Professional Documents
Culture Documents
ASEAN Aviation
Refer to important disclosures at the end of this report
Carrier earnings moving out of sweet spot as fuel prices AirAsia 2.70 2,032 3.25 (4.3) 92.9 BUY
depart from bottom. ASEAN airlines are (for the most part) AirAsia X 0.41 383 0.38 (4.7) 70.8 HOLD
on track for record CY16 performances on the back of the Airports of Thailand 42.00 1,713 45.50 12.6 12.3 BUY
Asia Aviation 6.10 845 7.60 (14.1) 9.9 BUY
trough in jet fuel prices. However, the CY17 outlook is less Bangkok Airways 21.30 1,277 26.30 (13.8) (11.3) BUY
benign as fuel has tracked crude oil prices upward trend. We Cebu Air 96.40 1,171 125 (9.5) 24.4 BUY
think margins will be squeezed from the bottom, as average China Aviation Oil 1.48 900 1.70 6.1 126.9 BUY
cost/available-seat-kilometre (ASKs) will be pushed up our Garuda Indonesia 338 658 475 (4.5) (17.2) BUY
Malaysia Airports 6.70 2,504 6.80 4.2 9.1 HOLD
current CY2017 forecast for jet fuel is US$60/bbl, c.13% higher SIA Engineering 3.61 2,856 3.58 2.9 3.7 HOLD
than 2016s US$52.9/bbl average. Singapore Airlines 9.80 8,175 10.10 (0.2) (12.8) HOLD
ST Engineering 3.33 7,309 3.68 8.5 20.7 BUY
Thai Airways 21.90 1,365 23.25 (19.6) 163.9 HOLD
More planes to fill the skies. Capacity growth is on the cards
for most airlines after a general lull in 2015-16, as strong CY16
Source: AllianceDBS, DBS Bank, Bloomberg Finance L.P. Closing price as of 9 Feb 2017
earnings bolstered balance sheets and expansion plans. Even
those adding fewer aircraft aim to improve volume. We think AirAsia : Low cost carrier based in Malaysia with similar-branded associates
competition is set to rise which will pull down average fares as across Asia
airlines attempt to drive up or maintain load factors. AirAsia X : Long-haul low cost carrier based in Malaysia
Airports of Thailand : The national airport operator managing six
international airports throughout Thailand, including Suvarnabhumi Airport
Preference for airlines with market share strongholds. in Bangkok.
Overall, we are unperturbed by the likely step-down in airline Asia Aviation : Majority owner of Thai AirAsia, low cost carrier based in
profits as it comes from a high base. In this environment, we Thailand
prefer airlines with stronger market shares and thus more Bangkok Airways : Full service regional carrier with hubs in Bangkok and
Samui, and is also a major and controlling shareholder of Samui Airport
flexibility in tweaking the levers (price / volume) to strengthen
Property Fund
their position or achieve their desired bottomlines. Top BUY Cebu Air : Low cost carrier based in the Philippines
recommendations along this theme are: AirAsia (AIRA MK), Asia China Aviation Oil : CAO is the largest physical jet fuel trader in the Asia
Aviation (AAV TB), and Cebu Air (CEB PM). Pacific region and the key importer of jet fuel into the PRC.
Garuda Indonesia : Garuda Indonesia (GIAA) is the national flag carrier of
Indonesia focusing in passenger and cargo service.
AoT remains a favoured pick while we also like CAO and
Malaysia Airports : Malaysia's primary airport operator, also operating the
ST Engineering. We prefer AoT to MAHB given the formers Istanbul Sabiha Gokcen airport
strong earnings growth prospects, which is driven by Thailands SIA Engineering : Provision of aviation maintenance, repair and overhaul
dynamic tourism sector. We also like China Aviation Oil (CAO) services
as a proxy for Chinas firm civil air travel demand growth and Singapore Airlines : Singapore Airlines owns and operates SIA, SIA Cargo
and Silk Air, Scoot. They also own majority stakes in SGX-listed SIA
finally, we prefer ST Engineering to SIA Engineering as it has a
Engineering and Tigerair.
strong order pipeline to underpin earnings and dividend ST Engineering : An integrated engineering group providing solutions
visibility. and services in aerospace, electronics, land systems and marine sectors.
Thai Airways : National Carrier of Kingdom of Thailand
Aviation players in the ASEAN region are (mostly) largely on Regional airlines FY16/17F core earnings forecasts (local
track to achieve stellar earnings in 2016, on the back of earlier currency)
anticipated factors of 1) bottoming of effective jet fuel prices, FY17F FY16F % variance
and 2) favourable supply-demand conditions from slower
aircraft deliveries. AAV (THB m) 2,215 2,322 (5%)
AAX (RM m) 189 206 (8%)
Moving into 2017, we think margins are set to come under AIRA (RM m) 975 1,334 (27%)
some pressure as those factors unwind, with a number of BA (THB m) 3,011 3,286 (8%)
airlines under our coverage expected to see dips in core CEB (PHP m) 9,480 9,892 (4%)
earnings except those charting low 2016 bases from GIAA (US$ m) 49 10 >100%
underperformance due to respective specific reasons. SIA (S$ m)* 684 629 9%
THAI (THB m) 4,882 4,590 6%
Source: Companies, DBS Bank, AllianceDBS
* FYE Mar, figures are FY18F/FY17F respectively
Regional airlines 9M16 core earnings (local currency)
9MCY16 9MCY15 % variance
Given this outlook, we also find other aviation plays like airports
and aerospace maintenance, report & operations (MRO) firms
AAV (THB m) 1,674 1,047 +60%
provide a good avenue for exposure to ASEAN aviation. Passenger
AAX (RM m) 151 (217) turnaround
AIRA (RM m) 923 165 +>100%
traffic demand is picking up in both Malaysia and Singapore,
BA (THB m) 2,535 1,740 +46% while Thailand is expected to rebound to being a key ASEAN
CEB (PHP m) 7,574 4,449 +70% tourist draw after a short blip given the crackdown on zero-
GIAA (US$ m) (22) 16 n.m. dollar tours that hurt China visitations. MRO players are a natural
SIA (S$ m)* 546 356 53% beneficiary of higher aircraft volumes in the region, for which Asia
THAI (THB m) 3,349 (4,621) turnaround is also a good longer-term prospect as the propensity to travel
Source: Companies, DBS Bank, AllianceDBS grows.
* FYE Mar
Airlines regaining growth ambitions
However, we are not overly concerned with a prospective
decline as it would not be outside the norm for global airline ASEAN airlines are looking at larger fleet growth in 2017. We
peers. The International Air Transport Association (IATA) has think this is in part incentivised by strong financial performances in
forecasted 2017 global airline industry net profit of 2016 which had for many airlines grew or rejuvenated cash piles
US$29.8bn, 16% down from US$35.6bn it projected for and book values. Across our coverage, we expect a net fleet
2016. For Asia-Pacific carriers in particular, IATA forecasted an growth of 35 (from 27 expected in 2016), which adds on the
aggregated 14% decline in 2017 net profit to US$6.3bn, from expected growth from competitors as well. This is led by Malaysia
US$7.3bn expected for 2016. We observe two key reasons for and Thai AirAsia with planned increases of seven and six,
the broad decline for ASEAN airline earnings: 1) the gradual respectively, which we view as the groups strategy to entrench its
uptick in fuel prices, and 2) easing of average fares due to domestic market share dominance. Notably, demand appears to
competition. Industry traffic growth is expected to record a be skewed towards short-haul and/or low-cost aircraft; and with
decent pace, though unable to overcome margin erosion less demand for new long-haul capacity. No new planes are
implied by the two headwind factors. Airlines we favour under expected for Malaysia AirAsia X, and players like Bangkok Air and
such circumstances are those with higher control over volume Garuda are only adding to their short-haul aircraft (the latter via
i.e. with strong demand positioning or captive markets. low-cost unit Citilink).
