Singapore Company Flash Note

Singapore Airlines Refer to important disclosures at the end of this report

Bloomberg: SIA SP | Reuters: SIAL.SI

DBS Group Research . Equity

20 Sep 2013

BUY S$10.47 STI : 3,251.78

SIA and Tata Sons to form new airline in India

Price Target : 12-Month S$ 11.40 Analyst Paul YONG CFA +65 6398 7951 [email protected]

What happened? SIA and Tata Sons have signed a MOU and applied for Foreign Investment Board approval to establish a new airline in India, which will be based in New Delhi and operate a full service model. SIA will own 49% and Tata Sons 51%.

Price Relative S$

Relative Index

17.5

214

16.5

194

15.5

174

14.5

The initial board will have 3 members, 2 nominated by Tata Sons and 1 by SIA. Otherwise no other details were disclosed, and we would have to wait for more clarity on the new airline's branding, management team as well as product and services.

154

13.5

134

12.5

114

11.5 10.5

94

9.5

74

8.5 Sep-09

Sep-10

Sep-11

Singapore Airlines (LHS)

Sep-12

54 Sep-13

Relative STI INDEX (RHS)

Forecasts and Valuation FY Mar (S$ m)

Revenue EBITDA Pre-tax Profit Net Profit Net Pft (Pre Ex.) EPS (S cts) EPS Pre Ex. (S cts) EPS Gth (%) EPS Gth Pre Ex (%) Diluted EPS (S cts) Net DPS (S cts) BV Per Share (S cts) PE (X) PE Pre Ex. (X) P/Cash Flow (X) EV/EBITDA (X) Net Div Yield (%) P/Book Value (X) Net Debt/Equity (X) ROAE (%)

2012A

2013A

2014F

2015F

14,858 2,089 448 336 341 28.5 29.0 (69) (73) 27.5 20.0 1,095.7 36.7 36.1 7.2 4.0 1.9 1.0 CASH 2.5

15,098 2,094 482 379 399 32.2 33.9 13 17 31.0 23.0 1,113.6 32.5 30.9 7.0 3.9 2.2 0.9 CASH 2.9

15,955 2,366 781 585 585 49.7 49.7 54 47 47.8 25.0 1,140.3 21.1 21.1 5.9 3.1 2.4 0.9 CASH 4.4

16,833 2,639 988 748 748 63.6 63.6 28 28 61.2 30.0 1,178.9 16.5 16.5 4.9 2.3 2.9 0.9 CASH 5.5

Based on news reports, the airline will focus on the domestic market and have an initial start-up capital of $100m. Our Take The pros: India's aviation market holds huge growth potential. Total passenger numbers handled at Indian airports exceed 120m annually (33m at New Delhi), ranking it amongst the top 10 markets in the world, and is well poised to grow firmly, given strong GDP growth, young population and fast growing middle class. The exit of Kingfisher (operations were shut down in 2012 when its flying license was suspended), leaves a vacuum that could be filled by this new airline. Notably, Kingfisher had the second largest share in India's domestic air travel market before its demise, which means the vacuum to be filled is substantial.

Source of all data: Company, DBS Vickers, Bloomberg Finance L.P

The cons: There are several challenges for airlines operating within India. Aside from intense competition which has been pressurizing yields, regulations and policies continue to be stumbling blocks for investors in this sector. This includes a punitive ad valorem sales tax, as well as on-going intervention on commercial issues (recent case being the rulings on unbundling of fares). A sharp depreciation of the Rupee will also impact (current) carriers. India's new Civil Aviation Authority is still not operational and a longawaited civil aviation policy is still in draft form at this point in time

www.dbsvickers.com ed: JS / sa: LMY

Company Flash Note Singapore Airlines

Although Tata Sons has a 30:70 joint venture with AirAsia, we don't see this as an issue for this partnership with SIA as Tata Sons does not playing an active role in the LCC JV with AirAsia (India AirAsia), and it operates in a different segment. This is SIA and Tata Son's second attempt to establish a JV airline, having been put off by bureaucratic issues over ten years ago. Hopefully, approval will be forthcoming this time round.

Over the long term, we see this as a positive deal for SIA provided it is well executed. Having been unsuccessful in their last deal to buy a stake in China Eastern Airlines, gaining a foothold in India is probably the next best thing and Tata Sons should be a strong venture partner given its standing in India In the short term, we do not expect any significant impact on SIA's numbers, nor should this JV require substantial investment in its formative years. Maintain BUY, TP S$11.40 (1x P/BV)

Target Price & Ratings History

11.96

S$

2 10.96

4 3

10.46

6 1

9.96

5

9.46 8.96 Sep-12

Jan-13

May-13

Sep-13

Not e : Share price and Target price are adjusted for corporate actions.

