Thailand Airlines

Thailand Industry Focus

Thailand Airlines

Refer to important disclosures at the end of this report

DBS Group Research . Equity 15 May 2017

Consolidation opportunity comes SET : 1,543.94 NOK-ing Analyst  Capital raising for struggling NOK raises Marvin KHOR +60 32604 3911 Paul YONG CFA +65 6682 3712 opportunity for consolidation [email protected] [email protected]

 Industry in need of capacity restraint against mild demand outlook

 Improved dynamics could boost yield development and industry profitability

 Potential beneficiary AAV (Buy, TP: Bt6.90), while risks remain for THAI (Hold, TP: Bt18.70) and NOK STOCKS (NR, FV: 4.95). Expect minimal involvement from 12-mth BA (Hold, TP Bt20.15) Price Mkt Cap Target Price Performance (%) Bt US$m Bt 3 mth 12 mth Rating Financial woes led to potential consolidation. While airlines had in 2016 generally saw bumper profits from cheaper fuel, Nok Asia Aviation 6.05 847 6.90 (2.4) 2.5 BUY Airways (NOK) sank to deeper losses due to pilot sourcing issues, Bangkok Airways 20.10 1,218 20.15 (6.9) (21.2) HOLD which hurt capacity and drove up costs. The group reached Nok Airlines 4.68 84.4 4.95 (4.1) 3.6 NOT RATED negative equity which prompted a rights issue – raising the Thai Airways 18.00 1,133 18.70 (17.8) 11.8 HOLD possibility that 39.2% stakeholder Thai Airways (THAI) may end up Source: AllianceDBS, DBS Bank, DBSVTH, Bloomberg Finance L.P. with a majority stake, if insufficient minority shareholders answer Closing price as of 12 May 2017

the cash call. On the other hand, NOK is emerging as a potential target for airlines seeking inorganic growth – given its sizeable 20% market share in the domestic segment. Airlines’ relative performance YTD

Opportunity to control supply growth as demand indicators Indexed closing price: AAV TB BA TB NOK TB ease. The Thai aviation market has been characterised by sliding 31Dec17 = 100 THAI TB SET yields (fares/revenue-passenger kilometre) over previous years, in 120 large part due to aggressive capacity additions by key and LCC (low cost carrier) players. The acquisition of NOK by another party 110 may allow for more judicious capacity addition decisions with its enlarged size. 100 Improved supply-demand balance can boost industry profitability. Historically, M&A activities had allowed other airline 90 markets globally to improve industry-wide profitability, resulting in improved load factors and yields for the remaining players. We 80 think consolidation, if it were to happen, may give rise to similar benefits for the Thai aviation industry. 70 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Acquirer could trade near-term earnings dilution for sizeable

market share. NOK is expected to continue making losses in the near term, thus no immediate accretion should be expected for Source: AllianceDBS, DBS Bank, DBSVTH, Bloomberg L.P. any party which may absorb it. A key benefit lies in control over medium- to long-term yields and load factors, thanks to an enlarged market share. Alternatively, we think NOK’s unit costs have room to be improved, especially with regard to aircraft- related expenses.

Retaining recommendations. Among our coverage, we prefer AAV for its market share lead that it can extend even further. THAI may be faced with injecting capital with minimal returns; or ceding sizeable domestic market share. We think Bangkok Airways (BA) will have minimal involvement in the NOK saga given its tighter focus on full-service carriage.

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Industry Focus Thailand Airlines

Financial woes at NOK had in its own analyst briefing revealed that this would trigger certain requirements for state-owned enterprises (SOE) as THAI While airlines had in 2016 generally saw bumper profits from is majority owned by the Thai government. cheaper fuel, Nok Airlines (NOK) sank to deeper losses due to We calculate that it would require >17.6% of current NOK pilot sourcing issues, which hurt capacity and drove up costs. shareholders (i.e. >28.95% of the remaining 60.8% share) to The severity of losses led the group into a negative equity answer the cash call to avoid this scenario. position, necessitating capital raising in 2017. The amount (up to Bt1.5bn) raised would likely go into working NOK’s end-FY16 financial statements capital / settlement of payables, which has grown to Bt3.1bn

Inc ome Sta te me nt (THB m) FY15 FY16 (excluding forward sales). Note that NOK is in a net cash Passenger & service rev 13,753 16,226 position, mainly because it has all planes on operating leases. Other income 499 676 Operating expenses (15,913) (20,076) NOK’s end-FY16 payables breakdown Ope ra ting profit (1,661) (3,174) Pa ya ble s bre a kdown (THB m) FY15 FY16 Net interest 3 (81) Payables 2,934 4,467 JV 0 (14) Profit/loss be fore ta x (1,658) (3,270) less Unearned passenger rev 883 1,324 Taxation (6) (0) 2,052 3,143 Profit a fte r ta x (1,664) (3,270) less Minority interest (938) (475) Related parties 106 68 PATAMI (726) (2,795) Trade & other (3rd parties) 624 999 Other advances 357 578 Shareholder EPS (THB) (1.2) (4.5) Accrued expenses 964 1,499 Ba la nc e She e t (THB m) FY15 FY16 Source: Company, AllianceDBS, DBS Bank, DBSVTH, DBS Bank Cash and liquid assets 4,214 3,231

Receivables 1,120 1,182 However, we think more capital raising may be required – this is Other assets 1,777 1,587 primarily because NOK is likely to continue seeing losses in Tota l Asse ts 7,110 6,001 Borrowings 520 700 FY17F (see our attached Non-Rated report), which would again Payables 2,934 4,467 whittle down its net asset value. Even assuming full subscription Other liabilities 714 1,173 of the rights, our projections of 43% reduction in bottomline Tota l Lia bilitie s 4,168 6,341 losses (to Bt1.88bn) would still result in negative total equity Share capital 625 625 widening again to Bt762m, from Bt340m at end-FY16. Retained earnings & others 2,422 (386) Shareholder equity 3,047 239 NOK’s end-FY17F forecasted financial statements Minority interest (105) (579) Ba la nc e She e t (THB m) FY16 FY17F Tota l Equity 2,942 (340) Cash and liquid assets 3,231 2,935 Receivables 1,182 1,489 Shareholder BVPS (THB) 4.9 0.4 Other assets 1,587 1,601 Total NA per share (THB) 4.7 (0.5) Tota l Asse ts 6,001 6,024 Source: Company, AllianceDBS, DBS Bank, DBSVTH, DBS Bank Borrowings 700 700

Rights issue to restore equity value, though potentially Payables 4,467 4,913 just temporarily Other liabilities 1,173 1,173 Tota l Lia bilitie s 6,341 6,786 NOK’s rights issue plan entails a 1-for-1 (625m) rights issue at Share capital 625 1,250 Bt2.40 per share which would raise up to Bt1.5bn; plus a 1-for- Retained earnings & others (386) (1,387) 4 (156.25m) free warrants issue with an exercise price of Bt5. Shareholder equity 239 (137) This received shareholder approval in Apr 2017. Minority interest (579) (625) Tota l Equity (340) (762) Given that THAI currently owns 39.2% of NOK, there is the possibility that minority shareholders’ under-subscription would Shareholder BVPS (THB) 0.4 (0.2) result in its ownership exceeding 50%– necessitating the full Total NA per share (THB) (0.5) (1.2) consolidation of NOK’s financials into THAI as a subsidiary. THAI Source: Company, AllianceDBS, DBS Bank, DBSVTH, DBS Bank

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Strategic significance of NOK Saturated domestic market has mild outlook

NOK has a fleet of 32 aircraft as end-FY16 (all on operating Tourist visitations have historically been a strong driver of leases), comprising 22 narrowbody jets (Boeing 737s) and 10 Thailand’s air traffic given the popularity of the country as a turboprops (mix of Q400s and ATR72s). In terms of capacity tourist destination. While visitation growth has been resilient – (available seat kilometres, ASK), its production in 2016 reliably rebounding after incidents of weakness – its temporary represents 7% of that of the largest carrier THAI (all services), up downturns had correspondingly tempered passenger traffic, to 30% of the largest domestic LCC player Thai AirAsia/AAV, which bodes ill for the aviation sector. and even more for smaller players. As such, it would be a significant acquisition in terms of total capacity addition. Air traffic growth vs tourist arrivals

Air traffic* growth Tourist arrival growth For intra-Thailand services, NOK makes up 19% of overall seats, 25% a sizeable chunk and placing it second behind Thai AirAsia 20% (29%), but slightly ahead of Thai Lion Air (19%). For any of the 15% top 4 airlines, consolidation of its seats will propel them to the top spot in terms of capacity share. 10%

5% Snapshot of airline statistics 0% 2016 statistics NOK AAV inc.* THAI inc.* -5% Year-end fleet -10% Tota l 32 51 63% 95 34% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Turboprops 10 - - *Airports of Thailand (AoT) data - inc. embark, disembark, transit

Narrowbody 22 51 43% 22 100% Source: AOT, Tourism Authority of Thailand (TAT) Widebody - - 73 The resilience and robustness in traffic has led to airline players ASK (m) 6,264 20,629 30% 85,042 7% being more aggressive in capacity growth as they anticipate demand to eventual grow to match supply. The intra-Thailand seat capacity has grown at a blistering 19% CAGR from 2012- 2016 RPK (m) 5,329 17,285 31% 62,442 9% 2016 (i.e. doubling in four years), far outpacing the Load factor 85.1% 83.8% 73.4% corresponding CAGRs of tourist arrivals (9.9%), GDP per capita in baht terms (3.5%), and total passengers (12.4%). Yield (fare/RPK) (THB) 2.18 1.56 2.37 Cost/ASK (THB) 2.51 1.42 2.02 Intra-Thailand seat capacity vs other indicators

*incremental, assuming full absorption Indexed: 2012=1 Source: Companies, AllianceDBS, DBS Bank, DBSVTH, DBS Bank 2.20 2.00 Intra-Thailand Domestic Thailand capacity share breakdown seat capacity 1.80 Thailand tourist Capacity share (by seats) - week of 24 Apr 2017 1.60 arrivals

1.40 Total air traffic Nok Air passengers 19% 1.20 Thai AirAsia Thailand GDP Kan Air 29% per capita 1% Thai Lion 1.00 Thai VietJet Air 0.80 1% 19% 2012 2013 2014 2015 2016 Thai Airways 9% Bangkok Source: CAPA, AOT, TAT, National Economic and Social Development Thai Smile Airways Board (NESDB), AllianceDBS, DBS Bank 11% 11%

Source: CAPA

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Industry Focus Thailand Airlines

Yields have been pressured as a consequence, falling at CAGRS of between 3% and 9% for the major carriers, with a larger impact for the domestic-centric airlines like NOK. This is unsurprising as strategically, airlines are more prone to give up yields in exchange for fuller planes (i.e. maintaining load factors) as empty seats are viewed as fully lost revenue.

Yield development (y-o-y) and 4-year CAGR

10% CAGR:

5% NOK -9.4%

0% TAA -5% -3.6%

-10% BA -6.0% -15% (dom. only) -20% THAI (dom. -3.2% -25% only) 2012 2013 2014 2015 2016

Source: Companies, AllianceDBS, DBS Bank

Load factors

86.0%

NOK 82.0%

TAA 78.0%

BA 74.0% (dom. only) THAI 70.0% (dom. only) 66.0% 2012 2013 2014 2015 2016

Source: Companies, AllianceDBS, DBS Bank

Outlook for yields remains largely lukewarm with the status quo. For 2017, Thailand Tourism Council forecasts tourist arrivals to increase at a slower y-o-y growth rate of 3.75% to 5.8% while IMF forecasts a 5% rise in Thai GDP per capita in baht terms in 2017 and 2018. Expansion in seat capacity of the domestic market is not slowing down dramatically as the first c.4 months of 2017 has recorded 11% y-o-y growth.

That said, a bright spot is that average fares rising between Bt150 and Bt200 for domestic service, as the airlines pass on increases in jet fuel excise taxes which came into effect in Feb. We also project NOK to slow its fleet growth as part of its cost management; though THAI, BA and AAV still have growth plans.

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Industry Focus Thailand Airlines

M&A could show positive impact on yields Mergers resulted in better market positioning: Based on company data and US Bureau of Transportation Statistics, the Observing the US airline market which has undergone multiple Delta Air and Northwest Airlines merger, completed in late mergers or acquisitions over previous years, the outcome has 2008, led to the combined unit having 24% of US domestic and generally been positive for the participants. Industry profitability international capacity or ASM (average seat miles), vs pre- had benefited, as average fare movement manages to trend merger Delta’s 15%. The United Airlines and Continental upwards in the wake of consolidation. Airlines merger, completed in Oct 2010, gave the group a combined 25% share (vs pre-merger United’s 15%). The latest Consolidation history of current major US carriers move in the race for size was the American Airlines-US Airways merger completed in Jul 2013, which gave the group 26% capacity share, vs American’s 17% before. Apart from size, the mergers also generally gave the groups geographical dominance in respective areas across the US, enhancing their pricing power.

Opportunity arises to curtail capacity growth

Following the approval of NOK’s rights issue, THAI representatives publicised plans to have a “joint management and strategic plan” between its brands (Thai Airways, Thai Smile) and NOK, to improve coordination and enhance efficiencies – pointing to potential rationalisation of capacity.

That said, we think that a third-party LCC acquirer, if it emerges, may prove to be more effective in terms of managing capacity expansion. This is primarily because THAI would likely want to maintain the market size and presence of its distinct brands (Thai Airways: full service, Thai Smile, low-cost regional). Whereas an LCC would be more wary of cannibalisation (especially for service on similar routes) allowing for more flexibility in trimming capacity.

Source: PWC Upside from tackling cost base – asset-related expenses Mergers resulted in positive yield development could benefit from being part of larger group

Average load factors (rhs) Avg fare gth y-o-y (current US$) Avg fare gth y-o-y (inflation adj.) Available seat miles (ASM) gth y-o-y In addition to a higher degree of control on industry capacity, a 12% 85% potential acquirer has room for upside from reducing NOK’s (1) (2) (4) (3) 84% relatively high unit cost base. Vis-à-vis LCC peer AAV, NOK’s 8% 83% cost/ASK has averaged from 40%->70% higher. While FY16 4% 82% may be seen as an anomaly as NOK’s ASK production was 81% disrupted by its pilot sourcing issues – reducing the 0% 80% denominators – drilling deeper reveals that it does have

-4% 79% structurally higher asset-related costs.

78% -8% 77% This is explained in part due to NOK opting to have its fleet on

-12% 76% operating leases (thus reducing pressure on its balance sheet), as 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 leasing is typically more expensive vs owning the aircraft. (1) Delta acq. Northwest (2) United acq. Continental However its maintenance costs per ASK are at a significant (3) Southwest acq. AirTran (4) American acq. US Airways premium, more than double that of AAV. We think this reflects Source: CAPA, US Bureau of Transportation Statistics, companies the benefit of being part of a wider airline group (in AAV’s case, AirAsia), as the bulk orders of aircraft result in more favourable terms for the subsequent service and upkeep.

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Industry Focus Thailand Airlines

Historical Cost/ASK differential helpful in speeding up the synergistic benefits from

FY12 FY13 FY14 FY15 FY16 consolidation, in terms of staff and crew training, route Costs/ASK 1.69 1.67 1.66 1.53 1.42 planning and other operational arrangements. THAI’s current Fuel 0.75 0.72 0.73 0.54 0.40 active fleet includes B737s, and it had previously used ATR72s. AAV Asset 0.32 0.28 0.30 0.29 0.29 TAA and Thai VietJet operate Airbus A320s, though no Cash opex 0.62 0.67 0.63 0.69 0.73 turboprops. Thai Lion Air flies B737s, also with no turboprops.

