Tokyo Cement Company PLC [TKYO.

N & X]
9MFY14 EARNINGS NOTE MAINTAIN A BUY
Previous Revised FY14E 32,406 FY14E 29,654 Revised FY15E 32,691

FYE MAR - LKR mn Revenue

FY13 27,296

9MFY13 20,371 1,112 583 1.7 18.8 19.5 15.8 1.8 1.5

9MFY14 21,651

Current Price (LKR) V/NV

Revenue growth
Operating Profit (EBIT)

19%
1,940

6%
2,299

19%
3,124

9%
3,205

10%
3,707

34/ 27.6
Fair Value (LKR) V/NV

EBIT growth
Profit attributable to Equity holders

14%
884

107%
1,722

61%
1,934

65%
2,104

16%
2,331

47.6/36.3
Recommendation

Profit growth
EPS (LKR) NAVPS (LKR) PER (x) - Voting PER (x) - Non-Voting P/BV (x) - Voting P/BV (x) - Non-Voting DPS (LKR)

-25%
2.6 21.5 12.9 10.4 1.6 1.3 1.2

195%
5.2 25.8 6.6 5.4 1.3 1.1

119%
5.8 25.6 5.9 4.8 1.3 1.1 1.7

138%
6.3 25.9 5.4 4.4 1.3 1.1 1.9

11%
7.0 31.2 4.9 4.0 1.1 0.9 1.7

BUY
Date

19-Feb-14

Dividend yield - Voting Dividend yield - Non-Voting

3.5% 4.3%

5.1% 6.3%

5.6% 6.8%

5.1% 6.3%
Market Capitalization (USD): 81mn Market Capitalization (LKR): 10.6bn 6mos avg. Daily T/O (USD) V/NV: 45k/20k 6mos H/L (LKR)-V: 38/22.6 6mos H/L (LKR)-NV: 30.3/18.5 Free Float V/NV: 26%/100%

TKYOs 9MFY14 profits came above expectations at LKR 1.7bn (+195% YoY vs. CALs +119% YoY for FY14E) despite a 5% YoY dip in sales volumes. EBIT margins expanded from 5% in 9MFY13 to 11% in 9MFY14 as an avg c.12% pricing revision and stable clinker prices aided margin improvement. CAL revises FY14E profits to LKR 2.1bn (vs. its previous LKR 1.9bn) taking into account lower volumes and higher than anticipated improvement in GP margins. CALs fair value for TKYO voting is LKR 47.6 and LKR 36.3/share for non-voting which may provide a 47% total return for the voting and 37% for the non-voting share. BUY Volumes to recover starting FY15 Higher rainfall and subdued economic activity during 1HFY14 dampened construction activity leading to TKYOs 9MFY14 sales volumes declining 5% YoY vs. CALs +6% YoY growth for FY14E. However, sales volumes have recovered in 3QFY14 (+3% YoY) leading to a 6% YoY growth in revenue for the 9MFY14. CAL revises TKYOs FY14E volumes to a 3% YoY decline while we anticipate a 6% YoY growth from FY15E due to a strong pipeline of infrastructure development projects. CAL reduces FY14E revenue by 8% to LKR 30bn. CAL does not anticipate any price revision in FY15. EBIT margins to improve to 11% in FY14E (vs. 7% in FY13) - TKYOs EBIT margins improved from 5% in 9MFY13 to 11% in 9MFY14 as an avg c.12% YoY increase in cement prices during the latter part of 2012 and stable clinker prices resulted in higher margins. (GP margins* improved from 14% in 9MFY13 to 19% in 9MFY14). The buildup of clinker supply in India and Vietnam is likely to keep clinker prices stable for the near future. CAL maintains FY14 EBIT margins at 11%. This may lead to FY14 profits growing +138% YoY to LKR 2.1bn (vs. our previous LKR 1.9bn) Post-FY14 profit growth may materialize from volume growth & the new power plant - Growth in FY15E may materialize from higher sales volumes (+6% YoY) and the start of operations at the Mahiyangana power plant which may add c.LKR 210mn to EBIT from FY15. The plant is expected to commence commercial operations by end FY14 and the entire output will be sold to the national grid. With regards to the 1mn MT capacity expansion, the land required for the plant has already been acquired and management expects the project to be completed by 2016. The USD 50mn capex required to finance the project may stem from internally generated funds and borrowing with interest rates remaining low and gearing currently standing at 30% (vs. FY13s 40%). CAL assumes an initial outlay of LKR 1.5bn for the project by end FY14 (c.37% from internal funds). CAL maintains a BUY on TKYO with the total return of 47% for Voting and 30% for Non-Voting TKYO.N currently trades at a FY14E PER of 5.4x and PBV of 1.3x while the non-voting trades at a FY14E PER of 4.4x and and PBV of 1.1x. CALs fair value for TKYO.N is LKR 47.6 (+41%) and LKR 36.3 (+30%) for TKYO.X (includes an LKR 6/share that may materialize from the 1mn MT capacity expansion) which may provide a total return of 40% and 37% respectively. BUY

* Quarter GP margins cannot be compared with annual figures due to reclassification of line items towards the end of fiscal year.