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Industry Focus
ASEAN Aviation
Expected year-end active fleet counts (non-exhaustive) Fares and yields to pare down as airlines opt for volume
Net Net
2017F chg 2016E chg 2015 Given the competitive environment above, we expect yields
Thailand (fares/RPK) to broadly pare down for the ASEAN airlines. We
Thai AirAsia 57 +6 51 +6 45
contrast the yield movement below relative to industry capacity
Bangkok Air 39 +4 35 +4 31
growth for each of the major markets, where it had
Thai Airways 97 +2 95 - 95
demonstratively fallen in higher competitive scenarios. The main
Nok Airways 34 +1 33 +5 28
6 - 6 +1 5
exception will be the Thai airlines, in particular those serving
Thai AirAsia X
Thai Lion 24 +6 18 domestic routes which be imposing an additional Bt150-200 per
Thai VietJet 3 +2 1 flight to pass on newly hiked jet fuel excise taxes. See further
NokScoot 5 +2 3 - 3 elaboration in Thailands domestic jet fuel excise quandary
section below.
Malaysia
Malaysia AirAsia 84 +7 77 -3 80 Additionally, yield, capacity and load factor also generally show
Malaysia AirAsia X 22 - 22 +2 20 a trade-off pattern, where higher capacity growth impact yield
Malaysia Airlines 87 +9 78 or load factor or both adversely, and vice versa. For example,
Malindo / Batik Msia 52 +10 42 +15 27 ambitious capacity growth from Malaysia AirAsia X from 2Q13
to 1Q14 resulted in a concurrent severe decline in yield; it is
Singapore apparent that during this time, AirAsia X sacrificed yield amid
Singapore Airlines (main) 110 1 109 7 102
capacity growth to maintain a reasonable level of load factor. In
Silk Air 35 4 31 2 29
contrast, after the capacity tapering, which started in 1Q14,
Tiger + Scoot 38 3 35 - 35
Singapore Tigerair is now enjoying higher load factors.
Philippines
Cebu Air 59 +2 57 +2 55 Another important factor in yields is the fuel surcharge which
PAL 66 +4 62 +4 58 now has been abolished. Reaching as high as one-fifth of total
Philippines AirAsia 18 +4 14 - 14 yields at its peak, fuel surcharges have largely been removed by
airlines following the collapse of jet fuel prices since late-2014,
Indonesia driving down yields external to supply-demand conditions.
Garuda (mainline) 144 - 144 +1 143
Citilink 56 +4 52 +8 44 Malaysia
Indonesia AirAsia 24 +2 22 -2 25
Indonesia AirAsia X 2 - 2 - 2 Fare/RPK (in local currency) y-o-y changes - Malaysia
Lion Air (+Wings + Batik) 233 +22 204 +16 188
MalaysiaAirAsia MalaysiaAirAsiaX
Source: CAPA, companies, DBS Bank, AllianceDBS 30%
20%
Major unlisted player Lion Group continues to be a major
contender in terms of capacity through its network comprising 10%
Indonesian LCCs (Lion Air, Wings Air) and FSC (Batik Air),
0%
Malaysian FSC (Malindo soon Batik Malaysia), and Thai LCC
(Thai Lion Air). The groups burgeoning orderbook of 442 10%
aircraft at the start of 2017 implies that growth must continue, 20%
despite a slowdown in deliveries in 2016, which had
contributed to the sectors stronger margin performance. CAPA 30%
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
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Industry Focus
ASEAN Aviation
Malaysia AirAsia Malaysia AirAsia X Thai AirAsia Bangkok Air Thai Airways Nok Air
60% 50%
50%
40%
40%
30%
30%
20% 20%
10%
10%
0%
0%
-10%
-20% -10%
Source: Companies, DBS Bank, AllianceDBS Source: Companies, DBS Bank, AllianceDBS
90%
Thai AirAsia Bangkok Air Thai Airways Nok Air
85%
90%
80% 85%
75% 80%
75%
70%
70%
65%
65%
60% 60%
55% 55%
Source: Companies, DBS Bank, AllianceDBS Source: Companies, DBS Bank, AllianceDBS
Thailand Singapore
Fare/RPK (local currency) y-o-y changes - Thailand Fare/RPK (local currency) y-o-y changes - Singapore
ThaiAirAsia BangkokAir ThaiAirways NokAir
20% SIA mainline Silkair Tigerair Scoot
15% 10%
10%
5% 5%
0%
5% 0%
10%
15% -5%
20%
25% -10%
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
-15%
Source: Companies, DBS Bank, AllianceDBS
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Industry Focus
ASEAN Aviation
60% 60%
50% 50%
40%
40%
30%
30%
20%
20%
10%
10%
0%
0% -10%
-10% -20%
-20% -30%
Source: Companies, DBS Bank, AllianceDBS Source: Companies, DBS Bank, AllianceDBS
90% 90%
85% 85%
80% 80%
75% 75%
70% 70%
65% 65%
Source: Companies, DBS Bank, AllianceDBS Source: Companies, DBS Bank, AllianceDBS
Indonesia Philippines
Fare/RPK (local currency) y-o-y changes - Indonesia Fare/RPK (local currency) y-o-y changes - Philippines
Garuda(group) IndonesiaAirAsia CebuAir
25% 10%
20% 5%
15%
0%
10%
5% 5%
0% 10%
5%
15%
10%
20%
15%
20% 25%
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
Source: Companies, DBS Bank, AllianceDBS Source: Companies, DBS Bank, AllianceDBS
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Industry Focus
ASEAN Aviation
Capacity (y-o-y changes) and load factors - Philippines brought down the relative price difference between FSC and
LCC average fares which we think made FSCs more
Cebu Air Load Factor (RHS) Cebu Air Capacity Growth (LHS) competitive and viable as a growth model. Going forward, we
35% 86% see LCC market penetration to be steady evidenced by the
30% 84% two largest groups AirAsia and Lion Air choosing different
82% tactics in service expansion (continued LCC for the former,
25%
80% and more FSC products for the latter).
20%
78%
15%
76%
LCC vs total seat growth intra-ASEAN segment
10% Total seats - intra-ASEAN (m) LCC seats - intra-ASEAN (m)
74%
5% Growth - Total Growth - LCC
72% 350 35%
0% 70%
300 30%
250 25%
150 15%
The LCC factor on yields 10.2%
100 10%
9.0%
LCC market penetration for ASEAN air travel had stagnated Source: CAPA, AllianceDBS, DBS Bank
for two years since 2014, implying it may be near to a mature
level for ASEAN. Jet fuel tracking crude oils tentative uphill climb
LCC market share: intra- & to/from ASEAN The severe collapse in oil and jet fuel prices were instrumental in
LCC market share - intra-ASEAN the record profitability logged in 2016, but the bottom appears
LCC market share - to/from ASEAN
60% to have come to pass in 1Q16. Right now, jet fuel has reached
57.0% 56.4% levels of above US$60/bbl (our average forecast for 2017),
50% 54% 54.2%
contrasting with the average of US$52/bbl in 2016. This is
47%
40%
43%
45% expected to contribute to cost/ASK rising up to 7% among our
41%
37%
coverage.
