Vietjet: Spreading its wings beyond its home market

Transcription

1 Vietjet Air Pre-Listing Report Anirban Lahiri Senior Manager ext. 130 Hai Hoang Analyst ext. 138 Vietjet: Spreading its wings beyond its home market Vietnam s leading low cost carrier (LCC) Vietjet will list on HOSE on February 28, The expected listing reference price on the first trading day is VND90,000 per share, which implies a market cap of USD1.2 billion based on 300 million shares outstanding. Key Transaction Facts Listing date February 28, 2017 Listing volume 300 million shares Listing price VND90,000/share Trading band ± 20% on FTD, ± 7% thereafter Total market cap VND27,000 billion (USD1.2 billion) As Vietnam s first homegrown private carrier and an emerging force in the regional low cost carrier (LCC) segment, Vietjet is well poised to ride Vietnam s domestic aviation boom as well as rising outbound travel by Vietnamese and growing tourist arrivals into the country. Growing competition on international routes and aggressive fleet expansion plans create some downside risks to long-term profitability. However, the domestic market should be the key growth engine of Vietjet for the next three years. Vietjet is both a contributor to and beneficiary of Vietnam s domestic aviation boom. In 2015, total domestic air passengers within Vietnam rose by 21% YoY to touch 21 million and are expected to grow at double-digit rates from 2016 to 2020 based on: (1) growing disposable income and a rising middle class; (2) the increasing penetration of low cost carriers, which is bringing air travel within reach of the middle class and allowing passengers to upgrade from traditional rail and road transporation mediums; (3) the underdeveloped infrastructure of railways and roads, which is in increasing contrast with the rapid improvement of aviation infrastructure (4) the boom in Vietnam s domestic tourism industry. Vietjet has taken Vietnam Airlines by surprise, with its share of the domestic aviation market touching 43% in June 2016, but this should stabilize from 2018 onward. VietJet s share of total passengers carried by Vietnam-based airlines on domestic routes over the first six months of 2016 touched 41.4%, compared to 42.5% for Vietnam Airlines. For the month ended June 30, 2016, the Company had a 43.1% market share, vs a 41.3% market share for Vietnam Airlines, indicating that Vietjet is inching past its archrival. However, with Vietjet having already captured a significant share of key routes, such as HCMC-Hanoi, and with limits on their ability to pioneer new domestic routes, we expect domestic passenger volume growth of the company to stabilize at between 8%-10% from 2018 onward, in line with overall market growth. Increased focus on international routes will be the growth driver from 2018 onward, but will also pit Vietjet into greater competition with seasoned regional LCC incumbents. Vietjet currently operates 17 international routes between Vietnam and other countries in Southeast and Northeast Asia, while regional leader AirAsia operates more than 70 international routes between its original hub in Kuala Lumpur and other Asian countries. In 2015, international routes only contributed around 12% to Vietjet s total passenger volumes, leaving substantial room to grow. However, competition is already fierce on popular international routes connecting HCMC and Hanoi to regional hubs, such as Bangkok and Singapore, with experienced LCC incumbents, such as AirAsia, Jetstar and Tiger Airways, jostling for space. On the bright side, management claims that Vietnamese nationals account for 85% of total passenger volume carried on international routes connecting with Vietnam, giving Vietjet an advantage against overseas competitors on these routes due to its domestic market leadership. See important disclosure at the end of this document VCSC<GO> February 24,

2 Delivery of 57 new aircraft through 2019 will drive ASK growth, but also pressure load factors and utilization; 50 new route openings are needed to maintain industry-leading block hours. If we were to assume no scope for deploying new aircraft on existing routes, then we would estimate that in order to maintain its current average utilization of 13.3 block hours per aircraft per day, the company would need to add 103 new routes through 2019 to deploy the 53 new Airbus and four Boeing aircraft it will take delivery of over the perid. However, given that many of the existing routes are new or underpenetrated, there is scope for management to increase frequency on these routes and hence, we assume that around half of the increase in fleet capacity can be absorbed by existing routes. This will still imply that over 50 new routes need to be added over the period. This will be a tough balancing act; aggressive route openings will support aircraft block hours but weigh on load factors in the interim as newly-opened routes are gradually ramped up. Maintaining load factors, on the other hand, will require a scale-back of new route additions, which could weigh on aircraft block hours. Sale/leaseback gains should significantly boost earnings. Because VietJet has placed large orders with both Boeing and Airbus, they have negotiated favorable pricing, according to management. We believe they may be able to record gains of USD2 million or even higher on each aircraft sold to lessors. Based on the aircraft delivery schedule of aircraft per annum from and assuming that all of these are sold and leased back that would result in USD22 million-usd38 million in incremental gross profit per year through 2019 from gains on the sale of newly delivered aircraft. Ancillary revenue per pax could double from a low base, thereby boosting yields. The ancillary revenue per passenger realized by Vietjet was only around USD12.14 during 2015, even after growing at a rapid clip of 13.8% CAGR over the past two years. Based on the regional LCC industry average of USD20-USD30 per passenger, there is still a lot of room for Vietjet to grow this revenue stream through improved in-flight merchandising, excess baggage fees, seat selection fees as well as cargo transportation and advertising services. For the first six months of 2016, anciliary revenues accounted for 22.6% of total revenue excluding revenue from aircraft sales, up from just 16.4% of revenue in 2013; this increase in revenue contribution should continue for a few years. A continued benign outlook for oil prices and growing economies of scale will support profit margins was a strong year for the global airline industry. Most LCC s and full service airlines ( FSA s ) achieved rapid margin expansion on the back of the free fall in oil prices, and the improvement in profitability boosted growth in seat capacity globally. We believe Vietjet s RASK minus CASK spread will expand in the next two years on the back of higher economies of scale and a continued benign outlook for oil prices; we assume Brent crude to average USD45 per barrel in 2016 and rise moderately through 2018 to level-off at USD65 per barrel. Meanwhile, growing RPKs on the back of fleet expansion will boost economies of scale, improve bargaining power with airports and vendors and thereby lift margins. However, an unexpectedly fast rise in oil prices remains a risk to the downside. Also, a sudden material hike in airport charges by the ACV could choke-off the RASK minus CASK spread expansion that we currently foresee. See important disclosure at the end of this document VCSC<GO> February 24,

3 Contents Vietjet: Spreading its wings beyond its home market... 1 Global Aviation Industry an overview... 4 Key current trends in the global airline industry... 4 Global airline industry revenue has doubled over the past decade... 4 Low cost carriers have been steadily taking market share from full service airlines... 5 Asia-Pacific Aviation industry... 5 International passenger traffic recorded robust growth in Within South East Asia, LCCs grew their capacity over five times over the past decade... 7 Global aviation outlook for 2016: positive economic growth will help fuel aviation growth... 8 Vietnam s airline industry Industry highlights in The arrival of Vietjet since 2011 has triggered a shift in the behaviour of Vietnamese travellers The Vietnam aviation industry recorded stellar growth in Leading airlines in Vietnam still have relatively high bargaining power vs their global counterparts16 The outlook sustainable GDP growth to spur the growth in the Vietnam airline industry Company at a glance Vietjet overview rapid ascendance to market leadership after being baptized by fire Vietjet entered the Vietnam airline industry amidst difficult market conditions but they were already profitable in their second year of operations Vietjet s leadership team has diverse industry experience Vietjet has a young fleet and operates more than 50 routes Vietjet s growth strategy - domestic market to be the key growth engine for the next two to three years Maintaining cost-competitiveness to be a key priority Vietjet will continue to ride the boom in domestic air travel demand over the medium-term even though its market share has likely levelled-off International route expansion to be the long term growth engine The ambitious fleet expansion plan might pressure average base fares and load factors in the medium term, but GPM will still expand in the face of continued oil price weakness and growing economies of scale Vietjet s decision to use an aircraft SAL model to grow its fleet can generate significant upfront cash flow Ancillary revenue a key growth and profitability lever over the medium term Charter flight service a useful strategy to test the viability of new international routes Cargo flight service a small but fast growing segment Vietjet s five-year plan Recap CASK fell dramatically on the back of steep drop of oil prices H recap Stellar growth on the back of rapid fleet expansion Outlook - Vietjet on track to capture 50% share of the domestic market Valuation Analysis Comparable Analysis Sensitivity Analysis Financial Statements Disclaimer See important disclosure at the end of this document VCSC<GO> February 24,

4 Global Aviation Industry an overview Key current trends in the global airline industry Passengers are benefitting from low oil prices with lower fares and more routes; total expenditure on air travel accounts for 1% of global GDP. City pairs have doubled in the past 20 years. Returns to shareholders in the airline industry have been improving with ROIC exceeding 8% in 2015, above the cost of capital for the first time. Fuel use per ATK (Available Ton Kilometer) fell a further 1.8% YoY in 2015, saving 14 million tonnes of CO2 emissions and USD2 billion of fuel costs, industry-wide. Load factors are forecast to slip a little as capacity rises; new aircraft deliveries in 2015 represent a USD180 billion investment. North America has been the best-performing region in terms of profitability with a 9.5% net post-tax profit margin in Africa is the weakest performing region with a 0.5% net loss. Source: IATA Global airline industry revenue has doubled over the past decade, with ancillary revenues being the fastest growing revenue source Today, the global airline industry consists of over 2,000 airlines operating more than 23,000 aircraft out of 3,700 airports. Global airline industry revenues including both passenger and cargo transportation services grew at a CAGR of 7.2% from USD369 billion in 2004 to USD746 billion in Within the industry, passenger transportation contributed the most with 75% of total revenue in 2014, while the fastest growing revenue stream was ancillary activities, the major component of other revenue in the chart below. During the period, revenue from ancillary activities, cargo transport and passenger transport recorded CAGRs of 13.7%, 3.0% and 6.6%, respectively, at a global level. Figure 1: Global airline industry revenue by segment USD billion Other revenue Cargo revenue Passenger revenue Source: IATA 2015 See important disclosure at the end of this document VCSC<GO> February 24,

5 Low cost carriers have been steadily taking market share from full service airlines Within the passenger airline industry, the 259 LCCs (out of more than 2,000 airlines in total) account for 25% of total market share and have been the fastest growing segment. LCCs usually operate at a subregional level with point-to-point short-haul flights. These airlines always offer competitive fares with no code-share and interlining involved. Historically, LCCs focused only on direct distribution through their websites. However, the expansion of low cost airlines has led them to diversify their distribution channels including call centers, Global Distribution System (GDS) and travel agencies in addition to their websites. Figure 2: LCC global market share in terms of available seats 30% 25% 20% 17.5% 19.2% 20.3% 21.4% 22.8% 23.5% 25.0% 25.9% 25.5% 15% 10% 5% 0% Source: CAPA 2016 In 2015, for the first time, we observed a loss in LCC market share, which was a result of the revamping of FSA strategy to claw back some market share. For instance, FSAs tried to focus on long-haul flights or changed their business model to reduce costs and ticket prices. FSAs have also tried to unbundle their offerings and improve the load density with promotional offers to match the prices offered by LCCs while retaining their value proposition for a more premium audience. Meanwhile, LCCs have been trying to extend their distribution channels and expand their route networks to include more mid-haul flights. Asia-Pacific aviation industry While cargo volumes only saw a marginal increase, international passenger traffic recorded robust growth in 2015 In 2015, Asia-Pacific was the fastest growing region worldwide with 7.9% growth in the number of international air passengers carried, an aggregate of million persons. This robust increase was fostered by more competitive fares, facilitated in turn by lower oil prices. The average international passenger load factor for APAC airlines increased to 78.4% for the year from the 77.0% achieved in According to AAPA (Association of Asia Pacific Airlines), long haul travel prospered due to the following key factors: (1) An improvement in economic conditions in select advanced economies in the West, (2) Strong growth in travel demand despite slowing overall economic growth and regional currency weakness (we think surging Chinese outbound travel was a key driver of this). At the same time, in 2015, air cargo demand in the Asia-Pacific region was weak, with an increase of only 1.6% in freight tonne kilometer (FTK), reflecting a slowdown in global trade momentum. The freight load factor fell to 63.7% from 65.0% in See important disclosure at the end of this document VCSC<GO> February 24,

6 Figure 3: 2015 Traffic statistics for Asia Pacific airlines International Dec-14 Dec-15 % Change Jan-Dec 2014 Jan-Dec 2015 % Change Passengers (000) 23,171 24, % 256, , % RPK (mn.) 83,401 89, % 924,784 1,000, % ASK (mn.) 106, , % 1,200,492 1,275, % Passenger Load Factor 78.2% 78.6% pp 77.0% 78.4% pp FTK (mn.) 5,612 5, % 63,917 64, % FATK (mn.) 8,587 8, % 98, , % Freight Load Factor Source: AAPA 65.4% 63.8% -1.6 pp 65.0% 63.7% pp Figure 4: Global aviation market share (in terms of RPK) by region as of December 31, % 5.4% 24.7% 9.4% 26.7% 31.5% Africa Asia Pacific Europe Latin America Middle East North America Source: IATA According to AAPA, the Asia-Pacific region is poised to dominate the global aviation industry for the following reasons: (1) The region generates 31% of global GDP and is experiencing the fastest economic growth among all regions, (2) The region is home to 4 billion people, accounting for 56% of the world s population, (3) It accounts for 35% of global trade value, (4) An outstanding safety record and (5) A wide range of income levels with strong growth in middle class spending. See important disclosure at the end of this document VCSC<GO> February 24,

