SECTOR BRIEFING number DBS Asian Insights DBS Group69 Research • December 2018 Asia Airports Think Big, Act Quick 19 DBS Asian Insights SECTOR BRIEFING 69 02 Asia Airports Think Big, Act Quick Paul Yong, CFA Equity Analyst DBS (Singapore) [email protected] Marvin Khor Equity Analyst DBS Alliance [email protected] Namida Artispong Equity Analyst DBS (Thailand) [email protected] Produced by: Asian Insights Office • DBS Group Research go.dbs.com/research @dbsinsights [email protected] Goh Chien Yen Editor-in-Chief Rachel Hui Ting Tan Editor Martin Tacchi Art Editor 19 DBS Asian Insights SECTOR BRIEFING 69 03 04 Executive Summary 06 Asia Pacific, the fastest growing air-travel region 13 Bursting at the seams Large investments needed over 19 two decades The increasing role of private 28 capital in Asia’s airport development 35 Fund-raising lessons 39 Asia’s most valuable airports Changi Airport Group Hong Kong International Airport Angkasa Pura I & II Seoul Incheon International Airport 59 Key Risks and Challenges 61 Investment cycle and share prices 67 Appendix DBS Asian Insights SECTOR BRIEFING 69 04 Executive Summary Rising air travel leads to growing middle class, rising propensity to travel and broadly improving global urgent need for more connectivity are setting the stage for air passenger volume in Asia to rise airport infrastructure significantly over the coming decades. Besides the impending expansion of airline fleet (evidenced by burgeoning Boeing & Airbus order books), the other Acritical component necessary to facilitate this growth is the expansion of key Asian airports. Urgency is a mounting factor as the majority of Asia’s busiest airports are already operating at above built-for capacity. Where possible, airport operators are aiming to enhance and enlarge their available infrastructure, in addition to furnishing them with cutting-edge technology and systems. Space constraints are also a common feature, leading to both public and private efforts to find and develop new hub locations. Urgent need for more The International Air Transportation Association (IATA) is forecasting passenger traffic in the airport capacity Asia Pacific to grow at a 20-yr compound annual growth rate (CAGR) of 5.1% from 2016, higher than the global rate of 3.8%, and to reach around 3,500m passengers (pax) in 2036. By 2036, the Asia Pacific market will potentially add 2.2bn more passengers, accounting for 45% of global traffic. On average, that works out to be more than 100m more passengers per year for the next two decades – requiring an increase in passenger throughput capacity of 200m pax per annum. While most of the region’s airports have expansions or a new airport planned, many of these airports will still be operating above or at near capacity by the time the expansions are complete, highlighting the need for continuous expansion and investment. Bigger, better and more Capital expenditure for airport construction has been rising, in particular for those aspiring airports to become hub airports, as best-in-class facilities will help draw airline and air passenger customers to use them as connecting points. The potential to build ‘aerotropolises’ (airport cities), especially around newer and larger airport expansions, implies large potential investment inflows for the respective geographical areas and leverage to procure government support. Taking the weighted average cost per pax for proposed airports in Asia of US$129.1 per pax multiplied by the c.4bn passenger handling capacity needed in Asia in the next 2 decades, we derive an estimated total Asia’s airports. Given rising land acquisition and construction costs over time, there is likely to be upside risk to this estimated figure of US$516bn. A growing role for While investment in airports in Asia were traditionally thought to be the domain of the private capital public sector, the large investment required, as well as the allure of steady returns and commercial revenue opportunities are attracting an increasing number of private capital into the sector. The staggering investment needed to build airport infrastructure is strong motivation for governments to turn to private capital as a supplementary, or even primary, DBS Asian Insights SECTOR BRIEFING 69 05 means of funding such projects. Generally, there are three airport privatisation models, 1) full private ownership, 2) partial privatisation, and 3) long-term concessions. There are more privatisation opportunities in markets like Japan, China, India, Indonesia, and the Philippines. Fund raising lessons Two of ASEAN’s largest airport groups – Malaysia Airports Holdings Berhad