Company Focus

Bloomberg: THAI TB | Reuters: THAI.BK

DBS Group Research . Equity 1 Apr 2011

BUY Bt37.75 SET : 1047.48 Mitigating Japan impact

Price Target : 12-month Bt 60.25 Reason for Report : Post non-deal roadshow note  Positive response from investors at Europe NDR Potential Catalyst: Launching low cost airlines, exit from SOE status, and despite concerns over Japan impact and fuel prices drop in fuel price.  Effective fuel hedging and timely surcharge Analyst adjustment to mitigate rising fuel prices; also Nalyne VIRIYASATHIEN +662 657 7823 [email protected] implementing measures to offset lower Japan traffic  Continued strong growth momentum; maintain BUY for attractive valuation and 60% upside potential to Bt60.25 TP

Price Relative With Japan contributing 11% Bt Relative Index Limited impact from Japan. 220 of passenger revenue, the recent turmoil in Japan affected . 55 80 THAI. But earnings should not be impacted substantially 45 . 80 170 because lower cabin factor on routes to Tokyo Narita and 35 . 80 120 Haneda (c. 50-60%) is being offset by robust cabin factor 25 . 80 70 (c.85%) on the remaining three Japanese routes to Fuguoka, 15 . 80

5 . 80 20 Nagoya and Osaka. These cities are further from the troubled 2007 2008 2009 2010 2011 Fukushima nuclear power plant. Meanwhile, THAI has Thai Airways ( LHS ) Relative SET INDEX ( RHS ) responded by cutting one flight/day to Tokyo Narita and increased frequency to Korea. Since the earthquake, THAI’s Forecasts and Valuation cabin factors on routes to China and Korea have edged FY Dec (Bt m) 2009A 2010A 2011F 2012F higher, implying the substitution effect. This should help to Revenue 161,603 180,589 198,351 209,339 EBITDA 31,758 32,226 38,875 43,131 partly offset the drop in Japan traffic.

Pre-tax Profit 8,107 17,523 13,070 16,170 Net Profit 7,344 15,350 9,087 11,250 Cabin factor in 1Q11F is estimated at Net Pft (Pre Ex.) 4,705 5,136 9,087 11,250 Healthy 1Q11F traffic. EPS (Bt) 4.3 7.0 4.2 5.2 76.8%, below highs of 81% in 1Q10. But revenue should EPS Pre Ex. (Bt) 2.8 2.4 4.2 5.2 remain strong, premised on 2-3% yoy higher capacity (ASK) EPS Gth Pre Ex (%) (160) (15) 77 24 and passenger yield rising to Bt2.8/km vs Bt2.6/km in FY10. Diluted EPS (Bt) 4.3 7.0 4.2 5.2 However, we expect THAI to book Bt2.9bn forex loss in 1Q11F Net DPS (Bt) 0.3 1.2 1.1 1.3 BV Per Share (Bt) 31.4 38.0 40.2 44.2 because the Euro has appreciated 6% against the Thai baht. PE (X) 8.7 5.4 9.1 7.3 PE Pre Ex. (X) 13.6 16.0 9.1 7.3 Attractive valuation, reiterate BUY. We remain positive P/Cash Flow (X) 2.3 2.4 2.8 2.5 on THAI. Our target price remains Bt60.25 based on 1.5x EV/EBITDA (X) 6.4 5.9 4.8 4.7 Net Div Yield (%) 0.7 3.3 2.9 3.4 FY11F P/BV (7-year average historical PBV +1SD), implying P/Book Value (X) 1.2 1.0 0.9 0.9 hefty 60% upside potential. Its attractive growth potential Net Debt/Equity (X) 2.6 1.3 1.2 1.2 has been largely discounted, trading at 0.9x P/BV and 4.8x ROAE (%) 14.9 22.6 10.7 12.3 EV/EBITDA currently, below its historical mean and regional

Earnings Rev (%): 0.0 0.0 0.0 peers’ averages of 1.2x and 6.6x (FY11F), respectively. Consensus EPS (Bt): - 4.8 5.7 Other Broker Recs: B: 14 S: 2 H: 3 At A Glance Issued Capital (m shrs) 2,183 ICB Industry : Consumer Services ICB Sector: Travel & Leisure Mkt. Cap (Btm/US$m) 82,400 / 2,718 Principal Business: THAI operates domestic, regional and Major Shareholders intercontinental flights to key destinations around the world and Ministry of Finance (%) 51.0 within Thailand. Vayupak Fund (%) 15.1 Corporate Governance Thai NVDR (%) 4.6 CG Rating (2010) Free Float (%) 32.0 Source of all data: Company, DBS Vickers, Bloomberg Avg. Daily Vol.(‘000) 7,768

“In , this research report or research analyses may only be distributed “Recipients of this report, received from DBS Vickers Research (Singapore) Pte Ltd to Institutional Investors, Expert Investors or Accredited Investors as defined in the (“DBSVR”), are to contact DBSVR at +65 6398 7954 in respect of any matters arising Securities and Futures Act, Chapter 289 of Singapore.” from or in connection with this report.” www.dbsvickers.com

Refer to important disclosures at the end of this report ed: SGC / sa: CS Company Focus

Thai Airways

Positive response at Europe Non-Deal Roadshow Japan: Impact areas map

Strong interest from investors in Europe. We had the pleasure of bringing Khun Raj Tanta-Nanta from Thai Airways International (THAI) on our non-deal roadshow (NDR) in Europe (Vienna, Frankfurt, Zurich, Edinburgh, and London). There was strong interest from investors and all the slots during the week long NDR were filled. Despite the unfortunate natural disaster in Japan, which full impact on Fukushima THAI is still being assessed, and continued concerns over daiichi nuclear rising fuel prices, sentiment towards the counter remained power plant epicenter positive. The management assured investors of its positive Sendai momentum going forward, given supportive industry fundamentals as well as continued improvements following the execution of its strategy. 250 km Nagoya Main questions. Questions centered on THAI’s fuel management policy, impact of Japan earthquake, launch of Thai-Tiger airline, cost cutting strategy, privatization plan, current operations, as well as strategies going forward.