30%
32%
0% 80
2007 2008 2009 2010 2011 2012 2013 2014 2015 Jan-Sep
2016
70
Source: CAPA, AllianceDBS, DBS Bank
60
After peaking at 57% in 2014, the proportion of LCC seats
over total seats available for intra-ASEAN flights had pared 50
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Industry Focus
ASEAN Aviation
Calculation of preliminary incremental excise tax impact FY17F jet fuel hedges
FY17F hedge % Approx. hedge
Excise tax (THB/litre) USDTHB I n c re me n Jet fuel I n c re me n (inc planned) price (US$/bbl)
ta l excise (US$/bbl) ta l % of
tax current
AAV 74% 60
price
AAX 74% 60
Revised* Previous (US$/bbl)
b a AIRA 74% 60
3.3 0.2 35.2 14 65 22% BA 38% 57
CEB^ 41% 65
*assuming 23% of current spot GIAA Up to 50% -
SIA*^ 32% 65
FY17F fuel Assumed Increment Previous % of THAI 43% -
req. (m % for al cost FY17F current Source: Companies, DBS Bank, AllianceDBS
bbls) domestic (THB m) - earnings forecasts
* FY18F end-Mar
use 11M (THB m)*
^includes hedges of Brent crude
= (a * b ) *
c d
(c * d )
AAV 4.2 50% 946 2570 37%
BA 1.4 60% 387 3488 11%
THAI 19.1 5% 433 5270 8%
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Industry Focus
ASEAN Aviation
FY17F earnings forecasts changes per US$5/bbl Thai AirAsia cost per ASK breakdown (THB)
deviation from US$60/bbl base assumption for jet fuel Fuel Cost / ASK Cash Opex / ASK Asset Cost / ASK
FY17F
1.8
adjusted FY17F % variance
1.6
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Industry Focus
ASEAN Aviation
Cebu Air cost per ASK breakdown (PHP) excessive growth. Most countries are still expecting single-digit
Fuel Cost / ASK Cash Opex / ASK Asset Cost / ASK
expansion.
2.5
Still confident in Thailand tourism
2.0
For Thailand, the number of international tourist arrivals to the
country has been strong in the first nine months of 2016,
1.5
growing by 12.4%. However, tourist arrivals growth started to
slow down in Oct as the impact from crackdown on low cost
1.0
zero-dollar tours by the Thai and Chinese governments have
kicked in, coupled with the passing of Thailands beloved late
0.5 43%
38%
King Bhumibol Adulyadej in mid-Oct in which several forms of
public entertainment were banned for one month until 13
0.0
2010 2011 2012 2013 2014 2015
November. As a result, the Ministry of Tourism reported only
Source: Bloomberg Finance L.P., DBS Bank, AllianceDBS 0.5% growth in international tourist arrivals to Thailand in Oct
and a 4.4% fall in arrivals in Nov. Note that Chinese tourist
Will fuel prices eventually raise fares for other countries? The numbers fell for the first time in Oct by 16.2% and continued
developments from Thailand provide some reassurance that to decline by 29.7% in Nov. Nevertheless, the sentiment on
excessive fuel price-related escalations indeed will induce tourism has improved after the Thai government announced in
airlines to pass it on via higher fares or yields. In relation to Nov that they will lift Bt1,000 visa fee for tourists who sought
spot jet price increases, however, the chance of reintroducing visas at Thai embassies and consulates for 19 countries
surcharges at present levels appear slim given that the last (including China, Bhutan, India, Taiwan). Also, the visa on
instances (before being removed) were in place when prices arrival fee will also be cut from Bt2,000 to Bt1,000. This has
were above the US$100/bbl level (>50% higher than current) been implemented from 1 Dec 2016 to 28 Feb 2017. Thanks to
back in 2014 and prior. the governments effort to boost tourism, international tourist
arrivals increased by 1.1% in Dec while the number of Chinese
Air travel demand still looking robust tourists fell by a smaller magnitude (-16% y-o-y). In line with
Ministry of Tourisms numbers, AOT's international passenger
Demand in ASEAN remains generally positive though still traffic growth started to slow down in Oct with growth of 3%,
below peak conditions. Air travel demand has generally been followed by a negative growth (in a low single digit) in Nov.
tied to economic activity in a region (i.e. correlated with GDP Then international passenger growth rebounded to 4% in Dec.
growth), but with more underlying potential in region where For the full year 2016, there were 32.6m international tourists
propensity to travel has yet to mature. visiting Thailand, representing an increase of 8.9%.
ASEAN GDP vs ASEAN passenger (RPK) y-o-y growth AOT: International passenger traffic at its six airports
20% '000 passengers
7,000 45%
18%
40%
16% 6,000
35%
14% 5,000 30%
12% 4,000 25%
10%
20%
3,000 15%
8%
2,000 10%
6% 5%
1,000
4% 0%
2% 0 -5%
Jan15
Mar15
Apr15
Aug15
Sep15
Oct15
Jan16
Mar16
Apr16
Aug16
Sep16
Oct16
Dec14
Feb15
May15
Jun15
Jul15
Nov15
Dec15
Feb16
May16
Jun16
Jul16
Nov16
Dec16
0%
2010 2011 2012 2013 2014 2015
International movement growth yoy (RHS)
ASEAN GDP growth Within ASEAN RPK growth
ASEAN to key regions* RPK growth Source: AOT, DBS Vickers
Source: ASEAN, Boeing, DBS Bank, AllianceDBS
*Includes, Africa, Asia Pacific, Europe, Middle East, North America For year 2017, we maintain our positive view on Thailand
tourism which has shown its resilience by rebounding rapidly
As GDP expectations for ASEAN countries remain on the mild in the wake of several unfavourable events in the past. We
side for 2017, air travel is accordingly not expected to chart believe the impact from crackdown on zero-dollar tours
should be temporary and that the zero-dollar tour ban will
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Industry Focus
ASEAN Aviation
benefit Thai tourism as a whole in a the long term from the MAHB passenger growth by month, segment
qualitative improvement of Chinese tourists. Thailand will then m pax
Domestic pax (lhs) International pax (lhs)
% y-o-y
Dom pax growth (rhs) Int pax growth (rhs)
be depending not only on the number of foreign tourist 10 50%
arrivals but also the quality of their spending per head. 9 Period of 2H14-1H16 averaged 0.4% growth 40%
4 (10%)
May-
May-
May-
May-
Jan-13
Mar-13
Jul-13
Sep-13
Nov-13
Jan-14
Mar-14
Jul-14
Sep-14
Nov-14
Jan-15
Mar-15
Jul-15
Sep-15
Nov-15
Jan-16
Mar-16
Jul-16
Sep-16
Nov-16
account for only 20% of arrivals last year. However, strong
growth in other key feed markets such as Russia, India, the Source: MAHB, DBS Bank, AllianceDBS
US, and the Middle East should compensate for Chinese
arrivals if they were to continue to slow down. On a positive Quarter pax growth vs Malaysias nominal GDP
note, Russian tourists which account for 3.3% of total arrivals Totalpassengergrowth(yoy)
have showed positive signs of recovery, growing by 23.3% to MalaysianGDPgrowth,currentprices(yoy)
30%
1.1m in 2016 after a long decline. Additionally, we believe the 25%
government will continue to support the tourism sector if any 20%
unfavourable event arises by lifting visa fee or offering tax 15%
rebates for domestic travel. 10%
5%
Thailand: International tourist arrivals 0%
'000 People 5%
3,400 10%
15%
3,000
1QFY09
2QFY09
3QFY09
4QFY09
1QFY10
2QFY10
3QFY10
4QFY10
1QFY11
2QFY11
3QFY11
4QFY11
1QFY12
2QFY12
3QFY12
4QFY12
1QFY13
2QFY13
3QFY13
4QFY13
1QFY14
2QFY14
3QFY14
4QFY14
1QFY15
2QFY15
3QFY15
4QFY15
1QFY16
2QFY16
3QFY16
4QFY16
2,600
Aug
Sep
Mar
Apr
May
Oct
Nov
Dec
Feb
Jun
Jul
56 10.0%
Passenger growth in Malaysia staved off two years of slowing
progress, with Malaysia Airports (MAHB) reporting a 6% 52 8.0%
increase in 2016 (from 0.6% in 2015, 4.7% in 2014). Pax
growth notched a long-unseen double-digit rate of c.10% in 48 6.0%
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Industry Focus
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Aerospace MRO has steady growth potential but structural challenges persist
Global air traffic outlook
Increasing air traffic trend can be sustained in Asia. Facilitated Expected global aircraft delivery demand
by rapid economic growth, there has been increasing demand De livery demand (2016-2035)
for air travel for the past 20 years. The air travel industry has
30000 28140
weathered various major external shocks over the years to
register a 5.4% CAGR over that period, almost double the 25000
average global GDP growth rate. Going forward, increasing 20000
per-capita income, increasing affordability and propensity to
15000
travel and the emergence of low cost carriers (LCCs) will 9100
continue to drive traffic growth, especially in emerging 10000
markets like Asia and spur the need for more aircraft and 5000 2380
aircraft maintenance. Driven by China and India as the main 0
engines of growth, passenger traffic in the region is forecast Regional Jets Single Aisle Widebody
to grow by around 6.1% CAGR till 2035, outstripping the
Source: Boeing CMO 2016-2035
global growth rate of 4.8%. Liberalisation and policy
initiatives like open skies and easing of visa regulations are
also driving the traffic expansion in this region.
