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TRANSCRIPT
Deutsche Bank Markets Research
Rating
Buy Asia
China
Transportation
Air
Company
Spring Airlines
Date
2 December 2016
Initiation of Coverage
An evident winner in China’s infant stage LCC market? Initiating with Buy
Reuters Bloomberg Exchange Ticker 601021.SS 601021 CH SHH 601021
Forecasts And Ratios
Year End Dec 31 2014A 2015A 2016E 2017E 2018E
Sales (CNYm) 7,312.4 8,069.6 8,294.4 9,684.5 11,564.7
EBITDA (CNYm) 1,056.4 1,591.2 1,441.0 1,748.8 2,163.0
Reported NPAT (CNYm) 884.2 1,327.9 1,336.9 1,646.5 1,972.3
DB EPS FD(CNY) 1.474 1.680 1.671 2.057 2.464
DB EPS growth (%) 20.8 14.0 -0.5 23.1 19.8
PER (x) – 32.0 24.6 20.0 16.7
EV/EBITDA (x) – 27.8 24.7 20.7 16.8
Yield (net) (%) – 0.4 0.5 0.7 0.9
DB ROE (%) 28.1 26.3 18.7 19.5 19.6
Source: Deutsche Bank estimates, company data 1 DB EPS is fully diluted and excludes non-recurring items
2 Multiples and yields calculations use average historical prices for past years and spot prices for current and future years, except P/B which uses
the year end close
Thriving on China's low LCC penetration; Buy with TP of RMB48.2
________________________________________________________________________________________________________________
Deutsche Bank AG/Hong Kong
Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, 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. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 057/04/2016.
Price at 1 Dec 2016 (CNY) 41.14
Price target - 12mth (CNY) 48.20
52-week range (CNY) 63.31 - 41.14
Shanghai Composite 3,274
Fei Sun, CFA
Research Analyst
(+852 ) 2203 6130
Vincent Ha, CFA
Research Analyst
(+852 ) 2203 6247
Price/price relative
0
15
30
45
60
75
1/15 7/15 1/16 7/16
Spring Airlines
Shanghai Composite (Rebased)
Performance (%) 1m 3m 12m
Absolute -5.2 -12.4 -26.3
Shanghai Composite 4.9 6.9 -5.3
Source: Deutsche Bank
The 9% low-cost carrier (LCC) penetration in China, compared to 56% in SE Asia, suggests there is ample room for industry leaders like Spring Airlines to grow. The airline's cost leadership over full-service carriers (FSC) mitigates its lower yield and offers even better profitability. We expect load factor to stay at c.92%, with yield bottoming out in FY17E. Despite short-term yield pressure, Spring's international expansion could help it capture increasing outbound tourism demand. Spring is a scarce LCC play in China and we believe it deserves a valuation premium over peers. With ROE recovering to 20% in FY18E, we initiate coverage with a Buy rating and TP of RMB48.2.
A scarce Chinese LCC airline with significant cost leadership Spring is China's largest LCC, with a 29% share of the LCC market in 2015. It enjoys significant cost efficiency vs. network carriers, with unit operating cost 35-40% lower; this enables better profitability even on 36-42% lower yields. In 1H16, sales from charter flights contributed 27% of revenue, indicating great synergy with parentco Spring Tour. The airline’s international business revenue contribution has increased rapidly to 37.5% in 1H16, from 1.4% in 2011.
International expansion to mitigate slow domestic traffic; yield to recover We expect Spring’s international RPK to expand by 25-48% YoY in FY16-18E vs. -2-4% for domestic traffic. With passenger yield bottoming in FY16E, we forecast a 4-6% YoY rebound in FY17-18. We estimate that capex (excl. disposal gain) will remain at RMB5-6bn per annum in FY16-18E, mainly for aircraft acquisition. While ROE is forecast to drop from 26% in FY15 to 19% in FY16E, we expect it return to 20% in FY18 on recovering yield and load factors.
Initiating coverage with a Buy; target price set at 4.2x FY17E P/BV; risks Our target price of RMB48.2 is based on 4.2x FY17E P/BV, c.20% below Spring’s average P/BV of 5.3x since listing. We believe this is justified, given a sustainable ROE of about 19-20% in FY17-18E. Key downside risks: excessive capacity addition; fiercer-than-expected competition from regional LCCs and Chinese airlines; and slower-than-expected demand growth.
Distributed on: 02/12/2016 14:03:38 GMT
2 December 2016
Air
Spring Airlines
Page 2 Deutsche Bank AG/Hong Kong
Model updated:02 December 2016
Running the numbers
Asia
China
Air
Spring Airlines Reuters: 601021.SS Bloomberg: 601021 CH
Buy Price (1 Dec 16) CNY 41.14
Target Price CNY 48.20
52 Week range CNY 41.14 - 63.31
Market Cap (m) CNYm 32,912
USDm 4,774
Company Profile
Headquartered in Shanghai, Spring Airlines is China's largest low-cost carrier by fleet size. The airline started to operate domestic flights since 2005 and international and regional routes since 2010.
Price Performance
0
15
30
45
60
75
Jan 15 Apr 15 Jul 15 Oct 15 Jan 16 Apr 16 Jul 16 Oct 16
Spring AirlinesShanghai Composite (Rebased)
Margin Trends
8
12
16
20
13 14 15 16E 17E 18E
EBITDA Margin EBIT Margin
Growth & Profitability
05101520253035
0
5
10
15
20
25
13 14 15 16E 17E 18E
Sales growth (LHS) ROE (RHS)
Solvency
0
2
4
6
8
10
12
0
10
20
30
40
50
60
13 14 15 16E 17E 18E
Net debt/equity (LHS) Net interest cover (RHS)
Fei Sun, CFA
+852 2203 6130 [email protected]
Fiscal year end 31-Dec 2013 2014 2015 2016E 2017E 2018E
Financial Summary
DB EPS (CNY) 1.22 1.47 1.68 1.67 2.06 2.46
Reported EPS (CNY) 1.22 1.47 1.68 1.67 2.06 2.46
DPS (CNY) 0.12 0.16 0.21 0.22 0.31 0.37
BVPS (CNY) 4.6 5.9 8.2 9.6 11.5 13.6
Weighted average shares (m) 600 600 790 800 801 801
Average market cap (CNYm) na na 42,520 32,912 32,912 32,912
Enterprise value (CNYm) na na 44,244 35,647 36,157 36,411
Valuation Metrics P/E (DB) (x) na na 32.0 24.6 20.0 16.7
P/E (Reported) (x) na na 32.0 24.6 20.0 16.7
P/BV (x) 0.00 0.00 7.43 4.26 3.58 3.02
FCF Yield (%) na na nm nm nm 0.4
Dividend Yield (%) na na 0.4 0.5 0.7 0.9
EV/Sales (x) nm nm 5.5 4.3 3.7 3.1
EV/EBITDA (x) nm nm 27.8 24.7 20.7 16.8
EV/EBIT (x) nm nm 37.6 35.5 29.4 23.5
Income Statement (CNYm)
Sales revenue 6,550 7,312 8,070 8,294 9,684 11,565
Gross profit 838 1,068 1,603 1,448 1,739 2,143
EBITDA 837 1,056 1,591 1,441 1,749 2,163
Depreciation 271 304 375 434 515 612
Amortisation 31 33 41 3 3 4
EBIT 536 720 1,175 1,004 1,231 1,547
Net interest income(expense) -81 -98 -154 -179 -149 -149
Associates/affiliates 0 0 -117 0 0 0
Exceptionals/extraordinaries 0 0 0 0 0 0
Other pre-tax income/(expense) 532 595 900 958 1,114 1,232
Profit before tax 987 1,216 1,804 1,783 2,195 2,630
Income tax expense 255 332 476 446 549 657
Minorities 0 0 0 0 0 0
Other post-tax income/(expense) 0 0 0 0 0 0
Net profit 732 884 1,328 1,337 1,646 1,972
DB adjustments (including dilution) 0 0 0 0 0 0
DB Net profit 732 884 1,328 1,337 1,646 1,972
Cash Flow (CNYm)
Cash flow from operations 1,536 1,076 1,610 1,919 2,545 2,760
Net Capex -713 -2,446 -3,188 -2,654 -2,753 -2,633
Free cash flow 823 -1,369 -1,578 -735 -208 127
Equity raised/(bought back) 0 0 1,755 14 0 0
Dividends paid -216 -237 -303 -166 -172 -245
Net inc/(dec) in borrowings -544 2,369 595 2,210 -192 -175
Other investing/financing cash flows -178 155 277 -123 -129 -136
Net cash flow -115 918 746 1,200 -702 -428
Change in working capital 422 -286 -355 -206 -9 -211
Balance Sheet (CNYm)
Cash and other liquid assets 1,475 2,400 3,095 4,295 3,593 3,164
Tangible fixed assets 4,349 6,884 10,146 12,355 14,582 16,588
Goodwill/intangible assets 51 54 63 71 79 90
Associates/investments 98 110 95 95 95 95
Other assets 1,679 1,813 2,630 2,702 2,867 2,974
Total assets 7,651 11,261 16,029 19,518 21,216 22,911
Interest bearing debt 2,251 4,375 4,915 7,125 6,933 6,758
Other liabilities 2,657 3,334 4,575 4,670 5,088 5,232
Total liabilities 4,908 7,708 9,489 11,795 12,021 11,990
Shareholders' equity 2,743 3,553 6,540 7,723 9,195 10,921
Minorities 0 0 0 0 0 0
Total shareholders' equity 2,743 3,553 6,540 7,723 9,195 10,921
Net debt 777 1,975 1,820 2,830 3,340 3,594
Key Company Metrics
Sales growth (%) 16.8 11.6 10.4 2.8 16.8 19.4
DB EPS growth (%) 17.2 20.8 14.0 -0.5 23.1 19.8
EBITDA Margin (%) 12.8 14.4 19.7 17.4 18.1 18.7
EBIT Margin (%) 8.2 9.8 14.6 12.1 12.7 13.4
Payout ratio (%) 10.1 10.9 12.5 13.0 15.0 15.0
ROE (%) 30.4 28.1 26.3 18.7 19.5 19.6
Capex/sales (%) 11.1 33.6 55.5 58.9 58.1 52.5
Capex/depreciation (x) 2.4 7.3 10.8 11.2 10.9 9.9
Net debt/equity (%) 28.3 55.6 27.8 36.6 36.3 32.9
Net interest cover (x) 6.6 7.3 7.6 5.6 8.3 10.4
Source: Company data, Deutsche Bank estimates
2 December 2016
Air
Spring Airlines
Deutsche Bank AG/Hong Kong Page 3
Table Of Contents
Investment thesis ................................................................ 4 Low LCC penetration suggests great potential .................................................... 4 Significant cost leadership to compensate for low yields ................................... 4 Charter flight arrangement for improved aircraft utilization ................................ 4 International expansion: short-term pain for long-term gain ............................... 5 Route subsidy sustainable; profit contribution decreasing .................................. 5 RMB4bn private placement to expand fleet size ................................................. 5
Valuation – scarce LCC play ................................................ 6 Summary .............................................................................................................. 6 Target price of RMB48.2 based on 4.2x FY17E P/BV .......................................... 6 Cross-check: valuation premium to global LCCs justified ................................... 7 Tiger Airways acquired by Singapore Airlines at 5.2x P/BV ................................ 8
An evident winner in China’s infant LCC market .............. 10 Summary ............................................................................................................ 10 China’s first and largest LCC airline ................................................................... 10 Significant cost leadership to compensate for low yields ................................. 12 Charter flight arrangement for improved aircraft utilization .............................. 17 International expansion: short-term pain for long-term gain ............................. 17 Route subsidy sustainable; profit contribution decreasing ................................ 19 More pricing freedom to fight railway competition ........................................... 21
Financials ........................................................................... 23 Summary ............................................................................................................ 23 Higher international growth mitigates slow domestic traffic ............................ 23 Major cost items well controlled ........................................................................ 25 Balance sheet and cash flow summary ............................................................. 27
Key risks ............................................................................ 31 Sector and company-specific risks .................................................................... 31 Sensitivity to key factors .................................................................................... 31
Company background ....................................................... 32 The first and largest player in China’s LCC industry .......................................... 32 Experienced management team ........................................................................ 34
2 December 2016
Air
Spring Airlines
Page 4 Deutsche Bank AG/Hong Kong
Investment thesis
Low LCC penetration suggests great potential
The low penetration of air travel and LCCs in China suggests to us that there is
ample room for growth in this booming tourism market for Spring Airlines.
