Get in for the Long Haul

October 7, 2013

Malaysia Airports Holdings COMPANY NOTE MAHB MK / MAHB.KL Current RM7.70 SHORT TERM (3 MTH) LONG TERM Market Cap Avg Daily Turnover Free Float Target RM8.90 US$2,982m US$2.51m 32.1% Prev. Target RM8.90 RM9,490m RM8.13m 1,210 m shares Up/Downside 15.6%

Conviction| |

Notes from the Field Get in for the long haul

The battle for supremacy among Malaysian carriers will be very good for MAHB as sharply lower fares will spur passenger traffic. In this report, we delve into the history of MAHB to give investors the background on our top pick in the Malaysian aviation space.

———————————————————————————————————————— We maintain our Outperform rating decade. But more upside is in store Raymond YAP, CFA and DCF-based target price (WACC of now that new entrant Malindo has T (60) 3 2084 9769 E [email protected] 6.9%). The intense competition triggered a new round of price among the airlines is likely to persist competition, with both MAS and in 2014 and will lead to healthy traffic AirAsia injecting capacity since May. growth, serving as MAHB's key Lower fares have since sparked strong

re-rating catalyst. MAHB is the best passenger traffic, which we expect to

bet on tourism flows during Visit continue next year. Company Visit Expert Opinion

Channel Check Customer Views Malaysia Year 2014 without the worry Tariffs to increase in 2014 ———————————————————————————————————————— of oil prices, exchange rates and depressed air fares. MAHB will be raising the passenger

service charges by around 9% in The 2009 restructuring February, five years after its last MAHB‟s share price has done well revision. The final part of a three- It is important for us to since the 2009 restructuring, which part increase in landing and parking meet the challenge of providing cleared investors‟ deep reservations charges will also be implemented on 1 ‘the ‘capacity for the airlines as about the viability of the business. January. These rate increases will and‘‘ when they grow. The government allowed passenger augment the already powerful – Tan Sri Bashir Ahmad, Managing Director service charges to increase, bought tailwind from traffic growth.

back non-core assets, agreed to compensate MAHB for future social KLIA2 – the next re-rating obligations and junked the heavy Even more upside is in store for long- tariffs of the past for a revenue term investors as the commissioning sharing formula. This enabled MAHB of KLIA2 by 2014/early 2015 will to settle its KLIA dues to the double MAHB‟s retail space at the government by end-2012, just four entire Sepang airport complex. KLIA2 years later. attracted strong rents and overwhelming demand for its shop Strong traffic growth lots, and MAHB has also tacked on an MAHB‟s share price has also done additional revenue sharing clause to well because of the massive success of its rental contracts. It had never used AirAsia as a business over the past this clause prior to this.

Price Close Relative to FBMKLCI (RHS) Financial Summary

7.9 121 Dec-11A Dec-12A Dec-13F Dec-14F Dec-15F

6.9 108 Revenue (RMm) 2,760 3,548 3,739 3,267 3,199 Operating EBITDA (RMm) 810 867 840 1,026 1,185 5.9 95 Net Profit (RMm) 425.0 394.4 464.1 555.4 509.9 4.9 82 8 Core EPS (RM) 0.38 0.35 0.34 0.44 0.42 6 Core EPS Growth 22.9% (7.8%) (4.9%) 31.6% (4.8%) 4 2 FD Core P/E (x) 20.06 20.78 22.89 17.40 18.27

Vol m Vol DPS (RM) 0.16 0.14 0.18 0.25 0.32 Oct-12 Jan-13 Apr-13 Jul-13 Dividend Yield 2.07% 1.77% 2.36% 3.24% 4.17% Source: Bloomberg EV/EBITDA (x) 12.58 13.44 15.01 12.52 10.55

52-week share price range P/FCFE (x) NA NA 40 1,601 14 7.70 Net Gearing 48.5% 53.4% 70.5% 70.7% 61.2% 5.17 7.77 P/BV (x) 2.39 2.14 2.00 1.87 1.79 ROE 12.3% 10.8% 9.0% 11.1% 10.0% 8.90 % Change In Core EPS Estimates 0% 0% 0% Current Target CIMB/consensus EPS (x) 1.10 1.35 1.12 SOURCE: CIMB, COMPANY REPORTS

IMPORTANT DISCLOSURES, INCLUDING ANY REQUIRED RESEARCH CERTIFICATIONS, ARE PROVIDED AT THE END OF THIS REPORT. Sources: CIMB. COMPANY REPORTS Designed by Eight, Powered by EFA

Malaysia Airports Holdings October 7, 2013

PEER COMPARISON

Research Coverage Bloomberg Code Market Recommendation Mkt Cap US$m Price Target Price Upside Sydney Airport SYD AU AU OUTPERFORM 8,234 3.98 4.25 6.9% Malaysia Airports Holdings MAHB MK MY OUTPERFORM 2,982 7.70 8.90 15.6% Auckland Int'l Airport AIA NZ NZ NEUTRAL 3,618 3.30 3.12 -5.6%

Airports of Thailand AOT TB TH UNDERPERFORM 8,988 197.0 150.0 -23.9%

Rolling P/BV (x) Rolling FD P/E (x) 3.5 50 45 3.0 40 2.5 35 2.0 30 25 1.5 20 1.0 15 10 0.5 5 0.0 0 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13

Sydney Airport Malaysia Airports Holdings Sydney Airport Malaysia Airports Holdings Auckland Int'l Airport Airports of Thailand Auckland Int'l Airport Airports of Thailand

Peer Aggregate: P/BV vs ROE Peer Aggregate: FD P/E vs FD EPS Growth 3.0 18% 35 3,000%

2.5 15% 30 2,500% 25 2,000% 2.0 12% 20 1,500% 1.5 9% 15 1,000% 1.0 6% 10 500%

0.5 3% 5 0%

0.0 0% 0 -500% Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14

Rolling P/BV (x) (lhs) ROE (See Footnote) (rhs) FD P/E (x) (See Footnote) (lhs) FD EPS Growth (See Footnote) (rhs)

Valuation FD P/E (x) (See Footnote) P/BV (x) EV/EBITDA (x) Dec-12 Dec-13 Dec-14 Dec-12 Dec-13 Dec-14 Dec-12 Dec-13 Dec-14 Sydney Airport 41.34 57.14 51.54 3.62 3.02 2.86 16.19 15.90 16.13 Malaysia Airports Holdings 20.78 22.89 17.40 2.14 2.00 1.87 13.44 15.01 12.52 Auckland Int'l Airport 29.76 27.05 25.08 1.76 1.74 1.73 16.81 16.08 15.18 Airports of Thailand 36.76 24.04 19.84 3.50 3.11 2.83 18.31 14.47 13.28

Growth and Returns FD EPS Growth (See Footnote) ROE (See Footnote) Dividend Yield Dec-12 Dec-13 Dec-14 Dec-12 Dec-13 Dec-14 Dec-12 Dec-13 Dec-14 Sydney Airport 47.5% -27.7% 10.9% 8.3% 5.6% 5.7% 5.28% 5.65% 6.03% Malaysia Airports Holdings -3.4% -9.2% 31.6% 10.8% 9.0% 11.1% 1.77% 2.36% 3.24% Auckland Int'l Airport 12.7% 10.0% 7.9% 5.9% 6.5% 6.9% 3.42% 3.79% 4.02% Airports of Thailand 76.2% 52.9% 21.2% 10.0% 13.7% 15.0% 1.16% 1.89% 1.98%

SOURCE: CIMB, COMPANY REPORTS

Calculations are performed using EFA™ Monthly Interpolated Annualisation and Aggregation algorithms to December year ends. NPAT/EPS values for calculations and valuations are based on recurring and normalized values for GAAP and IFRS accounting standard companies respectively.

Malaysia Airports Holdings October 7, 2013

BY THE NUMBERS

Share price info P/BV vs ROE FD Core P/E vs FD Core EPS Growth Share px perf. (%) 1M 3M 12M 2.5 14.0% 25 40% Relative 12.3 22.5 26.5 2.0 11.2% 20 28% Absolute 15.8 22.8 33.4 1.5 8.4% 15 16% Major shareholders % held 1.0 5.6% 10 4% Khazanah Nasional 40.2 0.5 2.8% 5 -8% Permodalan Nasional Berhad 15.1 0.0 0.0% 0 -20% Employees Provident Fund 12.6 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14

Rolling P/BV (x) (lhs) ROE (See Footnote) (rhs) Rolling FD Core P/E (x) (lhs) FD Core EPS Growth (rhs)

Profit & Loss

(RMm) Dec-11A Dec-12A Dec-13F Dec-14F Dec-15F Total Net Revenues 2,760 3,548 3,739 3,267 3,199 Gross Profit 810 867 840 1,026 1,185 Operating EBITDA 810 867 840 1,026 1,185 Depreciation And Amortisation (174) (221) (221) (221) (443) Operating EBIT 636 645 618 804 742 Total Financial Income/(Expense) (19) (19) (27) (31) (181) Strong rise in FY14 profits Total Pretax Income/(Loss) from Assoc. (22) 10 (10) 0 0 to come from hikes in Total Non-Operating Income/(Expense) 0 0 0 0 0 Profit Before Tax (pre-EI) 595 637 581 774 560 passenger service charge Exceptional Items 3 (34) 57 20 0 as well as landing and Pre-tax Profit 598 603 639 793 560 parking fees. But drop Taxation (173) (208) (174) (238) (50) Exceptional Income - post-tax expected in FY15 due to Profit After Tax 425 394 464 555 510 one-off impact of Minority Interests (0) 0 0 0 0 commissioning of KLIA2 Preferred Dividends 0 0 0 0 0 FX Gain/(Loss) - post tax (assumed on 1 January Other Adjustments - post-tax 2015), which will double Net Profit 425 394 464 555 510 depreciation and raise Recurring Net Profit 422 428 407 536 510 Fully Diluted Recurring Net Profit 422 428 407 536 510 interest expense materially.

Cash Flow

(RMm) Dec-11A Dec-12A Dec-13F Dec-14F Dec-15F EBITDA 810 867 840 1,026 1,185 Despite fall in FY15 profit, Cash Flow from Invt. & Assoc. operating cash flow should Change In Working Capital 44 79 31 (112) (56) rise as KLIA2 will help MAHB (Incr)/Decr in Total Provisions Other Non-Cash (Income)/Expense double its retail space. Other Operating Cashflow (200) (53) 30 (11) (181) Net Interest (Paid)/Received 19 5 27 31 181 Tax Paid (173) (208) (174) (238) (50) Cashflow From Operations 500 690 753 696 1,079 Capex (1,077) (1,666) (1,519) (690) (250) Disposals Of FAs/subsidiaries 3 4 0 0 0 Acq. Of Subsidiaries/investments 0 0 0 0 0 Other Investing Cashflow (6) (67) 0 0 0 Cash Flow From Investing (1,080) (1,729) (1,519) (690) (250) Debt Raised/(repaid) 0 600 1,000 0 (142) Proceeds From Issue Of Shares 0 608 0 0 0 Shares Repurchased 0 0 0 0 0 Dividends Paid (163) (120) (165) (220) (302) Preferred Dividends Other Financing Cashflow (19) (5) (27) (31) (181) Cash Flow From Financing (182) 1,082 808 (251) (625) Total Cash Generated (762) 43 42 (245) 204 Free Cashflow To Equity (580) (439) 234 6 687 Free Cashflow To Firm (599) (1,044) (793) (25) 647

SOURCE: CIMB, COMPANY REPORTS

Malaysia Airports Holdings October 7, 2013

BY THE NUMBERS

Balance Sheet

(RMm) Dec-11A Dec-12A Dec-13F Dec-14F Dec-15F Total Cash And Equivalents 778 774 816 571 775 Long-term debt should Total Debtors 785 640 675 590 577 increase materially in FY13, Inventories 79 99 99 99 99 Total Other Current Assets 0 0 0 0 0 with most of KLIA2 capex Total Current Assets 1,642 1,514 1,590 1,260 1,451 already spent by then Fixed Assets 266 291 291 291 291 Total Investments 0 0 0 0 0 Intangible Assets 4,727 6,198 7,496 7,965 7,771 Total Other Non-Current Assets 791 837 827 827 827 Total Non-current Assets 5,785 7,326 8,614 9,083 8,890 Short-term Debt 0 0 0 0 0 Current Portion of Long-Term Debt Total Creditors 841 802 867 671 603 Other Current Liabilities 37 31 31 31 31 Total Current Liabilities 879 834 899 702 634 Total Long-term Debt 2,500 3,100 4,100 4,100 3,958 Hybrid Debt - Debt Component Total Other Non-Current Liabilities 502 547 547 547 547 Total Non-current Liabilities 3,002 3,647 4,647 4,647 4,505 Total Provisions 0 0 0 0 0 Total Liabilities 3,880 4,480 5,546 5,349 5,139 Shareholders' Equity 3,547 4,359 4,659 4,994 5,201 Minority Interests 0 0 0 0 0 Total Equity 3,547 4,359 4,659 4,994 5,201

Key Ratios

Dec-11A Dec-12A Dec-13F Dec-14F Dec-15F Revenue Growth 11.8% 28.6% 5.4% (12.6%) (2.1%) Operating EBITDA Growth 9.7% 7.0% (3.1%) 22.1% 15.5% Operating EBITDA Margin 29.4% 24.4% 22.5% 31.4% 37.0% Net Cash Per Share (RM) (1.57) (1.92) (2.71) (2.92) (2.63) BVPS (RM) 3.22 3.60 3.85 4.13 4.30 Gross Interest Cover 33.79 33.90 22.91 26.16 4.09 Effective Tax Rate 28.9% 34.6% 27.3% 30.0% 9.0% Net Dividend Payout Ratio 29.5% 25.9% 37.9% 39.1% 69.4% Accounts Receivables Days 97.87 73.51 64.18 70.61 66.56 Inventory Days 13.06 12.12 12.48 16.13 17.96 Accounts Payables Days 142.1 112.2 105.1 125.2 115.4 ROIC (%) 9.84% 8.39% 6.41% 7.11% 6.13% ROCE (%) 10.7% 9.6% 7.6% 9.0% 8.1%

Key Drivers

(RM) Dec-11A Dec-12A Dec-13F Dec-14F Dec-15F Int'l Passenger Traffic Growth (%) 10.4% 6.1% 14.8% 15.2% 9.7% Domestic Pax Traffic Growth (%) 11.1% 3.9% 10.2% 7.6% 4.3% International Flight Traffic Growth (%) 9.3% 2.3% 10.4% 6.7% 4.2% Domestic Flight Traffic Growth (%) 9.3% 2.3% 10.4% 6.7% 4.2% Int'l Pax Service Charge 51.0 65.0 65.0 71.0 71.0 Dom Pax Serv Charge 9.0 9.0 9.0 9.0 9.0 Unit Meals Produced (% Change) N/A N/A N/A N/A N/A

SOURCE: CIMB, COMPANY REPORTS

Malaysia Airports Holdings October 7, 2013

Get in for the long haul

Table of Contents 1. BACKGROUND 1. BACKGROUND p.5 2. KLIA TODAY p.25 1.1 Taking a step back in time 3. RISKS p. 44 MAHB had its beginnings 22 years ago when the Malaysian government 4. FINANCIALS p. 48 decided to separate the responsibilities of aviation industry regulation and 5. VALUATION AND RECOMMENDATION p.63 airport management in 1991. The Department of Civil Aviation (DCA), which was previously tasked with both responsibilities, was reassigned to focus solely on regulating the airports and the aviation industry as a whole while MAHB was established to operate, manage and maintain nearly all of the airports in Malaysia. Air traffic control remains the responsibility of the DCA. MAHB currently operates 39 airports, after selling the Senai airport in Johor Bahru to Tan Sri Syed Mokhtar Al-Bukhary's Senai Airport Terminal Services Sdn Bhd in 2003 for RM80m.

Figure 1: MAHB's portfolio of Malaysian airports under management

Peninsular Malaysia East Malaysia STOLports Sabah Peninsular Malaysia 1. Kuala Lumpur 1. Kota Kinabalu 1. Redang Island 2. Langkawi 2. Sandakan 2. Pangkor Island 3. Penang 3. Labuan 3. Tioman Island 4. Alor Setar 4. Tawau 5. Kota Bahru 5. Lahad Datu Sabah 6. Kuala Terengganu 4. Kudat 7. Ipoh Sarawak 5. Long Pasia 8. Kuantan 6. Kuching 6. Semporna 9. Subang 7. Sibu 10. Malacca 8. Limbang Sarawak 9. Miri 7. Lawas 10. Bintulu 8. Marudi 9. Long Semado 10. Bakalalan 11. Long Seridan 12. Long Akah 13. Long Lellang 14. Long Banga 15. Bario 16. Belaga 17. Kapit 18. Mukah 19. Mulu SOURCES: CIMB, COMPANY REPORTS

When MAHB first received its licence in November 1992, the company was given the right to operate and manage 20 airports and 12 short take-off and landing airports (STOLports). Eight STOLports were later developed and also included in MAHB's portfolio of airports, while Senai was sold off. The airport operator was not tasked to manage the Kerteh airport in Terengganu, which is owned by Petronas and primarily serves Petronas and ExxonMobil employees in that area.

Malaysia Airports Holdings October 7, 2013

Figure 2: Airport traffic during 2012 (excluding transit passengers) – KLIA, KK, Penang, Kuching and Miri are the top five airports in Malaysia Airports Domestic International Total KLIA 11,901,458 27,612,088 39,513,546 Kota Kinabalu 4,537,990 1,306,618 5,844,608 Penang 2,438,330 2,323,926 4,762,256 Kuching 3,738,858 421,006 4,159,864 Miri 1,934,280 71,417 2,005,697 Langkawi 1,464,022 129,021 1,593,043 Subang 1,119,711 322,803 1,442,514 Kota Bharu 1,254,555 4,650 1,259,205 Sibu 1,183,419 - 1,183,419 Tawau 962,633 19,475 982,108 Sandakan 813,480 1,519 814,999 Bintulu 637,128 30 637,158 Labuan 575,642 4 575,646 Kuala Terengganu 547,152 3,679 550,831 Alor Setar 433,644 - 433,644 Kuantan 248,219 31,855 280,074 STOLSarawak 153,590 - 153,590 Lahad Datu 142,733 - 142,733 Ipoh 598 72,756 73,354 Tioman 42,826 17,315 60,141 Limbang 57,852 - 57,852 Mulu 49,619 - 49,619 Redang 25,287 10,635 35,922 Melaka 3,656 30,696 34,352 STOLSabah 4,350 - 4,350 Pangkor 4,068 - 4,068 Total 34,275,100 32,379,493 66,654,593 SOURCES: CIMB, COMPANY REPORTS

Figure 3: STOLport in Long Lellang, Sarawak Figure 4: STOLport in Bakalalan, Sarawak

SOURCES: CIMB, GOOGLE SOURCES: CIMB, GOOGLE

Malaysia Airports Holdings October 7, 2013

1.2 Operating from Subang airport, 1965 - 1998 The Sultan Abdul Aziz Shah airport (SZB), then known as the Subang International Airport, was Malaysia's main international gateway before the completion of the Kuala Lumpur International Airport (KLIA) in 1998. Located 21km from the heart of Kuala Lumpur, SZB replaced Sungai Besi airport in 1965 and was MAHB's key income generator before the migration to Sepang‟s KLIA in June 1998. At its peak, SZB operated three terminals, one of which was dedicated to international flights, the other for domestic travel and the last for Kuala Lumpur - Singapore commuter flights.

Figure 5: Subang airport, back in 1975

SOURCES: CIMB, GOOGLE

When AirAsia started its first flights under the stewardship of Tan Sri Tony Fernandes on 15 January 2002, it operated out of SZB, which was the base for the operations of the original AirAsia under its previous owner DRB-Hicom. However, AirAsia was requested by the government to move to KLIA in July 2012 despite appealing to remain at Subang. MAHB continues to operate SZB today. Terminal 3 underwent a major refurbishment in 2008/09 that was funded by Subang Skypark Sdn Bhd (under Tan Sri Ravindran Menon) and is now home to Firefly, Berjaya Air and the turboprop operations of Malindo Air. The airport currently serves 10 Peninsular Malaysian routes and six short haul international destinations to Singapore, Thailand and Indonesia. Transmile Air Services, a cargo airline, also operates from SZB. Aside from scheduled air transport, the airport also serves general aviation, private/corporate jets and helicopters. MAHB retains the rights to collect aeronautical revenue from SZB, and Subang Skypark Sdn Bhd pays MAHB an annual fee. However, the retail and rental revenues from the airport are collected and retained by Subang Skypark Sdn Bhd as the manager of the commercial site.