FAQ – Key questions from investors & management’s Source: DBS Vickers reply

Q: Will Japan disaster have significant impact on 1Q11 and Q: What would be the impact of the recent Japan incident? full year 2011 earnings?

A: THAI normally operates 59 flights per week to 5 Japanese A: Fortunately, THAI’s cabin factor to Japan has been robust cities - Tokyo Narita, Tokyo Haneda, Fuguoka, Nagoya, and at 85-90% YTD-Mar11, premised on the high tourist season Osaka – out of 287 domestic and 574 international flights per and improved travel demand. MTD-Mar11 cabin factor week. These Japanese routes are significant to THAI’s remained at 77%, hence, the average for Japan in 1Q11F earnings with 11% passenger revenue contribution and 9% should remain strong at above 80%. 2Q11F should feel a total revenue contribution in 2010. Hence, the turmoil in larger impact. Meanwhile, it is still premature to estimate full Japan is surely to have an impact on THAI. It has already seen year 2011 Japanese cabin factor, because it would depend on revenue drop by 5% over the last two weeks due to lower when the radiation fears will subside. For now, Japan travel travel demand since the earthquake and tsunami struck the demand remains soft and cabin factor could drop below Northeast coast of Japan. current levels if the concern persists.

Q: What are passenger cabin factors on Japanese routes? Q: What is THAI’s plan to cushion the negative revenue

impact from Japan? A: Average cabin factor to Japanese destinations is now at

c.60% from 85-90% during the same period last year. Each A: THAI has cut 7 flights per week to Japan (Tokyo Narita) to route to Japan saw different impact - Tokyo Narita and 52 flights per week now, and shifted aircraft to Korea routes. Haneda, to where THAI operates 17 and 7 flights per week, It is likely to maintain this level for now, because despite respectively (41% of all Japanese routes), saw the largest softer demand, it remains acceptable (c. 60% cabin factor). In drop to 50-60% because of radiation fears. The damaged any case, the company is monitoring the situation closely. If Fukushima nuclear power plant is 250km from Tokyo. there is potentially further significant drop in travel demand Meanwhile, cabin factor for the remaining three Japanese to Japan, it would announce plans to mitigate the impact routes are holding at c.85%. April bookings for all Japanese (The management is discussing the matter, but no details routes averaged 55%. were disclosed). The plan could be to divert more aircraft

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Company Focus Thai Airways

from Japan routes and raise frequency for other regional THAI: Fuel hedging and surcharge trend route with strong travel demand (e.g. Singapore, Hong Kong, % of consumption % of fuel surcharge coverage Korea, China, etc.). 80 200

70 Q: Do you see a shift in travel demand from Japan to other 60 150 destinations? 50 40 100 A: The Japanese earthquake has reduced cabin factor to 30 Japan, but THAI’s cabin factor to China and Korea has edged 20 50 higher. The company thinks these routes could be substitute 10 0 0 destinations for travelers to Japan. The average cabin factor 10 11 11 09 10 10 08 09 09 08 08 10 09 on various routes to China and Korea rose to c.80% from 08 Jul Jul Jul Jan Jan Jan Jan Oct Apr Oct Apr Oct Apr c.70% before. This should help to partly offset the drop in FuelApr heding F uel Surcharge Cov erage cabin factor on Japanese routes. Source: Company, DBS Vickers

Q: What is your fuel cost management plan? Q: Can you pass on higher fuel prices?

A: Rising fuel prices is one of THAI’s major concerns, because A: Part of the higher fuel costs is being passed on by hiking fuel cost accounts for c.30% of its total operating expenses. fuel surcharge. THAI had adjusted its fuel surcharge three The company is implementing fuel management measures times YTD, and is likely to hike surcharge again in the near rigorously. THAI applies hedging tools (mainly collar) and future. Fuel surcharge coverage is 98% of fuel costs in Jan11 proactively adjusts fuel surcharge to mitigate the full impact but fell to 89% in Feb11. There is usually 1-2 months lag time of higher fuel prices on a timely basis. Its policy now is to in passing on rising fuel costs through fuel surcharge due to hedge at least 20% but not more than 80% of its average timing difference between payment for airfares and actual monthly fuel consumption, with average contract period of travel. up to 18 months. This compares to its old policy where hedging over 50% of fuel consumption required board THAI: Fuel surcharge adjustment approval, which had caused delays in implementing hedging BKK-RGN, SGN, HAN, VTE, PNH, PEN V.V. Increase CHARGE US$19.00 (FROM US$ HKG-TPE V.V. KHI-MCT V.V. GAY-VNS 3 US$ 16.00) activities previously. V.V.

Increase CHARGE US$ 25.00 (FROM US$ BKK-KUL, SIN, KMG, CAN, DAC, CCU, Q: What is the current fuel hedging position? 4 US$ 21.00) HKG, TPE-SEL V.V.

BKK-CTU, XMN, CMB, MNL, KTM, BLR, Increase CHARGE US$ 32.00 (FROM US$ HYD, JKT, TPE, MAA, GAY, VNS V.V. HKG- 5 US$ 27.00) A: THAI’s hedging position in 1Q11F and 2Q11F are now SEL V.V. HKG-HKT V.V.

