Thailand Company Guide Version 3 Bloomberg: ERW TB Reuters: ERW.BK Refer to important disclosures at the end of this report DBS Group Research. Equity 3 Feb 2017 BUY Last Traded Price ( 2 Feb 2017): Bt4.42 (SET : 1,572.67) Price Target 12-mth: Bt5.80 (31% upside) Potential Catalyst: Recovery of international tourist arrivals Analyst Namida ARTISPONG +66 2657 7833 namidaa@th.dbsvickers.com What s New Expect to see positive surprise for 4Q16F earnings Seeing RevPar growing from both occupancy rate and room rate hike Adding eight Hop Inn hotels in Thailand and one in the Philippines this year No more losses during low season Price Relative 6.8 6.3 5.8 5.3 4.8 4.3 3.8 3.3 Bt 2.8 65 Feb-13 Feb-14 Feb-15 Feb-16 Feb-17 (LHS) Relative SET (RHS) Relative Index Forecasts and Valuation FY Dec (Bt m) 2014A 2015A 2016F 2017F Revenue 4,285 5,255 5,606 6,230 EBITDA 916 1,416 1,598 1,775 Pre-tax Profit (91.5) 331 511 611 Net Profit (112) 198 362 423 Net Pft (Pre Ex.) (115) 198 362 423 Net Pft Gth (Pre-ex) (%) nm nm 83.1 16.8 EPS (Bt) 0.0 0.08 0.15 0.17 EPS Pre Ex. (Bt) 0.0 0.08 0.15 0.17 EPS Gth Pre Ex (%) nm nm 83 17 Diluted EPS (Bt) 0.0 0.08 0.15 0.17 Net DPS (Bt) 0.04 0.04 0.06 0.07 BV Per Share (Bt) 1.84 1.88 1.99 2.10 PE (X) nm 55.8 30.5 26.1 PE Pre Ex. (X) nm 55.8 30.5 26.1 P/Cash Flow (X) 11.8 8.5 11.0 9.7 EV/EBITDA (X) 20.6 13.3 12.3 11.6 Net Div Yield (%) 0.9 0.9 1.3 1.5 P/Book Value (X) 2.4 2.3 2.2 2.1 Net Debt/Equity (X) 1.6 1.5 1.6 1.7 ROAE (%) (2.3) 4.3 7.5 8.3 Earnings Rev (%): 13 0 Consensus EPS (Bt): 0.14 0.18 Other Broker Recs: B: 15 S: 0 H: 1 Source of all data on this page: Company, DBS Vickers, Bloomberg Finance L.P 205 185 165 145 125 105 85 Sunny side-up Maintain BUY rating The period of mourning for our late king would have a lessthan-expected impact on its operations in 4Q16F. Meanwhile, we are positive on 2017 outlook which should be buoyed by organic growth (growing RevPar of its existing hotels) and hotel expansion. We believe ERW will benefit from the recovery of international tourist arrivals given its high Thailand exposure. Impact of mourning period was not as bad as expected. The mourning period has hurt ERW s 4Q16F operations due to cancellations and postponement of events and banquets though not as bad as earlier expected. Its Food and Beverage (F&B) segment in 4Q16F may have deteriorated slightly while hotel room revenue should still grow. Overall, we estimate ERW s net earnings will slide only 4.4% y-o-y to Bt98.4m in 4Q16F, including expected extraordinary gains of Bt2.6m from the sale of one unit of its shophouses in 4Q16. In 4Q16, ERW added two Hop Inn hotels in Thailand (Hat Yai and Phuket) and one Hop Inn in Manila, the Philippines. This adds another 326 rooms to its current portfolio to 41 hotels with a total of 6,385 rooms. Growing RevPar and hotel expansion to support FY17F earnings. We expect to see growing RevPar, driven by both average occupancy rate and average daily room rate. ERW should be able to increase its average occupancy rate (AOR) by 2ppts to 85% in FY17F, supported by continuous rise of international tourists and limited hotel supply. Given its high hotel AOR of 83% in FY16F, we estimate ERW to achieve c.5% increase in average room rate this year. ERW