Costs/ASK 2.65 2.41 2.34 2.21 2.50 No immediate earnings accretion… NOK Fuel 0.93 0.82 0.82 0.53 0.44

(main) Asset 0.36 0.40 0.38 0.46 0.59 Given our expectations for continued losses at NOK (with the Cash opex 1.37 1.19 1.14 1.21 1.47 status quo), any consolidation would thus likely result in the diff (T HB) 0.97 0.73 0.68 0.68 1.07 acquirer seeing no earnings accretion in addition to the required Costs/A SK 57% 44% 41% 45% 76% capital outlay. Post-rights issue, and assuming full subscription, a diff. Fuel 24% 13% 12% -2% 9% (%) third party would have to fork out c.Bt3.8bn for the 60.8% Asset 15% 41% 27% 60% 101% (non-THAI-held) share in NOK, at Bt4.95/share. This amount Cash opex 119% 78% 80% 75% 102% may require additional financing costs to be taken up. Source: Companies, AllianceDBS, DBS Bank

…but yield-sensitivity means high potential upside Aircraft-related costs/ASK differential

FY12 FY13 FY14 FY15 FY16 Airline earnings are typically highly yield-sensitive, accounting Cost/ASK (THB) for its volatile performance. To illustrate the potential upside AAV Aircraft lease* 0.31 0.25 0.24 0.23 0.24 of consolidation, our sensitivity analysis below shows the Aircraft maintenance^ 0.14 0.15 0.12 0.13 0.14 impact of raising our FY18F yield forecasts for our coverage NOK Aircraft lease* 0.35 0.39 0.36 0.45 0.58 by 3% – the average fare growth observed during 2008-13, Aircraft maintenance^ 0.54 0.43 0.44 0.52 0.61 i.e. years of M&A among US carriers. We find that core earnings could more than double, and book values by up to Aircraft lease* 0.04 0.14 0.12 0.22 0.34 12% – implying strong upside to industry profitability if the diff. Aircraft maintenance^ 0.40 0.28 0.32 0.40 0.47 benefits of consolidation are realised. Aircraft-related 0.44 0.42 0.44 0.62 0.81 share of diff. in total Cost/ASK 45% 57% 65% 90% 76% FY18F earnings sensitivity *under asset costs ^under cash opex AAV BA THAI NOK

Source: Companies, AllianceDBS, DBS Bank FY18F current Yield change +1.7% +0.0% +1.5% +1.0% Complicating factors in consolidation Core net earnings (THB m) 1,935.0 2,206.2 3,686.5 (1,678.9) Net book value (THB bn) 23.49 34.07 40.77 (1.82) NokScoot ownership. The continuation of NokScoot may be a wrinkle in the fold if NOK is consolidated, for several reasons. FY18F prospective First, NokScoot is only 24.01% owned by NOK, as 26.99% is Yield change +4.7% +3.0% +4.5% +4.0% held by Pueannammitr Co Ltd, which is owned by NOK’s Core net earning (THB m) 2,464.9 2,817.9 8,567.9 (1,242.4) management. However it is recognised as a subsidiary in NOK’s variance 27% 28% 132% -26% financials due to the deemed majority control (51%). Thus, the Net book value (THB bn) 23.8 34.4 45.7 (1.4) continuation of current management is necessary to maintain variance 1% 1% 12% -24% the status quo unless the stake is bought out. A second crucial Source: Companies, AllianceDBS, DBS Bank factor is the remaining 49% owner, Scoot Ltd which is wholly owned by Singapore Airlines (SIA). SIA may see conflicting interests in cooperating on this venture if a regional competitor becomes the controlling owner of NOK and thus NokScoot.

Fleet management. NOK’s fleet comprises 22 narrow-body Boeing 737 jets and 10 turboprop aircraft (eight Bombardier Q400s and two ATR72-500s). Congruence in fleet type is

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Recommendations debt-to-equity) at end-FY16 could be tested further with the Bt588m outlay for NOK rights, despite having a Bt13.4bn At present, the next indicator to watch for is the subscription cash pile; with risk of further outlays if NOK’s equity value rate of NOK’s rights issue – the subscription period ends on depletes again. We think Bangkok Airways (BA) will have 22 May 2017. Under-subscription by minority (i.e. non-THAI minimal involvement in the NOK saga given its tighter focus shareholders would result in NOK becoming a subsidiary of on full-service carriage. THAI. However, if that does not occur, we think there is opportunity for a third party to show interest. Among our coverage, we still prefer Asia Aviation (AAV) as its market share leadership (potentially widening) drives a solid medium- term outlook. Even if NOK is acquired by another party, AAV 55%-held Thai AirAsia holds price leadership – allowing it to pressure the enlarged competitor. We maintain our HOLD recommendation for THAI, as its stretched finances (4.6x net

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AllianceDBS, DBS Bank, DBSVTH recommendations are based an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame) BUY (>15% total return over the next 12 months for small caps, >10% for large caps) HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps) FULLY VALUED (negative total return i.e. > -10% over the next 12 months) SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame) Share price appreciation + dividends

Completed Date: 15 May 2017 15:14:05 (THA) Dissemination Date: 15 May 2017 15:49:28 (THA)

Sources for all charts and tables are AllianceDBS, DBS Bank, DBSVTH unless otherwise specified.

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ASIAN INSIGHTS VICKERS SECURITIES

Page 10

Industry Focus Thailand Airlines

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ASIAN INSIGHTS VICKERS SECURITIES

Page 11

Thailand Company Guide Asia Aviation

Version 9 | Bloomberg: AAV TB | Reuters: AAV.BK Refer to important disclosures at the end of this report

DBS Group Research . Equity 15 May 2017

BUY Pole position Last Traded Price ( 12 May 2017): Bt6.05 (SET : 1,543.94) Price Target 12-mth: Bt6.90 (14% upside) (Prev Bt6.90) Solid performance ahead. Asia Aviation (AAV) posted 1Q17 core earnings that eased 47% from the peak 1Q16; though Analyst recording a strong sequential recovery (over five-fold) from a Marvin KHOR +60 32604 3911 [email protected] poor 4Q16. Volume growth remains convincingly robust with Paul YONG CFA +65 6682 3712 [email protected] 9.5% growth in revenue passenger kilometres (RPK) on 89% Nantika WIANGPHOEM +66 26577836 [email protected] load factors, despite a milder 1.7% expansion of tourist arrivals. What’s New While yields (fares/RPK) were impacted by spillover weakness  1Q17 core earnings eased 47% y-o-y though from the previous quarter, this is expected to turn around as fare hikes come into play from 2Q17 onwards. Full-year rebounded more than five-fold q-o-q earnings are thus expected to be solid while the group may yet  Yields saw spillover weakness from 4Q16; extend its lead in the domestic market share. Maintain BUY with expected to turn around swiftly from fare hikes TP of Bt6.90, based on 1.5x P/BV.

 Market and volume control still impressive with Where we differ. Emphasis on volume control and strategic 9.5% RPK growth and 89% load factor, despite positioning. We highlight AAV’s leading domestic market tame growth in tourist arrivals positioning as the basis of our 1.5x P/BV valuation, above peers,  Maintain BUY, Bt6.90 TP despite our more conservative financial forecasts. Additionally,

we think it will hold a control premium for its 55% stake in Thai AirAsia – given the long-term ambitions of the AirAsia group to consolidate its regional airlines. Price Relative Bt Relative Index Potential catalyst. Faster yield upswing in coming quarters. 8.1 215 195 Yields (fares/RPK) are expected to improve as fare hikes are 7.1 175 155 6.1 implemented through the year. Forecasts and expectations are 135 for average yields to improve 4-6% – a better-than-expected 5.1 115 95 4.1 yield performance would likely expand margins further and have 75 3.1 55 a positive impact on the bottomline. At the same, it remains May-13 May-14 May-15 May-16 May-17 well-positioned to benefit from an uptick of tourist visitations. Asia Aviation (LHS) Relative SET (RHS) Forecasts and Valuation Valuation: FY Dec (Bt m) 2016A 2017F 2018F 2019F Reiterate BUY. Our TP of Bt6.90 is based on 1.5x FY17F P/BV Revenue 32,401 37,400 41,852 46,027 EBITDA 4,989 5,418 5,886 6,031 (+1SD of mean). Pre-tax Profit 3,206 3,464 3,675 3,662 Net Profit 1,869 1,772 1,880 1,873 Key Risks to Our View: Net Pft (Pre Ex.) 1,801 1,827 1,935 1,928 Higher jet fuel prices. Even with hedges in place, AAV (and Net Pft Gth (Pre-ex) (%) 41.4 1.4 5.9 (0.4) EPS (Bt) 0.39 0.37 0.39 0.39 other domestic-serving Thai airlines) is now more sensitive to EPS Pre Ex. (Bt) 0.37 0.38 0.40 0.40 higher fuel prices given the higher %-based excise taxes on EPS Gth Pre Ex (%) 41 1 6 0 fuel for local flights. Diluted EPS (Bt) 0.39 0.37 0.39 0.39 Net DPS (Bt) 0.15 0.15 0.15 0.15 At A Glance BV Per Share (Bt) 4.39 4.60 4.84 5.08 Issued Capital (m shrs) 4,850 PE (X) 15.7 16.6 15.6 15.7 PE Pre Ex. (X) 16.3 16.1 15.2 15.2 Mkt. Cap (Btm/US$m) 29,343 / 847 P/Cash Flow (X) 6.7 5.2 4.9 4.8 Major Shareholders (%) EV/EBITDA (X) 9.4 9.4 8.5 8.2 Srivaddhanaprabha Family 39.3 Net Div Yield (%) 2.5 2.5 2.4 2.4 Bijleveld Family 5.0 P/Book Value (X) 1.4 1.3 1.2 1.2 Bualuang-long-term-equity-long-term-fund 4.8 Net Debt/Equity (X) 0.3 0.3 0.3 0.2 Free Float (%) 45.4 ROAE (%) 8.7 8.4 8.4 8.0 3m Avg. Daily Val (US$m) 2.9 Earnings Rev (%): 0 0 0 ICB Industry : Consumer Services / Travel & Leisure Consensus EPS (Bt): 0.45 0.49 0.56 Other Broker Recs: B: 10 S: 3 H: 9 Source of all data on this page: Company, AllianceDBS, DBS Bank, DBSVTH, Bloomberg Finance L.P

ASIAN INSIGHTS VICKERS SECURITIES ed: CK / sa:CS, PY Company Guide

Asia Aviation

WHAT’S NEW Optimistic for stronger year ahead

1Q17: strong volumes, though yields brought margin domestic and regional services, as the group observes some pressure. Recapping 1Q17 results, AAV announced a 1Q17 easing competitive pressure from its peers. We think the fare headline profit of Bt570.3m, which after stripping out hikes implemented on domestic routes (to pass on hiked jet exceptional items reveals core earnings of Bt511.1m, which fuel excise taxes since Feb) will also play a part in raising was 49% lower y-o-y, but rebounding more than 500% q-o- yields. At the same time, the group aims to improve q. Volumes were strong as Thai AirAsia (TAA) recorded costs/ASK sequentially in the coming quarters, given that staff 89.1% load factor (+1.9ppts) with 9.5% growth in revenue costs will normalise (bonus payout in 1Q) plus improved fleet passenger kilometres (RPK), faster than the 7.2% available utilisation (raising ASK). As such, we expect the subsequent seat kilometres (ASK) capacity addition. However, yields 2-4Q17 to produce steadier earnings y-o-y, in particular 4Q (fares/RPK) dipped 7.5% y-o-y (though +9.2% q-o-q), which will be relative to a very low base in 4Q16. resulting in 2.2% revenue growth. Opex rose by 16.6% y-o-y leading to 47% lower EBIT y-o-y, as higher fuel costs led a Still in a comfortable position. Overall, we remain positive on 8.7% rise in cost/ASK. AAV largely on its leading domestic market share proposition, which gives it leverage in adjusting fares to boost profitability Outlook positive as yield growth turns the corner. The group or to increase volumes. This is important given that Thailand remains positive about its prospects, and in its analyst briefing tourist arrival growth has slowed somewhat to a mild +1.7% revealed that its 19.5m passenger carriage (+11% y-o-y) in 1Q17, and TAA had proved its capability of capturing target is maintained. More importantly, management was passenger and RPK growth exceeding that. positive on fare growth targeted fare/passenger to average Bt1,650 (i.e. over 5% growth), and yields in 2Q17 to be 4- 6% higher. This will come from improved fares on selected

Quarterly / Interim Income Statement (Btm) FY Dec 1Q2016 4Q2016 1Q2017 % chg yoy % chg qoq

Revenue 8,952 7,547 9,150 2.2 21.2 Cost of Goods Sold (6,467) (6,721) (7,569) 17.0 12.6 Gross Profit 2,485 826 1,581 (36.4) 91.4 Other Oper. (Exp)/Inc (433) (548) (495) 14.4 (9.6) Operating Profit 2,052 278 1,086 (47.1) 290.8 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 nm nm Associates & JV Inc 0.0 0.0 0.0 nm nm Net Interest (Exp)/Inc (127) (125) (158) (25.0) (27.1) Exceptional Gain/(Loss) (2.4) (145) 144 nm (199.3) Pre-tax Profit 1,923 8.48 1,071 (44.3) 12,526.7 Tax (90.3) 66.9 (36.0) (60.1) (153.8) Minority Interest (824) (34.1) (464) 43.6 1,261.6 Net Profit 1,009 41.3 570 (43.5) 1,282.7 Net profit bef Except. 1,010 84.0 511 (49.4) 508.3 EBITDA 2,338 591 1,416 (39.5) 139.5 Margins (%) Gross Margins 27.8 10.9 17.3 Opg Profit Margins 22.9 3.7 11.9 Net Profit Margins 11.3 0.5 6.2

Source of all data: Company, AllianceDBS, DBS Bank, DBSVTH

ASIAN INSIGHTS VICKERS SECURITIES Page 2 Company Guide Asia Aviation

ASK growth (%) CRITICAL DATA POINTS TO WATCH 17.5 17.7 Critical Factors 15.1 13.9

Adding five to six aircraft annually. Airline capacity is measured 12.6 11.3 10.2 10.1 via ASK (available seat kilometres), which is a function of the 8.4 active fleet and the flight distances of routes served. Thai 7.6

AirAsia (TAA) grew its fleet by six aircraft in 2016 to reach 51 5.0 planes – including two A320neos which have better fuel 2.5 efficiency. Six more are to be added in 2017 and five p.a. going 0.0 2015A 2016A 2017F 2018F 2019F forward. Premised on this, we expect TAA to grow ASK by 11%/10% in FY17/18F, with current focus on destinations in Load Factor (%) India and CLMV. 83.8 83 83 83 85.5 82.1

Conservative load factor expectations. Load factors determine 68.4 the ASK that is converted into RPKs (revenue passenger kilometres). TAA saw its load factor expand 1.7ppts in 2016 to 51.3

83.8%, supported by tourist growth and service quality issues in 34.2 key LCC competitors. We forecast a mild tapering to 83% in 17.1 FY17/18F as the tourist growth pares to a steadier pace, in contrast to its capacity expansion. 0.0 2015A 2016A 2017F 2018F 2019F

Yields boosted by passing on fuel excise hike. Passenger yields Fare / RPK (sen)

(fare/RPK) fell by 4.1% in FY16 largely due to competition and 1.7 1.73 1.63 1.65 1.67 desire to spur volume. While competition remains rife in 2017, 1.56 the steep jet fuel excise hike led to carriers hiking domestic 1.39 flight fares by Bt150 – c.9% of previous average fare/passenger, 1.04 potentially a higher % of some domestic routes. As such, we expect average yields to make a u-turn in FY17/18F with 0.69 +5.5%/+1.7% growth to pass on the additional costs. 0.35

Mild ancillary income/pax outlook. Like other members of the 0.00 AirAsia group, TAA focuses on growing ancillary income with 2015A 2016A 2017F 2018F 2019F offerings like value pack bundling, dynamic baggage pricing Ancillary income / pax (THB) and Fly Thru connectivity. However, we conservatively assume 359 362.8 mild near-term growth of 1%in FY17/18F to account for a 316 318 321 324 slower pick-up in the newer offerings, and prevalence of value- 290.3 sensitive passengers. 217.7

Unit costs jumping from fuel-related factors. We expect fuel 145.1 cost/ASK to rise 18% in FY17F, making a u-turn from an 72.6 expected 26% fall in FY16F. This is partly contributed by spot jet 0.0 fuel edging above US$60/bbl, after averaging US$53/bbl in 2015A 2016A 2017F 2018F 2019F 2016; though driven largely by the hike in jet fuel excise tax on domestic flights. We forecast this to push overall cost/ASK up Cost / ASK (THB)

