Nok Airlines Pcl (NOK TB) Thanachart Securities. Dropping coverage. SELL (From: HOLD) TP: Bt 6.00 (From: Bt ) Deteriorating market position

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1 SELL (From: HOLD) TP: Bt 6.00 (From: Bt ) Dropping Coverage Downside : 20.0% 11 NOVEMBER 2016 Nok Airlines Pcl (NOK TB) Dropping coverage Thanachart Securities Thanachart Securities Given its deteriorating market position, we now forecast NOK to make losses in and downgrade our call to SELL from Hold with a new TP of Bt6.0. With trading liquidity drying up, we also terminate coverage of NOK and recommend investors to switch to AAV and BA as we expect them to continue reaping the benefits of their expertise. Deteriorating market position NOK is one of Thailand s low-cost carriers focusing on the domestic market. Its strategy is to serve more destinations, have greater flight frequencies and cover less competitive routes to command price premiums. Unfortunately, when its competitors expanded aggressively into its niche market, the resulting fierce pricing competition since 2014 put NOK s margin under pressure. It suffered even more losses when it expanded into the overseas market by forming NokScoot, a joint venture with Scoot, a lowcost carrier owned by Singapore Airlines. Despite the significant drop in jet fuel prices, its high non-oil costs with low network coverage caused NokScoot to report a loss of Bt377m in 9M16 and Bt1.2bn in Chinese zero-dollar tour crackdown Besides intense competition, NOK has also suffered from a pilot shortage, forcing the company to cut domestic flights while its domestic passenger revenues (83% of NOK s total passenger revenues in 9M16) fell by 12% y-y in 9M16 and its market share fell to 21% in 1H16 vs. 28% in 1H15. Even though its international passenger revenues (17% of total passenger revenues in 9M16) grew by 122% y-y in 9M16, over 60% came from charter flights to China where we are concerned about a slowdown in Chinese tourist growth due to the crackdown on Chinese zero-dollar tours. Along with an expected rise in jet fuel prices, we forecast NOK to continue making losses in TP is cut to Bt6/share We now forecast NOK to make losses of Bt m in based on the following assumptions. First, given fierce competition, we forecast its passenger yield at Bt per revenue passenger kilometers (RPK) in vs. Bt2.4 in 2015 and Bt2.2 in 9M16. Second, we project jet fuel prices of US$55-67 in vs. US$52 so far this year. Third, we assume an exchange rate of Bt /US$1 in F vs. Bt35.2 so far this year. After rolling over our base year to 2017F, our DCFbased 12-month TP falls to Bt6.0 from Bt19.0. We downgrade our call to SELL from Hold. AAV, BA in better positions in our view Given its deteriorating business outlook with trading liquidity drying up from US$5.8m in 2013 to only US$0.4m so far this year, we drop NOK from our coverage and recommend investors to switch to Asia Aviation (AAV TB, Bt7.05, BUY) for its robust competitiveness due to its lowest operating costs and strong network to cover the mass markets, and Bangkok Airways (BA TB, Bt24.6, BUY) for its unique advantage of owning Samui airport and codeshare strategy to command price premiums. COMPANY VALUATION SAKSID PHADTHANANARAK saksid.pha@thanachartsec.co.th Y/E Dec (Bt m) 2015A 2016F 2017F 2018F Sales 13,753 15,951 16,560 17,950 Net profit (726) (2,474) (1,571) (1,254) Consensus NP Diff frm cons (%) na na na Norm profit (726) (2,474) (1,571) (1,254) Prev. Norm profit ,002 Chg frm prev (%) na na na Norm EPS (Bt) (1.2) (4.0) (2.5) (2.0) Norm EPS grw (%) na na na na Norm PE (x) na na na na EV/EBITDA (x) na na na na P/BV (x) na na Div yield (%) ROE (%) na na na na Net D/E (%) na na na na PRICE PERFORMANCE (Bt/shr) NOK Rel to SET Index Nov-15 Feb-16 May-16 Aug-16 Nov-16 COMPANY INFORMATION (%) (5) (10) (15) (20) Price as of 11-Nov-16 (Bt) 7.50 Market Cap (US$ m) Listed Shares (m shares) Free Float (%) 49.0 Avg Daily Turnover (US$ m) M Price H/L (Bt) 9.30/6.40 Sector Transport Major Shareholder Thai Airways 39.2% Sources: Bloomberg, Company data, Thanachart estimates Please see the important notice on the back page

