How we select stocks using FVMR

19 August 2014 2
Investment research focused on stock selection
Sornsak Kongcharoenpanich Andrew Stotz, CFA

19 August 2014 3
What we do:
 Advise One Asset Management as well as regional and global fund managers
 Focus on selecting stocks across Asia
 Construct and rebalance portfolios of selected stocks (e.g. Thailand, ASEAN,
Asia ex Japan, Asia ex China)
Who we are:
 Andrew Stotz has been a financial analyst since 1993
 Sornsak Kongcharoenpanich has worked as a financial analyst with Andrew
since 2000
 Alexander Wetterling joined the team in 2013
How we do it:
 Our universe of potential investments is 7,500 stocks across Asia
 In-depth academic-style research on stock selection and portfolio construction
 Select stocks using FVMR format
Introducing A. Stotz Investment Research

19 August 2014 4Source: A. Stotz Investment Research
Our universe of investable stocks in Asia

19 August 2014 5
Valuation
 How profitable a company is, and the trends in that
profitability, is a window on management
 Profitability tells us whether management policies are
having a positive impact
 We look for high or rising profitability
 We consider both absolute and relative valuation to
find companies with good fundamentals at cheap
prices
 That perfect combination is rare so we balance
valuation with fundamentals
 If fundamentals and valuation are favorable, positive
momentum in price and earnings would be fantastic
 We use momentum to avoid “value traps” (cheap
stocks that never move)
 And sometimes low momentum can reveal opportunity
 Prefer companies that have low business and price risk
 Not every stock in the portfolio is included based solely
on maximum gain
 Some stocks provide a stable return and high dividend,
which contributes to overall long-term performance
Sources: A. Stotz Investment Research
A. Stotz Four Elements
Fundamentals
Momentum Risk
 Pick stocks based on attractiveness with regard to Four Elements: Fundamentals, Valuation, Momentum, and Risk
 Compare the attractiveness of each element versus all other investable companies
 Start our stock-selection process from the most attractive of these stocks

619 August 2014
High profits almost
always fall
Note: The results of this study were
published on 12 June 2012

19 August 2014 7
Sources: Maybank Kim Eng, Bloomberg
Note: There is survivorship bias in this sample as companies that had previously closed were not included, their inclusion would have suppressed the lowest quintile return
Reversion to mean occurs for ‘stars’ but not for ‘dogs’

19 August 2014 8
Sources: A. Stotz Investment Research, Thomson Reuters
Profitability: Revert to slightly above average Growth: Synergy wiped out by leverage
CPALL: Profitability and growth6 out of 10
CPALL: ROA (%) & ranking CPALL: EPS growth (%) & ranking
Dec-10 Dec-11 Dec-12 Dec-13 Mar-14
Best
2 14 15 17
3
4 6
5 5
6
7
8
9
Worst
Note: CPALL is benchmarked against 310 companies in Asia.
-
2
4
6
8
10
12
14
16
18
20
CPALL
Asia Cons Staples
Thailand Cons Staples
(%, Return on assets)
CPALL: EPS growth (%) & ranking
Best
2
3 38
4 33 20
5
6 (5) (12)
7
8
9
Worst
-
20
40
60
80
100
120
140
160
180
CPALL
Asia Cons Staples
(EPS growth indices, rebased to 100)
Highest profitability
companies eventually fall

19 August 2014 9
Valuation
CPALL: A. Stotz Four Elements
Fundamentals
Momentum Risk
Worst Neutral Best
Rank relative to peers*
W B W B
W B W B
(%) Dec '10 Dec '11 Dec '12 Dec '13 Mar '14
Operating profit margin 6.6 6.6 7.0 5.6 5.2
Net margin 4.9 5.2 5.9 3.9 3.3
Asset turnover 292.3 299.9 295.2 150.9 163.7
Return on assets 14.4 15.5 17.3 5.8 5.3
Return on equity 36.5 40.5 45.2 37.7 32.7
(x) Dec '10 Dec '11 Dec '12 Dec '13 Mar '14
Price-to-sales 1.3 1.9 2.2 1.4 1.4
Price-to-earnings 27.0 36.7 37.6 37.1 42.9
Price-to-book 10.1 13.5 15.3 13.6 13.7
PE-to-EPS growth (PEG) 0.81 1.82 0.99 nm nm
EV/EBIT 17.9 26.2 28.8 36.6 37.8
Revenue growth 20.1 15.1 21.5 44.3 57.0
Recurring EPS growth 33.5 20.2 38.0 (4.6) (12.4)
Operating profit margin chg. (bps) 83 3 36 (144) (173)
6mth 3mth 1mth 3wk 1wk
Price change 20.8 10.1 (2.1) (0.5) (0.5)
Current ratio 1.1 1.2 1.2 0.3 0.8
Net debt-to-equity (%) (112.4) (109.4) (128.4) 569.4 539.6
Times-interest-earned 106,827 1,141,455 653,146 9 6
5yr 2yr 1yr 6mth 3mth
Beta 0.8 0.9 1.1 1.0 0.9
Profitability has plunged
in terms of ROA and ROE
compared to Dec’12

