SECTOR: Aviation IT HSI: 21,561 PRICE: HK$15.40

Transcription

1 Recommendation: BUY TP: HK$23.25(+50.97%) Travelsky Technology Limited (696.HK) 15 July 2016 SECTOR: Aviation IT HSI: 21,561 PRICE: HK$15.40 EARNINGS (reported in RMBm) KEY DATA For the fiscal year ended E 2017E 2018E Issued Capital (m Shrs) 2,926.2 Turnover 5,336 5,472 6,221 6,966 7,632 M arket Cap (HK$m) 45,063.6 Operating Profit 1,255 1,748 2,011 2,251 2,563 Avg. 6M Turnover (HK$m) 51.2 Net Profit 1,653 1,914 2,288 2,501 2, Week High/Low (HK$) / 7.77 EPS (RM B) Net Gearing (%) CASH % Change 37.1% 15.8% 19.5% 9.3% 10.5% Book Value per Share (HK$) 4.77 DPS (RM B) Free Float (%) 31.87% Dividend yield (%) 1.0% 1.3% 1.5% 1.5% 1.6% M ajor Shareholder(s) China Trav elsky Holding Company (29.3%) Source: Bloomberg, Company data, Platinum estimates 13 PRC Airlines (38.8%) SECTION 1 FY15 RESULTS BRIEFING Revenues impacted by slower System Integration Services. System integration services impacted fiscal FY15 results, reflecting a fall in orders from airport contracts; most likely due to the anticipation of the 13 th FYP. This is consistent with the pattern seen prior to the 12 th FYP in Revenue was RMB 5,471.8m, up 2.5% YoY. o Revenue from Aviation Information Technology (AIT) was RMB 3,315m, up 9.8% YoY o Revenue from Accounting, settlement and clearing services was RMB 492.7m, up 13.9% YoY. o Revenue from System Integration Services revenue was RMB 643.4m down 38.1% YoY. o Data network revenue and others was RMB 1,200.8m, up 18.9% YoY. Net profit was RMB 1,914m, up 15.8% YoY. o EPS was RMB 0.65, up 16.1% YoY. Reduction in personnel expenses improved the bottom-line. EBITDA margin was 41.4%, compared to 31.9% a year ago. o Personnel expenses grew at their slowest pace in three years, up 8.1%, compared to 20.2% in FY14, and 14.2% in FY13. Net profit margin was 35.0%, compared to 31.0% a year ago. Platinum Broking IMPORTANT DISCLOSURES ARE PROVIDED ON THE LAST PAGE OF THIS REPORT

2 SECTION 2 COMPANY BACKGROUND TravelSky is the leading data analyst, accounts processor, and portal operator for PRC airlines and airports. Travelsky is a State-owned Enterprise (SOE). The company was incorporated in the PRC in 2000, and listed in Hong Kong in The largest shareholder is TravelSky Holding Company, with a 29.29% stake. 13 Chinese commercial airlines, including China Southern Air Holding Company, China Eastern Air Holding Company, Air China, and China National Aviation Holding Company, hold a combined stake of 38.84%. Exhibit 1: Travelsky shareholder structure. The company s business model is transaction-fee based. Source: Company Data Note: Air China stake is included in Other airlines TravelSky has a portfolio of products and services that act as enablers for the aviation and travel IT services industry. o The service industry participants range from commercial airlines and airports to travel agencies and international organizations such as International Air Transportation Association (IATA). Exhibit 2: Travelsky s products and services oversees the whole aviation value chain Travelsky handles over 95% of all passenger bookings in the PRC. Source: Company Data Travelsky enabled all travel-related movement for over 470m passengers in FY15. o It has data warehouse centres and has emphasized the importance of data centres in their new Beijing HQ, which is scheduled for completion in TravelSky processes ~95% of total passenger bookings in China. o Airline passenger numbers have grown at a CAGR of 9.8% from 2012 to Platinum Broking 2

