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BUY ＃investSuggestionEng＃ ＃dyCompany＃

＃investSuggestionChangeEng＃ Spring Airlines Maintained ＃dyStockcode＃ ＃ ＃ ( 601021: SH) TransportindustryId

＃titleEng＃ ir Revenue Breakdown Dec 31, 2014 15H1 Earnings Preannouncement Higher than Expected Total Revenue 732,761.35 ＃createTimeEng＃ Operating Revenue 704,073.81 July 21, 2015

Revenue by Product:

1.Air Transport 694,426.60 ****年**月**日 (98.6%) Company Profile 2.Air Freight 9,647.21  Spring Airlines Co. Ltd. (601021: SH) offers air transportation services. The company (1.4%) provides domestic and international routes for passengers and cargoes. Spring Airlines

also offers ticket home delivery and electronic ticket services. Analyst＃emailAuthorEng ＃ Zhang Xiaoyun Event [email protected]  Spring Airlines (the company) announced that it plans to offer no more than 38.39 million S0190514070002 shares through private placement at a price no lower than CNY 117.2 per share and

raise no more than CNY 4.5 billion.

 In its recently-released 15H1 earnings forecast, the company stated that it would record Translator CNY 623 million-CNY 677 million in net profit, up 130%-150% YoY. PAN Mengchen [email protected] Comment  Funds raised via the private placement will be mainly used on purchase of new LI Xing planes and on development of its Internet airline projects. The company plans to [email protected] raise no more than CNY 4.5 billion via private placement. Specifically, CNY 3.7 billion will be spent on the purchase of 21 A320 planes (The total contacted value is CNY 12.45 billion), while the remaining CNY 800 million will be invested on the development of Internet airline projects (including retrofitting of WIFI systems, upgrade of information management systems, and construction of the E-commerce platform). The purchase of the 21 A320 planes is part of Spring Airline’s plan to buy a total of 61 new planes between 2014 and 2018. The launch of the private placement program will greatly improve the company’s financial conditions by bringing down its leverage.  Fleet commonality constitutes Spring Airlines’ greatest strengths. The company will be quickly expanding its fleet size. Like most low-cost carriers (LCCs), Spring Airlines strives to keep its cost low by operating fleet consisting of a single aircraft model. The company’s financing capability has been greatly strengthened after becoming listed. Given such, we expect the company to substantially increase its purchase of new aircrafts (At the end of 2014, only twelve of the 46 planes in operation are owned by the company.). Its fleet size will be expanding quickly. In 15H1, Spring Airlines enjoy rapid increase in transportation capacity, with the ASK increasing by 21.54% to 11.3 billion seat kilometers. Particularly, the ASK for international airlines reached 2.69 billion seat kilometers, remarkably up 168.38% YoY. We expect the company to operate 60 aircrafts in 2015 and 100 aircrafts in 2018. The transportation capacity will be growing at 20-25% on a yearly basis in the next few years. Before

