Analyst : TA Research Sector : Trading/Manufacturing Tel : ext : Distribution. network. development

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1 Company Note New L i ss tt ing i Thursday, 08 July 2010 For Internal Circulation Only Menara TA One, 22 Jalan P Ramlee, Kuala Lumpur. Malaysia Tel : Fax : FBMKLCI : 1, Analyst : TA Research Sector : Trading/Manufacturing Tel : ext : 1616 Bloomberg : N/A e mail : aarontan@ta.com.my Fair RM0.49 Value (-15.52%) Do Not Subscribe Share Info Stock Code Listing Main Market Enlarged Share Cap mn 102 Market RM0.58 mn RM59.16 Par Value RM0.50 Issue Price RM0.58 Oversubscription rate Estimated free float 28% Tentative Listing Date 22 Jul 10 Tentative Listing Dates Event Opening of the IPO Closing of the IPO Balloting of Applications Allotment of Shares Listing Tentative Date 28 Jun Jul Jul Jul Jul 10 Tatt Giap Group Bhd Not a Solid Steel Tatt Giap Group Bhd (TGG) is a Penang-based steel trading and steel processing company en route to the Main Market of Bursa Malaysia mn new shares will be made available for the public at an IPO price of RM0.58. Using a weighted average market capital CY11 PER of 5.69x and a CY11 EPS of 8.54sen, we derived a target price of RM0.49 for TGG shares. This represents a downside of 15.52% hence, we would advise investors not to subscribe. Background Ventured into steel processing after acquiring adequate market knowledge and resources and developing a wide distribution network Distribution network development Leveraged on its in house capability to produce slit coils and sheets to expand downstream Expanded upstream into rolling mill business to establish an integrated steel facility and penetrate the automotive, electrical and electronic markets Leveraged on its in house capability to produce electro galvanized steel coils Ratio & Analysis NTA per share (post IPO) RM1.21 Price to NTA x 0.5 Proforma ROE % 4.9 Proforma ROA % 1.7 Proforma Net Gearing x 1.23 Proforma Current Ratio x 0.89 Utilisation of Proceeds RMmn % Repayment of Term Loan Estimated Listing Expenses TOTAL : Began as importer, stockist and distributor of steel products Gradually advanced to become a nationwide steel distributor 1994: Started metal processing activities 1997: Expanded into surface treatment of stainless steel sheets in collaboration with NMIC 1998: Established full fledge steel processing centre 2005: Diversified into manufacturing of stainless steel tubes and pipes 2007: Acquired a full set of manufacturing facilities for the manufacturing of cold drawn and polished carbon steel/stainless steel bars 2008: Installed its Electro Galvanizing Line. Production of Electro Galvanized Steel Coils commence by mid year 2009: E Galv Steel Industry Sdn Bhd commenced commercial production in February E Galv Steel Industry joinventured with NSC and Hanwa Japan and change its name to Nippon EGalv Steel Sdn Bhd. in December Business Activities: Principal Activities Steel Processing: Provides custom-ordered steel according to the individual needs of the customers. Steel can be cut-to-length, sheared or slit depending on the customer s specification. Manufacturing of stainless steel tubes and pipes: Manufactures stainless steel tubes and pipes for water works treatment, oil and gas, palm oil and sugar refinery, food processing, pharmaceutical and air conditioning. Manufacturing of cold drawn and polished carbon steel/stainless steel bars: TGG plans to develop its capability to manufacture square and hexagonal bars apart from round bars. Tatt Giap Group Bhf [ 1 ] New Listing

2 Steel Distribution: TGG is a stockist, procuring steel products in large quantities, later to be distributed to smaller buyers in small quantities. Manufacturing of Electro Galvanized Steel coils: TGG, under its subsidiary Nippon EGalv plans to construct an EG steel supply system to meet the demand from local and Japanese consumer-electronics, automotive and office automation industries. Principal Products Flat Steel Products Stainless steel tubes and pipes Cold Drawn and Polished Carbon Steel/Stainless Steel Bars Revenue Breakdown by Products, Business Activities and Geographical Location for FYE Dec 2009 Figure 1: Revenue Breakdown by Products FYE Dec 2009 EG steel coils and sheets, 18% Others, 3% Stainless Steel 40% Hot rolled steel 19% GI steel coils and sheets, 8% Cold rolled steel 13% Figure 2: Revenue Breakdown by Company Activities for FYE Dec 2009 Processing, 37% Investment Holdings, 1% Trading, 35% Manufacturing, 27% Tatt Giap Group Bhd [ 2 ] New Listing