Asia will dominate narrowbody aircraft demand. To
accommodate the growing demand, Asia will need to add
Single aisle aircraft will dominate deliveries in future. Total jet
15,130 aircraft over the next 20 years (5% CAGR), according
aircraft fleet is expected to double over the next 20 years
to Boeing, nearly tripling the existing aircraft base. The growth
according to Boeing, and close to 71% of new deliveries will
will be driven by Low Cost Carriers (LCCs) and as a result,
be single-aisle or narrowbody aircraft. Better fuel economics
40% of all new projected single aisle aircraft deliveries will be
and lower maintenance requirements drive the replacement
in Asia.
demand for the narrowbody fleet.
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Industry Focus
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Regional variation in single aisle fleet demand North American airlines leading profit projections
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Industry Focus
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Global MRO market size forecast by geography STE will continue to leverage its status as the largest 3rd party
MRO provider. STEs wholly owned subsidiary, ST Aerospace is
120.0
the only major 3rd party MRO operator in the Asia Pacific
100.0 region, and hence, is a natural choice for many low cost
34.8 carriers operating in the region. Most LCCs tend to outsource
80.0
MRO activities to a large extent, and ST Aerospace remains a
60.0 18.3 12.8 partner of choice for operators like Air Asia, Jetstar Asia and
6.5
40.0 7.5
3.2
Lion Air. SIA Engineering, on the other hand, has developed
24.9 superior capabilities for modern wide body planes, as a direct
17.9
20.0 beneficiary of the fact that parent SIA is a leader in adopting
20.0 21.3
0.0 new generation aircraft. Thus, the two operators rarely
2015 2025 compete in the same segments of the market and we believe
the higher growth potential of LCCs in the region with their
North America Europe Latin America Africa/ ME Asia
narrowbody fleet vis--vis the full service carriers, where new
Source: Oliver Wyman planes are mostly meant for fleet renewal, will likely benefit ST
Engineering more than SIA Engineering.
Structural changes in industry here to stay. Despite the steady
growth potential for the MRO industry in general, MRO SIA Engineering has formed joint ventures with airframe
operators will need to reinvent to stay relevant as Original OEMs. As a specialist widebody MRO provider servicing
Equipment Manufacturers (OEMs) are increasingly taking a network airlines, SIE is facing a bigger challenge of OEMs
bigger share of the aftermarket space, especially for new bundling aftermarket services into new generation aircraft
generation planes. MRO operators will also need to invest in sales agreements. To overcome this, SIE has adopted a
big data analytics and predictive maintenance software to strategy of partnering with airframe OEMs to win back some
provide value-added services to customers, given the huge of the lost revenues. In 2015, SIE incorporated a 49:51 JV with
amount of operational data generated by new generation Boeing to provide fleet management services in the Asia
aircraft. Advances in data management may also result in Pacific region, having received regulatory approvals in the
lower downtimes for heavy checks and fewer repairs, resulting relevant geographies. This will help SIE to develop fleet
in lower manhour revenues in future. MROs will need to management partnerships with airlines with Boeing fleet in
compensate for this by capturing more of the value chain in the region and also open the doors for heavy maintenance
predicting maintenance cycle requirements for clients and business in the longer term. SIE has also established a heavy
providing fleet management services. maintenance JV with Airbus (65:35) in 2016 to provide MRO
services for A380, A350 and A330 aircraft in Asia Pacific and
Key structural trends in MRO industry beyond. Airbus will develop the JV as its Centre of Excellence
for Airbus A380 and A350 Heavy Maintenance in Asia. While
OEMs will see increased aftermarket presence for new near-term contribution from these JVs may not be significant,
generation aircraft they will be crucial over the long term, in our view.
Increased need for data analysis for new generation
aircraft will necessitate MROs to design rigorous data Narrowbody engine MRO is another driver for STE. As we saw
management software to value-add earlier, global engine MRO is the largest MRO segment, and is
Health monitoring and predictive maintenance will expected to maintain the highest growth rate over the next 10
reduce overall time for individual checks with fewer years. STE is well positioned for the growth in engine MRO
repairs with tie-ups with the top two engine manufacturers GE and
Mature markets are stagnating and nexus of MRO will CFM. GE and CFM are expected to further increase their
continue to shift to Asia market share from around 57% in 2016 to 61% by 2025,
Price and customer service are key levers to compete in according to industry consultant CAVOK/Oliver Wyman. To
stagnant MRO markets recall, STE has set up an engine MRO facility in Xiamen
(China) for total support of CFM56 series of engines. STE also
Source: Oliver Wyman has an engine leasing joint venture with Marubeni Corp of
Japan, which provides engine leasing services for CFM56-3,
CFM56-5B, CFM56-7B engines that power narrow-body
Page 13
Page 13
Industry Focus
ASEAN Aviation
Page 14
Page 14
Industry Focus
ASEAN Aviation
Airline valuations to cool off peak multiples Given a squeezed profit outlook, there may be some de-rating
of valuations from a P/BV perspective our chosen method of
ASEAN airline share prices ended 2016 on a subdued note, as valuing airlines under coverage easing from peak levels (see
the cooling-off period started around Sep 16 largely P/BV charts in Appendix below). That said, we think that there
reacting to the rising jet fuel price and US dollar; despite a remains room for individual stocks to trade up to +1SD above
larger proportion of 2Q16 results being in line or beating mean as 1) performance may yet hold up until end 1HCY17,
consensus. This is not isolated to ASEAN as the Asia-Pacific and 2) the performance gap may widen between performers
Airlines Index has likewise deteriorated on similar factors. and loss-makers. Further, given that fuel prices still remain far
below peak of >US$100/bbl, we think that most players will
Asia Pacific Airlines Index have sufficient space for competitive, load-inducing yields
300 without severely eating into equity values.
250
+2 SD
Look for market share winners among airlines
200 +1 SD
Despite expectations of thinner profitability, we still expect
150 Mean
most airlines to be able to preserve book value i.e. not fall
100 -1 SD into loss-making positions barring a severe upswing in fuel
-2 SD price or the US dollar. In such conditions we expect valuations
50
to edge down with the exception of airlines managing to
0 expand their business position by growing market share
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
Jul-10
Jan-11
Jul-11
Jan-12
Jul-12
Jan-13
Jul-13
Jan-14
Jul-14
Jan-15
Jul-15
Jan-16
Jul-16
Jan-17
Source: Bloomberg Finance L.P., DBS Bank, AllianceDBS Top airline picks
To that end, our BUY picks are AirAsia (BUY, TP: RM3.25),
Asia Aviation (Buy, TP: Bt7.60), and Cebu Air (BUY, TP: P125).
2H16 price movement, indexed (30 Jun 2016 = 100) All three of AIRA, AAV and CEB are expected to handily
maintain their domestic market share leads even despite
140
growing competitor efforts in 2017. While earnings may
Asia
Aviation indeed pare down, we think given their market positioning,
AirAsiaX
120 price leadership and cost control; its more likely that their
AirAsia respective competition is squeezed out before the players
Bangkok units see overtly unfavourable financial impact.
