09 December 2016 Vietnam airline sector: Update on VietJet Air Kim Nguyen kimntt@ssi.com.vn Aggressive strategy to win market share as the only private player in Vietnam Vietjet was launched at the end of 2011 as a private company, quickly replacing Jetstar Pacific and becoming Vietnam s largest low cost carrier (LLC). As of 1H16, Vietjet s charter capital increased to VND 2,000bn from VND 1,450bn as of 31 December 2015. Vietnam s airlines competition landscape: Vietnam s LLCs Vietjet Air Jetstar Pacific Solely private company. Owned 30 aircrafts less than 4 years old on average as of 2015 (of which 9 aircrafts were added in 2015) and increased to a fleet of total 38 aircrafts up till now. Vietjet currently operates 36 routes, including 28 domestic and 8 international routes. 2015 seat capacity increased by 74% YoY. Average load factor is nearly 90% in 1H16. Domestic market share: roughly 43% (Source: CAPA) Subsidiary of Vietnam Airlines. Shareholders: Vietnam Airline (70%), and Quantas Airways (30%) Owned 12 aircrafts by end of 2015 with roughly 8.2 years old on average and increased to 14 aircrafts up till now, flown on 23 domestic and international routes and expected to rise to 18 aircrafts in 2016. 2015 seat capacity increased by 52% YoY. In 2H15, average load factor dipped to 83.4% from 88.3% a year earlier. Domestic market share: 15%(Source: CAPA) 2015 PAT: VND 1,171bn 2015 PBT: VND 267mil In March 2016, Centre for Asia Pacific Aviation (CAPA) announced that domestic capacity in Vietnam has nearly tripled since 2011, with VietJet Air accounting for about two-thirds of the additional seats since its late 2011 launch. According to CAPA, "The evolution of the Jetstar Pacific model was inevitable but was slow to materialize, a mistake that has benefited VietJet". Vietjet currently accounts for roughly 43% of domestic seat capacity in Vietnam, up from 40% last year. Management Background Ms. Nguyen Thanh Ha: Chairwoman. Ms. Ha is the former Deputy Director General of Civil Aviation Authority Vietnam (CAAV) Ms. Nguyen Phuong Thao: Vice Chairwoman cum CEO of Vietjet and Chairwoman of Sovico Holdings SSI.COM.VN Visit SSI Research on Bloomberg at SSIV<GO> Page 1
Mr. Nguyen Thanh Hung, Vice Chairman of Vietjet and Chairman of founding shareholders of Sovico Holdings Luu Duc Khanh, CEO at Vietjet cum BoD member of Sovico Holdings Ms. Nguyen Phuong Thao (wife) and Mr. Nguyen Thanh Hung (husband) are founders of Sovico Holdings. Sovico Holdings is the large shareholder of HDBank, Vietjet Air and others businesses such as Furama Resort in Da Nang city. Financial performance: high growth thanks to sales of aircrafts and passenger capacity expansion Revenue breakdown 2015 COGS breakdown 2015 0.5% 3% 3% 0% 1% Aircrafts sold 44.2% 43.0% Passenger transportation Ancillary revenue Cargo transportation 11% 6% 6% 47% Fuel Aircraft leases Ground and flight operation services Staff cost Sales of aircrafts D&A 2.8% 9.5% Others 23% Aircraft maintenance Insurance Others Source: Vietjet In 2015, Vietjet posted consolidate revenue of VND 19,845bn (+128% YoY) and net profit achieved VND 1,171bn (+225.3% YoY), in which: Passenger transportation revenue (43% of total revenue) increased by 49% YoY in 2015, reaching VND 8,543bn with CARG of 64% from 2013-2015. In which, (1) domestic route (accounting for 79% of total passenger transportation) increased by 30% YoY, reaching VND 6,725bn and a CARG of 49.5% from 2013-2015. (2) International routes increased 170% YoY, achieving VND 482bn with CARG of 83% from 2013-2015 (accounting for 6% of passenger transportation). (3) Charter flights increased by 202% YoY, reaching VND 1,337bn (vs VND 19bn in 2013). In 2015, Vietjet s total passengers were 10mn passengers (+70% YoY) with average load factor of nearly 90% (vs Vietnam airlines of 17.4mn passengers in 2015). Sales of aircrafts (Vietjet buys new aircrafts in order to sell to leasing company and then leases those aircrafts) recorded VND 8,766bn (vs VND 1,760bn in 2015). If excluding aircraft sales in 2014 & 2015, Vietjet s 2015 net revenue should increase by 60% YoY, reaching VND11,079bn and PBT would increase by 65% YoY, reaching VND 650bn. SSI.COM.VN Visit SSI Research on Bloomberg at SSIV<GO> Page 2
In 1H16, Vietjet recorded VND 12,557bn in revenue (+41% YoY) and VND 1,238bn in net profit, increasing 66% YoY. The encouraging performance in revenue was attributable to (1) 38% increase in passenger transport (32% YoY increase in domestic routes, 61% YoY increase in international routes and 76% YoY increase in charter flights); (2) 64% YoY increase in ancillary revenue; and (3) sales of aircrafts increased by 37% YoY. If excluding profit from sales of aircrafts in both 1H16 and 1H15, Vietjet PBT would achieve VND 732bn and VND 552bn, respectively, implying an increase of32% YoY in 1H16. Expansion plan relies on sales and leaseback model Vietjet Air heavily relies on sales and leaseback model. In 2013, they signed a Master Agreement of sale and leaseback program with Airbus to buy/right