China Airport Sector Update

Transcription

1 PLATINUM Broking August 2010 China Airport Sector Update Source: BCIA, Platinum IMPORTANT DISCLOSURES ARE PROVIDED ON THE LAST PAGE OF THIS REPORT

2 TABLE OF CONTENTS EXECUTIVE SUMMARY...ii SECTION 1 National airport planning The government s grand plan Various airports expansion plans...3 SECTION 2 Major factors affecting Chinese airports Favourable Factors Potential risks to the aviation sector...6 SECTION 3 Company focus Listed airports analysis M&A activity Valuations i

3 EXECUTIVE SUMMARY This report focuses on the recent developments in the mainland of China airport industry, and includes analysis on the 6 listed airport companies. By evaluating the plans of the Chinese central government regarding the development of the airport industry, the building and expansion of airports, recent opportunities and threats for the sector and potential M&A activities, we aim to distinguish between where the industry is today and where it could be in the future. 1. The Chinese government aims to have 244 airports by 2020, indicating 78 new airports in the pipeline over the next 10 years. The government has also designated 5 zones of airports in the northern, eastern, central-southern, south-western, and north-western regions of China in order to boost the trade flow of those regions. 2. With passenger throughput and cargo throughput expected to increase by 11.5% and 12.3% CAGR respectively in the period from 2009 to 2020, a total of RMB247.8b is expected to be invested in airport construction in the next 10 years, both on existing airports expansion and on new airports. 3. Recovery in the global economy, removal of the business tax levied on international flights and higher contributions from non-aeronautical services are major opportunities for airport performance currently. 4. Major threats to the airport sector may come from high-speed railway services, the gap between global and domestic oil prices, as well as policy changes on the civil airport construction and management fee ( Airport Fee ). 5. Though there has been limited M&A activity recently due to issues over shareholding control and geographic coverage difficulties, we think it possible to see listed airports combining their assets with nearby aviation assets in the near future, such as Shanghai International Airport ( SHIA ) which, with its major asset being Shanghai Pudong International Airport ( Pudong ), may acquire its parent company s holding in Shanghai Hongqiao International Airport ( Hongqiao ); similarly Hainan Meilan International Airport ( Meilan ) has proposed to acquire the assets of Sanya Phoenix International Airport ( Sanya ).. 6. Among the six listed airports, SHIA, Beijing Capital International Airport ( BCIA ), Guangzhou Baiyuan International Airport ( Baiyun ) and Meilan each have one or more key attractions that we think make them worthy of consideration as investments, whether it is their dominant status in their region, their high exposure to international flights, a relatively low risk of being replaced by high-speed railways, or their potential for asset injection etc. ii

4 SECTION 1 National airport planning 1.1 The government s grand plan 47.0% increase in number of airports by In 2008 China announced the National Civil Airport Layout Plan ( the Plan ) for , the goals of which were to balance the development among the airports around China, to improve coordination between them and to increase the connectivity of domestic airports with other international airports. According to the Plan, by 2020 there will be 244 airports (compared with 166 as at the end of 2009) forming five airport zones linking small airports with nearby major cities. The airport density is planned to increase to 25.4 airports per million km 2 in 2020 (comparing with 17.3 airports per million km 2 in 2009). Kunming, Chengdu and Chongqing to be gateways to South Asia. Urumqi, Xi an and Lhasa to be gateways to Central Asia. Formation of airport zones. 5 zones of airports have been designated for the northern, eastern, central-southern, south-western, and north-western regions of China. Kunming will spearhead the south-western zone (in orange in Exhibit 1), supported by Chengdu and Chongqing, and will focus on freight routes between China and Exhibit China Airport Plan Map South Asia as well as South East Asia. Urumqi will spearhead the north-western zone (in light yellow), supported by Xi an and Lhasa, and focus on freight routes between China and Central Asia. We believe that the impact of these zones will be to strengthen throughput for the above mentioned airports, to increase the trade flow between China and the other parts of Asia by reducing export and import costs, and enhance the urbanisation and Sources: CAAC development in those regions, similar to the airport zone in the Pearl River Delta region. The potential entry of increased cargo volume will also enhance the attractiveness of other connecting airports, especially the 3 international cargo hubs which may benefit from their increased accessibility to neighbouring Asian countries as they become the Asian bases for aircraft stopovers. BCIA, Baiyun and Pudong airports among the world s fastest growing cargo hubs. 3 international air cargo hubs. China has identified BCIA, Baiyun airport and Pudong airport to be the key cargo hubs and their airports to be upgraded. According to information released by the Airport Council International ( AIC ) and as in Exhibit 2 below, in 2009, Pudong, BCIA, and Baiyun airports were respectively ranked 3 rd, 14 th and 21 st busiest airports by cargo volume in the world. Although most of the world s top 30 busiest airports experienced sharp decreases in cargo volumes in 2009, Baiyun and BCIA still registered positive cargo 1

