1. business and industrial
2. company
3. earnings

Regional Daily, 17 November 2014
5
Regional Daily
Ideas Troika
Top Stories
Samart Corp PCL (SAMART TB)
Communications - Telecommunications
TAKE PROFIT THB32.80 TP: THB34.50
Mkt Cap : USD1,005m
Pg2
Samart Corp’s net profit declined to THB350.9m (-14.8% QoQ) mainly due to
low seasonality in its handset business and a delay in Set Top Box (STB)
coupon. Given the share price has increased 123% ytd and is now trading at
15.5x FY15 P/E, we downgrade to Take Profit from Buy.
Analyst: Veena Naidu ([email protected])
Dialog (DLG MK)
Energy & Petrochemicals - Oil & Gas Services
BUY MYR1.56 TP: MYR2.00
Mkt Cap : USD2,298m
Pg3
We are positive on the green light received by Dialog to develop the LNG
phase of its mega Pengerang Terminal project, though significant earnings
accretion will only be in FY18. Maintain BUY with adjusted TP MYR2.00
Analyst: Kong Ho Meng ([email protected])
Other Key Stories
Malaysia
Petronas Gas (PTG MK)
Pg4
Energy & Petrochemicals - Downstream Products
NEUTRAL MYR21.66 TP: MYR21.98
KKB Engineering (KKB MK)
Construction & Engineering - Construction
SELL MYR1.96 TP: MYR1.38
Thailand
Asia Aviation (AAV TB)
Transport - Aviation
SELL THB4.18 TP: THB3.01
Nok Airlines (NOK TB)
Transport - Aviation
NEUTRAL THB11.90 TP: THB12.50
HongKong
Strategy - Hong Kong
Pg5
Embarking On Pengerang Regasification Project
Analyst: Joshua Ng ([email protected])
Waning Hope On O&G Contract Wins
Analyst: Ng Sem Guan, CFA ([email protected])
Pg6
Bracing For a Robust 4Q14
Analyst: Ahmad Maghfur Usman ([email protected])
Pg7
Higher-Than-Expected Unit Costs Widen Losses
Analyst: Ahmad Maghfur Usman ([email protected])
Pg8
Shanghai/HK Stock Connect Launch
Analyst: Kong Yong Ng ([email protected])
See important disclosures at the end of this report
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1
Results Review, 14 November 2014
Samart Corp PCL (SAMART TB)
Take Profit (from Buy)
Communications - Telecommunications
Market Cap: USD1,005m
Target Price:
Price:
THB34.50
THB32.80
Macro
Risks
9M14 Earnings Increased 6% YoY
Growth
Value
Samart Corp (SAMART TB)
Price Close
Relative to Stock Exchange of Thailand Index (RHS)
37.0
174
32.0
154
27.0
134
22.0
114
17.0
94
12.0
60
74
50
40
20
Sep-14
Jul-14
May-14
Mar-14
Jan-14
10
Nov-13
Vol m
Samart Corp’s 9M14 earnings rose 6.0% YoY to THB1.16bn.
We revise our call to TAKE PROFIT from Buy, with an
unchanged 12-month TP of THB34.50 (5.3% upside) based
on a 16.2x blended P/E. While 9M14 earnings accounted for
65.6% of our full-year forecast, we expect its earnings to
pick up substantially in 4QFY14, supported by: i) the big
smartphone order from DTAC, ii) higher consumer spending
due
to the festive
season,
and
revenue(-14.8%
from sale
of Samart
set 3QFY14
net profit
declined
to iii)
THB350.9m
QoQ).
top Corp’s
boxes(Samart)
(STBs).
sales revenue declined to THB5.43bn (-15.4% QoQ) in
3QFY14 mainly due to low seasonality in its handset business and the
delay in distributing STB’s coupon. Handset sales revenue declined
22.7% QoQ while ICT solution business revenue declined slightly by
1.85% QoQ in 3QFY14. Its EBIT fell 18.5% QoQ to THB637.2m as GPM
remained stable, while sales, general and administrative (SG&A)
expenses remained relatively stable in 3QFY14.

