Sats (Sats Sp) Sat S

Singapore Industrials 27 June 2016

SATS (SATS SP) SAT S

Target price: SGD4.660 Share price (24 Jun): SGD4.080 | Up/downside: +14.2%

Multi-pronged growth catalysts

 Leveraging on the planned expansion of Changi Airport Royston Tan (65) 6321 3086  Major share-price catalyst: margin improvement through automation [email protected]  Initiating with Outperform (2) rating and target price of SGD4.66

Investment case: We initiate coverage of SATS, the main ground-handling Share price performance and inflight-catering services provider at Singapore’s Changi Airport (Changi), (SGD) (%) with an Outperform (2) rating. SATS currently controls about 80% of Changi’s 4.5 155 ground-handling and catering business. In our view, the company’s dominant 4.2 139 market share puts it in first place to benefit from Changi’s infrastructure 3.9 123 3.7 106 upgrades (terminal capacity set to double by 2030E). 3.4 90 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16

Singapore is seeing a rise in air travel, supported by a boom in regional SATS (LHS) Relative to FSSTI (RHS) tourism, led by middle-class Chinese millennials (Mainland tourist arrivals to Singapore rose by 47% YoY for January-March 2016). The ASEAN Open 12-month range 3.470-4.450 Skies Agreement, effective April 2016, should also enhance connectivity Market cap (USDbn) 3.35 among the economies of ASEAN, boosting the regional aviation sector in 3m avg daily turnover (USDm) 6.38 terms of more passengers and higher cargo loads. Shares outstanding (m) 1,109 Major shareholder Temasek Holdings (43.2%)

Meanwhile, SATS’s low-capex business model has allowed it to recycle its free Financial summary (SGD) cash into overseas partnerships and ventures. While the earnings contribution Year to 31 Mar 17E 18E 19E from associates/JVs was stagnant over FY14-16 due to a lack of earnings- Revenue (m) 1,806 1,906 1,993 accretive acquisitions, this could change if management’s aggressive overseas Operating profit (m) 241 255 276 acquisitions in FY16 and 17 YTD are anything to go by – overseas earnings Net profit (m) 244 260 282 Core EPS (fully-diluted) 0.217 0.231 0.251 contribution should grow by 9-12% pa for FY17-19E. EPS change (%) 10.5 6.6 8.7 Daiwa vs Cons. EPS (%) 0.4 3.6 1.3 We estimate SATS’s push for automation and digitalisation will result in a PER (x) 18.8 17.7 16.2 further 0.7pp rise in its operating margin for FY17, translating into 11% YoY Dividend yield (%) 3.9 4.2 4.4 DPS 0.160 0.170 0.180 bottom-line growth. But margin improvement is likely to take centre stage, PBR (x) 2.9 2.8 2.6 with SATS focusing on such automation and digitalisation to reduce cost EV/EBITDA (x) 11.4 10.7 9.7 pressures derived from its current manpower shortage. ROE (%) 16.0 16.2 16.8 Source: FactSet, Daiwa forecasts Catalysts: More data points showing strong tourism figures (January-April YoY recorded an increase of 14%) and new airline contracts in 2H16 are likely to be the main positive share-price catalysts. Meanwhile, signs of the company’s successful transition to a more automated work system (in the form of sustainable margin improvement) would likely boost the shares.

Valuation: We initiate coverage with an Outperform (2) rating and DCF- based target price of SGD4.66, which translates into a 1-year forward PER of 21x, a 19% discount to the average of airport-linked counters around the region (consensus forecasts). While our target PER seems rich (2SD above its past-5-year average PER), we believe it is justified by our forecast EPS CAGR of 8.6% for FY16-19E vs. 2.3% for FY11-15. In addition, we find the company’s strong net cash position and FY17E yield of 3.9% appealing, especially given the low interest-rate environment.

Risks: The main risk: a lower-than-expected earnings contribution from associates/JVs, for which we forecast growth of 9-12% over FY17-19E.

See important disclosures, including any required research certifications, beginning on page 51

SATS (SATS SP): 27 June 2016

Table of contents

Multi-pronged growth catalysts ...... 6 Leveraging on Changi’s capacity expansion plans ...... 6 Asset-light expansion through M&A and partnerships ...... 15 Non-aviation tie-ups to reduce cyclicality impact ...... 24 Financial analysis ...... 27 Primed for steady growth ...... 27 Valuations ...... 30 Risks to our thesis ...... 33 Risk of an epidemic ...... 33 Risk of terrorist attacks ...... 33 Risk of increasing competition from regional air hubs ...... 33 Risk of slower-than-expected adoption in automation ...... 33 Appendix 1: Changi’s expansion plans ...... 34 SATS stands to benefit from the expansion of Changi ...... 34 Appendix 2: tourism boost to global air travel ...... 38 Acceleration in global air travel ...... 38 Appendix 3: cruise business a high-growth industry ...... 47 Resilient over the long term ...... 47

SATS (SATS SP): 27 June 2016

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

Growth outlook SATS: earnings growth (SGDm) Riding on the back of airport operator Changi Airport 350 287.2 Group’s (CAG) plans to increase terminal capacity at 300 264.5 Changi in anticipation of higher passenger numbers (rising 243.7 to 85m by 2018E and 135m by 2030E, from 65m 250 220.6 201.6 195.7 currently), we believe SATS’s long-term earnings growth 200 179.4 181.0 180.4 visibility is clear. We think short-term growth catalysts such 150 as Singapore’s booming tourism industry led by Chinese millennial tourists, the conclusion of the ASEAN Open 100

Skies Agreement in April 2016, SATS investment in 50 overseas partners and its rapid transition to automation and digitalisation could signal an increase in both its top- 0 2011 2012 2013 2014 2015 2016 2017E 2018E 2019E line and profit margins over FY17-19, ultimately translating Source: Company, Daiwa forecasts into an earnings CAGR of 9% for this period.

Valuation SATS: 5-year trailing PER (x) We initiate coverage with a 12-month DCF-derived TP that 24 translates into 1-year forward PER and PBR of 21x and 3x, 22 respectively, 2SD above the company’s past-5-year 20 averages. 18 16 While these valuations do not look cheap using 1-year 14 forward earnings-based methodology, we believe they are 12 justified by our EPS CAGR of 8.6% for FY16-19E vs. 2.3%

for FY11-15E. Compared with the other airport-related

5/27/2012 8/27/2012 5/27/2015 5/27/2011 8/27/2011 2/27/2012 2/27/2013 5/27/2013 8/27/2013 2/27/2014 5/27/2014 8/27/2014 2/27/2015 8/27/2015 2/27/2016 5/27/2016

11/27/2012 11/27/2013 11/27/2014 11/27/2015 players, our implied target PER of 21x is still a 19% 11/27/2011 PER +1 SD +2 SD discount to its regional peers, on average. Also, we think -1 SD -2 SD 5-year Average SATS’s net cash position and FY17E yield are appealing Source: Bloomberg given the current low interest-rate environment.

SATS: Bloomberg-consensus revisions to 2017E earnings vs. Earnings revisions share-price performance SATS’ earnings have surprised the Bloomberg consensus SGD SGD on the upside over the past 2 years, with its FY15-16 EPS 4.6 0.23 4.4 forecasts being repeatedly revised up since FY15. The 4.2 0.22 4.0 0.21 Bloomberg-consensus FY17E EPS forecast is now 4% 3.8 higher than it was 6 months ago, likely due to optimism 3.6 0.2 3.4 about the improved operating performance of both 3.2 0.19 Changi’s operations and the earnings contribution of its 3.0 0.18 2.8 overseas associates. 2.6 0.17

5/22/2014 7/22/2014 9/22/2014 1/22/2015 3/22/2015 5/22/2015 7/22/2015 9/22/2015 1/22/2016 3/22/2016 5/22/2016

11/22/2014 11/22/2015 Price 2017E EPS

Source: Bloomberg

SATS (SATS SP): 27 June 2016

Financial summary Key assumptions Year to 31 Mar 2012 2013 2014 2015 2016 2017E 2018E 2019E Gross meals produced (m) 27 28 26 26 28 29 31 32 Cargo/mail processed (m tonnes) 2 1 2 2 2 2 2 2 Passengers handled (m) 38 41 43 42 45 48 52 55

Profit and loss (SGDm) Year to 31 Mar 2012 2013 2014 2015 2016 2017E 2018E 2019E Food solutions 1,077 1,165 1,104 1,052 967 1,036 1,092 1,139 Gateway services 603 649 678 697 726 770 814 854 Other Revenue 6 6 5 5 5 0 0 0 Total Revenue 1,685 1,819 1,787 1,753 1,698 1,806 1,906 1,993 Other income 0 0 0 0 0 0 0 0 COGS (371) (393) (380) (349) (283) (321) (350) (364) SG&A (697) (766) (788) (801) (826) (842) (859) (876) Other op.expenses (449) (468) (448) (425) (375) (402) (443) (476) Operating profit 169 192 171 178 215 241 255 276 Net-interest inc./(exp.) (1) (2) (2) 0 2 0 0 0 Assoc/forex/extraord./others 54 51 46 46 48 54 60 65 Pre-tax profit 222 241 216 225 265 295 314 341 Tax (37) (40) (33) (34) (47) (47) (50) (55) Min. int./pref. div./others (4) 0 (2) 5 2 (4) (4) (4) Net profit (reported) 181 202 180 196 221 244 260 282 Net profit (adjusted) 171 185 180 196 221 244 260 282 EPS (reported)(SGD) 0.160 0.179 0.160 0.174 0.196 0.217 0.231 0.251 EPS (adjusted)(SGD) 0.151 0.164 0.160 0.174 0.196 0.217 0.231 0.251 EPS (adjusted fully-diluted)(SGD) 0.151 0.164 0.160 0.174 0.196 0.217 0.231 0.251 DPS (SGD) 0.260 0.150 0.130 0.140 0.150 0.160 0.170 0.180 EBIT 169 192 171 178 215 241 255 276 EBITDA 266 285 248 246 285 313 325 345

Cash flow (SGDm) Year to 31 Mar 2012 2013 2014 2015 2016 2017E 2018E 2019E Profit before tax 222 241 216 225 265 295 314 341 Depreciation and amortisation 109 93 77 68 70 72 70 69 Tax paid (40) (29) (39) (35) (36) (47) (50) (55) Change in working capital (68) (11) 35 21 17 21 13 1 Other operational CF items (54) (48) (42) (43) (43) (45) (50) (55) Cash flow from operations 168 246 247 236 273 296 297 302 Capex (64) (38) (57) (61) (51) (56) (61) (66) Net (acquisitions)/disposals 261 (5) (118) 28 (41) (70) (50) (20) Other investing CF items 28 26 29 92 35 32 36 39 Cash flow from investing 225 (17) (146) 58 (56) (94) (75) (47) Change in debt (12) (5) (5) (1) 0 0 0 0 Net share issues/(repurchases) 0 8 6 (49) (2) 0 0 0 Dividends paid (188) (289) (169) (147) (156) (178) (189) (201) Other financing CF items (16) 0 6 (4) 1 0 0 0 Cash flow from financing (216) (286) (163) (200) (157) (178) (189) (201) Forex effect/others (9) (3) (5) 1 0 0 0 0 Change in cash 168 (60) (66) 96 60 23 32 54 Free cash flow 104 208 190 175 222 240 236 236 Source: FactSet, Daiwa forecasts

SATS (SATS SP): 27 June 2016

Financial summary continued … Balance sheet (SGDm) As at 31 Mar 2012 2013 2014 2015 2016 2017E 2018E 2019E Cash & short-term investment 472 406 341 411 490 513 546 600 Inventory 44 53 46 19 22 25 26 27 Accounts receivable 294 301 288 283 277 297 313 328 Other current assets 22 21 50 81 40 35 30 30 Total current assets 831 780 725 793 830 870 916 986 Fixed assets 654 592 568 552 517 500 491 488 Goodwill & intangibles 213 193 185 166 164 164 164 164 Other non-current assets 426 438 542 510 596 687 761 807 Total assets 2,124 2,003 2,020 2,020 2,106 2,221 2,332 2,445 Short-term debt 27 23 18 16 110 110 110 110 Accounts payable 203 237 267 287 309 352 383 399 Other current liabilities 42 51 45 43 51 51 51 51 Total current liabilities 272 310 330 346 470 513 544 561 Long-term debt 131 109 97 90 1 0 0 0 Other non-current liabilities 106 84 79 67 70 69 69 74 Total liabilities 510 503 505 502 541 582 613 634 Share capital 326 338 368 368 368 368 368 368 Reserves/R.E./others 1,182 1,065 1,049 1,073 1,123 1,193 1,268 1,356 Shareholders' equity 1,508 1,403 1,417 1,441 1,491 1,561 1,636 1,723 Minority interests 106 97 98 77 74 78 82 87 Total equity & liabilities 2,124 2,003 2,020 2,020 2,106 2,221 2,332 2,445 EV 3,949 3,957 3,901 3,831 3,674 3,562 3,460 3,364 Net debt/(cash) (314) (274) (227) (306) (379) (403) (436) (490) BVPS (SGD) 1.347 1.253 1.265 1.291 1.344 1.407 1.475 1.554

Key ratios (%) Year to 31 Mar 2012 2013 2014 2015 2016 2017E 2018E 2019E Sales (YoY) 24.1 7.9 (1.8) (1.9) (3.1) 6.4 5.5 4.6 EBITDA (YoY) 8.2 7.1 (13.0) (0.8) 15.8 9.9 3.6 6.3 Operating profit (YoY) 0.0 13.8 (11.1) 4.1 20.6 12.3 5.7 8.5 Net profit (YoY) (10.7) 8.1 (2.4) 8.5 12.7 10.5 6.6 8.7 Core EPS (fully-diluted) (YoY) (10.7) 8.1 (2.4) 8.8 12.8 10.5 6.6 8.7 Gross-profit margin 78.0 78.4 78.8 80.1 83.4 82.2 81.7 81.7 EBITDA margin 15.8 15.7 13.9 14.0 16.8 17.3 17.0 17.3 Operating-profit margin 10.0 10.6 9.6 10.2 12.6 13.3 13.4 13.9 Net profit margin 10.1 10.2 10.1 11.2 13.0 13.5 13.6 14.2 ROAE 11.3 12.7 12.8 13.7 15.0 16.0 16.2 16.8 ROAA 7.7 9.0 9.0 9.7 10.7 11.3 11.4 11.8 ROCE 9.5 11.3 10.5 10.9 13.0 14.1 14.2 14.7 ROIC 10.1 12.7 11.5 12.1 14.7 16.7 17.0 17.8 Net debt to equity n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Effective tax rate 16.5 16.5 15.5 15.2 17.6 16.0 16.0 16.0 Accounts receivable (days) 64.6 59.6 60.1 59.3 60.2 58.0 58.4 58.7 Current ratio (x) 3.1 2.5 2.2 2.3 1.8 1.7 1.7 1.8 Net interest cover (x) 120.7 128.2 95.0 n.a. n.a. n.a. n.a. n.a. Net dividend payout 162.1 83.9 81.3 80.4 76.4 73.8 73.6 71.7 Free cash flow yield 2.3 4.6 4.2 3.9 4.9 5.3 5.2 5.2 Source: FactSet, Daiwa forecasts

Company profile

SATS Ltd is a food solutions and gateway services company. The Company's operating segments include food solutions, gateway services and corporate. The food solutions segment provides inflight and institutional catering, food processing, distribution services and airline laundry services. The gateway services segment provides both airport and cruise terminal services.

SATS (SATS SP): 27 June 2016

Multi-pronged growth catalysts Leveraging on Changi’s capacity expansion plans SATS looks set to be a According to CAG, the airport operator is looking to expand its terminal capacity from the key beneficiary of CAG’s current 66m passengers to 85m in 2018, following the completion of Terminal 4 by 2017. terminal expansion The completion of Terminal 5, slated for end-2030, will see Changi’s capacity increasing to plans 135m passengers, a doubling of passenger capacity from the current 65m. The construction of Terminal 4 has been given a preliminary budget of SGD1.5bn, which was first announced in the 2013 Singapore Budget, while Terminal 5 has a corresponding budget of SGD3.5bn, announced a year later in the 2014 Singapore Budget. (We provide more information pertaining to Changi’s expansion plans in Appendix 1.)

