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Anchor Report - Thailand air transport - Land of air miles

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In this anchor report, I initiate coverage on the Thailand air transport sector, with focus on 3 stocks - Airports of Thailand, Thai Airways and Asia Aviation Pcl.

In this anchor report, I initiate coverage on the Thailand air transport sector, with focus on 3 stocks - Airports of Thailand, Thai Airways and Asia Aviation Pcl.

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  • 1. ANCHOR REPORT Equity Research Thailand air transport: Land of air miles Buy AOT, THAI amidst booming tourism outlook and clear earnings drivers We start coverage of Thailand’s aviation sector with a bullish stance, on our view that the sector’s re-rating could well continue into 2013. Catalysts include seasonally strong 4Q12/1Q13 results, a strong tourism outlook and domestic demand. For airlines, THAI (Buy) has seen an earnings turnaround and we think its correlation to tourism is overlooked by the Street. We like AAV’s (Neutral) growth story, but we believe it is reflected in current valuations. February 6, 2013 Research analysts Thailand Transport / Logistics Tushar Mohata, CFA - NSM tushar.mohata@nomura.com +603 2027 6895 Bineet Banka - NSFSPL bineet.banka@nomura.com +91 22 4053 3784 Our top pick is not an airline but airport operator AOT (Buy), which we believe stands to benefit from the anticipated aviation boom in Thailand but with less earnings risk, especially after the win-win decision in 2012 to allow low-cost carriers to use the Don Muang Airport. Key analysis in this anchor report includes:  Identification of key drivers behind our 7-8% long-term aviation growth forecast, including domestic demand, tourism, and propensity to fly.  Details on why Thailand is in a sweet spot in terms of both geography and airport infrastructure to benefit from a Pan-Asia boom in flyers.  Explanation of why we still see room for Thailand’s LCC penetration to grow, based on the evolution in other ASEAN countries, and why this is not necessarily bad for full-service carriers like THAI. See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts.
  • 2. Thailand air transport TRANSPORT/LOGISTICS Land of air miles EQUITY RESEARCH February 6, 2013 Buy AOT, THAI amidst booming tourism outlook and clear earnings drivers Initiate coverage on Thailand aviation sector with a bullish outlook We initiate coverage of the Thailand aviation sector with a bullish stance. We expect 2013F to be another strong year for the sector, with ~9% overall passenger number growth (barring macro shocks), led by: a) a strong domestic demand outlook; b) tourist inflows expected by the tourism ministry to grow by 10% to 24.5mn, mainly from China and India; c) lowcost carrier (LCC) penetration in Thailand (currently at 27% market share) still having room to grow, which generates additional new traffic; and d) a structural improvement in propensity to fly (measured by income-adjusted RPK per capita) on growing incomes. With our oil team expecting a 5% y-y decline in oil prices in 2013F and 2014F, we think airlines can maintain margins and grow profits, which bodes well for ROE and should result in another year of re-rating in these stocks, in our view. LCC shift to Don Muang (DMK) was a win-win for all We believe that the 2012 decision to allow LCCs to use DMK was a masterstroke, effectively doubling Bangkok’s congested airport capacity and allowing LCC expansion to continue unhindered for the next few years. Airlines, in turn, can enjoy lower costs and minimize delays, improving cost efficiencies, and AOT can now focus on the long-term expansion at BKK. Buy AOT (our top pick) and THAI; Neutral on AAV We initiate coverage on AOT with a Buy (TP: THB145), as it has a high operating leverage to air traffic (3x), making it a direct beneficiary of growing passenger numbers. The airport operator also has lower earnings risk than airlines, in our view, with a forecast FY12-14F 20% EPS CAGR. Anchor themes We are bullish on Thailand's air transport sector, where we see growth of 7-8% pa. It has a relatively young LCC industry with scope for additional demand, planned airport capacity expansion to stay ahead of congestion, and backing from solid tourism demand and domestic consumption drivers. Nomura vs consensus We are more bullish on THAI and AOT than the street. We think AAV's earnings might disappoint near term. Research analysts Thailand Transport / Logistics Tushar Mohata, CFA - NSM tushar.mohata@nomura.com +603 2027 6895 Bineet Banka - NSFSPL bineet.banka@nomura.com +91 22 4053 3784 We also initiate coverage with a Buy on THAI (TP: THB28.50) on the back of its operational performance, which has shown steady improvement in 2012. We think THAI’s turnaround from a loss in 2Q12 might be sustainable (barring macro shocks) and would rekindle investor interest in the stock. With 77% revenue exposure to economy class (and consequently tourist traffic) and 70%-plus exposure to APAC traffic, THAI’s correlation to tourism is unappreciated by the Street, and warrants another look from investors, in our view. Although we like AAV’s (and Thai AirAsia’s) growth story, we think that it is adequately reflected in the stock’s current valuation (even in the context of a robust 33% earnings CAGR for the next two years), which is at an adjusted EV/EBITDAR premium (2014: 9.5x) to the LCC universe of ~60%. Neutral (TP: THB6.10) on AAV. Catalysts: Seasonally strong 4Q12, 1Q13 results and improving operating metrics should be key catalysts going into 2013 See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts.
  • 3. Nomura | Thailand air transport February 6, 2013 Contents 4 Stock rating and rationale 5 Focus charts 7 Valuation and catalysts 7 SET Transport Index should continue on its upward trajectory 8 THB appreciation likely to benefit air transport players 9 Valuation comparables 10 Sensitivity 11 Strong aviation growth forecast for Thailand 11 11 8% y-y growth in 2012 implies resilience of passenger numbers 12 We estimate a ~7-8% medium- to long-term traffic growth in Thailand as well 12 Low cost carriers (LCCs) likely to be key enabler in traffic expansion 13 Strong correlation with GDP a positive when viewed in context of our bullish growth forecasts for Thailand 15 Propensity to fly has scope for 3x upside, even after adjusting for income differentials 16 17 Historical data point to a healthy demand outlook for air travel Thailand’s LCC penetration is low for its income levels – suggesting more demand generation by LCCs to come Tourism should continue to underpin Thailand’s inbound air traffic 17 17 19 At ~22mn tourists, Thailand is close to breaking into the top 10 most visited nations in the world Four-hour flying radius from Thailand encompasses India, China and the ASEAN countries, making them suited to LCC proliferation Healthy domestic fundamentals to support outbound traffic as well 19 21 Five key themes supporting more air travel Cargo and business class might have a lacklustre 2013 22 Possible recovery in business class and cargo to begin in 2013 in our view 2
  • 4. Nomura | Thailand air transport 24 Risks 26 Appendix: Operating stats 29 Appendix: Fare comparison 30 Airports of Thailand PCL 54 Thai Airways International PCL 74 Asia Aviation PCL 93 February 6, 2013 Appendix A-1 3
  • 5. Nomura | Thailand air transport February 6, 2013 Stock rating and rationale Fig. 1: Ratings, target price and rationale Stock code AOT Currency Share price (31 Jan) Rating Price target Implied upside AOT TB THB 105.50 Buy 145.00 37.4% Rationale - We expect AOT's re-rating to continue, led by an expansion in forward earnings and return estimates, with consensus EPS estimates for AOT being raised ~50% since the beginning of 2012. This is backed by the proposed hikes in PSC charges to come into effect in FY14F, along with additional traffic growth to be realised by opening up of the DMK Airport. - With most of its cost base relatively fixed, and a 60% share of revenues from aeronautical sources, operating leverage at AOT is a key driver for earnings upside, with every 1% in additional passengers resulting in a 3% boost in earnings. - We note that AOT is still trading at a discount to the sector on growth-adjusted multiples, whereas we argue that higher-growth airports like AOT and MAHB (MAHB MK, Buy) should then trade at a premium to the sector PEG. We note that due to the defensive nature of earnings and generally higher dividend yields than airlines, airport-operator stocks trade at higher growth-adjusted P/E multiples than airlines. The sector average PEG is 1.7x. With AOT trading at PEG of only 1x, we think the discount to the sector is unwarranted. - We also note that that AOT’s retail realisation of USD3/passenger at its airports is lower than most major airports, including Malaysia Airports. This suggests that AOT’s concession agreement with King Power leaves some room for upside, which might be realised once the BKK concession agreements are up for re-negotiation in FY15F, through more preferential terms for AOT. THAI Airways THAI TB THB 23.10 Buy 28.50 23.4% Rationale - We expect THAI's massive underperformance vs peers to reverse on operational improvements, notably an increase in passenger loads to 77% in 9M12 (from 72% a year ago) which came amidst a relatively small loss in passenger yield (-1.2% to THB 2.70/RSK). We expect a profitable 4Q12 result. In line with consensus, we expect a substantial jump in profits for FY13-14F, led by softer oil prices. - We also expect THAI to re-rate to mid-cycle valuations, as it currently trades below mean and at a discount to the full-service airline sector. - We also note that THAI, with more than 70% of revenues from APAC and 77% from economy class, is correlated to tourism traffic, a fact which seems to be overlooked by the Street. - We are also bullish on THAI's recent refleeting and retrofitting, as well as its expansion through THAI Smile, which if done correctly, has the potential to be profitable (like SIA's SilkAir), in our view. AAV AAV TB THB 6.10 Neutral 6.10 0.0% Rationale - AAV has had a strong run since its IPO in May 2012. However, with valuations already peaking, we think AAV is arguably the world’s most expensive low-cost carrier (LCC) stock, with the high Street earnings growth expectations already price in, which might lead to investor disappointment for future earnings. We think that FY12F full-year earnings will likely fall short of Street estimates (median: THB 1.02bn), and thus limit near-term upside potential. - We like the company’s growth story, with its fleet projected by management to almost double by 2016F, and we think earnings will follow a similar trend. - A study of adjusted EV/EBITDAR multiples of Malaysia AirAsia (AIRA MK, Buy) shows that although AirAsia also traded up to more than 10x adj. forward EV/EBITDAR during the bullish months prior to the global financial crisis, it has since traded down to the 7-8x level and has struggled to break the 8.5x level. In fact, we note that the mere announcement of a new airline called Malindo in Malaysia in September 2012 was enough to make investors jittery and saw MAA falling to -1SD below 7x levels. As such, we note that Thai AirAsia cannot be immune to such future competitive pressures, and we prefer to wait for more attractive valuations to accumulate rather than chase the stock at such high levels. - At the same time, due to the scarcity of Thai tourism plays, we think investors might continue to ascribe to a premium to AAV, as it is one of the cleaner exposures to the tourism sector, along with a strong domestic growth component as well. With foreign shareholding hovering around ~9-10% levels, and the stock breaching the USD1bn valuation zone, we think the current high valuations might sustain. Source: Nomura research 4
  • 6. Nomura | Thailand air transport February 6, 2013 Focus charts Fig. 2: Thailand tourist arrivals Fig. 3: Stock price performance Tourist arrivals (LHS) (mn) 30 (%) 25% y-o-y growth (RHS) 20% 25 15% 20 150 10% 10 AOT SET MSCI EM Airlines 100 5% 15 AAV THAI SET Transport 200 50 0% 0 Source: CEIC, Ministry of Tourism Jan-13 Dec-12 Source: Bloomberg Fig. 4: Oil price forecasts Nov-12 Oct-12 Sep-12 Aug-12 Jul-12 Jun-12 May-12 Apr-12 (50) Mar-12 -10% Feb-12 0 Jan-12 -5% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012F 2013F 5 Fig. 5: Thailand’s propensity to fly has upside TOTAL traffic vs per capita GDP $/bbl 150 Domestic+International RPK / capita (2010) 100,000 130 y = 1931.7ln(x) - 13733 Singapore Brunei New Zealand Australia 10,000 110 90 70 50 3Q14F 1Q14F 3Q13F 1Q13F 3Q12 1Q12 3Q11 1Q11 3Q10 1Q10 3Q09 1Q09 3Q08 1Q08 3Q07 1Q07 30 Cambodia Malaysia Thailand Lao PDR Philippines China Vietnam Indonesia 100 India 1,000 South Korea Japan 10 Bangladesh 1 0 20,000 40,000 60,000 GDP/capita (USD, 2010) Source: Bloomberg, Nomura research Source: SAP Group, Nomura research Fig. 6: Domestic LCC share vs per capita GDP (nom USD) Fig. 7: International LCC share vs per capita GDP (nom USD) Per capita GDP (USD) Source: CAPA, IMF, World Bank, Nomura research 70,000 Japan 60,000 70,000 60,000 50,000 0 0 Japan Australia 50,000 China Russian Fed Saudi 40,000 10 30,000 Vietnam 20,000 20 Singapore 40,000 S.Korea 30,000 30 20,000 THAILAND 40 10,000 Australia 50 Malaysia 45 40 Indonesia 35 30 25 Philippines 20 India 15 THAILAND Vietnam 10 Saudi 5 China Russian S.Korea Fed 0 0 50 2011 LCC Capacity Share (international) 60 Philippines IndiaMalaysia Indonesia 10,000 2011 LCC Capacity Share (domestic) 70 Per capita GDP (USD) Source: CAPA, IMF, World Bank, Nomura research 5
  • 7. Nomura | Thailand air transport February 6, 2013 Fig. 8: LCC capacity share as % of total seats 45% Top 10 Airlines 1. Thai Airways International 2. Thai Air Asia 3. Bangkok Airways 4. Cathay Pacific Airways 5. Emirates 6. Nok Air 7. Orient Thai Airlies 8. Qatar Airways 9. Singapore Airlines 10. China Airlines Thailand (International) 40% Fig. 9: Market share of airlines – FSC and LCC Thailand (Domestic) 35% 30% 25% 20% 15% 10% 5% Source: CAPA, AOT 2011 2010 2009 2008 2007 2006 2005 2004 2003 0% Of which 1. Thai Air Asia 2. Nok Air 3. Orient Thai Airlines 4. Tiger Airways 5. Air Asia 6. JetStar Asia 7. IndiGo Airlines 8. Indonesia Air Asia 9. Jeju Air 10. CEBU Pacific Air 36.25% 12.17% 5.81% 2.97% 2.68% 2.13% 1.61% 1.58% 1.47% 1.34% % of overall 12.17% 2.13% 1.06% 0.95% 0.83% 0.57% 0.42% 0.40% 0.39% 0.31% Within LCCs 60.11% 10.52% 5.26% 4.69% 4.11% 2.80% 2.09% 1.97% 1.95% 1.51% Source: AOT 6
  • 8. Nomura | Thailand air transport February 6, 2013 Valuation and catalysts SET Transport Index should continue on its upward trajectory The SET Transport Index has gained 73% since the beginning of 2012 vs the SET’s 43% rise over the same period. AOT is up 140% over the same period, and AAV is up 64% since listing in May last year. AOT’s re-rating has occurred in line with consensus EPS estimates being raised ~50% since the beginning of 2012, reflecting the additional traffic growth to be realised by opening up the alternative DMK Airport for Thailand, which frees up the congested Suvarnabhumi Airport for additional capacity addition by full-service carriers. On the one hand, THAI has underperformed peers and the broader index, while we note EPS revisions for THAI are holding up relatively well for FY13F, with FY14F consensus expecting a substantial growth in profits. For AAV, we have seen consensus cutting earnings estimates for FY13F/14F, owing to higher-than-expected costs. As such, valuations for AAV are significantly above +1SD to the mean on most metrics we choose to look at (barring simple P/B which has been deflated due to a lumpy fair-value gain on IPO raising the book value). We think that SETTRANS’ re-rating might continue into 2013 as well, with catalysts such as seasonally strong 4Q12 and 1Q13 results to be announced in the first six months, a bullish outlook for the tourism sector, and domestic demand. Fig. 10: Sector performance SETPROP SETCOM SETFIN SETTRANS SETHHOLD SETENTER SETAUTO SETHELTH SETINS SETCOMUN SETBANK SET SETETRON SETCONMT SETFOOD SETPETRO SETAGRI SETENERG 0% 20% 40% 60% 80% 100% 120% % since Jan-2012 Source: Bloomberg 7
  • 9. Nomura | Thailand air transport February 6, 2013 (%) AAV THAI SET Transport AOT SET MSCI EM Airlines 4.5 FY13F FY14F 4.0 3.5 3.0 Source: Bloomberg Jan-13 Dec-12 Nov-12 Oct-12 Sep-12 Aug-12 Jul-12 Source: Bloomberg Fig. 13: AOT: EPS revisions Jun-12 Apr-12 May-12 Mar-12 Feb-12 Jan-13 Dec-12 Nov-12 Oct-12 Sep-12 Aug-12 Jul-12 Jun-12 May-12 Apr-12 Mar-12 Feb-12 2.0 Jan-12 2.5 Jan-12 160 140 120 100 80 60 40 20 0 (20) (40) Fig. 12: THAI: EPS revisions EPS (THB) Fig. 11: Stock price performance Fig. 14: AAV: EPS revisions 0.60 7.5 FY13F 7.0 FY13F FY14F 6.0 EPS (THB) 5.5 5.0 4.5 4.0 0.50 0.45 0.40 Jan-13 Dec-12 Nov-12 Oct-12 Sep-12 Aug-12 Jan-13 Dec-12 Nov-12 Oct-12 Sep-12 Aug-12 Jul-12 Jun-12 May-12 Apr-12 Mar-12 Feb-12 Jan-12 Source: Bloomberg 0.30 Jul-12 0.35 3.5 Jun-12 EPS (THB) 6.5 3.0 FY14F 0.55 Source: Bloomberg THB appreciation likely to benefit air transport players AOT: After having suffered forex losses in FY11, AOT entered into a cross-currency and interest-rate swap contract for 78% of the remaining balance of loan for JPY-THB. This also increased the effective borrowing cost of AOT to ~5%. As such, AOT will largely lose out on the impact of the recent JPY weakening vs the THB, but since we exclude the impact of forex gains / losses in our core net income calculations, and since 22% of the borrowings are still unhedged, we think on an overall basis, AOT will still benefit from the JPY weakening. THAI: For the income statement, THAI’s revenue is denominated primarily in foreign currencies, with the ratio being 38% USD, 28% EUR, 9% JPY and 24% THB. On the cost side, THAI’s exposure is 66% USD, 8% EUR, 3% JPY and 23% THB, with fuel costs and lease costs denominated in USD being the biggest cost item. As such, although THAI is net short USD (benefitting from THB appreciation), it is also net long EUR and JPY, thus losing out when these depreciate. However, in terms of balancesheet liabilities, it has loans denominated in JPY (11% of overall) and EUR (33% of overall), so a THB appreciation benefits here. Overall, we estimate THAI should be a beneficiary of THB appreciation. AAV: Approximately 65-70% of AAV’s revenue is denominated in THB, but ~80% of operating cost is in USD (oil, lease cost and MRO). There is no significant debt exposure to foreign currencies and as a result, AAV benefits from THB appreciation, in our view. 8
  • 10. Nomura | Thailand air transport February 6, 2013 Valuation comparables Fig. 15: Valuation comparables EPS CAGR (12-14F) PEG (2 YR) 11% 23% 8% 7% 21% 9% 416% nm 1.7 1.0 3.6 1.8 0.8 1.7 0.3 nm 12% -1% 16% 0.9 1.0 7.0 -1% 8% 13% 11% 8.1 4.1 0.8 1.7 Nomura Rating AIRPORTS Aeroports De Paris Airports of Thailand Auckland International Airport BBA Aviation BCIA Fraport AG Gemina GMR Infrastructure Last Mcap Close (USDmn) 30/Jan Neutral Buy Neutral NR Buy Buy NR NR 60.76 105.5 2.835 222 6.46 44.605 1.27 18.85 8,168 5,049 3,150 1,691 3,607 5,588 2,541 1,375 16.8 17.6 24.7 12.1 14.3 16.3 26.7 44.5 14.8 13.7 22.5 11.6 12.0 14.1 15.6 14.0 1.6 1.8 1.5 1.5 1.4 1.3 1.1 0.8 1.5 1.7 1.5 1.4 1.3 1.3 1.0 0.8 9.1 10.5 14.0 7.8 8.6 8.5 8.2 10.9 8.6 8.8 13.1 7.5 7.7 7.8 6.3 8.1 9.6 10.5 6.2 13.2 9.8 8.6 4.6 1.5 10.1 12.6 6.7 12.7 11.1 9.6 8.0 5.7 3.1 2.8 4.1 4.0 2.3 2.9 0.2 0.0 7.58 5.51 13.3 1,402 2,158 4,121 10.0 18.4 13.6 9.1 15.7 12.0 1.1 1.5 1.4 1.1 1.4 1.3 4.9 9.6 8.6 4.6 8.2 7.7 12.0 8.6 10.8 12.4 9.3 11.2 000089 CH NR SYD AU Neutral 600897 CH NR 4.23 3.17 13.65 1,150 6,158 654 13.7 35.9 9.8 16.3 12.7 33.6 8.7 14.0 0.9 3.5 1.6 1.4 0.9 4.0 1.3 1.3 7.8 13.3 5.8 8.6 7.0 12.6 5.2 7.7 7.5 7.3 16.5 9.6 5.8 9.7 15.9 10.1 4.0 2.8 2.6 #N/A N/A 6.8 #N/A 2.9 3.5 3.6 4.4 4.4 2.8 3.2 0.5 0.0 #N/A N/A 3.2 3.4 #N/A N/A 7.2 #N/A 3.3 753 HK AIR NZ 020560 KS 293 HK 2610 TT 670 HK 1055 HK 2618 TT 600221 CH 003490 KS MAS MK QAN AU SIA SP THAI TB Buy Buy NR Buy NR Neutral Buy Neutral NR Buy Reduce Buy Buy Buy 6.64 1.25 6030 15.06 12.95 3.53 4.66 18.9 4.35 45450 0.69 1.53 10.99 23.1 11,895 1,148 1,081 7,638 2,277 6,250 6,437 2,083 4,264 3,006 742 3,599 10,408 1,689 11.5 8.5 7.2 20.2 18.7 8.5 10.5 17.0 10.8 12.5 #N/A 22.0 20.5 8.1 11.5 9.4 7.3 4.5 11.6 10.9 7.6 9.2 11.6 9.4 7.4 15.7 7.7 15.9 5.9 9.3 1.2 0.8 0.9 1.0 1.2 1.2 1.0 1.5 1.3 1.0 1.3 0.5 1.0 0.7 1.0 1.1 0.7 0.7 1.0 1.1 1.0 0.9 1.3 1.1 0.9 1.2 0.5 0.9 0.6 1.0 6.6 3.0 6.3 8.2 10.0 5.1 5.7 7.4 7.3 6.8 10.7 3.5 3.9 5.2 6.4 5.9 2.7 5.4 6.6 9.1 4.5 5.0 6.7 6.8 6.2 6.9 2.8 3.4 4.6 5.7 11.1 9.3 13.6 4.9 7.2 15.7 9.4 9.6 13.0 15.2 4.1 4.4 5.1 8.9 9.3 11.9 10.0 18.3 8.0 8.5 14.7 10.6 11.2 13.5 11.5 8.6 6.6 6.2 11.2 10.3 1.5 6.2 0.3 1.6 0.6 0.2 1.6 0.8 1.8 0.5 0.0 1.0 3.2 3.1 1.3 2.0 7.1 0.5 2.9 0.7 0.3 1.8 0.7 #N/A 0.5 0.0 2.9 4.0 4.2 1.8 30% 22% 21% 181% 170% 18% 26% 88% 13% 40% nm 107% 63% 43% 30% 0.5 0.5 0.3 0.4 0.6 0.6 0.6 0.4 1.0 0.3 nm 0.4 0.7 0.3 0.5 AIRA MK AAV TB CEB PM EZJ LN RYA LN LUV US TGR SP VAH AU WJA CN Buy Neutral Buy Buy Neutral NR NR Neutral NR 2.78 6.1 62 931 5.491 11.21 0.765 0.43 21.36 2,487 991 923 5,855 10,791 8,273 507 1,102 2,827 8.4 23.2 11.0 12.0 10.7 11.1 20.4 10.6 10.8 11.0 7.4 17.2 11.0 11.2 12.5 9.3 11.4 6.7 10.0 11.0 1.2 1.5 1.5 1.8 2.2 1.1 2.0 0.9 1.7 1.6 1.1 1.4 1.4 1.6 2.0 1.0 1.7 0.8 1.5 1.5 6.9 9.6 6.3 7.2 8.1 3.8 11.2 5.0 3.5 6.9 6.1 6.4 6.0 6.6 7.6 3.5 7.6 4.3 3.2 6.1 16.0 6.7 14.4 16.0 16.4 9.4 12.3 9.3 18.3 14.4 15.4 8.4 13.3 15.7 16.3 10.9 14.6 11.9 29.9 14.6 1.3 NA 2.0 2.6 1.2 0.2 0.0 3.5 1.7 1.3 1.4 NA 0.7 2.8 0.7 0.2 0.0 2.8 2.1 1.4 11% 28% 4% 18% 9% 45% nm 349% 11% 15% 0.7 1.0 2.7 0.9 1.7 0.4 nm 0.4 1.1 0.8 ADP FP AOT TB AIA NZ BBA LN 694 HK FRA GR GEM IM GMRI IN Guangzhou Baiyun IA 600004 CH NR Malaysia Airports Holdings MAHB MK Buy Shanghai International Airport 600009 CH NR Shenzhen Airport Sydney Airport Xiamen International Airports Median AIRLINES FULL SERVICE Air China Air New Zealand Asiana Airlines Cathay Pacific China Airlines China Eastern Air China Southern Air EVA Airways Hainan Airlines Korean Air Malaysian Airlines Qantas Airlines Singapore Airlines Thai Airways Full Service Median LOW COST CARRIERS AirAsia Asia Aviation Cebu Air EasyJet PL Ryanair Holdings plc Southwest Airlines Tiger Airways Virgin Blue Holdings Westjet Airlines Ltd LCC Median P/E CY13F CY14F P/B CY13F CY14F EV/EBITDA CY13F CY14F ROE CY13F CY14F Div Yld CY13F CY14F Source: Nomura estimates for AOT, AAV and THAI. Bloomberg consensus for the rest. Priced as on 31-Jan-2013 9
