Asia Aviation - Credit Suisse

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14 August 2012 Asia Pacific/Thailand

Equity Research Airlines / MARKET WEIGHT

Asia Aviation (AAV.BK / AAV TB)

INITIATION

Thailand's leading LCC ■ Part of an established family. AAV owns 55% of Thai AirAsia (TAA),

Thailand’s largest low-cost carrier (LCC) with a 64% share of the budget airline market. TAA plans to double its fleet size to 48 aircraft by 2016. Leasing aircraft through partner AirAsia Berhad (AAB), TAA can benefit from synergies such as joint purchases, centralised training and strong branding. CEO Tassapon Bijleveld is AAV’s largest shareholder with a 33% stake.

■ Recipe for success in its DNA. TAA has one of the lowest Cost/ATK in the region, adjusted for sector length, giving it a key competitive advantage. This was achieved, in part, through its partnership with AirAsia, where TAA benefits from a strong common brand name and bulk discounts for purchases including those of aircraft. Through AirAsia, TAA draws on a successful pedigree, with an established template to follow, in areas such as route triangulation, multiple hub strategy and emphasis on ancillary income growth.

■ Fleet growth key to earnings expansion. We expect TAA to report FY11–14 net profit CAGR of 30%, driven by a 23% traffic CAGR and a 4% ancillary revenue per pax CAGR. TAA’s expansion plans should see its fleet clock a 20% CAGR over the same period, but we are not concerned about market saturation given the low incidence of flying and the robust Thai tourism sector.

■ Valuation. We are initiating coverage on AAV with OUTPERFORM. Our Bt4.6 target price, which implies 33% potential upside from the current level, is based on an average between AAV’s mid-range growth cycle adjusted EV/EBITDAR multiple of 8x and adjusted EV/Current Fleet Market Value ratio of 260%.

■ Key risks include oil price volatility, regulatory changes and natural disasters. AAV relies heavily on AAB in areas such as branding and procurement.

Share price performance

8090100110120

23456

Jun-12

Price (LHS) Rebased Rel (RHS)

The price relative chart measures performance against the THAILAND SET IDX which closed at 1219.37 on 10/08/12 On 10/08/12 the spot exchange rate was Bt31.46/US$1

Financial and valuation metrics

Year 12/11A 12/12E 12/13E 12/14E Revenue (Bt mn) 16,157.6 21,058.7 25,962.5 30,972.7 EBITDA (Bt mn) 2,119.9 3,543.4 4,630.4 6,006.1 EBIT (Bt mn) 2,048.4 3,389.8 4,309.6 5,422.6 Net profit (Bt mn) 719.6 9,265.5 1,859.5 2,259.6 EPS (CS adj.) (Bt) 0.18 1.91 0.38 0.47 Change from previous EPS (%) n.a. Consensus EPS (Bt) n.a. 0.27 0.36 0.47 EPS growth (%) 130.6 988.4 -79.9 21.5 P/E (x) 19.7 1.8 9.0 7.4 Dividend yield (%) 0 0 0 0 EV/EBITDA (x) 7.5 3.3 3.0 2.3 P/B (x) -5.8 1.8 1.5 1.2 ROE (%) -24.6 262.2 17.8 18.1 Net debt/equity (%) 155.9 Net cash Net cash Net cash

Performance Over 1M 3M 12M Source: Company data, Thomson Reuters, Credit Suisse estimates.

Rating OUTPERFORM Price (10 Aug 12, Bt) 3.46 Target price (Bt) 4.60¹ Upside/downside (%) 32.9 Mkt cap (Bt mn) 16,781.0 (US$ 533.4) Enterprise value (Bt mn) 11,624 Number of shares (mn) 4,850.00 Free float (%) 40.0 52-week price range 3.74 - 3.04 ADTO - 6M (US$ mn) 10.7 *Stock ratings are relative to the relevant country benchmark. ¹Target price is for 12 months.

Research Analysts

Annuar Aziz 603 2723 2084

[email protected]

Timothy Ross 65 6212 3337

[email protected]

14 August 2012

Asia Aviation

(AAV.BK / AAV TB) 2

Key charts and table Figure 1: TAA’s share of Airport Of Thailand’s LCC traffic* Figure 2: TAA’s fleet expansion plan (2011A–2016E)

Thai AirAsia

64%

AirAsia Berhad

3%

Nok Air26%

Others7%

22 22 22 22 22 22

5 5 5 5 56 6 6

5 5 55 5

6

5

0

10

20

30

40

50

2011A 2012E 2013E 2014E 2015E 2016E

2011A 2012E 2013E 2014E 2015E 2016E

22 22 22 22 22 22

5 5 5 5 56 6 6

5 5 55 5

6

5

0

10

20

30

40

50

2011A 2012E 2013E 2014E 2015E 2016E

2011A 2012E 2013E 2014E 2015E 2016E

Source: SAP Group * 2010 data Source: Company data

Figure 3: Cost/ATK vs stage length of regional airlines Figure 4: ASEAN annual round trip flight per capita

AAV

134%

61%

36%12% 10% 3%5%9%

382%

-

0.25

0.50

0.75

1.00

1.25

1.50

Sin

gap

ore

Bru

nei

Mal

aysi

a

Tha

iland

Phi

lipin

es

Ind

ones

ia

Cam

bodi

a

Vie

tna

m

Lao

s

Source: Company data, Credit Suisse estimates Source: SAP Group

Figure 5: Net profit CAGR of Asian LCCs (2011–14E) Figure 6: LCC sector EV/EBITDAR, 2012

3% 4%

30% 31%

0%

5%

10%

15%

20%

25%

30%

35%

Cebu Pacific Tiger Airways Asia Aviation AirAsia Berhad

3.8x

5.2x 5.6x 6.1x7.4x 7.8x 8.0x

27.6x

0x

2x

4x

6x

8x

10x

12x

easy

Jet

AAV

Rya

nair

Gol

Cop

a

AirA

sia

Ceb

u

Tige

r Air

6.3x Average EV/EBITDAR (ex-Tiger) **IBES consensus; Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Figure 7: Key assumptions (%) FY10A FY11A FY12E FY13E FY14E Pax traffic growth 14.1 20.3 29.2 22.4 14.1 ASK growth 16.8 21.0 26.3 22.4 14.1 Load factor 78.1 80.1 82.0 82.0 82.0 Rev/ASK growth 11.6 10.4 3.2 0.7 2.2 Avg. fare growth 18.6 5.4 0.7 0.5 2.0 Avg. ancillary growth 65.5 29.5 2.5 5.0 5.0 Avg. fuel cost (US$/bbl) 88 124 127 130 130

Source: Company data, Credit Suisse estimates

14 August 2012

Asia Aviation

(AAV.BK / AAV TB) 3

Thailand’s leading LCC Part of an established family Asia Aviation (AAV) is the holding company of 55%-owned Thai AirAsia (TAA), the largest low-cost carrier (LCC) in Thailand with a 64% market share and a fleet of 24 A320s, as of February 2012. TAA plans to more than double its fleet size to 48 aircraft by 2016. Leasing aircraft through its partner AirAsia Berhad (AAB) TAA can benefit from synergies such as joint purchases and centralised training, while leveraging the strong brand awareness of the ‘AirAsia’ name. Asia Aviation is 60%-owned by Thai AirAsia’s management team, led by CEO Tassapon Bijleveld, who owns a 33% stake in AAV.

Recipe for success in its DNA TAA has one of the lowest Cost/Available Tonne Km (ATK) in the region, adjusted for sector length, giving it a key competitive advantage. This was achieved, in part, through its partnership with AirAsia, where TAA benefits from a strong common brand name and bulk discounts for purchases including those of aircraft. More importantly, through its relationship with AirAsia Berhad (AAB), TAA has a strong pedigree for success. It has a successful template to follow to replicate the success of AAB in areas such as triangulation of routes, multiple hub strategy and emphasis on growing ancillary income. The competitive environment looks benign. New airline Thai Smile started operations in July 2012. However, as the airline plans to offer a ‘light premium service’, it is a hybrid business model, which means that it will not compete directly with Thai AirAsia.

Fleet growth key to earnings expansion We expect TAA to report a 30% net profit CAGR over FY11–14, driven mainly by a 23% passenger traffic CAGR and a 4% ancillary spend per pax CAGR. TAA’s expansion plans should see its fleet clock a 20% CAGR over the same period, but we are not concerned about market saturation, given the low incidence of flying and the robust Thai tourism sector. Moreover, through its dynamic ticket pricing model, TAA can stimulate demand or even create it by developing unique and untried routes that are economically unviable for legacy carriers. We conservatively expect TAA’s revenue/ASK (RASK) to remain firm over the next three years (FY11-14), given the relatively benign competitive environment.

Valuation: Pitched in line with peers We value AAV based on an average between its mid-range growth cycle adjusted EV/EBITDAR multiple of 8x and adjusted EV/Current Fleet Market Value (EV/CMFV) ratio of 260% its fleet value. We have derived a target price of Bt4.6, which implies 33% potential upside from the current level; thus, we are initiating coverage with an OUTPERFORM rating.