Changi: passenger handling capacity (m) 2016 2017E 2018E mid-2020s Terminal 1 21 21 24 24 Terminal 2 23 23 23 23 Terminal 3 22 22 22 22 Terminal 4 16 16 16 Terminal 5 50 Total 66 82 85 135 Source: Changi

This effort to increase terminal capacity was made to ensure that Changi retains its standing as the No.1 Airport in the world (Skytrax survey of 13.25m travellers), an accolade that it has retained for the past 4 years. However, the question now is whether the excess capacity is realistic without creating uneconomical space. We believe such capacity expansion is required to support the acceleration in global air travel, in particularly within Asia Pacific, where the recently concluded ASEAN Open Skies Agreement (April 2016) and the booming tourism sector are the key catalysts that we see supporting a larger flow of passengers through Changi (see Appendix 2 for additional information on the ASEAN Open Skies Agreement and our Singapore tourism outlook).

We forecast Changi’s passenger movements (number of people arriving, departing or transiting in Changi) to increase at CAGR of 7% over the 2016-18E period, normalising at 4% thereafter until 2025 (past-5-year CAGR of 4.5%). On the back of this micro-trend assumption, we expect SATS, with its dominant 80% share of the ground-handling and catering work at Changi, to register revenue growth of 5-6% YoY for FY17-19E and bottom-line growth of 9-11% YoY (on our high operating margin assumptions of 13-14%, for FY17-19E)

Changi’s terminal expansion should set the infrastructure backbone to support booming air-travel demand and the burgeoning tourism industry in Asia Pacific, both of which are key catalysts driving earnings growth for SATS over our forecast horizon, in our view. Accordingly, we initiate coverage of SATS with an Outperform (2) rating and DCF-based12- month target price of SGD4.66.

SATS (SATS SP): 27 June 2016

SATS business model SATS: PBT breakdown by business division (FY16)

SATS’s core food- Corporate solutions and gateway- 4% service businesses account for 78% of its Associates/JVs PBT, based on FY16 18% figures Gateway Food solutions services 60% 18%

Source: Company

SATS derives the bulk of its profit before tax (PBT) from its food-solutions division, which accounts for around 60% of the company’s PBT (based on FY16 figures), followed by its gateway services and contribution from associates/JVs, at 18% each. Its corporate division accounts for 4%. We provide a more detailed analysis of its associates/JVs’ earnings contribution later in this report. This is an area (investment in associates/JVs) where SATS is looking to diversify its geographical exposure from Changi, partaking in various overseas ventures through partnerships and M&A, usually in the form of minority equity stakes.

Its food-solutions and gateway-services divisions are SATS’s core businesses, which can be further classified into aviation and non-aviation-related.

SATS: FY16 revenue breakdown by industry SATS: FY16 revenue breakdown by division

Corporate 0%

Non-aviation 15%

Gateway Services 43% Food Solutions Aviation 57% 85%

Source: Company Source: Company

SATS derived around 85% of its revenue from the aviation sector in FY16. On our estimates, c.65% of the company’s revenue is derived from its exposure to Changi. Hence, the performance of Changi, in terms of passenger movements, meals generated and cargo handled, are key revenue drivers for SATS, in our view.

Changi is currently operating at a capacity utilisation rate of 83% (based on passenger movements of around 55-56m per year, with current terminal capacity of 66m passengers). With the completion of Terminal 4 and the further expansion of Terminal 1 by 2018, the capacity will be raised to 85m passengers per year. We forecast a passenger movement CAGR for Changi of 4.9% for 2015-25, from the 2015 level of 55m to 89m by 2025, achieving a capacity rate of 105%.

The planned completion of Terminal 5 (likely to open in phases from 2025) will further support passenger growth for an additional 10 years until 2035, before hitting maximum capacity again, based on our flat capacity growth assumption of 4% per year.

SATS (SATS SP): 27 June 2016

Changi: passenger movements vs. airport capacity utilisation We forecast a 4.9% 90 100% CAGR in Changi’s 80 95% 90% passenger movements 70 60 85% for 2015-25, hitting 80% 50 75% maximum capacity just 40 prior to the completion of 70% 30 65% Terminal 5 20 60% 10 55%

0 50%

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

2024E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2025E Passenger movement (m) - LHS Airport capacity (m) - LHS capacity utilisation - (RHS)

Source: Changi, Daiwa forecasts

We forecast SATS to record a strong 7% CAGR in terms of the number of passengers handled (the number of passengers that SATS provides services to each year), from 44.9m in FY16 to 55m in FY19, based on the strong January-April 2016 tourist arrival numbers. We can see from the following chart that Changi’s passenger movement growth closely tracks the growth in tourist arrivals to Singapore. The tourism arrival figures for Jan- April were up 14.1% YoY, with Changi’s passenger movements showing a corresponding 9.6% YoY increment. If this trend persists, we can expect Changi to achieve record levels of passenger movements in 2016.

Correspondingly, we forecast the number of passengers handled by SATS to rise by 8% YoY for FY17, moderating to 6% YoY for FY19, before normalising at 4% thereafter, hitting 69.6m passengers handled by FY25.

Tourist growth vs. Changi growth (in terms of passenger movements) Changi’s passenger 25% movement growth tracks 20% tourist arrivals; as such, 15% with record levels of 10% tourist arrivals for Jan- Apr 2016, we expect 5% passengers handled by 0% SATS to also show (5%) strong incremental YoY (10%) growth 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Jan-Apr 2016 Tourist Growth Changi Growth

Source: Singapore Tourism Board (STB), Changi

However, the number of gross meals SATS produces, another key revenue driver, is unlikely to grow in tandem with passenger movements due to the proliferation of low-cost carriers (LCCs) since their introduction in 2004, which do not include meals in their ticket prices. From 2007 to 2013, LCC passenger traffic at Changi recorded strong double-digit percentage growth, a key factor driving overall passenger movements at Changi. However that trend has slowed in recent years due to losses incurred by the LCCs, while the full- service carriers (FSCs) have still been able to eke out low-single-digit passenger traffic growth.

Our analysis shows that in general the growth in the number of SATS’s gross meals produced (ie, all the meals it produces; unit meals refers to meals produced by catering staff) is in line with the passenger traffic growth of the FSCs, apart from FY14, when SATS registered a decline of 8% YoY in gross meals produced due to the loss of key customer Qantas Airways.

SATS (SATS SP): 27 June 2016

Changi: annual LCC and FSC passenger traffic (m) SATS: growth in gross meals vs. FSC passenger traffic growth within Singapore 80 8% 70 6% 60 4% 50 2% 44.8 42.9 40 41.0 0% 37.2 38.6 36.8 37.1 (2%) 30 34.6 32.6 20 33.1 33.1 30.1 (4%) (6%) 10 21.1 23.1 14.4 16.6 16.9 16.9 18.9 7.1 9.4 11.9 (8%) 0 3.6 4.6

(10%)

2008 2009 2010 2011 2012 2013 2014 2015

2007 2012 2013 2014 2015 2016 2017E 2018E 2019E

2018E 2016E 2017E LCC FSC SATS's growth in gross meals Growth in FSC in Singapore

Source: CAPA Source: Company, CAPA Note: SATS’s passenger traffic growth data for any financial year is based on the data for the calendar year (as it has a March year-end), eg, FY13 data is based on calendar year 2012; FSC passenger traffic data is based on calendar year

Looking ahead, while we forecast SATS to record a 7% CAGR in the number of passengers handled for FY17-19, which is in line with the higher passenger movements that we expect at Changi, our assumptions call for the LCCs to increase their penetration rate at Changi following their return to profitability in 2015. Assuming the LCCs’ average penetration rate increases by 1.5pp in FY17 and a further 1pp a year in FY18 and FY19, to a record high of 34% in FY19, passenger traffic growth for the FSCs will still be a decent 6% YoY for FY17 and 4% each for FY18-19, on our forecasts. We expect the number of gross meals produced by SATS to rise in line with the FSC’s passenger-traffic growth for FY17-19, before normalising at 2% per year thereafter.

SATS: gross meals produced (m) SATS: passengers handled (m) 34 Meals produced to increase 60 in line with growth of FSCs; CAGR of 7% in-line with 32 forecast at 4-6% pa for next 55 growth in Changi’s 2-3 years passenger movement 30 Loss of key 50 customer Qantas 28 45 26 40 24

22 35

20 30 2011 2012 2013 2014 2015 2016 2017E 2018E 2019E 2011 2012 2013 2014 2015 2016 2017E 2018E 2019E Source: Company, Daiwa forecasts Source: Company, Daiwa forecasts

Our assumptions for SATS’s cargo/mail growth is more subdued than for its passenger movement growth, at 2-4% per year over FY2017-25E, due to the macro headwinds facing the global economies in terms of slower-than-previously expected growth (the WTO forecasts global trade growth in 2016 to remain benign at 2.8%, unchanged from the 2.8% increase registered in 2015 ). However, numbers could surprise on the upside post the completion of the ASEAN Open Skies Agreement in April 2016, which stands to boost trade movements between all 10 ASEAN countries, hence lifting cargo volumes in the region.

Singapore is seen as one of the major beneficiaries of the ASEAN Open Skies Agreement due to its sufficient airport capacity to handle greater flight volumes. This is in contrast to airports such as Bangkok’s Suvarnabhumi Airport, Manila’s Ninoy International Airport and Jakarta’s Soekarno-Hatta International Airport where volume growth could be constrained by their lack of airport capacity to service unlimited numbers of flights.

SATS (SATS SP): 27 June 2016

SATS: cargo/mail processed (m tonnes) Proliferation of 1.9 ecommerce likely to be 1.8 the dominant factor in 1.8 cargo/airmail growth 1.7 1.7 1.6 1.6 1.5 1.5 1.4 2011 2012 2013 2014 2015 2016 2017E 2018E 2019E Source: Company, Daiwa forecasts

Another macro trend that could be a boon for SATS’s cargo/mail growth is the proliferation of ecommerce. According to IATA’s Annual Review 2015, global ecommerce revenue is set to grow from USD1.3tn in 2014 to USD3.5tn in 2019, a CAGR of 22%. The evolution of online retail sales will in turn drive airmail growth, as seen in the case of China where the nation is flooding the world with low-cost goods in small postal packets. According to International Post Corporation, a cooperative association of 24 national postal services from major countries in Europe, Asia Pacific and North America (representing 60-80% of global cross border volumes), average monthly volumes of airmail increased by around 20% in 2015 (using the month of December as a proxy) and continual double-digit growth is expected.

To capture the growth in ecommerce, SATS and Singapore Post Limited (SingPost) announced in August 2015 a commercial agreement for the former to provide airmail consignment handling services to SingPost. The new automated facility, to be called SATS eCommerce AirHub, will improve efficiency and space utilisation as well as enhance the consignment handling capabilities of both parties. SATS will become the first ground handler in the world to own such an air-side facility, to become operational by December 2016.

While we are generally positive on SATS’s operational metrics, such as the growth in passenger traffic driven by LCCs, we are mindful of overall service revenue lagging these operational data-points, as the service revenue that SATS derives from LCCs is generally lower than that from FSCs. Similarly, while SATS’ cargo volumes processed have generally been on an uptrend since FY13, cargo yields remain weak, according to management guidance.

SATS: revenue contribution from Singapore aviation (SGD m) Growth in Singapore 1,400 aviation revenue likely to 1,300 fall short of growth in passengers movement 1,200 due to lack of pricing power 1,100

1,000

900

800 2012 2013 2014 2015 2016 2017E 2018E 2019E Source: Company, Daiwa forecasts

SATS (SATS SP): 27 June 2016

We forecast SATS’ revenue growth derived from Singapore aviation at 5-6% for FY17-19, lower than its overall CAGR in passenger movements of 7%, mainly a result of lower growth in meals produced (greater LCC penetration) and the limited pricing power of ground handlers/caterers such as SATS to increase their service charges to airlines. However, given the duopoly nature of Changi (SATS and Dnata [not listed] are the only 2 ground handlers at Changi), we believe the downside risk to SATS’s earnings from further cuts to its service charges to airlines can be viewed as low.

Volumes could surprise on the upside due to increasing hub outsourcing An area not widely discussed by the street is the trend of hub sourcing. John Menzies PLC (a company which provides ground handling services to the air cargo industry) presentation in 2015 quoted a study done by Boston Consulting Group (BCG) highlighting the increasing trend for airlines to outsource their ground handling/catering works to 3rd party ground handlers like SATS. This trend can be seen as occurring in 4 waves. In their view, the aviation industry globally is currently at the Wave 3 stage.

Wave 1: Outsourcing outstations (ie, airports that are not major hubs for the airline)  enabled by deregulation and driven by cost efficiency. Currently already near peak levels.

Wave 2: Outsourcing of major operations at LCCs’ bases  facilitated by LCC network expansion and the need for these LCCs to keep their costs down

Wave 3: Outsourcing of global network carriers’ (FSCs) regional operations  this wave has already started, led by American-based carriers, spearheaded by United and Delta Airlines

Wave 4: Outsourcing of network carriers’ mainline hubs  airlines reluctant to outsource complex and large-scale operations at main hubs but opportunities start to emerge

In 2015, SATS signed a SGD325m inflight catering deal with Delta Airlines through its 59.4%-owned subsidiary, TFK Corporation, reflective of the trend happening right now, where FSCs are increasingly forced to focus on their core operations (flight management), while outsourcing ground handling and catering works to 3rd parties where cost savings are primarily achieved through economies of scale.

TFK: revenue contribution from TFK to SATS (SGDm) We forecast the Delta 360 Airlines contract to add 340 about SGD30m per year 320 in revenue for TFK 300

280

260

240

220

200 2012 2013 2014 2015 2016 2017E 2018E 2019E Source: Company, Daiwa forecasts

The Delta deal, coupled with higher tourism arrivals in Japan, could see TFK turning the corner in FY17 (the company was marginally unprofitable in FY16). We forecast TFK’s revenue to rise at a CAGR of 10% from FY17-19, a combination of contributions from the Delta Airlines contract coupled with strong tourist arrivals, led by the Chinese. We provide further details on TFK in later segments.

SATS (SATS SP): 27 June 2016

Market share of airline caterers Global aircraft growth 45,000 Fly Food 40,000 SATS 1% Other 2% 37% 35,000 DO & Co 30,000 19,500 2% Newrest 25,000 32,600 New 5% 20,000 Servair aircraft 15,000 6% 13,100 gategroup 10,000 19,000 21% 5,000 Dnata 5,900 6% LSG 0 20% 2015 2034 Existing Replacement Growth

Source: Gategroup Source: Airbus

Outsourcing works such According to IATA, 60% of ground-handling work (a sector with an estimated market size of as ground handling USD100bn annually) is currently outsourced to 3rd party ground handlers. With the advent allows airlines to focus of LCCs as well as FSCs introducing larger aircraft, the need for 3rd party specialists with on their core the expertise to handle an array of complex ground-handling operations vs. airlines’ own competencies, ultimately in-house personnel, has become critical to ensure the airlines’ cost efficiency. Hence, we translating to bottom- do not expect the current outsourcing trend to abate. Assuming a 5pp increment in line benefits outsourced work (the combined global market size of ground handling and inflight catering is around USD115bn, according to estimates from IATA, Global Industry Analysts, Inc and Gategroup), we estimate that SATS would see a revenue increment of around 3% per year (for conservative reasons we have not yet incorporated this higher revenue growth in our assumptions).

While SATS’ overall ground handling/catering volumes are expected to increase due to the above outsourcing trend (a potential increment of 3% per year for every 5pp increase in outsourced work by airlines, based on our forecasts) as well as new aircraft being added to global capacity (according to forecast from Airbus, fleet size is expected to double by 2034, translating to a CAGR of 4%), the company at present has limited bargaining power, largely because airlines still have the option to provide services in-house; hence our assumption of a 0% increment in service charges across all of SATS’s key revenue drivers over FY17-25. In the current competitive landscape, margin improvements for ground handlers/caterers like SATS is possible only through cost savings as a result of increased productivity, in our view.

Is there a need for a third ground handler in Singapore? New entrant risk viewed as low In our view, the expansion of Changi could signal the need for a 3rd ground handler, thereby threatening the duopoly status of SATS and Dnata and potentially resulting in a drastic cut in ground handling fees charged by the 2 incumbents. However, history is not on the side of a 3rd ground handler successfully penetrating the local market, as seen from the failure of both Swissport in 2009 and ASIG recently in 2015, with the latter losing its sole client, Jetstar.

