231112 Comfort Delgro - Nomura

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Key company data: See page 2 for company data and detailed price/index chart.

ComfortDelGro Corp CMDG.SI CD SPTRANSPORT/LOGISTICS

EQUITY RESEARCH

Bullish on Downtown Line

In-built growth drivers to buoyprofit growth

November 23, 2012

RatingRemains

Buy

arget price

Increased from 1.72 SGD 1.86

Closing price

November 20, 2012 SGD 1.59

Potential upside +17%

Raise TP as we see in-built growth drivers buoying profit g rowth

We transfer coverage and raise our TP by 8% as we expect: 1) the newDowntown Line (DTL) to achieve profitability sooner than expected; 2)government subsidies to offset losses in its Singapore bus operations; and

3) stricter taxi regulations in Singapore to potentially benefit the group.In particular, we believe the street has either not factored in the profitabilityof the DTL in its forecasts or has underestimated it; we expect the DTL tobe profitable within the first three years of operations.

Potential upside to numbers from acquisitions in Australia

CD has been successful in growing its business with incremental bolt-onacquisitions. We estimate that ROI (pre-tax) in Australia has been at arespectable 8.5%, above the groups average ROA of 5+%. We expectacquisitions to continue and provide upside to our current numbers.

Stable dividend growth, opportunity for capital management

CD has a strong balance sheet with near-zero gearing as at 30 Sep 2012.

As such, we expect dividend to remain stable even in the worst-casescenario, with potential for capital management to lead dividend higher.

Valuations/Risks

The stock trades at 12.6x/11.5x FY13/14F P/E and 1.5x/1.4x FY13/14F P/B,which is at the low-mid end of its recent trading band (3-year range: 11-15x). It offers a FY12/13F dividend yield of 4.0/4.2% at current levels.

Key risks: loss of Australian bus contracts; higher-than-expected losses forDTL; NEL breakdown; regulatory changes; currency headwinds; higher oilprices.

31 Dec FY11 FY12F FY13F FY14F

Currency (SGD) Actual Old New Old New Old New

Revenue (mn) 3,411 3,338 3,530 3,485 3,684 3,861

Reported net profit (mn) 236 253 249 266 263 290

Normalised net profit (mn) 236 253 249 266 263 290

FD normalised EPS 11.27c 12.11c 11.92c 12.73c 12.59c 13.86c

FD norm. EPS growth (%) 2.9 10.4 5.8 5.1 5.6 10.1

FD normalised P/E (x) 14.1 N/A 13.3 N/A 12.6 N/A 11.5

EV/EBITDA (x) 4.7 N/A 4.6 N/A 4.2 N/A 3.9

Price/book (x) 1.8 N/A 1.7 N/A 1.5 N/A 1.4

Dividend yield (%) 3.8 N/A 4.0 N/A 4.2 N/A 4.4

ROE (%) 12.8 12.8 12.8 12.6 12.7 13.1

Net debt/equity (%) 2.9 15.7 2.7 21.9 0.5 net cash

Source: Company data, Nomura estimates

Anchor themes

Singapores long-term goal ofhaving at least 70% (fromcurrent 63%) of its population

relying on public transport by2020 means the two incumbentgovernment-linked operatorsstand to benefit from higherridership, particularly in the busand rail segments.

Nomura vs consensus

Our FY13F earnings are 3%above consensus estimates,while TP is 6% aboveconsensus.

Research analysts

Singapore Transport/Logistics

Wen Jie Chan - NSL

[email protected]+65 6433 6965

See Appendix A-1 for analystcertification, importantdisclosures and the status ofnon-US analysts.


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Nomura | ComfortDelGro Corp November 23, 2012

2

Key data on ComfortDelGro CorpIncomestatement(SGDmn)Year-end 31 Dec FY10 FY11 FY12F FY13F FY14F

Revenue 3,207 3,411 3,530 3,686 3,867

Cost of goods sold -2,355 -2,531 -2,627 -2,725 -2,835

Gross profit 852 880 903 961 1,032

SG&A -463 -481 -492 -525 -546

Employee share expense

Operating profit 388 399 411 437 486

EBITDA 679 716 740 791 854

Depreciation -291 -317 -329 -354 -369

Amortisation 0 0 0 0

EBIT 388 399 411 437 486

Net interest expense -36 -35 -31 -32 -34

Associates & J CEs 6 5 3 3 3

Other income 7 10 9 8 8

Earnings before tax 366 379 392 415 463

Income tax -78 -82 -82 -87 -97

Net profit after tax 288 298 310 328 366

Minority interests -60 -62 -60 -64 -71

Other items 0 0 0 0

Preferred dividends 0 0 0 0

Normalised NPAT 229 236 249 264 295

Extraordinary items 0 0 0 0

Reported NPAT 229 236 249 264 295

Dividends -115 -125 -134 -138 -146

Transfer to reserves 114 110 115 126 148

Valuation and ratio analysis

Reported P/E (x) 14.8 14.4 13.6 12.8 11.5

Normalised P/E (x) 14.8 14.4 13.6 12.8 11.5

FD normalised P/E (x) 14.8 14.4 13.6 12.8 11.5

FD normalised P/E at price target (x) 14.3 13.9 13.1 12.4 11.1

Dividend yield (%) 3.4 3.7 4.0 4.1 4.3

Price/cashflow (x) 5.3 4.1 4.7 4.3 4.0

Price/book (x) 1.9 1.8 1.7 1.6 1.5

EV/EBITDA (x) 5.1 4.8 4.6 4.3 3.9

EV/EBIT (x) 8.9 8.5 8.3 7.7 6.8

Gross margin (%) 26.6 25.8 25.6 26.1 26.7EBITDA margin (%) 21.2 21.0 21.0 21.4 22.1

EBIT margin (%) 12.1 11.7 11.6 11.9 12.6

Net margin (%) 7.1 6.9 7.1 7.2 7.6

Effective tax rate (%) 21.3 21.5 21.0 21.0 21.0

Dividend payout (%) 50.2 53.3 53.7 52.3 49.7

Capex to sales (%) 12.3 14.8 14.0 14.0 14.0

Capex to depreciation (x) 1.4 1.6 1.5 1.5 1.5

ROE (%) 13.1 12.8 12.8 12.7 13.2

ROA (pretax %) 10.7 10.3 10.0 10.2 10.9

Growth (%)

Revenue 5.1 6.4 3.5 4.4 4.9

EBITDA 7.9 5.4 3.4 6.9 8.1

EBIT 11.0 2.8 3.0 6.3 11.2

Normalised EPS 4.1 2.9 5.8 5.9 11.6

Normalised FDEPS 4.1 2.9 5.8 5.9 11.6

Per share

Reported EPS (SGD) 10.95c 11.27c 11.92c 12.62c 14.09c

Norm EPS (SGD) 10.95c 11.27c 11.92c 12.62c 14.09c

Fully diluted norm EPS (SGD) 10.95c 11.27c 11.92c 12.62c 14.09c

Book value per share (SGD) 0.86 0.90 0.96 1.03 1.10

DPS (SGD) 0.06 0.06 0.06 0.07 0.07


Relative perfo rmance chart (one year)

Source: ThomsonReuters, Nomura research

(%) 1M 3M 12M

Absolute (SGD) -1.2 -1.5 16.1

Absolute (USD) -1.3 0.2 22.5

Relative to index 0.5 1.2 8.6

Market cap (USDmn) 2,769.8

Estimated free float (%) 87.8

52-week range (SGD) 1.72/1.38

3-mth avg daily turnover(USDmn)

4.20

Major shareholders (%)

Singapore LabourFoundation

12.2

Source: Thomson Reuters, Nomura research

Notes

FY14F to see bump in growth rate

due to commencement of DTL


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Cashflow(SGDmn)Year-end 31 Dec FY10 FY11 FY12F FY13F FY14F

