Company Note

03 July 2007

New Listing
Tuesday, 03 July 2007 For Internal Circulation Only

KLCI : 1,364.37

Sector : NA

Bloomberg : SCW MK

Analyst : Michelle Teh

E- : michelleteh@ta.com.my

: 20721277 ext 1604

Fair Value RM0.86(+14.7%)

SHARE INFO Listing Enlarged Share Cap Market Cap @ RM0.75 Par Value Public Issue Issue Price Estimated Free Float Closing Date Tentative Listing Date Major Shareholders 2nd Board (m) 80.0 (RMm) 60.0 RM0.50 (m) 6.0 (RM) 0.75 (%) 21 3rd July 2007 16th July 2007 (%) Loo Bin Keong - 29.82 Zakaria Merican bin Osman Merican - 19.27 Tan Sin Keat - 10.47 Leuk Sing King - 10.47

Scanwolf Corporation Berhad

Time To Get Noticed! Introduction Scanwolf Corporation Berhad is marching its way into the Second Board of Bursa Malaysia on the 16th July 2007. The company, through its subsidiaries, designs and manufactures plastic extrusions, PVC compounding, processing of PVC coils, trading of industrial consumables, sales and marketing of PVC extruded building materials and trading of other building materials. Subscribe Scanwolf for its capabilities of being an integrated manufacturer of plastic extrusions and its move to further penetrate into other Asian markets such as Thailand, Indonesia, Vietnam, Philippines and India. We value the stock at RM0.86 based on a sector PE of 8.8x. Key Reasons for Investment Consideration 1) Integrated Manufacturer of Plastic Extrusions. Scanwolf Corporation Berhad has the in-house capabilities and expertise to provide customised solutions to meet the diverse needs and specifications of customers such as: Product design and development which includes assisting customers with product conceptualisation and colour matching services In-house design and fabrication of dies which is critical to the extrusion process and the quality of output Multi production line to perform large volume production runs Multi colour extrusion and wide colour range supported by in-house compounding and colour matching services In-house secondary operations including online four-tone printing, wrapping and laminating of decorative foils or tapes, and slitting processes.
Earnings Summary (RMm) FYE 31 Mar RMm Revenue Gross Profit EBITDA PBT Tax Net Profit EPS PER Dividend Diviend Yield Gross Profit Margin EBITDA Margin PBT Margin Tax Margin Net Profit Margin FY05 22.5 7.80 5.9 4.3 (1.0) 3.3 7.6 9.9 na na 34.7% 26.2% 19.0% 22.7% 14.7% FY06 27.3 9.9 8.0 6.0 (1.0) 4.9 11.3 6.6 na na 36.5% 29.3% 21.8% 17.0% 18.1% FY07 31.4 11.2 8.9 6.1 (0.7) 5.4 12.4 6.1 na na 35.6% 28.4% 19.5% 11.8% 17.2% FY08(E) 35.5 15.1 10.6 7.8 (0.7) 7.1 8.9 8.5 2.5 3.3 35.0% 29.9% 22.0% 9.2% 20.0%

RATIO & ANALYSIS NTA/share P/NTA @ RM0.75 ROE ROA Net Gearing (RM) (x) (%) (%) (x) FY08 0.52 1.4 8.86 11.7 net cash

UTILISATION OF IPO PROCEEDS RM'000 Repayment of Bank Borrowings 9,500 Capital Expenditure 6,200 Working Capital 4,076 Defray Estimated Listing Expenses 2,000 Total 21,776 % 43.6 28.5 18.7 9.2 100.0

sen x sen %

Scanwolf Corporation Berhad

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New Listing

Company Note

03 July 2007

2) Diverse Customer Base. Unlike its industry peers, earnings risk arising from single customer concentration is mitigated by wide range of customers involved in various industries. Cumulatively, the company has a total of 600 customers worldwide and 70% of its top 20 customers have been dealing with the company for 5 years or more. 3) Wide Market Coverage. FY07, the export market contributed RM19mn (60.3%) to the group's revenue. It markets to a total of 28 countries (including Malaysia). The diversification of markets aids the company to minimise the dependency on any one particular country. Management targets to export 70% of its total revenue. Below is the breakdown:
Export Markets Thailand Bangladesh Indonesia Vietnam Iran Philippines United Arab Emirates Export Market Local Market Total Group Revenue
Source: Prospectus

Revenue FY07 RM mil % 3.488 11.2 2.831 9.0 2.420 7.7 1.807 5.7 1.629 5.2 1.483 4.7 1.332 4.2 18.960 60.3 12.466 39.7 31.426 100.0

4) Strong Market Reputation & Established Track Record. The name Scanwolf has been in the market since 1984. As highlighted earlier, Scanwolf has been in town for years and went unnoticed. In 2006, the company ranked first among manufacturers of Plastics Extruded Edgings and Profiles in Malaysia based on sales value of local production. In the same year, the market size of he Plastic Extruded Edgings and Profiles in Malaysia was estimated at RM120mn based on sales value of local production. The company's market share was estimated at 25%. Also, currently the company has 6 foreign distributors. The distributors rely on their own distribution network to reach sub-distributor and end-users. Distributors are listed below:
Distributor Scanwolf Thailand Co., Ltd Scanwolf Philippines Manufacturing Inc. PT Malindo Jaya Dong Luc Hong Ahmad Kabiri Jazeh Partnership Morocco Malaysia Corporation
Source: Prospectus

