VietJet Aviation Joint Stock Company (VJC: HOSE)

Transcription

1 VietJet Aviation Joint Stock Company (VJC: HOSE) HOLD - 1Y Target Price: VND 140,400 Current price: VND 130,500 Kim Nguyen kimntt@ssi.com.vn ext May 2017 INDUSTRIALS VIETNAM Key figures Market cap (USD mn) 1,826 Market cap (VND bn) 41,459 Outstanding shares (mn) W high/low (VND 1,000) 138.0/108.0 Average 2M volume (share) 366,320 Average 2M value (USD mn) 2.06 Average 2M value (VND bn) Foreign ownership (%) State ownership (%) 0 Management ownership (%) Stock performance Company Snapshot N.A. Source: Bloomberg VJC is a privately-owned Low Cost Carrier (LCC) airline in Vietnam. It was established on 23rd July 2007, and commenced the first commercial flight on 24th December 2011 with the Ho Chi Minh City - Hanoi route. Total passengers served by VJC reached mn pax in 2016 after 4 years of operation. As of 31 Dec 2016, VJC operates a fleet of 41 aircraft, in which 19 aircraft are funded by SLB and 1 aircraft is owned by the company via financial lease. Other aircraft include 15 dry leases and 6 wet leases. VJC achieved a domestic market share of 40.8% as of 31 Dec 2016, an increase from 37.1% as of 31 Dec 2015, according to a report by the Civil Aviation Authority of Vietnam (CAAV) INITIATION REPORT Cost advantage enables competitive pricing Investment case: Thanks to a low fuel input cost, along with declines in other operation costs, VJC has been offering very competitive pricing to passengers in order to tap into Vietnam s underserved low cost airline market in recent years. Nevertheless, in line with the global airline industry outlook, VJC s core earnings growth appeared to peak in 2016, with previous record high growth rates being challenging to replicate. The peak stemmed from such advantages as a low fuel cost environment, declining ex-fuel Cost Available Seat Kilometers (ex-fuel CASKs), and high passenger volume growing from a low base. Catalysts: Domestic market will rise in and then experience a slowdown. VJC s positive passenger growth mainly comes from seizing market share from its competitors and passengers from other traditional transportation methods. However, the domestic market may gradually saturate in the next 2-3 years when total capacity increases along with expected new players such as Vietstar Airlines and AirAsia, which will push VJC to expand internationally in a more aggressive fashion. Strong capacity expansion in international routes. From 2017, VJC will aggressively open new international routes within a radius of 2,500 nautical miles, with average flight duration of roughly 5-6 hours to destinations such as Korea and Japan. Its strategic markets will be ASEAN and Northeast Asia including Taiwan, Hong Kong, Mainland China, Korea, and Japan. Passenger yields may continue to remain low in order to gain market share. We expect VJC s international yield to remain low in 2017 as the initial phase of its aggressive expansion begins. To counteract such low yield figures, VJC aims to aggressively expand to longer international flights, along with targeting a higher income class. Yields are expected to slightly improve from 2018 onwards, corresponding with increasing fuel prices and a stable flight route network. A fuel cost uptrend is the largest risk, but hedging might partly render the risk subdued. Amid the expected pick-up of jet fuel prices in 2017, VJC plans to hedge 30%-35% of the total fuel cost. At the same time, the company will receive a delivery of the A320 NEO aircraft model, the most fuel efficient model in its holdings, which will partly reduce the impact of a fuel price surge. Valuation: Combining the DCF method and the 1 year target P/E of 13x, and adjusted EV/EBITDAR of 7x (premium compared with industry average, attributable to VJC s duopoly positioning in the Vietnamese LCC segment and high growth in the initial phase of operation), we arrive at a 1 year target for VJC of VND 140,400/ share (+8%). We recommend to HOLD the stock. Risks: (1) fuel price uptrend; (2) increase in domestic airport fees; (3) overcapacity due to significant capacity expansion; (4) volatility of sales and lease back earnings (5) Financial risk and FX risk SSI.COM.VN Visit SSI Research on Bloomberg at SSIV <GO> Page 1

2 Table of Contents 1. BACKGROUND INFORMATION ON VJC Company profile VJC s milestones Sales and lease back business model adoption Company structure Charter capital increase Shareholders Structure Fleets and expansion plans Network structure HISTORICAL PERFORMANCE Financial: impressive growths and margins Operation: Strong cost-focus advantage but low yields INDUSTRY OVERVIEW Global Airlines Industry Vietnam Aviation Industry VJC s growth Outlook EARNINGS ESTIMATES business plans estimates estimates VALUATION DCF method Peers comparison Investment view and recommendation Risks and issues APPENDIX: ANNUAL FINANCIAL STATEMENTS ANALYST CERTIFICATION RATING DISCLAIMER CONTACT INFORMATION SSI.COM.VN Visit SSI Research on Bloomberg at SSIV <GO> Page 2

3 1. BACKGROUND INFORMATION ON VJC 1.1. Company profile VJC is one of two low cost carriers (LCCs) and the only private-owned carrier in Vietnam. The company was established on 23rd July 2007, and commenced the first commercial flight on 24th December 2011 with the Ho Chi Minh City - Hanoi route. Total passengers served by VJC reached mn pax in 2016 after 4 years of operation, representing a CAGR of 64.51% since As of 31 Dec 2016, VJC operates a fleet of 41 aircraft, in which 19 aircraft are funded by SLB and 1 aircraft is owned by the company via financial lease. Other aircraft include 15 dry leases and 6 wet leases. The airline owns an intensive network, with 37 domestic routes and 23 international routes. VJC achieved a domestic market share of 40.8% in 2016, an increase from 37.1% in 2015, with the metric based on total passengers boarding domestically via Vietnam-based airlines, according to Civil Aviation Authority of Vietnam (CAAV) s report VJC s milestones 2007: Founded as Vietnam s first privately-owned airline 2011: Commenced the first commercial flight from HCMC to Hanoi on Christmas Day : Fleet grew to 5 aircraft operating across 10 domestic routes 2013: Launched first international flight from HCMC to Bangkok, Thailand 2014: Opened new operating hub in Danang City and signed a purchasing contract for 100 aircraft from Airbus, bringing a total of 19 aircraft in VJC's fleet, with the rest to be delivered at a later date. Passenger volume accounted for a 29.6% share of domestic air transportation. 2016: Signed a purchase contract with Boeing for 100 B737 MAX 200 aircraft in May 2016, and another contract with Airbus for 20 A320 CEO and NEO aircraft in September VJC officially became an IATA member in August : Listing on HOSE on 28th Feb 2017, officially became the International Air Transport Association (IATA) full member on 18 th Feb 2017 SSI.COM.VN Visit SSI Research on Bloomberg at SSIV <GO> Page 3

