DRAGON CROWN GROUP HOLDINGS · 2013. 9. 27. · Company Profile Established in early nineties, Dragon Crown (DC) is an integrated terminal service provider in PRC (Nanjing, Ningbo

Dragon Crown Group Holdings 1

3 June 2013

LOGISTIC SERVICES

BUY Initiation TARGET HK$1.30

Previous Target N/A Consensus Target HK$N/A Current (31/5/2013) HK$0.90 Upside 44% Market Cap . HK$998.7M

Key Themes

Dragon Crown (DC) is in a premium-margin business with high entry barrier and earnings visibility. It will achieve an above industry return, from its premium position with the strategic tie-up with Celanese (CE US) and potential JV with Dow Chemical China.

How We Compare to Consensus

DC is not well-covered in the market, there is no consensus estimates for this stock.

Company Profile

Established in early nineties, Dragon Crown (DC) is an integrated terminal service provider in PRC (Nanjing, Ningbo and Tianjin), specialized in the storage and handling of liquid chemical products. Its major customer, Celanese Corporation (CE US) accounted for 88.4% of its total revenue in 2012. DC was listed in Jun 2011 on the MainBoard of the Stock Exchange Hong Kong.

YTD Price Performance vs. HSI

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May-2012 Jul-2012 Sep-2012 Nov-2012 Jan-2013 Mar-2013 May-2013

HSI Index 935 HK Equity Source: Bloomberg, QUAM Research

Basic Share Information

52-Week Range HK$0.76 – HK$1.07 Avg Daily Turnover (3M) HK$0.30M Shares Outstanding 1,109.7mn Free Float 29.7% Major Shareholders 70.3%

Major Shareholders

Mr. Ng Wai Man, Chairman 70.3% Public 29.7%

JENNIFER SO +852 2971 5433 [email protected]

“The Rising Dragon” “While the demand for liquid chemical products in China is generally linked to the economy’s GDP growth, we expect Dragon Crown (DC) to achieve an above-industry return based on capacity expansion, gross margin improvement and a turnaround of its Tianjin associate. If the Dow JV materialized, it will double DC’s existing throughput capacity on completion. We initiating coverage with a BUY rating, TP: HKD1.30, based on 13.6x EV/EBITDA (industry average) for 2013E. We believed it is greatly undervalued.” Revenue Secured by Long-term Contract, ~70-75% is Fixed – DC has been

serving Celanese’s three subsidiaries (Celanese Nanjing, Celanese Diversified and Celanese Acetyl) since 2004 under a 15-year terminal service contract, with minimum throughput guaranteed. The Celanese contracts provide an annual fixed contract sum to DC, which is calculated based on DC’s estimated return of their investments (usually over 15%) in constructing the terminal facilities. The fixed sum normally accounts for ~70-75% of the Group’s total revenue. Upside Comes from Excess Throughput Fees – Although fixed fees accounted

for a majority of DC’s total revenue, margins on variable throughput is higher than under the fixed contract. Thus, major upside on DC’s margin depends on variable fees charged when throughput exceeds the threshold level set in contract. With Celanese commercial sales of TCX® industrial ethanol plant in China expected in Q3 and Q4 2013, we expect it will be positive on DC’s throughput volume. Expansion of Nanjing Terminal Phase III and IV – We expect immediate catalyst

to come from capacity expansion of Phase III facilities in NJ Terminal, with an addition of 11 general tanks, which will start to operate in Jun 2013. Besides, DC will build the second cryogenic ethylene tank in NJ. We expect the above will raise DC’s total designed storage capacity (tanks) in NJ Terminal by +25% YoY to 190,000m

3 in

FY2013E and +10.5% YoY to 210,000m3 in FY2014E, which will translate into

+13.5% and +12.8% realized actual throughput handled according to our estimate, assuming a turnover ratio (actual throughput/ total designed capacity) of 11.0 x respectively. Tie-up with Dow Chemical China (Dow) –DC entered into an MOU with Dow in

Aug 2011 to establish an 80:20 JV Company to build and operate chemical terminal facilities in Tianjin Nangang Industrial Park for Dow. Since that time, no further details have been announced. Base on the size of the facilities, we expect it will double DC’s existing throughput capacity on completion. We estimate the total capex to be ~HKD600mn (HKD1.2bnx 50%), spreading over two fiscal years if materialized. Valuation – We are initiating coverage on Dragon Crown (DC) with a target price of

HK$1.3, based on 13.6x EV/ EBITDA (industry average). We expect DC to deliver 15.5% core net profit CAGR over 2012-2015E, under the premise of a 10.4% increase in total revenue in the same period. Our target price translates into 14.0x P/E in 2013, representing a discount of ~42% compared to its peers of 19.5x and a PEG of only 0.90x. It trades at an estimated DVD yield of 6.2% in 2013 Forecasts and Valuations Dec 11 Dec 12 Dec 13E Dec 14E Dec 15E

Total Revenue (HKDmn) 241 258 293 330 347

Revenue Growth 3.3% 7.1% 13.6% 12.8% 5.0%

EBITDA (HKDmn) 142 157 178 207 220

EBITDA Growth -8.4% 10.5% 13.7% 16.2% 6.1%

Net Profit (HKDmn) 90 99 103 120 127

Net Profit Growth -6.9% 10.0% 4.1% 15.9% 6.1%

Core Net Profit (HKDmn) 90 82 103 120 127

Core Net Profit Growth -4.4% -8.5% 25.2% 15.9% 6.1%

EPS (HKD) 0.092 0.089 0.093 0.108 0.114

DPS (HKD) 0.050 0.055 0.056 0.065 0.069

P/E (x) 9.8 10.1 9.7 8.3 7.9

EV/EBITDA (x) 4.5 4.8 4.9 4.1 3.7

Dividend Yield 5.6% 6.1% 6.2% 7.2% 7.6%

Source: Company data, Quam estimates, Bloomberg

DRAGON CROWN GROUP HOLDINGS (935.HK)

