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Malaysia

PP 7767/09/2010(025354)

RHB Research Institute Sdn Bhd A member of the RHB Banking Group
Company No: 233327 -M

New Listing

12 July 2010 Issue / Offer : Price Fair Value : RM0.58 RM0.595

MARKET DATELINE

Tatt Giap Group Bhd
Public Issue Of 14.6m Shares and Offer For Sale Of 14.2m Shares

Table 1: Investment Statistics Pretax FYE Dec 2009A 2010F 2011F 2012F Turnover (RMm) 225.4 241.7 273.9 301.3 Profit (RMm) 10.5 8.2 14.1 17.0 Net Profit (RMm) 6.9 6.1 10.6 12.7 EPS (sen) 6.7 5.9 10.4 12.5 EPS Growth (%) 76.5 -11.9 74.7 20.3 PER (x) 8.8 10.0 5.7 4.8 P/NTA (x) 0.8 0.7 0.6 0.6 ROE (%) 8.5 7.0 10.9 11.6

Bloomberg: TGGBMK Gearing (x) 1.3 1.2 1.2 1.2 GDY (%) -

Valuations based on estimated fair value of RM0.595/share Issued capital (m shares) 102.0 (RM0.50 par) Market capitalisation (RMm) 60.7

Background. Founded in 1978, Tatt Giap is one of the major players in the stainless steel processing industry, primarily involved in the manufacturing of stainless steel pipes and tubes, cold drawn and polished carbon steel/stainless steel bars, electro galvanised (EG) steel coils. Apart from its manufacturing business, Tatt Giap is also involved in the distribution of thirdparty steel products for various types of users, ranging from automotive part producers to construction companies. Key highlights. Key highlights for Tatt Giap are: 1. Long-term demand prospects for steel and steel-related products remain good. We remain positive on the sector’s longer-term outlook, as: 1) shortages of iron ore globally are likely to persist over the next two years, and this will result in an uptrend in iron ore prices over the medium term, hence pushing steel product prices upward; and 2) the Chinese government’s continued efforts to curb excess capacity in the country’s steel sector, and lower capacity would help boost pricing power of steel producers; Collaboration with Nippon Metal Industry. The collaboration with Nippon Metal Industry Co. Ltd enables Tatt Giap to secure a constant and reliable supply of stainless steel at competitive price and technical support, and this collaboration gives Tatt Giap an edge over its competitors, both in terms of production cost and product quality; and Its strong market position in the steel processing industry. Among the total 30 steel processing companies in Malaysia, Tatt Giap ranked 5th in terms of revenue (with an estimated market share of 8.2%) in 2008. The strong market position translates to better economies of scale, pricing power as well as market reach.

LISTING DETAILS Listing Sought Listing Date Public Issue Main Market of Bursa Malaysia 22 Jul 2010 14.56m shares including:

- 6.0m to
Malaysian public; - 6.56m private placement; and - 2.0m to eligible employees. Offer for Sale 14.2m shares including: - 10.2m private placement to Bumiputera investors; and - 4.0m private placement. MAJOR SHAREHOLDERS Dato’ Siah Kok Poay 51.0%

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MANAGEMENT FORECAST FY10 Revenue (RM m) Net Profit (RM m) Net EPS (sen) Net PER (x) NA NA NA NA

Earnings forecasts. We project FY12/11-12 net profit to rise by 74.7% and 20.3% to RM10.6m and RM12.7m respectively, as we expect both demand and prices of steel products to recover from FY12/11 on the back of firmer global recovery. Valuation. We value Tatt Giap at RM0.595/share, based on 5.7x FY12/11 EPS of 10.4 sen, which is in line with the average CY2011 PER of the peers. BUSINESS BACKGROUND Please read important disclosures at the end of this report.