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Research Report Distributed by SinoPac Securities (Europe) Ltd. Prepared by Industrial Securities Co., Ltd Notice: The attached research report and the comments below were written entirely by our China broker partner Industrial Securities Co., Ltd. SinoPac Securities is the distributor. Company Research Report INDUSTRIAL SECURITIES having a fleet consisting of 200 planes, Spring Airlines will be able to maintain its profit margin at relatively high levels given the persistently high passenger load factor and daily usage rate. In light of this, earnings growth of Spring Airlines is closely linked to the aircraft buying process. In the future, the transportation capacity will be mainly allocated to the flights scheduled for the more profitable North-East-Asia market (Japan, South Korea and Taiwan), flights departing from first-tier cities like Shanghai and Shenzhen, as well as flights departing from the some second-tier cities like Zhengzhou, Chongqing and Jinjiang.  The Internet airline projects are progressing steadily. The proportion of supplementary revenue to the total will be further raised. The proportion of supplementary revenue is expected to see further rise. The conceptual phase of Internet airline projects has passed. Through facilitation of online direct sales and construction of in-flight WiFi access, budget airlines such as Spring Airline will be able to develop inflight Internet ecosystems that could generate substantial supplementary revenue. Spring Airlines develops its client base by selling low-price air tickets. In order to improve its gross margin, the company needs to provide more value-added services to its clients for higher supplementary revenue. In addition to onboard products sales, overweight luggage transportation, check-in express and insurance agent services, Spring Airlines looks to further expand its service portfolio. The E-commerce business unit Spring Airline established in 2014 has been focusing on meeting clients’ additional needs through integration of the airline travel ecosystem. In 15H1, Spring Airline has taken multiple measures to increase its supplementary revenue, such as selling travel packages including both air tickets and insurances to Economy Class travelers, developing in-flight e-commerce by setting up WiFi connections, and partnering with Tencent on Internet businesses. There is much room for Spring Airlines to improve its supplementary revenue going forward. In 2014, Spring Airlines received supplementary revenue that accounts for 5.66% of total revenue. (The figure for Ryan Airline and Asian Airline were 22% and 39% respectively.) Between 2012 and 2014, Spring Airlines’ revenue from direct ticket sales accounts for 81.62% of the total on average. In the past decade, Spring Airlines has seen its online registered members to break 12 million and the direct sales customer resource to exceed 22 million person-hours. We believe that both the high direct ticket sales and the extensive client base will turn into the company’s profits in the future.  Benefitting from improving industry supply and demand, international oil price drops and explosive growth of international airlines, Spring Airlines registered remarkable earnings growth in 15H1. The RPK saw rapid growth in 15H1, reaching 10.64 billion passenger kilometers, up 22.92% YoY; the passenger load factor (PLF) reached 93.75%, up 1.06 percentage points YoY. In 15H1, Spring Airlines saw the number of its international travelers surge by 193.41% YoY to 1.09 million; the RPK of international flights increased 189.62% YoY to 2.43 billion passenger kilometers, while the PLF rose 6.64 percentage points to 90.57%. Benefitting from improving industry supply and demand, international oil price drops and explosive growth of international airlines, Spring Airlines registered remarkable earnings growth in 15H1. We forecast that the net profits attributable to shareholders in 15H1 would reach CNY 623 million - CNY 677 million, up 130% - 150% YoY. Looking ahead, we expect the deepening of the ‘Going Global’ strategy and further reduction on the number of crew members per flight

2 Company Research Report INDUSTRIAL SECURITIES will pave foundation for further gross margin increases. We think that the coming of the busy season (the summer vacation) in 15Q3 and the opening of Shanghai Disney Resort next year will provide strong boosts to the company’s growth.  Spring Airlines enjoys strong first-mover advantage in the budget airline industry, with potent prospects to become the domestic market leader. A study of overseas experience tells us that in a relatively mature airline market there will be only one dominant LLC operator. With accurate market positioning, strong management and effective cost control, Spring Airlines presents potent prospects to become a domestically-leading LCC operator.  Riding on the tailwind of the LCC boom, Spring Airlines enjoys potent prospects to become a domestically-leading LCC operator. At 2014 end, Spring Airlines operated a fleet of 46 planes, and its net profit reached CNY 880 million. Compared with its overseas budget counterparts (Southwest Airline: 680 planes in operation/profit of CNY 6.8 billion; Ryan Air: 305 planes in operation/profit of CNY 4.2 billion), the company still has large potential to grow. In China, travelling by air is becoming increasingly popular among the public. In February 2014, the Civil Aviation Administration of China released a guideline to promote the development of budget airlines. These indicate that the budget airline industry is embracing a golden era for development. In China, budget airlines only account for 8% of the total market, while the global average is 27% (31% in North America, 38% in Europe, and 26% in Asia). This suggests that the budget airline market in China has great potential to grow. As one of the very few players in the domestic budget airline industry, Spring Airlines is expected to draw significant benefits from the budget airline boom.  Earnings Forecast and Investment Recommendations: As the only listed budget airline company on the A-share market, Spring Airlines is quickly expanding its fleet, with the aim of operating 60 planes in 2015 and 100 planes in 2018. In view of the fast-rising demand for private travels by air, we show strong optimism towards the growth prospects of China’s budget airline industry. With terminals at both Shanghai Pudong International Airport and Shanghai Hongqiao International Airport, the company will enjoy faster growth once Shanghai Disney Resort is opened to the public (over 50% of the company’s airlines depart from the two airports in Shanghai.). With accurate market positioning, strong management and effective cost control, Spring Airlines presents potent prospects to become a domestically-leading LCC operator. We made EPS forecast for the company at CNY 3.69 in 2015 and CNY 4.85 in 2016, implying 34x 15E PE and 26x 16E PE. Reiterate BUY.  Potential Risks: economic downturn; unexpected air crashes., slower-than-expected flight schedule extension