Source: DBS Vickers

Page 2

1: 2:

Cl o s i n g Ta rg e t Pri c e Pri c e 05 Nov 12 10.47 10.00 17 Jan 13 11.02 11.20

3: 4:

08 Feb 13 17 May 13

11.07 10.93

11.20 11.50

Hold Hold

5: 6:

26 Jul 13 13 Sep 13

10.22 10.25

11.50 11.40

Hold Buy

S.No .

11.46

Da te

R a ti n g Hold Hold

Company Flash Note Singapore Airlines

DBSV recommendations are based an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame) BUY (>15% total return over the next 12 months for small caps, >10% for large caps) HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps) FULLY VALUED (negative total return i.e. > -10% over the next 12 months) SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)

Share price appreciation + dividends DBS Vickers Research is available on the following electronic platforms: DBS Vickers (www.dbsvresearch.com); Thomson (www.thomson.com/financial); Factset (www.factset.com); Reuters (www.rbr.reuters.com); Capital IQ (www.capitaliq.com) and Bloomberg (DBSR GO). For access, please contact your DBSV salesperson. GENERAL DISCLOSURE/DISCLAIMER This report is prepared by DBS Vickers Research (Singapore) Pte Ltd ("DBSVR"), a direct wholly-owned subsidiary of DBS Vickers Securities (Singapore) Pte Ltd ("DBSVS") and an indirect wholly-owned subsidiary of DBS Vickers Securities Holdings Pte Ltd ("DBSVH"). This report is intended for clients of DBSV Group only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBSVR. It is being distributed in the United States by DBSV US, which accepts responsibility for its contents. Any U.S. person receiving this report who wishes to effect transactions in any securities referred to herein should contact DBS Vickers Securities (USA) Inc (“DBSVUSA”) directly and not its affiliate. The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBSVR, DBSVS, and/or DBSVH) do not make any representation or warranty as to its accuracy, completeness or correctness. Opinions expressed are subject to change without notice. This document is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate independent legal or financial advice. DBSVR accepts no liability whatsoever for any direct, indirect and/or consequential loss (including any claims for loss of profit) arising from any use of and/or reliance upon this document and/or further communication given in relation to this document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. DBSVH is a wholly-owned subsidiary of DBS Bank Ltd. DBS Bank Ltd along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this document. DBSVR, DBSVS, DBS Bank Ltd and their associates, their directors, and/or employees may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies. Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments. The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed and it may not contain all material information concerning the company (or companies) referred to in this report. The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and assumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates on which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly from actual results. Therefore, the inclusion of the valuations, opinions, estimates, forecasts, ratings or risk assessments described herein IS NOT TO BE RELIED UPON as a representation and/or warranty by DBSVR, DBSVS and/or DBSVH (and/or any persons associated with the aforesaid entities), that: (a) (b)

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ANALYST CERTIFICATION The research analyst primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst also certifies that no part of his/her compensation was, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in this report. As of 20 Sep 2013, the analyst and his / her spouse and/or relatives who are financially dependent on the analyst, do not hold interests in the securities recommended in this report (“interest” includes direct or indirect ownership of securities, directorships and trustee positions).

Page 3

Company Flash Note Singapore Airlines COMPANY-SPECIFIC / REGULATORY DISCLOSURES DBS Vickers Securities (Singapore) Pte Ltd and its subsidiaries do not have a proprietary position in the company mentioned as of 1. 18 Sep 2013. 2.

DBSVR, DBSVS, DBS Bank Ltd and/or other affiliates of DBS Vickers Securities (USA) Inc ("DBSVUSA"), a U.S.-registered brokerdealer, may beneficially own a total of 1% or more of any class of common equity securities of the company mentioned as of 20 Sep 2013.

3.

Compensation for investment banking services: i.

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ii.

DBSVUSA does not have its own investment banking or research department, nor has it participated in any investment banking transaction as a manager or co-manager in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively.

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Page 4

Singapore Airlines

Sep 20, 2013 - domestic market and have an initial start-up capital of. $100m. ... forthcoming this time round. Over the long .... is provided pursuant to the approval by MAS of research distribution arrangements under Paragraph 11 of the First.

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