7 Figure 5: Asia among leaders of world passenger air traffic growth in the period (Passenger volume CAGR) 8.0% 7.0% 6.0% 5.0% 4.6% 4.9% 5.2% 5.3% 5.7% 6.7% 4.0% 3.6% 3.0% 2.5% 2.0% 1.0% 0.0% World North America Europe CIS Latin America Africa Asia Pacific Middle East Source: Airbus GMF Figure 6: LCC players in Asia Within Southeast Asia, LCCs grew their capacity over five times as much as FSAs over the past decade Within Southeast Asia, full service airlines (FSAs) only grew their capacity around 1.4 times from 180 million seats in 2004 to 260 million seats in 2014, equivalent to a CAGR of 3.7%, which is much lower than the demand growth over the same period; total passenger volumes grew at a CAGR of 5.4% over the same period (Source: IATA). According to PRNewswire, the capacity of LCCs in Southeast Asia has increased eight times from 25 million seats in 2004 to 200 million seats in 2014, equivalent to a CAGR of 23.1%. Source: VCSC, google map See important disclosure at the end of this document VCSC<GO> February 24,

8 Figure 7: Airline capacity growth by region (year end 2014 vs 2015) Source: Planestat.com Global aviation outlook for 2016: uneven but positive economic growth will help fuel aviation growth The growth in worldwide airline industry revenues has averaged approximately 5% per year over the past 30 years, with substantial yearly variations due both to changing economic conditions and cyclicality. Historically, the annual growth in air travel has been about twice the annual growth in GDP. Even with relatively conservative expectations of 2%-3% global economic growth per year over the next years, global air travel could grow at 4%-5%, leading to a doubling of total air travel volumes over the period. Figure 8: Global airline industry revenue growth vs global GDP growth % (5) (10) (15) (20) Global GDP growth Global industry airline growth Source: IATA In 2016, the global passenger transport industry will continue to be bolstered by: (1) Steady global economic growth, despite the uneven distribution of growth across countries, (2) Strong demand for air travel on the back of falling ticket prices, which will be supported by lower oil prices vs last year. See important disclosure at the end of this document VCSC<GO> February 24,

9 The close relationship between the dynamics of the world economy and passenger air transport has been evident in past decades: the higher the growth in per capita income, the greater the demand for air travel. According to the IMF, growth will still be positive this year despite a slowdown in some emerging economies and concerns over the health of the Eurozone economies, especially following Brexit. Figure 9: IMF forecasts for economic growth 5.0% 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% 4.6% 4.6% 4.0% 4.1% 1.9% 1.9% 1.8% 1.8% Emerging economies Developed economies Source: IMF World Economic outlook, July 2016 Strong demand for travel on the back of falling ticket prices. Given that fuel costs usually account for more than 30% of an airline s operating costs, it is reasonable to expect that at least a portion of the huge bonanza from the ongoing weakness in oil prices will continue to be passed along to customers by carriers. Figure 10: Future for oil prices is uncertain but a full recovery is unlikely soon International Energy Agency/ Goldman Sachs 20 0 Source: Bloomberg, EIA, Goldman Sachs Major airlines saw a marked improvement in profitability on the back of the recent fall in oil prices and this should continue to support margins this year: As shown below, the sharp fall in oil prices starting in 2014 has coincided with a sharp rise in the average operating and net margins of major airlines around the world. While passenger fares have fallen to some extent, airlines have retained some of the See important disclosure at the end of this document VCSC<GO> February 24,

10 01/03/ /05/ /07/ /09/ /11/ /01/ /03/ /05/ /07/ /09/ /11/ /01/ /03/ /05/ /07/ /09/ /11/ /01/ /03/ /05/ /07/ /09/ /11/ /01/ /03/ /05/2016 benefit of lower fuel costs. The fall in airfares has been sufficient to stoke demand growth and yet not enough to prevent the carriers from reaping the benefits of lower operating costs. Even though oil prices staged a mild recovery earlier this year, the average oil price in 2016 will still be lower than last year, allowing carriers to sustain or even expand their margins further. Figure 11: Profit margin improvement of 17 of the world largest airlines on the back of falling oil prices % USD per barrel Source: VCSC, Bloomberg AVG Oper margin AVG Prof margin Oil price Figure 12: Strong demand for air travel helped by falling ticket prices Source: ICAO, PaxIS, IATA Statistics and Economics However, air cargo transport is likely to continue to be hit by weak global trade growth. There is no signal that the average air freight rate will recover in 2016 as global trade growth stalls and the ratifications of major trade pacts, such as TPP, have now been delayed indefinitely amid growing protectionism around the world. See important disclosure at the end of this document VCSC<GO> February 24,

11 Figure 13: Cargo segment hit by weak trade growth and weakness in freight rates Source: Netherlands CPB, EIU, CargolS Despite the slump in the cargo segment, the global airline industry should continue to deliver healthy returns. The airline industry finally generated a normal return for investors in 2015, and this is projected to be sustained into According to ICAO and IATA, there are two main reasons for this, including: (1) expected continued weakness in oil prices; (2) invested capital has become more productive as asset utilizations have risen in recent years and are expected to remain at current levels through Figure 14: The airline industry has generated a positive economic return for the first time Source: ICAO, IATA Economics See important disclosure at the end of this document VCSC<GO> February 24,

12 Figure 15: Improving asset utilizations have raised load factors, sustainably Source: ICAO, IATA Economics Vietnam s airline industry Industry highlights in 2015 By the end of 2015, according to CAAV, the number of domestic air passengers carried reached 21 million, up 21.2% compared to By the end of October 2015, according to CAAV, the nationwide aircraft fleet reached 127, with an average age of 5.6 years. There were 51 owned aircraft, equal to about 40% of the total fleet. For the domestic aviation market, there was a shift in market share among key players. Vietjet saw a big increase in its market share by passenger volume from 29.6% in 2014 to 37.0% in On the other hand, Vietnam Airlines market share fell sharply in The Civil Aviation Administration of Vietnam expects continued double digit growth in 2016 for the domestic airline industry on the back of aggressive capacity expansion by domestic airlines. In September 2015, the CAAV estimated that over USD10.2 billion of investment would be required for airport infrastructure upgrades between 2015 and also witnessed the IPO of the Airport Corporation of Vietnam (ACV) which raised VND1.12 trillion (approximately USD49.6 million), which we consider to be a strong affirmation of Vietnam s aviation industry growth prospects. According to IATA, Vietnam will be one of the seven fastest-growing aviation markets worldwide between 2014 and 2017, with projected international passenger growth of 6.9% and expected international air cargo transport volume of 6.6% per annum. Note: ACV (the Airport Corporation of Vietnam) is a state-owned company that was established in 2012 by merging Northern Airports Corporation, Middle Airport Corporation and Southern Airports Corporation of Vietnam. ACV completed its IPO on December 10, 2015, as required per Decree No 51/2011/NĐ-CP mandating the transformation of State-Owned Enterprises to Joint-Stock Companies, and is expected to be listed on HOSE in December Currently, ACV fully-owns and operates a total of 22 airports in Vietnam, of which 21 airports are already in operation. See important disclosure at the end of this document VCSC<GO> February 24,

13 The arrival of Vietjet since 2011 has triggered a noticeable shift in the behavior of Vietnamese travellers Vietnam s domestic capacity has more than doubled since Vietjet s arrival. Vietnam s airline industry has three key players - Vietnam Airlines, Vietjet and Jetstar Pacific. In June 2016, Vietjet first overtook Vietnam Airlines in terms of passengers carried domestically to become the biggest airline in Vietnam with a 43.1% share of the domestic market, with Vietnam Airlines trailing slightly at 41.3%. In countries with below average per capita income, such as Vietnam, air travel demand is likely to be heavily skewed in favor of LCCs, which has helped Vietjet to catch-up with Vietnam Airlines in a short period of time. In recent years, the growing middle class of Vietnam gave VietJet a unique growth opportunity since its first flight in late 2011, driving a higher portion of the country s 92 million people to trade-up from long bus and train journeys to flights. Lower fuel surcharges on the back of falling oil prices and the increase in LCC capacity have led to a fall in average airfares which, coupled with rising income levels, has made air travel affordable for a larger segment of the population. As shown below, a growing share of passengers are traveling by air, implying that at least some of the growth in passenger volumes is being driven by first-time flyers which are a key target segment for VietJet. According to CAPA, weekly domestic capacity in Vietnam has more than doubled over the last four years from about 235,000 weekly seats in September 2011 (two months prior to VietJet s launch) to about 490,000 weekly seats in September 2015, and VietJet has accounted for about 75% of the weekly seats that have been added. Apart from during which a sharp economic downturn led passengers to downgrade, there has been a steady increase in air travel's share of total passenger transportation volumes. Figure 16: Passenger traffic by transportation medium since 2010 (million passenger kilometer) 100% 90% 80% 70% 22% 21% 20% 22% 21% 21% 3% 3% 2% 2% 2% 2% 60% 50% 40% 71% 72% 73% 73% 73% 74% 30% 20% 10% 0% 4% 4% 4% 4% 3% 3% Rail Road Inland waterway/ Maritime Air Source: GSO See important disclosure at the end of this document VCSC<GO> February 24,

14 Figure 17: Vietnam domestic weekly seat capacity: September 2011 to October 2015 Source: CAPA Centre of Aviation and OAG In the long term, we believe the Vietnamese LCC industry will continue to be dominated by Vietjet. Jetstar, in particular, has not been able to scale-up its operations because it is owned by Vietnam Airlines, which has focused on its full service model. Figure 18: Vietnam s LCC capacity share (% of seats) 50.0% 45.0% 40.0% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% 25.5% 22.0% 22.7% 19.9% 16.3% 17.3% 16.9% 18.3% 19.7% 11.6% 12.9% 14.9% 15.6% 15.9% 17.0% 12.3% 15.7% 11.8% 14.2% 3.9% 3.3% 2.8% 4.8% 7.6% 40.9% 46.6% Vietnam (international) Vietnam (domestic) Source: CAPA Centre of Aviation and OAG The Vietnamese aviation industry recorded stellar growth in 2015 In 2015, according to GSO, the Vietnamese airline industry recorded strong growth in domestic passenger traffic and a slight increase in domestic cargo volume transported. RPK (revenue passenger kilometer) and FTK (freight ton kilometer) touched 31 billion passenger-km (+9.8% YoY) and 556 million ton km (+2.5% YoY), respectively. Domestic passenger air transport volume reached 21 million, up 10% compared to We believe that the strong growth in domestic air passenger traffic was mainly bolstered by: (1) 6.7% GDP growth in 2015, corresponding to GDP per capita growth of 5.6%. With more money in their pockets, Vietnamese consumers are more inclined to trade-up to flights from rail and road transportation See important disclosure at the end of this document VCSC<GO> February 24,

15 in order to save time (2) Domestic airlines have continuously opened new routes in order to gain more market share and connect tier 2 cities and (3) Domestic travel and tourism is growing fast as the middle class surges and domestic tourism infrastructure continues to improve. Strong GDP growth in the face of expected record FDI disbursement: Both registered and disbursed FDI reached record highs in 2015 and helped the economy to continue its healthy expansion in This translated to a corresponding growth in GDP per capita of 5.6%, which helped to spur demand for air travel. Business travel demand also grew in line with the expansion in economic activity. Figure 19: Vietnam GDP growth Figure 20: FDI disbursement (USD billion) 8.0% % 6.0% 5.0% 6.7% 5.9% 6.0% 5.0% 5.4% % 8 3.0% 6 2.0% 4 1.0% 2 0.0% Source: GSO, VCSC 2016 strategy report Source: GSO, VCSC 2016 strategy report Domestic airlines have continuously opened new flights on underserved routes in order to gain more market share. Jetstar Pacific to launch 20 routes in 2015: Jetstar Pacific is now the 23rd largest airline in Southeast Asia based on current seat capacity with about 110,000 weekly seats by the end of 2015, representing a 52% increase in capacity compared to the previous year. According to OAG data, this LCC operated 34 routes by the end of 2015, including 24 domestic routes and 10 international routes, of which 20 routes were launched during 2015 itself (13 domestic routes and seven international routes). In the domestic market, Jetstar Pacific launched six new routes from its Ho Chi Minh city hub in 2015, connecting the following cities: Chu Lai, Da Lat, Dong Hoi, Pleiku, Quy Nhon, Tuy Hoa. It also has launched services to Da Lat and Tuy Hoa from the capital Hanoi and five point-to-point routes: Vinh to Nha Trang, Da Lat to Hue and Buon Ma Thuot to Chu Lai, Hai Phong and Thanh Hoa. The boom in domestic travel and tourism has fueled the growth of the aviation industry. In 2015, while the number of international visitors to Vietnam gradually recovered with 0.9% growth Y- o-y after declining in the previous year, the domestic travel market realized a record number of domestic visitors of 57 million (+48% YoY). Visitor arrivals to Phu Quoc and Da Nang, the hottest domestic holiday destinations in recent years, rose by 48% and 34%, respectively, in 2015 according to the Vietnam National Administration of Tourism. See important disclosure at the end of this document VCSC<GO> February 24,