has solid expansion plan to add eight Hop Inn hotels in Thailand and one hotel in Manila, the Philippines in 2017, implying a 12.2% increase in the number of hotel rooms. In 2018, ERW will continue to expand its Hop Inn network and also open two hotels in mid-scale and economy segments in Thailand. By 2020, the group targets to have 95 hotels with more than 10,000 rooms in Thailand and ASEAN. Valuation: We lift our FY16F earnings by 13% for better-than- expected 4Q16F earnings. We maintain FY17F earnings and TP at Bt5.80, based on DCF valuation. Thanks to its better profit quality, we expect ERW to remain profitable during Thailand s tourism low season in 2Q and 3Q. Key Risks to Our View: Key risks include i) Thailand s tourism industry slowdown, and ii) competition in the hotel industry. At A Glance Issued Capital (m shrs) 2,498 Mkt. Cap (Btm/US$m) 11,042 / 315 Major Shareholders (%) Wattanavekin's Family 23.3 City Holding 9.8 MITR Phol Sugarco Ltd 7.5 Free Float (%) 31.1 3m Avg. Daily Val (US$m) 0.89 ICB Industry : Consumer Services / Travel & Leisure ed: CK / sa:cs, PY
WHAT S NEW Impact from mourning period is not as bad as expected Not bad 4Q16F performance: The mourning period has hurt ERW s 4Q16F operations due to cancellations and postponement of events and banquets though not as bad as earlier expected. We expect its Food and Beverage (F&B) segment in 4Q16F to have deteriorated only slightly while hotel room revenue should still grow. We believe this impact on its hotel operations is temporary. Overall, we estimate ERW s net earnings will slide only 4.4% y-o-y to Bt98.4m in 4Q16F. Note that we expect extraordinary gains of Bt2.6m from the sale of one unit of its shophouses in the quarter. Excluding Hop Inn, group s hotel RevPar should rise by 3-4% y-o-y in 4Q16F, mainly driven by an increase in average occupancy rate (AOR) to 77%. In the quarter, ERW added two Hop Inn hotels in Thailand (Hat Yai and Phuket) and one Hop Inn in Manila, the Philippines. This adds another c.326 rooms to its portfolio. Growing RevPar: We expect Thailand tourism to continue to boom in 2017, as the impact of falling Chinese arrivals to Thailand in the past few months from the crackdown on zero-dollar tours should be short-lived. Of the total Chinese tourist arrivals to Thailand, 60% are free independent types, 20% are from normal tour groups, and the remaining 20% are lured by zero-dollar tour packages. With Thailand s beautiful nature and culture, good food, and good aviation networks to both main and secondary cities, Thailand s Tourism and Sports Ministry expects international tourist arrivals to Thailand to grow by 7.7% to 35m in 2017. Meanwhile, Chinese tourists are expected to increase to 9.8m (+11.4% y-o-y). Additionally, signs of a recovery in Russian arrivals will also support Thailand s tourism sector this year. should be able to increase its average occupancy rate (AOR) by 2ppts to 85% in FY17F. Given its high hotel AOR of 83% in FY16F, we estimate ERW to achieve c.5% increase in average room rate this year. Continuous expansion: As of end-2016, ERW operated 41 hotels with a total of 6,385 rooms. ERW plans to add eight Hop Inn hotels in Thailand and one hotel in Manila, the Philippines in 2017, implying