PP 7767/09/2010(025354)

Malaysia RHB Research

Institute Sdn Bhd
A member of the
RHB Banking Group
Company No: 233327 -M

New Listing 12 July 2010

MARKET DATELINE

Tatt Giap Group Bhd Issue / Offer : RM0.58

Price
Fair Value : RM0.595
Public Issue Of 14.6m Shares and Offer For Sale Of 14.2m
Shares

Table 1: Investment Statistics Bloomberg: TGGBMK

Pretax Net EPS

FYE Turnover Profit Profit EPS Growth PER P/NTA ROE Gearing GDY
Dec (RMm) (RMm) (RMm) (sen) (%) (x) (x) (%) (x) (%)
2009A 225.4 10.5 6.9 6.7 76.5 8.8 0.8 8.5 1.3 -
2010F 241.7 8.2 6.1 5.9 -11.9 10.0 0.7 7.0 1.2 -
2011F 273.9 14.1 10.6 10.4 74.7 5.7 0.6 10.9 1.2 -
2012F 301.3 17.0 12.7 12.5 20.3 4.8 0.6 11.6 1.2 -
Valuations based on estimated fair value of RM0.595/share

Issued capital (m shares) 102.0 (RM0.50 par) Market capitalisation (RMm) 60.7

LISTING DETAILS
X Background. Founded in 1978, Tatt Giap is one of the major players in the
Listing Sought Main Market of
stainless steel processing industry, primarily involved in the manufacturing of Bursa Malaysia
stainless steel pipes and tubes, cold drawn and polished carbon Listing Date 22 Jul 2010
steel/stainless steel bars, electro galvanised (EG) steel coils. Apart from its Public Issue 14.56m shares
manufacturing business, Tatt Giap is also involved in the distribution of third- including:

party steel products for various types of users, ranging from automotive part - 6.0m to
Malaysian public;
producers to construction companies.
- 6.56m private
placement; and
X Key highlights. Key highlights for Tatt Giap are:
- 2.0m to eligible
1. Long-term demand prospects for steel and steel-related products employees.

remain good. We remain positive on the sector’s longer-term outlook,

Offer for Sale 14.2m shares
as: 1) shortages of iron ore globally are likely to persist over the next
including:
two years, and this will result in an uptrend in iron ore prices over the - 10.2m private
medium term, hence pushing steel product prices upward; and 2) the placement to
Chinese government’s continued efforts to curb excess capacity in the Bumiputera
investors; and
country’s steel sector, and lower capacity would help boost pricing power
- 4.0m private
of steel producers;
placement.

2. Collaboration with Nippon Metal Industry. The collaboration with MAJOR SHAREHOLDERS
Nippon Metal Industry Co. Ltd enables Tatt Giap to secure a constant Dato’ Siah Kok Poay 51.0%
and reliable supply of stainless steel at competitive price and technical
support, and this collaboration gives Tatt Giap an edge over its
competitors, both in terms of production cost and product quality; and
MANAGEMENT FORECAST
3. Its strong market position in the steel processing industry.
FY10
Among the total 30 steel processing companies in Malaysia, Tatt Giap Revenue (RM m) NA
ranked 5th in terms of revenue (with an estimated market share of Net Profit (RM m) NA
8.2%) in 2008. The strong market position translates to better Net EPS (sen) NA
economies of scale, pricing power as well as market reach. Net PER (x) NA

X Earnings forecasts. We project FY12/11-12 net profit to rise by 74.7% and

20.3% to RM10.6m and RM12.7m respectively, as we expect both demand
and prices of steel products to recover from FY12/11 on the back of firmer
global recovery.

X Valuation. We value Tatt Giap at RM0.595/share, based on 5.7x FY12/11

EPS of 10.4 sen, which is in line with the average CY2011 PER of the peers.
Chye Wen Fei
(603) 92802172
BUSINESS
Please read important BACKGROUND
disclosures at the end of this report. chye.wen.fei@rhb.com.my

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 12 July 2010

X Background. Founded in 1978, Tatt Giap is one of the major players in the stainless steel processing
industry, primarily involved in the manufacturing of stainless steel pipes and tubes, cold drawn and polished
carbon steel/stainless steel bars, electro galvanised (EG) steel coils (see Table 2). Apart from its
manufacturing business, Tatt Giap is also involved in the distribution of third-party steel products for various
types of users, ranging from automotive part producers to construction companies (see Table 3).
Table 2: List of Manufactured Products
Type of sheets, plates and strips JIS specifications Principal applications
Hot-rolled steel SPHC-Black Trolley, elevator and escalator, computer parts, castor wheel,
SPHV-P/O electrical trucking and lighting, fire extinguisher and home
appliances.

