CH Karnchang

Valuation driven by subsidiaries BUY

CH Karnchang Plc (CK)

Raise TP to Bt34 from Bt30 as we switch to use of market value to value its

subsidiaries rather than our target prices. We use an 8-year DCF for its contractor

business and assign Bt25 for its own construction revenue, minus Bt10, which works

out to Bt15, plus valuation for its investments of Bt19 (Bt5.5 for TTW, Bt2.6 for BECL

instead of Bt3.5, Bt6.0 for BMCL instead of Bt3.8 and Bt4.0 for CKP instead of Bt2.2).

This change raises the value of subsidiary holdings by 13% to Bt19 from Bt15. We thus

lift target price by Bt4 per share from the previous Bt30.

Current backlog reported at Bt101bn. New contracts in 2014 include Bangpa-in

Cogeneration (SPP) Phase 2 with a value of Bt4.75bn and Nam Bak, a hydroelectric

power plant in Laos with a value of Bt17bn. This suggests at least Bt22bn added to

CK’s backlog in 2014. CK has a good chance of getting the M&E job from BMCL (bidding

expected to close before end-2014), which is expected to be awarded the Bt100bn

concession for the M&E system and O&M services for the Blue Line extension (27km).

Then BMCL will hire CK for the M&E system, valued at ~Bt25bn (26 stations, compared

to Bt20bn for the Purple Line’s 22 stations). This means CK has proportionately more

backlog from the MRT than peers.

Expect government projects to kick off in 4Q14. We believe CK will get Bt360bn of

the Bt2.4trn planned infrastructure projects, or an average of Bt46bn (between Bt30-

65bn) per year for the next eight years. CK expects contract signings to flow rapidly in

2015, with CK itself getting ~20% of the projects begun, possibly as much as Bt150bn-

Bt200bn in 2015. We expect two MRT projects to open for bid in 4Q14. The first is MRT

North Green Line (Morchit-KooKot), with total civil work value of Bt26bn; the bid

winner is expected to be announced before end-2014. This has four contracts and CK is

placed to win the two largest (Bt14bn, and Bt6bn). The second is the Pink Line (Khae

Rai-Minburi). This has a total project value of Bt56bn and is expected to open for

bidding in 2014. This is just the start of what promises to be a strong flow of projects

through 2022.

Expect impressive 3Q14F with large extra income. The company will book extra

income of Bt1bn from the sale of 5% of BMCL and dividends of Bt227mn from TTW and

Bt93mn from BECL. Construction revenue will be led by Xayaburi, MRT Blue Line, M&E

for MRT Purple Line and Si-Rat Expressway. We expect 3Q14 profit at ~Bt1.4bn.

Raise TP to Bt34, maintain BUY. We feel the government will proceed as planned

and that the huge buildup of Thailand’s infrastructure will make solid moves, with the

first bid – for the MRT North Green Line - on September 30. CK also has growth value

from subsidiaries, especially BMCL, in which it holds 25% and CKP (30%), both of which

are poised for high growth. We may raise forecast after 3Q14 preview meeting.