DBS Insight SparX Asia Airports Refer to important disclosures at the end of this report
DBS Group Research . Equity 26 Oct 2018
Think Big, Act Quick HSI: 24,994.46 KLCI: 1,686.59 • Air passenger traffic in Asia is projected to nearly triple to 3.5bn SET : 1,644.33 pax in the next two decades but most of Asia’s major airports are already congested Analysts • At least US$500bn in airport investments would be needed in Paul YONG, CFA +65 6682 3712 [email protected] the next 2 decades to meet demand, with private capital Marvin KHOR +60 32604 3911, [email protected] Namida ARTISPONG +66 28577833, [email protected] expected to play an increasing larger role, especially in emerging markets like Indonesia, Philippines, China, India and even Japan • Price weakness for airports on upcoming expansion capex presents an opportunity for investors to accumulate on the STOCKS cheap airports with growth potential, with throughput growth 12-mth proving to be a critical share price driver in the long term Price Mkt Cap Target Price Performance (%) LCL US$m LCL 3 mth 12 mth Rating • Our top picks are Airports of Thailand (TP Bt75) and Beijing Capital Airport (TP HK$12.50) Airports of Thailand 61.75 26,792 75.00 (6.4) 6.0 BUY Bigger, better and more airports needed in Asia. Most of Asia’s Beijing Capital Intl Airport 8.14 1,950 12.50 (8.1) (34.1) BUY major airports are already congested and expanding rapidly to Malaysia Airports 8.26 3,287 10.00 (8.5) (0.8) BUY meet burgeoning demand. It is estimated that at least US$500bn in airport investments are needed over the next 2 decades and Samui Airport Property Fund 23.30 672 23.00 0.4 (2.9) HOLD there are increasing opportunities for private capital to be involved to lighten the financial burden on governments, Source: DBS Bank, AllianceDBS Research, DBSVTH, especially in the emerging markets. Bloomberg Finance L.P. Closing price as of 25 Oct 2018 Asia’s billion-dollar airports. The region is home to many listed airports with a market capitalisation of above US$2b while there Growth in air passenger traffic in the Asia Pacific (m) are several unlisted airport groups that are also highly valuable. Names such as Hong Kong International Airport, Seoul Incheon 0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 International Airport and Changi Airport Group are likely worth 2017-2036 Asia Pacific 2016 pax tens of billions as listed companies while Indonesia’s Angkasa Pura pax I & II would also be worth billions. Look beyond capex spending and focus on throughput growth for North America share price performance. Observing listed airports under our coverage, the impact of expansion capital expenditure (capex) on Europe near term profits have generally been punished by the market, despite the potential of higher passenger throughput driving Latin America revenue and higher earnings in the longer term. Beijing Capital Airport (BCIA) offers deep value while Airports of Middle East Thailand (AOT) still has room to grow. BCIA is the cheapest major airport stock globally, as the market is too pessimistic on the Africa impact of Beijing Daxing International Airport’s expected opening in late 2019 on BCIA’s earnings, and we continue to like BCIA’s fundamentals. AOT may face some capacity constraints in the short Source: IATA, DBS Bank term, but a planned expansion, new duty free/commercial concessions and other projects should underpin its long term earnings growth as ASEAN’s premier tourism play.
ASIAN INSIGHTS Page 1 ed: KK / sa JC CW, CS Industry Focus Think Big, Act Quick
Table of Contents
Think Big, Act Quick - A Summary 3
The Asia Pacific is the fastest growing region in the world for air travel 4
Asian airports are bursting at the seams and playing catch-up to demand 7
At least US$500bn needed for airport investments in Asia in the next 2 decades 10
The increasing role of private capital in airport development 15
Fund raising lessons from Asia’s listed airports 19
Billion Dollar Whales - Asia's most valuable airports 21
Changi Airport Group 22
Hong Kong International Airport 26
Angkasa Pura I & II 29
Seoul Incheon International Airport 32
Key Risks and Challenges 34
Does the investment cycle drive share prices of airports? 35
Stock picks and recommendations 38
Stock profiles
Airports of Thailand PLC 42
Beijing Capital International Airport 52
Malaysia Airports Holdings Berhad 61
Samui Airport Property Fund 70
Appendix 82
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Think Big, Act Quick - A Summary
Rising air travel leads to urgent need for more airport A growing role for private capital. While investment in infrastructure. A growing middle class, rising propensity to airports in Asia were traditionally thought to be the domain travel and broadly improving global connectivity are setting of the public sector, the large investment required, as well as the stage for air passenger volume in Asia to rise significantly the allure of steady returns and commercial revenue over the coming decades. Besides the impending expansion opportunities are attracting more private capital into the of airline fleet (evidenced by burgeoning Boeing & Airbus sector. The staggering investment needed to build airport order books), the other critical component necessary to infrastructure is strong motivation for governments to turn to facilitate this growth is the expansion of key Asian airports. private capital as a supplementary, or even primary, means of Urgency is a mounting factor as the majority of Asia’s busiest funding such projects. Generally, there are three airport airports are already operating at above built-for capacity. privatisation models, 1) full private ownership, 2) partial Where possible, airport operators are aiming to enhance and privatisation, and 3) long term concessions. There are more enlarge their available infrastructure, in addition to furnishing privatisation opportunities in markets like Japan, China, India, them with cutting-edge technology and systems. Space Indonesia, and the Philippines. constraints are also a common feature, leading to both public Fund raising lessons from Asia’s listed airports. Two of and private efforts to find and develop new hub locations. ASEAN’s largest airport groups – Malaysia Airports Holdings Urgent need for more airport capacity. The International Air Berhad and Airports of Thailand - were among the earliest in Transportation Association (IATA) is forecasting passenger Asia to tap the equity markets to fund their expansion plans traffic in the Asia Pacific to grow at a 20-yr compound and both are now in a strong financial position to finance annual growth rate (CAGR) of 5.1% from 2016, higher than their own growth. Meanwhile, much smaller airports like the global rate of 3.8%, and to reach around 3,500m Samui Airport also managed to raise money from the equity passengers (pax) in 2036. By 2036, the Asia Pacific market markets with a well-structured sale of concession to a listed will add 2.2bn more passengers, accounting for 45% of fund, showing the way for other small airports to do the global traffic. On average, that works out to be more than same. 100m more passengers per year for the next two decades – The home of billion-dollar airports. The Asia Pacific region is requiring an increase in passenger throughput capacity of home to some of the most valuable airports in the world. In 200m pax per annum. fact, the largest pure play airport company in the world is 12 of the top 20 airports in Asia were operating at or above Airports of Thailand, with a market capitalisation of nearly capacity in 2017 while a further 4 airports were operating at US$28bn. Names such as Hong Kong International Airport, 90% or more. While most of the region’s airports have Seoul Incheon International Airport and Changi Airport expansions or a new airport planned, many of these airports Group which are among three of the most profitable airports will still be operating above or near capacity by the time the in Asia, are likely worth tens of billions of dollars as listed expansions are complete, highlighting the need for companies, while Indonesia’s Angkasa Pura I & II groups continuous expansion and investment. would also be worth billions, when we apply the average PE Bigger, better and more airports. Capital expenditure for of listed peer companies to their respective earnings. airport construction has been rising, in particular for those Look beyond capex spending and focus on throughput aspiring to become hub airports, as best-in-class facilities will growth for share price performance. The examples from help draw airline and air passenger customers to use them as airports under our coverage give clear evidence that capex- connecting points. The potential to build ‘aerotropolises’ driven declines in operator valuations are temporary in (airport cities), especially around newer and larger airport nature, and present an opportunity for investors to expansions, implies large potential investment inflows for the accumulate on the cheap for airports with growth potential, respective geographical areas and leverage to procure as throughput growth is a far more critical share price driver government support. Taking the weighted average cost per in the long term pax for proposed airports in Asia of US$129.1 per pax BUY ratings on BCIA, AOT, and MAHB. Our top picks for the multiplied by the c. 4bn passenger handling capacity needed sector are Beijing Capital Intl Airport (694 HK) and Airports of in Asia in the next 2 decades, we derive an estimated total Thailand (AOT TB); and we also have a BUY rating for value of US$516bn that will be needed for investment in Malaysia Airports Holdings (MAHB MK). Valuations remain Asia’s airports. Given rising land acquisition and construction reasonable vis-à-vis the respective growth profiles, while we costs over time, there is likely to be upside risk to this also find air passenger traffic to be a relatively resilient estimated figure of US$516bn. growth theme amid concerns about rising external risks within the region. We also have a HOLD rating on Samui Airport Property Fund (SPF TB).
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The Asia Pacific is the fastest growing region in the world for air travel
The Asia Pacific is the largest air transportation market in The Asia Pacific will see 2.2bn more air passengers by the world. According to the International Civil Aviation 2026. IATA is forecasting passenger traffic in Asia Pacific to Organization (ICAO), air passenger traffic in the Asia Pacific grow at a 20-yr CAGR of 5.1% from 2016, higher than the region reached 1,485m pax in 2017, accounting for global rate of 3.8%, and reach around 3,500m pax in c.36.5% of overall passengers globally, growing by 10.8% 2036. By 2036, the Asia Pacific market will add 2.2bn more y-o-y compared to 5.3% growth for the rest of the world in passengers, accounting for 45% of global traffic. 2017. Asia Pacific’s share of air passengers has risen from 27.7% in 2010 to 36.5% in 2017 and more than half the Growth of air passenger traffic by 2036 growth in passenger traffic in 2017 was from Asia Pacific. 8,000 7,000 Global air passenger traffic (2010 to 2017) 6,000 5,000
4,000
3,000
2,000 45% 1,000 35% 0 2016 2036E
Asia Pacific North America Europe Latin america Middle east Africa
Source: IATA, DBS Bank
On average, that works out to be more than 100m more passengers per year for the next two decades – requiring Source: ICAO, DBS Bank an increase in passenger throughput capacity of 200m pax per annum. This forecast may be pessimistic given that the In terms of absolute numbers, an average of nearly 100m year-to-date Revenue Passenger Kilometres (RPK) growth passengers were added in each year between 2011 and (August 2018) in the Asia Pacific was 9.5% while 2015 while nearly 140m passengers on average were passenger growth in 2017 was 10.8%. added each year in 2016 and 2017. Growth of air passenger traffic in Asia Pacific (m)
Growth of air passenger traffic in Asia Pacific (m) 0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000
2017-2036 144.6 Asia Pacific 2016 pax pax 134.7
North America
105.9 105.1 98.8 98.5 Europe 86.4 Latin America
Middle East
Africa
2011 2012 2013 2014 2015 2016 2017 Source: IATA, DBS Bank Source: ICAO, DBS Bank
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What are the drivers for air travel growth in Asia? Rising income levels and a growing middle class. Gross National Income (GNI) per capita in East Asia Pacific Massive population portends huge growth potential for the (excluding high income countries) grew to US$6,667 at a aviation market. Asia has a total of 4.46bn people (60% of CAGR of 11% in 1995-2016, achieving above middle-class the global population) but only accounts for 36% of the range defined by the World Bank since 2010. This has total air passenger traffic numbers, suggesting there is still driven rapid consumption growth, including demand for air plenty of room for civil aviation to grow in the region. travel in the region.
Asia is the world’s most populous region Rising incomes in East Asia Pacific (excl. high income)
8,000 9,000 8,513 8% US$ MIllion ppl 8,152 8,000 7,767 7,000 7,357 7% 6,933 7,000 6,520 6% 6,000 6,122 6,000 5,714 5% 5,000 5,000 4% 4,000 4,000 3% 3,000 3,000 59% 59% 58% 2% 2,000 61% 60% 2,000 61% 61% 61% 1,000 1% 1,000
- 0% - 1995 2000 2005 2010 2015 2020F 2025F 2030F 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Asia Rest of world Growth (RHS) East Asia & Pacific (ex-high income) Mddle class Source: populationpyramid.net, DBS Bank estimates Source: World Bank, DBS Bank estimates
China (1.38bn), India (1.32bn) and ASEAN (634m) alone 35% of China’s population is projected to be in the upper have a combined population of 3.33bn, or 45% of the middle-class income bracket or better by 2030, from just global total. While population growth in China has slowed 10% in 2015. This should drive continued growth in the down, there are signs that the government is trying to world’s second largest aviation market for the next two reverse this. Meanwhile, ASEAN and India’s birth rates decades. remain above the global average and will drive Asia’s population growth in the next decade. China’s growing middle class
ASEAN & India’s birth rates are above global average 100% 3% 7% 15% 12% 90% 80% 20% 10% 70% High(>RMB 200,000) 53% 60% 8% Upper middle 50% (RMB67,000-200,000) 6% 40% 55% Lower middle 30% (RMB13,000-67,000) 4% 20% 37% Low ( Source: populationpyramid.net, DBS Bank estimates Source: The Economist Intelligence Unit Page 5 Page 5 Industry Focus Think Big, Act Quick Low cost carriers have also been a huge catalyst for growth, Northeast Asia and ASEAN will continue to grow rapidly, as shown in ASEAN. With the growth of low cost carriers while South Asia is also becoming a force. In terms of (LCCs) like Air Asia, Lion Air, Tigerair (now part of Scoot), absolute numbers, Northeast and Southeast Asia have been Jetstar and recently Vietjet, air travel in ASEAN has grown driving the growth of outbound (international) tourists in the rapidly in the last decade. LCC seat capacity quadrupled from region, while South Asia has also been growing rapidly from 50.3m in 2007 to c.222.9m in 2016. In the same period a low base – at a CAGR of over 15% from 2011-2016. ASEAN also saw a c.76% jump in international arrivals from 62m to 109m. Tourism growth in Asia Pacific The fact that key aviation hubs in ASEAN are within 5 hours 350 15.3% CAGR flight from the major markets of China, India and ASEAN 300 5.9% CAGR itself has also helped the sector grow rapidly. 250 200 8.0% CAGR LCC seat capacity in ASEAN (2007 – 2016) 150 250 100 5.9% CAGR 50 Millions 200 0 2011 2012 2013 2014 2015 2016 150 North-East Asia ASEAN Oceania South Asia 100 Source: UNWTO, DBS Bank 50 0 Four of the five fastest growing markets, in terms of additional passengers per year, over the forecast period will be from Asia. According to forecasts by IATA, China will Source: CAPA, DBS Bank replace the US as the world’s largest aviation market by 2024. India will displace the UK for third place in 2025, while The great tourism drive in Asia. As a result of its latent Indonesia and Japan will be ranked 5th and 7th respectively. potential in terms of population base and the rapid rise in incomes, the Asia Pacific region has been adding the most to Fastest growing markets (2016 – 2036F) global tourists in the last decade. This trend is expected to Region Countries New Passengers Total Passengers continue. Outbound tourists globally (1990 2016) China 921 million 1.5 billion India 337million 478 million 1,200 Million Visitors Asia 1,000 Indonesia 235 million 355 million 800 Turkey 119 million 196 million 600 North United 401 million 1.1 billion America States 400 Source: IATA 200 0 1990 1995 2000 2005 2010 2013 2014 2015 2016 International Tourist Arrivals (m) Europe Asia and the Pacific Americas Africa Middle East Source: UNWTO, DBS Bank Page 6 Page 6 Industry Focus Think Big, Act Quick Airports in Asia are bursting at the seams and playing catch-up to demand 3 of the top 5 busiest airports globally are in Asia. The 10 of the busiest cargo airports are in Asia. 3 of the 5 busiest busiest airport in Asia in 2017 was the Beijing Capital cargo airports in the world reside in Asia, with Hong Kong in International Airport, also the second busiest in the world, the number one spot and growing by 9.4% y-o-y in terms of handling nearly 96m passenger movements. Meanwhile, tonnage handled to 5m tonnes in 2017. This is followed by Dubai International Airport (third busiest globally) and Tokyo Shanghai Pudong Airport with 3.8m tonnes handled Haneda Airport (fourth busiest globally) handled 88m and (+11.2% y-o-y) and Seoul Incheon International Airport with 85m passenger movements respectively in 2017. 2.9m tonnes handled (+7.6% y-o-y). E-commerce has been a key driver of growth and this is expected to continue Airports in Asia make up 21 of the 50 busiest airports globally. Among the 50 busiest airports globally, there were Top 5 cargo airports in Asia in 2017 10 from China, Hong Kong and Taiwan, 5 from the ASEAN 6.0 12.0% region, and 2 each from Japan and India. Korea and the 5.0 5.0 10.0% United Arab Emirates (UAE) were also represented in the list. 3.8 Notably, the combined passenger throughput of these 21 4.0 8.0% tonnes (m) airports grew by 6.9% y-o-y in 2017, exhibiting firm growth - 2.9 3.0 2.7 6.0% 2.3 Y growth despite the large base. - o - 2.0 4.0% Y 1.0 2.0% Freight Handled 0.0 0.0% Hong Kong Shanghai Seoul Dubai Tokyo International Pudong Incheon International Narita Airport International International Airport Airport Airport Airport Source: ACI Busiest passenger airports in Asia and in the world - 2017 Asia World Airport Country / Region Pax Handled Growth y-o-y 1 2 Beijing Capital International Airport China 95,786,442 1.5% 2 3 Dubai International Airport United Arab Emirates 88,242,099 5.5% 3 4 Tokyo Haneda Airport Japan 85,408,975 6.5% 4 8 Hong Kong International Airport Hong Kong SAR, China 72,665,078 3.4% 5 9 Shanghai Pudong International Airport China 70,001,237 6.1% 6 13 Guangzhou Baiyun International Airport China 65,887,473 10.3% 7 16 Indira Gandhi International Airport India 63,451,503 14.1% 8 17 Soekarno-Hatta International Airport Indonesia 63,015,620 8.3% 9 18 Singapore Changi Airport Singapore 62,219,573 6.0% 10 19 Seoul Incheon International Airport Republic of Korea 62,157,834 7.5% 11 21 Suvarnabhumi Airport Thailand 60,860,557 8.9% 12 23 Kuala Lumpur International Airport Malaysia 58,558,440 11.2% 13 26 Chengdu Shuangliu International Airport China 49,801,693 8.2% 14 29 Chhatrapati Shivaji International Airport India 47,204,259 5.7% 15 34 Shenzhen Bao'an International Airport China 45,558,409 8.5% 16 35 Taiwan Taoyuan International Airport Taiwan 44,878,703 6.1% 17 37 Kunming Changshui International Airport China 44,729,736 6.6% 18 44 Ninoy Aquino International Airport Philippines 42,022,484 6.2% 19 45 Shanghai Hongqiao International Airport China 41,884,059 3.5% 20 46 Xi'an Xianyang International Airport China 41,857,406 13.2% 21 49 Narita International Airport Japan 40,631,193 4.2% Source: Airports Council International Page 7 Page 7 Industry Focus Think Big, Act Quick China’s major airports are highly congested. In 2017, seven India’s airports will soon face the strain too. Given the rapid of China’s top ten airports were handling passenger growth of civil aviation in India, key airports in Mumbai and movements above their design capacity, while the rest were Chennai are already at or near saturation. The Indian operating at or near capacity. Inevitably, this has led to government also estimated that traffic in 6 major hubs will congestion issues at China’s major airports, affecting an reach capacity limit by 2019 covering nearly two-thirds of estimated 50% of air passengers domestically. passengers in India. An article by the Centre For Aviation CAPA) reports that based on projected growth rates, most Major airports in China – capacity vs demand (2017) of the 40 largest airports in the country will exceed their design capacities within the next decade. 33 Hangzhou 36 India’s top 10 airports’ pax movements FY17/18* Chongqing 45 39 70.0 65.7 30% 50 Xi'an 42 60.0 20 25% SH Hongqiao 42 48.5 50.0 45 20% Shenzhen 46 40.0 38 Kunming 45 15% 30.0 26.9 50 Chengdu 20.4 50 19.9 18.2 10% 20.0 36 Guangzhou 66 10.2 9.2 8.2 7.6 5% 50 10.0 SH Pudong 70 82 0.0 0% Beijing 96 0 20 40 60 80 100 120 Deisgn Capacity 2017 Pax FY17/18 Pax (m) Growth (RHS) Source: CAAC, CADAS Source: Airports Authority of India, *April 2017 to March 2018 ASEAN airports are also overcrowded. The main airports in Terminal congestion impacts passenger satisfaction levels Bangkok and Manila are already handling passenger while more severe congestion would impact demand. movements above their designed capacity, while Jakarta is While we mainly focus on passenger handling capacity for already nearing full capacity despite having just opened a airports, there are in fact many different aspects of airport new terminal. capacity constraints to consider. These include, but are not limited to, a) runway congestion, which leads to more Major airports in ASEAN – capacity vs demand (2017) delays and limits the number of flights, b) security, customs and immigration clearance (e.g. some airports take a much 90 82 longer time to process travellers than others), c) airspace 80 75 congestion, d) peak or ‘popular’ landing/take-off times, e) 70 other operations such as ground handling, fuelling, check- 62 63 61 60 59 60 in desks, boarding gates, baggage carousels etc. f) airport slot constraints and, g) a shortage or lack of skilled 50 45 42 personnel, which would impact safety or efficiency. 40 30 30 20 10 0 Singapore Jakarta Bangkok Kuala Lumpur Manila 2017 Arrivals 2017 Capacity Source: Respective airports, DBS Bank estimates Page 8 Page 8 Industry Focus Think Big, Act Quick 12 of the top 20 airports were operating at or above capacity A further 4 airports were operating at 90% or more. In in 2017. Many of Asia’s major airports were already handling 2017, 4 of the top 20 airports handled passenger movements passenger movements above their design capacities in 2017. equal to 90% or more of their designed capacity namely Guangzhou and Beijing airports for example, recorded Dubai, Tokyo Haneda, Indira Gandhi, and Soekarno-Hatta, passenger throughputs that were 31m and 16m above their with capacity expansion plans in place for Indira Gandhi (15m capacities respectively in 2017. The airport in Guangzhou more passengers by 2021) and Soekarno-Hatta (37m more opened its Terminal 2 in April 2018, raising its capacity to passengers by 2025). Dubai has long term plans to expand its 80m a year while a new airport in Beijing is slated for second airport Dubai World Central to handle 160m opening at the end of 2019. Most of these congested passengers, versus its current capacity of 26m (by 2018). airports do have plans for further expansion over the next decade. Targeted expansion for KLIA. While the Kuala Lumpur International Airport (KLIA) as a whole is operating below full It should be noted that based on projected growth rates, capacity, there is disparity between terminals as the many of these airports will still be operating above or near headroom is only at the klia2 which began operating in capacity by the time the expansions are complete, 2014. The KLIA main terminal is handling near its designed highlighting the need for continuous expansion and capacity of 30m pax in 2018, with notable points of investment. congestion such as at its arrival hall and contact piers receiving negative public feedback. Malaysia Airports Only Changi, KLIA, Xi’an and Seoul (Incheon) airports have Holdings has set out plans for procedural optimisation and some room for growth. Amongst Asia’s busiest airports, only some infrastructure upgrades to improve processing times; the main airports in Singapore, Kuala Lumpur, Xi’an and though the group expressed that more substantial expansion Seoul had some room for growth – they operated at 76%, plans may be implemented over the next 5 years. 