BTS Rail Mass Transit Growth Infrastructure Fund (BTSGIF)

Transcription

1 5 April 2013 THAILAND EQUITY Investment Research Thailand Research Team ext 2030 Unrated Target Price THB12.60 Infrastructure Fund BTSGIF is a close-ended infrastructure fund with initial investments in netfarebox revenue from the core network BTS SkyTrain system. Issue Statistics Bloomberg Ticker (post-ipo) Investment Unit (post-ipo) BTSGIF TB 5788m Foreign Limit 49.0% Offer Price per Unit THB Major Shareholders (post IPO) (%) BTS Group 33.3% Capital Research Management 6.6% AIA Group Limited 5.2% Schroder Investment Mgmt 5.0% IPO Note BTS Rail Mass Transit Growth Infrastructure Fund (BTSGIF) Limited Edition Debut BTSGIF will be Thailand s first infrastructure fund (IFF) and the nation s largest IPO to date. We believe the fund offers an attractive and unique proposition as it leverages on the rising demand for mass transit, as well as benefits from the latter s aggressive expansion. Our FV of THB12.60 is based on a relatively conservative target yield of 5% on FY14 DPU. A first for Thailand. BTSGIF s investment mandate is to invest in infrastructure businesses which have the capability to generate sustainable income with long term growth potential to provide unitholders with regular distributions at a competitive rate of return. This will initially be the net farebox revenue from the core network of the BTS SkyTrain for the remaining 17 years of the concession. BTS Group (BTSG), the fund s sponsor and major unitholder, will grant BTSGIF the right and/or the right of first refusal to purchase the revenues from future mass transit projects it or any of its affiliates undertakes. Resilient business with strong growth prospects. Since commencing operations in 1999, BTS SkyTrain has been progressively gaining popularity among commuters, with its ridership growing at a CAGR of 10%, driven by consistent organic growth as well as population growth, urbanization and major developments along the mass transit routes. Over the same period, its net farebox revenues have increased each year, despite the recent floods, global financial crisis and social unrest in Thailand, which demonstrates the resilience of the business. As the backbone of the mass transit system in Bangkok, BTS SkyTrain is expected to benefit from the extension and expansion of mass transit routes, which will provide additional feeders to its core network. 5% target yield, FV THB As it is the first IFF in Thailand, there is no direct peer to compare BTSGIF with. However, we think the listed property funds (PFs) in Thailand provide a decent benchmark for the fund due to some investment structure and class similarities. By imputing a 10% scarcity premium over the PF sector s average yield of ~5.5%, we arrive at a FY14 target yield of 5.0% for BTSGIF, and hence an FV of THB Forecasts and Valuations Mar-12 Mar-13 Mar-14F Mar-15F Mar-16F Total turnover (THBm) Net income (THBm) Net income growth 14.8% 20.5% 17.8% 15.0% Total distribution available to unitholders (THBm) Net income per unit (THB) DPU (THB) Yield 4.4% 4.9% 5.8% 6.7% 7.6% Note: Figures for FY12, FY13 and FY14 are on pro-forma basis Source: Company data, RHBRI estimates 1 Powered by Enhanced Datasystems EFA Platform

2 IPO BACKGROUND The fund. The BTS Rail Mass Transit Growth Infrastructure Fund (BTSGIF) will be a publicly-traded infrastructure fund in Thailand that invests in the revenues generated from Bangkok Mass Transit System PCL s (BTSC), which holds the exclusive concession to operate the BTS SkyTrain. The sponsor, BTS Group (BTSG), is a major shareholder of BTSC and will become a major unitholder of BTSGIF, owning not more than one-third of the total number of investment units. BTSG will grant BTSGIF the right to purchase and/or the right of first refusal to purchase the revenues, rights, benefits, title, interest and/or any investment in relation to the future greenfield and brownfield mass transit projects undertaken by BTSG or any of its affiliates. Figure 1: Structure of BTSGIF Source: Prospectus IPO offering. A total of 5.788bn investment units are up for grabs in a combined offering comprising the international offering, Thai offering and the sponsor subscription, with the estimated combined gross proceeds of THB62.510bn (based on a maximum offering price of THB10.80/unit). The sponsor (BTSG) has agreed to subscribe to 1.929bn investment units in the sponsor subscription and as a result, upon completion on the subscription, it will hold 33.33% of the total number of investment units. Cornerstone investors, which consist of both local and foreign investors, will collectively subscribe to 40.32% of the combined offering. Meanwhile, the remaining 26.36% of the total units will be held by the public, comprising institutional (other than cornerstone investors) and retail investors. Figure 2: Unitholders structure of BTSGIF post-ipo Source: Prospectus 2

