Central Plaza Hotel (CENTEL TB) Thanachart Securities. Top hotel play. BUY TP: Bt SEPTEMBER Initiate coverage with a BUY

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1 BUY TP: Bt SEPTEMBER 213 Initiation Upside : 29.4% Central Plaza Hotel (CENTEL TB) Top hotel play Thanachart Securities We initiate coverage on CENTEL with a BUY call as we see it as the best hotel play to enjoy the boom in Thai tourism with risks being balanced via the healthy cash flows from its food business. We forecast a strong EPS CAGR of 19% with upside potential coming from hotel expansions and new food brands. Initiate coverage with a BUY We initiate with a BUY call on CENTEL for four key reasons. 1) We forecast CENTEL to offer a strong EPS CAGR of 19% from its two core drivers hotel (6% of our 213F net profit) and food (4%) businesses. 2) We like CENTEL s strategy to move into the high-growth economy-hotel segment under its own brand versus its existing portfolio of mainly four-star hotels. 3) Its growing food business continues to generate healthy cash flows, helping to cushion risk from the hotel side. 4) CENTEL is trading at a 23% discount to our 214 SOTP DCF TP of Bt44. and at a 9% discount to our SOTP NAV of Bt37.5. Beneficiary of tourism boom We expect CENTEL to deliver a solid hotel performance in 213 with strong momentum continuing into 214. Its domestic hotel portfolio generates 85% of its total hotel business and CENTEL is therefore a beneficiary of Thailand s tourism boom. With 21% y-y tourist arrivals growth in Thailand in 1H13, CENTEL posted a record performance with occupancy at a high 79%, and a 15% rise in average daily room rate (ADR) in 1H13. Our 213 hotel assumptions are for occupancy to increase from 7% in 212 to 75% (low season in 2Q-3Q) and ADR to rise by 15% versus only 2% in 212. We expect all hotels to show improved performances, particularly those in Pattaya, Bangkok and the Maldives. Resilient with food growth story CENTEL s key food brands are KFC, Mister Donut, Auntie Anne s and Ootoya (together 84% of total food revenues). Performances of those brands, except for Ootoya which was acquired in 211, have been resilient, showing 4-7% same-store sales growth (SSSG) despite softening food consumption in 1H13. Our 213 SSSG and total store sales growth (TSSG) assumptions are 3% and 16% versus 3% and 13% in 1H13. We see its food growth story coming from outlet expansions of existing brands assuming a 1-12% capacity rise p.a. and 3-4% SSSG p.a., largely tracking GDP growth. CENTEL also plans to launch two to three new food brands p.a. via franchises or acquisitions which we leave as upside. Our top hotel sector pick We like CENTEL the best in the hotel sector although we don t expect it to offer the highest earnings growth (Exhibit 25). This is because we see it as offering the best balance of growth versus its risk profile. Its existing hotel business is also the 3-year-old, well-established company-owned brand, Centara, and we expect its next move with a new brand, Cosi, into the economy segment to also be a success. CENTEL s capex cycle is well covered by its healthy cash flow and REITs financing. COMPANY VALUATION KALVALEE THONGSOMAUNG kalvalee.tho@thanachartsec.co.th Y/E Dec (Bt m) 212A 213F 214F 215F Sales 14,54 18,256 2,18 21,799 Net profit 1,581 1,677 2,115 2,384 Consensus NP 1,571 1,984 2,435 Diff frm cons (%) (2.1) Norm profit 1,123 1,677 2,115 2,384 Norm EPS (Bt) Norm EPS grw (%) Norm PE (x) EV/EBITDA (x) P/BV (x) Div yield (%) ROE (%) Net D/E (%) PRICE PERFORMANCE (Bt/shr) CENTEL 45 Rel to SET Index (2) Sep - 12 Jan- 13 M ay- 13 Sep - 13 COMPANY INFORMATION Price as of 1-Sep-13 (Bt) 34. Market Cap (US$ m) 1,427.9 Listed Shares (m shares) 1,35. Free Float (%) 45.5 Avg Daily Turnover (US$ m) M Price H/L (Bt) 41.8/16.4 Sector Tourism Major Shareholder Chirathivat family 64% Sources: Bloomberg, Company data, Thanachart estimates (%) This report is prepared by Thanachart Securities. Please contact our salesperson for authorisation. Please see the important notice on the back page

2 Initiate coverage with a BUY We initiate coverage on Central Plaza Hotel Pcl (CENTEL TB) with a BUY rating and a DCF-derived SOTP-based 12-month TP of Bt44./share for the following reasons: We forecast a 19% EPS CAGR in We like its balanced business model Moving into the highergrowth, lower-risk economy-hotel segment Food business provides consistent growth Trades at a 23% discount to our DCF TP and a 9% discount to our NAV estimate First, we forecast CENTEL to offer strong EPS CAGR growth of 19% from its two core businesses its hotel business which we expect to contribute 6% of our 213F net profit and the food business at 4%. We see the hotel business growth driver as being much better performances in occupancy and average daily room rate (ADR) of hotels in Thailand and abroad while that for the food business is outlet expansion across Thailand. Secondly, we like CENTEL s balanced business model between hotel and food. This is from the angles of diversification of business risks, earnings and cash flow. Its defensive and consistent growth food business provides CENTEL with stability while we see the hotel business, which carries a little more risk due to the seasonality factor, offering a more exciting growth outlook. Thirdly, we like CENTEL s strategy to move into the high-growth economy hotel segment under its own brand Cosi on top of its existing portfolio of mainly four-star hotels. Two Cosi hotels are scheduled to be open for business in 215 one investment hotel and one managed hotel. We have yet to factor the revenue from Cosi hotels into our numbers as we see the contribution as only being small in 215. We leave it as upside to our forecast. Fourthly, CENTEL s food business has continued to grow well and it generates healthy cash flows, helping to cushion the risk from the seasonal effect of the hotel side. As CENTEL s food brands are generally affordable, its performance has been strong with same-store sales growth (SSSG) of 6-14% during and 3% in 1H13. Note that CENTEL s key food brands are KFC, Mister Donut, Auntie Anne s and Ootoya with a combined revenue contribution of 84% of its food business. Lastly, CENTEL is trading at a 23% discount to our target price of Bt44. and a 9% discount to our NAV estimate of Bt37.5. However, we believe our DCF calculation better captures its improving hotel performance. Trades at discounts to our DCF and NAV valuations We consider our DCF as conservative Our 12-month target price of Bt44. is derived using a DCF methodology with the SOTP of its hotel and food businesses. We have not yet factored in unannounced new hotel projects or new food franchises, leaving them as upside to our TP. Ex 1: DCF-based Valuation Business units (Bt m) Valuation based on Hotel 43,156 DCF Restaurant 27,455 DCF Enterprise value 7,611 Less Net debt 1,442 Less Minority interest 736 CENTEL's equity value 59,434 Issued shares 1,35 Per CENTEL share 44. THANACHART RESEARCH 2

