ComfortDelgro – DMG
New taxi licence award in Chengdu, China
ComfortDelGro (CD) becomes the 2nd largest taxi operator in Chengdu with latest taxi licence award. CD’s wholly-owned subsidiary Chengdu ComfortDelGro Taxi Co has been awarded 800 new taxi licences by the Chengdu Municipal Government. Based on the assumption that the 800 new Sagitar taxis will be added gradually throughout 2011, we raised our FY11F-FY12F PATMI by 0.4%-1.0% respectively. Our TP is also raised marginally from S$1.85 to S$1.87 based on discounted cash flow valuation (WACC: 8.8%; Terminal growth rate: 1.3%). Maintain BUY.
First foray into Chengdu taxi market began in 2004. CD’s taxi operations in Chengdu began in 2004 when it entered into a joint venture with a local entrepreneur to operate 90 taxis for RMB26m. Subsequently, CD augmented its taxi fleet size to 250 in Chengdu via taxi licence award in 2007 and acquisitions of existing licences. Following the latest licence win, CD’s taxi fleet size in Chengdu will be augmented to 1,050 by end 2011. Assuming a Sagitar taxi costs around RMB1205-RMB170k, we think that the incremental capex for the taxi fleet size expansion is ~S$20m-S$30m. The new licences will be renewed annually at RMB10k/licence/year. Separately, we estimate the 800 new Sagitar taxi additions will add S$1m-S$3m to CD’s bottomline a year.
Latest win proves CD is well-positioned for overseas growth. We continue to believe that CD enjoys better overseas growth opportunities over SMRT given its sizeable presence in both emerging and developed markets like China (9M10: 12% EBIT), Australia (9M10: 16% EBIT), and UK/Ireland (9M10: 13% EBIT). Despite the greater growth potential, CD is currently trading at a cheaper valuation of 14x FY11F PATMI vis-à-vis SMRT’s 18x FY11F PATMI. Hence, we reiterate our preference for CD over SMRT within the land transport sector. Key risks of CD are i) adverse forex movements, ii) sharp rise in oil price, and iii) liberalisation of bus sector in Singapore which may undermine CD’s dominant position.