TravelSky Technology | March 2, 2016 MORGAN STANLEY RESEARCH

March 2, 2016 MORGAN STANLEY ASIA LIMITED+ Watson Lau TravelSky Technology [email protected] +852 2239-1523 Edward H Xu, CFA A defensive play in China's growing air [email protected] +852 2239-1521 travel market; initiate at Overweight

Industry View Stock Rating Price Target In-Line Overweight HK$13.77 TravelSky Technology ( 0696.HK, 696 HK ) Hong Kong/China Transportation & Infrastructure / China Stock Rating Overweight TSK is a major global distribution system (GDS) provider in China Industry View In-Line with a near monopoly, fostered by government regulation and Price target HK$13.77 Up/downside to price target (%) 17 customer - shareholder support. We believe TSK will benefit from Shr price, close (Feb 29, 2016) HK$11.72 China's stable air traffic growth and increasing airport expansions in 52-Week Range HK$15.60-7.30 Sh out, dil, curr (mn) 2,926 the next three to five years. Mkt cap, curr (mn) Rmb28,844 EV, curr (mn) Rmb24,528 China's leader in electronic ticket distribution: TravelSky (TSK) enjoys Avg daily trading value (mn) HK$79 strong shareholder support (i.e., its major airline customers are also owners) and solid customer relationships, acting as China's sole electronic ticket Fiscal Year Ending 12/14 12/15e 12/16e 12/17e ModelWare EPS (Rmb) 0.56 0.57 0.57 0.64 distribution provider for almost all Chinese airlines (more than 30), except Consensus EPS (Rmb)§ - 0.59 0.58 0.63 Spring Airlines, which has its own distribution system. While TSK shares offer Revenue, net (Rmb 5,315 5,458 6,148 6,859 investment exposure to China's outbound travel market, RMB depreciation risk mn) ModelWare net inc 1,653 1,681 1,671 1,875 is limited, and the company enjoys stable cash flow and decent ROE, which we (Rmb mn) forecast at 15-16% for 2015-17. P/E 11.9 18.6 17.3 15.4 P/BV 1.9 2.8 2.3 2.1 Positive outlook on both air travel and airport development: Our RNOA (%) 17.8 17.1 16.0 15.1 ROE (%) 18.2 16.3 14.7 15.1 analysis suggests that growth in China's outbound tourism will persist for the EV/EBITDA 8.9 14.2 11.8 10.0 next five to six years, as the current penetration ratio of Chinese passengers Div yld (%) 2.1 2.0 2.2 2.5 traveling abroad is low. Moreover, we are positive on domestic airport FCF yld ratio (%) 4.9 1.2 0.2 4.5 development over the next five years, amid new airport construction and Leverage (EOP) (%) (44.3) (39.1) (31.9) (34.2) Unless otherwise noted, all metrics are based on Morgan Stanley ModelWare framework § = Consensus data is provided by Thomson Reuters Estimates expansion at existing airports. e = Morgan Stanley Research estimates Capex to peak in 2016: With the construction of a new Beijing data operations center, TSK's capex should peak at Rmb2bn in 2016, we estimate, after which free cash flow is likely to become positive. Valuation: We view TSK's share price as attractive versus its historical P/E trading band (since 2006) and global comparables. Our HK$13.77 (Rmb11.66) price target implies a multiple of 20x our 2016 EPS estimate (Rmb0.574), which we believe is justified as it is in line with valuations for the two leading global GDS players (Amadeus [20x] and Sabre Corp. [19x]), and also in view of TSK's near monopoly in one of the world's fastest-growing air travel markets Morgan Stanley does and seeks to do business with companies covered in Morgan Stanley Research. As a result, (in terms of traffic growth). Our price target also implies attractive upside investors should be aware that the firm may have a conflict potential (17%) relative to our China transportation & infrastructure universe. of interest that could affect the objectivity of Morgan Stanley Research. Investors should consider Morgan Potential catalysts: 1) monetization of TSK's mobile application, Umetrip; 2) Stanley Research as only a single factor in making their outbound travel strength; and 3) China's airport construction boom. investment decision. For analyst certification and other important disclosures, refer to the Disclosure Section, located at the end of this Key risks to our view include: 1) cuts in subsidy income (from local report. governments); 2) slowdown in outbound travel; 3) further competition in += Analysts employed by non-U.S. affiliates are not registered w ith FINRA, may not be associated persons of the member and may not be subject to NASD/NYSE international booking; and 4) regulatory and exogenous factors. restrictions on communications w ith a subject company, public appearances and trading securities held by a research analyst account.

1 TravelSky Technology | March 2, 2016 MORGAN STANLEY RESEARCH

TravelSky: Financial Summary

Exhibit 1: TSK: Financial summary

Profit and Loss Statements Ratio Analysis Rmb mn 2013 2014 2015E 2016E 2017E 2018E 2013 2014 2015E 2016E 2017E 2018E Domestic carriers booking (ETD) 2,079 2,269 2,490 2,745 3,030 3,331 Growth (%) Foreign carriers booking (ETD) 409 446 490 549 621 696 Domestic carriers booking 3.4 9.1 9.8 10.2 10.4 9.9 Others (APP) 94 140 156 175 193 208 Foreign carriers booking 5.2 9.1 9.8 12.1 13.1 12.0 AIT revenues 2,582 2,854 3,136 3,470 3,843 4,235 Others 161.3 48.6 12.0 12.0 10.0 8.0 System Integration Services 700 1,040 645 774 851 936 AIT revenues 6.0 10.5 9.9 10.6 10.8 10.2 Data Network and Others 797 1,010 1,212 1,394 1,603 1,843 System Integration Services na 48.7 (38.0) 20.0 10.0 10.0 ACCA Revenue 431 432 493 542 596 656 Data Network and Others (33.4) 26.8 20.0 15.0 15.0 15.0 Gross revenues 4,509 5,336 5,486 6,179 6,893 7,670 Net Revenues 13.2 18.7 2.7 12.6 11.6 11.3 Business Taxes/Other Surcharges (31) (21) (27) (31) (34) (38) Operating Profits 1.3 1.7 7.0 12.1 15.0 11.9 Net Revenues 4,479 5,315 5,458 6,148 6,859 7,632 Pretax Profits 0.6 45.1 (0.4) (0.4) 12.3 (0.6) Total Operating Expenses (3,245) (4,060) (4,115) (4,643) (5,129) (5,696) Net Profit 6.2 37.1 1.8 (0.6) 12.2 (0.8) Operating Profit 1,234 1,255 1,343 1,505 1,730 1,936 Net Profit Excl. Gov Subsidy 6.2 0.2 8.7 10.2 14.1 12.7 Net Interest Income/(Exp) 64 131 123 112 115 143 EBITDA 3.1 36.4 4.4 3.2 13.2 3.6 Share of Results of Associates 15 19 21 24 27 30 EPS 6.2 37.1 1.8 (0.6) 12.2 (0.8) Government Subsidy 0 500 410 250 250 0 Pre-tax Profit 1,312 1,905 1,897 1,890 2,122 2,109 Margins (%) Taxation (73) (213) (190) (189) (212) (211) EBITDA Margin 36.3 41.7 42.4 38.9 39.4 36.7 Minority Interest (34) (39) (27) (30) (35) (39) Operating Margin 27.5 23.6 24.6 24.5 25.2 25.4 Net Profit 1,206 1,653 1,681 1,671 1,875 1,859 Net Profit Margin 26.9 31.1 30.8 27.2 27.3 24.4 Net Profit Excl. Gov Subsidy 1,206 1,207 1,312 1,446 1,650 1,859 EBIT 1,246 1,772 1,774 1,779 2,007 1,966 Return (%) EBITDA 1,627 2,219 2,316 2,389 2,705 2,802 MW ROE 14.6 18.2 16.3 14.7 15.1 13.7 Reported EPS (Rmb) 0.41 0.56 0.57 0.57 0.64 0.64 ROA 10.8 13.0 12.1 11.0 11.3 10.3

Balance Sheet Gearing Rmb mn 2013 2014 2015E 2016E 2017E 2018E Net Debt/Equity (%) NC NC NC NC NC NC Net Fixed Assets 1,458 1,988 3,099 4,541 4,896 5,112 Net Interest Coverage (x) NM NM NM NM NM NM Long-term Assets/Investments 2,430 2,220 2,174 2,130 2,090 2,052 Intangible Assets 206 436 436 436 436 436 Operational Analysis Total Non-current Assets 4,094 4,644 5,708 7,107 7,421 7,600 2013 2014 2015E 2016E 2017E 2018E Short-term Bank Deposits 1,159 1,369 1,369 1,369 1,369 1,369 Air Pax. Bookings (mn) 383.5 424.6 470.7 524.2 584.4 643.1 Cash and Cash Equivalents 2,349 1,995 1,865 1,378 2,061 2,878 Domestic Airlines (mn) 366.0 405.2 449.2 500.2 557.6 613.1 Non-cash Assets 3,540 4,722 4,900 5,315 5,759 6,234 Non-domestic Airlines (mn) 17.5 19.4 21.6 24.0 26.8 30.0 Total Current Assets 7,047 8,086 8,135 8,062 9,189 10,481 Average Booking Fee (Rmb) 6.49 6.39 6.33 6.29 6.25 6.26 Total Liabilities 1,841 2,153 2,198 2,458 2,702 2,981 Domestic Airlines (Rmb) 5.68 5.60 5.54 5.49 5.43 5.43 Net Assets 9,300 10,576 11,645 12,711 13,909 15,100 Non-domestic Airlines (Rmb) 23.4 22.9 22.7 22.9 23.1 23.1 Capital and Reserves 9,078 10,319 11,361 12,397 13,559 14,712 Minority Interests 223 258 284 315 349 388 Growth (%) Capital Employed 9,300 10,576 11,645 12,711 13,909 15,100 Air Pax. Bookings (mn) 10.5 10.7 10.9 11.3 11.5 10.0 Domestic Airlines (mn) 10.7 10.7 10.9 11.4 11.5 9.9 Cash Flow Statement Non-domestic Airlines (mn) 6.8 11.3 10.9 11.0 12.0 12.0 Rmb mn 2013 2014 2015E 2016E 2017E 2018E Average Booking Fee (Rmb) (6.2) (1.4) (1.0) (0.7) (0.6) 0.2 Pre-tax Profit 1,312 1,905 1,897 1,890 2,122 2,109 Domestic Airlines (Rmb) (6.6) (1.4) (1.0) (1.0) (1.0) 0.0 Add: Depr & Amort. 381 447 542 610 698 836 Non-domestic Airlines (Rmb) (1.5) (2.0) (1.0) 1.0 1.0 0.0 Less: Profit on Asset Disposals 1 3 0 0 0 0 Less: Associates' Profits (15) (19) (21) (24) (27) (30) MW Valuation Other Non-cash Items (69) (76) (132) (120) (124) (152) x 2015E 2016E 2017E 2018E Change in Working Capital 218 (233) (151) (154) (204) (196) P/E 18.6 17.3 15.4 15.5 Gross Cash Flow 1,828 2,027 2,135 2,202 2,466 2,568 P/BV 2.8 2.3 2.1 2.0 Less: Tax Paid (226) (221) (172) (189) (208) (211) EV/EBITDA 14.2 11.8 10.0 8.5 Capex (979) (964) (1,600) (2,000) (1,000) (1,000) Dividend Yield 2.0 2.2 2.5 2.4 Sale on Fixed Assets/Investment 1 1 0 0 0 0 Increase in Long-term Assets/Inv. (148) (68) 0 0 0 0 Share Issues 0 0 0 0 0 0 Dividend Paid (389) (410) (639) (635) (713) (707) Bank Loan 0 0 0 0 0 0 Others 522 (718) 146 135 138 166 Change in Net Cash 610 (354) (130) (487) 683 817 Beginning Net Cash 1,739 2,349 1,995 1,865 1,378 2,061 Ending Net Cash 2,349 1,995 1,865 1,378 2,061 2,878

