SMRT Corp (MRT SP) SMRT Corp

Singapore Industrials 2 December 2015

Target price: SGD1.31 Share price (1 Dec): SGD1.46 | Up/downside: -10.0%

Initiation: not time to get on board yet

 Rail segment operating losses look set to persist over medium term Jame Osman (65) 6321 3092  Market expectations of a new rail model appear unfounded to us [email protected]  Initiating coverage with Underperform (4); TP of SGD1.31

Investment case: We initiate coverage of SMRT Corp (SMRT) with an Share price performance

Underperform (4) rating. While the Singapore Government’s overhaul of the (SGD) (%) public transport sector across rail and bus segments signals a more 1.8 110 favourable outlook for incumbent players, we believe the bus operators are 1.6 103 positioned to benefit from an arguably more attractive change in the 1.5 95 1.3 88 business model than the rail segment, mainly as revenue and ridership 1.1 80 risks will be effectively transferred to the government in the case of the Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 former. SMRT (LHS) Relative to FSSTI (RHS)

Considering that the rail business is SMRT’s largest segment (53% of FY15 12-month range 1.14-1.80 revenue), while the bus segment is ComfortDelGro’s (CDG) (CD SP, Market cap (USDbn) 1.57 SGD2.96, Buy [1]) largest segment (32% of its Singapore revenue), CDG 3m avg daily turnover (USDm) 2.18 appears better placed to leverage this shift in the operational landscape. Shares outstanding (m) 1,522 Major shareholder Temasek Holdings (54.2%) Accordingly, we recommend investors seeking exposure to the defensive

Singapore transport services sector to switch from SMRT to CDG. Financial summary (SGD) Meanwhile, we forecast the operating losses for SMRT’s rail segment to Year to 31 Mar 16E 17E 18E persist over FY16-18, as it grapples with dealing with network disruptions, Revenue (m) 1,305 1,309 1,321 while concurrently executing its rail-enhancement projects. Operating profit (m) 117 125 134 Net profit (m) 88 94 99 Core EPS (fully-diluted) 0.058 0.061 0.065 Finally, market expectations of a positive outcome for rail reforms in the EPS change (%) (3.1) 6.1 6.2 near term appear unfounded to us, given the lack of clarity – comments Daiwa vs Cons. EPS (%) 1.4 (1.0) (16.5) made by both the former and current transport minister suggest instead PER (x) 25.2 23.7 22.3 Dividend yield (%) 2.2 2.3 2.5 that the central agenda remains on improving Singapore’s rail reliability DPS 0.032 0.034 0.036 before addressing asset acquisitions. We believe negotiations between PBR (x) 2.5 2.4 2.2 SMRT and the government will gain traction only after the operator has EV/EBITDA (x) 9.0 8.5 8.2 ROE (%) 10.0 10.2 10.3 fulfilled its obligations to return rail network reliability to satisfactory levels Source: FactSet, Daiwa forecasts under its existing licence requirements – indicating a timeline that could stretch beyond 2018.

Catalysts: In the near term, we see the following derating catalysts: 1) news flow suggesting a delay in the implementation of a new rail model, 2) a sharper-than-expected deterioration in the rail segment’s margin, driven by higher repair/maintenance expenses, and to a lesser extent, 3) further major service disruptions to its network, which may result in significant penalties imposed by the regulator.

Valuation: We adopt a DCF-based approach to value SMRT’s shares, deriving a 12-month target price of SGD1.31. We value SMRT with the following inputs: a WACC of 7.2%, comprising a 6% equity-risk premium, risk-free rate of 2.6% and a terminal FCF growth rate of 1.0%.

Risks: The main risks to our call would be regulatory risks in the form of positive rail reforms as well as a decrease in labour costs.

See important disclosures, including any required research certifications, beginning on page 31

SMRT Corp (MRT SP): 2 December 2015

Table of contents

Getting back on track ...... 6 Investment thesis ...... 6 Rail: network upgrades weigh on operational performance ...... 8 Bus: transitioning to an asset-light operating model ...... 14 Taxi business: muted growth ...... 17 Rental: lack of clear catalysts ...... 19 Financial analysis ...... 21 Valuation...... 23 Investment risks ...... 25 Shareholding structure and key management ...... 26 Appendix 1: Singapore rail network ...... 27

SMRT Corp (MRT SP): 2 December 2015

How do we justify our view? Growth outlook Valuation Earnings revisions

Growth outlook SM RT: operating margin and net-profit forecasts Overall, we forecast a net profit (PATMI) CAGR of 3.0% SGD m over the FY15-18 period, largely driven by an expected 170 25% improvement in the operating margin for its bus segment, 150 20% following the industry’s transition to the new government 130 contracting model (GCM) in August 2016. Meanwhile, we 15% 110 forecast continued operating losses for the rail segment 10% over the FY15-18 period, as we expect the company’s rail- 90 network enhancement initiatives to be a multi-year 70 5% endeavour. 50 0% FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E Net profit (PATMI) (LHS) Operating margin (RHS)

Source: Company, Daiwa forecasts

Valuation SM RT: 12-month forward PER (x) The stock is currently trading at a 2016E PER of 25.2x, 12M forward PER (x) which is above its past-10-year mean of 20.6x. Our target 43 price of SGD1.31 implies a 2016E PER of 22.6x. While the 38 +2 stdev market could possibly be pricing in expectations of a 33 +1 stdev transition by the rail segment to a new rail model, we 28 believe negotiations between the government and SMRT 23 Mean will only gain traction after the company has fulfilled its 18 obligations to return network reliability to satisfactory levels -1 stdev 13 under its existing licence requirements, indicating a -2 stdev timeline that could stretch beyond 2018. 8 Jul-05 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Source: Bloomberg, Daiwa forecasts

Earnings revisions SMRT: Bloomberg EPS consensus revisions The Bloomberg consensus EPS forecasts for FY16-17 SGD SGD have seen downward revisions of 14-23% over the past 12 0.10 1.8 1.7 months, which we attribute mainly to increased 0.09 1.6 0.08 expectations of higher repair and maintenance and staff 1.5 costs, as well as the announcement of a 1.9% reduction in 0.07 1.4 1.3 fare prices. Looking ahead, management has indicated 0.06 that it expects the operating margin to remain depressed 1.2 0.05 on elevated repair and maintenance expenses, as well as 1.1 the expansion of its engineering workforce, resulting in 0.04 1

higher staff costs. Jul-15 Apr-15 Oct-15 Jan-15 Jun-15 Mar-15 Feb-15 Nov-15 Nov-14 Dec-14 Aug-15 Sep-15 May-15 FY16 EPS FY17 EPS Price Source: Bloomberg

SMRT Corp (MRT SP): 2 December 2015

Financial summary Key assumptions Year to 31 Mar 2011 2012 2013 2014 2015 2016E 2017E 2018E Operating margin - Bus (%) (0.8) (5.3) (15.0) (13.0) (2.7) 3.0 4.8 8.0 Operating margin - Taxi (%) (2.1) 2.4 4.9 7.3 9.6 13.0 10.0 10.0 Operating margin - MRT (%) 21.5 16.0 10.7 0.9 2.1 (2.5) (2.0) (2.0) Operating margin - LRT (%) (3.8) (3.3) (9.8) (20.0) (38.7) (55.0) (50.0) (45.0) Operating margin - Rental (%) 77.5 77.3 75.8 75.2 66.1 60.0 62.0 62.0

Profit and loss (SGDm) Year to 31 Mar 2011 2012 2013 2014 2015 2016E 2017E 2018E Rail 537 580 619 634 654 680 694 714 Bus 213 220 211 218 238 248 232 215 Other Revenue 220 257 290 312 343 377 384 392 Total Revenue 970 1,057 1,119 1,164 1,236 1,305 1,309 1,321 Other income 20 22 36 42 58 65 50 50 COGS (514) (613) (690) (739) (756) (802) (837) (869) SG&A 0 0 0 0 0 0 0 0 Other op.expenses (280) (318) (355) (383) (417) (451) (397) (369) Operating profit 196 149 110 84 121 117 125 134 Net-interest inc./(exp.) (5) (5) (5) (9) (11) (14) (15) (17) Assoc/forex/extraord./others 2 3 (0) (0) 1 4 4 4 Pre-tax profit 192 147 105 75 111 107 114 121 Tax (31) (27) (22) (13) (20) (20) (21) (22) Min. int./pref. div./others 0 0 0 0 1 1 1 1 Net profit (reported) 161 120 83 62 91 88 94 99 Net profit (adjusted) 161 120 83 62 91 88 94 99 EPS (reported)(SGD) 0.106 0.079 0.055 0.041 0.060 0.058 0.061 0.065 EPS (adjusted)(SGD) 0.106 0.079 0.055 0.041 0.060 0.058 0.061 0.065 EPS (adjusted fully-diluted)(SGD) 0.106 0.079 0.055 0.041 0.060 0.058 0.061 0.065 DPS (SGD) 0.085 0.075 0.025 0.022 0.033 0.032 0.034 0.036 EBIT 196 149 110 84 121 117 125 134 EBITDA 315 278 261 256 314 331 356 378

Cash flow (SGDm) Year to 31 Mar 2011 2012 2013 2014 2015 2016E 2017E 2018E Profit before tax 192 147 105 75 111 107 114 121 Depreciation and amortisation 135 163 178 181 203 224 240 254 Tax paid (32) (43) (15) (5) (9) (20) (21) (22) Change in working capital (14) 11 (19) (13) (10) 18 1 3 Other operational CF items 2 5 11 (4) (18) (15) 30 (14) Cash flow from operations 283 282 260 234 277 315 364 342 Capex (107) (235) (251) (652) (463) (424) (360) (363) Net (acquisitions)/disposals 1 (1) (14) 8 5 0 0 0 Other investing CF items 2 2 2 2 2 1 1 1 Cash flow from investing (104) (234) (262) (643) (456) (423) (359) (363) Change in debt 0 (100) 460 29 189 80 80 80 Net share issues/(repurchases) 0 0 0 0 0 0 0 0 Dividends paid (129) (129) (109) (30) (41) (48) (51) (55) Other financing CF items 0 0 3 19 31 0 0 0 Cash flow from financing (128) (229) 353 17 178 32 29 25 Forex effect/others 0 0 0 0 0 0 0 0 Change in cash 51 (181) 351 (391) (0) (77) 34 4 Free cash flow 176 47 10 (417) (185) (109) 4 (22) Source: FactSet, Daiwa forecasts

SMRT Corp (MRT SP): 2 December 2015

Financial summary continued … Balance sheet (SGDm) As at 31 Mar 2011 2012 2013 2014 2015 2016E 2017E 2018E Cash & short-term investment 380 195 546 161 156 79 113 117 Inventory 54 54 60 84 81 85 86 87 Accounts receivable 65 64 86 99 168 177 178 179 Other current assets 1 0 0 0 0 14 30 47 Total current assets 499 313 692 344 405 356 406 430 Fixed assets 998 1,346 1,436 1,642 2,042 2,232 2,295 2,392 Goodwill & intangibles 35 14 14 14 14 14 14 14 Other non-current assets 74 83 83 73 76 76 76 76 Total assets 1,607 1,756 2,224 2,073 2,537 2,678 2,792 2,911 Short-term debt 100 0 2 156 9 9 9 9 Accounts payable 269 546 577 355 568 600 602 607 Other current liabilities 72 58 54 54 63 63 63 63 Total current liabilities 441 604 633 566 640 672 674 679 Long-term debt 150 150 607 480 813 893 973 1,053 Other non-current liabilities 217 210 216 225 226 216 206 196 Total liabilities 808 965 1,456 1,271 1,678 1,780 1,852 1,928 Share capital 165 166 167 168 169 169 169 169 Reserves/R.E./others 634 625 601 634 690 730 772 817 Shareholders' equity 799 791 768 802 860 899 941 986 Minority interests 0 0 0 (0) (1) (1) (2) (2) Total equity & liabilities 1,607 1,756 2,224 2,073 2,537 2,678 2,792 2,911 EV 2,021 2,101 2,227 2,638 2,824 2,980 3,025 3,101 Net debt/(cash) (130) (45) 63 476 665 822 868 944 BVPS (SGD) 0.526 0.521 0.505 0.527 0.565 0.591 0.618 0.648