2 COMPANY NOTE NOK SAKSID PHADTHANANARAK Ex 1: NOK s Total Revenues/ASK vs. Total Costs/ASK vs. Non-oil Costs/ASK (Bt/ASK) Oil costs Non-oil costs Revenues F 2017F 2018F Ex 2: NOK s Total Revenues/ASK vs. Peers (Bt/ASK) NOK BA AAV F 2017F 2018F Ex 3: NOK s Total Costs/ASK vs. Peers (Bt/ASK) NOK BA AAV F 2017F 2018F Ex 4: NOK s Gross Profits/ASK vs. Peers (Bt/ASK) NOK BA AAV (0.2) (0.4) F 2017F 2018F THANACHART SECURITIES DAIWA CAPITAL MARKETS 2

3 COMPANY NOTE NOK SAKSID PHADTHANANARAK Ex 5: 12-month DCF-based Calculation Using A Base Year Of 2017F (Bt m) 2017F 2018F 2019F 2020F 2021F 2022F 2023F 2024F 2025F 2026F 2027F Terminal Value EBITDA (1,994) (1,608) (965) (274) Free cash flow (2,213) (1,629) (1,061) (373) ,333 PV of free cash flow (2,207) (1,389) (835) (271) ,123 Risk-free rate (%) 4.5 Market risk premium (%) 7.5 Beta 1.0 WACC (%) 8.3 Terminal growth (%) 2.0 Enterprise value - add investments 2,274 Net debt (2016F) (1,381) Minority interest (105) Equity value 3,760 # of shares 625 Target price/share 6.00 Source: Thanachart estimates THANACHART SECURITIES DAIWA CAPITAL MARKETS 3

4 APPENDIX NOK SAKSID PHADTHANANARAK COMPANY DESCRIPTION Nok Airlines Pcl (NOK) was set up in 2004 by Thai Airways International Pcl (THAI) and other Thai companies when the Thai government adopted a policy to liberalize the aviation industry and capture the growing low-cost airline market in Asia. THAI is the major shareholder with a 39% stake in the company. NOK currently focuses on the domestic market with a 21% share. It operates 32 aircraft flying from two hubs in Thailand at Don Mueang and Chiang Mai airports. Source: Thanachart COMPANY RATING Analyst REC. CG rating* Financials Industry Outlook Operating Source: Thanachart; * CG Ratings Business Outlook Manage ment Rating Scale Very Strong 5 Strong 4 Good 3 Fair 2 Weak 1 None 0 THANACHART S SWOT ANALYSIS S Strength W Weakness It covers most of the domestic destinations in Thailand. It enjoys first-mover advantage, allowing it to secure the best time slots. Thus, it can command price premiums on less competitive routes. Its lower cost-competitiveness makes it difficult to compete directly with rivals. Focusing only on the domestic market may limit the company s long-term future growth. Most aircraft are operationally leased, resulting in high leasing expenses. O Opportunity Thailand is one of the top destinations for tourists. Having Thailand as its hub should allow it to easily expand into the CLMV market. T Threat Highly volatile jet fuel prices pose a major risk. Competition in the aviation industry is severe while demand for travel is also dependent on global economic conditions. The government is planning to develop other transportation methods such as high-speed trains. CONSENSUS COMPARISON Consensus Thanachart Diff Target price (Bt) % Net profit 16F (Bt m) 182 (2,474) na Net profit 17F (Bt m) 408 (1,571) na Consensus REC BUY: 1 HOLD: 2 SELL: 4 HOW ARE WE DIFFERENT FROM THE STREET? We forecast losses in while the Bloomberg consensus projects profits. We believe this is because the stock is under-researched with information outdated. Our TP is also lower than those of other brokers following our lower earnings projections. RISKS TO OUR INVESTMENT CASE Fuel expenses account for 20-25% of NOK s total costs. Therefore, fluctuations in jet fuel prices present a major risk to our earnings projections. Political unrest and natural disasters in Thailand are another worry as the company depends a great deal on the domestic market. Congestion at airports in Thailand could cause carriers to be less efficient and make expansion difficult. Uncertainty over the Thai government s airport policy in Bangkok represents a risk to the carrier s operations. Sources: Bloomberg consensus, Thanachart estimates Source: Thanachart THANACHART SECURITIES DAIWA CAPITAL MARKETS 4