3 Our NAV calculation comes to Bt37.5/share We have also cross-checked our DCF-derived SOTP with a NAV calculation. We base our NAV calculation on the implied capitalization rates of its listed property fund Centara Hotels & Resorts Leasehold Property Fund (CTARAF TB, not rated). To recap, CENTEL divested its Centara Grand Beach Resort Samui into CTARAF in 28 for a 3-year lease term and it holds a 25% stake in CTARAF. We use CTARAF s NAV as at end-july 213 and project 213 EBITDA to derive a capitalization rate of 6.5% for its freehold assets and 8.% for its leasehold assets in our NAV valuation. We value its freehold assets at 6% of hotel NAV with leasehold assets at 4%. We also calculate the NAVs of other hotel stocks under our coverage which we discuss in the final section of this report. Ex 2: NAV-based Valuation Business unit (Bt m) Valuation based on Hotel 51,775 Capitalization rate Restaurant 8,254 EV/EBITDA Land bank 1,8 Estimated market value Enterprise value 61,37 Less Net debt 1,442 CENTEL's equity value 5,595 Issued shares 1,35 Per CENTEL share 37.5 Well-balanced business model A well-balanced mix of hotel and food contributions with decent growth from both businesses We regard CENTEL s business model as well balanced. CENTEL has its own brands, Centara and Centara Grand, for its hotel business but it is the franchisee for its food chain businesses. We estimate its 213F profit breakdown at about 6% from the hotel business and 4% food. 213F EBITDA breakdown is around 66% hotel and 34% food while we expect EBITDA margin to be higher on the hotel side at 32% versus food at 14%. Although we see the hotel industry prospects as more exciting than food, the hotel business is a far riskier business by nature. As a capital-intensive business, bad times in the hotel business can drag down margins and cash flows significantly. Its balanced business model should help CENTEL enjoy hotel industry growth from Thailand s tourism boom with stable growth income from its food business helping to cushion earnings and also cash flow. On the sustainability of its expansion, we estimate the food EBITDA of around Bt1.2bn p.a. and rising, which should also help provide a cushion for hotel expansion. Note that its food EBITDA to food capex ratio is 1.5x while for hotel it is 2.8x. In absolute terms in 213F, we estimate food EBITDA at Bt1.2bn versus hotel EBITDA of Bt2.4bn while food capex is Bt845m versus hotel capex of Bt855m. We expect its hotel business to grow at an average of 13% during in terms of EBITDA versus the food business at 1%. We discuss the key drivers of each business in later sections of this report. THANACHART RESEARCH 3

4 Ex 3: Good Balance Between Businesses Ex 4: With Self-Sufficient Cash Flow (%) Hotel Food Revenue EBITDA Net profit EBITDA margin Hotel 32% Food 14% (Bt m) Hotel Food 3, 2,5 2,391 2, 1,5 1,232 1, EBITDA Capex EBITDA to capex Hotel 2.8x Food 1.5x Note: All figures are 213F numbers Note: All figures are 213F numbers Ex 5: Hotel Revenue Growth Outlook Stronger Than Food (Bt m) Hotel Food 24, 21, 2,18 18,256 18, 14,54 15, 54% 11,278 54% 12, 9,256 56% 9, 57% 56% 6, 46% 46% 3, 43% 44% 44% F 214F Ex 6: Same Goes For EBITDA (Bt m) Hotel Food 4,5 4,58 4, 3,623 3,5 34% 3, 2,43 2,739 34% 2,5 2, 1,865 37% 46% 1,5 52% 66% 66% 1, 64% 54% 5 48% F 214F Beneficiary of tourism boom Brand owner enjoying the tourism boom CENTEL operates its own well-recognized four-star hotel brands, Centara and Centara Grand, which it has successfully built up over the past 3 years. The company is both the owner of its hotel assets and the manager earning management fees for other Centara chain hotels both in Thailand and abroad. Currently, CENTEL owns and manages 15 hotels in Thailand (13) and the Maldives (2) while it manages 23 hotels in Thailand and abroad. Note that its hotel management income still contributes only 2% of 213F hotel revenues. We give the details of CENTEL s properties in Exhibit 7. THANACHART RESEARCH 4