Source: Company data, Morgan Stanley Research. E=Morgan Stanley Research estimates.

2 TravelSky Technology | March 2, 2016 MORGAN STANLEY RESEARCH

Risk Reward

Defensive stock with attractive upside potential Investment Thesis HK$ 18 HK$16.72 (+43%) TSK is a major global distribution system provider 16 in China. It operates in one of the world's fastest- 14 HK$13.77 (+17%) growing aviation markets, and it enjoys strong HK$11.72 12 shareholder support and solid customer relationships. 10 We believe TSK is benefiting from China's appetite HK$8.59 (-27%) 8 for air travel, with an emphasis on international

6 travel. Excluding Hong Kong / Macau, we expect the number of China's outbound tourists to triple 4 by 2020, to 122mn, implying a 20% CAGR for 2 2015-20.

0 TSK's near monopoly, with limited competition in Feb-14 Aug-14 Feb-15 Aug-15 Feb-16 Aug-16 Feb-17 international routes, is supported by a favorable Price Target (Feb-17) Historical Stock Performance Current Stock Price WARNINGDONOTEDIT_RRS4RL~0696.HK~ regulatory environment relative to the rules that Source: Thomson Reuters, Morgan Stanley Research. foreign companies are subject to in China. Price Target HK$13.77 Derived from probability-weighted discounted cash flow (DCF) TSK shares, in our view, offer a defensive valuation scenarios: 20% bull case / 70% base case / 10% bear investment in our China transportation & case. infrastructure universe, supported by the company's strong free cash flow-generating ability. Bull HK$16.72 Strong growth in bookings and aviation development: We We rate the shares Overweight relative to our 25x base case 2016 EPS assume a 15% revenue CAGR in 2015-18, with operating profit coverage because of the attractive upside with less margin improvements to 30% in 2018 from 24% in 2014. exchange rate risk. Excluding capex for the construction of a new Base HK$13.66 Stable growth in bookings and aviation development: We Beijing data operations center, we estimate free 20x base case 2016 EPS forecast a 12% revenue CAGR (11% for the booking segment, 13% cash flow yield could reach 5% in 2017. for system integration, 15% for data network, and 10% for ACCA) in 2015-18. We expect operating profit margin to improve to 25% Key Value Drivers in 2018 from 24% in 2014. Ticket bookings Bear HK$8.59 Weak growth in bookings and aviation development: We Booking ASP 13x base case 2016 EPS assume an 8% revenue CAGR, 2015-18, with operating profit New airport infrastructure projects margin deteriorating to 23% in 2018 from 24% in 2014. Amount of tourism activities, i.e., online travel agencies (OTA), hotel bookings

Potential Catalysts Monetization of TSK's mobile application, Umetrip Strength in outbound travel numbers China's substantial airport infrastructure plans

Risks to Achieving Price Target Cut in subsidy income from local governments Slowdown in outbound travel Further competition in international booking Regulatory and exogenous factors, such as policy to open GDS market in China.

3 TravelSky Technology | March 2, 2016 MORGAN STANLEY RESEARCH

Investment Summary

We initiate coverage of TravelSky (TSK) with an Overweight rating, as we think it warrants a valuation that is in line with the world's two global leading GDS providers, Amadeus and Sabre Corporation, given its defensive cash flow and near monopoly in one of the world's fastest-growing air travel markets. We use a DCF model to derive our base case value.

We believe TSK's share price trades at attractive levels, at 17x our 2016 EPS estimate, above its historical average forward P/E of 12.2x but below its global comparables' average at 18x. We also believe our 20x implied price target P/E for 2016 is justified, in line with valuations for Amadeus and Sabre Corporation.

At current valuations, we think the market is not factoring in the long-term benefits from the completion of TSK's new Beijing data operations center and the potential extra value boost from its self-developed mobile application Umetrip. We believe TSK is a defensive play in the current market environment, with exposure to strong China tourism activities and continuous policy and investment support for the aviation industry, but largely shielded from exchange rate and oil price risks. Excluding the impact of lower local government subsidies, we estimate TSK's net profit will grow at respective YoY rates of 10%, 14%, and 13% for 2016-18. Our earnings estimates are 2-3% below the Thomson Reuters consensus for 2015-17, curbed by our more conservative government subsidy assumptions.

Exhibit 2: TSK: 1-year share price performance

100%

80%

60%

40%

20%

0%

-20%

-40%

-60% Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 HSCEI-HK 0696.HK

Source: Thomson Reuters, Morgan Stanley Research

4 TravelSky Technology | March 2, 2016 MORGAN STANLEY RESEARCH

Key Investment Issues

1. How will China's outbound tourism boom benefit TSK?

In our view, TSK is well positioned to benefit from the ongoing growth in China's outbound travel, with 54% of TSK's 2014 revenue generated by air ticket booking. Outbound tourism generally involves air travel, supporting demand for airline ticket sales. Moreover, TSK charges domestic airlines a 20% higher ASP per international booking than for domestic bookings. It also charges foreign airlines US$3.3-3.8 per international booking, 3.5x the international booking rate that it charges domestic airlines. Therefore, we expect an improved product mix, as booking revenue contribution from the international market grows.

Exhibit 3: TSK: ASP trend (domestic vs international) ASP Trend (Domestic vs. Int'l) 30.00 25.00 20.00 15.00 10.00 5.00 - 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Domestic Airlines ASP(Rmb) Int'l Airlines ASP (Rmb)

Source: Company data, Morgan Stanley Research. We expect overall air travel market demand to remain strong and sustainable, and, for 2016 / 2017, we forecast 9.5% / 9.0% domestic and 25% / 23% international revenue passenger kilometer (RPK) YoY growth. Such demand strength translates into higher bookings for TSK. Specifically, we forecast a 10.1% CAGR for domestic airline booking volume and an 11.0% CAGR for foreign airline booking volume, 2015-20. International route booking volume for domestic airlines will rise at a higher 17% CAGR versus domestic routes, at an 8.8% CAGR, per our forecasts. By 2020, we expect international route bookings by domestic airlines to reach 134mn, more than double the 2015 level. We expect total passenger volume for domestic airlines to reach 724mn in 2020, in line with the Civil Aviation Administration of China's (CAAC) target of over 700mn.

5 TravelSky Technology | March 2, 2016 MORGAN STANLEY RESEARCH Exhibit 4: Robust international RPK growth in 2015-18, driven by China's outbound travel demand

2012 2013 2014 2015E 2016E 2017E 2018E Passenger services RPK (bil) 503 566 633 731 826 929 1,040 YoY Chng 10.8% 12.6% 12.0% 15.4% 13.0% 12.5% 11.9% - Domestic 391 438 487 543 594 648 700 YoY Chng 10.2% 12.0% 11.2% 11.5% 9.5% 9.0% 8.0% - Regional 12 13 15 15 16 16 17 YoY Chng 11.0% 6.3% 13.6% 3.0% 1.0% 3.0% 3.0% - International 99 115 132 173 216 265 324 YoY Chng 13.0% 15.5% 14.9% 31.0% 25.0% 23.0% 22.0%

Source: Civil Aviation Administration of China (CAAC), company data, Morgan Stanley Research. E=Morgan Stanley Research estimates. Exhibit 5: Chinese airlines recorded robust Exhibit 6: New foreign destinations and international RPK growth in 2015 international routes should stimulate demand in 2016 40% 35% 700 663 30% 25% 600 20% 490 500 427 15% 381 10% 400 5% 300 0% 3 5 1 2 4 2 4 5 2 3 5 1 4 1 3 1 4 2 3 5 200 138 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 123 ------5% - - 121 118 l l l l l t t t t t r r r r r n n n n n u u u u u c c c c c p p p p p a a a a a J J J J J

J J J J J 56 O O O O O -10% A A A A A 100 52 50 48 Total RPK Growth Domestic Line 0 HK & Macau Line International Line 2012 2013 2014 2015 Routes Foreign Countries Foreign Cities Source: CEIC, Morgan Stanley Research. Source: CAAC, Morgan Stanley Research.

6 TravelSky Technology | March 2, 2016 MORGAN STANLEY RESEARCH 2. What is the outlook for system integration (related to airport expansion and construction projects)?

The system integration segment provides hardware integration, software integration, and data and information integration services to airports, commercial airlines, and other corporate clients. TSK should be able to gain business from the demand served at these new and existing airports.