5 FINANCIAL SUMMARY NOK SAKSID PHADTHANANARAK We forecast NOK to continue to make losses in due to intense competition and a rise in our oil price assumptions We expect continued losses to weaken its balance sheet INCOME STATEMENT FY ending Dec (Bt m) 2014A 2015A 2016F 2017F 2018F Sales 11,965 13,753 15,951 16,560 17,950 Cost of sales 12,024 14,902 17,955 17,601 18,585 Gross profit (60) (1,150) (2,005) (1,041) (634) % gross margin -0.5% -8.4% -12.6% -6.3% -3.5% Selling & administration expenses 814 1,011 1,037 1,043 1,077 Operating profit (874) (2,160) (3,042) (2,085) (1,711) % operating margin -7.3% -15.7% -19.1% -12.6% -9.5% Depreciation & amortization EBITDA (832) (2,099) (2,964) (1,994) (1,608) % EBITDA margin -7.0% -15.3% -18.6% -12.0% -9.0% Non-operating income Non-operating expenses Interest expense (2) (42) (33) (67) (111) Pre-tax profit (666) (1,658) (2,474) (1,571) (1,254) Income tax (0) After-tax profit (666) (1,664) (2,474) (1,571) (1,254) % net margin -5.6% -12.1% -15.5% -9.5% -7.0% Shares in affiliates' Earnings Minority interests Extraordinary items NET PROFIT (472) (726) (2,474) (1,571) (1,254) Normalized profit (472) (726) (2,474) (1,571) (1,254) EPS (Bt) (0.8) (1.2) (4.0) (2.5) (2.0) Normalized EPS (Bt) (0.8) (1.2) (4.0) (2.5) (2.0) BALANCE SHEET FY ending Dec (Bt m) 2014A 2015A 2016F 2017F 2018F ASSETS: Current assets: 5,184 6,139 4,367 3,437 3,099 Cash & cash equivalent 2,927 4,214 2,500 1,500 1,000 Account receivables 430 1,120 1,299 1,348 1,462 Inventories Others 1, Investments & loans Net fixed assets Other assets 1, Total assets 6,569 7,110 5,457 4,563 4,283 LIABILITIES: Current liabilities: 1,989 3,682 4,889 5,567 6,540 Account payables 1,834 2,934 3,535 3,466 3,659 Bank overdraft & ST loans ,119 1,842 2,608 Current LT debt Others current liabilities Total LT debt Others LT liabilities Total liabilities 2,220 4,168 4,989 5,667 6,640 Minority interest 578 (105) (105) (105) (105) Preferreds shares Paid-up capital Share premium 3,042 3,042 3,042 3,042 3,042 Warrants Surplus (6) (6) (6) (6) (6) Retained earnings 110 (614) (3,088) (4,660) (5,913) Shareholders' equity 3,771 3, (998) (2,252) Liabilities & equity 6,569 7,110 5,457 4,563 4,283 THANACHART SECURITIES DAIWA CAPITAL MARKETS 5

6 FINANCIAL SUMMARY NOK SAKSID PHADTHANANARAK We also forecast its free cash flow to be negative for the next three years CASH FLOW STATEMENT FY ending Dec (Bt m) 2014A 2015A 2016F 2017F 2018F Earnings before tax (666) (1,658) (2,474) (1,571) (1,254) Tax paid (6) (6) Depreciation & amortization Chg In w orking capital 1, (119) 79 Chg In other CA & CL / minorities (1,132) 1,369 (67) 3 (34) Cash flow from operations (702) 174 (2,046) (1,597) (1,105) Capex (203) (93) (100) (100) (100) ST loans & investments 2,840 (16) LT loans & investments (41) (36) Adj for asset revaluation Chg In other assets & liabilities (859) 736 (483) (27) (61) Cash flow from investments 1, (267) (127) (161) Debt financing (0) Capital increase Dividends paid (306) (306) Warrants & other surplus Cash flow from financing (301) Free cash flow (905) 81 (2,146) (1,697) (1,205) VALUATION FY ending Dec 2014A 2015A 2016F 2017F 2018F Normalized PE (x) na na na na na Normalized PE - at target price (x) na na na na na PE (x) na na na na na PE - at target price (x) na na na na na EV/EBITDA (x) na na na na na EV/EBITDA - at target price (x) na na na na na P/BV (x) na na P/BV - at target price (x) na na P/CFO (x) (6.7) 27.0 (2.3) (2.9) (4.2) Price/sales (x) Dividend yield (%) FCF Yield (%) (19.3) 1.7 (45.8) (36.2) (25.7) (Bt) Normalized EPS (0.8) (1.2) (4.0) (2.5) (2.0) EPS (0.8) (1.2) (4.0) (2.5) (2.0) DPS BV/share (1.6) (3.6) CFO/share (1.1) 0.3 (3.3) (2.6) (1.8) FCF/share (1.4) 0.1 (3.4) (2.7) (1.9) THANACHART SECURITIES DAIWA CAPITAL MARKETS 6

