) Opinion of IFA on the Connected Transections

per year, only 200,000 million cubic meters fall into rivers, canals, and swamps, while as little as 36,000 million cubic meters or 4.5% flow into underground water sources, compared with the nationwide water consumption (source : Department of Water Resources) of 98,756 cubic meters in 2010. It is evident that such natural water supply is somewhat limited and the usable water is steadily declining in both quantity and quality, hence likely aggravating the problem of annual shortage of usable quality water. Presently, there are 81 private water suppliers across the country with a combined production capacity of 1.1 million cubic meters per day. They can be classified by either business size or location as follows: Regions No. of Entrepreneurs Total Capacity Concession (m3/day) Period (years) S M L Total 5 10 15 25 Total North 9 1 - 10 8,484 6 3 - 1 10 Middle 52 6 7 65 1,091,388 55 - 2 8 65 Northeast 1 - - 1 930 1 - - - 1 South 4 1 - 5 15,075 4 - - 1 5 Total 66 8 7 81 1,115,877 66 3 2 10 81 Source: Department of Water Resources as at August 31, 2007. Notes: 1. Small water supply system means capacity not more than 3,000 m3/day and number of user not more than 2,000. 2. Medium water supply system means capacity between 3,001 and 15,000 m3/day and number of user between 2,001 and 8,000. 3. Large water supply system means capacity more than 15,000 m3/day and number of user more than 8,000. Among the entire 81 private operators, TTW and PTW are the largest operator with total production capacity of 628,000 m3/day and have obtained the highest minimum off-take quantity from PWA, in total MOQ of 560,000 m3/day, accounting for 89.17 per cent of their total capacity. However, summary of qualified competitors with the Company and PTW are as follows: TTW PTW EGCOMP Universal Industrial Water R.E.Q. Water Tara Utilities Resources Services Co., Ltd. Co., Ltd. Management Co., Ltd. Concession Nakorn Pathum Rajaburi Bangpakong Chonburi Phuket area Pathom Thani Samut Chachengsao Samut Songkram Nakornsawan Sakhon Sataheab Samui Rayong Total investment (Baht million) 8,375 4,300 650 2,706 200 697 Maximum production capacity 320,000 308,000 36,000 186,600 18,000 16,000 Minimum off-take quantity (m3/day) 300,000 260,000 32,300 100,580 10,000 16,000 % of MOQ compared with total production capacity 93.75 84.42 89.72 53.90 55.56 100.00 Notes : According to operation agreement (as of December 2007) 2.4 Revenue structure The Company and its subsidiary companies earn income solely from tap water production and distribution to PWA. The Company started to generate income on January 5, 2004 until July 20, 2004, regarded as a pre-sale period (a period before the operations under the PSA), bringing in Bt. 316.57 million. The income generation under the PSA commenced on July 21, 2004. PTW started its pre-sale production and distribution on September 11, 1998. Income generation under the agreement to produce and distribute tap water to PWA commenced on October 15, 1998. Meantime, BJT, a subsidiary of PTW, earned income partly from its provision of tap water system and waste water system maintenance services for Amata City Industrial Estate and Amata Nakorn Industrial Estate. Revenue structures of the Company and subsidiary companies (Unit: Bt. million) Company only Company and subsidiaries(1) 2004 2005 2006(5) 2007(6) End of Q3/08(6) Revenue % Revenue % Revenue % Revenue % Revenue % Income from tap water business - TTW (Company) 571.96 64.27 1,356.03 99.69 1,697.80 98.58 1,986.65 75.74 1,720.40 64.45 - PTW - - - - - - 580.38 22.12 900.00 33.71 Pre-sale income from tap water sale(2) 316.58 35.58 - - - - - - - - Service income(3) - - - - - - 23.04 0.88 25.90 0.97 Other income(4) 1.37 0.15 4.22 0.31 24.39 1.42 33.16 1.26 23.30 0.87 Total revenues889.91 100.00 1,360.25 100.00 1,722.19 100.00 2,623.23 100.00 2,669.60 100.00 Notes : (1) Data on revenue structures come from real financial statements of the Company and subsidiaries. (2) The Company's income from tap water business from January 5, 2004 until July 20, 2004. (3) Income from tap water production to serve Amata Nakorn by BJT, a subsidiary of PTW. (4) Mainly interest income. (5) Including revenue from Water Flow in the Company's revenue. (6) Including revenue from Water Flow in the Company's revenue and revenue from BJT in PTW's revenue. 