An evident winner in China’s infant stage LCC market? Initiating with Buy

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 fei.sun@db.com Vincent Ha, CFA Research Analyst (+852 ) 2203 6247 vincent.ha@db.com Price/price relative 015304560751/157/151/167/16Spring AirlinesShanghai 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 sin