Quam Securities | Jun 2013


Table of Contents

1. Valuation and Comparables………………………………………………….3

2. Financial Statements……………………………………………………….4-5 3. Investment Thesis…………………………………………………………..6-7

3.1 Revenue Secured by Long-term Contract 3.2 Capacity Expansion 3.3 Throughput Volume to Rebound In Tianjin Terminal 3.4 Doubling in Throughput Volume if the Dow JV Materialized 3.5 Early Mover Advantage

4. Financial Forecasts………………………………………………………..8-11 5. Background Information………………………………………………..12-14 6. Industry…………………………………………………………………….15-16

7. Key Risks………………………………………………………………………16



1. Valuation and Comparables

We are initiating coverage on Dragon Crown (DC) with a target price of HK$1.3, based on 13.6x EV/ EBITDA (industry average). We expect DC to deliver 15.5% core net profit CAGR over 2012-2015E, under the premise of a 10.4% increase in total revenue in the same period. Our target price translates into 14.0x P/E in 2013, representing a discount of ~42% compared to its peers of 19.5x and a PEG of only 0.90x. We believed DC is undervalued and should deserve a higher valuation based on the high visibility of its earnings model. DC is trading at a dividend yield of 6.2% in 2013E.

Figure 1: 52-week Forward P/E Bands

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0.6

0.8

1

1.2

1.4

1.6

2011 2012 2013E

10x

8x

6x

4x

12x

Source: Quam Estimates, Bloomberg

Valuation Methodology:

1.1 Comparable EV/ EBITDA

Comparable companies to DC in US, France and Brazil are trading at an average of 13.6x EV/ EBITDA in 2013E. Therefore, we arrived at a fair value of HKD1.3/shs for DC, based on 13.6x EV/ EBITDA multiple in 2013. Our target price equivalent to 14.0x P/E in 2013, a 42% discount to its peers of 19.9x and a PEG of 0.90x (based a core net profit 3-year CAGR of 15.5% for 2012-2015).

Figure 2: Peers Comparables

Name TickerMkt Cap

(bn HK$)Currency Last Price

2013 P/E

(x)

2014 P/E

(x)2013 P/B (x)

Sales

growth

(%)

Op Profit

Margin

(%)

Cap Ex/

Sales

(%)

ROIC

(%)

ROA

(%)

Dvd

Yield

(%)

EV/

EBITDA

(%)

OEM and Branded Peers

DRAGON CROWN GROUP HOLDINGS 935 HK 1.00 HKD 0.9 9.7 8.3 1.0 7.1 43.2 2.5 9.7 9.3 6.1 4.9

NANJING PORT CO LTD -A 002040 CH 1.64 CNY 6.7 N/A N/A N/A 5.3 19.2 21.9 3.5 2.6 N/A N/A

ZHUHAI WINBASE INTERNATION-A 002492 CH 1.96 CNY 16.3 18.8 17.0 1.7 12.3 46.5 71.6 6.5 6.4 1.2 N/A

KINDER MORGAN INC KMI US 313.59 USD 302.8 30.5 26.7 3.8 25.6 26.0 70.1 5.7 1.4 3.7 17.9

NUSTAR ENERGY LP NS US 28.43 USD 365.0 29.3 19.4 1.6 -5.0 3.6 6.9 N/A -3.9 9.3 16.4

BUCKEYE PARTNERS LP BPL US 54.15 USD 512.9 19.8 18.1 2.6 -8.5 9.2 7.6 N/A 4.6 6.3 16.9

MAGELLAN MIDSTREAM PARTNERS MMP US 91.13 USD 402.0 23.0 20.2 7.6 1.3 31.0 20.0 15.1 10.8 3.6 20.6

SUNOCO LOGISTICS PARTNERS LP SXL US 49.04 USD 472.4 18.1 18.3 1.1 20.2 4.6 2.9 10.2 6.8 3.2 10.9

WILSON SONS LTD-BDR WSON11 BZ 7.20 BRL 101.2 14.2 11.5 N/A -7.6 13.2 25.2 3.2 4.7 N/A N/A

VOPAK VPK NA 60.06 EUR 469.9 17.2 15.2 2.9 12.1 34.1 34.2 9.3 7.1 N/A 11.7

RUBIS RUI FP 15.81 EUR 478.1 14.8 13.9 1.5 31.5 5.3 4.0 6.8 4.9 N/A 9.4

Average 56.7 19.5 16.9 2.6 8.6 21.4 24.2 7.8 5.0 4.8 13.6

Source: Quam Estimates, Bloomberg As of 31 May 2013



2 a) Income Statement

We assume a distribution payout of 60%

Income Statement (HKD mn) Dec 11 Dec 12 Dec 13E Dec 14E Dec 15E

Revenue 241 258 293 330 347

Cost of goods sold (102) (104) (118) (127) (131)

Gross Profit 138 153 175 203 215

Administrative expenses (32) (34) (39) (44) (46)

Other income/ (costs) 1 2 2 2 3

Operating EBIT 108 121 138 162 172

EBITDA 142 157 178 207 220

Depreciation and amortisation 34 35 40 45 47

Net interest (7) (2) (0) (0) 0

Non-recurring items - 17 - - -

Share of profits and losses of:

Associates 2 (1) 2 2 2

Joint-controlled entities 6 6 6 6 6

Income Tax Expense (5) (26) (26) (31) (33)

Profit for the Year 103 114 119 138 147

Minority interests 13 15 15 18 20

Owners of the Company 90 99 103 120 127

103 114 119 138 147 Per Share Items (HKD) Dec 11 Dec 12 Dec 13E Dec 14E Dec 15E

EPS 0.09 0.09 0.09 0.11 0.11

FD EPS 0.09 0.09 0.0930 0.11 0.11

Book value per share 0.91 0.86 0.90 0.95 0.99

DPS 0.05 0.05 0.06 0.06 0.07

Strong core net profit growth in 2013E

ROIC on an upward trend

High DVD yield of 6.1%

Ratio Analysis Dec 11 Dec 12 Dec 13E Dec 14E Dec 15E

Growth (YoY %)