SAPH 310-P/O Automotive parts

SAPH 370-P/O
SAPH 400-P/O
SAPH 440-P/O
SAPH 490-P/O
SAPH 540-P/O
SAPH 590-P/O
SAPH 780-P/O

Cold-rolled steel SPCC-SD Office equipment and furniture, automotive parts, castor wheel,
SPCD-SD roller shutter, elevator and escalator.
SPCEN-SD

S45C Automotive parts

S55C
SPFC 440
SPC270
SPC440
SPC590

GI steel SGCC-E Window frame, door frame, ceiling tee and channel, roofing truss,
SGCC-Z farm equipment, air conditioning and insulation, cooling tower,
SGCC-R racking, elevator and excalator.
SGHC-R
SGCD1
SGCD3

Galvanealed steel SGACC-45/45 Automotive parts

SGACD-45/45
SGACE-45/45
SGCD2

EG steel SECC-P Computer parts, window frame, door frame, automotive parts,
SECC-AFP home appliances, audio and visual components.

Hot-rolled stainless steel SUS 304/304L Kitchen utensils, food and agricultural processing plants and
building architecture.

SUS 316/316L Chemical, petrochemical, fertilizer, food processing, desalination

plants and coastal installations.

Cold-rolled stainless steel SUS 304/304L Kitchen utensils, food and agricultural processing plants and
building architecture.

SUS 316/316L Chemical, petrochemical, fertilizer, food processing, desalination

plants and coastal installations.

SUS 430 Kitchen utensils, furniture and household appliances.

Stainless steel tubes SCH5S Water works, air-conditioning, palm oil and sugar refiners, cement
Nominal pipe size – 3/8, ½, ¾, 1, SCH10S plants, food processing, petrochemical and pharmaceutical
11/4, 11/2, 2, 21/2, 3, 31/2, 4, 5, SCH40S industries.
6, 8, 10, 12, 14, 16

Cold drawn and polished carbon SGD1/1K/2K Primarily used in the manufacturing of office automation,
steel/stainless steel bars SWRM10K/12K automotive parts, industrial machines, fasteners, home electrical
Nominal bar size (mm) – 4.76- S45C, S25C appliances and the furniture industry.
80.00 SAE 1018
SAE1020
12L14, 1215
302HQ, 303
303CU, 303F
304, 304HC, 304L
316,316L, 431
SUP3, SUP9

Source: Company

TATT GIAP GROUP 2 BERHAD

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 12 July 2010
Table 3: Products distributed
Principal applications
Product type Mechanical Automotive E&E Furniture and Building and
components parts components fittings construction
materials
Hot-rolled, cold-rolled, EG and GI steel
Sheets and plates
Hollow sections
Lipped channels and purlins
Beams and columns
Round, square, flat and angled bars
Tubes and pipes

Stainless steel
Sheets and plates
Round, square and hexagon bars
Flat, angled and channel bars
Tubes and pipes
Source: Company

X Future plans

1. Expanding market reach. Tatt Giap plans to set up two new sales and marketing offices in Kuantan and
Kuching (by mid and end-2011 respectively) to directly market its products and services to these
customers, which are currently being serviced by its sales personnel from Johor Baru and Penang.
Domestic expansion plan aside, Tatt Giap also plans to expand its market reach to the Middle East,
Australasia, the rest of the ASEAN countries as well as the European region.

2. Expanding downstream product range. Tatt Giap plans to expand its product range to pipe fittings
(such as elbows, caps, tees and reducers) and metal parts over the next three years in order to: 1)
complement its existing range of tube and pipe products; and 2) cater for industrial end users in the
automotive, electrical and engineering (E&E), and building and construction sectors.

X Key highlights. Key highlights for Tatt Giap include:

1. Long-term demand prospects for steel and steel-related products remain good. Despite the weak
near-term prospects of the overall steel sector in the region (on the back of heightened concerns on a
sharper-than-expected economic slowdown that will have a negative impact on both demand and prices of
steel products), we remain positive on the sector’s longer-term outlook, as: 1) Shortages of iron ore
globally are likely to persist over the next two years, and this will result in an uptrend in iron ore prices
over the medium term, hence pushing steel product prices upward; and 2) the Chinese government’s
continued efforts to curb excess capacity in the country’s steel sector, and lower capacity would help boost
pricing power of steel producers.

2. Collaboration with Nippon Metal Industry. The collaboration between Tatt Giap and Nippon Metal
Industry Co. Ltd (a leading manufacturer of stainless steel coils and sheet in Japan) began since 1997.
The collaboration enables Tatt Giap to secure a constant and reliable supply of stainless steel at
competitive price and technical support, and this collaboration gives Tatt Giap an edge over its
competitors, both in terms of production cost and product quality.