TSK has a 20% revenue contribution from the system integration segment. In 1H15, TSK's system integration segment revenue fell 38% YoY. A decrease in the number of contracted projects from airports and corporates precipitated the drop. Despite such fluctuations in revenues driven by contracts, we have a positive outlook on this segment for the next five years, as we believe airport construction will continue into the 13th Five-Year Plan (2016-20), with the total number of airports reaching 260 by 2020, according to CAAC, up from 202 in 2014. With the policy direction of the 13th Five-Year Plan most likely leaning towards the expansion of major airport hubs, differentiated positioning for the metropolitan and large airports, and further construction of local airports to cover remote areas, we have a positive view on the aviation market, anticipating continued strong support and capex from the government.

According to the CAPA Airport Construction & Capex Database, China has 56 airports that have ongoing projects, for a total investment of US$60bn. The Beijing area's second airport, at Daxing, represents the largest investment size (US$13.1bn) among such ongoing projects, which are also occurring in cities such as Chongqing, Dalian, Guangzhou, Haikou, Lanzhou, and Zhengzhou.

Exhibit 7: China airport fixed asset investments Exhibit 8: Rising number of airports in China

60 56 Number of Airports 50 50 51 300 50 43 44 40 250 n b

b 30 200 m R 20 150 10 100 0 2009 2010 2011 2012 2013 2014 50

0 Source: Wind, Morgan Stanley Research. 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015E 2020E Number of Airports

Source: CAAC, Morgan Stanley Research. E=Morgan Stanley Research estimates. In our January 27, 2016 report, China Airports: Industry Keep Climbing Even Though Economy Is Landing , we examined the supply-side investment in response to China's fast-growing air travel demand. Among the listed airport companies, some have completed expansions for near-term needs, with utilization and profitability picking up, while others are in the process of undertaking substantial capital expenditure.

We summarize the capex history and plans for China's airports as follows:

– Shenzhen Airport Company (SACL) completed construction of a new terminal at the end of 2013. Its second runway became operational in 2011, with asset ownership belonging to a holding group that takes a portion of annual landing fees from SACL. SACL's plan is to inject the second runway into the listco at an appropriate time. The group plans to construct a third runway after 2016. SACL's total capex plan for the next three years is Rmb1bn.

– Guangzhou Baiyun International Airport's (GBIA) third runway became operational in 2015, and the company will pay the holding company for the construction costs, as well as begin depreciation of the asset. Total capex for the asset will be around Rmb3.5bn. The listco has started construction on a second terminal. The total project is budgeted at Rmb13.6bn and is scheduled for completion in early 2018.

– Xiamen International Airport (XIAC) acquired a newly built T4 terminal from its parent group at the end of 2014. The holding group's plan is to construct a second airport for Xiamen by 2020 (China Daily, August 11, 7 TravelSky Technology | March 2, 2016 MORGAN STANLEY RESEARCH 2015). The total budget has not been disclosed.

– Shanghai International Airport (SIAC) completed its second terminal and fourth runway in 2008 and 2015, respectively. The company announced the start of construction on Phase III of Pudong Airport in June 2015. The total project budget is Rmb20.1bn, and the project is scheduled to take four years, starting in November 2015.

– Beijing Capital International Airport (BCIA) started operating its third runway in 2007 and T3 terminal in 2008. Construction of a fourth runway is planned and scheduled for completion in 2018. The parent group is engaged in building a second airport with four runways and a 700,000 sq m terminal, targeting a 72mn passenger throughput capacity. The total budget for the new airport is Rmb80bn, and it is slated to start operations in 2019, per a November 2014 statement from China's National Development and Reform Commission (NDRC).

3. Will TSK's mobile application, Umetrip create value for TSK?

Umetrip is TSK's self-developed mobile application that was launched in 2012. By end-2015, it had attracted 15mn users. Thanks to TSK's big data, users can access real-time flight and airport data for travel planning. Since almost all flight tickets from domestic airlines (except Spring Airlines) are processed through TravelSky GDS, Umetrip can automatically refresh a passenger's flight itinerary after ticket issuance. It is one of the most popular mobile travel applications in China for checking flights and airport information, according to TSK.

TSK has a dedicated team that continues to develop the mobile application, with plans to incorporate more interactive and value-added functions, but TSK has no monetization plan for the application as of yet, according to management. In our view, TSK's state-owned enterprise (SOE) background could hinder Umetrip's development because of the lack of support and incentives from top management to focus on such an application.

Acknowledging such potential constraints from top management and the current lack of revenue and earnings from the mobile application, we still believe the application can create value for TSK and become a long-term asset for the company because of its 15m user database – which has monetization potential. Therefore, we believe any plans for the company to monetize Umetrip would likely spur positive sentiment, and act as a stock price catalyst.

8 TravelSky Technology | March 2, 2016 MORGAN STANLEY RESEARCH Exhibit 9: TSK: Umetrip interface

Source: Morgan Stanley Research, Umetrip. 4. Will competition from foreign participants intensify in this market?

We believe competition is limited for TSK. TSK is China's GDS provider for almost all domestic airlines (except Spring Airlines); domestic airlines booking contributed 43% of TSK's total revenue in 2014. China's three largest airlines (in terms of capacity) have over 80% market share in terms of number of seats, and are themselves TSK shareholders. Currently, TSK has exclusive service agreements and non-compete agreements with all of its Chinese airline shareholders, and we believe China’s low booking fee environment is a major deterrent to potential foreign GDS competition.

Nonetheless, since 2012 when China relaxed its regulations, foreign GDS firms, such as Sabre and Amadeus, have been permitted to compete in the domestic market for foreign airlines' international flights. Since foreign airlines' international bookings contributed only 8% of TSK's 2014 revenue, and TSK's foreign airline market share (into and out of China maintained at 50%) and booking fees have not fallen significantly after the more relaxed regulations became effective, we believe the effect of competition on this front will remain limited.

9 TravelSky Technology | March 2, 2016 MORGAN STANLEY RESEARCH

Investment Positives

1. Near monopoly in China: TSK is China's only GDS provider offering electronic travel distribution (ETD) services (including inventory control system [ICS] and computer reservation system [CRS]) and airport passenger processing services for virtually all of China's airlines (except Spring). In 2014, TSK's ETD system processed 425mn flight bookings on domestic and foreign airlines, representing over 90% of China's air travel market.The number of foreign and regional commercial airlines with direct links to TSK's CRS systems reached 116 in 2014, and TSK has a far-reaching distribution network, consisting of over 7,000 travel agencies with over 60,000 sales terminals. TSK is the main flight information provider for the major online travel agencies, such as Ctrip, eLong, and Qunar.

Although Amadeus and Abacus (now part of Sabre) were permitted to enter China’s GDS market in 2014, we believe TSK will maintain its near monopoly in China’s GDS market because: 1) TSK has an advantageous shareholder structure that includes Air China, China Eastern Airlines (CEA), and China Southern Airlines (CSA); and 2) TSK imposes a lower booking fee versus that of international firms.

2. Defensive industry with stable growth: Despite China's challenging macro environment, we forecast a 12% core earnings (excluding government subsidy) CAGR for TSK in 2015-18, driven by stable growth in passenger bookings and aviation development in China. Furthermore, we see upside potential in revenue growth after the completion of TSK's new Beijing data operations center, which would increase capacity.

As TSK's business is closely tied to China’s overall civil aviation industry, we expect the 13th Five-Year Plan for China's civil aviation segment to benefit the company, as we noted in the Key Investment Issues section.

Exhibit 10: China air passenger growth forecast

2012 2013 2014 2015E 2016E 2017E 2018E Passenger (mil) 319 354 392 442 490 541 592 YoY Chng 8.9% 10.8% 10.7% 12.9% 10.7% 10.3% 9.5% - Domestic 288 318 350 391 428 466 504 YoY Chng 8.8% 10.7% 10.0% 11.5% 9.5% 9.0% 8.0% - Regional 8 9 10 10 10 11 11 YoY Chng 9.7% 8.4% 11.2% 3.0% 1.0% 3.0% 3.0% - International 23 27 32 41 52 64 78 YoY Chng 10.3% 13.7% 18.8% 31.0% 25.0% 23.0% 22.0%

Source: CEIC, Morgan Stanley Research. E = Morgan Stanley Research estimates. 3. Strong balance sheet and cash flow : Similar to the Chinese airlines, TSK should benefit from ongoing demand for outbound tourism in China and remain relatively unscathed by RMB exchange rate risk. In 2014, TSK had Rmb3.4bn in cash and short-term deposits and no interest-bearing debt. As we mentioned, TSK is at the peak of a capex cycle in which it is constructing a new Beijing data operations center, with total capex of Rmb3.6bn (through 1H15, TSK has spent Rmb1.05bn). On a normalized basis, we believe TSK can generate Rmb1.5bn free cash flow per year, implying a 5% free cash flow yield at its current market cap. Nonetheless, despite heavy capex spending in 2015 and in 2016, TSK should remain free cash flow positive, at Rmb387mn and Rmb21mn, respectively, per our forecasts.

10 TravelSky Technology | March 2, 2016 MORGAN STANLEY RESEARCH

Investment Concerns

1. Conflict of interest and related-party transactions: The airlines that TSK services are also the subsidiaries of TSK's shareholders (parent groups of CSA, CEA and Air China, etc.), which own a more than 30% combined stake in the company. This customer-shareholder relationship creates an inherent conflict of interest, as the interests of airline shareholders do not always align with those of minority shareholders. On the other hand, a substantial amount of revenue is from related-party transactions from China's top four airlines (CSA, CEA, Air China, Hainan Airlines). In 2014, related-party transactions yielded Rmb2.1bn, about 40% of TSK's total revenue.

2. Weak pricing power: Since China's airline industry is concentrated among the country's top three carriers (which captured around 80% capacity in 2014), TSK's airline customers have significant bargaining power, which reduces its pricing power. In addition, TSK has entered into a regressive pricing arrangement with the airlines, in which the booking fee (ASP) per ticket decreases should the airlines reach a certain volume bracket, according to management. In addition, TSK's average domestic booking fee has slowly declined, from Rmb7.2 in 2006 to Rmb5.6 in 2014.