  • 11. Nomura | Thailand air transport February 6, 2013 Sensitivity Fig. 16: Sensitivity to oil, load, yields – AAV, THAI Company AAV THAI Company AAV THAI Company AAV THAI Seat Load factor drops 1% point % chg in FY 14EPS % chg in TP -8% -7% -17% -2% 1% drop in Current Yield (Revenue / RPK) % chg in FY 14EPS % chg in TP -6% -5% -13% -2% Oil Price increases by 1% % chg in FY 14EPS % chg in TP -2% -2% -6% -1% Source: Nomura estimates Fig. 17: Sensitivity to Pax numbers, PSC hikes - AOT Company AOT Company AOT Passenger no drops 1% % chg in FY 14EPS % chg in TP -3.00% -1.45% PSC hike is not approved % chg in FY 14EPS % chg in TP -10.4% -3.0% Source: Nomura estimates 10
  • 12. Nomura | Thailand air transport February 6, 2013 Strong aviation growth forecast for Thailand Historical data point to a healthy demand outlook for air travel Thailand’s total passenger throughput has witnessed strong growth over the last seven years, notwithstanding crisis periods like the floods of late 2011, political unrest, and high fuel prices increasing the cost of travel and average ticket prices. As a reference we study the numbers provided by AOT, which comprises ~85% of Thailand’s air traffic, and are a good proxy for overall air travel demand. Since they comprise a large part of Thailand’s international traffic, they are a more relevant benchmark than the 28 regional airports managed by the DCA, in our view. Overall passenger numbers have increased at a 2007-12 CAGR of 5% (Domestic: 4.7% / International 5.5%), suggesting that the high fuel costs which currently prevail have not deterred potential travellers from flying. 8% y-y growth in 2012 implies resilience of passenger numbers After the flooding in Thailand in late 2011, which impacted demand, traffic was quick to normalize in 2012, with domestic as well as international throughput growing at ~8% y-y in 2012, also in the absence of any political roadblocks. This reinforces our view that traffic growth is relatively quick to return to steady-state levels of high single digits in the absence of external shocks, which are only short-term in nature. Fig. 18: Traffic at AOT FY07 FY08 FY09 FY10 FY11 FY12 07-12 CAGR BKK 41,935 32,689 9,246 41,180 34,025 7,155 37,051 28,106 8,945 42,497 32,381 10,116 47,801 37,386 10,414 52,369 38,688 13,681 4.5% 3.4% 8.2% 9.6% 3.5% 31.4% Don Muang International Domestic DMK 3,189 11 3,178 5,752 29 5,723 2,784 23 2,761 2,759 17 2,742 3,973 29 3,944 2,717 102 2,615 (3.1%) 55.9% (3.8%) (31.6%) 255.3% (33.7%) Chiang Mai International Domestic CNX 3,371 351 3,020 3,276 347 2,929 2,872 237 2,636 3,183 250 2,933 3,680 345 3,335 4,335 490 3,845 5.2% 6.9% 4.9% 17.8% 41.8% 15.3% Hat Yai International Domestic HDY 1,336 95 1,241 1,380 24 1,356 1,283 13 1,270 1,465 90 1,375 1,835 204 1,630 2,013 216 1,797 8.6% 18.0% 7.7% 9.7% 5.9% 10.2% Phuket International Domestic HKT 5,478 2,055 3,423 5,943 2,412 3,532 5,442 2,228 3,214 6,797 3,092 3,705 8,206 4,137 4,070 9,161 4,817 4,344 10.8% 18.6% 4.9% 11.6% 16.4% 6.7% Chiang Rai International Domestic CEI 712 0 712 772 0 772 649 0 648 724 1 724 806 9 796 926 5 921 5.4% 138.1% 5.3% 15.0% (46.8%) 15.7% 56,020 35,201 20,819 58,304 36,837 21,467 50,081 30,607 19,474 57,425 35,830 21,595 66,301 42,111 24,190 71,521 44,318 27,203 5.0% 4.7% 5.5% 7.9% 5.2% 12.5% 390 394 347 386 441 480 4.2% 8.8% 1,306 1,381 1,063 1,380 1,435 1,468 2.4% 2.3% (000) Passenger traffic Suvarnabhumi International Domestic Total International Domestic Aircraft movements (000) Cargo volume (000 tonnes) 2012 over 2011 Source: Company data 11
  • 13. Nomura | Thailand air transport February 6, 2013 We estimate a ~7-8% medium- to long-term traffic growth in Thailand as well We are bullish on Thailand’s long-term traffic growth potential, supported by the longterm orderbooks of major suppliers like Boeing and Airbus. South East Asia, due to its healthy economic fundamentals along with the separation by sea, has arguably a higher need for air travel, given the different countries cannot be connected by road or highspeed rail, and ferry travel is too slow. In its 20-year forecast for air traffic, Boeing forecasts 7-8% CAGR in revenue passenger kilometres (RPK) over 2011-31F, with traffic effectively growing to 4x its current size over the next 20 years. With China, Northeast Asia, South Asia and intra-SE Asia being the highest growth zones in the region, all of which are relatively four hours away from Thailand and therefore accessible by narrow-body jets, we think that Thailand will grow in line with the other emerging peers like Indonesia, and thus a long-term 7-8% growth forecast for Thailand can be considered quite achievable, in our view. Fig. 19: Boeing’s forecasts for aircraft growth (2011-31F) – long-term growth intact Fig. 20: 20 year traffic growth forecasts Single-aisle jets to grow 3x in the next 20 years South East Asia Key indicators and new airplane markets Growth measures (2011-31F) 2011-31F Economy (GDP) 4.3% Large Traffic (RPK) 6.5% Twin aisle Cargo (RTK) 5.7% Single aisle Airplane fleet 5.7% Regional jets Total Market size (2011-31F) Deliveries 2970 Large Market value $470bn Twin aisle Average value $160mn Single aisle Regional jets Total Intra SE Asia traffic to grow at 7.6% RPK New airplanes 110 950 1,840 70 2,970 2011 Fleet 130 310 680 20 1,140 Share by size 4% 32% 62% 2% 2031F Fleet 150 980 2,280 70 3,150 Source: Boeing Current Market Outlook 2011-31 Average growth (bn) 2011 to 2031 Africa - S.E. Asia 6.8% China - S.E. Asia 7.7% Europe - S.E. Asia 5.0% Middle East - S.E. Asia 6.4% N. America - S.E. Asia 5.8% N.E. Asia - S.E. Asia 5.4% Oceania - S.E. Asia 5.1% S.E. Asia - S.E. Asia 7.6% S.E. Asia - S. Asia 8.6% Source: Boeing Current Market Outlook 2011-31 Low cost carriers (LCCs) likely to be key enabler in traffic expansion Like other emerging markets in ASEAN, low-cost carriers, let by the AirAsia group (AirAsia Bhd + Thai AirAsia + Indonesia AirAsia) have been instrumental in increasing affordability of air travel and demand growth. In fact, the LCC market share at AOT airports has increased from being non-existent in 2003-04 when there were no LCCs to about 27% in 2011, largely dominating domestic passenger traffic. The AirAsia group now accounts for more than 15% of AOT’s total traffic, largely at the cost of Thai Airways, which has seen its share slip from 42% in 2006 to 33% now. However, a point to be noted in this instance is that in terms of passenger numbers, Thai has remained largely stagnant at 22mn, and LCCs have grown the overall size of the market, rather than significantly taking away Thai’s traffic numbers. 12
  • 14. Nomura | Thailand air transport February 6, 2013 Fig. 21: Market share at AOT airports in terms of passengers Fig. 22: LCC capacity share as % of total seats LCC market share has grown from 15% to 27% in 2011 11% 1% 0% 11% 6% 17% 13% 1% 0% 13% 5% 18% 13% 1% 0% 14% 6% 20% 13% 1% 0% 15% 13% 27% 40% Thailand (Domestic) 35% 30% 25% 20% 15% 10% 5% 0% 100% 100% 100% 100% 100% 100% 2011 33% 5% 34% 73% 2010 37% 5% 38% 80% 2009 42% 5% 35% 82% Thailand (International) 2008 41% 5% 37% 83% 45% 2007 2011 2006 2010 2005 2009 2004 Total 2008 2003 2006 2007 Full Service/Mainline Carriers Thai Airways 42% 42% Bangkok Airways 5% 5% All others 39% 37% Full Service/Mainline 85% 83% Low-Cost Carriers Thai Air Asia 8% 9% AirAsia 1% 1% Indonesia Air Asia 0% 0% AirAsia Group 9% 10% All others 6% 8% Low-Cost Carriers 15% 17% Source: AOT, Nomura research Source: CAPA, OAG Strong correlation with GDP a positive when viewed in context of our bullish growth forecasts for Thailand An analysis of data from AOT reveals that overall traffic, measured in terms of passenger numbers bears a strong correlation with overall GDP, with every incremental US$15bn to current GDP accounting for an ~1mn passengers, with an estimated reliability (R-sq of ~0.8). With our economics team expecting a strong 4.5%/5% GDP growth in 2013F/14F, (please see report, Global Economic Outlook Monthly: Tug of war, published 14 January 2013) we expect traffic growth to continue on its healthy trend of ~10% y-y growth in the next two years. Fig. 23: Traffic correlation with GDP Fig. 24: Real GDP growth forecasts Total passengers vs Nom GDP 70 (% y-y) 7 65 6.0 (mn pax) 6 y = 0.0715x + 41.176 R² = 0.787 60 5 4.9 4.1 1Q13 2Q13 3Q13 4Q13 5.0 4.8 4.5 4.2 4 55 3 50 2 45 Nom GDP (USDbn) Source: AOT, World Bank, Nomura estimates 400 350 300 250 200 150 1 0 2012 2013 2014 Source: Nomura economics estimates 13
  • 15. Nomura | Thailand air transport February 6, 2013 Fig. 25: Thailand economic forecasts % y-o-y growth unless otherwise stated Real GDP (sa, % q-o-q, annualized) Real GDP Private consumption Public consumption Gross fixed capital formation Exports (goods & services) Imports (goods & services) Contribution to GDP growth (% points) Domestic final sales Inventories Net trade (goods & services) Exports Imports Merchandise trade balance (US$bn) Current account balance (US$bn) Current account balance (% of GDP) Fiscal balance (% of GDP, fiscal year basis) Consumer prices Unemployment rate (sa, %) Overnight repo rate (%) Exchange rate (THB/USD) 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 2012 2013 2014 53.3 11.7 5.0 5.1 -4.8 12.4 7.7 4.5 0.4 4.4 3.0 17.2 4.1 4.2 4.9 4.8 6.0 4.5 5.0 2.9 5.3 6.0 11.9 7.6 7.3 4.7 0.8 6.5 5.1 3.9 -0.2 7.4 9.0 6.0 2.1 -2.4 -4.6 2.4 5.8 -1.0 -1.3 5.2 10.2 15.5 29.0 10.9 7.1 4.0 6.3 14.6 6.9 10.7 -3.2 1.1 -2.8 23.0 5.9 3.6 6.0 1.0 3.8 4.1 5.0 4.3 8.6 -1.8 21.7 6.0 3.4 7.4 -3.9 7.8 3.1 5.0 2.5 2.9 -4.7 -1.4 10.4 -5.2 1.4 1.6 5.9 2.8 -4.2 2.0 9.5 -5.2 -2.4 -2.6 7.6 -3.8 -1.1 -3.8 -1.7 -1.6 2.7 3.1 13.1 1.6 3.4 21.1 18.5 -6.1 0.9 1.0 6.3 -1.5 0.9 6.2 4.6 -4.5 0.6 0.6 5.4 -2.2 0.5 5.5 5.8 -5.7 -2.5 -2.4 2.9 0.9 0.0 9.0 14.7 -5.2 -0.5 -0.4 3.4 0.8 3.00 30.8 2.5 0.8 3.00 31.8 2.9 0.8 3.00 30.8 3.1 0.6 2.75 30.6 3.4 0.9 2.75 29.5 3.2 0.8 2.75 29.3 3.1 0.6 2.75 29.2 2.1 7.1 4.2 4.5 0.4 0.9 -0.6 -0.1 3.2 -1.8 1.2 0.7 -4.0 3.7 5.0 6.9 1.6 8.8 6.6 7.2 -7.6 -18.1 -23.0 -25.4 0.1 2.7 -2.2 -2.5 0.1 0.7 -0.6 -0.6 -2.5 -3.2 -3.7 3.2 3.0 3.2 3.1 0.6 0.7 0.7 0.7 2.75 2.75 2.75 3.25 29.1 30.6 29.1 28.6 Notes: Numbers in bold are actual values; others forecast. Interest rate and currency forecasts are end of period; other measures are period average. All forecasts are modal forecasts (i.e., the single most likely outcome). Table reflects data available as of 10 Jan 2013. Source: CEIC and Nomura Global Economics. 14
  • 16. Nomura | Thailand air transport February 6, 2013 Propensity to fly has scope for 3x upside, even after adjusting for income differentials A study of the RPKs (domestic and international) in the Asia-Pacific region shows that Thailand lies below the average trend line, adjusted for income differentials, implying that there is room to grow demand and traffic in Thailand, even at current income levels. We think this gap bodes well for aviation fundamentals in Thailand, and that upside in Thai air traffic can be had from two avenues: a) Normalisation of traffic vis-à-vis income levels and b) Organic growth in traffic through GDP/capita uplift At a current total RPK / capita level of 895km, the predicted income adjusted RPK/capita as per the model is ~2700, which suggests a 3x growth in traffic, even before the upside from GDP growth kicks in. Fig. 26: Total (DOMESTIC + INTERNATIONAL) RPK vs GDP / capita Domestic+International RPK / capita (2010) TOTAL traffic vs per capita GDP 100,000 y = 1931.7ln(x) - 13733 Brunei New Zealand 10,000 Malaysia Thailand Philippines China Vietnam Indonesia India Cambodia 1,000 Lao PDR 100 South Korea Singapore Australia Japan 10 Bangladesh 1 0 10,000 20,000 30,000 40,000 50,000 60,000 y = 234.01ln(x) - 1584.5 Australia GDP/capita (USD, 2010) Source: SAP Group, Nomura research Fig. 27: DOMESTIC RPK vs GDP / capita DOMESTIC traffic vs per capita GDP Domestic RPK / capita (2010) 10,000 1,000 New Zealand Cambodia Vietnam 100 Malaysia China Indonesia Philippines Japan South Korea Thailand India 10 1 0 10,000 20,000 30,000 40,000 50,000 60,000 GDP/capita (US$, 2010) Source: SAP Group, Nomura research 15
  • 17. Nomura | Thailand air transport February 6, 2013 Thailand’s LCC penetration is low for its income levels – suggesting more demand generation by LCCs to come Thailand’s LCC capacity share in domestic (2011: 40%) and international (14%) routes is lower than its peers in other ASEAN countries such as Malaysia, Indonesia and the Philippines. We believe there is room to grow the LCC share in both domestic and international routes – this will largely be realised through higher capacity deployment by LCCs led by Thai AirAsia, and supported by Nok Air and Thai Smile, and will be an underlying theme for the next five-six years, in our view. Vietnam 10 China Russian Fed Saudi Japan Per capita GDP (USD) Source: CAPA, IMF, World Bank, Nomura research 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 0 Australia Japan 70,000 20 60,000 S.Korea 50,000 30 Singapore 40,000 THAILAND 40 30,000 Australia 20,000 50 50 Malaysia 45 40 Indonesia 35 30 25 Philippines 20 India 15 THAILAND Vietnam 10 Saudi 5 China Russian S.Korea Fed 0 0 60 Philippines IndiaMalaysia Indonesia 2011 LCC Capacity Share (international) 2011 LCC Capacity Share (domestic) 70 Fig. 29: International LCC share vs. per capita GDP (nom USD) 10,000 Fig. 28: Domestic LCC share vs. per capita GDP (nom US$) Per capita GDP (USD) Source: CAPA, IMF, World Bank, Nomura research 16
  • 18. Nomura | Thailand air transport February 6, 2013 Tourism should continue to underpin Thailand’s inbound air traffic At ~22mn tourists, Thailand is close to breaking into the top 10 most visited nations in the world With a renewed thrust on promoting tourism, Thailand’s total tourist arrivals increased to 22.3mn passengers in 2012 (+16% y-y), and Thailand is close to breaking into the world’s top 10 visited nations based on Ministry of Tourism data. Tourist arrivals had grown by ~20% in the previous year (2011). We expect this trend to continue into 2013 (the Ministry of Tourism estimates 24.5mn, +10% y-y), underpinned by growth from China (12.5% of 2012 traffic), Malaysia (11.5%), Russia (5.9%), and India (4.6%). Japan (6%) and Korea (5.2%) are also stable sources of visitors to Thailand. Chinese arrivals are expected to grow substantially in 2013, having already overtaken Malaysia as the top origin country in 2012 (2.7mn vs 2.5mn), especially riding on the back of the blockbuster Chinese movie Lost in Thailand, which has reportedly increased awareness about Thailand even more in China. Now, the popular film Lost in Thailand is cementing Thailand’s congenial image. Its story familiarizes Chinese with its streets, its people, and its pace of life, and it presents Thailand in such natural beauty, cultural exoticism, and lush colors, which easily lure middle-class Chinese living in heavily polluted cities. The happy story of Lost in Thailand is bringing real value to Thailand and China. It is moving millions of people across national borders, people who may otherwise not make the decision to travel. It is impressive – asiancorrespondent.com, Lost in Thailand: a win-win picture for Thailand and China, 26 January 2013. The tourism authority is expecting 3.3mn tourists from China this year.Thailand’s tourist receipts per pax have also crossed the THB40,000/pax in 2011, having had at a CAGR of 3% y-y over the last decade. Fig. 30: Thailand tourist arrivals Fig. 31: Thailand tourist receipts per tourist y-o-y growth (RHS) Tourism revenue / pax (LHS) y-o-y growth (RHS) THB/tourist Tourist arrivals (LHS) (mn) 30 25% 45,000 15% 20% 25 40,000 10% 35,000 5% 30,000 0% 25,000 -5% 20,000 -10% 15% 20 10% 15 5% 10 Source: CEIC, Nomura research 2011 2009 2007 2005 2003 2001 -10% 1999 0 1997 -5% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012F 2013F 5 1995 0% Source: CEIC, Nomura research Four-hour flying radius from Thailand encompasses India, China and the ASEAN countries, making them suited to LCC proliferation A 3,500km circle centred around Thailand reveals that most of India, China, Indochina, and ASEAN countries falls within this radius, making it within the range of the LCCs 17
  • 19. Nomura | Thailand air transport February 6, 2013 operating with narrow body A320 / 737NG family of aircraft, which fly for flights less than four hours in duration. As such, this has been one key contributing factor leading to higher tourist arrivals from these countries, as holiday-goers have a high propensity to fly low-cost. This is reflected in the proportion of tourist arrivals by air, which hovers around the 80% level and which we expect to continue to be the lion’s share of tourist traffic. Fig. 32: 3500km and 8000km radius from Bangkok Source: Great Circle Mapper, Nomura research Fig. 33: Share of Thai tourist arrivals by nationality Fig. 34: % of tourist arrivals by air China, India and Russia showing strong growth 80% 70% 60% 50% 40% 30% 20% 10% 2010 2009 2008 2007 2006 2005 2004 0% 2003 5% 10% 2% 5% 5% 13% 22% 9% 2002 11.5% 12.5% 6.2% 5.2% 3.9% 4.6% 5.9% 4.2% 2001 16% 5% 12% 6% 5% 2% 1% 3% 90% 2000 Source: CEIC 1995-2011 CAGR 1999 Malaysia China Japan Korea UK India Russia Australia 2012 1998 1995 Source: CEIC 18
  • 20. Nomura | Thailand air transport February 6, 2013 Healthy domestic fundamentals to support outbound traffic as well Five key themes supporting more air travel Thailand’s domestic demographics and economics have room to sustain more outbound traffic as well, particularly on LCCs. • Increasing credit card usage (CAGR of 13% in credit card issuance from 2000-11), which leads to higher impulse spending. • Growing monthly income per household (CAGR of 5.5% from 2000 to 2011), implying more purchasing power and disposable income on luxuries like holidays. • Falling unemployment. • Rising internet penetration, which leads to higher online travel bookings, the staple of LCCs. • Growing consumer confidence. In addition to the above, increasing urbanisation means more population situated near airport infrastructure and so also tends to increase air travel. According to the United Nations Secretariat forecast, the 2010-50 average annual rate of change in the percentage of Thailand’s urban population would be 1.25% above the world’s average of only 0.65%. As shown in the figure below, Thailand’s urban population as a percentage of total was at 33% against 53% globally in 2011, according to the United Nations Secretariat, implying Thailand has significant room for urbanisation. Fig. 35: Rising number of credit cards Fig. 36: Consumer confidence restored after the floods Number of credit cards issued Consumer confidence Index Source: BOT 77.1 77.8 77.9 77.0 74.2 Sep-12 Jul-12 May-12 Mar-12 73.1 72.4 71.0 Jan-12 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 0 76.6 75.5 Nov-11 2,000,000 77.6 78.6 78.1 Sep-11 4,000,000 81.8 79.6 Jul-11 6,000,000 79.8 May-11 CAGR = 13% 84.1 83.4 80.4 Mar-11 8,000,000 81.7 81.5 80.9 Jan-11 86 84 82 80 78 76 74 72 70 68 66 64 10,000,000 Source: The Center for Economic and Business Forecasting, UTCC 19
  • 21. Nomura | Thailand air transport February 6, 2013 Fig. 37: Income growth beyond inflation implies more purchasing power (THB) Fig. 38: Rising employment towards non-agriculture Average monthly income per household Number of employees by industry (in thousands) Whole Kingdom Agricultural employment 25,000 Non-agricultural employment 25,000 20,000 CAGR = 5.5% 20,000 15,000 15,000 10,000 10,000 5,000 5,000 Source: National Statistical Office 2010 2009 Fig. 40: Internet penetration Number of unemployed (in thousands) 2008 Source: BOT Fig. 39: Unemployment is diminishing 2007 2006 2005 2011 2004 2009 2003 2006 2002 2004 2001 2002 2000 2000 1999 1998 0 0 Number and growth of internet users and mobile users Internet users (LHS) Mobile users (LHS) Internet users growth (RHS) Mobile users growth (RHS) (No. of population in mn) 70 1,600 1,400 1,200 20% 60 1,000 15% 50 800 40 10% 600 30 400 20 5% 200 10 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 0 0 0% 2005 2006 2007 2008 2009 Source: BOT Fig. 42: Significant room for urbanization Average annual rate of change of the percentage of urban population by major area, region and country, 2010-2050 (%) 2011 Source: NECTEC Fig. 41: Fast urbanization 2010 Urban population as total population, 2011 (%) US UK Viet Nam Thailand Singapore Philippines Malaysia Indonesia Republic of Korea Japan Hongkong China World 100% 100% 91% 83% 82% 80% 80% 73% 60% 52% 51% 51% 49% 34% 31% 40% Source: Population Division of the Department of Economic and Social Affairs of the United Nations Secretariat Viet Nam China World UK US Korea Thailand 2.0% Philippines 1.5% Indonesia 1.0% Malaysia 0.5% Japan 0% Singapore 20% Hong Kong 0.0% 100% Source: Population Division of the Department of Economic and Social Affairs of the United Nations Secretariat 20