5% FY17F, taking into account AAV’s hedging up to 74% of its 1.56 1.6 1.53 1.49 1.52 2017 requirements at c.US$60/bbl. Our spot jet fuel 1.42 assumptions are US$60/65/bbl in FY17/18F. 1.3

0.9

0.6

0.3

0.0 2015A 2016A 2017F 2018F 2019F

Source: Company, AllianceDBS, DBS Bank, DBSVTH

ASIAN INSIGHTS VICKERS SECURITIES Page 3 Company Guide

Asia Aviation

Appendix 1: AAV price correlation with critical factors

Graph 1: Share price vs key macroeconomic factors

Indexed: Jun12 = 100 AAV TB Jet fuel Thailand tourist arrivals 250 Optimism on fleet growth plans - +7/8 or up to 30% expansion 200

150 Record profitability from cheaper fuel, competitor weakness 100

Jun-12 Jun-13 Jun-14 Jun-15 Jun-16

Oct-12 Oct-13 Oct-14 Feb-15 Oct-15 Feb-16 Oct-16 Feb-17 Feb-13 Feb-14

Apr-13 Apr-14 Apr-15 Apr-16 Apr-17

Dec-12 Dec-13 Dec-14 Dec-15 Dec-16

Aug-15 Aug-16 Aug-12 Aug-13 Aug-14

Source: Company, Bloomberg L.P., AllianceDBS, DBS Bank, DBSVTH

AAV share price vs RPK development Remarks

Bt AAV TB AAV RPK (RHS) m p-km Beyond impacts from macroeconomic factors and profitability metrics, the group’s value is tied to its 8.00 6,000 control over revenue-generating volume (correlation 7.00 5,000 coefficient 0.6). This is denoted by RPKs or revenue 6.00 passenger kilometres – a function of available seat 4,000 5.00 kilometres (ASK) which is within the airline’s control; 4.00 3,000 while load factor is the function of demand determining 3.00 the conversion/utilisation rate. 2,000 2.00 1,000 1.00

0.00 0

Jun-12 Jun-13 Jun-14 Jun-15 Jun-16

Sep-12 Sep-13 Sep-15 Sep-16 Sep-14

Dec-12 Dec-13 Dec-14 Dec-15 Dec-16

Mar-13 Mar-14 Mar-15 Mar-16 Mar-17

Source: Company, Bloomberg L.P., AllianceDBS, DBS Bank, DBSVTH

AAV share price vs cost/ASK Remarks

Bt AAV TB Cost/ASK growth y-o-y % Earnings outperformance, especially relative to peers, is 8.00 10% influenced by the airline’s capacity to keep unit costs, or 7.00 cost/ASK low. Periods of negative cost/ASK movement is 5% typically positive for share price. 6.00

5.00 0% 4.00 3.00 -5% 2.00 -10% 1.00

0.00 -15%

Jun-12 Jun-13 Jun-14 Jun-15 Jun-16

Sep-13 Sep-14 Sep-15 Sep-16 Sep-12

Dec-12 Dec-13 Dec-14 Dec-15 Dec-16

Mar-13 Mar-14 Mar-15 Mar-16 Mar-17

Source: Company, Bloomberg L.P., AllianceDBS, DBS Bank, DBSVTH

ASIAN INSIGHTS VICKERS SECURITIES Page 4 Company Guide Asia Aviation

Leverage & Asset Turnover (x) Balance Sheet: 0.7 Finding the right balance in financing aircraft. TAA ended 2016 0.60 0.7 0.7 with 14 aircraft under finance lease (i.e. on balance sheet), and 0.50 0.6 37 on operating leases. Going forward, it plans receive a 0.40 0.6 0.6 majority of its six planes in 2017 under finance leases given its 0.30 low gearing position. Thus, we expect a mild rise in AAV’s net 0.6 0.20 0.6 gearing position from 0.3x in FY16 to 0.4x in FY17F, potentially 0.5 0.10 easing thereafter, depending on the number of finance leases. 0.5 0.00 0.5 2015A 2016A 2017F 2018F 2019F Share Price Drivers: Gross Debt to Equity (LHS) Asset Turnover (RHS) Travel and tourism growth. As the largest domestic LCC carrier Capital Expenditure with a wide international connectivity thanks to the AirAsia Btm group connection, TAA’s earnings will be impacted by growth 8,000.0 in both Thailand’s internal air traffic and its inbound tourist 7,000.0 6,000.0 arrivals. Positivity from those indicators, and TAA’s own route 5,000.0 expansion and development, can help drive earnings growth 4,000.0 and share price re-rating. 3,000.0 2,000.0 1,000.0 0.0 Key Risks: 2015A 2016A 2017F 2018F 2019F Price competition. The emergence of strong price competition Capital Expenditure (-) by airline competitors is a threat to both yields and earnings, as ROE (%) TAA would have to compete to maintain market share. 8.0% Fuel price upswing. Our forecasts and call are based on 7.0% 6.0% moderate low oil/fuel prices. A sudden rise will impact earnings 5.0% and may exacerbate associate-related risks. 4.0%

3.0%

Stronger USD. The stronger USD against the THB and other 2.0% regional currencies (i.e. MYR, SGD, IDR, RMB, JPY) will hurt 1.0%

AAV. The bulk of TAA’s revenues are in regional currencies, 0.0% 2015A 2016A 2017F 2018F 2019F while 66%/50% of opex/finance costs are in USD. Forward PE Band (x) Company Background (x) AAV owns a 55% stake in TAA, the Thai-based sister company 140.8 120.8 of AirAsia which owns the remaining 45%. TAA operates a 100.8 low-cost, short-haul model out of five hubs in Thailand – Don 80.8 +2sd: 82.2x Mueng Airport (Bangkok), Phuket International Airport 60.8 +1sd: 56.3x (Phuket), Chiang Mai International Airport (Chiang Mai), Krabi 40.8 Avg: 30.4x International Airport (Krabi) and U-Tapao Rayong-Pattaya 20.8

International Airport (Rayong). 0.8 -1sd: 4.5x May-13 May-14 May-15 May-16 -19.2

PB Band (x) (x) 2.1

1.9

1.7 +2sd: 1.66x 1.5 +1sd: 1.46x

1.3 Avg: 1.26x

1.1 -1sd: 1.06x

0.9 -2sd: 0.87x

0.7 May-13 May-14 May-15 May-16

Source: Company, AllianceDBS, DBS Bank, DBSVTH

ASIAN INSIGHTS VICKERS SECURITIES Page 5 Company Guide

Asia Aviation

Key Assumptions FY Dec 2015A 2016A 2017F 2018F 2019F

ASK growth (%) 17.5 13.9 11.3 10.2 8.40 Load Factor (%) 82.1 83.8 83.0 83.0 83.0 Fare / RPK (sen) 1.63 1.56 1.65 1.67 1.70 Ancillary income / pax 359 316 318 321 324 (THB) Cost / ASK (THB) 1.53 1.42 1.49 1.52 1.56

Income Statement (Btm) FY Dec 2015A 2016A 2017F 2018F 2019F

Revenue 29,507 32,401 37,400 41,852 46,027 Cost of Goods Sold (25,315) (26,688) (31,252) (35,173) (39,062) Gross Profit 4,192 5,713 6,148 6,678 6,965 Other Opng (Exp)/Inc (1,421) (1,906) (2,143) (2,462) (2,763) Operating Profit 2,771 3,806 4,005 4,216 4,202 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 0.0 0.0 0.0 0.0 0.0 Net Interest (Exp)/Inc (457) (521) (541) (541) (541) Exceptional Gain/(Loss) (205) (79.5) 0.0 0.0 0.0 Pre-tax Profit 2,109 3,206 3,464 3,675 3,662 Tax (151) 192 (243) (257) (256) Minority Interest (880) (1,528) (1,450) (1,538) (1,532) Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit 1,078 1,869 1,772 1,880 1,873 Net Profit before Except. 1,274 1,801 1,827 1,935 1,928 EBITDA 3,898 4,989 5,418 5,886 6,031 Growth Revenue Gth (%) 16.4 9.8 15.4 11.9 10.0 EBITDA Gth (%) 190.8 28.0 8.6 8.6 2.5 Opg Profit Gth (%) 436.3 37.4 5.2 5.3 (0.3) Net Profit Gth (Pre-ex) (%) 862.6 41.4 1.4 5.9 (0.4) Margins & Ratio Gross Margins (%) 14.2 17.6 16.4 16.0 15.1 Opg Profit Margin (%) 9.4 11.7 10.7 10.1 9.1 Net Profit Margin (%) 3.7 5.8 4.7 4.5 4.1 ROAE (%) 6.4 8.7 8.4 8.4 8.0 ROA (%) 2.5 3.3 3.1 3.1 2.9 ROCE (%) 5.8 8.0 7.4 7.4 7.0 Div Payout Ratio (%) 44.8 38.6 41.1 37.6 37.6 Net Interest Cover (x) 6.1 7.3 7.4 7.8 7.8 Source: Company, AllianceDBS, DBS Bank, DBSVTH

ASIAN INSIGHTS VICKERS SECURITIES Page 6 Company Guide Asia Aviation

Quarterly / Interim Income Statement (Btm) FY Dec 1Q2016 2Q2016 3Q2016 4Q2016 1Q2017

Revenue 8,952 7,756 8,145 7,547 9,150 Cost of Goods Sold (6,467) (6,556) (6,944) (6,721) (7,569) Gross Profit 2,485 1,200 1,201 826 1,581 Other Oper. (Exp)/Inc (433) (429) (496) (548) (495) Operating Profit 2,052 771 705 278 1,086 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 0.0 0.0 0.0 0.0 0.0 Net Interest (Exp)/Inc (127) (109) (160) (125) (158) Exceptional Gain/(Loss) (2.4) 28.3 39.3 (145) 144 Pre-tax Profit 1,923 690 584 8.48 1,071 Tax (90.3) 76.2 139 66.9 (36.0) Minority Interest (824) (344) (326) (34.1) (464) Net Profit 1,009 423 397 41.3 570 Net profit bef Except. 1,010 365 299 84.0 511 EBITDA 2,338 1,059 1,001 591 1,416

Growth Revenue Gth (%) 17.3 (13.4) 5.0 (7.4) 21.2 EBITDA Gth (%) 184.4 (54.7) (5.5) (40.9) 139.5 Opg Profit Gth (%) 287.8 (62.4) (8.5) (60.6) 290.8 Net Profit Gth (Pre-ex) (%) 345.1 (63.9) (18.1) (71.9) 508.3 Margins Gross Margins (%) 27.8 15.5 14.8 10.9 17.3 Opg Profit Margins (%) 22.9 9.9 8.7 3.7 11.9 Net Profit Margins (%) 11.3 5.4 4.9 0.5 6.2

Balance Sheet (Btm) FY Dec 2015A 2016A 2017F 2018F 2019F

Net Fixed Assets 18,216 20,425 26,418 27,894 29,210 Invts in Associates & JVs 0.0 0.0 0.0 0.0 0.0 Other LT Assets 25,781 27,414 27,409 27,404 27,399 Cash & ST Invts 7,591 6,733 4,215 6,324 8,551 Inventory 94.0 118 118 118 118 Debtors 765 1,251 1,435 1,605 1,765 Other Current Assets 379 658 658 658 658 Total Assets 52,827 56,599 60,253 64,003 67,702

ST Debt 1,261 1,792 1,792 1,792 1,792 Creditor 2,965 3,151 3,425 3,855 4,281 Other Current Liab 4,070 4,328 5,213 5,823 6,395 LT Debt 12,775 13,664 13,664 13,664 13,664 Other LT Liabilities 3,671 3,545 3,545 3,545 3,545 Shareholder’s Equity 20,142 21,271 22,315 23,487 24,655 Minority Interests 7,941 8,850 10,300 11,838 13,370 Total Cap. & Liab. 52,827 56,599 60,253 64,003 67,702

Non-Cash Wkg. Capital (5,797) (5,452) (6,428) (7,296) (8,134) Net Cash/(Debt) (6,446) (8,722) (11,240) (9,131) (6,905) Debtors Turn (avg days) 11.3 11.4 13.1 13.3 13.4 Creditors Turn (avg days) 39.1 43.8 40.2 39.7 39.9 Inventory Turn (avg days) 1.4 1.5 1.4 1.3 1.2 Asset Turnover (x) 0.6 0.6 0.6 0.7 0.7 Current Ratio (x) 1.1 0.9 0.6 0.8 0.9 Quick Ratio (x) 1.0 0.9 0.5 0.7 0.8 Net Debt/Equity (X) 0.2 0.3 0.3 0.3 0.2 Net Debt/Equity ex MI (X) 0.3 0.4 0.5 0.4 0.3 Capex to Debt (%) 5.8 4.0 47.9 20.3 20.3 Z-Score (X) 1.9 2.1 2.0 2.0 2.0

Source: Company, AllianceDBS, DBS Bank, DBSVTH

ASIAN INSIGHTS VICKERS SECURITIES Page 7 Company Guide

Asia Aviation

Cash Flow Statement (Btm) FY Dec 2015A 2016A 2017F 2018F 2019F

Pre-Tax Profit 2,109 3,206 3,464 3,675 3,662 Dep. & Amort. 1,127 1,182 1,412 1,669 1,828 Tax Paid (6.6) (18.4) (243) (257) (256) Assoc. & JV Inc/(loss) 0.0 0.0 0.0 0.0 0.0 Chg in Wkg.Cap. (1,738) (530) 976 869 838 Other Operating CF 1,514 543 0.0 0.0 0.0 Net Operating CF 3,007 4,382 5,610 5,956 6,071 Capital Exp.(net) (818) (621) (7,400) (3,140) (3,140) Other Invts.(net) 1,719 (942) 0.0 0.0 0.0 Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0 Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0 Other Investing CF (17.7) (1,222) 0.0 0.0 0.0 Net Investing CF 883 (2,786) (7,400) (3,140) (3,140) Div Paid (483) (722) (728) (708) (705) Chg in Gross Debt (1,059) (1,242) 0.0 0.0 0.0 Capital Issues 0.0 0.0 0.0 0.0 0.0 Other Financing CF (987) (604) 0.0 0.0 0.0 Net Financing CF (2,529) (2,568) (728) (708) (705) Currency Adjustments (27.3) 40.7 0.0 0.0 0.0 Chg in Cash 1,334 (931) (2,518) 2,109 2,227 Opg CFPS (Bt) 0.98 1.01 0.96 1.05 1.08 Free CFPS (Bt) 0.45 0.78 (0.4) 0.58 0.60 Source: Company, AllianceDBS, DBS Bank, DBSVTH

Target Price & Ratings History

Bt 12-mth 6 Date of Closing S.No. T arget Rating 7.60 Report Price Price 1: 30 May 16 6.00 7.15 BUY 5 7 2: 14 Jun 16 6.25 7.15 BUY 7.10 10 3: 15 Jun 16 6.15 7.15 BUY 8 9 4: 27 Jun 16 6.15 7.15 BUY 5: 17 Aug 16 7.35 8.30 BUY 6.60 6: 18 Aug 16 7.60 8.30 BUY 2 7: 06 Sep 16 7.40 8.30 BUY 4 12 1 14 8: 20 Oct 16 6.80 8.30 BUY 6.10 9: 10 Nov 16 7.15 8.30 BUY 3 11 13 15 10: 15 Nov 16 6.90 8.20 BUY 11: 07 Feb 17 6.10 7.60 BUY 5.60 12: 10 Feb 17 6.20 7.60 BUY May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 13: 24 Feb 17 6.10 7.60 BUY 14: 03 Mar 17 6.05 6.90 BUY Note : Share price and Target price are adjusted for corporate actions. 15: 09 May 17 6.10 6.90 BUY Source: AllianceDBS, DBS Bank, DBSVTH Analyst: Marvin KHOR Paul YONG CFA Nantika WIANGPHOEM THAI-CAC n/a Corporate Governance CG Rating 2016

THAI-CAC is Companies participating in Thailand's Private Sector Score Description Collective Action Coalition Against Corruption programme (Thai Declared Companies that have declared their intention to join CAC CAC) under Thai Institute of Directors (as of October 28, 2016) are Certified Companies certified by CAC. categorised into:

Corporate Governance CG Rating is based on Thai Institute of Score Range Number of Logo Description Directors (IOD)’s annual assessment of corporate governance 90-100 Excellent practices of listed companies. The assessment covers 235 criteria 80-89 Very Good in five categories including board responsibilities (35% weighting), 70-79 Good disclosure and transparency (20%), role of stakeholders (20%), equitable treatment of shareholders (10%) and rights of 60-69 Satisfactory shareholders (15%). The IOD then assigns numbers of logos to 50-59 Pass each company based on their scoring as follows: <50 No logo given N/A

ASIAN INSIGHTS VICKERS SECURITIES Page 8 Company Guide Asia Aviation

Completed Date: 15 May 2017 15:29:35 (THA) Dissemination Date: 15 May 2017 15:30:49 (THA)

Sources for all charts and tables are AllianceDBS, DBS Bank, DBSVTH unless otherwise specified.