5 volume growth, increasing by 39.3% and 4.0% respectively. BCIA has expanded its passenger handling capacity to 78.0m and cargo handling capacity to 1.8m tonnes since January 2008, Pudong has expanded its passenger handling capacity to 60.0m and cargo handling capacity to 4.2m tonnes since March 2008, while Baiyun is planning to expand its passenger handling capacity to 45.0m by Exhibit World Top 30 Cargo Handling Airports Total Cargo % YoY Rank City (Airport) (m Tons) Change Rank City (Airport) Total Cargo (m Tons) 1 MEMPHIS, TN (MEM) LONDON, GB (LHR) HONG KONG, CN (HKG) AMSTERDAM, NL (AMS) SHANGHAI, CN (PVG) CHICAGO, IL (ORD) SEOUL, KR (ICN) NEW YORK, NY (JFK) ANCHORAGE, AK (ANC) BANGKOK, TH (BKK) LOUISVILLE, KY (SDF) GUANGZHOU, CN (CAN) DUBAI, AE (DXB) INDIANAPOLIS, IN (IND) FRANKFURT, DE (FRA) TOKYO, JP (HND) TOKYO, JP (NRT) NEWARK, NJ (EWR) PARIS, FR (CDG) LUXEMBOURG, LU (LUX) SINGAPORE, SG (SIN) OSAKA, JP (KIX) MIAMI, FL (MIA) SHENZHEN, CN (SZX) LOS ANGELES, CA (LAX) DALLAS/FT WORTH, TX (DFW) BEIJING, CN (PEK) SELANGOR, MY (KUL) TAIPEI, TW (TPE) MUMBAI, IN (BOM) Source: Airports Council International ( ACI ). % YoY Change Northwestern and western regions expected to be the main benefactors of the development New airports to be established. For the remaining 78 airports to be established by 2020, the details of 23 new airports are shown in Exhibit 3, while information on the other 55 proposed airports is as yet unavailable. However, we expect most of the new airports to be built in the north-eastern, north-western and south-western regions, as these regions are currently thinly populated with airports and it is planned to bolster these areas economies significantly over the next few years. Exhibit 3 Plan of new airports Passenger Cargo Province Airport capacity capacity Date of completion Expenditure Province Airport Passenger Cargo capacity capacity Date of completion Expenditure (m) ( 000 Tons) (RMBm) (m) ( 000 Tons) (RMBm) Anhui Bengbu N.A N.A N.A N.A Henan Anyang Yubei N.A N.A N.A N.A Anhui Jiuhuashan 0.5 N.A Henan Zhumadian N.A N.A N.A N.A Anhui Wuhu N.A N.A N.A N.A Hunan Hengyang 0.36 N.A Fujian Sanming Shaxian Hunan Yueyang N.A N.A Guangdong Chaoshan 4.5 N.A ,764 Inner Mongolia Aershan Guangdong Yuexi N.A N.A N.A N.A Ningxia Guyuan Guangxi Hechi Shanxi Wutaishan Hainan Boao 0.1 N.A N.A 1,150 Tibet Naqu N.A N.A Hainan Dongfang N.A N.A N.A N.A Xinjiang Aqsu Hainan Wuzhishan N.A N.A N.A N.A Yunan Kunming 380 N.A ,100 Hainan Wuzhishan N.A N.A N.A N.A Yunan Kunming 380 N.A ,100 Heilongjian Yichun N.A N.A Source: CAAC, airports websites, news sources. 2

