ANALYSIS AND RECOMMENDATION

STOCK REPORT
October 17, 2016

Fair Value
Recommendation
We see value play for this stock on account of the current
macroeconomic
conditions of the country, particularly the increase in the
Piping
Industry overview
property sector movement. The demand for office and retail spaces
continue to grow as our currently flourishing economy is induced by the
influx of international outsourcing firms, and with such demand increase
in sales for infrastructure pipes will also be apparent.
With current expansion of the company and continuous increase in their
revenue and income growth, we believe that the company has set its
sights further and would have a ride with the demand from constructions
in the Philippines.

BUY

+
-

2.70

Property boom in PH means more pipe

sales for the company
Company is almost debt-free
Currently trading at a bargain
Low market capitalization
Slight inefficiency in using current
assets
Underperforms vs. the PSEi

It is now trading at a bargain due to having a single-digit P/E. Our initial

coverage on the stock concluded us to give a HOLD rating for CROWN
as we are still observing how the company will utilize its financial
liquidity. Having seen that their plans are now taking effect and that their
financial performance has even surpassed current industry growth
standards,
wefor
now
give pipes
a BUY
for the
stock.2019
Our fair
World
demand
plastic
willrating
rise 6.7%
through
to value of
P2.70 is retained,
but using
the last closing
price
basis,
we can see a
$19.3bn.
Construction
applications
account
for asthe
largest
35% upside.
share
of plastic pipe demand and will support growth moving

forward.
Upside risks that we can attribute for this company is the continuing
Growth in the Asia Pacific region will remain to be the largest
growth in the companys product demand on account of the currently
and fastest growing market. The Philippines in particular has
flourishing infrastructure industry. Downside risks, on the other hand, is
registered a CAGR of 8.3% growth in Pipe sales
still focused on its slow market liquidity, coupled with the current market
We
believe that
demand
will berisk
carried
in the to begin
downtrend.
Still,this
weglobal
see this
downside
as aonchance
Philippines
and
as
such
will
affect
CROWN
in
a
few
years.
In
accumulating shares.
their latest financial statements, they surpassed the projected
industry CAGR and achieved double-digit growth percentage.
Segment Analysis
UUpdates,
Disclosures & News

Crown Asia Chemicals Corp. is engaged in the

manufacturing and distribution of compounds and
pipes used for industrial companies.

Beta

The compounds segment rakes in the lions share in terms of

CROWN recorded a net income of P66.4-m for the first half of
revenue contributions to the company.
2016. This translates to a 60.8% increase in net income as
Contribution ofcompared
the pipestoindustry
also gradually
increasing also reported
previousis halfs
P41.3-m. Revenues
on account double-digit
of higher pipes
sales
and
not
due
growth at 12.7% to 562.8-m.to lower
compounds sales.
This growth
is enjoys
attributable
to growth,
a strongthe
pipe
group and project
Although the pipes
segment
strong
chemical
sales, each reporting 48% and 50% growth, respectively. We
segments are not doing so well as its sales went down 7.62%
note that the project sales segment of the company comprises
to P24.1-m on account of selling pressures during the 2nd
62% of the companys total pipe group sales.
quarter.
Compounds and Pipes segments registered a CAGR of 13.3%
CROWN launches new product line called the Enduro which
and 19.9%, respectively.
caters to the affordable segment of the market.
The Enduro line offers a complete range of pipes and fittings
for sanitary and drainage pipes made for value-conscious
markets like mass housing projects, which provide affordable
dwellings to the broader base of the mass population with
estimated backlog of 5-m units

+
+

CROWN enters into waterworks industry. Not only will they be

supplying projects with their main product to private
construction firms, they will also expand presence in
government PPPs.

Stock Information
Last Price

P2.00

Performance (YTD)

(14.12%)

52-week range

P1.99-P2.73
n/a

Outstanding Shares

630.8-m

Market Capitalization

1482.4-m

Free Float Level

34.2%

Par Value

P1.00

Sector
Subsector

Industrials
Construction and Infrastructure

Major stakeholders
Fiscal Year
Previous Rating

April 20, 2016

Board of Directors
Chairman

Walter H. Villanueva

President

Eugene H. Lee Villanueva

Tita P. Villanueva
Nicasio T. Perez
Derrick P. Villanueva

Directors

Rafael S. Alunan

Independent
Directors

Oscar Reyes III

RCDC Research
We made a forecast of robust sales CAGR of 13% in 2016 for
CROWN due to increase in commercial constructions in the
country. As of 1H16, revenues increased by 13.5% to P566mn

Page 1 of 6

Dec. 31
HOLD
P2.70

Paul Michael A. Angelo

Email: paangelo@reginacapital.com

Your Private Broker.