19 August 2014 10
Highest profitability companies are likely to fall
within a few years
But, they only fall to above average
“Once a dog, always a dog”. Be very careful about
investing in turnaround stories
Source: A. Stotz Investment Research
What we learned

1119 August 2014
Analysts cannot
predict future
share prices
Note: The results of this study were published
on 3 March 2014 and 27 May 2014

19 August 2014 12
Sources A. Stotz Investment Research
Do errors in analyst target prices follow a normal distribution?
 Is the actual outcome from analysts one year-ahead target prices a normal distribution?
 Would some be very wrong on the positive side and some, on the negative side, but most
would be clustered around the middle?

19 August 2014 13
22
6
8
4
9
5
9 8
29
-
5
10
15
20
25
30
35
<-30% -30% -20% -10% +/-5 % 10% 20% 30% >30%
Investable Asiaex-Japan(Consensusestimated target accuracy in 2003-2012,%)
<== Overly pessimisticconsensus Overly optimisticconsensus==>Accurate consensus
Sources: A. Stotz Investment Research, FactSet
Analysts’ target prices were extremely wrong 50% of the time
“Right” 18% of the stocks
“Right” 35% of the stocks

19 August 2014 14
Note: The chart shows the stocks, which were covered by at least three analysts
Thailand: The three most over/underestimated by target price
72
40 42
15
(33)
12
(19)
(35)
(22)
144
42
63
(60)
(40)
(20)
-
20
40
60
80
100
120
140
160
SIRI NOK THRE KCE TRUE PSL
12mth target upside/(downside) Actual return(%)
Overestimated
group
Underestimated
group

19 August 2014 15
Note: The chart shows the stocks, which were covered by at least three analysts
ASEAN: The three most over/underestimated by target price
105
68
99
(12)
7 10
(4)
(20)
23
131
148 143
(50)
-
50
100
150
200
250
SURYA
SEMESTA
INTERNUSA PT
GAJAH
TUNGGAL TBK
PT
BEKASI FAJAR
INDUSTRIAL
ESTA
KNM GROUP MALAYSIAN
PACIFIC INDS.
NICKEL ASIA
CORP
12mth target upside/(downside) Actual return(%)
Overestimated
group
Underestimated
group

19 August 2014 16
Predicting the future of a stock’s price is nearly
impossible
Analysts are incentivized to be extreme
(and mainly wrong) in their predictions
Focus on where a stock is today, not on where
someone guesses it will be next year
What we learned

1719 August 2014
Analysts cannot
predict EPS
Note: The results of this study were published
on 3 March 2014 and 27 May 2014

19 August 2014 18
 Each month, we averaged
the forecasted EPS absolute
deviation during 2001-2013
from forward-11 months to
the result date
 Analysts continuously
adjusted their forecasts until
the result date
 In Asia, analysts started
the year by being 29% off
with their EPS estimates, their
estimates move towards
actual results
 Even though analysts’
become more accurate closer
to the result date, they are
still 16% amiss with their
predictions at that date
 On average, throughout a
year, analysts’ EPS forecasts
are inaccurate by about 22%
The average analysts downgraded EPS forecast by half
29
16
10
12
14
16
18
20
22
24
26
28
30
Asia ex-Japan - Average (2001-2013)
(% forecasted EPS deviation from actual EPS)

19 August 2014 19
 We chart the time series of
over/under forecasted EPS,
starting from forward-11
months to the result date for
every year, FY2001-FY2013
 In 12 out of 13 years,
analysts started with
expectations too high and
adjusted them down
 In the crisis year 2008, the
big drop in Asia corporate
earnings surprised analysts,
who still started the year at
49% above actual earnings
 For the past three years,
analysts’ have, on average,
cut their EPS forecast by two
thirds by the time they have
reached the result date
 Conclusion: In nearly every
year, analysts started with high
estimates, failed to predict
downturns, and were always
overly optimistic
Analysts in Asia are overly optimistic and fail to foresee declines
62
41
33
29 28
22
16
12
30
20 18
7
12
8
49
24
7
8
13
7
33
12
34
11
37
11
-
10
20
30
40
50
60
70
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Monthly forecasted EPS deviation from actual EPS
(% over/(under) forecasted EPS)

19 August 2014 20
Analysts are incentivized to be overly optimistic
Profit from their predictable behavior
Focus on current and past earnings and how they
position the company for future earnings
Every time you think you should rely on a
forecast, stop and think again!
What we learned