2.5 Financial and operational performances 2.5.1 Summary of TTW's financial status and performances audited by Ernst & Young as of 31 December 2005, with Khun Siraphorn Uaanantakul, CPA no. 3844 as the auditor and as of 31 December 2006 - 2007 and as of 30 September 2008, with Khun Supachai Phanyawattano, CPA no. 3930 as the auditor are as follows: (Unit : Baht Million) Consolidated Financial Statements Audited Reviewed 31 Dec 05 31 Dec 06 31 Dec 07 30 Sep 08 Current assets Cash and cash equivalents 387.60 356.13 674.90 1,079.74 Current investments 285.00 695.00 847.26 594.98 Trade accounts receivable 126.43 217.60 292.70 330.49 Other current assets 21.41 37.93 142.89 345.03 Total current assets 820.44 1,306.66 1,957.75 2,350.24 Non-current assets Property, plant and equipment, net 9,536.45 9,355.96 9,196.86 8,992.35 Assets for production of treated water that must be transferred at end of concession, net - - 4,258.20 4,168.55 Rights to produce and sell treated water, net - - 3,079.62 2,933.28 Other non-current assets 4.07 19.32 188.72 7.89 Total non-current assets 9,540.52 9,375.28 16,723.40 16,102.07 Total assets 10,360.96 10,681.94 18,681.15 18,452.31 Current liabilities Bank overdrafts and short-term loans - - 3,004.84 14.90 Current portion of long-term loans 140.00 700.00 1,411.80 1,547.63 Other current liabilities 153.15 72.08 288.43 128.45 Total current liabilities 293.15 772.08 4,705.07 1,690.98 Non-current liabilities Long-term loans from financial institutions, net of current portion 6,720.00 6,020.00 9,261.31 8,218.12 Total non-current liabilities 6,720.00 6,020.00 9,261.31 8,218.12 Total liabilities 7,013.15 6,792.08 13,966.38 9,909.10 Registered and Paid-up capital 3,000.00 3,250.00 3,290.00 3,990.00 Retained earning 347.82 765.22 1,522.77 2,491.62 Difference on reorganization of business of group companies - (600.36) (600.36) (600.36) Minority interest - equity attributable of minority - - 19.36 24.18 Total shareholders' equity 3,347.82 3,889.86 4,714.77 8,543.20 Total liabilities and shareholders' equity 10,360.96 10,681.94 18,681.15 18,452.31 Total revenues 1,360.25 1,722.19 2,623.23 2,669.55 Total cost of sales 628.13 496.14 780.80 867.27 Selling and administrative expenses 52.19 105.06 158.05 133.59 Amortisation of rights to produce and sell treated water - - 89.49 146.34 Interest expenses (344.89) (437.02) (637.64) (542.13) Net profit (loss) 335.04 674.41 943.21 975.66 Minority interests of the subsidiaries - - (23.16) (6.82) Net profit (loss) per share (Baht) 0.11 0.21 0.28 0.27 Book value per share (Baht) 111.59 1.20 1.43 2.14 Notes: TTW has changed its par value from Baht 100 to Baht 1 per share on 6th July 2006. Analysis of operating results Total assets Total assets according to the consolidated financial statements as of December 31, 2006 and 2007 amounted to Bt. 10,681.94 million and Bt. 18,681.15 million respectively. The increase as of December 31, 2007 came from the rise in cash and cash equivalent of Bt. 318.76 million, short-term investment of Bt. 152.26 million, accounts receivable of Bt. 75.11 million, and construction advance payment to related company due to increase in the volume of tap water distribution in the past year as well as increase in other current assets totaling Bt. 39.53 million. There were also major non-current asset items that contributed significantly to the increase in total assets, i.e. committed deposit at bank amounting to Bt. 184.48 million aimed to be used to accommodate principal and interest payment under the long-term loan agreement of a subsidiary company, assets inwater production to be transferred upon the end of the agreement term worth Bt.4,258.20 million, and right to water production and distribution in a net amount of Bt. 3,079.62 million as a result of the Company's acquisition of PTW in 2007 which led to the increase in accounts receivable as earlier mentioned. Total assets according to the consolidated financial statements as of September 30, 2008 dropped from those in the consolidated financial statements as of December 31, 2007 by Bt. 228.84 million as resulted from major non-current asset items, amortization of assets in water production of PTW which are to be transferred to PWA after the end of the agreement term of 25 years, and amortization of the right to water production and distribution. Total liabilities and shareholders' equity According to the consolidated financial statements as of December 31, 2006 and 2007, total liabilities accounted for Bt. 6,792.08 million and Bt. 13,966.37 million respectively. The increase as of the end of 2007 stemmed from the rise in the long-term loans from financial institutions net of current portion of Bt. 711.80 million and the long-term loans from financial institutions net of over 1-year portion of