Company Report May 6, 2014 BUY CENTARA HOTELS PCL (CENTEL) Recovery play

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1 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Company Report CENTARA HOTELS PCL (CENTEL) Recovery play We initiate the coverage of CENTEL with a LONG-TERM BUY recommendation. CENTEL is a leading regional hospitality operator, focusing on hotel management services and operating the food catering business both as a franchisee and franchiser. We expect the company to post a solid 18.9% CAGR of EPS during , driven by aggressive organic and inorganic expansions from its hotel and food businesses. However, the ongoing political crisis has significantly slowed its earnings growth, especially in the hotel business. Expect a solid 18.9% CAGR of EPS in We expect CENTEL to post a solid 18.9% CAGR of EPS during , thanks to its food and hotel business expansion plan. We forecast 19.5% net profit growth for this year, driven by the full-year impact of 66 food restaurants which were opened in 2013 and additional expansion of 60 food outlets this year. We expect CENTEL s food business to have total sales growth of 16.7% in 2014, which is higher than 9.7% in The company has a target to operate more than 950 food restaurants by Increasing revenues from overseas hotels and food business to offset falling revenues from domestic hotels Although the outlook of the tourism industry in Thailand is very promising in the long term, we expect no growth for CENTEL s hotel business this year. The Centara Grand at Central World and the Centara Grand in Ladprao were severely affected by the Bangkok Shutdown during the first two months of the year and even after. Both locations contributed 32.6% of CENTEL s hotel revenue in We estimate that hotel revenues in Bangkok will fall by 20-25% YoY. However, we believe that CENTEL will be able to offset such possible damage by raising the room rates overseas, given CENTEL s two 5-stars resorts in Maldives. Moreover, we expect CENTEL to add at least 6-8 more hotels under its management contracts this year. Fees from these new management contracts flow through to its bottom line directly as this type of services costs very little. Recovery play: On the surface, CENTEL looks expensive as the share currently trades at a prospective 2014 PEG of 1.4x, given our 2014 EPS growth estimate of 20% and a prospective 2014 PE of 26.5x. However, after CENTEL took over the two resorts in Maldives in 2012, the share has traded on an average PE of 35x (up from the mean of 15.6x before the takeover). This suggests that if investors sentiment towards CENTEL returns to normal alongside the political situations, the share price should at least move back to trade around the mean of the historical PE. We expect CENTEL to recover from the negative sentiment from 3Q14 and to have a high 18.63% CAGR of earnings in We have set a target price for CENTEL in 2014 at Bt37 per share which is derived from a target 2014 PE of 31.6x, a 10% discount to the mean of the historical PE since Current Price Target Price BUY Bt30.25 Bt37.00 Upside/(Downside) % Consensus Sector Bt35.25 Tourism Paid-up Shares (mn.shares) 1,350 Market Capitalization (Btmn) 41,850 Free Float Major Shareholders Chirathivat Family Financial Hilights B tmn E 2015E 2016E Net Profit 1,322 1,580 1,861 2,223 Extra items Normalized Profi 1,322 1,580 1,861 2,223 Sales 17,557 18,970 22,149 25,817 EPS EPS Growth 24% 20% 18% 19% P/E (x) P/BV (x) Div. Yield 1.1% 1.9% 2.2% 2.7% Nb of shares 1,350 1,350 1,350 1,350 Source: SET, AWS estimates PE Band Price Source: SETSMART MULTIPLE EARNINGS of CENTEL Mr. Warut Siwasariyanon Tel: Warut.Si@asiawealth.co.th Mr. Traikun Kitimahakun Tel: Traikun.Ki@asiawealth.co.th 50x 42x 38x 34x 30x 26x 22x 18x