5 Ex 7: CENTEL s Existing Investment Hotel Portfolio Investment hotels No. Hotels Stake Revenue Opened Properties Location No. of rooms holding contribution of hotel business in 213F 1 Centara Grand at Central Plaza Ladprao 1% 1.5% 1983 Leasehold Bangkok Centara Grand Beach Resort & Villas Hua Hin 64% 7% 1986 Leasehold Hua Hin Centara Grand Beach Resort Samui * 1% 6% 1996 Freehold Samui 22 4 Centara Grand Beach Resort & Villas Krabi 1% 7% 26 Freehold Krabi Centara Grand & Bangkok Convention Centre 1% 14% 28 Leasehold Bangkok 512 at CentralWorld 6 Centara Grand Mirage Beach Resort Pattaya 1% 18% 29 Freehold Pattaya Centara Grand Beach Resort Phuket 1% 11% 21 Freehold Phuket Centara Grand Island Resort & Spa Maldives 74% 1% 29 Leasehold Maldives Centara Villas Samui 1% 2% 1998 Freehold Samui 1 1 Centara Hat Yai 1% 2% 1995 Freehold Hat Yai Centara Mae Sot Hill Resort 1%.4% 199 Freehold Tak Centara Villas Phuket 1% 1% 1999 Freehold Phuket Centara Karon Resort Phuket 84% 6% 26 Freehold Phuket Centara Kata Resort Phuket 5%.1% 26 Freehold Phuket Centara Ras Fushi Resort & Spa Maldives 75% 5% 213 Leasehold Maldives 14 Source: Company data Note * : Manages through Centara Hotels & Resorts Leasehold Property Fund (CTARAF TB, not rated) Ex 8: CENTEL s Existing Managed Hotels Managed hotels Location No. of properties No. of rooms Thailand 18 3,57 Vietnam 2 36 Indonesia 1 39 Mauritius 1 1 Sri Lanka Source: Company data Domestic portfolio generates 85% of hotel revenues We estimate the 213 revenue contributions of company-owned hotels in Thailand and overseas at 85% and 15%, respectively. Revenue from abroad is still small but we project the proportion to rise to 2% in 217 as we expect a very satisfactory performance of its two hotels in the Maldives. Centara Grand Island Resort & Spa, Maldives (opened in November 29) was profitable in 1H13 with a high occupancy rate of 8%. To recap, CENTEL acquired an additional 49% stake in Centara Grand Island Resort & Spa, Maldives in December 212 to bring its holding to 74% at present (from a previous equity stake of 25%). In addition, CENTEL opened its second hotel project (75% stake) in Maldives Centara Ras Fushi Resort & Spa, Maldives in late-march 213. We expect a loss contribution of Bt1m in 213 but for it to become profitable in 215F given its good performance with its occupancy at 7% in 1H13. THANACHART RESEARCH 5

6 Ex 9: 213F Hotel Revenue Geographic Breakdown Ex 1: And By Location In Thailand Overseas, 15% Bangkok, 3% Thailand, 85% Provinces, 7% We forecast CENTEL to post a solid hotel performance in 213 with strong momentum continuing into 214. We see its growth drivers as follows: Tourist arrivals grew by 21%y-y in 1H13 CENTEL s domestic hotel portfolio generates 85% of its total hotel business and thus CENTEL is a beneficiary of Thailand s booming tourism industry which enjoyed 21% y-y tourist arrival growth in Thailand in 1H13. Tourist arrivals from Europe (26% of the total in 1H13) and Asia (63%) continued to grow at healthy clips of 29% y-y and 14% y-y in 1H13, mainly driven by notable growth in tourist arrivals from China and Russia at 1% y-y and 42% y-y. Ex 11: Healthy International Tourist Arrivals To Thailand (m visitors) F Source: Department of Tourism THANACHART RESEARCH 6

7 Ex 12: Asian Tourist Arrivals To Thailand Should Continue To Grow Strongly (y-y %) Americas Oceania Europe Asia China Russia (1) H13 Source: Department of Tourism Asian visitors are becoming increasingly important Of CENTEL s guest mix, most still come from Europe at 4% of its total guests in 1H13 albeit trending down from 45% in 29. Meanwhile, the proportion of guests from Asia has surged from 19% in 29 to 29% in 1H13. Ex 13: CENTEL s Guest Mix Shifts To Capture Asian Growth Middle East 4% Australia 7% USA 2% 29 Others 5% Thailand 18% Middle East 3% Australia 8% USA 2% 1H13 Others 5% Thailand 13% Asia 19% Europe 45% Asia 29% Europe 4% Source: Company data We see both volume and pricing being in the works CENTEL posted a record performance in 1H13 with occupancy at a high 79% and a 15% average daily room rate (ADR) rise. Our 213 hotel assumptions are for occupancy to increase from 7% in 212 to 75% (taking into account the 2Q-3Q low season) and a 15% ADR increase versus only a 2% increment in 212. Note that our 213 ADR growth forecast of 15% looks high given the high base ADR of two hotels in the Maldives which were consolidated into CENTEL s hotel portfolio this year. If we exclude their effect, our 213F ADR growth would be 5%. In 214, we see occupancy staying at a steady high level of 75% but with ADR growing by a higher 7%. THANACHART RESEARCH 7

8 Pattaya, Bangkok and the Maldives should be very strong performers We expect all hotels to deliver stronger performances, particularly those in Pattaya, Bangkok and the Maldives. We expect Centara Grand Mirage Beach Resort in Pattaya (Thailand) to continue posting a high occupancy rate of 84% with an 11% ADR hike in 213. We see this high occupancy continuing in 214 but with ADR growing by 8%. We anticipate its two Bangkok hotels (Centara Grand at Central Plaza Ladprao and Centara Grand & Bangkok Convention Centre at Central World) to achieve higher occupancy rates on an increased number of hotel guests together with rising F&B function and meeting activities. We expect improved performances from its two hotels in the Maldives. The Centara Grand Island Resort & Spa, Maldives became profitable in 1H13 after a Bt2m loss contribution in 212. Centara Ras Fushi Resort & Spa (opened in late-march 213) has performed reasonably well with a 7% occupancy rate in 1H13 but we still expect a Bt1m loss contribution to CENTEL before turning to a profit in 215F. Ex 14: CENTEL s Improving Occupancy Rate Ex 15: CENTEL s Average Daily Room Rate Hike (%) ADR (LHS) (Bt/night) (%) ADR grow th (RHS) 5, 16 4,5 12 4, 8 3, , F 214F 2, F 214F (4) THANACHART RESEARCH 8

