April 25, 2015 – CROWN (IPO) – 25 year anniversary and finally an IPO derivative for Philippines’ Booming Construction Industry

April 27, 2015 marks the first IPO for the year and we have the Villanueva and Perez families to thank for listing their company “Crown Asia Compounds.”  Here’s a quick round-up about the company and what you can probably expect from them in the next coming months and years.

All details are from the prospectus.  You could download all of it through PSE (edge.pse.com.ph)  It’s a 9.7 MB file with 294 pages.  I’ll highlight the ones worth reading about.

Summary of the Offering:

Ticker Symbol: CROWN

Total outstanding shares: 630.8 M (Owners 74.95%, Public 25.05%)

Public’s Shares: 158Mil @ 1.41

Total Proceeds Raised for Company: P203.988 Mil /total gross (with investment fees et al is P222.78M)

Primary Use of Proceeds:

a.) PPR and HDPE manufacturing plant (Php 66.2 M by 2Q15)

b.) debt retirement (Php43.8M by 2Q15)

c.) modernization of existing compounds and pipes plants (Php 25M by 2Q15)

d.) working capital purposes (immediately after offering)

Dividend Payout Ratio (Historical 2012-2014):

2012= 109.93%; 2013 = 43.31% ; 2014 = 14.07%; Jan 2015: 38.24%

historically, but they indicated at least 10% div policy for shareholders.

Issue Manager and Underwriter: Abacus Capital

Participating Underwriters: RCBC and SB Capital

*****

Business Overview = Compounds and Pipes:

A.) Compounds (PVC) 

major competition: D&L Industries’ First in Colour (FIC), Tosoh Polyvin Corp, Elastobest Manufacturing

Key Differentiation of Crown:

a.) customized high quality compounds

b.) established long standing relationships

B.) Pipes

major competition: Neltex, Moldex, Atlanta and Emerald (competitive pressure here and abroad brings about price cutting).  Furthermore, ASEAN free trade agreement may also result in the entry of regional players into the Philippine market. Smugglers can also manufacture at low costs but quality standards may be less stringent.

Key Differentiation:

CROWN has Class A pipe products, a premium price over others in the market .  Major property developers as well as contractors of major Public Private Partnership (PPP) recognize the CROWN brand for its projects.  Furthermore the company maintains a strategic level of pipes and fittings inventory enabling them to supply based on customers’ needs promptly.  This lessens the lead time needed by customers especially in the HDPE line. The company has established quality assurance and control procedures for its Compounds and Pipes groups with multiple ISO certifications.

****

Margins: (What influences the gross margins)

1.) Raw Materials (PVC resins, polymers, stabilizers and plasticizers)

2.) Labor matters– the company has lessened the dependence on regular, rank and file employees by engaging in contractual employees.

3.) Power – the company relies on mainstream power for the production of compounds and PVC pipes for its 24 hour operations.

Business Strategies:

A.) PPR and HDPE Manufacturing Plant and Warehouse and Purchase of PPR and HDPE Equipment

In 2006, the company entered the HDPE market through the CROWN brand.  It used to be imported.  After the favorable market acceptance, the company started manufacturing its own starting in November 2014 utilizing 1.) existing extrusion machineries for the product line to meet the growing customers’ orders.  Further more, the company decided to be the first to embark on the manufacturing of a complete line of PPR- fittings in the Philippines.  Note that other PPR pipes sold in the Philippines are imported so a ready availability from the company will be able to serve the customers’ needs promptly.  The new facilities will have capacities of 4,800 MTPA for its PPR line and 4,500 MTPA for its HDPE line.  These are in Guiguinto Integrated Wood Industries Corporation.

(More info: HDPE is known for its large strength to density ratio – the density of HDPE can withstand higher temperators and accepted as the pipe of choice for trenchless applications such as directional drilling and pipe cursting, it’s product of choice for gas pipelines.  HDPE was used first for gas pipelines in 1960 and for sewer and water applications for more than 30 years.  PPR pipes is gaining popularity as an alternative to galvanized iron pipes for buildings and homes as they can withstand high pressure as well as hot and cold temperatures.)

B.) Modernization of Existing Compounds and Pipes plants

The company spent P43.72M (2012), Php20.96M (2013), Php 63.4M (2014) for capex to acquire new equipment including extruders, shrink film line, die cutter, power quality analyzer and data loggers.    The company estimates to spend another P24.78M for 2015 to improve the following lines.

C.) Working Capital 

Primarily for inventory (raw materials) and sustain the funds flow as sales to customers are mostly on credit terms of not more than 90 days before most receivables are turned into cash.   – Php 68.99M

D.) Debt Retirement – Php43.8M from SB Equity for the construction expense related to PPR and HDPE plants (4.25%)

Key Management (Top 6):

Eugene Villanueva (14.99%)

Walter Villanueva (11.24%)

Tita Villanueva (7.5%)

Nicasio Perez (7.5%)

Jefferson T. Sy (7.5%)

Christie T. Perez (7.5%)

Lockup of shares (180 days) = 264 Mil shares; (365 days) = 120M shares

***

25 years History: (1990-2015 – IPO debut)

The company started commercial operations in 1990 with the trading of imported PE compounds and paraffin waxes.  In the same year, the company started production and sales of PVC compounds at its plant in Guiguinto Bulacan with an operating capacity of 1,800 MTPA of PVC compounds with just 22 employees.  The company started exporting PVC compounds in 1995.