Exhibit 11: TSK: Domestic booking ASP decline Exhibit 12: TSK: 40% revenue contribution from (Rmb) top four Chinese carriers in 2014

Revenue Contribution from Big 3 in FY2014 Domestic ASP Decline 8.00 CSA 7.00 11% 6.00 CEA 5.00 CSA 4.00 12% 3.00 CEA 2.00 Air China 1.00 12% Air China Hainan Airlines - 60% 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Others Others Domestic Airlines ASP(Rmb) 5% Hainan Airlines Source: Company data, Morgan Stanley Research. Source: Company data, Morgan Stanley Research. Nonetheless, we expect the booking fee decline to slow and bottom as more customers reach the top volume bracket, so the incremental downside risk is limited. Moreover, we believe that TSK's current booking fee level for domestic routes, at US$0.85, is very low versus global competitors' rates at US$3.0-4.0.

3. Sustainability of government subsidy: TSK's capex and investment in a new data operations center in Beijing's Shunyi district entitled the company to Rmb500mn (26% of pretax profit) and Rmb410mn (22% of pretax profit) in local government subsidies as incentives to encourage and support provision of aviation information technology services in 2014 and 2015, respectively. This subsidy is a one-off item, but TSK can apply for it each year, although it remains subject to local government approval. Therefore, any shortfall in the government subsidy may result in earnings pressure on TSK.

11 TravelSky Technology | March 2, 2016 MORGAN STANLEY RESEARCH

Valuation Methodology

Given TSK's stable business model and positive free cash flow-generating ability, we assess the company's value based on a discounted cash flow (DCF) methodology (Exhibit 17), and cross-check this with the shares' P/E multiple relative to its historical trading band and comparables.

Exhibit 13: TSK: Historical forward P/E ratio, Exhibit 14: TSK: Historical forward EV/EBITDA, 2006-current 2006-current

Mean=6.4x 30.00 18.00 Mean=12.2x 16.00 25.00 14.00 12.00 20.00 A D T E I

/ 10.00 B P

E / d r 15.00 V 8.00 a E

w d r r

o 6.00 a F

10.00 w r

o 4.00 F 5.00 2.00 - 6 9 0 1 2 3 7 8 4 5 6 0 0 1 1 1 1 0 0 1 1 1

- / / / / / / / / / / / 1 1 1 1 1 1 1 1 1 1 1 6 7 8 9 0 1 2 3 4 5 6 (2.00) / / / / / / / / / / / 0 0 0 0 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 / / / / / / / / / / / 1 1 1 1 1 1 1 1 1 1 1 / / / / / / / / / / / 1 1 1 1 1 1 1 1 1 1 1

Forward EV/EBITDA Mean +1std -1std Forward P/E Mean +1std -1std

Source: Bloomberg, Morgan Stanley Research. Source: Bloomberg, Morgan Stanley Research. Our base case DCF model values TSK at HK$13.66 per Exhibit 15: TSK: WACC assumptions share, or 20x our base case 2016 EPS. This is above its historical average of 12.2x (since 2006). In our DCF calculation, we produce explicit cash flow forecasts up to 2030. Free cash flow beyond the explicit forecast period is captured by the company’s terminal value, which we derive by capitalizing the 2030 terminal free cash flow by the weighted average cost of capital (WACC).

Source: Bloomberg, Morgan Stanley Research. MVE = market value of common shares (equity) (number of common shares x common share price). MVD = market value of debt.

12 TravelSky Technology | March 2, 2016 MORGAN STANLEY RESEARCH Price target derivation – Probability-weighted approach and scenario analysis

We apply a probability weighting to each of our bull-/base-/bear-case scenarios, consistent with the valuation methodology used for our Hong Kong/China transportation stocks.

These probabilities do not forecast a precise series of events and do not account for all possible outcomes. Instead, they illustrate our sense of the relative plausibility of selected scenarios, based on our best judgment of current industry dynamics.

Our base-case scenario factors in visibility of stable growth in air ticket bookings and aviation development. We also take into account the strength in Chinese outbound tourism demand.

Our bear-case scenario incorporates downside risk potential from weaker bookings on both domestic and international routes, which could arise from weaker economic growth and a fall in outbound tourism demand. This scenario also reflects more intense competition from foreign competitors. Given more stable operations with high industry barriers to entry and government regulation, we believe the likelihood for such a scenario is smaller compare to our bull case, thus our 10% weighting.

Our bull-case scenario incorporates a somewhat more bullish view of bookings, as well as stronger demand from airports, in TSK's system integration segment. In our view, based on current positive industry trends for air travel and aviation development in China, there is a somewhat greater likelihood for this scenario than the bear case, thus our 20% weighting.

Base Case: 70% weighting Exhibit 16: TSK: Probability-weighted price Scenario value: HK$13.66 target We assume a 12% revenue CAGR (11% for booking, 13% for system integration, 10% for ACCA and 15% for data network) for 2015-18. We also forecast operating profit margin to improve to 26% in 2018 from 24% in 2014.

Source: Morgan Stanley Research scenarios. Bull Case: 20% weighting Scenario value: HK$16.72

We forecast a 15% revenue CAGR for 2015-18, with operating profit margin improvement to 30% in 2018 from 24% in 2014. We assume Umetrip continues to expand TSK's user base and that TSK starts to monetize this asset.

Bear Case: 10% weighting Scenario value: HK$8.59

We assume an 8% revenue CAGR for 2015-18. We assume operating profit margin deteriorates to 23% in 2018 from 24% in 2014, driven by a weaker-than-expected macro environment and a fall in outbound tourism demand.

Risks to our price target include:

1) Cut in subsidy income: This local government subsidy is a one-off item, but TSK can apply for it each year and it is subject to annual approvals. Any shortfall in the local government subsidy could result in earnings pressure on TSK.

2) Slowdown in outbound travel: Any slowdown in travel demand could adversely affect our booking income estimates and result in earnings pressure.

3) Further competition in international booking: The central government relaxed its regulation of foreign GDS companies (e.g., Sabre and Amadeus) in 2014, and such companies have been permitted to compete in the 13 TravelSky Technology | March 2, 2016 MORGAN STANLEY RESEARCH domestic market for foreign airlines' international flights. Any further relaxation in regulation could challenge TSK's share in China's booking market.

4) Regulatory and exogenous factors: Should the government further open China's GDS market to foreign firms into domestic routes, TSK could face further competition from global competitors or from other new business entrants. Other factors, such as natural disasters and diseases, could cause a sharp drop in air travel.

14 TravelSky Technology | March 2, 2016 MORGAN STANLEY RESEARCH

TravelSky: Discounted Cash Flow

Exhibit 17: TSK: Base case discounted cash flow (DCF) valuation

Discounted Cash Flow Valuation

Rmbmn 2014 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2030E

Valuation date 31-Dec-16 31-Dec-14 31-Dec-15 31-Dec-16 31-Dec-17 31-Dec-18 31-Dec-19 31-Dec-20 31-Dec-21 31-Dec-22 31-Dec-23 31-Dec-24 31-Dec-25 31-Dec-26 31-Dec-27 31-Dec-28 31-Dec-29 31-Dec-30

Revenue 5,315 5,458 6,148 6,859 7,632 8,318 8,984 9,703 10,479 11,003 11,553 12,130 12,737 13,374 14,042 14,745 15,482 Revenue growth 18.7% 2.7% 12.6% 11.6% 11.3% 9.0% 8.0% 8.0% 8.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0%

EBITDA 2,219 2,316 2,389 2,705 2,802 3,037 3,263 3,504 3,763 3,952 4,149 4,357 4,575 4,803 5,043 5,296 5,560 EBITDA growth 36.4% 4.4% 3.2% 13.2% 3.6% 8.4% 7.4% 7.4% 7.4% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% EBITDA margin 41.7% 42.4% 38.9% 39.4% 36.7% 36.5% 36.3% 36.1% 35.9% 35.9% 35.9% 35.9% 35.9% 35.9% 35.9% 35.9% 35.9%

- Depreciation and amortization (447) (542) (610) (698) (836) (665) (643) (625) (608) (594) (582) (571) (562) (554) (547) (541) (536)

Beginning net PPE 1,458 1,988 3,099 4,541 4,896 5,112 4,947 4,804 4,680 4,571 4,477 4,395 4,324 4,262 4,208 4,161 4,120

EBIT 1,772 1,774 1,779 2,007 1,966 2,373 2,619 2,880 3,155 3,357 3,567 3,785 4,012 4,249 4,496 4,755 5,025 - Imputed taxes on EBIT (443) (213) (213) (241) (236) (285) (314) (346) (379) (403) (428) (454) (481) (510) (540) (571) (603) 0 0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 EBITDA 2,219 2,316 2,389 2,705 2,802 3,037 3,263 3,504 3,763 3,952 4,149 4,357 4,575 4,803 5,043 5,296 5,560 - Imputed taxes on EBIT (443) (213) (213) (241) (236) (285) (314) (346) (379) (403) (428) (454) (481) (510) (540) (571) (603) - + (Inc)/dec in working capital (233) (151) (154) (204) (196) (213) (230) (249) (269) (282) (296) (311) (327) (343) (360) (378) (397) - Capital expenditures (964) (1,600) (2,000) (1,000) (1,000) (500) (500) (500) (500) (500) (500) (500) (500) (500) (500) (500) (500) + Proceeds from asset sales 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Free Cash Flow 578 352 21 1,260 1,370 2,039 2,218 2,410 2,616 2,767 2,925 3,091 3,266 3,450 3,644 3,847 4,060 FCF growth 4.5% -39.1% -93.9% 5815.6% 8.8% 48.8% 8.7% 8.7% 8.6% 5.8% 5.7% 5.7% 5.7% 5.6% 5.6% 5.6% 5.5%

WACC 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% Discount factor 1.21 1.10 1.00 0.91 0.83 0.75 0.68 0.62 0.56 0.51 0.47 0.42 0.39 0.35 0.32 0.29 0.26

NPV of Free Cash Flow 700 387 21 1,145 1,132 1,532 1,514 1,496 1,476 1,419 1,364 1,310 1,259 1,209 1,160 1,113 1,068

Calculation of terminal value Long-term sustainable growth rate (%) 2.0 FCF at the beginning of terminal period 4,060 Terminal value 50,754 PV of terminal value 13,355

DCF (Rmbmn) PV of FCF 18,199 Terminal value 13,355 Enterprise value 31,554 Net cash / (debt) 2,747 MVof minority interests (315) Equity value 33,986

No. of shares outstanding 2,926.2 0.0 Equity value per share (Rmb) 11.61 Equity value per share (HK$) 13.66

Source: Company data, Morgan Stanley Research. E=Morgan Stanley Research estimates.