7 FINANCIAL SUMMARY NOK SAKSID PHADTHANANARAK We expect its equity to turn to be negative from 2017F onward FINANCIAL RATIOS FY ending Dec 2014A 2015A 2016F 2017F 2018F Growth Rate Sales (%) Net profit (%) na na na na na EPS (%) na na na na na Normalized profit (%) na na na na na Normalized EPS (%) na na na na na Dividend payout ratio (%) Operating performance Gross margin (%) (0.5) (8.4) (12.6) (6.3) (3.5) Operating margin (%) (7.3) (15.7) (19.1) (12.6) (9.5) EBITDA margin (%) (7.0) (15.3) (18.6) (12.0) (9.0) Net margin (%) (5.6) (12.1) (15.5) (9.5) (7.0) D/E (incl. minor) (x) na na na Net D/E (incl. minor) (x) (0.7) (1.3) na na na Interest coverage - EBIT (x) na na na na na Interest coverage - EBITDA (x) na na na na na ROA - using norm profit (%) na na na na na ROE - using norm profit (%) na na na na na DuPont ROE - using after tax profit (%) na na na na na - asset turnover (x) operating margin (%) na na na na na - leverage (x) (23.6) (2.7) - interest burden (%) tax burden (%) na na na na na WACC (%) ROIC (%) (37.2) (255.8) NOPAT (Bt m) (874) (2,160) (3,042) (2,085) (1,711) THANACHART SECURITIES DAIWA CAPITAL MARKETS 7

8 DISCLAIMER NOK SAKSID PHADTHANANARAK Important Disclosures and Disclaimers: This publication is prepared by Thanachart Securities Public Company Limited and distributed outside Thailand by Daiwa Securities Group Inc. and/or its non-u.s. affiliates except to the extent expressly provided herein. This publication and the contents hereof are intended for information purposes only, and may be subject to change without further notice. Any use, disclosure, distribution, dissemination, copying, printing or reliance on this publication for any other purpose without our prior consent or approval is strictly prohibited. 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10 DISCLAIMER NOK SAKSID PHADTHANANARAK United States This report is distributed in the U.S. by Daiwa Capital Markets America Inc. (DCMA). It may not be accurate or complete and should not be relied upon as such. It reflects the preparer s views at the time of its preparation, but may not reflect events occurring after its preparation; nor does it reflect Thanachart Securities or DCMA s views at any time. Neither Thanachart Securities, DCMA nor the preparer has any obligation to update this report or to continue to prepare research on this subject. This report is not an offer to sell or the solicitation of any offer to buy securities. Unless this report says otherwise, any recommendation it makes is risky and appropriate only for sophisticated speculative investors able to incur significant losses. Readers should consult their financial advisors to determine whether any such recommendation is consistent with their own investment objectives, financial situation and needs. 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If the downside is 10% or more, the rating is SELL. For stocks where the upside or downside is less than 10%, the rating is HOLD. Unless otherwise specified, these ratings 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 rating. For the sector, Thanachart looks 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 Thanachart sees the industry trend improving. An arrow pointing down, or the word Negative, is used when Thanachart sees 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 Thanachart s top-down perspective on the industry rather than a bottom-up interpretation from the stocks that Thanachart covers. An Overweight sector weighting is used when Thanachart has BUYs on majority of the stocks under its coverage by market cap. Underweight is used when Thanachart has SELLs on majority of the stocks it covers by market cap. Neutral is used when there are relatively equal weightings of BUYs and SELLs]. Ownership of Securities For Ownership of Securities information, please visit BlueMatrix disclosure Link at Investment Banking Relationships For Investment Banking Relationship, please visit BlueMatrix disclosure Link at Relevant Relationships (TNS) TNS may from time to time have an individual employed by or associated with it serves as an officer of any of the companies under its research coverage. TNS market making TNS may from time to time make a market in securities covered by this research. THANACHART SECURITIES DAIWA CAPITAL MARKETS 10

