TPI Polene:Compelling growth story driven by power plant business amid risks of ongoing lawsuits

　　Power plant business holds key to stellar profit growth in FY17

　　In spite of deteriorating profit outlook for cement business, we believe power plant business wouldgive TPIPL a big earnings boost next year. Our forecast suggests profit from cement business willremain on the decline in the face of falling domestic selling prices and a slowdown in theconstruction market due to delays in the government’s mega‐infrastructure projects. Thecommercial startup of its new fourth cement plant at the beginning of this year boosts its totalcapacity by another 4.5mn tons per annum from 9mn tons per annum while TPIPL has attemptedto sell its new cement output into the domestic market first instead of exports despite continueddomestic oversupply conditions, sending domestic cement prices lower along with rising supply. Inpetrochemical business, profit from LDPE operations is also likely to remain weak. However, itseems to us that refuse derived fuel (RDF)‐based power plant business would overtake cement andpetrochemical businesses as a key driver of profit growth for TPIPL. In addition to full‐yearoperations of two power plants which started commissioning last year: (i) the 18‐MW unit in Jan2015 and (ii) the 55‐MW unit in Aug 2015, a new 90‐MW power plant is also scheduled to come online next year, bringing its total power generation capacity to 163MW in FY17 from 45MW and73MW in FY15‐FY16. All of its power plants supplies electricity to EGAT’s grid under the adderscheme for seven years. TPIPL expects to have the PPA for the new 90‐MW power plant signedwithin this year. Margin from power plant business is comparatively high at between 40%‐50%, wellabove those of other core businesses as the revenue risk is relatively low and feedstock contractshave already been made. However, TPIPL has of late changed its accounting method for assetvaluation. It has assets of around Bt19bn in the balance sheet. There are two options: (i) write‐off or(ii) depreciation calculation for assets and TPIPL has opted for the latter option. The move hasincreased its depreciation charges by around Bt1bn a year. Despite everything, we think growthfrom power plant business would be strong enough to offset the impact of rising depreciationcharges. We estimate TPIPL will achieve FY16‐FY17 norm profit growth of 37% and 371% y‐yrespectively. The forecast is built on assumptions that (i) total revenue will grow 13% and 16% y‐y inFY16‐FY17 on expectations that revenue contribution from power plant business will rise to 12%and 21% of total revenue in FY16‐FY17 respectively from 8% in FY15 and (ii) total margins willexpand to 16% and 20% in FY16‐FY17 respectively from 15% in FY15 on the back of strong marginfrom power plant business.

　　Lawsuit risks still an overhang on share prices

　　The Industry Ministry's Department of Primary Industries and Mines (DPIM) filed three civil lawsuitsagainst TPIPL, accusing it of running limestone mining activities in the areas exceeding what wasallowed via the licence, including in buffer zones, normally prohibited areas that separate miningzones from communities and demanding total damages of up to Bt6.3bn. TPIPL reiterated that ithas committed no offence and conducted its mining activities legally and it is ready to fight thecases in court. In our view, the above cases may take several years before the end‐game arrives asthere is a possibility that the cases may be litigated up to the supreme court. However, as damagesclaimed in the lawsuits are very huge, there may be a need for TPIPL to set aside a one‐timecompensation provision which would take a toll on the full‐year bottom‐line. From our viewpoint,these court cases would remain a negative overhang on TPIPL share prices going forward.

　　‘NEUTRAL’ rating with new target price of Bt2.36/share

　　To factor in the above additional depreciation charges and the inclusion of a new power plant in ourSOTP valuation model, we set a new target price of Bt2.36/share for TPIPL. As the new target offerslimited upside from current trading levels, we therefore retain a ‘NEUTRAL’ stance on TPIPL shares.