In 1998, the company was assessed and approved by QMS and ISO for having quality systems as manufacturer and distributor of chemical compounds.  Capitalizing its expertise in PVC formulation, CROWN expanded downstream into the manufacture of industrial plastic pipes under the CROWN pipes brand for electrical, sanitary, potable water and telecommunications applications.   Also in 1998, the ocmpany began the production of PVC flexible electrical pipes using German machinery (Battenfeld and Frankische) expanding the product lines further with the introduction of PVC electrical conduit pipes and potable water pipes in 2000, and sanitary pipes and fittings in 2002.

In 2003, Crown expanded PVC applications beyond wires and cables, developing and marketing PVC compounds for use in IC packaging tubes, films and bottles, as well as door and window profiles.

In 2006, company explored the HDPE market by engaging in marketing and trading HDPE pipes and fittings under the CROWN brand to test the market.  The company also expanded lines to included pressure main distribution pipes and telecommunication conduit pipes.

In its 25 years of operations, the company has transformed CROWN into a premium brand that is committed to excellence in product quality, reliability and safety earning confidence and trust of architects, builders and key players in the construction industry.

As of March 30, 2015 – Company has operating capacity of 15,000 MTPA for its compound business and 8,500 MTPA for its pipes business. (138 regular employees, 36 probationary, 73 contractual totaling 247 employees)

*******

Financials:

2014 Revenues: P850.74Mil (35% pipes, 65% compounds)

Pipes (P293M); Compounds (P556M)

Compounds (57% Local ,43% Export)

Compounds Description: (Using FY2014 % Sales)

a.) Wires and Cables (79%) (for building, telecom and automotive applications)

b.) IC tubes – (7.6%) to protect IC chips

c.) Films – (6.13%) for cap seals, shrink films, labels and other packaging applications

d.) Bottles – (6.06%) for food contact applications (high, medium, low impact properties)

e.) Customized Compounds (0.44%)

Pipes 

1.) Crown PVC Pipes – lighter, less expensive, durable lasting more than 40 years with potential in-service lives of up to 100 years, fire resistant

a.) Crown Blue – potable pipes and fittings

b.) Crown Electrical – electrical conduit pipes (Crown Supreme and Crown Hi-Tech)

c.) Crownflex – PVC Flexible electrical pipes highly resistant to flame

d.) Crown Sanitary – PVC sanitary pipes

e.) Crown Pressure Main Blue – for high pressure water works, irrigation, infrastructures.  In buildings, it’s the water source which passes into building reservoir or pipelines.

f.) Crown Telecom – conduit by which telecommunications wiring passes through to reach the telecom site

g.) HDPE Pipes and fittings (Crown Fuerza, Crown Sigma) – can be curved making it especially useful when installing water pipes in residential areas; practical for agriculture, irrigation, sewerage and infrastracture projects; less susceptible to damage during earthquakes

(For pictures go to page 89-105/294)

Crown Pipes 2014 Sales Breakdown:

a.) Sanitary 44.23%

b.) Electrical 40.7%

c.) Blue 6.51%

d.) HDPE 2.7%

e.) Others 5.86%

****

New Products PPR Pipes and Fittings  – for residential cold and hot water system, underground heating system, conveyor of industrial water and chemical materials, sanitary and pure water pipelines, hot water recycling system, compressed air pipelines and other industrial agricultural pipelines

2014 Net Income: 65.38 M

Total Assets Php829.05 Mil; Total Equity P562.9 Mil

Book Value Per share (1.22)

*****

Vision: To be the most highly regarded and leading supplier of quality construction products in the Philippines and international markets

Mission: To strive for market leadership in the Philippines by offering innovative and technologically up-to-date construction products that meet or exceed both national and international standards, thus ensuring quality, reliability and value for money for our customers, and upholding a nurturing environment for our employees where talents are developed, while always managing the business professionally and with integrity for good returns to our shareholders.

*****

Strengths

a.) 25 years operating history in the Philippines = customer base of the largest Philippine and multinational corporations in the construction, telecommunications, automotive and packaging industries.

b.) quality products – all certified by international boards like ISO and ASTM

c.) unique product offerings –

Customized production of compounds.  They can tailor proprietary formula for high quality customized compounds and PVC pellets suited for various applications like window profiles, door profiles, IC packaging tubes, wires and cables, and container packaging

UV-Protected Pipes and Customized Production of Pipes –  extends life of pipes resulting in cost savings to the user.  CROWN can also tailor fit PVC pipe specifications to customer requirements

d.) Established operational policies, systems and procedures

Growth Plans:

1.) HDPR and PPE Manufacturing Plants

2.) Increase Market Reach – presently serving Visayas and Mindanao market through their Davao depot, but plans to increase and be more aggressive such as continuing to sponsor architectural and engineering activities and expand sales force to cover larger areas and trade channels nationwide.

Key Customers:

Top Compounds’ Customers Contribution to Compounds Revenues:

Exito Electronics and Powerline Products Limited (40% of Sales) – Taiwan Export customers (since 1995)

American Wire and Cable (Local)  – 12.72% of sales (since 1990)

****

PVC Production Process Flow

Upstream (Basic Petrochemical) : Crude Oil – Naphtha – Ethylene

Midstream : Ethylene+Chlorine -> Ethylene Dichloride – Vinyl Chloride – Polyvinyl Chloride (PVC) –

Downstream : PVC Converters (PVC+ Additives) – PVC Products

End User – Industrial and Consumer Markets

****

To check further for competition (go to page 139-141/294) for the tables that compare Crown Pipes versus the Neltex, Moldex, Atlanta and Emerald upon sales and products as well as net income and margins.

***

Industry outlook:

1.) In a typical house or building, pipes account for 3% of the total cost of construction

2.) Construction of buildings has increased 12.52% (2013-2014)

3.) Value of new construction projects (up 37% 2013-2014 to Php344 Bil)

– Faceless Trader

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