100
Airways
CebuAir
Other calls
Garuda
80 Indonesia For other stocks under our coverage, BA is also a pick as its
Singapore
Airlines
focuses on relatively less contested markets of niche holiday
Thai routes, in particular to Samui (where it has the majority of flight
60 Airways
Jul16 Aug16 Sep16 Oct16 Nov16 Dec16 slots to the key airport, which it also partly owns). GIAA remains
a BUY on a valuation basis, as we think its discount to book
Source: Bloomberg Finance L.P., DBS Bank, AllianceDBS
value is unjustified as risks of severe prolonged loss-making has
eased. AAX remains a HOLD given its heightened sensitivity to
Airlines under our coverage gave up gains from Sep 16
fuel or currency cost escalation. While THAI is expected to make
onwards, to close the year at slightly below end-1H16 levels.
progress on its Transformation Plan, risks still remain elevated in
That said y-o-y performance at end-2016 remained mostly
its unsold decommissioned fleet, and its high gearing of >4x.
positive (6 out of 8).
Page 15
Page 15
Industry Focus
ASEAN Aviation
AirAsia MYR 2.65 3.25 BUY 1,999 6.6x 9.1x -27% 6.1x 7.6x 1.2x 1.1x 31.3% 13.0% 2.4%
AirAsia X MYR 0.42 0.38 HOLD 393 8.5x 9.2x -8% 5.6x 4.8x 2.1x 1.7x 28.4% 20.5% 0.0%
Asia Aviation THB 6.20 7.60 BUY 859 12.9x 13.6x -5% 6.7x 7.3x 1.4x 1.3x 10.6% 9.4% 2.8%
Bangkok Airways THB 21.20 26.30 BUY 1,271 13.5x 14.8x -8% 6.9x 7.2x 1.4x 1.3x 9.0% 9.1% 3.8%
Cebu Air PHP 95.0 125.0 BUY 1,162 5.8x 6.1x -4% 4.8x 4.5x 1.7x 1.4x 33.8% 25.8% 5.4%
Garuda Indonesia IDR 346.0 475.0 BUY 672 66.3x 13.6x >100% 4.4x 3.4x 0.7x 0.7x 1.1% 5.1% 0.0%
Singapore Airlines SGD 9.81 10.10 HOLD 8,228 14.2x 17.0x -17% 3.4x 3.9x 0.9x 0.9x 6.4% 5.4% 4.1%
Thai Airways THB 21.80 23.25 HOLD 1,359 10.4x 9.7x 6% 6.9x 7.2x 1.3x 1.1x 13.1% 12.2% 0.0%
A S EA N Airline s A vg 17.3x 11.6x -9% 5.6x 5.7x 1.3x 1.2x 16.7% 12.6% 2.3%
Sources: DBS Bank, Bloomberg Finance L.P.
Prices as of 7 Feb 2017
Airports of Thailand THB 414.00 455.00 BUY 16,891 29.2x 25.6x 14% 17.8x 16.3x 4.7x 4.2x 17.1% 17.2% 0.0%
Malaysia Airports MYR 6.60 6.80 HOLD 2,472 238.2x 47.8x 398% 9.5x 8.1x 1.4x 1.4x 0.6% 2.9% 1.9%
China Aviation Oil SGD 1.53 1.70 BUY 935 11.8x 10.9x 9% 8.2x 6.8x 1.4x 1.3x 12.7% 12.6% 2.9%
SIA Engineering SGD 3.52 3.58 HOLD 2,800 23.1x 24.9x -7% 15.2x 16.0x 2.4x 2.4x 18.8% 12.0% 3.6%
ST Engineering SGD 3.34 3.68 BUY 7,371 21.3x 20.0x 7% 12.8x 12.1x 5.0x 4.8x 20.2% 24.5% 4.5%
A vg 64.7x 25.8x 84% 12.7x 11.9x 3.0x 2.8x 13.9% 13.9% 2.6%
Sources: DBS Bank, Bloomberg Finance L.P.
Prices as of 7 Feb 2017
Page 16
Page 16
Industry Focus
ASEAN Aviation
Appendix
Valuation charts P/BV
0.4
Feb-13 Feb-14 Feb-15 Feb-16 Feb-17
1.0 1sd:1.03x
0.8
2sd:0.74x
0.6
0.4
Feb-13 Feb-14 Feb-15 Feb-16 Feb-17
0.4
Feb-13 Feb-14 Feb-15 Feb-16 Feb-17
0.4
Feb-13 Feb-14 Feb-15 Feb-16 Feb-17
Page 17
Industry Focus
ASEAN Aviation
0.4
Feb-13 Feb-14 Feb-15 Feb-16 Feb-17
1.0 1sd:1.03x
0.8
2sd:0.74x
0.6
0.4
Feb-13 Feb-14 Feb-15 Feb-16 Feb-17
1.0 1sd:1.03x
0.8
2sd:0.74x
0.6
0.4
Feb-13 Feb-14 Feb-15 Feb-16 Feb-17
1.0 1sd:1.03x
0.8
2sd:0.74x
0.6
0.4
Feb-13 Feb-14 Feb-15 Feb-16 Feb-17
Page 18
Industry Focus
ASEAN Aviation
COMPANY GUIDES
Page 19
Page 19
Malaysia Company Guide
AirAsia
Version 7 | Bloomberg: AIRA MK | Reuters: AIRA.KL Refer to important disclosures at the end of this report
3.7
Relative Index
Airlines (MAB) to expand its leading market share to c.32%
from c.27% in 2014. Going into 2017, AIRA is prepared to
207
3.2 187
1.2
67
47 strong position to defend or grow its expanded market share
0.7
Dec-12 Dec-13 Dec-14 Dec-15
27
Dec-16 given its active branding and digitalisation efforts.
AirAsia (LHS) Relative KLCI (RHS)
Returning to ASK growth. Airline capacity is measured via ASK 4.7 4.35
(available seat kilometres), which is a function of the active fleet 3.5
3.56
Cheaper fuel leads cost savings. AIRAs key expenses can be 26.5
split into cash opex, asset costs and fuel costs. We expect
cost/ASK to drop by 6% in FY16F (c.2% fall charted in 9M16), 17.7
requirements. Our spot jet fuel assumptions are 2014A 2015A 2016F 2017F 2018F
US$50/60/65/bbl in FY16/17/18F.