3 Exhibit 3: Travelsky s R&D and CAPEX: Targeted at Big Data analytics and associated technologies and applications R&D Expenses RMB ('000) RMB ('000) 700,000 16% 2,000, % 1,800, ,000 14% 8.50% 1,600,000 12% 500,000 1,400, % 7.61% 10% 10.44% 8.04% 1,200, ,000 8% 1,000, , ,000 6% 200, ,000 4% 400, ,000 2% 200, % A 2012A 2013A 2014A 2015A 2016E 2011A 2012A 2013A 2014A 2015A 2016E Construction of New Beijing Center Update and MA of the existing system R&D Costs R&D as % of Revenue Development of New Generation System Others Source: Company Data, Platinum Estimates CAPEX Summary and Forecast 35% 30% 25% 20% 15% 10% 5% 0% Exhibit 4: Travelsky revenue summary, and forecast 9,000,000 Revenue Breakdown and Forecast 8,000,000 7,632,013 7,000,000 6,221,465 6,965,857 6,000,000 5,336,412 5,471,831 RMB '000 5,000,000 4,000,000 4,060,518 4,509,311 3,000,000 2,000,000 1,000, A 2013A 2014A 2015A 2016E 2017E 2018E Aviation Information System Integration Services Accounting, Settlement and Clearing Services Data network and Others Source: Company Data, Platinum Estimates Note: Airline support includes Aviation Information and System Integration Services Business segments: 1. Aviation Information Technology (AIT) (57.3% of revenue): Provision of a series of information technology solutions for aviation companies, including airlines, airports, corporate clients, travellers and cargo shippers. These services are further categorized as: 1) Electronic travel distribution (ETD): o Inventory control systems (ICS): Provide support for multiple level flight class setups, availability of differently priced classes (First-Class, Business, Economy), seat availability, and flight control functions. o Their Umetrip platform provides a glimpse into their thinking in that seating can be further subdivided allowing for pricing by legroom, size of seat etc. (see exhibit 8). Platinum Broking 3

4 o Travelsky processed 470.7m passenger bookings in 2015, up 10.9% YoY. o This represents 95% of the passenger bookings handled, derived from statistics from Civil Aviation Administration of China. Exhibit 5: Breakdown of Passenger bookings by type of airline 50,000,000 45,000,000 40,000,000 35,000,000 30,000,000 25,000,000 20,000,000 15,000,000 10,000,000 5,000,000 0 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Source: Company Data, Platinum research Passenger Bookings PRC airlines (International route) PRC airlines (domestic route) Foreign Airlines 2) Airport passenger processing services (APP): o Provision of passenger services allowing for selfservice check-in to passenger flow monitoring. o 229 airports use their system, including all major PRC commercial airports such as Beijing Capital Airport, Pudong Shanghai Airport and Shenzhen international airport. o Travelsky s APP processed 123.2m passengers in 2015 (approx. 29% of total PRC passenger throughput), up 46.5% YoY. (There are over 200 APPs providers globally and this package is provided as part of the overall suite of services.) Exhibit 6: Examples of: Airport passenger processing (Left), Electronic travel distribution (Right) Website Sources: prweb.com, travelsky.com Platinum Broking 4

5 2. Accounting, Settlement and Clearing Services through ACCA (9.0% of revenue): Accounting Centre of China Aviation Limited Company (ACCA) is the largest provider of outsourced service and system products in revenue settlement and clearing for the air transportation industry in the PRC. We expect the segment to grow in-line with the overall aviation industry. 3. System Integration Services (11.8% of revenue): Travelsky provides hardware and software integration services to developing and new airports, commercial airlines and other aviation-related businesses. Revenue is determined by the number of contracted projects during the year. TravelSky collects and accounts for revenues in instalments, with integration projects taking 1-2 years. 4. Data Network Revenue and other revenue (21.9% of revenue): TravelSky provides travel product distribution systems, also known as global distribution systems (GDS) for corporate and individuals. o Travelsky s GDS network are connected to 8,000 travel agencies; compared to Amadeus 90,000, Sabre s 425,000 and Travelports 68,000. We believe the lower connectivity reflects higher inter-channel pricing per ticket. We also believe the company could lower this price and capture market share globally. Other revenue includes their hotel distribution platform- Sohoto.com, cargo security systems, electronic air waybills, and airport IT systems. Exhibit 7: Data Network: Travel content offered by Travelsky Source: Company Data Note: Yeexing - B2B corporate travel platform, Travelsky.com Online Travel Agency Sohoto.com Travelsky s hotel distribution platform, Travelsky service online News platform eterm Travelsky s GDS system, Agent Sky/UWing Learning platform for aviation companies Platinum Broking 5

6 Exhibit 8: Umetrip TravelSky s Flight booking/tracking mobile app (15m monthly average users) Source: Company Data, Umetrip Apple Store Exhibit 9: Travelsky s online travel agency (OTA) website Website source: travelsky.com, tnooz.com Exhibit 10: Example of Travelsky s Terminal Departure Control System Interface Gate departure and associated shopping experiences enable destinations to be matched with shops. Source: Company Data Platinum Broking 6