4 1.3. Sales and lease back business model adoption VJC pursues the sale and leaseback model, which is rather popular among global LCCs such as Indigo, Virgin Australia, Lion Air, SpiceJet, and Norwegian. It purchases new aircraft in large orders at steep discounts in order to sell the units to leasing companies at more favorable prices and then in turn leases those aircraft back. Leasing fees and term commitments are fixed over the leasing period of 6-12 years and non-cancellable. Gains recognized from these transactions accounted for 40-60% of VJC s PBT in 2015 and In the coming year, the gains will be dependent upon a timely aircraft delivery schedule. VJC s reputable lessors or lease managers include GE Capital Aviation Services, AWAS Aviation Capital, CIT Aerospace International, Celestial Aviation Trading 43 Limited, ACG Aircraft Leasing Ireland Limited and ALAFCO Aviation Lease and Finance Company. Thanks to SLB model, VJC can benefit from: (1) It does not require a significant upfront CAPEX in order to fund the fleet; (2) Gains from SLB are used to fund owned aircraft and deposit for future aircraft deliveries; (3) Keep young fleet which helps save operation cost, including the heavy D-check. However, when it comes to a fall in travel demand, the airline will face overcapacity and leads to significant drop in load factors. In that case, the airline can partly lease them out or arrange for early return of aircraft with certain penalty payments. The nationally-owned Vietnam Airlines (HVN: UPCOM) currently owns a fleet of more than 90 aircraft. HVN s model requires a significant amount of upfront cash raised via borrowing in order to finance the fleet (its D/E was 3.5x as of 2016 vs. VJC s D/E ratio of 1.44x during the same period). HVN s CAPEX used to be mainly funded from the State Budget or through Government guaranteed foreign debts. As such, HVN has to incur abundant interest expenses, depreciation, and FX risks for USD denominated debt, which may potentially impact the company s earnings performance. However, in 2017 HVN also plans to receive 4 aircraft via SLB in order to reduce debt financing Company structure VJC has 5 subsidiaries. It has 4 100%-owned subsidiaries which are primarily involved in SLB activities in Singapore, Ireland and British Virgin Island. SLB activities are conducted via these companies. VietJet Air Cargo JVC, a cargo handling company with a charter capital of VND 10bn, is VJC's remaining subsidiary with 90% ownership. VJC s subsidiaries Subsidiaries Business Date of operation Ownership VietJet Air Cargo JVC (Vietnam) Cargo 27-Aug-14 90% VietJet Air IVB No.I Limited (British Virgin Islands) Aircraft business 27-May % VietJet Air IVB No.II Limited (British Virgin Islands) Aircraft business 27-May % VietJet Air Singapore Pte. Ltd (Singapore) Aircraft business 27-Mar % VietJet Air Ireland No.I Limited (Ireland) Aircraft business 3-Jun % Source: VJC SSI.COM.VN Visit SSI Research on Bloomberg at SSIV <GO> Page 4

5 Affiliate: VJC owns 9% in Thai VietJet Air JSC Ltd, founded in November Thai Vietjet operates 2 international routes between Bangkok-HCMC and Bangkok-Hanoi, as well as other international charter flights. As of 2016, VJC has subleased 1 aircraft to Thai VietJet. In the future, VJC plans to reassign, sell, or lease of a portion of the delivered aircraft from Airbus and Boeing in the aforementioned contracts to Thai VietJet Charter capital increase Charter Capital (Unit: VND bn) 3,500 3,000 2,500 2,000 2,000 2,500 3,000 3,223 1,500 1,450 1, Jun-16 Sep-16 Nov-16 Feb-17 Source: VJC (1) Issuance for existing shareholders at 3:1; (2) Stock dividend payments at 25% and issuance for existing shareholders at 45%; (3) Bonus shares payment at 100:33, at an issuance of 7.15mn shares for ESOP (4) share issuance at 25% for existing shareholders, (5) Bonus share payment of 20%, (6) Private placement for Sunny Sunflower Investment Ltd. Co. For the period, VJC increased their charter capital by 5x, through both issuance to existing shareholders as well as stock dividend payments. It is worth noting that in 2015 and 2016, VJC mostly paid dividends in cash and net off by way of new share issuance, and shareholders therefore did not have to pay additional cash for new issued shares Shareholders Structure In December 2016, Mrs. Nguyen Thi Phuong Thao, the CEO successfully sold about 39 mn shares to the public at VND 84,600/share to institutional investors and VND 86,400/share for individual investors. Following afterwards in 1Q17, VJC successfully conducted a private placement consisting of roughly 22.4mn shares at VND VND 84,600/share to Sunflower Sunny Investment Ltd Co, of which Mrs. Nguyen Thi Phuong Thao is the CEO, as part of commitment to the above-mentioned institutional investors in order to fund the company expansion. SSI.COM.VN Visit SSI Research on Bloomberg at SSIV <GO> Page 5