2 Well diversified hotel and food business Centel Plaza Hotel PLC (CENTEL) was established in 1980 and was listed in SET in CENTEL owns and manages hotels and resorts both inside and outside Thailand under its own brand such as Centara Grand, Centara, and Centra. The company now owns 15, and manages 28 hotels and resorts. The company also operates restaurant franchises for more than 700 branches, with well-known brands such as KFC, Mister Donut, Ootoya, and Auntie Anne s. CENTEL targets to be a leading regional hospitality operator, focusing on hotel management services and expanding additional food brands and branches. Outlook for Tourism business From a macro view, South East Asia is ranked the first in term of high growth rate of international tourist arrivals at 8.3% during , according to World Travel & Tourism Council (WTTC). WTTC expects an upward trend of international tourist arrivals in ASEAN, with an average annual growth rate of 5.8% until 2020, as shown in Table 1.Table 2 shows that Thailand welcomed 26.5million international tourists in 2013, which were the highest number in ASEAN compared with Malaysia at 25.7million and Singapore at 15.2million. The incoming international tourists to Thailand has grown by 13.5% CAGR from 14.1million in 2009, thanks to Thailand s famous tourist attractions, its appetizing food, and its well reputation of hospitality. The number of tourist arrivals were mainly supported by growing Chinese tourists which has increased almost fivefold to now at 4 million within five years, as shown in Table 3. Table 1: Number of International Tourists Arrivals around the world Average Average annual annual growth 2020E growth Market Share Market Share by 2020E World Europe Asia and the Pacific S/E Asia Americas Africa Middle East Source: World Travel and Tourism Council Table 2: Number of International Tourists to ASEAN Number of Visitors to ASEAN Thailand Brunei Cambodia Indonesia Laos Malaysia Myanmar Philippines Singapore Vietnam Source: World Travel and Tourism Council Table 3: International Tourists Arrivals to Thailand by nationality East Asia 7,076 8,167 10,346 12,525 15,911 -China 778 1,122 1,721 2,787 4,637 Europe 4,060 4,442 5,101 5,651 6,306 Americas ,083 1,167 Total 14,150 15,936 19,230 22,354 26,547 Source: tourism.go.th Due to the current political crisis, the number of international tourist arrivals in the first three months has dropped 5.8%YoY to 6.59 million from 7.0 million last year, according to Thailand Immigration Bureau. We expect 3-5% negative growth of international tourists in 2014, even though the Tourism Authority of Thailand forecasts the number of international tourists in 2014 to grow by 5.6% to 28 million. Nevertheless, we still expect an 8-10% positive growth rate of international tourist arrivals during

3 Outlook for CENTEL s hotel business CENTEL s revenue from the hotel business grew 29.2%YoY in 2013 to Bt8,037mn. The company currently operates 15 of its owned hotels and resorts, 13 in Thailand and 2 in Maldives. The company has also franchised out 28 hotels under its own brands, mostly Centara Grand and Centara. The company has aimed to operate 80 hotels by 2018, with minimum investment in property assets. It plans to operate 21 as its owned hotels and 59 as manage under contracts. Although Thailand s tourism industry is promising as the World Travel and Tourism Council forecasts an upward trend of international tourist arrivals in ASEAN, with an average annual growth rate of 5.8% until However, the growth of tourism industry depends on many factors such as 1) local political stability, 2) tourists purchasing power and the health of their counties economy, and 3) safety from natural disaster. Currently the industry is affected by the local political conflict, but we forecast the turmoil to end in 2H14. We expect the political impact on CENTEL s hotel business only in Bangkok in 1H14 while the business in provinces remain intact. We also assume its hotel business overseas to continue growing. We expect the number of international tourists to continue flowing to Thailand as soon as the turmoil ends and the new government is fully functional. We expect no growth in CENTEL s revenue from the hotel business this year. The Centara Grand at Central World and the Centara Grand in Ladprao were negatively affected