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.

Comfort DelGro gets 800 new licences in Chengdu

COMFORTDELGRO Corporation, through its wholly-owned subsidiary Chengdu ComfortDelGro Taxi Co Ltd, has been awarded 800 new taxi licences by the Chengdu Municipal Government, making it the second largest taxi operator in the city with 1,050 taxis.

With the new licences, Chengdu ComfortDelGro Taxi will be placing an order for 800 new Sagitar taxis to supplement the existing fleet, the group said.

It will then have just 146 fewer taxis than its largest competitor, which has 1,196 taxis.

The licences, which cost about 10,000 yuan (S$1,950) each annually, represent the largest number the municipal government has ever awarded to a single operator in recent times, according to Comfort.

Including the latest Chengdu addition, ComfortDelGro now operates close to 36,000 taxis worldwide.

Of this, about 10,600 are in China – representing over two-thirds the size of the Singapore fleet. Besides taxi services, the group also operates car rental and leasing services, a vehicle inspection centre and a driving school in Chengdu.

The group aims to derive 70 per cent of its total revenue from overseas within the next four to six years.

KL non-deal roadshow

Maintain Outperform. We recently brought ComfortDelgro on a roadshow to Kuala Lumpur, where management updated investors on its local and overseas businesses and prospects. We continue to like ComfortDelgro for its steady domestic outlook and overseas growth potential. A strong balance sheet and steady cash flows should allow it to take advantage of any M&A opportunities. Trading at 13.5x CY11 P/E against SMRT’s 18.3x, we continue to recommend a switch from SMRT to ComfortDelgro. We keep our earnings estimates and DCF-based target price of S$1.90 (WACC: 8.0%). We see catalysts from an improving outlook and a potential Downtown Line tender win.

Highlights

Steady local operations. Supported by economic growth, strong tourist arrivals and rising costs of car ownership with recent spikes in COE premiums, ComfortDelgro’s local land-transport operations should continue to grow this year. Though strong ridership last year was partly attributable to the opening of Singapore’s two integrated resorts early in the year, we believe that the spillover for public transport has yet to wear off. Its taxi business has also been benefiting from higher demand. With plans to delay the scrapping of older taxis to expand its operational fleet as well as ongoing fleet renewal, we believe that increased hiring and higher average hiring rates could provide revenue drivers for its taxi business. In the longer term, the Land Transport Authority wants to increase public transport’s share during peak hours to 70% by 2020 from the current 63%, by enhancing the public transport system. This should be beneficial for both land operators under our coverage.

Downtown Line (DTL) win, if any, could provide catalyst. With its limited role in Singapore’s rail sector through North East line (NEL) and higher margins on the rail business, ComfortDelgro is eager to expand its local rail footprint. The tender has closed and we believe that an award could take place by mid-2011. With a total length of 41km and 33 stations, DTL is the longest of the next three lines to be awarded, the remaining two being Thomson Line (27km, 18 stations) and Eastern Region Line (21km, 12 stations).

DTL is expected to open in three phases and achieve daily ridership of 500,000 commuters when fully operational. Unlike the Circle Line which is an orbital line linking the other lines to the city, DTL is a trunk line cutting across the island. While time may still be required for breakeven, the presence of established housing estates along the line should facilitate a ridership ramp-up. With similar technology as the NEL and Circle Line (CCL), we believe that neither ComfortDelgro nor SMRT would have a technical edge over the other. Nonetheless, with rail typically yielding better margins than bus or taxi operations, a win may prove more beneficial for ComfortDelgro, which we believe could prompt the company to put in a competitive bid. SMRT’s current preoccupation with turning around its loss-making CCL could also be a consideration in the award of the contract, in our opinion. With higher margins, limited capex (LTA will fund both operational and non-operational assets) and the potential for boosting economies of scale, a DTL contract could help ComfortDelgro expand its rail footprint locally.

Overseas growth potential. Despite its local growth potential, ComfortDelgro recognises that Singapore is ultimately a small country. It sees the importance of investing beyond its shores for the longer term. It plans to lift overseas revenue contributions to 70% over the next 5-7 years from 40%, with an eye on opportunities in land transport, its core expertise. ComfortDelgro’s Australian bus business, backed by the North South Wales and Victorian governments’ drive to improve public transport in the northwestern suburbs of Sydney, should continue to grow. Contributions from Swan Taxis, the largest taxi operator in Perth Metropolitan, are also expected to kick in, with the acquisition completed in November last year. We estimate a net-profit contribution of 2% from the entity. ComfortDelgro is also among eight bidders for six contracts to run 850 government-supply buses in Adelaide. Results are expected in 2Q11. The outlook in the UK appears weaker, in our view, with its taxi business plagued by a weak London economy. Lower government subsidies for its bus operations could also eat into its profitability, though a gradual phasing in of the change should give ComfortDelgro time to pass on additional costs in contract renewals.

Higher fuel costs. With diesel costs hitting new highs, some investors expressed concerns on margin pressures. Nonetheless, with fuel and electricity costs accounting for about 7% of its revenue vs. SMRT’s 12%, we believe that the impact would be less dire for ComfortDelgro. The group has hedged about 20% of its fuel requirement for 2011. Fuel exposure is also mainly limited to its local operations with overseas operations largely enjoying price-index adjustments to offset fuel inflation.

Valuation and recommendation

Maintain Outperform. No change to our earnings estimates. We continue to like ComfortDelgro for its steady domestic outlook and overseas growth potential. A strong balance sheet and steady cash flows should also allow it to take advantage of any M&A opportunities. Trading at 13.5x CY11 P/E against SMRT’s 18.3x, we continue to recommend a switch from SMRT to ComfortDelgro. We keep our DCF-based target price of S$1.90 (WACC: 8.0%), expecting catalysts from an improving outlook and a potential DTL tender win.

Get onboard

• 3Q10 +10% yoy, above our expectations on better revenues from Bus and Taxi and lower costs

• FY10-11F earnings raised by 4%-6%

• Upgrade to Buy, TP raised to S$1.79 with 26% total return; potential DTL contract win and improving ops should propel share price

3Q above expectations, a record net profit quarter. 3Q net profit grew by 10% yoy to S$61.4m on the back of 5% topline growth to S$823.4m. This was slightly above our expectations on the back of a better-than-expected bus and taxi revenue contribution and slower growth in costs. Operating expenses increased by a slower clip at 3.7% vis-à-vis topline’s 5%, resulting in improvement in operating margin to 12.9% in 3Q10 (3Q09: 11.6%).

Time is right to get onboard; upgrade to Buy. We are upgrading our recommendation to Buy as we see near to medium term catalysts for ComfortDelgro. These include: (i) ComfortDelgro is the likely candidate to clinch the DTL contract; (ii) Singapore operations to benefit from better public transport network; (ii) UK ops upturn looks sustainable; (iv) Australia should continue to show robust growth; (v) undemanding valuations of 12.5x PE vs SMRT’s 17.5x (FYE Mar 12).

Raised forecasts by 4%/ 6%, see more upside than down. We raised our FY10F/ 11F forecasts by 4%/ 6% as we factor in (i) contributions from recently completed acquisition of Swan Taxis in Perth; (ii) higher revenue contributions from Singapore taxis arising from its higher rental/ expanded fleet. Consequently, we raised our TP to S$1.79 (26% upside) on the back of our earnings revision and as we roll our PE/ DCF valuation to FY11F, from blended FY10F/11F. Key risk to our recommendation is surge in oil price.