51% and 50% of fuel requirements, respectively, at average CHARGE US$ 42.50 (FROM US$ BKK-DEL, BOM, DPS, KHI, LHE, MCT, ISB, collar price of US$80-130/barrel. Hedging after Jun11 36.50) DXB, BJS, SHA V.V. TPE-HKT V.V. Increase remains minimal as it would be more expensive to enter into 6 US$ CHARGE US$ 46.00 (FROM US$ BKK-SEL, PUS, HKT-SEL V.V. BKK-TYO , 40.00) OSA, NGO, FUK V.V. TYO-HKT V.V. HKT- new contracts now, because jet fuel prices have peaked SEL V.V. currently (US$132.95/barrel) and it would need to pay a Increase CHARGE US$ 52.50 (FROM US$ BKK-PER V.V., PER-HKT V.V. contract premium. More importantly, with expectations for 7 US$ 45.50)

fuel prices to correct going into 2H11F as Middle East unrest Increase CHARGE US$ 65.00 (FROM US$ BKK-MEL, SYD, BNE V.V. ease and some OPEC member countries raise crude 8 US$ 57.00) production, the company prefers to hold off entering into FR SOLD WORLDWIDE INCL BKK-PAR, LON, MAD, DME, ATH, STO, new fuel hedging contracts for now. THAILAND CHARGE 90.00 CPH, OSL, MUC, ROM, MIL, ZRH, FRA, Increase (FROM US$ 64.00) TLV, JNB V.V. 26 US$ FR SOLD IN EUROPE/ SOUTH AFRICA CHARGE 90.00 (FROM

US$ 89.00)

CHARGE US$ 90.00 (FROM US$ Increase 71.50) BKK-AKL V.V. 18.5 CHARGE US$ 107.00 (FROM BKK-LAX V.V. US$ US$ 88.50)

Source: Company, DBS Vickers

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Company Focus

Thai Airways

Q: How is the cargo business? installing newer seats and entertainment systems to improve its product offering. A: Pricing power for cargo remains weak because the global economy is still picking up, and European routes remain slow. THAI: Aircraft Fleet Plan Despite an expected mild drop in 1Q11, overall cargo 2009 2010 2011 2012 2013 2014 (2010- business remains level with load factor at 56.8% vs 59.7% a 2014) TOTAL INCOMING 3 3 7 8 11 - 32 year ago. But this is based on higher capacity; ADTK (available AIRCRAFT dead ton kilometers) rose 12% yoy to 1,231m, causing RFTK A330-300 3 7 3 2 8 (revenue freight ton kilometer) to grow 7% yoy to Bt699m. A380-800 3 3 6 The capacity boost was led by a 2-year aircraft block space B777-300ER 3 2 6 8 agreement and THAI had started using two Boeing 777 TOTAL OUTGOING 1 5 2 8 7 2 25 freighters for its growing cargo business since Mar10. Going AIRCRAFT forward, the company also targets to convert two of its old B747-400 (B744 4 2 6 747 planes into dedicated freighters to cater for more cargo B777-300ER (Jet 3 3 along with a reviving economy, especially in regional markets. Airways) B737-400 1 1 2 3 THAI: Cargo load factor, ADTK and RFTK A300-600 (AB6) 2 2 4 2 10 ATR-72 2 2 m . % Source: Company, DBS Vickers , . . 64 8 . . 1 400 59 8597 61 7 60 4 . 70 , . 56 8 1 200 53 9 60 THAI: Total Number of New & Retrofit Aircraft , 1 000 50 Aircraft Type 2010 2011 2012 2013 Total 800 40 A330-300 (8aircraft) 3 5 - - 8 600 30 A330-300 (7aircraft) - 2 3 2 7 400 20 200 10 B777-300ER (8aircraft) - - 2 6 8 0 0 A380-800 (6 aircraft) - - 3 3 6

F B747-400, #7-12 (6aircraft) - 5 1 - 6 09 09 10 10 10 10 11 Q Q Q Q Q Q B777-200 (8aircraft) - 4 4 - 8 3 4 1 2 3 4 Q Freight factor (RHS) ADTK RDTK1 B747-400, #13-18 (6aircraft) - - 5 1 6 Total 3 16 18 12 49 Source: Company, DBS Vickers Source: Company, DBS Vickers

Note: Not include 3 projects to be approved and to be retrofitted in Q: What is your strategy in the increasingly competitive airline year 2012-2014 industry?

Q: What would be the benefit of newer aircrafts? A: Given escalating competition in the airline industry,

especially from middle eastern airlines and rapid expansion of A: New aircraft would reduce fuel consumption by 15-20%, low cost airlines, THAI intends to maintain/increase its while other benefits include more competitive products, customers base by restructuring routes, promoting more lower maintenance costs, and reduction in aircraft down connecting flights, and improving its services and products, time, and increase utilisation (from 11.4 hours/day up to 12 mainly by acquiring newer planes and retrofitting existing hours/day) to allow higher frequency and better asset aircraft. In addition, it is overhauling its IT system at a cost of utilization. Bt5bn CAPEX over the next 5 years to offer better service.

Q: What is your breakdown of owned and leased aircraft? Q: What is the progress of your aircraft modernisation plan?

A: Currently THAI has a total of 84 aircraft (excluding A: THAI is acquiring up to 32 new planes and retiring 25 aircrafts leased to ), with the majority booked in its aging planes over FY09-FY14. Hence, its fleet size should balance sheet including 45 owned and 29 on financial leases remain about the same (only 7 additional aircraft in 5 years), (FL). The remaining 10 aircraft (12% of total fleet) are under but the new and larger aircraft would raise seat capacity by operating leases (OL). The company plans to increase its 14% to ease current capacity constraint. Meanwhile, THAI is retrofitting 49 of its existing aircraft over 2010-13F mainly by

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Company Focus Thai Airways

proportion of OL to 20% of its fleet within the next five years Q: What about the upcoming launch of Thai Tiger Airways in order to reduce demand on capital. (TTA)?