Please contact the primary analyst for valuation methodologies and assumptions associated with the covered companies or price targets.

ASIAN INSIGHTS VICKERS SECURITIES Page 9 Company Guide

Asia Aviation

ASIAN INSIGHTS VICKERS SECURITIES Page 10 Company Guide Asia Aviation

Indonesia This report is being distributed in Indonesia by PT DBS Vickers Sekuritas Indonesia.

Wong Ming Tek, Executive Director, ADBSR

ASIAN INSIGHTS VICKERS SECURITIES Page 11 Company Guide

Asia Aviation

ASIAN INSIGHTS VICKERS SECURITIES Page 12 Thailand Company Guide Bangkok Airways

Version 8 | Bloomberg: BA TB | Reuters: BA.TB Refer to important disclosures at the end of this report

DBS Group Research . Equity 15 May 2017

HOLD Keep on hold for now Last Traded Price ( 12 May 2017): Bt20.10 (SET : 1,543.94) Price Target 12-mth: Bt20.15 (0%) (Prev Bt22.05) More caution in the near term. Bangkok Airways (BA) is expected to see near-term headwinds from rising fuel-related Analyst costs, and fare pressure on select routes. The milder 1.7% Marvin KHOR +60 32604 3911 [email protected] Paul YONG CFA +65 6682 3712 [email protected] growth in 1Q17 tourist arrivals also implies minimal upside Nantika WIANGPHOEM +66 26577836 [email protected] surprise from volume growth. While the group benefits from the

long-term structural growth in Thailand’s tourism traffic, near- term re-rating may pose a challenge. Maintain HOLD. Price Relative Bt Relative Index Where we differ. Conservative on forecasts, valuations. Our

29.4 211

27.4 191 forecasts impute lower yields for BA as we think consensus may

25.4 171 151 be underestimating the impact of competition from new low- 23.4 131 21.4 111 cost entrants on its routes. In addition to higher fuel costs,

19.4 91

17.4 71 margins are likely to see further pressure this year. We also Oct-14 Apr-15 Oct-15 Apr-16 Oct-16 Apr-17 impute DBS TPs in our SOP-based valuation, ultimately pointing Bangkok Airways (LHS) Relative SET (RHS) to limited upside for now. Forecasts and Valuation FY Dec (Bt m) 2016A 2017F 2018F 2019F Potential catalyst. Yield development in coming quarters. Our Revenue 24,692 27,173 29,467 31,715 expectations are for easing in yields, particularly in 1H17 which EBITDA 5,598 5,591 5,880 6,395 enjoyed a high base in FY16. Movement along this pattern may Pre-tax Profit 2,776 2,656 2,775 3,247 Net Profit 1,768 2,116 2,206 2,589 keep a lid on share price movement, though a downside Net Pft (Pre Ex.) 2,215 2,116 2,206 2,589 surprise may impact earnings given a higher cost base. Net Pft Gth (Pre-ex) (%) 23.3 (4.5) 4.3 17.3 EPS (Bt) 0.84 1.01 1.05 1.23 Valuation: EPS Pre Ex. (Bt) 1.05 1.01 1.05 1.23 HOLD. Our SOP-based TP is adjusted to Bt20.15 after EPS Gth Pre Ex (%) 23 (4) 4 17 Diluted EPS (Bt) 1.05 1.01 1.05 1.23 incorporating revised DBS TPs for its stakes in BDMS at Bt24.0 Net DPS (Bt) 0.75 0.50 0.53 0.62 and SPF at Bt24.0 (7.8% and 32.6% respectively). We value BV Per Share (Bt) 15.2 15.7 16.2 16.8 BA’s airline business at 1x P/BV, and include a 15% holding PE (X) 23.9 19.9 19.1 16.3 company discount. PE Pre Ex. (X) 19.1 19.9 19.1 16.3 P/Cash Flow (X) 12.1 16.6 15.7 13.8 EV/EBITDA (X) 8.4 8.7 8.4 7.8 Key Risks to Our View: Net Div Yield (%) 3.7 2.5 2.6 3.1 BA is exposed to Thai tourism, which is vulnerable to both P/Book Value (X) 1.3 1.3 1.2 1.2 external and internal demand shocks. Sustained weakness in Net Debt/Equity (X) 0.2 0.2 0.2 0.2 ROAE (%) 5.6 6.5 6.6 7.5 arrivals may impact its passenger count and earnings.

Earnings Rev (%): 0 0 N/A Consensus EPS (Bt): 1.25 1.29 1.59 At A Glance Other Broker Recs: B: 15 S: 0 H: 1 Issued Capital (m shrs) 2,100 Mkt. Cap (Btm/US$m) 42,210 / 1,218 Source of all data on this page: Company, AllianceDBS, DBS Bank, DBSVTH, Bloomberg Finance L.P Major Shareholders (%) Prasattong-Osoth Family 66.4 Bangkok Bank PCL 5.0 Sinsahakol Limited 3.0 Free Float (%) 32.5 3m Avg. Daily Val (US$m) 3.1 ICB Industry : Consumer Services / Travel & Leisure

ASIAN INSIGHTS VICKERS SECURITIES ed: CK / sa:CS, PY Company Guide

Bangkok Airways

ASK (m p-km) CRITICAL DATA POINTS TO WATCH 7741 7818.2 7372 6763 6701.3 6149 Critical Factors 5854 Measured capacity growth. Airline capacity is measured via ASK 5584.4 (available seat kilometres), which is a function of the active fleet 4467.5 and the flight distances of routes served. We expect BA to chart 3350.7

ASK of 10% in FY17F after 5% growth in FY16. This is 2233.8 supported by its fleet growth plans of five net-additions of three 1116.9

A319s and two ATR 72-600s, which will bring its total fleet to 0.0 2015A 2016A 2017F 2018F 2019F 39. Over the longer term, it plans to grow its fleet to 43 by 2018. The group also works on growing its codeshare partner Load Factor (%) base, targeting four new partners in 2017 from 22 in 2016. 72.5 69.2 71 71 71 66.8

Keeping load factors steady. Load factors determine the ASK 58.0 that is converted into RPKs (revenue passenger kilometres). BA’s load factor improved 2.3ppts in FY16 to 69.2% on the back of 43.5 improvements in both domestic and international segments. We 29.0 expect the group to increase loads to 71% for FY17/18F even 14.5 with capacity growth supported by raising frequencies on well- demanded routes and expansion of unique destinations. 0.0 2015A 2016A 2017F 2018F 2019F

More negative on yields. BA generally has more steady yields Yield (Bt per RPK) (fares/RPK) given its focus on ‘boutique’ destinations with fewer 4.88 4.98 4.87 4.72 4.72 4.86 competitors. However there is rising impact from competition, with FY17F expected to see up to 3-4% decline on average. 3.99 While it is raising fares by Bt200 on domestic routes to pass on 2.99 a jet fuel excise tax increase, this is a smaller proportion of average fares given its full-service carrier nature – though 1.99 domestic ASKs are >55% of total capacity. We impute a 3.1% 1.00 decline in FY17F. 0.00 Tourist growth recovery is potential factor. Tourist arrivals into 2015A 2016A 2017F 2018F 2019F Thailand have eased towards end-2016, pulling down full-year Jet Fuel Consumed ('000 barrels) growth to 8.8% from 12% for 9M16. However, dampening 1662 1678.3 1554 factors such as the crackdown on ‘zero-dollar’ tours are 1419 1353 expected to ease after 1Q17. BA is well positioned to benefit 1342.6 1288 from a resurgence in arrivals, given its slot dominance and 1007.0 ownership of Samui Airport – a gateway to key tourist destination Koh Samui. 671.3

335.7 Fuel-related costing to rise. We expect fuel cost/ASK to rise 0.0 16% in FY17F, making a u-turn from the 33% fall in FY16. This 2015A 2016A 2017F 2018F 2019F is partly contributed by spot jet fuel edging above US$60/bbl, after averaging US$53/bbl in 2016; though driven largely by the All in Jet Fuel Price (US$/bbl) higher jet fuel excise tax on domestic flights. We forecast this to 105 106.2 push overall cost/ASK up by 3% FY17F, taking into account 83.3 BA’s hedging of around half of forward requirements. Our spot 85.0 83.1 82.2 70.4 jet fuel assumptions are US$60/65/bbl in FY17/18F. 63.7

42.5

21.2

0.0 2015A 2016A 2017F 2018F 2019F

Source: Company, AllianceDBS, DBS Bank, DBSVTH

ASIAN INSIGHTS VICKERS SECURITIES Page 2 Company Guide Bangkok Airways

Appendix 1: BA price correlation with critical factors

Graph 1: Share price vs key macroeconomic factors

Indexed: Oct14 = 100 BA TB Jet fuel Thailand tourist arrivals 175

150

125

100

Optimism in expectation of lower fuel costs, 75 higher passenger traffic

Jul-15 Jul-16

Jan-15 Jan-16 Jan-17

Jun-15 Jun-16

Oct-14 Feb-15 Oct-15 Feb-16 Oct-16 Feb-17

Apr-15 Sep-15 Apr-16 Sep-16 Apr-17

Dec-15 Dec-16 Dec-14

Nov-14 Nov-15 Nov-16

Mar-15 Mar-16 Mar-17

Aug-15 Aug-16 May-16 May-15 Source: Company, Bloomberg L.P., AllianceDBS, DBS Bank, DBSVTH

BA share price vs BDMS share price Remarks

Bt BA TB BDMS TB The group has a 7.8% stake in listed Bangkok Dusit 27.5 Medical Services (BDMS), which due to its size comprises >55% of BA’s value. Share price movement is thus 25.5 interlinked (correlation coefficient 0.8).

23.5

21.5

19.5

17.5

15.5

Feb-15 Feb-16 Feb-17

Nov-14 Nov-15 Nov-16

Aug-15 Aug-16

May-15 May-16 May-17

Source: Company, Bloomberg L.P., AllianceDBS, DBS Bank, DBSVTH

BA share price vs cost/ASK Remarks

Bt BA TB Cost/ASK growth y-o-y % While BA may be viewed as low-beta due to the high 30.00 10% weightage of BDMS, earnings and performance still has sensitivity to unit cost movements which can be 25.00 5% influenced by factors like jet fuel prices and the Thai 0% 20.00 baht. -5% 15.00 -10% 10.00 -15%

5.00 -20%

0.00 -25%

Jun-15 Jun-16

Sep-14 Sep-15 Sep-16

Dec-14 Dec-15 Dec-16

Mar-15 Mar-16 Mar-17

Source: Company, Bloomberg L.P., AllianceDBS, DBS Bank, DBSVTH

ASIAN INSIGHTS VICKERS SECURITIES Page 3 Company Guide

Bangkok Airways

Leverage & Asset Turnover (x) Balance Sheet: 0.5 Solid balance sheet to continue. Following its IPO in 4Q14, 0.50 0.5 where BA raised c.Bt12.8bn (US$400m) in equity proceeds, BA 0.5 0.40 0.5 was in a net cash position at the end of 2014. BA intends to use 0.5 0.30 the IPO proceeds to 1) increase its fleet size, including outright 0.5 0.4 ownership, 2) construct a new hanger at Suvarnabhumi 0.20 0.4 International airport, and 3) make improvements at Samui 0.10 0.4 Airport. Despite planned capital expenditures of c.Bt7bn over 0.4 0.00 0.4 FY17-18F, we expect BA’s balance sheet to remain strong, 2015A 2016A 2017F 2018F 2019F reaching c.20% net gearing from net cash currently as its IPO Gross Debt to Equity (LHS) Asset Turnover (RHS) proceeds are utilised. Capital Expenditure Btm Share Price Drivers: 4,000.0 Tourist growth proxy. BA’s growth profile is tied to the 3,500.0 3,000.0 attractiveness of Thailand as a tourist destination and in 2,500.0 particular the growth at Koh Samui whose airport is undergoing 2,000.0 expansion. Stronger growth in tourism statistics will provide a 1,500.0 boost to BA’s earnings and help re-rate its share price. 1,000.0 500.0 0.0 Our TP of Bt22.05 for BA is based on sum-of-parts, which is 2015A 2016A 2017F 2018F 2019F shown in the table below. Capital Expenditure (-) ROE (%)

7.0% Key Risks: Intense competition in the airline industry. Players in this sector 6.0% face intense competition, and the constant threat of price 5.0% wars, especially during periods of weak demand. 4.0% 3.0% Effect of externalities on tourist arrivals. Tourism growth is 2.0% sensitive to demand shocks from external and internal events. 1.0%

Sustained weakness in arrivals may impact its passenger count 0.0% 2015A 2016A 2017F 2018F 2019F and earnings. Forward PE Band (x) Company Background (x) 36.8 Bangkok Airways, a full-service regional carrier with hubs in Bangkok and Samui, is also a major and controlling 31.8 shareholder of Samui Airport Property Fund, and has a 7.8% stake in Bangkok Dusit Medical Services. 26.8 +2sd: 26.4x +1sd: 24.5x

21.8 Avg: 22.6x -1sd: 20.6x -2sd: 18.7x 16.8 Oct-14 Apr-15 Oct-15 Apr-16 Oct-16 Apr-17

PB Band (x) (x) 2.5

2.3

2.1

1.9 +2sd: 1.85x 1.7 +1sd: 1.71x Avg: 1.57x 1.5 -1sd: 1.43x 1.3 -2sd: 1.29x

1.1 Oct-14 Apr-15 Oct-15 Apr-16 Oct-16 Apr-17

Source: Company, AllianceDBS, DBS Bank, DBSVTH

ASIAN INSIGHTS VICKERS SECURITIES Page 4 Company Guide Bangkok Airways

Key Assumptions FY Dec 2015A 2016A 2017F 2018F 2019F

ASK (m p-km) 5,854 6,149 6,763 7,372 7,741 Load Factor (%) 66.8 69.2 71.1 71.1 71.1 Yield (Bt per RPK) 4.88 4.87 4.72 4.72 4.86 Jet Fuel Consumed ('000 1,288 1,353 1,419 1,554 1,662 barrels) All in Jet Fuel Price 105 70.4 83.1 83.3 82.2 (US$/bbl) Segmental Breakdown FY Dec 2015A 2016A 2017F 2018F 2019F

Revenues (Btm) Airlines and airport 19,965 21,277 23,588 25,702 27,762 Airport related services 3,148 3,415 3,586 3,765 3,953 Total 23,113 24,692 27,173 29,467 31,715

Income Statement (Btm) FY Dec 2015A 2016A 2017F 2018F 2019F

Revenue 23,113 24,692 27,173 29,467 31,715 Cost of Goods Sold (18,228) (19,083) (21,671) (23,806) (25,501) Gross Profit 4,885 5,609 5,502 5,660 6,214 Other Opng (Exp)/Inc (3,473) (3,838) (3,933) (4,032) (4,175) Operating Profit 1,412 1,771 1,569 1,628 2,039 Other Non Opg (Exp)/Inc 1,254 1,632 1,600 1,600 1,600 Associates & JV Inc 504 685 720 756 794 Net Interest (Exp)/Inc (1,351) (1,754) (1,697) (1,697) (1,697) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 2,099 2,776 2,656 2,775 3,247 Tax (250) (939) (465) (486) (568) Minority Interest (52.2) (68.6) (75.5) (83.0) (91.3) Preference Dividend 0.0 0.0 0.0 0.0 1.00 Net Profit 1,797 1,768 2,116 2,206 2,589 Net Profit before Except. 1,797 2,215 2,116 2,206 2,589 EBITDA 4,284 5,598 5,591 5,880 6,395 Growth Revenue Gth (%) 9.9 6.8 10.0 8.4 7.6 EBITDA Gth (%) 60.7 30.7 (0.1) 5.2 8.8 Opg Profit Gth (%) 184.5 25.4 (11.4) 3.8 25.2 Net Profit Gth (Pre-ex) (%) 411.8 23.3 (4.5) 4.3 17.3 Margins & Ratio Gross Margins (%) 21.1 22.7 20.2 19.2 19.6 Opg Profit Margin (%) 6.1 7.2 5.8 5.5 6.4 Net Profit Margin (%) 7.8 7.2 7.8 7.5 8.2 ROAE (%) 6.4 5.6 6.5 6.6 7.5 ROA (%) 3.4 3.0 3.5 3.5 4.0 ROCE (%) 2.6 2.2 2.4 2.4 3.0 Div Payout Ratio (%) 81.8 89.1 50.0 50.0 50.0 Net Interest Cover (x) 1.0 1.0 0.9 1.0 1.2 Source: Company, AllianceDBS, DBS Bank, DBSVTH

