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Thai Airway International

Dull sentiment and earnings. Reiterate SELL SELL

Thai Airway International Plc (THAI)

- 4Q13 loss decreases 9%qoq

THAI posted a net loss of B5.7bn in 4Q13, decreasing 9%qoq, from recognition

of extraordinary expenses of B2.8bn (see table on page 2); excluding the

extraordinary items, a normalized loss equated to B2.8bn, decreasing 13%qoq.

It was the first high-season loss since the flooding crisis (consistent with our

forecast) because, while THAI increased its service capacity in the quarter by

4%qoq as usual, passenger volume slumped 2.2%qoq as domestic political

protests had damaged tourism atmosphere (4Q13 cabin factor was 71%, down

from 75% in 3Q13). Nevertheless, as proportion of promotion tickets was

reduced substantially from the middle of the year, passenger yield improved

4.8%qoq, compensating for the lower passenger volume. Consequently, 4Q13

revenue still grew 3.7%qoq to B52bn. The loss decreased because operating

cost increased at a slower rate than revenue at 3.5%qoq, mostly fuel cost

(40% of cost) that rose 7.4%qoq following the weak Baht in 4Q13. For FY2013,

THAI faced a net loss of B12bn, reversing from a profit last year.

- To face constant loss this year

We are convinced that THAI would continue to face loss in 2014. Although

1Q14 is a high season, year-to-date cabin factor has stood at 70%, lower than

that of 4Q13, because passenger volume in 1Q14 has been depressed by the

political factors for a full quarter. Accordingly, the company might post a

greater loss than in 4Q13, different from a normal year in which the first

quarter usually generates the highest profit; passenger volume and ticket fares

would subsequently decrease during a low season in 2Q14 and 3Q14, resulting

in a loss like every year. Still, we project to see a profit again in 4Q14 when the

tourism season returns (under an assumption that the political unrest ends

before 4Q14), but it would not be able to negate the loss in 9M14, thus THAI

would still face a normalized loss of around B7bn in FY2014, increasing

25%qoq. Moreover, at end-2013, THAI had still not booked entire impairment

loss of four unused A340-500 aircrafts (book value of outstanding impairment

loss is US$30m for each aircraft). Under our assumption that THAI books

impairment loss by 50% of the book value of the four aircrafts at B2bn this

year, the net loss in 2014 including the extraordinary item would be B9.1bn.

- Dull sentiment and earnings. Reiterate SELL

With dull investment sentiment as a result of the inconclusive political conflicts,

a tendency that THAI would continue to suffer a loss until 3Q14, and the fair

value of B10.5 which implies 19% downside, we reiterate to sell THAI.


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