a 12.2% increase in the number of hotel rooms. In 2018, ERW will continue to expand its Hop Inn network and also open two hotels in mid-scale and economy segments in Thailand (more details on hotel expansion plan will be announced on Feb 23). By 2020, the group targets to have 95 hotels (25 of high-end/midscale/economy hotels, 50 budget hotels in Thailand, and 20 budget hotels in the Philippines) with more than 10,000 rooms in Thailand and ASEAN. Continuous expansion: We lift our FY16F earnings by 13% for better-than- expected 4Q16F earnings. We maintain FY17F earnings and TP at Bt5.80, based on DCF valuation. Thanks to its better profit quality, we expect ERW to remain profitable during Thailand s tourism low season in 2Q and 3Q. Hence, we expect to see growing RevPar, driven by both average occupancy rate and average daily room rate. ERW Page 2
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Company Guide CRITICAL DATA POINTS TO WATCH Earnings Drivers: New hotels in the pipeline. As at end-fy16, ERW operated 41 hotels with a total of 6,385 hotel rooms across Thailand. Of the total EBITDA in 9M16, 44% came from luxury hotels, followed by mid-scale (29%), economy (21%), and budget (6%). ERW plans to expand its hotel portfolio via non-luxury segments which are the high-growth markets. ERW targets to have 95 hotels with more than 10,000 rooms in Thailand and ASEAN by 2020. Building footprints in ASEAN markets. ERW sees opportunities in overseas markets, particularly in the ASEAN region. New emerging markets have high growth potential. ERW took its first step overseas by venturing into the Philippines (168 rooms) in 4Q16. The group will use the Hop Inn brand (three stars) with an average of 150-200 rooms per hotel to penetrate the market. Its target customers are locals, especially business travellers. ERW targets to have 20 Hop Inn hotels overseas by 2020. Expanding RevPar. With continuous growth in Thailand s tourism sector, the group s hotel business is expected to see a higher occupancy rate. Meanwhile, we expect ERW to be able to increase the average room rate at each of its hotel segments with an average increase of 5%. Lower-end hotel segments to benefit margins. ERW is expanding its hotels in the non-luxury segments, and hence margins are expected to be stronger going forward as lowerend hotel segments generate higher margins. This is premised on lower investments and operation costs due to the simpler business model, and lower F&B contribution as a percentage of total hotel revenue. For luxury hotels, as high as 50% of total hotel revenues are contributed from F&B, while the rest is from room revenue. F&B contribution is less for hotels in the lowerend segment. Hotel revenue breakdown by segment 100% 1% 2% 90% 15% 17% 17% 20% 21% 18% 80% 15% 18% 18% 70% 20% 7% 21% 24% 60% 6% 8% 8% 50% 10% 8% 40% 30% 63% 59% 20% 57% 52% 48% 47% 10% 0% 2010 2011 2012 2013 2014 2015 Luxury Bangkok Luxury Resort Midscale Economy Hop Inn EBITDA margin by segment 50% 45% 40% 38% 35% 36% 35% 35% 33% 38% 37% 35% 30% 28% 34% 25% 28% 28% 30% 30% 27% 20% 24% 23% 15% 20% 2010 2011 2012 2013 2014 2015 Luxury Midscale Economy Hop Inn Room revenue by country of residence Country Contribution F Y15F China 16% Thailand 12% U.S. 11% Singapore 6% Hong Kong 4% India 4% U.K. 4% Germany 4% Russia 4% South Korea 4% Others 31% Total 100% '000 People 3,400 Thailand: Visitor arrivals 3,000 2,600 2,200 1,800 1,400 1,000 600 2009 2010 2011 2012 2013 2014 2015 2016 Source: Company, DBS Vickers Page 3