6 Ownership structure (as of 1Q17) Sunflower Sunny Investment Company Ltd 23% Others 62% Nguyen Thi Phuong Thao 9% Government of Singapore(GIC) 6% Source: VJC 1.7. Fleets and expansion plans VJC s fleet grew quickly from 10 aircraft as of 2013 to 41 aircraft in 2016, equivalent to a CAGR of 60%. VJC s fleet accommodates narrow-body aircraft (A320 and A321), considered suitable for short-haul routes. According to fleet expansion plans, VJC expects to receive roughly 41 Airbus A320-NEO types from , which will save fuel cost by 15% per aircraft, considerably more so than existing ones, according to Airbus. Amid an increasing fuel price, a fuel saving aircraft model will help mitigate adverse impacts of rising input costs for the company. Fleet structure (as of 31 December 2016) VJC projected fleet size: end 2017P- end 2023P Cummulative Fleet-737 Max 200 Cummulative Fleet-A , 73% 11, 27% Airbus A (180 seats) Airbus A ( seats) P 2018P 2019P 2020F 2021F 2022F 2023F Source: VJC Source: VJC, SSI Research forecast SSI.COM.VN Visit SSI Research on Bloomberg at SSIV <GO> Page 6

7 1.8. Network structure Within only 5 years of operation, VJC aggressively expanded from 1 route (Hanoi-HCMC) in 2011 to 37 domestic routes and 23 international routes as of 31 December VJC's network structure by number of routes International flight frequency China- Hongkong 20% ASEAN 8% Taiwan 3% Korea 7% Domestic 62% Taiwan 15% Korea 19% China- Hongkong 38% ASEAN 28% Source: VJC Intensive domestic network: The Company has established extensive domestic passenger routes, connecting to 22 airports in Vietnam. The routes originating from Ho Chi Minh City, Hanoi, Danang, Cam Ranh and Haiphong account for 92% of VJC s total domestic routes, and imply roughly 76% of total Available Seat Kilometer (ASK) from domestic routes. In order to capture the upcoming growth of the domestic air travel segment, VJC aims to increase flight frequencies in these 5 operating hubs. China and North Asia Countries is VJC s largest international market. As VJC initially focused on the domestic market, their international network has appeared small in the past few years, accounting for only 38% of the total amount of routes. VJC increased from 2 international routes in 2012 to 23 routes as of 2016 (excluding charter flights). Among those, routes connecting Vietnam to Greater China-Hongkong, Taiwan, Korea and ASEAN countries play as VJC s strategic ones, accounting for 38%, 15%, 19% and 28% of total international flights per week respectively. SSI.COM.VN Visit SSI Research on Bloomberg at SSIV <GO> Page 7

8 2. HISTORICAL PERFORMANCE 2.1. Financial: impressive growths and margins On a group consolidated basis, VJC s net revenue increased from VND 3,790bn in 2013 to VND 27,449bn in 2016, representing a 94% CAGR during The PBT margin leaped to 9.8% in 2016 from a paltry 0.04% in 2013 as its second year of operations. Historical revenue (VND bn) VJC s revenue breakdown 30,000 Total revenue Revenue ex SLB 27, % Passenger transportation Sales of aircrafts Others Ancillary revenue Aircraft rental 25,000 20,000 15,000 10,000 5,000 3,790 3,790 8,706 6,946 19,845 11,079 15, % 80% 60% 40% 20% 0% 16% 84% 0% 0% 1% 20% 14% 44% 43% 12% 13% 66% 43% 44% - FY13 FY14 FY15 FY16 0% FY13 FY14 FY15 FY16 Source: VJC Passenger transportation benefits from strong demand Accounting for 44% of total revenue in 2016, passenger transportation revenue posted VND 12,168bn (+43% YoY and a 56% CAGR growth from ), primarily stemming from a 65% CAGR in passenger volume growth from the same corresponding period. Rapid expansion in both domestic and international networks coupled with a capacity increase helped VJC to enjoy high passenger growth. Nevertheless, VJC s average base fare continued to decline with a CAGR of -11% during in line with aggressive fare promotions for new routes. The low jet fuel price (Jet A1) in during these years and declining in ex fuel CASK enabled VJC to aggressively reduce fares in order to engender passengers desire for traveling and gain more market share. For example, VJC has been continuously offered zero-dong' tickets for limited seats in airplanes (a maximum 30% of total seats on an airplane) as one of marketing strategies.. Ancillary revenue growth eclipses growth in passenger transportation revenue Ancillary business regarding flight changes and domestic cargo handling contributed roughly 13% of total sales in 2016 and 22.3% to adjusted total sales excluding sales of aircraft. Overall, ancillary revenue increased with 79% CAGR from in lockstep with VJC s passenger volume growth, posting revenue of VND 3,553bn (+44% YoY) in It implied revenue of USD11 per passenger (vs. USD 9 per pax in 2013), however, the revenue was far lower than SSI.COM.VN Visit SSI Research on Bloomberg at SSIV <GO> Page 8

9 regional peers due to Vietnam's lower income per capita. The region average ranges from USD per passenger, according to VJC. Sales of aircraft contribute significantly to earnings Aircraft sales expanded from contributing of 20% of total revenue in 2014 to 42% in 2016, thanks to gains from the significant addition of aircraft per year to the fleet size in 2015 and Aircraft sales displayed healthy expansion, from only VND 1,760bn in 2014 to VND 11,582bn in In terms of gross profit, VJC recorded roughly USD 6.89 mn per aircraft from SLB transactions in 2016 (vs. that of USD 2.6mn per aircraft in 2015), made possible due to VJC's skilled negotiations with manufacturers and lessors. However, the surge in aircraft sales profit renders estimating future profits from these activities rather unpredictable, and as such rather difficult for forecasting the company s future cash flow. If we were to exclude aircraft sales of VND 11,582bn in 2016, VJC s core revenue will record VND 15,917bn, implying a 61% CAGR during the period thanks to a high growth in passenger transportation and ancillary revenue. Others: Other sources of revenue remain insignificant, including aircraft rentals, which is recognized from subleasing VJC s one aircraft to Thai VietJet for VND 57bn per year) and other marginal activities. Operating cost breakdown (FY2016) Historical margin Others 0% GPM PBT margin GPM ex. SLB EBITDA margin Depretiation and amortisation 3% Outsourcing 25% Fuel 22% 16% 14% 12% 10% 8% Employee 7% 6% 4% Cost of aircraft SLB 43% 2% 0% FY13 FY14 FY15 FY16 Source: VJC VJC s GPM expanded substantially from 7.4% in 2013 to 14.2% in 2016 mainly thanks to (1) the increase in GPM of aircraft sales of SLB (increased from 3% in 2014 to 13% in 2016), (2) low fuel price in 2015 and Accordingly, VJC s fuel CASK declined to 3.9 U.S cents in 2016 (vs U.S. cents in 2015) from 5.3 U.S. cents in SSI.COM.VN Visit SSI Research on Bloomberg at SSIV <GO> Page 9