30
Source: Bloomberg
Avg Turnover (THB/USD)
Cons. Upside (%)
Upside (%)
52-wk Price low/high (THB)
Free float (%)
Share outstanding (m)
Shareholders (%)
Vilailuck International Holding
Co.,
Ltd.
Mr. Watchai
Vilailuck
Mr. Charoenrath Vilailuck
252m/7.80m
-31.7
5.3
14.0 - 34.0
51
1,007
17.4
12.0
11.9
Share Performance (%)






Handset sales dropped in 3QFY14 but we expect it to pick up in
4QFY14. Although the company’s total handset unit sales declined to
0.9m units (-23.1% QoQ) in 3QFY14, we expect total unit sales to pick
up substantially in 4QFY14 as: i) we expect consumer spending to pick
up due to festive season in 4QFY14 and ii) the company has delivered
500,000 units of smartphones worth THB637m in revenue to Total
Access Communication (DTAC TB, BUY, TP: THB138) in early 4Q14.
Moreover, we expect STB sales to contribute THB1.03bn in revenue in
4QFY14, assuming the company sells 1.5m of STBs at THB690/unit.
ICT solutions business flat. ICT revenue declined to THB1.54bn in
3QFY14 (-1.8% QoQ) as all government projects were delayed due to
the political unrest. Note that we assume flat earnings growth in ICT
solution business for FY15.
Revised to TAKE PROFIT. Given that the share price has increased
123% YTD and is now trading at 15.5x FY15 P/E (around 2SD above its
average 8-year mean), we believe the stock has factored in most of the
positive news flow on its record-high earnings this year. As such, we
revise the stock to TAKE PROFIT with an unchanged TP of THB34.50,
based on a blended P/E of 16.2x.
YTD
1m
3m
6m
12m
Absolute
121.3
0.8
40.6
65.4
68.8
Forecasts and Valuations
Dec-11
Dec-12
Dec-13
Dec-14F
Dec-15F
Relative
101.0
(0.5)
39.5
51.8
57.6
Total turnover (THBm)
19,767
16,733
22,315
27,963
29,288
Reported net profit (THBm)
836
1,084
1,468
1,776
2,120
Recurring net profit (THBm)
836
1,084
1,468
1,776
2,120
Recurring net profit growth (%)
33.1
29.6
35.5
21.0
19.4
Recurring EPS (THB)
0.85
1.10
1.47
1.77
2.12
DPS (THB)
0.75
0.61
0.81
0.89
1.06
Recurring P/E (x)
38.5
29.9
22.2
18.5
15.5
P/B (x)
6.88
6.00
5.21
4.56
3.98
7.3
15.7
34.0
19.7
2.3
1.8
2.5
2.7
3.2
EV/EBITDA (x)
18.6
17.8
12.6
10.0
9.3
Return on average equity (%)
18.4
21.5
25.1
26.3
27.5
124.8
120.9
94.9
113.7
103.1
0.7
4.7
Shariah compliant
Veena Naidu License No. 24418, 66 2862 9752
[email protected]
Chun Phokaisawan +66 2862 2029
P/CF (x)
[email protected]
Dividend Yield (%)
Net debt to equity (%)
Our vs consensus EPS (adjusted) (%)
See important disclosures at the end of this report
Source: Company data, RHB
na
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2


3

.
2
0
.
2
0
0
.
3
0
0
.
0
0
0
Corporate News Flash, 17 November 2014
Dialog (DLG MK)
Buy (Maintained)
Energy & Petrochemicals - Oil & Gas Services
Market Cap: USD2,298m
Target Price:
Price:
MYR2.00
MYR1.56
Macro
Risks
Green Light for Pengerang LNG
Growth
Value
Dialog (DLG MK)
Price Close
Relative to FTSE Bursa Malaysia KLCI Index (RHS)
2.00
132
1.90
127
1.80
122
1.70
117
1.60
112
1.50
107
1.40
102
1.30
300
97
0
0
.
2
0
0
We are positive on the green light received by Dialog to develop a key .
0
phase of its mega Pengerang Terminal project - dedicated for LNG 0
storage, trading and supply to the requirements of the Pengerang 0
Integrated Complex. We don’t expect any impact to our 3-year earnings
forecast, given its long development period. Maintain BUY, with revised
MYR2.00 TP (28.2% upside) to account for our new oil price forecast.

