Strong international throughput support our view tourism sector would recover in 2H19. We revised down AOT’s earnings after including a one-time provision under labor law, but recently approved DMK Phase 3 development plans by the board indicate bidding for DMK Duty-free will be as scheduled, in 4Q19-1Q20. We reiterate a BUY call for AOT with a TP of Bt87. The stock is trading at 22.6x forward EV/EBITDA, or +1.5SD of its 5-year mean multiple vs 27.8x FY20F target valuation (+2.5SD of mean).

International throughput grew 7.6% yoy in 1-14 Sep 2019

That outperformed domestic throughput which remained weak at -4.4%. Airports with a large share of Chinese tourist arrivals (DMK, CNX, HKT) outperformed BKK airport. Hence, we remain optimistic Chinese tourist arrivals will continue to recover momentum in September.

DMK Phase 3 development plan on track; keep eyes on concession bidding

Prachachat reported the AOT board has approved the Bt40b plan to increase DMK processing capacity from 30m passengers per year to 40m by end 2023. That plan needs cabinet approval, but it indicates bidding for DMK Duty-free concessions would be held in 4Q19-1Q20, in our views. We reiterate there could be strong competition, similar to the BKK Airport concession. This suggests further upside to concession income; we estimate every Bt1.5b increment in our assumed concession revenue would lift target price by Bt1/share.

Trimmed FY19F earnings by 2.6% after including provision under labor law

After the cabinet approved the new labor law last week, we expect AOT to book a Bt740m provision in 4Q19. Of that, Bt30m would be expenses for this fiscal year as there will be 61 retiring employees. We revised earnings by 2.6% based on this provision and latest passenger growth data.

Reiterate BUY rating, Bt87 TP

Our 2020F TP is based on DCF valuation (8.4% WACC) and implies 27.8x FY20F EV/EBITDA (at +2.5SD of its 5-year historical average multiple). Key downside risks include disruptions such as political unrest, natural disasters, and terrorist attacks, weaker inbound tourism, weak consumption dampening domestic tourism, rise/reduction in PSC rate, and larger-than-expected capex plan.