The duopoly strength of SATS and Dnata allow both entities to undertake massive under- cutting while still maintaining a net profit due to economies of scale. However, the same cannot be said for a new entrant in the local context, which would likely struggle to establish a reasonable customer base or volumes to ensure operational feasibility for a mid to long-term horizon.

SATS (SATS SP): 27 June 2016

Timeline of events for ground handlers in Changi Year Events 1947 SATS started ground-handling services in Singapore 1972 SATS formally corporatised with 1,673 staff 1977 Changi International Airport Services (CIAS) was established in December 1977 as a JV among 5 airlines — Air France, KLM, Lufthansa, China Airlines and Garuda, together with Port of Singapore (PSA) — to provide ground handling services to partner airlines at Changi Airport 2004 CIAS was acquired by Dnata Group in September 2004 2005 Swissport entry as the 3rd ground handler in Changi Airport 2009 Swissport pulled out of Changi after incurring losses of around SGD50m 2011 CIAS was rebranded to Dnata Singapore 2011 Aircraft Service International Group (ASIG) entered Changi Airport as the 3rd ground handler 2014 ASIG secured its first customer, Jetstar 2015 ASIG terminated its contract with Jetstar, its first and only airline customers Source: Various media

We see SATS and Dnata maintaining their respective market share in the short-medium term (until 2025) for the above reason, unless there is a major push for deregulation and liberalisation at Changi. Dnata, the monopoly ground handler at Dubai Airport, is currently managing traffic in excess of 78m passengers solely in Dubai vs. SATS’s share of traffic of 45m at Changi. Dnata was named 2016 Ground Handler of the Year by Air Cargo News for a third year running, proving that its monopoly status has not resulted in a decline in service quality.

However, despite their duopoly status, not all is rosy for the existing incumbents. The arrival and subsequent exit of Swissport and ASIG resulted in financial damage to Dnata and SATS, due to airlines’ “new” expectations of fare reductions introduced by the new entrants, which clearly was not feasible, resulting in their subsequent departure. However, the existing players were subsequently stuck with lower prices and now face resistance from the airlines for subsequent fare hikes. Hence, while volumes are rising in conjunction with greater air traffic demand, local incumbents will likely need to orchestrate a digital transformation of their ground-handling services to address inflationary cost issues.

Increasing productivity remains key despite duopoly status While the threat of a new entrant in the context of Changi can be viewed as low, a key cost driver that we believe has to be sufficiently addressed by SATS is the issue of its manpower shortage.

SATS: cost breakdown (based on FY16 figures) By reducing staff costs Other operating expenses as a percentage of (plug) revenue, the company 9% Staff costs aims to achieve Company premise and 56% operational leverage utilities expenses 7% Depreciation and amortisation charges 5% License fees Cost of raw 4% materials 19%

Source: Company

Staff costs are already the largest component of SATS’s operational expenses, amounting to 56% of total operating costs for FY16. Management has a target to keep its headcount constant at around 14,000 from now to FY25E through increased productivity and the use of automation/digitalisation of various airport processes. The company’s operational shift to greater automation has been necessitated by its shortage of labour, according to management. Our assumption calls for flat headcount with overall staff costs increasing at a 2% CAGR to account for inflation, over FY2017-25E. This would essentially imply that the cost per employee will grow at an annual rate of 2%, over FY2017-25 vs. an average 3.2% over FY2014-16.

SATS (SATS SP): 27 June 2016

While a strong margin improvement might not be visible in the short term as a result of the company keeping its headcount flat over the next 1-2 years, the effect of operating leverage on the bottom line should be magnified, with the operating profit growing at a faster rate than revenue from FY2019-25E, due to what we regard as the company’s excellent staff-cost management.

SATS has been one of the front-runners in advocating the use of better technology and robots to drive efficiency. Its adoption of automated vehicles and robotic arms to prepare inflight meals has helped the company cut total preparation time for an airline meal tray by about 40%. According to management, the shift towards automation has helped improve the company’s overall operating margin for the food-solutions division, which saw a 4.1pp improvement YoY in FY16, though the main driver of this strong margin improvement was still the deconsolidation of the low-margin SATS-BRF business.

Looking ahead, management says it remains committed to growing its pipeline of productivity and innovation projects involving the usage of robotics, sensors, automated guided vehicles and mobile computing technologies. The Civil Aviation Authority of Singapore’s (CAAS) expanded funding for the Singapore aviation industry to SGD160m, from SGD100m previously, for 5 years from 1 April 2015, which should provide a catalyst for SATS to push on with these projects to drive greater productivity. As such, we forecast its capex to accelerate at a CAGR of around 7% from FY16-25 vs. -5.5% from FY12-16 as more funding is committed to ensure that SATS’s business expansion is feasible without it being held to ransom by manpower shortages.

SATS: food solution vs. gateway services operating margin trend Food solutions margin 20% improvement will likely 18% 16% be driven by better 14% operational performance 12% by TFK 10% 8% 6% 4% 2% 0% 2011 2012 2013 2014 2015 2016 2017E 2018E 2019E Food solutions Gateway services

Source: Company, Daiwa forecasts

While we do not expect the same level of operating margin improvement within its food solutions division post the deconsolidation of SATS-BRF, we still forecast a 0.8pp improvement for FY17E as a result of a better operational performance by TFK driven by the full-year recognition of the Delta Airlines contract (implemented in October 2015), as well as our expectation that strong tourist arrivals into Japan’s Narita and Haneda airports will increase overall inflight-meals volume for the Japan routes.

SATS: operating profit (LHS) vs. operating margins (RHS) Headcount management 290 15.0% and a greater shift 270 14.0% towards automation and 250 digitalisation should be 13.0% 230 key operating margin 12.0% drivers for SATS 210 11.0% 190

170 10.0%

150 9.0% 2011 2012 2013 2014 2015 2016 2017E 2018E 2019E Operating profits (SGD m) Operating margins (%)

Source: Company, Daiwa forecasts

SATS (SATS SP): 27 June 2016

On a consolidated basis, a 0.7pp improvement in the group’s operating margin for FY17E would be a key driver propelling a c12% YoY increase in operating profit, based on our forecasts. While we expect the bulk of operating expenses for FY17E to increase in line with an acceleration in revenue growth, our assumption calls for the company to remain a beneficiary of low fuel costs in FY17. A sharp rise in fuel costs could result in its operating margin missing our forecast of 13.3% for FY17E.

While we expect the group’s operating margin to stabilise at around 14.9-16.5% for FY2019-25E, a successful reduction in headcount, coupled with slower-than-expected rate of increment in average cost per employee, could lead to an upside margin surprise during this period.

Asset-light expansion through M&A and partnerships Seeking growth overseas through deployment of its strong cash hoard SATS is seeking to replicate its success in Changi to various airports around the world, with its first joint venture in the Maldives back in 1988. SATS has since made its presence felt in places like Australia, China, Hong Kong, India, Philippines, Taiwan, Vietnam, Indonesia, Japan, the Middle East. More recently, SATS concluded a deal with Malaysia’s Brahim’s Airline Catering Holdings (Brahim’s) in February 2016, whereby the company took a 49% stake, worth around SGD71m, in the Malaysian airline caterer, an entity we believe is currently being underappreciated by the market. We provide a more detailed analysis on Brahim’s in our key associates write-up.

SATS: major overseas partnerships and M&A S/N Year Country Stake Entity Business 1 1988 Maldives 35% Maldives inflight catering Catering 2 1994 Vietnam 30% Tan Son Nhat cargo services Cargo services 3 1995 Taiwan 20% Evergreen Airline Services Catering 4 1996 Philippines 20% MacroAsia Catering Services Catering 5 1998 Hong Kong 49% Asia Airfreight Terminal Cargo services 6 2001 India 30% Taj Madras Flight kitchen Catering 7 2001 India 49% Taj SATS Air Catering Catering 8 2001 Taiwan 25% Evergreen Air Cargo Services Ground handling 9 2004 Indonesia 50% PT Jasa Angkasa Semesta, Tbk Ground handling 10 2008 India 50% Air India SATS Ground handling 11 2010 Japan 59% TFK Corporation Catering 12 2011 Australia/India 51% FASSCO International Catering 13 2012 China 40% Beijing airport inflight kitchen Catering 14 2012 China 40% Beijing aviation ground services Ground handling 15 2014 Indonesia 42% PT Cardig Aero Services Tbk Catering 16 2015 Brazil 51% SATS-Brf Food processing 17 2016 Malaysia 49% BACH Catering 18 2016 Oman 33% Oman Air Cargo services 19 2016 China 60% Yihai Kerry Food processing 20 2016 Indonesia 20% Purantara Mitra Angkasa Dua Catering Source: Company

To date, SATS has been involved in ~20 M&A deals as well as partnerships overseas, mainly in the Asia-Pacific region. One of its major acquisitions was it taking a 50.7% stake (since raised to 59.4% as of 31 March 2015) in Japan’s TFK, an inflight catering provider based at Narita Airport, for a consideration of around SGD122m, concluded in November 2010. TFK has experienced a volatile operational performance over the past 5 years, but in FY16 staged a recovery and is now close to operational break-even. With Sino-Japanese tensions easing and Japan being one of the top-4 tourist destinations of choice for Chinese tourists in 2015, we expect TFK’s profitability to improve further in FY17, on the back of a higher catering services volume on Japan routes, as well as an improvement in overall operating margins from greater economies of scale.

The write-up below provides an operational summary of SATS’s key subsidiary (TFK) and four other major associates which we see as key earnings contributors to SATS in the coming years.

SATS (SATS SP): 27 June 2016

TFK Corporation (59.4%) – subsidiary The acquisition of TFK in 2010 provided SATS with an entry into the Japanese airline catering market, strengthening relationships with key customers and increasing its capability to serve its core group of customers at new key locations. TFK holds the largest market share in terms of airline catering for both Narita (50%) and Haneda (40%) airports. Arrival and departure slots at both these airports have increased since 2010 and are likely to demonstrate an upward trajectory to 2020 in anticipation of greater visitor arrivals when Japan will host the next summer Olympics after Brazil in 2016.

Annual increment in slots at Tokyo Haneda and Narita airports Tourist arrivals to Japan 900 25 60% 800 50% 700 20 40% 30% 600 15 20% 500 10% 400 10 0% 300 -10% 200 5 -20% 100 -30% 0 0 -40% 2010 2011 2012 2013 2014 2015 2020 2009 2010 2011 2012 2013 2014 2015 Narita Haneda Tourist arrivals to Japan (m) YoY growth (%)

Source: MLIT Source: JNTO

Increasing tourist arrivals, led by middle-class Chinese, will also play a critical role in the operational performance of various airport-linked entities like TFK. Following the Fukushima accident in March 2011, tourist arrivals to Japan declined by 28% that year, but have since shown a strong double-digit improvement per year. Based on the latest data from the Japan National Tourism Organization (JNTO), the estimated number of international visitors to Japan in March 2016 reached 2.01m (up 31.7% YoY), recording the highest-ever figure on a monthly basis, and exceeding 2m for the first time in history. Chinese tourist arrivals increased by 47.3% YoY to hit 498,000 visitors in March, the highest among all countries. One key reason for the strong Chinese tourist arrival figures in recent years can be attributable to the relaxation of Chinese visa policies by the Japanese authorities, effective from 19 January 2015.

Top-10 destinations worldwide for Chinese tourists Foreign tourists visiting Japan in 2015 Rank Country Popularity Rank Country Number of people Percentage change YoY 1 Hong Kong 12.9% 1 China 4,993,689 107.3% 2 Thailand 10.3% 2 South Korea 4,002,095 45.3% 3 South Korea 9.5% 3 Taiwan 3,677,075 29.9% 4 Japan 7.3% 4 Hong Kong 1,524,292 64.6% 5 Taiwan 5.7% 5 United States 1,033,258 15.9% 6 USA 3.2% 6 Thailand 796,731 21.2% 7 Macao 2.1% 7 Australia 376,075 24.3% 8 UK 2.0% 8 Singapore 308,783 35.5% 9 Italy 1.5% 9 Malaysia 305,447 22.4% 10 France 1.4% 10 Philippines 268,361 45.7%

11 United Kingdom 258,488 17.5% 12 Canada 231,390 26.5%

Source: China.org.cn Source: Japan National Tourism Organisation Note: Based on a survey of 1,019 Chinese tourists done by FBIC Global Retail & Technology and China luxury Advisors

The chart below presents the key financials of TFK since 2012. While the company’s operational performance has been less than ideal due to the overcapacity situation in Japan, the company looks set to turn around in FY17 on a myriad of positive developments. The company signed a contract with Delta Airlines worth USD325m in June 2015 that will see the closure of Delta Airlines’ inflight kitchen at Narita, which should improve the supply-demand dynamics within the Japanese market. SATS has since commenced catering services to Delta flights (Delta operates 22 peak-day flights from Narita and Haneda) from October 2015. TFK also received Halal certification in 2014 after it invested JPY60m to convert one of its kitchens at Narita Airport to cater to the growing

SATS (SATS SP): 27 June 2016

Muslim population visiting Japan, which is expected to hit 1m arrivals by 2020 when Tokyo hosts the summer Olympics, a 19% CAGR from 2013 levels of around 300k.

TFK: revenue (SGDm) TFK: earnings (SGDm) 360 10 Higher revenue 340 boosted by Delta contract and 5 320 increased flight 300 volumes from booming tourism 0 280 (5) 260 Losses due to SGD2m of 240 (10) impairment. 220 Operationally close to breakeven 200 (15) 2012 2013 2014 2015 2016 2017E 2018E 2019E 2012 2013 2014 2015 2016 2017E 2018E 2019E Source: Company, Daiwa forecasts Source: Company, Daiwa forecasts

Besides the developments above, other positive factors likely to improve TFK’s operational performance ahead include an expected strong currency vis-à-vis the SGD, resulting in translational gains, as well as more tourist arrivals from China, with one of the key reasons being the relaxation of visa policies as highlighted earlier. We forecast TFK’s revenue to rise by 15% YoY for FY17E, 10% YoY for FY18E and 5% for FY19E on the back of the additional revenue contribution from the Delta contract as well as stronger tourist arrivals into Japan. We expect TFK to start contributing positively to SATS’s bottom line from FY17E onwards, with a potential attributable earnings contribution of SGD4.5m for FY17E.

We estimate the company’s earnings would rise at a CAGR of around 3% for FY17-19E, driven by higher revenue contributions during this period.

Stagnant associates’ contribution looks set to trend upwards The earnings contributions of SATS’s associates/JVs have remained relatively unchanged over the past 3-4 years, due to limited opportunities for SATS’s to partake in overseas ventures that would be immediately earnings-accretive. SATS’s main investments have been centred on Beijing Airport as well as getting a slice of the Indonesian airline-catering market through PT Cardig Aero Services Tbk (PT CAS). However, the increasing net profit contributions from PT CAS/PT Jasa Angkasa Semesta Tbk (PT JAS) over the past 3 years have been mainly offset by a lower contribution from Asia Airfreight Terminal (AAT) in Hong Kong, due to the latter’s weak cargo yield and lower cargo volume handled as a result of the introduction of a new entrant to the HK freight-handling market. All of the above explains the lack of earnings growth from associates/JVs contributions over the past 3-4 years.

However, all that is set to change, with SATS having completed 5 overseas acquisitions/ partnerships over 2015-16, which sets the stage for positive earnings growth from associates/JVs both in the short term (FY2017-19) and medium term (FY2020-25). We believe the market continues to underestimate the contributions from SATS-BRF and Brahim’s, both of which we expect earnings to surprise the market on the upside over the next 2-3 years.

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SATS: historical contribution from associates/JVs (SGDm) The recent slew of 56 acquisitions as well as 54

SATS-BRF entering its 52 2nd year of operation 50 should propel associate/ JV contributions over the 48 next few years 46 44

40 2011 2012 2013 2014 2015 2016 2017E 2018E 2019E Source: Company

Significant associate contributors include PT Jasa Angkasa Semesta Tbk (PT JAS), PT Cardig Aero Services Tbk (PT CAS) and Asia Airfreight Terminal Company (AAT), which collectively contributed 67% of SATS’s FY15 associate/JV earnings. We provide a more detailed analysis of its key associates/JVs below.