  • 22. Nomura | Thailand air transport February 6, 2013 Cargo and business class might have a lacklustre 2013 The recovery in airlines earnings is also likely to be reliant on cargo and premium traffic improving — these experienced weak demand last year due to the slowdown in developed economies. In fact,the cargo business for the majority of Asian airlines was loss-making (based on announced results). For premium passenger traffic, IATA data highlights the traffic growth rate improved slightly to +4.4% in November 2012, from +2.3% in October 2012, yet still below the growth rate of +4.7% in September 2012 and +8.5% in August 2012. For the first 11 months of 2012, IATA data highlights premium traffic grew by 4.6%, compared to the growth rate of 5.5% in 2011. In fact, growth started to slow from March 2012 and then remained relatively flat since August. Unsurprisingly, airlines with higher exposure to cargo and premium classes suffered the most in 2012F (based on our estimates). Amongst the Thailand carriers, THAI is more susceptible to cargo weakening, with 14% of revenue exposure to cargo in 2011. For AAV, cargo is an ancillary and LCCs have been shown to be more efficient in realising profits from cargo due to optimal belly space utilisation. We note that demand for air cargo and premium traffic is driven by global economies, consumer demand, and business sentiment. However, the European and US economies weakened throughout the year, with EU quarterly GDP at -1.6% in 4Q12F compared to 0.2% in 1Q12. Likewise, US quarterly GDP has been weakening of late (-0.1% in 4Q12). This led to weaker demand and yield pressure, which led to cargo being loss-making. On the positive side, Nomura’s global economics team are estimating EU and US quarterly GDP bottoming in 1Q13 and recovering to -0.1% and 3.1% by 4Q13 for EU and the US, respectively (see reports, US Economic Weekly, 1 February 2013, and Global Economics Outlook Monthly, 14 January 2013). Similarly our PC and handset analysts are looking for unit shipments to recover in 2Q13F for PC and 1Q13F for handsets (see report, Asia Technology: Outlook 2013, 10 December 2012). These could potentially drive cargo demand. We note that most of air cargo goods are coming from high-tech products including PCs and handsets. Domestic business sentiment indicates that the “feel good” factor is back We believe the main driver behind strong private investment is that both local and foreign investor confidence in Thailand returned in 2012 amid political stability and the current government’s strong support of investment. The following chart shows that the current business sentiment index remains relatively high, compared with previous years. Fig. 43: Thailand business sentiment index The "feel good factor" is here again 60 55 50 45 40 35 FEB 1999 JUL 1999 DEC 1999 MAY 2000 OCT 2000 MAR 2001 AUG 2001 JAN 2002 JUN 2002 NOV 2002 APR 2003 SEP 2003 FEB 2004 JUL 2004 DEC 2004 MAY 2005 OCT 2005 MAR 2006 AUG 2006 JAN 2007 JUN 2007 NOV 2007 APR 2008 SEP 2008 FEB 2009 JUL 2009 DEC 2009 MAY 2010 OCT 2010 MAR 2011 AUG 2011 JAN 2012 JUN 2012 30 Source: Bank of Thailand 21
  • 23. Nomura | Thailand air transport February 6, 2013 Possible recovery in business class and cargo to begin in 2013 in our view However, based on our economics team’s estimates of the EU and US GDP growth forecasts, and IATA’s analysis, it may be too early to call a recovery in cargo and business class demand in 2013. At best, we expect cargo traffic to be down 2% y-y throughout most of 2013F as well, and business class traffic to remain flat y-y. Fig. 44: FTK growth rate vs US and EU GDP trend FTK average growth rate (LHS) US GDP (RHS) EU GDP (RHS) (%) 40 4 10 30 2 20 0 10 2 5 - 0 (5) Source: IATA, Bloomberg, CEIC, Nomura estimates -4 (20) -6 3Q2013F 1Q2013F 3Q2012 1Q2012 3Q2011 1Q2011 3Q2010 1Q2010 3Q2009 1Q2009 Source: IATA, Bloomberg, CEIC, Nomura estimates However, we believe premium passenger traffic recovery is likely to lag the recovery in both economy passengers and cargo traffic because premium traffic is more sensitive to economic conditions and needs a sustained period of recovery for it to bounce back. Further, the changes in business confidence and Nomura’s Asia Export leading index show no sign of improvement in the near term. Fig. 46: Passenger traffic and premium passenger traffic growth rate (%) (%) IATA's RPK growth rate But air cargo and premium passenger traffic lag due to price sensitivity Fig. 47: Cargo traffic and premium passenger traffic growth rate (%) (%) IATA's FTK growth rate 40 Premium pax traffic growth rate Premium class passenger traffic growth 30 20 10 0 -10 Source: IATA, Nomura (HK) Jan-13 Jul-12 Jan-12 Jul-11 Jan-11 Jul-10 Jan-10 Jul-09 Jan-09 Jul-08 Jan-08 Jul-07 Jan-07 Jul-06 -30 Jan-06 May-06 Sep-06 Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 -20 Jan-06 25 20 15 10 5 0 -5 -10 -15 -20 -25 -30 3Q2008 (25) 1Q2008 3Q2004 1Q2005 3Q2005 1Q2006 3Q2006 1Q2007 3Q2007 1Q2008 3Q2008 1Q2009 3Q2009 1Q2010 3Q2010 1Q2011 3Q2011 1Q2012 3Q2012 1Q2013F 3Q2013F -6 (15) 3Q2007 -4 (20) 1Q2007 (10) -2 (10) 3Q2006 -2 1Q2006 - (30) Fig. 45: Premium class traffic growth rate vs US and EU GDP Premium class traffic growth rate (LHS) (%) US GDP (RHS) 15 4 EU GDP (RHS) Source: IATA, Nomura (HK) 22
  • 24. Nomura | Thailand air transport February 6, 2013 Fig. 48: FTK growth rate vs Nomura Asia Export leading index Fig. 49: FTK growth rate vs Business confidence change Business confidence change (LHS) IATA FTK growth rate (RHS) Premium traffic growth rate (RHS) Nomura Asia Export Leading index (LHS) 105 30 40 IATA FTK growth rate (RHS) 30 95 30 20 20 100 40 10 20 10 10 0 0 90 0 (10) (20) -20 -20 -30 -30 (30) -10 Jan-06 Jun-06 Nov-06 Apr-07 Sep-07 Feb-08 Jul-08 Dec-08 May-09 Oct-09 Mar-10 Aug-10 Jan-11 Jun-11 Nov-11 Apr-12 Sep-12 80 Sep-04 Mar-05 Sep-05 Mar-06 Sep-06 Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 85 -10 Source: Bloomberg, IATA Source: Bloomberg, CEIC, Nomura estimate Fig. 50: Singapore Jet Kerosene Price – historical Fig. 51: Singapore Jet Kerosene price forecast – expected to moderate $/bbl 150 Singapore Jet Kero Singapore Jet Kero quarterly averages 160 110 100 90 70 60 50 3Q14F 1Q14F 3Q13F 3Q12 1Q13F 1Q12 3Q11 1Q11 3Q10 1Q10 3Q09 1Q09 3Q08 1Q08 3Q07 30 1Q07 40 Oct-12 Jan-13 120 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 130 80 USD/bbl 140 Source: Bloomberg, Nomura estimates Source: Bloomberg, Nomura estimates Fig. 52: THB: USD Historical THB/ USD Jan-13 Oct-12 Jul-12 Apr-12 Jan-12 Jul-11 Oct-11 Apr-11 Jan-11 Jul-10 Oct-10 Apr-10 Oct-09 Jan-10 Jul-09 Apr-09 THB/ USD quarterly averages Jan-09 37 36 35 34 33 32 31 30 29 28 27 Source: Bloomberg 23
  • 25. Nomura | Thailand air transport February 6, 2013 Risks Common risk factors: Downside risk to our earnings estimates and target price include a) a jump in oil prices, load factors or yields due to demand weakening; b) political unrest in Thailand reducing tourism demand; c) disease outbreak; d) irrational competition (eg, entry of new players such as Lion Air with a new AOC); e) sharp PSC hikes; f) floods affecting operations at DMK and g) return of macroeconomic shocks. AAV: Thai AirAsia’s health is also inextricably linked to the health of its parent AirAsia Bhd in Malaysia, as it relies on the Malaysian entity for various functions including aircraft leases, etc. A change in the terms of this arrangement, or a weakening of the Malaysian entity’s health, might have an impact on TAA’s expansion plans as well. THAI: Additional downside risk to our earnings estimates and target price include: a) renewed labour union unrest; and b) higher-than-expected impairment of aircraft to be retired. Note that THAI is also a customer of the Boeing Dreamliner (787) aircraft, but deliveries are scheduled only from 2014 onwards. The Dreamliner aircraft are currently grounded pending safety investigations, and in case the investigations take a long time to complete or propose big design changes, the THAI’s EIS (entry-into-service) of the Dreamliner might be pushed back, and impact capacity growth plan next year. However, we note that unlike airlines like JAL or ANA, which had to ground in-service 787s, THAI still has plenty of time to observe the situation as it is evolving, and make alternative arrangements in case the aircraft are delivered late (eg, lease alternative aircraft, or not retire existing aircraft). AOT: a) Delay in implementing airport charge increases: A part of the earnings and margin expansion is premised on the PSC charges for AOT to go through. However, delays in implementing those charges will impact our earnings estimates and TP for the stock. b) Lower-than-expected air traffic, which can be due to various reasons like a reemergence of economic crisis, political unrest deterring air traffic, outbreak of disease, etc. c) Capex overruns at BKK airport, which would deter investor sentiment. d) SOE nature of the company leading to less-than-optimal utilisation of assets. Political risks Referendum before the third reading of the constitution amendment draft The coalition parties agreed in early December that the government would hold a public hearing and referendum before a vote on the charter amendment in the third reading. The Pheu Thai Party's key agenda is to amend Section 291 of the constitution to make way for the establishment of a drafting assembly to rewrite the 2007 charter. The charter amendment, according to the opposition, was an attempt to bring back the ex-prime minister. The draft bill passed the first reading from the parliament on Feb 24, 2012 and the second reading on May 14, 2012 before the opposition camp took it to the constitutional court, claiming that the amendment would be unconstitutional. The court ordered a public referendum before the third reading, which delayed the whole process. Showdown in March-April 2013 The referendum is likely take place between mid-March to April of 2013 as per our estimates. For the coalition parties to get their demands met, we believe they will need a turnout of at least half of the eligible votes (~23mn people). In addition, more than half of the turnouts must vote to support the referendum. This will be a tall order for the government to achieve, in our view. The following table shows the results of the last referendum held in 2007. We note that Thailand recently celebrated its 80 years of democracy and 17 constitutions. 24
  • 26. Nomura | Thailand air transport February 6, 2013 Fig. 53: Referendum in 2007 It was possible at that time to get 14mn votes Referendum on Constitution 2007 (19 August 07) Number of people % of voters YES vote 14,727,306 56.69 % NO vote 10,747,441 41.37 % 504,207 1. 94 % Voters who exercised rights 25,978,954 57.61 % No.of eligible voters 45,092,955 100% Error cards Source: Election Commission of Thailand 25
  • 27. Nomura | Thailand air transport February 6, 2013 Appendix: Operating stats Fig. 54: AOT: higher leverage to aeronautical revenues means higher leverage to passenger numbers Total Passengers (mn) Beijing Capital Intl Fraport Sydney Airport Malaysia Airports AOT Aeroports de Paris Changi 79 97 37 64 72 89 48 Total rev / pax (USD) Revenue split (aeronautical as percentage of total) Attributable retail rev / pax (USD) 13 33 29 13 14 38 30 2 6 6 4 3 13 14 59% 33% 49% 32% 60% 53% 40% Source: Nomura research, Data for last reported full year Fig. 55: Comparison of Revenue-Passenger-Kilometre (RPK) for regional airlines (y-y chg %) CSA CEA CAL EVA Thai MAS Jan-11 11.7 CA 16.6 27.0 Cathay 6.8 2.9 SIA Qantas 8.5 (1.1) (6.3) (3.1) 13.0 KAL 5.6 Feb-11 5.7 4.4 12.0 0.1 (1.0) 5.1 (6.8) (8.2) (3.0) 9.9 4.4 Mar-11 5.6 4.2 9.9 (1.6) (3.6) 3.3 (7.9) (11.4) (4.4) 15.3 (0.9) Apr-11 12.7 10.6 16.6 6.8 7.0 10.0 (0.1) (7.4) 8.0 15.2 4.0 May-11 10.0 13.1 13.8 5.1 4.3 8.6 1.4 (6.0) 13.9 11.8 8.0 Jun-11 9.4 8.7 2.8 4.5 (0.4) 0.4 2.0 2.9 8.0 8.3 7.0 Jul-11 6.7 10.8 5.3 5.4 4.5 4.8 0.3 6.9 7.4 8.5 11.7 Aug-11 6.6 6.0 2.0 6.8 3.0 5.0 2.1 8.8 4.7 0.1 11.0 Sep-11 9.2 8.0 3.0 7.0 4.7 4.0 0.2 7.8 0.4 (0.6) 9.1 Oct-11 6.0 9.0 1.1 6.2 0.7 (1.1) 0.2 12.6 (7.5) (4.7) 7.7 Nov-11 10.3 17.9 9.7 6.0 (2.6) 5.3 (5.8) 12.5 (16.8) (5.8) 7.3 Dec-11 Jan+Feb 12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 3.8 11.6 3.7 7.9 1.8 5.2 (1.7) 13.6 (8.9) 5.0 15.8 5.4 1.7 (1.0) (0.7) 2.5 4.1 4.33 2.8 (0.5) 2.6 8.6 14.3 11.0 10.1 7.3 9.7 10.3 12.3 12.5 7.8 8.5 11.5 4.8 6.3 7.4 5.4 9.6 9.8 11.4 11.5 7.1 8.5 9.7 7.4 11.7 11.9 4.5 5.3 (3.6) 1.6 (3.9) (5.4) (3.5) - 4.4 11.8 9.8 7.1 11.9 3.2 8.7 7.7 7.1 9.1 6.1 4.5 8.7 2.2 (1.7) 5.7 (1.4) 0.4 0.1 3.4 1.3 - 3.5 5.4 3.8 1.6 1.7 1.0 3.8 0.3 0.8 9.4 6.3 13.0 11.0 11.2 7.9 7.8 7.9 7.0 2.5 1.4 8.3 7.2 3.6 7.5 8.3 12.4 11.7 0.8 4.5 4.1 - (9.8) (14.1) (13.2) (14.1) (8.3) (15.0) (3.7) (3.6) 0.5 7.0 - 11.3 6.0 12.0 10.0 10.9 3.8 5.4 4.0 1.0 3.2 - Source: Company data 26
  • 28. Nomura | Thailand air transport February 6, 2013 Fig. 56: Comparison of passenger load factor trend (%) Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 CA 78.6 79.4 80.2 82.9 81.8 83.2 86.6 86.1 82.8 82.4 CSA 78.8 80.3 80.6 82.8 80.0 80.8 85.0 83.7 81.0 81.5 CEA 75.9 77.4 77.6 80.1 78.3 78.6 83.0 82.7 79.1 79.7 Cathay 81.3 77.3 76.9 80.3 78.3 81.5 86.1 84.2 79.7 80.2 SIA 78.1 75.1 73.2 74.6 73.6 78.8 81.6 76.6 79.6 76.7 Qantas 80.9 77.9 76.5 78.7 76.7 80.3 82.3 78.5 81.9 81.4 CAL 79.3 76.6 78.0 79.3 78.8 82.5 84.2 82.1 74.5 75.0 EVA 76.1 74.6 75.7 79.0 80.7 82.5 81.4 82.6 77.0 75.8 Thai 77.8 77.6 72.9 71.8 61.9 65.7 77.2 74.8 69.9 65.7 MAS 76.5 74.3 76.9 77.4 73.1 76.0 78.3 71.9 77.5 71.9 KAL 81.1 77.0 74.9 76.3 79.3 79.2 81.7 81.4 74.5 76.7 Nov-11 79.5 78.9 77.7 78.5 75.2 79.5 73.2 74.9 61.0 71.0 73.3 Dec-11 76.9 77.8 75.9 79.6 79.6 80.8 72.0 75.5 68.1 74.4 74.4 Jan+Feb 12 78.5 79.6 78.3 78.4 76.6 79.1 75.8 79.9 78.1 71.9 77.4 Mar-12 79.6 79.1 79.0 79.4 79.5 79.8 77.5 78.7 78.4 75.0 72.4 Apr-12 81.9 81.3 81.2 83.3 79.7 78.9 76.7 79.8 78.3 74.8 76.9 May-12 79.5 77.3 77.3 78.5 75.8 76.5 74.3 79.0 71.5 69.5 77.7 Jun-12 81.9 80.0 80.2 82.9 83.0 81.6 80.6 82.7 75.5 77.4 82.0 Jul-12 84.4 82.9 82.4 81.1 80.5 80.0 81.4 82.9 79.7 74.2 83.1 Aug-12 84.2 83.3 83.6 83.1 78.3 78.4 81.9 83.3 78.7 74.1 84.5 Sep-12 81.8 80.3 80.4 78.2 80.6 80.5 76.7 75.7 71.7 75.1 78.0 Oct-12 79.8 78.6 79.7 78.3 77.8 79.8 75.4 76.1 - 74.3 78.8 Nov-12 77.9 78.1 78.5 79.2 77.7 80.0 76.7 77.0 - 76.1 75.1 Dec-12 78.5 78.1 77.4 74.5 75.9 - - - Thai 10.0 2.9 7.8 8.6 (4.5) (5.8) (6.4) (8.8) (9.3) (11.4) (20.2) (10.1) (4.5) (10.7) (13.8) (9.1) (9.1) (5.6) (3.7) 4.1 - MAS 5.3 (16.6) (11.8) (11.4) (22.7) (22.2) (11.8) (19.5) (17.7) (22.6) (32.8) (16.3) (22.2) (18.7) (15.0) (8.1) (0.3) (7.1) (7.9) 11.3 (4.1) (3.7) - KAL 1.1 (4.8) (1.4) (5.0) (12.0) (7.0) (5.8) (4.8) (6.6) (7.3) (7.6) (5.3) (7.2) (13.2) (18.5) (12.0) (6.0) (11.9) (8.5) (2.1) (7.3) (4.4) - - 82.2 - Source: Company data Fig. 57: Comparison of Revenue-Freight-tonne-Kilometre (RFTK) growth rate (y-y chg %) Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan+Feb12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 CA 14.0 (15.8) 1.7 13.3 (0.8) 3.3 1.1 (1.0) (6.2) (8.3) (13.5) (16.6) (11.2) (9.5) (8.8) (4.7) 2.8 9.8 10.6 10.8 8.0 21.8 14.1 CSA 38.9 19.7 19.7 37.1 14.3 12.0 5.1 1.2 2.8 (2.5) 7.3 5.8 0.8 24.5 7.4 22.4 31.7 17.4 12.8 13.2 14.7 18.9 16.2 CEA (1.6) (18.9) (7.4) (18.8) (18.9) 7.8 27.5 16.2 13.5 8.0 8.6 13.7 20.8 20.6 20.3 26.9 3.6 (4.5) (4.9) 4.0 (3.8) 4.1 (6.2) Cathay 13.7 3.3 5.3 (2.3) (8.6) (5.5) (8.6) (9.7) (7.9) (15.9) (9.8) (9.0) (8.8) (6.7) (13.7) (15.3) (7.1) (14.0) (10.4) (3.3) (2.8) 2.8 - SIA 12.5 3.6 0.9 11.8 0.6 0.7 2.2 (0.1) (2.3) (1.6) 0.6 1.5 (3.4) (1.9) (8.8) (7.4) (0.5) (3.0) (4.3) (4.2) (13.1) (8.8) (8.0) Qantas - CAL (8.3) (26.7) (7.9) (17.8) (26.3) (20.7) (14.4) (13.0) (16.2) (13.1) (11.9) (4.0) (6.1) (18.6) (12.7) (8.9) (4.6) (12.9) (15.8) (13.2) (32.1) (20.9) (20.6) EVA 14.0 (1.9) 3.5 (2.9) (8.1) (9.2) (4.4) (8.2) (11.4) (10.2) (13.8) (10.5) (10.9) (7.9) (12.6) (13.6) (7.3) (10.6) (9.1) (5.6) (12.6) (1.1) 2.9 Source: Company data 27
  • 29. Nomura | Thailand air transport February 6, 2013 Fig. 58: Comparison of cargo load factor (%) (%) Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan+Feb12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 CA 58.8 47.1 60.9 60.0 60.4 62.1 60.4 57.7 57.7 56.1 57.1 58.3 48.5 58.8 58.2 58.2 59.6 59.9 58.9 61.6 58.6 61.3 59.5 CSA 52.3 38.7 53.9 52.1 49.6 49.7 49.9 49.3 52.1 48.2 48.5 51.3 42.4 55.9 53.1 53.5 56.0 53.1 53.8 58.0 53.5 55.3 56.0 CEA 60.4 49.5 62.6 60.8 60.6 64.9 63.3 62.1 64.4 61.3 62.2 65.5 48.7 65.6 62.9 64.0 66.3 64.0 64.2 67.3 62.7 65.3 66.4 Cathay 67.8 67.6 71.0 68.3 68.2 67.0 66.6 64.9 64.8 66.2 65.3 67.8 62.7 68.3 63.3 62.3 65.7 64.7 61.9 62.8 64.0 63.9 - SIA 61.4 61.8 64.5 65.5 64.7 64.0 65.0 62.3 63.7 66.3 64.2 63.6 60.2 65.0 62.6 62.8 63.1 63.0 60.6 64.1 63.9 66.1 64.4 Qantas - CAL 72.3 70.2 70.5 70.9 72.3 71.3 70.6 67.3 67.6 69.1 68.4 70.2 67.9 73.6 70.9 71.4 73.2 72.5 68.6 71.6 70.7 72.2 74.3 EVA 82.3 82.2 83.6 83.5 82.5 80.2 81.1 81.1 80.7 81.5 81.3 85.0 80.4 85.9 81.7 82.5 84.3 84.2 84.2 84.5 84.9 84.2 88.2 Thai 53.7 56.6 59.5 58.0 57.8 57.7 55.1 54.2 56.1 56.3 55.2 54.3 51.9 59.8 56.4 55.9 54.1 52.2 50.4 55.3 - MAS 67.8 66.4 70.8 64.8 67.2 69.5 71.3 66.8 68.6 73.3 56.8 73.5 63.6 72.6 70.3 71.8 71.7 71.4 68.3 70.4 72.1 72.9 - KAL 72.8 74.5 78.6 76.5 76.0 76.0 75.5 73.3 72.4 75.8 74.9 75.6 73.3 79.1 75.3 76.0 78.0 77.1 74.9 76.3 76.6 78.7 - Source: Company data 28
  • 30. Nomura | Thailand air transport February 6, 2013 Appendix: Fare comparison Fig. 59: International flight fare comparison – full service Airline Origin THAI SIA MAS Garuda T+3 weeks London 50,550 63,356 54,066 44,826 BKK SIN KUL JKT Sydney 37,175 34,928 35,967 28,156 Destination (THB, return fare) T+1 month London Sydney 51,470 36,535 63,356 34,928 54,066 35,952 57,292 25,153 T+3 months London 46,760 63,848 54,066 NA Sydney 30,670 35,073 35,952 25,153 Source: Respective company website Fig. 60: LCC flight fare comparison Airline Origin THAI Thai Airasia Bangkok Air Nok Air Thai Smile BKK BKK BKK BKK BKK Phuket 6,820 3,620 6,750 4,380 5,930 Destination T+3 weeks T+1 month T+3 months Kuala Kuala Kuala Lumpur Singapore Guangzhou Phuket Lumpur Singapore Guangzhou Phuket Lumpur Singapore Guangzhou 10,850 11,210 22,810 6,650 10,850 12,280 13,965 6,340 10,850 11,360 13,965 6,530 7,670 11,609 3,400 4,510 5,420 8,689 2,780 3,210 4,920 7,889 NA NA NA 5,300 NA NA NA 5,300 NA NA NA NA NA NA 3,780 NA NA NA 3,380 NA NA NA NA NA NA 5,240 NA NA NA 6,030 NA NA NA Source: Respective company websites 29
  • 31. Airports of Thailand PCL AOT.BK AOT TB EQUITY RESEARCH TRANSPORT/LOGISTICS February 6, 2013 Upside through capacity and operating leverage Lower-risk alternative to play Thailand’s aviation boom; top sector pick Target price Starts at Revenue (mn) FY12 FY13F Old New FY14F Old New +37.4% Anchor themes We are bullish on Thailand's air transport sector, where we see growth of 7-8% pa. It has a relatively young LCC industry with scope for additional demand, planned airport capacity expansion to stay ahead of congestion, and backing from solid tourism demand and domestic consumption drivers. Nomura vs consensus Our TP is higher than most on the street, which has yet to catch up with the improving long-term oulook. Valuation: DCF-based TP of THB145, upside potential of 37% We use a discounted FCFE to value AOT, which has relatively steady cashflow visibility (CoE of 13.4%), building in additional capex to account for future expansion. Our TP of THB145 is 37% above current levels. It implies 24x/19x multiples vs CY2013F/2014F EPS of THB6.0/THB7.7, inexpensive given the sustained period of above-average EPS growth (21% CAGR) we expect over FY12-14F. We think the Street is not ascribing to AOT the valuation premium it deserves in view of the longterm traffic growth outlook. In-growth airport operators like AOT (trading at 2-year PEG of 1x, 2012F P/E of 21x), are trading at a discount to the sector (PEG average of ~1.7x), which we see as undeserved. Actual THB 105.50 Potential upside Catalysts: PSC hikes, faster-than-expected passenger growth Catalysts include passenger service charge (PSC) hikes that we expect to be authorised this year and likely higher-than-consensus passenger throughput on capacity addition, which should be a running theme in 2013. 30 Sep THB 145.00 Closing price January 31, 2013 Initiate at Buy; Thai aviation proxy, less earnings risk than airlines AOT manages Thailand’s six major airports, accounting for ~85% of total air traffic in Thailand. The decision in 2012 to allow low-cost carriers (LCCs) to use Don Muang (DMK) Airport was a masterstroke, in our view, effectively doubling Bangkok’s congested airport capacity, allowing LCC expansion to continue unhindered, and adding concession revenues in one fell swoop. With most of its cost base relatively fixed, AOT’s operating leverage is a key driver for earnings upside potential; we estimate with every 1% in additional passengers resulting in a 3% boost in earnings, thereby making it a lower-risk proxy to play Thailand’s aviation growth, spurred by tourism and domestic demand. Currency (THB) Buy Rating Starts at Research analysts Thailand Transport / Logistics Tushar Mohata, CFA - NSM tushar.mohata@nomura.com +603 2027 6895 Bineet Banka - NSFSPL bineet.banka@nomura.com +91 22 4053 3784 FY15F Old New 30,472 33,051 37,920 43,056 Reported net profit (mn) 6,500 7,940 10,494 12,378 Normalised net profit (mn) 6,941 7,940 10,494 12,378 FD normalised EPS 4.86 5.56 7.35 8.66 FD norm. EPS growth (%) 69.2 FD normalised P/E (x) 21.7 N/A 19.0 N/A 14.4 N/A 12.2 EV/EBITDA (x) 11.4 N/A 10.9 N/A 9.3 N/A 8.4 Price/book (x) 1.9 N/A 1.8 N/A 1.7 N/A 1.6 Dividend yield (%) 2.2 N/A 2.6 N/A 3.5 N/A 4.1 ROE (%) 8.7 9.9 12.3 13.4 32.3 26.5 31.3 38.3 Net debt/equity (%) 14.4 32.2 Source: Company data, Nomura estimates Key company data: See page 2 for company data and detailed price/index chart. 17.9 See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts.
