Showtime for SPA in China: First franchise branch slated for grand opening on Jun 18, a startingpoint for further foray across Asia.

　　SPA plans to hold a grand opening for its first franchise branch in Kunming, China on Jun 18, 2016.

　　Under the franchise model, SPA will receive a 5% share of revenue in addition to an upfront fee. Theannual sales target for its first branch in China is set at Bt50mn. In our view, we remain upbeat on itsexpansion strategy through franchising and the Kunming branch would be the starting point forfurther expansion into other provinces of China and major tourist cities across Asia. Currently SPA isin talks with its prospective partner over a deal in the CLMV market. The move is in line with itsmission to position itself as a regional spa brand in FY20.

　　New expansion strategy through spa management contracts for hotels nationwide.

　　SPA has rejiged its expansion strategy through spa management contracts for hotels in highpotential areas. Under this model, SPA will act as a spa operator and it will lease space in the hotelsto operate spa business under the ‘Let’s Relax’ brand with an only six‐digit investment cost, wellbelow the Bt10mn required for the normal opening of a new branch. Lower investment cost aside,it will take shorter time to open new branches, which will help speed up the pace of branchexpansion ahead and it will also generate higher gross profit margins (GPM) than normal branches.

　　It seems to us that there remains plenty of room for further expansion through the above model,taking advantage of its track record of experience in this business and enough economies of scale.

　　The focus will be on medium‐size hotel chains with no expertise in spa business. In our opinion, thiswould be a win win for both hotels and SPA and SPA could also build up its brand visibility through anetwork of its strategic partners. To date, SPA has already clinched deals with two hotels, one inKrabi Province and the other one in Pratunam, Bangkok. Foreign tourists account for a largeproportion of the client base for both hotels.

　　Another year of strong growth seen for FY16: Net profit estimated to rise 40.57% y‐y with scopefor earnings upgrade if 2HFY16 outlook better than previously thought.

　　In our view, FY16 is expected to be another banner year for the country’s tourism industry afterdata showed international tourist arrivals to Thailand in 1QFY16 grew 19.75% y‐y. The stronggrowth in foreign tourist traffic sent SPA’s staff utilization rate to a record high of 88% in 1QFY16, upfrom an average of 82% in FY15. Its plan to roll out 10 new spa outlets in FY16 also remains intactafter it added two new spa outlets to its portfolio in 1QFY16 and it has already secured locations forthe remaining eight branches. The above expansion plan would bring the total number of its spaoutlets nationwide to 31 by end‐FY16. In addition to the rosy prospects for spa business, theoutlook for hotel, restaurant and spa product distribution businesses also remains favorable. Onthis basis, we estimate SPA will deliver FY16 net profit of Bt149mn, up 40.57% y‐y. Note that1QFY16 results accounted for 24% of our full‐year forecast. However, there remains scope for apossible earnings upgrade if its operations in China turn out to be better than previously thoughtand the pace of branch expansion through the above new model is faster than previously planned.

　　The positive impact from its operations in China and the new expansion strategy is likely to be seenin 2HFY16.

　　‘BUY’ rating with FY16 target price of Bt11.20/share.

　　SPA could keep up its strong growth pace as many things go according to plan. There is also scopefor potential upside from inorganic growth ahead after it acquired a 3‐star ‘Baan Suan Massage’ spabrand to broaden its domestic client base last year. At the end of the day, we reiterate a ‘BUY’stance on SPA shares. Our FY16 target price also remains unchanged at Bt11.20/share. The target isDCF‐based, assuming a WACC of 8% and a terminal growth rate of 5%.