PT Jasa Angkasa Semesta Tbk (PT JAS) (49.8%) and PT Cardig Aero Services Tbk (PT CAS) (41.7%) – associates While Changi is operating at a capacity in the mid-80s%, Indonesia’s airports are operating at as much as 3x over-capacity, according to a Bloomberg article in December 2015. To give an idea of the vast over-capacity situation, Indonesia’s main international airport, Soekarno-Hatta, was designed with an annual capacity of 22m passengers, but the airport handled around 54m passengers in 2015. Ignasius Jonan, Indonesia’s Transport Minister, said the government plans to extend and improve existing runways and terminals and build another 15 airports by 2018.

PT JAS started its These passenger numbers on the one hand highlight the attractiveness of Indonesia as operations in 1985 at one of the fastest-growing aviation markets in the world, but on the other hand also expose Soekarno-Hatta Airport the potentially ill-equipped nature of Soekarno-Hatta to handle the increasing traffic, which and is now the leading could lead to fatalities. According to data from IATA, Indonesia accounts for 1.4% of global ground-handler in traffic but accounted for 4% of all accidents in 2010. As such, ground-handlers in Indonesia Indonesia. The company are aware of the need to ensure that safety and security is not compromised in the pursuit serves about 42 airlines of earnings growth. with 12 stations in Indonesia In 2004, SATS marked its maiden entry into the Indonesian ground-handling business when it acquired a 49.8% stake in PT Jasa Angkasa Semesta Tbk (PT JAS) for USD60m. Subsequently in February 2014, the company made another major acquisition in Indonesia when it acquired a 41.65% stake in PT Cardig Aero Services Tbk (PT CAS) for around SGD118m. PT CAS is one the market leaders in food solutions and gateway services in Indonesia, with a presence at 17 airports across Indonesia and servicing more than 40 national and international carriers.

PT CAS: historical net profit performance (IDRbn) 200 180 160 140 120 100 80 60 40 20 0 2010 2011 2012 2013 2014 2015 2016E 2017E Source: Bloomberg

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The acquisition of PT CAS was done at a premium valuation (at a 2013 PER of around 23x) and close to 50% above PT CAS’s last volume weighted average price (VWAP). While the acquisition of a 41.65% stake in PT CAS might seem expensive, it allows SATS to participate in the fast-growing in-flight catering market in Indonesia, where we expect FY17-19 growth to be in the high double digits vs. our forecast for 4-6% pa in SATS’s inflight catering at Changi during the same corresponding period.

While SATS does not hold management control within PT CAS, we believe its equity involvement in the company could drive its Indonesian associate’s operational efficiency without compromising safety and service quality. While there is constant pressure for ground handlers to deliver quality services at reduced rates, airlines are realising that service failures, aircraft delays and damage to passengers’ luggage can prove far more costly than the savings derived from inferior service quality.

PT JAS: key clients PT JAS: net profit trend (in IDRm) 350,000 318,585 293,409 300,000 252,533 250,000 193,267 200,000 160,038 150,000

100,000

50,000

2011 2012 2013 2014 2015 Source: PT JAS Source: PT JAS

Both PT JAS and PT CAS have been consistent in growing their earnings contribution to SATS over the past 3 years. SATS management remains positive on the contribution from these 2 Indonesian entities ahead, driven by strong visitor arrivals into Indonesia. The company recently (on 25 May 2016) announced it had purchased a 20% shareholding in Purantara Mitra Angkasa Dua (PMAD), another inflight catering company in Indonesia, for a consideration of SGD11.3m, further strengthening its foothold in Indonesia. The latest transaction is not expected to have any material impact on the company’s EPS for FY17.

Asia Airfreight Terminal Company (AAT) (49%) – associate SATS has a 49% stake in AAT whose principal activities involve the provision of air cargo handling services in Hong Kong. AAT provides a handling capacity of around 1.5m tpa and is one of the world’s leading air cargo terminal operators. It is the smallest cargo handler in Hong Kong by cargo handling volume, after SuperTerminal 1, which is owned by Hong Kong Air Cargo Terminals Limited (HACTL), and Cathay Pacific, a new entrant that set up operations in 2013. AAT is owned by a consortium of 5 shareholders, comprising: 1) SATS, 2) Eastern Option Limited, a subsidiary of China Merchants Holdings (International), 3) Torres Investments (a subsidiary of Kerry Properties), 4) Keppel Telecommunications and Transportation, and 5) Federal Express.

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Air cargo handled at HKIA (in ‘000 tonnes) 5,000 While air cargo handled 4376 4380 4,500 4128 4127 in HK has been on an 3938 4025 upward trajectory, the 4,000 introduction of a new 3,500 entrant has severely 3,000 impacted the profitability 2,500 2,000 of incumbents like AAT 1352 1,500 1,000 500 0 2010 2011 2012 2013 2014 2015 Jan-Apr 2016 Source: Hong Kong Airport

Hong Kong’s air cargo terminals are currently ranked No.1 in the world in terms of freight volume handled. The territory handled a record level of cargo volume of 4.38m in 2015 vs. 3.5m in 2005, a CAGR of 2.3%. According to an IATA Cargo Strategy report published in August 2015, global air cargo volumes growth is expected at 4.1% per year over the next 5 years, with the acceleration of urbanisation creating megacities that are set to drive world trade. However, what is worrisome is the continual decline in air cargo yields, with forward indicators, such as the Purchasing Manager Indices, continuing to slide in 2016 alongside weak consumer demand in major developed economies.

We expect AAT, which currently has a c20% market share in cargo handling capacity in Hong Kong, to generate a net profit of around SGD11.2m for FY17. This associate has seen a major decline in earnings since FY14, post the entrant of newcomer Cathay Pacific taking a major slice of the cargo handling pie in Hong Kong. We see competition remaining intense within Hong Kong’s cargo handling space, given the current excess supply situation where terminal capacity of 7.5m tpa far outweighs current traffic of 4.4m tpa as of 2015.

SATS (SATS SP): 27 June 2016

Brahim’s Airline Catering Holdings (49%) – associate

BACH: shareholding structure post acquisition by SATS

Brahim's (BHB) SATS

51% 100%

49% BACH SIPL

70% 30% BAC MAB

Source: BACH circular Note: SIPL represents SATS Investments Pte Ltd, a wholly owned subsidiary of SATS; MAB represents Malaysia Airlines Berhad

SATS’s acquisition cost SATS completed the purchase of a 49% stake in Brahim’s Airline Catering Holdings of BACH could (BACH), the investment holding company that has a 70% stake in Brahim’s Airlines effectively be only Catering Sdn Bhd (BAC) (an inflight catering and related services provider), on 5 February MYR110m or SGD36.1m 2016. SATS had initially announced in October 2015 that it was proposing to acquire a if earn-out and 49% stake in BACH for a total consideration of MYR218m (~SGD70m), which comprised a outperformance base consideration of MYR110m (around SGD36.1m) and an additional earn-out considerations are not consideration and outperformance consideration of MYR108m, placed in an escrow met over the next 3 account from which only up to MYR36m could be withdrawn per year subject to certain years annual performance targets.

BACH’s management has guided that should BAC generate ~MYR23.7m in profit after tax and controlling interest (PATNCI), BAC would be able to withdraw MYR7.5m a year from the escrow account. Moreover, for every additional MYR1m in PATNCI, the company said it is entitled to draw down an additional MYR1.1m. Hence, to withdraw a maximum of MYR36m/year, PATNCI would have to be in the region of MYR49.5m (SGD16.5m). Assuming a PATNCI level of SGD16.5m translating into SATS’s share of profit (effective stake of 34.3%) of ~SGD5.7m, the return on investment would be around 8% per annum, or about a 12.3x 2016E PER.

The table below summarises the key PATNCI targets that BAC must meet for the next 3 reporting years to justify the additional earn-out/outperformance consideration. If BAC fails to hit the minimum PATNCI threshold stipulated in the respective years, then SATS’s effective purchase consideration of 49% stake in BACH would only amount to MYR110m, or around SGD37m.

BAC: historical meals uplifted (in m) Earn-out Year FYE 31 December PATNCI thresholds 2016 (MYRm) 2017 (MYRm) 2018 (MYRm) Minimum PATNCI 23.7 28.7 33.9 Target PATNCI 44.1 50.7 57.7 Capped PATNCI 49.5 56.5 64.0 Source: BAC

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BAC: number of meals served (in m) BAC: number of flights handled 20 90,000 18 80,000 16 70,000 23,631 24,484 6 22,156 14 5.5 5.3 60,000 19,438 12 6 6.2 20,158 50,000 10 40,000 8 30,000 60,028 6 12 55,967 57,780 11.5 10.7 47,710 45,875 4 9.1 8.8 20,000 2 10,000 0 0 2011 2012 2013 2014 2015 2011 2012 2013 2014 2015 MAS Others MAS Others

Source: BAC Source: BAC

The 49% BACH deal for SATS is unlikely to be earnings-accretive in for FY2017-18, based on our estimates, given that its largest customer, Malaysian Airlines (MAS), went through a restructuring exercise in 2015 which resulted in a new catering agreement signed between BAC and MAS with the overall concession value lowered by up to 25%. MAS saw its flight capacity decline by 20-30% in 2015 vs. 2014, which resulted in declining meal volumes for BAC, with MAS accounting for around 67% of its catering meals by volume, based on 2015 figures.

However, we believe most of MAS’s flight rationalisation plans have now been completed and expect flight trends to moderate and stabilise in 2016, resulting in greater stability of meal volumes catered by BAC moving forward. In our view, the decision by MAS to revamp its economy class meals as well as introduce new business class seats on all its 15 Airbus A330-300 aircraft show the airline’s commitment to emerge out of the restructuring process a larger and stronger entity than it was before. MAS recently announced that the company was profitable for the month of February 2016 and CEO Christoph Mueller expects the airline to return to the black by 2018. In early 2016, MAS also finalised a code-sharing agreement with Emirates Airline that was effective from February 2016. The tie-up will likely be positive for BAC as it will help to offset loss in meal volumes due to the reduction in MAS’s European routes.

Based on SATS’s effective stake of 34.3% in BAC, we forecast attributable earnings contributions of SGD0.7m for FY17E, SGD2.8m for FY18E and SGD4.3m for FY19E. This implies that BAC would need to generate around SGD2m (MYR6m) in PATNCI for FY17E, SGD8m (MYR24m) in FY18E and SGD12.5m (MYR37.5m) in FY19E. To get a sense of the achievability of these net-profit numbers (and we do think they are achievable), in 2013 BAC generated around MYR57m in net profit when meal volumes hit 17m, prior to the restructuring of the contract with MAS. Normalised earnings for 2014 would have been MYR68m before impairment charges.

Passenger movements at Kuala Lumpur International Airport (KLIA) (in m) Passenger movements at 60 KLIA registered 4.3% 48.9 48.94 50 47.5 growth in 1Q16, 39.9 37.7 supporting an 40 operational turnaround for BAC in 2016 30

0 2011 2012 2013 2014 2015 Source: Malaysia Airports Group

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Under the 25% reduction in concession value on the assumption of 17m meal volumes, BAC’s net profit would only be able to reach MYR43m when operations normalise. We expect these figures to be achieved only in FY20.

While the BACH deal is unlikely to be very earnings-accretive in FY17 based on our estimates, we believe management has identified BAC’s longer-term potential following the restructuring of MAS as well as the trend of higher passenger movements at Kuala Lumpur International Airport (KLIA), both of which should be major catalysts for upward earnings revisions for BAC.

Overseas expansion to drive future growth SATS overseas ventures While SATS is a natural beneficiary of Changi’s expansion plans over the coming decades, allow the company to it has since 1988 been actively establishing JVs and partnerships to grow its overseas partake in the region’s operations. YTD in 2016 alone, the company has announced 5 overseas JVs/partnerships: strong aviation growth

1) Macro Asia Catering Services (Philippines) – increased its equity stake from 20-33% in January 2016. 2) Yihai Kerry (China) – formed a JV in January 2016 with Yihai Kerry, a subsidiary of Wilmar to provide safe, high quality food. 3) Brahim’s Airline Catering Holdings (Malaysia) – completion of a 49% stake in February 2016. 4) Oman Air (Middle East) – signed a JV with Oman Air for cargo handling services at Muscat International Airport in March 2016. 5) Purantara Mitra Angkasa Dua (Indonesia) – took a 20% stake in the inflight-catering company announced in May 2016.

SATS: key associates/JVs driving incremental growth (SGD m) SATS: JV contribution as % of net profit 8.0 23% 7.0 22% 6.0 5.0 21% 4.0 20% 3.0 19% 2.0 1.0 18% 0.0 17% -1.0 PT JAS AAT PT CAS Brahim Others (include 16% SATS BRF) 15% 2016 2017E 2018E 2019E 2014 2015 2016 2017E 2018E 2019E Source: Company, Daiwa forecasts Source: Company, Daiwa forecasts

While we acknowledge that associate/JV contributions have shown minimal growth in the past 3-4 years, as explained by the lack of earnings-accretive overseas acquisitions (the only one being PT CAS) and the dismal performance of AAT post the introduction of new entrant Cathay Pacific, which has resulted in overcapacity at Hong Kong’s cargo terminals, we think this is all set to change with management’s recent aggressive efforts to partake in a number of various overseas ventures. We see the key earnings drivers mainly being PT JAS, BACH and SATS-BRF over the next 2-3 years, while in the medium term (FY2019- 25) earnings growth could materialise from the successful execution of its JVs with Yihai Kerry and Oman Air.

SATS (SATS SP): 27 June 2016

Dividends from associates/JVs Dividends from associates/JVs (LHS) vs. payout ratio (RHS) The big rise in the FY15 100 200% dividend from associates 90 180% 80 160% /JVs is due to the lifting 70 140% of certain regulatory 60 120% restrictions at the 50 100% associate level, thereby 40 80% allowing SATS to 30 60% repatriate excess cash 20 40% from those entities 10 20% 0 0% 2012 2013 2014 2015 2016 2017E 2018E 2019E Dividends from associates/JVs (SGD m) Payout ratio (%) - based on associates/JVs contribution

Source: Company, Daiwa associates

We forecast SATS’s associates/JVs’ earnings to increase from SGD48m in FY16 to SGD65m by FY19E. On an estimated 60% payout ratio, dividends received from associates/JVs can be expected to increase from SGD34m in FY16 to SGD39m in FY19E. Dividends received from associates/JVs should further increase SATS’s free cash coffers and provide it with additional ammunition to embark on new local/overseas acquisitions. In our DCF valuation, we incorporate associates/JVs’ dividends received as part of our free cash flow calculation.

Non-aviation tie-ups to reduce cyclicality impact Collaboration with BRF a long-term venture In April 2015, SATS’s subsidiary Singapore Food Industries (SFI) entered into a JV with Brazilian food distributor BRF GmbH (BRF), called SATS BRF Food. SFI holds a 51% stake and BRF the other 49%. This JV resulted in SATS’s non-aviation revenue declining by 26% YoY to SGD262m for FY16, as this portion of the business was deconsolidated and recognised on a JV basis. However, SATS’s margins benefitted from the deconsolidation impact due to the low-margin nature of SATS BRF Food. The aim of the collaboration is to bring high-quality meat into Singapore using BRF’s strong Brazilian connections, scale up SATS’s meat processing through productive technology, and offer new innovative branded food for the growing middle class in Singapore and expand into the other Southeast Asian markets in future.

While we believe the idea of leveraging on BRF’s strong network for procuring meat products, given its status as the 7th-largest food company in the world by revenue, is sound, margins for this business remain extremely tight and the positive impact from operational leverage will only be evident for SATS as volumes increase through the distribution of meat products into other Southeast Asian countries, which at present is limited to only Singapore.

As SATS-BRF steps into its second year of operation, we expect a gradual build-up in its processing volume. The macro outlook for the food processing industry in Asia remains bright, with a long-term food consumption uptrend, driven by a few factors such as :1) the growing population in Asia, 2) increasing affluence as seen in the rising middle-class population, and 3) the drive towards urbanisation.

According to a recent study by Research and Markets, a Dublin-based market research company, the global packaged food market will likely be a USD3tn industry by 2020, representing a 4.5% CAGR from 2015-20. Asia Pacific should see the fastest CAGR of 5.4% due to growing per capita incomes and increasing health awareness. SATS-BRF intends to grow its portfolio of branded food products for the growing middle-class population in Asia which is becoming increasingly savvy in terms of acknowledging branded food products that have a reputation for food safety and quality.