EBITDA 679 716 740 791 854

Change in working capital -72 137 -26 6 6

Other operating cashflow 29 -31 2 -2 -2

Cashflow from operations 636 822 716 795 858

Capital expenditure -396 -503 -493 -517 -542

Free cashflow 241 318 223 278 315

Reduction in investments 15 -79 0 0 0

Net acquisitions 0

Reduction in other LT assets -59 81 -3 -3 -3

Addition in other LT liabilities 91 67 9 10 10

Adjustments -95 -96 -72 -75 -84

Cashflow after investing acts 193 291 158 210 238

Cash dividends -140 -142 -127 -131 -139

Equity issue 0 0 0 0

Debt issue 0 0 0 0

Convertible debt issue 0 0 0 0

Others 28 -140 116 -11 -43

Cashflow from financial acts -112 -281 -11 -142 -182

Net cashflow 81 10 147 67 56

Beginning cash 486 567 577 724 791

Ending cash 567 577 724 791 847

Ending net debt 145 55 55 9 -56


Balancesheet(SGDmn)As at 31 Dec FY10 FY11 FY12F FY13F FY14F

Cash & equivalents 567 577 724 791 847

Marketable securities 6 18 18 18 18

Accounts receivable 103 133 140 146 154

Inventories 59 57 59 62 64

Other current assets 266 196 226 235 245

Total current assets 1,001 979 1,166 1,251 1,327

LT investments 19 86 86 86 86

Fixed assets 2,769 3,011 3,175 3,338 3,512

Goodwill 146 146 146 146 146

Other intangible assets 0 0 0 0 0

Other LT assets 447 367 369 372 375

Total assets 4,381 4,589 4,942 5,193 5,446

Short-term debt 188 198 194 205 300Accounts payable 544 601 611 635 660

Other current liabilities 166 203 206 206 206

Total current liabilities 898 1,002 1,012 1,046 1,167

Long-term debt 523 434 585 595 491

Convertible debt 0 0 0 0 0

Other LT liabilities 613 680 689 699 708

Total liabilities 2,034 2,115 2,286 2,340 2,366

Minority interest 547 582 643 707 778

Preferred stock 0 0 0 0 0

Common stock 566 569 569 569 569

Retained earnings 1,235 1,323 1,445 1,578 1,734

Proposed dividends 0 0 0 0

Other equity and reserves 0 0 0 0

Total shareholders' equity 1,801 1,892 2,014 2,147 2,302

Total equity & liabilities 4,381 4,589 4,942 5,193 5,446

Liquidity (x)

Current ratio 1.11 0.98 1.15 1.20 1.14

Interest cover 10.9 11.3 13.4 13.5 14.5

Leverage

Net debt/EBITDA (x) 0.21 0.08 0.07 0.01 net cash

Net debt/equity (%) 8.0 2.9 2.7 0.4 net cash

Act ivi ty (d ays)

Days receivable 11.5 12.7 14.2 14.2 14.2

Days inventory 8.8 8.3 8.1 8.1 8.1

Days payable 82.6 82.6 84.5 83.5 83.4

Cash cycle -62.3 -61.6 -62.3 -61.2 -61.1


Notes

Strong FCF generation across

forecast period

Notes

Low gearing going into net cash

position


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4

In-built growth drivers to propel growthEven though the short-term price momentum looks negative to any casual observer, we

believe that the company has sufficient in-built growth drivers to maintain earnings

growth across the forecast period.

Driver #1: Downtown L ine to contribute positively inFY14F/FY15F; value not yet reflected in stock price

By our estimates, the Downtown Line (DTL) will contribute positively after it starts

operating in end-2013. We expect the DTL to significantly contribute to growth in

FY14F/FY15F as the DTL commences operations and brings in revenues to offset the

start-up costs currently depressing rail profits. Overall, we expect the DTL to be

profitable by the third full year of operations (i.e. FY16F).

There are three key things we like about the DTL that we believe will allow it to quickly

contribute to earnings and cashflow: 1) we expect ramp-up in ridership to be quick as the

DTL cuts through existing built-up residential and commercial areas; 2) we expect rental

income to jump significantly as DTLs retail space of 14,000sqm is more than 4x of the

current North-East Line; 3) strong cashflow visibility as all incremental and replacement

capex cost is to be borne by the Land Transport Authority (LTA), unlike the existing

North East Line (NEL) where the operator may face uncertain large capex outlays.In our view, the value of the DTL has yet to be fully reflected in the stock price as the

street has either not factored in the profitability of the DTL in its forecasts or has

underestimated it. This represents potential upside for early investors who are willing to

take a positive view on DTLs profitability.

Driver #2: Turnaround of Singapore bus segment to helpdrive growth in FY13F

We expect losses in the Singapore bus segment to shrink in FY13F thanks to receipt of

subsidies both from the new bus financing framework and from the Bus Service

Enhancement Program (BSEP). This is despite new quality standards set by the LTA

higher trip frequency (shorter waiting time) and lower load factor that compressesprofitability. Lower oil prices or well placed fuel hedges will also be instrumental in

swinging segment profits into the black.

Driver #3: Stricter taxi regulations in Singapore to benefitmarket leader, potential for upside to numbers as impact notyet fully factored in

We are seeing a tighter regulatory environment in the Singapore taxi market as the

Singapore government seeks to: 1) restrict total vehicular growth, including taxis and

also 2) implement stricter taxi availability standards. The net effect of these measures

will be to reduce competition in the sector and allow the market leader to grab a larger

share of the pie.ComfortDelgro, as the market leader, will be a key beneficiary, in our view. We have yet

to fully factor in the benefits of these regulatory changes as details on the new taxi

availability standards have yet to emerge. As such, this represents potential upside to

our numbers.

Further upside to our numbers from accretive acquisit ions

ComfortDelgro has been successful in growing its business with incremental bolt-on

acquisitions. Return on investments in Australia has been at a respectable ROI (pre-tax)

of 8.5%, higher than its mid single digit ROA (5+%).


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We expect the group to continue making accretive acquisitions overseas, subject to

available targets at the right price. We have not factored these acquisitions into our

numbers and, as such, this represents potential upside to our numbers.

In an effort to quantify the impact, we estimate that the incremental impact of acquisitions

could go up to 5% in the immediate period, subject to the acquisition size.

Stable dividend growth with potential for more from earningsgrowth and capital management

ComfortDelgro has continued to increase dividends across both good and bad years.

The ability to sustain dividend payments is supported by strong cashflow generation and

a strong balance sheet with almost near-zero gearing as at 30 Sep 2012. As such, we

expect dividend to remain stable even in the worst-case scenario, with higher dividends

likely on the back of higher profits.

Dividends could potentially go higher through a higher dividend payout and/or capital

management. We note that ComfortDelgros dividend policy is a payout ratio of 50%.

This compares against SMRTs 60%, which is higher, despite having a poorer free

cashflow generation profile.

ComfortDelgro now offers a FY12/FY13F 4.0/4.2% dividend yield at current levels.

Fig. 1: ComfortDelgro - Dividend history

Source: Company data, Nomura research

Raise TP to SGD1.86 on our bull ish DTL estimates

We raise our TP to SGD1.86 as we refresh our estimates and incorporate our more

bullish estimates on the DTL. We continue to value the stock on a DCF basis, though we

update our underlying assumptions to reflect changes in cost of capital. We now apply a

cost of equity of 7.1% (previous: WACC 7.5%).

Other valuations methods support DCF valuation

We cross-check our DCF valuations against other valuation methods and found them in

support of our DCF-derived TP.

The stock currently trades at 12.6x/11.5x FY13/14F P/E and 1.5x/1.4x FY13/14F P/B,

which is in the low-mid end of its recent trading band (3-year range: 11-15x). It offers a

FY12/FY13F dividend yield of 4.0/4.2% at current levels.