Chinese citizens still travel less by air compared to global standards, although
the number of air passengers out of total transportation passengers has been
steadily increasing, growing from 0.4% in 1995 to 2.0% in 2015.
The penetration of air travel on low cost carriers (LCCs) in China is also much
lower than global levels. For every 1,000 air passengers in China, only 94 of
them travelled on LCCs in 2015, representing a penetration of merely 9%. In
contrast, LCC penetration stood at 56% in ASEAN, 40% in Western Europe,
32% in the US, and 11% in Northeast Asia.
Significant cost leadership to compensate for low yields
Spring sells cheaper air tickets than full service carriers (FSC). As a result, its
passenger yields are lower than FSCs’. In FY11-15, the company’s passenger
yields were on average 36-42% below China’s three largest FSCs.
To offset the weaker-than-FSC yields, lower unit operating costs are crucial for
Spring to compete with network carriers. During the same period, Spring’s unit
operating costs (measured by dividing total operating expenses by total ASK)
were on average 35-40% below its FSC peers’.
Charter flight arrangement for improved aircraft utilization
Spring provides charter flight services to parentco Spring Tour and its
subsidiaries for their group tour products. In 1H16, sales from Spring Tour’s
charter flight service contributed 26.7% of total revenue (FY15: 21.5%). The
trend has been steadily increasing over recent years.
While carrying a slightly lower yield than regular passenger traffic, we believe
charter flights can: 1) increase daily aircraft utilization hours and lower unit
fixed cost as chartered flights often take-off during off-peak hours; 2) help
maintain a healthy load factor for new routes and cultivate a market; and 3)
help yield management as chartered seats are booked 3-6 months in advance.
Figure 1: LCC penetration rate (to
total air capacity), global comparison
9% 11%19%
32%40%
56%
0%
10%
20%
30%
40%
50%
60%
Ch
ina
No
rth
ea
st A
sia
Mid
dle
Ea
st
No
rth
Am
eri
ca
We
ste
rn E
uro
pe
So
uth
ea
st A
sia
Source: CAPA, Diio, Deutsche Bank
Figure 2: Unit operating cost (per
ASK) comparison
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
2011 2012 2013 2014 2015
Spring Airlines Air China CEA CSA(RMB)
Source: Company data, Deutsche Bank
Figure 3: Charter flight revenue
contribution from Spring Tour
13.3% 14.3%15.9%
17.8%
21.5%
26.7%
0%
5%
10%
15%
20%
25%
30%
2011 2012 2013 2014 2015 1H16 Source: Company data, Deutsche Bank
2 December 2016
Air
Spring Airlines
Deutsche Bank AG/Hong Kong Page 5
International expansion: short-term pain for long-term gain
In view of China’s increasing outbound tourism demand, Spring started to
expand to international and regional routes in 2010. Its international business
revenue contribution increased rapidly to 37.5% in 1H16, from 1.4% in 2011.
International flights still enjoy a higher passenger yield than domestic ones,
even though Spring has experienced sequential declines in yields for both
international and domestic traffic. We expect its international passenger load
factor to stay at a healthy 87-88% level in FY16-18 (vs. 87-90% in FY13-1H16),
with yield bottoming out in FY17E.
Route subsidy sustainable; profit contribution decreasing
The route subsidy accounts for a large portion of Spring’s total subsidy
received, i.e. 73-96% in 2011-15. As route subsidy is directly related to flight
operation, we believe it is sustainable. Authorities view subsidies as a means
to promote a local economy, implying strong incentives for government to
continue such subsidizing practices.
While non-operating incomes accounted for over 65% of Spring’s reported net
profit in FY11-15, our forecast show that such reliance will maintain a slight
downward trend going forward as Spring continues to expand to regional
markets. In addition, as these subsidies are mostly offered on flights to less
popular destinations, this enables Spring to: 1) continue to offer low ticket
prices to attract passengers; 2) cultivate local travel markets at low costs; and
3) rapidly grow its share of the local market and gain a dominant position,
which in turn ensures healthy pricing and yields.
RMB4bn private placement to expand fleet size
Spring announced in Aug-16 that it plans to raise RMB4bn (at no less than
RMB43.71 per share for a total of 91.5m shares) in a private share placement
and use the proceeds to acquire 10 A320 aircraft. Our current financial forecast
has not yet reflected the share placement pending the completion of the deal
as it is still conditional on regulatory approval. Assuming a successful new
share issuance in mid-2017, we estimate that, with an 11% increase in the
number of outstanding shares, Spring's FY17E reported EPS dilution would be
about 4%, while FY17E BVPS enhancement would be about 29%, leading to a
drop in ROE to c.16% vs. our current forecast of 19.5% - all else equal.
Figure 4: Domestic and international
yield and load factor comparison
0.20
0.30
0.40
0.50
60%
70%
80%
90%
100%
2013 2014 2015 2016E 2017E 2018E
International load factor (%, LHS)
Domestic load factor (%, LHS)
International pax yield (RHS)
Domestic pax yield (RHS)
(RMB)(%)
Source: Company data, Deutsche Bank
Figure 5: Non-operating income as a
percentage of reported net profit
105%
85%76% 77%
68%81% 76%
69%
0%
20%
40%
60%
80%
100%
120%
20
11
20
12
20
13
20
14
20
15
20
16
E
20
17
E
20
18
E
Source: Company data, Deutsche Bank estimates
2 December 2016
Air
Spring Airlines
Page 6 Deutsche Bank AG/Hong Kong
Valuation – scarce LCC play
Summary
Our target price of RMB48.2 is based on a FY17E target P/BV of 4.2x,
about 20% below its average P/BV of 5.3x in the past two years.
While the target FY17E P/BV is at the higher end of the global LCCs
peer group, we believe this is justified considering Spring’s FY18E ROE
of 20%.
We also believe that Spring’s status as a scarce listed major Chinese
LCC play warrants a higher P/BV target multiple than peers.
Tiger Airways was acquired by Singapore Airlines at 5.2x P/BV. Tiger
had a FY16 ROE of less than 1% vs. Spring’s 19-20% in FY17-18E.
Target price of RMB48.2 based on 4.2x FY17E P/BV
Among Asian airlines, we generally find a positive correlation between P/BV
and forward ROE. Asian airline stocks are trading in a valuation range of 0.8-
1.7x FY17E P/BV, with FY17E core ROEs ranging 2.0-26.9%.
Similar to other Asian airlines, we value Spring Airlines using a P/BV ratio. Over
the past two years since listing, the stock has traded in a range of 1.6-8.0x
one-year forward P/BV, with ROEs in the range of 26-28%. Cost of equity for
Spring is estimated at 5.7% (risk-free rate for China of 3.9%, equity risk
premium of 5.6%, beta of 0.8, and debt/equity ratio of 1.0). With ROEs
expected to trend downwards over the next two years, we think a lower target
P/BV than current levels is prudent. In comparison with the rest of Asia,
Spring’s FY16-18E average ROE is near the higher end of the range, and this is
further supported by a relatively low COE. We also peg its valuation higher
than those of its peers in China because ROEs are superior at Spring.
Figure 6: Regional airlines – FY17E P/BV vs. FY16-18E
average ROE
Figure 7: Chinese airlines under DB’s coverage – FY17E
P/BV vs. FY16-18E average ROE
5
10
15
20
25
30
0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0
FY
16-1
8E
Ave
rag
e C
ore
R
OE
(%
)
2017E P/B (x)
Spring Airlines
Air ChinaAir
China-A
CSA CSA-ACEA CEA-A
10
12
14
16
18
20
0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0
FY
16-1
8E
Ave
rag
e C
ore
R
OE
(%
)
2017E P/B (x)
Spring Airlines
NOTE: Singapore Air, JAL, and ANA Holdings have March fiscal year ends Source: Company data, Bloomberg Finance LP, Deutsche Bank estimates
Source: Bloomberg Finance LP, Deutsche Bank estimates
2 December 2016
Air
Spring Airlines
Deutsche Bank AG/Hong Kong Page 7
Our target price of RMB48.2 for Spring is set at a target 4.2x FY17E P/BV,
about 20% below its average P/BV of 5.3x in the past two years since listing to
reflect our expectation of lower FY17-18E ROEs vs. previous years. This is
justified, in our view, since we expect the company to deliver 19-20% three-
year average ROE in FY16-18E, vs. 26-28% in FY14-15.
Figure 8: Spring Airlines – rolling forward P/BV band Figure 9: Spring Airlines – rolling forward P/BV vs. ROE
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
Jan
-15
Mar-
15
May-1
5
Jul-15
Sep
-15
No
v-1
5
Jan
-16
Mar-
16
May-1
6
Jul-16
Sep
-16
No
v-1
6
Rolling 12-mo P/BV (X) Mean
Mean -SD Mean +SD
.
10
15
20
25
30
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
Jan-1
5
Mar-
15
Ma
y-1
5
Jul-15
Sep-1
5
Nov-1
5
Jan-1
6
Mar-
16
Ma
y-1
6
Jul-16
Sep-1
6
Nov-1
6
Rolling 12-mo P/BV (X) Rolling 12-mo ROE (%, RHS)
Source: Company data, Bloomberg Finance LP, Deutsche Bank estimates
Source: Company data, Bloomberg Finance LP, Deutsche Bank estimates
Cross-check: valuation premium to global LCCs justified
Global low-cost carrier stocks are trading at 1.1-4.4x FY17E P/BV in their
respective regions. For Spring Airlines, we think that our target FY17E P/BV of
4.2x at the higher end of the global trading average, is justified considering
Spring’s relatively high FY18E ROE of 20%.
We do not use P/Es for valuing airlines because earnings are too volatile.
Adjusted EV/EBITDAR is our preferred earnings-based valuation model. In this
respect, Spring is trading at an adjusted FY17E EV/EBITDAR of 16.5x versus
FY16-18E two-year compounded EBITDAR growth of 16.5%.