Details of the shareholders’ agreement. Dialog’s wholly owned
subsidiary, Dialog LNG SB, inked a shareholders’ agreement with
Petronas Gas (PTG MK, NEUTRAL, TP: MYR21.98) on 14 Nov, to
undertake a MYR2.7bn development of Liquefied Natural Gas (LNG)
regasification facilities. The development comprised a regasification unit
and two units of 200,000 m³ LNG storage tanks. The tanks will have
initial send out capacity of 3.5m tonnes per annum. Dialog expects its
stake in the JV, Pengerang LNG (Two) SB (PLNG-2), to dilute to 25%
from 100% previously, while Petronas Gas will acquire 65% of PLNG-2
and Johor State for the remainder 10% of the special purpose vehicle.
According to Petronas Gas, 4Q17 is the targeted commercial operation.

Our view. This is another positive development for Dialog’s long-term
recurring income stream, as it marks at least 2 out of 3 of its key phases
for the mega Pengerang Terminal projects that have been given the
green light. The third phase, in which the company expects to see full
development by mid-2018, will be similar to PLNG-2 in the sense that
both are dedicated for the Refinery And Petrochemical Integrated
Development (RAPID). Nonetheless, given the long development period,
we do not expect significant earnings accretion until late 2017 (FY18).
250
200
150
Sep-14
Jul-14
May-14
Mar-14
Jan-14
Nov-13
Vol m
100
50
Source: Bloomberg
Avg Turnover (MYR/USD)
Cons. Upside (%)
Upside (%)
52-wk Price low/high (MYR)
Free float (%)
Share outstanding (m)
Shareholders (%)
EPF
Azam Utama
Wide Synergy
14.9m/4.59m
18.6
28.4
1.45 - 1.93
59
4,931
10.6
9.3
9.1
Share Performance (%)


2

.
1
0
.
2





Maintain BUY, SOP TP adjusted to MYR2.00 (from MYR2.25). We
reevaluated our SOP to take into account i) our current oil price forecast
of USD90-100/bbl, ii) a 25% stake in PLNG2, and iii) lower P/E multiple
to reflect current O&G sentiment. Our FY16F forecast is reduced by 2%
as lower oil prices will have direct impact on Dialog’s upstream activities.
While the stock will be increasingly driven by offshore developments, we
believe current levels do not reflect its defensive nature in its locational
advantage and concession-nature of its tank terminal/ logistic business.
Risk to our valuation would be worse-than-expected costs, as the
company is in the midst of an expansion.
Jun-13
Jun-14
Jun-15F
Jun-16F
Jun-17F
2,238
2,552
3,004
4,097
5,364
Reported net profit (MYRm)
193
191
246
322
437
Recurring net profit (MYRm)
193
194
246
322
437
Recurring net profit growth (%)
9.4
0.8
26.6
30.8
35.7
Recurring EPS (MYR)
0.04
0.04
0.05
0.06
0.08
DPS (MYR)
0.01
0.01
0.02
0.02
0.03
Kong Ho Meng +603 9207 7620
Recurring P/E (x)
43.2
42.8
33.8
25.9
19.1
[email protected]
P/B (x)
6.15
5.34
4.88
4.38
3.85
P/CF (x)
26.6
97.4
18.9
23.4
18.8
1.0
0.9
1.2
1.5
2.1
EV/EBITDA (x)
19.7
18.5
15.5
12.6
10.3
Return on average equity (%)
15.2
13.1
15.1
17.8
21.5
3.6
23.8
49.7
48.4
46.0
(10.1)
(5.1)
7.5
YTD
1m
3m
6m
12m
Absolute
(12.2)
(0.6)
(12.4)
(16.4)
7.0
Relative
(9.5)
(1.7)
(9.9)
(13.0)
5.2
Shariah compliant
Forecasts and Valuations
Total turnover (MYRm)
Dividend Yield (%)
Net debt to equity (%)
Our vs consensus EPS (adjusted) (%)
Source: Company data, RHB
See important disclosures at the end of this report
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3
Corporate News Flash, 17 November 2014
Petronas Gas (PTG MK)
Neutral (Maintained)
Energy & Petrochemicals - Downstream Products
Market Cap: USD12,805m
Target Price:
Price:
MYR21.98
MYR21.66
Macro
Risks
Embarking On Pengerang Regasification Project
Growth
Value
Petronas Gas (PTG MK)
Price Close
Relative to FTSE Bursa Malaysia KLCI Index (RHS)
26.0
106
25.0
103
24.0
99
23.0
96
22.0
93
21.0
89
20.0
7
86
0
0
.
2
0
0
Petronas Gas is embarking on the MYR2.7bn Pengerang regasification .
0
terminal project. While we are positive on the news, we maintain our 0
NEUTRAL call, earnings forecasts and TP of MYR21.98 (1.5% upside), 0
as the project will only start contributing from FY18. We believe the
market has priced in near-term earnings catalysts, ie contributions from
a new power plant in Sabah and a regasification terminal in Melaka.

