Description

Asahimas Flat Glass: Undervalued with an important catalyst for medium term revaluation given their parents strategy of acquiring their SE Asian affiliates.

Note: This was originally written about 2 weeks ago and since then the price has moved up to $0.08 from $0.06.

Asahimas Flat Glass (AMFG) is largest affiliate outside Japan of Asahi Glass Ltd. (AG) trading in Indonesia on the Jakarta Stock Exchange. Principal highlights include:

 AMFG represents excellent value relative to its cashflow and historical stock price currently trading at a PE of 1.8x and EV/EBITDA of 1.7 (normalized for FX gains/losses).
 As exports represent approximately 55% of sales, AMFG is protected from the current IDR depreciation.
 Asahi Glass Ltd. has stated their strategy of acquiring their SE Asian affiliates and recently offered to buy their subsidiary Thailand: Thai Asahi Glass (symbol TAG on SET).
 Asahi Glass Ltd., currently a 40% holder, is increasing their stake through open market purchases, which started on March 15th 2001.
 Demographics of one of the world's largest and growing countries coupled with low current consumption in the construction and automobile industries provide an excellent basis for medium-term growth. The low exchange rate of the IDR adds additional upside potential.
 Current Valuation of $0.41 per share based on an EBITDA multiple of 5x is very conservative given the multiples paid in the bid of TAG of over 8 times EBITDA with important upside potential vs. current price of $0.08.


THE BUSINESS

AMFG is a leading producer of flat glass (commodity glass including figured glass high quality & specialty glass) and fabricated glass (safety glass reflective glass mirror) principally for the construction and automotive industries.

Founded in 1971 and listed on the Jakarta Stock Exchange in 1995, today AMFG has capacity of 570,000 metric tons operating at approximately 62% of capacity versus 85% to 90% pre-crisis. For the latest year, a strong rebound in operating performance was more than offset by non-cash foreign currency losses

The company received the "Far Eastern Economic Review's" top position for "High Quality Product and Service in 1999 and leading positions in 1997 and 1998.


MILESTONES

1971 : Commenced construction of first furnace in Jakarta.
1973 : Began commercial production using fourcault process.
1975 : Commenced construction of safety glass factory.
1976 : Began safety glass production using tempering process.
: Built a second flat glass furnace in Jakarta.
1977 : Second furnace began commercial production.
1981 : Introduced float glass technology in Jakarta's new, third furnace.
1983 : Second furnace closing.
1985 : Began construction of Surabaya factory (fourth furnace).
: A new safety glass laminating process was introduced.
1986 : Commenced mirror glass production.
1987 : Surabaya factory began commercial production.
1988 : Awarded JIS accreditation.
1990 : Built a fifth furnace in Jakarta.
: Awarded ANSI accreditation.
1992 : Began on-line reflective glass production.
1993 : Fifth furnace began commercial production.
1994 : Began construction of new laminated glass production line.
: First furnace closing.
1995 : Initial Public Offering.
1996 : Began construction of a sixth furnace in Surabaya.
1997 : Sixth furnace began commercial production.
: Construction of a new safety glass factory in Cikampek
1998 : Awarded QS 9000 accreditation
1999 : Commence operation of Cikampek factory


PRODUCTION

Asahimas factories are located on sites scattered of 42.5 hectares in Jakarta, 50 hectares in Surabaya and 20 hectares in Cikampek. The manufacturing facilities are equipped with modern, sophisticated machinery imported from Japan, United States, Germany, Sweden and Finland.

Two float glass furnaces in Jakarta and the other two in Surabaya are currently operational, accounting a maximum capacity for 570,000 tons of Flat Glass p.a.

The Safety Glass Division has different furnaces for Tempered Glass and another for Laminated Glass. Annual production capacity of 4,500,000 square meters is the largest in Indonesia. To better meet rising demands, Asahimas has just expanded its Safety Glass production through the construction of the new factory in Cikampek, West Java.

The main raw materials used in glass production are silica sand, soda ash, dolomite, feldspar and salt cake. Except for soda ash which is still imported, all other raw materials are abundantly available in Indonesia. Asahimas buys these materials only from suppliers that meet strict quality requirements.