4.2

9.610.0

11.0

9.1

5.05.3 5.5

6.06.4 6.6

7.0

7.6

64%

99%102%

93%

85%

52% 50% 50% 53%54%

52% 50% 50%

0%

20%

40%

60%

80%

100%

120%

0.0

2.0

4.0

6.0

8.0

10.0

12.0

FY03 FY04 FY05 FY06A FY07A FY08A FY09A FY10A FY11A FY12F FY13F FY14F FY15F

DPS (S cents) P ayout ratio (%)


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Fig. 2: Valuation range

Other methods support DCF valuation

Source: Nomura research

Fig. 3: DCF valuations


Fig. 4: SOTP


1.95

1.76

1.89

1.86

1.00 1.10 1.20 1.30 1.40 1.50 1.60 1.70 1.80 1.90 2.00

Historical valuations - P/B

Historical valuations - P/E

SOTP

DCF

DCF 2013F 2014F 2015F 2016F 2017F Terminal1 2 3 4 5 5

Operating CF 707 755 805 876 939Capex (517) (542) (569) (598) (627)Proceeds from/(Repayment of) debt 21 (9) (105) (2) (151)FCFE 211 203 131 276 160

Terminal Value 4,378Discounted CF 197.0 177.4 106.5 209.9 114.0 3,722

Rf 1.4%Rm 9.9%

Beta 0.67Ke 7.1%

Terminal growth rate 3.3%

Target Price TPDCF basis 1.86

SOTP FY13 E P/E Valuation Basis

Taxi - SG 81.0 15 1,215 Cabcharge valuations, premium for being mkt leader

Bus +Rail +ad +rental - SG (ex DTL) 25.9 17 440 SMRT valuations

DTL 487 DCF

Bus +Taxi - UK 25.1 8 201 UK peers valuations

Bus +Taxi - Australia 27.9 12 335 Cabcharge valuations

Bus +Taxi - China +Vietnam 35.5 12 427 Cabcharge valuations

Inspection/testing 6.7 16 329 Vicom valuations

Driving school 6.7 16 107 Vicom valuations

Automotive & Car Rental 40.5 10 405 Stable underlying business

Total (S$'mn) 263.2 15.0 3,945

Shares('000) 2,091,000

TP 1.89


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Fig. 5: 12-month forward P/E band

Mid range of trading band

Source: Bloomberg, Nomura research

Fig. 6: 12-month fo rward P/B band

Low end of trading band

Source: Bloomberg, Nomura research

Fig. 7: Peer comps

Source: Bloomberg consensus for Not Rated (NR) stocks, Nomura estimates

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Price (S$)PBV (x)

PBV (RHS) Average SD- SD+ Price (LHS)

Rating

Mkt Cap

(US$ mn)

Price

(LC)

P/E (x)

2012E

P/E (x)

2013E

P/B (x)

2012E

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2013E

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(x)

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(x)

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(%)

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(%)

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(%)

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(%)

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FY12

EBITDA

Margin

SingaporeComfort Delgro BUY 2,756 1.59 13.3 12.6 1.7 1.5 5.6 5.2 12.8 12.7 4.0 4.2 15.8 36.2 21.0SMRT REDUCE 2,083 1.68 18.0 17.2 3.1 2.9 7.9 7.1 17.5 17.5 3.9 3.9 30.0 68.5 28.6SG Average 15.7 14.9 2.4 2.2 6.7 6.2 15.1 15.1 3.9 4.0 22.9 52.4 24.8

HK

MTR Corp BUY 22,412 30 19.2 19.4 1.3 1.2 13.7 13.2 7.3 6.5 2.6 2.6 17.2 26.4 55.9

HK Average 19.2 19.4 1.3 1.2 13.7 13.2 7.3 6.5 2.6 2.6 17.2 26.4 55.9

Aus tral ia

Cabcharge Australia Not Rated 516 4.14 7.1 11.0 1.5 1.4 6.8 6.5 21.3 20.4 9.1 5.9 32.0 51.9 46.5

Japan

East J apan Railway* BUY 25,786 5330 12.0 12.7 1.1 1.0 7.2 6.9 8.5 8.2 2.3 2.4 46.7 158.3 28.5

West J apan Railway* BUY 7,993 3300 11.0 11.2 0.9 0.8 6.0 6.0 7.7 7.8 3.3 3.5 39.7 135.8 22.1

Central J apan RI* Neutral 16,283 6470 6.7 7.0 0.9 0.8 5.8 5.7 12.0 12.0 1.5 1.5 52.2 165.2 44.1

Kintetsu Corp* Not Rated 6,522 312 26.6 25.7 2.8 2.6 18.6 18.3 11.1 11.0 1.6 1.5 71.1 680.3 10.0

Odakyu Elec Railway* Neutral 7,410 823 31.8 35.9 2.6 2.4 14.4 14.9 7.9 7.0 0.9 0.9 59.6 321.0 18.0Japan Average 17.6 18.5 1.6 1.5 10.4 10.4 9.4 9.2 1.9 2.0 53.9 292.1 24.5

Asia-pac Average 17.1 17.3 1.6 1.5 10.0 9.7 10.2 10.2 2.8 2.5 42.9 187.0 27.0

UK

National Express Group BUY 1,385 1.702 7.1 7.5 0.9 0.9 5.5 5.6 11.3 10.8 5.9 0.0 32.0 80.1 15.6

Firstgroup Plc REDUCE 1,348 1.759 5.9 5.4 1.0 0.9 4.4 4.5 14.5 15.8 11.9 0.0 46.1 277.9 11.2

Stagecoach BUY 2,510 2.739 9.9 9.9 n.a. n.a. 6.2 6.0 n.a n.a. n.a. 0.0 46.5 n.a. 11.7

UK Average 7.6 7.6 0.9 0.9 5.4 5.4 12.9 13.3 7.0 0.0 41.5 179.0 12.8Global Average

Source: Bloomberg

Prices as at 20-Nov-12

* based on FY13 due to Mar y/e


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8

Downtown Line: Bringing us more profits

Key reasons to be bullish on DTL

More rental space

Unlike the NEL, which has limited retail space in its stations, the DTL will have over

14,000 square metres of gross commercial space - more than four times the current line.

Quick ramp-up in ridership as DTL cuts through existing populated areas

We expect a relatively quick ramp-up in ridership as the DTL runs through existing built

up residential and commercial parts of Singapore and would be able to capture riders

from these areas due to the shorter travelling time

Greater cashflow visibil ity

Unlike the other LOAs which require the operator to take ownership of the operating

assets and to fund incremental expansion and asset replacement, the DTL framework

clears the operator from all such responsibilities. Consequently, this removes the risk of

uncertain large capex outlays and increases cashflow visibility.

Phase 1 to reach near break-even levels within 1st full year ofridership

Our forecasts show that Phase 1 (as a stand-alone) will reach near break-even levels

within FY14, the 1st full year of ridership.

We estimate that the 1st full year of revenue would potentially be ~SGD24m, assuming

initial ridership to be at the lower end of our range (75,000) and an average fare of

SGD0.6 (lower than average fare of SGD0.85 due to the short haul distance).

Separately, we estimate the operating cost of Phase 1 to be ~SGD25mn. We believe the

license fee will be back-ended and will not accrue in the initial phases of the DTL.

Entire DTL to be prof itable by FY16F

We expect the entire DTL to be profitable by FY16F, as revenue growth outpaces the

increase in cost, which should slow due to economies of scale. This is despite theconstant challenge from a rising cost base driven by start-up costs as the DTL is in a

perpetual ramp-up mode with phases coming on-stream in two-year intervals.

Please refer to the appendix for more details of our assumptions and background on the

DTL.


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9

Fig. 8: Downtown Line projected profitability

Source: Nomura estimates

Downtown Line Factors taken into consideration FY13F FY14F FY15F FY16F FY17F FY18F FY19F FY20F

Avg daily ridership in yr 37,500 82,500 132,500 265,000 370,000 642,500 707,500 742,875

Phase 1 - @end of period Assuming quick ramp-up in 1st 3yrs 75,000 90,000 100,000 105,000 110,000 115,000 120,000 126,000

Phase 2 - @end of period Growth tapers off and stabilise at 5% p.a. 150,000 175,000 200,000 210,000 220,000 231,000

Phase 3 - @end of period Growth rate slows further in later years 300,000 350,000 400,000 420,000

Avg daily ridership at end of yr 75,000 90,000 250,000 280,000 610,000 675,000 740,000 777,000

Ave Fare ($) Shorter route distance vs NEL 0.6 0.6 0.75 0.90 0.90 0.90 0.91 0.91

0 0 0 0 0 0 0 0

Rental space 25,834 25,834 35,521 35,521 150,696 150,696 150,696 150,696rent $psf/mth In line with NEL's retail space 24 24 22 22 20 20 20 20

