Anchor Report - Thailand air transport - Land of air miles

See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts.

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Thailand air transport: Land of air miles

Buy AOT, THAI amidst booming tourism outlook and clear earnings drivers

We start coverage of Thailand’s aviation sector with a bullish stance, on our view that the sector’s re-rating could well continue into 2013. Catalysts include seasonally strong 4Q12/1Q13 results, a strong tourism outlook and domestic demand.

For airlines, THAI (Buy) has seen an earnings turnaround and we think its correlation to tourism is overlooked by the Street. We like AAV’s (Neutral) growth story, but we believe it is reflected in current valuations.

Our top pick is not an airline but airport operator AOT (Buy), which we believe stands to benefit from the anticipated aviation boom in Thailand but with less earnings risk, especially after the win-win decision in 2012 to allow low-cost carriers to use the Don Muang Airport.

Key analysis in this anchor report includes:

Identification of key drivers behind our 7-8% long-term aviation growth forecast, including domestic demand, tourism, and propensity to fly.

Details on why Thailand is in a sweet spot in terms of both geography and airport infrastructure to benefit from a Pan-Asia boom in flyers.

Explanation of why we still see room for Thailand’s LCC penetration to grow, based on the evolution in other ASEAN countries, and why this is not necessarily bad for full-service carriers like THAI.

February 6, 2013

Research analysts

Thailand Transport / Logistics

Tushar Mohata, CFA - NSM [email protected] +603 2027 6895

Bineet Banka - NSFSPL [email protected] +91 22 4053 3784

Thailand air transport

TRANSPORT/LOGISTICS

EQ U I T Y R E S E A RC H

Land of air miles

Buy AOT, THAI amidst booming tourism outlook and clear earnings drivers

February 6, 2013

Initiate coverage on Thailand aviation sector with a bullish outlook We initiate coverage of the Thailand aviation sector with a bullish stance. We expect 2013F to be another strong year for the sector, with ~9% overall passenger number growth (barring macro shocks), led by: a) a strong domestic demand outlook; b) tourist inflows expected by the tourism ministry to grow by 10% to 24.5mn, mainly from China and India; c) low-cost carrier (LCC) penetration in Thailand (currently at 27% market share) still having room to grow, which generates additional new traffic; and d) a structural improvement in propensity to fly (measured by income-adjusted RPK per capita) on growing incomes. With our oil team expecting a 5% y-y decline in oil prices in 2013F and 2014F, we think airlines can maintain margins and grow profits, which bodes well for ROE and should result in another year of re-rating in these stocks, in our view.

LCC shift to Don Muang (DMK) was a win-win for all We believe that the 2012 decision to allow LCCs to use DMK was a masterstroke, effectively doubling Bangkok’s congested airport capacity and allowing LCC expansion to continue unhindered for the next few years. Airlines, in turn, can enjoy lower costs and minimize delays, improving cost efficiencies, and AOT can now focus on the long-term expansion at BKK.

Buy AOT (our top pick) and THAI; Neutral on AAV We initiate coverage on AOT with a Buy (TP: THB145), as it has a high operating leverage to air traffic (3x), making it a direct beneficiary of growing passenger numbers. The airport operator also has lower earnings risk than airlines, in our view, with a forecast FY12-14F 20% EPS CAGR.

We also initiate coverage with a Buy on THAI (TP: THB28.50) on the back of its operational performance, which has shown steady improvement in 2012. We think THAI’s turnaround from a loss in 2Q12 might be sustainable (barring macro shocks) and would rekindle investor interest in the stock. With 77% revenue exposure to economy class (and consequently tourist traffic) and 70%-plus exposure to APAC traffic, THAI’s correlation to tourism is unappreciated by the Street, and warrants another look from investors, in our view.

Although we like AAV’s (and Thai AirAsia’s) growth story, we think that it is adequately reflected in the stock’s current valuation (even in the context of a robust 33% earnings CAGR for the next two years), which is at an adjusted EV/EBITDAR premium (2014: 9.5x) to the LCC universe of ~60%. Neutral (TP: THB6.10) on AAV.

Catalysts: Seasonally strong 4Q12, 1Q13 results and improving operating metrics should be key catalysts going into 2013

Anchor themes

We are bullish on Thailand's air transport sector, where we see growth of 7-8% pa. It has a relatively young LCC industry with scope for additional demand, planned airport capacity expansion to stay ahead of congestion, and backing from solid tourism demand and domestic consumption drivers.

Nomura vs consensus

We are more bullish on THAI and AOT than the street. We think AAV's earnings might disappoint near term.

Research analysts





Nomura | Thailand air transport February 6, 2013

2

Contents

4 Stock rating and rationale

5 Focus charts

7 Valuation and catalysts

7 SET Transport Index should continue on its upward trajectory

8 THB appreciation likely to benefit air transport players

9 Valuation comparables

10 Sensitivity

11 Strong aviation growth forecast for Thailand

11 Historical data point to a healthy demand outlook for air travel

11 8% y-y growth in 2012 implies resilience of passenger numbers

12 We estimate a ~7-8% medium- to long-term traffic growth in Thailand as well

12 Low cost carriers (LCCs) likely to be key enabler in traffic expansion

13 Strong correlation with GDP a positive when viewed in context of our bullish growth forecasts for Thailand

15 Propensity to fly has scope for 3x upside, even after adjusting for income differentials

16 Thailand’s LCC penetration is low for its income levels – suggesting more demand generation by LCCs to come

17 Tourism should continue to underpin Thailand’s inbound air traffic

17 At ~22mn tourists, Thailand is close to breaking into the top 10 most visited nations in the world

17 Four-hour flying radius from Thailand encompasses India, China and the ASEAN countries, making them suited to LCC proliferation

19 Healthy domestic fundamentals to support outbound traffic as well

19 Five key themes supporting more air travel

21 Cargo and business class might have a lacklustre 2013

22 Possible recovery in business class and cargo to begin in 2013 in our view


3

24 Risks

26 Appendix: Operating stats

29 Appendix: Fare comparison

30 Airports of Thailand PCL

54 Thai Airways International PCL

74 Asia Aviation PCL

93 Appendix A-1


4

Stock rating and rationale Fig. 1: Ratings, target price and rationale

Source: Nomura research

Stock code CurrencyShare price (31 Jan) Rating Price target

Implied upside

AOT AOT TB THB 105.50 Buy 145.00 37.4%

THAI Airways THAI TB THB 23.10 Buy 28.50 23.4%

AAV AAV TB THB 6.10 Neutral 6.10 0.0%

Rationale- We expect AOT's re-rating to continue, led by an expansion in forward earnings and return estimates, with consensus EPS estimates for AOT being raised ~50% since the beginning of 2012. This is backed by the proposed hikes in PSC charges to come into effect in FY14F, along with additional traffic growth to be realised by opening up of the DMK Airport.

- With most of its cost base relatively fixed, and a 60% share of revenues from aeronautical sources, operating leverage at AOT is a key driver for earnings upside, with every 1% in additional passengers resulting in a 3% boost in earnings.

- We note that AOT is still trading at a discount to the sector on growth-adjusted multiples, whereas we argue that higher-growth airports like AOT and MAHB (MAHB MK, Buy) should then trade at a premium to the sector PEG. We note that due to the defensive nature of earnings and generally higher dividend yields than airlines, airport-operator stocks trade at higher growth-adjusted P/E multiples than airlines. The sector average PEG is 1.7x. With AOT trading at PEG of only 1x, we think the discount to the sector is unwarranted.

- We also note that that AOT’s retail realisation of USD3/passenger at its airports is lower than most major airports, including Malaysia Airports. This suggests that AOT’s concession agreement with King Power leaves some room for upside, which might be realised once the BKK concession agreements are up for re-negotiation in FY15F, through more preferential terms for AOT.

Rationale- We expect THAI's massive underperformance vs peers to reverse on operational improvements, notably an increase in passenger loads to 77% in 9M12 (from 72% a year ago) which came amidst a relatively small loss in passenger yield (-1.2% to THB 2.70/RSK). We expect a profitable 4Q12 result. In line with consensus, we expect a substantial jump in profits for FY13-14F, led by softer oil prices.

- We also expect THAI to re-rate to mid-cycle valuations, as it currently trades below mean and at a discount to the full-service airline sector.

- We also note that THAI, with more than 70% of revenues from APAC and 77% from economy class, is correlated to tourism traffic, a fact which seems to be overlooked by the Street.

- We are also bullish on THAI's recent refleeting and retrofitting, as well as its expansion through THAI Smile, which if done correctly, has the potential to be profitable (like SIA's SilkAir), in our view.

Rationale- AAV has had a strong run since its IPO in May 2012. However, with valuations already peaking, we think AAV is arguably the world’s most expensive low-cost carrier (LCC) stock, with the high Street earnings growth expectations already price in, which might lead to investor disappointment for future earnings. We think that FY12F full-year earnings will likely fall short of Street estimates (median: THB 1.02bn), and thus limit near-term upside potential.

- We like the company’s growth story, with its fleet projected by management to almost double by 2016F, and we think earnings will follow a similar trend.

- A study of adjusted EV/EBITDAR multiples of Malaysia AirAsia (AIRA MK, Buy) shows that although AirAsia also traded up to more than 10x adj. forward EV/EBITDAR during the bullish months prior to the global financial crisis, it has since traded down to the 7-8x level and has struggled to break the 8.5x level. In fact, we note that the mere announcement of a new airline called Malindo in Malaysia in September 2012 was enough to make investors jittery and saw MAA falling to -1SD below 7x levels. As such, we note that Thai AirAsia cannot be immune to such future competitive pressures, and we prefer to wait for more attractive valuations to accumulate rather than chase the stock at such high levels.

- At the same time, due to the scarcity of Thai tourism plays, we think investors might continue to ascribe to a premium to AAV, as it is one of the cleaner exposures to the tourism sector, along with a strong domestic growth component as well. With foreign shareholding hovering around ~9-10% levels, and the stock breaching the USD1bn valuation zone, we think the current high valuations might sustain.


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Focus charts Fig. 2: Thailand tourist arrivals

Source: CEIC, Ministry of Tourism

Fig. 3: Stock price performance

Source: Bloomberg

Fig. 4: Oil price forecasts

Source: Bloomberg, Nomura research

Fig. 5: Thailand’s propensity to fly has upside

Source: SAP Group, Nomura research

Fig. 6: Domestic LCC share vs per capita GDP (nom USD)

Source: CAPA, IMF, World Bank, Nomura research

Fig. 7: International LCC share vs per capita GDP (nom USD)


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Fig. 8: LCC capacity share as % of total seats

Source: CAPA, AOT

Fig. 9: Market share of airlines – FSC and LCC

Source: AOT

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Thailand (Domestic)

Top 10 Airlines1. Thai Airways International 36.25%2. Thai Air Asia 12.17%3. Bangkok Airways 5.81%4. Cathay Pacific Airways 2.97%5. Emirates 2.68%6. Nok Air 2.13%7. Orient Thai Airlies 1.61%8. Qatar Airways 1.58%9. Singapore Airlines 1.47%10. China Airlines 1.34%

Of which - % of overall Within LCCs1. Thai Air Asia 12.17% 60.11%2. Nok Air 2.13% 10.52%3. Orient Thai Airlines 1.06% 5.26%4. Tiger Airways 0.95% 4.69%5. Air Asia 0.83% 4.11%6. JetStar Asia 0.57% 2.80%7. IndiGo Airlines 0.42% 2.09%8. Indonesia Air Asia 0.40% 1.97%9. Jeju Air 0.39% 1.95%10. CEBU Pacific Air 0.31% 1.51%


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Valuation and catalysts

SET Transport Index should continue on its upward trajectory

The SET Transport Index has gained 73% since the beginning of 2012 vs the SET’s 43% rise over the same period. AOT is up 140% over the same period, and AAV is up 64% since listing in May last year. AOT’s re-rating has occurred in line with consensus EPS estimates being raised ~50% since the beginning of 2012, reflecting the additional traffic growth to be realised by opening up the alternative DMK Airport for Thailand, which frees up the congested Suvarnabhumi Airport for additional capacity addition by full-service carriers.

On the one hand, THAI has underperformed peers and the broader index, while we note EPS revisions for THAI are holding up relatively well for FY13F, with FY14F consensus expecting a substantial growth in profits.

For AAV, we have seen consensus cutting earnings estimates for FY13F/14F, owing to higher-than-expected costs. As such, valuations for AAV are significantly above +1SD to the mean on most metrics we choose to look at (barring simple P/B which has been deflated due to a lumpy fair-value gain on IPO raising the book value).

We think that SETTRANS’ re-rating might continue into 2013 as well, with catalysts such as seasonally strong 4Q12 and 1Q13 results to be announced in the first six months, a bullish outlook for the tourism sector, and domestic demand. Fig. 10: Sector performance

Source: Bloomberg

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Source: Bloomberg

Fig. 12: THAI: EPS revisions

Source: Bloomberg

Fig. 13: AOT: EPS revisions

Source: Bloomberg

Fig. 14: AAV: EPS revisions

Source: Bloomberg

THB appreciation likely to benefit air transport players

AOT: After having suffered forex losses in FY11, AOT entered into a cross-currency and interest-rate swap contract for 78% of the remaining balance of loan for JPY-THB. This also increased the effective borrowing cost of AOT to ~5%. As such, AOT will largely lose out on the impact of the recent JPY weakening vs the THB, but since we exclude the impact of forex gains / losses in our core net income calculations, and since 22% of the borrowings are still unhedged, we think on an overall basis, AOT will still benefit from the JPY weakening.

THAI: For the income statement, THAI’s revenue is denominated primarily in foreign currencies, with the ratio being 38% USD, 28% EUR, 9% JPY and 24% THB. On the cost side, THAI’s exposure is 66% USD, 8% EUR, 3% JPY and 23% THB, with fuel costs and lease costs denominated in USD being the biggest cost item. As such, although THAI is net short USD (benefitting from THB appreciation), it is also net long EUR and JPY, thus losing out when these depreciate. However, in terms of balance-sheet liabilities, it has loans denominated in JPY (11% of overall) and EUR (33% of overall), so a THB appreciation benefits here. Overall, we estimate THAI should be a beneficiary of THB appreciation.

AAV: Approximately 65-70% of AAV’s revenue is denominated in THB, but ~80% of operating cost is in USD (oil, lease cost and MRO). There is no significant debt exposure to foreign currencies and as a result, AAV benefits from THB appreciation, in our view.

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Valuation comparables Fig. 15: Valuation comparables

Source: Nomura estimates for AOT, AAV and THAI. Bloomberg consensus for the rest. Priced as on 31-Jan-2013

NomuraLast

CloseMcap

(USDmn)

EPS CAGR

(12-14F)PEG

(2 YR)Rating 30/Jan CY13F CY14F CY13F CY14F CY13F CY14F CY13F CY14F CY13F CY14F

AIRPORTSAeroports De Paris ADP FP Neutral 60.76 8,168 16.8 14.8 1.6 1.5 9.1 8.6 9.6 10.1 3.1 3.5 11% 1.7Airports of Thailand AOT TB Buy 105.5 5,049 17.6 13.7 1.8 1.7 10.5 8.8 10.5 12.6 2.8 3.6 23% 1.0Auckland International Airport AIA NZ Neutral 2.835 3,150 24.7 22.5 1.5 1.5 14.0 13.1 6.2 6.7 4.1 4.4 8% 3.6BBA Aviation BBA LN NR 222 1,691 12.1 11.6 1.5 1.4 7.8 7.5 13.2 12.7 4.0 4.4 7% 1.8BCIA 694 HK Buy 6.46 3,607 14.3 12.0 1.4 1.3 8.6 7.7 9.8 11.1 2.3 2.8 21% 0.8Fraport AG FRA GR Buy 44.605 5,588 16.3 14.1 1.3 1.3 8.5 7.8 8.6 9.6 2.9 3.2 9% 1.7Gemina GEM IM NR 1.27 2,541 26.7 15.6 1.1 1.0 8.2 6.3 4.6 8.0 0.2 0.5 416% 0.3GMR Infrastructure GMRI IN NR 18.85 1,375 44.5 14.0 0.8 0.8 10.9 8.1 1.5 5.7 0.0 0.0 nm nm

Guangzhou Baiyun IA 600004 CH NR 7.58 1,402 10.0 9.1 1.1 1.1 4.9 4.6 12.0 12.4 4.0 #N/A N/A 12% 0.9

Malaysia Airports Holdings MAHB MK Buy 5.51 2,158 18.4 15.7 1.5 1.4 9.6 8.2 8.6 9.3 2.8 3.2 -1% 1.0Shanghai International Airport 600009 CH NR 13.3 4,121 13.6 12.0 1.4 1.3 8.6 7.7 10.8 11.2 2.6 3.4 16% 7.0

Shenzhen Airport 000089 CH NR 4.23 1,150 13.7 12.7 0.9 0.9 7.8 7.0 7.5 5.8 #N/A

N/A#N/A N/A -1% 8.1

Sydney Airport SYD AU Neutral 3.17 6,158 35.9 33.6 3.5 4.0 13.3 12.6 7.3 9.7 6.8 7.2 8% 4.1Xiamen International 600897 CH NR 13.65 654 9.8 8.7 1.6 1.3 5.8 5.2 16.5 15.9 #N/A #N/A 13% 0.8Airports Median 16.3 14.0 1.4 1.3 8.6 7.7 9.6 10.1 2.9 3.3 11% 1.7

AIRLINESFULL SERVICEAir China 753 HK Buy 6.64 11,895 11.5 9.4 1.2 1.1 6.6 5.9 11.1 11.9 1.5 2.0 30% 0.5Air New Zealand AIR NZ Buy 1.25 1,148 8.5 7.3 0.8 0.7 3.0 2.7 9.3 10.0 6.2 7.1 22% 0.5Asiana Airlines 020560 KS NR 6030 1,081 7.2 4.5 0.9 0.7 6.3 5.4 13.6 18.3 0.3 0.5 21% 0.3Cathay Pacific 293 HK Buy 15.06 7,638 20.2 11.6 1.0 1.0 8.2 6.6 4.9 8.0 1.6 2.9 181% 0.4China Airlines 2610 TT NR 12.95 2,277 18.7 10.9 1.2 1.1 10.0 9.1 7.2 8.5 0.6 0.7 170% 0.6China Eastern Air 670 HK Neutral 3.53 6,250 8.5 7.6 1.2 1.0 5.1 4.5 15.7 14.7 0.2 0.3 18% 0.6China Southern Air 1055 HK Buy 4.66 6,437 10.5 9.2 1.0 0.9 5.7 5.0 9.4 10.6 1.6 1.8 26% 0.6EVA Airways 2618 TT Neutral 18.9 2,083 17.0 11.6 1.5 1.3 7.4 6.7 9.6 11.2 0.8 0.7 88% 0.4Hainan Airlines 600221 CH NR 4.35 4,264 10.8 9.4 1.3 1.1 7.3 6.8 13.0 13.5 1.8 #N/A 13% 1.0Korean Air 003490 KS Buy 45450 3,006 12.5 7.4 1.0 0.9 6.8 6.2 15.2 11.5 0.5 0.5 40% 0.3Malaysian Airlines MAS MK Reduce 0.69 742 #N/A 15.7 1.3 1.2 10.7 6.9 4.1 8.6 0.0 0.0 nm nmQantas Airlines QAN AU Buy 1.53 3,599 22.0 7.7 0.5 0.5 3.5 2.8 4.4 6.6 1.0 2.9 107% 0.4Singapore Airlines SIA SP Buy 10.99 10,408 20.5 15.9 1.0 0.9 3.9 3.4 5.1 6.2 3.2 4.0 63% 0.7Thai Airways THAI TB Buy 23.1 1,689 8.1 5.9 0.7 0.6 5.2 4.6 8.9 11.2 3.1 4.2 43% 0.3Full Service Median 11.5 9.3 1.0 1.0 6.4 5.7 9.3 10.3 1.3 1.8 30% 0.5

LOW COST CARRIERSAirAsia AIRA MK Buy 2.78 2,487 8.4 7.4 1.2 1.1 6.9 6.1 16.0 15.4 1.3 1.4 11% 0.7Asia Aviation AAV TB Neutral 6.1 991 23.2 17.2 1.5 1.4 9.6 6.4 6.7 8.4 NA NA 28% 1.0Cebu Air CEB PM Buy 62 923 11.0 11.0 1.5 1.4 6.3 6.0 14.4 13.3 2.0 0.7 4% 2.7EasyJet PL EZJ LN Buy 931 5,855 12.0 11.2 1.8 1.6 7.2 6.6 16.0 15.7 2.6 2.8 18% 0.9Ryanair Holdings plc RYA LN Neutral 5.491 10,791 10.7 12.5 2.2 2.0 8.1 7.6 16.4 16.3 1.2 0.7 9% 1.7Southwest Airlines LUV US NR 11.21 8,273 11.1 9.3 1.1 1.0 3.8 3.5 9.4 10.9 0.2 0.2 45% 0.4Tiger Airways TGR SP NR 0.765 507 20.4 11.4 2.0 1.7 11.2 7.6 12.3 14.6 0.0 0.0 nm nmVirgin Blue Holdings VAH AU Neutral 0.43 1,102 10.6 6.7 0.9 0.8 5.0 4.3 9.3 11.9 3.5 2.8 349% 0.4Westjet Airlines Ltd WJA CN NR 21.36 2,827 10.8 10.0 1.7 1.5 3.5 3.2 18.3 29.9 1.7 2.1 11% 1.1LCC Median 11.0 11.0 1.6 1.5 6.9 6.1 14.4 14.6 1.3 1.4 15% 0.8

P/E P/B EV/EBITDA ROE Div Yld


10

Sensitivity Fig. 16: Sensitivity to oil, load, yields – AAV, THAI

Source: Nomura estimates

Fig. 17: Sensitivity to Pax numbers, PSC hikes - AOT


% chg in FY 14EPS % chg in TP

AAV -8% -7%

THAI -17% -2%


AAV -6% -5%

THAI -13% -2%


AAV -2% -2%

THAI -6% -1%

Seat Load factor drops 1% point

1% drop in Current Yield (Revenue / RPK)

Oil Price increases by 1%

Company

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AOT -3.00% -1.45%


AOT -10.4% -3.0%

PSC hike is not approved

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11

Strong aviation growth forecast for Thailand

Historical data point to a healthy demand outlook for air travel

Thailand’s total passenger throughput has witnessed strong growth over the last seven years, notwithstanding crisis periods like the floods of late 2011, political unrest, and high fuel prices increasing the cost of travel and average ticket prices. As a reference we study the numbers provided by AOT, which comprises ~85% of Thailand’s air traffic, and are a good proxy for overall air travel demand. Since they comprise a large part of Thailand’s international traffic, they are a more relevant benchmark than the 28 regional airports managed by the DCA, in our view.

Overall passenger numbers have increased at a 2007-12 CAGR of 5% (Domestic: 4.7% / International 5.5%), suggesting that the high fuel costs which currently prevail have not deterred potential travellers from flying.

8% y-y growth in 2012 implies resilience of passenger numbers

After the flooding in Thailand in late 2011, which impacted demand, traffic was quick to normalize in 2012, with domestic as well as international throughput growing at ~8% y-y in 2012, also in the absence of any political roadblocks. This reinforces our view that traffic growth is relatively quick to return to steady-state levels of high single digits in the absence of external shocks, which are only short-term in nature.