Chye Wen Fei (603) 92802172 chye.wen.fei@rhb.com.my

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12 July 2010 Background. Founded in 1978, Tatt Giap is one of the major players in the stainless steel processing industry, primarily involved in the manufacturing of stainless steel pipes and tubes, cold drawn and polished carbon steel/stainless steel bars, electro galvanised (EG) steel coils (see Table 2). Apart from its manufacturing business, Tatt Giap is also involved in the distribution of third-party steel products for various types of users, ranging from automotive part producers to construction companies (see Table 3).
Table 2: List of Manufactured Products Type of sheets, plates and strips Hot-rolled steel JIS specifications SPHC-Black SPHV-P/O SAPH SAPH SAPH SAPH SAPH SAPH SAPH SAPH Cold-rolled steel 310-P/O 370-P/O 400-P/O 440-P/O 490-P/O 540-P/O 590-P/O 780-P/O Principal applications Trolley, elevator and escalator, computer parts, castor wheel, electrical trucking and lighting, fire extinguisher and home appliances. Automotive parts

SPCC-SD SPCD-SD SPCEN-SD S45C S55C SPFC 440 SPC270 SPC440 SPC590

Office equipment and furniture, automotive parts, castor wheel, roller shutter, elevator and escalator. Automotive parts

GI steel

SGCC-E SGCC-Z SGCC-R SGHC-R SGCD1 SGCD3 SGACC-45/45 SGACD-45/45 SGACE-45/45 SGCD2 SECC-P SECC-AFP SUS 304/304L SUS 316/316L

Window frame, door frame, ceiling tee and channel, roofing truss, farm equipment, air conditioning and insulation, cooling tower, racking, elevator and excalator.

Galvanealed steel

Automotive parts

EG steel Hot-rolled stainless steel

Computer parts, window frame, door frame, automotive parts, home appliances, audio and visual components. Kitchen utensils, food and agricultural processing plants and building architecture. Chemical, petrochemical, fertilizer, food processing, desalination plants and coastal installations. Kitchen utensils, food and agricultural processing plants and building architecture. Chemical, petrochemical, fertilizer, food processing, desalination plants and coastal installations. Kitchen utensils, furniture and household appliances. Water works, air-conditioning, palm oil and sugar refiners, cement plants, food processing, petrochemical and pharmaceutical industries. Primarily used in the manufacturing of office automation, automotive parts, industrial machines, fasteners, home electrical appliances and the furniture industry.

Cold-rolled stainless steel

SUS 304/304L SUS 316/316L SUS 430

Stainless steel tubes Nominal pipe size – 3/8, ½, ¾, 1, 11/4, 11/2, 2, 21/2, 3, 31/2, 4, 5, 6, 8, 10, 12, 14, 16 Cold drawn and polished carbon steel/stainless steel bars Nominal bar size (mm) – 4.7680.00

SCH5S SCH10S SCH40S SGD1/1K/2K SWRM10K/12K S45C, S25C SAE 1018 SAE1020 12L14, 1215 302HQ, 303 303CU, 303F 304, 304HC, 304L 316,316L, 431 SUP3, SUP9

Source: Company

TATT GIAP GROUP

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BERHAD

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12 July 2010
Table 3: Products distributed Principal applications Product type Mechanical components Automotive parts E&E components Furniture and fittings Building and construction materials

Hot-rolled, cold-rolled, EG and GI steel Sheets and plates Hollow sections Lipped channels and purlins Beams and columns Round, square, flat and angled bars Tubes and pipes Stainless steel Sheets and plates Round, square and hexagon bars Flat, angled and channel bars Tubes and pipes Source: Company

Future plans 1. Expanding market reach. Tatt Giap plans to set up two new sales and marketing offices in Kuantan and Kuching (by mid and end-2011 respectively) to directly market its products and services to these customers, which are currently being serviced by its sales personnel from Johor Baru and Penang. Domestic expansion plan aside, Tatt Giap also plans to expand its market reach to the Middle East, Australasia, the rest of the ASEAN countries as well as the European region. Expanding downstream product range. Tatt Giap plans to expand its product range to pipe fittings (such as elbows, caps, tees and reducers) and metal parts over the next three years in order to: 1) complement its existing range of tube and pipe products; and 2) cater for industrial end users in the automotive, electrical and engineering (E&E), and building and construction sectors.