Rental income 0.4 6 7 8 11 25 36 36

Occupancy Assuming a ramp-up in leas ing 20% 80% 75% 80% 31% 69% 100% 100%

Revenue - train 0.3 18.1 36.3 87.1 121.5 212.1 234.7 247.7

Revenue - rental & ad 0.4 6.0 7.1 7.5 11.3 25.1 36.2 36.2

Revenue (DTL) 0.7 24.0 43.3 94.6 132.8 237.2 270.9 283.9

License fees 0.0 0.0 0 0.0 0 40.0 50.0 60.0

License fees (annualised) 0.0 0.0 0 0.0 20.0 45.0 55.0 65.0

Op stats Phase 1 Phase 2 Phase 3

Fleet (3-cars) 8.0 24 41.0

Cumulative 8.0 8.0 32.0 32.0 73.0 73.0 73.0 73.0

Stations 6.0 12 16.0

Cumulative 6.0 6.0 18.0 18.0 34.0 34.0 34.0 34.0

Route Km 4.3 16.6 21.1

Cumulative 4.3 4.3 20.9 20.9 42.0 42.0 42.0 42.0

Timing gap/trip (min) Assuming frequency increases w time 5.0 4.8 4.6 4.2 4.0 3.6 3.5 3.4

#of trips/day (implied) 216.0 225.0 234.8 257.1 270.0 300.0 308.6 317.6

# of km travelled/day 929 968 4,907 5,374 11,340 12,600 12,960 13,341

Cost Phase 1 Phase 2 Phase 3

Staff # of stations & trains vs NEL 300 300 400

Cumulative #of staff Mgt guidance for Phase 1 300 600 700 1,000 1,100 1,133 1,167 1,190

Cost/employee (p.a.) Adjusting for economies of scale 0.048 0.049 0.050 0.051 0.052 0.053 0.054 0.055

Staff cost 13.200 14.982 20.783

Staff cost - cumulative 13.2 22.0 35.0 43.3 57.2 60.0 63.1 65.6

Repair # of trains vs NEL Phase 1 Phase 2 Phase 3

Repair cost - (annualised) Adjusting for younger flee t 4.0 4.4 6.9 9.9 15.8 22.8 23.2 23.7

Electricity # of trips & # of stations vs NEL Phase 1 Phase 2 Phase 3

Electricity - (annualised) Adjusting for rolling stk effic iency 5.3 5.6 14.5 23.5 31.1 41.0 43.1 45.2

& NEL's economies of scale

Total cost (annualised) 22.5 32.0 56.3 76.7 104.0 123.9 129.4 134.5

Total cost (adjusted for startup timing) 14.0 32.0 44.2 76.7 90.3 123.9 129.4 134.5

EBIT -13.3 -8.0 -0.8 17.9 22.5 68.4 86.5 84.3

EBIT (less rental) -13.6 -13.9 -7.9 10.4 11.2 43.3 50.4 48.2


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Singapore Buses: Losses to reduceWe expect losses in the Singapore bus segment to shrink in FY13 thanks to receipt of

subsidies both from the new bus financing framework and from the BSEP. This is

despite new quality standards set by LTA higher trip frequency (shorter waiting time)

and lower load factor that compresses profitability.

Lower oil prices or well placed fuel hedges will also be significant in swinging segment

profits into the black.

New bus financing framework to help reduce losses

Under the new bus financing framework, a portion of the advertisement revenues from

bus shelters, which is now retained by the government, will be passed on to bus

operators to help offset losses experienced by bus operators. We have assumed in our

forecast some amount of subsidy to offset the higher operating cost, which would reduce

the losses in the Singapore bus segment.

Under the new framework, the government will also take over all leasing and land-related

cost of bus depots and bus parks to offset the losses faced by operators.

BSEP subsidy to offset associated costs

In 3QFY12, we already saw some subsidies trickle in as revenue for the Singapore bus

segment increased by 6% y-y despite average fare falling and ridership increasing by 2%

y-y. The difference relates to subsidies for the BSEP (estimated at SGD6mn).

Going forward, we expect the subsidy to keep coming in to offset the direct and indirect

cost relating to BSEP and achieve profit-neutrality on the BSEP operations.

Keep an eye on fuel cost; Fuel hedges to help

We believe another key thing to watch out for is oil prices. Earnings are highly sensitive

to changes in fuel price as fuel cost makes up 20% of the cost structure and is the most

volatile and uncontrollable component. Lower oil prices will be a key contributor to a

turnaround in the bus operations. Well placed fuel hedges, as we seen in 3QFY12, willalso help mitigate of higher oil prices and stem losses.

Will we see higher bus fares?

Overall, we deem the fare review as a non-event and any fare increment will be minimal

at best due to the political sensitivity of it, especially in a lacklustre economic climate.

According to a 28 August 2012 blog post by the Fare Review Mechanism Committee

(FRMC), affordability of fares will remain the key focus in the ongoing review of the

current fare structure. It was also mentioned that the current price cap structure will be

preferred over a cost-plus structure. In other words, the fare formula will continue to be

biased towards the downside rather than up.

Some possible refinement like including an energy/fuel component inside the fareformula to better reflect the industry cost structure might be positive but marginal at best,

in our view.


11/28


12/28


12

does not. If ComfortDelgro meets the new taxi availability standards, then it has the

luxury of choice in whether to raise rental charges. By not raising charges,

ComfortDelgro might be able to squeeze out existing players, which will allow it to enjoy

higher profits in the future through a larger market share.

Overall posi tive for ComfortDelgro

It remains to be seen what the new taxi availability standards are and to what extent the

current operators can fulfill them. Overall, we believe ComfortDelgro is in a stronger

position to meet the new taxi availability standards than other competitors and, as the

market leader, is in a strategic position to benefit from it.The key financial benefit that consequently accrues to the group is a stronger ability to

raise taxi fares and to either raise rents or lower driver benefits. We have yet to factor

this into our numbers and, thus, it represents potential upside.


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13

Overseas acquisitions to providepotential upside to numbers

Strong track record in generating returns

Though the group has faced some hiccups in their overseas ventures, it has been able to

create more value on average. In particular, Australia has been a role model for their

success overseas.Returns on investment (pre-tax) in its Australia operations have been in the high single

digits, above the mid-single digit ROA generated by the group as a whole.

Fig. 10: Return on investment in Aus tralia


Diversified earnings base

Since the merger of Comfort Group and Delgro Corporation in 2003, the group has been

growing its operations beyond the shores of Singapore. Overseas contribution made up

60% and 50%, respectively, of the groups FY11 revenue and EBIT, up from 30% and

20% in FY03. The group is one of the largest transport operators in the world and

provides geographical diversification in earnings.

Further upside to our numbers from accretive acquisit ions

We expect the group to continue making accretive acquisition overseas, subject to

available targets at the right price. We have not factored these acquisitions into our

numbers and, as such, this represents potential upside to our numbers.

In an effort to quantify the impact, we estimate that the incremental impact of acquisitions

could go up to 5% in the immediate period, subject to the acquisition size.

We note that the acquisitions have historically been small relative to the size of the groupand have thus been easily digestible. Largest acquisition over the past 7 years was

~SGD150mn.

Where are the potential areas of acquisit ion?

We imagine that the group could continue expanding its bus business in Australia where

additional bus routes complementary to existing ones could provide synergistic benefits.

We also think that a bolder move into the Australian taxi segment could be on the table,

as could an entry into the Australian urban rail segment once it establishes a stronger

track record with the Downtown Line.

2005 2006 2007 2008 2009 2010 2011

Total investment 142.9 35.4 121.7 51.1 354.5 117 77.3

Cumul. investment 142.9 178.3 300 351.1 705.6 822.6 899.9

EBITDA 27.3 41.5 50.9 64.1 95.3 120.0

Cash-on-cash return (pre-tax) 17.0% 17.4% 15.6% 12.1% 12.5% 13.9%

Avg cash-on-cash return (pre-tax) 14.8%

Depreciation 10.3 15.7 18.9 24.3 28.6 31.5

EBIT 17.0 25.9 32.0 39.8 66.7 88.5

ROI (pre tax) 9.5% 8.6% 9.1% 5.6% 8.1% 9.8%

Average ROI (pre-tax) 8.5%

PAT 11.9 18.1 22.4 27.9 46.7 62.0


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14

China would continue to be another market for expansion though the dominant strategy

would be to enter into new provinces/areas with joint-venture partners, rather than

outright acquisitions.

We dont think that entry into a new geography is on the table at the moment, though we

understand that management has evaluated deals outside of existing markets.

Acquisi tion cr iteria

We understand that the acquisition criteria is premised on a set of factors such as thestability of the government, the willingness of the government to invest in infrastructure,

positive potential demand growth and potential scalability of the business.

