Vietjet Air ( VJA ) A Flight You Can t Miss

Vietjet Air ( VJA ) A Flight You Can t Miss Flash Notes I December 1, 016 Vietjet is Vietnam s Largest And Most Profitable Low Cost Carrier (LCC) We have recently attended a presentation by Vietjet Air management ahead of its pre-listing offering scheduled in February 017. Please find the highlights of the presentation with our comments below: Total domestic passengers travel by air grew 1% to 41 mils and accounts for 7.3% of total transported passengers Government is committed to invest USD 10bn to improve air transportation infrastructure, aiming to increase the number of airports from to 6 by 019 According to management team, VJA has increased its market share from 37% last year to 43% in June, surpassing Vietnam Airline ( V ) and contributing 70% of the industry growth The recent offering of 59 millions shares to institutional investors were oversubscribed and existing shareholders are offering 3.5 millions shares to individual investors The listing is scheduled in the 4 th week of February 017 with no lockin, VJA will also issue.4 millions new shares at offer price for one of the Chairwoman s holding companies 0.8% 3,793 Total Revenue in VND bn vs Net Margin 8.4% 9.8% 5.9% 4.1% 19,845 8,706 8,879 1,557 NOT-RATED Nguyen Khac Viet Bach, Analyst bachnkv@tvs.vn 1-month price target Sector Trading Data and Key Metrics Airlines Listing From Feb 017 IPO Price 86,500 5w High 5w Low Market Capital (VND bn) 7,888 Shares Outstanding (mm) 3.4 Free Float (mm) 15-Day Average Vol ( 000) T1M P/BV (x) 5.0 T1M P/E (x) 16.8 EV / EBITDAR (x) 5.7 Dividend Yield 8.1 Net Debt / Equity (x) 0.94 Chartered Capital (VND bn) Source : VJA, TVS 3,000 3,4 013 014 015 6M 015 6M 016 Revenue % Total Revenue Our Investment Views Vietjet Air is already the fastest growing LCC in Vietnam and ASEAN. However, we believe there is still a long runway for VJA in both domestic and regional markets. The Company will benefit from a secular shift from local travelers to travelling by air due to its effectiveness and affordability. It will be more challenging for VJA when they move on to compete at regional level. Nevertheless, our initial assessment shows that the management team has developed a sound and executable plan. At offer price of VND 86,500, VJA is attractively priced at 13.3x 016EPS with expected growth rate averaging more than 60% over the next two years, translating into 0.x PE-to-Growth (PEG). However investors should be cautious on the low float and existing of single dominant shareholder. Thien Viet Securities JSC (TVS) does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Please see more important disclosures in the last pages. 800 800 Ownership Structure 18.5% Chairwoman & Related Parties Institutional Investors Retail Investors 10.3% 1,450 013 014 015 Post Offering 71.3% Post IPO Source : VJA

1995 1996 1997 1998 1999 000 001 00 003 004 005 006 007 008 009 010 011 01 013 014 015 11M 016 Demand for air travel will likely growing at 10 1% over the next 5 10 years Favorable Industry Development Gives VJA A Long Growth Path Ahead From 005 015, the average growth rate in total passengers traveling by air for Vietnam is 18.6%, the highest in South East Asia ( SEA ). This growth was driven by two factors: (1) Domestic passengers shifting from traveling by rail and river to travelling by air and () Increased number of international tourists 17.0% Shares of Total Passengers Transported 1995 015 8.8%.7% 7.3% 8.0%.0% 66.1% Rail Land River Air 68.0% Rail Land River Air Source: GSO Total passengers travelling by air increased 10-fold over the last 0 years. The sub-sector has a historical CAGR of 1.4%. Over the next 5 10 years we expect growth rate to remains healthy between 10 1%, provided that the government follow up with their commitment to infrastructure investments. We would note that such higher-than-average growth rate has to come at the expense of other forms of transportation. More specific, rail and river travelling, especially medium to long distance, will continue to be squeezed while on-land travelling will also come under more pressure. Post financial crisis, total number of tourists visiting Vietnam by air increased nearly 3-fold 1 International Passengers Transported by Air (Million Passengers) 6 6 6 6 5 4 3 3 3 3 1 1 1 1 1 1 1 8 Source: GSO International tourists is another driving force behind air travelling growth. However, we are less optimistic about this growth driver going forward because: (1) The tourism industry still suffers from unsustainable investments by local governments and the lack of innovative services offering () As Vietnam Dong exchange rate is semi-pegged to the US Dollar, it will likely be stronger versus currencies such as Korean Won, Yen, Euro and Yuan and may discourage a large number of travelers from these regions (currently accounts for more than 56% of international passengers).