9 Food business is resilient with a growth story Resilient food business with outlet expansion CENTEL operates 12 food franchise brands in Thailand with 75 outlets across the country in 1H13. Its key food brands are KFC, Mister Donut, Auntie Anne s and Ootoya which we expect together to contribute 84% of food revenues in 213. CENTEL s food brands are mostly quick service restaurants with affordable prices and which are located in prime shopping malls and hypermarkets in Bangkok and the provinces. Ex 16: CENTEL s Strong Franchise Food Brands Food brands Opened Format Revenue contribution 1H13 Casual No. of of food business in SSSG TSSG Snack Meal Quick-service dinning outlets 1H13 (%) (%) (%) Mister Donut KFC Auntie Anne's Pepper Lunch (.7) 15.7 Beard Papa's (3.) (24.9) Chabuton (14.4) 3.9 Ryu Shabu Shabu (9.8) (1.2) Cold Stone (7.1) 3.4 The Terrace Yoshinoya (27.2) 82.5 Ootoya (4.3) (1.) Tenya Tendon * 4Q13 1 na na na Sources: Company data as of 3 June 213, Thanachart estimates Note: * Scheduled to be opened in October 213 Ex 17: Growing Proportion Of CENTEL s Food Outlets In The Provinces (No. of outlets) Bangkok Acquired 35 Ootoya outlets in Bangkok Provinces F 214F THANACHART RESEARCH 9

10 Despite softening food consumption in 1H13, the performances of CENTEL s wellestablished brands, i.e., KFC, Mister Donut and Auntie Anne s were resilient at 4-7% samestore-sale growth (SSSG) and 9-15% total store sales growth (TSSG). However, overall SSSG and TSSG were softer at 3% and 11% in 1H13 given the negative SSSG of newer brands. We believe this was a result of severe competition, reduced economies of scale benefits and a slowdown in consumption momentum. In October 213, CENTEL plans to launch the first branch of its new quick service Japanese food brand Tenya Tendon. It hopes to open 3 more outlets over the next five years though we have yet to factor this into our numbers. We forecast 3% SSSG and 18% TSSG in 214 with upside from new brands Our 213 SSSG and TSSG assumptions are 3% and 16% versus 3% and 13% in 1H13. We forecast 214 SSSG and TSSG of 3% and 18%. We see CENTEL s food growth story in being derived from outlet expansions of existing brands assuming 1-12% capacity increase and 3-4% SSSG p.a. along with GDP growth. In addition, CENTEL plans to launch two to three new food brands p.a. via franchises or acquisitions which we leave as upside. Ex 18: CENTEL s Food SSSG And TSSG vs Private Consumption Index (y-y %) SSS grow th TSS grow th PCI grow th (5) (1) 1Q7 2Q7 3Q7 4Q7 1Q8 2Q8 3Q8 4Q8 1Q9 2Q9 3Q9 4Q9 1Q1 2Q1 3Q1 4Q1 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 213F 214F Sources: Bank of Thailand, Company data, Thanachart estimates Business strategies and upside Expansion continues despite market concerns over consumption CENTEL continues to expand both of its core businesses hotel and food. Amid the softening private consumption index, consumption expenditure on hotel and restaurant services (one of the components of the private consumption index) still performed very well with 15% y-y and 17% y-y growth in 212 and 1H13 (Exhibit 19). Note that hotel and restaurant services consumption contributes 11% of total private consumption expenditure. Ex 19: Hotel And Restaurant Services Have Performed Strongly (%) Private consumption grow th Food & beverage grow th Hotel & restaurant services grow th H13 Source: Office of The National Economic and Social Development Board as of August 213 THANACHART RESEARCH 1

11 We see CENTEL s strategies for its hotel and food businesses strengthening its earnings outlook. Hotel growth strategy: Improve the performance of existing hotels along with new expansions We see upside from expansions of the new Cosi and existing Centara brands CENTEL is penetrating the economy hotel segment as it launched its own economy hotel brand Cosi in late 212. CENTEL plans to open a 15-2 room companyowned Cosi hotel and another 15-2 room company-managed hotel in 215. We expect the contribution of Cosi to be immaterial in 215. However, we believe once the opening plan for Cosi hotels is more concrete, expansion should take place rapidly in order to capture the potential of the high-growth economy segment. Note that we only incorporate one company-owned Cosi hotel scheduled to be opened in 215 in our model; thus, its contribution is still small. The expansion of company-owned four-star hotels in Thailand where we expect one sizeable project to be announced in 214 and for it to open its doors in 217. As we don t know the details yet, we also leave this as upside to our forecasts. Apart from asset investments, CENTEL continues to pursue an asset-light strategy. CENTEL plans to manage hotels across Thailand and overseas for at least five new managed hotel contracts p.a. Currently, CENTEL has signed 16 managed hotel contracts for We forecast hotel management income to increase from Bt18m in 213 to Bt41m in 217. CENTEL is striving to enhance the performance of existing hotels by focusing on pushing up ADR with high occupancy rates. In addition, the government s recent tax incentives for tourism-related spending by allowing Thai companies to get a double tax allowance for spending on off-site seminars in Thailand should help spur CENTEL s MICE (meetings, incentives, conferences, and exhibitions) market. Ex 2: CENTEL s Managed Hotels In The Pipeline Year No. of new managed Total rooms Countries hotel contracts 214F 6 1,188 Thailand, Maldives, Mauritius, Sri Lanka 215F 6 1,435 Thailand, China, Vietnam 216F Thailand 217F 1 3 Ethiopia Food growth strategy: Expanding outlets and looking for new franchise brands Upside from new food franchises CENTEL plans to add two to three food franchise brands p.a. to its food portfolio through the acquisition of existing brands in Thailand or new brand franchises. We expect the target names to be in the quick-service format rather than casual dining. We leave this as upside to our forecast. Expanding food outlets across the country, particularly in the high-growth and untapped provinces. Enhancing the performance of underperforming existing food brands i.e. Pepper Lunch, Shabuton, Yoshinoya and Ryu Shabu Shabu, etc. THANACHART RESEARCH 11