6 1.2 Various airports expansion plans Double digit annual growth for passengers and cargo expected up to Strong growth expected through China s per capita GDP is expected to reach at least US$5,000 by 2020, indicating a CAGR of at least 2.8% from US$3, of per capita GDP in Supported by this, Mr Yang Yunyun, former Minister of the Civil Aviation Administration of China ( CAAC ) made a preliminary forecast that both passenger and cargo throughput will rise by a CAGR of 11% from 2010 to Exhibit 4 Passenger Throughput ( E) Exhibit 5 Cargo Throughput ( E) 1000 Mil m ton 50% 20 YoY 25% % 30% 20% % 15% 10% % 5 5% 0 0% 0 0% Passenger throughput (LHS) Growth(YoY, RHS) avg Cargo throughput (LHS) Growth (%, RHS) avg Sources: CAAC, Platinum Research. Sources: CAAC, Platinum Research. Capacity expansion to push throughput growth. Aggressive FAI ahead. To achieve the targets set by the Plan, a total of RMB450b investment is needed for airport construction in the period from 2008 to 2020, or RMB247.8b to be committed over the next 10 years (RMB202.2b has already been invested during ). In light of the rapidly rising demand for air travel, numerous airports in China have been aggressively expanding their capacity, with 16 airports completing their proposed expansions or construction of additional capacity over the past two years, and another 7 airports are working on ongoing expansion plans till Mainly sourcing new capital from loans and government support. Massive funds required. Among the airports embarking on expansion plans, Hangzhou and Xi an airports may require an injection of funds as the sums of capital required for their expansion plans are among the most significant in the pipeline. Airport companies like Hangzhou, Xiaoshan and Kunming have tried to launch IPOs in the period since 2006 in order to raise the massive amounts of capital required for their expansion plans. However, CAAC has tended to discourage airports IPOs since last year, as CAAC would prefer to have airports mainly focusing on providing a public service rather than becoming commercial entities. As a result, loans from commercial banks and financial support from local government have now become the major sources of funding. Hong Kong listed Meilan Airport may be an exception for an A-share offering (refer to part 3.2 for details). 3

7 Exhibit 6 Recently completed new or expanded airports Date of completion Airport Location FY09 Passenger Throughput Designed passenger capacity FY09 Cargo Throughput Designed cargo capacity ('000) ('000) Chg(%) ('000 ton) ('000 Chg(%) Apr 2008 Yulin Shanxi , N.A N.A May 2008 Kunming Yunnan , N.A N.A May 2008 Tianjin Tianjin , Jun 2008 Shijiazhuang Hebei , Aug 2008 Changbaishan # Jilin Dec 2008 Huangshan Anhui , N.A N.A Apr-09 Luoyang # Hefei, Anhui Aug 2009 Dali Yunnan , N.A N.A Sep 2009 Daqing # Heilongjiang 1, Oct 2009 Erlianhot # Inner Mongolia N.A N.A Nov 2009 Urumqi Xinjiang 6, , Dec 2009 Jiangying Nanyang, Henan N.A N.A Mar 2010 Hongqiao Shanghai 25, , , Jul 2010 Ali Kunsha # Tibet 120 N.A Jul 2010 Jul 2010 Tagshan # Hebei 500 N.A Jul 2010 Jul 2010 Bole # Xinjiang 200 N.A Jul 2010 Avg Source: CAAC, airports websites, news sources. Note*: comparing with the year before the expansion completion. Note # :Newly built. Exhibit 7 Upcoming expansion plans Date of Airport Province Expanded completion passenger capacity Expanded cargo capacity Expenditure Expenditure/passenger capacity increment (m) Chg (%) ('000) Chg (%) (RMBb) (RMB) 2010 Dalian Zhoushuizi Liaoning %N.A N.A Dongying Shandong %7 678% Xigaze Tibet 0.2 N.A 1 N.A Shenzhen Baoan Guangdong %1, % N.A Hangzhou Xiaoshan Zhejiang % % Guangzhou Baiyun Guangdong % 2, % Tianjin Binhai Tianjin % 4, % Chongqing (Phase I) Chongqing % 450 N.A Changsha Huanghua Hunan Xiamen Gaoqi Fujian % 1, % Yichang (Phase I) Hubei % N.A N.A Akesu Xinjiang Changdu Bangda Tibet , Chongqing (Phase II) Chongqing % 450 N.A Xian Xianyang Shanxi % % Jinan Yaoqiang (Phase I) Jinan % 130 N.A Nanchang Jiangxi , Guilin Liangjiang Guangxi Zhangjiajie Dayong Hehua Hunan 5.0 N.A Xining Gansu % % Hefei Luogang (Phase II) Anhui % 400 N.A Yichang (Phase II) Hubei % N.A N.A 2040 Jinan Yaoqiang (Phase II) Jinan % 706 N.A 2045 Chongqing (Phase III) Chongqing % 2,500 N.A sum/ chg avg % 12, % ,892 Source: CAAC, airports websites, news sources Note * : The expected capacity is calculated based on the respective existing designed capacity. 4

