Emerging Market Infrastructure: BTS Group Holdings

Bangkok Mass Transit Systems Plc (BTSC), the $1.3billion skytrain operator in Bangkok, is a subsidiary of BTS Group Holdings. BTS Group Holdings offers safe and excellent exposure to emerging market infrastructure. In fact, I would venture that, as the only privately owned mass train service worldwide, it offers unique exposure to megacity infrastructure.

BTSC has been in operation since 1999, and having paid down the majority of the debt that hampered its profitability in the first 9 years of operation, BTS Group Holdings has recorded profitability since 2009. In fact in 2012, BTS Group Holdings recorded a profit of approximately £42.1million. The company’s EBITDA represents roughly 60% of its total revenue and roughly THB5.5million per day. BTSC operates Bangkok’s skytrain under a concession awarded by the Bangkok Metropolitan Administration. This concession was extended by 13 years after the original concession expires in 2029. As of February 2013, the Skytrain serves around 650,000 passengers daily along a system consisting of 32 stations along two lines. Equally, BTSC has obtained excellent fixed assets from two companies with a proven track record of durable trains. German engineering powerhouse Siemens AG manufactures trains not only for the BTSC but also for Nuremberg, Melbourne, Shanghai, Oslo, Guangzhou and Vienna’s train systems. BTSC have also sourced trains from Chinese enterprise Changchun Railway Vehicles Company Ltd, a subsidiary of China CNR Corporation. Changchun’s clients include 11 major cities in Mainland China (Beijing, Shanghai, Guangzhou included), Sydney’s Cityrail, Tehran’s metro, Hong Kong’s MTR, Rio De Janeiro’s metro, Pyongyang’s metro, Mecca Metro, and Singapore’s downtown line.

BTS Group’s short-term future looks rosy. It has a solid foundation in terms of its popularity, fixed assets and profitability. Furthermore, it is considering raising fares for commuters from May 2013 in response to the increase of the minimum wage and the fuel charge tariff in Thailand. The company is looking to pass on the higher costs of labour ,electricity and maintenance onto commuters as these three operating costs account for approximately 75% of the company’s expenses. The need to make provisions for possible energy shortages in Thailand starting in April this year increases the likelihood of a fare rise. Moreover, a fare rise is not likely to meet much resistance as it would be the first since 2005. At the same time, BTSC projects 196million journeys on the skytrain this year, roughly a 8% increase on the previous year. With further investment in developing more stations to extend the skytrain lines as well as develop real estate surrounding stations, there is much going for the company. From March, BTS Group is seeking to offer an infrastructure fund aimed at raising THB50-60million and plans to hold roadshows in the USA, UK, Hong Kong and Singapore. Additionally, a subsidiary of BTSC, Bangkok Smart Card System Co, has jointly launched with Thailand’s biggest bank Bangkok Bank, the Smart Rabbit Card. This debit and credit card affords greater convenience by allowing cardholders to pay for goods and services as well as skytrain fares. Therefore, a fare rise combined with the likely success of BTS Group’s Mass Transit infrastructure fund, continued investment in development of more stations, and a more flexible Smart Rabbit Card contribute to a positive outlook for BTS Group’s share price and dividends. Being a major constituent of the SET, Bangkok’s stock exchange, the sixth fastest-growing stock exchange in the world in 2012 with a 50.21% growth rate, also doesn’t hurt.

Sky high earnings

Outlook for the next 5-10 years is also bright. All current skytrain station platforms are built to accommodate trains of six cars, but currently only trains of three or four cars are in operation. There is therefore potential to increase the number of passengers on trains, perhaps partially during peak times. In addition, Western Bangkok is devoid of any train system and further development in this tourist hotspot (Wat Pho, Royal Palace, Wat Arun, among others are located here) could be a key growth area for BTS Group. The major hindrance to such development is regulatory consent. Although with an estimated net worth of $800million, founder and CEO Keeree Kanjanapas’ influence with various elements of Thai government and Hong Kong connections are good indicators that he would be able to push through such a development.

BTS Group’s current share price stands at THB8.15. To take advantage of the short-term developments, look to buy at THB8.00 and sell around the end of June where the summer season higher passenger totals and greater international awareness of BTS Group should see the price surge to around THB11.40. For the longer term, the outlook is positive and the dividends aren’t bad either – the dividend yield is 3.3%.