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This equity valuation report provides an in-depth analysis of Sansiri Public Company Limited (Ticker: SIRI). All information in this report is to provide a potential investor with a company overview including the current situation, fair market value of the firm, and future company outlook. The research focused on applying a diverse range of methodologies to gauge whether the current market value is realistic and is on sustainable path. There will be a combination between a strategic and financial analysis used to value the company used based on multiple scenarios: bull, base, and bear, performed in this research to get the intrinsic valuation range of the firm share price and enterprise value. The price target is derived from the methodologies and valuation modelling we applied in this report. Additionally, the report also focuses on joint venture between SIRI and BTS in addition to the equity valuation such as synergy analysis and overview. Additional analysis may be used to attempt to gain an insight into the factors influencing Sansiri PCL future growth potential.

This report primarily supports for academic purposes and are not for any investment advice. As we know that, historical performance does not lead and imply to any bright future performance which are subject to business, economic, competitive, risks and future uncertainties that may occur. All investment ideas provided herein represent our opinion so we are not responsible for any future changes or risks exposed by the investors. Hence, potential investors who keen on making an investment decisions should not solely rely upon and are suggested to conduct your own research or consult with qualified investment advisor before making any decision.

The outline of this report is structured as following:

1. Industry and Market Overview

2. Company Overview and Strategy Analysis

3. Joint Venture

4. Analysis and Valuation

5. Valuation Summary and Recommendations

Industry and Market Overview

2016

Factors that affected Thai real estate include high household debt level, the slow down of loan growth, poor export performance and economic issues caused a decline in overall sales.

This is due to the unfavorable economic environment that caused a lower purchasing power among Thais. Most developers ended the year with below-target performance because numerous of official launches were postponed after the Late King of Thailand passed away on 13 October 2016.

The real estate sector has also benefitted from the government stimulus packages to stimulate the overall economy especially demand by slashing both real estate transfer fee and mortgage registration fee to minimal percentage as 0.01% for half year as compared to the previous tax rate of 2% and 1%, respectively. Also, allowing individuals to deduct 20% of the cost of the home from personal income tax over a period of five years.

This is because the decline in argriculture, farm income and higher rejection rate of mortgage loan. Moreover, many real estate developers had delayed their projects to cope with the slowdown in property market. This maybe one of the reasons that major real estate developers are now tapping in the high-priced segments due to less affected by the slowdown economy.

2017

According to the Real Estate Information Center (REIC) forecasted that the real estate market are in line with economic condition and will be continuously recovering from 2016 due to low interest rate and the increase in job security. The NESDB forcasts to see a brighter future than last year and that consumers will gain more confident level in spending money in the property market. Due to slowdown economy, major real estate developers had to review and adjust their plan throughout to revise their plan and cope with the current and forecast the future. Some professionals managed well to capture foreign investors into high-end segment. The reseach from DBS shows that mid-range and high end condons were still doing well with +8% demand increase in mid-range, +3% in high-end and +14% in super luxury segment. Furthermore, government’s economic stimulus package on expansion of BTS lines potentially lead to the sales improvement of related areas.

We expected to gain back consumer confidence index points in 2017 after the mourning period in 4Q16. Due to this incident, marketing activities were mostly banned in respect to the situation and postponed their launches to 1Q17 or later. Some analysts claim that there was a low demand for low-end condominiums market but mid-range and high-ends condos were still doing well. The market is quite competitive as the price increases of City Condos and the rise of foreign buyers make it highly competitive in marketing campaigns. Currently, we can see the positive outlook overall since Thailand’s Consumer Confidence Index (CCI) has increased for the last four consecutive months starting from January 2017.

Retail Market Overview

Increasing in Thai CCI and purchasing power in 1Q 2017 affects the demand and supply of the retail market. The demand side of retail market is continuing growth despite the whole economy slowly recovery Colliers- Thai retail market report The average rental rate increased from the previous year since shopping mall demands higher rent than other types of mall including community mall. The average rental rate in Bangkok City Area is still the highest among others because Bangkok has become one of the popular place in Asia to buy luxury brands and convenient area where easily access to public transportation, BTS. In terms of supply side, retail developers are still trying to launch new projects and currently more than 300,000 sqm is still under construction which expected to be completed in 2017. The collier’s report shows that the occupancy rates are quite pleasant above 90% rate.

Overall, Thai retail industry has been gradually recovering along the side with its economic expansion, higher income and purchasing power of each income group. Many international brands and local brands see the prosperous opportunity to tap in the flourishing economy. CBRE report shows that the annual moving average of the retail sales index continued to show positive growth due to an increase growth of farm income and robust tourist arrivals. Nevertheless, we experience a decrease in occupancy in some of old and poorly managed property especially those suburban areas mall.