  • 32. Nomura | Airports of Thailand PCL February 6, 2013 Key data on Airports of Thailand PCL Income statement (THBmn) Year-end 30 Sep Revenue Cost of goods sold Gross profit SG&A Employee share expense Operating profit Relative performance chart (one year) FY11 28,641 -21,667 6,974 FY12 30,472 -19,692 10,780 FY13F 33,051 -21,702 11,350 FY14F 37,920 -23,617 14,303 FY15F 43,056 -26,094 16,961 6,974 10,780 11,350 14,303 16,961 14,840 -7,866 15,449 -4,669 15,883 -4,533 19,154 -4,851 22,220 -5,259 6,974 -1,428 0 -225 5,321 -1,262 4,059 44 10,780 -797 0 458 10,441 -3,494 6,947 -6 11,350 -1,321 0 0 10,028 -2,081 7,947 -7 14,303 -1,173 0 0 13,130 -2,626 10,504 -9 16,961 -1,475 0 0 15,486 -3,097 12,389 -11 4,103 -1,888 2,215 -1,143 1,072 6,941 -441 6,500 -3,250 3,250 7,940 0 7,940 -3,970 3,970 10,494 0 10,494 -5,247 5,247 12,378 0 12,378 -6,189 6,189 68.0 36.7 36.7 50.5 0.8 9.0 2.1 12.6 26.9 24.3 51.8 24.3 7.7 23.7 51.6 11.9 0.4 na 5.7 23.2 21.7 21.7 29.8 2.2 9.4 1.9 11.4 16.3 35.4 50.7 35.4 21.3 33.5 50.0 15.8 1.0 8.7 8.9 19.0 19.0 19.0 26.1 2.6 9.9 1.8 10.9 15.2 34.3 48.1 34.3 24.0 20.8 50.0 18.4 1.3 9.9 9.6 14.4 14.4 14.4 19.7 3.5 8.3 1.7 9.3 12.5 37.7 50.5 37.7 27.7 20.0 50.0 46.1 3.6 12.3 11.4 12.2 12.2 12.2 16.7 4.1 7.3 1.6 8.4 11.1 39.4 51.6 39.4 28.7 20.0 50.0 50.3 4.1 13.4 12.1 Growth (%) Revenue EBITDA EBIT Normalised EPS Normalised FDEPS 19.2 23.4 58.4 120.2 120.2 6.4 4.1 54.6 69.2 69.2 8.5 2.8 5.3 14.4 14.4 14.7 20.6 26.0 32.2 32.2 13.5 16.0 18.6 17.9 17.9 Per share Reported EPS (THB) Norm EPS (THB) Fully diluted norm EPS (THB) Book value per share (THB) DPS (THB) 1.55 2.87 2.87 50.49 0.80 4.55 4.86 4.86 54.35 2.27 5.56 5.56 5.56 57.63 2.78 7.35 7.35 7.35 62.20 3.67 8.66 8.66 8.66 67.19 4.33 EBITDA Depreciation Amortisation EBIT Net interest expense Associates & JCEs Other income Earnings before tax Income tax Net profit after tax Minority interests Other items Preferred dividends Normalised NPAT Extraordinary items Reported NPAT Dividends Transfer to reserves Valuation and ratio analysis Reported P/E (x) Normalised P/E (x) FD normalised P/E (x) FD normalised P/E at price target (x) Dividend yield (%) Price/cashflow (x) Price/book (x) EV/EBITDA (x) EV/EBIT (x) Gross margin (%) EBITDA margin (%) EBIT margin (%) Net margin (%) Effective tax rate (%) Dividend payout (%) Capex to sales (%) Capex to depreciation (x) ROE (%) ROA (pretax %) Source: ThomsonReuters, Nomura research (%) 1M Absolute (THB) 8.5 28.7 100.0 Absolute (USD) 11.5 32.7 107.9 Relative to index Market cap (USDmn) Estimated free float (%) 52-week range (THB) 3-mth avg daily turnover (USDmn) Major shareholders (%) Finance Ministry Thai NVDR Co 3M 12M 5.3 17.8 76.6 5,066.0 23.3 112/50 11.54 70.0 4.5 Source: Thomson Reuters, Nomura research Notes Some higher costs in FY13F on the back of capacity relocation to Don Muang Airport, reducing operating income Source: Company data, Nomura estimates 31
  • 33. Nomura | Airports of Thailand PCL February 6, 2013 Cashflow (THBmn) Year-end 30 Sep EBITDA Change in working capital Other operating cashflow Cashflow from operations Capital expenditure Free cashflow Reduction in investments Net acquisitions Reduction in other LT assets Addition in other LT liabilities Adjustments Cashflow after investing acts Cash dividends Equity issue Debt issue Convertible debt issue Others Cashflow from financial acts Net cashflow Beginning cash Ending cash Ending net debt FY11 14,840 2,977 -1,090 16,726 -3,402 13,324 -536 FY12 15,449 892 -260 16,080 -4,825 11,255 2,650 FY13F 15,883 -47 -572 15,264 -6,089 9,174 0 FY14F 19,154 -184 -892 18,078 -17,488 590 0 FY15F 22,220 -171 -1,314 20,735 -21,664 -930 0 -14,841 3,136 11,406 12,488 -786 0 -4,677 1,739 -324 -2,143 13,178 -1,143 0 -4,721 0 0 159 9,334 -3,250 0 1,555 0 0 318 907 -3,970 0 7,000 0 0 408 -521 -5,247 0 10,000 -2,200 -7,662 4,826 22,066 26,892 36,970 -2,095 -7,959 5,219 26,892 32,111 25,068 -2,830 -4,525 4,809 32,111 36,920 21,814 -2,908 122 1,030 36,920 37,949 27,785 -3,258 1,495 974 37,949 38,923 36,811 FY11 26,892 FY12 32,111 FY13F 36,920 FY14F 37,949 FY15F 38,923 1,660 313 3,089 31,954 5,895 90,014 1,766 252 3,055 37,183 3,245 88,662 1,915 277 3,055 42,167 3,245 90,157 2,197 302 3,055 43,504 3,245 102,574 2,495 334 3,055 44,807 3,245 118,668 692 22,044 150,599 5,823 1,042 9,702 16,567 58,039 616 20,305 150,012 5,773 1,259 10,387 17,418 51,407 519 20,305 156,392 328 1,388 10,387 12,102 58,407 421 20,305 170,049 328 1,510 10,387 12,224 65,407 324 20,305 187,349 328 1,669 10,387 12,383 75,407 3,716 78,322 145 3,392 72,217 152 3,392 73,900 159 3,392 81,023 168 3,392 91,181 179 26,853 45,278 26,853 50,790 26,853 55,480 26,853 62,004 26,853 69,135 72,132 150,599 77,643 150,012 82,333 156,392 88,858 170,049 95,988 187,349 Liquidity (x) Current ratio Interest cover 1.93 4.9 2.13 13.5 3.48 8.6 3.56 12.2 3.62 11.5 Leverage Net debt/EBITDA (x) Net debt/equity (%) 2.49 51.3 1.62 32.3 1.37 26.5 1.45 31.3 1.66 38.3 Activity (days) Days receivable Days inventory Days payable Cash cycle 31.5 4.8 15.5 20.8 20.6 5.3 21.4 4.4 20.3 4.5 22.3 2.5 19.8 4.5 22.4 1.9 Notes 19.9 4.4 22.2 2.1 Adequate funding for upcoming BKK capex plans Source: Company data, Nomura estimates Balance sheet (THBmn) As at 30 Sep Cash & equivalents Marketable securities Accounts receivable Inventories Other current assets Total current assets LT investments Fixed assets Goodwill Other intangible assets Other LT assets Total assets Short-term debt Accounts payable Other current liabilities Total current liabilities Long-term debt Convertible debt Other LT liabilities Total liabilities Minority interest Preferred stock Common stock Retained earnings Proposed dividends Other equity and reserves Total shareholders' equity Total equity & liabilities Notes Low gearing Source: Company data, Nomura estimates 32
  • 34. Nomura | Airports of Thailand PCL February 6, 2013 Valuation Re-rating still looks like there is room to go, even after the sharp run-up AOT has had a sharp re-rating in the last year, and is up 140% since Jan-2012, outperforming the SET Transport Index by ~70% and the SET by ~100%. However, we note that this re-rating has been led by an expansion in forward earnings and return estimates as well, and AOT is still trading at 18x one-year forward earnings, above mean levels on a forward P/E basis. On a forward P/B, the company’s re-rating from 0.6x to 1.6x in 2012 has been led by an expansion in forward ROE from 6% to 11%. Fig. 61: Relative stock performance Jan-13 Dec-12 Nov-12 Oct-12 Sep-12 Aug-12 AOT SET MSCI EM Airlines Jul-12 Jun-12 May-12 Mar-12 Feb-12 Apr-12 AAV THAI SET Transport Jan-12 (%) 160 140 120 100 80 60 40 20 0 -20 -40 Source: Bloomberg Fig. 63: P/B re-rating driven by expectation of ROE expansion Source: Bloomberg, Nomura research 4 Jan-13 Sep-12 May-12 Jan-12 Sep-11 Jan-11 2 May-11 Jan-13 Sep-12 May-12 Jan-12 Sep-11 May-11 Jan-11 Sep-10 May-10 Jan-10 Sep-09 May-09 Jan-09 Sep-08 Jan-08 0 May-08 5 6 Sep-10 10 8 Jan-10 15 (%) 12 Forward ROE 10 May-10 20 Sep-09 25 Forward P/B May-09 (x) 2.0 1.8 1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2 0.0 Jan-09 -1SD=12.6 Sep-08 Mean=15.8 +1SD=19.0 May-08 Forward P/E 30 Jan-08 Fig. 62: Forward P/E above mean levels 0 Source: Bloomberg, Nomura research Consensus EPS has been on an upward trajectory Consensus EPS estimates for AOT have been raised ~50%since the beginning of 2012, reflecting the additional traffic growth to be realised by opening up of the alternative DMK airport for Thailand, which frees up the congested Suvarnabhumi, as well for additional capacity addition by full-service carriers. These are also led by a bullish outlook on the Thai PSC charges, which are scheduled to be raised from THB700 to THB800 per 33
  • 35. Nomura | Airports of Thailand PCL February 6, 2013 international passenger and THB100 to THB150 per domestic passenger, the impact of which should flow in from FY14F onwards, in our view. Fig. 64: Consensus EPS estimates EPS (THB) 7.5 FY13F FY14F 7.0 6.5 6.0 5.5 5.0 4.5 4.0 Jan-13 Dec-12 Nov-12 Oct-12 Sep-12 Aug-12 Jul-12 Jun-12 May-12 Apr-12 Mar-12 Feb-12 3.0 Jan-12 3.5 Source: Bloomberg Valuing AOT on discounted cash flows – initiate with BUY with TP of THB145 (upside of 37%) We think that a DCF-based valuation of free cash flows to equity is the best way to value a stock like AOT, which has relatively steady cash-flow visibility, and predictable longterm earnings growth rates, which generally go in-line with overall traffic growth. We use a beta of 0.97, a market risk premium of 10% and a risk-free rate of 3.7% (implying a cost of equity of 13.4%). Our other assumptions are: • Cash flows till Sep-2052, which is the maximum concession period AOT has with the government to operate the airports. • No terminal value. • Increasing PSC for domestic and international passengers @ compounded CPI every ~5 years • Incremental capacity addition of 130mn passengers for 6 airports over FY21-52F, with total estimated capex spend of THB130bn. We discount our cash flows back to 2014F to arrive at our price target of THB145/share, representing an upside of 37% at current levels. Our target price implies a multiple of 24x/19x on CY2013F/14F EPS of THB6.0 / 7.7 (calendarised), which we view as inexpensive given the sustained period of above-average EPS growth (21% EPS CAGR) we forecast over FY12-14F. 34
  • 36. Nomura | Airports of Thailand PCL February 6, 2013 Fig. 65: DCF – based valuation Free Cash Flow to Equity THB m n Cash from operations (ex interest payments) Less, capex Add, net borrow ings FCFE Year Discount factor Discounted FCFE Terminal Value = zero Equity value (THB mn) Number of shares (mn) Fair value (THB / share) Tim e w eighted Target Price (2014F) (THB/share) FY13F FY14F FY15F FY16F FY17F 12,434 15,170 17,477 18,425 (6,089) (17,488) (21,664) (21,858) 1,555 7,000 10,000 10,000 7,899 4,682 5,813 6,567 19,472 (8,158) 0 11,314 FY18F FY19F FY20F 20,902 22,399 26,455 (2,717) (2,640) (2,563) 0 0 0 18,186 19,759 23,891 FY30F FY52F 56,036 231,436 (8,292) (22,459) (2,000) (2,153) 45,744 206,824 0 1.00 1 0.88 2 0.78 3 0.69 4 0.60 5 0.53 6 0.47 7 0.41 17 0.12 39 0.01 7,899 4,129 4,520 4,503 6,842 9,698 9,291 9,907 5,394 1,534 0 193,933 210,962 1,429 1,429 136.00 148.00 145.00 Source: Nomura estimates Still trading at a discount to sector on growth-adjusted multiples We note that due to the defensive nature of earnings and generally higher dividend yields than airlines, airport-operator stocks trade at a high growth-adjusted P/E multiples. The sector’s average PEG (CY12 P/E vs 2012-14F EPS CAGR) is 1.7x. We argue that out of the various emerging and developed market airport stocks, the ones which are still in higher-growth markets (ie, high single digits), like AOT, and MAHB (MAHB MK, Buy) should then trade at a premium to the sector PEG, given their EPS growth forecasts are higher than average. With both AOT and MAHB only trading at PEGs of 1x, we think the discount to the sector is unwarranted. Our target price for AOT implies a PEG of 1.4x, (MAHB: 1.3x), and on a P/E basis, a 2013F/14F target P/E of 24x / 19x which we think are still reasonable. Retail (concession and duty-free sales) has scope for upside Airport operators around the world extract duty-free sales revenues from passengers in different ways. Operators like AOT have awarded all their concession space en-masse to one / two store operators outside the company, and then collect a share of revenue (or a minimum annual guarantee, MAG, whichever is higher). MAHB, on the other hand, operates its own duty-free stores, along with letting out store space to a number of F&B and retail shops. In the case of AOT, a retailer which wants to rent space at an AOT airport has to negotiate with King Power directly, which owns the entire block. A study of six listed airports in the world based on their attributable revenues from retail / concessions (implying how much revenue the airport operator extracts from each passenger) suggests that AOT’s realisation of US$3/passenger at its airports is lower than most major airports, including Malaysia Airports (Eraman+Rental) at US$4.2/passenger. This suggests that AOT’s concession agreement with King Power leaves some room for upside, which might be realised once the BKK concession agreements are up for re-negotiation in FY15F, through more preferential terms for AOT. We are, however, not building in the possibility of this in our current estimates given that we believe it is too early for a revision in terms. 35
  • 37. Nomura | Airports of Thailand PCL February 6, 2013 Fig. 66: Retail + Concession revenues per passenger at listed airports – AOT has room to grow Attributable concession revenue / pax (USD) 16 14 12 10 8 6 4 2 0 Beijing Capital Intl Fraport Sydney Airport Malaysia Airports AOT Aeroports de Paris Changi Source: Company data, Nomura research. Note: Changi Airport is the fourth largest airport in the world in terms of concession sales Higher proportion of aeronautical revenues means 3x operating leverage to passenger growth With most of its cost base relatively fixed, and a 60% share of revenues from aeronautical sources, operating leverage at AOT is a key driver for earnings upside, with every 1% in additional passengers resulting in a 3% boost in earnings, thereby in our view making it a better play on passenger growth, spurred by tourism and domestic demand, with less earnings risk than airlines. Fig. 67: AOT: higher leverage to aeronautical revenues means higher leverage to passenger numbers Total Passengers (mn) Beijing Capital Intl Fraport Sydney Airport Malaysia Airports AOT Aeroports de Paris Changi 79 97 37 64 72 89 48 Total rev / pax (USD) 13 33 29 13 14 38 30 Attributable retail rev / pax (USD) 2 6 6 4 3 13 14 Revenue split (aeronautical as percentage of total) 59% 33% 49% 32% 60% 53% 40% Source: Nomura research, Data for last reported full year 36
  • 38. Nomura | Airports of Thailand PCL February 6, 2013 Traffic fundamentals appear healthy Historical data point to a healthy demand outlook for air travel Thailand’s total passenger throughput has witnessed strong growth over the last seven years, notwithstanding crisis periods like the floods of late 2011, political unrest, and high fuel prices increasing the cost of travel and average ticket prices. As a reference we study the numbers provided by AOT, which comprises ~85% of Thailand’s air traffic, and are a good proxy for overall air travel demand. Since they comprise almost the whole of Thailand’s international traffic, they are a more relevant benchmark than the 28 regional airports managed by the DCA, in our view. Overall passenger numbers have increased at a 2007-12 CAGR of 5% (Domestic: 5.5% / International 4.7%), suggesting that the high fuel costs which currently prevail have not deterred potential travellers from flying. 8% y-y growth in 2012 implies resilience in passenger numbers After the flooding in late 2011 which impacted demand, traffic was quick to normalize in 2012, with domestic as well as international throughput growing at ~8% y-y in 2012, also in the absence of any political roadblocks. This reinforces our view that traffic growth is relatively quick to return to steady-state levels of high single digits in the absence of external shocks, which are only short-term in nature. Fig. 68: Traffic at AOT (000) Passenger traffic Suvarnabhum i International Domestic FY07 FY08 FY09 FY10 FY11 FY12 07-12 2012 over CAGR 2011 BKK 41,935 32,689 9,246 41,180 34,025 7,155 37,051 28,106 8,945 42,497 32,381 10,116 47,801 37,386 10,414 52,369 38,688 13,681 4.5% 3.4% 8.2% 9.6% 3.5% 31.4% Don Muang International Domestic DMK 3,189 11 3,178 5,752 29 5,723 2,784 23 2,761 2,759 17 2,742 3,973 29 3,944 2,717 102 2,615 (3.1%) 55.9% (3.8%) (31.6%) 255.3% (33.7%) Chiang Mai International Domestic CNX 3,371 351 3,020 3,276 347 2,929 2,872 237 2,636 3,183 250 2,933 3,680 345 3,335 4,335 490 3,845 5.2% 6.9% 4.9% 17.8% 41.8% 15.3% Hat Yai International Domestic HDY 1,336 95 1,241 1,380 24 1,356 1,283 13 1,270 1,465 90 1,375 1,835 204 1,630 2,013 216 1,797 8.6% 18.0% 7.7% 9.7% 5.9% 10.2% Phuket International Domestic HKT 5,478 2,055 3,423 5,943 2,412 3,532 5,442 2,228 3,214 6,797 3,092 3,705 8,206 4,137 4,070 9,161 4,817 4,344 10.8% 18.6% 4.9% 11.6% 16.4% 6.7% Chiang Rai International Domestic CEI 712 0 712 772 0 772 649 0 648 724 1 724 806 9 796 926 5 921 5.4% 138.1% 5.3% 15.0% (46.8%) 15.7% 56,020 35,201 20,819 58,304 36,837 21,467 50,081 30,607 19,474 57,425 35,830 21,595 66,301 42,111 24,190 71,521 44,318 27,203 5.0% 4.7% 5.5% 7.9% 5.2% 12.5% 390 394 347 386 441 480 4.2% 8.8% 1,306 1,381 1,063 1,380 1,435 1,468 2.4% 2.3% Total International Domestic Aircraft m ovem ents (000) Cargo volum e (000 tonnes) Source: Company data 37
  • 39. Nomura | Airports of Thailand PCL February 6, 2013 We estimate a ~7-8% medium- tolong-term traffic growth in Thailand as well We are bullish on Thailand’s long-term traffic growth potential, supported by the long term orderbooks of major suppliers like Boeing and Airbus. South East Asia, due to its healthy economic fundamentals along with the separation by sea, has arguably a higher need for air travel, given the different countries cannot be connected by road or highspeed rail, and ferry travel is too slow. In its 20-year forecast for air traffic, Boeing forecasts 7-8% CAGR in revenue passenger kilometres (RPK) over 2011-31F, with traffic effectively growing to 4x its current size over the next 20 years. With China, Northeast Asia, South Asia and intra-SE Asia being the highest growth zones in the region, all of which are relatively four hours away from Thailand and therefore accessible by narrow-body jets, we think that Thailand will grow in line with the other emerging peers like Indonesia, and thus a long-term 7-8% growth forecast for Thailand can be considered quite achievable, in our view. Fig. 69: Boeing’s forecasts for aircraft growth (2011-31F) – long-term growth intact Fig. 70: 20 year traffic growth forecasts Intra SE Asia traffic to grow at 7.6% Single-aisle jets to grow 3x in the next 20 years South East Asia Key indicators and new airplane markets Growth measures (2011-31F) 2011-31F Economy (GDP) 4.3% Large Traffic (RPK) 6.5% Twin aisle Cargo (RTK) 5.7% Single aisle Airplane fleet 5.7% Regional jets Total Market size (2011-31F) Deliveries 2970 Large Market value $470bn Twin aisle Average value $160mn Single aisle Regional jets Total RPK New airplanes 110 950 1,840 70 2,970 2011 Fleet 130 310 680 20 1,140 Share by size 4% 32% 62% 2% 2031F Fleet 150 980 2,280 70 3,150 Source: Boeing Current Market Outlook 2011-31 Average growth (bn) 2011 to 2031 Africa - S.E. Asia 6.8% China - S.E. Asia 7.7% Europe - S.E. Asia 5.0% Middle East - S.E. Asia 6.4% N. America - S.E. Asia 5.8% N.E. Asia - S.E. Asia 5.4% Oceania - S.E. Asia 5.1% S.E. Asia - S.E. Asia 7.6% S.E. Asia - S. Asia 8.6% Source: Boeing Current Market Outlook 2011-31 Low-cost carriers (LCCs) likely to be key enabler in traffic expansion Like other emerging markets in ASEAN, low-cost carriers, let by the AirAsia group (AirAsia Bhd + Thai AirAsia + Indonesia AirAsia) have been instrumental in increasing affordability of air travel and demand growth. In fact, LCC market share at AOT airports has increased from being non-existent in 2003-04 when there were no LCCs to about 27% in 2012, largely dominating domestic passenger traffic. The AirAsia group now accounts for more than 15% of AOT’s total traffic, largely at the cost of Thai Airways, which has seen its share slip from 42% in 2006 to 33% now. However, a point to be noted in this instance is that in terms of passenger numbers, Thai has remained largely stagnant at 22mn, and LCCs have grown the overall size of the market, rather than significantly taking away Thai’s traffic numbers. 38
  • 40. Nomura | Airports of Thailand PCL February 6, 2013 Fig. 71: Market share at AOT airports in terms of passengers Fig. 72: LCC capacity share as % of total seats LCC share has grown from 15% to 27% in 2011 2006 2007 Full Service/Mainline Carriers Thai Airways 42% 42% Bangkok Airways 5% 5% All others 39% 37% Full Service/Mainline 85% 83% Low-Cost Carriers Thai Air Asia 8% 9% AirAsia 1% 1% Indonesia Air Asia 0% 0% AirAsia Group 9% 10% All others 6% 8% Low-Cost Carriers 15% 17% 2008 2009 2010 2011 41% 5% 37% 83% 42% 5% 35% 82% 37% 5% 38% 80% 33% 5% 34% 73% 11% 1% 0% 11% 6% 17% 13% 1% 0% 13% 5% 18% 13% 1% 0% 14% 6% 20% 13% 1% 0% 15% 13% 27% 45% Thailand (International) 40% Thailand (Domestic) 35% 30% 25% 20% 15% 10% 5% Source: AOT, Nomura research 2011 2010 2009 2008 2007 2006 2005 2004 100% 100% 100% 100% 100% 100% 2003 0% Total Source: CAPA, OAG 39
  • 41. Nomura | Airports of Thailand PCL February 6, 2013 Tourism should continue to underpin Thailand’s inbound air traffic At ~22mn tourists, Thailand is close to breaking into the top 10 most-visited nations in the world With a renewed thrust on promoting tourism, Thailand’s total tourist arrivals increased to 22.3mn passengers in 2012 (+16% y-y), and Thailand is close to breaking into the world’s top 10 visited nations. Tourist arrivals had grown by ~20% in the previous year (2011). We expect this trend to continue in 2013 (the Ministry of Tourism estimates 24.5mn, +10% y-y), underpinned by growth from China (12.5% of 2012 traffic), Malaysia (11.5%), Russia (5.9%), and India (4.6%). Japan (6%) and Korea (5.2%) are also stable sources of visitors to Thailand. Chinese arrivals are expected to grow substantially in 2013, having already overtaken Malaysia as the top origin country in 2012 (2.7mn vs 1.8mn), especially riding on the back of the blockbuster Chinese movie Lost in Thailand, which has reportedly increased awareness about Thailand even more in China. The tourism authority is expecting 3.3mn tourists from China this year. (http://asiancorrespondent.com/96338/lost-in-thailand-awin-win-picture-for-thailand-and-china/). Thailand’s tourist receipts per passenger have also crossed the THB40,000 mark in 2011, having grown at a CAGR of 3% y-y over the last decade. Fig. 73: Thailand tourist arrivals Fig. 74: Thailand tourist receipts per tourist THB/tourist Tourist arrivals (LHS) (mn) 30 25% y-o--y growth (RHS) Tourism revenue / pax (LHS) y-o-y growth (RHS) 45,000 15% 20% 25 40,000 10% 35,000 5% 30,000 0% 25,000 -5% 20,000 -10% 15% 20 10% 15 5% 10 Source: CEIC, Nomura research 2011 2009 2007 Source: CEIC, Nomura research Fig. 75: Share of Thai tourist arrivals by nationality 2005 2003 1995 2001 -10% 1999 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012F 2013F -5% 1997 0% 5 Fig. 76: % of tourist arrivals by air 90% 60% 50% 40% 30% 20% 10% 2010 2009 2008 2007 2006 0% 2005 Source: CEIC, Tourism Authority of Thailand 70% 2004 5% 10% 2% 5% 5% 13% 22% 9% 2003 11.5% 12.5% 6.2% 5.2% 3.9% 4.6% 5.9% 4.2% 2002 16% 5% 12% 6% 5% 2% 1% 3% 80% 2001 1995-2011 CAGR 2000 Malaysia China Japan Korea UK India Russia Australia 2012 1999 1995 1998 China, India and Russia showing strong growth Source: CEIC 40
  • 42. Nomura | Airports of Thailand PCL February 6, 2013 Bangkok capacity almost doubled on opening of DMK as alternative airport for LCCs Over the last two years, Suvarnabhumi Airport (BKK) had exceeded its stated capacity of 45mn passengers, and had been facing a lot of congestion delays and passenger dissatisfaction at the airport. Although AOT had a capex plan in place to grow capacity at BKK by an additional 15mn passengers per year at a cost of THB62.5bn, this incremental capacity was to only come online by FY17F. However, we expect growth at LCCs, especially at Thai AirAsia, to keep growing, and in order to accommodate these airlines, AOT incentivized LCCs to move to the old Bangkok airport at Don Muang (DMK). With the AirAsia group, comprising ~8-9mn passengers per year, agreeing to shift to DMK, this has effectively increased capacity at Bangkok from 45mn passengers per annum to ~81mn passengers, or 1.8x, freeing up resources at BKK. The incentive package was a progressive 30%-20%-10% discount on parking and landing charges at DMK airport for FY13F/FY14F/FY15F (AOT’s fiscal years), which AOT expects will cost it THB116/85/45mn, or a total of THB246mn, a small price to pay for the resultant additional passenger throughput which an unconstrained Thai AirAsia might bring to AOT. Recently the discount was extended to Nok Air and Orient Thai Airlines as well, which were not part of the original offer to 14 international airlines to move to DMK, since they had been based at DMK even before the floods. Fig. 77: AOT airports – capacity and utilisation Aircraft (Flights/Hour) Airports Capacity 76 BKK 60 DMK Capacity Utilisation BKK BKK+DMK FY11 58 19 20 24 20 12 21 13 10 6 HKT CNX HDY CEI Cargoes (Million Metric Tons/Year) Passengers (Million/Year) Actual Utilization Actual Utilization FY12 66 23 19 14 10 5 6.50 8.00 1.90 3.00 FY11 47.80 3.97 FY12 52.37 2.72 106% 64% Capacity 45.00 36.50 116% 68% 8.21 3.68 1.83 0.81 9.16 4.33 2.01 0.93 Actual Utilization Capacity 3.00 1.27 FY11 1.330 0.007 FY12 1.360 0.003 0.04 0.04 0.01 0.01 0.028 0.021 0.015 0.004 0.032 0.021 0.016 0.005 Source: Company data, Nomura research Fig. 78: AOT discounts on moving to DMK Period Aug-12 to Sep-12 Oct-12-Sep-13 Oct-13-Sep-14 Oct-14-Sep-15 Discount on Quantum Revenue loss to AOT Parking and landing Parking and landing Parking and landing Parking and landing -95% -30% -20% -10% 0 (no airline shifted) THB 116mn THB 85mn THB 45mn Source: Company data We do not see the possibility of PSC cuts at AOT for LCCs in the near term (unlike Malaysia) A key difference between the passenger service charges (PSC) in Thailand, and its neighbour Malaysia, is that in Malaysia, PSC applicable to the LCCs is ~half of the PSC applied to the full-service carriers, the rationale being a lower PSC is compensated by higher traffic which results from the cheaper ticket prices on average. AirAsia Group CEO Tan Sri Tony Fernandes has been vocal in requesting a similar concession in Thailand as well, from AOT. However, we think that a PSC discount for LCCs in Thailand is unlikely in the near term. In any case, if such a discount were to be instituted, it would not immediately result in a corresponding jump in passenger traffic, and there would be a downside risk to our earnings forecasts and TP in such a case. 41
  • 43. Nomura | Airports of Thailand PCL February 6, 2013 Note that based on our calculations, overall PSC collection from DMK should be ~THB5bn in FY13F, and a 50% discount on the PSC would result in a revenue loss of ~THB2.5bn, on our numbers, which accounts for ~33% of FY13F/14F estimates. Thailand PSC on the top end of regional airports Fig. 79: Thailand’s PSC at the top end of regional airports (USD / pax) 30 Domestic International Transfer and transit passengers 25 20 15 10 5 0 Thailand (All AOT airports) Indonesia Philippines Malaysia (KL Malaysia Singapore (Manila Main Terminal) (LCCT PSC) (Changi (Jakarta & Bali Airports) Airport) Airport) Source: Respective airport websites Fig. 80: Details of PSC Thailand Domestic International All AOT airports Passenger Service Charge (PSC) Passenger Service Charge (PSC) THB 150 (proposed) THB 800 (proposed) Changi Airport Passenger Service Charge (PSC) Passenger Security Service Charge (PSSC) Aviation Levy Total Passenger Service Charge (PSC) Passenger Security Service Charge (PSSC) Total SGD19.90 SGD 8.00 SGD 6.10 SGD 34.00 SGD 9.00 SGD 3.00 SGD 12.00 Singapore Departing passengers Transfer/ transit passengers Indonesia Domestic International Domestic International Jakarta's Soekarno-Hatta International Airport Passenger Service Charge (PSC) Passenger Service Charge (PSC) Ngurah Rai International Airport, Bali Passenger Service Charge (PSC) Passenger Service Charge (PSC) IDR 40,000 IDR 150,000 IDR 40,000 IDR 150,000 Philippines Ninoy Aquino International Airport, Manila Terminal Fee Domestic Terminal Fee International Transfer and transit passengerTerminal Fee 1st Class passenger Travel Tax 2nd Class passenger PHP 200 PHP 750 NIL PHP 2,700 PHP 1,620 Malaysia Domestic International Domestic International Kuala Lumpur (KUL) Main Terminal + LCCT Main terminal PSC Main terminal PSC LCCT PSC LCCT PSC MYR 9 MYR 65 MYR 6 MYR 32 Source: Various airport websites, Nomura research 42
  • 44. Nomura | Airports of Thailand PCL February 6, 2013 Financials: High operating leverage the key driver for earnings Aeronautical revenues comprise 60% of total revenues, the staple of AOT’s earnings Airport operators, like AOT, generally derive their revenue under two categories, aeronautical (revenues linked directly to passenger numbers) and non-aeronautical (not directly linked). Aeronautical revenues can be further divided into the following three subcategories: • Landing and parking charges (paid by airlines to AOT, not passed on directly to consumers). • PSC (part of ticket price and thus directly passed on to consumers). • Aircraft service charges, which comprise charges such as fees paid by airlines for the use of boarding bridges. These vary by the maximum takeoff weight of the aircraft and length of time at a gate (paid by airlines to AOT, not passed on directly to consumer). Aeronautical revenues for AOT comprise ~60% of total and are the staple for earnings generation for the company. Non-aeronautical revenues comprise • Office and state property rents: Mostly collected from airlines, government agencies and concession tenants. Rents are determined based on the tenants’ business use. • Service revenues: Service charges for utilities, check-in counters, services, airline announcement services, hydrant system services, etc. • Concession revenues: Duty-free, souvenirs, food & beverage, airline catering, fuelling services, car park, advertising, banking etc. We forecast revenue CAGR of 12% over FY12-15F, led by higher PSC and passenger throughput AOT is seeking approval from the regulators to raise PSC from the current THB700/100 to THB800/150, to offset the upcoming THB62.5bn capex for Suvarnabhumi airport. There has been a slight delay in raising the charges, due to a review of existing norms at DMK, by the authorities. However, we are optimistic of a PSC increase being greenlighted by the middle of the year. AOT is required to give airlines a one-year notice before raising charges, and so we think the impact of higher prices will only start by middle of 2014 (ie, in 2HFY14) onwards. As such, we are building in a partial impact of PSC hike in FY14F and a full implementation for FY15F. Overall, we forecast a revenue CAGR of 12% over FY12-15F, led by growth in passenger numbers and a scheduled PSC hike in FY14F. 43