Malaysia Airports Holdings October 7, 2013

Figure 6: Subang airport, today

SOURCES: CIMB, PANORAMIO

1.3 Kuala Lumpur International Airport (KLIA) The Kuala Lumpur International Airport (KLIA) replaced SZB as Malaysia's major international airport following its completion in June 1998 which ended SZB's 33-year reign as the country's aviation hub. KLIA, whose main terminal capacity is capable of handling 25m passengers annually, welcomed 20.7m passengers in 2012 (excluding LCCT traffic), implying a utilisation rate of 83%, although we believe that the main terminal is actually able to accommodate more than the nameplate capacity of 25m passengers p.a. The decision to build a new airport for the Malaysian capital came about in 1991 when then Prime Minister Tun Mahathir bin Mohamad launched Vision 2020 as part of the Sixth Malaysia Plan. The goal is for Malaysia to achieve developed status by the year 2020, and to achieve that, a rush to improve infrastructure was deemed necessary. KLIA and the Petronas Twin Towers were some of the most iconic structures built in Malaysia during that decade. Sepang was chosen to be KLIA's home as SZB faced space constraints for further expansion. Groundbreaking works started in June 1993 while the construction of the Petronas Twin Towers began a year later. The airport took almost five years to complete and the towers were also mostly ready by then, both in time for the 16th Commonwealth Games in September 1998. A number of criteria were set in deciding the ultimate location for KLIA:  The plot should be at least 100 sq km in order to house the new airport and support its future expansion.  The site should not be too far away from Kuala Lumpur and yet be able to fulfil all the aeronautical requirements of the city. Sepang was finally chosen after considering a total of eight potential sites. Structural and civil engineering consulting firm AKT II's co-founder and Harvard Graduate School of Design professor Hanif Kara believes that Sepang was picked primarily for the following reasons:  It was a sparsely populated greenfield site.  The terrain was relatively flat, making it suitable for the construction of an airport.  It is located in the vicinity of high-growth areas, namely Klang Valley and Seremban.  The cost to acquire land and resettle local residents was not high.

Malaysia Airports Holdings October 7, 2013

 It is located some 60km from Kuala Lumpur.

Figure 7: Compared to KLIA, SZB is much closer to Kuala Lumpur

SZB

KLIA

SOURCES: CIMB, GOOGLE MAPS

The plot of land on which KLIA sits was formerly used to cultivate oil palm trees and other agricultural produce. Despite being relatively flat, 130m cu m of earth still had to be moved to form a level airport platform. In order to blend the airport with its surroundings, the airport, which was designed by Kisho Kurokawa, embodies the concept of "airport in the forest, forest in the airport." A section of a rainforest was transplanted from the jungle to the satellite building. Construction of KLIA required 25,000 workers. Its US$3.5bn cost (about RM10.7bn at the RM:US$ exchange rate back then) was fully borne by the government. Hence, the cost of constructing KLIA is not booked in MAHB‟s balance sheet. The first phase of the airport, officiated on 27 June 1998, was meant to cater to up to 25m passengers and 650,000 tonnes of cargo annually. It has two runways and 106 aircraft parking stands while its predecessor SZB only had a single runway with 44 parking stands. In terms of terminal space, it has one main terminal building (MTB) together with one satellite terminal, linked to the MTB via an aerotrain service. Both the MTB and the satellite terminal are collectively called the “MTB” and are used primarily by full-service carriers. The MTB is clearly distinguished and separated from the low cost carrier terminal (LCCT), which is used by the LCCs today. However, the MTB and the LCCT share the two runways. KLIA‟s two runways are each 4,000m long, 60m wide and are capable of handling all types of aircraft. One of the runways is extendable to 4,600m should there be the need for longer runways to accommodate future larger aircraft. Both runways lie 2,535m apart, permitting each runway to be operated independently. SZB's runway is 3,780m long and 45m wide.

Malaysia Airports Holdings October 7, 2013

Figure 8: The jungle located within the satellite building Figure 9: The KLIA jungle boardwalk

SOURCES: CIMB, GOOGLE SOURCES: CIMB, GOOGLE

The site is able to accommodate a total of five runways, one of which will be built 90 degrees against the rest. This orientation allows an increase in take-off capacity as departing planes take off in different directions, hence relieving some pressure on airspace and traffic controllers. The original blueprint drawn in 1992 for KLIA's future expansion was to build a second satellite terminal for the MTB, which will extend the annual capacity to up to 45m passengers. As traffic increased over time, the original plan entailed the construction of a mirror image of the MTB and its two accompanying satellite terminals, providing KLIA with an ultimate capacity of 100m passengers a year. However, the shape of KLIA was to change in subsequent years when low cost air transport became the common mode of air travel in the country.

Figure 10: Kuala Lumpur International Airport (KLIA)

SOURCES: CIMB, COMPANY REPORTS

Malaysia Airports Holdings October 7, 2013

1.4 The rise in low cost flying and the construction of LCCT When KLIA commenced operations in 1998, AirAsia was never part of the picture. Nor was the thought of a dramatic shift in Malaysian travelling patterns towards low-cost flying. In 1998, Malaysia Airlines (MAS) accounted for 54% of MAHB's revenue, with Singapore Airlines taking up another 11%. Its top six customers, collectively representing 72% of MAHB's revenue, were all full-service carriers (FSC). As many as 86% of the domestic passengers and 55% of international travellers departing from MAHB's airports flew with MAS that year.

Figure 11: MAHB's aeronautical revenue breakdown, 1998 (by carrier)

SOURCES: CIMB, COMPANY REPORTS

Previously a debt-laden airline owned by DRB-Hicom, AirAsia's rise to prominence began in 2001 when Tan Sri Tony Fernandes purchased the carrier for a token sum of RM1, inheriting debts of US$11m and two B737-300s. Armed with a strong marketing background and recognising the untapped demand for affordable (though less comfortable) air travel, Tony modelled AirAsia after Ryanair and converted the airline into a low-cost carrier. Air fares were significantly below that of its only major competitor MAS and that helped the company generate a huge following among Malaysian holiday goers planning to make short haul trips domestically and abroad. Its ambition of extending its network further led to the birth of AirAsia X (AAX) in November 2007, which serves only long-haul routes of more than four hours‟ flight duration. The construction of the current LCCT itself was meant to serve the different operating needs of the low cost airline model. When AirAsia moved from SZB to KLIA in 2002, the carrier needed additional departure gates at the MTB as well as extra space for check-in counters. The company also did not require the aerobridge and fully-automated baggage handling systems that were present at the MTB. MAHB, therefore, agreed to build a separate facility for AirAsia. The location of the current LCCT was chosen because the land was already ready for development and there was already an apron in place. The construction of the LCCT was completed in just nine months (June 2005-March 2006) at a cost of RM108m, with a capacity of 10m passengers a year and 30 aircraft parking bays, and the option for further expansion to 15m passengers annually. The LCCT was built specifically to AirAsia's requirements, with simple check-in counter and a manual baggage handling system, but without aerobridges. Facilities were kept to a bare minimum, as requested by AirAsia in order to keep construction and operational cost low. With no aerobridges, passengers often have to walk outdoors for several hundred metres to reach their aircraft. Given the less comfortable infrastructure, MAHB charges substantially lower airport taxes for passengers departing from LCCT.

Malaysia Airports Holdings October 7, 2013

Figure 12: LCCT's facade Figure 13: LCCT's departure hall

SOURCES: CIMB, GOOGLE SOURCES: CIMB, GOOGLE

The terminal later underwent expansion works after AirAsia's traffic hit 11.8m passengers in 2008, outgrowing the terminal's intended capacity. AirAsia‟s original forecast was for its passengers carried to reach 10m annually only by 2012. AirAsia‟s faster-than-expected passenger growth was due to several factors:  AirAsia managed to secure more international rights than originally expected.  The domestic route rationalisation exercise in August 2006 gave AirAsia more domestic routes.  The AirAsia group expanded its fleet to include widebody aircraft for AAX's long-haul operations, which was not in its original plans when the LCCT was first designed. As the LCCT and its apron were designed to accommodate only narrowbody aircraft, the introduction of widebody planes has caused congestion at the terminal. MAHB proposed to shift AAX's operations to the MTB to ease congestion but AAX found it unsuitable because it wanted its passengers to enjoy a lower PSC at the LCCT and it also wanted connectivity with the AirAsia flights. The expansion of the LCCT terminal capacity from 10m to 15m passengers was, therefore, brought forward by three years and was completed in May 2009. The floor area was expanded from 35,290 sq m to 64,067 sq m. New international and domestic departure halls were constructed, along with a new baggage handling system, a public concourse, government offices, a curb side, an expanded parking area and additional retail space. The expansion cost RM124m, including RM45m spent on the baggage handling system. By the time KLIA2 comes onstream in 2014/15, we expect the LCCT to handle an annualised passenger traffic of some 26m, 73% more than its design capacity of 15m passengers p.a. Without adequate aircraft parking bays, AAX will have to introduce bussing from October 2013 to ferry passengers between the terminal and the aircraft as planes will have to be parked further away from the terminal.

Malaysia Airports Holdings October 7, 2013

1.5 The original concession agreement Although the government bore the cost of constructing KLIA, the rights to operate KLIA were granted in a 50-year concession (1998 to 2048) to MAHB, in exchange for the payment of various concession fees to the government. The fees were as follows: 1999 - 2004  A total concession fee of RM1.3bn, of which RM175m will be paid in 1999 and RM226.7m will be paid each year in 2000-04. 2004 onwards  A fixed lease payment of RM60m in 2004, increasing by 4% every year.  A variable lease payment, representing 8% of MAHB's revenues generated from managing, operating and maintaining KLIA. However, this original concession agreement was subsequently revised in 2009 as MAHB failed to generate enough revenue to pay the concession fees.

1.6 The 2009 restructuring - a major positive development MAHB was never quite able to pay the government for the concession fees for the following reasons:  Although traffic growth largely met the expectations set out in its 1999 IPO prospectus, the passenger service charge tariffs at KLIA were too low, at only RM40/pax for international departures and RM5/pax for domestic departures. Although these tariffs were raised in May 2002, the increment went straight to subsidising the Express Rail Link (ERL) which provides a train service from Kuala Lumpur city centre to the airport.  MAHB's profitability also came under pressure due to its obligation to serve the community on the government's behalf. Many of the STOLports were loss-making.  Its involvement in loss-making activities unrelated to the operation of an airport, such as the operation of the Sepang International Circuit, led to even more financial pressure.

Figure 14: Actual passenger traffic vs forecast (m passengers) Projected total traffic at Projected KLIA traffic at IPO (1999) Actual total traffic Actual vs forecast IPO (1999) Actual KLIA traffic Actual vs forecast Year Dom Intl Total Dom Intl Total Dom Intl Total Dom Intl Total Dom Intl Total Dom Intl Total 1998 16.3 10.7 27.0 5.7 8.8 14.5 2000 18.6 11.3 29.9 19.6 13.1 32.7 5% 15% 9% 6.4 9.0 15.4 na na 14.7 -4% 2002 19.9 12.6 32.5 20.4 13.3 33.7 2% 6% 4% 7.0 10.2 17.2 5.3 11.1 16.4 -25% 9% -5% 2004 21.6 14.2 35.8 24.0 15.4 39.4 11% 9% 10% 7.9 11.7 19.6 8.0 13.0 21.1 2% 12% 7% 2006 23.3 15.9 39.2 24.3 18.2 42.5 4% 14% 8% 8.9 13.3 22.2 8.6 15.5 24.1 -3% 17% 9% 2008 25.0 17.8 42.8 26.4 21.1 47.4 6% 18% 11% 9.7 15.1 24.7 9.4 18.1 27.5 -3% 20% 11% 2010 26.8 19.8 46.7 29.8 28.0 57.8 11% 41% 24% 10.4 17.1 27.4 10.3 23.8 34.1 -1% 40% 24% SOURCES: CIMB, COMPANY REPORTS

Malaysia Airports Holdings October 7, 2013

Figure 15: PSC charges at KLIA

From Mar From Feb 2009 From May 2006 (LCCT From Jan From Jun (post From Nov From Feb At IPO (1999) 2002 opens) 2007 2007 restructuring) & 2011 2014 # MTB International PSC 40 45 Ω 45 51 ^ 51 51 * 65 71 Domestic PSC 5 6 Ω 6 9 ^ 9 9 9 10

LCCT International PSC n.a. n.a. 35 41 ^ 25 + 25 32 35 Domestic PSC n.a. n.a. 6 9 ^ 6 + 6 6 6.5

Ω the increase in the PSC in May 2002 of RM5/international pax and RM1/domestic pax did not benefit MAHB, as it was passed over as a subsidy to ERL ^ including new security charge of RM6/international pax and RM3/domestic pax + LCCT PSC reduced by the government of Malaysia & From Feb 2009 onwards, MAHB no longer needed to subsidise ERL to the tune of RM5/international pax and RM1/domestic pax for all its passengers at MTB and LCCT * MAHB actually received RM65/international pax, with the difference of RM14/pax paid by the government of Malaysia # the hike will be at a cumulative 5-year inflation rate, minus 0.1%, estimated to be around 9% SOURCES: CIMB, COMPANY REPORTS

As a result, the debts owed to the government ballooned to RM1.4bn in 2008, comprising concession rights of RM827m which should have been settled by 2004 as well as annual fixed and variable lease payments. As restructuring was needed for MAHB, a painfully-delayed restructuring was finally agreed by the government two days before Christmas in 2008 and was signed by MAHB and the government on 12 February 2009. The key principle behind the 2009 restructuring agreement was to ensure that MAHB‟s commercially-viable operations and its social obligations were separated. The goal is for the government to re-assume its socioeconomic responsibilities and to compensate MAHB for the cost of any future socioeconomic responsibilities. Key highlights. These were the key strategic thrusts of the 2009 restructuring plan:  The concession period was revised from a 50-year concession (1998-2048) to a 25-year concession (2009-2034), with an option by the government to renew the concession by another 25 years (2034-2059).  The government will bear capital expenditures related to the development of any airport that MAHB deems not commercially viable, such as a STOLport.  MAHB's fixed and variable lease payment arrangement with the government will be abolished and replaced by a revenue sharing mechanism.  The government‟s share of MAHB‟s future revenue will be used to repay RM419m of the RM1.4bn in accumulated liabilities owed to government.  The government will compensate MAHB if the latter is directed to undertake loss-making social obligations or subsidise infrastructure such as the ERL.  MAHB will permitted to increase passenger service charges (PSC) once every five years at the compounded inflation rate.  MAHB will be permitted to raise landing and parking charges to at least the minimum of a group of regional airports, i.e. Bangkok, Jakarta, Singapore and Hong Kong.  The airport operator will be relieved from owning and operating non-airport related assets. The MARCS mechanism. A marginal cost support (MARCS) system was established to compensate MAHB for any reduction in its revenue or increase in cost resulting from following non-commercial instructions from the government. The MARCS system specifically covers:

Malaysia Airports Holdings October 7, 2013

 the loss of revenue if the government decides not to increase PSC to its benchmark level,  the loss of revenue if the government instructs MAHB to discount or reduce parking, landing and housing charges,  the loss of revenue if the government instructs MAHB to discount or reduce retail rental charges,  the increase in cost if the government instructs MAHB to pay a portion of its PSC collections to support a particular development, such as ERL, and  the increase in operating costs if the government carries out development in excess of what is commercially viable. The MARCS mechanism was implemented in two areas: first, to compensate MAHB for the burden of subsidising the Express Rail Link (ERL) project, and second, to compensate MAHB for the failure to raise the actual international passenger service charge (PSC) to the passenger in February 2009. The ERL which started operations in 14 April 2002 is a train service that connects KLIA with the city terminal KL Sentral. The non-stop service is named KLIA Ekspres while the KLIA Transit makes a stop at each station along the line. The ERL is owned by YTL Corporation (50% stake), Lembaga Tabung Haji (40%) and Trisilco Equity Sdn Bhd (10%). MAHB had earlier been instructed to subsidise the ERL project by paying ERL RM5 for every international passenger and RM1 for each domestic passenger, regardless of whether the passengers rode on the ERL trains. Under the restructuring arrangement, MAHB will continue to subsidise the ERL but the government will, in return, pay MAHB the amount that the airport operator paid to the ERL. This arrangement relieves MAHB from its obligations to subsidise the project and passes the burden to the government. Separately, MAHB was allowed to raise the international PSC from RM51/pax to RM65/pax in February 2009 but the government wanted to support the aviation industry in the midst of the global financial crisis (GFC) by keeping the tariffs to the passenger unchanged. As a result, the government stepped in to compensate MAHB for the difference of RM14/pax under the MARCS mechanism until the international departure PSC to the passenger was actually raised in November 2011 to RM65/pax. Despite MARCS, the government will not compensate MAHB for the ongoing losses from the STOLports and other non-viable airports, which were already in existence at the time the restructuring agreement came into force in February 2009. We estimate the losses to be around RM20m each year. However, if the government were to ask MAHB to build any non-viable airports after February 2009, the MARCS mechanism would kick in. Revenue sharing mechanism. The lease payments to the government under the old terms were replaced with a revenue sharing mechanism, whereby the government will take a percentage of the revenues generated by MAHB. Note that while the previous variable lease payment was dependent on KLIA's revenue only, from February 2009 onwards, the government will share in MAHB's total revenue. As a result of the new concession terms, MAHB started by paying the government 8.3% of its revenue in 2009, which has and will continue to increase by 0.25% pts every year. This is called the “baseline revenue share”. For 2013, MAHB will pay 9.3% of its revenue to the government. The maximum revenue share taken by the government is capped at 33%, which will only be reached in 2108 if annual increments stay at the current rate of 0.25% pts. There is a provision in the 2009 restructuring agreement to vary the revenue sharing rate if the government incurs capex on new commercially-viable airports. This is called the “incremental revenue share”. For every RM100m spent by the government, the government will be entitled to an incremental

Malaysia Airports Holdings October 7, 2013

revenue share of 0.3% pts on MAHB‟s entire revenue base. But the increase in the incremental revenue share will be spread over 32 quarters (eight years). For example, a RM1bn capex by the government would entail an incremental revenue share of 3%, with the revenue share stepping up 0.09375% pts every quarter for the next 32 quarters. There are two conditions that must be met before this incremental revenue share kicks in (1) both MAHB and the government must agree that the projects are commercially viable, and (2) MAHB chooses to allow the government to incur the capex for the construction of the project rather than undertake the project itself. If the project is deemed to be commercially unviable, any incremental revenue share should be wholly offset by the MARCS mechanism. Also, if the project is commercially viable, and MAHB chooses to fund and incur the capex, then the government is not entitled to claim any incremental revenue share. At present, the government is only enjoying the baseline revenue share and none of the incremental revenue share. With the KLIA2 project being funded by MAHB, we do not expect the incremental revenue share mechanism to kick in for the foreseeable future.

Figure 16: Revenue share mechanism - payments by MAHB to the Malaysian government Baseline revenue share Starting at 8.3% in 2009, increasing by 0.25% pts every year until the end of the first 25-year concession in 2034.

Incremental revenue share This is in addition to the baseline revenue share. For every RM100m capex spent by the government, the latter will take 0.3% pts in extra revenue share. However, this percentage share will increase in a linear fashion to total 0.3% pts over a period of 32 quarters after the commissioning of the new project.

SOURCES: CIMB, COMPANY REPORTS

How MAHB’s liabilities to the government were settled. In order to settle the RM1.4bn MAHB owes to the government, the government purchased from MAHB NECC Sdn Bhd, the developer of National Exhibition and Convention Centre (NECC) at Subang, for RM160m, which represented the accumulated development cost of the project. The NECC was a much-hyped project that never quite took off after it was launched in 2000. Slated to be completed by end-2002 and to be located at SZB's Terminal 1, NECC was a RM1bn complex that would have sported state-of-the-art facilities. A total of 14 halls with a combined floor space of 1m sq ft were planned. There was supposed to be a convention centre that can accommodate 2,000 people in auditorium style or 3,000 for banquet functions. Grocery outlets, boutiques, restaurants, cafes and bars were to be opened, along with a 250- to 450-room hotel. The activities of NECC Sdn Bhd have been suspended since 2001. The government has also offset the capex incurred by MAHB on the LCCT expansion project (RM124m), the KLIA spur line (aerotrain) project (RM208m) and the LCCT air traffic control upgrade project (RM10m) with the outstanding amounts owed to the government. MAHB also made a cash payment of RM508m to the government, hence offsetting RM1.0bn of its RM1.4bn debt. The remaining RM419m was intended to be settled in later years through the revenue sharing scheme described above. By end-2012, the RM419m was essentially settled via the revenue share after just four years into the February 2009 restructuring agreement.

