Dynasty Ceramic

Tiling a recovery story BUY

Dynasty Ceramic Plc (DCC)

DCC is a massive laggard, trading 18% below its 2012 peak while the

market is 28% higher in the same period. Successful operational fix in

the past 12 months will restore the company’s growth story. We expect

DCC’s earnings growth to surge to 25% this year, from near zero last

year, in our revised forecast. Our new TP of Bt70 implies 26% capital

gain, which would be further sweetened by a 7% dividend yield. BUY.

Strong operational improvements. Yesterday's analyst meeting led by Khun

Roongroj Saengsastra, Chairman & CEO, revealed that DCC successfully raised average

product selling price from Bt129/sqm in 2012 to Bt135/sqm in mid-Jan 13 and

Bt139/sqm in mid-Feb 13. Despite the price hike, sales volume picked up strongly by

12% YoY in January. Backing for this was provided by three elements. First, market

demand was strong. Second, it introduced a new product in 4Q12 that met with

customer approval. This is a "rectified floor ceramic tile" sized 16"x16", for which the

selling price is almost 30% below the price for imported granito tiles, and thus will lure

some share away from the imported granito tile market. Thirdly, last year's logistics

problems were solved by shortening the payment terms and using larger trucks.

Positive guidance for 2013. DCC targets 10percent sales volume growth and 7% average

selling price (ASP) increase to Bt138/sqm in 2013. Gross margin is expected to edge up

to 40percent from 39.2% in 2012, thanks to better economies of scale, higher ASP and sales

mix optimization. DCC aims to boost the proportion of the 16"x16" rectified floor

ceramic tile size from 3-4% of total sales volume to 35-40%. While the ASP on this

product is 20% above the conventional grade, its production cost is merely 5% higher.

DCC is not concerned about the current boom in modern trade distribution outlets for

home improvement products, as they generate only 2% of total sales from ceramic tile

sales due to space limitation. DCC's in-house outlets, primarily dedicated to ceramic

tiles, offer much broader product range and account for 75% of its sales.

Earnings upgrade. To reflect the stronger outlook, we have raised our forecast by

14% to Bt1.6bn in 2013F and Bt1.8bn in 2014F. Our key assumption changes are: 1) an

increase in ASP to Bt134/sqm (+4% YoY) in 2013F and Bt135/sqm (+1% YoY) in 2014F;

2) a rise in sales volume to 63mn sqm (+8% YoY) in 2013F and 69mn sqm (+8% YoY) in

2014F; and 3) a rise in gas cost by 5%. Our full-year ASP assumptions are more

conservative than company guidance as we see seasonality factors contributing to the

pricing so far in 1Q13. Our sensitivity analysis suggests that every 1% rise in sales

volume and ASP will increase DCC's earnings by 1% and 3.5%, respectively, while every

1% rise in gas cost will hurt its earnings by 1.5%.

Maintain BUY. We raised our 12-month PT to Bt70 (from Bt57), based on 18x PE (+1.5

S.D. over its 10-year PE of 13x) in response to our earnings upgrade. We like DCC for

several reasons: 1) potential earnings upgrade by street (our earnings are 14% above

consensus); 2) hugely laggard play in its sector (DCC -7% vs. SETCONMAT +24% and SET

+34% in the past 12 months); 3) attractive valuation, trading at 14x 13PE vs 3-year EPS

growth at 20%; and 4) compelling dividend yield at 7.0% in 2013F.