3. Its strong market position in the steel processing industry. Among the total 30 steel processing
companies in Malaysia, Tatt Giap ranked 5th in terms of revenue (with an estimated market share of
8.2%) in 2008. The strong market position translates to better economies of scale, pricing power as well
as market reach.

X Risk factors. Risks to our view include:

1. Fluctuation in prices of raw materials (in particular, steel). Tatt Giap’s financial performance relies
on global steel price movement, witnessed by a RM3.3m writedown in Tatt Giap’s inventory in FY12/08 on
the back of a sharp plunge in global steel prices.

TATT GIAP GROUP 3 BERHAD

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 12 July 2010

2. Foreign currency exposure. Approximately 34% of Tatt Giap’s raw materials are mainly transacted in
USD, and this means the company is exposed to foreign currency exchange losses/gains arising from
timing differences.

3. Competition. Tatt Giap faces competition from various steel distributors, steel service centres and
stainless steel pipe manufacturers, and potential new entrants into the industry, and there would be a
downward pressure on the prices of both products and services (and hence Tatt Giap’s profitability) should
demand for products and services decline.

X Utilisation of proceeds. Out of the RM8.4m expected to be raised from the listing exercise, Tatt Giap plans
to utilise RM2.5m (29.6%) as listing expenses, while the remaining RM5.9m (70.4%) will be utilised to reduce
its total borrowings (see Table 4).
Table 4: Utilisation of IPO Proceeds
RM’000 Estimated Timeframe for Use
Repayment of term loan borrowing 5,945 Within 1 year
Estimated listing expenses 2,500 Within 2 months
Total 8,445
Source: Company

Forecasts & Valuation

X Earnings forecasts. We project FY12/10 net profit to dip by 11.9% to RM6.1m, as we expect the recent
decline in both demand and prices of steel prices in the region to weaken both buying sentiment and prices of
steel products in 2H10, which will in turn weaken Tatt Giap’s overall performance in FY12/10. We project
FY12/11-12 net profit to rise by 74.7% and 20.3% to RM10.6m and RM12.7m respectively, as we expect both
demand and prices of steel products to recover from FY12/11 on the back of firmer global economic recovery.

X Valuation. We value Tatt Giap at RM0.595/share, based on 5.7x FY12/11 EPS of 10.4 sen, in line with the
average CY2011 PER of the peers (see Table 5).
Table 5: Peers Comparison
Share Price Issued Market Cap EPS (sen) PER (x)
Shares
RM m RMm CY2010 CY2011 CY2010 CY2011
Choo Bee Metal 1.80 109.9 197.8 26.0 33.0 6.9 5.5
Industries
Engtex Group 1.03 198.0 203.9 15.0 16.0 6.9 6.4
Hiap Teck Venture 1.25 327.4 409.3 19.5 23.5 6.4 5.3
Tatt Giap Group* 0.58 102.0 59.2 5.9 10.4 9.8 5.6
Average 6.7 5.7
* Based on IPO price of RM0.58/share
Source: RHBRI

TATT GIAP GROUP 4 BERHAD

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 12 July 2010
Table 6: Earnings Forecasts
FYE Dec (RM’m) 2009 2010F 2011F 2012F

Revenue 225.4 241.7 273.9 301.3

EBITDA 26.8 23.0 28.8 31.6

EBITDA margin 11.9% 9.5% 10.5% 10.5%
Depreciation -9.7 -9.6 -9.5 -9.4

EBIT 17.0 13.4 19.3 22.2

EBIT margin 7.6% 5.5% 7.0% 7.4%
Interest expense -8.4 -7.2 -7.2 -7.2
Other operating income 2.0 2.0 2.0 2.0
Associate -0.2 0.0 0.0 0.0

Pretax profit 10.5 8.2 14.1 17.0

Pretax margin 4.6% 3.4% 5.1% 5.6%
Tax expense -3.6 -2.1 -3.5 -4.2
Effective tax rate 34.0% 26.0% 25.0% 25.0%

Net profit 6.9 6.1 10.6 12.7

Net profit margin 3.0% 2.5% 3.9% 4.2%
Growth 76.5% -11.9% 74.7% 20.3%

Enlarged issued shares post IPO (m) 102.0 102.0 102.0 102.0
Basic EPS (sen) 6.7 5.9 10.4 12.5
Source: Company; RHBRI

TATT GIAP GROUP 5 BERHAD

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The recommendation framework for stocks and sectors are as follows : -

Stock Ratings

Outperform = The stock return is expected to exceed the FBM KLCI benchmark by greater than five percentage points over the next 6-12 months.

Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price and translate into an absolute return of 15% or
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Industry/Sector Ratings

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TATT GIAP GROUP 6 BERHAD

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