15 TravelSky Technology | March 2, 2016 MORGAN STANLEY RESEARCH

Comparables

Exhibit 18: TSK: China comps sheet

Last px Target Upside/ MS Mkt Cap Mkt Cap Share Price Perf. 52-wk P/E (x) P/BV (x) Company CURR 2/29/16 Price Downside Rating (LC Mn) (USD Mn) 1-mo 3-mo 12-mo YTD High Low 14A 15E 16E 14A 15E 16E Asia/Pacific Airlines Air China-H HKD 4.61 8.05 75% O 70,016 10,708 -7% -27% -33% -25% 10.20 4.30 18.1 11.0 13.7 1.3 1.2 0.8 CEA-H HKD 3.65 5.94 63% O 60,027 9,180 -3% -12% -1% -17% 7.56 3.26 10.0 8.0 11.8 1.3 1.2 0.8 CSA-H HKD 4.36 6.57 51% O 51,402 7,861 -7% -23% 13% -27% 10.36 3.49 16.5 10.1 12.4 0.8 1.2 0.8 Air China-A CNY 6.14 7.48 22% E 70,016 10,708 -5% -25% -22% -28% 15.36 5.98 28.3 18.5 21.7 2.0 2.0 1.3 CEA-A CNY 5.56 7.24 30% E 60,027 9,180 -8% -24% 1% -27% 13.98 5.05 18.1 17.3 19.0 2.2 2.6 1.5 CSA-A CNY 5.86 6.71 15% U 51,402 7,861 -7% -26% 13% -32% 16.74 4.79 28.8 17.3 19.9 1.4 2.1 1.3 Spring Airlines CNY 44.04 72.87 65% O 35,232 5,388 -11% -26% 26% -28% 76.00 33.13 8.9 33.0 18.5 2.2 7.4 3.0 Air Asia MYR 1.47 1.47 0% E 4,095 973 4% 11% -44% 14% 2.66 0.77 88.1 NM 33.5 1.7 0.8 0.9 Cathay Pacific Airways HKD 12.40 14.33 16% E 48,780 6,274 2% -9% -29% -8% 20.80 11.06 21.1 9.8 8.5 1.2 0.9 0.8 Qantas Airways Ltd AUD 3.86 5.40 40% O 8,477 6,042 -1% 2% 33% -6% 4.16 2.80 NM 9.4 6.4 1.0 2.0 1.9 Singapore Airlines SGD 11.63 14.25 23% O 14,347 10,198 5% 13% -3% 4% 12.24 9.57 40.1 19.4 12.4 1.1 1.0 0.9 Thai Airways Int'l THB 12.00 7.30 -39% U 26,193 734 45% 32% -10% 30% 14.30 7.40 NM NM 4.2 0.8 0.9 1.0 Japan Airlines JPY 4,040.00 5,300.00 31% O 1,464,512 12,848 -10% -6% 10% -7% 4,940.00 3,635.00 7.8 7.7 6.0 1.8 1.8 1.4 ANA Holdings JPY 319.30 380.00 19% U 1,115,748 9,788 -9% -9% -2% -9% 410.00 282.30 27.4 14.4 11.3 1.5 1.3 1.2 Median 19.6 12.7 12.4 1.3 1.3 1.1

Airport Services Beijing Capital International Airport Co. Ltd. HKD 6.77 7.10 5% E 24,660 3,771 -3% -21% -7% -19% 9.71 6.33 15.2 19.8 15.0 1.2 1.6 1.3 Guangzhou Baiyun International Airport Co. Ltd. CNY 11.28 11.80 5% U 12,972 1,984 -8% -15% -1% -21% 21.67 10.85 11.6 12.9 10.1 1.5 1.7 1.2 Shanghai International Airport Co. Ltd. CNY 27.20 31.48 16% O 52,413 8,015 5% -5% 29% -8% 41.26 20.36 18.0 22.1 18.0 2.0 2.8 2.3 Shenzhen Airport Co. Ltd. CNY 6.77 8.35 23% O 13,884 2,123 -3% -15% 8% -17% 15.45 6.00 36.6 37.6 22.5 1.2 2.0 1.6 Xiamen International Airport Co. Ltd. CNY 17.16 20.08 17% E 5,110 782 -3% -22% -28% -26% 41.27 16.30 15.6 17.5 12.0 2.6 2.3 1.5 Hainan Meilan International Airport Co. Ltd. HKD 8.40 NC NC NC 3,975 511 -3% -16% 0% 33% 11.26 6.13 9.9 8.4 NA 1.1 1.1 NA Median 15.4 18.7 15.0 1.4 1.9 1.5 Travelsky HKD 11.72 13.77 17% O 28,844 4,411 -1% -11% 41% -8% 15.60 7.30 11.9 18.6 17.3 1.9 2.8 2.3

ROE (%) EV/EBITDA (x) Dividend Yield (%) Net Debt to EBITDA Net Gearing (%) Company 14A 15E 16E 14A 15E 16E 14A 15E 16E 14A 15E 16E 14A 15E 16E Asia/Pacific Airlines Air China-H 7% 11% 6% 10.4 7.3 6.7 1.0 1.7 1.4 5.3 3.8 3.8 210% 200% 151% CEA-H 12% 17% 8% 10.1 8.0 7.6 0.0 0.0 0.0 5.6 4.2 4.2 324% 262% 168% CSA-H 5% 13% 7% 7.3 5.5 5.2 1.4 1.0 0.8 3.4 2.1 2.6 134% 148% 174% Air China-A 7% 11% 6% 10.4 7.3 6.7 0.7 0.0 0.0 5.3 3.8 3.8 210% 200% 151% CEA-A 12% 17% 8% 10.1 8.0 7.6 0.0 0.0 0.0 5.6 4.2 4.2 324% 262% 168% CSA-A 5% 13% 7% 7.3 5.5 5.2 0.8 0.6 0.5 3.4 2.1 2.6 134% 148% 174% Spring Airlines 28% 29% 21% 6.2 17.7 10.4 1.2 0.3 0.5 1.7 1.3 0.5 112% 56% -2% Air Asia 2% 4% 1% 13.6 7.9 7.0 1.3 0.0 3.5 7.4 6.6 5.2 250% 193% 160% Cathay Pacific Airways 5% 10% 10% 8.3 6.4 5.8 1.7 3.6 4.1 3.2 2.9 2.9 85% 81% 74% Qantas Airways Ltd -65% 18% 32% 6.4 4.1 3.0 0.0 0.0 0.0 3.4 1.3 0.7 122% 77% 43% Singapore Airlines 3% 6% 9% 4.7 3.6 3.1 1.8 3.2 5.1 (1.8) (1.3) (0.9) -25% -21% -17% Thai Airways Int'l -32% -62% 20% 305.4 9.0 5.9 0.0 0.0 0.0 251.4 8.2 5.5 389% 752% 559% Japan Airlines 20% 23% 24% 4.5 4.1 3.7 2.8 3.0 3.2 (0.0) (0.1) (0.2) 0% -7% -8% ANA Holdings 5% 8% 10% 6.0 5.2 4.5 1.2 1.9 2.2 2.0 1.5 1.2 62% 54% 42% Median 5% 12% 9% 7.8 6.9 5.9 1.1 0.4 0.7 3.4 2.5 2.7 134% 148% 151%

Airport Services Beijing Capital International Airport Co. Ltd. 8% 9% 9% 7.7 8.9 6.8 2.6 2.3 3.3 2.4 1.8 1.5 47% 43% 31% Guangzhou Baiyun International Airport Co. Ltd. 13% 14% 13% 4.4 6.3 5.5 2.7 1.5 2.0 (1.1) (1.0) (0.2) -37% -18% 6% Shanghai International Airport Co. Ltd. 12% 13% 14% 9.9 13.4 10.0 1.5 1.2 1.6 (1.8) (1.9) (1.7) -35% -35% -33% Shenzhen Airport Co. Ltd. 3% 5% 7% 10.6 14.0 9.0 0.4 0.5 0.8 1.2 0.5 (0.2) 12% 2% -7% Xiamen International Airport Co. Ltd. 17% 13% 13% 9.6 8.7 5.7 1.9 2.0 2.3 (1.1) (0.5) (0.8) -14% -14% -25% Hainan Meilan International Airport Co. Ltd. 12% 13% NA 5.9 5.4 NA 2.4 2.8 NA (0.1) (0.1) NA -2% NA NA Median 12% 13% 13% 8.6 8.8 6.8 2.1 1.8 2.0 (0.6) (0.3) (0.2) -8% -14% -7% Travelsky 17% 16% 14% 8.9 14.2 11.8 2.1 2.0 2.2 (2.3) (2.2) (1.8) -44% -39% -32%

Source: Thomson Reuters consensus estimates for non-covered ("NC") companies, Morgan Stanley Research estimates for all others. Results show n represent total absolute return (including dividends) and exclude brokerage commissions and transaction costs. These figures are not audited. Past performance is no guarantee of future results.

