Sei sulla pagina 1di 27

SSI RESEARCH INSTITUTIONAL RESEARCH & INVESTMENT ADVISORY

VietJet Aviation Joint Stock Company (VJC: HOSE)


HOLD - 1Y Target Price: VND 140,400
Current price: VND 130,500

Kim Nguyen INITIATION REPORT


kimntt@ssi.com.vn
+84 8 3824 2897 ext. 2140 Cost advantage enables competitive pricing
10 May 2017 Investment case: Thanks to a low fuel input cost, along with declines in other operation
INDUSTRIALS VIETNAM costs, VJC has been offering very competitive pricing to passengers in order to tap into
Vietnams underserved low cost airline market in recent years. Nevertheless, in line with
the global airline industry outlook, VJCs core earnings growth appeared to peak in 2016,
Key figures with previous record high growth rates being challenging to replicate. The peak stemmed
from such advantages as a low fuel cost environment, declining ex-fuel Cost Available
Market cap (USD mn) 1,826
Seat Kilometers (ex-fuel CASKs), and high passenger volume growing from a low base.
Market cap (VND bn) 41,459
Outstanding shares (mn) 322.4 Catalysts:
52W high/low (VND 1,000) 138.0/108.0
Average 2M volume (share) 366,320 Domestic market will rise in 2017-2019 and then experience a slowdown. VJCs
Average 2M value (USD mn) 2.06 positive passenger growth mainly comes from seizing market share from its
competitors and passengers from other traditional transportation methods. However,
Average 2M value (VND bn) 46.68
the domestic market may gradually saturate in the next 2-3 years when total capacity
Foreign ownership (%) 26.12
increases along with expected new players such as Vietstar Airlines and AirAsia,
State ownership (%) 0 which will push VJC to expand internationally in a more aggressive fashion.
Management ownership (%) N.A.
Strong capacity expansion in international routes. From 2017, VJC will
Stock performance aggressively open new international routes within a radius of 2,500 nautical miles,
with average flight duration of roughly 5-6 hours to destinations such as Korea and
Japan. Its strategic markets will be ASEAN and Northeast Asia including Taiwan,
Hong Kong, Mainland China, Korea, and Japan.

Passenger yields may continue to remain low in order to gain market share.
We expect VJCs international yield to remain low in 2017 as the initial phase of its
aggressive expansion begins. To counteract such low yield figures, VJC aims to
aggressively expand to longer international flights, along with targeting a higher
income class. Yields are expected to slightly improve from 2018 onwards,
Source: Bloomberg
corresponding with increasing fuel prices and a stable flight route network.
Company Snapshot

VJC is a privately-owned Low Cost Carrier (LCC)


A fuel cost uptrend is the largest risk, but hedging might partly render the risk
airline in Vietnam. It was established on 23rd July subdued. Amid the expected pick-up of jet fuel prices in 2017, VJC plans to hedge
2007, and commenced the first commercial flight 30%-35% of the total fuel cost. At the same time, the company will receive a delivery
on 24th December 2011 with the Ho Chi Minh of the A320 NEO aircraft model, the most fuel efficient model in its holdings, which
City - Hanoi route. Total passengers served by will partly reduce the impact of a fuel price surge.
VJC reached 14.05 mn pax in 2016 after 4 years
of operation. As of 31 Dec 2016, VJC operates a Valuation: Combining the DCF method and the 1 year target P/E of 13x, and adjusted
fleet of 41 aircraft, in which 19 aircraft are funded
EV/EBITDAR of 7x (premium compared with industry average, attributable to VJCs
by SLB and 1 aircraft is owned by the company
via financial lease. Other aircraft include 15 dry duopoly positioning in the Vietnamese LCC segment and high growth in the initial phase
leases and 6 wet leases. of operation), we arrive at a 1 year target for VJC of VND 140,400/ share (+8%). We
recommend to HOLD the stock.
VJC achieved a domestic market share of 40.8%
as of 31 Dec 2016, an increase from 37.1% as of Risks: (1) fuel price uptrend; (2) increase in domestic airport fees; (3) overcapacity due
31 Dec 2015, according to a report by the Civil to significant capacity expansion; (4) volatility of sales and lease back earnings (5)
Aviation Authority of Vietnam (CAAV)
Financial risk and FX risk

SSI.COM.VN Visit SSI Research on Bloomberg at SSIV <GO> Page 1


SSI RESEARCH INSTITUTIONAL RESEARCH & INVESTMENT ADVISORY

Table of Contents
1. BACKGROUND INFORMATION ON VJC .............................................................................................................................................. 3
1.1. Company profile........................................................................................................................................................... 3
1.2. VJCs milestones .......................................................................................................................................................... 3
1.3. Sales and lease back business model adoption ....................................................................................................... 4
1.4. Company structure ...................................................................................................................................................... 4
1.5. Charter capital increase ............................................................................................................................................... 5
1.6. Shareholders Structure .............................................................................................................................................. 5
1.7. Fleets and expansion plans ........................................................................................................................................ 6
1.8. Network structure ......................................................................................................................................................... 7
2. HISTORICAL PERFORMANCE .............................................................................................................................................................. 8
2.1. Financial: impressive growths and margins ............................................................................................................. 8
2.2. Operation: Strong cost-focus advantage but low yields ....................................................................................... 11
3. INDUSTRY OVERVIEW ........................................................................................................................................................................ 13
3.1. Global Airlines Industry ............................................................................................................................................ 13
3.2. Vietnam Aviation Industry ........................................................................................................................................ 15
3.3. VJCs growth Outlook ............................................................................................................................................... 18
4. EARNINGS ESTIMATES....................................................................................................................................................................... 21
4.1. 2017-2019 business plans ......................................................................................................................................... 21
4.2. 2017 estimates ........................................................................................................................................................... 21
4.3. 2018-2023 estimates .................................................................................................................................................. 22
5. VALUATION .......................................................................................................................................................................................... 23
5.1. DCF method ................................................................................................................................................................ 23
5.2. Peers comparison ...................................................................................................................................................... 23
5.3. Investment view and recommendation.................................................................................................................... 24
5.4. Risks and issues ........................................................................................................................................................ 24
APPENDIX: ANNUAL FINANCIAL STATEMENTS ..................................................................................................................................... 25
ANALYST CERTIFICATION......................................................................................................................................................................... 26
RATING ........................................................................................................................................................................................................ 26
DISCLAIMER ................................................................................................................................................................................................ 26
CONTACT INFORMATION .......................................................................................................................................................................... 27

SSI.COM.VN Visit SSI Research on Bloomberg at SSIV <GO> Page 2


SSI RESEARCH INSTITUTIONAL RESEARCH & INVESTMENT ADVISORY

1. BACKGROUND INFORMATION ON VJC

1.1. Company profile

VJC is one of two low cost carriers (LCCs) and the only private-owned carrier in Vietnam. The
company was established on 23rd July 2007, and commenced the first commercial flight on 24th
December 2011 with the Ho Chi Minh City - Hanoi route. Total passengers served by VJC
reached 14.05 mn pax in 2016 after 4 years of operation, representing a CAGR of 64.51% since
2013.

As of 31 Dec 2016, VJC operates a fleet of 41 aircraft, in which 19 aircraft are funded by SLB
and 1 aircraft is owned by the company via financial lease. Other aircraft include 15 dry leases
and 6 wet leases. The airline owns an intensive network, with 37 domestic routes and 23
international routes.

VJC achieved a domestic market share of 40.8% in 2016, an increase from 37.1% in 2015, with
the metric based on total passengers boarding domestically via Vietnam-based airlines,
according to Civil Aviation Authority of Vietnam (CAAV)s report.

1.2. VJCs milestones

2007: Founded as Vietnams first privately-owned airline

2011: Commenced the first commercial flight from HCMC to Hanoi on Christmas Day 2011

2012: Fleet grew to 5 aircraft operating across 10 domestic routes

2013: Launched first international flight from HCMC to Bangkok, Thailand

2014: Opened new operating hub in Danang City and signed a purchasing contract for 100
aircraft from Airbus, bringing a total of 19 aircraft in VJC's fleet, with the rest to be delivered at a
later date. Passenger volume accounted for a 29.6% share of domestic air transportation.

