Deutsche Bank Markets Research

Rating Company Date 7 December 2016 Buy TravelSky Tech Initiation of Coverage Asia China Reuters Bloomberg Exchange Ticker Price at 7 Dec 2016 (HKD) 15.46 Consumer 0696.HK 696 HK HSI 0696 Price target - 12mth (HKD) 21.00 Hotels / Leisure / ADR Ticker ISIN 52-week range (HKD) 18.92 - 10.07 Gaming TSYHY US89420Y2090 HANG SENG INDEX 22,675

Travelling high in the sky; initiating Tallan Zhou Karen Tang coverage with a Buy Research Analyst Research Analyst (+852 ) 2203 6464 (+852 ) 2203 6141 Initiating coverage with a Buy rating and price target of HKD21 [email protected] [email protected] We initiate coverage of TravelSky with a Buy and a HKD21 price target, implying 30% upside potential currently. TravelSky is a global distribution system (GDS) company for the aviation industry (similar to UnionPay in Price/price relative banking). As an SOE, TravelSky dominates the airline ticket distribution market 20 (>95% market share), based on the transaction fees it charges customers 16 (China Southern Air, China Eastern Air and other airlines), which are also its shareholders (39% collective stake). We view TravelSky as a proxy for China’s 12 growing tourism market, especially in outbound travel (96% in 2015). 8

4 Sustainable and defensive long-term growth player, almost a monopoly 12/14 6/15 12/15 6/16 With 13 Chinese commercial airlines holding a combined stake of 38.84% and TravelSky Tech supported by the Chinese government, and a 95.5% share of the market HANG SENG INDEX (Rebased) TravelSky almost has a monopoly. Its top-line revenue is therefore closely Performance (%) 1m 3m 12m correlated to the growth of Chinese travel. We forecast a 17% CAGR and 10-13% CAGR in 2016-2020 for China outbound and domestic travel, Absolute -6.8 -15.9 17.8 respectively. We believe structural growth in Chinese outbound travel will HANG SENG INDEX -0.6 -4.5 2.1 serve as a long-term driver for Travel Sky. As a leveraged business, we expect Source: Deutsche Bank further expansion of its operating margin and ROE. We forecast 2017/2018 earnings growth at 30.5% /15% YoY. A strong cash cow – we expect cash yield to exceed 7% from 2018 onwards Until 2015, TravelSky demonstrated a strong cash flow generating capability and maintained a net cash position. However, in 2016 and 2017, the company is to record a jump in capex with the construction of its new operation center in Beijing. We forecast that cash flow will normalize in 2018, with a stable cash yield of more than 7%. Valuation and risks Given TravelSky’s cash-generating ability, we value it based on DCF (9.8% WACC and 3% TGR). The shares currently trade at 21.1x/16.2x 2016/17E earnings which we view as attractive given that 1) its average tourism/GDS peers trade at 22x in 2017E, and 2) we project 23% 2016-18 earnings CAGR. Key downside risks: 1) private data leakage; 2) a slowdown in the China tourism industry; 3) threats from other transportation modes; and 4) RMB depreciation.

Forecasts And Ratios Year End Dec 31 2014A 2015A 2016E 2017E 2018E Sales (CNYm) 5,336.4 5,471.8 5,951.2 6,755.1 7,561.6 Reported NPAT (CNYm) 1,652.6 1,914.4 2,348.3 2,508.8 2,888.7 Reported EPS FD(CNY) 0.56 0.65 0.80 0.86 0.99 DB EPS FD(CNY) 0.41 0.53 0.66 0.86 0.99 DB EPS growth (%) – 29.5 22.8 30.5 15.1 Source: Deutsche Bank estimates, company data 1 DB EPS is fully diluted and excludes non-recurring items 2 Multiples and yields calculations use average historical prices for past years and spot prices for current and future years, except P/B which uses the year end close

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Deutsche Bank AG/Hong Kong Distributed on: 07/12/2016 15:59:0014:30:00 GMT Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 057/04/2016.