7 SECTION 2 INDUSTRY OVERVIEW Aviation IT systems can be subdivided into back-end and front end services. Travelsky s GDS includes 70,000 sales terminals, 8,000 travel agencies with input from 129 airlines and 400 domestic and overseas cities. Back-end services refer to IT support for airlines and airports. Such services can be further be broken down into inventory and passenger reservation systems, big data services, cargo management, revenue recognition software, revenue forecast and planning, etc. The IT services companies usually charge a subscription fee, on top of a fixed-commission fee measured by passengers processed. Travelsky operates the back-end under the segment Aviation Information Technology, Amadeus uses Amadeus Altea as well operates Navitaire, and Sabre operates under a series of products, namely SabreSonic Res, Sabre AirVision, and Sabre AirCentre. Front end refer to Global Distribution Systems (GDS). GDS are widely used by travel agents. It can be thought of as a billboard where airlines, hotels, and other reservation-required hospitality services can post their inventory. These travel agents include CTRIP, Qunar, Expedia, and Priceline, to name a few. GDS help drive traffic because it is the only information travel agents can see. Consumers generally approach travel agents and portals linked to travel content providers. The main GDS operators are Sabre, Amadeus, Travelport, and Travelsky. O The operators earn a subscription fee from the airlines, hotels, etc, as well as commission off each successful booking made through their GDS. O Travel agents can be connected to more than one GDS at a time, which means the GDS operators mainly compete for commission through the diversity of theirs offerings and pricing. Exhibit 11: Summary of businesses of Travelsky and its main competitors Company Travelsky: Amadeus: Sabre TravelPort Headquarters: Beijing Spain USA U.K. Also Operates: Openjaw Navitaire Abacus Galileo and Travelport Founded by: PRC Airlines Air France, Iberia, Lufthansa American Airlines United Airlines Aviation IT (57.3%) Distribution (70%) Airline and Hospitaility Air (72%) Business Operations as % Accounting (9.0%) IT Solutions (30%) solutions (30%) Beyond Air (22%) of Revenue System Integration (11.76%) Travel Network (70%) Tech Services (5%) Travel Distributions (21.9%) Pricing Scheme (avg): Airline Solutions (US$ per Booking): $1 $1.59 $1.89 N/A GDS (US$ per Booking): <$1 $8-13 $9-14 $8-13 GDS Coverage: 8,000 Travel Agencies 90,000 travel agencies 425,000 Travel Agencies 68,000 Travel Agencies Financials FY 2015 Rev (US$): 832m 4,331.0m 2,960.8m 2,221m Curr Market Cap (US$): 5.62b 18.13b 7.01b 1.42b Net Debt/Equity CASH 69.65% % - Interest Coverage x N/A 1.31x R&D as % of Revenue 7.6% 16.4% - - CAPEX as % of Revenue 18.0% 14.1% 9.7% 4.9% Source: Platinum Research, Company data Note: Assuming 6.5 RMB : 1US$ Platinum Broking 7

8 Consumers Travel Agencies GDS Travel Content Providers Ancillary Services Platinum Broking 8 Exhibit 12: Travelsky s model is more geared towards data analysis B2C B 2 C B 2 B B 2 B B 2 B Operated By TravelSky Source: Logos from respective companies, Platinum Research

9 Market Share The industry has been consolidated over the past few years to four major competitors. Amadeus is widely used in Europe and the European airlines use Amadeus aviation support system. o In terms of GDS, Amadeus has around 42% global market share (ex. China, Japan, Russia) with majority of bookings in Europe but has been gaining market share in North America. Sabre s aviation IT system is largely used by the American fleets. o Its GDS operates with around 28% global market share (ex. China, Japan, Russia). When Sabre acquired Abacus, it had access to the Asia-Pacific region including Hong Kong. Travelport (parent of Worldspan and Galileo) operates the back-end IT for only Delta airlines, whilst focusing on its front-end services, including its GDS. o Its GDS has a global market share of 30% (ex. China, Japan, Russia). Travelsky dominates with 95% market share in China in terms of aviation support. o We estimate its GDS system to process more than 95% of tourist bookings from the PRC. o Travelsky s GDS, known as Eterm, is not currently popular outside of China as it is largely not connected to overseas carriers. Platinum Broking 9