Key ratios (%) Year to 31 Mar 2011 2012 2013 2014 2015 2016E 2017E 2018E Sales (YoY) 8.3 9.0 5.9 4.0 6.2 5.6 0.3 0.9 EBITDA (YoY) 0.2 (11.6) (6.3) (2.0) 22.9 5.5 7.4 6.3 Operating profit (YoY) (0.8) (24.0) (25.9) (23.6) 43.4 (3.3) 7.1 6.7 Net profit (YoY) (1.1) (25.6) (30.5) (25.7) 47.0 (3.1) 6.1 6.2 Core EPS (fully-diluted) (YoY) (1.2) (25.6) (30.5) (25.7) 46.9 (3.1) 6.1 6.2 Gross-profit margin 47.0 42.0 38.3 36.5 38.8 38.5 36.1 34.2 EBITDA margin 32.5 26.3 23.3 22.0 25.4 25.4 27.2 28.6 Operating-profit margin 20.2 14.1 9.8 7.2 9.8 8.9 9.6 10.1 Net profit margin 16.6 11.3 7.4 5.3 7.4 6.8 7.1 7.5 ROAE 20.5 15.1 10.7 7.9 11.0 10.0 10.2 10.3 ROAA 10.1 7.1 4.2 2.9 3.9 3.4 3.4 3.5 ROCE 18.9 14.9 9.5 6.0 7.7 6.7 6.7 6.7 ROIC 24.1 17.1 11.1 6.6 7.0 5.9 5.8 5.8 Net debt to equity n.a. n.a. 8.2 59.4 77.4 91.4 92.3 95.8 Effective tax rate 16.0 18.4 20.8 17.6 18.4 18.4 18.4 18.4 Accounts receivable (days) 22.4 22.2 24.5 29.0 39.4 48.2 49.5 49.3 Current ratio (x) 1.1 0.5 1.1 0.6 0.6 0.5 0.6 0.6 Net interest cover (x) 35.8 30.7 22.3 9.0 10.8 8.6 8.2 8.0 Net dividend payout 80.1 94.4 45.6 54.1 54.4 55.0 55.0 55.0 Free cash flow yield 8.0 2.1 0.4 n.a. n.a. n.a. 0.2 n.a. Source: FactSet, Daiwa forecasts

Company profile

SMRT is a multi-modal transport services provider in Singapore across rail, bus and taxi segments, and is the operator of Singapore’s first mass rapid transit (MRT) network launched in 1987. The company also derives rental and advertising income from leased space around its train stations. The company was listed on the Singapore Exchange in July 2000.

SMRT Corp (MRT SP): 2 December 2015

Getting back on track Investment thesis We initiate coverage on SMRT with an Underperform (4) rating and DCF-based 12-month target price of SGD1.31.

As highlighted in our initiation report on ComfortDelGro (CDG) (CD SP, SGD2.96, Buy [1]) (Initiation: shifting gears, 22 Sept 2015), the Singapore government is in the midst of overhauling the public transport sector. In the bus segment, a new government contracting model (GCM) will be implemented from August 2016, while in the rail segment, new upcoming network lines will operate under a revised rail financing framework. Between these two segments, we believe the bus operators are positioned to benefit from an arguably more favourable change in business model relative to the rail segment, mainly as revenue and ridership risks will be effectively transferred to the government in the case of the former, under the proposed GCM.

CDG better positioned Hence, while the bus operators will no longer be subjected to a regulated public fare than SMRT to leverage pricing environment (a key factor behind the weak operating performance of public changes in operational transport operators) under a new ‘cost-plus’ model, the rail operators will remain exposed. environment Considering that the rail business is SMRT’s largest segment (53% of FY15 revenue), while the bus segment is CDG’s largest segment (32% of Singapore revenue), CDG appears better placed to leverage the shift in the operational landscape in the public transport sector.

SMRT: revenue breakdown by segment (FY15) Engineering services Others 2% Advertising 1% 3%

Rental 10% Taxi 12% Train 53%

Bus 19%

Source: Company

Additionally, while we expect both incumbent operators to be beneficiaries of longer-term structural changes to the industry, driven by the government’s plan to encourage greater use of public transport services in the land-scarce city-state, SMRT’s rail segment faces operational challenges that could negatively impact its near-term performance, in our view.

Accordingly, we recommend investors seeking exposure to the Singapore transport services sector to switch from SMRT to CDG.

Rail challenges remain While we expect CDG’s Singapore rail segment to see significant ridership growth, on the back of an 83% increase in the length of its rail with the opening of DTL Stages 2 and 3 over the near and medium term, SMRT’s rail network comparatively should remain largely unchanged. Further, ridership market share could be shifted from SMRT’s North-South East-West Line (NSEWL) to CDG’s Downtown Line Stage 2 (DTL2), particularly in the north-west region of Singapore, where the opening of the DTL2 in December 2015 is widely expected to reduce travelling time for commuters by up to 40% to the central areas of Singapore.

SMRT Corp (MRT SP): 2 December 2015

We forecast operating losses for SMRT’s biggest segment, its rail business, to persist over the FY15-18E period, as the company grapples between dealing with network disruptions while concurrently executing its rail enhancement projects – the latter is proving to be a multi-year endeavour for the company.

Capex should exceed Furthermore, we believe SMRT’s overall capex levels are likely to continue to exceed its operating cash flow over operating cash flow generation over the FY15-18E period. We expect the company to have FY16-18E to take on more debt to finance its rail enhancement projects. Consequently, we forecast the company’s net debt/EBITDA ratio to deteriorate from 2.1x, as at the end of FY15, to 2.5x by the end of FY18 – we expect interest bearing borrowing to increase from SGD150m (FY12) to SGD1.1bn by end-FY18E. As at end-2QFY16, gross debt stood at SGD836m.

Acquisition of NSEWL rolling stock unlikely in the near term SMRT’s recent share price strength (up 27% since August 2015 vs. 4% in the FSSTI) could be attributable to heightened market expectations of negotiations between the government and SMRT (on the transition of its rail business to a new rail model) to reach a favourable outcome in the near term. We believe this to be unfounded, given that: 1) both parties have given little to no indication as to the details and timeline of a possible deal, and 2) comments made by both the former and current transport minister suggest that the central agenda is still on improving the reliability of Singapore’s rail.

No basis for the In our view, it would be in the best interest of both the government and the Singapore acquisition of NSEWL public if SMRT were to fulfil all existing obligations with respect to network efficacy, before assets at this stage, in addressing any issue of asset acquisition. Further, given that the government already owns our view rail infrastructure (the assets we expect to be acquired include mainly SMRT’s NSEWL rolling stock), a transition to a new rail model is unlikely to materially alter the complexion of SMRT’s rail business positively from an operational standpoint. As such, the case for a transition of the NSEWL to a new rail model appears weak to us.

We believe negotiations between SMRT and the regulator will gain more traction only after the operator has fulfilled its obligations to return network reliability to satisfactory levels under its existing licence requirements – indicating a timeline that could stretch beyond 2018.

In addition, we rule out talk in the market of the possible privatisation of SMRT. It is clear that the government’s policy changes reflect a move to “nationalise” Singapore’s public transport infrastructure and operating assets, indicating an intention to separate asset ownership from the operators. This structure will allow the government a more timely response to changes in capacity and infrastructure demands, while transmitting service requirements to industry operators through competitive tenders. As such, we believe it would make little sense to privatise SMRT.

We prefer CDG to SMRT While we expect both operators to be beneficiaries of a more favourable shift in the operating landscape for the transport services sector in Singapore, we would recommend investors switch from SMRT to CDG, mainly as: 1) CDG is less exposed to Singapore’s regulated fare-pricing environment (around 24% of revenue vs. 72% for SMRT), 2) CDG’s greater exposure to the bus segment, for which we expect to see an uplift in operating margin from a transition to a new asset-light model, 3) CDG’s stronger balance sheet position (net cash of SGD88.7m as at end-2014 vs SMRT’s net debt of 665.5m as at end- FY15), 4) we see greater potential earnings growth catalysts from overseas acquisitions or expansion, and 5) we think it has greater potential for a higher dividend payout or special dividend in the near term.

SMRT Corp (MRT SP): 2 December 2015

Rail: network upgrades weigh on operational performance Operates 3 MRT lines SMRT’s rail segment is the largest contributor to the business, accounting for 53% of and 1 LRT line overall revenue. The company operates and maintains Singapore’s first Mass Rapid Transit (MRT) line. The initial section of the MRT (between Yio Chu Kang and Toa Payoh) commenced operations in 1987, making it the second-oldest metro system in Southeast Asia after the rail system in Manila, Philippines.

The existing MRT network comprises the North-South (26 stations) and East-West (31 stations) Lines (collectively referred to as the NSEWL), which form the backbone of the island’s rail network, as well as the Circle Line (CCL) (30 stations) – with a total rail length of 130km across 87 stations.

In addition, SMRT also operates and maintains Singapore’s first fully (driverless) automated Light Rail Transit (LRT) system in the Bukit Panjang area, which began operations in 1999 and has a rail length of 7.8km across 14 stations (refer to Appendix 1 for more details).

In recent years, the profitability of SMRT’s rail segment has been eroded by its various rail- enhancement projects, undertaken in response to an increase in the number of network disruptions to its ageing network, exacerbated under the strain of population growth over the past decade. Looking ahead, it appears to us that these network improvements and capacity enhancements to SMRT’s rail segment could prove to be a multi-year endeavour – we expect margins to remain depressed over the near term.

While the market’s expectations of a transition of its rail network to an asset-light model could improve SMRT’s free cash flow profile, too little is known at this stage in terms of details and timeline to comfortably incorporate this impact into our forecasts. We believe negotiations between SMRT and the regulator will gain traction only after the operator has fulfilled its obligations to return the network’s reliability to satisfactory levels under its existing licence requirements.

Grappling with rail network disruptions In recent years, SMRT’s ageing rail network has led to the company having to deal with an increasing frequency disruptions to its network, leading to public concern over the quality of public transport services in Singapore. According to service update reports by the LTA, there were 23 major disruptions (service delays lasting more than 30 minutes) between 2011-2H15 on SMRT’s NSEWL.

No. of train service delays by line (exceeding 5 minutes) 302 310 277 260 231 236

210

160

110 91 81 60 47 51 60 31 28 33 19 20 12 10

(40) 2011 2012 2013 2014 1H15 NSEWL CCL NEL

Source: LTA Note: NSEWL and CCL operated by SMRT; NEL operated by SBS Transit (ComfortDelGro)

SMRT Corp (MRT SP): 2 December 2015

In 2011, two high-profile train disruptions on the NSEWL on the 15 and 17 December, which lasted several hours during peak commuter periods, prompted the government to commission an investigation into the incidents. The LTA consequently imposed a maximum penalty of SGD2m on SMRT for failing to meet its licensing obligations.