11 DISCLAIMER NOK SAKSID PHADTHANANARAK Additional information may be available upon request. Japan - additional notification items pursuant to Article 37 of the Financial Instruments and Exchange Law (This Notification is only applicable where report is distributed by Daiwa Securities Co. Ltd.) If you decide to enter into a business arrangement with us based on the information described in materials presented along with this document, we ask you to pay close attention to the following items. In addition to the purchase price of a financial instrument, we will collect a trading commission* for each transaction as agreed beforehand with you. Since commissions may be included in the purchase price or may not be charged for certain transactions, we recommend that you confirm the commission for each transaction. In some cases, we may also charge a maximum of 2 million (including tax) per year as a standing proxy fee for our deposit of your securities, if you are a non-resident of Japan. For derivative and margin transactions etc., we may require collateral or margin requirements in accordance with an agreement made beforehand with you. Ordinarily in such cases, the amount of the transaction will be in excess of the required collateral or margin requirements. There is a risk that you will incur losses on your transactions due to changes in the market price of financial instruments based on fluctuations in interest rates, exchange rates, stock prices, real estate prices, commodity prices, and others. In addition, depending on the content of the transaction, the loss could exceed the amount of the collateral or margin requirements. There may be a difference between bid price etc. and ask price etc. of OTC derivatives handled by us. Before engaging in any trading, please thoroughly confirm accounting and tax treatments regarding your trading in financial instruments with such experts as certified public accountants. * The amount of the trading commission cannot be stated here in advance because it will be determined between our company and you based on current market conditions and the content of each transaction etc. When making an actual transaction, please be sure to carefully read the materials presented to you prior to the execution of agreement, and to take responsibility for your own decisions regarding the signing of the agreement with us. Corporate Name: Daiwa Securities Co. Ltd. Financial instruments firm: chief of Kanto Local Finance Bureau (Kin-sho) No.108 Memberships: Japan Securities Dealers Association, The Financial Futures Association of Japan Japan Investment Advisers Association Type II Financial Instruments Firms Association Thanachart Securities Pcl. Research Team 19 Floor, MBK Tower 444 Phayathai Road, Pathumwan Road, Bangkok Tel: thanachart.res@thanachartsec.co.th Pimpaka Nichgaroon, CFA Head of Research pimpaka.nic@thanachartsec.co.th Chak Reungsinpinya Energy, Petrochemical chak.reu@thanachartsec.co.th Pattarawan Wangmingmat Senior Technical Analyst pattarawan.wan@thanachartsec.co.th Sarachada Sornsong Bank, Financial, Telecom sarachada.sor@thanachartsec.co.th Wichaya Wongpanuwich, CFA, FRM Analyst, Retail Market wichaya.won@thanachartsec.co.th Kampon Adireksombat, Ph.D. Deputy Head of Research Economics kampon.adi@thanachartsec.co.th Chatchawin Lertapiruk Electronics, Insurance, Small Cap chatchawin.ler@thanachartsec.co.th Phannarai Tiyapittayarut Property, Retail phannarai.von@thanachartsec.co.th Siriporn Arunothai Small Cap Research, Healthcare siriporn.aru@thanachartsec.co.th Witchanan Tambamroong Technical Analyst witchanan.tam@thanachartsec.co.th Adisak Phupiphathirungul, CFA Retail Market Strategy adisak.phu@thanachartsec.co.th Kalvalee Thongsomaung Food, Hotel, Media kalvalee.tho@thanachartsec.co.th Saksid Phadthananarak Construction, Transportation saksid.pha@thanachartsec.co.th Supanna Suwankird Energy, Utilities supanna.suw@thanachartsec.co.th Sittichet Rungrassameephat Assistant Analyst, Quantitative sittichet.run@thanachart.co.th THANACHART SECURITIES DAIWA CAPITAL MARKETS 11