2016: Signed a purchase contract with Boeing for 100 B737 MAX 200 aircraft in May 2016, and
another contract with Airbus for 20 A320 CEO and NEO aircraft in September 2016. VJC
officially became an IATA member in August 2016

2017: Listing on HOSE on 28th Feb 2017, officially became the International Air Transport
th
Association (IATA) full member on 18 Feb 2017

SSI.COM.VN Visit SSI Research on Bloomberg at SSIV <GO> Page 3


SSI RESEARCH INSTITUTIONAL RESEARCH & INVESTMENT ADVISORY

1.3. Sales and lease back business model adoption

VJC pursues the sale and leaseback model, which is rather popular among global LCCs such
as Indigo, Virgin Australia, Lion Air, SpiceJet, and Norwegian. It purchases new aircraft in large
orders at steep discounts in order to sell the units to leasing companies at more favorable prices
and then in turn leases those aircraft back. Leasing fees and term commitments are fixed over
the leasing period of 6-12 years and non-cancellable. Gains recognized from these transactions
accounted for 40-60% of VJCs PBT in 2015 and 2016. In the coming year, the gains will be
dependent upon a timely aircraft delivery schedule. VJCs reputable lessors or lease managers
include GE Capital Aviation Services, AWAS Aviation Capital, CIT Aerospace International,
Celestial Aviation Trading 43 Limited, ACG Aircraft Leasing Ireland Limited and ALAFCO
Aviation Lease and Finance Company.

Thanks to SLB model, VJC can benefit from: (1) It does not require a significant upfront CAPEX
in order to fund the fleet; (2) Gains from SLB are used to fund owned aircraft and deposit for
future aircraft deliveries; (3) Keep young fleet which helps save operation cost, including the
heavy D-check. However, when it comes to a fall in travel demand, the airline will face
overcapacity and leads to significant drop in load factors. In that case, the airline can partly
lease them out or arrange for early return of aircraft with certain penalty payments.

The nationally-owned Vietnam Airlines (HVN: UPCOM) currently owns a fleet of more than 90
aircraft. HVNs model requires a significant amount of upfront cash raised via borrowing in order
to finance the fleet (its D/E was 3.5x as of 2016 vs. VJCs D/E ratio of 1.44x during the same
period). HVNs CAPEX used to be mainly funded from the State Budget or through Government
guaranteed foreign debts. As such, HVN has to incur abundant interest expenses, depreciation,
and FX risks for USD denominated debt, which may potentially impact the companys earnings
performance. However, in 2017 HVN also plans to receive 4 aircraft via SLB in order to reduce
debt financing.

1.4. Company structure

VJC has 5 subsidiaries. It has 4 100%-owned subsidiaries which are primarily involved in SLB
activities in Singapore, Ireland and British Virgin Island. SLB activities are conducted via these
companies. VietJet Air Cargo JVC, a cargo handling company with a charter capital of VND
10bn, is VJC's remaining subsidiary with 90% ownership.

VJCs subsidiaries

Subsidiaries Business Date of operation Ownership


VietJet Air Cargo JVC (Vietnam) Cargo 27-Aug-14 90%
VietJet Air IVB No.I Limited (British Virgin Islands) Aircraft business 27-May-14 100%
VietJet Air IVB No.II Limited (British Virgin Islands) Aircraft business 27-May-14 100%
VietJet Air Singapore Pte. Ltd (Singapore) Aircraft business 27-Mar-14 100%
VietJet Air Ireland No.I Limited (Ireland) Aircraft business 3-Jun-16 100%

Source: VJC

SSI.COM.VN Visit SSI Research on Bloomberg at SSIV <GO> Page 4


SSI RESEARCH INSTITUTIONAL RESEARCH & INVESTMENT ADVISORY

Affiliate: VJC owns 9% in Thai VietJet Air JSC Ltd, founded in November 2014. Thai Vietjet
operates 2 international routes between Bangkok-HCMC and Bangkok-Hanoi, as well as other
international charter flights. As of 2016, VJC has subleased 1 aircraft to Thai VietJet. In the
future, VJC plans to reassign, sell, or lease of a portion of the delivered aircraft from Airbus and
Boeing in the aforementioned contracts to Thai VietJet.

1.5. Charter capital increase

Charter Capital (Unit: VND bn)

3,500
3,223
3,000
3,000
2,500
2,500
2,000
2,000

1,450
1,500

1,000 800
600
500

-
2007 2013 2015 Jun-16 Sep-16 Nov-16 Feb-17

Source: VJC

(1) Issuance for existing shareholders at 3:1; (2) Stock dividend payments at 25% and issuance
for existing shareholders at 45%; (3) Bonus shares payment at 100:33, at an issuance of
7.15mn shares for ESOP (4) share issuance at 25% for existing shareholders, (5) Bonus share
payment of 20%, (6) Private placement for Sunny Sunflower Investment Ltd. Co.

For the 2007-2016 period, VJC increased their charter capital by 5x, through both issuance to
existing shareholders as well as stock dividend payments. It is worth noting that in 2015 and
2016, VJC mostly paid dividends in cash and net off by way of new share issuance, and
shareholders therefore did not have to pay additional cash for new issued shares.

1.6. Shareholders Structure

In December 2016, Mrs. Nguyen Thi Phuong Thao, the CEO successfully sold about 39 mn
shares to the public at VND 84,600/share to institutional investors and VND 86,400/share for
individual investors. Following afterwards in 1Q17, VJC successfully conducted a private
placement consisting of roughly 22.4mn shares at VND VND 84,600/share to Sunflower Sunny
Investment Ltd Co, of which Mrs. Nguyen Thi Phuong Thao is the CEO, as part of commitment
to the above-mentioned institutional investors in order to fund the company expansion.

SSI.COM.VN Visit SSI Research on Bloomberg at SSIV <GO> Page 5


SSI RESEARCH INSTITUTIONAL RESEARCH & INVESTMENT ADVISORY

Ownership structure (as of 1Q17)

Sunflower
Sunny
Investment
Company Ltd
23%

Nguyen Thi
Phuong Thao
Others 9%
62%

Government of
Singapore(GIC)
6%

Source: VJC

1.7. Fleets and expansion plans

VJCs fleet grew quickly from 10 aircraft as of 2013 to 41 aircraft in 2016, equivalent to a CAGR
of 60%. VJCs fleet accommodates narrow-body aircraft (A320 and A321), considered suitable
for short-haul routes. According to fleet expansion plans, VJC expects to receive roughly 41
Airbus A320-NEO types from 2017-2019, which will save fuel cost by 15% per aircraft,
considerably more so than existing ones, according to Airbus. Amid an increasing fuel price, a
fuel saving aircraft model will help mitigate adverse impacts of rising input costs for the
company.

Fleet structure (as of 31 December 2016) VJC projected fleet size: end 2017P- end 2023P

140
Cummulative Fleet-737 Max 200
120 Cummulative Fleet-A320-321
24
11, 100 24
27% 24
Airbus A320-
200 (180 80 24
4
seats)
Airbus A321- 60
200 (220-230
seats) 90 95
30, 40 74 78
73% 66 66
51
20 41

0
2016 2017P 2018P 2019P 2020F 2021F 2022F 2023F

Source: VJC Source: VJC, SSI Research forecast

SSI.COM.VN Visit SSI Research on Bloomberg at SSIV <GO> Page 6


SSI RESEARCH INSTITUTIONAL RESEARCH & INVESTMENT ADVISORY

1.8. Network structure

Within only 5 years of operation, VJC aggressively expanded from 1 route (Hanoi-HCMC) in
2011 to 37 domestic routes and 23 international routes as of 31 December 2016.

VJC's network structure by number of routes International flight frequency

Korea
7% Korea
Taiwan
3% 19%
ASEAN
28%
China-
Hongkong
20%
Taiwan
Domestic 15%
62%
ASEAN
China-
8%
Hongkong
38%

Source: VJC

Intensive domestic network: The Company has established extensive domestic passenger
routes, connecting to 22 airports in Vietnam. The routes originating from Ho Chi Minh City,
Hanoi, Danang, Cam Ranh and Haiphong account for 92% of VJCs total domestic routes, and
imply roughly 76% of total Available Seat Kilometer (ASK) from domestic routes. In order to
capture the upcoming growth of the domestic air travel segment, VJC aims to increase flight
frequencies in these 5 operating hubs.