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Key highlights. Key highlights for Tatt Giap include: 1. Long-term demand prospects for steel and steel-related products remain good. Despite the weak near-term prospects of the overall steel sector in the region (on the back of heightened concerns on a sharper-than-expected economic slowdown that will have a negative impact on both demand and prices of steel products), we remain positive on the sector’s longer-term outlook, as: 1) Shortages of iron ore globally are likely to persist over the next two years, and this will result in an uptrend in iron ore prices over the medium term, hence pushing steel product prices upward; and 2) the Chinese government’s continued efforts to curb excess capacity in the country’s steel sector, and lower capacity would help boost pricing power of steel producers. Collaboration with Nippon Metal Industry. The collaboration between Tatt Giap and Nippon Metal Industry Co. Ltd (a leading manufacturer of stainless steel coils and sheet in Japan) began since 1997. The collaboration enables Tatt Giap to secure a constant and reliable supply of stainless steel at competitive price and technical support, and this collaboration gives Tatt Giap an edge over its competitors, both in terms of production cost and product quality. Its strong market position in the steel processing industry. Among the total 30 steel processing companies in Malaysia, Tatt Giap ranked 5th in terms of revenue (with an estimated market share of 8.2%) in 2008. The strong market position translates to better economies of scale, pricing power as well as market reach.

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Risk factors. Risks to our view include: 1. Fluctuation in prices of raw materials (in particular, steel). Tatt Giap’s financial performance relies on global steel price movement, witnessed by a RM3.3m writedown in Tatt Giap’s inventory in FY12/08 on the back of a sharp plunge in global steel prices.

TATT GIAP GROUP

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BERHAD

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12 July 2010 2. Foreign currency exposure. Approximately 34% of Tatt Giap’s raw materials are mainly transacted in USD, and this means the company is exposed to foreign currency exchange losses/gains arising from timing differences. Competition. Tatt Giap faces competition from various steel distributors, steel service centres and stainless steel pipe manufacturers, and potential new entrants into the industry, and there would be a downward pressure on the prices of both products and services (and hence Tatt Giap’s profitability) should demand for products and services decline.

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Utilisation of proceeds. Out of the RM8.4m expected to be raised from the listing exercise, Tatt Giap plans to utilise RM2.5m (29.6%) as listing expenses, while the remaining RM5.9m (70.4%) will be utilised to reduce its total borrowings (see Table 4).
Table 4: Utilisation of IPO Proceeds RM’000 Repayment of term loan borrowing Estimated listing expenses Total Source: Company 5,945 2,500 8,445 Estimated Timeframe for Use Within 1 year Within 2 months

Forecasts & Valuation Earnings forecasts. We project FY12/10 net profit to dip by 11.9% to RM6.1m, as we expect the recent decline in both demand and prices of steel prices in the region to weaken both buying sentiment and prices of steel products in 2H10, which will in turn weaken Tatt Giap’s overall performance in FY12/10. We project FY12/11-12 net profit to rise by 74.7% and 20.3% to RM10.6m and RM12.7m respectively, as we expect both demand and prices of steel products to recover from FY12/11 on the back of firmer global economic recovery. Valuation. We value Tatt Giap at RM0.595/share, based on 5.7x FY12/11 EPS of 10.4 sen, in line with the average CY2011 PER of the peers (see Table 5).
Table 5: Peers Comparison Share Price RM Choo Bee Metal Industries Engtex Group Hiap Teck Venture Tatt Giap Group* Average * Based on IPO price of RM0.58/share Source: RHBRI 1.80 1.03 1.25 0.58 Issued Shares m 109.9 198.0 327.4 102.0 Market Cap RMm 197.8 203.9 409.3 59.2 EPS (sen) CY2010 26.0 15.0 19.5 5.9 CY2011 33.0 16.0 23.5 10.4 PER (x) CY2010 6.9 6.9 6.4 9.8 6.7 CY2011 5.5 6.4 5.3 5.6 5.7

TATT GIAP GROUP

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12 July 2010
Table 6: Earnings Forecasts FYE Dec (RM’m) 2009 2010F 2011F 2012F

Revenue EBITDA EBITDA margin Depreciation EBIT EBIT margin Interest expense Other operating income Associate Pretax profit Pretax margin Tax expense Effective tax rate Net profit Net profit margin Growth Enlarged issued shares post IPO (m) Basic EPS (sen)
Source: Company; RHBRI

