SECTOR BRIEFING number DBS Asian Insights DBS Group69 Research • December 2018 Asia 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 () [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 development 35 Fund-raising lessons 39 Asia’s most valuable airports Group Hong Kong I & II 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, , , 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 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 , 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. While population growth in China has slowed down, there are signs that the government is trying to reverse this. Meanwhile, ASEAN and India’s birth rates remain above the global average and will drive Asia’s population growth in the next decade. ASEAN & India’s birth rates are above global average

World China 12% ASEAN (Indonesia, Singapore, , Philippines) 10% India

8%

6%

4%

2%

0% 2000 2005 2010 2015 2020F 2025F 2030F

Source: populationpyramid.net, DBS Bank estimates

Rising income levels Gross National Income (GNI) per capita in East Asia Pacific (excluding high income countries) and a growing middle grew to US$6,667 at a CAGR of 11% in 1995-2016, achieving above middle-class range class defined by the World Bank since 2010. This has driven rapid consumption growth, including demand for air travel in the region.

Rising incomes in East Asia Pacific (excl. high income)

8,000 US$ 7,000 Middle class 6,000 5,000 4,000 3,000 2,000 1,000 - 1995 1996 1997 1998 1999 2 000 2 001 2 002 2 003 2 004 2 005 2 006 2 007 2 008 2 009 2 010 2 011 2 012 2 013 2 014 2 015 2 016

Source: World Bank, DBS Bank estimates DBS Asian Insights SECTOR BRIEFING 69 10

China’s growing middle class 100% 3% 7% 90% 15% 80% 20% 70% Low (RMB 200,000) 20% 37% 10% 11% 0% Source: The Economist Intelligence Unit 2015 2030

With the growth of low cost carriers (LCCs) like Air Asia, , Tigerair (now part of ), and recently Vietjet, air travel in ASEAN has grown rapidly in the last decade. LCC seat capacity quadrupled from 50.3m in 2007 to c.222.9m in 2016. In the same period, ASEAN also saw a c.76% jump in international arrivals from 62m to 109m.

The fact that key aviation hubs in ASEAN are within five hours of flight from the major markets of China, India and ASEAN itself has also helped the sector grow rapidly.

LCC seat capacity in ASEAN (2007 – 2016)

250 Millions

200

150

100

50

0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Source: CAPA, DBS Bank DBS Asian Insights SECTOR BRIEFING 69 11

The great tourism drive As a result of its latent potential in terms of population base and the rapid rise in incomes, in Asia the Asia Pacific region has been adding the most to global tourists in the last decade. This trend is expected to continue.

Outbound tourists globally (1990 2016)

Europe Asia Americas Africa Middle East 1,200 Million Visitors 1,000

800 276 308 250 263 600 205 154 110 400 82 56 200

0 1990 1995 2000 2005 2010 2013 2014 2015 2016

Source: UNWTO, DBS Bank

In terms of absolute numbers, Northeast and have been driving the growth of outbound (international) tourists in the region while South Asia has also been growing rapidly from a low base – at a CAGR of over 15% from 2011-2016.

Tourism growth in Asia Pacific

North-East Asia ASEAN Oceania South Asia 350 Million Visitors 300 15.3% CAGR 5.9% CAGR 250

200 8% CAGR

150

100 5.9% CAGR 50

0 2011 2012 2013 2014 2015 2016

Source: UNWTO, DBS Bank DBS Asian Insights SECTOR BRIEFING 69 12

Four of the five fastest growing markets, in terms of additional passengers per year, over the forecast period will be from Asia. According to forecasts by IATA, China will replace the US as the world’s largest aviation market by 2024. India will displace the UK for third place in 2025, while Indonesia and Japan will be ranked 5th and 7th respectively.

Fastest growing markets (2016 – 2036F)

Region Countries New Passengers Total Passengers

Asia China 921 million 1.5 billion

India 337 million 478 million

Indonesia 235 million 355 million

Turkey 119 million 196 million

North America United States 401 million 1.1 billion

Source: IATA DBS Asian Insights SECTOR BRIEFING 69 13

Bursting at the seams

3 of the top 5 busiest he busiest airport in Asia in 2017 was the Beijing Capital International Airport, airports globally are in also the second busiest in the world, handling nearly 96m passenger movements. Asia Meanwhile, Dubai International Airport (third busiest globally) and (fourth busiest globally) handled 88m and 85m passenger movements Trespectively in 2017.

Airports in Asia make Among the 50 busiest airports globally, there were 10 from China, Hong Kong and Taiwan, up 21 of the 50 busiest five from the ASEAN region, and two each from Japan and India. Korea and the United airports globally Arab (UAE) were also represented in the list. Notably, the combined passenger throughput of these 21 airports grew by 6.9% y-o-y in 2017, exhibiting firm growth despite the large base.

10 of the busiest cargo Three of the five busiest cargo airports in the world reside in Asia, with Hong Kong in the airports are in Asia number one spot and growing by 9.4% y-o-y in terms of tonnage handled to 5m tonnes in 2017. This is followed by Shanghai Pudong Airport with 3.8m tonnes handled (+11.2% y-o-y) and Seoul Incheon International Airport with 2.9m tonnes handled (+7.6% y-o-y). E-commerce has been a key driver of growth and this is expected to continue.

Top 5 cargo airports in Asia in 2017

6.0 12.0% 5.0 5.0 10.0%

3.8 4.0 8.0% tonnes (m)

- 2.9 3.0 2.7 6.0%

2.3 Y growth - o -

2.0 4.0% Y

1.0 2.0%

Freight Handled 0.0 0.0% Hong Kong Shanghai Seoul Dubai Tokyo Narita International Pudong Incheon International Airport Airport International International Airport Airport Airport

Source: ACI DBS Asian Insights SECTOR BRIEFING 69 14

Busiest passenger airports in Asia and in the world – 2017

Asia World Airport Country Pax Handled Growth y-o-y 1 2 Beijing Capital International Airport China 95,786,442 1.5% 2 3 Dubai International Airport United Arab Emirates 88,242,099 5.5% 3 4 Tokyo Haneda Airport Japan 85,408,975 6.5% 4 8 Hong Kong International Airport Hong Kong SAR, China 72,665,078 3.4% 5 9 Shanghai Pudong International Airport China 70,001,237 6.1% 6 13 Guangzhou Baiyun International Airport China 65,887,473 10.3% 7 16 Indira Gandhi International Airport India 63,451,503 14.1% 8 17 Soekarno-Hatta International Airport Indonesia 63,015,620 8.3% 9 18 Singapore Changi Airport Singapore 62,219,573 6.0% 10 19 Seoul Incheon International Airport Republic of Korea 62,157,834 7.5% 11 21 Airport Thailand 60,860,557 8.9% 12 23 Kuala Lumpur International Airport Malaysia 58,558,440 11.2% 13 26 Chengdu Shuangliu International Airport China 49,801,693 8.2% 14 29 Chhatrapati Shivaji International Airport India 47,204,259 5.7% 15 34 Shenzhen Bao'an International Airport China 45,558,409 8.5% 16 35 Taiwan Taoyuan International Airport Taiwan 44,878,703 6.1% 17 37 Kunming Changshui International Airport China 44,729,736 6.6% 18 44 Ninoy Aquino International Airport Philippines 42,022,484 6.2% 19 45 Shanghai Hongqiao International Airport China 41,884,059 3.5% 20 46 Xi'an Xianyang International Airport China 41,857,406 13.2% 21 49 Narita International Airport Japan 40,631,193 4.2%

Source: Airports Council International

China’s major airports In 2017, seven of China’s top ten airports were handling passenger movements above their are highly congested design capacity, while the rest were operating at or near capacity. Inevitably, this has led to congestion issues at China’s major airports, affecting an estimated 50% of air passengers domestically. DBS Asian Insights SECTOR BRIEFING 69 15

Major airports in China – capacity vs demand (2017)

33 Hangzhou 36 Design Capacity Chongqing 45 2017 Pax 39 Xi'an 50 42 20 SH Hongqiao 42 Shenzhen 45 46 38 Kunming 45 50 Chengdu 50 36 Guangzhou 66 50 SH Pudong 70 82 Beijing 96 02 04 06 08 0 100 120

Source: CAAC, CADAS

ASEAN airports are also The main airports in and Manila are already handling passenger movements above overcrowded their designed capacity while Jakarta is already nearing full capacity despite having just opened a new terminal.

Major airports in ASEAN – capacity vs demand (2017)

90 82 2017 Arrivals 2017 Capacity 80 75 70 62 63 61 60 59 60

50 45 42 40 30 30

20

10

0 SingaporeJ akarta Bangkok Kuala Lumpur Manila

Source: Respective airports, DBS Bank estimates DBS Asian Insights SECTOR BRIEFING 69 16

India’s airports will Given the rapid growth of civil aviation in India, key airports in and Chennai soon face the strain too are already at or near saturation. The Indian government also estimated that traffic in six major hubs will reach capacity limit by 2019 covering nearly two-thirds of passengers in India. An article by the Centre For Aviation CAPA) reports that based on projected growth rates, most of the 40 largest airports in the country will exceed their design capacities within the next decade.

India’s top 10 airports’ pax movements FY17/18* FY17/18 Pax (m) Growth 70.0 65.7 30%

60.0 25% 48.5 50.0 20% 40.0 15% 30.0 26.9 20.4 19.9 18.2 10% 20.0 10.2 9.2 8.2 10.0 7.6 5%

0.0 0% i i a a u Go Pune Delh Koch Kolkat Chennai Mumbai Bengalur Hyderabad Ahmedabad

Source: Airports Authority of India, *April 2017 to March 2018

Terminal congestion impacts passenger satisfaction levels, while more severe congestion would impact demand. While we mainly focus on passenger handling capacity for airports, there are in fact many different aspects of airport capacity constraints to consider. These include, but are not limited to, a) congestion, which leads to more delays and limits the number of flights, b) security, customs and immigration clearance (e.g. some airports take a much longer time to process travellers than others), c) airspace congestion, d) peak or ‘popular’ landing/take-off times, e) other operations such as ground handling, fuelling, check-in desks, boarding gates, baggage carousels etc. f) airport slot constraints and, g) a shortage or lack of skilled personnel, which would impact safety or efficiency.

12 of the top 20 airports Many of Asia’s major airports were already handling passenger movements above their were operating at or design capacities in 2017. Guangzhou and Beijing airports for example, recorded passenger above capacity in 2017 throughputs that were 31m and 16m above their capacities respectively in 2017. The airport DBS Asian Insights SECTOR BRIEFING 69 17

in Guangzhou opened its Terminal 2 in April 2018, raising its capacity to 80m a year while a new airport in Beijing is slated for opening at the end of 2019. Most of these congested airports do have plans for further expansion over the next decade.

It should be noted that based on projected growth rates, many of these airports will still be operating above or near capacity by the time the expansions are complete, highlighting the need for continuous expansion and investment.

Amongst Asia’s busiest airports, only the main airports in Singapore, Kuala Lumpur, Xi’an and Seoul have some room for growth as they operated at 76%, 79%, 84% and 86% of their design capacities respectively in 2017.

A further 4 airports In 2017, four of the top 20 airports handled passenger movements equal to 90% or more were operating at 90% of their designed capacity, namely Dubai, Tokyo Haneda, Indira Gandhi and Soekarno- or more Hatta, with capacity expansion plans in place for Indira Gandhi (15m more passengers by 2021) and Soekarno-Hatta (37m more passengers by 2025). Dubai has long-term plans to expand its second airport, Dubai World Central, to handle 160m passengers versus its current capacity of 26m (by 2018).