Figure 10: Global LCCs – FY17E P/BV vs. FY18E ROE Figure 11: Regional airlines – EV/EBITDAR comparison
0
5
10
15
20
25
30
35
40
45
0.0 2.0 4.0 6.0 8.0
FY
16-1
8E
Ave
rag
e C
ore
R
OE
(%
)
2017E P/B (x)
Spring Airlines
-10.0
-5.0
0.0
5.0
10.0
15.0
20.0
0.0 5.0 10.0 15.0 20.0
Spring AirlinesSpring Airlines
FY17E adj. EV/EBITDAR (x)
FY
16
-18
E E
BIT
DA
R
2-y
ear
CA
GR
(%
)
Remark: Excluding outlier Source: Bloomberg Finance LP, Deutsche Bank estimates
NOTE: Singapore Air, JAL, and ANA Holdings have March fiscal year ends Source: Company data, Bloomberg Finance LP, Deutsche Bank estimates
2 December 2016
Air
Spring Airlines
Page 8 Deutsche Bank AG/Hong Kong
Tiger Airways acquired by Singapore Airlines at 5.2x P/BV
In November 2015, Singapore Airlines (SIA) proposed to buy all the remaining
outstanding shares of Tiger at SGD0.41. It subsequently raised the final offer
price to SGD0.45 in cash for each share, which values Tiger at 5.2x FY16 P/BV
(fiscal year ends Mar-16), on our estimates.
Tiger Airways is a Singapore-based regional LCC with 23 A320 aircraft in
operation as of the end of 2015. Tiger recorded FY16 net profit of SGD0.28m
(vs. a net loss of SGD264.2m in FY15) and ROE of less than 1%.
All in all, we believe our target multiple of 4.2x FY17E P/BV for Spring Airlines
is prudent as we expect Spring to deliver FY17-18E ROE of 19-20%, i.e.
significantly above Tiger’s.
Sp
ring
Airlin
es
Air
2 D
ecem
ber 2
01
6
Deu
tsch
e B
an
k A
G/H
on
g K
on
g
Pag
e 9
Figure 12: Global low cost carrier (LCC) stocks – valuation comparison (as of 1 December 2016)
Bloomberg Company Rec Cur Price TP Mkt cap PE (x) EPS growth (%) P/BV (x) EV/EBITDA (x) ROAE (%) Yield (%)
Ticker (HKD) (USDm) 2016E 2017E 2016E 2017E 2016E 2017E 2016E 2017E 2016E 2017E 2016E 2017E
U.S
ALGT US Allegiant Buy USD 160.60 190.00 2,693 12.2 NA 2.8 -2.6 5.08 3.86 6.0 5.9 50.0 34.9 1.5 1.7
HA US Hawaiian Buy USD 50.40 55.00 2,749 9.5 13.5 60.9 -24.1 3.72 2.90 7.1 8.2 49.4 24.5 0.0 0.0
JBLU US JetBlue Buy USD 20.40 29.00 6,577 9.4 10.0 8.6 -6.6 1.67 1.46 5.8 6.0 20.6 16.1 0.0 0.0
LUV US Southwest Buy USD 47.07 53.00 29,236 12.6 13.3 5.1 -5.5 3.12 2.53 6.7 6.7 28.1 21.1 0.5 0.5
SAVE US Spirit Buy USD 55.60 56.00 3,912 13.9 13.6 -8.4 2.5 2.63 2.18 9.9 9.0 20.8 17.5 0.0 0.0
VA US Virgin America Hold USD 56.60 57.00 2,503 20.2 21.7 -38.3 -6.9 2.69 2.39 19.7 21.6 14.4 11.8 0.0 0.0
Un-weighted average 13.0 14.4 5.1 -7.2 3.15 2.55 9.2 9.6 30.5 21.0 0.3 0.4
Europe
EZJ LN easyJet** Hold GBp 996.50 935.00 8,130 13.5 11.2 -22.1 -17.4 1.46 1.36 9.3 9.5 17.2 12.6 3.7 4.5
RYA ID Ryanair* Hold EUR 13.87 15.00 19,331 11.3 13.1 47.4 14.6 5.28 4.44 9.3 8.9 40.9 35.4 2.4 6.0
Un-weighted average 12.4 12.2 12.7 -1.4 3.37 2.90 9.3 9.2 29.0 24.0 3.0 5.3
Asia (ex-China)
AIRA MK AirAsia Hold MYR 2.69 3.12 1,676 5.0 6.0 174.6 -16.7 1.30 1.11 4.5 4.2 29.6 21.5 1.9 1.9
CEB PM Cebu Air Buy PHP 101.70 140.00 1,254 7.0 6.2 49.9 1.3 1.90 1.50 5.8 5.7 30.7 26.9 2.0 2.0
AAV TB Asia Aviation Hold THB 6.40 7.05 871 13.5 12.2 77.4 13.9 1.43 1.32 6.9 6.2 11.0 11.3 2.3 2.6
AAX MK AirAsia X Bhd Not rated MYR 0.38 NA 350 7.5 7.7 147.2 -2.0 1.75 1.45 5.9 6.2 27.7 13.8 0.0 0.0
Un-weighted average 8.2 8.0 112.3 -0.9 1.60 1.35 5.8 5.6 24.8 18.4 1.5 1.6
China A-share
601021 CH Spring Airlines Buy CNY 41.14 48.20 4,774 24.6 20.0 -0.5 23.1 4.26 3.58 24.7 20.7 18.7 19.5 0.5 0.7
603885 CH Juneyao Airlines Not rated CNY 25.24 NA 4,699 20.0 16.1 30.0 24.3 5.05 4.00 13.2 10.8 26.3 24.4 0.7 0.9
Un-weighted average 22.3 18.0 14.8 23.7 4.66 3.79 19.0 15.8 22.5 21.9 0.6 0.8
Asia un-weighted average (ex-outlier) 17.2 14.1 26.5 16.2 3.74 3.03 14.6 12.4 25.3 23.6 1.0 1.2 * Fiscal years ended Mar 2016 and 2017 are referenced instead ** Fiscal years ended Sep 2016 and 2017 are referenced instead Source: Company data, Bloomberg Finance LP, Deutsche Bank estimates
2 December 2016
Air
Spring Airlines
Page 10 Deutsche Bank AG/Hong Kong
An evident winner in China’s infant LCC market?
Summary
Spring Airlines is China’s first and largest LCC carrier with two major
base airports, at Shanghai Hongqiao and Shanghai Pudong.
With its single-type A320 aircraft, Spring can cover most cities/regions
in China, Northeast Asia and Southeast Asia (ASEAN).
The company has managed to steadily grow its market share in China.
Spring achieved 3.0% market share in 2015. In addition, it maintained
a stable lead in China’s LCC market, with 29-34% share in 2011-15.
Spring enjoys significant cost leadership over network carriers. Its unit
operating costs are 35-40% lower, which enables the company to
deliver better profitability even on 36-42% lower passenger yields.
Compared to ASEAN LCC peers, Spring’s unit operating cost is on par
with that for Cebu, AAV and Tiger but lags behind AirAsia. However,
this is offset by Spring’s higher passenger yield and load factor.
We foresee great synergy with parentco Spring Tour. In 1H16, sales
from Spring Tour’s charter flights contributed 27% of revenue (FY15:
22%). The trend has been steadily increasing over recent years.
The airline started to expand to international and regional routes in
2010. Its international business revenue contribution increased rapidly
to 37.5% in 1H16, from 1.4% in 2011.
As route subsidy is directly related to flight operation, we believe it is
sustainable. While government subsidies still accounted for over 60%
of reported net profit in FY11-15, we note that reliance on these
subsidies has declined.
China’s first and largest LCC airline
Headquartered in Shanghai, Spring Airlines was China’s first low-cost carrier
(LCC) and one of China’s first airlines funded by private capital. The company
was established in 2004 to provide domestic air passenger services and started
to expand to international and regional routes in 2010. As of 1H16, the
company offers 66 domestic, 50 international and 6 regional routes (122 in
total).
Spring operates at two base airports, Shanghai Hongqiao and Shanghai
Pudong. It has also set up hub operations at Shijiazhuang, Shenyang,
Hangzhou and, most recently, Shenzhen.
2 December 2016
Air
Spring Airlines
Deutsche Bank AG/Hong Kong Page 11
Figure 13: Spring Airlines – base and hub airports
Shanghai Hongqiao/
Shanghai Pudong
Shijiazhuang
Hangzhou
Shenzhen
Shenyang
Source: Company data, Deutsche Bank
Low air travel penetration and increasing citizen travel
Chinese citizens still travel less by air than global standards, although the
number of air passengers out of total transportation passengers has been
steadily increasing, growing from 0.4% in 1995 to 2.0% in 2015. In 2015, we
estimate that on average Chinese people traveled 0.3 times by air. This
compares to 2.5 times for every person in the US, 1.3 times in Korea and 0.9
times in Japan.
Penetration of LCCs in China is also much lower than global levels. For every
1,000 air passengers in China, only 94 travelled on LCCs in 2015, representing
a penetration of merely 9%. In contrast, LCC penetration reached 56% in
ASEAN, 40% in Western Europe, 32% in the US, and 11% in Northeast Asia.
Figure 14: Air travel penetration*, global comparison
Figure 15: LCC penetration rate (to total air travel
capacity), global comparison
0.3
0.9
1.2 1.3 1.4
2.0
2.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
Ch
ina
Jap
an
Fra
nce
Ko
rea
Ge
rma
ny
U.K
.
U.S
.
9% 11%19%
32%40%
56%
0%
10%
20%
30%
40%
50%
60%
Ch
ina
No
rth
ea
st A
sia
Mid
dle
Ea
st
No
rth
Am
eri
ca
We
ste
rn E
uro
pe
So
uth
ea
st A
sia
* Penetration rates = total passengers carried (domestic and international) by air / total population Source: CEIC, World Bank
Source: CAPA, Diio, Deutsche Bank
2 December 2016
Air
Spring Airlines
Page 12 Deutsche Bank AG/Hong Kong
Already the largest LCC player with potential to fly higher
With its single-type Airbus A320 aircraft, Spring can cover most cities/regions
in China, Northeast Asia and Southeast Asia (ASEAN). According to Airbus, the
maximum cruising distance of the A320-200 is 6,150km. With a typical two-
class layout (business and economy) and 150 passengers on-board, the A320-
200 aircraft can reach most regions in East Asia, Northeast Asia and Southeast
Asia (ASEAN) from Shanghai.
The company has managed to steadily grow its share of China’s passenger air
travel market over the last several years. In 2015, Spring Airlines achieved a
3.0% market share, measured by passenger traffic (RPK), in China. In addition,
it maintained a relatively stable lead in China’s LCC market with a 29-34%
share in 2011-15.
Figure 16: Spring Airlines – market share in China Figure 17: Spring Airlines – market share in LCC
2.3%
2.8%2.9% 2.9%
3.0%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
2011 2012 2013 2014 2015
32.5%34.1%
30.9%29.3% 28.8%
0%
5%
10%
15%
20%
25%
30%
35%
40%
2011 2012 2013 2014 2015
Source: Company data, CEIC
Source: Company data, CEIC, Diio
Significant cost leadership to compensate for low yields
Spring sells cheaper air tickets than its peer full service carriers (FSC) such as
Air China, China Eastern Airlines (CEA) and China Southern Airlines (CSA). As a
result, Spring’s passenger yields are lower than FSCs’. In FY11-15, the
company’s passenger yields were on average 36-42% below those of China’s
three largest FSCs.