Revenue 3.3% 7.1% 13.6% 12.8% 5.0%

EBIT -12.5% 12.8% 13.8% 17.2% 6.5%

EBITDA -8.4% 10.5% 13.7% 16.2% 6.1%

Net profit -6.9% 10.0% 4.1% 15.9% 6.1%

Core Net profit -4.4% -8.5% 25.2% 15.9% 6.1%

Margins

Gross margin 57.5% 59.5% 59.6% 61.5% 62.1%

EBIT margin 44.7% 47.1% 47.2% 49.0% 49.7%

EBITDA margin 58.9% 60.8% 60.9% 62.7% 63.4%

Net profit margin 42.9% 44.2% 40.5% 41.8% 42.3%

Other Ratios

Sales/ avg. assets 26.2% 24.2% 27.5% 29.9% 30.1%

Return on average assets 9.8% 9.3% 9.7% 10.8% 11.0%

Return on average equity 15.0% 12.3% 12.1% 13.5% 13.6%

ROIC 11.6% 9.7% 11.3% 12.7% 12.9%

Dividend payout ratio 54.6% 61.6% 60.0% 60.0% 60.0%

Valuation Measures

EV/ Sales (x) 2.7x 2.9x 3.0x 2.6x 2.3x

EV/ EBITDA (x) 4.5x 4.8x 4.9x 4.1x 3.7x

EV/ IC (x) 0.7x 0.7x 0.9x 0.8x 0.7x

P/E (x) 9.8x 10.1x 9.7x 8.3x 7.9x

P/ B (x) 1.0x 1.0x 1.0x 1.0x 0.9x

Dividend yield 5.6% 6.1% 6.2% 7.2% 7.6%

Source: Company data, QUAM Estimates



2 b) Cash Flow Statement and Balance Sheet

Capex for NJ Phase III and IV expansion in 2013-14

We have not modeled the capex

(~HKD600mn) of the Dow JV development in our financial projections

Cashflow Statement (HKD mn ) Dec 11 Dec 12 Dec 13E Dec 14E Dec 15E

Operating Cashflow

Profit Before Tax 109 140 145 169 180

Depreciation and Amortization 34 35 40 45 47

Income Tax Paid (5) (26) (26) (31) (33)

Other (1) 0 (7) (6) (7)

Operating Cashflow before W/C 136 150 152 177 187

Change in Working Capital 7 28 (15) (12) (5)

Cash flow from operations 144 178 137 165 182

Investing Activities

Purchases of PPE (6) (96) (195) (45) (45)

Other 6 4 - - -

Cash flow from investing activities (0) (92) (195) (45) (45)

Financing Activities

Net Proceeds from Issue of Shares 355 13 - - -

Increases/ (decreases) in debt (62) (144) 2 (14) -

Dividend paid (67) (77) (78) (88) (92)

Cashflow from financing activities 226 (208) (76) (102) (92)

Net Increase in Cash and Cash Equivalents 370 (123) (134) 17 44

Cash and Cash Equivalents at Beginning of the Year 47 403 266 132 149

Cash and Cash Equivalents at End of the Year 416 281 132 149 193

Balance Sheet (HKD mn) Dec 11 Dec 12 Dec 13E Dec 14E Dec 15E

Non-Current Assets

PPE 547 636 792 793 791

Prepaid lease payments 47 47 53 60 63

Other 51 48 54 60 66

Total Non-Current Assets 645 730 899 913 920

Current Assets

Accounts Receivables 40 40 48 55 57

Inventories 4 4 4 5 5

Cash and Cash Equivalents 403 266 132 149 193

Other - 1 1 2 2

Total Current Assets 447 312 186 210 258

Total Assets 1,093 1,042 1,085 1,123 1,178

Current Liabilities

Accounts Payable - - - - -

Bank borrowings 144 12 14 - -

Other 36 65 65 67 67

Total Current Liabilities 180 77 80 67 67

Non-Current Liabilities

Bank borrowings 12 - - - -

Deferred tax liabilities 6 6 6 7 8

Other - - - - -

Total Non-Current Liabilities 18 6 6 7 8

Total Liabilities 198 83 86 74 75

Equity

Share Capital 156 169 168 171 174

Reserves 739 789 831 879 929

Total Shareholder's Equity 895 959 999 1,049 1,103 Net cash position Key Ratios Dec 11 Dec 12 Dec 13E Dec 14E Dec 15E

Net debt (HK$mn) -247 -254 -118 -149 -193

Net debt to equity -27.6% -26.5% -11.8% -14.2% -17.5%

Net debt/ EBITDA -1.7x -1.6x -0.7x -0.7x -0.9x

Capex/ Sales 2.5% 37.2% 66.6% 13.6% 13.0%

Current ratio 13.9x 5.5x 3.7x 4.1x 4.8x

Quick ratio 11.3x 4.1x 2.0x 2.2x 2.9x

Interest coverage 15.1x 54.5x n.a. n.a. n.a.

Book value per share (HK$) 0.8 0.9 0.9 0.9 1.0

Avg Inventory (days) 12 15 13 13 13

Avg Receivables (days) 64 57 60 60 60

Avg Payables (days) - - - - -

Cash conversion cycle (days) 76 72 74 74 74

Source: Company data, QUAM Estimates



3. Investment Thesis ~70-75% of its revenue is secured

under long-term fixed contract 3.1 Revenue Secured by Long-term Contract DC has been serving Celanese’s three subsidiaries (Celanese Nanjing, Celanese Diversified and Celanese Acetyl) since 2004 under a 15-year terminal service contract, with minimum throughput guaranteed. The contract will not expire until 2022 at the earliest. (see Figure 3) The Celanese contracts provide an annual fixed contract sum to DC, which is calculated based on DC’s estimated return of their investments (usually over 15%) in constructing the terminal facilities. The fixed

sum normally accounts for ~70-75% of the Group’s total revenue. On top of the fixed fee, DC will charge an operational fee based on the minimum throughput volume stated in the contract. This part usually accounts for ~25% of the Group’s total revenue and is renegotiable in Apr and Jun (subject to an upside cap) every year. (see Figure 4).