  • 45. Nomura | Airports of Thailand PCL February 6, 2013 Fig. 81: Revenue growth Fig. 82: Revenue split PSC to be main driver (THB mn) 45,000 Total revenues (LHS) 16% % y-o-y (RHS) 40,000 Landing and parking charges Aircraft service charges Service revenues Passenger service charges Office and state property rents Concession revenues 14% 35,000 12% 30,000 100% 22% 23% 25% 26% 26% 12% 6% 2% 11% 5% 2% 11% 5% 2% 10% 4% 2% 9% 3% 1% 43% 43% 44% 45% 46% 15% 16% 15% 15% 14% FY11 FY12 FY13F FY14F FY15F 10% 25,000 8% 20,000 6% 15,000 10,000 4% 5,000 50% 2% 0 0% FY11 FY12 FY13F FY14F FY15F Source: Company data, Nomura estimates 0% Source: Company data, Nomura estimates Costs on the other hand are mostly fixed in nature… Operating costs for AOT, on the other hand, are mostly fixed in nature, with the exception of state property rental (which is the fee AOT pays to the government as part of the utilisation agreement, @5% of operating income from BKK, DMK and 2% from other airports). We forecast an operating cost CAGR of ~10% over FY12-15F, mainly led by staff costs and other opex (utilities, lease costs). Fig. 83: Opex growth to lag revenue growth (THB mn) Fig. 84: FY13F opex breakdown Total opex (LHS) % y-o-y (RHS) 30,000 15% 25,000 10% 20,000 5% 15,000 0% 10,000 -5% 5,000 -10% Personnel expenses and Management’ s remuneration 24% Depreciation and amortization 21% 0 -15% FY11 FY12 FY13F Source: Company data, Nomura estimates FY14F State property rental 9% Repairs and maintenance 12% Operating expenses (utilities, leases) 34% FY15F Source: Nomura estimates 44
  • 46. Nomura | Airports of Thailand PCL February 6, 2013 … higher operating leverage to translate to higher earnings and margin uplift Fig. 85: Core net income (THBmn) 14,000 Fig. 86: We see margin uplift through higher op leverage 45% Core net income (LHS) % y-o-y growth (RHS) 80% 70% 8,000 30% 50% 10,000 Net margin 35% 60% 12,000 EBIT margin 40% 25% 40% 20% 15% 30% 10% 0% FY11 FY12 FY13F Source: Company data, Nomura estimates FY14F FY15F FY15F 0% FY14F 0 5% 10% 2,000 FY11 20% FY13F 4,000 FY12 6,000 Source: Company data, Nomura estimates 45
  • 47. Nomura | Airports of Thailand PCL February 6, 2013 Key assumptions • We are forecasting 9.3% passenger growth in FY13F, (note, 1QFY13F passenger numbers have grown by 28.5%, to 20.8mn largely due to the effect of a lower base due to flood effect last year). • Our aircraft growth numbers are slightly above passenger growth figures, owing to the higher propensity of LCCs to use narrow-body aircraft, which have lower average capacity, and as such need more aircraft to carry the same number of passengers than a widebody A330 or B777. • We estimate that the effect of the higher PSC will only partially be reflected in FY14F owing to delays in getting approval, and as a result our effective PSC for FY14F is THB750/THB125 for international / domestic passengers. • In addition to the planned capex till FY20 for BKK and HKT, future traffic growth will necessitate further capacity expansion at all AOT airports according to our estimates. We have used an incremental THB1bn for 1mn passengers/annum capacity addition, and arrive at a total capex of THB130bn for ~130mn additional passengers per year capacity at AOT’s 6 airports. Fig. 87: Key assumptions FY11 Passenger movements (mn) Suvarnabhumi Don Mueang Chiang Mai Hat Yai Phuket Chiang Rai Total Passenger movements ( % y-o-y) Suvarnabhumi Don Mueang Chiang Mai Hat Yai Phuket Chiang Rai Total Aircraft movements Total movements Aircraft movements (% y-o-y) Total movements Effective PSC (THB/pax) International Domestic * partial implementation in FY14F FY12 FY13F FY14F FY15F 47.8 4.0 3.7 1.8 8.2 0.8 66.3 52.4 2.7 4.3 2.0 9.2 0.9 71.5 44.9 15.1 4.9 2.2 10.1 1.0 78.2 47.2 17.8 5.5 2.3 11.1 1.1 85.0 49.6 20.5 6.0 2.5 12.0 1.2 91.7 12.5% 44.0% 15.6% 25.2% 20.7% 11.3% 15.5% 9.6% (31.6%) 17.8% 9.7% 11.6% 15.0% 7.9% (14.3%) 457.3% 12.9% 7.7% 10.3% 10.0% 9.3% 5.3% 17.6% 11.5% 7.0% 9.4% 9.0% 8.7% 4.9% 15.1% 10.2% 6.4% 8.5% 8.0% 7.9% 441,440 480,335 526,275 574,533 622,504 14.4% 8.8% 9.6% 9.2% 8.3% 700 100 700 100 700 100 750* 125* 800 150 New Capex post FY20F Total new capacity to be added (mn pax pa) Total new capex (THB mn) @ THB1bn for 1mn additional pax per annum FY21 - FY25 4 3,507 FY26 - FY30 9 8,897 FY31 - FY35 11 11,310 FY36 - FY40 28 27,734 FY41-52 79 79,359 Source: Company data, Nomura estimates 46
  • 48. Nomura | Airports of Thailand PCL February 6, 2013 Retail and concession Only one major tenant – King Power, unlike KLIA We noted a key difference between AOT airports and airports run by Malaysia Airports, in that AOT awards the concession for duty-free shops and F&B (food & beverage) enmasse to one major concessionaire (in this case – King Power Duty Free – KPD and King Power Suvarnabhumi – KPS respectively), whereas Malaysia Airports negotiates with individual tenants and awards to many of them. Malaysia Airports also operates its own duty-free stores under the Eraman brand, ensuring a higher profitability for itself. The recently opened for bidding DMK concession was also awarded to KPD (for duty free) and the Mall Group (for F&B); however, we note that the Minimum Annual Guarantee (MAG) offered by KPD was 50% more than the next highest bid. Fig. 88: Suvarnabhumi Concession Details BKK Concession Min Annual Guarantee (THB mn) MAG Concession Fee (% of gross rev) Additional KPD - 5,496sqm 16,832 (10 years) 15% till FY10, then inc by 1% each year till FY15 Prepaid THB2,632mn (incl VAT) at Signing of contract KPS - 20,000 sqm 1,431/yr (first year) and then decided by 15% min annual guarantee formula Prepaid THB2,140mn (incl VAT) at Signing of contract Source: Media articles, AOT Fig. 89: Don Muang Concession Details DMK new concession Period Area Min Annual Guarantee (THB mn) - MAG King Power Duty Free Mall group (F&B) 10 years starting 2012 10 years starting 2012 1100 sqm MAG: THB 63mn / month = THB756mn/year 2700 sqm MAG: THB 16.7mn / month = THB200mn/year Source: Media articles, Company data 47
  • 49. Nomura | Airports of Thailand PCL February 6, 2013 Balance sheet strong; impact of JPY weakening to be offset by hedged loans Gearing to remain manageable at 0.4x net debt-to-equity Due to the strong operating cashflow generation, even if we factor in the higher capex from the construction of the new airports, gearing should remain manageable, peaking at 0.45x net debt to equity in FY16F, before decreasing further. AOT’s loans are largely (more than 90%) denominated in JPY from overseas financial institutions, guaranteed by the Ministry of Finance with fixed annual interest rate at 0.75-2.70% and 2003-2042 payment due. Fig. 90: Gearing Net debt to equity (x) 0.6 0.5 0.4 0.3 0.2 0.1 0.0 FY11 FY12 FY13F FY14F FY15F FY16F FY17F FY18F FY19F FY20F Source: Company data, Nomura estimates Forex: likely beneficiary of JPY weakening vs THB After having suffered forex losses in FY11, AOT entered into a cross-currency and interest-rate swap contract for 78% of the remaining balance of loan for JPY-THB. This also increased the effective borrowing cost of AOT to ~5%. As such, AOT will largely lose out on the impact of the recent JPY weakening vs the THB, but since we exclude the impact of forex gains / losses in our core net income calculations, and since 22% of the borrowings are still unhedged, we think on an overall basis, AOT will still benefit from the JPY weakening. RoE uplift to be driven by margin expansion We forecast AOT’s core RoE to rise from 9% in FY12 to 13.1% in FY15F. The primary driver of this growth is growth in margins. Fig. 91: Du-pont analysis: margin the main driver of RoEs Du Pont Analysis Net margin (%) - core FY11 FY12 FY13F FY14F FY15F 14.3% 22.8% 24.0% 27.7% 28.7% Asset turns (x) 0.19 0.20 0.21 0.22 0.23 Leverage (x) 2.09 1.93 1.90 1.91 1.95 Source: Nomura estimates 48
  • 50. Nomura | Airports of Thailand PCL February 6, 2013 Risks Major potential downside risks for the stock are • Delay in implementing airport charge increases: A part of the earnings and margin expansion is premised on the PSC charges for AOT to go through. However, delays in implementing those charges will impact our earnings estimates and price target for the stock. • Lower-than-expected air traffic, which can be due to various reasons like a reemergence of economic crisis, political unrest deterring air traffic, outbreak of disease, etc. • Capex overruns at BKK airport, which would deter investor sentiment. • SOE nature of the company leading to less-than-optimal utilisation of assets. Please see the front section for a sensitivity analysis. 49
  • 51. Nomura | Airports of Thailand PCL February 6, 2013 AOT: Quasi-monopolistic airports operator in Thailand Airports of Thailand came into being as a result of the corporatization of the Airports Authority of Thailand, a state enterprise. It became a public company on 30 September 2002, and is 70%-owned by the government through the Ministry of Finance, which is the largest shareholder, with the remaining held by institutional and retail investors. Foreign investors hold ~15% of the company. AOT’s share of Thailand air traffic rising Although AOT manages only 6 out of Thailand’s 38 airports (see figures below), by virtue of them being Thailand’s major business and tourist destinations, these 6 account for ~84% of Thailand’s total air traffic. As such, AOT can be considered a good proxy to play the Thai air travel boom, in our view. The Department of Civil Aviation (DCA) manages 28 regional airports, and Bangkok Airways manages 3. Pattaya is managed by the Royal Thai Navy. As per management, there is no plan to inject other regional airports into AOT, which is not necessarily a drawback, given only 5-6 of the regional airports are making profits. Fig. 92: Airports in Thailand – who manages what Fig. 93: Map of Thailand airports Total of 38 airports in Thailand AOT 2 in Bangkok and perimeter 1. Suvarnabhumi Airport (BKK) 2. Don Muang International Airport (DMK) 4 international airports at regional sites 1. Chiang Mai International Airport (CNX) 2. Phuket International Airport (HKT) 3. Hat Yai International Airport (HDY) 4. Mae Fah Luang-Chiang Rai International Airport (CEI) Departm ent of Civil Aviation (DCA) 28 regional airports Royal Thai Navy U-Tapao Pataya International Airport Bangkok Airw ays Com pany 1. Sukhothai Airport 2. Samui Airport 3. Trad Airport Source: AOT Source: AOT 50
  • 52. Nomura | Airports of Thailand PCL February 6, 2013 Fig. 94: AOT vs regional airports capacity Area Capacity Total Area (Acres) Terminal Area BKK Runways Passengers Cargoes (Sq. m.) Aircraft (Flight/Hour) (Million/Year) (MMT/Year) 8,000 563,000 76 45.0 3.000 2 DMK 1,552 391,316 60 36.5 1.270 2 HKT CNX HDY CEI 47 86 28 15 23,369 16,742 14,656 16,650 20 24 20 12 6.5 8.0 1.9 3.0 0.036 0.035 0.013 0.005 1 1 1 1 Chek Lap Kok - HK Changi 3,101 3,212 710,000 1,043,020 54 n/a 45.0 64.0 3.000 2.000 2 3 Incheon 13,880 500,000 70 44.0 4.500 3 Airports (Metres) 60 x 3,700 60 x 4,000 60 x 3,700 45 x 3,500 45 x 3,000 45 x 3,100 45 x 3,050 45 x 3,000 60 x 3,800 60 x 3,800 60 x 4,000 59 x 2,748 60 x 4,000 60 x 3,750 60 x 3,750 Source: AOT Fig. 95: Market share of airlines – FSC and LCC Top 10 Airlines 1. Thai Airways International 2. Thai Air Asia 3. Bangkok Airways 4. Cathay Pacific Airways 5. Emirates 6. Nok Air 7. Orient Thai Airlies 8. Qatar Airways 9. Singapore Airlines 10. China Airlines Of which Top 10 LCCs 1. Thai Air Asia 2. Nok Air 3. Orient Thai Airlines 4. Tiger Airways 5. Air Asia 6. JetStar Asia 7. IndiGo Airlines 8. Indonesia Air Asia 9. Jeju Air 10. CEBU Pacific Air 36.25% 12.17% 5.81% 2.97% 2.68% 2.13% 1.61% 1.58% 1.47% 1.34% % of overall 12.17% 2.13% 1.06% 0.95% 0.83% 0.57% 0.42% 0.40% 0.39% 0.31% Within LCCs 60.11% 10.52% 5.26% 4.69% 4.11% 2.80% 2.09% 1.97% 1.95% 1.51% Source: AOT, Nomura research 51
  • 53. Nomura | Airports of Thailand PCL February 6, 2013 Fig. 96: AOT: Capex plans approved Investment Cost (THB bn) 62.50 Suvarnabhumi 1. Project Management Consultant (PMC) 2. 1st Midfield Satellite 3. Apron around 1st Midfield Satellite 4. South Tunnel and Automated People Mover 5. Main Terminal Extension 6. Parking Garage and Airlines Office 7. Utilities Expected Timeframe 2011 - 2017 Additional Capacity - 15 mn pax per year - 28 contacted gates Investment Cost (THB bn) 5.79 Phuket 1. New International Passenger Terminal 2. Renovation of the Existing Terminal 3. Apron 4. Other related facilities Expected Timeframe 2009 - 2015 Additional Capacity - 6 mn pax per year - 4 contacted gates Source: Company data Rank of airports by passenger numbers Fig. 97: Bangkok was the 16th largest airport in the world in 2011 Rank 2011 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 Airport Atlanta (ATL) Beijing (PEK) London (LHR) Chicago (ORD) Tokyo Haneda (HND) Los Angeles (LAX) Paris (CDG) Dallas/Fort Worth (DFW) Frankfurt (FRA) Hong Kong (HKG) Denver (DEN) Jakarta (CGK) Dubai (DXB) Amsterdam (AMS) Madrid (MAD) Bangkok (BKK) New York (JFK) Singapore (SIN) Guangzhou (CAN) Las Vegas (LAS) Shanghai (PVG) San Francisco (SFO) Phoenix (PHX) Houston (IAH) Charlotte (CLT) Miami (MIA) Munich (MUC) Kuala Lumpur (KUL) Rome (FCO) Istanbul (IST) Passengers 92,365,860 77,403,668 69,433,565 66,561,023 62,263,025 61,848,449 60,970,551 57,806,152 56 436 255 53,314,213 52,699,298 52,446,618 50,977,960 49,754,910 49,644,302 47,910,744 47,854,283 46,543,845 45,400,156 41,479,572 41,450,211 40,907,389 40,565,677 40,170,844 39,043,708 38,314,389 37,763,701 37,670,586 37,651,222 37,398,221 % y-y chg in 2011 3.4% 4.7% 5.4% -0.5% -2.9% 4.8% 4.8% 1.6% 6.5% 5.0% 0.9% 19.2% 8.0% 10.0% -0.4% 12.0% 2.9% 10.7% 10.8% 4.3% 2.6% 4.2% 5.2% -0.8% 2.4% 7.3% 8.8% 10.5% 3.9% 16.3% Source: CAPA 52
  • 54. Nomura | Airports of Thailand PCL February 6, 2013 Key management personnel Fig. 98: Management personnel Name Position Flying Officer Anirut Thanomkulbutra Mr. Somchai Sawasdeepon Outgoing President Senior Executive Vice President (Engineering and Construction) Senior Executive Vice President (Planning and Finance) Senior Executive Vice President (Administration) Senior Executive Vice President (Regional Airports) Senior Specialist 10 Acting Senior Executive Vice President (Business Development and Marketing) Executive Vice President (Engineering and Construction) Executive Vice President (Regional Airports) Executive Vice President (Planning and Finance) Executive Vice President (Administration) Executive Vice President Project Manager of Suvarnabhumi Airport Construction Management Office Executive Vice President (Business Development and Marketing) Mrs. Supaporn Burapakusolsri Flying Officer Passakorn Surapipith Wing Commander Prateep Wichitto Miss Vilaiwan Nadvilai Flying Officer Chaturongkapon Sodmanee Sub Lieutenant Naris Yoadchan Mrs. Poolsiri Virojanapa Mr. Montri Mongkoldaow Mr. Chaowalit Paka-Ariya Mr. Sirote Duangratana Source: Company data from 2012 Annual Report Please note that the AOT President Flying Officer Anirut Thanomkulbutra was removed by the board in late 2012. Operational relationship with the government AOT pays 5% of the operating income from Don Muang Airport and Suvarnabhumi Airport and 2% for the other regional airports to the Treasury Department. In return, AOT owns the concession rights to manage the airports for a period of 30 years (2002-2032) as part of an utilisation agreement. The agreement can be extended for another 10+10 year period, till 2052. PSC and L&P: the foundation of aeronautical revenues The aeronautical charges (PSC or passenger service charge), and the landing and parking charges are levied by AOT on the airlines and their passengers. Revisions in these charges are subject to an approval by the DCA, and are generally done after a period of ~5 years based on a compounded CPI based formula. Note that AOT is currently negotiating for an increase in PSC from THB700 to THB800 (international) and THB100 to THB150 (domestic). Note that such an increase in charges is generally justified by capex needs on the horizon (like the upcoming BKK expansion). The last time the charges were raised was in 2007, from THB500 to THB 700 (int’l) and THB 50 to THB100, in view of the Suvarnabhumi opening. After a hike in charges is approved, AOT has to give a notice to airlines of 1 year in advance. As such, we are only building in a hike coming into effect from 2HFY14 (i.e. March-2014) onwards in our estimates. 53
  • 55. Thai Airways International PCL EQUITY RESEARCH THAI.BK THAI TB TRANSPORT/LOGISTICS February 6, 2013 Laggard play on the verge of turnaround Rating Starts at Underappreciated tourism proxy; we believe sector discount should narrow Target price Starts at FY11 FY12F Old New FY13F Old New +23.4% Anchor themes We are bullish on Thailand's air transport sector, where we see growth of 7-8% pa. It has a relatively young LCC industry with scope for additional demand, planned airport capacity expansion to stay ahead of congestion, and backing from solid tourism demand and domestic consumption drivers. Nomura vs consensus Our earnings are higher than the Street due to our assumption of slight oil price declines in 2013-14F. Research analysts Thailand Transport / Logistics Tushar Mohata, CFA - NSM tushar.mohata@nomura.com +603 2027 6895 Catalysts: Upcoming quarterly results, 4Q12/1Q13 being seasonally strong, sustainable quarterly profits and continued operational improvements Actual THB 23.10 Potential upside Valuation: Should trade above mid-cycle on an improving outlook Our target multiple for THAI at 0.8x P/B implies mid-cycle valuations, in view of the 43% earnings turnaround we expect over FY12-14F (with our book value adjusted for impairment losses). We also note that in terms of P/E (CY13F: 8x) and EV/EBITDA (CY13F: 5.2x), THAI is currently trading a discount to its full-service peers (average P/E 11.4x, and average EV/EBITDA 6.4x), which might narrow going forward, as the market comes around to our view of a turnaround. 31 Dec THB 28.50 Closing price January 31, 2013 Action: Initiate with Buy; underperformance to SET Transport might reverse in 2013F We initiate coverage of Thai Airways (THAI) with a Buy rating and TP of THB28.50, implying potential upside of 23%. Over the past year, THAI has underperformed the SET Transport index by 60% and peers AOT/AAV by 130%/50%; however, its operational performance has improved steadily (PLF up to 77% in 9M12 vs. 72% a year ago), with yields holding up (only -1.2% y-y to THB2.70/RSK). We think THAI’s turnaround from a loss in 2Q12 might be sustainable (barring macro shocks) and should rekindle investor interest in the stock. With 77% revenue exposure to the economy class (and consequently tourist traffic), and more than 70% exposure to APAC traffic, we think THAI’s potential as a tourism proxy is unappreciated by the Street and warrants another look. Currency (THB) Buy Bineet Banka - NSFSPL bineet.banka@nomura.com +91 22 4053 3784 FY14F Old New Revenue (mn) 190,997 205,099 214,979 225,451 Reported net profit (mn) -10,197 4,173 6,194 8,480 -4,443 4,173 6,194 8,480 -2.04 1.91 2.84 3.88 Normalised net profit (mn) FD normalised EPS FD norm. EPS growth (%) -154.6 na 48.4 36.9 FD normalised P/E (x) na N/A 12.1 N/A 8.1 N/A 5.9 EV/EBITDA (x) 9.8 N/A 6.3 N/A 5.2 N/A 4.6 Price/book (x) 0.8 N/A 0.7 N/A 0.7 N/A 0.6 Dividend yield (%) na N/A 2.1 N/A 3.1 N/A 4.2 ROE (%) -14.6 6.4 8.9 11.2 Net debt/equity (%) 198.9 190.5 179.9 162.5 Source: Company data, Nomura estimates Key company data: See page 2 for company data and detailed price/index chart. See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts.
  • 56. Nomura | Thai Airways International PCL February 6, 2013 Key data on Thai Airways International PCL Income statement (THBmn) Year-end 31 Dec Revenue Cost of goods sold Gross profit SG&A Employee share expense Operating profit Relative performance chart (one year) FY10 180,589 -171,323 9,266 FY11 190,997 -193,237 -2,239 FY12F 205,099 -197,319 7,780 FY13F 214,979 -202,157 12,823 FY14F 225,451 -209,564 15,888 9,266 -2,239 7,780 12,823 15,888 29,502 -20,236 17,750 -19,989 27,873 -20,093 34,304 -21,481 38,976 -23,088 9,266 -4,981 258 3,497 8,040 -1,166 6,874 -48 -2,239 -4,945 184 2,634 -4,367 -41 -4,408 -35 7,780 -5,002 400 1,435 4,614 -231 4,383 -210 12,823 -5,092 400 0 8,131 -1,626 6,505 -311 15,888 -5,155 400 0 11,132 -2,226 8,906 -426 6,826 7,918 14,744 -2,748 11,996 -4,443 -5,754 -10,197 0 -10,197 4,173 0 4,173 -1,043 3,130 6,194 0 6,194 -1,548 4,645 8,480 0 8,480 -2,120 6,360 Valuation and ratio analysis Reported P/E (x) Normalised P/E (x) FD normalised P/E (x) FD normalised P/E at price target (x) Dividend yield (%) Price/cashflow (x) Price/book (x) EV/EBITDA (x) EV/EBIT (x) Gross margin (%) EBITDA margin (%) EBIT margin (%) Net margin (%) Effective tax rate (%) Dividend payout (%) Capex to sales (%) Capex to depreciation (x) ROE (%) ROA (pretax %) 2.9 6.2 6.2 7.6 5.4 1.5 0.7 5.3 16.7 5.1 16.3 5.1 8.2 14.5 18.6 5.4 0.5 na 3.7 na -11.3 na na na 5.5 0.8 9.8 na -1.2 9.3 -1.2 -5.3 na na 6.6 0.6 -14.6 -0.8 12.1 12.1 12.1 14.9 2.1 1.9 0.7 6.3 21.9 3.8 13.6 3.8 2.0 5.0 25.0 12.1 1.2 6.4 3.1 8.1 8.1 8.1 10.0 3.1 1.5 0.7 5.2 13.7 6.0 16.0 6.0 2.9 20.0 25.0 13.4 1.3 8.9 4.9 5.9 5.9 5.9 7.3 4.2 1.4 0.6 4.6 11.0 7.0 17.3 7.0 3.8 20.0 25.0 12.8 1.2 11.2 5.9 Growth (%) Revenue EBITDA EBIT Normalised EPS Normalised FDEPS 11.7 -1.6 3.6 17.1 17.1 5.8 -39.8 -124.2 -154.6 -154.6 7.4 57.0 na na na 4.8 23.1 64.8 48.4 48.4 4.9 13.6 23.9 36.9 36.9 8.06 3.73 3.73 34.86 1.25 -4.67 -2.04 -2.04 28.94 0.00 1.91 1.91 1.91 30.85 0.48 2.84 2.84 2.84 33.21 0.71 3.88 3.88 3.88 36.39 0.97 EBITDA Depreciation Amortisation EBIT Net interest expense Associates & JCEs Other income Earnings before tax Income tax Net profit after tax Minority interests Other items Preferred dividends Normalised NPAT Extraordinary items Reported NPAT Dividends Transfer to reserves Per share Reported EPS (THB) Norm EPS (THB) Fully diluted norm EPS (THB) Book value per share (THB) DPS (THB) Source: ThomsonReuters, Nomura research (%) 1M 3M 12M Absolute (THB) 4.5 0.0 -2.5 Absolute (USD) 7.4 3.1 1.3 Relative to index 1.3 -10.9 -25.9 Market cap (USDmn) Estimated free float (%) 52-week range (THB) 3-mth avg daily turnover (USDmn) Major shareholders (%) 1,694.9 43.1 27.75/19.5 4.94 Finance Ministry 51.0 Vayupak Fund 15.5 Source: Thomson Reuters, Nomura research Notes We see a steady improvement in profit levels in FY12-14F Source: Company data, Nomura estimates 55
  • 57. Nomura | Thai Airways International PCL February 6, 2013 Cashflow (THBmn) Year-end 31 Dec EBITDA Change in working capital Other operating cashflow Cashflow from operations Capital expenditure Free cashflow Reduction in investments Net acquisitions Reduction in other LT assets Addition in other LT liabilities Adjustments Cashflow after investing acts Cash dividends Equity issue Debt issue Convertible debt issue Others Cashflow from financial acts Net cashflow Beginning cash Ending cash Ending net debt FY10 29,502 -3,973 2,738 28,268 -9,684 18,584 -352 FY11 17,750 -7,639 -944 9,167 -12,628 -3,461 -199 FY12F 27,873 -1,610 901 27,164 -24,849 2,315 -400 FY13F 34,304 -221 -1,280 32,803 -28,771 4,032 -400 FY14F 38,976 -251 -1,866 36,860 -28,771 8,089 -400 -909 7,726 -5,648 19,401 -423 14,750 -4,711 2,107 591 -814 -1,776 -2,748 1 -10,664 0 -304 1,204 2,815 0 0 1,128 0 346 507 4,486 -1,043 0 0 0 361 429 8,479 -1,548 0 0 -5,637 3,979 23,380 14,300 37,680 108,600 -5,827 -19,238 -21,014 37,680 16,666 125,634 -5,502 -4,374 -1,559 16,666 15,107 128,321 -5,545 -6,589 -2,103 15,107 13,004 130,424 -5,545 -7,094 1,385 13,004 14,389 129,038 FY10 37,680 550 17,027 6,968 16,353 78,576 1,480 206,119 FY11 16,666 419 16,649 7,710 17,850 59,294 1,809 204,995 FY12F 15,107 419 17,878 7,873 17,711 58,988 2,209 209,750 FY13F 13,004 419 18,739 8,066 17,952 58,179 2,609 217,040 FY14F 14,389 419 19,652 8,361 18,202 61,023 3,009 222,722 552 9,831 296,558 23,155 6,439 51,142 80,736 123,125 624 7,724 274,445 18,872 7,363 44,440 70,675 123,427 624 7,724 279,295 0 7,518 43,928 51,446 143,427 624 7,724 286,175 0 7,703 44,817 52,519 143,427 624 7,724 295,102 0 7,985 45,742 53,727 143,427 16,315 220,176 288 16,907 211,009 266 16,603 211,476 476 16,949 212,896 787 17,310 214,465 1,213 47,376 28,718 47,376 15,793 47,376 19,966 47,376 25,117 47,376 32,048 76,094 296,558 63,169 274,445 67,342 279,295 72,492 286,175 79,424 295,102 0.97 1.9 0.84 -0.5 1.15 1.6 1.11 2.5 1.14 3.1 3.68 142.7 7.08 198.9 4.60 190.5 3.80 179.9 3.31 162.5 32.7 14.0 13.9 32.8 32.2 13.9 13.0 33.0 30.8 14.5 13.8 31.5 31.1 14.4 13.7 31.7 Notes 31.1 14.3 13.7 31.7 High net debt levels, but funding should be less of a concern given its national carrier status Source: Company data, Nomura estimates Balance sheet (THBmn) As at 31 Dec Cash & equivalents Marketable securities Accounts receivable Inventories Other current assets Total current assets LT investments Fixed assets Goodwill Other intangible assets Other LT assets Total assets Short-term debt Accounts payable Other current liabilities Total current liabilities Long-term debt Convertible debt Other LT liabilities Total liabilities Minority interest Preferred stock Common stock Retained earnings Proposed dividends Other equity and reserves Total shareholders' equity Total equity & liabilities Liquidity (x) Current ratio Interest cover Leverage Net debt/EBITDA (x) Net debt/equity (%) Activity (days) Days receivable Days inventory Days payable Cash cycle Notes Gearing to remain high at around 1.8-1.9x net debt-to-equity levels Source: Company data, Nomura estimates 56
  • 58. Nomura | Thai Airways International PCL February 6, 2013 Valuation Laggard play on SET Transport, despite improving operational metrics We note THAI has been one of the biggest laggards on the SET and the SET Transport index, underperforming the benchmark SET (by 31%), SET Transport Index (by 60%) and its peers in the aviation space (AOT by 130%, and AAV by 50%) since January 2012. This has come amidst a relatively turbulent 2012, which saw one loss-making quarter in 2Q12 out of the nine months reported so far, an unexpected change in President, continued growth of low-cost carriers (LCCs), and more recently a strike by labour unions. However, we note, there were several major positives for THAI on the operational front, which we think outweigh the impact of these negatives, notably an increase in passenger loads to 77% in 9M12 (from 72% a year ago), which came amidst a relatively minimal loss in passenger yields (-1.2% to THB 2.70 / RSK). As a result, 9M12 core net income reached a profitable THB3bn, compared with a loss of THB4.9bn in 9M11, and we believe THAI looks on track to deliver a strong finish to the full year, with another decently profitable 4Q12 result. We note EPS revisions for THAI are relatively holding up for FY13F, with FY14F consensus expecting substantial growth in profits. Even so, THAI is only trading at below mid-cycle forward valuations, as opposed to the THAI transport sector trading generally above 1SD of the mean, at a discount, which we think is unreasonable considering the improving profitability and return cycle. Fig. 99: Stock price performance AAV AOT THAI SET SET Transport MSCI EM Airlines EPS (THB) 4.5 FY13F FY14F 4.0 3.5 3.0 Source: Bloomberg Jan-13 Source: Bloomberg Fig. 101: Trading below mid-cycle valuation Dec-12 Nov-12 Oct-12 Sep-12 Aug-12 Jul-12 Jun-12 May-12 Apr-12 Mar-12 Feb-12 2.0 Jan-12 Jan-13 Dec-12 Nov-12 Oct-12 Sep-12 Aug-12 Jul-12 Jun-12 May-12 Apr-12 Mar-12 Feb-12 2.5 Jan-12 (%) 160 140 120 100 80 60 40 20 0 -20 -40 Fig. 100: THAI: EPS revisions Fig. 102: Forward P/B to forward ROE estimates Forward P/B (LHS) +1SD=1.1 1.6 1.4 (x) 1.6 Mean=0.8 -1SD=0.5 (%) 20 Forward P/B (LHS) Forward ROE (RHS) 1.4 1.2 15 1.2 1.0 10 1.0 Source: Bloomberg, Nomura research 5 0 Jan-13 Sep-12 May-12 Jan-12 Sep-11 Jan-11 May-11 Sep-10 Jan-10 May-10 Sep-09 May-09 Jan-09 Sep-08 May-08 -5 Jan-08 Oct-12 Dec-11 May-12 Jul-11 Feb-11 Sep-10 Apr-10 Nov-09 Jun-09 0.0 Jan-09 0.0 Aug-08 0.2 Oct-07 0.2 Mar-08 0.4 May-07 0.4 Dec-06 0.6 Jul-06 0.8 0.6 Feb-06 0.8 -10 Source: Bloomberg, Nomura research 57