Malaysia Airports Holdings October 7, 2013

Figure 17: How MAHB settled its RM1.4bn debt with the government Settlement RMm Sale of National Exhibition and Convention Centre (NECC) 160 LCCT expansion cost 124 KLIA spur line project cost 208 LCCT air traffic control upgrade cost 10 Cash payment 508 1,010 Future revenue share 419 Debt owed to government 1,429 SOURCES: CIMB, COMPANY REPORTS

Separately, the government has also purchased Sepang International Circuit Sdn Bhd, the promoter and organiser of the F1 Malaysian Grand Prix since 1999, for a token sum of RM1 and also assumed its liabilities of RM121m. The government has a 10-year option to purchase the racing circuit at book value, which amounts to RM319m. Some RM400m was spent on building the circuit. The option will be deemed exercised if the government does not exercise it by April 2019. In the meantime, if a suitor approaches MAHB expressing his interest in purchasing the circuit, the government has the right of first refusal. The option has yet to be exercised.

Figure 18: Express Rail Link (ERL) Figure 19: Sepang International Circuit

SOURCES: CIMB, COMPANY REPORTS SOURCES: CIMB, COMPANY REPORTS

Every part of the 2009 restructuring was highly positive for MAHB. Airport operation and social welfare responsibilities have been in most part successfully separated while the shift from heavy lease payments to a revenue sharing arrangement significantly reduced operating leverage, giving the government greater participation in MAHB's better years, yet reducing the strain on cash flows in less favourable years. The sale of its non-core assets to the government also meant that the airport operator can finally focus on its core business of operating airports. The flexibility in deciding which airport development to participate in allows MAHB to only undertake projects it deems viable and leaves socioeconomically-driven investments to the government. The announcement of the February 2009 restructuring was greeted with enthusiasm by the stock market and MAHB‟s share price soared 140% from RM1.73 to RM4.15 within 12 months.

Malaysia Airports Holdings October 4, 2013

Figure 20: MAHB's key events timeline

May 13 - Announces 9 Aug 11 - MAS & Nov 11 - Announces fourth deferment of AirAsia enters into a second deferment of KLIA2 completion to Share price (RM) share swap KLIA2 completion to May14 Aug 09 - Tengku agreement. Ahmad Apr 13 Azmil becomes 8 Jauhari becomes MD of MAS MD of MAS Nov 11 - PSC charges raised

Aug 10 - Issues Oct 04 - Khazanah its first Islamic MTN 6 becomes MAHB's largest shareholder after the MoF Feb 09 - The 2009 transferred its stake Dec 05 - Idris Jala restructuring to Khazanah becomes MD of Nov 07 - AirAsia exercise, which enabled 5 MAS launches MAHB to get a MARCS AirAsia X compensation and established a new Mar 12 - revenue sharing scheme Issues shares 4 Dec 01 - Tony Mar 06 - LCCT opens for business via a private Fernandes buys placement AirAsia

3 Aug 10 - MAS- AirAsia share Mar 13 - Malindo swap unravels starts operations and triggers price war and strong Aug 10 - Announces 2 capacity injection first deferment of by MAS and KLIA2 completion to AirAsia Apr 12

1 Mar 09 - Announces Oct 09 - SZB plan to build a new completes Jan 13 - Announces third LCCT, targeted for refurbishment deferment of KLIA2 completion in Sep 11 completion to Jun 13 0 N J M M J A O D F M M J S O D F A J J S N D F A J J S N J M A J A S N J M M J A O N J M M J A O D J M M J A O D F A M J S N D F A J J S N J M A J A S N J M M J A O D J M M J A O D F A M J S 00 01 02 03 04 05 06 07 08 09 10 11 12 13

SOURCES: CIMB, COMPANY REPORTS

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1.7 KLIA2 - the LCCs' permanent home The Labu airport. The KLIA2 is currently being built by MAHB as a replacement for the LCCT but if AirAsia had its way, it would never have been built. After operating at the LCCT for a number of years and expressing a lack of confidence in MAHB‟s ability to provide for AirAsia‟s future expansion, AirAsia was reported in late 2008 to have entered into a JV with Sime Darby to build a new LCCT replacement at Labu, which is not too far from the present LCCT, and that the private finance initiative had already obtained cabinet approval. However, by February 2009, then Deputy Prime Minister Datuk Seri Najib Razak had decided that AirAsia‟s proposal to build a dedicated new LCCT at Labu with Sime would not be allowed to proceed, expressing reservations about AirAsia‟s ability to raise financing for the project. Clearly, the strong lobbying by Khazanah and MAHB had worked. The original KLIA2 plan – September 2011 completion. The conceptualisation of KLIA2 started in August 2007 amid plans to give AirAsia and other LCCs flying to Kuala Lumpur a permanent home. But concrete plans were only announced in February 2009. The initial intention was to build a smaller, 30m-passengers a year terminal at a cost of about RM2bn, to be completed by September 2011. The new terminal was to have a floor space of 150,000 sq m with 70 aircraft parking bays. The development plan includes the construction of the airport's third runway. There will also be full parallel taxiways built for the second and third runways to ensure quicker turnaround. In keeping with AirAsia's stance of not using aerobridges to disembark or board its passengers, MAHB did not plan to provide aerobridges but will provide ramps instead, even though provisions have been made in the design to accommodate the installation of aerobridges in the future should the need arise. By not using aerobridges, AirAsia hopes to reduce turnaround time, hence allowing the airline to increase fleet utilisation and operate additional sectors each day.

Figure 21: The new LCCT's original master plan (2009)

SOURCES: CIMB, COMPANY REPORTS

Malaysia Airports Holdings October 4, 2013

Figure 22: An artist impression of KLIA2 and the Integrated Complex (shopping mall) at the entrance of the check-in area

SOURCES: CIMB, COMPANY REPORTS

The first delay to April 2012 completion. In August 2010, changes were made to the design of the new terminal and the commissioning date was revised from 3Q11 to April 2012. The changes were meant to cater for the following.  AirAsia's business model evolution from wholly point-to-point services to a partial hub-and-spoke model, where AAX passengers will hop onto AirAsia's short-haul network at KLIA to reach their ultimate destinations, or vice versa. As a result, the new LCCT will need to allocate space for transfer/transit passengers and baggage transfer handling facilities.  The government's requirement for the full separation of arriving and departing international passengers as well as the separation of international and domestic travellers. Hence, the terminal needed three levels (nine storeys) instead of just two levels (two storeys) originally.  The increase in the number of gates from 55 to 68. Additional gates will help reduce the amount of towing needed and will lower operating costs for the airlines.  The inclusion of additional commercial space.  The construction of a multi-modal transportation hub for buses, taxis and the ERL. To incorporate these changes, MAHB increased the terminal's size from 150,000 sq m to 242,000 sq m. The company nonetheless admitted that the completion of earthworks for the third runway was behind schedule.

Malaysia Airports Holdings October 4, 2013

Figure 23: KLIA2's planned layout

SOURCES: CIMB, SKYSCRAPERCITY

Figure 24: Deferments and delays for the completion of KLIA2

Announcement Targeted Capacity (m Terminal size Budgeted date opening date passengers) (sq m) Aerobridges? Gates construction cost March 2009 September 2011 30 150,000 No 55 RM2bn August 2010 April 2012 30 242,000 No 68 RM2bn November 2011 April 2013 45 257,000 Yes 68 RM3.6-3.9bn January 2013 June 2013 45 257,000 Yes 68 RM3.6-3.9bn May 2013 May 2014 45 257,000 Yes 68 RM4bn SOURCES: CIMB, COMPANY REPORTS

The second delay to April 2013 completion. Another change in specifications was announced in November 2011, which then postponed KLIA2's launch by another year to April 2013. This time, the cost of construction was officially raised from RM2bn to RM3.6bn-3.9bn. The floor space was increased to 257,000 sq m from 242,000 sq m and the annual passenger capacity was raised from 30m to 45m. Several more enhancements were made:  Aerobridges will be installed in KLIA2 to make plane boarding and disembarking a more convenient process for passengers, especially the elderly, expectant mothers, children as well as those with restricted movement.  The baggage handling system will be upgraded to a fully automated one.  The third runway will be 3.96km-long, instead of the initial 2.5km planned.

Malaysia Airports Holdings October 4, 2013

 Instead of an apron control tower, an airport traffic control tower will be built. It will also serve as a back-up traffic control tower to the existing one at the MTB. The third delay to June 2013 completion. On 7 January 2013, KLIA's opening date was revised to 28 June 2013 in order to coincide with the date of KLIA's commencement 15 years ago in 1998. Prime Minister Datuk Seri Najib Razak expressed confidence that KLIA2 will be completed as scheduled in May 2013, stating that the slight delay was to ensure that any teething issues that may arise will be resolved before the official launch. However, during that time, we heard that several contractors were having difficulties with gravel supply as the Klang Valley MRT project got underway and absorbed the available supply. The fourth delay to May 2014 completion. Just two days after Malaysia's 13th general election, MAHB admitted on 7 May 2013 that contractors for KLIA2 may have difficulty meeting the 28 June 2013 deadline. MAHB blamed its contractors and imposed liquidated ascertained damages (LAD) on some of them. The main contractor for the terminal building, the UEM-Binapuri JV was slapped with a RM199,445.40 LAD for each day of delay, starting from 16 June 2013. AirAsia, KLIA2's largest customer, publicly voiced its disappointment with the delay. "What we're disappointed is that MAHB should have been more transparent and honest about it from the beginning," AirAsia Malaysia CEO Aireen Omar commented. A new date for the opening, 2 May 2014, was set. Physical completion of the facilities is expected in November 2013, with two months needed to obtain a certificate of fitness from the Department of Civil Aviation (DCA) and another three months for operational readiness and testing (ORAT). Despite the latest delay, MAHB maintains that it will keep KLIA2 construction costs at RM4bn, saying that any additional construction costs will be paid by its contractors under fixed price contracts. A fifth delay to end-2014 or early-2015 completion? MAHB continues to guide that it will be able to commission KLIA2 on 2 May 2014. However, there may be some ongoing issues with the final stages of the construction of the terminal building, and as a precaution, we have assumed in our model that the KLIA2 will officially open on 1 January 2015. We have also factored into our model a total project capex of RM4.5bn. About RM550m of the RM4bn capex (coloured green in Figure 26) are government assets funded by MAHB, including the air traffic control tower (ATCT) and upgraded public roads and infrastructure. MAHB is likely to receive lease payments from the government for these assets, subject to future negotiations.

Malaysia Airports Holdings October 4, 2013

Figure 25: How the final KLIA2 specifications differ from the original ‘LCCT replacement’ plan

SOURCES: CIMB, COMPANY REPORTS

Figure 26: This is the breakdown of how the KLIA2 capex escalated from RM2bn to RM4bn – 35% of the cost increase came from more earthworks (due to increase in the footprint, as well as to stabilise the soft earth, 22% came from the larger terminal building, and about 10% came from the longer runway/taxiway. About RM550m of the RM4bn capex (coloured green) are government assets funded by MAHB, including the air traffic control tower (ATCT) and upgraded public roads and infrastructure.

SOURCES: CIMB, COMPANY REPORTS

Malaysia Airports Holdings October 4, 2013

1.8 A bittersweet relationship with Malaysia's largest airline MAHB has a bittersweet relationship with Malaysia's largest airline, AirAsia. Together with MAS, AirAsia is one of the airport operator's largest customers. Nevertheless, this has not prevented public displays of dissatisfaction with each other every now and then, though the source of frustration appears to be most publicly aired by AirAsia. The disagreement between AirAsia and MAHB over who was to construct the new LCCT replacement was one of the first major displays of mutual disaffection and burst into the public arena when the Labu airport proposed by the AirAsia-Sime Darby JV for completion in February 2011 secured cabinet approval (albeit temporary) in late 2008. By February 2009, Khazanah and MAHB had succeeded in their lobbying against the Labu airport project. We wrote in our 22 February 2009 report: “AirAsia had justified its Labu proposal on several grounds. First, Malaysia Airports‟ proposed RM2.9bn new LCCT replacement was significantly more expensive than the RM1.6bn cost for building Labu, and AirAsia feared that airport charges would be raised. Second, AirAsia felt that Malaysia Airports was slow in responding to its needs and may only be able to complete the new permanent LCCT by 2014, which is too late to cater to the airline‟s rapid growth. However, Malaysia Airports refuted AirAsia‟s allegations, and claimed that it could build the new LCCT within the 2011 timeframe and at a lower cost than the greenfield Labu airport, and that it would not raise airport charges.” From where we stand right now, we can see that AirAsia‟s fears have turned out to be prescient. You could even say that AirAsia was conservative. The current official guidance is for the KLIA2 to open in May 2014 and cost RM4bn though we think it is likely to open only in late 2014 or early 2015 and has the potential to rise to a cost of RM4.5bn. The scale and size of the KLIA2 is of course much larger than the original LCCT replacement proposed by MAHB, so this is not an entirely like-for-like comparison. But as far as AirAsia is concerned, it has always wanted a simple terminal so the upcoming KLIA2 is probably too grandiose for its liking and took much too long to build. MAHB and AirAsia were also often at loggerheads over the issue of PSC charges. When MAHB announced that it will increase international PSC charges for the LCCT from RM25 to RM32 and MTB charges from RM51 to RM65, effective 15 September 2011, AirAsia publicly accused MAHB of not fulfilling its promise of freezing the PSC for the LCCT, saying that the government had previously assured it that there will be no increase in LCCT PSCs. "We will fight tooth and nail. We are paying for MAHB's inefficiencies, which is what I've always said is the problem," AirAsia‟s Fernandes said. MAHB rebutted the claims, stating that PSC and other aeronautical charges are determined solely by the government. MAHB said that it is the sole prerogative of the government to reduce, maintain or increase aeronautical charges, which MAHB will abide by. Amid claims that the rise in PSC is meant to compensate for potential cost overruns at the new terminal, MAHB cited several examples of PSC not being raised despite additional capex spent by the airport operator:  PSC remained the same when aviation operations moved from SZB to KLIA in 1998.  PSC remained the same after new terminals were built at several airports.  PSC remained the same after LCCT's expansion to accommodate widebody planes and AirAsia‟s growth. Probably a sign of AirAsia's lobbying power with the government, the PSC hikes were temporarily put on hold but were finally implemented on 15 November 2011.

Malaysia Airports Holdings October 4, 2013

Tensions came to the boil again recently when KLIA2 missed its June 2013 completion deadline, with AirAsia seizing the opportunity to take a jab at MAHB's lack of communication with the airline on the project's status. When MyCC recently accused AirAsia and MAS of infringing section 4(2) (b) of the Competition Act 2010 during the period of their shareholders‟ share swap agreement, AirAsia said that it intended to vigorously defend the allegations, and at the same time urged MyCC to "also focus its attention on entities that are in monopolistic positions such as MAHB".

2. KLIA TODAY 2.1 Malaysia's main international gateway Kuala Lumpur International Airport (KLIA) is Malaysia's main international gateway and is the country's largest and busiest airport. MAHB originally had a 50-year concession to manage and operate the airport since its completion in 1998 till 2048. Since the 2009 restructuring, the arrangement has been revised to a 25-year concession agreements starting from 2009 to 2034, with an option by the government to renew the concession by another 25 years to 2059. MAHB is currently negotiating with the government to formalise an extension of the concession agreement to 2069. We believe that its chances are good. KLIA initially consisted of only the main terminal building (MTB) but incorporated an LCC terminal in 2006. The KLIA2 is currently being built. When completed, it will be the permanent replacement for the LCCT. The current LCCT will be subsequently leased out to cargo operators once AirAsia constructs its new headquarters and moves out of its existing offices at the LCCT. Passenger traffic at KLIA grew at an 8.6% CAGR in 2007-2012 to 39.9m, led by the 10.1% average annual increase in international traffic. Domestic traffic growth was more muted at 5.4% annually. Traffic in the world's top 50 airports increased at a much milder 2.5% CAGR due to slowdowns in European and American traffic amid sluggish economic conditions. Traffic in Asia, together with much milder growth from the Oceanic region, was the only bright spot. Asia as a whole expanded at a quicker pace than KLIA, at 10.9% a year, led by Jakarta (+12.5%), Dubai (+10.9%), Guangzhou (+9.4%) and Shanghai-Pudong (+9.2%). KLIA has remained in the world's top 50 list by passenger traffic over the past six years, gradually rising up the ranks. The airport was ranked 45 back in 2006, steadily improving to 42 in 2007, 41 in 2008, 40 in 2009, 31 in 2010, 28 in 2011 and finally 27 in 2012. KLIA is Southeast Asia's fourth busiest airport, behind Jakarta (57.7m passengers in 2012), Bangkok (53.0m) and Singapore (51.2m). Fifty-nine airlines currently fly into KLIA.

Figure 27: Passenger traffic growth for the 50 largest airports in the world, by region 2007 2008 2009 2010 2011 2012 Asian airports 7.0% 5.4% 13.6% 17.4% 6.7% 11.7% European airports 5.6% -5.1% -8.6% -2.7% 7.2% 1.7% American airports 3.1% -4.5% -6.7% 3.0% 3.0% -1.1% Australian airports 7.7% 80.0% 0.9% 8.6% 0.6% 4.2% All airports 4.7% -0.9% -1.7% 6.2% 5.0% 4.0% SOURCES: CIMB, COMPANY REPORTS NOTE: THE SHARP RISE IN AUSTRALIAN AIRPORTS’ PASSENGER GROWTH WAS DUE TO THE INCLUSION OF MELBOURNE (JOINING SYDNEY) AS ONE OF THE WORLD’S TOP 50 AIRPORTS

Malaysia Airports Holdings October 4, 2013

Figure 28: Share of global traffic, by region 2007 2008 2009 2010 2011 2012 Asian airports 24.5% 26.0% 30.1% 33.3% 33.8% 36.3% European airports 25.8% 24.7% 22.9% 21.0% 21.5% 21.0% American airports 48.1% 46.3% 44.0% 42.7% 41.8% 39.8% Australian airports 1.6% 2.9% 3.0% 3.1% 2.9% 2.9% SOURCES: CIMB, AIRPORTS COUNCIL INTERNATIONAL

2.2 A truly international airport International passengers form the bulk of KLIA's passenger traffic, with 69% of seats landing at the airport coming from international routes. Over half of the international traffic is bound for neighbouring countries in Southeast Asia, with Northeast Asia being the second most frequented region. Indonesia, Thailand and Singapore, because of their proximity to Malaysia, are unsurprisingly the three most popular international destinations.

Figure 29: KLIA and LCCT's top international destinations (by regions)

Title: Southeast Asia Source: Northeast Asia Please fill in the values above to have them entered in your report South Asia

Middle East

Southwest Pacific

Western Europe

Eastern/Central Europe

Central Asia

Southern Africa

0 50 100 150 200 250 300 350 400 450 500 Seats per week ('000) SOURCES: CIMB, COMPANY REPORTS, CAPA

Figure 30: KLIA and LCCT's top international destinations (by country)

Indonesia Title: Source: Thailand

Singapore Please fill in the values above to have them entered in your report China

Australia

India

Hong Kong

UAE

Vietnam

Philippines

Japan

Others

0 50 100 150 200 250 Seats per week ('000) SOURCES: CIMB, COMPANY REPORTS, CAPA

Malaysia Airports Holdings October 4, 2013

Some 20% of the international seats heading out of KLIA are bound for Indonesia while Thailand and Singapore each account for approximately 11%. LCCs command a slight edge over the FSCs in terms of seat capacity, at 51% of KLIA's seats, largely due to the strength of the AirAsia franchise as well as the tighter seat configuration on an LCC aircraft. The MTB nonetheless still represents the bulk of traffic as a number of LCCs operate from MTB, such as Jetstar Asia. However, MTB's share of the capacity pie has fallen over the years, declining from over 71% in 2007 to 52% currently. Nearly 58% of KLIA's international traffic departs from the MTB, where PSC charges are double that at the LCCT.

Figure 31: Seat capacity split between FSCs and LCCs at KLIA Figure 32: Seat capacity split between KLIA and LCCT (23-29 and LCCT (23-29 September 2013) September 2013)

SOURCES: CIMB, COMPANY REPORTS, CAPA SOURCES: CIMB, COMPANY REPORTS, CAPA

Malaysia Airports Holdings October 4, 2013

2.3 KLIA has plenty of space for airlines to expand Runway capacity. The key constraint to airports is the utilisation of its runways. In this regard, KLIA is doing relatively well with its two runways. The theoretical maximum number of take-offs and landings is 70 movements/hour for the two runways combined. During the 3-4pm peak, there are 59 movements/hour. However, once KLIA‟s third runway becomes operational in mid-2014 or early 2015, the theoretical maximum capacity should rise by another 35 movements/hour to 105, leaving ample capacity for future airline expansion. The government is also planning to invest in new air traffic control equipment and technology, as well as construct the third Air Traffic Control Centre, in order to raise the capacity of Runway 1 and 2 to a combined 78 movements/hour, from 70 movements/hour currently. This will come at a cost of RM426m, and enable simultaneous takeoffs and landings at those two runways. Once all these investments are in place, KLIA‟s three runways should be able to accommodate about 120 movements/hour, from the present 70 movements/hour for the existing two runways, representing an increase of 71%.