China and North Asia Countries is VJCs largest international market. As VJC initially
focused on the domestic market, their international network has appeared small in the past few
years, accounting for only 38% of the total amount of routes. VJC increased from 2 international
routes in 2012 to 23 routes as of 2016 (excluding charter flights). Among those, routes
connecting Vietnam to Greater China-Hongkong, Taiwan, Korea and ASEAN countries play as
VJCs strategic ones, accounting for 38%, 15%, 19% and 28% of total international flights per
week respectively.

SSI.COM.VN Visit SSI Research on Bloomberg at SSIV <GO> Page 7


SSI RESEARCH INSTITUTIONAL RESEARCH & INVESTMENT ADVISORY

2. HISTORICAL PERFORMANCE

2.1. Financial: impressive growths and margins

On a group consolidated basis, VJCs net revenue increased from VND 3,790bn in 2013 to
VND 27,449bn in 2016, representing a 94% CAGR during 2013-2016. The PBT margin leaped
to 9.8% in 2016 from a paltry 0.04% in 2013 as its second year of operations.

Historical revenue (VND bn) VJCs revenue breakdown

Total revenue Revenue ex SLB Passenger transportation Ancillary revenue


30,000 Sales of aircrafts Aircraft rental
27,499
120% Others

25,000
0% 0% 1%
100% 0%
19,845 16%
20,000 20%

15,822 80% 44% 43%


14%
15,000
60%
11,079
12% 13%
10,000 8,706
6,946 40% 84%
66%
5,000 3,790 3,790 43% 44%
20%

- 0%
FY13 FY14 FY15 FY16 FY13 FY14 FY15 FY16

Source: VJC

Passenger transportation benefits from strong demand

Accounting for 44% of total revenue in 2016, passenger transportation revenue posted VND
12,168bn (+43% YoY and a 56% CAGR growth from 2013-2016), primarily stemming from a
65% CAGR in passenger volume growth from the same corresponding period. Rapid expansion
in both domestic and international networks coupled with a capacity increase helped VJC to
enjoy high passenger growth. Nevertheless, VJCs average base fare continued to decline with
a CAGR of -11% during 2013-2016 in line with aggressive fare promotions for new routes. The
low jet fuel price (Jet A1) in during these years and declining in ex fuel CASK enabled VJC to
aggressively reduce fares in order to engender passengers desire for traveling and gain more
market share. For example, VJC has been continuously offered zero-Dong' tickets for limited
seats in airplanes (a maximum 30% of total seats on an airplane) as one of marketing
strategies..

Ancillary revenue growth eclipses growth in passenger transportation revenue

Ancillary business regarding flight changes and domestic cargo handling contributed roughly
13% of total sales in 2016 and 22.3% to adjusted total sales excluding sales of aircraft. Overall,
ancillary revenue increased with 79% CAGR from 2013-2016 in lockstep with VJCs passenger
volume growth, posting revenue of VND 3,553bn (+44% YoY) in 2016. It implied revenue of
USD11 per passenger (vs. USD 9 per pax in 2013), however, the revenue was far lower than

SSI.COM.VN Visit SSI Research on Bloomberg at SSIV <GO> Page 8


SSI RESEARCH INSTITUTIONAL RESEARCH & INVESTMENT ADVISORY

regional peers due to Vietnam's lower income per capita. The region average ranges from USD
30-56 per passenger, according to VJC.

Sales of aircraft contribute significantly to earnings

Aircraft sales expanded from contributing of 20% of total revenue in 2014 to 42% in 2016,
thanks to gains from the significant addition of 10-11 aircraft per year to the fleet size in 2015
and 2016. Aircraft sales displayed healthy expansion, from only VND 1,760bn in 2014 to VND
11,582bn in 2016. In terms of gross profit, VJC recorded roughly USD 6.89 mn per aircraft from
SLB transactions in 2016 (vs. that of USD 2.6mn per aircraft in 2015), made possible due to
VJC's skilled negotiations with manufacturers and lessors. However, the surge in aircraft sales
profit renders estimating future profits from these activities rather unpredictable, and as such
rather difficult for forecasting the companys future cash flow.

If we were to exclude aircraft sales of VND 11,582bn in 2016, VJCs core revenue will record
VND 15,917bn, implying a 61% CAGR during the 2013-2016 period thanks to a high growth in
passenger transportation and ancillary revenue.

Others: Other sources of revenue remain insignificant, including aircraft rentals, which is
recognized from subleasing VJCs one aircraft to Thai VietJet for VND 57bn per year) and other
marginal activities.

Operating cost breakdown (FY2016) Historical margin

Others
0% GPM GPM ex. SLB
PBT margin EBITDA margin

Fuel 16%
Depretiation 22%
14%
and Outsourcing
amortisation 25% 12%
3%
10%
8%

Employee 6%
7%
4%
Cost of 2%
aircraft SLB
43% 0%
FY13 FY14 FY15 FY16

Source: VJC

VJCs GPM expanded substantially from 7.4% in 2013 to 14.2% in 2016 mainly thanks to (1)
the increase in GPM of aircraft sales of SLB (increased from 3% in 2014 to 13% in 2016), (2)
low fuel price in 2015 and 2016. Accordingly, VJCs fuel CASK declined to 3.9 U.S cents in
2016 (vs. 4.14 U.S. cents in 2015) from 5.3 U.S. cents in 2013.

SSI.COM.VN Visit SSI Research on Bloomberg at SSIV <GO> Page 9


SSI RESEARCH INSTITUTIONAL RESEARCH & INVESTMENT ADVISORY

Average Jet fuel and VJCs GPM ex. SLB from 2013-2016

Jet fuel price (USD/barrel) GPM ex. SLB

140 16%
14.4%
13.7%
120 114.8 14%
124.5
12%
100 11.9%
10%
80
7.4%
8%
60
66.7
6%
40 52.1
4%

20 2%

0 0%
2013 2014 2015 2016

Source: VJC, IATA

If we were to exclude profit from SLB, VJCs GPM would achieve 14.9% in 2016, significantly
expanding from 7.4% in 2013. VJCs fuel cost accounts for 22% of COGS (excluding SLBs
aircraft cost, fuel should have contributed 39% of COGS in 2016). The global oil price staged a
decline from its yearly peak of roughly USD 112 per barrel in 2012, and began trending
downwards from 2013-2016 at a CAGR of -26% Consequently, jet fuel costs also fell from its
highest level of USD 124.5/barrel in 2012 to USD 52.1/barrel (~ CAGR of -25%) in 2016. The
low oil price in recent years has encouraged LLCs like VJC to reduce air fares and encourage
air travel. Given that the Vietnamese market is highly price sensitive with limited premium
demand, the low oil price environment provides an opportunity for VJC to lower fares and
increase market share.

In line with sales growth and cost reductions, VJCs PBT and EBITDA margins improved to
9.8% and 10.7% in 2016 vs 0.04% and 0.5% in 2013. VJC manages to continually maintain a
passenger load at 88% (domestic routes: 89%; international routes: 84%) in recent years. High
passenger loads enable the company to maintain a healthy RASK/CASK spread, which
improved to 0.46 US cents in 2016 from 0.09 U.S cents in 2013 (but slightly declined compared
with 0.59 U.S cents in 2015).

SSI.COM.VN Visit SSI Research on Bloomberg at SSIV <GO> Page 10


SSI RESEARCH INSTITUTIONAL RESEARCH & INVESTMENT ADVISORY

2.2. Operation: Strong cost-focus advantage but low yields

VJCs historical operation data

Operating data FY13 FY14 FY15 FY16


1
ASK s (m) 3,341 6,019 11,055 16,498
YoY 80% 84% 49%
2
RPK s (m) 2,945 5,322 9,690 14,451
YoY 81% 82% 49%
Passenger load factor (%) 88.2 88.6 88.1 88.2
3
CASK s (U.S. cents) 5.30 5.04 4.14 3.9
YoY -5% -18% -5.8%
Ex-fuel CASK 2.57 2.48 2.42 2.43
YoY -3.5% -2.4% 0.4%
4
Yield (U.S. cents) 5.1 5.1 3.9 3.6
YoY - -23.5% -7.7%

Source: VJC

Stringent cost and expense management are crucial to keep fares low: VJC possesses an
absolute competitive advantage over other Vietnamese carriers thanks to a very low CASK ex-
fuel. Total CASK declined steadily with a CAGR of -10% from 2013-2016. The improvement in
cost efficiency was mainly thanks to (1) a declining jet fuel cost over the past 3 years, declining
from an average of USD 125/barrel in 2013 to USD 44/barrel in 2016. Fuel cost accounts for
the largest proportion of VJCs total CASK, with 50% in 2013 and decreasing to 38% in 2016 as
a result of declining oil prices. (2) Economies of scale thanks to fast expansion of fleet and a
stringent cost saving system, keeping CASK ex-fuel low. As a result, these and a stringent cost
control system enable VJC to maintain its competitive pricing. In comparison with other LCCs in
the world, VJC was among the lowest of global LCCs with CASK ex-fuel of 2.43 U.S. cents in
2016, similar to Cebu Pacific, Thai AirAsia, Indigo and Jet Blue, but still higher than Air Asia
group.