  • 59. Nomura | Thai Airways International PCL February 6, 2013 Fig. 103: Forward P/E Fig. 104: Forward EV/EBITDA Forward P/E +1SD=11.5 25 Mean=9.0 -1SD=6.5 Forward EV/EBITDA +1SD=6.5 9.0 Mean=5.7 -1SD=4.9 8.0 20 7.0 15 6.0 10 5.0 5 Source: Bloomberg, Nomura research Oct-12 May-12 Jul-11 Dec-11 Feb-11 Apr-10 Sep-10 Jun-09 Nov-09 Jan-09 Aug-08 Oct-07 Mar-08 Dec-06 May-07 Jul-06 3.0 Feb-06 Aug-12 Nov-12 May-12 Feb-12 Nov-11 Aug-11 Feb-11 May-11 Nov-10 Aug-10 May-10 Feb-10 Aug-09 May-09 0 Nov-09 4.0 Source: Bloomberg, Nomura research We value THAI at mid-cycle on our bullish outlook for Thailand aviation; anticipated impairment loss unlikely to cause book value erosion; TP of THB28.50/share; Buy We think THAI deserves to trade at its mid-cycle valuation, in view of the 43% earnings turnaround we expect over FY12-14F and its steep discount to its other full-service peers. However, we note THAI’s book value has a risk of impairment losses on its old aircraft (owned / finance leased) which it needs to retire over the next two years, like the A300, A345, B734 and B744s. We provide for ~THB3bn of impairments on the progressive retirement of these aircraft, and estimate end-2014F adjusted BV of THB36. We highlight that based on our NPAT estimates of THB6.2bn/THB8.4bn for FY13F/FY14F, the potential impairment losses are unlikely to lead to erosion in book value. Applying a target P/B of 0.8x, which implies mid-cycle for THAI in view of the bullish outlook for the THAI transport sector, we arrive at our TP of THB28.50/share, representing potential upside of 23% from current levels. We initiate on THAI with a Buy rating. We note that in terms of P/E (CY13F: 8x) and EV/EBITDA (CY13F: 5.2x), THAI is currently trading a discount to its full-service peers (average P/E 11.4x, and average EV/EBITDA 6.4x). Fig. 105: Valuation Adjusted equity value (ex provisions) – FY14F Adj BVPS Target Valuation (P/B) Price target (THB / share) Source: Nomura research Fig. 106: Aircraft retirals – owned and finance leased 77,637 36 0.8x 28.50 A300-600 A340-500 A330-300 B737-400 B747-400 B777-200 B777-300ER Risk of Owned? impairment? Own Yes FL Yes Mix No 2 Own+ Rest OL Yes 14 O, 4 FL Yes 6 O, 2 OL No 6 OL No FY13F 4 4 FY14F 5 FY15F 2 2 2 1 Source: Company data, Nomura research Exposure to economy-class passengers and Asia-Pacific more than 70% of revenues; THAI is an overlooked tourism proxy, in our view The current weakness in global business-class passenger demand affects various airlines to a varying degree, depending on how much of their revenue is earned from premium passengers (although business-class passengers only account for ~10% or less of overall passengers, average ticket prices on business class are far higher than economy). For airlines such as SIA, we estimate the business class contributes more 58
  • 60. Nomura | Thai Airways International PCL February 6, 2013 than 30-35% of overall revenue and, as such, SIA is quite susceptible to a slowdown in premium flyers. THAI generates ~23% of its revenue from the business class, thus making it less sensitive to premium passengers, and more geared towards the economy class, which comprises bulk of the holidaymakers and tourists. We also note that THAI’s exposure to Europe is ~28% of revenues. More than 70% of its revenue still comes from domestic, ASEAN, Japan and Australia destinations, where the bulk of the tourist traffic originates. We highlight that Japan, which is one of the most profitable routes for THAI, still relies almost completely on full-service air travel for outbound tourism, as LCCs in Japan are a fairly recent development and mainly domestic (with a few exceptions like AirAsia X flying to Malaysia). We also observe that along with tourist arrivals growing at a CAGR of 7% since 2001, RPKs at THAI have also grown at a slower 2%, with the correlation between tourist arrivals and THAI RPK a strong 0.77. Based on the above, we conclude that THAI is also a beneficiary of rising tourist traffic, although primarily long haul. Fig. 107: Jan – Aug 2012 passenger revenue by class Fig. 108: Jan – Aug 2012 passenger revenue by region Australia 10% Royal First 2% Royal Silk 20% Premium economy 1% Europe 28% N. Pacific 2% Africa 1% Domestic 10% Economy 77% Source: Company data Regional 49% Source: Company data Fig. 109: Correlation between tourists and THAI RPKs Visitor Arrivals: Excluding Overseas Thai ('000) (LHS) 21,000 19,000 63,000 Correlation = 0.77 61,000 59,000 Revenue Passenger-Kilometers (mn) (RHS) 17,000 57,000 55,000 53,000 15,000 51,000 13,000 49,000 47,000 11,000 45,000 FY11 FY10 FY09 FY08 FY07 FY06 FY05 FY04 FY03 FY02 43,000 FY01 9,000 Source: Nomura research 59
  • 61. Nomura | Thai Airways International PCL February 6, 2013 Fuel hedging on the higher side; to benefit from lower fuel prices and less volatility THAI typically hedges more than 50% of its fuel requirements for the coming months. It has hedged roughly 38-54% of its requirement for the 1H2013 period. We expect fuel prices to decline to USD105/bbl by 2013F and USD100/bbl by 2014F and, as such, view the hedging decision as neutral to our view of benign fuel prices. With part of future bookings matched to fuel costs, only a highly volatile movement in oil prices would result in costly hedges being unwound for THAI, in our view, which we do not expect to happen. As such, we expect our view of 5% lower oil prices in 2013/14 to benefit THAI. Note that we exclude MTM effect of fuel hedges in the calculation of our core net income for airlines. Fig. 110: Hedging levels 100% Monthly fuel hedging - % of consumption 90% 80% 70% 60% 50% 40% 30% 20% Apr-13 Oct-12 Jan-13 Jul-12 Apr-12 Jan-12 Jul-11 Oct-11 Apr-11 Jan-11 Jul-10 Oct-10 Apr-10 Jan-10 Jul-09 Oct-09 Apr-09 Jan-09 Jul-08 Oct-08 Apr-08 0% Jan-08 10% Source: Company data Recent strike by THAI employees might weigh on share price in the near term We note that the mid-January strike by some THAI employees demanding a higher bonus (2 month, vs 1 month payout) and salary increment (7.5%) might be fresh on investors’ minds and impact the share price in the near term. However, we also note that the strike was called off fairly quickly by reaching a settlement, only resulting in a small delay in flights, so the effect of disruption was fairly negligible. However, a repeat of such incidents, which we deem unlikely, might turn into a continuous overhang on the share price and limit upside. Moving to protect market share on the lines of SIA; THAI Smile can be profitable like SilkAir, in our view Over the past decade, THAI has lost market share to LCCs, mainly on domestic routes (from 84% in 2003 to 40% in 2010), and to a certain extent on regional routes (42% to 33%), as per company data. However, we note that such a significant drop in market share has not necessarily come with a similar drop in passenger numbers, as most of the passengers migrating to LCCs have been new flyers, and LCCs have been hugely successful in simulating demand. In fact, passenger numbers have held relatively steady for THAI over this period, and RPK numbers have grown over the years. This is in line with the developments in neighbouring Malaysia, where MAS’s market share in domestic routes has fallen to 30-35% from a monopoly a decade ago, losing share to AirAsia. Even in Singapore, LCCs now account for 25% of the total traffic from non-existence 10 years ago, as per CAPA data. Full-service carriers have gradually begun to realise that they can, in fact, share in this growth in new passengers through stakes in LCCs, without necessarily compromising on profitability for the entire group, because as a separate LCC arm within the parent 60
  • 62. Nomura | Thai Airways International PCL February 6, 2013 company, a carrier can manage costs better by negotiating new staff contracts, outsourcing staff, and thus get over the various cost issues legacy carriers face. We see this method being adopted by SIA, which has a 33% stake in a pure-play LCC (Tiger Airways), a full-service short-haul arm (SilkAir), which is profitable; and Scoot, a recent entrant in the long-haul LCC space. We note that THAI’s evolution follows a similar trend. Over the past 2 years, it has built up a 49% stake in domestic LCC Nok Air (which competes with Thai AirAsia at the DMK hub). More recently the last 10% in Nok Air was acquired for THB165mn. In July 2012, it started a new affiliate called THAI Smile, which was to be positioned between a ‘pure, no frills’ LCC service like Nok and a premium service like THAI’s mainline operations. However, we note that as per aviation website CAPA, THAI Smile is slowly moving toward a more premium offering by having a dedicated business class in its future aircraft (its initial aircraft were all economy + premium economy), which follows SIA’s strategy with SilkAir. We note that THAI Smile can easily achieve lower costs than the overall group structure, as it operates narrow-body fuel efficient aircraft on routes which have historically been flown by THAI using wide-body aircraft, and thus THAI Smile has the potential to be profitable in the medium term like SilkAir. Fig. 111: Domestic routes market share evolution Fig. 112: Regional routes market share evolution Source: Company data Source: Company data Fig. 113: THAI – brands vs product positioning Fig. 114: Comparison with SIA Thai SIA Mainline THAI SQ / SIA Regional THAI Smile SilkAir Short haul LCC Long haul LCC Nok (49%) Tiger (33%) - Scoot Source: Nomura research Source: Company data 61
  • 63. Nomura | Thai Airways International PCL February 6, 2013 Fig. 115: THAI Smile network plan Source: Company data Fig. 116: Nok Air route map (white) Source: Company data 62
  • 64. Nomura | Thai Airways International PCL February 6, 2013 Recovery in play THAI’s improving load factors; yields are steady… We note THAI’s load factor and yields appear to be firmly on the recovery path, post the floods of 4Q11, helped by capacity rationalisation and an improving load factor. Passenger loads increased to 77% in 9M12, from 72% a year ago, which came amidst a relatively small loss in passenger yields (-1.2% to THB 2.70 / RSK) for the 9M period. As a result, 9M12 core net income stood at a profitable THB3bn, compared with a loss of THB4.9bn in 9M11, and we think THAI looks on track to deliver a strong finish to the full year, with the seasonal uptick in the 4Q12 results (our FY12F core net income forecasts: THB4bn). Fig. 117: Passenger load factors Fig. 118: Passenger yields holding steady (%) 85 (THB/km) 80 3.0 75 2.5 70 2.0 65 1.5 60 1.0 55 0.5 50 0.0 3Q12 2Q12 1Q12 2Q11 2Q11 4Q11 1Q11 1Q11 3Q11 4Q10 3Q10 2Q10 1Q10 4Q09 3Q09 4Q10 Source: Company data, Nomura research 2Q09 1Q09 3Q12 2Q12 1Q12 4Q11 3Q11 2Q11 1Q11 4Q10 3Q10 2Q10 1Q10 4Q09 3Q09 2Q09 1Q09 3.5 Source: Company data, Nomura research … leading to steady profitability With the fourth quarter typically being one of the two quarters comprising the seasonal high (the other being 1Q), we expect profitability to continue to be sustained and expect THAI to record ~THB4bn in full-year core net income, notwithstanding higher bonus provisions for employees, which was a reason for the recent employee strike. Fig. 119: Core EBITDA Fig. 120: Operating revenue Higher bonuses might cause slight dip in profitability in 4Q 14,000 60,000 12,000 50,000 10,000 40,000 8,000 30,000 6,000 20,000 4,000 Source: Company data, Nomura estimates 4Q12F 3Q12 2Q12 1Q12 4Q11 3Q11 3Q10 2Q10 1Q10 4Q09 3Q09 2Q09 (2,000) 1Q09 0 4Q11 1Q12 2Q12 3Q12 4Q12F 0 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 10,000 1Q09 2Q09 3Q09 4Q09 2,000 Source: Company data, Nomura estimates 63
  • 65. Nomura | Thai Airways International PCL February 6, 2013 Cargo yields and loads to drop slightly in FY12F, and likely to stage a small recovery in FY13-14F With cargo (comprising ~14% of FY12F revenue for THAI) going through a worldwide weak environment for freight, we estimate a 2pp drop in cargo load to 54% for FY12F and a 4% drop in freight yield to THB9.66/FTK. However, with the US and EU GDP growth estimates suggesting a bottoming out in 1Q2013, we are arguing for a small recovery in cargo loads by 1pp each year over FY13F/14F, aided by capacity cuts (RATK down to 4.8bn in FY12F from 4.9bn in FY11). Fig. 121: Freight load factor Fig. 122: Freight yields (THB/FTK) (%) 64 12 62 11 60 10 58 56 9 54 8 52 7 50 Source: Company data, Nomura estimates FY14F FY13F FY12F FY11 FY10 FY09 FY08 FY07 FY14F FY13F FY12F FY11 FY10 5 FY09 46 FY08 6 FY07 48 Source: Company data, Nomura estimates Improving product offering through re-fleeting and retrofitting to support yields THAI is concentrating on improving its product offerings by retiring old and aged costinefficient aircraft, which in our view should result in added benefits of lowering long-term maintenance costs as well. In addition, it is retrofitting its aged B744s which are scheduled to keep operating for a longer period with newer seats, and its B772s with personal IFE (Video on demand). These measures, although by no means compensate fully for the rather forgettable experience of flying the old aircraft, are still a small positive step going towards improving the passenger experience, in our view, and should support THAI’s passenger yields. Fig. 123: Retrofitting THAI’s old B744s and B772s Source: Company data 64
  • 66. Nomura | Thai Airways International PCL February 6, 2013 Fig. 124: Wt average age of THAI fleet set to fall (Years) 12 11 10 9 8 7 6 FY11 FY12F FY13F FY14F FY15F FY16F FY17F Source: Company data Higher proportion of Internet bookings to result in lower distribution costs In line with our theme of growing Internet penetration in Thailand, and aided by an overhaul of THAI’s IT backbone, we note that the proportion of bookings through the Internet is on a consistently upward trend. We note that although at ~10%, THAI’s proportion of Internet bookings is still much lower vs. AirAsia’s 85%, we still view this trend favourably as it helps to eliminate distribution margins, which in some cases can be a sizeable part of overall ticket prices (total A&P + distributor commissions form ~3% of operating costs for THAI). Fig. 125: % of tickets sold via the Internet (%) 14 Fig. 126: % of Internet checkins (%) Ticket sales via internet Check in via internet 9 8 12 7 10 6 8 5 6 4 3 4 2 Source: Company data Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Jul-12 Apr-12 Jan-12 Jul-11 Oct-11 Apr-11 Oct-10 Jan-11 Jul-10 Apr-10 Jan-10 Jul-09 0 Oct-09 0 Apr-09 1 Jan-09 2 Source: Company data 65
  • 67. Nomura | Thai Airways International PCL February 6, 2013 Key assumptions Fig. 127: Revenue and operating metrics Passenger RPK Domestic Regional Asia Europe North Pacific Aus+NZ Africa Summary of key operating statistics Number of Aircraft FY10 55,526 3,036 21,566 21,655 1,604 7,254 410 FY11 55,089 3,159 21,698 20,711 1,513 7,422 586 FY12F 60,150 3,582 25,301 21,165 1,315 8,165 621 FY13F 62,083 3,710 26,581 21,377 1,446 8,329 640 FY14F 64,110 3,846 27,928 21,591 1,591 8,495 659 90 89 93 97 97 Available Ton-Kilometers (mn) Revenue Ton-Kilometers (mn) Load Factor (%) 11,516 7,997 69.4 11,987 7,836 65.4 11,826 8,107 68.6 12,101 8,359 69.1 12,388 8,620 69.6 Number of Passengers ('000) Available Seat-Kilometers (mn) Revenue Passenger-Kilometers (mn) Cabin Factor (%) 18,165 75,600 55,676 73.6 18,398 78,533 55,267 70.4 20,226 78,137 60,150 77.0 20,876 80,661 62,083 77.0 21,558 83,307 64,110 77.0 4,708 2,895 61.5 4,919 2,766 56.2 4,794 2,589 54.0 4,842 2,663 55.0 4,890 2,739 56.0 25,884 25,848 25,331 25,920 26,534 Passenger yields - blended (THB / RPK) Passenger yields - blended (USD / RPK) 2.5 0.08 2.6 0.09 2.7 0.09 2.7 0.09 2.7 0.09 Freight yields - blended (THB / FTK) Freight yields - blended (USD / FTK) 9.46 0.30 9.85 0.32 9.66 0.31 9.66 0.32 9.66 0.33 Exchange rates Nomura assumptions Average THB/USD 31.7 30.5 31.0 29.9 29.2 80.2 28.9% 111.8 39.5% 112.0 0.2% 105.0 (6.3%) 100.0 (4.8%) Available Dead Load Ton-Kilometers (mn) Revenue Freight Ton-Kilometers (mn) Freight Load Factor (%) Number of Personnel (people) Average Brent oil price (USD/ bbl) % change Source: Nomura estimates 66
  • 68. Nomura | Thai Airways International PCL February 6, 2013 Fig. 128: Costs and fleet FY10 Cost breakdown Fuel and oil Employee benefits expenses Flight service expenses Crew expenses Aircraft maintenance and overhaul costs Depreciation and amortisation expenses Lease of aircraft and spare parts Inventories and supplies Selling and advertising expenses Insurance expenses Other expenses CASK (THB / ASK) CASK (USD / ASK) Fleet A300-600 A340-500 A340-600 A330-300 A320-200 B737-400 B747-400 B777-200 B777-200ER B777-300 B777-300ER ATR72 A380-800 A350-900 B787-9 B787-8 Average age FY11 FY12F FY13F FY14F 33% 20% 11% 3% 6% 12% 3% 5% 4% 0% 4% 40% 16% 11% 3% 6% 10% 3% 5% 3% 0% 4% 39% 15% 10% 3% 7% 10% 3% 5% 3% 0% 4% 36% 17% 10% 3% 6% 11% 4% 5% 3% 0% 4% 33% 18% 10% 3% 5% 11% 6% 5% 3% 0% 4% 2.27 0.071 2.46 0.081 2.53 0.081 2.51 0.084 2.52 0.086 84 13 4 6 15 0 5 18 8 6 6 3 0 0 0 0 0 89 11 4 6 22 0 5 16 8 6 6 5 0 0 0 0 0 93 9 0 6 25 4 5 14 8 6 6 7 0 3 0 0 0 97 5 0 6 27 10 3 12 8 6 6 8 0 6 0 0 0 97 0 0 6 25 12 1 12 8 6 6 11 0 6 0 0 4 11.0 10.3 9.4 8.8 Source: Nomura estimates Gearing to remain high at near 2x levels We estimate THAI’s gearing should peak at near 2x net debt-to-equity in FY12F, and with future finance lease / capex commitments in the range of ~THB30bn each year for the next few years, we expect the strong operating cash generation will be used to pay for the aircraft. However, gearing should remain near 1.4x levels even in FY14F, we estimate. Forex risks: Overall beneficiary of appreciating THB, although revenue impact mixed For the income statement, THAI’s revenue is denominated primarily in foreign currencies, with the ratio being USD: EUR: JPY: THB = 38:28:9:24. On the cost side, THAI’s exposure is USD: EUR: JPY: THB = 66:8:3:23, with fuel costs and lease costs denominated in USD being the biggest cost item. As such, although THAI is net short USD (benefitting from THB appreciation), it is also net long EUR and JPY, thus losing out when these depreciate. However, in terms of balance sheet liabilities, it has loans denominated in JPY (11% of overall) and EUR (33% of overall), so a THB appreciation benefits here. Overall, we estimate THAI should be a beneficiary of THB appreciation. 67
  • 69. Nomura | Thai Airways International PCL February 6, 2013 Risks Downside risk to our earnings estimates and target price include: a) a jump in oil prices, or lower load factors or yields due to demand weakening; b) political unrest in Thailand reducing tourism demand; c) disease outbreak; d) irrational competition (eg, entry of new players such as Lion Air with a new AOC); e) floods affecting operations; f) return of macroeconomic shocks; g) renewed labour union unrest; and h) higher-than-expected impairment of aircraft to be retired Note that THAI is also a customer of the Boeing Dreamliner (787) aircraft, but deliveries are scheduled only from 2014 onwards. The Dreamliner aircraft are currently grounded pending safety investigations, and in case the investigations take a long time to complete or propose big design changes, the THAI’s EIS (entry-into-service) of the Dreamliner might be pushed back, and impact capacity growth plan next year. However, we note that unlike airlines like JAL or ANA, which had to ground in-service 787s, THAI still has plenty of time to observe the situation as it is evolving, and make alternative arrangements in case the aircraft are delivered late (eg, lease alternative aircraft, not retire existing aircraft). Please refer to the front section for our sensitivity table. 68
  • 70. Nomura | Thai Airways International PCL February 6, 2013 About Thai Airways International PCL The national carrier of Thailand Thai Airways International Public Company Limited (THAI) is the national carrier of the Kingdom of Thailand. THAI operates domestic, regional and intercontinental flights from the Bangkok hub to destinations around the world. Thai Airways International commenced operations in 1960 as a joint venture between Thailand's domestic carrier, Thai Airways Company (TAC) and Scandinavian Airlines System (SAS). SAS initially provided a 30% share capital of THB2mn. The joint venture was also helped by SAS’ operations, managerial and marketing expertise. SAS also provided training assistance aimed at building a fully independent national airline within the shortest possible time. Gradually, with the help of training and experience, Thai nationals were able to assume full managerial responsibility and the number of expatriate staff was reduced significantly, and by 1987 expatriates accounted for less than 1% of the staff based in Thailand. After a 17-year partnership with SAS, the Thai government on 1 April 1977 bought out the remaining 15% holding from SAS and THAI became fully-owned by the Thai people. Thai Airways International started operating flights in 1960, with flights originating from Bangkok to nine overseas destinations within Asia. Intercontinental services were launched in 1971, to Australia, followed by flights to Europe in 1972, and to North America in 1980. Thai Airways International merged with Thai Airways Company (TAC) on 1 April 1988. THAI shares were listed on 19 July 1991, with a total share capital of THB14,000mn, the largest Thai IPO at its time. In November 2003, THAI offered for sale the company's 442.75mn ordinary shares, which comprised 285mn newly issued shares to increase capital and 157.75mn existing ordinary shares held by the Ministry of Finance. In September 2010, THAI made another public offering of no more than 1,000mn newly issued shares to raise another THB15bn to fund growth. THAI is now 51%-owned by the Ministry of Finance. 69
  • 71. Nomura | Thai Airways International PCL February 6, 2013 Key management personnel Fig. 129: Management Name Mr. Sorajak Kasemsuvan Position President Education Ph.d in International Law, London School of Economics Ph. D. in Political Science, University of London, UK Mr. Pandit Chanapai Executive Vice President, Commercial Department Master of Arts, International Relations, The University of Connecticut, USA Flt. Lt. Montree Jumrieng Executive Vice President, Technical Department Bachelor of Science, Mechanical Engineering, Royal Thai Air Force Academy Mr. Chokchai Panyayong Executive Vice President, Strategy and Business Development Department Master of Engineering, Civil Engineering, University of Detroit, USA Executive Vice President, Diploma Prufung Bauingenieurwesen Vice President, Aviation Resources, Development Department Operations Department Master Degree Level), Civil Engineering Hochschule Der Bundeswehr Muenchen Germany Master of Science, Operations Research, University of Southampton, UK Director, Flight Deck Crew Training Department Deputy Director, Domestic Flight Deck Crew Training Department Sqn. Ldr. Asdavut Watanangura Mr. Teerapol Chotichanapibal Mrs.Wasukarn Visansawatdi Executive Vice President, Product and Customer Services Department Experiences Chairman, MCOT Public Company Limited Chairman, M Pictures Entertainment Public Company Limited Independent Director, Electricity Generating Public Company Limited Director, M Pictures Entertainment Public Company Limited Independent Director, Seamico Securities ... Public Co. Ltd Executive Vice-President, Human Resources and General Administration Department Vice President Commercial Development and Support Department Director The Americas and East Asia Region Executive Vice-President, Human Resources and General Management Department Vice-President, Human Resources Management Department Director, Pilot Administration Department Vice President, Business Development and Special Project Department Vice President, Suvarnabhumi Project Vice President Human Resource Development and Management Department Vice President, Commercial Development and Support Department Managing Director, Catering Department Vice President, Commercial Development and Support Department Director, Brand Management and Commercial Comunications Department Executive Vice President, Finance and Accounting Department Mr. Sathok Varasarin Bachelor of Business Administration, Managing Director, Catering Department Human Resources Mr. Danuj Bunnag Executive Vice President Washington International University, USA Master of Business Administration, Middleham University, Great Britain Vice President, In-Flight Services Department Bachelor of Special Studies, Cornell College, USA Managing Director, Ground Services Business Unit Ground Services Mr. Niruj Maneepun Executive Vice President B. Sc. Washington University at St. Louis, USA Bachelor of Science, Washington University Vice President, Market Planning and Revenue Management Department Executive Vice President Bachelor of Special Studies, Cornell College, USA Managing Director, Ground Services Business Unit Corporate Secretariat B. Sc., Washington University at St. Louis, USA Master of Construction Management, Washington University , USA Vice President, Market Planning and Revenue Management Department Source: Company data Fig. 130: Board of directors Name Mr. Ampon Kittiampon Position Chairman and Independent Director Mr. Chulasingh Vasantasingh Vice Chairman MCL (Comparative Law), and Independent Director University of Illinois, USA Mr. Areepong Bhoocha-oom Vice Chairman Mr. Kanit Sangsubhan Independent Director Mr. Pradit Sintavanarong Director Pol. Gen. Preophan Dhamapong Director Education Ph. D. (Applied Economics) Clemson University, South Carolina, USA Ph. D. (Finance), University of Mississippi, USA Ph. D. (Economics), University of Toronto, Canada MPH, Harvard University M. Sc. (Crimonology), Eastern Kentucky University USA Experience Deputy Permanent Secretary, Ministry of Agriculture and Cooperatives Secretary General, Office of the National Economic and Social Development Board Deputy Attorney General Director, Electricity Generating Authority of Thailand Director, Ratchaburi Electricity Generating Holding PCL Deputy General, The Excise Department, Ministry of Finance Director General, State Enterprise Policy Office (SEPO) Independent Director, Tisco Bank Director, Dhanarak Asset Development Co. Executive Director of J&W Development Co. Commander of Immigration Division 2, Immigration Bureau Commissioner of Narcotics Suppression Bureau Source: Company data 70
  • 72. Nomura | Thai Airways International PCL February 6, 2013 Route map Fig. 131: THAI: International route map Source: Company data 71
  • 73. Nomura | Thai Airways International PCL February 6, 2013 Fig. 132: Domestic route map Source: Company data 72
  • 74. Nomura | Thai Airways International PCL February 6, 2013 Key routes and capacity distribution Fig. 133: THAI: Capacity distribution (Oct 2012 - Week 3) Mid East SW Pacific E/ C Europe S. Africa N. America Fig. 134: THAI: Top 10 International routes (Oct 2012 - Week 3) BKK - HKG BKK - SIN BKK - NRT BKK - ICN S Asia Domestic BKK - RGN BKK - KUL W Europe BKK - KIX BKK - FRA SE Asia NE Asia BKK - DEL BKK - TPE 0 Source: CAPA Centre for Aviation 10,000 20,000 30,000 Source: CAPA Centre for Aviation 73
  • 75. Asia Aviation PCL AAV.BK AAV TB EQUITY RESEARCH TRANSPORT/LOGISTICS February 6, 2013 Solid franchise; but pricing in high growth Rating Starts at Proxy to Thai LCC growth, but premium valuation limits upside; wait for better levels Neutral Target price Starts at THB 6.10 Closing price January 31, 2013 THB 6.10 Potential downside 0% Action: Initiate with Neutral; look for better entry levels AAV is the listed proxy to play the growth of Thailand’s largest low cost carrier (LCC) – Thai AirAsia (TAA), in which it is the 55% shareholder. We argue for a strong growth outlook for TAA, helped by spare capacity unlocked with the shift of hub to Don Muang, strong tourism demand, TAA’s fleet growing 1.8x to 48 aircraft by 2016F from the current 27, and its first-mover advantage in the LCC arena. In our view, this growth should be underpinned by AAV’s strong balance sheet (net cash position) and recently raised IPO funds, Thailand’s geographic proximity to China, making it servable by TAA’s A320s, synergies through its association with Malaysia AirAsia (through bulk discounts and shared infrastructure) and room for ancillary uplift. Anchor themes We are bullish on the Thai air transport sector, with ~7-8% annual growth potential, a relatively young LCC industry with the scope to create additional demand, planned airport capacity expansion to stay ahead of congestion, backed by solid tourism demand and domestic consumption. Valuation: Pricing in a bullish outlook; wait for a correction However, we think TAA’s current valuation adequately reflects all these factors, which is at a 50% adj EV/EBITDAR premium (2014F: 9.5x) to the LCC universe, and is already pricing in this bullish outlook (even in the context of a 33% earnings CAGR in the next two years). We also think there is some downside risk to the Street’s earnings estimates, which appears overly bullish; we think the stock may trade range-bound on a likely miss in 4Q12F results. We rate the stock Neutral and would advise investors to wait for a better entry point to accumulate it. Nomura vs consensus Our FY13F/FY14F are 17%/15% respectively, below the Street, as we think results might fall short of Street targets. Research analysts Thailand Transport / Logistics Tushar Mohata, CFA - NSM tushar.mohata@nomura.com +603 2027 6895 Catalyst: Underperforming Street expectations, a sharp spike in oil price or more competitive pressure might cause the share price to decline. On the other hand, falling oil prices might be a key positive. 31 Dec FY11 FY12F FY13F Bineet Banka - NSFSPL bineet.banka@nomura.com +91 22 4053 3784 FY14F Currency (THB) Actual Revenue (mn) 8,123 15,016 23,295 26,957 Reported net profit (mn) 1,014 15,718 1,274 1,717 936 977 1,274 1,717 22.83c 21.52c 26.26c 35.40c Normalised net profit (mn) FD normalised EPS Old New Old New 21.7 FD normalised P/E (x) 26.7 N/A 28.3 N/A 23.2 N/A 17.2 EV/EBITDA (x) 34.8 N/A 18.7 N/A 9.6 N/A 6.4 Price/book (x) 3,269.2 N/A 1.6 N/A 1.5 N/A 1.4 na N/A na N/A na N/A na ROE (%) Net debt/equity (%) 22.0 New FD norm. EPS growth (%) Dividend yield (%) -5.7 Old 34.8 -213.1 170.8 6.7 8.4 net cash net cash net cash net cash Source: Company data, Nomura estimates Key company data: See page 2 for company data and detailed price/index chart. See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts.