Record fine imposed for More recently, SMRT was fined a record SGD5.4m for the breakdown of the NSEWL on 7 network disruption July, where around 413,000 commuters were affected during the evening peak period for more than two hours. This is the highest penalty imposed on an operator since the 2011 disruptions. It was determined that the breakdown had been caused by a power trip that had caused damage to a rail insulator, arising from a water leak in a tunnel.

Near- and medium-term repair and maintenance burden to remain high With the higher incidence of major disruptions to the rail network since 2011, SMRT has had to step up its repair and maintenance activities significantly. Consequently, the operating margin of its MRT segment has declined sharply over the FY11-15 period, declining from a peak of 29.6% in FY08 to 0.9% in FY14. Similarly, the LRT segment has seen widening operating losses over the same period.

SMRT: MRT operating profit and margin SMRT: LRT operating profit and margin SGD m SGD m 140 35% 0 0% 120 30% (1) (10%) 100 25% 80 20% (2) (20%) 60 15% (3) (30%) 40 10% 20 (4) (40%) 0 5% (5) (50%) (20) 0% (40) (5%) (6) (60%) FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY13 FY14 FY15 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY16E FY17E FY18E FY16E FY17E FY18E MRT operating profit (LHS) MRT operating margin (RHS) LRT operating profit (LHS) LRT margin operating margin (RHS)

Source: Company, Daiwa forecasts Source: Company, Daiwa forecasts

Looking ahead, it appears to us that the various network and capacity enhancements to its rail segment could prove to be a multi-year endeavour. Key projects include:

Replacing the sleepers. The company has completed the replacement of old wooden sleepers (which support the rail on which the trains run) for the entire NSL with concrete ones, and targets to complete the EWL by end-2016. Replacing the sleepers with concrete ones (with a 50-year lifespan) is expected to improve train speeds and result in a smoother journey for commuters.

New signalling system. Concurrently, the company is working on a new communication- based signalling system to reduce the intervals between trains to 100 seconds (from 120 seconds), replacing the legacy system dating back to the 1980s. At present, around 95% and 52% of the NSL and EWL, respectively, have been upgraded to the new system, with the former targeted for completion by April 2016 and the latter by 2018.

New ‘third rail’. SMRT’s tracks are powered by a special rail known as the third rail, which runs parallel to the tracks and provides electricity through the collector shoes beneath the trains. The ageing third rail system, which has been responsible for a number of power- fault-related disruptions, is being replaced and targeted to be completed by 2017. In the interim, the company has sought to minimise such disruptions through early detection and real-time updates, by deploying Linear Variable Differential Transformers (LVDT).

Train rejuvenation. Finally, the upgrading of its older trains will also be instrumental in improving the reliability of its fleet. Currently, 4 types of train are operated on the NSEWL – the oldest models being the C151 KHI (66 trains) and Siemens C651 (19 trains) introduced

SMRT Corp (MRT SP): 2 December 2015

in 1987 and 1994, respectively. Upgrading works will involve, among other things, the critical refurbishment of components such as brakes and propulsion systems, for more efficient fleet management.

SMRT: list of key rail network enhancements Project Timeline Affected lines Progress to date 1 Replacing timbre sleepers with concrete ones end-2016/early-2017 NSEWL NSL: 100% EWL: 14%

2 Upgrading the signalling system to reduce train frequency from Apr-2016 (NSL) NSEWL NSL: 95% 120seconds to 100s, at a cost of SGD195m 2018 (EWL) EWL: 52%

3 System-wide renewal of a third rail to reduce power-related faults caused end-2016/early-2017 NSEWL NSL: 0% by the interfacing of aged third rail and collector shoes EWL: 10%

4 Upgrading of older trains 2018 All lines

5 Increasing headcount and engineering workforce Progressive til 2018 All lines 70% more engineers; 23% more technicians since 2012

Source: Company, LTA

Transforming the workforce. According to management, SMRT’s total current headcount is around 8,800, with 600 staff added year-to-date (50:50 split between rail and bus). Rail- related staff account for around 4,500 personnel. For 2H FY16, management expects the staff headcount to grow by 300-500. The company said that it has almost doubled the number of executive engineers to 326 since December 2011, and technicians by more than 30% to 2,265. By 2018, it aims to have more than 400 engineers and 2,600 technicians, who will be required to keep the network running. We forecast staff costs to increase at a CAGR of 6.1% over the FY15-18E period, and the total staff headcount to reach around 9,237 by end-FY18E.

SMRT: total staff headcount SMRT: staff costs and R&M expense as a % of revenue 9,000 55% 8,500 8,000 50% 7,500 45% 7,000 6,500 40% 6,000 5,500 35% 5,000 4,500 30% 4,000 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E Source: Company, Daiwa calculations Source: Company, Daiwa forecasts

Management expects effective rail repair and maintenance-related expenses (which include staff-related costs) to increase from 41% of rail segment revenue as at 2Q FY16 to 50% by the end of 2015. While the company does not actively disclose a breakdown of opex items by business segment, its combined overall staff costs and repair and maintenance (R&M) expenses have increased from around 39.1% in FY09 to 49% in FY15. Looking ahead, we expect this number to increase to around 54% of revenue by FY18.

Transition to new rail model still uncertain, benefits unclear Background. In 2010, the Rapid Transit Systems Act was amended to allow the implementation of a new rail financing framework, following its proposal by the LTA. Under the framework, the government will own all train assets; meanwhile operators will pay a licence fee to a Railway Sinking Fund, retaining fare revenue and shouldering all operating and maintenance costs. At the same time, the licensing period for new rail lines (starting with the DTL) was shortened to 15 years from 30-40 years. In this manner, the LTA will be better positioned to respond and ensure adequate capacity is available to meet projected

SMRT Corp (MRT SP): 2 December 2015

demand. The Downtown Line (DTL) was the first line subjected to this new asset-light operating model.

Singapore rail: changes to rail model Existing model Potential new model Financing framework “Line-by-line” approach to evaluating the financial Network approach to evaluating financial viability of new viability of new lines lines License period 30 years 15 years License fees % of fare revenue Licence charge, comprising fixed and variable components, pooled in a Railway Sinking Fund Asset ownership Government owns infrastructure assets; Government owns all rail assets Operator owns operating assets Repair and maintenance Responsibility of operator Responsibility of operator Fare and ridership risks Borne by operator Borne by operator

Source: LTA, Daiwa compiled

At present, SMRT owns the operating assets for the NSEWL (purchased from the government on 1 April 1998 for SGD1.2bn) and BPLRT; its CCL assets are owned by LTA, although SMRT is supposed to purchase these assets at book value on 4 May 2019, according to LTA.

While we expect that all the rail networks will eventually transition to a new rail model, the timing and details remain unclear at this stage. According to management and statements from the regulator, negotiations between SMRT and the government are ongoing, with no indication as to when they will be finalised. We expect the operating terms to be broadly similar to those of the DTL – although details on LTA’s acquisition of assets from SMRT remain unclear. Based on the company’s disclosure, the segmental MRT net asset value stood at around SGD463.1m as at end-FY15, or SGD0.30/share.

Further, comments made by both the former and current transport minister suggest that the central agenda continues to be on improving Singapore’s rail reliability. In our view, it would be in the best interest of both the government and Singapore public for SMRT to fulfil all existing obligations with respect to network efficacy, before addressing asset acquisitions. Further, given that the government already owns rail infrastructure (the assets expected to be acquired include mainly SMRT’s NSEWL rolling stock), a transition to a new rail model is unlikely to materially alter the complexion of SMRT’s rail business positively from an operational standpoint. As such, the case for a transition of the NSEWL to a new rail model appears weak to us.

How could negotiations conclude between the government and SMRT? As positive rail reforms would represent a key upside risk to our negative thesis and valuation for the stock, we assess the potential impact of reform in the near term under two possible scenarios:

Scenario 1: transition to a new rail model – If the government announces a transition of SMRT’s NSEWL to a new rail model in the near term, we would see the following potential impact on SMRT based on several estimates and assumptions: 1) proceeds of around SGD463m (SGD30cents/share) arising from the acquisition of its NSEWL operating assets, 2) an estimated annual capex reduction of around SGD120m, given that rail capex accounts for around 50% of overall capex spend, and 3) an assumed improvement in its rail segment operating margin to 5% by FY19. Based on our back of the envelope calculations, this translates to a potential valuation uplift of SGD1.17/share to our existing target price (assuming gearing levels remain unchanged).

SMRT Corp (MRT SP): 2 December 2015

SMRT: potential impact of transition to new rail model on our current valuation Operational assumptions Uplift to Daiwa’s target price (SGD/share) Asset sale proceeds Assets are acquired in a lump sum of around SGD463m 0.30 based on the existing NAV of the MRT segment Capex savings SGD120m in annual capex reduction 0.72 Operating margin Assumption that FY19 margin improves to 5% from current 0.15 forecasts Total valuation impact Assuming no change to gearing levels 1.17

Source: Daiwa estimates

Scenario 2: privatisation of SMRT – Calls to privatise SMRT have resurfaced in recent months, following the July 2015 NSEWL disruption. On balance, we believe the probability of this happening is low. It is clear that the government’s policy changes reflect a move to “nationalise” public transport infrastructure and operating assets, indicating an intention to separate asset-ownership from the operators. This structure will allow the government a more timely response to changes in capacity and infrastructure demands, while transmitting service requirements to industry operators through competitive tenders. As such, we believe it would make little sense to privatise SMRT. In the event of a privatisation scenario occurring, we see upside risk to our target price as controlling shareholder Te masek Holdings is likely to acquire the minority interest at a premium to current share price levels, in our view.

Ridership growth could be capped by the opening of new lines Average daily ridership (ADR) on the MRT has grown at a healthy pace over the past few years, at a 4.9% CAGR over the FY11-15 period. In contrast to this, the ADR for the LRT has declined since FY13, which we attribute to commuters switching to feeder bus services given the additional capacity and improved bus frequency.

NSEWL could lose some While we expect overall ridership growth to continue to be driven by structural factors of its ridership to the (population growth, government restrictions on private vehicle growth, etc), the DTL2, when it starts government’s plans to expand the rail network significantly is likely to reduce reliance on operations on 27 Dec the backbone NSEWL network over the longer term, as commuters switch to some of 2015 these newer lines, such as the DTL2 (operated by CDG), which opens on 27 December 2015.

For example, a person currently travelling from his home in Bukit Panjang to work in the Central Business District would have to take the BPLRT and switch to the NSL (Choa Chu Kang station) and then to the EWL (Jurong East interchange) to arrive at his workplace (Raffles Place) (see rail station map in Appendix 1). With the opening of the DTL2 on 27 December, the same commuter would have a direct line to the CBD from his home, which should reduce their travel time by up to 40%.

SMRT: MRT average daily ridership SMRT: LRT average daily ridership (mil'/day) (000'/day) 2.2 9% 54 4% 8% 3% 2.1 53 7% 2% 2.0 6% 52 1% 1.9 5% 0% 51 1.8 4% -1% 3% 50 -2% 1.7 2% -3% 49 1.6 1% -4% 1.5 0% 48 -5% FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E FY12 FY13 FY14 FY15 FY16E FY17E FY18E MRT average daily ridership (ADR) ADR YoY growth LRT average daily ridership (ADR) ADR YoY growth

Source: Company, Daiwa forecasts Source: Company, Daiwa forecasts

We forecast ADR CAGR of 2% over FY16-18E for the MRT, while we expect flat ADR growth for the LRT.

