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 Page 2 Page 2 Industry Focus Think Big, Act Quick 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).