16 TravelSky Technology | March 2, 2016 MORGAN STANLEY RESEARCH

Exhibit 19: TSK: Global GDS comp sheet

Last px Target MS Mkt Cap Mkt Cap Share Price Perf. 52-wk P/E (x) P/BV (x) Company CURR 2/29/16 Price Rating (LC Mn) (USD Mn) 1-mo 3-mo 12-mo YTD High Low 14A 15E 16E 14A 15E 16E Travelsky HKD 11.72 13.77 O 28,844 4,411 -1% -11% 41% -8% 15.60 7.30 11.9 18.6 17.3 1.9 2.8 2.3 Sabre Corp USD 27.15 36.00 O 59,398 7,640 5% -9% 25% -3% 30.46 21.25 21.6 25.6 18.8 61.5 16.3 12.1 Travelport Worldwide Limited USD 12.98 17.00 O 12,304 1,583 13% -3% -20% 1% 17.18 8.50 NM 12.6 11.3 NM NM NM Amadeus IT Holdings S.A. EUR 37.17 48.00 O 140,303 18,046 -1% -1% 1% -9% 42.84 32.29 21.6 23.6 20.0 7.9 7.7 6.1 Median 21.6 21.1 18.1 7.9 7.7 6.1

ROE (%) EV/EBITDA (x) Dividend Yield (%) Net Debt to EBITDA Net Gearing (%) Company 14A 15E 16E 14A 15E 16E 14A 15E 16E 14A 15E 16E 14A 15E 16E Travelsky 17% 16% 14% 8.9 14.2 11.8 2.1 2.0 2.2 (2.3) (2.2) (1.8) -44% -39% -32% Sabre Corp NM 108% 73% 9.9 11.5 9.2 1.1 1.3 2.0 4.2 3.2 2.7 3470% 628% 435% Travelport Worldwide Limited NM NM NM 7.8 7.4 6.8 0.8 2.3 2.3 5.3 4.3 3.9 -681% -714% -703% Amadeus IT Holdings S.A. 34% 33% 30% 12.3 13.1 11.5 2.1 1.9 2.3 1.0 1.0 1.1 78% 70% 76% 26% 33% 30% 9.4 12.3 10.3 1.6 2.0 2.3 2.6 2.1 1.9 17% 16% 22%

Source: Thomson Reuters, Morgan Stanley Research. E=Morgan Stanley Research estimates. Results show n represent total absolute return (including dividends) and exclude brokerage commissions and transaction costs. These figures are not audited. Past performance is no guarantee of future results.

17 TravelSky Technology | March 2, 2016 MORGAN STANLEY RESEARCH

Earnings Forecasts

B reakdown by segment

TSK's aviation information technology (AIT) segment, which consists of electronic travel distribution services (air ticket bookings) and airport passenger services, contributed 53.5% of TSK's 2014 revenue.

The system integration segment provides hardware integration, software integration and data and information integration services to airports, commercial airlines and other corporate clients. It accounted for 19.5% of TSK's 2014 revenue.

Data network and other segments accounted for 18.9% of TSK's total revenue in 2014. TSK generated revenue from: 1) distribution information technology services provided to agencies, 2) travel distribution services provided to travel product providers (e.g., hotels), 3) air freight logistics information technology services provided to commercial airlines, airports and cargo shippers, 4) airport information technology services, and 5) public information technology services.

Accounting, settlement and clearing services (ACCA) segment accounted for 8.1% of total revenue in 2014, providing accounting, settlement and clearing services to third parties (e.g., commercial airlines, airports, agencies and government bodies).

Exhibit 20: TSK: Revenue breakdown, by segment, Exhibit 21: TSK: Segment revenue (Rmb mn) 2014 4,235 3,843 3,470 3,136 System Integration 2,854 2,436 2,582 2,083 2,259 19.5% 1,843 1,603 1,394 1,195 1,212 1,033 797 1,010 936 Data Network 675 700 1,040 774 851 493645 542 596 656 and Others 296 380 430 431 432 18.9% 53.5% Aviation Information 2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E Technology 8.1% Aviation Information Technology Data Network and Others ACCA revenues ACCA revenues System Integration Services Source: Company data, Morgan Stanley Research. E=Morgan Source: Company data, Morgan Stanley Research. Stanley Research estimates.

18 TravelSky Technology | March 2, 2016 MORGAN STANLEY RESEARCH E arnings forecasts

Revenues, by segment

To arrive at our revenue projection for the AIT Exhibit 22: TSK: Total bookings YoY growth segment, we forecast booking volumes and booking fees for domestic and foreign airlines, and also estimate 50.0% airport departure processing revenue. 40.0% 2006 30.0% 2007 2008 Taking into account China's strong demand in 20.0% 2009 2010 outbound tourism, we forecast that domestic airlines' 10.0% 2011 2012 international bookings will increase at a 17% CAGR in 0.0% Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2013 2015-20, and foreign airlines' international bookings -10.0% 2014 2015 will increase at an 11% CAGR, 2015-20. On the other -20.0% hand, we forecast that domestic bookings will increase at a slower 9% CAGR in the same period. We estimate Source: Company data, Morgan Stanley Research. total bookings for Chinese airlines to reach 724mn in 2020, which compares with CAAC's forecast of over 700mn passengers.

For booking fees, we project a slight decline of 1% per year in 2015-17, and flat thereafter for Chinese airlines, resulting from the regressive pricing arrangement with airlines. For TSK's business from foreign airlines, we project a 1% YoY decline in 2015, but 1% YoY growth in each of 2016 and 2017, driven by RMB depreciation (pricing based on USD terms), as suggested by our China economics team.

On airport and departure processing, we forecast a 9% CAGR for 2015-20, in line with domestic bookings growth and company guidance.

For TSK's system integration segment, we assume respective 20%, 10%, and 10% YoY revenue growth for 2016, 2017, and 2018, driven by ongoing airport construction and expansion projects at airports and other clients.

For the data network and other segment, we assume stable 15% YoY revenue growth in 2016-18, with more revenue generated from travel agencies and public services, supported by extra capacity after the launch of TSK's Beijing data operations center.

For the ACCA segment, we forecast a 10% revenue CAGR, 2015-18, in line with overall ticket bookings growth.

Costs

We break down operating expenses into personnel, G&A expenses, commission and promotion expenses, technical support services, D&A, operating lease rentals, cost of software and hardware sold, and network usage.

Specifically, personnel and cost of software and hardware sold accounted for a respective 29% and 20% of TSK's total 2014 operating expenses. For personnel expenses, TSK quickly expanded on-staff hiring in the past years to support its new data operations center and develop new systems. We forecast personnel expense to increase at a 10% CAGR in 2015-18, with a 5% increase in employees per year. The cost of software and hardware sold is directly related to system integration segment revenue, and therefore we forecast it to grow at the same pace as the segment's top-line growth.

TSK expects an incremental increase in depreciation after the launch of its new data operations center, and the company will expand its business scope into public information services to expand business and reduce operating rental to save costs.

With improved operating efficiency, we estimate operating profit will increase at a 13.0% CAGR, 2015-18, with operating profit margin improvement from 24.6% in 2015 to 25.4% in 2018. 19 TravelSky Technology | March 2, 2016 MORGAN STANLEY RESEARCH

Exhibit 23: TSK: Operating expense breakdown, Exhibit 24: TSK: Operating profit 2014 2,500 40.0% 35.0% Network Usage 1% 2,000 30.0% 25.0% Cost of software and Personnel n 1,500 20.0% m hardware sold 20% b 15.0% m

29% R 1,000 10.0% Operating 5.0% Lease Rentals 4% 500 0.0% -5.0% 11% General, 9% 0 -10.0% D&A Admin. 2008 2009 2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 12% and Others 14% Operating Profit YoY Chng (%) Operating Margin (%) Technical Commission support services and promotion Source: Company data, Morgan Stanley Research. E= Morgan expenses Stanley Research estimates. Source: Company data, Morgan Stanley Research. Other Items

We estimate the local government subsidy to remain Rmb410mn in 2015, in line with management guidance. Given such subsidy is mostly related to the capex of the new data operations center in Beijing, where we forecast peak capex in 2016 ongoing into 2017, we estimate Rmb250mn in government subsidies for both 2016 and 2017. With the launch of the new data operations center in 2017 and no further substantial capex, we conservatively assume no subsidy in 2018 onwards. Still, given such subsidy is one-off and subject to annual approval, earnings pressure is likely should there be no subsidy in any given year.

Morgan Stanley Research vs. Consensus

Given our more conservative government subsidy Exhibit 25: TSK: Morgan Stanley vs consensus assumptions, our 2015-17 net profit estimates are net profit estimates slightly below consensus. Year to Dec 31 2015E 2016E 2017E Travelsky (696.HK) MS estimates Rmb mn 1,681 1,671 1,875 Consensus estimates Rmb mn 1,718 1,709 1,927 % variance -2% -2% -3%

Source: Thomson Reuters consensus estimates, Morgan Stanley Research estimates.

20 TravelSky Technology | March 2, 2016 MORGAN STANLEY RESEARCH

Industry Overview

Air travel and tourism are among the most information-intensive industries in the world. They rely heavily on travel distribution systems to connect millions of travelers with thousands of travel suppliers, such as airlines, car rental agencies, hotels, and tour operators. Broadly speaking, such distribution system providers include travel agencies (traditional and online) and GDS, as well as the travel suppliers themselves.

Global distribution systems (GDS) : Today, the global travel IT industry is dominated by the Big Three GDS providers – Sabre, Amadeus, and Travelport. These three GDS providers control more than 95% of the global GDS market in terms of bookings (excluding China, where TSK has the majority share). In Asia Pacific, Abacus International (acquired by Sabre), is TSK's No. 1 competitor and controls more than 30% of the market (in terms of bookings). Other regional reservation systems providers include TSK, Infini (Japanese) and Topas (Korean and partner with Amadeus). GDS providers serve as a critical link between travel agents and the vast inventory of airlines, hotels, and other travel suppliers. Travel agents use these systems to check fares, availability, and access rates for their clients (end-users). Each time a reservation is booked by a travel agent or through a website connected to a GDS, the system collects a fee from the travel suppliers. International GDS providers usually charge US$3-4 per segment, and one trip equals 2.6 travel segments, on average. Thus, GDS providers generally receive US$10-11 per trip. In China, TSK charges airlines Rmb4.5-6.0 (US$0.85) per domestic route segment, and most trips are origin to destination. Thus, TSK receives only Rmb5.6 per domestic trip, on average. In addition to core booking functions, GDS providers also sell other travel-related IT solutions, including airport departure, control systems, and consulting services.