2119 August 2014
Value stocks earned
a 2% premium
published on 9 November 2012

19 August 2014 22
Sources: Maybank Kim Eng, Datastream
Value beats growth in developed and emerging markets

19 August 2014 23
In Asia, value outdoes growth in seven out of 10 countries

19 August 2014 24
Valuation
Notes: *Bars are decile rankings of most recent period. na = not available, nm = not meaningful
SVI: A. Stotz Four Elements
Fundamentals
Momentum Risk
Note: Benchmarked against 250 non-financial companies in Thailand.
Net margin 9.1 8.3 16.7 20.3 19.4
Asset turnover 168.4 176.5 173.2 140.1 140.8
Return on assets 15.3 14.6 28.9 28.4 27.3
Return on equity 30.5 (62.2) 66.2 47.9 44.6
Price-to-sales 0.9 0.8 1.2 1.2 1.2
Price-to-earnings 10.0 nm 7.2 6.0 6.1
Price-to-book 2.7 4.8 3.2 2.3 2.2
PE-to-EPS growth (PEG) 0.68 nm 0.04 0.28 0.22
EV/EBIT 8.7 5.9 5.8 4.1 4.7
Revenue growth 24.6 4.5 (8.8) 3.9 10.0
Recurring EPS growth 17.2 (8.1) 83.3 24.3 34.9
Operating profit margin chg. (bps) (75) 12 683 460 624
Price change 12.6 3.2 1.8 7.2 5.7
Current ratio 2.6 9.6 1.9 2.4 2.4
Net debt-to-equity (%) (52.9) (43.1) (5.0) (45.8) (44.8)
Times-interest-earned 1,813.2 377.7 35.7 101.2 118.8
Beta 0.9 0.9 0.9 0.7 1.3
Worst Neutral Best
W B W B
W B W B
The stock is cheap on
most multiples, note
the low PE and PEG

19 August 2014 25
Value stocks produce higher returns due mainly
to a strong dividend yield
Value beats growth in both the developed and
the emerging world, and in most Asian countries
What we learned

2619 August 2014
Avoid M&A, unless
it hasn’t happened
published on 10 August 2012

19 August 2014 27
Pre-announcement: Best to hold the target company

19 August 2014 28
Post-announcement: Buying on acquisition date rarely works

19 August 2014 29
Asset utilization: Reducing by half Net margin: Diminishing to five-year low
CPALL: Breaking down ROA
CPALL: Asset turnover (%) & ranking CPALL: Net margin (%) & ranking
Best 292 300 295
2 164
3 151
4
5
6
7
8
9
Worst
Note: CPALL is benchmarked against 310 companies in Asia.
-
50
100
150
200
250
300
350
CPALL
Asia Cons Staples
(%, Asset turnover)
CPALL: Net margin (%) & ranking
Best
2
3
4
5 6
6 5 4
7 5 3
8
9
Worst
-
1
2
3
4
5
6
7
8
CPALL
Asia Cons Staples
(%, Net margin)
MAKRO was
consolidated
in 2H13

19 August 2014 30
CPALL: “Buy on rumor, sell on the fact”
80
90
100
110
120
130
140
Jan-12 May-12 Aug-12 Dec-12 Apr-13 Aug-13 Dec-13 Apr-14 Aug-14
CPALL relative to SET
Price when CPALL announced the M&A
Index
Post-announcement of
MAKRO acquisition
Pre-announcement of
MAKRO acquisition

19 August 2014 31
Valuation
CPALL: A. Stotz Four Elements
Fundamentals
Momentum Risk
Worst Neutral Best
W B W B
W B W B
Net margin 4.9 5.2 5.9 3.9 3.3
Asset turnover 292.3 299.9 295.2 150.9 163.7
Return on assets 14.4 15.5 17.3 5.8 5.3
Return on equity 36.5 40.5 45.2 37.7 32.7
Price-to-sales 1.3 1.9 2.2 1.4 1.4
Price-to-book 10.1 13.5 15.3 13.6 13.7
PE-to-EPS growth (PEG) 0.81 1.82 0.99 nm nm
EV/EBIT 17.9 26.2 28.8 36.6 37.8
Revenue growth 20.1 15.1 21.5 44.3 57.0
Recurring EPS growth 33.5 20.2 38.0 (4.6) (12.4)
Operating profit margin chg. (bps) 83 3 36 (144) (173)
Price change 20.8 10.1 (2.1) (0.5) (0.5)
Current ratio 1.1 1.2 1.2 0.3 0.8
Net debt-to-equity (%) (112.4) (109.4) (128.4) 569.4 539.6
Times-interest-earned 106,827 1,141,455 653,146 9 6
Beta 0.8 0.9 1.1 1.0 0.9
CPALL consolidated
MAKRO in 2H13. Note the
significant drop on all
profitability ratios