Key risks AAV is sensitive to changes in jet fuel prices, as fuel should account for 43–44% of its total operating costs between FY12E and FY14E. AAV also has forex exposure through jet fuel, and maintenance and aircraft leasing costs, among others. AAV operates in a highly regulated industry and is exposed to changes in regulations that may result in additional costs or limit its growth prospects (e.g., if there is a shortage of landing rights or airport slots). Changes in the competitive environment, particularly from new entrants in the LCC market, can negatively impact the company. AAV is also subject to fluctuations in the business cycle due to changes in the global economic situation. Moreover, travel demand could be impacted by events such as disease outbreaks (SARS, Bird flu), natural disasters such as floods, infrastructure bottlenecks and geo-political risks (civil unrest). AAV relies heavily on AAB, but there is no guarantee that AAB will remain a shareholder in the future.

Thai AirAsia is the largest LCC in Thailand

Partnership with AirAsia Berhad gives TAA a template for success

TAA fleet to grow at a 20% CAGR over FY11–14E

Target price of Bt4.6 implies 33% potential upside

Sensitive to changes in fuel prices

14 August 2012

Asia Aviation

(AAV.BK / AAV TB) 4

Key financial data Figure 8: Key financial data Year-end 31 Dec P&L (Bt mn) FY10A FY11A FY12E FY13E FY14E Revenue 12,099 16,158 21,059 25,963 30,973

EBITDAR 4,221 4,848 6,670 7,957 9,333

EBITDA 2,021 2,120 3,543 4,630 6,006

EBIT 1,897 2,048 3,390 4,310 5,423

Forex impact 357 155 0 0 0

Net interest income (243) (184) (36) (83) (287)

Exceptional Items 0 0 0 14,690 0

Profit before tax 2,011 2,020 18,043 4,226 5,135

Income tax 0 0 (671) (845) (1,027)

Minority interest (985) (990) (8,107) (1,521) (1,849)

Net profit 1,026 1,030 9,265 1,860 2,260

Balance sheet (Bt mn) FY10A FY11A FY12E FY13E FY14E

Non-current assets 808 953 17,693 23,820 28,624

Cash 508 1,360 5,166 7,564 11,286

Others 3,551 1,477 1,892 2,205 2,526

Current assets 4,058 2,836 7,058 9,770 13,812

Short term loans 200 486 0 0 0

Other liabilities 7,168 3,745 5,154 6,155 7,178

Current liabilities 7,368 4,231 5,154 6,155 7,178

Long-term loans 0 13 0 4,458 8,173

Others 1 92 92 92 92

Non-current liabilities 1 105 92 4,550 8,265

Net assets (2,503) (546) 19,504 22,885 26,993

Shareholders' equity (3,405) (2,438) 9,505 11,365 13,624

Minority interest 902 1,892 9,999 11,520 13,369

(2,503) (546) 19,504 22,885 26,993

Cash flow (Bt mn) FY10A FY11A FY12E FY13E FY14E

Pre-tax profit 2,011 2,020 18,043 4,226 5,135

Depreciation 123 13 154 321 583

Chg. in working capital (2,523) (1,621) 995 687 702

Taxes paid 0 0 (671) (845) (1,027)

Others 73 110 (14,726) (83) (287)

Cash flow from ops (316) 521 3,795 4,306 5,107

Capex (109) (82) (2,203) (6,448) (5,387)

Others 75 113 36 83 287

Cash flow in investing (33) 31 (2,166) (6,365) (5,100)

Net proceeds from loans 200 299 (499) 4,458 3,715

Others (1) (41) 2,677 0 0

Cash flow from financing 199 258 2,178 4,458 3,715

Net change in cash (151) 810 3,806 2,398 3,722


14 August 2012

Asia Aviation

(AAV.BK / AAV TB) 5

Part of an established family Asia Aviation (AAV) is the holding company of Thai AirAsia (TAA), the largest LCC in Thailand. As shown in Figure 9, AAV owns a 55% stake in Thai AirAsia, with the remaining owned by its partner Malaysian LCC AirAsia Berhad (AAB).

Figure 9: Thai AirAsia’s current corporate structure

Asia Aviation AirAsia Berhad

55% 45%

Thai AirAsia

Source: Company data

In operation since 2004, Thai AirAsia operates on the traditional short-haul low-cost carrier model. It offers a point-to-point service on routes with less than four hours of flying time, using a single aircraft type with a single class configuration. TAA flies to 11 domestic and 14 international destinations (as of December 2011), operating out of its three hubs in Bangkok, Phuket and Chiang Mai. The company plans to open new hubs in Hatyai and Udon Thani in 2013 and 2014, respectively.

Figure 10: Thai AirAsia’s route map


TAA is the largest LCC in Thailand with a 64% market share of total LCC traffic through Airports of Thailand (AOT). In total, TAA accounts for almost 13% of AOT’s total passenger traffic.

AAV owns a 55% stake in Thai AirAsia

TAA operates on the traditional short-haul low-cost model

TAA accounts for 64% of LCC traffic through Airports of Thailand (AOT)

14 August 2012

Asia Aviation

(AAV.BK / AAV TB) 6

Figure 11: TAA’s share of AOT’s LCC

traffic

Figure 12: TAA’s share of AOT’s total

traffic

Thai AirAsia

64%

AirAsia Berhad

3%

Nok Air26%

Others7%

TAA

13%

Others

87%

Source: SAP Group Source: SAP Group

Benign competitive environment

In our view, Thai AirAsia’s market share growth has been aided by a benign competitive environment. During the financial crisis of 2008–09, legacy carriers cut capacity, while rival Thai LCC Nok Air (unlisted) pulled out of the international market and One-Two-Go (unlisted) ceased operations. This void was filled by TAA, which grew its market share and cemented its leadership position in the Thai LCC market.

Figure 13: Market share of passenger movements in Thailand (2006–10)

7.9% 8.5% 10.6% 12.5% 12.7%7.1% 8.8% 6.7% 5.4% 7.3%

43.4% 41.2% 41.6% 40.4%42.9%

41.6% 41.5% 41.1% 41.7% 37.2%

0%

20%

40%

60%

80%

100%

2006 2007 2008 2009 2010

Thai AirAsia Other LCCs Other FSC Thai international

Source: AOT

There is a new entrant in the form of ‘Thai Smile’ (unlisted). This is a wholly owned unit of Thai International that will service domestic and international destinations within a four-hour radius from Bangkok. However, Thai Smile is being pitched as a ‘light premium’ airline, with service levels in between those of a full-service carrier and an LCC. We are not overly concerned about Thai Smile, as its hybrid business model means that it will not compete directly with Thai AirAsia.

TAA operates in a benign competitive environment

Thai Smile is a hybrid airline with ‘light premium’ service offerings

14 August 2012

Asia Aviation

(AAV.BK / AAV TB) 7

Figure 14: Other Thai airlines Airlines Business Model Note

Thai International Airways Full service carrier National airline

Bangkok Airways Full service carrier Boutique regional airline

Thai Smile Light premium carrier A regional "medium" cost carrier, in between full service and LCCs

Nok Air Low cost carrier 51%-owned affiliate of Thai International. Dual class on regional flights in 2013.

Orient Thai Airlines Low cost carrier Operates mixed fleet of narrow & wide bodies, inc B747s


In our view, the most serious contender for TAA would have been Thai Tiger Airways, a proposed joint venture between Thai International and Singapore’s Tiger Airways. However, the proposed deal was scrapped as it faced difficulties in receiving regulatory approvals to begin operations. At this juncture, we do not expect the project to be revived by the two airlines.

Thai International did look to start a new LCC to serve the regional market, but instead opted to focus on returning to profitability, and back Nok Air’s re-entry into the international market in 2013. However, Nok Air plans to operate dual class configured aircraft on its international flights, thus, in our view, will not compete directly with TAA.

Fleet type and size TAA operates a young fleet of 24 Airbus A320s (as end of 2Q12), with an average age of 2.3 years. Leased from its partner AirAsia Berhad for a term of 9–12 years, these leases will expire between 2019 and 2024. TAA’s A320s have 180 seats, 20% more than the typical dual-class model. By operating a single jet aircraft type from the A320 family, the company can enjoy better economies of scale in areas such as pilot training and maintenance costs, given the common parts and spares.

Figure 15: TAA’s fleet composition plan

38

12

1922

2733

3843

48

69

1212

8

8

0

10

20

30

40

50

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

A320 B737


The company plans to more than double its fleet to 48 aircraft by 2016, by taking delivery of five to six aircraft each year. As of end 2Q 2012, TAA had taken delivery of two A320s, with three more aircraft to be delivered later in the year. We expect TAA to procure the additional 26 aircraft from AirAsia Berhad.