10 SECTION 3 INVESTMENT THESIS Travelsky has an eye in the sky and a foot on the ground. We expect that data analysis will propel TravelSky to enter the overseas markets with substantially better pricing. Big Data is quickly becoming an effective tool to drive revenues and benefit industries associated with travel in the air and on the ground. The benefits of Big Data are obvious but execution is a key differentiator. The airline-it companies grew from the airline companies they serviced. Amadeus was founded by Air France, Iberia and Lufthansa. Sabre was founded by American Airlines. Meanwhile, Travelsky was founded by a collection of PRC airlines and backed by the PRC government. We believe Travelsky is at the forefront of Big Data applications with 30 years of data collection and analyses under its belt. The company has announced implementation of Big-Data for key projects as part of their policy direction for the 13 th -FYP. TravelSky acts as the link between airports and airlines, and can drive its top-line by actively managing passenger flow to increase the output of airports and airlines. Their enablers (processing systems and portals etc.) become more valuable. Currently the top-line is volume dependent as pricing is regulated domestically. China s market potential is more than 4x that of the United States. In 2015, Travelsky processed 470.7m passengers, compared to Sabre s 585k and Amadeus 747.3m. China stated they will build an additional 276 airports, bringing the total number to nearly 800. This could potentially translate to an additional >50% output by airports in 2020E. Boeing estimates that China s commercial aircraft fleet will nearly triple, from 2,570 aircraft in 2014 (Air China, China Southern and China Eastern account for 70%), to 7,210 aircraft in Including replacement of retired planes, the net demand would be 6,330 aircraft during the 20 years o On average, the number of commercial planes in the PRC would increase by 232 per year, and suggests passenger throughput could increase by 3x by Platinum Broking 10

11 Exhibit 13: China s Airport Expansion Plan by 2020E Source: NSB Passenger volume growth is driven by Big Data applications. With limited capacity on airports and airplanes, delivering profitability is driven by Big Data applications. Efficiency through Big Data improves margins across the whole aviation industry. TravelSky, with its comprehensive travel products and services, uses data to make it easier to improve customers experiences, in addition to efficiency of flight and passenger traffic. The applications of such data are endless. For example: o Raw data inputs such as the airline, weather, aircraft type, time of the year, time of the day, and flight destination could provide a reasonable forecast of the number passengers who would book for specific flight. From thereon, the appropriate departure gate could be assigned that maximizes passenger efficiency. This would also provide influential information on the target audience for F&B or retail stores (Exhibit 16). o Big data is crucial for making time-sensitive decisions. Airlines can use such services to determine where their boarding passengers are, and how long it will take for them to reach their departure gate. Big data considers the impact of flight; what are the consequences of a delayed flight, how many on-board passengers have connecting flights and how many other incoming flights are scheduled for that departure hall? o With airline profit margins being heavily dependent on oil prices, we believe big data applications that improve the efficiency of airlines are highly sought after. General Electric launched its aviation division called Flight Efficiency Services which reportedly helped Alitalia Platinum Broking 11

12 identify 1.5% savings (US$ 15m) in fuel costs in 2011 for a fleet size of approx 100. However the total estimate of inefficient uses of fuel stands at 18-22%, which could generate potential savings of up to US$ m per aircraft. Exhibit 14: Big Data Processing and its applications Retail Data Airport Operations Data Aviation systems Data Passenger Processing Data Departure Data Airport Security Systems Passenger Location data Passenger Booking Data Data Collection Analysis& Processing Data Storage Retailers Security Airlines Processing Airport Departures Passenger Handling Passenger Processing Various Inputs of Raw Data Source: Platinum Research Near Real-Time Processing Applicable Data Analytics Exhibit 15: Travelsky s new data center in Beijing (expected to finish during 2017, currently 47.3% completed, target total CAPEX: RMB 3.7b) Source: Company Data TravelSky provides much more value than it is monetizing: 1. Travelsky has publicly announced their cooperation with various companies to explore the analysis of big data. I. Travelsky has signed a strategic agreement covering joint research and big data analysis with Sugon (RMB 24b mkt cap) in July The agreement states the two parties will explore research in marketing, solutions integration, cloud services and big data applications. II. On Jan 2014, Travelsky worked with Tableau (US$ 3.6b mkt cap), an analytics company, to produce data reports that are more specialized to cater their clients, rather than raw sets of data. 2. Airports have increasingly become a shopping destination, and TravelSky hold a key to make it an effective one. The company handles airport passenger processing, departure system controls, Platinum Broking 12

13 flight destination, and thus possessed capabilities to provide consulting services to retailers. For example, if a retailer knows a departure gate near them has a flight destination that is cold, they could place emphasis on keep-warm products. 3. Their string of recent acquisitions leads us to think they are planning to make strides in the area, both domestically and eventually overseas: I. The acquisition of Openjaw, which operates an online retail Three verticals receiving the most platform, provides retail data on consumers and is expected capital from venture to be extended to all of Travelsky s 30 major commercial capital globally are airline customers, including Air China, China Southern and travel, healthcare China Eastern Airlines. and insurance. With II. The insurance JVs could provide medical data on their TravelSky s recent consumers, as well as a cross-selling the appropriate investment in insurance JVs, the company has eyes in two of the three verticals. insurance products to consumers. We believe the long-term growth of the company relies on the company s big data, which they have already begun selling to airlines and airports. The aviation participants use that data to better their revenue forecasts and planning. We believe TravelSky s story provides opportunity for a potential upward revaluation. Exhibit 16: Big Data Applications: real-time flow of aircraft (left), Correlation heat map of retailers to departure gate & flight destination (right). Fraport AG, an airport manager, has implemented a solution that matches retailers to destination locations. Website Source: internationalairportreview.com, Fraport AG Platinum Broking 13

