (5.9) (6.5) (7.2) (22.2) (10.2)

Exceptional Gain/(Loss) 0.0 1.48 0.0 nm nm

Pre-tax Profit 30.8 9.09 10.4 (66.4) 13.9

Tax (0.4) (1.0) (1.0) 121.1 2.6

Minority Interest 0.0 0.0 0.0 nm nm

Net Profit 30.3 8.14 9.38 (69.1) 15.3

Net profit bef Except. 30.3 6.66 9.38 (69.1) 40.9

EBITDA 73.1 51.0 55.7 (23.9) 9.1

Margins (%)

Gross Margins 29.0 21.3 17.5

Opg Profit Margins 32.1 13.9 15.3

Net Profit Margins 35.2 9.7 11.8



Company Guide

Ezion Holdings


Earnings Drivers:

Charter-backed fleet expansion. Since the delivery of its first liftboat, the Lewek Leader, in January 2010, Ezion has expanded its fleet rapidly to 26 service rigs (excluding unit #10 that was taken out for conversion into MOPU). Based on the existing schedule, management expects another 2/7/2 units to come on stream in 2016/17/18. All the vessels under construction have already secured back-to-back contracts and will start contributing to earnings upon delivery to customers. Rate reduction and uncertainty. While we expect sequential improvement from the maiden contribution of the ten new service rigs to be delivered the next three years and resumption of the ten vessels currently under repair/upgrade/conversion at the yards, the pace of earnings growth is dependent on the magnitude of rate reduction. With oil price hovering at current levels, rate renegotiation is inevitable. Against this backdrop, we have factored in a rate reduction of 15/10% p.a. in 2016-2017. Pick-up in offshore logistic revenue. Ezion’s Australian offshore logistic fleet comprises ten tugs and 30 ballastable barges. Ballastable barges, which have specially reinforced decks, have been modified to carry heavy offshore platforms and jackets. Demand for such high-end vessels has fallen off the cliff since 4Q14, with the construction of major Australian LNG projects coming to an end. This was exacerbated by depressed oil prices that have discouraged customers from exercising charter options after the initial term of 18 months. We estimate overhead costs to be around US$15-20m a year, taking into account depreciation, crew costs and interest expenses. Upside potential would come from a stronger-than-expected demand or disposal of the fleet, which has a carrying value of around US$250m. However, we believe it is not easy to find buyers in the current climate. Contract wins from windfarm expansion to fuel growth. During the peak of its contract wins, Ezion won 12/9/7 new charter contracts in 2012/13/14 respectively. The contracting pace is expected to slow down, constrained by Ezion’s stretched balance sheet. But the unexpected collapse in oil prices has accelerated the decline as some customers have held back the award of new contracts or have negotiated down charter rates. We believe demand will continue to grow in this region as liftboats/service rigs are in early stages of the industry cycle, to substitute workboats and barges that are traditionally used to support offshore production platforms. Ezion enjoys first-mover advantage to tap the industry’s growth. In addition, its recent venture into offshore windfarm could be a medium-term growth engine as well.

Total fleet

Operating fleet



Company Guide

Ezion Holdings

Balance Sheet:

Net gearing improved to 0.93x post right issues in July. Ezion completed the rights issue (which saw subscription of 2.06x for each rights issued) in July 2016, raising c.US$100m worth of equity in this capitalisation exercise. In 3Q16, Ezion reported a net repayment of debt of c.US$39.9m which also contributed to the slight improvement in gearing.

Relatively better financial health in current climate. Net debt/EBITDA is expected to hover around 6x in 2016. The current ratio of c.1.0x indicates Ezion’s ability to service short-term financing needs that may arise. Ezion should be able to meet its interest payments with c.1.5x net interest coverage ratio. Share Price Drivers:

Oil price rebound. Oil price is a leading indicator and key re-rating catalyst for O&G sector as the market has widely priced in the weak earnings and new lower norm of oil prices. We believe Ezion is one of the best proxies to ride the recovery, given its earnings resiliency and growth potential.

Vessel deliveries. Besides the delivery rescheduling, ten of Ezion’s service rigs have been withdrawn from its fleet for repairs/upgrades/conversions. The resumption of these rigs in 2016 should drive earnings recovery. In addition, Ezion is expected to take delivery of 2/1/8 vessels in 2016/17/18, driving recovery into 2017. Management could potentially dispose of four newbuild liftboats in early construction stages. Key downside risk is a rate reduction greater than the 10-15% p.a. factored into our model.

New contracts/renewals at good rates. Securing new/renewal of charter contracts at good rates would alleviate concerns over contract cancellations and rate reductions and thus lower the risk premium ascribed to the company. Key Risks:

Rising interest rates. About 50% of its debts have been are either on fixed rates or swapped to fixed rates, lowering the sensitivity. We estimate that every 100-bp increase in interest rates could reduce Ezion's net profit by approximately 8%.

Rate reduction and contract terminations. Five service rigs are due for charter renewals in FY16. In terms of termination, the Mexican contracts appear to be at risk as these consist of the few units that are deployed for drilling and PEMEX has exercised early termination clauses on a couple of drilling rigs last year and is facing a liquidity crunch because of the oil price collapse.

Keener competition. The rising acceptance and growing demand for liftboats have attracted new entrants to the market. We estimate that there are c.20 new liftboats currently under construction to be delivered largely in 2017. We believe demand growth should outpace supply growth in the under-penetrated Asia-Pacific region. Company Background

Ezion provides service rigs and offshore logistics support services to the offshore oil & gas industry. It was one of the first companies to introduce liftboats in Asia and the Middle East regions. Ezion had a total of 26 service rigs delivered and 17 service rigs in operation as of September 2016. The fleet is expected to grow to 28 vessels by end-2016, 29 by end-2017 and 33-37 by end-2018.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)



Company Guide

Ezion Holdings

Key Assumptions

FY Dec 2013A 2014A 2015A 2016F 2017F Total fleet 18.0 21.0 26.0 28.0 29.0 Operating fleet 18.0 18.0 18.0 N/A N/A

Segmental Breakdown

FY Dec 2013A 2014A 2015A 2016F 2017F Revenues (US$ m) Production and 376 312 273 298 Exploration and 10 38 54 79 Others 0 0 1 1 Total 387 351 328 378 Operating profit (US$ m) Production and 195 26 23 36 Exploration and (8) 0 11 10 Others (8) 83 11 11 Total 179 109 45 57 Operating profit Margins Production and 51.8 8.4 8.5 12.0 Exploration and (78.6) 0.1 20.4 13.2 Others 99.7 100.0 100.0 100.0 Total 46.2 31.1 13.7 15.0

Income Statement (US$ m)

FY Dec 2013A 2014A 2015A 2016F 2017F Revenue 282 387 351 328 378 Cost of Goods Sold (149) (191) (233) (254) (304) Gross Profit 133 196 118 74 73 Other Opng (Exp)/Inc (14) (17) (9) (29) (16) Operating Profit 119 179 109 45 57 Other Non Opg (Exp)/Inc 0 0 0 0 0 Associates & JV Inc 31 28 23 19 24 Net Interest (Exp)/Inc (7) (17) (22) (30) (35) Exceptional Gain/(Loss) 20 36 (72) 15 0 Pre-tax Profit 163 226 38 48 46 Tax (3) (2) (2) (2) (2) Minority Interest 0 0 0 0 0 Net Profit 160 224 37 45 44 Net Profit before Except. 141 188 109 31 44 Preference Dividend (8) (9) (14) (8) (8) Net Pft Pre-Ex, Aft Pref Div 133 179 95 22 37 EBITDA 195 309 267 213 239 Growth Revenue Gth (%) 77.7 37.1 (9.1) (6.7) 15.3 EBITDA Gth (%) 115.7 58.3 (13.6) (20.3) 12.1 Opg Profit Gth (%) 108.5 49.9 (38.9) (59.0) 26.9 Net Profit Gth (%) 103.4 39.4 (83.6) 23.7 (2.8) Net Pft Pre-Ex Aft Perf Div Gth (%) 103.1 34.8 (46.7) (76.4) 63.5

Margins & Ratio Gross Margins (%) 47.2 50.7 33.6 22.6 19.4 Opg Profit Margin (%) 42.3 46.2 31.1 13.7 15.0 Net Profit Margin (%) 56.9 57.9 10.5 13.9 11.7 ROAE (%) 27.2 24.5 2.1 3.2 3.0 ROA (%) 9.4 8.6 0.8 1.2 1.2 ROCE (%) 7.8 7.5 3.7 1.5 1.9 Div Payout Ratio (%) 0.6 0.5 0.0 0.0 0.0 Net Interest Cover (x) 17.5 10.7 5.0 1.5 1.6



Company Guide

Ezion Holdings

Quarterly / Interim Income Statement (US$ m)

FY Dec 3Q2015 4Q2015 1Q2016 2Q2016 3Q2016 Revenue 86 85 82 84 80 Cost of Goods Sold (61) (65) (61) (66) (66) Gross Profit 25 20 21 18 14 Other Oper. (Exp)/Inc 3 (2) (19) (6) (2) Operating Profit 28 18 2 12 12 Other Non Opg (Exp)/Inc 0 0 0 0 0 Associates & JV Inc 9 9 8 3 5 Net Interest (Exp)/Inc (6) (6) (8) (7) (7) Exceptional Gain/(Loss) 0 (84) 13 1 0 Pre-tax Profit 31 (63) 16 9 10 Tax 0 0 0 (1) (1) Minority Interest 0 0 0 0 0 Net Profit 30 (64) 15 8 9 Net profit bef Except. 30 21 2 7 9 Preference Dividend 0 0 0 0 0 Net Pft (Pre-Ex, Aft Pref Div) 30 21 2 7 9

EBITDA 73 62 46 51 56 Growth Revenue Gth (%) (4.3) (1.7) (3.1) 2.0 (4.7) EBITDA Gth (%) 6.9 (15.1) (26.6) 11.8 9.1 Opg Profit Gth (%) 6.7 (35.6) (89.8) 541.6 5.5 Net Profit Gth (%) 4.8 nm nm (47.5) 15.3 Margins Gross Margins (%) 29.0 23.8 25.2 21.3 17.5 Opg Profit Margins (%) 32.1 21.0 2.2 13.9 15.3 Net Profit Margins (%) 35.2 (74.9) 18.9 9.7 11.8

Balance Sheet (US$ m)

FY Dec 2013A 2014A 2015A 2016F 2017F Net Fixed Assets 1,464 2,136 2,284 2,238 2,243 Invts in Associates & JVs 194 173 204 211 235 Other LT Assets 5 14 12 12 12 Cash & ST Invts 166 372 230 264 108 Inventory 0 0 0 0 0 Debtors 107 160 193 234 252 Other Current Assets 107 128 186 186 186 Total Assets 2,043 2,981 3,108 3,144 3,035 ST Debt 223 288 375 375 375 Creditor 69 70 116 130 133 Other Current Liab 84 69 109 105 105 LT Debt 863 1,208 1,230 1,135 986 Other LT Liabilities 4 33 36 36 36 Shareholder’s Equity 800 1,313 1,241 1,364 1,400 Minority Interests 0 0 0 0 0 Total Cap. & Liab. 2,043 2,981 3,108 3,144 3,035 Non-Cash Wkg. Capital 60 148 153 185 200 Net Cash/(Debt) (920) (1,125) (1,375) (1,245) (1,253) Debtors Turn (avg days) 106.5 125.9 183.4 238.0 234.7 Creditors Turn (avg days) 181.0 288.9 345.8 432.7 327.4 Inventory Turn (avg days) N/A N/A N/A N/A N/A Asset Turnover (x) 0.2 0.2 0.1 0.1 0.1 Current Ratio (x) 1.0 1.5 1.0 1.1 0.9 Quick Ratio (x) 0.7 1.2 0.7 0.8 0.6 Net Debt/Equity (X) 1.1 0.9 1.1 0.9 0.9 Net Debt/Equity ex MI (X) 1.1 0.9 1.1 0.9 0.9 Capex to Debt (%) 67.3 34.9 23.8 6.9 12.0 Z-Score (X) 0.8 0.8 0.6 0.7 0.7



Company Guide

Ezion Holdings

Cash Flow Statement (US$ m)

FY Dec 2013A 2014A 2015A 2016F 2017F Pre-Tax Profit 163 226 38 48 46 Dep. & Amort. 45 103 135 150 158 Tax Paid (2) (2) (4) (7) (2) Assoc. & JV Inc/(loss) (31) (28) (23) (19) (24) Chg in Wkg.Cap. (5) (62) (32) (27) (14) Other Operating CF (15) (23) 94 0 0 Net Operating CF 155 214 209 145 163 Capital Exp.(net) (731) (522) (382) (104) (164) Other Invts.(net) 22 (19) (4) 0 0 Invts in Assoc. & JV (19) 15 0 0 0 Div from Assoc & JV 0 0 0 0 0 Other Investing CF (5) 6 8 0 0 Net Investing CF (733) (520) (378) (104) (164) Div Paid (1) (1) (1) 0 0 Chg in Gross Debt 532 290 180 (95) (149) Capital Issues 97 272 (87) 97 0 Other Financing CF (14) (30) (38) (8) (8) Net Financing CF 614 530 54 (7) (156) Currency Adjustments (6) (18) (27) 0 0 Chg in Cash 31 206 (142) 35 (157) Opg CFPS (S cts) 11.3 17.5 15.2 8.3 8.5 Free CFPS (S cts) (40.5) (19.5) (10.9) 2.0 0.0



Source: DBS Bank

Analyst: Pei Hwa HO

ASIAN INSIGHTS VICKERS SECURITIES ed: TH / sa: YM, PY

HOLD Last Traded Price ( 15 Nov 2016): S$0.119 (STI : 2,797.55) Price Target 12-mth: S$0.12 (-2% downside) (Prev S$0.09) Potential Catalyst: Contract wins, higher oil prices, privatisation Where we differ: More bearish on earnings Analyst Suvro SARKAR +65 6682 3720 [email protected] Singapore Research Team [email protected]

What’s New 3Q16 earnings above expectations on cost savings

But orderbook down to US$155m as of end-3Q16

Associate profits will fall as expected on reduced

rates for the AOD rigs

Price Relative

Forecasts and Valuation FY Sep (US$ m) 2014A 2015A 2016F 2017F Revenue 412 337 184 153 EBITDA 103 41.2 49.0 43.7 Pre-tax Profit 57.5 (231) 13.7 (0.3) Net Profit 49.5 (229) 14.9 (0.3) Net Pft (Pre Ex.) 51.0 4.99 14.9 (0.3) Net Pft Gth (Pre-ex) (%) 218.8 (90.2) 199.6 nm EPS (S cts) 4.95 (22.9) 1.49 0.0 EPS Pre Ex. (S cts) 5.10 0.50 1.49 0.0 EPS Gth Pre Ex (%) 79 (90) 200 nm Diluted EPS (S cts) 4.95 (22.9) 1.49 0.0 Net DPS (S cts) 1.23 0.0 0.0 0.0 BV Per Share (S cts) 56.4 32.2 33.7 33.6 PE (X) 2.4 nm 8.0 nm PE Pre Ex. (X) 2.3 23.8 8.0 nm P/Cash Flow (X) 2.3 18.8 3.2 3.1 EV/EBITDA (X) 1.4 4.1 3.6 11.0 Net Div Yield (%) 10.3 0.0 0.0 0.0 P/Book Value (X) 0.2 0.4 0.4 0.4 Net Debt/Equity (X) 0.0 0.2 0.2 1.1 ROAE (%) 9.2 (51.7) 4.5 (0.1) Earnings Rev (%): 25 nm Consensus EPS (S cts): 1.6 1.7 Other Broker Recs: B: 1 S: 0 H: 1


Orderbook decline a worry Maintain HOLD for now. Despite the lower earnings visibility on the back of a declining orderbook, and the expected fall in JV/associate profits, we maintain our HOLD call as we believe investors willing to ride out this oil price cycle can still consider relatively safer stocks like Mermaid, especially in the wake of more O&G-related companies facing distress (e.g. Swissco announcing it will file for judicial management this week). Mermaid continues to generate positive cash flows and has low net gearing of 0.11x currently with no bonds outstanding, thus providing comfort. Additionally, we believe Mermaid remains a candidate for privatisation by majority shareholder Thoresen Thai and its promoter group, which together control 77% of the outstanding shares. The key risk for Mermaid remains the ability to arrange for financing and find contracts for the three newbuild vessels on order. These are scheduled for delivery at end-2016 and mid-2017, subject to negotiations with the yards. 3Q16 profits were above expectations on cost savings, but the low orderbook calls for caution. Mermaid’s core net profit of US$7.5m was slightly above our estimates due to better-than-expected cost savings realised. However, the orderbook has decreased to a low of US$155m from US$246m as of end-2Q16, and thus revenue visibility has deteriorated markedly. Tweaking our earnings estimates. Adjusting for this stronger-than-expected quarter, we raise FY16 earnings, but factoring in lower rates negotiated on some existing charters, we now expect minor losses in FY17, versus breakeven levels previously. Valuation:

Our TP is adjusted upwards to S$0.12, based on a slightly higher 0.35x P/BV peg, rolling over the valuation base to FY17 and factoring in a stronger USD. Key Risks to Our View:

Only a sharp spike in oil price – albeit unlikely in our view – could result in some respite from the gloom surrounding the offshore services industry currently. At A Glance Issued Capital (m shrs) 1,413 Mkt. Cap (S$m/US$m) 168 / 119 Major Shareholders (%) Thoresen Thai Agencies PCL 58.2 Mahagitsiri Chalermchai 10.7 Mahagitsiri Prayudh 8.4


WHAT’S NEW

3Q16 results highlights



Mermaid Maritime Version 5 | Bloomberg: MMT SP | Reuters: MMPC.SI Refer to important disclosures at the end of this report


Company Guide

Mermaid Maritime

Core profits above estimates on cost savings. Core net profit came in at US$7.5m – slightly above our estimates, as continued cost-saving initiatives such as reduction in crew expenses, dive tech expenses and travel expenses resulted in lower-than-expected costs. Revenues came in at US$51.9m for the quarter – in line with our estimates of about US$53m. Vessel utilisation was 56%, higher than the 45% in 2Q16 (as 3Q is usually a seasonally strong quarter), but lower y-o-y versus the 81% seen in 3Q15 due to the continuing idling of three smaller vessels. Mermaid’s key vessels – the Asiana, Commander, Sapphire and Endurer – achieved utilisation rates of 83% for the quarter on average, though several other vessels remain stacked.

JV/associate profits continue to fall, as expected, on rollover of contracts to lower day rates. Share of JV/Associate income was US$2.0m, also essentially in line with our estimates. Associate/JV income has fallen from US$7.3m in 3Q15 to the current US$2.0m due to sharp rate reductions on renewals of contracts for the three jack-up rigs held under associate AOD. We expect this to fall even further in 4Q16 as the third rig’s (AOD III) contract rolls over to the new one only in October, for a short-term contract till December.

Sharp q-o-q reduction in orderbook to lows of US$155m. Mermaid’s order book (excluding associate AOD) had fallen to a low of US$155m as of end-3Q16, significantly lower than the average of US$246m in the preceding four quarters,

and providing limited revenue visibility. This quarter’s drawdown was a combination of revenues recognised and lower rates negotiated on certain charters. Bidding season, which peaks in 1Q, could provide some respite early next year in the form of order wins, though there is no guarantee.

Debt covenant issue has been resolved; gearing remains low and debt maturity profile is not lumpy. Mermaid’s wholly-owned subsidiary – Mermaid Subsea Services (Thailand) Ltd (MSST) – had previously breached a loan covenant, which caused all of the group’s bank loans to be reclassified as current. That issue has been remedied with an injection of cash into this subsidiary from the holding company. Thus, we should see the majority of loans re-classified as non-current in 4Q16. Operating cash flows remained positive at US$10.1m in 3Q16 and net gearing stood at 0.11x. Mermaid’s current bank debt maturity profile is also spread over five years and is far from lumpy. A key risk, however, remains the availability of financing for the three newbuild vessels, which entail outstanding committed capex of close to US$400m.

Newbuild delivery timeline unchanged; still no contracts secured. There was no official change to the delivery dates of Mermaid’s two newbuild tender rigs, which remains as 31 December 2016, though these are likely fluid and subject to negotiations with the yard. No change either for the newbuild DSV, whose delivery date remains as 30 June 2017. No contracts are in place yet for these vessels.


FY Sep 3Q2015 2Q2016 3Q2016 % chg yoy % chg qoq

Revenue 96.6 49.6 51.9 (46.3) 4.5

Cost of Goods Sold (75.7) (38.2) (39.2) (48.2) 2.4

Gross Profit 20.9 11.4 12.7 (39.4) 11.4

Other Oper. (Exp)/Inc (10.4) (6.3) (6.4) (38.6) 0.8

Operating Profit 10.5 5.07 6.31 (40.2) 24.5

Other Non Opg (Exp)/Inc 0.0 0.0 0.0 - -

Associates & JV Inc 7.51 3.48 2.04 (72.8) (41.4)

Net Interest (Exp)/Inc (0.9) (0.8) (0.7) 17.3 5.8

Exceptional Gain/(Loss) 0.0 0.0 0.0 - -

Pre-tax Profit 17.2 7.78 7.62 (55.6) (2.0)

Tax (0.7) 0.0 (0.1) (85.5) nm

Minority Interest 0.05 0.0 0.0 nm (3.7)

Net Profit 16.5 7.74 7.49 (54.6) (3.3)

Net profit bef Except. 16.5 7.74 7.49 (54.6) (3.3)

EBITDA 25.9 14.3 14.2 (45.2) (0.4)

Margins (%)






Company Guide

Mermaid Maritime

CRITICAL DATA POINTS TO WATCHEarnings Drivers:

Subsea fleet utilisation is critical. While subsea contracts involving diving and other services usually result in good margins, the contract durations tend to be short (around 3-6 months) and hence, gaps between contracts need to be continuously filled up. In the past, Mermaid had built up a fleet ahead of demand in some cases, resulting in underutilisation of fleet and losses. With orderbook declining to US$155m as of 3Q16 from a high of US$473m at end-FY14, Mermaid had negotiated a penalty-free return earlier this year for its three long-term chartered-in vessels post-completion of their jobs (one has already been returned; one has been re-chartered – so there is some flexibility to this arrangement; one ends work in December 2016). This will help shore up fleet utilisation in the near term but indicates lower targets for orderbook and revenues in the process. Older tender rigs are off-hire, needs to secure charters for the newbuilds MTR-3 and MTR-4. Mermaid has a long track record in the niche tender rig business in SE Asia but its older rigs are more than 30 years' old and are currently being marketed for sale. It is currently building two new tender rigs as replacement, now scheduled for delivery in December 2016. Securing long-term contracts for these two new rigs ahead of delivery would go a long way in boosting confidence.

Drilling segment contribution should dwindle after rate revisions as part of contract extensions. In 3Q15, contributions from Mermaid’s 34%-owned drilling rig associate AOD was ~US$7.3m. However, with the recent renegotiation of day rates to ~US$100k/day for the AOD I and AOD II rigs, profitability has been depressed, with profits from associates in 3Q16 having been reduced to about US$2m. Contributions are expected to drop further in FY17, to ~US$2.5m for the full year as the AOD III also rolls over to lower day rates.

New cable-laying business may lose its sheen. Mermaid established a new cable-laying business in the Middle East in late 2014 and seemed to have conquered the learning curve in FY15, with the business having generated positive contribution margin in FY15. However, securing additional projects has been a challenge so far in FY16, and this trend may spill into FY17.

Acquisitions could provide earnings uplift. Having established a US$500m multi-currency Medium Term Note (MTN) programme in May 2015, we think it is possible that acquisitions could be on the cards for Mermaid. Low valuations of O&G players currently increase the likelihood that such acquisitions will be EPS accretive.

Utilisation rate - subsea fleet (%)

Avg day rate - subsea fleet (US$)

Utilisation rate - tender rigs (%)

Avg day rate - tender rigs (US$)



Company Guide

Mermaid Maritime

Balance Sheet:

Significant capex commitments loom. Mermaid’s net gearing remains quite low currently at 0.11x, but this will increase in FY17. Capex requirements for the new DSV (~US$100m outstanding) and the new tender rigs (~US$300m total outstanding) are intended to be funded through project debt and internal cash reserves, and its US$500m multi-currency debt issuance programme may also come in handy. However, uncertainty remains on the eventual access to funding closer to the delivery dates amidst challenging market conditions, given that these newbuild vessels have yet to secure any contracts. Share Price Drivers:

Recovery in oil prices would drive share price. Offshore/Marine stocks tend to display a strong correlation to oil prices, which is the fundamental driver of offshore activity; a strong rebound in oil prices would undoubtedly be positive for Mermaid’s share price. Privatisation cannot be ruled out. With O&G sector valuations near multi-year lows, share price upside could stem from possible privatisation by parent Thoresen Thai and its associated promoter group (the Mahagitsiri family), which hold at least 77% stake in Mermaid. Thoresen Thai has a gross cash balance of about S$250m and net gearing is quite low as well; thus we believe there is enough financial muscle to buy out Mermaid’s remaining free float worth c.S$37m at current prices. Key Risks:

Subsea engineering operations are sensitive to delays in the award of offshore projects. The short-term nature of shallow-water subsea projects makes Mermaid's subsea engineering revenue sensitive to delays in the award of projects, which oil majors have recently tended towards. New tender rigs could find themselves jobless. Management has noted that there seems to be some extra capacity in the tender rig market of late. The MTR-3 and MTR-4, still slated to be delivered at end-2016, could find themselves without secured contracts if the oil crisis prolongs. Inability to take delivery of newbuild vessels. Mermaid will need to secure financing for the c.US$400m remaining capex commitments over the next 6-12 months. It may need to cough up penalties in case it has to cancel the newbuild orders. Company Background

Mermaid Maritime PCL (Mermaid) is a provider of drilling and subsea engineering services for the offshore oil & gas industry, serving a diverse client base globally.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)



Company Guide

Mermaid Maritime

Segmental Breakdown

FY Sep 2013A 2014A 2015A 2016F 2017F Revenues (US$m) Subsea services 246 389 337 184 133 Drilling services 23.6 32.4 0.05 0.0 19.3 Others/ Elimination 0.0 (9.2) 0.0 0.0 0.0 Total 270 412 337 184 153 Operating Profit (US$m)

Subsea services 24.3 27.3 (68.9) 4.75 7.12 Drilling services (2.4) 4.84 (92.1) (1.2) (2.7) Others/ Elimination 1.48 (7.4) 147 3.08 0.0 Total 23.4 24.8 (14.0) 6.64 4.44

Income Statement (US$m)

FY Sep 2013A 2014A 2015A 2016F 2017F Revenue 270 412 337 184 153 Cost of Goods Sold (219) (340) (304) (154) (123) Gross Profit 50.7 71.4 33.1 30.3 29.7 Other Opng (Exp)/Inc (27.3) (46.6) (47.0) (23.6) (25.2) Operating Profit 23.4 24.8 (14.0) 6.64 4.44 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 4.21 38.3 20.5 10.4 2.53 Net Interest (Exp)/Inc (4.8) (4.1) (3.2) (3.3) (7.3) Exceptional Gain/(Loss) (0.2) (1.5) (234) 0.0 0.0 Pre-tax Profit 22.6 57.5 (231) 13.7 (0.3) Tax (7.1) (7.9) (0.5) 1.21 0.0 Minority Interest 0.32 (0.1) 2.23 0.0 0.0 Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit 15.7 49.5 (229) 14.9 (0.3) Net Profit before Except. 16.0 51.0 4.99 14.9 (0.3) EBITDA 57.9 103 41.2 49.0 43.7 Growth Revenue Gth (%) 46.9 52.8 (18.3) (45.3) (17.2) EBITDA Gth (%) 35.5 77.5 (59.9) 19.1 (10.9) Opg Profit Gth (%) 38.9 6.0 nm nm (33.2) Net Profit Gth (Pre-ex) (%) 385.3 218.8 (90.2) 199.6 nm Margins & Ratio Gross Margins (%) 18.8 17.3 9.8 16.4 19.4 Opg Profit Margin (%) 8.7 6.0 (4.1) 3.6 2.9 Net Profit Margin (%) 5.8 12.0 (68.1) 8.1 (0.2) ROAE (%) 3.5 9.2 (51.7) 4.5 (0.1) ROA (%) 2.5 6.7 (36.3) 3.0 (0.1) ROCE (%) 2.7 3.2 (2.5) 1.5 0.7 Div Payout Ratio (%) 77.2 24.8 N/A 0.0 N/A Net Interest Cover (x) 4.9 6.0 (4.3) 2.0 0.6


We assume the MTR3/4 finds work in mid-2017


Company Guide

Mermaid Maritime


FY Sep 3Q2015 4Q2015 1Q2016 2Q2016 3Q2016 Revenue 96.6 71.7 39.6 49.6 51.9 Cost of Goods Sold (75.7) (68.4) (38.0) (38.2) (39.2) Gross Profit 20.9 3.39 1.59 11.4 12.7 Other Oper. (Exp)/Inc (10.4) (14.8) (4.7) (6.3) (6.4) Operating Profit 10.5 (11.5) (3.1) 5.07 6.31 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 7.51 (1.8) 4.25 3.48 2.04 Net Interest (Exp)/Inc (0.9) (0.8) (0.8) (0.8) (0.7) Exceptional Gain/(Loss) 0.0 (234) 0.0 0.0 0.0 Pre-tax Profit 17.2 (248) 0.39 7.78 7.62 Tax (0.7) 0.84 0.85 0.0 (0.1) Minority Interest 0.05 1.96 0.03 0.0 0.0 Net Profit 16.5 (245) 1.27 7.74 7.49 Net profit bef Except. 16.5 (11.3) 1.27 7.74 7.49 EBITDA 25.9 (4.4) 6.82 14.3 14.2 Growth Revenue Gth (%) (10.1) (25.7) (44.8) 25.3 4.5 EBITDA Gth (%) (0.5) nm nm 109.0 (0.4) Opg Profit Gth (%) 16.8 nm 73.0 nm 24.5 Net Profit Gth (Pre-ex) (%) 5.9 nm nm 511.2 (3.3) Margins Gross Margins (%) 21.7 4.7 4.0 22.9 24.4 Opg Profit Margins (%) 10.9 (16.0) (7.8) 10.2 12.2 Net Profit Margins (%) 17.1 (342.0) 3.2 15.6 14.4

Balance Sheet (US$m)

FY Sep 2013A 2014A 2015A 2016F 2017F Net Fixed Assets 328 378 214 225 533 Invts in Associates & JVs 100 139 74.8 85.2 87.8 Other LT Assets 15.1 17.6 11.7 11.7 11.7 Cash & ST Invts 149 89.4 57.4 51.4 46.0 Inventory 5.28 5.58 2.52 2.52 2.52 Debtors 89.9 111 115 108 102 Other Current Assets 23.1 23.1 24.3 24.3 24.3 Total Assets 710 763 500 509 807 ST Debt 19.3 8.93 107 107 107 Creditor 16.6 29.1 12.1 6.10 4.31 Other Current Liab 37.1 49.4 53.5 53.5 53.5 LT Debt 117 104 0.0 0.0 300 Other LT Liabilities 3.07 6.20 5.84 5.84 5.84 Shareholder’s Equity 515 564 322 337 336 Minority Interests 1.69 1.77 (0.5) (0.5) (0.5) Total Cap. & Liab. 710 763 500 509 807 Non-Cash Wkg. Capital 64.4 60.9 76.1 75.6 70.8 Net Cash/(Debt) 12.1 (23.3) (50.0) (56.0) (361) Debtors Turn (avg days) 94.3 88.9 122.3 221.1 251.3 Creditors Turn (avg days) 26.3 27.7 27.9 27.2 22.0 Inventory Turn (avg days) 10.2 6.6 5.5 7.5 10.7 Asset Turnover (x) 0.4 0.6 0.5 0.4 0.2 Current Ratio (x) 3.7 2.6 1.2 1.1 1.1 Quick Ratio (x) 3.3 2.3 1.0 1.0 0.9 Net Debt/Equity (X) CASH 0.0 0.2 0.2 1.1 Net Debt/Equity ex MI (X) CASH 0.0 0.2 0.2 1.1 Capex to Debt (%) 26.2 77.7 23.4 40.0 84.4 Z-Score (X) 4.5 4.6 5.5 5.2 3.1


Associate/JV profits down on lower charter rates for associate AOD jackup rigs

Gearing to rise on higher debt levels to fund newbuild assets


Company Guide

Mermaid Maritime

Cash Flow Statement (US$m)