16 Figure 21: The number of domestic travellers has surged in recent years 60 million visitors Source: GSO Leading airlines in Vietnam still have relatively high bargaining power vs their global counterparts We believe the Vietnamese airline industry looks more attractive than its global counterparts. Passengers have relatively low bargaining power because there are only three domestic airlines in Vietnam and passengers have no choice but to use one of them. Substitutes to flying are also weak because they are usually too expensive and underdeveloped due to poor infrastructure. Stringent licensing requirements and high capital costs also make it difficult for new players to enter the industry quickly. However, the industry is still subscale, meaning that domestic airlines do not have as much clout with the large aircraft manufacturers compared with counterparts in larger markets. Larger airliners today have a disproportionate advantage because of their economies of scale, which allows them to lower ticket prices and have greater distribution muscle, greater bargaining power with aircraft manufacturers and lessors as well as greater choice of routes and flight times to offer customers. This implies that Vietjet and Vietnam Airlines are fairly well placed from a competitive standpoint. See important disclosure at the end of this document VCSC<GO> February 24,

17 Threat from Potential Entrants Medium - Existing companies have a large cost advantage. This industry requires a large amount of capital and a strong customer base to make a profit in the early years. - Customers tend to only choose popular airlines. As tickets are expensive, people prefer to use their money on brands they trust. - The industry requires aircraft and flying experience, which also lowers the threat of entry. - Very restrictive licensing procedures to start an airline in Vietnam. - The time and money spent to open an airline is enough to prevent most people from entering the industry. Bargaining power of suppliers Medium - The main suppliers are the aircraft manufacturers. In this industry, the inputs are significantly standardized. Airline firms only seem to differentiate with amenities. The planes are very similar. A few manufacturers are currently focusing on producing ecofriendly aircraft. - Airline companies are the only source of origin for these manufacturers so their business is excessively important. Based on this, the bargaining power of suppliers has a low threat as well. Competitive Rivalry Medium - High barrier to exit: the fixed costs are particularly high in this industry. Leaving the industry is difficult due to the long-term loan agreements that make companies stay in business. - Because of low switching costs for air passengers, none of the airlines can really hold a dominant market share in the long run. - Recently, competition has intensified on international routes on the back of a slew of bilateral open sky agreements signed between countries in the region. - However, the Vietnam domestic industry is still in its early growth stages, with lots of non-served and under-served routes, leaving room for players to grow. This will reduce competitive intensity for now. Threat of Substitutes Medium - Potential travellers can choose other means of transportation such as cars, buses, trains, or boats to go to their destination. There is no monetary cost to switch, the major cost is time. - Aircraft are by far the quickest means of transportation available in the market. Airlines outperform any other forms of transportation when it comes to convenience and service. Customers sometimes do choose other methods for diverse reasons such as cost if they are not traveling very far, which raises the risk. - The underdeveloped infrastructure of Vietnam places a huge constraint on train, bus and inland waterway transport in terms of price competition with low cost carriers. If the difference in price is not significant, people will choose LCCs because it saves time. Bargaining power of customers Low - The airline industry is composed of two categories of buyers. First, there are single flyers. The reason why they purchase tickets is either personal or business related. This category is particularly diverse. They can proceed through the specific airline or through the second category of buyers: travel agencies and online portals. This buyer group works as an intermediate between the airlines and the travellers. They work with several airline companies in order to give consumers the best flight possible. Between these two groups, there is a large number of buyers compared to the number of companies. - In Vietnam, there are only three big domestic airlines, whereas there is a large number of buyers, including single flyers and travel agencies. Therefore, the bargaining power of buyers is an extremely low threat in the domestic context. See important disclosure at the end of this document VCSC<GO> February 24,

18 The outlook sustainable GDP growth to spur growth in the Vietnamese airline industry We believe Vietnam s passenger air transportation industry will grow at double digit rates between 2016 and 2022 on the back of: (1) Growing disposable income which is leading consumers to trade up to air travel from traditional mediums, (2) The significant under-penetration of low-cost carriers in Vietnam compared to other Asian countries, (3) The underdeveloped infrastructure of railways and roads, in contrast with the rapid improvement of aviation infrastructure, providing opportunities for low-cost carriers to grab more travellers from other modes of transport, (4) The boom in Vietnam s tourism industry will further spur air travel demand. (1) Expected strong growth in disposable income will stimulate inbound and outbound air travel demand. According to Vietnam s GSO, GDP between is projected to grow at 6.5%-7.0% on average, fuelled by the rapid disbursement of FDI capital in recent years. The FDI inflows to Vietnam are likely to be sustained in light of: (1) The rising average wage in China making it less competitive compared to other developing countries such as Vietnam, (2) The conclusion of many FTAs will also hasten the trend of relocation of plants and factories from China to Vietnam in the coming years. It is also worth noting that the conclusion of FTAs and growing FDI also directly spur the inbound and outbound air travel demand for business purposes. (2) The under-penetration of low-cost carriers in Vietnam compared to other Asian countries, implies that there is still lots of room for budget airlines to grow on both domestic and international routes. On international routes, in particular, the penetration of Vietnamese LCCs is really low due to lack of fleet capacity. Figure 22: LCC market share (based on capacity) in Asian countries Source: Based on seat capacity between September 1-7, 2015 of SAP independent industry report, Boeing, IMF (3) The underdeveloped infrastructure of railways and roads, in contrast with the rapid improvement of aviation infrastructure will narrow the price gap between these transport modes while leaving a compelling gap in travel time, thereby providing opportunities for low-cost carriers to grab more travellers from other modes of transport. In fact, the upgrading and expansion of small airports around the country will help the LCCs improve their efficiency on routes connecting smaller cities, thereby leading to a fall in fares. As income levels continue to rise and air fares decrease, people are expected to switch from bus and rail to budget airlines, given its superior advantages in terms of time savings, safety and service quality. See important disclosure at the end of this document VCSC<GO> February 24,

19 Figure 23: Passenger traffic growth by modes of transport in Q12016 (million passenger kilometers) Figure 24: Domestic passenger air transport volume (million passengers) 20.0% 15.0% 18.2% % 5.0% 4.8% 3.7% 7.0% % % -4.1% -10.0% Source: GSO Source: GSO While the development of road and rail infrastructure is still progressing quite slowly, aviation infrastructure is rapidly improving with many large projects having been recently approved by the government. In fact, air transport has increased from 13% of total transportation in 2000 to 21% in 2015 and the country expecting to see significant growth in air passenger traffic over the coming years. The government has ambitious plans to develop airport infrastructure, and the partial privatization of ACV's assets will help to unlock funds to support airport construction. According to BMI 2015 transportation report, besides the Long Thanh airport project which Aeroports de Paris (ADP), a huge French airport management company, is interested in and is estimated to cost USD15.8 billion, there are also plans to build an additional terminal at Cam Ranh International Airport. The Cam Ranh project is expected to cost VND4,000 billion (USD182million), with the new terminal expected to operate in Meanwhile, construction of new terminals at the Cat Bi International Airport and Phu Cat Airport also commenced in January See important disclosure at the end of this document VCSC<GO> February 24,

20 Figure 25: Air transport infrastructure development plans for the coming years Source: Vietjet, Mink Khue Law Company Limited, Freshfields Bruckhaus Deringer, CAAV, CAPA. (1) Based on the passenger and cargo volume in ACV (Airports corporation of Vietnam) report of (2) Based on Decision No. 355/QD-TTg dated February 25, 2013, the Prime Minister approved the adjusted strategy for development of Vietnam s transport through 2020, with the vision toward (3) Based on the airport master plan, which was approved by the Prime Minister under decision 21 dated January 6, 2009 (Air traffic infrastructure current status and impending changes, Vietnam-2014, by Freshfields Bruckhaus Deringer) (4) Based on Saigon Times news report in May Figure 26: Air travel is the most efficient on major routes within Vietnam (1) Source: Vietjet, SAP independent industry report, IMF (1) All fares shown are based on average fare quotes as of Feb 1 st for flights scheduled on 1 Mar 2016 and 1 April (2) Air fares refer to average Vietjet ticket base fares for FY 2015, note that the fare base doesn t include fuel surcharges and other taxes, (3) Base fare excludes other ancillary fee of USD 8.3, total gross fare of USD 52.3, (4) Base airfare excludes other ancillary fee of USD 7.4; total gross fare of USD Source: SAP independent industry report, IMF. (5) The boom in Vietnam s travel and tourism market in recent years will be the growth pillar for the aviation industry. According to the World Tourism Organization (UNWTO), the growth rate of international visitors to Vietnam was 8.9% over the past decade, far more than the average of 3.4% worldwide. In the past five years, international travel to and from Vietnam has grown at an even faster rate, with the total number of international passengers growing at 11.2% between 2010 and 2014, the second fastest pace among Asian countries. Given that 50% of the world s population lives within a 5.5- hour flight radius of Ho Chi Minh city, Vietnam is well positioned to attract more international tourists in coming years. See important disclosure at the end of this document VCSC<GO> February 24,

21 Figure 27: No. of international passengers Figure 28: Foreign tourist arrival and departures growth by country, Million people % 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% 2.8% 2.9% Inbound Outbound 11.3% 11.7% 11.2% 9.5% 8.9% 7.7% 7.3% 3.3% 5.2% 4.3% Source: SAP independent industry report, CAAV Apart from international arrivals and departures, air travel demand from domestic tourists is also projected to be robust in In Q1 2016, according to the Vietnam national administration of tourism, domestic visitor arrivals to tourist destinations within the country reached 18.7 million, a dramatic 21% increase on To ride this boom in domestic tourism, Vietjet, Vietnam Airlines and Jetstar Pacific have been continuously adding more routes to the hottest holiday destinations such as Phu Quoc and Da Nang. See important disclosure at the end of this document VCSC<GO> February 24,

22 Company at a glance Business Low cost carrier Key Sales Drivers Vietnamese disposable income per capita, air travel penetration. Key Cost Drivers Fuel cost, aircraft lease and maintenance, labor, ground services. Key Risks The volatility of oil prices, competition from international LCCs. Major Clients Vietnamese air travellers Leadership Mdm. Nguyen Thanh Ha (Chairman Mdm. Nguyen Thi Phuong Thao (Vice chairman & CEO) Headquarters Floor 7, Nhat An building, Kim Ma Thuong street, Cong Vi district, Ba Dinh, Ha Noi Website Telephone 84-(8) SELECT COMPANY METRICS Revenue Mix % Passenger Revenue VND billion 100% 80% 60% 40% 20% 0% Passenger revenue Ancillary revenue Other revenue 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000-3,169 5,742 8, RASK minus CASK Total Pax Carried US cents Source: Vietjet, VCSC 10,000 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 - '000 9,313 5,562 3, See important disclosure at the end of this document VCSC<GO> February 24,

23 Vietjet overview rapid ascendance to market leadership after baptism by fire Vietjet entered the Vietnam airline industry amid difficult market conditions On December 2, 2011, the new-generation airline VietJet, a private company, launched its ticketing system nationwide, marking its entry into the Vietnam Airlines-dominated aviation industry in Vietnam. This was an extremely challenging time for the global and domestic economies with many difficulties facing the aviation industry, including: (1) The slowdown in GDP growth due to a domestic economic crisis, (2) high inflation, which discouraged people from travel in general and air travel in particular and (3) high oil prices which made it difficult for LCCs to control costs. Figure 29: Vietnam GDP growth Figure 30: Vietnam annual inflation rate 8.00% 7.00% Vietjet s first flight 20% Vietjet s first flight 19% 6.00% 16% 5.00% 4.00% 3.00% 2.00% 1.00% 12% 8% 4% 9% 9% 7% 4% 1% 0.00% 0% Source: GSO Source: GSO but they were already profitable in their second year of operations A mere two years after its first commercial flight from Ho Chi Minh City to Ha Noi in December 2011, Vietjet had overtaken Jetstar (the first mover into the LCC segment to become the biggest LCC in Vietnam with 20% of domestic airline market share by the end of August 2013, according to CAPA. At the beginning of 2013, Vietjet shocked the domestic and foreign aviation industry by signing a contract for 99 aircraft with Airbus, worth a total USD9.1 billion. The first aircraft under this contract was delivered by the end of November In June 2016, the domestic market share of Vietjet was recorded at 43.1%, which finally surpassed Vietnam Airlines (41.3% market share) making Vietjet the biggest airline in Vietnam. This LCC currently operates a fleet of 38 aircraft comprising 33 Airbus A320 and 5 Airbus A321 aircraft on 17 international and 36 domestic routes. See important disclosure at the end of this document VCSC<GO> February 24,