12 Low net D/E at.7x in 214F helps support funding CENTEL s capex plan is Bt1.8bn for 213F and Bt1.2bn-1.4bn for F, excluding additional hotel investment and food acquisitions. We have factored Bt1.2bn p.a. for planned business expansions into our earnings model but have yet to include the hotel investment and food acquisitions budget. CENTEL expects to use the annual Bt1.2bn budget for hotel renovation and food outlet expansion. Given our forecast for EBITDA of Bt4bn p.a. starting from 214, we expect net interest bearing debt to equity (net D/E) to fall from 1.2x in 212 to.9x in 213F and.7x in 214F, below CENTEL s internal policy of 1.25x and the 2.x as stipulated in its debt covenants. Ex 21: Falling Net D/E With EBITDA Support (Bt m) 5, 1.6 Capex (LHS) EBITDA (LHS) Net D/E (RHS) (x) 2. 4, 3, 2, , F 214F 215F. Ex 22: CENTEL s Debt Structure Ex 23: And Debt Profile Debenture 15% Bank overdrafts 1% Short-term loans 18% Short-term debts 4% Fixed rate 16% Current portion of long-term loans 8% Long-term loans 46% Current portion of debentures 12% Long-term debts 6% Floating rate 84% Source: Company data as end of June 213 Source: Company data as at the end of June 213 Given that we forecast CENTEL to generate free cash flow of Bt bn over , we are not too concerned about the short-term debt maturities. THANACHART RESEARCH 12

13 Our top hotel sector pick We believe CENTEL offers the best balance of risk profile and growth Among the hotel companies in our coverage universe, ie The Erawan Group (ERW TB, Bt4.3, BUY) and Minor International (MINT TB, Bt23.5, BUY), we like CENTEL the most. We present here our investment checklists for CENTEL as our top sector pick. Ex 24: CENTEL Is Our Top Sector Pick On Our Investment Checklists Best balance of growth versus risk profile in our view although we don t expect CENTEL to offer the highest earnings growth (Exhibit 25). Given CENTEL s F EPS CAGR of 19% versus The Erawan Group s at 38% and Minor International s at 14%. CENTEL offers an inexpensive 214F PEG of 1.1x versus ERW s 1.x and MINT s 1.5x (Exhibit 26). CENTEL s portfolio is well diversified by business units and middle-income customer segments and therefore we expect CENTEL to be impacted less by the slowdown in the economy (Exhibit 27). CENTEL s existing hotel business is also 3 years old with well-established company-owned brands; the Centara Grand and Centara four-star hotel chains and the Centra three-star hotel chain. We expect CENTEL s next move with a new brand Cosi into the high-growth economy segment to also be a success. Given that CENTEL s food brands are generally affordable; they generate healthy cash flows to help cushion the seasonal impact on the hotel business. CENTEL s capex cycle is well covered by its cash flow, debt and REITs financing with a strong balance sheet at net D/E of.7x in 214F. Valuation wise, CENTEL is trading 23% below our DCF-derived TP and 9% below our estimate of its NAV (Exhibit 28). Upside from hotel expansion and food brand acquisitions should capture solid growth in hotel and restaurant services. Ex 25: Business Diversification vs Growth Ex 26: 214F PE Valuation vs F EPS CAGR Business diversification High MINT Low ERW CENTEL Earnings growth High F norm EPS CAGR (%) ERW CENTEL 15 MINT PE (x) THANACHART RESEARCH 13

14 We summarize in Exhibit 27 our coverage of the hotel stocks; CENTEL, ERW and MINT. The exhibit shows CENTEL s portfolio is well diversified by business units and middleincome customer segments which lead us to expect that CENTEL should suffer less of an impact from the economic slowdown. Ex 27: Comparison Of Our Hotel Stock Coverage Company Business unit Portion to 213F net profits Segment Brands Type of investment CENTEL Hotel 6% Mid- to highend Company-owned brands: Centara Grand, Investment hotels, Centara and Centra managed hotels Geography Thailand and overseas Food 4% Quick service Franchise brands: KFC, Mister Donut, Investment outlets Thailand restaurants Auntie Anne's, Ootoya, Yoshinoya, Chabuton, Cold Stone, Beard Papa's, The Terrace and Ryu Shabu Shabu ERW Hotel 97% High-end, mid, Franchise brands: Grand Hyatt, JW Investment hotels Thailand economy and Marriott, Courtyard, Holiday Inn, Mercure budget and Ibis Rental 3% High-end Areas adjacent to Grand Hyatt Erawan Bangkok Hotel MINT Hotel 52% High-end Company-owned brands: Anantara Franchise brands: Four Seasons, Marriott, Oaks, Avani, Per Aquum Food 39% Casual dining Franchise brands: The Pizza Company, Swensen's, Sizzler, Dairy Queen, Burger King, The Coffee Club, Ribs & Rumps and Thai Express Residence 5% High-end St. Regis Residence, Anantara Vacation Club Investment Investment hotels, managed hotels Investment outlets and franchise outlets Investment residences Thailand Thailand and overseas Thailand and overseas Thailand and overseas Retail 4% Mid- to high- Franchise brands: Esprit, GAP, Bossini, Rental outlets in Thailand end Tumi, Charles & Keith, Pedro, Redearth shopping malls and Zwilling Henckels CENTEL is trading at a 23% discount to our DCF TP and 9% to our estimated NAV Valuation wise, CENTEL is trading at a 23% discount to our DCF-derived SOTP-based TP and at a 9% discount to our estimate of its NAV. Our DCF TP is calculated using the SOTP of its hotel and food businesses while we calculate our NAV estimate by using the capitalization rate for the hotel business. We use CTARAF s NAV as at the end of July and 213 forecast EBITDA to derive a capitalization rate of 6.5% for its freehold assets and 8.% for its leasehold assets in our NAV valuation. For its food business, we use EV/EBITDA methodology to derive our NAV numbers. We also value ERW based on NAV methodology (please refer to our ERW initiation report, A pure hotel play, dated 9 May 213) by assuming its recent transaction of divesting two properties (Ibis Patong and Ibis Pattaya) to The Erawan Hotel Growth Property Fund (ERWPF TB, not rated) in early April 213 to derive capitalization rates of 6.% for freehold assets and 8.% for leasehold assets in our NAV valuation. ERW is trading at a 48% discount to our estimate of its NAV. THANACHART RESEARCH 14