FY Sep 2013A 2014A 2015A 2016F 2017F Pre-Tax Profit 22.6 57.5 (231) 13.7 (0.3) Dep. & Amort. 30.3 39.6 34.7 32.0 36.7 Tax Paid (2.5) (10.9) (6.6) 1.21 0.0 Assoc. & JV Inc/(loss) (4.2) (38.3) (20.5) (10.4) (2.5) Chg in Wkg.Cap. (21.9) (1.7) (18.0) 0.45 4.86 Other Operating CF 0.72 5.51 247 0.0 0.0 Net Operating CF 25.0 51.7 6.31 36.9 38.7 Capital Exp.(net) (35.8) (87.6) (25.1) (43.0) (344) Other Invts.(net) 0.0 0.0 0.0 0.0 0.0 Invts in Assoc. & JV (34.0) 0.0 0.0 0.0 0.0 Div from Assoc & JV 0.0 0.0 6.75 0.0 0.0 Other Investing CF (0.2) (0.6) (1.3) 0.0 0.0 Net Investing CF (70.0) (88.2) (19.6) (43.0) (344) Div Paid (0.7) (12.2) (12.3) 0.0 0.0 Chg in Gross Debt 5.79 (24.2) (5.4) 0.0 300 Capital Issues 126 12.8 0.0 0.0 0.0 Other Financing CF 0.0 0.03 0.0 0.0 0.0 Net Financing CF 132 (23.5) (17.7) 0.0 300 Currency Adjustments 0.02 0.63 (1.0) 0.0 0.0 Chg in Cash 86.5 (59.4) (32.0) (6.1) (5.3) Opg CFPS (S cts) 8.33 5.34 2.43 3.65 3.38 Free CFPS (S cts) (1.9) (3.6) (1.9) (0.6) (30.5)



Source: DBS Bank

Analyst: Suvro SARKAR


Operating cash flows have been consistently positive

ASIAN INSIGHTS VICKERS SECURITIES ed: TH / sa: JC, PY

HOLD (Upgrade from FULLY VALUED)

Last Traded Price ( 2 Dec 2016): S$0.153 (STI : 2,919.37) Price Target 12-mth : S$0.16 (5% upside) (Prev S$0.12) Potential Catalyst: Higher oil prices Where we differ: More bearish on earnings Analyst Suvro SARKAR +65 6682 3720 [email protected] Singapore Research Team [email protected]

What’s New OPEC cut brightens oil outlook

Higher oil prices and rig counts bode well for increase in OSV demand

Upgrade to HOLD with higher TP of S$0.16

Price Relative

Forecasts and Valuation FY Dec (US$ m) 2014A 2015A 2016F 2017F Revenue 172 122 73 67 EBITDA 71 32 (12) (10) Pre-tax Profit 68 5 (97) (54) Net Profit 68 4 (99) (54) Net Pft (Pre-Ex, Aft Pref Div)*

67 5 (54) (54)

EPS (S cts) 13.4 0.7 (19.7) (10.7) EPS Pre Ex, Aft Pref Div (S cts)

13.1 1.1 (10.7) (10.7)

EPS Gth (%) 20 (94) nm 46

EPS Gth Pre Ex, Aft pref div (%)

27 (92) nm 0

Net DPS (S cts) 3.2 1.0 0.0 0.0 BV Per Share (S cts) 83.7 80.8 62.5 51.8 PE (X) 1.1 20.3 nm nm PE Pre Ex, Aft Pref Div (X) 1.2 14.3 nm nm P/Cash Flow (X) 1.3 3.2 nm nm EV/EBITDA (X) 4.4 13.7 nm nm Net Div Yield (%) 20.7 6.6 0.0 0.0 P/Book Value (X) 0.2 0.2 0.2 0.3 Net Debt/Equity (X) 0.5 0.9 1.7 2.2 ROAE (%) 17.0 0.9 (27.2) (18.7) Earnings Rev (%): 0 0 Consensus EPS (S cts): (10.4) (6.4) Other Br oker Recs: B: 0 S: 1 H: 3


Turnaround takes time Upgrade to HOLD with higher TP of S$0.16, based on 0.25x P/BV (0.20x previously). Oil prospects have been lifted with the OPEC deal. We believe OSV operators like Pacific Radiance will be more leveraged to the oil price increase and an eventual restoration of capex budgets from oil majors. PACRA will still need to resolve cash flow problems but at least further earnings downside risks should abate with improvement in oil prices. Hence, we upgrade the stock to HOLD. Addressing cash flow constraints. Operating cash flows have been negative for four consecutive quarters now; hence the gross cash balance remains low at c.US$30m. The looming maturity of PACRA’s August 2018 S$100m notes remains a medium-term risk. A refund from the Chinese yards of c.US$11m expected in 4Q16 on deposits for terminated PSV contracts could help boost the cash balance temporarily, but does not address PACRA’s core issues. On the positive side, the company has managed to push out the repayment and maturity profiles of its loans (from a 7- to 12-year profile and 2019-2021 maturity on average) at minimal extra cost. Expect losses to persist in FY17; further earnings downside risks abate with improvement in oil prices. We expect core net losses in FY16/17 of US$54m/US$58m respectively. FY17 revenues are expected to be lower y-o-y on poorer OSV segment takings. Hopefully, with the improving oil prospects and rising rig count, demand for OSVs should start going up in a bigger way towards 2H17, earlier than previous expectation of 2018. Valuation:

TP is lifted to S$0.16 based on a higher P/BV peg of 0.25 (0.2x previously) – in line with the weaker peers in the region and reflecting a slight uptick in valuations in anticipation of sector recovery. Key Risks to Our View:

A sharp spike in oil price – albeit unlikely in our view – could result in uplift in utilisation and day rates for vessels, boosting earnings and the share price. At A Glance Issued Capital (m shrs) 714 Mkt. Cap (S$m/US$m) 109 / 76.5 Major Shareholders (%) Yoke Min Pang 68.1 Weng Vai Mok 6.6




Pacific Radiance Version 6 | Bloomberg: PACRA SP | Reuters: PACI.SI Refer to important disclosures at the end of this report

12

62

112

162

212

0.1

0.3

0.5

0.7

0.9

1.1

1.3

1.5

1.7


Relative IndexS$

Pacific Radiance (LHS) Relative STI (RHS)

ASIAN INSIGHTS VICKERS SECURITIES Page 2

Company Guide

Pacific Radiance


Earnings Drivers:

Utilisation of young and diverse fleet of OSVs is the key. The group’s fleet of wholly owned OSVs has an average age of just around five years – significantly younger than the industry average. The fleet ranges from high-end sophisticated vessels such as Diving Support Vessels (DSVs) for shallow water subsea work and large Anchor Handling Tug Supply (AHTS) vessels with hybrid propulsion systems to ocean tug and barge vessels, allowing the group to support clients over a wide variety of operations throughout the oil & gas life cycle. The challenge is to ensure overall fleet utilisation levels stay around 70% or higher to ensure good margins and returns on capital. Currently though, the fleet is operating below gross profit breakeven levels as a result of lesser work available due to a downturn in the oil & gas industry. Growth prospects from cabotage-protected markets like Indonesia and Malaysia have been derailed. PACRA’s tie-ups with foreign partners, which allow it access to markets with cabotage laws that boost charter rates and utilisation levels, have seen red ink in recent quarters, as these markets have inevitably been hit by the oil price rout. Reforms in Indonesia have also been more lip service than action, prolonging the persistent lack of investment due to overly high levels of bureaucracy. Upstream investment has also been curtailed due to uncertainty over the fate of production-sharing contracts due to expire. Over in Malaysia, Petronas has announced this year an additional RM50bn cut to its capex and opex budgets from 2016-2019, setting the stage for a long winter for oil services companies in the region. Supply chain control kept costs low, but the prolonged downturn is levelling margins. The group has a long track record of managing and supervising vessel construction at third-party shipyards with direct oversight in the third-party shipbuilding process which gives some measure of control over the supply chain. Established relationships with competent third-party shipyards and equipment suppliers ensure quality and timeliness. This was one reason PACRA was historically able to make better margins versus peers during good years. However, given the protracted downturn, margins have gone the way of its peers – in other words, gross losses – due to the rock-bottom day rates from intense competition. An industry recovery stemming chiefly from higher oil prices would be the key driver of higher day rates/utilisation and thus margins. Newbuild vessel pipeline could exacerbate utilisation issues. PACRA took delivery of two vessels onto its fleet in 1H16, and is expecting one more in 2H16, which will be funded mainly with debt and minimal cash. With current utilisation rates already at low levels of ~50%, these newbuilds could weigh on the fleet utilisation problem in the near term.

AHTS/PSV fleet utilisation (%)

DSV fleet utilisation (%)

AWB fleet utilisation (%)

Tugs/ barges fleet utilisation (%)


82 79.8

54.3

47.551.3

0.0

11.8

23.7

35.5

47.3

59.2

71.0

82.8

2013A 2014A 2015A 2016F 2017F

83

57.5

20.8

37.5

28.8

0.0

16.9

33.9

50.8

67.7

84.7

2013A 2014A 2015A 2016F 2017F

50

61.6

50.6

45

40

0.00

12.57

25.13

37.70

50.27

62.84

2013A 2014A 2015A 2016F 2017F

55

6560

35 35

0.0

13.1

26.3

39.4

52.5

65.7

2013A 2014A 2015A 2016F 2017F


Company Guide

Pacific Radiance

Balance Sheet:

Gearing expected to increase further. Net gearing has jumped from 1.1x in 1Q16 to 1.5x currently on higher debt levels and a lower equity base due to impairments taken in 2Q16. PACRA also has a S$100m 4.3% MTN note maturing in August 2018 (which we deem will be tough to refinance given the current oil & gas downturn), but that is more of a medium-term worry. However, with the unpledged cash balance at just ~US$19m (having been whittled down from c.US$54m a year ago), and operating cash flows being negative for four quarters in a row, we think PACRA will likely need to tap on its undrawn revolving credit facilities for working capital requirements, which will affect the gearing levels further. On the positive side, the company has managed to push out the repayment and maturity profiles of its loans (from a 7- to 12-year profile and 2019-2021 maturity on average) at minimal extra cost.

Share Price Drivers:

Oil price movements. Oil & gas service stocks typically move in tandem with the oil price. A spike in the oil price would therefore boost their share prices. Day rates and utilisation. PACRA’s utilisation and day rates across its various vessels are strong drivers of earnings and therefore its share price. Higher utilisation would give investors more confidence in the company, although this is also very dependent on the oil price, which affects demand for OSVs.

Key Risks:

Counterparty issues. Given the oil price slide, oil majors have cut costs by delaying projects and reducing existing costs. Charter rates could see further downside as companies have opted to prop up utilisation rates by offering discounted rates. There could also be risks of counterparty defaults on charters as the downturn prolongs. Interest rate risks. We believe every 25-bp increase in floating interest rates could impact net profit by about US$1m.

Company Background

Emerging regional OSV player. Pacific Radiance Ltd. (PACRA) is a Singapore-based provider of offshore support vessels (OSVs) for the oil & gas, subsea and related industries. The group currently has a fully owned fleet of about 60 vessels, plus access to another 70-odd vessels through investments in associates in Indonesia and Malaysia. Experienced management team. Executive Chairman Mr. Pang Yoke Min is a veteran in the offshore shipbuilding and chartering space in the region and along with other key members of the management team, brings a long track record and solid reputation and credibility to the table.


Capital Expenditure

ROE (%)

PB Band (x)


0.0

0.1

0.1

0.2

0.2

0.3

0.3

0.00

0.50

1.00

1.50

2.00

2013A 2014A 2015A 2016F 2017F


0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

180.0

2013A 2014A 2015A 2016F 2017F


US$m

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

2013A 2014A 2015A 2016F 2017F

Avg: 0.91x

+1sd: 1.49x

+2sd: 2.08x

‐1sd: 0.32x

-0.2

0.3

0.8

1.3

1.8

2.3


(x)


Company Guide

Pacific Radiance

Key Assumptions

FY Dec 2013A 2014A 2015A 2016F 2017F AHTS/PSV fleet utilisation 82.0 79.8 54.3 47.5 51.3 DSV fleet utilisation (%) 83.0 57.5 20.8 37.5 28.8 AWB fleet utilisation (%) 50.0 61.6 50.6 45.0 40.0 Tugs/ barges fleet 55.0 65.0 60.0 35.0 35.0

Segmental Breakdown

FY Dec 2013A 2014A 2015A 2016F 2017F Revenues (US$ m) Offshore Support Services 109 128 107 63 57 Subsea Services 45 33 9 8 6 Complementary Business 14 11 6 2 4 Total 169 172 122 73 67 Gross Profit (US$ m) Offshore Support Services 37 46 30 (21) (19) Subsea Services 19 4 (6) (5) (4) Complementary Business 3 2 0 0 0 Total 59 51 24 (25) (22) Gross Profit Margins (%) Offshore Support Services 34.0 35.5 27.9 (33.6) (33.3) Subsea Services 42.0 11.6 (69.1) (60.1) (61.5) Complementary Business 20.6 15.5 7.0 10.0 10.0 Total 35.0 29.6 19.9 (35.0) (33.2)


FY Dec 2013A 2014A 2015A 2016F 2017F Revenue 169 172 122 73 67 Cost of Goods Sold (110) (118) (98) (98) (89) Gross Profit 59 54 24 (25) (22) Other Opng (Exp)/Inc (22) (24) (21) (13) (13) Operating Profit 37 30 3 (38) (35) Other Non Opg (Exp)/Inc 16 35 12 0 0 Associates & JV Inc 14 13 3 (1) (3) Net Interest (Exp)/Inc (13) (9) (12) (16) (17) Exceptional Gain/(Loss) 0 0 0 (43) 0 Pre-tax Profit 53 68 5 (97) (54) Tax 4 1 (2) (2) 0 Minority Interest 0 (1) 0 1 1 Net Profit 57 68 4 (99) (54) Net Profit before Except. 53 67 5 (54) (54) Preference Dividend 0 0 0 0 0 Net Pft Pre-Ex, Aft Pref Div 53 67 5 (54) (54) EBITDA 75 71 32 (12) (10) Growth Revenue Gth (%) 28.9 2.2 (29.3) (40.2) (8.6) EBITDA Gth (%) 60.3 (6.3) (55.0) nm 16.2 Opg Profit Gth (%) 81.6 (17.6) (90.7) nm 9.0 Net Profit Gth (%) 76.4 20.4 (94.4) nm 45.7 Net Pft Pre-Ex Aft Perf Div Gth (%)

64.4 27.0 (91.9) nm (0.2)

Margins & Ratio Gross Margins (%) 35.0 31.5 19.9 (35.0) (33.2) Opg Profit Margin (%) 21.8 17.6 2.3 (52.3) (52.1) Net Profit Margin (%) 33.7 39.7 3.1 (135.9) (80.8) ROAE (%) 19.6 17.0 0.9 (27.2) (18.7) ROA (%) 8.6 8.6 0.4 (10.4) (5.5) ROCE (%) 6.2 4.2 0.2 (4.3) (3.9) Div Payout Ratio (%) 32.7 23.6 134.9 N/A N/A Net Interest Cover (x) 2.8 3.3 0.2 (2.4) (2.1)



Company Guide

Pacific Radiance


FY Dec 3Q2015 4Q2015 1Q2016 2Q2016 3Q2016 Revenue 34 22 18 20 19 Cost of Goods Sold (27) (25) (20) (28) (27) Gross Profit 7 (3) (1) (8) (8) Other Oper. (Exp)/Inc (7) (5) (3) (4) (3) Operating Profit 0 (8) (4) (11) (11) Other Non Opg (Exp)/Inc 7 5 0 0 0 Associates & JV Inc 0 2 1 (1) 1 Net Interest (Exp)/Inc (3) (3) (3) (4) (4) Exceptional Gain/(Loss) 0 0 0 (41) (2) Pre-tax Profit 3 (4) (7) (57) (17) Tax (1) 1 0 (1) (1) Minority Interest 0 0 0 0 0 Net Profit 2 (3) (7) (58) (18) Net profit bef Except. 2 (3) (7) (17) (16) Preference Dividend 0 0 0 0 0 Net Pft (Pre-Ex, Aft Pref Div) 2 (3) (7) (17) (16)

EBITDA 13 6 4 (4) (2) Growth Revenue Gth (%) (2.9) (35.7) (15.4) 9.0 (5.4) EBITDA Gth (%) 3.3 (57.7) (33.5) nm 44.3 Opg Profit Gth (%) nm (3,296.3) 50.3 (171.1) (1.7) Net Profit Gth (%) (56.6) nm (162.8) (753.4) 68.9 Margins Gross Margins (%) 21.3 (15.5) (7.2) (38.6) (43.4) Opg Profit Margins (%) (0.7) (38.5) (22.6) (56.2) (60.5) Net Profit Margins (%) 4.9 (11.9) (36.8) (288.5) (95.0)


FY Dec 2013A 2014A 2015A 2016F 2017F Net Fixed Assets 549 572 606 709 682 Invts in Associates & JVs 44 66 68 67 64 Other LT Assets 1 0 76 76 76 Cash & ST Invts 65 101 43 25 29 Inventory 3 3 1 1 1 Debtors 48 35 25 18 17 Other Current Assets 36 62 97 89 89 Total Assets 746 840 917 986 957 ST Debt 53 51 81 81 81 Creditor 11 16 14 14 12 Other Current Liab 54 49 60 59 56 LT Debt 240 276 319 489 519 Other LT Liabilities 10 16 27 27 27 Shareholder’s Equity 376 428 413 314 260 Minority Interests 2 4 3 2 1 Total Cap. & Liab. 746 840 917 986 957 Non-Cash Wkg. Capital 22 35 49 35 38 Net Cash/(Debt) (228) (226) (356) (544) (571) Debtors Turn (avg days) 84.8 87.6 90.4 108.9 95.5 Creditors Turn (avg days) 39.6 55.1 77.4 73.3 79.9 Inventory Turn (avg days) 12.1 13.8 11.0 4.8 5.3 Asset Turnover (x) 0.3 0.2 0.1 0.1 0.1 Current Ratio (x) 1.3 1.7 1.1 0.9 0.9 Quick Ratio (x) 0.9 1.2 0.4 0.3 0.3 Net Debt/Equity (X) 0.6 0.5 0.9 1.7 2.2 Net Debt/Equity ex MI (X) 0.6 0.5 0.9 1.7 2.2 Capex to Debt (%) 37.2 11.3 38.6 22.8 0.0 Z-Score (X) 1.0 1.1 0.7 0.2 0.1



Company Guide

Pacific Radiance


FY Dec 2013A 2014A 2015A 2016F 2017F Pre-Tax Profit 53 68 5 (97) (54) Dep. & Amort. 25 28 26 27 28 Tax Paid 0 (4) (3) (3) (2) Assoc. & JV Inc/(loss) (14) (13) (3) 1 3 Chg in Wkg.Cap. (27) 17 15 7 0 Other Operating CF (15) (36) (17) 23 0 Net Operating CF 22 61 24 (43) (26) Capital Exp.(net) (109) (37) (154) (130) 0 Other Invts.(net) 0 0 0 0 0 Invts in Assoc. & JV (1) (8) (3) 0 0 Div from Assoc & JV 0 1 1 0 0 Other Investing CF 0 (9) 13 (15) 0 Net Investing CF (110) (53) (144) (145) 0 Div Paid (7) (11) (18) 0 0 Chg in Gross Debt 13 39 79 170 30 Capital Issues 123 0 0 0 0 Other Financing CF 0 0 (4) 0 0 Net Financing CF 129 28 58 170 30 Currency Adjustments 0 0 0 0 0 Chg in Cash 41 37 (62) (18) 4 Opg CFPS (S cts) 6.8 6.1 1.3 (7.0) (3.6) Free CFPS (S cts) (12.0) 3.4 (17.9) (24.3) (3.7)



Source: DBS Bank



S.No.Date of Report

Closing Price

12-mth Target Price

Rat ing

1: 11 Jan 16 0.31 0.42 BUY

2: 18 Jan 16 0.29 0.42 BUY

3: 25 Jan 16 0.30 0.32 HOLD

4: 01 Feb 16 0.30 0.32 HOLD

5: 10 Feb 16 0.29 0.32 HOLD

6: 15 Feb 16 0.30 0.32 HOLD


8: 15 Mar 16 0.34 0.25 FULLY VALUED

9: 03 May 16 0.32 0.25 FULLY VALUED

10: 13 May 16 0.29 0.26 FULLY VALUED

11: 24 May 16 0.28 0.26 FULLY VALUED12: 15 Aug 16 0.13 0.11 FULLY VALUED13: 10 Nov 16 0.16 0.12 FULLY VALUED14: 28 Nov 16 0.15 0.12 FULLY VALUED

Note : Share price and Target price are adjusted for corporate actions. 15: 01 Dec 16 0.15 0.16 HOLD

1

2

3

4

5

6

7

8

910

11

12 13

14

15

0.10

0.15

0.20

0.25

0.30

0.35

Dec-15 Apr-16 Aug-16 Dec-16

S$

ASIAN INSIGHTS VICKERS SECURITIES ed: TH / sa: JC, PY

BUY (Upgrade from HOLD)

Last Traded Price ( 2 Dec 2016): S$0.32 (STI : 2,919.37) Price Target 12-mth : S$0.41 (29% upside) (Prev S$0.33) Potential Catalyst: Contract wins, higher oil prices, privatisation Where we differ: More bearish on earnings Analyst Suvro SARKAR +65 6682 3720 [email protected] Singapore Research Team [email protected]

What’s New Prospects lifted by OPEC cut

POSH remains our favoured operator; one of the

healthier balance sheets among peers

A potential privatisation candidate

Upgrade to BUY; TP S$0.41

Price Relative

Forecasts and Valuation FY Dec (US$ m) 2014A 2015A 2016F 2017F Revenue 234 281 188 211 EBITDA 106 90 49 80 Pre-tax Profit 56 (129) (33) (12) Net Profit 53 (131) (34) (12) Net Pft (Pre-Ex, Aft Pref Div)*

53 17 (34) (12)

EPS (S cts) 4.2 (10.3) (2.7) (1.0) EPS Pre Ex, Aft Pref Div (S cts)

4.2 1.4 (2.7) (1.0)

EPS Gth Pre Ex, Aft pref div (%)

(20) (67) nm 64

Net DPS (S cts) 1.5 0.5 0.0 0.0 BV Per Share (S cts) 94.7 83.1 80.4 79.5 PE (X) 7.6 nm nm nm PE Pre Ex, Aft Pref Div 7.6 23.0 nm nm P/Cash Flow (X) 6.7 5.8 7.1 7.9 EV/EBITDA (X) 9.0 10.5 20.7 13.8 Net Div Yield (%) 4.7 1.6 0.0 0.0 P/Book Value (X) 0.3 0.4 0.4 0.4 Net Debt/Equity (X) 0.5 0.5 0.6 0.7 ROAE (%) 5.1 (11.5) (3.3) (1.2) Earnings Rev (%): - - Consensus EPS (S cts): (4.3) (0.9) Other Broker Recs: B: 1 S: 0 H: 2


Favoured operator Upgrade to BUY; TP lifted to S$0.41, based on 0.6x P/BV. While day rates and utilisation remain depressed, POSH is a more stable long-term bet versus peers, with no immediate debt concerns and positive operating cash flows YTD. The company has also demonstrated its ability to secure work for its vessels amidst an anaemic market (e.g. long-term contracts in the Middle East for 13 vessels). POSH’s SSAVs remain the key driver of profitability (or lack thereof) going forward. The improving oil prospects following OPEC’s cut should accelerate recovery. In addition, POSH is among the potential privatisation candidates with high ownership of 81.89% by majority shareholder, Kuok (Singapore) Ltd. No near-term liquidity issues. POSH had undrawn bank lines of c.US$365m as of 3Q16 – sufficient to cover its committed capex outstanding of US$151m. While net gearing may rise to ~0.7x from the current 0.6x after further asset impairments expected at year-end (assuming US$150m in impairments, similar to 4Q15’s amount), POSH’s debt profile remains relatively manageable versus peers. The absence of outstanding bonds, its positive operating cash flows sustained through the last three quarters and an already-extended term-loan profile (over two-thirds of its loans have 5- to 7-year maturities) give us confidence in the company’s ability to weather the crisis. Expect FY17 to be a better year than FY16. We estimate a smaller loss of c.US$7m in FY17. We expect the progressive commencement of long-term contracts secured on 13 vessels in the Middle East and maiden contributions from the POSH Arcadia SSAV to help narrow core losses y-o-y in FY17.

Valuation:

We upgraded POSH to BUY with a higher TP of S$0.41, based on a 0.6x P/BV peg (0.5x previously). Key Risks to Our View:

Failure to secure/extend charter contracts for the SSAVs. Our model assumes that the POSH Xanadu is employed through FY17, while the POSH Arcadia should start its 6-month contract mid-2017. If contracts for the SSAVs are not renewed, or if there are delays, there could be downside risk to earnings. At A Glance Issued Capital (m shrs) 1,812 Mkt. Cap (S$m/US$m) 571 / 402 Major Shareholders (%) Kuok (Singapore) Limited 81.9

Free Float (%) 18.1 3m Avg. Daily Val (US$m) 0.09 ICB Industry : Oil & Gas / Oil Equipment; Services & Distribution



PACC Offshore Services Holdings Version 6 | Bloomberg: POSH SP | Reuters: PACC.SI Refer to important disclosures at the end of this report

25

45

65

85

105

125

145

165

185

205

0.2

0.4

0.6

0.8

1.0

1.2

Apr-14 Oct-14 Apr-15 Oct-15 Apr-16 Oct-16

Relative IndexS$

PACC Offshore Services Holdings (LHS) Relative STI (RHS)


Company Guide

PACC Offshore Services Holdings


Earnings Drivers:

Four key vessel segments. POSH, one of the largest Asia-based providers of offshore support vessels, is the result of the M&A of several companies in the industry. There are four key business segments now: 1) Offshore support vessels (OSV), 2) Transport & Installation (T&I), 3) Offshore Accommodation (OA), and 4) Harbour Services and Emergency Response (HSER). Thus, while POSH has a more diversified business mix than peers, but other than the HSER segment, it is still rather dependent on the level of offshore oil & gas activity, and in turn, oil prices. SSAVs are a bold bet. The economics of these accommodation units are very attractive, owing to niche market dynamics, but finding continuous employment for these deepwater-capable high-spec vessels is proving challenging given that low oil prices have curtailed interest in deepwater E&P. We think the two SSAVs would easily account for over 50% of group profits if they are fully employed. The first SSAV has secured a 1-year renewal of its contract with Petrobras (now ending in March 2017), while the second has secured a 6-month contract with Technip Oceania beginning in mid-2017 (with a 3-month extension option). We will continue to watch for news of contract renewals/fixtures for these two units. OSV division struggling to remain profitable, but long-term charters secured should help in FY17. OSV owners across the board have seen further declines in utilisation and day rates in 2016 so far. Some companies are reporting 30-40% utilisation rates and AHTS day rates below US$1.00/bhp are the norm now. POSH has seen its OSV utilisation rates fall from 69% as of end-2015 to 56% currently as the OSV oversupply situation has gradually worsened over the past year (vessel-to-rig ratio now close to historic highs of 6.5x) and oil prices have remained volatile, causing oil majors to defer projects. However, recent long-term charters secured for nine vessels (of which seven are newbuild vessels) in the Middle East should help stem the losses in FY17 and thus, we expect OSV segment gross losses to narrow as we approach end-2017. Being part of the Kuok Group has its advantages. POSH is a member of the Kuok Group, a respected conglomerate with diversified investments in commodities, hospitality, logistics, real estate and shipping, among others. We believe this brings three key advantages to POSH: i) Ready access to affiliated shipyards of the Kuok Group, which enables POSH to achieve faster turnaround times for newbuilds and better manage maintenance and refurbishment costs; ii) Lower financing costs; and iii) Access to the Kuok Group’s global network and connections to open new markets and expand business.

OSV fleet utilisation (%)

T&I fleet utilisation (%)

Acco fleet utilisation (%)

HSER fleet utilisation (%)


87 86.6

67.2

59.1 57.4

0.0

12.5

25.1

37.6

50.2

62.7

75.3

2013A 2014A 2015A 2016F 2017F

74.5

63.6

49.5

42.4 44.6

0.0

15.2

30.4

45.6

60.8

76.0

2013A 2014A 2015A 2016F 2017F

85

60.2 61.9

48.343.7

0.00

17.34

34.68

52.02

69.36

86.70

2013A 2014A 2015A 2016F 2017F

43.8

49.9 50 50 50

0.0

10.1

20.2

30.3

40.4

50.5

2013A 2014A 2015A 2016F 2017F


Company Guide


Balance Sheet:

Relatively strong balance sheet should support capex commitments. As a result of new long-term contract wins in the Middle East, and a requirement for specific vessel types, POSH had boosted its newbuild orderbook to 19 vessels as of 3Q16. The company now has about US$151m of remaining committed capex, and all its newbuilds are scheduled for delivery by 2017. Nonetheless, undrawn bank lines of approximately US$365m are more than sufficient to fund this. The group’s leverage remains relatively low compared to peers at 0.6x, though expected impairments at year-end could see this number tick upwards to about 0.7x (assuming US$150m impairments; a similar amount to 4Q15). A lack of near-term refinancing issues (POSH has no outstanding bonds) is another plus point. We therefore do not see any near-term liquidity issues for the company.


More offshore oil activities as a result of higher oil prices. POSH’s business is essentially a function of offshore activity. Higher oil prices are the key catalyst here, which will spur companies to invest in more capex offshore, resulting in more operational rigs as well as rig installations, increasing demand for POSH’s OSVs across the oilfield lifecycle. Announcement of more or longer-term contracts for the SSAVs. While the POSH Xanadu has secured a 1-year extension of contract with Petrobras ending in March 2017 and the POSH Arcadia has a 6-month job for Technip Oceania for the Shell Prelude FLNG project beginning in mid-2017 (and with a 3-month extension option), this still leaves some uncertainty over the utilisation of the two heavyweight assets in FY17 and FY18. Securing contract renewals or new long-term contracts for the SSAVs would be a boon to POSH’s share price.

Key Risks:

Lack of contract wins for the two SSAVs. Again, since the SSAVs are key drivers of profitability, if contract wins dry up POSH would see its losses intensify, which would be detrimental to its share price performance.

Company Background

PACC Offshore Services Holdings Ltd. (POSH) is the largest Asia-based international operator of offshore support vessels and one of the top five globally. It operates a combined fleet of about 110 vessels (including JV vessels).