Fig. 18: Traffic at AOT

Source: Company data

(000) FY07 FY08 FY09 FY10 FY11 FY1207-12

CAGR2012 over

2011Passenger trafficSuvarnabhumi BKK 41,935 41,180 37,051 42,497 47,801 52,369 4.5% 9.6%

International 32,689 34,025 28,106 32,381 37,386 38,688 3.4% 3.5%Domestic 9,246 7,155 8,945 10,116 10,414 13,681 8.2% 31.4%

Don Muang DMK 3,189 5,752 2,784 2,759 3,973 2,717 (3.1%) (31.6%)International 11 29 23 17 29 102 55.9% 255.3%Domestic 3,178 5,723 2,761 2,742 3,944 2,615 (3.8%) (33.7%)

Chiang Mai CNX 3,371 3,276 2,872 3,183 3,680 4,335 5.2% 17.8%International 351 347 237 250 345 490 6.9% 41.8%Domestic 3,020 2,929 2,636 2,933 3,335 3,845 4.9% 15.3%

Hat Yai HDY 1,336 1,380 1,283 1,465 1,835 2,013 8.6% 9.7%International 95 24 13 90 204 216 18.0% 5.9%Domestic 1,241 1,356 1,270 1,375 1,630 1,797 7.7% 10.2%

Phuket HKT 5,478 5,943 5,442 6,797 8,206 9,161 10.8% 11.6%International 2,055 2,412 2,228 3,092 4,137 4,817 18.6% 16.4%Domestic 3,423 3,532 3,214 3,705 4,070 4,344 4.9% 6.7%

Chiang Rai CEI 712 772 649 724 806 926 5.4% 15.0%International 0 0 0 1 9 5 138.1% (46.8%)Domestic 712 772 648 724 796 921 5.3% 15.7%

Total 56,020 58,304 50,081 57,425 66,301 71,521 5.0% 7.9%International 35,201 36,837 30,607 35,830 42,111 44,318 4.7% 5.2%Domestic 20,819 21,467 19,474 21,595 24,190 27,203 5.5% 12.5%

Aircraft movements (000) 390 394 347 386 441 480 4.2% 8.8%

Cargo volume (000 tonnes) 1,306 1,381 1,063 1,380 1,435 1,468 2.4% 2.3%


12

We estimate a ~7-8% medium- to long-term traffic growth in Thailand as well

We are bullish on Thailand’s long-term traffic growth potential, supported by the long-term orderbooks of major suppliers like Boeing and Airbus. South East Asia, due to its healthy economic fundamentals along with the separation by sea, has arguably a higher need for air travel, given the different countries cannot be connected by road or high-speed rail, and ferry travel is too slow. In its 20-year forecast for air traffic, Boeing forecasts 7-8% CAGR in revenue passenger kilometres (RPK) over 2011-31F, with traffic effectively growing to 4x its current size over the next 20 years.

With China, Northeast Asia, South Asia and intra-SE Asia being the highest growth zones in the region, all of which are relatively four hours away from Thailand and therefore accessible by narrow-body jets, we think that Thailand will grow in line with the other emerging peers like Indonesia, and thus a long-term 7-8% growth forecast for Thailand can be considered quite achievable, in our view.

Fig. 19: Boeing’s forecasts for aircraft growth (2011-31F) – long-term growth intact Single-aisle jets to grow 3x in the next 20 years

Source: Boeing Current Market Outlook 2011-31

Fig. 20: 20 year traffic growth forecasts Intra SE Asia traffic to grow at 7.6%

RPK Average

growth

(bn) 2011 to 2031

Africa - S.E. Asia 6.8%

China - S.E. Asia 7.7%

Europe - S.E. Asia 5.0%

Middle East - S.E. Asia 6.4%

N. America - S.E. Asia 5.8%

N.E. Asia - S.E. Asia 5.4%

Oceania - S.E. Asia 5.1%

S.E. Asia - S.E. Asia 7.6%

S.E. Asia - S. Asia 8.6%


Low cost carriers (LCCs) likely to be key enabler in traffic expansion

Like other emerging markets in ASEAN, low-cost carriers, let by the AirAsia group (AirAsia Bhd + Thai AirAsia + Indonesia AirAsia) have been instrumental in increasing affordability of air travel and demand growth. In fact, the LCC market share at AOT airports has increased from being non-existent in 2003-04 when there were no LCCs to about 27% in 2011, largely dominating domestic passenger traffic. The AirAsia group now accounts for more than 15% of AOT’s total traffic, largely at the cost of Thai Airways, which has seen its share slip from 42% in 2006 to 33% now. However, a point to be noted in this instance is that in terms of passenger numbers, Thai has remained largely stagnant at 22mn, and LCCs have grown the overall size of the market, rather than significantly taking away Thai’s traffic numbers.

South East AsiaKey indicators and new airplane marketsGrowth measures (2011-31F) 2011-31F New airplanes Share by sizeEconomy (GDP) 4.3% Large 110 4%Traffic (RPK) 6.5% Twin aisle 950 32%Cargo (RTK) 5.7% Single aisle 1,840 62%Airplane fleet 5.7% Regional jets 70 2%

Total 2,970Market size (2011-31F) 2011 Fleet 2031F FleetDeliveries 2970 Large 130 150Market value $470bn Twin aisle 310 980Average value $160mn Single aisle 680 2,280

Regional jets 20 70Total 1,140 3,150


13

Fig. 21: Market share at AOT airports in terms of passengersLCC market share has grown from 15% to 27% in 2011

Source: AOT, Nomura research


Source: CAPA, OAG

Strong correlation with GDP a positive when viewed in context of our bullish growth forecasts for Thailand

An analysis of data from AOT reveals that overall traffic, measured in terms of passenger numbers bears a strong correlation with overall GDP, with every incremental US$15bn to current GDP accounting for an ~1mn passengers, with an estimated reliability (R-sq of ~0.8). With our economics team expecting a strong 4.5%/5% GDP growth in 2013F/14F, (please see report, Global Economic Outlook Monthly: Tug of war, published 14 January 2013) we expect traffic growth to continue on its healthy trend of ~10% y-y growth in the next two years.

Fig. 23: Traffic correlation with GDP

Source: AOT, World Bank, Nomura estimates

Fig. 24: Real GDP growth forecasts

Source: Nomura economics estimates

2006 2007 2008 2009 2010 2011Full Service/Mainline CarriersThai Airways 42% 42% 41% 42% 37% 33%Bangkok Airways 5% 5% 5% 5% 5% 5%All others 39% 37% 37% 35% 38% 34%Full Service/Mainline 85% 83% 83% 82% 80% 73%

Low-Cost CarriersThai Air Asia 8% 9% 11% 13% 13% 13%AirAsia 1% 1% 1% 1% 1% 1%Indonesia Air Asia 0% 0% 0% 0% 0% 0%

AirAsia Group 9% 10% 11% 13% 14% 15%All others 6% 8% 6% 5% 6% 13%Low-Cost Carriers 15% 17% 17% 18% 20% 27%

Total 100% 100% 100% 100% 100% 100%

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y = 0.0715x + 41.176R² = 0.787

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1Q13 2Q13 3Q13 4Q13 2012 2013 2014

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14

Fig. 25: Thailand economic forecasts

Notes: Numbers in bold are actual values; others forecast. Interest rate and currency forecasts are end of period; other measures are period average. All forecasts are modal forecasts (i.e., the single most likely outcome). Table reflects data available as of 10 Jan 2013. Source: CEIC and Nomura Global Economics.

% y-o-y growth unless otherwise stated 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 2012 2013 2014

Real GDP (sa, % q-o-q, annualized) 53.3 11.7 5.0 5.1 -4.8 12.4 7.7 4.5

Real GDP 0.4 4.4 3.0 17.2 4.1 4.2 4.9 4.8 6.0 4.5 5.0

Private consumption 2.9 5.3 6.0 11.9 7.6 7.3 4.7 0.8 6.5 5.1 3.9

Public consumption -0.2 7.4 9.0 6.0 2.1 -2.4 -4.6 2.4 5.8 -1.0 -1.3

Gross fixed capital formation 5.2 10.2 15.5 29.0 10.9 7.1 4.0 6.3 14.6 6.9 10.7

Exports (goods & services) -3.2 1.1 -2.8 23.0 5.9 3.6 6.0 1.0 3.8 4.1 5.0

Imports (goods & services) 4.3 8.6 -1.8 21.7 6.0 3.4 7.4 -3.9 7.8 3.1 5.0

Contribution to GDP growth (% points)

Domestic final sales 2.5 5.9 7.6 13.1 6.3 5.4 2.9 2.1 7.1 4.2 4.5

Inventories 2.9 2.8 -3.8 1.6 -1.5 -2.2 0.9 0.4 0.9 -0.6 -0.1

Net trade (goods & services) -4.7 -4.2 -1.1 3.4 0.9 0.5 0.0 3.2 -1.8 1.2 0.7

Exports -1.4 2.0 -3.8 21.1 6.2 5.5 9.0 -4.0 3.7 5.0 6.9

Imports 10.4 9.5 -1.7 18.5 4.6 5.8 14.7 1.6 8.8 6.6 7.2

Merchandise trade balance (US$bn) -5.2 -5.2 -1.6 -6.1 -4.5 -5.7 -5.2 -7.6 -18.1 -23.0 -25.4

Current account balance (US$bn) 1.4 -2.4 2.7 0.9 0.6 -2.5 -0.5 0.1 2.7 -2.2 -2.5

Current account balance (% of GDP) 1.6 -2.6 3.1 1.0 0.6 -2.4 -0.4 0.1 0.7 -0.6 -0.6

Fiscal balance (% of GDP, fiscal year basis) -2.5 -3.2 -3.7

Consumer prices 3.4 2.5 2.9 3.1 3.4 3.2 3.1 3.2 3.0 3.2 3.1

Unemployment rate (sa, %) 0.8 0.8 0.8 0.6 0.9 0.8 0.6 0.6 0.7 0.7 0.7

Overnight repo rate (%) 3.00 3.00 3.00 2.75 2.75 2.75 2.75 2.75 2.75 2.75 3.25

Exchange rate (THB/USD) 30.8 31.8 30.8 30.6 29.5 29.3 29.2 29.1 30.6 29.1 28.6


15

Propensity to fly has scope for 3x upside, even after adjusting for income differentials

A study of the RPKs (domestic and international) in the Asia-Pacific region shows that Thailand lies below the average trend line, adjusted for income differentials, implying that there is room to grow demand and traffic in Thailand, even at current income levels. We think this gap bodes well for aviation fundamentals in Thailand, and that upside in Thai air traffic can be had from two avenues:

a) Normalisation of traffic vis-à-vis income levels and

b) Organic growth in traffic through GDP/capita uplift

At a current total RPK / capita level of 895km, the predicted income adjusted RPK/capita as per the model is ~2700, which suggests a 3x growth in traffic, even before the upside from GDP growth kicks in. Fig. 26: Total (DOMESTIC + INTERNATIONAL) RPK vs GDP / capita


Fig. 27: DOMESTIC RPK vs GDP / capita


Australia

Bangladesh

Brunei

Cambodia

China

IndiaIndonesia

JapanLao PDR

MalaysiaNew Zealand

Philippines

Singapore

South KoreaThailand

Vietnam

y = 1931.7ln(x) - 13733

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TOTAL traffic vs per capita GDP

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16

Thailand’s LCC penetration is low for its income levels – suggesting more demand generation by LCCs to come

Thailand’s LCC capacity share in domestic (2011: 40%) and international (14%) routes is lower than its peers in other ASEAN countries such as Malaysia, Indonesia and the Philippines. We believe there is room to grow the LCC share in both domestic and international routes – this will largely be realised through higher capacity deployment by LCCs led by Thai AirAsia, and supported by Nok Air and Thai Smile, and will be an underlying theme for the next five-six years, in our view.

Fig. 28: Domestic LCC share vs. per capita GDP (nom US$)


Fig. 29: International LCC share vs. per capita GDP (nom USD)


Australia

China

IndiaIndonesia

Japan

MalaysiaPhilippines

Russian Fed Saudi

S.Korea

THAILAND

Vietnam

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17

Tourism should continue to underpin Thailand’s inbound air traffic

At ~22mn tourists, Thailand is close to breaking into the top 10 most visited nations in the world

With a renewed thrust on promoting tourism, Thailand’s total tourist arrivals increased to 22.3mn passengers in 2012 (+16% y-y), and Thailand is close to breaking into the world’s top 10 visited nations based on Ministry of Tourism data. Tourist arrivals had grown by ~20% in the previous year (2011). We expect this trend to continue into 2013 (the Ministry of Tourism estimates 24.5mn, +10% y-y), underpinned by growth from China (12.5% of 2012 traffic), Malaysia (11.5%), Russia (5.9%), and India (4.6%). Japan (6%) and Korea (5.2%) are also stable sources of visitors to Thailand.

Chinese arrivals are expected to grow substantially in 2013, having already overtaken Malaysia as the top origin country in 2012 (2.7mn vs 2.5mn), especially riding on the back of the blockbuster Chinese movie Lost in Thailand, which has reportedly increased awareness about Thailand even more in China. Now, the popular film Lost in Thailand is cementing Thailand’s congenial image. Its story familiarizes Chinese with its streets, its people, and its pace of life, and it presents Thailand in such natural beauty, cultural exoticism, and lush colors, which easily lure middle-class Chinese living in heavily polluted cities. The happy story of Lost in Thailand is bringing real value to Thailand and China. It is moving millions of people across national borders, people who may otherwise not make the decision to travel. It is impressive – asiancorrespondent.com, Lost in Thailand: a win-win picture for Thailand and China, 26 January 2013.

The tourism authority is expecting 3.3mn tourists from China this year.Thailand’s tourist receipts per pax have also crossed the THB40,000/pax in 2011, having had at a CAGR of 3% y-y over the last decade.

Fig. 30: Thailand tourist arrivals

Source: CEIC, Nomura research

Fig. 31: Thailand tourist receipts per tourist


Four-hour flying radius from Thailand encompasses India, China and the ASEAN countries, making them suited to LCC proliferation

A 3,500km circle centred around Thailand reveals that most of India, China, Indochina, and ASEAN countries falls within this radius, making it within the range of the LCCs

-10%

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18

operating with narrow body A320 / 737NG family of aircraft, which fly for flights less than four hours in duration. As such, this has been one key contributing factor leading to higher tourist arrivals from these countries, as holiday-goers have a high propensity to fly low-cost. This is reflected in the proportion of tourist arrivals by air, which hovers around the 80% level and which we expect to continue to be the lion’s share of tourist traffic.

Fig. 32: 3500km and 8000km radius from Bangkok

Source: Great Circle Mapper, Nomura research

Fig. 33: Share of Thai tourist arrivals by nationality China, India and Russia showing strong growth

1995 2012 1995-2011

CAGR

Malaysia 16% 11.5% 5%

China 5% 12.5% 10%

Japan 12% 6.2% 2%

Korea 6% 5.2% 5%

UK 5% 3.9% 5%

India 2% 4.6% 13%

Russia 1% 5.9% 22%

Australia 3% 4.2% 9%

Source: CEIC

Fig. 34: % of tourist arrivals by air

Source: CEIC

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19

Healthy domestic fundamentals to support outbound traffic as well

Five key themes supporting more air travel

Thailand’s domestic demographics and economics have room to sustain more outbound traffic as well, particularly on LCCs.

• Increasing credit card usage (CAGR of 13% in credit card issuance from 2000-11), which leads to higher impulse spending.

• Growing monthly income per household (CAGR of 5.5% from 2000 to 2011), implying more purchasing power and disposable income on luxuries like holidays.

• Falling unemployment.

• Rising internet penetration, which leads to higher online travel bookings, the staple of LCCs.

• Growing consumer confidence.

In addition to the above, increasing urbanisation means more population situated near airport infrastructure and so also tends to increase air travel. According to the United Nations Secretariat forecast, the 2010-50 average annual rate of change in the percentage of Thailand’s urban population would be 1.25% above the world’s average of only 0.65%. As shown in the figure below, Thailand’s urban population as a percentage of total was at 33% against 53% globally in 2011, according to the United Nations Secretariat, implying Thailand has significant room for urbanisation.

Fig. 35: Rising number of credit cards Number of credit cards issued

Source: BOT

Fig. 36: Consumer confidence restored after the floods Consumer confidence Index

Source: The Center for Economic and Business Forecasting, UTCC

0

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Fig. 37: Income growth beyond inflation implies more purchasing power (THB) Average monthly income per household

Source: National Statistical Office

Fig. 38: Rising employment towards non-agriculture Number of employees by industry (in thousands)

Source: BOT

Fig. 39: Unemployment is diminishing Number of unemployed (in thousands)

Source: BOT

Fig. 40: Internet penetration Number and growth of internet users and mobile users

Source: NECTEC

Fig. 41: Fast urbanization Average annual rate of change of the percentage of urban population by major area, region and country, 2010-2050 (%)

Source: Population Division of the Department of Economic and Social Affairs of the United Nations Secretariat

Fig. 42: Significant room for urbanization Urban population as total population, 2011 (%)

Source: Population Division of the Department of Economic and Social Affairs of the United Nations Secretariat

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WorldChina

HongkongJapan

Republic of KoreaIndonesiaMalaysia

PhilippinesSingapore

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21

Cargo and business class might have a lacklustre 2013 The recovery in airlines earnings is also likely to be reliant on cargo and premium traffic improving — these experienced weak demand last year due to the slowdown in developed economies. In fact,the cargo business for the majority of Asian airlines was loss-making (based on announced results). For premium passenger traffic, IATA data highlights the traffic growth rate improved slightly to +4.4% in November 2012, from +2.3% in October 2012, yet still below the growth rate of +4.7% in September 2012 and +8.5% in August 2012. For the first 11 months of 2012, IATA data highlights premium traffic grew by 4.6%, compared to the growth rate of 5.5% in 2011. In fact, growth started to slow from March 2012 and then remained relatively flat since August.

Unsurprisingly, airlines with higher exposure to cargo and premium classes suffered the most in 2012F (based on our estimates). Amongst the Thailand carriers, THAI is more susceptible to cargo weakening, with 14% of revenue exposure to cargo in 2011. For AAV, cargo is an ancillary and LCCs have been shown to be more efficient in realising profits from cargo due to optimal belly space utilisation.

We note that demand for air cargo and premium traffic is driven by global economies, consumer demand, and business sentiment. However, the European and US economies weakened throughout the year, with EU quarterly GDP at -1.6% in 4Q12F compared to 0.2% in 1Q12. Likewise, US quarterly GDP has been weakening of late (-0.1% in 4Q12). This led to weaker demand and yield pressure, which led to cargo being loss-making. On the positive side, Nomura’s global economics team are estimating EU and US quarterly GDP bottoming in 1Q13 and recovering to -0.1% and 3.1% by 4Q13 for EU and the US, respectively (see reports, US Economic Weekly, 1 February 2013, and Global Economics Outlook Monthly, 14 January 2013). Similarly our PC and handset analysts are looking for unit shipments to recover in 2Q13F for PC and 1Q13F for handsets (see report, Asia Technology: Outlook 2013, 10 December 2012). These could potentially drive cargo demand. We note that most of air cargo goods are coming from high-tech products including PCs and handsets.

Domestic business sentiment indicates that the “feel good” factor is back We believe the main driver behind strong private investment is that both local and foreign investor confidence in Thailand returned in 2012 amid political stability and the current government’s strong support of investment. The following chart shows that the current business sentiment index remains relatively high, compared with previous years.

Fig. 43: Thailand business sentiment index The "feel good factor" is here again

Source: Bank of Thailand

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22

Possible recovery in business class and cargo to begin in 2013 in our view

However, based on our economics team’s estimates of the EU and US GDP growth forecasts, and IATA’s analysis, it may be too early to call a recovery in cargo and business class demand in 2013. At best, we expect cargo traffic to be down 2% y-y throughout most of 2013F as well, and business class traffic to remain flat y-y.

Fig. 44: FTK growth rate vs US and EU GDP trend

Source: IATA, Bloomberg, CEIC, Nomura estimates

Fig. 45: Premium class traffic growth rate vs US and EU GDP

Source: IATA, Bloomberg, CEIC, Nomura estimates

However, we believe premium passenger traffic recovery is likely to lag the recovery in both economy passengers and cargo traffic because premium traffic is more sensitive to economic conditions and needs a sustained period of recovery for it to bounce back. Further, the changes in business confidence and Nomura’s Asia Export leading index show no sign of improvement in the near term.

Fig. 46: Passenger traffic and premium passenger traffic growth rate (%)

Source: IATA, Nomura (HK)

Fig. 47: Cargo traffic and premium passenger traffic growth rate (%)

Source: IATA, Nomura (HK)

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091Q

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3Q20

101Q

2011

3Q20

111Q

2012

3Q20

121Q

2013

F3Q

2013

F

FTK average growth rate (LHS)US GDP (RHS)EU GDP (RHS)

(%)

-6

-4

-2

0

2

4

(25)

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-

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Premium class traffic growth rate (LHS)US GDP (RHS)EU GDP (RHS)

(%)

-30-25-20-15-10-505

10152025

Jan

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Premium class passenger traffic growth

(%)

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0

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IATA's FTK growth rate

Premium pax traffic growth rate

(%)

But air cargo and premium passenger traffic lag due to price sensitivity


23

Fig. 48: FTK growth rate vs Nomura Asia Export leading index

Source: Bloomberg, IATA

Fig. 49: FTK growth rate vs Business confidence change

Source: Bloomberg, CEIC, Nomura estimate

Fig. 50: Singapore Jet Kerosene Price – historical

Source: Bloomberg, Nomura estimates

Fig. 51: Singapore Jet Kerosene price forecast – expected to moderate


Fig. 52: THB: USD Historical

Source: Bloomberg

(30)

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IATA FTK growth rate (RHS)

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D/b

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Singapore Jet Kero

Singapore Jet Kero quarterly averages

30

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THB/ USD

THB/ USD quarterly averages


24

Risks Common risk factors: Downside risk to our earnings estimates and target price include a) a jump in oil prices, load factors or yields due to demand weakening; b) political unrest in Thailand reducing tourism demand; c) disease outbreak; d) irrational competition (eg, entry of new players such as Lion Air with a new AOC); e) sharp PSC hikes; f) floods affecting operations at DMK and g) return of macroeconomic shocks.

AAV: Thai AirAsia’s health is also inextricably linked to the health of its parent AirAsia Bhd in Malaysia, as it relies on the Malaysian entity for various functions including aircraft leases, etc. A change in the terms of this arrangement, or a weakening of the Malaysian entity’s health, might have an impact on TAA’s expansion plans as well.

THAI: Additional downside risk to our earnings estimates and target price include: a) renewed labour union unrest; and b) higher-than-expected impairment of aircraft to be retired. Note that THAI is also a customer of the Boeing Dreamliner (787) aircraft, but deliveries are scheduled only from 2014 onwards. The Dreamliner aircraft are currently grounded pending safety investigations, and in case the investigations take a long time to complete or propose big design changes, the THAI’s EIS (entry-into-service) of the Dreamliner might be pushed back, and impact capacity growth plan next year. However, we note that unlike airlines like JAL or ANA, which had to ground in-service 787s, THAI still has plenty of time to observe the situation as it is evolving, and make alternative arrangements in case the aircraft are delivered late (eg, lease alternative aircraft, or not retire existing aircraft).

AOT: a) Delay in implementing airport charge increases: A part of the earnings and margin expansion is premised on the PSC charges for AOT to go through. However, delays in implementing those charges will impact our earnings estimates and TP for the stock. b) Lower-than-expected air traffic, which can be due to various reasons like a re-emergence of economic crisis, political unrest deterring air traffic, outbreak of disease, etc. c) Capex overruns at BKK airport, which would deter investor sentiment. d) SOE nature of the company leading to less-than-optimal utilisation of assets.

Political risks Referendum before the third reading of the constitution amendment draft The coalition parties agreed in early December that the government would hold a public hearing and referendum before a vote on the charter amendment in the third reading. The Pheu Thai Party's key agenda is to amend Section 291 of the constitution to make way for the establishment of a drafting assembly to rewrite the 2007 charter. The charter amendment, according to the opposition, was an attempt to bring back the ex-prime minister. The draft bill passed the first reading from the parliament on Feb 24, 2012 and the second reading on May 14, 2012 before the opposition camp took it to the constitutional court, claiming that the amendment would be unconstitutional. The court ordered a public referendum before the third reading, which delayed the whole process.

Showdown in March-April 2013 The referendum is likely take place between mid-March to April of 2013 as per our estimates. For the coalition parties to get their demands met, we believe they will need a turnout of at least half of the eligible votes (~23mn people). In addition, more than half of the turnouts must vote to support the referendum. This will be a tall order for the government to achieve, in our view. The following table shows the results of the last referendum held in 2007. We note that Thailand recently celebrated its 80 years of democracy and 17 constitutions.