Currently all of TAA’s aircraft are leased from AirAsia Berhad. However, TAA plans to own its aircraft in the future. Funded by IPO proceeds, we expect the company to purchase two

Proposed Thai Tiger Airways unlikely to be restarted

Dual class offering on Nok Air’s upcoming regional flights

TAA operates a fleet of 24 Airbus A320s

TAA plans to double its fleet size to 48 aircraft by 2016

TAA plans to own its aircraft

14 August 2012

Asia Aviation

(AAV.BK / AAV TB) 8

aircraft in FY12. We expect the company to gear up to acquire all its future aircraft from FY13 and beyond. We estimate TAA will have to spend Bt17.0 bn if it wanted to own all its FY12–14 aircraft deliveries.

AAV’s shareholding structure Asia Aviation is 60%-owned by Thai AirAsia’s management team, led by CEO Tassapon Bijleveld, who owns a 33% stake in AAV. The other key members of TAA’s management team collectively own a 27% stake in AAV.

Figure 16: AAV’s shareholding structure

CEO Tassapon Bijleveld

33%

Management team27%

Free float40%


AAV is 60%-owned by the management team of Thai AirAsia

14 August 2012

Asia Aviation

(AAV.BK / AAV TB) 9

Recipe for success in its DNA Thai AirAsia has one of the lowest Cost/ATK in the region, adjusted for sector length, giving it a key competitive advantage. This was achieved, in part, through its partnership with AirAsia, where TAA benefits from a strong common brand name and bulk discounts for purchases including those of aircraft. More importantly, TAA can replicate AirAsia Berhad’s (AAB) template for success, such as the triangulation of routes, the multiple hub strategy and the emphasis on growing ancillary income.

Benefits from low cost base Thai AirAsia’s key advantage is its low cost base, which gives it a significant competitive advantage. Adjusted for sector length, TAA’s Cost/ATK (C/ATK) of US¢0.55 in FY11 is less than those of most of airlines that fly an average stage length of under 2,000 km. However, as shown in Figure 17, AirAsia Berhad has a lower Cost/ATK than Thai AirAsia.

Figure 17: Cost/ATK vs stage length of regional airlines

CX SQ

CIBR

CACZ

MU

MH

TG

AK

5J

TR

KEOZ

QF

VA

NH

AAT

0.30

0.40

0.50

0.60

0.70

0.80

0.90

1.00

1.10

500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500 5,000 5,500

Source: Credit Suisse estimates, company data

In our view, AAB’s cost advantage stems from its greater economies of scale (AAB has a fleet of 55 aircraft vs TAA’s 22 in FY11) and use of a dedicated low-cost carrier terminal in Kuala Lumpur International Airport (KLIA), Malaysia, which offers the lowest airport charge in the region. In contrast, Thai AirAsia operates out of the Suvarnabhumi Airport, which is one of the most expensive airports in the region.

Fortunately, Airports of Thailand (AOT) has decided to turn Bangkok’s Don Muang Airport into a dedicated LCC airport, offering discounts on landing & parking charges (LPC) over a three-year period. Thai AirAsia will transfer its operations to Don Muang effective 1 October 2012. In addition to lower LPCs, by operating in a simpler uncongested airport, TAA will lower its fuel burn. Less time and fuel will be spent in a holding pattern waiting to land, while the taxiing between the runway and the terminal will also be shorter. The move to Don Muang is expected to reduce TAA’s total fuel costs by 1-2%.

Partnership with AirAsia AAV’s partnership with AirAsia, in our view, has been one of the cornerstones of Thai AirAsia’s success. The key benefits and synergies of the partnership include:

Partnership with AirAsia Berhad gives TAA a template for success

TAA has one of the lowest Cost/ATK in the region

AirAsia Berhad has a cost advantage by using the LCC terminal in Malaysia

TAA’s Cost/ATK will improve when it moves to Bangkok’s Don Muang airport

Benefits from the partnership with AAB include:

14 August 2012

Asia Aviation

(AAV.BK / AAV TB) 10

■ Leveraging a common trademark, AirAsia, to maximise brand awareness. Through intense marketing, including sponsorship of international sporting platforms such as F1 Team Caterham and the Queens Park Rangers football team, AirAsia has become a globally recognised brand. Stronger brand recognition, in our view, has helped it attract new passengers and capture market share. TAA has a brand licence agreement to use the AirAsia trademark. Under this five-year deal, which was signed in January 2012, TAA has to pay a licence fee of 1% of its total revenue per annum.

■ Taking advantage of the high traffic at AirAsia’s website, which according to Google is the top travel website in Asia. The website records over 25 mn unique visitors each month, recording over 65 mn monthly page views.

■ Significant discounts through bulk purchases: By negotiating with sister companies within the AirAsia group, TAA enjoys volume discounts in areas such as catering, spare parts and maintenance service contracts. Even the purchases of jetfuel in airports, such as Macau, are negotiated en bloc to enjoy volume discounts.

■ Group aircraft purchase: Group ordering lowers the capital outlay, reducing the average cost per unit and enhancing TAA’s cost advantage. The 200 A320-NEO aircraft ordered by AAB in June 2011 is the largest single order for Airbus. Thus, TAA enjoys volume discounts and ‘early bird discounts’ for its aircraft requirements 2016 onwards.

■ It uses the AirAsia Academy in Malaysia to train TAA’s pilots, cabin crew and engineers.

■ TAA has access to AirAsia Group’s feeder network, which allows customers to connect to an additional 68 destinations across 15 countries.

Figure 18: AirAsia group network


… a common brand name that’s globally recognised ...

… a high-traffic website …

… savings from bulk purchases…

…group purchase of aircraft to deepen the discounts…

… and access to AirAsia Group’s regional network.

14 August 2012

Asia Aviation


Replicating the success of AirAsia Berhad In our view, there is already a successful template in AirAsia Berhad for Thai AirAsia to follow. In addition to the synergies mentioned above, we expect TAA to focus on the following areas:

■ Aggressive fleet expansion: A key part of TAA’s strategy is to aggressively grow its fleet to dominate key routes. By leveraging its low cost base, TAA adds capacity to force less-cost-efficient rivals out and improve yields.

■ High aircraft utilisation rate: LCCs can lower its average unit costs by having a high aircraft utilisation rate. If measured by the average number of sectors per aircraft, as shown below, TAA’s aircraft (6.7) fly more sectors per day than AAB’s (6.1). Note that the average sector per day is inversely correlated with the average sector length. On average, AAB has a longer sector length, thus its aircraft would have fewer flights per day than TAA.

Figure 19: Avg. daily sector per aircraft of regional LCCs Figure 20: 2011 regional LCCs—avg daily sector per

aircraft vs sector length

6.0

5.3

7.9

6.9

6.0

5.1

7.8

6.4 6.1

3.4

7.5

6.7

3

4

5

6

7

8

9

AirAsia Berhad Tiger Airways Cebu Pacific Asia Aviation

Dai

ly s

ecto

r per

air

craf

t (x

)

FY09 FY10 FY11

AirAsia

Tiger

Cebu Asia Aviation

3.0

4.0

5.0

6.0

7.0

8.0

500 700 900 1,100 1,300 1,500 1,700

Dai

ly s

ecto

r p

er a

ircr

aft

(x)

Average Sector Length (km) Source: Company data Source: Company data

■ Route triangulation: By ‘connecting the dots’, and flying to the destinations already serviced by the AirAsia Group, TAA expands its routes in a cost-efficient manner. For instance, if TAA flies from Chiang Mai to Macau, where AAB already flies to, it does not have to incur costs related to setting up a new station or advertising.

■ Multiple hubs: Being able to operate more flights from multiple points during peak hours helps TAA to increase revenue. It also allows for the creation of unique routes which could become more lucrative in the absence of competition. TAA plans to open new hubs in Hatyai and Udon Thani in 2013 and 2014, respectively.

■ Use of LCC terminals and airports: One of the contributing factors to AAB’s low cost/ASK is the use of LCC terminal in KLIA, as highlighted earlier. In October 2012, TAA will move its Bangkok hub to Don Muang airport, now a dedicated LCC airport, to benefit from low operating costs at the airport.

■ Growing ancillary income: Most ancillary services have high margins and have a leveraged impact on the bottom line. Some of the ancillary charges involve almost no extra cost, such as choice of seats (Hot Seat) or convenience fees for credit card payments. Moreover, demand for ancillary services is relatively inelastic, with minimal seasonal impact. Thus, it acts as a buffer against fares, which under the dynamic pricing model, could change dramatically during seasonally weak quarters.