Figure 3: Long-term Contract with Celanese

Methanol, Acetic Acid, Cryogenic Ethylene, VAM, Acetic Anhydride, Phenol and Propylene Oxide Celanese subsidiaries Contract Terms Contract Structure Products

I. Celanese Nanjing 2022 Acetic acid & methanol

II. Celanese Diversified 2023 Ethylene & VAM

III. Celanese Acetyl 2023 Acetic anhydride

Annul fixed contract sum (fixed fee +

operational fee based on min. throughput

volume), paid monthly & adjusted annually

Source: Company Data, Quam

Figure 4: Celanese Monthly Contract Sum

Monthly Contract Sum = Fixed Fee plus Operational Fee (Variable Fee)

Calculation is based on …. DC's estimated return on investment Min. throughput volume stated in the contract

(usually >15%)

% to DC's Total Revenue ~70-75% ~25-30%

(the higher of (i.) min. throughput vol. x operational fee rate

OR (ii.) min. throughput vol. x operational fee rate + excess

throughput vol. x excess operational fee rate)

Source: Company Data, Quam estimates

Margins on variable throughput is higher than those guaranteed under

the fixed contract

Upside Comes from Excess Throughput Fees – According to DC’s disclosures in

its prospectus, the fixed contract sum was HKD123.3mn in FY2008, HKD155.9mn in FY2009 and HKD157.2mn in FY2010, which accounted for 82.1%, 78.5% and 67.5% of DC’s total revenue respectively. This fixed fee provided a stable income to DC. Therefore, the major upside on DC’s margin depends on variable fees charged when actual throughput exceeds the threshold level set in contract. Although the fixed fee accounts for a majority of DC’s total revenue, its significance will drop if there is no capacity expansion and rising excess throughput. With capacity expansion from NJ Phase III and IV in 2013-14, we expect the contribution from the fixed fee to maintain at ~70% of DC’s total revenue.

DC is the largest independent terminal service providers in the Nanjing Chemical Industry Park

A Mutually Dependent Relationship with Celanese – Although the Celanese

contract is non-exclusive, as the construction of terminal infrastructure requires substantial construction time and investment resources, Celanese is also relying on DC to provide such services under the Celanese contracts. As of end of 2011, there are only three independent terminal service providers inside the Nanjing Chemical Industry Park, and DC has the largest market share in terms of actual throughput handled. Besides, DC has constructed five dedicated pipelines (each 15 km long) connecting DC’s NG terminal directly to Celanese’s manufacturing facilities inside the Nanjing Chemical Park, serving Celanese’s five different types of products. DC and Celanese are mutually dependent.

Celanese’s expansion in China

continues Celanese’s Latest Expansion in China – Celanese has completed the construction

of TCX® industrial ethanol plant in China in May 2013, with annual production capacity of ~400,000 tons. Commercial sales are expected to commence in Q3 and Q4 2013. This is expected to support DC’s demand for terminal services. Ethanol is produced both as a petrochemical, through the hydration of ethylene and via a biological process by fermenting sugars with yeast. Celanese has also received government approvals to modify and enhance its existing integrated acetyl facility at the Nanjing Chemical Industrial Park to produce ethanol for industrial uses. Celanese now expects to have ~30-40% additional ethanol production capacity at the Nanjing



facility than the original announced 200,000 tons. The current demand for industrial ethanol in China is ~3mn tons annually and is expected to grow between 8% and 10% per year.

3.2 Capacity Expansion

NJ Phase III and IV expansion Figure 5:Capacity Expansion

2010 2011 2012 2013E 2014E 2015E

Total no. of storage tanks 47 47 47 58 59 59

- Nanjing 20 20 20 31 32 32

- Tianjin 15 15 15 15 15 15

- Ningbo 12 12 12 12 12 12

Total Designed Storage Capacity (m3) 205,900 205,900 205,900 243,900 263,900 263,900

- Nanjing 152,000 152,000 152,000 190,000 210,000 210,000

- Tianjin 24,900 24,900 24,900 24,900 24,900 24,900

- Ningbo 29,000 29,000 29,000 29,000 29,000 29,000

Source: Company, Quam estimates (pro-rata basis)

We expect +13.5% YoY increase in the actual throughput of the NJ

Terminal in 2013E

Expansion of Nanjing Terminal Phase III – We expect the immediate catalyst to

come from capacity expansion of Phase III facilities in NJ Terminal, with an addition of 11 general tanks (4 tanks have already secured with long-term terminal services contracts under Celanese), which will start to operate in Jun 2013. This is expected to raise DC’s total designed storage capacity (tanks) in NJ Terminal by +25% YoY to 190,000m

3 in FY2013E, which will translate into a +13.5% YoY realized actual

throughput handled according to our estimate, assuming a turnover ratio (actual throughput/ total designed capacity) of 11.0 x. (see Figure 5 and Figure 6: Key Assumptions) DC expects to sub-lease the excess capacity to other customers if there is any excess capacity after satisfying Celanese’s demands.

We further expect +12.8% YoY increase in the actual throughput of

the NJ Terminal in 2014E

Phase IV Expansion, the Second Cryogenic Ethylene Tank– Apart from Phase III

expansion, DC has entered into a construction agreement to build the second cryogenic ethylene tank and other associated facility in NJ at a contract sum of HKD127mn. The construction started in 1Q 2013 and is expected to be operational by Q3 2014. The tank is able to handle deep cooled liquid at -104 degree Celsius, which requires specific techniques to build and maintain. We estimate it will raise DC’s total designed storage capacity (tanks) further by +10.5% YoY to 210,000m

3 in

FY2014E and estimate actual throughput handled to increase by 12.8% assuming the same turnover ratio.