25

Fig. 53: Referendum in 2007 It was possible at that time to get 14mn votes

Source: Election Commission of Thailand

Referendum on Constitution 2007 (19 August 07)

Number of people % of voters

YES vote 14,727,306 56.69 %

NO vote 10,747,441 41.37 %

Error cards 504,207 1. 94 %

Voters who exercised rights 25,978,954 57.61 %

No.of eligible voters 45,092,955 100%


26

Appendix: Operating stats Fig. 54: AOT: higher leverage to aeronautical revenues means higher leverage to passenger numbers

Source: Nomura research, Data for last reported full year

Fig. 55: Comparison of Revenue-Passenger-Kilometre (RPK) for regional airlines (y-y chg %)


Total Passengers

(mn) Total rev / pax (USD)

Attributable retail rev / pax

(USD)

Revenue split (aeronautical as

percentage of total)

Beijing Capital Intl 79 13 2 59%

Fraport 97 33 6 33%

Sydney Airport 37 29 6 49%

Malaysia Airports 64 13 4 32%

AOT 72 14 3 60%

Aeroports de Paris 89 38 13 53%

Changi 48 30 14 40%

CA CSA CEA Cathay SIA Qantas CAL EVA Thai MAS KAL

Jan-11 11.7 16.6 27.0 6.8 2.9 8.5 (1.1) (6.3) (3.1) 13.0 5.6

Feb-11 5.7 4.4 12.0 0.1 (1.0) 5.1 (6.8) (8.2) (3.0) 9.9 4.4

Mar-11 5.6 4.2 9.9 (1.6) (3.6) 3.3 (7.9) (11.4) (4.4) 15.3 (0.9)

Apr-11 12.7 10.6 16.6 6.8 7.0 10.0 (0.1) (7.4) 8.0 15.2 4.0

May-11 10.0 13.1 13.8 5.1 4.3 8.6 1.4 (6.0) 13.9 11.8 8.0

Jun-11 9.4 8.7 2.8 4.5 (0.4) 0.4 2.0 2.9 8.0 8.3 7.0

Jul-11 6.7 10.8 5.3 5.4 4.5 4.8 0.3 6.9 7.4 8.5 11.7

Aug-11 6.6 6.0 2.0 6.8 3.0 5.0 2.1 8.8 4.7 0.1 11.0

Sep-11 9.2 8.0 3.0 7.0 4.7 4.0 0.2 7.8 0.4 (0.6) 9.1

Oct-11 6.0 9.0 1.1 6.2 0.7 (1.1) 0.2 12.6 (7.5) (4.7) 7.7

Nov-11 10.3 17.9 9.7 6.0 (2.6) 5.3 (5.8) 12.5 (16.8) (5.8) 7.3

Dec-11 3.8 11.6 3.7 7.9 1.8 5.2 (1.7) 13.6 (8.9) 5.0 15.8

Jan+Feb 12 5.4 14.3 4.8 7.4 4.4 4.5 3.5 13.0 3.6 (9.8) 11.3

Mar-12 1.7 11.0 6.3 11.7 11.8 8.7 5.4 11.0 7.5 (14.1) 6.0

Apr-12 (1.0) 10.1 7.4 11.9 9.8 2.2 3.8 11.2 8.3 (13.2) 12.0

May-12 (0.7) 7.3 5.4 4.5 7.1 (1.7) 1.6 7.9 12.4 (14.1) 10.0

Jun-12 2.5 9.7 9.6 5.3 11.9 5.7 1.7 7.8 11.7 (8.3) 10.9

Jul-12 4.1 10.3 9.8 (3.6) 3.2 (1.4) 1.0 7.9 0.8 (15.0) 3.8

Aug-12 4.33 12.3 11.4 1.6 8.7 0.4 3.8 7.0 4.5 (3.7) 5.4

Sep-12 2.8 12.5 11.5 (3.9) 7.7 0.1 0.3 2.5 4.1 (3.6) 4.0

Oct-12 (0.5) 7.8 7.1 (5.4) 7.1 3.4 0.8 1.4 - 0.5 1.0

Nov-12 2.6 8.5 8.5 (3.5) 9.1 1.3 9.4 8.3 - 7.0 3.2

Dec-12 8.6 11.5 9.7 - 6.1 - 6.3 7.2 - - -


27

Fig. 56: Comparison of passenger load factor trend (%)


Fig. 57: Comparison of Revenue-Freight-tonne-Kilometre (RFTK) growth rate (y-y chg %)



Jan-11 78.6 78.8 75.9 81.3 78.1 80.9 79.3 76.1 77.8 76.5 81.1

Feb-11 79.4 80.3 77.4 77.3 75.1 77.9 76.6 74.6 77.6 74.3 77.0

Mar-11 80.2 80.6 77.6 76.9 73.2 76.5 78.0 75.7 72.9 76.9 74.9

Apr-11 82.9 82.8 80.1 80.3 74.6 78.7 79.3 79.0 71.8 77.4 76.3

May-11 81.8 80.0 78.3 78.3 73.6 76.7 78.8 80.7 61.9 73.1 79.3

Jun-11 83.2 80.8 78.6 81.5 78.8 80.3 82.5 82.5 65.7 76.0 79.2

Jul-11 86.6 85.0 83.0 86.1 81.6 82.3 84.2 81.4 77.2 78.3 81.7

Aug-11 86.1 83.7 82.7 84.2 76.6 78.5 82.1 82.6 74.8 71.9 81.4

Sep-11 82.8 81.0 79.1 79.7 79.6 81.9 74.5 77.0 69.9 77.5 74.5

Oct-11 82.4 81.5 79.7 80.2 76.7 81.4 75.0 75.8 65.7 71.9 76.7

Nov-11 79.5 78.9 77.7 78.5 75.2 79.5 73.2 74.9 61.0 71.0 73.3

Dec-11 76.9 77.8 75.9 79.6 79.6 80.8 72.0 75.5 68.1 74.4 74.4

Jan+Feb 12 78.5 79.6 78.3 78.4 76.6 79.1 75.8 79.9 78.1 71.9 77.4

Mar-12 79.6 79.1 79.0 79.4 79.5 79.8 77.5 78.7 78.4 75.0 72.4

Apr-12 81.9 81.3 81.2 83.3 79.7 78.9 76.7 79.8 78.3 74.8 76.9

May-12 79.5 77.3 77.3 78.5 75.8 76.5 74.3 79.0 71.5 69.5 77.7

Jun-12 81.9 80.0 80.2 82.9 83.0 81.6 80.6 82.7 75.5 77.4 82.0

Jul-12 84.4 82.9 82.4 81.1 80.5 80.0 81.4 82.9 79.7 74.2 83.1

Aug-12 84.2 83.3 83.6 83.1 78.3 78.4 81.9 83.3 78.7 74.1 84.5

Sep-12 81.8 80.3 80.4 78.2 80.6 80.5 76.7 75.7 71.7 75.1 78.0

Oct-12 79.8 78.6 79.7 78.3 77.8 79.8 75.4 76.1 - 74.3 78.8

Nov-12 77.9 78.1 78.5 79.2 77.7 80.0 76.7 77.0 - 76.1 75.1

Dec-12 78.5 78.1 77.4 - 82.2 - 74.5 75.9 - - -


Jan-11 14.0 38.9 (1.6) 13.7 12.5 - (8.3) 14.0 10.0 5.3 1.1

Feb-11 (15.8) 19.7 (18.9) 3.3 3.6 - (26.7) (1.9) 2.9 (16.6) (4.8)

Mar-11 1.7 19.7 (7.4) 5.3 0.9 - (7.9) 3.5 7.8 (11.8) (1.4)

Apr-11 13.3 37.1 (18.8) (2.3) 11.8 - (17.8) (2.9) 8.6 (11.4) (5.0)

May-11 (0.8) 14.3 (18.9) (8.6) 0.6 - (26.3) (8.1) (4.5) (22.7) (12.0)

Jun-11 3.3 12.0 7.8 (5.5) 0.7 - (20.7) (9.2) (5.8) (22.2) (7.0)

Jul-11 1.1 5.1 27.5 (8.6) 2.2 - (14.4) (4.4) (6.4) (11.8) (5.8)

Aug-11 (1.0) 1.2 16.2 (9.7) (0.1) - (13.0) (8.2) (8.8) (19.5) (4.8)

Sep-11 (6.2) 2.8 13.5 (7.9) (2.3) - (16.2) (11.4) (9.3) (17.7) (6.6)

Oct-11 (8.3) (2.5) 8.0 (15.9) (1.6) - (13.1) (10.2) (11.4) (22.6) (7.3)

Nov-11 (13.5) 7.3 8.6 (9.8) 0.6 - (11.9) (13.8) (20.2) (32.8) (7.6)

Dec-11 (16.6) 5.8 13.7 (9.0) 1.5 - (4.0) (10.5) (10.1) (16.3) (5.3)

Jan+Feb12 (11.2) 0.8 20.8 (8.8) (3.4) - (6.1) (10.9) (4.5) (22.2) (7.2)

Mar-12 (9.5) 24.5 20.6 (6.7) (1.9) - (18.6) (7.9) (10.7) (18.7) (13.2)

Apr-12 (8.8) 7.4 20.3 (13.7) (8.8) - (12.7) (12.6) (13.8) (15.0) (18.5)

May-12 (4.7) 22.4 26.9 (15.3) (7.4) - (8.9) (13.6) (9.1) (8.1) (12.0)

Jun-12 2.8 31.7 3.6 (7.1) (0.5) - (4.6) (7.3) (9.1) (0.3) (6.0)

Jul-12 9.8 17.4 (4.5) (14.0) (3.0) - (12.9) (10.6) (5.6) (7.1) (11.9)

Aug-12 10.6 12.8 (4.9) (10.4) (4.3) - (15.8) (9.1) (3.7) (7.9) (8.5)

Sep-12 10.8 13.2 4.0 (3.3) (4.2) - (13.2) (5.6) 4.1 11.3 (2.1)

Oct-12 8.0 14.7 (3.8) (2.8) (13.1) - (32.1) (12.6) - (4.1) (7.3)

Nov-12 21.8 18.9 4.1 2.8 (8.8) - (20.9) (1.1) - (3.7) (4.4)

Dec-12 14.1 16.2 (6.2) - (8.0) - (20.6) 2.9 - - -


28

Fig. 58: Comparison of cargo load factor (%)


(%) CA CSA CEA Cathay SIA Qantas CAL EVA Thai MAS KAL

Jan-11 58.8 52.3 60.4 67.8 61.4 - 72.3 82.3 53.7 67.8 72.8

Feb-11 47.1 38.7 49.5 67.6 61.8 - 70.2 82.2 56.6 66.4 74.5

Mar-11 60.9 53.9 62.6 71.0 64.5 - 70.5 83.6 59.5 70.8 78.6

Apr-11 60.0 52.1 60.8 68.3 65.5 - 70.9 83.5 58.0 64.8 76.5

May-11 60.4 49.6 60.6 68.2 64.7 - 72.3 82.5 57.8 67.2 76.0

Jun-11 62.1 49.7 64.9 67.0 64.0 - 71.3 80.2 57.7 69.5 76.0

Jul-11 60.4 49.9 63.3 66.6 65.0 - 70.6 81.1 55.1 71.3 75.5

Aug-11 57.7 49.3 62.1 64.9 62.3 - 67.3 81.1 54.2 66.8 73.3

Sep-11 57.7 52.1 64.4 64.8 63.7 - 67.6 80.7 56.1 68.6 72.4

Oct-11 56.1 48.2 61.3 66.2 66.3 - 69.1 81.5 56.3 73.3 75.8

Nov-11 57.1 48.5 62.2 65.3 64.2 - 68.4 81.3 55.2 56.8 74.9

Dec-11 58.3 51.3 65.5 67.8 63.6 - 70.2 85.0 54.3 73.5 75.6

Jan+Feb12 48.5 42.4 48.7 62.7 60.2 - 67.9 80.4 51.9 63.6 73.3

Mar-12 58.8 55.9 65.6 68.3 65.0 - 73.6 85.9 59.8 72.6 79.1

Apr-12 58.2 53.1 62.9 63.3 62.6 - 70.9 81.7 56.4 70.3 75.3

May-12 58.2 53.5 64.0 62.3 62.8 - 71.4 82.5 55.9 71.8 76.0

Jun-12 59.6 56.0 66.3 65.7 63.1 - 73.2 84.3 54.1 71.7 78.0

Jul-12 59.9 53.1 64.0 64.7 63.0 - 72.5 84.2 52.2 71.4 77.1

Aug-12 58.9 53.8 64.2 61.9 60.6 - 68.6 84.2 50.4 68.3 74.9

Sep-12 61.6 58.0 67.3 62.8 64.1 - 71.6 84.5 55.3 70.4 76.3

Oct-12 58.6 53.5 62.7 64.0 63.9 - 70.7 84.9 - 72.1 76.6

Nov-12 61.3 55.3 65.3 63.9 66.1 - 72.2 84.2 - 72.9 78.7

Dec-12 59.5 56.0 66.4 - 64.4 - 74.3 88.2 - - -


29

Appendix: Fare comparison Fig. 59: International flight fare comparison – full service

Source: Respective company website

Fig. 60: LCC flight fare comparison

Source: Respective company websites

London Sydney London Sydney London SydneyTHAI BKK 50,550 37,175 51,470 36,535 46,760 30,670 SIA SIN 63,356 34,928 63,356 34,928 63,848 35,073 MAS KUL 54,066 35,967 54,066 35,952 54,066 35,952 Garuda JKT 44,826 28,156 57,292 25,153 NA 25,153

Destination (THB, return fare)T+3 weeks T+1 month T+3 monthsAirline Origin

PhuketKuala

Lumpur Singapore Guangzhou PhuketKuala

Lumpur Singapore Guangzhou PhuketKuala

Lumpur Singapore Guangzhou THAI BKK 6,820 10,850 11,210 22,810 6,650 10,850 12,280 13,965 6,340 10,850 11,360 13,965 Thai Airasia BKK 3,620 6,530 7,670 11,609 3,400 4,510 5,420 8,689 2,780 3,210 4,920 7,889 Bangkok Air BKK 6,750 NA NA NA 5,300 NA NA NA 5,300 NA NA NA Nok Air BKK 4,380 NA NA NA 3,780 NA NA NA 3,380 NA NA NA Thai Smile BKK 5,930 NA NA NA 5,240 NA NA NA 6,030 NA NA NA

Airline Origin

Destination

T+3 weeks T+1 month T+3 months

Key company data: See page 2 for company data and detailed price/index chart.

Airports of Thailand PCL AOT.BK AOT TB

TRANSPORT/LOGISTICS

EQUITY RESEARCH

Upside through capacity and operating leverage

Lower-risk alternative to play Thailand’s aviation boom; top sector pick

February 6, 2013

Rating Starts at

Buy

Target price Starts at THB 145.00

Closing price January 31, 2013 THB 105.50

Potential upside +37.4%

Initiate at Buy; Thai aviation proxy, less earnings risk than airlines AOT manages Thailand’s six major airports, accounting for ~85% of total air traffic in Thailand. The decision in 2012 to allow low-cost carriers (LCCs) to use Don Muang (DMK) Airport was a masterstroke, in our view, effectively doubling Bangkok’s congested airport capacity, allowing LCC expansion to continue unhindered, and adding concession revenues in one fell swoop. With most of its cost base relatively fixed, AOT’s operating leverage is a key driver for earnings upside potential; we estimate with every 1% in additional passengers resulting in a 3% boost in earnings, thereby making it a lower-risk proxy to play Thailand’s aviation growth, spurred by tourism and domestic demand.

Catalysts: PSC hikes, faster-than-expected passenger growth Catalysts include passenger service charge (PSC) hikes that we expect to be authorised this year and likely higher-than-consensus passenger throughput on capacity addition, which should be a running theme in 2013.

Valuation: DCF-based TP of THB145, upside potential of 37% We use a discounted FCFE to value AOT, which has relatively steady cashflow visibility (CoE of 13.4%), building in additional capex to account for future expansion. Our TP of THB145 is 37% above current levels. It implies 24x/19x multiples vs CY2013F/2014F EPS of THB6.0/THB7.7, inexpensive given the sustained period of above-average EPS growth (21% CAGR) we expect over FY12-14F. We think the Street is not ascribing to AOT the valuation premium it deserves in view of the long-term traffic growth outlook. In-growth airport operators like AOT (trading at 2-year PEG of 1x, 2012F P/E of 21x), are trading at a discount to the sector (PEG average of ~1.7x), which we see as undeserved.

30 Sep FY12 FY13F FY14F FY15F

Currency (THB) Actual Old New Old New Old New

Revenue (mn) 30,472 33,051 37,920 43,056

Reported net profit (mn) 6,500 7,940 10,494 12,378

Normalised net profit (mn) 6,941 7,940 10,494 12,378

FD normalised EPS 4.86 5.56 7.35 8.66

FD norm. EPS growth (%) 69.2 14.4 32.2 17.9

FD normalised P/E (x) 21.7 N/A 19.0 N/A 14.4 N/A 12.2

EV/EBITDA (x) 11.4 N/A 10.9 N/A 9.3 N/A 8.4

Price/book (x) 1.9 N/A 1.8 N/A 1.7 N/A 1.6

Dividend yield (%) 2.2 N/A 2.6 N/A 3.5 N/A 4.1

ROE (%) 8.7 9.9 12.3 13.4

Net debt/equity (%) 32.3 26.5 31.3 38.3

Source: Company data, Nomura estimates

Anchor themes


Nomura vs consensus

Our TP is higher than most on the street, which has yet to catch up with the improving long-term oulook.

Research analysts





Nomura | Airports of Thailand PCL February 6, 2013

31

Key data on Airports of Thailand PCL Income statement (THBmn) Year-end 30 Sep FY11 FY12 FY13F FY14F FY15FRevenue 28,641 30,472 33,051 37,920 43,056Cost of goods sold -21,667 -19,692 -21,702 -23,617 -26,094Gross profit 6,974 10,780 11,350 14,303 16,961SG&A

Employee share expense

Operating profit 6,974 10,780 11,350 14,303 16,961

EBITDA 14,840 15,449 15,883 19,154 22,220Depreciation -7,866 -4,669 -4,533 -4,851 -5,259Amortisation

EBIT 6,974 10,780 11,350 14,303 16,961Net interest expense -1,428 -797 -1,321 -1,173 -1,475Associates & JCEs 0 0 0 0 0Other income -225 458 0 0 0Earnings before tax 5,321 10,441 10,028 13,130 15,486Income tax -1,262 -3,494 -2,081 -2,626 -3,097Net profit after tax 4,059 6,947 7,947 10,504 12,389Minority interests 44 -6 -7 -9 -11Other items

Preferred dividends

Normalised NPAT 4,103 6,941 7,940 10,494 12,378Extraordinary items -1,888 -441 0 0 0Reported NPAT 2,215 6,500 7,940 10,494 12,378Dividends -1,143 -3,250 -3,970 -5,247 -6,189Transfer to reserves 1,072 3,250 3,970 5,247 6,189

Valuation and ratio analysis

Reported P/E (x) 68.0 23.2 19.0 14.4 12.2Normalised P/E (x) 36.7 21.7 19.0 14.4 12.2FD normalised P/E (x) 36.7 21.7 19.0 14.4 12.2FD normalised P/E at price target (x) 50.5 29.8 26.1 19.7 16.7Dividend yield (%) 0.8 2.2 2.6 3.5 4.1Price/cashflow (x) 9.0 9.4 9.9 8.3 7.3Price/book (x) 2.1 1.9 1.8 1.7 1.6EV/EBITDA (x) 12.6 11.4 10.9 9.3 8.4EV/EBIT (x) 26.9 16.3 15.2 12.5 11.1Gross margin (%) 24.3 35.4 34.3 37.7 39.4EBITDA margin (%) 51.8 50.7 48.1 50.5 51.6EBIT margin (%) 24.3 35.4 34.3 37.7 39.4Net margin (%) 7.7 21.3 24.0 27.7 28.7Effective tax rate (%) 23.7 33.5 20.8 20.0 20.0Dividend payout (%) 51.6 50.0 50.0 50.0 50.0Capex to sales (%) 11.9 15.8 18.4 46.1 50.3Capex to depreciation (x) 0.4 1.0 1.3 3.6 4.1ROE (%) na 8.7 9.9 12.3 13.4ROA (pretax %) 5.7 8.9 9.6 11.4 12.1

Growth (%)

Revenue 19.2 6.4 8.5 14.7 13.5EBITDA 23.4 4.1 2.8 20.6 16.0EBIT 58.4 54.6 5.3 26.0 18.6Normalised EPS 120.2 69.2 14.4 32.2 17.9Normalised FDEPS 120.2 69.2 14.4 32.2 17.9

Per share

Reported EPS (THB) 1.55 4.55 5.56 7.35 8.66Norm EPS (THB) 2.87 4.86 5.56 7.35 8.66Fully diluted norm EPS (THB) 2.87 4.86 5.56 7.35 8.66Book value per share (THB) 50.49 54.35 57.63 62.20 67.19DPS (THB) 0.80 2.27 2.78 3.67 4.33Source: Company data, Nomura estimates

Relative performance chart (one year)

Source: ThomsonReuters, Nomura research (%) 1M 3M 12M

Absolute (THB) 8.5 28.7 100.0

Absolute (USD) 11.5 32.7 107.9

Relative to index 5.3 17.8 76.6

Market cap (USDmn) 5,066.0

Estimated free float (%) 23.3

52-week range (THB) 112/50

3-mth avg daily turnover (USDmn)

11.54

Major shareholders (%)

Finance Ministry 70.0

Thai NVDR Co 4.5

Source: Thomson Reuters, Nomura research

Notes

Some higher costs in FY13F on the back of capacity relocation to Don

Muang Airport, reducing operating income


32

Cashflow (THBmn) Year-end 30 Sep FY11 FY12 FY13F FY14F FY15FEBITDA 14,840 15,449 15,883 19,154 22,220Change in working capital 2,977 892 -47 -184 -171Other operating cashflow -1,090 -260 -572 -892 -1,314Cashflow from operations 16,726 16,080 15,264 18,078 20,735Capital expenditure -3,402 -4,825 -6,089 -17,488 -21,664Free cashflow 13,324 11,255 9,174 590 -930Reduction in investments -536 2,650 0 0 0Net acquisitions

Reduction in other LT assets -14,841 1,739 0 0 0Addition in other LT liabilities 3,136 -324 0 0 0Adjustments 11,406 -2,143 159 318 408Cashflow after investing acts 12,488 13,178 9,334 907 -521Cash dividends -786 -1,143 -3,250 -3,970 -5,247Equity issue 0 0 0 0 0Debt issue -4,677 -4,721 1,555 7,000 10,000Convertible debt issue

Others -2,200 -2,095 -2,830 -2,908 -3,258Cashflow from financial acts -7,662 -7,959 -4,525 122 1,495Net cashflow 4,826 5,219 4,809 1,030 974Beginning cash 22,066 26,892 32,111 36,920 37,949Ending cash 26,892 32,111 36,920 37,949 38,923Ending net debt 36,970 25,068 21,814 27,785 36,811Source: Company data, Nomura estimates

Balance sheet (THBmn) As at 30 Sep FY11 FY12 FY13F FY14F FY15FCash & equivalents 26,892 32,111 36,920 37,949 38,923Marketable securities

Accounts receivable 1,660 1,766 1,915 2,197 2,495Inventories 313 252 277 302 334Other current assets 3,089 3,055 3,055 3,055 3,055Total current assets 31,954 37,183 42,167 43,504 44,807LT investments 5,895 3,245 3,245 3,245 3,245Fixed assets 90,014 88,662 90,157 102,574 118,668Goodwill

Other intangible assets 692 616 519 421 324Other LT assets 22,044 20,305 20,305 20,305 20,305Total assets 150,599 150,012 156,392 170,049 187,349Short-term debt 5,823 5,773 328 328 328Accounts payable 1,042 1,259 1,388 1,510 1,669Other current liabilities 9,702 10,387 10,387 10,387 10,387Total current liabilities 16,567 17,418 12,102 12,224 12,383Long-term debt 58,039 51,407 58,407 65,407 75,407Convertible debt

Other LT liabilities 3,716 3,392 3,392 3,392 3,392Total liabilities 78,322 72,217 73,900 81,023 91,181Minority interest 145 152 159 168 179Preferred stock

Common stock 26,853 26,853 26,853 26,853 26,853Retained earnings 45,278 50,790 55,480 62,004 69,135Proposed dividends

Other equity and reserves

Total shareholders' equity 72,132 77,643 82,333 88,858 95,988Total equity & liabilities 150,599 150,012 156,392 170,049 187,349

Liquidity (x)

Current ratio 1.93 2.13 3.48 3.56 3.62Interest cover 4.9 13.5 8.6 12.2 11.5

Leverage

Net debt/EBITDA (x) 2.49 1.62 1.37 1.45 1.66Net debt/equity (%) 51.3 32.3 26.5 31.3 38.3

Activity (days)

Days receivable 31.5 20.6 20.3 19.8 19.9Days inventory 4.8 5.3 4.5 4.5 4.4Days payable 15.5 21.4 22.3 22.4 22.2Cash cycle 20.8 4.4 2.5 1.9 2.1Source: Company data, Nomura estimates

Notes

Adequate funding for upcoming BKK capex plans

Notes

Low gearing


33

Valuation

Re-rating still looks like there is room to go, even after the sharp run-up

AOT has had a sharp re-rating in the last year, and is up 140% since Jan-2012, outperforming the SET Transport Index by ~70% and the SET by ~100%. However, we note that this re-rating has been led by an expansion in forward earnings and return estimates as well, and AOT is still trading at 18x one-year forward earnings, above mean levels on a forward P/E basis. On a forward P/B, the company’s re-rating from 0.6x to 1.6x in 2012 has been led by an expansion in forward ROE from 6% to 11%.