19 August 2014 32
Buy on M&A rumors and sell on the facts
(when they are announced)
If you must buy, buy the target company
On the majority of occasions, mergers do not lead
to fundamental improvement for the buyer
What we learned

3319 August 2014
Prefer ‘FreshMo’
over ‘StaleMo’
published on 17 July 2014

19 August 2014 34
 The chart represents the
distribution as a percentage
of Asian stocks that have
shown positive momentum
for between one and 19
consecutive months
 The bars show the
distribution of the 1,200
stocks that had a market
capitalization of at least
US$500m (investable stocks)
 About 56% of stocks
showed the longest rising
momentum for five to seven
consecutive months at least
once in the past 10.5 years
More than half of Asian stocks show the longest momentum
runs of five to seven months
13
22
19
15
-
5
10
15
20
25
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
Percentage of stocks in Asia ex-Japan, (stocks with
market capitalization of at least US$500m)
(Distribution, %)
Longest period of consecutive months of positive return during Dec '03 to Jun '14, months

19 August 2014 35
 In 46% (57 months) of the
126 months of our study,
momentum was positive; in
48% (60 months) of the
period, stocks produced
negative monthly returns; and
6% were neutral months
 Dropping by half: Stocks
that continued to show
positive return for a second
month accounted for only
21%, or 27 months
 Dropping by another half,
for the third consecutive
month, there was only a 10%
chance of positive return
 Only 5% of the time did
stocks show positive return
for four consecutive months
or more
 Losing months are more
than winning months
Long-lasting momentum is rare, losing more than winning
1 1
3
6
11
24
48
6
46
21
10
5
3 1 1
-
10
20
30
40
50
60
-7
-6
-5
-4
-3
-2
-1
Neutral
1
2
3
4
5
6
7
Aggregate probability - Asia ex-Japan
(Percentage out of 126 months)
<==Consecutive months of negative return Consecutive months of positive return ==>

19 August 2014 36
Valuation
MINT: A. Stotz Four Elements
Fundamentals
Momentum Risk
Net margin 6.8 11.0 9.9 11.8 11.5
Asset turnover 59.4 69.4 66.5 62.1 58.5
Return on assets 4.0 7.7 6.6 7.3 6.7
Return on equity 10.3 21.2 20.2 19.1 16.7
Price-to-sales 2.2 1.8 2.9 2.8 2.9
Price-to-book 3.0 3.3 5.0 4.0 3.9
PE-to-EPS growth (PEG) nm 0.29 3.26 1.43 2.54
EV/EBIT 15.9 11.3 17.3 16.6 25.7
Revenue growth 10.2 44.1 19.8 10.7 12.0
Recurring EPS growth (11.6) 132.8 4.3 25.4 11.0
Operating profit margin chg. (bps) (206) 493 (79) 116 (32)
Price change 8.3 4.0 5.3 7.0 5.3
Current ratio 1.1 0.9 1.1 1.0 1.4
Net debt-to-equity (%) 109.5 134.8 121.2 86.1 80.8
Times-interest-earned 7.8 7.0 6.3 7.6 5.7
Beta 1.1 1.3 1.5 1.5 1.2
Worst Neutral Best
W B W B
W B W B
Positive price
momentum for the
past six months

19 August 2014 37
Valuation
KCE: A. Stotz Four Elements
Fundamentals
Momentum Risk
Net margin 7.4 1.8 9.9 12.6 13.3
Asset turnover 82.7 79.5 66.0 86.2 88.8
Return on assets 6.1 1.5 6.6 10.9 11.8
Return on equity 21.8 5.0 22.7 32.8 32.6
Price-to-sales 0.5 0.4 1.1 1.7 2.1
Price-to-book 1.4 1.0 2.4 3.6 4.3
EV/EBIT 6.4 8.6 9.0 10.2 16.3
Revenue growth 26.2 (0.8) (10.0) 43.5 41.0
Operating profit margin chg. (bps) 296 (610) 987 90 143
Price change 85.4 43.4 7.0 8.6 (2.6)
Current ratio 0.7 0.9 0.8 0.9 1.0
Beta 1.0 1.0 0.8 0.6 0.9
Worst Neutral Best
W B W B
W B W B
We also care about
earnings momentum

19 August 2014 38
In the past 10 years more than half of stocks in
Asia showed their longest momentum runs of
about six months
Long-lasting momentum is rare; only 10% of
the time does momentum last for more than
three months
Invest in fresh momentum (‘FreshMo’) to lower
risk, avoid stale momentum (‘StaleMo’)
What we learned

3919 August 2014
Stay invested:
Panic selling is a
long-term death blow
published on 12 June 2012

19 August 2014 40
In Asia, you lose half the return by missing 10 days

19 August 2014 41
In Thailand, you lose all the return by missing 10 days

19 August 2014 42
By missing only the best 10 days in Asia over the
past 20 years, you would have lost about half your
return in Asia
Panic selling in Thailand would have cost you all
of your return
Set your long term investing plan and stick with it,
be careful about how extremely negative sentiment
can hurt your decision making
What we learned