3 Company Research Report INDUSTRIAL SECURITIES Appendix

Balance Sheet Mn/CNY Income Statement

FY 2014 2015E 2016E 2017E FY 2014 2015E 2016E 2017E

Current Assets 2922 6109 7425 10028 Operating Income 7328 9219 12140 15384

Cash and Cash Equivalent 2400 5477 6603 9000 Operating Expense 6245 7286 9356 11552

Trading Financial Assets 0 0 0 0 Business Tax and Surcharges 15 19 25 32

Account Receivables 73 92 121 153 Selling Expense 184 230 302 382

Other Receivables 193 240 316 400 Administration Expense 163 206 268 338

Inventory 43 51 65 81 Financial Expense 98 126 191 247

Non-current Asset 8340 11688 14737 17581 Asset Impairment 0 0 0 0

Available-for-sale Financial Assets 0 0 0 0 Change in Fair Value 0 0 0 0

Long-term Equity Investment 110 130 150 190 Investment Income -81 -80 -80 -100

Investment Real Estate 0 0 0 0 Operating Profit 540 1272 1916 2731

Fixed Assets 4372 7835 11898 15090 Non-business Income 683 765 765 765

Construction in Progress 2512 2279 1149 585 Non-business Expense 8 10 10 10

Oil and Gas Assets 0 0 0 0 Total Profit 1216 2027 2672 3487

Intangible Assets 54 56 58 60 Income Tax 332 553 729 951

Total Assets 11261 17797 22161 27609 Net Profit 884 1474 1943 2536

Current Liabilities 4217 6545 8037 9849 Minority Interest Income 0 0 3 3

Short-term Loans 2046 4000 5000 6200 Net Profit Attributable to Parent Company 884 1474 1940 2533

Notes Payable 0 0 0 0 EPS(CNY) 2.21 3.69 4.85 6.33

Account Payable 204 238 306 378

Others 1967 2306 2731 3271 Key Financial Ratios

Non-current Liabilities 3491 4490 5515 6615 FY 2014 2015E 2016E 2017E

Long-term Loans 2329 3329 4329 5329 Growth

Others 1162 1161 1186 1286 Increase Rate of Business Revenue 11.6% 25.8% 31.7% 26.7%

Total Liabilities 7708 11035 13552 16464 Increase Rate of Business Profit 24.9% 135.3% 50.7% 42.5%

Share Capital 300 400 400 400 Net Profit Growth Rate 20.8% 66.7% 31.6% 30.5%

Capital Reserve 280 1905 1905 1905

Undistributed Profit 2824 4298 6142 8675 Profitability

Minority Interest 0 0 3 6 Gross Margin Rate 14.8% 21.0% 22.9% 24.9%

Total Shareholders’ Equity 3553 6753 8600 11135 Net Profit Margin 12.1% 16.0% 16.0% 16.5%

Total Liabilities and Equity 11261 17787 22152 27599 ROE 24.9% 21.8% 22.6% 22.8%

Cash Flow Statement Mn/CNY Solvency

FY 2014 2015E 2016E 2017E Asset-liability Ratio 68.4% 62.0% 61.2% 59.7%

Net Profit 884 1474 1940 2533 Current Ratio 0.69 0.93 0.92 1.02

Depreciation and Amortization 337 465 765 1076 Quick Ratio 0.68 0.93 0.92 1.01

Property Depreciation Preparation 0 0 0 0

Amortization of Intangible Assets 33 35 39 43 Operation Capacity

Loss from Fair Value Change 0 0 0 0 Asset Turnover Ratio 77.5% 63.5% 60.8% 61.8%

Financial Expense 70 126 191 247 AR Turnover Ratio 10700.2 11123.4 11367.7 11178.4

Investment Loss 81 80 80 100 % % % %

Minority Interest Income 0 0 3 3 Stock Info(CNY)

Change in Working Capitals -275 184 195 322 EPS 2.21 3.69 4.85 6.33

Cash Flows from Operating Activities 1076 2263 3114 4139 OCFPS 2.69 5.66 7.79 10.35