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


0.1

0.1

0.1

0.1

0.1

0.2

0.2

0.2

0.2

0.2

0.2

0.00

0.20

0.40

0.60

0.80

1.00

2013A 2014A 2015A 2016F 2017F


0.0

50.0

100.0

150.0

200.0

250.0

300.0

350.0

400.0

450.0

2013A 2014A 2015A 2016F 2017F


US$m

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

2013A 2014A 2015A 2016F 2017F

Avg: 0.63x

+1sd: 0.99x

+2sd: 1.34x

‐1sd: 0.28x

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

Apr-14 Oct-14 Apr-15 Oct-15 Apr-16 Oct-16

(x)


Company Guide


Key Assumptions

FY Dec 2013A 2014A 2015A 2016F 2017F OSV fleet utilisation (%) 87.0 86.6 67.2 59.1 57.4 T&I fleet utilisation (%) 74.5 63.6 49.5 42.4 44.6 Acco fleet utilisation (%) 85.0 60.2 61.9 48.3 43.7 HSER fleet utilisation (%) 43.8 49.9 50.0 50.0 50.0

Segmental Breakdown

FY Dec 2013A 2014A 2015A 2016F 2017F Revenues (US$ m) Offshore Support Vessels 120 141 136 74 78 Transportation & 65 38 27 17 26 Accommodation 29 31 93 77 84 HSER 22 24 24 22 23 Total 237 234 281 188 211 Gross Profit (US$ m) Offshore Support Vessels 30 31 13 (11) (7) Transportation & 20 12 5 1 3 Accommodation 14 11 36 19 16 HSER 8 3 4 5 4 Total 72 57 58 14 15 Gross Profit Margins (%) Offshore Support Vessels 25.3 21.9 9.6 (14.6) (9.1) Transportation & 30.2 32.4 16.9 8.7 10.2 Accommodation 47.3 35.5 38.6 24.9 18.5 HSER 37.4 12.6 18.0 22.0 15.0 Total 30.5 24.4 20.7 7.7 6.9


FY Dec 2013A 2014A 2015A 2016F 2017F Revenue 237 234 281 188 211 Cost of Goods Sold (165) (177) (223) (174) (197) Gross Profit 72 57 58 14 15 Other Opng (Exp)/Inc (13) (23) (23) (35) (15) Operating Profit 59 34 35 (21) (1) Other Non Opg (Exp)/Inc 11 46 4 1 2 Associates & JV Inc 1 (14) (10) 1 1 Net Interest (Exp)/Inc (13) (11) (10) (14) (15) Exceptional Gain/(Loss) 19 0 (148) 0 0 Pre-tax Profit 77 56 (129) (33) (12) Tax (4) (3) (2) (2) 0 Minority Interest 0 0 0 0 0 Net Profit 73 53 (131) (34) (12) Net Profit before Except. 54 53 17 (34) (12) Preference Dividend 0 0 0 0 0 Net Pft Pre-Ex, Aft Pref Div 54 53 17 (34) (12) EBITDA 108 106 90 49 80 Growth Revenue Gth (%) (2.3) (1.4) 20.0 (33.0) 12.3 EBITDA Gth (%) 18.4 (1.7) (14.8) (45.9) 64.1 Opg Profit Gth (%) 28.0 (43.0) 3.9 nm 96.8 Net Profit Gth (%) 37.1 (27.4) nm 73.7 64.2 Net Pft Pre-Ex Aft Perf Div Gth (%)

35.1 (1.8) (67.2) nm 64.2

Margins & Ratio Gross Margins (%) 30.5 24.4 20.7 7.7 6.9 Opg Profit Margin (%) 25.0 14.4 12.5 (11.0) (0.3) Net Profit Margin (%) 30.9 22.7 (46.6) (18.3) (5.8) ROAE (%) 9.6 5.1 (11.5) (3.3) (1.2) ROA (%) 4.6 2.9 (7.3) (2.0) (0.7) ROCE (%) 3.8 1.9 2.1 (1.3) 0.0 Div Payout Ratio (%) 0.0 35.9 N/A N/A N/A Net Interest Cover (x) 4.6 3.1 3.4 (1.5) 0.0



Company Guide



FY Dec 3Q2015 4Q2015 1Q2016 2Q2016 3Q2016 Revenue 80 72 59 46 42 Cost of Goods Sold (62) (55) (45) (44) (43) Gross Profit 18 17 14 2 (1) Other Oper. (Exp)/Inc (4) (4) (11) (13) (7) Operating Profit 14 13 3 (11) (8) Other Non Opg (Exp)/Inc 1 1 0 0 0 Associates & JV Inc 1 (12) 5 (3) 0 Net Interest (Exp)/Inc (3) (3) (3) (3) (4) Exceptional Gain/(Loss) 0 (148) 0 0 0 Pre-tax Profit 13 (149) 5 (17) (13) Tax (1) (1) (1) 0 0 Minority Interest 0 0 0 0 0 Net Profit 13 (150) 4 (18) (13) Net profit bef Except. 13 (1) 4 (18) (13) Preference Dividend 0 0 0 0 0 Net Pft (Pre-Ex, Aft Pref Div) 13 (1) 4 (18) (13) EBITDA 32 19 24 3 9 Growth Revenue Gth (%) 13.2 (10.7) (18.3) (21.4) (9.7) EBITDA Gth (%) 31.3 (41.3) 28.9 (88.1) 215.3 Opg Profit Gth (%) 177.1 (6.1) (76.0) nm 23.1 Net Profit Gth (%) 105.9 nm nm nm 26.2 Margins Gross Margins (%) 22.9 23.9 23.9 4.0 (3.4) Opg Profit Margins (%) 17.5 18.4 5.4 (23.7) (20.2) Net Profit Margins (%) 15.6 (208.4) 7.6 (38.0) (31.1)


FY Dec 2013A 2014A 2015A 2016F 2017F Net Fixed Assets 1,038 1,114 1,278 1,331 1,398 Invts in Associates & JVs 211 241 100 100 102 Other LT Assets 304 300 180 180 180 Cash & ST Invts 11 12 14 20 15 Inventory 1 2 1 1 1 Debtors 68 77 94 70 70 Other Current Assets 141 126 68 68 68 Total Assets 1,774 1,871 1,734 1,769 1,834 ST Debt 507 261 560 168 258 Creditor 62 70 69 70 59 Other Current Liab 40 27 43 42 40 LT Debt 300 300 0 462 462 Other LT Liabilities 0 0 0 0 0 Shareholder’s Equity 864 1,214 1,061 1,027 1,014 Minority Interests 0 0 0 0 0 Total Cap. & Liab. 1,774 1,871 1,734 1,769 1,834 Non-Cash Wkg. Capital 108 108 50 26 39 Net Cash/(Debt) (797) (548) (546) (610) (704) Debtors Turn (avg days) 101.3 112.7 110.7 158.5 121.0 Creditors Turn (avg days) 160.4 176.0 157.2 241.3 199.2 Inventory Turn (avg days) 10.3 4.9 3.7 2.3 1.7 Asset Turnover (x) 0.1 0.1 0.2 0.1 0.1 Current Ratio (x) 0.4 0.6 0.3 0.6 0.4 Quick Ratio (x) 0.1 0.2 0.2 0.3 0.2 Net Debt/Equity (X) 0.9 0.5 0.5 0.6 0.7 Net Debt/Equity ex MI (X) 0.9 0.5 0.5 0.6 0.7 Capex to Debt (%) 48.3 13.8 45.7 19.2 20.2 Z-Score (X) 0.5 0.8 0.4 0.5 0.4



Company Guide



FY Dec 2013A 2014A 2015A 2016F 2017F Pre-Tax Profit 77 56 (129) (33) (12) Dep. & Amort. 37 39 61 68 78 Tax Paid (2) (1) (3) (3) (2) Assoc. & JV Inc/(loss) (1) 14 10 (1) (1) Chg in Wkg.Cap. 21 (2) (16) 25 (12) Other Operating CF 2 (46) 147 0 0 Net Operating CF 135 60 70 57 51 Capital Exp.(net) (390) (77) (256) (121) (145) Other Invts.(net) 0 0 0 0 0 Invts in Assoc. & JV (28) (11) 206 0 0 Div from Assoc & JV 0 0 0 0 0 Other Investing CF 13 (9) 0 0 0 Net Investing CF (405) (97) (50) (121) (145) Div Paid (7) 0 (20) 0 0 Chg in Gross Debt 282 (247) (1) 70 90 Capital Issues 0 296 (2) 0 0 Other Financing CF 5 (11) 5 0 0 Net Financing CF 280 39 (18) 70 90 Currency Adjustments 0 0 0 0 0 Chg in Cash 10 2 2 6 (4) Opg CFPS (S cts) 7.7 3.4 4.7 1.7 3.5 Free CFPS (S cts) (17.2) (1.0) (10.3) (3.5) (5.2)



Source: DBS Bank



S.No.Date of Report

Closing Price

12-mth Target Price

Rat ing

1: 11 Jan 16 0.30 0.35 HOLD

2: 18 Jan 16 0.29 0.35 HOLD

3: 25 Jan 16 0.30 0.29 HOLD

4: 01 Feb 16 0.30 0.29 HOLD

5: 10 Feb 16 0.30 0.29 HOLD

6: 15 Feb 16 0.28 0.29 HOLD

7: 22 Feb 16 0.29 0.28 HOLD

8: 15 Mar 16 0.37 0.28 HOLD

9: 03 May 16 0.37 0.28 HOLD

10: 05 May 16 0.37 0.35 HOLD

11: 04 Aug 16 0.32 0.33 HOLD12: 08 Nov 16 0.31 0.33 HOLD13: 01 Dec 16 0.32 0.41 BUY

Note : Share price and Target price are adjusted for corporate actions.

1

2

3

4

56

7

8

9

10

11

1213

0.26

0.28

0.30

0.32

0.34

0.36

0.38

0.40

0.42

Dec-15 Apr-16 Aug-16

S$

ASIAN INSIGHTS VICKERS SECURITIES ed: TH / sa:AS, PY

BUY

Last Traded Price ( 1 Dec 2016): S$2.89 (STI : 2,928.58) Price Target 12-mth: S$3.10 (7% upside) (Prev S$2.90) Potential Catalyst: Long-term PPA for 2nd India plant; oil recovery Where we differ: In line Analyst Pei Hwa HO +65 6682 3714 [email protected]

What’s New OPEC’s commitment to cut output excites the

market

SCI is a safer proxy to oil recovery, through 61%-

owned SMM

Reiterate BUY; TP lifted to S$3.10

Price Relative

Forecasts and Valuation FY Dec (S$ m) 2014A 2015A 2016F 2017F Revenue 10,895 9,545 7,967 7,722 EBITDA 1,612 590 1,273 1,261 Pre-tax Profit 1,246 426 497 522 Net Profit 801 549 356 386 Net Pft (Pre Ex.) 801 123 399 386 Net Pft Gth (Pre-ex) (%) (2.4) (84.6) 223.4 (3.3) EPS (S cts) 44.9 30.7 19.9 21.6 EPS Pre Ex. (S cts) 44.9 6.91 22.3 21.6 EPS Gth Pre Ex (%) (2) (85) 223 (3) Diluted EPS (S cts) 44.5 30.5 19.8 21.4 Net DPS (S cts) 16.0 11.0 6.78 6.90 BV Per Share (S cts) 315 360 369 384 PE (X) 6.4 9.4 14.5 13.4 PE Pre Ex. (X) 6.4 41.8 13.0 13.4 P/Cash Flow (X) nm nm 25.6 4.5 EV/EBITDA (X) 6.1 20.3 10.6 10.6 Net Div Yield (%) 5.5 3.8 2.3 2.4 P/Book Value (X) 0.9 0.8 0.8 0.8 Net Debt/Equity (X) 0.4 0.6 0.8 0.8 ROAE (%) 14.8 9.1 5.5 5.7 Earnings Rev (%): 0 0 Consensus EPS (S cts): 22.8 25.4 Other Broker Recs: B: 6 S: 3 H: 7


Riding on oil recovery

BUY SCI; TP lifted to S$3.10, after imputing higher valuation for SMM (from S$1.15 to S$1.55). The risk premium for O&M players should be reduced with the brighter oil outlook following OPEC’s agreement to cut production. Sembcorp Industries (SCI) offers the best risk reward among the three O&M large caps, trading at an undemanding 0.7x P/BV, implying a next-to-zero valuation for SMM. Our TP translates to 0.9x P/BV, which is c.20% below the trough levels seen during the Global Financial Crisis and Asian Financial Crisis. We believe this is fair in view of its 6% ROE and 3% dividend yield. Reiterate BUY on SCI.

TPCIL delivers encouraging earnings. Thermal Powertech Corporation India (TPCIL) - SCI’s first Indian power plant which has been fully operational since September 2015 - has turned from a loss position of c.S$1m in 1H16 to c.S$7m profit in 3Q16. This follows the resumption of operations after the plant had been shut down for repairs in June. We expect more stable contribution of ~S$10m profit a quarter with the commencement of long-term Power Purchase Agreements (PPAs – 86% of total capacity) and resolution of technical issues.

Emerging markets remain the growth engine. TPCIL is projected to contribute c.5/10% of FY16/17F earnings from startup losses of S$22.5m in FY15. This would help to mitigate the earnings decline from Singapore power plants while other overseas utility businesses are expected to be stable this year. Besides, SCI has also made forays into other emerging markets - Bangladesh and Myanmar - and this should underpin the longer-term growth prospects of its utilities segment. However, the second Indian plant SembcorpGayatri Power Ltd (SGPL) is coming on stream soon in 4Q16/1Q17 but long-term PPAs with the government may only commence in 2018. This could result in earnings volatility in the transitional year given the exposure to short PPAs and spot market.

Valuation: Given its diverse earnings stream and various listed assets, we derive our fair value for SCI based on the sum of its different parts: market valuations of its stakes in listed companies Sembcorp Marine (SGX-listed, 60.6% stake), Gallant Venture (SGX-listed, 11.96% stake) and Salalah (Muscat stock exchange, 40% stake) and earnings from utilities and urban development. For its holding company position, we have applied a 10% conglomerate discount to the reappraised net asset value (RNAV). We derive a TP of S$3.10, translating to 0.9x P/BV.

Key Risks to Our View: Key risks to earnings are further deferments/cancellations of marine projects, deterioration of Singapore's power spark spreads, and execution hiccups at its Indian power plants.

At A Glance Issued Capital (m shrs) 1,786 Mkt. Cap (S$m/US$m) 5,162 / 3,620 Major Shareholders (%) Temasek Holdings Pte Ltd 49.5 Mondrian Investment Partners Ltd 5.0




Sembcorp Industries Version 10 | Bloomberg: SCI SP | Reuters: SCIL.SI Refer to important disclosures at the end of this report

46

66

86

106

126

146

166

186

206

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0


Relative IndexS$

Sembcorp Industries (LHS) Relative STI (RHS)


Company Guide

Sembcorp Industries

Tables or Charts

Value (S$ m)

Basis

Sembcorp Marine 1,963 Fair value for Sembcorp Marine

Gallant Ventures 75 Share price

Salalah 347 40% stake

2,385

Less: book value of listed companies (2,186)

Surplus / (Deficit) from listed companies 199

Utilities 4,004 Based on 11x FY16 PE

Urban Development 507 Based on 11x FY16 PE

4,511

Less: book value of Utilities (4,254)

book value of Urban Development (813)

(5,067)

Surplus / (Deficit) from unlisted companies (556)

Net Surplus / (Deficit) (357)

Book value as of end FY15 6,593

RNAV 6,236

RNAV per share (S$) 3.47

Fair value (S$) 3.10 10% conglomerate discount

Implied FY16 PE (x) 15.6

Implied FY16 PB (x) 0.9


Company Guide

Sembcorp Industries


Earnings Drivers:

Utilities’ project pipeline should progressively add to earnings. New facilities will add to SCI’s power generation and water treatment capacities, which should increase earnings, assuming that the operations are profitable. A total of 3,800MW of power generation capacity, 140 tonnes per hour of steam capacity and 1.3m cubic metres per day of water treatment capacity is expected to be added from now until 2018. This roughly translates to 36%, 3% and 14% increase in power, steam and water treatment capacities respectively. Narrowing spark spreads in Singapore hit power generation earnings. Growth in supply of electricity outpacing the growth in consumption led to a 22% y-o-y fall in the Uniform Singapore Energy Price (USEP) in 2013, 21% in 2014 and a further 29% in 2015, shrinking the generator’s spark spreads – a barometer of profits on electricity sales. However, the impact will not be significant, as Singapore power generation only makes up <5% of SCI’s net income. Nonetheless, an increase in USEP prices will help earnings. Greater contribution from non-Singapore power generation facilities would also alleviate the pressure on profitability. Marine business (SMM) earnings are orderbook-driven. Sembcorp Marine (SMM)’s orderbook had declined to S$8.4bn as at September 2016, in tandem with the downturn in the offshore oil & gas industry. Order wins of S$3.2bn in 2015 were weak but respectable amid the current environment; 2013 and 2014 saw full-year order wins of S$4.2bn but order wins so far amount to only S$320m. The current orderbook stretches until 2020, but there is risk of order deferments – which would spread revenues and earnings thinner – given that drilling units account for 75% of its value. Low oil prices led oil majors and asset owners to defer capex spending, hence, a rebound in oil prices should trigger more order wins for SMM, which would be positive for earnings. Urban Development business provides growth opportunities. Urban Development accounts for c.6-7% of SCI’s bottom line. Thus, a strong performance of this segment will not move the needle too much for now, but represents an avenue for growth. SCI has about 3,500ha of saleable land remaining across China, Indonesia and Vietnam, which it can develop. However, headwinds in the form of delays in China land sales have proven to be a stumbling block recently; better sales momentum, which we are seeing a glimmer of, would give some earnings uplift.

Marine contract wins

Sales Trend

Asset Trend

Profitability Trend

Margin Trends (%)


4,193 4,192

3,150

1,500

2,000

0

605

1,210

1,815

2,420

3,025

3,630

2013A 2014A 2015A 2016F 2017F


Company Guide

Sembcorp Industries

Balance Sheet:

SCI’s gearing stood at 0.9x as at September 2016 – a stark contrast to a net cash position in 2013; increasing leverage at SMM has been the main reason for the increase in debt levels. Overall, gearing remains at palatable levels and there is adequate debt headroom of approximately S$1-2bn for SCI’s expansion capex and working capital. Share Price Drivers:

Oil price rebound would drive the share price higher. Investors would have greater confidence in the Marine business, as the operating environment improves. While drilling rig orders may lag oil price recovery, we could expect orders for production-related facilities to flow through. Order wins in the Marine segment and land sales from Urban Development would bode well for SCI’s share price. While the oil price rebound would be an early indicator, securing contract wins by SMM is more tangible. More momentum in land sales would signal more hope for growth, and be positive to share price. Widening spark spreads at Singapore power plants. Signs of positive and widening spark spreads in Singapore would alleviate a key concern of investors and provide support to the share price. Key Risks:

Increasing competition in the Singapore power market. Total power generation supply in Singapore rose by over 9% y-o-y in the past two years, marking the biggest y-o-y jumps since the electricity market started. This has depressed prices and hurt SCI’s bottom line. The oversupply of capacity and over-commitment of gas supply issues will likely continue to plague Singapore's power market in the near-to-medium term. Execution of Indian power plants. The availability of coal supply and power purchase agreements (PPA) for SCI’s power plants in India are concerns. We find comfort that the TPCIL plant is up and running, with 86% of capacity committed on long-term PPAs and operating using both domestic and imported coal. Company Background

Sembcorp Industries (SCI) is a trusted provider of essential energy and water solutions to both industrial and municipal customers. It has facilities with 10,600MW of gross power capacity and over 10m cubic metres of water per day in operation and under development. It is also a world leader in marine and offshore engineering (via Sembcorp Marine) as well as an established brand name in urban development (comprising industrial parks as well as business, commercial and residential space) in Vietnam, China and Indonesia.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


0.3

0.4

0.5

0.6

0.7

0.8

0.9

0.00

0.20

0.40

0.60

0.80

1.00

2013A 2014A 2015A 2016F 2017F


0.0

200.0

400.0

600.0

800.0

1,000.0

1,200.0

1,400.0

1,600.0

2013A 2014A 2015A 2016F 2017F


S$m

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

2013A 2014A 2015A 2016F 2017F

Avg: 19.7x

+1sd: 31.6x

+2sd: 43.6x

‐1sd: 7.7x

-3.7

6.3

16.3

26.3

36.3

46.3

56.3

66.3

Dec-12 Dec-13 Dec-14 Dec-15

(x)

Avg: 1.41x

+1sd: 1.88x

+2sd: 2.36x

‐1sd: 0.93x

‐2sd: 0.45x0.4

0.9

1.4

1.9

2.4


(x)


Company Guide

Sembcorp Industries

Key Assumptions

FY Dec 2013A 2014A 2015A 2016F 2017F Marine contract wins 4,193 4,192 3,150 1,500 2,000

Segmental Breakdown

FY Dec 2013A 2014A 2015A 2016F 2017F Revenues (S$m) Utilities 5,138 4,850 4,227 4,284 4,379 Marine 5,526 5,831 4,967 3,401 3,114 Industrial Parks 12.5 6.54 7.95 8.61 10.3 Other Businesses and Corporate

122 208 342 274 219

Total 10,798 10,895 9,545 7,967 7,722 Net Profit before EI

Utilities 450 408 701 351 364 Marine 337 340 (176) 44.6 74.5 Industrial Parks 50.2 44.3 33.5 33.8 34.2 Other Businesses and Corporate

(16.6) 8.78 (9.7) (22.1) (17.6)

Total 820 801 549 407 455 Net Profit before EI Utilities 8.8 8.4 16.6 8.2 8.3 Marine 6.1 5.8 (3.6) 1.3 2.4 Industrial Parks 401.4 678.1 421.3 392.9 330.7 Other Businesses and Corporate

(13.6) 4.2 (2.8) (8.1) (8.0)

Total 7.6 7.4 5.8 5.1 5.9 Income Statement (S$m)

FY Dec 2013A 2014A 2015A 2016F 2017F Revenue 10,798 10,895 9,545 7,967 7,722 Cost of Goods Sold (9,510) (9,480) (8,813) (6,827) (6,647) Gross Profit 1,287 1,415 732 1,140 1,075 Other Opng (Exp)/Inc (339) (352) (950) (358) (347) Operating Profit 948 1,062 (218) 782 728 Other Non Opg (Exp)/Inc 212 76.7 418 (7.8) (7.8) Associates & JV Inc 155 158 6.20 95.7 97.6 Net Interest (Exp)/Inc (101) (50.7) (205) (330) (295) Exceptional Gain/(Loss) 0.0 0.0 426 (42.5) 0.0 Pre-tax Profit 1,214 1,246 426 497 522 Tax (117) (162) 28.1 (112) (108) Minority Interest (277) (283) 94.5 (29.0) (29.0) Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit 820 801 549 356 386 Net Profit before Except. 820 801 123 399 386 EBITDA 1,619 1,612 590 1,273 1,261 Growth Revenue Gth (%) 6.0 0.9 (12.4) (16.5) (3.1) EBITDA Gth (%) 4.6 (0.4) (63.4) 115.8 (0.9) Opg Profit Gth (%) (10.5) 12.0 nm nm (6.9) Net Profit Gth (Pre-ex) (%) 8.9 (2.4) (84.6) 223.4 (3.3) Margins & Ratio Gross Margins (%) 11.9 13.0 7.7 14.3 13.9 Opg Profit Margin (%) 8.8 9.7 (2.3) 9.8 9.4 Net Profit Margin (%) 7.6 7.4 5.8 4.5 5.0 ROAE (%) 16.9 14.8 9.1 5.5 5.7 ROA (%) 6.2 5.2 3.0 1.7 1.8 ROCE (%) 9.5 8.3 (1.5) 3.6 3.2 Div Payout Ratio (%) 37.0 35.7 35.8 34.0 32.0 Net Interest Cover (x) 9.4 21.0 (1.1) 2.4 2.5



Company Guide

Sembcorp Industries


FY Dec 3Q2015 4Q2015 1Q2016 2Q2016 3Q2016 Revenue 2,399 2,419 1,895 1,847 2,140 Cost of Goods Sold (2,110) (2,619) (1,627) (1,559) (1,841) Gross Profit 290 (200) 269 288 298 Other Oper. (Exp)/Inc (104) (677) (78.8) (110) (83.9) Operating Profit 186 (877) 190 178 214 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 21.2 (114) 35.6 38.1 3.49 Net Interest (Exp)/Inc (57.0) (72.6) (76.6) (85.1) (83.3) Exceptional Gain/(Loss) 0.0 371 12.1 (8.3) (46.2) Pre-tax Profit 150 (692) 161 123 88.3 Tax (10.9) 121 (29.9) (28.2) (30.0) Minority Interest (17.0) 207 (24.0) (8.3) (4.5) Net Profit 122 (365) 107 86.5 53.9 Net profit bef Except. 122 (736) 95.0 94.8 100 EBITDA 207 (990) 225 216 218 Growth Revenue Gth (%) 0.5 0.8 (21.7) (2.6) 15.9 EBITDA Gth (%) (33.5) nm nm (4.1) 0.7 Opg Profit Gth (%) (26.0) nm nm (6.1) 20.3 Net Profit Gth (Pre-ex) (%) (27.7) nm nm (0.2) 5.7 Margins Gross Margins (%) 12.1 (8.3) 14.2 15.6 13.9 Opg Profit Margins (%) 7.8 (36.2) 10.0 9.7 10.0 Net Profit Margins (%) 5.1 (15.1) 5.6 4.7 2.5

Balance Sheet (S$m)

FY Dec 2013A 2014A 2015A 2016F 2017F Net Fixed Assets 5,127 7,725 8,685 9,782 10,339 Invts in Associates & JVs 1,852 2,074 2,349 2,375 2,403 Other LT Assets 1,086 1,246 1,273 1,273 1,273 Cash & ST Invts 2,257 1,663 1,609 1,885 1,995 Inventory 2,241 3,205 4,233 4,193 3,861 Debtors 1,140 1,200 1,568 1,897 1,716 Other Current Assets 52.8 63.8 201 201 201 Total Assets 13,754 17,176 19,915 21,603 21,782 ST Debt 414 1,086 1,801 1,501 1,501 Creditor 2,692 2,745 3,388 3,319 3,218 Other Current Liab 1,796 1,526 758 624 613 LT Debt 1,485 3,649 5,032 7,032 7,032 Other LT Liabilities 837 938 894 894 894 Shareholder’s Equity 5,230 5,616 6,433 6,593 6,857 Minority Interests 1,300 1,616 1,610 1,639 1,668 Total Cap. & Liab. 13,754 17,176 19,915 21,603 21,782 Non-Cash Wkg. Capital (1,054) 198 1,856 2,347 1,948 Net Cash/(Debt) 358 (3,071) (5,223) (6,648) (6,538) Debtors Turn (avg days) 39.1 39.2 52.9 79.4 85.4 Creditors Turn (avg days) 109.5 108.3 132.8 190.6 192.3 Inventory Turn (avg days) 81.8 108.4 161.0 239.4 236.9 Asset Turnover (x) 0.8 0.7 0.5 0.4 0.4 Current Ratio (x) 1.2 1.1 1.3 1.5 1.5 Quick Ratio (x) 0.7 0.5 0.5 0.7 0.7 Net Debt/Equity (X) CASH 0.4 0.6 0.8 0.8 Net Debt/Equity ex MI (X) CASH 0.5 0.8 1.0 1.0 Capex to Debt (%) 61.3 27.4 20.2 17.6 11.7 Z-Score (X) 2.0 1.6 1.2 1.2 1.1



Company Guide

Sembcorp Industries


FY Dec 2013A 2014A 2015A 2016F 2017F Pre-Tax Profit 1,214 1,246 426 497 522 Dep. & Amort. 303 315 405 403 443 Tax Paid (125) (119) (150) (192) (112) Assoc. & JV Inc/(loss) (155) (158) (6.2) (95.7) (97.6) Chg in Wkg.Cap. 141 (1,414) (1,961) (411) 403 Other Operating CF 92.0 72.9 525 0.0 0.0 Net Operating CF 1,470 (57.4) (761) 201 1,159 Capital Exp.(net) (1,164) (1,298) (1,381) (1,500) (1,000) Other Invts.(net) 16.1 4.30 9.98 0.0 0.0 Invts in Assoc. & JV (284) (280) (427) 0.0 0.0 Div from Assoc & JV 94.7 122 129 70.0 70.0 Other Investing CF (21.0) 10.9 471 0.0 0.0 Net Investing CF (1,358) (1,441) (1,199) (1,430) (930) Div Paid (413) (539) (415) (196) (121) Chg in Gross Debt 393 393 (982) 1,700 0.0 Capital Issues 0.0 0.0 0.0 0.0 0.0 Other Financing CF 81.9 1,049 3,289 0.0 0.0 Net Financing CF 61.8 903 1,892 1,504 (121) Currency Adjustments 22.1 1.78 14.7 0.0 0.0 Chg in Cash 196 (594) (53.0) 275 108 Opg CFPS (S cts) 73.9 76.1 67.3 34.3 42.3 Free CFPS (S cts) 17.0 (76.0) (120) (72.7) 8.91



Source: DBS Bank

Analyst: Pei Hwa HO

S.No.Date of Report

Closing Price

12-mth Target Price

Rat ing

1: 09 Dec 15 3.04 3.80 BUY

2: 06 Jan 16 2.92 0.91 BUY

3: 22 Jan 16 2.34 3.80 BUY

4: 27 Jan 16 2.23 3.50 BUY

5: 18 Feb 16 2.66 3.30 BUY

6: 22 Feb 16 2.70 3.30 BUY

7: 11 Mar 16 3.03 3.30 BUY

8: 15 Mar 16 3.00 3.30 BUY

9: 20 Apr 16 3.06 3.30 BUY

10: 03 May 16 2.82 3.30 BUY

11: 05 May 16 2.84 3.10 BUY12: 31 May 16 2.79 3.10 BUY13: 03 Aug 16 2.74 3.10 BUY14: 28 Sep 16 2.53 3.10 BUY

Note : Share price and Target price are adjusted for corporate actions. 15: 29 Sep 16 2.60 3.10 BUY16: 28 Oct 16 2.53 2.90 BUY17: 28 Nov 16 2.73 2.90 BUY18: 01 Dec 16 2.89 3.10 BUY

12

34

5

6

7

8

910

11

1213

14

15

16 17

18

2.08

2.28

2.48

2.68

2.88

3.08

3.28


S$

ASIAN INSIGHTS VICKERS SECURITIES ed: TH / sa:JC, PY

HOLD (Upgrade from FULLY VALUED)

Last Traded Price ( 1 Dec 2016): S$1.47 (STI : 2,928.58) Price Target 12-mth: S$1.55 (6% upside) (Prev S$1.15) Potential Catalyst: Oil price recovery, vessel delivery, order win Where we differ: In line Analyst Pei Hwa HO +65 6682 3714 [email protected]

What’s New OPEC’s output cut brightens oil outlook

Higher oil prices could motivate customers to take

delivery and place orders for production facilities

Upgrade to HOLD; TP S$1.55

Price Relative

Forecasts and Valuation FY Dec (S$ m) 2014A 2015A 2016F 2017F Revenue 5,833 4,968 3,332 2,874 EBITDA 829 (216) 334 417 Pre-tax Profit 707 (378) 92.9 155 Net Profit 560 (290) 73.5 123 Net Pft (Pre Ex.) 560 (290) 73.5 123 Net Pft Gth (Pre-ex) (%) 4.1 nm nm 66.8 EPS (S cts) 26.8 (13.9) 3.52 5.87 EPS Pre Ex. (S cts) 26.8 (13.9) 3.52 5.87 EPS Gth Pre Ex (%) 4 nm nm 67 Diluted EPS (S cts) 27.0 (13.9) 3.52 5.87 Net DPS (S cts) 13.0 6.00 1.97 2.00 BV Per Share (S cts) 142 120 118 122 PE (X) 5.5 nm 41.8 25.0 PE Pre Ex. (X) 5.5 nm 41.8 25.0 P/Cash Flow (X) nm nm 5.3 6.3 EV/EBITDA (X) 4.7 nm 17.6 13.5 Net Div Yield (%) 8.8 4.1 1.3 1.4 P/Book Value (X) 1.0 1.2 1.2 1.2 Net Debt/Equity (X) 0.2 1.0 1.0 0.9 ROAE (%) 19.9 (10.6) 3.0 4.9 Earnings Rev (%): 0 0 Consensus EPS (S cts): 5.30 6.30 Other Broker Recs: B: 1 S: 11 H: 8


Brightened Oil Outlook

Upgrade to HOLD with higher TP of S$1.55, based on 1.3x FY17 P/BV (1.0x previously), which is in line with 1.5SD below mean (2SD previously) and recovery valuation post AFC. We believe risk premium should be reduced with improving O&G outlook following OPEC’s successful agreement to cut output. The sector recovery should “motivate” customers to take delivery of existing units and place orders for production facilities. However, the operating environment remains challenging with yard overcapacity. Declining order book. SMM’s orderbook declined by S$800m q-o-q to S$8.4bn as at the end of September 2016, and is set to decline further as we anticipate order flows to remain sluggish. The orderbook stands at S$5.2bn excluding Sete’s rig orders. We believe rig orders are unlikely to make a comeback anytime soon, given the supply glut. New order wins of S$3.2bn in 2015 came from two sizeable contracts to build a fixed platform and the world’s largest semi-submersible crane vessel. We expect SMM to secure S$1bn in new orders in 2016. SMM has clinched orders worth S$320m year-to-date. Shipyard merger on the cards? While its macro outlook has improved, the rigbuilding sector is on a structural downturn, in our view. The restructuring of Brazilian customer continues to be an overhang and deferment and cancellation risks remain prevalent in the current climate. Both Singapore rigbuilders have been rationalising their operations since early 2015 to cope with the lower activity level. A merger could make sense to further streamline their operations, achieve cost synergies and eliminate competition. Valuation:

Our target price of S$1.55 is based on 1.3x FY17 P/BV, on the back of mid-single-digit ROE. SMM’s book value was written down after the massive S$609m provisions in FY15. Key Risks to Our View:

Key downside risks are sustained by low oil prices which affect rig count and newbuilding activities, execution risks in protected markets, especially Brazil, and further deferments/cancellations. Upside risk could come from privatisation or M&A activities, as well as write-back of the provisions with successful deliveries or vessel sales. At A Glance Issued Capital (m shrs) 2,089 Mkt. Cap (S$m/US$m) 3,071 / 2,154 Major Shareholders (%) Sembcorp Industries Ltd 61.0 Franklin Resources 5.0




Sembcorp Marine Version 9 | Bloomberg: SMM SP | Reuters: SCMN.SI Refer to important disclosures at the end of this report

27

47

67

87

107

127

147

167

187

207

1.1

1.6

2.1

2.6

3.1

3.6

4.1

4.6

5.1


Relative IndexS$

Sembcorp Marine (LHS) Relative STI (RHS)


Company Guide

Sembcorp Marine


Earnings Drivers:

Oil price rebound and reversal in capex trend. OPEC’s output cut effective 1 January 2017 could bring forward oil equilibrium to 1Q17, drive oil price recovery and increase in capex after 2-3 years of contraction. The injection of cash flow, through oil majors’ capex, into O&G ecosystem is much needed to stimulate the O&G activity. Rig utilisation and day rates. Low oil prices added fuel to fire, aggravating the already challenging rigbuilding market that is suffering from a massive order backlog and keen competition. Utilisation and day rates have fallen by around 40-50% from June 2014 levels. On a positive note, utilisation seems to be bottoming out. We believe a gradual recovery in oil prices and rig market towards 2017 will set the stage for rising newbuild demand thereafter. Orderbook replenishment. Order wins and orderbook trends are often the key drivers of rigbuilders’ share prices and earnings. Based on existing capacity, SMM requires S$4-5bn worth of order replenishments every year. We expect new orders to be 20-40% of those levels in the coming two years amid sector headwinds, a harbinger of declining orderbook and earnings ahead. SMM’s orderbook stood at S$8.4bn as at September 2016, of which c.38% comes from the drillship projects with Sete Brasil. While this translates into a book-to-bill ratio of over 2x based on existing delivery schedule, it is vulnerable to deferments and cancellations. Asset deflation. Post-Global Financial Crisis, newbuild prices for drilling rigs tumbled 20-30% from 2008-2010. The 5-15% price gain over the past few years could all be given back, if not worse. In this downturn, China is playing a bigger role in the global rig market, garnering one-third of the global orderbook. Over 90% of these contracts are built on speculation, without back-to-back charters and on 5:95 balloon payment terms, making it vulnerable to cancellations. We expect fire sales to suppress rig prices as shipyards would be desperate to recoup their construction costs if ship owners walk away. Pace of rigbuilding recovery is dependent on oil price rebound, retirement of old fleets, and cancellations at Chinese yards. Oil price rebounding above US$60/bbl will stimulate E&P activities and thus rig demand, while rig attribution and cancellations will soothe the supply pressure and eventually bring the sector back to equilibrium.