6
5
4
3
Sep-14
Jul-14
May-14
Mar-14
Jan-14
1
Nov-13
Vol m
2
Source: Bloomberg

Avg Turnover (MYR/USD)
Cons. Upside (%)
Upside (%)
52-wk Price low/high (MYR)
Free float (%)
Share outstanding (m)
Shareholders (%)
Petroliam Nasional
EPF
Kumpulan Wang Persaraan
29.9m/9.23m
-12.9
1.5
21.1 - 24.9
21
1,979
60.7
13.7
5.3


2

.
1
0
.
1





Pengerang regasification project is good to go. Petronas Gas has
decided to go ahead with the MYR2.7bn regasification terminal project at
the Pengerang Deep Water Terminal, which is an integral part of the
MYR89bn Refinery and Petrochemical Integrated Development (RAPID)
project in Pengerang, Johor. The project will be carried out via a
65:25:10 JV called Pengerang LNG (Two) SB between Petronas Gas,
Dialog Group (DLG MK, BUY, TP: MYR2.00) and the Johor state
government. Petronas Gas’ share of the project cost is MYR2bn.
Construction for the plant with an annual capacity of 35m tonnes will
start in 2Q15 with a targeted commercial operations date by 4Q17.
Petronas Gas has awarded a MYR1.5bn engineering, procurement,
construction and commissioning contract for the plant to a SamsungWhessoe-STS-SCTKL consortium. Separately, Petronas Gas has
entered into heads of agreement with Linde (M) SB to “pursue possibility
of the development” of an air separation unit on a JV basis in
Pengerang, to be operational by 4Q18.
Forecasts. We are positive on Petronas Gas’ latest venture that will
underpin its earnings growth over the longer term. The MYR2bn capital
outlay will result in Petronas Gas having a net debt and gearing of
MYR1.9bn and 0.18x respectively that are still highly manageable, from
a net cash of MYR69m as at end-3Q14. We maintain our earnings
forecasts as the project will only start contributing from FY18.
Maintain NEUTRAL. We believe the market has priced in near-term
earnings catalysts of Petronas Gas, ie contributions from a new 300MW
power plant in Kimanis, Sabah, and a regasification terminal in Sg
Udang, Melaka. However, its long-term outlook remains favourable,
backed by continued industrialisation in Malaysia, and hence rising
demand for gas. We maintain our SOP-based TP of MYR21.98 (see
Figure 1).
Share Performance (%)
YTD
1m
3m
6m
12m
Absolute
(10.8)
2.2
(4.6)
(8.2)
(4.7)
Relative
(8.1)
1.1
(2.1)
(4.8)
(6.5)
Shariah compliant
Forecasts and Valuations
Dec-12
Dec-13
Dec-14F
Dec-15F
Dec-16F
Total turnover (MYRm)
3,577
3,892
4,101
4,240
4,382
Reported net profit (MYRm)
1,405
1,453
1,673
1,785
1,908
Recurring net profit (MYRm)
1,405
1,453
1,673
1,785
1,908
Recurring net profit growth (%)
434.1
3.4
15.2
6.6
6.9
Recurring EPS (MYR)
0.71
0.73
0.85
0.90
0.96
DPS (MYR)
0.40
0.50
0.62
0.63
0.67
Recurring P/E (x)
30.5
29.5
25.6
24.0
22.5
P/B (x)
4.68
4.17
4.14
3.98
3.84
P/CF (x)
22.2
20.7
26.1
14.5
12.5
1.8
2.3
2.9
2.9
3.1
22.7
22.5
23.2
22.5
21.4
15.9
15.0
16.2
16.9
17.4
Dividend Yield (%)
EV/EBITDA (x)
Return on average equity (%)
Joshua Ng +603 9207 7606
[email protected]
Net debt to equity (%)
Our vs consensus EPS (adjusted) (%)
net cash net cash net cash net cash net cash
(5.0)
(3.0)
1.5
Source: Company data, RHB
See important disclosures at the end of this report
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4
Results Review, 17 November 2014
KKB Engineering (KKB MK)
Sell (from Trading Buy)
Construction & Engineering - Construction
Market Cap: USD151m
Target Price:
Price:
MYR1.38
MYR1.96
Macro
Risks
Waning Hope On O&G Contract Wins
Growth
Value
KKB Engineering (KKB MK)
Price Close
Relative to FTSE Bursa Malaysia KLCI Index (RHS)
3.00
105
2.80
98
2.60
92
2.40
85
2.20
78
2.00
72
1.80
1
65
0
0
.
2
0
0
KKB’s 9M14 results were way below our and street expectations. We .
0
downgrade our rating to SELL (from Trading Buy) as we trim our target 0
P/E to 12x FY15 and cut our TP to MYR1.38 (-29.5% downside). Due to 0
the waning hope on its associate unit winning more O&G contracts in
the near future (on weakening oil prices) and poor contract wins for
other divisions to-date, we are slashing our FY14/15 earnings numbers.