Commercial Market Overview.

Supply: most of future office buildings are under construction and postponed due to the raise in land price for freehold land. Currently, there is a trend of mix-use development projects going on around the city which means that office building, hotel, residential and retail are comprised all in one project. Colliers market report shows that supply still remains limited due to the lack of new supply entering.

Demand: Thailand economic situation is expected to move towards the brighter side over the last few years as well as the political stability as compared to the last five years. Many office buildings are located along the sky train, subway station and other transportation hubs. Overall occupancy rate remains in a pretty good range of 90% above especially on those Grade A buildings. Additionally, Bangkok becomes a very population destination to open the new office which lately very attractive for both Thai and foreign companies.

Rental rate: Colliers report illustrates that the asking rents are expecting to continue to increase throughout 2017 and afterwards due to robust demand and limited supply. One of the reason is intention of Thai government is still continuing to promote Thailand as a gateway to 10-nation ASEAN, where goods, services, capital and skilled labours are allowed to flow freely across the Southeast Asia region, and the tax advantage to attract more of those foreign investors. Statistically, it shows that Grade A building rental rate has gradually increased more than 10% yearly.

Hotel Market Overview

Thailand is one of the top hit destination for international tourists due to value for the money, culture and lifestyle. Each year, Thailand usually welcomes the largest number of Chinese tourists and thus are the key driver boosting the hotel industry in Thailand which followed by Hongkong and Malaysia. Overall picture tends to remain strong with the growth trend of Chinese arrivals since the visitor arrivals are the prominent key of the direct contribution of Hotel Marketing. World Travel&Tourism Council report shows that by 2027, international tourists arrivals are forecast to total 67,655,000, generating expenditure of THB 4,210.2bn or equivalent to an increase of 7.3% per annum.

Key Drivers

There are several other key drivers than the economic growth including the positive outlook towards the property industry in Thailand after the launch of The AEC and a rise in consumer confidence index, that significantly impact Thai real estate industry such as: Infrastructure investment, success of oversea market penetration, affordable segment condominium recovery.

Both public and private parties come together to expand its mass-transit routes across the nation and big project of 876km China-Thailand railway plan which expected to see more money coming in through toursism1.

Thailand’s popularity as tourist destination, beautiful beaches hour away and the low living cost. Thailand has the lowest property taxes and more affordable price than other Asian cities like in Hongkong and Singapore which make it very attractive place to invest. According to www.golbalproperty guide.com, the world’s top real estate markets resided in the US, UK and in Asia like Singapore, Taiwan, Hongkong and Japan are far more expensive than in Thailand roughly 2-6 times. Hence, Thai property provides investors with high yields with unusal low price when comparing to other places in Asia. Overall, we expect to see a surge in demand among both local and international investors.

The popularity of living in Condominium based on affordable segment condominium recovery: condominiums had become a major part of life in Bangkok due to the greater convenince offered by modern public transit systems which is expanding every year. As many people know, Bangkok’s traffic jams among world’s worst. According to the Scorecard, it shows that ‘Bangkok drivers spent an average of 64.1 hours a year in traffic jams’. Thus, residing in Condominium along the BTS line or Subway could potentially save up times each indicidual needs to spend on the road.

Key Risks

A rise in Thai Household Debt

Composition of household debt

Household debt includes personal loans, student loans, credit card loans, car loans and mortgages. Household debt could raise people standard of living but a large increase in Household Debt could negatively impact on the whole economy since we could see loan defaults rise and higher interest that lead to reductions in consumer spending. To maintain or reduce the household debt, Thailand’s central bank tightened controls on credit cards and unsafe personal loans. The card holders can no longer get credit limits of five times their income at least individual earns at least THB 50,000/ month. These days Thai household debt still continued to rise faster than the household income and needed to be monitored closely according to BoT.

Bank’s Strict Lending Measures

BoT had LTV rules in place several years ago for residential property in preventing in a rise in household debt. LTV policy might not be enough on its own so banks have their own internal criteria for client’s debt-to-income limits. The reason behind the fact that BoT did not impose both policies simultaneously because it will be tough for borrowers and financial institutions to obtain debts given the stricter credit conditions.

Fierce Competition among firms and between foreign-local owners

Many develops tried to come up with new strategy to bring up the firm value. Recently, Thai real estate firms welcome more JV’s with foreign investors, partner up, or M&A. Competition in this Real Estate industry will be fierce and those who understand the market needs and good location that are located near mass transit systems will achieve and obtain higher market share.