Balance Sheet: Balance sheet is manageable. As at end-3q16, interest bearing debt-to-equity was 1.7x, lower than its covenant of 2.5x. Share Price Drivers: Recovery of international tourist arrivals to Thailand. Despite a crackdown on Chinese zero-dollar tours, we are still positive on the tourism industry given Thailand s costcompetitive travelling and variety of destinations. We believe the decline in international tourists should have already bottomed out in Nov. International passenger growth at AOT s six airports has rebounded to 7% during 1-20 Jan 2017. The Tourism Authority of Thailand expects the number of tourists to continue to grow by 7.7% to 35.1m in 2017. Given that most of ERW s earnings come from Thailand, the group will be a key beneficiary of the rising number of international tourist arrivals to Thailand. Leverage & Asset Turnover (x) 1.80 1.60 1.40 1.20 1.00 0.80 0.60 0.40 0.20 0.00 2013A 2014A 2015A 2016F 2017F Gross Debt to Equity (LHS) Asset Turnover (RHS) Btm 2,500.0 2,000.0 1,500.0 1,000.0 Capital Expenditure 0.4 0.4 0.4 0.3 0.3 0.3 Key Risks: Tourism industry slowdown. Thailand s tourism industry can be affected by several factors such as political uncertainty, global economic slowdown, epidemics and natural disasters. Competition in the hotel industry. A new supply of hotel rooms is expected to come onstream. However, as Thailand is a top tourist destination, we believe that demand will outpace supply. Also, its strong international hotel brands and welldiversified hotel portfolio will enable it to be competitive. 500.0 0.0 20.0% 15.0% 10.0% 2013A 2014A 2015A 2016F 2017F Capital Expenditure (-) ROE (%) Company Background ERW is a leading investor, developer, and operator of hotels in Thailand. It was founded in 1982 by the three families of Vongkusolkit, Wattanavekin and Janewattanawit. It targets various segments of customers as its assets range from budget to luxury hotels. The group was listed on the Stock Exchange of Thailand on 26 Aug 1988 at an IPO price of Bt31.0 per share (Bt10 par value). However, the par value has since been reduced to Bt1 per share. 5.0% 0.0% 2013A 2014A 2015A 2016F 2017F PB Band (x) (x) 4.3 3.8 3.3 +2sd: 3.25x 2.8 +1sd: 2.82x 2.3 Avg: 2.39x -1sd: 1.95x 1.8-2sd: 1.52x 1.3 Feb-13 Feb-14 Feb-15 Feb-16 Source: Company, DBS Vickers Page 4
Income Statement (Btm) FY Dec 2013A 2014A 2015A 2016F 2017F Revenue 4,702 4,285 5,255 5,606 6,230 Cost of Goods Sold (2,156) (2,230) (2,510) (2,602) (2,891) Gross Profit 2,546 2,055 2,744 3,004 3,340 Other Opng (Exp)/Inc (1,858) (1,811) (2,046) (2,143) (2,345) Operating Profit 688 244 699 861 994 Other Non Opg (Exp)/Inc (84.0) 0.0 0.0 0.0 0.0 Associates & JV Inc 15.8 20.9 19.4 11.7 12.9 Net Interest (Exp)/Inc (368) (360) (387) (361) (396) Exceptional Gain/(Loss) 805 3.57 0.0 0.0 0.0 Pre-tax Profit 1,057 (91.5) 331 511 611 Tax (90.7) (19.0) (98.8) (116) (148) Minority Interest (29.6) (1.1) (34.8) (33.7) (39.3) Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit 937 (112) 198 362 423 Net Profit before Except. 