Disappointing results. KKB Engineering’s (KKB) 9M14 net profit of
MYR12.6m represented only 31.9%/27.3% of our/street estimates. We
are not surprised by its weak results after the absence of significant new
contract wins for its fabrication unit for the past one year. Nevertheless,
the actual profit was way more disappointing; we initially thought its
MYR227m pipe order contract win in late-2013 may have helped to
partly compensate for the poor results in the fabrication unit.
Furthermore, pressured by higher interest rate and depreciation
expenses arising from the commissioning of its new fabrication yard at
Lot 777 resulted in a marginal loss to the fabrication unit.

Pushback on Oil and Gas (O&G) hope. KKB’s associate, OceanMight
SB, became a licensed supplier of Petronas under the category of
onshore fabrication for offshore major construction in early 2013. We
were initially encouraged that this associate finally won its first fabrication
works in September as it was a critical breakthrough into the lucrative
O&G industry. However, the weakening oil prices, which recently broke
its support level of USD80 a barrel, suggest that a majority of new O&G
projects may be put on hold, thus limiting the number of fabrication jobs
available in the market. Being the new kid on the block, its unit may also
find it tougher to compete with its peers on the lack of track record.
1
1
1
Sep-14
Jul-14
May-14
Mar-14
Jan-14
Nov-13
Vol m
1
Source: Bloomberg
Avg Turnover (MYR/USD)
Cons. Upside (%)
Upside (%)
52-wk Price low/high (MYR)
Free float (%)
Share outstanding (m)
Shareholders (%)
0.07m/0.02m
38.8
-29.5
1.94 - 2.76
31
258
Dato Kho Kak Beng & family
Cahya Mata Sarawak
Laman Satria SB
42.5
20.1
5.6
Share Performance (%)

Downgrade to SELL, MYR1.38 TP. Together with the poor contract win
for its fabrication units to-date and waning hope on its associate winning
more lucrative O&G contracts in the near future on weakening oil prices,
we are cutting our contract win rate for the next two years. We cut our
FY14/15 earnings estimates by a hefty 64.4%/42.0% respectively, while
we introduce our FY16 projection. We also trim our target P/E to 12x
FY15F (from 14x) as we remove the premium we had incorporated
earlier due to its exposure to the O&G industry. Accordingly, we slash
our TP to MYR1.38 (from MYR2.78) and downgrade KKB’s rating to
SELL (from Trading Buy).
YTD
1m
3m
6m
12m
Absolute
(26.6)
(10.9)
(18.0)
(19.0)
(28.7)
Forecasts and Valuations
Relative
(23.9)
(12.0)
(15.5)
(15.6)
(30.5)
Total turnover (MYRm)
Reported net profit (MYRm)
Shariah compliant
Recurring net profit (MYRm)
[email protected]
Dec-13
Dec-14F
Dec-15F
167
229
191
289
Dec-16F
315
19.5
33.1
14.1
29.7
33.1
19.5
33.1
14.1
29.7
33.1
69.7
(57.5)
111.1
11.6
Recurring EPS (MYR)
0.08
0.13
0.05
0.12
0.13
DPS (MYR)
0.05
0.07
0.02
0.05
0.05
Recurring P/E (x)
25.9
15.3
35.9
17.0
15.3
P/B (x)
1.95
1.82
1.76
1.64
1.52
18
31
10
462
14
2.6
3.4
1.1
2.3
2.6
16.6
9.8
18.1
9.7
8.6
7.7
12.3
5.0
10.0
10.4
P/CF (x)
Dividend Yield (%)
EV/EBITDA (x)
Return on average equity (%)
Net debt to equity (%)
Our vs consensus EPS (adjusted) (%)
See important disclosures at the end of this report
Dec-12
(58.1)
Recurring net profit growth (%)
Ng Sem Guan, CFA +603 9207 7678