Targeted expansion for While the Kuala Lumpur International Airport (KLIA) as a whole is operating below full KLIA capacity, there is disparity between terminals as the headroom is only at the klia2 which began operating in 2014. The KLIA main terminal is handling near its designed capacity of 30m pax in 2018, with notable points of congestion, such as at its arrival hall and contact piers, and these congested points have received negative public feedback. Malaysia Airports Holdings has set out plans for procedural optimisation and some infrastructure upgrades to improve processing times, though the group expressed that more substantial expansion plans may be implemented over the next five years. DBS Asian Insights SECTOR BRIEFING 69 18

Top 20 busiest airports in Asia (2017) – capacity, passenger movements and expansion plans

Rank Region Busiest airports in Asia Pax (m) Capacity Deficit (m) Additional Completion (m) capacity date 1 China Beijing Capital 96 80 -16 NA NA 2 UAE Dubai International 88 90 NA NA 3 Japan Tokyo Haneda 85 90 8 2020 4 China Hong Kong 73 72 -1 30 2027 5 China Shanghai Pudong 70 60 -10 20 2020 6 China Guangzhou Baiyun 66 35 -31 45 2018 7 India Indira Gandhi 63 70 15 2021 8 Indonesia Soekamo-Hatta 61 63 37 2025 9 Singapore Singapore Changi 62 82 50 2030 10 Korea Seoul Incheon 62 72 28 2030 11 Thailand Suvamabhumi 60 45 -15 45 2020 12 Malaysia Kuala Lumpur 59 75 10 NA 13 China Chengdu Shuangliu 50 50 NA NA 14 India Mumbai Chhatrapti Shivaji 47 45 -2 5 2020 15 China Shenzhen Bao'an 46 45 -1 NA NA 16 Taiwan Taiwan Taoyuan 45 35 -10 10 2020 17 China Kunming Changsui 45 38 -7 22 NA 18 Philippines Manila Ninoy Aquino 42 30 -12 45 2020 19 China Shanghai Hongqiao 42 40 -2 NA NA 20 China Xi'an Xianyang 42 50 30 2022

Source: Airports Authority of India, *April 2017 to March 2018 DBS Asian Insights SECTOR BRIEFING 69 19

Large investments needed over two decades

ATA projects that air passenger traffic in the Asia Pacific region will increase by 2.2bn pax over the next two decades. Assuming that 80% of that travel is within Asia Pacific with the remaining being inbound or outbound flights from the region, this implies that additional airport capacity totalling nearly 4bn passenger movements will be needed to Imeet this demand.

Mega airports will We estimate that in 2017, the top 20 airports in Asia Pacific handled over 40% of total continue to drive air passenger traffic in the region, while the top 50 airports handled over 70% of traffic. growth in the region… Each of these top 50 airports handled between 20m to over 95m passengers in 2017 (see appendix for details) with an aggregate of 2bn passenger movements, which grew by 7.9% y-o-y from 2016.

There were another 30 or more airports in Asia that handled over 10m passengers in 2017, which meant that the top 80 airports in the region handled about 85% of the total passenger traffic, in our estimates.

We believe that mega airports, which we define as airports that handle over 10m passengers a year, will continue to be the preferred and primary infrastructure to accommodate and support Asia’s rapid air-travel growth.

…supplemented by At the same time, the proliferation of low-cost carriers has also seen an increasing clamour secondary airports for low-cost terminals, which cost a fraction of mega airports (in terms of both absolute price and cost per passenger handling capacity) to construct. Low-cost terminals are also more suitable as secondary airports or for emerging cities keen to develop or boost their local economy.

The low-cost dilemma Smaller airports are cheaper to build on an absolute dollar basis and on a per pax handling capacity basis, but at the same time, they struggle to be profitable. In contrast, larger airports are expensive but often provide superior returns. (This is discussed in further detail later in the report.) Besides the fact that major airports are often home to a large catchment area and attract airlines as hubs, the reality that smaller airports often have low or negative returns means that investment in airports is largely concentrated on larger projects and should continue to be so. DBS Asian Insights SECTOR BRIEFING 69 20

We examine a number of proposed airport projects in Asia to extrapolate the amount of investment needed in airport projects to meet the projected demand for air travel in the region. These are airport projects that have been proposed or announced with details on the expected project cost and passenger handling capacity.

These include, a) 16 new airport projects that have a proposed capital expenditure of over US$2bn, with an aggregate project cost of US$117.3bn and total passenger handling capacity of 887m, b) 19 airport expansion projects with an aggregate project cost of US$71.1bn and total passenger handling capacity of 513.5m and, c) 21 new airport projects that have a proposed capital expenditure of below US$2bn, with an aggregate project cost of US$10.6bn and total passenger handling capacity of 140.6m. These are provided in detail subsequently.

Proposed airport projects in Asia Project Type Number Capex (US$bn) Capacity (m)

New Airports >US$2bn 16 117.3 887.0 Airport Expansions 19 71.1 513.5 New Airports

Source: Various news reports

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 two decades, we derive an estimated total investment of US$516bn that will be needed for Asia’s airports. Given rising land acquisition and construction costs over time, there is likely to be upside risk to this estimated figure.

Average cost per pax for proposed airports in Asia (US$ per pax) 160.0 138.4 140.0 132.3 Weighted Average 129.1 120.0 100.0 75.3 80.0 60.0 40.0 20.0 0.0 New Airports >US$2bn Airport Expansions New Airports

Source: DBS Bank Estimates DBS Asian Insights SECTOR BRIEFING 69 21

229 new airports under Based on data from CAPA, there were 229 new airport projects being planned in Asia as of construction in Asia March 2018. This is more than the combined total of the rest of the world, underlining the growth trajectory and potential of the sector.

Number of airports under construction (Mar 2018)

250 229

200

150

100 58 57 46 50 29 10 0 Asia Europe Africa Latin Middle North America East America

Source: CAPA, DBS Bank

Based on the same data from CAPA, these new airport projects were worth a total of US$145bn, which was more than double that of Europe’s. Investments in airports under construction – US$m US$mn 160,000 145,191 140,000

120,000

100,000

80,000 67,499 60,000

40,000 23,242 20,608 20,000 7,731 3,662 - Asia Europe Latin Africa Middle North America East America

Source: CAPA, DBS Bank DBS Asian Insights SECTOR BRIEFING 69 22

The table below lists 16 major new airport projects that are under construction or that have been proposed. Of these, nine have an eventual passenger capacity of over 50m passengers while others leave room for further growth. For a list of smaller new airports, please see the appendix.

New airports (proposed and under construction) in Asia with project value over U$2bn

Country City Airport Investment Initial Estimated Final Estimated (US$bn) Capacity Completion Capacity Completion (m) (m) China Beijing Beijing Daxing International Airport 13.8 45 2019 75 2025

Chengdu Chengdu Tianfu International Airport 12.0 40 2019 90 2040

Qingdao Qingdao Jiaodong International Airport 5.2 35 2025 55 2045

Foshan New Foshan Airport 5.1 - - 30 2022

Dalian Dalian Jinzhouwan International Airport 4.3 20 2018 20 NA

Hohhot New Hohhot Airport 3.8 - - 30 2018

Sanya New Sanya Airport 14.5 38 2025 70 2045

Xiamen Xiamen Xiangan Airport 2.1 45 2020 75 2040

India Mumbai Navi Mumbai international Airport 2.4 10 2021 10 2032

Delhi Second Delhi Airport 2.3 5 2022 30 2032

Indonesia Tangerang Soekarno-Hatta Airport II 6.8 - - 70 2024

Bali Buleleng Airport 3.7 - - 32 2019

Philippines Manila New Manila Airport 13.7 - - 100 2025

Manila Sangley Point International Airport 9.3 25 2021 75 2035

South Korea Jeju New Jeju Airport 3.6 - - 25 2025

Vietnam Ho Chi Minh City Long Thanh International Airport 14.8 25 2025 100 2050

Source: Various new sources and Airport Authorities, DBS Bank estimates DBS Asian Insights SECTOR BRIEFING 69 23

Meanwhile, based on data from CAPA, there were 339 airport expansion projects being planned in Asia as of March 2018. This compares with 208 projects in North America and 266 in Europe. Number of airports under expansion (Mar 2018)

400 339 350

300 266 250 208 200

150 104 100 66 43 50

0 Asia North Europe Latin Africa Middle America America East Source: CAPA, DBS Bank

Based on the same data from CAPA, these expansion projects were worth a total of US$171bn, higher than North America’s US$120bn and Europe’s US$105bn.

Investments in airport expansions – US$m

180,000 170,821 160,000 140,000 120,428 120,000 105,359 100,000 86,564 80,000 60,000 40,000 18,915 23,244 20,000 - Asia North Europe Latin Africa Middle America America East

Source: CAPA, DBS Bank DBS Asian Insights SECTOR BRIEFING 69 24

Asia’s mega airports The table below lists 19 major airport expansions that are ongoing or being planned. Of are undergoing these, six already have a passenger handling capacity of over 50m while four airports will expansions eventually reach a capacity of 100m or more passengers per annum.

Major airport expansion projects (proposed and under construction) in Asia

Airport Investment Current New capacity Addition Estimated (US$n) capacity completion

Hong Kong International Airport 18.3 72 102 30 2024

Chongqing Jiangbei International Airport 4.7 70 84 14 2025

Shanghai Pudong International Airport 3.0 60 80 20 2019

Guiyang Longdongbao International Airport 3.2 16 32 16.5 2019

Fuzhou Changle International Airport 2.6 13 29 16

Lanzhou Zhongchuan Airport 2.6 10 30 20 2020

Guangzhou Baiyun International Airport 2.1 35 80 45 2018

Haikou Hainan Meilan International Airport 0.1 23 35 12 2020

New Delhi Indira Gandhi International Airport 2.0 70 85 15 2021

Mumbai Chhatrapati Shivaji Maharaj International Airport 2.0 47 52 5

Jakarta Soekarno-Hatta International Airport 4.0 43 100 57 2025

Clark International Airport 0.2 4 12 8 2020

Manila Ninoy Aquino International Airport 3.0 31 72 41 2020

Singapore Changi Airport 10.0 82 132 50 2030

Busan Gimhae Airport 5.3 17 38 21 2026

Seoul Incheon International Airport 3.5 72 100 28 2020

Bangkok Suvarnabhumi International Airport 2.6 45 90 45 2020

Hanoi Noi Bai Airport 0.5 15 60 45 2030

Tan Son Nhat International Airport 1.3 25 50 25 2025

Source: Various new sources and Airport Authorities, DBS Bank estimates DBS Asian Insights SECTOR BRIEFING 69 25

Airport expansion plans by region North Asia China In the 13th Five-Year-Plan (FYP) proposed by the People’s Republic of China (PRC) (ex-HK, MO, TW) government, China is targeting to have 260 civil airports by 2020. By the end of 2017, there were 229 airports with licences in China but massive airport construction plans are still on the way. In 2016, China invested a total amount of RMB66bn (c.US$9.5bn) in airport development. To finance the construction and upgrade of civil airports, the Chinese government introduced the Civil Aviation Development Fund collected from passengers/cargo/airlines. The fund’s budget reached RMB13.3bn in 2017, as 20% of total investment. Local governments also issued bonds to support airport projects. Huge bank loans made up for the rest.

No. of civil airports in China (2006-2020)

300

250

200

150

100

50

0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017E 2018E 2019E 2020E

Source: Wind, 13th FYP, DBS Bank’s estimates

Hong Kong As part of the Hong Kong 2030+ Plan, the Hong Kong International Airport initiated the construction of a triple-runway system in 2016, which is expected to be completed in 2023. The project is a complex mixture of land reclamation, a new terminal and third runway. It is estimated to cost around HK$141.5bn (c.US$18bn), funded by bonds (49%), airport development fees charged to departing passengers (18%) and the airport itself (33%).

South Korea South Korea’s primary Incheon International Airport has undertaken progressive expansion plans led by the government-held Incheon International Airport Corporation (IIAC), with the latest Phase 4 set to be completed by 2023. Plans to partially privatise (divesting stakes) IIAC were proposed as early as 2008 but met negative public response. To accommodate rising levels of tourist arrivals, a second new Jeju airport has also been proposed by the Ministry of Land, Infrastructure and Transport, with targeted investment costs of US$3.6bn and completion by 2025. DBS Asian Insights SECTOR BRIEFING 69 26

Japan Airport infrastructure is relatively mature in Japan with progressive expansions primarily being undertaken at key connecting airports. Narita International Airport Corporation is currently planning to add a third runway with a targeted completion by 2028 and expand its LCC terminal’s (completed in 2015) handling capacity to 15m pax by 2021 from 7.5m p.a., via increased lobby area and improved equipment. However, no investment costs have been announced. The Airport HD Corporation also intends to explore a LCC terminal after it commences operating the in April 2019 as part of its privatisation plans.