VJCs successful cost saving system is made possible by the following factors:

Operating within the A320 aircraft model guarantees predictable cost budgeting. VJC
owns 30 182-seat A320 models and 11 230-seat A321 models as of the end of 2016. The
single aircraft model of A320 family simplifies cost budgeting such as simplifying
maintenance and reducing spare parts inventory requirements. Gradually, VJC targets to
increase number of 230-seat A321 models (56 aircraft by the end of 2019), as this aircraft
has more seats than the A320 model, and thus helps to reduce CASK further.

A low average fleet age helps minimize maintenance costs. As of 2016, VJCs fleet age
is quite low at 3.03, aiding in lower input costs and providing for an overall better customer
experience. It also aids in fuel cost savings, keeping maintenance expenses low. Similar to
Air Asia and some other LCCs, VJC employs a maintenance-by-thehour program for
engine maintenance, in which the airline pays a fixed hourly rate to the contractor based on
the number of flight hours of each aircraft. Newer aircraft render lower maintenance
expenses, as less overall flight hours are required less rates of maintenance. Such

1
ASK: Available Seat Kilometers, which is the total number of seats available on scheduled flights multiplied by the
number of kilometers those seats were flown
2
RPK: Revenue Passenger Kilometers, which is the total number of paying passengers carried on scheduled flights
multiplied by the number of kilometers those passengers were flown
3
CASK: Total Cost per ASK (excluding costs of aircraft sales)
4
Yield: Revenue from passenger transportation per RPK (excluding revenue from chartered flights)
SSI.COM.VN Visit SSI Research on Bloomberg at SSIV <GO> Page 11
SSI RESEARCH INSTITUTIONAL RESEARCH & INVESTMENT ADVISORY

maintenance includes daily maintenance, A-checks (every 600 hours of operation), B-


Checks (every 160-180 flight hours), C-Checks (every 6,000 flight hours), and heavy
maintenance D-checks (every 6 years). In addition, this program will also enable budgeting
to be more predictable and simplified. Therefore, VJC keeps retiring old aircraft with more
than 6 year leasing term contracts (including dry leased and wet leased aircraft) and
replacing with new ones in order to maintain a relatively low average fleet age.

Increased block hours drives CASK to decline as aircraft is well utilized. VJCs
average aircraft utilization rate improved on a yearly basis, from 11.9, 12.4, and 13.3 block
hours per day in 2013, 2014 and 2015 respectively. 2016 maintained 13.1 block hours of
last year. The airline targets to maintain high block hours per day in the near future by
increasing the frequency of night flights for domestic routes as well as number of
international flights. VJCs block hours per day is the highest among global LCCs (vs. block
hours per day of Air Asia: 12.4, Indigo: 11.4, Easy Jet: 11.1, Ryan Air: 9). Hence, it helps
the company to maintain a competitive CASK amid aggressive capacity expansion.

Low sales and marketing costs via the internet and mobile application bookings. VJC
focuses on developing their internet distribution channel through their website and mobile
platform. 23% of ticket sales were conducted through website and the mobile application in
2016. It helped VJC significantly reduce distribution costs in comparison with traditional
channels such as booking agencies, booking offices and others. However, all of these
agencies and booking offices ultimately direct customer orders to either the website or the
mobile application to book ticket. Therefore, to eliminate redundancy, VJC distributes their
tickets via online channel more than 90% of the time. Every year, the sales expense per
ASK was 0.13 U.S. cents- 0.14 U.S. cents, or 4% of the total CASK, which is quite low.

Low yield: Due to competitive pricing and short distance flights, VJCs passenger yields
have been declining from 2013 to 2016, achieving 51 U.S. cents in 2013 and decreasing to
35 U.S. cents in 2016 (equivalent to -12% CAGR). Declining in yield was mainly driven by
aggressive promotion, stimulated by a sustained low fuel price in 2015 and 2016, as well as
expanded capacity. Other drivers include VJC's focus on the domestic market,
concentrating on lower-yield but higher frequency short distance flights.

COGs breakdown (FY2016) VJCs historical yield growth

Others
Average total base fare growth Yield growth
0%
5%

Fuel
Outsourcin 22% 0%
Depretiatio g 2014 2015 1H16 2016
n and 25%
-5%
amortisatio
n
3% -10%
Employee
7%
Cost of -15%
aircraft
SLB
43% -20%

-25%

Source: VJC, SSI Research

SSI.COM.VN Visit SSI Research on Bloomberg at SSIV <GO> Page 12


SSI RESEARCH INSTITUTIONAL RESEARCH & INVESTMENT ADVISORY

3. INDUSTRY OVERVIEW

3.1. Global Airlines Industry

Global airline productivity has increased during the period of 2005-2016, according to a
report by Boeing and the International Air Transport Association (IATA). In 2016, IATA
estimated that global airlines net profitability improved by 1% YoY, posting an after tax profit of
USD 35.6 bn (vs. the operating profit industry average of only USD 4.3bn in 2005). Last year,
the global airlines industry benefited from healthy revenue and profit growth thanks to a 5.9%
YoY growth in total RPK and reduced jet fuel cost (down 22% YoY).

Specifically in Southeast Asia after the South China Sea crisis in 2014, the region has enjoyed
a boom in air travel demand till now thanks to (1) more stable geopolitics, (2) low jet fuel cost
and (3) strong air travel demand within the region.

2017 Outlook: Global airlines industry might deliver negative earnings growth due rising
oil prices

For 2017, IATA forecasts the global airline industry after tax profit to achieve USD 29.8n in
2017, down 16% YoY, representing potentially difficult years grappling with an expected rising
oil price. IATA forecasts the jet fuel price may reach USD 65/barrel in 2017 from USD 52/barrel
in 2016, up 25% YoY. As a result, fare promotions spurred on by lower oil prices may shrink in
2017, slowing global traffic growth to 5.1% (from 5.9% in 2016).

Performance of global airlines industry vs. Jet fuel cost

140.0 10.0%

120.0 8.0%

6.0%
100.0
4.0%
80.0
2.0%
60.0
0.0%
40.0
-2.0%

20.0 -4.0%

- -6.0%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016E2017F

Jet fuel price (USD/barrel) Operating margin Net profit margin

Source: IATA

SSI.COM.VN Visit SSI Research on Bloomberg at SSIV <GO> Page 13


SSI RESEARCH INSTITUTIONAL RESEARCH & INVESTMENT ADVISORY

Long term outlook: Air travel demand will continue to grow

For the 2015-2034 periods, IATA is still optimistic about global air travel demand. It expects
global passenger numbers to reach 7.3 billion by 2034, implying an annual 4.1% growth. One of
Boeing's reports titled Current Aviation Market Outlook also shows that global aviation will
continue to accelerate with a CAGR of 4.9% from 2015-2034, mainly thanks to stronger global
GDP growth of 3.1% by 2034 with a brighter outlook upon emerging countries. Among major
markets, Boeing suggests that air travel demand within Asia will prove the strongest growth,
with an annual growth of 6.2% in RPKs from 2015-2034.

Source: Boeing

Southeast Asia is one of the most active regions of LCCs. The region is seen as one of the
pioneer regions to employ the LCC business model. It grew to nearly 20,000 weekly commercial
flights, with a fleet total of 623 aircraft in 2016 (+7% YoY) according to CAPA. Due to rapid
expanding capacity, competition is fierce across the region, with crowded LCC fleets and
competitive air fares in a low fuel cost environment in recent years. CAPA forecasts that the
total LCC fleet in the region will grow by 11% YoY, reaching a total of 693 aircraft in 2017. As
such, this development will create a more intense competition landscape. Nevertheless,
according to Boeing the Southeast Asia aviation industry is expected to grow by 4.6% a year
through 2034. Urbanization and the expatriate population are rapidly rising in the region, which
will further contribute to healthy travel demand and industry growth. Additionally, the adoption of
the ASEAN Single Aviation Market will also strongly support industry growth. The ASEAN
Single Aviation Market will liberalize the regions air services, specifically among ASEAN
countries, benefiting both passengers and airlines alike.