Figure 33: Aircraft movements at KLIA’s two runways (23-29 September 2013)

70 Title: Departing Arriving Source: 60 59 53 54 53 55 55 54 53 53 49 49 50 Please fill in the values above to have them entered in your report 50 47 49 50

40 36 31 32 30

20 20 12 8 8 10 6 3 0 12am - 1am - 2am - 3am - 4am - 5am - 6am - 7am - 8am - 9am - 10am - 11am - 12pm - 1pm - 2pm - 3pm - 4pm - 5pm - 6pm - 7pm - 8pm - 9pm - 10pm - 11pm - 1am 2am 3am 4am 5am 6am 7am 8am 9am 10am 11am 12pm 1pm 2pm 3pm 4pm 5pm 6pm 7pm 8pm 9pm 10pm 11pm 12am

SOURCES: CIMB, COMPANY REPORTS, CAPA

Terminal capacity at KLIA MTB. Terminal capacity is also adequate, in our opinion. The KLIA MTB has a theoretical passenger capacity of 25m passenger p.a., and we expect the MTB to see 24.8m passengers in 2013, suggesting full capacity. However, MTB‟s capacity of 25m passenger/year is premised on very high levels of passenger comfort (minimum required space between one passenger and the next) of 55 sq m/pax. If these conditions are relaxed, the MTB‟s theoretical capacity can increase. Even at peak hours, the MTB never feels very congested and passenger traffic will probably need to double before KLIA‟s MTB feels anything like Bangkok‟s Suvarnabhumi or Jakarta‟s Soekarno-Hatta International Airport. Also, while Malindo currently operates from the MTB, it is likely to move to the KLIA2 once it is completed. By comparison, Changi Airport was designed for a passenger comfort level of 30 sq m/pax. Applying Changi Airport‟s passenger comfort level, KLIA‟s MTB actually has a passenger capacity of 45m passengers/year, which will only be achieved after 2050, according to our projections. Nevertheless, we believe MAHB will start to build a second satellite terminal at KLIA‟s MTB in around eight years from now, i.e. in 2021, as there may not be

Malaysia Airports Holdings October 4, 2013

enough boarding gates for aircraft, though this problem can be solved easily by bussing passengers from the terminal to the aircraft parked remotely. The cost of building the second satellite terminal should not be very high as the surrounding infrastructure is already mature. Terminal capacity at the LCCT/KLIA2. Terminal capacity at the LCCT is currently a problem, with 26m passengers expected to flow through the LCCT in 2014 compared with its design capacity of 15m p.a., which was based on a passenger comfort level of 15-20 sq m/pax. However, the completion of KLIA2 sometime in 2014 will resolve the problem immediately as the new terminal will have a capacity of 45m passengers p.a., based on a passenger comfort level of 25 sq m/pax. By our estimate, KLIA2‟s passenger traffic should hit 32m passengers in 2015, or 72% utilisation in its first full year of operations, and then rise to 45m passengers by 2021, at which time an expansion of KLIA2 will be required. This coincides with the need to build a second satellite terminal at the MTB, so we expect the first few years of the next decade to see another major expansion capex cycle.

Figure 34: Terminal capacity at KLIA Passenger Capacity comfort Passenger traffic (m pax p.a.) Terminal utilisation (%) Pax p.a. sq m/pax 2013F 2014F 2015F 2020F 2013F 2014F 2015F 2020F MTB - nameplate capacity 25 55 24.8 28.1 26.8 30.1 99% 113% 107% 120% - capacity on the basis of lower passenger comfort 45 30 55% 63% 59% 67%

LCCT 15 20 22.1 26.2 147% 175%

KLIA2 45 25 32.3 43.7 72% 97% SOURCES: CIMB, COMPANY REPORTS

2.4 Comparisons with regional airports Terminal capacity. KLIA compares very well with other regional airports in terms of terminal capacity, and this will open the way for airlines to expand in KLIA. Although KLIA today has a nameplate passenger capacity of just 40m p.a., we believe that the MTB can accommodate 80% more passengers than is officially claimed, while the new KLIA2 will be commissioned within a year. Hence, the whole KLIA complex will soon have a capacity of 90m passengers p.a. As a result, by next year, KLIA should be catapulted to the top of the rankings table in Southeast Asia in terms of passenger capacity across all terminals, exceeding Greater Bangkok‟s 81.5m (Suvarnabhumi and Don Muang combined), Changi‟s 66m, Hong Kong‟s 60m, Manila NAIA‟s 28m, and Jakarta‟s 22m. Greater Bangkok should regain its number one ranking by 2017, once the Phase 2 expansion of Suvarnabhumi is completed, as that will lift total passenger handling capacity by 15m passengers p.a. At the moment, FSCs are using Suvarnabhumi, whereas LCCs are using the old Don Muang Airport which is actually closer to the Bangkok city centre. Changi‟s capacity should rise to 85m once Terminal 4 is ready by 2017 and the expansion of Terminal 1 is completed, and then rise further to 132m by 2023 with the massive Terminal 5 in place. Although Changi has been very explicit on its airport development plans, we also expect the capacity of KLIA‟s MTB and KLIA2 to be raised to around 160m passengers p.a. in the 2021-23 timeframe. Hong Kong‟s passenger terminal capacity should be increased from 60m presently to 70m p.a. by 2015, after the completion of the Midfield

Malaysia Airports Holdings October 4, 2013

Development, which according to Wikipedia, “is located to the west of Terminal 1 and between the two existing runways. It is the last piece of land on the airport island available for large-scale development”. Manila‟s Ninoy Aquino International Airport (NAIA) is very full, in particular Terminal 1, but there are no plans to expand the airport, as the surrounding area is fully built-up. However, the San Miguel group (which owns 49% of of Philippine Airlines and PAL Express) has expressed confidence that it will be allowed by the government to proceed with a plan to build a brand new US$6bn airport, speculated to be in Bulacan, which lies to the northwest of Metro Manila. Until this is confirmed, we have no indication of its potential terminal size. Finally, Jakarta‟s Soekarno-Hatta International Airport already has almost 3x more passenger traffic that its actual capacity. But the expansions of Terminal 1, 2 and 3 are currently ongoing and will be completed by end-2015, lifting total capacity to 62m passengers p.a. Unfortunately, this will only match the current passenger traffic. Angkasa Pura II, which is the body in charge of developing the Jakarta airport complex, hopes to build a 25m passengers p.a. Terminal 4, but is hampered by land acquisition issues. The Indonesian government will have to step in with the funds to make the land acquisition, but we are unclear if it will, and how long it will take, to happen. In conclusion, the KLIA complex will have one of the highest terminal capacities by next year, with the Greater Bangkok airports and Changi catching up only in 2017. Therefore, there are no near- or medium-term capacity limits for airlines wishing to expand their operations at KLIA.

Figure 35: Terminal capacity - comparison with regional airports

Current Looking ahead Current annual 2012 pax Terminal Future annual pax capacity (m) traffic (m) utilisation (%) pax capacity (m) Notes Kuala Lumpur 40.0 39.9 100% 90.0 90m pax once KLIA2 is completed by 2014/15. - MTB, Sepang 25.0 20.7 83% 45.0 Assume that MTB capacity is raised to 45m pax p.a. without any - LCCT, Sepang 15.0 19.2 128% capex spending, just by reducing the passenger comfort levels. - KLIA2, Sepang 45.0

Bangkok 81.5 55.1 68% 96.5 96.5m pax by 2017,once Phase 2 expansion at BKK is completed. - Suvarnabhumi, Bangkok 45.0 52.4 116% 60.0 - Don Muang, Bangkok 36.5 2.7 7% 36.5 DMK traffic should rise in 2013 with AirAsia moving there in Oct 2012.

Changi, Singapore 66.0 51.2 78% 85.0 85m pax by 2017 (with T1 expansion & T4); 132m by 2023 (with T5). - Terminal 1 21.0 24.0 Terminal 1 to be expanded from 21m pax to 24m pax p.a. - Terminal 2 23.0 23.0 - Terminal 3 22.0 22.0 - Terminal 4 16.0 Terminal 4 to be ready by 2017. ≈≈≈≈ ≈≈≈≈ - Terminal 5 47.0 Terminal 5 to be ready by 2023.

Hong Kong 60.0 56.5 94% 70.0 70m pax by 2015, after completion of Midfield Development.

Manila NAIA, Pasay 28.0 31.6 113% 28.0 No expansion plans; traffic to rise as AirAsia Php moving from Clark. - Terminal 1 6.0 6.0 - Terminal 2 9.0 9.0 - Terminal 3 13.0 13.0

Soekarno-Hatta, Jakarta 22.0 57.8 263% 62.0 T1, T2 and T3 will all be expanded to capacity of 62m pax p.a. - Terminal 1 9.0 18.0 - Terminal 2 9.0 19.0 - Terminal 3 4.0 25.0 T3 expansion to complete by end-2015. ≈≈≈≈ ≈≈≈≈ - Terminal 4 25.0 T4 cannot be constructed unless land acquisition is funded by govt. SOURCES: CIMB, COMPANY REPORTS

Malaysia Airports Holdings October 4, 2013

Runway capacity. KLIA also compares well with the other key regional airports in terms of runway capacity. Its two runways have a maximum capacity of 70 aircraft movements/hour, and is usually about 70% used during 6-12am. With Runway 3 slated for opening by end-2014, the 6-12am utilisation will fall down to 47% for all three runways combined, giving enough space for airlines to expand in KLIA. As mentioned earlier, the Malaysian government is planning to invest in new air traffic control equipment and technology, as well as construct the third Air Traffic Control Centre, in order to raise the capacity of Runway 1 and 2 to a combined 78 movements/hour, from 70 movements/hour currently, by enabling simultaneous takeoffs and landings. Once this investment in technology is made, KLIA‟s three runways will have even more room for airline expansion. Greater Bangkok is currently served with four runways, two each at Suvarnabhumi and Don Muang. Therefore, Greater Bangkok has the highest runway capacity among our sample airports, with 136 movements/hour, assisted also by the advanced air traffic equipment at Suvarnabhumi which enables simultaneous takeoffs and landings. It is hence not surprising that utilisation is only 42% between 6am and 12am, the lowest in our sample. The Phase 2 Suvarnabhumi expansion will see the construction of Runway 3 at the airport by 2018, but as the surrounding area is already built-up, Runway 3 has to be built very close to Runway 1. The distance separating the two runways is only 400m, vs. an ideal of 2km. As a result, Runway 1 and Runway 3 cannot be operated independently, and the addition of Runway 3 will add capacity of just seven movements/hour, taking the total for Greater Bangkok from 136 to 143 movements/hour by 2018. Despite this operational restriction on the future Runway 3, runway utilisation at Greater Bangkok will remain very low among Southeast Asian airports because the city is served by two full-fledged airports. Singapore‟s Changi Airport is presently served by two runways, with an average utilisation of 68% during 6-12am, which is similar to KLIA. This is based on a capacity of 68 movements/hour. In reality, Changi‟s two runways‟ capacity can decline to as low as 51 movements/hour, if the nearby Paya Lebar Airport is also in use, and also because of operations restrictions caused by the proximate rifle range at Pulau Tekong. While Changi does have a third runway, it is presently used by the military and only 2,750m long. It will be brought over to commercial use and lengthened to 4,000m only by 2020. As a result, Changi will continue to remain congested during peak hours for the next seven years, whereas KLIA will already be able to utilise its Runway 3 by 2014. Runway congestion is an even bigger issue for Hong Kong, as its two runways with a capacity of 64 movements/hour are already 97% utilised at peak hours, and utilisation averages 78% during 6-12am, among the highest in our airport sample. The third runway is only expected to be completed in 2023, as it involves major land reclamation work. As a result, slots available for airline growth will be very limited for the next 10 years. Manila NAIA has the lowest runway capacity of all the airports in our sample, at just 36-40 movements/hour, due to the fact that the runways are at a right angle to each other (as opposed to parallel runways for other airports in the region), and because one runway is just 2,300 km long. As a result, runway utilisation is among the highest, and airlines have very little space for growth. Between 6am and 12am, Manila NAIA‟s two runways have a utilisation of 79%. Compounding the problem at Manila NAIA is the absence of rapid-exit taxiways, which means that aircraft have to taxi all the way to the end of the runway and hence stay on the runway for a longer amount of time than other airports that have rapid-exit taxiways. This means that the separation of time between one aircraft movement and another is lengthened at Manila NAIA, and this caps runway efficiency and capacity. Plans are afoot to build two rapid-exit taxiways at a cost of Php600m, that will be able to increase the capacity to 60 movements/hour in the next two years. Beyond this, a brand-new airport in a

Malaysia Airports Holdings October 4, 2013

different site is needed to serve the Greater Manila area, as the area surrounding NAIA is fully built-up. We have not included Clark International Airport‟s two 3,200 km runways into our analysis, as airlines have not succeeded in making Clark a base for profitable operations, and carriers like AirAsia Philippines are moving to reduce their flights and operations from Clark and moving their operations to Manila NAIA. Hence, despite plans to develop Clark, it will increasingly become a marginalised airport and will play only a very small role in serving the Greater Manila area. Jakarta‟s Soekarno-Hatta airport at Cengkareng is similarly very congested, with its capacity of 75 movements/hour on its two runways already exceeded during peak hours. During 6-12am, the average utilisation is 83%, the highest for our sample of airports. The plans to build Runway 3 together with Terminal 4, which are to the north of the present facilities, are completely dependent on whether the government will proceed with the land acquisition. In conclusion, the KLIA complex after the completion of Runway 3 in 2014 will have one of the highest runway capacities in ASEAN, higher than even Singapore Changi and Hong Kong, and in second place behind Bangkok‟s combined two airports Suvarnabhumi and Don Muang.

Malaysia Airports Holdings October 4, 2013

Figure 36: Runway capacity - comparison with regional airports

Current Looking ahead Aircraft movements/hour Runway utilisation

Length of Actual peak- Avg 6- Length of New No. of runways Maximum hour Avg (24 Avg (6- At peak Avg 24 12am No. of runways capacity New utilisation - runways (km) capacity utilisation * hrs) 12am) hour (%) hrs (%) (%) runways (km) per hour avg 6-12am (%) Notes Kuala Lumpur 2 70 59 39.1 49 84% 56% 70% 3 105 47% By next year 2014. - Runway 1 4.1 4.1 - Runway 2 4.0 4.0 - Runway 3 4.0 Third runway to be ready by 2014.

Bangkok 4 136 74 47 57 54% 35% 42% 5 143 40% - Suvarnabhumi, Bangkok 2 76 45 33 38 59% 43% 50% 3 83 46% * Runway 1 4.0 4.0 * Runway 2 3.7 3.7 * Runway 3 4.0 Third runway to be ready by 2018, but only adds 7 movements/hour - Don Muang, Bangkok 2 60 29 14 19 48% 23% 32% 2 60 32% because only 400m separation from Runway 1 (ideal is 2km). * Runway 1 3.7 3.7 * Runway 2 3.5 3.5

Changi, Singapore 2 68 57 39 47 84% 57% 68% 3 102 46% By 2020 only. - Runway 1 4.0 4.0 - Runway 2 4.0 4.0 - Runway 3 4.0 Existing third runway to be extended from 2.75km to 4km by 2020.

Hong Kong 2 64 62 42 50 97% 65% 78% 3 96 52% By 2023 only. - Runway 1 3.8 3.8 - Runway 2 3.8 3.8 - Runway 3 3.8 Third runway to be completed by 2023.

Manila NAIA, Pasay 2 40 37 27 32 93% 67% 79% 2 40 79% No expansion possible as surrounding area is fully built-up. * Runway 1 3.7 3.7 * Runway 2 2.3 2.3

Soekarno-Hatta, Jakarta 2 75 81 50 62 108% 67% 83% 2 75 83% No expansion possible unless private land is acquired by government. - Runway 1 3.7 3.7 - Runway 2 3.6 3.6

* on Friday, 4 October 2013 SOURCES: CIMB, COMPANY REPORTS

One third Half page Two thirds Full page Landscape

Malaysia Airports Holdings October 4, 2013

2.5 KLIA's key customers Malaysia AirAsia, AirAsia X and Indonesia AirAsia, all part of the wider AirAsia group of companies, are some of MAHB's largest customers, collectively accounting for 43% of the airport's traffic. MAS is in second place with 32% while new entrant Malindo Air has 3%. The largest foreign airline is Emirates, with a 2% share of seat capacity.

Figure 37: KLIA and LCCT's major customers (by number of seats) – 23-29 September 2013

SOURCES: CIMB, COMPANY REPORTS, CAPA

AirAsia is Malaysia's largest airline. The AirAsia group is one of Asia‟s leading LCCs, operating a standardised cost-efficient fleet of A320-200 narrowbody jets for its short-haul network and A330 widebody aircraft for its longer-haul routes. At the end of 2Q13, the Malaysian operation of AirAsia has a fleet of 66 A320s and 15 A330s, with 349 A320s, 15 A330s and 10 A350s still on order. The carrier‟s fleet will, therefore, triple by the end of the decade, with new orders spread across several hubs in Southeast Asia and India. About 55% of AirAsia‟s seat capacity is deployed domestically, with 45% deployed internationally.

Figure 38: AirAsia group's fleet expansion plans 2005 2006 2007 2008 2009 2010 2011 2012 2013F 2014F 2015F Group No of Aircraft 35 49 65 72 84 90 98 118 152 173 191 - Malaysia 23 31 39 44 48 53 57 64 72 77 82 * A320 2 15 31 44 48 53 57 64 72 77 82 * B737 21 16 8 0 0 0 0 0 0 0 0 - Thailand 8 12 15 16 20 19 22 27 35 43 49 * A320 0 0 2 7 12 19 22 27 35 43 49 * B737 8 12 13 9 8 0 0 0 0 0 0 - Indonesia 4 6 11 12 16 18 17 22 29 35 41 * A320 0 0 0 5 10 14 17 22 29 35 41 * B737 4 6 11 7 6 4 0 0 0 0 0 - Philippines A320 0 0 0 0 0 0 1 2 16 13 9 - Japan A320 0 0 0 0 0 0 1 3 0 0 0 - India A320 0 0 0 0 0 0 0 0 0 5 10

Change in Malaysia fleet (%) 34.8% 25.8% 12.8% 9.1% 10.4% 7.5% 12.3% 12.5% 6.9% 6.5% SOURCES: CIMB, COMPANY REPORTS

AAX will see explosive capacity additions next year, driven by the seven aircraft delivered this year and a further seven (five for Malaysian operations, two for Thai AAX JV) in 2014.

Malaysia Airports Holdings October 4, 2013

Figure 39: AirAsia X’s fleet expansion plans

2009 2010 2011 2012 2013F 2014F 2015F 2016F No of aircraft 8 11 11 11 18 25 28 31 - A330-300 6 9 9 9 16 23 28 31 - A340 2 2 2 2 2 2 0 0

Change in A330 fleet (%) 50.0% 0.0% 0.0% 77.8% 43.8% 21.7% 10.7% SOURCES: CIMB, COMPANY REPORTS

MAS – Malaysia's national carrier. MAS is Malaysia's national full-service carrier, operating a fleet of 97 planes, comprising 74 Boeing and 23 Airbus aircraft. Its subsidiary Firefly owns another 13 ATR72s and operates out of SZB. MAS currently has 25 B737-800s and 2 A330-300s on order, with many of these expected to replace the current aged fleet. MAS‟s fleet size is expected to shrink between 2012 and 2014, though it is compensated by better utilisation and reliability of the new aircraft. Around 55% of MAS's seats are dedicated to international routes, mostly flying to cities in Southeast Asia and Northeast Asia. Domestic routes account for 45% of MAS‟s seat capacity.