14 Passenger Bookings ('000) TravelSky Technology 15 July 2016 SECTION 4 BUSINESS UPDATE Passenger booking numbers will remain in-line with the overall aviation industry. One Belt, One Road, One Sky. TravelSky is an SOE, and founded and owned by PRC airlines. This means its market share is protected by its shareholders. In essence we see no threat to its market share. Passenger bookings will continue to be driven by domestic and outbound tourism, which will be reflected in TravelSky s top-line. o We forecast PRC passenger growth to reach 740m by 2020E, slightly above CAAC s forecast of 700m passengers. o Our forecast for Travelsky includes both its dominating presence in the PRC, and bookings on foreign carriers. o YTD passenger bookings on Travelsky continue to grow steadily at 11-12% YoY. Further, favourable government policies, such as the announcement of new airports, will provide TravelSky with new aviation projects goingforward. The company has recently finished developing a new passenger processing system and has begun implementation for PRC airports and airlines, positioning Travelsky for margin expansion. Exhibit 17: Total Passenger Bookings Processed by TravelSky summary and forecast 900,000 Number of Bookings Processed by TravelSky 800, ,000 CAGR of 9.97% 636, , , , , , , ,571 CAGR of 10.7% 424, , , , , , , A 2013A 2014A 2015A 2016E 2017E 2018E 2019E 2020E Source: Company Data, Platinum Estimates TravelSky s New-Generation passenger service information system begins implementation. TravelSky has spent five years to develop the system, beginning in Oct The new system, New Generation System, was jointly researched and developed by the company and the PRC commercial airlines, mainly Air China and China Southern. o The purpose of the new system was to introduce pricing flexibility in the passenger booking system as well as improve its scalability. Platinum Broking 14

15 It offers origin & destination revenue management with automatic full flight lifecycle management. It also has several core modules put into operation, such as uniform seat selection, and payment and sales for flight bookings. This levels the playing field with the international competitors (Sabre and Amadeus). o Compared to competitors, Travelsky charges significantly cheaper The New prices: TravelSky s charges on average RMB 6.0 per passenger Generation system processed (RMB 5.5 for Chinese commercial airlines, RMB 23 for provides airlines foreign commercial airlines), compared to Sabre s RMB 9.7 and with more pricing variations to Amadeus RMB maximize airline TravelSky s domestic pricing is regulated and substantially profits. lower than international platforms. (Exhibit 11) We are waiting for a catalyst to propel TravelSky into the overseas market and believe it has emphasized scalability during its development for such expansion purposes. As the new software begins implementation, the company will also benefit from margin expansion as associated R&D expenses stabilize. Exhibit 18: Aviation Information Revenue Summary and Forecast Projections (RMB '000) 2013A 2014A 2015A 2016E 2017E 2018E Aviation Info Revenue 2,582,004 2,854,335 3,134,973 3,451,981 3,795,367 4,203,407 ETD (Passenger Bookings #) 385,571, ,605, ,747, ,530, ,395, ,290,072 APP (Passengers Processed #) 70,000,000 84,100, ,200, ,760, ,093, ,859,275 Blended ASP Source: Company Data, Platinum Estimates One Belt, One Road, One Sky China plans to develop 276 new airports by 2020E. The slowdown in contracted projects in FY15 was likely due to anticipation for the 13 th Five- Year-Plan. China issued new aviation guidelines for the 13 th five-year-plan (May 18 th 2016). They aim to grow the number of airports from 500 to 766, an increase of approx 53 airports each year. O They aim to grow the number of small airports to over 500 by 2020, from the 300 recorded as of O China also plans to build 66 new civil airports in the next five years, increasing the number from 206 to 272. O For 2016, they target eleven key infrastructure projects and 52 upgrade/expansion works on existing facilities. O This compares to the 13,500 airports located in the US as of Contracted growth in FY15 most likely slowed in anticipation of the new 13 th Five-Year-Plan. We estimate TravelSky to be awarded 80% of the airport integration services in the new 13 th FYP. O Since airports take 2-4 years to complete, we expect a ramp up in contracts in the later years. Platinum Broking 15