79%, 84% and 86% of their design capacities respectively in 2017. Top 20 busiest airports in Asia (2017) – capacity, passenger movements and expansion plans Pax Deficit Additional Rank Region Busiest airports in Asia (m) Capacity (m) (m) capacity (m) Completion date 1 China Beijing Capital 96 80 -16 NA NA 2 UAE Dubai International 88 90 NA NA 3 Japan Tokyo Haneda 85 90 NA NA 4 China Hong Kong 73 72 -1 30 2027 5 China Shanghai Pudong 70 60 -10 20 2020 6 China Guangzhou Baiyun 66 35 -31 45 2018 7 India Indira Gandhi 63 70 15 2021 8 Indonesia Soekarno-Hatta 61 63 37 2025 9 Singapore Singapore Changi 62 82 50 2030 10 Korea Seoul Incheon 62 72 28 2023 11 Thailand Suvamabhumi 60 45 -15 45 2020 12 Malaysia Kuala Lumpur 59 75 10 NA 13 China Chengdu Shuangliu 50 50 NA NA 14 India Mumbai Chhatrapti Shivaji 47 45 -2 5 2020 15 China Shenzhen Bao'an 46 45 -1 NA NA 16 Taiwan Taiwan Taoyuan 45 35 -10 10 2020 17 China Kunming Changsui 45 38 -7 22 NA 18 Philippines Manila Ninoy Aquino 42 30 -12 45 2020 19 China Shanghai Hongqiao 42 40 -2 NA NA 20 China Xi'an Xianyang 42 50 30 2022 Source: ACI, various Airport Authorities, DBS Bank estimates Page 9 Page 9 Industry Focus Think Big, Act Quick At least US$500bn needed for Asia’s airport investments in the next 2 decades 4bn passenger handling capacity needed in Asia Pacific in the We examine a number of proposed airport projects in Asia to next 2 decades. IATA projects that air passenger traffic in the extrapolate the amount of investment needed in airport Asia Pacific region will increase by 2.2bn pax over the next 2 projects to meet the projected demand for air travel in the decades. Assuming that 80% of that travel is within Asia region. These are airport projects that have been proposed or Pacific with the remaining being inbound or outbound flights announced with details on the expected project cost and from the region, this implies that additional airport capacity passenger handling capacity. totalling nearly 4bn passenger movements will be needed to meet this demand. These include, a) 16 new airport projects that have a proposed capital expenditure of over US$2bn, with an Mega airports will continue to drive growth in the region… aggregate project cost of US$117.3bn and total passenger We estimate that in 2017, the top 20 airports in Asia Pacific handling capacity of 887m, b) 19 airport expansion handled over 40% of total air passenger traffic in the region projects with an aggregate project cost of US$71.1bn and while the top 50 airports handled over 70% of traffic. Each total passenger handling capacity of 513.5m and, c) 21 of these top 50 airports handled between 20m to over 95m new airport projects that have a proposed capital passengers in 2017 (see appendix for details) with an expenditure of below US$2bn, with an aggregate project aggregate of 2bn passenger movements, which grew by cost of US$10.6bn and total passenger handling capacity 7.9% y-o-y from 2016. of 140.6m. These are provided in detail subsequently. There were another 30 or more airports in Asia that handled Proposed airport projects in Asia over 10m passengers in 2017, which meant that the top 80 Capex Capacity airports in the region handled about 85% of the total Project Type Number (US$bn) (m) passenger traffic, in our estimates. New Airports >US$2bn 16 117.3 887.0 Airport Expansions 19 71.1 513.5 We believe that mega airports, which we define as airports New Airports Source: DBS Bank Estimates Page 10 Page 10 Industry Focus Think Big, Act Quick 229 new airports under construction in Asia. Based on data US$145bn worth of new airport projects in Asia. Based on from CAPA, there were 229 new airport projects being the same data from CAPA, these new airport projects were worth a total of US$145bn, which was more than double planned in Asia as at March 2018. This is more than the that of Europe’s. combined total of the rest of the world, underlining the growth trajectory and potential of the sector. Investments in airports under construction – US$m 160,000 Number of airports under construction (Mar 2018) 145,191 140,000 250 229 120,000 200 100,000 80,000 67,499 150 60,000 40,000 100 23,242 20,608 20,000 58 57 7,731 3,662 46 - 50 29 US$mn Asia Europe Latin Africa Middle North 10 Pacific America East America 0 Source: CAPA, DBS Bank Asia Europe Africa Latin Middle North Pacific America East America More new mega airports in Asia to come. The table below Source: CAPA, DBS Bank lists 16 major new airport projects that are under construction or that have been proposed. Of these, 9 have an eventual passenger capacity of over 50m passengers while others leave room for further growth. For a list of smaller new airports, please see the appendix. New airports (proposed and under construction) in Asia with project value over U$2bn Initial Final Investment Estimated Estimated City Airport Capacity Capacity (US$bn) Completion Completion (m) (m) Beijing Beijing Daxing International Airport 13.8 45 2019 75 2025 Chengdu Chengdu Tianfu International Airport 12.0 40 2019 90 2040 Qingdao Qingdao Jiaodong International Airport 5.2 35 2025 55 2045 Foshan New Foshan Airport 5.1 - - 30 2022 Dalian Dalian Jinzhouwan International Airport 4.3 20 2018 20 NA Hohhot New Hohhot Airport 3.8 - - 30 2018 Sanya New Sanya Airport 14.5 38 2025 70 2045 Xiamen Xiamen Xiangan Airport 2.1 45 2020 75 2040 Mumbai Navi Mumbai international Airport 2.4 10 2021 Delhi Second Delhi Airport 2.3 5 2022 30 2032 Tangerang Soekarno-Hatta Airport II 6.8 - - 70 2024 Bali Bali Buleleng Airport 3.7 - - 32 2019 Manila New Manila Airport 13.7 - - 100 2025 Manila Sangley Point International Airport 9.3 25 2021 75 2035 Jeju New Jeju Airport 3.6 - - 25 2025 Ho Chi Minh Long Thanh International Airport 14.8 25 2025 100 2050 Source: Various new sources and Airport Authorities, DBS Bank estimates Page 11 Page 11 Industry Focus Think Big, Act Quick 339 airports in Asia undergoing expansion. Meanwhile, Investments in airport expansions– US$m based on data from CAPA, there were 339 airport 180,000 170,821 expansion projects being planned in Asia as at March 2018. 160,000 This compares with 208 projects in North America and 266 140,000 in Europe. 120,428 120,000 105,359 Number of airports under expansion (Mar 2018) 100,000 86,564 400 80,000 339 350 60,000 40,000 23,244 300 266 18,915 20,000 250 208 - 200 Asia North Europe Latin Africa Middle Pacific America America East 150 104 Source: CAPA, DBS Bank 100 66 43 50 Asia’s mega airports are undergoing expansions. The table 0 below lists 19 major airport expansions that are ongoing or Asia North Europe Latin Africa Middle being planned. Of these, 6 already have a passenger Pacific America America East handling capacity of over 50m while 4 airports will eventually Source: CAPA, DBS Bank reach a capacity of 100m or more passengers per annum US$171bn worth of airport expansion projects in Asia. . Based on the same data from CAPA, these expansion projects were worth a total of US$171bn, higher than North America’s US$120bn and Europe’s US$105bn. Major airport expansion projects (proposed and under construction) in Asia Investment Current New Addition Estimated Airport (US$n) capacity (m) capacity (m) (m) completion Hong Kong International Airport 18.3 72 102 30 2024 Chongqing Jiangbei International Airport 4.7 70 84 14 2025 Shanghai Pudong International Airport 3.0 60 80 20 2019 Guiyang Longdongbao International Airport 3.2 16 32 16.5 2019 Fuzhou Changle International Airport 2.6 13 29 16 NA Lanzhou Zhongchuan Airport 2.6 10 30 20 2020 Guangzhou Baiyun International Airport 2.1 35 80 45 2018 Haikou Hainan Meilan International Airport 0.1 23 35 12 2020 New Delhi Indira Gandhi International Airport 2.0 70 85 15 2021 Mumbai Chhatrapati Shivaji Maharaj International Airport 2.0 47 52 5 NA Jakarta Soekarno-Hatta International Airport 4.0 43 100 57 2025 Clark International Airport 0.2 4 12 8 2020 Manila Ninoy Aquino International Airport 3.0 31 72 41 2020 Singapore Changi Airport 10.0 82 132 50 2030 Busan Gimhae Airport 5.3 17 38 21 2026 Seoul Incheon International Airport 3.5 72 100 28 2020 Bangkok Suvarnabhumi International Airport 2.6 45 90 45 2020 Hanoi Noi Bai Airport 0.5 15 60 45 2030 Tan Son Nhat International Airport 1.3 25 50 25 2025 Source: Various new sources and Airport Authorities, DBS Bank estimates Page 12 Page 12 Industry Focus Think Big, Act Quick Airport expansion plans by region North Asia Japan: Airport infrastructure is relatively mature in Japan with China (ex-HK, MO, TW): In the 13th Five-Year-Plan (FYP) progressive expansions primarily being undertaken at key proposed by the People’s Republic of China (PRC) connecting airports. Narita International Airport Corporation government, China is targeting to have 260 civil airports by is currently planning to add a third runway with a targeted 2020. By the end of 2017, there were 229 airports with completion by 2028, and expand its LCC terminal’s licences in China but massive airport construction plans are (completed in 2015) handling capacity to 15m pax by 2021 still on the way. In 2016, China invested a total amount of from 7.5m p.a. currently via increased lobby area and RMB66bn (c.US$9.5bn) in airport development. To finance improved equipment. However, no investment costs have the construction and upgrade of civil airports, the Chinese been announced. The Fukuoka Airport HD Corporation also government introduced the Civil Aviation Development Fund intends to explore a LCC terminal after it commences collected from passengers/cargo/airlines. The fund’s budget operating the Fukuoka Airport in April 2019 as part of its reached RMB13.3bn in 2017, as 20% of total investment. privatisation plans. Local governments also issued bonds to support airport projects. Huge bank loans made up for the rest. South Asia India: The Indian government had announced to double the No. of civil airports in China (2006-2020) number of airports (from 100 to 200) with a total investment 300 amount of US$60bn to meet the surging demand. The Aviation Authority of India (AAI), the state-owned enterprise 250 also planned to commence the “mega projects of new terminals and buildings” this year, as reported by The 200 Economic Times. The private sector will form the bulk of the investment. 150 West Asia 100 Turkey: Turkey is on track for first-phase completion and opening of the Istanbul Grand Airport, slated to replace its 50 current primary airport the Ataturk International Airport. Built 0 by a consortium of local developer/operators, the Istanbul Grand Airport will open with an initial capacity of 90m pax 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 p.a., and more funding will be required for further 2017E 2018E 2019E 2020E expansion. Turkey is planning it to be the largest airport in Source: Wind, 13th FYP, DBS Bank’s estimates the world by 2028, capable of serving 200m pax p.a. with a projected total investment cost of USD36.4bn. Hong Kong: As part of the Hong Kong 2030+ Plan, the Hong Kong International Airport initiated the construction of a triple-runway system in 2016, which is expected to be completed in 2023. The whole project is a complex mixture of land reclamation, new terminal and third runway. It is estimated to cost around HK$141.5bn (c.US$18bn) funded by bonds (49%), airport development fees charged to departing passengers (18%) and the airport itself (33%). South Korea: South Korea’s primary Incheon International Airport has undertaken progressive expansion plans led by the government-held Incheon International Airport Corporation (IIAC), with the latest Phase 4 set to be completed by 2023. Plans to partially privatise (divesting stakes) IIAC were proposed as early as 2008 but met negative public response. To accommodate rising levels of tourist arrivals, a second new Jeju airport has also been proposed by the Ministry of Land, Infrastructure and Transport, with targeted investment costs of US$3.6bn and completion by 2025. Page 13 Page 13 Industry Focus Think Big, Act Quick Southeast Asia Assistance (ODA) likely from China and Japan, according to Indonesia: Airport development is part of the Indonesian Forbes. government’s key strategies. According to the Indonesia Investment Coordinating Board, the new government has Singapore: Singapore Changi Airport is already working on nine priorities in its agenda. One of the key programmes is to its 3rd runway and a 5th terminal is expected to be develop 15 new airports by 2019. The crowded Soekarno- completed by 2030 as part of the ‘Changi East’ project. To Hatta Airport serving the key Jakarta area has expansion fund expansions, the Changi Airport Development Fund was plans of up to US$6bn for capacity enlargement and air set up in 2015, which collects from passengers, airlines, and traffic management improvement to global standards.There the Changi Airport Group. The Singapore government has is also potentially a new Soekarnao-Hatta Airport II in the also committed S$9bn to the project via the fund. coming years. According to Bloomberg, only a small portion of funding will come from the government’s, with the bulk Thailand: Airport of Thailand (AOT) is undertaking the Phase committed by private investors, including from China. 2 expansion of its key Bangkok Suvarnabhumi airport to double capacity to 90m pax p.a. by 2021, involving Malaysia: Malaysia Airports Holdings’ (MAHB) near term investment of up to Bt125bn (US$3.8bn). Initial plans for focus is on improving the quality of airport services and secondary airports at Chiangmai and Phuket have also been facilities, particularly to comply with the newly established proposed with tentative capex of Bt120bn for both. Quality of Service (QoS) benchmarks. While passenger volumes are still below capacity at the primary KLIA/klia2 Vietnam: The Vietnamese government, via its Master Plan to airports, there are acknowledged choke-points which will 2020, is planning to upgrade and expand most of the 23 require expansion or enhancements to improve passenger existing airports in the country as well as potential new flow and comfort. The group is expected to require an airports, with a projected budget of up to US$13.4bn. These additional.RM200-300m (USD50-70m) over 2-3 years in projects will be funded by a mix of government budget, capex for the purpose of quality improvement. However, domestic and foreign investment as well as overseas capacity increases at other smaller international airports will development aid, according to the Civil Aviation be required (Penang, Kota Kinabalu, Langkawi, Subang) Administration of Vietnam. which is estimated to need up to RM400m (USD100m) in capex. MAHB largely intends to self-fund capex if feasible, as its Operating Agreement (OA) requires a larger revenue share rate if capex is borne by the government; but amendments to the OA are expected to be finalised in the coming year after a review with the new federal government. Philippines: In 2017 the ‘Build Build Build’ programme was released by the Philippines government. A Php8 trn (c.US$158bn) investment will be rolled out for infrastructure program for the next 5 years including 6 airports as flagship projects. The Clark International Airport expansion is the first project of ‘Build Build Build’ programme, which will be funded mainly by the government and Official Development Page 14 Page 14 Industry Focus Think Big, Act Quick The increasing role of private capital in Asia’s airport development While investment in airports in Asia have been traditionally Partial privatisation. The best known and a common been thought of as the domain of the public sector, the large example of this in Asia would include airports (or airport investment required, as well as the allure of steady returns groups) that are publicly listed, where the government retains and commercial revenue opportunities is attracting more a majority or substantial stake with public and institutional private capital into the sector. shareholders as minority owners. This would include Airports of Thailand, Malaysia Airport Holdings Berhad, Beijing Capital The staggering investment needed to build airport International Airport, and the airports in Shanghai, infrastructure is a strong motivation for governments to turn Guangzhou and Shenzhen. Undoubtedly, the access to to private capital as a supplementary, or even primary, means private capital and corporate debt has helped these airports of funding such projects. fund their rapid development over the years. In addition to leveraging on private capital to reduce the With many governments concerned about giving up control funding burden on governments, airport privatisation can over key public facilities, public-private partnerships (PPP) are also help to increase efficiency, both operationally and also popular in Asia as a means of funding airport financially, and improve customer satisfaction. It can also investments. Partial stakes maintained by the government help promote local trade and tourism while supporting local ensure that they have a certain degree of control and economic growth. Other benefits would also include the influence, while managing public perception. For example, creation of a more dynamic labour force as well as airport India’s government has developed new airports or operations that are more responsive to market changes. modernised existing airports on a PPP basis in Delhi, Mumbai and Hyderabad. Generally, there are three airport privatisation models, 1) full private ownership, 2) partial privatisation and, 3) long term Long term concessions. In a bid to raise money, improve concessions: efficiencies, promote the growth of the airport sector, or all of the above, some governments in Asia are now exploring Full private ownership. This includes airports that the the sale of long term concessions to the private sector. In government has fully sold or transferred ownership of to the 2011, Japan’s Ministry of Land, Infrastructure, Transport and private sector. A good example of this is in Australia, where Tourism announced that it would privatise all 19 national airport leases for 50 years with an option for an additional 49 airports by 2020. Transactions have picked up noticeably in years were sold to the private sector. In 1997, phase 1 of recent years as 2020 approaches. For example, on 1 April Australia’s Airport Privatisation Program, which included 2016, VINCI Airports (40%) and ORIX Corporation (40%) Brisbane, Melbourne and Perth was completed, which raised along with other investors (20%) won a 44-year concession proceeds of A$3.3bn with direct cost of sales of less than to operate Kansai International and Osaka Itami airports for 5%. This helped to substantially lower the government’s c. €2.1bn, of which an estimated 70% is debt funded. financial burden. In some cases, the government remains the owner and is A much rarer example of a fully private owned airport in responsible for funding capital expenditures but signs a Asia, not involving the government at any stage, would be management contract with a private operator for a limited the Samui Airport which was conceptualised, developed and period (e.g. 10 to 20 years). funded solely by Bangkok Airways. Page 15 Page 15 Industry Focus Thing Big, Act Quick Smaller airports struggle to be profitable. One key issue that Portfolio bundling. One approach that governments are stands out for the airport industry is that profitability and utilising to privatise smaller airports is to bundle smaller returns are highly skewed towards large or major airports, airports into a portfolio of assets that also include larger, with many of the small airports being unprofitable. more attractive airports to entice investors. A good example According to the Airports Council International (ACI), the of this is happening in Japan, where 5 small airports with less global return on invested capital in airports in 2016 was than 2m passenger movements (based on 2015 figures) are 7.3%, which was an improvement from 6.3% achieved in being bundled with the Shin-Chitose (Sapporo) airport, which 2015. However, in ACI’s 2015 Economics Report, it was handles over 20m passengers a year, as a ‘One Hokkaido’ reported that 69% of airports globally were loss-making. package. Indeed, this has attracted a large number of interested bidders internationally and domestically, and could Generally speaking, smaller airports handling less than 1m pave the way for Japan’s airport privatisation program to passenger movements a year (which makes up 80% of all blossom. airports globally) struggle to be profitable, given the intensive capital requirements even for basic airports. A case study on Passengers handled by ‘One Hokkaido’ airports in 2015 Japanese airports (courtesy of Japan’s Ministry of Land, One Hokkaido 2015 pax Infrastructure, Transport and Tourism or MLIT) illustrates this Shin-Chitose (Sapporo) 20,461,531 point quite well: - Hakodate 1,772,052 Asahikawa 1,148,825 Using 2016 financial data provided by the MLIT, we plot the Memanbetsu 1,088,195 revenue and EBITDA of various airports under the MLIT in Kushiro 877,242 2016. We excluded the 4 largest airports Tokyo, Shin- Obihiro 605,703 Chitose (Sapporo), Fukuoka and Naha, which all have Wakkanai Hokkaido 197,500 revenues above 16bn yen and positive EBITDA. A clear trend emerges – airports with higher revenue (driven by higher Source: Ministry of Land, Infrastructure, Transport & Tourism (Japan) passenger throughput) are more likely to be profitable than The logic behind the bundling of smaller airports with larger the smaller airports. ones, especially those within the same region, is that the smaller airports could benefit from the economies of scale Revenue vs EBITDA for selected airports in Japan (2016) (purchasing, administration and management expenses etc.), 1,500 co-operation opportunities, and the reinvestment of returns from the larger airports into the portfolio. In addition, the Hiroshima private sector would likely be more innovative, and financially 1,000 Kumamoto motivated, to improve the operations of the small airports. Nagasaki Matsuyama Miyazaki The private sector may also be receptive to investing in 500 Kagoshima Tokushima Komatsu smaller airports that could improve the value of their vested assets, such as nearby real estate or tourism related ventures. Miho Kochi Hakodate Iwakuni Takamatsu 0 0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 Misawa Hyakuri Kitakyushu Oita EBITDA Yen (m) EBITDA Yen Okadama Niigata -500 Kushiro -1,000 Wakkanai -1,500 Revenue Yen (m) Source: Ministry of Land, Infrastructure, Transport & Tourism (Japan) Therefore, there is considerable difficulty in attracting private investments to smaller, secondary airports. Page 16 Page 16 Industry Focus Thing Big, Act Quick Privatisation opportunities in Asia China In 2016 the Civil Aviation Administration of China (CAAC) The funding structure of airports in China is mainly published an opinion paper encouraging a further opening- composed of government and self-raised capital. Part of the up of airports to private capital. In September 2018, CAAC government capital is contributed by the Aviation announced the first batch of 28 airport projects to welcome Development Fund（民航发展建设基金）which is charged private investment. Among the 28 projects, 11 of them have to passengers to support airport development country-wide. already secured investors with 8 airport construction projects. Meanwhile, the central and local governments will also Another 17 projects are still being promoted to private allocate budget for funding of airports. Self-raised capital capital. The total investment of these projects is US$16.8bn includes airport group funds and funding from other and includes both existing and new projects. More projects financing channels, such as debt and equity. are expected to be open to the private sector over time. Capital structure for China’s civil airports Status of China’s airport privatisation program Project capital Financing capital Type Progress Projects US$bn Government capital Non-govt capital Bank loan Airport Identified Private Investors 8 7.5 Corporate self- Corporate bond Construction Aviation Development Fund Ongoing promotions 2 3.7 owned fund Equity funding Govt financial appropriation Airport Identified Private Investors 3 1.6 Self-raised capital Support Ongoing promotions 15 4.0 Source: CAAC Total 28 16.8 In 2012-2017, total airport fixed asset investments in China Source: CAAC grew at a CAGR of 8.3% and reached US$11.4bn. Nearly half of the investments came from the government with the In the long term, we can expect government participation in Aviation Development Fund contributing c. 30%. The airport funding to be reduced as multi-source financing gains proportion of funds from government capital declined from more ground. Equity funding, especially the PPP model is a 67% in 2015 to 43% in 2017, while self-raised capital share preferred channel as it can help ease financial burden on rose from 33% to 57%, or roughly US$6.5bn. local governments. Airport fixed asset investments in China (US$bn) Japan. In June 2018, Japan broadened the scope of its 12 privatisation plans to cover all 97 airports across the country, which include 5 Class 1 airports (mainly for international air 10 travel), 24 Class 2 airports (mainly for domestic air transport), 33% 8 57% and 53 Class 3 local airports, as well as others used for 40% 50% 41% defence and local governments. 6 57% 30% 28% 4 28% 17% 15% Of these, 8 handled over 10m passengers in 2015, 9 handled 14% between 2m to 10m passengers, and a further 11 handled 2 37% 33% 28% 29% 31% 33% between 1m to 2m passengers, with 14 handling between - 500,000 to 1m passengers. While it would be difficult to 2012 2013 2014 2015 2016 2017 privatise all of the smaller airports, the bundling of small Aviation development fund Govt financial appropriation airports with a larger, more profitable airport like the ‘One Self-raised capital Hokkaido’ package could pave the way for a significant Source: Wind, CAAC number of Japan’s airports to be privatised. Having already completed several transactions and armed with a determination to push the privatisation plan through, and most importantly with a clear transaction framework and process, it is likely that a lot more transactions in Japan will be sealed in the next few years. Page 17 Page 17 Industry Focus Thing Big, Act Quick India Indonesia Privatisation in the country has seen little progress since the According to a presentation by PricewaterhouseCoopers Delhi and Mumbai airports transactions, with frequent PWC at the Global Airport Development (GAD) Conference changes the legal framework, terms and conditions and even in Singapore in 2018, there are at least 200 airports in a change in government delaying the country’s airport Indonesia that need to be expanded to support economic privatisation program.Recently, India’s government was growth and tourism development, and more investment is reported to be looking at the privatisation of eight airports - needed to support this. Currently, almost all of the airports Lucknow, Ahmedabad, Chennai, Jaipur, Kolkata, Guwahati are owned and operated by the government, while 26 of the and Pune. It was reported that the civil aviation ministry is 27 busiest airports are operated by Angkasa Pura I & II, which currently having discussions on setting the framework on are Indonesian state-owned entities (SOEs). potential bids for these airports. The government is keen to keep costs, and passenger as well as aircraft fees low, but The Ministry of Transport plans to build 10 new airports would have to balance this with providing bidders from the under PPP schemes, and some airports that are already under sector an attractive enough return for them to be interested. consideration include Komodo, Kediri, Batam and Jayapura. At the same time, a new mechanism called “Limited It was reported by CAPA in August 2018 that the Ministry of Concession Scheme” has also been developed, which is Civil Aviation had proposed a new financial model for new aimed towards improving the performance of existing airport development projects under the NextGen Airports For infrastructure by offering concessions to the private sector. Bharat (NABH) Nirman scheme with the aim of attracting This will also help funds for the government or SOEs. foreign investment to new airport projects such as the Jewar Currently, Medan and Lombok airports are under Noida International Airport, Bhogapuram Airport and New consideration as part of this plan. Pune International Airport. Some key highlights of the new financial model include, a) extension of airport concession For privatisation to successfully take off in Indonesia, the contracts from 30 to 40 years, b) airport tariffs to be rules of engagement need to be clearly defined and determined by Maximum Blended Aeronautical Yield in terms streamlined, which will help attract the necessary private of Indian Rupees (INR) per passenger, rather than capital sector funding to help Indonesia meet its airport expenditure. infrastructure needs. Philippines There have been several unsolicited proposals for airports in the country in 2018, and two have recently won Original Proponent Status (OPS). Firstly, a consortium of 7 of the Philippines’ top conglomerates, with Changi Airport acting as a technical consultant (NAIA Consortium), confirmed in September 2018 that the Department of Transportation had awarded it the OPS to rehabilitate, develop, operate and maintain the Ninoy Aquino International Airport (NAIA). The project is said to be worth P102bn for a period of 15 years. In the same month, Aboitiz InfraCapital Inc (AIC) was granted OPS on its proposal to operate the New Bohol International Airport, located in Panglao Island. New Bohol Airport is projected to handle two million passengers per year and is intended to replace the existing Tagbilaran Airport. Once approved by the National Economic and Development Authority Board, the unsolicited proposal will undergo a Swiss Challenge, where other private groups are invited to make a competing offer, with the holder of the OPS having a right to match the offer. Besides the two offers above, offers have been made by Mega7 Construction Corp for Kalibo Airport for P12 bn, and by Chelsea Logistics Corp for Davao Airport for P49bn. Meanwhile, the government is also accepting proposals for Iloilo, Laguindingan and Bacolod airports. Page 18 Page 18 Industry Focus Thing Big, Act Quick Fund raising lessons from Asia’s listed airports Airports of Thailand’s early access to equity funding helped AOT’s operating cashflow, net capex, and D/E ratio raise its game. Airports of Thailand (AOT) became a public Bt m company in 2002 under the Corporatisation Act B.E. 2542 35,000 100% with the Ministry of Finance (MOF) as the sole shareholder. 