2

.
2
0
.
2




Source: Company data, RHB
net cash net cash net cash net cash net cash
(69.2)
(48.4)
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(48.6)
5
Results Review, 14 November 2014
Asia Aviation (AAV TB)
Sell (Maintained)
Transport - Aviation
Market Cap: USD618m
Target Price:
Price:
THB3.01
THB4.18
Macro
Risks
Bracing For a Robust 4Q14
Growth
Value
Asia Aviation (AAV TB)
Relative to Stock Exchange of Thailand Index (RHS)
5.70
104
5.20
96
4.70
88
4.20
80
3.70
72
3.20
160
140
120
100
80
60
40
20
64
0
0
.
2
0
0
AAV’s 9M14 core net loss of THB307m came in line with our estimate. .
0
Maintain SELL, with a THB3.01 TP (9x FY15 adjusted EV/EBITDAR, 0
27.9% downside). Thailand’s new tax deduction on travel package costs 0
incurred by locals should propel demand for low-cost travel. As we
expect a strong 4Q14 (4Q is the peak season for travel), the company
may make up for its current earnings shortfall this quarter.

Sep-14
Jul-14
May-14
Mar-14
Jan-14

Nov-13
Vol m
Price Close
Source: Bloomberg
Avg Turnover (THB/USD)
Cons. Upside (%)
Upside (%)
52-wk Price low/high (THB)
Free float (%)
Share outstanding (m)
Shareholders (%)
Tassapon Bijleveld
Prichaya Rasamitanin
Gerdprasert
113m/3.52m
6.5
-27.9
3.42 - 5.30
42
4,850
28.1
5.9
5.9
Share Performance (%)
YTD
1m
3m
6m
12m
Absolute
14.2
(4.1)
(9.5)
8.3
(21.1)
Relative
(6.1)
(5.4)
(10.6)
(5.3)
(32.3)


3

.
2
0
.
3






Within estimates. Asia Aviation’s (AAV) 9M14 core net loss of
THB307m was in line with our estimate but significantly below
consensus. Its core net loss of THB214.4m booked in 3Q14 widened
from the loss of THB167.2m in 2Q14, as the company recorded lower
yields while unit costs increased (+4.2% QoQ) given the depreciating
THB. Although the political turmoil in Thailand eased in 3Q, visitor traffic
failed to pick up sequentially as passenger numbers only grew by 1.7%
QoQ vs 5.5% QoQ in 3Q13.
Outlook ahead. We expect the visa exemption (which ended on 8 Nov)
for Chinese and Taiwanese passport holders visiting Thailand to
stimulate demand for tourism activities in the country. Furthermore, the
Government also announced a tax incentive last month for Thai locals, in
which travel package costs (at a maximum of THB15k per annum) can
be claimed in order to offset the individual income tax levied – which
could further stimulate demand for domestic travel. This incentive is in
effect until 31 Dec 2015. We believe low-cost carriers would benefit the
most from this given their relative cheaper air fares. This, on top of the
lower jet fuel prices, leads us to believe that we are likely to see AAV
recording a strong profit in 4Q14. However, moving into 2015, we expect
competition to continue intensifying. Thus, the recovery in yields may not
likely reach levels prior to the political crisis that beset the Kingdom since
Dec 2013.
Forecasts. On expectations of a strong 4Q14 – the peak for seasonal
travel – we expect its robust numbers to make up for the earnings
shortfall in 9M14.
Maintain SELL. AAV is valued at a 20.4x FY15 P/E, which is expensive
compared with the peer average of 15x. We keep our SELL
recommendation, while our TP remains at THB3.01, premised at an
unchanged 9x adjusted FY15 EV/EBITDAR. Our TP also implies a FY15
P/E of 14.7x, which is in line with the company’s regional peer average.
Forecasts and Valuations
Dec-11
Dec-12
Dec-13
Dec-14F
Dec-15F
Total turnover (THBm)
8,123
16,103
23,485
25,123
30,420
Reported net profit (THBm)
1,014
15,513
1,042
243
994
Ahmad Maghfur Usman 603 9207 7654
Recurring net profit (THBm)
992
787
1,096
243
994
[email protected]
Recurring net profit growth (%)
(1.3)
(20.7)
39.2
(77.8)
308.9
Recurring EPS (THB)
0.20
0.16
0.23
0.05
0.20
Recurring P/E (x)
20.4
25.8
18.5
83.4
20.4
2,650
1
1
1
1
77.3
7.7
5.5
6.4
4.4
11.0
Shariah compliant
P/B (x)
P/CF (x)
EV/EBITDA (x)
18.8
13.5
9.1
26.7
Return on average equity (%)
26512.4
169.9
5.5
1.2
4.9
Net debt to equity (%)
net cash
6.4
7.8
20.6
(69.6)
(22.4)
Our vs consensus EPS (adjusted) (%)
See important disclosures at the end of this report
Source: Company data, RHB
net cash
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6
Results Review, 17 November 2014
Nok Airlines (NOK TB)
Neutral (from Sell)
Transport - Aviation
Market Cap: USD226m
Target Price:
Price:
THB12.50
THB11.90
Macro
Risks
Higher-Than-Expected Unit Costs Widen Losses
Growth
Value
Nok Airlines (NOK TB)
Relative to Stock Exchange of Thailand Index (RHS)
26.0
105
24.0
96
22.0
88
20.0
79
18.0
70
16.0
61
14.0
53
12.0
44
10.0
18
16
14
12
10
8
6
4
2
35
0
0
.
1
0
0
Nok’s 9M14 core net loss of THB481m was larger than we expected. The .
0
sharp drop in yields amidst higher-than-expected unit costs is 0
worrying, lifting its breakeven load factor to 116% in 3Q14. While it 0
would be challenging for the airline to significantly cut unit costs in
2015, a yield recovery may return it to the black. Upgrade to NEUTRAL,
with a new THB12.50 TP (7.5x adjusted EV/EBITDAR, 5% upside).