South Asia India The Indian government had announced plans to double the number of airports (from 100 to 200) with a total investment amount of US$60bn to meet the surging demand. The Aviation Authority of India (AAI), the state-owned enterprise also planned to commence the ‘mega projects of new terminals and buildings’ this year, as reported by The Economic Times. The private sector will form the bulk of the investment.

West Asia Turkey Turkey is on track for first-phase completion and opening of the Istanbul Grand Airport, slated to replace its current primary airport the Ataturk International Airport. Built by a consortium of local developer and operators, the Istanbul Grand Airport will open with an initial capacity of 90m pax p.a., though more funding will be required for further expansion. Turkey is planning for it to be the largest airport in the world by 2028, capable of serving 200m pax p.a. with a projected total investment cost of USD36.4bn.

Southeast Asia Indonesia Airport development is part of the Indonesian government’s key strategies. According to the Indonesia Investment Coordinating Board, the new government has nine priorities in its agenda. One of the key programmes is to develop 15 new airports by 2019. The crowded Soekarno- Hatta Airport serving the key Jakarta area has expansion plans of up to US$6bn for capacity enlargement and air traffic management improvement to global standards. There is potentially a new Soekarnao-Hatta Airport II in the coming years as well. According to Bloomberg, only a small portion of funding will come from the government, with the bulk committed by private investors, including those from China.

Malaysia Malaysia Airports Holdings’ (MAHB) near-term focus is on improving the quality of airport services and facilities, particularly to comply with the newly established Quality of Service (QoS) benchmarks. While passenger volumes are still below capacity at the primary KLIA/ klia2 airports, there are acknowledged choke-points which will require expansion or enhancements to improve passenger flow and comfort. The group is expected to require an additional RM200-300m (USD50-70m) over 2-3 years in capex for the purpose of quality improvement. However, capacity increases at other smaller international airports will be required (Penang, Kota Kinabalu, Langkawi, Subang), which is estimated to need up to RM400m (USD100m) in capex. MAHB largely intends to self-fund capex if feasible DBS Asian Insights SECTOR BRIEFING 69 27

as its Operating Agreement (OA) requires a larger revenue share rate if capex is borne by the government but amendments to the OA are expected to be finalised in the coming year after a review with the new federal government.

Philippines In 2017 the ‘Build Build Build’ programme was released by the Philippines government. A Php8 trn (c.US$158bn) investment will be rolled out for the infrastructure program over the next five years including six airports as flagship projects. The Clark International Airport expansion is the first project of ‘Build Build Build’ programme, which will be funded mainly by the government and Official Development Assistance (ODA), likely from China and Japan, according to Forbes.

Singapore Singapore Changi Airport is already working on its third runway and a fifth terminal is expected to be completed by 2030 as part of the ‘Changi East’ project. To fund the expansions, the Changi Airport Development Fund was set up in 2015, which collects from passengers, airlines and the Changi Airport Group. The Singapore government has also committed S$9bn to the project via the fund.

Thailand Airport of Thailand (AOT) is undertaking the Phase 2 expansion of its key Bangkok Suvarnabhumi airport to double capacity to 90m pax p.a. by 2021, involving investment of up to Bt125bn (US$3.8bn). Initial plans for secondary airports at Chiangmai and Phuket have also been proposed with tentative capex of Bt120bn for both.

Vietnam The Vietnamese government, via its Master Plan to 2020, is planning to upgrade and expand most of the 23 existing airports in the country as well as potential new airports, with a projected budget of up to US$13.4bn. These projects will be funded by a mix of government budget, domestic and foreign investment as well as overseas development aid, according to the Civil Aviation Administration of Vietnam. DBS Asian Insights SECTOR BRIEFING 69 28

The increasing role of private capital in Asia’s airport development

hile investment in airports in Asia has traditionally been thought of as the domain of the public sector, the large investment required, as well as the allure of steady returns and commercial revenue opportunities, is W attracting more private capital into the sector. The staggering investment needed to build airport infrastructure is a strong motivation for governments to turn to private capital as a supplementary, or even primary, means of funding such projects.

In addition to leveraging on private capital to reduce the funding burden on governments, airport privatisation can also help to increase efficiency, both operationally and financially, and improve customer satisfaction. It can also help promote local trade and tourism while supporting local economic growth. Other benefits would also include the creation of a more dynamic labour force as well as airport operations that are more responsive to market changes.

Generally, there are three airport privatisation models, 1) full private ownership, 2) partial privatisation and, 3) long term concessions:

Full private ownership This includes airports that the government has fully sold or transferred ownership of to the private sector. A good example of this is in Australia, where airport leases for 50 years with an option for an additional 49 years were sold to the private sector. In 1997, Phase 1 of Australia’s Airport Privatisation Program, which included Brisbane, Melbourne and Perth was completed, which raised proceeds of A$3.3bn with direct cost of sales of less than 5%. This helped to substantially lower the government’s financial burden.

A much rarer example of a fully private owned airport in Asia, not involving the government at any stage, would be the Samui Airport which was conceptualised, developed and funded solely by . DBS Asian Insights SECTOR BRIEFING 69 29

Partial privatisation The best known and a common example of this in Asia would include airports (or airport groups) that are publicly listed, where the government retains a majority or substantial stake with public and institutional shareholders as minority owners. This would include Airports of Thailand, Malaysia Airport Holdings Berhad, Beijing Capital International Airport, and the airports in Shanghai, Guangzhou and Shenzhen. Undoubtedly, the access to private capital and corporate debt has helped these airports fund their rapid development over the years.

With many governments concerned about giving up control over key public facilities, public-private partnerships (PPP) are also popular in Asia as a means of funding airport investments. Partial stakes maintained by the government ensure that they have a certain degree of control and influence, while managing public perception. For example, India’s government has developed new airports or modernised existing airports on a PPP basis in Delhi, Mumbai and Hyderabad.

Long term concessions In a bid to raise money, improve efficiencies, promote the growth of the airport sector, or all of the above, some governments in Asia are now exploring the sale of long-term concessions to the private sector. In 2011, Japan’s Ministry of Land, Infrastructure, Transport and Tourism announced that it would privatise all 19 national airports by 2020. Transactions have picked up noticeably in recent years as 2020 approaches. For example, on 1 April 2016, VINCI Airports (40%) and ORIX Corporation (40%) along with other investors (20%) won a 44-year concession to operate Kansai International and Itami airports for c.€2.1bn, of which an estimated 70% is debt-funded.

In some cases, the government remains the owner and is responsible for funding capital expenditures but signs a management contract with a private operator for a limited period (e.g. 10 to 20 years).

Smaller airports One key issue that stands out for the airport industry is that profitability and returns are struggle to be highly skewed towards large or major airports, with many of the small airports being profitable unprofitable. According to the Airports Council International (ACI), the global return on invested capital in airports in 2016 was 7.3%, which was an improvement from 6.3% achieved in 2015. However, in ACI’s 2015 Economics Report, it was reported that 69% of airports globally were loss-making.

Generally speaking, smaller airports handling less than 1m passenger movements a year (which makes up 80% of all airports globally) struggle to be profitable, given the intensive capital requirements even for basic airports. A case study on Japanese airports (courtesy of Japan’s Ministry of Land, Infrastructure, Transport and Tourism or MLIT) illustrates this point quite well:

Using 2016 financial data provided by the MLIT, we plot the revenue and EBITDA of various airports under the MLIT in 2016. We excluded the four largest airports, i.e. Tokyo, DBS Asian Insights SECTOR BRIEFING 69 30

Shin- Chitose (), Fukuoka and , which all have revenues above 16bn yen and positive EBITDA. A clear trend emerges – airports with higher revenue (driven by higher passenger throughput) are more likely to be profitable than the smaller airports.

Revenue vs EBITDA for selected airports in Japan (2016)

1,500

Hiroshima

1,000 Matsuyama Miyazaki 500 Kagoshima

) Tokushima Komatsu

Miho Kochi en (m Hakodate Iwakuni Takamatsu 0 01 ,000 2,000 3,000 4,000 5,000 6,000 7,000 Misawa HyakuriKitakyushu Oita EBITDA Y Okadama Niigata -500 Kushiro

-1,000 Wakkanai

-1,500 Revenue Yen (m)

Source: Ministry of Land, Infrastructure, Transport & Tourism (Japan)

Therefore, there is considerable difficulty in attracting private investments to smaller, secondary airports.

Portfolio bundling One approach that governments are utilising to privatise smaller airports is to bundle smaller airports into a portfolio of assets that also include larger, more attractive airports to entice investors. A good example of this is happening in Japan, where five small airports with less than 2m passenger movements (based on 2015 figures) are being bundled with the Shin-Chitose (Sapporo) airport, which handles over 20m passengers a year, as a ‘One Hokkaido’ package. Indeed, this has attracted a large number of interested bidders internationally and domestically and could pave the way for Japan’s airport privatisation program to blossom. DBS Asian Insights SECTOR BRIEFING 69 31

Passengers handled by ‘One Hokkaido’ airports in 2015

One Hokkaido 2015 pax Shin-Chitose (Sapporo) 20,461,531 Hakodate 1,772,052 Asahikawa 1,148,825 Memanbetsu 1,088,195 Kushiro 877,242 Obihiro 605,703 Wakkanai Hokkaido 197,500

Source: Ministry of Land, Infrastructure, Transport & Tourism (Japan)

The logic behind the bundling of smaller airports with larger ones, especially those within the same region, is that the smaller airports could benefit from the economies of scale (purchasing, administration and management expenses etc.), co-operation opportunities and the reinvestment of returns from the larger airports into the portfolio. In addition, the private sector would likely be more innovative, and financially motivated, to improve the operations of the small airports. The private sector may also be receptive to investing in smaller airports that could improve the value of their vested assets, such as nearby real estate or tourism related ventures. Privatisation opportunities in Asia

China The funding structure of airports in China is mainly composed of government and self-raised capital. Part of the government capital is contributed by the Aviation Development Fund（ 民航发展建设基金）which is charged to passengers to support airport development country-wide. Meanwhile, the central and local governments will also allocate budget for funding of airports. Self-raised capital includes airport group funds and funding from other financing channels, such as debt and equity. Capital structure for China’s civil airports

Project capital Financing capital Government capital Non-govt capital Bank loan Corporate bond Aviation Development Fund Corporate self-owned fund Equity funding Government financial appropriation

Self-raised capital

Source: CAAC DBS Asian Insights SECTOR BRIEFING 69 32

In 2012-2017, total airport fixed asset investments in China grew at a CAGR of 8.3% and reached US$11.4bn. Nearly half of the investments came from the government with the Aviation Development Fund contributing c.30%. The proportion of funds from government capital declined from 67% in 2015 to 43% in 2017, while self-raised capital share rose from 33% to 57%, or roughly US$6.5bn.

Airport fixed asset investments in China (US$bn)

12 Self-raised capital

10 Aviation development fund

33% 8 57% 40% 50% 41% 6 57% 30% 28% 4 28% 17% 15% 14% 2 37% 33% 28% 29% 31% 33% - 2012 2013 2014 2015 2016 2017

Source: Wind, CAAC

In 2016 the Civil Aviation Administration of China (CAAC) published an opinion paper encouraging a further opening-up of airports to private capital. In September 2018, CAAC announced the first batch of 28 airport projects to welcome private investment. Among the 28 projects, 11 of them have already secured investors with eight airport construction projects. Another 17 projects are still being promoted to private capital. The total investment of these projects is US$16.8bn and includes both existing and new projects. More projects are expected to be open to the private sector over time.

Status of China’s airport privatisation program

Type Progress Projects US$bn Airport Construction Indentified Private Investors 8 7.5 In promotion 2 3.7 Airport Support Indentified Private Investors 3 1.6 In promotion 15 4 Total 28 16.8

Source: CAAC DBS Asian Insights SECTOR BRIEFING 69 33

In the long term, we can expect government participation in airport funding to be reduced as multi-source financing gains more ground. Equity funding, especially the PPP model is a preferred channel as it can help ease financial burden on local governments.

Japan In June 2018, Japan broadened the scope of its privatisation plans to cover all 97 airports across the country, which include 5 Class 1 airports (mainly for international air travel), 24 Class 2 airports (mainly for domestic air transport), and 53 Class 3 local airports, as well as others used for defence and local governments.

