Posted by Paul A. Renaud

Here is another leader in a higher growth area of the Thai economy. Its stock price has moved up already some since I pointed it out to you all. But I think it has more to go. Here is my company visit report and reasoning.

February 13 2013 at 5.13 PM.

QTC (6.25) Another quality growth stock in a desirable industry. After including QTC in my model portfolio on Jan 2 2013, on January 22, 2013 at 08:17 AM Bangkok time, I posted the following to our Member Only Lounge:

" am now turning just about maximum bullish now on QTC (5.05), after reading some good news by Thai broker Country Securities this morning! Its confirmed. The company expects some 70 mill+ Baht in earning for the 4th Q. which will be a blow away quarter. Dividend yield on the current mkt. price is around 5% and next year looks even better due to capacity expansion. Stay tuned."Here then today is my company visit report to you which I had nearly completed already a few days ago -only to get sidetracked.

QTC is a world class manufacturer providing world class quality in electric transformation equipment and services from the smallest to the largest types. Here is a top quality transformer export company which pays close attention to details, quality and profit margins. You can see their web site at: www.qtc-energy.com

Since my first upbeat sense here, I spend a few quality hours with K. Poonphiphat the company's CEO. It was informative and quality time as I could sense this company focuses on pride through "quality of details on everything from staff, to way of thinking, way of working, technological advancement, factory operations, products as well as consideration for society and environment."

QTC was founded in mid 1996 by a group of professional engineers who had over 35 years experience in this industry. The company focused from the beginning on high quality goods with "ability to be confident in their efficiency and maximum value to QTC customers". Firmly committed to continued research and development in order to guarantee its products with modern besides efficient QTC seems forward looking. Its transformers have passed various testing for resistance against electrical shorts by CESI in Italy and KEMA in the Netherland. QTC received a number of awards and certifications....its able to produce quality transformers meeting various international standards to just about anywhere in the world.

QTC transformers are of high quality and over the years the company has become one of the 5 leaders in the manufacturing of electricity distribution transformers. I got convinced that QTC transformers are likely superior in terms of quality, reliability and modern technology. QTC received a number ISO accreditations i.e. ISO 9001, ISO 14002, and OHSAS 18001, affirmation of the excellence quality of QTC factories. In 2009 QTC was granted 9001:2008 accreditation for quality management systems from UKAS, ENGAND. I state again, this company received many other awards and accreditations to numerous to mention here.

QTC IPO's in July of 2011. Just before the PAR value was reduces from 100 to Baht in March of 2011. Currently the company has 200 million shares outstanding and likely growing due to higher growth phase ahead.

From the lowest to the highest electrical systems. "We can manufacture every design to meet every standard across the globe". Asia is the region that has the highest electricity generation average future growth rate expected at over 4% per year. (According to Energy Information Administration, USA). Thailand" electricity growth rate is almost double that and hence transformers here are in a growth business. Not least also because Thailand first real economic surge came from 1989 to 1996, where a huge number of now near obsolete transformers where installed. Transformers have an approx. life expectancy of 20 years. Replacement market and the service sector is growing even faster I sense.

QTC employees 180 people including some 20 engineers. Many have received training from leading transformer manufacturing countries in foreign such as Germany and Japan. There are 20 transformer manufacturers in Thailand -and QTC is in the top 5. The company can produce both power and distribution type of transformers.

QTC's transformers can be categorized as follows:

1) Hermitically Sealed Oil Type Distribution Transformers
2) Open Type Transformers with Conservators

The company provides various types of services for customers such as scheduled checks and maintenance transformer repairs and maintenance, transformer oil fill services, transformer rental services etc.. These service centers are a higher margin business and set to grow rapidly from 10.3 mill in year 2009 to currently 20 mill and to projected 100 million Baht in a couple of years. I can see QTC earning some 100 net profit mill. for last year, or 0.50 Baht per share and this increasing to 125,000 mill. in 2013 or 0.62 Baht for this calendar year 2013. The stock is so trading at around a p/e of less then 11 for this year. This still looks undervalued to me for such a leading company in a growing industry.

Exports are growing and is also a slightly higher margin business. Some 25% of revenues will come from exports here forth, up from 15% a year ago. 50% of its exports are to Australia and 30% to Malaysia. Should the strong AU currency weaken as some believe this would be a positive. But this company exports just about worldwide and as far away as Mexico. Besides AU and MY, it has representative agents in places among others like Italy, Spain, Africa, Philippines. Hence it views itself as a leader and beneficiary of AEC as its already successfully exporting!

"The company's board of director has set proactive policy for greater market expansion in the ASEAN group of countries and set goals to increase sales for goods and services to 15% more than last year by focusing on maintaining standards and quality for the company goods as an important key to building reliability".Page 5 of QTC's 2011 Annual report.