3 VJA plans to quadruple its fleet of aircrafts and double the routes offering Summary Of VJA s Detailed 5 Years Growth Plan There are 8 initiatives in VJA s growth plan for 016 01 period. However, we believe there are 3 key factors to watch: Aggressively expand more routes, both domestic and international Current Routes vs Planned Expansion 55 45 Planned Fleet Expansion 19 8 17 38 78 but cost control is still the key factor to maintain profitability in the sector Domestic International In Vietnam, foreign airlines are not permitted to operates on domestic routes and stringent licensing requirement will deter potential entries. VJA operates out of 5 key hubs and has planned to increase both its flight frequencies and hub network. We believe VJA with its focus on efficiency and profitability can best the more bureaucratic V and capture even more market share. On the international routes, however, VJA will face intense competition from other regional players, especially from Air Asia. Despite such challenges, we are pleased that management adopt a cautious approach through operating chartered flight prior to offering full services, establishing affiliations (franchisee) and entering interline agreements. Focus on better managing cost and increasing operational efficiency SEA Airlines RASK CASK (USD) RASK CASK, ex- Fuel (USD) Fleet Size (Planes) Domestic 019E 03E Key Operating Metrics ASK Growth RPK Growth Load Factor EBITDAR Margin Net Margin AirAsia 1..58 81 8.1 10.0 81.0 44.7 8.6 Cebu Pacific 0.86.41 55 1.5.6 79.8 33.3 7.9 Thai AirAsia 0.58.16 45 17.5 19.7 81.0 9.8 6.8 Average 0.89.38 60 15.7 17.4 80.6 35.9 7.8 Vietjet Air 0.44.16 30 8.1 83.7 88.1 3.8 6.1, definitions for key metrics are given at the end The Company is behind its peers in term of revenue and cost per available seats kilometers (ASK), leading to lower EBITDAR and Net Margin, while enjoyed explosive ASK and RPK growth rate and maintained a superior Load Factor. On the revenue side, VJA enjoyed a the lower starting base and a very favorable shift of Vietnamese transporting behavior. We believe VJA s ASK and RPK will grow significantly over the next 3 5 years, albeit at a slower rate. The impact on Load Factor would be less clear and we err on the conservative assumption that it will likely converge to industry average. Our biggest concern lies with the cost side. The industry has benefited from the lower fuel price since oil collapsed in 014. However VJA did not reap the full benefit given PVN s monopoly in fuel supply. As it has the thinnest margin amongst peers, VJA will be the first to feel pressured if oil price recovers.

4 Ancillary revenue will the key profit driver for VJA given its low marginal cost Plan to boost revenue from ancillary services, including sale of in-flight merchandise, advertising, sale of duty-free items, cargo transportation and add-on charged to related passengers, to more than 30% of total revenue, in line with global peers. 16.4% 17.% Ancillary Revenue in VND bn vs as % of Total Revenue.3%,475 19.9%.6% 63 1,193 1,019 1,67 Management has also prepared strategies across Human Resources, Marketing and Financing In our opinion, Vietjet Air management was open and most questions raised were answered appropriately 013 014 015 6M 015 6M 016 This is the less cyclical and higher margin portion of VJA s revenue. We are positive on the development of VJA s innovative e-commerce platform in partnership with Facebook, Google and banking institutions. Based on our research of passengers behaviors, we anticipate these in-flight shopping and entertainment services will have more impact on longer haul flights and thus will complement VJA s regional expansion plan. Other highlights in VJA s strategies: Focus on human resources: the Company plans to builds its own training center with support from Airbus. We believe this is part of VJA s cost controlling program. Strengthening of the Vietjet brand through customer royalty program. This is a good initiative but given how LCC passengers are highly price sensitive, we believe it will have minimal impact. Diversify sources of capital through utilizing of onshore offshore financing with operating leases. We believe VJA has done a good jobs on this regards with their sale and leaseback program and there will be little room for further improvement. Invest in domestic airport passengers terminals to reduce on the ground cost and improve route-flight efficiency. This strategy was widely adopted by leading LCCs such as South West and Ryan Air. As the management has not formalized a detailed plan, we hesitate to comment on the initiative. Highlights of Q&A Session Revenue % Total Revenue 1) VJA is known for its frequent delay thus if price difference is less than VND 500,000 passengers will likely opt for more reliable airlines Management s reply: Among domestic airlines, VJA s on time percentage of 8.6% is competitive, on par of global peers. The issue lies more with the airports inefficiency and was also exacerbated by the media. ) What is the timing of cash flow from the Sale & Leaseback? Management s reply: VJA will receive cash upfront and book profit immediately. This is in line with industry standard practice.