  • 76. Nomura | Asia Aviation PCL February 6, 2013 Key data on Asia Aviation PCL Income statement (THBmn) Year-end 31 Dec Revenue Cost of goods sold Gross profit SG&A Employee share expense Operating profit EBITDA Depreciation Amortisation EBIT Net interest expense Associates & JCEs Other income Earnings before tax Income tax Net profit after tax Minority interests Other items Preferred dividends Normalised NPAT Extraordinary items Reported NPAT Dividends Transfer to reserves Valuation and ratio analysis Reported P/E (x) Normalised P/E (x) FD normalised P/E (x) FD normalised P/E at price target (x) Dividend yield (%) Price/cashflow (x) Price/book (x) EV/EBITDA (x) EV/EBIT (x) Gross margin (%) EBITDA margin (%) EBIT margin (%) Net margin (%) Effective tax rate (%) Dividend payout (%) Capex to sales (%) Capex to depreciation (x) ROE (%) ROA (pretax %) Relative performance chart (one year) FY10 6,049 -5,340 709 FY11 8,123 -7,321 802 FY12F 15,016 -13,665 1,351 FY13F 23,295 -20,844 2,452 FY14F 26,957 -23,563 3,394 709 802 1,351 2,452 3,394 771 -62 838 -36 1,416 -64 2,706 -255 3,823 -428 709 -96 0 156 769 0 769 0 802 -24 0 158 936 0 936 0 1,351 -56 0 293 1,588 -365 1,223 -246 2,452 -11 0 454 2,895 -579 2,316 -1,042 3,394 -18 0 526 3,902 -780 3,121 -1,405 769 236 1,005 0 1,005 936 78 1,014 0 1,014 977 14,741 15,718 0 15,718 1,274 0 1,274 0 1,274 1,717 0 1,717 0 1,717 24.9 32.5 32.5 32.5 na na na 38.2 41.5 11.7 12.7 11.7 16.6 0.0 0.0 0.9 0.9 na na Per share Reported EPS (THB) Norm EPS (THB) Fully diluted norm EPS (THB) Book value per share (THB) DPS (THB) 24.51c 18.77c 18.77c -0.23 0.00 1.8 28.3 28.3 28.3 na 8.7 1.6 18.7 19.6 9.0 9.4 9.0 104.7 23.0 0.0 19.0 44.5 170.8 9.3 23.2 23.2 23.2 23.2 na 8.6 1.5 9.6 10.6 10.5 11.6 10.5 5.5 20.0 0.0 12.3 11.2 6.7 8.5 17.2 17.2 17.2 17.2 na 7.0 1.4 6.4 7.2 12.6 14.2 12.6 6.4 20.0 0.0 10.6 6.7 8.4 10.8 34.3 8.7 13.1 21.7 21.7 Growth (%) Revenue EBITDA EBIT Normalised EPS Normalised FDEPS 24.7 26.7 26.7 26.7 na 95.3 3,269.2 34.8 36.3 9.9 10.3 9.9 12.5 0.0 0.0 0.4 0.9 -213.1 40.2 84.9 68.9 68.5 -5.7 -5.7 55.1 91.2 81.4 22.0 22.0 3.46 21.52c 21.52c 3.79 0.00 26.26c 26.26c 26.26c 4.06 0.00 (%) 1M 3M 12M Absolute (THB) 26.0 33.2 Absolute (USD) 29.5 37.4 Relative to index Market cap (USDmn) Estimated free float (%) 52-week range (THB) 3-mth avg daily turnover (USDmn) Major shareholders (%) 22.9 22.3 994.5 40.0 6.4/3.04 10.57 Tassapon Bijleveld + other 60.0 mgmt Source: Thomson Reuters, Nomura research Notes AAV’s 2012 financials are a mix of full and proportionate consolidation, and as such, line items, eg, revenues, EBITDA are not strictly comparable over FY11-13F. Also note that since AAV is a 55% shareholder of TAA, ratios such as EV/EBITDA cannot be directly compared across its other airline peers. We have addressed this issue in our valuation section. We estimate a 33% core earnings CAGR over FY12-14F. 15.7 41.3 38.5 34.8 34.8 24.73c 22.83c 22.83c 0.00 0.00 Source: ThomsonReuters, Nomura research 35.40c 35.40c 35.40c 4.41 0.00 Source: Company data, Nomura estimates 75
  • 77. Nomura | Asia Aviation PCL February 6, 2013 Cashflow (THBmn) Year-end 31 Dec EBITDA Change in working capital Other operating cashflow Cashflow from operations Capital expenditure Free cashflow Reduction in investments Net acquisitions Reduction in other LT assets Addition in other LT liabilities Adjustments Cashflow after investing acts Cash dividends Equity issue Debt issue Convertible debt issue Others Cashflow from financial acts Net cashflow Beginning cash Ending cash Ending net debt FY10 771 -1,261 333 -157 -54 -211 FY11 838 -653 78 262 -33 230 0 FY12F 1,416 1,957 -207 3,166 -2,859 307 -8 FY13F 2,706 863 -136 3,434 -2,855 578 0 FY14F 3,823 702 -273 4,252 -2,849 1,403 0 -68 42 104 308 0 0 144 -308 41 -50 -19 0 2,677 2,024 0 0 0 578 0 0 1,232 0 0 0 1,403 0 0 1,232 -18 127 434 260 694 -433 0 4,701 4,683 694 5,377 -3,132 0 1,232 1,810 5,377 7,187 -3,710 0 1,232 2,635 7,187 9,822 -5,113 FY10 260 4 55 3 1,712 2,035 4 137 286 11 253 2,726 101 88 3,496 3,685 1 FY11 694 5 98 26 628 1,451 4 154 286 7 321 2,224 250 54 1,858 2,162 11 FY12F 5,377 9 226 61 942 6,616 7 3,083 7,786 14,702 629 32,824 5 126 4,221 4,352 2,240 FY13F 7,187 9 281 74 942 8,494 7 5,686 7,786 14,701 629 37,302 5 154 5,124 5,282 3,472 FY14F 9,822 9 325 84 942 11,182 7 8,108 7,786 14,699 629 42,412 5 174 5,860 6,038 4,704 0 3,685 0 42 2,216 0 83 6,675 7,746 83 8,838 8,788 83 10,826 10,193 410 -1,369 410 -387 3,087 15,331 3,087 16,605 3,087 18,322 0 -959 2,726 -16 8 2,224 -16 18,403 32,824 -16 19,676 37,302 -16 21,393 42,412 0.55 7.4 0.67 32.9 1.52 24.1 1.61 220.1 1.85 184.2 net cash net cash net cash net cash net cash net cash net cash net cash net cash net cash 0.0 3.4 0.7 3.5 0.6 4.0 1.2 2.4 2.7 4.0 1.2 2.5 2.7 Notes 4.1 1.2 2.5 2.8 372 161 0 0 99 0 99 260 260 We expect the company’s net cash position to continue Source: Company data, Nomura estimates Balance sheet (THBmn) As at 31 Dec Cash & equivalents Marketable securities Accounts receivable Inventories Other current assets Total current assets LT investments Fixed assets Goodwill Other intangible assets Other LT assets Total assets Short-term debt Accounts payable Other current liabilities Total current liabilities Long-term debt Convertible debt Other LT liabilities Total liabilities Minority interest Preferred stock Common stock Retained earnings Proposed dividends Other equity and reserves Total shareholders' equity Total equity & liabilities Liquidity (x) Current ratio Interest cover Leverage Net debt/EBITDA (x) Net debt/equity (%) Activity (days) Days receivable Days inventory Days payable Cash cycle Notes We think that TAA will be able to fund at least half of its own aircraft deliveries from FY13F onwards through finance leases, on the back of a strong cash balance post the IPO Source: Company data, Nomura estimates 76
  • 78. Nomura | Asia Aviation PCL February 6, 2013 Valuation AAV has had a strong run since its IPO in May 2012, rising by 70%, compared with the SET Transport index at 73%, SET at 43%, and MSCI EM Airline index’s 10% run during the same period. However, FY13F/14F consensus earnings estimates were cut owing to higher-than-expected costs. Hence, the current valuation for AAV is significantly above +1SD to its mean on whichever metric we decide to look at, barring a simple P/B which has been deflated due to a substantial fair value gain due to the IPO which has increased the book value. Fig. 135: AAV: Forward P/E significantly above +1SD 20 Forward P/E +1SD=14.5 18 Fig. 136: AAV: Forward RoE estimates on a decline Mean=12.5 -1SD=10.4 (X) 4.5 50 40 30 20 10 May-12 Jun-12 Jun-12 Jul-12 Jul-12 Aug-12 Aug-12 Sep-12 Sep-12 Oct-12 Oct-12 Nov-12 Nov-12 Nov-12 Dec-12 Dec-12 Jan-13 Jan-13 Dec-12 Dec-12 0.0 Nov-12 0 Nov-12 0.5 Oct-12 1.0 2 Nov-12 4 Oct-12 1.5 Sep-12 6 Sep-12 2.0 Aug-12 2.5 8 Jul-12 10 Aug-12 3.0 Jul-12 12 Jun-12 3.5 Jun-12 14 Forward ROE (RHS) 4.0 May-12 16 (%) 60 Forward P/B (LHS) Source: Bloomberg, Nomura estimates Source: Bloomberg, Nomura estimates Fig. 137: Forward EV/EBITDA (adjusted for minority stake) 0 Fig. 138: Street cutting earnings estimates 16 EV/EBITDA Mean - 1SD 15 Mean Mean + 1 SD EPS (THB) 0.60 14 FY13F FY14F 0.55 13 12 0.50 11 0.45 10 9 0.40 8 Source: Bloomberg, Nomura estimates Jan-13 Dec-12 Nov-12 Oct-12 Sep-12 Aug-12 Jul-12 Jun-12 Jan-13 Jan-13 Dec-12 Dec-12 Dec-12 Nov-12 Nov-12 Oct-12 Oct-12 Sep-12 Sep-12 Aug-12 Aug-12 0.30 Jul-12 6 Jul-12 0.35 Jul-12 7 Source: Bloomberg We cannot use P/B to value AAV Our preferred valuation methodology for full-service airlines, or airlines which have most of the aircraft on finance lease or on their own books, is a P/B multiple, with a higher multiple ascribed to the stock in times of a cyclical recovery in RoEs coordinated with earnings turnaround. However, we do not use P/B to value Asia Aviation because: • AAV does not have any aircraft on its own books (owned or finance leased, unlike AirAsia Bhd which has 90% of aircraft owned/fin lease), and uses operating leases for almost all its aircraft delivered thus far, thereby making book value an ineffective reflection of its asset base, in our view. 77
  • 79. Nomura | Asia Aviation PCL February 6, 2013 • AAV’s equity value was negative prior to the IPO, and the current book value has a large proportion of intangibles (due to the fair value gain on the IPO). We value AAV using adjusted EV/EBITDAR; TP of THB6.10 As a workaround, we use an adjusted EV/EBITDAR method to value AAV, noting that although the equity value in the EV only reflects AAV’s 55% stake in TAA, the EBITDAR is consolidated for 100% of TAA. We make adjustments for this differential in the shareholding of the operating company (TAA), and also account for the operating leases and off-balance sheet debt arising from the same, by adding the capitalised leases back to the EV calculation (using the formula 7x annual aircraft lease expense). We value AAV at an adjusted 2014F EV/EBITDAR target multiple of 9.5x, at a ~60% premium to the sector average of 6x and a 40% premium to AirAsia Bhd, which is a closer peer, although admittedly in a slower growth market. We justify our premium ascribed on the basis of the following advantages in AAV: • Cleaner operations than AirAsia Bhd, with no drag from start-up associates unlike the latter (through IAA, PAA and AAJ). • Stellar growth prospects, with net income CAGR of 33% over FY12-14F, on our estimates. • Industry growth prospects being brighter in Thailand, unhindered by capacity restrictions due to DMK airport’s spare capacity (unlike at Manila-NAIA, Kuala LumpurLCCT and Jakarta). Using our target 9.5x 2014F adjusted EV/EBITDAR, we arrive at an equity value of THB53.9bn for Thai AirAsia, implying an equity value of THB30.7bn for AAV, and a TP of THB6.10. Fig. 139: AAV: Valuation Valuation - Adj EV/EBITDAR 2014F mean Target Adj EV/EBITDAR (CY2014F) - 20% premium for AAV Target Adj EV (THB mn) Add, net cash (THB mn) Less, capitalised leases (THB mn) Equity value (THB mn) - Thai AirAsia Number of shares (mn) AAV's stake in Thai AirAsia Price target (THB/share) 2014F 6.0 x 9.5 x 60% Premium to Sector 85,133 4,761 (35,970) 53,924 4,850 55% 6.10 Source: Nomura estimates Initiate with Neutral; we like the long-term growth prospects and franchise, but think near-term earnings might disappoint We initiate AAV with a Neutral rating, with a potential upside of 0%. We like the company’s growth story, with fleet projected by management to almost double from 2012’s 27 aircraft to 48 aircraft at 2016F, and we think earnings will follow a similar trend. We also like the cost advantages the company enjoys over larger flag carrier THAI Airways, and believe that AAV will clearly benefit from the tourism boom in Thailand, with connections to ASEAN countries, India and China servable by TAA’s A320 aircraft. However, with valuations already peaking, we think AAV is arguably the world’s most expensive low cost carrier (LCC) stock, and has priced-in the high Street earnings growth expectations, which might lead to investor disappointment during future earnings. 78
  • 80. Nomura | Asia Aviation PCL February 6, 2013 Our FY13F and FY14F earnings are 17% and 15%, respectively, below the Street as we believe that rapid capacity expansion will largely limit any yield and load upside from here onwards, although we remain confident about TAA’s ability to maintain its current level of load (80%) and yields (THB2.20/RPK, ie, USD7 cents/RPK). We think that FY12F full-year earnings might fall short of the Street’s (median: THB 1.02bn) expectations, and thus limit near-term upside potential. Malaysia AirAsia’s trading history shows correction is never too far off A study of adj EV/EBITDAR multiples of Malaysia AirAsia (AIRA MK, Buy) shows that although AirAsia also traded up to ~10x+ adj forward EV/EBITDAR during the bullish months prior to the global financial crisis began, it has since traded down to 7-8x levels and has struggled to break the 8.5x level. In fact, we note that the mere announcement of a new airline called Malindo in Malaysia in September 2012 was enough to make investors jittery and led to MAA falling to -1SD levels of below 7x. As such we note that TAA cannot be immune to such future competitive pressures, and prefer to wait for more attractive valuations to accumulate rather than chase the stock at such high levels of valuation. Fig. 140: Malaysia AirAsia’s adjusted EV/EBITDAR trading history Adj EV/EBITDAR Mean Mean - 1SD 11 Mean + 1 SD 10 Malindo announced 9 8 7 6 Jan-13 Oct-12 Jul-12 Apr-12 Jan-12 Oct-11 Jul-11 Apr-11 Jan-11 Oct-10 Jul-10 Apr-10 Jan-10 Oct-09 Jul-09 Apr-09 Jan-09 Oct-08 Jul-08 Apr-08 4 Jan-08 5 Source: Add Source Here Scarcity of Thai tourism plays to support the stock’s premium valuation At the same time, due to the scarcity of Thai tourism plays, we think investors might continue to ascribe to a premium to AAV, as it is one of the cleaner exposures to the tourism sector, along with a strong domestic growth component as well. With foreign shareholding hovering around ~9-10% levels, and the stock breaching the USD1bn market capitalisation zone, we think the current high valuations might sustain, notwithstanding the downside risk to earnings. 79
  • 81. Nomura | Asia Aviation PCL February 6, 2013 Strong growth in traffic seen Low cost carriers (LCCs) to be a key enabler in traffic expansion – largely the source of traffic growth Like other emerging markets in ASEAN, low cost carriers, led by the AirAsia group (AirAsia Bhd + Thai AirAsia + Indonesia AirAsia) have been instrumental in increasing affordability of air travel and demand growth. In fact, according to AOT data the LCC market share at AOT airports has increased from being non-existent in 2003-04 when there were no LCCs to about 27% in 2011, largely dominating domestic passenger traffic. The AirAsia group now accounts for more than 15% of AOT’s total traffic, largely at the cost of Thai Airways, which has seen its share slip from 42% in 2006 to 33% now. However, a point to be noted is that in terms of passenger numbers, Thai Airways has remained largely stagnant at 22mn, and LCCs have grown the overall size of the market, rather than by significantly taking away Thai’s traffic numbers. Fig. 141: Market share by pax at AOT airports Fig. 142: LCC capacity share as a % of total seats LCC share grown from 15% to 27% in 2011 13% 1% 0% 13% 5% 18% 13% 1% 0% 14% 6% 20% 13% 1% 0% 15% 13% 27% 35% 30% 25% 20% 15% 10% 5% 0% 100% 100% 100% 100% 100% 100% Source: AOT, Nomura research 2011 11% 1% 0% 11% 6% 17% Thailand (Domestic) 2010 33% 5% 34% 73% 2009 37% 5% 38% 80% 2008 42% 5% 35% 82% 2007 41% 5% 37% 83% Thailand (International) 2006 2011 2005 2010 2004 Total 2009 45% 40% 2008 2003 2006 2007 Full Service/Mainline Carriers Thai Airways 42% 42% Bangkok Airways 5% 5% All others 39% 37% Full Service/Mainline 85% 83% Low-Cost Carriers Thai Air Asia 8% 9% AirAsia 1% 1% Indonesia Air Asia 0% 0% AirAsia Group 9% 10% All others 6% 8% Low-Cost Carriers 15% 17% Source: CAPA, OAG We estimate a 19% 2011-14F CAGR in passenger numbers TAA’s passenger numbers have been on a strong uptrend, having had a CAGR of 19% over the 2008-11 period, notwithstanding the crisis and the political unrest (in Thailand, along with the Thai floods). With the IPO funds in its coffers, AAV has committed to add 17 more aircraft to its fleet of 22 (end-2011) over FY12-14, almost doubling its capacity. On our estimates, this will result in another three years of 19% CAGR in passenger numbers at TAA, reaching more than 11.7mn passengers by 2014F. Fig. 143: Passengers carried Fig. 144: RPKs Passengers Carried (LHS) % y-o-y (RHS) 14,000,000 25% 12,000,000 20% 10,000,000 (mn) RPK (LHS) % y-o-y (RHS) 14,000 30% 12,000 25% 10,000 8,000,000 6,000,000 10% 20% 15% 8,000 15% 4,000,000 5% 6,000 10% 4,000 FY14F FY13F FY12F FY11 0% FY10 FY14F FY13F FY12F FY11 FY10 FY09 FY08 Source: Company data, Nomura estimates 0 FY09 0% 0 5% FY08 2,000 2,000,000 Source: Company data, Nomura estimates 80
  • 82. Nomura | Asia Aviation PCL February 6, 2013 TAA to acquire aircraft on its own books starting FY12F One key benefit since the IPO of AAV and the resultant balance sheet strength (AAV is in a net cash position) is that Thai AirAsia will start to acquire aircraft on its own books through finance leases, beginning with two aircrafts in 2012F. We estimate that all new aircraft delivered till 2014 will be a mix of operating lease and finance lease, with deliveries after 2014 being mainly on finance lease. This would reduce the strain on the parent AirAsia Bhd’s balance sheet as well; however, we note that the FL aircraft will be delivered out of the same pool of AirAsia’s significant orderbook of aircraft, thus enabling the company to get 50%+ discounts on listed prices (USD50mn or less instead of USD100mn each). Fig. 145: Fleet growth forecasts FY05 TOTAL FLEET Thailand Fleet Size - total B737 (148 seats) A320 (180 seats) 9 9 0 Net addition - op lease B737 (148 seats) A320 (180 seats) FY08 9 9 0 16 8 8 FY09 12 12 0 15 12 3 3 0 3 30.4% 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 12 12 0 15 12 3 3 3 0 3 0 3 FY10 0 0 0 0 0 0 0 0 0 Net addition - own B737 (148 seats) A320 (180 seats) OPERATING LEASE Thailand Fleet Size - op lease B737 (148 seats) A320 (180 seats) FY07 3 3 0 33.3% Net addition - total B737 (148 seats) A320 (180 seats) % growth (seat weighted) OWN / FINANCE LEASE Thailand Fleet Size - own B737 (148 seats) A320 (180 seats) FY06 FY13F FY14F 27 0 27 34 0 34 39 0 39 3 0 3 15.8% 5 0 5 22.7% 7 0 7 25.9% 5 0 5 14.7% 0 0 0 0 0 0 2 0 2 4 0 4 6 0 6 0 0 0 0 0 0 0 0 0 2 0 2 2 0 2 2 0 2 16 8 8 20 8 12 19 0 19 22 0 22 25 0 25 30 0 30 33 0 33 1 (4) 5 4 0 4 (1) (8) 7 3 0 3 3 0 3 5 0 5 3 0 3 4 0 4 27.4% 19 0 19 FY12F 22 0 22 1 (4) 5 13.3% 20 8 12 FY11 (1) (8) 7 2.3% Source: Company data, Nomura estimates Bangkok capacity almost doubled on the opening of DMK as an alternative airport for LCCs; win-win for AOT and AAV Over the last two years, the Suvarnabhumi airport (BKK) had exceeded its stated capacity of 45mn passengers, and had been facing a lot of congestion delays and passenger dissatisfaction at the airport. Although AOT had a capex plan in place to grow capacity at BKK by an additional 15mn pax at a cost of THB62.5bn, this incremental capacity was to only come online by FY17F, as per AOT data. However, growth at LCCs, especially at Thai AirAsia, was started to keep growing, and in order to accommodate these airlines, AOT has incentivized LCCs to move to the old Bangkok airport at Don Muang (DMK). With the AirAsia group, comprising ~8-9mn pax, agreeing to shift to DMK, this has effectively increased capacity at Bangkok from 45mn pax p.a to ~81mn passengers, or 1.8x, freeing up resources at BKK. The incentive package was a progressive 30%-20%-10% discount on parking and landing charges at the DMK airport for FY13F/FY14F/FY15F (AOT’s fiscal years), which AOT expects to cost THB116/85/45mn, or a total of THB246mn, a small price to pay for the resultant additional passenger throughput which an unconstrained TAA might grow. 81
  • 83. Nomura | Asia Aviation PCL February 6, 2013 As well, with fuel savings of ~1% of overall cost due to lower congestion delays, the impact to bottom line is also not negligible, in our view. Fig. 146: AOT airports – Capacity and utilisation Aircraft (Flights/Hour) Airports Capacity 76 BKK 60 DMK Capacity Utilisation BKK BKK+DMK FY11 58 19 20 24 20 12 21 13 10 6 HKT CNX HDY CEI Cargoes (Million Metric Tons/Year) Passengers (Million/Year) Actual Utilization Actual Utilization FY12 66 23 19 14 10 5 6.50 8.00 1.90 3.00 FY11 47.80 3.97 FY12 52.37 2.72 106% 64% Capacity 45.00 36.50 116% 68% 8.21 3.68 1.83 0.81 9.16 4.33 2.01 0.93 Actual Utilization Capacity 3.00 1.27 FY11 1.330 0.007 FY12 1.360 0.003 0.04 0.04 0.01 0.01 0.028 0.021 0.015 0.004 0.032 0.021 0.016 0.005 Source: Company data, Nomura research Fig. 147: AOT discounts on moving to DMK Period Aug-12 to Sep-12 Oct-12-Sep-13 Oct-13-Sep-14 Oct-14-Sep-15 Discount on Quantum Incremental savings to TAA Parking and landing Parking and landing Parking and landing Parking and landing -95% -30% -20% -10% 0 (no airline shifted) THB116mn THB85mn THB45mn Source: Company data We do not see the possibility of PSC cuts at AOT for LCCs in the near term (unlike Malaysia) A key difference between the passenger service charge (PSC) at Thailand, and its neighbour Malaysia, is that in Malaysia, PSC applicable to LCCs is ~half of the PSC applied to full service carriers, the rationale being a lower PSC is compensated by higher traffic, which results from the cheaper ticket prices on average. AirAsia Group CEO Tan Sri Tony Fernandes has been vocal in requesting a similar concession in Thailand as well, from AOT. However, we think that a PSC discount for LCCs in Thailand is unlikely in the near term, as it might lead to a significant revenue loss for AOT in the immediate term. Synergies from the association with AirAsia Bhd and TAA to pay AirAsia Bhd for shared services Due to its close association with Malaysian peer AirAsia Bhd, Thai AirAsia shares almost all characteristics of the latter, which are reflected in its low CASK of USD5.2cent (3 cent CASK-ex fuel) compared with Malaysia’s USD5cent (2.9 cent CASK-ex fuel). Synergies are also realised through: • Common aircraft orderbook to realise bulk discounts from Airbus, with TAA’s aircraft leased from AirAsia Bhd at market rates. • Common sourcing of fuel and fuel hedging planning. • A common IT backbone with tickets sold at www.airasia.com. As part of these services rendered, TAA will have to pay AirAsia Bhd a flat brand license fee of 1% of revenue. This agreement was originally scheduled to come into effect in FY12F, for a five-year period; however, AirAsia Bhd waived the fee for FY12. We estimate the fee will amount to 1.1%/1.1% of FY13F/14F total operating cost for AAV. 82
  • 84. Nomura | Asia Aviation PCL February 6, 2013 A true blue LCC Thai AirAsia adheres strictly to the 11 key tenets of the LCC framework, which results in the strong CASK dynamics seen in MAA and TAA. Fig. 148: TAA: adherence to LCC characteristics 1 2 3 4 5 6 Trait High seating density High aircraft utilisation (block hours/day) Single aircraft type Low fares, including very low promotional fares Predominant use of internet based booking Single class configuration TAA Comments  Standard 180 seat configuration for A320s   All A320 fleet   85% of bookings thru www.airasia.com  All point to point services with no connection guarantee, but recently emphasizing its Fly-Thru services which is connection based for some routes to enhance passenger traffic  Everything including baggage, seats comes at additional cost  Maximum 4 hours, which is the range of A320  7 Point-to-point services 8 No frills / frills at additional price 9 Predominantly short to medium haul route structures  10 Frequent use of second tier airports Particularly true for KL (using LCCT, charges lower compared to main airport), Philippines (uses Clark), Bangkok (recently moved to Don Mueang). But for Singapore, Indonesia still using main terminals  25-30 minutes 11 Rapid turnaround time at airports Source: Framework: CAPA, Nomura research Thailand’s LCC penetration is low for its income levels – suggesting more demand generation by LCCs to come Thailand’s LCC capacity share in domestic (2011: 40%) and international (14%) routes is lower than its peers in other ASEAN countries such as Malaysia, Indonesia and the Philippines. We believe there is room to grow the LCC share in both domestic and international routes – this will largely be realised through higher capacity deployment by LCCs led by Thai AirAsia, and supported by Nok Air and Thai Smile, and will be an underlying theme for the next five-six years, in our view. Vietnam 10 China Russian Fed Saudi Japan Per capita GDP (USD) Source: CAPA, IMF, World Bank, Nomura research 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 0 Australia Japan 70,000 20 60,000 S.Korea 50,000 30 Singapore 40,000 THAILAND 40 30,000 Australia 20,000 50 50 Malaysia 45 40 Indonesia 35 30 25 Philippines 20 India 15 THAILAND Vietnam 10 Saudi 5 China Russian S.Korea Fed 0 0 60 Philippines IndiaMalaysia Indonesia 2011 LCC Capacity Share (international) 2011 LCC Capacity Share (domestic) 70 Fig. 150: International LCC share vs. per capita GDP (nom USD) 10,000 Fig. 149: Domestic LCC share vs. per capita GDP (nom US$) Per capita GDP (USD) Source: CAPA, IMF, World Bank, Nomura research 83