KEY RATIOS AND LIMLINGAN FINANCIAL MODEL

Key Ratios &Limlingan Financial Model: PCOR

Key Financial Data

Ratios

2013

2014

2015

2016E

2017E

in Php Millions

Return on Equity

8.84%

11.61%

11.78%

12.39%

12.63%

Ave Total Assets

0.24

0.14

0.17

0.21

0.25

6.20%

7.69%

9.33%

10.23%

10.54%

0.97

1.03

1.07

1.10

1.12

6.00%

7.89%

10.01%

11.62%

11.93%

Assets to Equity

1.47

1.47

1.18

1.35

1.42

Altman's Z-Score

1.94

2.11

7.90

6.4

6.0

Price to Earnings

13.27

10.32

Price to Book Value

2.50

2.13

1.24

1.19

1.47

5.3

5.63

5.54

Earnings per Share

Profit Margin
Asset Turnover
Return on Assets

Net Book Value per share

Current Ratio

(a) Total Interest-Bearing Debt

132.1

9.37

Debt/Equity

0.29

2.01

Cost of Debt

1.63

1.79

*Does not include Comprehensive Income

5.39

6.48

2014

1.63%

**Asset Income = NIAT+ Interest Expense

The stock under performs the PSEi in terms of price movement but P/E and P/B
ratios show that they are currently trading at a bargain price.

EBITDA

867.33

104

Asset turnover has been consistently within range, although there is an indication of
decline.

Interest Coverage Ratio

Ave Total Equity

Asset Income

Debt to Equity ratio at 0.14x shows that the company is more reliant on equity to
finance its operations. This is a low risk company if investors take into
consideration the companys leveraging capacity.

Interest Expense

142.93

8.4

Altman scores are way above the distress levels. No need to worry about the
companys going concern.

2013

Ave Total Debt

Interest Expense

Profit margins may seem to be low but industry wise this is considered above
average as the company is engaged in the manufacturing of pipes and
compounds.

in Php millions, except for ratios

EBIT

1,010.25

Net Income After Tax*

The company has been historically operating while registering double-digit ROEs.
IPO offer increased companys equity and yet ROE still remained to be at doubledigits. This shows that company has efficiency utilized its proceeds.

Debt Service

2015

2015

Limlingan Financial Model(C)

ROE = ROA + D/E * (ROA - Cost of Debt)
LFM Inputs
Return on Assets

2015
11.32%

Debt/Equity

0.29

Cost of Debt

1.63%

ROA CD

9.69%

Return on Equity

14.18%

Case 1: Improve Efficiency 20%

Return on Assets
Debt/Equity

13.59%
0.29

Cost of Debt

1.63%

ROA - CD

11.96%

Return on Equity

17.11%

71

96

150

30.36

28.31

44.12

92

118

174

73

69

Return on Assets

Case 2: Increase Leverage 20%

11.32%

6.0748

6.0748

Debt/Equity

0.35

(a/b) Implied Debt Amortization

12

11

Cost of Debt

1.63%

(c) EBITDA less: Implied Debt Amortization

80

107

174

ROA - CD

9.69%

Return on Equity

14.75%

(b) Present Value of Ordinary Annuity

2. Based on the tenor and the interest rate of largest long-term debt

Company has increased their long term loans three-fold. As of 1H16 their long term
debt is now at P5.5bn as compared to last years P1.8mn. Still, current ratio of the
company at 5.5x is an indication of being a safe company in terms of credit risk.

EBITDA may seem low but what we like is that they are almost debt free. Moving
forward they could further contract loans from local banks to finance their
operations and still yield with acceptable EBITDA simulations.

Case 3: Lower Cost of Debt 20%

Return on Assets

11.32%

Debt/Equity

0.29

Cost of Debt

1.3%

ROA - CD

10.02%

Return on Equity

14.27%

Highlighted items denote changed inputs

Page 3 of 6

Asset Income
Your
Private
Broker.
** In this model,
ROA
=
Ave. Total Assets

REGINA-NERI ISOQUANT MODEL

Leverage vs. Profitability

774

Both ROE and AE of the company has been

historically in range.
The company is almost debt-free, with debt to
equity ratio at 0.17x. Proceeds were already
used for expansion and equipment acquisitions
Gridlines represent the 3-year Asset to Equity and
ROE average of the PSEi.
Legend:
I - Higher Returns,
IV - Higher Returns,
Higher Financial Risk Lower Financial Risk

II - Lower Returns,
Lower Financial Risk

III - Lower Returns,

Higher Financial Risk

Perception vs. Profitability

P/E is trading at premium because company has
registered lower ROEs due to also having lower
net income
We can see however that the company follows a
trend which leads to quadrant II doe to its
organic growth.

Isoquant lines (1,2,3,4) represent Price to Book

values, while gridlines represent the average
P/E and ROE of companies in the PSEi in the
last 3 years.
I Undervalued

IV Fairly valued

II Fairly Valued

Page 6 of 6

III - Overpriced

Your Private Broker.

TECHNICAL ANALYSIS

Daily chart as of October 14, 2016

CROWN has been an under performer vs. the PSEi,
mainly due to the fact that it has low trading volume.
DMI shows that it is still currently facing selling pressures
but we see it gradually weakening.
RSI is already at oversold levels and is actually trading
near its 1 year support of P2.00
MACD still showing signs of bearish divergence with
continuous down trend, we expect the stock to breach
the P2.00 support level but a bounce back is expected.
We maintain support at P2.00, followed by P1.90 (already
a 1-year low). Resistances are at P2.20, then expected
to test P2.40 levels within a 3-month period.