CALs Fair Value for TKYO is based on the avg. of fair values derived from DCF, DDM and PER valuation methods. See appendix 3

CAL Research
Level 5, Millennium House, No.46/58, Nawam Mawatha, Colombo 2 Tel: +94 11 231 7746 Email:udeeshan@cal.lk

Udeeshan Jonas

Refer p.5 for Important Disclaimer

Appendix 1: TKYO Income Statement

YEAR END MAR (LKR mn) Revenue Cost of Sales Gross Profit Other Income Total Operating Expenses Finance Cost Profit Before Taxation Income Tax Expenses/(Income) Profit for the Year Profit to equity Holders Minority Interest EPS FY12 22,927 18,685 4,242 80 2,622 424 1,276 231 1,045 1,171 (129) 3.504 FY13 27,296 22,007 5,289 105 3,455 700 1,255 360 894 884 9 2.645 FY14E 29,654 22,993 6,662 287 3,744 684 2,553 408 2,145 2,104 40 6.298 FY15E 32,691 25,280 7,411 339 4,043 957 2,794 447 2,347 2,331 16 6.978

Source: Company data & CAL Research estimates 2

Appendix 2: TKYO Balance Sheet

YEAR END MAR (LKR mn) ASSETS Property, Plant & Equipment Goodwill and Lease Prepayment Inventories Trade and other Receivables Other Assets Cash and Cash Equivalents Total Assets Equity and Liabilities Stated Capital Reserves Minority Interest Total equity Total Interest Bearing Debt Trade payables Other Liabilities TOTAL LIABILITIES AND EQUITY 2,367 4,339 (26) 6,680 4,166 1,565 1,127 13,539 2,367 4,828 (17) 7,178 4,240 1,763 1,636 14,816 2,894 5,774 23 8,691 5,444 1,839 1,838 17,812 2,894 7,523 39 10,455 6,299 2,022 2,280 21,057 9,843 109 1,483 1,569 303 232 13,539 10,602 102 1,793 1,740 211 369 14,816 12,826 97 1,839 2,016 150 883 17,812 15,730 93 2,022 2,223 145 843 21,057 FY12 FY13 FY14E FY15E

Source: Company data & CAL Research estimates 3

Appendix 3: TKYO Fair Value Calculation

TKYO Cement Target Capital Structure (D/E) Cost of Equity Cost of Debt Terminal Growth Rate WACC VALUE 40/60 23.0% 13.1% 1.0% 19.0%

LKR mn EBIT Total FCFF Terminal Value EV NPV/share

FY14E 3,205 219 13,956 19,523 47.5

Valuation Method DCF DDM P/E Average

Voting 47.5 45.9 49.3 47.6

Non-voting 36.2 35.0 37.6 36.3

*CALs Fair Value for TKYO is based on the avg. of fair values derived from DCF, DDM and PER valuation methods.

Source: Company data & CAL Research estimates 4

DISCLAIMER
This document has been prepared and issued on the basis of publicly available information, internally developed data and other sources, believed to be reliable. Capital Alliance Securities (Private) Limited however does not warrant its completeness or accuracy. Opinions and estimates given constitute a judgment as of the date of the material and are subject to change without notice. This report is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The recipient of this report must make their own independent decision regarding any securities, investments or financial instruments mentioned herein. Securities or financial instruments mentioned may not be suitable to all investors. Capital Alliance Securities (Private) Limited its directors, officers, consultants, employees, outsourced research providers associates or business partner, will not be responsible, for any claims damages, compensation, suits, damages, loss, costs, charges, expenses, outgoing or payments including attorneys fees which recipients of the reports suffers or incurs directly or indirectly arising out actions taken as a result of this report. This report is for the use of the intended recipient only. Access, disclosure, copying, distribution or reliance on any of it by anyone else is prohibited and may be a criminal offence.

Contacts
Research Team
Tel No: +94 11 231 7777 (General) Email: teamresearch@capitalalliance.lk
Head of Research Purasisi Jinadasa Tel No: +94 11 231 7786 Email: purasisi@cal.lk

Udeeshan Jonas Tel No: +94 11 231 7746 Email: udeeshan@cal.lk

Thushani de Silva Tel No: +94 11 231 7777 (Ext: 7815) Email: thushani@cal.lk

Devin Karunaratne Email: devin@cal.lk