Sep-14
Jul-14
May-14
Mar-14
Jan-14

Nov-13
Vol m
Price Close
Source: Bloomberg
Avg Turnover (THB/USD)
Cons. Upside (%)
Upside (%)
52-wk Price low/high (THB)
Free float (%)
Share outstanding (m)
Shareholders (%)
Thai Airways International
Aviation Investment
State Street Bank Europe
33.7m/1.04m
46.2
5.0
11.9 - 24.4
30
625
39.2
9.5
6.8
Share Performance (%)


Below. Nok Airlines’ (Nok) 9M14 core net loss of THB481m was larger
than our and consensus expectations. For 3Q14, it reported a wider loss
of THB365m vs THB154m in 2Q14, owing to the sharp drop in yields.
Nok suffered a severe drop in yields (-19% YoY, -12% YTD) on
aggressive promotional offerings in 3Q14 as the airline attempted to
keep its load factor high. At the same time, unit costs (excluding fuel)
rose more than expected from higher maintenance costs, leasing rates
and the strengthening USD. Unit costs for fuel were largely unchanged
QoQ but were higher YoY. The sharp drop in its yields amidst higherthan-expected unit costs is worrying, bumping up its breakeven load
factor to 116% in 3Q14 from 93% in 3Q13.
Forecasts. Following the higher-than-expected loss, we raise our FY14F
losses to THB281m from THB111m. Meanwhile, we cut our FY15F
earnings by 8%, but lift our FY17F net profit by 4% given the lower jet
fuel price assumption for that year. The major revision to our numbers
was on its unit costs as we have lifted our estimates on its leasing rates.
Outlook. While we expect Nok to record a seasonally stronger quarter in
4Q, the chances of it recording a sharp spike in profit is highly unlikely
given the increase in its fixed unit costs. The Nok-Scoot JV is also not
likely to start this year, given the slow progress in approvals thus far. The
startup had only received its air operating certificate earlier this month.
After the approval, Nok only submitted an application for Japan's foreign
air carrier permit to the Japan Civil Aviation Bureau.
Upgrade to NEUTRAL. We still think Nok’s outlook would remain
challenging, as it may be difficult for it to trim unit costs drastically next
year – although a yield recovery would bring the airline to profitability.
We upgrade our call to NEUTRAL from Sell, with a lower TP of
THB12.50 (previously THB15.20), premised at an unchanged 7.5x FY15
adjusted EV/EBITDAR. Our new TP also reflects a FY15 P/E of 13.8x,
which is within the regional peer average range of 14-15x.
YTD
1m
3m
6m
12m
Absolute
(37.4)
(18.5)
(28.3)
(30.0)
(51.2)
Forecasts and Valuations
Relative
(58.8)
(20.5)
(30.6)
(43.0)
(62.6)
Total turnover (THBm)
Shariah compliant
Dec-12
Dec-13
Dec-14F
Dec-15F
Dec-16F
8,218
11,180
14,041
18,404
21,038
Reported net profit (THBm)
505
1,066
(281)
566
733
Recurring net profit (THBm)
748
1,063
(281)
566
278.2
42.1
(126.4)
Recurring EPS (THB)
1.50
1.70
(0.45)
0.91
1.17
DPS (THB)
1.10
1.03
0.00
0.45
0.59
8.0
7.0
13.1
10.1
P/B (x)
6.70
1.64
1.70
1.55
P/CF (x)
7.05
6.54
6.03
7.05
9.2
8.7
5.55
1.99
59.9
39.3
Recurring net profit growth (%)
Ahmad Maghfur Usman 603 9207 7654
[email protected]
Recurring P/E (x)
Dividend Yield (%)
EV/EBITDA (x)
Return on average equity (%)
Net debt to equity (%)
Our vs consensus EPS (adjusted) (%)
See important disclosures at the end of this report