AAB provides a successful template for Thai AirAsia

Aggressive fleet expansion to dominate routes

High aircraft utilisation to lower average unit costs

Triangulation of routes to minimise start-up costs

Operate multiple hubs to maximise revenue

Use of LCC terminals and airports to lower operating costs

Focus on growing high-margin ancillary income

14 August 2012

Asia Aviation


Figure 21: AAB’s quarterly avg. ancillary spend per pax Figure 22: Tiger’s quarterly avg. ancillary spend per pax

RM0

RM10

RM20

RM30

RM40

RM50

RM601Q

09

2Q09

3Q09

4Q09

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

SGD 0

SGD 5

SGD 10

SGD 15

SGD 20

SGD 25

1Q F

Y10

2Q F

Y10

3Q F

Y10

4Q F

Y10

1Q F

Y11

2Q F

Y11

3Q F

Y11

4Q F

Y11

1Q F

Y12

2Q F

Y12

3Q F

Y12

4Q F

Y12

Source: Company data Source: Company data

14 August 2012

Asia Aviation


Fleet growth key to earnings expansion We expect Asia Aviation to report a net profit CAGR of 30% between FY11 and FY14, driven mainly by higher traffic and increases in the average ancillary spend. We expect average ancillary spend to grow at a 4% CAGR over the next three years (FY11–14) on a slew of new initiatives. As a regional tourism play, driven by a 20% fleet CAGR over FY11–14E, we forecast 23% traffic CAGR over the same period.

Figure 23: Asia Aviation’s revenue and net profit (2009–14E)

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

(500)

0

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2,500

2009A 2010A 2011A 2012E 2013E 2014E

Rev

enue

(Bt m

n)

Net

Pro

fit (B

t mn)

Net Profit Revenue


How does it compare with peers?

We expect the LCCs in the region (Figure 24) to report a net profit CAGR of 3–31% over 2011–14. AAV’s core net profit growth is expected to outpace that of its peers with the exception of AirAsia Berhad. Note that this growth excludes the Bt14.7 bn revaluation gain from the IPO, which was reported in 2Q FY12.

Figure 24: Net profit CAGR of Asian LCCs (2011A–2014E)

3% 4%

30% 31%

0%

5%

10%

15%

20%

25%

30%

35%

Cebu Pacific Tiger Airways Asia Aviation AirAsia Berhad

Source: Credit Suisse estimates

Fleet expansion drives growth Thai AirAsia plans to take delivery of five to six new aircraft each year between 2012 and 2016. Thus, the company will more than double its fleet to 48 aircraft by 2016, which equates to a five-year CAGR of 17%. Between 2011 and 2014, we expect TAA’s fleet to clock a 20% CAGR.

30% net profit CAGR expected between FY11 and FY14 driven by 20% fleet growth

Regional LCCs to see a net profit CAGR of 3–31% over 2011–14E

TAA to grow its fleet at a 20% CAGR between FY11 and FY14

14 August 2012

Asia Aviation


Figure 25: TAA aircraft delivery (2011A–2016E) Figure 26: TAA fleet expansion (2011A–2016E)

3

56

5 5 5

0

1

2

3

4

5

6

7

2011A 2012E 2013E 2014E 2015E 2016E

No of A320s

3

56

5 5 5

0

1

2

3

4

5

6

7

2011A 2012E 2013E 2014E 2015E 2016E

No of A320s

22 22 22 22 22 22

5 5 5 5 5

6 6 6

5 5 55 5

6

5

0

10

20

30

40

50

2011A 2012E 2013E 2014E 2015E 2016E

2011A 2012E 2013E 2014E 2015E 2016E

22 22 22 22 22 22

5 5 5 5 5

6 6 6

5 5 55 5

6

5

0

10

20

30

40

50

2011A 2012E 2013E 2014E 2015E 2016E

2011A 2012E 2013E 2014E 2015E 2016E

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

These new aircraft will be deployed on new as well as existing routes. Among the new routes planned for FY11, Thai AirAsia intends to fly to Bangkok-Chennai (India), Bangkok-Chongqing (China) and Chiang Mai-Macau. It plans to add capacity to key routes such as Bangkok-Singapore and Bangkok-Phuket. TAA also plans to pull out of routes such as Bangkok-New Delhi (India) and Chiang Mai-Singapore. It plans to add 124 weekly flights in FY12, of which 62% are on domestic routes.

Figure 27: TAA’s route expansion plans in 2012 Additional weekly Increase in Commencement

From To roundtrip flights frequency date

International routes

Bangkok Singapore 14 50% Feb-12 & Sept-12

Macau 14 50% Nov-12

Colombo, Sri Lanka 7 New route Mar-12

Chennai, India 5 New route Mar-12

Chongqing, China 7 New route Mar-12

Shantou, China 5 New route Oct-12

Chengdu, China 5 New route Nov-12

New Delhi, India -7 -100% Mar-12

Yangon, Myanmar 7 -50% July-12

Mandalay, Myanmar 4 New route Oct-12

Chiang Mai Macau 7 New route Mar-12

Singapore -7 -100% Mar-12

Total 47

Domestic routes

Bangkok Phuket 14 25.0% Jul-12 & Oct-12

Hatyai 7 16% Mar-12

Chiang Mai 14 33% Feb-12

Chiang Rai 7 33% Oct-12

Krabi 7 25% Oct-12

Surat Thani 7 50% Sep-12

Nakhon Si Thammarat 7 50% Sep-12

Trang 7 New route Jan-12

Nakhon Phanom 7 New route Feb-12

Chiang Mai Bangkok -4 -100% Apr-12

Ubon Ratchathani 4 133% Apr-12

Total 77

Grand total 124

Source: Company data, CS estimates

New aircraft will be used on new and existing routes

14 August 2012

Asia Aviation


Despite the high growth rate, we are not overly concerned about market saturation with travellers still getting attracted to the Kingdom. Moreover, the incidence of flying in Thailand is still relatively low, where less than 36% of people take a return flight each year versus 61% in Malaysia.

Figure 28: Annual round trip flight per capita in Asean

134%

61%

36%12% 10% 3%5%9%

382%

-

0.25

0.50

0.75

1.00

1.25

1.50

Sin

ga

po

re

Bru

ne

i

Ma

lays

ia

Th

aila

nd

Ph

ilip

ine

s

Ind

on

esi

a

Ca

mb

od

ia

Vie

tna

m

La

os

Source: SAP Group

Moreover, TAA had set a precedent of profitably adding planes when its fleet saw a 20% CAGR between end-2004 and 2011. At the same time, TAA can take advantage of the experience of its partner, AirAsia Berhad, whose fleet saw a 23% CAGR over the same period.

Figure 29: TAA fleet growth in 2004–11 Figure 30: AAB fleet growth in 2004–11

6

9

12

1516

2019

22

0

5

10

15

20

25

2004 2005 2006 2007 2008 2009 2010 2011

20% CAG R6

9

12

1516

2019

22

0

5

10

15

20

25

2004 2005 2006 2007 2008 2009 2010 2011

20% CAG R

13

2326

3944

4852

55

0

10

20

30

40

50

60

2004 2005 2006 2007 2008 2009 2010 2011

23% CAGR13

2326

3944

4852

55

0

10

20

30

40

50

60

2004 2005 2006 2007 2008 2009 2010 2011

23% CAGR

Source: Company data Source: Company data

23% traffic CAGR We expect Thai AirAsia’s passenger traffic to clock a 23% CAGR between FY11 and FY14, as shown in Figure 31. This growth, in our view, will be driven primarily by the 20% growth in TAA’s fleet over the same period. Moreover, TAA’s traffic growth will also get a boost from higher load factors. We expect the company to raise its seat load factor from 80% in FY11 to 82% in FY12–14E.

Figure 31: Thai AirAsia’s growth assumptions 2009 2010 2011 2012E 2013E 2014E

Pax traffic (mn) 5.0 5.7 6.9 8.9 10.9 12.9

Growth (%) 14.1 20.3 29.2 22.4 18.3

Seat capacity (mn) 6.6 7.3 8.6 10.8 13.2 15.7

Growth (%) 10.7 17.3 26.3 22.4 18.3

Load factor (%) 75.8 78.1 80.1 82.0 82.0 82.0


Only 36% of Thais take a return flight each year

TAA passenger traffic to see a 23% CAGR between FY11 and FY14E

14 August 2012

Asia Aviation


This is in line with AirAsia Group’s publicly stated aim to raise its load factors. At the Credit Suisse Asia Investment Conference 2012 (AIC 2012), as highlighted in CS Asian Daily dated 19 March 2012, Notes from the AIC: Management plans for 2012, AirAsia Berhad’s management said that the group is aiming to raise its load factors in 2012 to 82%.

Figure 32: A comparison of LCC load factors

70%

75%

80%

85%

90%

AAV AirAsia Berhad Tiger Cebu Pacific RyanAir EasyJet

FY10 FY11


As a group, AirAsia’s load factors are relatively low than those of its LCC peers. In 2010–11 (Figure 32), AirAsia Group reported load factors of 78–80%, compared with its peers’ 83–87%. We estimate that a 1 pp increase in load factors would increase our FY12–14 net profit forecast by 7%.

Unique routes Thai AirAsia is the only LCC in Thailand that has hubs outside Bangkok. Through its hubs in Phuket and Chiang Mai, international travellers can bypass Bangkok and fly directly to their final destinations, on routes such as Phuket–Hong Kong and Chiang Mai–Singapore.

