Bangkok--2 Apr--HSBC
* ICAO's safety concerns on Thailand's aviation standards triggers foreign flying restrictions on Thailand airlines
* We argue Thailand's airports are better placed than airlines; foreign airline expansion prospects cap risks
* Upgrade Airports of Thailand to Buy (from Neutral) on recent share pull-back; establish Reduce on Thai Airways
Risks from regulatory scruitny. In response to the International Civil Aviation Organization (ICAO) declaring "Significant Safety Concern" over Thailand's civil aviation standards following an audit, several countries including China, Japan and Korea have imposed restrictions on Thailand based airlines from operating charters and flying new routes into their countries. History suggests an ICAO red flag is generally followed by a Federal Aviation Administration (FAA) downgrade that restricts flying into the United States. While Thailand's Department of Civil Aviation (DCA) has time (until May) to take corrective action towards meeting compliance, the government has moved quickly to resolve matters given the importance of tourism to its economy. It has announced the set up of a new aviation regulator within a month to address the issue.
Airports better placed than airlines. While flying restrictions are a clear negative for Thailand airlines with big expansion plans, we argue risks are capped for the airport. History suggests that, even after similar restrictions were imposed on Indonesia and the Philippines, international traffic at their airports continued to grow. We argue the scope for increased utilisation (higher load factors on current capacity) in the short term and the prospect of continued expansion by foreign airlines cap earnings risk for the airports. Our senstivity anaysis suggests a 5% lower traffic growth assumption for AOT would lower our 2015 net profit estimate by 7% and implied valuation by 10%, all else being equal.
Upgrade Airports of Thailand to Buy (from Neutral under HSBC's prior rating system). We set our fair value target price at THB330 (unchanged from our previous forward-looking TP). We establish a Reduce rating on Thai Airways (was Underweight under the prior rating system) and set our fair value target price at THB10 (down from THB11).