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ASEAN Industry Focus

ASEAN Aviation
Refer to important disclosures at the end of this report

DBS Group Research . Equity 10 Feb 2017

Flying a little lower KLCI : 1,688.50 STI : 3,071.64


SET : 1,589.29
Airline earnings in 2017 to see margin pressure Analyst
from higher fuel cost Marvin KHOR +60 32604 3911 Paul YONG CFA +65 6682 3712
marvinkhor@alliancedbs.com paulyong@dbs.com
Aircraft deliveries reaccelerating after two-year
Suvro SARKAR +65 6682 3720 Namida ARTISPONG +66 2657 7833
slowdown, yields to see downwards pressure suvro@dbs.com namidaa@th.dbsvickers.com
Structural regional growth in fleet and passengers Singapore Research Team equityresearch@dbs.com
bodes well for aeronautical support and airport
players STOCKS
12-mth
ASEAN airline picks: AIRA MK, AAV TB, CEB PM; Price Mkt Cap Target Price Performance (%)
other aviation picks: AOT TB, CAO SP, STE SP RM US$m RM 3 mth 12 mth Rating

Carrier earnings moving out of sweet spot as fuel prices AirAsia 2.70 2,032 3.25 (4.3) 92.9 BUY
depart from bottom. ASEAN airlines are (for the most part) AirAsia X 0.41 383 0.38 (4.7) 70.8 HOLD
on track for record CY16 performances on the back of the Airports of Thailand 42.00 1,713 45.50 12.6 12.3 BUY
Asia Aviation 6.10 845 7.60 (14.1) 9.9 BUY
trough in jet fuel prices. However, the CY17 outlook is less Bangkok Airways 21.30 1,277 26.30 (13.8) (11.3) BUY
benign as fuel has tracked crude oil prices upward trend. We Cebu Air 96.40 1,171 125 (9.5) 24.4 BUY
think margins will be squeezed from the bottom, as average China Aviation Oil 1.48 900 1.70 6.1 126.9 BUY
cost/available-seat-kilometre (ASKs) will be pushed up our Garuda Indonesia 338 658 475 (4.5) (17.2) BUY
Malaysia Airports 6.70 2,504 6.80 4.2 9.1 HOLD
current CY2017 forecast for jet fuel is US$60/bbl, c.13% higher SIA Engineering 3.61 2,856 3.58 2.9 3.7 HOLD
than 2016s US$52.9/bbl average. Singapore Airlines 9.80 8,175 10.10 (0.2) (12.8) HOLD
ST Engineering 3.33 7,309 3.68 8.5 20.7 BUY
Thai Airways 21.90 1,365 23.25 (19.6) 163.9 HOLD
More planes to fill the skies. Capacity growth is on the cards
for most airlines after a general lull in 2015-16, as strong CY16
Source: AllianceDBS, DBS Bank, Bloomberg Finance L.P. Closing price as of 9 Feb 2017
earnings bolstered balance sheets and expansion plans. Even
those adding fewer aircraft aim to improve volume. We think AirAsia : Low cost carrier based in Malaysia with similar-branded associates
competition is set to rise which will pull down average fares as across Asia
airlines attempt to drive up or maintain load factors. AirAsia X : Long-haul low cost carrier based in Malaysia
Airports of Thailand : The national airport operator managing six
international airports throughout Thailand, including Suvarnabhumi Airport
Preference for airlines with market share strongholds. in Bangkok.
Overall, we are unperturbed by the likely step-down in airline Asia Aviation : Majority owner of Thai AirAsia, low cost carrier based in
profits as it comes from a high base. In this environment, we Thailand
prefer airlines with stronger market shares and thus more Bangkok Airways : Full service regional carrier with hubs in Bangkok and
Samui, and is also a major and controlling shareholder of Samui Airport
flexibility in tweaking the levers (price / volume) to strengthen
Property Fund
their position or achieve their desired bottomlines. Top BUY Cebu Air : Low cost carrier based in the Philippines
recommendations along this theme are: AirAsia (AIRA MK), Asia China Aviation Oil : CAO is the largest physical jet fuel trader in the Asia
Aviation (AAV TB), and Cebu Air (CEB PM). Pacific region and the key importer of jet fuel into the PRC.
Garuda Indonesia : Garuda Indonesia (GIAA) is the national flag carrier of
Indonesia focusing in passenger and cargo service.
AoT remains a favoured pick while we also like CAO and
Malaysia Airports : Malaysia's primary airport operator, also operating the
ST Engineering. We prefer AoT to MAHB given the formers Istanbul Sabiha Gokcen airport
strong earnings growth prospects, which is driven by Thailands SIA Engineering : Provision of aviation maintenance, repair and overhaul
dynamic tourism sector. We also like China Aviation Oil (CAO) services
as a proxy for Chinas firm civil air travel demand growth and Singapore Airlines : Singapore Airlines owns and operates SIA, SIA Cargo
and Silk Air, Scoot. They also own majority stakes in SGX-listed SIA
finally, we prefer ST Engineering to SIA Engineering as it has a
Engineering and Tigerair.
strong order pipeline to underpin earnings and dividend ST Engineering : An integrated engineering group providing solutions
visibility. and services in aerospace, electronics, land systems and marine sectors.
Thai Airways : National Carrier of Kingdom of Thailand

ed-CK / sa- YM, PY


Industry Focus
ASEAN Aviation

Executive summary airline earnings coming off peak

Aviation players in the ASEAN region are (mostly) largely on Regional airlines FY16/17F core earnings forecasts (local
track to achieve stellar earnings in 2016, on the back of earlier currency)
anticipated factors of 1) bottoming of effective jet fuel prices, FY17F FY16F % variance
and 2) favourable supply-demand conditions from slower
aircraft deliveries. AAV (THB m) 2,215 2,322 (5%)
AAX (RM m) 189 206 (8%)
Moving into 2017, we think margins are set to come under AIRA (RM m) 975 1,334 (27%)
some pressure as those factors unwind, with a number of BA (THB m) 3,011 3,286 (8%)
airlines under our coverage expected to see dips in core CEB (PHP m) 9,480 9,892 (4%)
earnings except those charting low 2016 bases from GIAA (US$ m) 49 10 >100%
underperformance due to respective specific reasons. SIA (S$ m)* 684 629 9%
THAI (THB m) 4,882 4,590 6%
Source: Companies, DBS Bank, AllianceDBS
* FYE Mar, figures are FY18F/FY17F respectively
Regional airlines 9M16 core earnings (local currency)
9MCY16 9MCY15 % variance
Given this outlook, we also find other aviation plays like airports
and aerospace maintenance, report & operations (MRO) firms
AAV (THB m) 1,674 1,047 +60%
provide a good avenue for exposure to ASEAN aviation. Passenger
AAX (RM m) 151 (217) turnaround
AIRA (RM m) 923 165 +>100%
traffic demand is picking up in both Malaysia and Singapore,
BA (THB m) 2,535 1,740 +46% while Thailand is expected to rebound to being a key ASEAN
CEB (PHP m) 7,574 4,449 +70% tourist draw after a short blip given the crackdown on zero-
GIAA (US$ m) (22) 16 n.m. dollar tours that hurt China visitations. MRO players are a natural
SIA (S$ m)* 546 356 53% beneficiary of higher aircraft volumes in the region, for which Asia
THAI (THB m) 3,349 (4,621) turnaround is also a good longer-term prospect as the propensity to travel
Source: Companies, DBS Bank, AllianceDBS grows.
* FYE Mar
Airlines regaining growth ambitions
However, we are not overly concerned with a prospective
decline as it would not be outside the norm for global airline ASEAN airlines are looking at larger fleet growth in 2017. We
peers. The International Air Transport Association (IATA) has think this is in part incentivised by strong financial performances in
forecasted 2017 global airline industry net profit of 2016 which had for many airlines grew or rejuvenated cash piles
US$29.8bn, 16% down from US$35.6bn it projected for and book values. Across our coverage, we expect a net fleet
2016. For Asia-Pacific carriers in particular, IATA forecasted an growth of 35 (from 27 expected in 2016), which adds on the
aggregated 14% decline in 2017 net profit to US$6.3bn, from expected growth from competitors as well. This is led by Malaysia
US$7.3bn expected for 2016. We observe two key reasons for and Thai AirAsia with planned increases of seven and six,
the broad decline for ASEAN airline earnings: 1) the gradual respectively, which we view as the groups strategy to entrench its
uptick in fuel prices, and 2) easing of average fares due to domestic market share dominance. Notably, demand appears to
competition. Industry traffic growth is expected to record a be skewed towards short-haul and/or low-cost aircraft; and with
decent pace, though unable to overcome margin erosion less demand for new long-haul capacity. No new planes are
implied by the two headwind factors. Airlines we favour under expected for Malaysia AirAsia X, and players like Bangkok Air and
such circumstances are those with higher control over volume Garuda are only adding to their short-haul aircraft (the latter via
i.e. with strong demand positioning or captive markets. low-cost unit Citilink).

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Industry Focus
ASEAN Aviation

Expected year-end active fleet counts (non-exhaustive) Fares and yields to pare down as airlines opt for volume
Net Net
2017F chg 2016E chg 2015 Given the competitive environment above, we expect yields
Thailand (fares/RPK) to broadly pare down for the ASEAN airlines. We
Thai AirAsia 57 +6 51 +6 45
contrast the yield movement below relative to industry capacity
Bangkok Air 39 +4 35 +4 31
growth for each of the major markets, where it had
Thai Airways 97 +2 95 - 95
demonstratively fallen in higher competitive scenarios. The main
Nok Airways 34 +1 33 +5 28
6 - 6 +1 5
exception will be the Thai airlines, in particular those serving
Thai AirAsia X
Thai Lion 24 +6 18 domestic routes which be imposing an additional Bt150-200 per
Thai VietJet 3 +2 1 flight to pass on newly hiked jet fuel excise taxes. See further
NokScoot 5 +2 3 - 3 elaboration in Thailands domestic jet fuel excise quandary
section below.
Malaysia
Malaysia AirAsia 84 +7 77 -3 80 Additionally, yield, capacity and load factor also generally show
Malaysia AirAsia X 22 - 22 +2 20 a trade-off pattern, where higher capacity growth impact yield
Malaysia Airlines 87 +9 78 or load factor or both adversely, and vice versa. For example,
Malindo / Batik Msia 52 +10 42 +15 27 ambitious capacity growth from Malaysia AirAsia X from 2Q13
to 1Q14 resulted in a concurrent severe decline in yield; it is
Singapore apparent that during this time, AirAsia X sacrificed yield amid
Singapore Airlines (main) 110 1 109 7 102
capacity growth to maintain a reasonable level of load factor. In
Silk Air 35 4 31 2 29
contrast, after the capacity tapering, which started in 1Q14,
Tiger + Scoot 38 3 35 - 35
Singapore Tigerair is now enjoying higher load factors.
Philippines
Cebu Air 59 +2 57 +2 55 Another important factor in yields is the fuel surcharge which
PAL 66 +4 62 +4 58 now has been abolished. Reaching as high as one-fifth of total
Philippines AirAsia 18 +4 14 - 14 yields at its peak, fuel surcharges have largely been removed by
airlines following the collapse of jet fuel prices since late-2014,
Indonesia driving down yields external to supply-demand conditions.
Garuda (mainline) 144 - 144 +1 143
Citilink 56 +4 52 +8 44 Malaysia
Indonesia AirAsia 24 +2 22 -2 25
Indonesia AirAsia X 2 - 2 - 2 Fare/RPK (in local currency) y-o-y changes - Malaysia
Lion Air (+Wings + Batik) 233 +22 204 +16 188
MalaysiaAirAsia MalaysiaAirAsiaX
Source: CAPA, companies, DBS Bank, AllianceDBS 30%

20%
Major unlisted player Lion Group continues to be a major
contender in terms of capacity through its network comprising 10%
Indonesian LCCs (Lion Air, Wings Air) and FSC (Batik Air),
0%
Malaysian FSC (Malindo soon Batik Malaysia), and Thai LCC
(Thai Lion Air). The groups burgeoning orderbook of 442 10%
aircraft at the start of 2017 implies that growth must continue, 20%
despite a slowdown in deliveries in 2016, which had
contributed to the sectors stronger margin performance. CAPA 30%
1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

3Q14

4Q14

1Q15

2Q15

3Q15

4Q15

1Q16

2Q16

3Q16

estimates that the group is set to receive 32 (non-turboprop)


aircraft in 2017 which after removing the 10 slated for
Source: Companies, DBS Bank, AllianceDBS
Malindo, leaves 22 to be split among Thai Lion Air and its
Indonesian units.

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Industry Focus
ASEAN Aviation

Capacity (y-o-y changes) - Malaysia Capacity y-o-y changes - Thailand

Malaysia AirAsia Malaysia AirAsia X Thai AirAsia Bangkok Air Thai Airways Nok Air

60% 50%

50%
40%
40%
30%
30%

20% 20%

10%
10%
0%
0%
-10%

-20% -10%

Source: Companies, DBS Bank, AllianceDBS Source: Companies, DBS Bank, AllianceDBS

Load factors - Malaysia Load factors - Thailand


Malaysia AirAsia Malaysia AirAsia X

90%
Thai AirAsia Bangkok Air Thai Airways Nok Air
85%
90%
80% 85%

75% 80%
75%
70%
70%
65%
65%
60% 60%
55% 55%

Source: Companies, DBS Bank, AllianceDBS Source: Companies, DBS Bank, AllianceDBS

Thailand Singapore

Fare/RPK (local currency) y-o-y changes - Thailand Fare/RPK (local currency) y-o-y changes - Singapore
ThaiAirAsia BangkokAir ThaiAirways NokAir
20% SIA mainline Silkair Tigerair Scoot

15% 10%

10%
5% 5%

0%
5% 0%

10%
15% -5%

20%
25% -10%
1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

3Q14

4Q14

1Q15

2Q15

3Q15

4Q15

1Q16

2Q16

3Q16

-15%
Source: Companies, DBS Bank, AllianceDBS

Source: Companies, DBS Bank, AllianceDBS

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Industry Focus
ASEAN Aviation

Capacity y-o-y changes - Singapore Capacity (y-o-y changes) - Indonesia

SIA mainline Silkair Tigerair Scoot Garuda (group) Indonesia AirAsia

60% 60%

50% 50%
40%
40%
30%
30%
20%
20%
10%
10%
0%
0% -10%
-10% -20%
-20% -30%

Source: Companies, DBS Bank, AllianceDBS Source: Companies, DBS Bank, AllianceDBS

Load factors - Singapore Load factors - Indonesia


SIA mainline Silkair Tigerair Scoot Garuda (group) Indonesia AirAsia

90% 90%

85% 85%

80% 80%

75% 75%

70% 70%

65% 65%

Source: Companies, DBS Bank, AllianceDBS Source: Companies, DBS Bank, AllianceDBS

Indonesia Philippines

Fare/RPK (local currency) y-o-y changes - Indonesia Fare/RPK (local currency) y-o-y changes - Philippines
Garuda(group) IndonesiaAirAsia CebuAir
25% 10%
20% 5%
15%
0%
10%
5% 5%

0% 10%
5%
15%
10%
20%
15%
20% 25%
1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

3Q14

4Q14

1Q15

2Q15

3Q15

4Q15

1Q16

2Q16

3Q16
1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

3Q14

4Q14

1Q15

2Q15

3Q15

4Q15

1Q16

2Q16

3Q16

Source: Companies, DBS Bank, AllianceDBS Source: Companies, DBS Bank, AllianceDBS

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Industry Focus
ASEAN Aviation

Capacity (y-o-y changes) and load factors - Philippines brought down the relative price difference between FSC and
LCC average fares which we think made FSCs more
Cebu Air Load Factor (RHS) Cebu Air Capacity Growth (LHS) competitive and viable as a growth model. Going forward, we
35% 86% see LCC market penetration to be steady evidenced by the
30% 84% two largest groups AirAsia and Lion Air choosing different
82% tactics in service expansion (continued LCC for the former,
25%
80% and more FSC products for the latter).
20%
78%
15%
76%
LCC vs total seat growth intra-ASEAN segment
10% Total seats - intra-ASEAN (m) LCC seats - intra-ASEAN (m)
74%
5% Growth - Total Growth - LCC
72% 350 35%

0% 70%
300 30%

250 25%

Source: Companies, DBS Bank, AllianceDBS 200 20%

150 15%
The LCC factor on yields 10.2%
100 10%
9.0%

A factor frequently associated with easing average industry 50 5%

yield growth is the prevalence of low cost carriers or LCCs, 0 0%


2007 2008 2009 2010 2011 2012 2013 2014 2015 Jan-Sep
which had been a key factor boosting air travel over the 00s. 2016

LCC market penetration for ASEAN air travel had stagnated Source: CAPA, AllianceDBS, DBS Bank
for two years since 2014, implying it may be near to a mature
level for ASEAN. Jet fuel tracking crude oils tentative uphill climb

LCC market share: intra- & to/from ASEAN The severe collapse in oil and jet fuel prices were instrumental in
LCC market share - intra-ASEAN the record profitability logged in 2016, but the bottom appears
LCC market share - to/from ASEAN
60% to have come to pass in 1Q16. Right now, jet fuel has reached
57.0% 56.4% levels of above US$60/bbl (our average forecast for 2017),
50% 54% 54.2%
contrasting with the average of US$52/bbl in 2016. This is
47%
40%
43%
45% expected to contribute to cost/ASK rising up to 7% among our
41%
37%
coverage.
30%
32%

20% 24% 24.2% 23.7% 23.7%


Jet fuel price FOB Singapore (US$/barrel)
22% 22%
20% 21%
17% 19% Spot jet fuel (US$/bbl) Calendar quarter average
10% 90

0% 80
2007 2008 2009 2010 2011 2012 2013 2014 2015 Jan-Sep
2016
70
Source: CAPA, AllianceDBS, DBS Bank
60
After peaking at 57% in 2014, the proportion of LCC seats
over total seats available for intra-ASEAN flights had pared 50

down to 56% in 2015 and further to 54% in 9M16. This


40
trend was slightly less noticeable for flights to/from ASEAN,
which has lower LCC share justified by mostly longer average 30
Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17
flight times.
Source: Bloomberg Finance L.P., DBS Bank, AllianceDBS
Breaking it down, LCC seat growth for intra-ASEAN air travel
had, for the first time since 2015, grown at a slower (9%)
pace than that of total seat growth (10%). On one hand, this
may be due to the simple maturing exposure of ASEAN to the
LCC concept. However, the removal of fuel surcharges has

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Industry Focus
ASEAN Aviation

Airline cost/ASK to rise


FY17F FY16F % variance Quantum of fare hike over current average fares
AAV BA* NOK^
AAV (THB) 1.51 1.42 6.3%
AAX (RM sen) 13.5 12.7 5.6%
9M16 avg fare / passenger (Bt) 1616 3196 1686
AIRA (RM sen) 13.4 12.5 7.3%
Fare increase (Bt) 150 200 150
BA (THB) 3.30 3.19 3.2% Share of previous avg fare 9.3% 6.3% 8.9%
CEB (PHP m) 2.00 1.89 5.5%
GIAA (US ct) 6.14 6.23 (1.5%) *domestic segment only
SIA (S ct)* 9.36 9.14 2.4% ^not under coverage
THAI^ (THB) 14.9 14.8 0.5%
Source: Companies, AllianceDBS, DBS Bank
Source: Bloomberg L.P., DBS Bank, AllianceDBS
* FY18F end-Mar
Overall, the fare hikes offset most but not all of the impact we
^cost/ATK
cut estimates by up to 14% after imputing the changes. A
potential after-effect in our view is that the higher prices may
Thailands domestic jet fuel excise quandary
make passengers more selective in picking air travel airlines
may find that stronger market shares can help mitigate this.
The Thai Excise Department had in Jan 2017 raised excise
taxes on jet fuel for domestic flights to the higher of Bt3 or
Airline fuel price sensitivity
23% of price per litre; from Bt0.2 or 1% before. At current
spot jet fuel prices of c.USD65/bbl, this works out to c.US$13-
Our current base case assumption is for spot jet fuel to average
15/bbl. The municipal tax (10%) and VAT (7%) on the excise
US$60/bbl in 2017 (2016: US$52.9/bbl) however airlines
amount will thus also grow in tandem. Given the large impact,
would see different effective prices depending on their
the changes necessitated key local-serving carriers like Thai
respective hedging levels. Among our coverage, a sensitivity
AirAsia, Nok Air and Thai Lion Air to announce fare hikes of
analysis for a US$5/bbl deviation from our spot jet fuel
Bt150, and Bangkok Airways of Bt200, per flight. This
assumption of US$60/bbl would result in FY17F (FY18F for SIA)
represents upwards of c.6%-9% of their average
negative earnings impact of 3-33%). Note that this looks at
fare/passenger currently (higher because shorter-haul
changes to spot prices, meaning that the impact is diluted by
domestic flights would likely have cheaper fares than the
average). the hedges the respective airlines have in place.