Figure 40: MAS fleet numbers MAS - MAINLINE CARRIER 2006 2007 2008 2009 2010 2011 2012 2013F 2014F 2015F 2016F 2017F LONG-RANGE 34 30 30 27 27 26 28 23 21 22 23 23 B747-400P 17 13 13 10 10 9 7 0 0 0 0 0 A380 (new) 0 0 0 0 0 0 4 6 6 6 6 6 B777-200 17 17 17 17 17 17 17 17 15 11 5 2 A330-300 (HGW) 0 0 0 0 0 0 0 0 0 5 12 15

MEDIUM-RANGE 16 14 14 14 12 17 20 17 15 15 15 15 A330-300 (classic) 11 11 11 11 9 9 7 3 0 0 0 0 A330-200 5 3 3 3 3 3 3 0 0 0 0 0 A330-300 (new) 0 0 0 0 0 5 10 14 15 15 15 15

SHORT-RANGE 40 37 37 40 49 50 61 61 60 62 68 71 B737-400 40 37 37 37 37 34 26 12 0 0 0 0 B737-800 (new) 0 0 0 3 12 16 35 49 60 62 68 71

Total passenger jet fleet 90 81 81 81 88 93 109 101 96 99 106 109 Change in number (%) -10.0% 0.0% 0.0% 8.6% 5.7% 17.2% -7.3% -5.0% 3.1% 7.1% 2.8%

FIREFLY/MASWings 2006 2007 2008 2009 2010 2011 2012 2013F 2014F 2015F 2016F 2017F ATR72-500/600 0 6 14 19 22 22 25 30 36 38 42 - Firefly 0 5 7 10 12 12 14 16 20 22 23 - MASWings 0 1 7 9 10 10 11 14 16 16 19

B737-400/800 (Firefly) 8 2 2 2 2 2 2 Fokker 50 (MASWings) 10 9 7 0 0 0 0 0 0 0 0 Twin Otter DHC-6 (MASWings) 5 5 4 4 4 4 4 4 4 4 4

Total Firefly/MASWings fleet 15 20 25 23 34 28 31 36 42 44 48 Change in number (%) 33.3% 25.0% -8.0% 47.8% -17.6% 10.7% 16.1% 16.7% 4.8% 9.1% SOURCES: CIMB, COMPANY REPORTS

Passengers on MAS flights rose 44% yoy in August, bringing 8M13 passenger growth to a stunning 27%. International passenger traffic advanced 29%, faster than domestic traffic's 24%. MAS has been responsible for the strong traffic in MTB this year and the faster international traffic growth bodes well for MAHB as international PSC is 6x higher than domestic charges at the MTB. It is, however, important to note that an increasing percentage of transfer traffic has

Malaysia Airports Holdings October 4, 2013

accompanied MAS's overall traffic growth. As transit passengers do not have to pay PSC, PSC-related revenue growth is likely to trail passenger growth.

Figure 41: MAS's passengers carried (monthly)

50% 1,800 Title: Source: yoy growth - LHS Passengers carried ('000) - RHS 40% 1,600 Please fill in the values above to have them entered in your report 1,400 30%

1,200 20% 1,000 10% 800 0% 600

-10% 400

-20% 200

-30% - J A J O J A J O J A J O J A J O J A J O J A J O J A J O J A J O J A J 05 06 07 08 09 10 11 12 13

SOURCES: CIMB, COMPANY REPORTS

For Malaysia AirAsia, MAS and AAX combined, we expect 17% growth in passengers carried in 2013, although this rate of growth is expected to moderate from 2014 onwards. Between 2011 and 2016, the 5-year CAGR is forecast at 10% p.a., which is a very healthy rate of growth. The growth should be even stronger once we include Malindo into the picture.

Figure 42: Passengers carried (000) 2010 2011 2012 2013F 2014F 2015F 2016F 1 Malaysia AirAsia 16,055 17,987 19,679 22,439 24,858 26,526 28,194

2 MAS 13,112 13,302 13,390 16,165 17,340 17,860 18,396 - International 8,369 8,732 8,330 10,224 11,041 11,373 11,714 - Domestic 4,743 4,570 5,060 5,942 6,298 6,487 6,682

3 AirAsia X 1,921 2,526 2,581 3,204 5,315 6,826 7,964

Total 31,088 33,815 35,650 41,808 47,512 51,212 54,554

Yoy growth (%) 8.8% 5.4% 17.3% 13.6% 7.8% 6.5% Five-year CAGR (%) 10.5% 10.0% SOURCES: CIMB, COMPANY REPORTS

Malindo makes a grand entrance. Malindo Air is still a small player in a market dominated by two giants, but its impact on traffic volumes has been keenly felt this year. Malindo launched its first flight in March 2013 and has progressively added new aircraft since. It currently has a fleet of nine planes, of which six are B737-900ERs flying out of the MTB and three are ATR72-600s operating from SZB. The ATR72 turboprops serve destinations within Peninsular Malaysia while the B737 jets are mainly deployed to serve routes to East Malaysia and abroad. Boasting an entirely new fleet and service almost matching that of an FSC, Malindo has priced competitively to gain traction with travellers. Being a relatively small airline, its presence would, at best, lead to a minor negative impact on the overall industry's yields. But MAS's swift response to the new competition was the trigger behind the industry's drastic fall in yields, leading to a strong increase in passenger traffic.

Malaysia Airports Holdings October 4, 2013

Malindo started as an airline serving only domestic routes before branching out to Jakarta, Bali and Dhaka recently. Domestic routes hence still represent some 84% of its total seat capacity, with flights to Indonesia accounting for 11% and Bangladesh taking up the remaining 5%. Despite its relatively small size, Malindo has undeniably led to improvements in traffic at the MTB and SZB this year. With more aircraft to be delivered in 2014, capacity will continue to expand, to the benefit of MAHB. Malindo may end 2013 with a fleet of 10 planes, comprising six B737-900ERs and four ATR72-600s, and had earlier expressed a target of a 100-strong fleet in 10 years. This aggressive pace of growth may be revised downwards under pressure from a resurgent MAS. But we are quite certain Malindo will continue to expand its footprint in Malaysia. For comprehensive analysis on airline competition, seat capacity growth, and airline strategy in Malaysia, we refer readers to our recent 46-page 25 September report on the Malaysian aviation space captioned “More of 2013 in 2014?” [PDF]. 2.6 Passenger service charges (PSC) Following MAHB's restructuring in 2009, the government permitted the airport operator to increase PSC once every five years at the compounded inflation rate. If the government decides to keep PSC unchanged, it will compensate MAHB for the shortfall via its MARCS scheme. The government decided to grant MAHB a hike in PSC charges for MTB from RM51 per international passenger to RM65 in 2009. The RM51 rate has been in place since 2002 so the RM65 price adjustment reflects a 3.5% annual increase. In a bid to stimulate tourism, the government decided to absorb the RM14m hike until end-2011. MAHB hence continued to charge departing international passengers RM51 but also received RM14 from the government as compensation for keeping rates unchanged. When the government stopped subsidising, rates rose on 15 November 2011:  PSC was raised to RM65 from RM51 for international departing passengers at the MTB, Penang, Langkawi, Kuching and Kota Kinabalu's Terminal 1.  PSC was raised to RM32 from RM25 for international passengers departing at the LCCT or Kota Kinabalu's Terminal 2.  Domestic PSC charges remained the same at RM9 for all PSC-paying airports, except LCCT, which pays RM6.  Aircraft landing charges were to be raised in three stages by 9% annually on January 2012, January 2013 and January 2014.  Aircraft parking charges were also to be raised in three stages by 18% annually on January 2012, January 2013 and January 2014.

Figure 43: PSC charges at KLIA

LCCT International PSC n.a. n.a. 35 41 ^ 25 + 25 32 35 Domestic PSC n.a. n.a. 6 9 ^ 6 + 6 6 6.5

Malaysia Airports Holdings October 4, 2013

The government will allow MAHB to increase its PSC charges again in 2014, five years after the revision in 2009. The quantum of the increase is based on cumulative increase in the Consumer Price Index of the past five years, adjusted down by 0.1% pts:

[1+(Inflation rate year 1 – 0.1%)] x [1+(Inflation rate year 2 – 0.1%)] x

[1+(Inflation rate year 3 – 0.1%)] x [1+(Inflation rate year 4 – 0.1%)] x

[1+(Inflation rate year 5 – 0.1%)] Based on the historical CPI data and our forecast for 2013, we expect that MAHB will be able to increase its PSC by approximately 9.1% in February 2014. In our forecasts, we have factored in a 9% increase in international PSC at the MTB from RM65 to RM71, and a similar 9% rise in international PSC at the LCCT from RM32 to RM35.

Figure 44: Expected increase in PSC charges in 2014 Adjustment factor (% Malaysia's CPI (yoy %) pts) Net CPI (yoy %) 2009 0.6% 0.1% 0.5% 2010 1.7% 0.1% 1.6% 2011 3.2% 0.1% 3.1% 2012 1.6% 0.1% 1.5% 2013F 2.2% 0.1% 2.1%

Cumulative CPI increase (2009-2013F) 9.1% SOURCES: CIMB, COMPANY REPORTS

Figure 45: MAHB's current PSC charges at various airports Forecast 2014 PSC Airport Flights / destinations Current PSC (RM/pax) (RM/pax) KLIA-MTB, Penang, Langkawi, Kuching, Kota Kinabalu T1 International flights 65 71 KLIA-LCCT, Kota Kinabalu T2 International flights 32 35 Secondary airports* Asean destinations 26 28 Kota Kinabalu, Kuching, Labuan, Miri BIMP-EAGA destinations ^ 26 28 Penang, Langkawi, Alor Setar, Kota Bharu, Ipoh IMT-GT destinations ^^ 26 28 All PSC-paying airports, except LCCT Domestic flights 9 10 KLIA-LCCT Domestic flights 6 6.5 Rural airports All flights 0 0 * Secondary airports: Alor Setar, Bintulu, Ipoh, Kuala Terengganu, Kota Bharu, Kuantan, Labuan, Lahad Datu, Limbang, Melaka, Miri, Mulu, Pangkor, Redang, Sandakan, Sibu, Tawau, Tioman ^ BIMP-EAGA: Brunei, Balik Papan, Manado, Santos, Puerto Princesa, Zamboanga ^^ IMT-GT: Medan, Banda Aceh, Padang, Nias, Hat Yai, Narathiwat, Trang, Nikhon Si Thammarat, Patani

Malaysia Airports Holdings October 4, 2013

2.7 Landing and parking charges Landing and parking charges at all airports in Malaysia are standardised and based on the Civil Aviation Act 1969 and the Civil Aviation Regulations 1996. According to the Act/Regulations, landing charges are based on the maximum take-off weight (MTOW) of the aircraft, and calculated according to the following table.

Figure 46: Landing charges under the Civil Aviation Regulations 1996 Authorised maximum weight Single landing charge 1 Not exceeding 5,000 kg RM3/kg or part thereof 2 Exceeding 5,000 kg but not exceeding 45,000 kg RM30 plus RM4 for every 500 kg or part thereof in excess of 5,000 kg 3 Exceeding 45,000 kg but not exceeding 90,000 kg RM350 plus RM4.70 for every 500 kg or part thereof in excess of 45,000 kg 4 Exceeding 90,000 kg but not exceeding 135,000 kg RM773 plus RM5.30 for every 500 kg or part thereof in excess of 90,000 kg 5 Exceeding 135,000 kg RM1,250 plus RM5.70 for every 500 kg or part thereof in excess of 135,000 kg SOURCES: CIMB, COMPANY REPORTS

Therefore, for an A320-200 with an MTOW of 78,000 kg, the landing charge would be [RM350 + (78,000 – 45,000) / 500 * RM4.70] = RM660. However, given that landing charges was raised 9% on 1 January 2012 and another 9% on 1 January 2013 and will be raised a further 9% on 1 January 2014 (cumulative increase of 30%), the A320-200 landing charge will rise to RM858 on 1 January 2014, or approximately US$264. Historically, KLIA‟s landing charges have been significantly lower than at other regional airports. Cranfield University College of Aeronautics compared user charges for a B747-400 aircraft across the region back in 1999 and found KLIA to the second cheapest, after Brunei. User charges include landing, parking, aerobridge and passenger service charges.

Figure 47: User charges for B747-400 in 1999 (most expensive airport benchmarked at 100)

SOURCES: CIMB, COMPANY REPORTS

Malaysia Airports Holdings October 4, 2013

As a result of this wide discrepancy, the 2009 operating agreement benchmarked MAHB‟s landing and parking charges to four regional airports – Singapore, Bangkok, Jakarta and Hong Kong – and in principle, allowed MAHB to increase these charges to match the lowest of the four by application to the government. The one and only time landing and parking charges were raised after the 2009 operating agreement came into force was announced in 2011, with a 30% increase in landing charges and a 64% rise in parking charges evenly spread over three years on 1 January 2012, 2013 and 2014. That would take the landing charges to US$264 for an A320-200, US$268 for a B737-800 and US$1,694 for a B747-400. Surprisingly, the new landing rates effective 1 January 2014 are still 20-25% lower than Bangkok‟s rates, being the lowest of the four benchmark airports. We know for a fact that Airports of Thailand has kept its landing charges unchanged since 2007. So although the 2009 operating agreement should have allowed MAHB to raise its landing and parking charges to Bangkok‟s level, in practice, the actual increase permitted by the government may be less than the theoretical level, perhaps to assuage the concerns of the airlines.

Figure 48: Landing charges for an A320-200 (KLIA charge projected for 1 January 2014)

3,000 Title: Source:

2,500 2,394 Benchmark airports Please fill in the values above to have them entered in your report

2,000 1,795 1,694 1,528 1,500

1,000 880 797 812 818 687 587 497 394 500 328 347 264 306

0 KLIA Taipei Bangkok Jakarta Manila Beijing Seoul Singapore Chennai Delhi Mumbai Hong Kong Nagoya Osaka Narita Haneda

SOURCES: CIMB, COMPANY REPORTS

Figure 49: Landing charges for a B737-800 (KLIA charge projected for 1 January 2014)

3,000 Title:

2,574 Source: 2,500 Benchmark airports Please fill in the values above to have them entered in your report 1,931 2,000 1,822 1,644

1,500

925 1,000 828 857 873 744 631 533 429 500 329 356 375 268

0 KLIA Taipei Bangkok Jakarta Manila Beijing Seoul Singapore Mumbai Chennai Delhi Hong Kong Nagoya Osaka Narita Haneda

SOURCES: CIMB, COMPANY REPORTS

Malaysia Airports Holdings October 4, 2013

Figure 50: Landing charges for a B747-400 (KLIA charge projected for 1 January 2014)

14,000 Title: 12,932 Source: 12,000

Benchmark airports 10,196 Please fill in the values above to have them entered in your report 10,000 9,152 8,256 8,000

5,515 6,000 5,152 5,414

4,000 3,507 3,550 3,083 3,111 2,404 1,997 2,132 2,161 1,694 2,000

0 KLIA Taipei Bangkok Jakarta Manila Seoul Beijing Hong Kong Singapore Mumbai Chennai Delhi Nagoya Osaka Narita Haneda

SOURCES: CIMB, COMPANY REPORTS

2.8 Retail optimisation plan There is no denying that MAHB has put in a fantastic amount of work to reduce its dependence on aeronautical revenues by expanding its retail offerings. The retail optimisation plan started in 2008 and since then, the airport operator has continued to seek ways to diversify its revenue. When KLIA was first launched in 1998, only 16,000 sq m or 3% of its gross floor area was dedicated to commercial space. Renovations started in 2008 and by 2011, the MTB had increased its commercial space by 46% to 23,300 sq m. MAHB estimates that revenue grew by RM72m annually as a result. The goal is to have two-thirds of MAHB's revenue ultimately derived from non-aeronautical sources, compared with just 48% during 1H13. The construction of KLIA2 will help MAHB move towards that goal.

Figure 51: KLIA MTB's retail optimisation plan Year 1998 2008 2009 2010 2011 Location The beginning Contact Pier Satellite Main Terminal 1A Main Terminal 1B Commercial space (sq m) 16,000 18,200 21,400 21,500 23,300 % of gross floor area 3.0% 3.5% 4.2% 4.2% 4.6% SOURCES: CIMB, COMPANY REPORTS

KLIA2 is targeted to have 35,200 sq m of commercial space, representing 14% of the new terminal's gross floor area. With the LCCT only offering 6,500 sq m of commercial space currently, the incremental commercial space available to KLIA as a whole (MTB and KLIA2 combined) will amount to some 28,700 sq m, reflecting a 96% increase in the total commercial space for the Sepang aviation hub. When the LCCT expanded its commercial space from 1,353 sq m to 6,500 sq m and increased its outlets from 15 to 61, retail sales improved from RM14/pax to the current RM22. The KLIA2 will push this even higher. KLIA2 will offer 225 retail outlets (LCCT: 61), with retail sales per passenger expected to grow from the present RM22/pax to RM40/pax as a result of the new terminal's much broader retail offerings.

Malaysia Airports Holdings October 4, 2013

Figure 52: Retail optimisation at the present LCCT, and at the future KLIA2

SOURCES: CIMB, SKYSCRAPERCITY

While the MTB focuses on duty-free and high-end fashion shopping, KLIA2 will provide a balance between retail and food & beverage (F&B) outlets in order to capture the medium-income group. A wide range of F&B brands will be present at KLIA2 while MAHB's very own duty-free shop, Eraman, will also occupy prominent spaces. Eraman will continue to be the sole vendor of duty-free liquor and tobacco at KLIA2, as with the MTB. F&B outlets currently do well at the LCCT because LCCs do not provide free meals on board. Shops offering fast food or quick bites currently perform best at the LCCT. Offerings are aplenty and brands that have already signed up for a space in KLIA2 include Starbucks, Dome, KFC, McDonalds, Pappa Rich, Chatime, Bumbu Desa, Body Shop, Quiksilver, WHSmith and Victoria's Secret. There will also be an integrated complex linked to KLIA2. The complex will offer a combination of retail, F&B, spa, karaoke lounges and other recreational activities. MAHB believes that the emphasis placed on non-aeronautical income will help the segment grow from about half to 67% of KLIA's total revenue over the next few years.