Sales Trend

Asset Trend

Profitability Trend

Margin Trends (%)

Source: Company, DBS Vickers

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

0

1,000

2,000

3,000

4,000

5,000

2013A 2014A 2015A 2016F 2017F

S$ m

Total Revenue Revenue Growth (%) (YoY)

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

2013A 2014A 2015A 2016F 2017F

S$ m

Net Fixed Assets (Tangible) Total Current Assets

(378)

(178)

22

222

422

622

2013A 2014A 2015A 2016F 2017F

S$ m

Operating EBIT Pre tax Profit Net Profit

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

2013A 2014A 2015A 2016F 2017F

EBITDA Margin % EBIT Margin % Net Income Margin %


Company Guide

Sembcorp Marine

Balance Sheet:

Net gearing reduced to 1.0x as at end-September 2016, from 1.1x a quarter ago, following receipts of S$909m from deliveries of Noble Lloyd Noble jackup rig and fixed platform projects. Gearing level should decline further with the delivery of newbuild vessels. In addition, the completion of the new yard in 2016 will reduce yard capex to a more normalised level of S$400m this year, S$200m next year and S$100m thereafter. Share Price Drivers:

Recovery in oil prices. Rising oil prices typically lift sentiment on rigbuilders. We believe SMM would benefit if oil prices recover to at least the US$60/bbl level, which would trigger more offshore oil & gas capex spending. Order win momentum. Shipyards are orderbook-driven. Strong order flows could push up their share prices, as investors reward greater visibility on revenues and earnings. Restructuring of Sete Brasil. The successful restructuring of Brazil will allow Sete Brasil to obtain financing for its rigbuilding programme. This will eliminate an overhang on the rigbuilders. Key Risks:

Sustained low oil price. Brent crude oil prices of below US$60/bbl would defer investments into deepwater projects, and higher-cost oilfield projects. This could dampen newbuild demand for drilling rigs, especially floaters. Rig supply glut and competition. A slower order flow is expected, as the market takes time to absorb about 160 rigs scheduled for delivery in the next two years, representing c.20% of its existing fleet. Competition has intensified with the low order backlog of Korean yards and emergence of Chinese shipyards in the offshore space. Company Background

Sembcorp Marine (SMM) is a pure play in the offshore & marine sector. Its principal activities are rig building and offshore engineering, ship conversion, ship repair and shipbuilding of specialised vessels.


Capital Expenditure

ROE (%)

PB Band (x)


0.3

0.4

0.5

0.6

0.7

0.8

0.9

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

2013A 2014A 2015A 2016F 2017F


0.0

100.0

200.0

300.0

400.0

500.0

600.0

700.0

800.0

900.0

1,000.0

2013A 2014A 2015A 2016F 2017F


S$m

0.0%

5.0%

10.0%

15.0%

20.0%

2013A 2014A 2015A 2016F 2017F

Avg: 2.5x

+1sd: 3.43x

+2sd: 4.36x

‐1sd: 1.57x

‐2sd: 0.65x0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5


(x)


Company Guide

Sembcorp Marine

Key Assumptions

FY Dec 2013A 2014A 2015A 2016F 2017F New order wins (S$ m) 4,193 4,192 3,128 1,000 1,500

Segmental Breakdown

FY Dec 2013A 2014A 2015A 2016F 2017F Revenues (S$m) Rigs & Floaters 3,564 4,207 3,319 2,018 1,249 Offshore Platforms 1,204 925 1,017 753 988 Repairs & Upgrades 681 622 557 482 557 Specialised Shipbuilding 0.0 0.0 0.0 0.0 0.0 Others 76.9 78.6 75.8 80.0 80.0 Total 5,526 5,833 4,968 3,332 2,874

Income Statement (S$m)

FY Dec 2013A 2014A 2015A 2016F 2017F Revenue 5,526 5,833 4,968 3,332 2,874 Cost of Goods Sold (4,818) (4,989) (4,837) (2,998) (2,537) Gross Profit 708 844 131 334 336 Other Opng (Exp)/Inc (78.3) (137) (281) (130) (101) Operating Profit 630 707 (150) 204 236 Other Non Opg (Exp)/Inc 1.96 1.19 (18.2) (5.0) 4.50 Associates & JV Inc 15.6 9.86 (174) (26.1) (0.1) Net Interest (Exp)/Inc 0.13 (11.3) (36.0) (80.3) (85.0) Exceptional Gain/(Loss) 17.8 0.10 0.0 0.0 0.0 Pre-tax Profit 665 707 (378) 92.9 155 Tax (76.7) (106) 77.6 (16.7) (27.9) Minority Interest (32.5) (41.2) 10.3 (2.7) (4.5) Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit 556 560 (290) 73.5 123 Net Profit before Except. 538 560 (290) 73.5 123 EBITDA 744 829 (216) 334 417 Growth Revenue Gth (%) 24.7 5.6 (14.8) (32.9) (13.8) EBITDA Gth (%) 6.0 11.4 nm nm 24.8 Opg Profit Gth (%) 13.6 12.3 nm nm 15.3 Net Profit Gth (Pre-ex) (%) 7.5 4.1 nm nm 66.8 Margins & Ratio Gross Margins (%) 12.8 14.5 2.6 10.0 11.7 Opg Profit Margin (%) 11.4 12.1 (3.0) 6.1 8.2 Net Profit Margin (%) 10.1 9.6 (5.8) 2.2 4.3 ROAE (%) 21.7 19.9 (10.6) 3.0 4.9 ROA (%) 8.5 7.2 (3.3) 0.9 1.5 ROCE (%) 15.9 13.2 (2.6) 2.7 3.0 Div Payout Ratio (%) 48.9 48.5 N/A 56.0 34.0 Net Interest Cover (x) NM 62.9 (4.2) 2.5 2.8



Company Guide

Sembcorp Marine


FY Dec 3Q2015 4Q2015 1Q2016 2Q2016 3Q2016 Revenue 1,130 1,327 918 908 888 Cost of Goods Sold (1,039) (1,655) (838) (802) (817) Gross Profit 90.8 (328) 80.6 106 71.0 Other Oper. (Exp)/Inc (16.0) (182) (8.9) (52.9) (38.0) Operating Profit 74.8 (510) 71.7 53.6 32.9 Other Non Opg (Exp)/Inc (17.1) (1.7) 9.50 (8.4) (3.9) Associates & JV Inc (24.4) (150) 2.61 (4.7) (27.7) Net Interest (Exp)/Inc (10.6) (9.4) (15.6) (21.2) (19.6) Exceptional Gain/(Loss) 0.0 (0.2) 0.0 0.0 0.0 Pre-tax Profit 22.6 (671) 68.3 19.2 (18.3) Tax 8.95 118 (12.7) (8.5) (3.5) Minority Interest 0.60 16.7 (0.8) 0.72 0.02 Net Profit 32.1 (537) 54.8 11.5 (21.8) Net profit bef Except. 32.1 (537) 54.8 11.5 (21.8) EBITDA 65.1 (624) 119 76.1 36.8 Growth Revenue Gth (%) (6.4) 17.4 (30.8) (1.1) (2.3) EBITDA Gth (%) (63.0) nm nm (35.8) (51.7) Opg Profit Gth (%) (49.1) nm nm (25.3) (38.5) Net Profit Gth (Pre-ex) (%) (70.6) nm nm (79.1) nm Margins Gross Margins (%) 8.0 (24.7) 8.8 11.7 8.0 Opg Profit Margins (%) 6.6 (38.4) 7.8 5.9 3.7 Net Profit Margins (%) 2.8 (40.5) 6.0 1.3 (2.5)

Balance Sheet (S$m)

FY Dec 2013A 2014A 2015A 2016F 2017F Net Fixed Assets 2,394 3,009 3,541 3,780 3,803 Invts in Associates & JVs 446 470 312 286 286 Other LT Assets 189 192 231 231 231 Cash & ST Invts 1,695 1,093 690 993 1,242 Inventory 2,084 3,005 3,833 2,380 2,053 Debtors 442 469 590 417 359 Other Current Assets 0.20 0.20 3.89 3.89 3.89 Total Assets 7,250 8,238 9,201 8,091 7,978 ST Debt 166 434 915 915 915 Creditor 1,781 1,826 2,519 1,333 1,149 Other Current Liab 1,583 1,189 463 339 323 LT Debt 600 1,308 2,465 2,715 2,715 Other LT Liabilities 310 350 175 175 175 Shareholder’s Equity 2,677 2,965 2,511 2,459 2,541 Minority Interests 132 167 153 156 160 Total Cap. & Liab. 7,250 8,238 9,201 8,091 7,978 Non-Cash Wkg. Capital (838) 459 1,445 1,129 943 Net Cash/(Debt) 929 (648) (2,690) (2,637) (2,388) Debtors Turn (avg days) 30.1 28.5 38.9 55.1 49.3 Creditors Turn (avg days) 134.1 134.9 168.3 247.7 191.9 Inventory Turn (avg days) 147.5 190.4 264.9 399.6 342.7 Asset Turnover (x) 0.8 0.8 0.6 0.4 0.4 Current Ratio (x) 1.2 1.3 1.3 1.5 1.5 Quick Ratio (x) 0.6 0.5 0.3 0.5 0.7 Net Debt/Equity (X) CASH 0.2 1.0 1.0 0.9 Net Debt/Equity ex MI (X) CASH 0.2 1.1 1.1 0.9 Capex to Debt (%) 104.0 42.4 27.6 11.0 5.5 Z-Score (X) 2.0 1.9 1.1 1.3 1.3



Company Guide

Sembcorp Marine


FY Dec 2013A 2014A 2015A 2016F 2017F Pre-Tax Profit 665 707 (378) 92.9 155 Dep. & Amort. 101 115 132 161 177 Tax Paid (53.6) (82.8) (104) (46.6) (16.7) Assoc. & JV Inc/(loss) (15.6) (9.9) 174 26.1 0.05 Chg in Wkg.Cap. 243 (1,267) (291) 345 175 Other Operating CF (1.8) 29.5 (521) 0.0 0.0 Net Operating CF 937 (508) (989) 578 490 Capital Exp.(net) (797) (738) (932) (400) (200) Other Invts.(net) 0.0 (26.5) 0.0 0.0 0.0 Invts in Assoc. & JV (0.3) 0.0 0.0 0.0 0.0 Div from Assoc & JV 1.18 0.0 0.0 0.0 0.0 Other Investing CF (1.5) (5.4) 0.0 0.0 0.0 Net Investing CF (798) (770) (932) (400) (200) Div Paid (283) (285) (265) (125) (41.2) Chg in Gross Debt 438 964 1,744 250 0.0 Capital Issues (19.8) (10.8) (11.3) 0.0 0.0 Other Financing CF 0.0 1.99 2.02 0.0 0.0 Net Financing CF 135 670 1,469 125 (41.2) Currency Adjustments 11.2 (7.2) 4.71 0.0 0.0 Chg in Cash 286 (616) (447) 303 249 Opg CFPS (S cts) 33.2 36.3 (33.4) 11.1 15.1 Free CFPS (S cts) 6.71 (59.7) (92.0) 8.54 13.9



Source: DBS Bank

Analyst: Pei Hwa HO

S.No.Date of Report

Closing Price

12-mth Target Price

Rat ing

1: 02 Dec 15 1.97 1.85 FULLY VALUED









10: 02 Mar 16 1.58 1.24 FULLY VALUED

11: 11 Mar 16 1.73 1.24 FULLY VALUED12: 15 Mar 16 1.68 1.24 FULLY VALUED13: 20 Apr 16 1.85 1.24 FULLY VALUED14: 28 Apr 16 1.69 1.24 FULLY VALUED

Note : Share price and Target price are adjusted for corporate actions. 15: 03 May 16 1.64 1.24 FULLY VALUED16: 29 Jul 16 1.41 1.20 FULLY VALUED17: 24 Aug 16 1.34 1.20 FULLY VALUED18: 26 Oct 16 1.28 1.15 FULLY VALUED19: 31 Oct 16 1.30 1.15 FULLY VALUED20: 01 Dec 16 1.47 1.55 HOLD

1

2

3

4

5

6

7

89

1011

121314

15

16

17

18

19

20

1.16

1.36

1.56

1.76

1.96

2.16


S$

ASIAN INSIGHTS VICKERS SECURITIES ed: JS / sa:YM, PY

BUY Last Traded Price ( 9 Nov 2016): S$0.805 (STI : 2,789.88) Price Target 12-mth: S$0.95 (18% upside) (Prev S$1.00) Potential Catalyst: New orders Where we differ: Our revenue and marign assumptions are more conservative Analyst Pei Hwa HO +65 6682 3714 [email protected]

What’s New 3Q16 core profits in line, but bottomline dragged

by impairments Secured orders worth US$65m for three units of

1.9k TEU small containership; minimal financial impact from termination of six vessels

Trimmed FY16-17F earnings by 2-8% adjusting for exceptionals and lower order wins

Maintain BUY for its wide economic moat, undemanding valuation and decent yield; TP adjusted to S$0.95

Price Relative

Forecasts and Valuation FY Dec (RMB m) 2014A 2015A 2016F 2017F Revenue 15,354 16,014 13,780 13,156 EBITDA 4,336 3,506 3,447 3,080 Pre-tax Profit 3,953 3,185 2,615 2,609 Net Profit 3,479 2,460 1,707 1,850 Net Pft (Pre Ex.) 3,479 1,903 1,804 1,692 Net Pft Gth (Pre-ex) (%) 12.4 (45.3) (5.2) (6.2) EPS (S cts) 18.7 13.2 9.15 9.92 EPS Pre Ex. (S cts) 18.7 10.2 9.68 9.08 EPS Gth Pre Ex (%) 12 (45) (5) (6) Diluted EPS (S cts) 17.2 12.1 9.15 9.92 Net DPS (S cts) 5.65 4.16 3.95 3.95 BV Per Share (S cts) 110 117 122 128 PE (X) 4.3 6.1 8.8 8.2 PE Pre Ex. (X) 4.3 7.9 8.4 8.9 P/Cash Flow (X) 1.7 4.0 4.3 12.2 EV/EBITDA (X) 2.7 3.3 2.5 2.6 Net Div Yield (%) 7.0 5.1 4.9 4.9 P/Book Value (X) 0.7 0.7 0.7 0.6 Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) 18.2 11.6 7.7 7.9 Earnings Rev (%): (8) 6 Consensus EPS (S cts): 10.1 9.9 Other Broker Recs: B: 6 S: 5 H: 2


Value emerging Steep discount to book unwaranted. While the operating environment for shipbuilding remains challenging, Yangzijiang Shipbuilding (Yangzijiang) is well-positioned to emerge stronger from this downturn with its wide economic moat. Its net cash of 54 Scts per share (includes Held-to-Maturity investments), representing 43% of NTA, bodes well for M&A opportunities. Valuation is undemanding at 0.6x P/B, which represents a 33% discount to the Global Financial Crisis trough of 0.9x P/B. Our SOP-based TP of S$0.95 translates to 0.8x P/B, against 7.5% ROE and 4-5% yield. Reiterate BUY.

Riding out industry cycles with solid management and healthy order backlog. As the largest and most cost-efficient private shipbuilder in China, Yangzijiang is among the few Chinese yards that have crossed into the high-end vessel space to compete against Korean rivals, and is well positioned to benefit from the post-consolidation upturn of the shipbuilding market, alongside a shipping recovery. It has emerged stronger in the past few cycles with Executive Chairman, Mr Ren Yuanlin at the helm. Mr Ren, ranked 82 in Lloyd's List's Top 100 most influential people in shipping, is highly respected for his great foresight, strategic sense, and cost and cash management. Its healthy order backlog of US$4.4bn as at end Sept-2016 with high revenue coverage of c. 2x vis-à-vis global peers does not just provide earnings visibility but is also a testament to Yangzijiang’s market leadership.

Revenue recognition slows down. Net earnings in 3Q16 slid 32% q-o-q to Rm281m, below our expectation of Rmb500m due to Rmb531m impairment loss on its shipping fleet and higher provisions of Rmb219m (vs Rmb53m in 2Q16) for HTM assets.. This brings 9M16 earnings to Rmb1,145m, making up c.62% of our FY16 estimate. We trimmed FY16-17F earnings by 2-8% after imputing the impairments and lowering FY16 order wins to US$650m, partially mitigated by the preferential tax rate for New Yangzi yard. There is potential upside to earnings from a partial writeback of provisions of Rmb369m in the event of the successful delivery of its only jack-up rig order and grant of preferential tax rate of 15% on high-tech status for Xinfu yards, vs the usual 25%.

Valuation: We value Yangzijiang based on sum-of-parts (SOP) methodology to better reflect the valuations of the various segments. We arrive at a target price of S$0.95, after applying 8x FY16F price earnings (PE) on shipbuilding earnings, 1.0x price-to-book value (P/B) for bulk carriers, 1x P/B for investments, and a 25% discount to the net present value (NPV) for its property project. Key Risks to Our View: USD depreciation and hike in steel cost. Revenue is denominated mainly in USD, and only half is naturally hedged. If the net exposure is unhedged, every 1% USD depreciation could lead to a 2% decline in earnings. Every 1% rise in steel costs, which accounts for about 20% of COGS, could result in a 1.1% drop in earnings.



Yangzijiang Shipbuilding Version 5 | Bloomberg: YZJSGD SP | Reuters: YAZG.SI Refer to important disclosures at the end of this report


Company Guide

Yangzijiang Shipbuilding

WHAT’S NEW

Hit by impairments

Results review

3Q16 core profit in line but dragged by impairments. Yangzijiang’s headline net profit dropped 32% q-o-q to Rm281m in 3Q16, falling short of our expectation of Rmb500m due to Rmb531m impairment loss on its shipping fleet and higher provision of Rmb219m (vs Rmb53m in 2Q16) for HTM assets. This was partially mitigated by the recognition of forfeited deposits from terminated contracts in 2010 that amounted to Rmb439m. This brings 9M16 net profit to Rmb1,145m, making up c.62% of our FY16 estimate.

Shipbuilding margin remains decent at 22%. We estimate that core shipbuilding gross margin held up at c.22% (excluding reversal of warranty provisions), slightly better than 21% in 2Q16. This was supported by reversal of warranty provision and appreciation of USD against Rmb. The warranty provision has been reduced from 2% of sales in 2012-2015 to 1% of sales from 2016 onwards, which could mitigate the margin decline of new projects by 3ppts.

Solid balance sheet. Including HTM investments, Yangzijiang is in net cash, equivalent to 54 Scts per share or 43% of its NTA. This bodes well for M&A activities.

Orderbook

Deliveries. Yangzijiang delivered 8 vessels in the quarter, bringing 9M16 deliveries to 30 units.

Secured orders for three 1.9k TEU containerships. Yangzijang has won contracts to build three units of 1.9k TEU containership totalling c.US$65m in 3Q16, lifting year-to-date (YTD) wins to US$650m. This has lagged behind our order win assumption of US$1.5bn. As we are approaching year end, we assume that any new orders signed by end of the year will be announced in 2017.

Termination of six more vessels. In addition to the 11 vessels terminated in 1H16, Yangzijiang saw cancellations of another six vessels in 3Q16. Construction for three of the six units had yet to commence while the other three units were at various construction stages. Under normal circumstances, Yangzijiang will forfeit the deposit received from customers – 30% for the half-built units and 5% for the remaining three (customer was not able to fork out the second 5% payment due). Note that Yangzijiang has found buyers for most terminated units under construction, except the three units cancelled in 3Q16, and is actively looking for buyers for these units.

Orderbook declined from US$4.7bn to US$4.4bn, still implying revenue coverage of more than 2-years. Yangzijiang is ranked No.1 in China and No.4 in the world based on outstanding order book.

Key takeaways from briefing

Shipping fleet marked down by c.40%. Yangzijiang has further impaired the book value of its shipping fleet consists of 10 units 92k dwt and three units of 64k dwt bulkers. Post mark-down, the fleet now has an average carrying value of US$13.8m per vessel (from US$17m prior to this exercise and US$22m before the first impairment made in 4Q15). With the lower fixed cost, the shipping business is expected to be profitable going forward.

Potential preferential tax rate. Yangzijiang has been granted the high-tech status for its New Yangzi yard in 4Q16. This would reduce the corporate tax rate from the usual 25% to 15% (est. impact of around Rmb150m) with effect from 2016. The Xinfu yard could potentially obtain the approval in early 2017, which could bring about an additional Rmb50m tax savings based on our back-of-envelope calculation.

Stable dividend yield. Management reiterates their informal dividend policy to reward shareholders with stable dividends with dividend yields of 4-5% based on a dividend payout ratio of 40-50% on moderated earnings. Based on our earnings forecasts, this could translate to 3.5 – 4.5 Scts dividend. We have assumed 4Scts DPS for each of the coming two years, which implies attractive 5% yield.

Recommendation

Trim forecasts by 2-8%. We have lowered FY16/17 forecasts by 8%/2% after imputing the impairments and lower order win of US$650m this year, partially mitigated by recognition of forfeited deposits and tax savings for high-tech status granted to New Yangzi yard.

Reiterate BUY with lowered SOTP-based TP of S$0.95 translates to 0.8x P/B. We continue to like Yangzijiang’s decent dividend yield of over 4-5% and ROE of 7.5%. Valuation remains undemanding at 0.6x P/B with net cash of 54 Scts per share or 43% of NTA.


Company Guide




Revenue 4,136 2,994 3,880 (6.2) 29.6

Cost of Goods Sold (3,159) (2,309) (3,011) (4.7) 30.4

Gross Profit 977 684 869 (11.0) 27.1

Other Oper. (Exp)/Inc (387) (19.6) (93.8) (75.7) 377.9

Operating Profit 590 665 776 31.5 16.7


Associates & JV Inc 3.75 (2.8) (95.8) nm (3,326.4)

Net Interest (Exp)/Inc (182) (75.1) (32.9) 81.9 56.2

Exceptional Gain/(Loss) 557 0.0 (97.6) nm nm

Pre-tax Profit 968 587 549 (43.3) (6.4)

Tax (278) (151) (236) (15.0) 56.1

Minority Interest (10.1) (20.2) (32.2) (219.2) 59.1

Net Profit 681 415 281 (58.7) (32.3)

Net profit bef Except. 124 415 379 206.3 (8.8)

EBITDA 719 789 820 14.0 3.9

Margins (%)






Company Guide



Earnings Drivers: Healthy order backlog offers revenue visibility. Orderbook stood at US$4.4bn as at end-Sept 2016, implying a healthy book-to-bill ratio of c.2x and providing revenue visibility for the next two years. Yangzijiang is now ranked no.1 in China and no.4 in the world, by orderbook. The group has secured orders of US$650m YTD, substantially lower than the US$2.2bn worth of new orders in 2015 and its target of US$2.0-2.5bn, the desirable levels for orderbook replenishment and optimisation of operational activities. This is largely attributable to the sluggish newbuild market, which saw global new contracts plunged 60-70% y-o-y. We now assume order win of US$650m for 2016 and US$1.5bn for 2017. Recognition of deferred income cushions downturn. Post financial crisis, Yangzijiang has adopted more prudent provision and accounting policies. For instance, it extended the warranty provision (2% of sales in 2012-2015; 1% from 2016 onwards) from one year to three. The reversal of the warranty provision will be captured under COGS and bolster margins. We also expect the recognition of the remaining Rmb158m exceptional gain for the old yard’s relocation fee in FY16-17 (in the form of government subsidy, Rmb557m out of total of Rmb715m has been recognised in FY15). Near-term upside potential: Write-back of impairment for jack-up rig and grant of preferential tax rate. Yangzijiang could write back up to Rmb369m upon successful delivery of the only jack-up rig on its orderbook which has been marked down from the initial contract value of US$170m to US$110m in 4Q15. Yangzijiang has been granted the high-tech status for its New Yangzi yard in 4Q16. This would reduce the corporate tax rate from the typical 25% to 15% (est. impact of around Rmb150m) with effective from 2016. The Xinfu yard could potentially obtain the approval in early 2017, which could bring about an additional Rmb50m tax savings based on our back-of-envelope calculation. Exploring M&A opportunities for long-term growth. The Chinese shipbuilding industry has shrunk from over 3,000 yards to less than 100 currently. Further consolidation is underway, probably ending with 20-30 survivors, and Yangzijiang will surely make the list. Yangzijiang’s acquisition of a 2.8% stake in Shenzhen-listed system supplier Beijing Highlander Digital Co. Ltd (“Highlander”) could in the longer run, pave the way for Yangzijiang to enter the military vessel space. Production efficiency and cost control. Yangzijiang enjoys 5- to 10-ppt higher margins vis-à-vis peers. This is achievable through its premium newbuild prices and better payment terms among Chinese yards, as well as production efficiency and cost control. Shipping recovery. While the worst for the shipping market is probably behind us with relatively more balanced supply/demand dynamics, the recovery path is bumpy. The overcapacity issue is yet to be fully resolved and this will weigh on freight rates for dry bulk and containerships. In fact, the Baltic Dry Index (BDI) made a historic low at <300 points in early 2016. A better shipping market is required to drive shipbuilding orders.

Order wins (US$ m)

Steel cost (RMB/t)

RMB / USD



Company Guide


Balance Sheet:

Sound balance sheet. Including held-to-maturity (“HTM”) investments, Yangzijiang is in net cash, equivalent to 54 Scts per share or 43% of its NTA. It is expected to churn positive free cash flow in the light of its minimal capex requirement, more Share Price Drivers:

Contract wins is traditionally the leading indicator of shipbuilders’ share price performance and earnings. In particular, Yangzijiang is gaining a good foothold in the “high specs” vessel space, which has long been occupied by its Korean peers. Key Risks:

Prolonged industry downturn. The shipping market of bulk carriers and containerships remains challenging in view of the influx of new capacity and slower-than-expected demand growth amid China's economic slowdown. The prolonged downturn could affect Yangzijiang's order wins and share price. USD depreciation and hike in steel cost. Revenue is denominated mainly in USD, and only half is naturally hedged. Assuming the net exposure is unhedged, every 1% USD depreciation could lead to a 2% earnings decline. Every 1% rise in steel costs, which account for about 20% of COGS, could result in a 1.1% drop in bottom line. Company Background

Yangzijiang is one of the largest, most efficient and most profitable shipbuilders in China. It has moved up the value chain to produce mega containerships and very large bulk carriers, as well as LNG vessels.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)



Company Guide


Key Assumptions

FY Dec 2013A 2014A 2015A 2016F 2017F Order wins (US$ m) 2,900 1,808 2,209 650 1,500 Steel cost (RMB/t) 4,042 4,163 2,914 3,206 3,687 RMB / USD 6.20 6.10 6.10 6.10 6.10

Segmental Breakdown

FY Dec 2013A 2014A 2015A 2016F 2017F Revenues (RMBm) Shipbuilding 12,832 11,590 12,209 9,148 9,274 Investment 1,507 1,688 1,326 1,036 874 Others 0.0 2,076 2,480 3,596 3,008 Total 14,339 15,354 16,014 13,780 13,156 Gross profit (RMBm)

Shipbuilding 3,753 2,469 2,375 1,607 1,453 Investment 1,247 1,584 1,253 984 830 Others (237) 91.2 91.5 547 344 Total 4,762 4,144 3,719 3,138 2,627 Gross profit Margins (%)

Shipbuilding 29.2 21.3 19.5 17.6 15.7 Investment 82.7 93.9 94.5 95.0 95.0 Others N/A 4.4 3.7 15.2 11.4 Total 33.2 27.0 23.2 22.8 20.0

Income Statement (RMBm)

FY Dec 2013A 2014A 2015A 2016F 2017F Revenue 14,339 15,354 16,014 13,780 13,156 Cost of Goods Sold (9,577) (11,210) (12,295) (10,642) (10,529) Gross Profit 4,762 4,144 3,719 3,138 2,627 Other Opng (Exp)/Inc (48.7) (238) (757) (107) (77.2) Operating Profit 4,713 3,906 2,963 3,031 2,550 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 0.0 0.0 0.0 (116) 0.0 Net Interest (Exp)/Inc (93.6) 47.1 (335) (203) (98.3) Exceptional Gain/(Loss) 0.0 0.0 557 (97.6) 158 Pre-tax Profit 4,620 3,953 3,185 2,615 2,609 Tax (1,542) (472) (731) (682) (584) Minority Interest 18.5 (2.1) 5.36 (226) (175) Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit 3,096 3,479 2,460 1,707 1,850 Net Profit before Except. 3,096 3,479 1,903 1,804 1,692 EBITDA 4,998 4,336 3,506 3,447 3,080 Growth Revenue Gth (%) (3.1) 7.1 4.3 (14.0) (4.5) EBITDA Gth (%) 2.9 (13.3) (19.1) (1.7) (10.6) Opg Profit Gth (%) 2.3 (17.1) (24.1) 2.3 (15.9) Net Profit Gth (Pre-ex) (%) (13.5) 12.4 (45.3) (5.2) (6.2) Margins & Ratio Gross Margins (%) 33.2 27.0 23.2 22.8 20.0 Opg Profit Margin (%) 32.9 25.4 18.5 22.0 19.4 Net Profit Margin (%) 21.6 22.7 15.4 12.4 14.1 ROAE (%) 18.6 18.2 11.6 7.7 7.9 ROA (%) 8.1 8.3 6.0 4.2 4.6 ROCE (%) 10.9 10.8 7.2 6.9 5.9 Div Payout Ratio (%) 29.7 30.3 31.5 43.1 39.8 Net Interest Cover (x) 50.3 NM 8.8 14.9 25.9



Company Guide



FY Dec 3Q2015 4Q2015 1Q2016 2Q2016 3Q2016 Revenue 4,136 3,125 2,707 2,994 3,880 Cost of Goods Sold (3,159) (2,196) (2,059) (2,309) (3,011) Gross Profit 977 930 648 684 869 Other Oper. (Exp)/Inc (387) (838) 71.5 (19.6) (93.8) Operating Profit 590 91.1 720 665 776 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 3.75 (3.9) (67.2) (2.8) (95.8) Net Interest (Exp)/Inc (182) (140) (24.7) (75.1) (32.9) Exceptional Gain/(Loss) 557 0.0 0.0 0.0 (97.6) Pre-tax Profit 968 (52.9) 628 587 549 Tax (278) 61.4 (169) (151) (236) Minority Interest (10.1) 33.0 (11.6) (20.2) (32.2) Net Profit 681 41.5 448 415 281 Net profit bef Except. 124 41.5 448 415 379 EBITDA 719 279 781 789 820 Growth Revenue Gth (%) (27.6) (24.4) (13.4) 10.6 29.6 EBITDA Gth (%) (51.0) (61.1) 179.4 1.1 3.9 Opg Profit Gth (%) (56.3) (84.5) 690.2 (7.7) 16.7 Net Profit Gth (Pre-ex) (%) (88.0) (66.5) 980.7 (7.3) (8.8) Margins Gross Margins (%) 23.6 29.7 24.0 22.9 22.4 Opg Profit Margins (%) 14.3 2.9 26.6 22.2 20.0 Net Profit Margins (%) 16.5 1.3 16.5 13.9 7.2

Balance Sheet (RMBm)

FY Dec 2013A 2014A 2015A 2016F 2017F Net Fixed Assets 5,793 6,117 6,402 6,171 5,940 Invts in Associates & JVs 605 809 1,423 1,307 1,307 Other LT Assets 8,725 8,090 7,614 6,860 6,219 Cash & ST Invts 17,816 12,046 12,241 14,320 15,517 Inventory 1,463 2,015 1,613 2,138 2,041 Debtors 2,682 6,721 6,197 2,297 1,879 Other Current Assets 6,127 4,980 5,756 6,528 7,454 Total Assets 43,211 40,778 41,246 39,620 40,358 ST Debt 12,241 5,414 2,209 2,319 2,435 Creditor 3,418 5,723 5,042 3,445 2,631 Other Current Liab 6,783 4,227 3,689 3,607 3,510 LT Debt 1,133 2,636 6,074 4,859 5,102 Other LT Liabilities 1,363 1,702 1,874 1,874 1,874 Shareholder’s Equity 17,801 20,473 21,799 22,730 23,844 Minority Interests 472 603 560 786 961 Total Cap. & Liab. 43,211 40,778 41,246 39,620 40,358 Non-Cash Wkg. Capital 71.2 3,767 4,835 3,910 5,233 Net Cash/(Debt) 4,443 3,995 3,959 7,142 7,980 Debtors Turn (avg days) 42.2 111.8 147.2 112.5 57.9 Creditors Turn (avg days) 109.0 154.8 167.2 153.2 110.9 Inventory Turn (avg days) 48.1 58.9 56.3 67.7 76.3 Asset Turnover (x) 0.4 0.4 0.4 0.3 0.3 Current Ratio (x) 1.3 1.7 2.4 2.7 3.1 Quick Ratio (x) 0.9 1.2 1.7 1.8 2.0 Net Debt/Equity (X) CASH CASH CASH CASH CASH Net Debt/Equity ex MI (X) CASH CASH CASH CASH CASH Capex to Debt (%) 7.5 9.0 2.4 4.2 4.0 Z-Score (X) 1.6 1.9 2.0 2.2 2.2



Company Guide


Cash Flow Statement (RMBm)

FY Dec 2013A 2014A 2015A 2016F 2017F Pre-Tax Profit 4,620 3,953 3,185 2,615 2,609 Dep. & Amort. 285 430 543 531 531 Tax Paid (1,001) (492) (606) (763) (682) Assoc. & JV Inc/(loss) 0.0 0.0 0.0 116 0.0 Chg in Wkg.Cap. (7,639) 5,331 260 1,006 (1,226) Other Operating CF 66.6 (140) 353 0.0 0.0 Net Operating CF (3,669) 9,082 3,735 3,505 1,233 Capital Exp.(net) (1,000) (729) (196) (300) (300) Other Invts.(net) 0.0 0.0 0.0 0.0 0.0 Invts in Assoc. & JV 0.0 (94.4) (554) 0.0 0.0 Div from Assoc & JV 20.8 30.8 0.0 0.0 0.0 Other Investing CF (137) (572) 813 1,537 1,307 Net Investing CF (1,116) (1,364) 63.3 1,237 1,007 Div Paid (938) (960) (958) (776) (736) Chg in Gross Debt 5,206 (5,523) 516 (1,104) 359 Capital Issues 91.1 0.0 0.0 0.0 0.0 Other Financing CF (224) (18.6) (16.4) 0.0 0.0 Net Financing CF 4,134 (6,502) (458) (1,880) (377) Currency Adjustments 0.0 0.0 0.0 0.0 0.0 Chg in Cash (650) 1,216 3,340 2,862 1,863 Opg CFPS (S cts) 21.3 20.1 18.6 13.4 13.2 Free CFPS (S cts) (25.0) 44.8 19.0 17.2 5.00



Source: DBS Bank

Analyst: Pei Hwa HO

ASIAN INSIGHTS VICKERS SECURITIES sa: BC, PY

Bumi Armada (BAB MK) : BUY

Mkt. Cap: US$1,111m I 3m Avg. Daily Val: US$4.7m

Last Traded Price : RM0.77

Price Target 12-mth: RM0.85 (11% upside)

Analyst

TAN Jianyuan +60 326043913; [email protected]

2Q16 in line: Recognized RM575m impairment

2Q16 recorded core profit of RM49m – in line with

our expectations

Expect weaker 2H16 as FPSO conversion activities

reach tail end stage

Maintain BUY with unchanged TP of RM0.85

Source of all data on this page: Company, AllianceDBS, Bloomberg Finance L.P.