15 For MINT s SOTP NAV numbers, we use capitalization rate to derive its hotel s NAV. A capitalization rate of 6.5% is used for its freehold assets and 8.3% for leasehold assets. For its food and retail business, we use EV/EBITDA methodology to calculate our NAV. We use the current transaction and project the cost of its real estate business to derive the NAV numbers. We estimate MINT s SOTP NAV at Bt17.3/share, implying it is trading at a premium to its current share price. We don't believe MINT's NAV numbers have fully reflected its operation due to the ongoing underperformance of its food business, particularly overseas, and its real estate business only being in the initial stages. Initiate BUY call on CENTEL CENTEL is our top sector pick as we believe it enjoys the best balance of earnings growth and risk profile. CENTEL is one of the beneficiaries of Thailand s tourism boom with 85% of its revenue exposure to the domestic market. Its healthy cash flow from its resilient food business helps provide a cushion against the hotel seasonal effect and capture the urbanization growth trend in Thailand. We initiate coverage with a BUY rating. Ex 28: Comparison Of DCF Valuation And Estimated NAV Company DCF TP Note Estimated NAV Current price Discount to (Bt/share) (Bt/share) (Bt/share) NAV CENTEL* 44. DCF SOTP % Note Capitalization rate (6.5-8.%) and EV/EBITDA methods ERW 6.2 DCF % Capitalization rate (6.%-8.%) Capitalization rate (6.5%-8.3%), MINT 23. DCF SOTP % Source: Thanachart estimates Note: * Our CENTEL TP is based on 214F DCF valuation while ERW and MINT s TP are based on 213F DCF valuations. Based on 1-Sep-13 closing prices EV/EBITDA and project cost methods Ex 29: CENTEL s Major Shareholding Structure Local institution and retail 28% Ex 3: CENTEL s Board of Directors CENTEL s board of directors consists of 11 members and includes four independent directors, two executive directors and five nonexecutive directors. There are six directors who represent the Chirathivat family. The board of directors has appointed two committees, namely the Audit Committee and the Nomination and Compensation Committee. Foreign 8% Chirathivat family 64% Source: Company data Source: Company data THANACHART RESEARCH 15

16 Ex 31: 214 DCF-based TP Calculation (Bt m) 214F 215F 216F 217F 218F 219F 22F 221F 222F 223F 224F Terminal Value EBITDA 4,58 4,261 4,569 4,847 5,135 5,879 6,474 7,199 7,622 8,11 8,625 Free cash flow 2,483 2,698 2,945 3,194 3,442 4,31 4,849 5,439 5,851 6,272 6,815 15,388 PV of free cash flow 2,477 2,288 2,299 2,297 2,279 2,628 2,722 2,812 2,785 2,749 2,75 42,526 Risk-free rate (%) 4.5 Market risk premium (%) 8. Beta.9 WACC (%) 8.6 Terminal growth (%) 2. Enterprise value - add investments 7,611 Net debt (213F) 1,442 Minority interest 736 Equity value 59,434 # of shares 1,35 Equity value/share 44. THANACHART RESEARCH 16

17 Valuation Comparison Ex 32: Valuation Comparison With Regional Peers EPS growth PE P/BV EV/EBITDA Div yield Name BBG code Country 13F 14F 13F 14F 13F 14F 13F 14F 13F 14F (%) (%) (x) (x) (x) (x) (x) (x) (%) (%) Mirvac Group MGR AU Australia Huatian Hotel Group 428 CH China na na Emei Shan Tourism 888 CH China Shanghai Jin Jiang Int l 26 HK China (29.8) Beijing Capital Tourism 6258 CH China Jinling Hotel Corp 617 CH China (12.8) na na na na Hongkong & Shanghai 45 HK Hong Kong na na Shangri-La Asia 69 HK Hong Kong Indian Hotels IH IN India na Mandarin Oriental Int l MAND SP Singapore 36.7 (2.) Banyan Tree Holdings BTH SP Singapore (49.) Hotel Properties HPL SP Singapore (18.) (19.) Hotel Shilla 877 KS South Korea (34.6) Ambassador Hotel 274 TT Taiwan Central Plaza Hotel CENTEL TB* Thailand Erawan Group ERW TB* Thailand Minor International MINT TB* Thailand Average Note: * Thanachart estimates, using normalized EPS Based on 1-Sep-13 closing prices THANACHART RESEARCH 17