30,000 Its paid-up share capital was increased from Bt5.7bn to 80% 25,000 Bt10bn in 2003. A year later, it was listed on the Stock 20,000 60% Exchange of Thailand (SET) with a total registered capital of 15,000 Bt14.3bn and the MOF’s stake was reduced to 70%, but 40% 10,000 AOT remains a SOE because government agencies have over 20% 5,000 50% stake. Under SOE status, AOT must operate within 0 0% government rules and regulations. The decision making FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 process tends to be lengthy and AOT is less flexible than Operating cashflow Net capex (outflow) Debt-to-capital (rhs) private companies. However, being an SOE also has its advantages such as lower funding costs and better access to Source: Company, DBS Bank funding with the government effectively acting as a guarantor. Samui Airport Property Fund – a lesson for secondary airports. Samui Airport was built in 1982 by Bangkok IPO was mainly to fund the new Suvarnabhumi airport Airways, a private enterprise, and was the 7th busiest airport project. The main objective of AOT’s initial public offering in Thailand in 2017, handling over 2.6m passengers. In (IPO) was to find another source to fund the hefty November 2006, Bangkok Airways sold a 30-year concession Suvarnabhumi airport project phase I (budget of Bt125bn) of the key assets of Samui Airport, including the land, project, which was funded by equity capital (44%) and runways, parking aprons, passenger terminal and other foreign loans borrowed in Japanese yen from overseas constructions to Samui Airport Property Fund (SPF) which was financial institutions (56%). The new airport was targeted as listed on the Thai Stock Exchange, and raised over Bt5.5bn Thailand’s new international and domestic aviation hub for Bangkok Airways. (Bangkok Airways held a 37.15% stake catering for another 45m passengers p.a. Suvarnabhumi in the fund upon IPO.) Airport was officially opened on 15 Sep 2006. SPF holds the leasehold rights to operate Samui Airport for Cash pile of over Bt65bn to help fund the next capex cycle. 30 years (2006-2036) and has sub-leased the airport back to Under government rules and regulations, AOT’s cash flows the operator (Bangkok Airways) which gives SPF potential from operations cannot be used for other purposes except upside with downside protection. That is, SPF’s revenue will for airport expansion. As AOT has no significant investment be in line with the number of passengers and aircrafts to and in any airport expansion due to several delays since the fro Samui Airport. Moreover, SPF has a minimum guaranteed Suvarnabhumi airport phase I, AOT was sitting on a pile of revenue of 6% of the fund size from the sponsor. All cash of Bt65.7bn as at end 3QFY18F. Therefore, the funding operating expenses and capex are borne by the operator and source for its upcoming major capex cycle- the Suvarnabhumi the fund itself incurs only annual fund expenses and any airport expansion phase II (costing about Bt62.5bn) should be increases in revenue would flow directly to the bottom line. easily funded by its cash pile and perhaps some debt. Samui Airport handled just over 1.4m passengers in 2006, Increasing aeronautical service fees is another potential the year SPF completed its IPO. While it was certainly not very source of funding. One way to defray expenses related to the profitable at that time given its size, its owner still managed upcoming airport expansion is to obtain additional revenue to structure a transaction using its key airport assets that was (further boosting internal operating cashflows) from hiking well received by investors, had a limited concession of 30 aeronautical service fees such as parking, landing, and years, and most importantly raised a significant amount of passenger service charges. However, this requires quite a money for the airport owner. This certainly could show the tedious process as fee hikes must be approved by both the way for many of the region’s smaller or secondary airports on Civil Aviation Authority of Thailand and the Ministry of fund raising. Transport. Such a hike was approved only once in 2007 for AOT where international passenger service charge was raised by 40% to Bt700/passenger and doubled to Bt100/passenger for domestic passengers. AOT expects to seek an approval for another fee hike after the completion of the Suvarnabhumi airport expansion phase II expected in FY20F-FY21F. Page 19 Page 19 Industry Focus Thing Big, Act Quick Malaysia Airport Holdings Berhad – a pioneer in tapping the MAHB’s operating cashflow, net capex, and D/E ratio equity markets. Malaysia has an established history of RM m flexibility in terms of funding its airport infrastructure, as 2500 50% Malaysia Airports Holdings (MAHB) holds the distinction of 2000 being the first Asian listed airport operator after entering the 45% Kuala Lumpur Stock Exchange in 1999. This had followed a 1500 bill passed by the Malaysian parliament in 1991 to separate 40% the regulatory and operational functions of its civil aviation 1000 35% unit. The initial listing raised RM495m (US$130m at the time) 500 – RM275m to the group and RM220m to the government – and the government retained 72% ownership in addition to 0 30% FY10 FY11 FY12 FY13 FY14 FY15* FY16 FY17 1 ‘special share’ to ensure that national and government Operating cashflow Net capex (outflow) Debt-to-capital (rhs) interests are maintained. Government interest in MAHB, held *ISG consolidated as subsidiary from end-FY15 via sovereign investment fund Khazanah Nasional, has since been pared down to 33% (at 1H18) over the years via stake Source: Company, DBS Bank placements and sales for the purpose of realising investment gains and fund raising. klia2 and ISG investment tapped investors and debt funding. In the group’s last major capex cycle, MAHB had to incur Cross-subsidisation model impacted financing decisions. aggregated capex of over RM7bn over FY11-FY15 which MAHB is responsible for operations of most (39 today) included RM4bn for the klia2 expansion and RM2.2bn for its airports in Malaysia, on a ‘cross-subsidisation’ model given purchase of the remaining unowned stakes in the Istanbul that the majority is operated at a loss. However, the Sabiha Gokcen airport in Turkey. Over the period, the group Operating Agreement held with the government allows for tapped various funding sources including, 1) a 10% private maintenance capex to be borne by the government, at the placement raising c.RM1bn, 2) a 1-for-5 rights issue raising cost of increasing the revenue share % (called user fees). RM1.3bn, 3) a Sukuk (Islamic financing, treated as preference Thus far, MAHB has generally preferred to utilise internally capital) issuance of c.RM1bn, and 4) build-up of gross debt generated cash flows for capex rather than increasing the of RM1.35bn (reaching RM3.85bn from RM1.5bn). In a revenue share with the government. general sense, MAHB funded its major capex cycle with 38% of debt/fixed rate financing, 37% additional capital raising and the remainder from organic cash flow. This helped maintain the group’s debt-to-capital ratio, staying within the 40-50% band over the years. Page 20 Page 20 Industry Focus Thing Big, Act Quick Billion Dollar Whales – Asia’s most valuable airports The home of billion-dollar airports. The Asia Pacific region is Asia’s most profitable airports are not listed. Meanwhile, the three also home to some of the most valuable airports (or airport airports with the largest earnings in the region in 2017 were Hong groups) in the world. Below is a list of airports that are Kong International Airport with nearly US$1.5bn in profit, followed publicly traded in Asia Pacific with a market capitalisation of by Seoul Incheon International Airport with nearly US$1bn in over US$2bn as at 12 October 2018. In fact, the largest pure earnings, and Changi Airport Group with c. US$620m in profit. Not play airport company in the world is Airports of Thailand, with coincidentally, these were also airports with the highest concession a market capitalisation of nearly US$28bn, while the next sales globally. Additionally, these three are also not publicly listed. largest in the region would be Shanghai International Airport and Sydney Airport Holdings with market capitalisations of Key financials of major airports in Asia Pacific US$15.2bn and US$10.4bn respectively. (US$m) - 2017 Airport operator Revenue PAT Market capitalisation of airports in Asia Pacific (US$m) Hong Kong International Airport 2,823 1,474 Seoul Incheon International Airport 2,212 988 Sydney Airport Holdings Pty Ltd 10,433 Changi Airport Group 1,927 619 Malaysia Airports Holdings Bhd 3,356 Airports of Thailand** 1,618 609 Shanghai International Airport 1,193 545 Airports Corp Of Viet Nam 7,657 Beijing Capital Intl Airport 1,416 366 Airports of Thailand PCL 27,741 Sydney Airport 1,141 269 Japan Airport Terminal Co Ltd 3,471 Baiyun Airport 1,000 236 Angkasa Pura II 606 150 Auckland International Airport Ltd 5,532 Angkasa Pura I 538 106 Beijing Capital International Airport Co Ltd 4,627 Japan Airport Terminal* 2,016 105 Guangzhou Baiyun International Airport Shenzhen Bao'an 491 100 Co Ltd 3,404 Malaysia Airport Holdings Berhad 1,082 55 Shanghai International Airport Co Ltd 15,211 Source: Company Annual Reports, DBS Bank estimates Shenzhen Airport Co Ltd 2,296 Applying the peer average historical PE of 31.8x to the Source: ThomsonReuters, DBS Bank estimates earnings of unlisted airports in the region yields several companies worth potentially tens of billions (US$) and a In terms of historical PE valuations, these traded at a wide couple more that could be valued at several billion. We profile range of between 12x to 55.9x, with an average of 31.8x. some of these in the next section. Historical PE for listed airports in the Asia-Pacific Potential market value of selected airports (US$m) 60.0 55.9 1,800 Hong Kong 50.0 1,600 Intl Airport, 41.5 42.1 46,888 38.4 40.0 1,400 33.7 Average 31.8 32.0 Seoul 29.9 1,200 30.0 Incheon Intl Airport, 18.4 1,000 20.0 14.7 31,429 12.0 800 10.0 600 Changi 0.0 Angkasa Airport 400 2017 ProfitAfter (US$m) Tax Pura II, Group, Angkasa 3,374 19,669 200 Pura II, 4,776 0 0 1,000 2,000 3,000 4,000 2017 Revenue (US$m) Source: ThomsonReuters, DBS Bank estimates Source: DBS Bank estimates Page 21 Page 21 Industry Focus Thing Big, Act Quick Changi Airport Group – Setting the standard More than a gateway to Singapore. In addition to facilitating Numerous accolades and awards. According to a press release travellers to and from Singapore, Changi Airport is a major air by the Changi Airport Group on 23 Jan 2018, it clinched a hub in Asia, and indeed globally – being the sixth busiest total of 26 Best Airport awards in 2017, bringing the total to airport in the world for international traffic. According to the 557 as of Jan 2018, including the World’s Best Airport Changi Airport Group, as at 31 December 2017 the airport accolade at the 2017 Skytrax World Airport Awards, an award connected passengers to over 400 cities in about 100 it won for the fifth year in a row. countries and territories around the world, and served over 100 airlines. In 2017, Changi Airport was the 18th busiest Strong financials. Changi Airport Group saw revenue growth passenger airport in the world (9th in Asia), and the 12th busiest of 12.9% y-o-y in its FYE Mar ‘2018 figures to S$2.6bn while cargo airport globally (7th in Asia). Passenger movements at profit after tax reached S$835m, compared to a profit after Changi Airport grew at a 5.2% CAGR from 1998 to 2017, tax (excluding investment impairment losses) of S$767m in reaching 62.2m passengers in 2017. It also handled over 2m FY17. This was driven by contributions from the newly tonnes of air freight in 2017. completed Terminal 4. Passenger movements at Changi Airport (m pax) Revenue & PAT for Changi Airport in S$m (FYE Mar) 70.0 3,000 62.2 2,602 60.0 2,500 2,305 2,106 2,150 2,164 1,911 50.0 2,000 40.0 1,500 30.0 896 1,000 751 782 784 835 23.8 657 20.0 500 10.0 0 2013 2014 2015 2016 2017 2018 0.0 FYE Mar (S$m) Revenue PAT 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Source: Changi Airport Group Source: Changi Airport Group Based on departing seats by country, the top markets for Changi Airport are Indonesia, Malaysia, China, Australia and Thailand. This is followed by India, Hong Kong and Japan. Departing seats by country at Changi Airport For the week commencing 1 Oct 2018 Indonesia Other 13% 23% Malaysia 11% Vietnam 4% Philippines 4% China 11% Japan 4% Hong Kong 5% Australia India 9% 7% Thailand 9% Source: CAPA – Centre for Aviation and OAG Page 22 Page 22 Industry Focus Thing Big, Act Quick 50% of revenue is from commercial services. In FYE Mar Jewel Changi Airport 2018, 50% of Changi Airport Group’s revenue or c. S$1.3bn, was derived from airport concessions and rental income with less than 40% coming from airport and security services. This was achieved on the back of c. S$2.5bn in concession sales, placing Changi Airport as one of the top three airports in the world for concession sales. Changi Airport has a total concession space of 91,000 sqm with transit malls accounting for 62,000sqm, and there are more than 400 retail and services outlets, and about 140 food & beverage outlets. FY18 revenue breakdown in S$ - Changi Airport Group Others, $202,m, 8% Airport services, $820m, 31% Source: www.jewelchangiairport.com Jewel Changi Airport – staying ahead of the rest. Designed as a lifestyle hub that is linked to Terminal 1 and connected to Airport Terminals 2 and 3 via air-conditioned pedestrian linkways, concessions and rental Jewel Changi Airport is a mixed-use development at Changi income, Security Airport which is scheduled to open in 2019, covering a total $1,298m, services, 50% $282m, 11% gross floor area of 134,000 sqm and spanning 10 storeys. Jewel is a joint venture between Changi Airport Group and Source: Changi Airport Group CapitaLand (Singapore’s largest property developer) and will cost S$1.7bn to construct. The development will include a Terminal 4 opened in Oct 2017. Changi Airport’s Terminal 4 hotel, aviation facilities, 300 retail and dining facilities, was officially opened on 31 Oct 2017 with a gross floor area gardens and attractions such as the Rain Vortex (the world’s of 225,000 sqm. This added a capacity of 16 million largest indoor waterfall) the Forest Valley (an indoor garden passengers per annum to Changi Airport, increasing its total spanning five storeys) and Canopy Park, among others. annual handling capacity to 82 million passenger movements. Furthermore, completion of Jewel Changi Airport will also Construction of Terminal 4 began in early 2017 and cost an help raise Terminal 1’s capacity from 21m to 24m pax. The estimated S$985m to build. development of Jewel Changi Airport could help Changi Airport stay ahead of its competitors as a global aviation hub, Actively involved globally. According to a recent interview by further bolstering its position as the world’s leading airport. its Chairman, Changi Airport Group's international arm is already involved in business activities in some 40 airports Ahead of its opening, Changi Airport Group announced that around the world, including investment in airports in Brazil, it had achieved committed occupancies for almost 90% of its Russia, India and China. It has also conducted planning, retail space (based on NLA of ~575,900 sqft) for Jewel Changi. design and management consulting for other airports. The consulting involves retail space management, one of Changi's strengths. Page 23 Page 23 Industry Focus Thing Big, Act Quick Planning for 2030 and beyond – Changi East and Terminal 5. Changi Airport – projected capacity and demand Apart from growing capacity and seeking to meet more 140.0 sophisticated needs, Singapore also aims to redefine air travel through the delivery of creative solutions and signature 120.0 experiences. In addition to the construction of Terminal 4 and the development of Jewel Changi Airport, the government’s 100.0 long term plans include the Changi East development project 80.0 (including Terminal 5 or T5). Planning for T5 began four decades before it’s due to be completed in 2030 (phase 1), as 60.0 the government approved the land site for reclamation in 1989. 40.0 20.0 Totalling 1,080 hectares, the Changi East project includes the construction of a mega terminal (T5) that will be able to 0.0 handle 50m passengers a year, as well as the operation of a three-runway system, the construction of tunnels and other 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018F 2020F 2022F 2024F 2026F 2028F 2030F underground systems, as well as cargo complexes and other Capacity 3% growth supporting infrastructure. T5 will have an initial capacity of Actual 5% growth 50m passengers per annum by the end of 2030 and could have a capacity of c. 70m passengers when it’s fully completed Source: Changi Airport Group, DBS Estimates (with the addition of two satellite buildings). Changi Airport will be operating above its capacity by 2028 assuming just 3% growth in passengers per annum. While Changi Airport’s utilisation was a comfortable 76% in 2017 with the completion of Terminal 4, it would be facing overcapacity by 2028 assuming just 3% growth in passenger movements and could face overcapacity as early as 2024 if passenger movements grew by 5% per annum. The completion of Terminal 5 by 2030 to increase Changi Airport’s capacity to 135m passengers per annum would be a timely addition to the airport. Page 24 Page 24 Industry Focus Thing Big, Act Quick Changi Airport and Changi East development Source: Changi Airport Group PagPage 1 Page 25 Industry Focus Thing Big, Act Quick Hong Kong International Airport – Heart of Asia Honours and awards. HKIA was selected as the “Airport of the Year” by Asia Transport World in 2016 and 2018. It also From China to the world. Hong Kong International Airport won the “Best Global Airport” by Asia Cargo News in 2016 (HKIA) is a major hub in Asia serving as the transit of China and 2017. HKIA was named the “World’s Best Airport” by and the rest of the globe. It ranked as the 8th busiest airport Airport Council International from 2007-2011. The Skytrax worldwide (4th in Asia) with annual passengers of 72.9m in ranked HKIA as a five-star airport. 2017 and 3rd busiest airport in terms of international passengers right after Dubai and Heathrow. HKIA now Robust profitability. HKIA’s revenue grew 18.1% y-o-y in its connects over 220 destinations including 50 mainland FYE Mar 2017 to HK$22.0bn while profit after tax rose 38.2% destinations by serving more than 120 airlines globally y-o-y to HK$11.5bn. according to Hong Kong Airport Authority. HKIA has also been the largest cargo airport in the world for 7 continuous Revenue & PAT for HKIA in HK$m (FYE Mar) years. Passenger movements at HKIA grew at a CAGR of 5.0% 25,000 from 1998 to 2017, reaching 72.9m passengers in 2017. It 21,994 also delivered more than 5m tonnes of air mail and cargo. 20,000 18,184 18,627 16,367 14,810 Passenger movements at HKIA (m pax) 15,000 80.0 11,486 72.9 70.0 10,000 8,374 8,310 7,270 60.0 6,448 50.0 5,000 40.0 30.0 0 2013 2014 2015 2016 2017 20.0 Revenue PAT 10.0 - Source: HKIA 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Pax traffic (mn) Commercial services contributed over 40% of income. In FYE Source: HKIA Mar 2017, HK$9.3bn which accounted of 42% of HKIA’s revenue, was derived from airport concessions and rental Based on departing seats by country, the top markets for income with less than 35% coming from airport and security HKIA are China, Taiwan, Japan, Thailand and South Korea, services. followed by Philippines, U.S, and Singapore. FY17 revenue breakdown in HK$ - HKIA Departing seats by country at HKIA For the week commencing 8 Oct 2018 Airport services, Others, $4,990m, 23% Other China $5,692m, 26% 22% 21% Malaysia 3% Security services, Australia Taiwan $1,999m, 9% 4% 12% Singapore 4% United States Japan 5% Airport concessions and Philippines 12% rental income, $9,313m, 42% 5% South Korea Thailand 5% 7% Source: HKIA Source: CAPA – Centre for Aviation and OAG Page 26 Page 26 Industry Focus Thing Big, Act Quick Mega transportation network further equips HKIA as a world handling system and facilities. The new passenger building is class aviation hub. HKIA is establishing an Intermodal Transfer expected to serve an extra capacity of 30m passengers Terminal (ITT) with five stories covering 22,000 sqm adjacent annually by the end of 2030 for HKIA. to SkyPier, which is to be completed by 2022. The ITT is a The three-runway system will bring additional economic 360-meter bonded vehicular bridge to link boundary crossing benefits of about HK$445bn in 2012-2061 according to facilities in Hong Kong. Apart from that, with the completion HKIA’s estimates. The airport will be able to handle 100m of Tuen Mun-Chek Lap Kok Link, Express Rail Link and Hong passengers and a maximum of 620,000 aircraft movements Kong-Zhuhai-Macao bridge, the catchment areas of HKIA will annually (102 per hour) when the three-runway system is be largely improved by enhancing cross-boundary completed. transportation and sea connectivity for the whole Pearl River Delta area. HKIA– projected capacity and demand 140 SKYCITY – airport city. As one of the largest projects in Hong Kong, SKYCITY is an integrated commercial complex covering 120 25 hectares of land areas beside HKIA. The entire project is expected to be completed by 2027 with retail, entertainment 100 facilities, offices and hotels connected to HKIA. Currently the 80 first new hotel is under construction and expected to be operational by 2023. The Phase 1 Retail/Dining/Entertainment 60 development tender was done in 2017. With the strong synergistic potential created by the mega infrastructure, the 40 HK government forecasted that there will be a population of 20 more than 120,000 people living in the airport community by 2030. 0 SKYCITY 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018F 2020F 2022F 2024F 2026F 2028F 2030F Capacity 3% growth Actual 5% growth Source: HKIA, DBS Estimates HKIA is already operating beyond capacity. While the current capacity of HKIA is 70m passengers per year with Terminal 1 handling 40m and Terminal 2 30m, passenger throughput in 2017 reached 73m passengers. Assuming a 3% annual growth rate of passenger volume, we’ll see a large gap between surging demand and limited capacity before 2024 when the new passenger building is completed. The three- runway system might also be too crowded by 2030 given the designed capacity of 100m passengers, let alone a 5% annual growth of passengers. Source: HKIA The three-runway system and other airport expansion projects emerging for HKIA are to address the increasing capacity Master plan 2030 – three-runway system. In 2016 HKIA deficit and the need to be fast-tracked. launched the development plan for its third runway to be completed by 2030 to meet the growing appetite of air services. The whole project includes a reclamation of about 650 hectares of land by 2020, the third runway passenger building with more than 280,000 sqm gross floor area (GFA), a 3,800-meter long new runway, a 2,600-metre long new automated people mover system connecting Terminal 2 and the new passenger building, a new baggage handling system (BHS), expansion of Terminal 2 and relative transportation, Page 27 Page 27 Industry Focus Thing Big, Act Quick Hong Kong International Airport and SKYCITY Source: HKIA PagPage 2 Page 28 Industry Focus Thing Big, Act Quick PT Angkasa Pura I & II Groups – Sky high ceiling Indonesia’s aviation sector continuously growing. Airports in Jakarta Soekarno-Hatta International Airport is Indonesia’s Indonesia are operated by the Angkasa Pura I and II Groups, main air transportation hub operated by Angkasa Pura II. This units under the Ministry of Transport, the Air Force or regional airport is the main gateway to Jakarta, catering to domestic, government. The composition of airports by operators is regional and international passengers and cargo services to indicated in the diagram below. As at 31st Mar 2018, Angkasa more than 25 airlines. It serves as a hub to airlines such as Pura I managed 13 airports in the Eastern Indonesia and Garuda Indonesia, Lion Air and Indonesia AirAsia. In 2017, Angkasa Pura II managed 14 airports in Western Indonesia. Soekarno-Hatta International Airport was the 17th busiest The establishment of the Group of airport operators such as passenger airport in the world. the Angkasa Pura II is to provide airport-related services by optimising the utilisation of resources owned by the Group Passenger movements at Jakarta Soekarno-Hatta International and practicing good governance. Airport grew at a 5.4% CAGR from 2010 to 2017, reaching 60.2m passengers in 2017. It also handled over 500,000 Total airports in Indonesia by operators tonnes of air freight in 2017. Based on departing seats by country, the top markets for Soekarno-Hatta International Airport are Singapore, Malaysia, Thailand, China and Saudi Arabia, followed by Japan, Hong Kong and UAE. Departing seats by country at Soekarno-Hatta Airport Source: Indonesia Statistics (BPS) Composition of airports managed PT Angkasa Pura I PT Angkasa Pura II International Airport I Gusti Ngurah Rai – Soekarno-Hatta International Airport, 1 Bali. Tangerang 2 International Airport Juanda – Surabaya. Halim Perdanakusuma Airport, Jakarta International Airport Sultan Hasanuddin – Sultan Mahmud Badaruddin II Airport, 3 Makassar. Palembang International Airport Sultan Aji Supadio Airport, Pontianak Source: CAPA – Centre for Aviation Muhammad Sulaiman Sepinggan – 4 Balikpapan International Airport Frans Kaisiepo – Kualanamu International Airport, Deli Awards and recognition. According to both Angkasa Pura I 5 Biak Serdang and II Groups’ annual report, a total of 26 airport-related International Airport Sam Ratulangi – Sultan Syarif Kasim II Airport, Pekanbaru awards were achieved in FY2017, including the World’s Most 6 Manado Syamsudin Noor Airport – Banjarmasin Minangkabau International Airport, Improved Airports award for Jakarta Soekarno-Hatta 7 Padang Pariaman International Airport at the 2017 Skytrax World Airport International Airport Ahmad Yani – Sultan Iskandar Muda International Awards, recognising its improved facilities and quality of 8 Semarang Airport, Banda Aceh services provided. International Airport Adisutjipto – Husein Sastranegara International 9 Yogyakarta. Airport, Bandung International Airport Adi Soemarmo – Raja Haji Fisabilillah Airport, Tanjung 10 Surakarta Pinang International Airport Lombok – Central Sultan Thaha Airport, Jambi 11 Lombok. 