SMRT Corp (MRT SP): 2 December 2015

Network expansion opportunities are some way off Newest line, DTL, was According to the LTA, Singapore’s rail system will double in rail length to 360km by 2030, awarded to rival CDG from 178km currently. In addition to the extension of several existing lines, three new lines will be introduced – the Thomson-East Coast Line (43km), Cross Island Line (50km) and the Jurong Region Line (20km) (see Appendix 1).

While we expect CDG’s Singapore rail segment to see significant ridership growth from an 83% increase in its rail length with the opening of DTL Stages 2 and 3 over the near and medium term, SMRT’s rail network should remain comparatively unchanged.

For SMRT’s existing lines, the Circle Line will see a further 3 new stations to close the loop – a 4km stretch connecting Harbourfront Station to Marina Bay Station (CCL6) – and this will begin construction in mid-2017, with completion targeted only in 2025. The construction cost is SGD3.7bn. Currently, the EWL is being extended by a further 4 stations (from Joo Koon) under the Tuas West Extension, with completion targeted in 2016.

In the long term, it is clear that the Singapore government is keen to make the rail network the key mode of transport for commuters, by increasing the “last mile” connectivity of stations to homes across all areas of the island.

As bidding has yet to be initiated, as the completions of these lines are not due for several more years, the potential has yet to be priced in, in our view. We expect that bidding for these lines to commence some time in 2017.

Greater exposure to regulated public fare pricing Accounting for around 72% of SMRT’s current top line, the company is significantly exposed to Singapore’s regulated fare pricing. The Public Transport Council (PTC), via the Fare Review Mechanism Committee established in 2012, applies a formula that is reviewed annually (until 2017) as:

Maximum Allowable Fare Adjustment = 0.4*cCPI + 0.4*WI +0.2*EI - 0.5% where cCPI = change in core Consumer Price Index over the preceding year; WI = change in Wage Index and EI = change in Energy Index; 0.5% refers to the productivity extraction based on a share of productivity gains achieved by public transport operators from 2013-17.

In addition, the PTC mandated in October 2011 that SMRT will commit SGD5m annually in support of the travel demand management schemes, whereby discounts are provided to commuters during certain pre-peak hours to encourage staggered travel times and reduce the burden on the network during peak periods into the Central Region of Singapore, at 16 designated MRT stations.

Singapore Public Transport Fares: actual fare increases (2005-11) 3%

(1%)

(2%)

(3%)

(4%) 2005 2006 2007 2008 2009 2010 2011 Source: Fare Review Mechanism Committee Report Note: fare adjustments were suspended from 2012

SMRT Corp (MRT SP): 2 December 2015

In October 2015, the PTC announced a 1.9% reduction in fare prices starting from 27 December 2015 after factoring in the low fuel cost environment. The PTC reported that SMRT will see its annual revenue decline by around SGD20.4m in total across its rail and bus segments.

While the bus segment will transition to the proposed GCM by August 2016, the rail segment (53% of revenue) remains exposed to government-regulated fares reviewed by the PTC fare review committee. We have factored the lower average ticket price growth into our FY16-17E forecasts.

Forecast and assumptions We forecast a revenue CAGR of 3.0% for the MRT segment over FY15-18E, driven mainly by the 2% CAGR in ADR that we forecast over the period. For the LRT segment, we forecast a modest 1.0% revenue CAGR over FY15-18E, as we expect both ADR and pricing growth to be largely flat over the same period.

We forecast both segments to continue to post operating losses over FY15-18E, as margins will continue to be impacted by the network-enhancement initiatives and higher repair and maintenance burden. Our forecasts for the rail segment do not incorporate a potential transition of the business to a new rail model, owing to the lack of clarity over the terms and timeline.

SM RT: rail segment key assumptions FY14 FY15 FY16E FY17E FY18E MRT (NSEWL + CCL) Average daily ridership ('000) 1,947.4 2,001.6 2,041.7 2,082.5 2,124.2 ADR growth (% YoY) 2.9% 2.8% 2.0% 2.0% 2.0% Average ticket size per ride (SGD) 0.878 0.882 0.899 0.899 0.908 % growth -0.3% 0.5% 2.0% 0.0% 1.0% MRT revenue (SGD m) 623.8 644.2 670.2 683.6 704.3 % growth YoY 2.6% 3.3% 4.0% 2.0% 3.0%

LRT Average daily ridership ('000) 52.3 50.1 50.1 50.1 50.1 ADR growth (% YoY) -1.5% -4.2% 0.0% 0.0% 0.0% Average ticket size per ride 0.54 0.54 0.55 0.55 0.55 % growth -1.1% 2.0% 0.0% 1.0% LRT revenue (SGD m) 10.3 9.8 10.0 10.0 10.1 % growth YoY -5.2% 2.0% 0.0% 1.0%

Source: Company, Daiwa forecasts

Bus: transitioning to an asset-light operating model SMRT is the second-largest bus operator in Singapore’s duopolistic public bus market, managing a fleet of 1,282 buses (end-FY15) (vs. SBS Transit’s fleet of around 3,500 buses), providing mainly scheduled public bus services for commuters.

Revenue growth for the bus segment has been driven primarily by healthy growth in average daily ridership trends, which have increased by 3-5% YoY over the past 5 years, since FY11. We attribute this both to population growth, as well as the government’s cap on private vehicle growth encouraging greater use of public transport services.

SMRT Corp (MRT SP): 2 December 2015

SMRT: bus average daily ridership trends (million/day) 1.1 6%

1.0 5%

1.0 4%

0.9 3%

0.9 2%

0.8 1%

0.8 0% FY11 FY12 FY13 FY14 FY15 Average daily ridership (LHS) ADR YoY growth (RHS)

Source: Company Note: calculated from annual ridership figures disclosed

Bus segment Despite the ridership growth, as highlighted in our report on ComfortDelGro (Initiation: profitability has been shifting gears, 22 Sept 2015) regulated fare pricing (governed by the Fare Review negatively impacted by Mechanism Committee of the Public Transport Council [PTC]) has restricted operators regulated fare prices from raising fare prices in tandem with rising costs. As a result, SMRT’s bus segment has seen operating losses since FY08, as the company has had to absorb escalations in labour and operating costs in response to demand for higher bus service standards.

In October 2015, the PTC announced that fare prices would be revised down by around 1.9% from 27 December 2015, coinciding with the expected opening of the Downtown Line Stage 2 rail network (operated by SBS Transit). Similar to the rail segment, we have factored the lower average ticket price growth into our FY16-17E forecasts.

However, looking ahead, we think the government’s proposal of a new asset-light government contracting model (GCM) bodes well for the operational outlook of the bus operators in Singapore.

Bus margins to improve with the transition to an asset-light operating model The implementation of the proposed GCM, scheduled to take effect from August 2016, will effectively transfer the burden of ridership and revenue risk to the government. In turn, the LTA will pay the operators to deliver bus services through competitive tenders, on a cost- plus basis – based on designated bus routes and specified service standards (bus frequency, operating hours, etc). In this manner, the government hopes to meaningfully raise the quality of bus services for commuters.

The LTA has divided all bus routes nationwide into 12 packages to be tendered out– 2 packages have been awarded already, and one more will be announced before August 2016. To date, the first (Bulim package) and second (Loyang Package) have been awarded to UK-based bus operators Tower Transit and Go-Ahead respectively, while the third package (Mandai) has yet to be put up for tender.

Notably, both SMRT and SBS Transit will continue to operate the remaining 9 packages from August 2016 until end-2021. The government will use the results of the initial three packages as a basis for negotiating the terms for the remaining 9 (which comprise around 80% of the existing bus fleet) with the two incumbents.

New bus model should At this stage, although it remains unclear how the financials of the operators could be positive for industry eventually evolve under the GCM, we expect the operating margin of the operators to be operating margin positively impacted by the imposition of this new asset-light operating model.

To be consistent with our expectations for the industry (and with CDG), our base case for SMRT’s bus segment incorporate the following assumptions:

SMRT Corp (MRT SP): 2 December 2015

1) Our existing base case assumes that neither of the incumbents will win the remaining one package that will be awarded by end-Aug 2016 (the first two packages have already been awarded to new entrants).

2) We forecast a 20% decline in bus revenue from FY17E, as this represents the share of bus routes transferred under the first 3 packages (SMRT’s market share of service routes would be reduced from 25% to 20% by FY17).

3) We expect SMRT’s bus operating margin to improve to around 8% (excluding advertising revenue).

SMRT: impact of GCM on bus segment operating profit forecasts SGD m FY15 FY16E FY17E FY18E Current model Bus segment revenue (unconsolidated) 238.6 248.2 258.2 268.7 YoY revenue growth 4.0% 4.0% 4.0% Operating profit margin -2.7% 3.0% 1.5% 1.5% Segment operating profit (6.5) 7.4 3.9 4.0 Under proposed GCM Bus segment revenue 238.6 248.2 232.4 214.9 YoY revenue growth 4.0% -6.4% -7.5% Operating profit margin -2.7% 3.0% 4.8% 8.0% Segment operating profit (6.5) 7.4 11.0 17.2 Incremental operating profit - - 7.2 13.2 % increase to overall operating profit forecasts 6.1% 10.9% Assumptions Remaining 1 package is not won by either incumbent 20% decline in revenues

Source: Company, Daiwa estimates

While there exists some uncertainty as to where the operating margin could eventually settle post-GCM, we believe using the London bus market as a proxy for how the Singapore market could evolve is suitable, mainly as: 1) we believe the government’s decision to adopt the GCM, after studying similar bus models in London and Australia, reflects its desire to meaningfully improve service standards, in part by creating a more attractive environment for the operators, and 2) the bus market must also be attractive enough for foreign players such as Tower Transit and Go-Ahead (UK bus operators that have won the first two GCM packages) given the small market size.

Notably, we observe that operators such as CDG and StageCoach have been able to achieve operating margins of around 10% for their London bus operations, despite the greater competition (characterised by a high number of market participants vying for routes up for renewal every year) in the tendering process. We acknowledge that part of this could be attributable to the operators owning the bus assets, which is unlike the Singapore GCM as the government will own all bus assets.

We estimate that the implementation of the GCM could increase our bus segment operating profit forecasts by 6-11% over FY17-18E, driven by an improvement in the operating margin to 8% in FY18E from around 3% in FY16E.

Capital inflows from bus asset sales All bus assets in As part of the GCM, we expect the government to acquire all bus-related assets (operating Singapore will be assets, infrastructure) from the operators prior to it being implemented in August 2016. At acquired by the present, this includes around 1,083 of SMRT’s existing bus fleet (excluding 199 buses government under the Bus Service Enhancement Program [BSEP]). Going forward, capacity additions will also be borne by the government (new buses, infrastructure etc).

Asset sales. Overall, we estimate that SMRT could see potential proceeds of around SGD44.6m (SGD0.02/share), assuming that the acquisition of its bus assets is executed at net book value, and outstanding bus segment liabilities are fulfilled. The resulting net asset value immediately excludes the proportion of bus assets held on behalf of the government under the BSEP (as assets and corresponding liabilities offset each other).

SMRT Corp (MRT SP): 2 December 2015

SMRT: proceeds from the potential government acquisition of bus assets SGDm Amount SMRT segmental bus assets (FY15) 393.1 SMRT segmental bus liabilities (FY15) 348.5 Net asset value 44.6

Potential net proceeds 44.6 Per share (SGD) 0.02

Source: Company, Daiwa estimates

While there is still a lack of clarity surrounding the asset acquisitions at this point (including issues such as the timeline, purchase mechanism of the assets to be acquired, operating requirements, etc), we have incorporated the asset acquisition proceeds of SGD44.6m into our FY17E forecasts to factor in this potential upside risk.