Fig. 61: Relative stock performance

Source: Bloomberg

Fig. 62: Forward P/E above mean levels


Fig. 63: P/B re-rating driven by expectation of ROE expansion


Consensus EPS has been on an upward trajectory

Consensus EPS estimates for AOT have been raised ~50%since the beginning of 2012, reflecting the additional traffic growth to be realised by opening up of the alternative DMK airport for Thailand, which frees up the congested Suvarnabhumi, as well for additional capacity addition by full-service carriers. These are also led by a bullish outlook on the Thai PSC charges, which are scheduled to be raised from THB700 to THB800 per

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34

international passenger and THB100 to THB150 per domestic passenger, the impact of which should flow in from FY14F onwards, in our view.

Fig. 64: Consensus EPS estimates

Source: Bloomberg

Valuing AOT on discounted cash flows – initiate with BUY with TP of THB145 (upside of 37%)

We think that a DCF-based valuation of free cash flows to equity is the best way to value a stock like AOT, which has relatively steady cash-flow visibility, and predictable long-term earnings growth rates, which generally go in-line with overall traffic growth.

We use a beta of 0.97, a market risk premium of 10% and a risk-free rate of 3.7% (implying a cost of equity of 13.4%). Our other assumptions are:

• Cash flows till Sep-2052, which is the maximum concession period AOT has with the government to operate the airports.

• No terminal value.

• Increasing PSC for domestic and international passengers @ compounded CPI every ~5 years

• Incremental capacity addition of 130mn passengers for 6 airports over FY21-52F, with total estimated capex spend of THB130bn.

We discount our cash flows back to 2014F to arrive at our price target of THB145/share, representing an upside of 37% at current levels. Our target price implies a multiple of 24x/19x on CY2013F/14F EPS of THB6.0 / 7.7 (calendarised), which we view as inexpensive given the sustained period of above-average EPS growth (21% EPS CAGR) we forecast over FY12-14F.

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Fig. 65: DCF – based valuation


Still trading at a discount to sector on growth-adjusted multiples

We note that due to the defensive nature of earnings and generally higher dividend yields than airlines, airport-operator stocks trade at a high growth-adjusted P/E multiples. The sector’s average PEG (CY12 P/E vs 2012-14F EPS CAGR) is 1.7x. We argue that out of the various emerging and developed market airport stocks, the ones which are still in higher-growth markets (ie, high single digits), like AOT, and MAHB (MAHB MK, Buy) should then trade at a premium to the sector PEG, given their EPS growth forecasts are higher than average. With both AOT and MAHB only trading at PEGs of 1x, we think the discount to the sector is unwarranted. Our target price for AOT implies a PEG of 1.4x, (MAHB: 1.3x), and on a P/E basis, a 2013F/14F target P/E of 24x / 19x which we think are still reasonable.

Retail (concession and duty-free sales) has scope for upside

Airport operators around the world extract duty-free sales revenues from passengers in different ways. Operators like AOT have awarded all their concession space en-masse to one / two store operators outside the company, and then collect a share of revenue (or a minimum annual guarantee, MAG, whichever is higher). MAHB, on the other hand, operates its own duty-free stores, along with letting out store space to a number of F&B and retail shops. In the case of AOT, a retailer which wants to rent space at an AOT airport has to negotiate with King Power directly, which owns the entire block.

A study of six listed airports in the world based on their attributable revenues from retail / concessions (implying how much revenue the airport operator extracts from each passenger) suggests that AOT’s realisation of US$3/passenger at its airports is lower than most major airports, including Malaysia Airports (Eraman+Rental) at US$4.2/passenger. This suggests that AOT’s concession agreement with King Power leaves some room for upside, which might be realised once the BKK concession agreements are up for re-negotiation in FY15F, through more preferential terms for AOT. We are, however, not building in the possibility of this in our current estimates given that we believe it is too early for a revision in terms.

Free Cash Flow to Equity FY13F FY14F FY15F FY16F FY17F FY18F FY19F FY20F FY30F FY52FTHB mnCash from operations (ex interest payments) 12,434 15,170 17,477 18,425 19,472 20,902 22,399 26,455 56,036 231,436Less, capex (6,089) (17,488) (21,664) (21,858) (8,158) (2,717) (2,640) (2,563) (8,292) (22,459)Add, net borrow ings 1,555 7,000 10,000 10,000 0 0 0 0 (2,000) (2,153)FCFE 7,899 4,682 5,813 6,567 11,314 18,186 19,759 23,891 45,744 206,824

Year 0 1 2 3 4 5 6 7 17 39Discount factor 1.00 0.88 0.78 0.69 0.60 0.53 0.47 0.41 0.12 0.01

Discounted FCFE 7,899 4,129 4,520 4,503 6,842 9,698 9,291 9,907 5,394 1,534Terminal Value = zero 0Equity value (THB mn) 193,933 210,962Number of shares (mn) 1,429 1,429Fair value (THB / share) 136.00 148.00

Time weighted Target Price (2014F) (THB/share) 145.00


36

Fig. 66: Retail + Concession revenues per passenger at listed airports – AOT has room to grow

Source: Company data, Nomura research. Note: Changi Airport is the fourth largest airport in the world in terms of concession sales

Higher proportion of aeronautical revenues means 3x operating leverage to passenger growth

With most of its cost base relatively fixed, and a 60% share of revenues from aeronautical sources, operating leverage at AOT is a key driver for earnings upside, with every 1% in additional passengers resulting in a 3% boost in earnings, thereby in our view making it a better play on passenger growth, spurred by tourism and domestic demand, with less earnings risk than airlines.

Fig. 67: AOT: higher leverage to aeronautical revenues means higher leverage to passenger numbers

Source: Nomura research, Data for last reported full year

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37

Traffic fundamentals appear healthy

Historical data point to a healthy demand outlook for air travel

Thailand’s total passenger throughput has witnessed strong growth over the last seven years, notwithstanding crisis periods like the floods of late 2011, political unrest, and high fuel prices increasing the cost of travel and average ticket prices. As a reference we study the numbers provided by AOT, which comprises ~85% of Thailand’s air traffic, and are a good proxy for overall air travel demand. Since they comprise almost the whole of Thailand’s international traffic, they are a more relevant benchmark than the 28 regional airports managed by the DCA, in our view.

Overall passenger numbers have increased at a 2007-12 CAGR of 5% (Domestic: 5.5% / International 4.7%), suggesting that the high fuel costs which currently prevail have not deterred potential travellers from flying.

8% y-y growth in 2012 implies resilience in passenger numbers

After the flooding in late 2011 which impacted demand, traffic was quick to normalize in 2012, with domestic as well as international throughput growing at ~8% y-y in 2012, also in the absence of any political roadblocks. This reinforces our view that traffic growth is relatively quick to return to steady-state levels of high single digits in the absence of external shocks, which are only short-term in nature.

Fig. 68: Traffic at AOT


(000) FY07 FY08 FY09 FY10 FY11 FY1207-12CAGR

2012 over 2011

Passenger trafficSuvarnabhumi BKK 41,935 41,180 37,051 42,497 47,801 52,369 4.5% 9.6%

International 32,689 34,025 28,106 32,381 37,386 38,688 3.4% 3.5%Domestic 9,246 7,155 8,945 10,116 10,414 13,681 8.2% 31.4%

Don Muang DMK 3,189 5,752 2,784 2,759 3,973 2,717 (3.1%) (31.6%)International 11 29 23 17 29 102 55.9% 255.3%Domestic 3,178 5,723 2,761 2,742 3,944 2,615 (3.8%) (33.7%)

Chiang Mai CNX 3,371 3,276 2,872 3,183 3,680 4,335 5.2% 17.8%International 351 347 237 250 345 490 6.9% 41.8%Domestic 3,020 2,929 2,636 2,933 3,335 3,845 4.9% 15.3%

Hat Yai HDY 1,336 1,380 1,283 1,465 1,835 2,013 8.6% 9.7%International 95 24 13 90 204 216 18.0% 5.9%Domestic 1,241 1,356 1,270 1,375 1,630 1,797 7.7% 10.2%

Phuket HKT 5,478 5,943 5,442 6,797 8,206 9,161 10.8% 11.6%International 2,055 2,412 2,228 3,092 4,137 4,817 18.6% 16.4%Domestic 3,423 3,532 3,214 3,705 4,070 4,344 4.9% 6.7%

Chiang Rai CEI 712 772 649 724 806 926 5.4% 15.0%International 0 0 0 1 9 5 138.1% (46.8%)Domestic 712 772 648 724 796 921 5.3% 15.7%

Total 56,020 58,304 50,081 57,425 66,301 71,521 5.0% 7.9%International 35,201 36,837 30,607 35,830 42,111 44,318 4.7% 5.2%Domestic 20,819 21,467 19,474 21,595 24,190 27,203 5.5% 12.5%

Aircraft movements (000) 390 394 347 386 441 480 4.2% 8.8%

Cargo volume (000 tonnes) 1,306 1,381 1,063 1,380 1,435 1,468 2.4% 2.3%


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We estimate a ~7-8% medium- tolong-term traffic growth in Thailand as well

We are bullish on Thailand’s long-term traffic growth potential, supported by the long term orderbooks of major suppliers like Boeing and Airbus. South East Asia, due to its healthy economic fundamentals along with the separation by sea, has arguably a higher need for air travel, given the different countries cannot be connected by road or high-speed rail, and ferry travel is too slow. In its 20-year forecast for air traffic, Boeing forecasts 7-8% CAGR in revenue passenger kilometres (RPK) over 2011-31F, with traffic effectively growing to 4x its current size over the next 20 years.

With China, Northeast Asia, South Asia and intra-SE Asia being the highest growth zones in the region, all of which are relatively four hours away from Thailand and therefore accessible by narrow-body jets, we think that Thailand will grow in line with the other emerging peers like Indonesia, and thus a long-term 7-8% growth forecast for Thailand can be considered quite achievable, in our view.

Fig. 69: Boeing’s forecasts for aircraft growth (2011-31F) – long-term growth intact Single-aisle jets to grow 3x in the next 20 years


Fig. 70: 20 year traffic growth forecasts Intra SE Asia traffic to grow at 7.6%

RPK Average

growth

(bn) 2011 to 2031

Africa - S.E. Asia 6.8%

China - S.E. Asia 7.7%

Europe - S.E. Asia 5.0%

Middle East - S.E. Asia 6.4%

N. America - S.E. Asia 5.8%

N.E. Asia - S.E. Asia 5.4%

Oceania - S.E. Asia 5.1%

S.E. Asia - S.E. Asia 7.6%

S.E. Asia - S. Asia 8.6%


Low-cost carriers (LCCs) likely to be key enabler in traffic expansion

Like other emerging markets in ASEAN, low-cost carriers, let by the AirAsia group (AirAsia Bhd + Thai AirAsia + Indonesia AirAsia) have been instrumental in increasing affordability of air travel and demand growth. In fact, LCC market share at AOT airports has increased from being non-existent in 2003-04 when there were no LCCs to about 27% in 2012, largely dominating domestic passenger traffic. The AirAsia group now accounts for more than 15% of AOT’s total traffic, largely at the cost of Thai Airways, which has seen its share slip from 42% in 2006 to 33% now. However, a point to be noted in this instance is that in terms of passenger numbers, Thai has remained largely stagnant at 22mn, and LCCs have grown the overall size of the market, rather than significantly taking away Thai’s traffic numbers.

South East AsiaKey indicators and new airplane marketsGrowth measures (2011-31F) 2011-31F New airplanes Share by sizeEconomy (GDP) 4.3% Large 110 4%Traffic (RPK) 6.5% Twin aisle 950 32%Cargo (RTK) 5.7% Single aisle 1,840 62%Airplane fleet 5.7% Regional jets 70 2%

Total 2,970Market size (2011-31F) 2011 Fleet 2031F FleetDeliveries 2970 Large 130 150Market value $470bn Twin aisle 310 980Average value $160mn Single aisle 680 2,280

Regional jets 20 70Total 1,140 3,150


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Fig. 71: Market share at AOT airports in terms of passengersLCC share has grown from 15% to 27% in 2011



Source: CAPA, OAG

2006 2007 2008 2009 2010 2011Full Service/Mainline CarriersThai Airways 42% 42% 41% 42% 37% 33%Bangkok Airways 5% 5% 5% 5% 5% 5%All others 39% 37% 37% 35% 38% 34%Full Service/Mainline 85% 83% 83% 82% 80% 73%Low-Cost CarriersThai Air Asia 8% 9% 11% 13% 13% 13%AirAsia 1% 1% 1% 1% 1% 1%Indonesia Air Asia 0% 0% 0% 0% 0% 0%AirAsia Group 9% 10% 11% 13% 14% 15%All others 6% 8% 6% 5% 6% 13%Low-Cost Carriers 15% 17% 17% 18% 20% 27%

Total 100% 100% 100% 100% 100% 100%

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Tourism should continue to underpin Thailand’s inbound air traffic

At ~22mn tourists, Thailand is close to breaking into the top 10 most-visited nations in the world With a renewed thrust on promoting tourism, Thailand’s total tourist arrivals increased to 22.3mn passengers in 2012 (+16% y-y), and Thailand is close to breaking into the world’s top 10 visited nations. Tourist arrivals had grown by ~20% in the previous year (2011). We expect this trend to continue in 2013 (the Ministry of Tourism estimates 24.5mn, +10% y-y), underpinned by growth from China (12.5% of 2012 traffic), Malaysia (11.5%), Russia (5.9%), and India (4.6%). Japan (6%) and Korea (5.2%) are also stable sources of visitors to Thailand.

Chinese arrivals are expected to grow substantially in 2013, having already overtaken Malaysia as the top origin country in 2012 (2.7mn vs 1.8mn), especially riding on the back of the blockbuster Chinese movie Lost in Thailand, which has reportedly increased awareness about Thailand even more in China. The tourism authority is expecting 3.3mn tourists from China this year. (http://asiancorrespondent.com/96338/lost-in-thailand-a-win-win-picture-for-thailand-and-china/).

Thailand’s tourist receipts per passenger have also crossed the THB40,000 mark in 2011, having grown at a CAGR of 3% y-y over the last decade.

Fig. 73: Thailand tourist arrivals


Fig. 74: Thailand tourist receipts per tourist


Fig. 75: Share of Thai tourist arrivals by nationality China, India and Russia showing strong growth

1995 2012 1995-2011

CAGR

Malaysia 16% 11.5% 5%

China 5% 12.5% 10%

Japan 12% 6.2% 2%

Korea 6% 5.2% 5%

UK 5% 3.9% 5%

India 2% 4.6% 13%

Russia 1% 5.9% 22%

Australia 3% 4.2% 9%

Source: CEIC, Tourism Authority of Thailand

Fig. 76: % of tourist arrivals by air

Source: CEIC

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Bangkok capacity almost doubled on opening of DMK as alternative airport for LCCs

Over the last two years, Suvarnabhumi Airport (BKK) had exceeded its stated capacity of 45mn passengers, and had been facing a lot of congestion delays and passenger dissatisfaction at the airport. Although AOT had a capex plan in place to grow capacity at BKK by an additional 15mn passengers per year at a cost of THB62.5bn, this incremental capacity was to only come online by FY17F. However, we expect growth at LCCs, especially at Thai AirAsia, to keep growing, and in order to accommodate these airlines, AOT incentivized LCCs to move to the old Bangkok airport at Don Muang (DMK). With the AirAsia group, comprising ~8-9mn passengers per year, agreeing to shift to DMK, this has effectively increased capacity at Bangkok from 45mn passengers per annum to ~81mn passengers, or 1.8x, freeing up resources at BKK.

The incentive package was a progressive 30%-20%-10% discount on parking and landing charges at DMK airport for FY13F/FY14F/FY15F (AOT’s fiscal years), which AOT expects will cost it THB116/85/45mn, or a total of THB246mn, a small price to pay for the resultant additional passenger throughput which an unconstrained Thai AirAsia might bring to AOT. Recently the discount was extended to Nok Air and Orient Thai Airlines as well, which were not part of the original offer to 14 international airlines to move to DMK, since they had been based at DMK even before the floods.

Fig. 77: AOT airports – capacity and utilisation

Source: Company data, Nomura research

Fig. 78: AOT discounts on moving to DMK

Period Discount on Quantum Revenue loss to AOT

Aug-12 to Sep-12 Parking and landing -95% 0 (no airline shifted)

Oct-12-Sep-13 Parking and landing -30% THB 116mn




We do not see the possibility of PSC cuts at AOT for LCCs in the near term (unlike Malaysia)

A key difference between the passenger service charges (PSC) in Thailand, and its neighbour Malaysia, is that in Malaysia, PSC applicable to the LCCs is ~half of the PSC applied to the full-service carriers, the rationale being a lower PSC is compensated by higher traffic which results from the cheaper ticket prices on average. AirAsia Group CEO Tan Sri Tony Fernandes has been vocal in requesting a similar concession in Thailand as well, from AOT. However, we think that a PSC discount for LCCs in Thailand is unlikely in the near term. In any case, if such a discount were to be instituted, it would not immediately result in a corresponding jump in passenger traffic, and there would be a downside risk to our earnings forecasts and TP in such a case.

Airports Capacity FY11 FY12 Capacity FY11 FY12 Capacity FY11 FY12BKK 76 58 66 45.00 47.80 52.37 3.00 1.330 1.360DMK 60 19 23 36.50 3.97 2.72 1.27 0.007 0.003

Capacity UtilisationBKK 106% 116%BKK+DMK 64% 68%

HKT 20 21 19 6.50 8.21 9.16 0.04 0.028 0.032CNX 24 13 14 8.00 3.68 4.33 0.04 0.021 0.021HDY 20 10 10 1.90 1.83 2.01 0.01 0.015 0.016CEI 12 6 5 3.00 0.81 0.93 0.01 0.004 0.005

Cargoes (Million Metric Tons/Year)

Actual Utilization

Aircraft (Flights/Hour)

Actual Utilization

Passengers (Million/Year)

Actual Utilization


42

Note that based on our calculations, overall PSC collection from DMK should be ~THB5bn in FY13F, and a 50% discount on the PSC would result in a revenue loss of ~THB2.5bn, on our numbers, which accounts for ~33% of FY13F/14F estimates.

Thailand PSC on the top end of regional airports Fig. 79: Thailand’s PSC at the top end of regional airports

Source: Respective airport websites

Fig. 80: Details of PSC

Source: Various airport websites, Nomura research

0

5

10

15

20

25

30

Thailand (All AOT airports)

Singapore (Changi Airport)

Indonesia (Jakarta & Bali

Airports)

Philippines (Manila Airport)

Malaysia (KL Main Terminal)

Malaysia (LCCT PSC)

Domestic International Transfer and transit passengers(USD / pax)

Thailand

Domestic Passenger Service Charge (PSC) THB 150 (proposed)International Passenger Service Charge (PSC) THB 800 (proposed)

Singapore

Passenger Service Charge (PSC) SGD19.90Passenger Security Service Charge (PSSC) SGD 8.00Aviation Levy SGD 6.10Total SGD 34.00Passenger Service Charge (PSC) SGD 9.00Passenger Security Service Charge (PSSC) SGD 3.00Total SGD 12.00

Indonesia

Domestic Passenger Service Charge (PSC) IDR 40,000International Passenger Service Charge (PSC) IDR 150,000

Domestic Passenger Service Charge (PSC) IDR 40,000International Passenger Service Charge (PSC) IDR 150,000

Philippines

Domestic Terminal Fee PHP 200International Terminal Fee PHP 750Transfer and transit passengerTerminal Fee NIL

1st Class passenger PHP 2,7002nd Class passenger PHP 1,620

Malaysia

Domestic Main terminal PSC MYR 9International Main terminal PSC MYR 65

Domestic LCCT PSC MYR 6International LCCT PSC MYR 32

Kuala Lumpur (KUL) Main Terminal + LCCT

All AOT airports

Ngurah Rai International Airport, Bali

Ninoy Aquino International Airport, Manila

Travel Tax

Changi Airport

Departing passengers

Transfer/ transit passengers

Jakarta's Soekarno-Hatta International Airport


43

Financials: High operating leverage the key driver for earnings

Aeronautical revenues comprise 60% of total revenues, the staple of AOT’s earnings

Airport operators, like AOT, generally derive their revenue under two categories, aeronautical (revenues linked directly to passenger numbers) and non-aeronautical (not directly linked). Aeronautical revenues can be further divided into the following three subcategories:

• Landing and parking charges (paid by airlines to AOT, not passed on directly to consumers).

• PSC (part of ticket price and thus directly passed on to consumers).

• Aircraft service charges, which comprise charges such as fees paid by airlines for the use of boarding bridges. These vary by the maximum takeoff weight of the aircraft and length of time at a gate (paid by airlines to AOT, not passed on directly to consumer).

Aeronautical revenues for AOT comprise ~60% of total and are the staple for earnings generation for the company.

Non-aeronautical revenues comprise

• Office and state property rents: Mostly collected from airlines, government agencies and concession tenants. Rents are determined based on the tenants’ business use.

• Service revenues: Service charges for utilities, check-in counters, services, airline announcement services, hydrant system services, etc.

• Concession revenues: Duty-free, souvenirs, food & beverage, airline catering, fuelling services, car park, advertising, banking etc.

We forecast revenue CAGR of 12% over FY12-15F, led by higher PSC and passenger throughput

AOT is seeking approval from the regulators to raise PSC from the current THB700/100 to THB800/150, to offset the upcoming THB62.5bn capex for Suvarnabhumi airport. There has been a slight delay in raising the charges, due to a review of existing norms at DMK, by the authorities. However, we are optimistic of a PSC increase being green-lighted by the middle of the year. AOT is required to give airlines a one-year notice before raising charges, and so we think the impact of higher prices will only start by middle of 2014 (ie, in 2HFY14) onwards. As such, we are building in a partial impact of PSC hike in FY14F and a full implementation for FY15F. Overall, we forecast a revenue CAGR of 12% over FY12-15F, led by growth in passenger numbers and a scheduled PSC hike in FY14F.