Cost / ASK (sen)
Keeping a tab on regional associates. AIRA maintains a strong 14.0
13.8
13.2 13.4 13.8
12.5
regional presence with its associates in Thailand, Indonesia, the
11.2
Philippines, India and Japan. While the group gains from the
extended network and brand image, challenging operating 8.4
conditions have led to losses in a few associates. Of its
associates, we are most positive on Thai AirAsia (TAA) (listed on 5.6
shareholders via a new share issuance. Any further divestments 1.50 0.3
may serve to bring net gearing down further if proceeds are 1.00
0.3
0.3
used to pare down debts. 0.2
0.50
0.2
0.00 0.2
Share Price Drivers: 2014A 2015A 2016F 2017F 2018F
Continued profitability for the group. AIRA had notched losses Gross Debt to Equity (LHS) Asset Turnover (RHS)
2,000.0
the group, potentially in the form of cash proceeds to pare Capital Expenditure (-)
10.0%
Irrational competition. The emergence of irrational competition
in the form of excessive capacity increases by AIRAs 5.0%
-0.8
Dec-12 Dec-13 Dec-14 Dec-15 Dec-16
PB Band (x)
2.2
(x)
2.0
+2sd:1.94x
1.8
1.6 +1sd:1.64x
1.4
Avg:1.35x
1.2
1.0 1sd:1.05x
0.8
2sd:0.76x
0.6
0.4
Dec-12 Dec-13 Dec-14 Dec-15 Dec-16
Key Assumptions
FY Dec 2014A 2015A 2016F 2017F 2018F
ASK growth (%) 3.56 8.15 7.00 8.00 4.35
Load Factor (%) 78.9 80.2 86.0 84.0 84.0
Fare / RPK (sen) 13.4 12.8 12.6 12.2 12.6
Ancillary income / pax (RM) 43.2 43.1 43.8 43.8 43.8
Cost / ASK (sen) 13.8 13.2 12.5 13.4 13.8
Segmental Breakdown
FY Dec 2014A 2015A 2016F 2017F 2018F
Revenues (RMm)
MAA - Airline Operations 4,623 4,874 5,532 5,698 6,085
MAA - Aircraft leasing 793 1,425 1,057 1,182 1,299
Associates and JV 0.0 0.0 0.0 0.0 0.0
Total 5,416 6,299 6,589 6,880 7,383
Core PBT (RMm)
MAA - Airline Operations 262 386 1,077 640 559
MAA - Aircraft leasing 152 709 230 243 341
Associates and JV 27.6 (800) 149 136 158
Total 441 296 1,457 1,019 1,059
Core PBT Margins (%)
MAA - Airline Operations 5.7 7.9 19.5 11.2 9.2
MAA - Aircraft leasing 19.2 49.8 21.8 20.6 26.3
Associates and JV N/A N/A N/A N/A N/A
Total 8.2 4.7 22.1 14.8 14.3
Growth
Revenue Gth (%) 14.4 43.0 (21.6) (4.5) 3.9
EBITDA Gth (%) (19.6) 130.8 21.0 (33.9) 11.0
Opg Profit Gth (%) 37.1 153.4 (34.9) (20.4) 7.4
Net Profit Gth (Pre-ex) (%) nm 112.5 55.9 (43.9) 53.3
Margins
Opg Profit Margins (%) 20.8 36.9 30.7 25.5 26.4
Net Profit Margins (%) (26.8) 25.6 51.7 21.1 21.0
RM
3.20 12- mt h
6 7 Dat e of Closing
S.No. T arget Rat ing
Report Pric e
8 Pric e
1: 29 F eb 16 1.47 1.90 BUY
2.70 2: 04 Apr 16 1.93 2.20 BUY
9 3: 06 Apr 16 1.90 2.20 BUY
4: 10 May 16 2.05 2.20 BUY
5: 27 May 16 2.40 2.70 BUY
2.20 4 5
2 6: 01 Aug 16 3.00 2.70 BUY
7: 30 Aug 16 3.00 3.20 HOLD
8: 01 Nov 16 2.84 3.20 HOLD
1.70 3
9: 25 Nov 16 2.71 3.25 BUY
1
1.20
Dec-15 Apr-16 Aug-16 Dec-16
Not e : Share price and Target price are adjusted for corporate actions.
Source: AllianceDBS
Analyst: Marvin KHOR
Earnings Drivers:
Adding five to six aircraft annually. Airline capacity is measured
via ASK (available seat kilometres), which is a function of the
active fleet and the flight distances of routes served. Thai
AirAsia (TAA) grew its fleet by six aircraft in 2016 to reach 51
planes including two A320neos which have better fuel
efficiency. Six more are to be added in 2017 and five p.a. going
Load Factor (%)
forward. Premised on this, we expect TAA to grow ASK by
11%/10% in FY17/18F, with current focus on destinations in
India and CLMV.
Key Risks:
Price competition. The emergence of strong price competition ROE (%)
by airline competitors is a threat to both yields and earnings, as
TAA would have to compete to maintain market share.
Stronger USD. The stronger USD against the THB and other
regional currencies (i.e. MYR, SGD, IDR, RMB, JPY) will hurt
AAV. The bulk of TAAs revenues are in regional currencies,
while 66%/50% of opex/finance costs are in USD. Forward PE Band (x)
Company Background
AAV owns a 55% stake in TAA, the Thai-based sister company
of AirAsia which owns the remaining 45%. TAA operates a
low-cost, short-haul model out of five hubs in Thailand Don
Mueng Airport (Bangkok), Phuket International Airport
(Phuket), Chiang Mai International Airport (Chiang Mai), Krabi
International Airport (Krabi) and U-Tapao Rayong-Pattaya
International Airport (Rayong).
PB Band (x)
Key Assumptions
FY Dec 2014A 2015A 2016F 2017F 2018F
ASK growth (%) 19.1 17.5 13.9 11.3 10.2
Load Factor (%) 80.6 82.1 83.8 83.0 83.0
Fare / RPK (sen) 1.56 1.63 1.57 1.65 1.68
Ancillary income / pax 493 359 364 366 370
Cost / ASK (THB) 1.66 1.53 1.42 1.51 1.54
Growth
Revenue Gth (%) 5.4 5.2 17.3 (13.4) 5.0
EBITDA Gth (%) (3.2) 4.4 184.4 (54.7) (5.5)
Opg Profit Gth (%) (4.3) 3.9 287.8 (62.4) (8.5)
Net Profit Gth (Pre-ex) (%) 7.3 (1.7) 345.1 (63.9) (18.1)
Margins
Gross Margins (%) 12.4 11.4 27.8 15.5 14.8
Opg Profit Margins (%) 7.0 6.9 22.9 9.9 8.7
Net Profit Margins (%) 1.3 3.6 11.3 5.4 4.9
Source: AllianceDBS
Analyst: Marvin KHOR
Paul YONG CFA
THAI-CAC Declared
Corporate Governance CG Rating 2016
Corporate Governance CG Rating is based on Thai Institute of Score Range Number of Logo Description
Directors (IOD)s annual assessment of corporate governance 90-100 Excellent
practices of listed companies. The assessment covers 235 criteria 80-89 Very Good
in five categories including board responsibilities (35% weighting), 70-79 Good
disclosure and transparency (20%), role of stakeholders (20%),
equitable treatment of shareholders (10%) and rights of 60-69 Satisfactory
shareholders (15%). The IOD then assigns numbers of logos to 50-59 Pass
each company based on their scoring as follows: <50 No logo given N/A
WHATS NEW
Expect 1QFY17F core earnings to still grow: Despite the tourist arrivals to Thailand to grow by 7.7% y-o-y to 35m in
mourning period and the crackdown on zero-dollar tours, we 2017. Meanwhile, Chinese tourists are expected to increase
expect AOT to still deliver core earnings growth in 1QFY17F to 9.8m (+11.4% y-o-y).
(Oct-Dec), though not as robust as before.
Reiterate BUY. In our view, AOT would be the best proxy of
AOT should be able to post 6.1% y-o-y growth in total tourism recovery. The improving volume growth and the split
passengers through its six airports in 1QFY17F, mainly driven of par value from Bt10 to Bt1 would support the share price.
by domestic volume growth of 11.1%. International
passenger traffic only grew by 2.2% y-o-y as the number of
Chinese tourists dropped. Nevertheless, we should still see an
increase in the number of European and Russian arrivals.
Meanwhile, we expect to see same trend for aircraft traffic,
growing by 6.9% y-o-y in 1QFY17F (domestic; +12.2% and
international; +1.9%).
Earnings Drivers:
Rising traffic volume.
Management has no plans to submit another proposal to the
DCA (Department of Civil Aviation) to approve a hike in PSC
(Passenger Service Charge) just yet, but may revisit the proposal
in FY19F when Suvarnabhumi Airport expansion phase II is
completed. Therefore, earnings growth over the next two to
three years would be driven by higher passenger throughput
and aircraft traffic at its six airports. Rising air travel demand Domestic aircrafts movement (flts)
and expanding airline capacities will support traffic growth.
AOTs passenger and aircraft traffic have been growing at an
average of 12.6% and 12% p.a., respectively, in the past five
years. We expect them to average 8.2% and 4%, respectively,
over the next few years.
