Dialog Group Bhd: Looking 'deeper' into tank farms - ALERT

· Dialog is the largest independent tank farm builder / operator in Malaysia. Other smaller players include Dovechem (with approximately 50k m3 capacity in Kuantan with other capacity in Indonesia) and other oil majors / oil traders who own tank terminals for use in their respective operations.

· Major regional players are Vopak and Oiltanking: Vopak has global storage capacity of 27.6MM m3 globally, of which 3.9MM m3 is situated in South East Asia (including the 400k m3 JV with Dialog and Petronas in Kertih). Meanwhile, Oiltanking has 16.2MM m3 globally and 1.5MM m3 in South East Asia.

· Dialog to focus on Malaysia; excited about prospects of deepwater tank terminal: The company will focus on expanding its tank farm business in Malaysia first. There is a possibility of the company expanding overseas with its partner and logistics provider, MISC, albeit in a much longer-term horizon. Management is also very excited about the prospects of its newly proposed deepwater tank terminal in Pengerang, Johor as it will enable the company to venture into a new product i.e. crude oil. Note that the company's current storage facility in Kertih stores petrochemical products while its Tanjung Langsat terminals will be used for petroleum products.

· Demand for tank farms is likely to be high: The tank farms to be constructed in the state of Johor are complementary to the terminals available in Singapore. At present, we were made to understand that Singapore has approximately 10-11MM m3 of capacity (with limited space for expansion) while the proposed project in Johor will add 4-5MM m3 of capacity over the next 10 years. Moreover, with strong economic growth in Asia, including China, demand for crude oil / petroleum products will likely rise and hence, create demand for additional storage space. Note that with 400-500MM population in Europe, Rotterdam has capacity of 28.4MM m3.

· Catalysts for the stock from the tank division? (1) Successful commissioning of the 400k m3 capacity in Tanjung Langsat (expected March 2010); (2) Announcement of construction start date / customer for potentially an additional 100k m3 at Tanjung Langsat; and (3) Completion of feasibility studies / EIA for the deepwater tank farm project. We note that the regulatory risks should be minimal for this project as we were made to understand that the Johor state government is supportive and will take a 10% stake in the project.