SATS (SATS SP): 27 June 2016

Cruise business highly resilient to economic downturn In the 10 years to 2014, According to the STB, Singapore’s local cruise market is expected to grow by an global cruise vacations annualised 8% for 2015-18. The key beneficiaries of the boom in the local cruise market grew faster in popularity will undoubtedly be Singapore Cruise Centre (SCC) and Marina Bay Cruise Centre than global land-based (MBCC), the latter being operated by SATS-Creuers Cruise Services, a JV between SATS vacations, by a 20% (60%) and Creuers del Port de Barcelona S.A. (40%). margin, according to the United Nations World In September 2013, SATS announced its intention to purchase its only competitor, SCC, Tourism Organisation from Temasek but the deal was called off in May 2014 due to negotiation hiccups that could not be satisfactorily resolved. While SATS’s management does not rule out another attempt to purchase SCC, given its intention to treat its cruise business as a core business and grow this segment over the next 5-10 years, it believes any acquisition would need to make financial sense.

Number of ship calls in Singapore Cruise passenger throughput 1,200 1,400,000 Annualised 8% growth 1022 forecast by STB 1,000 928 1,200,000 787 1,000,000 800 717 640 800,000 600 454 600,000 394 391 372 385 334 400 400,000

200 200,000

2009 2005 2006 2007 2008 2010 2011 2012 2013 2014 2015

2015 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

2017E 2018E 2016E Source: MPA Source: STB

Singapore is located strategically in Southeast Asia, where what we view as its excellent air connectivity and world-class port infrastructure make it an ideal hub for cruising in the region. While overall visitor arrivals to Singapore increased only slightly by 1% YoY for 2015, passenger throughput for the cruise industry expanded by 14% last year. Singapore welcomed a total of 385 cruise ships, including international cruise brands such as TUI Cruises and Royal Caribbean, as well as 9 maiden calls (new to Singapore and Southeast Asia). The total number of cruise passengers amounted to 1.02m in 2015 vs. 890k in 2014.

While the cruise market remains a small contributor in terms of revenue for the SATS group, it is a steady and growing market that could be a lucrative source of income for the company in the next few years, as Singapore welcomes an influx of middle class tourists from places like China, which currently accounts for the largest share of Asia’s cruise volume by source market at 50%. (see Appendix 3 for more information on the outlook for Asia’s cruise industry.)

Singapore Sports Hub In March 2013, SATS’s JV, Sports Catering Services (a 70:30 JV between SATS and Delaware North Companies), clinched a contract with Singapore Sports Hub to provide catering and food and beverage services for Singapore Sports Hub’s retail concessions, corporate suites, members’ dining areas, Meetings, Incentive Travel, Conventions and Exhibitions (MICE) and special events across 5 of its venues. The tenure is for 21 years with expected revenue of around SGD50m per year.

However, in an article posted on the Channel News Asia site on 18 February 2016 that the Singapore Sports Hub consortium faces a potential partnership breakdown. The Sports Hub Pte Ltd (SHPL) board, led by major equity partner InfraRed Capital Partners, is understood to be proposing to terminate the contract of its venue operation partner, Global Spectrum Pico, with the consortium (InFraRed Capital partners, Dragages Singapore, DTZ Facilities & Engineering (S) Limited and Global Spectrumm Asia) taking over the venue operator’s role.

SATS (SATS SP): 27 June 2016

We do not foresee much revenue growth materialising out of the current contract with Singapore Sports Hub over the next 2-3 years, and estimate revenue to remain at around SGD50m per year.

SATS: non-aviation revenue contribution The fall in FY16 was due 380 25% to the deconsolidation of 360 20% SATS-BRF; we forecast 340 320 non-aviation revenue to 15% grow at a CAGR of 4% for 300 280 FY17-19, driven mainly 10% by SATS’s cruise 260 business 240 5% 220 200 0% 2012 2013 2014 2015 2016 2017E 2018E 2019E Non-aviation revenue % of total Group revenue

Source: Company

SATS’s non-aviation sector currently comprises about 18% of total group revenue, mainly driven by the stable SFI contracts as well as the management of the MBCC. We forecast the company’s non-aviation revenue to rise by around 4% per year from FY17 onwards, mainly driven by the expansion of its cruise management business.

SATS (SATS SP): 27 June 2016

Financial analysis Primed for steady growth Greater automation, reduced dependency on headcount SATS experienced a strong uptrend in revenue from FY11-13, when revenue from both its food solutions and gateway services divisions increased due to an improving operating environment where the number of gross meals produced and passengers handled both saw high single-digit growth. However, revenue declined in FY14 as a result of lower meal volumes when Qantas Airways’ transit hub was shifted from Singapore to Dubai and SATS subsequently lost the account.

Coupled with the loss of Qantas was the foreign-exchange translational impact arising from the weakening of the Yen, which affected SATS’s contribution from TFK. As a result, FY15 and FY16 were followed by a series of weaker spending within the food solutions division as well as the deconsolidation of SATS-BRF food distribution and processing business, resulting in a further decline in revenue for FY16.

SATS: historical and forward revenue trend (SGDm) SATS: historical and forward net profit trend (SGD m) 4% growth in Changi’s passenger Driven by top line growth and 2,000 handled, 2-3% growth in Changi’s 300 improvement in operating margins 1,900 meals produced and 5-15% growth from adoption of automation  in TFK revenue 250 reduce impact of staff cost 1,800 1,700 200 1,600 1,500 150 1,400 100 1,300 1,200 50 1,100 1,000 0 2011 2012 2013 2014 2015 2016 2017E 2018E 2019E 2011 2012 2013 2014 2015 2016 2017E 2018E 2019E Source: Company Source: Company Note: Before restatement due to disposal of loss-making entity

While net profit followed a similar upward pattern from FY11-13, earnings troughed in FY14 at SGD180m, but have progressively improved over the past 2 years to SGD196m in FY15 and SGD221m in FY16. This improvement was due mainly to better operating margins, in particularly within the gateway services segment where the operating margin improved from 2% in FY14 (affected by rising staff costs) to 6% in FY16 (higher productivity). The improvement in the food solutions operating margin from 12.9% in FY14 to 16.2% was due mainly to the deconsolidation of the low-margin SATS-BRF business, coupled with an overall margin improvement as a result of greater automation.

SATS: divisional operating margins The margin improvement 20% post the deconsolidation 18% 16% of SATS-BRF has been 14% driven by the push 12% towards automation, 10% which should help 8% alleviate rising 6% manpower costs 4% 2% 0% 2011 2012 2013 2014 2015 2016 2017E 2018E 2019E Food solutions Gateway services

Source: Company, Daiwa forecasts

SATS (SATS SP): 27 June 2016

SATS: gross meals produced (m) SATS: passengers handled (m) 34 60 CAGR of 7% in-line with 32 55 growth in Changi’s passenger movement 30 50 28 45 26 40 24

22 35

20 30 2011 2012 2013 2014 2015 2016 2017E 2018E 2019E 2011 2012 2013 2014 2015 2016 2017E 2018E 2019E Source: Company, Daiwa forecasts Source: Company, Daiwa forecasts

Looking ahead, we expect SATS to reverse its declining revenue trend for FY17-19E, supported by a 4-6% pa increment in gross meals produced and 6-8% growth in passengers handled due to burgeoning tourist arrivals and the subsequent opening of Changi’s Terminal 4. Our assumptions then call for 2% and 4% increases in gross meals produced and passengers handled, respectively, every year from FY20 to FY25.

SATS: cost components (based on FY16) SATS: cost components (based on FY25E)

Other operating Other operating expenses (plug) expenses (plug) 9% 11% Company Company premise and premise and Staff costs Staff costs utilities expenses utilities 56% 49% 7% expenses Depreciation and 8% amortisation charges Depreciation 5% and amortisation License fees Cost of raw charges Cost of raw 4% materials 4% materials 19% 22% License fees 6%

Source: Company Source: Daiwa forecasts

The earnings increment should be largely supported by a continuous effort by management to drive productivity and improve margins, in our view. We expect its food solutions business to show a 0.8pp operating-margin improvement from 16.2% in FY16 to 17% in FY17-18E due to a turnaround in TFK’s business. Also, we think a 0.5pp improvement in gateway services can be expected due to greater automation and reduced dependency on headcount (where staff cost currently is the largest component of the group’s expenses).

While business is expected to improve on the back of the expansion of Changi, management aims to maintain its headcount level at around 14K from hereon to 2025 through various forms of automation. Staff costs as a percentage of total operating expenses should hence decline from 56% currently to 49% in FY25, on our forecasts. The added operating leverage should translate to a potential operating-margin improvement of 3.9pp in FY25 vs. FY16, or c.SGD93m of additional operating profit from a margin improvement alone.

Increasing number of partnerships to drive associates’ contribution Management has been very active in terms of engaging in various partnerships and JVs, both locally and overseas. From Jan-May 2016, the company announced 5 overseas partnerships as well as formed a JV with Duty Free Singapore (DFASS) to penetrate the fast-growing local travel retail market. The latest announcement was for a proposed share subscription of a 20% stake in Purantara Mitra Angkasa Dua (PMAD) for a total consideration of around SGD11.3m. The proposed acquisition will further strengthen the company’s foothold in Indonesia and is in addition to the investment SATS currently has in PT CAS and PT JAS.

SATS (SATS SP): 27 June 2016

SATS: historical and forecast associates/JVs contributions Key associates/JVs driving incremental growth (SGDm) (SGDm) 56 8.0 7.0 54 6.0 52 5.0 50 4.0 3.0 48 2.0 46 1.0 44 0.0 -1.0 42 PT JAS AAT PT CAS Brahim Others (include SATS BRF) 40 2016 2017E 2018E 2019E 2011 2012 2013 2014 2015 2016 2017E 2018E 2019E Source: Company, Daiwa forecasts Source: Company, Daiwa forecasts

We believe greater air traffic to Indonesia will continue to drive earnings for PT JAS, currently the dominant earnings contributor (accounting for around 32% of total associates/JV contribution for FY17, on our forecasts) among all of SATS’s associates/JVs. This would be supported by BAC returning to profitability on the back of higher meal volumes generated as traffic flows to KLIA continue to improve from 2015 levels. We are already seeing an improvement in BAC’s operating climate, with net losses narrowing to MYR1.9m in 4Q15 vs. losses of MYR49.7m in 4Q14 and MYR10.7m in 3Q15. We forecast BAC to generate an attributable earnings contribution of SGD0.7m for FY17E, SGD2.8m for FY18E and SGD4.3m for FY19E.

We see the key earnings drivers being PT JAS, PT CAS, BACH and SATS-BRF (after its deconsolidation) over the next 2-3 years, increasing associates/JVs’ contributions by 9- 12% per year. For FY19-25, we expect earnings growth from the successful execution of its JV with Yihai Kerry and Oman Air.

Balance sheet to remain strong with increasing net cash position We do not expect SATS’s balance-sheet position to deteriorate significantly over the next few years, given the strong cash-flow generation that continues to build its cash coffers. The company has slowly increased its net cash position from FY14-16 (SGD227m to SGD380m) given minimal overseas investments made during this period. We expect the rate of cash generation to slow in FY17, given the various acquisition announcements made by the company so far in 2016.

SATS: net (cash) position (SGDm) Accumulation of net 0 cash will likely slow in (50) FY17 due to (100) management’s (150) aggressive overseas (200) expansion, with 5 recent (250) overseas ventures in (300) 2016 YTD (350) (400) (450) (500) 2011 2012 2013 2014 2015 2016 2017E 2018E 2019E

Source: Company, Daiwa forecasts

SATS (SATS SP): 27 June 2016

We believe the risks to its balance sheet pertain to the significant amount of intangibles, which as of FY16 amounted to SGD164m. The bulk of its goodwill mainly pertains to its stake in SFI, for which we see low risk of an impairment, considering that SFI’s main client is the Singapore Government.

Dividends to grow from increasing cash-flow generation Free cash flow (LHS) vs. dividend payment (LHS) vs. payout ratio (RHS) SATS’s dividend payout 350 180% ratio has historically 300 160% hovered around the 80% 250 mark; we expect a steady 140% 200 dividend increment of 120% SGD0.01 per year for 150 100% FY17-19E 100

50 80%

0 60% 2012 2013 2014 2015 2016 2017E 2018E 2019E Free cash flow (inclusive of dividends from associates) - (SGD m) Dividend payment (SGD m) Payout ratio

Source: Company, Daiwa forecasts

Although SATS does not have a formal dividend policy, management has been paying higher dividends, in line with its expanding business. We expect the dividend payout ratio to remain in the range of 72-74% for FY17-19E, and trend slightly lower to 68% in the medium term assuming a steady SGD0.01 increment every year, a trend we have seen over FY14-16.

Valuations SATS: DCF valuation (SGDm) Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19 Mar-20 Mar-21 Mar-22 Mar-23 Mar-24 Mar-25 Mar-26 EBITDA (SGD m)* 335.7 294.5 292.6 333.2 367.0 384.3 410.2 443.2 467.2 493.1 514.0 536.1 552.8 Less: Net interest shield due to tax (0.2) (0.3) 0.1 0.4 ------Less: Increase in working capital (11.9) 31.6 20.0 24.7 ------Less: Tax paid (29.3) (38.5) (35.3) (35.9) (47.1) (50.3) (54.6) (60.0) (63.8) (67.8) (70.9) (74.2) (76.5) Add: Other non-cash items (47.9) (39.4) (43.7) (42.5) (45.4) (50.2) (54.7) (56.9) (59.6) (62.6) (64.2) (65.8) (67.6) Add: Dividends received from associates/JVs 25.9 27.8 89.9 34.3 32.2 35.7 39.0 40.9 43.1 45.6 47.1 48.7 50.3 Less: Capex (37.8) (57.1) (61.3) (51.1) (56.0) (61.0) (65.8) (70.0) (74.2) (78.6) (83.2) (88.0) (93.1) FCFF (SGD m) 234.5 218.6 262.3 263.1 250.7 258.5 274.1 297.3 312.8 329.6 342.7 356.8 366.0 5,321.3

Discount rate 7.9% 7.9% 7.9% 7.9% 7.9% 7.9% 7.9% 7.9% 7.9% 7.9% Discount factor 1.00 0.93 0.86 0.80 0.74 0.68 0.63 0.59 0.54 0.54 PV - FCFF 250.7 239.5 235.2 236.3 230.4 224.9 216.6 208.9 198.5 2,886.5 Source: Daiwa forecasts *Note: includes contributions from associates/JVs

SATS: key assumptions Terminal assumptions Beta 0.81 Risk Free Rate 2.60% Market Risk Premium 6.60% Cost of Debt 3.60% Cost of Equity 7.95% Target gearing 0% WACC 7.9% Long-term FCF growth 1.0% NPV - FCFF 2017-25 2,041.0 NPV Terminal FCFF 2,886.5 Total Enterprise Value 4,927.4

Less: Net debt/(cash) (end-FY16) (379.3) Less: Minority interest (end-FY16) 74.3 Value of equity 5,232.4 No. of shares (FY16 m) 1,124.1 DCF per share value SGD 4.66 Net debt/(cash) per share (0.34) Source: Daiwa forecasts

SATS (SATS SP): 27 June 2016

SATS: DCF sensitivity analysis WACC WACC Base FCF Growth 5.9% 6.4% 6.9% 7.4% 7.9% 8.4% 8.9% 9.4% 9.9% 0.0% 5.67 5.25 4.89 4.58 4.31 4.07 3.86 3.67 3.50 0.5% 6.01 5.53 5.12 4.77 4.47 4.21 3.98 3.77 3.59 FCF Growth Base 1.0% 6.41 5.85 5.39 4.99 4.66 4.36 4.11 3.89 3.69 1.5% 6.91 6.24 5.70 5.25 4.87 4.54 4.26 4.02 3.80 2.0% 7.53 6.72 6.08 5.55 5.12 4.75 4.43 4.16 3.92 Source: Daiwa forecasts

We value SATS using DCF methodology, backed by the key assumptions shown in the table above.