ASIAN INSIGHTS VICKERS SECURITIES Page 5 Company Guide

Bangkok Airways

Quarterly / Interim Income Statement (Btm) FY Dec 4Q2015 1Q2016 2Q2016 3Q2016 4Q2016

Revenue 5,798 7,280 5,350 6,222 5,841 Cost of Goods Sold (4,677) (4,785) (4,375) (4,707) (5,217) Gross Profit 1,120 2,495 975 1,515 624 Other Oper. (Exp)/Inc (1,055) (901) (926) (923) (1,088) Operating Profit 65.7 1,594 48.6 592 (464) Other Non Opg (Exp)/Inc 324 496 332 355 449 Associates & JV Inc 137 170 158 185 172 Net Interest (Exp)/Inc (296) (444) (368) (449) (493) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 231 1,816 492 804 (336) Tax (161) (242) (604) (123) 29.1 Minority Interest (12.6) (21.7) (15.7) (18.5) (12.8) Net Profit 56.9 1,553 (128) 662 (319) Net profit bef Except. 56.9 1,553 319 662 (318) EBITDA 756 2,507 1,123 1,527 440

Growth Revenue Gth (%) (1.6) 25.6 (26.5) 16.3 (6.1) EBITDA Gth (%) (34.1) 231.8 (55.2) 36.0 (71.2) Opg Profit Gth (%) (82.7) 2,325.6 (97.0) 1,118.2 (178.4) Net Profit Gth (Pre-ex) (%) (90.2) 2,630.9 (79.4) 107.4 (148.0) Margins Gross Margins (%) 19.3 34.3 18.2 24.4 10.7 Opg Profit Margins (%) 1.1 21.9 0.9 9.5 (8.0) Net Profit Margins (%) 1.0 21.3 (2.4) 10.6 (5.5)

Balance Sheet (Btm) FY Dec 2015A 2016A 2017F 2018F 2019F

Net Fixed Assets 9,559 12,793 15,111 17,258 19,362 Invts in Associates & JVs 2,450 2,862 2,862 2,862 2,862 Other LT Assets 29,157 30,441 30,441 30,441 30,441 Cash & ST Invts 13,243 10,670 9,299 8,641 8,365 Inventory 306 369 372 404 434 Debtors 1,847 1,966 2,233 2,422 2,607 Other Current Assets 449 1,188 1,188 1,188 1,188 Total Assets 57,013 60,289 61,507 63,216 65,260

ST Debt 500 465 465 465 465 Creditor 2,261 2,687 2,978 3,229 3,476 Other Current Liab 3,764 4,175 3,969 4,241 4,653 LT Debt 13,858 15,060 15,060 15,060 15,060 Other LT Liabilities 5,534 5,913 5,914 5,915 5,916 Shareholder’s Equity 30,956 31,913 32,971 34,074 35,368 Minority Interests 139 75.9 151 234 326 Total Cap. & Liab. 57,013 60,289 61,508 63,218 65,263

Non-Cash Wkg. Capital (3,422) (3,340) (3,154) (3,456) (3,900) Net Cash/(Debt) (1,115) (4,855) (6,226) (6,884) (7,160) Debtors Turn (avg days) 28.1 28.2 28.2 28.8 28.9 Creditors Turn (avg days) 49.3 50.1 50.6 50.6 50.9 Inventory Turn (avg days) 6.1 6.8 6.6 6.3 6.4 Asset Turnover (x) 0.4 0.4 0.4 0.5 0.5 Current Ratio (x) 2.4 1.9 1.8 1.6 1.5 Quick Ratio (x) 2.3 1.7 1.6 1.4 1.3 Net Debt/Equity (X) 0.0 0.2 0.2 0.2 0.2 Net Debt/Equity ex MI (X) 0.0 0.2 0.2 0.2 0.2 Capex to Debt (%) 8.1 12.9 22.9 22.9 22.9 Z-Score (X) 2.0 2.1 2.1 2.1 2.1

Source: Company, AllianceDBS, DBS Bank, DBSVTH

ASIAN INSIGHTS VICKERS SECURITIES Page 6 Company Guide Bangkok Airways

Cash Flow Statement (Btm) FY Dec 2015A 2016A 2017F 2018F 2019F

Pre-Tax Profit 2,099 2,776 2,656 2,775 3,247 Dep. & Amort. 834 1,068 1,237 1,408 1,451 Tax Paid (250) (939) (465) (486) (568) Assoc. & JV Inc/(loss) (504) (685) (720) (756) (794) Chg in Wkg.Cap. (226) 287 330 258 253 Other Operating CF (162) 988 (495) (504) (522) Net Operating CF 1,792 3,495 2,545 2,695 3,067 Capital Exp.(net) (1,156) (1,996) (3,555) (3,555) (3,555) Other Invts.(net) 2,900 452 0.0 0.0 0.0 Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0 Div from Assoc & JV 878 1,182 1,184 1,243 1,305 Other Investing CF (396) (314) 30.5 16.8 10.2 Net Investing CF 2,225 (675) (2,340) (2,295) (2,239) Div Paid (945) (1,470) (1,575) (1,058) (1,103) Chg in Gross Debt (596) 1,167 0.0 0.0 0.0 Capital Issues 0.0 0.0 0.0 0.0 0.0 Other Financing CF (23.0) (4,093) 0.0 0.0 0.0 Net Financing CF (1,564) (4,396) (1,575) (1,058) (1,103) Currency Adjustments 0.0 0.0 0.0 0.0 0.0 Chg in Cash 2,453 (1,577) (1,371) (658) (276) Opg CFPS (Bt) 0.96 1.53 1.05 1.16 1.34 Free CFPS (Bt) 0.30 0.71 (0.5) (0.4) (0.2) Source: Company, AllianceDBS, DBS Bank, DBSVTH

Target Price & Ratings History

Bt 26.43 12-mth Date of Closing S.No. T arget Rating 25.43 Report Price 6 Price 4 1: 27 Jun 16 23.00 28.30 BUY 24.43 5 2: 04 Aug 16 22.70 28.30 BUY 3 3: 11 Aug 16 24.50 28.30 BUY 23.43 2 4: 15 Aug 16 24.30 26.80 BUY 22.43 1 5: 03 Oct 16 25.00 26.80 BUY 7 8 6: 11 Nov 16 24.60 30.90 BUY 21.43 7: 06 Jan 17 22.80 30.90 BUY 9 20.43 10 8: 07 Feb 17 21.40 26.30 BUY 9: 10 Feb 17 21.60 26.30 BUY 19.43 11 10: 27 Feb 17 20.10 22.05 HOLD 11: 03 Mar 17 20.00 22.05 HOLD 18.43 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17

Note : Share price and Target price are adjusted for corporate actions. Source: AllianceDBS, DBS Bank, DBSVTH Analyst: Marvin KHOR Paul YONG CFA Nantika WIANGPHOEM THAI-CAC n/a Corporate Governance CG Rating 2016

ASIAN INSIGHTS VICKERS SECURITIES Page 7 Company Guide

Bangkok Airways

Completed Date: 15 May 2017 15:33:58 (THA) Dissemination Date: 15 May 2017 15:38:46 (THA)

Sources for all charts and tables are AllianceDBS, DBS Bank, DBSVTH unless otherwise specified.

Please contact the primary analyst for valuation methodologies and assumptions associated with the covered companies or price targets.

ASIAN INSIGHTS VICKERS SECURITIES Page 8 Company Guide Bangkok Airways

Directorship/trustee interests: 5.

Disclosure of previous investment recommendation produced: 6. DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates may have published other investment recommendations in respect of the same securities / instruments recommended in this research report during the preceding 12 months. Please contact the primary analyst listed in the first page of this report to view previous investment recommendations published by DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates in the preceding 12 months.

ASIAN INSIGHTS VICKERS SECURITIES Page 9 Company Guide

Bangkok Airways

Indonesia This report is being distributed in Indonesia by PT DBS Vickers Sekuritas Indonesia.

Wong Ming Tek, Executive Director, ADBSR

ASIAN INSIGHTS VICKERS SECURITIES Page 10 Company Guide Bangkok Airways

ASIAN INSIGHTS VICKERS SECURITIES Page 11 SMC Research

Thailand Equity Explorer Nok Airlines

Bloomberg: NOK TB | Reuters: NOK.BK Refer to important disclosures at the end of this report DBS Group Research . Equity 15 May 2017

NOT RATED Bt4.68 SET : 1,543.94 The faltering contender

Closing price as of 12 May 2017  Thailand’s second largest domestic LCC player Return *: 2 Risk: High  Entered negative equity position after three years Potential Target 12-mth* : 12-Month Bt 4.95 (6% of losses, rights issue to temporarily remedy issue upside)  Cost control is key focus to stabilise profitability, easing away from competitive domestic scene Analyst  Fair value of Bt4.95 (ex-rights) based on 0.3x price Marvin KHOR +60 32604 3911 [email protected] to sales The Business Paul YONG CFA +65 6682 3712 Second largest Thai LCC. Nok Airlines (NOK) is a low-cost carrier [email protected] (LCC) airline primarily serving the Thai domestic market. It is the second largest player within this segment with 20% market Price Relative share; though this has declined from 25% the year before.

Bt Relative Index Financials in dire straits. NOK has fallen to negative total equity 222 as at end-FY16, capping three years in the red with its largest- 19.8 202 17.8 182 ever headline loss of Bt2.8bn. This was broadly due to severe 15.8 162 competitive pressures – however NOK was additionally impacted 13.8 142 122 11.8 by pilot sourcing issues in early-2016. To remedy its equity 102 9.8 82 position, NOK is carrying out a rights issue (1-for-1) to raise up 7.8 62 5.8 42 to Bt1.5bn, with free warrants (1-for-4). 3.8 22 Jun-13 Jun-14 Jun-15 Jun-16 Strategic importance means group will get lifeline. We think the rights issue may be just the start of additional capital raising if Nok Airlines (LHS) Relative SET (RHS) Forecasts and Valuation NOK fails to turn around operationally. That said, major (39.2%)

FY Dec (Btm) 2016A 2017F 2018F 2019F shareholder Thai Airways (THAI) is likely to continue supporting Revenue 16,399 20,612 24,661 27,546 it due to NOK’s market size and strategic position against other EBITDA (3,590) (1,691) (1,378) (958) airline competitors. Additionally, NOK may attract takeover Pre-tax Profit (3,270) (1,922) (1,709) (1,314) interest from other major LCC player – consolidation of its Net Profit (2,795) (1,876) (1,679) (1,378) market share may give an acquirer a solid leading position. Net Pft (Pre Ex.) (3,298) (1,876) (1,679) (1,378) EPS (Bt) (4.5) (2.0) (1.3) (1.1) The Stock EPS Pre Ex. (Bt) (5.3) (2.0) (1.3) (1.1) Firm value distorted by negative equity value. We arrive at a EPS Gth (%) (285) 55 33 18 Bt4.95 (ex-rights) fair value for NOK. This is based on 0.3x price- EPS Gth Pre Ex (%) 196 (62) (33) (18) to-sales (P/S) (+2SD to its 3 year mean) as: 1) our typical P/BV Diluted EPS (Bt) (5.3) (1.8) (1.2) (0.9) methodology for airline stocks is inapplicable, and 2) we think Net DPS (Bt) 0.0 0.0 0.0 0.0 the firm’s inherent value lies within its notable market share, BV Per Share (Bt) 0.38 (0.1) (1.5) (2.6) PE (X) nm nm nm nm route network and market familiarity, which is encapsulated by PE Pre Ex. (X) nm nm nm nm its revenue churn. P/Cash Flow (X) nm nm nm nm Turnaround is a challenge. A turnaround may prompt a re- EV/EBITDA (X) 0.1 nm nm nm rating, though we think this is unlikely in the near term. Net Div Yield (%) 0.0 0.0 0.0 0.0 However, if a takeover offer from a third party materialises, that P/Book Value (X) 12.2 nm nm nm would present a nearer-term catalyst. Net Debt/Equity (X) CASH CASH CASH CASH Risks elevated on several fronts. Earnings risks are high as we ROAE (%) (170.1) (85.2) 171.9 55.0 expect further losses. Business continuity is also contingent upon Consensus EPS (Bt): (0.4) 0.65 N/A securing more funding and support from external parties. Other Broker Recs: B: 0 S: 4 H: 2 At A Glance

Issued Capital (m shrs) 625 ICB Industry : Consumer Services Mkt. Cap (Btm/US$m) 2,925 / 84.4 ICB Sector: Travel & Leisure Major Shareholders (%) Principal Business: Low cost carrier based in Thailand Thai Airways 39.2 Nattapol Chulangkul 12.1 Taweechat Chulangkul 9.7 Free Float (%) 39.0 3m Avg. Daily Val (US$m) 0.41 Source of all data on this page: Company, DBSVTH, Bloomberg Finance L.P.

*This Equity Explorer report represents a preliminary assessment of the subject company, and does not represent initiation into DBSV’s coverage universe. As such DBSV does not commit to regular updates on an ongoing basis. The rating system is distinct from stocks in our regular coverage universe and is explained further on the back page of this report. ed: CK / sa: CS , PY

Equity Explorer Nok Airlines

COMPANY BACKGROUND

Nok Airlines (NOK) is a short-haul low cost carrier (LCC) based in Chart 1 : Revenue breakdown – NOK group Thailand, primarily providing domestic services. 25,000 22,500 Sharp growth before being buffeted by headwinds. NOK was 20,000 inaugurated in Feb 2004 and commenced operations in Jul 2004. 17,500 Initially known as Sky Asia, it was re-branded as Nok Air in Jan 15,000 2006. NOK successfully listed on the SET in 2013, which was 12,500 NokScoot followed by swift growth – with its fleet doubling to 32 at end- 10,000 Nok Air 2016. Its passenger carriage also saw encouraging momentum, 7,500 peaking at 8.76m in 2015 (more than doubling that of 2012), but 5,000 fell for the first time by 2.3% to 8.56m in 2016. 2,500 Long-haul arm with bumpy start. NOK linked up with Scoot Ltd 0 (unit of Singapore Airlines) to initiate NokScoot in late-2013, a long- FY12 FY13 FY14 FY15 FY16 FY17F FY18F Chart 2: Revenue breakdown – Nok Air mainline haul LCC based out of Thailand. Operations only begin mid-2015 due to delays and regulatory issues (including International Civil Aviation Organization’s (ICAO) ‘red-flagging’ Thai aviation on safety 7% 1% concerns). This also resulted in the unit serving China destinations 6%1% rather than its initial plans of Korea and Japan. NOK recognises Passenger Revenue NokScoot as a subsidiary due to deemed control, despite only a FY16 FY15 Service Revenue direct 24.01% stake – as NOK’s management team owns the Other income remaining 26.99% portion of a 51% controlling stake. 93%

92% REVENUE DRIVERS

Chart 3: Nok Air mainline ASK & RPK Converting presence in domestic airspace into revenue- generating volume. NOK has c.20% market share in 2016 in ASK (m p-km) RPK (m p-km) Load factor terms of domestic passenger traffic, of which it recorded 8.56m. 8,000 89% That aside, volume can be measured by revenue passenger 7,000 87% kilometres (RPK), or the number of revenue-paying passengers 6,000 85% multiplied by the distance carried. This presents a better metric for 5,000 83% assessing volume as longer distances generally has higher ticket 4,000 81% prices and thus more revenue per passenger – which is not factored 3,000 in by a simple passenger count. RPK is contrasted against available 2,000 79% seat kilometres (ASK), the relevant measure of capacity – number of 1,000 77% seats provided multiplied by distance served. The ratio of RPK/ASK is 0 75% an airline’s load factor. Growing revenue-generating volumes thus 2012 2013 2014 2015 2016 2017F 2018F depends on the airline expanding ASKs (which may require capex) Chart 4: Nok Air mainline yields (passenger revenue/RPK) and/or improving load factors (which may require opex). Yields (Bt) y-o-y change Maintaining yield levels. Average fare growth can be measured 3.50 5% by yields, or passenger fare revenue/RPK. Yields are a function are 3.00 supply/demand dynamics in a particular market, as steep 2.50 0% competition may drive down average fares; while underserved or 2.00 monopoly routes may command higher fares. Overall, yields have -5% been on a declining trend for NOK due to stiff competition. Besides 1.50 that, there are ancillary yields (ancillary revenue/RPK). 1.00 -10% 0.50 NokScoot. NOK’s revenue growth is also impacted by NokScoot contributions which ramped up substantially in 2016 to Bt3.9bn, or 0.00 -15% FY12 FY13 FY14 FY15 FY16 FY17F FY18F c.24% of total topline, not factoring in eliminations. As NokScoot intends to grow its fleet further (up to 6 by 2018, from three Source: Company, DBSVTH currently), its revenue growth should continue to outstrip NOK’s mainline.