24 Figure 31: Vietjet launched its first flight during a period of high oil prices Crude prices USD/ barrel 140 Vietjet still recorded growth in market share and profits during a period of very high oil prices Vietjet s first flight Break-even after 2 years of operations Source: VCSC Figure 32: Key milestones in Vietjet s history. Source: Vietjet See important disclosure at the end of this document VCSC<GO> February 24,

25 Figure 33: Vietjet was the biggest airline in Vietnam in terms of domestic market share for the month ended June % Figure 34: Domestic routes contributed the bulk of revenue for Vietjet in 2015 (1) 0.6% 22.3% 43.1% 41.3% 12.1% 4.3% 60.7% Vietjet Vietnam airline Others Source: Vietjet 2016 outlook report from CAPA Domestic routes International routes Charter flights Ancillary revenue Others Source: VCSC, Vietjet (1) Total revenue excludes revenue from aircraft sales Figure 35: Number of years taken to achieve > 30% domestic market share 7 years 9 years (1) 11 years 4 years Vietjet Air Indigo Air Asia Cebu Pacific Source: Vietjet, (1) Since implementation of LCC business model See important disclosure at the end of this document VCSC<GO> February 24,

26 Figure 36: Total revenue and profits from (VND billion) Figure 37: Adjusted* EBITDAR margin from ,000 17,000 Revenue Operating profit Net profit to owners 19, % 30.0% 25.0% 22.6% 28.7% 32.8% 12,000 8, % 15.0% 7,000 2,000 (3,000) 3,793 1, , % 5.0% 0.0% Source: Vietjet, Note: total revenue includes aircraft sales Figure 38: Pax carried, ASKs and RPKs from Source: Vietjet *Note: based on revenue excluding aircraft sales Figure 39: Load factors 12,000 10,000 8,000 6,000 4,000 2,000 - Total pax carried ('000) Total ASKs (million) Total RPKs (million) 3,156 3,341 2,945 5,562 6,019 5,321 11,146 9,708 9, % 90.0% 80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% 88.2% 88.6% 88.1% Source: Vietjet Source: Vietjet Vietjet s leadership team has diverse industry experience Chairwoman Mdm Nguyen Thanh Ha: She has 26 years in the aviation industry, used to be a deputy head of CAAV prior to joining Vietjet and was the head of the planning and investment department at Vietnam Airlines before joining CAAV. She was appointed chairwoman of the board in Vice chairwoman and CEO Mdm Nguyen Thi Phuong Thao: She was appointed standing vicechairwoman of the Board of Directors in 2007 and is the company s current CEO. She is also the vice chairwoman of HD Bank. Vice chairman Dr Nguyen Thanh Hung: He was appointed vice chairman of the board of director since July He is also founder and chairman of Sovico holdings. See important disclosure at the end of this document VCSC<GO> February 24,

27 Managing director Mr Luu Duc Khanh: He was appointed managing director of Vietjet in He is also vice chairman of HD bank and chairman of representative board of Vietnam Securities Investment Fund. Vietjet has a young fleet and operates more than 50 routes Vietjet s fleet is poised to expand rapidly over the next decade. At the beginning of 2013, Vietjet shocked the domestic and foreign aviation markets when it signed a contract for 99 aircraft with Airbus, worth up to USD 9.1 billion with the aircraft to be delivered over the period The first aircraft under this contract was handed over at the end November As of H1 2016, Vietjet had a total fleet of 38 aircraft with an average age of about 3.3 years, which is very young compared to 5.3 years for Vietnam Airlines (normally an aircraft can operate up to 25 years). According to the company s plan, there will be 53 new Airbus aircraft and 4 Boeing aircraft added from H22016 to the end of 2019, bringing the total fleet size to 78 aircraft (17 leased aircraft will also be retired over the same period). This will still leave another 49 Airbus aircraft and 96 Boeing aircraft to be delivered between 2020 and 2023 but the delivery schedule for these remaining aircraft is not known at this point. In May 2016, VietJet placed a firm order of 100 Boeing 737 MAX 200 jets worth USD 11.3 billion at list prices with Boeing aircraft manufacturer, making it one of Southeast Asia's fastest-growing low-cost carriers in terms of fleet capacity. The first four Boeing aircrafts are expected to be delivered by 2019, with the remaining 96 aircraft to be delivered by the end of 2023; the exact delivery schedule, post 2019 is not known. On September 6, 2016, Vietjet signed another USD 2.39 billion order for 20 more A321 planes, which will be delivered from 2017 through In summary, Vietjet is expected to take delivery of 57 new aircraft between June 30, 2016 and the end of 2019 and retire 17 aircraft over the same period, taking its total fleet to 78 aircraft. Figure 40: Vietjet s fleet as of June 30, 2016 Aircraft type Number of aircraft Capacity (pax) Note Airbus A Y180 Vietjet-Air only owns Airbus A321 5 Y230 1 A320 plane, all Total 38 others are operationally leased. Source: Vietjet, VCSC research Figure 41: The fleet of Jetstar Pacific, the main LCC competitor of Vietjet, as of March 10, 2016 Jetstar Pacific Aircraft In service In storage On order* Airbus A Airbus A Total See important disclosure at the end of this document VCSC<GO> February 24,

28 Source: CAPA Fleet database Vietjet (as of June ) Aircraft In service In storage On order* Airbus A Airbus A Airbus A320 neos Airbus A321 neos Max 100 Total Note* orders include commitments for new aircraft from leasing companies Vietjet s network growth thus far has been mostly driven by the addition of new domestic routes. While Vietjet has added several international flights since launching international services in 2013, domestic expansion has continued to account for an overwhelming majority of its growth. Total passenger numbers rocketed from 5.6 million in 2014 to touch 9.3 million in 2015 but 8.2 million of the 2015 passenger traffic was contributed by domestic routes. According to Vietjet, the company currently operates 36 domestic and 17 international routes. According to statistics from CAPA, in April 2016 the Ho Chi Minh City Hanoi route was the highest volume route of Vietjet, accounting for 23% of domestic seats and 21% of total seats. Figure 42: Aircraft delivery schedule A320ceo Airbus A321ceo aircraft to be A320neo delivered A321neo Max Total Source: Vietjet Figure 43: Vietjet s domestic routes ranked by seat capacity (April 11 April 17, 2016) Rank Origin Destination 1 SGN 2 SGN 3 HAN 4 SGN 5 SGN 6 SGN 7 SGN 8 HAN 9 SGN 10 SGN 11 SGN 12 SGN 13 SGN Ho Chi Minh City Tan Son Nhat Airport Ho Chi Minh City Tan Son Nhat Airport Hanoi Noi Bai Airport Ho Chi Minh City Tan Son Nhat Airport Ho Chi Minh City Tan Son Nhat Airport Ho Chi Minh City Tan Son Nhat Airport Ho Chi Minh City Tan Son Nhat Airport Hanoi Noi Bai Airport Ho Chi Minh City Tan Son Nhat Airport Ho Chi Minh City Tan Son Nhat Airport Ho Chi Minh City Tan Son Nhat Airport Ho Chi Minh City Tan Son Nhat Airport Ho Chi Minh City Tan Son Nhat Airport HAN Hanoi Noi Bai Airport Weekly seats Annual growth 59,856 11% DAD Da Nang Airport 32,760 49% DAD Da Nang Airport 18,000 0% HPH HUI Hai Phong Cat Bi Airport Hue Phu Bai Airport 17,100 70% 12,600 25% VII Vinh City Airport 12,600 67% PQC CXR CXR THD VCL UIH DLI Phu Quoc International Airport Nha Trang Cam Ranh Airport Nha Trang Cam Ranh Airport Thanh Hoa Airport Chu Lai International Airport Qui Nhon Phu Cat Airport Da Lat Lien Khuong Airport 12,600 67% 12, % 12, % 8,232 63% 6,480 n/a 5, % 5, % See important disclosure at the end of this document VCSC<GO> February 24,

29 14 HAN 15 SGN 16 HAN 17 HAN Hanoi Noi Bai Airport Ho Chi Minh City Tan Son Nhat Airport Hanoi Noi Bai Airport Hanoi Noi Bai Airport PQC Phu Quoc International Airport 5, % PXU Pleiku Airport 5,040 n/a DLI BMV 18 DAD Da Nang Airport HPH Da Lat Lien Khuong Airport Buon Ma Thuot Airport Hai Phong Cat Bi Airport 5, % 3,960 57% 2,520 n/a 19 DAD Da Nang Airport VCA Can Tho Airport 2,520 75% 20 VII Vinh City Airport BMV 21 VII Vinh City Airport DLI 22 SGN 23 SGN 24 HAN 25 SGN 26 HAN 27 HAN 28 HAN 29 HPH 30 HPH Ho Chi Minh City Tan Son Nhat Airport Ho Chi Minh City Tan Son Nhat Airport Hanoi Noi Bai Airport Ho Chi Minh City Tan Son Nhat Airport Hanoi Noi Bai Airport Hanoi Noi Bai Airport Hanoi Noi Bai Airport Hai Phong Cat Bi Airport Hai Phong Cat Bi Airport Buon Ma Thuot Airport Da Lat Lien Khuong Airport 2,520 n/a 2,520 75% TBB Tuy Hoa Airport 2,520 n/a BMV UIH Buon Ma Thuot Airport Qui Nhon Phu Cat Airport 2,520 0% 2,520 n/a VDH Dong Hoi Airport 2,520 n/a VCA Can Tho Airport 2,520 0% PXU Pleiku Airport 2,520 n/a VCL CXR Chu Lai International Airport Nha Trang Cam Ranh Airport 2,520 n/a 1,800 n/a PXU Pleiku Airport 1,440 n/a 31 VII Vinh City Airport PXU Pleiku Airport 1,080 n/a Source: CAPA-Centre for Aviation & OAG Vvvvvvvvvvvvvvvvvvvvvvvvvvvvvvvvvvvvvv Figure 44: Vietjet s international routes ranked by seat capacity (April 11 April 17, 2016) Rank Origin Destination 1 SGN Ho Chi Minh City Tan Son Nhat Airport Ho Chi Minh City 2 SGN Tan Son Nhat Airport Ho Chi Minh City 3 SGN Tan Son Nhat Airport 4 HAN Hanoi Noi Bai Airport Ho Chi Minh City 5 SGN Tan Son Nhat Airport 6 HAN Hanoi Noi Bai Airport Ho Chi Minh City 7 SGN Tan Son Nhat Airport Source: CAPA-Centre for Aviation & OAG SIN BKK ICN ICN TPE BKK RGN Singapore Changi Airport Bangkok Suvarnabhumi Airport Seoul Incheon International Airport Seoul Incheon International Airport Taipei Taoyuan International Airport Bangkok Suvarnabhumi Airport Yangon Mingaladon Airport Weakly seats Annual growth 5, % 5,040 0% 2,520 n/a 2,520 0% 2,520 40% 2,520 0% 1,800 n/a See important disclosure at the end of this document VCSC<GO> February 24,

30 Vietjet s growth strategy - domestic market the key growth engine for the next two to three years Maintaining cost-competitiveness a key priority Fleet efficiency, route network optimization and marketing / distribution efficiency are the three main cost control levers at management s disposal. Fleet efficiency: Vietjet owns relatively new aircraft of a single type. About 87% of its fleet are Airbus A320 aircraft as of June 30, 2016, (33 A320 and 5 A321), which helps to reduce training and maintenance cost and complexity. Secondly, its cost saving abilities are enhanced by the use of a younger fleet, which is more fuel efficient. In fact, the average age of Vietjet s aircraft fleet was only 3.3 years as of H1 2016, which is relatively low compared to the global LCC average. Third, 73 of the total 102 new Airbus aircraft on order are A320 Neo and A321 Neo aircraft which are 15% more fuel efficient than the existing fleet. Furthermore, the 100 latest generation 737-max- 200 jets on order with Boeing are also expected to improve fuel efficiency. However, the inclusion of new models of aircraft, sourced from two different manufacturers will certainly add some complexity to operations, particularly in terms of maintenance, repair and overhauls. Figure 45: Average fleet age (1) years Vietjet Air Indigo Thai AirAsia Wizz Air Cebu Pacific Air Asia Ruanair Easyjet Source: SAP independent report, Vietjet (1) As of calendar year 2014, except for Indigo (as of Mar 31, 2015), Wizz Air (as of Mar 31, 2015), Ryanair (as of Mar 31, 2015), easy Jet (as of Sep 30, 2015) and Vietjet (as of H1 2016) Network optimization: Vietjet s strategy in the domestic market is to add more flights on underserved and non-served short haul routes (see figure 51 below). The destinations are usually Tsmaller airports which are less congested than the major hubs and, therefore help reduce aircraft turnaround times and delays, helping to boost aircraft block hours. That being said, shorter routes also come with a greater frequency of take-offs and landings which can adversely impact aircraft block hours or utilization and so it is critical to achieve the correct balance. See important disclosure at the end of this document VCSC<GO> February 24,