to buy and lease 100 aircrafts with total value of USD 9.1bn. In May 2016, the company signed a general purchase agreement with Boeing to purchase 100 aircrafts with total investment of USD 11.3bn with delivery from 2019-2023. According to CAPA: Vietjet will accelerate international expansion from 2016. It will continue to build up international growth from 2016 including the Feb-launch of Hanoi-Teipei, becoming the 8 th scheduled international route. Vietjet targets to increase 50% in total passengers in 2016 for a total of 40 aircrafts. Vietjet s fleet will likely end 2016 with total 8,170 seats, adding 52% YoY. The company plans to reach 200 aircrafts by 2023. Our initial thoughts As one of two LLCs in Vietnam, Vietjet Air is capturing growth opportunities from the economic development and a rising middle class, given poor highway and high speed rail in Vietnam. Domestic market share of Vietjet Air continues to increase while that of Vietnam Airlines/Jetstar Pacific continue to decrease (As of Mar-2016, Vietjet s domestic market share increased to 43% share of domestic seat capacity (vs 40% as of 2015), surpassing Vietnam Airlines with 42% and Jetstar Pacific with 15%). The only competitor is LLC Jetstar Pacific (which is also a subsidiary of Vietnam Airlines) which is not as aggressive in its expansion plan. High growth of Vietjet Air mainly comes from winning market share from its competitors thanks to higher competitiveness and passengers from other traditional transportations including trains and buses. Regarding organic growth, from 2010-2015, Vietnamese airlines reported a CAGR of 16.7% in total carried passengers, achieving 31.1mn passengers in 2015. Vietjet Air pursues sales and leaseback model, which explains why they can rapidly increase their fleet and have a younger fleet age as compared with Jetstar Pacific who might pursue a tradition method of acquiring new aircrafts and deploying for a long time similar to Vietnam Airlines. Please note that currently Vietnam Airlines is only deploying 93 aircrafts. Risk of this business model might arise from General risk for all airlines (1) Uptrend in fuel price will be negative for all airlines. (2) Possible landing charge increase at 7 largest airports in Vietnam on domestic routes by ACV. According to ACV, the company together with Civil Aviation Authority of Vietnam proposed to the Ministry of Transport to SSI.COM.VN Visit SSI Research on Bloomberg at SSIV<GO> Page 3
increase landing charge at 7 airports including Tan Son Nhat, Noi Bai, Da Nang, Cam Ranh, Phu Quoc, Vinh and Phu Bai Airport since 01 January 2017. Specifically, domestic landing charge may increase and equal to 50% of international flights (from the current ratio of 34%). This should significantly impact airlines GPM. Specific risks (1) Market share of Vietjet Air is already high and it might be difficult for the company to grasp more market share and to maintain high load factor with large number of aircrafts being delivered in the next 5-10 years. Meanwhile, Jetstar Pacific has also become more aggressive. In July 2016, Jetstar Pacific signed a contract to purchase 10 Airbus A320 CEO Sharklet aircrafts after Vietnam Airlines and Qantas Group had invested USD 139 million in the budget carrier to expand its fleet. Vietnam Airlines also transferred some domestic routes to the carrier. Competition from low-cost carriers forces Vietnam Airlines to pour more capital into Jetstar Pacific to maintain its domestic market share. (2) A large portion of Vietjet Air profit comes from sales of new aircraft that the company buys at huge discount on large quantity. On the one hand, this strategy has helped Vietjet Air increase competitiveness by lowering ownership cost and operating cost. On the flip side, this part of earnings will not be stable over the coming years, therefore, earnings will be more volatile. Furthermore, lease payment terms could be fixed and non-cancellable regardless of the actual situation of passenger traffic. (3) Excessive purchase of aircrafts may create oversupply while air travel demand in Vietnam may decelerate onwards as recent growths were created partly by the low base. As a result, Vietjet s loading capacity may decrease while leasing costs will be non-cancellable. (4) Risk is on the financing side & exposure to FX risk: This very much depends on the lease terms with the lessors. As of 1H16, deposit for aircraft purchases was VND 4,421bn (vs VND 3,846bn in 1H15). D/E ratio was 1.72x, in which USD dominant loans totaled USD 89mn. Besides, (1) Vietjet has capital commitments of VND 642bn as of 1H16 (vs VND 236bn as of 31 December 2015) to buy aircrafts. Pursuant to purchase agreements with Airbus and Boeing, the Group s commitments relating to pre-delivery payments for the remaining aircrafts to be delivered as of June 2016 were USD 1.3 bn (in respect of Airbus aircrafts) and USD 1.05bn (in respect of Boeing Aircraft). (2) Future minimum lease payment under non-cancellable operating leases for aircraft leasing