THAI: Owned, Financial lease, and Operating lease aircrafts A: Low cost airline has been the fastest growing segment in OL percent the industry in the past decade, but a premium carrier such as Thai Airways cannot compete directly with them due to large 100 . % . % . % . % . % . % 8 0 8 1 8 3 13 1 17 2 17 2 differences in cost structures, especially personnel expense. 80 Hence, THAI plans to launch a new carrier, ‘Thai Tiger Airways’ (Joint venture with Tiger Airways and Ryan Asia) to 60 72 72 capture this high growth segment, which still has ample room 81 80 77 73 40 to grow. TTA would operate short haul flights (maximum of 20 five hours) and focus on existing routes where there are strong demand and new routes that are feasible for a low 77711 15 15 0 cost carrier (compared to its premium airline). The venture will 2009 2010 2011 2012 2013 2014 OL Own & FL help THAI to expand its network, diversify into a new Source: Company, DBS Vickers customer segment, exploit the fast-growing budget travel industry, and protect its market share against other low cost Q: What is your CAPEX plan? carriers.

A: CAPEX for 2011F, 2012F, and 2013F are estimated at Average cost per kilometer Bt22.8bn, Bt48bn, and Bt41.2bn, respectively (total Bt112bn). Carrier Bt/km About 70% of total CAPEX will be budgeted for new aircraft Thai Airways 1.75 purchases (Bt78bn) between 2011-13F. Nok Air 1.4 Thai Tiger Airways* 1.25 . THAI: CAPEX Plan Source: Company, DBS Vickers * Estimated Bt bn 60 Q: What is the progress on TTA launch? 48 . 50 41 2 40 A: The venture has been approved by the board of directors . 24 8 . (BoD) and is now pending approval from the Ministry of 30 22 8 Transportation and Ministry of Finance (MOF). It is expected 20 to be launched by end 3Q11 or early 4Q11 with a fleet of 10 four A320 aircraft (180 seats), and it will add four aircraft in 0 2012. These eight aircraft were originally ordered from Tiger F F F 2010 2011 2012 2013 Airways under lease contracts. Aircraft Aircraft retrofit Spare parts & spare engine Others TTA: Shareholding Structure Source: Company, DBS Vickers Ryan Asia TTA Thai % Employee . % Q: How will you finance for your CAPEX? 10 1 1

A: With operations expected to improve going forward, THAI should be able to fund the bulk of its CAPEX with internal cashfllow. The balance will be funded by the issue of Bt8bn worth of bonds in May11 with expected maturity of 5-10 years. Part of the proceeds from the bond issue would also be used to refinance maturing debt and working capital. Apart Tiger Airway s THAI % % from this, it might also seek to extend more credit lines in 39 50 order to allow more financial flexibility. Source: Company, DBS Vickers

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Company Focus

Thai Airways

Q: When can we expect THAI to exit State-Owned-Enterprise program and buying new aircraft) should also help. In any (SOE) status? case, yield growth in FY11F could potentially be higher than targeted given several fuel surcharge hikes amid rapidly rising A: THAI is still planning to exit from state-owned enterprise jet fuel prices. (SOE) status by reducing the Ministry of Finance (MOF)’s stake to below 50%, although still a major shareholder. The current THAI: Passenger’s yield trend plan is to reduce the current 51% stake by 2% to 49%. It still THB/RPK has two loan covenants that mandate the MOF to maintain at . 2 45 least 50% stake in THAI. But THAI is negotiating to unlock . 2 35 these loan covenants which would require the repayment of . part of the loans, estimated at Bt5bn, possibly this year. The 2 25 . exact timing is unclear, but expected to be after the general 2 15 . election in Jul11. 2 05 . 1 95 . THAI: Shareholders structure 1 85 . Other 1 75 . % Jul Jan Sep Feb Apr Jun 29 28 Oct Dec Mar Nov Aug Ministry May of Finance 2008 2009 2010 2011 . % 51 03 Source: Company, DBS Vickers

Q: Is the company targeting more employees for early Thai NV DR . % retirement this year? 4 57 Vayupak A: Apart from the regular 200-400 normal retirements p.a., Fund the company is also targeting early retirement, to retire up to . % 15 12 c.3,000 employees within the next 3-4 years. This would allow THAI to save Bt16bn on personnel expenses over the Source: SET, DBS Vickers next 10 years. Meanwhile, new hire for replacement would

be kept to a minimum to keep costs low, and it would focus Q: How would this privatization benefit THAI and MOF? on increasing employee’s efficiency and work process instead.