16 Exhibit 19: Contracted projects # drops prior to announcement of the upcoming FYP. Source: Company Data, Platinum Estimates Exhibit 20: System Integration Revenue Summary and Forecast Source: Company Data, Platinum Estimates Number of Contracted Projects A 2011A 2012A 2013A 2014A 2015A 2016E 2017E 2018E 2019E 2020E Projections (RMB '000) 2013E 2014E 2015E 2016E 2017E 2018E System Integration Services 699,558 1,039, , , ,163 1,029,528 Number of Contracted Projects Average Project Cost TravelSky will expand its margins as operating costs decline. Operating leverage should continue to increase with the reduction of associated R&D costs to levels inline with peers at approx. 8-12%. Operating profit margin was 35.0%, up 4pps YoY. This was largely due to the slowdown in personnel expenses, which was the bulk of the cost of goods sold. O Personnel expenses accounts for 23% of revenue and 33.7% of total operating expenses. O It has grown at a CAGR of 14% between 2012 and 2015, almost double the average wage growth in the PRC. It has grown 14% and 20% YoY in FY13 and FY14 respectively, compared to the 8% growth in FY15. O We believe this was mostly due to development of the new system, and therefore going-forward, we expect personnel expense growth to reduce to 9-10%. Operating lease payments, 2.8% of revenue, should decrease beginning 2018E as the company completes its new HQ in Beijing. O Travelsky has been constructing its new corporate data centre in Beijing with a projected cost of RMB 3.7b. O As of FY15 end, the construction costs totalled RMB 1.73b, representing 47.3% of total projected costs. O Management guided a complete date by FY17, with FY16 target expenditure of RMB 1.06b. This leads us to believe CAPEX could peak between FY16E-FY17E and lead to increasing free cash flow from thereon. Platinum Broking 16

17 17.16% 38.67% 35.19% 43.55% 43.03% 36.25% 38.34% Operating Cash Flow Margin TravelSky Technology 15 July 2016 O The decrease in leasing payments should offset the increase in depreciation, further improving profitability in the coming years. Exhibit 21: Travelsky FCF (OPCF less CAPEX) RMB 2,000,000 Free Cash Flow 1,800,000 1,781, ,600,000 Beijing Data Centre expenditure impacts free cash flows until 2017E. 1,400,000 1,200,000 1,000, , , , , ,394, , ,410, , , , A 2013A 2014A 2015A 2016E 2017E 2018E Source: Company Data, Platinum Estimates Note: 2016E fall in FCF is related to expenses for the new data centre Exhibit 22: Consistently high cash flow margin RMB '000 8,000,000 OPCF to Revenue 100% 7,000,000 90% 6,000,000 80% 70% 5,000,000 60% 4,000,000 50% 3,000,000 40% 2,000,000 30% 20% 1,000,000 10% A 2013A 2014A 2015A 2016E 2017E 2018E Total revenue Total cash flows from operating activities Series3 0% Cash balances held in Govt bonds are being deployed into investment opportunities, such as insurance services. Source: Company Data, Platinum Estimates Exhibit 23: Cash balance at year end 3,000,000 2,500,000 2,000,000 1,500,000 1,000, ,000 RMB '000 1,739, ,348, ,994,953.0 Cash Balance at Year End Aggressive Investments in Insurance JVs and Openjaw's retail platform could lead to top up of capital structure. 2,242, ,389, ,836, ,600, A 2013A 2014A 2015A 2016E 2017E 2018E Source: Company Data, Platinum Estimates Platinum Broking 17

18 The insurance JV investments are head in availablefor-sale assets in the balance sheet. TravelSky has also stated they would decrease commission payments to travel agencies on travel bookings, which we believe is reasonable because of the steep discount to global peers. We expect operating expenses to grow at a CAGR of 10.8% from 2015 to 2018, compared to our projected revenue growth of 11.7% CAGR during the same period, leading to higher profitability moving forward. Cash flow structure from the investment in the insurance JVs will not be consolidated under the current holding structure, but rather reflected as gains/losses during revaluations. Exhibit 24: Profitability summary and Forecast 38.0% Profitability Margins 36.0% 35.0% 36.8% 35.9% 36.2% 34.0% 32.0% 30.0% 28.0% 26.0% 30.0% 27.9% 26.7% 27.4% 31.0% 31.9% 32.3% 32.3% 33.6% 24.0% 22.0% 23.5% 20.0% 2012A 2013A 2014A 2015A 2016E 2017E 2018E Operating Profit Margin Net Profit Margin Source: Company Data, Platinum Estimates RECENT DEVELOPMENTS TravelSky has been trying to grab international market share. Currently there are only a few international airlines working with TravelSky. Foreign airlines represent only 4% of total bookings. The recent acquisition of Openjaw from GuestLogix for HK$ 305.6m (5% of cash and cash eqv.), and the pricing and scalability of the New Generation system are potential catalysts for overseas contracts. o The acquisition by Travelsky should reaccelerate the company s growth through introduction into new markets. o Openjaw s operates the t-retail Platform, a merchandising platform that is supplementary to the existing sales platform of airlines, online travel agencies (OTA), loyalty programs and hotels. Its closest competitor is Datalex (trading at P/E of 65x), which has a market cap of EUR 266.3m (HK$ 2,350m). The true value of Openjaw could stand at a 5-10% premium to TravelSky s purchase price, since the previous owner, GuestLogix, was facing bankruptcy. o OpenJaw largely supplements Travelsky s services through the aviation supply chain with an emphasis to increase personalized offerings for industry participants. Platinum Broking 18