SATS: past 5-year trailing PER SATS: past 5-year trailing PBR 24 3.5

22 3.0 20 2.5 18 2.0 16 14 1.5

12 1.0

5/27/2012 8/27/2012 5/27/2015 5/27/2013 2/27/2016 5/27/2011 8/27/2011 2/27/2012 2/27/2013 5/27/2013 8/27/2013 2/27/2014 5/27/2014 8/27/2014 2/27/2015 8/27/2015 2/27/2016 5/27/2016 5/27/2011 8/27/2011 2/27/2012 5/27/2012 8/27/2012 2/27/2013 8/27/2013 2/27/2014 5/27/2014 8/27/2014 2/27/2015 5/27/2015 8/27/2015 5/27/2016

11/27/2011 11/27/2012 11/27/2013 11/27/2014 11/27/2015 11/27/2011 11/27/2012 11/27/2013 11/27/2014 11/27/2015 PER +1 SD +2 SD PER +1 SD +2 SD -1 SD -2 SD 5-year Average -1 SD -2 SD 5-year Average

Source: Bloomberg Source: Bloomberg

We derive a fair-value target price of SGD4.66 for SATS, which represents 14% upside from the current share price of SGD4.08. Our target price implies a PER of 21x on our FY17E EPS forecast. While this PER valuation seems expensive at close to 2SD above SATS’s past 5-year average, we believe it is justified given our expectation of an acceleration in earnings growth, with an FY16-19E EPS CAGR of 8.6% vs. 2.3% for FY11- 15. SAT’s regional peers are trading currently at an average PER of 26x (based on Bloomberg forecasts), a 24% premium to our implied target multiple, which is reflective of the long-term growth prospects for this industry.

Operating leverage is We believe SATS’s increasing focus on the usage of automation to reduce staff likely the key to margins dependency will have a major impact on curbing the rise in its manpower cost, currently a improvement, in our major component (56%) of its overall operational expenses. We look for its operating profit view margin to improve from 12.6% in FY16 to 16.5% in FY25, translating to c.SGD93m in additional operating profit from the margin improvement alone (around a 25% increase in operating profit based on our FY25 operating profit forecast of SGD394m). Further, we forecast SATS’s current free cash flow yield of 5% to increase to 8% in FY25 on the back of an acceleration in free cash flow generation (FY19-25: 4.9% vs. FY17-19: 1.5%).

Thus, we believe investors should focus on SATS’s strong and sustainable free cash flow generation, inclusive of dividends received from its associates, which we forecast to grow from SGD263m for FY16 to SGD366m by FY25. This method of valuation accrues an associate/JVs value of around SGD700m, which translates into a FY17E PER of 13.5x and a PBR of 1.1x. Compared to SATS’s FY17E PER of 19x at its current share price, our valuation for its associates/JVs looks conservative.

SATS (SATS SP): 27 June 2016

SATS: peer comparisons Ticker Name Mkt Cap (USD) EV (USD m) EV/EBITDA FY1 (x) P/E (x) P/E FY1 (x) P/E FY2 (x) P/FCF (x) Dividend Yield (%) Airport-related counters MNZS LN Equity MENZIES (JOHN) PLC 480.4 661.8 6.1 32.4 11.6 11.1 44.2 3.1 600004 CH Equity GUANGZHOU BAIYUN INTERNATI-A 2,104.6 2,190.7 5.8 10.7 10.8 10.4 N.A. 2.4 CTRG FP Equity CATERING INTL SERVICES 125.0 95.4 6.6 21.6 30.7 23.2 N.A. 0.9 BBA LN Equity BBA AVIATION PLC 3,248.7 2,795.4 7.0 28.2 16.7 13.7 34.6 3.9 9706 JP Equity JAPAN AIRPORT TERMINAL CO 2,857.7 3,048.5 12.2 32.4 23.8 21.8 N.A. 0.9 AIA NZ Equity AUCKLAND INTL AIRPORT LTD 5,410.5 6,617.1 21.6 30.8 36.2 32.5 110.3 2.5 600009 CH Equity SHANGHAI INTERNATIONAL AIR-A 7,617.3 6,503.2 11.2 19.7 17.4 15.3 22.3 1.3 694 HK Equity BEIJING CAPITAL INTL AIRPO-H 4,493.4 5,968.6 8.5 18.0 16.4 14.3 24.7 2.1 MAHB MK Equity MALAYSIA AIRPORTS HLDGS BHD 2,704.8 4,198.9 10.8 N.A. 84.5 47.1 13.5 1.3 SYD AU Equity SYDNEY AIRPORT 11,940.4 17,633.9 21.1 56.4 54.0 47.6 N.A. 3.5 AOT TB Equity AIRPORTS OF THAILAND PCL 15,638.9 15,111.6 17.4 27.4 28.8 24.7 26.1 1.3 SGS AB Equity SAUDI GROUND SERVICES CO 2,425.4 2,212.2 9.1 14.7 11.8 11.8 13.8 5.4 44 HK Equity HONG KONG AIRCRAFT ENGINEERG 1,041.8 1,559.9 10.6 17.4 17.5 17.1 45.2 3.5 Average Average 4,622.2 5,276.7 11.4 25.8 27.7 22.4 37.2 2.5 Food catering counters DOC AV Equity DO & CO AG 942.9 1,004.6 7.9 29.7 23.3 20.9 31.4 1.4 SW FP Equity SODEXO 16,673.5 18,441.8 11.1 20.0 20.9 19.2 19.6 2.3 BRAH MK Equity BRAHIM'S HOLDINGS BERHAD 55.8 92.7 11.3 N.A. 41.5 10.9 183.8 N.A. CPG LN Equity COMPASS GROUP PLC 31,475.1 35,847.9 13.9 23.7 22.1 20.3 21.9 2.3 CATERING AB Equity SAUDI AIRLINES CATERING CO 2,093.7 1,956.4 10.7 11.7 11.9 10.9 26.8 7.3 CASS IJ Equity CARDIG AERO SERVICES TBK PT 156.9 176.0 4.2 18.8 14.5 12.1 12.7 2.1 Average Average 8,566.3 9,586.6 9.8 20.8 22.4 15.7 49.4 3.1 Total Average 5,867.7 6,637.7 10.9 24.3 26.0 20.3 42.1 2.6

SATS SP Equity SATS LTD 3350.0 3662.0 11.4 21.1 18.8 17.7 18.9 3.9 Source: Bloomberg, Daiwa forecasts

We believe SATS will remain as one of the few rare long-term players leveraging on Singapore’s attractiveness as both a tourism and transit hub. The company has been a consistent dividend payer and we have seen dividend payments increasing steadily over the past 3 financial years. We forecast the stock’s forward yield at an attractive 3.9%, significantly higher than its peers’ average of 2.6%.

We expect SATS’s dividend payment to grow by around 6% per year over the course of FY17-19E to hit SGD0.18/share by FY19, implying a forward yield of around 4.4% at its current share price. The company plans to reinvest the excess capital in capex to improve productivity (leading to better margins) as well as to fund its overseas ventures to partake in the region’s booming air travel and tourism sector.

SATS (SATS SP): 27 June 2016

Risks to our thesis Risk of an epidemic Though remote, the risk of an epidemic impacting regional travel to Singapore is real as can be seen from past cases such as the SARS outbreak in Singapore in 2003 as well as the more recent outbreak of the Middle East respiratory syndrome in South Korea in 2015 which negatively impacted both retail sales as well as tourist visits to the nation. The risk of an epidemic will deter potential tourists from travelling to the region, consequently reducing passenger movement/traffic and result in lower service revenue for SATS.

Risk of terrorist attacks The twin disasters of MH370 and MH17 in 2014 resulted in cancellations by numerous travellers flying with MAS. While such a risk could again be viewed as remote, the implications of a terrorist attack on Singapore’s local airlines or airport would be extremely detrimental in terms of passenger/tourist loss due to safety concerns.

Risk of increasing competition from regional air hubs Changi’s status as one of the fastest-growing air hubs in the world is increasingly being challenged by the regional air hubs looking to increase their market share. This is evident within the transit market where cost competition is intense and Changi is clearly not among the most cost-effective airports for LCCs, whose core business pertains to the transit market. The reduction of Changi’s transit market would reduce a significant source of revenue for SATS, given its 80% market share in Changi’s ground-handling services.

Risk of slower-than-expected adoption in automation One of the factors in our expectation of higher earnings in FY17-19E stems from potential margin improvements from increasing adoption of automation and digitalisation in SATS’s operations, to reduce the impact of rising staff costs as well as the manpower shortage. Slower-than-expected adoption of new technology to increase productivity could result in less-than-ideal margins for the company and a subsequent miss to our FY17-19 earnings forecasts.

SATS (SATS SP): 27 June 2016

Appendix 1: Changi’s expansion plans SATS stands to benefit from the expansion of Changi SATS and Dnata’s SATS is a leading provider of gateway and food solutions catering to 43 airports across 11 duopoly status at Changi countries. In FY16, the company derived the bulk of its revenue from Singapore (81% of have prevented other the group’s total FY16 revenue) where it is the runaway market leader with around an 80% global established market share of the ground-handling business, while Dnata manages the remaining 20%. ground-handlers from Attempts made by other established ground-handlers such as Swiss-based Swissport and penetrating the local Orlando-based Aircraft Service International Group (ASIG) to penetrate the local scene market have ended in failure.

Swissport entered the market in 2005 with a 10-year operating licence but could only secure 4 customers: Tiger Airways, AirAsia, Northwest Airlines and Swiss International. The failure to achieve the critical mass needed to sustain operations led to its departure from the Singapore market 4 years later in 2009, racking up losses in excess of SGD50m. Thereafter, Changi Airport awarded a new licence to ASIG in 2011, but the company clinched its first customer, Jetstar, only after 3 years, in October 2014. However, ASIG’s contract was terminated in June 2015.

These illustrations highlight the duopoly market status of SATS and Dnata at Changi, where the threat of new entrants is seen as low. Although we do not rule out the threat of future new entrants diminishing the market share of the incumbents, a coordinated effort between Changi and various airlines would be required for such a scenario to pan out any time in the future, in our view. Without additional incentives or a government-led initiatives to facilitate the entry of a third player at Changi, we believe it is highly plausible that both SATS and Dnata will remain as the clear-cut beneficiaries of the current expansion plans for Changi’s Terminals 4 and 5.

Changi Airport One of the fastest-growing air-hubs in the world Changi is currently the 6th busiest airport for international traffic, serving a record 55.4m passengers and 346,300 aircraft in 2015. According to OAG rankings, an industry consultant, Changi was ranked 6th in terms of the world’s fastest-growing air hubs in 2015, with Istanbul’s Ataturk Airport taking the top spot and Dubai International Airport the 4th spot. The rise of LCCs has helped Asian airports including Changi boost their air-hub status. As LCCs continue to expand in Asia, airports in the region are expected by industry experts to further cement their position as “mega-hubs” in the next few years.

World’s fastest growing mega-hubs List of the busiest airports in Asia Connections on busiest Increase in connections Total Rank Airport Country day in 2015 vs busiest day in 2010 Rank Airport Country passenger 1 IST Turkey 132,355 101,439 1 Beijing Capital International Airport China 90,203,000 2 DFW USA 389,852 81,502 2 Dubai International Airport UAE 78,014,838 3 PVG China 89,698 60,616 3 Tokyo Haneda Airport Japan 75,300,000 4 DXB UAE 88,545 56,578 4 Hong Kong International Airport Hong Kong 68,488,000 5 MEX Mexico 84,263 36,230 5 Istanbul Ataturk Airport Turkey 61,322,729 6 SIN Singapore 74,531 32,540 6 Shanghai Pudong International Airport China 59,700,000 7 MDW USA 46,295 29,973 7 Soekarno-Hatta International Airport Indonesia 57,000,000 8 KMG China 42,540 28,703 8 Singapore Changi Airport Singapore 55,448,964 9 SAW Turkey 28,199 25,008 9 Guangzhou baiyun International Airport China 55,200,000 10 CLT USA 244,040 24,606 10 Suvarnabhumi Airport Thailand 52,918,785

Source: OAG Source: Airports Council International

Changi established new connections with 8 cities in 2015 and another 7 airlines (Air New Zealand, Jetstar Pacific, Malindo Air, Oman Air, Tigerair Taiwan, Uzbekistan Airways and Vietjet Air), all of which now have flights to the Changi. We believe these ongoing initiatives have been taken by CAG to stimulate passenger growth and cement Singapore’s status as one of the key aviation hubs in the Asia Pacific region.

SATS (SATS SP): 27 June 2016

Changi Airport aims to double its terminal capacity by 2030

Passenger movements at Changi (m) Air-freight movements at Changi (m tonnes) 60 2.0 53.7 54.1 55.45 1.87 1.83 1.84 1.84 1.85 51.2 1.8 50 46.5 1.6 1.4 40 1.2 30 1.0 19.16 0.8 0.64 20 0.6 0.4 10 0.2 0 0.0 2011 2012 2013 2014 2015 Jan-Apr 2016 2011 2012 2013 2014 2015 Jan-Apr 2016 Source: Changi Source: Changi

Terminal capacity We think the need for additional terminal capacity will be a key challenge for Changi in its expansion ensures that pursuit of passenger capacity growth. Currently, Changi’s Terminals 1-3 can accommodate passengers’ experience 66m passengers. While 2015 passenger movements amounted to a record 55.4m, traffic is not compromised in can become congested during peak hours, which could result in a sub-optimal customer any situation, especially experience. Changi has long anticipated the need for terminal expansion and in 2012 during peak periods announced the expansion plan for Terminal 4 at a cost of SGD1.5bn. This was followed by an announcement in 2013 to construct Terminal 5 with an initial budget of around SGD3.5bn.

Passenger handling capacity at Changi (m) 2016 2017E 2018E mid-2020s Terminal 1 21 21 24 24 Terminal 2 23 23 23 23 Terminal 3 22 22 22 22 Terminal 4 16 16 16 Terminal 5 50 Total 66 82 85 135 Source: Changi

The planned expansion of Terminal 4, due to open in 2H17, will boost passenger capacity by 16m, raising the total airport capacity to around 82m passenger movements per year. The planned expansion of its Terminal 1 will further boost Changi airport’s passenger capacity to 85m by 2018. Furthermore, we expect Changi’s fifth terminal, Terminal 5, to be up by the end of the next decade, boosting passenger capacity by an additional 50m and bringing total capacity in Changi to 135m.

It’s not just about passenger traffic; runways matter too Existing bottlenecks due more to limited runways than terminal capacity Our focus thus far has been on the increase in passenger movement from Changi’s planned expansion of its terminals. However, given that current airport utilisation stands at only around 83% vs. the neighbouring international airports, some in excess of 200%, we believe the airport capacity is not the bottleneck for Changi at this point. Instead a more pressing issue is the need for an additional runway to reduce the congestion on its 2 existing commercial runways. The 3rd runway is currently scheduled for commercial use from 2020.

SATS (SATS SP): 27 June 2016

Asia: largest airports by movements per runway Changi Airport has one 250 of the highest 200 movements per runway 150 among regional airports 100 50

International

BeijingCapital

ShanghaiPudong

SingaporeChangi

Guangzhou Baiyun

ChengduShuangliu

KunmingChangshui

Shenzhen International

JakartaSoekarno-Hatta BangkokSuvarnabhumi Hong Kong International Source: Centre for Aviation, companies

While higher movements per runway could be an indication of better efficiency and utilisation, we believe carriers/passengers should not have to compromise in terms of waiting time. We think a third runway would also give Singapore the leeway to re-adopt its more open policy of warmly welcoming all airlines, instead of prioritising precious peak- hour slots for certain airlines.

Asia: planned runway expansions Some airports, such as Airport No of existing Planned developments for future runways Indonesia’s Soekarno- runways Jakarta Soekarno-Hatta 2 Operates at nearly three times its designed capacity. A third runway is planned to become operational Hatta Airport, rank high by 2017. A new airport is also planned in terms of Guangzhou Baiyun 3 Third runway just completed in 2014. Beijing Capital International 3 New Beijing Daxing Airport to open in 2018 with eventual expansion of runways to 6. movements/runway, but Hong Kong International 2 Third runway proposed and awaiting approval. Construction would not be finished until 2022 low in terms of on-time Singapore Changi 2 Third runway for commercial flights to be completed around 2020 performance due to Bangkok Suvarnabhumi 2 Third runway approved but as a reserve facility Shenzhen International 2 Third runway being constructed by 2040 airport/runway over- Kunming Changshui 2 No plans for third runway capacity Chengdu Shuangliu 2 New airport is due to open in 2018 with five runways and capacity to handle 80m pax/year Shanghai Pudong 4 Fourth runway open in 2015. Has received approval for fifth runway

Source: Centre for Aviation and airports

Changi announced in October 2015 that it had awarded the contract to construct the third runway, valued at SGD1.12bn, to a joint venture between Samsung C&T Corporation and Koh Brothers, and that this was the first of several contracts for the runway works. Once the third runway becomes operational, Runway 2 will be closed temporarily to complete the network of taxiways required to link the new runway with the airports existing runways.