To offset the weaker-than-FSC yields and compete with network carriers,
lower unit operating costs are crucial for Spring. During the same period,
Spring’s unit operating costs (measured by dividing total operating expenses
by total ASK) were on average 35-40% below its FSC peers’.
2 December 2016
Air
Spring Airlines
Deutsche Bank AG/Hong Kong Page 13
Figure 18: Passenger yield comparison Figure 19: Unit operating cost (per ASK) comparison
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
2011 2012 2013 2014 2015
Spring Airlines Air China CEA CSA(RMB)
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
2011 2012 2013 2014 2015
Spring Airlines Air China CEA CSA(RMB)
Source: Company data, Deutsche Bank
Source: Company data, Deutsche Bank
As Spring expand its global footprint into ASEAN market (e.g. Thailand), it will
face direct competition against regional LCCs, where cost efficiency would be
even more important. Compared to Asian peers, Spring’s unit operating cost is
on par with that for Cebu Pacific, AAV and Tiger Airways but still lags behind
LCC leader AirAsia.
Figure 20: Global LCCs – unit operating cost (per ASK) comparison
0.00
0.01
0.02
0.03
0.04
0.05
0.06
0.07
0.08
0.09
0.10
Sp
ring
Air
lines
Air
Asia
Tig
er
Air
ways*
Air
Asia
X
Ceb
u P
acific
AA
V
Ryanair*
easyJet*
*
So
uth
west
Air
lines
JetB
lue
WestJ
et
2011 2012 2013 2014 2015(USD)
* March yearend. ** September yearend. Note: Tiger Airways was delisted on 11 May 2016 after Singapore Airlines acquired more than 90% of its stake to make it private Source: Company data, Deutsche Bank
We believe a large part of the difference is from scale. To elaborate, AirAsia
Malaysia has a fleet size of 80 A320 as of the end of 2015, while Spring
operates a total of 52 A320, 50 A320 for AAV (Thai AirAsia) and 55 for Cebu.
Our unit cost forecasts for Spring point to a narrowing gap with AirAsia as it
expands its fleet to 95 aircraft by FY18E. In addition, a higher unit operating
cost is offset by Spring’s higher passenger yield and load factor than ASEAN
LCCs, including AirAsia.
2 December 2016
Air
Spring Airlines
Page 14 Deutsche Bank AG/Hong Kong
Figure 21: ASEAN LCCs – passenger yield comparison
Figure 22: ASEAN LCCs – passenger load factor
comparison
0.01
0.02
0.03
0.04
0.05
0.06
0.07
0.08
Sp
ring
Air
lines
Air
Asia
Tig
er
Air
ways*
Air
Asia
X
Ceb
u P
acific
AA
V
2011 2012 2013 2014 2015(USD)
70%
75%
80%
85%
90%
95%
Sp
ring
Airlin
es
Air A
sia
Tig
er
Air
ways*
Air
Asia
X
Ceb
u P
acific
AA
V
2011 2012 2013 2014 2015
* March yearend. Tiger Airways was delisted on 11 May 2016 after Singapore Airlines acquired more than 90% of its stake to make it private Source: Company data, Deutsche Bank
* March yearend. Tiger Airways was delisted on 11 May 2016 after Singapore Airlines acquired more than 90% of its stake to make it private Source: Company data, Deutsche Bank
Single type of aircraft
Spring Airlines operates only one type of aircraft (Airbus A320), to control its
operating expenses. A simple fleet structure not only provides strong
bargaining power with aircraft manufacturers and leasing companies when
placing purchase/lease orders, but also reduces spending on aviation materials.
In addition, efficiency can be improved through: 1) customized pilot training to
ensure flexibility in aircrew resource optimization; and 2) standardized aircraft
maintenance processes.
Figure 23: Spring Airlines – fleet structure and delivery schedule
2011 2012 2013 2014 2015 2016E 2017E 2018E
A320 28 32 39 46 52 66 80 95
- Self ow ned 5 10 12 12 19
- Finance lease 2 2 2 4 3
- Op lease 21 20 25 30 30 Source: Company data , Deutsche Bank estimates
All economy class and high-density seating
Spring adopts all-economy class seating (i.e. no business or premium economy
classes) with shortened seat pitch to increase seat density and therefore
maximize seat capacity.
The maximum seating of an A320 aircraft is 180-186 seats at 74cm pitch,
while typical seating is 150-168 seats at 81cm. According to the company, its
all-economy A320 fleet can increase seating by 15-20% compared with the
typical two-class A320 layout for network carriers.
Figure 24: Comparison of A320-200 aircraft layout for LCCs vs. FSCs
LCC FSC
Cabin class All economy Business class and economy class
Seat pitch 74cm 81cm
Number of seats 180-186 1-class: 164-168; 2-class: 150-158
Number of pilots 2 2
Number of flight attendants 2-3 5-6 Source: Spring Airlines, Airbus, Deutsche Bank
2 December 2016
Air
Spring Airlines
Deutsche Bank AG/Hong Kong Page 15
With a larger number of passengers on board each flight, the all-economy
cabin setting enables the budget airline to: 1) reduce unit fuel consumption;
and 2) lower unit aircraft depreciation cost and leasing expenses.
Figure 25: Unit fuel cost comparison
Figure 26: Unit aircraft depreciation and leasing
expenses comparison
0.00
0.05
0.10
0.15
0.20
0.25
2011 2012 2013 2014 2015 2016E 2017E 2018E
Air China China Southern Airlines
China Eastern Airlines Spring Airlines(RMB)
0.03
0.04
0.05
0.06
0.07
0.08
0.09
0.10
2011 2012 2013 2014 2015 2016E 2017E 2018E
Air China China Southern Airlines
China Eastern Airlines Spring Airlines(RMB)
Source: Company data, Deutsche Bank estimates
Source: Company data, Deutsche Bank estimates
High aircraft utilization to lower unit fixed cost
Longer aircraft utilization lowers unit fixed costs for Spring. Average aircraft
utilization for Spring is about two hours higher than the industry average in
China. To elaborate, aircraft utilization hours for Spring Airlines stayed at a
level of above 11 hours per day in FY11-15 (average utilization of 11.5 hours),
vs. an average of 9.4 hours for Chinese carriers.
Figure 27: Utilization hours for Chinese airlines Figure 28: Unit fixed cost comparison
9.3 9.29.5 9.5 9.5
11.4 11.411.6 11.5 11.5
6.0
7.0
8.0
9.0
10.0
11.0
12.0
2011 2012 2013 2014 2015
China Spring Airlines Air China CEA CSA(hours)
0.00
0.05
0.10
0.15
0.20
0.25
0.30
2011 2012 2013 2014 2015 2016E 2017E 2018E
Air China China Southern Airlines
China Eastern Airlines Spring Airlines(RMB)
Source: Company data, CEIC, Deutsche Bank
Source: Company data, Deutsche Bank estimates
2 December 2016
Air
Spring Airlines
Page 16 Deutsche Bank AG/Hong Kong
High load factor and passenger volume for preferential airport fees
In China, aeronautical fees such as landing fees and passenger service fees are
regulated by the Civil Aviation Administration of China (CAAC). According to
CAAC regulation on passenger service fees, domestic flights flown by
domestic carriers can enjoy a preferential 20-30% discount to benchmark rates,
if those flights satisfy the following two prerequisites:
1) they deploy aircraft that are equipped with at least 10% more seats
than the average seat number of comparable fleet models; and
2) they achieve a minimum passenger load factor of 85%.
Figure 30: Passenger load factor for Chinese airlines
Figure 31: Unit landing cost (per ASK) for Chinese
airlines
81.8%79.6%
81.1% 81.4% 82.1%
94.4% 94.1% 93.5% 93.1% 92.8%
70%
75%
80%
85%
90%
95%
100%
2011 2012 2013 2014 2015
China Spring Airlines Air China CEA CSA
0.02
0.03
0.04
0.05
0.06
0.07
0.08
0.09
2011 2012 2013 2014 2015 2016E 2017E 2018E
Air China China Southern Airlines
China Eastern Airlines Spring Airlines(RMB)
Source: Company data, CEIC, Deutsche Bank
Source: Company data, Deutsche Bank
Figure 32: Passenger load factor for global LCC airlines
70%
75%
80%
85%
90%
95%
100%
Sp
ring
Air
lines
Air
Asia
Tig
er
Air
ways*
Air
Asia
X
Ceb
u P
acific
AA
V
Ryanair*
easyJet*
*
So
uth
west
Air
lines
JetB
lue
WestJ
et
2011 2012 2013 2014 2015
Source: Company data, Deutsche Bank
Figure 29: Preferential airport charge
for domestic flights
Passenger load factor Discount to benchmark rate
85-90% 20%
90-95% 25%
95% & above 30%
Source: CAAC
2 December 2016
Air
Spring Airlines
Deutsche Bank AG/Hong Kong Page 17
Charter flight arrangement for improved aircraft utilization
We see great potential synergy with parentco Spring Tour. In addition to its
regular air passenger service, Spring Airlines provides charter flight services to
parentco Spring Tour and its subsidiaries for their group tour products. In
1H16, sales from Spring Tour’s charter flight service contributed 26.7% of
Spring Airlines’ total reported revenue (FY15: 21.5%). The trend has been
steadily increasing over recent years.
Figure 33: Spring Airlines – charter flight revenue contribution from Spring
Tour
13.3%14.3%
15.9%
17.8%
21.5%
16.4%
19.1%20.4%
22.5%
26.7%
0%
5%
10%
15%
20%
25%
30%
2011 2012 2013 2014 2015 1H14 2H14 1H15 2H15 1H16
Source: Company data
Charter flights are booked for a certain route for the whole flight season or for
a certain number of seats on some route. This is an important sales channel for
Spring Airlines for tourist routes such as Shanghai-Sanya, Shanghai-Guilin, and
Shanghai-Zhangjiajie.
While carrying a slightly lower yield vs. regular passenger traffic, we believe
charter flights can benefit Spring by:
Increasing daily aircraft utilization hours and lowering unit fixed cost,
as chartered flights often take-off during off-peak hours (i.e. before
8am or after 9pm)
Maintaining a healthy load factor on new routes and cultivating a
market, and by leveraging on travel agencies’ strong customer
acquisition capabilities
Helping yield management and increasing ticket prices for individual
sales for mature routes, as chartered seats are booked 3-6 months in
advance
International expansion: short-term pain for long-term gain
In view of China’s increasing outbound tourism demand, Spring started to
expand to international and regional routes in 2010. Its international business
revenue contribution increased rapidly to 37.5% in 1H16, from 1.4% in 2011.
2 December 2016
Air
Spring Airlines
Page 18 Deutsche Bank AG/Hong Kong
Meanwhile, international passenger capacity (ASK) grew from 1.2% of Spring’s
total ASK in 2011 to 36.2% in 1H16 and registered a 120.3% 5-year CAGR in
FY11-15.