The group seeks to achieve an average payback period of 5-8 years for both its taxi and

bus operations, while achieving a mid-teen IRR.


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15

Stable dividend growth with manydrivers that could push it higherComfortDelgro has continued to increase dividends across both good and bad years.

The ability to sustain dividend payments is supported by strong cashflow generation and

a strong balance sheet with almost near-zero gearing as at 30 Sep 2012. We expect

dividend to remain stable even in the worst-case scenario, with higher dividends likely on

the back of higher profits.

Fig. 11: Dividend hi story


Fig. 12: FCF generationImproving FCF generation


Fig. 13: Net cash/equityUnder-geared with potential for capital management


Room for more

We further note that there is room for more through a higher dividend payout ratio and

capital management. We note that ComfortDelgros dividend policy is to pay out 50% of

net profit. This compares against SMRTs payout ratio, which is higher at 60% despite

having a poorer free cashflow generation profile. Presumably, a higher dividend payout

ratio, if it happens, could potentially cause valuations to re-rate higher.

310.3

217.5

276.4

55.1

163.5

78.4

124.1

143.8

163.0

0

50

100

150

200

250

300

350

FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15

-2.9%

-9.5%

5.0%

6.2%

2.2% 2.1%

0.4%

-1.6%

-3.7%

-12.0%

-10.0%

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15


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16

Segment outlookOverall, we expect earnings growth across the forecast period to remain in line with

historical growth rates (10-year CAGR of 6.6%), with FY14F seeing a significant growth

spurt as the DTL commences operations and brings in revenues to offset the start-up

costs currently depressing rail profits. FY15F earnings will continue to be significantly

driven by the rail segment, while the more immediate FY13F net profit will be led by the

turnaround of the bus segment.

We expect the bus and taxi segment to remain the key earnings contributors, withautomotive and vehicle inspection/testing next up in line and rail earnings increasing in

importance.

We expect turnaround of the Singapore bus segment to be the key driver of bus division

earnings and to offset a lower growth profile in Australia due to loss of bus routes and an

anaemic UK division facing currency headwinds.

On the taxi front, we expect Singapore and China to maintain its growth profile and offset

a contracting UK business suffering from the economic malaise. We expect growth from

Australia to be low due to economic headwinds in Australia.

We expect rail segment profits to contract further in FY13F due to start-up costs but to

pick up quite sharply in FY14F as the DTL ramps up and start contributing revenues to

offset the start-up costs. We expect the DTL to turn profitable by FY16F as the rate of

increase in revenues outpaces the rate of growth in costs.

Growth in earnings for the vehicle inspection/testing business remains one of the out-

performers in the group. However, we expect the long-term growth profile to be lower

than historical experience (8% v >10% previously) due to slower vehicular growth in

Singapore and a maturing growth profile for the testing business, after growing from a

small base.

Automotive segment earnings have historically been quite volatile due to the inclusion of

diesel sales within the segment. The historical variance in EBIT growth rate has been

20+% in either direction and has largely been driven by movement in oil prices and

diesel sales margins. The underlying engineering and repair business is generally stable

and exhibit a low single digit growth rate. We have assumed a normalised growth rate in

our forecasts, though the volatile nature of automotive earnings may cause surprises onthe upside/downside.

We expect the bus station in China to continue growing nicely, while growth in the car

rental and driving centre segment will be tepid. Contribution from these three segments

combined is


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17

Fig. 16: Segment breakdown


FY07A FY08A FY09A FY10A FY11A FY12F FY13F FY14F FY15F

Bus

Revenues 1537.0 1532.8 1530.9 1612.2 1684.1 1736.3 1805.1 1862.0 1934.9

% growth 11.9% -0.3% -0.1% 5.3% 4.5% 3.1% 4.0% 3.2% 3.9%

EBIT 132.7 96.3 123.9 149.2 145.0 150.3 167.7 178.8 189.7

% growth 4% -27% 29% 20% -3% 4% 12% 7% 6%

EBIT mrgns 8.6% 6.3% 8.1% 9.3% 8.6% 8.7% 9.3% 9.6% 9.8%

Bus StationRevenues 17.9 19.4 21.4 22.7 23.9 26.5 28.4 30.1 31.6

% growth 14.0% 8.4% 10.3% 6.1% 5.3% 11.0% 7.0% 6.0% 5.0%

EBIT 7.9 10.1 10.3 10.6 10.8 12.3 13.2 14.0 14.7

% growth 10% 28% 2% 3% 2% 14% 7% 6% 5%

EBIT mrgns 44.1% 52.1% 48.1% 46.7% 45.2% 46.5% 46.5% 46.5% 46.5%

Rail

Revenues 90.5 110.5 119.7 134.4 147.0 155.1 162.0 200.0 224.6

% growth 18.1% 22.1% 8.3% 12.3% 9.4% 5.5% 4.5% 23.4% 12.3%

EBIT 9.2 16.7 20.5 25.6 27.7 12.9 6.6 24.3 34.2

% growth 1433% 82% 23% 25% 8% -53% -49% 265% 41%

EBIT mrgns 10.2% 15.1% 17.1% 19.0% 18.8% 8.3% 4.1% 12.2% 15.2%

EBIT (excl DTL) 27.7 22.9 27.4 32.3 35.1

% growth 7% 5% 5% 5%

Taxi

Revenues 917.3 945.3 927.6 981.9 1039.2 1099.0 1149.7 1202.7 1259.5

% growth 5.9% 3.1% -1.9% 5.9% 5.8% 5.8% 5.0% 5.0% 5.0%

EBIT 121.2 102.1 105.2 119.3 129.6 138.4 145.6 153.2 161.3

% growth 12% -16% 3% 13% 9% 7% 5% 5% 5%

EBIT mrgns 13.2% 10.8% 11.3% 12.1% 12.5% 12.6% 12.7% 12.7% 13.0%

Diesel sales

Revenues 192.2 253.5

% growth -8.4% 31.9%

EBIT 8.1 0.0

% growth -38% -100%

EBIT mrgns 4.2% 0.0%

Automotive Engineering

Revenues 97.8 92.6 307.4 300.1 351.6 369.2 387.6 407.0 427.4% growth -5.6% -5.3% 232.0% -2.4% 17.2% 5.0% 5.0% 5.0% 5.0%

EBIT 22.2 16.9 51.2 39.1 37.5 48.0 50.4 52.9 55.6

% growth -3% -24% 203% -24% -4% 28% 5% 5% 5%

EBIT mrgns 22.7% 18.3% 16.7% 13.0% 10.7% 13.0% 13.0% 13.0% 13.0%

Vehicle inspection/testing

Revenues 62.4 72.7 77.3 83.7 90.9 97.7 105.0 112.9 121.4

% growth 14.1% 16.5% 6.3% 8.3% 8.6% 7.5% 7.5% 7.5% 7.5%

EBIT 15.4 19.8 24.7 27.3 30.7 33.2 35.7 38.4 41.3

% growth 22% 29% 25% 11% 12% 8% 8% 7% 8%

EBIT mrgns 24.7% 27.2% 32.0% 32.6% 33.8% 34.0% 34.0% 34.0% 34.0%

Car rental & leasing

Revenues 36.1 37.0 33.3 33.6 35.4 36.1 36.8 37.6 38.3

% growth -1.4% 2.5% -10.0% 0.9% 5.4% 2.0% 2.0% 2.0% 2.0%

EBIT 6.7 6.9 4.4 5.9 7.3 8.3 8.5 8.6 8.8

% growth -8% 3% -36% 34% 24% 14% 2% 2% 2%

EBIT mrgns 18.6% 18.6% 13.2% 17.6% 20.6% 23.0% 23.0% 23.0% 23.0%

Driving centre

Revenues 29.6 33.5 34.2 38.3 39.0 36.2 37.3 38.5 39.6

% growth 21.3% 13.2% 2.1% 12.0% 1.8% -7.0% 3.0% 3.0% 3.0%

EBIT 7.2 9.2 9.7 11.4 10.6 7.6 7.8 8.1 8.3

% growth 22% 28% 5% 18% -7% -28% 3% 3% 3%

EBIT mrgns 24.3% 27.5% 28.4% 29.8% 27.2% 21.0% 21.0% 21.0% 21.0%

Others 4.2 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Total EBIT 334.8 278.0 349.9 388.4 399.2 411.1 435.6 478.3 513.8

EBIT growth % 10% -17% 26% 11% 3% 3% 6% 10% 7%

EBIT mrgns % 11.1% 8.9% 11.5% 12.1% 11.7% 11.6% 11.8% 12.4% 12.7%

Have since been subsumed into the

automotive engineering segment


18/28


18

Key Risks

Loss of Australian bus contracts

There is a risk that the group may lose the re-tender for a major bus route in New South

Wales (NSW), Australia. This is on the back of a recent loss of two existing bus routes in

NSW in a re-tendering exercise (estimated impact: ~1%). We estimate that the loss of

the major bus route could impact FY14F/15F earnings by close to 5% (after adjusting for

its 51% stake in the Australian bus operations), depending on the handover timing of thebus routes in the event of a loss.