Malaysia Airports Holdings October 4, 2013

Figure 53: Some of the brand names that will be present at KLIA2

SOURCES: CIMB, COMPANY REPORTS, CAPA

Malaysia Airports Holdings October 4, 2013

3. RISKS 3.1 KLIA2 project risks Physical completion of KLIA2 is expected by November 2013 and the current opening date is set for 2 May 2014. But as a precaution, we are assuming a delay in the opening date to end-2014/early 2015. The airport has already been delayed from its 28 June 2013 opening as some of KLIA2‟s contractors did not complete their work on schedule. We highlight that MAHB is keeping firm to the 2 May 2014 opening date. Deputy Transport Minister Datuk Abdul Aziz Kaprawi said recently that he was "very confident" that there will be no more delays and all will be in place by 30 April 2014. Therefore, our assumption of a later opening date is purely at our own discretion. If KLIA2 does manage to be fully completed by then, it will be a boost for the airport operator and its clients, with MAHB benefiting from potentially higher retail revenue and the airlines finally getting relief from the congestion at the LCCT. 3.2 Airlines may move from MTB to KLIA2 Currently, PSC charges at the MTB are higher than that at the LCCT, and this gap is expected to be carried over to KLIA2 since the present LCCT tariffs will be retained at KLIA2 in the immediate future. The gap is as much as RM33/pax for international flights (RM65 at the MTB vs. RM32 at the LCCT) and RM3/pax for domestic flights (RM9 at the MTB vs. RM6 at the LCCT). Although the amounts look small, airlines are very sensitive to these fees as these PSC charges can account for a large percentage of the total airfare when average fare levels are low, which is currently the case given the ongoing price war environment. In several instances, we have noted that the gap between a MAS and an AirAsia international flight is almost wholly comprised of the gap between the PSC tariffs at the MTB and at the LCCT. When airlines operate from a terminal that has a lower PSC charge, airlines can (1) typically raise their own fares such that the cost of travel to the passenger is unaffected, or (2) keep their fares but enjoy higher passenger loads because the cost of travel is lower. Either way, the airlines benefit at the expense of the airport. As a result, airlines may want to move from the MTB to KLIA2, especially if the facilities and comfort levels at KLIA2 are comparable to the MTB. We know for sure that Malindo will move wholesale and some smaller and newer foreign carriers without large volume of connecting traffic may also be interested in moving. For instance, we would not be surprised if some of the newer airlines like Thai Smile, Regent Airlines or Turkish Airlines considered a move. Some of the smaller carriers like Iran Air, Mahan Air, Iraqi Airways, Yemenia, Ethiopian Airlines, Uzbekistan Airways, Biman Bangladesh Airlines, United Airways Bangladesh, Myanmar Airways International, Nepal Airlines, etc. may also consider a move. Nevertheless, any migration from the MTB to KLIA2 will be fairly limited in terms of total passenger flow in our view as (1) most FSCs will want to cater to their passengers‟ needs to transfer/transit, and (2) MAHB has no immediate plans to connect the MTB with the new KLIA2 with an airside bus service that does not require passengers to exit immigration and customs. The only way for passengers to move between the MTB and KLIA2 would be to take the ERL service for RM2 one-way but this connection is on the landside that will require passengers to first exit immigration and customs. This will make it very inconvenient for many transit/transfer passengers, especially those that require a Malaysian entry visa just to move between terminals. 3.3 Passenger traffic growth dependent on airline strategies The growth of MAHB‟s passenger traffic is entirely dependent on airlines‟ strategies, and in particular, MAS‟s. The current MAS strategy of expansion and price discounting to generate volume and revenue is the brainchild of the

Malaysia Airports Holdings October 4, 2013

current management team, led by managing director, Ahmad Jauhari (fondly known as “AJ”), and the head of commercial, Dr. Hugh Dunleavy. AJ‟s three-year contract will expire in September 2014 while Dr. Dunleavy‟s contract will expire in January 2015. We are unclear whether they will be renewed. We believe that the current MAS growth strategy will be unchanged until at least their contracts expire, i.e. September 2014 at the earliest. However, MAS will be judged on its progress towards achieving AJ‟s target of profitability by end-2014. If MAS‟s losses persist in 2014, chances increase that MAS will change its present revenue- and capacity-maximisation strategy sometime in 2015. If this happens, the current strong growth in MAHB‟s passenger traffic may weaken. MAS has been marked by several major shifts in strategic direction in the recent past.  Before Dato‟ Sri Idris Jala joined as MD in December 2005, MAS competed aggressively on pricing with AirAsia in 2004 and 2005, and KLIA traffic grew robustly in those two years.  During Idris Jala‟s tenure, he aggressively cut domestic and international capacity in an attempt to constrain supply and lift yields. This led to a slower pace of KLIA traffic growth in 2006-08.  His successor, Tengku Dato‟ Sri Azmil Zahruddin, who stepped into the MD role in August 2009, began reversing the capacity declines and expanded domestic and international capacity again, including overseeing the entry of Firefly into the domestic LCC space in January 2011. As a result, KLIA traffic growth began to accelerate in 2009-11.  This changed when MAS and AirAsia announced on 9 August 2011 that Khazanah, which then owned 69% of MAS, would give up a 20.5% stake in MAS to Tune Air in exchange for the latter‟s 10% stake in AirAsia. Tune Air‟s holdings in AirAsia were then reduced to 13%. This brought about a change in strategic direction at MAS because then MD Tengku Azmil was replaced by AJ. AJ‟s strategy was to focus MAS‟s efforts on being an FSC and hence, the Firefly LCC operations were discontinued by end-2011. As a result, KLIA‟s traffic growth dropped to a mere 5.8% in 2012.  But the share swap unravelled in May 2012 as a result of the discontent of the MAS unions over the proposed restructuring efforts. It was also around this time that Dr. Dunleavy, who joined in January 2012, settled into his new role and formulated a plan of action. By 3Q12, MAS was on a clear expansion path for domestic capacity and this spread to the international routes from 1Q13. For 8M13, KLIA‟s passenger traffic grew an impressive 17.2% yoy.

Figure 54: KLIA passenger traffic (m pax) - Main terminal and LCCT

Yoy change (%) KLIA passenger traffic (m pax) 25% 45 Title: Source: 20.6% 40 20% 17.2% 35 Please fill in the values above to have them entered in your report 14.8% 15% 30 12.8% 12.0% 11.8% 10.2% 10.6% 25 9.6% 10% 7.8% 20 6.4% 5.8% 5% 3.9% 4.1% 15

10 0% 5 -1.3% -5% 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 8M13

SOURCES: CIMB, COMPANY REPORTS

Malaysia Airports Holdings October 4, 2013

Figure 55: MAS: International and domestic passenger ASK growth (%) – note that this chart excludes Firefly’s LCC jet capacity, which was operating during Jan-Dec 2011

Dometic ASK yoy change (%) Int'l ASK yoy change (%) 40% Idris Jala's tenure Tengku Azmil's tenure AJ's tenure 30% During 20% share swap

10% period

-10% Post -20% share swap -30% 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 05 06 07 08 09 10 11 12 13

SOURCES: CIMB, COMPANY REPORTS

3.4 Future increases in PSC charges dependant on CPI After the increase in the PSC scheduled in February 2014, the next increase will be in February 2019. But the quantum of the increase will depend on the CPI readings in the intervening period. We are currently forecasting an annual inflation rate of 2.5% for 2014-18, which is more than the 1.9% CAGR of inflation in 2009-13. We believe that the inflation during 2009-13 was suppressed by the strengthening ringgit. Going forward, we think that the ringgit will probably weaken as the US Federal Reserve moves to reduce quantitative easing over the next few years. As a result, imported goods and services should cost more. Also, with the Malaysian government likely to introduce the Goods and Services Tax next year, the CPI will also take a step up. However, there is still inherent uncertainty over the rate of inflation in the next few years and this could affect our PSC rate hike assumptions in February 2019 and beyond. 3.5 Future increases in landing and parking charges subject to government agreement Under the 2009 restructuring agreement, MAHB has the right to seek an increase in its landing and parking charges up to the lowest of the four benchmark regional airports, namely Bangkok, Singapore, Hong Kong and Jakarta. However, the government has the absolute discretion on whether to approve MAHB‟s application for an increase in these charges or whether to vary the request. For instance, in 2011, MAHB announced that it had obtained the government‟s approval to increase the landing charges by 30% and parking charges by 64%, being the gap between MAHB‟s current charges and the rates being charged by Airports of Thailand (AOT). But instead of increasing the charges all in one go, the increases were spread out equally over three years, with one increase each on 1 January 2012, 1 January 2013 and 1 January 2014. Furthermore, future increases will also depend on whether AOT intends to raise its landing and parking charges and if so, the quantum of that increase. This is because the AOT charges are currently the lowest among the benchmark airports. Our checks with AOT suggest that it has no plans to put through any increases in its landing and parking charges in the near future. We have, therefore, not factored any increases in our MAHB earnings model.

Malaysia Airports Holdings October 4, 2013

In our view, any increase in AOT‟s charges will have to wait until 2016-17 when the THB62.5bn construction of Phase 2 of the Suvarnabhumi Airport is completed, which may give an impetus to AOT to raise the landing and parking fees. The last time these fees were increased by AOT was on 1 April 2007, six months after the opening of the airport in September 2006. We have not factored any increase in MAHB‟s landing and parking fees into our earnings and DCF model. 3.6 Extension of concession agreement still not confirmed MAHB is negotiating with the government to formalise an extension of the concession agreement by 35 years from the end of the current concession in 2034 to 2069, instead of 2059 as per the current agreement. We believe that its chances are good. The extension of the concession will be very important to MAHB because the KLIA2 capex of around RM4bn will have to be depreciated over the concession period. The longer the concession period, the lower the annual depreciation (enabling MAHB to pay more dividends on a 50% payout ratio), and the higher the DCF due to the longer concession period. Our DCF model discounts cashflows to 2059, not 2069. However, we are unclear if the government will impose some additional payment or charge on MAHB in exchange for the extension of the concession. Hence, we are not perfectly certain if the concession extension will be net beneficial to our DCF calculation or not. Assuming existing terms apply for the additional 10-year extension, our DCF will be raised by an additional RM0.30/share, or 3.4%. 3.7 Investment tax allowance not yet granted Our DCF model assumes that MAHB will be granted an investment tax allowance (ITA) after the commissioning of KLIA2, totalling 70% of the KLIA2 capex of RM4bn. In other words, MAHB will enjoy RM2.8bbn in future tax-free profits. However, if the ITA is not granted, our DCF will be reduced by RM0.50/share, or 5.6%. 3.8 SWOT analysis

Figure 56: SWOT analysis Strengths Opportunities Operator of nearly all airports in Malaysia with minimal competition for domestic traffic Continued capacity additions and fare discounting by carriers Government guarantee for PSC increases every five years Potential to equalise LCCT PSC charges with the MTB's, or at least narrow the gap Will receive MARCS payments if instructed to support govt's social obligations Potential to charge PSC on transit/transfer passengers Landlord for rental space in KLIA, which fetches high rental rates Continued focus on non-aeronautical revenue, this reducing dependence on airline Strong and stable operating cash flows strategies and government policies Nationwide implementation of new rental model, providing further exposure to passenger traffic growth

Weaknesses Threats Continues to support loss making STOLports Airlines switching base from MTB to KLIA2, which has lower PSC charges Final decision for PSC, landing and parking charges lie with government A further delay in the completion of KLIA2, which will postpone the recognition of Subject to external pressures by airlines, as shown by the frequent changes in higher retail revenue at the new terminal KLIA2's specifications If airlines refocus on yields, capacity and passenger traffic growth will be affected. KLIA2's delays suggest that MAHB may have deficiencies in its project mgt skills An epidemic outbreak in the region, which will reduce travelling MAHB has not been able to attract major carriers like BA/Qantas to fly into KLIA Expansion plans of Changi and Suvarnabhumi airports may entrench their hubs SOURCES: CIMB, COMPANY REPORTS

Malaysia Airports Holdings October 4, 2013

4. FINANCIALS 4.1 Overall revenue breakdown Reducing dependence on aeronautical revenue. MAHB's total revenue is fairly evenly split between aeronautical and non-aeronautical revenue. Non-aeronautical turnover accounted for 52% of the company's revenue in 2012, with aeronautical revenue accounting for the remainder. MAHB's goal is to reduce reliance on aeronautical revenue and in order to do so, it has actively embarked on commercial space expansion at its airports. We think non-aeronautical's share of the pie will grow gradually but will experience a dip once every five years when PSC charges are revised.

Figure 57: Split between aeronautical and non-aeronautical Figure 58: CIMB's forecast split between aeronautical and revenue, 2012 non-aeronautical revenue, 2018

SOURCES: CIMB, COMPANY REPORTS SOURCES: CIMB

4.2 Aeronautical revenue MAHB generates aeronautical revenue from four main sources (1) PSC charges, (2) landing and parking fees, (3) other fees such as aerobridge and check-in-counter charges, and (4) MARCS payments from the government, which are meant to compensate MAHB for non-commercial sacrifices. PSC receipts form the largest part of aeronautical proceeds, generally representing 60-73% of MAHB's aeronautical revenue. Landing and parking charges, determined based on the size and weight of the aircraft as well as the length of time it parks at the airport, are the second largest contributors, at 23-26%. Of the two, parking charges are relatively small. Other charges reflect a relatively small portion of aeronautical revenue at just 3-5%. Separating business and social responsibility. The MARCS scheme, introduced during MAHB's restructuring in 2009, reimburses MAHB for the PSC discounts that the government instructed it to give between 2009 and 2011. The government also reimburses MAHB for the subsidies it provides to the Express Rail Link (ERL). As the government stopped subsidising PSC in November 2011, payments from the government fell from 16% to 6% of aeronautical proceeds between 2011 and 2012, with PSC revenue rising from 67% to 73%.

Malaysia Airports Holdings October 4, 2013

Figure 59: MAHB's aeronautical revenue composition, 2012 (excluding airline incentives) – ―PSSC‖ stands for Passenger Safety and Security Charge which stands at RM6/international pax and RM3/domestic pax and is typically folded into the main PSC

SOURCES: CIMB, COMPANY REPORTS

Airline incentives. In the hope of attracting higher frequencies into its airports, MAHB also provides a number of incentives to entice airlines to land in Malaysia. Here are the key incentives provided by MAHB under the “Airline Incentive Programme”:  New routes or additional frequencies operated by the airlines will be given three years of free landing for that particular route/frequency.  New airlines will receive six months of free office space rental.  Airlines are also rewarded for growing with a scheme of rebates:  If the airline's international passenger traffic flying into MAHB's airports grows by more than 10% yoy, the airline will receive RM10 for each incremental international passenger above the 10% threshold.  If growth is more than 15% yoy, the rebate will be RM12.50 for each incremental international passenger above the 15% threshold.  If growth is more than 18% yoy, the rebate will be RM15 for each incremental international passenger above the 18% threshold. MAHB's previous airline incentive programme, named the "Airlines Recovery Programme", was in place between 2009 and 2011, and was meant to support the airlines during tough times following the 2008/09 GFC. It is similar in many ways to the existing structure, except that rebates were benchmarked to the airline's traffic base in 2008. This meant that airlines would have continued to receive rebates in 2011 as long as its traffic in 2011 was at least 10% above what it achieved in 2008, even if it did not grow at all between 2010 and 2011. This incentive cost MAHB RM216m in 2009-11. The payment of airline incentives, which reduces MAHB's aeronautical revenue, accounted for 4-12% of aeronautical proceeds over the past three years.

Malaysia Airports Holdings October 4, 2013

Figure 60: MAHB's aeronautical revenue

25% 1,600 Title:

yoy growth - LHS Aeronautical revenue (RMm) - RHS Source: 1,400 20% Please fill in the values above to have them entered in your report 1,200

1,000 15%

800

10% 600

400 5% 200

0% 0 2007 2008 2009 2010 2011 2012 2013f 2014f 2015f

SOURCES: CIMB, COMPANY REPORTS

Healthy growth in the years ahead. MAHB's aeronautical revenue jumped 21% in 2009 following the increase in the restructuring exercise and has since racked up a 9.5% CAGR for the last three years. This was due to (1) traffic volume growth, as well as (2) tariff hikes and (3) MARCS compensation from the government, including:  MARCS compensation received from February 2009 onwards amounting to RM5/international pax and RM1/domestic pax, which was previously passed over to ERL as a subsidy,  MARCS compensation amounting to RM14/international pax received from February 2009 onwards, as MAHB was not permitted to raise the international PSC to the passenger from RM51 to RM65,  An increase in the PSC for international passengers departing from the LCCT from RM25 to RM32, effective November 2011, and  A equal three-part increase in parking and landing charges on 1 January 2012, 2013 and 2014, cumulatively totalling 30% and 64% respectively. We expect aeronautical revenue to rise by 16% this year on the back of a 12.4% improvement in passenger traffic while 2014 should see an even greater increase of 20%, led by an 11.4% rise in passenger traffic and a 9% increase in PSC rate. MAHB is likely to see aeronautical revenue growth slow to 6% in 2015 as traffic expansion mellows to 7.1%, based on our current forecasts.

Figure 61: MAHB's PSC revenue (excluding MARCS payments) Figure 62: MAHB's landing & parking revenue

30% 1,200 25% Title: 450 Title: yoy growth - LHS PSC revenue (RMm) - RHS yoy growth - LHSSource: Landing & parking revenue (RMm) - RHS Source: 400 25% 1,000 20% Please fill in the values above to have them entered350 in your report Please fill in the values above to have them entered in your report

20% 800 15% 300

250 15% 600 10% 200

10% 400 5% 150

5% 200 100 0% 50 0% 0 -5% 0 2007 2008 2009 2010 2011 2012 2013f 2014f 2015f 2007 2008 2009 2010 2011 2012 2013f 2014f 2015f

SOURCES: CIMB, COMPANY REPORTS SOURCES: CIMB, COMPANY REPORTS

Malaysia Airports Holdings October 4, 2013

Balance tilts to international travel. Although international travellers accounted for 49% of MAHB's passengers in 2012, the balance is likely to tilt in favour of international traffic in the near future as carriers dedicate more capacity to international routes. International capacity will be especially strong in 2014, driven by aggressive capacity additions by AAX and Malindo's international operations. The tilt in balance is positive for MAHB in view of the significantly higher PSC tariff for international flights vs. domestic flights. We expect international passengers to represent 54% of MAHB's total traffic by 2016.

Figure 63: MAHB's international and domestic passengers (m)

50 Title: Source: 45 International Domestic 40 Please fill in the values above to have them entered in your report 35

0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013f 2014f 2015f

SOURCES: CIMB, COMPANY REPORTS

4.3 Retail and other non-aeronautical revenue MAHB generates non-aeronautical revenue from various sources. They consist of revenue from commercial activities within the airport and outside the airport. The key sources of airport-related commercial revenue are derived from (1) office and retail space rental, (2) operation of its duty free and non-duty free shops, (3) management of F&B outlets, (4) operation of its parking facilities and (5) advertising. Revenues derived outside the airport include revenue from (1) the operation of Sama-Sama hotel and (2) the cultivation of palm oil trees.

Malaysia Airports Holdings October 4, 2013

Figure 64: MAHB's non-aeronautical revenue

25% 1,800 Title: Source: yoy growth - LHS Non-aeronautical revenue (RMm) - RHS 1,600

20% 1,400 Please fill in the values above to have them entered in your report

1,200 15% 1,000

800 10% 600

400 5%

200

0% 0 2007 2008 2009 2010 2011 2012 2013f 2014f 2015f

SOURCES: CIMB, COMPANY REPORTS

Figure 65: MAHB's non-aeronautical revenue composition, 2012

SOURCES: CIMB, COMPANY REPORTS

Eraman, KLIA’s sole duty-free operator. Revenue from its duty free/non-duty free shops and F&B outlets is MAHB's biggest source of non-aeronautical revenue, representing 40-48% of its non-aeronautical proceeds since the restructuring. Eraman is MAHB's key retail brand, selling a variety of chocolates, fragrances, fashion accessories, duty-free liquor and cigarettes. Eraman's growth has been stellar, riding on the back of MAHB's retail optimisation plan. Its revenue grew at a 15.1% CAGR over the last three years amid continuous efforts to increase commercial floor space at its terminals. Eraman's revenue as a portion of MAHB's total non-aeronautical revenue has risen as well, increasingly steadily every year from 40% in 2009 to 48% in 2012. Eraman, being KLIA2's largest tenant, will see another leg of growth when the new terminal starts operations. Eraman is likely to have five outlets in KLIA2, spread across the new terminal's arrival concourse, contact pier and satellite building. We expect contributions from Eraman to rise 15% this year, aided by strong passenger traffic growth of 17.5% at KLIA. We think that its revenue will then expand by 16% in 2014 before increasing by a strong 21% in 2015 following the completion of KLIA2. Eraman's share of MAHB's non-aeronautical revenue is likely to increase as time passes, rising to 52% by 2015.

Malaysia Airports Holdings October 4, 2013

Retail spending per passenger is relatively low at the LCCT, understandable given the limited retail offerings at the terminal. For all the commercial outlets combined, retail spending is RM22/pax at LCCT vs. RM40/pax at the MTB. However, a larger proportion of the spending at the LCCT goes to Eraman, benefitting MAHB directly. Eraman sales amount to RM13/pax at the LCCT (59% of the total spending), vs. RM11/pax at the MTB (28%). The airport operator hopes to increase retail spending per pax to RM40 at KLIA2 with its much broader offerings, similar to the revenues it is getting at the MTB. Of the RM40/pax targeted to be spent at KLIA2, expectations are that at least half will be going to Eraman, i.e. RM20/pax. In our forecast, we expect passengers at KLIA2 to spend only RM15.60/pax at Eraman stores in the first full year of KLIA2‟s opening in 2015, rising to RM20/pax only by 2020, so our forecasts are conservative relative to MAHB‟s internal expectations and guidance.

Figure 66: Eraman spending per passenger at the MTB and LCCT / KLIA2 (RM)

18.0 Title: Source: 16.0 15.6 MTB LCCT / KLIA2 13.4 14.0 13.0 Please fill in the values above to have them entered in your report 12.6 11.9 12.0 11.3 11.4 10.8 10.8 10.3 10.7 10.6 9.7 10.0 9.4

8.0

6.0

4.0

2.0

0.0 2009 2010 2011 2012 2013f 2014f 2015f

SOURCES: CIMB, COMPANY REPORTS

The airport's landlord. The second largest contributor to MAHB's aeronautical revenue is income from rental and advertising. The segment generally accounts for 33-34% of total non-aeronautical revenue, with the rental of office and retail spaces accounting for the bulk of it. Revenue from this segment has notched up a 7.6% CAGR over the past three years but is now very much constrained by the limited commercial space available at the LCCT. Retail space available for rental at the LCCT amounts to approximately 4,800 sq m, 70% lower than the rental space at MTB. As occupancy rates are generally high, growth in the immediate term will only come from adjustments to rental rates. The timely completion of KLIA2 is hence crucial for the segment's growth. With 35,200 sq m of available rental retail space at KLIA2, retail space for rent at KLIA will jump by 96% once KLIA2 commences operations and LCCT phases out. There is nonetheless little need for a drastic increase in office rental space even after the migration to KLIA2 as non-aviation related companies are unlikely to set up an office at a location 60km from the city centre just because office space happens to be available. We believe that KLIA2 will increase KLIA's office rental space by 18%. We estimate rental and advertising revenue to increase by 2-12% in 2013-14 before expanding by 36% in 2015.

