Rating Date Company Buy Spring Airlinesimg3.gelonghui.com/pdf201612/pdf20161206133627964.pdf · Deutsche Bank Markets Research Rating Date Buy Asia China Transportation Air Company

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

[email protected]

Vincent Ha, CFA

Research Analyst

(+852 ) 2203 6247

[email protected]

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


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


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)(%)


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

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13

20

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16

E

20

17

E

20

18

E


2 December 2016

Air

Spring Airlines


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

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)

2017E P/B (x)

Spring Airlines

Air ChinaAir

China-A

CSA CSA-ACEA CEA-A

10

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20

0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0

FY

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)

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


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

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No

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6

Rolling 12-mo P/BV (X) Mean

Mean -SD Mean +SD

.

10

15

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25

30

0.0

1.0

2.0

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y-1

5

Jul-15

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5

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5

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6

Mar-

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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

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0.0 2.0 4.0 6.0 8.0

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Spring Airlines

-10.0

-5.0

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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


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

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01

6

Deu

tsch

e B

an

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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


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


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


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


Figure 13: Spring Airlines – base and hub airports

Shanghai Hongqiao/

Shanghai Pudong

Shijiazhuang

Hangzhou

Shenzhen

Shenyang


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


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


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


0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

2011 2012 2013 2014 2015




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


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


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





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



Source: Company data, CEIC, Deutsche Bank


2 December 2016

Air

Spring Airlines


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



Source: Company data, CEIC, 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


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


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


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


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


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%)



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


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



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


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


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


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


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



2 December 2016

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Spring Airlines


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


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




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


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


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)



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%


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


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

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Spring Airlines


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



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


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


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


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


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

2 December 2016

Air

Spring Airlines


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

2 December 2016

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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


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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.


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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

http://gm.db.com/ger/disclosure/Disclosure.eqsr?ricCode=601021.SS

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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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