44

Fig. 81: Revenue growth


Fig. 82: Revenue split PSC to be main driver


Costs on the other hand are mostly fixed in nature…

Operating costs for AOT, on the other hand, are mostly fixed in nature, with the exception of state property rental (which is the fee AOT pays to the government as part of the utilisation agreement, @5% of operating income from BKK, DMK and 2% from other airports). We forecast an operating cost CAGR of ~10% over FY12-15F, mainly led by staff costs and other opex (utilities, lease costs).

Fig. 83: Opex growth to lag revenue growth


Fig. 84: FY13F opex breakdown


0%

2%

4%

6%

8%

10%

12%

14%

16%

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

FY11 FY12 FY13F FY14F FY15F

Total revenues (LHS)

% y-o-y (RHS)

(THB mn)

15% 16% 15% 15% 14%

43% 43% 44% 45% 46%

2% 2% 2% 2% 1% 6% 5% 5% 4% 3% 12% 11% 11% 10% 9%

22% 23% 25% 26% 26%

0%

50%

100%


Landing and parking charges Passenger service chargesAircraft service charges Office and state property rentsService revenues Concession revenues

-15%

-10%

-5%

0%

5%

10%

15%

0

5,000

10,000

15,000

20,000

25,000

30,000


Total opex (LHS)

% y-o-y (RHS)

(THB mn) Personnel expenses

and Manage-ment’ s

remuneration24%

Operating expenses (utilities, leases)

34%Repairs and maintenance

12%

State property

rental9%

Depreciation and

amortization21%


45

… higher operating leverage to translate to higher earnings and margin uplift Fig. 85: Core net income


Fig. 86: We see margin uplift through higher op leverage


0%

10%

20%

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50%

60%

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80%

0

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14,000


Core net income (LHS)% y-o-y growth (RHS)

(THBmn)

0%

5%

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15%

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45%

FY

11

FY

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FY

13F

FY

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FY

15F

EBIT margin Net margin


46

Key assumptions • We are forecasting 9.3% passenger growth in FY13F, (note, 1QFY13F passenger

numbers have grown by 28.5%, to 20.8mn largely due to the effect of a lower base due to flood effect last year).

• Our aircraft growth numbers are slightly above passenger growth figures, owing to the higher propensity of LCCs to use narrow-body aircraft, which have lower average capacity, and as such need more aircraft to carry the same number of passengers than a widebody A330 or B777.

• We estimate that the effect of the higher PSC will only partially be reflected in FY14F owing to delays in getting approval, and as a result our effective PSC for FY14F is THB750/THB125 for international / domestic passengers.

• In addition to the planned capex till FY20 for BKK and HKT, future traffic growth will necessitate further capacity expansion at all AOT airports according to our estimates. We have used an incremental THB1bn for 1mn passengers/annum capacity addition, and arrive at a total capex of THB130bn for ~130mn additional passengers per year capacity at AOT’s 6 airports.

Fig. 87: Key assumptions


FY11 FY12 FY13F FY14F FY15FPassenger movements (mn)Suvarnabhumi 47.8 52.4 44.9 47.2 49.6Don Mueang 4.0 2.7 15.1 17.8 20.5Chiang Mai 3.7 4.3 4.9 5.5 6.0Hat Yai 1.8 2.0 2.2 2.3 2.5Phuket 8.2 9.2 10.1 11.1 12.0Chiang Rai 0.8 0.9 1.0 1.1 1.2Total 66.3 71.5 78.2 85.0 91.7

Passenger movements ( % y-o-y)Suvarnabhumi 12.5% 9.6% (14.3%) 5.3% 4.9%Don Mueang 44.0% (31.6%) 457.3% 17.6% 15.1%Chiang Mai 15.6% 17.8% 12.9% 11.5% 10.2%Hat Yai 25.2% 9.7% 7.7% 7.0% 6.4%Phuket 20.7% 11.6% 10.3% 9.4% 8.5%Chiang Rai 11.3% 15.0% 10.0% 9.0% 8.0%Total 15.5% 7.9% 9.3% 8.7% 7.9%

Aircraft movementsTotal movements 441,440 480,335 526,275 574,533 622,504

Aircraft movements (% y-o-y)Total movements 14.4% 8.8% 9.6% 9.2% 8.3%

Effective PSC (THB/pax)International 700 700 700 750* 800Domestic 100 100 100 125* 150* partial implementation in FY14F

New Capex post FY20FFY21 - FY25 FY26 - FY30 FY31 - FY35 FY36 - FY40 FY41-52

Total new capacity to be added (mn pax pa) 4 9 11 28 79Total new capex (THB mn) 3,507 8,897 11,310 27,734 79,359@ THB1bn for 1mn additional pax per annum


47

Retail and concession

Only one major tenant – King Power, unlike KLIA

We noted a key difference between AOT airports and airports run by Malaysia Airports, in that AOT awards the concession for duty-free shops and F&B (food & beverage) en-masse to one major concessionaire (in this case – King Power Duty Free – KPD and King Power Suvarnabhumi – KPS respectively), whereas Malaysia Airports negotiates with individual tenants and awards to many of them. Malaysia Airports also operates its own duty-free stores under the Eraman brand, ensuring a higher profitability for itself.

The recently opened for bidding DMK concession was also awarded to KPD (for duty free) and the Mall Group (for F&B); however, we note that the Minimum Annual Guarantee (MAG) offered by KPD was 50% more than the next highest bid.

Fig. 88: Suvarnabhumi Concession Details

BKK Concession

Min Annual Guarantee (THB mn) - MAG

Concession Fee (% of gross rev) Additional

KPD - 5,496sqm 16,832 (10 years) 15% till FY10, then inc by 1% each year till FY15

Prepaid THB2,632mn (incl VAT) at Signing of contract

KPS - 20,000 sqm

1,431/yr (first year) and then decided by min annual guarantee formula

15% Prepaid THB2,140mn (incl VAT) at Signing of contract

Source: Media articles, AOT

Fig. 89: Don Muang Concession Details

DMK new concession Period Area Min Annual Guarantee (THB mn) - MAG

King Power Duty Free 10 years starting 2012 1100 sqm MAG: THB 63mn / month = THB756mn/year

Mall group (F&B) 10 years starting 2012 2700 sqm MAG: THB 16.7mn / month = THB200mn/year

Source: Media articles, Company data


48

Balance sheet strong; impact of JPY weakening to be offset by hedged loans

Gearing to remain manageable at 0.4x net debt-to-equity

Due to the strong operating cashflow generation, even if we factor in the higher capex from the construction of the new airports, gearing should remain manageable, peaking at 0.45x net debt to equity in FY16F, before decreasing further. AOT’s loans are largely (more than 90%) denominated in JPY from overseas financial institutions, guaranteed by the Ministry of Finance with fixed annual interest rate at 0.75-2.70% and 2003-2042 payment due.

Fig. 90: Gearing


Forex: likely beneficiary of JPY weakening vs THB

After having suffered forex losses in FY11, AOT entered into a cross-currency and interest-rate swap contract for 78% of the remaining balance of loan for JPY-THB. This also increased the effective borrowing cost of AOT to ~5%. As such, AOT will largely lose out on the impact of the recent JPY weakening vs the THB, but since we exclude the impact of forex gains / losses in our core net income calculations, and since 22% of the borrowings are still unhedged, we think on an overall basis, AOT will still benefit from the JPY weakening.

RoE uplift to be driven by margin expansion

We forecast AOT’s core RoE to rise from 9% in FY12 to 13.1% in FY15F. The primary driver of this growth is growth in margins.

Fig. 91: Du-pont analysis: margin the main driver of RoEs

Du Pont Analysis FY11 FY12 FY13F FY14F FY15F

Net margin (%) - core 14.3% 22.8% 24.0% 27.7% 28.7%

Asset turns (x) 0.19 0.20 0.21 0.22 0.23

Leverage (x) 2.09 1.93 1.90 1.91 1.95


0.0

0.1

0.2

0.3

0.4

0.5

0.6

FY11 FY12 FY13F FY14F FY15F FY16F FY17F FY18F FY19F FY20F

Net debt to equity (x)


49

Risks

Major potential downside risks for the stock are

• Delay in implementing airport charge increases: A part of the earnings and margin expansion is premised on the PSC charges for AOT to go through. However, delays in implementing those charges will impact our earnings estimates and price target for the stock.

• Lower-than-expected air traffic, which can be due to various reasons like a re-emergence of economic crisis, political unrest deterring air traffic, outbreak of disease, etc.

• Capex overruns at BKK airport, which would deter investor sentiment.

• SOE nature of the company leading to less-than-optimal utilisation of assets.

Please see the front section for a sensitivity analysis.


50

AOT: Quasi-monopolistic airports operator in Thailand Airports of Thailand came into being as a result of the corporatization of the Airports Authority of Thailand, a state enterprise. It became a public company on 30 September 2002, and is 70%-owned by the government through the Ministry of Finance, which is the largest shareholder, with the remaining held by institutional and retail investors. Foreign investors hold ~15% of the company.

AOT’s share of Thailand air traffic rising

Although AOT manages only 6 out of Thailand’s 38 airports (see figures below), by virtue of them being Thailand’s major business and tourist destinations, these 6 account for ~84% of Thailand’s total air traffic. As such, AOT can be considered a good proxy to play the Thai air travel boom, in our view. The Department of Civil Aviation (DCA) manages 28 regional airports, and Bangkok Airways manages 3. Pattaya is managed by the Royal Thai Navy. As per management, there is no plan to inject other regional airports into AOT, which is not necessarily a drawback, given only 5-6 of the regional airports are making profits.

Fig. 92: Airports in Thailand – who manages what

Source: AOT

Fig. 93: Map of Thailand airports

Source: AOT

Total of 38 airports in Thailand

AOT2 in Bangkok and perimeter

1. Suvarnabhumi Airport (BKK)2. Don Muang International Airport (DMK)

4 international airports at regional sites1. Chiang Mai International Airport (CNX)2. Phuket International Airport (HKT)3. Hat Yai International Airport (HDY)4. Mae Fah Luang-Chiang Rai International Airport (CEI)

Department of Civil Aviation (DCA)28 regional airports

Royal Thai NavyU-Tapao Pataya International Airport

Bangkok Airways Company1. Sukhothai Airport2. Samui Airport3. Trad Airport


51

Fig. 94: AOT vs regional airports capacity

Source: AOT

Fig. 95: Market share of airlines – FSC and LCC


Total Area Terminal Area Aircraft Passengers Cargoes

Airports (Acres) (Sq. m.) (Flight/Hour) (Million/Year) (MMT/Year)60 x 3,70060 x 4,00060 x 3,70045 x 3,500

HKT 47 23,369 20 6.5 0.036 1 45 x 3,000CNX 86 16,742 24 8.0 0.035 1 45 x 3,100HDY 28 14,656 20 1.9 0.013 1 45 x 3,050CEI 15 16,650 12 3.0 0.005 1 45 x 3,000

Chek Lap Kok - HK 3,101 710,000 54 45.0 3.000 2 60 x 3,800Changi 3,212 1,043,020 n/a 64.0 2.000 3 60 x 3,800

60 x 4,00059 x 2,748

Incheon 13,880 500,000 70 44.0 4.500 3 60 x 4,00060 x 3,75060 x 3,750

2

1.270 2

BKK 8,000 563,000 76 45.0 3.000

DMK 1,552 391,316 60 36.5

Area Runways

(Metres)

Capacity

Top 10 Airlines1. Thai Airways International 36.25%2. Thai Air Asia 12.17%3. Bangkok Airways 5.81%4. Cathay Pacific Airways 2.97%5. Emirates 2.68%6. Nok Air 2.13%7. Orient Thai Airlies 1.61%8. Qatar Airways 1.58%9. Singapore Airlines 1.47%10. China Airlines 1.34%

Of which - Top 10 LCCs % of overall Within LCCs1. Thai Air Asia 12.17% 60.11%2. Nok Air 2.13% 10.52%3. Orient Thai Airlines 1.06% 5.26%4. Tiger Airways 0.95% 4.69%5. Air Asia 0.83% 4.11%6. JetStar Asia 0.57% 2.80%7. IndiGo Airlines 0.42% 2.09%8. Indonesia Air Asia 0.40% 1.97%9. Jeju Air 0.39% 1.95%10. CEBU Pacific Air 0.31% 1.51%


52

Fig. 96: AOT: Capex plans approved


Rank of airports by passenger numbers Fig. 97: Bangkok was the 16th largest airport in the world in 2011

Source: CAPA

Investment Cost Expected(THB bn) Timeframe

1. Project Management 62.50 2011 - 2017 - 15 mn pax per yearConsultant (PMC)

2. 1st Midfield Satellite - 28 contacted gates3. Apron around 1st Midfield Satellite4. South Tunnel and Automated

People Mover5. Main Terminal Extension6. Parking Garage and Airlines Office7. Utilities

Investment Cost Expected(THB bn) Timeframe

1. New International Passenger 5.79 2009 - 2015 - 6 mn pax per yearTerminal

2. Renovation of the Existing Terminal - 4 contacted gates3. Apron4. Other related facilities

Suvarnabhumi Additional Capacity

Phuket Additional Capacity

Rank 2011 Airport Passengers % y-y chg in 20111 Atlanta (ATL) 92,365,860 3.4%2 Beijing (PEK) 77,403,668 4.7%3 London (LHR) 69,433,565 5.4%4 Chicago (ORD) 66,561,023 -0.5%5 Tokyo Haneda (HND) 62,263,025 -2.9%6 Los Angeles (LAX) 61,848,449 4.8%7 Paris (CDG) 60,970,551 4.8%8 Dallas/Fort Worth (DFW) 57,806,152 1.6%9 Frankfurt (FRA) 56 436 255 6.5%10 Hong Kong (HKG) 53,314,213 5.0%11 Denver (DEN) 52,699,298 0.9%12 Jakarta (CGK) 52,446,618 19.2%13 Dubai (DXB) 50,977,960 8.0%14 Amsterdam (AMS) 49,754,910 10.0%15 Madrid (MAD) 49,644,302 -0.4%16 Bangkok (BKK) 47,910,744 12.0%17 New York (JFK) 47,854,283 2.9%18 Singapore (SIN) 46,543,845 10.7%19 Guangzhou (CAN) 45,400,156 10.8%20 Las Vegas (LAS) 41,479,572 4.3%21 Shanghai (PVG) 41,450,211 2.6%22 San Francisco (SFO) 40,907,389 4.2%23 Phoenix (PHX) 40,565,677 5.2%24 Houston (IAH) 40,170,844 -0.8%25 Charlotte (CLT) 39,043,708 2.4%26 Miami (MIA) 38,314,389 7.3%27 Munich (MUC) 37,763,701 8.8%28 Kuala Lumpur (KUL) 37,670,586 10.5%29 Rome (FCO) 37,651,222 3.9%30 Istanbul (IST) 37,398,221 16.3%


53

Key management personnel Fig. 98: Management personnel

Name Position

Flying Officer Anirut Thanomkulbutra Outgoing President

Mr. Somchai Sawasdeepon Senior Executive Vice President

(Engineering and Construction)

Mrs. Supaporn Burapakusolsri Senior Executive Vice President

(Planning and Finance)

Flying Officer Passakorn Surapipith Senior Executive Vice President

(Administration)

Wing Commander Prateep Wichitto Senior Executive Vice President

(Regional Airports)

Miss Vilaiwan Nadvilai Senior Specialist 10

Acting Senior Executive Vice President

(Business Development and Marketing)

Flying Officer Chaturongkapon Sodmanee Executive Vice President

(Engineering and Construction)

Sub Lieutenant Naris Yoadchan Executive Vice President

(Regional Airports)

Mrs. Poolsiri Virojanapa Executive Vice President

(Planning and Finance)

Mr. Montri Mongkoldaow Executive Vice President

(Administration)

Mr. Chaowalit Paka-Ariya Executive Vice President

Project Manager of Suvarnabhumi Airport

Construction Management Office

Mr. Sirote Duangratana Executive Vice President

(Business Development and Marketing)

Source: Company data from 2012 Annual Report

Please note that the AOT President Flying Officer Anirut Thanomkulbutra was removed by the board in late 2012.

Operational relationship with the government

AOT pays 5% of the operating income from Don Muang Airport and Suvarnabhumi Airport and 2% for the other regional airports to the Treasury Department. In return, AOT owns the concession rights to manage the airports for a period of 30 years (2002-2032) as part of an utilisation agreement. The agreement can be extended for another 10+10 year period, till 2052.

PSC and L&P: the foundation of aeronautical revenues

The aeronautical charges (PSC or passenger service charge), and the landing and parking charges are levied by AOT on the airlines and their passengers. Revisions in these charges are subject to an approval by the DCA, and are generally done after a period of ~5 years based on a compounded CPI based formula. Note that AOT is currently negotiating for an increase in PSC from THB700 to THB800 (international) and THB100 to THB150 (domestic). Note that such an increase in charges is generally justified by capex needs on the horizon (like the upcoming BKK expansion). The last time the charges were raised was in 2007, from THB500 to THB 700 (int’l) and THB 50 to THB100, in view of the Suvarnabhumi opening. After a hike in charges is approved, AOT has to give a notice to airlines of 1 year in advance. As such, we are only building in a hike coming into effect from 2HFY14 (i.e. March-2014) onwards in our estimates.


Thai Airways International PCLTHAI.BK THAI TB

TRANSPORT/LOGISTICS

EQUITY RESEARCH

Laggard play on the verge of turnaround

Underappreciated tourism proxy; we believe sector discount should narrow

February 6, 2013

Rating Starts at

Buy



Potential upside +23.4%

Action: Initiate with Buy; underperformance to SET Transport might reverse in 2013F We initiate coverage of Thai Airways (THAI) with a Buy rating and TP of THB28.50, implying potential upside of 23%. Over the past year, THAI has underperformed the SET Transport index by 60% and peers AOT/AAV by 130%/50%; however, its operational performance has improved steadily (PLF up to 77% in 9M12 vs. 72% a year ago), with yields holding up (only -1.2% y-y to THB2.70/RSK). We think THAI’s turnaround from a loss in 2Q12 might be sustainable (barring macro shocks) and should rekindle investor interest in the stock. With 77% revenue exposure to the economy class (and consequently tourist traffic), and more than 70% exposure to APAC traffic, we think THAI’s potential as a tourism proxy is unappreciated by the Street and warrants another look.

Valuation: Should trade above mid-cycle on an improving outlook Our target multiple for THAI at 0.8x P/B implies mid-cycle valuations, in view of the 43% earnings turnaround we expect over FY12-14F (with our book value adjusted for impairment losses). We also note that in terms of P/E (CY13F: 8x) and EV/EBITDA (CY13F: 5.2x), THAI is currently trading a discount to its full-service peers (average P/E 11.4x, and average EV/EBITDA 6.4x), which might narrow going forward, as the market comes around to our view of a turnaround.

Catalysts: Upcoming quarterly results, 4Q12/1Q13 being seasonally strong, sustainable quarterly profits and continued operational improvements

31 Dec FY11 FY12F FY13F FY14F


Revenue (mn) 190,997 205,099 214,979 225,451

Reported net profit (mn) -10,197 4,173 6,194 8,480

Normalised net profit (mn) -4,443 4,173 6,194 8,480

FD normalised EPS -2.04 1.91 2.84 3.88

FD norm. EPS growth (%) -154.6 na 48.4 36.9

FD normalised P/E (x) na N/A 12.1 N/A 8.1 N/A 5.9


Price/book (x) 0.8 N/A 0.7 N/A 0.7 N/A 0.6

Dividend yield (%) na N/A 2.1 N/A 3.1 N/A 4.2

ROE (%) -14.6 6.4 8.9 11.2

Net debt/equity (%) 198.9 190.5 179.9 162.5


Anchor themes


Nomura vs consensus

Our earnings are higher than the Street due to our assumption of slight oil price declines in 2013-14F.

Research analysts





Nomura | Thai Airways International PCL February 6, 2013

55

Key data on Thai Airways International PCL Income statement (THBmn) Year-end 31 Dec FY10 FY11 FY12F FY13F FY14FRevenue 180,589 190,997 205,099 214,979 225,451Cost of goods sold -171,323 -193,237 -197,319 -202,157 -209,564Gross profit 9,266 -2,239 7,780 12,823 15,888SG&A


Operating profit 9,266 -2,239 7,780 12,823 15,888

EBITDA 29,502 17,750 27,873 34,304 38,976Depreciation -20,236 -19,989 -20,093 -21,481 -23,088Amortisation

EBIT 9,266 -2,239 7,780 12,823 15,888Net interest expense -4,981 -4,945 -5,002 -5,092 -5,155Associates & JCEs 258 184 400 400 400Other income 3,497 2,634 1,435 0 0Earnings before tax 8,040 -4,367 4,614 8,131 11,132Income tax -1,166 -41 -231 -1,626 -2,226Net profit after tax 6,874 -4,408 4,383 6,505 8,906Minority interests -48 -35 -210 -311 -426Other items

Preferred dividends

Normalised NPAT 6,826 -4,443 4,173 6,194 8,480Extraordinary items 7,918 -5,754 0 0 0Reported NPAT 14,744 -10,197 4,173 6,194 8,480Dividends -2,748 0 -1,043 -1,548 -2,120Transfer to reserves 11,996 -10,197 3,130 4,645 6,360


Reported P/E (x) 2.9 na 12.1 8.1 5.9Normalised P/E (x) 6.2 -11.3 12.1 8.1 5.9FD normalised P/E (x) 6.2 na 12.1 8.1 5.9FD normalised P/E at price target (x) 7.6 na 14.9 10.0 7.3Dividend yield (%) 5.4 na 2.1 3.1 4.2Price/cashflow (x) 1.5 5.5 1.9 1.5 1.4Price/book (x) 0.7 0.8 0.7 0.7 0.6EV/EBITDA (x) 5.3 9.8 6.3 5.2 4.6EV/EBIT (x) 16.7 na 21.9 13.7 11.0Gross margin (%) 5.1 -1.2 3.8 6.0 7.0EBITDA margin (%) 16.3 9.3 13.6 16.0 17.3EBIT margin (%) 5.1 -1.2 3.8 6.0 7.0Net margin (%) 8.2 -5.3 2.0 2.9 3.8Effective tax rate (%) 14.5 na 5.0 20.0 20.0Dividend payout (%) 18.6 na 25.0 25.0 25.0Capex to sales (%) 5.4 6.6 12.1 13.4 12.8Capex to depreciation (x) 0.5 0.6 1.2 1.3 1.2ROE (%) na -14.6 6.4 8.9 11.2ROA (pretax %) 3.7 -0.8 3.1 4.9 5.9

Growth (%)

Revenue 11.7 5.8 7.4 4.8 4.9EBITDA -1.6 -39.8 57.0 23.1 13.6EBIT 3.6 -124.2 na 64.8 23.9Normalised EPS 17.1 -154.6 na 48.4 36.9Normalised FDEPS 17.1 -154.6 na 48.4 36.9

Per share

Reported EPS (THB) 8.06 -4.67 1.91 2.84 3.88Norm EPS (THB) 3.73 -2.04 1.91 2.84 3.88Fully diluted norm EPS (THB) 3.73 -2.04 1.91 2.84 3.88Book value per share (THB) 34.86 28.94 30.85 33.21 36.39DPS (THB) 1.25 0.00 0.48 0.71 0.97Source: Company data, Nomura estimates



Absolute (THB) 4.5 0.0 -2.5

Absolute (USD) 7.4 3.1 1.3

Relative to index 1.3 -10.9 -25.9

Market cap (USDmn) 1,694.9


52-week range (THB) 27.75/19.5


4.94


Finance Ministry 51.0

Vayupak Fund 15.5


Notes

We see a steady improvement in profit levels in FY12-14F


56

Cashflow (THBmn) Year-end 31 Dec FY10 FY11 FY12F FY13F FY14FEBITDA 29,502 17,750 27,873 34,304 38,976Change in working capital -3,973 -7,639 -1,610 -221 -251Other operating cashflow 2,738 -944 901 -1,280 -1,866Cashflow from operations 28,268 9,167 27,164 32,803 36,860Capital expenditure -9,684 -12,628 -24,849 -28,771 -28,771Free cashflow 18,584 -3,461 2,315 4,032 8,089Reduction in investments -352 -199 -400 -400 -400Net acquisitions

