ASEAN Travel and Hospitality
The Rise of ASEAN Travel

ASEAN aviation has expanded at a rapid pace since 2000, along with economic growth and the introduction of LCCs into the region. The number of seats has grown from c. 69m in 2000 to 228m in 2012, representing a CAGR of 10.4%. With the middle class population set to increase from 79m to 196m by 2020, and factoring in the aggressive expansion plans by LCCs as well as progress of the ASEAN Open Skies talks, we project ASEAN short haul air traffic (intra-ASEAN and ASEAN - China/South Asia) to double by 2020 from 2012.

ASEAN hotels have and will continue to benefit from the increased numbers of travellers into and within this region. RevPARs in Bangkok and Singapore have grown by 21% and 38% CAGR respectively over 2010-2012. While supply in these 2 markets will increase steadily, the rapid growth in travellers should well support rates and occupancy in these countries in the medium term. Our top picks for hotel plays are Central Plaza Hotel, Minor International and CDL Hospitality Trust.

Low Cost Carriers (LCCs) will continue to grow rapidly, backed by a huge order book (>1,000 narrow-body aircraft on order). While AirAsia (HOLD, TP RM2.90) could become the dominant LCC player in the region given its first mover advantage and wide footprint, it will face stiff competition from Lionair, which has already taken the fight to Malaysia through its JV, Malindo Air. Meanwhile, we like Tigerair (BUY, TP S$0.74) for its strong position in Singapore, and its increasing exposure to Indonesia and the Philippines. Indonesia is the crown jewel in ASEAN’s aviation market. As an island nation of 235m people with a fast
growing middle class population, Indonesia is the honey pot that all the regional carriers are eyeing. Whilst we do see Indonesia gradually liberalising its aviation market, it will be at a pace that is in line with the growth of its home-grown carriers, rather than what the ASEAN Open Skies 2015 blueprint dictates. We initiate coverage on Garuda with a BUY call and Rp650 TP as we see Garuda riding on demand growth in Indonesia, whilst enjoying a protectionist stance from the government.

Related industries such as airports, maintenance, repair and overhaul (MRO) and ground handling companies should also benefit. We prefer Airports of Thailand (BUY, TP Bt 242) over Malaysia Airports (HOLD, TP RM7.20) as Thailand is seeing strong visitor arrivals growth, while we believe investors should BUY ST Engineering (TP S$4.80) over SIA Engineering (HOLD, TP S$5.10) among the MRO players that will benefit from strong ASEAN travel demand. SATS is a HOLD (TP S$3.29) as it is mainly dependent on Full Service Carrier business.

AirAsia; Hold; RM2.60
Price Target: RM2.90; AIRA MK
Competition in home market

Strong passenger growth in Indonesia. Competition driving yields lower. Maintain HOLD rating and RM2.90 TP.

Malaysian Airlines; Fully Valued; RM0.35
Price Target: RM0.30; MAS MK
Yields drop amid intense competition

Competition is driving yields lower. Oneworld Alliance lifts passenger numbers. Maintain Fully Valued rating with RM0.30 TP.

Malaysia Airports; Hold; RM7.59
Price Target: RM7.20; MAHB MK
Ready for ASEAN growth

KLIA2 is over 90% complete, on track for May 2014 opening. Ready to accommodate passenger growth. Maintain HOLD with RM7.20 SOP-derived TP.