132 (115) 198 362 423 EBITDA 1,354 916 1,416 1,598 1,775 Growth Revenue Gth (%) 9.3 (8.9) 22.6 6.7 11.1 EBITDA Gth (%) 7.1 (32.4) 54.7 12.8 11.1 Opg Profit Gth (%) 10.5 (64.6) 186.5 23.2 15.5 Net Profit Gth (Pre-ex) (%) 128.1 nm nm 83.1 16.8 Margins & Ratio Gross Margins (%) 54.1 48.0 52.2 53.6 53.6 Opg Profit Margin (%) 14.6 5.7 13.3 15.4 16.0 Net Profit Margin (%) 19.9 (2.6) 3.8 6.5 6.8 ROAE (%) 22.0 (2.3) 4.3 7.5 8.3 ROA (%) 7.1 (0.8) 1.3 2.4 2.6 ROCE (%) 5.1 1.9 3.6 4.6 4.9 Div Payout Ratio (%) 40.0 N/A 50.5 40.0 40.0 Net Interest Cover (x) 1.9 0.7 1.8 2.4 2.5 Source: Company, DBS Vickers Page 5
Quarterly / Interim Income Statement (Btm) FY Dec 3Q2015 4Q2015 1Q2016 2Q2016 3Q2016 Revenue 1,216 1,386 1,542 1,277 1,375 Cost of Goods Sold (625) (638) (665) (631) (637) Gross Profit 591 748 877 646 738 Other Oper. (Exp)/Inc (504) (507) (550) (524) (546) Operating Profit 86.3 241 327 122 192 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 5.25 2.14 8.09 5.23 (3.9) Net Interest (Exp)/Inc (96.1) (95.3) (93.2) (88.8) (89.4) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit (4.6) 148 242 38.6 98.7 Tax (13.1) (33.5) (43.8) (15.9) (29.9) Minority Interest (2.3) (11.5) (7.5) (5.7) (13.0) Net Profit (20.0) 103 191 17.0 55.8 Net profit bef Except. (20.0) 103 191 17.0 55.8 EBITDA 267 421 507 303 377 Growth Revenue Gth (%) 0.8 14.0 11.3 (17.2) 7.7 EBITDA Gth (%) 0.4 57.4 20.6 (40.3) 24.5 Opg Profit Gth (%) 0.1 179.5 35.8 (62.7) 57.1 Net Profit Gth (Pre-ex) (%) 19.4 nm 85.6 (91.1) 228.9 Margins Gross Margins (%) 48.6 54.0 56.9 50.6 53.6 Opg Profit Margins (%) 7.1 17.4 21.2 9.6 14.0 Net Profit Margins (%) (1.6) 7.4 12.4 1.3 4.1 Balance Sheet (Btm) FY Dec 2013A 2014A 2015A 2016F 2017F Net Fixed Assets 10,558 11,603 11,632 12,724 13,947 Invts in Associates & JVs 162 162 162 162 162 Other LT Assets 1,768 1,705 1,617 1,620 1,623 Cash & ST Invts 827 676 1,011 890 903 Inventory 51.6 55.3 61.5 63.1 69.3 Debtors 209 212 202 219 248 Other Current Assets 139 103 134 136 139 Total Assets 13,715 14,517 14,820 15,815 17,092 ST Debt 1,002 1,720 2,617 2,532 2,674 Creditor 502 386 317 336 381 Other Current Liab 612 610 625 628 631 LT Debt 6,030 6,722 5,988 6,785 7,590 Other LT Liabilities 340 344 357 360 364 Shareholder s Equity 5,035 4,554 4,703 4,960 5,238 Minority Interests 194 180 214 214 214 Total Cap. & Liab. 13,715 14,517 14,820 15,815 17,092 Non-Cash Wkg. Capital (714) (626) (544) (545) (555) Net Cash/(Debt) (6,204) (7,766) (7,594) (8,428) (9,361) Debtors Turn (avg days) 15.6 17.9 14.4 13.7 13.7 Creditors Turn (avg days) 118.5 104.0 71.6 63.9 62.0 Inventory Turn (avg days) 12.3 12.5 11.9 12.2 11.4 Asset Turnover (x) 0.4 0.3 0.4 0.4 0.4 Current Ratio (x) 0.6 0.4 0.4 0.4 0.4 Quick Ratio (x) 0.5 0.3 0.3 0.3 0.3 Net Debt/Equity (X) 1.2 1.6 1.5 1.6 1.7 Net Debt/Equity ex MI (X) 1.2 1.7 1.6 1.7 1.8 Capex to Debt (%) 23.4 21.0 8.5 18.6 18.8 Z-Score (X) NA NA NA NA NA Source: Company, DBS Vickers Page 6
