Ch Karnchang

Ch Karnchang Plc (CK)

Si Rat expressway project worth Bt22.5bn awaits cabinet approval. Earlier in
the year, Bangkok Expressway (BECL), the concessionaire of this expressway, obtained
shareholder approval to engage CK as project manager for its construction. BECL
expects to obtain cabinet approval soon, after which it will sign the contract with CK.
Signing this project will increase CK’s backlog by 20% to Bt130bn (new record high), to
77% of our full-year assumption of new projects of Bt30bn.

Winners of Red Line Contracts 2 and 3 coming soon. The government is currently
finalizing the details with JICA, the loan provider for Red Line, and expects to sign the
construction contract (Red Line Contract 1) with STEC within a month or two. After
that, it can open the bidding envelopes for Red Line Contracts 2 and 3. As only CK and
ITD are eligible to win the remaining two contracts, we expect each to get one.

Management confirms construction of Xayaburi project on course plus it plans
to list CK Power. According to article in Reuters last week, CK’s CEO confirmed that it
has not yet received any letter from Laos to stop construction on this hydropower
project on the Mekong, thus preparation work is going ahead and it expects to book
Bt4bn in revenue from this project this year. Management also said it plans to list CK
Power (it has 38% stake) later this year or early next year. This could result in some
investment gain depending on how much of its holding it sells.

Weak 2Q12, expect turnaround in 2H12. CK posted a core loss in 2Q12 of Bt38mn
vs. core profit of Bt108mn in the previous quarter. This was largely due to a spike in
SG&A expense. The 2Q12 bottom line was boosted by investment gain, resulting in a
net profit of Bt124mn. For 1H12, CK reported core profit of Bt70mn; we maintain our
full-year expectation of core profit of Bt497mn on the expectation of more revenue to
be booked in 2H12 as work on new projects signed this year speeds up.

Limited downside; BUY with SOTP TP of Bt10.8/sh. We value associate companies
at fair value and the construction business based on EV/EBITDA of 20x (2x over STEC
since CK’s backlog is twice that of STEC). We see limited downside to share price
especially after the material underperformance relative to the SET in 2011 and YTD: CK
share price fell 20% in 2011 and is down 5% this year vs. an 18% increase in SET. The
positive news flow noted should help act as catalyst for the stock price. At the current
price, CK is trading on P/BV of just 1.7x, slightly below its 10-year average of 2.0x.