A: Without being a state enterprise, THAI can respond to Q: What would be the major cost reduction drivers going changes in market conditions more quickly, be more forward? competitive, and have more flexibility in implementing new

strategies. Currently, many changes in strategies are subject A: THAI will continue to cut costs, especially (i) personnel to long approval process at government bodies (e.g. costs though early retirement, adjusting management investment of over Bt1bn requires approvals). The benefit for benefits, and increase outsourcing, (ii) renegotiating supply MOF would be that it can allow more funding through debt contracts, (iii) increase fuel efficiency, and (iv) increasing facility for the government as a portion of THAI’s Bt140bn internet bookings. The bulk of ticket sales is now from debt is now also on the government’s balance sheet as public wholesale agents. But THAI’s redesigned internet reservation debt. system is completed, and it expects 15% of ticket sales from

internet bookings by end FY11, compared to 6% at end FY10 Q: What is your plan to increase passenger yields? and 3% in FY09. Costs could be reduced by Bt1bn p.a.

through lower agent commission that is currently up to 7%. A: THAI is targeting passenger yield to improve by 2% p.a. It The company expects to save up to Bt20bn over FY10-12F. intends to achieve this by applying real time dynamic pricing

scheme to match higher prices with higher demand. In addition, it targets to improve its RBD (Reservation booking designator) by placing priority on selling higher priced tickets. Meanwhile, better product quality (from aircraft retrofit

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Company Focus Thai Airways

THAI: Operating expense breakdown any case, the company should not bear the full impact of higher fuel prices given its effective cost control measures via Marketing Other hedging instruments and timely adjustment of fuel surcharge. Depreciation % expense 3 Personnel % % Flight 10 4 % 25 Demand remains strong amid hike in fuel surcharge. Given operations healthy travel demand now, we expect travelers to be less % 19 price-sensitive. Demand had not contracted much because of higher surcharge, as the surcharge accounts for only c.10% of the total fare. Hence, when the surcharge is raised by 15- Lease 20%, fares only rise by 1-2%, which normally goes % 3 Fuel unobserved by travelers. Moreover, the quantum of THAI’s Supplies % fuel surcharge increase is comparable to peers. Also, we % 31 5 expect current high fuel prices to be unsustainable because Source: Company, DBS Vickers the recent increase in fuel prices were due to unrest in the

Middle East that should not last long and fuel prices should Q: Are you targeting capacity expansion? correct when it ends.

A: Capacity or ASK is expected to grow 4-5% p.a., with most Jet Fuel Price vs Crude Oil Price of the growth coming from higher flights frequency rather US$/bbl than new routes, given that it is more cost efficient and 200 requires less marketing effort to penetrate existing markets. 175 150 125 Our view on THAI - positive 100 75 Limited impact. With 11% passenger revenue contribution 50 from Japan, the Japan quake and ongoing crisis had raised 25 concerns over the immediate and long-term impact on THAI, 0 08 09 10 11 07 and created negative sentiment towards the counter. In any 07 08 09 10

case, the impact on THAI’s earnings should not be affected Jul- Jul- Jul- Jul- Jan- Jan- Jan- Jan- Jan- Jet Kerosene Brent substantially because lower cabin factor on routes to Tokyo Narita and Haneda (50-60%) is being offset by robust cabin Source: Bloomberg, DBS Vickers factor (c.85%) on the remaining three Japanese routes to Fuguoka, Nagoya and Osaka. These cities are further from the Tourist arrivals remain robust. Meanwhile, strong Thailand troubled Fukushima nuclear power plant. Meanwhile, THAI tourism industry continues to favor THAI. Visitor arrivals has responded by cutting one flight/day to Tokyo Narita and continued to improve in Jan11, jumping 13% yoy to 1.81m increased frequency to Korea. Since the earthquake, THAI’s visitors. This is premised on a more stable political cabin factors on routes to China and Korea have edged environment and the lifting of emergency rule in all provinces higher, implying the substitution effect. This should help to since 22 Dec. Thailand remains an attractive value-for-money partly offset the drop in Japan traffic. holiday destination. Visitor arrivals are expected to grow 9% yoy to 17.5m in 2011 from 16m in 2010. THAI will be a Could divert more aircraft from Japan routes. Given still prime beneficiary since c.70% of its passengers is leisure ample room to increase frequency at other strong regional travelers. routes that are now still lacking aircraft, THAI should be able to transfer more aircraft from Japan routes if traffic remains stumpy or worsens, and try to recoup total passenger traffic volume.

Effective fuel price management. Another major concern for THAI is rising fuel costs. We had earlier factored in and raised jet fuel price assumptions for this year to US$116/barrel. In

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Company Focus

Thai Airways

Thailand: Monthly visitor arrivals THAI: Forecast translation gain/loss on outstanding loans ' People Loan At end Dec10 As of 30 Mar11 Forex , 000 % Amount Forex rate (Btm) Forex rate (Btm) gain/loss 2 000 60 (m) (Btm) , % EUR 1 500 40 1,237 Bt40.25/EUR 49,796 Bt42.82/EUR 52,975 (3,179) % JPY 20 36,786 Bt0.3742/JPY 13,766 Bt0.366/JPY 13,464 302 , USD 1 000 % 65 Bt30.3/USD 1,977 Bt30.32/USD 1,978 (1) 0 Total 65,539 68,417 (2,878) 500 - % 20 Source: DBS Vickers - % 0 40 07 07 08 08 09 09 10 10 07 07 08 08 09 09 10 10 Valuation

Feb Feb Feb Feb Nov Nov Nov Nov Aug Aug Aug Aug May V isitor arriv alsMay May % chg.May y-o-y (RHS) Retaining estimates, core profit to surge in FY11F. We are Source: BOT, DBS Vickers retaining our estimates for FY11-12F, as it is too early to assess full impact from Japan. Additionally, the impact is Healthy 1Q11F traffic. Jan-Feb11 cabin factor was solid at partly being offset by higher traffic at other regional routes. average of 77.7%, albeit still below its highs of 82% in Jan10 FY11F reported net profit is expected to fall 41% yoy to and 82.3% in Feb10. But revenue should remain strong, Bt9.1bn, mainly because of the absence of Bt10.2bn extra premised on 2-3% yoy higher capacity (ASK) and passenger gains booked in FY10. Excluding the extra gains, core profit yield rising to Bt2.8/km vs Bt2.6/km in FY10. Meanwhile, should surge 77% yoy as easing political uncertainty in Mar11 cabin factor is estimated at 75% and yield should still Thailand and an improving economy should boost traffic and inch up given a hike in fuel surcharge. Hence, cabin factor in operations. Meanwhile, operating costs remain under control, 1Q11F is estimated at 76.8%, a mild 4 ppts lower than especially with efficient management of fuel costs, yields are 1Q10’s 81%. Meanwhile, we expect THAI’s operating rising, and THAI continues to implement measures to improve statistics to be strong with an improving tourism climate, with efficiency. Apr11 booking remaining strong at c.70%. Attractive valuation, reiterate BUY. Our target price is THAI: Passenger cabin factor trend maintained at Bt60.25. It is pegged to 1.5x FY11F P/BV, in line with its 7-year average historical PBV +1SD and implying % 01 27 hefty 60% upside potential. The share price has fallen over . . %