Key Risks:
Slowdown in the tourism industry
AOT's earnings are driven by flight and passenger traffic
volumes in Thailand. An economic slowdown, natural disasters,
and political uncertainty are main threats to its operations, and ROE (%)
their frequent recurrence would dampen air traffic.
Company Background
Airports of Thailand Public Company Ltd. is a state-owned
enterprise which operates six major airports in Thailand
Suvarnabhumi, Don Muang, Phuket, Chiang Rai, Chiang Mai,
and Had Yai. AOTs airports account for over 90% of
Thailands air traffic. Most of the other airports in Thailand are
much smaller in scale and located in second tier cities, and are
owned by the Department of Civil Aviation (DCA), Royal Thai Forward PE Band (x)
Navy, and Bangkok Airways Company.
PB Band (x)
Key Assumptions
FY Sep 2014A 2015A 2016A 2017F 2018F
International aircrafts 324,859 365,321 402,720 428,897 458,920
movement (flts)
Domestic aircrafts 285,077 342,041 374,200 404,136 444,550
movement (flts)
No. of international 50,163 60,296 67,129 71,276 77,932
passengers
No. of domestic 36,354 45,436 51,832 55,488 60,641
passengers
Growth
Revenue Gth (%) 0.8 7.9 16.8 (8.9) 1.6
EBITDA Gth (%) (4.9) 18.6 16.0 (12.2) (6.7)
Opg Profit Gth (%) (17.2) 38.2 18.2 (15.2) (8.0)
Net Profit Gth (Pre-ex) (%) (24.3) 49.5 21.8 (15.0) (8.0)
Margins
Gross Margins (%) 56.2 67.3 69.6 67.0 62.3
Opg Profit Margins (%) 43.1 55.2 55.8 52.0 47.0
Net Profit Margins (%) 53.4 39.2 40.3 40.3 33.8
THAI-CAC Declared
Corporate Governance CG Rating 2016
Corporate Governance CG Rating is based on Thai Institute of Score Range Number of Logo Description
Directors (IOD)s annual assessment of corporate governance 90-100 Excellent
practices of listed companies. The assessment covers 235 criteria 80-89 Very Good
in five categories including board responsibilities (35% weighting), 70-79 Good
disclosure and transparency (20%), role of stakeholders (20%),
equitable treatment of shareholders (10%) and rights of 60-69 Satisfactory
shareholders (15%). The IOD then assigns numbers of logos to 50-59 Pass
each company based on their scoring as follows: <50 No logo given N/A
Earnings Drivers:
Conservative ASK growth. Airline capacity is measured via ASK
(available seat kilometres), which is a function of the active fleet
and flight distances of routes served. As CEB has marginal net
fleet growth planned (+2/+2 in FY16/17F, from 55 at end-
2015), we expect slower overall capacity growth. Expansion will
be mainly led by up-gauging of aircraft (larger capacity planes
on the same routes) and improving fleet utilisation. More
growth is set to come in FY18 with +10 net fleet additions Load Factor (%)
planned as it receives 12 of its A321neo orders (less other lease
expiries and replacements).
A more neutral outlook for yields. Passenger yield (fare per RPK)
estimates the average payment by a passenger to fly a
kilometre. The 13% decline in FY15 yields was largely due to
the abolishment of fuel surcharges. We forecast yield to stay flat
in FY16, grow by a mild 2% in FY17 and remain at that level in
FY18. While the competitive landscape is not expected to be
slack, we think the capacity constraints at Manila airport limiting
capacity addition for all players will allow fares to be edged up. Ancillary income / pax (PHP)
Key Risks:
Sustained rise in jet fuel prices. Fuel costs are a major
component of the groups operating expenditures, at c.38% in
FY15. Despite hedging strategies securing c.52%/41% of
FY16/17F requirements, a sustained rise in jet fuel prices will ROE (%)
risk increasing unit costs. Our current spot jet fuel price
assumptions are US$50/60/bbl in FY16/17F.
Company Background
CEB wholly owns and operates two LCC carriers in Philippines,
namely Cebu Pacific and Cebgo. Cebu Pacific has an extensive
domestic network in addition to international services in Asia
Pacific and Middle East. Cebgo, formally known as Tigerair
Philippines, was acquired in 2014 and is currently operating
the groups turboprop fleet on domestic routes.
PB Band (x)
Key Assumptions
FY Dec 2014A 2015A 2016F 2017F 2018F
ASK growth (%) 26.5 21.5 5.00 5.00 10.3
Load Factor (%) 79.1 79.8 81.5 82.0 82.0
Fare / RPK (PHP) 2.48 2.15 2.15 2.19 2.19
Ancillary income / pax 700 752 767 783 790
Cost / ASK (PHP) 2.33 1.88 1.80 1.96 2.01
Growth
Revenue Gth (%) (16.7) 11.7 13.1 5.5 (20.0)
EBITDA Gth (%) (85.3) 274.8 111.7 18.2 (59.5)
Opg Profit Gth (%) nm nm 221.3 23.5 (78.5)
Net Profit Gth (Pre-ex) (%) nm nm 139.3 4.0 (80.0)
Margins
Opg Profit Margins (%) (4.6) 9.0 25.7 30.1 8.1
Net Profit Margins (%) (12.9) 5.8 25.1 21.5 (4.3)
Source: AllianceDBS
Analyst: Marvin KHOR
Paul YONG CFA
1.5
224
204
civil aviation industry, CAO should benefit from the long-term growth
1.3
184
164
of Chinas international air travel market. Furthermore, with the
1.1
0.9
144
124
backing of SOE parent China National Aviation Fuel Group (CNAF),
0.7
104
84
CAO has expanded its business to marketing and supply of jet fuel at
0.5
Dec-12 Dec-13 Dec-14 Dec-15
64
Dec-16 43 international airports outside China, and further growing its reach,
China Aviation Oil (LHS) Relative STI (RHS) volumes, and ultimately achieving greater economies of scale.
Forecasts and Valuation
FY Dec (US$ m) 2015A 2016F 2017F 2018F Firm outlook for prized asset 33%-owned associate, SPIA. As the
Revenue 8,987 9,410 10,948 11,495 exclusive supplier of jet fuel to Pudong International Airport, Shanghai
EBITDA 66.2 83.9 90.8 95.9 Pudong International Airport Aviation Fuel Supply Company (SPIA)
Pre-tax Profit 63.6 81.8 88.9 94.3 has and should carry on to benefit from rising air traffic at the airport,
Net Profit 61.3 78.6 85.4 90.5 which is driven by the continued development of Shanghai as Chinas
Net Pft (Pre Ex.) 61.3 78.6 85.4 90.5
Net Pft Gth (Pre-ex) (%) 24.7 28.2 8.7 6.0
key financial centre. Net cash and strong balance sheet could fund
EPS (S cts) 10.3 13.2 14.4 15.3 acquisition-driven growth. With net cash of c.US$203m at the end of
EPS Pre Ex. (S cts) 10.3 13.2 14.4 15.3 3Q16, and strong support from its parent CNAF, we believe that CAO
EPS Gth Pre Ex (%) 25 28 9 6 could be on the lookout for acquisitions to further grow the scale and
Diluted EPS (S cts) 10.3 13.2 14.4 15.3 reach of its business and profits.
Net DPS (S cts) 3.08 3.97 4.32 4.58
BV Per Share (S cts) 99.9 109 119 130
PE (X) 13.6 10.6 9.8 9.2 Valuation:
PE Pre Ex. (X) 13.6 10.6 9.8 9.2 Our TP of S$1.70 is based on 12x FY17F PE. We think that 12x
P/Cash Flow (X) 16.0 18.9 18.3 16.5 earnings against the projected 18% EPS CAGR over FY15-FY17F is
EV/EBITDA (X) 10.0 7.1 5.7 4.6 reasonable, and believe that the group is poised to see a structural re-
Net Div Yield (%) 2.2 2.8 3.1 3.3 rating of its valuation multiple on sustained earnings growth,
P/Book Value (X) 1.4 1.3 1.2 1.1
especially if CAO can utilise its strong cash balance to further
Net Debt/Equity (X) CASH CASH CASH CASH
ROAE (%) 10.7 12.7 12.6 12.2 accelerate growth through M&A.