Bt. 3,241.31 million. Such long-term loans were granted under loan agreements with syndication lenders all of which were local banks. O/D and short-term loans also increased Bt. 3,004.84 million because in 2007 the Company borrowed loans from local financial institutions to finance its acquisition of PTW ordinary shares in a proportion of 98% of PTW's paid capital. Total liabilities dropped from Bt. 13,966.37 million as of the end of 2007 to Bt. 9,909.10 million as of the end of September 30, 2008 due to such major items as repayments of O/D and short-term loans from financial institutions of Bt. 2,989.94 million after the Company's fund raising through new share offering and repayments of long-term loans of Bt. 907.36 million, etc. Shareholders' equity according to the financial statements as of December 31, 2006 and 2007 was exhibited with retained earnings amounting to Bt. 765.22 million and Bt. 1,522.77 million respectively. Retained earnings increased in 2007 attributable to a net profit of Bt. 920.05 million recorded in this year (excluding net profit on the part of manority interest of subsidiary company amounting to Bt. 23.16 million). Retained earnings increased from Bt. 1,522.77 million as of the end of 2007 to Bt. 2,491.62 million as of the end of September 2008. The increase in the first nine months of 2008 stemmed from a net profit of Bt. 968.84 million recorded in this period (excluding net profit on the part of manority interest of subsidiary company amounting to Bt. 6.82 million). Revenues Total revenues in 2006 and 2007 amounted to Bt. 1,722.19 million and Bt. 2,623.23 million respectively. Main items were income from water sales of Bt. 1,697.80 million and Bt. 2,567.03 million respectively. The increase in income from water sales since 2006 was a result of the increase in sales volume and adjustment of water tariff to Bt. 21.48 per cu.m. under the PSA and also the integration of PTW's and BJT's income durng July 1 - December 31, 2007 as part of income from water sales in the 2007 income statement. Other income was also recorded at Bt. 24.38 million in 2006 and Bt. 56.20 million in 2007, coming mainly from income from service. For 9-month periods of 2007 and 2008, total revenues amounted to Bt. 1,802.65 million and Bt. 2,669.55 million respectively, representing an increase of Bt. 866.90 million or 48.09% year-on-year. Major item was the increase in income from water sales of Bt. 854.15 million due to the rise in sales volume in the period. This accorded with the provision in the PSA regarding MOQ in that PWA has to purchase tap water supply from the Company by another 50,000 cu.m./day beginning July 21, 2008. Another major item was the adjustment of water tariff chargeable on PWA from Bt. 21.481579 per cu.m. in 2007 to Bt. 22.751945 per cu.m. in 2008. Net profit The Company's net profit was Bt. 674.41 million in 2006 and Bt. 920.05 million in 2007. Net profit margin was 39.16% and 35.07% respectively. The net profit increase was attributable mainly to the rise in the income from water sales (as detailed above) and the integration of PTW's and BJT's income durng July 1 - December 31, 2007 as part of income from water sales in the 2007 income statement, contributing to the Company's better operating results. However, net profit margin dropped as interest payment in 2007 moved up Bt. 200.63 million due to the recording of PTW's interest payment in the Company's consolidated financial statements. For 9-month periods of 2007 and 2008, the Company's net profit was recorded at Bt. 683.40 million and Bt. 968.84 million respectively (excluding net profit on the part of manority interest of subsidiary company amounting to Bt. 10.96 million and Bt. 6.82 million respectively). The net profit went up Bt. 281.29 million due to the increase in water sales volume and the adjustment of water tariff from Bt. 21.481579 per cu.m. to Bt. 22.751945 per cu.m. (as detailed in the above section). 