4319 August 2014
Low debt means
high return
published on 21 September 2012

19 August 2014 44
Gearing alone works quite well as a stock selector

19 August 2014 45
Note: Total return is market-cap weighted mean return. In 1991-1998 the universe consisted of 500 companies and 2,400 in 2011
Low-gearing stocks outperform in times of crisis in Asia

19 August 2014 46
Valuation
STPI: A. Stotz Four Elements
Fundamentals
Momentum Risk
Net margin 42.8 39.9 33.1 33.7 27.4
Asset turnover 89.7 25.1 56.8 62.2 72.5
Return on assets 38.0 10.0 18.8 21.0 19.9
Return on equity 70.1 12.3 27.0 36.9 34.6
Price-to-sales 1.9 11.4 11.0 5.7 4.6
Price-to-book 2.8 3.5 7.8 5.4 5.1
EV/EBIT 3.3 19.3 23.0 12.8 13.3
Revenue growth (45.6) (79.0) 213.7 80.5 83.9
Operating profit margin chg. (bps) 2,735 (918) 362 (312) (932)
Price change 25.1 9.3 6.2 12.6 6.7
Current ratio 2.6 9.6 1.9 1.7 1.7
Beta 0.8 0.9 1.0 1.0 1.1
Worst Neutral Best
W B W B
W B W B
The company has been
net-cash over every period

19 August 2014 47
Stock prices of companies with low or no debt
tend to outperform
The benefit is mostly felt in bad times when
low-debt-company prices fall less
Low-gearing companies are low risk and yield
high returns
What we learned

4819 August 2014
Enjoy humdrum,
low-beta stocks
published on 17 July 2014

19 August 2014 49
50
100
150
200
250
300
350
400
Jan-93 Aug-96 Mar-00 Oct-03 May-07 Dec-10 Jul-14
World-equity indexIndex, rebased to 100
 To investigate why low
beta beats high beta, we look
at the price performance of
world equity
 During the past two
decades, world equity markets
have seen three major booms
and two major busts
 The index dropped during
the Asian financial crisis in
1997-1998 before it peaked in
March 2000, then the
dot-com bubble burst
 After the bottom in March
2003, the next bull run began
and peaked in October 2007,
followed by the global
financial crisis
 Compared to the dot-com
bubble, the global financial
crisis showed a larger and
faster drop in equity prices
Major crashes in the world over the past two decades
Note: Price index is weekly data of MSCI AC World index in local prices.
-49%
-56%
Dot-com
bubble
Global
financial
crisisAsian
financial
crisis

19 August 2014 50
 To test this, we construct
two annually rebalanced
portfolios, one investing in
the lowest-beta decile and
the other in the highest-beta
decile
 The highest-beta portfolio
clearly yields a higher return
in bull markets; note how it
outperformed until the
dotcom bubble burst
 After the bust, the lowest-
beta experienced a much
smaller drop and started to
outperform the highest-beta
decile and the market; this
gap increased further after
the global financial crisis
 In the long run, low risk
outperforms high risk due to
superior preservation of
capital. If you can’t time the
market turns, choose low risk!
World equity: Low beta beats high beta and the market
Note: *World equity consists of, on average, 2,300 companies over the time period.
-
50
100
150
200
250
300
350
400
450
Dec-93
Dec-94
Dec-95
Dec-96
Dec-97
Dec-98
Dec-99
Dec-00
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Dec-09
Dec-10
Dec-11
Dec-12
Dec-13
Lowest-beta decile
World equity*
Highest-beta decile
Mcap-weighted portfolio indices

19 August 2014 51
 Note that the emerging-
world equity large-cap
universe comprised about 100
stocks in 1994 and 1,200 in
2013. Chinese stocks started
to appear in 2005
 The lowest-beta portfolio
did not get hit as hard as the
highest-beta portfolio in the
Asian financial crisis, the
bursting of the dot-com
bubble or the global
financial crisis
 Because it takes a 100%
increase to recover a 50%
loss, the lowest-beta portfolio
clearly shows that reducing
volatility, will significantly
improve your terminal wealth
 Our research supports the
truth in Warren Buffet’s Rule
No. 1: “Never lose money”
Emerging world: Huge advantage of investing in lowest beta
Note: *Emerging world equity consists of, on average, 430 companies over the time period.
-
100
200
300
400
500
600
700
800
900
1,000
Dec-93
Dec-94
Dec-95
Dec-96
Dec-97
Dec-98
Dec-99
Dec-00
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Dec-09
Dec-10
Dec-11
Dec-12
Dec-13
Lowest-beta decile
Emerging-world equity*
Highest-beta decile
Mcap-weighted portfolio indices