Calculation of preliminary incremental excise tax impact FY17F jet fuel hedges
FY17F hedge % Approx. hedge
Excise tax (THB/litre) USDTHB I n c re me n Jet fuel I n c re me n (inc planned) price (US$/bbl)
ta l excise (US$/bbl) ta l % of
tax current
AAV 74% 60
price
AAX 74% 60
Revised* Previous (US$/bbl)
b a AIRA 74% 60
3.3 0.2 35.2 14 65 22% BA 38% 57
CEB^ 41% 65
*assuming 23% of current spot GIAA Up to 50% -
SIA*^ 32% 65
FY17F fuel Assumed Increment Previous % of THAI 43% -
req. (m % for al cost FY17F current Source: Companies, DBS Bank, AllianceDBS
bbls) domestic (THB m) - earnings forecasts
* FY18F end-Mar
use 11M (THB m)*
^includes hedges of Brent crude
= (a * b ) *
c d
(c * d )
AAV 4.2 50% 946 2570 37%
BA 1.4 60% 387 3488 11%
THAI 19.1 5% 433 5270 8%

*before our net earnings adjustment

Source: Companies, AllianceDBS, DBS Bank

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Industry Focus
ASEAN Aviation

FY17F earnings forecasts changes per US$5/bbl Thai AirAsia cost per ASK breakdown (THB)
deviation from US$60/bbl base assumption for jet fuel Fuel Cost / ASK Cash Opex / ASK Asset Cost / ASK
FY17F
1.8
adjusted FY17F % variance
1.6

AAV (THB m) 2,113m 2,215m (5%) 1.4


AAX (RM m) 143m 189m (24%) 1.2
AIRA (RM m) 947m 975m (3%)
1.0
BA (THB m) 2,898m 3,011m (4%)
0.8
CEB (PHP m) 8,874m 9,480m (6%)
GIAA (US$ m) 32.9m 49.3m (33%) 0.6
SIA (S$ m)* 598m 682m (12%) 0.4
THAI (THB m) 3,287m 4,882m (33%) 37% 35%
0.2
Source: Companies, DBS Bank, AllianceDBS
0.0
* FY18F end-Mar 2010 2011 2012 2013 2014 2015
Source: Bloomberg Finance L.P., DBS Bank, AllianceDBS
This relatively mild increase (or indeed any further spikes) may
not result in the immediate collapse of airline earnings, SIA cost per ASK breakdown (S$ cents)
somewhat like the initial oil price collapse took time to raise
Fuel Cost / ASK Cash Opex / ASK Asset Cost / ASK
airline profitability. This is simply because of the hedges airlines
12
have employed are up to or even above half of their expected
requirements in 2017. As such a sustained increase will only 10
have more meaningful impact in 2018, wherein the operating
landscape may yet shift again to accommodate the higher cost 8

environment. Over the past five years, fuel costs as a % of


6
overall cost/ASK has deteriorated from 23-50% to 20-40%
4
AirAsia cost per ASK breakdown (RM sen)
Fuel Cost / ASK Cash Opex / ASK Asset Cost / ASK 2 35% 32%
14
0
12 2010 2011 2012 2013 2014 2015
Source: Bloomberg Finance L.P., DBS Bank, AllianceDBS
10

8 Garuda cost per ASK breakdown (US cents)


Fuel Cost / ASK Cash Opex / ASK Asset Cost / ASK
6
10
4
9
42% 40%
2 8
7
0
2010 2011 2012 2013 2014 2015 6
Source: Bloomberg Finance L.P., DBS Bank, AllianceDBS 5
4
3
2
38%
1 28%
0
2011 2012 2013 2014 2015
Source: Bloomberg Finance L.P., DBS Bank, AllianceDBS

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Industry Focus
ASEAN Aviation

Cebu Air cost per ASK breakdown (PHP) excessive growth. Most countries are still expecting single-digit
Fuel Cost / ASK Cash Opex / ASK Asset Cost / ASK
expansion.
2.5
Still confident in Thailand tourism
2.0
For Thailand, the number of international tourist arrivals to the
country has been strong in the first nine months of 2016,
1.5
growing by 12.4%. However, tourist arrivals growth started to
slow down in Oct as the impact from crackdown on low cost
1.0
zero-dollar tours by the Thai and Chinese governments have
kicked in, coupled with the passing of Thailands beloved late
0.5 43%
38%
King Bhumibol Adulyadej in mid-Oct in which several forms of
public entertainment were banned for one month until 13
0.0
2010 2011 2012 2013 2014 2015
November. As a result, the Ministry of Tourism reported only
Source: Bloomberg Finance L.P., DBS Bank, AllianceDBS 0.5% growth in international tourist arrivals to Thailand in Oct
and a 4.4% fall in arrivals in Nov. Note that Chinese tourist
Will fuel prices eventually raise fares for other countries? The numbers fell for the first time in Oct by 16.2% and continued
developments from Thailand provide some reassurance that to decline by 29.7% in Nov. Nevertheless, the sentiment on
excessive fuel price-related escalations indeed will induce tourism has improved after the Thai government announced in
airlines to pass it on via higher fares or yields. In relation to Nov that they will lift Bt1,000 visa fee for tourists who sought
spot jet price increases, however, the chance of reintroducing visas at Thai embassies and consulates for 19 countries
surcharges at present levels appear slim given that the last (including China, Bhutan, India, Taiwan). Also, the visa on
instances (before being removed) were in place when prices arrival fee will also be cut from Bt2,000 to Bt1,000. This has
were above the US$100/bbl level (>50% higher than current) been implemented from 1 Dec 2016 to 28 Feb 2017. Thanks to
back in 2014 and prior. the governments effort to boost tourism, international tourist
arrivals increased by 1.1% in Dec while the number of Chinese
Air travel demand still looking robust tourists fell by a smaller magnitude (-16% y-o-y). In line with
Ministry of Tourisms numbers, AOT's international passenger
Demand in ASEAN remains generally positive though still traffic growth started to slow down in Oct with growth of 3%,
below peak conditions. Air travel demand has generally been followed by a negative growth (in a low single digit) in Nov.
tied to economic activity in a region (i.e. correlated with GDP Then international passenger growth rebounded to 4% in Dec.
growth), but with more underlying potential in region where For the full year 2016, there were 32.6m international tourists
propensity to travel has yet to mature. visiting Thailand, representing an increase of 8.9%.

ASEAN GDP vs ASEAN passenger (RPK) y-o-y growth AOT: International passenger traffic at its six airports
20% '000 passengers
7,000 45%
18%
40%
16% 6,000
35%
14% 5,000 30%
12% 4,000 25%
10%
20%
3,000 15%
8%
2,000 10%
6% 5%
1,000
4% 0%
2% 0 -5%
Jan15

Mar15
Apr15

Aug15
Sep15
Oct15

Jan16

Mar16
Apr16

Aug16
Sep16
Oct16
Dec14

Feb15

May15
Jun15
Jul15

Nov15
Dec15

Feb16

May16
Jun16
Jul16

Nov16
Dec16

0%
2010 2011 2012 2013 2014 2015
International movement growth yoy (RHS)
ASEAN GDP growth Within ASEAN RPK growth
ASEAN to key regions* RPK growth Source: AOT, DBS Vickers
Source: ASEAN, Boeing, DBS Bank, AllianceDBS
*Includes, Africa, Asia Pacific, Europe, Middle East, North America For year 2017, we maintain our positive view on Thailand
tourism which has shown its resilience by rebounding rapidly
As GDP expectations for ASEAN countries remain on the mild in the wake of several unfavourable events in the past. We
side for 2017, air travel is accordingly not expected to chart believe the impact from crackdown on zero-dollar tours
should be temporary and that the zero-dollar tour ban will

Page 9

Page 9
Industry Focus
ASEAN Aviation

benefit Thai tourism as a whole in a the long term from the MAHB passenger growth by month, segment
qualitative improvement of Chinese tourists. Thailand will then m pax
Domestic pax (lhs) International pax (lhs)
% y-o-y
Dom pax growth (rhs) Int pax growth (rhs)
be depending not only on the number of foreign tourist 10 50%

arrivals but also the quality of their spending per head. 9 Period of 2H14-1H16 averaged 0.4% growth 40%

Nevertheless, we should see the return of Chinese tourist 8 30%

arrivals to Thailand given Thailands cost-competitive travelling 7 20%

and variety of destinations, as well as, the close proximity of 6 10%

these two countries and flight connectivity. 5 0%

4 (10%)

The Tourism Authority of Thailand (TAT) expects international 3 (20%)

tourist arrivals to Thailand to grow by 7.7% to 35.1m in 2017 2 (30%)

while Chinese arrivals are also expected to increase by 11.3% 1 (40%)

to 9.8m as tourists from zero-dollar tours were estimated to 0 (50%)

May-

May-

May-

May-
Jan-13
Mar-13

Jul-13
Sep-13
Nov-13
Jan-14
Mar-14

Jul-14
Sep-14
Nov-14
Jan-15
Mar-15

Jul-15
Sep-15
Nov-15
Jan-16
Mar-16

Jul-16
Sep-16
Nov-16
account for only 20% of arrivals last year. However, strong
growth in other key feed markets such as Russia, India, the Source: MAHB, DBS Bank, AllianceDBS
US, and the Middle East should compensate for Chinese
arrivals if they were to continue to slow down. On a positive Quarter pax growth vs Malaysias nominal GDP
note, Russian tourists which account for 3.3% of total arrivals Totalpassengergrowth(yoy)
have showed positive signs of recovery, growing by 23.3% to MalaysianGDPgrowth,currentprices(yoy)
30%
1.1m in 2016 after a long decline. Additionally, we believe the 25%
government will continue to support the tourism sector if any 20%
unfavourable event arises by lifting visa fee or offering tax 15%
rebates for domestic travel. 10%
5%
Thailand: International tourist arrivals 0%

'000 People 5%
3,400 10%
15%
3,000
1QFY09
2QFY09
3QFY09
4QFY09
1QFY10
2QFY10
3QFY10
4QFY10
1QFY11
2QFY11
3QFY11
4QFY11
1QFY12
2QFY12
3QFY12
4QFY12
1QFY13
2QFY13
3QFY13
4QFY13
1QFY14
2QFY14
3QFY14
4QFY14
1QFY15
2QFY15
3QFY15
4QFY15
1QFY16
2QFY16
3QFY16
4QFY16
2,600

2,200 Source: MAHB, Department of Statistics, DBS Bank, AllianceDBS


1,800
In Singapore, Changi Airport pax growth charted a healthy
1,400
+5.9% for 2016, showing a somewhat similar rebound trend to
1,000
Malaysia. This continued improvements from 2015 (+2.5%),
600 moving on from a relative slowdown in 2014 (+0.7%).
Jan

Aug

Sep
Mar

Apr

May

Oct

Nov

Dec
Feb

Jun

Jul

2009 2010 2011 2012 Changi Airports y-o-y passenger growth


2013 2014 2015 2016
ChangiAirportpassengermovements(m) yoygrowth
Source: Ministry of Tourism and Sports (Thailand), DBS Vickers 60 12.0%

56 10.0%
Passenger growth in Malaysia staved off two years of slowing
progress, with Malaysia Airports (MAHB) reporting a 6% 52 8.0%
increase in 2016 (from 0.6% in 2015, 4.7% in 2014). Pax
growth notched a long-unseen double-digit rate of c.10% in 48 6.0%

2H16; appearing to shrug off a 24-month or 2-year slowdown


44 4.0%
(0.4% average growth) largely attributed to the airline
incidences in 2014. Looking forward, MAHBs MD Datuk 40 2.0%
Badlisham Ghazali stated its internal growth target of 5% for
2017 (and in a newer statement, 5-7%), likewise our forecast 36 0.0%
2011 2012 2013 2014 2015 2016
for the year. This represents a closer match with the pace of
Source: Changi Airport, DBS Bank, AllianceDBS
Malaysias nominal GDP growth from pre-2H14.

Page 10

Page 10
Industry Focus
ASEAN Aviation

Aerospace MRO has steady growth potential but structural challenges persist
Global air traffic outlook

Source: Boeing CMO 2016-2035

Increasing air traffic trend can be sustained in Asia. Facilitated Expected global aircraft delivery demand
by rapid economic growth, there has been increasing demand De livery demand (2016-2035)
for air travel for the past 20 years. The air travel industry has
30000 28140
weathered various major external shocks over the years to
register a 5.4% CAGR over that period, almost double the 25000
average global GDP growth rate. Going forward, increasing 20000
per-capita income, increasing affordability and propensity to
15000
travel and the emergence of low cost carriers (LCCs) will 9100
continue to drive traffic growth, especially in emerging 10000
markets like Asia and spur the need for more aircraft and 5000 2380
aircraft maintenance. Driven by China and India as the main 0
engines of growth, passenger traffic in the region is forecast Regional Jets Single Aisle Widebody
to grow by around 6.1% CAGR till 2035, outstripping the
Source: Boeing CMO 2016-2035
global growth rate of 4.8%. Liberalisation and policy
initiatives like open skies and easing of visa regulations are
also driving the traffic expansion in this region.
Asia will dominate narrowbody aircraft demand. To
accommodate the growing demand, Asia will need to add
Single aisle aircraft will dominate deliveries in future. Total jet
15,130 aircraft over the next 20 years (5% CAGR), according
aircraft fleet is expected to double over the next 20 years
to Boeing, nearly tripling the existing aircraft base. The growth
according to Boeing, and close to 71% of new deliveries will
will be driven by Low Cost Carriers (LCCs) and as a result,
be single-aisle or narrowbody aircraft. Better fuel economics
40% of all new projected single aisle aircraft deliveries will be
and lower maintenance requirements drive the replacement
in Asia.
demand for the narrowbody fleet.

Page 11

Page 11
Industry Focus
ASEAN Aviation

Regional variation in single aisle fleet demand North American airlines leading profit projections

S ingle Aisle Fleet Development Industry Profitability by Region


14000 25.0
12000 20.0
10000
15.0
8000
6000 10.0
4000 5.0
2000
0.0
0 North Europe Asia-Pacific Middle East Latin Africa
Asia N. Europe Middle Latin Africa Russia -5.0
America America
America East America and CIS
2015 2016E 2017F
2015 2035 Source: International Air Transport Association (IATA)
Source: Boeing CMO 2016-2035
All this bodes well for MRO growth but heavy maintenance
Airline profitability trends holding up well. With oil prices will lag. Industry consultant Oliver Wyman expects the global
falling up to 50% from the highs of 2014, airline profitability MRO market to grow at around 4.4% CAGR for the rest of
has improved significantly since 2015, as evident from the the decade and at a slightly lower CAGR of 3.9% for the next
figure below. According to latest estimates from industry body five years to 2025. Engine MRO will remain the largest
IATA, airlines are expected to enjoy another good year in segment, with sustained engine MRO outsourcing trend.
2017, the third year in succession that airlines will record a However, growth in heavy maintenance or airframe
return on invested capital (ROIC) that is better than the maintenance segment will be lower than average as new
weighted average cost of capital (WACC). The strongest technology will lead to lower costs and longer schedules of
performance is from North America, which benefits from a heavy maintenance.
strong local currency and consolidated industry structure.
Airlines are likely to use the improved financial position to Global MRO market size forecast
invest in interior upgrades, operational improvements and
120.0
new planes, boosting prospects for aviation service companies
3.8% CAGR
like MRO providers. 100.0
4.4% CAGR 17.8
80.0
Airline profitability trends 15.0 19.2
60.0 12.3 15.2
Global airline industry profitability trends 12.4
40.0 46.8
40.0 6.0% 37.1
27.9
30.0 4.0% 20.0
20.0 14.5 15.9 16.7
2.0% 0.0
10.0 2015 2020 2025
0.0%
0.0
-2.0% Airframe Engine Components Line
-10.0
-20.0 -4.0% Source: Oliver Wyman
-30.0 -6.0%
In line with the fleet additions in the region, Asia is expected
Net profit/ loss (US$bn) (LHS) Net profit margin (%) (RHS)
Source: International Air Transport Association (IATA) to drive the growth of the global MRO market at 6.6% CAGR
over 2015-2025, with market share expanding from 27% to
35%. The North American MRO market is likely to stagnate
though, as fleet additions will be offset to a large extent by
retirements.

Page 12
Page 12
Industry Focus
ASEAN Aviation

Global MRO market size forecast by geography STE will continue to leverage its status as the largest 3rd party
MRO provider. STEs wholly owned subsidiary, ST Aerospace is
120.0
the only major 3rd party MRO operator in the Asia Pacific
100.0 region, and hence, is a natural choice for many low cost
34.8 carriers operating in the region. Most LCCs tend to outsource
80.0
MRO activities to a large extent, and ST Aerospace remains a
60.0 18.3 12.8 partner of choice for operators like Air Asia, Jetstar Asia and
6.5
40.0 7.5
3.2
Lion Air. SIA Engineering, on the other hand, has developed
24.9 superior capabilities for modern wide body planes, as a direct
17.9
20.0 beneficiary of the fact that parent SIA is a leader in adopting
20.0 21.3
0.0 new generation aircraft. Thus, the two operators rarely
2015 2025 compete in the same segments of the market and we believe
the higher growth potential of LCCs in the region with their
North America Europe Latin America Africa/ ME Asia
narrowbody fleet vis--vis the full service carriers, where new
Source: Oliver Wyman planes are mostly meant for fleet renewal, will likely benefit ST
Engineering more than SIA Engineering.
Structural changes in industry here to stay. Despite the steady
growth potential for the MRO industry in general, MRO SIA Engineering has formed joint ventures with airframe
operators will need to reinvent to stay relevant as Original OEMs. As a specialist widebody MRO provider servicing
Equipment Manufacturers (OEMs) are increasingly taking a network airlines, SIE is facing a bigger challenge of OEMs
bigger share of the aftermarket space, especially for new bundling aftermarket services into new generation aircraft
generation planes. MRO operators will also need to invest in sales agreements. To overcome this, SIE has adopted a
big data analytics and predictive maintenance software to strategy of partnering with airframe OEMs to win back some
provide value-added services to customers, given the huge of the lost revenues. In 2015, SIE incorporated a 49:51 JV with
amount of operational data generated by new generation Boeing to provide fleet management services in the Asia
aircraft. Advances in data management may also result in Pacific region, having received regulatory approvals in the
lower downtimes for heavy checks and fewer repairs, resulting relevant geographies. This will help SIE to develop fleet
in lower manhour revenues in future. MROs will need to management partnerships with airlines with Boeing fleet in
compensate for this by capturing more of the value chain in the region and also open the doors for heavy maintenance
predicting maintenance cycle requirements for clients and business in the longer term. SIE has also established a heavy
providing fleet management services. maintenance JV with Airbus (65:35) in 2016 to provide MRO
services for A380, A350 and A330 aircraft in Asia Pacific and
Key structural trends in MRO industry beyond. Airbus will develop the JV as its Centre of Excellence
for Airbus A380 and A350 Heavy Maintenance in Asia. While
OEMs will see increased aftermarket presence for new near-term contribution from these JVs may not be significant,
generation aircraft they will be crucial over the long term, in our view.
Increased need for data analysis for new generation
aircraft will necessitate MROs to design rigorous data Narrowbody engine MRO is another driver for STE. As we saw
management software to value-add earlier, global engine MRO is the largest MRO segment, and is
Health monitoring and predictive maintenance will expected to maintain the highest growth rate over the next 10
reduce overall time for individual checks with fewer years. STE is well positioned for the growth in engine MRO
repairs with tie-ups with the top two engine manufacturers GE and
Mature markets are stagnating and nexus of MRO will CFM. GE and CFM are expected to further increase their
continue to shift to Asia market share from around 57% in 2016 to 61% by 2025,
Price and customer service are key levers to compete in according to industry consultant CAVOK/Oliver Wyman. To
stagnant MRO markets recall, STE has set up an engine MRO facility in Xiamen
(China) for total support of CFM56 series of engines. STE also
Source: Oliver Wyman has an engine leasing joint venture with Marubeni Corp of
Japan, which provides engine leasing services for CFM56-3,
CFM56-5B, CFM56-7B engines that power narrow-body

Page 13
Page 13
Industry Focus
ASEAN Aviation

aircraft such as the A320 and B737, and the opportunities in


this segment in Asia Pacific region remains potentially huge.
SIA Engineering, on the other hand, with its exposure to
legacy widebody engines, has seen a structural decline in
engine MRO demand and will hope for the Rolls Royce Trent
series widebody engines to contribute to demand growth in
future.

Cabin retrofitting and VIP reconfigurations will be a key


business area for STE, going forward. In 2011, STE had
launched AERIA Luxury Interiors in the US, a unit that focuses
on refurbishing and outfitting of VIP aircraft. ST Aerospace is
armed with endorsements from the world's leading aircraft
OEMs both an Airbus Corporate Jet service centre and an
approved Boeing Business Jet completion centre. ST
Aerospace has also extended its VIP aircraft interior business
to Singapore, by unveiling a new facility at Seletar Aerospace
Park to target demand for bespoke cabin interiors from Asian
and Middle Eastern customers. In 2016, ST Aerospaces VIP
aircraft interiors business gained traction by securing five
major maintenance and refurbishments contracts for three
Boeing Business Jet (BBJ), one Airbus Corporate Jet (ACJ) and
a Boeing 757, from VIP customers in Asia Pacific and the US.
ST Aerospace has also established an aircraft seats JV in
Singapore to complement its cabin interiors business.

STE expanding into aircraft and engine leasing business to


generate new maintenance streams. ST Aerospace has
commenced its aircraft leasing business with acquisition of
two aircraft in FY15, and added more aircraft in FY16. It has
decided to collaborate with Sojitz Corporation of Japan in its
aircraft leasing business, by divesting 50% stake the holding
company for STEs aircraft leasing investments.

STE has also further strengthened leadership position in PTF.


ST Aerospaces 55% owned European MRO centre in Dresden
in collaboration with Airbus EADS EFW has successfully
launched the A330 and the A320/321 Passenger to Freighter
programmes. This will add to STEs existing track record of PTF
capabilities MD11, B767-300, and B757-200 (14 &141/2
pallet). STE has also received the supplemental type certificate
from US FAA for the 15-Pallet B757-200SF conversion.

Page 14
Page 14
Industry Focus
ASEAN Aviation

Valuations and stock picks

Airline valuations to cool off peak multiples Given a squeezed profit outlook, there may be some de-rating
of valuations from a P/BV perspective our chosen method of
ASEAN airline share prices ended 2016 on a subdued note, as valuing airlines under coverage easing from peak levels (see
the cooling-off period started around Sep 16 largely P/BV charts in Appendix below). That said, we think that there
reacting to the rising jet fuel price and US dollar; despite a remains room for individual stocks to trade up to +1SD above
larger proportion of 2Q16 results being in line or beating mean as 1) performance may yet hold up until end 1HCY17,
consensus. This is not isolated to ASEAN as the Asia-Pacific and 2) the performance gap may widen between performers
Airlines Index has likewise deteriorated on similar factors. and loss-makers. Further, given that fuel prices still remain far
below peak of >US$100/bbl, we think that most players will
Asia Pacific Airlines Index have sufficient space for competitive, load-inducing yields
300 without severely eating into equity values.

250
+2 SD
Look for market share winners among airlines
200 +1 SD
Despite expectations of thinner profitability, we still expect
150 Mean
most airlines to be able to preserve book value i.e. not fall
100 -1 SD into loss-making positions barring a severe upswing in fuel
-2 SD price or the US dollar. In such conditions we expect valuations
50
to edge down with the exception of airlines managing to
0 expand their business position by growing market share
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
Jul-10
Jan-11
Jul-11
Jan-12
Jul-12
Jan-13
Jul-13
Jan-14
Jul-14
Jan-15
Jul-15
Jan-16
Jul-16
Jan-17

without severely impacting profitability.

Source: Bloomberg Finance L.P., DBS Bank, AllianceDBS Top airline picks
To that end, our BUY picks are AirAsia (BUY, TP: RM3.25),
Asia Aviation (Buy, TP: Bt7.60), and Cebu Air (BUY, TP: P125).
2H16 price movement, indexed (30 Jun 2016 = 100) All three of AIRA, AAV and CEB are expected to handily
maintain their domestic market share leads even despite
140
growing competitor efforts in 2017. While earnings may
Asia
Aviation indeed pare down, we think given their market positioning,
AirAsiaX
120 price leadership and cost control; its more likely that their
AirAsia respective competition is squeezed out before the players
Bangkok units see overtly unfavourable financial impact.
100
Airways
CebuAir
Other calls
Garuda
80 Indonesia For other stocks under our coverage, BA is also a pick as its
Singapore
Airlines
focuses on relatively less contested markets of niche holiday
Thai routes, in particular to Samui (where it has the majority of flight
60 Airways
Jul16 Aug16 Sep16 Oct16 Nov16 Dec16 slots to the key airport, which it also partly owns). GIAA remains
a BUY on a valuation basis, as we think its discount to book
Source: Bloomberg Finance L.P., DBS Bank, AllianceDBS
value is unjustified as risks of severe prolonged loss-making has
eased. AAX remains a HOLD given its heightened sensitivity to
Airlines under our coverage gave up gains from Sep 16
fuel or currency cost escalation. While THAI is expected to make
onwards, to close the year at slightly below end-1H16 levels.
progress on its Transformation Plan, risks still remain elevated in
That said y-o-y performance at end-2016 remained mostly
its unsold decommissioned fleet, and its high gearing of >4x.
positive (6 out of 8).