3 BTSC & CORE NETWORK BTSC. The BTSC Group was founded in 1992 and in the same year, it was granted a concession by the Bangkok Metropolitan Authority (BMA) to exclusively operate the Core BTS SkyTrain for 30 years from the commencement of its commercial operations in 5 Dec The BTS SkyTrain core network. The BTS SkyTrain is an electric elevated railway with two separate lines running above certain central Bangkok s major public roadways. Under the concession agreement, BTSC has the right to operate the BTS SkyTrain through two lines, the Core Sukhumvit Line and the Core Silom Line, which together form part of the Green Line, covering 23 stations with a combined track length of 23.5km. It also has the right to collect the full amount of fares derived from the existing 23.5 km route under the concession agreement. The Core Sukhumvit Line consists of 17 stations and runs northwards and eastwards from central Bangkok for 17.0 km, connecting Mo Chit and On Nut. The Core Silom Line consists of seven stations and runs through one of Bangkok s central business district for 6.5km, connecting the National Stadium and Taksin Bridge (Saphan Taksin). Figure 3: BTS SkyTrain s network Source: BTSG 3

4 KEY INVESTMENT HIGHLIGHTS Resilient business with strong growth prospects. Despite the weaker-than-expected ridership during its early days in 1999, Sky Train has become increasingly popular among commuters over the years. Its ridership has been growing at a CAGR of 10% since 1999, driven by consistent organic as well as population growth, urbanization and major developments along the mass transit routes. Since the BTS SkyTrain commenced commercial operations, its farebox revenues-net have increased each year, despite the recent flooding, global financial crisis and social unrest in Thailand. Figure 4: Historical ridership and average fare price for BTS SkyTrain Source: Prospectus Benefiting from major shift in mass transit market. In 2011, Bangkok s mass transit (bus, rail, ferry and other) carried an average of 11.8m passengers per day, with rail mass transit taking up about 5.8% of the market share. Given Bangkok s persistent road congestion and the aggressive expansion of its rail mass transit networks, we think rail mass transit should be able to gain a bigger share of Bangkok s transportation moving forward. This may mean that BTS SkyTrain will be one of the key beneficiaries from the major shift in the mass transit market. In tandem with the expanding networks, Bangkok s rail mass transit demand is projected to increase significantly at the expense of bus transit. Figure 5: The projected Bangkok s transit market share Figure 6: Rail market share in comparable markets Source : BTSG Source : BTSG 4

5 Growing with an expanding mass transit system. To improve connectivity in greater Bangkok, the Thai government started embarking on mass transit projects more than a decade ago. Under the rail master plan, it aims to have 12 mass transit lines operational by 2029, covering a total distance of about 495km. In the first phase of the master plan, about 309km is expected to be ready by With the rail mass transit market share in Bangkok at only around 6% currently, compared to other major cities in Asia such as Singapore (40%), Hong Kong (44%) and Seoul (51%), it represents significant growth potential for the city s rail mass transit sector. The ongoing route expansion will provide the strong passenger feeds to the core network, which is strategically located in the city centre. Figure 7: The planned rail mass transit routes in Bangkok Source: Various Figure 8: Bangkok s existing and future rail mass transit system Source: BTSG 5

6 Efficient operation with high operational leverage. The BTS SkyTrain was designed in such a way that allows BTSC to maintain it at low operational costs. This is mainly because its system and rolling stock use modern technology and efficient designs. In addition, as an elevated railway system, BTSC does not incur the costs otherwise necessary, such as air-conditioning its stations and ventilating long indoor tunnels. This allows the BTS SkyTrain to have lower operational costs relative to underground transit systems. As ridership and farebox revenues increase, BTSC expects its cost of farebox to increase at a lower rate given that the high cost of its operation is fixed. Capacity expansion fuels future growth. In order to cope with growing demand, BTSC is progressively expanding its capacity by adding new rolling stock. It has taken delivery of 35 single-car trains in August 2012, the first batch of which were put into service at end-2012, with the balance to be progressively added to its fleet the single-car trains are attached/added to the fleet s existing three-car trains to make four-car trains. Another five four-car trains have been scheduled for delivery in 3Q13 to be put into service by end These extra carriages will boost BTSC s total capacity by 35.9% from 153 carriages (as at mid 2012) to 208 carriages by end The enlarged capacity will help BTSC support ridership growth for the next 11 years should there be no further line extensions. Figure 9: BTS SkyTrain s fleets Source: BTSG Upside from future fare hike. In February 2012, BTSC obtained BMA s approval to increase its authorized fare (the price ceiling for the effective fare that passengers pay) by 25%, or THB18.79, to THB56.36 per trip. While this did not directly affect the effective fare, it gives the company the flexibility to raise fares in the future. BTSC expects to hike the effective fare in the near term, possibly with the delivery of the new trains. While fares can be adjusted every 18 months, the first and last effective fare increase was in March 2007, during which the minimum fare was increased from THB10 to THB15. Figure 10: BTS SkyTrain s effective and authorized fare structure Source: BTSG 6