225.4 26.8 11.9% -9.7 17.0 7.6% -8.4 2.0 -0.2 10.5 4.6% -3.6 34.0% 6.9 3.0% 76.5% 102.0 6.7

241.7 23.0 9.5% -9.6 13.4 5.5% -7.2 2.0 0.0 8.2 3.4% -2.1 26.0% 6.1 2.5% -11.9% 102.0 5.9

273.9 28.8 10.5% -9.5 19.3 7.0% -7.2 2.0 0.0 14.1 5.1% -3.5 25.0% 10.6 3.9% 74.7% 102.0 10.4

301.3 31.6 10.5% -9.4 22.2 7.4% -7.2 2.0 0.0 17.0 5.6% -4.2 25.0% 12.7 4.2% 20.3% 102.0 12.5

TATT GIAP GROUP

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BERHAD

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12 July 2010
IMPORTANT DISCLOSURES
This report has been prepared by RHB Research Institute Sdn Bhd (RHBRI) and is for private circulation only to clients of RHBRI and RHB Investment Bank Berhad (previously known as RHB Sakura Merchant Bankers Berhad). It is for distribution only under such circumstances as may be permitted by applicable law. The opinions and information contained herein are based on generally available data believed to be reliable and are subject to change without notice, and may differ or be contrary to opinions expressed by other business units within the RHB Group as a result of using different assumptions and criteria. This report is not to be construed as an offer, invitation or solicitation to buy or sell the securities covered herein. RHBRI does not warrant the accuracy of anything stated herein in any manner whatsoever and no reliance upon such statement by anyone shall give rise to any claim whatsoever against RHBRI. RHBRI and/or its associated persons may from time to time have an interest in the securities mentioned by this report. This report does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. The securities discussed in this report may not be suitable for all investors. RHBRI recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a financial adviser. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives. Neither RHBRI, RHB Group nor any of its affiliates, employees or agents accepts any liability for any loss or damage arising out of the use of all or any part of this report. RHBRI and the Connected Persons (the “RHB Group”) are engaged in securities trading, securities brokerage, banking and financing activities as well as providing investment banking and financial advisory services. In the ordinary course of its trading, brokerage, banking and financing activities, any member of the RHB Group may at any time hold positions, and may trade or otherwise effect transactions, for its own account or the accounts of customers, in debt or equity securities or loans of any company that may be involved in this transaction. “Connected Persons” means any holding company of RHBRI, the subsidiaries and subsidiary undertaking of such a holding company and the respective directors, officers, employees and agents of each of them. Investors should assume that the “Connected Persons” are seeking or will seek investment banking or other services from the companies in which the securities have been discussed/covered by RHBRI in this report or in RHBRI’s previous reports. This report has been prepared by the research personnel of RHBRI. Facts and views presented in this report have not been reviewed by, and may not reflect information known to, professionals in other business areas of the “Connected Persons,” including investment banking personnel. The research analysts, economists or research associates principally responsible for the preparation of this research report have received compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors and firm revenues. The recommendation framework for stocks and sectors are as follows : Stock Ratings Outperform = The stock return is expected to exceed the FBM KLCI benchmark by greater than five percentage points over the next 6-12 months. Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price and translate into an absolute return of 15% or more over a period of three months, but fundamentals are not strong enough to warrant an Outperform call. It is generally for investors who are willing to take on higher risks. Market Perform = The stock return is expected to be in line with the FBM KLCI benchmark (+/- five percentage points) over the next 6-12 months. Underperform = The stock return is expected to underperform the FBM KLCI benchmark by more than five percentage points over the next 6-12 months. Industry/Sector Ratings Overweight = Industry expected to outperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months. Neutral = Industry expected to perform in line with the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months. Underweight = Industry expected to underperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months. RHBRI is a participant of the CMDF-Bursa Research Scheme and will receive compensation for the participation. securities, subject to the duties of confidentiality, will be made available upon request. Additional information on recommended

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TATT GIAP GROUP

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