8 SECTION 2 Major factors affecting Chinese airports 2.1 Favourable Factors Both passenger and cargo traffic is recovering Recovery of global economy. After an RMB27.0b loss for the overall aviation industry in China in 2008 (mainly due to the global crisis and the oil price hike), the industry earned profits of RMB12.2b in This strong growth has continued so far this year: passenger turnover and cargo turnover volume increased 17.6% YoY and 38.6% YoY respectively in 1H10. As can be seen from Exhibits 8 & 9 below, overseas flights, including to Hong Kong and Macau, led the growth. The major reasons may include the recovery of the world economy, the increasing travel demand from domestic residents (passenger) and newly operated transshipment centers in Shanghai and Guangdong for global express couriers such as UPS and FedEx. Exhibit 8 Growth of Cargo Traffic 80% 60% 40% 20% 0% -20% -40% May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Passenger Traffic Growth (HK,Macau) Passenger Traffic Growth (Domestic) Passenger Traffic Growth (International) Sources: CAAC, Platinum Research Exhibit 9 Growth of Passenger Traffic 140% 120% 100% 80% 60% 40% 20% 0% -20% -40% May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Cargo Traffic Growth (HK,Macau) Cargo Traffic Growth (Domestic) Cargo Traffic Growth (International) Sources: CAAC, Platinum Research Beijing and Shanghai airports to benefit given high exposure to international flights. Non-aeronautical, especially retail & rental business expected to contribute Removal of business tax on international flights. With effect from 1 January 2010, a new tax system exempts domestic airlines from paying business tax (3% of revenue) on the revenue from their international flights. This new policy will encourage domestic airlines to offer more international flights. For Air China, China Eastern and China Southern, international flights accounted for 34.8%, 26.0% and 13.1% respectively of their overall flights in 2009, and it is estimated that Air China could save more than RMB550m or 10.9% of its pre-tax earnings of 2009, and China Eastern Airlines RMB170m or 37.2% of pre-tax earnings. As a result, we think that BCIA and the two airports in Shanghai will also benefit more due to their role as international airline hubs and base airports for Air China and China Eastern Airports non-aeronautical business expected to contribute more. Non-aeronautical revenue accounted for 25-45% of listed airports total revenue in 2009 (refer to Exhibit 10). Among the various components of non-aeronautical revenue, retail and rental income is expected to contribute more, given the expanded retail area that will be available after the terminals have been improved. 5

9 Exhibit 10 Listed airports non-aeronautical business contribution to revenue (FY09) Name Total Revenue Aeronautical Non-Aeronautical Revenue Component as % of Total Revenue (RMBm) Revenue (%) Total Advertising Rental Retailing Restaurants Others BCIA 4, % 37.0% 10.9% 14.0% 8.4% 1.7% 3.7% SHIA 3, % 43.0% 1.8% 9.5% 31.7% Baiyun 3, % 42.2% 4.8% 9.2% 2% NA 26.2% Shenzhen 1, % 37.9% NA NA NA NA NA Xiamen % 36.0% 3.5% 32.5% Meilan % 24.7% NA 3.8% 20.9% Average 36.8% Sources: Company data, Platinum Research Mainland-Taiwan Direct Link. There are 31 domestic cities that have been approved since 2008 for the landing of passenger flights under the Mainland-Taiwan Direct Links agreement, and currently 270 flights per week operate on those routes. Xiamen and Shanghai airports are the main beneficiaries of the direct link, given that there are more Taiwan businessmen in or near the two cities, while Hong Kong Airport has marginally suffered due to lower volumes of transit traffic. 2.2 Potential risks to the aviation sector High-speed railways Competition inevitable China will have constructed 4,042 km of high-speed (above 250km/h) railway lines by July 2010, and is planning to complete 13,109 km by With increasing competition from high-speed railways, especially after 2012, some experts expect that about 90% of the market for trips under two hours (500km-700km) and 50-70% of those under four hours (1,000km-1,400km) might be cannibalised by railways. As an example, all the airlines have now stopped flights between Zhenzhou and Xian (5,050km) since the 350km/h train came into service in February This competition is inevitable, and domestic airlines and airports have taken the following actions to enhance their competitive advantage. Airports need to strengthen internal flights, and cooperation with railways. Increase the proportion of international flights. With the removal of business tax on revenue from international flights, airline companies plan to raise the proportion of international flights in their schedules so as to relieve the pressure from high-speed railways. For example, China Southern Airlines is going to double its proportion (from around 15% to 30%) of international flights by Similar plans are expected by other airlines. Introduce express flights between airports. Airports, especially those heavily affected by the increase in high-speed rail services, are now gradually introducing express flights (featuring express check-in of about 15 minutes, an express boarding channel and better airbridge locations) to save passenger total travelling time and make the flights more competitive. Wuhan, Qingdao, Baiyun and Changsha airports have already put these 6