85 77 25 . 82 82 8 6 2

. the last few weeks mainly due to Japan concerns, but we 8 . % . 34 1 . . . 34 2 1 1 20 78 63 . . . 4 32 . . 77 . . 77

80 77 % 77 07

76 believe the impact will be limited and THAI has implemented 76 76 1 . 84 15 3 . 75 75 1 75 . 75 . 74 . 74 74

74 %

75 73 10 measures to mitigate the drop in Japan traffic. The counter’s 72 71 71 71 % 70 33 1 5 . 70 . % current valuation has largely discounted its attractive growth

2 0 . 65 65 - % potential, trading at 0.9x P/BV and 4.8x EV/EBITDA, below its

65 62 5

67 - % . 10 historical mean and regional peers’ averages of 1.2x and 6.6x 60 - % 56 15 - % (FY11F), respectively. 55 20 10 11 09 09 10 09 10 10 10 11 11 11 09 09 09 09 09 10 10 10 09 10 09 09 09 10 10 10 Key risks to our call are: (i) lingering or worsening political Jul Jul Jan Jan Jan Sep Sep Dec Feb Dec Feb Apr Feb Apr Jun Oct Oct Mar Mar Mar Nov Nov Aug Aug Apr- May May Jun- uncertainty in Thailand, (ii) spiking fuel costs, (iii) natural Cabin Factor y-o-y growth (RHS) disasters at tourist destinations, and epidemics, and (iv) Source: Company, DBS Vickers prolonged or worsening unrest in the Middle East.

Potentially forex loss in 1Q11F. We also expect THAI to book Bt2.9bn extra forex loss mainly due to a stronger Euro against the Thai baht. The baht has weakened 6% from Bt40.25/Euro at end Dec10 to Bt42.82 currently (34% of THAI’s Bt146bn outstanding loans is denominated in euro).

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Company Focus Thai Airways

THAI: PBV Band

PBV (x) . 2 5 . + sd 2 0 2 . + sd 1 5 1 . Mean 1 0 . - sd 0 5 1 - sd - 2

04 05 06 07 08 09 10 11

Source: Reuters, DBS Vickers

Regional peers comparison Market PE P/BV EV/EBITDA Div Yield ROE Share Price Performance Cap (x) (x) (x) (%) (%) (%) BB Ticker Name (US$m) 11F 12F 11F 12F 11F 12F 11F 11F 1M 3M YTD 1Y 293 HK CATHAY PACIFIC AIRWAYS 9,424 7.9 7.7 1.3 1.1 5.7 5.4 5.0 16.1 3.0 (13.1) (13.1) 13.9 2610 TT CHINA AIRLINES LTD 2,673 6.7 11.7 1.5 1.4 7.2 10.3 1.8 24.9 (12.2) (34.3) (34.3) 46.1 1055 HK CHINA SOUTHERN AIRLINES 9,865 7.5 10.2 1.1 1.0 9.7 9.6 0.7 12.7 (6.0) (27.3) (27.3) (0.3) CO-H 2618 TT EVA AIRWAYS CORP 2,345 7.8 7.6 1.6 1.4 8.4 7.8 1.4 7.6 (13.2) (36.8) (36.8) 55.5 003490 KS KOREAN AIR LINES CO LTD 4,323 8.9 7.3 1.1 1.0 7.2 6.4 0.6 13.1 7.0 (5.5) (5.5) (1.1) MAS MK MALAYSIAN AIRLINE SYSTEM 2,032 17.9 9.7 1.5 1.3 6.1 4.2 0.1 7.7 (2.6) (12.0) (12.0) (14.4) BHD SIA SP SINGAPORE AIRLINES LTD 12,982 12.0 10.8 1.2 1.1 3.5 3.3 4.5 9.4 0.4 (10.6) (10.6) (10.0) THAI TB THAI AIRWAYS 2,742 9.1 7.3 0.9 0.9 4.8 4.7 2.9 10.7 (1.3) (22.4) (22.4) 34.5 INTERNATIONAL Average (simple) 9.7 9.0 1.3 1.2 6.6 6.5 2.1 12.8

Source: Bloomberg, DBS Vickers

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Company Focus

Thai Airways

Key Assumptions Sensitivity Analysis 2011 FY Dec 2008A 2009A 2010A 2011F 2012F Jet fuel price +/- Net Profit +/- 3% Passenger's cabin factor 74.8 73.0 73.6 74.9 75.7 US$1/barrel Passenger's ASK (m) 75,391.0 72,031.0 75,600.0 79,071.1 81,750.1 Interest rate +/- 50 Net Profit +/- 6% Passenger's RPK (Btm) 56,377.0 52,593.0 55,676.0 59,211.9 61,874.1 bps Freight load factor (%) 55.2 52.1 61.5 64.0 66.0 Jet fuel price (US$/barrel) 142.0 74.7 94.1 116.0 121.8

Segmental Breakdown Fuel price is expected to jump FY Dec 2008A 2009A 2010A 2011F 2012F 23% yoy mainly due to Middle

East unrest. Revenues (Bt m) Passenger and excess 164,319 134,479 144,862 162,005 171,108 Freight 25,841 18,525 27,391 27,827 29,201

Mail 913 823 839 881 899 Strong 12% yoy growth Other activities 9,046 7,775 7,497 7,638 8,131 in passenger revenue

given improving travel Total 200,118 161,603 180,589 198,351 209,339 demand.