Figure 34: Spring Airlines – international flights revenue
contribution
Figure 35: Spring Airlines – international capacity (ASK)
percentage contribution
1.4% 4.2% 8.9% 12.9%29.7% 37.5%
0%
20%
40%
60%
80%
100%
2011 2012 2013 2014 2015 1H16
Domestic International Regional
92.3% 90.6% 84.5% 81.9%67.6% 60.0%
1.2% 3.3% 8.8% 12.6%28.1% 36.2%
0%
20%
40%
60%
80%
100%
2011 2012 2013 2014 2015 1H16
Domestic International Regional
Source: Company data; Deutsche Bank
Source: Company data; Deutsche Bank
Currently, major international markets for Spring include Japan, Korea,
Thailand and to a lesser extent other ASEAN markets (Malaysia, Singapore and
Indonesia). In addition, the airline set up a 33%-owned Japanese JV in 2012 to
operate Japan-China routes. The company’s A320 fleet can cover most of the
popular tourism destinations in Northeast Asia (mainly Japan and Korea
markets) and the ASEAN region.
International flights still enjoy a higher passenger yield than domestic ones,
even though Spring has experienced sequential declines in yields for both
international and domestic traffic, probably due to: 1) declines in fuel prices
and subsequent fuel surcharge cancelation for domestic routes in FY14-15;
and 2) international capacity expansion by competitors in recent years
resulting in a drop in international ticket prices.
Figure 36: Spring Airlines – domestic and international yield comparison
83.6%85.0%
88.8%87.2% 88.1%
89.5%86.7% 86.7% 86.7%
0.560.57
0.42
0.44
0.400.37
0.36 0.37
0.38
0.20
0.30
0.40
0.50
0.60
60%
70%
80%
90%
100%
2011 2012 2013 2014 2015 1H16 2016E 2017E 2018E
International load factor (%, LHS) Domestic load factor (%, LHS)
International pax yield (RHS) Domestic pax yield (RHS) (RMB)(%)
Source: Company data, Deutsche Bank estimate
2 December 2016
Air
Spring Airlines
Deutsche Bank AG/Hong Kong Page 19
We expect Spring’s international passenger load factor to stay at a healthy 87-
88% level in FY16-18 (vs. 87-90% in FY13-1H16), with yield bottoming out in
FY17E.
Japan: We expect a negative yield impact from competition in the
Japan market and for Japanese Yen appreciation to ease YoY.
Korea: The additional Jeju flights should further ramp up load factor,
while supply on Seoul routes remains tight given limited available slots
at Incheon Airport.
Thailand: ASK on Thailand routes expanded 64.6% YoY in 1H16, with
92.7% load factor. Among Spring’s ASEAN destinations, we expect
the Thailand market to remain more profitable, considering tight flight
slots at major Thai airports, while the impact from the recent “zero-
dollar” group tour crackdown should only be temporary.
Figure 37: Spring Airlines – international and domestic
passenger load factor
Figure 38: Spring Airlines – international and domestic
passenger traffic growth
70%
75%
80%
85%
90%
95%
100%
Jan-1
4
Ap
r-1
4
Jul-1
4
Oct-
14
Jan-1
5
Ap
r-1
5
Jul-1
5
Oct-
15
Jan-1
6
Ap
r-1
6
Jul-1
6
International pax load factor
Domestic pax load factor
-50%
0%
50%
100%
150%
200%
250%
Jan-1
5
Mar-
15
May-1
5
Jul-1
5
Sep
-15
No
v-1
5
Jan-1
6
Mar-
16
May-1
6
Jul-1
6
Sep
-16
International pax traffic (RPK YoY%)
Domestic pax traffic (RPK YoY%)
Source: Company data; Deutsche Bank
Source: Company data; Deutsche Bank
Route subsidy sustainable; profit contribution decreasing
Spring’s subsidy income mainly comes in two ways: 1) local governments and
local airport authorities subsidizing the operation of inbound/outbound flights
(route subsidy); and 2) local governments’ direct financial subsidies. The
amount of route subsidy usually depends on passenger traffic volume or
capacity deployment on a certain route.
Route subsidy linked to flight operation; sustainable going forward
As route subsidy is directly related to flight operation, we believe it is
sustainable. Route subsidies account for a large portion of Spring’s total
subsidy received, at 73-96% in 2011-15. Authorities view the subsidies as a
means to promote the local economy by bringing in more travelers, which
implies strong incentives for governments to continue such subsidizing
practices.
While total government subsidy still accounted for over 60% of Spring’s
reported net profit in FY11-15, we note that Spring’s reliance on subsidies
declined during the period from 100.5% to 64.0%.
These subsidies are mostly offered on flights to less popular destinations. They
enable Spring to: 1) continue offering low ticket prices to attract passengers; 2)
2 December 2016
Air
Spring Airlines
Page 20 Deutsche Bank AG/Hong Kong
cultivate local travel markets at low costs and 3) rapidly grow share in the local
market and gain a dominant position, which in turn ensures healthy pricing
and yields.
Figure 39: Spring Airlines – route subsidy as a
percentage of total government subsidy income
Figure 40: Spring Airlines – total government subsidy as
a percentage of reported net profit
80.2%
72.5%
79.3% 77.7%
95.5%
50%
60%
70%
80%
90%
100%
2011 2012 2013 2014 2015
100.5%
80.8%
71.3% 69.7%64.0%
50%
60%
70%
80%
90%
100%
110%
2011 2012 2013 2014 2015
Source: Company data, Deutsche Bank
Source: Company data, Deutsche Bank
Our forecasts show that profit contribution from non-operating incomes, over
90% of which are from government subsidy, will maintain a slight downward
trend going forward as Spring continues to expand to regional markets.
Figure 41: Spring Airlines – non-operating income as a percentage of reported
net profit
105%
85%
76% 77%
68%
81%76%
69%
0%
20%
40%
60%
80%
100%
120%
2011 2012 2013 2014 2015 2016E 2017E 2018E
Source: Company data, Deutsche Bank estimates
Layout of civil airport construction plan implies more regional routes
Central government has laid out a national construction plan for civil airports in
China’s vast lower-tier cities and inland regions, which is another reason why
we believe the route subsidy arrangement between airlines and municipal
government is sustainable.
According to the plan issued by the Civil Aviation Administration of China
(CAAC) in 2008, the country aims to have 244 civil airports by 2020, a net
2 December 2016
Air
Spring Airlines
Deutsche Bank AG/Hong Kong Page 21
increase of 38 new airports from the 206 total airports by 2015. In addition,
CAAC recently announced that the government has opened up the civil airport
market to private capital and encourages public-private partnership models
(PPP) for airport construction and operation.
More pricing freedom to fight railway competition
Easing pressure from high-speed railway roll-out
We believe the peak of China’s vast launch of high-speed railways (HSR) has
passed, with the large majority of trunk lines included in the nation’s “four
horizontal and four vertical HSR network” plan already in operation for a few
years. The key milestone of the network, the Beijing-Shanghai HSR, has been
in operation for more than five years, since Jun-11. The only remaining four
sections still in construction will be completed by 2018.
Figure 42: China’s four horizontal and four vertical HSR network
Four horizontal HSR lines Sections in operation Sections in construction
Xuzhou-Zhengzhou-Lanzhou Xuzhou-Zhengzhou in operation Sep-16, Zhengzhou-Xi'an Feb-10, Xi'an-Baoji Dec-13
Baoji-Lanzhou to operate by mid-17
Shanghai-Hangzhou-Nanchang-Changsha-Kunming Shanghai-Hangzhou in operation Oct-10, Hangzhou-Changsha Dec-14, Changsha-Guiyang Jun-15
Guiyang-Kunming to operate by end-16
Qingdao-Shijiazhuang-Taiyuan Qingdao-Jinan in operation Jul-08, Shijiazhuang-Taiyuan Apr-09
Jinan-Shijiazhuang to operate by end-17
Shanghai-Nanjing-Wuhan-Chongqing-Chengdu Whole line in operation Jul-14 Nil
Four vertical HSR lines Sections in operation Sections in construction
Beijing-Wuhan-Guangzhou-Shenzhen Beijing-Wuhan in operation Dec-12, Wuhan-Guangzhou Dec-09, Guangzhou-Shenzhen Dec-11
Nil
Beijing-Shanghai (incl. Bengbu-Hefei, Nanjing-Hangzhou)
Whole line in operation Jun-11 Nil
Beijing-Shenyang-Harbin (Dalian) Harbin-Dalian in operation Dec-12 Beijing-Shenyang to operate by end-18
Shanghai-Hangzhou-Ningbo-Fuzhou-Shenzhen Whole line in operation Dec-13 Nil Source: Deutsche Bank
Competition from the HSR network is intense for routes with lengths of less
than 800km, given the shorter commute time. However, HSR is less attractive
for routes over 1,000km due to prolonged travelling time, as HSR takes longer
than air travel even considering the time needed for airport security checks and
possible flight delays of 1-2 hours. Figure 43 shows a travel time and ticket
price comparison between air travel and HSR.
Routes below 600km: We see fierce competition between the two
means of transport and the contest clearly favors HSR given its short
travel time of merely c.1-3 hours. As a result, airlines terminate flight
services once HSR enters operation.
Routes of 600-800km: We see fierce competition but certain airlines
still offer scheduled flights on these routes on a reduced frequency
and with ticket prices close to HSR. Some of the flights serve as
feeders to airlines’ transit flights, in our view.
Routes of 800-1,000km: The competitiveness of air travel increases
due to prolonged travel times on HSR.
Routes above 1,000km: We foresee limited traffic dilution as HSR
takes longer than air travel even considering the time needed for
commuting to the airport, security checks and possible flight delays.
2 December 2016
Air
Spring Airlines
Page 22 Deutsche Bank AG/Hong Kong
Figure 43: Travel time and ticket price comparison for HSR and air travel
Flight and train route Travel duration (hour)
Lowest economy-class ticket price (all fees inclusive, RMB)
Hangzhou-Hefei (404km)
HSR 2h18m-2h43m 178
Flight N/A N/A
Zhengzhou-Shijiazhuang (418km)
HSR 1h21m-2h4m 189.5-208
Flight N/A N/A
Hefei-Fuzhou (630km)
HSR 4h19m-4h43m 357
Flight N/A N/A
Hangzhou-Wuhan (656km)
HSR 4h38m-5h18m 283
Flight 1h20m-1h36m 250-510
Hangzhou-Xiamen (717km)
HSR 5h18m-5h44m 376
Flight 1h35m-1h45m 370-440
Fuzhou-Nanjing (747km)
HSR 5h5m-5h36m 410
Flight 1h5m 300-470
Ningbo-Wuhan (754km)
HSR 5h46m-6h27m 354
Flight 1h40m-1h45m 250-500
Hangzhou-Changsha (805km)
HSR 4h34m-5h 405
Flight 1h45m-2h 230-510
Hangzhou-Zhengzhou (841km)
HSR 4h56m-5h26m 431
Flight 1h45m-1h50m 270-530
Shanghai Hongqiao-Xiamen (878km)
HSR 6h22m-6h46m 449
Flight 1h50m-2h 600-690
Wuhan-Guangzhou (873km)
HSR 3h54m-4h6m 444-464
Flight 1h45m-1h55m 370-490
Shanghai Hongqiao-Shijiazhuang (1,130km)
HSR 7h6m-7h31m 623.5
Flight 2h10m-2h25m 296-730 Source: Deutsche Bank, Company data
Increasing pricing freedom for domestic routes
In early October, CAAC and NDRC together issued a statement that, with
effect from November, the government will allow domestic carriers to adjust
pricing more freely according to the market situation for: 1) routes of less than
800km; and 2) routes over 800km and in direct competition with HSR (with the
cumulative upward revision not exceeding 10% per flight season for a
particular route).