Of these, eight handled over 10m passengers in 2015, nine handled between 2m to 10m passengers, and a further 11 handled between 1m to 2m passengers, with 14 handling between 500,000 to 1m passengers. While it would be difficult to privatise all of the smaller airports, the bundling of small airports with a larger, more profitable airport like the ‘One Hokkaido’ package could pave the way for a significant number of Japan’s airports to be privatised.

Having already completed several transactions and armed with a determination to push the privatisation plan through with a clear transaction framework and process, it is likely that a lot more transactions in Japan will be sealed in the next few years.

India Privatisation in the country has seen little progress since the Delhi and Mumbai airports transactions, with frequent changes in the legal framework, terms and conditions and even a change in the government, thereby delaying the country’s airport privatisation program. Recently, India’s government was reported to be looking at the privatisation of eight airports - Lucknow, Ahmedabad, Chennai, Jaipur, Kolkata, Guwahati and Pune. It was reported that the civil aviation ministry is currently having discussions on setting the framework for the potential bids of these airports. The government is keen to keep costs and passengers, as well as aircraft fees low but it would have to balance this with providing bidders from the sector an attractive enough return for them to be interested.

It was reported by CAPA in August 2018 that the Ministry of Civil Aviation had proposed a new financial model for new airport development projects under the NextGen Airports Type Progress Projects US$bn For Bharat (NABH) Nirman scheme with the aim of attracting foreign investment to new Airport Construction Indentified Private Investors 8 7.5 airport projects such as the Jewar Noida International Airport, and New Pune International Airport. Some key highlights of the new financial model include In promotion 2 3.7 a) extension of airport concession contracts from 30 to 40 years, b) airport tariffs to be Airport Support Indentified Private Investors 3 1.6 determined by Maximum Blended Aeronautical Yield in terms of Indian Rupees (INR) per In promotion 15 4 passenger, rather than capital expenditure. Total 28 16.8 Philippines There have been several unsolicited proposals for airports in the country in 2018, and two have recently won Original Proponent Status (OPS). Firstly, a consortium of seven of DBS Asian Insights SECTOR BRIEFING 69 34

the Philippines’ top conglomerates, with Changi Airport acting as a technical consultant (NAIA Consortium), confirmed in September 2018 that the Department of Transportation had awarded it the OPS to rehabilitate, develop, operate and maintain the Ninoy Aquino International Airport (NAIA). The project is said to be worth P102bn for a period of 15 years. In the same month, Aboitiz InfraCapital Inc (AIC) was granted OPS on its proposal to operate the New Bohol International Airport, located in Panglao Island. New Bohol Airport is projected to handle two million passengers per year and is intended to replace the existing Tagbilaran Airport.

Once approved by the National Economic and Development Authority Board, the unsolicited proposal will undergo a Swiss Challenge, where other private groups are invited to make a competing offer, with the holder of the OPS having a right to match the offer. Besides the two offers above, offers have been made by Mega7 Construction Corp for Kalibo Airport for P12 bn, and by Chelsea Logistics Corp for Davao Airport for P49bn. Meanwhile, the government is also accepting proposals for Iloilo, Laguindingan and Bacolod airports.

Indonesia According to a presentation by PricewaterhouseCoopers PWC at the Global Airport Development (GAD) Conference in Singapore in 2018, there are at least 200 airports in Indonesia that need to be expanded to support economic growth and tourism development and more investment is needed to support this. Currently, almost all of the airports are owned and operated by the government, while 26 of the 27 busiest airports are operated by Angkasa Pura I & II, which are Indonesian state-owned entities (SOEs).

The Ministry of Transport plans to build 10 new airports under PPP schemes, and some airports that are already under consideration include Komodo, Kediri, Batam and Jayapura. At the same time, a new mechanism called ‘Limited Concession Scheme’ has also been developed, which is aimed towards improving the performance of existing infrastructure by offering concessions to the private sector. This will also help funds for the government or SOEs. Currently, Medan and Lombok airports are under consideration as part of this plan. For privatisation to successfully take off in Indonesia, the rules of engagement need to be clearly defined and streamlined, which will help attract the necessary private sector funding to help Indonesia meet its airport infrastructure needs. DBS Asian Insights SECTOR BRIEFING 69 35

Fund raising lessons

Airports of Thailand’s early access to equity funding helped raise its game

Airports of Thailand (AOT) became a public company in 2002 under the Corporatisation Act B.E. 2542 with the Ministry of Finance (MOF) as the sole shareholder. Its paid-up share capital was increased from Bt5.7bn to Bt10bn in 2003. A year later, it was listed on the Stock Exchange of Thailand (SET) with a total registered capital of Bt14.3bn and the MOF’s stake was reduced to 70%, but AOT remains a SOE because government agencies have over 50% stake. Under SOE status, AOT must operate within government rules and regulations. The decision-making process tends to be lengthy and AOT is less flexible than private companies. However, being an SOE also has its advantages such as lower funding costs and better access to funding with the government effectively acting as a guarantor.

IPO was mainly to fund The main objective of AOT’s initial public offering (IPO) was to find another source to fund the new Suvarnabhumi the hefty Suvarnabhumi airport project Phase I (budget of Bt125bn) project, which was airport project funded by equity capital (44%) and foreign loans borrowed in Japanese yen from overseas financial institutions (56%). The new airport was targeted as Thailand’s new international and domestic aviation hub catering for another 45m passengers p.a. Suvarnabhumi Airport was officially opened on 15 Sep 2006.

Under government rules and regulations, AOT’s cash flows from operations cannot be used for other purposes except for airport expansion. As AOT has no significant investment in any airport expansion due to several delays since the Suvarnabhumi airport Phase I, AOT was sitting on a pile of cash of Bt65.7bn as at end 3QFY18F. Therefore, the funding source for its upcoming major capex cycle- the Suvarnabhumi airport expansion Phase II (costing about Bt62.5bn) should be easily funded by its cash pile and perhaps some debt.

Increasing aeronautical One way to defray expenses related to the upcoming airport expansion is to obtain service fees is another additional revenue (further boosting internal operating cashflows) from hiking aeronautical potential source of service fees such as parking, landing and passenger service charges. However, this funding requires quite a tedious process as fee hikes must be approved by both the Civil Aviation Authority of Thailand and the Ministry of Transport. Such a hike was approved only once in 2007 for AOT where international passenger service charge was raised by 40% to Bt700/passenger and doubled to Bt100/passenger for domestic passengers. AOT expects to seek an approval for another fee hike after the completion of the Suvarnabhumi airport expansion Phase II expected in FY20F-FY21F. DBS Asian Insights SECTOR BRIEFING 69 36

AOT’s operating cashflow, net capex, and D/E ratio

Bt m Debt-to-capital 40,000 100%

80% 30,000 60% 20,000 40% 10,000 20%

0 0% FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17

Source: Company, DBS Bank

Samui Airport Property Fund – a lesson for secondary airports

Samui Airport was built in 1982 by Bangkok Airways, a private enterprise, and was the 7th busiest airport in Thailand in 2017, handling over 2.6m passengers. In November 2006, Bangkok Airways sold a 30-year concession of the key assets of Samui Airport, including the land, runways, parking aprons, passenger terminal and other constructions to Samui Airport Property Fund (SPF) which was listed on the Thai Stock Exchange and raised over Bt5.5bn for Bangkok Airways. (Bangkok Airways held a 37.15% stake in the fund upon IPO.)

SPF holds the leasehold rights to operate Samui Airport for 30 years (2006-2036) and has sub-leased the airport back to the operator (Bangkok Airways) which gives SPF potential upside with downside protection. That is, SPF’s revenue will be in line with the number of passengers and aircrafts to and fro Samui Airport. Moreover, SPF has a minimum guaranteed revenue of 6% of the fund size from the sponsor. All operating expenses and capex are borne by the operator and the fund itself incurs annual-only fund expenses and any increases in revenue would flow directly to the bottom line.

Samui Airport handled just over 1.4m passengers in 2006, the year SPF completed its IPO. While it was certainly not very profitable at that time given its size, its owner still managed to structure a transaction using its key airport assets that was well received by investors, had a limited concession of 30 years and most importantly raised a significant amount of money for the airport owner. This certainly could pave the way for many of the region’s smaller or secondary airports on fund raising. DBS Asian Insights SECTOR BRIEFING 69 37

Malaysia Airport Holdings Berhad – a pioneer in tapping the equity markets

Malaysia has an established history of flexibility in terms of funding its airport infrastructure, as Malaysia Airports Holdings (MAHB) holds the distinction of being the first Asian listed airport operator after entering the Kuala Lumpur Stock Exchange in 1999. This had followed a bill passed by the Malaysian parliament in 1991 to separate the regulatory and operational functions of its civil aviation unit. The initial listing raised RM495m (US$130m at the time) – RM275m to the group and RM220m to the government – and the government retained 72% ownership in addition to one ‘special share’ to ensure that national and government interests are maintained. Government interest in MAHB, held via sovereign investment fund Khazanah Nasional, has since been pared down to 33% (at 1H18) over the years via stake placements and sales for the purpose of realising investment gains and fund raising.

Cross-subsidisation MAHB is responsible for operations of most (39 today) airports in Malaysia, on a ‘cross- model impacted subsidisation’ model given that the majority is operated at a loss. However, the Operating financing decisions Agreement held with the government allows for maintenance capex to be borne by the government, at the cost of increasing the revenue share % (called user fees). Thus far, MAHB has generally preferred to utilise internally generated cash flows for capex rather than increasing the revenue share with the government.

MAHB’s operating cashflow, net capex, and D/E ratio

RM m 2,500 Debt-to-equity 50%

2,000 45%

1,500 40% 1,000

35% 500

0 30% 2010A 2011A 2012A 2013A 2014A 2015A 2016A 2017A

Source: Company, DBS Bank DBS Asian Insights SECTOR BRIEFING 69 38

klia2 and ISG In the group’s last major capex cycle, MAHB had to incur aggregated capex of over investment tapped RM7bn over FY11-FY15 which included RM4bn for the klia2 expansion and RM2.2bn investors and debt for its purchase of the remaining unowned stakes in the Istanbul Sabiha Gokcen airport funding in Turkey. Over the period, the group tapped various funding sources including 1) a 10% private placement raising c.RM1bn, 2) a 1-for-5 rights issue raising RM1.3bn, 3) a Sukuk (Islamic financing, treated as preference capital) issuance of c.RM1bn and 4) build-up of gross debt of RM1.35bn (reaching RM3.85bn from RM1.5bn). In a general sense, MAHB funded its major capex cycle with 38% of debt/fixed rate financing, 37% additional capital raising and the remainder from organic cash flow. This helped maintain the group’s debt- to-capital ratio, staying within the 40-50% band over the years. DBS Asian Insights SECTOR BRIEFING 69 39

Billion-Dollar Whales – Asia’s most valuable airports

he Asia Pacific region is also home to some of the most valuable airports (or airport groups) in the world. Below is a list of airports that are publicly traded in Asia Pacific with a market capitalisation of over US$2bn as at 12 October 2018. In fact, the largest pure play airport company in the world is Airports of TThailand, with a market capitalisation of nearly US$28bn, while the next largest in the region would be Shanghai International Airport and Holdings with market capitalisations of US$15.2bn and US$10.4bn respectively.