In term of competition for rentals, this makes it difficult for foreign investor those who plan to invest in Thai property in hoping to get a rent in return, since they will be competing with local owners who have an advantage or relation to attract more local people. Thus, this could be one of the factor that drive out small foreign investors in purchasing Thai properties. This could be very challenging but because of the growing infrastructure makes it a stable one when comparing it to the risk involved

Slow Economic Recovery

Impact from slow economic recovery directly impact the low-end-medium real estate demand due to their high level of debt as opposed to low household income. As a result, developers may experience lower than target revenue of low-end to medium projects and might reflects in oversupply in some areas and certain price ranges. Financial institutions which lent out the loans to those may see an increase rate in default as well.

Company Overview

Sansiri Public Company Limited is one of the biggest Thai-based leading real estate developers with a well-diversified product portfolio including quality houses, townhouses and condominiums targeting every market except the low-end segment. Sansiri was first established in 1984 with its first flagship resort condominium in Huahin that turned out to be very successful project that marked a major milestone of the firm.

Due to its successful achievement and fame, Sansiri decided to expand its business and was listed on Stock Exchange of Thailand in 1996 which attractiveness brought in many opportunities to the firm, including a partnership with Starwood Capital Group.

Over 30 years of operating, Sansiri began its expansion to all regions of Thailand including Chaing Mai, Chiang Rai, Phuket, Huahin, Khon Kaen, Pattaya and Khao Yai. Sansiri diversified from the flagship business of real estate development into the property asset management, hospitality business and investment business service with its headquartered is located in Bangkok.

One of the keys successful is Sansiri’s vision to enhance the quality of life and create a pleasant living experience with outstanding after-sales services and customers’ privileges to residents and relevant parties. Besides its exceptional brand name, Sansiri’s commitment extends to giving back to community by focusing on CSR activities mainly to provide youth development which includes health, sports and education. Sansiri managed well to expand and reach out to business partners from both government and private sectors together make an impact on society at large under the UNICEF-Sansiri partnership and many more organizations.

Vision, Mission and Corporate Strategy https://www.sansiri.com/pdf/AnnualReport/ar2016-en.pdf page 29

Vision: To enhance the quality of life and create an exceptional living experience

• Community Engagement: “Sansiri Academy”, “Aid of Children-Baandek Foundation”, “UNICEF Global Emergency Fund”

Mission

• To be essential part of living including exceptional lifestyle with its unique brand experience

• To act as a one-stop world-class service that offers wide ranges of products and services

• To create good life for everyone by collaborating with all related parties

• To provide ‘best in class’ products and services that cover all segment globally

Strategy

• Maintain market leadership in the upscale condominium segment

• Expand and strengthened foreign customer base in overseas market especially in Chinese market. To take advantage of the fruitful demand, SIRI has found a local agency in major cities like Shanghai, Shenzhen, Beijing and Guangzhou

• Launch its first community mall in T77 Community

• Joining in ‘EFG programme’ to sustain improvement of SG&A expenses and reduce other costs

Competitor Analysis

SIRI EBITDA margin is slightly below the average but not the lowest as compare to its competitors. Majority of the firms that obtained higher EBITDA margin, relatively smaller market cap than SIRI, which implies that those companies operate more efficiently as a way to maximize their profitability, whereas SIRI may have a higher fixed cost or facing lower sales. In term of sales growth, SIRI obtained negative sales growth due to very impressive, beat-the-market sales company achieved in 2015. For Net Debt/EBITDA, SIRI’ Net debt/EBITDA of 6.62x shows how long it would take to pay back its debt if net debt and EBITDA remain constant, and is positioned above average of 5.73x or the fourth from the highest the multiple. This could cause by the capital-intensive investment SIRI made during the year.

There is high competition in the property market proven by an increasing number in joint ventures in recent year. Finding a right strategic partner could be tough but if we found the right one it would give us a fast-track ticket to our desirable destination. It is also known as a common way of combining expertise and resources of two firms together seeking to achieve a specific goal. Benefits are helping business grow faster, adding competitiveness to its peers, generate higher profits. However, it can present certain risks due to complexity it could get between partners. Agreements and objectives must be stated clearly and effectively communication is needed. We will be discussing the impact of BTS-SIRI joint venture towards the development plan for residential projects.

About BTS

BTS Group Holding PLC (BTSG) is a leading provider of passenger services in Thailand with market capitalisation of THB 108.6 bn as of May 2016. BTSG mainly focuses on the Mass Transit Business i.e.Sky Train and core network and the bus rapid transit systems. There are four main sources of revenue including: Mass Transit, Media, Property and Services.