7 December 2016

Hotels / Leisure / Gaming TravelSky Tech

Model updated:03 December 2016 Fiscal year end 31-Dec 2014 2015 2016E 2017E 2018E

Running the numbers Financial Summary Asia DB EPS (CNY) 0.41 0.53 0.66 0.86 0.99 Reported EPS (CNY) 0.56 0.65 0.80 0.86 0.99 China DPS (CNY) 0.13 0.17 0.32 0.34 0.39 BVPS (CNY) 3.5 4.0 4.7 5.2 5.9 Hotels / Leisure / Gaming Weighted average shares (m) 2,926 2,926 2,926 2,926 2,926 TravelSky Tech Average market cap (CNYm) 16,859 25,345 40,104 40,104 40,104 Enterprise value (CNYm) 12,443 19,887 34,048 33,111 30,875 Reuters: 0696.HK Bloomberg: 696 HK Valuation Metrics P/E (DB) (x) 14.0 16.2 20.9 16.0 13.9 Buy P/E (Reported) (x) 10.2 13.2 17.1 16.0 13.9 Price (7 Dec 16) HKD 15.46 P/BV (x) 1.84 2.52 2.92 2.62 2.34

Target Price HKD 21.00 FCF Yield (%) 4.3 5.3 2.5 4.3 7.7 Dividend Yield (%) 2.3 1.9 2.3 2.5 2.9 52 Week range HKD 10.07 - 18.92 EV/Sales (x) 2.3 3.6 5.7 4.9 4.1 Market Cap (m) HKDm 45,239 EV/EBITDA (x) 7.3 8.8 12.7 9.7 7.8 EV/EBIT (x) 9.9 11.4 15.7 11.7 9.5 USDm 5,833 Income Statement (CNYm) Company Profile Sales revenue 5,336 5,472 5,951 6,755 7,562 Travelsky Technology is an information technology Gross profit 3,011 3,537 3,991 4,541 5,032 solutions provider for China's aviation and tourism EBITDA 1,702 2,251 2,673 3,410 3,967 industry. Key businesses include aviation information Depreciation 231 229 238 323 408 technology service, distribution information technology Amortisation 216 275 265 268 302 service, and clearing and accounting and settlement EBIT 1,255 1,748 2,170 2,819 3,257 service. Net interest income(expense) 133 170 172 202 202 Associates/affiliates 19 23 27 32 38 Exceptionals/extraordinaries 500 410 500 0 0 Other pre-tax income/(expense) -2 -33 -26 -16 0 Profit before tax 1,905 2,317 2,843 3,037 3,497 Price Performance Income tax expense -213 -344 -422 -451 -519 Minorities -39 -59 -73 -78 -89 20 Other post-tax income/(expense) 0 0 0 0 0 Net profit 1,653 1,914 2,348 2,509 2,889 16

DB adjustments (including dilution) -444 -349 -426 0 0 12 DB Net profit 1,209 1,565 1,922 2,509 2,889 8 Cash Flow (CNYm) 4 Dec 14Mar 15Jun 15Sep 15Dec 15Mar 16Jun 16Sep 16 Cash flow from operations 1,878 2,383 2,722 2,989 3,471 Net Capex -1,157 -1,044 -1,738 -1,253 -382 TravelSky Tech Free cash flow 721 1,339 984 1,736 3,089 HANG SENG INDEX (Rebased) Equity raised/(bought back) 0 0 0 0 0 Margin Trends Dividends paid -410 -389 -486 -939 -1,004 Net inc/(dec) in borrowings 7 14 21 28 35 60 Other investing/financing cash flows -665 -702 -6 26 34 50 Net cash flow -347 262 513 851 2,155 Change in working capital -150 85 -29 29 23 40 Balance Sheet (CNYm) 30 Cash and other liquid assets 1,995 2,243 2,735 3,557 5,677 20 Tangible fixed assets 1,988 2,742 3,892 4,522 4,196 14 15 16E 17E 18E Goodwill/intangible assets 436 254 392 477 528 EBITDA Margin EBIT Margin Associates/investments 2,679 3,546 3,725 3,916 4,122

Other assets 5,632 6,087 6,281 6,563 6,853 Growth & Profitability Total assets 12,730 14,871 17,024 19,035 21,376 Interest bearing debt 0 0 0 0 0 15 19 Other liabilities 2,153 2,690 2,907 3,272 3,638 18 Total liabilities 2,153 2,690 2,907 3,272 3,638 10 17 Shareholders' equity 10,319 11,850 13,713 15,282 17,168 Minorities 258 331 403 481 570 16 5 Total shareholders' equity 10,576 12,181 14,116 15,763 17,738 15 Net debt -1,995 -2,243 -2,735 -3,557 -5,677 0 14 14 15 16E 17E 18E Key Company Metrics Sales growth (%) nm 2.5 8.8 13.5 11.9 Sales growth (LHS) ROE (RHS) DB EPS growth (%) na 29.5 22.8 30.5 15.1 Solvency EBITDA Margin (%) 31.9 41.1 44.9 50.5 52.5 EBIT Margin (%) 23.5 31.9 36.5 41.7 43.1 0 Payout ratio (%) 23.6 25.4 40.0 40.0 40.0 -5 ROE (%) 16.0 17.3 18.4 17.3 17.8 -10 Capex/sales (%) 21.7 19.1 29.2 18.6 5.1 -15 Capex/depreciation (x) 2.6 2.1 3.5 2.1 0.5 -20 -25 Net debt/equity (%) -18.9 -18.4 -19.4 -22.6 -32.0 -30 Net interest cover (x) nm nm nm nm nm

