INDUSTRY COVERAGE 31-Jan-18 Industry AVIATION New phrase of growth Rating OVERWEIGHT Pros: . The momentum from recent booming period could keep the annual growth rate of Vietnam aviation at around 12-15% for the next 3 years with motivations from the fast- Contents growing economy, tourism and retail sectors; raising standard of living and middle- income class (IATA). 1. Overviews . Airlines of Vietnam are taking their initial steps to penetrate further regional markets after 2. Vietnam aviation industry recent years of capturing adequately the domestic one. If the expansion is successful, it 3. Performance would maintain airlines recent impressive growth rate for the next 3 years. 4. Valuation . International expansion, in one hand, can bring a substantial number of passengers and 5. Stock pick air cargo through Vietnam aviation chain and, in other hand, it could also enhance noticeably profitability of aviation companies with a higher price in aviation services. ASEAN SAM or ASEAN Open Skies Agreement is expected to be a game-changing Mr. Bao H. Vo factor for regional aviation in general, Vietnam market in specific in long-term when it could lift the current regulatory barriers of ASEAN markets if it could be ratified. (+84 28) 3914 8585 - Ext: 1460 [email protected] Cons: www.kisvn.vn . Although Vietnam market is still forecasted as the 5th fastest growing-market in the world, the growth of domestic market is slowing down in number of passengers, and it could decline to a single-digit rate beyond 2020 with a relatively high penetration rate. The competition of airlines (full-service with LCC; short haul with long haul) are expected to intensify in the foreseeable future while the South Asian markets have already been dominated by regional LCCs (AirAsia, Cebu, Indigo, etc.). Hence, airlines of Vietnam would face a strong barrier from regional peers with their expansion plans. Restrains from airport infrastructure are causing more concerns when it could limit the long-term potential growth of airlines and the whole aviation chain. The uptrend of fuel price in 2017 is expected to be continue in 2018. This could squeeze and negatively affect the recent improvement of airlines’ profitability. Conclusion . Airlines as the “anchor” of aviation chain will directly benefit from the booming momentum of regional and domestic aviation; hence, their growth rate could be highest in the chain in the next 3 years. However, due to their dramatically high financial leverage, if there is any interruption to the growth of aviation market, they will have to deal with a huge risk of financial instability. Airport infrastructure and air freight companies have the highest (and improvable) profit margin and cash generation with their unique advantages; hence, those companies can be considered to have much higher financial stability. Nonetheless, their growth rates are more stable but slower than airlines. Stock pick: VJC, SCS Page 1 Bloomberg: KISVN <GO> INDUSTRY COVERAGE - Aviation KIS Vietnam Securities JSC 1. Overviews of Aviation industry: 1.1. Industry definition: According to ICB and GICS, Aviation companies are companies providing transportation, logistics and other related services for both passengers and cargo within airport area including: passenger and air freight transportation; air cargo courier and logistics services (package, mail delivery and customs agents); airports operations; ground and other related airport services. In this report, we majorly focus on Vietnam listed aviation companies due to data availability. 1.2. Global and Regional aviation industry 1.2.1 Global: Global aviation industry 5,000 70 60 4,000 mn.tonnes 50 3,000 40 2,000 30 mn.pax 20 1,000 10 - 0 Cargo Passenger Source: IATA, KISVN With the explosive expansion of Low-Cost Carriers (LCCs) in recent years, the global aviation industry is slowly returning to profitability and gaining an annual growth rate of 6.3% in term of passenger kilometers (RPK) and 4.2% in term of freight ton kilometers (FTKs) from 2010 to 2016. Especially in 2016, those growth figures were 7.4% and 4% respectively. Furthermore, the International Air Transport Association (IATA) positively implied that the strong performance of global aviation industry could continue in foreseeable future. Based on their cost-efficient operating model and affordable-price services, LCCs has not only noticeably seized the market share of legacy/full-service airlines thorough years or even threated their existence but also reduced significantly the average fare price to make air travel even more accessible. Hence, the air travel demand of markets will raise, and the global growth was forecasted to reach 7.2% in term of passenger number and 7.4% in RPKs. On the other side, the robust growth in air cargo demand from the end of 2016 and early 2017 is consistent with an uptick in global trade, rising export orders and upbeat business confidence indicators. Air cargo often sees a boost in demand at the beginning of an economic upturn as companies look to restock inventories quickly. There are signs that demand growth for air freight may be nearing a peak, but IATA still remain their forecasted growth in FTKs for 2018 of 7.5%. 