Revenues (%) Passenger and excess 82.1% 83.2% 80.2% 81.7% 81.7% Freight 12.9% 11.5% 15.2% 14.0% 13.9% Mail 0.5% 0.5% 0.5% 0.4% 0.4% Other activities 4.5% 4.8% 4.2% 3.9% 3.9%

Total 100.0% 100.0% 100.0% 100.0% 100.0%

Margins Trend

8.0%

3.0% Income Statement (Bt m) FY Dec 2008A 2009A 2010A 2011F 2012F -2.0% 2008A 2009A 2010A 2011F 2012F

Revenue 200,118 161,603 180,589 198,351 209,339 Cost of Goods Sold (190,081) (137,514) (157,489) (169,558) (177,587) -7.0% Gross Profit 10,037 24,089 23,099 28,793 31,752 Other Opng (Exp)/Inc (17,062) (15,146) (14,564) (14,192) (14,433) -12.0% Operating Profit (7,025) 8,943 8,535 14,601 17,319 Operating Margin% Net Income Margin% Other Non Opg (Exp)/Inc 1,994 2,094 3,497 3,769 4,082 Associates & JV Inc (65) (9) 258 70 72 Net Interest (Exp)/Inc (4,992) (5,559) (4,981) (5,369) (5,303) Exceptional Gain/(Loss) (13,511) 2,638 10,214 0 0 Pre-tax Profit (23,600) 8,107 17,523 13,070 16,170 Tax 2,285 (691) (2,125) (3,921) (4,851) Minority Interest (65) (72) (48) (62) (69) Preference Dividend 0 0 0 0 0 Net Profit (21,379) 7,344 15,350 9,087 11,250 Net Profit before Except. (7,868) 4,705 5,136 9,087 11,250 EBITDA 14,952 31,758 32,226 38,875 43,131 Growth Revenue Gth (%) 1.4 (19.2) 11.7 9.8 5.5 EBITDA Gth (%) (45.8) 112.4 1.5 20.6 10.9 Opg Profit Gth (%) (176.9) (227.3) (4.6) 71.1 18.6 Net Profit Gth (%) (736.8) (134.3) 109.0 (40.8) 23.8 Net profit fell in the absence of Bt9.1bn forex gain in FY10, but

Margins & Ratio core profit should surge 77%. Gross Margins (%) 5.0 14.9 12.8 14.5 15.2 Opg Profit Margin (%) (3.5) 5.5 4.7 7.4 8.3 Net Profit Margin (%) (10.7) 4.5 8.5 4.6 5.4 ROAE (%) (37.7) 14.9 22.6 10.7 12.3 ROA (%) (7.9) 2.8 5.4 3.1 3.7 ROCE (%) (3.4) 4.0 3.3 4.3 5.1 Div Payout Ratio (%) N/A 5.8 17.8 26.4 25.0 Net Interest Cover (x) (1.4) 1.6 1.7 2.7 3.3 Source: Company, DBS Vickers

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Company Focus Thai Airways

Balance Sheet (Bt m) Asset Breakdown FY Dec 2008A 2009A 2010A 2011F 2012F

Net Fixed Assets 207,064 213,505 206,118 208,639 234,888 Inventory- 2.6% Invts in Associates & JVs 1,337 1,241 1,401 1,436 1,472 Bank, Debtors- Cash 6.7% Other LT Assets 9,012 9,823 7,939 8,017 7,672 and Cash & ST Invts 7,976 14,650 38,229 36,697 16,898 Liquid Assets - Inventory 6,779 6,198 6,968 7,559 7,900 Associates'/J Vs 0.5% Debtors 15,829 16,204 18,107 19,835 20,934 Net Other Current Assets 11,538 10,237 14,997 15,327 14,567 Fixed Total Assets 259,535 271,857 293,760 297,510 304,331 Assets -

ST Debt 36,206 25,490 23,155 19,203 15,903 Other Current Liab 62,378 54,961 57,581 60,684 63,684 LT Debt 106,417 129,410 123,125 121,153 119,631

Other LT Liabilities 8,652 8,589 6,989 8,795 8,619 Shareholder’s Equity 45,603 53,056 82,510 87,213 95,962 Minority Interests 279 352 400 462 531 Total Cap. & Liab. 259,535 271,857 293,760 297,510 304,331

Non-Cash Wkg. Capital (28,231) (22,323) (17,509) (17,963) (20,284) Net Cash/(Debt) (134,647) (140,250) (108,050) (103,659) (118,636) Debtors Turn (avg days) 31.6 36.2 34.7 34.9 35.5 Creditors Turn (avg days) 17.9 20.6 17.3 16.4 16.7 Inventory Turn (avg days) 13.8 20.3 17.5 17.8 18.1 Asset Turnover (x) 0.7 0.6 0.6 0.7 0.7 Current Ratio (x) 0.4 0.6 1.0 1.0 0.8 Lower net gearing after Bt15bn capital raising in Quick Ratio (x) 0.2 0.4 0.7 0.7 0.5 2H10 and better Net Debt/Equity (X) 2.9 2.6 1.3 1.2 1.2 operations. Net Debt/Equity ex MI (X) 3.0 2.6 1.3 1.2 1.2 Capex to Debt (%) 15.0 10.6 6.5 16.3 35.3 Z-Score (X) 0.5 0.5 0.5 1.0 1.3