We recommend a BUY on account of its safe riskreward ratios.

Page 6 of 6

Efficiency vs. Profitability

Profit margins of the company is increasing over
time, which is matched by its asset turnover.
Despite showing low operating profit margins, this
is considered to be higher as compared to
industry averages.
Isoquant lines (5%, 7%, 9%) represent Return on
Assets.

CROWN vs. PSEi

Source: www.bloomberg.com

Your Private Broker.

GLOSSARY

Expected Performance

Recommendation Guide

within 1 year

BUY

The stock is a bargain relative to the PSEi or its peers; the stock has significant
long-term upside

Projected Gain > 10%

HOL
D

Neutral; the companys fundamentals are good, but interested buyers should
wait and consider buying other stocks with better upside.

+/- 10%

SELL

Take profits or cut losses; the stock does not have much upside so investors
should close their position and look for bargains.

Projected Loss > 10%

Financial Ratios
Return on Equity

Shows how much profit a company generates with the money its shareholders have invested.

Earnings per share

The portion of a companys profits allocated to each outstanding share of common stock.

Profit Margin

Measures how much earnings a company actually keeps after expenses.

Asset Turnover

The amount of sales generated for every peso of assets

Return on Assets

Reflects a companys efficiency at using its assets to generate earnings.

Asset to Equity

Shows the companys financial leverage. It is an indicator of the overall financial stability of a company.
An indicator of a firms financial stability; It calculates the odds that a company will become bankrupt.

Altmans Z-Score

If: Z > 3.0, Safe Zone;

1.80 < Z < 3.0, Grey Zone;

Z < 1.80, Distress Zone (high likelihood of bankruptcy)

Price to Earnings

Reflects how much investors are willing to pay per dollar of earnings.

Price to Book

Reflects how many times book value investors are willing to pay for a share of the company.

Graham Multiplier

P/E Ratio x P/B Ratio; Benjamin Graham prefers companies that have a Graham Multiplier below 22.5

Book Value per share

A per share estimation of the minimum value of a companys equity.

Dividend Yield

Shows how much a company pays out in dividends relative to its share price.

Technical Analysis Term/s

Fibonacci Retracement

Potential retracement of a securitys original move in price. It uses horizontal lines to indicate key areas
of support or resistance (23.6%, 38.2%, 50%, 61.8% and 100%).

Limlingan Model: ROE = ROA + D/E * (ROA CD)

Basic Assumptions:
ROE = Return on Equity
ROA = Return on Assets*
D/E = Debt to Equity
CD = Cost of Debt

If ROA > CD, then ROE > ROA

If ROA < CD, then ROE < ROA

*using Asset Income

Can be used to undertake the following financial

analyses:
CEO
Pinpoint areas of weak and strong
financialROE for its shareholders
Maximize
management
Answers what if in terms of the impact of the ROE
Prepare financial plans which start with the ROE
COO
CFO
targets and end with specific, financial targets
Improve
ROE through
operational
efficiencydebt
or ROA
Improve
ROE
by maximizing
(reduce leverage or cost of debt)
such as maintaining
operating
expenses
and
leverage
Better assign areas of responsibilities to financial
officers

Create

equity centers where general managers

have both asset and debt management
responsibilities

Disclaimer: The material contained in this publication is for information purposes only. It is not to be reproduced or copied or made available to
others. Under no circumstances it is to be considered as an offer to sell or a solicitation to buy any security. While the information herein is from
sources we believe reliable, we do not represent that it is accurate or complete and it should not be relied upon as such. In addition, we shall not be
responsible for amending, correcting or updating any information or opinions contained herein. Some of the views expressed in this report are not
necessarily opinions of Regina Capital Development Corporation.

Page 6 of 6

Your Private Broker.

CONTACT US

HEAD OFFICE
Suite 806, Tower I, PSE Plaza
Ayala Ave., Ayala Triangle,
Makati City, Metro Manila

Backroom(+63) 2 848 5482 to 84

Fax

(+63) 2 848 5482

Trading Floor (+63) 2 891 9413 to 17

Available from 9:30 am to 12:00 pm, and 1:30 to 3:30 pm only.

www.reginacapital.com
rcdc@reginacapital.com

LOCATIONS WITHIN METRO MANILA

PASIG

GREENHILLS

Unit 1242 Megaplaza Building,

ADB Ave. cor. Garnet St.,
Ortigas Center, Pasig City

512-B Tower 2 Lee Gardens

Condominium, Lee St. cor. Shaw
Blvd., Mandaluyong City

(+63) 2 584 0951

(+63) 2 584 0951 and 661 6508

Manuel Luis Zialcita, Branch Head

mzialcita@reginacapital.com

Giok Hon Gotua, Branch Head

ggotua@reginacapital.com

Page 6 of 6

Your Private Broker.