10 Average Jet fuel and VJC s GPM ex. SLB from Jet fuel price (USD/barrel) GPM ex. SLB % % 14.4% % % 14% 12% 10% 8% 6% 4% 20 2% % Source: VJC, IATA If we were to exclude profit from SLB, VJC s GPM would achieve 14.9% in 2016, significantly expanding from 7.4% in VJC s fuel cost accounts for 22% of COGS (excluding SLB s aircraft cost, fuel should have contributed 39% of COGS in 2016). The global oil price staged a decline from its yearly peak of roughly USD 112 per barrel in 2012, and began trending downwards from at a CAGR of -26% Consequently, jet fuel costs also fell from its highest level of USD 124.5/barrel in 2012 to USD 52.1/barrel (~ CAGR of -25%) in The low oil price in recent years has encouraged LLCs like VJC to reduce air fares and encourage air travel. Given that the Vietnamese market is highly price sensitive with limited premium demand, the low oil price environment provides an opportunity for VJC to lower fares and increase market share. In line with sales growth and cost reductions, VJC s PBT and EBITDA margins improved to 9.8% and 10.7% in 2016 vs 0.04% and 0.5% in VJC manages to continually maintain a passenger load at 88% (domestic routes: 89%; international routes: 84%) in recent years. High passenger loads enable the company to maintain a healthy RASK/CASK spread, which improved to 0.46 US cents in 2016 from 0.09 U.S cents in 2013 (but slightly declined compared with 0.59 U.S cents in 2015). SSI.COM.VN Visit SSI Research on Bloomberg at SSIV <GO> Page 10

11 2.2. Operation: Strong cost-focus advantage but low yields VJC s historical operation data Operating data FY13 FY14 FY15 FY16 ASK 1 s (m) 3,341 6,019 11,055 16,498 YoY 80% 84% 49% RPK 2 s (m) 2,945 5,322 9,690 14,451 YoY 81% 82% 49% Passenger load factor (%) CASK 3 s (U.S. cents) YoY -5% -18% -5.8% Ex-fuel CASK YoY -3.5% -2.4% 0.4% Yield 4 (U.S. cents) YoY % -7.7% Source: VJC Stringent cost and expense management are crucial to keep fares low: VJC possesses an absolute competitive advantage over other Vietnamese carriers thanks to a very low CASK exfuel. Total CASK declined steadily with a CAGR of -10% from The improvement in cost efficiency was mainly thanks to (1) a declining jet fuel cost over the past 3 years, declining from an average of USD 125/barrel in 2013 to USD 44/barrel in Fuel cost accounts for the largest proportion of VJC s total CASK, with 50% in 2013 and decreasing to 38% in 2016 as a result of declining oil prices. (2) Economies of scale thanks to fast expansion of fleet and a stringent cost saving system, keeping CASK ex-fuel low. As a result, these and a stringent cost control system enable VJC to maintain its competitive pricing. In comparison with other LCCs in the world, VJC was among the lowest of global LCCs with CASK ex-fuel of 2.43 U.S. cents in 2016, similar to Cebu Pacific, Thai AirAsia, Indigo and Jet Blue, but still higher than Air Asia group. VJC s successful cost saving system is made possible by the following factors: Operating within the A320 aircraft model guarantees predictable cost budgeting. VJC owns seat A320 models and seat A321 models as of the end of The single aircraft model of A320 family simplifies cost budgeting such as simplifying maintenance and reducing spare parts inventory requirements. Gradually, VJC targets to increase number of 230-seat A321 models (56 aircraft by the end of 2019), as this aircraft has more seats than the A320 model, and thus helps to reduce CASK further. A low average fleet age helps minimize maintenance costs. As of 2016, VJC s fleet age is quite low at 3.03, aiding in lower input costs and providing for an overall better customer experience. It also aids in fuel cost savings, keeping maintenance expenses low. Similar to Air Asia and some other LCCs, VJC employs a maintenance-by-the hour program for engine maintenance, in which the airline pays a fixed hourly rate to the contractor based on the number of flight hours of each aircraft. Newer aircraft render lower maintenance expenses, as less overall flight hours are required less rates of maintenance. Such 1 ASK: Available Seat Kilometers, which is the total number of seats available on scheduled flights multiplied by the number of kilometers those seats were flown 2 RPK: Revenue Passenger Kilometers, which is the total number of paying passengers carried on scheduled flights multiplied by the number of kilometers those passengers were flown 3 CASK: Total Cost per ASK (excluding costs of aircraft sales) 4 Yield: Revenue from passenger transportation per RPK (excluding revenue from chartered flights) SSI.COM.VN Visit SSI Research on Bloomberg at SSIV <GO> Page 11