Page 15
Page 15
Industry Focus
ASEAN Aviation

Peer Comparison Airlines


Cur La s t 12-mth Rtg M k t Ca p -------- PER --------- EPS Gth EV/EBIT DA P/BV ROA E Fwd yld
Compa ny Px Tgt Px US $m CY16 CY17 CY17 CY16 CY17 CY16 CY17 CY16 CY17 CY17

AirAsia MYR 2.65 3.25 BUY 1,999 6.6x 9.1x -27% 6.1x 7.6x 1.2x 1.1x 31.3% 13.0% 2.4%
AirAsia X MYR 0.42 0.38 HOLD 393 8.5x 9.2x -8% 5.6x 4.8x 2.1x 1.7x 28.4% 20.5% 0.0%
Asia Aviation THB 6.20 7.60 BUY 859 12.9x 13.6x -5% 6.7x 7.3x 1.4x 1.3x 10.6% 9.4% 2.8%
Bangkok Airways THB 21.20 26.30 BUY 1,271 13.5x 14.8x -8% 6.9x 7.2x 1.4x 1.3x 9.0% 9.1% 3.8%
Cebu Air PHP 95.0 125.0 BUY 1,162 5.8x 6.1x -4% 4.8x 4.5x 1.7x 1.4x 33.8% 25.8% 5.4%
Garuda Indonesia IDR 346.0 475.0 BUY 672 66.3x 13.6x >100% 4.4x 3.4x 0.7x 0.7x 1.1% 5.1% 0.0%
Singapore Airlines SGD 9.81 10.10 HOLD 8,228 14.2x 17.0x -17% 3.4x 3.9x 0.9x 0.9x 6.4% 5.4% 4.1%
Thai Airways THB 21.80 23.25 HOLD 1,359 10.4x 9.7x 6% 6.9x 7.2x 1.3x 1.1x 13.1% 12.2% 0.0%
A S EA N Airline s A vg 17.3x 11.6x -9% 5.6x 5.7x 1.3x 1.2x 16.7% 12.6% 2.3%
Sources: DBS Bank, Bloomberg Finance L.P.
Prices as of 7 Feb 2017

Other Aviation Picks


Airports of Thailand (BUY, TP Bt 455) structural re-rating to 12x on sustained earnings growth,
For airport picks, AOT TB would be the best proxy for a especially if CAO can utilise its strong net cash balance of
Thailand tourism recovery in our view. We believe the decline US$203m to further accelerate growth via M&A.
in passenger traffic at its six airports should have already
bottomed out in Nov last year as international passenger ST Engineering (BUY, TP S$3.50)
growth rebounded to 4% in Dec 2016 and 7% during 1-20 STE is a relatively defensive stock with a healthy balance
Jan 2017. AOT has maintained its FY17F total passenger sheet, strong order book and secure dividend payouts. Its
movement target at its six airports at 8.7% (vs our Aerospace segment has positioned itself well by investing in
assumptions of 6.5%). We expect the improving volume growth markets such as narrow-body aircraft Passenger-to-
growth would support the share price. Another short-term Freighter (PTF) conversions, the Chinese MRO market, and
catalyst for AOT will be the split of par value from Bt10 to Bt1 cabin interior solutions, to name a few. The Electronics
which will be subjected to shareholders' approval at AGM segment should also benefit from the Smart City trend, not
on 27 Feb. The par split should increase AOT's liquidity only in Singapore but various overseas markets as well.

China Aviation Oil (BUY, TP S$1.70). Other Calls


With the backing of its SOE parent, CNAF, and monopoly in MAHB remains a HOLD despite improving Malaysian pax
the supply of bonded jet fuel in China, we like CAO as a growth and a recent extension of its operating agreement; as
proxy to the long-term growth of China's international air the group is still heavily dragged by its loss-making Turkish
travel market, growing international presence, and for its operations. SIA Engineering is seeing limited engines for
exposure to Pudong International Airport's firm outlook growth, while core base maintenance and fleet management
through 33%-owned associate, SPIA. Currently trading at businesses are on declining trends given SIAs fleet cycle. .
<10x FY17F PE, we believe that the group is poised to see a

Valuations other ASEAN Aviation


TP La s t 12-mth Rtg M k t Ca p -------- PER --------- EPS Gth EV/EBIT DA P/BV ROA E Fwd yld
Compa ny Crncy Px Tgt Px US $m CY16 CY17 CY17 CY16 CY17 CY16 CY17 CY16 CY17 CY17

Airports of Thailand THB 414.00 455.00 BUY 16,891 29.2x 25.6x 14% 17.8x 16.3x 4.7x 4.2x 17.1% 17.2% 0.0%
Malaysia Airports MYR 6.60 6.80 HOLD 2,472 238.2x 47.8x 398% 9.5x 8.1x 1.4x 1.4x 0.6% 2.9% 1.9%
China Aviation Oil SGD 1.53 1.70 BUY 935 11.8x 10.9x 9% 8.2x 6.8x 1.4x 1.3x 12.7% 12.6% 2.9%
SIA Engineering SGD 3.52 3.58 HOLD 2,800 23.1x 24.9x -7% 15.2x 16.0x 2.4x 2.4x 18.8% 12.0% 3.6%
ST Engineering SGD 3.34 3.68 BUY 7,371 21.3x 20.0x 7% 12.8x 12.1x 5.0x 4.8x 20.2% 24.5% 4.5%
A vg 64.7x 25.8x 84% 12.7x 11.9x 3.0x 2.8x 13.9% 13.9% 2.6%
Sources: DBS Bank, Bloomberg Finance L.P.
Prices as of 7 Feb 2017

Page 16
Page 16
Industry Focus
ASEAN Aviation

Appendix
Valuation charts P/BV

AirAsia PB Band (x)


2.2
(x) AirAsia. AIRA MK (BUY, RM3.25 TP) had tracked back to its longer-
2.0
term mean of near 1.3x P/BV as profitability began to recover as
+2sd:1.92x demonstrated by its earnings reports from 4Q15, as well as
1.8
improvements in the standing of its receivables from loss-making
1.6 +1sd:1.62x
associates. However concerns over a weakening ringgit dragged its
1.4
Avg:1.33x share price from end-2016 onwards. As group performance steadies
1.2 itself amid strong market shares in Malaysia and Thailand, we think
1.0 1sd:1.03x the group should trade above mean valuations as its network and
0.8 branding ensures longevity of the business.
2sd:0.74x
0.6

0.4
Feb-13 Feb-14 Feb-15 Feb-16 Feb-17

AirAsia X PB Band (x)


2.2
(x) AirAsia X. AAX MK (HOLD, RM0.38 TP) exceeded +1SD of its mean
2.0
historical valuations after charting successive profit since 4Q15, and
+2sd:1.92x reaching high ROAEs given a severely beaten down net asset value
1.8
from multiple FYs of losses. As its profitability outlook is more
1.6 +1sd:1.62x
uncertain, we see it de-rating back towards historical mean levels.
1.4
Avg:1.33x
1.2

1.0 1sd:1.03x
0.8
2sd:0.74x
0.6

0.4
Feb-13 Feb-14 Feb-15 Feb-16 Feb-17

Asia Aviation PB Band (x)


2.2
(x) Asia Aviation. AAV TB (BUY, Bt7.60 TP) re-rated reaching +2SD of
2.0
historical mean P/BV, but was dragged by growing concerns of Thai
+2sd:1.92x LCC competition plus the slowdown in tourist arrivals near end-2016
1.8
from the crackdown on zero-dollar tours. We think it has consolidated
1.6 +1sd:1.62x
its position in 2016 and is poised to defend or grow its market share
1.4
Avg:1.33x in 2017 even against competitors fleet expansion; while remaining
1.2 financially.
1.0 1sd:1.03x
0.8
2sd:0.74x
0.6

0.4
Feb-13 Feb-14 Feb-15 Feb-16 Feb-17

Bangkok Airways PB Band (x)


2.2
(x) Bangkok Airways. BA TB (BUY, Bt26.30 TP) has historically traded
2.0
at a slight premium to airline peers averaging 1.6x P/BV, given its
+2sd:1.92x more secure profit stream with a stake in Samui Airport (where it also
1.8
controls the majority of the slots). However a one-off taxation
1.6 +1sd:1.62x
recognition dragged FY16 earnings and concerns on tourism growth
1.4
Avg:1.33x dragged it to -1SD. We find this unjustified given its strong niche
1.2 position servicing boutique routes in Thailand.
1.0 1sd:1.03x
0.8
2sd:0.74x
0.6

0.4
Feb-13 Feb-14 Feb-15 Feb-16 Feb-17

Page 17
Industry Focus
ASEAN Aviation

Cebu Air PB Band (x)


2.2
(x) Cebu Air. CEB PM (BUY, P125 TP) has typically traded far above
2.0
regional peers at almost 2x P/BV, given its consistently strong ROAEs
+2sd:1.92x and solid profit track record even during peak oil prices. Valuations
1.8
had come down in 2016 given a deceleration of its capacity growth
1.6 +1sd:1.62x
due to infrastructure constraints in the Philippines, and caution on
1.4
Avg:1.33x travel statistics with a new political regime. We remain confident on
1.2 its maintenance of profit stability and expect a reversion to mean with
1.0 1sd:1.03x good earnings reports.
0.8
2sd:0.74x
0.6

0.4
Feb-13 Feb-14 Feb-15 Feb-16 Feb-17

Garuda Indonesia PB Band (x)


2.2
(x) Garuda Indonesia. GIAA IJ (BUY, Rp475 TP) has typically traded
2.0
below book value given a loss-making track record, in part due to a
+2sd:1.92x continuous weakening rupiah against the US dollar. We think it is
1.8
nearer to profit stability after easing aircraft deliveries and
1.6 +1sd:1.62x
restructuring efforts, and should trade nearer to mean of 0.9x P/BV
1.4
Avg:1.33x with the production of profitable quarters.
1.2

1.0 1sd:1.03x
0.8
2sd:0.74x
0.6

0.4
Feb-13 Feb-14 Feb-15 Feb-16 Feb-17

Singapore Airlines PB Band (x)


2.2
(x) Singapore Airlines. SIA SP (S$10.10 TP) is expected to trade to
2.0
below or -1SD (0.9x) of its historical mean of 1x P/BV, as ROAEs
+2sd:1.92x decline to near 5% given a weak demand scenario while fuel cost
1.8
savings are offset by softer yields and higher operating expenses.
1.6 +1sd:1.62x
1.4
Avg:1.33x
1.2

1.0 1sd:1.03x
0.8
2sd:0.74x
0.6

0.4
Feb-13 Feb-14 Feb-15 Feb-16 Feb-17

Thai Airways PB Band (x)


2.2
(x) Thai Airways. THAI TB (HOLD, Bt23.25 TP) re-rated very strongly to
2.0
around +2SD from historical mean of below-book value as the
+2sd:1.92x beginning of its Transformation Plan coincided with low jet fuel to
1.8
show sharply improved profitability. However low season still turned
1.6 +1sd:1.62x
losses and we remain wary of a large unsold fleet and high gearing,
1.4
Avg:1.33x which imply below-potential earnings until those items are resolved.
1.2

1.0 1sd:1.03x
0.8
2sd:0.74x
0.6

0.4
Feb-13 Feb-14 Feb-15 Feb-16 Feb-17

Page 18
Industry Focus
ASEAN Aviation

COMPANY GUIDES

Page 19
Page 19
Malaysia Company Guide
AirAsia
Version 7 | Bloomberg: AIRA MK | Reuters: AIRA.KL Refer to important disclosures at the end of this report

DBS Group Research . Equity 14 Dec 2016

BUY Ambitions refuelled


Last Traded Price ( 13 Dec 2016): RM2.51 (KLCI : 1,645.28)
Price Target 12-mth : RM3.25 (29% upside) (Prev RM3.25) Value emerging in market leader. AirAsia (AIRA) firmed up its
leading position in the Malaysian air travel space with 15.6%
revenue-passenger-kilometre (RPK) growth for 2016, on 86.5%
Potential Catalyst: Value-accretive disposals, associate profit growth
load factor. This alongside lower average jet fuel prices secures
Where we differ: Lower yield forecasts than consensus
strong FY16 profitability. We think the P/BV valuation at current
prices appear unjustified given decent expected of ROAEs of 12-
Analyst
Marvin KHOR +60 32604 3911 marvinkhor@alliancedbs.com 13% despite its aggressive growth plans. Potential catalysts may
come from its plan to unlock value via divestments, or further
improvements of associate performance.

Well equipped to defend market share. AirAsia (AIRA) has taken


Price Relative advantage of the restructuring of key competitor Malaysia
RM

3.7
Relative Index
Airlines (MAB) to expand its leading market share to c.32%
from c.27% in 2014. Going into 2017, AIRA is prepared to
207
3.2 187

expand capacity to absorb any pick-up in demand, with 7-8 new


167
2.7 147
127

aircraft deliveries from 77 currently. We think that it is in a


2.2
107
1.7 87

1.2
67
47 strong position to defend or grow its expanded market share
0.7
Dec-12 Dec-13 Dec-14 Dec-15
27
Dec-16 given its active branding and digitalisation efforts.
AirAsia (LHS) Relative KLCI (RHS)

Measures in place to manage margin pressure. AIRA has hedged


c.74% of its jet fuel requirements at USD60/bbl, plus currency
Forecasts and Valuation or natural hedges for c.67% of USD-denominated borrowings.
FY Dec (RM m) 2015A 2016F 2017F 2018F From the revenue perspective, yields (fares/RPK) are expected to
Revenue 6,299 6,589 6,880 7,383 pare down in light of steeper competition, which we account
EBITDA 1,487 2,696 2,314 2,398 for by imputing 3% yield contraction in FY17. That said, we are
Pre-tax Profit 215 1,848 1,019 1,059
reassured by the fact that MAB has a profitability priority going
Net Profit 541 1,819 975 1,025
Net Pft (Pre Ex.) 412 1,334 975 1,025 forward, implying fare competition should not reach the
Net Pft Gth (Pre-ex) (%) 56.0 224.2 (26.9) 5.1 mutually damaging levels seen in pre-2014.
EPS (sen) 19.4 54.4 29.2 30.7
EPS Pre Ex. (sen) 14.8 39.9 29.2 30.7 Valuation:
EPS Gth Pre Ex (%) 56 170 (27) 5 Reiterate BUY. Our TP of RM3.25 is based on 1.5x (historical
Diluted EPS (sen) 19.4 54.4 29.2 30.7 mean) FY16/17F P/BV; on book value adjusted for cumulative
Net DPS (sen) 4.00 8.72 6.10 6.33 unrecognised losses from associates.
BV Per Share (sen) 160 214 235 259
PE (X) 12.9 4.6 8.6 8.2
PE Pre Ex. (X) 17.0 6.3 8.6 8.2
Key Risks to Our View:
P/Cash Flow (X) 3.2 4.6 4.4 4.6 Severe yield or ringgit depreciation. If yields or the ringgit sees
EV/EBITDA (X) 11.6 6.0 7.4 6.4 severe sustained weakening, earnings and ROAE are at risk of
Net Div Yield (%) 1.6 3.5 2.4 2.5 erosion.
P/Book Value (X) 1.6 1.2 1.1 1.0
Net Debt/Equity (X) 2.3 1.1 1.1 0.8 At A Glance
ROAE (%) 12.0 31.3 13.0 12.4 Issued Capital (m shrs) 2,783
Earnings Rev (%): 0 0 0 Mkt. Cap (RMm/US$m) 6,985 / 1,577
Consensus EPS (sen): 45.8 39.0 39.3 Major Shareholders (%)
Other Broker Recs: B: 16 S: 2 H: 4 Tune Air 16.7
Tune Live 15.5
Source of all data on this page: Company, AllianceDBS, Bloomberg Employees Provident Fund 4.5
Finance L.P. Free Float (%) 75.4
3m Avg. Daily Val (US$m) 7.3
ICB Industry : Consumer Services / Travel & Leisure

ASIAN INSIGHTS VICKERS SECURITIES


Page 20
ed: CK / sa:BC, PY
Company Guide
AirAsia

ASK growth (%)


8.15 8
CRITICAL DATA POINTS TO WATCH 8.2
7
7.1

Earnings Drivers: 5.9

Returning to ASK growth. Airline capacity is measured via ASK 4.7 4.35
(available seat kilometres), which is a function of the active fleet 3.5
3.56

and flight distances of routes served. Malaysia AirAsia (MAA) is 2.4


shrinking its fleet to 77 by end-2016 from 80 in 2015, but is
1.2
looking at resuming growth by up to 7/8 new aircraft in FY17 as
0.0
strong volumes had driven up load factors. However, we expect 2014A 2015A 2016F 2017F 2018F
ASK to dive 8% in FY17. Nevertheless, efficiency improvements
like reducing time of grounded aircraft may also help boost Load Factor (%)
overall ASK. 87.7 86 84 84
78.8 80.2

Load factors to ease after peaking in FY16. Load factors 70.2

determine the ASK that is converted into RPKs (revenue


52.6
passenger kilometres). AIRAs passenger load factor averaged
80.2% in 2015 (+1.4ppts) as Malaysia Airlines (MAB) capacity 35.1

cuts helped to rebalance supply and demand. We forecast an


17.5
improved 86% load factor for FY16 (86.6% for 9M16) as
supply-demand dynamics remain friendly, and easing to 84% 0.0
from FY17F onwards as MAB replenishes some capacity. 2014A 2015A 2016F 2017F 2018F

Fare / RPK (sen)


Expect yields to ease. Passenger yields (fare/RPK) were 5.1%
13.4
lower in 2015 due to the spillover effect of the stiff 13.71 12.8 12.6 12.2 12.6
competition, plus phasing out of the fuel surcharge in fares. 10.97
Despite MAB carrying out rationalisation, we view that yields
are not still due for an upcycle in 2016, having declined 1.1% in 8.23

9M16. Moving into FY17, resumption of MABs capacity growth


5.48
may mean more fare competition, thus easing yields further.
2.74
Forecast flattish ancillary income. AIRA has in the pipeline
several initiatives to boost ancillary income (onboard WIFI, 0.00
2014A 2015A 2016F 2017F 2018F
enhanced duty-free operation, new purchasing system, etc.).
However, we conservatively assume flat growth in our forecast Ancillary income / pax (RM)
years to account for a slower pick-up in the more novel 44.2 43.2 43.1 43.8 43.8 43.8
offerings, and the prevalence of value-sensitive passengers.
35.4

Cheaper fuel leads cost savings. AIRAs key expenses can be 26.5
split into cash opex, asset costs and fuel costs. We expect
cost/ASK to drop by 6% in FY16F (c.2% fall charted in 9M16), 17.7

led by fuel cost/ASK falling 26%. Going into FY17F we expect a


8.8
weaker ringgit to drive up costs/ASK by 7%, plus slightly higher
fuel costs of USD60/bbl of which AIRA has hedged 74% of 0.0

requirements. Our spot jet fuel assumptions are 2014A 2015A 2016F 2017F 2018F

US$50/60/65/bbl in FY16/17/18F.
Cost / ASK (sen)
Keeping a tab on regional associates. AIRA maintains a strong 14.0
13.8
13.2 13.4 13.8
12.5
regional presence with its associates in Thailand, Indonesia, the
11.2
Philippines, India and Japan. While the group gains from the
extended network and brand image, challenging operating 8.4
conditions have led to losses in a few associates. Of its
associates, we are most positive on Thai AirAsia (TAA) (listed on 5.6

the Stock Exchange of Thailand), and expect it to be the key 2.8


contributor to associate income.
0.0
2014A 2015A 2016F 2017F 2018F

Source: Company, AllianceDBS

ASIAN INSIGHTS VICKERS SECURITIES


Page 2 Page 21
Company Guide
AirAsia

Leverage & Asset Turnover (x)


Balance Sheet: 0.4

Expect gearing to improve. We expect AIRAs net gearing to 2.50


0.4
0.4
ease from 1.5x at end-Sep16 to 1.1x FY16/17F, given improved 0.3
2.00
profits and aided by the c.RM1bn injection from major 0.3

shareholders via a new share issuance. Any further divestments 1.50 0.3

may serve to bring net gearing down further if proceeds are 1.00
0.3
0.3
used to pare down debts. 0.2
0.50
0.2
0.00 0.2
Share Price Drivers: 2014A 2015A 2016F 2017F 2018F
Continued profitability for the group. AIRA had notched losses Gross Debt to Equity (LHS) Asset Turnover (RHS)

in previous FYs due to forex translation items and losses from


Capital Expenditure
associates. As associate performance stabilises, and the group RMm
demonstrates profitability even against expected higher 3,000.0

competition, we expect valuations to catch-up to mean. 2,500.0

2,000.0

Value-accretive disposals and spin-offs. AIRA is mulling 1,500.0

unlocking value by potentially 1) divesting its leasing arm, 2) 1,000.0


conducting IPOs for IAA, PAA, and flight school AACE, and/or 500.0
3) entering JVs for its ground handling and cargo units.
0.0
Favourable valuations by counterparties may prove accretive to 2014A 2015A 2016F 2017F 2018F

the group, potentially in the form of cash proceeds to pare Capital Expenditure (-)

down borrowings or pay out in the form of dividends. ROE (%)


30.0%
Key Risks:
25.0%
Further depreciation of the MYR against the USD. A stronger
USD will pressure AIRAs profitability as a significant portion of 20.0%

its operating and financing costs are in USD. 15.0%

10.0%
Irrational competition. The emergence of irrational competition
in the form of excessive capacity increases by AIRAs 5.0%

competitors or new entrants pose threats to both yields and 0.0%


2014A 2015A 2016F 2017F 2018F
load factors. Besides the natural dilution of demand, the airline
players would also drive down fares to recapture passengers. Forward PE Band (x)
(x)
Company Background 29.2 +2sd:29.8x

AirAsia (AIRA) is a low-cost airline that operates short-haul, 24.2


point-to point domestic and international route operating out +1sd:22.1x
19.2
of its hub in klia2, Malaysia. The group also has similarly-
14.2 Avg:14.4x
branded associates in Thailand, Indonesia, the Philippines,
Japan and India, forming a network for its airlines to leverage 9.2
1sd:6.8x
on for passenger connectivity. 4.2