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Equity Explorer Nok Airlines

COST STRUCTURE the other hand, group topline only grew 18% due to a larger NokScoot contribution – mainline revenue was 2.9% lower y-o-y. Aircraft-related expenses dominate. NOK utilises an ‘asset-light’ This was dragged by yields (passenger fares/RPK) falling by 5.3% strategy wherein all of its operated aircraft are on operating leases due to competitive pressure – RPK had eked out 2% growth as load with third-party lessors. As such, for FY16, 21% of the group’s opex factors improved 1.1ppts to 85.1%. is for aircraft lease and spare parts. Additionally, 24% of opex comes from aircraft maintenance. NokScoot managed to narrow losses. Since NokScoot was able to operate scheduled flights for the whole of FY16, it reported Jet fuel is another prominent cost. For FY16, jet fuel made up substantially higher growth in revenue (THB3.9bn, more than 19% of opex, down from 23% in FY15 and much lower than the tripling y-o-y) than opex (Bt4.5bn, more than doubling). Thus, it 34% recorded in FY13/14. This tracks the fall of fuel expenses/ASK reported a narrower operating loss of Bt606m (-50% y-o-y). which fell 18% y-o-y (for NOK mainline) in line with lower jet fuel prices, which averaged US$53/bbl in 2016 from US$65/bbl in 2015. NOK has a policy allowing for hedging of up to 50% of its forward Chart 5 : Cost breakdown – NOK group fuel requirements. Our current employed forecasts are for jet fuel to average US$65/70/bbl in FY17/18F.

Net US$ expense. Jet fuel, aircraft lease and maintenance costs are Other opex 36% Jet fuel typically denominated in US dollars. This gives NOK a forex exposure 19% of net US$ expense due to minimal US$-denominated revenue. Aircraft lease Thus, NOK is vulnerable to a THB depreciation against the US$. and spare Aircraft part maintenance 21% Unit costs have room to shrink. In cost/ASK terms, NOK 24% experienced a severe 12.8% rise in FY16 as its expenses rose (in Depreciation absolute terms) as a result of a larger fleet and this was not offset by and a commensurate rise in ASK. Thus unit costs may be pared down as amortization 0.5% aircraft utilisation improves. Chart 6: Nok Air mainline cost/ASK movement Asset cost / ASK Cash opex / ASK Bt Fuel cost / ASK Total cost/ASK y-o-y change KEY OPERATING ASSETS 3.00 15% 2.50 10% Expect minimal expansion of short-haul fleet. As at end-2016, NOK had a fleet of 22 narrow-body Boeing 737 jets and 10 2.00 5% turboprop aircraft (eight Bombardier Q400s and two ATR72-500s). 1.50 0% Its aircraft are all on operating leases as it usually enters sale & 1.00 -5% leaseback agreements upon new deliveries. The group has a delivery orderbook of nine planes (1/5/3 over 2017/18/19, according to 0.50 -10%

CAPA) but as at early-2017 it has subleased two aircraft to India’s - -15% SpiceJet with more potentially to come – an agreement for three in FY12 FY13 FY14 FY15 FY16 FY17F FY18F Chart 7: Leased in fleet count total had been announced. As such, we think NOK is likely to either Turboprop - ATR72 Turboprop - Q400 keep its net active fleet count flat or trim it; aiming to grow seat Narrowbody jet - B737 capacity mainly through better fleet utilisation. Besides that, 40 NokScoot operates three wide-body B777-200ERs leased from 35 Scoot/Singapore Airlines. 30 25 FINANCIAL PERFORMANCE 20 15 FY16 review: cost expansion met sliding yields. NOK as a group 10 recorded Bt2.8bn of losses in FY16, almost tripling that of FY15. 5 Stripping out a Bt313m gain on aircraft sale & leaseback and 14 16 24 28 32 33 37 0 Bt190m of maintenance refund, core losses were wider at Bt3.3bn. 2012 2013 2014 2015 2016 2017F 2018F The chief reason was spiking costs – NOK’s overall opex rose 26% in Source: Company, DBSVTH FY16, which was in several ways due to its pilot sourcing issues early in the year. The incident had given rise to higher cash opex (staff costs, replacements) and led to NOK’s aircraft additions (+4, or

+14%) not fully translating to ASK growth (+0.7%). Total costs/ASK for its mainline operations rose 12.8% despite a 17.8% fall in fuel costs/ASK – as the denominator (ASK) failed to grow sufficiently. On

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Equity Explorer Nok Airlines

GROWTH PROSPECTS while certain unprofitable domestic routes are reportedly under review for suspension. Cost management is key focus, attempting better coordination with THAI. NOK’s recovery plans primarily involve optimisation of its costs and routes, as evidenced by its tame fleet Chart 8: Operating profit breakdown growth plans. Following shareholder approval of NOK’s rights issue, Bt m NokScoot Nok Air THAI issued a statement saying that its brands (Thai Airways main 1,250 line, Thai Smile (regional LCC unit), and Nok Air) will be coming up with a joint management and strategic plan to enhance the 250 efficiencies of all units. This would involve cooperation on flight routes (possibly involving the removal of duplicate or competing (750) services) and shared resources relating to marketing and costing. (1,750)

Substantial rights issue, will more be necessary later? NOK has (2,750) on 19 Apr 2017 received shareholder approval in an AGM for its proposed rights issue and warrant offering plan. The plan entails a (3,750) FY11 FY12 FY13 FY14 FY15 FY16 FY17F FY18F 1-for-1 (625m) rights issue at Bt2.40 per share to raise up to Bt1.5bn; plus a 1-for-4 (156.25m) free warrants issue with an Chart 9: Domestic Thailand capacity share breakdown exercise price of Bt5. This is primarily to fix its equity position, as the Capacity share (by seats) - week of 24 Apr 2017 group remains on a net cash basis at end-FY16. We note that the Bt1.5bn (if fully subscribed) raised may not be sufficient to keep the Nok Air group’s net equity value positive if another year of losses materialise. 19% Thai AirAsia With our projected loss of Bt1.88bn in FY17F, NOK will remain with Kan Air 29% c.Bt762m in negative net equity by year-end. As such, the group 1% Thai Lion Thai VietJet Air may require further capital injections; which may not be well 1% 19% received by minority shareholders – if the initial rights are full taken Thai Airways up in the first place. 9% Bangkok Thai Smile Airways 11% NokScoot revenue contribution to ramp up. From a topline 11% perspective, long-haul NokScoot had grown its group contribution Table 1: Key Management Team to 24% in 2016 from 7% in 2015, as it began its first full year of Patee Sarasin, CEO of NOK since 2004, Mr Sarasin is instrumental in operations. Utilisation of its fleet (three widebody aircraft) has room Director, CEO the founding and development of the company. He to expand as it increases services to China; and it has announced a holds a stake of 2% in NOK. He is also an revenue target of Bt5.78bn (+48% y-o-y) for FY17F. independent director of Minor International PCL from 2012 and NokScoot from 2014.

MANAGEMENT & STRATEGY Piya Yodmani Mr Yodmani has acted as deputy CEO since 2004. He Deputy CEO is also the CEO of NokScoot. Continuity in key management since initiation. NOK has a well Captain Sanjai Cpt Boonma has served as COO Officer since 2004. experienced management team under Mr. Patee Sarasin who has Boonma been the Chief Executive Officer (CEO) since its initiation. In addition Chief Operation to Mr. Sarasin, other key management personnel have also been Officer playing a pivotal role in piloting NOK and NokScoot since initiation. Brian Leslie Jeffery Mr Jeffery joined NOK as CFO in 2017, with most Note that the management team is in control of Pueanammitr Co Chief Financial recent experience as an independent aviation finance Ltd, which holds 26.99% in NokScoot – making their continuity Officer consultant. crucial in maintaining NOK’s primary control over NokScoot, plus recognition of it as a subsidiary. Source: Company, DBSVTH, CAPA Pushing international to diversify domestic focus. NOK has historically been domestically focused, with only three international routes from a total of 27 in 2016. However, it has begun placing emphasis on international connectivity as seen with NokScoot, which serves five routes to China and one to Taiwan; and being a founding member of the Value Alliance in May 2016 – an Asia- based LCC alliance aiming to improve interline service between members. For 2017 NOK’s mainline route development is China- focused, announcing plans to commence six new services there;

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Equity Explorer Nok Airlines

Key Assumptions Sensitivity Analysis FY Dec 2014A 2015A 2016A 2017F 2018F 2019F 2017F Yields +/- 1% Net Loss -/+ 7% Nok ASK (m p-km) 5,375 6,219 6,264 7,103 7,549 8,013 Load factor +/- 1% Net Profit -/+ 9% Nok load factor (%) 81.4 84.0 85.1 85.0 85.0 85.0 Nok yields (THB) 2.57 2.30 2.18 2.27 2.29 2.31 Nok cost/ASK (THB) 2.34 2.21 2.50 2.35 2.35 2.36 NokScoot revenue 16.2 909 3,824 5,603 8,446 10,187

(external) (Bt m)

Segmental Breakdown

FY Dec 2014A 2015A 2016A 2017F 2018F 2019F

Revenues (Btm) Nok Air 12,015 12,955 12,575 15,009 16,215 17,359 NokScoot 16.2 909 3,824 5,603 8,446 10,187 Estimate 47% growth based Total 12,031 13,864 16,399 20,612 24,661 27,546 on 20% improvement in EBIT (Btm) ASK/aircraft and 5% rise in Nok Air (551) (808) (3,061) (1,654) (1,542) (1,533) yields. Below management’s NokScoot (256) (1,242) (616) (156) 23.8 414 target of Bt5.78bn. Total (807) (2,049) (3,677) (1,810) (1,518) (1,119) EBIT Margins (%) Nok Air (4.6) (6.2) (24.3) (11.0) (9.5) (8.8) NokScoot (1,579.0) (136.7) (16.1) (2.8) 0.3 4.1

Total (6.7) (14.8) (22.4) (8.8) (6.2) (4.1)

Income Statement (Btm)

FY Dec 2014A 2015A 2016A 2017F 2018F 2019F

Revenue 12,031 13,864 16,399 20,612 24,661 27,546 Margins Trend Cost of Goods Sold 0.0 0.0 0.0 0.0 0.0 0.0 Gross Profit 0.0 0.0 0.0 0.0 0.0 0.0 -4.0% 2015A 2016A 2017F 2018F 2019F Other Opng (Exp)/Inc (12,838) (15,913) (20,076) (22,421) (26,179) (28,665)

Operating Profit (807) (2,049) (3,677) (1,810) (1,518) (1,119) -9.0% Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 0.0 0.0 (14.2) (5.0) (5.0) (5.0) Net Interest (Exp)/Inc 98.3 2.94 (81.5) (108) (186) (190) -14.0% Exceptional Gain/(Loss) 42.8 388 503 0.0 0.0 0.0 Pre-tax Profit (666) (1,658) (3,270) (1,922) (1,709) (1,314) -19.0% Tax 0.39 (6.2) (0.1) 0.0 0.0 0.0 Minority Interest 194 938 475 46.0 30.1 (63.6) -24.0% Preference Dividend 0.0 0.0 0.0 0.0 0.0 0.0 Net Profit (472) (726) (2,795) (1,876) (1,679) (1,378) Operating Margin % Net Income Margin % Net Profit before Except. (514) (1,114) (3,298) (1,876) (1,679) (1,378) EBITDA (737) (1,967) (3,590) (1,691) (1,378) (958) Growth

Revenue Gth (%) 7.3 15.2 18.3 25.7 19.6 11.7 EBITDA Gth (%) nm (166.9) (82.5) 52.9 18.5 30.5 Opg Profit Gth (%) (181.3) 153.9 79.4 (50.8) (16.1) (26.3) Net Profit Gth (Pre-ex) (%) nm (116.6) (196.0) 43.1 10.5 17.9 Margins & Ratio Opg Profit Margin (%) (6.7) (14.8) (22.4) (8.8) (6.2) (4.1) Net Profit Margin (%) (3.9) (5.2) (17.0) (9.1) (6.8) (5.0) ROAE (%) (11.3) (21.3) (170.1) (85.2) 171.9 55.0 ROA (%) (7.3) (10.6) (42.6) (30.5) (28.3) (25.7) ROCE (%) (17.4) (48.1) (139.7) (64.7) (281.2) 237.2 Div Payout Ratio (%) N/A N/A N/A N/A N/A N/A Net Interest Cover (x) NM NM (45.1) (16.8) (8.2) (5.9)

Source: Company, DBSVTH

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Equity Explorer Nok Airlines

Quarterly / Interim Income Statement (Btm) Revenue Trend 4,500 30% FY Dec 3Q2015 4Q2015 1Q2016 2Q2016 3Q2016 4Q2016 4,000 25%

Revenue 3,141 3,832 4,114 3,909 4,120 4,256 3,500 20% 3,000 15% Cost of Goods Sold 0.0 0.0 0.0 0.0 0.0 0.0 2,500 10%

Gross Profit 0.0 0.0 0.0 0.0 0.0 0.0 2,000 5%

Other Oper. (Exp)/Inc (3,983) (4,403) (4,630) (4,757) (5,344) (5,344) 1,500 0%

Operating Profit (842) (571) (516) (848) (1,224) (1,088) 1,000 -5%

Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 0.0 500 -10%

Associates & JV Inc 0.0 0.0 (5.5) (2.7) (3.4) (2.6) 0 -15%

Net Interest (Exp)/Inc (1.9) (8.8) (38.9) (13.6) (15.8) (13.2)

2Q2015 4Q2014 1Q2015 3Q2015 4Q2015 1Q2016 2Q2016 3Q2016 4Q2016 Exceptional Gain/(Loss) 191 197 95.2 0.0 172 236 3Q2014 Pre-tax Profit (653) (383) (465) (864) (1,072) (868) Revenue Revenue Growth % (QoQ) Tax 0.12 (6.5) (0.6) 0.09 0.26 0.14 Minority Interest 229 235 60.1 119 113 183 Net Profit (424) (154) (406) (746) (959) (685) Net profit bef Except. (615) (351) (501) (746) (1,130) (921) EBITDA (821) (549) (499) (826) (1,203) (1,062)

Growth Revenue Gth (%) (5.0) 22.0 7.4 (5.0) 5.4 3.3

EBITDA Gth (%) (84.2) 33.1 9.1 (65.6) (45.5) 11.7 Opg Profit Gth (%) 81.1 (32.2) (9.6) 64.3 44.4 (11.1) Net Profit Gth (%) 182.2 (63.6) 163.1 83.8 28.5 (28.6) Margins Opg Profit Margins (%) (26.8) (14.9) (12.5) (21.7) (29.7) (25.6) Net Profit Margins (%) (13.5) (4.0) (9.9) (19.1) (23.3) (16.1)