18 APPENDIX CENTEL KALVALEE THONGSOMAUNG COMPANY DESCRIPTION COMPANY RATING Central Plaza Hotel Plc (CENTEL) owns and operates hotels in Thailand and abroad with company-owned brands of Centara Grand, Centara and Centra. CENTEL also managed hotels across Thailand and abroad. The company operates restaurant franchises including key brands such as KFC, Mister Donut, Auntie Anne s and Ootoya. Manage ment Financial management Risk manage ment Rating Scale Very Strong 5 Strong 4 Good 3 Liquidity *Corp. governance Fair 2 Weak 1 None Source: Thanachart Source: Thanachart; *CG Awards THANACHART S SWOT ANALYSIS S Strength Well-received owned hotel brands in Thailand such as Centara Grand, Centara and Centra. CENTEL s food business comprises affordable quick service restaurants which are the brand leaders in each category. W Weakness Highly exposed to Thailand s tourism industry. Thailand s upscale hotel oversupply. Dependent on Thailand consumption. Well-balance risk profile of hotel and food businesses. Strong financial position with a low net D/E of.7x at end 214F. O Opportunity Strategic investments and acquisitions locally and globally. Strong growth in tourism and consumption, particularly in Thailand and some high-growth global tourist destinations. T Threat Fiercer competition among hotel operators leading to obstacles to unlocking its profitability. Competition among restaurant operators. Moving to capture high growth of economy hotel segment. CONSENSUS COMPARISON Consensus Thanachart Diff Target price (Bt) % Net profit 13F (Bt m) 1,571 1,677 7% Net profit 14F (Bt m) 1,984 2,115 7% Consensus REC BUY: 17 HOLD: 2 SELL: 1 HOW ARE WE DIFFERENT FROM THE STREET? Our DCF TP is based on a 214F valuation and is 7% above consensus. RISKS TO OUR INVESTMENT CASE Thailand s political situation and natural disasters. Slower tourism growth in Thailand and global destinations. Slower domestic and global economic and consumption growth. If the baht strengthens to a level higher than we expect, then this presents downside risk to Thailand s tourism. Slower expansion of hotels and food outlets. Our F earnings are 7% above consensus and we assume an improved hotel business performance on a boom in Thailand s tourism industry. Sources: Bloomberg consensus, Thanachart estimates Source: Thanachart THANACHART RESEARCH 18

19 FINANCIAL SUMMARY CENTEL KALVALEE THONGSOMAUNG We see its higher gross margins over F reflecting an improvement in the hotel business INCOME STATEMENT FY ending Dec (Bt m ) 211A 212A 213F 214F 215F Sales 11,278 14,54 18,256 2,18 21,799 Cost of sales 5,642 8,67 1,66 11,473 12,544 Gross profit 5,636 5,834 7,596 8,545 9,255 % gross margin 5.% 4.2% 41.6% 42.7% 42.5% Selling & administration expenses 4,341 4,447 5,472 6, 6,534 Operating profit 1,295 1,387 2,123 2,544 2,72 % operating margin 11.5% 9.6% 11.6% 12.7% 12.5% Depreciation & amortization 1,135 1,351 1,499 1,514 1,54 EBITDA 2,43 2,739 3,623 4,58 4,261 % EBITDA margin 21.5% 18.9% 19.8% 2.3% 19.5% Non-operating income Non-operating expenses (336) Interest expense (414) (486) (466) (413) (335) Pre-tax profit 841 1,319 2,27 2,55 2,864 Income tax After-tax profit 586 1,16 1,71 2,14 2,43 % net margin 5.2% 7.6% 9.3% 1.7% 11.% Shares in affiliates' Earnings Minority interests (4) (43) (54) (59) (65) Extraordinary items (74) 458 NET PROFIT 55 1,581 1,677 2,115 2,384 Norm alized profit 624 1,123 1,677 2,115 2,384 EPS (Bt) Normalized EPS (Bt) BALANCE SHEET FY ending Dec (Bt m ) 211A 212A 213F 214F 215F ASSETS: Current assets: 1,76 1,989 2,927 3,87 3,261 Cash & cash equivalent , 1, 1, Account receivables ,7 1,166 Inventories Others Investments & loans 1,332 1,82 1,82 1,82 1,82 Net fixed assets 16,276 21,988 22,289 21,975 21,635 Other assets 2,316 2,698 3,396 3,724 4,55 Total assets 21,684 27,757 29,694 29,868 3,33 Long-term loans account for 6% of total debt in 213F LIABILITIES: Current liabilities: 6,512 7,843 8,69 7,464 6,939 Account payables 1,541 1,851 2,276 2,45 2,679 Bank overdraft & ST loans 1,918 2,599 2,288 1,929 1,49 Current LT debt 2,266 2,763 2,471 2,84 1,69 Others current liabilities ,33 1,1 1,162 Total LT debt 5,917 6,942 6,682 5,634 4,35 Others LT liabilities 3,26 2,913 3,666 4,2 4,378 Total liabilities 15,635 17,698 18,418 17,118 15,668 Minority interest Preferreds shares Paid-up capital 1,35 1,35 1,35 1,35 1,35 Share premium Warrants Surplus 1,549 3,751 3,751 3,751 3,751 Retained earnings 1,927 3,36 4,47 5,883 7,435 Shareholders' equity 5,796 9,377 1,541 11,955 13,56 Liabilities & equity 21,684 27,757 29,694 29,868 3,33 THANACHART RESEARCH 19