-0.8
Dec-12 Dec-13 Dec-14 Dec-15 Dec-16

PB Band (x)
2.2
(x)

2.0
+2sd:1.94x
1.8

1.6 +1sd:1.64x
1.4
Avg:1.35x
1.2

1.0 1sd:1.05x

0.8
2sd:0.76x
0.6

0.4
Dec-12 Dec-13 Dec-14 Dec-15 Dec-16

Source: Company, AllianceDBS

ASIAN INSIGHTS VICKERS SECURITIES


Page 22 Page 3
Company Guide
AirAsia

Key Assumptions
FY Dec 2014A 2015A 2016F 2017F 2018F
ASK growth (%) 3.56 8.15 7.00 8.00 4.35
Load Factor (%) 78.9 80.2 86.0 84.0 84.0
Fare / RPK (sen) 13.4 12.8 12.6 12.2 12.6
Ancillary income / pax (RM) 43.2 43.1 43.8 43.8 43.8
Cost / ASK (sen) 13.8 13.2 12.5 13.4 13.8

Segmental Breakdown
FY Dec 2014A 2015A 2016F 2017F 2018F
Revenues (RMm)
MAA - Airline Operations 4,623 4,874 5,532 5,698 6,085
MAA - Aircraft leasing 793 1,425 1,057 1,182 1,299
Associates and JV 0.0 0.0 0.0 0.0 0.0
Total 5,416 6,299 6,589 6,880 7,383
Core PBT (RMm)
MAA - Airline Operations 262 386 1,077 640 559
MAA - Aircraft leasing 152 709 230 243 341
Associates and JV 27.6 (800) 149 136 158
Total 441 296 1,457 1,019 1,059
Core PBT Margins (%)
MAA - Airline Operations 5.7 7.9 19.5 11.2 9.2
MAA - Aircraft leasing 19.2 49.8 21.8 20.6 26.3
Associates and JV N/A N/A N/A N/A N/A
Total 8.2 4.7 22.1 14.8 14.3

Income Statement (RMm)


FY Dec 2014A 2015A 2016F 2017F 2018F
Revenue 5,416 6,299 6,589 6,880 7,383
Other Opng (Exp)/Inc (4,590) (4,716) (4,799) (5,584) (6,028)
Operating Profit 826 1,583 1,790 1,296 1,355
Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0
Associates & JV Inc 27.6 (800) 149 136 158
Net Interest (Exp)/Inc (412) (488) (482) (413) (454)
Exceptional Gain/(Loss) (419) (80.6) 391 0.0 0.0
Pre-tax Profit 22.7 215 1,848 1,019 1,059
Tax 60.1 326 (29.2) (43.8) (33.8)
Minority Interest 0.0 0.09 0.0 0.0 0.0
Preference Dividend 0.0 0.0 0.0 0.0 0.0
Net Profit 82.8 541 1,819 975 1,025
Net Profit before Except. 264 412 1,334 975 1,025
EBITDA 1,573 1,487 2,696 2,314 2,398
Growth
Revenue Gth (%) 5.9 16.3 4.6 4.4 7.3
EBITDA Gth (%) 3.8 (5.5) 81.3 (14.2) 3.6
Opg Profit Gth (%) (4.3) 91.7 13.0 (27.6) 4.6
Net Profit Gth (Pre-ex) (%) (41.6) 56.0 224.2 (26.9) 5.1
Margins & Ratio
Opg Profit Margin (%) 15.3 25.1 27.2 18.8 18.4
Net Profit Margin (%) 1.5 8.6 27.6 14.2 13.9
ROAE (%) 1.7 12.0 31.3 13.0 12.4
ROA (%) 0.4 2.6 8.2 4.1 4.2
ROCE (%) 4.7 8.5 8.9 5.8 6.0
Div Payout Ratio (%) 100.8 20.6 16.0 20.9 20.7
Net Interest Cover (x) 2.0 3.2 3.7 3.1 3.0
Source: Company, AllianceDBS

ASIAN INSIGHTS VICKERS SECURITIES


Page 4 Page 23
Company Guide
AirAsia

Quarterly / Interim Income Statement (RMm)


FY Dec 3Q2015 4Q2015 1Q2016 2Q2016 3Q2016

Revenue 1,516 2,168 1,699 1,624 1,687


Other Oper. (Exp)/Inc (1,200) (1,367) (1,178) (1,209) (1,242)
Operating Profit 316 801 521 415 445
Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0
Associates & JV Inc (156) (225) 219 11.4 35.9
Net Interest (Exp)/Inc (150) (106) (111) (138) (88.9)
Exceptional Gain/(Loss) (472) (34.5) 464 (33.9) 81.5
Pre-tax Profit (462) 435 1,093 254 474
Tax 56.0 120 (216) 88.1 (121)
Minority Interest 0.0 (0.1) 0.85 0.24 1.43
Net Profit (406) 554 878 342 354
Net profit bef Except. 115 244 381 214 328
EBITDA 329 759 919 608 674

Growth
Revenue Gth (%) 14.4 43.0 (21.6) (4.5) 3.9
EBITDA Gth (%) (19.6) 130.8 21.0 (33.9) 11.0
Opg Profit Gth (%) 37.1 153.4 (34.9) (20.4) 7.4
Net Profit Gth (Pre-ex) (%) nm 112.5 55.9 (43.9) 53.3
Margins
Opg Profit Margins (%) 20.8 36.9 30.7 25.5 26.4
Net Profit Margins (%) (26.8) 25.6 51.7 21.1 21.0

Balance Sheet (RMm)


FY Dec 2014A 2015A 2016F 2017F 2018F

Net Fixed Assets 13,034 11,593 11,102 12,859 11,912


Invts in Associates & JVs 422 1,185 1,334 1,470 1,628
Other LT Assets 4,675 4,690 4,690 4,690 4,690
Cash & ST Invts 1,338 2,431 4,562 3,524 5,205
Inventory 304 458 458 458 458
Debtors 891 923 1,083 1,131 1,214
Other Current Assets 0.0 0.0 0.0 0.0 0.0
Total Assets 20,664 21,279 23,228 24,132 25,106

ST Debt 2,275 2,432 2,432 2,432 2,432


Creditor 853 1,624 1,231 1,427 1,539
Other Current Liab 984 1,123 1,092 1,116 1,157
LT Debt 10,453 10,185 9,845 9,845 9,845
Other LT Liabilities 1,544 1,467 1,467 1,467 1,467
Shareholders Equity 4,555 4,447 7,161 7,845 8,666
Minority Interests 0.0 0.0 0.0 0.0 0.0
Total Cap. & Liab. 20,664 21,279 23,228 24,132 25,106

Non-Cash Wkg. Capital (642) (1,367) (782) (954) (1,024)


Net Cash/(Debt) (11,390) (10,185) (7,715) (8,752) (7,072)
Debtors Turn (avg days) 80.9 52.5 55.6 58.7 58.0
Creditors Turn (avg days) (409.3) (642.8) (688.5) (550.3) (611.8)
Inventory Turn (avg days) (85.5) (197.9) (220.9) (189.6) (188.9)
Asset Turnover (x) 0.3 0.3 0.3 0.3 0.3
Current Ratio (x) 0.6 0.7 1.3 1.0 1.3
Quick Ratio (x) 0.5 0.6 1.2 0.9 1.3
Net Debt/Equity (X) 2.5 2.3 1.1 1.1 0.8
Net Debt/Equity ex MI (X) 2.5 2.3 1.1 1.1 0.8
Capex to Debt (%) 14.3 (7.0) 2.2 21.5 (0.5)
Z-Score (X) 0.8 0.8 1.2 1.2 1.3
Source: Company, AllianceDBS

ASIAN INSIGHTS VICKERS SECURITIES


Page 24 Page 5
Company Guide
AirAsia

Cash Flow Statement (RMm)


FY Dec 2014A 2015A 2016F 2017F 2018F

Pre-Tax Profit 22.7 215 1,848 1,019 1,059


Dep. & Amort. 720 703 757 882 885
Tax Paid (15.2) (31.0) (29.2) (43.8) (33.8)
Assoc. & JV Inc/(loss) (27.6) 800 (149) (136) (158)
Chg in Wkg.Cap. (871) (138) (585) 172 70.6
Other Operating CF 511 567 0.0 0.0 0.0
Net Operating CF 302 2,191 1,842 1,893 1,822
Capital Exp.(net) (1,823) 888 (266) (2,639) 61.9
Other Invts.(net) 49.3 (53.8) 0.0 0.0 0.0
Invts in Assoc. & JV (381) 258 0.0 0.0 0.0
Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0
Other Investing CF 0.0 71.4 0.0 0.0 0.0
Net Investing CF (2,154) 1,164 (266) (2,639) 61.9
Div Paid (111) (83.5) (111) (291) (204)
Chg in Gross Debt 1,888 (2,456) (340) 0.0 0.0
Capital Issues 2.06 0.0 1,006 0.0 0.0
Other Financing CF 0.0 (11.9) 0.0 0.0 0.0
Net Financing CF 1,779 (2,551) 555 (291) (204)
Currency Adjustments 30.4 290 0.0 0.0 0.0
Chg in Cash (42.6) 1,093 2,131 (1,037) 1,680
Opg CFPS (sen) 42.2 83.7 72.6 51.5 52.4
Free CFPS (sen) (54.6) 111 47.1 (22.3) 56.4
Source: Company, AllianceDBS

Target Price & Ratings History

RM
3.20 12- mt h
6 7 Dat e of Closing
S.No. T arget Rat ing
Report Pric e
8 Pric e
1: 29 F eb 16 1.47 1.90 BUY
2.70 2: 04 Apr 16 1.93 2.20 BUY
9 3: 06 Apr 16 1.90 2.20 BUY
4: 10 May 16 2.05 2.20 BUY
5: 27 May 16 2.40 2.70 BUY
2.20 4 5
2 6: 01 Aug 16 3.00 2.70 BUY
7: 30 Aug 16 3.00 3.20 HOLD
8: 01 Nov 16 2.84 3.20 HOLD
1.70 3
9: 25 Nov 16 2.71 3.25 BUY

1
1.20
Dec-15 Apr-16 Aug-16 Dec-16

Not e : Share price and Target price are adjusted for corporate actions.

Source: AllianceDBS
Analyst: Marvin KHOR

ASIAN INSIGHTS VICKERS SECURITIES


Page 6 Page 25
Thailand Company Guide
Asia Aviation
Version 7 | Bloomberg: AAV TB | Reuters: AAV.BK Refer to important disclosures at the end of this report

DBS Group Research . Equity 7 Feb 2017

BUY Well positioned to compete


Last Traded Price ( 6 Feb 2017): Bt6.20 (SET : 1,589.13) Coming out strong from 2016. Asia Aviation (AAV) is on track for
Price Target 12-mth: Bt7.60 (23% upside) (Prev Bt8.20) a strong earnings year as 55%-owned Thai AirAsia (TAA) clocked
Potential Catalyst: Positive yield or volume growth surprise
in outperforming revenue-passenger-kilometre (RPK) growth of
Where we differ: More conservative margins than consensus 16% in 2016, on 83.8% load factor (+1.7ppts). This should
Analyst cement its leading domestic market share of near 30%. While
Marvin KHOR +60 32604 3911 marvinkhor@alliancedbs.com 2017 brings cost headwinds primarily relating to fuel, higher fares
Paul YONG CFA +65 6682 3712 paulyong@dbs.com will soften the earnings impact and we think TAAs market
positioning will support its volume ambitions. We also reiterate
Whats New that AAV holds implicit value from the TAA stake, given the
FY16F earnings supported by 16% RPK growth longer-term ambitions of the AirAsia group to consolidate its
Expect cost escalation from hiked fuel excise, but regional airlines. Maintain BUY with a lower TP of Bt7.60, based
on 1.6x P/BV.
fare increases are set to help mitigate impact
Leading market share to drive FY17 volume Equipped for rising-price environment. The excise tax increase on
growth, but cut FY17/18F earnings by 14%/8% for jet fuel for domestic flights (up to 23% of value, from 1%) will
higher cost/ASK offset by higher yields exacerbate already-expected unit cost hikes, as spot prices have
Upside remains on reduced TP of Bt7.60 on more exceeded US$60/bbl from 2016s average of US$53/bbl. TAA and
conservative P/BV multiple, maintain BUY other local carriers have implemented a Bt150 fare hike to offset
this. As higher ticket prices may induce more selective consumer
behaviour, we think AAV has an edge in keeping volume given its
Price Relative leadership in market position and costing.

Focus on international growth. TAAs capacity expansion is


focused on the India and CLMV markets, given a more saturated
domestic airspace. It plans to add six aircraft (reaching 57) to
support its 2017 target of 19.5m passenger carriage (+13%), with
a load factor of 84%. Our estimates employ a more conservative
83% load factor and 19m passengers (+11%).
Forecasts and Valuation
FY Dec (Bt m) 2015A 2016F 2017F 2018F Valuation:
Revenue 29,507 33,374 38,491 43,067
Reiterate BUY. Our revised TP of Bt7.60 is based on 1.6x FY17F
EBITDA 3,898 6,092 6,093 6,660 P/BV (+1.5SD of mean), lowered from 1.7x before. While airlines
Pre-tax Profit 2,109 4,325 4,116 4,400 generally see profitability being eroded by higher expenses, we
Net Profit 1,078 2,212 2,105 2,250 think AAV should command a premium to peers with its domestic
Net Pft (Pre Ex.) 1,274 2,322 2,215 2,360 market share dominance.
Net Pft Gth (Pre-ex) (%) 862.6 82.3 (4.6) 6.6
EPS (Bt) 0.22 0.46 0.43 0.46
EPS Pre Ex. (Bt) 0.26 0.48 0.46 0.49 Key Risks to Our View:
EPS Gth Pre Ex (%) 863 82 (5) 7 Higher jet fuel prices. Even with hedges in place, AAV (and
Diluted EPS (Bt) 0.22 0.46 0.43 0.46 other domestic-serving Thai airlines) is now more sensitive to
Net DPS (Bt) 0.10 0.15 0.15 0.17 higher fuel prices given the higher %-based excise taxes on
BV Per Share (Bt) 4.15 4.46 4.74 5.03 fuel for local flights.
PE (X) 27.9 13.6 14.3 13.4
PE Pre Ex. (X) 23.6 12.9 13.6 12.7
P/Cash Flow (X) 10.0 4.7 4.7 4.4 At A Glance
EV/EBITDA (X) 11.4 6.7 7.3 6.5 Issued Capital (m shrs) 4,850
Net Div Yield (%) 1.6 2.4 2.4 2.8 Mkt. Cap (Btm/US$m) 30,070 / 859
P/Book Value (X) 1.5 1.4 1.3 1.2 Major Shareholders (%)
Srivaddhanaprabha Family 39.3
Net Debt/Equity (X) 0.2 0.0 0.1 CASH
Bijleveld Family 5.0
ROAE (%) 6.4 11.1 9.9 10.0
Free Float (%) 45.4
Earnings Rev (%): 0 (14) (8) 3m Avg. Daily Val (US$m) 7.1
Consensus EPS (Bt): 0.46 0.50 0.52 ICB Industry : Consumer Services / Travel & Leisure
Other Broker Recs: B: 12 S: 3 H: 7
Source of all data on this page: Company, AllianceDBS, Bloomberg Finance L.P

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Page 26
ed: CK / sa:CS, PY
Company Guide
Asia Aviation

ASK growth (%)

CRITICAL DATA POINTS TO WATCH

Earnings Drivers:
Adding five to six aircraft annually. Airline capacity is measured
via ASK (available seat kilometres), which is a function of the
active fleet and the flight distances of routes served. Thai
AirAsia (TAA) grew its fleet by six aircraft in 2016 to reach 51
planes including two A320neos which have better fuel
efficiency. Six more are to be added in 2017 and five p.a. going
Load Factor (%)
forward. Premised on this, we expect TAA to grow ASK by
11%/10% in FY17/18F, with current focus on destinations in
India and CLMV.

Conservative load factor expectations. Load factors determine


the ASK that is converted into RPKs (revenue passenger
kilometres). TAA saw its load factor expand 1.7ppts in 2016 to
83.8% supported by tourist growth and service quality issues in
key LCC competitors. We forecast a mild tapering to 83% in
FY17/18F as the tourist growth pares to a steadier pace,
contrasted to its capacity expansion.
Fare / RPK (sen)

Yields boosted by passing on fuel excise hike. Passenger yields


(fare/RPK) are expected to fall in FY16 largely due to
competition and desire to spur volume. While competition
remains rife in 2017, the steep jet fuel excise hike led to carriers
hiking domestic flight fares by Bt150 c.9% of previous
average fare/passenger, potentially a higher % of some
domestic routes. As such, we expect average yields to make a u-
turn in FY17/18F with +5.5%/+1.7% growth to pass on the
additional costs.
Ancillary income / pax (THB)
Mild ancillary income/pax outlook. Like other members of the
AirAsia group, TAA focuses on growing ancillary income with
offerings like value pack bundling, dynamic baggage pricing
and Fly Thru connectivity. However, we conservatively assume
mild near-term growth of 1%in FY17/18F to account for a
slower pick-up in the newer offerings, and prevalence of value-
sensitive passengers.

Unit costs jumping from fuel-related factors. We expect fuel


cost/ASK to rise 22% in FY17F, making a u-turn from an
expected 29% fall in FY16F. This is partly contributed by spot jet Cost / ASK (THB)
fuel edging above US$60/bbl, after averaging US$53/bbl in
2016; though driven largely by the hiked jet fuel excise tax on
domestic flights. We forecast this to push overall cost/ASK up
6% FY17F, taking into account AAVs hedging up to 74% of its
2017 requirements at c.US$60/bbl. Our spot jet fuel
assumptions are US$60/65/bbl in FY17/18F.

Source: Company, AllianceDBS

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Page 2 Page 27
Company Guide
Asia Aviation

Leverage & Asset Turnover (x)


Balance Sheet:
Finding the right balance in financing aircraft. TAA ended 2016
with 14 aircraft under finance lease (i.e. on balance sheet), and
37 on operating leases. Going forward, it plans receive a
majority of its six planes in 2017 under finance leases given its
low gearing position. Thus, we expect a mild rise in AAVs net
gearing position from 0.1x in FY16F to 0.2x in FY17F,
potentially easing thereafter, depending on the number of
finance leases.

Share Price Drivers:


Capital Expenditure
Travel and tourism growth. As the largest domestic LCC carrier
with a wide international connectivity thanks to the AirAsia
group connection, TAAs earnings will be impacted by growth
in both Thailands internal air traffic and its inbound tourist
arrivals. Positivity from those indicators, and TAAs own route
expansion and development, can help drive earnings growth
and share price re-rating.

Key Risks:
Price competition. The emergence of strong price competition ROE (%)
by airline competitors is a threat to both yields and earnings, as
TAA would have to compete to maintain market share.

Fuel price upswing. Our forecasts and call are based on


moderate low oil/fuel prices. A sudden rise will impact earnings
and may exacerbate associate-related risks.

Stronger USD. The stronger USD against the THB and other
regional currencies (i.e. MYR, SGD, IDR, RMB, JPY) will hurt
AAV. The bulk of TAAs revenues are in regional currencies,
while 66%/50% of opex/finance costs are in USD. Forward PE Band (x)

Company Background
AAV owns a 55% stake in TAA, the Thai-based sister company
of AirAsia which owns the remaining 45%. TAA operates a
low-cost, short-haul model out of five hubs in Thailand Don
Mueng Airport (Bangkok), Phuket International Airport
(Phuket), Chiang Mai International Airport (Chiang Mai), Krabi
International Airport (Krabi) and U-Tapao Rayong-Pattaya
International Airport (Rayong).

