Travelling high in the sky; initiating coverage with a Buy

Deutsche Bank Markets Research Rating Buy Asia China Consumer Hotels / Leisure / Gaming Company TravelSky Tech Date 7 December 2016 Initiation of Coverage Travelling high in the sky; initiating coverage with a Buy Reuters Bloomberg Exchange Ticker 0696.HK 696 HK HSI 0696 ADR Ticker ISIN TSYHY US89420Y2090 Forecasts And Ratios Year End Dec 31 2014A 2015A 2016E 2017E 2018E Sales (CNYm) 5,336.4 5,471.8 5,951.2 6,755.1 7,561.6 Reported NPAT (CNYm) 1,652.6 1,914.4 2,348.3 2,508.8 2,888.7 Reported EPS FD(CNY) 0.56 0.65 0.80 0.86 0.99 DB EPS FD(CNY) 0.41 0.53 0.66 0.86 0.99 DB EPS growth (%) – 29.5 22.8 30.5 15.1 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 Initiating coverage with a Buy rating and price target of HKD21 ________________________________________________________________________________________________________________ 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 7 Dec 2016 (HKD) 15.46 Price target - 12mth (HKD) 21.00 52-week range (HKD) 18.92 - 10.07 HANG SENG INDEX 22,675 Tallan Zhou Research Analyst (+852 ) 2203 6464 tallan.zhou@db.com Karen Tang Research Analyst (+852 ) 2203 6141 karen.tang@db.com Price/price relative 4812162012/146/1512/156/16TravelSky TechHANG SENG INDEX (Rebased) Performance (%) 1m 3m 12m Absolute -6.8 -15.9 17.8 HANG SENG INDEX -0.6 -4.5 2.1 Source: Deutsche Bank We initiate coverage of TravelSky with a Buy and a HKD21 price target, implying 30% upside potential currently. TravelSky is a global distribution system (GDS) company for the aviation industry (similar to UnionPay in banking). As an SOE, TravelSky dominates the airline ticket distribution market (>95% market share), based on the transaction fees it charges customers (China Southern Air, China Eastern Air and other airlines), which are also its shareholders (39% collective stake). We view TravelSky as a proxy for China’s growing tourism market, especially in outbound travel (96% in 2015). Sustainable and defensive long-term growth player, almost a monopoly With 13 Chinese commercial airlines holding a combined stake of 38.84% and supported by the Chinese government, and a 95.5% share of the market TravelSky almost has a monopoly. Its top-line revenue is therefore closely correlated to the growth of Chinese travel. We forecast a 17% CAGR and 10-13% CAGR in 2016-2020 for China outbound and domestic travel, respectively. We believe structural growth in Chinese outbound travel will serve as a long-term driver for Travel Sky. As a leveraged business, we expect further expansion of its operating margin and ROE. We forecast 2017/2018 earnings growth at 30.5% /15% YoY. A strong cash cow – we expect cash yield to exceed 7% from 2018 onwards Until 2015, TravelSky demonstrated a strong cash flow generating capability and maintained a net cash position. However, in 2016 and 2017, the company is to record a jump in capex with the construction of its new operation center in Beijing. We forecast that cash flow will normalize in 2018, with a stable cash yield of more than 7%. Valuation and risks Given TravelSky’s cash-generating ability, we value it based on DCF (9.8% WACC and 3% TGR). The shares currently trade at 21.1x/16.2x 2016/17E earnings which we view as attractive given that 1) its average tourism/GDS peers trade at 22x in 2017E, and 2) we project 23% 2016-18 earnings CAGR. Key downside risks: 1) private data leakage; 2) a slowdown in the China tourism industry; 3) threats from other transportation modes; and 4) RMB depreciation. Distributed on: 07/12/2016 15:59:00 GMTDistributed on: 07/12/2016 14:30:00 GMT 7 December 2016 Hotels / Leisure / Gaming TravelSky Tech Page 2 Deutsche Bank AG/Hong Kong Model updated:03 December 2016 Running the numbers Asia China Hotels / Leisure / Gaming TravelSky Tech Reuters: 0696.HK Bloomberg: 696 HK Buy Price (7 Dec 16) HKD 15.46 Target Price HKD 21.00 52 Week range HKD 10.07 - 18.92 Market Cap (m) HKDm 45,239 USDm 5,833 Company Profile Travelsky Technology is an information technology solutions provider for China's aviation and tourism industry. Key businesses include aviation information technology service,