10 flights into operation. Seek cooperation with high-speed railways. The National Development Regulatory Commission ( NDRC ) hopes to see cooperation between the aviation and high-speed rail industries in order that passengers are able to travel more efficiently. As an example of this, Hongqiao airport is expected to be the first of the domestic airports to cooperate with its competitors from the railways, as the HongQiao Railway Station (one metro station away from Hongqiao airport s Terminal 2 which opened in March 2010) started operation on 1 st July It is expected the airport and the railway station can be not only physically joined with each other, but also provide services of ticket purchasing and changing as well as check-in for each other. Jet fuel price gap remains large Pressure from fuel price remains. Under the control of the government, the domestic ex-factory jet fuel price has been maintained above the level of US$95/bbl since Nov 2009 (close to the pre-crisis level), indicating an about 40% premium to Singapore s spot price of between US$85/bbl and US$95/bbl (about half of the mid-2008 height). This differential (partly due to fuel processing efficiency while also tax liabilities) remains pressing on airlines operation cost. In addition, though airlines are allowed to adjust the fuel surcharge charged to passengers (still limited to certain rules by NDRC) to partly offset the fuel price burden, they are cautious on the move so as to avoid affecting the traffic demand. Exhibit 11 - Jet fuel price, China vs. Singapore (Jan 08-Jun 10) 200 US$/bbl % 80% 60% 40% 20% 0% -20% -40% Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 China ex -factory jet fuel price (LHS) Singapore jet fuel price (LHS) Price premium/(discount) of China to international (%, RHS) Sources: NDRC, U.S. Energy Information Administration. Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 BCIA, Baiyun and Meilan airport may no longer enjoy airport construction fee rebate after Policy changes on Airport Fee. The airport construction and management fee ( Airport Fee ) is a tax charged on each passenger by CAAC when a passenger buys a ticket. According to several regulations issued since late 2007, the levy of this Airport Fee will last until the end of 2010, while a rebate of nearly 50% of the Airport Fee collected from passengers departing from individual airports may be cancelled unless the airports get special approval. BCIA, Baiyun and Meilan currently all enjoy a 48% rebate of the Airport Fee (which accounted for 205.2%, 60.4% and 51.2% of their respective pre-tax earnings in FY09). It is expected that the rules governing the Airport Fee levy are likely to be extended after this year, but the special treatment of the Airport Fee rebate for the three airports may be difficult to justify, and is unlikely to continue. If the three airports current high tax rebate were to be totally or partly removed after this year, it would lead to a sharp decrease in their earnings. 7

11 SECTION 3 Company focus 3.1 Listed airports analysis Listed airports ranked high among all airports. SWOT analysis. There are six listed airports, either quoted on the Shanghai Stock Exchange, Shenzhen Stock Exchange or Hong Kong Stock Exchange. In the 2009 ranking of Chinese airports, 4 out of the top 10 in terms of passenger throughput and aircraft movements are listed companies, while 5 of the listed airports rank among the top 10 airports in terms of cargo throughput. Exhibit 12 Top 5 airports aircraft movement (05 09) Exhibit 13 Top 5 airports passenger numbers (05 09) '000 Million Beijing SH Pudong Guangzhou SH Hongqiao Shenzhen 10.0 Beijing SH Pudong Guangzhou SH Hongqiao Shenzhen Sources: CAAC, Platinum Research. Sources: CAAC, Platinum Research. Airports strengths mainly accrue from their location, the size of the surrounding population, the local economic environment and so on. Major international events such as the Shanghai World Expo and Guangzhou Asia Games in 2010 are likely to provide a boost to Shanghai and Guangzhou s competitiveness. Some of the listed airports face capacity problems, and have already implemented significant expansion plans. Further expansion plans and asset injections could bring further opportunities to certain of the listed airport companies. 8