Market capitalisation of airports in Asia Pacific (US$m)

Sydney Airport Holdings Pty Ltd 10,433

Malaysia Airports Holdings Bhd 3,356

Airports Corp Of Viet Nam 7,567

Airports of Thailand PCL 27,741

Japan Co Ltd 3,471

Auckland International Airport Ltd 5,532

Beijing Capital International Airport Co Ltd 4,627

Guangzhou Baiyun International Airport Co Ltd 3,404

Shanghai International Airport Co Ltd 15,211

Shenzhen Airport Co Ltd 2,296

Source: ThomsonReuters, DBS Bank estimates

In terms of historical PE valuations, these traded at a wide range of between 12x to 55.9x, with an average of 31.8x. DBS Asian Insights SECTOR BRIEFING 69 40

Key financials for listed airports in the Asia-Pacific (2016) Airport operator Revenue (US$m) PAT (US$m) Hong Kong 2,823 1,474 Seoul Incheon 2,212 988 Changi Airport Group 1,927 619 Airports of Thailand** 1,618 609 Shanghai International Airport 1,193 545 Beijing Capital International Airport 1,416 366 Sydney Airport 1,141 269 Baiyun Airport 1,000 236 Angkasa Pura II 606 150 Angkasa Pura I 538 106 Japan Airport Terminal* 2,016 105 Shenzhen Bao'an 491 100 Malaysia Airport Holdings Berhad 1,082 55 Source: Company Annual Reports, DBS Bank estimates Applying the peer average historical PE of 31.8x to the earnings of unlisted airports in the region yields several companies worth potentially tens of billions (US$) and a couple more that could be valued at several billion. We profile some of these in the next section. Potential market value of selected airports (US$m)

1,800 Hong Kong 1,600 Intl Airport, 46,888 1,400

Seoul 1,200 Incheon Intl Airport, 1,000 31,429 800 Changi 600 Airport Group, 400 19,669 Angkasa Pura II, 200 3,374 Angkasa Pura II, 4,776 0 01 ,000 2,0003 ,000 4,000

2017 Revenue (US$m) Source: DBS Bank estimates DBS Asian Insights SECTOR BRIEFING 69 41

Changi Airport Group – Setting the standard

More than a gateway In addition to facilitating travellers to and from Singapore, Changi Airport is a major to Singapore air hub in Asia, and indeed globally – being the sixth busiest airport in the world for international traffic. According to the Changi Airport Group, as at 31 December 2017 the airport connected passengers to over 400 cities in about 100 countries and territories around the world and served over 100 airlines. In 2017, Changi Airport was the 18th busiest passenger airport in the world (9th in Asia), and the 12th busiest cargo airport globally (7th in Asia). Passenger movements at Changi Airport grew at a 5.2% CAGR from 1998 to 2017, reaching 62.2m passengers in 2017. It also handled over 2m tonnes of air freight in 2017.

Passenger movements at Changi Airport (m pax)

70.0 62.2

60.0

50.0

40.0

30.0 23.8

20.0

10.0

0.0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Source: Changi Airport Group

Based on departing seats by country, the top markets for Changi Airport are Indonesia, Malaysia, China, Australia and Thailand. This is followed by India, Hong Kong and Japan. DBS Asian Insights SECTOR BRIEFING 69 42

Departing seats by country at Changi Airport For the week commencing 1 Oct 2018 Indonesia Other 13% 23%

Malaysia 11%

Vietnam 4% Philippines 4% China 11% Japan 4% Hong Kong 5% Australia India 9% Thailand 7% 9% Source: CAPA – Centre for Aviation and OAG

Numerous accolades According to a press release by the Changi Airport Group on 23 Jan 2018, it clinched and awards a total of 26 Best Airport awards in 2017, bringing the total to 557 as of Jan 2018, including the World’s Best Airport accolade at the 2017 Skytrax World Airport Awards, an award it won for the fifth year in a row.

Strong financials Changi Airport Group saw revenue growth of 12.9% y-o-y in its FYE Mar ‘2018 figures to S$2.6bn while profit after tax reached S$835m, compared to a profit after tax (excluding investment impairment losses) of S$767m in FY17. This was driven by contributions from the newly completed Terminal 4.

Revenue & PAT for Changi Airport in S$m (FYE Mar)

3,000 FYE Mar (S$m) Revenue PAT 2,602 2,500 2,305 2,106 2,150 2,164 2,000 1,911

1,500

1,000 896 782 784 835 751 657 500

0 2013 2014 2015 2016 2017 2018

Source: Changi Airport Group DBS Asian Insights SECTOR BRIEFING 69 43

In FYE Mar 2018, 50% of Changi Airport Group’s revenue or c.S$1.3bn, was derived from airport concessions and rental income with less than 40% coming from airport and security services. This was achieved on the back of c.S$2.5bn in concession sales, placing Changi Airport as one of the top three airports in the world for concession sales. Changi Airport has a total concession space of 91,000 sqm with transit malls accounting for 62,000sqm, and there are more than 400 retail and services outlets and about 140 food & beverage outlets. FY18 revenue breakdown in S$ - Changi Airport Group

Others $202,m, 8% Airport services $820m, 31%

Airport concessions and rental Security income services $1,298m, 50% $282 m, 11%

Source: Changi Airport Group

Changi Airport’s Terminal 4 was officially opened on 31 Oct 2017 with a gross floor area of 225,000 sqm. This added a capacity of 16 million passengers per annum to Changi Airport, increasing its total annual handling capacity to 82 million passenger movements.

Construction of Terminal 4 began in early 2017 and cost an estimated S$985m to build.

Actively involved According to a recent interview by its Chairman, Changi Airport Group’s international arm globally is already involved in business activities in some 40 airports around the world, including investment in airports in Brazil, Russia, India and China. It has also conducted planning, design and management consulting for other airports. The consulting involves retail space management, one of Changi’s strengths.

Designed as a lifestyle hub that is linked to Terminal 1 and connected to Terminals 2 and 3 via air-conditioned pedestrian linkways, Jewel Changi Airport is a mixed-use development at Changi Airport which is scheduled to open in 2019, covering a total gross floor area of 134,000 sqm and spanning 10 storeys. Jewel is a joint venture between Changi Airport DBS Asian Insights SECTOR BRIEFING 69 44

Jewel Changi Airport

Source: AFP

Jewel Changi Airport Group and CapitaLand (Singapore’s largest property developer) and will cost S$1.7bn to – staying ahead of the construct. The development will include a rest hotel, aviation facilities, 300 retail and dining facilities, gardens and attractions such as the Rain Vortex (the world’s largest indoor waterfall) the Forest Valley (an indoor garden spanning five storeys) and Canopy Park, among others.

Furthermore, completion of Jewel Changi Airport will also help raise Terminal 1’s capacity from 21m to 24m pax. The development of Jewel Changi Airport could help Changi Airport stay ahead of its competitors as a global aviation hub, further bolstering its position as the world’s leading airport.

Ahead of its opening, Changi Airport Group announced that it had achieved committed occupancies for almost 90% of its retail space (based on NLA of ~575,900 sqft) for Jewel Changi.

Planning for 2030 and Apart from growing capacity and seeking to meet more sophisticated needs, Singapore beyond – Changi East also aims to redefine air travel through the delivery of creative solutions and signature and Terminal 5 experiences. In addition to the construction of Terminal 4 and the development of Jewel Changi Airport, the government’s long-term plans include the Changi East development project (including Terminal 5 or T5). Planning for T5 began four DBS Asian Insights SECTOR BRIEFING 69 45

decades before it’s due to be completed in 2030 (Phase 1), as the government approved the land site for reclamation in 1989.

Totalling 1,080 hectares, the Changi East project includes the construction of a mega terminal (T5) that will be able to handle 50m passengers a year, as well as the operation of a three-runway system, the construction of tunnels and other underground systems, as well as cargo complexes and other supporting infrastructure. T5 will have an initial capacity of 50m passengers per annum by the end of 2030 and could have a capacity of c.70m passengers when it’s fully completed (with the addition of two satellite buildings).

Changi Airport – projected capacity and demand

140.0 Capacity 3% growth 120.0 Actual 5% growth 100.0

80.0

60.0

40.0

20.0

0.0 2000 2002 2004 2006 2008 2010 2012 2014 2016 2 018F 2 020F 2 022F 2 024F 2 026F 2 028F 2 030F

Source: Changi Airport Group, DBS Estimates

While Changi Airport’s utilisation was a comfortable 76% in 2017 with the completion of Terminal 4, it would be facing overcapacity by 2028 assuming just 3% growth in passenger movements and could face overcapacity as early as 2024 if passenger movements grow by 5% per annum. The completion of Terminal 5 by 2030 to increase Changi Airport’s capacity to 135m passengers per annum would be a timely addition to the airport. DBS Asian Insights SECTOR BRIEFING 69 46

Hong Kong International Airport – Heart of Asia

From China to the Hong Kong International Airport (HKIA) is a major hub in Asia serving as the transit of China and world the rest of the globe. It ranked as the 8th busiest airport worldwide (4th in Asia) with annual passengers of 72.9m in 2017 and 3rd busiest airport in terms of international passengers right after Dubai and Heathrow. HKIA now connects over 220 destinations, including 50 mainland destinations by serving more than 120 airlines globally according to Hong Kong . HKIA has also been the largest cargo airport in the world for seven continuous years. Passenger movements at HKIA grew at a CAGR of 5.0% from 1998 to 2017, reaching 72.9m passengers in 2017. It also delivered more than 5m tonnes of air mail and cargo. Passenger movements at HKIA (m pax)

80.0 Actual 72.9 70.0 60.0 50.0 40.0 30.0 20.0 10.0 - 1998 1999 2 000 2 001 2 002 2 003 2 004 2 005 2 006 2 007 2 008 2 009 2 010 2 011 2 012 2 013 2 014 2 015 2 016 2 017 Source: HKIA Based on departing seats by country, the top markets for HKIA are China, Taiwan, Japan, Thailand and South Korea, followed by Philippines, U.S and Singapore. Departing seats by country at HKIA For the week commencing 8 Oct 2018 Other China 22% 21%

Malaysia 3% Australia Taiwan 4% 12% Singapore 4% United States Japan 5% 12% Philippines South Korea Source: CAPA – Centre 5% Thailand for Aviation and OAG 5% 7% DBS Asian Insights SECTOR BRIEFING 69 47

Honours and awards HKIA was selected as the ‘Airport of the Year’ by Asia Transport World in 2016 and 2018. It also won the ‘Best Global Airport’ by Asia Cargo News in 2016 and 2017. HKIA was named the ‘World’s Best Airport’ by Airport Council International from 2007-2011. The Skytrax ranked HKIA as a five-star airport.

Robust profitability HKIA’s revenue grew 18.1% y-o-y in its FYE Mar 2017 to HK$22.0bn while profit after tax rose 38.2% y-o-y to HK$11.5bn.

Revenue & PAT for HKIA in HK$m (FYE Mar) 25,000 Revenue PAT 21,994

20,000 18,184 18,627 14,810 15,000 11,486 10,000 8,374 8,310 6,448 7,270 5,000

0 2013 2014 2015 2016 2017

Source: HKIA

In FYE Mar 2017, HK$9.3bn which accounted of 42% of HKIA’s revenue, was derived from airport concessions and rental income with less than 35% coming from airport and security services.

FY17 revenue breakdown in HK$ - HKIA

Airport services Others $4,990m2 3% $5,692m2 6%

Security services $1,999m9 %

Airport concessions and rental income $9,313m4 2%

Source: HKIA DBS Asian Insights SECTOR BRIEFING 69 48

HKIA is establishing an Intermodal Transfer Terminal (ITT) with five stories covering 22,000 sqm adjacent to SkyPier, which is to be completed by 2022. The ITT is a 360-meter bonded vehicular bridge to link boundary crossing facilities in Hong Kong. Apart from that, with the completion of Tuen Mun-Chek Lap Kok Link, Express Rail Link and Hong Kong-Zhuhai- Macao bridge, the catchment areas of HKIA will be largely improved by enhancing cross- boundary transportation and sea connectivity for the whole Pearl River Delta area.

SKYCITY – airport city. As one of the largest projects in Hong Kong, SKYCITY is an integrated commercial complex covering 25 hectares of land areas beside HKIA. The entire project is expected to be completed by 2027 with retail, entertainment facilities, offices and hotels connected to HKIA. Currently, the first new hotel is under construction and expected to be operational by 2023. The Phase 1 Retail/Dining/Entertainment development tender was done in 2017. With the strong synergistic potential created by the mega infrastructure, the HK government forecasted that there will be a population of more than 120,000 people living in the airport community by 2030.