PB Band (x)

Source: Company, AllianceDBS

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Company Guide
Asia Aviation

Key Assumptions
FY Dec 2014A 2015A 2016F 2017F 2018F
ASK growth (%) 19.1 17.5 13.9 11.3 10.2
Load Factor (%) 80.6 82.1 83.8 83.0 83.0
Fare / RPK (sen) 1.56 1.63 1.57 1.65 1.68
Ancillary income / pax 493 359 364 366 370
Cost / ASK (THB) 1.66 1.53 1.42 1.51 1.54

Income Statement (Btm)


FY Dec 2014A 2015A 2016F 2017F 2018F
Revenue 25,356 29,507 33,374 38,491 43,067
Cost of Goods Sold (23,708) (25,315) (26,530) (31,525) (35,471)
Gross Profit 1,648 4,192 6,844 6,966 7,596
Other Opng (Exp)/Inc (1,131) (1,421) (1,985) (2,317) (2,663)
Operating Profit 517 2,771 4,859 4,649 4,933
Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0
Associates & JV Inc 0.0 0.0 0.0 0.0 0.0
Net Interest (Exp)/Inc (313) (457) (533) (533) (533)
Exceptional Gain/(Loss) 126 (205) 0.0 0.0 0.0
Pre-tax Profit 330 2,109 4,325 4,116 4,400
Tax 1.28 (151) (303) (288) (308)
Minority Interest (148) (880) (1,810) (1,722) (1,841)
Preference Dividend 0.0 0.0 0.0 0.0 0.0
Net Profit 183 1,078 2,212 2,105 2,250
Net Profit before Except. 132 1,274 2,322 2,215 2,360
EBITDA 1,340 3,898 6,092 6,093 6,660
Growth
Revenue Gth (%) 8.0 16.4 13.1 15.3 11.9
EBITDA Gth (%) (53.4) 190.8 56.3 0.0 9.3
Opg Profit Gth (%) (79.1) 436.3 75.3 (4.3) 6.1
Net Profit Gth (Pre-ex) (%) (87.4) 862.6 82.3 (4.6) 6.6
Margins & Ratio
Gross Margins (%) 6.5 14.2 20.5 18.1 17.6
Opg Profit Margin (%) 2.0 9.4 14.6 12.1 11.5
Net Profit Margin (%) 0.7 3.7 6.6 5.5 5.2
ROAE (%) 0.7 6.4 11.1 9.9 10.0
ROA (%) 0.3 2.5 4.2 3.7 3.7
ROCE (%) 1.3 5.8 9.5 8.5 8.5
Div Payout Ratio (%) 0.0 45.0 32.9 34.6 37.6
Net Interest Cover (x) 1.7 6.1 9.1 8.7 9.2
Source: Company, AllianceDBS

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Page 4 Page 29
Company Guide
Asia Aviation

Quarterly / Interim Income Statement (Btm)


FY Dec 3Q2015 4Q2015 1Q2016 2Q2016 3Q2016

Revenue 7,254 7,634 8,952 7,756 8,145


Cost of Goods Sold (6,354) (6,764) (6,467) (6,556) (6,944)
Gross Profit 900 870 2,485 1,200 1,201
Other Oper. (Exp)/Inc (391) (341) (433) (429) (496)
Operating Profit 510 529 2,052 771 705
Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0
Associates & JV Inc 0.0 0.0 0.0 0.0 0.0
Net Interest (Exp)/Inc (88.2) (117) (127) (109) (160)
Exceptional Gain/(Loss) (231) 95.6 (2.4) 28.3 39.3
Pre-tax Profit 190 507 1,923 690 584
Tax (21.4) (10.0) (90.3) 76.2 139
Minority Interest (76.6) (223) (824) (344) (326)
Net Profit 91.9 274 1,009 423 397
Net profit bef Except. 231 227 1,010 365 299
EBITDA 788 822 2,338 1,059 1,001

Growth
Revenue Gth (%) 5.4 5.2 17.3 (13.4) 5.0
EBITDA Gth (%) (3.2) 4.4 184.4 (54.7) (5.5)
Opg Profit Gth (%) (4.3) 3.9 287.8 (62.4) (8.5)
Net Profit Gth (Pre-ex) (%) 7.3 (1.7) 345.1 (63.9) (18.1)
Margins
Gross Margins (%) 12.4 11.4 27.8 15.5 14.8
Opg Profit Margins (%) 7.0 6.9 22.9 9.9 8.7
Net Profit Margins (%) 1.3 3.6 11.3 5.4 4.9

Balance Sheet (Btm)


FY Dec 2014A 2015A 2016F 2017F 2018F

Net Fixed Assets 16,033 18,216 17,287 23,248 24,665


Invts in Associates & JVs 0.0 0.0 0.0 0.0 0.0
Other LT Assets 25,976 25,781 25,777 25,772 25,767
Cash & ST Invts 6,298 7,591 13,019 11,355 14,196
Inventory 96.9 94.0 94.0 94.0 94.0
Debtors 1,057 1,081 1,280 1,476 1,652
Other Current Assets 40.3 63.3 63.3 63.3 63.3
Total Assets 49,502 52,827 57,520 62,009 66,438

ST Debt 959 1,261 1,261 1,261 1,261


Creditor 2,212 2,965 2,907 3,455 3,887
Other Current Liab 4,693 4,070 5,526 6,367 7,119
LT Debt 11,118 12,775 12,775 12,775 12,775
Other LT Liabilities 3,503 3,671 3,671 3,671 3,671
Shareholders Equity 19,534 20,142 21,627 23,005 24,409
Minority Interests 7,482 7,941 9,751 11,473 13,315
Total Cap. & Liab. 49,502 52,827 57,520 62,009 66,438

Non-Cash Wkg. Capital (5,712) (5,797) (6,996) (8,188) (9,198)


Net Cash/(Debt) (5,779) (6,446) (1,018) (2,682) 159
Debtors Turn (avg days) 16.5 13.2 12.9 13.1 13.3
Creditors Turn (avg days) 35.0 39.1 42.4 38.6 39.7
Inventory Turn (avg days) 1.5 1.4 1.4 1.1 1.0
Asset Turnover (x) 0.5 0.6 0.6 0.6 0.7
Current Ratio (x) 1.0 1.1 1.5 1.2 1.3
Quick Ratio (x) 0.9 1.0 1.5 1.2 1.3
Net Debt/Equity (X) 0.2 0.2 0.0 0.1 CASH
Net Debt/Equity ex MI (X) 0.3 0.3 0.0 0.1 CASH
Capex to Debt (%) 10.5 5.8 2.1 52.7 22.4
Z-Score (X) 1.9 2.0 2.1 2.1 2.1
Source: Company, AllianceDBS

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Page 30 Page 5
Company Guide
Asia Aviation

Cash Flow Statement (Btm)


FY Dec 2014A 2015A 2016F 2017F 2018F

Pre-Tax Profit 330 2,109 4,325 4,116 4,400


Dep. & Amort. 824 1,127 1,234 1,444 1,727
Tax Paid (121) (6.6) (303) (288) (308)
Assoc. & JV Inc/(loss) 0.0 0.0 0.0 0.0 0.0
Chg in Wkg.Cap. 444 (1,738) 1,199 1,192 1,009
Other Operating CF 373 1,514 0.0 0.0 0.0
Net Operating CF 1,849 3,007 6,455 6,464 6,828
Capital Exp.(net) (1,270) (818) (300) (7,400) (3,140)
Other Invts.(net) 3,120 1,719 0.0 0.0 0.0
Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0
Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0
Other Investing CF 175 (17.7) 0.0 0.0 0.0
Net Investing CF 2,025 883 (300) (7,400) (3,140)
Div Paid 0.0 (483) (728) (728) (847)
Chg in Gross Debt (704) (1,059) 0.0 0.0 0.0
Capital Issues 0.0 0.0 0.0 0.0 0.0
Other Financing CF (326) (987) 0.0 0.0 0.0
Net Financing CF (1,031) (2,529) (728) (728) (847)
Currency Adjustments (13.1) (27.3) 0.0 0.0 0.0
Chg in Cash 2,830 1,334 5,428 (1,664) 2,841
Opg CFPS (Bt) 0.29 0.98 1.08 1.09 1.20
Free CFPS (Bt) 0.12 0.45 1.27 (0.2) 0.76
Source: Company, AllianceDBS

Target Price & Ratings History

Source: AllianceDBS
Analyst: Marvin KHOR
Paul YONG CFA
THAI-CAC Declared
Corporate Governance CG Rating 2016

THAI-CAC is Companies participating in Thailand's Private Sector Score Description


Collective Action Coalition Against Corruption programme (Thai Declared Companies that have declared their intention to join CAC
CAC) under Thai Institute of Directors (as of October 28, 2016) are Certified Companies certified by CAC.
categorised into:

Corporate Governance CG Rating is based on Thai Institute of Score Range Number of Logo Description
Directors (IOD)s annual assessment of corporate governance 90-100 Excellent
practices of listed companies. The assessment covers 235 criteria 80-89 Very Good
in five categories including board responsibilities (35% weighting), 70-79 Good
disclosure and transparency (20%), role of stakeholders (20%),
equitable treatment of shareholders (10%) and rights of 60-69 Satisfactory
shareholders (15%). The IOD then assigns numbers of logos to 50-59 Pass
each company based on their scoring as follows: <50 No logo given N/A

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Page 6 Page 31
Thailand Company Guide
Airports of Thailand
Version 5 | Bloomberg: AOT TB | Reuters: AOT.BK Refer to important disclosures at the end of this report

DBS Group Research . Equity 10 Feb 2017

BUY Best proxy for Thailands tourism recovery


Last Traded Price ( 9 Feb 2017): Bt40.25 (SET : 1,583.25)
Price Target 12-mth: Bt45.50 (13% upside) Reiterate BUY. The rebound of international tourist arrivals to
Potential Catalyst: Recovery of international tourist arrivals to Thailand, Thailand and strong demand of domestic travelling should
increasing liquidity from par-value split support the share price. Additionally, the par-value split would
increase trading liquidity.
Analyst Expect 1QFY17F core earnings to still grow. Despite the
Namida ARTISPONG +66 2657 7833 namidaa@th.dbsvickers.com
mourning period and the crackdown on zero-dollar tours, we
Whats New expect AOT to still deliver core earnings growth in 1QFY17F
Expect 1QFY17F core earnings to rise 3% y-o-y (Oct-Dec), though not as robust as before. We estimate
despite mourning period and fewer Chinese 1QFY17F total revenue to rise by 7.9% y-o-y to Bt12.8bn, but
tourists core earnings should increase at a slower pace by 3.2% y-o-y
to Bt4.8bn due to narrower operating margins from the slow
Core earnings growth to accelerate and hit a new growth in international passengers. Note that we expect AOT
record-high in 2QFY17F to book FX gains in the quarter from the weakening of JPY
Extended governments policy in cutting visa fee against THB (most of AOTs loans are in JPY). Total passengers
will surely boost international tourist arrivals through its six airports in 1QFY17F are expected to rise by
6.1% y-o-y, mainly driven by domestic volume growth of
TP of Bt45.50, reflecting the par-value split 11.1%. International passenger traffic only grew by 2.2% y-o-
y as the number of Chinese tourists dropped.
Government policy on visa fee to boost international arrivals.
Price Relative We expect core earnings growth to accelerate and hit a new
record high in 2QFY17F, thanks to the governments stimulus
measure in cutting visa fees on arrival temporarily and waiver of
visa fees at Thai embassies for 19 nations. There were signs of a
foreign tourist rebound, with AOT reporting a 3.8% y-o-y
increase in international passengers through its airports in Dec
2016 and the number continued to grow in Jan 2017 (+7.1%)
and 1-4 Feb 2017 (+13.7%). Recently, the government has
Forecasts and Valuation extended this visa fee policy to be implemented by another six
FY Sep (Bt m) 2015A 2016A 2017F 2018F months till 31 Aug 2017. We believe this will surely boost
Revenue 43,969 50,962 55,373 61,194 international arrivals to Thailand and AOT would be a key
EBITDA 26,880 31,024 33,731 37,044 beneficiary.
Pre-tax Profit 23,335 24,424 28,089 30,834
Net Profit 18,729 19,571 22,536 24,740
Net Pft (Pre Ex.) 15,755 19,482 22,536 24,740 Valuation:
Net Pft Gth (Pre-ex) (%) 31.0 23.7 15.7 9.8 The split of par value from Bt10 to Bt1 gives a new TP of
EPS (Bt) 13.1 13.7 15.8 17.3 Bt45.50 vs Bt455.0 previously. Our TP is based on DCF
EPS Pre Ex. (Bt) 11.0 13.6 15.8 17.3
EPS Gth Pre Ex (%) 31 24 16 10
valuation (10.4% WACC, 3% terminal growth).
Diluted EPS (Bt) 13.1 13.7 15.8 17.3
Net DPS (Bt) 5.00 5.00 5.00 6.00 Key Risks to Our View:
BV Per Share (Bt) 76.0 84.9 95.7 108 The key risk is a slowdown in Thailands tourism industry which
PE (X) 3.1 2.9 2.6 2.3
PE Pre Ex. (X) 3.6 3.0 2.6 2.3
can dampen passenger traffic.
P/Cash Flow (X) 2.3 1.9 2.2 1.9
EV/EBITDA (X) 1.6 0.9 1.0 0.9 At A Glance
Net Div Yield (%) 12.4 12.4 12.4 14.9 Issued Capital (m shrs) 1,429
P/Book Value (X) 0.5 0.5 0.4 0.4 Mkt. Cap (Btm/US$m) 57,500 / 1,642
Net Debt/Equity (X) CASH CASH CASH CASH Major Shareholders (%)
ROAE (%) 18.2 17.0 17.5 17.0 Ministry Of Finance 70.0
Earnings Rev (%): 0 0 0 Thai NVDR 5.0
Consensus EPS (Bt): N/A 15.2 16.9 State Street Bank Europe Limited 1.9
Other Broker Recs: B: 18 S: 3 H: 5
Free Float (%) 22.1
Source of all data on this page: Company, DBS Vickers, Bloomberg 3m Avg. Daily Val (US$m) 43.2
Finance L.P ICB Industry : Industrials / Industrial Transportation

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Page 32
ed: CK / sa:CS, PY
Company Guide
Airports of Thailand

WHATS NEW

Tourism returning to bright spot

Expect 1QFY17F core earnings to still grow: Despite the tourist arrivals to Thailand to grow by 7.7% y-o-y to 35m in
mourning period and the crackdown on zero-dollar tours, we 2017. Meanwhile, Chinese tourists are expected to increase
expect AOT to still deliver core earnings growth in 1QFY17F to 9.8m (+11.4% y-o-y).
(Oct-Dec), though not as robust as before.
Reiterate BUY. In our view, AOT would be the best proxy of
AOT should be able to post 6.1% y-o-y growth in total tourism recovery. The improving volume growth and the split
passengers through its six airports in 1QFY17F, mainly driven of par value from Bt10 to Bt1 would support the share price.
by domestic volume growth of 11.1%. International
passenger traffic only grew by 2.2% y-o-y as the number of
Chinese tourists dropped. Nevertheless, we should still see an
increase in the number of European and Russian arrivals.
Meanwhile, we expect to see same trend for aircraft traffic,
growing by 6.9% y-o-y in 1QFY17F (domestic; +12.2% and
international; +1.9%).

Revenues from office and state property rents, and


concession are also expected to grow y-o-y in 1QFY17F,
thanks to additional commercial areas at Don Muang airport
and a 1-ppt increase in the revenue sharing rate to 19%,
respectively.

We estimate 1QFY17F total revenue to rise by 7.9% y-o-y to


Bt12.8bn, but core earnings should increase at a slower pace
of 3.2% y-o-y to Bt4.8bn due to narrower operating margins
from the slow growth in international passengers. Note that
we expect AOT to book FX gains in the quarter from the
weakening of JPY against THB (most of AOTs loans are in
JPY).

Governments stimulus measure to boost Thailand tourism:


We believe international tourist arrivals have already
bottomed out in Nov 2016, in which we saw 4.4% decrease
in international tourist arrivals to Thailand and also a decline
of 1.6% y-o-y for international passengers through AOTs six
airports. With the governments stimulus measure to cut visa
fees on arrival temporarily from Bt2,000 to Bt1,000 and the
waiver of visa fees of Bt1,000 at Thai embassies for foreign
tourists from 19 nations, including China, Bhutan, India,
Taiwan, and Saudi Arabia, from 1 Dec to 28 Feb 2017,
foreign tourists (including Chinese) have rebounded. AOT
reported 3.8% y-o-y increase in international passengers
through its airports in Dec 2016 and the number continued
to grow in Jan 2017 (+7.1%) and 1-4 Feb 2017 (+13.7%).
Hence, we expected core earnings growth to accelerate in
2QFY17F.
Recently, the government has extended the visa fee policy to
be implemented till 31 Aug 2017 and will be valid for two
additional countries, Fiji and Papua New Guinea. We believe
this will surely boost international arrivals to Thailand.
Thailands Tourism and Sports Ministry expects international

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Page 33
Company Guide
Airports of Thailand

AOT: 1QFY17F results preview


FY Sep (Btm) 1Q16 4Q16 1Q17F % Chg % Chg
y-o-y q-o-q
Total Revenue 11,814 12,775 12,751 8% (0%)
Operating exp. 5,294 6,769 6,044 14% (11%)
EBIT 6,520 6,006 6,707 3% 12%
Interest inc. 299 270 270 (10%) (0%)
Interest exp. 361 329 344 (5%) 5%
Other inc. 41 59 44 6% (25%)
Other exp. 629 535 701 11% 31%
Pretax Profit 5,871 5,471 5,975 2% 9%
Extra Gain/(Loss) (6) (96) 0 na na
MI (10) (8) (6) na na
Tax 1,229 1,053 1,195 (3%) 13%
Net Profit 4,626 4,314 4,774 3% 11%
Norm Profit 4,632 4,410 4,774 3% 8%
EBITDA 7,813 7,412 8,079 3% 9%

EBITDA margin 66.1% 58.0% 63.4%


EBIT Margin 55.2% 47.0% 52.6%
Net Margin 39.2% 33.8% 37.4%
Eff.Tax Rate % 20.9% 19.2% 20.0%

Source of all data: Company, DBS Vickers

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Page 34
Company Guide
Airports of Thailand

International aircrafts movement (flts)


CRITICAL DATA POINTS TO WATCH

Earnings Drivers:
Rising traffic volume.
Management has no plans to submit another proposal to the
DCA (Department of Civil Aviation) to approve a hike in PSC
(Passenger Service Charge) just yet, but may revisit the proposal
in FY19F when Suvarnabhumi Airport expansion phase II is
completed. Therefore, earnings growth over the next two to
three years would be driven by higher passenger throughput
and aircraft traffic at its six airports. Rising air travel demand Domestic aircrafts movement (flts)
and expanding airline capacities will support traffic growth.
AOTs passenger and aircraft traffic have been growing at an
average of 12.6% and 12% p.a., respectively, in the past five
years. We expect them to average 8.2% and 4%, respectively,
over the next few years.

Growth of low-cost carriers.


The number of domestic passengers had grown at 8.7% p.a.
over FY03-FY10. But in the last five years, growth has
accelerated to an average of 16.1% because the rising number
of low-cost carriers has stimulated domestic demand by offering No. of international passengers
affordable fares and convenient booking platforms.
Additionally, domestic passengers are supporting passenger
throughput at AOTs airports, like in FY14 when Thailand
experienced political unrest. Total passenger throughput still
grew 1.7% y-o-y despite the 5.7% drop in international
passenger traffic.

Higher concession revenue-sharing rate.


In FY16, the duty-free concessionaires will pay AOT 18% of
their gross revenues or the minimum guaranteed payment
(MGP), whichever is higher. This rate is subject to 1-ppt increase No. of domestic passengers
p.a. to a maximum rate of 20%.

Additional commercial space.


Terminal 2 at Don Muang Airport was opened in Dec 2015,
which would add commercial space of another 27,109 sqm
(from 6,144 sqm) to AOTs rental portfolio. Meanwhile, the
construction of Phuket Airport which was completed in Sep
2016 also doubled the existing commercial area to 10,289 sqm.
This should lift overall concession and retail rental revenues.

Airport expansion to support sustainable growth. Revenue breakdown


The Suvarnabhumi (BKK) airport development project (phase 2) 100%
with an investment budget of Bt62.5bn finally kicked off in Sep 80%
23% 25% 26% 27% 27%
2016. Upon completion in 2019, BKK Airports capacity will 11% 10% 11% 10% 12%
60% 5% 5% 5% 4%
increase from 45m to 60m. Additionally, AOT also plans to build 2% 1% 2% 2%
4%
2%
terminal 2 at BKK Airport (capacity will rise to 90m in 2021) and 40% 43% 45% 43% 45% 43%
construct the third runway (flight capacity will rise from 68 20%
flights per hour to 94 flights per hour in 2020). 16% 13% 14% 13% 13%
0%
FY12 FY13 FY14 FY15 FY16

Landing and parking charges Passenger service charges


Aircraft service charges Office and state property rents
Service revenues Concession revenues

Source: Company, DBS Vickers

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Page 35
Company Guide
Airports of Thailand

Leverage & Asset Turnover (x)


Balance Sheet:
Low leverage.
AOT has healthy operating and free cash flows with a low
gearing of 0.3x at end-3QFY16. The bulk of its long-term loans
are in Japanese yen borrowed from financial institutions
overseas. Nonetheless, AOT has hedged 93.4% of the total loan
with cross currency swap contracts. The Suvarnabhumi Airport
Expansion II project should be sufficiently funded by internal
cash flow and debt.

Share Price Drivers:


Capital Expenditure
International passenger traffic through AOTs six airports should
remain strong given that Thailand still offers cost-competitive
travelling and a variety of destinations. The Department of
Thailand Tourism expects the number of international tourist
arrivals to Thailand to continue to grow by 10% in 2017.

Key Risks:
Slowdown in the tourism industry
AOT's earnings are driven by flight and passenger traffic
volumes in Thailand. An economic slowdown, natural disasters,
and political uncertainty are main threats to its operations, and ROE (%)
their frequent recurrence would dampen air traffic.

Company Background
Airports of Thailand Public Company Ltd. is a state-owned
enterprise which operates six major airports in Thailand
Suvarnabhumi, Don Muang, Phuket, Chiang Rai, Chiang Mai,
and Had Yai. AOTs airports account for over 90% of
Thailands air traffic. Most of the other airports in Thailand are
much smaller in scale and located in second tier cities, and are
owned by the Department of Civil Aviation (DCA), Royal Thai Forward PE Band (x)
Navy, and Bangkok Airways Company.

