SMRT – AmFraser

First overseas foray in transport services

• SMRT Corp Ltd has signed a new agreement to buy a 49% stake in Shenzhen ZONA Transportation Group Co Ltd (ZONA) for S$68.4mil (320 million yuan). This purchase price is 25% lower than that in an earlier agreement signed in September 2008.

• The other 51% stake in ZONA is held by National Express Transportation Group Co Ltd.
Completion of the deal depends on conditional precendents to be met by ZONA, as well as
approvals from relevant authorities in China.

• ZONA is a key transport provider in Shenzhen, Guangdong Province. Its total fleet of 803 buses offering public services also extends to Huizhou in Guangdong. ZONA also runs 142 chartered and tourist coaches, 78 long haul coaches, 260 leased cars as well as 830 taxis in Shenzhen.

• We view the deal as positive for SMRT, marking SMRT’s first overseas foray in transport
services. ZONA provides SMRT an avenue to tap further opportunities in the vast China market
through National Express, which is SMRT’s partner in ZONA. National Express has nationwide
bus licences and currently provides extensive intercity bus services in 67 cities in China.

• In terms of financials, SMRT is not disclosing much details until the deal is completed. But suffice to say, ZONA is currently in the black, and while accretive to SMRT’s earnings in FY10, will not be material.

• However, SMRT is guiding that ZONA is expected to contribute significantly in the longer term upon reaching a steady state in its operational expansion. By this, we reckon ZONA could
account for a 10% earnings contribution in five years time, at a minimum.

• Through a 33.5%-associate, ZONA has been awarded the sole public bus operations in the
BoaAnn district (where the international airport is located) in Shenzhen. Much of SMRT’s
purchase price will go towards capex for fleet expansion for this purpose.

• In the near-term, SMRT has spelt out profit targets for ZONA in the deal for (YE March) FY10 and FY11. Falling short of these targets, SMRT will be entitled to additional proportions of distributable profits based on a pre-defined formula.

• SMRT’s purchase consideration for ZONA works out to a price-to-book valuation of 1.7x for
ZONA, cheaper than SMRT’s price-to-book of 3.9x. This is based on ZONA’s net asset value of
376.7 million yuan (S$80.5mil) for its FY ending Dec-2008.

• We maintain our BUY rating on SMRT, which is trading at 17% discount to fair value of S$2.11/ share. While we currently maintain our numbers, we expect the ZONA deal to provide an upside when completed.

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