PRINCIPAL SHAREHOLDERS

ASAHI GLASS CO.,LTD. ("Asahi Glass") 40%: Asahi Glass, which domiciled in Tokyo and was established in 1907 in Japan, specializing in the glass and its related products and has become one of the world's four foremost glass manufacturers. Asahi Glass is a member of the Mitsubishi Group with an international network comprising of hundred of subsidiaries and affiliates in Japan and numerous other countries. Asahi Glass, which involved in 5 major industries namely glass & its related products, chemical, ceramics & its related products, electronics and others, went public in 1950. Historically, Asahi Glass has grown with the leading growth industry in each decade, the construction industry in the 1960s and 1970s, the automotive industry in the 1980s, and the electronics industry in the 1990s; by delivering the best glass and chemical solutions for each industry. Asahi Glass would like to maintain this strategy into the next century, while at the same time focusing on the global expansion of its core business. For more detail information on Asahi Glass Co. Ltd., kindly visit the website: http://www.agc.co.jp/english/index.htm

Asahi Glass in their latest strategy document classifies International Glass operations as attractive as cash generating businesses and states their intention to:

 "Consolidate S/E Asian Affiliates"
 "Optimize allocation of production between Japan & S/E Asian Operations".
 "Restructure Construction Glass Business in Japan"

This Strategy can be seen at work with the acquisition of Thai Asahi Glass in late 2000 and the open market purchases of AMFG starting on March 15, 2001.


PT RODAMAS ("Rodamas") 40%: According to the Articles of Association, Rodamas was established to conduct business in the field of general trade, including trading, export and import, establishing and managing an advertising agency, contractor, planner and developer of construction works, as well as participate or join with companies having the same objectives and goals. The Rodamas business group, which was started as a trading company in the 1950's and focusing its activities as an importer of goods not yet manufactured in Indonesia, has also expanded its business into other domains namely that of industry and consumer goods. The activity now encompasses the construction material, basic chemical, glass, metal, diamond cutting, tools industry, as well as the consumer goods industry, such as sanitary products, food and packaging.

Rodamas is today a distinct leader in some of the fastest growing industries in the country. As Indonesia races ahead toward industrialization, it is creating enormous opportunities for local manufacturers and at the same time developing a burgeoning consumer market. Rodamas is well positioned to benefit from such a robust economic environment. The Rodamas group has a combined work force of more than 12,000. Its network spans the Indonesian archipelago and includes an office in Singapore.


RESULTS EVOLUTION

The company's EBITDA peaked at $70 Million pre-crisis and has since then increased capacity substantially. Our EBITDA estimate is for $45 Million in 2001, down slightly from 2000.

ACQUISITION OF THAI AFFILIATES

As stated in the press release from Nov. 2000 shown below AG purchased their Thai affiliates for approximately $36 Million. In April 2001, AG launched a tender offer for the outstanding shares of TAG with the intention of delisting the stock.

"Asahi Glass Co., Ltd. ("AG"; headquartered in Tokyo; president: Mr. Shinya Ishizu) has increased its shareholding ratio in Thai-Asahi Glass Public Co., Ltd. ("TAG"), Bangkok Float Glass Co., Ltd. ("BFG") and Thai Safety Glass Co., Ltd. ("TSG") by purchasing all the shares held by Srifuengfung & Phanichewa group ("Thai Partners") to take majority ownership in those three companies. In addition, AG has indirectly acquired, from Thai Partners, all the shares in Thai-Asahi Electronic Devices Co., Ltd. ("TAE"). The total amount of acquisition for the four companies is approximately ¥ 4.4 billion.
Before the acquisition, AG had owned 39.6%, 41.4%, 45.0% and 70.0% of the shares in TAG, BFG, TSG and TAE respectively. After the acquisition, AG's ownership in those companies has become 85.2%, 96.3%, 93.2% and 100% respectively. Since TAG is listed in the Stock Exchange of Thailand ("SET"), following the acquisition as mentioned above, AG is to make a public tender offer to purchase all the remaining shares in TAG according to the regulation of the Securities and Exchange Commission of Thailand. And thereafter, AG is planning to de-list the company from SET. In addition, AG intends to own 100% of the shares in BFG and TSG, as well, by purchasing all the remaining shares from the other shareholders.