7 FAVOURABLE CATALYSTS TO SUPPORT RISING DEMAND Traffic congestion continues to stir rail mass transit demand. Bangkok has experienced an increase in demand for car transportation over the years, which resulted in severe traffic congestion and air pollution problems. The number of newly registered passenger cars in Bangkok has ballooned by 129.8% between 2002 and 2011, representing a CAGR of 9.7%. In the January-November 2012 period alone, the number of newly registered passenger cars in Bangkok grew by 44.2% y-o-y. The higher number of cars and ongoing urbanization in Bangkok has not been matched by a corresponding increase in road capacity. Consequently, compared to other cities, Bangkok has one of the most severe traffic congestions and related air pollution problems. This gave rise to an increasing need for speedy, reliable and accessible modes of transportation, leading to a growing demand for rail transportation systems in the city. Figure 11: No. of newly registered vehicles in Bangkok Source: Prospectus Income growth makes rail transport increasingly affordable. Although the rail transport network provides a quick and reliable form of transport, the fare is relatively higher than alternative modes of transportation. For example the regular non air-conditioned buses charge a minimum fare of THB6.5 to most destinations within metropolitan Bangkok while air-conditioned buses charge a minimum of THB10.0, with the fare increasing according to the distance traveled. However, in the past few decades, Thailand has experienced remarkable economic growth where its real GDP per capita expanded at a CAGR of 9.8% during the period between 2002 and Bangkok accounted for 10.7% of the country s population and approximately 24.9% of its GDP in Bangkok s gross provincial product per capita was approximately THB365,619 in 2010, up from THB254,087 in 2002, representing a CAGR of 4.7%. The rising income has made rail mass transport increasingly affordable and viable to Bangkok commuters. Along with the nation s economic growth as well as population expansion and rising purchasing power, increasingly more commuters are expected to switch from road public transportation to this relatively faster and more convenient mode of transport. Population growth. The population of Bangkok has grown steadily over the past decade, reaching 6.9m in 2011, representing approximately 10.7% of the country s population. As such, we believe the population growth in Bangkok will also contribute to an increase in the use of rail mass transit, particularly in light of traffic congestion issues mentioned earlier. 7

8 KEY RISKS Business risks. BTSC s business operation was negatively affected last year by domestic political conflicts as well as severe flooding, which impacted Bangkok s commuting pattern. As such, we believe instability in the domestic political landscape and potential natural disasters pose certain risks to its business operation and hinders its ability to grow its ridership and net farebox revenue. Regulatory risks. Laws, regulations and enforcement policies in Thailand, including those regulating the mass transit system, are evolving and subject to future changes. Different regulatory authorities may have different interpretations and enforcement practices. Changes in laws, regulations, policies or government attitude towards the BTS SkyTrain could adversely affect its business, financial condition, results of operations and prospects. Fare hike limitations. Despite a revision in authorized fare, BTSC might be unable to translate that into a higher effective fare given the sensitivity of price hikes, thus restricting its flexibility to increase fares without causing a public outcry. In addition, even though BTSC is allowed to increase the effective fare under the Concession Agreement and it intends to in the future, it may not be able to, or choose not to do so for a variety of reasons, such as political, social and other reasons relating to competitive dynamics in the mass transit industry, commuter preferences or other factors such as ridership trends. Inability to acquire additional assets. BTSGIF s revenue will initially be solely from the Sale Revenue from the BTS SkyTrain Business derived from the Concession Agreement, which expires in December 2029 unless extended with the consent of the Ministry of Interior. If the fund is unable to purchase or invest in additional assets, it will no longer have any material revenues after the concession agreement ends, which could ultimately result in the dissolution of the fund. VALUATION 5.8% indicative yield. Based on the indicative income distribution per unit of THB0.63 for FY14 (FYE March), the BTSGIF has an indicative yield of about 5.8%. As it is the first infrastructure fund in Thailand, it does not have a direct local peer to compare it with. Nevertheless we think the listed property funds in Thailand could be used as a decent benchmark due to some similarities in regards to the investment structure and investment class. BTSGIF offers a yield of 5.8%, higher than the average comparable (in terms of size and liquidity) among listed property funds in Thailand, which offer an indicative yield of around 5.5%. FV of THB12.60 at 5% target yield. As it will be the first and only infrastructure fund listed in Thailand, we believe BTSGIF deserves a premium over the listed property fund sector in Thailand due to its unique proposition as well as its size and liquidity. By imputing a 10% scarcity premium over the average yield on the property fund sector, we derive a target yield of 5.0% for FY14. Based on that, we arrive at a FV of THB12.60, which represents a 16.7% upside from the (maximum) indicate offering price of THB

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