BUY with unchanged TP of RM0.85

Following our upgrade of Bumi Armada (BAB) on 1 June

2016, share price has since appreciated 18%, hitting

intraday high of RM0.84 on 16 August. We remain

convinced of BAB’s long term business outlook, particularly

its FPSO segment which will see three of new FPSOs coming

on stream by next year. We maintain our BUY call with

unchanged TP of RM0.85 based on SOP valuation which still

implies 11% upside.

Our earnings forecast were spot on with 2Q16 numbers

BAB reported 2Q16 revenue and core net profit of

RM402.9m and RM49.0m (after adjusting for RM574.5m

impairment and RM7.3m unrealised forex gain), which

achieved 50% and 55.6% of our full year forecasts

respectively. We deemed our results to be in line as we

expect 2H16 earnings to be weaker as the conversion of

three FPSOs are reaching its tail end.

Results expected to be lower y-o-y

1H16 revenue was 19.2% lower at RM833.6m mainly due

to lower contributions from FPSO Claire, Perdana and

Perkasa, lower conversion work from Kraken and lower OSV

vessels utilisation. Core net profit fell a mere 3.6% to

RM92.6m partly cushioned by higher joint venture profit

(from RM17.3m to RM91.1m) from Armada Sterling and

Sterling II.

Lower revenue q-o-q: lower FPSO, higher OMS contribution

2Q16 revenue dip 6.5% q-o-q to RM402.9m mainly

dragged down by weaker FPSO segment as revenue fell

28.1% due to lower contribution from FPSO Claire, Perkasa

and lower Olombendo conversion activities, but offset by

higher offshore marine services (OMS) segment which saw

DBS Group Research . Equity

29 Aug 2016

Malaysia

Flash Note Refer to important disclosures at the end of this report

Bumi Armada

Forecasts and Valuation FY Dec (RMm) 2015A 2016F 2017F 2018F

Revenue 2,180 1,680 2,680 2,745 EBITDA 1,119 1,015 1,347 1,372 Pre-tax Profit (171) 216 483 517 Net Profit (235) 166 367 394 Net Pft (Pre Ex.) 327 166 367 394 Net Pft Gth (Pre-ex) (%) 25.8 (49.0) 120.6 7.2 EPS (sen) (4.0) 2.84 6.26 6.71 EPS Pre Ex. (sen) 5.57 2.84 6.26 6.71 EPS Gth Pre Ex (%) 26 (49) 121 7 Diluted EPS (sen) (4.0) 2.84 6.26 6.71 Net DPS (sen) 1.63 0.71 1.56 1.68 BV Per Share (sen) 124 126 131 136 PE (X) nm 27.0 12.2 11.4 PE Pre Ex. (X) 13.7 27.0 12.2 11.4 P/Cash Flow (X) 8.4 4.8 3.2 5.2 EV/EBITDA (X) 9.9 11.2 7.7 7.3 Net Div Yield (%) 2.1 0.9 2.0 2.2 P/Book Value (X) 0.6 0.6 0.6 0.6 Net Debt/Equity (X) 0.9 0.9 0.8 0.7 ROAE (%) (3.4) 2.3 4.9 5.0

https://www.dbs.com.sg/private-banking/aics/EquityArticle.page?dcrPath=templatedata/article/equity/data/en/DBSV/012014/BAB_MK.xml


Page 2

Flash Note

revenue increased 15.4% on the back of higher LukOil

project contribution and OSV vessel utilisation. Overall OSV

utilisation rate improved from 45% in 1Q16 to 55% in

2Q16.

Expanding gearing level

Gearing level continue to expand from 1x in 1Q16 to 1.24x

mainly due to loans drawdown for FPSO Olombendo and

Kraken. We are particularly concern with its borrowing level

– net debt level increased RM1.1bn q-o-q.

Earnings forecast unchanged

BAB is on track to meeting our full year expectations. As

such, we maintain our earnings forecast unchanged at this

juncture.

Valuation and recommendation

While long term outlook remains promising, earnings

contribution for the next 2-3 quarters will moderate as 3

FPSOs reach tail end of its conversion activities. Nonetheless,

this is a mere short ‘’transitional’’ period before an upswing

in its earnings and cash flow from 2017 onwards which we

will see earnings doubling driven by the 3 additional FPSOs

coming online. We continue to like BAB for its long term

recurring income business model from FPSO business.

Maintain BUY call with RM0.85 TP based on SOP valuation.

Key takeaway from result briefing

1. BAB will continue to focus on the deliveries of its three

FPSOs. It remains active in pursuing business

opportunities from all regions.

2. 2Q16 saw RM574.5m impairment – RM570.1m is

relating to its recently terminated FPSO Claire, with the

remaining RM4.4m for its Armada Hawk.

3. Projects from Armada Perdana and Perkasa remains

manageable – clients continue to pay only its operation

cash cost hence no earnings contribution from both

FPSOs. We could potentially see upside in revenue

contribution from this.

4. Armada Claire stopped revenue contribution starting

2Q16.

5. 2Q16 orderbook stands at RM24.5bn as compared to

RM24.2bn in 1Q16. FPSO segment makes up 89% of

its orderbook. Current extension orderbook size at

RM12.6bn.

6. Number of stacked vessels in 2Q16 remains unchanged

from 1Q16 at 13 vessels.

Quarterly / Interim Income Statement (RMm)


Revenue 459 431 403 (12.2) (6.5)

Cost of Goods Sold (362) (350) (359) (0.7) 2.5

Gross Profit 97.5 80.8 44.0 (54.9) (45.6)

Other Oper. (Exp)/Inc 12.2 (22.7) (34.9) (384.8) 53.8

Operating Profit 110 58.1 9.09 (91.7) (84.3)

Other Non Opg (Exp)/Inc 423 20.1 567 34.1 2,717.0

Associates & JV Inc 16.2 38.1 53.0 227.3 39.2

Net Interest (Exp)/Inc (400) (40.2) (588) (46.8) (1,361.1)

Exceptional Gain/(Loss) (423) (20.1) (567) (34.1) (2,717.0)

Pre-tax Profit (274) 55.9 (525) (91.2) nm

Tax (24.6) (34.8) 9.45 (138.4) (127.2)

Minority Interest 7.40 2.27 (2.1) (128.7) (193.8)

Net Profit (292) 23.4 (518) (77.8) nm

Net profit bef Except. 132 43.6 49.1 (62.7) 12.6

EBITDA 693 116 631 (8.8) 442.9

Margins (%)



Net Profit Margins (63.5) 5.4 (128.7)

Source of all data: Company, AllianceDBS


Page 3

Flash Note


Source: AllianceDBS

Analyst: TAN Jianyuan

ASIAN INSIGHTS VICKERS SECURITIES ed: JS / sa:CS, PY

BUYLast Traded Price ( 28 Oct 2016): Bt30.75 (SET : 1,494.44) Price Target 12-mth: Bt39.00 (27% upside)

Potential Catalyst: Improving gross refining margin Where we differ: We are more optimistic on gross refining margin

Analyst Chaipat THANAWATTANO +66 2657 7827 [email protected]

What’s New 3Q16E performance to weaken q-o-q

Crude run is a sub-optimal level

Higher crude run should affect refining margins

2016F net profit revised down by 15%

Price Relative

Forecasts and Valuation FY Dec (Bt m) 2015A 2016F 2017F 2018F Revenue 151,140 123,569 141,687 151,961 EBITDA 11,542 12,655 13,863 14,474 Pre-tax Profit 4,770 6,476 8,069 8,671 Net Profit 4,151 5,340 6,177 6,630 Net Pft (Pre Ex.) 4,600 5,340 6,177 6,630 Net Pft Gth (Pre-ex) (%) 671.7 16.1 15.7 7.3 EPS (Bt) 3.01 3.88 4.49 4.81 EPS Pre Ex. (Bt) 3.34 3.88 4.49 4.81 EPS Gth Pre Ex (%) 672 16 16 7 Diluted EPS (Bt) 3.01 3.88 4.49 4.81 Net DPS (Bt) 2.00 1.60 1.80 2.00 BV Per Share (Bt) 25.8 27.8 30.6 33.5 PE (X) 10.2 7.9 6.9 6.4 PE Pre Ex. (X) 9.2 7.9 6.9 6.4 P/Cash Flow (X) 3.5 2.8 4.4 3.9 EV/EBITDA (X) 5.6 4.3 3.7 3.1 Net Div Yield (%) 6.5 5.2 5.9 6.5 P/Book Value (X) 1.2 1.1 1.0 0.9 Net Debt/Equity (X) 0.6 0.3 0.2 0.0 ROAE (%) 12.1 14.5 15.4 15.0

Earnings Rev (%): (15) (9) (5) Consensus EPS (Bt): 3.62 4.03 4.25 Other Broker Recs: B: 8 S: 2 H: 6 Source of all data on this page: Company, DBS Vickers, Bloomberg Finance L.P

3Q16E earnings could be soft q-o-q Underperformance was overdone. Bangchak Petroleum Pcl (BCP)’s share price has underperformed the market and its peers year-to-date, down 7% compared with 16% rise in the SET Index and 31% for the Energy sector. We believe this reflects market’s concern over BCP’s E&P business which continues to drag the overall earnings of the company. Trading at attractive valuations and offering dividend yields of 5-6% during 2016-18F, we maintain our BUY call with 12-month TP at Bt39/share.

2016F earnings revised down. We believe BCP’s gross refining margin (GRM) to date may be lower than previously expected. This reflects the company’s oil refining plan to maximise output to offset production loss in 1Q16 but this led to lower refining margins on higher cost from an increase in imported crude oil. Hence, we have revised down our forecast for 2016F by 15% to reflect weaker than expected GRM.

BCP’s earnings could be driven by better GRM. Although we expect BCP’s market GRM to ease to more sustainable levels of US$6-7/bbl for 2016-18F, its earnings outlook could continue to improve, driven by a gradually increase in GRM. Also, its oil marketing and solar power businesses would continue to generate stable cash flows. These two segments are the key factors that should reduce BCP’s earnings volatility in the longer term.

Valuation:

BCP’s valuation is undemanding at 6.9x 2017 PE, compared with 10x average for regional peers. We also expect the company to maintain its dividend yield of 5-6% for 2016-18F. Our TP of Bt39 comprises Bt28 for the oil-related businesses and Bt11 for the solar business.


Volatile oil price is the key risk Refiners’ earnings are volatile because of inventory gains/losses following changes in crude oil prices each quarter. BCP mitigates this volatility by hedging and has a good track record. BCP has a policy of hedging up to 30% of its output.

At A Glance Issued Capital (m shrs) 1,377 Mkt. Cap (Btm/US$m) 42,340 / 1,208 Major Shareholders (%) Vayupak Fund 1 15.6 Social Security Office 14.3

Ministry of Finance 10.0 Free Float (%) 62.7 3m Avg. Daily Val (US$m) 6.9 ICB Industry : Oil & Gas / Oil & Gas Producers

DBS Group Research . Equity 30 Oct 2016

Thailand Company Guide

Bangchak Petroleum Pcl Version 4 | Bloomberg: BCP TB | Reuters: BCP.BK Refer to important disclosures at the end of this report


Company Guide

Bangchak Petroleum Pcl

WHAT’S NEW

3Q16E performance could be weak

Earnings to weaken in 3Q16E: We expect BCP’s 3Q16E profit to weaken q-o-q to Bt1.2bn given an absence of huge inventory gains. But, net profit is expected to surge 181% y-o-y given a huge inventory loss in 3Q15. We estimate core profit will fall on both y-o-y and q-o-q basis due to lower gross refining margin (GRM) as a result of higher crude cost. We believe this reflects the higher crude run at its refinery which required more imported crude oil to be used, whereby its price is linked to Brent crude oil price. Other possible reasons behind the lower profit would be weaker performance of oil marketing business and a potential loss of bio-fuel business due to inventory loss.

Utilisation was boosted in 3Q16E: Management guided that BCP has attempted to boost its crude run to 115kbd (thousand barrels/day) or 96% utilisation rate to make up for the production loss in 1Q16. To date, we estimate BCP’s average crude run at 97kbd in 9M16, in line with its full-year target crude run of 97-98kbd, compared with 113kbd in 2015.

Base GRM could soften from higher crude run than optimum: We expect the company’s market GRM to weaken from US$6.27/bbl in 2Q16 to US$6.1/bbl in 3Q16E and US$7.9/bbl in 3Q15. The lower GRM reflects its high utilisation rate which required more imported crude, whereby its price is linked to Brent crude oil. We expect its oil refining business to also book a small inventory loss of c.Bt250m, compared with the huge gain of Bt905m in 2Q16.

Marketing margin could weaken to normalised levels: We expect marketing margin to normalise at Bt0.72/liter in 3Q16E, down from Bt0.87/liter in 2Q16 due to seasonal effect and higher supply in the market after domestic refineries resumed operations from the maintenance shutdown in 2Q16. Nonetheless, this should remain in line with BCP’s full-year target of Bt0.76/liter. We also expect the average sales volume to fall 5% q-o-q to 461m liters/month, mainly from industrial customers while retail segment should be stable q-o-q.

Flat contribution from other businesses q-o-q expected: With more capacity of solar power business (mainly from Japan), we expect higher EBITDA contribution from the segment. This would be offset by lower profit from bio-diesel business. As a result, earnings of other businesses could be flat q-o-q. Its E&P business would continue to contribute losses to the

company due to high unit cost of c.US$50/bbl compared with the current oil price of US$45/bbl.

4Q16F earnings outlook: We expect the industry’s GRM to recover in 4Q16F on higher demand for middle distillate products during winter season. There is more upside from an increase of oil price, where inventory gains could also drive earnings. With normal operations at its refinery plus an absence of huge inventor loss, we expect earnings to improve for 4Q16F. We expect the company to maintain high crude run at 110kbd for the remaining of the year to achieve its target crude run for the year of 96kbd or even exceed this.

9M16E may be weaker than expectations. The cumulative profit for 9M16E may only account for 61% of our previous full-year net profit estimate, which is below our expectation. Hence, we have revised down our forecast for 2016F by 15% to reflect the weaker than expected gross refining margin.

BCP: 3Q16E earnings preview

(Bt m) 3Q15 2Q16 3Q16E YoY% QoQ% Sales 35,203 37,262 33,642 -4.4% -9.7% EBITDA 2,157 4,180 2,569 19.1% -38.6% Core profit 2,061 2,123 1,447 -29.8% -31.8% Net profit 432 2,646 1,214 181.0% -54.1% EPS (Bt/share) 0.31 1.92 0.88 181.0% -54.1% Crude run (kbd) 116.7 111.7 115.0 -1.5% 3.0% Base GRM (US$/bbl) 7.90 6.27 6.10 -22.8% -2.7% Acct. GRM (US$/bbl) 4.07 8.79 5.42 33.2% -38.3% Marketing margin (Bt/lt) 0.70 0.93 0.72 2.9% -22.6% EBITDA - solar (Bt mn) 692 525 578 -16.5% 10.0%


BCP: Base GRM vs. Singapore GRM


8.10

5.68

4.72

4.93

6.41

4.89

6.94

8.45

10.1

9

10.4

1

7.90

7.98

5.35

6.27

6.10

0

2

4

6

8

10

12

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

3Q14

4Q14

1Q15

2Q15

3Q15

4Q15

1Q16

2Q16

3Q16

E

Base GRM Singapore GRMUS$/bbl


Company Guide



Earnings Drivers:

Crude run to be ramped up in 4Q16-2017. BCP’s crude run in 2015 was at a record, at 113kbd (94% utilisation rate) compared to its average of 87kbd (73% utilisation) in the past five years. The higher crude run was driven by the new crude distillate unit (CDU), which was installed in 2014 to replace the one damaged by fire in 2012. The new CDU increases BCP’s crude distillation capacity by 20kbd to 140kbd. BCP has optimised crude run to capture favourable GRM in 2015 but its crude run would decline to 100kbd in 2016F due to planned maintenance shutdowns in 1Q16.

GRM should normalise in 2016-17 after its peak in 2015. GRM is the critical factor for BCP’s earnings from oil refining business. We expect its abnormally high GRM in 2015 to ease to more sustainable level at US$6-7/bbl in 2016-18F. There would be upside from inventory gain in 2016 from higher crude oil prices in 4Q16. Nonetheless, we expect GRM to be somewhat affected by the capacity additions in the region, especially for middle distillate products.

Oil marketing business will continue to benefit from low oil prices. BCP’s marketing margins should be sustainable at Bt0.7/litre, after registering a strong Bt0.76/litre in 2015, following the sharp decline in oil prices as well as energy price deregulation and restructuring in Thailand. The outlook for BCP’s marketing business is solid, given its strong foothold in the retail oil market (with the second largest market share after PTT). Stable earnings from the marketing business will be able to offset volatile profits from the oil refining segment.

More solar capacity to be added into portfolio. The capacity of BCP’s solar farms will continue to increase after the company acquired SunEdison Japan with incremental capacity of 198MW. Only 13MW is in operation currently, with 27MW more under construction and coming onstream during 2016-18. We assume only 13MW additional capacity in our earnings forecast. Management is keen on expanding the total capacity of the renewable power business to 500MW by 2020, including solar farms and a geothermal power plant in Indonesia.

EBITDA contribution from solar business will gradually increase from new capacity in Japan. We estimate EBITDA contribution from the solar business will be steady at Bt3bn p.a. for the next three years. This will account for 21% of 2016-17F group EBITDA. The EBITDA contribution from the solar power business will gradually increase when new capacity of the business in Japan comes online in 2016.

Crude run (kbd)

Base GRM (US$/bbl)

Marketing margin (Bt/litre)

Total capacity - Solar (MW) YE

EBITDA contribution - Solar (Bt, mn)



Company Guide


Balance Sheet:

Improving financials. BCP’s financial position is expected to improve gradually, as its D/E ratio drops from 0.9x to 0.6x by 2017, driven by steady profit growth – thanks to stable earnings from the marketing and solar power businesses. Asset turnover could dip in 2016, following a 46-day planned maintenance shutdown to further improve refinery efficiency under its 3E (Efficiency, Energy and Environment) improvement programme. The programme will be implemented over the next three years up to 2018, when its refinery is upgraded to one of the most complex in Thailand.


Attractive valuation and yield. BCP is trading at less than 7x PE based on forecast earnings for the next three years, compared with >10x for regional peers. And the stock offers good dividend yields of >6% over the same period. This could attract investors who are looking for beneficiaries of rising oil demand in the domestic market. BCP’s profit will be less volatile than that of oil refineries which do not have retail outlets. The stable cash flow from its solar business could also cushion the impact of volatile oil prices.

Recurring income from alternative energy business. BCP plans to consolidate its stakes in alternative energy businesses under new subsidiary, BCPG. Management plans to list this subsidiary on the stock exchange by 4Q16 to unlock the value of BCP’s power business, which is overlooked by the market.

Key Risks:

Earnings exposed to crude oil volatility. Refiners’ earnings are volatile due to inventory gains/losses, following changes in crude oil prices each quarter. BCP mitigates the volatility by hedging and has a good track record, booking hedging gains over the past seven quarters. The company has a policy of hedging up to 30% of its output. Another risk is impairment charge of its E&P business if oil price continues its downward trend.

Company Background

BCP operates a 120-kbd oil refinery located in Bangkok. Its refined oil products are distributed via petrol stations under its retail marketing segment. BCP also invests in alternative energy, mainly solar and bio fuel.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)



Company Guide


Key Assumptions

FY Dec 2014A 2015A 2016F 2017F 2018F

Crude run (kbd) 86.5 113 100 105 105 Base GRM (US$/bbl) 6.96 9.05 6.21 6.78 6.92 Marketing margin (Bt/litre) 0.71 0.76 0.70 0.70 0.70 Total capacity - Solar 118 118 131 131 131 EBITDA contribution - Solar 2,572 3,005 3,147 3,552 3,896

Income Statement (Btm)

FY Dec 2014A 2015A 2016F 2017F 2018F

Revenue 183,016 151,140 123,569 141,687 151,961 Cost of Goods Sold (178,473) (139,686) (111,856) (128,686) (138,013) Gross Profit 4,543 11,454 11,713 13,001 13,948 Other Opng (Exp)/Inc (4,480) (5,175) (4,448) (4,676) (5,167) Operating Profit 63.1 6,279 7,265 8,325 8,781 Other Non Opg (Exp)/Inc 1,197 543 532 586 678 Associates & JV Inc 5.15 12.4 12.7 12.9 13.2 Net Interest (Exp)/Inc (1,427) (1,615) (1,333) (855) (801) Exceptional Gain/(Loss) 99.8 (449) 0.0 0.0 0.0 Pre-tax Profit (61.5) 4,770 6,476 8,069 8,671 Tax 691 (673) (940) (1,171) (1,259) Minority Interest 66.9 53.4 (197) (721) (782) Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit 696 4,151 5,340 6,177 6,630 Net Profit before Except. 596 4,600 5,340 6,177 6,630 EBITDA 4,579 11,542 12,655 13,863 14,474 Growth

Revenue Gth (%) (1.9) (17.4) (18.2) 14.7 7.3 EBITDA Gth (%) (52.2) 152.1 9.6 9.5 4.4Opg Profit Gth (%) (98.7) 9,854.4 15.7 14.6 5.5 Net Profit Gth (Pre-ex) (%) (87.1) 671.7 16.1 15.7 7.3 Margins & Ratio

Gross Margins (%) 2.5 7.6 9.5 9.2 9.2Opg Profit Margin (%) 0.0 4.2 5.9 5.9 5.8Net Profit Margin (%) 0.4 2.7 4.3 4.4 4.4ROAE (%) 2.0 12.1 14.5 15.4 15.0ROA (%) 0.9 5.2 6.4 7.0 7.1ROCE (%) (1.3) 4.3 5.5 7.0 7.3Div Payout Ratio (%) 197.9 66.3 41.3 40.1 41.5Net Interest Cover (x) 0.0 3.9 5.4 9.7 11.0



Company Guide


Quarterly / Interim Income Statement (Btm)

FY Dec 2Q2015 3Q2015 4Q2015 1Q2016 2Q2016

Revenue 41,357 35,203 35,136 30,276 37,262 Cost of Goods Sold (36,390) (33,118) (33,097) (29,327) (32,986) Gross Profit 4,967 2,085 2,039 949 4,276 Other Oper. (Exp)/Inc (1,314) (1,133) (1,672) (1,212) (1,433) Operating Profit 3,653 952 367 (264) 2,843Other Non Opg (Exp)/Inc 139 201 98.8 126 111 Associates & JV Inc (1.0) (1.8) 3.71 12.6 (5.8)Net Interest (Exp)/Inc (401) (391) (412) (373) (327)Exceptional Gain/(Loss) 12.8 (332) (266) 305 252Pre-tax Profit 3,403 429 (208) (193) 2,874Tax (594) (5.6) 17.2 167 (459)Minority Interest (14.9) 8.72 78.6 72.0 2.50Net Profit 2,794 432 (112) 46.6 2,417 Net profit bef Except. 2,781 764 154 (259) 2,165 EBITDA 5,024 2,356 1,689 973 3,967

Growth

Revenue Gth (%) 4.8 (14.9) (0.2) (13.8) 23.1 EBITDA Gth (%) 103.1 (53.1) (28.3) (42.3) 307.5 Opg Profit Gth (%) 179.5 (73.9) (61.4) nm nm Net Profit Gth (Pre-ex) (%) 208.5 (72.5) (79.9) nm nm Margins

Gross Margins (%) 12.0 5.9 5.8 3.1 11.5Opg Profit Margins (%) 8.8 2.7 1.0 (0.9) 7.6Net Profit Margins (%) 6.8 1.2 (0.3) 0.2 6.5

Balance Sheet (Btm) FY Dec 2014A 2015A 2016F 2017F 2018F

Net Fixed Assets 38,136 40,044 38,626 36,951 34,167 Invts in Associates & JVs 762 774 783 792 801 Other LT Assets 5,773 7,324 7,338 7,352 7,366 Cash & ST Invts 8,577 12,390 20,776 24,568 30,364 Inventory 14,059 13,945 11,393 13,224 14,237 Debtors 5,835 5,234 5,078 5,823 6,245 Other Current Assets 3,824 2,230 2,235 2,239 2,244 Total Assets 76,966 81,942 86,229 90,950 95,424

ST Debt 1,312 1,026 1,026 1,000 1,000 Creditor 5,774 4,994 7,329 8,476 9,110 Other Current Liab 4,223 4,468 4,468 4,468 4,468 LT Debt 28,886 32,632 31,606 30,606 29,606 Other LT Liabilities 2,804 2,838 2,841 2,844 2,847 Shareholder’s Equity 33,309 35,481 38,259 42,137 46,191 Minority Interests 657 502 699 1,420 2,202 Total Cap. & Liab. 76,966 81,942 86,229 90,950 95,424

Non-Cash Wkg. Capital 13,720 11,947 6,908 8,342 9,147 Net Cash/(Debt) (21,621) (21,268) (11,856) (7,038) (241) Debtors Turn (avg days) 14.5 13.4 15.2 14.0 14.5 Creditors Turn (avg days) 18.0 14.6 21.0 23.3 24.1 Inventory Turn (avg days) 32.5 37.9 43.2 36.3 37.7 Asset Turnover (x) 2.4 1.9 1.5 1.6 1.6 Current Ratio (x) 2.9 3.2 3.1 3.3 3.6 Quick Ratio (x) 1.3 1.7 2.0 2.2 2.5 Net Debt/Equity (X) 0.6 0.6 0.3 0.2 0.0 Net Debt/Equity ex MI (X) 0.6 0.6 0.3 0.2 0.0 Capex to Debt (%) 24.3 13.8 10.5 10.3 7.2 Z-Score (X) 3.7 3.4 3.0 3.2 3.4



Company Guide


Cash Flow Statement (Btm)

FY Dec 2014A 2015A 2016F 2017F 2018F

Pre-Tax Profit (61.5) 4,770 6,476 8,069 8,671 Dep. & Amort. 3,313 4,708 4,846 4,939 5,002 Tax Paid 691 (673) (940) (1,171) (1,259)Assoc. & JV Inc/(loss) (5.2) (12.4) (12.7) (12.9) (13.2) Chg in Wkg.Cap. 157 1,773 5,039 (1,434) (805) Other Operating CF 2,027 1,586 (195) (719) (780)Net Operating CF 6,121 12,153 15,213 9,670 10,816 Capital Exp.(net) (7,350) (4,645) (3,428) (3,264) (2,218) Other Invts.(net) 0.0 0.0 0.0 0.0 0.0Invts in Assoc. & JV (5.2) (12.4) (8.9) (9.0) (9.2) Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0Other Investing CF (2,687) (6,686) 0.0 0.0 0.0Net Investing CF (10,042) (11,343) (3,437) (3,273) (2,227) Div Paid (1,946) (2,039) (2,561) (2,299) (2,575) Chg in Gross Debt 9,369 3,460 (1,026) (1,026) (1,000) Capital Issues 0.0 0.0 0.0 0.0 0.0Other Financing CF (2,075) (2,313) 197 721 782Net Financing CF 5,348 (893) (3,391) (2,605) (2,793) Currency Adjustments 0.0 0.0 0.0 0.0 0.0Chg in Cash 1,427 (82.4) 8,385 3,792 5,796 Opg CFPS (Bt) 4.33 7.54 7.39 8.06 8.44Free CFPS (Bt) (0.9) 5.45 8.56 4.65 6.24



Source: DBS Vickers

Analyst: Chaipat THANAWATTANO

Anti-corruption Progress Indicator DeclaredCertified

Corporate Governance CG Rating 2015

THAI-CAC is Companies participating in Thailand's Private Sector Collective Action Coalition Against Corruption programme (Thai CAC) under Thai Institute of Directors (as of August 29, 2016) are categorised into:

Score Description Declared Companies that have declared their intention to join CAC

Certified Companies certified by CAC.

Corporate Governance CG Rating is based on Thai Institute of Directors (IOD)’s annual assessment of corporate governance practices of listed companies. The assessment covers 235 criteria in five categories including board responsibilities (35% weighting), disclosure and transparency (20%), role of stakeholders (20%), equitable treatment of shareholders (10%) and rights of shareholders (15%). The IOD then assigns numbers of logos to each company based on their scoring as follows:

Score Range Number of Logo Description 90-100 Excellent

80-89 Very Good

70-79 Good

60-69 Satisfactory

50-59 Pass <50 No logo given N/A


ed: JS / sa:CS, PY

BUYLast Traded Price ( 11 Nov 2016): Bt335 (SET : 1,494.53)

Price Target 12-mth: Bt370 (10% upside)

Potential Catalyst: Oil price recovery

Where we differ: In line


What’s New 3Q16 profit was better than expected

Gas and coal segments were the key drivers

4Q16F profit should continue to surge y-o-y

Revised up earnings for 2016F slightly

Price Relative

Forecasts and Valuation FY Dec (Bt m) 2015A 2016F 2017F 2018F

Revenue 2,011,701 1,730,453 1,936,704 2,165,343 EBITDA 303,280 297,788 296,313 308,171 Pre-tax Profit 55,574 142,152 137,706 151,328 Net Profit 19,936 90,977 92,470 100,330 Net Pft (Pre Ex.) 100,084 86,477 92,470 100,330 Net Pft Gth (Pre-ex) (%) 17.5 (13.6) 6.9 8.5 EPS (Bt) 6.98 31.9 32.4 35.1 EPS Pre Ex. (Bt) 35.0 30.3 32.4 35.1 EPS Gth Pre Ex (%) 18 (14) 7 9 Diluted EPS (Bt) 6.98 31.9 32.4 35.1 Net DPS (Bt) 10.0 13.0 13.0 15.0 BV Per Share (Bt) 244 267 286 307 PE (X) 48.0 10.5 10.3 9.5 PE Pre Ex. (X) 9.6 11.1 10.3 9.5 P/Cash Flow (X) 3.2 4.5 4.1 4.0 EV/EBITDA (X) 5.4 5.3 5.2 4.9 Net Div Yield (%) 3.0 3.9 3.9 4.5 P/Book Value (X) 1.4 1.3 1.2 1.1 Net Debt/Equity (X) 0.3 0.2 0.1 0.1 ROAE (%) 2.9 12.5 11.7 11.8

Earnings Rev (%): 3 0 0 Consensus EPS (Bt): 29.9 32.7 34.6 Other Broker Recs: B: 17 S: 2 H: 6

Source of all data on this page: Company, DBS Vickers, Bloomberg Finance L.P

Earnings optimism to continue

BUY maintained on positive earnings outlook

We maintain our positive view on PTT’s earnings outlook

following the strong profit in 3Q16. Although its solid share

price performance has reflected market optimism over its

positive outlook, we believe the market has reason to remain

optimistic. This would be driven by the deregulation of fuel

prices in domestic market which could also reduce PTT’s burden

in subsidising energy costs for the public. We reaffirm our BUY

rating with TP of Bt370.