We estimate that about 35-40% of domestic routes are within the 800km flight
distance. We expect domestic airlines to be more independent in setting
airfares going forward. In addition, the price reform could enable airlines to
better manage yields in peak season and lower prices to improve load factor
(to at least cover fixed costs) in offseason.
2 December 2016
Air
Spring Airlines
Deutsche Bank AG/Hong Kong Page 23
Financials
Summary
The composition of Spring’s air transport has changed over the years,
with a meaningful increase in international business. Domestic
passenger revenue contributed 87% of total revenue in FY11 vs. 59%
in FY15, while international business climbed from 1% to 29%.
We expect international RPK to expand by 25.0-47.5% YoY in FY16-
18E, with a relatively stable load factor of 87-88% for the same period.
With passenger yield bottoming in FY16E, we forecast a 4.1-6.0% YoY
rebound in FY17-18. We also expect load factor to remain stable on
more balanced demand and supply increases.
We project a decline in operating profit margin from 14.6% in FY15 to
12.1% in FY16E and recovery to 12.7-13.4% in FY17-18E.
The airline is considering an overall fleet increase from 52 planes at
the end of FY15 to about 80 by the end of FY17 and 95 by FY18.
We estimate that capex will remain at about RMB5-6bn per annum in
FY16-18E, with the majority of the spending on aircraft acquisition.
While ROE is forecast to drop from 26.3% in FY15 to 18.7% in FY16E,
we expect it to return to 19-20% in FY17-18 with recovering passenger
yield and load factors on international routes.
The debt-to-equity ratio, if off-balance lease obligations are included,
was 1.4x at the end of FY15, well down from 2.2-2.5x at the end of
FY13-14. We believe it should fall to around 1x within two years.
Higher international growth mitigates slow domestic traffic
Passenger air transportation is the biggest contributor to revenue and gross
profits, at roughly 95% and 75-80%, respectively. There has been little change
in this composition in recent years.
Figure 44: Spring – revenue and growth trend Figure 45: Spring – revenue breakdown
26%
17%
12%10%
3%
17%19%
0%
10%
20%
30%
0
2,500
5,000
7,500
10,000
12,500
20
11
20
12
20
13
20
14
20
15
20
16
E
20
17
E
20
18
E
Total gross revenue (RMBm) YoY (%, RHS)
94% 95% 95% 95% 93.6% 93% 93% 93%
0%
20%
40%
60%
80%
100%
20
11
20
12
20
13
20
14
20
15
20
16
E
20
17
E
20
18
E
Passenger service Cargo service Others
Source: Company data, Deutsche Bank estimates
Source: Company data, Deutsche Bank estimates
2 December 2016
Air
Spring Airlines
Page 24 Deutsche Bank AG/Hong Kong
Meanwhile, the composition of Spring Airlines’ air transport business has
changed rapidly over the years, with a meaningful increase in international
business, particularly since 2014. The passenger business still dominates. In
FY11, passenger revenue was 93.7% of total gross revenue, with domestic at
87.1% of total revenue and international at 1.4%. By the end of FY15,
passenger revenue as a percentage of total gross revenue was stable at 93.6%,
but with domestic falling to 59.4% and international climbing to 29.2%. Over
the same period (FY11-15), air cargo remained almost flat, going from 2.2% to
1.2%. All of Spring’s cargo capacity is belly-hold.
Figure 46: Spring – passenger revenue breakdown Figure 47: Spring – passenger RPK breakdown
93% 89% 84% 80%63% 57% 53% 50%
1% 4% 9% 14%31% 38% 43% 47%
0%
20%
40%
60%
80%
100%
20
11
20
12
20
13
20
14
20
15
20
16
E
20
17
E
20
18
E
Domestic International Regional
93% 91% 85% 83%69% 61% 57% 53%
1% 3% 8% 12%27% 35% 40% 45%
0%
20%
40%
60%
80%
100%
20
11
20
12
20
13
20
14
20
15
20
16
E
20
17
E
20
18
E
Domestic International Regional
Source: Company data, Deutsche Bank estimates
Source: Company data, Deutsche Bank estimates
International RPK has been growing much faster than domestic traffic, partly
due to a low base, and we expect this trend to continue, driven by Chinese
citizens’ increasing outbound tourism demand. We expect Spring’s
international RPK to expand by 25.0-47.5% YoY in FY16-18E on the back of
20.0-50.0% YoY growth in international passenger capacity (ASK), translating
to a relatively stable load factor of 87-88% for the same period (FY15: 88.1%).
Meanwhile, we expect domestic load factor to remain around a robust c.94%
level in FY16-18E on more balanced demand and supply increases.
We forecast passenger yield will bottom in FY16E (8.4% YoY decline) and
rebound by 4.1-6.0% in FY17-18E to a level close to the yield in FY15.
For domestic passenger yield, the decline in FY16E is mainly due to
the removal of fuel surcharges for domestic routes amid low fuel price
since FY15. With the dissipation of such negative impact amid our
expectation of stable load factor outlook, we expect a 5.0-6.0%
growth in domestic yield for FY17-18E.
For international yield, while we estimate a 2.0-5.0% increase in FY17-
18 given slowing capacity expansion in the North Asia and Thailand
markets, yield will by no means return to FY11-15 levels as Spring
expands its ASEAN operation and competes with other LCCs in the
region.
2 December 2016
Air
Spring Airlines
Deutsche Bank AG/Hong Kong Page 25
Figure 48: Spring – RPK growth breakdown Figure 49: Spring – passenger load factor and yield
34%
10% 8%1%
-2%
4% 4%
57%48%
28% 25%
-20%
0%
20%
40%
60%
20
12
20
13
20
14
20
15
20
16
E
20
17
E
20
18
E
Domestic International Regional
281% 233% 175%
0.0
0.1
0.2
0.3
0.4
0.5
90%
91%
92%
93%
94%
95%
20
11
20
12
20
13
20
14
20
15
20
16
E
20
17
E
20
18
E
Passenger load factor (%, LHS)
Passenger yield (RMB, RHS)
Source: Company data, Deutsche Bank estimates
Source: Company data, Deutsche Bank estimates
Major cost items well controlled
Fuel costs are the most volatile of the major costs. In FY15, jet fuel accounted
for the largest portion (30%) of Spring’s operating expenses. Other significant
expense items include depreciation and leasing expenses (18%), take-off and
landing charges (18%) and staff costs (16%).
Figure 50: Spring – breakdown of major cost items for FY15
Fuel costs
30%
Depreciation and
operating lease
rentals
18%Staff
16%
Take-off, landing
and depot
charges
18%
Maintenance,
repair and
overhaul costs
6%
Pilot training
2%
Civil Aviation
Development
Fund
3%
Others
6%Ancillary services
related costs
1%
Source: Company data; Deutsche Bank
Lower jet fuel prices help
The fall in fuel prices, while having a direct negative effect on the top-line fuel
surcharge, has a positive indirect effect through: 1) lower ticket prices fueling
demand; and 2) a reduction in costs. Fuel costs tanked 25.4% YoY in FY15, on
the back of a c.31% drop in jet fuel price during the year, despite 21.6%
growth in ATK (total passenger and cargo capacity).
The Deutsche Bank commodities team expects a slow recovery in fuel pricing
following a similar trend in crude oil. Going forward, we expect jet fuel to
remain a core expense item and estimate Spring’s unit fuel cost (in terms of
2 December 2016
Air
Spring Airlines
Page 26 Deutsche Bank AG/Hong Kong
fuel costs divided by ATK) will decline 16.6% YoY in FY16 followed by 15.7-
22.0% growth in FY17-18.
Figure 51: Brent prices Figure 52: Spring – unit fuel cost per ATK
2030405060708090
100110120130140
Aug-1
1
Nov-1
1
Feb-1
2
May-1
2
Jul-12
Oct-
12
Jan
-13
Apr-
13
Jul-13
Oct-
13
Jan
-14
Apr-
14
Jul-14
Oct-
14
Jan
-15
Apr-
15
Jul-15
Oct-
15
Jan
-16
Apr-
16
Jul-16
Oct-
16
2015 average Brent price: USD 54.19/bbl
DB's 2016 assumption: USD45.0/bbl
DB's 2017 assumption: USD55.0/bbl
(USD/bbl)
-40%
-20%
0%
20%
40%
0.0
0.5
1.0
1.5
2.0
20
11
20
12
20
13
20
14
20
15
20
16
E
20
17
E
20
18
E
Unit fuel cost (RMB/ATK, LHS) YoY (%,RHS)
Source: Bloomberg Finance LP, Deutsche Bank estimates
Source: Company data , Deutsche Bank estimates
Other non-fuel expenses
In FY15, the 14.6% YoY growth in depreciation and leasing expenses was the
result of the addition of six aircraft to the company’s fleet. In the past four
fiscal years, depreciation and rental expenses have on average increased by
18.3% per annum due to fleet expansion from 28 to 52 airplanes.
The marked 26.1% YoY jump in wages and staff costs in FY15 was mainly due
to the increase in staff numbers and growth in total hours flown.
Another major cost item, take-off and landing charges, increased 21.3-37.7%
in FY12-15 as Spring grew its fleet size and expanded international flights.
We think it is reasonable to assume that most of the major other costs will
continue to gradually trend up in absolute terms.
With the current plan of fleet expansion, we expect depreciation and
lease rentals to increase in the next two years and then tail off in YoY
terms as the rate of fleet expansion declines.
The government’s regulated airport fee structure and the company’s
strategy in international traffic expansion imply that landing fees are
unlikely to flatten or fall, as airports are unable to cut fees without
government price guidance.
Staff costs are unlikely to drop either given wage inflation pressure
and Spring’s ongoing expansion in operation scale.
With the increase in fleet size and thus total capacity (ATK), it is also
natural to assume maintenance costs will continue to climb in
absolute terms.
Similarly, pilot training and civil aviation development commissions
should also increase, although more slowly than sales.
The net effect is a projected decrease in operating profit margin from 14.6%
actual in FY15 to 12.1% in FY16E and a recovery to 12.7-13.4% in FY17-18E.
2 December 2016
Air
Spring Airlines
Deutsche Bank AG/Hong Kong Page 27
Figure 53: Spring – operating expenses and growth Figure 54: Spring – operating profit margin trend
26.3%
16.1%
9.5%
3.2%5.7%
16.0%
18.5%
0%
10%
20%
30%
0
2,000
4,000
6,000
8,000
10,000
20
11
20
12
20
13
20
14
20
15
20
16
E
20
17
E
20
18
E
Total operating expenses (core business) YoY
4.8%
7.7% 8.2%9.8%
14.6%
12.1%12.7%
13.4%
0%
2%
4%
6%
8%
10%
12%
14%
16%
20
11
20
12
20
13
20
14
20
15
20
16
E
20
17
E
20
18
E
Source: Company data , Deutsche Bank estimates
Source: Company data , Deutsche Bank estimates
Balance sheet and cash flow summary
Spring Airlines is considering an overall fleet increase from 52 planes (at an
average age of 3.5 years) at the end of FY15 to about 80 by the end of FY17
and 95 by FY18. The planes ordered for the next few years are A320neo (the
latest generation of the A320 series).
