BTS Group Holdings

BTS Group Holdings Plc (BTS)
Infrastructure fund. BTS’s board gave the nod to the setup of an infrastructure fund
by Bangkok Mass Transit System (BTSC, 97.46% held by BTS) to which it will sell the net
fare box revenue from the core sky train system. BTS will take one third of the fund.
We roughly estimate this will give it extra gains of Bt6-13bn, but it will slash core
earnings by 30%. While its targeted proceeds from this transaction at Bt50-60bn are
close to our projections, the proceeds will provide upside in the form of funding for
potential new mass transit investments, subject to the bidding format/details of
concession agreements. We see a high chance that BTS will pay a special DPS, on the
excess cash and gain from the sale of land and listing of VGI at Bt6bn (Bt0.6/sh) and
Bt2.5bn (Bt0.3/sh) and potential additional cash of Bt34-40bn and gains of Bt6-13bn
from this transaction, most of which we expect to be kept for new investments.

2QFY13A above estimates. BTS reported a 2QFY13 (Jul-Sep 12) net profit of Bt691mn
(-46% YoY but +124% QoQ). Excluding gains on the sale of land, normalized profit was
Bt395mn (+45% YoY and +22% QoQ). Profit was 5% above SCBS and 20% above
consensus from higher-than-expected extra gains and mass transit/media earnings.

Mass transit gross profit was Bt755mn, +20% YoY and +8% QoQ. The increase YoY
was brought by: 1) a rise in fare box revenue from a jump in ridership (+9% YoY)
and average fare rate (+4% YoY) to Bt25.1/trip from the increase in the price of the
30-day pass; 2) a jump in income from train operating management (+13% YoY)
from income related to the On Nut-Bearing extension from Aug 2011 and the
revised O&M contract for Silom line extension from May 2012.

Media gross profit was Bt438mn, +33% YoY and +20% QoQ, backed by both non-BTS
and BTS related media units. Non-BTS related media revenue jumped by +55% YoY
from 1) additional modern trade contracts (Tesco Lotus and BigC, notably sales
floor area); 2) the rights for advertising media in another four office buildings
(+10%); 3) the adjustment in selling strategy by bundling office building media with
BTS-related media. BTS-related media revenue rose by 25% YoY) from: 1) price
increase for train body advertising, 2) higher available space on train body, instation,
and LCD in-train ads provided by the 12 additional 4-car trains.

Property gross profit was Bt74mn, +117% YoY and +103% QoQ. The jump was
brought by: 1) revenue from the opening of Eastin Grand Hotel in May 2012; 2) the
completion and closure of the low-margin Baan Aur Athorn project.

Raised earnings in FY2013-14. We raised FY2013 earnings by 30% and FY2014 by 10%
to factor in: 1) additional gains on the sale of land at Sukhumvit of Bt680mn (to be
booked in 3QFY13); 2) 3% rise in average fare rate in FY2013-14; 3) margin expansion in
mass transit and media on the economy of scale and better cost control.

BUY with new PT at Bt7.8. We raise PT in response to: 1) raise in earnings; 2) rerating
valuation for VGI; 3) PT rolled over to year-end. These led to a raise in SOTP PT to
Bt7.8 (end-2013) from Bt6.5 (mid-2013), fully diluted and not yet including the upside
from new O&M contracts at Bt0.3/sh. Our PT consists of Bt5.6/sh for mass transit (DCF
ending FY2030, 9% WACC and 0% growth), Bt1.2/sh for media (10% discount to market
price), and Bt1.0/sh for property (book value). ST catalysts: 1) potential special DPS;
2) record high 3QFY13F earnings. We will have more details after the Nov 12 meeting.