Changi: future runway 3 Changi: future development

Source: Straits Times Source: CAAS

SATS (SATS SP): 27 June 2016

Changi still ranks among the top 10 airports based on on-time performance

Top-10 global airports by on-time performance Top 10 Asia-Pacific airlines by on-time performance Rank Airport Average OTP 2015 Rank Airport Average OTP 2015 1 Tokyo Haneda 91.25% 1 Japan Airlines 90.44% 2 Munich 87.71% 2 All Nippon Airways 89.65% 3 Sao Paolo 87.47% 3 Virgin Australia 88.56% 4 Minneapolis 85.27% 4 Qantas Airways 88.08% 5 Sydney 85.20% 5 Air New Zealand 87.33% 6 Melbourne 85.02% 6 IndiGo Air 84.57% 7 Singapore Changi 84.75% 7 Singapore Airlines 84.31% 8 Atlanta 84.38% 8 Thai AirAsia 84.28% 9 Frankfurt 84.12% 9 Jet Airways 81.98% 10 Seattle 83.56% 10 Skymark Airlines 81.94%

Source: OAG Source: OAG

Changi ranked 7th among the top-10 large airports globally in terms of on-time performance in 2015, ensuring high standards are maintained as air traffic growth will be crucial in its outperformance vs. peers. Besides adequate terminal and runway capacity, ensuring customer satisfaction through on-time arrival and departure of flights is a key differentiating factor for Changi, in our view.

SATS (SATS SP): 27 June 2016

Appendix 2: tourism boost to global air travel Acceleration in global air travel According to IATA, air travel will continue to accelerate and expand by an average of 5.3% YoY in 2016, which is higher than Changi’s average 4-year passenger CAGR of 4.5%. IATA also states that Asia Pacific along with Latin America, Africa and the Middle East will see the strongest passenger growth, with China leading the field. Although China’s air-travel growth has slowed in recent years, 3 decades of rapid economic expansion have established a thriving middle class and Boeing expects this growing population group, complemented by “new visa policies”, to lead Chinese air travel expansion.

RPK traffic by airline domicile (bn) World air traffic growth forecast Region % of 2014 world RPK 20-year growth % of 2034 world RPK Africa Asia Pacific 29% 5.7% 36% CIS Europe 25% 3.6% 21% North America 25% 2.5% 17% Latin America Middle East 9% 6.7% 13% Latin America 5% 5.2% 6% Middle East CIS 4% 4.9% 4% Africa 3% 5.3% 3%

North America

Europe

Asia Pacific

0 1,000 2,000 3,000 4,000 5,000 6,000 2014 traffic 2015-2034 traffic

Source: Airbus GMF 2015-2034 Source: Airbus GMF 2015-2034

ASEAN Open Skies Policy Implementation of the The Southeast Asia’s Open Skies agreement came into effect in April 2016 after ASEAN Open Skies ratifications by Indonesia and after Laos lifted restrictions on capacity and competition, Policy could be a boon allowing airlines to launch unlimited flights from their home country to any point in the to regional air travel region, subject to airport slot availability. This means that the agreement has not achieved demand ratification by all 10 ASEAN member states (Brunei, Cambodia, Indonesia, Laos, Malaysia, Philippines, Singapore, Thailand and Vietnam).

Hubs like Singapore, which have a clear expansion plan, could gain from an increase in air services, while airports such as Bangkok’s Suvarnabhumi Airport, Manila’s Ninoy International Airport and Jakarta’s Soekarno-Hatta International Airport could be constrained by their lack of airport capacity to service unlimited flights.

The most important aspect of liberalising the region’s aviation markets is the guarantee of third, fourth, fifth and seventh freedoms of the air, which are as follows:

 Third and fourth freedom rights: The right to fly from an airline’s home country to a foreign country and vice versa without government approval.

 Fifth freedom rights: The right to fly between two foreign countries during flights originating or ending in an airline’s home country

 Seventh freedom rights: The right to fly between two foreign countries while not offering flights to an airline’s home country (not addressed)

The agreement removes restrictions on third, fourth and fifth freedom rights which allow ASEAN-based carriers to freely transport people and cargo to or from a foreign country and to pick up and drop off people and cargo from a second country en route to a third.

SATS (SATS SP): 27 June 2016

First to fifth freedom rights

Source: Daiwa

The agreement should mean improved connectivity, which should spur growth for the aviation and logistics industries. The tourism industry should also get a boost from low ticket prices, which will appeal to travellers looking at convenient and affordable airline services. We believe both Changi Airport Group and SATS stand to be clear beneficiaries of this policy implementation, given that Changi’s existing airport capacity is more than capable of handling an increase in passenger traffic (~80% utilisation) prior to the expansion of Terminal 4, which will immediately ease capacity utilisation to ~60%. This is unlike airports such as those in the Philippines where the nation is limiting access to Manila due to capacity and over-crowding concerns.

Boost in regional tourism The rise in global Asia-Pacific region to benefit from an influx of tourists, led by the Chinese tourism is a major Air travel in Asia Pacific has undoubtedly been a big beneficiary of the tourism boom in the catalyst for increase region since 2005. It accounts for around 23% of the world’s international overnight arrivals demand for air travel and has been the fastest-growing region for international tourism since 2005, according to the UN World Tourism Organisation.

According to the MasterCard Asia Pacific Destinations Index 2015, Bangkok had the most international arrivals of any Asia-Pacific city in 2015, at 21.9m, with Singapore coming in at a distant second, at 11.8m. In terms of tourist expenditure, Bangkok ranks 1st while Seoul and Singapore took 2nd and 3rd places, respectively, according to the MasterCard index. The above data accounts for international visitor arrivals by air only and does not include other modes of arrival like sea and land.

SATS (SATS SP): 27 June 2016

Chinese household debt to GDP ratio China disposable income per capita (CNY) - LHS vs. YoY growth - RHS 40 35,000 20% 18% 35 30,000 16% 30 25,000 14% 25 20,000 12% 20 10% 15,000 15 8% 10,000 6% 10 4% 5,000 5 2% 0 0 0% 2007 2009 2011 2013 2015 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Source: tradingeconomics Source: tradingeconomics

Rapid urbanisation, increased disposable income and relaxed travel restrictions have enabled more people to travel, notably in Asia, led by the Chinese. China’s slowing GDP growth in recent years, depreciation of the Yuan, and large falls in the Chinese stock market have raised concerns that the number of outbound Chinese tourists and their related spending will likely decline in 2016. However, we see the purchasing power of Chinese tourists remaining high, as we expect China’s per capita income to keep growing and given its low household-debt to GDP ratio, which has led to a vast increase in China’s middle-income class.

According to the data from the China Outbound Tourism Research Institute (COTRI), 30.2m Chinese tourists travelled abroad in 1Q16, a 2.4% YoY increase, the lowest growth rate reported since the beginning of outbound tourism from China in 1997. We note that the surprisingly small YoY growth rate masks 2 very different trends: 1) Chinese tourist arrivals to Hong Kong and Macau declined by 15% and 2%, respectively, in 1Q16, while 2) the growth rate to the rest of the world (which includes top destinations like Thailand, Japan, South Korea, Singapore, and Taiwan) was around 22%, for an overall growth rate of 2.4% in 1Q16.

Despite economic uncertainties and a weak yuan, the latest data points demonstrate the resilience of Chinese tourists visiting countries beyond Hong Kong and Macau.

Asia Pacific: top-10 destinations by international arrivals (m) Asia Pacific: top-10 destinations by total expenditure (USDbn)

Osaka 6.5 Sydney 6 Bali 7.2 HongKong 6.7 Pattaya 8.1 Phuket 8 Hong Kong 8.3 Taipei 9.5 Seoul 9.2 Bali 10.3 Phuket 9.3 Kuala Lumpur 10.5 Kuala Lumpur 11.3 Tokyo 11.9 Tokyo 11.8 Singapore 14.1 Singapore 11.8 Seoul 14.4 Bangkok 21.9 Bangkok 15.2

0 5 10 15 20 25 0 5 10 15 20

Source: Mastercard Source: Mastercard

Singapore tourist numbers are improving on Chinese arrivals According to the Singapore Tourism Board (STB), tourist arrivals into Singapore peaked in 2013 with 15.6m arrivals, but declined to 15.1m in 2014 and 15.2m in 2015. STB estimates tourist arrivals will reach 15.2-15.7m in 2016, growth of 0-3% YoY.

SATS (SATS SP): 27 June 2016

Annual tourist arrivals (m) Tourist breakdown by geography 18 25% 15.6 15.1 15.2 America 16 14.5 4% 13.2 20% 14 Others 11.6 15% Indonesia 12 8% 9.8 10.3 10.1 9.7 18% 10 8.9 10% Europe Malaysia 11% 8% 8 5% 5.5 Australia 6 0% 7% China 4 14% -5% 2 India 0 -10% 7% South Korea Philippines

4% 4%

2011 2006 2007 2008 2009 2010 2012 2013 2014 2015 2005 Thailand Japan Vietnam Hong Kong 3% 5% 3%

Tourist arrivals Tourist Growth 4% Jan-Apr 2016

Source: Singapore Tourism Board Source: Singapore Tourism Board

Top-3 visitor arrivals by country (m) Tourist arrivals from 3.5 China rebounded in 2015 3.0 while those from 2.5 Indonesia and Malaysia 2.0 remained weak 1.5

1.0

0.5

0.0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Mar-16 China Indonesia Malaysia

Source: Singapore Tourism Board

Visitors from Indonesia, China and Malaysia collectively accounted for 40% of tourist arrivals to Singapore in 2015. Indonesia tourists remain Singapore’s largest group of arrivals, with a CAGR of 4.2% from 2005-15. A key reason for the weak tourist performance in 2014-15 was the slowdown in tourist arrivals from Indonesia and Malaysia on the depreciating Indonesian Rupiah and Malaysian Ringgit, which curbed the spending power of Indonesian/Malaysian tourists. However, we believe that the situation could reverse in 2016 following the appreciation of the Ringgit by 2% against the SGD over the past 6 months. The Rupiah has been relatively flat against the SGD during this period.

The Monetary Authority of Singapore’s surprise decision to ease its exchange-rate based monetary policy in April 2016 could see the SGD weaken against neighbouring currencies such as the Rupiah and Ringgit in the near future. Early signs indicate a likely strong rebound in tourists from Indonesia, with an 11.4% increase in visitor arrivals between January and March 2016 compared with January-March 2015. Growth in Malaysia arrivals was flat YoY in January-March 2016.

SGD/IDR 5-year historical chart SGD/MYR 5-year historical chart 11,000 3.2 10,500 3.1 10,000 3.0 9,500 2.9 9,000 2.8 8,500 2.7 8,000 2.6 7,500 2.5 7,000 2.4 6,500 2.3

6,000 2.2

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

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

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

Sep-12 Sep-11 Dec-11 Dec-12 Sep-13 Dec-13 Sep-14 Dec-14 Sep-15 Dec-15

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

Sep-12 Dec-13 Sep-11 Dec-11 Dec-12 Sep-13 Sep-14 Dec-14 Sep-15 Dec-15

Source: Bloomberg Source: Bloomberg

SATS (SATS SP): 27 June 2016

Tourist arrivals from China saw a major decline in 2014 (down by 24% YoY) as a result of a tourism law implemented by China in October 2013 (“zero-fare tours”) which tightened the regulations on overseas travel. The poor tourist arrival figures that year could also be partly attributed to the disappearance of flight MH370, abduction of Chinese visitors in Sabah and political unrest in Thailand, all of which had a dampening effect on Chinese travel to the region. Despite a 24% YoY decline in Chinese tourist arrivals in 2014, the overall impact on total tourist arrivals to Singapore was minimal at -3%, demonstrating a healthy tourism mix which was not significantly affected by a decline for a single geographical location.

Chinese tourist growth in Singapore Tourist growth in 2015 60% 47% and 2016 was bolstered 50% 40% 35% by the relaxation of visa 29% 25% policies and increase in 30% 21% 22% fleet size by China 20% 12% 7% carriers to accommodate 10% greater demand for air 0% travel (10%) -3% (20%) -13% (30%) -24% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Jan-Mar 2016

Source: STB

Chinese tourist arrivals rebounded strongly in 2015 to 2.1m, a 22% YoY increase, as the validity of multiple journey visas for Chinese visitors was extended to a maximum of 10 years from 1 June 2015. The extension was aimed at attracting more upmarket Chinese middle-class travellers to Singapore. Other initiatives by the STB, such as intensification of its publicity campaign, saw positive results with a 22% YoY rise in Chinese tourist arrivals in 2015.

Alitrip Eco system Market share of China online travel agencies in 2015

Ctrip 25% Others 43%

Tuniu 15% CY 10% Lvmama magengwo 3% 4%

Source: STB Source: China Internet Watch

Visitors from China On 8 January 2016, Alitrip, the travel service arm of Alibaba Group, announced a new visitors can search for partnership with Singapore’s tourism industry and the STB which allows Singapore firms in Singapore destination the tourism sector such as airlines, hotels, and tourist attraction businesses to set up their offerings, navigate retail outlets on the Alitrip platform. The platform will offer dining and shopping promotions to Singapore and share Chinese travellers through discount cards and coupons, and also allow them to make their travel experience bookings for myriad services (theme parks, performances, airlines and hotels). Although only online a contributing factor, the collaboration has supported a 47% YoY increase in Chinese tourist arrivals to Singapore for January-March 2016. Indeed, we think tourists from China could even displace Indonesian visitors to take the No.1 spot in terms of tourist arrivals in 2016.

SATS (SATS SP): 27 June 2016

Sustained growth in Chinese tourist arrivals The table below illustrates some of the reasons why we believe China’s outbound tourism is set to bloom and how that will have a positive knock-on impact on Singapore tourism.