by the state of emergency decree and the Bangkok Shutdown from 13 Jan 2014 to 3 Mar Both locations contributed as much as Bt2,510mn or 32.6% of CENTEL s hotel revenue in We estimate revenues this year from both locations to drop by 20-25%YoY. The occupancy rate of the two locations for the entire year should drop from around 76-78% in 2013 to 60%, which is still above the 51% rate during political crisis in We expect a negative impact of political situation in Bangkok to be counterbalanced by additional hotel rooms of the company across country as well as hotel business overseas. CENTEL plans to add a total of 770 rooms in Off this, 68% will be expanded overseas in Bali, Maldives, and Sri Lanka. The new rooms should boost the revenue. While the two 5-stars Maldives resorts have been unaffected by the local political crisis. CENTEL can raise room rate to offset possible losses of hotels in Bangkok. In 2013, CENTEL increased its room rates for the Maldives resorts by 20%, but its occupancy rate was still above 80%. The room rate hike for Maldives resorts and the additional hotel rooms should be able to offset possible losses from the two Centara Grand in Bangkok. Assuming that the current political crisis would end in 2H14, we expect CENTEL s revenue to recover from negative business sentiment in 3Q14. We forecast the average of occupancy rate to resume above 75-80% in 4Q14, under the assumption of normal political status, continuous growth of international tourist arrivals, and expansion of additional hotel rooms. CENTEL plans to add 2,800 rooms to its capacity during to the total of 11,100 rooms. However, we do not factor in potential new projects from joint ventures or M&As, which the company is studying. We also see REIT as an option to boost CENTEL s upside, providing its financial flexibility to be more aggressive in expansion. Table 4: Key Hotel Business Assumptions E 2015E 2016E Owned Manage under Contract Total Operating Total Room 6,135 6,579 8,189 8,900 10,200 11,100 RevPAR (Baht) 2,340 2,617 3,486 3,200 3,520 3,730 Occupancy Rate 63.9% 69.9% 79.8% 68% 75% 80% Nb of International tourist Arrivals (million) Source: Company Data and AWS estimates

4 Outlook for CENTEL s food business CENTEL s revenue from food business grew 9.7%YoY in 2013 to Bt9,058mn. CENTEL currently operates 12 food brands including KFC, Mister Donut, Ootaya, Auntie Anne s, Chabuton, Pepper Lunch, Yoshinoya, Cold Stone, The Terrace, Beard Papa s, Ryu Chabu Chabu, and Tenyu (Ranked from the highest revenue to lowest). CENTEL s food business has grew stronger after adding new Japanese brands like Ootaya, Yoshinoya, and Chabuton, which now contribute 13% to food portfolio. The main driver of food revenue is the KFC brand, which generates 52% to revenue of the food business. KFC sales grew by 48% in the last three years. The company targets to operate 14 food brands with more than 950 outlets within Even though the food branches in Bangkok contributed 55% to overall food revenue in 2013, CENTEL s food business in Bangkok was only partially affected by the nearby PDRC protest site. That is because CENTEL s food business branches spread-out across the city, unlike the two Centara Grand hotels in Bangkok which were close to the PDRC s main protest site. The same-store-sales growth of branches in Bangkok s outskirt and other provinces should continue to grow as the political crisis should not have much impact on the food business. On the contrary, the economic crisis would have adverse impact on the food business. CENTEL s food business has risk exposure to slower domestic consumption growth. In 2009, CENTEL s same-store-sales growth dropped 4.5%, affected by the US subprime crisis. However, we do not expect the 2014 economic situation to be as bad as in We expect CENTEL s food revenue to grow 16.7% in 2014 before accelerating to 15.5% growth in 2015F-16F. We assume a 16.7% growth rate in 2014 which is above an average growth rate of 6.5% during , but still below an average of 20% growth rate in revenue of the last