ST Aerospace Plans to Expand, Boost Spending in China
By Chan Sue Ling, Bloomberg News | Sep. 29, 2008
Singapore Technologies Aerospace Ltd., Asia's biggest plane-maintenance company, plans to open a new base in the region and raise investments in China as economic growth boosts air travel.
The company is considering "at least two or three" countries for the new base, President Tay Kok Khiang said in an interview on Bloomberg TV. It may also spend as much as US$200 million over the next three to five years to expand in China, the world's second-largest aviation market, he added.
Global aircraft maintenance demand will likely grow about 5 percent on average annually over the next 10 years, according to UOB-Kay Hian Research Pte. At least 18 low-fare Asian airlines have started operations since 2001, including ST Aerospace customers AirAsia Bhd. and PT Lion Mentari Airlines.
"There's definitely going to be demand for maintenance and repair because airlines in Asia have a huge fleet," said K. Ajith, a Singapore-based analyst at UOB-Kay Hian. "The established players will benefit." ST Aerospace gets about half its sales from Asia.
Still, the company's parent Singapore Technologies Engineering Ltd. has fallen 31 percent this year on concern rising oil prices and slowing travel demand will force more airlines to ground planes. The stock declined 1.5 percent to S$2.60 in Singapore on Sep. 29.
Profit Margins
Profit margins before tax at ST Aerospace's commercial maintenance business may shrink to 15 percent from 16.7 percent, JPMorgan Chase & Co. analyst Winnifred Heap, said in a Sep. 19 report. She has a "neutral" rating on ST Engineering. The company generates about a third of revenue from aerospace, according to Bloomberg data.
ST Aerospace has sidestepped some of the slowdown in the commercial aviation industry as it mainly services newer aircraft such as the latest generation of Boeing Co. 737s and Airbus SAS A320s, Tay said. Some airlines are grounding older, fuel-guzzling planes.
"The recent financial fiasco is still rippling through and I suppose we haven't seen the last of everything," Tay said. The "temporary blip" will likely cut about US$1 billon to US$2 billion from the US$30 billion global outsourced maintenance market, he added.
The company has boosted revenue by increasing its engine-servicing and components business, which now accounts for about 50 percent of sales, Tay said. The conversion of older passenger planes into freighters will also help counter a slowdown in maintenance and repair revenue, he added.
Singapore Facilities
ST Aerospace operates eight widebody and 13 narrowbody bays across its three facilities in Singapore. It also converts passenger aircraft into freighters and does engine maintenance work in the city-state.
In China, the company has formed a maintenance venture with China Eastern Airlines Corp., the country's third-largest carrier, in Shanghai. The pair will open a hangar, capable of handling the double-decker Airbus SAS A380, at Pudong airport next year.
ST Aerospace has also partnered with Xiamen Aviation Industry Co. to set up an engine-repair company. The venture will begin operations late next year in Xiamen, with the capacity to service as many as 150 CFM International engines a year, Tay said.
Rival Hong Kong Aircraft Engineering Co., also known as Haeco, is due to open a third hangar at the city's airport next year. The company and affiliates also bought a Chinese engine-repair company from General Electric Co. in June.