The Joint Venture- Agreement

BTS-SIRI entered into the Strategic Alliance Framework Agreement to partner together with 50:50 JV investment basis on developing residential projects which situated within 500m of rail mass transit station. Goal is to work together to launch THB 100bn worth residential projects over 5 years period under the BTS-SIRI JV.

Synergies

This JV agreement can bring large potential value creation and synergies for both firms. For BTS, its main contribution to this JV is that it owns a lot of good land parcels near mass transit lines at low cost since it acquired over a decade ago and its strong connections with potential to bring in foreign investors. For SIRI, its main contribution would be its superb reputation name brand, outstanding services and expertise in real estate field.

In line with company strategies

• Help develop key strategies in terms of expanding foreign customer base in overseas market and to maintain market share of foreign customers

Market Trend

• Many buyers willing to pay higher price to just live close by the BTS station. This shows that there is a strong demand for BTS-SIRI JV project in the future

Revenue Synergies

• BTS has weaker reputation than SIRI in real estate. Under the JV, BTS can enjoy the premium from SIRI brands with customer satisfaction due to its outstanding performances of sales teams in terms of service, attitude, and knowledge. Together, they could raise higher price which would bring in more revenue to the JV than stand-alone project. Also, the JV would boost up service income from management fee as stated under the JV agreement until the completion of the projects

Cost Synergies: Variable and SG&A

Variable: COGS like cement and raw materials are expected to slightly improved by better bargaining power which assumed to be 1-2% cost saving. Also, this could potentially help to reduce the land cost for SIRI if it was to go out and acquire its own parcels which could save up to 10% compare to current market price

SG&A: the operational improvement reduces operating expenses through saving on selling teams. SIRI has a very strong and many expertise in selling team where BTS could save 3-5% commission fees from agents. Also, both firms could reduce the marketing campaign fees assumed to be 2%

If successful, it can make SIRI a Thai’s biggest real estate developer with strong competitiveness among its industry.

Success Story

Excellent presales on new launched under JV with Sansiri. Good feedback and very impressive start for the strategic alliance with Sansiri. The first 3 projects under BTS-SIRI JV were fully sold out during 1-2 days after pre-sales. This generated over THB 11 bn of pre-sales. Overall, there is still a strong demand of mass transit-centric strategy and the synergistic relationship between the JV partners. Both firms can enjoy a larger pipeline of more consistent profits and share those risks. Additionally, the projects also attracted many foreign buyers from Hong Kong, Singapore, and Taiwan which reaffirms the strength of mass transit centric location together with JV partners which can prove by an increasing in presales from foreign buyers below.

Operating Model and Assumptions

Due to fluctuated historical sales growth, we made an adjustment based on CAGR during 2014-2016 of 10.9%. We slightly adjusted it down to 8% (base case) due to uncertainty of overall Thai economy, trends, demand-supply, consumer confidence index and other factors. Last two years of projection periods are given at 3%. This chosen figure is considered relatively conservative when compared to peers and economic outlook. High revenue growth is expected in Bull case at 2% higher than base case scenario over 5-year projection period, driven by the political stability, more projects with JVs including high-end residential property, and beat the market expectation, whereas the slow growth is applied at 1% lower than the base case possibly due to the high household debts and slow recovery of the economy that weakened the whole economy.

Sales/ Revenue

These items are forecasted as a percentage of sales. The percentage rate of each item except D&A is computed based on the average rate over the last three years. D&A rate is expected to reduce slightly between 1-3% every consecutive years while CAPEX is assumed to be 0.55% (base case), lower than D&A. Tax rate of 23%, which is the average of effective tax rate during the last 3 years. For Bull case, we assumed 1% lower than base case in COGS and SG&A due to the bargaining power and economies of scale and 1% higher in bear case.

COGS, SG&A, D&A, CAPEX and Taxes

Balance Sheet Assumption/ Efficiency Assumption

All of these items are expected to remain at the constant average percentage based on the last three historical years for all three cases.

Valuation

In this section, a number of methodologies including DCF under the Gordon growth method, exit multiple, comparable and the broker’s analysis were utilized in finding an intrinsic share price of SIRI. The primary model is projected over five years period since it is highly exposed to higher risks in predicting the longer period of time. There were three scenarios used in this analysis. Each of them was formulated using guidance from a variety assumptions which including: historical performance, industry trends, and adjustments about its future expectation.

Method1: Discounted Cash Flow Model

SIRI’s DCF is conducted based on mid-year convention during the last 3 years historical period from 2014-2016. The DCF is most sensitive to our assumption and the derivation of which are explained underneath.