20 FINANCIAL SUMMARY CENTEL KALVALEE THONGSOMAUNG CASH FLOW STATEMENT FY ending Dec (Bt m ) 211A 212A 213F 214F 215F Earnings before tax 841 1,319 2,27 2,55 2,864 Tax paid (252) (266) (238) (426) (427) Depreciation & amortization 1,135 1,351 1,499 1,514 1,54 Chg In w orking capital (29) (43) Chg In other CA & CL / minorities (18) 7 Cash flow from operations 1,76 2,584 3,564 3,493 4,6 Annual capex is for hotel maintenance and food outlet expansion Capex (1,736) (7,63) (1,8) (1,2) (1,2) ST loans & investments LT loans & investments (159) 25 Adj for asset revaluation (44) 2,23 Chg In other assets & liabilities (281) Cash flow from investm ents (2,15) (4,544) (1,545) (997) (1,3) Debt financing 612 2,23 (863) (1,795) (2,198) Capital increase Dividends paid (68) (23) (513) (71) (832) Warrants & other surplus (138) () Cash flow from financing 47 2,1 (1,375) (2,497) (3,3) Free cash flow 24 (4,479) 1,764 2,293 2, PE to F EPS CAGR is at 1.1x VALUATION FY ending Dec 211A 212A 213F 214F 215F Normalized PE (x) Normalized PE - at target price (x) PE (x) PE - at target price (x) EV/EBITDA (x) EV/EBITDA - at target price (x) P/BV (x) P/BV - at target price (x) P/CFO (x) Price/sales (x) Dividend yield (%) FCF Yield (%).1 (9.8) (Bt) Normalized EPS EPS DPS BV/share CFO/share FCF/share. (3.3) THANACHART RESEARCH 2

21 FINANCIAL SUMMARY CENTEL KALVALEE THONGSOMAUNG FINANCIAL RATIOS FY ending Dec 211A 212A 213F 214F 215F Grow th Rate Sales (%) Net profit (%) na EPS (%) na Normalized profit (%) na Normalized EPS (%) na Dividend payout ratio (%) Strong financial position with falling net D/E Operating performance Gross margin (%) Operating margin (%) EBITDA margin (%) Net margin (%) D/E (incl. minor) (x) Net D/E (incl. minor) (x) Interest coverage - EBIT (x) Interest coverage - EBITDA (x) ROA - using norm profit (%) ROE - using norm profit (%) DuPont ROE - using after tax profit (%) asset turnover (x) operating margin (%) leverage (x) interest burden (%) tax burden (%) WACC (%) ROIC (%) NOPAT (Bt m) 92 1,163 1,782 2,135 2,282 THANACHART RESEARCH 21

22 DISCLAIMER KALVALEE THONGSOMAUNG General Disclaimers And Disclosures: This report is prepared and issued by Thanachart Securities Public Company Limited (TNS) as a resource only for clients of TNS, Thanachart Capital Public Company Limited (TCAP) and its group companies. Copyright Thanachart Securities Public Company Limited. All rights reserved. The report may not be reproduced in whole or in part or delivered to other persons without our written consent. This report is prepared by analysts who are employed by the research department of TNS. While the information is from sources believed to be reliable, neither the information nor the forecasts shall be taken as a representation or warranty for which TNS or TCAP or its group companies or any of their employees incur any responsibility. This report is provided to you for informational purposes only and it is not, and is not to be construed as, an offer or an invitation to make an offer to sell or buy any securities. Neither TNS, TCAP nor its group companies accept any liability whatsoever for any direct or consequential loss arising from any use of this report or its contents. The information and opinions contained herein have been compiled or arrived at from sources believed reliable. However, TNS, TCAP and its group companies make no representation or warranty, express or implied, as to their accuracy or completeness. Expressions of opinion herein are subject to change without notice. The use of any information, forecasts and opinions contained in this report shall be at the sole discretion and risk of the user. TNS, TCAP and its group companies perform and seek to perform business with companies covered in this report. TNS, TCAP, its group companies, their employees and directors may have positions and financial interest in securities mentioned in this report. TNS, TCAP or its group companies may from time to time perform investment banking or other services for, or solicit investment banking or other business from, any entity mentioned in this report. Therefore, investors should be aware of conflict of interest that may affect the objectivity of this report. THANACHART RESEARCH 22

23 DISCLAIMER KALVALEE THONGSOMAUNG Recommendation Structure: Recommendations are based on absolute upside or downside, which is the difference between the target price and the current market price. If the upside is 1% or more, the recommendation is BUY. If the downside is 1% or more, the recommendation is SELL. For stocks where the upside or downside is less than 1%, the recommendation is HOLD. Unless otherwise specified, these recommendations are set with a 12-month horizon. Thus, it is possible that future price volatility may cause a temporary mismatch between upside/downside for a stock based on the market price and the formal recommendation. For sectors, we look at two areas, ie, the sector outlook and the sector weighting. For the sector outlook, an arrow pointing up, or the word Positive, is used when we see the industry trend improving. An arrow pointing down, or the word Negative, is used when we see the industry trend deteriorating. A double-tipped horizontal arrow, or the word Unchanged, is used when the industry trend does not look as if it will alter. The industry trend view is our top-down perspective on the industry rather than a bottom-up interpretation from the stocks we cover. An Overweight sector weighting is used when we have BUYs on majority of the stocks under our coverage by market cap. Underweight is used when we have SELLs on majority of the stocks we cover by market cap. Neutral is used when there are relatively equal weightings of BUYs and SELLs. Thanachart Securities Pcl. Research Team 28 Floor, Siam Tower Unit A1 989 Rama 1, Pathumwan Road, Bangkok 133 Tel: research@thanachartsec.co.th Pimpaka Nichgaroon, CFA Head of Research Economics & Strategy pimpaka.nic@thanachartsec.co.th Sarachada Sornsong Banks, Telecom sarachada.sor@thanachartsec.co.th Phannarai Tiyapittayarut Property, Retail phannarai.von@thanachartsec.co.th Supanna Suwankird Energy, Utilities supanna.suw@thanachartsec.co.th Saksid Phadthananarak Construction, Electronics, Transportation saksid.pha@thanachartsec.co.th Kalvalee Thongsomaung Food, Hotel, Media kalvalee.tho@thanachartsec.co.th Siriporn Arunothai Ad Hoc Research, Healthcare siriporn.aru@thanachartsec.co.th Noppadol Pririyawut Senior Technical Analyst noppadol.pri@thanachartsec.co.th Adisak Phupiphathirungul, CFA Retail Market Strategy adisak.phu@thanachartsec.co.th THANACHART RESEARCH 23