3.3 Throughput Volume to Rebound in TJ Terminal Normal Operation for the TJ Terminal Resumed in 2013 – Due to the construction

works of the local government along the inner river of Tianjin Bin Hai Xin Qu, the actual throughput handled by DC’s TJ Terminal slumped 69.8% YoY, resulting in a HKD1.4mn loss reported by its associates in 2012. The works were finally completed in May 2012, thus we expect a volume rebound from the TJ Terminal in 2013. However, do not expect the TJ Terminal to regain its throughput volume back to the levels in 2011 (222,300 metric tonnes) as some old customers have switched to other terminals.

3.4 Doubling in Throughput Volume If the DOW JV Materialized DC’s MOU’s exclusivity period will

expire by the end of 2013 Tie-up with Dow – Back in Aug 2011, DC entered into an MOU with Dow Chemical

China (Dow) to establish a JV Company to build and operate chemical terminal facilities in Tianjin Nangang Industrial Park to provide chemical logistics service to DOW. DC will hold 80% equity interest of the JV and DOW will hold the remaining 20%. The initial investment plan for the chemical terminal facilities is ~USD200mn, with a total land area of 50 hectares and an estimated handling capacity of 6-9mn metric tonnes of throughout volume annually, which is ~2-3x larger than DC’s existing handling capacity. The MOU is subjected to an exclusivity period, which will expire by the end of 2013. Although no concrete details have been announced on this JV, base on the size of this facilities, we expect that it will double DC’s existing throughput capacity on completion.

3.5 Early Mover Advantage DC was established very early back in the 1990s, which enabled it to secure the

coastline, with geographic advantage along Nanjing, Tianjin and Ningbo, exclusively for its own use. This allows DC to have greater control on operation costs and higher flexibility on business operations, as well as future expansion. It increases the barrier



of entry, as most of the coastline has already been taken up and there is a long waiting time for the approval process.

4. Financial Forecasts

Figure 6: Key Assumptions: 2008 2009 2010 2011 2012 2013E 2014E 2015E

Storage TANKS

No. of Storage Tanks : TOTAL 47 47 47 47 47 58 59 59

- Nanjing 20 20 20 20 20 31 32 32

- Tianjin 15 15 15 15 15 15 15 15

- Ningbo 12 12 12 12 12 12 12 12

No. of Storage Tanks : Net Adds 0 0 0 0 0 11 1 0

- Nanjing 0 0 0 0 0 11 1 0

- Tianjin 0 0 0 0 0 0 0 0

- Ningbo 0 0 0 0 0 0 0 0

Total Designed Storage Capacity (m3) 205,900 205,900 205,900 205,900 205,900 243,900 263,900 263,900

- Nanjing 152,000 152,000 152,000 152,000 152,000 190,000 210,000 210,000

- Tianjin 24,900 24,900 24,900 24,900 24,900 24,900 24,900 24,900

- Ningbo 29,000 29,000 29,000 29,000 29,000 29,000 29,000 29,000

Total Designed Storage Capacity (m3): Net Adds - - - - - 38,000 20,000 -

- Nanjing - - - - - 38,000 20,000 -

- Tianjin - - - - - - - -

- Ningbo - - - - - - - -

Storage tank usage ratio (actual throughput/ designed storage capacity) 6.2 7.7 12.3 11.1 10.3 10.3 10.5 10.9

- Nanjing 5.6 8.2 11.9 10.4 11.3 11.0 11.0 11.0

- Tianjin 10.0 6.6 18.6 19.2 13.2 15 15 15

- Ningbo 5.8 6.4 9.4 7.7 2.3 6.5 6.5 6.5

Actual Throughput (metric tonnes) 1,267,800 1,591,200 2,536,900 2,289,500 2,114,100 2,511,633 2,760,967 2,870,967

- Nanjing 850,600 1,241,400 1,801,600 1,588,200 1,717,700 1,950,667 2,200,000 2,310,000

- Tianjin 250,000 164,100 462,300 479,000 329,300 373,500 373,500 373,500

- Ningbo 167,200 185,700 273,000 222,300 67,100 187,467 187,467 187,467

Revenue/ per metric tonne of actual throughput - (HKD) 176.5 159.9 129.3 151.5 150.1 150.1 150.1 150.1

YoY % N/A -9.4% -19.1% 17.2% -1.0% 0.0% 0.0% 0.0%

Margins

Gross Profit Margin 62.9% 61.9% 61.6% 57.5% 59.5% 59.6% 61.5% 62.1%

EBIT Margin 68.9% 66.1% 70.4% 70.2% 72.0% 72.1% 73.9% 74.6% Source: Quam estimates, Company data

The exclusivity period for the Dow’s

MOU to expire by end of 2013

4.1 Top-line Growth Our financial model is subjected to upside risks – We did include the potential

joint venture with Dow in our financial projections because there had been no further announcements on such developments since DC signed the MOU with Dow in Aug 2011. The MOU is subjected to an exclusivity period of two years, which will expire by the end of 2013. DC’s revenue only includes its operations in NJ Terminal, as TJ and NB Terminals are DC’s associates and jointly-controlled entities; their contributions will only appear as a share of profits and losses from associates and jointly-controlled entities.

Revenue to rise 13.6% YoY in FY2013E

Capacity expansion to drive growth – In FY2013E, based on the capacity expansion in NJ Phase III and IV, we expect DC to post a double-digit growth in its revenue of 13.6% in FY2013E and +12.8% in FY2014E, compared to only a single digit growth in FY2011 and FY2012.