12 Exhibit 14 Listed companies SWOT table Airport Strength Weakness Opportunities Threats BCIA Located in the capital of China. The busiest passenger airport in China - passenger throughput of 65.4m in FY09. The busiest airport in China with 487,918 flights in FY09. Airport Fee rebate may be totally or partly eliminated after 2010 High gearing (62.8% in FY09) One of the major beneficiaries from increasing international flights (encouraged by business tax removal) CAAC is considering building fourth runway at BCIA. Potential increase of retail/rental areas after the acquisition of T3. 3 of the top 6 busiest flights (to Shanghai, Hangzhou and Xi an) would be relatively heavily affected by competition from high-speed railway after 2012 High financing and operating expense for T3 acquisition. SHIA Baiyun Shenzhen Meilan Xiamen Home to China s financial capital and the center of the Yangtze River Delta Economic Zone. Busiest cargo airport - 2.5m tonnes of cargo throughput in FY09 High retail income,reflecting Shanghai s status as fashion center in China No major capacity problems after 2008 s expansion to 60.0m passengers and 4.2m tones of cargo. Important transit center for overseas businessmen targeting Pearl River Delta region. International cargo hub (Fedex transit center) Located in high-tech center of China - convenient for Hong Kong. International cargo hub (UPS transit center) One of the major airports on Hainan island, which is being developed as International leisure center High tech industry environment. Major civil aircraft maintenance centre of China, which will guarantee constant flow of aircraft. Source: Company data, Platinum research. Not close to city center Significant beneficiary of increasing international flights Room to improve utilisation of T2 dramatically Potential for asset injection of Hongqiao airport from parent. Beneficiary of Mainland-Taiwan Direct Link, with half of cargo flights allocated to Pudong airport Retail income will further improve if retail area is increased. Hosting World Expo Airport Feerebate may be totally or partly removed after Capacity constraints need to be addressed - passenger utilisation rate of above 120% and cargo utiliation of nearly 100% not sustainable Short term growth capped by capacity limitation, with passenger throughput utilisation at 137% in Airport Feerebate may be totally or partly removed after Capacity constraints, with passenger and cargo utilisation of 113% and 131% respectively in Benefit from increasing international flights Plans to add Runway 3 and Terminal 2 by 2012, to increase the passenger and cargo capacity by 1.3x and 1.6x respectively. Hosting Asian Games Completion of 2 nd runway and 3 rd terminal expected in 2011 and 2012, which should increase the passenger and cargo capacity by 1.4x and 1.6x respectively. Potential acquisition of Sanya airport, which would provide Meilan with a monopoly over the Hainan market. Non-aeronautical business as yet underdeveloped. Beneficiary of Mainland-Taiwan Direct Link Phase III expansion expected by 2015, which would increase passenger and cargo capacity by 50% and 7x respectively. Competition from Hongqiao airport Adversely affected by high-speed railway, especially on the Wuhan-Guangzhou route Strong competition in the region, with 5 airports concentrated in the area. Requirement for capex on Runway 3 and Terminal 2 after Strong competition in the region, with 5 airports concentrated in the area. Construction cost of T3 may exceed the budget. Competition from Sanya airport amid increasing leisure demand Competition from Fuzhou Changle Airport, to fly international (ex-hong Kong) flights 3.2 M&A activity Not much M&A activity recently. Airport M&A activity in China. Although the formation of airport groups can enable the larger market participants to improve their bargaining power with airlines, to share 9