12 maintenance includes daily maintenance, A-checks (every 600 hours of operation), B- Checks (every flight hours), C-Checks (every 6,000 flight hours), and heavy maintenance D-checks (every 6 years). In addition, this program will also enable budgeting to be more predictable and simplified. Therefore, VJC keeps retiring old aircraft with more than 6 year leasing term contracts (including dry leased and wet leased aircraft) and replacing with new ones in order to maintain a relatively low average fleet age. Increased block hours drives CASK to decline as aircraft is well utilized. VJC s average aircraft utilization rate improved on a yearly basis, from 11.9, 12.4, and 13.3 block hours per day in 2013, 2014 and 2015 respectively maintained 13.1 block hours of last year. The airline targets to maintain high block hours per day in the near future by increasing the frequency of night flights for domestic routes as well as number of international flights. VJC s block hours per day is the highest among global LCCs (vs. block hours per day of Air Asia: 12.4, Indigo: 11.4, Easy Jet: 11.1, Ryan Air: 9). Hence, it helps the company to maintain a competitive CASK amid aggressive capacity expansion. Low sales and marketing costs via the internet and mobile application bookings. VJC focuses on developing their internet distribution channel through their website and mobile platform. 23% of ticket sales were conducted through website and the mobile application in It helped VJC significantly reduce distribution costs in comparison with traditional channels such as booking agencies, booking offices and others. However, all of these agencies and booking offices ultimately direct customer orders to either the website or the mobile application to book ticket. Therefore, to eliminate redundancy, VJC distributes their tickets via online channel more than 90% of the time. Every year, the sales expense per ASK was 0.13 U.S. cents U.S. cents, or 4% of the total CASK, which is quite low. Low yield: Due to competitive pricing and short distance flights, VJC s passenger yields have been declining from 2013 to 2016, achieving 51 U.S. cents in 2013 and decreasing to 35 U.S. cents in 2016 (equivalent to -12% CAGR). Declining in yield was mainly driven by aggressive promotion, stimulated by a sustained low fuel price in 2015 and 2016, as well as expanded capacity. Other drivers include VJC's focus on the domestic market, concentrating on lower-yield but higher frequency short distance flights. COGs breakdown (FY2016) VJC s historical yield growth Others 0% Average total base fare growth Yield growth 5% Depretiatio n and amortisatio n 3% Outsourcin g 25% Employee 7% Cost of aircraft SLB 43% Fuel 22% 0% -5% -10% -15% -20% H % Source: VJC, SSI Research SSI.COM.VN Visit SSI Research on Bloomberg at SSIV <GO> Page 12

13 3. INDUSTRY OVERVIEW 3.1. Global Airlines Industry Global airline productivity has increased during the period of , according to a report by Boeing and the International Air Transport Association (IATA). In 2016, IATA estimated that global airlines net profitability improved by 1% YoY, posting an after tax profit of USD 35.6 bn (vs. the operating profit industry average of only USD 4.3bn in 2005). Last year, the global airlines industry benefited from healthy revenue and profit growth thanks to a 5.9% YoY growth in total RPK and reduced jet fuel cost (down 22% YoY). Specifically in Southeast Asia after the South China Sea crisis in 2014, the region has enjoyed a boom in air travel demand till now thanks to (1) more stable geopolitics, (2) low jet fuel cost and (3) strong air travel demand within the region Outlook: Global airlines industry might deliver negative earnings growth due rising oil prices For 2017, IATA forecasts the global airline industry after tax profit to achieve USD 29.8n in 2017, down 16% YoY, representing potentially difficult years grappling with an expected rising oil price. IATA forecasts the jet fuel price may reach USD 65/barrel in 2017 from USD 52/barrel in 2016, up 25% YoY. As a result, fare promotions spurred on by lower oil prices may shrink in 2017, slowing global traffic growth to 5.1% (from 5.9% in 2016). Performance of global airlines industry vs. Jet fuel cost E2017F Jet fuel price (USD/barrel) Operating margin Net profit margin 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% -4.0% -6.0% Source: IATA SSI.COM.VN Visit SSI Research on Bloomberg at SSIV <GO> Page 13

14 Long term outlook: Air travel demand will continue to grow For the periods, IATA is still optimistic about global air travel demand. It expects global passenger numbers to reach 7.3 billion by 2034, implying an annual 4.1% growth. One of Boeing's reports titled Current Aviation Market Outlook also shows that global aviation will continue to accelerate with a CAGR of 4.9% from , mainly thanks to stronger global GDP growth of 3.1% by 2034 with a brighter outlook upon emerging countries. Among major markets, Boeing suggests that air travel demand within Asia will prove the strongest growth, with an annual growth of 6.2% in RPKs from Source: Boeing Southeast Asia is one of the most active regions of LCCs. The region is seen as one of the pioneer regions to employ the LCC business model. It grew to nearly 20,000 weekly commercial flights, with a fleet total of 623 aircraft in 2016 (+7% YoY) according to CAPA. Due to rapid expanding capacity, competition is fierce across the region, with crowded LCC fleets and competitive air fares in a low fuel cost environment in recent years. CAPA forecasts that the total LCC fleet in the region will grow by 11% YoY, reaching a total of 693 aircraft in As such, this development will create a more intense competition landscape. Nevertheless, according to Boeing the Southeast Asia aviation industry is expected to grow by 4.6% a year through Urbanization and the expatriate population are rapidly rising in the region, which will further contribute to healthy travel demand and industry growth. Additionally, the adoption of the ASEAN Single Aviation Market will also strongly support industry growth. The ASEAN Single Aviation Market will liberalize the region s air services, specifically among ASEAN countries, benefiting both passengers and airlines alike. SSI.COM.VN Visit SSI Research on Bloomberg at SSIV <GO> Page 14

15 3.2. Vietnam Aviation Industry Historical performance Airlines No. of Average Load Passengers Domestic aircrafts fleet age factor transported (mn pax) market share HVN % % Vietjet Air % % Jetstar Pacific 14* % % VASCO N.A % Source: CAAV, Companies data, SSI Research, (*) excluding wet leased aircraft Vietnam s airlines industry shares by airlines % 10% 1% 27% 23% % 9% 1% 23% 24% % 8% 1% 17% 27% % 7% 1% 11% 30% 0% 20% 40% 60% 80% 100% 120% Vietnam Airlines Jetstar Pacific VASCO VietJet Air Foreign airlines Source: CAPA Players are few but competition is intense. Vietnam has other 3 main carriers, Vietnam Airlines, and its 2 subsidiaries Jetstar Pacific and VASCO. Jetstar Pacific has a similar model to VJC, which also serves the low cost segment. The airline established in 2009, but operated much older aircraft mainly under wet leased arrangements. It served around 1.8 to 2mn passengers per year from and increased to a total passengers of 5 mn pax in 2016, effectively implying a 36% CAGR for the period from Despite stronger competition from VJC, Jetstar Pacific managed to expand by 8 aircraft in 2016 and plans for another 10 new A320 CEO's in 2017 for both replacing wet leased aircraft and for fleet expansion, according to the CAPA Center for Aviation. Obviously, Vietnam domestic airlines see more intense competition. SSI.COM.VN Visit SSI Research on Bloomberg at SSIV <GO> Page 15

