BTS Group Holding

Progress on new mass transit contracts. After finalizing talks with the BMA and MRTA, BTS will negotiate new E&M and O&M contracts for the North and South Green Lines (Mo Chit–Khu Khot, and Bearing–Samutprakarn) extensions rather than bidding. The benefits for the public include: 1) saving time by offering a seamless service (same operator); 2) more rapid opening of some new stations as BTS can open them as soon as completed. BTS expects to sign these contracts in 2Q15. BTS is also still planning to bid for four new projects: 1) Pink Line (Khae Rai-Min Buri) in 2015; 2) Light Rail Transit (Bang Na–Suvarnabhumi) in 2015; 3) Grey Line (Watcharaphol–Rama 9 Bridge) in 2016; and 4) Light Green Line (Bang Wa-Borommaratchachonnani) in early 2017. 

Progress on new media contracts. BTS signed contracts for the right to operate commercial area at seven more stations on the Green Line extensions, adding to existing rights for the 23 stations on the core Green Line network. It will take around six months before it records any of this as revenue. Revenue from station operations is currently 10% of BTS’s revenue, and we estimate these new contracts will add up to 3% to BTS’s revenue in FY2016. Though TESCO may not renew its sales floor area contracts, BTS believes the new media contracts will more than offset the loss of TESCO. These include: 1) the exclusive right to manage Family Mart’s advertising spaces; 2) a 5-year renewal of the contract with BIGC (to 2019); 3) a 5-year term as exclusive sales agent for the largest mega LED in Laos; 4) the possibility of new contracts from TESCO for non-sales floor area and pylon areas.

New property partners. SIRI (residential property): BTS established a 50:50 JV with SIRI to develop residential property within 500m from mass transit stations with sales value per project of at least Bt3bn. BTS will help in the land acquisition and lifestyle solutions (i.e. Rabbit card) and SIRI will do the actual project development. It targets a project value of Bt25-30bn developed over next five years, a 12% net profit margin, and equity IRR of at least 17%. The first project will be near BTS Mo Chit station, with Bt5.3bn sales value (high-rise condominium; 873 units), presales in Mar 2015, and units transferred in Mar 2018. NPARK (commercial property): BTS will sell its assets (Eastin Grand Sathorn Hotel, land plots near BTS Mo Chit and Phayathai station) worth ~Bt8-10bn to NPARK in exchange for up to 37% NPARK shares, warrants, and cash. This is subject to due diligence, NPARK shareholder approval (29 Dec 2014), and BTS board approval. If this goes through, BTS aims to develop a mixed-use commercial project (i.e. hotel and office building) with NPARK. 

BTS’s rationale is to recognize gain on sale of assets (~Bt400mn from SIRI in 3QFY15 and ~Bt2bn from NPARK in 4QFY15, pending on deal finalization), partner with experts, and retain a major LT stake in existing assets without capital injection. Since this is a long-term plan, we expect insignificant core earnings impact in the immediate term. 

Maintain BUY, raise SOTP PT to Bt12.5 (end-2015) from Bt10.8 (mid-2015), rolling PT to year-end and including upside from new North and South Green extension lines (contracts to be signed soon). Our PT consists of Bt2.8 from existing extension lines and Bt1.2 from new extension lines (DCF), Bt1.7 from BTSGIF (market price), Bt2.1 from VGI (market price), Bt1.9 from property (2x BV), and Bt2.8 from net cash.