Beijing Airport pays the price for Terminal 3

PUBLISHED : Monday, 07 April, 2008, 12:00am
UPDATED : Monday, 07 April, 2008, 12:00am

The market is punishing Beijing Capital Airport for the high price it agreed to pay for Terminal 3, but the long-term benefits may eventually overshadow the short-term expense.

The airport said in late January it would acquire the world's largest stand-alone terminal from its parent for 26.9 billion yuan (HK$29.9 billion), a price that was 22 per cent higher than it budgeted in December 2006.

Its shares have plunged more than 46 per cent this year after analysts downgraded the airport to sell or underperform after the acquisition price became public.

The planned acquisition is estimated to be completed in June but no later than October, pending approval from the National Development and Reform Commission.

The huge spending will result in an almost 40 per cent drop in net profits this year and a further 2 per cent drop in 2009, according to a Bloomberg estimate. Depreciation costs will increase about 250 per cent to almost 1.8 billion yuan next year compared with last year. Interest expense would rise from 333 million yuan to 621 million yuan this year and more than triple to 992 million yuan next year.

What intensifies the concern in the market is slow passenger growth and a decrease in aircraft landings and departures in the first two months of the year. Passenger volume has grown only 3 per cent so far this year compared with double-digit growth nationwide. Aircraft movement in Beijing dropped 4 per cent from the same period last year.

'I have lowered my full-year aircraft movement and passenger growth to 11 per cent from 15 per cent and 15 per cent from 18 per cent respectively due to the weakness in the first two months,' said Ally Ma, transport analyst for Citigroup.

Uncertainty on the company's A-share issuing plan also cast doubts on its ability to fund the purchase. Last year the Hong Kong listed company said it would do an A-share offering of 800 million shares. But analysts worry the listing could be scrapped due to the poor investment sentiment on the mainland.

All these negatives may cloud otherwise positive results for Beijing Airport.

Last year its non-aeronautical revenue grew 18.6 per cent last year to 1 billion yuan, accounting for 29 per cent of total sales. Concessions sales - comprising retail, advertising, ground handling services, restaurants and air catering - increased 24 per cent to 712 million yuan. Retail sales rose 33 per cent to 285 million yuan, while advertising income rose 49 per cent to 244.2 million yuan. Restaurants and food shops also contributed 16 per cent more revenue to 61 million yuan.

Management expects that next year the non-aeronautical division will contribute 1.5 billion yuan, a 50 per cent growth over last year.

Terminal 3 has 46,000 square metres of retail and restaurants area, twice the combined 22,000 square metres in Terminal 1 and Terminal 2. Since all of Terminal 3's retail area is leased, and there will be a concession rate hike during the Olympic Games, analysts said the outlook for non-aeronautical sales is promising.

Damien Horth, Asian transport research head at UBS Investment, forecast that non-aeronautical sales would increase to 38 per cent of total sales next year in the airport from 29 per cent last year. Concession sales will grow to 27 per cent next year from 21 per cent last year.

Still, Beijing Capital Airport has natural advantages. China already is the world's second-largest aviation market. And Beijing Capital Airport, the busiest in China, ranked 9th in the world in 2006 with 41 million passengers. The airport said it aims to handle at least 60 million passengers this year, up 12 per from last year's 53.6 million. Citigroup forecasts that Beijing Airport will become Asia's busiest passenger airport by next year and the world's No1 by 2012.

The acquisition of Terminal 3 will translate into a 121.8 per cent increase in passenger throughput capacity for the whole airport.