Figure 33: Thai AirAsia’s unique routes


TAA aims to raise its FY12E load factors to 82%

If load factor rises by 1 ppt TAA’s net profits would increase by 7%

TAA is the only Thai LCC to operate a hub outside of Bangkok

14 August 2012

Asia Aviation


By leveraging its dynamic ticket pricing model and low-cost base, LCCs can also generate demand by creating unique routes that are uneconomical for full-service carriers (FSCs). For example, Bandung, Indonesia, has opened up to become a shopping haven for Asean travellers because of the direct flights to the city. This is a small, almost purely leisure market that is economical only for the airlines operating on a LCC model.

Through its secondary hubs, as shown above, TAA has been able to create demand on unique routes. To date, the company is the sole airline operating on four unique routes: Chiang Mai–Hatyai, Phuket–Bali, Phuket–Ubon Ratchathani, and Phuket–Udon Thani routes.

Thailand: Window into India, China and Indo-China Thailand is an excellent gateway into the Indo-Chinese economies of Vietnam, Cambodia and Laos. As shown below, the major Indo-Chinese cities are within a two-hour flight radius of Bangkok. This is ideal for Thai AirAsia, as the relatively short duration (vs four hours) allows TAA to have more frequencies on these routes. Moreover, the local aviation sector in Indo-China is still underdeveloped, thus connectivity to international destinations is relatively limited. This creates a void that could be filled by the likes of TAA.

Figure 34: Flying time from Bangkok, Thailand to key Indo-China destinations Destination Duration

Hanoi, Vietnam 1 hour 50 minutes

Ho Chi Mihn City, Vietnam 1 hour 30 minutes

Da Nang, Vietnam 1 hour 20 minutes

Phnom Penh, Cambodia 1 hour 10 minutes

Siem Reap, Cambodia 1 hour 10 minutes

Luang Prabang, Laos 2 hours

Source: AirAsia.Com, Bloomberg.

More importantly, in our view, Thailand is an excellent launch pad for flights into India and China. As shown below, most of India and China fall within the four-hour flight time of Bangkok. Therefore, TAA is strategically located to tap into outbound travel markets of both these economies, in particular the growth of outbound tourism from China. According to the World Tourism Organisation (UNWTO), China is now one of the top three spenders on international tourism and has the fastest-growing outbound tourist spending in the world. To this end, TAA plans to mount daily flights to three new destinations in China in 2012: Bangkok-Chongqing, Bangkok-Shantou and Bangkok-Chengdu.

Figure 35: Flight radius from Bangkok

Source: SAP Group

TAA operates four unique routes

Thailand is a gateway into Indo-China, India and China

China and India are within a four-hour flight radius from Bangkok

14 August 2012

Asia Aviation


Average fare and ancillary income outlook We expect Thai AirAsia to raise its FY12-14 load factor by 2 pp to 82%, mainly by stimulating demand through lower fares. Thus, we expect Thai AirAsia’s total revenue per pax, which includes the average seat fare plus average ancillary spend per pax, to see a modest 1% CAGR between 2011A and 2014E. As shown in the following table, this will be driven mainly by growth in the average ancillary income spend per pax of between 2.5% and 5%. This represents a 4% CAGR versus our modest expectation of a 0.6% CAGR in the seat fare, including fuel surcharge.

Figure 36: TAA fare and ancillary assumptions 2009A 2010A 2011A 2012E 2013E 2014E

(Bt)

Average seat fare* 1,516 1,799 1,895 1,909 1,919 1,927 Av. ancillary spend per pax 179 296 383 392 412 433 Total revenue per pax 1,695 2,094 2,278 2,301 2,331 2,360

Growth (%) Average fare 18.6 5.4 0.7 0.5 0.4 Av. ancillary spend per pax 65.5 29.5 2.5 5.0 5.0 Total revenue per pax 23.5 8.8 1.0 1.3 1.2

Source: Company data, Credit Suisse estimates * inc. charter flights, exc fuel surcharge

Ancillary income

TAA’s ancillary income is still relatively low because TAA only had an all-Airbus fleet in 2010. Unlike the older smaller B737-400s, the A320s have larger galleys, which include ovens that allow TAA to sell hot food to its passengers. There is also more space for merchandise, which increased the product offering that boosted in-flight sales.

Figure 37: TAA’s ancillary revenue 2009 2010 2011 2012E 2013E 2014E

Ancillary revenue (Bt mn) 893 1,687 2,627 3,734 4,916 6,108

Growth (%) 88.9 55.8 42.1 31.6 24.3

Ancillary spend pax (Bt) 179 296 383 421 453 475

Growth (%) 65.5 29.5 10.0 7.5 5.0


Ancillary outlook

Despite the fast growth in recent years, TAA’s ancillary business is still relatively small. TAA’s ancillary income accounted for only 10–16% of revenue between FY09 and FY11 which is lower than its peers’. Ancillary income contribution to total revenue for Tiger Airways, RyanAir and EasyJet ranges from 20–23%.

Figure 38: TAA’s ancillary revenue as a % of revenue Figure 39: Ancillary income contribution to total revenue

9.6%

13.9%

16.3%

0%

3%

6%

9%

12%

15%

18%

FY09 FY10 FY11

0%

5%

10%

15%

20%

25%

AAV AirAsia Tiger CebuPacific *

RyanAir EasyJet

FY10 FY11

Source: Company data Source: Company data. * includes cargo

Revenue/ASK growth to be driven by ancillary income

The A320 has a bigger galley, which increased the product offering to passengers

Still room for ancillary income to grow

14 August 2012

Asia Aviation


As a group, AirAsia aims to raise its ancillary income contribution to 25% of revenue. To reach 25% of total revenue by FY14, TAA’s ancillary income per pax needs to see a CAGR of 20% compared with our forecast of 6%. This implies an average ancillary spend of between Bt454 and Bt656, which is 10–45% above our current forecast. If these ancillary spend levels are achieved, we would have to raise our FY12–14 net profit forecast by 13–52%.

Total revenue: Sensitivity analysis

We estimate that a Bt10 increase in total revenue per pax, either through higher seat fare or ancillary spend, will raise our FY12–14 net profit forecast by 2.5–2.6%. Conversely, a Bt10 reduction would see a 2.5-2.6% fall in our net profit forecast over the same period.

A Bt10 increase in total revenue increases net profit by 3%

14 August 2012

Asia Aviation


Valuation: In line with peers We have used a combination of EV/EBITDAR and EV/CMFV as the primary valuation methodologies for AAV. We are using an adjusted mid-cycle EV/EBITDAR multiple of 8x and an EV/CFMV of 260%. Our target price of Bt4.60 is based on the average between adjusted EV/EBITDAR and EV/CFMV. This implies 33% potential upside to the stock. Thus, we initiate coverage on the stock with an OUTPERFORM rating. Note, that in our view, Price to Book (P/B) is inappropriate given the company’s asset light base, due to its heavy reliance on off-balance sheet financing for its aircraft.

Adjusted EV/EBITDAR LCC stocks under Credit Suisse coverage trade at an adjusted EV/EBITDAR range of 3–27x, as shown below. Excluding Tiger Airways, which is in the midst of rebuilding its franchise in Australia, the LCC sector trades at an average EV/EBITDAR of 6.3x in CY12E and 5.2x in CY13E.

Figure 40: LCC sector EV/EBITDAR 2012E Figure 41: LCC sector EV/EBITDAR 2013E

3.8x

5.2x 5.6x 6.1x

7.4x7.8x 8.0x

27.6x

0x

2x

4x

6x

8x

10x

12x

easy

Jet

AAV

Rya

nair

Gol

Cop

a

AirA

sia

Ceb

u

Tige

r Air

6.3x Average EV/EBITDAR (ex-Tiger)

3.4x

4.4x

4.9x 5.1x 6.2x6.7x 6.8x

10.5x

0x

2x

4x

6x

8x

10x

12x

easy

Jet

AAV

Rya

nair

Gol

Ceb

u

Cop

a

AirA

sia

Tige

r Air

5.3x Average EV/EBITDAR (ex-Tiger)

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

AAV’s valuations based on EV/EBITDAR

In our view, the use of a simple sector average FY12E EV/EBITDAR of 6.3x is not the most appropriate metric, given the differing circumstances of each airline. For instance, LCCs such as EasyJet are operating in ex-growth markets, while Tiger Airways is in a rebuilding phase after the grounding of its Australian fleet in 2H 2011. In our view, the closest comparison and proxy to AAV is its partner, AirAsia Berhad. AAV shares with AirAsia Berhad not only a common brand name, but also the same business model and pedigree.

AirAsia Berhad has traded at an average FY12E EV/EBITDAR of 7.7x, as shown in Figure 42, since January 2011. Moreover, in our view, AAV should trade at a premium to the sector, given that AAV is at an early point of its growth cycle. If one looks back at AirAsia Berhad and Cebu Pacific at this stage in their growth cycles, the valuation ranged at 8–12x and 7–9x EV/EBITDAR, respectively. We are using the mid-range growth cycle EV/EBITDAR multiple of 8x to value AAV.