Reduction in other LT assets -909 2,107 0 0 0Addition in other LT liabilities 7,726 591 -304 346 361Adjustments -5,648 -814 1,204 507 429Cashflow after investing acts 19,401 -1,776 2,815 4,486 8,479Cash dividends -423 -2,748 0 -1,043 -1,548Equity issue 14,750 1 0 0 0Debt issue -4,711 -10,664 1,128 0 0Convertible debt issue

Others -5,637 -5,827 -5,502 -5,545 -5,545Cashflow from financial acts 3,979 -19,238 -4,374 -6,589 -7,094Net cashflow 23,380 -21,014 -1,559 -2,103 1,385Beginning cash 14,300 37,680 16,666 15,107 13,004Ending cash 37,680 16,666 15,107 13,004 14,389Ending net debt 108,600 125,634 128,321 130,424 129,038Source: Company data, Nomura estimates

Balance sheet (THBmn) As at 31 Dec FY10 FY11 FY12F FY13F FY14FCash & equivalents 37,680 16,666 15,107 13,004 14,389Marketable securities 550 419 419 419 419Accounts receivable 17,027 16,649 17,878 18,739 19,652Inventories 6,968 7,710 7,873 8,066 8,361Other current assets 16,353 17,850 17,711 17,952 18,202Total current assets 78,576 59,294 58,988 58,179 61,023LT investments 1,480 1,809 2,209 2,609 3,009Fixed assets 206,119 204,995 209,750 217,040 222,722Goodwill

Other intangible assets 552 624 624 624 624Other LT assets 9,831 7,724 7,724 7,724 7,724Total assets 296,558 274,445 279,295 286,175 295,102Short-term debt 23,155 18,872 0 0 0Accounts payable 6,439 7,363 7,518 7,703 7,985Other current liabilities 51,142 44,440 43,928 44,817 45,742Total current liabilities 80,736 70,675 51,446 52,519 53,727Long-term debt 123,125 123,427 143,427 143,427 143,427Convertible debt

Other LT liabilities 16,315 16,907 16,603 16,949 17,310Total liabilities 220,176 211,009 211,476 212,896 214,465Minority interest 288 266 476 787 1,213Preferred stock

Common stock 47,376 47,376 47,376 47,376 47,376Retained earnings 28,718 15,793 19,966 25,117 32,048Proposed dividends

Other equity and reserves

Total shareholders' equity 76,094 63,169 67,342 72,492 79,424Total equity & liabilities 296,558 274,445 279,295 286,175 295,102

Liquidity (x)

Current ratio 0.97 0.84 1.15 1.11 1.14Interest cover 1.9 -0.5 1.6 2.5 3.1

Leverage

Net debt/EBITDA (x) 3.68 7.08 4.60 3.80 3.31Net debt/equity (%) 142.7 198.9 190.5 179.9 162.5

Activity (days)

Days receivable 32.7 32.2 30.8 31.1 31.1Days inventory 14.0 13.9 14.5 14.4 14.3Days payable 13.9 13.0 13.8 13.7 13.7Cash cycle 32.8 33.0 31.5 31.7 31.7Source: Company data, Nomura estimates

Notes

High net debt levels, but funding should be less of a concern given its national carrier status

Notes

Gearing to remain high at around 1.8-1.9x net debt-to-equity levels


57

Valuation

Laggard play on SET Transport, despite improving operational metrics We note THAI has been one of the biggest laggards on the SET and the SET Transport index, underperforming the benchmark SET (by 31%), SET Transport Index (by 60%) and its peers in the aviation space (AOT by 130%, and AAV by 50%) since January 2012. This has come amidst a relatively turbulent 2012, which saw one loss-making quarter in 2Q12 out of the nine months reported so far, an unexpected change in President, continued growth of low-cost carriers (LCCs), and more recently a strike by labour unions. However, we note, there were several major positives for THAI on the operational front, which we think outweigh the impact of these negatives, notably an increase in passenger loads to 77% in 9M12 (from 72% a year ago), which came amidst a relatively minimal loss in passenger yields (-1.2% to THB 2.70 / RSK). As a result, 9M12 core net income reached a profitable THB3bn, compared with a loss of THB4.9bn in 9M11, and we believe THAI looks on track to deliver a strong finish to the full year, with another decently profitable 4Q12 result.

We note EPS revisions for THAI are relatively holding up for FY13F, with FY14F consensus expecting substantial growth in profits. Even so, THAI is only trading at below mid-cycle forward valuations, as opposed to the THAI transport sector trading generally above 1SD of the mean, at a discount, which we think is unreasonable considering the improving profitability and return cycle.


Source: Bloomberg

Fig. 100: THAI: EPS revisions

Source: Bloomberg

Fig. 101: Trading below mid-cycle valuation


Fig. 102: Forward P/B to forward ROE estimates


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Fig. 103: Forward P/E


Fig. 104: Forward EV/EBITDA


We value THAI at mid-cycle on our bullish outlook for Thailand aviation; anticipated impairment loss unlikely to cause book value erosion; TP of THB28.50/share; Buy

We think THAI deserves to trade at its mid-cycle valuation, in view of the 43% earnings turnaround we expect over FY12-14F and its steep discount to its other full-service peers. However, we note THAI’s book value has a risk of impairment losses on its old aircraft (owned / finance leased) which it needs to retire over the next two years, like the A300, A345, B734 and B744s. We provide for ~THB3bn of impairments on the progressive retirement of these aircraft, and estimate end-2014F adjusted BV of THB36. We highlight that based on our NPAT estimates of THB6.2bn/THB8.4bn for FY13F/FY14F, the potential impairment losses are unlikely to lead to erosion in book value. Applying a target P/B of 0.8x, which implies mid-cycle for THAI in view of the bullish outlook for the THAI transport sector, we arrive at our TP of THB28.50/share, representing potential upside of 23% from current levels.

We initiate on THAI with a Buy rating. We note that in terms of P/E (CY13F: 8x) and EV/EBITDA (CY13F: 5.2x), THAI is currently trading a discount to its full-service peers (average P/E 11.4x, and average EV/EBITDA 6.4x).

Fig. 105: Valuation Adjusted equity value (ex provisions) – FY14F 77,637

Adj BVPS 36

Target Valuation (P/B) 0.8x

Price target (THB / share) 28.50


Fig. 106: Aircraft retirals – owned and finance leased


Exposure to economy-class passengers and Asia-Pacific more than 70% of revenues; THAI is an overlooked tourism proxy, in our view

The current weakness in global business-class passenger demand affects various airlines to a varying degree, depending on how much of their revenue is earned from premium passengers (although business-class passengers only account for ~10% or less of overall passengers, average ticket prices on business class are far higher than economy). For airlines such as SIA, we estimate the business class contributes more

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Owned?Risk of impairment? FY13F FY14F FY15F

A300-600 Own Yes 4 5A340-500 FL Yes 4A330-300 Mix NoB737-400 2 Own+ Rest OL Yes 2 2 1B747-400 14 O, 4 FL Yes 2B777-200 6 O, 2 OL NoB777-300ER 6 OL No


59

than 30-35% of overall revenue and, as such, SIA is quite susceptible to a slowdown in premium flyers.

THAI generates ~23% of its revenue from the business class, thus making it less sensitive to premium passengers, and more geared towards the economy class, which comprises bulk of the holidaymakers and tourists. We also note that THAI’s exposure to Europe is ~28% of revenues. More than 70% of its revenue still comes from domestic, ASEAN, Japan and Australia destinations, where the bulk of the tourist traffic originates. We highlight that Japan, which is one of the most profitable routes for THAI, still relies almost completely on full-service air travel for outbound tourism, as LCCs in Japan are a fairly recent development and mainly domestic (with a few exceptions like AirAsia X flying to Malaysia).

We also observe that along with tourist arrivals growing at a CAGR of 7% since 2001, RPKs at THAI have also grown at a slower 2%, with the correlation between tourist arrivals and THAI RPK a strong 0.77. Based on the above, we conclude that THAI is also a beneficiary of rising tourist traffic, although primarily long haul.

Fig. 107: Jan – Aug 2012 passenger revenue by class


Fig. 108: Jan – Aug 2012 passenger revenue by region


Fig. 109: Correlation between tourists and THAI RPKs


Economy77%

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Fuel hedging on the higher side; to benefit from lower fuel prices and less volatility

THAI typically hedges more than 50% of its fuel requirements for the coming months. It has hedged roughly 38-54% of its requirement for the 1H2013 period. We expect fuel prices to decline to USD105/bbl by 2013F and USD100/bbl by 2014F and, as such, view the hedging decision as neutral to our view of benign fuel prices. With part of future bookings matched to fuel costs, only a highly volatile movement in oil prices would result in costly hedges being unwound for THAI, in our view, which we do not expect to happen. As such, we expect our view of 5% lower oil prices in 2013/14 to benefit THAI.

Note that we exclude MTM effect of fuel hedges in the calculation of our core net income for airlines.

Fig. 110: Hedging levels


Recent strike by THAI employees might weigh on share price in the near term We note that the mid-January strike by some THAI employees demanding a higher bonus (2 month, vs 1 month payout) and salary increment (7.5%) might be fresh on investors’ minds and impact the share price in the near term. However, we also note that the strike was called off fairly quickly by reaching a settlement, only resulting in a small delay in flights, so the effect of disruption was fairly negligible. However, a repeat of such incidents, which we deem unlikely, might turn into a continuous overhang on the share price and limit upside.

Moving to protect market share on the lines of SIA; THAI Smile can be profitable like SilkAir, in our view

Over the past decade, THAI has lost market share to LCCs, mainly on domestic routes (from 84% in 2003 to 40% in 2010), and to a certain extent on regional routes (42% to 33%), as per company data. However, we note that such a significant drop in market share has not necessarily come with a similar drop in passenger numbers, as most of the passengers migrating to LCCs have been new flyers, and LCCs have been hugely successful in simulating demand. In fact, passenger numbers have held relatively steady for THAI over this period, and RPK numbers have grown over the years. This is in line with the developments in neighbouring Malaysia, where MAS’s market share in domestic routes has fallen to 30-35% from a monopoly a decade ago, losing share to AirAsia. Even in Singapore, LCCs now account for 25% of the total traffic from non-existence 10 years ago, as per CAPA data.

Full-service carriers have gradually begun to realise that they can, in fact, share in this growth in new passengers through stakes in LCCs, without necessarily compromising on profitability for the entire group, because as a separate LCC arm within the parent

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company, a carrier can manage costs better by negotiating new staff contracts, outsourcing staff, and thus get over the various cost issues legacy carriers face. We see this method being adopted by SIA, which has a 33% stake in a pure-play LCC (Tiger Airways), a full-service short-haul arm (SilkAir), which is profitable; and Scoot, a recent entrant in the long-haul LCC space.

We note that THAI’s evolution follows a similar trend. Over the past 2 years, it has built up a 49% stake in domestic LCC Nok Air (which competes with Thai AirAsia at the DMK hub). More recently the last 10% in Nok Air was acquired for THB165mn. In July 2012, it started a new affiliate called THAI Smile, which was to be positioned between a ‘pure, no frills’ LCC service like Nok and a premium service like THAI’s mainline operations. However, we note that as per aviation website CAPA, THAI Smile is slowly moving toward a more premium offering by having a dedicated business class in its future aircraft (its initial aircraft were all economy + premium economy), which follows SIA’s strategy with SilkAir. We note that THAI Smile can easily achieve lower costs than the overall group structure, as it operates narrow-body fuel efficient aircraft on routes which have historically been flown by THAI using wide-body aircraft, and thus THAI Smile has the potential to be profitable in the medium term like SilkAir.

Fig. 111: Domestic routes market share evolution


Fig. 112: Regional routes market share evolution


Fig. 113: THAI – brands vs product positioning


Fig. 114: Comparison with SIA

Thai SIA

Mainline THAI SQ / SIA

Regional THAI Smile SilkAir

Short haul LCC Nok (49%) Tiger (33%)

Long haul LCC - Scoot



62

Fig. 115: THAI Smile network plan


Fig. 116: Nok Air route map (white)



63

Recovery in play

THAI’s improving load factors; yields are steady…

We note THAI’s load factor and yields appear to be firmly on the recovery path, post the floods of 4Q11, helped by capacity rationalisation and an improving load factor. Passenger loads increased to 77% in 9M12, from 72% a year ago, which came amidst a relatively small loss in passenger yields (-1.2% to THB 2.70 / RSK) for the 9M period. As a result, 9M12 core net income stood at a profitable THB3bn, compared with a loss of THB4.9bn in 9M11, and we think THAI looks on track to deliver a strong finish to the full year, with the seasonal uptick in the 4Q12 results (our FY12F core net income forecasts: THB4bn).

Fig. 117: Passenger load factors


Fig. 118: Passenger yields holding steady


… leading to steady profitability

With the fourth quarter typically being one of the two quarters comprising the seasonal high (the other being 1Q), we expect profitability to continue to be sustained and expect THAI to record ~THB4bn in full-year core net income, notwithstanding higher bonus provisions for employees, which was a reason for the recent employee strike.

Fig. 119: Core EBITDA Higher bonuses might cause slight dip in profitability in 4Q


Fig. 120: Operating revenue


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Cargo yields and loads to drop slightly in FY12F, and likely to stage a small recovery in FY13-14F

With cargo (comprising ~14% of FY12F revenue for THAI) going through a worldwide weak environment for freight, we estimate a 2pp drop in cargo load to 54% for FY12F and a 4% drop in freight yield to THB9.66/FTK. However, with the US and EU GDP growth estimates suggesting a bottoming out in 1Q2013, we are arguing for a small recovery in cargo loads by 1pp each year over FY13F/14F, aided by capacity cuts (RATK down to 4.8bn in FY12F from 4.9bn in FY11).

Fig. 121: Freight load factor


Fig. 122: Freight yields


Improving product offering through re-fleeting and retrofitting to support yields

THAI is concentrating on improving its product offerings by retiring old and aged cost-inefficient aircraft, which in our view should result in added benefits of lowering long-term maintenance costs as well. In addition, it is retrofitting its aged B744s which are scheduled to keep operating for a longer period with newer seats, and its B772s with personal IFE (Video on demand). These measures, although by no means compensate fully for the rather forgettable experience of flying the old aircraft, are still a small positive step going towards improving the passenger experience, in our view, and should support THAI’s passenger yields.

Fig. 123: Retrofitting THAI’s old B744s and B772s


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Fig. 124: Wt average age of THAI fleet set to fall


Higher proportion of Internet bookings to result in lower distribution costs

In line with our theme of growing Internet penetration in Thailand, and aided by an overhaul of THAI’s IT backbone, we note that the proportion of bookings through the Internet is on a consistently upward trend. We note that although at ~10%, THAI’s proportion of Internet bookings is still much lower vs. AirAsia’s 85%, we still view this trend favourably as it helps to eliminate distribution margins, which in some cases can be a sizeable part of overall ticket prices (total A&P + distributor commissions form ~3% of operating costs for THAI).

Fig. 125: % of tickets sold via the Internet


Fig. 126: % of Internet checkins


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Key assumptions Fig. 127: Revenue and operating metrics


FY10 FY11 FY12F FY13F FY14FPassenger RPK 55,526 55,089 60,150 62,083 64,110Domestic 3,036 3,159 3,582 3,710 3,846Regional Asia 21,566 21,698 25,301 26,581 27,928Europe 21,655 20,711 21,165 21,377 21,591North Pacific 1,604 1,513 1,315 1,446 1,591Aus+NZ 7,254 7,422 8,165 8,329 8,495Africa 410 586 621 640 659

Summary of key operating statisticsNumber of Aircraft 90 89 93 97 97

Available Ton-Kilometers (mn) 11,516 11,987 11,826 12,101 12,388Revenue Ton-Kilometers (mn) 7,997 7,836 8,107 8,359 8,620Load Factor (%) 69.4 65.4 68.6 69.1 69.6

Number of Passengers ('000) 18,165 18,398 20,226 20,876 21,558Available Seat-Kilometers (mn) 75,600 78,533 78,137 80,661 83,307Revenue Passenger-Kilometers (mn) 55,676 55,267 60,150 62,083 64,110Cabin Factor (%) 73.6 70.4 77.0 77.0 77.0

Available Dead Load Ton-Kilometers (mn) 4,708 4,919 4,794 4,842 4,890Revenue Freight Ton-Kilometers (mn) 2,895 2,766 2,589 2,663 2,739Freight Load Factor (%) 61.5 56.2 54.0 55.0 56.0

Number of Personnel (people) 25,884 25,848 25,331 25,920 26,534

Passenger yields - blended (THB / RPK) 2.5 2.6 2.7 2.7 2.7Passenger yields - blended (USD / RPK) 0.08 0.09 0.09 0.09 0.09

Freight yields - blended (THB / FTK) 9.46 9.85 9.66 9.66 9.66Freight yields - blended (USD / FTK) 0.30 0.32 0.31 0.32 0.33

Exchange rates Nomura assumptionsAverage THB/USD 31.7 30.5 31.0 29.9 29.2

Average Brent oil price (USD/ bbl) 80.2 111.8 112.0 105.0 100.0% change 28.9% 39.5% 0.2% (6.3%) (4.8%)


67

Fig. 128: Costs and fleet


Gearing to remain high at near 2x levels

We estimate THAI’s gearing should peak at near 2x net debt-to-equity in FY12F, and with future finance lease / capex commitments in the range of ~THB30bn each year for the next few years, we expect the strong operating cash generation will be used to pay for the aircraft. However, gearing should remain near 1.4x levels even in FY14F, we estimate.

Forex risks: Overall beneficiary of appreciating THB, although revenue impact mixed

For the income statement, THAI’s revenue is denominated primarily in foreign currencies, with the ratio being USD: EUR: JPY: THB = 38:28:9:24. On the cost side, THAI’s exposure is USD: EUR: JPY: THB = 66:8:3:23, with fuel costs and lease costs denominated in USD being the biggest cost item. As such, although THAI is net short USD (benefitting from THB appreciation), it is also net long EUR and JPY, thus losing out when these depreciate. However, in terms of balance sheet liabilities, it has loans denominated in JPY (11% of overall) and EUR (33% of overall), so a THB appreciation benefits here. Overall, we estimate THAI should be a beneficiary of THB appreciation.

FY10 FY11 FY12F FY13F FY14FCost breakdownFuel and oil 33% 40% 39% 36% 33%Employee benefits expenses 20% 16% 15% 17% 18%Flight service expenses 11% 11% 10% 10% 10%Crew expenses 3% 3% 3% 3% 3%Aircraft maintenance and overhaul costs 6% 6% 7% 6% 5%Depreciation and amortisation expenses 12% 10% 10% 11% 11%Lease of aircraft and spare parts 3% 3% 3% 4% 6%Inventories and supplies 5% 5% 5% 5% 5%Selling and advertising expenses 4% 3% 3% 3% 3%Insurance expenses 0% 0% 0% 0% 0%Other expenses 4% 4% 4% 4% 4%

CASK (THB / ASK) 2.27 2.46 2.53 2.51 2.52CASK (USD / ASK) 0.071 0.081 0.081 0.084 0.086

Fleet 84 89 93 97 97A300-600 13 11 9 5 0A340-500 4 4 0 0 0A340-600 6 6 6 6 6A330-300 15 22 25 27 25A320-200 0 0 4 10 12B737-400 5 5 5 3 1B747-400 18 16 14 12 12B777-200 8 8 8 8 8B777-200ER 6 6 6 6 6B777-300 6 6 6 6 6B777-300ER 3 5 7 8 11ATR72 0 0 0 0 0A380-800 0 0 3 6 6A350-900 0 0 0 0 0B787-9 0 0 0 0 0B787-8 0 0 0 0 4

Average age 11.0 10.3 9.4 8.8


68

Risks

Downside risk to our earnings estimates and target price include: a) a jump in oil prices, or lower load factors or yields due to demand weakening; b) political unrest in Thailand reducing tourism demand; c) disease outbreak; d) irrational competition (eg, entry of new players such as Lion Air with a new AOC); e) floods affecting operations; f) return of macroeconomic shocks; g) renewed labour union unrest; and h) higher-than-expected impairment of aircraft to be retired

Note that THAI is also a customer of the Boeing Dreamliner (787) aircraft, but deliveries are scheduled only from 2014 onwards. The Dreamliner aircraft are currently grounded pending safety investigations, and in case the investigations take a long time to complete or propose big design changes, the THAI’s EIS (entry-into-service) of the Dreamliner might be pushed back, and impact capacity growth plan next year. However, we note that unlike airlines like JAL or ANA, which had to ground in-service 787s, THAI still has plenty of time to observe the situation as it is evolving, and make alternative arrangements in case the aircraft are delivered late (eg, lease alternative aircraft, not retire existing aircraft).

Please refer to the front section for our sensitivity table.


69

About Thai Airways International PCL

The national carrier of Thailand

Thai Airways International Public Company Limited (THAI) is the national carrier of the Kingdom of Thailand. THAI operates domestic, regional and intercontinental flights from the Bangkok hub to destinations around the world. Thai Airways International commenced operations in 1960 as a joint venture between Thailand's domestic carrier, Thai Airways Company (TAC) and Scandinavian Airlines System (SAS). SAS initially provided a 30% share capital of THB2mn. The joint venture was also helped by SAS’ operations, managerial and marketing expertise. SAS also provided training assistance aimed at building a fully independent national airline within the shortest possible time. Gradually, with the help of training and experience, Thai nationals were able to assume full managerial responsibility and the number of expatriate staff was reduced significantly, and by 1987 expatriates accounted for less than 1% of the staff based in Thailand. After a 17-year partnership with SAS, the Thai government on 1 April 1977 bought out the remaining 15% holding from SAS and THAI became fully-owned by the Thai people.

Thai Airways International started operating flights in 1960, with flights originating from Bangkok to nine overseas destinations within Asia. Intercontinental services were launched in 1971, to Australia, followed by flights to Europe in 1972, and to North America in 1980. Thai Airways International merged with Thai Airways Company (TAC) on 1 April 1988.

THAI shares were listed on 19 July 1991, with a total share capital of THB14,000mn, the largest Thai IPO at its time. In November 2003, THAI offered for sale the company's 442.75mn ordinary shares, which comprised 285mn newly issued shares to increase capital and 157.75mn existing ordinary shares held by the Ministry of Finance. In September 2010, THAI made another public offering of no more than 1,000mn newly issued shares to raise another THB15bn to fund growth.

THAI is now 51%-owned by the Ministry of Finance.