19 Exhibit 25: OpenJaw and its application to different platforms Source: Company Data, Platinum Research Umetrip will be capitalized for a possible listing. China s Insurance industry is heavily regulated but exhibits phenomenal growth rates. Management expects to capitalize Umetrip, Travelsky s self-developed mobile app with 15m users, and monetize the app this year. The app tracks flight information with real-time updates as well as provides booking services. It is currently looking for strategic investors. o Umetrip is a distant competitor to Skyscanner. Skyscanner s last fundraising round valued the company at US$ 1.6b (beginning of 2016). With 50m monthly active users, each user is valued at US$ 32. We assign a 70% discount due to lack of functionality and offerings, we estimate Umetrip s valuation to be US$ 144m (RMB 946m). On 20th of May 2016, TravelSky entered into a joint venture to form two insurance JVs along with China Merchants Finance Investment, China Mobile, Shenzhen Investment Holdings, Shenzhen Excellence and others. The two insurance businesses, CMRH Life and CMRH P&C (CMRH: China Merchants RenHe), each have a committed capital of RMB 5b. Travelsky has committed 17.5% equity interest in both JVs while China Merchants Finance Investment and China Mobile have committed 20% in each. The other investors with minor stakes include Shenzhen Investment Holdings, Qianhai Financial Holdings, Shenzhen Excellence, Shenzhen Brightoil, IZP (Beijing) Technology, and Kehuitong. As a total, Travelsky contributed RMB 1.75b. o Travelsky will likely package travel products with insurance offerings. The movement into insurance was unexpected; nevertheless, we believe Travelsky has the appropriate existing platforms for cross-selling of insurance products should it choose to do so. o Because the investment is below 20%, it will currently be classified as a held-for-sale investment, for which we value together with cash and investments. Platinum Broking 19

20 Exhibit 26: Financial Summary and Projections Projections (RMB '000) 2013A 2014A 2015A 2016E 2017E 2018E Aviation Info Revenue 2,582,004 2,854,335 3,134,973 3,451,981 3,795,367 4,203,407 ETD (Passenger Bookings #) 385,571, ,605, ,747, ,530, ,395, ,290,072 APP (Passengers Processed #) 70,000,000 84,100, ,200, ,760, ,093, ,859,275 Blended ASP Accounting, Settlement and Clearing 431, , , , , ,961 Total Accounting Transactions 891,800, ,200,000 1,024,200,000 1,107,609,000 1,203,419,004 1,311,112,013 Cost per Transaction System Integration Services 699,558 1,039, , , ,163 1,029,528 Number of Contracted Projects Average Project Cost 31,798 22,607 22,980 23,669 24,379 25,110 Data Network and Others 796,513 1,009,789 1,200,770 1,399,497 1,601,025 1,745,117 GDS Reservations ('000) 303,700, ,100, ,100, ,141, ,555, ,555,059 Rev per Transaction Total Revenue 4,509,311 5,336,412 5,471,831 6,221,465 6,965,857 7,632,013 Revenue YoY Change Aviation Info Revenue 6.01% 10.55% 9.83% 10.11% 9.95% 10.75% Accounting, Settlement and Clearing 0.40% 0.26% 13.94% 9.93% 9.74% 10.04% System Integration Services 48.65% % 28.75% 17.71% 5.58% Data Network and Others % 26.78% 18.91% 16.55% 14.40% 9.00% Total Revenue 11.05% 18.34% 2.54% 13.70% 11.96% 9.56% Expenses Breakdown Depreciation and amortisation -380, , , , , ,899 Personnel expenses -975,904-1,172,783-1,268,188-1,406,051-1,535,971-1,667,595 Operating lease payments -148, , , , , ,112 Other operating expenses -1,771,183-2,302,081-1,797,988-2,048,060-2,335,612-2,562,274 Total Operating Expenses -3,275,721-4,081,255-3,724,191-4,179,244-4,673,286-5,015,880 Profitability Operating Profit Margin 27.36% 23.52% 31.94% 32.83% 32.91% 34.28% Net Income Margin ex. Gov grants 27.49% 22.33% 28.58% 29.69% 29.65% 30.58% Net Income Margin 26.74% 30.97% 34.99% 36.78% 35.90% 36.20% Cash Flow Summary Cash flows from Operations Earnings before Tax 1,312,419 1,904,968 2,317,358 2,173,090 2,429,661 2,745,591 Change in Working Capital 217, ,409-89, , ,700-98,155 Taxes Paid and Others 213, , , , , ,904 Total Operating Cash Flow 1,743,840 1,878,093 2,383,184 2,677,137 2,525,210 2,926,341 Cash Flow from Investing Activites CAPEX -979, , ,765-1,878,882-1,114,537-1,144,802 As a % of Revenue Others 234, , ,518-1,182, , ,500 Total Cash Flow from Investing -744,739-1,814,477-1,737,283-3,060,982-1,565,037-1,595,302 Cash Flow from Financing activites -391, , , , , ,750 Net Change in Cash 607, , , , , ,288 Cash at End of the Year 2,348,825 1,994,953 2,242,661 1,389,390 1,836,521 2,600,809 Free Cash Flow 764, ,714 1,394, ,255 1,410,673 1,781,539 CAGR FY13-18E: 18% Source: Company Data, Platinum Estimates Note: Free Cash Flow = OPCF less CAPEX Platinum Broking 20