Exhibit 26: Major GDS providers

Company Amadeus Sabre Travelport Headquarters Madrid, Spain Texas, USA Langley, UK Co-founded in 1987 by Air The first GDS provider; Founded from Galileo, Orbitz France, Iberia, Lufthansa Worldwide and Worldspan; and SAS; Used to be a section of AMR; Listed in NYSE in September History Listed in Spanish Stock 2014 with ticker TVPT Exchange with ticker Listed in NASDAQ in April AMS.MC 2014 with ticker SABR

195 countries and regions North America, Latin Over 170 countries and worldwide America, Europe, Asia regions worldwide Coverage Pacific, Middle East, and Africa

FY 2014 Revenue €3.4bn US$2.6bn US$2.1bn (1) Distribution (72%); (1) Travel network (70%); (1) Travel Commerce Platform (2) IT solutions (28%) (2) Airline and hospitality Air (75%); Major business solutions (30%) (2) Travel Commerce Platform (% of FY2014 Beyond Air (20%); revenue) (3) Technology Services (5%)

Source: Company w ebsites, Morgan Stanley Research. The GDS market has high barriers to entry, good margins, and is also concentrated. In our view, the cost to invest and obtain the required technology is very high. Even if a company develops the required technology, it would take a while for the new entrant to expand its user network to become profitable. Strict industry regulations also ensure that individual suppliers do not receive preferential treatment; such regulations foster 21 TravelSky Technology | March 2, 2016 MORGAN STANLEY RESEARCH consistent pricing. We believe these forces have helped GDS companies maintain operating margins of more than 20%.

22 TravelSky Technology | March 2, 2016 MORGAN STANLEY RESEARCH

Business Overview

Founded in October 18, 2000, TSK is the provider of Exhibit 27: TSK: Company milestones information technology solutions for China’s aviation and travel industry, with clients in commercial airlines, 2000 TravelSky Technology Limited was established air travel products, services suppliers, and airports. The 2001 The company is listed on the Hong Kong Stock Exchange with ticker 0696.HK company mainly focuses on aviation information 2002 China TravelSky Holding Company was established technology (AIT) services, distribution information 2006 TravelSky Technology Limited signed a strategic cooperation agreement with IATA technology services, and accounting, settlement and 2007 Accounting Center of China Aviation changed its name into clearing services (ACCA) for the aviation industry. TSK Accounting Center of China Aviation Limited Company serves virtually all of the country's 30+ airline 2008 China TravelSky Holding Company completed the companies (except Spring Airlines). restructuring of assets and main businesses 2009 Accounting Center of China Aviation Limited Company became a wholly-owned subsidiary of TravelSky Technology TSK was listed on The Stock Exchange of Hong Kong Limited Limited in February 2001. Through December 31, 2014, its H-shares accounted for 31.87% of total shares; the Source: Morgan Stanley Research. remaining 68.13% is domestic non-tradeable shares, predominantly owned by China TravelSky Holding Company, China Southern Air Holding Company, China Eastern Air Holding Company and China National Aviation Holding Company. Approximately 38.84% of the equity interest in the company is held by 13 Chinese commercial airlines.

Exhibit 28: TSK: Shareholder structure (2014)

China Southern Air Holding Company

China National Aviation Holding Company Others China TravelSky Holding Company China Eastern Air Holding Company H shareholders

11.94% 9.17% 11.22% 29.29% 31.87% 6.51%

TravelSky Technology Limited (696.HK)

Source: Company data, Morgan Stanley Research.

23 TravelSky Technology | March 2, 2016 MORGAN STANLEY RESEARCH Exhibit 29: TSK: Products and customers

Products Main Business Clients Aviation Information Technology (AIT) Includes Inventory Control System (“ICS”) services, Computer Reservation Commercial airlines System (“CRS”) services, Airport Passenger Processing (“APP”) services, and other extended information technology solutions related to the above core businesses.

Accounting, Settlement and Clearing Services Provides accounting, settlement and clearing services, and information Commercial airlines, airports, agents, system development and support services to commercial airlines and government, etc. other aviation corporations. Distribution of Information Technology Services Provides technology support for travel distribution, and building the Travel agencies, travel distribution agents airline tickets distribution procedure. Airport Information Technology Services Provides Airport Message Broker (AMB), mobile airport operation data Airports monitoring system, self check-in service, passenger front-end processing system, etc. Air Freight Logistics Information Technology Services Connected a number of medium- to large-sized air cargo terminals with its Commercial airlines and airports air logistics information platform, and provides data service for 16 domestic and international commercial airlines. Travel Product Distribution Services Provides data services through the hotel information platform to realize Hotels and car rental companies the smooth data sharing among the hotels(upstream), suppliers and distributors(downstream), and also building up a car rental platform. Public Information Technology Services Provides data outsourcing services. Government and enterprises

Source: Morgan Stanley Research.

24 TravelSky Technology | March 2, 2016 MORGAN STANLEY RESEARCH

TravelSky: Consolidated Income Statement

Exhibit 30: TSK: Consolidated income statement

TravelSky Consolidated Income Statement

(Rmb Mn; Years Ending December) 2011 2012 2013 2014 2015E 2016E 2017E 2018E

Electronic Travel Distribution 1,869 2,084 2,291 2,538 2,820 3,144 3,506 3,912 Airport Passenger Processing 822 924 1,039 1,167 1,312 1,474 1,658 1,863

Domestic carriers booking 1,917 2,011 2,079 2,269 2,490 2,745 3,030 3,331 Foreign carriers booking 311 389 409 446 490 549 621 696 Others 32 36 94 140 156 175 193 208 Aviation Information Technology 2,259 2,436 2,582 2,854 3,136 3,470 3,843 4,235 System Integration 0 0 700 1,040 645 774 851 936 Data Network and Others 1,033 1,195 797 1,010 1,212 1,394 1,603 1,843 ACCA revenues 380 430 431 432 493 542 596 656 Total Revenues 3,672 4,061 4,509 5,336 5,486 6,179 6,893 7,670 Business Taxes and Other Surcharges (134) (104) (31) (21) (27) (31) (34) (38) Net Revenues 3,538 3,956 4,479 5,315 5,458 6,148 6,859 7,632 %YoY 20.1% 11.8% 13.2% 18.7% 2.7% 12.6% 11.6% 11.3%

Operating Expenses Depreciation and Amortisation (406) (331) (381) (447) (542) (610) (698) (836) Network Usage (55) (56) (65) (47) (53) (59) (65) (71) Personnel (678) (855) (976) (1,173) (1,293) (1,426) (1,572) (1,733) Operating Lease Rentals (98) (122) (148) (159) (167) (176) (185) (185) Technical Support Services (192) (212) (327) (470) (517) (569) (626) (688) Selling expenses (452) (491) (461) (574) (677) (779) (857) (942) General, Admin. and Others (475) (671) (327) (377) (377) (415) (457) (502) Cost of software and hardware sold 0 0 (561) (813) (488) (610) (671) (738) Total Operating Expenses (2,356) (2,739) (3,245) (4,060) (4,115) (4,643) (5,129) (5,696) Operating Profit 1,182 1,218 1,234 1,255 1,343 1,505 1,730 1,936 Operating Margin (%) 33.4% 30.8% 27.5% 23.6% 24.6% 24.5% 25.2% 25.4%

Financial Income, Net 74 58 64 131 123 112 115 143 Share of Results of Associated Companies 27 29 15 19 21 24 27 30 Other Income/(Expenses), Net 0 0 0 500 410 250 250 0 Pretax Profit 1,283 1,304 1,312 1,905 1,897 1,890 2,122 2,109 Taxation (208) (142) (73) (213) (190) (189) (212) (211) Effective Tax Rate (%) 16.2% 10.9% 5.5% 11.2% 10.0% 10.0% 10.0% 10.0% Statutory Tax Rate (%) 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0%

After-tax Profit 1,075 1,163 1,240 1,692 1,708 1,701 1,910 1,898

Minority Interests (28) (30) (34) (39) (27) (30) (35) (39) Net Profit 1,045 1,133 1,204 1,651 1,681 1,671 1,875 1,859 %YoY 17.0% 8.4% 6.2% 37.1% 1.8% -0.6% 12.2% -0.8% Net Profit Margin (%) 29.5% 28.6% 26.9% 31.1% 30.8% 27.2% 27.3% 24.4% Net Profit excl. government subsidy 1,133 1,204 1,207 1,312 1,446 1,650 1,859 %YoY 6.2% 0.2% 8.7% 10.2% 14.1% 12.7% Margin (%) 28.6% 26.9% 22.7% 24.0% 23.5% 24.1% 24.4%

Source: Company data, Morgan Stanley Research. E=Morgan Stanley Research estimates.

25 TravelSky Technology | March 2, 2016 MORGAN STANLEY RESEARCH

TravelSky: Consolidated Balance Sheet

Exhibit 31: TSK: Consolidated balance sheet

(Rmbmn; Years Ending December) 2011 2012 2013 2014 2015E 2016E 2017E 2018E Non-Current Assets Property, Plant and Equipment, Net 950 897 1,458 1,988 3,099 4,541 4,896 5,112 Lease prepayment for land use rights, Net 2,020 1,967 1,914 1,861 1,809 1,756 1,703 1,650 Intangible Assets, Net 51 67 206 436 436 436 436 436 Investments in Associated Companies 154 163 172 178 185 194 207 222 Other Long-term Investment 0 0 0 0 0 0 0 0 Other Long-term Assets 11 192 311 139 139 139 139 139 Deferred tax asset 12 25 34 41 41 41 41 41 Total Non-Current Assets 3,197 3,310 4,094 4,644 5,708 7,107 7,421 7,600 Current Assets Inventories 4 29 9 15 15 17 19 21 Accounts Receivables, Net 432 591 753 755 775 873 974 1,084 Due From Associated Companies 18 41 36 28 28 28 28 28 Due From Related Parties 1,610 1,911 1,853 2,239 2,390 2,644 2,929 3,227 Prepayments and Other Current Assets 262 354 398 468 474 535 591 656 Income tax receivable 1 74 81 7 7 7 7 7 Short-term Investments 0 0 0 0 0 0 0 0 Held-to-maturity financial assets 500 800 410 1,210 1,210 1,210 1,210 1,210 Short-term Bank Deposits 2,093 1,031 1,159 1,369 1,369 1,369 1,369 1,369 Cash and Cash Equivalents 890 1,739 2,349 1,995 1,865 1,378 2,061 2,878 Total Current Assets 5,809 6,571 7,047 8,086 8,135 8,062 9,189 10,481 Total Assets 9,007 9,881 11,142 12,730 13,843 15,170 16,610 18,081 Capital and Reserves Share Capital 2,926 2,926 2,926 2,926 2,926 2,926 2,926 2,926 Reserves 2,705 2,892 3,090 3,334 3,334 3,334 3,334 3,334 Retained Earnings 1,850 2,445 3,061 4,058 5,100 6,136 7,299 8,452 Total 7,481 8,263 9,078 10,319 11,361 12,397 13,559 14,712 Minority Interests 145 168 223 258 284 315 349 388 Current Liabilities Accounts Payable and Accrued Liabilities 1,169 1,226 1,579 2,003 2,031 2,291 2,531 2,810 Due to Related Parties 153 182 192 93 93 93 93 93 Dividend Payable 0 0 0 0 0 0 0 0 Taxes Payable 34 14 19 14 32 32 35 35 Deferred Revenue 6 10 33 20 20 20 20 20 Total Current Liabilities 1,362 1,432 1,823 2,130 2,175 2,435 2,679 2,958

Debt / Bank loans 0 0 0 0 0 0 0 0 Deferred tax liabilities and derferred revenue 18 17 18 23 23 23 23 23

Total equity and Liabilities 9,007 9,881 11,142 12,730 13,843 15,170 16,610 18,081

Source: Company data, Morgan Stanley Research. E=Morgan Stanley Research estimates.