16 E 2017F Mn pax SSI RESEARCH Passengers volume carried by Vietnamese airlines Domestic passenger carried shares in % Passengers Passenger YoY 44% 30% 27% 50% 45% 40% 35% 30% 14.9% 1.5% Vietnam Airlines % 13% 19% 25% 20% 15% 10% 42.8% Vietjet Air Jetstar Pacific 10-1% 5% 0% 40.8% VASCO 0-5% Source: GSO, SSI Research Source: CAAV According to the General Statistics Office of Vietnam (GSO), total passengers transported by Vietnamese airlines are estimated to grow 30.3% YoY to roughly 40.5 mn pax in 2016 (vs. that of 27% YoY in 2015), representing a CAGR of 19% from The encouraging growth was attributable to (1) Sustained strong GDP (growth of 6.2%in 2016), resulting in an increase of roughly 5% in per capita GDP growth reaching USD 2,095 bn, which highly correlated with air travel per capita growth and correspondingly accelerated airlines industry growth; (2) international tourists to Vietnam by air increased by 31% YoY compared with a flat growth YoY in 2015; and (3) low fuel prices encouraged airlines to reduce air fares, sparking travel demand. Industry outlook 2017 In our opinion, we believe that Vietnam s airline industry will continue to experience positive growth in the coming years due to the following drivers: GDP growth of Vietnam at 6.2% in 2017, according to the IMF forecast (Government s target: 6.7%, SSI Research s forecast: 6.6% in 2017 vs. 6.21% in 2016), leading to GDP per capita to increase to USD 2,199 (+5% YoY), and should significantly benefit airlines. We also forecast Vietnam s exports and imports to grow by 6.5% YoY and 10% YoY respectively, making a wider implication of expected higher air transportation and a boost in air travel demand overall. International tourist traffic to Vietnam is expected to grow to 12% YoY in 2017 from the average of 9.48% over the last five years, originating from the recent government initiative to boost the tourism sector. The aviation industry is the largest beneficiary of Vietnam s robust tourism growth in the coming years. Low cost carriers (LCCs) will continue to win more passengers from traditional transportation modes such as railway and bus, with more affordable air fares amid a rising domestic middle class. Underdeveloped infrastructure such as highways and bridges

17 causing time consuming delays will also be a variable in an increase of passengers to opt for air travel. Aggressive capacity expansion added in 2017 (Vietjet: 12 new aircraft, Jetstar: 6 aircraft, Vietnam Airlines: 5 aircraft) will result in more air fare promotions, thus prompting air travel demand. Despite the above advantages, we expect demand growth to be somewhat affected in 2017 onwards with the variable of the expected global oil price recovery. Additionally, airline capacity expansion is another variable, with 27 additional aircraft to be delivered in 2017 as stated above, which will lower airline industry passenger loads. Nevertheless, the negative impact of lower passenger loads per plane is expected to be outstripped by the overall positive volume growth of passenger growth across all routes industry-wide. Long term Vietnam is ranked as the 5 th fastest growing market in terms of passenger growth per year, and the 7th fastest growing industry from by IATA. According to the most updated forecast by IATA, Vietnam aviation will continue to grow at an annual rate of 7.3%, being the 7th fastest growing market of countries that IATA tracks. The growth will be largely supported by: (1) sustained strong GDP growth of 6.5% and 6.3% in 2017 and 2018 (Source: IMF, 2017), leading to an improvement in per capita GDP growth. We expect GDP per capita to reach USD 2,692 by 2020, a CAGR of 5% from , according to our SSI Research forecast. (2) Positive international tourist volume growth is expected to persist over the next 5 years. Vietnam is among the fastest growing countries regarding international tourist arrivals, reporting a 9.5% CAGR from (after Thailand with 9.5%). It is forecast to continue to see a CAGR growth of 7.9% from (Euromonitor, 2016 quoted by VJC). (3) Increased urbanization rates will also support the trend of domestic air travel in the future. Urbanization is expected to grow at a CAGR of 1% from (IFM, 2014) and reach roughly 38-40% by 2020 (according to the Vietnamese government s 5 year development plan), implying a continuous rise in Vietnam's middle class. Overall, bright key macro-economic growth drivers as above mentioned will continue to support the Vietnamese aviation industry over the next 5 years. Improved aviation infrastructure will better facilitate air travel demand: First, the monopoly entity Airport Corporation of Vietnam plans to expand designed capacity of its all 22 airports with a 13% CAGR from , in which the Noi Bai International Airport, Tan Son Nhat Airport and Da Nang Airport will be expanded by 6%, 15% and 29% CAGR respectively. In addition, Long Thanh International Airport project with 25 mn passengers in designed capacity may be operational by As such, the infrastructure expansion will ease the bottleneck in trunk routes, connecting the 3 largest airports to improve passenger service and further promote air travel for both domestic and international passengers.