Master plan 2030 – In 2016, HKIA launched the development plan for its third runway to be completed by three-runway system 2030 to meet the growing appetite of air services. The whole project includes a reclamation of about 650 hectares of land by 2020, the third runway passenger building with more than 280,000 sqm gross floor area (GFA), a 3,800-meter long new runway, a 2,600-metre long new automated people mover system connecting Terminal 2 and the new passenger building, a new baggage handling system (BHS), expansion of Terminal 2 and relative transportation, handling system and facilities. The new passenger building is

expected to serve an extra capacity of 30m passengers annually by the end of 2030 for HKIA. The three-runway system will bring additional economic benefits of about HK$445bn in 2012-2061 according to HKIA’s estimates. The airport will be able to handle 100m passengers and a maximum of 620,000 aircraft movements annually (102 per hour) when the three-runway system is completed. HKIA– projected capacity and demand

140 Capacity 3% growth 120 Actual 5% growth 100 80 60 40 20 0 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2 018F 2 020F 2 022F 2 024F 2 026F 2 028F 2 030F

Source: HKIA, DBS Estimates DBS Asian Insights SECTOR BRIEFING 69 49

HKIA is already While the current capacity of HKIA is 70m passengers per year with Terminal 1 handling 40m operating beyond and Terminal 2 30m, passenger throughput in 2017 reached 73m passengers. Assuming capacity a 3% annual growth rate of passenger volume, we’ll see a large gap between surging demand and limited capacity before 2024 when the new passenger building is completed. The three-runway system might also be too crowded by 2030 given the designed capacity Robust profitability of 100m passengers, let alone a 5% annual growth of passengers. The three-runway system and other airport expansion projects emerging for HKIA are to address the increasing capacity deficit and the need to be fast-tracked. Angkasa Pura I & II

Indonesia’s aviation Airports in Indonesia are operated by the Angkasa Pura I and II Groups, units under the sector continuously Ministry of Transport, the Air Force or regional government. The composition of airports by growing operators is indicated in the diagram below. As of 31st Mar 2018, Angkasa Pura I managed 13 airports in the Eastern Indonesia and Angkasa Pura II managed 14 airports in Western Indonesia. The establishment of the Group of airport operators such as the Angkasa Pura II is to provide airport-related services by optimising the utilisation of resources owned by the Group and practicing good governance.

Total airports in Indonesia by operators

PT. Angkasa Pura II PT. Angkasa Pura I 4% 4%

Regional Government Ministry of Transport 15% (Airport Unit) 57%

TNI 20%

Source: Indonesia Statistics (BPS) DBS Asian Insights SECTOR BRIEFING 69 50

Composition of airports managed

Compostion of Airports Managed PT Angkasa Pura I PT Angkasa Pura II 1 International Airport I Gusti Ngurah Rai – Bali. Soekarno-Hatta International Airport, Tangerang 2 International Airport Juanda – Surabaya. Halim Perdanakusuma Airport, Jakarta 3 International Airport Sultan Hasanuddin – Makassar. Sultan Mahmud Badaruddin II Airport, Palembang 4 International Airport Sultan Aji Muhammad Sulaiman Sepinggan – Balikpapan Supadio Airport, Pontianak 5 International Airport Frans Kaisiepo – Biak Kualanamu International Airport, Deli Serdang 6 International Airport Sam Ratulangi – Manado Sultan Syarif Kasim II Airport, Pekanbaru 7 Syamsudin Noor Airport – Banjarmasin Minangkabau International Airport, Padang Pariaman 8 International Airport Ahmad Yani – Semarang Sultan Iskandar Muda International Airport, Banda 9 International Airport Adisutjipto – . Husein Sastranegara International Airport, Bandung 10 International Airport Adi Soemarmo – Surakarta Raja Haji Fisabilillah Airport, Tanjung Pinang 11 International Airport Lombok – Central Lombok. Sultan Thaha Airport, 12 International Airport Pattimura – Ambon Depati Amir Airport, 13 International Airport El Tari – Kupang Silangit Airport, Siborong-Borong 14 Bandara Banyuwangi (Banyuwangi)

Source: PT Angkasa Pura I & II Groups

Jakarta Soekarno-Hatta International Airport is Indonesia’s main air transportation hub operated by Angkasa Pura II. This airport is the main gateway to Jakarta, catering to domestic, regional and international passengers and cargo services to more than 25 airlines. It serves as a hub to airlines such as , Lion Air and Indonesia AirAsia. In 2017, Soekarno- Hatta International Airport was the 17th busiest passenger airport in the world.

Passenger movements at Jakarta Soekarno-Hatta International Airport grew at a 5.4% CAGR from 2010 to 2017, reaching 60.2m passengers in 2017. It also handled over 500,000 tonnes of air freight in 2017.

Based on departing seats by country, the top markets for Soekarno-Hatta International Airport are Singapore, Malaysia, Thailand, China and Saudi Arabia, followed by Japan, Hong Kong and UAE. DBS Asian Insights SECTOR BRIEFING 69 51

Departing seats by country at Soekarno-Hatta Airport For the week commencing 8th Oct 2018 Other 11.1%

Qatar2 .7% Singapore 27.2% South Korea3 .1% United Arab Emirates 4.5%

Hong Kong 5.3%

Japan 5.6%

Saudi Arabia6 .1% Malaysia 20.5%

China 6.8% Thailand 7.0% Source: CAPA – Centre for Aviation

Awards and recognition According to both Angkasa Pura I and II Groups’ annual report, a total of 26 airport-related awards were achieved in FY2017, including the World’s Most Improved Airports award for Jakarta Soekarno-Hatta International Airport at the 2017 Skytrax World Airport Awards, recognising its improved facilities and quality of services provided.

Angkasa Pura I Angkasa Pura I Group revenue improved by 17.2% y-o-y in FYE Mar ‘2017 to IDR7,194 bn. financials Profit after tax increased by 22.4% to IDR1,420 bn in FY17 compared to IDR1,160 bn in FY16. The Group’s total assets improved by 5.9% to IDR25.1 trn.

Revenue & PAT for Angkasa Pura I in IDRbn (FYE Mar)

8,000 Revenue PAT 7,194 7,000 6,138 6,000 5,250 5,000 4,584 4,000 3,064 3,000 2,000 1,160 1,420 994 842 1,000 675 0 2013 2014 2015 2016 2017

Source: Angkasa Pura I Group DBS Asian Insights SECTOR BRIEFING 69 52

In FYE Mar 2017, 47% of Angkasa Pura I Group’s revenue (c. IDR3,402 bn) was derived from aircraft passenger service charges with less than 30% coming from airport concession and rentals. The higher revenue contribution from passenger service charges could also be attributed to the growth (5-year CAGR: 10.2%) in service charge per domestic passenger departing from Indonesian airports.

FY17 revenue breakdown in IDR bn – Angkasa Pura I

Others1 ,064 15%

Passenger service Concession and 3,402 , 47% rental 1,845 26%

Landing, parking 884 12% Source: Angkasa Pura I Group

Angkasa Pura II Angkasa Pura II Group’s revenue improved significantly by 22.0% y-o-y in FYE Mar ‘2017 to financials IDR8,110 bn. However, profit after tax increased slightly by 3.6% to IDR2,010 bn in FY17 compared to IDR1,940 bn in FY16 due to an increase in corporate income tax expenses.

Revenue & PAT for Angkasa Pura II in IDRbn (FYE Mar) 9,000 Revenue PAT 8,110 8,000 7,000 6,646 6,000 5,644 4,861 5,000 4,154 4,000 3,000 1940 2010 2,000 1687 846 1127 1,000 0 2013 2014 2015 2016 2017 Source: Angkasa Pura II Group DBS Asian Insights SECTOR BRIEFING 69 53

In FYE Mar 2017, 45% of Angkasa Pura II Group’s revenue (c.IDR3,668 bn) was derived from aircraft passenger service charges with c.30% coming from airport retail and rentals. Land, parking and other revenue made up the remaining 25% of the Group’s revenue.

FY17 revenue breakdown in IDR bn – Angkasa Pura II

Others 660 8%

Passenger service Retail and rental 3,668 45% 2,432 30%

Landing, parking 1,351 17% Angkasa Pura II Group

Jakarta is focal point Angkasa Pura II Group’s expansion plans stretch out to 2023, including for its main airport of expansion, given its Soekarna-Hatta, as many under its stable face passenger backlogs. Established plans include congestion required investments totalling IDR94.9 trn (US$6.2bn). Most of the spending is focused in Jakarta, with the remainder to airports in . Investment in the Soekarno-Hatta airport is for the construction of its 4th terminal and 3rd runway, together with renovations of the first two terminals and other infrastructure developments. These renovations and expansions are funded through increased passenger service charges and state injections.

Construction of the 4th terminal is expected to be completed by 2022 and to occupy an area of 300,000 sqm. The 3rd runway construction is to commence by 3Q2018 and is expected to be completed in 2021. According to the transportation ministry the 3rd runway will be built 500m from the airport’s 2nd runway to reduce costs. The airport’s handling capacity is expected to improve to 114 aircraft per hour from 81 currently. These expansion plans are expected to improve the airport’s handling capacity to 100 m passengers by 2025. DBS Asian Insights SECTOR BRIEFING 69 54

Seoul Incheon International Airport – So good

South Korea’s largest Incheon airport is the largest airport in South Korea and is also one of the top 10 leading and busiest airports in the World. The airport is operated by Incheon International Airport Corporation and is located west of Incheon City and 30 miles west of Seoul. Incheon serves as a primary hub for passenger and cargo transportation for airlines such as , , and . The airport has two running terminals. Terminal 2 was opened in Jan 2018 to improve existing runway capacity. LCCs account for almost 31% of Incheon’s aircraft movements in 2017. In 2017, Incheon Airport was the 8th busiest airport in the world for international traffic.

Passenger movements at Incheon Airport grew at an 8.4% CAGR from 2008 to 2017, reaching 62m passengers in 2017. It plans to increase passenger volume to 100m by 2030.

Passenger movements at Incheon Airport (m pax) 70.0 62.1 60.0 50.0 40.0 30.0 30.0 20.0 10.0 0.0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Source: CAPA – Centre for Aviation

Based on departing seats by country, the top markets for Incheon Airport are China, Japan, Vietnam, US and Hong Kong, followed by Philippines, Thailand and Taiwan. Departing seats by country at Incheon Airport For the week commencing 15th Oct 2018

Other 19.9% China 19.8%

Singapore 2.1%

Malaysia 2.9%

Taiwan 4.2% Japan 19.3%

Thailand 4.6%

Philippines 5.0% Source: CAPA – Centre Hong Kong 5.1% for Aviation USA7 .6% Vietnam 9.5% DBS Asian Insights SECTOR BRIEFING 69 55

Several awards and The Incheon airport has won several awards over the years, including the Skytrax Airport recognition Awards World’s Best Staff Service Award for 2018 and World’s Best Transfer Award for 2017 which it won for the 5th consecutive year.

Strong financial status In 2017, Incheon Airport saw revenue growth of 11.0% y-o-y to KRW2.4 trn from KRW2.2 trn in 2016, while profit after tax increased by 15.5% y-o-y to KRW1.1 trn from KRW1.0 trn. Total assets improved to KRW12.3 trn (up 13.0% y-o-y) from 10.9 trn in 2016.

Revenue & PAT for Incheon Airport in KRW trn (FYE Dec) 3.00 Revenue PAT 2.50 2.43 2.19 1.94 2.00 1.75 1.60 1.50 1.12 0.97 1.00 0.77 0.62 0.50 0.47

0.00 2013 2014 2015 2016 2017 Source: Incheon Airport

In 2017, 58% of Incheon Airport’s revenue (c. KRW1.4trn) was derived from airport commercial revenue, while passenger revenue made up only 18.5% of total revenue. In total nonaeronautical revenue made up 66% of total revenue.

FY17 revenue breakdown in KRW trn - Incheon Airport

Others Lease, Utility 0% Revenue 8% Flight Revenue 15%

Passenger Revenue 19%

Commercial Revenue 58% Source: Incheon Airport DBS Asian Insights SECTOR BRIEFING 69 56

Incheon Airport – LCCs make-up 31% of movements For the week commencing 15th Oct 2018

Cargo 2.0%

Low Cost Carrier 31.3% Full Service Carrier 66.7%

Source: CAPA – Centre for Aviation

According to CAPA local Korean LCCs account for almost 31% of the Incheon Airport’s aircraft movements. Korea’s LCC sector displays rapid growth given its strong demand with new aircraft variants providing new options for both short and long-haul growth. A new low- cost terminal, if built, will attract more LCCs by reducing costs through lower airport charges.