Country Thailand Philippines Indonesia Vietnam Iran Morocco

5) In-House Profile Design Capabilities. The company has the ability to customise and this is considered critical, as application and designs are very diverse. The company has in-house die design and fabrication capabilities. Cumulatively the company has a total of approximately 800 designs of extruded products since. Of these, 300 are still active designs. Above this, the company manufactures at least 20 colour options for each design, 6) R&D Capabilities. This capability enables the company to sustain and grow the business through the development and improvement of existing and new products. It helps to increase revenue and profitability and lower the cost of production via improvement to the manufacturing processes. It will be able to have optimal usage of automation and machine integration and use of recycled materials through inhouse compounding. Management mentioned that they have intentions to utilise dry blending (powder) and stop usage of pallets to cut out one of its processes. FY07, the company has spent half a million Ringgit (1.58% of Group's turnover) specifically on R&D.
Scanwolf Corporation Berhad [2] New Listing Company Note

03 July 2007

Business Overview The group structure is depicted in the chart below:

Scanwolf Corporation Berhad (SCB) 100% Scanwolf Plastic Industries Sdn Bhd (SPI) 100% Scanwolf Building Materials Sdn Bhd (SBM)

Source: Prospectus

Once Upon A Time It all started in 1984 when Mr. Loo Bin Keong (CEO) together with two other directors namely Mr Tan Sin Keat and Mr Leuk Sing Kong formed a partnership under the name of Scanwolf Plastics Engineering Consultant Firm to manufacture PVC pipes and conduits and plastics extrusion for furniture fittings. To date, they have 22 solid years of experience in the plastic extrusion industry. What Does Scanwolf Do? Below is briefly of Scanwolf Corporation Berhad's business activities:
Business Activities

81.1%

1.7 %

5.0 %

12.2 %

Design & Manufacture of Plastic Extrusions PVC Edging PVC Jointings PVC Foam Profiles PVC Extruded Building Materials PVC TPEE Profiles ABS Profiles & Edging PVC Wrapping Profiles

PVC Compounding

Processing of PVC Coils

Trading

PVC Compounds

Thin PVC Edging

Industrial Consumables Other Building Materials

Source: Prospectus

Application of Plastic Extrusions The table below shows the various industries that use plastic extruded products. Please refer to appendix for its products and applications.
Furnitures Automotive Interior Fit-Outs Kitchen & Wardrobe System Promotional Display & Exhibition System Pallet Systems Light Racking System Office Equipment Picture Frames
Scanwolf Corporation Berhad [3] New Listing Company Note

03 July 2007

What Lies Ahead 1) Expansion of Product Range. Scanwolf intends to develop rigid PVC vertical and horizontal blind profiles, flexible Polymer Filaments, polymer picture frame profiles, polymer decorative profiles, new extruded building materials (plasterwork trim profiles & step nosing profiles) and Calendered PVC Film. 2) Expansion of Production Facilities. Currently the company has 2 twin-screw and 9single screw extrusion machines. It intends to purchase 3 twin screw machines. The commissioning of these machines in Nov07 will boost capacity by 62%, from the existing 2,909 tonnes to 4,724 tonnes. These 3 twin screw machine is equivalent to 6 single screw machines. Contribution to the revenue will only be evident in FY08. However they intend to maintain 80%-85% capacity for ad-hoc projects and testing. 3) Main Board. Scanwolf is determined to list on the Main Board of Bursa Malaysia in 3-4 years time. It will pay shareholders a dividend of 2.5sen per share and the remaining would be retained to facilitate its main board transfer. 4) Overseas Business Expansion. Thailand & Indonesia. The company intends to acquire an equity stake in Scanwolf Thailand Co. Ltd and PT Malindo Jaya by end 2009. Following its acquisition, it will set up a manufacturing plant in each country by 2010. The reason to move into Indonesia with its lower and medium end products is the country's population. Vietnam. The company intends to form a joint-venture with Dong Luc Hong, a trading house and also present distributor in Vietnam to further strengthen its existing presence in the country. The company is currently in negotiation phase. Philippines. The company intends to acquire an equity stake in Scanwolf Philippines Manufacturing Inc., the Group's sole distributor in Philippines by 2009. India. The company intends to establish a sales office in India by 2010. Management mentioned this would take place at a later date because of high barrier for market penetration. Exhibitions. Main sources for the company to increase its revenue are exhibitions, distributors, trading houses, manufacturers, MITI and internet. The company will be participating in the exhibitions in Las Vegas and Brazil next year. Some of the exhibition and trade fairs the company participated in are listed below:
Exhibition Participated Malaysia Malaysian International Furniture Fair Asianwood Woodtech Trade Fair Export Furniture Exhibition Malaysian Furniture Export Exhibition International Interzum Guangzhou 2006 & 2007 Indiawood 2006 Index Dubai 2003,2005 & 2006 Interzum Cologne 2003 & 2005 International Exhibition of Furniture, Fittings & Upholstery 2005 Firniteno Indonesia 2002 WORLDBEX 2005 (via distributor) 2nd International Kitchenware & Equipments Exhibition of Iran (via distributor)
Source: Prospectus