12 International Airport Pattimura – Ambon Depati Amir Airport, Pangkal Pinang 13 International Airport El Tari – Kupang Silangit Airport, Siborong-Borong 14 Bandara Banyuwangi (Banyuwangi) Source: PT Angkasa Pura I & II Groups Page 29 Page 29 Industry Focus Thing Big, Act Quick Angkasa Pura I financials. Angkasa Pura I Group revenue Angkasa Pura II financials. Angkasa Pura II Group’s revenue improved by 17.2% y-o-y in FYE Mar ‘2017 to IDR7,194 bn. improved significantly by 22.0% y-o-y in FYE Mar ‘2017 to Profit after tax increased by 22.4% to IDR1,420 bn in FY17 IDR8,110 bn. However, profit after tax increased slightly by 3.6% compared to IDR1,160 bn in FY16. The Group’s total assets to IDR2,010 bn in FY17 compared to IDR1,940 bn in FY16 due improved by 5.9% to IDR25.1 trn. to an increase in corporate income tax expenses. Revenue & PAT for Angkasa Pura I in IDRbn (FYE Mar) Revenue & PAT for Angkasa Pura II in IDRbn (FYE Mar) Source: Angkasa Pura II Group Source: Angkasa Pura I Group Around 45% of revenue is from passenger services. In FYE Over 45% of revenue is from passenger services. In FYE Mar Mar 2017, 45% of Angkasa Pura II Group’s revenue (c. 2017, 47% of Angkasa Pura I Group’s revenue (c. IDR3,402 IDR3,668 bn) was derived from aircraft passenger service bn) was derived from aircraft passenger service charges with charges with c.30% coming from airport retail and rentals. less than 30% coming from airport concession and rentals. Land, parking and other revenue made up the remaining 25% The higher revenue contribution from passenger service of the Group’s revenue. charges could also be attributed to the growth (5-year CAGR: 10.2%) in service charge per domestic passenger departing FY17 revenue breakdown in IDR bn – Angkasa Pura II from Indonesian airports. FY17 revenue breakdown in IDR bn – Angkasa Pura I Angkasa Pura II Group Source: Angkasa Pura I Group Page 30 Page 30 Industry Focus Thing Big, Act Quick Jakarta is focal point of expansion, given its congestion. Another new Jakarta airport plan in the works. Despite the Angkasa Pura II Group’s expansion plans stretch out to 2023, abovementioned expansion plans, an additional new airport in including for its main airport Soekarna-Hatta, as many under Tangerang is being considered, tentatively named Jakarta its stable face passenger backlogs. Established plans include Soekarno-Hatta International Airport II – given its c.10km required investments totalling IDR94.9 trn (US$6.2bn). Most of proximity to the existing Soekarno-Hatta airport. Indonesia’s the spending focused in Jakarta, with the remainder to airports Transport Ministry has floated a potential investment cost of in Sumatra. Investment in the Soekarno-Hatta airport is for the up to IDR100 trn (US$6.6bn) for the project as it aims to construction of its 4th terminal and third runway, together exceed the current Soekarno-Hatta’s airport in terms of size with renovations of the first two terminals and other and total capacity. It has not been made clear yet whether infrastructure developments. These renovations and Angkasa Pura II will have a direct or immediate involvement in expansions are funded through increased passenger service the project – given its already heavy capex commitments for charges and state injections. expansion plans in the coming years. The Transport Ministry had cited the project’s potential commencement in 2020 and Construction of the 4th terminal is expected to be completed targeted completion by 2024; and claims to be inviting private by 2022 and to occupy an area of 300,000 sqm. The 3rd companies to take part in funding the project. runway construction is to commence by 3Q2018 and is expected to be completed in 2021. According to the transportation ministry the 3rd runway will be built 500m from the airport’s 2nd runway to reduce costs. The airport’s handling capacity is expected to improve to 114 aircraft per hour from 81 currently. These expansion plans are expected to improve the airport’s handling capacity to 100 m passengers by 2025. Soekarno-Hatta airport: Third runway Source: https://theinsiderstories.com/indonesian-govt-to-add-fourth- terminal-at-soekarno-hatta-airport Source: https://seasia.co/2018/01/31/runway-3-terminal-4-to-add- capacity-of-jakarta-airport Page 31 Page 31 Industry Focus Thing Big, Act Quick Seoul Incheon International Airport – So good South Korea’s largest and busiest. Incheon airport is the Several awards and recognition. The Incheon airport has won largest airport in South Korea and is also one of the top 10 several awards over the years, including the Skytrax Airport leading airports in the World. The airport is operated by Awards World’s Best Staff Service Award for 2018 and Incheon International Airport Corporation and is located west World’s Best Transfer Award for 2017 which it won for the 5th of Incheon City and 30 miles west of Seoul. Incheon serves as consecutive year. a primary hub for passenger and cargo transportation for airlines such as Asiana Airlines, Jeju Air, Korean Air and Polar Strong financial status. In 2017, Incheon Airport saw revenue Air Cargo. The airport has two running terminals. Terminal 2 growth of 11.0% y-o-y to KRW2.4 trn from KRW2.2 trn in was opened in Jan 2018 to improve existing runway capacity. 2016, while profit after tax increased by 15.5% y-o-y to LCCs account for almost 31% of Incheon’s aircraft KRW1.1 trn from KRW1.0 trn. Total assets improved to movements in 2017. In 2017, Incheon Airport was the 8th KRW12.3 trn (up 13.0% y-o-y) from 10.9 trn in 2016. busiest airport in the world for international traffic. Revenue & PAT for Incheon Airport in KRW trn (FYE Dec) Passenger movements at Incheon Airport grew at an 8.4% CAGR from 2008 to 2017, reaching 62m passengers in 2017. It plans to increase passenger volume to 100m by 2030. Passenger movements at Incheon Airport (m pax) Source: Incheon Airport Over 50% of revenue is from commercial services. In 2017, 58% of Incheon Airport’s revenue (c. KRW1.4trn) was derived Source: CAPA – Centre for Aviation from airport commercial revenue, while passenger revenue made up only 18.5% of total revenue. In total non- Based on departing seats by country, the top markets for aeronautical revenue made up 66% of total revenue. Incheon Airport are China, Japan, Vietnam, US and Hong Kong, followed by Philippines, Thailand and Taiwan. FY17 revenue breakdown in KRW trn - Incheon Airport Departing seats by country at Incheon Airport Source: Incheon Airport Source: CAPA – Centre for Aviation Page 32 Page 32 Industry Focus Thing Big, Act Quick Incheon Airport – LCCs make-up 31% of movements Terminal 2 opened in Jan 2018. Incheon Airport’s Terminal 2 which cost c. KRW4.9 trn was officially opened to the public on 18 Jan 2018. The terminal had a floor area of c.7.4m sqft. The new terminal increases the airport’s handling capacity to 72m, making it competitive with other global hubs. It also improves the airport’s cargo handling capacity to 5m tonnes compared to the existing 4.5m tonnes in 2017. Terminal 2 of Incheon Airport Source: CAPA – Centre for Aviation According to CAPA local Korean LCCs account for almost 31% of the Incheon Airport’s aircraft movements. Korea’s LCC sector displays rapid growth given its strong demand with new aircraft variants providing new options for both short and long haul growth. A new low-cost terminal, if built, will attract Source: more LCCs by reducing costs through lower airport charges. http://english.visitkorea.or.kr/enu/AKR/FU_EN_15.jsp?cid=2528673 Expansion plans for Terminal 2. Terminal 2 is planned for Incheon Airport’s movements expansion, where phase 4 of the project involves improving the annual capacity of the terminal from the existing 18m pax to 46m pax by 2025, as well as adding a 4th runway. The cost is expected to be c. KRW4.2 trn and after the completion of this project, the aggregate capacity of the Incheon Airport is expected to reach 100m by 2030, which will allow it to compete with other regional hubs such as Hong Kong International Airport and Changi Airport. Source: CAPA – Centre for Aviation Page 33 Page 33 Industry Focus Thing Big, Act Quick Key risks and challenges Demand-side risks Airspace – In certain markets such as China, airspace While air travel has generally been growing rapidly in Asia, constraint is also an issue. It was reported by the China Daily there are several risks that could slow down or even impede newspaper in 2016 that less than 30% of the country’s the growth of air travel. Firstly, greater restrictions on trade airspace can be used by commercial airlines, compared to and travel, such as a reversal of open skies policies or a about 80% in the U.S. This has sometimes resulted in mass broadening of the trade war would certainly have an impact cancellations, and is one of the reasons why high-speed on demand for passenger air travel and air freight. Secondly, railway is often preferred by travellers in the country. a competing means of transport such as a high-speed railway networks would also slow down the growth of air travel, Safety and security – Given the greater number of travellers which we saw in China. Thirdly, high or excessive user and increasing security threats, airports needs to invest more charges and passenger fees could dampen demand for air time, money and effort to upgrade and enhance their travel, especially in the burgeoning, price-sensitive low-cost security and safety facilities, and train their personnel. At the travel segment. same time, the customers’ experience needs to be taken into account, as long queues and delays are obviously not Supply-side risks desirable. The issue of cyber security also has to be Most of the conversations in the airport sector are centred considered. around supply-side risks, and rightly so. There are a multitude of constraints that are being faced by governments and the Others private sector planning to increase airport capacity. One key Cost overruns and delays are a real risk for major issue that’s been discussed substantially in this report is infrastructure projects. Airports are especially prone to this funding. However, there are several other factors worth given the number of stakeholders involved and multiple noting: issues to consider. A large cost overrun or lengthy delays would reduce the returns and viability of the airport project, Land – Many cities that require airport expansion or a new and result in a significant burden for the owners of the airport face the lack of available land space or competing airport, which in most cases are the governments. uses. Some choose to build a new airport far away from the city centre (e.g. in Kuala Lumpur), or reclaim land like in While the vast majority of large airports built in Asia are Singapore (which is also very expensive). Even if space is quickly utilised, there is a risk that an airport becomes under- available in urban centres, there are issues such as building utilised due to a lack of planning or sometimes height limits and noise pollution to nearby residents to overconfidence. One good example is the Mattala Rajapaksa consider. International Airport in Sri Lanka. Built at a cost of over US$200m to handle a million passengers a year, it opened in Personnel – Given the rapid growth of the sector in Asia, 2013 and currently has no scheduled flights. It is reported to there has been many instances where a shortage of staff (in be incurring tens of millions of dollars of losses a year. particular skilled staff) have caused bottlenecks at airports. The lack of personnel, or skills gap as the International Civil As more airports diversify their revenue streams into other Aviation Organisation calls it, extends across the entire segments such as retail, car parks, hotels and conferences, aviation industry including pilots, cabin crew, air traffic operators have to gain wider management expertise in controllers, maintenance and other skilled technicians, multiple sectors, or partner or outsource with third parties to baggage handlers and even immigration officers. All manage operations. stakeholders in the aviation sector have to invest in educating, training and attracting more people to work in From the private sector’s perspective, one of the key risks is a the sector. potential change in government policies and framework with regards to airport development and operations. Any Environmental - The development and operation of airports significant changes by the government on the rules of may impact the environment in a few ways, such as noise engagement can lead to a substantial impact on returns or pollution to local residents, reduced local air quality from project timeline. From another perspective, a lack of a clear aircraft, cars and other activities, carbon emissions and and viable framework by governments would result in an the generation of waste such as air emissions, as well as solid inability to attract needed investments from the private and liquid waste. In some cases, the construction or sector. expansion of an airport may impact the surrounding environment, such as wildlife and flora and fauna. Page 34 Page 34 Industry Focus Think Big, Act Quick Does the investment cycle drive share prices of airports? Capex activity is generally cyclical. Listed airport operators Valuation trends imply some earnings-biased myopia. We in Asia have primarily been responsible for the capital find that listed airports have typically been punished from a requirements of the major airports under their wing. valuation perspective during the peak of the capex cycle. Expansion of existing facilities may impact the existing Share prices generally came down for the counters under processing capabilities of passengers and impair smooth our coverage as they embarked on expansion projects or throughput and passenger experience. For that reason, acquisitions, involving steeper negative free cash flows and wholesale addition of terminals or runways are often soon after, higher depreciation charges. Financing charges viewed as more desirable rather than minor renovations to have also risen for those who partially financed their expand boarding or check-in areas. Given the rapid growth expansion via borrowings. of passengers in Asia, major airport players have been We believe this discounts the expanded passenger (and planning and building capacity by adding whole terminals, thus earnings) ceiling for the respective airports, in addition and sometimes even new airports, to keep pace with to the improvement of its market position regarding demand infrastructure attractiveness, especially if capex was used to As a result, there is an observable cyclical trend in modernise and upgrade the airports with the latest expansion capex – involving multiple years of heavier technologies. Over the long term, structural growth in negative free cash flow (plus potential financing inflows), passenger volume prove to be a more steady and reliable followed by a length of steadier operations as the metric of growth in firm value. additional capacity is utilised and operations mature. Examine: Malaysia Airports’ major klia2 expansion to RM4bn (c.USD1.2bn), which was a point of contention The proposal to revamp Malaysia Airports Holdings’ given initial estimates of around RM2bn. The opening of (MAHB) previous low cost-carrier terminal (LCCT) at its the terminal was also delayed to early-2014 (vs mid to late- Kuala Lumpur International Airport (KLIA) emerged as early 2013). We do note that there are some clouding factors in as 2010 following rapid growth in low-cost passenger the assessment of its expansion capex, especially its traffic, aided by the AirAsia Group. KLIA had in that year acquisition of additional stakes in the Istanbul Sabiha breached 30m passengers handled, with projections of Gokcen (ISG) airport in Turkey, made in two tranches over hitting 60m by 2020 – a target it would eventually be on 2013-2014 which came to RM2.2bn of outlay. track to hit by 2018. The total investment cost amounted MAHB share price versus investment news and cycle MAHB Share Px (LHS) RM FBMKLCI (RHS) 12.00 2400 2200 10.00 Reveal revised larger klia2 opens plans with larger capex 2000 RM3bn sukuk funding 8.00 proposed 1800 Announcement of klia2 1600 plans 6.00 1400 4.00 1200 Private placement to 1000 2.00 Market speculation raise RM616m Acquiring 40% stake in about cost overruns ISG 800 0.00 600 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 Sep-16 Sep-17 Sep-18 May-08 May-09 May-10 May-11 May-12 May-13 May-14 May-15 May-16 May-17 May-18 Source: Bloomberg Finance L.P., company, news sources Page 35 Page 35 Industry Focus Think Big, Act Quick Emergence of higher D&A costs had direct negative impact Beijing Airport International Airport (BCIA) likewise saw near- on share price. MAHB’s share price had relatively term negatives from investing heavily in capacity expansion. underperformed in the late-2011 to 2012 period and then In February 2018, BCIA announced that it would acquire from 2014 to 2015, covering the span of works on klia2 and Terminal 3 and other assets from its parent for RMB26.9bn, its opening. We find that this tracks the trend of the group’s which was mainly funded by debt with equity fund raising of expansion capex, and more importantly the subsequent rise nearly RMB1.9bn. The company’s net debt to equity ratio in quarterly depreciation and amortisation (D&A) recognition. rose from a net cash position in 2007 to over 160% in 2009. As a result of higher depreciation charges and finance costs, MAHB share price vs capex BCIA’s earnings fell by 96% y-o-y in 2008 to RMB85m and Capex by quarter (RHS) RM m MAHB Share Px (LHS) RM took four years to recover back to its 2007 level. 12.00 900 800 10.00 At the same time, BCIA’s share price fell from HK$9.98 just 700 before the acquisition announcement to a low of HK$3.31 8.00 600 on 27th October 2008. Since then, the company’s share price 500 6.00 has been primarily driven by throughput growth, with news 400 on a new retail concession revenue agreement and a new 4.00 300 200 airport in Beijing (Daxing) also augmenting its share price 2.00 100 performance. 0.00 0 BCIA share price vs depreciation & amortisation Jul-11 Jul-18 Jan-08 Jan-15 Jun-14 Oct-09 Oct-16 Apr-13 Feb-12 Sep-12 Dec-10 Dec-17 Aug-08 Aug-15 Nov-13 Mar-09 Mar-16 May-10 May-17 BCIA Share Px (LHS) HK$ D&A (RHS) - RMB m 16.00 Source: Bloomberg Finance L.P., company, news sources 800 14.00 12.00 700 MAHB share price vs depreciation & amortisation 10.00 600 MAHB Share Px (LHS) RM D&A (RHS) RM m 8.00 12.00 300 500 6.00 10.00 250 400 4.00 8.00 200 300 2.00 6.00 150 0.00 200 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 4.00 100 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 2.00 50 Source: Bloomberg Finance L.P., company, news sources 0.00 0 Jul-11 Jul-18 Jan-08 Jan-15 Jun-14 Oct-09 Oct-16 Feb-12 Sep-12 Apr-13 Dec-10 Dec-17 Nov-13 Mar-09 Mar-16 Aug-08 Aug-15 May-10 May-17 Source: Bloomberg Finance L.P., company, news sources MAHB’s quarterly D&A ballooned from below the RM50m level to RM100-150m from FY12, and then to RM200-250m by FY15-16 as ISG financials were also consolidated. This had a direct impact on financial performance as the group reported net losses or minimal earnings in the immediate financial periods. Page 36 Page 36 Industry Focus Think Big, Act Quick Long term valuations still boil down to traffic growth. As BCIA share price vs passenger throughput airport expansion and investments have proved to be BCIA Share Px (LHS) HK$ Passengers (m, by HY) 16.00 55 ultimately fleeting in terms of operator valuations, we find 14.00 that the more reliable, long term metric remains passenger 50 growth. Across the major listed airports we cover (MAHB, 12.00 45 BCIA, AOT), total passenger throughput and its growth 10.00 provide, over an extended period, an underlying trend to 8.00 40 which share prices eventually converge to – with a correlation 6.00 of 0.8-0.9 for the three airports examined. 35 4.00 30 MAHB share price vs passenger throughput 2.00 0.00 25 MAHB MK Passengers (m, by quarter) 12.00 30 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Jul-18 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 10.00 25 Millions Source: Bloomberg Finance L.P., Company, DBS Bank 8.00 20 6.00 Notably, MAHB benefited from a surge in pax growth in 15 4.00 2013 (+14% for the year), reflected in its strong share price performance before the subsequent impact of its peak capex 10 2.00 cycle plus the airline incidences in Malaysia in 2014. AOT’s firm value has been a consistent beneficiary of the 0.00 5 ever-rising air travel in Thailand over the past decade, Jul-11 Jul-18 supported by persistent tourist arrival growth despite Jan-08 Jan-15 Jun-14 Oct-09 Oct-16 Apr-13 Feb-12 Sep-12 Dec-10 Dec-17 Aug-08 Aug-15 Nov-13 Mar-09 Mar-16 May-10 May-17 temporary incidences like the coup in 2014, the passing of Source: Bloomberg Finance L.P., company, DBS Bank King Bhumibol Adulyadej and the crackdown on Chinese zero-dollar tours in 2016. AOT share price vs passenger throughput While BCIA has been a beneficiary of the steady growth of its total passenger traffic over the years, the construction and AOT TB Passengers (m, by quarter) 80.00 40 planned opening of the nearby Beijing Daxing Airport (built 70.00 to alleviate capacity limitations at BCIA) has dampened its 35 Millions valuations. BCIA’s involvement in the Daxing Airport currently 60.00 remains uncertain as the latter is built by its state-controlled 30 50.00 parent company, though absorption into the listed entity 40.00 25 would then provide it a direct bump-up to its long term maximum passenger handling capacity. 30.00 20 20.00 15 Key takeaway: Capex-heavy expansion creates entry points 10.00 for listed airports, as long as there are prospects for 0.00 10 continued passenger traffic growth. The examples from Asian listed airports give clear evidence that capex-driven Jul-11 Jul-18 Jan-08 Jan-15 Jun-14 Oct-09 Oct-16 Apr-13 Feb-12 Sep-12 Dec-10 Dec-17 Aug-08 Aug-15 Nov-13 Mar-09 Mar-16 May-10 May-17 declines in operator valuations are temporary in nature and Source: Bloomberg Finance L.P., Company, DBS Bank should be viewed as entry opportunities, as long as there is sufficient conviction on the trajectory of its passenger throughput after expansion. Expansion plans by airport operators or government units also have been relatively reliable or even conservative guidelines, evidenced by the typically overcapacity situation in Asian airports. Investments in new airport projects or airport expansions should prioritise the ability to attract and sustain increased flow of airline services and passenger traffic; in addition to internal rate of return (IRR) requirements. Page 37 Page 37 Industry Focus Think Big, Act Quick Stock Picks and Recommendations Generally positive on airports under coverage. We continue BUY ratings on BCIA, AOT, and MAHB. Our top picks for to be upbeat about prospects for most airline stocks under the sector are Beijing Capital Intl Airport (694 HK) and coverage, underpinned by continued exposure to structural Airports of Thailand (AOT TB); and we also have a BUY long term passenger growth in their respective markets –a rating for Malaysia Airports Holdings (MAHB MK). trajectory we believe to be still a distance from its plateau. Valuations remain reasonable vis-à-vis respective growth Notably, the airports present a steadier play into this theme profiles, while we also find air passenger traffic to be a relative to airlines, which have to price in higher risk relatively resilient growth theme amid concerns about rising elements from the cyclical upturn in energy or jet fuel external risks within region. We also have a HOLD rating on prices plus financing costs (from aircraft acquisitions). Samui Airport Property Fund (SPF TB), owner of its namesake airport and a notable strategic exposure to potential upturns in Thailand’s tourist arrivals. Peer Comparisons Table Mk t Cap ------PER ------Price-to-Book ROE Crnt Company Last Px US$m Hist Crnt Forw Hist Crnt Hist Crnt Yield Shenzhen Airport Co Ltd HKD 7.66 2,260 17.7 17.8 15.3 1.13 1.17 6.4% 6.6% 1.7% Shanghai International Airport Co Ltd CNY 49.93 14,084 27.4 22.4 18.2 3.86 3.44 14.1% 15.3% 1.4% Guangzhou Baiyun International Airport Co Ltd CNY 11.04 3,261 14.3 15.8 18.7 1.59 1.43 11.1% 9.0% 2.3% Beijing Capital International Airport Co Ltd HKD 8.26 4,496 11.8 10.1 12.6 1.37 1.33 11.6% 13.1% 4.0% Auckland International Airport Ltd NZD 6.86 5,368 32.7 30.2 29.4 1.89 1.45 5.8% 4.8% 3.3% Japan Airport Terminal Co Ltd JPY 4210 3,142 29.2 15.4 34.0 2.63 2.12 9.0% 13.8% 1.0% Airports of Thailand PCL THB 61.75 26,797 40.9 34.5 31.5 6.65 6.11 16.3% 17.7% 1.5% Airports Corp Of Viet Nam VND 80000 7,460 37.4 29.7 25.2 6.35 5.54 17.0% 18.6% 1.2% Malaysia Airports Holdings Bhd MYR 8.40 3,290 55.9 28.3 23.3 1.69 1.58 3.0% 5.6% 2.2% Sydney Airport Holdings Pty Ltd AUD 6.91 10,092 41.5 39.7 36.0 21.7 53.2 52.2% 133.9% 5.5% A v erage 8,025 30.9 24.4 24.4 4.88 7.74 14.7% 23.9% 2.4% Aena SME SA EUR 140.55 23,979 17.5 16.1 15.4 3.71 3.50 21.3% 21.7% 4.8% Aeroports de Paris SA EUR 185.00 20,854 37.3 32.4 29.6 4.07 3.73 10.9% 11.5% 1.9% Flughafen Zuerich AG CHF 195.30 5,999 22.7 21.4 20.0 2.57 2.46 11.3% 11.5% 3.5% Fraport AG Frankfurt Airport Services Worldwide EUR 68.04 7,175 19.0 14.9 14.6 1.58 1.48 8.3% 9.9% 2.6% Copenhagen Airports A/S DKK 5720.00 6,855 Grupo Aeroportuario del Sureste SAB de CV MXN 330.28 5,107 22.2 21.0 18.4 4.00 3.38 18.0% 16.1% 2.3% Grupo Aeroportuario del Centro Norte SAB de CV MXN 121.35 2,085 23.2 18.1 16.1 6.44 6.05 27.8% 33.5% 3.9% Grupo Aeroportuario del Pacifico SAB de CV MXN 184.86 5,343 23.0 20.6 18.7 4.96 5.57 21.6% 27.0% 4.5% Corporacion America Airports SA USD 8.06 1,290 58.3 10.9 2.50 4.3% 2.9% A v erage 8,743 23.6 25.3 18.0 3.90 3.58 17.0% 16.9% 3.3% Vinci SA EUR 78.34 53,313 16.6 14.5 13.4 2.52 2.32 15.2% 15.9% 3.4% Regal International Airport Group Co Ltd HKD 6.84 409 7.3 4.4 6.6 0.64 0.61 8.8% 13.8% 5.4% Samui Airport Property Fund Leasehold THB 23.30 672 10.5 15.1 14.5 1.83 12.1% 6.6% Weihai Guangtai Airport Equipment Co Ltd CNY 9.32 505 26.6 17.2 13.6 1.30 1.27 4.9% 7.4% 2.3% Malta International Airport PLC EUR 6.20 573 Xiamen International Airport Co Ltd CNY 19.75 837 14.1 13.0 12.2 1.72 1.66 12.2% 12.7% 5.8% TAV Havalimanlari Holding AS TRY 27.60 1,759 11.2 6.3 6.6 2.09 1.22 18.6% 19.3% 7.8% Source: ThomsonReuters, DBS Bank estimates Page 38 Page 38 Industry Focus Think Big, Act Quick AOT TB (BUY, TP: Bt75.00): Airports of Thailand (AOT) is MAHB MK (BUY, TP: RM10): Regulatory reform is a key currently facing capacity constraints at some of its airports development being awaited for Malaysia Airports (MAHB) as which may cap short term growth. However, several factors the Transport Ministry is on the path to restructure Passenger such as airport capacity expansion, new duty free/commercial Service Charges (PSC) in addition to modifying the Operating concessions, airport city projects and managing additional Agreement and revenue share