Incheon Airport’s movements For the week commencing 15th Oct 2018

Korean Air

Asiana Airlines

JEJU Air

Jin Air

T'way Air

Easter Jet

China Southern Airlines

Air Seoul

China Eastern Airlines

Shandong Airlines

Others

- 250 500 750 1,000 1,250 1,500 1,750 2,000

Source: CAPA – Centre for Aviation DBS Asian Insights SECTOR BRIEFING 69 57

Terminal 2 opened in Incheon Airport’s Terminal 2 which cost c.KRW4.9 trn was officially opened to the public Jan 2018 on 18 Jan 2018. The terminal had a floor area of c.7.4m sqft. The new terminal increases the airport’s handling capacity to 72m, making it competitive with other global hubs. It also improves the airport’s cargo handling capacity to 5m tonnes as compared to the existing 4.5m tonnes in 2017.

Terminal 2 of Incheon Airport

Source: AFP DBS Asian Insights SECTOR BRIEFING 69 58

Expansion plans for Terminal 2 is planned for expansion, where Phase 4 of the project involves improving the Terminal 2 annual capacity of the terminal from the existing 18m pax to 46m pax by 2025, as well as adding a 4th runway. The cost is expected to be c.KRW4.2 trn and after the completion of this project, the aggregate capacity of the Incheon Airport is expected to reach 100m by 2030, which will allow it to compete with other regional hubs such as Hong Kong International Airport and Changi Airport. DBS Asian Insights SECTOR BRIEFING 69 59

Key risks and challenges

Demand-side risks

While air travel has generally been growing rapidly in Asia, there are several risks that could slow down or even impede the growth of air travel. Firstly, greater restrictions on trade and travel, such as a reversal of open skies policies or a broadening of the trade war would certainly have an impact on demand for passenger air travel and air freight. Secondly, a competing means of transport such as a high-speed railway networks would also slow down the growth of air travel, which we saw in China. Thirdly, high or excessive user charges and passenger fees could dampen demand for air travel, especially in the burgeoning, price-sensitive, low- cost travel segment. Supply-side risks

Most of the conversations in the airport sector are centred around supply-side risks and rightly so. There are a multitude of constraints that are currently being faced by governments and the private sector when planning to increase airport capacity. One key issue that’s been discussed substantially in this report is funding. However, there are several other factors worth noting:

Land Many cities that require airport expansion or a new airport face competing uses or the lack of available land space. Some choose to build a new airport far away from the city centre (e.g. in Kuala Lumpur), or reclaim land like in Singapore (which is also very expensive). Even if space is available in urban centres, there are issues such as building height limits and noise pollution to nearby residents to consider.

Personnel Given the rapid growth of the sector in Asia, there has been many instances where a shortage of staff (in particular, skilled staff) has caused bottlenecks at airports. The lack of personnel, or skills gap as the International Civil Aviation Organisation calls it, extends across the entire aviation industry including pilots, cabin crew, air traffic controllers, maintenance and other skilled technicians, baggage handlers and even immigration officers. All stakeholders in the aviation sector have to invest in educating, training and attracting more people to work in the sector.

Environmental The development and operation of airports may impact the environment in a few ways, such as noise pollution to residents, reduced local air quality from aircrafts, cars and other activities, carbon emissions and the generation of waste such as air emissions, as well as solid and liquid waste. In some cases, the construction or expansion of an airport may impact the surrounding environment, such as wildlife and flora and fauna. DBS Asian Insights SECTOR BRIEFING 69 60

Airspace In certain markets such as China, airspace constraint is also an issue. It was reported by the China Daily newspaper in 2016 that less than 30% of the country’s airspace can be used by commercial airlines, compared to about 80% in the U.S. This has sometimes resulted in mass cancellations and is one of the reasons why high-speed railway is often preferred by travellers in the country.

Safety and security Given the greater number of travellers and increasing security threats, airports needs to invest more time, money and effort to upgrade and enhance their security and safety facilities and train their personnel. At the same time, the customers’ experience needs to be taken into account, as long queues and delays are not desirable. The issue of cyber security has to be considered as well. Others

Cost overruns and delays are a real risk for major infrastructure projects. Airports are especially prone to this given the number of stakeholders involved and multiple issues to consider. A large cost overrun or lengthy delays would reduce the returns and viability of the airport project and result in a significant burden for the owners of the airport, which in most cases are the governments.

While the vast majority of large airports built in Asia is quickly utilised, there is a risk that an airport becomes underutilised due to a lack of planning or sometimes overconfidence. One good example is the Mattala Rajapaksa International Airport in Sri Lanka. Built at a cost of over US$200m to handle a million passengers a year, it opened in 2013 and currently has no scheduled flights. It is reported to be incurring tens of millions of dollars of losses a year.

As more airports diversify their revenue streams into other segments such as retail, car parks, hotels and conferences, operators have to gain wider management expertise in multiple sectors, or partner, or outsource with third parties to manage operations.

From the private sector’s perspective, one of the key risks is a potential change in government policies and framework with regards to airport development and operations. Any significant changes by the government on the rules of engagement can lead to a substantial impact on returns or project timeline. From another perspective, a lack of a clear and viable framework by governments would result in an inability to attract needed investments from the private sector. DBS Asian Insights SECTOR BRIEFING 69 61

Does the investment cycle drive share prices of airports?

Capex activity is isted airport operators in Asia have primarily been responsible for the capital generally cyclical requirements of the major airports under their wing. Expansion of existing facilities may impact the existing processing capabilities of passengers and impair smooth throughput and passenger experience. For that reason, wholesale addition of Lterminals or runways are often viewed as more desirable rather than minor renovations to expand boarding or check-in areas. Given the rapid growth of passengers in Asia, major airport players have been planning and building capacity by adding whole terminals, and sometimes even new airports, to keep pace with demand.

As a result, there is an observable cyclical trend in expansion capex – involving multiple years of heavier negative free cash flow (plus potential financing inflows), followed by a length of steadier operations as the additional capacity is utilised and operations mature.

Valuation trends imply We find that listed airports have typically been punished from a valuation perspective during some earnings-biased the peak of the capex cycle. Share prices generally came down for the counters under our myopia coverage as they embarked on expansion projects or acquisitions, involving steeper negative free cash flows and soon after, higher depreciation charges. Financing charges have also risen for those who partially financed their expansion via borrowings.

We believe this discounts the expanded passenger (and thus earnings) ceiling for the respective airports, in addition to the improvement of its market position regarding infrastructure attractiveness, especially if capex was used to modernise and upgrade the airports with the latest technologies. Over the long term, structural growth in passenger volume prove to be a steadier and more reliable metric of growth in firm value.

Examine: Malaysia The proposal to revamp Malaysia Airports Holdings’ (MAHB) previous low cost-carrier terminal Airports’ major klia2 (LCCT) at its Kuala Lumpur International Airport (KLIA) emerged as early as 2010 following expansion rapid growth in low-cost passenger traffic, aided by the AirAsia Group. KLIA had in that year breached 30m passengers handled, with projections of hitting 60m by 2020 – a target it would eventually be on track to hit by 2018. The total investment cost amounted to RM4bn (c.USD1.2bn), which was a point of contention given initial estimates of around RM2bn. The opening of the terminal was also delayed to early-2014 (vs mid to late- 2013). We do note that there are some clouding factors in the assessment of its expansion capex, especially its acquisition of additional stakes in the Istanbul Sabiha Gokcen (ISG) airport in Turkey, made in two tranches over 2013-2014 which came to RM2.2bn of outlay. DBS Asian Insights SECTOR BRIEFING 69 62

MAHB share price versus investment news and cycle

MAHB Share Px RM FBMKLCI 12.00 2400 RM3bn sukuk funding 2200 10.00 proposed klia2o pens Reveal revised larger plans 2000 with larger capex 8.00 Announcement 1800 of klia2 plans 1600 6.00 1400 4.00 1200 1000 2.00 Market speculation about Private placement to raise cost overruns RM616m Acquiring 40% stake in ISG 800 0.00 600 0 7/08/2009 15/10/2009 2 3/12/2009 0 2/03/2010 10/05/2010 16/07/2010 2 3/09/2010 0 1/12/2010 0 8/02/2011 18/04/2011 2 4/06/2011 0 1/09/2011 0 9/11/2011 17/01/2012 2 6/03/2012 0 1/06/2012 0 9/08/2012 17/10/2012 2 5/12/2012 0 4/03/2013 10/05/2013 18/07/2013 2 5/09/2013 0 3/12/2013 10/02/2014 18/04/2014 2 6/06/2014 0 3/09/2014 11/11/2014 19/01/2015 2 7/03/2015 0 4/06/2015 12/08/2015 2 0/10/2015 2 8/12/2015 0 4/03/2016 12/05/2016 2 0/07/2016 2 7/09/2016 0 5/12/2016 10/02/2017 2 0/04/2017 2 8/06/2017 0 5/09/2017 13/11/2017 19/01/2018 2 9/03/2018 0 6/06/2018 14/08/2018

Source: Bloomberg Finance L.P., company, news sources

Emergence of higher D&A costs had direct negative impact on the share price. MAHB’s share price had relatively underperformed in the late-2011 to 2012 period and then from 2014 to 2015, covering the span of works on klia2 and its opening. We find that this tracks the trend of the group’s expansion capex, and more importantly the subsequent rise in quarterly depreciation and amortisation (D&A) recognition.

MAHB share price vs capex

12.00 MAHB Share Px RM Capex by quarter RM m 900 800 10.00 700 8.00 600 500 6.00 400 4.00 300 200 2.00 100 0.00 0 07/08/2009 23/10/2009 08/01/2010 26/03/2010 11/06/2010 27/08/2010 12/11/2010 28/01/2011 15/04/2011 01/07/2011 16/09/2011 02/12/2011 17/02/2012 04/05/2012 20/07/2012 05/10/2012 21/12/2012 08/03/2013 24/05/2013 09/08/2013 25/10/2013 10/01/2014 28/03/2014 13/06/2014 29/08/2014 14/11/2014 30/01/2015 17/04/2015 03/07/2015 18/09/2015 04/12/2015 19/02/2016 06/05/2016 22/07/2016 07/10/2016 23/12/2016 10/03/2017 26/05/2017 11/08/2017 27/10/2017 12/01/2018 30/03/2018 15/06/2018 31/08/2018

Source: Bloomberg Finance L.P., company, news sources DBS Asian Insights SECTOR BRIEFING 69 63

MAHB share price vs depreciation & amortisation 12.00 MAHB Share Px RM D&A RM m 300

10.00 250

8.00 200

6.00 150

4.00 100

2.00 50

0.00 0 0 7/08/2009 15/12/2009 2 2/04/2010 3 0/08/2010 0 5/01/2011 13/05/2011 2 0/09/2011 2 6/01/2012 0 4/06/2012 10/10/2012 15/02/2013 2 5/06/2013 3 1/10/2013 10/03/2014 16/07/2014 2 1/11/2014 3 1/03/2015 0 6/08/2015 14/12/2015 2 0/04/2016 2 6/08/2016 0 3/01/2017 11/05/2017 18/09/2017 2 4/01/2018 0 1/06/2018

Source: Bloomberg Finance L.P., company, news sources

MAHB’s quarterly D&A ballooned from below the RM50m level to RM100-150m from FY12, and then to RM200-250m by FY15-16 as ISG financials were also consolidated. This had a direct impact on financial performance as the group reported net losses or minimal earnings in the immediate financial periods.

In February 2018, BCIA announced that it would acquire Terminal 3 and other assets from its parent for RMB26.9bn, which was mainly funded by debt with equity fund raising of nearly RMB1.9bn. The company’s net debt to equity ratio rose from a net cash position in 2007 to over 160% in 2009. As a result of higher depreciation charges and finance costs,

BCIA’s earnings fell by 96% y-o-y in 2008 to RMB85m and took four years to recover back to its 2007 level.