Cash Flow Statement (Btm) FY Dec 2013A 2014A 2015A 2016F 2017F Pre-Tax Profit 1,057 (91.5) 331 511 611 Dep. & Amort. 563 572 619 658 707 Tax Paid 111 90.7 19.0 98.8 116 Assoc. & JV Inc/(loss) (15.8) (20.9) (19.4) (11.7) (12.9) Chg in Wkg.Cap. 183 (87.9) (81.3) 0.26 10.7 Other Operating CF (554) 464 436 (256) (291) Net Operating CF 1,345 926 1,305 1,001 1,141 Capital Exp.(net) (1,646) (1,770) (732) (1,730) (1,930) Other Invts.(net) 0.0 0.0 0.0 0.0 0.0 Invts in Assoc. & JV (162) 0.48 0.09 0.0 0.0 Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0 Other Investing CF 1,526 23.3 24.7 (2.7) (2.8) Net Investing CF (283) (1,746) (707) (1,733) (1,933) Div Paid (42.5) (375) (99.3) (99.9) (145) Chg in Gross Debt (845) 1,409 163 713 947 Capital Issues 646 14.6 69.4 (5.3) 0.0 Other Financing CF (403) (380) (396) 3.57 3.60 Net Financing CF (645) 669 (263) 611 805 Currency Adjustments 0.0 0.0 0.0 0.0 0.0 Chg in Cash 417 (151) 335 (121) 13.3 Opg CFPS (Bt) 0.46 0.41 0.55 0.40 0.45 Free CFPS (Bt) (0.1) (0.3) 0.23 (0.3) (0.3) Source: Company, DBS Vickers Target Price & Ratings History Analyst: 5.17 4.97 4.77 4.57 4.37 4.17 Bt 4 2 5 6 7 Namida ARTISPONG 8 9 12 10 11 13 14 15 S.No. Date of Report Closing Price 12-mth T arget Price Rating 1: 11 Feb 16 3.96 5.30 BUY 2: 24 Feb 16 4.04 5.30 BUY 3: 29 Feb 16 4.14 5.30 BUY 4: 07 Mar 16 4.14 5.30 BUY 5: 05 Apr 16 4.56 5.30 BUY 6: 20 Apr 16 4.50 5.30 BUY 7: 04 May 16 4.34 5.30 BUY 8: 13 May 16 4.48 5.70 BUY 3.97 3 9: 27 Jun 16 4.50 5.70 BUY 1 3.77 10: 29 Jul 16 4.76 5.70 BUY 11: 05 Aug 16 5.10 5.70 BUY 3.57 12: 10 Aug 16 5.00 5.70 BUY Feb-16 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 Feb-17 13: 06 Sep 16 4.74 5.70 BUY 14: 28 Oct 16 4.56 5.80 BUY Note : Share price and Target price are adjusted for corporate actions. 15: 10 Nov 16 4.58 5.80 BUY Source: DBS Vickers THAI-CAC Corporate Governance CG Rating 2016 Certified THAI-CAC is Companies participating in Thailand's Private Sector Collective Action Coalition Against Corruption programme (Thai CAC) under Thai Institute of Directors (as of October 28, 2016) are categorised into: Score Declared Certified Description Companies that have declared their intention to join CAC Companies certified by CAC. Corporate Governance CG Rating is based on Thai Institute of Directors (IOD) s annual assessment of corporate governance practices of listed companies. The assessment covers 235 criteria in five categories including board responsibilities (35% weighting), disclosure and transparency (20%), role of stakeholders (20%), equitable treatment of shareholders (10%) and rights of shareholders (15%). The IOD then assigns numbers of logos to each company based on their scoring as follows: Score Range Number of Logo Description 90-100 Excellent 80-89 Very Good 70-79 Good 60-69 Satisfactory 50-59 Pass <50 No logo given N/A Page 7
DBS Vickers recommendations are based an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame) BUY (>15% total return over the next 12 months for small caps, >10% for large caps) HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps) FULLY VALUED (negative total return i.e. > -10% over the next 12 months) SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame) Share price appreciation + dividends Completed Date: 3 Feb 2017 06:29:25 (THA) Dissemination Date: 3 Feb 2017 06:55:56 (THA) GENERAL DISCLOSURE/DISCLAIMER This report is prepared by DBS Vickers Securities (Thailand) Co, Ltd. 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