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TA Securities

A Member of the TA Group
MENARA TA ONE, 22 JALAN P. RAMLEE, 50250 KUALA LUMPUR, MALAYSIA TEL: +603-20721277 / FAX: +603-20325048

NEW LISTING
Friday, April 01, 2011 FBM KLCI: 1,545.13 Sector: Transportation

SMARTAG Solutions Berhad
Leverage on RFID Booms in SEA
THIS REPORT IS STRICTLY FOR INTERNAL CIRCULATION ONLY*

FV: RM 0.40
ACE Market Listing

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TA Research Team Coverage +603-2072-1277 ext:1641 stchin@ta.com.my www.taonline.com.my

CORPORATE PROFILE Not to be confused with the widely used transponder based electronic toll collection system (Smart Tag), Smartag Berhad is essentially a provider of total radio frequency identification (RFID)–based solutions, encompassing the development of RFID software as well as provision and implementation of RFID solutions. The group was incorporated on 12 January 2004 as a private limited company and converted into a public company on 11 June 2008. On 25 February 2011, it received a Thai foreign business license to provide container tracking services using RFID to Netbay. Smartag headquartered in Penang and has operations set-up in Malaysia and Thailand. Malaysia operation includes R&D centers in Cyberjaya and Penang. STATISTICS OF THE IPO Offer for sale : 57mn Shares Enlarged issued and full paid-up capital : 227mn shares Market Cap based on IPO listing: RM70.4mn CORPORATE STRUCTURE The figure below illustrates the group’s corporate structure and the respective principal activities: Figure 1: Corporate Structure

Share Information Listing Enlarged Share Capital (mn) Market Cap @ RM0.31 (mn) Par Value (RM) Issue Price Oversubscription rate Estimated free float (%) Tentative Listing Date Tentative Listing Dates Event Opening of the IPO Closing of the IPO Balloting of Applications Allotment of Shares Listing Ratio & Analysis NTA per share (post IPO)(sen) Price to NTA (x) Proforma ROE (%) Proforma ROA (%) Proforma Net Gearing (x) Proforma Current Ratio (x) Utilisation of Proceeds Project Related Capex R&D Capex Working Capital Estimated Listing Expenses TOTAL RMmn 8.8 3.4 3.5 1.9 17.7

ACEMarket 227 70.37 0.10 0.31 NA NA 18-Apr-11

Tentative Date 28-Mar-11 4-Apr-11 6-Apr-11 12-Apr-11 18-Apr-11

Smartag Solutions

19.60 2.6 23.3 23.0 Net Cash 28.3

Smartag Technologies (100%)
Source: Prospectus, TA Securities

Smartag International (94.01%)

Sure-reach Smartag (50%)

% 50 19 20 11 100

Principals Activities Smartag solutions Smartag Technologies Smartag International Provision of RFID solutions for various applications

Currently dormant

Currently dormant

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The application of bulk reading enables an almost parallel reading of tags. RFID have the advantage over barcode systems as they have the ability to be read without line-of-sight. inventory management. SmartwareTM and RFID-based solutions for various applications such as logistics management. RFID can be read through a variety of substance such as ice. Some tags can be read from several meters away and beyond the line of sight of the reader. TA Securities What is RFID? Radio-frequency identification (RFID) is a technology that uses communication via radio waves to exchange data between a reader and an electronic tag attached to an object. supply chain management. crusted grime and other visually and environmentally challenging conditions. paint. for the purpose of identification and tracking.01/04/11 Sure-reach Smartag Provision of RFID-based solutions for the courier services and record management industry Source: Prospectus. Smartag’s business model can be summarized as follows: Source: Prospectus. TA Securities Figure 2: Revenue Sources Source: Prospectus. warehouse optimization and asset tracking. Page 2 of 8 . TA Securities BUSINESS DESCRIPTION Smartag generates revenue from the sales of internally developed RFID software product.

TA Securities Source: Prospectus.01/04/11 Figure 1: Basic RFID System/Solution Source: Prospectus. TA Securities Page 3 of 8 .

TA Securities MAJOR CUSTOMERS The composition of the group’s major customers varies from year to year but generally limited to a few numbers. Page 4 of 8 . In 2010. Figure 3: Customers Breakdown (FY10) Others 27% skycomp Technology Sdn Bhd 23% UCH Technology Sdn Bhd 17% PT Andira Citra Mandiri Utama 33% Source: Prospectus. making up 50.9% to the total purchases for FY10. This is largely due to limitation of its resources at any one point of time.2% of the group’s total revenue.01/04/11 Figure 3: Principal Markets (FY10) Indonesia 33% Malaysia 67% Source: Prospectus. availability of projects and the relatively long sales cycle of a project which could span over a year. its top three customers collectively contributed 73. TA Securities MAJOR SUPPLIERS The group’s top supplier is Skycomp Technology Sdn Bhd.