PB Band (x)

Source: Company, DBS Vickers

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Page 36
Company Guide
Airports of Thailand

Key Assumptions
FY Sep 2014A 2015A 2016A 2017F 2018F
International aircrafts 324,859 365,321 402,720 428,897 458,920
movement (flts)
Domestic aircrafts 285,077 342,041 374,200 404,136 444,550
movement (flts)
No. of international 50,163 60,296 67,129 71,276 77,932
passengers
No. of domestic 36,354 45,436 51,832 55,488 60,641
passengers

Income Statement (Btm)


FY Sep 2014A 2015A 2016A 2017F 2018F
Revenue 37,585 43,969 50,962 55,373 61,194
Cost of Goods Sold (14,559) (15,805) (17,020) (17,789) (20,384)
Gross Profit 23,027 28,164 33,942 37,583 40,809
Other Opng (Exp)/Inc (7,934) (7,734) (9,587) (10,355) (11,382)
Operating Profit 15,093 20,430 24,355 27,229 29,427
Other Non Opg (Exp)/Inc 414 262 265 292 321
Associates & JV Inc 0.0 0.0 0.0 0.0 0.0
Net Interest (Exp)/Inc (430) (330) (285) 569 1,086
Exceptional Gain/(Loss) 191 2,974 89.7 0.0 0.0
Pre-tax Profit 15,269 23,335 24,424 28,089 30,834
Tax (3,007) (4,585) (4,821) (5,519) (6,059)
Minority Interest (41.8) (21.4) (32.1) (33.7) (35.4)
Preference Dividend 0.0 0.0 0.0 0.0 0.0
Net Profit 12,220 18,729 19,571 22,536 24,740
Net Profit before Except. 12,029 15,755 19,482 22,536 24,740
EBITDA 21,157 26,880 31,024 33,731 37,044
Growth
Revenue Gth (%) 2.1 17.0 15.9 8.7 10.5
EBITDA Gth (%) 4.6 27.0 15.4 8.7 9.8
Opg Profit Gth (%) 0.2 35.4 19.2 11.8 8.1
Net Profit Gth (Pre-ex) (%) 21.1 31.0 23.7 15.7 9.8
Margins & Ratio
Gross Margins (%) 61.3 64.1 66.6 67.9 66.7
Opg Profit Margin (%) 40.2 46.5 47.8 49.2 48.1
Net Profit Margin (%) 32.5 42.6 38.4 40.7 40.4
ROAE (%) 13.0 18.2 17.0 17.5 17.0
ROA (%) 8.0 12.0 11.8 12.6 13.0
ROCE (%) 8.7 11.4 12.8 13.2 13.3
Div Payout Ratio (%) 57.7 38.1 36.5 31.7 34.6
Net Interest Cover (x) 35.1 61.9 85.3 NM NM
Source: Company, DBS Vickers

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Page 37
Company Guide
Airports of Thailand

Quarterly / Interim Income Statement (Btm)


FY Sep 4Q2015 1Q2016 2Q2016 3Q2016 4Q2016

Revenue 10,945 11,814 13,800 12,572 12,775


Cost of Goods Sold (4,789) (3,863) (4,193) (4,152) (4,812)
Gross Profit 6,156 7,952 9,608 8,420 7,963
Other Oper. (Exp)/Inc (1,439) (1,431) (1,900) (1,888) (1,957)
Operating Profit 4,718 6,521 7,707 6,532 6,006
Other Non Opg (Exp)/Inc (188) (588) (603) (479) (476)
Associates & JV Inc 0.0 0.0 0.0 0.0 0.0
Net Interest (Exp)/Inc (83.6) (61.6) (94.7) (70.5) (58.6)
Exceptional Gain/(Loss) 2,752 (6.4) (75.8) 268 (96.1)
Pre-tax Profit 7,198 5,865 6,933 6,251 5,375
Tax (1,339) (1,229) (1,353) (1,186) (1,053)
Minority Interest (9.7) (9.9) (14.2) (0.1) (8.0)
Net Profit 5,850 4,626 5,567 5,065 4,314
Net profit bef Except. 3,098 4,632 5,642 4,796 4,410
EBITDA 6,332 7,513 8,716 7,654 7,142

Growth
Revenue Gth (%) 0.8 7.9 16.8 (8.9) 1.6
EBITDA Gth (%) (4.9) 18.6 16.0 (12.2) (6.7)
Opg Profit Gth (%) (17.2) 38.2 18.2 (15.2) (8.0)
Net Profit Gth (Pre-ex) (%) (24.3) 49.5 21.8 (15.0) (8.0)
Margins
Gross Margins (%) 56.2 67.3 69.6 67.0 62.3
Opg Profit Margins (%) 43.1 55.2 55.8 52.0 47.0
Net Profit Margins (%) 53.4 39.2 40.3 40.3 33.8

Balance Sheet (Btm)


FY Sep 2014A 2015A 2016A 2017F 2018F

Net Fixed Assets 81,624 95,253 91,692 110,290 127,154


Invts in Associates & JVs 0.0 0.0 0.0 0.0 0.0
Other LT Assets 25,725 12,446 16,366 15,298 14,932
Cash & ST Invts 43,203 48,490 60,490 55,764 50,311
Inventory 195 238 261 274 288
Debtors 2,094 2,356 2,871 3,034 3,353
Other Current Assets 947 841 535 546 557
Total Assets 153,789 159,624 172,216 185,206 196,594

ST Debt 3,971 4,228 4,797 3,280 2,927


Creditor 1,444 1,151 1,370 1,137 1,283
Other Current Liab 12,550 10,476 12,262 11,648 11,066
LT Debt 30,679 28,202 27,261 27,187 21,731
Other LT Liabilities 7,898 6,755 4,949 4,949 4,949
Shareholders Equity 97,044 108,588 121,322 136,715 154,313
Minority Interests 203 225 257 290 326
Total Cap. & Liab. 153,789 159,624 172,216 185,206 196,594

Non-Cash Wkg. Capital (10,757) (8,192) (9,964) (8,931) (8,151)


Net Cash/(Debt) 8,553 16,060 28,433 25,297 25,653
Debtors Turn (avg days) 21.2 18.5 18.7 19.5 19.0
Creditors Turn (avg days) 55.3 49.2 43.3 39.5 33.7
Inventory Turn (avg days) 8.2 8.2 8.6 8.4 7.8
Asset Turnover (x) 0.2 0.3 0.3 0.3 0.3
Current Ratio (x) 2.6 3.3 3.5 3.7 3.6
Quick Ratio (x) 2.5 3.2 3.4 3.7 3.5
Net Debt/Equity (X) CASH CASH CASH CASH CASH
Net Debt/Equity ex MI (X) CASH CASH CASH CASH CASH
Capex to Debt (%) 22.0 21.3 15.1 76.4 93.3
Z-Score (X) 6.9 7.8 8.5 8.8 10.0
Source: Company, DBS Vickers

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Page 38
Company Guide
Airports of Thailand

Cash Flow Statement (Btm)


FY Sep 2014A 2015A 2016A 2017F 2018F

Pre-Tax Profit 15,269 23,335 24,424 28,089 30,834


Dep. & Amort. 5,650 6,189 6,405 6,212 7,297
Tax Paid 4,869 3,007 4,585 4,821 5,519
Assoc. & JV Inc/(loss) 0.0 0.0 0.0 0.0 0.0
Chg in Wkg.Cap. (740) 9,571 (3,254) (665) (413)
Other Operating CF (6,108) (17,195) (1,834) (11,933) (12,800)
Net Operating CF 18,941 24,907 30,327 26,524 30,437
Capital Exp.(net) (7,609) (6,919) (4,850) (23,277) (23,000)
Other Invts.(net) 1,750 (9,250) (9,900) 7,104 0.0
Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0
Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0
Other Investing CF (72.4) 90.3 27.3 27.3 27.3
Net Investing CF (5,932) (16,079) (14,722) (16,146) (22,973)
Div Paid (6,571) (7,057) (7,142) (7,143) (7,143)
Chg in Gross Debt (6,775) (1,952) (557) (1,591) (5,809)
Capital Issues 0.0 0.0 0.0 0.0 0.0
Other Financing CF 768 (3,781) (5,104) 33.7 35.4
Net Financing CF (12,578) (12,790) (12,803) (8,700) (12,916)
Currency Adjustments 0.0 0.0 0.0 0.0 0.0
Chg in Cash 431 (3,962) 2,801 1,678 (5,452)
Opg CFPS (Bt) 13.8 10.7 23.5 19.0 21.6
Free CFPS (Bt) 7.93 12.6 17.8 2.27 5.21
Source: Company, DBS Vickers

Target Price & Ratings History

Source: DBS Vickers


Analyst: Namida ARTISPONG

THAI-CAC Declared
Corporate Governance CG Rating 2016

THAI-CAC is Companies participating in Thailand's Private Sector Score Description


Collective Action Coalition Against Corruption programme (Thai Declared Companies that have declared their intention to join CAC
CAC) under Thai Institute of Directors (as of October 28, 2016) are Certified Companies certified by CAC.
categorised into:

Corporate Governance CG Rating is based on Thai Institute of Score Range Number of Logo Description
Directors (IOD)s annual assessment of corporate governance 90-100 Excellent
practices of listed companies. The assessment covers 235 criteria 80-89 Very Good
in five categories including board responsibilities (35% weighting), 70-79 Good
disclosure and transparency (20%), role of stakeholders (20%),
equitable treatment of shareholders (10%) and rights of 60-69 Satisfactory
shareholders (15%). The IOD then assigns numbers of logos to 50-59 Pass
each company based on their scoring as follows: <50 No logo given N/A

ASIAN INSIGHTS VICKERS SECURITIES


Page 39
Philippines Company Guide
Cebu Air
Version 2 | Bloomberg: CEB PM | Reuters: CEB.PS Refer to important disclosures at the end of this report

DBS Group Research . Equity 15 Nov 2016

BUY Running a tight ship


Last Traded Price ( 14 Nov 2016): P105 (PCOMP : 6,871.48)
Price Target 12-mth: P125 (19% upside) (Prev P143) Solid FY16 performance is on track. CEB is due to deliver a
robust FY16, having notched a respectable 6.7% revenue-
Potential Catalyst: Sustained growth in yields passenger-kilometre growth (on 81.6% load factor) for the year
Where we differ: Wider margin assumption than consensus
despite a backdrop of limited capacity growth space, due to
Analyst
Marvin KHOR +60 32604 3911 marvinkhor@alliancedbs.com airport constraints. Meanwhile, core profitability has leapt from
Paul YONG CFA +65 6682 3712 paulyong@dbs.com cheaper fuel costs and resilient yields, despite some Peso
depreciation. We continue to be positive about CEBs
Whats New dominating position in the Philippines domestic air travel
market, maintain BUY with TP of P125.
CEB records core profits despite 3Q16 low season,
and adverse forex translation hitting headline Sound fundamental outlook for profitability. Thanks to
Surprise yield growth lifted earnings, supported supportive demand and capacity constraints in the domestic
by cheaper fuel and healthy load factors space, CEB is achieving previously-unexpected growth in yields
Tweak core earnings forecasts by 6%/2% for & fares. This further supplements FY16s margin expansion from
FY16/17F; TP adjusted to P125 on more cheaper fuel. As the dominant market share leader (>56%), we
expect CEB to maintain its robust profitability via further yield
conservative multiple maintain BUY
management against a backdrop of low industry capacity
expansion.
Price Relative
Constrained capacity conditions are positive for domestic and
short-haul international operations. We anticipate more good
performance in CEBs domestic and short-haul international
operations, which will more than offset a tougher long-haul
segment which faces stiffer competition. This comes especially
as slot limitations in Manila are expected to rein in capacity
competition for the airlines players.

Forecasts and Valuation Valuation:


FY Dec (P m) 2015A 2016F 2017F 2018F Reiterate BUY. We change our valuation multiple on CEB to
Revenue 56,502 60,876 65,599 72,564 1.9x (from 2.2x) FY17F P/BV (historical mean, from +1SD) to
EBITDA 11,916 17,065 16,924 18,788 reflect higher macro-related risks such as a stronger US$
Pre-tax Profit 3,529 10,485 10,048 10,683 against the Peso. Nonetheless, upside remains visible backed
Net Profit 4,387 9,892 9,480 10,079
Net Pft (Pre Ex.) 5,857 9,892 9,480 10,079
by regionally outperforming ROAE - maintain BUY.
Net Pft Gth (Pre-ex) (%) 79.5 68.9 (4.2) 6.3
EPS (P) 7.24 16.3 15.6 16.6 Key Risks to Our View:
EPS Pre Ex. (P) 9.67 16.3 15.6 16.6 Substantial strengthening of US$ against Peso. CEB is
EPS Gth Pre Ex (%) 80 69 (4) 6 vulnerable to a stronger US$, as a significant proportion of its
Diluted EPS (P) 9.67 16.3 15.6 16.6
earnings are denominated in Peso, while the company incurs
Net DPS (P) 1.50 2.00 5.39 5.16
BV Per Share (P) 41.2 55.5 65.8 77.2 more than half its expenses in US$ and almost all its debt is
PE (X) 14.5 6.4 6.7 6.3 denominated in US$.
PE Pre Ex. (X) 10.9 6.4 6.7 6.3
P/Cash Flow (X) 5.1 4.0 3.9 3.5 At A Glance
EV/EBITDA (X) 8.0 5.1 4.8 5.4 Issued Capital (m shrs) 606
Net Div Yield (%) 1.4 1.9 5.1 4.9 Mkt. Cap (Pm/US$m) 63,625 / 1,297
P/Book Value (X) 2.5 1.9 1.6 1.4 Major Shareholders (%)
Net Debt/Equity (X) 1.3 0.7 0.4 0.8
CP Air Holdings 66.2
ROAE (%) 25.2 33.8 25.8 23.3
Free Float (%) 33.8
Earnings Rev (%): 6 2 3
3m Avg. Daily Val (US$m) 1.6
Consensus EPS (P): 16.2 14.2 12.4
Other Broker Recs: B: 12 S: 1 H: 3 ICB Industry : Consumer Services / Travel & Leisure
Source of all data on this page: Company, AllianceDBS, Bloomberg Finance L.P

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Page 40
ed: TH / sa:MR, PY
Company Guide
Cebu Air

ASK growth (%)


CRITICAL DATA POINTS TO WATCH

Earnings Drivers:
Conservative ASK growth. Airline capacity is measured via ASK
(available seat kilometres), which is a function of the active fleet
and flight distances of routes served. As CEB has marginal net
fleet growth planned (+2/+2 in FY16/17F, from 55 at end-
2015), we expect slower overall capacity growth. Expansion will
be mainly led by up-gauging of aircraft (larger capacity planes
on the same routes) and improving fleet utilisation. More
growth is set to come in FY18 with +10 net fleet additions Load Factor (%)
planned as it receives 12 of its A321neo orders (less other lease
expiries and replacements).

Load factors to improve. Load factors are calculated as number


of passengers into the distance they travelled (RPK Revenue
Passenger km) as a percentage of ASK (i.e. how full the aircraft
are). Given the muted capacity addition in the domestic
segment, CEB as the market leader expects its load factors to
improve, and we forecast 81.5%/82% in FY16/17F
(+1.7/0.5ppt) and remain flat in FY18F. CEB prides itself on its
competitive index score of >1, i.e. having a greater proportion Fare / RPK (PHP)
of passenger share than seat share implying stronger load
factors than its competitors.

A more neutral outlook for yields. Passenger yield (fare per RPK)
estimates the average payment by a passenger to fly a
kilometre. The 13% decline in FY15 yields was largely due to
the abolishment of fuel surcharges. We forecast yield to stay flat
in FY16, grow by a mild 2% in FY17 and remain at that level in
FY18. While the competitive landscape is not expected to be
slack, we think the capacity constraints at Manila airport limiting
capacity addition for all players will allow fares to be edged up. Ancillary income / pax (PHP)

Ancillary and other income to inch up. Ancillary and other


income per pax includes per passenger in-flight sales, excess
baggage and changing reservations payments, plus freight
charges. Both FY14 and FY15 have recorded above 7% growth
in ancillary income per pax. With higher range of in-flight
offerings and on average longer flights (mainly due to
international expansion), further growth can be expected and
we have forecast a conservative growth rate of 2%/2%/1% for
FY16/17/18F.
Cost / ASK (PHP)
Unit costs to edge up. Cost/ASK measures fuel costs, cash
operating costs and asset costs (aircraft rental & depreciation)
with respect to flying a seat for a kilometre. We forecast a
decline of 4% in FY16F cost/ASK largely due to a decline of
16% in fuel costs. We forecast spot jet fuel price at
US$50/60/bbl in FY16/17F and depreciation of Peso at 4%/5%
against the USD in FY16/17F. Accordingly, cost/ASK is expected
to increase by 9% in FY17F and by a milder 3% in FY18F due to
smaller fuel price increase and stable forecast of Peso.

Source: Company, AllianceDBS

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Page 2 Page 41
Company Guide
Cebu Air

Leverage & Asset Turnover (x)


Balance Sheet:
Gearing expected to remain moderate. With the rising earnings,
net gearing is forecast to gradually ease to 0.7x/0.4x in
FY16/17F from 1.3x in FY15. However, we expect some bump
up with the more sizeable delivery of 12 A321neos beginning
2018, with it rising to a still-manageable level of 0.8x in FY18F.

Share Price Drivers:


Continuing earnings momentum. As margins are lifted from
lower fuel costs; we project CEB to see core earnings growth of
69% in FY16F to reach record bottom-line figures, and help
Capital Expenditure
drive share price performance. Furthermore, our FY17F
assumptions are tame given the expected inching up of fuel
costs if CEB finds another engine of growth (via larger yield
improvement, market share expansion, or further cost
reductions), further re-rating may be seen.

Key Risks:
Sustained rise in jet fuel prices. Fuel costs are a major
component of the groups operating expenditures, at c.38% in
FY15. Despite hedging strategies securing c.52%/41% of
FY16/17F requirements, a sustained rise in jet fuel prices will ROE (%)
risk increasing unit costs. Our current spot jet fuel price
assumptions are US$50/60/bbl in FY16/17F.

Adverse exposure to a stronger US$. About 58% of CEBs


expenses are US$-denominated (in FY15) primarily fuel,
aircraft leasing and repair & maintenance costs. However, the
groups US$-denominated revenue is at a much lower level.
Additionally, all the long-term liabilities of the group are
denominated in US$. Further appreciation of the US$ against
the Peso may result in cost escalation as well as foreign
exchange translation losses. Forward PE Band (x)

Company Background
CEB wholly owns and operates two LCC carriers in Philippines,
namely Cebu Pacific and Cebgo. Cebu Pacific has an extensive
domestic network in addition to international services in Asia
Pacific and Middle East. Cebgo, formally known as Tigerair
Philippines, was acquired in 2014 and is currently operating
the groups turboprop fleet on domestic routes.

PB Band (x)

Source: Company, AllianceDBS

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Page 42 Page 3
Company Guide
Cebu Air

Key Assumptions
FY Dec 2014A 2015A 2016F 2017F 2018F
ASK growth (%) 26.5 21.5 5.00 5.00 10.3
Load Factor (%) 79.1 79.8 81.5 82.0 82.0
Fare / RPK (PHP) 2.48 2.15 2.15 2.19 2.19
Ancillary income / pax 700 752 767 783 790
Cost / ASK (PHP) 2.33 1.88 1.80 1.96 2.01

Income Statement (Pm)


FY Dec 2014A 2015A 2016F 2017F 2018F
Revenue 52,000 56,502 60,876 65,599 72,564
Other Opng (Exp)/Inc (50,157) (49,733) (49,472) (54,794) (60,972)
Operating Profit 1,843 6,769 11,404 10,805 11,592
Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0
Associates & JV Inc 96.3 35.4 83.7 83.7 83.7
Net Interest (Exp)/Inc (933) (990) (1,004) (840) (993)
Exceptional Gain/(Loss) (127) (2,286) 0.0 0.0 0.0
Pre-tax Profit 879 3,529 10,485 10,048 10,683
Tax (25.1) 858 (593) (568) (604)
Minority Interest 0.0 0.0 0.0 0.0 0.0
Preference Dividend 0.0 0.0 0.0 0.0 0.0
Net Profit 854 4,387 9,892 9,480 10,079
Net Profit before Except. 3,262 5,857 9,892 9,480 10,079
EBITDA 6,221 11,916 17,065 16,924 18,788
Growth
Revenue Gth (%) 26.8 8.7 7.7 7.8 10.6
EBITDA Gth (%) (0.8) 91.5 43.2 (0.8) 11.0
Opg Profit Gth (%) (31.6) 267.3 68.5 (5.3) 7.3
Net Profit Gth (Pre-ex) (%) 68.6 79.5 68.9 (4.2) 6.3
Margins & Ratio
Opg Profit Margin (%) 3.5 12.0 18.7 16.5 16.0
Net Profit Margin (%) 1.6 7.8 16.2 14.5 13.9
ROAE (%) 15.3 25.2 33.8 25.8 23.3
ROA (%) 4.5 7.3 11.1 9.7 8.8
ROCE (%) 3.3 11.2 15.8 13.5 12.0
Div Payout Ratio (%) 71.0 20.7 12.3 34.4 31.0
Net Interest Cover (x) 2.0 6.8 11.4 12.9 11.7
Source: Company, AllianceDBS

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Page 4 Page 43
Company Guide
Cebu Air

Quarterly / Interim Income Statement (Pm)


FY Dec 3Q2015 4Q2015 1Q2016 2Q2016 3Q2016

Revenue 12,753 14,243 16,106 16,987 13,598


Other Oper. (Exp)/Inc (13,336) (12,955) (11,967) (11,874) (12,500)
Operating Profit (583) 1,288 4,139 5,113 1,098
Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0
Associates & JV Inc 10.6 36.5 55.6 47.9 48.7
Net Interest (Exp)/Inc (252) (269) (274) (251) (263)
Exceptional Gain/(Loss) (1,444) (476) 460 (887) (1,341)
Pre-tax Profit (2,268) 580 4,381 4,024 (457)
Tax 623 252 (344) (378) (127)
Minority Interest 0.0 0.0 0.0 0.0 0.0
Net Profit (1,645) 832 4,037 3,645 (584)
Net profit bef Except. (112) 1,408 3,369 3,506 699
EBITDA 715 2,679 5,673 6,707 2,717

Growth
Revenue Gth (%) (16.7) 11.7 13.1 5.5 (20.0)
EBITDA Gth (%) (85.3) 274.8 111.7 18.2 (59.5)
Opg Profit Gth (%) nm nm 221.3 23.5 (78.5)
Net Profit Gth (Pre-ex) (%) nm nm 139.3 4.0 (80.0)
Margins
Opg Profit Margins (%) (4.6) 9.0 25.7 30.1 8.1
Net Profit Margins (%) (12.9) 5.8 25.1 21.5 (4.3)

Balance Sheet (Pm)


FY Dec 2014A 2015A 2016F 2017F 2018F

Net Fixed Assets 65,227 72,076 72,994 74,212 102,890


Invts in Associates & JVs 591 526 609 693 777
Other LT Assets 1,717 2,464 2,464 2,464 2,464
Cash & ST Invts 3,964 4,706 12,870 18,661 15,870
Inventory 679 919 970 1,107 1,253
Debtors 1,302 1,398 1,501 1,618 1,789
Other Current Assets 2,581 2,739 2,739 2,739 2,739
Total Assets 76,062 84,829 94,147 101,494 127,782

ST Debt 4,712 5,424 5,424 5,424 5,424


Creditor 3,984 3,773 3,878 4,427 5,011
Other Current Liab 15,364 17,303 17,837 18,419 19,278
LT Debt 29,137 31,165 31,165 31,165 49,060
Other LT Liabilities 1,325 2,208 2,208 2,208 2,208
Shareholders Equity 21,539 24,955 33,635 39,851 46,802
Minority Interests 0.0 0.0 0.0 0.0 0.0
Total Cap. & Liab. 76,062 84,829 94,147 101,494 127,782

Non-Cash Wkg. Capital (14,786) (16,020) (16,505) (17,382) (18,508)


Net Cash/(Debt) (29,886) (31,883) (23,719) (17,928) (38,614)
Debtors Turn (avg days) 7.9 8.7 8.7 8.7 8.6
Creditors Turn (avg days) 353.7 277.0 250.4 251.2 242.2
Inventory Turn (avg days) 59.3 57.1 61.8 62.8 60.6
Asset Turnover (x) 0.7 0.7 0.7 0.7 0.6
Current Ratio (x) 0.4 0.4 0.7 0.9 0.7
Quick Ratio (x) 0.2 0.2 0.5 0.7 0.6
Net Debt/Equity (X) 1.4 1.3 0.7 0.4 0.8
Net Debt/Equity ex MI (X) 1.4 1.3 0.7 0.4 0.8
Capex to Debt (%) 39.3 32.9 17.8 19.8 65.7
Z-Score (X) NA NA NA NA NA
Source: Company, AllianceDBS

ASIAN INSIGHTS VICKERS SECURITIES


Page 44 Page 5
Company Guide
Cebu Air

Cash Flow Statement (Pm)


FY Dec 2014A 2015A 2016F 2017F 2018F

Pre-Tax Profit 879 3,529 10,485 10,048 10,683


Dep. & Amort. 4,282 5,112 5,577 6,035 7,112
Tax Paid (45.0) (60.8) (593) (568) (604)
Assoc. & JV Inc/(loss) (96.3) (35.4) (83.7) (83.7) (83.7)
Chg in Wkg.Cap. 901 1,001 485 877 1,125
Other Operating CF 1,628 2,840 0.0 0.0 0.0
Net Operating CF 7,575 12,395 15,871 16,309 18,232
Capital Exp.(net) (13,316) (12,035) (6,495) (7,254) (35,790)
Other Invts.(net) (489) 0.0 0.0 0.0 0.0
Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0
Div from Assoc & JV 83.8 101 0.0 0.0 0.0
Other Investing CF 116 129 0.0 0.0 0.0
Net Investing CF (13,605) (11,805) (6,495) (7,254) (35,790)
Div Paid (606) (909) (1,212) (3,264) (3,129)
Chg in Gross Debt 4,301 949 0.0 0.0 17,895
Capital Issues 0.0 0.0 0.0 0.0 0.0
Other Financing CF 0.0 0.0 0.0 0.0 0.0
Net Financing CF 3,695 39.7 (1,212) (3,264) 14,766
Currency Adjustments (14.4) 113 0.0 0.0 0.0
Chg in Cash (2,349) 742 8,164 5,791 (2,791)
Opg CFPS (P) 11.0 18.8 25.4 25.5 28.2
Free CFPS (P) (9.5) 0.59 15.5 14.9 (29.0)
Source: Company, AllianceDBS

Target Price & Ratings History

Source: AllianceDBS
Analyst: Marvin KHOR
Paul YONG CFA

ASIAN INSIGHTS VICKERS SECURITIES


Page 6 Page 45
Singapore Company Guide
China Aviation Oil
Version 3 | Bloomberg: CAO SP | Reuters: CNAO.SI Refer to important disclosures at the end of this report

DBS Group Research . Equity 29 Dec 2016


BUY Cruising towards record 2016
Last Traded Price ( 28 Dec 2016): S$1.405 (STI : 2,898.30)
Price Target 12-mth: S$1.70 (21% upside) Maintain BUY with TP of S$1.70 as our 2017 outlook remains
unchanged. Registering a 31% y-o-y jump in net profit to US$23.2m
Potential Catalyst: Earnings growth and delivery; value-accretive acquisitions in 3Q16, China Aviation Oil (CAO)s results were above expectations,
Where we differ: Slightly below consensus due to lower GP/tonne estimates as several associates benefited from one-offs such as mark-to-market
inventory gains and favourable currency movements.
Analyst
Paul YONG CFA +65 6682 3712 paulyong@dbs.com
Singapore Research Team equityresearch@dbs.com While our FY17F earnings are intact, we lift FY16F earnings by 4% as
we adjust for slightly higher supply and trading volumes.