involved in operating those airports under the Department of Airports will underpin its airports. We view these factors being priced in, leading to it long term growth. Although we expect a short term hiccup trading at multiples (particularly EV/EBITDA) lower than its from a decline in international tourist arrivals to Thailand due historical mean as well as short of its peer group average. to a drop in Chinese tourists following a boat sinking incident We maintain our view that MAHB will not come out worse in Phuket and an airport official attacking a Chinese tourist at from the regulatory restructuring – reduced PSCs would be Don Mueang International Airport, history guides that the offset by lower revenue share. Going forward, higher capex recovery should not take too long. may be rewarded by dynamic PSC increases. After the dust clears within the coming ~6 months, we expect the group to We expect the results of bids for new a concession contract start benefiting from tailwinds of recovering Malaysian at the Suvarnabhumi airport to be announced in Feb next domestic passenger growth plus the emergent profitability of year. AOT is looking for a single concession operator and the its Turkish airport, Istanbul Sabiha Gokcen (ISG). Group winner will likely offer the highest minimum guarantee. earnings are expected to continue its strong upwards Meanwhile, additional earnings are expected to flow into the trajectory on the back of those factors. The undervalued ISG company by the end of next year after AOT’s proposal to also presents a potential catalyst if a partial stake sale manage four airports – Udon Thani, Sakon Nakhon, Tak, and proceeds. Chumphon - was approved by the Ministry of Transportation and the cabinet. SPF TB (HOLD, TP: Bt23.00): SPF holds a 30-year leasehold rights to operate the Samui Airport which will expire in 2036 Beijing Capital International Airport (BUY, TP: HK$12.50): (18 years from now), after which the asset will be returned to BCIA is the cheapest major airport stock (market cap over Bangkok Airways (BA). US$2bn) in the world at 13x FY19 consensus PE, which is at The fund derives revenue from the number of departing nearly 50% discount to the peer average and 20%-35% passengers and incoming flights to the Samui Airport. The discount to other listed Chinese airports. We believe that the number of passengers has been growing at a CAGR of 5.9% market is too negative on the impact of the opening of the during the past decade. We conservatively expect passenger Daxing Airport on BCIA’s financials as major Chinese carriers volume to grow at 3% in 2018 and 5% going forward, are unlikely to move a substantial portion of their flights to thanks to continued growth in Samui tourism. The fund is the new airport, but instead are planning to introduce new paying out all cash profit as dividends on a quarterly basis, flights to the Daxing Airport. This will mean that the given that there’s no major capex. Note that all airport cannibalisation effect expected by the market should not be operating expenses are borne by Bangkok Airways. SPF is as bad. Meanwhile, BCIA’s management has also reiterated now offering decent 2019 dividend yield of 6.7% (payable that the company will not be considering the acquisition of quarterly). Our TP on the stock is Bt23, based on DCF (WACC the Daxing Airport in the next few years while it is still of 7.05%). ramping up its operations (and likely loss-making). Investors should be assured that BCIA will not be making an earnings dilutive acquisition. We see BCIA as an attractive stock to own even though earnings in the next 12 to 18 months will be affected by the discontinuation of airport fees as well as the opening of the Daxing Airport in Sep 2019. We remain positive on the long term outlook of the company as it generates healthy cash flows (the company is projected to be in a net cash position within a few years) and has a strong position in one of the world’s most important air travel markets. Page 39 Page 39 Industry Focus Think Big, Act Quick Busiest passenger airports in asia based on 2017 passenger movements (Rank 41-50) Rank Airport City 2017 2016 Growth 41 Wuhan Tianhe International Airport Wuhan 23,129,400 21,007,629 10.1% 42 Qingdao Liuting International Airport Qingdao 23,210,530 21,005,005 10.5% 43 Noi Bai International Airport Hanoi 23,068,227 20,596,631 12.0% 44 New Chitose Airport Sapporo 22,916,914 21,619,730 6.0% 45 Ngurah Rai International Airport Denpasar 22,863,647 20,323,242 12.5% 46 Haikou Meilan International Airport Haikou 22,584,815 19,352,883 16.7% 47 Juanda International Airport Surabaya 21,882,335 19,731,592 10.9% 48 Ürümqi Diwopu International Airport Ürümqi 21,500,901 20,283,869 6.0% 49 Tianjin Binhai International Airport Tianjin 21,005,001 17,562,710 19.6% 50 Ben Gurion Airport Central District 20,781,226 18,840,640 10.3% Source: Various new sources and Airport Authorities, DBS Bank estimates New airports (proposed and under construction) in Asia with project value below U$2bn Investment Capacity Estimated City Airport (US$mn) (m) Completion Chenzhou Chenzhou Beihu Airport 295 0.6 2019 Heze Heze Airport 260 1.0 2019 Yutian Yutian Airport 104 0.2 2020 Yibin Yibin Wuliangye Airport 160 0.8 2018 Jishou Jishou Xiangxi Airport 260 0.3 2020 Kerala Kannur International Airport 279 5.0 2018 Goa Goa Mopa Airport 552 4.4 2020 Sikkim Pakyong Airport 68 0.04 2018 Nellore Dagadarthi Airport 54 2.0 2020 Sindhudurg Sindhudurg Airport 78 1.2 2018 Bhogapuram Sindhudurg Airport 406 6.3 2020 Bago Hanthawaddy International Airport 1,500 12.0 2022 West Java Kertajati International Airport 800 60.0 2018 Nagoya Nagoya LCCT 165 5.0 2018 Phuket Phang Nga Airport 1,800 10.0 2025 Chiang Mai Chiang Mai International Airport 2 1,800 10.0 2025 Panglao New Bohol International Airport 88 3.0 2018 Legazpi Bicol International Airport 96 2.1 2020 Pokhara Pokhara International Airport 305 1.0 2021 Bhairawa Gautam Buddha Airport 323 0.8 2019 Nijgadh Nijgadh International Airport 1,200 15.0 2025 Source: Various new sources and Airport Authorities, DBS Bank estimates Page 41 Page 4140 Industry Focus Think Big, Act Quick COMPANY GUIDES Page 42 Page 4241 Thailand Company Guide Airports of Thailand Version 14 | Bloomberg: AOT TB | Reuters: AOT.BK Refer to important disclosures at the end of this report DBS Group Research . Equity 25 Sep 2018 BUY Ignoring a short term hiccup Last Traded Price ( 24 Sep 2018): Bt66.00 (SET : 1,749.42) Price Target 12-mth: Bt75.00 (14% upside) A short term hiccup. We expect Airports of Thailand’s (AOT) y- o-y earnings growth momentum to decline in 4QFY18F due to Analyst a slowdown in international tourist arrivals to Thailand in the Namida ARTISPONG +66 28577833 [email protected] quarter. In July and Aug, foreign visitors grew by only 2.9% y- o-y (vs 12.5% in 1H18) from a drop in Russian (due to FIFA What’s New World Cup) and Chinese (following a boat sinking incident in • 4QFY18F y-o-y earnings growth momentum may slow Phuket) tourists. This was also reflected in AOT’s international down due to slowdown in foreign visitors to Thailand passenger and aircraft traffic. However, we expect a recovery • However, recovery is expected from 1QFY19F onwards for foreign arrivals in 1QFY19 and 2QFY19 as Thailand is as Thailand enters peak tourism seasons entering peak tourism seasons. • Four additional airports are approved and could sustain AOT’s long term future growth Four additional airports approved. AOT’s proposal to manage four airports – Udonthani, Sakonnakorn, Tak, and Chumporn - • Concession winner should be announced by Feb next which are operated by the Department of Airports, has already year been approved by the Ministry of Transportation and the cabinet. AOT expects additional earnings to flow into the company by the end of next year. Although earnings upside Price Relative from the additional airports will be limited in the near term (four airports with profits of c.Bt44m p.a.), this should help AOT sustain its long term growth. Among the four airports, Udonthani airport has the highest potential as it is profitable and handles about 2.3m passengers p.a. It can be developed into an international airport for north eastern Thailand. Potential catalysts. Earnings upside from managing four Forecasts and Valuation FY Sep (Btm) 2016A 2017A 2018F 2019F additional airports and news flow from upcoming concession Revenue 50,962 54,901 64,071 70,223 bids in Feb next year. EBITDA 31,024 33,264 38,150 42,051 Pre-tax Profit 24,171 26,185 32,358 35,430 Valuation: Net Profit 19,318 20,684 25,941 28,407 Our target price (TP) is based on DCF (8% WACC, 4% terminal Net Pft (Pre Ex.) 19,482 21,959 25,941 28,407 Net Pft Gth (Pre-ex) (%) 23.7 12.7 18.1 9.5 growth). EPS (Bt) 1.35 1.45 1.82 1.99 EPS Pre Ex. (Bt) 1.36 1.54 1.82 1.99 Key Risks to Our View: EPS Gth Pre Ex (%) 24 13 18 10 The key risks are a slowdown in Thailand’s tourism industry Diluted EPS (Bt) 1.35 1.45 1.82 1.99 Net DPS (Bt) 0.68 0.50 0.60 0.60 which may dampen passenger traffic, delay of concession bids BV Per Share (Bt) 8.40 9.20 10.4 11.8 and higher than expected investment in Suvarnabhumi Airport PE (X) 48.8 45.6 36.3 33.2 phase 2. PE Pre Ex. (X) 48.4 42.9 36.3 33.2 P/Cash Flow (X) 31.1 34.8 32.8 28.0 At A Glance EV/EBITDA (X) 29.5 27.0 23.6 21.3 Net Div Yield (%) 1.0 0.8 0.9 0.9 Issued Capital (m shrs) 14,286 P/Book Value (X) 7.9 7.2 6.3 5.6 Mkt. Cap (Btm/US$m) 942,856 / 29,065 Net Debt/Equity (X) CASH CASH CASH CASH Major Shareholders (%) ROAE (%) 16.9 16.5 18.5 17.9 Ministry Of Finance 70.0 Earnings Rev (%): 0 0 Thai NVDR 5.0 Consensus EPS (Bt): 1.78 1.97 State Street Bank Europe Limited 1.9 Other Broker Recs: B: 16 S: 5 H: 10 Free Float (%) 22.1 Source of all data on this page: Company, DBSVTH, Bloomberg Finance 3m Avg. Daily Val (US$m) 53.4 L.P ICB Industry : Industrials / Industrial Transportation Page 4342 ed: KK / sa: CW, CS Company Guide Airports of Thailand WHAT’S NEW Recovery imminent after short term hiccup A short term hiccup. We expect AOT’s y-o-y earnings growth Thailand: Passenger capacity (yearly) of regional airports momentum to slow down in 4QFY18F due to a decline in Demand Connecting international tourist arrivals to Thailand in the quarter. In July Region A irport Direct (Shadow T otal and Aug, foreign visitors grew by only 2.9% y-o-y (vs 12.5% demand) Nan Nakhon airport 244,221 158,610 402,831 in 1H18) from a drop in Russian (due to FIFA World Cup) and North Chinese (following a boat sinking incident in Phuket) tourists. Lampang airport 214,768 78,033 292,801 Udon Thani international airport 1,841,909 446,161 2,288,070 This was also reflected in AOT’s international passenger and Ubon Ratchathani international airport 1,220,994 414,373 1,635,367 Khon Kaen airport 1,222,859 398,954 1,621,813 aircraft traffic. However, we expect a recovery in foreign North-East Nakhon Phanom airport 228,098 166,358 394,456 arrivals in 1QFY19 and 2QFY19 as Thailand is entering peak Sakhon Nakhon airport 256,713 123,239 379,952 tourism seasons. Roi Et airort 204,190 142,551 346,741 Central Phitsanulok airport 309,727 176,612 486,339 AOT: International passenger traffic at six airports West Mae Sot airport 97,484 78,328 175,812 Krabi international airport 2,970,046 872,262 3,842,308 Millions Surat Thani international airport 1,567,539 485,781 2,053,320 8.00 South Nakhon Si Thammarat airport 992,388 371,888 1,364,276 Trang airport 449,391 217,822 667,213 7.00 Narathiwat airport 183,621 60,728 244,349 T otal 12,003,948 4,191,700 16,195,648 6.00 5.00 Source of all data: Company, DBSVTH 4.00 3.00 Concession winner should be announced in Feb next year. 2.00 We expect the results of bids for new a concession contract Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec at Suvarnabhumi airport to be announced in Feb next year. 2014 2015 2016 2017 2018 AOT is looking for a single concession operator and the winner of the concession will likely offer the highest Source of all data: Company, DBSVTH minimum guarantee. Meanwhile, AOT will determine the revenue sharing rate. The minimum guarantee will be used as Four additional airports approved. AOT’s proposal to manage the winning criteria as the aim is to stabilise contribution of four airports – Udonthani, Sakonnakorn, Tak, and Chumporn AOT’s non-aeronautical revenue. AOT would also get revenue - which are operated by the Department of Airports, has sharing based on a certain percentage, if income exceeds the already been approved by the Ministry of Transportation and minimum guarantee. the cabinet. AOT expects additional earnings to flow into the No capex concerns yet for Chiangmai and Phuket airports. company by the end of next year. Although earnings upside We believe investors have been concerned about the capital from the additional airports will be limited in the near term expenditure (capex) plans for second airports in Chiangmai (four airports with profits of c.Bt44m p.a.), this should help and Phuket. AOT guided that investment for these two new AOT sustain its long term future growth. Among the four airports is estimated to be Bt120bn (Bt60bn each) which is airports, Udonthani airport has the highest potential as it is quite high in our view. AOT explained that the investment for profitable and handles about 2.3m passengers p.a. It can be these two airports are high, as each of the new airports has developed into an international airport for north eastern to be located about 20-30km away from the existing airports Thailand. due to geographical limitations and will not be able to share existing facilities. However, these projects need to be approved by the Ministry of Transportation and the cabinet first. Suvarnabhumi Terminal 2 project continues. Following the controversy over the design winner of Suvarnabhumi airport’s second passenger terminal, AOT’s board of directors (BOD) decided to continue to the project with the Duangrit Bunnag Group (DBALP) Consortium which was the second runner up. The SA Group, which was initially named as the winner, failed to submit the original quotation for the design cost. AOT expects to sign a contract with the DBALP Consortium in September. It would take another 10 months for the design Page 4443 Company Guide Airports of Thailand to be completed. Bidding for construction jobs is expected next year and construction work should be completed by the end of 2021. Suvarnabhumi’s expansion phase 2 and second passenger terminal is expected to increase passenger capacity by another 15m and 30m p.a., respectively. This would bring passenger capacity to 90m p.a. by 2021 from 45m currently. AOT: Suvarnabhumi airport development plans Investment Completed Additional A irport Description Cost (Bt bn) Year Capacity 1. Suvarnabhumi development project phase 2 62.5 2020 15m p.a. Suvarnabhumi 2. Passenger terminal 2 42.1 2021 30m p.a. 3. Third runway 20.3 2021 n.a. Source of all data: Company, DBSVTH Page 4544 Company Guide Airports of Thailand International aircrafts movement (flts) CRITICAL DATA POINTS TO WATCH Critical Factors Rising traffic volume. The DCA’s (Department of Civil Aviation) approval of a PSC (Passenger Service Charge) hike is expected in FY20F when Suvarnabhumi Airport’s expansion phase 2 is completed. Earnings growth over the next two to three years would be driven by higher passenger throughput and flight traffic at its six airports. Rising air travel demand and expanding airline capacities will support traffic growth. AOT’s passenger and flight traffic have been growing at an average of 12.6% Domestic aircrafts movement (flts) and 12% p.a. respectively in the past five years. We expect them to grow by an average of 8% and 5% respectively this year. Rise of low-cost carriers. The number of domestic passengers has grown by 8.7% p.a. over FY03-FY10. In the last five years, growth has accelerated to an average of 16.1%. The rise of low-cost carriers offering affordable fares and convenient booking platforms has stimulated domestic demand. Domestic passengers are supporting passenger throughput at AOT’s airports. A similar scenario unfolded when Thailand experienced No. of international passengers political unrest in FY14 but total passenger throughput still grew 1.7% y-o-y despite a 5.7% drop in international passenger traffic. More commercial space. Terminal 2 at Don Muang Airport opened in December 2015, adding 27,109 sqm (from 6,144 sqm) commercial space to AOT’s rental portfolio. The construction of Phuket Airport was completed in September 2016, doubling the existing commercial area to 10,289 sqm. Commercial space at Suvarnabhumi Airport will also increase by 33% to 40,000 sqm upon completion. This should lift overall No. of domestic passengers concession and retail rental revenue. Airport expansion to support growth. The Suvarnabhumi Airport phase 2 development, with an investment budget of Bt62.5bn, kicked off in September 2016. Upon its completion in 2019, the airport’s capacity will increase from 45m to 60m. AOT is planning to build terminal 2 at the airport with capacity rising to 90m in 2021. It is also constructing a third runway which will lead to flight capacity rising from 68 to 94 flights per hour in 2020. Revenue breakdown 100% 90% 23% 25% 26% 27% 27% 27% 80% 70% 11% 10% 11% 10% 12% 13% 5% 60% 5% 5% 4% 4% 2% 1% 4%1% 50% 2% 2% 2% 40% 43% 45% 43% 45% 43% 30% 42% 20% 10% 16% 13% 14% 13% 13% 12% 0% FY12 FY13 FY14 FY15 FY16 FY17 Landing and parking charges Passenger service charges Aircraft service charges Office and state property rents Service revenues Concession revenues Source: Company, DBSVTH Page 4645 Company Guide Airports of Thailand Leverage & asset turnover (x) Balance Sheet: Low leverage. AOT has healthy operating and free cash flows with a low gearing of 0.2x as at end-3QFY18. The bulk of its long term loans are in Japanese yen from financial institutions overseas. AOT has hedged 93.4% of total loans with cross currency swap contracts. The Suvarnabhumi Airport phase 2 development should be sufficiently funded by internal cash flow and debt. Share Price Drivers: Airports of Thailand (AOT) is currently facing capacity constraints at some of its airports which may cap short term Capital expenditure growth. However, several factors such as airport capacity expansion, new duty free/commercial concessions, airport city projects and managing additional airports under the Department of Airports will underpin its long term growth. Key Risks: Slowdown in tourism. AOT's earnings are driven by flight and passenger traffic volume in Thailand. An economic slowdown, natural disasters and political uncertainty could dampen air traffic and are the main threats to its operations. ROE (%) Company Background Airports of Thailand Public Company Ltd. (AOT) is a state- owned enterprise which operates six major airports in Thailand – Suvarnabhumi, Don Muang, Phuket, Chiang Rai, Chiang Mai and Had Yai. AOT’s airports account for over 90% of Thailand’s air traffic. Most of the other airports in Thailand located in second-tier cities are much smaller in scale and are owned by the Department of Civil Aviation (DCA), Royal Thai Navy and Bangkok Airways Company. Forward PE Band (x) PB Band (x) Source: Company, DBSVTH Page 4746 Company Guide Airports of Thailand Income Statement (Btm) FY Sep 2015A 2016A 2017A 2018F 2019F Revenue 43,969 50,962 54,901 64,071 70,223 Cost of Goods Sold (15,805) (17,020) (17,410) (20,458) (22,781) Gross Profit 28,164 33,942 37,491 43,613 47,443 Other Opng (Exp)/Inc (7,734) (9,587) (10,236) (11,917) (12,991) Operating Profit 20,430 24,355 27,255 31,696 34,451 Other Non Opg (Exp)/Inc 262 265 364 401 441 Associates & JV Inc 0.0 0.0 0.0 0.0 0.0 Net Interest (Exp)/Inc (330) (285) (159) 261 538 Exceptional Gain/(Loss) 2,974 (163) (1,275) 0.0 0.0 Pre-tax Profit 23,335 24,171 26,185 32,358 35,430 Tax (4,585) (4,821) (5,445) (6,358) (6,962) Minority Interest (21.4) (32.1) (56.0) (58.8) (61.7) Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit 18,729 19,318 20,684 25,941 28,407 Net Profit before Except. 15,755 19,482 21,959 25,941 28,407 EBITDA 26,880 31,024 33,264 38,150 42,051 Growth Revenue Gth (%) 17.0 15.9 7.7 16.7 9.6 EBITDA Gth (%) 27.0 15.4 7.2 14.7 10.2 Opg Profit Gth (%) 35.4 19.2 11.9 16.3 8.7 Net Profit Gth (Pre-ex) (%) 31.0 23.7 12.7 18.1 9.5 Margins & Ratio Gross Margins (%) 64.1 66.6 68.3 68.1 67.6 Opg Profit Margin (%) 46.5 47.8 49.6 49.5 49.1 Net Profit Margin (%) 42.6 37.9 37.7 40.5 40.5 ROAE (%) 18.2 16.9 16.5 18.5 17.9 ROA (%) 12.0 11.6 11.8 14.0 14.3 ROCE (%) 11.4 12.8 13.5 15.1 15.0 Div Payout Ratio (%) 38.1 50.5 34.5 33.0 30.2 Net Interest Cover (x) 61.9 85.3 171.6 NM NM Source: Company, DBSVTH Page 4847 Company Guide Airports of Thailand Quarterly / Interim Income Statement (Btm) FY Sep 2Q2017 3Q2017 4Q2017 1Q2018 2Q2018 Revenue 14,665 13,503 14,120 14,612 16,317 Cost of Goods Sold (4,099) (4,282) (5,162) (4,384) (4,567) Gross Profit 10,566 9,221 8,958 10,229 11,750 Other Oper. (Exp)/Inc (1,961) (1,966) (2,009) (2,022) (2,115) Operating Profit 8,605 7,256 6,948 8,207 9,635 Other Non Opg (Exp)/Inc (497) (471) (525) (406) (578) Associates & JV Inc 0.0 0.0 0.0 0.0 0.0 Net Interest (Exp)/Inc (48.8) (36.1) (21.1) 2.47 (14.3) Exceptional Gain/(Loss) 38.4 (1.3) (1,479) (16.2) 50.3 Pre-tax Profit 8,098 6,747 4,923 7,786 9,093 Tax (1,609) (1,342) (1,175) (1,549) (1,803) Minority Interest (18.4) (7.1) (16.2) (18.2) (17.7) Net Profit 6,470 5,398 3,731 6,220 7,273 Net profit bef Except. 6,432 5,399 5,210 6,236 7,222 EBITDA 9,492 8,173 7,866 9,176 10,429 Growth Revenue Gth (%) 16.3 (7.9) 4.6 3.5 11.7 EBITDA Gth (%) 22.8 (13.9) (3.8) 16.7 13.7 Opg Profit Gth (%) 25.9 (15.7) (4.2) 18.1 17.4 Net Profit Gth (Pre-ex) (%) 30.8 (16.0) (3.5) 19.7 15.8 Margins Gross Margins (%) 72.0 68.3 63.4 70.0 72.0 Opg Profit Margins (%) 58.7 53.7 49.2 56.2 59.1 Net Profit Margins (%) 44.1 40.0 26.4 42.6 44.6 Balance Sheet (Btm) FY Sep 2015A 2016A 2017A 2018F 2019F Net Fixed Assets 95,253 91,692 93,625 112,411 125,614 Invts in Associates & JVs 0.0 0.0 0.0 0.0 0.0 Other LT Assets 12,446 16,366 13,129 12,816 12,478 Cash & ST Invts 48,490 60,490 67,672 61,245 64,678 Inventory 238 261 277 291 306 Debtors 2,356 2,871 3,069 3,511 3,848 Other Current Assets 841 535 637 650 663 Total Assets 159,624 172,216 178,410 190,924 207,587 ST Debt 4,228 4,797 4,282 3,419 2,914 Creditor 1,151 1,370 1,955 1,324 1,463 Other Current Liab 10,476 13,526 14,492 13,767 13,079 LT Debt 28,202 27,261 19,609 16,684 14,505 Other LT Liabilities 6,755 4,949 6,384 6,384 6,384 Shareholder’s Equity 108,588 120,058 131,376 148,975 168,810 Minority Interests 225 257 312 371 433 Total Cap. & Liab. 159,624 172,216 178,410 190,924 207,587 Non-Cash Wkg. Capital (8,192) (11,229) (12,463) (10,639) (9,725) Net Cash/(Debt) 16,060 28,433 43,781 41,143 47,259 Debtors Turn (avg days) 18.5 18.7 19.7 18.7 19.1 Creditors Turn (avg days) 49.2 43.3 51.6 41.5 32.6 Inventory Turn (avg days) 8.2 8.6 8.4 7.2 7.0 Asset Turnover (x) 0.3 0.3 0.3 0.3 0.4 Current Ratio (x) 3.3 3.3 3.5 3.5 4.0 Quick Ratio (x) 3.2 3.2 3.4 3.5 3.9 Net Debt/Equity (X) CASH CASH CASH CASH CASH Net Debt/Equity ex MI (X) CASH CASH CASH CASH CASH Capex to Debt (%) 21.3 15.1 22.2 114.4 109.1 Z-Score (X) 12.6 12.5 13.8 15.4 16.6 Source: Company, DBSVTH Page 4948 Company Guide Airports of Thailand Cash Flow Statement (Btm) FY Sep 2015A 2016A 2017A 2018F 2019F Pre-Tax Profit 23,335 24,171 26,185 32,358 35,430 Dep. & Amort. 6,189 6,405 5,646 6,054 7,160 Tax Paid 3,007 4,585 4,821 5,445 6,358 Assoc. & JV Inc/(loss) 0.0 0.0 0.0 0.0 0.0 Chg in Wkg.Cap. 9,571 (1,990) 5,207 (1,510) (577) Other Operating CF (17,195) (2,845) (14,755) (13,639) (14,682) Net Operating CF 24,907 30,327 27,103 28,708 33,689 Capital Exp.(net) (6,919) (4,850) (5,312) (23,000) (19,000) Other Invts.(net) (9,250) (9,900) (3,050) 0.0 0.0 Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0 Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0 Other Investing CF 90.3 27.3 (61.7) (61.7) (61.7) Net Investing CF (16,079) (14,722) (8,423) (23,062) (19,062) Div Paid (7,057) (7,142) (9,757) (7,143) (8,571) Chg in Gross Debt (1,952) (557) (7,724) (3,788) (2,684) Capital Issues 0.0 0.0 0.0 0.0 0.0 Other Financing CF (3,781) (5,104) 2,233 (1,141) 61.7 Net Financing CF (12,790) (12,803) (15,247) (12,072) (11,193) Currency Adjustments 0.0 0.0 0.0 0.0 0.0 Chg in Cash (3,962) 2,801 3,432 (6,426) 3,434 Opg CFPS (Bt) 1.07 2.26 1.53 2.12 2.40 Free CFPS (Bt) 1.26 1.78 1.53 0.40 1.03 Source: Company, DBSVTH Target Price & Ratings History Source: DBSVTH Analyst: Namida ARTISPONG THAI-CAC Declared Corporate Governance CG Rating (as of Oct 2017) THAI-CAC is Companies participating in Thailand's Private Sector Score Description Collective Action Coalition Against Corruption programme (Thai Declared Companies that have declared their intention to join CAC CAC) under Thai Institute of Directors (as of May 2018) are Certified Companies certified by CAC. categorised into: Score Range Number of Logo Description Corporate Governance CG Rating is based on Thai Institute of 90-100 Excellent Directors (IOD)’s annual assessment of corporate governance practices of listed companies. The assessment covers 235 criteria 80-89 Very Good in five categories including board responsibilities (35% weighting), 70-79 Good disclosure and transparency (20%), role of stakeholders (20%), equitable treatment of shareholders (10%) and rights of 60-69 Satisfactory shareholders (15%). The IOD then assigns numbers of logos to 50-59 Pass each company based on their scoring as follows: <50 No logo given N/A Page 5049 Company Guide Airports of Thailand DBSVTH recommendations are based an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame) BUY (>15% total return over the next 12 months for small caps, >10% for large caps) HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps) FULLY VALUED (negative total return i.e. > -10% over the next 12 months) SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame) Share price appreciation + dividends Completed Date: 25 Sep 2018 06:11:21 (THA) Dissemination Date: 25 Sep 2018 08:14:56 (THA) Sources for all charts and tables are DBSVTH unless otherwise specified. GENERAL DISCLOSURE/DISCLAIMER This report is prepared by DBS Vickers Securities (Thailand) Co Ltd (''DBSVTH''). This report is solely intended for the clients of DBS Bank Ltd, its respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBS Vickers Securities (Thailand) Co Ltd (''DBSVTH''). The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS Bank Ltd, its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively, the “DBS Group”) have not conducted due diligence on any of the companies, verified any information or sources or taken into account any other factors which we may consider to be relevant or appropriate in preparing the research. Accordingly, we do not make any representation or warranty as to the accuracy, completeness or correctness of the research set out in this report. Opinions expressed are subject to change without notice. This research is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate independent legal or financial advice. The DBS Group accepts no liability whatsoever for any direct, indirect and/or consequential loss (including any claims for loss of profit) arising from any use of and/or reliance upon this document and/or further communication given in relation to this document. 