Figure 55: Spring Airlines – fleet structure and delivery schedule
2011 2012 2013 2014 2015 2016E 2017E 2018E
A320 28 32 39 46 52 66 80 95
- Self ow ned 5 10 12 12 19
- Finance lease 2 2 2 4 3
- Op lease 21 20 25 30 30 Source: Company data , Deutsche Bank estimates
The change in lease versus owned from 75/25 to 60/40 is notable, indicating
that the company prefers to own and maintain its aircraft. We expect the
proportion of owned aircraft vs. leased to continue to increase, considering
that the current low interest rates allow low-cost financing for aircraft
acquisition.
In addition, Spring announced in Aug-16 that it plans to raise RMB4bn (at no
less than RMB43.71 per share for a total of 91.5m shares) in a private share
placement and use the proceeds to acquire 10 A320 aircraft. Our current
financial forecast has not yet reflected the share placement pending the
completion of the deal as it is still conditional on regulatory approval.
Assuming a successful new share issuance in mid-2017, we estimate that,
with an 11% increase in the number of outstanding shares, Spring's FY17E
reported EPS dilution would be about 4%, while FY17E BVPS enhancement
would be about 29%, leading to a drop in ROE to c.16% vs. our current
forecast of 19.5%.
Capex increased steadily from RMB697.5m in FY11 to RMB4.5bn in FY15. We
estimate that capex will remain at about RMB5-6bn per annum in FY16-18E,
with the majority of the spending on aircraft acquisition.
While ROE is forecast to decline from 26.3% in FY15 to 18.7% in FY16 on our
estimates, due to a likely decline in yield (amid lower fuel surcharges) affecting
2 December 2016
Air
Spring Airlines
Page 28 Deutsche Bank AG/Hong Kong
profitability, we expect ROE to return to 19-20% in FY17-18E with recovering
passenger yield and load factors on international routes.
We note that the debt-to-equity ratio, if off-balance lease obligations are
included, was 1.4x at the end of FY15, well down from 2.2-2.5x at the end of
FY13-14. On our forecasts, it should fall to around 1x within two years,
depending on whether the company undertakes finance leases. We are
expecting a steady low increase in dividends to maintain the payout ratio for at
least the next two years.
Figure 56: Spring Airlines – summary of income statement
Year-end December (RMBm) 2013 2014 2015 2016E 2017E 2018E
Net revenue 6,549.8 7,312.4 8,069.6 8,294.4 9,684.5 11,564.7
Cost of sales -5,711.9 -6,244.8 -6,466.4 -6,846.6 -7,945.4 -9,421.8
Gross (loss)/profit 837.9 1,067.6 1,603.2 1,447.9 1,739.1 2,142.9
Gross profit margin (%) 12.8% 14.6% 19.9% 17.5% 18.0% 18.5%
Selling and distribution expenses -152.8 -184.5 -233.1 -248.8 -285.7 -335.4
Administrative expenses -149.4 -163.5 -194.6 -194.9 -222.7 -260.2
Operating (loss)/profit (EBIT) 535.7 719.6 1,175.5 1,004.1 1,230.6 1,547.3
Operating profit margin (%) 8.2% 9.8% 14.6% 12.1% 12.7% 13.4%
Investment income -22.0 -80.7 -117.3 -123.1 -129.3 -135.8
Finance income/(costs), net -81.0 -98.4 -154.5 -179.1 -149.1 -149.3
Non-operating income 554.5 683.5 902.4 1,082.9 1,245.3 1,369.8
Non-operating expense -0.1 -8.1 -2.1 -2.2 -2.3 -2.4
(Loss)/profit before income tax 987.0 1,215.9 1,804.0 1,782.5 2,195.3 2,629.7
Income tax credit/(expense) -254.8 -331.7 -476.2 -445.6 -548.8 -657.4
(Loss)/profit for the period/year 732.2 884.2 1,327.9 1,336.9 1,646.5 1,972.3
Minority interest 0.0 0.0 0.0 0.0 0.0 0.0
Net profit 732.2 884.2 1,327.9 1,336.9 1,646.5 1,972.3
YoY% 17.2% 20.8% 50.2% 0.7% 23.2% 19.8% Source : Company data, Deutsche Bank estimates
2 December 2016
Air
Spring Airlines
Deutsche Bank AG/Hong Kong Page 29
Figure 57: Spring Airlines – summary of balance sheet
As of 31 December (RMBm) 2013 2014 2015 2016E 2017E 2018E
Total current assets 1,916.4 2,921.9 4,264.4 5,507.9 4,941.1 4,587.7
Cash and cash equivalent 1,474.8 2,399.9 3,094.5 4,294.9 3,592.7 3,164.3
Bills and accounts receivables 63.1 75.1 101.8 91.5 147.4 153.8
Prepayments 169.3 194.7 261.2 274.3 288.0 302.4
Other receivables 159.4 192.8 720.5 756.6 794.4 834.1
Inventory 41.6 42.8 55.0 57.6 83.9 96.8
Other current assets 8.1 16.5 31.4 33.0 34.7 36.4
Total non-current assets 5,735.0 8,339.6 11,764.6 14,010.0 16,275.1 18,323.4
Long-term equity investment 97.5 110.3 95.3 95.3 95.3 95.3
Property, plant and equipment 3,799.5 4,371.8 5,858.4 6,781.4 7,893.0 9,230.9
Construction in progress 549.4 2,512.1 4,287.6 5,573.9 6,688.6 7,357.5
Intangible assets 51.3 54.3 63.0 70.6 79.5 89.7
Long term deferred expense 299.9 362.3 441.6 463.7 486.9 511.2
Deferred tax asset 102.4 112.8 127.7 134.1 140.8 147.9
Other non-current assets 835.0 816.1 891.0 891.0 891.0 891.0
Total assets 7,651.4 11,261.5 16,029.0 19,517.8 21,216.2 22,911.2
Total current liabilities 2,227.8 4,217.1 4,978.7 5,094.4 5,533.7 5,700.2
Short term borrowings 290.2 2,045.5 1,561.1 1,639.1 1,721.1 1,807.1
Bills and accounts payables 362.5 204.3 339.5 223.2 418.9 329.6
Advance received from customers 554.7 679.1 1,355.0 1,422.8 1,493.9 1,568.6
Payroll payable 141.1 131.0 199.6 209.6 220.0 231.1
Tax payable 339.2 255.9 317.0 332.8 349.5 366.9
Interest payable 21.2 37.8 32.8 34.5 36.2 38.0
Other payables 108.8 119.7 150.3 157.9 165.7 174.0
Non-current liabilities maturing within one year
410.1 743.7 1,023.4 1,074.6 1,128.3 1,184.7
Total non-current liabilities 2,680.6 3,491.1 4,510.5 6,700.6 6,487.1 6,290.3
Long term borrowings 1,961.2 2,329.1 3,353.5 3,185.9 3,026.6 2,875.2
Bonds payable 0.0 0.0 0.0 2,300.0 2,185.0 2,075.8
Long-term payables 675.2 1,066.6 1,006.1 1,056.4 1,109.2 1,164.7
Deferred revenue 0.0 9.7 17.4 18.3 19.2 20.1
Other non-current liabilities 44.2 85.6 133.4 140.1 147.1 154.5
Total liabilities 4,908.4 7,708.2 9,489.2 11,795.1 12,020.8 11,990.4
Net assets 2,743.0 3,553.3 6,539.8 7,722.8 9,195.4 10,920.7
Minority interests 0.0 0.0 0.0 0.0 0.0 0.0
Share capital & Reserves 729.7 729.7 2,613.9 2,627.9 2,627.9 2,627.9
Retained earnings 2,013.3 2,823.6 3,925.9 5,094.8 6,567.5 8,292.8
Total shareholder's equity 2,743.0 3,553.3 6,539.8 7,722.8 9,195.4 10,920.7 Source: Company data, Deutsche Bank estimates
2 December 2016
Air
Spring Airlines
Page 30 Deutsche Bank AG/Hong Kong
Figure 58: Spring Airlines – summary of cash flow statement
As of 31 December (RMBm) 2013 2014 2015 2016E 2017E 2018E
Cash flows from operating activities
Net profit after tax 732.2 884.2 1,327.9 1,336.9 1,646.5 1,972.3
Adjustments for:
Depreciation and amortization 301.7 336.8 415.7 436.9 518.2 615.7
Losses (gains) on disposal of fixed assets, intangible assets and other long-term assets & Losses on write-off of fixed assets
-7.3 -9.6 -24.8 0.0 0.0 0.0
Finance costs 65.3 69.9 129.2 228.8 260.1 246.4
Losses (gains) arising from investments 22.0 80.7 117.3 123.1 129.3 135.8
Change in working capital: 422.4 -285.6 -354.9 -206.4 -9.1 -210.5
Net cash flow from operating activities 1,536.4 1,076.4 1,610.3 1,919.3 2,545.0 2,759.6
Cash flows from investing activities
Cash received from investments income 0.0 0.0 1.8 -98.5 -103.4 -108.6
Net cash received from disposal of fixed assets, intangible assets and other long-term assets
10.4 12.9 1,288.6 2,233.8 2,876.9 3,434.3
Net change in other investing activities -29.4 135.0 -101.8 0.0 0.0 0.0
Cash paid to acquire fixed assets, intangible assets and other long-term assets
-723.9 -2,458.6 -4,477.0 -4,887.7 -5,630.3 -6,066.9
Cash paid for equity investment -89.3 -93.5 -104.2 -24.6 -25.9 -27.2
Net cash flow from investing activities -832.2 -2,404.2 -3,392.6 -2,777.1 -2,882.7 -2,768.4
Cash flows from financing activities
Equity issuance 0.0 0.0 1,754.6 14.1 0.0 0.0
Net change in borrowings -543.6 2,369.1 595.0 2,210.4 -192.3 -174.5
Interest expenses and dividends -216.4 -236.8 -302.7 -166.4 -172.1 -245.2
Other financing cash flow -54.3 111.3 388.0 0.0 0.0 0.0
Net cash flow from financing activities -814.2 2,243.6 2,434.9 2,058.1 -364.4 -419.7
Net increase/(decrease) in cash and cash equivalents -115.3 918.2 746.2 1,200.4 -702.2 -428.5 Source: Company data, Deutsche Bank estimates
2 December 2016
Air
Spring Airlines
Deutsche Bank AG/Hong Kong Page 31
Key risks
Sector and company-specific risks
Key sector downside risks: 1) depreciation of RMB; 2) an unexpected decline in
yield on US and other international routes amid aggressive capacity expansion;
3) a fuel price surge beyond our expectations; 4) a sequential decline in air
passenger traffic demand in 2017E; and 5) a worse-than-expected impact from
high-speed rail competition.
Specific downside risks for Spring Airlines include: 1) excessive new capacity
on international routes; 2) worse-than-expected competition in the ASEAN
market from other regional LCC players; 3) slower-than-expected demand
growth on the North Asia and ASEAN routes; 4) competition from other
Chinese airlines on domestic and regional routes; and 5) a worse-than-
expected impact from high-speed railway line launches in China (passenger
traffic diversion from high-speed railway routes).