Cash Flows from Investment Activities -2404 -3796 -3801 -3845 NAVPS 8.88 16.88 21.49 27.82

Cash Flows from Financing Activities 2244 4610 1813 2103

Net Change in Cash 918 3077 1126 2397 Valuation Ratio

Beginning Balance of Cash -1410 2400 5477 6603 PE 50.6 30.3 23.1 17.7

Ending Balance of Cash 2328 5477 6603 9000 PB 12.6 6.6 5.2 4.0

4 Company Research Report INDUSTRIAL SECURITIES Introduction of Share Investment Rating Industry Investment Rating When measuring the difference between the markup of the industry index and that of the market’s benchmarks (Shanghai Composite Index/Shenzhen Component Index) within twelve months after the release of the report, we define the terms as follows:  Overweight：Industry performs better than that of the whole market；  Neutral：Industry performs about the same as that of the whole market；  Underweight：Industry performs worse than that of the whole market Company Investment Rating When measuring the difference between the markup of the company stock price and that of the market’s benchmarks (Shanghai Composite Index/Shenzhen Component Index) within twelve months after the release of this report, we define the terms as follows:  Buy： With a markup more than 15% better than that of the market；  Outperform：With a markup 5% to 15% better than that of the market；  Neutral： With a markup less than 5% better or worse than that of the market；  Underperform： With a markup more than 5% worse than that of the market. Information Disclosure The Industrial Securities Co., Ltd. fulfills its duty of disclosure within its sphere of knowledge. The clients may visit the column of Insider Trading Prevention and Control at www.xyzq.com.cn for the arrangement of the quiet period and the affiliates’ shareholdings. Analyst Certification We are conferred the Professional Quality of Securities Investment Consultant Industry by the Securities Association of China and have registered as the Securities Analysts. We hereby issue this report independently and objectively with due diligence, professional and prudent research methods and only legitimate information is used in this report. We hereby certify that the views expressed in this report accurately reflect our personal views about any or all of the subject securities or issuers referred to herein. We have never been, are not, and will not be compensated directly or indirectly in any form for the specific recommendations or opinions herein. Disclaimer Industrial Securities Co., Ltd. (hereinafter referred to as the ‘Company’) is a qualified securities investment consulting institute approved by the China Securities Regulatory Commission. The report is to be used solely by the clients of the Company. The Company will not treat unauthorized receivers of this report as its clients. The clients understand that the text message reminder and telephone recommendation are no more than a brief communication of research opinions, which are subject to the complete report released on the Company’s website (http://www.xyzq.com.cn). The clients may ask for follow-up explanations if they so wish. Based on different assumptions or standards and with different analytical approaches, the Company’s salespersons, traders and other professionals may express views, written or oral, towards market trend and securities trading which are inconsistent with opinions and recommendations contained herein. The views in this report are subject to change, and the Company has no obligation to update its information with all receivers of the report. The Company’s asset management department, proprietary business department and other investment-related departments may make independent investment decisions based on investment that are inconsistent with opinions and recommendations contained herein. The report is based on public information; however, the authenticity, accuracy or completeness of such information is not warranted by the Company. The materials contained herein are for the clients’ reference only, and are not to be regarded or deemed as an invitation for the sale or purchase of any securities. The clients should make investment decisions independently and solely at their own risks. Under the legal framework, the Company may take positions in and trade stocks of the companies referred to herein, which may receive investment banking services from the Company. The clients shall consider the Company’s possible conflict of interests which may affect the objectivity of this report, and shall not base their investment decisions solely on the report. Independent investment consultant should be consulted before any investment decision is rendered based on this report or at any request of explanation for this report where the receiver of this report is not a client of the Company. The Company possesses all copyrights of this report and reserves all rights related to this report. Unless otherwise indicated in writing, all the copyrights of all the materials herein belong to the Company. In the absence of any prior authorization by the Company in writing, no part of this report shall be copied, photocopied, replicated or redistributed to any other person in any form by any means, or be used in any other ways which will infringe upon the copyrights of the Company. 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Global Markets Team LIU Yirong, Connie 86-21-38565452 [email protected] ZHANG Zhenlan, Lana 86-21-20370633 [email protected] XU Hao, Howe 86-21-38565450 [email protected] CHAN Chiwan, Rex 86-21-38565439 [email protected]

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