We use a combination of EV/EBITDAR and EV/CFMV to value AAV

Sector trades at 6.3x EV/EBITDAR in CY12E

Comparison with AAB is more appropriate

AAB has traded at an average EV/EBITDAR of 7.7x since Jan-2011

14 August 2012

Asia Aviation


Figure 42: AirAsia’s EV/EBITDAR band (2011–12)

6.0 x

6.5 x

7.0 x

7.5 x

8.0 x

8.5 x

9.0 x

Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12

Average EV/EBITDAR of 7.7x


Using an FY12E EV/EBITDAR multiple of 8.0x, we derive a value of Bt4.0 for AAV based on its 55% stake in TAA. As shown on Figure 43, this is based on FY12E EBITDAR of Bt6.7 bn. To derive FY12 net debt of Bt18.2 bn of net debt, we have added the capitalised aircraft leases to the forecast net cash position of Bt5.2 bn (including Bt 2.7bn IPO proceeds). At 7.5x the lease payments, this equals to Bt23.5 bn

Figure 43: AAV’s target price based on 8x EV/EBITDAR EV/EBITDAR multiple (x) 8

Net Debt (Bt mn) 18,286

EBITDAR (Bt mn) 6,670

Enterprise Value (EV: Bt mn) = [(EV/EBITDAR Multiple) x EBITDAR]- Net Debt

= (8 x 6,670) – 18,286

35,077

AAV stake (%) 55%

Value of AA stake (Bt mn) 19,292

No of shares (mn) 4,850

Value per AAV share (Bt) 4.0


Figure 44: AAV’s target price based on differing EV/EBITDAR multiples EV/EBITDAR EBITDAR EBITDAR x Net Debt Enterprise Equity EV per AAV

multiple (x) (THB mn) multiple (THB mn) Value (THB mn) Stake Value share

4.0 6,670 26,681 18,286 8,396 55% 4,618 1.0

5.0 6,670 33,352 18,286 15,066 55% 8,286 1.7

6.0 6,670 40,022 18,286 21,736 55% 11,955 2.5

7.0 6,670 46,692 18,286 28,407 55% 15,624 3.2

7.5 6,670 50,027 18,286 31,742 55% 17,458 3.6

8.0 6,670 53,363 18,286 35,077 55% 19,292 4.0

8.5 6,670 56,698 18,286 38,412 55% 21,127 4.4

9.0 6,670 60,033 18,286 41,747 55% 22,961 4.7


Using a mid-range growth cycle EV/EBITDAR multiple of 8x to value AAV…

… to derive a value of Bt4.0.

14 August 2012

Asia Aviation


Adjusted EV/CMFV To more accurately capture the intrinsic value of the airline’s assets, we look at the company’s value based on its adjusted EV/CMFV (current fleet market value). Based on data from Ascend, TAA’s fleet has a market value (CFMV) of US$818 mn (Bt24.9 bn). ROIC is calculated using the current fleet value, adding back the accumulated depreciation to get a proxy for the capital that has been invested in the company, or would have been if the aircraft was not leased.

Figure 45: AAV’s ROIC calculation (Bt mn) FY09 FY10 FY11 2012 2013 2014

ROIC = EBITDAR / (CFMV + Acc Depreciation)

CFMV 24,934 24,934 24,934 29,789 73,490 103,837

Acc depreciation 182 306 377 531 851 1,435

(CFMV + Acc Depreciation) 25,116 25,239 25,311 30,320 74,341 105,272

EBITDAR 1,545 4,221 4,848 6,670 7,957 9,333

ROIC 6.2% 16.7% 19.2% 22.0% 10.7% 8.9%

2011-2013 average ROIC 17.3%


When calculating the fair value, we use the three-year average ROIC to normalise for where we are in the cycle. Based on a three-year average ROIC of 17.3% and an industry average WACC of 6.7%, we believe TAA should trade at 260% of fleet value and derive a value of Bt5.20 per share, as shown below.

Figure 46: AAV’s valuation based on EV/CMFV Three-year average ROIC 17%

Airline industry average WACC 6.7%

ROIC / WACC (x) 2.6

CFMV 24,934

Target EV / CFMV (x) 2.6

Target EV 64,326

less: net debt 5,165

less Capitalised Op Lease (23,452)

plus: value of investments 0

Equity Value 46,040

AAV stake in TAA 55%

25,322

No of AAV shares 4850

Valuation (Bt) 5.2


Target price of Bt4.60 Our target price of Bt4.60 is based on the average between adjusted EV/EBITDAR and EV/CFMV, as shown below. This implies 33% potential upside to the stock. Thus, we initiate coverage on the stock with an OUTPERFORM rating.

Figure 47: Target price Fair Value Methodology Bt Weighting BT

Adjusted EV/EBITDAR 4.00 50% 2.0

EV/CMFV 5.20 50% 2.6

4.6


TAA’s fleet has a market value of Bt24.9bn.

Adjusted EV/CMFV value of Bt5.20 per share

Target price of Bt4.6 implies 33% potential upside

14 August 2012

Asia Aviation


Key risk factors Sensitive to changes in jet fuel prices

AAV is sensitive to changes in jet fuel prices, as fuel accounts for 43-44% of total operating costs between FY12E and FY14E. The company hedges around 25% of its forward quarters’ fuel requirements. The company can also pass on some of the higher fuel costs via higher ancillary charges and fuel surcharge. Note that the company is not allowed to impose a fuel surcharge on domestic routes. We estimate that a US$1/bbl increase in our average fuel cost reduces our net profit forecast by 1.7–1.8%.

Close relationship with AirAsia Berhad

AAV has a close relationship with its partner AirAsia Berhad, and relies heavily on AAB in areas such as usage of brand name, procurement and information technology. TAA’s current fleet of 24 aircraft (as of February 2012) is leased from AirAsia Berhad. There is no assurance that AAB will not reduce its shareholdings in TAA in the future. In such a scenario, TAA might lose the synergistic benefits of the relationship and in turn its competitive advantage.

Exposed to foreign exchange fluctuations

AAV has significant forex exposure in its cost structure through items such as jet fuel, maintenance and aircraft leasing costs, which are primarily denominated in USD. The company does not have a natural hedge to USD as 72% of its revenues are in THB. We estimate that 1% depreciation in THB would cause a 3% fall in our net profit forecast.

Regulatory concerns

AAV operates in a heavily regulated environment. For instance, Thai AirAsia is required to hold Air Operator Certificate (AOC) from the Thai Department of Civil Aviation (DCA) and an Air Service Licence (ASL) from the Ministry of Transport to provide air transportation services. These licences will not be automatically renewed when they expire in 2013. Landing rights and airports are also heavily regulated by the authorities.

Changes in the interpretations of the law, or introduction of new rules could have a material impact on the company. For example, if the government decides to move all LCCs to Don Muang Airport, TAA would have to comply and bear the cost (and benefits) of the move. TAA also has no control over potential changes in airport charges such as landing fees and airport taxes (PSC), which are set by the local airport regulators.

Infrastructure bottlenecks

Structural limitations of airports, particularly those in Thailand could have a negative impact on the company’s ability to increase utilisation rates, lower its aircraft turnaround time and improve on its on-time performance. This is a concern at Bangkok’s Suvarnabhumi Airport, TAA’s primary hub, which is currently operating at above 100% utilisation rates. However, this problem would be averted when Thai AirAsia moves to Bangkok’s underutilised Don Muang Airport in October 2012. We estimate that the current utilisation rate at Don Muang Airport is only 10%.

New entrants

New entrants into the Thai LCC market would increase competitive pressure on TAA and have a negative impact on the company. There could be pressure on pricing, especially if the new entrants irrationally price their tickets in an effort to gain market share. We estimate that a Bt10 decline in our fare assumption would see a 2.6-2.8% reduction in net profit.

Demand impact from outbreak, natural disasters and civil unrest

AAV is also subject to fluctuations in the business cycle due to changes in the global economic situation, which can negatively impact demand for air travel. Demand would also be impacted by events such as disease outbreaks (SARS and Bird flu), natural disasters

A US$1/bbl increase in jet fuel price would lower net profit by ~2%

Heavy reliance on AAB in areas such as brand name, procurement and IT

1% depreciation in THB would lower net profit by 3%

The airlines sector is a heavily regulated industry

Changes in regulations could be costly for AAV

Airport bottlenecks could impact operational performance

New entrants could put pressure on fares

A 1 pp rise in the load factor would increase net profit by 7%

14 August 2012

Asia Aviation


such as flooding and tsunamis, as well as geo-political risks and civil unrest. We estimate that a 1 pp increase in load factors would increase our FY12-14 net profit forecast by 7%.

However, we expect the company to respond to these events by stimulating demand through lower fares. This happened during incidences such as the SARS pandemic. Assuming no changes to the load factor, we estimate that a Bt10 decline in our fare assumption would see a 3% reduction in net profit.