31 Figure 46: Industry leading aircraft utilization (block hours) Thai AirAsia easyjet Indigo Ryanair Air Asia Ceby Pacific Wizz Air Vietjet Air Source: Other companies statistics as of FY2014 based on SAP independent industry report, Vietjet data as of December 2015 Marketing, distribution and labor costs: Since Vietjet offers lower fares, we believe it requires less marketing effort to sell tickets. Most of the tickets are sold directly through the internet which saves commission costs on sales through travel agents. Vietjet also has lower labor costs compared to its regional peers due to fewer employees per aircraft and low unit labor costs in Vietnam vs other countries in the region. Figure 47: Number of bookings by distribution channel 80.0% 70.0% 65.7% 67.9% 65.4% 60.0% 50.0% 40.0% 30.0% 26.6% 24.2% 22.6% 20.0% 10.0% 9.9% 5.7% 6.3% 2.0% 1.5% 2.1% 0.0% Vietjet website Travel agencies (Web-based) Booking office (Web- based) Others (Global distribution system, call center, retailers) Source: Vietjet See important disclosure at the end of this document VCSC<GO> February 24,

32 Figure 48: Among the lowest unit labor costs (USD cents/ ASK) Vietjet Air Wizz Air Cebu Pacific Ryanair Indigo Thai AirAsia 0.59 AirAsia 0.93 EasyJet Source: Other companies as of FY2014 based on SAP independent industry report, Vietjet as of December 2015 Figure 49: Among the lowest unit sales and marketing cost (USD cents/ ASK) Figure 50: The lowest airport fees (USD cents/ ASK) Source: As of FY2014 based on SAP independent industry report, Vietjet s statistics as of December 2015 The reason for below average airport fees enjoyed by Vietjet is mainly due to the government subsidy for domestic airlines via lower domestic airport fees. According to ACV, currently take-off and landing fee for domestic terminals are only equal to 34% of international terminals, which is fairly low compared to the level of 40%-60% of regional domestic terminals. Similarly, the airport service fee of domestic terminals is only equal to 12%-15% of that of international terminals, which is very low compared the level of 40-60% of regional domestic terminals (source: ACV). In July 2016, ACV did propose that the Ministry of transport (MOT) raise the airport service fee by 33% and make take-off landing fees at domestic terminals equal to 50% of those of international terminals starting January 1, 2017 to support its investment in aviation infrastructure. Up to now, there has been no official feedback from MOT regarding a fee increase. Though the Ministry of Transport is still cautious about raising airport fees, it is worth pointing out that any such increase could compromise gross margins or even passenger volumes in case Vietjet choses to pass through some of this cost escalation to its customers. See important disclosure at the end of this document VCSC<GO> February 24,

33 Figure 51: Vietjet s CASK ex-fuel (USD cents/ask) is among the lowest, globally Source: SAP independent industry report, as of FY 2014 for peers Vietjet will continue to ride the boom in domestic air travel demand over the medium-term even though its market share has likely levelled-off By the end of 2015, according to CAPA, Vietnam Airlines accounted for 47.1% of domestic market share, dramatically down from 56.0% in 2014, whereas the market share of Vietjet jumped to 37.1% from just 29.6% in Since its inception in 2011, Vietjet has transported more than 25 million passengers as of June 2016, scripting a fairy tale in the Vietnam aviation industry. Domestic passenger air transport in 2015 grew by 23.3%, with Vietjet contributing more than 75% of this growth. Figure 52: Domestic air passengers transported (million) million people Vietjet Air Vietnam ex Vietjet Vietnam Source: Vietjet See important disclosure at the end of this document VCSC<GO> February 24,

34 Figure 53: Domestic market share % (by passengers transported) 80% 70% 60% 50% 40% 30% 42.50% 41.40% 20% 10% 0% H Vietnam Airlines Vietjet Air Jetstar Pacific VASCO Air Mekong Source: Vietjet, SAP independent industry report, CAAV Since its inception, Vietjet s strategy in the domestic market has been to add more flights on underserved routes, open entirely new routes and acquire first-time flyers. These strategies have helped drive supercharged growth so far. In coming years, management has emphasized that Vietjet will continue to focus on opening short and medium haul domestic routes connecting major population centers originating from its four key hubs, which are Tan Son Nhat international airport (HCMC), Noi Bai international airport (Ha Noi), Da Nang international airport (Da Nang) and Cam Ranh international airport (Nha Trang). Furthermore, Vietjet has just opened a new hub in Hai Phong in order to catch the expected wave in air travel demand to and from this city due to its booming economy which is benefiting from its privileged position in the Northern economic triangle as well as its proximity to Halong Bay, among the most famous tourist destinations in Vietnam. Figure 54: Vietjet s domestic routes as of May 2016 Figure 55: Number of domestic routes* 2019E Source: Vietjet *Note: the company operates 36 domestic routes as of June 2016 See important disclosure at the end of this document VCSC<GO> February 24,

35 We believe the inclusion of Hai Phong as a hub is a wise strategic move With a population of over two million people, with huge potential for tourism and economic activity, the demand for air travel to and from Hai Phong city has risen in recent years. According to Vietnam Aviation Department, in 2015 the output through Cat Bi Airport reached 1.3 million passengers and 4.3 thousand tons of cargo throughput, up 14% and 30%, respectively from Since May 13, 2016, when the runway system and new airport terminal were put into operation, several new domestic and international routes have been opened, including Hai Phong Phu Quoc; Hai Phong - Da Lat; Hai Phong - Can Tho; Hai Phong Vinh; Hai Phong- Cam Ranh; Hai Phong- Buon Me Thuot, Hai Phong - Pleiku along with a number of international flights to China, Japan, Korea, Singapore and Thailand. We applaud Vietjet management s decision to choose Hai Phong city as Vietjet s fifth hub for the following reasons: The city has a strong economic outlook: Strong FDI inflow to the North, especially Hai Phong, will further boost the cargo throughput of Cat Bi airport. Secondly, according to GSO, strong GDP growth of up to 8.67% on average between 2010 and 2015, which helped the GDP per capita touch USD 2,857 by 2015, means that Hai Phong s GDP per capita is now 50% higher than the country s average. Needless to say, the higher GDP per capita, the more demand for air travel. According to Vietnam Aviation department, by 2020 passenger throughput at the Cat Bi international terminal will reach 2.3 million and cargo throughput will touch 11 thousand tonnes. Hai Phong is the focal point for both import and export activities in the North due to its location favoring manufacturing and transporting activities. The city is only about 200km away from the Vietnam-China border, meaning that manufacturers in Hai Phong have easier logistical access to the huge Chinese market for finished goods. Obviously, the demand for air cargo transport is likely to boom in coming years as big high-tech manufacturers such as Samsung, LG or Microsoft need to transport their high value finished products by air. According to ACV, along with Noi Bai airport, Cat Bi airport is the only international airport in the North after the commencement of its international terminal in May 12, 2016 and this will help Hai Phong to absorb more air cargo volume being destined for export markets from other industrial cities in the North such as Hai Duong or Hung Yen. Moreover, the Vietnamese government also plans to develop Hai Phong as a regional manufacturing and logistics hub. Figure 56: Hai Phong s trade connectivity, GDP, FDI and export numbers in 2014 Source: CBRE Vietnam, Hai Phong statistics office, Hai Phong statistical yearbook 2014 See important disclosure at the end of this document VCSC<GO> February 24,

36 Figure 57: The North has been increasing its share of national FDI in recent years 120% 100% 80% 60% 40% 20% 0% 61% 53% 47% 39% 47% 53% North South and Central Source: GSO, VCSC Figure 58: One of the top six cities in attracting FDI capital (registered capital in 2015) USD billion Ho Chi Minh Tra Vinh Binh Duong Dong Nai Ha Noi Hai Phong Tay Ninh Quang Ninh Ba Ria - Long An Vung Tau Source: GSO The inclusion of Cat Bi airport in Hai Phong as its fifth hub is essential for Vietjet to avoid ceding market share to Vietnam Airlines and Jetstar Pacific. According to CAAV, currently, three domestic airlines including Vietjet, Vietnam Airlines and Jetstar Pacific are operating nine routes departing from Cat Bi airport in Hai Phong, including five domestic routes to Ho Chi Minh city, Da Nang, Nha Trang, Pleiku, Buon Me Thuot and four international routes to China, Laos, Thailand and Singapore. Hai Phong also has the potential to be connected to Can Tho, Quy Nhon, Tuy Hoa, Hue, Vinh, Dien Bien and five more countries Hong Kong, Macao, Japan, Korea and Malaysia. As a result, we believe Vietjet s competitors are sure to ramp up their presence along routes connecting Hai Phong, leaving it at a disadvantage if it does not act fast. In the next two to three years, the RPK growth in the domestic market will mainly be driven by the increase in frequency on existing routes, rather than opening of new routes. We believe strong economic growth between certain cities creates the opportunity to increase frequency on certain existing routes and we believe that this will be the cornerstone of the company s domestic growth strategy over the medium-term. However, opening new domestic routes stemming from new hub Hai Phong, Da Nang hub or Ha Noi hub is also important for Vietjet to consolidate its hold on the domestic market. We estimate that around 11 new domestic routes could be opened between 2016 and See important disclosure at the end of this document VCSC<GO> February 24,

37 Figure 59: Existing domestic airports in network and potential new airports Airport Location Population (thousands) GDP growth Ca Mau Airport Ca Mau 1,216,4 14% Pleiku Airport Pleiku % Buon Me Thuot Airport Buon Me Thuot % Con Dao Airport Vinh Long 1, % Rach Gia Airport Kien Giang 1, % Tuy Hoa Airport Phu Yen % Can Tho International Airport Can Tho 1, % Phu Cat Airport Binh Dinh 1, % Chu Lai Airport Quang Nam 1, % Phu Quoc International Airport Kien Giang 1, % Cat Bi Airport Hai Phong 1, % Dien Bien Airport Dien Bien % Tan Son Nhat international Airport Ho Chi Minh city 7, % Da Nang International Airport Da Nang city 1, % Noi Bai International Airport Ha Noi city 7, % Phu Bai International Airport Thua Thien Hue 1, % Tho Xuan Airport Thanh Hoa 3, % Lien Khuong Airport Lam Dong 1, % Cam Ranh International Airport Khanh Hoa 1, % Vinh Airport Vinh 2, % Dong Hoi Airport Quang Binh % Source: VCSC, Note: All destinations in the red are currently covered by Vietjet See important disclosure at the end of this document VCSC<GO> February 24,

38 Figure 60: Expected new routes from Hai Phong hub Figure 61: Expected new routes from Da Nang hub Source: VCSC forecasts, Note: Red lines present VCSC s expected new routes Source: VCSC forecasts, Note: Red lines present VCSC s expected new routes See important disclosure at the end of this document VCSC<GO> February 24,

39 Figure 62: Expected new routes from Ha Noi hub Source: VCSC forecasts, Note: Red lines present VCSC s expected new routes Figure 63: Estimated total domestic RPK breakdown million 20,000 RPK from existing domestic routes RPK from opening new domestic routes within the year 15,000 10,000 5, F 2017F Source: VCSC forecasts Note: new routes = routes which have been opened within the year in which they are being reported International route expansion the long term growth engine Vietjet first spread its wings beyond Vietnam on February 10, 2013 when it opened a new route to Bangkok, Thailand. Vietjet s international network expanded to 11 scheduled routes by the end of 2015 See important disclosure at the end of this document VCSC<GO> February 24,

40 and 17 on June 30, 2016 with plans to increase the number of international routes to 36 by the end of For three to five-year outlook, with an Airbus family fleet with maximum range of about 6,100km and maximum cruising speed of about 827 km/h per aircraft, Vietjet will mainly serve international destinations that lie within the Asia-Pacific region. Given there are only potential domestic routes which can be added, we estimate that Vietjet needs to add about 40 international routes between 2016 and 2019 to absorb additional the 57 aircraft being delivered during the same period. Figure 57: Vietjet s international routes as of May 2016 Figure 58: Number of international routes at the end of each year* 2018E E Source: Vietjet, Source: Vietjet Note*: the company operates 17 international routes as of June We believe that despite Vietjet s resounding success in gaining domestic market share, its quest for continued growth will bring it in direct competition with established regional LCC incumbents. Vietjet lacks the economies of scale and operating expertise of established players like Air Asia and Tiger Airways. However, the international strategy of Vietjet is to open new flights to regional destinations from domestic destinations such as Nha Trang, Ho Chi Minh City, Da Nang and Ha Noi where it already has a stronghold. According to Vietjet, Tan Son Nhat international Airport (HCMC) is well-positioned to be a regional aviation hub in Asia, given that around 50% of the world s population lives within 2,500 nautical miles of HCMC. The company is also in discussions with regional airlines regarding interconnecting arrangements to expand its presence further into the international market. We believe the opening of new international routes will bring two advantages for Vietjet: Longer international routes will boost aircraft utilization: Normally, domestic flights are shorter and do not operate during the night, both of which compromise aircraft block hours. As Vietjet continues to expand its international route network to further flung destinations such as Incheon (Korea) and Tiajiin (China) with travel time of four to five hours, passengers will be willing to travel during the night time. Also, the aircraft will spend a greater amount of time in the air for each takeoff and landing. Both will boost block hours. International routes will support growth once growth on domestic routes levels-off: Vietnam is still relatively underserved by international airlines and, with its growing economic and tourism profile within the region, there is a golden opportunity for domestic leaders such as Vietjet to bridge this connectivity gap. Vietjet expects to open Ho Chi Minh - Kaohsiung, Ha Noi- Taipei, Ha Noi - Busan and Hai Phong Seoul H See important disclosure at the end of this document VCSC<GO> February 24,