Malaysia Airports Holdings October 4, 2013

Figure 67: MAHB's Eraman retail revenue Figure 68: MAHB's rental & advertising revenue

25% 1,000 40% Title: 700 Title: yoy growth - LHSSource: Rental & advertising revenue (RMm) - RHS Source: yoy growth - LHS Eraman revenue (RMm) - RHS 900 35% 600 20% 800 Please fill in the values above to have them entered in your report Please fill in the values above to have them entered in your report 30% 700 500

15% 600 25% 400 500 20%

10% 400 300 15% 300 200 10% 5% 200

100 5% 100

0% 0 0% 0 2007 2008 2009 2010 2011 2012 2013f 2014f 2015f 2007 2008 2009 2010 2011 2012 2013f 2014f 2015f SOURCES: CIMB, COMPANY REPORTS SOURCES: CIMB, COMPANY REPORTS

Eraman to have a large presence at KLIA2. Some 25% of KLIA2's 35,200 sq m commercial space has been dedicated to MAHB's Eraman franchise, giving the duty-free retailer 8,800 sq m of space. Including Eraman‟s portion, approximately 80% of the 35,200 sq m of available space has been rented out on 3+2 year rental agreements at an average rental rate of RM530/sq m/month. MAHB is keeping the remaining 20% space for launch one year after KLIA2 opens for business. We think this is a good strategy as MAHB is likely to be able to fish for higher rental rates once the terminal is open. Based on our projections, utilisation at KLIA2 will reach 72% during its first year of operation, rising to 92% in 2018 before attaining 100% utilisation in 2021. The average rental rate of RM530/sq m/month at KLIA2 compares against the existing average rental rates of RM700 at the MTB and RM590 at LCCT. We think that retailers have been less aggressive with their bidding at KLIA2 due to fear that (i) KLIA2 may not be completed on time and (ii) traffic flow may be lower than expected. We believe that these fears will eventually dissipate once the terminal begins operations, and given the strong capacity expansion by MAS, the AirAsia group, and Malindo. Keeping the remaining 20% untenanted for the first year of operations will also ease some of the pressure on rental rates following the five-fold increase in commercial space supply at KLIA2, compared to LCCT's 6,500 sq m commercial area. However, in order to recuperate the lost rentals in the first year, we estimate that rates for the remaining 20% will have to be above RM663/sq m/month, some 25% higher than the current RM530. Under the rental agreements, rental rates for the first three years are fixed and will only be inflation-adjusted. If a mutual agreement is reached by the end of the third year for an extension, the tenant will continue to rent the space for the next two years, albeit with some adjustments to rental rates. The new rental model at KLIA2 gives MAHB an extra cut of the meat. At KLIA2, MAHB will be making beneficial adjustments to the way it currently charges rental rates. The new model gives MAHB greater participation in the revenue of its tenants, giving them better rental income when high passenger traffic leads to strong retail sales. The existing rental model, which is applicable to all of MAHB's existing airports including the MTB and LCCT, has two components. MAHB has the prerogative to charge the tenant either (1) the fixed monthly rent, or (2) the variable royalty on any particular month, depending on which is higher.

Malaysia Airports Holdings October 4, 2013

The variable royalty rate applied to different types of businesses varies greatly. Variable royalty rates range from 5-28%, depending on the inherent profit margins of the business. Low profit margin items like electronic items are charged 5% of its selling price while high profit margin items like liquor, food and beverages are charged 25% of selling price, as the variable royalty. Approximately 85% of its tenants are currently paying the fixed rent only, and only 15% of tenants pay the variable royalty rate.

Figure 69: Existing and new rental model

SOURCES: CIMB, COMPANY REPORTS

In the new model to be used at KLIA2, the tenant will pay the higher of (1) the fixed monthly rent component which will now includes a compulsory fixed royalty as well, and (2) the variable royalty, whichever is higher. In both the old and the new models, the „variable royalty‟ rate remains precisely the same for similar types of businesses. The difference with the new model is the inclusion of an extra „fixed royalty‟ rate, which is a new compulsory payment. This fixed royalty amounts to 2% of revenue for core products and 1% of revenue for non-core products, and is going to enhance MAHB‟s rental revenue collection.

Malaysia Airports Holdings October 4, 2013

We have included an example of rental income calculation for a hypothetical tenant. Under the existing rental model, MAHB can only collect rental of RM20,000/month in October, but this has the potential to rise to RM22,000 under the new rental model.

Figure 70: MAHB's rental income from a hypothetical tenant Existing rental agreement Oct-13 Nov-13 Tenant A's monthly revenue (RM) 150,000 300,000

Choice 1 Fixed rental rate 20,000 20,000 Fixed rental payment (RM) 20,000 20,000 OR Choice 2 Royalty rate 10% of revenue 10% of revenue Royalty payment (RM) 15,000 30,000

MAHB's rental proceeds (larger of the two choices) 20,000 30000

Rental agreement at KLIA2 Oct-13 Nov-13 Tenant A's monthly revenue (RM) 150,000 300,000

Choice 1 Fixed rental rate + rental rate 19,000 + 2% 19,000 + 2% Fixed rental payment (RM) 22,000 25,000 OR Choice 2 Royalty rate 10% of revenue 10% of revenue Royalty payment (RM) 15,000 30,000

MAHB's rental proceeds (larger of the two choices) 22,000 30,000 SOURCES: CIMB, COMPANY REPORTS

4.4 Operating costs MAHB's operating costs are made up of a few key elements: (1) staff cost, (2) direct materials, (3) utilities, and (4) user fee paid to the government under the revenue sharing scheme. Employee compensation the largest. Staff cost is MAHB's largest operating cost component, accounting for 34-35% of operating cost in 2008-2012. Direct materials, largely in the form of inventory purchases for its Eraman franchise, make up 21-22%. Utility bills take up another 14-18% while maintenance costs are generally 10-11% of operating cost. The number of airport employees under MAHB's payroll has risen from 5,954 in 2009 to 6,393 people in 2012, translating into a 2.4% average annual increase. Staff cost has nonetheless risen by a faster 8.6% CAGR over the same period due to inflation adjustments and increments. Staff cost is likely to increase by a sharper-than-usual quantum this year and next year as the airport operator hires additional staff to manage the daily operation of the larger KLIA2. As these new hires are mostly in non-executive positions, average salaries are likely to increase more slowly than usual this year or perhaps even decline marginally, mitigating the rise in headcount. We expect staff cost to rise 18% this year, followed by a 6-8% increase in 2014-15.

Malaysia Airports Holdings October 4, 2013

Figure 71: MAHB's operating cost composition, 2012

SOURCES: CIMB, COMPANY REPORTS

Inventory for MAHB's retail arm. Inventory purchases for Eraman command the lion‟s share of direct materials cost and generally rise in tandem with Eraman's revenue. Over the last three years, direct materials costs have increased at a 14% annual rate, shadowing the 15% CAGR that Eraman's revenue has achieved over the same period. Direct materials expenses represent 51-54% of Eraman‟s revenue, indicating an 87-95% selling price mark-up in order to cover rental charges and labour cost. We are forecasting direct materials cost to increase by 15% in 2013, 16% in 2014 and 21% in 2015, similar to our Eraman revenue growth projections. Utility bills to rise when KLIA2 opens for business. Utility costs have remained relatively stagnant over the years, declining by a 1.1% CAGR in 2009-2012. The airports' gross floor area is probably the determinant of utility expenses. With minimal floor space expansion in the last few years, MAHB have been able to keep utility costs in check. The commencement of KLIA2 should lead to a substantial increase in utility charges as gross floor area triples from 64,067 sq m at the existing LCCT to 257,845 sq m at KLIA2. We have incorporated 5-15% p.a. increases in utility expenses in 2013-15.

Malaysia Airports Holdings October 4, 2013

Figure 72: Operating cost breakdown RM million 2009 2010 2011 2012 3-year CAGR Direct Materials 230 259 270 311 10.6% Direct Labour 83 82 91 80 -1.1% Direct Overheads 29 36 65 59 26.2% Staff cost 296 318 354 405 11.0% Utilities 199 212 185 196 -0.4% Maintenance 123 118 125 157 8.2% User Fee 113 77 84 99 -4.1% Prov for debt 5 8 2 7 9.7% Others 7 95 104 109 na Total operating cost 1,084 1,204 1,279 1,421 9.5%

Total staff-related cost 378 400 445 485 8.6% Staff count (airport) 5,954 5,666 6,339 6,393 2.4%

% of total operating cost 2009 2010 2011 2012 Direct Materials 21% 22% 21% 22% Direct Labour 8% 7% 7% 6% Direct Overheads 3% 3% 5% 4% Staff cost 27% 26% 28% 28% Utilities 18% 18% 14% 14% Maintenance 11% 10% 10% 11% User Fee 10% 6% 7% 7% Prov for debt 0% 1% 0% 0% Others 1% 8% 8% 8%

Total staff-related cost 35% 33% 35% 34% SOURCES: CIMB, COMPANY REPORTS

4.5 User fee - revenue sharing with the government The user fee was introduced in 2009 as part of the restructuring programme, where the government replaced the fixed and variable lease payments it was charging MAHB back then to a revenue sharing mechanism. The user fee charge essentially represents the government's share of MAHB revenue. Replacing lease payment with revenue sharing arrangements. In return for relieving MAHB from its annual lease obligations, the government received 8.3% of MAHB's revenue in 2009. The government's share of MAHB's revenue has risen by 0.0625% pts every quarter since then, translating into a 0.25% pts rise every year. Quarterly revenue share increments will grow even faster if MAHB opts for the government to undertake a commercially-viable airport development project. If the government undertakes the development, it will receive a greater share of MAHB's revenue, set at 0.3% pts for every RM100m capex spent. Thankfully, the incremental revenue share will be implemented gradually over eight years, with the government's share increasing by 0.009375% pts every quarter for every RM100m spent by the government. This is why MAHB has decided to take on KLIA2's RM4bn development as failure to do so would increase the government's share by an additional 12% after eight years. For projects that are deemed not commercially viable, such as the development of a STOLport, the government will continue to fork out the necessary capital expenditures without a corresponding increase in its share of MAHB's revenue.

Malaysia Airports Holdings October 4, 2013

Full user fees to hit the P&L from 2013. After the February 2009 restructuring was announced, MAHB still owed RM419m to the government, and the user fees were used to help reduce that debt to the government. However, only half of the revenue share was used to pare down that liability on the balance sheet, with the remaining 50% charged to the income statement. Dr. User fee expense (P&L) 50% Dr. Liability to the government (B/S) 50% Cr. Cash payment of the user fee (B/S) 100% After fully settling the outstanding debt with the government in April 2013, the government's revenue share will be fully recognised in the income statement beginning 2Q13. Dr. User fee expense (P&L) 100% Cr. Cash payment of the user fee (B/S) 100% As a result, we expect the user fee expense in the P&L to surge 115% in 2013, driven by three factors:  The full recognition of the government's revenue share in the income statement, beginning 2Q13,  The government‟s higher share of MAHB's revenue, which will rise to 9.3% by year-end from 9.05% at end-2012, and  MAHB's higher revenue, which we estimate will increase by 12% in 2013. User fee charges are likely to rise by 20% in 2014 and 17% in 2015, led by MAHB's strong revenue growth, and also an annual step-up in the revenue share by 0.25% pts every year. Marginal positive impact on cash flows. The switch from partial recognition of user fee in the income statement to full recognition will lead to a one-off dip in earnings this year. As user fee payments have been fully recognised in the cash flow statement since the start of the revenue sharing programme in 2009, the switch does not materially affect the company's cash flows. Cash flows will actually improve as the 2013 tax liability falls. 4.6 Financing the RM4bn KLIA2 project MAHB launched a debt raising programme in August 2010 to fund the capex required for the construction of KLIA2. It issued its inaugural 10-year Islamic medium term notes (MTN) in the same month, raising RM1bn at a yield of 4.55%, of which RM492m was used to fund the KLIA2 project and RM508m was used to refinance the borrowings it had raised to pay the government during the 2009 restructuring. Another RM1.5bn was raised almost four months later. MAHB raised equity for the project as well when it issued new shares amounting to 10% of its original share capital at the time. A total of RM616m was raised in March 2012, increasing its share base to 1.21bn shares. Two years after the last Islamic MTN issuance, MAHB took on another RM600m of Islamic debt in December 2012. Another RM500m of sukuk was raised in September 2013, with maturities of 3-5 years and yields of 3.85-4.15%. We expect another RM500m in sukuk debt to be issued within the next year. In total, we expect around RM3.6bn in debt to be raised specifically to finance the KLIA2 project, meaning that KLIA2 is around 90% debt financed.

Malaysia Airports Holdings October 4, 2013

Figure 73: Capital raised for the KLIA2 project Issue date Type Tranche Amount raised (RMm) Coupon/profit rate Tenure (years) Note 30-Aug-10 Islamic medium term notes 1st 1,000 4.55% 10 Partly for KLIA2 capex, partly for debt repayment 17-Dec-10 Islamic medium term notes 2nd 1,500 4.68% 12 28-Dec-12 Islamic medium term notes 3rd 600 4.15% 12 6-Sep-13 Sukuk Musharakah 1st 250 3.85% 3 6-Sep-13 Sukuk Musharakah 2nd 250 4.15% 5 Total debt raised 3,600 4.46%* 10* *weighted average coupon/profit rate and tenure.

Listing date Type Tranche Amount raised (RMm) Shares (m) Price (RM) Shares outstanding after issuance (m) 20-Mar-12 Primary offering n.a. 616 110.0 5.60 1,210 Total equity raised 616

Total capital raised 4,216

SOURCES: CIMB, COMPANY REPORTS

4.7 Dividend policy MAHB has a dividend policy of at least 50% of its profit after tax. Dividend payouts have been reduced from almost 60% before 2010 amid large cash outflows for the construction of KLIA2. With the terminal 94% complete, most of the capital expenditures dedicated to the terminal have been spent. Cash constraints will ease in the coming years, with the commencement of KLIA2 likely to boost cash reserves due to the significantly higher commercial floor space at KLIA2, which will increase retail and rental proceeds. At that point, MAHB will have greater ability to increase its dividend payouts. 4.8 Khazanah's share placements over the years Khazanah Nasional first took a majority stake in MAHB when Malaysia's Ministry of Finance transferred its 49.3% stake to the government investment vehicle on 14 October 2004. With an initial 23.5% stake in the company, Khazanah's stake ballooned to 72.7% when it absorbed the Ministry of Finance's shares. Khazanah continued to hold the 800.2m shares it had in MAHB for five years subsequently, before gradually reducing its stake amid government efforts to reduce participation in the private sector.  Khazanah made its first share placement in September 2009 when it sold 5% of MAHB (55m shares).  Another 7.7% stake (85.2m shares) was subsequently placed out six month later, paring down Khazanah's stake to 60%.  It also disposed of an additional 66m shares, representing 6% of the company in November 2010.  Finally, Khazanah disposed 106m shares in November 2012 at RM5.50/share. Khazanah's stake first fell below the 50% mark in March 2012 when MAHB issued 110m in new shares via a private placement exercise. The private placement attracted demand from both domestic and foreign institutions but Khazanah did not participate. Its stake in MAHB hence declined nearly 5% pts after the placement exercise to 49.1%. Today, after the November 2012 share placement exercise, the government investment vehicle holds approximately 40% of MAHB. Still very much a GLC. The Malaysian government and its related entities continue to own more than 50% of MAHB. Permodalan Nasional Berhad (PNB) currently has a 15.1% stake while the Employees Provident Fund (EPF) has 12.6%. With Kumpulan Wang Persaraan (KWAP) also invested in MAHB, the government and its related entities currently own more than 67% of the airport operator.

Malaysia Airports Holdings October 4, 2013

Figure 74: Khazanah's historical share sale of stake in MAHB Khazanah's shares Khazanah's stake Pricing date Activity Amount (RMm) Shares (m) Placing Price (RM) Selling shareholder after sale (m) after sale 14-Oct-04 Share transfer 541.9 Ministry of Finance 800.2 72.7% 9-Sep-09 Secondary offering 181.5 55.0 3.30 Khazanah 745.2 67.7% 11-Mar-10 Secondary offering 400.2 85.2 4.70 Khazanah 660.0 60.0% 11-Nov-10 Secondary offering 396.0 66.0 6.00 Khazanah 594.0 54.0% 22-Nov-12 Secondary offering 583.0 106.0 5.50 Khazanah 488.0 40.3% 14-May-13 Dividend reinvestment n.a. 7.2 n.a. n.a. 495.2 40.2% Amount sold 1,560.7 312.2 SOURCES: CIMB, COMPANY REPORTS

4.9 Accounting for construction revenue Under the accounting standards, MAHB has to recognise an intangible asset in respect of projects involving public-private partnerships whereby a private service operator is involved in the construction of an infrastructure asset to be used in providing a public service, and involving a concession agreement from the government which gives a right to the private service operator to collect future revenue. This is applicable to the ongoing KLIA2 project. The intangible asset is recognised as construction revenue, assuming that the construction cost is given a mark-up of 4.5%. After KLIA2 is commissioned, the intangible asset will be amortised over the remaining concession period. Here are the accounting entries: 1. To recognise the intangible asset during the construction period. Dr. Intangible asset (B/S) Cr. Construction revenue (P&L) 2. To recognise the construction cost during the construction period. Dr. Construction cost (P&L) Cr. Cash/Trade Payables (B/S) 3. To amortise the intangible asset upon the commissioning of the asset over the concession period. Dr. Amortisation charge (P&L) Cr. Intangible asset (B/S)

4.10 Key aeronautical assumptions Healthy traffic ahead. We are forecasting passenger traffic growth of 12.4%, in 2013, 11.4% in 2014 and 7.1% in 2015. Traffic this year will be buoyed by (i) Malindo's entry into the Malaysian market, as well as (ii) MAS's rapid capacity addition and aggressive pricing strategy, leading to a potential 23% increase in passengers carried. Traffic is set to grow strongly again in 2014, driven by capacity additions from AAX and Malindo. MTB to reach full utilisation in 2013? Based on our projections, passenger traffic at the MTB will reach 24.8m in 2013, further growing to 28.1m in 2014. Based on MTB's published annual capacity of 25m passengers, utilisation will hit 99% in 2013 and 113% in 2014. However, the terminal was designed to provide an extremely generous comfort level of 55 sq m per passenger, indicating that the terminal will remain relatively uncongested even when utilisation breaches 100%. Singapore's Changi Airport and Hong Kong International Airport's passenger capacities are based on comfort levels of 25-30 sq m per passenger, suggesting that the MTB can easily double its nameplate capacity with minimal capital expenditure required. London's Heathrow Airport and Sydney Airport's capacities are based on even lower comfort levels of approximately 18 sq m per

Malaysia Airports Holdings October 4, 2013

passenger. The MTB should be able to easily stretch its capacity by another 20-40% to 30-35m annually before congestion at the boarding gates becomes a constraint. Malindo to move to KLIA2 in 2015. We expect MTB's utilisation to fall to 107% in 2015, based on our expectation that Malindo will shift its operations to KLIA2 once the new terminal is complete. A severely congested LCCT. The LCCT is currently bursting at the seams, with passenger traffic expected to reach 22.1m this year compared to its design capacity of 15m. We expect traffic to expand by 18% to 26.2m in 2014 on the back of AAX's explosive ASK growth, indicating utilisation of 147% in 2013 and 175% in 2014. Although the terminal is experiencing severe congestion, the existing runways are still capable of handling the present amount of aircraft movements, hence allowing aircraft landings and take-offs without significant delays. KLIA2 to ease the congestion. The commencement of KLIA2, which we conservatively assume will happen only on 1 January 2015, will significantly improve comfort for LCC travellers. Utilisation will fall to a comfortable 72% in the 45m-passengers-a-year facility, even after taking into consideration Malindo's migration to the new terminal. We expect passenger traffic at KLIA2 in 2015 to be 23% higher than the 2014 traffic in LCCT.

