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  • See important disclosures, including any required research certifications, beginning on page 28

    Singapore Consumer Discretionary

    What's new: Singapores public transport landscape is set to undergo

    extensive change. In the rail segment, details of regulatory reform and

    asset acquisition are scant, and we believe these developments will only

    gain traction after rail reliability obligations have been fulfilled, which we do

    not expect to occur in the near term. Meanwhile, in the bus segment, the

    transition to a new government contracting model (GCM) is imminent, and

    we recommend that investors position themselves ahead of the events we

    expect to play out in the run-up to, and following, the GCMs

    implementation in September 2016. We expect shares in the sector to be

    rerated over the coming months as clarity increases.

    What's the impact: Given that we are drawing close to the GCMs

    implementation, we incorporate its full impact into our forecasts despite the

    lack of disclosure. Our recent discussions with new entrant Go-Ahead, as

    well as our analysis of the London bus market, where a similar model has

    been in place since 2000, strengthen our conviction that the transport

    service providers under Daiwas coverage will be net beneficiaries of the

    shift to the GCM, mainly as we foresee: 1) scope for operating-margin

    enhancement as revenue risk is transferred to the government, 2) reduced

    capex burdens as the government will assume asset ownership, and 3)

    capital proceeds from a potential acquisition of existing bus assets.

    After fine-tuning our margin assumptions for the bus segment, we estimate

    the move to the GCM will account for 5-9% of our operating profit forecasts

    for ComfortDelGro (CDG) for 2016-18E, and 4-7% of SMRTs for FY17-

    19E. In terms of asset acquisitions, we believe a direct acquisition remains

    the most sensible option for the regulator, and estimate net inflows of

    around SGD566m and SGD44.6m for CDG and SMRT respectively.

    What we recommend: We have a Positive rating on the sector. We

    reaffirm our Buy (1) call on CDG (CD SP, SGD2.97) with a higher DCF-

    based 12-month TP of SGD3.59 (from SGD3.38) and Underperform (4)

    rating on SMRT (MRT SP, SGD1.58), after raising our DCF-based TP to

    SGD1.41 (from SGD1.34). We continue to prefer CDG over SMRT, as we

    believe the former is better placed to leverage this operational shift given

    the bus segment is CDGs largest segment (32% of Singapore revenue vs.

    SMRTs 19%). Further, its superior FCF profile, stronger balance sheet (net

    cash of SGD229.2m as at end-2015 vs SMRTs net debt of SGD665.5m as

    at end-FY15) and 2016E dividend yield of 3.3% looks attractive, while the

    stock is trading at a 2016E PER of 19.7x (vs. SMRTs 24.7x for FY17E).

    How we differ: We believe the attractiveness of the new bus model in the

    Singapore market could be under-appreciated by some in the market.

    18 March 2016

    Singapore Land Transport Sector

    What will restructuring mean for the bus market in

    2016?

    In a pivotal year for the segment, we expect implementation of a new contracting model in September to be positive for existing operators

    Government acquisition of CDG and SMRTs bus assets could take place by 3Q16

    We have a Positive sector rating; prefer CDG over SMRT for superior earnings growth and more attractive valuation

    Key stock calls

    Source: Daiwa forecasts

    Jame Osman(65) 6321 3092

    jame.osman@sg.daiwacm.com

    New Prev.

    ComfortDelGro Corp (CD SP)

    Rating Buy Buy

    Target 3.590 3.380

    Upside p 20.9%

    SMRT Corp (MRT SP)

    Rating Underperform Underperform

    Target 1.410 1.340

    Downside q 11%

  • 2

    Singapore Land Transport Sector: 18 March 2016

    How do we justify our view?

    Growth outlook Valuation Earnings revisions

    Growth outlook Singapore Land Transport Sector: net profit growth forecasts

    (% YoY)

    While we expect the transition to a new bus model in

    Singapore in September 2016 to drive an expansion in

    operating profit margins for CDG and SMRT, we believe

    CDG will be the main beneficiary of this move due to its

    greater exposure to the bus segment.

    Further, our forecast 6.5% YoY decline in SMRTs FY17E

    net profit (2016 forecasts in the chart) incorporates our

    expectation of operating losses for its rail operation (MRT

    and LRT), due to: 1) increased rail and maintenance

    expenses, 2) the impact of the 1.9% fare reduction

    implemented in December 2015, and 3) lower government

    grants.

    Source: Daiwa forecasts Note: SMRT FY17E forecasts shown above as 2016 forecasts due to March year-end

    Valuation Singapore Land Transport Sector: 2016E valuations

    The valuations of the land transport operators have seen a

    rerating, likely driven by a positive shift in the markets

    outlook toward the public transport sector following

    favourable policy announcements signalling the

    governments intention to encourage public transport

    usage in the long term.