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Therefore, the inclusion of the valuations, opinions, estimates, forecasts, ratings or risk assessments described herein IS NOT TO BE RELIED UPON as a representation and/or warranty by the DBS Group (and/or any persons associated with the aforesaid entities), that: (a) such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and (b) there is any assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments stated therein. Please contact the primary analyst for valuation methodologies and assumptions associated with the covered companies or price targets. Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies) mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the commodity referred to in this report. Page 5150 Company Guide Airports of Thailand DBSVUSA, a US-registered broker-dealer, does not have its own investment banking or research department, has not participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months and does not engage in market-making. ANALYST CERTIFICATION The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst(s) also certifies that no part of his/her compensation was, is, or will be, directly or indirectly, related to specific recommendations or views expressed in the report. The research analyst (s) primarily responsible for the content of this research report, in part or in whole, certifies that he or his associate1 does not serve as an officer of the issuer or the new listing applicant (which includes in the case of a real estate investment trust, an officer of the management company of the real estate investment trust; and in the case of any other entity, an officer or its equivalent counterparty of the entity who is responsible for the management of the issuer or the new listing applicant) and the research analyst(s) primarily responsible for the content of this research report or his associate does not have financial interests2 in relation to an issuer or a new listing applicant that the analyst reviews. DBS Group has procedures in place to eliminate, avoid and manage any potential conflicts of interests that may arise in connection with the production of research reports. The research analyst(s) responsible for this report operates as part of a separate and independent team to the investment banking function of the DBS Group and procedures are in place to ensure that confidential information held by either the research or investment banking function is handled appropriately. There is no direct link of DBS Group's compensation to any specific investment banking function of the DBS Group. COMPANY-SPECIFIC / REGULATORY DISCLOSURES 1. DBS Bank Ltd, DBS HK, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS'') or their subsidiaries and/or other affiliates have a proprietary position in Airports of Thailand recommended in this report as of 31 Aug 2018. 2. Neither DBS Bank Ltd nor DBS HK market makes in equity securities of the issuer(s) or company(ies) mentioned in this Research Report. Compensation for investment banking services: 3. DBSVUSA does not have its own investment banking or research department, nor has it participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively. Disclosure of previous investment recommendation produced: 4. DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates may have published other investment recommendations in respect of the same securities / instruments recommended in this research report during the preceding 12 months. Please contact the primary analyst listed in the first page of this report to view previous investment recommendations published by DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates in the preceding 12 months. 1 An associate is defined as (i) the spouse, or any minor child (natural or adopted) or minor step-child, of the analyst; (ii) the trustee of a trust of which the analyst, his spouse, minor child (natural or adopted) or minor step-child, is a beneficiary or discretionary object; or (iii) another person accustomed or obliged to act in accordance with the directions or instructions of the analyst. 2 Financial interest is defined as interests that are commonly known financial interest, such as investment in the securities in respect of an issuer or a new listing applicant, or financial accommodation arrangement between the issuer or the new listing applicant and the firm or analysis. This term does not include commercial lending conducted at arm's length, or investments in any collective investment scheme other than an issuer or new listing applicant notwithstanding the fact that the scheme has investments in securities in respect of an issuer or a new listing applicant. Page 5251 China / Hong Kong Company Guide Beijing Capital Intl Airport Version 8 | Bloomberg: 694 HK EQUITY | Reuters: 0694.HK Refer to important disclosures at the end of this report DBS Group Research . Equity 31 Aug 2018 BUY Strong cash flows, firm fundamentals Last Traded Price ( 30 Aug 2018):HK$9.08(HSI : 28,164) Price Target 12-mth:HK$12.50 (37.7% upside) (Prev HK$12.90) Maintain BUY as we continue to like the company for its strong A nalyst cash flow generation and firm fundamentals. We see Beijing Paul YONG, CFA+65 6682 3712, [email protected] Capital Intl Airport (BCIA) as an attractive stock to own even , though earnings in the next 12 to 18 months will be affected by What’s New the discontinuation of airport fees as well as the opening of Firm interim profit growth of 18% y-o-y to Daxing Aiport in Sep 2019. We remain positive on the long RMB1,487m, though slightly below expectations term outlook of the company as it generates healthy cash flows and has a strong market position in one of the world’s most Non-aeronautical revenues grew strongly by 24% important and growing air travel markets. y-o-y, led by 48% jump in retailing revenue Interim DPS of 10.3 RMB cents (+18% y-o-y) The company posted a robust set of 1H18 results, underlining its strong cash flow generation ability, with non-aeronautical Maintain Buy with adjusted TP of HK$12.50 revenues poised to become a driver of growth in the future, as retailing revenues take the front seat. Price Relative HK$ Relative Index 15.0 Where w e differ: We have factored in a 26-27% drop in 14.0 207 13.0 passenger throughput and aircraft movements in 2020F for 187 12.0 11.0 167 BCIA on the expected opening of Daxing Airport in September 10.0 147 9.0 2019, with a 4-5% recovery per year from 2021F-2026F in 8.0 127 7.0 aircraft movements and passenger traffic, in our DCF valuation. 107 6.0 5.0 87 Aug-14 Aug-15 Aug-16 Aug-17 Aug-18 Potential catalysts: BCIA’s share price should re-rate as it Beijing Capital Intl Airport (LHS) Relative HSI (RHS) continues to deliver good results, while a less than expected Forecasts and Valuation impact from the opening of the new airport would also be a FY Dec (RMBm) 2016A 2017A 2018F 2019F positive for its earnings and share price. Turnover 8,678 9,575 10,637 10,708 EBITDA 4,450 4,960 5,347 5,180 Pre-tax Profit 2,377 3,470 3,772 3,610 Valuation: Net Profit 1,781 2,600 2,827 2,705 DCF -based target price of HK$12.50. Our target price for BCIA Net Pft (Pre Ex) (core profit) 1,935 2,473 2,867 2,705 is based on discounted cash flow, and assumes WACC of 7.1% Net Profit Gth (Pre-ex) (%) 8.9 27.8 15.9 (5.6) and terminal growth rate of 1%. EPS (HK$) 0.47 0.69 0.75 0.72 Core EPS (HK$) 0.51 0.65 0.76 0.72 EPS Gth (%) 8.5 46.0 8.7 (4.3) Key Risks to Our View: Core EPS Gth (%) 8.9 27.8 15.9 (5.6) Impact from new airport could be more negative than DPS (HK$) 0.19 0.28 0.30 0.29 BV Per Share (HK$) 5.13 5.67 6.12 6.55 expected. We have factored in 25% decline in passenger PE (X) 19.3 13.2 12.1 12.7 throughput and aircraft movements for BCIA when the new CorePE (X) 17.7 13.9 12.0 12.7 airport opens, but the impact could be more than expected. P/Cash Flow (X) 7.4 8.0 8.4 8.1 P/Free CF (X) 8.3 10.1 36.9 9.9 EV/EBITDA (X) 9.1 7.6 7.1 6.9 A t A Glance Net Div Yield (%) 2.1 3.0 3.3 3.2 Issued Capital (m shrs) 1,879 P/Book Value (X) 1.8 1.6 1.5 1.4 - Non H shrs (m shs) 2,452 Net Debt/Equity (X) 0.3 0.2 0.2 0.0 Mkt Cap (HK$m/US$m) 39,324 / 5,010 ROAE(%) 9.5 12.7 12.7 11.3 Major Shareholders (%) Earnings Rev (%): (4.7) (4.1) NWS Holdings Ltd 12.8 Consensus EPS (RMB) 0.74 0.59 Aberdeen Asset Management (Asia) Ltd. 7.6 Other Broker Recs: B:9 S:4 H:9 Free Float (%) 79.7 Source of all data on this page: Company, DBS Bank (Hong Kong) 3m Avg. Daily Val. (US$m) 16.3 Limited (“DBS HK”), Thomson Reuters, HKEX ICB Industry: Industrials / Industrial Transportation ed-JS/ sa- CS /JY Page 5352 Company Guide Beijing Capital Intl Airport WHAT’S NEW Solid 18% y-o-y growth in interim profit Below the operating line, interest costs fell by 36% y -o-y on lower debt levels though there was a forex loss of RMB21m BCIA reported firm interim results that were slightly below versus a gain of RMB49m a year ago. our expectations. Net profit improved by nearly 18% y-o-y to RMB1,487m on revenue improvement of 15% to A n interim dividend of 10.3RMBcts was declared, which is RMB5,322m. Total aeronautical revenue improved 7.6% y -o- 17.6% higher y-o-y, in line with earnings growth. y to RMB2,641m on higher aircraft movements (+4.1% y-o-y) and passenger throughput (+6.3% y-o-y), as well as an Strong cash flow generation and balance sheet. The company increase in aircraft movement fees (+5.8% y -o-y). Non- generated strong cash flows during the period and saw its aeronautical revenue rose by 24% y-o-y to RMB2,681m – net debt position decline from c. RMB3.4bn to RMB2bn, marking the first reporting period ever in which non- translating to a decline in its net debt to equity ratio from aeronautical revenues exceeded aeronautical revenues, driven 15.8% to 8.9%. by a 48% y-o-y jump in retail revenue, due to the new duty - free concession contracts kicking in. We continue to see the company as undervalued given its strong cash flow generation, and even though earnings over However, costs rose more than we expected as concession the next 12-18 months will be impacted by the management fees (+39% y-o-y), operating service costs discontinuation of airport fees as well as the opening of (+45% y-o-y), as well as Aviation safety & security guard costs Daxing Aiport in Sep 2019, we remain positive on the long (+21% y-o-y) all jumped fairly substantially. Rental expenses term outlook of the company and see valuations as attractive were also much higher (+160% y-o-y) as the GTC assets currently at just 7.1x FY18F EV/EBITDA and 6.9x FY19F entered into a transitional leasing agreement (this should be EV/EBITDA. reduced once the GTC assets are acquired). Nonetheless, operating profits rose by 16% y-o-y to RMB2,070m. Interim Income Statement (RMBm) FY Dec 1H2017 2H2017 1H2018 % chg yoy % chg hoh Revenue 4,614 4,960 5,322 15.3 7.3 Cost of Goods Sold (2,823) (3,203) (3,252) 15.2 1.5 Gross Profit 1, 792 1, 757 2, 070 15. 5 17. 8 Other Oper. (Exp)/Inc 0.0 0.0 0.0 nm nm O pe rating Profit 1, 792 1, 757 2, 070 15. 5 17. 8 Other Non Opg (Exp)/Inc (32.2) 36.0 8.00 nm (77.8) Associates & JV Inc (1.4) 4.66 0.0 nm nm Net Interest (Exp)/Inc (120) (92.9) (73.2) 39.1 21.2 Exceptional Gain/(Loss) 49.4 78.1 (20.7) nm nm Pre -tax Profit 1, 687 1, 783 1, 984 17. 6 11. 3 Tax (423) (447) (497) 17.5 11.2 Minority Interest 0.0 0.0 0.0 nm nm Ne t Profit 1, 264 1, 336 1, 487 17. 6 11. 3 Net profit bef Except. 1,227 1,278 1,502 22.4 17.6 EBITDA 2,467 2,492 2,777 12.5 11.4 Margins (%) Gross Margins 38.8 35.4 38.9 Opg Profit Margins 38.8 35.4 38.9 Net Profit Margins 27.4 26.9 27.9 Source: Company, DBS HK Page 5453 Company Guide Beijing Capital Intl Airport CRITICAL FACTORS TO WATCH Aircraft movement growth (%) 2.7 2.72 Critical Factors 2.11 1.62 1.64 A eronautical fees to decrease in importance. Aeronautical 1.49 1.41 revenue made up 53.3% of total net revenue in FY17, and 0.87 consisted of 1) passenger charges, 2) aircraft movements and 0.25 related charges, and 3) airport fees. These components made -0.37 up 38%, 38% and 24% of total aeronautical revenue -0.98 respectively. -1.60 -1.46 2015A 2016A 2017A 2018F 2019F With the announced policy change that BCIA will cease to Passenger throughput growth (%) recognise airport fees from 29 Nov 2018 onwards, the 5.05 5.0 contribution of aeronautical fees to total revenue will decline 4.4 to less than 39% in 2019F. 4.04 3.03 Meanwhile, BCIA is expected to continue with its strategy of improving the passenger throughput mix towards international 2.02 1.9 1.9 1.5 travellers, which generate higher aeronautical and non- 1.01 aeronautical revenue per pax. 0.00 2015A 2016A 2017A 2018F 2019F Non-aeronautical revenues get a boost from higher concession Aeronautical revenue income. Non-aeronautical revenue includes revenue from 1) 5,100.7 5,124.4 concessions (from retailing, advertising, restaurants and food 5,227 4,829.2 4,585.9 shops, ground handling, VIP service and others), 2) rentals, and 4,120.9 4,181 3) car park charges and others. Among these, the larger revenue contributors are retailing, advertising, and rentals, with 3,136 each making up over a quarter of total non-aeronautical 2,091 revenue in 2017. 1,045 It was announced in July 2017 that BCIA’s retail concession 0 will receive a significant boost in revenue following the tender 2015A 2016A 2017A 2018F 2019F of its duty-free concessions in T2 and T3. With the new Non-Aeronautical revenue 6,587 concession kicking in from 1Q18, we project non-aeronautical 6,653 revenue to grow from c. RMB4.5bn in FY17 to c. RMB5.5bn in 5,513 5,322 FY18F, and RMB6.6bn in FY19F. Non-aeronautical revenue 4,474 will thus make up 51% of total revenue in FY18F and 61% in 3,992 3,801 3,849 FY19F. 2,661 EBIT to improve by 6% over FY17-FY19F despite the 1,331 abolishment of airport fees revenue for BCIA. Despite a 0 reduction in revenue of nearly RMB1.3bn from the policy 2015A 2016A 2017A 2018F 2019F announcement, we project BCIA’s FY19F EBIT to improve by Source: Company, DBS HK c.6% from 2017 to RMB3,767m, though declining by 4.6% from FY18F’s level of RMB3,947m. Low er interest costs to further boost profits. We expect BCIA’s interest costs to continue declining as it pays down loans using internally generated cash. Even taking into account the impending acquisition of the GTC assets, we project BCIA to be nearly debt-free by end-2019F (5% net debt to equity ratio). Page 5554 Company Guide Beijing Capital Intl Airport Balance Sheet: Net gearing to improve on positive free cash flow generation. Leverage & Asset Turnover (x) 0.4 Taking into account a modest capital expenditure programme 0.70 0.4 of less than RMB4bn in total in the next two years, and 0.60 0.4 0.3 coupled with steadily growing earnings and cash flow, we 0.50 0.3 project BCIA’s net gearing to improve from 0.16x in 2017 0.40 0.3 (from 0.32x in 2016) to 0.05x by end-2019F. 0.30 0.3 0.3 0.20 We have factored in BCIA completing the acquisition of the 0.2 0.10 GTC assets in 2H18 for c. RMB2.4bn. 0.2 0.00 0.2 2015A 2016A 2017A 2018F 2019F Share Price Drivers: Gross Debt to Equity (LHS) Asset Turnover (RHS) Capital Expenditure DCF -based target price of HK$12.50. Our target price for BCIA RMBm is based on discounted cash flows, and assumes WACC of 3,500.0 7.1% and terminal growth rate of 1%. 3,000.0 2,500.0 Improving earnings and ROE to re-rate share price. We see 2,000.0 BCIA’s share price re-rating towards our target price as the 1,500.0 company delivers better earnings. 1,000.0 500.0 0.0 Second Beijing airport a longer-term catalyst. With Beijing’s 2015A 2016A 2017A 2018F 2019F second airport slated to open in September 2019, which would Capital Expenditure (-) cater for longer-term air traffic growth in Beijing, a subsequent ROE potential asset injection of the second airport by BCIA’s parent 12.0% company could prove beneficial to BCIA – at the right price and 10.0% at the right time 8.0% Key Risks: 6.0% Capacity bottleneck restrains growth. Beijing Airport has 4.0% already reached/exceeded its design capacity (nearly 96m 2.0% passengers handled in 2017 vs capacity of c.80m) and is 0.0% currently facing constraints in growing its passenger 2015A 2016A 2017A 2018F 2019F throughput, which would limit its revenue growth potential Forward PE Band over the next few years. Additionally, the airspace around (x) Beijing is tightly controlled and BCIA's growth could be limited 18.8 if airspace restrictions are not relaxed when there is demand. +2sd: 17.7x 16.8 +1sd: 16x Ov erpaying for acquisitions. There is a risk that BCIA will 14.8 Avg: 14.3x overpay for any acquisition, which would lead to lower returns 12.8 for shareholders. -1sd: 12.6x 10.8 -2sd: 10.8x Company Background 8.8 Beijing Capital International Airport (BCIA) owns and operates Sep-14 Sep-15 Sep-16 Sep-17 Beijing Capital Airport, which is the busiest airport in Asia in PB Band (x) terms of passenger throughput, and the second busiest in the 2.7 world. Its revenue streams are segmented into aeronautical 2.5 2.3 revenues (passenger charges, airport movement fees and +2sd: 2.26x 2.1 +1sd: 1.97x airport fees) and non-aeronautical (concessions, rentals and 1.9 car park) revenues. It is over 56% owned by the government. 1.7 Avg: 1.69x 1.5 -1sd: 1.4x 1.3 1.1 -2sd: 1.11x 0.9 Sep-14 Sep-15 Sep-16 Sep-17 Source: Company, DBS HK Page 5655 Company Guide Beijing Capital Intl Airport Key Assumptions FY Dec 2015A 2016A 2017A 2018F 2019F Aircraft movement growth (%) 1.4 2.7 (1.5) 1.6 1.6 Passenger throughput growth (%) 4.4 5.0 1.5 1.9 1.9 Aeronautical revenue 4,585.9 4,829.2 5,100.7 5,124.4 4,120.9 Non-Aeronautical revenue 3,801.3 3,848.6 4,473.8 5,512.8 6,586.9 Source: Company, DBS HK Segmental Breakdown (RMB m) FY Dec 2015A 2016A 2017A 2018F 2019F R e venues (RMB m) Aeronautical 4,586 4,829 5,101 5,124 4,121 Non-Aeronautical 3,801 3,849 4,474 5,513 6,587 T otal 8, 387 8, 678 9, 575 10, 637 10, 708 Source: Company, DBS HK Income Statement (RMB m) FY Dec 2015A 2016A 2017A 2018F 2019F Revenue 8,387 8,678 9,575 10,637 10,708 Cost of Goods Sold (5,603) (5,786) (6,026) (6,694) (6,944) Gross Profit 2, 784 2, 891 3, 549 3, 943 3, 763 Other Opng (Exp)/Inc 0 0 0 0 0 O pe rating Profit 2, 784 2, 891 3, 549 3, 943 3, 763 Other Non Opg (Exp)/Inc 15 3 4 4 4 Associates & JV Inc 8 6 3 4 4 Net Interest (Exp)/Inc (479) (369) (213) (138) (161) Dividend Income 0 0 0 0 0 Exceptional Gain/(Loss) (135) (154) 127 (40) 0 Pre -tax Profit 2, 193 2, 377 3, 470 3, 772 3, 610 Tax (551) (596) (870) (945) (905) Minority Interest 0 0 0 0 0 Preference Dividend 0 0 0 0 0 Ne t Profit 1, 642 1, 781 2, 600 2, 827 2, 705 Net Profit before Except. 1,777 1,935 2,473 2,867 2,705 EBITDA 4,400 4,450 4,960 5,347 5,180 Growth Revenue Gth (%) 11.0 3.5 10.3 11.1 0.7 EBITDA Gth (%) 14.2 1.1 11.5 7.8 (3.1) Opg Profit Gth (%) 16.7 3.9 22.7 11.1 (4.6) Net Profit Gth (%) 18.0 8.5 46.0 8.7 (4.3) M a rgins & Ratio Gross Margins (%) 33.2 33.3 37.1 37.1 35.1 Opg Profit Margin (%) 33.2 33.3 37.1 37.1 35.1 Net Profit Margin (%) 19.6 20.5 27.2 26.6 25.3 ROAE (%) 9.3 9.5 12.7 12.7 11.3 ROA (%) 5.1 5.3 8.1 9.0 8.4 ROCE (%) 7.0 7.2 9.3 10.8 10.0 Div Payout Ratio (%) 40.0 40.0 40.0 40.0 40.0 Net Interest Cover (x) 5.8 7.8 16.7 28.5 23.4 Source: Company, DBS HK Page 5756 Company Guide Beijing Capital Intl Airport Balance Sheet (RMB m) FY Dec 2015A 2016A 2017A 2018F 2019F Net Fixed Assets 27,750 26,629 26,051 27,786 27,160 Invts in Associates & JVs 53 53 0 4 8 Other LT Assets 1,384 1,403 1,428 1,448 1,422 Cash & ST Invts 2,113 4,530 1,615 1,414 1,809 Inventory 0 0 0 0 0 Debtors 1,266 1,139 1,315 1,330 1,338 Other Current Assets 126 150 229 229 229 T otal Assets 32, 691 33, 904 30, 637 32, 210 31, 965 ST Debt 4,645 5,670 161 161 161 Creditors 2,216 3,149 3,646 3,523 3,655 Other Current Liab 391 387 406 406 406 LT Debt 7,038 5,133 4,838 4,838 2,838 Other LT Liabilities 132 187 156 156 156 Shareholder’s Equity 18,269 19,378 21,430 23,126 24,749 Minority Interests 0 0 0 0 0 T otal Cap. & Liab. 32, 691 33, 904 30, 637 32, 210 31, 965 Non-Cash Wkg. Capital (1,216) (2,247) (2,508) (2,371) (2,494) Net Cash/(Debt) (9,570) (6,273) (3,384) (3,585) (1,190) Debtors Turn (avg days) 57.8 50.6 46.8 45.4 45.5 Creditors Turn (avg days) 188.6 231.1 268.3 247.0 236.6 Inventory Turn (avg days) N/A N/A N/A N/A N/A Asset Turnover (x) 0.3 0.3 0.3 0.3 0.3 Current Ratio (x) 0.5 0.6 0.7 0.7 0.8 Quick Ratio (x) 0.5 0.6 0.7 0.7 0.7 Net Debt/Equity (X) 0.5 0.3 0.2 0.2 0.0 Net Debt/Equity ex MI (X) 0.5 0.3 0.2 0.2 0.0 Capex to Debt (%) 20.6 4.3 17.3 63.1 25.2 Z-Score (X) 2.5 2.5 3.9 3.9 4.9 Source: Company, DBS HK Cash Flow Statement (RMB m) FY Dec 2015A 2016A 2017A 2018F 2019F Pre-Tax Profit 2,193 2,377 3,470 3,772 3,610 Dep. & Amort. 1,593 1,550 1,404 1,397 1,409 Tax Paid (551) (596) (870) (945) (905) Assoc. & JV Inc/(loss) (8) (6) (3) (4) (4) (Pft)/ Loss on disposal of FAs 0 0 0 0 0 Chg in Wkg.Cap. 356 1,030 262 (137) 123 Other Operating CF 574 255 8 0 0 Ne t Operating CF 4, 157 4, 610 4, 271 4, 082 4, 233 Capital Exp.(net) (2,406) (463) (866) (3,153) (756) Other Invts.(net) 0 0 0 0 0 Invts in Assoc. & JV 0 0 0 0 0 Div from Assoc & JV 0 0 0 0 0 Other Investing CF 0 324 322 0 0 Ne t Investing CF ( 2,406) ( 139) ( 545) ( 3,153) ( 756) Div Paid (602) (712) (1,040) (1,131) (1,082) Chg in Gross Debt (529) (880) (5,804) 0 (2,000) Capital Issues 0 0 0 0 0 Other Financing CF (696) 1 0 0 0 Ne t Financing CF ( 1,827) ( 2,052) ( 6,642) ( 1,131) ( 3,082) Currency Adjustments 4 (1) 0 0 0 Chg in Cash (71) 2,418 (2,916) (201) 395 Opg CFPS (RMB) 0.88 0.83 0.93 0.97 0.95 Free CFPS (RMB) 0.40 0.96 0.79 0.21 0.80 Source: Company, DBS HK Page 5857 Company Guide Beijing Capital Intl Airport Target Price & Ratings History S.No. Date Closing 12-mth Rating HK$ 15.0 Price T arget Price 14.0 1 1: 5-Sep-17 HK$13.18 HK$16.00 Buy 13.0 2: 29-Mar-18 HK$10.16 HK$16.50 Buy 3: 22-Jun-18 HK$8.81 HK$12.90 Buy 12.0 2 11.0 10.0 3 9.0 8.0 7.0 Jul-18 Jan-18 Jun-18 Oct-17 Feb-18 Sep-17 Apr-18 Dec-17 Nov-17 Mar-18 Aug-17 Aug-18 Aug-18 May-18 Source: DBS HK Analyst: Paul YONG, CFA Page 5958 Company Guide Beijing Capital Intl Airport DBS HK recommendations are based an Absolute Total Return* Rating system, defined as follows: S TRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame) B U Y (>15% total return over the next 12 months for small caps, >10% for large caps) H O LD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps) FU LLY VALUED (negative total return i.e. > -10% over the next 12 months) S ELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame) Share price appreciation + dividends Completed Date: 31 Aug 2018 16:53:01 (HKT) Dissemination Date: 31 Aug 2018 17:50:24 (HKT) Sources for all charts and tables are DBS HK unless otherwise specified. 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Please contact the primary analyst listed in the first page of this report to view previous investment recommendations published by DBS Bank Ltd, DBS HK, DBSVS, their subsidiaries and/or other affiliates of DBSVUSA in the preceding 12 months. 1 An associate is defined as (i) the spouse, or any minor child (natural or adopted) or minor step-child, of the analyst; (ii) the trustee of a trust of which the analyst, his spouse, minor child (natural or adopted) or minor step-child, is a beneficiary or discretionary object; or (i ii) another person accustomed or obliged to act in accordance with the directions or instructions of the analyst. 2 Financial interest is defined as interests that are commonly known financial interest, such as investment in the securities i n respect of an issuer or a new listing applicant, or financial accommodation arrangement between the issuer or the new listing applicant and the firm or analysis. This term does not include commercial lending conducted at arm's length, or investments in any collectiv e investment scheme other than an issuer or new listing applicant notwithstanding the fact that the scheme has investments in securities in respect of an issuer or a new lis ting applicant. Page 6160 Malaysia Company Guide Malaysia Airports Version 14 | Bloomberg: MAHB MK | Reuters: MAHB.KL Refer to important disclosures at the end of this report DBS Group Research . Equity 26 Oct 2018 BUY More improvement on the horizon Last Traded Price ( 25 Oct 2018): RM8.26 (KLCI : 1,686.59) Price Target 12-mth : RM10.00 (21% upside) (Prev RM10.00) Undemanding valuations back firm earnings growth profile. Malaysia Airports (MAHB) is expected to return to a firm Analyst Marvin KHOR +60 32604 3911 [email protected] passenger growth trajectory in FY19F despite a blip in 2018 domestic throughput. While potential regulatory changes What’s New remain a key near term uncertainty, more clarity is expected by 9M18 pax growth of 2.6% in Malaysia and 10.5% in mid-2019. We maintain our view that the net effect of changes Turkey, some drag from soft domestic traffic would not be unduly negative to the group. We continue to see Expect continued earnings rebound as Turkish value emerging from its Turkish operations anchored around operations pick up from low base the Istanbul Sabiha Gokcen (ISG) airport, where more consistent Regulatory changes expected in coming 12 months, but profitability is around the corner. We believe this will underpin a we do not expect net outcome to be negative for the re-rating, though it may be accelerated by a partial stake sale of group the unit. Maintain BUY. Revise FY18/19 pax growth assumptions to 2.9%/4.5%, trim core earnings by 5-6%, TP to Where we differ. Higher valuation for ISG. Consensus views are RM10.00 – maintain BUY diverged on MAHB. Our rating of the group is at the higher end of the streets’ rating spectrum on the back of a higher ISG valuation. Price Relative RM Relative Index 10.8 Potential catalysts: Favourable ISG valuation; OA revisions. We 205 9.8 185 8.8 note two potential catalysts in the near term, 1) a stake sale in 165 7.8 145 6.8 125 ISG at valuations matching or beating expectations, and 2) 5.8 105 4.8 85 revisions in Operating Agreement (OA) with the government for 3.8 65 Oct-14 Oct-15 Oct-16 Oct-17 Oct-18 changes in benchmark rates or user fee terms. Malaysia Airports (LHS) Relative KLCI (RHS) Forecasts and Valuation Valuation: FY Dec (RMm) 2017A 2018F 2019F 2020F Our TP of RM10.00 is based on SOP valuation, where we value Revenue 4,652 4,994 5,311 5,673 the Malaysian operations using DCF, Turkish operations at 8x EBITDA 1,912 2,156 2,342 2,491 Pre-tax Profit 334 927 790 954 FY18F EV/EBITDA, and KLIA landbank at RM7.50 psf. Our TP Net Profit 236 764 607 745 implies 9.9x FY19F EV/EBITDA. Net Pft (Pre Ex.) 179 407 549 688 Net Pft Gth (Pre-ex) (%) 446.9 127.4 34.9 25.2 Key Risks to Our View: EPS (sen) 14.3 46.0 36.6 44.9 EPS Pre Ex. (sen) 10.8 24.5 33.1 41.4 Weaker passenger traffic. If passenger traffic at MAHB’s EPS Gth Pre Ex (%) 447 127 35 25 Malaysian or Turkish airports undershoots growth expectations Diluted EPS (sen) 10.8 42.6 33.1 41.4 due to weakened travel demand, there is a downside risk to Net DPS (sen) 13.0 15.0 18.3 22.5 our earnings expectations. BV Per Share (sen) 483 513 531 554 PE (X) 58.0 17.9 22.6 18.4 PE Pre Ex. (X) 76.6 33.7 25.0 19.9 At A Glance P/Cash Flow (X) 6.9 8.8 6.7 6.6 Issued Capital (m shrs) 1,659 EV/EBITDA (X) 9.3 8.2 7.4 7.0 Mkt. Cap (RMm/US$m) 13,705 / 3,287 Net Div Yield (%) 1.6 1.8 2.2 2.7 Major Shareholders (%) P/Book Value (X) 1.7 1.6 1.6 1.5 Khazanah Nasional Bhd 33.2 Net Debt/Equity (X) 0.3 0.3 0.3 0.3 Employees Provident Fund 10.1 ROAE (%) 3.0 9.2 7.0 8.3 Amanah Saham Bumiputera 11.9 Earnings Rev (%): 0 0 0 Free Float (%) 56.7 Consensus EPS (sen): 27.3 34.8 42.5 3m Avg. Daily Val (US$m) 8.1 Other