1

.
2
0
.
2




Source: Company data, RHB
na
1.88
na
0.0
na
(6.6)
na
733
29.6
3.8
4.9
3.79
2.69
13.6
16.0
net cash net cash net cash net cash net cash
188.0
(22.7)
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(30.6)
7
Sector News Flash, 17 November 2014
Strategy - Hong Kong
Macro
Risks
Shanghai/HK Stock Connect Launch
Growth
Value


2

2

2




2
What’s new?


The highly anticipated Shanghai and HK Stock Connect Scheme will
begin today 17 Nov (Monday). We provide an update following our
report on 11 April when the scheme was first announced.
The highlights are:
HK market (Southbound)
1. Daily quota of CNY10.5bn (19% of 3M average daily turnover
(ADT)) and total quota of CNY250bn.
2. Stocks that are constituents of the HS Composite Large Caps, HS
Composite Mid-Caps and Shanghai listed A-H stocks.
3. Eligible participants are institutional investors and individuals with at
least CNY500,000 in their securities accounts.
4. Eligible Chinese investors can trade approved HK-listed stocks via
the Shanghai Stock Exchange.
5. Eligible Chinese investors are exempted from the 10% Capital
Gains Tax for three years.
Shanghai market (Northbound)
1. Daily quota of CNY13.5bn (9% of 3M ADT) and total quota of
CNY300bn.
2. Stocks that are constituents of SSE180, SSE380 and Shanghai
listed A-H stocks.
3. HK and overseas investors can trade approved Shanghai listed
stocks via the HKEX.
4. Capital gains tax for HK and overseas investors will be waived
“temporarily.”
Our view: Selected stocks may still be impacted


In our view, the scheme's launch will no longer have a big impact on the
overall HK and Shanghai markets. This is because: i) since the scheme
was first announced in April, the price difference between A and H
shares have narrowed considerably, ii) large funds that want exposure to
the eligible stocks are likely to have already done so via the existing
QFII/RFII and QDII mechanisms, iii) Chinese investors with at least
CNY500,000 to invest may have already bought the eligible HK stocks
via their HK brokerage accounts before the scheme's launch.
Nonetheless, certain stocks may still see a more pronounced impact.
Positive impact on:
1.
2.
3.
Kong Yong Ng 852 2103 5844
[email protected]
Christopher Tse 852 2103 9415
[email protected]
See important disclosures at the end of this report
HKEX (388 HK, NEUTRAL, TP:HKD181)
Brokerage stocks. Refer to Fig. 1 on the next page.
H shares are still trading at big discounts to their A shares, eg
Sinopec Shanghai (338 HK, NR). See Fig. 2 and A shares trading
at big discounts to their H shares (none currently).
4. Well-known stocks that are: i) listed only in HK, and ii) included in
HS Composite Large Caps Index or HS Composite Mid-Cap
Index, eg Tencent (700 HK, BUY, TP: HKD156), HSBC (5 HK,
NR), AIA (1299 HK, NR) and Macau gaming stocks. See Fig. 3
Negative impact on:
1. A shares still trading at big premium to their H shares (ie Sinopec
Shanghai (386 HK, NR)); H shares still trading at a big premium to
their A shares (none currently). Refer to Fig 2.
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