Potential capex Capex avoidance. With the government taking ownership of all bus assets, we expect reduction of SGD90m SMRT’s future bus capex commitments to be correspondingly alleviated. Based on our annually discussions with the company, around 30-35% of its overall capex spend is allocated to its bus segment. On a year-to-date basis, it has spent around SGD50.7 in bus-related capex, while management is guiding for overall FY16E capex levels of not more than SGD430m. We estimate SMRT’s capex levels to decline by around SGD90m annually as a result of the transition to the GCM, and have factored this into our forecasts.

With the excess capital on hand, we expect SMRT to channel this toward reducing its gearing levels.

Forecast and assumptions Overall, we forecast SMRT’s bus segment revenue to decline by a 3.4% CAGR over FY15- 18E, as our base case assumes that the first 3 GCM packages will be awarded to new entrants in order to spur competition and expand service quality options for commuters.

In addition, we expect SMRT’s bus operating margin to improve to around the 8% level by FY18E, consistent with our expectations of a more favourable operating environment for the industry.

SMRT: bus segment revenue forecasts SMRT: bus segment operating margin forecasts (SGD m) 10% 15% 240 5% 10% 190 0% 5% 140 (5%) 0% (10%) 90 (5%) (15%) 40 (10%) FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E (20%) Bus revenue (LHS) YoY growth (RHS) FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E Source: Company, Daiwa forecasts Source: Company, Daiwa forecasts

Taxi business: muted growth Third- largest licensed With a fleet of around 3,545 taxis (as at end-2QFY16) representing around 13% of the total taxi operator in taxi population of around 28,000 taxis, SMRT is the third-largest taxi operator in Singapore Singapore by fleet size after ComfortDelGro and Trans-Cab. It was granted its Taxi Operator Licence (TOL) from the Land Transport Authority (LTA) in 2003.

SMRT Corp (MRT SP): 2 December 2015

SMRT derives its taxi revenue mainly through rental income from its taxis driven by qualified drivers, revenue coming from taxi bookings through its online system (phone, app bookings) remains largely insignificant, according to the company. As such, revenue growth is mainly a function of: 1) the hire-out rate, 2) the average rental rate of its taxi vehicles, and 3) overall fleet growth.

Meeting LTA’s services Despite ongoing concerns in the market over private car-hire services (such as Uber), we standards a bigger expect the Singapore taxi market to remain relatively resilient to greater competition from concern than Uber such services, which we believe fulfil excess demand caused by an undersupply, as detailed in our note (ComfortDelGro: Singapore taxi resilient, 12 Oct 2015). However, we believe SMRT’s taxi segment performance is more likely to be hindered by muted fleet growth as a result of challenges in fulfilling service standards set by the government.

Challenges in meeting the regulator’s requirements hinder fleet growth According to the Taxi Availability framework set by the LTA, operators are required to meet the standards of minimum daily mileage (250km) and taxi fleet availability (85%) for at least four months in every half-yearly period to be eligible to expand their fleet in the corresponding six-month period the following year. Taxi fleet growth has been capped by the LTA (2% cap was imposed in Aug 2012).

Based on the latest report by the regulator (for Jan to Sept 2015), only operators ComfortDelGro and Trans-Cab were deemed eligible to expand their fleets by the 2% cap in 1H16. Further, SMRT was fined SGD21.4k for not meeting the minimum daily mileage requirements. Smallest operator, Prime Taxis, was given the biggest finest (SGD109k).

SMRT: taxi fleet 4,000 10% 3,800 8% 3,600 3,400 6% 3,200 4% 3,000 2,800 2% 2,600 0% 2,400 -2% 2,200 2,000 -4% FY12 FY13 FY14 FY15 FY16E FY17E FY18E Fleet size YoY growth (RHS)

Source: Company, Daiwa forecasts

We forecast SMRT’s taxi fleet to grow at a modest pace, from around 3,461 vehicles as at end-FY15 to 3,725 by FY18E.

Taxi rental income should remain resilient As first discussed in our initiation report on ComfortDelGro (Initiation: shifting gears, 22 Sept 2015), we expect the hire-out rate for the larger taxi operators to see minimal impact despite the increasing popularity of private car hire services (such as UberX and GrabCab). This is mainly as: 1) the majority of its services are rendered through street hails (around 80%), 2) private care hire services mainly fill commuter demand during peak hours, caused by the undersupply of licensed taxis, and 3) we believe the government could introduce regulation in the near term, which could ‘level the playing field’ between licensed operators and currently unregulated private car hire services offered by these booking apps.

1HFY16 taxi revenue up Further, despite the relative maturity of private car hire services like Uber in the Singapore 8.5% YoY market, SMRT’s 1HFY16 taxi revenue increased by 8.5% YoY, indicating to us that the market for licensed taxi operators remains resilient. According to management, around

SMRT Corp (MRT SP): 2 December 2015

98% of its SMRT’s existing taxi fleet continues to be hired out – we expect these levels to be sustained in the medium-term.

Forecasts and assumptions Overall, we forecast a revenue CAGR of 3.7% for SMRT’s taxi segment over the FY15-18E period. We expect fleet growth to remain modest as the company contends with meeting the regulator’s service availability standards. At the same time, we expect a slowdown in the pace of rental rate growth given the average age of its fleet of 2 years 8 months (as at 2QFY16, according to the company), reflecting that a majority of its fleet has been replaced by newer models such as the Toyota Prius Hybrid. Finally, we expect the hire-out rate of its existing fleet to remain relatively resilient despite concerns over the increasing presence of private care hire services.

SMRT: taxi segment revenue forecasts (SGD m) 180 35%

160 30%

140 25%

120 20%

100 15%

80 10%

60 5%

40 0% FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E Taxi revenue (LHS) YoY growth (RHS)

Source: Company, Daiwa forecasts

SMRT: taxi segment key assumptions FY15 FY16E FY17E FY18E Taxi segment key assumptions Fleet size 3,461 3,634 3,670 3,725 Fleet growth (% YoY) 4.8% 5.0% 1.0% 1.5% Average daily rental rate (SGD) implied 113 115 116 117 Rental rate growth (% YoY) 2.8% 1.5% 1.0% 1.0% Taxi segment revenue 142.9 152.3 155.4 159.3

Source: Company, Daiwa forecasts

Rental: lack of clear catalysts 79% of rental income SMRT manages the retail spaces within its network of train stations and bus interchanges, derived mainly from through its wholly owned subsidiary SMRT Investment, spanning more than 820 retail units retail space around its with a total net lettable area (NLA) of around 37,226sq m (as at end-FY15). train stations The segment is a high-margin business (as the space is leased from LTA at nominal rates), which has performed strongly over the past decade, growing at a 16.6% CAGR over the FY05-15 period. Further, occupancy rates have remained high at around 98% over the past few years, and we expect this to be sustained as these rental areas typically see heavy footfall due to their proximity to the various transport stations, ensuring demand for the space remains strong.

In addition, SMRT Alpha, a JV between SMRT Investments and Alpha Investments, won the bid in 2012 to manage and sub-lease space at the Singapore Sports Hub over a 12- year license (expiring 2026), which spans 41,000 sq m (NLA of around 23,000 sq m) of retail and F&B space and includes Kallang Wave Mall, which was opened in Feb 2015 (4QFY15).

Management said it will continue to pursue “out-of-network” opportunities similar to Kallang Wave Mall, which includes potential overseas opportunities should they arise. Within its existing network portfolio, it is seeking to improve its rental yield through the rejuvenation of several spaces (eg, Raffles Xchange, Tanjong Pagar).

SMRT Corp (MRT SP): 2 December 2015

Retail rents likely to remain soft Soft retail rent outlook Looking ahead, we expect overall segment growth to be partially capped by a soft retail rent market. According to data from Jones Lang LaSalle, retail rents have started to show some weakness in recent quarters, though the QoQ declines (3Q15: -0.1% QoQ) to date are marginal. We expect rental reversions to be relatively flat over the FY17-18E period, mainly as Singapore economic growth remains sluggish, while retail sales remain largely stagnant in the near term.

Monthly retail rents for grade-A shopping centres (SGD/sq ft) SGD psf 45

20 2Q01 4Q01 2Q02 4Q02 2Q03 4Q03 2Q04 4Q04 2Q05 4Q05 2Q06 4Q06 2Q07 4Q07 2Q08 4Q08 2Q09 4Q09 2Q10 4Q10 2Q11 4Q11 2Q12 4Q12 2Q13 4Q13 2Q14 4Q14 2Q15 Primary Suburban

Source: Jones Lang LaSalle

Opportunities appear limited In addition, following the company’s opening of Ang Mo Kio Xchange in November 2014 and Kallang Wave Mall in February 2015, opportunities to secure further additions to its existing portfolio remain scarce, in our view. According to Daiwa’s Property REIT analyst David Lum, unlike the situation seen in 2013-14, the rate of new addition of retail space appears to be moderating, particularly in the suburban region. Based on Jones Lang LaSalle’s gross retail supply forecasts for the coming years, new supply appears considerably lower than for 2013 and 2014.

As such, we forecast SMRT’s overall NLA under management to be largely unchanged in the near term, with any marginal increase driven mainly by its efforts to rejuvenate its existing retail space.

Forecast and assumptions Out forecast for a revenue CAGR of 6.8% for the rental segment is driven largely by the 18.9% YoY revenue growth in FY16E, boosted by the opening of Kallang Wave Mall in February 2015 (4Q FY15), which started contributing meaningfully from 1Q FY16 onwards.

SMRT: rental segment revenue forecasts (SGD m) 160 25%

140 20% 120 15% 100 10% 80

60 5%

40 0% FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E Rental revenue (LHS) YoY growth (RHS)

Source: Company, Daiwa forecasts

SMRT Corp (MRT SP): 2 December 2015

Financial analysis Higher gearing required to take on elevated capex levels We expect SMRT’s gearing levels to increase as the company executes its rail network enhancement projects over the medium term. As we believe capex levels are likely to continue to exceed operating cash flow over the FY16-18E period, we expect the company to take on more debt to finance these projects. At present, management is guiding for an FY16E cash capex level of not more than SGD430m (our FY16E forecast: SGD424m; FY15: SGD463m).

Consequently, we forecast SMRT’s net debt/equity ratio to increase further from 0.8x as at end-FY15 to 1.0x by end-FY18E. Similarly, we foresee net debt/EBITDA ratios deteriorating from 2.1x to 2.5x over the same period.

SMRT: net debt/(cash) trend SMRT: net debt/EBITDA ratio forecasts SGD m (x) 1,000 3.0

800 2.5 2.0 600 1.5 400 1.0 0.5 200 0.0 0 -0.5 (200) -1.0 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E FY16E FY17E FY18E Source: Company, Daiwa forecasts Source: Company, Daiwa forecasts

Our current forecasts incorporate 1) estimated annual capex savings of SGD90m from the transition of the bus segment to the new GCM, as well as 2) proceeds (SGD44.6m) from a potential bus asset acquisition by the government, but do not include 1) a potential transition of the rail segment to a new asset-light model, due to a lack of clarity over the terms and timeline.