Broker Recs: B: 11 S: 2 H: 8 ICB Industry : Industrials / Industrial Transportation Source of all data on this page: Company, AllianceDBS, Bloomberg Finance L.P. Page 6261 ed: KK / sa:BC, CW, CS Company Guide Malaysia Airports WHAT’S NEW Setting up for a solid 2019 9M18 international pax firm despite milder domestic traffic. Already, the Turkish operations has halved its net losses to MAHB’s total passenger throughput in Malaysia expanded EUR4.7m in 1H18 (from EUR10.3m in 1H17), on the back of 2.6% in 9M18, as a healthy 5.9% growth in international 15% EBITDA growth EUR81m. Our forecasted EBITDA passengers (pax) was tempered by a 0.8% contraction in growth is 15% in FY18F and 11% in FY19F, on the back of domestic traffic. To an extent, this trails expectations vs our 11%/8% pax growth. This will continue to drive group previous full year projections of 6.5% and the group’s 6.3% bottom line with a rebound from a low base. We expect target. We attribute this to several factors, including election MAHB’s valuations to gradually benefit from this factor, related uncertainties (held in May18), plus generally softer- whether or not a potential stake sale in ISG materialises in the than-expected economic growth (slowing to +4.5% in 2Q18, near term. from >5% in previous periods, leading to downward revisions in consensus forecasts). Pax growth at the ISG however Not overly perturbed by regulatory uncertainty. An ongoing remained robust and within expectations, rising 10.5% in issue impacting MAHB is the revisions to aeronautical charges 9M18, with a 12%/9.8% rise in international/domestic traffic. led by the Malaysian Aviation Commission (MAVCOM) plus the impending review of the OA with the government for the Expect earnings rebound to continue in 3Q18. Pax growth in 39 airports operating in Malaysia. As per our report dated 24 3Q18 was moderate, with a 1.4% rise in Malaysia and 7.5% Oct ‘No change to view, as blueprints for structural changes in ISG. However, we project core earnings to continue its are being drawn up’, we do not expect the group to be upward trajectory, with a forecasted range of RM113m- materially worse off as a net result of the regulatory changes. RM132m, or a 42%-65% rise y-o-y. This is slightly below the While new charges are expected to be firmed up and pace of 1H18 core earnings growth of 85%. This will be led implemented by 2Q-3Q19, revisions to the OA may occur as by the Turkish operations, which we expect to post a positive early as late-2018. bottom line on the back of its peak travel season. We also highlight that earnings are NOT negatively impacted by the We see opportunities in a 2019 pax growth rebound. We sharp depreciation of the Turkish Lira (to near 5.6 per US revise down pax growth assumptions for the Malaysian dollar from 3.8 in early-2018, or >30% weaker). This is operations to 2.9%/4.5%/4.5% from 6.5%/5%/5% because ISG’s functional currency is the Euro, making up a previously for FY18/19/20F, trimming our group core earnings majority of revenue from collected passenger charges, while forecasts by 6%/5%/5%. A recovery in domestic pax after personnel related costs are in Lira. On the other hand, stabilising in 2018 will help support the rebound, while the MAHB’s Malaysia operations should look forward to better still-firm growth in international pax limits the earnings performance in the peak 4Q travel season. impact from higher passenger service charges (PSCs). A majority of earnings growth will still be led by the Turkish ISG value emerging, whether or not potential stake sale operations as it approaches full year profitability. Overall, our proceeds. We expect continued improvements in ISG’s SOP-based TP is reduced to RM10.00. Maintain Buy. financial performance, especially if pax traffic persists in 2019. SOP Valuation Sta ke Va lue Pe r Comme nt (RM m) sha re (RM) Domestic airport 100% 8,943.3 5.39 DCF-valuation; WACC=8.8%; assuming major RM4bn capex every operations 10 years Istanbul 's Sabiha Gokcen 100% 4,765.9 2.87 8x FY18F EV/EBITDA, less RM2.2bn borrowings International Airport KLIA Aeropolis landbank 100% 2,587.5 1.56 40% discount to RM15 psf transacted price on 6,600 acres Hyderabad’s Rajiv Gandhi 11% 295.3 0.18 Disposal price International Airport Sums-of-Pa rts Va lue 16,592.0 10.00 Rounded to the nearest 5 sen Source: AllianceDBS Page 6362 Company Guide Malaysia Airports M'sia Pax Growth (%) CRITICAL DATA POINTS TO WATCH 8.61 8.7 Critical Factors 7.5 6.14 Malaysian passenger traffic growth. As the primary airport 6.2 operator in Malaysia with 39 airports under its stable, MAHB is 5.0 4.52 4.52 a proxy to air travel demand. A recovery in air travel demand 3.7 following the twin airline incidences in 2014 boosted passenger 2.91 2.5 traffic particularly from 2H16 to 1H17. This resulted in growth of 6.1%/8.5% in 2016/17, turning around from a slowdown in 1.2 0.0 2015. We expect a mild softening of growth in 2018 to 2.9%, 2016A 2017A 2018F 2019F 2020F given some impact from election-related uncertainty plus a mild softening in Malaysia’s economic growth. We assume a M'sia airport tax/pax (RM) conservative 4.5% growth thereafter. 26.6 26.6 26.7 27.2 25.7 24.7 Malaysian airport tax/pax. MAHB’s key revenue source is the 21.8 PSC, commonly known as airport tax/pax on departures from its airports. PSC charged to consumers was raised in 2017 by 16.3 MAVCOM to RM11/pax for domestic departures (from RM6-9), 10.9 RM50-73/pax for international (from RM32-65), and an Association of Southeast Asian Nations (ASEAN) countries tier at 5.4 RM35/pax. These rates were equalised across the airports from 0.0 2018 onwards. MAHB is bound by benchmark rates as per its 2016A 2017A 2018F 2019F 2020F OA with the government, whereby the difference is recouped as Marginal Cost Support Sums (MARCS). Given the establishment ISG Pax Growth (%) of MAVCOM, the OA may be revised in 2018. 11.22 11 ISG traffic growth recovering. In 2014, MAHB acquired the 8.98 remaining 40% stake in Istanbul Sabiha Gokcen (ISG) and from 7.67 7.34 6.73 FY15 onwards, the group has fully consolidated ISG’s earnings. 5.61 4.83 ISG was a high traffic growth airport, charting c.20% growth 4.49 p.a. over 2013-2015. This tapered to 5-6% growth in 2016-17 given domestic unrest in Turkey, before the gradual rebound 2.24 late in 2017 in tandem with a rebound in tourist arrivals. We 0.00 project 11%/8%/7% growth in FY18/19/20F from an ongoing 2016A 2017A 2018F 2019F 2020F recovery momentum, supported by a boarding hall expansion completed mid-2018 and an additional runway slated for mid- ISG airport tax/pax (EUR) 2019. 6.21 6.3 5.81 5.97 5.97 5.95 Flattish ISG airport tax /pax. ISG’s average airport tax/pax rose 5.0 by 3% in FY17, as the passenger growth weighed towards the 3.8 international segment (33% of total, from 32% in FY16) which commands a higher airport tax (EUR15/pax vs EUR3/pax for 2.5 domestic). This was due to international traffic being affected 1.3 more by the incidents in Turkey. Going forward, we expect airport tax/pax to stay flattish. After some near term rebound in 0.0 international traffic, ISG will likely continue its fixture as a vital 2016A 2017A 2018F 2019F 2020F domestic LCC airport with key airline customers Pegasus Airlines and Turkish Airlines. Forex rate: RM/EUR 4.94 4.82 4.9 4.9 5.0 4.62 Currency movement of EUR against MYR. ISG’s functional currency is the EUR, and key operational items like passenger 4.0 fees are EUR-denominated. We forecast its earnings in EUR, and 3.0 apply a EUR/MYR rate of 4.82/4.90 to FY18/19F forecasts. 2.0 1.0 0.0 2016A 2017A 2018F 2019F 2020F Source: Company, AllianceDBS Page 6463 Company Guide Malaysia Airports Appendix 1: MAHB price correlation with critical factors Graph 1: Share price vs key macroeconomic factors Indexed: Dec99 = 100 MAHB MK (LHS) FBMKLCI (LHS) Malaysia GDP (current, local currency) (RHS) 400 475 klia2 expansion & scheduled PSC hike 300 350 Approval of PSC hike 200 225 100 100 Consolidation of ISG losses 0 -25 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Source: Company, Bloomberg L.P., AllianceDBS MAHB share price vs M’sia pax traffic and tourist arrivals Remarks Indexed: Jan09 = 100 MAHB MK (LHS) M'sia pax traffic (RHS) Malaysia tourist arrivals (RHS) MAHB’s share price is unsurprisingly highly correlated 550 250 with its Malaysian airport passenger traffic (correlation coefficient of 0.8), as the latter is the driver of direct 400 200 aeronautical revenue (like passenger service charges) as well as indirect, non-aeronautical sources like duty-free and retail sales, rental and car park revenue. 250 150 While tourist arrivals can provide uplift to a country’s air 100 100 travel market, over the past years it has only been mildly influential on passenger traffic (correlation coefficient of 0.16) and thus to MAHB (<0.1) – implying Malaysia -50 50 remains predominantly an outbound market for now. Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Source: Company, Bloomberg L.P., AllianceDBS MAHB share price vs ISG pax traffic and Turkey unit earnings Remarks Indexed: Jan14 = 100 MAHB MK ISG pax traffic MAHB’s share price is not yet directly moved by ISG’s passenger traffic development as the combined Turkey ISG + LGM EBITDA (RHS) ISG +LGM Net profit (RHS) EUR 200 60 operations (including lounge and hotel operator LGM) have yet to achieve sustained profitability. However, 50 175 expectations of positive earnings or a steady turnaround 40 can be positive for the share price. 150 30 125 20 10 100 0 75 -10 50 -20 Jul-14 Jul-15 Jul-16 Jul-17 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Oct-14 Oct-15 Oct-16 Oct-17 Apr-14 Apr-15 Apr-16 Apr-17 Source: Company, Bloomberg L.P., AllianceDBS Page 6564 Company Guide Malaysia Airports Leverage & asset turnover (x) Balance Sheet: 0.3 Net gearing to continue easing. The completion of Kuala 0.70 0.60 Lumpur International Airport 2 (klia2) and full acquisition of ISG 0.3 heralded the end of a huge capital expenditure (capex) cycle for 0.50 0.40 MAHB. In FY18/19F, we expect MAHB to incur capex of 0.2 c.RM550m p.a., backed by rising operating cash flow. We also 0.30 project MAHB’s net gearing to slide to 0.3x over FY18/19F, after 0.20 0.2 having eased to 0.34x in FY17. 0.10 0.00 0.1 2016A 2017A 2018F 2019F 2020F Share Price Drivers: Gross Debt to Equity (LHS) Asset Turnover (RHS) Passenger traffic outlook. Passenger traffic is a key driver of Capital expenditure earnings and cash flow, as it directly affects MAHB’s RMm aeronautical revenue (PSC collection), and indirectly affects the 1,200.0 group’s non-aeronautical revenue (higher passenger traffic 1,000.0 should lead to higher Eraman retail sales and variable rents). 800.0 600.0 Realisation of ISG value. Continued improvements in earnings 400.0 from the Turkish operations will help re-rate the group as its full 200.0 integration of ISG has been bottom line dilutive since FY15. 0.0 Alternatively, a partial stake divestment may speed up the value 2016A 2017A 2018F 2019F 2020F realisation of the unit. Capital Expenditure (-) ROE (%) Key Risks: 9.0% Weakness in Malaysian/Turkish passenger traffic. Malaysian 8.0% passenger traffic is reliant on air travel demand, which may be 7.0% impacted by a myriad of external factors, including aviation 6.0% incidents, currency movements and international relations. Any 5.0% externalities may hurt passenger traffic and MAHB’s profits. 4.0% 3.0% MAHB is also exposed to potential declines in air travel 2.0% demand in Turkey as the ISG caters for both domestic and 1.0% international flights. Perceptions of instability in the region may 0.0% be a dampening factor, especially on tourist demand. 2016A 2017A 2018F 2019F 2020F Company Background PB Band (x) MAHB provides management, maintenance, and operational (x) services to all Malaysian airports (except Senai Airport). It also 2.2 operates duty-free and non-duty free retail stores, as well as 2.0 +2sd: 2.01x 1.8 food and beverage outlets at the airports. The group also +1sd: 1.76x operates the Istanbul Sabiha Gokcen (ISG) airport in Turkey 1.6 Avg: 1.51x and its hotel and lounge operator, LGM Airport Operations 1.4 -1sd: 1.26x Trade and Tourism Inc (LGM). 1.2 1.0 -2sd: 1.01x 0.8 Oct-14 Oct-15 Oct-16 Oct-17 Source: Company, AllianceDBS Page 6665 Company Guide Malaysia Airports Key Assumptions FY Dec 2016A 2017A 2018F 2019F 2020F M'sia Pax Growth (%) 6.14 8.61 2.91 4.52 4.52 M'sia airport tax/pax (RM) 24.7 25.7 26.6 26.6 26.7 ISG Pax Growth (%) 4.83 5.61 11.0 7.67 7.34 ISG airport tax/pax (EUR) 5.81 5.97 5.97 5.95 6.21 Forex rate: RM/EUR 4.62 4.94 4.82 4.90 4.90 Segmental Breakdown FY Dec 2016A 2017A 2018F 2019F 2020F Revenues (RMm) M'sia - Airport services 2,223 2,423 2,538 2,637 2,737 M'sia - Retail 741 855 908 979 1,076 M'sia - Others 34.3 39.2 38.0 38.0 38.0 M'sia - Hotel 216 250 245 245 245 Others 959 1,086 1,264 1,413 1,577 Total 4,173 4,652 4,994 5,311 5,673 EBIT (RMm) M'sia - Airport services 417 675 777 836 832 M'sia - Retail 25.5 51.3 54.5 58.7 64.5 M'sia - Others 5.83 2.74 2.66 2.66 2.66 M'sia - Hotel 25.9 48.5 46.9 46.9 46.9 Others 402 252 439 532 680 Total 876 1,030 1,321 1,476 1,626 EBIT Margins (%) M'sia - Airport services 18.7 27.9 30.6 31.7 30.4 M'sia - Retail 3.4 6.0 6.0 6.0 6.0 M'sia - Others 17.0 7.0 7.0 7.0 7.0 M'sia - Hotel 12.0 19.4 19.1 19.1 19.1 Others 42.0 23.2 34.8 37.7 43.1 Total 21.0 22.1 26.4 27.8 28.7 Income Statement (RMm) FY Dec 2016A 2017A 2018F 2019F 2020F Revenue 4,173 4,652 4,994 5,311 5,673 Other Opng (Exp)/Inc (3,296) (3,622) (3,673) (3,835) (4,047) Operating Profit 876 1,030 1,321 1,476 1,626 Other Non Opg (Exp)/Inc 56.7 57.5 57.5 57.5 57.5 Associates & JV Inc 15.7 20.6 17.7 18.0 18.2 Net Interest (Exp)/Inc (690) (716) (711) (705) (690) Exceptional Gain/(Loss) (75.7) (57.5) 242 (57.5) (57.5) Pre-tax Profit 183 334 927 790 954 Tax (110) (97.4) (163) (183) (209) Minority Interest (2.8) (0.6) 0.0 0.0 0.0 Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit 70.4 236 764 607 745 Net Profit before Except. 32.7 179 407 549 688 EBITDA 1,721 1,912 2,156 2,342 2,491 Growth Revenue Gth (%) 7.8 11.5 7.3 6.4 6.8 EBITDA Gth (%) 10.2 11.1 12.7 8.6 6.4 Opg Profit Gth (%) 32.9 17.5 28.2 11.8 10.1 Net Profit Gth (Pre-ex) (%) nm 446.9 127.4 34.9 25.2 Margins & Ratio Opg Profit Margin (%) 21.0 22.1 26.4 27.8 28.7 Net Profit Margin (%) 1.7 5.1 15.3 11.4 13.1 ROAE (%) 0.9 3.0 9.2 7.0 8.3 ROA (%) 0.3 1.1 3.4 2.7 3.3 ROCE (%) 1.8 3.6 5.3 5.5 6.1 Div Payout Ratio (%) 235.7 91.2 32.6 50.0 50.0 Net Interest Cover (x) 1.3 1.4 1.9 2.1 2.4 Source: Company, AllianceDBS Page 6766 Company Guide Malaysia Airports Quarterly / Interim Income Statement (RMm) FY Dec 2Q2017 3Q2017 4Q2017 1Q2018 2Q2018 Revenue 1,100 1,212 1,247 1,216 1,155 Other Oper. (Exp)/Inc (855) (941) (1,007) (865) (857) Operating Profit 245 271 240 351 298 Other Non Opg (Exp)/Inc 0.0 0.0 57.5 0.0 0.0 Associates & JV Inc 6.09 4.51 5.24 2.50 10.8 Net Interest (Exp)/Inc (165) (184) (193) (180) (181) Exceptional Gain/(Loss) 0.0 0.0 (57.5) 299 (1.9) Pre-tax Profit 86.2 90.7 51.5 473 126 Tax (24.3) (11.0) (23.7) (28.1) (39.5) Minority Interest 0.40 0.0 0.0 0.0 0.0 Net Profit 62.3 79.7 27.9 445 86.1 Net profit bef Except. 62.3 79.7 (29.6) 146 88.0 EBITDA 466 521 495 571 520 Growth Revenue Gth (%) 0.6 10.2 2.9 (2.5) (5.0) EBITDA Gth (%) (7.8) 11.7 (4.9) 15.4 (9.0) Opg Profit Gth (%) (10.1) 10.4 (11.4) 46.4 (15.1) Net Profit Gth (Pre-ex) (%) (3.1) 28.0 (137.2) (590.9) (39.5) Margins Opg Profit Margins (%) 22.3 22.3 19.2 28.9 25.8 Net Profit Margins (%) 5.7 6.6 2.2 36.6 7.5 Balance Sheet (RMm) FY Dec 2016A 2017A 2018F 2019F 2020F Net Fixed Assets 382 354 483 594 594 Invts in Associates & JVs 119 137 155 173 191 Other LT Assets 18,198 18,604 18,191 17,764 17,987 Cash & ST Invts 1,572 2,461 2,485 2,972 2,911 Inventory 135 141 161 168 177 Debtors 872 792 821 873 933 Other Current Assets 11.1 10.2 10.2 10.2 10.2 Total Assets 21,289 22,499 22,304 22,554 22,803 ST Debt 194 423 423 423 423 Creditor 1,539 1,752 1,678 1,703 1,724 Other Current Liab 33.6 58.0 58.0 58.0 58.0 LT Debt 5,386 5,126 5,126 5,126 5,126 Other LT Liabilities 5,440 6,128 5,517 5,442 5,285 Shareholder’s Equity 8,695 9,011 9,502 9,802 10,187 Minority Interests 2.03 0.0 0.0 0.0 0.0 Total Cap. & Liab. 21,289 22,499 22,304 22,554 22,803 Non-Cash Wkg. Capital (554) (868) (744) (710) (662) Net Cash/(Debt) (4,008) (3,088) (3,065) (2,577) (2,639) Debtors Turn (avg days) 88.0 65.3 58.9 58.2 58.1 Creditors Turn (avg days) (718.3) (680.7) (749.4) (713.2) (722.9) Inventory Turn (avg days) (54.7) (57.1) (65.8) (69.3) (72.7) Asset Turnover (x) 0.2 0.2 0.2 0.2 0.3 Current Ratio (x) 1.5 1.5 1.6 1.8 1.8 Quick Ratio (x) 1.4 1.5 1.5 1.8 1.7 Net Debt/Equity (X) 0.5 0.3 0.3 0.3 0.3 Net Debt/Equity ex MI (X) 0.5 0.3 0.3 0.3 0.3 Capex to Debt (%) 7.7 5.0 9.9 9.9 19.6 Z-Score (X) 1.3 1.3 1.4 1.5 1.6 Source: Company, AllianceDBS Page 6867 Company Guide Malaysia Airports Cash Flow Statement (RMm) FY Dec 2016A 2017A 2018F 2019F 2020F Pre-Tax Profit 183 334 927 790 954 Dep. & Amort. 844 882 835 865 865 Tax Paid (77.2) (76.2) (163) (183) (209) Assoc. & JV Inc/(loss) (15.7) (20.6) (17.7) (18.0) (18.2) Chg in Wkg.Cap. 27.0 294 (124) (33.8) (47.8) Other Operating CF 809 586 100 629 533 Net Operating CF 1,771 2,000 1,558 2,049 2,078 Capital Exp.(net) (431) (278) (550) (550) (1,088) Other Invts.(net) 108 76.0 0.0 0.0 0.0 Invts in Assoc. & JV 0.0 (3.0) 0.0 0.0 0.0 Div from Assoc & JV 3.01 5.51 0.0 0.0 0.0 Other Investing CF 25.3 42.0 0.0 0.0 0.0 Net Investing CF (294) (158) (550) (550) (1,088) Div Paid (141) (183) (216) (249) (303) Chg in Gross Debt (345) (79.1) 0.0 0.0 0.0 Capital Issues 0.0 0.0 0.0 0.0 0.0 Other Financing CF (729) (762) (769) (762) (748) Net Financing CF (1,215) (1,023) (984) (1,011) (1,051) Currency Adjustments 23.5 69.8 0.0 0.0 0.0 Chg in Cash 285 889 23.5 488 (61.9) Opg CFPS (sen) 105 103 101 126 128 Free CFPS (sen) 80.8 104 60.7 90.4 59.6 Source: Company, AllianceDBS Target Price & Ratings History RM 10.17 12-mth Date of Closing 12 S.No. T arget Rating Report Price Price 9.67 1: 27 Nov 17 8.28 8.75 HOLD 14 2: 30 Nov 17 8.25 8.75 HOLD 8 4 3: 05 Jan 18 8.80 8.75 HOLD 9.17 6 13 10 4: 08 Jan 18 9.10 8.75 HOLD 9 7 5: 19 Jan 18 8.98 10.00 BUY 5 8.67 6: 22 Jan 18 9.00 10.00 BUY 3 7: 31 Jan 18 9.05 10.00 BUY 2 8: 05 Feb 18 9.17 10.15 BUY 8.17 9: 22 Feb 18 8.76 10.05 BUY 1 11 15 10: 28 Mar 18 8.85 10.05 BUY 11: 30 May 18 8.30 10.30 BUY 7.67 12: 10 Aug 18 9.86 10.30 BUY Oct-17 Dec-17 Feb-18 Apr-18 Jun-18 Aug-18 Oct-18 13: 13 Aug 18 9.33 10.30 BUY 14: 29 Aug 18 9.33 10.30 BUY Note : Share price and Target price are adjusted for corporate actions. 15: 24 Oct 18 8.29 10.30 BUY Source: AllianceDBS Analyst: Marvin KHOR Page 6968 Company Guide Malaysia Airports AllianceDBS recommendations are based an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame) BUY (>15% total return over the next 12 months for small caps, >10% for large caps) HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps) FULLY VALUED (negative total return i.e. > -10% over the next 12 months) SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame) Share price appreciation + dividends Completed Date: 26 Oct 2018 16:41:43 (MYT) Dissemination Date: 26 Oct 2018 16:42:44 (MYT) Sources for all charts and tables are AllianceDBS unless otherwise specified. 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This term does not include commercial lending conducted at arm's length, or investments in any collective investment scheme other than an issuer or new listing applicant notwithstanding the fact that the scheme has investments in securities in respect of an issuer or a new listing applicant. Page 7170 Thailand Company Guide Samui Airport Property Fund Version 8 | Bloomberg: SPF TB | Reuters: SPFu.BK Refer to important disclosures at the end of this report DBS Group Research . Equity 27 Feb 2018 HOLD Offering decent yields Last Traded Price ( 26 Feb 2018): Bt23.10 (SET : 1,834.18) Price Target 12-mth: Bt24.00 (4% upside) Maintain HOLD with DCF-based TP of Bt24.00. With the mourning period of the late King ending late last year, traffic Analyst volume growth should come back this year after slowing down Chanpen SIRITHANARATTANAKUL +662 857 7824 [email protected] last year. Note that passenger volume slowed to 2.9% last year, after surging 14.8% in 2016. We conservatively expect passenger volume to grow 5% p.a. until 2036. Note that What’s New despite the political uncertainty, SPF’s passenger numbers had • In-line 4Q17 performance; net investment income grew expanded by 5.9% CAGR during the past decade. The fund 4% y-o-y offers a decent dividend yield of 7.0% for 2018 (payable quarterly), representing a 4.4% premium over the Thai 10-year • Traffic volume growth should come back to normal this government bond yield of 2.55%. It also offers a decent IRR of year, following the end of mourning period 7.5%. • Samui airport renovation postponed • Offering decent 2018 dividend yield of 7.0% Where we differ: The stock is not well covered by the investment community. We are the only broker covering the stock at the moment. Price Relative Potential catalyst: Stronger-than-expected passenger and flight volume. SPF derived revenue from two mainly sources e.g. passenger and flight volume. We have assumed passenger volume will grow 5% p.a. from 2018 until 2036, which is the end of the leasehold period. Stronger-than-expected passenger volume could be upside to our forecast, and vice versa. Valuation: Forecasts and Valuation We value SPF at Bt24.00, based on the DCF model. FY Dec (Btm) 2016A 2017A 2018F 2019F Gross Revenue 1,438 1,499 1,567 1,644 Net Property Inc 1,438 1,499 1,567 1,644 Key Risks to Our View: Total Return 1,558 2,796 1,525 1,602 The key risk is a sharp drop in tourists to Samui. Nonetheless, Distribution Inc 1,402 1,459 1,525 1,602 the downside is protected by annual revenue guarantee of EPU (Bt) 1.64 2.94 1.61 1.69 EPU Gth (%) 41 79 (45) 5 Bt570m (Bt0.6 per share) from Bangkok Airways, the property DPU (Bt) 1.47 1.50 1.61 1.69 manager, which implies a dividend yield of 2.4% at the current DPU Gth (%) 14 2 7 5 price. NAV per shr (Bt) 11.1 12.6 12.6 12.6 PE (X) 14.1 7.8 14.4 13.7 At A Glance Distribution Yield (%) 6.4 6.5 7.0 7.3 Issued Capital (m shrs) 950 P/NAV (x) 2.1 1.8 1.8 1.8 Aggregate Leverage (%) 0.0 0.0 0.0 0.0 Mkt. Cap (Btm/US$m) 21,945 / 701 ROAE (%) 14.9 24.9 12.8 13.3 Major Shareholders (%) Bangkok Airways 33.0 Kiatnakin Bank Plc. 8.1 Distn. Inc Chng (%): 0 0 0 Ayudhya Allianz C.P. 7.1 Consensus DPU (Bt): 1.51 1.61 1.60 Free Float (%) 46.9 Other Broker Recs: B: 0 S: 0 H: 2 3m Avg. Daily Val (US$m) 0.25 Source of all data on this page: Company, DBSVTH, Bloomberg Finance ICB Industry : Financials / Real Estate Investment Trust L.P Page 7271 ed: CK / sa:TP, PY, CS Company Guide Samui Airport Property Fund WHAT’S NEW In-line 4Q17 results 4Q17 net investment income grew 5% y-o-y but slid 14% q-o- specific business tax it is subject to pay will be about Bt41m per q. SPF’s net investment income increased 5% y-o-y to Bt337m. annum. That represents about 2.7% of distributable income This was on the back of the 9% growth in passenger revenue each year. and 4% growth in flight revenue. On a q-o-q basis, net investment income should drop 14% due to seasonality. Note OUTLOOK that Samui’s high seasons are in 1Q and 3Q of every year. Traffic volume should improve this year. Total passenger volume grew only 2.9% last year, due partly to the mourning An unrealised revaluation loss of Bt250m in 4Q17. This is a period of the late King. Now that the mourning period has non-cash item, therefore it did not affect dividend payment. ended since late last year, traffic volume should come back this year. Announced an interim DPU of Bt0.3450 for its 4Q17 performance. This represents 97% dividend payout ratio. The Our assumptions. We currently estimate that passenger volume stock went ex-dividends on 16 Feb and payment will be made should grow 5% p.a. throughout our forecast period (until on 6 Mar 2018. Combined with the 9M17 DPU already paid, 2036). Flight volume should increase albeit at a softer rate, as the total DPU for the year stands at Bt1.50. we assume increased proportion of larger aircrafts in our forecasts. We have raised the dividend payout assumption from 2017F net investment amounted to Bt1,458m, up 4% y-o-y. 98% in 2017 to 100% from 2018 onwards, assuming that the This was on the back of the 3% growth in passenger revenue tax will be settled by end 1Q18. Based on these assumptions, and 5% growth in flight revenue. SPF recorded an unrealised SPF’s DPU should increase from Bt1.50 in 2017 to Bt1.61 this revaluation gain of Bt1,337m in 2017. The amount is a non- year and Bt1.69 in 2019. cash item, and therefore did not affect dividend payment. Applying for increase in maximum daily flights. Bangkok Still awaiting ruling from the Revenue Department. Note that Airways (BA), the property manager, had received approval from property funds are required to pay VAT, stamp duty and specific the Department of Civil Aviation to increase the maximum business taxes from 24 May 2017. It is still unclear if SPF is number of flights per day to Samui Airport from 36 to 50 subject to VAT or specific business tax. The fund and Bangkok effective November 2014. In 2017, the average number of Airways (BA) have jointly consulted with the Revenue flights to Samui Airport was 41 flights per day, still far below the Department in order to clarify the tax obligation. The parties are maximum level allowed. Nonetheless, BA has asked for now awaiting a ruling and guidance from the Revenue approval to increase the maximum number of flights to over 70 Department, which is expected to come out by end-1Q18. flights+ per day two years ago. This is in preparation for the growth in flight volume which may exceed the current 50 flights If SPF is subject to VAT, BA is to be responsible for the tax. Note per day limit in the next few years. that the VAT is normally charged at 7% based on the service revenue. We estimate that the 7% VAT on service income Recommendation (80% of total revenue) is about Bt88m p.a. If the Revenue Department rules that such sub-lease agreements are subject to Maintain HOLD with DCF-based TP of Bt24. SPF now offers a VAT, then we believe there should be no impact to SPF as BA is decent 2018F dividend yield of 7.0% and an IRR of 7.5% at its likely to be responsible for the tax. current price. But SPF is subject to specific business tax, the fund is likely to be responsible for the tax. Note that the specific business tax is normally charged at 3.3% based on the interest income. Assuming that the principal fund size of Bt9.5bn (the original amount BA got from setting up the fund) is amortised on a straight-line basis over the 30-year leasehold rights, then the repayment of principal each year is about Bt317m. Based on our 2018 revenue estimate at Bt1.6bn, subtracting the principal repayment of Bt317m, the interest portion should be Bt1.2bn. If SPF pays 3.3% on this Bt1.25bn interest portion, then the Page 7372 Company Guide Samui Airport Property Fund Quarterly / Interim Income Statement (Btm) FY Dec 4Q2016 3Q2017 4Q2017 % chg yoy % chg qoq Gross revenue 331 403 348 5.1 (13.7) Property expenses 0.0 0.0 0.0 N/A N/A Net Property Income 331 403 348 5.1 (13.7) Other Operating expenses (10.0) (11.7) (11.5) 15.1 (1.3) Other Non Opg (Exp)/Inc 0.0 0.0 0.0 N/A N/A Net Interest (Exp)/Inc 1.45 1.30 1.21 (16.7) (6.8) Net Investment Income 322 393 337 4.7 (14.1) Asset revaluation loss (36.0) (44.0) (250) N/A N/A Increase in net assets 286 349 87.5 (69.4) (74.9) DPU (Bt) 0.3400 0.4000 0.3450 Dividend payout 100.2% 96.8% 97.1% Ratio (%) Net Prop Inc Margin 100.0 100.0 100.0 Dist. Payout Ratio N/A N/A N/A Source of all data: Company, DBSVTH Page 7473 Company Guide Samui Airport Property Fund Revenue is on the rise CRITICAL DATA POINTS TO WATCH Btm 1,800 Critical Factors Passenger revenue Increasing passenger and flight volume. Unlike many other 1,600 Flight revenue PFPOs and REITs which are now running at nearly full capacity, 1,400 SPF is operating below its full capacity. The fund has ample 1,200 room to grow – current traffic is only 1.3m passengers per year 1,000 compared to its maximum capacity of over 2m passengers at 800 Samui Airport. In terms of flights, current number of flights 600 averaged 41 flights per day in 2017, still below its maximum 50 400 200 flights per day. In addition, Bangkok Airways (BA), the property 0 manager, had submitted EIA to the relevant authorities to ask for approval to increase the maximum number of flights to 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Samui Airport from 50 to 70+. This is in preparation for future 2018F 2019F growth at the airport. Passenger volume and growth 1,600,000 20% Recovering tourism industry. SPF’s passenger and flight volumes 1,400,000 15% have improved substantially since 2Q15, following the lifting of 1,200,000 martial law in April 2015. Passenger volume dropped 1.6% in 1,000,000 10% 2014, before rebounding 5.4% in 2015, 14.8% in 2016. 