Sino-Thai Engineering & Construction

Sino-Thai Engineering & Construction Plc (STEC)

2Q12A pre-tax profit up 48% YoY and 5% QoQ. STEC delivered very strong results
with core profit up 21% YoY to Bt266mn; since it resumed paying the normal level of
tax this quarter (tax shield used up), we use pre-tax numbers for comparative
purposes. At this level, growth was high at 48% YoY with gross margin actually +50bps
YoY and +40bps QoQ. This confirms our belief that gross margin for mass transit
projects won over the last three years is much higher than in the past due to less
competition.

Backlog and profit on track to hit new high this year. 1H12A profit accounts for
55% of our full-year projection. We expect profit to grow a further 15% this year to
Bt1.04bn after already doubling in 2011 from a jump in backlog of 1.3x to Bt48bn end-
2011. STEC is on track to achieve our assumption of new work worth Bt30bn this year,
and our expectation that backlog will rise further by 23% to Bt60bn by end-2012. YTD it
has signed projects worth Bt1.2bn, with others combined worth Bt26bn already
secured and close to signing.

Last month the government rolled out infrastructure projects every week. In
the last week of June the cabinet finally turned its attention to the languishing
infrastructure projects and approved 11 projects for Eastern Seaboard logistics
development worth Bt150bn. Then, from the beginning of July it took more action by:
1) confirming STEC as winner of the Bt18bn Red Line contract 1, 2) selling Terms of
Reference (TOR) for water projects worth combined ~Bt300bn (partly mega projects,
partly dams for flood prevention), 3) giving cabinet approval for a double railway
project worth Bt11bn with bid results expected in three months.

All chessmen in place, reiterate BUY with new target price of Bt20/sh. With
2Q12 results showing limited impact from the increase in minimum wage (2Q12 gross
margin at its highest for the last six quarters) and the government finally paying
attention to speeding up infrastructure projects, we believe STEC’s backlog will rise
significantly going forward, which will lead to valuation re-ratings – historically coming
when bidding starts for big projects. We upgrade our TP to Bt20 from Bt17 as we lift
our EV/backlog ratio to 0.36x, a premium of 20% from previously 0.3x, which is based on
a 5-year historical average in line with our more positive view on the sector outlook.
This is still conservative compared to the range of 0.6-