Longer-term improvement in free cash flow should be used to pare debt While we expect SMRT eventually to turn free cash flow positive following the completion of its rail network projects, this is likely to only sustainably occur beyond an FY18E horizon, in our view. Even so, we believe the company is likely to allocate proceeds toward paring down the debt burden accumulated between FY12 and FY18 – we forecast interest- bearing borrowing to increase from SGD150m to SGD1.1bn by end-FY18. As at end-2Q FY16, its gross debt stood at SGD836m. While management has not specified a target gearing ratio, we believe an eventual reduction in its net debt/equity ratio to 0.5x could potentially occur as far out as FY24.

SMRT: capex and operating cashflow (OCF) forecasts SMRT: FCFF forecasts SGD m SGD m 700 250 600 150

500 50 400 (50) 300 (150) 200 100 (250) 0 (350) FY09 FY14 FY06 FY07 FY08 FY10 FY11 FY12 FY13 FY15 (450) FY16E FY17E FY18E

Cash capex OCF FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E Source: Company, Daiwa forecasts Source: Company, Daiwa forecasts

SMRT Corp (MRT SP): 2 December 2015

Margins weighed down by rail, lifted by bus Overall, we forecast SMRT’s net profit (PATMI) to see a 3.0% CAGR over the FY15-18E period, largely driven by an expected improvement in the operating margin for its bus segment following the industry transition to the new GCM in August 2016. Meanwhile, we forecast continued operating losses for the rail segment over the FY15-18E period, as we expect the company’s rail network enhancement initiatives to be a multi-year endeavour.

SMRT: segment operating margin forecasts SMRT: operating margin and net profit forecasts 15% SGD m 170 25% 10% 150 20% 5% 130 15% 0% 110 10% (5%) 90 70 5% (10%) 50 0% (15%) FY11 FY12 FY13 FY14 FY15 FY06 FY07 FY08 FY09 FY10

FY14 FY15 FY16E FY17E FY18E FY16E FY17E FY18E Train (MRT+LRT) Bus Taxi Net profit (PATMI) (LHS) Operating margin (RHS)

Source: Company, Daiwa forecasts Source: Company, Daiwa forecasts

We forecast a modest overall revenue CAGR of 2.2% over FY15-18E, driven by the company’s MRT, taxi and rental segments, offset by the expected decline in revenue in the bus segment following the industry’s transition to the new GCM in August 2016.

SMRT: key forecasts FY15 FY16E FY17E FY18E FY15-18E CAGR (%) P&L (SGD m) Revenue 1,235.5 1,305.2 1,309.2 1,320.8 2.2 % revenue growth YoY 5.6% 0.3% 0.9% Operating profit 120.8 116.8 125.1 133.5 3.4 Operating profit margin (%) 9.8 8.9 9.6 10.1 0.3 p.p Net profit (PATMI) 91.0 88.1 93.6 99.3 3.0 EPS 6.0 5.8 6.1 6.5 2.8 % EPS growth YoY -3.5% 6.1% 6.2%

Segmental revenue MRT 644.2 670.2 683.6 704.3 3.0 LRT 9.8 10.0 10.0 10.1 1.0 Bus 238.1 247.7 232.0 214.5 (3.4) Taxi 142.9 152.3 155.4 159.3 3.7 Rental 120.4 143.1 144.8 146.9 6.8 Advertising 36.2 38.0 38.8 39.5 3.0 Engineering services 15.2 13.7 13.0 13.0 (5.1) Other services 28.7 30.1 31.6 33.2 5.0

Segmental operating profit MRT 13.4 (16.8) (13.7) (14.1) n.m. LRT (3.8) (5.5) (5.0) (4.5) 6.2 Bus (6.5) 7.4 11.0 17.2 n.m. Taxi 13.7 19.8 15.5 15.9 5.1 Rental 79.6 85.9 89.8 91.1 4.6 Advertising 21.9 23.0 23.5 23.9 3.0 Engineering services (2.4) (1.5) (1.4) (1.4) (16.0) Other services 2.4 2.5 2.6 2.8 5.0

Source: Company, Daiwa forecasts

We forecast the company’s operating margin to improve by 0.3pp over FY15-18E, and its net profit to see a 3% CAGR over the same period. We expect the improvement in operating margin to be driven by the bus segment, which we expect to benefit operationally from a transfer of ridership and revenue risk to the government.

Dividend payout should be unchanged SMRT’s stated dividend policy is to pay out around 60% of its net profit. The company reduced its payout ratio from around 80% in FY11 to around 54% in FY15. We expect

SMRT Corp (MRT SP): 2 December 2015

current payout levels to be sustained despite an improvement in its free cash flow profile, mainly because we believe the company will opt to reduce gearing levels and improve its balance-sheet strength, given its commitment to raise the performance of its rail segment through the various enhancement projects it is undertaking. We forecast a 55% payout ratio for FY15-18E.

SMRT: dividend and payout ratio forecasts SGD cents 9.00 100% 8.00 7.00 80% 6.00 60% 5.00 4.00 40% 3.00 2.00 20% 1.00 0.00 0% FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E DPS (LHS) Payout ratio (RHS)

Source: Company, Daiwa forecasts

Consensus revision trend The Bloomberg consensus FY16-17 EPS forecasts have seen downward revisions of 14- 23% over the past 12 months, against an 11% fall in the share price, which we attribute mainly to increased expectations of higher repair and maintenance and staff costs, as well as the announcement of a 1.9% reduction in fare prices.

SMRT: Bloomberg consensus EPS revisions SMRT: Bloomberg consensus EBITDA revisions SGD SGD SGD m SGD 0.10 1.8 390 1.8 1.7 1.7 0.09 380 1.6 1.6 0.08 370 1.5 1.5 360 1.4 0.07 1.4 1.3 1.3 350 0.06 1.2 1.2 340 0.05 1.1 1.1 330 1 0.04 1 5-Oct-15 5-Jan-15 1-Jun-15 9-Mar-15 Jul-15 3-Aug-15 13-Jul-15 Apr-15 Oct-15 Oct-15 Jan-15 Jan-15 Jun-15 Jun-15 20-Apr-15 26-Oct-15 26-Jan-15 22-Jun-15 Mar-15 Mar-15 Feb-15 Nov-14 Dec-14 Nov-15 Aug-15 Aug-15 Sep-15 30-Mar-15 16-Feb-15 24-Nov-14 15-Dec-14 16-Nov-15 24-Aug-15 14-Sep-15 May-15 11-May-15 FY16 EPS FY17 EPS Price FY16 EBITDA FY17 EBITDA Price

Source: Bloomberg Source: Bloomberg

Daiwa forecasts versus consensus Although our FY16-17E EPS forecasts are broadly in line with those of the Bloomberg consensus, our FY18E EPS is 16.5% below – we attribute this largely to different views on the timing and magnitude of earnings impact arising from: 1) the proposed GCM in its bus segment, and 2) the factoring of a new rail model by some views on the street.

Expectations for rail We believe negotiations between SMRT and the government (which could see a potential asset acquisition appear acquisition of its rail assets by LTA) are likely to gain more traction only after the operator unfounded has fulfilled its obligations to return network reliability to satisfactory levels under its existing license requirements – indicating a timeline that could stretch beyond 2018.

Valuation Methodology We initiate coverage on SMRT with an Underperform (4) rating and DCF-based 12-month target price of SGD1.31. We value SMRT using a 10-year DCF model with the following inputs: a weighted average cost of capital (WACC) of 7.2%, comprising a 6% equity-risk

SMRT Corp (MRT SP): 2 December 2015

premium, risk-free rate of 2.6%, a 20% long-term debt-to-capital ratio, and a terminal FCF growth rate of 1.0% (long-term inflation estimate for Singapore transport services).

SMRT: DCF valuation inputs Long-term FCF growth 1.0% WACC 7.2% NPV - FCFF 2015-24 642.0 NPV Terminal FCFF 2,017.2 Total Enterprise Value 2,659.2

Less: Net debt (end-FY15) 665.5 Less: Minority interest (end-FY15) (0.6) Value of equity 1,994.4 No. of shares (FY15 m) 1,522.0 DCF per share value (SGD) 1.31 Net debt/(cash) per share (SGD) 0.44

Source: Daiwa forecasts

SMRT: sensitivity of DCF analysis (FY16-25E) WACC Base Terminal FCF rate 5.2% 5.7% 6.2% 6.7% 7.2% 7.7% 8.2% 8.7% 9.2% 0.0% 1.94 1.68 1.46 1.27 1.12 0.98 0.86 0.76 0.66 0.5% 2.15 1.84 1.59 1.38 1.21 1.05 0.92 0.81 0.71 Base 1.0% 2.41 2.05 1.75 1.51 1.31 1.14 1.00 0.87 0.76 1.5% 2.74 2.30 1.95 1.66 1.43 1.24 1.08 0.94 0.82 2.0% 3.18 2.61 2.19 1.85 1.58 1.36 1.18 1.02 0.89

Source: Daiwa estimates

SMRT: sensitivity of DCF analysis (FY16-25E) Discount rate NPV of FCF Enterprise Value Equity Value Equity Value Per Share (SGD) 4.7% 768.0 5,044.8 4,380.0 2.88 5.2% 740.8 4,333.9 3,669.1 2.41 5.7% 714.6 3,777.3 3,112.4 2.04 6.2% 689.4 3,330.3 2,665.5 1.75 6.7% 665.2 2,964.1 2,299.3 1.51 7.2% 641.8 2,659.0 1,994.2 1.31 7.7% 619.4 2,401.3 1,736.5 1.14 8.2% 597.7 2,181.0 1,516.1 1.00 8.7% 576.9 1,990.7 1,325.9 0.87 9.2% 556.8 1,825.0 1,160.1 0.76 9.7% 537.5 1,679.4 1,014.6 0.67

Source: Daiwa estimates

Share price performance SMRT’s shares have underperformed the benchmark FSSTI since January 2013, down 14% vs. a 9% decline in the index. We believe the underperformance has been driven largely by several factors including: 1) fare price cuts of 1.9% announced in August 2015, 2) uncertainty over the implementation of a new rail model, and 3) poor operational performance of its rail segment.

SMRT: share price performance vs. FSSTI (%) 20 Fare hikes announced in Apr 2014; proposed new bus contracting model announced in May 2014 10

(10)

(20) Transport minister announced (30) fare reduction by 1.9% in Aug 2015 (40) Jul-13 Jul-14 Jul-15 Apr-13 Apr-14 Apr-15 Oct-13 Oct-14 Oct-15 Jan-13 Jun-13 Jan-14 Jun-14 Jan-15 Jun-15 Mar-13 Mar-14 Mar-15 Feb-13 Feb-14 Feb-15 Nov-13 Dec-13 Nov-14 Dec-14 Nov-15 Aug-13 Sep-13 Aug-14 Sep-14 Aug-15 Sep-15 May-13 May-14 May-15 FSSTI SMRT

Source: Bloomberg

SMRT Corp (MRT SP): 2 December 2015

In the near term, we see the following derating catalysts: 1) newsflow suggesting a delay in the implementation of a new rail model, 2) a sharper-than-expected deterioration in the rail segment margin, driven by elevated repair and maintenance expense, and to a lesser extent 3) further major service disruptions to its network, which may result in significant penalties imposed by the regulator

SMRT is currently trading at a 2016E PER of 25.2x, which is above its past-10-year mean of 20.6x. Our target price of SGD1.31 implies a 2016E PER of 22.6x. We believe valuations look expensive given the challenging outlook we see for the company’s key rail segment.

While the market could possibly be pricing in expectations for a transition of the rail segment to a new rail model, we believe negotiations between the government and SMRT could only gain traction after the company has fulfilled its obligations to return network reliability to satisfactory levels under its existing licence requirements – indicating a timeline that could stretch beyond 2018.