Source: Company, DBSVTH

Balance Sheet (Btm) FY Dec 2014A 2015A 2016A 2017F 2018F 2019F Asset Breakdown (2017) Net Fixed Net Fixed Assets 254 286 339 368 379 371 Assets - Debtors - 9.7% Invts in Associates & JVs 0.0 34.8 15.2 10.2 5.22 0.22 12.0% Other LT Assets 1,131 651 827 814 798 780 Assocs'/JVs - Cash & ST Invts 3,227 4,530 3,231 2,935 2,457 1,322 0.3% Inventory 17.5 20.6 31.4 34.4 41.1 45.9 Debtors 86.5 174 371 458 548 612 Other Current Assets 1,854 1,414 1,186 1,405 1,608 1,752 Total Assets 6,569 7,110 6,001 6,024 5,836 4,883 Inventory - 0.9% ST Debt 0.0 520 700 700 1,700 1,700 Bank, Cash and Liquid Creditor 518 691 1,045 1,121 1,309 1,433 Assets - Other Current Liab 1,470 2,470 3,639 4,009 4,342 4,579 77.1% LT Debt 0.0 0.0 0.0 0.0 0.0 0.0 Other LT Liabilities 231 487 957 957 957 957 Shareholder’s Equity 3,771 3,047 239 (137) (1,816) (3,194) Minority Interests 578 (105) (579) (625) (655) (591)

Total Cap. & Liab. 6,569 7,110 6,001 6,024 5,836 4,883

Non-Cash Wkg. Capital (31.0) (1,553) (3,096) (3,232) (3,454) (3,602) Net Cash/(Debt) 3,227 4,010 2,531 2,235 757 (378) Debtors Turn (avg days) 2.4 3.4 6.1 4.7 7.4 7.7 Creditors Turn (avg days) (2,419.1) (2,691.5) (3,121.3) (2,251.2) (3,061.3) (3,022.7) Inventory Turn (avg days) (73.9) (84.6) (93.4) (66.6) (95.1) (95.9) Asset Turnover (x) 1.9 2.0 2.5 3.4 4.2 5.1 Current Ratio (x) 2.6 1.7 0.9 0.8 0.6 0.5 Quick Ratio (x) 1.7 1.3 0.7 0.6 0.4 0.3 Net Debt/Equity (X) CASH CASH CASH CASH CASH CASH Net Debt/Equity ex MI (X) CASH CASH CASH 16.3 0.4 CASH Capex to Debt (%) N/A 23.8 25.9 20.0 8.2 8.2

Source: Company, DBSVTH

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Equity Explorer Nok Airlines

Cash Flow Statement (Btm) Capital Expenditure FY Dec 2014A 2015A 2016A 2017F 2018F 2019F Btm 200.0 Pre-Tax Profit (666) (1,658) (3,270) (1,922) (1,709) (1,314) 180.0 Dep. & Amort. 70.1 82.0 102 124 145 166 160.0 140.0 Tax Paid (11.4) (11.6) (5.0) 0.0 0.0 0.0 120.0 Assoc. & JV Inc/(loss) 0.0 0.0 14.2 5.00 5.00 5.00 100.0 Chg in Wkg.Cap. (844) 1,522 1,543 137 221 148 80.0 Other Operating CF (998) 715 233 0.0 0.0 0.0 60.0 Net Operating CF (2,450) 649 (1,383) (1,657) (1,338) (995) 40.0 Capital Exp.(net) (224) (124) (181) (140) (140) (140) 20.0 0.0 Other Invts.(net) 2,799 (16.8) 317 0.0 0.0 0.0 2015A 2016A 2017F 2018F 2019F

Invts in Assoc. & JV 0.0 (34.8) 3.46 0.0 0.0 0.0 Capital Expenditure (-) Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0 0.0 Other Investing CF 144 43.4 39.5 0.0 0.0 0.0 Net Investing CF 2,718 (132) 178 (140) (140) (140) Div Paid (306) 0.0 0.0 0.0 0.0 0.0 Chg in Gross Debt 0.0 520 180 0.0 1,000 0.0 Capital Issues 0.0 0.0 0.0 1,500 0.0 0.0 Other Financing CF (5.4) 8.50 (53.9) 3.00 4.00 5.00 Net Financing CF 458 775 165 1,500 1,000 0.0 Currency Adjustments 7.43 (5.5) 57.9 0.0 0.0 0.0 Chg in Cash 733 1,287 (983) (297) (478) (1,135) Opg CFPS (Bt) (2.6) (1.4) (4.7) (1.9) (1.2) (0.9) Free CFPS (Bt) (4.3) 0.84 (2.5) (1.9) (1.2) (0.9)

Source: Company, DBSVTH

VALUATIONS risks of earnings missing our targets. Shareholding risks are present as if minority shareholders do not subscribe to the rights, THAI may Normal valuations inapplicable. We typically value airline stocks end up being the majority shareholder and consolidate the unit. using the P/BV methodology to reflect profitability via ROAE. However, this is inapplicable to NOK given its negative equity value plus slim likelihood of regularisation in the near term. Chart 2: Historical forward P/S ratio (x) FV of Bt4.95 based on 0.3x P/S – value lies in market share. We ( X ) 0.35 NOK use a 0.3x price to sales (P/S) multiple to value NOK, given that its P/Sales inherent value lies in its share of Thailand’s air travel market. This 0.30 Mean represents +2SD to its historical 3-year P/S mean. This is also between +1/+2SD for its parent THAI’s historical P/S of 0.28-0.35. 0.25 +1sd Applied to FY17F, this gives NOK a valuation of Bt6.18bn or per 0.20 +2sd share fair value of Bt4.95, based on its post-rights issue share base.

0.15 -1sd Warrants likely to be out-of-the-money. At current share price 0.10 of Bt4.94, we find the warrants with Bt5 strike price to be out of the -2sd money. Trading at the band of Bt0.1-Bt0.5 would result in an implied premium of c.3%-11%. Table 6: Peer comparisons Risk Assessment: High EPS Net Net Category Risk Rating Wgt Wgtd Score CAG Profit Margi 1 (Low) - 3 (High) Mkt PE P/B R FY17 n Earnings 3 40% 1.2 Price Cap (Bt FY17 FY17 FY16- F (Bt FY17F Company (Bt) bn F (x) F (x) 18F bn) (%) Financials 3 20% 0.6 Asia Aviation 6.05 29.3 16.6x 1.3x 4% 1.94 5% Shareholdings 2 40% 0.8 Bangkok 20.10 42.2 19.9x 1.3x 0% 2.21 8% Overall 2.6 Airways Thai Airways 18.00 39.3 11.0 1.1x 7% 3.69 2% Earnings risks are high. Our forecasts for FY17F show a c.43% Source: DBSVTH, Bloomberg Finance L.P reduction in core losses, though premised on assumptions like 4% higher yields, 13% increased ASK, 85% load factor, and a 6% reduction in cost/ASK. Deviation from these assumptions presents

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Equity Explorer Nok Airlines

THAI-CAC n/a Corporate Governance CG Rating 2016

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Equity Explorer Nok Airlines

DBSVTH Equity Explorer return ratings reflect return expectations based on an assumed earnings profile and valuation parameters: 1 (>20% potential returns over the next 12 months) 2 (0 - 20% potential returns over the next 12 months) 3 (negative potential return over the next 12 months) The risk assessment is qualitative in nature and is rated as either high, low or moderate risk. (see section on risk assessment) Note that these assessments are based on a preliminary review of factors deemed salient at the time of publication. DBSV does not commit to ongoing coverage and updated assessments of stocks covered under the Equity Explorer product suite. Such updates will only be made upon official initiation of regular coverage of the stock.

Completed Date: 15 May 2017 15:40:50 (THA) Dissemination Date: 15 May 2017 15:45:11 (THA)

GENERAL DISCLOSURE/DISCLAIMER This report is prepared by DBS Vickers Securities (Thailand) Co Ltd (''DBSVTH''). This report is solely intended for the clients of DBS Bank Ltd, its respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBS Vickers Securities (Thailand) Co Ltd (''DBSVTH'').

Please contact the primary analyst for valuation methodologies and assumptions associated with the covered companies or price targets. Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies) mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the commodity referred to in this report.

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Equity Explorer Nok Airlines

COMPANY-SPECIFIC / REGULATORY DISCLOSURES 1. DBS Vickers Securities (Thailand) Co, Ltd and its subsidiaries do not have a proprietary position in the securities recommended in this report as of 28 Apr 2017. 2. Neither DBS Bank Ltd, DBS HK nor DBSV HK market makes in equity securities of the issuer(s) or company(ies) mentioned in this Research Report.

Compensation for investment banking services: 3. DBSVUSA does not have its own investment banking or research department, nor has it participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively. Directorship/trustee interests: Disclosure of previous investment recommendation produced: 4. DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates may have published other investment recommendations in respect of the same securities / instruments recommended in this research report during the preceding 12 months. Please contact the primary analyst listed in the first page of this report to view previous investment recommendations published by DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates in the preceding 12 months.

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Equity Explorer Nok Airlines

For any query regarding the materials herein, please contact Paul Yong (CE. No. ASE988) at [email protected].

Indonesia This report is being distributed in Indonesia by PT DBS Vickers Sekuritas Indonesia.

Wong Ming Tek, Executive Director, ADBSR

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Equity Explorer Nok Airlines

United This report is produced by DBS Vickers Securities (Thailand) Co Ltd which is regulated by the Securities and Exchange Kingdom Commission, Thailand.

This report is disseminated in the United Kingdom by DBS Vickers Securities (UK) Ltd, ("DBSVUK"). DBSVUK is authorised and regulated by the Financial Conduct Authority in the United Kingdom.

United States This report was prepared by DBS Vickers Securities (Thailand) Co Ltd. DBSVUSA did not participate in its preparation. The research analyst(s) named on this report are not registered as research analysts with FINRA and are not associated persons of DBSVUSA. The research analyst(s) are not subject to FINRA Rule 2241 restrictions on analyst compensation, communications with a subject company, public appearances and trading securities held by a research analyst. This report is being distributed in the United States by DBSVUSA, which accepts responsibility for its contents. This report may only be distributed to Major U.S. Institutional Investors (as defined in SEC Rule 15a-6) and to such other institutional investors and qualified persons as DBSVUSA may authorize. Any U.S. person receiving this report who wishes to effect transactions in any securities referred to herein should contact DBSVUSA directly and not its affiliate.

DBS Vickers Securities (Thailand) Co Ltd 989 Siam Piwat Tower Building, 9th, 14th-15th Floor Rama 1 Road, Pathumwan, Bangkok Thailand 10330 Tel. 66 2 657 7831, Fax: 66 2 658 1269 Company Regn. No 0105539127012 Securities and Exchange Commission, Thailand

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Thailand Company Guide Thai Airways

Version 8 | Bloomberg: THAI TB | Reuters: THAI.BK Refer to important disclosures at the end of this report

DBS Group Research . Equity 15 May 2017

HOLD Still facing potential headwinds Last Traded Price ( 12 May 2017): Bt18.00 (SET : 1,543.94) Price Target 12-mth : Bt18.70 (4% upside) (Prev Bt18.70) Turnaround path not yet clear of headwinds. Thai Airways’ (THAI) faces the challenge of maintaining a profitable FY17 after Analyst a bare turnaround in FY16. However, fuel cost has come off its Marvin KHOR +60 32604 3911 [email protected] low which may offset planned gains from its Transformation Paul YONG CFA +65 6682 3712 [email protected] Plan. Further, the group will be injecting capital for an Nantika WIANGPHOEM +66 26577836 [email protected] associate’s cash call, which may result in consolidation of the

loss-making unit if other shareholders under-subscribe. Overall, near-term earnings risks remain elevated for the group – maintain HOLD. Price Relative Bt Relative Index 36.8 205 Where we differ. Monitoring underlying risks. We have 31.8 185 165 reiterated the key risks faced by THAI, namely 1) the need to 26.8 145 21.8 125 dispose of its decommissioned fleet, and 2) steeper-than-peer 105 16.8 85 net gearing of 4.6x. We are also cautious on its investment in 65 11.8 45 6.8 25 associate Nok Airlines (NOK), in which THAI is injecting capital of May-13 May-14 May-15 May-16 May-17 Bt588m (via rights issue). This may also result in consolidating Thai Airways (LHS) Relative SET (RHS) NOK’s losses if its other shareholders under-subscribe, leaving THAI as a >50% shareholder. Forecasts and Valuation FY Dec (Bt m) 2016A 2017F 2018F 2019F Potential catalyst. Effectiveness of cost initiatives. THAI’s Revenue 178,313 191,121 199,890 209,739 Transformation Plan is aimed at paring down certain unit cost EBITDA 26,395 25,411 24,241 23,839 items over 1-2 years. While we have factored this into our Pre-tax Profit (1,417) 3,674 3,791 4,122 Net Profit 15.1 3,583 3,686 3,992 forecasts, slower-than-expected progress may jeopardise its full- Net Pft (Pre Ex.) 3,196 3,583 3,686 3,992 year profitability. Net Pft Gth (Pre-ex) (%) nm 12.1 2.9 8.3 EPS (Bt) 0.01 1.64 1.69 1.83 Valuation: EPS Pre Ex. (Bt) 1.46 1.64 1.69 1.83 Maintain HOLD rating. Our TP is Bt18.70, based on 1.1x FY17F EPS Gth Pre Ex (%) (152) 12 3 8 P/BV (+0.5SD of historical mean). Diluted EPS (Bt) 0.01 1.64 1.69 1.83 Net DPS (Bt) 0.0 0.0 0.0 0.0 BV Per Share (Bt) 15.3 17.0 18.7 20.5 Key Risks to Our View: PE (X) 2595.2 11.0 10.7 9.8 Fuel price upswing. Our forecasts and call are based on PE Pre Ex. (X) 12.3 11.0 10.7 9.8 continued low oil/fuel prices. A sudden rise will impact group P/Cash Flow (X) 1.6 2.5 2.0 2.1 EV/EBITDA (X) 7.3 7.4 7.4 7.1 earnings. Net Div Yield (%) 0.0 0.0 0.0 0.0 P/Book Value (X) 1.2 1.1 1.0 0.9 At A Glance Net Debt/Equity (X) 4.6 4.0 3.4 2.9 Issued Capital (m shrs) 2,183 ROAE (%) 0.0 10.2 9.5 9.3 Mkt. Cap (Btm/US$m) 39,290 / 1,133 Earnings Rev (%): 0 0 0 Major Shareholders (%) Consensus EPS (Bt): 1.43 1.63 1.77 Ministry of Finance 51.0 Other Broker Recs: B: 0 S: 10 H: 9 Vayupak Fund 15.1 Source of all data on this page: Company, AllianceDBS, DBS Bank, Thai NVDR 3.2 DBSVTH, Bloomberg Finance L.P. Free Float (%) 27.4 3m Avg. Daily Val (US$m) 7.3 ICB Industry : Consumer Services / Travel & Leisure

ASIAN INSIGHTS VICKERS SECURITIES ed: CK / sa:CS, PY Company Guide

Thai Airways

ATK growth (%) CRITICAL DATA POINTS TO WATCH 5.54 5.6 Critical Factors 3.8 3.08 2.99 2.0 Careful fleet management. THAI has kept its active fleet at 95 0.83 aircraft since 2015, as part of its Transformation Plan to cut loss- 0.2 making routes and adjust its network to match market demand. -1.6

The group is taking delivery of five A350-900s p.a. in FY17/18F, -3.4 plus two B787s in 2017. Netting off decommissioning of older -5.3 aircraft, net active fleet growth is expected to be +5/+1. We expect -7.1 -6.42 2015A 2016A 2017F 2018F 2019F ATKs (available ton-kilometres) to grow along a similar pattern with 5.5%/3.8% forecasted for FY17/18F. Passenger Load Factor (%)

76.5 76.5 76.5 Trying to improve load factors. Passenger load factors inched up by 78.0 72.9 73.4