Higher-than-expected losses on DTL

The DTL could see losses run deeper and longer if ridership numbers and average fares

are below expectations. A slower leasing rate or lower rental rates for its retail space,

together with higher cost pressures, could also cause the DTL to be less profitable than

our expectations.

Regulatory changes

In 2013, the Singapore government will release its new Land Transport Masterplan

which will outline the governments key strategic thrusts for the sector over the next 5

years. We could see further tightening of the regulatory environment which might

depress the profitability of public transport operators, including ComfortDelgro, which

generates ~50% of its earnings from Singapore.

NEL breakdown

The NEL is entering into its 10th year of operations and has seen a greater frequency of

breakdowns that have been put under the public spotlight. We are already seeing the

group spending more on repair and maintenance to raise service reliability. The fear is

that further breakdowns could lead to a upgrading plan that could require significant

capex outlay which would depress profitability and cashflows.

Currency headwinds

Though operational performance of overseas operations has been commendable, their

contribution to the groups growth have been weakened by a stronger SGD. We

estimate that a stronger SGD, based on Nomuras forex forecasts, can potentially shave

3% off earnings growth on the EBIT level.

Higher oil prices

Even though fuel and electricity costs make up only ~10% of the groups cost base, it

has been a significant drag on earnings in the recent years due to high oil prices. If oil

prices go up higher, we could see a reduction in our growth estimates. We estimate thata 1% change in oil prices has a 90% pass-through effect to the bottom line.


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19

Key Catalysts

Higher dividends

Viewed as a defensive yield stock, a higher dividend payment could cause the stock to

re-rate. With its payout ratio at only 50%, the group can pay out more of its growing

profits. A robust balance sheet with near-zero gearing also provide room for higher

dividend through capital management.

Better-than-expected performance of Downtown Line

Lower-than-expected losses on the DTL, when it commences operations in 4QFY13, will

alleviate fears of it being a drag on earnings for multiple years. With the overhang of fear

removed, we could see the stock re-rate.

Subsidies & grants

Better-than-expected subsidies for the bus segment, such as a meaningful sharing of

bus shelter advertisement revenues, would be a key contributor to better earnings and

cashflows.

Higher average fares; longer average travelling distance

The fare formula review and the subsequent fare review in 1Q/2QFY13 could see higher

fare levels. Average fares could also increase on the back of longer average travelling

distance by commuters. Such increases will be positive for the bottom line as it will be

amplified by the high operating leverage effect.

Change in Singapore bus framework

A game changer could come if the government, through its review of the Land Transport

Masterplan, decides that a cost-plus model will be more suited for managing bus

operations in Singapore. A cost-plus model will potentially be more rewarding for

operators as they are rewarded based on what they can control costs and as such,the bus segment could see a reversal of its losses.

Better cost contro l

With electricity/diesel cost being one of the main drag on earnings, lower oil prices would

be beneficial. Higher productivity and a slower expansion in headcount could see cost

increase being slower than expected, which would be a positive for earnings.

M&A

New accretive acquisitions would be viewed favourably and could cause the stock to re-

rate, depending on the deal size and impact on the bottom line.

Shift to new rail financing framework

ComfortDelgro could potentially shift its existing rail operating license to the new regime

which is currently applied to the new Downtown Line. Under the new Downtown Line

regime, the operator will not be required to fund replacement assets. The quid pro quo

will be a shorter license period and possibly, a higher annual license fee. The new

regime will eliminate cashflow uncertainty revolving around capex and potentially lead to

higher valuations. However, a shorter operating license period and a possibly higher

annual license fee may be taken negatively, and the outcome is therefore mixed and will

be dependent on the specific details of the arrangement.


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20

Appendix: Downtown Line

Background

In August 2011, SBS Transit, a subsidiary of Comfort Delgro, was awarded the license to

operate Singapores 5th

mass rapid transit line, the Downtown Line (DTL). Like the North

East Line (NEL) which SBS Transit currently operates, the DTL is a fully automated

underground rail system. The award of the 15-year license means that SBS Transit will

more than double its share of the rail network in Singapore - from 40km currently, to82km (note: 19-year license if the clock starts ticking from the start of Phase 1).

Retail space

However, unlike the NEL, which has limited retail space in its stations, the DTL will have

over 14,000 square metres of gross commercial space - more than four times the current

line.

Ridership

According to SBS Transits press release (29 August 2011), average daily ridership on

the DTL is expected to be in excess of 700,000 upon completion. This is premised on the

fact that the DTL runs through existing built-up residential and commercial parts of

Singapore and would be able to capture riders from these areas due to the shorter

travelling time. The line, which will have 34 stations, is expected to reduce rail travel time

from Bukit Panjang to Bugis from 46 minutes currently to just about 28.5 minutes. To put

things in perspective, the current NEL carried 417,000 passengers daily in 2010 and an

estimated 465,000 passengers daily in 2012.

License conditions

It is estimated that SBS Transit will pay a total licence charge of SGD1.6 billion over a

19-year period, subject to ridership growth and profitability. The licence amount

comprises both fixed and variable components. Under the terms of the licence, the LTA

will retain ownership of all operating assets and infrastructure, and will pay for asset

replacement, while SBS Transit will pay for operations, maintenance and insurance. This

is unlike the NELs license agreement, which requires the operator to do all the above

and also fund future asset replacement. A second difference is that the DTL license lasts

only for 15 years from the completion of the entire DTL, as opposed to a 30-year license

life for the NEL.

Fig. 17: Comparison of NEL vs DTL

Source: Company, Nomura research

NEL DTL

Driver System Driverless Driverless

#of stations 16 34

Length of track 20 km 42 km

Retail space (sqm) 3,000 14,000

Length 30 years from 15 J an 2003 15 years from completion in 2017

License fee

0.5% of annual fare and non-fare revenue, net of GST for 1st 10

years to LTA, subject to modification thereafter (est S$0.7mn in

FY11)

The licence amount comprises both fixed and variable

components. Details not announced. Company estimates

S$1.6bn over 19 years, but it is unclear when operator startspaying

Depreciation $1.2mn in FY11 Nil

Asset replacement Operator to fund replacement assets LTA will fund replacement assets

Asset purchase

Operator to purchase operating asset from LTA (timing

indeterminate); operator may write in to LTA for a grant to replace

any eligible operating assets based on difference between

purchase cost of new asset and purhcase cost of operating assets

to be replaced.

LTA will continue to own the operating assets

Maintenance Operator to maintain operating and fixed assets Operator to maintain operating and fixed assets

Passenger load est. 465,000 in FY12 Coy guidance: 700,000 in FY17F


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21

Assumptions and Est imates for Phase 1

The Downtown Line will be completed in 3 stages which will be completed in 2013, 2015

and 2017 respectively. The 1st stage should commence in end-2013.

Fig. 18: DTL Schematics

Source: LTA

Estimated Ridership for Stage1

The 1st stage will comprise of 6 stations in the Southern part of Singapore. Daily ridership

could potentially hit 75,000-80,000 in the initial period, in our view

In our view, the 1st stage will see ridership coming primarily from passengers seeking to

reach the Marina Bay area from North-East Line, from the East segment of the E-W line

and from the Circle Line. We think spillover from passengers on other lines will be limited

as passengers will find it more convenient to access the Marina Bay area through theexisting Marina Bay station, despite the unsheltered short walk from the station, as the

hassle of changing trains repeatedly will be too cumbersome. This preference might of

course change depending on weather conditions. (Marina Bay Sands [MBS] will be

serviced by Bayfront Station and Marina Bay Financial Centre [MBFC] will be serviced by

Downtown Station.)