-35 Source: Company data, Deutsche Bank estimates 14 15 16E 17E 18E

Net debt/equity (LHS) Net interest cover (RHS)

Tallan Zhou +852 2203 6464 [email protected]

Page 2 Deutsche Bank AG/Hong Kong

7 December 2016 Hotels / Leisure / Gaming TravelSky Tech

Investment thesis

Outlook

We initiate cover of TravelSky with a Buy rating and target price of HKD21. We like TravelSky for three reasons: 1) with a 95.5% share, it is almost a monopoly player, and it has government support; 2) it captures the growth of the tourism sector, especially in outbound travel; and 3) it has a strong and sustainable free cash flow capability.

Extremely high entry barrier: almost a monopoly in electronic air ticket distribution TravelSky dominates China’s electronic ticket distribution market (with the exception of Spring Airline), which is well supported by the government. Its airline shareholders (13 Chinese commercial airlines, including China Southern Air Holding Company, China Eastern Air Holding Company, Air China, and China National Aviation Holding Company) together hold a 39% stake. As a result, TravelSky has solid customer relationships with all major airlines (except Spring Airlines, which distributes tickets though its own system).

Proxy for China tourism volume – leveraging its outbound travel growth story As TravelSky’s business is to process more than 95% of all passenger ticket bookings in China, it captures the industry’s growth as a distribution platform, which is driven by continuous tourism growth, especially in outbound travel. Unlike airline companies, whose earnings are also subject to ASP and cost fluctuations (oil price etc), TravelSky is purely a volume growth story, reflecting the growth of the whole industry. The stock is therefore defensive, with the potential to sustain long-term growth.

A strong cash cow; we expect cash yield to exceed 7% in 2018 Historically, TravelSky has had strong free cash flow and been in a net cash position. Because the company is in the process of building a new operation center in Beijing, capex should surge in 2016 and 2017. However, the new Beijing center will significantly lower the expense ratio of the company’s rental and personnel costs. In addition, we estimate free cash flow will surge in 2018, resulting in a cash yield of more than 7%.

Valuation

TravelSky’s platform and its distribution business nature enable the company to enjoy strong and sustainable free cash flow We therefore believe DCF is the best way to value TravelSky from a long-term perspective. Our DCF-based target price is HKD21, and our key valuation assumptions include a 9.8% WACC and 3% TGR. The shares currently trade at 21.1x/16.2x 2016/17E earnings, which we believe is attractive, given that: 1) its average tourism/GDS peers trade at 22x in 2017E; and 2) we project a 2016-18 earnings CAGR of 23%.

Risks

Key downside risks include: 1) private data leakage; 2) a slowdown in the China tourism industry; 3) threats from other transportation modes; and 4) RMB depreciation.

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Hotels / Leisure / Gaming TravelSky Tech

Best proxy for China tourism

Captures both domestic and outbound travel growth

Tourism growth and TravelSky’s growth are highly correlated Over the past 10 years, TravelSky is a proxy for China’s tourism market, especially in the outbound TravelSky’s growth has been travel segment where flights are the preferred mode of travel. in line with that of China’s domestic and outbound travel While domestic travelers have more travel options (such as high-speed industry. railways/highways), we note increasingly more travelers are choosing flights as their preferred mode of transport. Figure 1: Outbound growth, 2006-15

As shown in the three charts on this page, TravelSky recorded a CAGR of15% 140 CAGR=17.4% between 2000 and 2015, correlating strongly with China’s outbound and 120 domestic tourism growth rates of 13% and 17.4% respectively. 100 80

60 We expect China’s total outbound travelers to hit 191m by 2020 (Figure 6). 40 Excluding HK and Macau, we expect outbound travelers to grow to 119m, 20 implying a CAGR of 17%. - 2006200720082009201020112012201320142015

The best HK-listed stock fit for OUTBOUND travel thesis Source: Deutsche Bank, WIND In Figure 4, we estimate TravelSky captured 96% of Chinese outbound travel market in 2015. Figure 2: Domestic growth, 2006-15

700,000 30%  In 2015, for example, TravelSky distributed 61 million tickets for 600,000 CAGR=13% 25% in 2004-14 500,000 20% international flight from domestic carriers. 400,000 15% 300,000  In 2015, excluding Hong Kong and Macau, the total number of 200,000 10% Chinese outbound travelers reached 53.8 million. Here, we can 100,000 5% - 0%

assume almost 100% outbound travelers used airlines.