3Q16 profit remained strong

PTT’s 3Q16 continued to display strong performances y-o-y and

q-o-q and reaffirmed the advantage of integration for its

profitability in the longer term. We still expect the company to

deliver strong earnings growth y-o-y in 4Q16F due to low base

in 4Q15. Nonetheless, volatile oil prices are a potential downside

risk to earnings.

Business integration remains key competitive strength

PTT’s core profit when oil prices were low in 2015-1H16 attests

to the success of the company’s integrated business model. This

will remain its key competitive strength in the longer term. Its

strategy to diversify the business towards the retail segment

could also reduce its reliance on commoditised businesses in the

longer term, in our view.

Valuation: We value PTT based on sum-of-parts (SOP) valuation. We have

applied the discounted cash flow (DCF) method to value the

core gas business, and our target prices for the exploration and

production (E&P) subsidiary (PTT Exploration & Production) and

the refinery and petrochemical associates.


Volatile oil price is a key risk for PTT’s future earnings, especially

for the E&P subsidiary. PTT’s earnings would also be exposed to

potential inventory gains/losses at its oil refining and

petrochemical associates if there are large swings in oil prices.

Downside risks from lower oil prices should be limited, in our

view.

At A Glance

Issued Capital (m shrs) 2,856

Mkt. Cap (Btm/US$m) 956,860 / 27,030

Major Shareholders (%)

Ministry of Finance 51.1

Vayupak Fund 14.9

Thai NVDR 5.8

Free Float (%) 30.9

3m Avg. Daily Val (US$m) 60.8

ICB Industry : Oil & Gas / Oil & Gas Producers


14 Nov 2016


PTT Version 5 | Bloomberg: PTT TB | Reuters: PTT.BK Refer to important disclosures at the end of this report

58

78

98

118

138

158

178

198

218

178.2

228.2

278.2

328.2

378.2

428.2


Relative IndexBt

PTT (LHS) Relative SET (RHS)


Company Guide

PTT

WHAT’S NEW

Gas and coal segments supported 3Q16 profit

3Q16 earnings was better than expected. PTT reported net

profit of Bt27bn in 3Q16, up 8% q-o-q and turning around

from net loss in 3Q15 when most of its associated companies

reported huge inventory losses. The performance was

stronger than expected due to higher FX gain and profit

contribution from associates. What supported earnings

performance in 3Q16 were natural gas business (transmission

and gas processing), oil marketing and coal businesses. The

cumulative profit for 9M16 accounted for 85% of our full-

year forecast.

Better performance of gas business. Earnings performance of

its gas business remained strong, boosted by its gas

processing business via six gas separation plants (GSP). Sales

volume from the GSPs increased by 8% y-o-y and 17% q-o-q

after planned maintenance shutdown in 2Q16. Further, the

key offtaker, PTT Global Chemical (PTTGC) could operate its

ethane crackers more smoothly after the unplanned

shutdown in the previous quarter. Nonetheless, PTT’s overall

gas sales volume softened by 3% q-o-q to 4,750 million cubic

feet per day (mmcfd) on seasonal effect due to lower demand

for gas for power plants. Demand for gas in transportation

sector (NGV) also weakened 13% y-o-y and 7% q-o-q as

incentive of price gap with oil price narrowed. PTT’s loss from

the NGV business increased from Bt1.3bn in 2Q16 to Bt1.5bn

in 3Q16 as it booked a non-recurring item in 2Q16 from the

reversal of an asset write down.

Lower profit contribution q-o-q from downstream business.

Earnings performance of petrochemical and oil refining

segment fell by 38% q-o-q to reflect lower inventory gain

from 2Q16, especially for oil refining segment. This was offset

to some extent by an improved performance of its flagship

petrochemical company, PTTGC, whose operations improved

q-o-q after unplanned shutdown in 2Q16. Nonetheless, the

performance of this segment nearly doubled y-o-y given a

huge stock loss in 3Q15.

Higher price was behind stronger coal business in 3Q16. The

performance of PTT’s coal business recovered in 3Q16 with

operating profit increasing by 90% q-o-q and turned around

from a loss in 3Q15. Behind this was the higher average

selling price of coal, which increased by 13% q-o-q to

US$47.2/ton, though this was 11% lower y-o-y. The EBITDA

margin improved from 21% in 2Q16 and 20% in 3Q15 to

28%, the highest since 1Q15. Meanwhile, the sales volume

weakened 8% q-o-q as a result of unfavorable weather

which affected transportation.



Revenue 503,983 420,447 435,172 (13.7) 3.5


Gross Profit 46,006 66,843 60,394 31.3 (9.6)

Other Oper. (Exp)/Inc (27,554) (19,692) (19,875) (27.9) 0.9

Operating Profit 18,452 47,151 40,518 119.6 (14.1)

Other Non Opg (Exp)/Inc 11,757 774 4,815 (59.0) 521.6

Associates & JV Inc 263 839 1,162 341.9 38.5

Net Interest (Exp)/Inc (7,525) (7,245) (7,237) 3.8 0.1

Exceptional Gain/(Loss) (57,815) (248) 2,322 nm nm

Pre-tax Profit (34,868) 41,272 41,580 nm 0.7

Tax (7,849) (6,912) (6,727) (14.3) (2.7)

Minority Interest 16,136 (9,481) (7,879) nm (16.9)

Net Profit (26,581) 24,879 26,974 nm 8.4

Net profit bef Except. 31,233 25,127 24,652 (21.1) (1.9)

EBITDA 65,915 80,696 78,840 19.6 (2.3)

Margins (%)



Net Profit Margins (5.3) 5.9 6.2

Source of all data: Company, DBS Vickers


Company Guide

PTT


Earnings Drivers:

The oil price is the key earnings driver for PTT group, as the

selling prices of most of its products are largely linked to Dubai

crude price. Our earnings forecast is based on Dubai oil price of

US$42/bbl in 2016F, down from US$51/bbl in 2015 before

gradually recovering to US$47/bbl in 2017F and US$52/bbl in

2018F. This reflects our view that the market rebalancing could

be gradual albeit sooner than previously expected.

Gas sales volume is expected to rise by 2% p.a. PTT’s gas sales

volume grew 3% y-o-y in 2015 to 4,807 mmcfd, slightly above

its current pipeline capacity of 4,580 mmcfd. Capacity will

increase to 7,180 mmcfd when the fourth pipeline (onshore)

commences operations at the end of this year. This would be

sufficient to accommodate anticipated gas transmission volume

for up to 20 years, based on demand growth of 2% p.a.

Nonetheless, PTT plans to invest in a fifth pipeline (onshore)

along the east-west corridor to increase flexibility in sourcing

natural gas from Gulf of Thailand and Andaman Sea. The new

pipeline would also accommodate plans to invest in a floating

LNG terminal in the west as gas reserves in the Gulf of Thailand

are depleting.

Smoother gas flow from gas separation plants (GSPs). We

estimate sales volume from the GSPs could recover and expect

4% CAGR during 2016-18F following smoother operations

after an incident in 2013. Nonetheless, with current capacity at

6.7m tons, PTT has plans to debottleneck its gas separation

plants. But a significant increase of capacity is still unlikely

because of uncertainty over gas reserves in the Gulf of Thailand.

More capex cuts ahead if oil prices continue to fall. PTT

maintains its unconsolidated investment budget for 2016-20F at

Bt297bn, focusing mainly on infrastructure investments, i.e. gas

transmission pipeline. Together with PTTEP’s investment plan,

the consolidated capex could reach Bt628bn during the period.

The current capex had been cut from the original plan due to

investment rationalisation to cope with the low oil price.

E&P and gas business are key contributors to EBITDA. More

than 60% of PTT’s EBITDA in 2015 was generated by the gas-

related business, E&P, transmission and gas processing

businesses. Cash profit would have been better if NGV price

had been raised to reflect actual cost at c.13-15/kg, from

<Bt13/kg currently. The company still reported a loss from the

NGV business of Bt11.7bn in 2015, but this was much smaller

than the Bt20bn loss booked in 2014. We believe the

government will continue to take advantage of low oil prices to

rationalise domestic energy prices, including raising NGV price.

This would reduce PTT’s subsidy burden over the long term.

Dubai oil price (US$/bbl)

Gas sales vol. (mmcfd)

GSP sales vol. (kTons)

Equity income (Bt m)

Capex (Bt m)


96.6

51.2

4247

52

0.0

13.9

27.9

41.8

55.7

69.7

83.6

97.5

2014A 2015A 2016F 2017F 2018F

4688 4807 47505040 5130

0.0

1046.5

2093.0

3139.6

4186.1

5232.6

2014A 2015A 2016F 2017F 2018F

6397 6414 63406727

7190

0.00

1466.75

2933.49

4400.24

5866.98

7333.73

2014A 2015A 2016F 2017F 2018F

860

6032 6152 6275 6401

0.0

1293.0

2586.0

3878.9

5171.9

6464.9

2014A 2015A 2016F 2017F 2018F

171407

154870

115112

148043142428

0.0

34624.2

69248.5

103872.7

138496.9

173121.1

2014A 2015A 2016F 2017F 2018F


Company Guide

PTT

Balance Sheet:

PTT has a strong balance sheet with 0.3-0.5x D/E ratio for the

next three years. This should cushion the company from the

adverse impact of lower oil prices in the medium term. This

healthy financial position reflects the company’s conservative

expansion strategy, especially during the current difficult period.

Rising oil prices could turn its asset turnover back up in 2017-

18F after hitting the bottom in 2016F, based on our current oil

price assumptions.


Rebound in oil prices. Higher oil prices would be the key driver

of PTT’s share price in the near term, given the high correlation

(0.9) based on the past six months’ data. Fundamentally, higher

oil prices would be positive for most of its business segments,

mainly E&P and gas processing, as the product selling prices are

partially linked to oil prices. Coupled with profit contribution

from the oil refining and petrochemical associates, we estimate

that every US$1 increase in the oil price would lift PTT’s

earnings by 0.6-0.9% over 2016-18F.

Deregulating domestic energy prices. This would be a boon for

PTT after having to bear the huge burden of regulated LPG and

NGV prices. The government is promoting a market-based

mechanism for domestic energy pricing, which has reduced

PTT’s losses from the NGV business from Bt5bn/quarter to Bt1-

2bn recently. The losses will continue to narrow when the NGV

price is floated to reflect actual cost of c.Bt13-15/kg.

Key Risks:

Oil price volatility. Volatile oil prices remain the key risk for

PTT’s future earnings, especially for the E&P subsidiary. PTT’s

earnings would also be exposed to potential inventory

gains/losses at its oil refining and petrochemical associates if

there are large swings in oil prices.

Change in government’s policy on energy price. PTT booked

Bt11.7bn losses in 2015 for the NGV business because of the

regulated price which was still below its operating cost despite

adjustments. Nonetheless, this has improved significantly in

9M16 with a loss of only Bt4bn. The government has

liberalised the NGV price in 2H16 which would be positive for

PTT’s earnings. As a leading state enterprise in the energy

sector, PTT could remain the government’s arm in regulating

energy prices in the future. This may create downside risk to

PTT’s earnings and share price.

Company Background

PTT is a state-controlled, fully integrated oil and gas company.

The company is c.70%-owned by the government and related

investment agencies. Core operations include E&P and running

a petrochemical complex through its subsidiaries and

associated companies.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


0.7

0.8

0.9

1.0

1.1

1.2

1.3

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

2014A 2015A 2016F 2017F 2018F


0.0

20,000.0

40,000.0

60,000.0

80,000.0

100,000.0

120,000.0

140,000.0

160,000.0

180,000.0

2014A 2015A 2016F 2017F 2018F


Btm

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

2014A 2015A 2016F 2017F 2018F

Avg: 9.9x

+1sd: 10.8x

+2sd: 11.7x

-1sd: 9x

-2sd: 8.1x

5.8

6.8

7.8

8.8

9.8

10.8

11.8

12.8


(x)

Avg: 1.33x

+1sd: 1.5x

+2sd: 1.68x

-1sd: 1.15x

-2sd: 0.98x

0.7

0.9

1.1

1.3

1.5

1.7

1.9


(x)


Company Guide

PTT

Key Assumptions

FY Dec 2014A 2015A 2016F 2017F 2018F

Dubai oil price (US$/bbl) 96.6 51.2 42.0 47.0 52.0

Gas sales vol. (mmcfd) 4,688 4,807 4,750 5,040 5,130

GSP sales vol. (kTons) 6,397 6,414 6,340 6,727 7,190

Equity income (Bt m) 860 6,032 6,152 6,275 6,401

Capex (Bt m) 171,407 154,870 115,112 148,043 142,428


FY Dec 2014A 2015A 2016F 2017F 2018F

Revenue 2,583,484 2,011,701 1,730,453 1,936,704 2,165,343

Cost of Goods Sold (2,374,014) (1,803,585) (1,538,853) (1,728,611) (1,940,774)

Gross Profit 209,469 208,116 191,600 208,093 224,570

Other Opng (Exp)/Inc (85,000) (79,120) (59,287) (64,686) (69,814)

Operating Profit 124,469 128,996 132,314 143,408 154,755

Other Non Opg (Exp)/Inc 34,406 24,491 22,985 8,894 8,583

Associates & JV Inc 860 6,032 6,152 6,275 6,401

Net Interest (Exp)/Inc (27,427) (23,796) (23,799) (20,871) (18,411)

Exceptional Gain/(Loss) (26,475) (80,148) 4,500 0.0 0.0

Pre-tax Profit 105,833 55,574 142,152 137,706 151,328

Tax (38,006) (24,855) (28,430) (28,918) (33,292)

Minority Interest (9,149) (10,783) (22,744) (16,318) (17,705)

Preference Dividend 0.0 0.0 0.0 0.0 0.0

Net Profit 58,678 19,936 90,977 92,470 100,330

Net Profit before Except. 85,153 100,084 86,477 92,470 100,330

EBITDA 295,299 303,280 297,788 296,313 308,171

Growth

Revenue Gth (%) (8.2) (22.1) (14.0) 11.9 11.8

EBITDA Gth (%) 15.5 2.7 (1.8) (0.5) 4.0

Opg Profit Gth (%) (12.2) 3.6 2.6 8.4 7.9

Net Profit Gth (Pre-ex) (%) (8.8) 17.5 (13.6) 6.9 8.5

Margins & Ratio

Gross Margins (%) 8.1 10.3 11.1 10.7 10.4

Opg Profit Margin (%) 4.8 6.4 7.6 7.4 7.1

Net Profit Margin (%) 2.3 1.0 5.3 4.8 4.6

ROAE (%) 8.6 2.9 12.5 11.7 11.8

ROA (%) 2.9 0.9 4.2 4.2 4.5

ROCE (%) 3.5 4.0 3.3 3.7 4.2

Div Payout Ratio (%) 63.3 143.3 40.8 40.2 42.7

Net Interest Cover (x) 4.5 5.4 5.6 6.9 8.4



Company Guide

PTT


FY Dec 3Q2015 4Q2015 1Q2016 2Q2016 3Q2016

Revenue 503,983 471,573 386,940 420,447 435,172

Cost of Goods Sold (457,977) (418,142) (331,758) (353,604) (374,778)

Gross Profit 46,006 53,431 55,182 66,843 60,394

Other Oper. (Exp)/Inc (27,554) (24,920) (18,964) (19,692) (19,875)


Other Non Opg (Exp)/Inc 11,757 8,785 4,000 774 4,815

Associates & JV Inc 263 1,444 865 839 1,162


Exceptional Gain/(Loss) (57,815) (20,985) 2,349 (248) 2,322

Pre-tax Profit (34,868) 10,913 36,196 41,272 41,580

Tax (7,849) (4,566) (3,798) (6,912) (6,727)

Minority Interest 16,136 (6,159) (8,730) (9,481) (7,879)

Net Profit (26,581) 188 23,669 24,879 26,974

Net profit bef Except. 31,233 21,173 21,320 25,127 24,652

EBITDA 65,915 74,236 72,916 80,696 78,840

Growth

Revenue Gth (%) (6.0) (6.4) (17.9) 8.7 3.5

EBITDA Gth (%) (27.4) 12.6 (1.8) 10.7 (2.3)

Opg Profit Gth (%) (60.9) 54.5 27.0 30.2 (14.1)

Net Profit Gth (Pre-ex) (%) 15.5 (32.2) 0.7 17.9 (1.9)

Margins

Gross Margins (%) 9.1 11.3 14.3 15.9 13.9

Opg Profit Margins (%) 3.7 6.0 9.4 11.2 9.3

Net Profit Margins (%) (5.3) 0.0 6.1 5.9 6.2

Balance Sheet (Btm)

FY Dec 2014A 2015A 2016F 2017F 2018F

Net Fixed Assets 1,105,147 1,118,677 1,097,452 1,107,760 1,111,756

Invts in Associates & JVs 89,548 62,020 79,139 103,022 121,529

Other LT Assets 351,519 313,597 294,536 282,608 271,869

Cash & ST Invts 316,757 346,725 363,975 329,971 311,000

Inventory 119,795 84,085 80,693 91,530 103,696

Debtors 220,245 195,484 216,000 241,200 270,000

Other Current Assets 47,341 53,408 45,436 51,386 58,086

Total Assets 2,250,351 2,173,996 2,177,231 2,207,476 2,247,936

ST Debt 60,909 48,966 54,986 54,986 54,986

Creditor 234,443 195,023 183,600 208,800 236,400

Other Current Liab 117,049 71,397 62,997 64,997 67,997

LT Debt 591,694 578,215 509,707 441,199 372,691

Other LT Liabilities 191,562 192,708 196,496 200,472 204,648

Shareholder’s Equity 683,287 697,147 761,846 817,184 878,097

Minority Interests 371,408 390,540 407,599 419,837 433,116

Total Cap. & Liab. 2,250,351 2,173,996 2,177,231 2,207,476 2,247,936

Non-Cash Wkg. Capital 35,889 66,557 95,532 110,318 127,385

Net Cash/(Debt) (335,846) (280,456) (200,719) (166,215) (116,677)

Debtors Turn (avg days) 37.5 37.7 43.4 43.1 43.1

Creditors Turn (avg days) 43.9 47.2 49.3 45.0 45.1

Inventory Turn (avg days) 12.1 22.4 21.4 19.8 19.8

Asset Turnover (x) 1.3 0.9 0.8 0.9 1.0

Current Ratio (x) 1.7 2.2 2.3 2.2 2.1

Quick Ratio (x) 1.3 1.7 1.9 1.7 1.6

Net Debt/Equity (X) 0.3 0.3 0.2 0.1 0.1

Net Debt/Equity ex MI (X) 0.5 0.4 0.3 0.2 0.1

Capex to Debt (%) 26.3 24.7 20.4 29.8 33.3

Z-Score (X) 2.4 2.3 2.3 2.4 2.5



Company Guide

PTT


FY Dec 2014A 2015A 2016F 2017F 2018F

Pre-Tax Profit 105,833 55,574 142,152 137,706 151,328

Dep. & Amort. 135,563 143,761 136,337 137,736 138,432

Tax Paid (49,826) (24,855) (28,430) (28,918) (33,292)

Assoc. & JV Inc/(loss) (860) (6,032) (6,152) (6,275) (6,401)

Chg in Wkg.Cap. (95,141) 13,412 (36,843) (14,787) (17,067)

Other Operating CF 253,564 120,761 6,256 5,861 3,610

Net Operating CF 349,133 302,622 213,319 231,323 236,610

Capital Exp.(net) (171,407) (154,870) (115,112) (148,043) (142,428)

Other Invts.(net) 0.0 0.0 0.0 0.0 0.0

Invts in Assoc. & JV 156,789 27,528 (17,119) (23,882) (18,507)

Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0

Other Investing CF (198,604) (5,701) 0.0 0.0 0.0

Net Investing CF (213,223) (133,043) (132,231) (171,925) (160,935)

Div Paid (68,675) (43,811) (26,278) (37,132) (39,417)

Chg in Gross Debt 243,081 (69,503) (54,618) (68,508) (68,508)

Capital Issues 0.0 0.0 0.0 0.0 0.0

Other Financing CF (233,788) (50,500) 17,058 12,239 13,279

Net Financing CF (59,382) (163,813) (63,838) (93,402) (94,646)

Currency Adjustments 0.0 0.0 0.0 0.0 0.0

Chg in Cash 76,529 5,766 17,249 (34,004) (18,971)

Opg CFPS (Bt) 156 101 87.6 86.2 88.8

Free CFPS (Bt) 62.2 51.7 34.4 29.2 33.0



Source: DBS Vickers


Anti-corruption Progress Indicator Certified



Score Description

Declared Companies that have declared their intention to join CAC


Corporate Governance CG Rating is based on Thai Institute of

Directors (IOD)’s annual assessment of corporate governance practices of listed companies. The assessment covers 235 criteria in five categories including board responsibilities (35% weighting), disclosure and transparency (20%), role of stakeholders (20%), equitable treatment of shareholders (10%) and rights of shareholders (15%). The IOD then assigns numbers of logos to each company based on their scoring as follows:

Score Range Number of Logo Description

90-100 Excellent

80-89 Very Good

70-79 Good

60-69 Satisfactory

50-59 Pass

<50 No logo given N/A

S.No.Date of

Report

Closing

Price

12-mth

Target

Price

Rat ing

1: 13 Nov 15 276.00 350.00 BUY

2: 18 Nov 15 263.00 350.00 BUY

3: 22 Feb 16 258.00 350.00 BUY

4: 28 Feb 16 264.00 350.00 BUY

5: 03 Mar 16 272.00 320.00 BUY

6: 07 Mar 16 286.00 320.00 BUY

7: 20 Apr 16 303.00 320.00 BUY

8: 03 May 16 297.00 320.00 BUY

9: 13 May 16 300.00 320.00 BUY

10: 24 May 16 295.00 320.00 BUY

11: 08 Jul 16 312.00 370.00 BUY

12: 15 Aug 16 344.00 370.00 BUY

13: 05 Sep 16 333.00 370.00 BUY

14: 29 Sep 16 342.00 370.00 BUY

Note : Share price and Target price are adjusted for corporate actions. 15: 02 Nov 16 342.00 370.00 BUY

12

3

4

5

67

8

9

1011

12

13

14

15

188.00

208.00

228.00

248.00

268.00

288.00

308.00

328.00

348.00

368.00


Bt


ed: JS / sa:CS, PY

BUYLast Traded Price ( 11 Nov 2016): Bt335 (SET : 1,494.53)

Price Target 12-mth: Bt370 (10% upside)

Potential Catalyst: Oil price recovery

Where we differ: In line


What’s New 3Q16 profit was better than expected

Gas and coal segments were the key drivers

4Q16F profit should continue to surge y-o-y

Revised up earnings for 2016F slightly

Price Relative

Forecasts and Valuation FY Dec (Bt m) 2015A 2016F 2017F 2018F

Revenue 2,011,701 1,730,453 1,936,704 2,165,343 EBITDA 303,280 297,788 296,313 308,171 Pre-tax Profit 55,574 142,152 137,706 151,328 Net Profit 19,936 90,977 92,470 100,330 Net Pft (Pre Ex.) 100,084 86,477 92,470 100,330 Net Pft Gth (Pre-ex) (%) 17.5 (13.6) 6.9 8.5 EPS (Bt) 6.98 31.9 32.4 35.1 EPS Pre Ex. (Bt) 35.0 30.3 32.4 35.1 EPS Gth Pre Ex (%) 18 (14) 7 9 Diluted EPS (Bt) 6.98 31.9 32.4 35.1 Net DPS (Bt) 10.0 13.0 13.0 15.0 BV Per Share (Bt) 244 267 286 307 PE (X) 48.0 10.5 10.3 9.5 PE Pre Ex. (X) 9.6 11.1 10.3 9.5 P/Cash Flow (X) 3.2 4.5 4.1 4.0 EV/EBITDA (X) 5.4 5.3 5.2 4.9 Net Div Yield (%) 3.0 3.9 3.9 4.5 P/Book Value (X) 1.4 1.3 1.2 1.1 Net Debt/Equity (X) 0.3 0.2 0.1 0.1 ROAE (%) 2.9 12.5 11.7 11.8



Earnings optimism to continue

BUY maintained on positive earnings outlook

We maintain our positive view on PTT’s earnings outlook

following the strong profit in 3Q16. Although its solid share

price performance has reflected market optimism over its

positive outlook, we believe the market has reason to remain

optimistic. This would be driven by the deregulation of fuel

prices in domestic market which could also reduce PTT’s burden

in subsidising energy costs for the public. We reaffirm our BUY

rating with TP of Bt370.

3Q16 profit remained strong

PTT’s 3Q16 continued to display strong performances y-o-y and

q-o-q and reaffirmed the advantage of integration for its

profitability in the longer term. We still expect the company to

deliver strong earnings growth y-o-y in 4Q16F due to low base

in 4Q15. Nonetheless, volatile oil prices are a potential downside

risk to earnings.

Business integration remains key competitive strength

PTT’s core profit when oil prices were low in 2015-1H16 attests

to the success of the company’s integrated business model. This

will remain its key competitive strength in the longer term. Its

strategy to diversify the business towards the retail segment

could also reduce its reliance on commoditised businesses in the

longer term, in our view.

Valuation: We value PTT based on sum-of-parts (SOP) valuation. We have

applied the discounted cash flow (DCF) method to value the

core gas business, and our target prices for the exploration and

production (E&P) subsidiary (PTT Exploration & Production) and

the refinery and petrochemical associates.


Volatile oil price is a key risk for PTT’s future earnings, especially

for the E&P subsidiary. PTT’s earnings would also be exposed to

potential inventory gains/losses at its oil refining and

petrochemical associates if there are large swings in oil prices.

Downside risks from lower oil prices should be limited, in our

view.

At A Glance

Issued Capital (m shrs) 2,856

Mkt. Cap (Btm/US$m) 956,860 / 27,030

Major Shareholders (%)

Ministry of Finance 51.1

Vayupak Fund 14.9

Thai NVDR 5.8

Free Float (%) 30.9

3m Avg. Daily Val (US$m) 60.8

ICB Industry : Oil & Gas / Oil & Gas Producers


14 Nov 2016


PTT Version 5 | Bloomberg: PTT TB | Reuters: PTT.BK Refer to important disclosures at the end of this report

58

78

98

118

138

158

178

198

218

178.2

228.2

278.2

328.2

378.2

428.2


Relative IndexBt

PTT (LHS) Relative SET (RHS)


Company Guide

PTT

WHAT’S NEW

Gas and coal segments supported 3Q16 profit

3Q16 earnings was better than expected. PTT reported net

profit of Bt27bn in 3Q16, up 8% q-o-q and turning around

from net loss in 3Q15 when most of its associated companies

reported huge inventory losses. The performance was

stronger than expected due to higher FX gain and profit

contribution from associates. What supported earnings

performance in 3Q16 were natural gas business (transmission

and gas processing), oil marketing and coal businesses. The

cumulative profit for 9M16 accounted for 85% of our full-

year forecast.

Better performance of gas business. Earnings performance of

its gas business remained strong, boosted by its gas

processing business via six gas separation plants (GSP). Sales

volume from the GSPs increased by 8% y-o-y and 17% q-o-q

after planned maintenance shutdown in 2Q16. Further, the

key offtaker, PTT Global Chemical (PTTGC) could operate its

ethane crackers more smoothly after the unplanned

shutdown in the previous quarter. Nonetheless, PTT’s overall

gas sales volume softened by 3% q-o-q to 4,750 million cubic

feet per day (mmcfd) on seasonal effect due to lower demand

for gas for power plants. Demand for gas in transportation

sector (NGV) also weakened 13% y-o-y and 7% q-o-q as

incentive of price gap with oil price narrowed. PTT’s loss from

the NGV business increased from Bt1.3bn in 2Q16 to Bt1.5bn

in 3Q16 as it booked a non-recurring item in 2Q16 from the

reversal of an asset write down.

Lower profit contribution q-o-q from downstream business.

Earnings performance of petrochemical and oil refining

segment fell by 38% q-o-q to reflect lower inventory gain

from 2Q16, especially for oil refining segment. This was offset

to some extent by an improved performance of its flagship

petrochemical company, PTTGC, whose operations improved

q-o-q after unplanned shutdown in 2Q16. Nonetheless, the

performance of this segment nearly doubled y-o-y given a

huge stock loss in 3Q15.

Higher price was behind stronger coal business in 3Q16. The

performance of PTT’s coal business recovered in 3Q16 with

operating profit increasing by 90% q-o-q and turned around

from a loss in 3Q15. Behind this was the higher average

selling price of coal, which increased by 13% q-o-q to

US$47.2/ton, though this was 11% lower y-o-y. The EBITDA

margin improved from 21% in 2Q16 and 20% in 3Q15 to

28%, the highest since 1Q15. Meanwhile, the sales volume

weakened 8% q-o-q as a result of unfavorable weather

which affected transportation.



Revenue 503,983 420,447 435,172 (13.7) 3.5


Gross Profit 46,006 66,843 60,394 31.3 (9.6)

Other Oper. (Exp)/Inc (27,554) (19,692) (19,875) (27.9) 0.9

Operating Profit 18,452 47,151 40,518 119.6 (14.1)

Other Non Opg (Exp)/Inc 11,757 774 4,815 (59.0) 521.6

Associates & JV Inc 263 839 1,162 341.9 38.5

Net Interest (Exp)/Inc (7,525) (7,245) (7,237) 3.8 0.1

Exceptional Gain/(Loss) (57,815) (248) 2,322 nm nm

Pre-tax Profit (34,868) 41,272 41,580 nm 0.7

Tax (7,849) (6,912) (6,727) (14.3) (2.7)

Minority Interest 16,136 (9,481) (7,879) nm (16.9)

Net Profit (26,581) 24,879 26,974 nm 8.4

Net profit bef Except. 31,233 25,127 24,652 (21.1) (1.9)

EBITDA 65,915 80,696 78,840 19.6 (2.3)

Margins (%)



Net Profit Margins (5.3) 5.9 6.2

Source of all data: Company, DBS Vickers


Company Guide

PTT


Earnings Drivers:

The oil price is the key earnings driver for PTT group, as the

selling prices of most of its products are largely linked to Dubai

crude price. Our earnings forecast is based on Dubai oil price of

US$42/bbl in 2016F, down from US$51/bbl in 2015 before

gradually recovering to US$47/bbl in 2017F and US$52/bbl in

2018F. This reflects our view that the market rebalancing could

be gradual albeit sooner than previously expected.

Gas sales volume is expected to rise by 2% p.a. PTT’s gas sales

volume grew 3% y-o-y in 2015 to 4,807 mmcfd, slightly above

its current pipeline capacity of 4,580 mmcfd. Capacity will

increase to 7,180 mmcfd when the fourth pipeline (onshore)

commences operations at the end of this year. This would be

sufficient to accommodate anticipated gas transmission volume

for up to 20 years, based on demand growth of 2% p.a.

Nonetheless, PTT plans to invest in a fifth pipeline (onshore)

along the east-west corridor to increase flexibility in sourcing

natural gas from Gulf of Thailand and Andaman Sea. The new

pipeline would also accommodate plans to invest in a floating

LNG terminal in the west as gas reserves in the Gulf of Thailand

are depleting.

Smoother gas flow from gas separation plants (GSPs). We

estimate sales volume from the GSPs could recover and expect

4% CAGR during 2016-18F following smoother operations

after an incident in 2013. Nonetheless, with current capacity at

6.7m tons, PTT has plans to debottleneck its gas separation

plants. But a significant increase of capacity is still unlikely

because of uncertainty over gas reserves in the Gulf of Thailand.

More capex cuts ahead if oil prices continue to fall. PTT

maintains its unconsolidated investment budget for 2016-20F at

Bt297bn, focusing mainly on infrastructure investments, i.e. gas

transmission pipeline. Together with PTTEP’s investment plan,

the consolidated capex could reach Bt628bn during the period.

The current capex had been cut from the original plan due to

investment rationalisation to cope with the low oil price.

E&P and gas business are key contributors to EBITDA. More

than 60% of PTT’s EBITDA in 2015 was generated by the gas-

related business, E&P, transmission and gas processing

businesses. Cash profit would have been better if NGV price

had been raised to reflect actual cost at c.13-15/kg, from

<Bt13/kg currently. The company still reported a loss from the

NGV business of Bt11.7bn in 2015, but this was much smaller

than the Bt20bn loss booked in 2014. We believe the

government will continue to take advantage of low oil prices to

rationalise domestic energy prices, including raising NGV price.

This would reduce PTT’s subsidy burden over the long term.

Dubai oil price (US$/bbl)

Gas sales vol. (mmcfd)

GSP sales vol. (kTons)

Equity income (Bt m)

Capex (Bt m)


96.6

51.2

4247

52

0.0

13.9

27.9

41.8

55.7

69.7

83.6

97.5

2014A 2015A 2016F 2017F 2018F

4688 4807 47505040 5130

0.0

1046.5

2093.0

3139.6

4186.1

5232.6

2014A 2015A 2016F 2017F 2018F

6397 6414 63406727

7190

0.00

1466.75

2933.49

4400.24

5866.98

7333.73

2014A 2015A 2016F 2017F 2018F

860

6032 6152 6275 6401

0.0

1293.0

2586.0

3878.9

5171.9

6464.9

2014A 2015A 2016F 2017F 2018F

171407

154870

115112

148043142428

0.0

34624.2

69248.5

103872.7

138496.9

173121.1

2014A 2015A 2016F 2017F 2018F


Company Guide

PTT

Balance Sheet:

PTT has a strong balance sheet with 0.3-0.5x D/E ratio for the

next three years. This should cushion the company from the

adverse impact of lower oil prices in the medium term. This

healthy financial position reflects the company’s conservative

expansion strategy, especially during the current difficult period.