SSI.COM.VN Visit SSI Research on Bloomberg at SSIV <GO> Page 14


SSI RESEARCH INSTITUTIONAL RESEARCH & INVESTMENT ADVISORY

3.2. Vietnam Aviation Industry

Historical performance

No. of Average Load Passengers Domestic


Airlines
aircrafts fleet age factor transported (mn pax) market share
HVN 94 5.7 80% 20 42.8%
Vietjet Air 41 3.03 88% 14.05 40.8%
Jetstar Pacific 14* 8.2 83% 5 14.9%
VASCO 3 12.2 N.A 0.5 1.5%

Source: CAAV, Companies data, SSI Research, (*) excluding wet leased aircraft

Vietnams airlines industry shares by airlines

2016 40% 10% 1% 27% 23%

2015 43% 9% 1% 23% 24%

2014 47% 8% 1% 17% 27%

2013 51% 7% 1% 11% 30%

0% 20% 40% 60% 80% 100% 120%

Vietnam Airlines Jetstar Pacific VASCO VietJet Air Foreign airlines

Source: CAPA

Players are few but competition is intense. Vietnam has other 3 main carriers, Vietnam
Airlines, and its 2 subsidiaries Jetstar Pacific and VASCO. Jetstar Pacific has a similar model to
VJC, which also serves the low cost segment. The airline established in 2009, but operated
much older aircraft mainly under wet leased arrangements. It served around 1.8 to 2mn
passengers per year from 2009-2013 and increased to a total passengers of 5 mn pax in 2016,
effectively implying a 36% CAGR for the period from 2009-2016. Despite stronger competition
from VJC, Jetstar Pacific managed to expand by 8 aircraft in 2016 and plans for another 10 new
A320 CEO's in 2017 for both replacing wet leased aircraft and for fleet expansion, according to
the CAPA Center for Aviation. Obviously, Vietnam domestic airlines see more intense
competition.

SSI.COM.VN Visit SSI Research on Bloomberg at SSIV <GO> Page 15


SSI RESEARCH INSTITUTIONAL RESEARCH & INVESTMENT ADVISORY

Passengers volume carried by Vietnamese airlines Domestic passenger carried shares in 2016

60 Passengers Passenger YoY 50% 1.5%


44%
45%
50 40% 14.9%
Mn pax

30% 30% 35%


40 27% Vietnam Airlines
30%
25% 42.8%
30 19% Vietjet Air
20%
13%
15%
20 Jetstar Pacific
6% 10%
10 5% 40.8%
-1% VASCO
0%
0 -5%
2010

2011

2012

2013

2014

2015

2016E

2017F

Source: GSO, SSI Research Source: CAAV

According to the General Statistics Office of Vietnam (GSO), total passengers transported by
Vietnamese airlines are estimated to grow 30.3% YoY to roughly 40.5 mn pax in 2016 (vs. that
of 27% YoY in 2015), representing a CAGR of 19% from 2010-2016. The encouraging growth
was attributable to (1) Sustained strong GDP (growth of 6.2%in 2016), resulting in an increase
of roughly 5% in per capita GDP growth reaching USD 2,095 bn, which highly correlated with air
travel per capita growth and correspondingly accelerated airlines industry growth; (2)
international tourists to Vietnam by air increased by 31% YoY compared with a flat growth YoY
in 2015; and (3) low fuel prices encouraged airlines to reduce air fares, sparking travel demand.

Industry outlook

2017

In our opinion, we believe that Vietnams airline industry will continue to experience positive
growth in the coming years due to the following drivers:

GDP growth of Vietnam at 6.2% in 2017, according to the IMF forecast (Governments
target: 6.7%, SSI Researchs forecast: 6.6% in 2017 vs. 6.21% in 2016), leading to GDP
per capita to increase to USD 2,199 (+5% YoY), and should significantly benefit airlines.
We also forecast Vietnams exports and imports to grow by 6.5% YoY and 10% YoY
respectively, making a wider implication of expected higher air transportation and a boost in
air travel demand overall.

International tourist traffic to Vietnam is expected to grow to 12% YoY in 2017 from the
average of 9.48% over the last five years, originating from the recent government initiative
to boost the tourism sector. The aviation industry is the largest beneficiary of Vietnams
robust tourism growth in the coming years.

Low cost carriers (LCCs) will continue to win more passengers from traditional
transportation modes such as railway and bus, with more affordable air fares amid a rising
domestic middle class. Underdeveloped infrastructure such as highways and bridges
SSI RESEARCH INSTITUTIONAL RESEARCH & INVESTMENT ADVISORY

causing time consuming delays will also be a variable in an increase of passengers to opt
for air travel.

Aggressive capacity expansion added in 2017 (Vietjet: 12 new aircraft, Jetstar: 6 aircraft,
Vietnam Airlines: 5 aircraft) will result in more air fare promotions, thus prompting air travel
demand.

Despite the above advantages, we expect demand growth to be somewhat affected in 2017
onwards with the variable of the expected global oil price recovery. Additionally, airline capacity
expansion is another variable, with 27 additional aircraft to be delivered in 2017 as stated
above, which will lower airline industry passenger loads. Nevertheless, the negative impact of
lower passenger loads per plane is expected to be outstripped by the overall positive volume
growth of passenger growth across all routes industry-wide.

Long term

th
Vietnam is ranked as the 5 fastest growing market in terms of passenger growth per
year, and the 7th fastest growing industry from 2016-2035 by IATA. According to the most
updated forecast by IATA, Vietnam aviation will continue to grow at an annual rate of 7.3%,
being the 7th fastest growing market of countries that IATA tracks. The growth will be largely
supported by: (1) sustained strong GDP growth of 6.5% and 6.3% in 2017 and 2018 (Source:
IMF, 2017), leading to an improvement in per capita GDP growth. We expect GDP per capita to
reach USD 2,692 by 2020, a CAGR of 5% from 2016-2020, according to our SSI Research
forecast. (2) Positive international tourist volume growth is expected to persist over the next 5
years. Vietnam is among the fastest growing countries regarding international tourist arrivals,
reporting a 9.5% CAGR from 2010-2015 (after Thailand with 9.5%). It is forecast to continue to
see a CAGR growth of 7.9% from 2015-2020 (Euromonitor, 2016 quoted by VJC). (3) Increased
urbanization rates will also support the trend of domestic air travel in the future. Urbanization is
expected to grow at a CAGR of 1% from 2015-2020(IFM, 2014) and reach roughly 38-40% by
2020 (according to the Vietnamese governments 5 year development plan), implying a
continuous rise in Vietnam's middle class. Overall, bright key macro-economic growth drivers as
above mentioned will continue to support the Vietnamese aviation industry over the next 5
years.

Improved aviation infrastructure will better facilitate air travel demand: First, the
monopoly entity Airport Corporation of Vietnam plans to expand designed capacity of its all 22
airports with a 13% CAGR from 2016-2019, in which the Noi Bai International Airport, Tan Son
Nhat Airport and Da Nang Airport will be expanded by 6%, 15% and 29% CAGR respectively. In
addition, Long Thanh International Airport project with 25 mn passengers in designed capacity
may be operational by 2025. As such, the infrastructure expansion will ease the bottleneck in
trunk routes, connecting the 3 largest airports to improve passenger service and further
promote air travel for both domestic and international passengers.
SSI RESEARCH INSTITUTIONAL RESEARCH & INVESTMENT ADVISORY

3.3. VJCs growth Outlook

VJCs top-line will benefit from higher seat capacity thanks to an upcoming aggressive fleet
expansion. This will be partly offset by low yield due to strong competition and continuously
offering low fares in newly established routes.

Domestic market will rise in 2017-2019 and then experience a slowdown

We expect high growth of VJC mainly comes from seizing market share from its competitors
and passengers from other traditional transportation methods such as trains and buses.
According to the GSO and the Civil Aviation Authority of Vietnam, total passengers traveling by
train and bus were 10 mn and 3 mn pax per year respectively. As such, there is still room for
VJC to gain more market share from these modes of transportation. However, the domestic
market may saturate in the next 2-3 years, which will push VJC to expand internationally in
more aggressive fashion.