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Key management personnel Fig. 129: Management


Fig. 130: Board of directors


Name Position Education ExperiencesMr. Sorajak Kasemsuvan President Ph.d in International Law, Chairman, MCOT Public Company Limited

London School of Economics Chairman, M Pictures Entertainment Public Company LimitedPh. D. in Political Science, Independent Director, Electricity Generating Public Company Limited University of London, UK Director, M Pictures Entertainment Public Company Limited

Independent Director, Seamico Securities ... Public Co. Ltd

Mr. Pandit Chanapai Executive Vice President, Master of Arts, International Relations, Executive Vice-President, Human Resources and General Administration DepartmentCommercial Department The University of Connecticut, USA Vice President Commercial Development and Support Department

Director The Americas and East Asia Region

Flt. Lt. Montree Jumrieng Executive Vice President, Bachelor of Science, Mechanical Engineering, Executive Vice-President, Human Resources and General Management Department

Technical Department Royal Thai Air Force Academy Vice-President, Human Resources Management DepartmentDirector, Pilot Administration Department

Mr. Chokchai Panyayong Executive Vice President, Master of Engineering, Civil Engineering, Vice President, Business Development and Special Project DepartmentStrategy and Business University of Detroit, USA Vice President, Suvarnabhumi ProjectDevelopment Department Vice President Human Resource Development and Management Department

Sqn. Ldr. Asdavut Watanangura Executive Vice President, Diploma Prufung Bauingenieurwesen Vice President, Aviation Resources, Development Department

Operations Department Master Degree Level), Civil Engineering Director, Flight Deck Crew Training DepartmentHochschule Der Bundeswehr Deputy Director, Domestic Flight Deck Crew Training DepartmentMuenchen Germany

Mr. Teerapol Chotichanapibal Executive Vice President, Master of Science, Operations Research, Vice President, Commercial Development and Support DepartmentProduct and Customer University of Southampton, UK Managing Director, Catering DepartmentServices Department Vice President, Commercial Development and Support Department

Director, Brand Management and Commercial Comunications Department

Mrs.Wasukarn Visansawatdi Executive Vice President,

Finance and Accounting Department

Mr. Sathok Varasarin Executive Vice President Bachelor of Business Administration, Managing Director, Catering Department

Human Resources Washington International University, USA Vice President, In-Flight Services DepartmentMaster of Business Administration, Middleham University, Great Britain

Mr. Danuj Bunnag Executive Vice President Bachelor of Special Studies, Cornell College, USA Managing Director, Ground Services Business Unit

Ground Services B. Sc. Washington University at St. Louis, USA Vice President, Market Planning and Revenue Management DepartmentBachelor of Science, Washington University

Mr. Niruj Maneepun Executive Vice President Bachelor of Special Studies, Cornell College, USA Managing Director, Ground Services Business Unit

Corporate Secretariat B. Sc., Washington University at St. Louis, USA Vice President, Market Planning and Revenue Management DepartmentMaster of Construction Management, Washington University , USA

Name Position Education ExperienceMr. Ampon Kittiampon Chairman and Ph. D. (Applied Economics) Deputy Permanent Secretary, Ministry of Agriculture and Cooperatives

Independent Director Clemson University, Secretary General, Office of the National Economic and Social Development BoardSouth Carolina, USA

Mr. Chulasingh Vasantasingh Vice Chairman MCL (Comparative Law), Deputy Attorney Generaland Independent Director University of Illinois, USA Director, Electricity Generating Authority of Thailand

Director, Ratchaburi Electricity Generating Holding PCLMr. Areepong Bhoocha-oom Vice Chairman Ph. D. (Finance), Deputy General, The Excise Department, Ministry of Finance

University of Mississippi, USA Director General, State Enterprise Policy Office (SEPO)Mr. Kanit Sangsubhan Independent Director Ph. D. (Economics), Independent Director, Tisco Bank

University of Toronto, Canada Director, Dhanarak Asset Development Co.Mr. Pradit Sintavanarong Director MPH, Harvard University Executive Director of J&W Development Co.

Pol. Gen. Preophan Dhamapong Director M. Sc. (Crimonology), Commander of Immigration Division 2, Immigration BureauEastern Kentucky University Commissioner of Narcotics Suppression BureauUSA


71

Route map Fig. 131: THAI: International route map



72

Fig. 132: Domestic route map



73

Key routes and capacity distribution Fig. 133: THAI: Capacity distribution (Oct 2012 - Week 3)

Source: CAPA Centre for Aviation

Fig. 134: THAI: Top 10 International routes (Oct 2012 - Week 3)


Domestic

NE AsiaSE Asia

W Europe

S Asia

SW Pacific

Mid EastE / C

Europe S. Africa

N. America

0 10,000 20,000 30,000

BKK - HKG

BKK - SIN

BKK - NRT

BKK - ICN

BKK - RGN

BKK - KUL

BKK - KIX

BKK - FRA

BKK - DEL

BKK - TPE


Asia Aviation PCL AAV.BK AAV TB

TRANSPORT/LOGISTICS

EQUITY RESEARCH

Solid franchise; but pricing in high growth

Proxy to Thai LCC growth, but premium valuation limits upside; wait for better levels

February 6, 2013

Rating Starts at

Neutral



Potential downside 0%

Action: Initiate with Neutral; look for better entry levels AAV is the listed proxy to play the growth of Thailand’s largest low cost carrier (LCC) – Thai AirAsia (TAA), in which it is the 55% shareholder. We argue for a strong growth outlook for TAA, helped by spare capacity unlocked with the shift of hub to Don Muang, strong tourism demand, TAA’s fleet growing 1.8x to 48 aircraft by 2016F from the current 27, and its first-mover advantage in the LCC arena. In our view, this growth should be underpinned by AAV’s strong balance sheet (net cash position) and recently raised IPO funds, Thailand’s geographic proximity to China, making it servable by TAA’s A320s, synergies through its association with Malaysia AirAsia (through bulk discounts and shared infrastructure) and room for ancillary uplift.

Valuation: Pricing in a bullish outlook; wait for a correction However, we think TAA’s current valuation adequately reflects all these factors, which is at a 50% adj EV/EBITDAR premium (2014F: 9.5x) to the LCC universe, and is already pricing in this bullish outlook (even in the context of a 33% earnings CAGR in the next two years). We also think there is some downside risk to the Street’s earnings estimates, which appears overly bullish; we think the stock may trade range-bound on a likely miss in 4Q12F results. We rate the stock Neutral and would advise investors to wait for a better entry point to accumulate it.

Catalyst: Underperforming Street expectations, a sharp spike in oil price or more competitive pressure might cause the share price to decline. On the other hand, falling oil prices might be a key positive.

31 Dec FY11 FY12F FY13F FY14F


Revenue (mn) 8,123 15,016 23,295 26,957

Reported net profit (mn) 1,014 15,718 1,274 1,717

Normalised net profit (mn) 936 977 1,274 1,717

FD normalised EPS 22.83c 21.52c 26.26c 35.40c

FD norm. EPS growth (%) 21.7 -5.7 22.0 34.8

FD normalised P/E (x) 26.7 N/A 28.3 N/A 23.2 N/A 17.2


Price/book (x) 3,269.2 N/A 1.6 N/A 1.5 N/A 1.4

Dividend yield (%) na N/A na N/A na N/A na

ROE (%) -213.1 170.8 6.7 8.4

Net debt/equity (%) net cash net cash net cash net cash


Anchor themes

We are bullish on the Thai air transport sector, with ~7-8% annual growth potential, a relatively young LCC industry with the scope to create additional demand, planned airport capacity expansion to stay ahead of congestion, backed by solid tourism demand and domestic consumption.

Nomura vs consensus

Our FY13F/FY14F are 17%/15% respectively, below the Street, as we think results might fall short of Street targets.

Research analysts





Nomura | Asia Aviation PCL February 6, 2013

75

Key data on Asia Aviation PCL Income statement (THBmn) Year-end 31 Dec FY10 FY11 FY12F FY13F FY14FRevenue 6,049 8,123 15,016 23,295 26,957Cost of goods sold -5,340 -7,321 -13,665 -20,844 -23,563Gross profit 709 802 1,351 2,452 3,394SG&A


Operating profit 709 802 1,351 2,452 3,394

EBITDA 771 838 1,416 2,706 3,823Depreciation -62 -36 -64 -255 -428Amortisation

EBIT 709 802 1,351 2,452 3,394Net interest expense -96 -24 -56 -11 -18Associates & JCEs 0 0 0 0 0Other income 156 158 293 454 526Earnings before tax 769 936 1,588 2,895 3,902Income tax 0 0 -365 -579 -780Net profit after tax 769 936 1,223 2,316 3,121Minority interests 0 0 -246 -1,042 -1,405Other items

Preferred dividends

Normalised NPAT 769 936 977 1,274 1,717Extraordinary items 236 78 14,741 0 0Reported NPAT 1,005 1,014 15,718 1,274 1,717Dividends 0 0 0 0 0Transfer to reserves 1,005 1,014 15,718 1,274 1,717


Reported P/E (x) 24.9 24.7 1.8 23.2 17.2Normalised P/E (x) 32.5 26.7 28.3 23.2 17.2FD normalised P/E (x) 32.5 26.7 28.3 23.2 17.2FD normalised P/E at price target (x) 32.5 26.7 28.3 23.2 17.2Dividend yield (%) na na na na naPrice/cashflow (x) na 95.3 8.7 8.6 7.0Price/book (x) na 3,269.2 1.6 1.5 1.4EV/EBITDA (x) 38.2 34.8 18.7 9.6 6.4EV/EBIT (x) 41.5 36.3 19.6 10.6 7.2Gross margin (%) 11.7 9.9 9.0 10.5 12.6EBITDA margin (%) 12.7 10.3 9.4 11.6 14.2EBIT margin (%) 11.7 9.9 9.0 10.5 12.6Net margin (%) 16.6 12.5 104.7 5.5 6.4Effective tax rate (%) 0.0 0.0 23.0 20.0 20.0Dividend payout (%) 0.0 0.0 0.0 0.0 0.0Capex to sales (%) 0.9 0.4 19.0 12.3 10.6Capex to depreciation (x) 0.9 0.9 44.5 11.2 6.7ROE (%) na -213.1 170.8 6.7 8.4ROA (pretax %) na 40.2 9.3 8.5 10.8

Growth (%)

Revenue 34.3 84.9 55.1 15.7EBITDA 8.7 68.9 91.2 41.3EBIT 13.1 68.5 81.4 38.5Normalised EPS 21.7 -5.7 22.0 34.8Normalised FDEPS 21.7 -5.7 22.0 34.8

Per share

Reported EPS (THB) 24.51c 24.73c 3.46 26.26c 35.40cNorm EPS (THB) 18.77c 22.83c 21.52c 26.26c 35.40cFully diluted norm EPS (THB) 18.77c 22.83c 21.52c 26.26c 35.40cBook value per share (THB) -0.23 0.00 3.79 4.06 4.41DPS (THB) 0.00 0.00 0.00 0.00 0.00Source: Company data, Nomura estimates



Absolute (THB) 26.0 33.2

Absolute (USD) 29.5 37.4

Relative to index 22.9 22.3

Market cap (USDmn) 994.5


52-week range (THB) 6.4/3.04


10.57


Tassapon Bijleveld + other mgmt

60.0


Notes

AAV’s 2012 financials are a mix of full and proportionate consolidation, and

as such, line items, eg, revenues, EBITDA are not strictly comparable over FY11-13F. Also note that since

AAV is a 55% shareholder of TAA, ratios such as EV/EBITDA cannot be directly compared across its other airline peers. We have addressed this issue in our valuation section. We

estimate a 33% core earnings CAGR

over FY12-14F.


76

Cashflow (THBmn) Year-end 31 Dec FY10 FY11 FY12F FY13F FY14FEBITDA 771 838 1,416 2,706 3,823Change in working capital -1,261 -653 1,957 863 702Other operating cashflow 333 78 -207 -136 -273Cashflow from operations -157 262 3,166 3,434 4,252Capital expenditure -54 -33 -2,859 -2,855 -2,849Free cashflow -211 230 307 578 1,403Reduction in investments 0 -8 0 0Net acquisitions

Reduction in other LT assets -68 -308 0 0Addition in other LT liabilities 42 41 0 0Adjustments 372 104 -50 0 0Cashflow after investing acts 161 308 -19 578 1,403Cash dividends 0 0 0 0 0Equity issue 0 0 2,677 0 0Debt issue 99 144 2,024 1,232 1,232Convertible debt issue

Others 0 -18 0 0 0Cashflow from financial acts 99 127 4,701 1,232 1,232Net cashflow 260 434 4,683 1,810 2,635Beginning cash 260 694 5,377 7,187Ending cash 260 694 5,377 7,187 9,822Ending net debt -433 -3,132 -3,710 -5,113Source: Company data, Nomura estimates

Balance sheet (THBmn) As at 31 Dec FY10 FY11 FY12F FY13F FY14FCash & equivalents 260 694 5,377 7,187 9,822Marketable securities 4 5 9 9 9Accounts receivable 55 98 226 281 325Inventories 3 26 61 74 84Other current assets 1,712 628 942 942 942Total current assets 2,035 1,451 6,616 8,494 11,182LT investments 4 4 7 7 7Fixed assets 137 154 3,083 5,686 8,108Goodwill 286 286 7,786 7,786 7,786Other intangible assets 11 7 14,702 14,701 14,699Other LT assets 253 321 629 629 629Total assets 2,726 2,224 32,824 37,302 42,412Short-term debt 101 250 5 5 5Accounts payable 88 54 126 154 174Other current liabilities 3,496 1,858 4,221 5,124 5,860Total current liabilities 3,685 2,162 4,352 5,282 6,038Long-term debt 1 11 2,240 3,472 4,704Convertible debt

Other LT liabilities 0 42 83 83 83Total liabilities 3,685 2,216 6,675 8,838 10,826Minority interest 0 0 7,746 8,788 10,193Preferred stock

Common stock 410 410 3,087 3,087 3,087Retained earnings -1,369 -387 15,331 16,605 18,322Proposed dividends

Other equity and reserves 0 -16 -16 -16 -16Total shareholders' equity -959 8 18,403 19,676 21,393Total equity & liabilities 2,726 2,224 32,824 37,302 42,412

Liquidity (x)

Current ratio 0.55 0.67 1.52 1.61 1.85Interest cover 7.4 32.9 24.1 220.1 184.2

Leverage

Net debt/EBITDA (x) net cash net cash net cash net cash net cashNet debt/equity (%) net cash net cash net cash net cash net cash

Activity (days)

Days receivable 3.4 4.0 4.0 4.1Days inventory 0.7 1.2 1.2 1.2Days payable 3.5 2.4 2.5 2.5Cash cycle 0.0 0.6 2.7 2.7 2.8Source: Company data, Nomura estimates

Notes

We expect the company’s net cash position to continue

Notes

We think that TAA will be able to fund at least half of its own aircraft deliveries from FY13F onwards through finance leases, on the back of a strong cash balance post the IPO


77

Valuation AAV has had a strong run since its IPO in May 2012, rising by 70%, compared with the SET Transport index at 73%, SET at 43%, and MSCI EM Airline index’s 10% run during the same period. However, FY13F/14F consensus earnings estimates were cut owing to higher-than-expected costs. Hence, the current valuation for AAV is significantly above +1SD to its mean on whichever metric we decide to look at, barring a simple P/B which has been deflated due to a substantial fair value gain due to the IPO which has increased the book value.

Fig. 135: AAV: Forward P/E significantly above +1SD


Fig. 136: AAV: Forward RoE estimates on a decline


Fig. 137: Forward EV/EBITDA (adjusted for minority stake)


Fig. 138: Street cutting earnings estimates

Source: Bloomberg

We cannot use P/B to value AAV

Our preferred valuation methodology for full-service airlines, or airlines which have most of the aircraft on finance lease or on their own books, is a P/B multiple, with a higher multiple ascribed to the stock in times of a cyclical recovery in RoEs coordinated with earnings turnaround. However, we do not use P/B to value Asia Aviation because:

• AAV does not have any aircraft on its own books (owned or finance leased, unlike AirAsia Bhd which has 90% of aircraft owned/fin lease), and uses operating leases for almost all its aircraft delivered thus far, thereby making book value an ineffective reflection of its asset base, in our view.

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(%)(X) Forward P/B (LHS)

Forward ROE (RHS)

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Mean - 1SD Mean + 1 SD

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EPS (THB)

FY13F FY14F


78

• AAV’s equity value was negative prior to the IPO, and the current book value has a large proportion of intangibles (due to the fair value gain on the IPO).

We value AAV using adjusted EV/EBITDAR; TP of THB6.10

As a workaround, we use an adjusted EV/EBITDAR method to value AAV, noting that although the equity value in the EV only reflects AAV’s 55% stake in TAA, the EBITDAR is consolidated for 100% of TAA. We make adjustments for this differential in the shareholding of the operating company (TAA), and also account for the operating leases and off-balance sheet debt arising from the same, by adding the capitalised leases back to the EV calculation (using the formula 7x annual aircraft lease expense).

We value AAV at an adjusted 2014F EV/EBITDAR target multiple of 9.5x, at a ~60% premium to the sector average of 6x and a 40% premium to AirAsia Bhd, which is a closer peer, although admittedly in a slower growth market. We justify our premium ascribed on the basis of the following advantages in AAV:

• Cleaner operations than AirAsia Bhd, with no drag from start-up associates unlike the latter (through IAA, PAA and AAJ).

• Stellar growth prospects, with net income CAGR of 33% over FY12-14F, on our estimates.

• Industry growth prospects being brighter in Thailand, unhindered by capacity restrictions due to DMK airport’s spare capacity (unlike at Manila-NAIA, Kuala Lumpur-LCCT and Jakarta).

Using our target 9.5x 2014F adjusted EV/EBITDAR, we arrive at an equity value of THB53.9bn for Thai AirAsia, implying an equity value of THB30.7bn for AAV, and a TP of THB6.10.

Fig. 139: AAV: Valuation


Initiate with Neutral; we like the long-term growth prospects and franchise, but think near-term earnings might disappoint

We initiate AAV with a Neutral rating, with a potential upside of 0%. We like the company’s growth story, with fleet projected by management to almost double from 2012’s 27 aircraft to 48 aircraft at 2016F, and we think earnings will follow a similar trend. We also like the cost advantages the company enjoys over larger flag carrier THAI Airways, and believe that AAV will clearly benefit from the tourism boom in Thailand, with connections to ASEAN countries, India and China servable by TAA’s A320 aircraft.

However, with valuations already peaking, we think AAV is arguably the world’s most expensive low cost carrier (LCC) stock, and has priced-in the high Street earnings growth expectations, which might lead to investor disappointment during future earnings.

Valuation - Adj EV/EBITDAR2014F

2014F mean 6.0 xTarget Adj EV/EBITDAR (CY2014F) - 20% premium for AAV 9.5 x 60% Premium to Sector

Target Adj EV (THB mn) 85,133Add, net cash (THB mn) 4,761Less, capitalised leases (THB mn) (35,970)

Equity value (THB mn) - Thai AirAsia 53,924Number of shares (mn) 4,850

AAV's stake in Thai AirAsia 55%Price target (THB/share) 6.10


79

Our FY13F and FY14F earnings are 17% and 15%, respectively, below the Street as we believe that rapid capacity expansion will largely limit any yield and load upside from here onwards, although we remain confident about TAA’s ability to maintain its current level of load (80%) and yields (THB2.20/RPK, ie, USD7 cents/RPK). We think that FY12F full-year earnings might fall short of the Street’s (median: THB 1.02bn) expectations, and thus limit near-term upside potential.

Malaysia AirAsia’s trading history shows correction is never too far off

A study of adj EV/EBITDAR multiples of Malaysia AirAsia (AIRA MK, Buy) shows that although AirAsia also traded up to ~10x+ adj forward EV/EBITDAR during the bullish months prior to the global financial crisis began, it has since traded down to 7-8x levels and has struggled to break the 8.5x level. In fact, we note that the mere announcement of a new airline called Malindo in Malaysia in September 2012 was enough to make investors jittery and led to MAA falling to -1SD levels of below 7x. As such we note that TAA cannot be immune to such future competitive pressures, and prefer to wait for more attractive valuations to accumulate rather than chase the stock at such high levels of valuation.

Fig. 140: Malaysia AirAsia’s adjusted EV/EBITDAR trading history

Source: Add Source Here

Scarcity of Thai tourism plays to support the stock’s premium valuation

At the same time, due to the scarcity of Thai tourism plays, we think investors might continue to ascribe to a premium to AAV, as it is one of the cleaner exposures to the tourism sector, along with a strong domestic growth component as well. With foreign shareholding hovering around ~9-10% levels, and the stock breaching the USD1bn market capitalisation zone, we think the current high valuations might sustain, notwithstanding the downside risk to earnings.

4

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Adj EV/EBITDAR Mean

Mean - 1SD Mean + 1 SD

Malindo announced


80

Strong growth in traffic seen

Low cost carriers (LCCs) to be a key enabler in traffic expansion – largely the source of traffic growth Like other emerging markets in ASEAN, low cost carriers, led by the AirAsia group (AirAsia Bhd + Thai AirAsia + Indonesia AirAsia) have been instrumental in increasing affordability of air travel and demand growth. In fact, according to AOT data the LCC market share at AOT airports has increased from being non-existent in 2003-04 when there were no LCCs to about 27% in 2011, largely dominating domestic passenger traffic. The AirAsia group now accounts for more than 15% of AOT’s total traffic, largely at the cost of Thai Airways, which has seen its share slip from 42% in 2006 to 33% now. However, a point to be noted is that in terms of passenger numbers, Thai Airways has remained largely stagnant at 22mn, and LCCs have grown the overall size of the market, rather than by significantly taking away Thai’s traffic numbers.

Fig. 141: Market share by pax at AOT airports LCC share grown from 15% to 27% in 2011


Fig. 142: LCC capacity share as a % of total seats

Source: CAPA, OAG

We estimate a 19% 2011-14F CAGR in passenger numbers TAA’s passenger numbers have been on a strong uptrend, having had a CAGR of 19% over the 2008-11 period, notwithstanding the crisis and the political unrest (in Thailand, along with the Thai floods). With the IPO funds in its coffers, AAV has committed to add 17 more aircraft to its fleet of 22 (end-2011) over FY12-14, almost doubling its capacity. On our estimates, this will result in another three years of 19% CAGR in passenger numbers at TAA, reaching more than 11.7mn passengers by 2014F.

Fig. 143: Passengers carried


Fig. 144: RPKs


2006 2007 2008 2009 2010 2011Full Service/Mainline CarriersThai Airways 42% 42% 41% 42% 37% 33%Bangkok Airways 5% 5% 5% 5% 5% 5%All others 39% 37% 37% 35% 38% 34%Full Service/Mainline 85% 83% 83% 82% 80% 73%

Low-Cost CarriersThai Air Asia 8% 9% 11% 13% 13% 13%AirAsia 1% 1% 1% 1% 1% 1%Indonesia Air Asia 0% 0% 0% 0% 0% 0%

AirAsia Group 9% 10% 11% 13% 14% 15%All others 6% 8% 6% 5% 6% 13%Low-Cost Carriers 15% 17% 17% 18% 20% 27%

Total 100% 100% 100% 100% 100% 100%

0%

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45%

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FY08

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FY10

FY11

FY12

F

FY13

F

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F

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81

TAA to acquire aircraft on its own books starting FY12F

One key benefit since the IPO of AAV and the resultant balance sheet strength (AAV is in a net cash position) is that Thai AirAsia will start to acquire aircraft on its own books through finance leases, beginning with two aircrafts in 2012F. We estimate that all new aircraft delivered till 2014 will be a mix of operating lease and finance lease, with deliveries after 2014 being mainly on finance lease. This would reduce the strain on the parent AirAsia Bhd’s balance sheet as well; however, we note that the FL aircraft will be delivered out of the same pool of AirAsia’s significant orderbook of aircraft, thus enabling the company to get 50%+ discounts on listed prices (USD50mn or less instead of USD100mn each).

Fig. 145: Fleet growth forecasts


Bangkok capacity almost doubled on the opening of DMK as an alternative airport for LCCs; win-win for AOT and AAV

Over the last two years, the Suvarnabhumi airport (BKK) had exceeded its stated capacity of 45mn passengers, and had been facing a lot of congestion delays and passenger dissatisfaction at the airport. Although AOT had a capex plan in place to grow capacity at BKK by an additional 15mn pax at a cost of THB62.5bn, this incremental capacity was to only come online by FY17F, as per AOT data. However, growth at LCCs, especially at Thai AirAsia, was started to keep growing, and in order to accommodate these airlines, AOT has incentivized LCCs to move to the old Bangkok airport at Don Muang (DMK). With the AirAsia group, comprising ~8-9mn pax, agreeing to shift to DMK, this has effectively increased capacity at Bangkok from 45mn pax p.a to ~81mn passengers, or 1.8x, freeing up resources at BKK.

The incentive package was a progressive 30%-20%-10% discount on parking and landing charges at the DMK airport for FY13F/FY14F/FY15F (AOT’s fiscal years), which AOT expects to cost THB116/85/45mn, or a total of THB246mn, a small price to pay for the resultant additional passenger throughput which an unconstrained TAA might grow.

FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12F FY13F FY14F

TOTAL FLEET

Thailand Fleet Size - total 9 12 15 16 20 19 22 27 34 39B737 (148 seats) 9 12 12 8 8 0 0 0 0 0A320 (180 seats) 0 0 3 8 12 19 22 27 34 39

Net addition - total 3 3 1 4 (1) 3 5 7 5B737 (148 seats) 3 0 (4) 0 (8) 0 0 0 0A320 (180 seats) 0 3 5 4 7 3 5 7 5

% growth (seat weighted) 33.3% 30.4% 13.3% 27.4% 2.3% 15.8% 22.7% 25.9% 14.7%

OWN / FINANCE LEASEThailand Fleet Size - own 0 0 0 0 0 0 0 2 4 6

B737 (148 seats) 0 0 0 0 0 0 0 0 0 0A320 (180 seats) 0 0 0 0 0 0 0 2 4 6

Net addition - own 0 0 0 0 0 0 2 2 2B737 (148 seats) 0 0 0 0 0 0 0 0 0A320 (180 seats) 0 0 0 0 0 0 2 2 2

OPERATING LEASEThailand Fleet Size - op lease 9 12 15 16 20 19 22 25 30 33

B737 (148 seats) 9 12 12 8 8 0 0 0 0 0A320 (180 seats) 0 0 3 8 12 19 22 25 30 33

Net addition - op lease 3 3 1 4 (1) 3 3 5 3B737 (148 seats) 3 0 (4) 0 (8) 0 0 0 0A320 (180 seats) 0 3 5 4 7 3 3 5 3


82

As well, with fuel savings of ~1% of overall cost due to lower congestion delays, the impact to bottom line is also not negligible, in our view.

Fig. 146: AOT airports – Capacity and utilisation


Fig. 147: AOT discounts on moving to DMK

Period Discount on QuantumIncremental savings to

TAA

Aug-12 to Sep-12 Parking and landing -95% 0 (no airline shifted)

Oct-12-Sep-13 Parking and landing -30% THB116mn




We do not see the possibility of PSC cuts at AOT for LCCs in the near term (unlike Malaysia)

A key difference between the passenger service charge (PSC) at Thailand, and its neighbour Malaysia, is that in Malaysia, PSC applicable to LCCs is ~half of the PSC applied to full service carriers, the rationale being a lower PSC is compensated by higher traffic, which results from the cheaper ticket prices on average. AirAsia Group CEO Tan Sri Tony Fernandes has been vocal in requesting a similar concession in Thailand as well, from AOT. However, we think that a PSC discount for LCCs in Thailand is unlikely in the near term, as it might lead to a significant revenue loss for AOT in the immediate term.

Synergies from the association with AirAsia Bhd and TAA to pay AirAsia Bhd for shared services

Due to its close association with Malaysian peer AirAsia Bhd, Thai AirAsia shares almost all characteristics of the latter, which are reflected in its low CASK of USD5.2cent (3 cent CASK-ex fuel) compared with Malaysia’s USD5cent (2.9 cent CASK-ex fuel). Synergies are also realised through:

• Common aircraft orderbook to realise bulk discounts from Airbus, with TAA’s aircraft leased from AirAsia Bhd at market rates.

• Common sourcing of fuel and fuel hedging planning.

• A common IT backbone with tickets sold at www.airasia.com.

As part of these services rendered, TAA will have to pay AirAsia Bhd a flat brand license fee of 1% of revenue. This agreement was originally scheduled to come into effect in FY12F, for a five-year period; however, AirAsia Bhd waived the fee for FY12. We estimate the fee will amount to 1.1%/1.1% of FY13F/14F total operating cost for AAV.

Airports Capacity FY11 FY12 Capacity FY11 FY12 Capacity FY11 FY12BKK 76 58 66 45.00 47.80 52.37 3.00 1.330 1.360DMK 60 19 23 36.50 3.97 2.72 1.27 0.007 0.003

Capacity UtilisationBKK 106% 116%BKK+DMK 64% 68%

HKT 20 21 19 6.50 8.21 9.16 0.04 0.028 0.032CNX 24 13 14 8.00 3.68 4.33 0.04 0.021 0.021HDY 20 10 10 1.90 1.83 2.01 0.01 0.015 0.016CEI 12 6 5 3.00 0.81 0.93 0.01 0.004 0.005

Cargoes (Million Metric Tons/Year)

Actual Utilization

Aircraft (Flights/Hour)

Actual Utilization

Passengers (Million/Year)

Actual Utilization


83

A true blue LCC

Thai AirAsia adheres strictly to the 11 key tenets of the LCC framework, which results in the strong CASK dynamics seen in MAA and TAA.

Fig. 148: TAA: adherence to LCC characteristics

Source: Framework: CAPA, Nomura research

Thailand’s LCC penetration is low for its income levels – suggesting more demand generation by LCCs to come

Thailand’s LCC capacity share in domestic (2011: 40%) and international (14%) routes is lower than its peers in other ASEAN countries such as Malaysia, Indonesia and the Philippines. We believe there is room to grow the LCC share in both domestic and international routes – this will largely be realised through higher capacity deployment by LCCs led by Thai AirAsia, and supported by Nok Air and Thai Smile, and will be an underlying theme for the next five-six years, in our view.

Fig. 149: Domestic LCC share vs. per capita GDP (nom US$)


Fig. 150: International LCC share vs. per capita GDP (nom USD)


Trait TAA Comments

1 High seating density Standard 180 seat configuration for A320s

2 High aircraft utilisation (block hours/day) 3 Single aircraft type All A320 fleet

4 5 Predominant use of internet based booking 85% of bookings thru www.airasia.com

6 Single class configuration

7 Point-to-point services All point to point services with no connection guarantee, but recently emphasizing its Fly-Thru services which is connection based for some routes to enhance passenger traffic

8 No frills / frills at additional price Everything including baggage, seats comes at additional cost

9 Predominantly short to medium haul route structures Maximum 4 hours, which is the range of A320

10 Frequent use of second tier airports

Particularly true for KL (using LCCT, charges lower compared to main airport), Philippines (uses Clark), Bangkok (recently moved to Don Mueang). But for Singapore, Indonesia still using main terminals

11 Rapid turnaround time at airports 25-30 minutes

Low fares, including very low promotional fares

Australia

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84

Financial analysis

More flights = more earnings, 33% earnings CAGR over FY12-14F seen

Asia Aviation’s earnings expansion is a relatively simple story of higher aircraft numbers translating into more passengers and ultimately earnings. We forecast FY12F-14F earnings CAGR of 33%, on the back of a fleet CAGR of 20% over the same time period.

Key assumptions Fig. 151: Macroeconomic and capacity assumptions


FY11 FY12F FY13F FY14F

MACROECONOMIC

EXCHANGE RATES

Average THB/USD 31 31 30 29

Average Brent price (US$ / bbl) 112 112 105 100

% y-y 39.4% 0.2% (6.3%) (4.8%)

Average Singapore jet price (US$ / bbl) 126 127 119 113

% y-y 39.4% 1.2% (6.3%) (4.8%)

Thailand Inflation Rate 3.0% 3.0% 3.1%

TOTAL FLEET

Thailand Fleet Size - total 22 27 34 39

Thailand Fleet Size - own 0 2 4 6

Thailand Fleet Size - op lease 22 25 30 33

CAPACITY

ASK (million) 9,199 10,579 13,322 15,281

% y-o-y 21.0% 15.0% 25.9% 14.7%

RPK (LHS) 7,389 8,675 10,657 12,224

% y-o-y (RHS) 24.8% 17.4% 22.9% 14.7%

Seat Load Factor 80.3% 82.0% 80.0% 80.0%

Passengers Carried (LHS) 6,863,467 8,326,765 10,229,810 11,734,194

% y-o-y (RHS) 20.3% 21.3% 22.9% 14.7%

0 0 0 0

Average Stage Length (km) 1,074 1,042 1,042 1,042

% y-o-y 4.1% (3.0%) 0.0% 0.0%


85

Fig. 152: Yield and cost assumptions (THB mn, except for per RPK/ASK data)


Ancillary realisation still sub-optimal with growth potential

With TAA’s ancillary revenue only comprising 16-17% of overall revenue (as opposed to MAA’s 20%+), we think ancillary is below its full potential. Hence, even though we are not building in an increase in the average ticket prices of ~THB1,900/pax over FY11-14F, we estimate a 5% y-y growth in ancillary income/pax, till it reaches close to 20% of revenue by FY16F. In our view, this growth should be led by a higher spending, supported by the income growth in Thailand. We think that this will be led by a higher take-up of in-flight meals and other passenger amenities.

Growth plans: New routes and new frequencies

TAA’s growth in 2012F and 2013F will be through a combination of new routes as well as new frequencies, in our view.

FY11 FY12F FY13F FY14F

REVENUES

Thai AirAsia Revenues

Total 15,928 18,802 23,295 26,957

% y-y 34.3% 18.0% 23.9% 15.7%

ANCILLARY PER PAX

Ancillary revenue per pax (THB) 383 383 402 422

% y-y 29.4% 0.0% 5.0% 5.0%

Ancillary as % of overall revenues 16.5% 17.0% 17.7% 18.4%

YIELD

Revenue / RPK (THB) 2.16 2.17 2.19 2.21

Revenue / RPK (US$) 0.071 0.070 0.073 0.076

Revenue / ASK (THB) 1.73 1.78 1.75 1.76

Revenue / ASK (US$) 0.057 0.057 0.058 0.060

COST % BREAKDOWN

Depreciation and amortisation 0% 0% 1% 2%

Staff costs 10% 10% 11% 12%

Fuel costs 44% 43% 40% 37%

Aircraft rental 19% 20% 21% 22%

Repair and maintenance 8% 9% 10% 11%

Ramp and airport operatings costs 9% 9% 7% 6%

Other operating expenses 4% 3% 3% 3%

Selling expenses 3% 3% 3% 3%

Administrative expenses 2% 2% 3% 3%

Brand Licensing Fees 0% 0% 1% 1%

(1% of revs from FY12 onwards - but waived for FY12)

COST / ASK

Cost / ASK (THB) 1.56 1.62 1.56 1.54

Cost / ASK (US cents) 5.12 5.22 5.23 5.28

Cost / ASK-ex Fuel (THB) 0.87 0.93 0.94 0.97

Cost / ASK-ex Fuel (US cents) 2.87 2.99 3.14 3.31


86

Fig. 153: Route additions

Source: Company data (FY13 estimates are company guidance)

Hedging: In line with the parent’s strategy to align with forward bookings

TAA, like its peer MAA, only hedges ~20-25% of its annual fuel consumption, and this is aligned with forward bookings to lock in profitability.

Route movements: 9M12 4Q12 outlook

New routes:

• Bangkok – Nakhorn Phanom (1Q12)• Bangkok – Trang (1Q12)• Bangkok – (Chennai 1Q12)• Bangkok – Chongqing (1Q12)• Chiang Mai – Macau (2Q12)

• BKK - Mandalay (Myanmar)• BKK - Wuhan (China)• BKK - Xi’an ( Xi an China)

Additional frequencies:

• Bangkok – Singapore (1Q12)• Bangkok – Chiang Mai (1Q12)• Bangkok – Trang (2Q12)

• BKK - Yangon (3rd frequency)• BKK – Ho Chi Minh city (3rd frequency)• BKK - Surat Thani (3rd frequency)• BKK - Hat Yai (7th frequency)• BKK – Krabi (5th frequency)• BKK – Trang (3td frequency)• BKK – Chiang Mai (8th frequency)

FY2013F: 2-4 new cities in China and Indochina


87

Balance sheet

Should remain in net cash position till FY15F and free cash positive

Based on our assumption of new aircraft deliveries to be 50:50 between finance: operating leases, we estimate that AAV will remain in a net cash position at least till FY15F, keeping its gearing ratio as one of the lowest in the airline industry (not adjusting for off balance sheet debt).

TAA is also one of the few airlines globally to be in the expansion mode which is also free cashflow positive. We estimate a FCF of THB2.3bn over FY12-14F for the company.

Beneficiary of THB appreciation

Approximately 65-70% of AAV’s revenue is denominated in THB, but ~80% of operating cost is in USD (oil, lease cost and MRO). There is no significant debt exposure to foreign currencies and as a result, AAV benefits from THB appreciation, in our view.


88

Risks Upside risks to our earnings estimates and target price include: a sharp fall in oil prices leading to higher earnings. Downside risk to our earnings estimates and target price include a) a jump in oil prices, load factors or yields due to demand weakening, b) political unrest in Thailand reducing tourism demand c) disease outbreak d) irrational competition (eg, entry of new players such as Lion Air with a new AOC), e) sharp PSC hikes, f) floods affecting operations at DMK, and g) return of macroeconomic shocks.

Thai AirAsia’s health is also inextricably linked to the health of its parent AirAsia Bhd in Malaysia, as it relies on the Malaysian entity for various functions including aircraft leases, etc. A change in the terms of this arrangement, or a weakening of the Malaysian entity’s health might have an impact on TAA’s expansion plans as well.

Please refer to the front section for our sensitivity table.


89

About AAV

The AirAsia way of growth

Asia Aviation Pcl is the holding listco of Thai AirAsia, having a 55% stake in the operating airline. It currently does not have any other business activity, and as such AAV’s earnings are a proxy to play Thai AirAsia’s (TAA) earnings inflection, in line with its position as Thailand’s leading LCC. In line with its larger sibling AirAsia Bhd in Malaysia, TAA has led low cost carriers (LCCs) in terms of market share, and has been instrumental in increasing affordability of air travel and demand growth in Thailand, in our view.

In fact, the LCC market share at AOT airports has increased from being non-existent in 2003-04 when there were no LCCs to about 27% in 2012, largely dominated by domestic passenger traffic. The AirAsia group now accounts for more than 15% of AOT’s total traffic, largely at the cost of Thai Airways, which has seen its share slip from 42% in 2006 to 33% now, according to AOT data. However, in terms of passenger numbers, Thai Airways has remained largely stagnant at 22mn, and LCCs have grown the overall size of the market, rather than by significantly taking away Thai Airway’s traffic numbers.

History of shareholding

In 2004, TAA started off as a JV between AirAsia Bhd in Malaysia and Shin Corp in Thailand, with Shin holding a majority stake. AAV was incorporated on February 14, 2006, and later became a public company on December 26, 2011. However, in 2006, due to former PM Thaksin’s sale of his stake in Shin Corp to Singapore’s Temasek Group, the controlling shareholders at TAA effectively turned foreign-based. To work around this difficulty, Asia Aviation Plc was set up in February 2006 to take over Shin Corp’s stake of 50% in Thai AirAsia.

Following AAV’s inception, management of TAA later bought out Shin Corp’s stake in AAV as well in June 2007, becoming its sole shareholder, and owing 50% in TAA.

After the initial public offering on 31 May 2012, Asia Aviation increased its shareholding in Thai AirAsia to 55%. AAV is currently 60%-owned by the management of TAA and 40% held by the public. The current foreign shareholding is ~9%. Mr. Tassapon Bijleveld, its CEO, is the largest single shareholder with a 33% stake.

AirAsia Bhd owns 45% of the operating company Thai AirAsia, but otherwise has no shareholding in AAV Plc.

Starting off with two Boeing 737-300 aircraft flying with a point-to-point network from the Bangkok hub every day, TAA commenced its inaugural commercial flights on 4 February 2004 from Bangkok to Hat Yai. The airline rapidly expanded its domestic and international routes; as on 31 December 2011, its route network covers a total of 25 cities across eight countries in Asia, covering 14 international destinations and 11 domestic destinations from its serving 22 Airbus A320 aircraft fleet. Thai AirAsia has carried approximately 6.9 passengers in 2011 and more than 30mn passengers to date via its Bangkok, Phuket and Chiang Mai hubs.

The lock-up period for AAV shares held by management (~60%) expired after six months of listing (end-November 2012), but management has not sold down and remains committed to holding at least 51% of Asia Aviation shares to comply with Thailand's Aviation Act by having the 51% lock-up through the Thailand Securities Depository for a period of not less than five years (till mid-2017). In addition, the stocks under the sponsorship portion that the company has allocated to the employees at the IPO price will be under lock-up for one year (till May 2013).


90

Fig. 154: Block diagram of shareholding post IPO

Source: http://www.aavplc.com/EN/InvestmentStructure.html

Key management personnel Fig. 155: Management and board

Management team

Name Position

Mr. Tassapon Bijleveld Chief Executive Officer

Mr. Pornanan Gerdprasert Chief Financial Officer

Mr. Tanapat Ngamplung Director of Flight Operation

Mr. Preechaya Rasametanin Director of Engineer

M.L. Bovornovadep Devakula Director of Business Development

Mr. Santisuk Klongchaiya Director of Commercial

Mr. Natthawach Siriwongsal Director of Ancillary

Mr. Vorakit Techapalokul Director of People

Board of directors

Name Position

Dr. Pongsathorn Siriyodhin Chairman/Independent Director

Tan Sri’ Anthony Francis Fernandes Director

Dato’ Kamarudin Bin Meranun Director

Mr. Tassapon Bijleveld Director

Mr. Pornanan Gerdprasert Director

Mr. Preechaya Rasametanin Director

Mr. Nuttawut Phowborom Independent Director

Dato’ Sri Farid Ridzuan Independent Director


AirAsia Bhd

AirAsia Investment

AAV

Thai AirAsia

PublicManagement

100%

55%

40%60%

45%


91

Route map Fig. 156: Route map Multiple hubs in Chiang Mai and Ubon Ratchathani

Source: 3Q12 company presentation

Note about financial presentation

Prior to May 2012, AAV’s financials represented a proportionate consolidation of its 51% stake in Thai AirAsia. However, post the reorganisation on 4 May 2012, under TFRS 3, AAV has classified TAA as its subsidiary (after increasing its stake to 55%) and started full consolidation of TAA’s earnings, netting out AirAsia Bhd’s share of TAA’s profits at the minority interest level. As such, FY12F financials are a blend of proportionate and full consolidation, and is not comparable directly to FY11/FY13F numbers.


92

Key routes and capacity distribution Fig. 157: TAA: Capacity distribution (Oct 2012 - Week 3)


Fig. 158: Top 10 International routes (Oct 2012 - Week 3)


DomesticSouth East

Asia

North East Asia

South Asia

0 5,000 10,000 15,000

DMK - SIN

DMK - MFM

DMK - KUL

DMK - RGN

DMK - SGN

DMK - HKG

DMK - CCU

DMK - CKG

CNX - MFM

SIN - HKT


93

Appendix A-1

Analyst Certification

I, Tushar Mohata, hereby certify (1) that the views expressed in this Research report accurately reflect my personal views about any or all of the subject securities or issuers referred to in this Research report, (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this Research report and (3) no part of my compensation is tied to any specific investment banking transactions performed by Nomura Securities International, Inc., Nomura International plc or any other Nomura Group company.

Issuer Specific Regulatory Disclosures The term "Nomura Group" used herein refers to Nomura Holdings, Inc. or any of its affiliates or subsidiaries, and may refer to one or more Nomura Group companies.

Materially mentioned issuers Issuer Ticker Price Price date Stock rating Sector rating Disclosures Asia Aviation PCL AAV TB THB 6.30 04-Feb-2013 Neutral Not rated Airports of Thailand PCL AOT TB THB 104.50 04-Feb-2013 Buy Not rated Thai Airways International PCL THAI TB THB 23.20 04-Feb-2013 Buy Not rated

Thai Airways International PCL (THAI TB) THB 23.20 (04-Feb-2013)

Buy (Sector rating: Not rated) Chart Not Available

Valuation Methodology We think THAI deserves to trade at its mid-cycle valuations, in view of the 43% earnings turnaround we expect over FY12-14F and its steep discount to its other full-service peers. We provide for ~THB3bn of impairments on the progressive retirement of these aircraft, and estimate end-2014F adj BV of THB36. Applying a target P/B of 0.8x, which implies midcycle for THAI in view of the bullish outlook for the THAI transport sector, we arrive at our TP of THB28.50/share. Risks that may impede the achievement of the target price Downside risk to our earnings estimates and target price include a) a jump in oil prices, or lower load factors or yields due to demand weakening, b) political unrest in Thailand reducing tourism demand c) disease outbreak d) irrational competition (eg, entry of new players such as Lion Air with a new AOC), e) floods affecting operations and f) return of macroeconomic shocks, g) renewed labour union unrest h) higher than expected impairment of aircraft to be retired Note that THAI is also one of the customers of the Boeing Dreamliner (787) aircraft, but deliveries are scheduled only from 2014 onwards. The Dreamliner aircraft are currently grounded pending safety investigations, and in case the investigations take a long time to complete or propose big design changes, the THAI’s EIS (entry-into-service) of the Dreamliner might be pushed back, and impact capacity growth plan next year. However, we note that unlike airlines like JAL or ANA, who had to ground in-service 787s, THAI still has plenty of time to observe the situation as it is evolving, and make alternative arrangements in case the aircraft is delivered late (like lease alternative aircraft, not retire existing aircraft).

Airports of Thailand PCL (AOT TB) THB 104.50 (04-Feb-2013)

Buy (Sector rating: Not rated) Chart Not Available

Valuation Methodology We think that a DCF-based valuation of free cash flows to equity is the best way to value a stock like AOT, which has relatively steady cash-flows visibility, and predictable long-term earnings growth rates, which generally go in-line with overall traffic growth. We use a beta of 0.97, a market risk premium of 10% and a risk-free rate of 3.7% (implying a cost of equity of 13.4%). We discount our cash flows back to 2014F to arrive at our price target of THB145/share. Risks that may impede the achievement of the target price Delay in implementing airport charge increases: A part of the earnings and margin expansion is premised on the PSC charges for AOT to go through. However, delays in implementing those charges will impact our earnings estimates and price target for the stock. Lower-than-expected air traffic, which can be due to various reasons like a re-emergence of economic crisis, political unrest deterring air traffic, outbreak of disease, etc. Capex overruns at BKK airport, which would deter investor sentiment. SOE nature of the company leading to less than optimal utilisation of assets.


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Asia Aviation PCL (AAV TB) THB 6.30 (04-Feb-2013)

Neutral (Sector rating: Not rated) Chart Not Available

Valuation Methodology we use an adjusted EV/EBITDAR method to value AAV, noting that although the equity value in the EV only reflects AAV’s 55% stake in TAA, the EBITDAR is consolidated for 100% of TAA. We make adjustments for this differential in the shareholding of the operating company (TAA), and also account for the operating leases and off-balance sheet debt arising from the same, by adding the capitalised leases back to the EV calculation (using the formula 7x annual aircraft lease expense). We value AAV at an adjusted 2014F EV/EBITDAR target multiple of 9.5x, at a ~50% premium to the sector average of 6x and a 40% premium to AirAsia Bhd, which is a closer peer, although admittedly in a slower growth market. Using our target 9.5x 2014F adjusted EV/EBITDAR, we arrive at an equity value of THB53.9bn for Thai AirAsia, implying an equity value of THB30.7bn for AAV, and a target price of THB6.10. Risks that may impede the achievement of the target price Upside risks to our earnings and target price include: a sharp fall in oil prices leading to higher earnings. Downside risks to our earnings and target price include: a) a jump in oil prices, load factors or yields due to demand weakening, b) political unrest in Thailand reducing tourism demand, c) disease outbreak, d) irrational competition (e.g. the entry of new players like Lion Air with a new AOC), e) sharp PSC hikes, f) floods affecting operations at DMK, and g) return of macroeconomic shocks. Thai AirAsia’s health is also inextricably linked to the health of its parent AirAsia Bhd in Malaysia, as it relies on the Malaysian entity for various functions including aircraft leases, etc. A change in terms of this arrangement, or a weakening of the Malaysian entity’s health might have an impact on TAA’s expansion plans as well.

Rating and target price changes

Issuer Ticker Old stock rating New stock rating Old target price New target price

Asia Aviation PCL AAV TB Not rated Neutral N/A THB 6.10

Airports of Thailand PCL AOT TB Not rated Buy N/A THB 145.00

Thai Airways International PCL THAI TB Not rated Buy N/A THB 28.50


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Anchor Report - Thailand air transport - Land of air miles

Economy & Finance