800,000 Passenger volume growth slowed to 2.9% in 2017 due partly to 600,000 5% the mourning period of the late King. We conservatively expect 400,000 passenger volume to grow 5% p.a. from 2018 until 2036. Note 0% that despite the political uncertainty, SPF’s passenger numbers 200,000 had expanded by 5.9% CAGR in the last decade. 0 -5% 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Increasing international passenger service charge. BA, the 2018F 2019F property manager, has secured approval from the Department Domestic passengers International passengers Growth RHS) of Civil Aviation (DCA) to raise the passenger service charge Flight volume and growth (PSC) for international passengers at Samui Airport from Bt600 18,000 25% to Bt700, effective June 2015. Under the agreement with BA, 16,000 SPF will get 20% of the increase and the rest will go to BA. 20% 14,000 SPF’s share of PSC is now Bt340 per passenger on international 15% 12,000 10% flights (from Bt320 earlier). The full-year impact from the hike 10,000 5% was seen in 2016. Our forecast assumes the PSC stays flat 8,000 0% throughout our forecast period. Successful increase in 6,000 international PSC in the future will mean upside to our forecast. 4,000 -5% 2,000 -10% More new services by BA from and to Samui Airport. Note that 0 -15% BA accounts for a large portion (c 90%) of flight volume at 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Samui Airport. Other airlines include Thai Airways, Silk Air, and 2018F 2019F Firefly. BA currently flies directly to six international destinations, Airbus ATR Growth (y-o-y) including Hong Kong, Singapore, Kuala Lumpur, Chengdu, Net investment income Btm Guangzhou and Chongqing. The Samui-Chengdu has been 1,800 added in July 2016, while Samui-Guangzhou and Samui 1,600 Chongqing flights were added in Jan 2017 and July 2017, 1,400 respectively. Any future additional flights and services should 1,200 help to support growth at Samui Airport in the future. 1,000 800 600 400 200 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018F 2019F Source: Company, DBSVTH Page 7574 Company Guide Samui Airport Property Fund Appendix 1: SPF’s price correlation with critical factors SPF: Historical price vs Thai 10-year treasury yield Remarks % SPF’s share price has negative correlation with the 10-year Bt government bond yield. As bond yields drop, SPF’s share 30 SPF 7.0 price normally rises. This is mainly because SPF’s yield is 10-Year Govt Bond Yield 6.0 25 considered more attractive than government bond yields. 5.0 20 On the other hand, if bond yield rises sharply, SPF’s share 4.0 15 price could fall, as it becomes less attractive for investors. 3.0 10 2.0 5 1.0 0 0.0 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Source: Company, Bloomberg Finance L.P., DBSVTH SPF: Historical yield vs Thai 10-year treasury yield Remarks This chart shows historical SPF’s yield spread vs the Thai % 10-year government bond yield. The historical 10-year 20 SPF's Yield average spread over the Thai 10-year government bond 18 16 10-Year Govt Bond Yield yield is 527bps. The fund now offers a distribution yield 14 of 7.0% or 440bps over the Thai 10-year government 12 bond yield at 2.55%. This suggests the current spread is 10 below the historical average. 8 6 4 2 0 2007 200 200 2010 2011 2012 2013 2014 2015 2016 2017 201 Source: Company, Bloomberg Finance L.P., DBSVTH Page 7675 Company Guide Samui Airport Property Fund DPU and capital reduction Balance Sheet: Its balance sheet is strong with a net cash position and virtually no debt. SPF has no operating expenses or capex, as these are borne by Bangkok Airways, the property manager. The fund incurs only annual fund expenses of about Bt46m. Hence, any increases in revenue would flow directly to the bottom line. The fund normally pays out 100% of cash profits every quarter. Distributions have risen steadily since its inception, in line with rising passenger and flight numbers. Even with the political unrest in 2014 which led to a military coup in May 2014, SPF managed to pay stable dividends compared to 2013. Share Price Drivers: Recovering tourism industry. Since the fund’s revenues and ROE (%) profits are tied directly to Samui’s tourism, the strong tourist recovery will be a key driver for both earnings and share price. Key Risks: Political unrest. Political unrest, like what happened in 2014 which led to the implementation of martial law, will affect tourist arrivals to Thailand including Samui Airport, and hence, revenues of the fund. Reliance on a single asset. SPF relies on a single asset to generate its revenues, which is Samui Airport. Distribution Yield (%) Company Background SPF is one of Thailand's leading property funds. The fund has invested in leasehold rights to operate Samui Airport for 30 years (2006-2036). Bangkok Airways, the sponsor, has voluntarily agreed to retain a stake of at least 25% in the fund for 20 years. Bangkok Airways has been steadily raising its stake in SPF from 25% since 2015 to 33.0% currently. Bangkok Airways had planned to renovate Samui Airport. Nonetheless, such renovation plan of the Samui Airport has been delayed as obtaining the approval to increase the allowed PB Band (x) daily flight count (to 70, from 50 currently) are prioritised. The process is expected to take more than a year. Based on our forecasts, the number of flights will not exceed its maximum limit of 50 flights per day until 2022. Source: Company, DBSVTH Page 7776 Company Guide Samui Airport Property Fund Key Assumptions FY Dec 2015A 2016A 2017A 2018F 2019F No. of passengers (m) 1.1 1.3 1.3 1.4 1.5 Growth 5.4% 14.8% 2.9% 5.0% 5.0% Sharing (Bt/pax) Domestic passengers 300.0 300.0 300.0 300.0 300.0 International passengers 330.0 340.0 340.0 340.0 340.0 Mourning period Passenger rev (Btm) 349.5 403.8 416.6 437.8 459.7 Cabin factor 79% 81% 80% 80% 80% Operating hours/day 16.0 16.0 16.0 16.0 16.0 No. of flights p.a.: ATR 4,831 4,767 4,276 4,258 4,240 Boeing/Airbus 8,632 9,933 10,841 11,452 12,154 Sharing: ATR (Bt/flight) 50,000 50,000 50,000 50,000 50,000 Boeing (Bt/flight) 80,000 80,000 80,000 80,000 80,000 Div. Payout 98% 100% 98% 100% 100% Segmental Breakdown FY Dec 2015A 2016A 2017A 2018F 2019F Revenues (Btm) Passenger revenue 349 404 417 438 460 Flight revenue ATR 242 238 214 213 212 Boeing 691 795 867 916 972 Total flight revenue 932 1,033 1,081 1,129 1,184 Total revenue 1,282 1,437 1,498 1,567 1,644 Revenue breakdown Passenger revenue 27% 28% 28% 28% 28% Flight revenue ATR 19% 17% 14% 14% 13% Boeing 54% 55% 58% 58% 59% Total flight revenue 73% 72% 72% 72% 72% Total revenue 100% 100% 100% 100% 100% Income Statement (Btm) FY Dec 2015A 2016A 2017A 2018F 2019F Gross revenue 1,283 1,438 1,499 1,567 1,644 Property expenses 0.0 0.0 0.0 0.0 0.0 Net Property Income 1,283 1,438 1,499 1,567 1,644 Other Operating expenses (40.1) (40.9) (45.6) (46.6) (48.0) Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Net Interest (Exp)/Inc 5.30 5.25 5.28 5.10 5.63 Net Investment Income 1,248 1,402 1,459 1,525 1,602 Asset revaluation gain (147) 156 1,337 0 0 Increase in net assets 1,101 1,558 2,796 1,525 1,602 Dividend payout 98.2 99.6 97.7 100.0 100.0 DPU (Bt) 1.29 1.47 1.50 1.61 1.69 Growth & Ratio Revenue Gth (%) 5.5 12.0 4.3 4.5 4.9 N Property Inc Gth (%) 5.5 12.0 4.3 4.5 4.9 Net Inc Gth (%) (6.5) 41.5 79.4 (45.4) 5.0 Dist. Payout Ratio (%) 98.2 99.6 97.7 100.0 100.0 Net Prop Inc Margins (%) 96.9 97.2 97.0 97.0 97.1 Net Income Margins (%) 85.8 108.4 186.5 97.4 97.4 Dist to revenue (%) 97.3 97.5 97.3 97.4 97.4 Managers & Trustee’s fees 3.1 2.8 3.0 3.0 2.9 ROto salesAE (%) %) 10.6 14.9 24.9 12.8 13.3 ROA (%) 10.5 14.8 24.7 12.7 13.3 ROCE (%) 11.9 13.3 12.8 12.6 13.2 Int. Cover (x) NM NM NM NM NM Source: Company, DBSVTH Page 7877 Company Guide Samui Airport Property Fund Quarterly / Interim Income Statement (Btm) FY Dec 4Q2016 1Q2017 2Q2017 3Q2017 4Q2017 Gross revenue 331 400 348 403 348 Property expenses 0.0 0.0 0.0 0.0 0.0 Net Property Income 331 400 348 403 348 Other Operating expenses (10.0) (10.8) (11.8) (11.7) (11.5) Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Net Interest (Exp)/Inc 1.45 1.33 1.45 1.30 1.21 Net Investment Income 322 391 338 393 337 Exceptional Gain/(Loss) (36.0) 1,672 (41.0) (44.0) (250) Increase in net assets 286 2,063 297 349 87 Div. payout (%) 100.2 99.7 97.1 96.8 97.1 DPU (Bt) 0.3400 0.4100 0.3450 0.4000 0.3450 Growth & Ratio Revenue Gth (%) (14) 21 (13) 16 (14) High seasons are in 1Q and N Property Inc Gth (%) (14) 21 (13) 16 (14) 3Q of every year Net Inc Gth (%) (16) 621 (86) 18 (75) Net Prop Inc Margin (%) 100.0 100.0 100.0 100.0 100.0 Balance Sheet (Btm) FY Dec 2015A 2016A 2017A 2018F 2019F Investment Properties 10,028 10,184 11,521 11,521 11,521 Other LT Assets 403 426 482 482 482 Cash & ST Invts 1.40 12.6 10.5 62.8 81.9 Inventory 0.0 0.0 0.0 0.0 0.0 Debtors 0.0 0.0 0.0 0.0 0.0 Other Current Assets 0.0 0.0 0.0 0.0 0.0 Total Assets 10,433 10,623 12,014 12,066 12,085 ST Debt 0.0 0.0 0.0 0.0 0.0 Creditor 0.0 0.0 0.0 0.0 0.0 Other Current Liab 0.0 0.0 0.0 0.0 0.0 LT Debt 0.0 0.0 0.0 0.0 0.0 Other LT Liabilities 61.7 62.1 77.1 77.1 77.1 Unit holders’ funds 10,371 10,561 11,936 11,989 12,009 Minority Interests 0.0 0.0 0.0 0.0 0.0 Total Funds & Liabilities 10,433 10,623 12,014 12,067 12,086 Non-Cash Wkg. Capital 0.0 0.0 0.0 0.0 0.0 Net Cash/(Debt) 1.40 12.6 10.5 62.8 81.9 Debt-free Ratio Current Ratio (x) N/A N/A N/A N/A N/A Quick Ratio (x) N/A N/A N/A N/A N/A Aggregate Leverage (%) 0.0 0.0 0.0 0.0 0.0 Z-Score (X) 273.5 0.0 NA NA NA Source: Company, DBSVTH Page 7978 Company Guide Samui Airport Property Fund Cash Flow Statement (Btm) FY Dec 2015A 2016A 2017A 2018F 2019F Pre-Tax Income 1,101 1,558 2,796 1,525 1,602 Dep. & Amort. 0.0 0.0 0.0 0.0 0.0 Tax Paid 0.0 0.0 0.0 0.0 0.0 Associates &JV Inc/(Loss) 0.0 0.0 0.0 0.0 0.0 Chg in Wkg.Cap. (14.4) (1.2) (49.0) 0.0 0.0 Other Operating CF 147 (156) (1,337) 0.0 0.0 Net Operating CF 1,234 1,401 1,410 1,525 1,602 Net Invt in Properties 0.0 0.0 0.0 0.0 0.0 Other Invts (net) (25.0) (22.5) 8.00 0.0 0.0 Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0 Div from Assoc. & JVs 0.0 0.0 0.0 0.0 0.0 Other Investing CF 0.0 0.0 0.0 0.0 0.0 Net Investing CF (25.0) (22.5) 8.00 0.0 0.0 Distribution Paid (1,211) (1,368) (1,420) (1,472) (1,583) Chg in Gross Debt 0.0 0.0 0.0 0.0 0.0 New units issued 0.0 0.0 0.0 0.0 0.0 Other Financing CF 0.0 0.0 0.0 0.0 0.0 Net Financing CF (1,211) (1,368) (1,420) (1,472) (1,583) Currency Adjustments 0.0 0.0 0.0 0.0 0.0 Chg in Cash (2.3) 10.9 (2.6) 53.6 19.1 Operating CFPS (Bt) 1.31 1.48 1.54 1.61 1.69 Free CFPS (Bt) 1.30 1.47 1.48 1.61 1.69 Source: Company, DBSVTH Target Price & Ratings History Source: DBSVTH Analyst: Chanpen SIRITHANARATTANAKUL THAI-CAC n/a Corporate Governance CG Rating (as of Oct 2017) n/a THAI-CAC is Companies participating in Thailand's Private Sector Score Description Collective Action Coalition Against Corruption programme (Thai Declared Companies that have declared their intention to join CAC CAC) under Thai Institute of Directors (as of Feb 2018) are Certified Companies certified by CAC. categorised into: Score Range Number of Logo Description Corporate Governance CG Rating is based on Thai Institute of 90-100 Excellent Directors (IOD)’s annual assessment of corporate governance practices of listed companies. The assessment covers 235 criteria 80-89 Very Good in five categories including board responsibilities (35% weighting), 70-79 Good disclosure and transparency (20%), role of stakeholders (20%), equitable treatment of shareholders (10%) and rights of 60-69 Satisfactory shareholders (15%). The IOD then assigns numbers of logos to 50-59 Pass each company based on their scoring as follows: <50 No logo given N/A Page 8079 Company Guide Samui Airport Property Fund DBSVTH recommendations are based an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame) BUY (>15% total return over the next 12 months for small caps, >10% for large caps) HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps) FULLY VALUED (negative total return i.e. > -10% over the next 12 months) SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame) Share price appreciation + dividends Completed Date: 27 Feb 2018 06:15:39 (THA) Dissemination Date: 27 Feb 2018 06:17:46 (THA) Sources for all charts and tables are DBSVTH unless otherwise specified. 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They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the commodity referred to in this report. Page 8180 Company Guide Samui Airport Property Fund DBSVUSA, a US-registered broker-dealer, does not have its own investment banking or research department, has not participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months and does not engage in market-making. ANALYST CERTIFICATION The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst(s) also certifies that no part of his/her compensation was, is, or will be, directly or indirectly, related to specific recommendations or views expressed in the report. 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DBSVUSA does not have its own investment banking or research department, nor has it participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively. Disclosure of previous investment recommendation produced: 4. DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates may have published other investment recommendations in respect of the same securities / instruments recommended in this research report during the preceding 12 months. Please contact the primary analyst listed in the first page of this report to view previous investment recommendations published by DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates in the preceding 12 months. 1 An associate is defined as (i) the spouse, or any minor child (natural or adopted) or minor step-child, of the analyst; (ii) the trustee of a trust of which the analyst, his spouse, minor child (natural or adopted) or minor step-child, is a beneficiary or discretionary object; or (iii) another person accustomed or obliged to act in accordance with the directions or instructions of the analyst. 2 Financial interest is defined as interests that are commonly known financial interest, such as investment in the securities in respect of an issuer or a new listing applicant, or financial accommodation arrangement between the issuer or the new listing applicant and the firm or analysis. This term does not include commercial lending conducted at arm's length, or investments in any collective investment scheme other than an issuer or new listing applicant notwithstanding the fact that the scheme has investments in securities in respect of an issuer or a new listing applicant. Page 8281 Industry Focus Think Big, Act Quick Appendix Busiest passenger airports in Asia based on 2017 passenger movements (Rank 1-40) Rank Airport City 2017 2016 Growth 1 Beijing Capital International Airport Beijing 95,786,296 91,661,527 4.5% 2 Dubai International Airport Dubai 88,242,099 83,641,800 5.5% 3 Tokyo Haneda Airport Tokyo 84,956,964 80,072,539 6.1% 4 Hong Kong International Airport Hong Kong 72,921,000 70,591,481 3.3% 5 Shanghai Pudong International Airport Shanghai 70,001,237 65,976,661 6.1% 6 Guangzhou Baiyun International Airport Guangzhou 65,806,977 59,715,950 10.2% 7 Indira Gandhi International Airport Delhi 63,451,503 55,610,432 14.1% 8 Soekarno–Hatta International Airport Jakarta 63,015,620 58,347,796 8.0% 9 Singapore Changi Airport Singapore 62,219,573 58,697,710 6.0% 10 Incheon International Airport Seoul/Incheon 62,082,032 57,750,727 7.5% 11 Suvarnabhumi Airport Bangkok 60,860,704 55,886,781 8.9% 12 Kuala Lumpur International Airport Kuala Lumpur 58,618,680 52,714,640 11.2% 13 Chengdu Shuangliu International Airport Chengdu 49,801,693 46,027,443 8.2% 14 Chhatrapati Shivaji International Airport Mumbai 47,204,259 44,701,003 5.6% 15 Shenzhen Bao'an International Airport Shenzhen 45,610,651 41,960,121 8.7% 16 Taiwan Taoyuan International Airport Taipei 44,878,703 42,298,495 6.1% 17 Kunming Changshui International Airport Kunming 44,727,691 41,997,832 6.5% 18 Ninoy Aquino International Airport Manila 42,000,000 39,585,297 6.1% 19 Shanghai Hongqiao International Airport Shanghai 41,884,059 40,467,690 3.5% 20 Xi'an Xianyang International Airport Xi'an 41,857,229 37,009,044 13.1% 21 Narita International Airport Tokyo 40,687,040 39,047,063 4.2% 22 Chongqing Jiangbei International Airport Chongqing 38,715,210 35,913,924 7.8% 23 Don Mueang International Airport Bangkok 38,299,757 35,201,983 8.8% 24 Tan Son Nhat International Airport Ho Chi Minh City 35,900,000 32,488,688 10.5% 25 Hamad International Airport Doha 35,867,252 35,867,252 0.0% 26 Hangzhou Xiaoshan International Airport Hangzhou 35,570,411 32,016,572 11.1% 27 King Abdulaziz International Airport Jeddah 33,917,282 31,404,891 8.0% 28 Sabiha Gökçen International Airport Istanbul 31,385,841 29,609,284 6.0% 29 Jeju International Airport Jeju 29,604,363 29,486,417 0.4% 30 Kansai International Airport Greater Osaka Area 27,983,093 25,485,513 9.8% 31 Antalya Airport Antalya 25,931,659 18,791,057 38.0% 32 Nanjing Lukou International Airport Nanjing 25,822,936 22,771,549 13.4% 33 Gimpo International Airport Seoul 25,101,147 24,901,932 0.8% 34 Kempegowda International Airport Bangalore 25,047,272 22,484,086 11.4% 35 King Khalid International Airport Riyadh 25,038,000 23,598,492 6.1% 36 Xiamen Gaoqi International Airport Xiamen 24,485,239 22,862,035 7.1% 37 Zhengzhou Xinzheng International Airport Zhengzhou 24,299,073 21,221,898 14.5% 38 Changsha Huanghua International Airport Changsha 23,764,820 21,545,621 10.3% 39 Abu Dhabi International Airport Abu Dhabi 23,760,561 23,760,561 0.0% 40 Fukuoka Airport Fukuoka 23,484,678 22,155,357 6.0% Source: Various new sources and Airport Authorities, DBS Bank estimates Page 40 Page 8382 Industry Focus Think Big, Act Quick Busiest passenger airports in asia based on 2017 passenger movements (Rank 41-50) Rank Airport City 2017 2016 Growth 41 Wuhan Tianhe International Airport Wuhan 23,129,400 21,007,629 10.1% 42 Qingdao Liuting International Airport Qingdao 23,210,530 21,005,005 10.5% 43 Noi Bai International Airport Hanoi 23,068,227 20,596,631 12.0% 44 New Chitose Airport Sapporo 22,916,914 21,619,730 6.0% 45 Ngurah Rai International Airport Denpasar 22,863,647 20,323,242 12.5% 46 Haikou Meilan International Airport Haikou 22,584,815 19,352,883 16.7% 47 Juanda International Airport Surabaya 21,882,335 19,731,592 10.9% 48 Ürümqi Diwopu International Airport Ürümqi 21,500,901 20,283,869 6.0% 49 Tianjin Binhai International Airport Tianjin 21,005,001 17,562,710 19.6% 50 Ben Gurion Airport Central District 20,781,226 18,840,640 10.3% Source: Various new sources and Airport Authorities, DBS Bank estimates New airports (proposed and under construction) in Asia with project value below U$2bn Investment Capacity Estimated City Airport (US$mn) (m) Completion Chenzhou Chenzhou Beihu Airport 295 0.6 2019 Heze Heze Airport 260 1.0 2019 Yutian Yutian Airport 104 0.2 2020 Yibin Yibin Wuliangye Airport 160 0.8 2018 Jishou Jishou Xiangxi Airport 260 0.3 2020 Kerala Kannur International Airport 279 5.0 2018 Goa Goa Mopa Airport 552 4.4 2020 Sikkim Pakyong Airport 68 0.04 2018 Nellore Dagadarthi Airport 54 2.0 2020 Sindhudurg Sindhudurg Airport 78 1.2 2018 Bhogapuram Sindhudurg Airport 406 6.3 2020 Bago Hanthawaddy International Airport 1,500 12.0 2022 West Java Kertajati International Airport 800 60.0 2018 Nagoya Nagoya LCCT 165 5.0 2018 Phuket Phang Nga Airport 1,800 10.0 2025 Chiang Mai Chiang Mai International Airport 2 1,800 10.0 2025 Panglao New Bohol International Airport 88 3.0 2018 Legazpi Bicol International Airport 96 2.1 2020 Pokhara Pokhara International Airport 305 1.0 2021 Bhairawa Gautam Buddha Airport 323 0.8 2019 Nijgadh Nijgadh International Airport 1,200 15.0 2025 Source: Various new sources and Airport Authorities, DBS Bank estimates Page 41 Page 8483 Industry Focus Think Big, Act Quick DBS Bank, DBS HK, AllianceDBS Research, DBSVTH recommendations are based an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame) BUY (>15% total return over the next 12 months for small caps, >10% for large caps) HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps) FULLY VALUED (negative total return i.e. > -10% over the next 12 months) SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame) Share price appreciation + dividends Completed Date: 26 Oct 2018 17:15:04 (SGT) Dissemination Date: 26 Oct 2018 17:20:28 (SGT) Sources for all charts and tables are DBS Bank, DBS HK, AllianceDBS Research, DBSVTH unless otherwise specified. GENERAL DISCLOSURE/DISCLAIMER This report is prepared by DBS Bank, DBS HK, AllianceDBS Research, DBS Vickers Securities (Thailand) Co Ltd (''DBSVTH''). This report is solely intended for the clients of DBS Bank Ltd, its respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBS Bank Ltd, DBS HK, AllianceDBS Research, DBS Vickers Securities (Thailand) Co Ltd (''DBSVTH''). 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They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the commodity referred to in this report. DBSVUSA, a US-registered broker-dealer, does not have its own investment banking or research department, has not participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months and does not engage in market-making. ANALYST CERTIFICATION The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst(s) also certifies that no part of his/her compensation was, is, or will be, directly or indirectly, related to specific recommendations or views expressed in the report. 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The research analyst(s) responsible for this report operates as part of a separate and independent team to the investment banking function of the DBS Group and procedures are in place to ensure that confidential information held by either the research or investment banking function is handled appropriately. There is no direct link of DBS Group's compensation to any specific investment banking function of the DBS Group. COMPANY-SPECIFIC / REGULATORY DISCLOSURES 1. DBS Bank Ltd, DBS HK, DBS Vickers Securities (Singapore) Pte Ltd (“DBSVS”) or their subsidiaries and/or other affiliates have proprietary positions in Airports of Thailand, Beijing Capital Intl Airport, recommended in this report as of 30 Sep 2018 2. Neither DBS Bank Ltd nor DBS HK market makes in equity securities of the issuer(s) or company(ies) mentioned in this Research Report. Compensation for investment banking services: 3. DBSVUSA does not have its own investment banking or research department, nor has it participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively. Disclosure of previous investment recommendation produced: 4. DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates may have published other investment recommendations in respect of the same securities / instruments recommended in this research report during the preceding 12 months. Please contact the primary analyst listed in the first page of this report to view previous investment recommendations published by DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates in the preceding 12 months. 1 An associate is defined as (i) the spouse, or any minor child (natural or adopted) or minor step-child, of the analyst; (ii) the trustee of a trust of which the analyst, his spouse, minor child (natural or adopted) or minor step-child, is a beneficiary or discretionary object; or (iii) another person accustomed or obliged to act in accordance with the directions or instructions of the analyst. 2 Financial interest is defined as interests that are commonly known financial interest, such as investment in the securities in respect of an issuer or a new listing applicant, or financial accommodation arrangement between the issuer or the new listing applicant and the firm or analysis. This term does not include commercial lending conducted at arm's length, or investments in any collective investment scheme other than an issuer or new listing applicant notwithstanding the fact that the scheme has investments in securities in respect of an issuer or a new listing applicant. Page 44 Page 848685 Industry Focus Think Big, Act Quick RESTRICTIONS ON DISTRIBUTION General This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation. Australia This report is being distributed in Australia by DBS Bank Ltd, DBSVS or DBSV HK. DBS Bank Ltd holds Australian Financial Services Licence no. 475946. 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Page 46 Page 868887 Industry Focus Think Big, Act Quick DBS Regional Research Offices HONG KONG MALAYSIA SINGAPORE DBS Bank (Hong Kong) Ltd AllianceDBS Research Sdn Bhd DBS Bank Ltd Contact: Carol Wu Contact: Wong Ming Tek (128540 U) Contact: Janice Chua 18th Floor Man Yee Building 19th Floor, Menara Multi-Purpose, 12 Marina Boulevard, 68 Des Voeux Road Central Capital Square, Marina Bay Financial Centre Tower 3 Central, Hong Kong 8 Jalan Munshi Abdullah 50100 Singapore 018982 Tel: 65 6878 8888 Kuala Lumpur, Malaysia. Tel: 65 6878 8888 Fax: 65 65353 418 Tel.: 603 2604 3333 Fax: 65 65353 418 e-mail: [email protected] Fax: 603 2604 3921 e-mail: [email protected] Participant of the Stock Exchange of Hong Kong e-mail: [email protected] Company Regn. No. 196800306E INDONESIA THAILAND PT DBS Vickers Sekuritas (Indonesia) DBS Vickers Securities (Thailand) Co Ltd Contact: Maynard Priajaya Arif Contact: Chanpen Sirithanarattanakul DBS Bank Tower 989 Siam Piwat Tower Building, Ciputra World 1, 32/F 9th, 14th-15th Floor Jl. Prof. Dr. Satrio Kav. 3-5 Rama 1 Road, Pathumwan, Jakarta 12940, Indonesia Bangkok Thailand 10330 Tel: 62 21 3003 4900 Tel. 66 2 857 7831 Fax: 6221 3003 4943 Fax: 66 2 658 1269 e-mail: [email protected] e-mail: [email protected] Company Regn. No 0105539127012 Securities and Exchange Commission, Thailand Page 47 Page 878988