41 Though opening new international routes is inevitable for Vietjet to sustain long term growth, the competition in the international market will be quite fierce and will put Vietjet at a scale disadvantage versus competitors which have much larger fleets. Figure 64: Vietjet s fleet vs those of regional LCCs Vietjet* Cebu Pacific ATR 42/72 8 Wizz Air Air Asia Indigo Easy Jet Airbus A Airbus A Airbus A Airbus A330 6 Ryan Air Boeing Total Source: Vietjet, websites of other airlines, Note*: Vietjet s fleet as of 30 June 2016, while other airlines s fleet as of 31 Dec The ambitious fleet expansion plan might pressure average base fares and load factors in the medium term, but GPM will still expand in the face of continued oil price weakness and growing economies of scale Even after assuming that half of the incremental fleet capacity over the next four years can be used to increase frequency on existing routes, we estimate that over 50 new routes will need to be added over the period We estimate that to maintain its current average utilization of block hours per aircraft per day, the company would need to add new routes through 2019 to deploy the 53 new Airbus aircraft and four Boeing aircraft it will take delivery of over the period between However, given that many of the existing routes are new or underpenetrated, there is scope for management to increase frequency on these routes and hence we assume that around half of the increase in fleet capacity can be absorbed by existing routes. This will still imply that over 50 new routes need to be added which might pressure either passenger load factors or aircraft utilization in the interim as newly-added routes are gradually ramped-up. From 2019 to 2023, the company expects to add a further 96 Boeing aircraft and 49 Airbus aircraft which will continue to keep fleet utilization under pressure. The pressure to add around 12 to 13 new routes each year might also pressure fares. To boost load factors quickly, management might use aggressive promotional pricing campaigns as was the case with past new route openings. During 2014 and 2015, the airline opened 14 new domestic routes and nine international routes, with tickets priced at low base fares to attract first-time and low-income flyers. As a result of the promotion program to support the aggressive route expansion plans the base fares dropped by an average of 2% YoY in 2014 and 17% in See important disclosure at the end of this document VCSC<GO> February 24,

42 Figure 65: Domestic and international RPK yield Figure 66: Average total base fare since 2013 VND revenue per pax per km VND 1, , ,400.0 Domestic RPK yield International RPK yield 1,200,000 1,000,000-2% -17% 1, ,000 1, , , , Source: Vietjet, VCSC Source: Vietjet, VCSC However, continued weakness in oil prices and increasing economies of scale will support margins, despite the expected pressure on load factors and fleet utilization. We expect Brent crude prices to average USD 45 per barrel in 2016 and rise to USD 55 per barrel in 2017 before stabilizing at USD 65 per barrel from 2018 onward. However, an oil price of USD 55 to USD 65 per barrel is still much lower than the average level of USD 109 per barrel seen in Secondly, fixed or semi-fixed overhead costs such as maintenance and ground staff wage costs will fall on a unit basis as ASK rises in line with fleet expansion. We see the RASK minus CASK spread widening from USD 0.44 in 2015 to USD 0.79 by 2017, based on these rising scale economies and, despite the rise in oil prices and pressure on load factors and fleet utilization over the period. Figure 67: Fuel cost per ASK dropped since 2013 on the back of the plunge in oil prices US cents Source: Vietjet, VCSC See important disclosure at the end of this document VCSC<GO> February 24,

43 Figure 68: RASK minus CASK Figure 69: Gross profit margin (excluding air craft sales) US cents % 14.0% 12.0% 10.0% 8.0% 7.5% 11.9% 14.4% % 4.0% 2.0% % Source: Vietjet, VCSC Source: Vietjet, VCSCs Even though average base fares per RPK will likely fall over the medium-term due to the pressure to open new routes to absorb the new additions to the fleet, Vietjet might be able to partially offset this through its differentiated pricing strategy. Currently, the airline offers a three-tiered service hierarchy to cater to different customer segments Skyboss, Economy and Promotion. It is conceivable that management will reduce base fairs to boost volumes in the Economy and Promotion segments which have a high price elasticity of demand while retaining premium fares for Skyboss customers who are less price sensitive. This segment could therefore provide some degree of buffer against price declines in the other two segments. That being said, a key challenge for management will be maintaining brand differentiation between its LCC from its premium offerings. Premium travellers might not want to fly an airline which is associated with budget travel simply because of perception or prestige considerations. Figure 70: Differentiated products and fare structures Fare types Features - Reserved seats at front of plane, free in-flight meals. - Last-minute flight changes. - VIP lounge access. - Priority boarding and seating. Economy Promotion Source: Vietjet - Basic flight package; customers who have purchased economy tickets can purchase ancillary services for a better flight experience. - Promotion fares account for 20% of any particular flight, and are generally available only through Vietjet s internet distribution channel. Vietjet s decision to use an aircraft sale and leaseback model to grow its fleet can generate significant upfront cash flow Airlines typically acquire aircraft at a steeper discount from manufacturers than third parties, so when carriers sell these units, it is likely to be at a premium. Aircraft prices would have increased since the See important disclosure at the end of this document VCSC<GO> February 24,

44 time of the orders, further contributing to the gain realised on each sale. Also influencing the profit is the size of the aircraft order and the credit of the airline. This extra cash can be very useful, particularly if the airline is just starting operations, in that they will have more capital to increase the fleet size, open new routes or build more private air terminals. According to Flightglobal, India's IndiGo has been the most active user of sale-and-leaseback financing among low-cost carriers. A year before starting operations in 2006, IndiGo placed a firm order for 100 Airbus A320s, which were likely acquired at a discount given the size of the deal. It is not uncommon for IndiGo to make as much as USD4-5 million per aircraft under each sale-and-leaseback transaction. This Indian airline, more so than any other carriers, has been extremely transparent in its efforts to focus primarily on sale-and-leaseback financing and, as a result, has created a profit stream for itself just through buying and selling of aircraft, while it builds its fleet. Virgin Australia is the next largest user of this model, followed by Lion Air, SpiceJet and Norwegian. By the end of 2016, Vietjet s aircraft fleet is projected to reach 42, with all 11 newly delivered aircraft in 2016 expected to go through sale-and-lease back (SLB) transactions with global aircraft lessors such as Avolon, BH Air or Avation. Under a sale-leaseback arrangement, Vietjet will sell the aircraft to the lessor, who then immediately leases the aircraft back to Vietjet. Why has Vietjet chosen a sale-and-leaseback arrangement? We believe that Vietjet management has likely opted for the sale-and-lease back model to grow its fleet because: Sale-leaseback can be a useful way to unlock the cash invested in aircraft for other investments. Even if there is no pressing need for funds, a sale-lease-back allows Vietjet to use the capital tied up in the aircrafts in a more productive fashion to grow its business. The risk of resale can be shifted via a sale-lease-back arrangement. Since Vietjet is no longer the aircraft owner under a SLB agreement, the company will not bear the risk of trying to liquidate what might become an obsolete asset. However, the lease also can be written to give the lessee an option to purchase the aircraft at the end of the lease, should that be desired. The balance sheet will be improved and less asset intensive. Under the SLB arrangement, Vietjet will not have to account for the lease obligation as debt on the balance sheet, thereby reducing its leverage and improving asset return ratios. As with most operating leases, this represents a form of offbalance sheet financing for the lessee. See important disclosure at the end of this document VCSC<GO> February 24,

45 Figure 71: Sale and lease back model Source: VCSC With the delivery of 57 new aircraft over the H period, the expected gain from aircraft sales to the lessors can generate significant cash flow for the company which can then be re-invested into business expansion. We estimate that Vietjet can realize a USD2 million gain on the sale of each aircraft to the lessor (possibly more), resulting in a potential USD114 million of additional earnings over the period. Ancillary revenue a key growth and profitability lever over the medium term Between 2013 and 2015, Vietjet recorded an impressive 99.3% CAGR in ancillary revenue, supported by a good combination of a wide range of value added services, cargo, and in-flight advertising services. However, Vietjet s ancillary revenue per passenger carried was only USD as of 2015 still substantially below regional and global averages, even after growing at a CAGR of 20.6% from 2013 to Also, Vietjet s ancillary revenues as a percentage of total revenue was around 22.3% in 2015 and 22.6% in H This suggests that there is some scope for increasing ancillary revenues per passenger carried for a few years to come. See important disclosure at the end of this document VCSC<GO> February 24,

46 Figure 72: Ancillary revenue from VND billion 3,000 2,500 2,475 2,000 1,500 1,193 1, Source: Vietjet Figure 73: Ancillary revenue per passenger Figure 74: Vietjet s ancillary revenue per passenger is still very low compared to peers, implying lots of room to grow USD Source: Vietjet Figure 75: Ancillary revenue % of total adjusted revenue Source: SAP independent industry report, IdeaWorks Figure 76: Top 10 airlines globally by ancillary revenue% of total revenue in % 22.3% 20.0% 15.0% 16.4% 17.2% 10.0% 5.0% 0.0% Source: Vietjet Source: SAP independent industry report, IdeaWorks See important disclosure at the end of this document VCSC<GO> February 24,

47 Ancillary Revenue Value added services Description Excess baggage fee: Passengers can pay for an increase in baggage allowance online or at check in. Flight change fees, services charges, fees incurred at the airport. Seat selection fee: passengers can select seats online. Booking charges: booking through Vietjet s call center, sales offices, airport sales counter and group desks are levied a perpassenger booking fee. In-flight services: Vietjet offers amenities such as meals and drinks separately and also has in-flight souvenir, merchandise and duty-free sales. Sales commission model Passengers can purchase hotels, travel insurance, car rentals and other consumer goods when booking online. Advertising services Company sells advertising services to third parties on Vietjet s inflight magazine, space inside and outside of Vietjet planes and website. Source: Vietjet For management, growing the ancillary revenue stream is a key priority. The company s strategies to boost this high-margin revenue stream include: Focus on ancillary revenue sales, particularly pre-flight and on-board purchases. Develop e-commerce solutions to develop tailored product packages, comprising a combination of banking, airline and retail products. Leverage insights and data from e-commerce sales to develop unique, tailored products. Given that Vietnam is still a relatively low income country with most passengers of LCCs belonging to a middle-class income demographic, we remain conservative and expect ancillary revenues per passenger carried to rise to USD15 by Charter flight service a useful strategy for management to test the viability of new international routes The number of charter flights operated by Vietjet jumped dramatically from 30 flights in 2013 to 2,376 flights in 2015, translating to a 731% revenue CAGR from 2013 to Though normally a charter flight is paid for by travel companies and are offered at lower prices than a scheduled flight, it still brings two advantages for Vietjet, including: (1) Helps the company to maintain revenue during the low season, normally at the end of Q3, when passenger traffic is low, and (2) service as a useful guide for management to test the viability of new international routes. Revenue from charter flights jumped by 75.4% y-o-y in H with the strong growth being attributed by management to the strong growth in Chinese tourist arrivals into Vietnam. See important disclosure at the end of this document VCSC<GO> February 24,

48 Figure 77: Charter flight revenue (VND billion) 1,500 1,337 1, Source: Vietjet Given the expected strong growth in demand for inbound tourism to Vietnam in the coming years, there is plenty of room for Vietjet to boost its charter flight business. Figure 78: Historical and forecast international tourist arrival Actual CAGR Country ~2014 CAGR 2010~2014 Forecast CAGR ~2019 Indonesia 5,154 7,003 9, % 7.7% 10,098 12, % Malaysia 12,775 24,577 27, % 2.8% 29,247 36, % Philippines 1,698 3,292 4, % 8.9% 4,935 6, % Singapore 9,818 14,451 17, % 4.3% 18,017 22, % Thailand 10,061 15,936 24, % 11.7% 25,814 31, % Vietnam 1,599 3,990 6, % 11.3% 6,489 8, % Total 42,262 74,433 99, % 7.6% 105, , % Source: Vietnam tourism department Cargo flight service a small but fast growing segment According to Vietjet management, Vietjet manages the cargo services through selling hard blocked space on passenger flights to agents, under which a specific space on new and small routes will be sold to air cargo forwarders at wholesale prices. Figure 79: Cargo transportation sales 600 VND billion According to BMI, the air freight tonnage of Vietnam is expected to grow between 6%-6.5% from 2016 to 2019, driven largely by the inflow of high-tech manufacturing investment particularly into the consumer electronics and machinery sectors. June 2015 saw the approval of the construction of Long Thanh See important disclosure at the end of this document VCSC<GO> February 24,