Rising oil prices could turn its asset turnover back up in 2017-

18F after hitting the bottom in 2016F, based on our current oil

price assumptions.


Rebound in oil prices. Higher oil prices would be the key driver

of PTT’s share price in the near term, given the high correlation

(0.9) based on the past six months’ data. Fundamentally, higher

oil prices would be positive for most of its business segments,

mainly E&P and gas processing, as the product selling prices are

partially linked to oil prices. Coupled with profit contribution

from the oil refining and petrochemical associates, we estimate

that every US$1 increase in the oil price would lift PTT’s

earnings by 0.6-0.9% over 2016-18F.

Deregulating domestic energy prices. This would be a boon for

PTT after having to bear the huge burden of regulated LPG and

NGV prices. The government is promoting a market-based

mechanism for domestic energy pricing, which has reduced

PTT’s losses from the NGV business from Bt5bn/quarter to Bt1-

2bn recently. The losses will continue to narrow when the NGV

price is floated to reflect actual cost of c.Bt13-15/kg.

Key Risks:

Oil price volatility. Volatile oil prices remain the key risk for

PTT’s future earnings, especially for the E&P subsidiary. PTT’s

earnings would also be exposed to potential inventory

gains/losses at its oil refining and petrochemical associates if

there are large swings in oil prices.

Change in government’s policy on energy price. PTT booked

Bt11.7bn losses in 2015 for the NGV business because of the

regulated price which was still below its operating cost despite

adjustments. Nonetheless, this has improved significantly in

9M16 with a loss of only Bt4bn. The government has

liberalised the NGV price in 2H16 which would be positive for

PTT’s earnings. As a leading state enterprise in the energy

sector, PTT could remain the government’s arm in regulating

energy prices in the future. This may create downside risk to

PTT’s earnings and share price.

Company Background

PTT is a state-controlled, fully integrated oil and gas company.

The company is c.70%-owned by the government and related

investment agencies. Core operations include E&P and running

a petrochemical complex through its subsidiaries and

associated companies.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


0.7

0.8

0.9

1.0

1.1

1.2

1.3

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

2014A 2015A 2016F 2017F 2018F


0.0

20,000.0

40,000.0

60,000.0

80,000.0

100,000.0

120,000.0

140,000.0

160,000.0

180,000.0

2014A 2015A 2016F 2017F 2018F


Btm

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

2014A 2015A 2016F 2017F 2018F

Avg: 9.9x

+1sd: 10.8x

+2sd: 11.7x

-1sd: 9x

-2sd: 8.1x

5.8

6.8

7.8

8.8

9.8

10.8

11.8

12.8


(x)

Avg: 1.33x

+1sd: 1.5x

+2sd: 1.68x

-1sd: 1.15x

-2sd: 0.98x

0.7

0.9

1.1

1.3

1.5

1.7

1.9


(x)


Company Guide

PTT

Key Assumptions

FY Dec 2014A 2015A 2016F 2017F 2018F

Dubai oil price (US$/bbl) 96.6 51.2 42.0 47.0 52.0

Gas sales vol. (mmcfd) 4,688 4,807 4,750 5,040 5,130

GSP sales vol. (kTons) 6,397 6,414 6,340 6,727 7,190

Equity income (Bt m) 860 6,032 6,152 6,275 6,401

Capex (Bt m) 171,407 154,870 115,112 148,043 142,428


FY Dec 2014A 2015A 2016F 2017F 2018F

Revenue 2,583,484 2,011,701 1,730,453 1,936,704 2,165,343

Cost of Goods Sold (2,374,014) (1,803,585) (1,538,853) (1,728,611) (1,940,774)

Gross Profit 209,469 208,116 191,600 208,093 224,570

Other Opng (Exp)/Inc (85,000) (79,120) (59,287) (64,686) (69,814)


Other Non Opg (Exp)/Inc 34,406 24,491 22,985 8,894 8,583

Associates & JV Inc 860 6,032 6,152 6,275 6,401


Exceptional Gain/(Loss) (26,475) (80,148) 4,500 0.0 0.0

Pre-tax Profit 105,833 55,574 142,152 137,706 151,328

Tax (38,006) (24,855) (28,430) (28,918) (33,292)

Minority Interest (9,149) (10,783) (22,744) (16,318) (17,705)

Preference Dividend 0.0 0.0 0.0 0.0 0.0

Net Profit 58,678 19,936 90,977 92,470 100,330

Net Profit before Except. 85,153 100,084 86,477 92,470 100,330

EBITDA 295,299 303,280 297,788 296,313 308,171

Growth

Revenue Gth (%) (8.2) (22.1) (14.0) 11.9 11.8

EBITDA Gth (%) 15.5 2.7 (1.8) (0.5) 4.0

Opg Profit Gth (%) (12.2) 3.6 2.6 8.4 7.9

Net Profit Gth (Pre-ex) (%) (8.8) 17.5 (13.6) 6.9 8.5

Margins & Ratio

Gross Margins (%) 8.1 10.3 11.1 10.7 10.4

Opg Profit Margin (%) 4.8 6.4 7.6 7.4 7.1

Net Profit Margin (%) 2.3 1.0 5.3 4.8 4.6

ROAE (%) 8.6 2.9 12.5 11.7 11.8

ROA (%) 2.9 0.9 4.2 4.2 4.5

ROCE (%) 3.5 4.0 3.3 3.7 4.2

Div Payout Ratio (%) 63.3 143.3 40.8 40.2 42.7

Net Interest Cover (x) 4.5 5.4 5.6 6.9 8.4



Company Guide

PTT


FY Dec 3Q2015 4Q2015 1Q2016 2Q2016 3Q2016

Revenue 503,983 471,573 386,940 420,447 435,172

Cost of Goods Sold (457,977) (418,142) (331,758) (353,604) (374,778)

Gross Profit 46,006 53,431 55,182 66,843 60,394

Other Oper. (Exp)/Inc (27,554) (24,920) (18,964) (19,692) (19,875)


Other Non Opg (Exp)/Inc 11,757 8,785 4,000 774 4,815

Associates & JV Inc 263 1,444 865 839 1,162


Exceptional Gain/(Loss) (57,815) (20,985) 2,349 (248) 2,322

Pre-tax Profit (34,868) 10,913 36,196 41,272 41,580

Tax (7,849) (4,566) (3,798) (6,912) (6,727)

Minority Interest 16,136 (6,159) (8,730) (9,481) (7,879)

Net Profit (26,581) 188 23,669 24,879 26,974

Net profit bef Except. 31,233 21,173 21,320 25,127 24,652

EBITDA 65,915 74,236 72,916 80,696 78,840

Growth

Revenue Gth (%) (6.0) (6.4) (17.9) 8.7 3.5

EBITDA Gth (%) (27.4) 12.6 (1.8) 10.7 (2.3)

Opg Profit Gth (%) (60.9) 54.5 27.0 30.2 (14.1)

Net Profit Gth (Pre-ex) (%) 15.5 (32.2) 0.7 17.9 (1.9)

Margins

Gross Margins (%) 9.1 11.3 14.3 15.9 13.9

Opg Profit Margins (%) 3.7 6.0 9.4 11.2 9.3

Net Profit Margins (%) (5.3) 0.0 6.1 5.9 6.2

Balance Sheet (Btm)

FY Dec 2014A 2015A 2016F 2017F 2018F

Net Fixed Assets 1,105,147 1,118,677 1,097,452 1,107,760 1,111,756

Invts in Associates & JVs 89,548 62,020 79,139 103,022 121,529

Other LT Assets 351,519 313,597 294,536 282,608 271,869

Cash & ST Invts 316,757 346,725 363,975 329,971 311,000

Inventory 119,795 84,085 80,693 91,530 103,696

Debtors 220,245 195,484 216,000 241,200 270,000

Other Current Assets 47,341 53,408 45,436 51,386 58,086

Total Assets 2,250,351 2,173,996 2,177,231 2,207,476 2,247,936

ST Debt 60,909 48,966 54,986 54,986 54,986

Creditor 234,443 195,023 183,600 208,800 236,400

Other Current Liab 117,049 71,397 62,997 64,997 67,997

LT Debt 591,694 578,215 509,707 441,199 372,691

Other LT Liabilities 191,562 192,708 196,496 200,472 204,648

Shareholder’s Equity 683,287 697,147 761,846 817,184 878,097

Minority Interests 371,408 390,540 407,599 419,837 433,116

Total Cap. & Liab. 2,250,351 2,173,996 2,177,231 2,207,476 2,247,936

Non-Cash Wkg. Capital 35,889 66,557 95,532 110,318 127,385

Net Cash/(Debt) (335,846) (280,456) (200,719) (166,215) (116,677)

Debtors Turn (avg days) 37.5 37.7 43.4 43.1 43.1

Creditors Turn (avg days) 43.9 47.2 49.3 45.0 45.1

Inventory Turn (avg days) 12.1 22.4 21.4 19.8 19.8

Asset Turnover (x) 1.3 0.9 0.8 0.9 1.0

Current Ratio (x) 1.7 2.2 2.3 2.2 2.1

Quick Ratio (x) 1.3 1.7 1.9 1.7 1.6

Net Debt/Equity (X) 0.3 0.3 0.2 0.1 0.1

Net Debt/Equity ex MI (X) 0.5 0.4 0.3 0.2 0.1

Capex to Debt (%) 26.3 24.7 20.4 29.8 33.3

Z-Score (X) 2.4 2.3 2.3 2.4 2.5



Company Guide

PTT


FY Dec 2014A 2015A 2016F 2017F 2018F

Pre-Tax Profit 105,833 55,574 142,152 137,706 151,328

Dep. & Amort. 135,563 143,761 136,337 137,736 138,432

Tax Paid (49,826) (24,855) (28,430) (28,918) (33,292)

Assoc. & JV Inc/(loss) (860) (6,032) (6,152) (6,275) (6,401)

Chg in Wkg.Cap. (95,141) 13,412 (36,843) (14,787) (17,067)

Other Operating CF 253,564 120,761 6,256 5,861 3,610

Net Operating CF 349,133 302,622 213,319 231,323 236,610

Capital Exp.(net) (171,407) (154,870) (115,112) (148,043) (142,428)

Other Invts.(net) 0.0 0.0 0.0 0.0 0.0

Invts in Assoc. & JV 156,789 27,528 (17,119) (23,882) (18,507)

Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0

Other Investing CF (198,604) (5,701) 0.0 0.0 0.0

Net Investing CF (213,223) (133,043) (132,231) (171,925) (160,935)

Div Paid (68,675) (43,811) (26,278) (37,132) (39,417)

Chg in Gross Debt 243,081 (69,503) (54,618) (68,508) (68,508)

Capital Issues 0.0 0.0 0.0 0.0 0.0

Other Financing CF (233,788) (50,500) 17,058 12,239 13,279

Net Financing CF (59,382) (163,813) (63,838) (93,402) (94,646)

Currency Adjustments 0.0 0.0 0.0 0.0 0.0

Chg in Cash 76,529 5,766 17,249 (34,004) (18,971)

Opg CFPS (Bt) 156 101 87.6 86.2 88.8

Free CFPS (Bt) 62.2 51.7 34.4 29.2 33.0



Source: DBS Vickers





Score Description

Declared Companies that have declared their intention to join CAC


Corporate Governance CG Rating is based on Thai Institute of

Directors (IOD)’s annual assessment of corporate governance practices of listed companies. The assessment covers 235 criteria in five categories including board responsibilities (35% weighting), disclosure and transparency (20%), role of stakeholders (20%), equitable treatment of shareholders (10%) and rights of shareholders (15%). The IOD then assigns numbers of logos to each company based on their scoring as follows:

Score Range Number of Logo Description

90-100 Excellent

80-89 Very Good

70-79 Good

60-69 Satisfactory

50-59 Pass

<50 No logo given N/A

S.No.Date of

Report

Closing

Price

12-mth

Target

Price

Rat ing

1: 13 Nov 15 276.00 350.00 BUY

2: 18 Nov 15 263.00 350.00 BUY

3: 22 Feb 16 258.00 350.00 BUY

4: 28 Feb 16 264.00 350.00 BUY

5: 03 Mar 16 272.00 320.00 BUY

6: 07 Mar 16 286.00 320.00 BUY

7: 20 Apr 16 303.00 320.00 BUY

8: 03 May 16 297.00 320.00 BUY

9: 13 May 16 300.00 320.00 BUY

10: 24 May 16 295.00 320.00 BUY

11: 08 Jul 16 312.00 370.00 BUY

12: 15 Aug 16 344.00 370.00 BUY

13: 05 Sep 16 333.00 370.00 BUY

14: 29 Sep 16 342.00 370.00 BUY

Note : Share price and Target price are adjusted for corporate actions. 15: 02 Nov 16 342.00 370.00 BUY

12

3

4

5

67

8

9

1011

12

13

14

15

188.00

208.00

228.00

248.00

268.00

288.00

308.00

328.00

348.00

368.00


Bt

ASIAN INSIGHTS VICKERS SECURITIES ed: CK / sa:CS, PY

BUYLast Traded Price ( 25 Oct 2016): Bt60.00 (SET : 1,506.47) Price Target 12-mth: Bt70.00 (17% upside)

Potential Catalyst: Positive momentum for earnings in 2H16 Where we differ: We are more cautious on product spread Analyst Chaipat THANAWATTANO +66 2657 7827 [email protected]

What’s New 3Q16E performance should be strong

Most of key production units were back to normal

Key investment decisions could be made by 4Q16

Positive momentum could continue in 4Q16F

Price Relative

Forecasts and Valuation FY Dec (Bt m) 2015A 2016F 2017F 2018F Revenue 403,440 346,827 390,164 405,903 EBITDA 45,339 45,853 51,136 55,635 Pre-tax Profit 22,765 24,566 29,809 34,405 Net Profit 20,503 22,371 26,604 30,732 Net Pft (Pre Ex.) 22,727 22,371 26,604 30,732 Net Pft Gth (Pre-ex) (%) 54.1 (1.6) 18.9 15.5 EPS (Bt) 4.55 4.96 5.90 6.82 EPS Pre Ex. (Bt) 5.04 4.96 5.90 6.82 EPS Gth Pre Ex (%) 54 (2) 19 16 Diluted EPS (Bt) 4.55 4.96 5.90 6.82 Net DPS (Bt) 2.80 2.80 2.80 3.10 BV Per Share (Bt) 51.4 53.5 56.6 60.5 PE (X) 13.2 12.1 10.2 8.8 PE Pre Ex. (X) 11.9 12.1 10.2 8.8 P/Cash Flow (X) 5.4 7.6 6.6 5.4 EV/EBITDA (X) 7.3 7.1 6.1 5.2 Net Div Yield (%) 4.7 4.7 4.7 5.2 P/Book Value (X) 1.2 1.1 1.1 1.0 Net Debt/Equity (X) 0.2 0.2 0.2 0.1 ROAE (%) 9.0 9.5 10.7 11.6



Positive earnings trend to emerge

Maintain BUY and TP of Bt70. We maintain our BUY rating on PTT Global Chemical (PTTGC) with its positive earnings momentum to persist in 3Q16 and 4Q16 after several hiccups in 1H16. We believe the market has yet to price in this encouraging trend, at least for the next six months as its share price still underperformed the sector and SET Index. The current share price still offers 17% upside potential and 21% total returns (including dividends).

Strong 3Q16E performance could be share price catalyst. We believe PTTGC’s strong 3Q16E performance could be a near-term re-rating catalyst, as its net profit could rise both q-o-q and y-o-y to Bt6.3bn, the best since 2Q15. Behind this strong performance was the higher utilisation of its money makers, i.e. olefins cracker and oil refinery after these two units returned to normal operations in 3Q16.

New investments to be concluded in 4Q16. Its long-term earnings outlook relies heavily on its new investments, which are still in the feasibility study stage, especially for financial return. We expect two projects, i.e. the Map Tha Put Retrofit Project that enables the company to upgrade internal naphtha feedstock to downstream, and the Propylene Oxide and Polyol plants in Thailand, to be finalised by end-2016. It should be able to fund these projects using its cash pile and strong cashflow.

Valuation:

PTTGC is among the cheapest petrochemical plays in the region at 10.6x 2017F PE, compared with 14x PE on average for peers. Despite lower oil prices, its gas-based olefin cracker will remain more competitive than naphtha-based players.


Further weakening of oil prices. PTTGC’s refinery business could be impacted by more stock losses if oil price weakens from the current level, though we see limited downside. This will also depress petrochemical prices and product spreads.

At A Glance Issued Capital (m shrs) 4,460 Mkt. Cap (Btm/US$m) 267,618 / 7,637 Major Shareholders (%) PTT Pcl 48.9 Thai NVDR 8.0 State Street Bank Europe Limited 3.0

Free Float (%) 51.1 3m Avg. Daily Val (US$m) 19.4 ICB Industry : Oil & Gas / Oil & Gas Producers

DBS Group Research . Equity 26 Oct 2016


PTT Global Chemical Version 4 | Bloomberg: PTTGC TB | Reuters: PTTGC.BK Refer to important disclosures at the end of this report

67

87

107

127

147

167

187

207

40.5

45.5

50.5

55.5

60.5

65.5

70.5

75.5

80.5

85.5

Oct-12 Oct-13 Oct-14 Oct-15 Oct-16

Relative IndexBt

PTT Global Chemical (LHS) Relative SET (RHS)


Company Guide

PTT Global Chemical

WHAT’S NEW

Strong profit expected for 3Q16E

Profit should improve q-o-q in 3Q16 with higher

utilisation of refinery in the previous quarter: We expect PTTGC’s 3Q16E net profit to rise both q-o-q and y-o-y to Bt6.3bn. Behind this strong performance was the higher utilisation of olefins cracker and oil refinery after these two units returned to normal operations in 3Q16. The former’s operation was affected by unplanned outage in 2Q16 while the latter’s utilisation was low in 2Q16 due to a planned maintenance shutdown. Further, the company is likely to book c.Bt1bn compensation from an insurance company for the unplanned outage of its olefins cracker. An inventory gain of c.Bt500m should also be a plus. Although we estimate its core profit to improve 70% q-o-q, we believe that it could still fall 20% y-o-y from the lower performance of the oil refining segment. The cumulative net profit for 9M16 could be as high as Bt15.8bn or 71% of our full-year forecast but we believe our profit target for 2016F remains achievable – thus we maintain on our full-year forecast.

Olefins operation picked up on higher utilisation rate: Following lower-than-planned utilisation of the olefins segment in 1H16, we believe the utilisation rate of the company’s olefins cracker will improve to at least 90% in 3Q16E, up from an average 83% in 1H16 which was affected by planned and unplanned shutdowns of its main olefins cracker with a capacity of 1mtpa (million tons per annum). Also supporting its operations was the smoother flow of gas feedstock from PTT’s gas processing plant which increased from 225 tons/hour (tph) in 2Q16 to 251tph in 3Q16E. This gas feedstock could be boosted to 270-280tph in 4Q16. This should reduce the proportion of naphtha feedstock from 14% in 2Q16 to <10% in 3Q16E. This implies higher ethylene output for its downstream polyethylene plants whose utilisation could be boosted from an average 92% in 2Q16 to c.>100% in 3Q16E. We expect the EBITDA margin of the segment to be maintained at c.24% in 3Q16E. This could be c.28% if including the insurance compensation as mentionedearlier.

Refinery operation was back to normal: The operating performance of its oil refinery should be back to normal in 3Q16E after the maintenance shutdown in the previous quarter. We expect its refinery to operate at nearly 100% in 3Q16E. Nonetheless, the efficiency of the refinery during utilisation ramp-up is expected to be suboptimal, hence the market gross refining margin (GRM) of PTTGC should be similar to 2Q16’s US$4/bbl, although crack spread of middle distillate products (c.>60% of total refined oil products) improved q-o-q.

Planned shutdown reduced utilisation rate of aromatics

plants: The performance of PTTGC’s aromatics segment could be affected by the planned maintenance shutdown at some units of aromatics complex. This could reduce the utilisation rate of this segment from 83% in 2Q16 to c.75%

in 3Q16E. Nonetheless, the performance of this segment could be supported by better price-to-feed margin which is expected to improve from US$147/t in 2Q16 to US$180/t in 3Q16E, reflecting the better product spread of both Paraxylene and Benzene.

4Q16F outlook: We believe the positive momentum of PTTGC’s performance could be maintained in 4Q16E from better operation of all segments after several hiccups in 1H16. This would also be supported by improving refining margins from seasonal demand and favourable spreads for polyethylene. The key risk is weaker spread for aromatics due to more supply in the region. We also expect the company to conclude its investment plans, including the Map Tha Put Retrofit Project that enables the company to upgrade internal naphtha feedstock to downstream, and Propylene Oxide and Polyol plants in Thailand by the end of this year. The final investment decision for another big project, i.e. US shale gas cracker could be delayed from end-2016 to 2017 as more time is needed for its feasibility and technical studies.

Preview of 3Q16F performance – PTTGC

(Bt m) 3Q15 2Q16 3Q16E y-o-y q-o-q

Sales 93,620 65,543 90,668 -3.2% 38.3%

EBITDA 7,824 10,119 11,989 53.2% 18.5%

Core profit 5,583 2,620 4,450 -20.3% 69.8%

Net profit 1,207 4,924 6,264 419.0% 27.2%

EPS (Bt/share) 0.27 1.09 1.39 419.0% 27.2%

CDU utilization rate 102% 35% 99% -2.9% 182.9%

Market GRM (US$/bbl) 4.2 4.0 4.0 -3.8% 0.0%

Utilization rate - PE 107% 93% 113% 5.6% 21.5%

EBITDA margin - Olefins 24% 24% 24% 0.0% 0.0%

Utilization rate - BTX 57% 83% 75% 31.6% -9.6%

P2F margin - aromatics (US$/t) 183 147 181 -1.6% 22.4%

Source: Company, DBS Vickers PTTGC – market gross refining margin

Source: Company, Datastream, DBS Vickers


Company Guide

PTT Global Chemical

HDPE-naphtha spread


Aromatics product spreads



Company Guide

PTT Global Chemical


Earnings Drivers:

Operating rate to improve from better gas flow. Smoother gas flow from PTT should be positive for PTTGC’s operation of its ethane-based crackers. Hence, we expect the average utilisation rate of PTTGC’s major business segments, i.e. oil refinery, aromatics and olefins, to gradually increase. Among these three segments, oil refinery will run at full capacity while an increase in utilisation will be driven by olefins and aromatic plants.

Stable market GRM expected. We assume stable market gross refining margins (GRM) for PTTGC over 2016-18 at US$5.2-5.5/bbl on a more balanced demand/supply outlook for regional oil refineries in Asia. We believe lower oil prices could bolster the regional demand for refined oil products. Downside risk is posed by a massive supply of middle distillates (mainly diesel and jet fuel) as new refineries in the region shift towards these products. In addition, higher demand for gasoline has prompted refiners to increase their operating rates to gain more gasoline output, which will also lead to ample supply of middle distillates in the near term.

EBITDA margin for olefins could be steady. We view that the olefins chain, mainly ethylene, would be the best place in the petrochemical space due to better demand/supply balance. We expect PTTGC’s EBITDA margin for this segment to be sustained at 23-24% over the next three years. The next wave of new capacity for ethylene cracker could be expected after 2017F, when capacity additions from low cost shale gas in the US enter the market.

Abundant PX supply should keep spreads at bay. We assume PX condensate spread to be within the range of US$350-370/t for the next three years to reflect abundant supply in the market. This is driven by new capacity which needs more time to be absorbed given the economic slowdown in China. Nonetheless, an upside to PX spreads would be lower condensate cost, which is normally linked to crude oil prices.

Olefin business contributes nearly half of profit. The olefin segment will remain in the driver’s seat in 2016F, as product prices and spreads should remain healthy due to more balanced demand-supply in the market. Also, we expect the gas price adjustment in 2016 to favour PTTGC, based on the netback formula for feedstock supplied by PTT. Nonetheless, the weak oil prices could be a major headwind in 3Q16 but this will also depend on PTTGC’s inventory management and hedging strategy to reduce the impact.

Average utilization (%)

Market GRM (US$/bbl)

EBITDA margin - Olefins (%)

PX-condensate spread (US$/t)

EBITDA Breakdown (1H16)


91.3 89.384.4

91.7 91.7

0.0

13.2

26.5

39.7

52.9

66.1

79.4

92.6

2014A 2015A 2016F 2017F 2018F

4.41

5.455.24

5.51 5.51

0.00

1.12

2.25

3.37

4.50

5.62

2014A 2015A 2016F 2017F 2018F

2624

23 2324

0.0

5.3

10.6

15.9

21.2

26.5

2014A 2015A 2016F 2017F 2018F

400382

350370 370

0

81

162

242

323

404

2014A 2015A 2016F 2017F 2018F

Refinery17%

Aromatics24%

Olefins & Derivatives

56%

Others3%


Company Guide

PTT Global Chemical

Balance Sheet:

Improving financial health. Without new investments in the near term, we expect PTTGC’s financial position to improve, which makes room for new investment opportunities. The company is finalising its investment plans for the next five years, which includes a 1mtpa ethane-based cracker in the US and the expansion of its naphtha cracker in the current location in Rayong, under the “Map Tha Put Retrofit” (MTPR) project. The construction of these projects is expected to start in 2018 with commercial operations in 2020-21.


Higher oil and petrochemical prices. The recent increase in oil price could be positive for PTTGC’s earnings via higher product prices and inventory gains. The correlation between PTTGC share price and oil price during the past six months was 85%.

Balancing feedstock to reduce reliance on gas. One of the major concerns on PTTGC’s outlook is depleting gas feedstock in the Gulf of Thailand. This has prompted the group to adjust production to reduce reliance on gas feedstock. PTTGC is trying to increase the share of naphtha feedstock from below 10% currently to c.30% by utilising 1.5mtpa of naphtha output from its refinery and aromatics plants to produce 761ktpa of olefin products under MTPR project. This will reduce the impact of volatile oil prices and depleting gas resources in Thailand.

Key Risks:

Lower-than-expected oil and petrochemical product prices. The impact of inventory loss on PTTGC’s earnings is less severe than Thai Oil (TOP TB) because of lower earnings contribution from refinery at c.20% of total EBITDA, vs. 73% from the petrochemical business. Also, a decline in oil prices will also lead to lower petrochemical product prices, which is the key parameter in calculating the profit sharing with gas supplier, PTT, based on a netback formula.

Long-term risk: Depleting gas reserves. Over 90% of PTTGC's olefin feedstock is gas. The unplanned or planned shutdown of gas separation plants could reduce gas supply and hurt PTTGC's earnings. Thailand has only six years of gas reserves, which could pose a risk to PTTGC in the long term. Nonetheless, PTTGC has planned to leverage its expertise in gas-based ethylene cracker in the new market, the US, to capture the competitive feedstock cost from shale gas.

Company Background

PTT Global Chemical (PTTGC) is Thailand's largest ethane-based petrochemical producer. The company is the core petrochemical arm under PTT Group. PTTGC was formed after the amalgamation of two petrochemical companies: PTT Chemical and PTT Aromatics and Refining in 2012.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


0.9

1.0

1.1

1.2

1.3

1.4

0.00

0.10

0.20

0.30

0.40

0.50

2014A 2015A 2016F 2017F 2018F


0.0

2,000.0

4,000.0

6,000.0

8,000.0

10,000.0

12,000.0

14,000.0

16,000.0

18,000.0

20,000.0

2014A 2015A 2016F 2017F 2018F


Btm

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

2014A 2015A 2016F 2017F 2018F

Avg: 13.3x

+1sd: 16.9x

+2sd: 20.5x

-1sd: 9.7x

-2sd: 6.1x5.5

10.5

15.5

20.5

25.5


(x)

Avg: 1.26x

+1sd: 1.42x

+2sd: 1.57x

-1sd: 1.11x

-2sd: 0.95x

0.7

0.9

1.1

1.3

1.5

1.7


(x)


Company Guide

PTT Global Chemical

Key Assumptions

FY Dec 2014A 2015A 2016F 2017F 2018F

Average utilization (%) 91.3 89.3 84.4 91.7 91.7 Market GRM (US$/bbl) 4.41 5.45 5.24 5.51 5.51 EBITDA margin - Olefins 26.0 24.0 23.0 23.0 24.0 PX-condensate spread 400 382 350 370 370


FY Dec 2014A 2015A 2016F 2017F 2018F

Revenue 554,695 403,440 346,827 390,164 405,903 Cost of Goods Sold (526,068) (366,168) (309,896) (348,758) (359,848) Gross Profit 28,627 37,272 36,931 41,406 46,055 Other Opng (Exp)/Inc (11,802) (11,424) (12,024) (11,605) (12,076) Operating Profit 16,825 25,849 24,907 29,801 33,979 Other Non Opg (Exp)/Inc 1,494 2,395 2,400 2,400 2,400 Associates & JV Inc 177 711 711 711 711 Net Interest (Exp)/Inc (4,452) (3,966) (3,452) (3,103) (2,684) Exceptional Gain/(Loss) 628 (2,224) 0.0 0.0 0.0 Pre-tax Profit 14,673 22,765 24,566 29,809 34,405 Tax (581) (1,984) (1,908) (2,910) (3,369) Minority Interest 1,280 (278) (287) (295) (304) Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit 15,372 20,503 22,371 26,604 30,732 Net Profit before Except. 14,743 22,727 22,371 26,604 30,732 EBITDA 34,439 45,339 45,853 51,136 55,635 Growth Revenue Gth (%) 0.3 (27.3) (14.0) 12.5 4.0 EBITDA Gth (%) (38.9) 31.7 1.1 11.5 8.8 Opg Profit Gth (%) (55.9) 53.6 (3.6) 19.6 14.0Net Profit Gth (Pre-ex) (%) (56.1) 54.1 (1.6) 18.9 15.5Margins & Ratio Gross Margins (%) 5.2 9.2 10.6 10.6 11.3Opg Profit Margin (%) 3.0 6.4 7.2 7.6 8.4Net Profit Margin (%) 2.8 5.1 6.5 6.8 7.6ROAE (%) 6.6 9.0 9.5 10.7 11.6ROA (%) 3.8 5.4 6.0 7.1 8.0ROCE (%) 2.8 5.4 5.4 6.7 7.7Div Payout Ratio (%) 69.5 61.6 56.4 47.5 45.5Net Interest Cover (x) 3.8 6.5 7.2 9.6 12.7



Company Guide

PTT Global Chemical


FY Dec 2Q2015 3Q2015 4Q2015 1Q2016 2Q2016

Revenue 111,979 94,466 96,909 81,473 66,385 Cost of Goods Sold (98,010) (88,155) (88,943) (73,855) (58,062) Gross Profit 13,969 6,311 7,966 7,618 8,323 Other Oper. (Exp)/Inc (2,634) (2,872) (3,311) (2,556) (2,645) Operating Profit 11,335 3,438 4,654 5,062 5,678 Other Non Opg (Exp)/Inc 297 201 1,635 269 283 Associates & JV Inc 134 485 (209) 178 53.0 Net Interest (Exp)/Inc (993) (960) (936) (822) (833)Exceptional Gain/(Loss) (874) (2,087) 399 675 102Pre-tax Profit 9,900 1,077 5,542 5,362 5,283 Tax (932) 216 (769) (623) (380)Minority Interest 6.02 (86.1) (83.5) (31.9) 21.4 Net Profit 8,974 1,207 4,690 4,707 4,924 Net profit bef Except. 9,848 3,294 4,291 4,032 4,823 EBITDA 15,729 8,300 10,336 9,636 10,159

Growth

Revenue Gth (%) 11.9 (15.6) 2.6 (15.9) (18.5) EBITDA Gth (%) 43.3 (47.2) 24.5 (6.8) 5.4 Opg Profit Gth (%) 76.5 (69.7) 35.4 8.8 12.2 Net Profit Gth (Pre-ex) (%) 86.1 (66.6) 30.3 (6.0) 19.6 Margins

Gross Margins (%) 12.5 6.7 8.2 9.4 12.5Opg Profit Margins (%) 10.1 3.6 4.8 6.2 8.6Net Profit Margins (%) 8.0 1.3 4.8 5.8 7.4

Balance Sheet (Btm)

FY Dec 2014A 2015A 2016F 2017F 2018F

Net Fixed Assets 219,346 220,213 216,208 207,894 199,524 Invts in Associates & JVs 23,187 23,502 29,071 34,640 40,209 Other LT Assets 15,781 15,929 14,879 13,933 13,082 Cash & ST Invts 45,788 47,741 47,418 51,659 71,314 Inventory 31,577 29,930 22,955 25,649 26,224 Debtors 43,441 38,274 37,969 40,523 40,042 Other Current Assets 2,325 1,956 1,956 1,956 1,956 Total Assets 381,443 377,545 370,456 376,254 392,350