3 Figure 3: Revenue Breakdown by Region of Sales for FYE Dec 2009 East Coast, 2% Southern Region, 12% East Malaysia, 2% Export Market, 3% Central Region, 45% Northern Region, 36% Investment Thesis Hopeful Outlook for Steel Sector But not for a stockist The stainless steel sector has experienced a rough patch in the middle of However, it recovered sometime in the 2H09 right to 4Q09. Since 1Q10, stainless steel prices have been gaining momentum. As of June 2010, stainless steel price reached a 21-month high of USD3721/MT. However, the rise in stainless steel or rather steel price in general is detrimental to stockiest like TGG. When steel price is rising (overseas prices), suppliers in Malaysia would rather export the steel overseas where they can fetch a higher selling price. In that respect, TGG would face a supply risk and would not be able to meet the demands of their clients. Potential Double-Whammy from Steel Price Fluctuations On the other hand, when steel price fall, steel suppliers would also be reluctant to sell to the stockist because they would rather use the cheaper input to produce downstream products where they are able to enjoy a higher profit margin. As many of the steel suppliers are also involved in downstream products, these suppliers would rather use the cheaper input for their own use. In addition to that, we gather that some of TGG s competitors are related to major steel players such as Bright Steel Service Centre Sdn Bhd (Lion Corp Bhd) and Anshin Service Centre Sdn Bhd (Ann Joo Resources Bhd). Figure 4: Stainless Steel Prices USD/MT Stainless Steel Prices Stainless Steel Prices Source: MEPS International, TA Research Tatt Giap Group Bhd [ 3 ] New Listing

4 Is stocking in bulk a good thing? Not necessarily. Inventory management in this kind of business has to be precise. A sudden increase or decrease in prices could pose a serious threat to TGG. For example, when a stockist doesn t stock up enough cheap inventories, then they could potentially lose out on an increase in demand. At the other end of the spectrum, if they were to stock up on steel and the price faces a sudden drop, they would then be burdened by slow moving expensive inventories. This would in turn translate to higher input cost for their steel products. Figure 5: Inventory Turnover Rate Referring to figure 5, TGG s inventory turnover gets lower from year 2006 to year This might suggest overstocking or inefficient inventory management. In the steel industry, a low inventory turnover rate is unfavourable because it takes up valuable floor space. Year 2009 is an example where decreasing inventory turnover is unfavourable. Sales were down YoY which caused TGG s inventory to be hogged causing a 32% drop in inventory turnover rate. Valuation In valuing TGG, we have taken into consideration two factors. The first factor we looked into is its closest comparable company in terms of business offerings. The second factor is that some of TGG s competitors are related to major steel industry players in Malaysia. However, in terms of contributions, we do not view TGG s competitors (as stated in the prospectus) as significant revenue contributors to the parent companies. Hence, it would not be reflective to include major steel players into the derivation of an average PER. We have opted to take the weighted average market capital CY11 PER of Pantech Group Holdings Bhd and Engtex Group Bhd because we believe that they reflect TGG s business on a more holistic manner. Hence, using the weighted average CY11 PER of 5.69x, we arrived at a fair value of RM0.49 for TGG. We recommend investors Not to Subscribe based on the nature of its business, which is adversely susceptible to industry-wide fluctuations and larger competitors. Companies Market Capitalization (RMmn) CY11 PER Pantech Group Hldgs Bhd Engtex Group Bhd Market Capital Weighted Average PER 5.69 Tatt Giap Group Bhd [ 4 ] New Listing

5 Major Steel Industry Players Companies Market Capitalization (RMmn) CY 11 PER Ann Joo Resources Bhd Lion Industries Corp Bhd Southern Steel Bhd Kinsteel Bhd Perwaja Holdings Bhd CSC Steel Holdings Bhd Market Capital Weighted Average PER 5.75 Earnings Summary FYE 31 December (RMmn) F 2011F Revenue Gross Profit PBT PAT Enlarged Share Cap Gross Profit Margin 7% 8% 9% 7% 12% 11% 11% Net Profit Margin 3% 4% 4% 2% 3% 3% 4% Earnings Per Share (sen) Disclaimer The information in this report has been obtained from sources believed to be reliable. Its accuracy or completeness is not guaranteed and opinions are subject to change without notice. This report is for information only and not to be construed as a solicitation for contracts. We accept no liability for any direct or indirect loss arising from the use of this document. We, our associates, directors, employees may have an interest in the securities and/or companies mentioned herein. for TA SECURITIES HOLDINGS BERHAD(14948-M) (A Participating Organisation of Bursa Malaysia Securities Berhad) Kaladher Govindan Head of Research Tatt Giap Group Bhd [ 5 ] New Listing