China: tourism catalysts S/N Catalyst Potential Impact on Singapore tourism 1 Millennials encompass the bulk of China According to a research done by GfK, half of China's outbound According to a survey by hotels.com, millennial’s most favoured activities outbound tourism travellers are 15-29 years old. This group is more tech savvy while travelling include sightseeing, dining and shopping. Almost one in five and prefers to use online platforms to research tourist locations booked into hostels and backpacker accommodations, while only one in ten and hotspots booked into a five-star hotel in 2015 2 Various countries such as Japan, Korea, Easy visa applications and relaxation of various visa Singapore-granted 10-year multiple-journey visas’ (MJVs) validity to be Singapore, Thailand, Indonesia etc. are relaxing requirements such as lengthening visa validity, granting extended from June 2015, so Mainland travellers with valid MJVs need not visa requirements for Chinese tourists multiple-entry visas and lifting quotas etc. could be key factors apply for a visa each time they visit Singapore (applies to travellers’ spouses behind a likely rise in China tourist numbers. and children below 21 years of age). The previous arrangement had varying requirements for such visas. 3 Passport ownership is set to increase from The passport ownership rate is low in China compared with Singapore will benefit from more Chinese tourist being able to travel current 5-6% of Chinese population mature nations such as the US, at 46%, according to a report overseas, with the Lion City among one of the top Asia-Pacific destinations published in Forbes in January 2016. The figure for China favoured by Chinese tourists amounts to ~75m China passport holders; but we expect the number to increase exponentially in the coming years 4 Singapore is regarded as a safe place for travel Tourists are more inclined to visit Singapore vs. locations such as Japan (due to ongoing fears following the Fukushima accident) despite Singapore not having many heritage sites compared with its neighbouring countries 5 STB is actively partnering with various Chinese The majority of Chinese tourists are millennials who are tech- Singapore is seeing initial signs of success with its partnership with various digital players such as Alitrip, Mafengwo, Tuniu savvy and usually access online platforms for information or to Chinese digital players, with January-March 2016 tourists from China etc. to allow Chinese locals to have an easy make bookings when they look to travel overseas vs. the increasing by 46% vs. January-March 2015 access to information pertaining to Singapore traditional medium of a tour agency 6 Increasing flight connectivity with the number of According to data from Boeing, the number of commercial Expansion of Singapore airport terminals will be a front runner to gain a larger aircrafts and airports expected to grow airplanes in China will likely increase from 2,570 units in 2014 to market share of the boom in China's aviation sector exponentially in China 7,210 units by 2034 Source: Daiwa forecast

Demographics of Chinese travellers Various countries are relaxing visa requirements for Chinese tourists

60+ years old Countries relaxing requirements for Chinese tourists 46-60 years old 3% Asia Pacific Japan, Korea, Thailand, Indonesia, Singapore, Australia, Malaysia 10% Europe UK, France, Germany America US

15-29 years old 50% 30-45 years old 37%

Source: GfK Source: Various media

CAG: number of China cities to which airlines fly China: online holiday market (2009-18) 35 900 60% 772.05 800 30 50% 700 654.49 25 600 542.09 40% 500 432.63 20 30% 400 303.19 15 300 220.1 20% 168.95 200 131.39 10 94.89 61.76 10% 100 5 0 0% 0 2009 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E 2010 2011 2012 2013 2014 2015 Online holiday market (bn yuan) - (LHS) Growth YoY - (RHS)

Source: CAG Source: China Internet Watch

SATS (SATS SP): 27 June 2016

China: most important factors for Mainland tourists when China: new airplane deliveries (2015-2034) choosing holiday destinations 60% Airplane type Seats Total deliveries Dollar value (USD) 48% 50% Regional jets 90 and below 190 10bn 37% 40% Single-aisle 90-230 4,630 490bn 29% 26% 30% 23% Small wide-body 200-300 810 210bn 17% 16% 16% Medium wide-body 300-400 650 220bn 20% 15% 12% 12% 9% 8% large wide-body 400 and above 50 20bn 10% Total 6,330 950bn 0% (16.6% of world total)

Safety

Cuisine

Climate

Shopping

Reputation

Cleanliness

Qualityof

sites

Festiveevents

accommodation…

Value for money

Politicalsituation

Historicalheritage and

Public transport system Easeofvisa application

Source: Hotels.com Source: Boeing Note: Chinese International Travel monitor 2014

Better connections by We see the strong growth in Chinese tourist arrivals as a major catalyst propelling air, serving second-tier passenger movements in Changi, and correspondingly resulting in higher gateway revenue Chinese cities, have for SATS. Historically, tourist arrivals have accounted for around 28% of total passenger helped boost overall movements at Changi. Assuming this ratio remains the same, strong tourist arrivals inbound tourist numbers stemming from strong growth in Chinese tourists arrivals could see passenger movement from China increasing to 57.1m in 2016 vs. 55.4m in 2015, and reaching 60.7m by 2018E.

Singapore tourism needs to reinvent itself to ensure long-term sustainability Attract tourists through attractive local content Macro fundamentals generally appear to be supportive of a tourism boom within Asia- Pacific, led by the rise of China’s middle class. Singapore has so far been a beneficiary of this rise and the past decade has been a banner decade for tourism in the Lion City.

Singapore started hosting the world’s only Formula One night race in 2008, followed by the opening of the Singapore Flyer Ferris wheel in the same year. Furthermore, 2 integrated resorts, Marina Bay Sands and Resorts World at Sentosa, were opened in 2010 together with the Universal Studios Singapore, followed by the opening of Gardens by the Bay and Marina Bay Cruise Centre in 2012. Looking at the numbers, it seems a major attraction is required every 2 years to attract tourists; the lack of new attractions can result in a decline in tourist arrivals, as was seen in 2014 when no major attraction was launched.

However, it is not feasible to keep building new attractions to keep tourists interested, competing head-on with countries such as South Korea and Shanghai, which are scheduled to open Universal Studios and integrated resorts as well. Nevertheless, we believe selling Singapore’s local content with a focus on food, culture and nature could serve as a solution. Singapore is known for being a food-lover’s haven, a multi-racial society, and a clean and green nation with plenty of parks and unique islands.

In sum, we think Singapore needs to give tourists a strong reasons to keep coming back by figuring out and focusing on its core selling proposition and offering more unique experiences that can appeal to the increasing number of Internet-savvy and discerning tourists.

SATS (SATS SP): 27 June 2016

Not just a centre of attraction for tourists Playing host to business travellers Singapore is Asia’s top Singapore is not just a popular tourist destination but also an ideal place to conduct various meeting and convention MICE events. Every year, Singapore plays host to a variety of small and major events that city, according to the attract thousands of business visitors. In 2014, Singapore hosted 3.2m business visitors Union of International (around 21% of total tourist arrivals in 2014) and these visitors spent an estimated Associations and SGD5.2bn (around 22% of the total tourist spending recorded for 2014). International Congress and Convention Major events in 2016 include Real Estate Investment World, Singapore International Water Association Week, World Cities Summit, MICE Asia pacific Exhibition 2016, Aviation Week MRO Asia Pacific 2016, ITB Asia 2016, Oishii Japan and OSEA 2016.

Major MICE events to be held in Singapore in 2016

Source: yoursingapore

Eyeing the transit segment CAG wants to capture the transit passenger segment in its efforts to consolidate Singapore as a regional air hub. Changi is currently the leading transit hub in Asia, due to its strategic location in South East Asia as well as numerous interline and code share agreements with established partners such as JetBlue Airways, Swiss International, Virgin etc.

However, CAG is undoubtedly facing increasing pressure from its competitors in Dubai. A prime example would be the departure of Qantas in 2013, with the airline moving its transit hub for European services from Singapore to Dubai partly due to Dubai’s closer proximity to London, which could lower the British departure tax for the airline.

One of the key CAG initiatives in response to the heightened competition for its transit market was the announcement of a 50% rebate for 18 months on landing fees on all long- haul flights starting from September 2014, which was subsequently extended to March 2016. This is one of several initiatives under Changi’s SGD100m Growth and Assistance Incentive (GAIN) Programme. The programme also includes a 50% rebate on parking fees and a 15% discount on aerobridge fees, which has been extended to March 2017 from March 2016. Its other initiative to boost transit traffic was the provision of SGD10 per incremental departing transit passenger to airlines, capped at SGD3m/airline between 1 October 2014 and 31 March 2016. This was aimed at encouraging airlines to adjust their fares and revenue management models to stimulate traffic growth.

However, these are general short-term incentives that arguably fail to address the issue of When it opens in 2018, structurally higher costs vs. other airports, a pertinent issue among the low-cost carriers Jewel will have 5 storeys (LCCs). While Changi still needs to find a way to keep itself cost effective for airlines and above ground and 5 passengers amid the huge budget for expansion of terminals, we believe an indirect below ground differentiating solution to attract transit growth could be in the form of Jewel Changi Airport, an iconic mall which, when completed in 2018, should raise Changi Airport’s appeal as a stopover hub and help Singapore capture a larger mindshare among the travelling population.

SATS (SATS SP): 27 June 2016

Jewel Changi Airport will boast of the world’s largest indoor waterfall

Source: Jewel Changi Airport

The Jewel Changi Airport promises transit passengers a taste of Singapore’s Garden City experience and could conceivably entice them to visit Singapore proper in the not-too- distant future.

Tourist arrivals to Singapore (in m, LHS) vs. YoY growth (RHS) Passenger movements at Changi (m) 18 25% 60 55.45 15.6 15.1 15.2 53.7 54.1 16 14.5 51.2 13.2 20% 14 50 46.5 11.6 15% 12 9.8 10.3 10.1 9.7 10 8.9 10% 40 8 5.5 5% 6 30 0% 4 19.16 2 -5% 20 0 -10%

2011 2005 2006 2007 2008 2009 2010 2012 2013 2014 2015 0

Tourist arrivals Tourist Growth 2011 2012 2013 2014 2015 Jan-Apr 2016 Jan-Apr 2016

Source: STB Source: CAG

While tourist arrivals dipped by 3% in 2014, passenger movement in Changi increased by 0.7%, a result of higher transit passenger growth that year. According to SATS’s management, the company continues to benefit from higher transit passenger movement (difference between airport passenger movement and number of tourist arrivals by air), through an immediate collection of arrival- and departure-related fees.

We think Changi needs to make permanent improvements to enhance the airport’s competitiveness compared with other hubs in the region or risk losing its transit market share to regional airports such as KLIA and airports outside of Southeast Asia such as HKIA and Dubai, where rivals are well-equipped and are offering attractive propositions for both airlines and travellers. Failure to keep its costs down may reduce Changi’s attractiveness as an airport of choice for regional flights, especially when cheaper alternatives are a stone’s throw away.

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Appendix 3: cruise business a high-growth industry Resilient over the long term Singapore is located According to statistics in the UNWTO Tourism Highlights 2015 edition, the global cruise strategically in industry has achieved a 7.5% CAGR over the past 10 years, outpacing the general travel Southeast Asia, where trade’s 3.8% pa growth over the same period. In Asia, the cruise industry is experiencing its good air connectivity double-digit growth, with Southeast Asia singled out in the UNTWO Tourism Highlights and port infrastructure 2015 edition as a region with great potential to be the “Caribbean of the East”. The cruise make it an ideal hub for business in Asia remains relatively untapped, accounting for only 8.5% of cruise cruising in the region passengers by source in 2015 vs. the developed cruise markets such as North America and Europe, which together account for 84.5% of the market. From 2016-17, 15 more new cruise vessels will come on line, adding 39,637 or 8.1% to worldwide passenger capacity.

2015 worldwide cruise passengers by source New cruise ships capacity 2016-17 70% 12,000 10,000 60% 8,000 50% 6,000 4,000 40% 2,000 0 30%

20% MSC

Carnival

Princess

Norwegian Clive Palmer

10% AIDACruises

HollandAmerica Royal Caribbean

RegentSeven Seas Viking Ocean Cruises North America Europe Asia Sourth Australia/New Middle Seabourn CruiseLine America Zealand East/Africa 2016 2017

Source: Royal Caribbean Cruises, Carnival Corporation, NCL Corporation, CLIA, FCCA Source: Royal Caribbean Cruises, Carnival Corporation, NCL Corporation, CLIA, FCCA

CLIA global ocean cruise passengers Ranking of ship calls in Asia 25 Rank Market Port 24 1 Singapore Singapore 23 2 South Korea Jeju Island 3 Hong Kong Hong Kong 22 4 China Baoshan/Shanghai 21 5 Malaysia Georgetown/Penang 20 6 Thailand Patong Bay/Phuket 7 Malaysia Port Kelang/ Kuala Lumpur 19 8 Taiwan Keelung/ taiperi 18 9 Vietnam Ho Chi Minh City/ Phu My 10 Japan Fukuoka

17 16 15 2009 2010 2011 2012 2013 2014 2015 2016E

Source: CLIA Source: CLIA

On 26 April 2016, Singapore’s Minister for Trade and Industry, S. Iswaran, said that the government plans to give a SGD700m boost to the tourism industry over the 5 years until 2020, with the funds being used to tap big data to gain insights into visitor behaviour as well as attract and train industry professionals required to grow the cruise industry. Besides support from the government, which is a welcome move for the tourism industry, given the recent slowdown in tourist arrivals to the Lion City, Changi and STB have been active in recent years in luring global cruise players into Singapore.

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Passenger volume by source market in Asia Share of Asian source passenger by age 100% Philippines 9% 8% 9% 90% South korea 14% 14% 80% 16% Indonesia 70% 20% 21% 21% Malaysia 60% Hong Kong 50% 20% 15% 14% 40% India 30% 15% 19% 19% Japan 20% 9% 8% 8% 4% taiwan 10% 4% 3% 9% 10% 10% 0% Singapore 2012 2013 2014 China Below 13 yrs 13-19 yrs 20-29 yrs 30-39 yrs 0% 10% 20% 30% 40% 50% 60% 40-49 yrs 50-59 yrs 60-69 yrs 70 yrs and over

Source: CLIA Source: CLIA

Collaboration with Royal We note that the Royal Caribbean International cruise company signed its first-ever multi- Caribbean could bring in million dollar marketing collaboration with STB and CAG in August 2015 to promote over 170,000 overseas overseas fly-cruising (fly to another country and board the boat there) out of Singapore. In visitors to Singapore to this regard, Singapore appeals for its flight connections to major cities, its year-round warm sail on Royal climate, and reputation as a safe and politically stable port. Caribbean’s cruises between 2015 and 2018, according to the STB

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Daiwa’s Asia Pacific Research Directory HONG KONG SOUTH KOREA Takashi FUJIKURA (852) 2848 4051 [email protected] Sung Yop CHUNG (82) 2 787 9157 [email protected] Regional Research Head Pan-Asia Co-head/Regional Head of Automobiles and Components; Automobiles; John HETHERINGTON (852) 2773 8787 [email protected] Shipbuilding; Steel Regional Deputy Head of Asia Pacific Research Mike OH (82) 2 787 9179 [email protected] Rohan DALZIELL (852) 2848 4938 [email protected] Banking; Capital Goods (Construction and Machinery) Regional Head of Asia Pacific Product Management Iris PARK (82) 2 787 9165 [email protected] Kevin LAI (852) 2848 4926 [email protected] Consumer/Retail Chief Economist for Asia ex-Japan; Macro Economics (Regional) SK KIM (82) 2 787 9173 [email protected] Jonas KAN (852) 2848 4439 [email protected] IT/Electronics – Semiconductor/Display and Tech Hardware Head of Hong Kong and China Property Thomas Y KWON (82) 2 787 9181 [email protected] Cynthia CHAN (852) 2773 8243 [email protected] Pan-Asia Head of Internet & Telecommunications; Software – Internet/On-line Game Property (China) Kevin JIN (82) 2 787 9168 [email protected] Leon QI (852) 2532 4381 [email protected] Small/Mid Cap

Banking (Hong Kong/China); Broker (China); Insurance (China) TAIWAN Yan LI (852) 2773 8822 [email protected] Rick HSU (886) 2 8758 6261 [email protected] Banking (China) Head of Regional Technology; Head of Taiwan Research; Semiconductor/IC Design Anson CHAN (852) 2532 4350 [email protected] (Regional) Consumer (Hong Kong/China) Christie CHIEN (886) 2 8758 6257 [email protected] Adrian CHAN (852) 2848 4427 [email protected] Banking; Insurance (Taiwan); Macro Economics (Regional) Consumer (Hong Kong/China) Steven TSENG (886) 2 8758 6252 [email protected] Jamie SOO (852) 2773 8529 [email protected] IT/Technology Hardware (PC Hardware) Gaming and Leisure (Hong Kong/China) Christine WANG (886) 2 8758 6249 [email protected] Dennis IP (852) 2848 4068 [email protected] IT/Technology Hardware (Automation); Pharmaceuticals and Healthcare; Consumer Power; Utilities; Renewables and Environment (Hong Kong/China) Kylie HUANG (886) 2 8758 6248 [email protected] John CHOI (852) 2773 8730 [email protected] IT/Technology Hardware (Handsets and Components) Head of Hong Kong and China Internet; Regional Head of Small/Mid Cap Helen CHIEN (886) 2 8758 6254 [email protected] Kelvin LAU (852) 2848 4467 [email protected] Small/Mid Cap Head of Automobiles; Transportation and Industrial (Hong Kong/China) Brian LAM (852) 2532 4341 [email protected] INDIA Transportation – Railway; Construction and Engineering (China) Punit SRIVASTAVA (91) 22 6622 1013 [email protected] Thomas HO (852) 2773 8716 [email protected] Head of India Research; Strategy; Banking/Finance Custom Products Group Saurabh MEHTA (91) 22 6622 1009 [email protected] Capital Goods; Utilities PHILIPPINES Patricia Tamase (63) 2 797 3024 [email protected] SINGAPORE Banking Ramakrishna MARUVADA (65) 6499 6543 [email protected]

Head of Singapore Research; Telecommunications (China/ASEAN/India) Royston TAN (65) 6321 3086 [email protected] Oil and Gas; Capital Goods David LUM (65) 6329 2102 [email protected] Banking; Property and REITs Shane GOH (65) 64996546 [email protected] Small/Mid Cap (Singapore) Jame OSMAN (65) 6321 3092 [email protected] Telecommunications (ASEAN/India); Pharmaceuticals and Healthcare; Consumer (Singapore)

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