19 August 2014 52
Valuation
TTW: A. Stotz Four Elements
Fundamentals
Momentum Risk
Net margin 46.9 46.5 47.5 49.7 46.0
Asset turnover 20.7 21.0 21.2 21.1 21.9
Return on assets 9.7 9.8 10.1 10.5 10.1
Return on equity 22.8 21.5 22.5 23.8 23.5
Price-to-sales 5.4 5.3 8.8 7.5 8.1
Price-to-book 2.5 2.4 4.1 3.5 4.1
PE-to-EPS growth (PEG) 0.51 4.78 1.94 1.64 nm
EV/EBIT 8.8 8.2 12.5 9.9 15.9
Revenue growth 8.6 3.4 8.3 5.2 5.2
Recurring EPS growth 29.4 2.4 10.6 10.1 (7.7)
Operating profit margin chg. (bps) 66 86 354 231 (914)
Price change 7.0 15.1 7.5 8.1 5.9
Current ratio 4.1 1.2 6.4 2.4 4.7
Beta 0.5 0.6 0.6 0.4 0.5
Worst Neutral Best
W B W B
W B W B
Beta is about 0.5x over every time
horizon, hence the stock has low risk
and reacts less to market movements

19 August 2014 53
Low beta is boring in market up-cycles, but
fantastic in down-cycles
Stocks that the market calls “high risk” are often
“low return”
Low beta helps you follow Warren Buffet’s advice:
“Rule No. 1 is never lose money. Rule No. 2 is never
forget Rule No. 1.”
What we learned

5419 August 2014
Example of
company research
Note: This was published on 6 June 2014

19 August 2014 55
 Relatively large amount of cash gives flexibility, strong sales
momentum, and gaining more sales from existing assets
 STPI is using the full capacity of its steel fabrication, boiler, and pressure-
vessel plants to service the Ichthys LNG project in Darwin, Australia, which
will continue to be the company’s main profit driver for 2014 and 2015
 We believe STPI’s unconventional strategy–running at low capacity
while awaiting high-margin projects–will continue to drive the company’s
long-term performance, and hence, the stock as well
 The company trades at 14CE* 9.5x PE, a discount to its Thai sector peers
 Risk: Inability to secure new projects; with growing demand for LNG
there are going to be many competitive players bidding for these projects
STPI: Unconventional strategy shows its strength
Background: STP&I Public Company Limited is a distribution and service
agent for mechanical equipment used in the construction and energy
industries. It provides steel products for a vast array of heavy-industry
projects, such as high-rise buildings, refineries, bridges and airports, and is
engaged in projects in several countries, such as the US, Japan and Australia.
Sources: A. Stotz Investment Research, Bloomberg, Company data, FactSet, Thai Institute of Directors (IOD), Thomson Reuters
Note: *CE are consensus estimates
Stock information:
Name: STP&I Public Co. Ltd.
Ticker: STPI TB
Price (THB): 19.3
Mcap: US$886m
3MADTO: US$2m
Beta (6mth): 1.1x
IOD CG: 2 out of 5
Sector: Materials
Industry: Materials
Major shareholders:
13% Chanvirakul family
5% Suthep Setboonsang
40% Free float
Year End Dec 11 12 13 14CE* 15CE*
PE (x) 70.6 27.5 15.0 9.5 12.2
EPS (THB) 0.3 0.7 1.3 2.0 1.6
EPS growth (%) (80.7) 156.7 83.5 57.2 (22.0)
PBV (x) 8.5 6.4 4.8 3.2 2.6
BVPS (THB) 2.3 3.0 4.0 6.1 7.3
ROE (%) 12.3 27.0 37.3 42.0 26.3
Dividend yield (%) 1.7 0.4 1.8 4.5 3.5
Watching ‘The Street’A. Stotz Four Elements
na, 0
Neutral, 2
Buy, 2 Buy, 5
-
20
40
60
80
100
-
20
40
60
80
100
Dec' 11 Dec' 12 Dec' 13 Current
STPI TB
Buy
Sell
Buy
Sell
- 1 2 3 4 5 6 7 8 9 10
Risk
Momentum
Overall
Fundamentals
Valuation
Worst Decile ranking Best
30
80
130
180
230
280
330
-
5
10
15
20
25
30
Aug-11 May-12 Jan-13 Oct-13 Jul-14
STPI-TH(LHS)
Price relative to local index
(THB) (%)