4.2 Margin Analysis

DC Enjoys a Premium Margin – DC’s gross margin is high and has been maintained

at around 60% in the past six years, despite the disruption due to the construction works in TJ, which brought the gross margin down to 57.5% in FY2011. We believed the premium margin earned by DC was due to high entry barriers in terms of capital investment in building the terminal infrastructure at the initial stage. The stable margin was due to its revenue structure (where 70-75% of the revenue is ensured under a fixed fee). We expect gross margin to pick up slightly to 59.6% in FY2013E compared to 59.5% in FY2012. (see Figure 7)

Figure 7: Margin Trends

64.8%62.9% 61.9% 61.6%

57.5%59.5% 59.6%

61.5%

55.0%56.7% 57.3%

52.9%43.2%

46.3% 47.2%49.0%48.0%

40.3%43.0%

41.5%

37.4% 38.4%40.5% 41.8%

20%

25%

30%

35%

40%

45%

50%

55%

60%

65%

70%

2007 2008 2009 2010 2011 2012 2013E 2014E

Gross margin Operating margin Net margin


Turnaround in its TJ associate

provides further upside on DC’s bottom-line growth in FY2013

4.3 TJ Associates to Turnaround from Losses into Profit We expect DC’s TJ associate to turnaround from a loss before tax of HKD1.4mn in FY2012 to a PBT of HKD1.7mn, as operations have returned to normal after the construction work of the local government along the inner river of Tianjin Bin Hai Xin Qu has been completed.

Although competition in NB is high, the terminal is fully-utilized most of the time and we expect a stable performance from its NB-JV in FY2013, with PBT maintained at similar level as in FY2012 of HKD5.6mn.

A 25% rise in core net profit is

expected in FY2013

4.4 Strong Growth in Core Net Profit in FY2013E In FY2012, DC recorded an arbitration gain from a debtor of HKD16.7mn. If we exclude this one-off gain, we expect core net profit growth of 25.2% to HKD103.2mn in FY2013E, under the backdrop of i) capacity expansion; ii) gross margin improvement and iii) turnaround from TJ associate. Thus, DC’s

core net profit will increase by a 3-year CAGR of 15.5% for FY2012-2015E.

4.5 Effective Tax Rate

Effective tax rate of ~18.6% maintained

Effective Tax Rate will Normalize in 2013 – Effective tax rate increased from 4.9%

in FY2011 to 18.6% in FY2012 due to the expiration of tax holidays in its subsidiaries. This affected the net profit in FY2012. However, the impact will normalize in FY2013 and we expect it to maintain at ~18.6% going forward.

4.6 Working Capital Working capital ratio increases IPO Proceeds Eased Pressure on Working Capital – Before the listing, DC’s

working capital ratio was below 1.0x, mainly due to i) large capital expenditure for building storage tank facilities and ii) a long cash conversion cycle (~over 2 months), without payables and limited inventory. This suggests DC relies mostly on bank loans to fund its working capital. With its listing (IPO proceeds ~HKD302mn came in) in 2011, DC’s working capital ratio increased to 2.5x by the end of 2011 and further increased to 4x in 2012 as it repaid a majority of its short-term bank loans.



Figure 8: Working Capital Ratio

0.20.4

0.5

1.1

2.5

4.0

2.3

3.2

3.8

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

2007 2008 2009 2010 2011 2012 2013E 2014E 2015E

Wo

rkin

g C

ap

ital

Rati

o (

x)


Figure 9: Cash Conversion Cycle

2009 2010 2011 2012

Account Payable Days 0 0 0 0

Account Receivable Days 55.6 63.0 64.5 56.8

Inventory Turnover Days 8.8 8.6 11.7 15.0

Cash Conversion Cycle 64.3 71.6 76.2 71.8

Source: Company Data

4.6 Capex The large capex has resulted in negative FCF (free-cash-flow) in 2007-2008, but

FCF improved afterwards. (see Figure 10) With the expansion of NJ Phase III and IV facilities, we estimate the remaining capex to be ~HKD195mn in FY2013E and then mainly minimal maintenance capex of HKD45mn thereafter, which can be fully financed by internal resources.

We estimate capex of ~HKD600mn is required if DC undertakes the JV

project with Dow in Tianjin

Additional Financing is Needed if DC Undertakes the Dow’s JV Project –

However, if DC were to undertake the DOW’s JV project, the entire investment would require USD200mn (or HKD1.56bn) with DC’s accounting for 80%, which would require ~HKD1.2bn in total. The investment is huge, therefore we expect DC to develop it gradually by phases. The total land area in Tianjin Nangang Industrial Park is ~50 hectares, compared to ~25-30 hectares of land in DC’s existing NJ Terminal. We expect DC to develop half of the land area in Tianjin Nangang Park, to match its operation size in NJ (with total designed throughput capacity of 2.6mn metric tonnes). Therefore we estimate the total capex to be ~HKD600mn (HKD1.2bn x 50%), which will be spread over two fiscal years. As at end of Dec 2012, DC has a net cash of HKD254mn, and we expect it to drop to HKD118mn in FY2013E because of the higher capex incurred in the expansion of NJ Phase III and IV, despite an operating cash inflow of HKD137mn. This suggests that DC might have to seek additional financing to undertake the DOW JV project.

Figure 10: Free Cash Flow and Capex HKD mn 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E

FCF (149.1) (43.4) 132.7 105.1 133.1 59.3 (57.8) 118.6 136.3

Capex 170.4 115.7 12.3 17.4 5.9 95.8 195 45 45

Net debt/ (cash) (273.2) (303.7) (163.2) (172.0) 246.8 253.7 (117.7) (149.3) (193.7)




4.7 Return on Invested Capital Attractive return – DC’s ROIC has been above 18% in the three year before it get

listed in 2011 (see Figure 11). ROIC declined to 11.6% as capital base is enlarged. We expect it to regain its rising trend in 2013.