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

2015E 2016E 2017E 2018E 2019E  In 2015, the number of Chinese outbound travelers to Hong Domestic tourist number (LHS) Growth (RHS) Kong/Macau reached 66.2 million. However, according to public Hong Kong immigration data, only 15.6% of total travelers ex China to Hong Source: Deutsche Bank estimates, WIND Kong used airlines in 2015. Therefore, if we apply 16% to 66.2 million, we derive a rough estimate that a total of 10 million Chinese travelers Figure 3: TravelSky top-line growth, used airlines to travel to Hong Kong in 2015. 2000-2015

 We estimate the combined total number of Chinese outbound 6,000 CAGR=14.2% travelers that used airline at 63.8 million. Therefore, we conclude that 5,000 2000-2015 TravelSky captured 96% of the Chinese outbound travel market, as 4,000 shown in the table below. 3,000

2,000

1,000

- 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Source: Deutsche Bank, company data

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Figure 4: TravelSky captured more than 95% market share of outbound travelers in 2015 Year of 2015 million (ppl) comments Total Chinese outbound travelers 120 Travelers excluding HK and Macau (assuming 100% took airlines) 53.8 Travelers took airlines to HK and Macau 10 HK immigration disclosed that only 15.6% of arrival passengers took airlines to arrive HK Total outbound travelers used airlines 63.8 TravelSky international electronic ticket distribution 61 TravelSky's distribution market share in outbound travel 95.6% Source: Deutsche Bank estimates

Figure 5: TravelSky – ticket distributed growth in international flights vs. domestic flights, 2006-2015

30.0% 27.9%

25.0% 20.7% 18.2%18.3% 20.0% 17.0% 17.0% 21.9% 14.0% 13.0% 11.8% 15.0% 17.7% 10.8% 17.0% 17.0% 17.0% 15.5% 10.0% 14.1% 10.3%9.7% 9.8% 5.0% 8.6% 9.5% 7.8% 8.2% 8.1% 7.4% 5.6% 6.1% 0.0%

-5.0% -4.9% -10.0% -9.4% -15.0% -Domestic -International

Source: Deutsche Bank estimates, Company data

Figure 6: DB’s forecast of total Chinese outbound travelers by country, 2015-2020E Countries 2015 (million people) 2020E CAGR Upside HK/Macau 66.2 => 73 2% 1.1x Thailand 7.9 => 21 22% 2.7x Korea 6.0 => 16 22% 2.7x Japan 5.0 => 14 23% 2.8x Taiwan 4.2 => 5 2% 1.1x EU 6.2 => 11 13% 1.8x USA 2.6 => 5 16% 2.1x Singapore 2.1 => 5 18% 2.3x Vietnam 1.8 => 4 18% 2.3x Malaysia 1.6 => 4 18% 2.3x Russia 1.3 => 2 12% 1.8x Australia 1.1 => 2 18% 2.3x Others 14.1 => 28 15% 2.0x Total 120.0 => 192 10% 1.6x Total excluding HK/Macau 53.80 => 119 17% 2.2x Source: Deutsche Bank estimates

Deutsche Bank AG/Hong Kong Page 5

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Hotels / Leisure / Gaming TravelSky Tech

Business model

A transaction fee based business model

TravelSky generates revenue from four key segments: Aviation Information Technology (57%), Data Network and others (22%), Accounting Settlement and Clearing (9%), and System Integration (12%). Of the four segments, Aviation Information Technology – essentially its electronic air tickets’ distribution business – is the largest contributor to revenue and profit. In this segment, TravelSky charges flat transaction fees of USD1-4 for each electronic ticket it distributes. As a result, the company’s revenue/earnings largely correlate with electronic ticket booking volume, as shown in Figure 7. We provide a detailed analysis of each segment below.