19 August 2014 56
Selected completed and ongoing projects Revenue breakdown by product type 2013
STP & I Public Company Limited
Sources: A. Stotz Investment Research, Thomson Reuters, Company data
 STPI is a producer and distributor of three main categories of products:
 Structures – It makes steel structures, including those of unusual
shapes used in the construction of, for example, airports, exhibition halls,
high-rise buildings, industrial complexes and power plants
 Piping – Its piping products are fabricated at STPI’s facilities and
transported to project sites for installation. Such pipes are used at facilities
such as power plants, oil refineries, and aromatics plants
 Modules – STPI’s module products include offshore and onshore
modules installed on barges or platforms that are vital in crude-oil
stabilization or gas separation
 It carries out manufacturing at its plants on the eastern seaboard of
Thailand, in Chonburi, Rayong and Si Racha and its first module assembly
plant is located at the city port of Laem Chabang, also in Chonburi
 STPI also offers consulting services related to its goods, such as
construction, fabrication or engineering consulting for its steel-structure
and piping products
Completed Ongoing
Doha Int’l
Airport, steel
fabrication,
38,000 tonnes
Two IFC, Hong
Kong, building
structure, 9,000
tonnes
Ichthys Project, Darwin,
Australia, LNG facilities,
132,000 tonnes,
2012-2015
Modules
Piping
fabrication
Sales and
service
67% 17% 11%

19 August 2014 57
Valuation
STPI: A. Stotz Four Elements
Fundamentals
Momentum Risk
Net margin 42.8 39.9 33.1 33.7 27.4
Asset turnover 89.7 25.1 56.8 62.2 72.5
Return on assets 38.0 10.0 18.8 21.0 19.9
Return on equity 70.1 12.3 27.0 36.9 34.6
Price-to-sales 1.9 11.4 11.0 5.7 4.6
Price-to-book 2.8 3.5 7.8 5.4 5.1
EV/EBIT 3.3 19.3 23.0 12.8 13.3
Revenue growth (45.6) (79.0) 213.7 80.5 83.9
Operating profit margin chg. (bps) 2,735 (918) 362 (312) (932)
Price change 25.1 9.3 6.2 12.6 6.7
Current ratio 2.6 9.6 1.9 1.7 1.7
Beta 0.8 0.9 1.0 1.0 1.1
Worst Neutral Best
W B W B
W B W B

19 August 2014 58
BEST
Profitability: Stable at the Best Growth: Slowdown in growth, but still high
STPI: Regional benchmarking
STPI: ROA (%) & ranking STPI: EPS growth (%) & ranking
2010 2011 2012 2013 Now
Best 38 19 21 20
2 10
3
4
5
6
7
8
9
Worst
Note: STPI is benchmarked against 830 companies in Asia.
-
5
10
15
20
25
30
35
40
45
2010 2011 2012 2013 Now
STPI
Asia Materials
Thailand Materials
(%, Return on assets)
STPI: EPS growth (%) & ranking
2010 2011 2012 2013 Now
Best 158
2 83
3 44
4
5 51
6
7
8
9 (80)
Worst
-
20
40
60
80
100
120
140
2010 2011 2012 2013 Now
STPI
Asia Materials
Thailand Materials
(EPS growth indices, rebased to 100)

19 August 2014 59
Asset utilization: Rising asset turnover, lower than average Net margin: Superior margins
STPI: Regional benchmarking – Breaking down ROA
STPI: Asset turnover (%) & ranking STPI: Net margin (%) & ranking
2010 2011 2012 2013 Now
Best
2
3
4
5 90 72
6 62
7 57
8
9
Worst 25
Note: STPI is benchmarked against 830 companies in Asia.
-
20
40
60
80
100
120
2010 2011 2012 2013 Now
STPI
Asia Materials
Thailand Materials
(%, Asset turnover)
STPI: Net margin (%) & ranking
2010 2011 2012 2013 Now
Best 43 40 33 34 27
2
3
4
5
6
7
8
9
Worst
-
5
10
15
20
25
30
35
40
45
2010 2011 2012 2013 Now
STPI
Asia Materials
Thailand Materials
(%, Net margin)