2.5.2 Key financial ratios Consolidated Financial Statements Audited Reviewed 31 Dec 05 31 Dec 06 31 Dec 07 30 Sep 08 Liquidity ratios; Current ratio (times) 2.80 1.69 0.42 1.24 Quick ratio (times) 2.73 1.64 0.39 1.19 Cash Flow ratio (times) 2.88 1.39 0.36 0.42 Receivables turnover (times) 13.05 9.87 10.15 8.34 Inventory turnover period (times) - 148.43 75.07 54.51 Account payable turnover (times) 8.36 7.76 17.22 21.30 Collection period (days) 27.97 36.98 35.96 32.85 Inventory period (days) - 2.46 4.86 5.03 Payment period (days) 43.64 47.04 21.19 12.86 Cash cycle (days) (15.67) (7.60) 19.63 25.61 Profitability ratios; Gross profit margin (%) 53.68 70.78 69.85 67.23 Operating Profit (%) 49.99 65.09 60.80 57.03 Cash to Earnings Ratio (%) 111.92 66.04 61.69 91.60 Net Profit Margin (%) 24.63 39.16 35.07 36.29 Return on equity (%) 10.36 18.64 21.39 15.13 Efficiency ratios; Return on assets (%) 3.26 6.41 6.27 7.06 Return on Fixed assets (%) 5.79 9.84 11.58 14.05 Assets turnover (times) 0.13 0.16 0.18 0.19 Financial ratios; Debt to equity ratio 2.09 1.75 2.96 1.16 Interest coverage (times) 3.21 2.70 2.51 3.36 Contingent liabilities coverage ratio (times) 1.42 0.49 0.18 1.20 Dividend Payout Ratio (%) 31.34 38.11 17.66 N/A Liquidity The Company recorded increase in cash from Bt. 356.13 million in 2006 to Bt. 674.89 million in 2007. Net cash flows went up from cash inflows from operting activity of Bt. 983.82 million thanks to improving working performance as a result of operating profit growth from 2006 and integration of cash flows from operating activity of PTW in which the Company made equity investment in 2007, as well as cash inflows from financing activity of around Bt. 3,695.81 million. Financing activity was mainly in borrowing from financial insitutions for use in acquisition of ordinary shares of PTW, making it become a subsidiary, in an amount of Bt. 3,998.3 million (comprising short-term loans of Bt. 3,000 million and long-term loans of Bt. 998.3 million), increase in loans from financial institutions for PTW of Bt. 683.9 million (net of reduction of O/D from banks) and new share offering of Bt. 48 million, offset by repayments of long-term loans of the Company of Bt. 871.9 million and its dividend payment of Bt. 162.5 million. This was aligned with cash obtained from investing activity which dropped from 2006 as in 2007 the Company used funds to invest in PTW and BJT, its subsidiaries, in a net amount of Bt. 3,498.49 million (additional details in note no. 12 to financial statements for 2007 regarding investment in subsidiaries) For 9-month periods of 2007 and 2008, the Company's cash surged from Bt. 541.47 million in 2007 to Bt. 1,079.74 million in 2008 over the corresponding periods. Net cash flows increased from net cash flows obtained from operating activity of about Bt. 1,394.49 million owing to the growth in the normal business operations of the Company. Another contributing factor was the Company's business restructuring with the above-mentioned additional investment. Net cash flows obtained from investing activity was around Bt. 54.87 million which was opposite to the drop in cash flows from financing activity. This was because in the 9-month period of 2008, the Company repaid O/D and short-term loans from financial institutions amounting to Bt. 2,989.94 million and long-term loans from financial institutuions of Bt. 979.36 million. Despite the receipt of funds from new share offering, part of the funds had to be used to make repayment of loans from financial institutions. As regards key financial ratios, for the year ended December 31, 2007, the Company's current ratio dropped from 1.69 times in 2006 to 0.42 time. Quick current ratio also dropped from 1.64 times to 0.39 time respectively. This was because the Company borrowed additional loans (short-term loans from financial institutions). With such increase in borrowings, the Company's total liabilities to equity ratio moved up from 1.75 times in 2006 to 2.96 times in 2007. Considering the 9-month perod ended September 30, 2008 compared with the end of 2007, current ratio increased from 0.42 time to 1.24 time. Quick current ratio also moved up from 0.39 time to 1.19 time. This was attributable to the increase in cash and cash equivalents from the growth in the normal business operations of the Company, investment in subsidiaries and significant drop in short-term loans from financial institutions. 2.6 Shareholders Top ten shareholders of the Company as of September 30 are as follows: Name No. of shares % holding 1. CH. Karnchang Plc. 1,408,777,400 35.31 2. Mitsui Water Holdings (Thailand) Limited1,032,500,000 25.88 3. Bangkok Expressway Plc. 368,750,000 9.24 4. HSBC (Singapore) Nominees Pte Ltd. 144,146,800 3.61 5. Thai NVDR Co., Ltd. 141,399,174 3.54 6. Bangkok Bank Plc. 73,895,000 1.85 7. Thailand Securities Depository 58,025,100 1.45 for Depositors 8. Somers (U.K.) Limited 47,484,700 1.19 9. Chase Nominees Limited 1 43,351,400 1.09 10. Caceis Bank Luxembourg 38,556,000 0.97 Total top ten shareholders 3,356,885,574 84.13 Minority shareholders 633,114,426 15.87 Total 3,990,000,000 100.00 Notes : The latest list of shareholders which provided by the Company. (more)