Around 35% of QTC sales go to the Thai government agencies where it supplies transformers, as just one example was to the Airport Rail Link. The newly planned massive government investment in mega infrastructures, besides its high GDP growth rate (Electricity consumption is growing at an average 6-7% pace in the country) assures QTC a solid future supplying to the State.

Thai electrical authorities (EGAT, PEA and MEA have stated big plans to invest and upgrade the national grid due to the increase of electricity consumption. As well as ambitious plans to upgrade and expand the electricity distribution system along with increase of green energy portion to the national grid.Lots is going on in this now. Higher standards and an increased electrification for Thailand is now a near non-cyclical long term growth business, par excellence.

QTC also supplies many domestic transformers to growing private industries/companies, like as example to DEMCO which bought over 100 mill. Baht of its transformers, just last year.

QTC s d/e ratio is a very modest 0.6. It targets revenues to grow to 1.5 Billion Baht within 5 years. Last year's revenues will likely be 900 mill. Baht.up from 718 mill. revenues for the year before. So look for a very strong 4th Quarter, as I sensed and pointed out on observing some accounting data in their notes to the financial statements. (Raw materials, work in process on hand etc, had increased considerably). I am counting on a 0.25 Baht yearly dividend for last years operations, or a near 4% yield on the current market price of 6.25

Its key raw materials compromise silicon steel/metal, coated round wires oil and cooper foils. The prices of these do and can fluctuate according to world market prices. The company has over 30 years of industry experience and good relationships with suppliers which enables reliable estimates for raw material price trends. Since QTC exports its final products as well as imports raw materials, it so has a natural currency hedge. (Raw material imports of recent are similar to exports in currency value.). Further, the sales department calculates carefully transformer prices by using mark ups (or downs) adjusting for FX movements and raw material prices. QTC seems to be closer to currency neutral and so FX currency movements is not likely to be a key concern.

The company officially announced to the SET, on Jan 25th :
"Reference is made to our Director interviewed on January 25th 2013 to newspapers informing that we are expected the income and dividend of year 2012 about 900 MB and 0.25 Baht/share. It is because of the operation in last quarter reach to the target."

QTC will likely diversify more into some well thought out green/biomass energy joint ventures, this after already undertaking a smaller 10 mega watt bio-methane gas or CBG production project. This a co-project with UAC and currently still a pilot project. Energy derived from effluents and residues from the pineapple industry. Thailand is one of the biggest pineapple growers in the world. If this bio CBG project is successful more will be in the coming and its likely a new growth venue for QTC.

QTC also cooperates with ABB which supplies the main raw material using the production of lighting arrester to the company. QTC is also negotiating with Schneider (Thailand) for the coordination in order to manufacture Dry Type Cast Resin Distribution Transformer. Schneider and ABB are well known global leaders/names with an excellent world wide reputation.

This March 19th the company will give a presentation to the "SET Opportunity Day" and we hope to learn more about its core and expanding new green business. The CEO K. Poonphiphat speaks very good English.
I want to say again as stated to members last year. Electricity generation is a huge and low-cyclical growth business in Thailand which still few have grasped....Laos cannot be" the battery of Thailand" and Burma is still infantile and may I say unreliable for natural gas into the future. QTC is just another choice of mine here in this vibrant -yet under researched sector- dominated by some very interesting niche smaller cap Thai listed companies! Institutional investors have very little large cap choices here so they show little interest to date.

The owners Mr. PoonphiphatTantanasin group account for some 137 mill shares which is some 68% of the total outstanding shares QTC has at present. This gives the owners total power of control. Broadly speaking this can be good or bad as I have pointed out in other writings here in the past. Any such company can do what is best for all the shareholders or can have potential conflicts of interest.

While not projecting or feeling like this in any way(!), I did let know the owner/CEO K. Poonphiphat at our dinner that I have a long & solid reputation for pointing out any misleading or wrong statements by a listed company at my web site. I say this to any majority owners of a company I visit. Note that QTC has an audit committee to check, consider and screen any items posing potential conflicts of interest and so to generate transparency in the company's operations. I also note QTC's dividend policy being 50% of net profit and so all shareholders receive the same dividend amount, per share. My own opinion is that K. Poonphipha is a rightly so proud and honorable & highly professional with charisma and very pleased with QTC -and I do not see any corporate governance problems.

QTC is another higher then SET average growth company trading at a lower then market average p/e ratio. Its dividend yield is good and it is in a lower then average cyclical business with some potential high growth ventures in the promising green/bio energy area. It would likely reap revenue and higher profit rewards should the AU currency weaken. It's a leader in what it does from the perspective that it already is a successful exporter and so will benefit from the coming AEC integration. Buy view is maintained. Of course I welcome any comments as always.

Best Regards

Paul A. Renaud.
www.thaistocks.com

* This original oil painting photo is by K. SomprasongYothongyos (1940). A famous Thai artist who also was TV Chanel 3's Chief of Graphic department, whose painting I just purchased.

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