In 2017, VJCs domestic passenger volume growth will be mainly driven by growth in
existing trunk routes: As of 2016, its 26 routes fly out from one of the 2 main airport hubs
of Hanoi, Ho Chi Minh City together comprise for about 70% of domestic flights. VJC will
add more capacity onto these routes in 2017 to capture the growing demand of the country.
These routes have quite high frequencies of more than 7 flights per week with high
passenger loads. Overall, VJC forecasts that passenger volume in domestic trunk routes
will grow by approximately 20% YoY this year.

New domestic routes: VJC commenced 6 domestic new routes including Hanoi - Tuy
Hoa, Haiphong - Phu Quoc, Haiphong - Dalat, Haiphong - Buon Me Thuot, Nha Trang -
Thanh Hoa and Hanoi - Hue with 4-7 flights per week in May 2016 and 2H16. These will
contribute to 2017 growth as operating in the entire year. However, these routes
frequencies are quite low due to low demand. Passenger load factors for these routes are
expected to be lower than the trunk routes. In 2017, VJC plans to open 4 additional routes.
As VJCs flight network covers almost all airports in Vietnam, there will be limited
opportunities for further domestic expansion. VJC targets to increase scheduled domestic
routes to 45 by the end of 2019 (vs end of 2016: 37 routes and end of 2017P: 41 routes).

Strong capacity expansion in international routes

From 2017, the airline will over the next coming years aggressively open new international
routes within a radius of 2,500 nautical miles, average flight duration of roughly 5-6 hours to
destinations such as Korea and Japan.

Existing routes Vietnam-destinations: Originally cutting the ribbon with the


commencement of the Bangkok Hanoi route back in 2013, currently VJCs international
network comprises of 23 routes, including:

4 routes to South Korea, directly competing with Eastar Jet, Air Busan, Jeju Air, Jin Air,
and Tway.

2 routes to Taiwan, facing competition with Vanilla Air(Tokyo-HCMC via Taipei) and
Tigerair Taiwan;

8 routes to China, with 7 Chinese LCC competitors; In Southeast Asia resides the
fiercest competition for VJC's core market, namely AirAsia and other local LCCs.
SSI RESEARCH INSTITUTIONAL RESEARCH & INVESTMENT ADVISORY

Expansion plan to Taiwan, Korea and Japan to serve strong inbound and outbound
tourism: 6 new international routes including Ho Chi Minh City - Tainan, Hanoi - Taipei, Ho
Chi Minh City - Hong Kong, Haiphong - Incheon, Hanoi - Busan, Wuhan - Cam Ranh, and
Wuhan - Dalat, which were added at the end of 2016, will prove to be positive growth
drivers for 2017. Additionally during 2017, VJC will continue to open around 14 new
international routes, reaching a total of 37 routes by the end of 2017, surpassing its initial
plan of a total 36 routes in 2018).

Inbound tourism: Strong inbound international tourists will be one of major catalysts
for VJCs international passenger growth. According to the Vietnam GSO, international
tourists from Asia to Vietnam enjoyed encouraging growth in 2016 at 30% YoY,
achieving around 7.3 mn pax (vs total international tourists of 10mn px in 2016, up 26%
YoY). Particularly, Chinese tourists recorded the strongest growth of roughly 51% YoY,
thanks to aggressive 'zero-dollar' tours (2.7 mn pax, ~37% of Asian tourists). This trend
is expected to continue in 2017, and will benefit VJCs scheduled routes connecting
Vietnam and these destinations.

Overview: International tourists to Vietnam in 2016

27%
China (+51.4% YoY)
Korea (+38.7% YoY)
46%
Japan (+10.3% YoY)
Taiwan (+15.6% YoY)
Others (+12% YoY)
15%

5% 7%

Source: GSO

Outbound tourism: VJC also strongly focuses upon outbound growth, which is fast
growing among expats working in Vietnam and young middle-class Vietnamese
travelers as aforementioned.

Yield trends in 2017 and onwards

Due to strong competition, we expect VJCs international yield to remain low in 2017 as the
initial phase of its aggressive expansion commences along with associated fare promotions.
The regional landscape is rife with competition, with crowded LCC fleets in the sky and the
expansion plan of the other Vietnam LCC, Jetstar Pacific. Air Asia also plans to set up a joint
venture with a Vietnamese local operator (foreign ownership is capped at 30%) to establish a
new airline to compete directly in both the domestic and international market from 2018 and
beyond.

To counteract such low yield figures, VJC aims to aggressively expand international flights, with
longer distances and targeting a higher income class such as foreign expats and an increasing
SSI RESEARCH INSTITUTIONAL RESEARCH & INVESTMENT ADVISORY

number of Vietnamese tourists with the means to go abroad for vacations and other occasions.
As such, yield is expected to slightly improve from 2018 onwards, corresponding with
increasing fuel prices and a stable flight route network. Adding to this is the undercurrent
variable of increasing demand from the Vietnamese middle class for LCC's and other Asian
countries which as a whole will support the yield to stabilize. However, the road to significant
recovery will also be marked by intense competition over the next 2-3 years

Low base provides a launching pad for VJCs ancillary revenue growth

VJCs ancillary revenue accounted for 22% of total revenue in 2016 (excluding SLB revenue),
compared to an average 26.1% of other LCCs (for example Air Asia: 25%, Spirit Airlines:
38.7%). VJCs ancillary revenue achieved USD 11.4 per pax (declining 6% YoY, but up 14%
compared with 2015), still lower than the industry average of $43 USD per person. Therefore,
ancillary revenue still has large room to grow via changes of extensions to non-refundable
tickets and oversized luggage, as well as in-flight retails.

Revenue from SLB activities

VJC continues to pursue the SLB model and expects to record profit recognition from aircraft
sales, which will not require significant upfront CAPEX for acquiring new aircraft. In 2017, VJC
plans to add 17 new aircraft in which 15 will be SLB.

The company believes that it can maintain high SLB gains in 2017 as the received aircraft are
all A321 considered favorable by lessors. Additionally, the Company believes they have better
bargaining power over manufacturers and lessors thanks to its excellent performance recently.
In total, SLB gain is conservatively projected at USD 90mil by VJC in 2017. The revenue is
expected to contribute roughly 40-47% to VJCs total revenue from 2017-2019.

A fuel cost uptrend is the largest risk, but hedging might partly render the risk subdued:
Amid the expected pick-up of jet fuel prices in 2017, of roughly 25 % (forecast by IATA). VJC
plans to hedge 30-35% of the total fuel cost (In fact, in 1Q17, average fuel jet price increased
by 47% YoY and -7% YTD). At the same time, the company will receive 5 A321-NEO aircraft in
2017, which will partly reduce the impact of fuel price surge with fuel efficiency gains of 15% per
aircraft.

Historical Jet fuel A1 price

160

140

120

100

80

60

40

20

0
4/27/2012 4/27/2013 4/27/2014 4/27/2015 4/27/2016 4/27/2017

Source: Bloomberg
SSI RESEARCH INSTITUTIONAL RESEARCH & INVESTMENT ADVISORY

4. EARNINGS ESTIMATES

4.1. 2017-2019 business plans

Positive passenger volume growth and low cost will help VJCs core revenue and net profit to
enjoy encouraging growth from 2017-2019. Besides, the company also plans to continue
recognizing revenue from SLB in the coming years. It plans to pay a 50% dividend (30% cash
and 20% stock) over the next 3 years.

VND bn 2017P 2018P 2019P


Revenue 42,018 48,767 56,998
YoY 49% 16% 17%
Net profit 3,395 4,406 4,950
YoY 36% 30% 12%
Dividend (on par) 50% 50% 50%
+Cash 30% 30% 30%
+Stock 20% 20% 20%
Fleet delivery schedule (total)Number of aircraft at year end 51 66 78
A320(New delivery) 28 32 38
A321-200(New Delivery) 56 59 64

Source: VJC

4.2. 2017 estimates

Based on VJCs fleet expansion and new route openings, we forecast that VJCs 2017 net
revenue will achieve VND 39,387bn (+43% YoY). Net income might reach VND 3,103bn (+24%
YoY). Our forecast based on the following summary of our analysis:

Passenger volume will achieve roughly 18.9 mn passengers in 2017, increasing by 34%
YoY thanks to (1) the 4 new domestic routes featuring 3-7 flights per week, and the 6
international routes with 3-6 flights per week added in 2H16. These flights will contribute
growth to both passenger transportation and ancillary revenue. (2) In terms of opening new
routes, VJC targets to launch 4 domestic and 14 international routes in 2017. Overall, total
ASK is subjected to an increase of 38% YoY in 2017.