Sensitivity to key factors
Starting from our base scenario, we estimate that a 1% increase in RPK would
add 3.5%, or RMB57m, to reported net profit, while a 1% increase in yield
would boost net profit by 3.8%, or RMB62m (all else equal). A USD1/bbl
decrease in fuel price results in a 1.4% net profit gain of RMB23m. Changes in
the RMB/USD rates are more complex, as they affect both demand and costs,
as discussed in the revenue and profit review earlier. On a 1ppt weakening of
the RMB, the simple direct effect on fuel would cause a 0.5% decrease in net
profit. According to Spring, the company’s US dollar liabilities are hedged by
US dollar denominated assets.
Figure 59: Spring Airlines – key FY17E earnings/book value sensitivity
Key variables Change in FY17E net profit (RMBm)
% change in FY17E net profit
% change in FY17E book value
1ppt change in passenger traffic growth 57 3.5% 0.6%
1ppt change in passenger yield growth 62 3.8% 0.7%
USD1/bbl change in fuel price (un-hedged portion)
23 1.4% 0.2%
1ppt change in RMB/USD appreciation rate (unrealized FX-gain portion)
8 0.5% 0.1%
Source: Deutsche Bank estimates
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Company background
The first and largest player in China’s LCC industry
Headquartered in Shanghai, Spring Airlines was China’s first low-cost carrier
(LCC) and one of China’s first airlines funded by private capital. The parent
company of Spring Airlines is Shanghai Spring International Travel Services
Group, the largest private travel agency in China.
With the mission of making air travel affordable and available to ordinary
people, Spring Airlines was established in 2004 to provide domestic air
passenger services and started to expand to international and regional routes
in 2010. As of 1H16, the company offers 66 domestic, 50 international and 6
regional routes (122 in total).
Spring operates at two base airports, Shanghai Hongqiao and Shanghai
Pudong, and has also set up hub operations at Shijiazhuang, Shenyang,
Hangzhou and, most recently, Shenzhen.
Figure 60: Spring Airlines – development milestones
Year Milestones
Jul-2004 Civil Aviation Administration of China granted operation certificate to Spring Airlines, indicating its establishment
Jul-2005 Spring Airlines successfully completed its first flight from Shanghai to Yantai
Dec-2006 Spring Airlines launched its second base, at Sanya Phoenix International Airport
Mar-2009 Spring Airlines formed Safe Management System (SMS), which was approved in Feb 2010.
Mar-2009 Spring Airlines purchased its own A320 for the first time and offered 1 million tickets at RMB199/299/399
Jul-2010 Spring Airlines launched a new route from Shanghai to Ibaraki, the first international route to be operated by a private airline company
Sep-2010 Spring Airlines launched a new route from Shanghai to Hong Kong
Apr-2011 Spring Airlines launched a new route from Shanghai to Macao
Aug-2012 Spring Airlines launched a new route from Shanghai to Bangkok
Aug-2014 Spring Airlines Japan commenced domestic flights
Jan-2015 Spring Airlines was listed on the Shanghai Stock Exchange Source: Company data, Deutsche Bank
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The company’s founder, Mr. WANG Zhenghua, holds 25% of Spring’s public
shares. Mr. WANG Zhenghua is the father of WANG Yu, President and
Director, and WANG Wei, head of Spring Airlines Japan, who hold 0.8% and
0.2%, respectively. As Mr. WANG Zhenghua’s most important subordinate,
Ms. ZHANG Xiuzhi assisted Mr. WANG in founding Spring Airlines in 2004.
She was President of Spring Airlines before Mr. WANG Yu succeeded her in
April 2016. She holds 1.3% of Spring Airlines.
Other middle and senior management, key technicians and business
backbones also hold shares of Spring Airlines through Chunxiang Investment
and Chunyi Investment.
Figure 61: Spring Airlines – corporate structure
Source: Company data, Deutsche Bank
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Experienced management team
Spring Airlines was founded and led by Mr. WANG Zhenghua, who brought
the LCC concept to China. He is famous for his hardworking and thrifty style,
which he later integrated into the company’s core values and operation.
Overall, most of Spring Airlines’ senior management team (including the
executive directors and non-executive directors), on average, have more than
20 years of experience in the airline industry.
Figure 62: Spring Airlines – senior management
Name Age Position Background
Mr. WANG Zhenghua 王正华
71 Chairman Senior economist. Mr. Wang was Deputy Party Secretary of Changning District of Shanghai. He established Shanghai Spring Travel Services in 1981. He has been Chairman of Spring International Travel Services Group Co., Ltd since 1987 and Spring Airlines Co., Ltd since 2004, when it was established. Apart from that, Mr. Wang is currently Chairman of Shanghai Spring Training Center and Shanghai Spring Property Development Limited. He is an Executive Director of Spring Culture and Media Company and Shanghai Spring Conference and Exhibition Services Company. Mr. Wang was awarded "Model Worker in Shanghai" in 1992-1993, 1994-1995, 1996-1997 and was awarded "Lifetime Model Worker in Shanghai" in 1998.
Ms. ZHANG Xiuzhi 张秀智
51 Deputy Chairman, Director and President
MBA. Her past roles include Deputy General Manager of Shanghai Spring International Travel Services Group Co., Ltd, General Manager of Spring Baoji Company, President of Spring Airlines Co., Ltd. Her current roles include Deputy Chairman of Spring Airlines Co., Ltd, Deputy Chairman of Spring International Travel Services Group Co., Ltd, Director of Shanghai Spring Property Development Limited, Chairman of Chunxiang Investment, Executive Director of Spring Baoji, Pilot Training Company, Equipment Technology Company and Qiushi Company. She is also a Director of Hong Kong International Holdings, a Director of Spring Airlines Singapore and a Director of Spring Finance Leasing Company.
Mr. WANG Yu 王煜
45 President and Director
Mr. Wang graduated from Southern Illinois University with a master’s degree in Economics and an MBA. In the past he worked at Roland Berger, Bearing Point and Hewitt. He is currently President and Director of Spring Airlines, Director of Spring International Travel Services Group Co., Ltd, Chairman of Chunyi Investment, Executive Director of Shanghai Business Travel Services, Director of Hong Kong International Holdings, Chairman of Spring Financial Leasing, Executive Director of Chunji (Shanghai) Aircraft Finance Leasing Limited, Chunliao (Shanghai) Aircraft Finance Leasing Limited, Chunzhe (Shanghai) Aircraft Finance Leasing Limited, No.3/4/7/8 Spring (Tianjin) Aircraft Finance Leasing Limited and Shanghai Spring Investment Management Limited.
Mr. WANG Zhijie 王志杰
46 Vice-president and Director
Mr. Wang graduated from Beijing University of Aeronautics and Astronautics with a master’s degree in Aero-engine Engineering. He worked as an Engineer, Technical Project Manager and General Engineer at Shanghai Airlines Limited. Mr. Wang started to work with Spring Airlines Co., Ltd as the Vice President and General Engineer in 2005. He is currently a Director of Spring Airlines, Spring Finance Leasing Company and Chunxiang Investment. He is also the Chairman of Chunxu Company.
Mr. CHEN Ke 陈可
39 CFO and Secretary of the Board
Mr. Chen holds a bachelor’s degree from Nanjing University of Aeronautics and Astronautics and a master’s degree from Brunel University. He was an engineer at Shanghai Airlines Limited. Since 2005, he has worked with Spring Airlines as Deputy Manager of Planning Department, Manager of Finance and Planning Department. He is currently CFO, Secretary of the Board of Spring Airlines. He is also a Director of Chunxiang Investment, General Manager of Spring Finance Leasing, Executive Director of Chunhu (Shanghai) Aircraft Leasing Limited, Chunjing (Shanghai) Aircraft Leasing, No.1/2/3/4/5/6/7/8 Spring (Tianjin) Aircraft Finance Leasing, Chunjin (Shanghai) Aircraft Leasing Limited, Chunyu (Shanghai) Aircraft Leasing and Chunyue (Shanghai) Aircraft Leasing limited.
Mr. WANG Gang 王刚
42 Vice-president Mr. Wang graduated from Civil Aviation Flight University of China with a Bachelor of Aviation (Pilot). He was a pilot at the Gansu branch of China Eastern Airlines. He was General Manager of the Flight Scheduling Department, Deputy Manager and General Manager of the Flight Department at Spring Airlines from 2005 to 2013. He was the Chief Pilot of Spring Airlines from Aug 2013 to Sep 2014. He is currently Vice-President of Spring Airlines.
Mr. WU Xinyu 吴新宇
47 Chief Engineer Mr. Wu graduated from Civil Aviation Flight University of China with a Bachelor of Aviation Automation. He was an engineer in the maintenance base of China Northwestern Airlines. Since 2005, he has worked with Spring Airlines as Supervisor of Route Maintenance Room and General Manager of the Maintenance Engineering Department. He is currently Chief Engineer of Spring Airlines.
Mr. TENG Shimin 滕石敏
42 Chief Pilot Mr. Teng Shimin graduated from Civil Aviation Flight University of China. He was a pilot in the Gansu branch of China Eastern Airlines. Since 2005, he has worked with Spring Airlines as a Manager in the Flight Scheduling Department, Flight Training Department and Flight Technology Management Department. He is currently the Chief Pilot of Spring Airlines.
Source: Company data, Deutsche Bank
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Appendix 1
Important Disclosures
*Other information available upon request
Disclosure checklist
Company Ticker Recent price* Disclosure
Spring Airlines 601021.SS 41.14 (CNY) 1 Dec 16 NA Prices are current as of the end of the previous trading session unless otherwise indicated and are sourced from local exchanges via Reuters, Bloomberg and other vendors . Other information is sourced from Deutsche Bank, subject companies, and other sources. For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr. Aside from within this report, important conflict disclosures can also be found at https://gm.db.com/equities under the "Disclosures Lookup" and "Legal" tabs. Investors are strongly encouraged to review this information before investing. For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/Disclosure.eqsr?ricCode=601021.SS
Analyst Certification
The views expressed in this report accurately reflect the personal views of the undersigned lead analyst(s) about the subject issuer and the securities of the issuer. In addition, the undersigned lead analyst(s) has not and will not receive any compensation for providing a specific recommendation or view in this report. Fei Sun
Historical recommendations and target price: Spring Airlines (601021.SS) (as of 12/1/2016)
0.00
20.00
40.00
60.00
80.00
100.00
120.00
140.00
160.00
Jan 15 Apr 15 Jul 15 Oct 15 Jan 16 Apr 16 Jul 16 Oct 16
Secu
rity
Pri
ce
Date
Previous Recommendations
Strong Buy Buy Market Perform Underperform Not Rated Suspended Rating
Current Recommendations
Buy Hold Sell Not Rated Suspended Rating
*New Recommendation Structure as of September 9,2002
**Analyst is no longer at Deutsche Bank
2 December 2016
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Equity rating key Equity rating dispersion and banking relationships
Buy: Based on a current 12- month view of total share-holder return (TSR = percentage change in share price from current price to projected target price plus pro-jected dividend yield ) , we recommend that investors buy the stock.
Sell: Based on a current 12-month view of total share-holder return, we recommend that investors sell the stock
Hold: We take a neutral view on the stock 12-months out and, based on this time horizon, do not recommend either a Buy or Sell.
Newly issued research recommendations and target prices supersede previously published research.
53 %
37 %
10 %19 %18 % 25 %
050
100150200250300350400450500
Buy Hold Sell
Asia-Pacific Universe
Companies Covered Cos. w/ Banking Relationship
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