18 3.3. VJC s growth Outlook VJC s top-line will benefit from higher seat capacity thanks to an upcoming aggressive fleet expansion. This will be partly offset by low yield due to strong competition and continuously offering low fares in newly established routes. Domestic market will rise in and then experience a slowdown We expect high growth of VJC mainly comes from seizing market share from its competitors and passengers from other traditional transportation methods such as trains and buses. According to the GSO and the Civil Aviation Authority of Vietnam, total passengers traveling by train and bus were 10 mn and 3 mn pax per year respectively. As such, there is still room for VJC to gain more market share from these modes of transportation. However, the domestic market may saturate in the next 2-3 years, which will push VJC to expand internationally in more aggressive fashion. In 2017, VJC s domestic passenger volume growth will be mainly driven by growth in existing trunk routes: As of 2016, its 26 routes fly out from one of the 2 main airport hubs of Hanoi, Ho Chi Minh City together comprise for about 70% of domestic flights. VJC will add more capacity onto these routes in 2017 to capture the growing demand of the country. These routes have quite high frequencies of more than 7 flights per week with high passenger loads. Overall, VJC forecasts that passenger volume in domestic trunk routes will grow by approximately 20% YoY this year. New domestic routes: VJC commenced 6 domestic new routes including Hanoi - Tuy Hoa, Haiphong - Phu Quoc, Haiphong - Dalat, Haiphong - Buon Me Thuot, Nha Trang - Thanh Hoa and Hanoi - Hue with 4-7 flights per week in May 2016 and 2H16. These will contribute to 2017 growth as operating in the entire year. However, these routes frequencies are quite low due to low demand. Passenger load factors for these routes are expected to be lower than the trunk routes. In 2017, VJC plans to open 4 additional routes. As VJC s flight network covers almost all airports in Vietnam, there will be limited opportunities for further domestic expansion. VJC targets to increase scheduled domestic routes to 45 by the end of 2019 (vs end of 2016: 37 routes and end of 2017P: 41 routes). Strong capacity expansion in international routes From 2017, the airline will over the next coming years aggressively open new international routes within a radius of 2,500 nautical miles, average flight duration of roughly 5-6 hours to destinations such as Korea and Japan. Existing routes Vietnam-destinations: Originally cutting the ribbon with the commencement of the Bangkok Hanoi route back in 2013, currently VJC s international network comprises of 23 routes, including: 4 routes to South Korea, directly competing with Eastar Jet, Air Busan, Jeju Air, Jin Air, and T way. 2 routes to Taiwan, facing competition with Vanilla Air(Tokyo-HCMC via Taipei) and Tigerair Taiwan; 8 routes to China, with 7 Chinese LCC competitors; In Southeast Asia resides the fiercest competition for VJC's core market, namely AirAsia and other local LCCs.

19 Expansion plan to Taiwan, Korea and Japan to serve strong inbound and outbound tourism: 6 new international routes including Ho Chi Minh City - Tainan, Hanoi - Taipei, Ho Chi Minh City - Hong Kong, Haiphong - Incheon, Hanoi - Busan, Wuhan - Cam Ranh, and Wuhan - Dalat, which were added at the end of 2016, will prove to be positive growth drivers for Additionally during 2017, VJC will continue to open around 14 new international routes, reaching a total of 37 routes by the end of 2017, surpassing its initial plan of a total 36 routes in 2018). Inbound tourism: Strong inbound international tourists will be one of major catalysts for VJC s international passenger growth. According to the Vietnam GSO, international tourists from Asia to Vietnam enjoyed encouraging growth in 2016 at 30% YoY, achieving around 7.3 mn pax (vs total international tourists of 10mn px in 2016, up 26% YoY). Particularly, Chinese tourists recorded the strongest growth of roughly 51% YoY, thanks to aggressive 'zero-dollar' tours (2.7 mn pax, ~37% of Asian tourists). This trend is expected to continue in 2017, and will benefit VJC s scheduled routes connecting Vietnam and these destinations. Overview: International tourists to Vietnam in % 27% 15% China (+51.4% YoY) Korea (+38.7% YoY) Japan (+10.3% YoY) Taiwan (+15.6% YoY) Others (+12% YoY) 5% 7% Source: GSO Outbound tourism: VJC also strongly focuses upon outbound growth, which is fast growing among expats working in Vietnam and young middle-class Vietnamese travelers as aforementioned. Yield trends in 2017 and onwards Due to strong competition, we expect VJC s international yield to remain low in 2017 as the initial phase of its aggressive expansion commences along with associated fare promotions. The regional landscape is rife with competition, with crowded LCC fleets in the sky and the expansion plan of the other Vietnam LCC, Jetstar Pacific. Air Asia also plans to set up a joint venture with a Vietnamese local operator (foreign ownership is capped at 30%) to establish a new airline to compete directly in both the domestic and international market from 2018 and beyond. To counteract such low yield figures, VJC aims to aggressively expand international flights, with longer distances and targeting a higher income class such as foreign expats and an increasing

20 number of Vietnamese tourists with the means to go abroad for vacations and other occasions. As such, yield is expected to slightly improve from 2018 onwards, corresponding with increasing fuel prices and a stable flight route network. Adding to this is the undercurrent variable of increasing demand from the Vietnamese middle class for LCC's and other Asian countries which as a whole will support the yield to stabilize. However, the road to significant recovery will also be marked by intense competition over the next 2-3 years Low base provides a launching pad for VJC s ancillary revenue growth VJC s ancillary revenue accounted for 22% of total revenue in 2016 (excluding SLB revenue), compared to an average 26.1% of other LCCs (for example Air Asia: 25%, Spirit Airlines: 38.7%). VJC s ancillary revenue achieved USD 11.4 per pax (declining 6% YoY, but up 14% compared with 2015), still lower than the industry average of $43 USD per person. Therefore, ancillary revenue still has large room to grow via changes of extensions to non-refundable tickets and oversized luggage, as well as in-flight retails. Revenue from SLB activities VJC continues to pursue the SLB model and expects to record profit recognition from aircraft sales, which will not require significant upfront CAPEX for acquiring new aircraft. In 2017, VJC plans to add 17 new aircraft in which 15 will be SLB. The company believes that it can maintain high SLB gains in 2017 as the received aircraft are all A321 considered favorable by lessors. Additionally, the Company believes they have better bargaining power over manufacturers and lessors thanks to its excellent performance recently. In total, SLB gain is conservatively projected at USD 90mil by VJC in The revenue is expected to contribute roughly 40-47% to VJC s total revenue from A fuel cost uptrend is the largest risk, but hedging might partly render the risk subdued: Amid the expected pick-up of jet fuel prices in 2017, of roughly 25 % (forecast by IATA). VJC plans to hedge 30-35% of the total fuel cost (In fact, in 1Q17, average fuel jet price increased by 47% YoY and -7% YTD). At the same time, the company will receive 5 A321-NEO aircraft in 2017, which will partly reduce the impact of fuel price surge with fuel efficiency gains of 15% per aircraft. Historical Jet fuel A1 price /27/2012 4/27/2013 4/27/2014 4/27/2015 4/27/2016 4/27/2017 Source: Bloomberg