Location Kuala Lumpur Kuala Lumpur Kuala Lumpur Kuala Lumpur China India UAE Germany Russia Indonesia Philippines Iran

Date Mar02,03,06,07 Sept05 Mar05 Mar03,04 Mar06,07 Feb06 Oct03, Nov05 & 06 May03 & Apr05 Nov04 Nov02 Mar05 Jun06

Scanwolf Corporation Berhad

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Probable Issues 1) Repayment of Bank Borrowings. As of May 2007, the company has bank borrowings which comprise of trade facilities, hire purchase and term loans amounting to approximately RM19.1mn. RM15.3mn is outstanding and RM9.5mn from the IPO proceeds will be utilised to repay the bank. The facilities have been utilised to finance the working capital requirements and capital expenditure of SPI, their subsidiary. 2) Price of Raw Material s & Petroleum. Main raw materials used in manufacturing are PVC Resins, plasticisers, stabilisers and PVC Coils that contribute approximately 69% of total raw material purchases for FY07. Petroleum products are the major feedstock for plastic resins including PVC Resins and a range of other raw materials like plasticisers, used in the manufacturing of Plastics Extrusions. Similarly, petroleum products are the major feedstock used in manufacturing PVC Coils. The prices of PVC Coils are also dependent on the price of petroleum. However any significant increase in raw material cost can ultimately be passed on to customers but this remains a threat. 3) Exposure to Foreign Exchange. FY07, export sales was 60% and import purchases were 32%. These were mainly denominated in USD. To the certain extent that there are timing differences between collections and payments and for those amount which are not covered by natural hedge, the company may be exposed to any adverse fluctuations of the USD against RM. Management mentioned that the impact would be minimal. 4) Foreign Workers. As of May07, the company has approximately 41% foreign workers (mainly Nepalese). Their employment in Malaysia is subject to annual renewal by the Ministry of Home Affairs. As such, any non renewal of foreign workers' permit and any changes in regulations and policies i.e., lowering of the number of foreign workers permissible to be employed by the company or an increase in levy, may adversely affect the company. Lower Effective Tax Rate & Subsidy 1) Reinvestment Allowance. All manufacturing companies that have been in operation for at least 12 months and incur qualifying capital expenditure to expand production capacity, modernise and upgrade production facilities, diversify into related products, and automate its production facilities can obtain a Reinvestment Allowance. The company's subsidiary, SPI is enjoying this incentive. 2) Import Duty Exemption. The company has been granted import duty exemption on specific raw materials and components for the manufacture of specific finished goods. Raw materials that were granted import duty exemption by the Ministry of Finance are PVC Resins, Coating Oil and PVC Rigid Film. Exemptions are given till 19th July 2008. 3) Diesel Subsidy. The company is also granted diesel subsidy by the Ministry of Domestic Trade and Consumer Affairs for 7,200 liters per month since January 06. Valuation We are valuing the company, we draw a parallel to Tek Seng Holdings Berhad, V.S. Industry Berh and LCTH Corporation Berhad which offer similar but not exactly the same type of product and services. Hence, we arrived at a fair value of RM0.86 inputting a sector PE of 8.8x and an annualised FY07 EPS of 9.7sen. This gives an upside potential of 14.7%. Together with a 3.3% dividend yield, total appreciation is an attractive 18.0%. Note that additional potential revenue contribution by the new machines has not been taken into account. Subscribe.
Peer Comparison Company Price (RM) 2-Jul-07 Tek Seng Holdings Berhad 0.505 V.S. Industry Berhad* 3.760 LCTH Corporation Berhad 0.545 Sector PER (market cap weighted) Scanwolf Corporation Berhad 0.75
[5]

Market Cap 121.2 143.8 327.0 60.0

EPS (sen) CY07 5.6 40.8 6.2 9.7

PER (x) CY07 9.0 9.2 8.8 8.9 7.7

Company Note

Scanwolf Corporation Berhad

New Listing

03 July 2007

Appendix (Source: Scanwolf) Products

Edgeband

Profiles

Roller Shutter

Extruded Building Materials

Extruded Building Materials

Foam Profiles

Scanwolf Corporation Berhad

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Application of Products

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 Yaw Chun Soon, Executive Director - Operations TA Securities Holdings Berhad (14948-M) (A Participating Organisation of Bursa Malaysia Securities Berhad) Menara TA One, 22 Jalan P Ramlee, 50250 Kuala Lumpur. Malaysia Tel : 603 - 2072 1277. Fax : 603 - 2032 5048 Scanwolf Corporation Berhad [7] New Listing Company Note