The Telok Ayer station will also capture part of the crowd that currently travels to Raffles

Place or Tanjong Pagar MRT station. However, this will largely be limited to passengers

who want to get on the NEL line, again because of the hassle of changing trains

repeatedly. We believe the contribution from this station will not be significant and is best

viewed as a single-station extension of the current NEL rail.

We could also see short-haul travellers wanting to move from between Bugis, Chinatown

and Promenade (Suntec).

3

3


22/28


22

We estimate a catchment population of 18,000 office workers in MBFC and 80,000

(employee +visitors) from MBS alone. Due to limited connectivity to existing rail lines, we

estimate that the DTL will capture 50% of all rail passengers. Assuming rail captures a

70% share of all travelling modes and a 2-way travelling pattern to and fro via rail, we

estimate ridership contribution from the Marina Bay region to hit 65,000 passengers

daily, adjusted for the work week. If we add in the contribution from other stations, we

think daily ridership could potentially hit 75,000-80,000 in the initial period.

Fig. 19: DTL relative to the current rail network

Source: LTA

Rental estimates for Stage 1We estimate that 80% of the Stage 1 rental space would be leased out by end-FY14F,

given that the amount of space available is manageable (~26,000 sq ft) and the location

is good. We estimate rental to be SGD24/sq ft, a premium to the NELs retail space due

to its location in town.

Revenue estimates for Stage 1

We estimate that average fare to be lower than the existing line due to the short route

distance and as such have applied SGD0.60 vs the current experience of SGD0.85.

Based on this and the above assumptions, we estimate that revenue for the 1st full year

would be ~SGD24mn.


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23

Cost estimates for Stage 1

Management expects to hire 300 employees for the 1st

phase of DTL and we estimate

that the associated staff cost will reach ~SGD15mn, based on the fact that ~150 staff

were employed for the DTL at a cost of SGD1.9mn in 3QFY12.

We expect the initial repair cost to be low as this is a new fleet. Based on the current

repair cost incurred on the NEL (estimated at ~SGD20mn), and adjusting for the size

and the age of the DTL fleet relative to the NELs, we estimate initial repair and

maintenance cost to be ~SGD4mn in the 1st

full year of operations.

We expect the electricity cost to be substantially lower than that of the NELs due to twomain factors: 1) less distance travelled resulting from fewer trips per day and a shorter

route distance; and 2) a lighter and smaller train set relative to the NELs. Based on the

current electricity cost incurred on the NEL (estimated at ~SGD45mn) and adjusting for

the above factors and lower economies of scale relative to the NEL, we estimate an

initial electricity cost of~SGD6mn.

We have assumed that the license fee is not payable in the initial periods when the line

is yet to be profitable. Rather, it would be back-ended to match the cashflow and

profitability profile of the line to ensure its viability.

Based on the above, we estimate that cost for the 1st

full year to be ~SGD25mn

Profitability estimate for Stage 1

As such, the 1st

full year of operations for the DTL phase 1 would be close to break-evenlevel. However, the overall losses will be much more significant due to erosion of phase

1 profits by start-up cost of Phase 2 (mainly staff cost).

Impact on NEL Network effect

We might also see a higher growth in ridership on the NEL, as some passengers might

now find it more accessible due to increased connectivity via the DTL. We have yet to

factor this in.

Profitability across time Phase 2 + 3 and beyond

We go through the same thought process as we extend our forecasts into the 2nd

and 3rd

phase.

On the revenue side, we have been generally conservative in our estimates, with

ridership number below companys guidance and minimal growth in average fares and

no growth in rent psf.

Revenue assumptions

On the train revenues front, we have assumed that DTL only reaches an average daily

ridership of 610,000 at the end of FY17F, while management is guiding for 700,000. We

also assumed that the average fare increases to SGD0.90 in Phase 2 as the average

travelling distance increase and remains flat till Phase 3, before starting to grow at 0.5%

p.a. across the forecast period.

On the rental front, we assume a slower ramp-up (3 years) for commercial space in

Phase 2 and Phase 3 and average rents to fall due to less desirable locations outside

the city area but stabilise at SGD20 psf across the forecast period.Cost assumptions

On the cost side, we have assumed an inflation rate of 2% across time, while adjusting

for certain economies of scale. Our basis for inflation is the 10yr CAGR for the CPI.

We assumed wage inflation of 2% p.a across the entire forecast period. Staff count is

assumed to increase with the number of stations and trains in service but at a slower

rate due to economies of scale and eventually tapers down after Phase 3 and stabilise at

a 1% growth rate in FY22F.

Repair cost is expected to increase in line with the number of km travelled/day and slows

to a 2% growth rate post Phase 3 (FY19 21F) but to grow at a faster rate of 3% from

FY22F 26F and 4% p.a. from FY27F FY32F.


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Electricity cost will increase in proportion with the number of km travelled/day, though the

cost/km will decline across the phases due to the fact that some of the electrical cost is

fixed (e.g. electrical cost of running a station). We have assumed a 2% inflation rate,

post phase 3, across the forecast period.

License fee assumptions

We had assume that the license fee kicks in when Phase 3 starts in FY17F and the fees

to increase at a constant rate of SGD10mn p.a. for the first 11 years before tapering off

at a rate of SGD5mn p.a for the remaining 4 years. This rate of increase will be fasterthan the increase in EBIT (excl. license costs).

In arriving at our license fees estimates, we had one guiding principle that the license

fee is structured to ensure the viability of the line as a primary objective and to recoup

the construction cost as a secondary objective. As such, the license fee structure will

likely match the profitability profile of the DTL and this view is reinforced by the fact that

there is a variable component in the license fee.

The corollary of that is that a larger share of the profits will be captured by LTA in the

later years of the DTL as a quid pro quo for not charging a license fees in the initial

years. Consequently, the DTL earnings growth profile will most likely be flat or mildly

negative in the later years.


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Fig. 20: Downtown Line projected profitability

Source: Nomura estimates

Downtown Line Factors taken into consideration FY13F FY14F FY15F FY16F FY17F FY18F FY19F FY20F

Avg daily ridership in yr 37,500 82,500 132,500 265,000 370,000 642,500 707,500 742,875

Phase 1 - @end of period Assuming quick ramp-up in 1st 3yrs 75,000 90,000 100,000 105,000 110,000 115,000 120,000 126,000

Phase 2 - @end of period Growth tapers off and stabilise at 5% p.a. 150,000 175,000 200,000 210,000 220,000 231,000

Phase 3 - @end of period Growth rate slows further in later years 300,000 350,000 400,000 420,000

Avg daily ridership at end of yr 75,000 90,000 250,000 280,000 610,000 675,000 740,000 777,000

Ave Fare ($) Shorter route distance vs NEL 0.6 0.6 0.75 0.90 0.90 0.90 0.91 0.91

0 0 0 0 0 0 0 0

Rental space 25,834 25,834 35,521 35,521 150,696 150,696 150,696 150,696

rent $psf/mth In line with NEL's retail space 24 24 22 22 20 20 20 20

Rental income 0.4 6 7 8 11 25 36 36

Occupancy Assuming a ramp-up in leasing 20% 80% 75% 80% 31% 69% 100% 100%

Revenue - train 0.3 18.1 36.3 87.1 121.5 212.1 234.7 247.7

Revenue - rental & ad 0.4 6.0 7.1 7.5 11.3 25.1 36.2 36.2

Revenue (DTL) 0.7 24.0 43.3 94.6 132.8 237.2 270.9 283.9

License fees 0.0 0.0 0 0.0 0 40.0 50.0 60.0

License fees (annualised) 0.0 0.0 0 0.0 20.0 45.0 55.0 65.0

Op stats Phase 1 Phase 2 Phase 3

Fleet (3-cars) 8.0 24 41.0

Cumulative 8.0 8.0 32.0 32.0 73.0 73.0 73.0 73.0

Stations 6.0 12 16.0

Cumulative 6.0 6.0 18.0 18.0 34.0 34.0 34.0 34.0

Route Km 4.3 16.6 21.1

Cumulative 4.3 4.3 20.9 20.9 42.0 42.0 42.0 42.0

Timing gap/trip (min) Assuming frequency increases w time 5.0 4.8 4.6 4.2 4.0 3.6 3.5 3.4