SMRT: 12-month-forward EV/EBITDA ratio (x) SMRT: 12-month-forward PER (x) 12M forward EV/EBITDA (x) 12M forward PER (x) +2 stdev 12 43 38 +2 stdev 11 +1 stdev 33 10 +1 stdev Mean 28 9 23 Mean 8 -1 stdev 18 7 -1 stdev -2 stdev 13 -2 stdev 6 8 Jul-05 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-05 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Source: Bloomberg, Daiwa forecasts Source: Bloomberg, Daiwa forecasts

Land transport service providers: peer comparison Bloomberg Share price Market cap PER (x) EV/EBITDA (x) ROE (%) Dividend yield (%) Company name code (local curr.) (USD m) 2015E 2016E 2017E 2015E 2016E 2017E 2015E 2016E 2017E 2015E 2016E 2017E Regional peers 01-Dec-15 ComfortDelGro* CD SP 2.96 4,516 21.0 18.5 16.5 9.0 8.7 8.5 13% 15% 15% 3.1% 3.5% 3.9% SMRT* MRT SP 1.46 1,573 25.2 23.7 22.3 9.0 8.5 8.2 10% 10% 10% 2.2% 2.3% 2.5% MTR Corp 66 HK 36.65 27,687 19.8 23.1 20.3 13.7 13.8 12.5 6% 6% 6% 3.0% 4.5% 4.9% Blue Bird BIRD IJ 6,850.00 1,243 19.3 14.8 12.0 9.4 7.5 6.3 24% 26% 26% 1.9% 2.3% 3.0% Ekspress Transindo Utama TAXI IJ 136.00 21 4.5 3.2 3.1 3.9 3.6 3.7 7% 13% 10% 8.4% 6.8% 6.5% BTS Group BTS TB 9.45 3,148 44.2 46.6 44.6 40.4 36.6 33.6 4% 5% 6% 7.1% 2.5% 2.2% Average 22.3 21.6 19.8 14.2 13.1 12.1 11% 12% 12% 4.3% 3.7% 3.8% Global peers FirstGroup FGP LN 106.30 1,930 10.7 8.7 7.5 4.8 4.6 4.3 8% 9% 10% 0.7% 2.2% 2.8% Go-Ahead Group GOG LN 2,605.00 1,688 14.6 12.5 11.5 4.4 3.9 3.7 79% 66% 53% 3.8% 4.1% 4.5%

Source: Bloomberg, *Daiwa forecasts

Investment risks We identify the following key risks to our thesis:

Manpower risks Staff costs account for around 41% of SMRT’s operating expenses, representing the biggest cost to its operations. The loosening of government restrictions on foreign labour in Singapore or a more efficient workforce through the retention of experienced engineers, technicians or drivers could result in lower-than-expected staff costs, posing an upside risk to our earnings forecasts.

SMRT Corp (MRT SP): 2 December 2015

Regulatory risks The public transportation sector is closely regulated by the government. Favourable shifts in the regulatory landscape could result in policies that have a positive impact on SMRT’s business and pose an upside risk to our earnings forecasts.

Energy-related costs Fuel costs (electricity and diesel) represent around 13% of SMRT’s operating expenses. According to management, the company has already hedged 100% of its energy requirements for FY16E. However, its FY17E requirements remain unhedged. A sustained decline in fuel prices could have a positive impact on our earnings forecasts.

Shareholding structure and key management Temasek Holdings is the largest shareholder of SMRT, with a 54.2% stake.

SMRT: selected profiles of key management Name Designation Qualifications Experience Desmond President & Group CEO Master of Arts (Engineering Science) from Oxford University - Prior to SMRT, he served in the Singapore Armed Forces from 1982 to 2010, rising Kuek Bak and a Master in Public Administration from Harvard University. to Chief of Army in 2003 and Chief of Defence Force in 2007. Chye - From 2010 to 2012, held the appointment of Permanent Secretary in the Ministry of the Environment and Water Resources. He also previously served on the Boards of Singapore Technologies Engineering Ltd and its subsidiaries, Defence Science and Technology Agency, Housing and Development Board, Jurong Town Corporation and International Enterprise Singapore. - Currently a member of the Civil Service College Board and chairs its Audit Committee; also a member of the International Advisory Panel for the Lee Kuan Yew Centre for Innovative Cities at the Singapore University of Technology and Design. Manfred Seah Group CFO First-Class Honours degree in Mathematics from Queen Mary - Prior to SMRT, he headed the Strategic Finance and Business Structuring advisory Kok Khong College, University of London and a MBA from the London office, supporting the Group CEO in steering changes to the finance and business Business School. Qualified Chartered Accountant and a Fellow structure of the group, coordinating the developments on the new rail financing of the Institute of Chartered Accountants in England and Wales. framework, and partnering business units to develop new capital financing structures to service their needs. - Held several senior leadership positions in Asia and Singapore, with his specialised experience in corporate and entrepreneurial finance, direct investments, mergers and acquisitions, strategic business development, corporate fundraising and equity capital markets. Lee Ling Wee Managing Director, Degree in Aeronautical Engineering from the Ecole Nationale - Prior to joining SMRT, he was Head of Air Engineering and Logistics with the Trains de l’Aviation Civile in France, and an Executive MBA from the Republic of Singapore Air Force (RSAF) - was with the RSAF for over 20 years and National University of Singapore. during his time there, he held various senior leadership roles and directed fleet management, competency and resource optimisation programmes. Benny Lim Managing Director, MBA in International Management from Royal Melbourne - Over 25 years of experience in the Transportation and Automotive industries, Kian Heng Roads Institute of Technology, Australia, where he also received his leading the management, sales, marketing, after-sales service, business Bachelor of Business Administration, majoring in Business development and supply chain management in multiple countries across Asia- Finance. Also completed a one-year Foreign Integration Pacific. Programme for International Executives with Audi AG in - Prior to joining SMRT, he was the Group General Manager of Audi and Volkswagen Germany. Centre in Qatar, where he was instrumental in setting up the greenfield business operations. - Also served as the President and CEO of MAN Truck and Bus China and was responsible for business operations in China and North Asia. Other senior management positions he has held include Vice President of International Sales in China Yuchai International, Group Director in Audi Volkswagen Korea and Malaysia as well as Country Manager in Audi Asia Pacific. Mario Favaits Managing Director, Master of Science in Mechanical and Electrical Engineering - Before joining SMRT, he served as the Global Director of Services Sales & Singapore Rail from the University of Brussels, MBA from the University of Marketing at Faiveley Transport. Engineering Antwerp Management School and Master of Laws from the - Between 2011 and 2014, he was Director of Services at Alstom Transport in Asia- University of Liverpool. Pacific. He was a member of the Asia-Pacific Management team and was responsible for the Maintenance, Repair & Overhaul projects and operations in the region. - Invited to be part of a global team tasked with driving and implementing a culture change programme at Alstom Transport. In the 10 years prior to joining Alstom, he held senior leadership positions at Siemens and Continental in Europe, the U.S. and Asia. His responsibilities focused on business development and growth, building a sustainable competitive advantage and driving change. Dawn Low Kar Managing Director, Master in Mass Communications from the Nanyang - Previously led the Company’s branding, strategic marketing, corporate social Mun Commercial and SMRT Technological University and a Bachelor of Social Science responsibility (CSR) and environmental sustainability strategies. Properties & Media (Honours) from the National University of Singapore. Also an - In 2008, she joined SMRT Taxis to head up marketing and partnership. She was accredited member of the Institute of Public Relations of previously with the Ministry of Defence and City Developments Limited Singapore.

Source: Company

SMRT Corp (MRT SP): 2 December 2015

Appendix 1: Singapore rail network

Singapore rail: network system

Source: LTA

SMRT Corp (MRT SP): 2 December 2015

Singapore rail: network details Name Commencement Next extension No. of stations Rail length (km) Operator MRT North South Line 07-Nov-87 2019 26 45 SMRT Trains East West Line 12-Dec-87 2016 35 49 SMRT Trains Circle Line 28-May-09 2025 30 35.4 SMRT Trains

North East Line 20-Jun-03 2030 16 20 SBS Transit Downtown Line (Stage 1) 22-Dec-13 2024 6 4.3 SBS Transit

Upcoming Downtown Line (Stage 2) 1Q16 12 16.6 Downtown Line (Stage 3) 2017 16 21 Downtown Line Extension 2024 30 37.6 SBS Transit Thomson-East Coast Line (Stage 1) 2019 Thomson-East Coast Line (Stage 2) 2020 Thomson-East Coast Line (Stage 3) 2021 Thomson-East Coast Line (Stage 4) 2023 Thomson-East Coast Line (Stage 5) 2024 31 43 TBA

Jurong Region Line 2025 20 TBA Cross Island Line 2030 50 TBA

LRT Bukit Panjang 1999 14 7.8 SMRT Punggol 2005 16 10.3 SBS Transit Sengkang 2003 15 10.7 SBS Transit

Source: LTA

SMRT Corp (MRT SP): 2 December 2015

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Custom Products Group SINGAPORE Ramakrishna MARUVADA (65) 6499 6543 [email protected] PHILIPPINES Bianca SOLEMA (63) 2 737 3023 [email protected] Head of Singapore Research; Telecommunications (China/ASEAN/India) Utilities and Energy Royston TAN (65) 6321 3086 [email protected]

Oil and Gas; Capital Goods David LUM (65) 6329 2102 [email protected] Property and REITs Shane GOH (65) 64996546 [email protected] Small/Mid Cap (Singapore) Jame OSMAN (65) 6321 3092 [email protected] Telecommunications (ASEAN/India); Pharmaceuticals and Healthcare; Consumer (Singapore)

SMRT Corp (MRT SP): 2 December 2015

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SMRT Corp (MRT SP): 2 December 2015

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Japan Daiwa Securities Co. Ltd. and Daiwa Securities Group Inc. Daiwa Securities Co. Ltd. is a subsidiary of Daiwa Securities Group Inc. Investment Banking Relationship Within the preceding 12 months, the subsidiaries and/or affiliates of Daiwa Securities Group Inc. * has lead-managed public offerings and/or secondary offerings (excluding straight bonds) of the securities of the following companies: Modern Land (China) Co. Ltd (1107 HK); econtext Asia Ltd (1390 HK); Accordia Golf Trust (AGT SP); GF Securities Co Ltd (1776 HK); Mirae Asset Life Insurance Co Ltd (085620 KS); China Reinsurance Group Corporation (1508 HK). *Subsidiaries of Daiwa Securities Group Inc. for the purposes of this section shall mean any one or more of: Daiwa Capital Markets Hong Kong Limited (大和資本市場香港有限公司), Daiwa Capital Markets Singapore Limited, Daiwa Capital Markets Australia Limited, Daiwa Capital Markets India Private Limited, Daiwa-Cathay Capital Markets Co., Ltd., Daiwa Securities Capital Markets Korea Co., Ltd.

Hong Kong This research is distributed in Hong Kong by Daiwa Capital Markets Hong Kong Limited (大和資本市場香港有限公司) (“DHK”) which is regulated by the Hong Kong Securities and Futures Commission. Recipients of this research in Hong Kong may contact DHK in respect of any matter arising from or in connection with this research.

Relevant Relationship (DHK) DHK may from time to time have an individual employed by or associated with it serves as an officer of any of the companies under its research coverage.