A Bt10 fare reduction causes a 3% fall in net profit

14 August 2012

Asia Aviation


Appendix: Sensitivity analysis Figure 48: Sensitivity to jet fuel prices Change in Jet fuel price assumption (US$/bbl) Core net profit (Bt mn) * Change in core net profit (%)

Jet fuel price (US$/bbl) 2012E 2013E 2014E 2012E 2013E 2014E 2012E 2013E 2014E (25) 102 105 105 2,088 2,679 3,231 46% 44% 43% (20) 107 110 110 1,956 2,516 3,037 37% 35% 34% (10) 117 120 120 1,694 2,188 2,648 18% 18% 17% (5) 122 125 125 1,562 2,024 2,454 9% 9% 9% (3) 125 128 128 1,497 1,942 2,357 5% 4% 4% (1) 126 129 129 1,457 1,892 2,298 2% 2% 2% n/a 127 130 130 1,431 1,860 2,260 n/a n/a n/a 1 128 131 131 1,405 1,827 2,221 -2% -2% -2% 3 130 133 133 1,365 1,778 2,162 -5% -4% -4% 5 132 135 135 1,299 1,696 2,065 -9% -9% -9% 10 137 140 140 1,168 1,532 1,871 -18% -18% -17% 20 147 150 150 905 1,204 1,483 -37% -35% -34% 25 152 155 155 774 1,040 1,288 -46% -44% -43%

Source: Credit Suisse estimates, * excludes revaluation gains of Bt 14.7 bn in FY12

Figure 49: Sensitivity of net profits to changes in total revenue per pax Change in total Total revenue per pax (Bt) Core net profit (Bt mn) * Change in core net profit (%) revenue per pax (Bt) 2012E 2013E 2014E 2012E 2013E 2014E 2012E 2013E 2014E (100) 2,217 2,245 2,271 1,052 1,381 1,692 -26% -26% -25% (50) 2,267 2,295 2,321 1,241 1,620 1,976 -13% -13% -13% (25) 2,292 2,320 2,346 1,336 1,740 2,118 -7% -6% -6% (20) 2,297 2,325 2,351 1,355 1,764 2,146 -5% -5% -5% (10) 2,307 2,335 2,361 1,393 1,812 2,203 -3% -3% -3% (5) 2,312 2,340 2,366 1,412 1,836 2,231 -1% -1% -1% n/a 2,317 2,345 2,371 1,431 1,860 2,260 n/a n/a n/a 5 2,322 2,350 2,376 1,450 1,883 2,288 1% 1% 1% 10 2,327 2,355 2,381 1,469 1,907 2,316 3% 3% 3% 20 2,337 2,365 2,391 1,507 1,955 2,373 5% 5% 5% 25 2,342 2,370 2,396 1,526 1,979 2,401 7% 6% 6% 50 2,367 2,395 2,421 1,620 2,099 2,543 13% 13% 13% 100 2,417 2,445 2,471 1,810 2,339 2,827 26% 26% 25%

Source: Credit Suisse estimates * Excludes revaluation gains of Bt14.7 bn in FY12

Figure 50: Sensitivity of net profits to changes in load factor Change in Load factor (%) Core net profit (Bt mn) * Change in core net profit (%)

load factor 2012E 2013E 2014E 2012E 2013E 2014E 2012E 2013E 2014E -3.0% 79% 79% 79% 1,110 1,449 1,767 -22% -22% -22% -2.0% 80% 80% 80% 1,217 1,586 1,931 -15% -15% -15% -1.0% 81% 81% 81% 1,324 1,723 2,096 -7% -7% -7% -0.5% 82% 82% 82% 1,377 1,791 2,178 -4% -4% -4% n/a 82% 82% 82% 1,431 1,860 2,260 n/a n/a n/a 0.5% 83% 83% 83% 1,484 1,928 2,342 4% 4% 4% 1.0% 83% 83% 83% 1,538 1,997 2,424 7% 7% 7% 2.0% 84% 84% 84% 1,645 2,133 2,588 15% 15% 15% 3.0% 85% 85% 85% 1,752 2,270 2,752 22% 22% 22%

Source: Credit Suisse estimates *Excludes revaluation gains of Bt 14.7 bn in FY12

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Appendix: TAA’s management team Mr Tassapon Bijleveld – Chief Executive Officer

Mr Bijleveld has more than 12 years of experience in the consumer products industry, having worked in various countries in Southeast Asia and Indochina for two Fortune 500 companies—Adams (Thailand), a division of Warner Lambert, and Monsanto (Thailand). Prior to joining TAA in 2004, he was Managing Director of Warner Music (Thailand). Mr Bijleveld holds a Master’s degree in Marketing from Thammasat University.

Mr Pornanan Gerdprasert – Chief Financial Officer

Mr Pornanan Gerdprasert was the Finance & Accounting Director of Teleinfo Media Co, prior to joining Thai AirAsia in 2004. Mr Gerdprasert holds a Bachelor’s degree in accounting, a higher diploma in Auditing and a Master’s in accounting from Thammasat University

Mr Tanapat Ngamplang – Director of Operations

Mr Ngamplang was Director of Flight Operations for Phuket Airline, before he joined AirAsia. He holds an electrical engineering degree from Royal Thai Air Force Academy and MBA from Kirk University.

Mr Preechaya Rasametanin – Director of Engineering

Prior to joining Thai AirAsia in 2004, he was the Product Support Manager for Goodyear Thailand. Mr Rasametanin holds a Bachelor’s degree in Science, majoring in mechanical engineering, from the Royal Thai Air Force Academy.

Mr M.L. Bovornovadep Devakula – Director of Business Development

With TAA since 2004, Mr Devakula has held key positions including Secretary to the Chairman of Shin Corporation and Secretary to the Deputy Prime Minister of Thailand. M.L. Devakula holds a Bachelor’s degree in Science from the State University of New York.

Mr Santisuk Klongchaiya – Director of Commercial

Prior to joining Thai AirAsia in 2007, he was General Manager of Warner Music (Thailand). Mr Klongchaiya holds a Master’s of Science degree, majoring in marketing, from Thammasat University.

Mr Vorakit Techapalokul – Director of People

Mr Techapalokul was the Business Unit Human Resources Manager of Nestle Thai, prior to joining TAA. He holds a Master’s degree from National Institution of Development Administration.

Mr Natthawach Siriwongsal – Director of Commercial

Prior to joining TAA in 2011, Mr Natthawach Siriwongsal headed marketing & branding for MNCs in Thailand in LG Mobile (2009–11), Pepsi-Cola (2007–09) and Nestle Thai (2001–07). Mr Siriwongsal holds a Master’s degree in marketing from Thammasat University.

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Appendix: Key financial data Figure 51: AAV’s P&L Year-end 31 Dec (Bt mn) FY10A FY11A FY12E FY13E FY14E

Passenger seat sales 10,260 13,008 16,931 20,841 24,766

Ancillary 1,687 2,627 3,480 4,474 5,559

Others 152 523 648 648 648

Revenue 12,099 16,158 21,059 25,963 30,973

EBITDAR 4,221 4,848 6,670 7,957 9,333

EBITDA 2,021 2,120 3,543 4,630 6,006

EBIT 1,897 2,048 3,390 4,310 5,423

Forex gain 357 155 0 0 0

Net interest income (243) (184) (36) (83) (287)

Associates 0 0 0 0 0

Exceptional Items 0 0 14,690 0 0

Profit before tax 2,011 2,020 18,043 4,226 5,135

Income tax 0 0 (671) (845) (1,027)

Minority interest (985) (990) (8,107) (1,521) (1,849)

Net Profit 1,026 1,030 9,265 1,860 2,260


Figure 52: AAV’s cash flow statement Year-end 31 Dec (Bt mn) FY10A FY11A FY12E FY13E FY14E

Pre-tax profit 2,011 2,020 18,043 4,226 5,135

Depreciation 123 13 154 321 583

Change in working capital (2,523) (1,621) 995 687 702

Taxes paid 0 0 (671) (845) (1,027)

Others 73 110 (14,726) (83) (287)

Cash flow from operations (316) 521 3,795 4,306 5,107

Capex (109) (82) (2,203) (6,448) (5,387)

Others 75 113 36 83 287

Cash flow in investing activities (33) 31 (2,166) (6,365) (5,100)

Net proceeds from loans 200 299 (499) 4,458 3,715

Others (1) (41) 2,677 0 0

Cash flow from financing 199 258 2,178 4,458 3,715

Net change in cash (151) 810 3,806 2,398 3,722


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Figure 53: AAV’s balance sheet Year-end 31 Dec (Bt mn) FY10A FY11A FY12E FY13E FY14E

Non-current assets 808 953 17,693 23,820 28,624

Cash 508 1,360 5,166 7,564 11,286

Others 3,551 1,477 1,892 2,205 2,526

Current assets 4,058 2,836 7,058 9,770 13,812

Short term loans (secured) 200 486 0 0 0

Other liabilities 7,168 3,745 5,154 6,155 7,178

Current liabilities 7,368 4,231 5,154 6,155 7,178

Long term loans 0 13 0 4,458 8,173

Others 1 92 92 92 92

Non-current liabilities 1 105 92 4,550 8,265

Net assets (2,503) (546) 19,504 22,885 26,993

Share capital 410 410 485 485 485

Reserves (3,815) (2,848) 9,020 10,880 13,139

Shareholders' equity (3,405) (2,438) 9,505 11,365 13,624

Minority interest 902 1,892 9,999 11,520 13,369

(2,503) (546) 19,504 22,885 26,993


Figure 54: Key financial ratios, margins and growth rates FY10A FY11A FY12E FY13E FY14E