was VND 20,592bn for the terms from 1 to more than 5 years (vs VND 8,777bn as of 31 December 2015). Valuation: The bidding price ranging VND 75,900 to VND 98,400/ share are equivalent to TTM (2H15 to 1H16) P/E of 8x to 9.4x respectively (core P/E without the profit from aircraft sales activities of 16x to 21x, respectively) and EV/EBITDA of 9.4x to 11.4x, respectively, compared with similar LLCs with sales and leaseback model with average P/E of 13x and EV/EBITDA of 9.5x (Including Virgin Australia, SpiceJet, Norwegian and Ryan Air). Although the P/E is low and the organic growth of Vietnam passenger air transportation could be promising at a minimum of 20% pa, as noted above, earnings of Vietjet Air might be volatile due to sales and leaseback model. SSI.COM.VN Visit SSI Research on Bloomberg at SSIV<GO> Page 4
1. ANALYST CERTIFICATION The research analyst(s) on this report certifies that (1) the views expressed in this research report accurately reflect his/her/our own personal views about the securities and/or the issuers and (2) no part of the research analyst(s) compensation was, is, or will be directly or indirectly related to the specific recommendation or views contained in this research report. 2. RATING Within 12-month horizon, SSIResearch rates stocks as either BUY, HOLD or SELL determined by the stock s expected return relative to the market required rate of return, which is 18% (*). A BUY rating is given when the security is expected to deliver absolute returns of 18% or greater. A SELL rating is given when the security is expected to deliver returns below or equal to -9%, while a HOLD rating implies returns between -9% and 18%. Besides, SSIResearch also provides Short-term rating where stock price is expected to rise/reduce within three months because of a stock catalyst or event. Short-term rating may be different from 12-month rating. Industry Rating: We provide the analyst industry rating as follows: Overweight: The analyst expects the performance of the industry over the next 6-12 months to be attractive vs. the relevant broad market Neutral: The analyst expects the performance of the industry over the next 6-12 months to be in line with the relevant broad market Underweight: The analyst expects the performance of the industry over the next 6-12 months with caution vs. the relevant broad market. *The market required rate of return is calculated based on 5-year Vietnam government bond yield and market risk premium derived from using Relative Equity Market Standard Deviations method. Our rating bands are subject to changes at the time of any significant changes in the above two constituents. 3. DISCLAIMER The information, statements, forecasts and projections contained herein, including any expression of opinion, are based upon sources believed to be reliable but their accuracy completeness or correctness are not guaranteed. Expressions of opinion herein were arrived at after due and careful consideration and they were based upon the best information then known to us, and in our opinion are fair and reasonable in the circumstances prevailing at the time and no unpublished price sensitive information would be included in the report. Expressions of opinion contained herein are subject to change without notice. This document is not, and should not be construed as, an offer or the solicitation of an offer to buy or sell any securities. SSI and other companies in the SSI and/or their officers, directors and employees may have positions and may affect transactions in securities of companies mentioned herein and may also perform or seek to perform investment banking services for these companies. This document is for private circulation only and is not for publication in the press or elsewhere. SSI accepts no liability whatsoever for any direct or consequential loss arising from any use of this document or its content. The use of any information, statements forecasts and projections contained herein shall be at the sole discretion and risk of the user. WWW.SSI.COM.VN SAIGON SECURITIES INC. Member of the Ho Chi Minh Stock Exchange, Regulated by the State Securities Commission HO CHI MINH CITY 72 Nguyen Hue Street, District 1 Ho Chi Minh City Tel: (848) 3824 2897 Fax: (848) 3824 2997 HANOI 1C Ngo Quyen Street, Ha Noi City Tel: (844) 3936 6321 Fax: (844) 3936 6311 Page 5
4. CONTACT INFORMATION Institutional Research & Investment Advisory Kim Nguyen Analyst, Industrials Tel: (848) 3824 2897 ext. 2140 kimntt@ssi.com.vn Phuong Hoang Hung Pham Giang Nguyen, ACCA Deputy Managing Director, Associate Director Associate Director Head of Institutional Research & Investment Advisory hungpl@ssi.com.vn giangntt@ssi.com.vn phuonghv@ssi.com.vn WWW.SSI.COM.VN SAIGON SECURITIES INC. Member of the Ho Chi Minh Stock Exchange, Regulated by the State Securities Commission HO CHI MINH CITY 72 Nguyen Hue Street, District 1 Ho Chi Minh City Tel: (848) 3824 2897 Fax: (848) 3824 2997 HANOI 1C Ngo Quyen Street, Ha Noi City Tel: (844) 3936 6321 Fax: (844) 3936 6311 Page 6