ST Debt 23,467 9,871 14,817 7,017 5,977 Creditor 21,679 19,650 15,424 17,011 17,500 Other Current Liab 10,972 11,700 3,921 3,921 3,921 LT Debt 89,675 95,976 85,913 83,650 82,427 Other LT Liabilities 7,200 6,083 6,083 6,083 6,083 Shareholder’s Equity 224,763 231,552 241,298 255,277 272,843 Minority Interests 3,687 2,713 3,000 3,295 3,599 Total Cap. & Liab. 381,443 377,545 370,456 376,254 392,350

Non-Cash Wkg. Capital 44,692 38,810 43,534 47,197 46,801 Net Cash/(Debt) (67,355) (58,106) (53,312) (39,008) (17,090) Debtors Turn (avg days) 33.5 37.0 40.1 36.7 36.2 Creditors Turn (avg days) 24.1 21.6 21.9 17.9 18.5 Inventory Turn (avg days) 29.3 32.1 33.0 26.8 27.7 Asset Turnover (x) 1.4 1.1 0.9 1.0 1.1 Current Ratio (x) 2.2 2.9 3.2 4.3 5.1 Quick Ratio (x) 1.6 2.1 2.5 3.3 4.1 Net Debt/Equity (X) 0.3 0.2 0.2 0.2 0.1 Net Debt/Equity ex MI (X) 0.3 0.3 0.2 0.2 0.1 Capex to Debt (%) 15.3 16.8 12.7 9.9 10.5 Z-Score (X) 3.4 3.3 3.4 3.7 3.8



Company Guide

PTT Global Chemical


FY Dec 2014A 2015A 2016F 2017F 2018F

Pre-Tax Profit 14,673 22,765 24,566 29,809 34,405 Dep. & Amort. 15,942 16,385 17,835 18,224 18,545 Tax Paid 0.0 0.0 0.0 0.0 0.0Assoc. & JV Inc/(loss) (177) (711) (711) (711) (711)Chg in Wkg.Cap. 12,639 5,882 (4,725) (3,662) 396 Other Operating CF (53.3) 5,715 (1,484) (2,494) (2,963) Net Operating CF 43,023 50,036 35,481 41,166 49,672 Capital Exp.(net) (17,304) (17,746) (12,780) (8,964) (9,324) Other Invts.(net) 0.0 0.0 0.0 0.0 0.0Invts in Assoc. & JV (10,638) (316) (5,569) (5,569) (5,569) Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0Other Investing CF 3,805 (4,283) 0.0 0.0 0.0Net Investing CF (24,137) (22,345) (18,349) (14,533) (14,893) Div Paid (15,094) (11,765) (12,625) (12,625) (13,166) Chg in Gross Debt (4,898) (7,296) (5,117) (10,063) (2,263) Capital Issues (41.6) 0.0 0.0 0.0 0.0Other Financing CF (3,615) (10,967) 287 295 304Net Financing CF (23,648) (30,028) (17,455) (22,393) (15,125) Currency Adjustments 0.0 0.0 0.0 0.0 0.0Chg in Cash (4,763) (2,337) (323) 4,241 19,655 Opg CFPS (Bt) 6.74 9.79 8.92 9.94 10.9Free CFPS (Bt) 5.70 7.16 5.03 7.14 8.95



Source: DBS Vickers





Score Description Declared Companies that have declared their intention to join CAC


Corporate Governance CG Rating is based on Thai Institute of Directors (IOD)’s annual assessment of corporate governance practices of listed companies. The assessment covers 235 criteria in five categories including board responsibilities (35% weighting), disclosure and transparency (20%), role of stakeholders (20%), equitable treatment of shareholders (10%) and rights of shareholders (15%). The IOD then assigns numbers of logos to each company based on their scoring as follows:

Score Range Number of Logo Description 90-100 Excellent

80-89 Very Good

70-79 Good

60-69 Satisfactory

50-59 Pass <50 No logo given N/A

S.No.Date of Report

Closing Price

12-mth Target Price

Rat ing

1: 10 Nov 15 55.25 70.00 BUY

2: 19 Feb 16 56.00 70.00 BUY

3: 22 Feb 16 56.00 70.00 BUY

4: 07 Apr 16 57.00 70.00 BUY

5: 20 Apr 16 60.75 70.00 BUY

6: 03 May 16 60.75 70.00 BUY

7: 12 May 16 61.50 70.00 BUY

8: 23 May 16 59.25 70.00 BUY

9: 14 Jun 16 59.25 70.00 BUY

10: 08 Jul 16 58.75 70.00 BUY

11: 28 Jul 16 61.50 70.00 BUY12: 11 Aug 16 61.00 70.00 BUY13: 16 Aug 16 62.25 70.00 BUY14: 29 Sep 16 59.75 70.00 BUY

Note : Share price and Target price are adjusted for corporate actions. 15: 12 Oct 16 56.75 70.00 BUY

1 234 5

6

78

9

10 11

12

1314

15

42.75

47.75

52.75

57.75

62.75

67.75

Oct-15 Feb-16 Jun-16 Oct-16

Bt

ASIAN INSIGHTS VICKERS SECURITIES ed: CK / sa:MA, PY

BUY (Upgrade from HOLD)

Last Traded Price: Rp1,495 (JCI : 5,357.00) Price Target 12-mth: Rp2,000 (34% upside) (Prev Rp1,350) Potential Catalyst: Quarterly financial result, M&A announcement Where we differ: We believe MEDC will deliver robust operational profitability, thanks to its internal efficiencies

Analyst

William SIMADIPUTRA +62 2130034939 [email protected]

What’s New Raise earnings forecasts for new ASP assumption

Maximising profitability is the key theme this year

Batu Hijau asset acquisition is earnings accretive

Upgrade to BUY, with higher TP of Rp2,000

Price Relative

Forecasts and Valuation FY Dec (US$ m) 2015A 2016F 2017F 2018F Revenue 629 555 611 675 EBITDA 231 222 275 327 Pre-tax Profit (146) 34.2 87.6 127 Net Profit (182) 21.1 54.1 78.3 Net Pft (Pre Ex.) (2.8) 21.1 54.1 78.3 Net Pft Gth (Pre-ex) (%) nm nm 156.4 44.8 EPS (Rp) (721) 83.7 214 310 EPS Pre Ex. (Rp) (11.1) 83.7 214 310 EPS Gth Pre Ex (%) nm nm 156 45 Diluted EPS (Rp) (721) 83.7 214 310 Net DPS (Rp) 0.0 16.7 21.4 62.1 BV Per Share (Rp) 2,772 3,094 3,474 3,722 PE (X) nm 17.9 7.0 4.8 PE Pre Ex. (X) nm 17.9 7.0 4.8 P/Cash Flow (X) nm 2.4 2.3 2.0 EV/EBITDA (X) 5.5 5.3 4.1 3.3 Net Div Yield (%) 0.0 1.1 1.4 4.2 P/Book Value (X) 0.5 0.5 0.4 0.4 Net Debt/Equity (X) 1.3 1.0 0.8 0.7 ROAE (%) (22.6) 2.9 6.5 8.6 Earnings Rev (%): 56 131 59 Consensus EPS (Rp): 46.6 93.2 273.1 Other Broker Recs: B: 2 S: 0 H: 2


Sustaining robust profitability

Raise TP for new management strategy. We upgrade MEDC to a BUY with a new target price of Rp2,000, mainly for new ASP assumption and continuous efficiency efforts that could lead to better profitability and FCFF generation. We believe MEDC’s low cost structure will ensure its survival, following the bottoming of crude oil prices. It will also focus on its most profitable blocks, mainly the onshore blocks such as Rimau – given its low cost structure. Revising forecasts for lower lifting cash cost and capex. We bump up our EBITDA by 6%, 22% and 17% for FY16, FY17 and FY18 to US$222m, US$275m and US$327m, respectively, for our new ASP assumption, higher gas production outlook, and stable lifting cost per barrel assumption. Our new assumption implies EBITDA margins of 44% in FY17 and 49% in FY18, higher than FY16's 39%. Stable cash lifting costs and a higher ASP allow MEDC to achieve better economies of scale and hence, margin expansion. Batu Hijau NNT asset acquisition is earnings accretive. We believe the acquisition of Batu Hijau NNT (Newmont NusaTenggara) mining assets is earnings accretive, given Batu Hijau is in a healthy financial position. It booked revenue of US$1.6bn with estimated EBIT of US$749m in FY15. However, MEDC has not disclosed the transaction structure yet. Valuation:

We have a Buy call with a higher DCF-based target price of Rp2,000 per share 5.5x FY17F EV/EBTDA). We assume WACC of 9.4% and a terminal growth rate of 0%. Our valuation is based on our earnings forecast, consisting of MEDC's existing business only (ex. M&A). Key Risks to Our View:

Execution risk. Our earnings forecast also depends on MEDC’s execution capability to maintain its cash cost per barrel at low levels, enhance its depleted existing reserves and achieve successful exploration investments. At A Glance Issued Capital (m shrs) 3,332 Mkt. Cap (Rpm/US$m) 4,982,015 / 377 Major Shareholders (%) Encore Energy Pte Ltde 50.7Credit Suisse Group AG 20.7Prudential Life Assurance 9.9

Free Float (%) 18.73m Avg. Daily Val (US$m) 0.61 ICB Industry : Oil & Gas / Oil & Gas Producers

DBS Group Research . Equity 6 Sep 2016

Indonesia Company Guide

Medco Energi Internasional Version 3 | Bloomberg: MEDC IJ | Reuters: MEDC.JK Refer to important disclosures at the end of this report


Company Guide

Medco Energi Internasional

WHAT’S NEW

Sustaining robust profitability

Revising forecasts for new ASP and gas production volume. We bump up our EBITDA by 6%, 22% and 17% for FY16, FY17 and FY18 to us$222m, US$275m and US$327m, respectively, for our new ASP assumption, and 3% lower lifting cost per barrel from FY18. Moreover, we lifted our gas production outlook as Senoro-Toili Gas field started to fully operate this year. Our FY17 and FY18 earnings forecasts rise by 131% and 59% to US$54m and US$78m, respectively, on the back of stable financing costs – we do not see the need for MEDC to drawdown its debt facility for significant expansion.

Our new ASP assumption implies EBITDA margins of 45% in FY17 and 48% in FY18, higher than FY16's 40%. Stable cash lifting costs and a higher ASP allow MEDC to achieve better economies of scale and hence, margin expansion. It will also focus on its most profitable blocks, mainly the onshore blocks such as Rimau – given its low cost structure. We maintain our

overall oil and gas lifting target this year. As MEDC will remain conservative on its production expansion, it will continue to focus on reducing its cash margin per barrel.

Our new forecast also results 58% and 23% higher FCFF in FY17 and FY18. Higher ASP is positive for MEDC cash flow; every US$10 per barrel of higher ASP, MEDC can take home extra US$45m cash inflows to its pocket. Moreover, we maintain our capex forecast, as management will prioritise only the maintenance capex of existing production blocks. We continue to believe that MEDC capex will be minimum as it has 17 years of reserves life index.

We believe the acquisition of Batu Hijau NNT is earnings accretive, given Batu Hijau is in a healthy financial position. It booked revenue of US$1.6bn with estimated EBIT of US$749m in FY15. However, MEDC has not disclosed the transaction structure yet.

Earnings revision summary

2016F 2017F 2018F

Old New Changes Old New Changes Old New Changes

Revenue (US$mn) 540 555 3% 540 611 13% 613 675 10%Gross profit (US$mn) 197 212 8% 219 281 28% 280 337 21% EBITDA (US$mn) 210 222 6% 225 275 22% 280 327 17%Net profit (US$mn) 13 21 56% 23 54 131% 49 78 59%

Oil ASP (US$/bbl) 45 45 0% 45 50 11% 55 57 4% Gas ASP (US$/MMBTU) 5.9 5.9 0% 6.0 6.0 0% 6.2 6.2 0% Oil prod (MBOPD) 19.8 19.8 0% 18.8 19.8 5% 18.8 19.8 5%Gas prod (BBTUPD) 123.6 132 7% 127.3 141.2 11% 131.1 148.3 13% Cash cost (US$/boe) 12.0 12.0 0% 12.0 12.0 0% 12.4 12.0 -3%Capex (US$mn) 121 121 0% 141.3 141.3 0% 121.6 121.6 0%

FCFF (US$mn) 96.7 107.0 11% 66.9 105.6 58% 129.3 159.3 23%

Source : DBS Vickers


Company Guide



Earnings Drivers:

Flattish oil and gas lifting target on profitability prioritisation. Our forecast is in line with management’s guidance on oil and gas lifting target, as management adopts a more defensive stance for its production plan. Management will only focus on the most profitable shore blocks such as Rimau to keep its cash cost at the lowest level. Meanwhile we see higher gas production volume going forward as Senoro-Toili gas field started to fully operate this year.

Lower ASP in line with global crude oil price trend. We are raising our ASP by around US$5 per barrel to obtain our crude oil price forecasts of US$50 per barrel in FY17. Our crude oil ASP trend is largely in line with our in-house oil price forecast of US$45 per barrel in FY16 with a gradual recovery to US$50 per barrel in 2017, and US$57 per barrel thereafter. On the other hand, we see natural gas ASP being more stable going forward, as MEDC’s gas pricing is based on long-term contracts (in some cases, inflation-adjusted).

Lower lifting cash cost will keep margins stable. We are lowering our lifting cash cost per barrel to US$12 per barrel, which is still higher than management’s guidance of US$10 per barrel this year. MEDC will halt its offshore and other high cost blocks to further lower its cost structure this year. We believe the low cash cost per barrel will sustain for the next three years, as the Rimau block can still maintain its production momentum without significant additional reserve enhancement programmes in the medium term.

Slash capex further. MEDC will slash its capex further this year or around one third of our previous forecast. MEDC will focus only on the maintenance capex for its existing projects and cut unnecessary spending on exploration programmes. This will not harm MEDC’s business in the long run, as it has a remaining oil and gas reserve life of 17 years.

Oil production (MMBOPD)

Gas production (BBUPD)

Crude oil ASP (US$/bbl)

Lifting cost (US$/bbl)

Net capex (US$mn)



Company Guide


Balance Sheet:

Balance sheet is solid, no liquidity issues. We also do not see any liquidity issue for MEDC, as it had US$400 cash balance in 1Q16, with the maturing debt this year at US$253m. Moreover, we also expect its EBITDA to interest to remain above 2.0x going forward, given MEDC’s low operating cash cost structure


MEDC’s share price trend is in line with the global crude oil price outlook, as crude oil price is one of the key drivers of MEDC’s overall drilling activities, expansion strategy and earnings growth. Its share price tumbled last year in tandem with crude oil prices, though it has rebounded in the past month on the back of speculation that MEDC will acquire the Newmont's Batu Hijau Indonesia mining assets.

Key Risks:

Crude oil price. If the crude oil price dips below our price range, the impact on Indonesia’s oil and gas industry could be larger than expected. This would translate into lower ASP for MEDC and hence, lead to weaker-than-expected earnings growth.

Execution risk. Our earnings forecast also depends on MEDC’s execution capability to maintain its cash cost per barrel at low levels, enhance its depleted existing reserves and achieve successful exploration investments.

Worse-than-expected oil and gas lifting performance. We assume natural gas production volume would still be able to offset the oil production volume going forward. If MEDC cuts natural gas production, its operational and financial performance will come in below our expectations.

Company Background

MEDC is an integrated energy company that is in involved in oil and gas exploration and production activities in Indonesia and internationally.


Capital Expenditure

ROE (%)

Forward EV/EBITDA (x)

PB Band (x)


Average

+1 stdev

+2 stdev

-1 stdev

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16

(x)


Company Guide


Key Assumptions

FY Dec 2014A 2015A 2016F 2017F 2018F

Oil production (MMBOPD) 22.2 22.0 19.8 19.8 19.8 Gas production (BBUPD) 141 130 132 141 148 Crude oil ASP (US$/bbl) 97.8 49.0 45.0 50.0 57.0 Lifting cost (US$/bbl) 13.8 14.2 12.0 12.0 12.0 Capex (US$mn) (308) 282 (121) (141) (122)

Segmental Breakdown

FY Dec 2014A 2015A 2016F 2017F 2018F

Revenues (US$m)

Oil and gas sales 701 574 517 572 637 Chemicals and other 36.1 32.6 17.0 17.0 17.0 Services 13.2 21.5 21.5 21.5 21.5 Total 751 629 555 611 675

Income Statement (US$m)

FY Dec 2014A 2015A 2016F 2017F 2018F

Revenue 751 629 555 611 675 Cost of Goods Sold (480) (420) (343) (330) (338) Gross Profit 271 208 212 281 338 Other Opng (Exp)/Inc (106) (119) (108) (109) (121) Operating Profit 165 89.5 104 172 217 Other Non Opg (Exp)/Inc 0.0 7.20 0.0 0.0 0.0 Associates & JV Inc 7.10 7.20 7.20 7.20 7.20 Net Interest (Exp)/Inc (61.0) (71.2) (77.0) (91.4) (97.0) Exceptional Gain/(Loss) 0.0 (179) 0.0 0.0 0.0 Pre-tax Profit 111 (146) 34.2 87.6 127 Tax (97.8) (33.5) (12.0) (30.7) (44.4) Minority Interest (3.6) (2.0) (1.1) (2.8) (4.1) Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit 9.60 (182) 21.1 54.1 78.3 Net Profit before Except. 9.60 (2.8) 21.1 54.1 78.3 EBITDA 259 231 222 275 327 Growth

Revenue Gth (%) (15.3) (16.3) (11.6) 10.0 10.6 EBITDA Gth (%) (27.6) (10.7) (3.9) 23.8 18.7 Opg Profit Gth (%) (33.7) (45.7) 16.1 65.3 26.1 Net Profit Gth (Pre-ex) (%) (72.5) nm nm 156.4 44.8 Margins & Ratio

Gross Margins (%) 36.1 33.1 38.2 46.0 50.0 Opg Profit Margin (%) 22.0 14.2 18.7 28.1 32.1 Net Profit Margin (%) 1.3 (28.9) 3.8 8.9 11.6 ROAE (%) 1.1 (22.6) 2.9 6.5 8.6 ROA (%) 0.4 (6.5) 0.7 1.9 2.6 ROCE (%) 0.8 3.5 2.6 4.3 5.2 Div Payout Ratio (%) 52.5 N/A 20.0 10.0 20.0 Net Interest Cover (x) 2.7 1.3 1.4 1.9 2.2


Flattish oil production outlook as MEDC will focus on maximising its profitability and cashflow


Company Guide



FY Dec 1Q2015 2Q2015 3Q2015 4Q2015 1Q2016

Revenue 128 146 144 210 145 Cost of Goods Sold (78.0) (101) (80.2) (161) (87.0) Gross Profit 49.8 45.0 64.1 48.9 57.6 Other Oper. (Exp)/Inc (32.1) (16.3) (39.7) (30.7) (23.2) Operating Profit 17.6 28.7 24.4 18.3 34.4 Other Non Opg (Exp)/Inc 0.0 0.0 (23.9) (148) (5.8) Associates & JV Inc 2.20 1.60 2.50 0.90 0.50 Net Interest (Exp)/Inc (15.6) (18.8) (15.5) (21.4) (23.7) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 4.20 11.6 (12.5) (150) 5.40 Tax (5.5) (4.1) (14.6) (9.3) 5.60 Minority Interest (1.2) (0.5) (1.6) 1.30 (0.8) Net Profit (1.5) (16.1) (27.0) (144) 10.2 Net profit bef Except. (1.5) (16.1) (27.0) (144) 10.2 EBITDA 44.9 52.6 60.4 58.4 65.0

Growth

Revenue Gth (%) (35.8) 14.4 (1.2) 45.5 (31.1) EBITDA Gth (%) 6.4 17.1 14.9 (3.3) 11.2 Opg Profit Gth (%) (60.8) 62.9 (15.1) (25.1) 88.1 Net Profit Gth (Pre-ex) (%) nm (998.9) (68.2) (432.1) nm Margins

Gross Margins (%) 39.0 30.8 44.4 23.3 39.8 Opg Profit Margins (%) 13.8 19.7 16.9 8.7 23.8 Net Profit Margins (%) (1.1) (11.0) (18.7) (68.4) 7.1

Balance Sheet (US$m)

FY Dec 2014A 2015A 2016F 2017F 2018F

Net Fixed Assets 1,396 986 996 1,041 1,060 Invts in Associates & JVs 0.0 0.0 0.0 0.0 0.0 Other LT Assets 556 879 879 879 879 Cash & ST Invts 475 692 561 716 770 Inventory 39.3 40.1 28.1 27.0 27.7 Debtors 102 98.5 75.2 82.6 91.4 Other Current Assets 135 217 217 217 217 Total Assets 2,702 2,913 2,756 2,963 3,045

ST Debt 184 258 230 344 344 Creditor 91.9 77.4 65.7 63.1 64.7 Other Current Liab 192 191 192 211 224 LT Debt 922 1,322 1,123 1,100 1,100 Other LT Liabilities 392 360 360 360 360 Shareholder’s Equity 911 699 780 876 939 Minority Interests 9.60 5.10 6.20 9.10 13.2 Total Cap. & Liab. 2,702 2,913 2,756 2,963 3,045

Non-Cash Wkg. Capital (8.2) 87.5 62.8 53.0 47.2 Net Cash/(Debt) (631) (888) (791) (728) (674) Debtors Turn (avg days) 59.6 58.1 57.1 47.2 47.0 Creditors Turn (avg days) 86.6 105.5 112.5 100.7 99.3 Inventory Turn (avg days) 35.5 49.5 53.6 43.1 42.5 Asset Turnover (x) 0.3 0.2 0.2 0.2 0.2 Current Ratio (x) 1.6 2.0 1.8 1.7 1.7 Quick Ratio (x) 1.2 1.5 1.3 1.3 1.4 Net Debt/Equity (X) 0.7 1.3 1.0 0.8 0.7 Net Debt/Equity ex MI (X) 0.7 1.3 1.0 0.8 0.7 Capex to Debt (%) 27.8 (17.9) 8.9 9.8 8.4 Z-Score (X) 1.1 0.9 0.9 0.9 1.0


Earnings hit by one-off impairment charges despite core earnings being still positive

Strong balance sheet will guarantee MEDC’s survival in the current low oil price environment


Company Guide


Cash Flow Statement (US$m)

FY Dec 2014A 2015A 2016F 2017F 2018F

Pre-Tax Profit 111 (146) 34.2 87.6 127 Dep. & Amort. 87.0 127 111 96.0 103 Tax Paid (97.8) (33.5) (12.0) (30.7) (44.4) Assoc. & JV Inc/(loss) (7.1) 0.0 0.0 0.0 0.0 Chg in Wkg.Cap. 28.7 (53.0) 24.7 9.70 5.90 Other Operating CF 41.5 (32.3) 0.0 0.0 0.0 Net Operating CF 163 (138) 158 163 191 Capital Exp.(net) (308) 282 (121) (141) (122) Other Invts.(net) (27.3) (6.2) 0.0 0.0 0.0 Invts in Assoc. & JV 0.0 128 0.0 0.0 0.0 Div from Assoc & JV 0.50 (451) 0.0 0.0 0.0 Other Investing CF 21.0 0.0 0.0 0.0 0.0 Net Investing CF (314) (47.2) (121) (141) (122) Div Paid (5.0) 0.0 (4.2) (5.4) (15.7) Chg in Gross Debt 205 474 (228) 92.1 0.0 Capital Issues 20.5 (23.4) 64.2 47.0 0.0 Other Financing CF (127) (6.4) 0.0 0.0 0.0 Net Financing CF 93.9 444 (168) 134 (15.7) Currency Adjustments (0.7) 0.0 0.0 0.0 0.0 Chg in Cash (57.3) 259 (131) 155 53.8 Opg CFPS (Rp) 534 (337) 528 607 734 Free CFPS (Rp) (574) 572 148 84.9 276



Source: DBS Vickers

Analyst: William SIMADIPUTRA

S.No. Da teClos ing

Pric eTa rge t Pri c e

Ra ting

1 15 Dec 15 765 820 HOLD

2 01 Apr 16 1435 820 HOLD

3 20 Apr 16 1385 1350 HOLD

4 01 Jul 16 1870 1350 BUY

Note : Share price and Target price are adjusted for corporate actions.

1

23

4

636

836

1036

1236

1436

1636

1836

Sep-15 Jan-16 May-16 Sep-16

Rp

Our capex forecast is in line with management’s capital efficiency strategy and guidance


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DBS Bank recommendations are based an Absolute Total Return* Rating system, defined as follows:

STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)

BUY (>15% total return over the next 12 months for small caps, >10% for large caps)

HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)

FULLY VALUED (negative total return i.e. > -10% over the next 12 months)

SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)

Share price appreciation + dividends

Completed Date: 16 Dec 2016 12:30:20 (SGT) Dissemination Date: 16 Dec 2016 15:54:32 (SGT) GENERAL DISCLOSURE/DISCLAIMER This report is prepared by DBS Bank Ltd. This report is solely intended for the clients of DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd, its respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBS Bank Ltd. The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS Bank Ltd, its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively, the “DBS Group”)) do not make any representation or warranty as to its accuracy, completeness or correctness. Opinions expressed are subject to change without notice. This document is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate independent legal or financial advice. The DBS Group accepts no liability whatsoever for any direct, indirect and/or consequential loss (including any claims for loss of profit) arising from any use of and/or reliance upon this document and/or further communication given in relation to this document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. The DBS Group, along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this document. The DBS Group may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies. Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments. The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed and it may not contain all material information concerning the company (or companies) referred to in this report and the DBS Group is under no obligation to update the information in this report. This publication has not been reviewed or authorized by any regulatory authority in Singapore, Hong Kong or elsewhere. There is no planned schedule or frequency for updating research publication relating to any issuer. The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and assumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates on which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly from actual results. Therefore, the inclusion of the valuations, opinions, estimates, forecasts, ratings or risk assessments described herein IS NOT TO BE RELIED UPON as a representation and/or warranty by the DBS Group (and/or any persons associated with the aforesaid entities), that: (a) such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and (b) there is any assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk

assessments stated therein. Please contact the primary analyst for valuation methodologies and assumptions associated with the covered companies or price targets. Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies) mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the commodity referred to in this report. DBS Vickers Securities (USA) Inc ("DBSVUSA")"), a U.S.-registered broker-dealer, does not have its own investment banking or research department, has not participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months and does not engage in market-making.


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ANALYST CERTIFICATION The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst(s) also certifies that no part of his/her compensation was, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in the report. The DBS Group has procedures in place to eliminate, avoid and manage any potential conflicts of interests that may arise in connection with the production of research reports. As of 16 Dec 2016, the analyst(s) and his/her spouse and/or relatives who are financially dependent on the analyst(s), do not hold interests in the securities recommended in this report (“interest” includes direct or indirect ownership of securities). The research analyst(s) responsible for this report operates as part of a separate and independent team to the investment banking function of the DBS Group and procedures are in place to ensure that confidential information held by either the research or investment banking function is handled appropriately. COMPANY-SPECIFIC / REGULATORY DISCLOSURES 1. DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates have proprietary positions in

Sembcorp Marine, Sembcorp Industries, Yangzijiang Shipbuilding, Cosco Corporation, Ezion Holdings, Ezra Holdings, The Bangchak Petroleum, IRPC Pcl, PTT, PTT Exploration & Production, PTT Global Chemical, Thai Oil PCL, CNOOC Ltd recommended in this report as of 30 Nov 2016.

2. DBS Bank Ltd does not market make in equity securities of the issuer(s) or company(ies) mentioned in this Research Report.

Compensation for investment banking services: 3. DBS Bank Ltd., DBSVS, their subsidiaries and/or other affiliates of DBSVUSA have received compensation, within the past 12 months for

investment banking services from Ezion Holdings, Ezra Holdings, Nam Cheong Ltd, Medco Energi Internationalas of 30 Nov 2016

4. DBS Bank Ltd., DBSVS, their subsidiaries and/or other affiliates of DBSVUSA, within the next 3 months, will receive or intend to seek compensation for investment banking services from Medco Energi International as of 30 Nov 2016

5. DBS Bank Ltd., DBSVS, their subsidiaries and/or other affiliates of DBSVUSA have managed or co-managed a public offering of securities for Ezion Holdings, Nam Cheong, Medco Energi International in the past 12 months, as of 30 Nov 2016

6. DBSVUSA does not have its own investment banking or research department, nor has it participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively.

Disclosure of previous investment recommendation produced: 7. DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates may have published other

investment recommendations in respect of the same securities / instruments recommended in this research report during the preceding 12 months. Please contact the primary analyst listed in the first page of this report to view previous investment recommendations published by DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates in the preceding 12 months.


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RESTRICTIONS ON DISTRIBUTION

General This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation.

Australia This report is being distributed in Australia by DBS Bank Ltd. (“DBS”) or DBS Vickers Securities (Singapore) Pte Ltd (“DBSVS”), both of which are exempted from the requirement to hold an Australian Financial Services Licence under the Corporation Act 2001 (“CA”) in respect of financial services provided to the recipients. Both DBS and DBSVS are regulated by the Monetary Authority of Singapore under the laws of Singapore, which differ from Australian laws. Distribution of this report is intended only for “wholesale investors” within the meaning of the CA.

Hong Kong This report is being distributed in Hong Kong by or on behalf of, and is attributable to DBS Vickers (Hong Kong) Limited which is licensed and regulated by the Hong Kong Securities and Futures Commission and/or by DBS Bank (Hong Kong) Limited which is regulated by the Hong Kong Monetary Authority and the Securities and Futures Commission. Where this publication relates to a research report, unless otherwise stated in the research report(s), DBS Bank (Hong Kong) Limited is not the issuer of the research report(s). This publication including any research report(s) is/are distributed on the express understanding that, whilst the information contained within is believed to be reliable, the information has not been independently verified by DBS Bank (Hong Kong) Limited. This report is intended for distribution in Hong Kong only to professional investors (as defined in the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong) and any rules promulgated thereunder.) For any query regarding the materials herein, please contact Paul Yong (CE. No. ASE988) at [email protected].

Indonesia This report is being distributed in Indonesia by PT DBS Vickers Securities Indonesia.

Malaysia This report is distributed in Malaysia by AllianceDBS Research Sdn Bhd ("ADBSR"). Recipients of this report, received from ADBSR are to contact the undersigned at 603-2604 3333 in respect of any matters arising from or in connection with this report. In addition to the General Disclosure/Disclaimer found at the preceding page, recipients of this report are advised that ADBSR (the preparer of this report), its holding company Alliance Investment Bank Berhad, their respective connected and associated corporations, affiliates, their directors, officers, employees, agents and parties related or associated with any of them may have positions in, and may effect transactions in the securities mentioned herein and may also perform or seek to perform broking, investment banking/corporate advisory and other services for the subject companies. They may also have received compensation and/or seek to obtain compensation for broking, investment banking/corporate advisory and other services from the subject companies.

Wong Ming Tek, Executive Director, ADBSR

Singapore This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) or DBSVS (Company Regn No. 198600294G), both of which are Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd and/or DBSVS, may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, DBS Bank Ltd accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact DBS Bank Ltd at 6327 2288 for matters arising from, or in connection with the report.

Thailand This report is being distributed in Thailand by DBS Vickers Securities (Thailand) Co Ltd. Research reports distributed are only intended for institutional clients only and no other person may act upon it.


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United Kingdom This report is produced by DBS Bank Ltd which is regulated by the Monetary Authority of Singapore.

This report is disseminated in the United Kingdom by DBS Vickers Securities (UK) Ltd, ("DBSVUK"). DBSVUK is authorised and regulated by the Financial Conduct Authority in the United Kingdom. In respect of the United Kingdom, this report is solely intended for the clients of DBSVUK, its respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBSVUK. This communication is directed at persons having professional experience in matters relating to investments. Any investment activity following from this communication will only be engaged in with such persons. Persons who do not have professional experience in matters relating to investments should not rely on this communication.

Dubai

This research report is being distributed in The Dubai International Financial Centre (“DIFC”) by DBS Bank Ltd., (DIFC Branch) having its office at PO Box 506538, 3rd Floor, Building 3, East Wing, Gate Precinct, Dubai International Financial Centre (DIFC), Dubai, United Arab Emirates. DBS Bank Ltd., (DIFC Branch) is regulated by The Dubai Financial Services Authority. This research report is intended only for professional clients (as defined in the DFSA rulebook) and no other person may act upon it.

United States This report was prepared by DBS Bank Ltd. DBSVUSA did not participate in its preparation. The research analyst(s) named on this report are not registered as research analysts with FINRA and are not associated persons of DBSVUSA. The research analyst(s) are not subject to FINRA Rule 2241 restrictions on analyst compensation, communications with a subject company, public appearances and trading securities held by a research analyst. This report is being distributed in the United States by DBSVUSA, which accepts responsibility for its contents. This report may only be distributed to Major U.S. Institutional Investors (as defined in SEC Rule 15a-6) and to such other institutional investors and qualified persons as DBSVUSA may authorize. Any U.S. person receiving this report who wishes to effect transactions in any securities referred to herein should contact DBSVUSA directly and not its affiliate.

Other jurisdictions In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is intended only for qualified, professional, institutional or sophisticated investors as defined in the laws and regulations of such jurisdictions.

DBS Bank Ltd

12 Marina Boulevard, Marina Bay Financial Centre Tower 3 Singapore 018982 Tel. 65-6878 8888

e-mail: [email protected] Company Regn. No. 196800306E

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