Earnings Rev (%): 0 0 -
Consensus EPS (S cts): 13.3 15.7 17.8 Key Risks to Our View:
Other Broker Recs: B: 4 S: 0 H: 0 Weaker demand for air travel and execution risk. A sustained
Source of all data on this page: Company, DBS Bank, Bloomberg
slowdown in demand for air travel could impact jet fuel demand and
Finance L.P volumes. Further, the group could also face execution risk in its
trading business and prospective M&A activities.
At A Glance
Issued Capital (m shrs) 865
Mkt. Cap (S$m/US$m) 1,215 / 838
Major Shareholders (%)
China National Aviation Fuel Grp 51.0
BP Plc 20.1
Free Float (%) 28.9
3m Avg. Daily Val (US$m) 1.4
ICB Industry : Oil & Gas / Oil & Gas Producers
Sole importer of jet fuel into the PRC with growing international 13.6
12.1 11.9
presence Leveraging on the network of its parent, China 11.3
National Aviation Fuel Group Corporation (CNAF) a state-
9.1
owned enterprise and the largest aviation transportation
logistics services provider in the PRC China Aviation Oil 6.8
Middle East.
13.5
Owing to its domestic monopoly, CAO should benefit from the 10.1
long-term growth of Chinas international air travel market. 8.29 8.28
115.06
While opportunities to improve margins are available in both
backwardation and contango markets, CAO generally prefers 86.30
contango markets as it allows for superior opportunities for 74.4
64.7 64.7
margin optimisation from the storing and trading of fuels 57.53
56.6
0.02 9.0
announce significant M&A plans its last major investment was Gross Debt to Equity (LHS) Asset Turnover (RHS)
accretive opportunities should lead to a further rerating of the Capital Expenditure (-)
7.0
1sd:6.6x
Company Background 6.0
transportation fuel (such as fuel oil, gas oil and aviation gas) 1.5
and has varying equity stakes in oil-related assets. These assets +2sd:1.41x
1.3
include airport refuelling facilities (SPIA and CNAF HKR), +1sd:1.2x
pipelines (TSN-PEKCL) and storage facilities (Xinyuan and 1.1
Avg:0.99x
OKYC). 0.9
1sd:0.78x
0.7
2sd:0.57x
0.5
Dec-12 Dec-13 Dec-14 Dec-15 Dec-16
Key Assumptions
FY Dec 2014A 2015A 2016F 2017F 2018F
Jet Fuel Volumes (m 12.1 11.9 14.3 15.0 15.7
Other Oil Product 8.29 8.28 16.6 15.7 16.5 We adjust our GP/tonne
Implied Average Jet Fuel 141 74.4 56.6 64.7 64.7 assumptions for FY16F/17F
Gross Profit per Tonne 1.34 1.76 1.37 1.46 1.51 slightly downward on the
Contribution from 43.2 42.3 58.8 62.9 66.8 expectation of a more
challenging trading environment.
Segmental Breakdown
FY Dec 2014A 2015A 2016F 2017F 2018F
Revenues (US$m)
Middle distillates 13,508 7,010 6,400 7,680 8,064
Other oil products 3,553 1,978 3,010 3,268 3,431
Total 17,061 8,987 9,410 10,948 11,495
S$
1.55 12- mt h
Dat e of Closing
4 6 S.No. T arget Rat ing
Report Price
Pric e
2 3
1.35 1: 29 Apr 16 0.87 1.04 NOT RATED
5
2: 07 J ul 16 1.30 1.62 BUY
3: 02 Aug 16 1.47 1.70 BUY
1.15 4: 30 Aug 16 1.44 1.70 BUY
5: 03 Nov 16 1.40 1.70 BUY
6: 13 Dec 16 1.43 1.70 BUY
0.95
1
0.75
0.55
Dec-15 Apr-16 Aug-16 Dec-16
Not e : Share price and Target price are adjusted for corporate actions.
Earnings Drivers:
Conglomerate with diverse interests in defense and commercial
spheres. STE started out life as a defense contractor but has
leveraged its technical knowhow over the years to penetrate the
commercial market. It boasts multinational operations with a
global presence in 23 countries and 41 cities, and hires more
than 22,000 employees. The group has reduced its reliance on
the defense sector over time from 57% of revenues in 2002 to
the current 36%, with another 33% from government agencies Electronics sales growth (%)
and the balance from commercial businesses.
Company Background
ST Engineering (STE) is an integrated engineering group in the
aerospace, electronics, land systems and marine sectors. The
company has over the years diversified its businesses and
geographies.
Key Assumptions
FY Dec 2014A 2015A 2016F 2017F 2018F
Aerospace sales growth (0.9) 1.41 14.1 4.64 3.92
Electronics sales growth (4.1) 7.96 8.79 6.75 6.78
Land Systems sales (5.3) (0.1) (14.3) (3.1) 0.0
Marine sales growth (%) 8.32 (28.6) (7.3) (16.6) (13.4)
DBS Bank recommendations are based an Absolute Total Return* Rating system, defined as follows:
STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)
BUY (>15% total return over the next 12 months for small caps, >10% for large caps)
HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)
FULLY VALUED (negative total return i.e. > -10% over the next 12 months)
SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)
Share price appreciation + dividends
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This report is prepared by DBS Bank Ltd. This report is solely intended for the clients of DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd,
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The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS
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the DBS Group)) do not make any representation or warranty as to its accuracy, completeness or correctness. Opinions expressed are subject to
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Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can
be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments.
The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed and it
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which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly from actual
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assessments stated therein.
Please contact the primary analyst for valuation methodologies and assumptions associated with the covered companies or price targets.
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commodity referred to in this report.
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DBS Vickers Securities (USA) Inc ("DBSVUSA")"), a U.S.-registered broker-dealer, does not have its own investment banking or research
department, has not participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction
in the past twelve months and does not engage in market-making.
ANALYST CERTIFICATION
The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the
companies and their securities expressed in this report accurately reflect his/her personal views. The analyst(s) also certifies that no part of his/her
compensation was, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in the report. The DBS Group has
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research reports. As of 10 Feb 2017, the analyst(s) and his/her spouse and/or relatives who are financially dependent on the analyst(s), do not
hold interests in the securities recommended in this report (interest includes direct or indirect ownership of securities). The research analyst(s)
responsible for this report operates as part of a separate and independent team to the investment banking function of the DBS Group and
procedures are in place to ensure that confidential information held by either the research or investment banking function is handled
appropriately.
4. DBS Bank Ltd., DBSVS, their subsidiaries and/or other affiliates of DBSVUSA, within the next 3 months, will receive or intend to seek
compensation for investment banking services from Singapore Airlines as of 30 Dec 2016.
5. DBS Bank Ltd., DBSVS, their subsidiaries and/or other affiliates of DBSVUSA have managed or co-managed a public offering of securities for
Singapore Airlines as of 30 Dec 2016.
6. DBSVUSA does not have its own investment banking or research department, nor has it participated in any public offering of securities as a
manager or co-manager or in any other investment banking transaction in the past twelve months. Any US persons wishing to obtain further
information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document
should contact DBSVUSA exclusively.
Directorship/trustee interests
7. Peter Seah Lim Huat, Chairman & Director of DBS Group Holdings, is a Director / Chairman of Singapore Airlines as of 1 Jan 2017.
Lim Sim Seng, a member of DBS Group Executive Committee, is an Independent Non-Executive Director of ST Engineering as of 1 Feb 2017
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rd
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it.
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ASEAN Aviation
United States This report was prepared by DBS Bank Ltd. DBSVUSA did not participate in its preparation. The research analyst(s) named on
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