26 TravelSky Technology | March 2, 2016 MORGAN STANLEY RESEARCH

TravelSky: Consolidated Cash Flow Statement

Exhibit 32: TSK: Consolidated cash flow statement

(Rmbmn; Years Ending December) 2011 2012 2013 2014 2015E 2016E 2017E 2018E

Cashflows from Operating Activities 218 174 104 264 231 234 261 264 Profit Before Taxation and Minority Interests 1,283 1,304 1,312 1,905 1,897 1,890 2,122 2,109 Depreciation and Amortisation 406 331 381 447 542 610 698 836 Interest Income (64) (109) (93) (128) (123) (112) (115) (143) Interest expense ------Loss on Disposal of Property, Plant and Equipment (0) 3 1 3 - - - - Loss on Revaluation of Property, Plant and Equipment ------Provision for (Write-back of) Doubtful Debts 13 12 13 61 - - - - Provision for (Write-back of) Decline in Net Realisable Value of Inventories ------Share of Results from Associated Companies (27) (29) (15) (19) (21) (24) (27) (30) Staff cost arising from share appreciation rights 2 4 18 1 - - - - Exchange loss 10 (0) (7) (8) (8) (8) (8) (8) Decrease/(Increase) in Working Capital (169) (570) 218 (233) (151) (154) (204) (196) Accounts Receivable (216) (171) (157) (51) (20) (98) (101) (110) Inventories 4 (26) 21 (6) (0) (2) (2) (2) Prepayments and Other Current Assets (30) (132) (34) (74) (6) (61) (56) (65) Due from Related Parties/Associated Companies (226) (312) 56 (390) (152) (254) (285) (298) Accounts Payable and Accrued Liabilities 294 37 304 370 27 260 240 280 Deferred Revenue (27) 4 22 (11) - - - - Due to Related Parties 32 29 5 (71) - - - - Taxes Payable ------Cash Generated from Operating Activities 1,454 946 1,828 2,027 2,135 2,202 2,466 2,568

Interest paid ------Long term rental deposit ------Refund of enterprise income tax 53 - 141 72 - - - - Enterprise Income Tax Paid (187) (249) (226) (221) (172) (189) (208) (211)

Cash Flows from Investing Activities Purchases of Property, Plant, Equipment and Intangible Assets (212) (363) (979) (964) (1,600) (2,000) (1,000) (1,000) Decrease/(Increase) in Short-term Bank Deposits (354) 1,062 (101) (131) - - - - Interest Received 52 113 91 134 123 112 115 143 Dividend Received from Associated Companies 4 6 2 15 15 15 15 15 Proceeds from Disposal of Property, Plant and Equipment 0 1 1 1 - - - - Disposal/(Acquisition) of Short-term Investment ------Increase in Other Long-term Investment 0 (4) 5 (3) - - - - Increase in Other Long-term Assets - - (152) (65) - - - - Maturities of held-to-maturity treasury bonds (500) (300) 390 (800) - - - - Net Cash Used in Investing Activities (1,010) 514 (745) (1,814) (1,462) (1,874) (870) (842) Cashflows from Financing Activities Contribution from Shareholders ------Funds Contributed by the CAAC ------Repayment of Long-term Bank Loans ------Bank loans ------Investment from Minority Shareholders ------Dividend Paid to Group Shareholders (306) (351) (389) (410) (639) (635) (713) (707) Dividend Paid to Minority Shareholders (9) (7) (9) (8) - - - - Distribution to CACI - - 7 - - - - - Disbursement for Other Financing Activities ------Net Cash (used in)/Provided by Financing Activities (316) (358) (391) (418) (639) (635) (713) (707) Effect of foreign exchange rate changes (3) (3) 2 0 8 8 8 8 Restatement ------Net Increase in Cash and Cash Equivalents (9) 849 610 (354) (130) (487) 683 817 Cash and Cash Equivalents, beginning of year 899 890 1,739 2,349 1,995 1,865 1,378 2,061 Cash and Cash Equivalents, end of year 890 1,739 2,349 1,995 1,865 1,378 2,061 2,878

Source: Company data, Morgan Stanley Research. E=Morgan Stanley Research estimates.

27 TravelSky Technology | March 2, 2016 MORGAN STANLEY RESEARCH

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28 TravelSky Technology | March 2, 2016 MORGAN STANLEY RESEARCH

COVERAGE UNIVERSE INVESTMENT BANKING CLIENTS (IBC) STOCK RATING CATEGORY COUNT % OF TOTAL COUNT % OF TOTAL % OF RATING IBC CATEGORY Overweight/Buy 1216 36% 320 44% 26% Equal-weight/Hold 1399 42% 320 44% 23% Not-Rated/Hold 69 2% 3 0% 4% Underweight/Sell 671 20% 89 12% 13% TOTAL 3,355 732

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30 TravelSky Technology | March 2, 2016 MORGAN STANLEY RESEARCH

INDUSTRY COVERAGE: Hong Kong/China Transportation & Infrastructure

COMPANY (TICKER) RATING (AS OF) PRICE* (03/01/2016)

Edward H Xu, CFA Air China Limited (0753.HK) O (11/16/2015) HK$4.69 Air China Limited (601111.SS) E (01/21/2016) Rmb6.23 Beijing Capital Int'l Airport (0694.HK) E (12/17/2013) HK$7.05 Cathay Pacific Airways (0293.HK) E (08/19/2013) HK$12.80 China Eastern Airlines (0670.HK) O (11/16/2015) HK$3.62 China Eastern Airlines (600115.SS) E (11/16/2015) Rmb5.62 China Merchants Hldg Intl (0144.HK) E (04/01/2015) HK$21.95 China Southern Airlines (1055.HK) O (11/16/2015) HK$4.41 China Southern Airlines (600029.SS) U (04/08/2015) Rmb5.91 CIMC (2039.HK) E (07/14/2014) HK$11.52 CIMC (000039.SZ) U (01/19/2015) Rmb13.82 COSCO Pacific (1199.HK) HK$8.30 Daqin Railway Co. Ltd. (601006.SS) O (01/07/2010) Rmb6.57 Guangshen Railway (0525.HK) U (04/28/2014) HK$3.46 Guangshen Railway (601333.SS) U (07/18/2014) Rmb3.67 Hutchison Port Holdings Trust (HPHT.SI) E (03/05/2014) US$0.45 Kerry Logistics Network (0636.HK) O (03/27/2015) HK$11.62 Shanghai International Airport (600009.SS) O (08/28/2015) Rmb27.31 Shenzhen International Holdings (0152.HK) O (05/27/2014) HK$11.90 Sinotrans Air Transportation Development (600270.SS) O (02/23/2016) Rmb17.76 Sinotrans Limited (0598.HK) O (05/27/2014) HK$3.00 SITC International Holdings Company (1308.HK) O (08/08/2011) HK$3.39 Spring Airlines (601021.SS) O (08/31/2015) Rmb44.40

Qianlei Fan, CFA Guangzhou Baiyun Int'l Airport (600004.SS) U (01/27/2016) Rmb11.43 Shenzhen Airport Company (000089.SZ) O (01/27/2016) Rmb7.00 Xiamen International Airport (600897.SS) E (01/27/2016) Rmb17.48

Victoria Wong, CFA Anhui Expressway Co. Ltd. (0995.HK) O (10/07/2015) HK$6.10 Anhui Expressway Co. Ltd. (600012.SS) U (01/15/2016) Rmb13.32 China COSCO (601919.SS) Rmb5.66 China COSCO (1919.HK) HK$2.74 China Merchants Energy Shipping Co. Ltd. (601872.SS) O (06/25/2015) Rmb4.70 China Shipping CL (2866.HK) E (07/09/2012) HK$1.55 China Shipping CL (601866.SS) U (08/19/2014) Rmb4.30 China Shipping Development (1138.HK) O (10/23/2013) HK$4.71 China Shipping Development (600026.SS) O (06/25/2015) Rmb6.05 Hopewell Highway Infrastructure (0737.HK) E (08/12/2014) HK$3.64 Jiangsu Expressway Company Limited (600377.SS) U (10/06/2015) Rmb7.75 Jiangsu Expressway Company Limited (0177.HK) E (10/06/2015) HK$9.57 Orient Overseas Int'l Limited (0316.HK) O (03/05/2014) HK$28.75 Pacific Basin Shipping (2343.HK) O (11/03/2014) HK$1.21 Shenzhen Expressway Company (600548.SS) E (01/15/2016) Rmb8.52 Shenzhen Expressway Company (0548.HK) E (01/15/2016) HK$5.92 Sichuan Expressway Co. Ltd. (601107.SS) U (10/07/2015) Rmb3.92 Sichuan Expressway Co. Ltd. (0107.HK) U (10/07/2015) HK$2.37 Zhejiang Expressway Company (0576.HK) O (10/06/2015) HK$7.06

Watson Lau TravelSky Technology (0696.HK) O (03/02/2016) HK$12.08

Stock Ratings are subject to change. Please see latest research for each company. * Historical prices are not split adjusted.

© 2016 Morgan Stanley

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