0.5ppt to 73.4% in FY16, due to competitive factors especially in 62.4 the domestic and regional segments. The group is targeting around 80% in FY17F as a result of its capacity rationalisation efforts and 46.8 introduction of new Internet and mobile sales platforms. To be 31.2 conservative, we forecast a c.3ppt improvement to 76.5% for the 15.6 year and flat thereafter. This together with our ASK assumption implies RPK (revenue-passenger-kilometre) growth of 8%/3% for 0.0 2015A 2016A 2017F 2018F 2019F FY17/18F. Passenger revenue / RPK (THB) Staying cautious on yields. Passenger yields (fares/RPK) fell 5% in 2.55 2.5 2.43 FY16, a second consecutive drop that largely reflects higher 2.37 2.35 2.38 competitive pressures. While fares are expected to rise on domestic 2.04 routes to pass on higher fuel excise taxes, regional and 1.53 international routes will likely see continued downside in the near term from capacity injections from competitors. We forecast an 1.02 overall blended 1% decline in FY17F yields before a 1.5% recovery 0.51 in FY18F. 0.00 Freight yields to stay low. Freight yields eased another 2% in FY16 2015A 2016A 2017F 2018F 2019F after a 7% decline in FY15, mainly reflecting the full phasing-out of Freight revenue / RFTK (THB) fuel surcharges and tepid freight demand. We impute a mild 1% 8.98 9.1 8.92 8.71 8.8 8.89 p.a. increase going forward, which hinges on broader improvements in Thailand’s export outlook and the economic 7.3 conditions in the region. 5.4

Restructuring efforts may help unit cost control. Cost/ATK fell 8% 3.6 in FY16, largely thanks to falling jet fuel prices. However, given the 1.8 higher spot prices and to a smaller extent the higher excise taxes, 0.0 we expect fuel cost/ATK to rise 13% in FY17F and nudge overall 2015A 2016A 2017F 2018F 2019F cost/ATK up by 2.3%. The escalation may be reined in with better unit cost easing from its restructuring plan, which had involved Cost / ATK (THB) headcount reduction in 2015-16. Our spot jet fuel assumptions are 16 16.2 15.1 15.3 15.6 US$60/65/bbl in FY17/18F. 14.7 13.0

9.7

6.5

3.2

0.0 2015A 2016A 2017F 2018F 2019F

Source: Company, AllianceDBS, DBS Bank, DBSVTH

ASIAN INSIGHTS VICKERS SECURITIES Page 2 Company Guide Thai Airways

Appendix 1: THAI price correlation with critical factors

Graph 1: Share price vs key macroeconomic factors

Indexed: Apr07 = 100 THAI TB Bloomberg AP Airlines Index SET Index 250

200

150 Underperformance assocaite with periods of sustained loss-making 100

Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 Apr-13 Apr-14 Apr-15 Apr-16 Apr-17

Dec-07 Dec-08 Dec-09 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-10

Aug-07 Aug-08 Aug-09 Aug-10 Aug-11 Aug-12 Aug-13 Aug-14 Aug-15 Aug-16

Source: Company, Bloomberg L.P., AllianceDBS, DBS Bank, DBSVTH

THAI share price vs earnings forecasts Remarks

Bt THAI TB FY consensus EPS forecast Bt The group has posted precarious profitability and share 40 8.0 price movements has been closely related to expectations of positive earnings or recoveries 35 6.0 (correlation coefficient 0.6). 30 4.0

25 2.0

20 0.0

15 -2.0

10 -4.0

5 -6.0

0 -8.0 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17

Source: Company, Bloomberg L.P., AllianceDBS, DBS Bank, DBSVTH

THAI share price vs cost/ASK Remarks

Bt THAI TB Cost/ASK growth m p-km Achieving positive profitability for THAI requires 50.00 15% moderation in its unit costs. Sustained reductions in 45.00 cost/ASK would have positive pressure on share price 10% 40.00 and vice versa. 35.00 5% 30.00 25.00 0% 20.00 -5% 15.00 10.00 -10% 5.00

0.00 -15%

Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16

Sep-11 Sep-13 Sep-14 Sep-15 Sep-16 Sep-12

Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16

Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16

Source: Company, Bloomberg L.P., AllianceDBS, DBS Bank, DBSVTH

ASIAN INSIGHTS VICKERS SECURITIES Page 3 Company Guide

Thai Airways

Leverage & Asset Turnover (x) Balance Sheet: 0.8 Elevated gearing levels may slowly ease. THAI’s net debt-to- 5.00 0.8 equity eased to 4.6x at end-FY16 after peaking at 5.2x at end- FY15. We expect net gearing to trend down gradually to the 4x 4.00 0.7 level and below over FY17-18F, as THAI is primarily taking in 3.00 0.7 new deliveries on operating leases rather than finance leases. 2.00 0.6 Gearing may be further trimmed with swift disposal of its 25 1.00 0.6 decommissioned aircraft. 0.00 0.5 2015A 2016A 2017F 2018F 2019F Share Price Drivers: Gross Debt to Equity (LHS) Asset Turnover (RHS) Execution of Transformation Plan. As THAI moves forward with Capital Expenditure its restructuring plan, its re-rating will hinge on proving Btm sustainable profitability after 2016 which was boosted by the 14,000.0 sharp fall in fuel costs. The group will need to achieve 12,000.0 improvements in asset and cash costs, as fuel prices as expected 10,000.0 to gradually ease upwards. 8,000.0 6,000.0 Key Risks: 4,000.0 2,000.0 Fuel price upswing. Our forecasts and call are predicated on 0.0 continued low oil/fuel prices. A sudden, sharp rise will impact 2015A 2016A 2017F 2018F 2019F earnings and may exacerbate associate-related risks. Capital Expenditure (-) ROE (%) Price competition. The emergence of strong price competition 10.0% by airline competitors will pose a threat to both load factors and yields, directly impacting earnings. 8.0%

6.0% Forex risks. A weaker THB against foreign currencies will impact performance, especially the USD and EUR which make 4.0% up a large proportion of its expenses and liabilities, 2.0% respectively.

0.0% 2015A 2016A 2017F 2018F 2019F Company Background Thai Airways (THAI) is the national full service carrier of the PB Band (x) Kingdom of Thailand. It has stakes in several ancillary (x) businesses including airport hotels and in-flight catering, plus a 2.1 39.2% stake in listed low cost-carrier Nok Airlines. 1.6 +2sd: 1.61x +1sd: 1.25x 1.1 Avg: 0.89x

0.6 -1sd: 0.53x

0.1 -2sd: 0.17x May-13 May-14 May-15 May-16

Source: Company, AllianceDBS, DBS Bank, DBSVTH

ASIAN INSIGHTS VICKERS SECURITIES Page 4 Company Guide Thai Airways

Key Assumptions FY Dec 2015A 2016A 2017F 2018F 2019F

ATK growth (%) (6.4) 0.83 5.54 3.08 2.99 Passenger Load Factor (%) 72.9 73.4 76.5 76.5 76.5 Passenger revenue / RPK 2.50 2.37 2.35 2.38 2.43 (THB) Freight revenue / RFTK 8.92 8.71 8.80 8.89 8.98 (THB) Cost / ATK (THB) 16.1 14.7 15.1 15.3 15.6

Income Statement (Btm) FY Dec 2015A 2016A 2017F 2018F 2019F

Revenue 182,727 178,313 191,121 199,890 209,739 Other Opng (Exp)/Inc (183,427) (169,329) (182,891) (191,705) (201,368) Operating Profit (700) 8,984 8,230 8,184 8,370 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 132 (579) 305 413 442 Net Interest (Exp)/Inc (5,566) (5,135) (4,861) (4,807) (4,690) Exceptional Gain/(Loss) (7,983) (4,687) 0.0 0.0 0.0 Pre-tax Profit (14,116) (1,417) 3,674 3,791 4,122 Tax 1,069 1,464 (56.1) (67.7) (91.7) Minority Interest (20.7) (31.7) (35.0) (36.8) (38.6) Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit (13,068) 15.1 3,583 3,686 3,992 Net Profit before Except. (6,197) 3,196 3,583 3,686 3,992 EBITDA 18,565 26,395 25,411 24,241 23,839 Growth Revenue Gth (%) (3.0) (2.4) 7.2 4.6 4.9 EBITDA Gth (%) 465.5 42.2 (3.7) (4.6) (1.7) Opg Profit Gth (%) (96.0) (1,384.0) (8.4) (0.5) 2.3 Net Profit Gth (Pre-ex) (%) 73.2 nm 12.1 2.9 8.3 Margins & Ratio Opg Profit Margin (%) (0.4) 5.0 4.3 4.1 4.0 Net Profit Margin (%) (7.2) 0.0 1.9 1.8 1.9 ROAE (%) (35.3) 0.0 10.2 9.5 9.3 ROA (%) (4.3) 0.0 1.3 1.3 1.4 ROCE (%) (0.3) 3.8 3.6 3.5 3.5 Div Payout Ratio (%) N/A 0.0 0.0 0.0 0.0 Net Interest Cover (x) (0.1) 1.7 1.7 1.7 1.8 Source: Company, AllianceDBS, DBS Bank, DBSVTH

ASIAN INSIGHTS VICKERS SECURITIES Page 5 Company Guide

Thai Airways

Quarterly / Interim Income Statement (Btm) FY Dec 1Q2016 2Q2016 3Q2016 4Q2016 1Q2017

Revenue 49,740 40,742 43,270 44,560 49,289 Other Oper. (Exp)/Inc (42,452) (41,046) (42,531) (43,299) (45,402) Operating Profit 7,288 (304) 739 1,261 3,887 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 77.6 (198) (286) (172) 27.0 Net Interest (Exp)/Inc (1,339) (1,280) (1,289) (1,227) (1,230) Exceptional Gain/(Loss) (855) (1,705) (504) (1,624) 243 Pre-tax Profit 5,172 (3,487) (1,340) (1,761) 2,927 Tax 839 572 (251) 304 242 Minority Interest (11.5) (5.9) (10.3) (4.4) (12.0) Net Profit 5,999 (2,921) (1,601) (1,462) 3,157 Net profit bef Except. 6,004 (1,797) (858) (153) 2,661 EBITDA 11,993 4,026 4,932 5,444 8,121

Growth Revenue Gth (%) 7.4 (18.1) 6.2 3.0 10.6 EBITDA Gth (%) 164.3 (66.4) 22.5 10.4 49.2 Opg Profit Gth (%) (3,192.1) (104.2) (343.0) 70.7 208.2 Net Profit Gth (Pre-ex) (%) (480.9) (129.9) (52.2) (82.2) (1,837.8) Margins Opg Profit Margins (%) 14.7 (0.7) 1.7 2.8 7.9 Net Profit Margins (%) 12.1 (7.2) (3.7) (3.3) 6.4

Balance Sheet (Btm) FY Dec 2015A 2016A 2017F 2018F 2019F

Net Fixed Assets 208,285 194,891 189,507 183,325 177,854 Invts in Associates & JVs 4,739 3,891 4,196 4,609 5,051 Other LT Assets 18,970 24,967 24,967 24,967 24,967 Cash & ST Invts 20,866 13,520 18,031 27,743 37,042 Inventory 5,921 4,987 5,760 6,024 6,321 Debtors 20,601 18,337 20,945 21,906 22,985 Other Current Assets 23,088 22,530 22,530 22,530 22,530 Total Assets 302,471 283,124 285,936 291,104 296,751

ST Debt 37,056 30,367 30,367 30,367 30,367 Creditor 4,242 4,951 5,076 5,320 5,587 Other Current Liab 54,725 52,203 51,272 52,474 53,823 LT Debt 155,347 137,016 137,016 137,016 137,016 Other LT Liabilities 18,176 24,999 24,999 24,999 24,999 Shareholder’s Equity 32,856 33,501 37,084 40,770 44,763 Minority Interests 69.7 86.8 122 159 197 Total Cap. & Liab. 302,471 283,124 285,936 291,104 296,751

Non-Cash Wkg. Capital (9,357) (11,300) (7,114) (7,334) (7,573) Net Cash/(Debt) (171,536) (153,863) (149,352) (139,640) (130,341) Debtors Turn (avg days) 42.2 39.9 37.5 39.1 39.1 Creditors Turn (avg days) (166.9) (93.3) (108.4) (121.3) (132.5) Inventory Turn (avg days) (117.5) (110.6) (116.2) (137.5) (149.9) Asset Turnover (x) 0.6 0.6 0.7 0.7 0.7 Current Ratio (x) 0.7 0.7 0.8 0.9 1.0 Quick Ratio (x) 0.4 0.4 0.4 0.6 0.7 Net Debt/Equity (X) 5.2 4.6 4.0 3.4 2.9 Net Debt/Equity ex MI (X) 5.2 4.6 4.0 3.4 2.9 Capex to Debt (%) 0.6 2.5 6.9 5.7 5.7 Z-Score (X) 0.5 0.7 0.7 0.7 0.7

Source: Company, AllianceDBS, DBS Bank, DBSVTH

ASIAN INSIGHTS VICKERS SECURITIES Page 6 Company Guide Thai Airways

Cash Flow Statement (Btm) FY Dec 2015A 2016A 2017F 2018F 2019F

Pre-Tax Profit (14,116) (1,417) 3,674 3,791 4,122 Dep. & Amort. 19,133 17,991 16,876 15,643 15,027 Tax Paid (287) (564) (56.1) (67.7) (91.7) Assoc. & JV Inc/(loss) (132) 579 (305) (413) (442) Chg in Wkg.Cap. (2,593) (222) (4,186) 219 240 Other Operating CF 16,569 8,082 0.0 0.0 0.0 Net Operating CF 18,567 24,559 16,003 19,173 18,855 Capital Exp.(net) (1,137) (4,199) (11,492) (9,461) (9,556) Other Invts.(net) 49.2 (46.8) 0.0 0.0 0.0 Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0 Div from Assoc & JV 154 264 0.0 0.0 0.0 Other Investing CF 213 155 0.0 0.0 0.0 Net Investing CF (721) (3,826) (11,492) (9,461) (9,556) Div Paid (0.1) (0.1) 0.0 0.0 0.0 Chg in Gross Debt (14,816) (23,286) 0.0 0.0 0.0 Capital Issues 0.0 0.0 0.0 0.0 0.0 Other Financing CF (6,021) (4,884) 0.0 0.0 0.0 Net Financing CF (20,838) (28,171) 0.0 0.0 0.0 Currency Adjustments 427 46.7 0.0 0.0 0.0 Chg in Cash (2,565) (7,392) 4,511 9,711 9,299 Opg CFPS (Bt) 9.69 11.4 9.25 8.68 8.53 Free CFPS (Bt) 7.98 9.33 2.07 4.45 4.26 Source: Company, AllianceDBS, DBS Bank, DBSVTH

Target Price & Ratings History

32.63 Bt 12-mth Date of Closing 30.63 S.No. T arget Rating Report Price Price 28.63 2 1: 18 May 16 15.70 16.80 HOLD 26.63 2: 17 Aug 16 26.75 25.40 HOLD 3: 18 Aug 16 26.75 25.40 HOLD 3 4 24.63 4: 14 Nov 16 23.70 23.50 HOLD 22.63 6 5: 07 Feb 17 21.90 23.25 HOLD 6: 10 Feb 17 21.90 23.25 HOLD 20.63 5 7: 22 Mar 17 18.30 18.70 HOLD

18.63

16.63 7

14.63 1 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17

ASIAN INSIGHTS VICKERS SECURITIES Page 7 Company Guide

Thai Airways

Completed Date: 15 May 2017 15:43:26 (THA) Dissemination Date: 15 May 2017 15:47:32 (THA)

Sources for all charts and tables are AllianceDBS, DBS Bank, DBSVTH unless otherwise specified.

Please contact the primary analyst for valuation methodologies and assumptions associated with the covered companies or price targets.

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COMPANY-SPECIFIC / REGULATORY DISCLOSURES 1. DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates have a proprietary position in Thai Airways recommended in this report as of 28 Apr 2017. 2. DBS Vickers Securities (Thailand) Co, Ltd and its subsidiaries do not have a proprietary position in the securities recommended in this report as of 28 Apr 2017. 3. Neither DBS Bank Ltd, DBS HK nor DBSV HK market makes in equity securities of the issuer(s) or company(ies) mentioned in this Research Report.

ASIAN INSIGHTS VICKERS SECURITIES Page 9 Company Guide

Thai Airways

Indonesia This report is being distributed in Indonesia by PT DBS Vickers Sekuritas Indonesia.

Wong Ming Tek, Executive Director, ADBSR

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