#of trips/day (implied) 216.0 225.0 234.8 257.1 270.0 300.0 308.6 317.6

# of km travelled/day 929 968 4,907 5,374 11,340 12,600 12,960 13,341

Cost Phase 1 Phase 2 Phase 3

Staff # of stations & trains vs NEL 300 300 400

Cumulative #of staff Mgt guidance for Phase 1 300 600 700 1,000 1,100 1,133 1,167 1,190

Cost/employee (p.a.) Adjusting for economies of scale 0.048 0.049 0.050 0.051 0.052 0.053 0.054 0.055

Staff cost 13.200 14.982 20.783

Staff cost - cumulative 13.2 22.0 35.0 43.3 57.2 60.0 63.1 65.6

Repair # of trains vs NEL Phase 1 Phase 2 Phase 3

Repair cost - (annualised) Adjusting for younger fleet 4.0 4.4 6.9 9.9 15.8 22.8 23.2 23.7

Electricity # of trips & # of stations vs NEL Phase 1 Phase 2 Phase 3

Electricity - (annualised) Adjusting for rolling stk efficiency 5.3 5.6 14.5 23.5 31.1 41.0 43.1 45.2

& NEL's economies of scale

Total cost (annualised) 22.5 32.0 56.3 76.7 104.0 123.9 129.4 134.5

Total cost (adjusted for startup timing) 14.0 32.0 44.2 76.7 90.3 123.9 129.4 134.5

EBIT -13.3 -8.0 -0.8 17.9 22.5 68.4 86.5 84.3


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26

Appendix A-1

Analyst Cert ificat ion

I, Wen J ie Chan, hereby certify (1) that the views expressed in this Research report accurately reflect my personal views about

any or all of the subject securities or issuers referred to in this Research report, (2) no part of my compensation was, is or will be

directly or indirectly related to the specific recommendations or views expressed in this Research report and (3) no part of my

compensation is tied to any specific investment banking transactions performed by Nomura Securities International, Inc.,

Nomura International plc or any other Nomura Group company.

Issuer Specific Regulatory Disclosures

The term "Nomura Group Company" used herein refers to Nomura Holdings, Inc. or any affiliate or subsidiary of Nomura Holdings, Inc. Nomura

Group Companies involved in the production of Research are detailed in the disclaimer below.

Issuer name Ticker Price Price date Stock rating Sector rating Disclosures

ComfortDelGro Corp CD SP SGD 1.59 20-Nov-2012 Buy Not rated

Previous Rating

Issuer name Previous Rating Date of change

ComfortDelGro Corp Neutral 21-J an-2011

ComfortDelGro Corp (CD SP) SGD 1.59 (20-Nov-2012)

Rating and target price chart (three year history)

Buy (Sector rating: Not rated)

Date Rating Target price Closing price

07-Sep-11 1.72 1.35

21-J an-11 Buy 1.62

21-J an-11 1.98 1.62

For explanation of ratings refer to the stock rating keys located after chart(s)

Valuation Methodology Our target price of SGD1.86 is based on our DCF valuation with a cost of equity of 7.1% and terminalgrowth of 3.3%. Cash flows are discounted back to end-2012.

Risks that may impede the achievement of the target price Key risks: loss of Australian bus contracts; slower-than-expectedramp-up of DTL; NEL breakdown; regulatory changes; currency headwinds; higher oil price.


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Important DisclosuresOnline availability of research and conflict-of-interest disclosuresNomura research is available on www.nomuranow.com/research, Bloomberg, Capital IQ, Factset, MarkitHub, Reuters and ThomsonOne.Important disclosures may be read at http://go.nomuranow.com/research/globalresearchportal/pages/disclosures/disclosures.aspxor requestedfrom Nomura Securities International, Inc., on 1-877-865-5752. If you have any difficulties with the website, please email [email protected] help.The analysts responsible for preparing this report have received compensation based upon various factors including the firm's total revenues, aportion of which is generated by Investment Banking activities. Unless otherwise noted, the non-US analysts listed at the front of this report arenot registered/qualified as research analysts under FINRA/NYSE rules, may not be associated persons of NSI, and may not be subject toFINRA Rule 2711 and NYSE Rule 472 restrictions on communications with covered companies, public appearances, and trading securities heldby a research analyst account.Any authors named in this report are research analysts unless otherwise indicated. Industry Specialists identified in some Nomura Internationalplc research reports are employees within the Firm who are responsible for the sales and trading effort in the sector for which they havecoverage. Industry Specialists do not contribute in any manner to the content of research reports in which their names appear. Marketing

Analysts identified in some Nomura research reports are research analysts employed by Nomura International plc who are primarily responsiblefor marketing Nomuras Equity Research product in the sector for which they have coverage. Marketing Analysts may also contribute toresearch reports in which their names appear and publish research on their sector.Distribution of ratings (Global)The distribution of all ratings published by Nomura Global Equity Research is as follows:43% have been assigned a Buy rating which, for purposes of mandatory disclosures, are classified as a Buy rating; 40% of companies with thisrating are investment banking clients of the Nomura Group*.45% have been assigned a Neutral rating which, for purposes of mandatory disclosures, is classified as a Hold rating; 46% of companies withthis rating are investment banking clients of the Nomura Group*.12% have been assigned a Reduce rating which, for purposes of mandatory disclosures, are classified as a Sell rating; 22% of companies withthis rating are investment banking clients of the Nomura Group*.As at 30 September 2012. *The Nomura Group as defined in the Disclaimer section at the end of this report.Explanation of Nomura's equity research rating system in Europe, Middle East and Africa, US and Latin America The rating system is a relative system indicating expected performance against a specific benchmark identified for each individual stock.Analysts may also indicate absolute upside to target price defined as (fair value - current price)/current price, subject to limited managementdiscretion. In most cases, the fair value will equal the analyst's assessment of the current intrinsic fair value of the stock using an appropriatevaluation methodology such as discounted cash flow or multiple analysis, etc.STOCKSA rating of 'Buy',indicates that the analyst expects the stock to outperform the Benchmark over the next 12 months. A rating of ' Neutral',indicates that the analyst expects the stock to perform in line with the Benchmark over the next 12 months. A rating of ' Reduce', indicates thatthe analyst expects the stock to underperform the Benchmark over the next 12 months. A rating of 'Suspended', indicates that the rating, targetprice and estimates have been suspended temporarily to comply with applicable regulations and/or firm policies in certain circumstancesincluding, but not limited to, when Nomura is acting in an advisory capacity in a merger or strategic transaction involving the company.

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have been suspended temporarily to comply with applicable regulations and/or firm policies in certain circumstances including when Nomura isacting in an advisory capacity in a merger or strategic transaction involving the subject company. Securities and/or companies that are labelledas 'Not rated' or shown as 'No rating' are not in regular research coverage of the Nomura entity identified in the top banner. Investors shouldnot expect continuing or additional information from Nomura relating to such securities and/or companies. SECTORSA 'Bullish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a positiveabsolute recommendation. A 'Neutral' rating means most stocks in the sector have (or the weighted average recommendation of the stocksunder coverage is) a neutral absolute recommendation. A 'Bearish' rating means most stocks in the sector have (or the weighted averagerecommendation of the stocks under coverage is) a negative absolute recommendation.Target PriceA Target Price, if discussed, reflect in part the analyst's estimates for the company's earnings. The achievement of any target price may beimpeded by general market and macroeconomic trends, and by other risks related to the company or the market, and may not occur if thecompany's earnings differ from estimates.
http://www.nomuranow.com/researchhttp://go.nomuranow.com/research/globalresearchportal/pages/disclosures/disclosures.aspxhttp://[email protected]/http://[email protected]/http://go.nomuranow.com/research/globalresearchportal/pages/disclosures/disclosures.aspxhttp://go.nomuranow.com/research/globalresearchportal/pages/disclosures/disclosures.aspxhttp://go.nomuranow.com/research/globalresearchportal/pages/disclosures/disclosures.aspxhttp://[email protected]/http://[email protected]/http://go.nomuranow.com/research/globalresearchportal/pages/disclosures/disclosures.aspxhttp://www.nomuranow.com/research


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231112 Comfort Delgro - Nomura