three years. The new food branches and strong revenue growth from KFC, Mister Donut, and Ootaya are keys factors to support the CENTEL s food business Table 5: Key Food Business Assumptions E 2015E 2016E Nb of Brands Nb of branches Branch growth 17.7% 12.3% 9.7% 8.1% 7.5% 4.6% Total sales growth 23.7% 27.1% 9.7% 16.7% 15% 16.1% Source: Company Data and AWS estimates Comparison with MINT CENTEL and MINT operate a very similar business. Both companies provide hotel and food services as core business, but MINT also operates other businesses including garment retail stores, rental space, entertainment, spa services, and real estates. CENTEL s hotel and food businesses contributed 47.5% and 52.5% to its revenue in 2013, respectively. Meanwhile, MINT s hotel, food, and other businesses contributed 34%, 38%, and 28%, respectively, to MINT s revenue in MINT seems to have a more diversified revenue portfolio, with relatively stable revenue from garment retail stores, rental space, entertainment, and spa services. Therefore, we expect CENTEL to have higher growth. We expect MINT s revenue to grow by 12% in 2014, mainly driven by food business, and we expect its net profit growth of 10.5%, as compared with our forecast for CENTEL s 20% growth. Hotel business comparison: CENTEL s 15 owned hotels were the main source of revenue of its hotel business, worth up to Bt7,905mn each year. CENTEL s strategic focuses are middle- to high-end customers. The company also prepares to launch COSI in 2016 as a budget hotel brand, targeting low-end customers. CENTEL manages other 28 hotels under contracts but does not own and these hotels altogether contributed only Bt187mn in revenue in CENTEL operates all these 43 hotels

5 under its own brands including Centara Grand, Centara, and Centra. The acquisitions of two 5-stars resorts in Maldives in 2012 have boosted the revenue per available room for CENTEL. It has also helped diversify CENTEL s revenue source. On the contrary, MINT operates hotels as a franchiser and a franchisee. MINT generated Bt12,058mn in 2013 from its 65 owned hotels, including 9 Anantara hotels, 4 Four Seasons hotels (franchisee), 2 Avani hotels, 2 JW Marriott (franchisee), 1 St. Regis (franchisee), and 47 Oaks hotels. MINT also manages 17 hotels under joint-venture agreements and 17 hotels under management services agreements. Most of MINT s hotels cluster in major cities of Thailand, targeting at mostly high-end tourists while its overseas hotels spread across regions such as Maldives, Australia, New Zealand, Sri Lanka, Africa, China, and the Middle East. Figure 1: Occupancy Rate Figure 2: Revenue Per Available Room Figure 3: Revenue by Destination Figure 4: Revenue by Hotels Sources Food business comparison: CENTEL operates service restaurants as a franchisee. It focuses on expanding quick service restaurants only in Thailand. It currently owns 743 domestic food branches. CENTEL had an average annual growth rate of 14.7% in the past five years. On the contrary, MINT operates service restaurants as a franchiser and a franchisee. MINT expands fast in the domestic and international markets. It currently has three food brands operating outside Thailand: The Coffee Club in Australia, Thai Express in Singapore, and Beijing Riverside & Courtyard in China. Thirty percent of MINT s food revenue comes from the overseas brands. Although MINT owns 668 food branches in Thailand and 146 food branches overseas, it owns only 52.7% of the total of 1,544 food branches as it has franchised 342 food branches in Thailand and 388 food branches overseas. Over the last few years, MINT preferred to take over food brands and focuses on expanding food branches via franchise. On the other hand, CENTEL concentrates on purchasing rights to use international food brands and expanding them through as a franchisee in Thailand. Thus, MINT had an average annual growth rate of 11.2% in the past five years, which is below CENTEL s food business growth rate, as MINT s strategic franchisee expansion provide lesser profit margin.