49 international airport to serve as an aviation hub for both Vietnam and the Southeast Asian region which should further boost air cargo traffic throughput. Figure 80: Vietnam domestic air cargo traffic (freight ton kilometer) from 2000 to 2014 Million ton kilometre Source: Vietnam GSO Figure 81: Vietnam s air freight tonnage Million ton kilometer % 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% F 2017F 2018F 2019F -4.0% Air freight tonnes-km (mn ton km) Air freight tonnes-km % y-o-y Source: BMI 2015 freight report See important disclosure at the end of this document VCSC<GO> February 24,

50 Vietjet s five-year plan Figure 82: Strategy and future plans Plans Details Purpose Expand domestically Increase depth and breadth of network, with focus on route profitability. Strengthen leadership position as a leading domestic carrier Build international network Grow high-volume, short and medium haul route network in Asia, increasing international network from 17 routes to 36 routes by the end of Build franchise model with local partners or join interline agreements with other airlines. Growing international traffic by adding more short and medium haul routes within Asia Expand fleet and maintain a young fleet age Plans to grow its fleet with new, fuel efficient aircraft under the Airbus A320, A321 and A320 neo series. Increasing total fleet size to 78 aircraft. Maintain a young fleet. Optimize capacity, reduce cost per seat and maintain competitive cost advantage Drive ancillary revenue growth Focus on ancillary revenue sales, particularly pre-flight and on board purchases. Use e-commerce platform to develop tailored product packages, comprising a combination of banking, airline and retail products, and create synergies for the whole group. Leverage insights and data from e-commerce sales to develop unique, tailored products. Focus on human resources Enhance training program, implement good corporate culture and foster next generation. Continuously improve quality of training program of Vietjet Training Center and plans to implement Vietjet Aviation Academy project as a profit center. Increase proportion of high margin ancillary services revenue stream in line with other leading LCCs in the world Build up international and professional working environment, and encourage creativity and passion from the staff Focus on cost management and operational efficiency Achieved a 18% cost reduction in total operating cost on per ASK basis in Increase aircraft utilization and actively manage fuel consumption. Effectively manage inventory and labor force, active cost management through partnerships with Airbus, CFM and P&W, starting from Invest in and improve various IT platforms to enhance operational efficiency. Maintain leading position in lowest unit- costs and best-in- class operational efficiency Strengthen the Vietjet brand Establish high brand awareness and a reputation for excellent customer service. Build on strong risk and safety management systems and reputation. Customer loyalty program to be launched in 2016 to further increase customer retention. Diversify sources of capital Finance aircraft with a mix of sources. Access the international capital markets and build relationships with international banks. Grow a loyal customer base Diversify funding platform See important disclosure at the end of this document VCSC<GO> February 24,

51 Invest in domestic airport passenger terminal Souce: Vietjet Partner with local investors to secure rights to operate terminals in key domestic hubs. Invest not more than 10% of the company s balance sheet equity. Reduce operational costs, improve route scheduling and enhance passenger service 2015 Recap CASK fell dramatically on the back of steep drop of oil prices In 2015, the company posted an audited VND11.08 trillion (USD506 million) in revenue sales (+82% YoY) and VND772 billion (USD35 million) in net income (+135% YoY), also adjusted for aircraft sales, both excluding the impact of aircraft sales. If profit from aircraft sales is also included, the net profit to owners touched VND1.18 trillion (+227% YoY), equivalent to a 2015 EPS of VND8,140 per share (Note: the number of shares outstanding at the end of 2015 was 145 million). Vietjet achieved stellar growth in adjusted revenue (excluding aircraft sales) during 2015 on the back of impressive increases across its three core revenue streams: passenger ticket sales, ancillary sales and Charter flights, as follows: Passenger revenue: In 2015, Vietjet carried about 9.3 million international and domestic passengers, up by 66.1% compared to 2014 and achieved an average load factor of 88.1%, which is very high relative to industry standards. We attribute this impressive growth to: (1) The addition of 11 aircraft to the company s fleet during the year, and (2) A strong increase in seat capacity on underserved domestic routes as well as the addition of new routes. Domestic routes grew from 19 as of year-end 2014 to 28 as of December 31, 2015, and (3) International scheduled routes also grew from six as of year-end 2014 to 11 as of December 31, Figure 83: Domestic route network as of June 30, 2016 Date of commencement Route December 24, 2011 Ho Chi Minh City Hanoi Ho Chi Minh City April 27, 2012 Ho Chi Minh City Da Nang Ho Chi Minh City June 01, 2013 Hanoi Nha Trang Hanoi 24 May 24, 2012 Hanoi Da Nang Hanoi August 03, 2012 Ho Chi Minh City Nha Trang Ho Chi Minh City October 01, 2012 Ho Chi Minh City Hai Phong Ho Chi Minh City November 15, 2012 Ho Chi Minh City Vinh Ho Chi Minh City November 22, 2012 Ho Chi Minh City Hue Ho Chi Minh City December 7, 2012 Hanoi Da Lat Hanoi December 12, 2012 Ho Chi Minh City Phu Quoc Ho Chi Minh City May 20, 2012 Ho Chi Minh City Buon Me Ho Chi Minh City October 15, 2013 Hanoi Buon Me Thuot Hanoi November 01, 2013 Ho Chi Minh City Quy Nhon Ho Chi Minh City December 23, 2013 Vinh Dat Lat Vinh March 22, 2014 Ho Chi Minh City Da Lat Ho Chi Minh City May 28, 2014 Hanoi Phu Quoc Hanoi July 22, 2014 Da Nang Can Tho Da Nang October 17, 2014 Hanoi Can Tho Hanoi November 25, 2014 Ho Chi Minh City Thanh Hoa Ho Chi Minh City April 26, 2015 Hanoi Quy Nhon Hanoi April 29, 2015 Ho Chi Minh City Dong Hoi Ho Chi Minh City May 27, 2015 Ho Chi Minh City Chu Lai Ho Chi Minh City June 01, 2015 Da Nang Hai Phong Da Nang October 01, 2015 Ho Chi Minh City Pleiku Ho Chi Minh City November 18, 2015 Hanoi Chu Lai Hanoi November 18, 2015 Hai Phong Nha Trang Hai Phong See important disclosure at the end of this document VCSC<GO> February 24,

52 November 19, 2015 December 16, 2015 January 15, 2016 January 16, 2016 January 20, 2016 May 20, 2016 May 20, 2016 May 20, 2016 June 02, 2016 June 06, 2016 Source: Vietjet Vinh Buon Me Thuot Vinh Hanoi Pleiku Hanoi Hai Phong Pleiku Hai Phong Vinh Pleiku Vinh Ho Chi Minh Tuy Hoa- Ho Chi Minh Ha Noi Tuy Hoa Ha Noi Hai Phong Phu Quoc Hai Phong Hai Phong Da Lat Hai Phong Hai Phong Buon Me Thuot Hai Phong Nha Trang Thanh Hoa Nha Trang Figure 84: International route network as of June 30, 2016 Date of commencement February 10, 2013 June 01, 2013 May 23, 2014 July 24, 2014 December 12, 2014 June 22, 2015 July 11, 2015 September 25, 2015 September 27, 2015 October 02, 2015 November 07, 2015 January 18, 2016 January 22, 2016 February 06, 2016 April 10, 2016 June 01, 2016 June 22, 2016 Source: Vietjet Routes Ho Chi Minh City Bangkok Ho Chi Minh City Hanoi Bangkok Hanoi Ho Chi Minh City Singapore Ho Chi Minh City Hanoi Incheon Hanoi Ho Chi Minh City Taipei Ho Chi Minh City Nha Trang Hangzhou Nha Trang Nha Trang Chengdu Nha Trang Nha Trang Tianjin Nha Trang Nha Trang Ningbo Nha Trang Ho Chi Minh City Yangon Ho Chi Minh City Ho Chi Minh City Incheon Ho Chi Minh City Nha Trang Shanghai Nha Trang Nha Trang Chongqing Nha Trang Da Nang Hangzhou Da Nang Da Nang Macau Da Nang Ho Chi Minh City Kuala Lumpur Ho Chi Minh city Ho Chi Minh City Tainan Ho Chi Minh city Figure 85: Vietjet s fleet over the years A A321 3 Retired aircraft Total Source: Vietjet See important disclosure at the end of this document VCSC<GO> February 24,

53 Figure 86: Load factor Figure 87: Aircraft utilization (block hours) 100.0% 95.0% 90.0% 85.0% 80.0% 75.0% 70.0% 65.0% 60.0% 81.4% 83.8% 83.8% 88.6% 88.2% 89.0% 88.6% 88.7% 88.1% Domestic International Overall hours per aircraft per day Source: Vietjet Source: Vietjet Figure 88: Total pax carried 10,000 9,000 1,115 8,000 7,000 6,000 5, ,000 8,198 3, ,160 2,000 1,000 2, Figure 89: Domestic market share 40.0% 37.1% 35.0% 29.6% 30.0% 25.0% 20.2% 20.0% 15.0% 10.0% 5.0% 0.0% Domestic pax carried International pax carried Source: Vietjet Source: Vietjet See important disclosure at the end of this document VCSC<GO> February 24,

54 Figure 90: Vietnam air passenger volume nationwide Source: Vietnam GSO Charter flights increased to 2,376 in 2015, a drastic increase from just 30 flights operated in 2013 when this service first opened. This was driven by the increase in international charter routes from just 12 at the end 2014 to 37 at the end of In 2015, the charter flight segment reached VND1.34 trillion (USD69.9 million) in revenue, rising 225% compared to 2014 and contributing 12% to total revenue adjusted for air craft sales. Ancillary revenue touched VND2.48 trillion (USD113 million) in 2015, increasing by 107.4% compared to 2014 on the back of growth in revenue from flight-related services (in-flight services, booking charges, excess baggage fee). By the end of 2015, the ancillary revenue per passenger reached USD12.14, which was still significantly lower than the regional average of about USD30- USD35 per passenger, implying that there is still a lot of potential for Vietjet to further grow this segment. Figure 91: revenue by segment over the years Figure 92: 2015 adjusted revenue breakdown VND billion 10,000 9, % % 1% 22% 8,000 7,000 6, % 5,000 4, % 3,000 2,000 1, % 77% - Passenger revenue Ancillary revenue Others Passenger revenue Ancillary revenue Others Source: Vietjet Source: Vietjet Note: adjusted revenue excludes revenue from aircraft sales See important disclosure at the end of this document VCSC<GO> February 24,

55 EBITDA margin and net profit margin expanded on the back of the steep drop in oil prices and efficiency gains during 2015 In 2015, oil prices saw a record drop of about 45%. Since fuel cost accounts for 40%-50% of CASKs, the plummeting oil prices helped Vietjet substantially. CASK decreased 18% in comparison to 2014, reaching US4.14 cents by the end of However, base fares fell by 17% in 2015 as Vietjet embarked on an aggressive route expansion strategy. Despite this fall in base fares, which nearly matched the decline in CASK, the spread between RASK and CASK in 2015 rose by 13%, implying that the increase in the RASK minus CASK spread was achieved through better non-fuel cost controls and improved efficiency. Consequently, adjusted gross margins rose by a substantial 250 bps in the year. Figure 93: Adjusted gross margin expansion Figure 94: Brent Crude oil prices 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% 2014 and 2015 margin expansion facilitated by better non-fuel cost controls 7.5% 11.9% 14.4% USD/ barrel Source: Vietjet, Note: these are gross margins adjusted for the sale of aircrafts. Source: Bloomberg Figure 95: CASK has decreased over the years driven largely by falling oil prices Figure 96: RASK minus CASK cents RASK CASK CASK ex fuel Average oil price of 109 USD per barrel Average oil price of 99.4 USD per barrel Average oil price of 53.6 USD per barrel Source: Vietjet Source: Vietjet, VCSCs See important disclosure at the end of this document VCSC<GO> February 24,

56 Figure 97: Vietjet s profitability vs industry average 2015 Net Margin Global 4.6% North America 9.5% Europe 3.5% Asia Pacific 2.9% Middle East 2.3% Latin America -0.9% Africa -2.1% Vietjet 5.9% Source: IATA, Vietjet, VCSC, Note: the net margins are not adjusted for aircraft sales. Figure 98: Vietjet s profitability vs global peers in 2015 (%) Operating margin Net margin Source: IATA, Vietjet, VCSC Note: margins are not adjusted for aircraft sales See important disclosure at the end of this document VCSC<GO> February 24,