1.2.2 Regional: Deregulation and Liberalization Asia-Pacific, especially Southeast Asia, has been the fastest growing area with deregulations and liberalizations carrying in major markets recent years, but this is 31-Jan-18 Page 2 Equity Research - KIS VN Bloomberg: KISVN <GO> INDUSTRY COVERAGE - Aviation KIS Vietnam Securities JSC also the toughest competitive area between carriers with low-cost, full-service and long- and short-haul airlines dueling for market share and depressing yields (Bloomberg Intelligence). The competition in South Asia, may intensify as the penetration of LCC in this area is higher than the North, leads to very diverse performances of airlines in the region. Aviation growth rates in regions 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% 2011 2012 2013 2014 2015 2016 2017 F Asia-Pacific Global North America Europe Latin America Source: IATA (2017), KISVN After a long period of negotiation, the first phrase of ASEAN Single Aviation Market or ASEAN Open Skies agreement, which aims for a “Single Aviation Market” (SAM) between ASEAN countries, has come into effect in 2016; the other two phrases are expected to reach a mutual agreement before 2023. This agreement may not completely create a “single” or fully liberalized market, and is much less ambitious compared to what the EU has achieved; however, this could be seen as a game- changing factor for the growth of aviation industry in the region in long term when it lifts the regulatory limits on the frequency or capacity of flights between international airports across ASEAN countries, thus, boost further regional air transportation for both passengers and cargo. According to Bloomberg Intelligence’s forecasts for Asia-Pacific Aviation in 2018, regional aviation industry will continue to gain passenger-traffic growth for next two decades with high economic growth and a rising middle class (faster than in other regions). The middle class of this region is expected to account for 65% global middle class in 2030 from 46% in 2015 (according to February Brooking Institution study), which will likely to fuel the demand for both domestic and outbound (international) air travel. However, amid the strong demand and improvement in load factors, high and intensifying competition in Asia, which is strengthen by the increase in seat capacity, will continue to maintain high pressure on passenger yields of airlines in 2018. 31-Jan-18 Page 3 Equity Research - KIS VN Bloomberg: KISVN <GO> INDUSTRY COVERAGE - Aviation KIS Vietnam Securities JSC Source: Bloomberg Intelligence Regarding to air cargo, Bloomberg Intelligence and IATA expect that after a rise in cargo traffic of 10.5% in 2017 (through September) following almost no growth in 2015-16, and the air-freight volume growth is on track to rise further in 2018 after its best growth since 2010. Demand growth is outpacing capacity for the first time in three years and the trend is likely to continue next year. Asian Freight Volume and Capacity Growth Moreover, Asian airlines could enjoy robust cargo load factors and yields in 2018 as cross-border e-commerce is emerging as the air-freight market’s strongest growth motivation for the next several years; especially the growth in Chinese cross-border e-commerce is expected to keep at double-digit rates into 2019 (according to e- Marketer). Chinese Cross Border E-Commerce 31-Jan-18 Page 4 Equity Research - KIS VN Bloomberg: KISVN <GO> INDUSTRY COVERAGE - Aviation KIS Vietnam Securities JSC 2. Vietnam Aviation industry 2.1. Value chain of Vietnam aviation industry: The list of companies participating in Vietnam aviation industry: Subsidiary/ Associate Ticker Name Operating base Listed of ACV Airports Corporation of Vietnam State-owned (95%) All airports UpCOM HVN Vietnam Airlines State-owned (86%) All airports UpCOM VJC Vietjet Air Private-owned All airports HOSE Jetstar Jetstar Pacific Airline HVN (70%) All airports Non-listed VASCO Vietnam Air Services Company HVN (100%) All airports* Non-listed VATM Vietnam Air Traffic Management Corporation State-owned (100%) All airports Non-listed SKYPEC Vietnam Air Petrol Company Ltd HVN (100%) All airports Non-listed VALC Vietnam Aircraft Leasing Company JSC HVN (32%), BIDV (32%) All airports Non-listed CIA Cam Ranh International Airport Services JSC ASG (22%) Cam Ranh Airport HNX AGS Aviation Ground Services