At the same time, BCIA’s share price fell from HK$9.98 just before the acquisition announcement to a low of HK$3.31 on 27th October 2008. Since then, the company’s share price has been primarily driven by throughput growth, with news on a new retail concession revenue agreement and a new airport in Beijing (Daxing) also augmenting its share price performance. DBS Asian Insights SECTOR BRIEFING 69 64

BCIA share price vs depreciation & amortisation BCIA Share Px HK$ 16.00 D&A - RMB m 800 14.00 12.00 700

10.00 600 8.00 500 6.00 400 4.00 2.00 300 0.00 200 7 6 5 4 3 2 1 0 9 8 7 6 Jul-1 Jul-1 Jul-1 Jul-1 Jul-1 Jul-1 Jul-1 Jul-1 Jul-0 Jul-0 Jul-0 Jul-0 J an-18 J an-17 J an-16 J an-15 J an-14 J an-13 J an-12 J an-11 J an-10 J an-09 J an-08 J an-07 Source: Bloomberg Finance L.P., company, news sources

Long term valuations As airport expansion and investments have proved to be ultimately fleeting in terms of operator still boil down to traffic valuations, we find that the more reliable, long-term metric remains passenger growth. Across growth the major listed airports we cover (MAHB, BCIA, AOT), total passenger throughput and its growth provide, over an extended period, an underlying trend to which share prices eventually converge to – with a correlation of 0.8-0.9 for the three airports examined.

MAHB share price vs passenger throughput 12.00 MAHB Share Px RM Passengers (m, by quarter) 30

10.00 25

8.00

20 Millions 6.00 15 4.00

10 2.00

0.00 5 18/09/2009 29/01/2010 11/06/2010 22/10/2010 04/03/2011 15/07/2011 25/11/2011 06/04/2012 17/08/2012 28/12/2012 10/05/2013 20/09/2013 31/01/2014 13/06/2014 24/10/2014 06/03/2015 17/07/2015 27/11/2015 08/04/2016 19/08/2016 30/12/2016 12/05/2017 22/09/2017 02/02/2018 15/06/2018 Source: Bloomberg Finance L.P., company, news sources DBS Asian Insights SECTOR BRIEFING 69 65

AOT share price vs passenger throughput 80.00 AOT TB Passengers (m, by quarter) 40

70.00 35 60.00

30 Millions 50.00

40.00 25

30.00 20 20.00 15 10.00

0.00 10 7 0 6 9 13 16 09 Jul-18 Jul-11 Jan-15 Jan-08 Jun-14 Oct-1 Oct-0 Ap r- Feb-12 Sep-12 Dec-1 Dec-1 Aug-15 Aug-08 Nov-13 Ma r- Ma r- May-17 May-10

Source: Bloomberg Finance L.P., company, news sources

BCIA share price vs passenger throughput

16.00 BCIA Share Px HK$ Passengers (m, by HY) 55

14.00 50 12.00 45 10.00

8.00 40

6.00 35 4.00 30 2.00

0.00 25 9 Jul-0 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Jul-18 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18

Source: Bloomberg Finance L.P., company, news sources DBS Asian Insights SECTOR BRIEFING 69 66

Notably, MAHB benefited from a surge in pax growth in 2013 (+14% for the year), reflected in its strong share price performance before the subsequent impact of its peak capex cycle plus the airline incidences in Malaysia in 2014. AOT’s firm value has been a consistent beneficiary of the ever-rising air travel in Thailand over the past decade, supported by persistent tourist arrival growth despite temporary incidences like the coup in 2014, the passing of King and the crackdown on Chinese zero- dollar tours in 2016.

While BCIA has been a beneficiary of the steady growth of its total passenger traffic over the years, the construction and planned opening of the nearby Beijing Daxing Airport (built to alleviate capacity limitations at BCIA) has dampened its valuations. BCIA’s involvement in the Daxing Airport currently remains uncertain as the latter is built by its state-controlled parent company, though absorption into the listed entity would then provide it a direct bump-up to its long-term maximum passenger handling capacity.

Key takeaway: Capex-heavy expansion creates entry points for listed airports, as long as there are prospects for continued passenger traffic growth. The examples from Asian listed airports give clear evidence that capex-driven declines in operator valuations are temporary in nature and should be viewed as entry opportunities, as long as there is sufficient conviction on the trajectory of its passenger throughput after expansion. Expansion plans by airport operators or government units also have been relatively reliable or even conservative guidelines, evidenced by the typically overcapacity situation in Asian airports. Investments in new airport projects or airport expansions should prioritise the ability to attract and sustain increased flow of airline services and passenger traffic; in addition to internal rate of return (IRR) requirements. DBS Asian Insights SECTOR BRIEFING 69 67

Appendix Busiest passenger airports in Asia based on 2017 passenger movements (Rank 1-50) Rank Airport City 2017 2016 Growth 1 Beijing Capital International Airport Beijing 95,786,296 91,661,527 4.5% 2 Dubai International Airport Dubai 88,242,099 83,641,800 5.5% 3 Tokyo Haneda Airport Tokyo 84,956,964 80,072,539 6.1% 4 Hong Kong International Airport Hong Kong 72,921,000 70,591,481 3.3% 5 Shanghai Pudong International Airport Shanghai 70,001,237 65,976,661 6.1% 6 Guangzhou Baiyun International Airport Guangzhou 65,806,977 59,715,950 10.2% 7 Indira Gandhi International Airport Delhi 63,451,503 55,610,432 14.1% 8 Soekarno–Hatta International Airport Jakarta 63,015,620 58,347,796 8.0% 9 Singapore Changi Airport Singapore 62,219,573 58,697,710 6.0% 10 Incheon International Airport Seoul/Incheon 62,082,032 57,750,727 7.5% 11 Suvarnabhumi Airport Bangkok 60,860,704 55,886,781 8.9% 12 Kuala Lumpur International Airport Kuala Lumpur 58,618,680 52,714,640 11.2% 13 Chengdu Shuangliu International Airport Chengdu 49,801,693 46,027,443 8.2% 14 Chhatrapati Shivaji International Airport Mumbai 47,204,259 44,701,003 5.6% 15 Shenzhen Bao'an International Airport Shenzhen 45,610,651 41,960,121 8.7% 16 Taiwan Taoyuan International Airport Taipei 44,878,703 42,298,495 6.1% 17 Kunming Changshui International Airport Kunming 44,727,691 41,997,832 6.5% 18 Ninoy Aquino International Airport Manila 42,000,000 39,585,297 6.1% 19 Shanghai Hongqiao International Airport Shanghai 41,884,059 40,467,690 3.5% 20 Xi'an Xianyang International Airport Xi'an 41,857,229 37,009,044 13.1% 21 Narita International Airport Tokyo 40,687,040 39,047,063 4.2% 22 Chongqing Jiangbei International Airport Chongqing 38,715,210 35,913,924 7.8% 23 Don Mueang International Airport Bangkok 38,299,757 35,201,983 8.8% 24 Tan Son Nhat International Airport Ho Chi Minh City 35,900,000 32,488,688 10.5% 25 Hamad International Airport Doha 35,867,252 35,867,252 0.0% 26 Hangzhou Xiaoshan International Airport Hangzhou 35,570,411 32,016,572 11.1% 27 King Abdulaziz International Airport Jeddah 33,917,282 31,404,891 8.0% 28 Sabiha Gökçen International Airport Istanbul 31,385,841 29,609,284 6.0% 29 Jeju International Airport Jeju 29,604,363 29,486,417 0.4% 30 Kansai International Airport Greater Osaka Area 27,983,093 25,485,513 9.8% 31 Antalya Airport Antalya 25,931,659 18,791,057 38.0% DBS Asian Insights SECTOR BRIEFING 69 68

Busiest passenger airports in Asia based on 2017 passenger movements (Rank 1-50) cont.

Rank Airport City 2017 2016 Growth 32 Nanjing Lukou International Airport Nanjing 25,822,936 22,771,549 13.4% 33 Gimpo International Airport Seoul 25,101,147 24,901,932 0.8% 34 Kempegowda International Airport Bangalore 25,047,272 22,484,086 11.4% 35 King Khalid International Airport 25,038,000 23,598,492 6.1% 36 Xiamen Gaoqi International Airport Xiamen 24,485,239 22,862,035 7.1% 37 Zhengzhou Xinzheng International Airport Zhengzhou 24,299,073 21,221,898 14.5% 38 Changsha Huanghua International Airport Changsha 23,764,820 21,545,621 10.3% 39 Abu Dhabi International Airport Abu Dhabi 23,760,561 23,760,561 0.0% 40 Fukuoka Airport Fukuoka 23,484,678 22,155,357 6.0% 41 Wuhan Tianhe International Airport Wuhan 23,129,400 21,007,629 10.1% 42 Qingdao Liuting International Airport Qingdao 23,210,530 21,005,005 10.5% 43 Noi Bai International Airport 23,068,227 20,596,631 12.0% 44 Sapporo 22,916,914 21,619,730 6.0% 45 Ngurah Rai International Airport Denpasar 22,863,647 20,323,242 12.5% 46 Haikou Meilan International Airport Haikou 22,584,815 19,352,883 16.7% 47 Juanda International Airport Surabaya 21,882,335 19,731,592 10.9% 48 Ürümqi Diwopu International Airport Ürümqi 21,500,901 20,283,869 6.0% 49 Tianjin Binhai International Airport Tianjin 21,005,001 17,562,710 19.6% 50 Central District 20,781,226 18,840,640 10.3%

Source: Various new sources and Airport Authorities, DBS Bank estimates DBS Asian Insights SECTOR BRIEFING 69 69

New airports (proposed and under construction) in Asia with project value below U$2bn

City Airport Investment (US$mn) Capacity (m) Estimated Completion 32 Nanjing Lukou International Airport Nanjing 25,822,936 22,771,549 13.4% Chenzhou Chenzhou Beihu Airport 295 0.6 2019 33 Gimpo International Airport Seoul 25,101,147 24,901,932 0.8% 260 1.0 2019 34 Kempegowda International Airport Bangalore 25,047,272 22,484,086 11.4% Yutian Yutian Airport 104 0.2 2020 35 King Khalid International Airport Riyadh 25,038,000 23,598,492 6.1% Yibin Yibin Wuliangye Airport 160 0.8 2018 36 Xiamen Gaoqi International Airport Xiamen 24,485,239 22,862,035 7.1% Jishou Jishou 260 0.3 2020 37 Zhengzhou Xinzheng International Airport Zhengzhou 24,299,073 21,221,898 14.5% Kerala Kannur International Airport 279 5.0 2018 38 Changsha Huanghua International Airport Changsha 23,764,820 21,545,621 10.3% Goa Goa 552 4.4 2020 39 Abu Dhabi International Airport Abu Dhabi 23,760,561 23,760,561 0.0% Sikkim 68 0.0365 2018 40 Fukuoka Airport Fukuoka 23,484,678 22,155,357 6.0% Nellore Dagadarthi Airport 54 2.0 2020 41 Wuhan Tianhe International Airport Wuhan 23,129,400 21,007,629 10.1% Sindhudurg 78 1.2 2018 42 Qingdao Liuting International Airport Qingdao 23,210,530 21,005,005 10.5% Bhogapuram Sindhudurg Airport 406 6.3 2020 43 Noi Bai International Airport Hanoi 23,068,227 20,596,631 12.0% Bago Hanthawaddy International Airport 1500 12.0 2022 44 New Chitose Airport Sapporo 22,916,914 21,619,730 6.0% West Kertajati International Airport 800 60.0 2018 45 Ngurah Rai International Airport Denpasar 22,863,647 20,323,242 12.5% Nagoya Nagoya LCCT 165 5.0 2018 46 Haikou Meilan International Airport Haikou 22,584,815 19,352,883 16.7% Phuket Phang Nga Airport 1800 10.0 2025 47 Juanda International Airport Surabaya 21,882,335 19,731,592 10.9% Chiang Mai International Airport 2 1800 10.0 2025 48 Ürümqi Diwopu International Airport Ürümqi 21,500,901 20,283,869 6.0% Panglao New Bohol International Airport 88 3.0 2018 49 Tianjin Binhai International Airport Tianjin 21,005,001 17,562,710 19.6% Legazpi Bicol International Airport 96 2.1 2020 50 Ben Gurion Airport Central District 20,781,226 18,840,640 10.3% Pokhara Pokhara International Airport 305 1.0 2021 Bhairawa Gautam Buddha Airport 323 0.8 2019 Nijgadh Nijgadh International Airport 1200 15.0 2025

Source: Various new sources and Airport Authorities, DBS Bank estimates DBS Asian Insights SECTOR BRIEFING 69 70 DBS Asian Insights SECTOR BRIEFING 69 71

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The information herein is published for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Company, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Company or any other person has been advised of the possibility thereof.

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