Sole supplier of imported jet fuel in China with growing international


Price Relative
S$ Relative Index presence. With monopoly on the supply of bonded jet fuel to Chinas
1.7

1.5
224
204
civil aviation industry, CAO should benefit from the long-term growth
1.3
184
164
of Chinas international air travel market. Furthermore, with the
1.1

0.9
144
124
backing of SOE parent China National Aviation Fuel Group (CNAF),
0.7
104
84
CAO has expanded its business to marketing and supply of jet fuel at
0.5
Dec-12 Dec-13 Dec-14 Dec-15
64
Dec-16 43 international airports outside China, and further growing its reach,
China Aviation Oil (LHS) Relative STI (RHS) volumes, and ultimately achieving greater economies of scale.
Forecasts and Valuation
FY Dec (US$ m) 2015A 2016F 2017F 2018F Firm outlook for prized asset 33%-owned associate, SPIA. As the
Revenue 8,987 9,410 10,948 11,495 exclusive supplier of jet fuel to Pudong International Airport, Shanghai
EBITDA 66.2 83.9 90.8 95.9 Pudong International Airport Aviation Fuel Supply Company (SPIA)
Pre-tax Profit 63.6 81.8 88.9 94.3 has and should carry on to benefit from rising air traffic at the airport,
Net Profit 61.3 78.6 85.4 90.5 which is driven by the continued development of Shanghai as Chinas
Net Pft (Pre Ex.) 61.3 78.6 85.4 90.5
Net Pft Gth (Pre-ex) (%) 24.7 28.2 8.7 6.0
key financial centre. Net cash and strong balance sheet could fund
EPS (S cts) 10.3 13.2 14.4 15.3 acquisition-driven growth. With net cash of c.US$203m at the end of
EPS Pre Ex. (S cts) 10.3 13.2 14.4 15.3 3Q16, and strong support from its parent CNAF, we believe that CAO
EPS Gth Pre Ex (%) 25 28 9 6 could be on the lookout for acquisitions to further grow the scale and
Diluted EPS (S cts) 10.3 13.2 14.4 15.3 reach of its business and profits.
Net DPS (S cts) 3.08 3.97 4.32 4.58
BV Per Share (S cts) 99.9 109 119 130
PE (X) 13.6 10.6 9.8 9.2 Valuation:
PE Pre Ex. (X) 13.6 10.6 9.8 9.2 Our TP of S$1.70 is based on 12x FY17F PE. We think that 12x
P/Cash Flow (X) 16.0 18.9 18.3 16.5 earnings against the projected 18% EPS CAGR over FY15-FY17F is
EV/EBITDA (X) 10.0 7.1 5.7 4.6 reasonable, and believe that the group is poised to see a structural re-
Net Div Yield (%) 2.2 2.8 3.1 3.3 rating of its valuation multiple on sustained earnings growth,
P/Book Value (X) 1.4 1.3 1.2 1.1
especially if CAO can utilise its strong cash balance to further
Net Debt/Equity (X) CASH CASH CASH CASH
ROAE (%) 10.7 12.7 12.6 12.2 accelerate growth through M&A.
Earnings Rev (%): 0 0 -
Consensus EPS (S cts): 13.3 15.7 17.8 Key Risks to Our View:
Other Broker Recs: B: 4 S: 0 H: 0 Weaker demand for air travel and execution risk. A sustained
Source of all data on this page: Company, DBS Bank, Bloomberg
slowdown in demand for air travel could impact jet fuel demand and
Finance L.P volumes. Further, the group could also face execution risk in its
trading business and prospective M&A activities.
At A Glance
Issued Capital (m shrs) 865
Mkt. Cap (S$m/US$m) 1,215 / 838
Major Shareholders (%)
China National Aviation Fuel Grp 51.0
BP Plc 20.1
Free Float (%) 28.9
3m Avg. Daily Val (US$m) 1.4
ICB Industry : Oil & Gas / Oil & Gas Producers

ASIAN INSIGHTS VICKERSPage


SECURITIES
46
ed: JS / sa:YM, PY
Company Guide
China Aviation Oil

Jet Fuel Volumes (m tonnes)


CRITICAL DATA POINTS TO WATCH
15.7
15.9
Earnings Drivers: 14.3
15

Sole importer of jet fuel into the PRC with growing international 13.6
12.1 11.9
presence Leveraging on the network of its parent, China 11.3
National Aviation Fuel Group Corporation (CNAF) a state-
9.1
owned enterprise and the largest aviation transportation
logistics services provider in the PRC China Aviation Oil 6.8

(Singapore) Corporation Ltd (CAO) has monopoly in the supply 4.5


of imported jet fuel (or bonded jet fuel) to 17 international 2.3
airports in China.
0.0
2014A 2015A 2016F 2017F 2018F
With the backing of its parent, CAO has also expanded its
business to the marketing and supply of jet fuel to airline Other Oil Product Volumes (m tonnes)
companies at 43 international airports outside of the PRC, 16.6 16.5
spanning across Asia Pacific, North America, Europe and the 16.9 15.7

Middle East.
13.5

Owing to its domestic monopoly, CAO should benefit from the 10.1
long-term growth of Chinas international air travel market. 8.29 8.28

Coupled with its ongoing international expansion, we expect jet 6.8


fuel volumes supplied and traded to grow at a 4.5% CAGR
from c.12m in FY15 to almost 16m by FY18F. 3.4

Optimising of margins through trading activities. As CAO enjoys 0.0


2014A 2015A 2016F 2017F 2018F
cost-plus pricing (we estimate gross profit (GP) of
US$3.02/tonne) for its China jet fuel supply business, and after Implied Average Jet Fuel Price (USD/bbl)
hedging downside risk, CAO will seek to further optimise
141
margins when viable trading opportunities arise. 143.83

115.06
While opportunities to improve margins are available in both
backwardation and contango markets, CAO generally prefers 86.30
contango markets as it allows for superior opportunities for 74.4
64.7 64.7
margin optimisation from the storing and trading of fuels 57.53
56.6

(which also includes gas oil, fuel oil and avgas).


28.77

With trading opportunities potentially constrained by the lack of


clarity in the underlying oil market, we have lowered our 0.00
2014A 2015A 2016F 2017F 2018F
GP/tonne assumptions to US$1.37 and US$1.46 for FY16F and
FY17F respectively. Gross Profit per Tonne (US$)
1.76
Contributions from associates, including prized asset SPIA. 1.8

Arguably CAOs best-performing asset, SPIA has never had a 1.37


1.46 1.51
1.4 1.34
cash call since the group first invested in Shanghai Pudong
International Airports exclusive supplier of jet fuel in 2002, and 1.1
has historically close to 90% share in the annual income
contributions from CAOs associated companies. Notably, SPIA 0.7
alone contributed c.61.3% of the groups FY15 profit, and
continues to perform firmly as it contributed c.66% of CAOs 0.4

9M16 net profit. 0.0


2014A 2015A 2016F 2017F 2018F
With two new runways added in the last 18 months, which has
doubled the capacity of the airport, and additional satellite Contribution from Associates (US$ m)
concourse expected to be completed by 2019, capacity at
Chinas second-largest airport is expected to be raised from 67.4 62.9
66.8

60m to 80m passengers p.a., which should underpin SPIAs 58.8

long-term growth prospects. 54.0


43.2 42.3
40.5
Nearer term, given SPIAs consistently firm performance - even
as expected air traffic increases from the recent opening of 27.0
Shanghai Disneyland have yet to show up, we think that
contributions from the associate should more than offset 13.5
trading challenges (if any) in 2H16.
0.0
2014A 2015A 2016F 2017F 2018F

Source: Company, DBS Bank

ASIAN INSIGHTS VICKERS SECURITIES


Page 2 Page 47
Company Guide
China Aviation Oil

Leverage & Asset Turnover (x)


Balance Sheet: 0.05
Strong balance sheet with a net cash position of US$203m as at 0.05 11.0

end-3Q16. With net cash of US$202.8m in 3Q16, we believe 0.04


10.5
the company has sufficient firepower with room to gear up 0.04
0.03 10.0
further to finance its M&A opportunities and grow the scale and 0.03
reach of its business and profits. 0.02
9.5

0.02 9.0

Share Price Drivers: 0.01


8.5
Progress on the M&A front. While CAO is armed with dry 0.01
0.00 8.0
powder for potential acquisitions and investments, it has yet to 2014A 2015A 2016F 2017F 2018F

announce significant M&A plans its last major investment was Gross Debt to Equity (LHS) Asset Turnover (RHS)

in 2013, when the company acquired a 39% stake in refueller


Capital Expenditure
CNAF Hong Kong Refuelling Limited. US$m
0.3

Management has shared that they will be looking at both 0.3


0.2
asset-light investments, which will allow the group to gain 0.2
access to air spaces, customer contracts, strategic alliances and 0.2
further trading synergies, as well as asset-backed investments 0.2

(or infrastructure assets), which may include airport refuelling 0.2


0.2
stations, pipelines going into airports and storage facilities. 0.2
0.2
We believe that the eventual deployment of cash to fund value- 2014A 2015A 2016F 2017F 2018F

accretive opportunities should lead to a further rerating of the Capital Expenditure (-)

stock. ROE (%)


12.0%
Key Risks:
Weaker demand for air travel. Given the groups exposure to 10.0%

the air passenger market, events that could significantly 8.0%


dampen travellers sentiment, such as the outbreak of diseases
and acts of terror, pose direct threats to the tourism and air 6.0%

travel industry which in turn, could weigh on global demand 4.0%

for jet fuel. 2.0%

Potential mark-to-market losses for associates. As SPIA and 0.0%


2014A 2015A 2016F 2017F 2018F
CNAF-HKR hold inventories of fifteen days and seven days
respectively, these have to be marked to market. In a declining Forward PE Band (x)
oil price environment, these would result in paper losses for (x)
these associates, which add volatility to CAOs bottom line. 13.0
+2sd:12.4x
12.0

Trading and execution risks. CAO is exposed to a myriad of 11.0


+1sd:10.5x
10.0
risks that are inherent in the lifecycle of trades, which include 9.0
market risk, credit risk, and operational risk. 8.0
Avg:8.6x

7.0
1sd:6.6x
Company Background 6.0

China Aviation Oil (Singapore) Corporation Ltd (CAO SP) is 5.0


2sd:4.7x
principally engaged in the supply and trading of bonded jet 4.0
Dec-12 Dec-13 Dec-14 Dec-15 Dec-16
fuel, with monopoly in China and a growing international
presence. PB Band (x)
(x)
Apart from jet fuel, the group also trades and/or supplies other 1.7

transportation fuel (such as fuel oil, gas oil and aviation gas) 1.5
and has varying equity stakes in oil-related assets. These assets +2sd:1.41x
1.3
include airport refuelling facilities (SPIA and CNAF HKR), +1sd:1.2x
pipelines (TSN-PEKCL) and storage facilities (Xinyuan and 1.1
Avg:0.99x
OKYC). 0.9
1sd:0.78x
0.7

2sd:0.57x
0.5
Dec-12 Dec-13 Dec-14 Dec-15 Dec-16

Source: Company, DBS Bank

ASIAN INSIGHTS VICKERS SECURITIES


Page 48 Page 3
Company Guide
China Aviation Oil

Key Assumptions
FY Dec 2014A 2015A 2016F 2017F 2018F
Jet Fuel Volumes (m 12.1 11.9 14.3 15.0 15.7
Other Oil Product 8.29 8.28 16.6 15.7 16.5 We adjust our GP/tonne
Implied Average Jet Fuel 141 74.4 56.6 64.7 64.7 assumptions for FY16F/17F
Gross Profit per Tonne 1.34 1.76 1.37 1.46 1.51 slightly downward on the
Contribution from 43.2 42.3 58.8 62.9 66.8 expectation of a more
challenging trading environment.
Segmental Breakdown
FY Dec 2014A 2015A 2016F 2017F 2018F
Revenues (US$m)
Middle distillates 13,508 7,010 6,400 7,680 8,064
Other oil products 3,553 1,978 3,010 3,268 3,431
Total 17,061 8,987 9,410 10,948 11,495

Income Statement (US$m)


FY Dec 2014A 2015A 2016F 2017F 2018F
Revenue 17,061 8,987 9,410 10,948 11,495
Cost of Goods Sold (17,034) (8,952) (9,368) (10,903) (11,447)
Gross Profit 27.4 35.4 42.3 45.0 48.6
Other Opng (Exp)/Inc (16.5) (13.1) (18.7) (18.5) (20.6)
Operating Profit 10.9 22.3 23.5 26.5 28.0
Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0
Associates & JV Inc 43.2 42.3 58.8 62.9 66.8
Net Interest (Exp)/Inc (3.1) (1.0) (0.5) (0.5) (0.5)
Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0
Pre-tax Profit 51.0 63.6 81.8 88.9 94.3
Tax (1.9) (2.3) (3.3) (3.6) (3.8)
Minority Interest 0.0 0.0 0.0 0.0 0.0 Tax rate to remain low
Preference Dividend 0.0 0.0 0.0 0.0 0.0 as CAO receives tax
Net Profit 49.2 61.3 78.6 85.4 90.5 incentives under
Net Profit before Except. 49.2 61.3 78.6 85.4 90.5 Singapores Global
EBITDA 55.6 66.2 83.9 90.8 95.9 Trader Programme.
Growth
Revenue Gth (%) 9.6 (47.3) 4.7 16.3 5.0
EBITDA Gth (%) (30.1) 19.1 26.7 8.2 5.7
Opg Profit Gth (%) (65.1) 104.8 5.3 12.5 5.7
Net Profit Gth (Pre-ex) (%) (30.0) 24.7 28.2 8.7 6.0
Margins & Ratio
Gross Margins (%) 0.2 0.4 0.4 0.4 0.4
Opg Profit Margin (%) 0.1 0.2 0.3 0.2 0.2
Net Profit Margin (%) 0.3 0.7 0.8 0.8 0.8
ROAE (%) 9.1 10.7 12.7 12.6 12.2
ROA (%) 3.2 5.5 8.9 8.8 8.4
ROCE (%) 1.9 3.7 3.6 3.7 3.6
Div Payout Ratio (%) 26.5 29.8 30.0 30.0 30.0
Net Interest Cover (x) 3.5 21.5 47.1 53.0 56.0
Source: Company, DBS Bank

ASIAN INSIGHTS VICKERS SECURITIES


Page 4 Page 49
Company Guide
China Aviation Oil

Quarterly / Interim Income Statement (US$m)


FY Dec 3Q2015 4Q2015 1Q2016 2Q2016 3Q2016

Revenue 2,399 1,973 1,464 3,023 3,940


Cost of Goods Sold (2,386) (1,965) (1,451) (3,013) (3,929)
Gross Profit 12.9 8.00 13.2 9.90 10.4
Other Oper. (Exp)/Inc (4.1) (5.7) (2.3) (4.3) (5.3)
Operating Profit 8.80 2.30 10.8 5.62 5.08
Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0
Associates & JV Inc 9.73 9.75 14.2 19.4 19.5
Net Interest (Exp)/Inc (0.2) (0.2) (0.1) (0.2) (0.7)
Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0
Pre-tax Profit 18.3 11.9 24.9 24.8 23.9
Tax (0.6) (0.4) (0.7) (1.2) (0.7)
Minority Interest 0.0 0.0 0.0 0.0 0.0
Net Profit 17.7 11.4 24.2 23.6 23.2
Net profit bef Except. 17.7 11.4 24.2 23.6 23.2
EBITDA 18.5 12.0 25.0 25.0 24.6
Contribution from SPIA alone
Growth represented c.75% of 3Q16
Revenue Gth (%) (4.9) (17.8) (25.8) 106.5 30.3 net profit.
EBITDA Gth (%) (1.7) (35.0) 107.7 (0.1) (1.7)
Opg Profit Gth (%) 64.2 (73.9) 371.7 (48.1) (9.7)
Net Profit Gth (Pre-ex) (%) (0.3) (35.6) 111.6 (2.2) (1.7)
Margins
Gross Margins (%) 0.5 0.4 0.9 0.3 0.3
Opg Profit Margins (%) 0.4 0.1 0.7 0.2 0.1
Net Profit Margins (%) 0.7 0.6 1.6 0.8 0.6

Balance Sheet (US$m)


FY Dec 2014A 2015A 2016F 2017F 2018F

Net Fixed Assets 6.79 6.21 5.64 5.06 4.49


Invts in Associates & JVs 270 266 275 285 295
Other LT Assets 9.96 9.43 8.70 8.20 7.90
Cash & ST Invts 94.3 171 241 313 392
Inventory 38.1 56.8 66.9 75.2 78.9
Debtors 959 337 314 342 348
Other Current Assets 0.0 0.0 0.0 0.0 0.0
Total Assets 1,379 846 910 1,029 1,128

ST Debt 0.0 0.0 0.0 0.0 0.0


Creditor 819 247 253 311 347
Other Current Liab 0.02 0.01 3.28 3.56 3.78
LT Debt 0.0 0.0 0.0 0.0 0.0
Other LT Liabilities 6.24 6.16 6.16 6.16 6.16
Shareholders Equity 554 593 648 707 771
Minority Interests 0.0 0.0 0.0 0.0 0.0
Total Cap. & Liab. 1,379 846 910 1,029 1,128

Non-Cash Wkg. Capital 179 147 124 102 76.7


Net Cash/(Debt) 94.3 171 241 313 392
Debtors Turn (avg days) 23.8 26.3 12.6 10.9 11.0
Creditors Turn (avg days) 21.2 21.7 9.7 9.5 10.5
Inventory Turn (avg days) 1.6 1.9 2.4 2.4 2.5
With net cash of
Asset Turnover (x) 11.0 8.1 10.7 11.3 10.7 US$203m as at end-
Current Ratio (x) 1.3 2.3 2.4 2.3 2.3 Sep 2016, CAO is well
Quick Ratio (x) 1.3 2.1 2.2 2.1 2.1 able to finance value-
Net Debt/Equity (X) CASH CASH CASH CASH CASH accretive M&A
Net Debt/Equity ex MI (X) CASH CASH CASH CASH CASH opportunities
Capex to Debt (%) N/A N/A N/A N/A N/A internally, if they arise.

Source: Company, DBS Bank

ASIAN INSIGHTS VICKERS SECURITIES


Page 50 Page 5
Company Guide
China Aviation Oil

Cash Flow Statement (US$m)


FY Dec 2014A 2015A 2016F 2017F 2018F

Pre-Tax Profit 51.0 63.6 81.8 88.9 94.3


Dep. & Amort. 1.50 1.56 1.56 1.33 1.13
Tax Paid (2.6) (2.2) 0.0 (3.3) (3.6)
Assoc. & JV Inc/(loss) (43.2) (42.3) (58.8) (62.9) (66.8)
Chg in Wkg.Cap. 36.1 33.1 19.6 21.6 25.4
Other Operating CF 4.34 (1.7) 0.0 0.0 0.0
Net Operating CF 47.2 52.1 44.2 45.6 50.5
Capital Exp.(net) (0.2) (0.3) (0.3) (0.3) (0.3)
Other Invts.(net) 0.0 0.0 0.0 0.0 0.0
Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0
Div from Assoc & JV 35.2 37.2 49.9 52.9 56.0
Other Investing CF 0.07 0.19 0.0 0.0 0.0
Net Investing CF 35.0 37.2 49.6 52.6 55.8
Div Paid (13.7) (12.8) (23.6) (25.6) (27.2)
Chg in Gross Debt (28.6) 0.0 0.0 0.0 0.0
Capital Issues 0.0 0.0 0.0 0.0 0.0
Other Financing CF (1.6) (0.3) 0.0 0.0 0.0
Net Financing CF (43.9) (13.0) (23.6) (25.6) (27.2)
Currency Adjustments (0.4) (0.1) 0.0 0.0 0.0
Chg in Cash 38.0 76.2 70.3 72.6 79.1
Opg CFPS (S cts) 1.87 3.20 4.15 4.05 4.23
Free CFPS (S cts) 7.92 8.75 7.41 7.65 8.46
Source: Company, DBS Bank

Target Price & Ratings History

S$
1.55 12- mt h
Dat e of Closing
4 6 S.No. T arget Rat ing
Report Price
Pric e
2 3
1.35 1: 29 Apr 16 0.87 1.04 NOT RATED
5
2: 07 J ul 16 1.30 1.62 BUY
3: 02 Aug 16 1.47 1.70 BUY
1.15 4: 30 Aug 16 1.44 1.70 BUY
5: 03 Nov 16 1.40 1.70 BUY
6: 13 Dec 16 1.43 1.70 BUY
0.95

1
0.75

0.55
Dec-15 Apr-16 Aug-16 Dec-16

Not e : Share price and Target price are adjusted for corporate actions.

