Ch Karnchang

Ch Karnchang Plc (CK)

 - Transit line expansions add work for CK, riders for BMCL
 - Just two more years before BMCL becomes a cash cow
 - Xayaburi: still building, PPA in hand, working on EHIA as ordered by court
 - Recommend BUY, TP of Bt30

More transit lines, more jobs, more passengers for BMCL. CK has the M&E contract for the Purple Line (Bang Yai-Bang Sue) valued at Bt20bn (2013-2016). This line will be connected to the existing Blue Line at Tao Poon MRT station, with operations scheduled to start in 2H16. This is expected to add 100,000 riders per day to the BMCL’s MRT. Then, two years after that, the extension Blue Line will start running, adding more passengers. The existing Blue Line carries ~257,000 passengers per day, representing growth of 8.8%YoY; BMCL expects average growth of 8-10% between 2014-2016 to reach 300,000 passengers in 2016 on the existing line. When the Purple Line starts up, passenger numbers will surge to 400,000 in 2017. With the Blue Line extension (27 km: Bangsue-Tha Phra and Hua Lamphong-Bang Kae.) scheduled to run in 2018, bidding for the O&E concession should open this year.
Only two more years of red ink for BMCL. BMCL operates the MRT Blue Line (Bang Sue-Hua Lamphong) and has yet to reach breakeven, though losses are coming down steadily, to a 1Q14 net loss of Bt74mn, which beat consensus estimate of a loss of Bt100mn. The loss will climb in 2H14, however, as it must make its first payment of ~Bt500mn, half of the fixed revenue sharing to the MRTA of Bt981mn (from the 11th year of its concession). Consensus estimates this will increases losses to Bt0.05/share (loss of Bt928mn) in 2015 after a loss of Bt0.03/share (loss of Bt636mn) in 2014 and. BMCL should be in the clear from 2016, with earnings surging to Bt1bn p.a. from 2017.
Xayaburi overhang gone. The Supreme Administrative Court (SAC) accepted a case against Thai government agencies purchasing power from the Xayaburi dam in Laos. The construction of this dam, in which CK holds 30%, is to contribute 30% of CK’s construction revenue in 2014-2019. The court has ordered the operators to run an Environment Health Impact Assessment (EHIA) for the eight provinces on the Thai side of the Mekong River. CK, as the main operator is working on meeting this stipulation and will sent documentation to the SAC in six months. The operator must clear the case with the court and protestors before the 2019 commercial startup. However, construction is proceeding without hindrance.
BUY: bullish on infrastructure plans and BMCL’s progress. We value CK using sum-of-the-parts, with 8-year DCF for its contractor business, which works out to Bt15, plus Bt15 for value of investments (Bt5.5/share for TTW, Bt3.5/share for BECL, Bt3.8 for BMCL and Bt2.2 for CKP). BMCL, in the red since startup, will finally get into the black and become a cash cow, with a surge in EBITDA and net profit from 2017. We are Neutral on BMCL, with TP of Bt1/share. We prefer CK, its parent with 30.19%; CK’s target price is Bt30.