We expect VJC's to maintain its passenger load ratios, at 87% for domestic routes and 82%
in international routes (vs. 88% and 82% in 2016 respectively).

We expect that revenue from SLB activities will record VND 16,915bn (+46% YoY),
attributable to gains recognized from 15 new aircraft being delivered during the year for
SLB. We assume that gross profit may be recorded at USD 6mn per aircraft

We assume that the average jet fuel price will increase by 14% YoY.

Jet Fuel Quarterly assumption in 2017

USD/barrel 1Q 2Q 3Q 4Q Average
2016 43.9 55.3 56.5 61.2 54.2
2017F 64.8 62 58 62 61.9
YoY 48% 12% 3% 1% 14%

Source: Bloomberg, SSI Research assumption

Gross profit margin will slightly decline to 12.4% in 2017 due to the expected fuel cost hike
and lower GPM of SLB at 12% (vs 13% in 2016)
SSI RESEARCH INSTITUTIONAL RESEARCH & INVESTMENT ADVISORY

4.3. 2018-2023 estimates

We forecast that VJCs total passenger volume will grow at 13% CAGR. Domestic passenger
volume will grow at 10% CAGR, and international passenger volumes may enjoy a CAGR of
23% due to a rise from a low base. In summary, from 2018-2023, we expect total revenue and
net profit of VJC will grow at CAGRs of 19% and 20% respectively thanks to significant revenue
and gain from SLB recognized from Airbus and Boeing contracts. We assume that VJC may
receive 39 aircraft per year from 2020-2023, according to schedule delivery.

We assume that VJC will purchase and own 2 aircraft per year.

VJCs operating data assumptions

VJC: Group operating data FY15 FY16 FY17E FY18E FY19E FY20E FY21E FY22E FY23E
RPKs(m) 9,690 14,451 21,891 26,607 32,063 37,090 42,233 47,233 52,449
ASKs (m) 11,055 16,498 25,715 34,237 42,983 51,114 58,826 66,056 73,733
Passenger load factor
Domestic 89% 89% 87% 87% 86% 85% 85% 85% 85%
International 84% 83% 82% 82% 82% 81% 80% 80% 80%
Yield per RPK (U.S. cents) 4.03 3.80 2.76 2.82 2.84 2.82 2.81 2.79 2.77
Average jet fuel price (USD/bbl) 66.70 52.10 59.39 64.74 66.36 67.87 69.23 69.92 69.92
Appreciation of USD against VND 3% 1% 2% 2% 2% 2% 2% 2% 2%

Source: VJC, IATA, World Bank, SSI Research forecats


SSI RESEARCH INSTITUTIONAL RESEARCH & INVESTMENT ADVISORY

5. VALUATION

5.1. DCF method

Because SLB activity is tied into VJC's business model, we factor in SLB profits in our DCF
model as a core business profit resource corresponding with aircraft leasing fees in the future.
Overall, we apply a DCF model for VJC with WACC at 12.96%, terminal growth at 1%, and
arrive at a present fair value for VJC of VND 131,034/share.

DCF Calculation

Consolidated (VND million) 2017F 2018F 2019F 2020F 2021F 2022F 2023F
EBIT 3,660,491 4,404,345 5,431,414 9,320,973 10,237,830 11,530,070 11,919,141
Abnormal adjustments 0 0 0 0 0 0 0
Adjusted EBIT 3,660,491 4,404,345 5,431,414 9,320,973 10,237,830 11,530,070 11,919,141
Effective CIT rate (%) 10.0% 10.0% 15.0% 15.0% 15.0% 15.0% 15.0%
EBIT(1-T) 3,294,442 3,963,910 4,616,702 7,922,827 8,702,155 9,800,560 10,131,270
Add: Depreciation 165,264 215,359 264,399 316,265 368,131 471,862 575,594
Less: CAPEX 2,000,000 2,000,000 2,000,000 2,000,000 2,000,000 2,000,000 2,000,000
Less: Change in WC 964,485 1,088,832 1,162,730 1,303,739 1,372,188 1,529,382 1,685,056

Free cash flow to firm 495,221 1,090,438 1,718,371 4,935,353 5,698,098 6,743,040 7,021,809
Terminal growth 1% Terminal value 69,529,675
Discount period 0.67 1.67 2.67 3.67 4.67 5.67 6.67
Discount factor 0.92 0.82 0.72 0.64 0.57 0.50 0.44
Present value 456,325 889,512 1,240,917 3,155,145 3,224,827 3,378,373 3,114,412
Terminal PV 30,838,788
PV of FCFF - Operating 46,298,298
Cash & cash equivalents 2,741,341
ST Investments 1,400
Total Firm Value 49,041,040
Debt 6,797,227
Equity Value 42,243,813
No. of shares 322,388,060
Value of a share (VND) 131,034

5.2. Peers comparison

Name Country Market Cap (USD mn) P/E T12M P/B ROE (%) EV/EBITDAR T12M
Ryanair Holdings PLC Ireland 18,199 13.5 3.6 40.9 8.5
EasyJet PLC UK 4,630 8.7 1.4 17.2 4.0
WestJet Airlines Ltd Canada 1,951 8.8 1.2 14.7 3.2
JetBlue Airways Corp US 6,596 8.9 1.6 21.0 3.9
Spirit Airlines Inc US 3,600 12.5 2.6 20.2 5.2
Southwest Airlines Co US 36,017 15.7 4.5 28.4 7
AirAsia Bhd Malaysia 1,972 3.6 1.1 36.8 5.1
Cebu Air Inc Philippines 1,121 7.1 1.8 18.9 4.2
Vietnam Airlines JSC Vietnam 1,395 15.3 2.7 17.0 N/A
Average 10.5 2.3 23.9 5.1
Vietjet Aviation JSC Vietnam 1,840 10.3 5.9 68.7 10.5

Source: Bloomberg, VJC


SSI RESEARCH INSTITUTIONAL RESEARCH & INVESTMENT ADVISORY

5.3. Investment view and recommendation

At the current price of VND 130,500/share, VJC is trading at 2017 and 2018 P/E of 13x and
12x, respectively and adjusted EV/EBITDAR of 7.2x and 5.6x, which are quite fair compared to
industry average. Combining DCF method and 1 year target P/E of 13x and adjusted
EV/EBITDAR of 7x (premium compared with industry average attributable to the duopoly
position in Vietnamese LCC segment and high growths in the initial phase of operation). We
arrive at a 1 year target for VJC of VND 140,400/ share (+8%). We recommend to HOLD the
stock.

5.4. Risks and issues

General risk for all airlines

(1) Uptrends in fuel price will be negative for all airlines.

(2) Possible landing charge increases at the 7 largest airports in Vietnam for domestic routes
by ACV. According to ACV, the company together with Civil Aviation Authority of Vietnam
proposed to the Ministry of Transport to increase the landing charge at 7 airports including
Tan Son Nhat, Noi Bai, Da Nang, Cam Ranh, Phu Quoc, Vinh and Phu Bai Airport.
Specifically, domestic landing charges may increase and equal to a 50% charge from that
of international flights (from the current ratio of 34%). This should significantly impact the
airline industry GPM.

Specific risks for VJC

(1) As market share of VJC is already high, it might be difficult for the company to soak up
more market share and also to maintain high passenger loads per plane given the large
number of aircraft being delivered over the next 5-10 years.

(2) A large portion of VJC profits comes from the sale of new aircraft that the company buys in
bulk at deep discounts. On the one hand, this strategy has helped Vietjet Air increase
competitiveness by lowering ownership cost and operating costs. On the flip side, this
makes earnings more volatile. Furthermore, lease payment terms could be fixed and non-
cancellable, regardless of whether or not passenger traffic delivers.

