TIEN WAH PRESS HOLDINGS BERHAD

(KLSE: TWP)

Presenter: Kenneth Lai (kennethlai.kl@gmail.com)

1. Investment Thesis – Multiple Drivers of Value

• Recommend investors to buy Tien Wah Press (TWP) with target share price of RM3.02, which represents ~26% upside from the current share price

• 4 Main Points to Investment Thesis• The market currently views TWP as less

attractive than other packaging companies thus underestimating its valuation

• Underfollowed by the investment community

• The market underestimates the levers TWP can pull to counter negative impact of competition

• Tougher operating environment would mean lesser competition into tobacco segment

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As of 29/8/13; in RM '000 except per share data

Current Capitalization

Share Price 2.40RM

Diluted Shares Oustanding ('mil) 96,495

Market Capitalization 231,588RM

Cash & Equivalents (48,864)

Investment in Associates (13,349)

Debt 97,713

Minority Interest 71,661

Unfunded Pension Liability 1,784

Enterprise Value 340,533RM

Trading Statistics

52-Week Range RM 1.93 - RM 2.65

Dividend Yield 6.6%

Avg. Daily Volume 10,000

2. Business Overview

• Printing (2012 rev: RM187mil): Production factories in Malaysia, Vietnam, Australia, printing for tobacco and FMCG products

• Trading (2012 rev: RM221mil): Operated via Hong Kong and Singapore to trade mainly tobacco related products

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Business DescriptionRevenue Breakdown

Printing

46%Trading

54%

Singapore

49%

GeographySegment

Australia

30%

Malaysia

17%

Other Countries

4%

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

1.00

1.20

1.40

1.60

1.80

2.00

2.20

2.40

2.60

2.80

Jan-07 Oct-07 Jul-08 May-09 Feb-10 Dec-10 Sep-11 Jul-12 May-13

RM

'Mil

Tien Wah Press Holdings Bhd (KLSE:TIENWAH)

- Volume

Tien Wah Press Holdings Bhd (KLSE:TIENWAH)

- Share Pricing

2008: Acquisition of factory in

Australia and established a

full office in Hong Kong

2007: Acquisition of a factory in

Vietnam

2009: Acquisition of a second

factory in Vietnam

Acquisitions

3. Valuation Analysis

• TWP currently trades at 4.6x forward EV/EBITDA versus its peer average of 5.7x and 5yr average EV/EBITDA of 5.2x

• On a forward P/E basis, TWP currently trades at 7.2x– This is a significant

discount to its peer average of 10.1x and 5yr historical average P/E of 7.8x

• Based on the assessment on P/E, EV/EBITDA and Discounted Cash Flow Analysis (DCF), we arrive at a target share price of RM3.02 or ~26% upside to today’s share price

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Methodology Target Price

(RM '000 except per share data) Base Bear Bull

FY2013 Estimates

EBITDA 71,923RM 68,374RM 72,855RM

EPS 0.27RM 0.25RM 0.28RM

FCFF 27,841RM 30,530RM 27,135RM

Target Forward Multiples

EV/EBITDA1

4.7 x 3.7 x 8.4 x

P/E1

8.8 x 5.9 x 14.3 x

P/FCFF 10.0 x 8.9 x 10.3 x

Equity Price per Share

EV/EBITDA x EBITDA 3.10RM 1.83RM 5.25RM

P/E x EPS 2.74RM 2.05RM 3.97RM

DCF Implied Equity Value 3.21RM 2.35RM 3.43RM

Target Price 3.02RM 2.08RM 4.22RM

Upside (Downside) 26% -13% 76%1 Based on public comparables

4. Catalysts

• No sell-side coverage or conference calls, under the “unexciting” packaging sector

• Illiquid due to low floatation ~35% with ~54% owned by ultimate shareholder and ~14% held by Lembaga Tabung Angkatan Tentera

• Market underestimating TWP strength as the market leader in tobacco product packaging – pricing power advantage, as well as being the one of the top 5 commercial printing companies in Malaysia

• Niche business: Concentration in tobacco segment in addition to F&B segment

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Possible Reasons for Undervaluation

• Price discovery: research rating

initiation improves awareness

• Liquidity improvement via rights

issuance

• Margin expansion: operational

efficiency has continually improve and

wastage reduced over the years

• Acquisition of core business related

companies to increase market share and

enhance economies of scale

Catalysts

5. Strong Management Team & Cash Returns

• Strong and committed

management team with

laser focus on

cost, return, quality and

customer satisfaction

• Experienced management

team from holding

company providing strong

continuous support

• EBITDA margin +161bps

and ROIC + 143bps from

2009 to 2012

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Key Management

Tengku Tan Sri Dr. Mahaleel

Non-Executive Chairman

Jacco Djike

Group General Manager

“…customer complaints reducing by 30% from 2011.” “…an average of 20% of production time spent on product development and further quality programmes…”

- Jacco Djike

Cash Return to Shareholders

• Strong FCFF generation has allowed TWP

to pay down corporate debt and achieve the

lower end range of target debt/equity ratio of

0.2x and net debt/EBITDA ratio of 0.6x

• Such prudent capital management has

enabled TWP to consistently return dividend

to shareholders with an 5yr average dividend

payout ratio of ~50%

• We expect for a dividend payout of 35% of

FCFF for the next 5 years, assuming no

minimal debt repayment over the same

period. This represents a dividend yield of

~5% on top of capital gains.

6. Risks and Mitigants

• Australia plain packaging law that was announced in late 2012– Such measure has prompted four countries

(Ukraine, Cuba, Honduras, Dominican Republic) backed by BAT and Philip Morris to file a trade dispute at the World Trade Organisation. TWP operates in a niche market serving tobacco customers, where tougher operating environment would mean lesser competition and new market entrant

• Customer concentration risk– TWP has a 7+3 (7 years plus rights to 3 years extension) contract agreement

with BAT. Switching cost should be medium to medium high which includes but not limited to compromise on quality, supply chain, and negotiation on trade terms. Hence we believe there will be significant hurdles/switching cost for BAT to switch from TWP to other suppliers.

• Emergence of 3D printer– 3D printer has not reached its critical mass for mass productivity. Even if it

materializes, TWP has more than sufficient FCF, cash and low leverage to hop on the 3D printer bandwagon. Management has always kept themselves current with the latest technological advancement to stay ahead of their competition.

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7. Investment Recommendation: Buy TWP at RM2.40

Multiple drivers to realize TWP’s intrinsic value of RM3.02 per share

• Tougher operating environment would mean small players would give in to the

competition, and TWP has healthy balance sheet to acquire at depressed prices

• TWP’s is underfollowed and business model is misunderstood

• Strong revenue growth opportunities outside South East Asia

• Strong support from holding company with strategic partnerships to continually

enhance cost synergy

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