ROIC has been above 18% in the past three years before listing

Figure 11: Return on Invested Capital

18.1%

21.5%

19.4%

11.6%

9.7%

11.3%

12.7% 12.9%

4%

6%

8%

10%

12%

14%

16%

18%

20%

22%

24%

2008 2009 2010 2011 2012 2013E 2014E 2015E

ROIC


Listed in 2011, capital base enlarged



5. Background Information Figure 12: Ownership structure

70.27% 3.01% 1.51% 25.21%

65.0% 60.0% 60.0% 88.6%

Mr. Ting Yian Ann,

Executive Direction &

CEO

Mr. Chong Yat Chin,

Executive DirectorPublic

Mr. Ng Wai Man,

Chairman

Tianjin Tianlong Ningbo Ningxiang Ningbo Xinxiang Nanjing Dragon Crown

100%

Dragon Crown Group (935 HK)

100%

Source: Hong Kong Exchange, Quam

One-stop Chemical Logistic Services Provider – DC offers a comprehensive

range of terminal and storage of liquid chemical services ranging from loading and discharging of liquid chemical products at its own jetties and storage of liquid chemical products at its tank farms, as well as delivery of such products by utilizing its dedicated pipelines and other basic terminal infrastructure. Through its own terminal facilities, including storage tanks, dedicated pipelines, jetties and the related exclusive coastline use right, DC is able to enjoy high flexibility in operational management and ‘further expansions in the future. It specializes in the handling of liquid chemicals, including those classified as Category A Dangerous chemicals.

Figure 13: One-stop Chemical Logistic Services

Source: Company website

DC Began its Business in Industrial Chemical Trading – DC’s Chairman, Mr. Ng

incorporated Dragon Source back in 1988 to engage in the business of import and export of industrial chemicals. Ningbo Haixiang Liquid Chemical Store Co. Ltd. was a joint venture approved by the PRC authority in 1988 and was 60% owned by Dragon Source and 40% by Ningbo Port. In 2003, Dragon Source and Ningbo Port formed Ningbo Xinxiang with assets transferred from Ningbo Haixiang upon its expiry of operation terms. In Oct 1993, Ningbo Ningxiang was established in Ningbo by Ningbo Zhenhai and DC Investments as to 40% and 60% respectively, to engage in the provision of a liquid chemical products terminal and storage services in Ningbo.

Tianjin Expansion – In 1993, the Group expanded into Tianjin by setting up an

associate company, Tianjin Tianlong. The Tianjin operation began in 1996, upon completion of a terminal for loading and unloading of liquid chemical products and



the establishment of terminal infrastructures such as pipelines and connection to rail, vehicles loading platforms and drums for the delivery of liquid chemical products.

Nanjing Expansion – Following the success in Ningbo and Tianjin, the company

further expanded its reach into Nanjing in 2003 by establishing NJ Dragon Crown with the collaboration of Nanjing CIPC. The NJ operation mainly serves companies in the Nanjing Chemical Industry Park and various chemical customers nearby, as well as along the Yangtze River Delta region. It secured the Celanese (Nanjing) Contract with Celanese (Nanjing) for the provision of terminal and bulk chemical storage for Acetic Acid and Methanol in 2004.

Figure 14: Dragon Crown’s Development Roadmap

• Phase IV facilities in Nanjing will commence operation in Q3

2014E

• Phase III facilities in Nanjing Constructed & commenced operation

2013

• Listing on the Main Board of Hong Kong Stock Exchange in Jun 2011

2011

• Phase II facilities in Nanjing Constructed & commenced operation

2008

• Phase I facilities (storage tanks & jetty) constructed and commenced operation; secured the Celanese Acetyl Contract. 2007

• Secured the Celanese Diversified Contract

2006

• Established Nanjing Dragon Crow; secured the Celanese (Nanjing) Contract

2004

• Commenced operation of stroage tanks and jetty in Tianjin1996

• Second storage tank equipped with jetty in Ningbo constructed and commenced operation

1995

• First storage tank in Ningbo constructed and commenced operation

1990

Source: Company

Three Terminals in Mainland China – DC owns three terminals in Mainland China,

namely Nanjing (NJ) Terminal, Tianjin (TJ) Terminal and Ningbo (NB) Terminal. The NJ Terminal is operated by its 88.6%-owned subsidiary, Nanjing Dragon Crown , whereas the TJ Terminal is operated by its 65%-owned associate, Tianjin Tianlong and Tianlong Haixiang and the Ningbo Terminal is operated under a 60%-owned JV, Ningbo Ningxiang and Ningbo Xinxiang. The NJ and NB terminals are located along the Yangtze River Delta, which is one of the major petrochemical clusters in the PRC. The NJ terminal is located at the core part inside Nanjing Chemical Industry Park, which is the largest chemical industry parks in the Yangtze River Delta. It occupies an area of ~45 sq km with a total coastline of 14 km located along Yangtze River, which is a major global acetic acid production base and a leading production base for ethylene, aromatics, caprolactam, raw materials for polyurethanes, oil refining and differential mucilage glue fiber in Mainland China.



Figure 15: Strategic Geographical Locations

Source: Company website

Figure 16: Details of Dragon Crown’s Terminals

Terminals Nanjing Tianjin Ningbo

Commencement of operations Apr 2007 1996 1990-1995

Phase 1 Jetty 1 x 20k DWT Jetty 3,000MT DWT Jetty 3,000MT DWT

1 x 5K DWT

Tanks 3 x 17,000 CBM Carbon Steel Methanol Tanks Tanks 9 x 2,000 CBM Carbon Steel Tanks Tanks 4 x 4,000 CBM Carbon Steel tanks

3 x 11,000 CBM SS304L Stainless Steel Acetic Acid 1 x 1,500 CBM Carbon Steel Tank 4 x 2,000 CBM Carbon Steel tanks

9 x 2,000 CBM tanks for various chemicals 2 x 500 CBM Carbon Steel Tanks 1 x 500 CBM Carbon Steel tank

Pipelines 15 km SS316L Stainless Steel Acetic Acid pipeline 1 x 2,000 CBM Stainless Steel Tank 2 x 2,000 CBM Stainless Steel tanks

15 km Carbon Steel methanol pipeline 2 x 1,200 CBM Stainless Steel Tank 1 x 500 CBM Stainless Steel tank