13 management insights, and increase cost efficiencies through the acquisition of smaller airports, current regulations restrict foreign companies from owning relatively significant stakes in domestic airports, limiting the scope for both inbound and cross-border M&A activity. In addition, as airports in China are typically managed by local government and run as public utilities, M&A activity across provincial borders is not easy. Available information shows that there has only been one M&A deal in the sector since 2008 with a transaction value of only RMB90m (Sichuan airport acquiring Panzhihua airport). However we have identified another 2 possible M&A deals that may take place in the next few years. SAG controls both airports in Shanghai and aims to merge their assets. Two airports in Shanghai. Shanghai Airport (Group) Co Ltd ( SAG ) is the controlling shareholder of both Pudong airport (ranked 3 rd among all domestic airports in terms of passenger throughput, 1 st in terms of cargo throughput and 3 rd in terms of aircraft movements) and Hongqiao airport (4 th, 5 th and 7 th in terms of passenger, cargo and aircraft respectively), both of which are located in Shanghai, the largest city in China with a population of 19.3m in When SHIA was first listed, the assets in the listco consisted of Hongqiao airport, but this was subsequently exchanged for Pudong airport s assets in 2006 so as to keep relatively strong assets inside the listing vehicle. SAG has from time to time expressed its willingness to list all of the Group s assets, including both Hongqiao and Pudong airports. By combining the two airports, not only would competition decrease, but cooperation should improve, at a time when it is especially important to confront the challenge from high-speed rail services. Meilan is to acquire other airports on Hainan island. Two airports in Hainan. Sanya airport (ranked 18 th among all domestic airports in terms of passenger throughput, 31 st in terms of cargo throughput and 24 th in terms of aircraft movements) is a favourite destination for domestic travellers for leisure and golf trips, and is expected to be the largest beneficiary of Hainan s development plan to become an international leisure destination. Its passenger throughput grew at a CAGR of 26.6%, as compared to the industry average of 15.4%. By contrast, Meilan airport, located in Haikou(250 km away from Sanya) has been losing passenger market share to Sanya airport with passenger throughput growth of CAGR at only 4.5%. Hainan Airlines Group ( HNA ) owns 50.2% of Meilan airport and 30% stake of HNA Airport Holding ( HAH ), which in turn owns 67% of Sanya airport (as well as 7 other smaller airports in Shandong, Heilongjiang, Hubei and Ganxu provinces). Meilan airport, which is listed in Hong Kong, proposed in late 2009 to acquire shareholdings in HAH from both its foreign investors (Hong Kong Pacific Funds and Qihe Investment, together holding 49% currently) and HNA, after which Meilan airport, HNA and foreign investors will own 54.5%, 21% and 24.5% shareholdings in HAH respectively. Meilan airport may also launch an A-share listing to raise money for the acquisition. With net cash of RMB484.6m at the end of 2009, Meilan s acquisition of Sanya airport assets would help to improve their overall utilisation rate and operating efficiency. 10

14 3.3 Valuations Since the beginning of 2010, the prices of all of the listed Chinese airport stocks have performed relatively poorly, ranging from Baiyuan, which has edged down by 1.5%, to SHIA, which has fallen 25.5%. Of these six airport stocks, the two HK-listed airports market capitalisation has fallen 21.1% YTD to HK$20.9b (as compared to Hang Seng Index s 4.4% YTD fall). Meanwhile the four domestically listed airports total market capitalisation has fallen by 19.4% YTD to RMB51.7b (as compared to Shanghai and Shenzhen 300 Composite Index s 19.4% YTD loss). We favour airports that (1) dominate their local markets so that they can ensure passenger and cargo turnover growth (e.g. BCIA and SHIA, as well as Meilan which will monopolize the Hainan market if the potential acquisition proceeds); (2) have high exposure to international flights so as to enjoy increased flight movements and benefit from the removal of business tax (e.g. SHIA and Baiyun airport); (3) have a relatively low risk of being significantly challenged by the expansion of high-speed rail services (e.g. SHIA and Meilan); and (4) have potential catalysts, such as opportunities to have other airport assets injected into them, to support the performance of the shares (e.g. SHIA and Meilan). Exhibit 15 Relative valuations of listed airports Market PER PBR Yield EV/EBIDA ROE Net Cash/Gearing Airports Ticker Price* Cap* FY09 FY10E FY09 FY10E FY09 FY10E FY09 FY10E FY09 FY10E FY09 (HK$ b) (x) (x) (x) (x) (%) (%) (x) (x) (%) (%) (%) SHIA CH RMB , BCIA 694.HK HK$ , Baiyun CH RMB , Net Cash Shenzhen CH RMB , Net Cash Xiamen CH RMB , Net Cash Meilian 357.HK HK$ , Net Cash Simple average Market cap weighted average Source: Bloomberg, Company Data, Platinum Research Note * : The price and market capitalization are of as at the end of 23 August 2010, and the exchange rate is RMB1=HK$