57 H recap Stellar growth on the back of rapid fleet expansion H results continued to see impressive growth on the back of rapid fleet expansion. In H1 2016, Vietjet recorded VND 7,402 billion (USD million) (+45% YoY) in revenue ex aircraft sale and VND 1,236 billion (USD 55.4 million) (+65% YoY) in NPATMI. During the first half, the aircraft fleet expanded by 27% compared to Dec 31, 2015 to reach 38 airplanes, including 33 A320 aircrafts and 5 A321 aircrafts. For the month ended 30 June 2016, the Company had 43.1% domestic market share, versus 41.3% market share for Vietnam Airlines, indicating that Vietjet finally overtook Vietnam Airline to become Vietnam s biggest airline in term of domestic passengers carried. Figure 99: Strong improvement in financial performance during H VND billion 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1, % Revenue ex aircraft sale +26% Gross profit ex aircraft sale H H % +65% Operating profit NPATMI Source: Vietjet, VCSC Figure 100: Vietjet market share in H Figure 101: Vietjet s aircraft fleet over the years % % % 10 Vietjet Vietnam Airlines Others H A320 A321 Source: Vietjet, VCSC Source: Vietjet, VCSC Passenger revenue was the key growth engine in H1, while aircraft sale activities continued to be strong. In H1 2016, Total revenue arrived at VND 12,557 billion (USD million) (+41%) due to strong improvement across all key segments except international cargo service. The international cargo service plunged by 65% during H12016, however, this segment is very small and only contributes less than 1% of total revenue of Vietjet. See important disclosure at the end of this document VCSC<GO> February 24,

58 Figure 102: Revenue breakdown by segment REVENUE H H % Change Passenger transport 5, , % + Domestic 4, , % + Internationals % + Charter flights % Ancillary revenue 1, , % + Ancillary fees 1, % + Ancillary in-flight merchandise % + Cargo transportation - domestic routes % + Cargo transportation - international routes % + Advertising income % + Other ancillary revenue % Sales of Aircrafts 5, , % Aircraft Rental 28.1 Others ,172% Total Revenue 12, , % Revenue ex aircraft sale 7, , % Source: Vietjet, VCSCs Passenger revenue (45% of total revenue): witnessed strong growth in both domestic and international segments. Vietjet opened 8 new domestic routes, including: Hai Phong- Pleiku, Vinh - Pleiku, Ho Chi Minh - Tuy Hoa, Ha Noi - Tuy Hoa, Hai Phong - Phu Quoc, Hai Phong - Da Lat, Hai Phong - Buon Me Thuot and Nha Trang - Thanh Hoa with the flight frequency on each route ranging from 3-7 per week. There were also 6 new international routes opened in H1 2016, including Nha Trang - Shanghai, Nha Trang - Chongqing, Da Nang - Handzhou, Da Nang - Ma Cau, Ho Chi Minh - Kuala Lumpur and Ho Chi Minh - Tainan. Despite the rapid expansion during H12016, the company still maintained high load factors across domestic and international routes of more than 80%. Figure 103: H12016 load factor Figure 104: Aircraft utilization (block hours per day) 90.0% hours 88.0% 86.0% 84.0% 88.1% 87.9% 87.3% 87.5% 83.7% % 81.4% % 78.0% H12015 H H12015 H12016 Blended load factor International load factor Domestic load factor Source: Vietjet, VCSCs Source: Vietjet, VCSCs, Note: aircraft utilization or block hours is the time from the moment the aircraft door closes at departure of a revenue flight until the moment the aircraft door opens at the arrival gate following its landing. See important disclosure at the end of this document VCSC<GO> February 24,

59 Figure 105: RASK in H12016 Figure 106: CASK in H12016 US cents H H12016 US cents H12015 H12016 Source: Vietjet, VCSC Source: Vietjet, VCSC Figure 107: CASK ex fuel Figure 108: RASK CASK spread US cents US cents H12015 H H12015 H12016 Source: Vietjet, VCSC Source: Vietjet, VCSC Ancillary revenue (13.3% of total revenue) grew by a stellar 64%. We believe there are 2 main reasons behind this strong rise in ancillary revenue: (1) The low base in the previous year, and (2) the sharp increase in the number of routes operated by Vietjet. In the first half of 2016, there 8 domestic and 6 international routes were put into operation. Aircraft sale activities (41.1% of total revenue) saw a 37% jump compared to H During H1 2016, Vietjet conducted 6 aircraft sale and lease-back transactions with a total value of more than USD 230 million. Blended GPM expanded by 110 bps due to the improvement in aircraft sale GPM, while passenger-related businesses (passenger revenue, ancillary revenue) saw GPM contraction due to the fall in the RASK CASK spread which, in turn, was driven by an increase in non-fuel operating costs and a fall in RASK. The rise in non-fuel CASK seems to have been spurred by the sharp increase in take-off, landing fees, staff costs and maintenance expenses, while we attribute the decline in RASK to the continued aggressive pace of new route openings which pressured fares and weighed on yields. See important disclosure at the end of this document VCSC<GO> February 24,

60 Figure 109: GPM by segment 20.0% H % 13.7% 12.6% 10.0% 5.0% 5.6% H % 17.7% 15.4% 0.0% Blended GPM AC sale GPM Passenger related GPM The GPM of aircraft sale activities expanded by a significant 570 bps. Each aircraft sale generated on average, a USD 4.3 million gain, much higher than the level of only USD 2 million in the same period last year. Passenger related segment GPM contracted on the back of jumps in take-off, landing, staff and maintenance costs with 59%, 64%, 95% and 151% increases YoY, respectively. Take off landing fee: This was driven not by the increase in fee rates but rather due to the greater frequency of take-offs and landings due to new route additions and frequency increases on existing routes. While the number of flights increased and drove the sharp increase in take-off and landing fees, revenues did not increase proportionately due to compensate as base fares were kept low to ramp up passenger loads on new routes. Future increases in take-off and landing fees remain a risk. According to ACV, currently take-off and landing fee for domestic terminals are only equal to 34% of international terminals, which is fairly low compared to the level of 40-60% of regional domestic terminals. In July 2016, ACV did propose to Ministry of transport (MOT) to raise take-off landing fee of domestic terminals equal to 50% of that of international terminals since January 1, 2017 to support its investment in aviation infrastructure. Up to now, there is no official feedback from MOT on increasing fees. Though the ministry of transport is still cautious in raising airport fees, a hike in the near future cannot be ruled out due to government budgetary constraints and this poses a significant downside risk to Vietjet s future operating margins. Staff costs: increased by 95% YoY because Vietjet performed more training program for pilots and in-flight staffs to prepare for the coming delivered aircraffs per annum from 2016 to Maintenance costs: hiked 151% in first half this year when Vietjet performed routine maintenance for its fleet, including both sale-and- leaseback aircrafts and wet/dry leased aircrafts. NPATMI arrived at VND 1,235 billion (USD 56 million), up 65% YoY. Growth was mainly driven by: (1) Blended GPM expansion of 110 bps, (2) An 8.6% decline in administration expenses with lower staff remuneration expenses, (3) Unwinding of discount of provisions related to maintenance reserves decreased by 28% YoY. See important disclosure at the end of this document VCSC<GO> February 24,

61 2016 Outlook - Vietjet on track to capture 50% share of the domestic market According to CAPA report in Jan 2016, VietJet s total seat capacity jumped by 74% YoY to reach 261,000 weekly seats by Jan This includes an 82% increase on domestic routes to about 242,000 weekly seats, and a 30% increase on international routes to touch 19,000 weekly seats. For the month ended 30 June 2016, Vietjet eventually overtook Vietnam Airlines to become the largest domestic carrier in Vietnam with 43.1% market share, slightly ahead of Vietnam Airlines 41.3% market share. Vietjet s domestic capacity touched 260,000 seats per week by March 2016, representing an 7% increase in comparison to March Figure 110: Vietjet and Vietnam Airlines domestic weekly seat capacity from Sep 2011 to Mar 2016 Source: CAPA-CentRE for Aviation & OAG According to the company, Vietjet will continue to focus on the expansion of domestic trunk routes, especially the Ho Chi Minh Ha Noi route. According to CAPA, VietJet occupied about 40% of total seat capacity on the Ho Chi Minh-Hanoi route in 2015 and its share touched about 50% in April 2016 due to substantial capacity expansion since Figure 111: Vietjet one-way weekly seat capacity on Ho Chi Minh HaNoi from Sep 2011 to May 2016 Source: CAPA-CentRE for Aviation & OAG See important disclosure at the end of this document VCSC<GO> February 24,

62 For full year 2016, we expect Vietjet to achieve a GPM (excluding aircraft sales) of around 15.1%, implying that H22016 s GPM ex aircraft sale will touch 14.8%, which will represent a contraction from the first half of the year but still much higher than the level of 10.7% realized in H The main reasons for the expected Y-o-Y expansion in GPM ex aircraft sale in H22016 are as follows: H s GPM ex aircraft sale was exceptionally low. Vietjet incurred high routine maintenance expenses during the period, while the passenger revenue was far below the level that could be supported by the fixed cost base. In 2016, the company also booked lots of maintenance expenses during the first half (maintenance costs jumped by 151% YoY in H1 2016); in H2 the pressure from maintenance expenses should ease per management. Our expected YoY jump of more than 60% in RPK and the addition of longer flights should boost economies of scale. This comes despite average base fares still being under pressure due to the aggressive pace of route openings. In particular, the additional of longer haul flights means that the company will see its revenues rise without a proportionate increase in fixed and quasi-fixed costs such as ground handling costs as well as take-off and landing fees. By the end of 2016, the number of international routes is expected to increase to more than 20 routes by converting some regular chartered flights to scheduled flights, while the number of domestic routes might not increase, but some profitable routes such as Ho Chi Minh Da Nang, Da Nang Ha Noi or Ha Noi Nha Trang might see improvement in frequency. See important disclosure at the end of this document VCSC<GO> February 24,

63 Valuation Analysis Comparable Analysis Figure 112: Vietjet versus listed peers Unit: million USD EZJ LN Equity AIRA MK Equity CEB PM Equity JBLU US Equity RYA ID Equity SAVE US Equity VA US Equity AIRARABI UH Equity VOLARA MM Equity Name Country Mkt cap TTM Net sales y-o-y % TTM core NPAT y-o-y % D/E ROE (%) Forward P/E* LQ P/B* EV/ EBITDA* easyjet PLC BRITAIN 5, , AirAsia Bhd MALAYSIA 2, , , Cebu Air Inc PHILIPPINES 1, , JetBlue Airways Corp Ryanair Holdings PLC Spirit Airlines Inc Virgin America Inc Air Arabia PJSC Controladora Vuela Cia de Aviacion SAB de CV UNITED STATES 5, , IRELAND 17, , , UNITED STATES UNITED STATES 2, , , , UAE 1, , (2.2) MEXICO 1, , Mean 4, , Median 2, , Vietjet* Vietjet VIETNAM N/A 1, Source: Bloomberg, VCSC; Note*: P/E, P/B and EV/EBITDA are adjusted for country risk differential between Vietnam and other countries; based on share prices as at November * Note: for Vietjet we use 2016F numbers because there is no TTM data available. Sensitivity Analysis Figure 113: 2016 forecasted earnings based on oil price scenarios Scenarios for oil prices Base case oil price assumption + USD 3/ barrel + USD 6/ barrel 2016 NPAT (VND billion) 2,213 2,037 1,860 EPS (VND/share) 11,067 10,185 9,302 ROE 68% 64% 60% Source: VCSC; Note: our base case oil price assumption is USD 45/barrel in Figure 114: 2016 forecast earnings based on gain on sale of each aircraft Scenarios for Aircraft gain on sale USD 1 mil gain per SAL transaction USD 2 mil gain per SAL transaction Base case (USD 2.9 mil gain per SAL transaction) USD 4 mil gain per SAL transaction 2016 NPAT (VND billion) 1,855 2,057 2,213 2,438 EPS (VND/share) 9,274 10,283 11,067 12,188 ROE 60% 65% 68% 72% Source: VCSC See important disclosure at the end of this document VCSC<GO> February 24,

64 Valuation range The following valuation analysis is provided by Viet Capital s Investment Banking Department We arrive at an indicative post-money equity valuation range of VND27,914 billion (c.usd1.25 billion) to VND35,284 billion (c.usd1.58 billion) based on a weighted average of P/E peer-based multiple and residual income model methodology. For each of these methods, we construct a range by sensitizing performance to two scenarios of oil prices, the first scenario (high case) is that the Brent crude oil price averages USD 45/barrel in 2016, USD 55/ barrel in 2017, and USD 65/barrel from 2016 onwards. The second scenario (low case) is that the average oil prices will be USD8 per barrel higher than the first case scenario over the forecast horizon. Post-Money Valuation Range (VND billion) Residual income Residual target price target price VND27,914 billion VND35,284 billion P/E P/E target target price price - 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000 See important disclosure at the end of this document VCSC<GO> February 24,