and Airports of from Asia’s listed Thailand - were among the earliest in Asia to tap the equity markets to fund their expansion airports plans and both are now in a strong financial position to finance their own growth. Meanwhile, much smaller airports like Samui Airport also managed to raise money from the equity markets with a well-structured sale of concession to a listed fund, showing the way for other small airports to do the same. The home of billion- The Asia Pacific region is home to some of the most valuable airports in the world. In fact, dollar airports the largest pure play airport company in the world is Airports of Thailand, with a market capitalisation of nearly US$28bn. Names such as Hong Kong International Airport, Seoul Incheon International Airport and Changi Airport Group, which are among three of the most profitable airports in Asia, are likely worth tens of billions of dollars as listed companies, though Indonesia’s Angkasa Pura I & II groups would also be worth billions when we apply the average PE of listed peer companies to their respective earnings. The examples from airports under our coverage give clear evidence that capex-driven declines in operator valuations are temporary in nature and present an opportunity for investors to accumulate on the cheap for airports with growth potential, as throughput growth is a far more critical share price driver in the long term. DBS Asian Insights SECTOR BRIEFING 69 06 Fastest growing air travel region The Asia Pacific ccording to the International Civil Aviation Organization (ICAO), air passenger is the largest air traffic in the Asia Pacific region reached 1,485m pax in 2017, accounting for transportation market c.36.5% of overall passengers globally and growing by 10.8% y-o-y compared in the world to 5.3% growth for the rest of the world in 2017. Asia Pacific’s share of air Apassengers has risen from 27.7% in 2010 to 36.5% in 2017 and more than half the growth of passenger traffic in 2017 was from Asia Pacific. Global air passenger traffic (2010 to 2017) Europe 4,500 Africa Middle East 4,000 N. America Latin America and Caribbean 3,500 3,000 2,500 2,000 1,500 1,000 1,340 1,485 500 1,008 1,107 1,206 711 817 922 0 2010 2011 2012 2013 2014 2015 2016 2017 Source: ICAO, DBS Bank In terms of absolute numbers, an average of nearly 100m passengers was added each year between 2011 and 2015, while nearly 140m passengers on average were added each year in 2016 and 2017. DBS Asian Insights SECTOR BRIEFING 69 07 Growth of air passenger traffic in Asia Pacific (m) 144.6 134.7 105.9 105.1 98.8 98.5 86.4 2011 2012 2013 2014 2015 2016 2017 Source: ICAO, DBS Bank The Asia Pacific will IATA is forecasting passenger traffic in Asia Pacific to grow at a 20-yr CAGR of 5.1% from see 2.2bn more air 2016, which is higher than the global rate of 3.8%, to reach around 3,500m pax in 2036. passengers by 2026 By 2036, the Asia Pacific market will add 2.2bn more passengers, accounting for 45% of global traffic. Growth of air passenger traffic by 2036 Series1 Series2 Series3 Series4 Series5 Series6 Series7 9000.0 8000.0 7000.0 6000.0 5000.0 4000.0 3000.0 2000.0 28% 1000.0 35% 0.0 2016 2036E Source: IATA, DBS Bank DBS Asian Insights SECTOR BRIEFING 69 08 On average, that works out to be more than 100m more passengers per year for the next two decades – requiring an increase in passenger throughput capacity of 200m pax per annum. This forecast may be pessimistic given that the year-to-date Revenue Passenger Kilometres (RPK) growth (August 2018) in the Asia Pacific was 9.5%, while passenger growth in 2017 was 10.8%. Growth of air passenger traffic in Asia Pacific (m) 0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 2016 pax 2017-2036 pax North America Europe Latin America Middle East Africa Source: IATA, DBS Bank What are the drivers for air travel growth in Asia? Massive population Asia has a total of 4.46bn people (60% of the global population) but only accounts for portends huge growth 36% of the total air passenger traffic numbers, suggesting there is still plenty of room for potential for the civil aviation to grow in the region. aviation market Asia is the world’s most populous region Asia Rest of world Growth 9,000 MIllion ppl 8,513 8% 8,152 7,767 8,000 7,357 7% 6,933 7,000 6,520 6,122 6% 6,000 5,714 5% 5,000 4% 4,000 3% 3,000 58% 61% 60% 59% 59% 2% 2,000 61% 61% 61% 1,000 1% - 0% 1995 2000 2005 2010 2015 2020F 2025F 2030F Source: populationpyramid.net, DBS Bank estimates DBS Asian Insights SECTOR BRIEFING 69 09 China (1.38bn), India (1.32bn) and ASEAN (634m) alone have a combined population of 3.33bn, or 45% of the global total.