(3) Financial risk and FX risk persists, with its payback lease terms with the lessors leaving the
company potentially vulnerable.
SSI RESEARCH INSTITUTIONAL RESEARCH & INVESTMENT ADVISORY

APPENDIX: ANNUAL FINANCIAL STATEMENTS

VND Billion 2015 2016 2017F 2018F VND Billion 2015 2016 2017F 2018F
Balance Sheet Income Statement
+ Cash 924 2,741 6,474 9,029 Net Sales 19,845 27,499 39,387 47,640
+ Short-term investments 270 1 0 0 COGS -17,736 -23,597 -34,517 -42,264
+ Account receivables 5,516 8,391 7,764 11,162 Gross Profit 2,110 3,902 4,870 5,376
+ Inventories 164 138 138 169 Financial Income 154 145 112 208
+ Other current assets 209 304 204 249 Financial Expense -562 -654 -711 -498
Total Current Assets 7,083 11,575 14,580 20,609 Income from associates 0 0 0 0
+ LT Receivables 2,060 3,843 4,278 5,099 Selling Expense -318 -518 -646 -773
+ Net Fixed Assets 29 1,047 2,882 3,667 Admin Expense -203 -189 -218 -226
+ Investment properties 0 0 0 0 Income from business operation 1,160 2,671 3,393 4,072
+ LT Assets in progress 137 181 181 181 Net Other Income 8 32 55 67
+ LT Investments 8 68 68 68 Profit Before Tax 1,168 2,703 3,448 4,138
+ Other LT Assets 2,727 3,348 4,832 5,917 Net Income 1,171 2,496 3,103 3,725
Total Long-Term Assets 4,962 8,487 12,242 14,933 NI attributable to shareholders 1,170 2,496 3,105 3,726
Total Assets 12,045 20,063 26,822 35,542 Minority interest 0 0 -2 -2
+ Current Liabilities 5,883 9,326 10,942 15,722
In which: ST debt 3,543 6,102 6,903 9,298 Basic EPS (VND) 0 0 9,630 11,559
+ Non-current Liabilities 4,015 6,002 7,440 8,622 BVPS (VND) 14,802 15,775 26,184 34,743
In which: LT debt 0 695 1,094 1,340 Dividend (VND/share) 0 0 4,000 3,000
Total Liabilities 9,897 15,329 18,382 24,345 EBIT 1,298 2,884 3,660 4,404
+ Contributed capital 1,450 3,000 3,224 3,224 EBITDA 1,308 2,930 3,826 4,620
+ Share premium 0 0 1,670 1,670
+ Retained earnings 686 1,703 3,518 6,277 Growth
+ Other capital/fund 12 31 30 -97 Sales 127.9% 38.6% 43.2% 21.0%
Shareholders' Equity 2,147 4,734 8,441 11,197 EBITDA 151.6% 123.9% 30.6% 20.8%
Total Liabilities & Equity 12,045 20,063 26,823 35,542 EBIT 155.2% 122.1% 26.9% 20.3%
NI 225.0% 113.2% 24.3% 20.0%
Cash Flow Equity 122.2% 120.4% 78.3% 31.2%
CF from operating activities 852 1,636 3,928 1,882 Chartered Capital 81.3% 106.9% 7.5% 0.0%
CF from investing activities -1,201 -2,830 -2,000 -2,000 Total assets 56.9% 66.6% 33.7% 32.5%
CF from financing activities 740 2,986 1,805 1,673
Net increase in cash 391 1,792 3,732 2,555 Valuation
Beginning cash 527 924 2,741 6,474 P/E 0.0 0.0 13.3 11.1
Ending cash 924 2,741 6,474 9,029 P/B 0.0 0.0 4.9 3.7
P/Sales N.a N.a 1.0 0.9
Liquidity Ratios Dividend yield N.a N.a 3.1% 2.3%
Current ratio 0.98 0.98 1.33 1.31 EV/EBITDA 1.8 1.4 10.8 8.9
Acid-test ratio 0.92 0.93 1.30 1.28 EV/Sales 0.1 0.1 1.0 0.9
Cash ratio 0.19 0.26 0.59 0.57
Net debt / EBITDA 1.79 1.14 0.73 0.34 Profitability Ratios
Interest coverage 10.01 15.96 17.21 16.56 Gross Margin 10.6% 14.2% 12.4% 11.3%
Days of receivables 6.3 15.9 9.1 0.8 Operating Margin 6.4% 10.2% 9.1% 9.0%
Days of payables 7.8 6.3 3.9 7.0 Net Margin 5.9% 9.1% 7.9% 7.8%
Days of inventory 2.7 2.3 1.5 1.3 Selling exp./Net sales 1.6% 1.9% 1.6% 1.6%
Admin exp./Net sales 1.0% 0.7% 0.6% 0.5%
Capital Structure ROE 75.2% 72.5% 47.1% 38.2%
Equity/Total asset 0.18 0.24 0.31 0.31 ROA 11.9% 15.5% 13.2% 11.9%
Liabilities/Total Assets 0.82 0.76 0.69 0.69 ROIC 28.1% 30.9% 23.6% 20.8%
Liabilities/Equity 4.61 3.24 2.18 2.20
Debt/Equity 1.65 1.44 0.95 0.96
ST Debt/Equity 1.65 1.29 0.82 0.84

Source: VJC, SSIResearch


SSI RESEARCH INSTITUTIONAL RESEARCH & INVESTMENT ADVISORY

1. ANALYST CERTIFICATION

The research analyst(s) on this report certifies that (1) the views expressed in this research report accurately reflect
his/her/our own personal views about the securities and/or the issuers and (2) no part of the research analyst(s)
compensation was, is, or will be directly or indirectly related to the specific recommendation or views contained in this
research report.

2. RATING

Within 12-month horizon, SSIResearch rates stocks as either BUY, HOLD or SELL determined by the stocks expected
return relative to the market required rate of return, which is 18% (*). A BUY rating is given when the security is expected to
deliver absolute returns of 18% or greater. A SELL rating is given when the security is expected to deliver returns below or
equal to -9%, while a HOLD rating implies returns between -9% and 18%.

Besides, SSIResearch also provides Short-term rating where stock price is expected to rise/reduce within three months
because of a stock catalyst or event. Short-term rating may be different from 12-month rating.

Industry Rating: We provide the analyst industry rating as follows:

Overweight: The analyst expects the performance of the industry over the next 6-12 months to be attractive vs. the
relevant broad market

Neutral: The analyst expects the performance of the industry over the next 6-12 months to be in line with the relevant
broad market

Underweight: The analyst expects the performance of the industry over the next 6-12 months with caution vs. the
relevant broad market.

*The market required rate of return is calculated based on 5-year Vietnam government bond yield and market risk premium derived from using
Relative Equity Market Standard Deviations method. Our rating bands are subject to changes at the time of any significant changes in the above
two constituents.

3. DISCLAIMER

The information, statements, forecasts and projections contained herein, including any expression of opinion, are based
upon sources believed to be reliable but their accuracy completeness or correctness are not guaranteed. Expressions of
opinion herein were arrived at after due and careful consideration and they were based upon the best information then
known to us, and in our opinion are fair and reasonable in the circumstances prevailing at the time, and no unpublished price
sensitive information would be included in the report. Expressions of opinion contained herein are subject to change without
notice. This document is not, and should not be construed as, an offer or the solicitation of an offer to buy or sell any
securities. SSI and other companies in the SSI and/or their officers, directors and employees may have positions and may
affect transactions in securities of companies mentioned herein and may also perform or seek to perform investment banking
services for these companies.

This document is for private circulation only and is not for publication in the press or elsewhere. SSI accepts no liability
whatsoever for any direct or consequential loss arising from any use of this document or its content. The use of any
information, statements forecasts and projections contained herein shall be at the sole discretion and risk of the user.
SSI RESEARCH INSTITUTIONAL RESEARCH & INVESTMENT ADVISORY

4. CONTACT INFORMATION

Institutional Research & Investment Advisory

Kim Nguyen
Analyst, Industrials
Tel: (848) 3824 2897 ext. 2140
kimntt@ssi.com.vn

Phuong Hoang Hung Pham Giang Nguyen, ACCA


Deputy Managing Director, Associate Director Associate Director
Head of Institutional Research & Investment Advisory hungpl@ssi.com.vn giangntt@ssi.com.vn
phuonghv@ssi.com.vn

WWW.SSI.COM.VN SAIGON HO CHI MINH HANOI


SECURITIES INC. CITY 1C Ngo Quyen Street, Ha Noi City
Member of the Ho Chi 72 Nguyen Hue Tel: (844) 3936 6321
Minh Stock Exchange, Street, District 1 Fax: (844) 3936 6311
Regulated by the State Ho Chi Minh City Email: info@ssi.com.vn
Securities Commission Tel: (848) 3824 2897
Fax: (848) 3824 2997
Email:
info@ssi.com.vn Page 27

Potrebbero piacerti anche