5 3) How much cost can VJA past to customers through price increase and whether it hit the Government s cap on commercial airline ticket price? Management s reply: As fuel cost is 40% of VJA s operating cost and is higher by 0-5% to global fuel price due to PVN s control of supply while ticket price is only 30% of cap price, VJA has room to upcharge its passengers if fuel cost rise. The Company would prefer not to implement such policy, especially if it dampens ticket demand. VJA prefer to smooth earnings and margin through increasing ancillary revenue. 4) Will Load Factor decrease? Management s reply: To mitigate potential demand drop, VJA will try to cater to multiple customer groups simultaneously (both first-time-fliers and frequent-fliers) through new products offering (SkyBOSS cabin for business travelers, Royalty Rewards and in-flight shopping). However, the Company will never merge flights to fill its plane. They will actively increase pre-sales, targeting to fill 88-90% of plane 1 week before scheduled flights. 5) Is Vietjet Air s fleet growing too fast? Management s reply: VJA s fleet is still small relative to regional peers. They plan to buy 10 1 planes annually for the next 5 years, taking advantage of the Government s aviation infrastructure investment plan. 6) What is VJA s current tax rate as well as profit and dividend target? Management s reply: VJA will be taxed at 10% for 016-018 and 0% for 019-00 periods. Management expects VJA to report USD 100m in profit this year. Dividend were 85% and 100% of chartered capital for 015 and 016 respectively and management will maintain an average payout ratio of 70%. Key Metrics Definitions ASK: Available seat kilometers, which is the total number of seats available on scheduled and charter flights multiplied by the number of kilometers those seats were flown. RASK: Revenue per ASK. CASK: Total costs, including depreciation and amortization expenses and the costs of operating leases, but excluding cost of aircraft sold, foreign exchange effects, net financing charges and taxation, divided by ASK. Load Factor: The total number of passengers divided by the total number of actual seats on actual flights flown during the year EBITDAR: Operating profit after adding depreciation and amortization and aircraft and engine lease expenses.

6 DISCLAIMER ALYST CERTIFICATION I, Nguyen Khac Viet Bach, hereby certify that the views expressed in this research report accurately reflect our personal views about the subject securities or issuers. I also certify that no part of my compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. RATING and VIEWS Buy (B), Neutral (N), Sell (S) Analysts recommend stocks as Buys or Sell based on his own views. Being assigned a Buy or Sell is determined by as total stock s return (TSR) potential that represents the price differentials between the current share price and the price target expected during the time horizon plus expected current dividend yield. Any stock not assigned as Buy or Sell is deemed Neutral. TVS Investment Research: Equity Rating Definitions 1-month rating Definition Buy Total Stock s Return > 15% Neutral Total Stock s Return between (-15%) and 15% Sell Total Stock Return < (-15%) Short-term rating Definition Buy Stock price expected to rise within three-month because of a specific catalyst or event Sell Stock price expected to fall within three-month because of a specific catalyst or event Not-rated The investment rating and target price, if any, suspended as there is not a sufficient fundamental basis for determining an investment rating or target. DISCLAIMER Copyright 016 by Thien Viet Securities Joint-Stock Company (TVS). ALL RIGHT RESERVED. This research report is prepared for the use of TVS clients and may not be redistributed, retransmitted or disclosed as a whole or partially in any form or manner without the prior written consent of TVS. The information herein is obtained from various sources and TVS does not guarantee its accuracy. Neither the information nor any opinions expressed in this publication constitutes a buy or sell recommendation on any securities or investment. TVS therefore does not take any responsibilities for any investor s decisions. CONTACTS Ho Chi Minh Office 63A Vo Van Tan, District 3 Floor 9, Bitexco Nam Long Building Tel : +84 8 99099 I Fax : +84 8 99088 Ha Noi Office Lang Ha, Dong Da District TDL Building Tel : +84 4 038 I Fax : +84 4 037 Research Department Duy Nguyen (Mr.), Manager Equity Capital Market duynh@tvs.vn Son Nguyen (Mr.), Senior Analyst Real Estate; Technology sonnt@tvs.vn Trung Dong (Mr.), Associate Consumer Goods; Pharma trungdq@tvs.vn Bach Nguyen(Mr.), Analyst Oil & Gas; Industrial Goods bachnkv@tvs.vn Quang Luong (Mr.), Analyst Team Support quanglt@tvs.vn Investment Banking Department ib.hcm@tvs.vn Brokerage Department brokerage.hcm@tvs.vn brokerage.hn@tvs.vn