Figure 75: MAHB passenger growth assumptions FY11 FY12 FY13f FY14f FY15f FY16f Overall passenger traffic growth 10.7% 5.0% 12.4% 11.4% 7.1% 6.4% KLIA MTB 7.5% 3.0% 19.8% 13.5% -4.9% 3.0% LCCT 14.3% 9.1% 15.1% 18.4% 23.4% 11.4% Other airports 11.0% 3.8% 5.0% 4.2% 4.2% 4.2%

International 10.4% 6.1% 14.8% 15.2% 9.7% 8.3% KLIA MTB 6.3% 5.2% 17.0% 12.2% -1.3% 3.0% LCCT 17.0% 8.2% 15.8% 23.0% 24.9% 14.5% Other airports 9.5% 4.3% 5.0% 5.0% 5.0% 5.0%

Domestic 11.1% 3.9% 10.2% 7.6% 4.3% 4.3% KLIA MTB 11.6% -4.2% 29.4% 17.6% -15.8% 3.0% LCCT 10.0% 10.6% 14.0% 10.8% 20.6% 5.6% Other airports 11.3% 3.7% 5.0% 4.0% 4.0% 4.0%

Utilisation rate 94% 100% 117% 136% 84% 91% KLIA MTB 80% 83% 99% 113% 107% 110% LCCT / KLIA2 117% 128% 147% 175% 72% 80%

Terminal capacity (m) 40 40 40 40 70 70 KLIA MTB 25 25 25 25 25 25 LCCT / KLIA2 15 15 15 15 45 45 SOURCES: CIMB, COMPANY REPORTS

Malaysia Airports Holdings October 4, 2013

5. VALUATION AND RECOMMENDATION 5.1 Our top Malaysian aviation pick Maintain Outperform, with a target price of RM8.90. MAHB is the obvious beneficiary of the price and capacity war being waged by MAS, AirAsia, AAX and Malindo right now. As the four carriers contemplate the prospect of weaker profits or widening losses amid heavy competition, the increased seat capacity and „load active, yield passive‟ strategies employed by the carriers will benefit MAHB through higher aeronautical and non-aeronautical revenue. We believe that aggressive air fare pricing and large increases in capacity will be here to stay in 2014. The strong increase in seat capacity should flow through directly to MAHB via higher landing and parking charges as flight frequencies increase. In addition, improved passenger traffic as a result of the low fares will lead to a rise in PSC receipts and retail revenue. We continue to value MAHB on a DCF basis with an average WACC of 6.9%.

Figure 76: WACC assumption WACC First phase Second phase Average 2013-2034 2035-2059 Risk free rate 3.7% 3.7% Market risk premium 6.0% 6.0% Beta 0.9 0.8 Cost of equity 9.1% 8.5% 8.8% Cost of debt 4.5% 4.5% After tax cost of debt 3.4% 3.4% 3.4% Equity-asset ratio 0.56 0.78 Debt-asset ratio 0.44 0.22 WACC 6.57% 7.35% 6.96% SOURCES: CIMB, COMPANY REPORTS

Assumption changes. In our last report on MAHB and the Malaysian aviation space dated 25 September and captioned “More of 2013 in 2014?” [PDF], we made several assumption changes which we enumerate again below for the convenience of our readers.  We increased overall passenger growth expectations from 10.1% to 12.4% for 2013, from 8.4% to 11.4% for 2014, and from 5.9% to 7.1% for 2015. Traffic growth at KLIA MTB and LCCT combined has been raised from 13.6% to 17.5% in 2013, from 11% to 15.8% in 2014, and from 6.9% to 8.7% in 2015.  Delayed our KLIA2 opening assumption to 1 January 2015, which increased our 2014 profit forecast due to the reduction in depreciation and interest expense recognised in the income statement. The rise is partially offset by lower retail revenue as available retail space is much lower at the LCCT compared to KLIA2.  Raised our risk free rate assumption to 3.7% from 3.4% to reflect the current Malaysian 10-year government bond yield. Our market premium has however been reduced to 6.0% from 6.4%. On a net basis, our average WACC was raised to 6.9% from 6.8%.  Assumed that Malindo will shift its operations to KLIA2 on 1 January 2015 when the terminal is completed. This reduced PSC revenue assumptions. As a final point, we believe that MAHB‟s concession is likely to be extended by another 10 years to 2069. The terms of the extension remain unknown, however, and we think that an adjustment in the government's favour, such as an increase in revenue share, is likely. We hence continue to discount MAHB‟s cash flows only up till 2059 until more details are finalised.

Malaysia Airports Holdings October 4, 2013

5.2 Longer-term upsides for MAHB We believe that MAHB has two sources of revenue that could boost earnings materially in the future. 1. Standardise PSC charges at MTB and LCCT First, after KLIA2 is commissioned, the gap between the comfort levels of KLIA2 and the existing MTB will narrow significantly. MAHB could request for a standardisation of the PSC charges at both terminals. If this is resisted by the airline lobby, we think that the charges at KLIA2 can at least be narrowed. Currently, the PSC at the LCCT stands at RM32/pax for international departures, which is just half of the RM65/pax at the MTB. This gap is acceptable at the moment given the stark differences between conditions at the LCCT and at the MTB. But once KLIA2 is up and running, airlines operating at the MTB will badger MAHB to move to KLIA2 if the present LCCT tariffs are carried over to KLIA2. This will create a huge problem for MAHB as it sets up a fight between MAHB and the airlines operating at the MTB, with MAHB preferring the status quo and the airlines preferring a move. Also, MAHB would be under pressure to keep Malindo at the MTB because, for all intents and purposes, Malindo is an FSC masquerading as an LCC. But we understand that Malindo has already extracted a promise that it will be allowed to move to KLIA2, which will certainly anger the other FSCs that are forced to continue operating at the MTB. To prevent such contradictions, it would be better to standardise the tariffs, or at least narrow the gap. However, we believe that MAHB will need the go-ahead from the government in order to standardise/narrow the tariffs, and we believe that any discussions to that effect will have to wait until the KLIA2 project is actually completed and commissioned. MAHB will also have to overcome the resistance from the airlines operating at the KLIA2.

Figure 77: EPS and DCF sensitivity to PSC changes at KLIA2

KLIA2's PSC (RM) 2015 EPS change DCF target price (RM) 30 -8% 8.04 32 -5% 8.37 35 +0% 8.90 40 +8% 9.63 45 +17% 10.44 50 +25% 11.10 55 +33% 11.81 60 +42% 12.62 65 +50% 13.40 70 +59% 14.04 71 +60% 14.24 SOURCES: CIMB, COMPANY REPORTS

2. Impose transit/transfer charges Second, MAHB can emulate Changi Airport by charging transit/transfer passengers some fees. Changi Airport currently charges S$9/pax to all departing transit/transfer passengers. This will be an increasingly important initiative, especially with up to 30% of the MTB's passengers eventually transiting through KLIA under expanded and improved MAS services, and the expansion of long-haul LCCs operating from KLIA2 in the future. Nevertheless, we think that the imposition of transit/transfer charges at KLIA/KLIA2 is even further away than the potential to standardise/narrow the tariffs between the MTB and KLIA2 because KLIA is not as mature a transit/transfer hub as Changi Airport. We have not factored either of the above two potentials into our earnings model.

Malaysia Airports Holdings October 4, 2013

Figure 78: Sector Comparisons

Bloomberg Price Target Price Market Cap Core P/E (x) 3-year EPS P/BV (x) Recurring ROE (%) EV/EBITDA (x) Dividend Yield (%) Company Recom. Ticker (local curr) (local curr) (US$ m) CY2013 CY2014 CAGR (%) CY2013 CY2014 CY2013 CY2014 CY2015 CY2013 CY2014 CY2013 CY2014 AirAsia Bhd AIRA MK Outperform RM2.62 RM3.05 2,280 9.6 9.8 -1.8% 1.40 1.20 14.9% 13.7% 12.3% 7.8 7.6 2.3% 2.1% AirAsia X Bhd AAX MK Neutral RM1.08 RM1.23 801 27.2 13.8 na 1.68 1.37 9.3% 10.9% 13.4% 12.7 9.5 0.0% 0.0% Asia Aviation Pcl AAV TB Underperform THB5.45 THB5.00 845 18.0 12.0 43.9% 1.34 1.20 7.7% 10.5% 11.5% 12.4 8.2 0.0% 0.0% Tiger Airways TGR SP Underperform S$0.56 S$0.60 438 na 20.8 na 1.04 0.79 -11.9% 4.3% 8.1% 6.7 4.2 0.0% 0.0% Cebu Air CEB PM Underperform PHP53.90 PHP40.70 758 13.9 16.5 -0.5% 1.35 1.25 10.5% 7.8% 8.9% 7.2 7.2 0.0% 0.0% SpiceJet SJET IN Not Rated INR19.60 - 165 na na na na na 62.1% 27.9% -78.4% 72.3 61.8 0.0% 0.0% Air Arabia AIRARABI UH Not Rated AED1.47 - 1,868 14.8 12.5 14.0% 1.23 1.17 8.4% 9.6% 10.6% 11.7 9.8 5.0% 5.5% Ryanair RYA ID Not Rated €6.32 - 12,139 17.6 15.3 10.1% 2.76 2.53 16.1% 17.3% 18.8% 9.1 8.0 1.7% 1.0% easyJet EZJ LN Not Rated £13.02 - 8,294 13.9 12.3 14.4% 2.52 2.21 18.4% 19.1% 19.0% 8.1 7.0 2.4% 3.2% Southwest LUV US Not Rated US$14.72 - 10,395 15.1 12.7 0.4% 1.45 1.38 9.6% 11.1% 9.6% 5.6 4.9 0.8% 1.0% JetBlue JBLU US Not Rated US$6.67 - 1,883 14.5 10.8 3.4% 0.98 0.90 6.7% 8.7% 8.4% 6.5 5.6 0.0% 0.0% GOL GOL US Not Rated US$4.99 - 1,392 na 55.4 na 3.84 5.01 -45.5% 7.8% 17.9% 11.1 7.6 0.0% 1.2% WestJet WJA CN Not Rated C$25.41 - 3,228 13.2 11.2 6.9% 1.95 1.80 15.1% 16.6% 17.1% 4.4 4.3 1.6% 1.8% Low-Cost Carriers 16.3 13.2 9.1% 1.84 1.68 11.5% 13.4% 13.5% 7.5 6.5 1.6% 1.6%

Cathay Pacific Airways 293 HK Outperform HK$15.16 HK$16.00 7,691 25.5 11.5 73.0% 0.99 0.93 4.0% 8.3% 8.5% 7.5 5.3 0.9% 1.3% China Eastern Airlines 670 HK Underperform HK$2.50 HK$1.80 5,410 17.6 11.7 -5.9% 0.93 0.86 6.0% 7.6% 8.2% 8.2 7.1 0.0% 0.0% China Southern Airlines 1055 HK Underperform HK$2.81 HK$2.00 4,247 19.6 10.3 0.9% 0.62 0.59 3.2% 5.8% 6.3% 7.9 6.8 2.1% 1.4% Air China 753 HK Neutral HK$5.21 HK$5.00 8,688 13.5 10.1 6.4% 0.91 0.85 7.1% 8.7% 8.7% 7.2 6.6 1.7% 1.8% Korean Air 003490 KS Neutral Won34,300 Won37,000 1,882 na 13.3 na 1.04 0.92 -3.0% 7.4% 12.2% 8.3 7.1 0.0% 0.8% Asiana Airlines 020560 KS Neutral Won5,060 Won4,675 923 na 94.1 na 1.07 1.04 -12.4% 1.1% 20.4% 18.2 11.2 0.0% 0.2% Malaysian Airline System MAS MK Underperform RM0.34 RM0.17 1,752 na na na 1.34 1.97 -36.3% -36.4% -53.2% na na 0.0% 0.0% Singapore Airlines SIA SP Neutral S$10.32 S$10.50 9,707 21.1 16.4 28.3% 0.91 0.89 4.4% 5.5% 5.9% 3.2 2.8 3.4% 4.3% Thai Airways International THAI TB Underperform THB20.40 THB22.00 1,424 12.9 9.1 52.7% 0.62 0.59 5.0% 6.7% 6.4% 7.4 6.8 1.9% 2.7% Qantas Airways QAN AU Neutral A$1.46 A$1.49 3,075 25.1 12.0 42.7% 0.55 0.54 2.3% 4.5% 7.2% 3.2 2.9 1.4% 3.4% Virgin Australia Holdings VAH AU Underperform A$0.43 A$0.36 1,046 na 23.0 136.3% 1.11 1.11 -1.3% 4.7% 8.7% 8.2 5.8 0.0% 0.0% China Airlines 2610 TT Not Rated TWD10.90 - 1,930 20.7 13.7 1665.2% 1.07 1.03 5.2% 7.6% 9.2% 11.7 9.9 0.3% 0.5% EVA Airways 2618 TT Not Rated TWD16.65 - 1,847 28.5 14.9 1.8% 1.43 1.36 4.8% 9.3% 8.8% 9.0 7.4 0.4% 0.7% Garuda GIAA IJ Not Rated Rp495 - 985 9.4 7.2 14.5% 0.81 0.71 9.7% 10.4% 14.0% 4.7 4.1 0.0% 0.0% Full-Service Carriers 27.2 14.2 24.3% 0.88 0.84 3.4% 6.1% 7.3% 7.4 6.4 1.5% 1.9%

Airports of Thailand AOT TB Underperform THB197.00 THB150.00 8,997 24.0 19.8 25.8% 3.11 2.83 13.8% 15.0% 14.7% 14.4 13.3 1.9% 2.0% Malaysia Airports Holdings MAHB MK Outperform RM7.70 RM8.90 2,970 22.9 17.4 4.6% 2.00 1.87 9.3% 11.1% 10.0% 14.7 12.6 2.4% 3.2% Auckland Int'l Airport AIA NZ Neutral NZ$3.30 NZ$3.12 3,619 27.0 25.1 8.3% 1.74 1.73 6.5% 6.9% 7.4% 15.6 14.7 3.8% 4.0% Sydney Airport SYD AU Outperform A$3.98 A$4.25 8,204 57.1 51.5 -6.0% 3.02 2.86 6.0% 5.7% 6.4% 15.9 16.2 5.7% 6.0% Beijing Capital International 694 HK Not Rated HK$5.11 - 2,854 29.2 24.5 9.6% 1.1 1.0 8.6% 9.8% 10.5% 5.0 4.3 2.9% 3.5% Shanghai International 600009 CH Not Rated Rmb15.13 - 4,761 14.8 12.9 11.0% 1.69 1.56 11.4% 12.6% 13.0% 9.3 8.1 2.4% 2.7% Aeroports de Paris ADP FP Not Rated €78.24 - 10,525 22.3 19.4 9.4% 2.04 1.95 9.5% 10.3% 11.0% 10.4 9.7 2.7% 3.0% Airports 24.9 21.4 11.1% 2.29 2.16 9.5% 10.4% 10.8% 12.7 11.9 3.0% 3.3%

Average (all) 21.8 15.4 15.2% 1.38 1.30 6.6% 8.7% 9.6% 8.3 7.3 2.0% 2.2% SOURCES: CIMB, COMPANY REPORTS

Malaysia Airports Holdings October 7, 2013

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Spitzer Chart for stock being researched ( 2 year data )

Price Close

8.4 Recommendations & Target Price

7.9

6.90 6.90 5.90 6.75 7.55 7.56 8.90 7.80 7.80 7.95 6.05 6.60 6.50

7.4 6.40 6.9 6.4 5.9 5.4 4.9 Outperform Neutral Underperform Trading Buy Trading sell Not Rated Oct-11 Feb-12 Jun-12 Oct-12 Feb-13 Jun-13

Distribution of stock ratings and investment banking clients for quarter ended on 31 August 2013 1211 companies under coverage Rating Distribution (%) Investment Banking clients (%) Outperform/Buy/Trading Buy 50.5% 7.2% Neutral 34.1% 4.8% Underperform/Sell/Trading Sell 15.4% 4.9%

Recommendation Framework #1 * Stock Sector OUTPERFORM: The stock's total return is expected to exceed a relevant OVERWEIGHT: The industry, as defined by the analyst's coverage universe, is benchmark's total return by 5% or more over the next 12 months. expected to outperform the relevant primary market index over the next 12 months. NEUTRAL: The stock's total return is expected to be within +/-5% of a relevant NEUTRAL: The industry, as defined by the analyst's coverage universe, is expected benchmark's total return. to perform in line with the relevant primary market index over the next 12 months. UNDERPERFORM: The stock's total return is expected to be below a relevant UNDERWEIGHT: The industry, as defined by the analyst's coverage universe, is benchmark's total return by 5% or more over the next 12 months. expected to underperform the relevant primary market index over the next 12 months. TRADING BUY: The stock's total return is expected to exceed a relevant TRADING BUY: The industry, as defined by the analyst's coverage universe, is benchmark's total return by 5% or more over the next 3 months. expected to outperform the relevant primary market index over the next 3 months. TRADING SELL: The stock's total return is expected to be below a relevant TRADING SELL: The industry, as defined by the analyst's coverage universe, is benchmark's total return by 5% or more over the next 3 months. expected to underperform the relevant primary market index over the next 3 months. * This framework only applies to stocks listed on the Singapore Stock Exchange, Bursa Malaysia, Stock Exchange of Thailand, Jakarta Stock Exchange, Australian Securities Exchange, Taiwan Stock Exchange and National Stock Exchange of India/Bombay Stock Exchange. Occasionally, it is permitted for the total expected returns to be temporarily outside the prescribed ranges due to extreme market volatility or other justifiable company or industry-specific reasons. CIMB Research Pte Ltd (Co. Reg. No. 198701620M)

Malaysia Airports Holdings October 7, 2013

Recommendation Framework #2 ** Stock Sector OUTPERFORM: Expected positive total returns of 10% or more over the next 12 OVERWEIGHT: The industry, as defined by the analyst's coverage universe, has a months. high number of stocks that are expected to have total returns of +10% or better over the next 12 months. NEUTRAL: Expected total returns of between -10% and +10% over the next 12 NEUTRAL: The industry, as defined by the analyst's coverage universe, has either (i) months. an equal number of stocks that are expected to have total returns of +10% (or better) or -10% (or worse), or (ii) stocks that are predominantly expected to have total returns that will range from +10% to -10%; both over the next 12 months. UNDERPERFORM: Expected negative total returns of 10% or more over the next 12 UNDERWEIGHT: The industry, as defined by the analyst's coverage universe, has a months. high number of stocks that are expected to have total returns of -10% or worse over the next 12 months. TRADING BUY: Expected positive total returns of 10% or more over the next 3 TRADING BUY: The industry, as defined by the analyst's coverage universe, has a months. high number of stocks that are expected to have total returns of +10% or better over the next 3 months. TRADING SELL: Expected negative total returns of 10% or more over the next 3 TRADING SELL: The industry, as defined by the analyst's coverage universe, has a months. high number of stocks that are expected to have total returns of -10% or worse over the next 3 months. ** This framework only applies to stocks listed on the Korea Exchange, Hong Kong Stock Exchange and China listings on the Singapore Stock Exchange. Occasionally, it is permitted for the total expected returns to be temporarily outside the prescribed ranges due to extreme market volatility or other justifiable company or industry-specific reasons.

Corporate Governance Report of Thai Listed Companies (CGR). CG Rating by the Thai Institute of Directors Association (IOD) in 2012. AAV – not available, ADVANC - Excellent, AEONTS – Good, AMATA - Very Good, ANAN – not available, AOT - Excellent, AP - Very Good, BANPU - Excellent , BAY - Excellent , BBL - Excellent, BCH – not available, BCP - Excellent, BEC - Very Good, BGH - not available, BJC – Very Good, BH - Very Good, BIGC - Very Good, BTS - Excellent, CCET - Good, CENTEL – Very Good, CK - Very Good, CPALL - Very Good, CPF - Very Good, CPN - Excellent, DELTA - Very Good, DTAC - Very Good, EGCO – Excellent, ERW – Excellent, GLOBAL - Good, GLOW - Very Good, GRAMMY – Excellent, HANA - Very Good, HEMRAJ - Excellent, HMPRO - Very Good, INTUCH – Very Good, ITD – Very Good, IVL - Very Good, JAS – Very Good, KAMART – not available, KBANK - Excellent, KK – Excellent, KTB - Excellent, LH - Very Good, LPN - Excellent, MAJOR - Good, MAKRO – Very Good, MCOT - Excellent, MINT - Very Good, PS - Excellent, PSL - Excellent, PTT - Excellent, PTTGC - Excellent, PTTEP - Excellent, QH - Excellent, RATCH - Excellent, ROBINS - Excellent, RS – Excellent, SAMART – Excellent, SC – Excellent, SCB - Excellent, SCC - Excellent, SCCC - Very Good, SIRI - Good, SPALI - Very Good, SRICHA – not available, SSI – not available, STA - Good, STEC - Very Good, TCAP - Very Good, THAI - Excellent, THCOM – Very Good, TICON – Very Good, TISCO - Excellent, TMB - Excellent, TOP - Excellent, TRUE - Very Good, TTW – Very Good, TUF - Very Good, VGI – not available, WORK – Good.