21 SECTION 5 VALUATION Exhibit 27: Relative valuation Name Ticker Sources: Bloomberg, Platinum estimates FY15 Total Assets (HK$m) Mkt cap (HK$m) Closing price (HK$) 52-week High/Low (HK$) 6M Volume (m shrs) 6M Turnover (HK$m) 696.HK, HK$ 15.4, TP: HK$ 23.25, % BUY FY14 Avg. P/E (x) FY15 Cur. P/E Avg. P/E (x) (x) Aviation IT and Travel Distribution IT 1 Travelsky Technology Ltd-H 696 HK 14,871 45, / Amadeus It Holding Sa-A Shs AMS SM 60, , / Sabre Corp SABR US 41,822 62, / Simple avg Mkt cap wtd avg Big Data Company 1 Alliance Data Systems Corp ADS US 173,859 97, / , Fair Isaac Corp FICO US 9,539 28, / Isentia Group Ltd ISD AU 1,044 3, / (31.92) Sap Se-Sponsored Adr SAP US 320, , / Simple avg Mkt cap wtd avg Travel Distribution IT 1 Travelport Worldwide Ltd TVPT US 22,711 12, / (12.20) (17.70) 2 Datalex Plc DLE ID 449 2, / Simple avg Mkt cap wtd avg (7.92) (11.36) Overall avg Overall mkt wtd avg FY16E P/E (x) FY17E P/E (x) FY14 ROE (%) FY15 ROE (%) FY16E ROE (%) FY17E ROE (%) We value the core business of Travelsky at 23x P/E FY16E EPS of RMB Our valuation is in line-with its closest peers, Amadeus and Sabre. Our target price is HK$ % BUY. Risks affecting our target price: Delays in completion of the Beijing data centre. Weak ticket bookings which could be impacted by exogenous factors such as political instability or terrorism. The recent investments in insurance could prompt a debt issuance. Exhibit 28: SOTP valuation SOTP Valuation Equity Valuation (HK$ '000) HKD/RMB: 1.2 Core Business FY16 NI (RMB): 2,288,448 P/E Multiple: 23x 63,161, Umetrip Valuation: 1,123,200 64,284, Openjaw Valuation: 336,160 64,620, Cash and Investments: 3,419,390 68,039, Value Per Share (HK$) Shares Outstanding: 2,926,209 Target Price: Current Price: Upside: 50.97% Sources: Bloomberg, Platinum estimates Platinum Broking 21

22 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Volume (m shares) Share price (HK$) TravelSky Technology 15 July 2016 Exhibit 29: Travelsky 2-year share price performance Travelsky Technology Ltd-H (696.HK) Last price (Jul 14,16) = HK$15.4 SMA(50) = SMA(100) = SMA(200) = Volume (Jul 14,16) = 3.6m Sources: Bloomberg Platinum Broking 22

23 APPENDIX Ownership flow chart of Chinese PRC Airlines Note: All airlines except Spring airlines use Travelsky s booking system. Source: Platinum Research, Company data Platinum Broking 23

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