Key assumptions

Pax traffic growth (%) 14.1% 20.3% 29.2% 22.4% 14.1%

ASK growth (%) 16.8% 21.0% 26.3% 22.4% 14.1%

Load Factor (%) 78.1% 80.1% 82.0% 82.0% 82.0%

Rev / ASK growth (%) 11.6% 10.4% 3.2% 0.7% 2.2%

Av fare growth (%) 18.6% 5.4% 0.7% 0.5% 2.0%

Av ancillary growth (%) 65.5% 29.5% 2.5% 5.0% 5.0%

Av fuel cost (US$/bbl) 88 124 127 130 130

Total Fleet at year end 19 22 27 33 38

AirAsia stake in TAA (%) 49% 49% 47% 45% 45%

Margins FY10A FY11 FY12 FY13 FY14

EBIT (%) 15.7% 12.7% 16.1% 16.6% 17.5%

EBITDA (%) 16.7% 13.1% 16.8% 17.8% 19.4%

EBITDAR (%) 34.9% 30.0% 31.7% 30.6% 30.1%

Pre-tax (%) 16.6% 12.5% 85.7% 16.3% 16.6%

Growth rates FY10A FY11 FY12 FY13 FY14

EBIT (%) -733% 8% 65.5% 27.1% 25.8%

EBITDA (%) -1305% 5% 67.2% 30.7% 29.7%

EBITDAR (%) 173% 15% 37.6% 19.3% 17.3%

Pre-tax (%) -1279% 0% 793.2% -76.6% 21.5%


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Companies Mentioned (Price as of 10 Aug 12) Asiana Airlines (020560.KS, W7,600, OUTPERFORM, TP W8,010) Cathay Pacific (0293.HK, HK$12.72, NEUTRAL, TP HK$12.10) Cebu Pacific, Inc. (CEB.PS, P68.00, UNDERPERFORM, TP P59.00) China Airlines (2610.TW, NT$12.40, OUTPERFORM, TP NT$13.70) China Eastern Airlines (0670.HK, HK$2.63, OUTPERFORM [V], TP HK$3.50) China Southern Airlines (1055.HK, HK$3.79, UNDERPERFORM [V], TP HK$3.90) Copa Holdings (CPA, $76.66, OUTPERFORM, TP $100.00) easyJet (EZJ.L, 556 p, OUTPERFORM, TP 665.00 p) EVA Air (2618.TW, NT$17.50, OUTPERFORM, TP NT$26.70) Gol (GOLL4, R$10.76, NEUTRAL [V], TP R$12.00) Korean Airlines (003490.KS, W49,200, OUTPERFORM, TP W76,550) Malaysia Airlines (MASM.KL, RM1.03, UNDERPERFORM, TP RM0.90) Qantas Airways (QAN.AX, A$1.16, OUTPERFORM, TP A$1.75) Ryanair (RYA.I, Eu4.04, OUTPERFORM, TP Eu4.75) Singapore Airlines (SIAL.SI, S$10.86, NEUTRAL, TP S$11.85) Thai Airways International (THAI.BK, Bt20.00, NEUTRAL, TP Bt22.50) Tiger Airways (TAHL.SI, S$0.70, OUTPERFORM, TP S$0.75) Virgin Australia Holdings (VAH.AX, A$0.44, OUTPERFORM, TP A$0.50)

Disclosure Appendix Important Global Disclosures I, Annuar Aziz, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.

See the Companies Mentioned section for full company names. 3-Year Price, Target Price and Rating Change History Chart for AAV.BK AAV.BK Closing

Price Target

Price

Initiation/ Date (Bt) (Bt) Rating Assumption

0

0.5

1

1.5

2

2.5

3

3.5

Closing Price Target Price Initiation/Assumption Rating

Bt

O=Outperform; N=Neutral; U=Underperform; R=Restricted; NR=Not Rated; NC=Not Covered

The analyst(s) responsible for preparing this research report received compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities. Analysts’ stock ratings are defined as follows: Outperform (O): The stock’s total return is expected to outperform the relevant benchmark* by at least 10-15% (or more, depending on perceived risk) over the next 12 months. Neutral (N): The stock’s total return is expected to be in line with the relevant benchmark* (range of ±10-15%) over the next 12 months. Underperform (U): The stock’s total return is expected to underperform the relevant benchmark* by 10-15% or more over the next 12 months. *Relevant benchmark by region: As of 29th May 2009, Australia, New Zealand, U.S. and Canadian ratings are based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe**, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. Some U.S. and Canadian ratings may fall outside the absolute total return ranges defined above, depending on market conditions and industry factors. For Latin American, Japanese, and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; for European stocks, ratings are based on a stock’s total return relative to the analyst's coverage universe**. For Australian and New Zealand stocks, 12-month rolling yield is incorporated in the absolute total return calculation and a 15% and a 7.5% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholds replace the +10-15% and -10-15% levels in the Neutral stock rating definition, respectively.

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**An analyst's coverage universe consists of all companies covered by the analyst within the relevant sector. Restricted (R): In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Volatility Indicator [V]: A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.

Analysts’ coverage universe weightings are distinct from analysts’ stock ratings and are based on the expected performance of an analyst’s coverage universe* versus the relevant broad market benchmark**: Overweight: Industry expected to outperform the relevant broad market benchmark over the next 12 months. Market Weight: Industry expected to perform in-line with the relevant broad market benchmark over the next 12 months. Underweight: Industry expected to underperform the relevant broad market benchmark over the next 12 months. *An analyst’s coverage universe consists of all companies covered by the analyst within the relevant sector. **The broad market benchmark is based on the expected return of the local market index (e.g., the S&P 500 in the U.S.) over the next 12 months. Credit Suisse’s distribution of stock ratings (and banking clients) is:

Global Ratings Distribution Outperform/Buy* 46% (59% banking clients) Neutral/Hold* 42% (55% banking clients) Underperform/Sell* 10% (48% banking clients) Restricted 2%

*For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors.

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See the Companies Mentioned section for full company names. Price Target: (12 months) for (AAV.BK) Method: Our target price of Bt4.6 for Asia Aviations is the average of its (i) adjusted 2012 EV/EBITDAR(enterprise value/earnings before interest, taxes, depreciation, amortization, and rent) of 8x and (ii) adjusted EV/Current Fleet Market Value (EV/CFMV) ratiio of 260% its fleet value of THB25 bn. Risks: Risks to our Bt4.6 target price for Asia Aviation (AAV) are airlines are generally exposed to risks from rising fuel prices, competition, uncertain demand and their combined impact on fares and load factors, as well as labour unrest and interest rate exposure. AAV is also sensitive to changes in currency, with over half its operating expenses in US$. AAV is also heavily reliant on its partner AirAsia Berhad, in areas such as procurement & branding. Other risks include: disease outbreak, natural disasters, geo-political risk and risk of new entrants. Please refer to the firm's disclosure website at www.credit-suisse.com/researchdisclosures for the definitions of abbreviations typically used in the target price method and risk sections.

See the Companies Mentioned section for full company names. The subject company (AAV.BK) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse. Credit Suisse provided investment banking services to the subject company (AAV.BK) within the past 12 months. Credit Suisse has managed or co-managed a public offering of securities for the subject company (AAV.BK) within the past 12 months. Credit Suisse has received investment banking related compensation from the subject company (AAV.BK) within the past 12 months. Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (AAV.BK) within the next 3 months. Important Regional Disclosures Singapore recipients should contact a Singapore financial adviser for any matters arising from this research report.

The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (AAV.BK) within the past 12 months.

Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares. Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report.

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Credit Suisse Securities (Europe) Limited acts as broker to EZJ.L, QAN.AX.

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As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report.

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For Thai listed companies mentioned in this report, the independent 2010 Corporate Governance Report survey results published by the Thai Institute of Directors Association are being disclosed pursuant to the policy of the Office of the Securities and Exchange Commission: Airports of Thailand(Excellent), Asia Aviation(), Thai Airways International(Very Good). Taiwanese Disclosures: This research report is for reference only. Investors should carefully consider their own investment risk. Investment results are the responsibility of the individual investor. Reports may not be reprinted without permission of CS. Reports written by Taiwan-based analysts on non-Taiwan listed companies are not considered recommendations to buy or sell securities under Taiwan Stock Exchange Operational Regulations Governing Securities Firms Recommending Trades in Securities to Customers. To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. • Annuar Aziz, non-U.S. analyst, is a research analyst employed by Credit Suisse Securities (Malaysia) Sdn Bhd.. For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at www.credit-suisse.com/researchdisclosures or call +1 (877) 291-2683. Disclaimers continue on next page.

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Asia Aviation - Credit Suisse

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