Cash Flow Statement (Bt m) Capital Expenditure FY Dec 2008A 2009A 2010A 2011F 2012F

Pre-Tax Profit (23,600) 8,107 17,523 13,070 16,170 60000 Dep. & Amort. 20,048 20,730 19,936 20,435 21,658 50000 Tax Paid (1,478) 2,285 (691) (2,125) (3,921) 40000 Assoc. & JV Inc/(loss) 65 9 (258) (70) (72) 30000 Chg in Wkg.Cap. 3,000 (8,885) (6,248) (1,342) 1,391 20000

Other Operating CF 13,188 6,165 (1,990) 25 76 10000

Net Operating CF 11,224 28,411 28,273 29,994 35,301 0 Capital Exp.(net) (21,403) (16,428) (9,581) (22,887) (47,908) 2008A 2009A 2010A 2011F 2012F Other Invts.(net) 18 2 8 (14) (2) Capital Expenditure(-) Invts in Assoc. & JV 131 96 (160) (35) (36) Div from Assoc & JV 0 0 0 0 0 Other Investing CF 944 1,858 861 0 0

Net Investing CF (20,309) (14,472) (8,872) (22,936) (47,946) Div Paid (3,814) (637) (423) (2,728) (2,401)

Chg in Gross Debt (5,466) 15,444 486 (5,924) (4,822) Capital Issues 0 0 14,749 0 0 Other Financing CF (2) (21,892) (10,833) 62 69 Majority of CAPEX is for new aircrafts purchases. Net Financing CF (9,283) (7,085) 3,979 (8,590) (7,154) Currency Adjustments 0 0 0 0 0 Chg in Cash (18,368) 6,854 23,380 (1,532) (19,799) Opg CFPS (Bt) 4.8 22.0 15.8 14.4 15.5

Free CFPS (Bt) (6.0) 7.1 8.6 3.3 (5.8)

Source: Company, DBS Vickers

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Company Focus

Thai Airways

Quarterly / Interim Income Statement (Bt m) Margins Trend FY Dec 4Q2009 1Q2010 2Q2010 3Q2010 4Q2010 30%

Revenue 47,709 48,913 38,759 44,433 48,483 20% Cost of Goods Sold (37,100) (38,896) (37,190) (37,129) (44,273) 10%

Gross Profit 10,609 10,017 1,569 7,304 4,210 0% 08 08 08 08 09 09 09 09 10 10 10 Other Oper. (Exp)/Inc (3,886) (3,860) (3,606) (3,673) (3,426) 10 Q Q Q Q Q Q Q Q Q Q Q -10% Q 1 2 3 4 1 2 3 4 1 2 3 Operating Profit 6,724 6,157 (2,037) 3,631 784 4 Other Non Opg (Exp)/Inc 1,088 861 842 938 855 -20%

Associates & JV Inc (11) (7) 176 57 32 -30% Net Interest (Exp)/Inc (1,410) (1,314) (1,230) (1,272) (1,165) -40% Exceptional Gain/(Loss) 2,808 5,610 4,361 (3,220) 3,462 Operating Margin% Net Income Margin% Pre-tax Profit 9,199 11,308 2,112 135 3,969 Tax (269) (564) (552) 14 (1,024) Minority Interest (17) (20) (7) (13) (8) Net Profit 8,913 10,724 1,552 136 2,937 High cost mainly due to extra Net profit bef Except. 6,104 5,114 (2,808) 3,356 (526) personnel expenses - early EBITDA 12,227 12,227 4,099 9,619 6,581 retirement benefits and employees’ bonus.

Growth Revenue Gth (%) 22.8 2.5 (20.8) 14.6 9.1 EBITDA Gth (%) 133.0 (7.5) (66.5) 134.7 (31.6) Opg Profit Gth (%) 8,538.0 (8.4) (133.1) (278.2) (78.4) Net Profit Gth (%) (320.9) 20.3 (85.5) (91.2) 2,053.1 Margins Gross Margins (%) 22.2 20.5 4.0 16.4 8.7 Opg Profit Margins (%) 14.1 12.6 (5.3) 8.2 1.6 Net Profit Margins (%) 18.7 21.9 4.0 0.3 6.1 Source: Company, DBS Vickers

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Company Focus Thai Airways

DBSV recommendations are based an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)

BUY (>15% total return over the next 12 months for small caps, >10% for large caps) HOLD (-10 to +15% total return over the next 12 months for small caps, -10% to +10% for large caps) FULLY VALUED (negative total return i.e. > -10% over the next 12 months) SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)

Share price appreciation + dividends

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Company Focus

Thai Airways

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Corporate Governance Rating

Score Range Number of Logo Description Disclaimer & Disclosure

90-100 Excellent The disclosure of the survey result of the Thai Institute of Directors Association (“IOD”) regarding corporate governance is made pursuant to the policy of the Office of the Securities and Exchange Commission. The survey of 80-89 Very Good the IOD is based on the information of a company listed on the Stock Exchange of Thailand and the Market for Alternative Investment disclosed to the public 70-79 Good and able to be accessed by a general public investor. The result, therefore, is from the perspective of a third party. It is not an evaluation of operation and is 60-69 Satisfactory not based on inside information.

50-59 Pass The survey result is as of the date appearing in the Corporate Governance Report of Thai Listed Companies. As result, the survey result may be changed >50 N/A N/A after that date. DBS Vickers Securities (Thailand) Co., Ltd. does not confirm nor certify the accuracy of such survey result.

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