15 Appendix Exhibit 16 China Airports Ranking 2009 (Top 40 by passenger throughput) Airport Overseas destination Passenger throughput Cargo throughput (ton) Aircraft movements 2009 Rank Chg Chg Chg 2009 Rank Rank 2009 (%) (%) (%) Total 486,063, ,455, ,840, Beijing Capital Y 1 65,375, ,475, , Guangzhou Baiyun Y 2 37,048, , , Shanghai Pudong Y 3 31,921, ,543, , Shanghai Hongqiao Y 4 25,078, , , Shenzhen Baoan Y 5 24,486, , , Chengdu Shuangliu Y 6 22,637, , , Kunming Wujiaba Y 7 18,944, , , Xian Xianyang Y 8 15,294, , , Hangzhou Xiaoshan Y 9 14,944, , , Chongqing Y 10 14,038, , , Xiamen Gaoqi Y 11 11,327, , , Wuhan Tianhe Y 12 11,303, , , Changsha Huanghua Y 13 11,284, , , Nanjing Lukou Y 14 10,837, , , Qingdao Liuting Y 15 9,660, , , Dalian Zhoushuizi Y 16 9,550, , , Hainan Meilan Y 17 8,390, , , Sanya Fenghuang Y 18 7,941, , , Shenyang Taoxian Y 19 7,504, , , Zhengzhou Xinzheng Y 20 7,342, , , Urumqi Diwopu Y 21 6,575, , , Harbin Y 22 6,558, , , Jinan Yaoqiang Y 23 5,852, , , Tianjin Binhai Y 24 5,780, , , Guiyang Longdongbao Y 25 5,687, , , Fuzhou Chengle Y 26 5,451, , , Guilin Liangjiang Y 27 5,319, , , Wenzhou Y 28 4,821, , , Taiyuan Wusu Y 29 4,632, , , Nanning Wuxu Y 30 4,520, , , Ningbo Y 31 4,031, , , Nanchang Y 32 3,937, , , Changchun Y 33 3,878, , , Hefei Luogang Y 34 3,205, , , Hohhot N 35 2,898, , , Lanzhou N 36 2,861, , , Yinchuan Hedong N 37 2,305, , , Lijiang N 38 2,295, , , Wuxi Y 39 2,217, , , Yantai Laishan Y 40 2,094, , , Source: CAAC, Platinum research. 12

16 IMPORTANT HONG KONG REGULATORY DISCLOSURES ON HONG KONG LISTED COMPANIES OF WHICH WE HAVE COMMENTED ON. Research Certification. No part of the compensation of the analyst(s) who are primarily responsible for producing this report was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the analyst(s) in this research. Market Making. This firm does not make a market in securities of the companies covered in this report. Conflicts of Interest. This firm does not own 1% or more of the common class of securities of the companies covered in this report. The analysts involved in the preparation of this report do not have financial interests in the common class of securities of the companies covered in this report. Investment Banking. Within the past 12 months this firm has not provided investment banking services to and received compensation from the companies covered in this report, however, a company controlled by the holding company of this firm has provided investment banking services to and received compensation from one of the companies covered in this report, namely Beijing Capital International Airport Company Limited. Relevant relationships. This firm and individuals employed by or associated with the firm are not officers of the companies covered in this report. GENERAL DISCLOSURES. This report is for distribution only under such circumstances and in such jurisdictions as may be permitted by applicable law. This report is not intended to offer or solicit purchase or sale of any financial instrument in any jurisdiction where such an offer or solicitation would be illegal, including but not limited to the United States of America and the United Kingdom and the rest of Europe. It does not take into account the specific investment objectives, financial situation or needs of any specific recipient. While reasonable effort has been made to ensure the information contained herein is not untrue or misleading at the time of publication, its correctness and completeness are not guaranteed, and they are subject to change without notice. Neither Company Limited, nor any of its holding or affiliated companies, nor any of its or their directors or employees, represent or warrant the accuracy or completeness of the information contained herein or as to the existence of other facts which may be significant, and will not accept any responsibility or liability whatsoever for any use of or reliance upon this publication or any of the contents thereof. Use of any information herein shall be at the sole discretion and risk of the user. Investors are expected to make their own investment decisions without relying on this publication. This report is produced by Company Limited Hong Kong Office: 22/F Standard Chartered Bank Building, 4 Des Voeux Rd Central, Hong Kong Telephone: Fax: Shanghai Office: Platinum Holdings Company Ltd (Shanghai Representative Office), 11B Jin Ming Building, Block 2, 8 South Zun Yi Road, Shanghai Tel: Fax: Singapore Office: Platinum Securities Company Ltd, 1 Scotts Road, #23-06 Shaw Centre, Singapore Tel: Fax: Company Limited. All rights reserved. This publication may not be reproduced, distributed or published by any person for any purpose without the prior express consent of Company Limited. 13