Singapore This research is distributed in Singapore by Daiwa Capital Markets Singapore Limited and it may only be distributed in Singapore to accredited investors, expert investors and institutional investors as defined in the Financial Advisers Regulations and the Securities and Futures Act (Chapter 289), as amended from time to time. By virtue of distribution to these category of investors, Daiwa Capital Markets Singapore Limited and its representatives are not required to comply with Section 36 of the Financial Advisers Act (Chapter 110) (Section 36 relates to disclosure of Daiwa Capital Markets Singapore Limited’s interest and/or its representative’s interest in securities). Recipients of this research in Singapore may contact Daiwa Capital Markets Singapore Limited in respect of any matter arising from or in connection with the research.

Australia This research is distributed in Australia by Daiwa Capital Markets Australia Limited and it may only be distributed in Australia to wholesale investors within the meaning of the Corporations Act. Recipients of this research in Australia may contact Daiwa Capital Markets Stockbroking Limited in respect of any matter arising from or in connection with the research.

India This research is distributed in India to Institutional Clients only by Daiwa Capital Markets India Private Limited (Daiwa India) which is an intermediary registered with Securities & Exchange Board of India as a Stock Broker, Merchant Bank and Research Analyst. Daiwa India, its Research Analyst and their family members and its associates do not have any financial interest save as disclosed or other undisclosed material conflict of interest in the securities or derivatives of any companies under coverage. Daiwa India and its associates may have received compensation for any products other than Investment Banking (as disclosed) or brokerage services from the subject company in this report during the past 12 months. Unless otherwise stated in BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action, Daiwa India and its associates do not hold more than 1% of any companies covered in this research report.

There is no material disciplinary action against Daiwa India by any regulatory authority impacting equity research analysis activities as of the date of this report.

Taiwan This research is distributed in Taiwan by Daiwa-Cathay Capital Markets Co., Ltd and it may only be distributed in Taiwan to institutional investors or specific investors who have signed recommendation contracts with Daiwa-Cathay Capital Markets Co., Ltd in accordance with the Operational Regulations Governing Securities Firms Recommending Trades in Securities to Customers. Recipients of this research in Taiwan may contact Daiwa-Cathay Capital Markets Co., Ltd in respect of any matter arising from or in connection with the research.

Philippines This research is distributed in the Philippines by DBP-Daiwa Capital Markets Philippines, Inc. which is regulated by the Philippines Securities and Exchange Commission and the Philippines Stock Exchange, Inc. Recipients of this research in the Philippines may contact DBP-Daiwa Capital Markets Philippines, Inc. in respect of any matter arising from or in connection with the research. DBP-Daiwa Capital Markets Philippines, Inc. recommends that investors independently assess, with a professional advisor, the specific financial risks as well as the legal, regulatory, tax, accounting, and other consequences of a proposed transaction. DBP-Daiwa Capital Markets Philippines, Inc. may have positions or may be materially interested in the securities in any of the markets mentioned in the publication or may have performed other services for the issuers of such securities. For relevant securities and trading rules please visit SEC and PSE links at http://www.sec.gov.ph/irr/AmendedIRRfinalversion.pdf and http://www.pse.com.ph/ respectively.

Thailand This research is distributed to only institutional investors in Thailand primarily by Thanachart Securities Public Company Limited (“TNS”). This report is prepared by analysts who are employed by Daiwa Securities Group Inc. and/or its non-U.S. affiliates. This report is provided to you for informational purposes only and it is not, and is not to be construed as, an offer or an invitation to make an offer to sell or buy any securities. Neither Thanachart Securities Public Company Limited, Daiwa Securities Group Inc. nor any of their respective parent, holding, subsidiaries or affiliates, nor any of their respective directors, officers, servants and employees accept any liability whatsoever for any direct or consequential loss arising from any use of this research or its contents. The information and opinions contained herein have been compiled or arrived at from sources believed to be reliable. However, Thanachart Securities Public Company Limited, Daiwa Securities Group Inc. nor any of their respective parent, holding, subsidiaries or affiliates, nor any of their respective directors, officers, servants and employees make no representation or warranty, express or implied, as to their accuracy or completeness. Expressions of opinion herein are subject to change without notice. The use of any information, forecasts and opinions contained in this report shall be at the sole discretion and risk of the user. Daiwa Securities Group Inc. and/or its non-U.S. affiliates perform and seek to perform business with companies covered in this research. Thanachart Securities Public Company Limited, Daiwa Securities Group Inc., their respective parent, holding, subsidiaries or affiliates, their respective directors, officers, servants and employees may have positions and financial interest in securities mentioned in this research. Thanachart Securities Public Company Limited, Daiwa Securities Group Inc., their respective parent, holding, subsidiaries or affiliates may from time to time perform investment banking or other services for, or solicit investment banking or other business from, any entity mentioned in this research. Therefore, investors should be aware of conflict of interest that may affect the objectivity of this research.

United Kingdom This research report is produced by Daiwa Securities Co. Ltd. and/or its affiliates and is distributed in the European Union, Iceland, Liechtenstein, Norway and Switzerland. Daiwa Capital Markets Europe Limited is authorised and regulated by The Financial Conduct Authority (“FCA”) and is a member of the London Stock Exchange and Eurex. This publication is intended for investors who are not Retail Clients in the United Kingdom within the meaning of the Rules of the FCA and should not therefore be distributed to such Retail Clients in the United Kingdom. Should you enter into investment business with Daiwa Capital Markets Europe’s affiliates outside the United Kingdom, we are obliged to advise that the protection afforded by the United Kingdom regulatory system may not apply; in particular, the benefits of the Financial Services Compensation Scheme may not be available.

SMRT Corp (MRT SP): 2 December 2015

Daiwa Capital Markets Europe Limited has in place organisational arrangements for the prevention and avoidance of conflicts of interest. Our conflict management policy is available at http://www.uk.daiwacm.com/about-us/corporate-governance-regulatory.

Germany This document is distributed in Germany by Daiwa Capital Markets Europe Limited, Niederlassung Frankfurt which is regulated by BaFin (Bundesanstalt fuer Finanzdienstleistungsaufsicht) for the conduct of business in Germany.

Bahrain This research material is distributed in Bahrain by Daiwa Capital Markets Europe Limited, Bahrain Branch, regulated by The Central Bank of Bahrain and holds Investment Business Firm – Category 2 license and having its official place of business at the Bahrain World Trade Centre, South Tower, 7th floor, P.O. Box 30069, Manama, Kingdom of Bahrain. Tel No. +973 17534452 Fax No. +973 535113

United States This report is distributed in the U.S. by Daiwa Capital Markets America Inc. (DCMA). It may not be accurate or complete and should not be relied upon as such. It reflects the preparer’s views at the time of its preparation, but may not reflect events occurring after its preparation; nor does it reflect DCMA’s views at any time. Neither DCMA nor the preparer has any obligation to update this report or to continue to prepare research on this subject. This report is not an offer to sell or the solicitation of any offer to buy securities. Unless this report says otherwise, any recommendation it makes is risky and appropriate only for sophisticated speculative investors able to incur significant losses. Readers should consult their financial advisors to determine whether any such recommendation is consistent with their own investment objectives, financial situation and needs. This report does not recommend to U.S. recipients the use of any of DCMA’s non-U.S. affiliates to effect trades in any security and is not supplied with any understanding that U.S. recipients of this report will direct commission business to such non-U.S. entities. Unless applicable law permits otherwise, non-U.S. customers wishing to effect a transaction in any securities referenced in this material should contact a Daiwa entity in their local jurisdiction. Most countries throughout the world have their own laws regulating the types of securities and other investment products which may be offered to their residents, as well as a process for doing so. As a result, the securities discussed in this report may not be eligible for sales in some jurisdictions. Customers wishing to obtain further information about this report should contact DCMA: Daiwa Capital Markets America Inc., Financial Square, 32 Old Slip, New York, New York 10005 (Tel no. 212-612-7000).

Ownership of Securities For “Ownership of Securities” information please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.

Investment Banking Relationships For “Investment Banking Relationships” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.

DCMA Market Making For “DCMA Market Making” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.

Research Analyst Conflicts For updates on “Research Analyst Conflicts” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The principal research analysts who prepared this report have no financial interest in securities of the issuers covered in the report, are not (nor are any members of their household) an officer, director or advisory board member of the issuer(s) covered in the report, and are not aware of any material relevant conflict of interest involving the analyst or DCMA, and did not receive any compensation from the issuer during the past 12 months except as noted: no exceptions.

Research Analyst Certification For updates on “Research Analyst Certification” and “Rating System” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The views about any and all of the subject securities and issuers expressed in this Research Report accurately reflect the personal views of the research analyst(s) primarily responsible for this report (or the views of the firm producing the report if no individual analysts[s] is named on the report); and no part of the compensation of such analyst(s) (or no part of the compensation of the firm if no individual analyst[s)] is named on the report) was, is, or will be directly or indirectly related to the specific recommendations or views contained in this Research Report.

The following explains the rating system in the report as compared to relevant local indices, unless otherwise stated, based on the beliefs of the author of the report. "1": the security could outperform the local index by more than 15% over the next 12 months. "2": the security is expected to outperform the local index by 5-15% over the next 12 months. "3": the security is expected to perform within 5% of the local index (better or worse) over the next 12 months. "4": the security is expected to underperform the local index by 5-15% over the next 12 months. "5": the security could underperform the local index by more than 15% over the next 12 months.

Disclosure of investment ratings Rating Percentage of total Buy* 63.8% Hold** 22.2% Sell*** 14.0% Source: Daiwa Notes: data is for single-branded Daiwa research in Asia (ex Japan) and correct as of 30 September 2015. * comprised of Daiwa’s Buy and Outperform ratings. ** comprised of Daiwa’s Hold ratings. *** comprised of Daiwa’s Underperform and Sell ratings.

Additional information may be available upon request.

Japan - additional notification items pursuant to Article 37 of the Financial Instruments and Exchange Law (This Notification is only applicable where report is distributed by Daiwa Securities Co. Ltd.)

If you decide to enter into a business arrangement with us based on the information described in materials presented along with this document, we ask you to pay close attention to the following items. • In addition to the purchase price of a financial instrument, we will collect a trading commission* for each transaction as agreed beforehand with you. Since commissions may be included in the purchase price or may not be charged for certain transactions, we recommend that you confirm the commission for each transaction. • In some cases, we may also charge a maximum of ¥ 2 million (including tax) per year as a standing proxy fee for our deposit of your securities, if you are a non-resident of Japan. • For derivative and margin transactions etc., we may require collateral or margin requirements in accordance with an agreement made beforehand with you. Ordinarily in such cases, the amount of the transaction will be in excess of the required collateral or margin requirements. • There is a risk that you will incur losses on your transactions due to changes in the market price of financial instruments based on fluctuations in interest rates, exchange rates, stock prices, real estate prices, commodity prices, and others. In addition, depending on the content of the transaction, the loss could exceed the amount of the collateral or margin requirements. • There may be a difference between bid price etc. and ask price etc. of OTC derivatives handled by us. • Before engaging in any trading, please thoroughly confirm accounting and tax treatments regarding your trading in financial instruments with such experts as certified public accountants. *The amount of the trading commission cannot be stated here in advance because it will be determined between our company and you based on current market conditions and the content of each transaction etc.

When making an actual transaction, please be sure to carefully read the materials presented to you prior to the execution of agreement, and to take responsibility for your own decisions regarding the signing of the agreement with us.

Corporate Name: Daiwa Securities Co. Ltd. Financial instruments firm: chief of Kanto Local Finance Bureau (Kin-sho) No.108 Memberships: Japan Securities Dealers Association, The Financial Futures Association of Japan Japan Securities Investment Advisers Association Type II Financial Instruments Firms Association