Source: DBS Bank


Analyst: Paul YONG CFA
Singapore Research Team

ASIAN INSIGHTS VICKERS SECURITIES


Page 6 Page 51
Singapore Company Guide
ST Engineering
Version 6 | Bloomberg: STE SP | Reuters: STEG.SI Refer to important disclosures at the end of this report

DBS Group Research . Equity 13 Dec 2016

BUY Earnings should rebound in FY17


Last Traded Price ( 13 Dec 2016): S$3.41 (STI : 2,955.23)
Price Target 12-mth: S$3.68 (8% upside) (Prev S$3.50) Maintain BUY; fundamentals remain strong. ST Engineering
(STE) remains a relatively defensive stock with a healthy balance
Potential Catalyst: Smart city-related contract wins, M&A sheet and secure dividend payouts, and also looks set to resume
Where we differ: Slightly more conservative on earnings than consensus its earnings recovery trajectory in FY17. Its Aerospace segment
has positioned itself well by investing in growth markets such as
Analyst narrow-body aircraft Passenger-to-Freighter (PTF) conversions,
Suvro SARKAR +65 6682 3720 suvro@dbs.com the Chinese MRO market, and cabin interior solutions, to name
Singapore Research Team a few. The Electronics segment should also benefit from the
Smart City trend, not only in Singapore but various overseas
Whats New markets as well.
FY16 final dividends should be unaffected by one-off
write-downs recorded during the year Expect earnings recovery in 2017. In 3Q16, STE reported
S$61.1m in one-off write-downs and closure costs related to its
Expect earnings recovery in FY17 Chinese specialty vehicles subsidiary that has ceased operations.
STE is a beneficiary of the stronger US$ But our core estimates remained largely unchanged for FY16/17.
We expect a reasonable earnings rebound in FY17, following a
kitchen-sinking year in FY16 associated with a management
transition. Cessation of losses at the Chinese specialty vehicle
Price Relative subsidiaries, coupled with continued growth at Electronics
division, should help offset weakness at the Marine division in
FY17.Orderbook remained flattish at S$11.4bn as of end-3Q16,
and the YTD announced order win trend is encouraging.

Beneficiary of strong US$, no impact to dividends from one-off


items. We believe dividends in FY16/17 should be maintained at
15 Scts, notwithstanding the one-off earnings impact in FY16.
STE should also stand to benefit from the stronger US$
Forecasts and Valuation expectations as around 25% of sales are derived from the US.
FY Dec (S$ m) 2015A 2016F 2017F 2018F
Revenue 6,335 6,492 6,543 6,676 Valuation:
EBITDA 834 837 883 904 Our TP is adjusted to S$3.68 as we roll over to FY17 numbers.
Pre-tax Profit 630 552 654 673 Our TP is based on a blended valuation framework to factor in
Net Profit 529 426 519 534
Net Pft (Pre Ex.) 529 487 519 534
both earnings growth and long-term cash-generative nature of
Net Pft Gth (Pre-ex) (%) (0.5) (7.9) 6.6 2.8 the business.
EPS (S cts) 17.1 13.7 16.7 17.2
EPS Pre Ex. (S cts) 17.1 15.7 16.7 17.2 Key Risks to Our View:
EPS Gth Pre Ex (%) 0 (8) 7 3 A protracted slowdown in the shipbuilding and commercial
Diluted EPS (S cts) 17.1 13.7 16.7 17.2
vehicle businesses could hurt prospects, unless STE can offer
Net DPS (S cts) 15.0 15.0 15.0 15.0
BV Per Share (S cts) 68.7 67.3 69.0 71.2 niche products or streamline operations quickly. Also, the
PE (X) 19.9 24.8 20.4 19.8 continued lack of action on the M&A front could lead to
PE Pre Ex. (X) 19.9 21.7 20.4 19.8 inefficient use of balance sheet and lower ROEs in the future.
P/Cash Flow (X) 22.7 19.7 16.1 16.0
EV/EBITDA (X) 12.9 13.0 12.3 12.0 At A Glance
Net Div Yield (%) 4.4 4.4 4.4 4.4 Issued Capital (m shrs) 3,109
P/Book Value (X) 4.9 5.1 4.9 4.8
Mkt. Cap (S$m/US$m) 10,569 / 7,425
Net Debt/Equity (X) 0.0 0.1 0.1 0.1
ROAE (%) 24.8 20.2 24.5 24.5 Major Shareholders (%)
Temasek Holdings Pte Ltd (%) 51.2
Earnings Rev (%): 0 0 0 Aberdeen Asset Management (%) 5.0
Consensus EPS (S cts): 15.3 17.2 18.3 Capital Group (%) 4.2
Other Broker Recs: B: 6 S: 0 H: 6 Free Float (%) 39.6
Source of all data on this page: Company, DBS Bank, 3m Avg. Daily Val (US$m) 7.5
Bloomberg Finance L.P ICB Industry : Industrials / Aerospace & Defense

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ed: CK / sa:JC, PY
Company Guide
ST Engineering

Aerospace sales growth (%)


CRITICAL DATA POINTS TO WATCH

Earnings Drivers:
Conglomerate with diverse interests in defense and commercial
spheres. STE started out life as a defense contractor but has
leveraged its technical knowhow over the years to penetrate the
commercial market. It boasts multinational operations with a
global presence in 23 countries and 41 cities, and hires more
than 22,000 employees. The group has reduced its reliance on
the defense sector over time from 57% of revenues in 2002 to
the current 36%, with another 33% from government agencies Electronics sales growth (%)
and the balance from commercial businesses.

STE's four key business divisions bring diversification benefits. Its


Aerospace, Electronics, Land Systems and Marine businesses
contributed 33%, 27%, 22% and 15% respectively to FY15
revenues, allowing the company to avoid reliance on any
particular sector. This has engendered relatively stable revenues
and earnings, weathering even crisis periods.

Acquisitions have been a key driver, accounting for around


40% of revenue growth over the last decade. However, the Land Systems sales growth (%)
dampening effect of a weakening US dollar and addition of
lower-margin businesses meant earnings growth has not kept
up with top-line growth. Utilisation of its strong balance sheet
and steady cash flows to undertake acquisitions of high-ROE
assets could boost future earnings.

Healthy orderbook drives visibility. As of end-3Q16, STE's


orderbook stood at S$11.4bn, down slightly from S$11.6bn at
end-2Q16 but still provides healthy visibility on revenues over
FY16/17 at a roughly 1.8x book-to-bill ratio.
Marine sales growth (%)
Aerospace MRO primed for steady growth. Continued initiatives
by ST Aerospace to broaden its capabilities should propel its
growth in the longer term. These include a partnership with
Airbus for passenger-to-freighter conversion of its A320/A321
and A330 jets, marking a diversification of its conversion
portfolio; a continued expansion of its cabin interior service
solutions business, particularly for VIP aircraft completions; and
expansion of its mid-life aircraft leasing business.

Electronics divisions initiatives should be a key long-term


Source: Company, DBS Bank
growth driver. Within the Smart Nation framework, we estimate
projects worth more than S$1bn in the near future, as the
Singaporean government pushes for smart technology usage
across the utilities, healthcare, housing and transport spaces.
The recently launched TeLEOS-1 satellite is now ready to provide
commercial imagery services and should herald a new space-
centred growth channel for the division. We are also seeing
increased importance being placed on robotics, which could be
another future key growth driver.

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Company Guide
ST Engineering

Leverage & Asset Turnover (x)


Balance Sheet:
Healthy balance sheet can drive M&A ambitions. STE has
traditionally been in net cash position but ended FY15 in a
minor gearing position due to channelling of cash into bonds
and share buybacks to improve returns on capital. Nevertheless,
its balance sheet remains very strong and STE has ample
ammunition to pursue attractive acquisitions in growth areas.

Dividend payout should remain steady. Strong operating cash


flows provide support to healthy dividend yield levels of around
4.8% currently. Despite the fall in headline net profit expected
Capital Expenditure
in FY16, we believe the non-cash writedown recorded in 3Q16
should not have an effect on dividends, and total payout for
FY16 should be similar to the FY15 level of 15 Scts.

Share Price Drivers:


Strong order wins. Total announced order wins in FY15 of
S$4bn were slightly lower than previous years, as a result of the
Land Systems and Marine divisions seeing some weak industry
trends, while the Aerospace and Electronics divisions have
announced steady order wins. YTD order wins in 2016 are
trending slightly higher than 2015 order wins, and any further ROE (%)
improvement in order win momentum would be beneficial to its
stock price.

Recovery in the Marine sector. The Marine sector is arguably


facing the strongest industry headwinds on the commercial
front, with low offshore oil & gas spending and broad
overcapacity in shipping. Cost overruns in the US exacerbate the
situation. An industry recovery, as well as better productivity in
the US, would provide more confidence in the medium-term
earnings of the business.
Forward PE Band (x)
Key Risks:
Aerospace margins could come under pressure during
transition period. As STE has consolidated the European EfW
Airbus P2F operations, revenue will increase but margins will
be low owing to the learning cost involved in new P2F
programmes for the A330-300. STE also faces slowdown in its
CFM-56B engine MRO operations owing to increased engine
reliability and intense competition.

Protracted slowdown in shipbuilding. The traditional shipping


sector has been plagued by overcapacity for some time now, PB Band (x)
while the slide in oil prices also affects demand for offshore
vessels. Visibility on demand recovery is low at this point.

Company Background
ST Engineering (STE) is an integrated engineering group in the
aerospace, electronics, land systems and marine sectors. The
company has over the years diversified its businesses and
geographies.

Source: Company, DBS Bank

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Company Guide
ST Engineering

Key Assumptions
FY Dec 2014A 2015A 2016F 2017F 2018F
Aerospace sales growth (0.9) 1.41 14.1 4.64 3.92
Electronics sales growth (4.1) 7.96 8.79 6.75 6.78
Land Systems sales (5.3) (0.1) (14.3) (3.1) 0.0
Marine sales growth (%) 8.32 (28.6) (7.3) (16.6) (13.4)

Boost from Efw


Segmental Breakdown acquisition
FY Dec 2014A 2015A 2016F 2017F 2018F
Revenues (S$m)
Aerospace 2,061 2,090 2,384 2,494 2,592
Electronics 1,583 1,709 1,859 1,985 2,119
Land Systems 1,397 1,396 1,197 1,159 1,159
Marine 1,341 958 888 740 641
Others 157 182 164 164 164
Total 6,539 6,335 6,492 6,543 6,676 Marine revenues likely to
PBT (S$m) remain under pressure
Aerospace 283 291 296 309 320
Electronics 184 191 188 205 220
Land Systems 56.2 65.0 10.1 89.9 81.2
Marine 123 88.3 68.7 53.2 50.1
Others 4.70 (4.6) (11.0) (3.3) 1.64
Total 651 630 552 654 673
PBT Margins (%)
Aerospace 13.7 13.9 12.4 12.4 12.3
Electronics 11.6 11.2 10.1 10.3 10.4
Land Systems 4.0 4.7 0.8 7.8 7.0 Learning curve in Efw
Marine 9.2 9.2 7.7 7.2 7.8 P2F programmes
Others 3.0 (2.5) (6.7) (2.0) 1.0
Total 10.0 9.9 8.5 10.0 10.1

Income Statement (S$m)


FY Dec 2014A 2015A 2016F 2017F 2018F
Revenue 6,539 6,335 6,492 6,543 6,676
Cost of Goods Sold (5,221) (5,053) (5,193) (5,182) (5,274)
Gross Profit 1,319 1,282 1,298 1,361 1,402
Other Opng (Exp)/Inc (711) (694) (712) (726) (750)
Operating Profit 608 588 586 635 652 One-off items related to
closure of Chinese
Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0
specialty vehicle
Associates & JV Inc 57.2 58.3 59.5 53.6 54.6
subsidiary JHK
Net Interest (Exp)/Inc (14.3) (16.3) (32.9) (34.3) (34.0)
Exceptional Gain/(Loss) 0.0 0.0 (61.1) 0.0 0.0
Pre-tax Profit 651 630 552 654 673
Tax (114) (98.7) (121) (131) (135)
Minority Interest (5.0) (2.6) (4.3) (4.2) (4.3)
Preference Dividend 0.0 0.0 0.0 0.0 0.0
Net Profit 532 529 426 519 534
Net Profit before Except. 532 529 487 519 534
EBITDA 835 834 837 883 904
Growth
Revenue Gth (%) (1.4) (3.1) 2.5 0.8 2.0
EBITDA Gth (%) (6.4) (0.2) 0.3 5.5 2.4
Opg Profit Gth (%) (15.5) (3.2) (0.3) 8.3 2.7
Net Profit Gth (Pre-ex) (%) (8.4) (0.5) (7.9) 6.6 2.8
Margins & Ratio
Gross Margins (%) 20.2 20.2 20.0 20.8 21.0
Opg Profit Margin (%) 9.3 9.3 9.0 9.7 9.8
Net Profit Margin (%) 8.1 8.4 6.6 7.9 8.0
ROAE (%) 25.0 24.8 20.2 24.5 24.5
ROA (%) 6.2 6.4 5.2 6.4 6.5
ROCE (%) 10.3 10.6 9.9 11.0 11.1
Div Payout Ratio (%) 87.9 87.9 109.5 89.8 87.4
Net Interest Cover (x) 42.7 36.2 17.8 18.5 19.2
Source: Company, DBS Bank

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Company Guide
ST Engineering

Quarterly / Interim Income Statement (S$m)


FY Dec 3Q2015 4Q2015 1Q2016 2Q2016 3Q2016

Revenue 1,500 1,779 1,627 1,623 1,613


Cost of Goods Sold (1,181) (1,441) (1,335) (1,294) (1,279)
Gross Profit 319 338 292 330 334
Other Oper. (Exp)/Inc (175) (185) (180) (167) (177)
Operating Profit 144 153 112 162 157
Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0
Associates & JV Inc 15.4 17.6 22.6 12.4 13.3
Net Interest (Exp)/Inc (4.6) (3.9) (4.2) (4.6) (3.1)
Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 (61.1)
Pre-tax Profit 155 167 130 170 107
Tax (22.3) (23.4) (19.6) (37.3) (34.2)
Minority Interest 0.81 (2.3) (0.6) (5.8) 4.21
Net Profit 133 141 110 127 76.7
Net profit bef Except. 133 141 110 127 138 One-off items related to
EBITDA 207 221 190 231 236 closure of Chinese specialty
vehicle subsidiary JHK
Growth
Revenue Gth (%) (2.9) 18.6 (8.5) (0.2) (0.6)
EBITDA Gth (%) (0.6) 6.7 (13.7) 21.4 2.0
Opg Profit Gth (%) (2.8) 6.2 (26.7) 45.0 (3.1)
Net Profit Gth (Pre-ex) (%) 6.6 5.7 (21.7) 15.5 8.2
Margins
Gross Margins (%) 21.3 19.0 18.0 20.3 20.7
Opg Profit Margins (%) 9.6 8.6 6.9 10.0 9.8
Net Profit Margins (%) 8.9 7.9 6.8 7.8 4.8

Balance Sheet (S$m)


FY Dec 2014A 2015A 2016F 2017F 2018F

Net Fixed Assets 1,578 1,709 1,718 1,724 1,726


Invts in Associates & JVs 478 462 491 515 539
Other LT Assets 937 1,208 1,208 1,208 1,208
Cash & ST Invts 1,590 1,134 1,035 1,055 1,079
Inventory 1,802 1,943 1,991 2,007 2,047
Debtors 1,319 1,320 1,298 1,309 1,335
Other Current Assets 615 394 394 394 394
Total Assets 8,319 8,169 8,135 8,210 8,328

ST Debt 74.7 195 195 195 195


Creditor 1,667 1,703 1,623 1,636 1,669
Other Current Liab 1,974 1,822 1,903 1,908 1,921
LT Debt 944 1,019 1,019 1,019 1,019
Other LT Liabilities 1,395 1,170 1,170 1,170 1,170
Shareholders Equity 2,132 2,132 2,093 2,146 2,213
Minority Interests 132 129 133 137 142
Total Cap. & Liab. 8,319 8,169 8,135 8,210 8,328

Non-Cash Wkg. Capital 94.8 132 158 166 187


Net Cash/(Debt) 571 (79.3) (179) (159) (135)
Debtors Turn (avg days) 70.9 76.0 73.6 72.7 72.3
Creditors Turn (avg days) 118.2 126.4 121.3 119.2 118.8
Inventory Turn (avg days) 130.4 140.5 143.5 146.3 145.8
Asset Turnover (x) 0.8 0.8 0.8 0.8 0.8
Current Ratio (x) 1.4 1.3 1.3 1.3 1.3
Quick Ratio (x) 0.8 0.7 0.6 0.6 0.6
Net Debt/Equity (X) CASH 0.0 0.1 0.1 0.1
Net Debt/Equity ex MI (X) CASH 0.0 0.1 0.1 0.1
Capex to Debt (%) 22.0 22.5 16.5 16.5 16.5
Z-Score (X) 2.5 2.4 2.5 2.5 2.5
Source: Company, DBS Bank

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Company Guide
ST Engineering

Cash Flow Statement (S$m)


FY Dec 2014A 2015A 2016F 2017F 2018F

Pre-Tax Profit 651 630 552 654 673


Dep. & Amort. 171 187 191 194 198
Tax Paid (133) (111) (121) (131) (135)
Assoc. & JV Inc/(loss) (57.2) (58.3) (59.5) (53.6) (54.6)
Chg in Wkg.Cap. (72.2) (227) (25.8) (8.0) (20.8)
Other Operating CF 65.3 44.6 0.0 0.0 0.0
Net Operating CF 624 465 536 656 660
Capital Exp.(net) (224) (273) (200) (200) (200)
Other Invts.(net) 79.0 (264) 0.0 0.0 0.0
Invts in Assoc. & JV 5.67 0.27 (5.0) (5.0) (5.0)
Div from Assoc & JV 35.0 51.4 35.0 35.0 35.0
Other Investing CF (53.4) 7.98 0.0 0.0 0.0
Net Investing CF (157) (477) (170) (170) (170)
Div Paid (499) (498) (465) (467) (467)
Chg in Gross Debt (394) 109 0.0 0.0 0.0
Capital Issues 10.7 (75.9) 0.0 0.0 0.0
Other Financing CF (43.8) (55.1) 0.0 0.0 0.0
Net Financing CF (926) (520) (465) (467) (467)
Currency Adjustments (0.3) 12.6 0.0 0.0 0.0
Chg in Cash (459) (519) (99.4) 19.6 23.8
Opg CFPS (S cts) 22.3 22.3 18.1 21.4 21.9
Free CFPS (S cts) 12.8 6.20 10.8 14.7 14.8
Source: Company, DBS Bank

Target Price & Ratings History

Source: DBS Bank


Analyst: Suvro SARKAR

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Page 57
Industry Focus
ASEAN Aviation

DBS Bank recommendations are based an Absolute Total Return* Rating system, defined as follows:
STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)
BUY (>15% total return over the next 12 months for small caps, >10% for large caps)
HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)
FULLY VALUED (negative total return i.e. > -10% over the next 12 months)
SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)
Share price appreciation + dividends

Completed Date: 10 Feb 2017 07:15:17 (SGT)


Dissemination Date: 10 Feb 2017 08:00:04 (SGT)

GENERAL DISCLOSURE/DISCLAIMER
This report is prepared by DBS Bank Ltd. This report is solely intended for the clients of DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd,
its respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated
in any form or by any means or (ii) redistributed without the prior written consent of DBS Bank Ltd.

The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS
Bank Ltd, its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively,
the DBS Group)) do not make any representation or warranty as to its accuracy, completeness or correctness. Opinions expressed are subject to
change without notice. This document is prepared for general circulation. Any recommendation contained in this document does not have regard
to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of
addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate independent legal
or financial advice. The DBS Group accepts no liability whatsoever for any direct, indirect and/or consequential loss (including any claims for loss of
profit) arising from any use of and/or reliance upon this document and/or further communication given in relation to this document. This
document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. The DBS Group, along with its affiliates and/or
persons associated with any of them may from time to time have interests in the securities mentioned in this document. The DBS Group may have
positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and
other banking services for these companies.

Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can
be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments.
The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed and it
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This publication has not been reviewed or authorized by any regulatory authority in Singapore, Hong Kong or elsewhere. There is no planned
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The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and
assumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates on
which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly from actual
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UPON as a representation and/or warranty by the DBS Group (and/or any persons associated with the aforesaid entities), that:

(a) such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and
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Please contact the primary analyst for valuation methodologies and assumptions associated with the covered companies or price targets.

Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies)
mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the
commodity referred to in this report.

Page 20
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Industry Focus
ASEAN Aviation

DBS Vickers Securities (USA) Inc ("DBSVUSA")"), a U.S.-registered broker-dealer, does not have its own investment banking or research
department, has not participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction
in the past twelve months and does not engage in market-making.

ANALYST CERTIFICATION
The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the
companies and their securities expressed in this report accurately reflect his/her personal views. The analyst(s) also certifies that no part of his/her
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COMPANY-SPECIFIC / REGULATORY DISCLOSURES


1. DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates have a proprietary positions in the
Airports of Thailand, SIA Engineering, Singapore Airlines, ST Engineering, Thai Airways recommended in this report as of 30 Dec 2016.
2. DBS Bank Ltd does not market make in equity securities of the issuer(s) or company(ies) mentioned in this Research Report.

Compensation for investment banking services:


3. DBS Bank Ltd., DBSVS, their subsidiaries and/or other affiliates of DBSVUSA have received compensation, within the past 12 months for
investment banking services from Singapore Airlines as of 30 Dec 2016.

4. DBS Bank Ltd., DBSVS, their subsidiaries and/or other affiliates of DBSVUSA, within the next 3 months, will receive or intend to seek
compensation for investment banking services from Singapore Airlines as of 30 Dec 2016.

5. DBS Bank Ltd., DBSVS, their subsidiaries and/or other affiliates of DBSVUSA have managed or co-managed a public offering of securities for
Singapore Airlines as of 30 Dec 2016.

6. DBSVUSA does not have its own investment banking or research department, nor has it participated in any public offering of securities as a
manager or co-manager or in any other investment banking transaction in the past twelve months. Any US persons wishing to obtain further
information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document
should contact DBSVUSA exclusively.

Directorship/trustee interests
7. Peter Seah Lim Huat, Chairman & Director of DBS Group Holdings, is a Director / Chairman of Singapore Airlines as of 1 Jan 2017.
Lim Sim Seng, a member of DBS Group Executive Committee, is an Independent Non-Executive Director of ST Engineering as of 1 Feb 2017

Disclosure of previous investment recommendation produced:


8. DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates may have published other
investment recommendations in respect of the same securities / instruments recommended in this research report during the preceding 12
months. Please contact the primary analyst listed in the first page of this report to view previous investment recommendations published by
DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates in the preceding 12 months.

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only for wholesale investors within the meaning of the CA.

Page 21
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Industry Focus
ASEAN Aviation

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Industry Focus
ASEAN Aviation

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