Other Infrastructure Tank Truck Loading Bays

Admin & Laboratory Buildings

Various Utilities

Phase 2 Commencement of operations Apr 2008

Tanks 1 x 20,000 CMB Cryogenic Ethylene storage tank

2 x 10,000 CBM VAM Tanks

2 x 5,000 CBM SS304L Acetic Anhydride tanks

Pipelines 15 km SS316L Stainless Steel Anhydride pipeline

15 km Carbon Steel VAM pipeline

15 km Carbon Steel Ethylene vapor pipeline

Other Infrastructure Tank Truck Loading Bays

Various Utilities

Phase 3 Commencement of operations May 2013

Tanks 4 general tanks, total capacity 24,000m3

7 general tanks, total capacity 14,000m3

Phase 4 Commencement of operations Q4 2014

Tanks 1 Cryogenic Ethylene tank, 20,000m3

Source: Company data, Quam



6. Industry

6.1 Chemical Industry in China DC’s business depends on the chemical industry in China – As an integrated

terminal service provider in China specializing in the storage and handling of liquid chemical products, DC’s business is highly correlated to the expansion in chemical materials industry in China, as well as China’s GDP (Gross Domestic Product) growth. According to the National Bureau of Statistics of China (NBSC), China’s FAI in the manufacturing of raw chemical materials and products increased significantly from RMB110bn in 2003 to RMB1,148bn in 2012, growing by a double-digit percentage every year. (see Figure 17)

Figure 17: China FAI in Manufacture of Raw Chemical Materials & Products

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

0

200

400

600

800

1,000

1,200

1,400

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

FAI YoY %

Source: National Bureau Statistics of China (NBSC)

Figure 18: China GDP (constant) Growth YoY

9.90%9.50%

9.90%

10.40%

11.20%

6.80%

10.70%

9.80%

8.90%

7.90%

4%

5%

6%

7%

8%

9%

10%

11%

12%

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

GDP YoY %

Source: National Bureau Statistics of China (NBSC) , Quam

6.2 Chemical Storage and Logistics Industry

Linked development between chemical manufacturer and logistic services provider – The industry of logistic services for handling petroleum and chemicals is

developing rapidly because of the demand for a highly-efficient and safe process of handling chemicals, from chemical manufacturing to sales and delivery, and with the objectives of maximizing profits with lower overall costs. Thus, the formation of strategic business partnerships between multinational petroleum and chemical companies and large integrated logistics companies is a popular trend in international logistics in handling chemicals because over emphasis on self-running logistics may weaken the chemical manufacturer’s core competitiveness. Logistic services are localized, costly and capital-intensive because transportation and



storage of materials and product distribution require a lot of space, special equipment and skilled labor.

6.3 Chemical Storage & Logistics Services in the YRD Region DC built its jetties along the Yangtze River Delta (YRD) – The YRD is one of the

largest heavy industrial bases in China, and is also a main logistics hinge for the large inland industrial cities with strong demand for petroleum and chemical products. Many refineries and chemical complexes are located along the YRD and coastal regions. According the a report by CNCC (xxx), there are ~94 chemical industrial parks in China, amongst which seven of them are major chemical industrial parks located along the coastal line of YRD region. They are namely, the Nanjing Chemical Industry Park, Shanghai Chemical Industrial Park, Yangzhou Chemical Industry Park, Jiangsu Yangtze River International Chemical Industrial Park, Ningbo Chemical Industry Zone, Jiangsu Province Taixing Economic Development Zone and Jiaxing Port Economic Development Zone Chemical Park. DC built its jetties in Nanjing, Tianjin and Ningbo, which are favorably positioned to enjoy the growth for liquid chemical products in these cities around these three areas.

7. Key Risks Risks to our view include: 1) A disruption in Celanese’s production plant in Nanjing

Chemical Industry Park; 2) Unexpected construction works along the coastline which will affect its terminal operations in Nanjing, Tianjin and Ningbo; 3) Huge capex, which requires additional financings; 4) Low share trading turnover.



Rating Definitions Disclaimer and Risk Statement BUY We expect the stock to have a total return of > 15% over the next

12 months This document is published by Quam Securities Company Limited (“Quam Securities”), a licensed corporation (central entity number AAC577) regulated by the Securities and Futures Commission in Hong Kong. This document is for distribution in Hong Kong only to persons who are “Professional Investors” as defined in Part 1 of Schedule 1 of Securities and Futures Ordinance (Cap 571) of Hong Kong and any rules made thereunder. This document is not intended for distribution to or use by, any person or entity who is a citizen or resident of any jurisdiction where such distribution or use would be contrary to applicable law or regulation within such jurisdiction. This document does not constitute an offer or a solicitation of an offer to buy or sell any securities. This document is circulated to addresses solely and may not be reproduced or redistributed to any other person or published, in whole or in part, for any purpose. The research is based on information obtained from sources believed to be reliable, but Quam Securities does not make any representation or warranty as to its accuracy, completeness or correctness. Opinions expressed are subject to change without prior notice. Any recommendation does not have regard to specific investment objectives, financial situation and particular needs of any specific addressee. Quam Securities accepts no liability whatsoever for any direct or consequential loss arising from any use of this document. Quam Securities and its affiliates as well as persons associated with any of them from time to time may or may not have interests in the securities mentioned in this document. The prices of securities may move up or down, and past performance is not an indication of future performance. Investors shall consider seeking separate legal or financial advice before making investment decisions.

HOLD We expect the stock to have a total return of < 15% and >-15% over the next 12 months

SELL We expect the stock to have a total return of < -15% over the next 12 months

Disclosures Analyst Certification: The following analysts hereby certify that their views about the companies and their securities discussed in this report are accurately expressed and that they have not received and will not receive direct or indirect compensation in exchange for expressing specific recommendations or views in this report: Jennifer So (CE No. AHA295) Quam Securities Company Limited and Jennifer So (CE No: AHA295), the author of this document and her associates declare that as of the date of the publication of this report, they do not hold any financial interest in the company.

Documents

DRAGON CROWN GROUP HOLDINGS · 2013. 9. 27. · Company Profile Established in early nineties, Dragon Crown (DC) is an integrated terminal service provider in PRC (Nanjing, Ningbo