Free Cash Flow Projection: Base Case Scenario (See Appendix ___ and ____for bull and base case, respectively)

WACC Analysis and Beta Calculation

WACC calculation represents the discount rate for FCF valuation. The projected FCF and terminal value are discounted at WACC of 5.733% which is slightly higher than Bloomberg’s WACC of 5.2% due to the different levered beta value.

Two main components are Debt and Equity which have significantly risk profiles and tax ramifications, WACC is dependent on capital structure and different in each firm. The cost of debt was calculated based on average of SIRI’s interest rate over the last 5 years. The cost of equity was derived using interpolated yield on 10-year Thai Government Bond from Bloomberg. Market risk premium was obtained from risk-premia.com at 5.04% and a levered beta of 1.28 by re-levering its comparable average unlevered beta.

In DCF analysis, there were two different approaches used in terminal value calculation which are the Multiples and the Gordon Growth methods. 2.25% perpetuity growth rate and SIRI’s mean EV/EBITDA multiple of 14.0x, obtained as the historical mean of last three years, were applied in DCF analysis as Exit multiple. The perpetuity growth rate is usually between 2-3% so we assumed it to be 2.25% which reflects Thai’s market condition.

Applying Exit Multiple and Gordon Growth Model to derive Terminal Value, Enterprise Value, Implied Equity Value and Share Price Calculation- Base Case Scenario

These two results in a very similar share price. The average implied share price or final price between two methods is given at THB 2.58 per share. The current share price is at THB 2.14 per share as of 18/7/17. This implies that excess return for both methods are between 14%-28% higher than the current share price, which could potentially due to assumed perpetuity growth rate or potential growth. The result shows that SIRI’s share price is undervalued by THB 0.44/ share.

DCF Sensitivity Analysis

Method2: Comparable Company Analysis

We evaluate the value of SIRI based on other businesses which operate in the same industry with similar characteristics. We selected 10 peer firms and categorized them into three groups based on its market capitalisation. The analysis shows that Large-Cap companies all trade at the highest multiples than others. The differences in these multiples are due to risks and future expectations. SIRI was classified as a Large-Cap firm with 2016, 2017E EV/EBITDA multiples of 10.8x and 12.5x respectively. The Large-Cap of 2016 and 2017E Mean EV/EBITDA multiples are 29.1x and 22.6x, whereas the median multiples are 15.1x in 2016 and 13.7x in 2017E. Taking all firms into account, our analysis illustrates that the overall mean EV/EBITDA of 2016, 2017E are 18.2x and 15.7x while the median are down to 11.4x and 11.6x respectively. We consider that SIRI EV/EBITDA multiple is aligned with its peers. In our analysis, we used Large-Cap firm median or the closest peers EV/EBITDA of 13.7x instead of the current industry median of 11.6x because it seems more realistic and suitable for SIRI’ characteristics.

Comparing SIRI with the industry averages, SIRI looks somewhat undervalued because its valuation ratios are lower than the overall industry average.

To find the implied share price, we assumes everything else is equal except the exit multiple of 13.7x derived it from comparable analysis. As a result, the implied share price under comparable EV/EBITDA exit multiple is THB 2.35/ share, whereas under EV/Revenue gives us THB 2.92/share.

Method3: Broker’s Analysis

The broker’s analysis was used to see if the exit multiples are consistent with other valuation methods. The Median EV/EBITDA multiples from several brokers is 13.4x which is slightly lower than what we got from DCF and comparable valuation methods. Our implied share price occurs to be THB 2.25/ share as shown below. In conclusion, we found that SIRI is undervalued by THB 0.11/share. On the other hand, we derived implied share price based on EV/Revenue Multiple which gives us THB 2.46/share as shown in appendix____.

Valuation Summary and Recommendation

A valuation summary illustrates the final result based on different methodologies in diagram of valuation football field. The implied share prices valuation base on different parameters for different scenarios: base, bear and bull case. The graph indicates the minimum and maximum range of implied share prices in each approach. To derive the range of implied share prices in each case, we assigned specific weights into each approach but slightly more on EV/EBITDA since it is considered to be a better method to use in valuation. All results were derived based on our assumptions and forecasts that are too doubt. We have gained confidence from our valuation because of consistency across a variety methods below.

Combining all three methods, we obtained a price range of THB 1.743 to THB 3.344. However, we based our implied share price on the base case which is THB 2.4825. Currently, we found that SIRI’s stock price is undervalued, thus, we issued a ‘‘BUY’’ recommendation to obtain a premium of 16% approximately. Additionally, we believe that supporting positive factors including strong demand in Luxury residential market among foreign and local investors and the political stability will enhance the company competitiveness and enterprise value as well.