6 CENTEL s 12 food brands include: KFC, Mister Donut, Ootaya, Auntie Anne s, Chabuton, Pepper Lunch, Yoshinoya, Cold Stone, The Terrace, Beard Papa s, Ryu Chabu Chabu, and Tenyu. MINT s 8 food brands comprise: Pizza Company, Swensens, Sizzlers, Dairy Queens, Burgetr King, Select Services, Coffee Club, Thai Express, and Beijing Riverside & Courtyard. Figure 5: Number of Food Branches Nb of branches Owned Owned Franchised CENTEL MINT Figure 6: Food Revenue(LHS) &Total-system-sales growth(rhs) Baht (mn) TSSG 16,000 30% 14,000 25% 12,000 10,000 20% 8,000 15% 6,000 10% 4,000 2,000 5% 0 0% CENTEL (LHS) MINT (LHS) CENTEL (RHS) MINT (RHS) Comparison with Regional peers: Name Mkt Cap (THB) Upside 2014 Revenue Growth P/E ROE 2014 EPS Growth Gross Margin Profit Margin Dividend Yield CENTRAL PLAZA HOTEL PCL 41, % Hotel & Food Business MINOR INTERNATIONAL PCL 97, % SHANGHAI JIN JIANG INTL HO-H 44, % N/A SH JINJIANG INTL HOTELS - B 38, % N/A XI'AN CATERING CO LTD -A 9, % N/A Hotel Business HILTON WORLDWIDE 676, % 4.9 N/A N/A N/A N/A MARRIOTT INTERNATIONAL 546, % N/A STARWOOD (Sheraton/St. Regis) 464, % INTERCONTINENTAL HOTELS 277, % 3.7 N/A N/A N/A MANDARIN ORIENTAL INTERNATIONAL 59, % N/A ERAWAN GROUP 9, % N/A AMARA HOLDINGS 7, % N/A Food Business YUM! BRANDS INC 1,106, % HIRAMATSU INC 10,288.9 N/A N/A CREATE RESTAURANTS HOLDINGS 9, % N/A Source: Bloomberg

7 Valuation and recommendation: Company Report On the surface, CENTEL looks expensive as the share currently trades at a prospective 2014 PEG of 1.4x, given our 2014 EPS growth estimate of 20% and a prospective 2014 PE of 26.5x. However, after CENTEL took over the two resorts in Maldives in 2012, the share has traded on an average PE of 35x in 2013 (up from the mean of 15.6x before the takeover). This suggests that if investors sentiment towards CENTEL returns to normal alongside the political situations, the share price should at least move back to trade around the mean of the historical PE. We expect CENTEL to recover from the negative sentiment from 3Q14 and to have a high 18.63% CAGR of earnings in We have set a target price for CENTEL in 2014 at Bt37 per share which is derived from a target 2014 PE of 31.6x, a 10% discount to the mean of the historical PE since Long-term buy.

8 Key Financial Ratios E 2015E 2016E Sales Growth 17.7% 8.0% 16.8% 16.6% Net Profit Growth 24.2% 19.5% 17.8% 19.5% Gross Profit Margin 41.8% 41.6% 41.9% 41.8% EBITDA Margin 22.2% 22.0% 22.0% 21.1% Net Profit Margin 7.5% 8.3% 8.4% 8.6% Effective tax rate 19.6% 20.0% 25.0% 25.0% ROA 4.7% 5.5% 6.1% 6.8% ROE 13.0% 14.3% 15.1% 15.8% Net Debt to Equity (x) EPS (Bt) BVPS (Bt) DPS (Bt) Net Dividend Payout Ratio 30.6% 50.0% 50.0% 50.0% P/E (x) P/BV (x) EV/EBITDA (x) Div. Yield 1.1% 1.9% 2.2% 2.6% Income Statement Unit: Btmn E 2015E 2016E Sales 17,557 18,970 22,149 25,817 COGS 10,219 10,997 12,867 15,035 Gross Profit 7,339 7,972 9,283 10,783 SG&A 5,024 5,406 6,202 7,229 EBITDA 3,892 4,246 4,870 5,460 Interest Expenses Net Profit 1,322 1,580 1,861 2,223 EPS (Bt) Balance Sheet Unit: Btmn E 2015E 2016E Cash Account Receivable 1,019 1,299 1,578 1,910 Inventory Total Current Assets 2,505 2,564 3,149 3,867 Net PP&E 22,946 23,589 24,610 26,075 Total Non-Current Assets 25,336 26,028 27,144 28,719 Total Assets 27,840 28,592 30,293 32,586 Short-Term Borrowings 2,262 2,726 3,655 4,950 Account Payable 1,714 1,657 1,939 2,265 Total Current Liabilities 6,167 6,765 8,202 9,937 Long-Term Borrowings 7,943 7,425 6,929 6,466 Total Non-Current Liabilities 11,488 10,743 9,758 8,617 Total Liabilities 17,654 17,508 17,960 18,554 Paid-up Capital 1,350 1,350 1,350 1,350 Capital Surplus Retained Earnings 4,749 5,539 6,470 7,581 Total Equity of the Company 10,132 11,012 12,242 13,923 Minority Interests Total Equity 10,186 11,084 12,333 14,032 Total Liabilities and Equity 27,840 28,592 30,293 32,586