  • 85. Nomura | Asia Aviation PCL February 6, 2013 Financial analysis More flights = more earnings, 33% earnings CAGR over FY1214F seen Asia Aviation’s earnings expansion is a relatively simple story of higher aircraft numbers translating into more passengers and ultimately earnings. We forecast FY12F-14F earnings CAGR of 33%, on the back of a fleet CAGR of 20% over the same time period. Key assumptions Fig. 151: Macroeconomic and capacity assumptions FY11 FY12F FY13F FY14F MACROECONOMIC EXCHANGE RATES Average THB/USD Average Brent price (US$ / bbl) % y-y Average Singapore jet price (US$ / bbl) % y-y 31 31 30 29 112 112 105 100 39.4% 0.2% (6.3%) (4.8%) 126 127 119 113 39.4% 1.2% (6.3%) (4.8%) 3.0% 3.0% 3.1% 39 Thailand Inflation Rate TOTAL FLEET Thailand Fleet Size - total 22 27 34 Thailand Fleet Size - own 0 2 4 6 22 25 30 33 9,199 21.0% 10,579 15.0% 13,322 25.9% 15,281 14.7% % y-o-y (RHS) 7,389 24.8% 8,675 17.4% 10,657 22.9% 12,224 14.7% Seat Load Factor 80.3% 82.0% 80.0% 80.0% 6,863,467 20.3% 8,326,765 21.3% 10,229,810 22.9% 11,734,194 14.7% Thailand Fleet Size - op lease CAPACITY ASK (million) % y-o-y RPK (LHS) Passengers Carried (LHS) % y-o-y (RHS) 0 Average Stage Length (km) % y-o-y 0 0 0 1,074 4.1% 1,042 (3.0%) 1,042 0.0% 1,042 0.0% Source: Company data, Nomura estimates 84
  • 86. Nomura | Asia Aviation PCL February 6, 2013 Fig. 152: Yield and cost assumptions (THB mn, except for per RPK/ASK data) FY11 FY12F FY13F FY14F REVENUES Thai AirAsia Revenues Total 15,928 34.3% % y-y 18,802 18.0% 23,295 23.9% 26,957 15.7% ANCILLARY PER PAX Ancillary revenue per pax (THB) % y-y Ancillary as % of overall revenues 383 383 402 422 29.4% 0.0% 5.0% 5.0% 16.5% 17.0% 17.7% 18.4% YIELD Revenue / RPK (THB) 2.16 2.17 2.19 2.21 Revenue / RPK (US$) 0.071 0.070 0.073 0.076 Revenue / ASK (THB) 1.73 1.78 1.75 1.76 Revenue / ASK (US$) 0.057 0.057 0.058 0.060 COST % BREAKDOWN 0% 0% 1% 2% Staff costs 10% 10% 11% 12% Fuel costs 44% 43% 40% 37% Aircraft rental 19% 20% 21% 22% Repair and maintenance 8% 9% 10% 11% Ramp and airport operatings costs 9% 9% 7% 6% Other operating expenses 4% 3% 3% 3% Selling expenses 3% 3% 3% 3% Administrative expenses 2% 2% 3% 3% Brand Licensing Fees 0% 0% 1% 1% Cost / ASK (THB) 1.56 1.62 1.56 1.54 Cost / ASK (US cents) 5.12 5.22 5.23 5.28 Cost / ASK-ex Fuel (THB) 0.87 0.93 0.94 0.97 Cost / ASK-ex Fuel (US cents) 2.87 2.99 3.14 3.31 Depreciation and amortisation (1% of revs from FY12 onwards - but waived for FY12) COST / ASK Source: Company data, Nomura estimates Ancillary realisation still sub-optimal with growth potential With TAA’s ancillary revenue only comprising 16-17% of overall revenue (as opposed to MAA’s 20%+), we think ancillary is below its full potential. Hence, even though we are not building in an increase in the average ticket prices of ~THB1,900/pax over FY1114F, we estimate a 5% y-y growth in ancillary income/pax, till it reaches close to 20% of revenue by FY16F. In our view, this growth should be led by a higher spending, supported by the income growth in Thailand. We think that this will be led by a higher take-up of in-flight meals and other passenger amenities. Growth plans: New routes and new frequencies TAA’s growth in 2012F and 2013F will be through a combination of new routes as well as new frequencies, in our view. 85
  • 87. Nomura | Asia Aviation PCL February 6, 2013 Fig. 153: Route additions Route movements: 9M12 4Q12 outlook New routes: • Bangkok – Nakhorn Phanom (1Q12) • Bangkok – Trang (1Q12) • Bangkok – (Chennai 1Q12) • Bangkok – Chongqing (1Q12) • Chiang Mai – Macau (2Q12) • BKK - Mandalay (Myanmar) • BKK - Wuhan (China) • BKK - Xi’an ( Xi an China) Additional frequencies: • BKK - Yangon (3rd frequency) • BKK – Ho Chi Minh city (3rd frequency) • Bangkok – Singapore (1Q12) • BKK - Surat Thani (3rd frequency) • Bangkok – Chiang Mai (1Q12) • BKK - Hat Yai (7th frequency) • BKK – Krabi (5th frequency) • Bangkok – Trang (2Q12) • BKK – Trang (3td frequency) • BKK – Chiang Mai (8th frequency) FY2013F: 2-4 new cities in China and Indochina Source: Company data (FY13 estimates are company guidance) Hedging: In line with the parent’s strategy to align with forward bookings TAA, like its peer MAA, only hedges ~20-25% of its annual fuel consumption, and this is aligned with forward bookings to lock in profitability. 86
  • 88. Nomura | Asia Aviation PCL February 6, 2013 Balance sheet Should remain in net cash position till FY15F and free cash positive Based on our assumption of new aircraft deliveries to be 50:50 between finance: operating leases, we estimate that AAV will remain in a net cash position at least till FY15F, keeping its gearing ratio as one of the lowest in the airline industry (not adjusting for off balance sheet debt). TAA is also one of the few airlines globally to be in the expansion mode which is also free cashflow positive. We estimate a FCF of THB2.3bn over FY12-14F for the company. Beneficiary of THB appreciation Approximately 65-70% of AAV’s revenue is denominated in THB, but ~80% of operating cost is in USD (oil, lease cost and MRO). There is no significant debt exposure to foreign currencies and as a result, AAV benefits from THB appreciation, in our view. 87
  • 89. Nomura | Asia Aviation PCL February 6, 2013 Risks Upside risks to our earnings estimates and target price include: a sharp fall in oil prices leading to higher earnings. Downside risk to our earnings estimates and target price include a) a jump in oil prices, load factors or yields due to demand weakening, b) political unrest in Thailand reducing tourism demand c) disease outbreak d) irrational competition (eg, entry of new players such as Lion Air with a new AOC), e) sharp PSC hikes, f) floods affecting operations at DMK, and g) return of macroeconomic shocks. Thai AirAsia’s health is also inextricably linked to the health of its parent AirAsia Bhd in Malaysia, as it relies on the Malaysian entity for various functions including aircraft leases, etc. A change in the terms of this arrangement, or a weakening of the Malaysian entity’s health might have an impact on TAA’s expansion plans as well. Please refer to the front section for our sensitivity table. 88
  • 90. Nomura | Asia Aviation PCL February 6, 2013 About AAV The AirAsia way of growth Asia Aviation Pcl is the holding listco of Thai AirAsia, having a 55% stake in the operating airline. It currently does not have any other business activity, and as such AAV’s earnings are a proxy to play Thai AirAsia’s (TAA) earnings inflection, in line with its position as Thailand’s leading LCC. In line with its larger sibling AirAsia Bhd in Malaysia, TAA has led low cost carriers (LCCs) in terms of market share, and has been instrumental in increasing affordability of air travel and demand growth in Thailand, in our view. In fact, the LCC market share at AOT airports has increased from being non-existent in 2003-04 when there were no LCCs to about 27% in 2012, largely dominated by domestic passenger traffic. The AirAsia group now accounts for more than 15% of AOT’s total traffic, largely at the cost of Thai Airways, which has seen its share slip from 42% in 2006 to 33% now, according to AOT data. However, in terms of passenger numbers, Thai Airways has remained largely stagnant at 22mn, and LCCs have grown the overall size of the market, rather than by significantly taking away Thai Airway’s traffic numbers. History of shareholding In 2004, TAA started off as a JV between AirAsia Bhd in Malaysia and Shin Corp in Thailand, with Shin holding a majority stake. AAV was incorporated on February 14, 2006, and later became a public company on December 26, 2011. However, in 2006, due to former PM Thaksin’s sale of his stake in Shin Corp to Singapore’s Temasek Group, the controlling shareholders at TAA effectively turned foreign-based. To work around this difficulty, Asia Aviation Plc was set up in February 2006 to take over Shin Corp’s stake of 50% in Thai AirAsia. Following AAV’s inception, management of TAA later bought out Shin Corp’s stake in AAV as well in June 2007, becoming its sole shareholder, and owing 50% in TAA. After the initial public offering on 31 May 2012, Asia Aviation increased its shareholding in Thai AirAsia to 55%. AAV is currently 60%-owned by the management of TAA and 40% held by the public. The current foreign shareholding is ~9%. Mr. Tassapon Bijleveld, its CEO, is the largest single shareholder with a 33% stake. AirAsia Bhd owns 45% of the operating company Thai AirAsia, but otherwise has no shareholding in AAV Plc. Starting off with two Boeing 737-300 aircraft flying with a point-to-point network from the Bangkok hub every day, TAA commenced its inaugural commercial flights on 4 February 2004 from Bangkok to Hat Yai. The airline rapidly expanded its domestic and international routes; as on 31 December 2011, its route network covers a total of 25 cities across eight countries in Asia, covering 14 international destinations and 11 domestic destinations from its serving 22 Airbus A320 aircraft fleet. Thai AirAsia has carried approximately 6.9 passengers in 2011 and more than 30mn passengers to date via its Bangkok, Phuket and Chiang Mai hubs. The lock-up period for AAV shares held by management (~60%) expired after six months of listing (end-November 2012), but management has not sold down and remains committed to holding at least 51% of Asia Aviation shares to comply with Thailand's Aviation Act by having the 51% lock-up through the Thailand Securities Depository for a period of not less than five years (till mid-2017). In addition, the stocks under the sponsorship portion that the company has allocated to the employees at the IPO price will be under lock-up for one year (till May 2013). 89
  • 91. Nomura | Asia Aviation PCL February 6, 2013 Fig. 154: Block diagram of shareholding post IPO AirAsia Bhd Management 60% 100% AirAsia Investment Public 40% AAV 45% 55% Thai AirAsia Source: http://www.aavplc.com/EN/InvestmentStructure.html Key management personnel Fig. 155: Management and board Management team Name Position Mr. Tassapon Bijleveld Mr. Pornanan Gerdprasert Mr. Tanapat Ngamplung Mr. Preechaya Rasametanin M.L. Bovornovadep Devakula Mr. Santisuk Klongchaiya Mr. Natthawach Siriwongsal Mr. Vorakit Techapalokul Chief Executive Officer Chief Financial Officer Director of Flight Operation Director of Engineer Director of Business Development Director of Commercial Director of Ancillary Director of People Board of directors Name Position Dr. Pongsathorn Siriyodhin Tan Sri’ Anthony Francis Fernandes Dato’ Kamarudin Bin Meranun Mr. Tassapon Bijleveld Mr. Pornanan Gerdprasert Mr. Preechaya Rasametanin Mr. Nuttawut Phowborom Dato’ Sri Farid Ridzuan Chairman/Independent Director Director Director Director Director Director Independent Director Independent Director Source: Company data 90
  • 92. Nomura | Asia Aviation PCL February 6, 2013 Route map Fig. 156: Route map Multiple hubs in Chiang Mai and Ubon Ratchathani Source: 3Q12 company presentation Note about financial presentation Prior to May 2012, AAV’s financials represented a proportionate consolidation of its 51% stake in Thai AirAsia. However, post the reorganisation on 4 May 2012, under TFRS 3, AAV has classified TAA as its subsidiary (after increasing its stake to 55%) and started full consolidation of TAA’s earnings, netting out AirAsia Bhd’s share of TAA’s profits at the minority interest level. As such, FY12F financials are a blend of proportionate and full consolidation, and is not comparable directly to FY11/FY13F numbers. 91
  • 93. Nomura | Asia Aviation PCL February 6, 2013 Key routes and capacity distribution Fig. 157: TAA: Capacity distribution (Oct 2012 - Week 3) Fig. 158: Top 10 International routes (Oct 2012 - Week 3) DMK - SIN South Asia North East Asia DMK - MFM DMK - KUL DMK - RGN DMK - SGN DMK - HKG South East Asia Domestic DMK - CCU DMK - CKG CNX - MFM SIN - HKT 0 Source: CAPA Centre for Aviation 5,000 10,000 15,000 Source: CAPA Centre for Aviation 92
  • 94. Nomura | Thailand air transport February 6, 2013 Appendix A-1 Analyst Certification I, Tushar Mohata, hereby certify (1) that the views expressed in this Research report accurately reflect my personal views about any or all of the subject securities or issuers referred to in this Research report, (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this Research report and (3) no part of my compensation is tied to any specific investment banking transactions performed by Nomura Securities International, Inc., Nomura International plc or any other Nomura Group company. Issuer Specific Regulatory Disclosures The term "Nomura Group" used herein refers to Nomura Holdings, Inc. or any of its affiliates or subsidiaries, and may refer to one or more Nomura Group companies. Materially mentioned issuers Issuer Asia Aviation PCL Airports of Thailand PCL Thai Airways International PCL Ticker AAV TB AOT TB Price THB 6.30 THB 104.50 Price date Stock rating Sector rating Disclosures 04-Feb-2013 Neutral Not rated 04-Feb-2013 Buy Not rated THAI TB THB 23.20 04-Feb-2013 Buy Thai Airways International PCL (THAI TB) Not rated THB 23.20 (04-Feb-2013) Buy (Sector rating: Not rated) Chart Not Available Valuation Methodology We think THAI deserves to trade at its mid-cycle valuations, in view of the 43% earnings turnaround we expect over FY12-14F and its steep discount to its other full-service peers. We provide for ~THB3bn of impairments on the progressive retirement of these aircraft, and estimate end-2014F adj BV of THB36. Applying a target P/B of 0.8x, which implies midcycle for THAI in view of the bullish outlook for the THAI transport sector, we arrive at our TP of THB28.50/share. Risks that may impede the achievement of the target price Downside risk to our earnings estimates and target price include a) a jump in oil prices, or lower load factors or yields due to demand weakening, b) political unrest in Thailand reducing tourism demand c) disease outbreak d) irrational competition (eg, entry of new players such as Lion Air with a new AOC), e) floods affecting operations and f) return of macroeconomic shocks, g) renewed labour union unrest h) higher than expected impairment of aircraft to be retired Note that THAI is also one of the customers of the Boeing Dreamliner (787) aircraft, but deliveries are scheduled only from 2014 onwards. The Dreamliner aircraft are currently grounded pending safety investigations, and in case the investigations take a long time to complete or propose big design changes, the THAI’s EIS (entry-into-service) of the Dreamliner might be pushed back, and impact capacity growth plan next year. However, we note that unlike airlines like JAL or ANA, who had to ground in-service 787s, THAI still has plenty of time to observe the situation as it is evolving, and make alternative arrangements in case the aircraft is delivered late (like lease alternative aircraft, not retire existing aircraft). Airports of Thailand PCL (AOT TB) THB 104.50 (04-Feb-2013) Buy (Sector rating: Not rated) Chart Not Available Valuation Methodology We think that a DCF-based valuation of free cash flows to equity is the best way to value a stock like AOT, which has relatively steady cash-flows visibility, and predictable long-term earnings growth rates, which generally go inline with overall traffic growth. We use a beta of 0.97, a market risk premium of 10% and a risk-free rate of 3.7% (implying a cost of equity of 13.4%). We discount our cash flows back to 2014F to arrive at our price target of THB145/share. Risks that may impede the achievement of the target price Delay in implementing airport charge increases: A part of the earnings and margin expansion is premised on the PSC charges for AOT to go through. However, delays in implementing those charges will impact our earnings estimates and price target for the stock. Lower-than-expected air traffic, which can be due to various reasons like a re-emergence of economic crisis, political unrest deterring air traffic, outbreak of disease, etc. Capex overruns at BKK airport, which would deter investor sentiment. SOE nature of the company leading to less than optimal utilisation of assets. 93
  • 95. Nomura | Thailand air transport February 6, 2013 Asia Aviation PCL (AAV TB) THB 6.30 (04-Feb-2013) Neutral (Sector rating: Not rated) Chart Not Available Valuation Methodology we use an adjusted EV/EBITDAR method to value AAV, noting that although the equity value in the EV only reflects AAV’s 55% stake in TAA, the EBITDAR is consolidated for 100% of TAA. We make adjustments for this differential in the shareholding of the operating company (TAA), and also account for the operating leases and off-balance sheet debt arising from the same, by adding the capitalised leases back to the EV calculation (using the formula 7x annual aircraft lease expense). We value AAV at an adjusted 2014F EV/EBITDAR target multiple of 9.5x, at a ~50% premium to the sector average of 6x and a 40% premium to AirAsia Bhd, which is a closer peer, although admittedly in a slower growth market. Using our target 9.5x 2014F adjusted EV/EBITDAR, we arrive at an equity value of THB53.9bn for Thai AirAsia, implying an equity value of THB30.7bn for AAV, and a target price of THB6.10. Risks that may impede the achievement of the target price Upside risks to our earnings and target price include: a sharp fall in oil prices leading to higher earnings. Downside risks to our earnings and target price include: a) a jump in oil prices, load factors or yields due to demand weakening, b) political unrest in Thailand reducing tourism demand, c) disease outbreak, d) irrational competition (e.g. the entry of new players like Lion Air with a new AOC), e) sharp PSC hikes, f) floods affecting operations at DMK, and g) return of macroeconomic shocks. Thai AirAsia’s health is also inextricably linked to the health of its parent AirAsia Bhd in Malaysia, as it relies on the Malaysian entity for various functions including aircraft leases, etc. A change in terms of this arrangement, or a weakening of the Malaysian entity’s health might have an impact on TAA’s expansion plans as well. Rating and target price changes Issuer Ticker Old stock rating New stock rating Old target price New target price Asia Aviation PCL Airports of Thailand PCL Thai Airways International PCL AAV TB AOT TB THAI TB Not rated Not rated Not rated Neutral Buy Buy N/A N/A N/A THB 6.10 THB 145.00 THB 28.50 94
  • 96. Nomura | Thailand air transport February 6, 2013 Important Disclosures Online availability of research and conflict-of-interest disclosures Nomura research is available on www.nomuranow.com/research, Bloomberg, Capital IQ, Factset, MarkitHub, Reuters and ThomsonOne. Important disclosures may be read at http://go.nomuranow.com/research/globalresearchportal/pages/disclosures/disclosures.aspx or requested from Nomura Securities International, Inc., on 1-877-865-5752. If you have any difficulties with the website, please email grpsupporteu@nomura.com for help. The analysts responsible for preparing this report have received compensation based upon various factors including the firm's total revenues, a portion of which is generated by Investment Banking activities. 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Distribution of ratings (Global) The distribution of all ratings published by Nomura Global Equity Research is as follows: 43% have been assigned a Buy rating which, for purposes of mandatory disclosures, are classified as a Buy rating; 41% of companies with this rating are investment banking clients of the Nomura Group*. 45% have been assigned a Neutral rating which, for purposes of mandatory disclosures, is classified as a Hold rating; 46% of companies with this rating are investment banking clients of the Nomura Group*. 12% have been assigned a Reduce rating which, for purposes of mandatory disclosures, are classified as a Sell rating; 26% of companies with this rating are investment banking clients of the Nomura Group*. As at 31 December 2012. *The Nomura Group as defined in the Disclaimer section at the end of this report. Explanation of Nomura's equity research rating system in Europe, Middle East and Africa, US and Latin America The rating system is a relative system indicating expected performance against a specific benchmark identified for each individual stock. Analysts may also indicate absolute upside to target price defined as (fair value - current price)/current price, subject to limited management discretion. In most cases, the fair value will equal the analyst's assessment of the current intrinsic fair value of the stock using an appropriate valuation methodology such as discounted cash flow or multiple analysis, etc. STOCKS A rating of 'Buy', indicates that the analyst expects the stock to outperform the Benchmark over the next 12 months. A rating of 'Neutral', indicates that the analyst expects the stock to perform in line with the Benchmark over the next 12 months. A rating of 'Reduce', indicates that the analyst expects the stock to underperform the Benchmark over the next 12 months. A rating of 'Suspended', indicates that the rating, target price and estimates have been suspended temporarily to comply with applicable regulations and/or firm policies in certain circumstances including, but not limited to, when Nomura is acting in an advisory capacity in a merger or strategic transaction involving the company. Benchmarks are as follows: United States/Europe: please see valuation methodologies for explanations of relevant benchmarks for stocks, which can be accessed at: http://go.nomuranow.com/research/globalresearchportal/pages/disclosures/disclosures.aspx; Global Emerging Markets (ex-Asia): MSCI Emerging Markets ex-Asia, unless otherwise stated in the valuation methodology. SECTORS A 'Bullish' stance, indicates that the analyst expects the sector to outperform the Benchmark during the next 12 months. A 'Neutral' stance, indicates that the analyst expects the sector to perform in line with the Benchmark during the next 12 months. A 'Bearish' stance, indicates that the analyst expects the sector to underperform the Benchmark during the next 12 months. Benchmarks are as follows: United States: S&P 500; Europe: Dow Jones STOXX 600; Global Emerging Markets (ex-Asia): MSCI Emerging Markets ex-Asia. Explanation of Nomura's equity research rating system in Japan and Asia ex-Japan STOCKS Stock recommendations are based on absolute valuation upside (downside), which is defined as (Target Price - Current Price) / Current Price, subject to limited management discretion. In most cases, the Target Price will equal the analyst's 12-month intrinsic valuation of the stock, based on an appropriate valuation methodology such as discounted cash flow, multiple analysis, etc. A 'Buy' recommendation indicates that potential upside is 15% or more. A 'Neutral' recommendation indicates that potential upside is less than 15% or downside is less than 5%. A 'Reduce' recommendation indicates that potential downside is 5% or more. A rating of 'Suspended' indicates that the rating and target price have been suspended temporarily to comply with applicable regulations and/or firm policies in certain circumstances including when Nomura is acting in an advisory capacity in a merger or strategic transaction involving the subject company. Securities and/or companies that are labelled as 'Not rated' or shown as 'No rating' are not in regular research coverage of the Nomura entity identified in the top banner. Investors should not expect continuing or additional information from Nomura relating to such securities and/or companies. SECTORS A 'Bullish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a positive absolute recommendation. A 'Neutral' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a neutral absolute recommendation. A 'Bearish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a negative absolute recommendation. Target Price A Target Price, if discussed, reflects in part the analyst's estimates for the company's earnings. The achievement of any target price may be impeded by general market and macroeconomic trends, and by other risks related to the company or the market, and may not occur if the company's earnings differ from estimates. 95
  • 97. Nomura | Thailand air transport February 6, 2013 Disclaimers This document contains material that has been prepared by the Nomura entity identified at the top or bottom of page 1 herein, if any, and/or, with the sole or joint contributions of one or more Nomura entities whose employees and their respective affiliations are specified on page 1 herein or identified elsewhere in the document. The term "Nomura Group" used herein refers to Nomura Holdings, Inc. or any of its affiliates or subsidiaries and may refer to one or more Nomura Group companies including: Nomura Securities Co., Ltd. ('NSC') Tokyo, Japan; Nomura International plc ('NIplc'), UK; Nomura Securities International, Inc. ('NSI'), New York, US; Nomura International (Hong Kong) Ltd. (‘NIHK’), Hong Kong; Nomura Financial Investment (Korea) Co., Ltd. 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