TAG and BFG were established in 1963 and 1989, respectively, for manufacture and sales of flat glass for construction and automobile use, and they have been managed as joint ventures between Thai Partners and AG. They have been playing an important role as export centers of flat glass in the region of Southeast Asia. TSG, which manufactures and sells fabricated glass for automobiles and industrial use, was established in 1974 first as a subsidiary of TAG and reorganized in 1988 to be a joint venture between Thai Partners and AG. Japanese, American and European car manufacturers operating in Thailand are its major customers.

AG understands that Thailand has recovered from Asian economic crisis, and expects that it will make further economic growth in the future. Therefore, after being the majority shareholder to take full control over the three companies, AG intends to make them function as its important production centers in Asian region within the framework of its global business strategy."

To get an idea of pricing of the TAG buyout:

TAG Buyout TAG Current AMFG @ 5X AMFG @ 7X
@ 20THB Price EV/EBITDA EV/EBITDA
SHARE PRICE 20 THB $0.06 $0.39 $0.60
EV/EBITDA 8.04 1.84 5.00 7.00
EV/Revenue 2.87 0.70 1.91 2.67
Source: Horizon Management Estimates

SHARE PRICE/PURCHASES BY AG

Currently the shares of AMFG are trading at near all-time lows in US$ terms. How appropriate for Asahi Glass Ltd. (Japanese parent) to take advantage of this opportunity to start buying shares on the open market. Since March 15th 2001, AG has purchased over 3.1 Million shares at prices of up to 800 IDR as stated in their JSX filings. In the current volatile financial markets, the substantial purchases of AG help to limit down side risk.

To gain control with a 50% stake AG will need to purchase approximately an additional 41.7 Million shares. Given the recent acquisition of 100% Thai Asahi Glass and the excellent value of AMFG it is highly likely that AG will not stop at 50%. It is likely that AG will purchase a substantial additional interest through the JSX and then tender for the remaining shares at a substantially higher valuation as Rodamas is probably not interested in selling at fire sale prices.

When might a bid take place? Probably not in the next 3-6 months as AG needs time to buy as many shares as possible at a bargain price on the open market. Current trading volumes are still quite low and AG has only purchased 3 Million shares in one month. Assuming higher trading volume as the price moves up they should be able to complete substantial purchases in the next 3-6 months. After that it could come at any time or probably in the next 6 to 24 months.

Remember there is no guarantee of a bid from AG, just a high probability.



VALUATION

Independent of any potential bid from AG, it appears that AMFG represent an excellent value based on projected 2001 financials using a range of valuation measures. Using 2002e earnings the valuations would be even more compelling as 2001 earnings are estimated to decline slightly in US$ terms as a weaker global economy and slightly weaker domestic economy impact sales with robust margins due to the current IDR weakness. While not the cheapest Indonesian stock, the potential buyout and attractive valuation make an attractive potential investment.

In US $ Est. 2001 Valuation Price Potential Appreciation

IPO in US$ $1.06 $0.06 1672%
Thai Buyout Multiple 0.71 0.06 1080%
EV/EBITDA 7X 0.60 0.06 899%
EV/EBITDA 5X 0.39 0.06 551%
PE = 8x 0.33 0.06 457%


RISKS

The risks associated with Asahimas Flat Glass, in addition to the significant country risks include:

 Forecast earnings are dependent on the macroeconomic recovery and social stability that has occurred in other Asian crisis countries and should continue in 2001 and beyond in Indonesia. Should this recovery and stability not be achieved then the business will be affected.
 The Exchange Rate IDR/US$ has an important impact on the purchasing power of end users of AMFG products. A strong IDR is favorable to AMFG (from a US$ earnings standpoint) and forecast earnings assume a further recovery to 8000 in 2001 and 7500 in 2002.
 Due to the limited public float of AMFG shares the current level of liquidity is very low. We feel that this is in part a function of the low current price relative to the potential valuation of AMFG but there can be no assurances that a higher price will lead to higher liquidity or that a buyout offer from Asahi Glass will materialize.

Catalyst

Asahi Glass Ltd. has stated their strategy of acquiring their SE Asian affiliates and recently offered to buy their subsidiary Thailand: Thai Asahi Glass (symbol TAG on SET). Asahi Glass Ltd., currently a 40% holder, is increasing their stake in AMFG through open market purchases, which started on March 15th 2001. AMFG is probably next on AG's shopping list.