TA Securities MAJOR FUTURE PLANS Source: Prospectus. The group plans to expand this route into a network of RFID-linked routes from Malaysia to Thailand. Over-dependence on Key Personnel. Among the few RFID solution providers in the South East Asian Region. The group is collaborating with Netbay to implement RFID container tracking systems at key customs checkpoints throughout Thailand. Asia Pacific’s RFID market is expected to grow at CAGR of 23. The initial commercialisation point for the Land Checkpoint Project will begin in Thailand. Land Checkpoint Project will be the main catalyst for the group. Weaknesses • • • Too dependent on certain customers / suppliers. Vietnam and parts of Southern China. Page 5 of 8 . unless immediately rectified. Tags are scanned by readers set up at customs checkpoints or gateway to retrieve vital information pertaining to the merchandise stored in the RFID tag. Laos. Lack of awareness may inhibit greater up-take of RFID technology. • • • Source: Prospectus.01/04/11 INVESTMENT SWOT Strengths • • Experience technical team (30 years of experiences) High barriers to entry as the setup of an RFID business generally necessitates high investment costs and capital outlay. • Opportunities • Threats • Any disruption to the customer’s operations.3% from 2010 to 2013. South East Asia’s RFID market is expected to grow at CAGR of 19. Need to keep abreast with the latest development framework technologies as the IT industry is characterized by rapid changes.0% from 2011 to 2013. TA Securities Land Checkpoint Project According to management. the land checkpoint project will enable containers transported via land to be tracked using RFID system. will result in reputation and financial risk to the group.

TA Securities Page 6 of 8 . Source: Prospectus. Smartag has successfully completed port-to-port trials between Johor Port and Shanghai Port and are ready for commercialisation.01/04/11 Figure 4: The route in which the initial phase of the RFID system will cover. Clients are able to subscribe to the group’s RFID container tracking service which allows tracking of merchandise that are being transported from factories or warehouse to shipping ports for exportation. Figure 5: Current RFID Infrastructures Source: Prospectus. Year-to-date. TA Securities Port Project The port project is an extension of the Land Checkpoint Project. the company plans to expand this network to other ports in South East Asia. Moving forward.

3mn in 2013 with a compound annual growth rate (CAGR) of 19.9% vs.2x. Page 7 of 8 . using CY11 EPS of 4. we estimate Smartag owns approximately 25% market share in SEA’s RFID market.6mn in FY11 and FY12.2% to RM11.0%. This is because the RFID market is monopolised by only a few players. supply chain management and transportation applications. The growth will mainly come from the area such as security. TA Securities 14 12 10 8 6 4 2 0 FY10 FY11F Net Profit (RHS) FY12F VALUATION Based on its IPO price of RM0.4x FY11 PER and 6. The PER of 8. The group has been granted the Investment Tax Allowance. the group has changed its strategy by bundling RFID software with only the essential RFID hardware and specialized hardware required as part of its solution sales. We also assumed that the contribution from Land Checkpoint project to materialise in FY12. Nonetheless.9sen and PER of 8. Figure 6: Revenue vs. we think that Smartag will grow in tandem with the industry. SUBSCRIBE. For FY10-FY12 we expect the group’s earnings to grow by a compounded annual growth rate (CAGR) of 4. respectively.5mn and RM26. the South East Asia (SEA) RFID industry is expected to further grows to roughly USD46.8%) due to the success of the strategy highlighted above. Revenue is projected to reach RM24.2x is in line with our target PER for CBS Technology. the group has achieved higher profit margin (FY10: 56.01/04/11 OUTLOOK According to Frost & Sullivan.0x FY12 PER. FY09: 23.40. The growth in revenue will driven by additional contracts expected to be won in the logistics and manufacturing category. The group has zero borrowing as at end of FY2010. FINANCIAL HIGHLIGHTS Smartag’s net profit decreased by 34. According to management.31. With that. Here. thus allowing them to enjoy tax exemption for a period of 5 years from July 2007. Smartag will trade at 6.1% YoY in FY10 mainly due to lower sales value of RFID solutions.7mn. Our fair value offers a capital upside in excess of 30%. Based on the figure provided by Frost & Sullivan. This resulted in lower sales in 2010. Net Profit (RM mn) 40 35 30 25 20 15 10 5 0 FY08 FY09 Revenue (LHS) Source: Prospectus. we fairly value Smartag at RM0.

3 (0. We accept no liability for any direct or indirect loss arising from the use of this document.8 (0.2 46.0 FY09 34. directors.0 11. 22 JALAN P. employees may have an interest in the securities and/or companies mentioned herein.2 54.4 0.9) 19.0) 10.4 45.8 6. 50250 KUALA LUMPUR.2 0.2 6.8 44.8 44.2 6.7 0.1 0.7 8.5 (22.3 44.0 (THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK) Disclaimer The information in this report has been obtained from sources believed to be reliable.4 3.0 4.4 35.4 (0.3 4.4 7. MALAYSIA TEL: +603-20721277 / FAX: +603-20325048 (A Participating Organisation of Bursa Malaysia Securities Berhad) Kaladher Govindan – Head of Research Page 8 of 8 .7 11. RAMLEE. for TA SECURITIES HOLDINGS BERHAD (14948-M) MENARA TA ONE.5 13.9 10.5 8.6 6. This report is for information only and not to be construed as a solicitation for contracts.5 2. We.9 8.5 (0.1 45.0) FY11F 24.0 11.8 0.4 35.0 FY12F 26. Its accuracy or completeness is not guaranteed and opinions are subject to change without notice.0 8.8 6.5 10.5 55.01/04/11 Earnings Summary (RMmn) FYE Dec 31 Revenue EBITDA PBT Tax Net Profit EPS (sen) DPS (sen) PER (X) Sales Growth (%) EPS Growth (%) EBITDA Margin (%) PBT Margin (%) Net Margin (%) Tax Rate (%) FY08 23.1) 59.7 44.2 18.8 18.8 (34.0 8.2 35.4 11.8 10.6 14.0 0.0) 6.7 5.1 44.6 6. our associates.1) FY10 22.6 6.