    CDGs valuations look reasonable to us in the context of

    its superior free cash flow generation, stronger balance

    sheet and 2016E dividend yield of 3.3%, as well as its

    stronger earnings growth prospects, relative to SMRT.

    (x) PER PBR EV/EBITDA Dividend yield CDG 19.7 2.6 7.3 3.3%

    SMRT 24.7 2.5 9.0 2.2%

    Source: Companies, Daiwa forecasts Note: SMRTs valuations are for FY17E (March year-end)

    Earnings revisions Singapore Land Transport Sector: consensus earnings-forecasts revisions

    The Bloomberg-consensus EPS forecasts for 2016-17

    have seen downward revisions over the past 12 months,

    mainly due to the announcement in October 2015 of a

    1.9% reduction in fares by the government. SMRT has

    seen sharper cuts due to its greater exposure to the

    regulated fare environment (around 72% of revenue vs.

    24% for CDG), as well as increased expectations of higher

    repair and maintenance and staff costs arising from its rail-

    enhancement projects.

    2016 2017

    EPS EBITDA EPS EBITDA

    CDG (4) (4) (4) (7)

    SMRT (29) (8) (31) (17)

    Source: Bloomberg

    -7%

    -2%

    3%

    8%

    13%

    2016 2017 2018

    CDG SMRT

  • 3

    Singapore Land Transport Sector: 18 March 2016

    Sector stocks: key indicators

    Source: Bloomberg, Daiwa forecasts

    Singapore Land Transport: timeline of GCM-related events

    Date Details

    May-14 LTA announces plans for new Government Contracting Model

    Oct-14 Tender for Bulim package opened

    Apr-15 Tender for Loyang package opened

    May-15 Winner of Bulim package announced

    Aug-15 SBS Transit announces transfer of BSEP buses to LTA

    Nov-15 Winner of Loyang package announced

    Dec-15 LTA announces it will take over SBST's 2016/17 bus purchase contracts; acquires 50 of its existing buses at NBV

    Upcoming

    2Q16E Tender for third bus package (Mandai)

    3Q16E Purchase of SBST/SMRT bus assets

    4Q16E Award of third bus package

    Sep-16 GCM takes effect - Tower Transit commences operations

    Source: Companies, Land Transport Authority (LTA), Daiwa compiled

    CDG: impact of GCM on Singapore bus segment operating forecasts

    SMRT: impact of GCM on Singapore bus segment operating forecasts

    SGD m 2014 2015E 2016E 2017E 2018E

    Current model

    Singapore bus revenues 777.4 848.8 883.1 918.7 955.8

    YoY revenue growth

    9.2% 4.0% 4.0% 4.0%

    Operating profit margin 1.6% 1.6% 1.6% 1.6% 1.6%

    Segment operating profit 12.4 13.6 14.1 14.7 15.3

    Under proposed GCM

    Singapore bus revenues 777.4 848.8 794.75 734.98 764.68

    YoY revenue growth

    9.2% -6.4% -7.5% 4.0%

    Operating profit margin 1.6% 1.6% 4.8% 8.0% 8.0%

    Segment operating profit 12.4 13.6 38.1 58.8 61.2

    Incremental operating profit - - 24.0 44.1 45.9

    % increase to overall operating profit forecasts

    5.1% 8.8% 9.0%

    Assumptions

    First 3 GCM packages are not won by either incumbent

    20% decline in revenues (according to % of bus routes lost)

    SGD m FY15 FY16E FY17E FY18E FY19E

    Current model

    Bus segment revenues (non-consolidated) 238.6 250.7 260.8 271.3 282.3

    YoY revenue growth

    5.1% 4.0% 4.0% 4.0%

    Operating profit margin -2.7% 4.0% 1.5% 1.5% 1.5%

    Segment operating profit (6.5) 10.0 3.9 4.1 4.2

    Under proposed GCM

    Bus segment revenues 238.6 250.7 234.7 217.0 225.8

    YoY revenue growth

    5.1% -6.4% -7.5% 4.0%

    Operating profit margin -2.7% 4.0% 3.8% 6.0% 6.0%

    Segment operating profit (6.5) 10.0 8.9 13.0 13.5

    Incremental operating profit - - 5.0 9.0 9.3

    % increase to overall operating profit forecasts

    4.1% 7.1% 7.0%

    Assumptions

    First 3 GCM packages are not won by either incumbent

    20% decline in revenues (according to % of bus routes lost)

    Source: Company, Daiwa estimates Note: CDG stopped disclosing segmental Singapore bus revenue in 4Q15; hence full-year

    2015 Singapore bus revenue not available

    Source: Company, Daiwa estimates

    CDG: proceeds from the potential government acquisition of Singapore bus assets

    SMRT: proceeds from the potential government acquisition of bus assets

    (SGD m) Amount

    SBST segmental bus assets (

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