21 4. EARNINGS ESTIMATES business plans Positive passenger volume growth and low cost will help VJC s core revenue and net profit to enjoy encouraging growth from Besides, the company also plans to continue recognizing revenue from SLB in the coming years. It plans to pay a 50% dividend (30% cash and 20% stock) over the next 3 years. VND bn 2017P 2018P 2019P Revenue 42,018 48,767 56,998 YoY 49% 16% 17% Net profit 3,395 4,406 4,950 YoY 36% 30% 12% Dividend (on par) 50% 50% 50% +Cash 30% 30% 30% +Stock 20% 20% 20% Fleet delivery schedule (total)number of aircraft at year end A320(New delivery) A (New Delivery) Source: VJC estimates Based on VJC s fleet expansion and new route openings, we forecast that VJC s 2017 net revenue will achieve VND 39,387bn (+43% YoY). Net income might reach VND 3,103bn (+24% YoY). Our forecast based on the following summary of our analysis: Passenger volume will achieve roughly 18.9 mn passengers in 2017, increasing by 34% YoY thanks to (1) the 4 new domestic routes featuring 3-7 flights per week, and the 6 international routes with 3-6 flights per week added in 2H16. These flights will contribute growth to both passenger transportation and ancillary revenue. (2) In terms of opening new routes, VJC targets to launch 4 domestic and 14 international routes in Overall, total ASK is subjected to an increase of 38% YoY in We expect VJC's to maintain its passenger load ratios, at 87% for domestic routes and 82% in international routes (vs. 88% and 82% in 2016 respectively). We expect that revenue from SLB activities will record VND 16,915bn (+46% YoY), attributable to gains recognized from 15 new aircraft being delivered during the year for SLB. We assume that gross profit may be recorded at USD 6mn per aircraft We assume that the average jet fuel price will increase by 14% YoY. Jet Fuel Quarterly assumption in 2017 USD/barrel 1Q 2Q 3Q 4Q Average F YoY 48% 12% 3% 1% 14% Source: Bloomberg, SSI Research assumption Gross profit margin will slightly decline to 12.4% in 2017 due to the expected fuel cost hike and lower GPM of SLB at 12% (vs 13% in 2016)

22 estimates We forecast that VJC s total passenger volume will grow at 13% CAGR. Domestic passenger volume will grow at 10% CAGR, and international passenger volumes may enjoy a CAGR of 23% due to a rise from a low base. In summary, from , we expect total revenue and net profit of VJC will grow at CAGRs of 19% and 20% respectively thanks to significant revenue and gain from SLB recognized from Airbus and Boeing contracts. We assume that VJC may receive 39 aircraft per year from , according to schedule delivery. We assume that VJC will purchase and own 2 aircraft per year. VJC s operating data assumptions VJC: Group operating data FY15 FY16 FY17E FY18E FY19E FY20E FY21E FY22E FY23E RPKs(m) 9,690 14,451 21,891 26,607 32,063 37,090 42,233 47,233 52,449 ASKs (m) 11,055 16,498 25,715 34,237 42,983 51,114 58,826 66,056 73,733 Passenger load factor Domestic 89% 89% 87% 87% 86% 85% 85% 85% 85% International 84% 83% 82% 82% 82% 81% 80% 80% 80% Yield per RPK (U.S. cents) Average jet fuel price (USD/bbl) Appreciation of USD against VND 3% 1% 2% 2% 2% 2% 2% 2% 2% Source: VJC, IATA, World Bank, SSI Research forecats

23 5. VALUATION 5.1. DCF method Because SLB activity is tied into VJC's business model, we factor in SLB profits in our DCF model as a core business profit resource corresponding with aircraft leasing fees in the future. Overall, we apply a DCF model for VJC with WACC at 12.96%, terminal growth at 1%, and arrive at a present fair value for VJC of VND 131,034/share. DCF Calculation Consolidated (VND million) 2017F 2018F 2019F 2020F 2021F 2022F 2023F EBIT 3,660,491 4,404,345 5,431,414 9,320,973 10,237,830 11,530,070 11,919,141 Abnormal adjustments Adjusted EBIT 3,660,491 4,404,345 5,431,414 9,320,973 10,237,830 11,530,070 11,919,141 Effective CIT rate (%) 10.0% 10.0% 15.0% 15.0% 15.0% 15.0% 15.0% EBIT(1-T) 3,294,442 3,963,910 4,616,702 7,922,827 8,702,155 9,800,560 10,131,270 Add: Depreciation 165, , , , , , ,594 Less: CAPEX 2,000,000 2,000,000 2,000,000 2,000,000 2,000,000 2,000,000 2,000,000 Less: Change in WC 964,485 1,088,832 1,162,730 1,303,739 1,372,188 1,529,382 1,685,056 Free cash flow to firm 495,221 1,090,438 1,718,371 4,935,353 5,698,098 6,743,040 7,021,809 Terminal growth 1% Terminal value 69,529,675 Discount period Discount factor Present value 456, ,512 1,240,917 3,155,145 3,224,827 3,378,373 3,114,412 Terminal PV 30,838,788 PV of FCFF - Operating 46,298,298 Cash & cash equivalents 2,741,341 ST Investments 1,400 Total Firm Value 49,041,040 Debt 6,797,227 Equity Value 42,243,813 No. of shares 322,388,060 Value of a share (VND) 131, Peers comparison Name Country Market Cap (USD mn) P/E T12M P/B ROE (%) EV/EBITDAR T12M Ryanair Holdings PLC Ireland 18, EasyJet PLC UK 4, WestJet Airlines Ltd Canada 1, JetBlue Airways Corp US 6, Spirit Airlines Inc US 3, Southwest Airlines Co US 36, AirAsia Bhd Malaysia 1, Cebu Air Inc Philippines 1, Vietnam Airlines JSC Vietnam 1, N/A Average Vietjet Aviation JSC Vietnam 1, Source: Bloomberg, VJC