19 August 2014 60
Profit & loss (THB m) Dec '09 Dec '10 Dec '11 Dec '12 Dec '13 Mar '13 Jun '13 Sep '13 Dec '13 Mar '14
Revenue 8,760 4,770 1,001 3,140 5,669 1,256 1,197 1,316 1,900 2,726
Cost of goods sold (7,436) (2,842) (971) (1,883) (3,638) (785) (705) (888) (1,260) (2,083)
Gross profit 1,324 1,928 30 1,257 2,031 470 492 428 641 642
SG&A & others 13 105 306 (159) (191) (4) (87) (33) (67) 69
Operating profit 1,337 2,033 336 1,097 1,840 467 405 395 574 712
Other inc/(exp) 22 57 68 181 233 11 114 34 74 (52)
Earnings before interest & tax 1,360 2,090 404 1,279 2,073 477 518 429 648 660
Interest expense (2) (1) (1) (4) (7) (2) (2) (1) (2) (3)
Pretax profit 1,358 2,089 403 1,275 2,066 476 517 428 646 657
Income tax (72) (55) (3) (305) (248) (5) (109) (66) (68) (66)
After-tax profit 1,285 2,034 400 969 1,819 470 408 362 578 591
Equity income 3 - - - - - - - - -
Minorities - - - - - - - - - -
Earnings from continuing operations 1,288 2,034 400 969 1,819 470 408 362 578 591
Forex gain/(loss) & unusual items 5 (12) - 70 90 (46) 79 3 55 (96)
Net income 1,293 2,021 400 1,039 1,909 425 486 365 633 495
EPS (THB) 0.93 1.42 0.28 0.71 1.29 0.29 0.33 0.25 0.41 0.34
Weighted average shares (m) 1,387 1,419 1,452 1,464 1,476 1,464 1,476 1,477 1,477 1,477
Balance sheet (THB m) Dec '09 Dec '10 Dec '11 Dec '12 Dec '13 Mar '13 Jun '13 Sep '13 Dec '13 Mar '14
Assets 6,370 4,260 3,708 7,347 10,867 8,063 8,299 8,782 10,867 11,634
Liabilities 3,837 1,022 424 2,922 4,956 3,196 3,349 3,470 4,956 5,201
Equity 2,533 3,238 3,284 4,425 5,911 4,867 4,950 5,312 5,911 6,433
Growth (%) Dec '09 Dec '10 Dec '11 Dec '12 Dec '13 Mar '13 Jun '13 Sep '13 Dec '13 Mar '14
Revenue 25.9 (45.6) (79.0) 213.7 80.5 144.0 79.6 33.5 95.3 117.1
Operating income 27.3 52.0 (83.5) 226.6 67.7 543.8 110.6 (8.1) 42.5 52.5
EPS 15.6 52.8 (80.7) 158.1 82.2 218.8 180.2 (9.9) 57.8 15.6
Assets 7.8 (33.1) (12.9) 98.1 47.9 75.1 57.1 39.2 50.2 44.3
Liabilities (7.4) (73.4) (58.5) 589.2 69.6 160.5 82.4 43.6 69.6 62.8
Equity 43.4 27.8 1.4 34.7 33.6 44.0 43.6 36.5 37.1 32.2
Profits (%) Dec '09 Dec '10 Dec '11 Dec '12 Dec '13 Mar '13 Jun '13 Sep '13 Dec '13 Mar '14
Gross margin 15.1 40.4 3.0 40.0 35.8 37.5 41.1 32.5 33.7 23.6
Operating margin 15.3 42.6 33.6 34.9 32.5 37.2 33.8 30.0 30.2 26.1
Net margin 14.8 42.4 39.9 33.1 33.7 33.8 40.6 27.7 32.1 18.2
ROE 60.2 70.1 12.3 27.0 36.9 37.0 39.6 28.4 43.5 32.1
ROIC nm nm 34.7 130.0 954.7 nm nm 273.8 514.6 551.0
STPI: Financials

19 August 2014 61
Board composition
Institutional ownership
Sources: A. Stotz Investment Research, Company data, FactSet, Settrade
Notes: *outstanding ,**institution, ***growth at a reasonable price
STPI: Leadership and Ownership
Chairman
Anutin Charnvirakul
Managing Director
Masthawin Charnvirakul
-
2
4
6
8
10
Dec-11 Dec-12 Dec-13 Latest
STPI TB
SET100
(Institutional ownership, %)Top shareholders % O/S* Holding style % of inst**
Government Pension Fund of Thailand 1.88 Aggressive Growth -
Dimensional Fund Advisors LP 0.57 Deep Value -
Dimensional Fund Advisors Ltd 0.01 GARP*** -
Others 0.00 Growth 76
Total institutional ownership 2.46 Index -
Region % of inst** Value 24
Asia 76 Yield -
North America 23 Total 100
Europe 0
8 4
50
12
4
36
-
10
20
30
40
50
60
Number of
Directors
Number of
Independent
Directors
Independent
Directors (%)
STPI SET100(#/%)

19 August 2014 62
DISCLAIMER
Analyst Certification
The analyst(s) named in this report certifies that (i) all views expressed in this report accurately reflect the personal views of the analyst(s) with
regard to any and all of the subject securities and companies mentioned in this report and (ii) no part of the compensation of the analyst(s)
was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by that analyst herein.
Required Disclosures
The analyst named in this report (or their associates) does not have a financial interest in the corporation(s) mentioned in this report.
Global Disclaimer
This report was prepared by IND-X Securities (Asia) Limited (“IND-X”). IND-X is a limited company registered in Hong Kong and is authorised
and regulated by Hong Kong's Securities and Futures Commission. The registered office is Unit 801-04,Kinwick Centre, 32 Hollywood Road,
Central, Hong Kong.
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