Figure 7: TravelSky – revenue growth and ticket booking volume growth, 2005-2020E. We project ticket volume to achieve a 9.3% CAGR, FY16-20E

25.0%

20.0%

15.0%

10.0%

5.0%

0.0%

Revenue growth Electric travel distributionbooking volume

Source: Deutsche Bank estimates, company data

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Hotels / Leisure / Gaming TravelSky Tech

Figure 8: TravelSky’s business overview

Source: Deutsche Bank, company data

Aviation information technology services (AIT) – core business

AIT is TravelSky’s core business, accounting for nearly 60% of TravelSky’s total revenue in 2015. The AIT segment is divided into two parts: 1) electronic travel distribution (ETD), which is the ticket booking business; and 2) airport passenger processing (APP), which is located in more than 220 airports and allows self-check-in services for passengers.

Electronic Travel Distribution (ETD) – growth driven by traffic The ETD business is mostly driven by ticket booking volumes, especially bookings from domestic carriers (96% of total carriers in 2016). We believe TravelSky is well positioned to benefit from China’s continuous demand from tourism, especially the high growth of outbound travel.

 Outbound travel growth. 17% CAGR in FY16-FY20E. We believe We believe tourism is a outbound travel growth is the primary driver for air ticket sales and primary driver of TravelSky’s this should correlate with TravelSky’s international booking for its domestic carriers. In our recent Chinese outbound report: Chinese ticket booking business outbound travel: a trip beyond the agency horizon (published: 29 September 2016), we forecast China’s outbound travelers would reach 191 million in 2020, implying a CAGR of 17%. As a result, we have assigned a 17% CAGR for the volume growth of TravelSky’s international ticket booking for its domestic carriers.

 Domestic tourism growth. 8% CAGR in FY16E-20E. China’s domestic We believe domestic carriers tourist volumes have seen a 13% CAGR over the past 10 years and we will contribute most of the believe this growth momentum will continue for the next 10 years, driven by rising disposable income and improving transportation growth in ETD volume in the infrastructure. In our China domestic tourism report: Home is where next five years the growth is (published: 2 July 2016), we projected a domestic tourism CAGR of 10-13% in FY16-20. Since domestic travel transportation can be supported by various methods (such as high- speed railways or highways), we believe growth from airlines should be lower than overall growth. As a result, we have assigned a CAGR of 8% (vs. growth of 10% for FY13-15) for domestic ticket booking for TravelSky’s domestic carriers.

Deutsche Bank AG/Hong Kong Page 7

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Hotels / Leisure / Gaming TravelSky Tech

Combining outbound travel and domestic travel booked on domestic carriers, We assign a 9.3% CAGR to we forecast volume to achieve a CAGR of 9.3% between FY16 and FY20 for domestic carriers, but only the volume contributed from domestic carriers. 4% to international carriers over the next five years International carriers contribute only c.4% of total ETA bookings. As there are other global GDS operators for international carriers, we believe TravelSky’s market is more for domestic carriers than for international carriers. As a result, we only assign a moderate CAGR of 4% for international carriers’ ticket booking volume. We give a detailed breakdown of ETD’s volume forecasts in the figure below.

Figure 9: TravelSky – tickets booked (in millions) at domestic carriers, 2014-2020E ETD ( million ) 2014 2015 2016E 2017E 2018E 2019E 2020E CAGR Total 425 471 519 567 620 674 727 YoY 10.2% 10.8% 10.2% 9.3% 9.2% 8.8% 7.8% a) Domestic carriers 405 449 496 543 595 649 701 YoY 10.7% 10.9% 10.5% 9.5% 9.5% 9.0% 8.0% 9.3% -Domestic routes 353 388 425 460 497 534 566 YoY 9.7% 9.8% 9.5% 8.2% 8.1% 7.4% 6.1% 8.0% -International routes 52 61 72 84 98 115 134 YoY 18.2% 18.3% 17.0% 17.0% 17.0% 17.0% 17.0% 17.0% b) Foreign carriers 19.45 21.58 22.66 23.79 24.50 25.24 26.00 YoY 11.3% 10.9% 5.0% 5.0% 3.0% 3.0% 3.0% 4.0% Source: Deutsche Bank estimates, company data

Pricing power. Based on the flat price trend of the past five years, we forecast We expect ASP to remain relatively flattish growth between FY16 and FY20. However, TravelSky will give flattish over the next five extra discounts to its clients if booking volume growth is significantly higher years than expected. Considering China’s strong demand in both domestic and outbound tourism, we do not expect TravelSky to increase its transaction fees and as a result we forecast flat growth over the next five years.

 Management guided that the ASP of ETD remains flattish in the long term.

 Significantly high booking volumes will generate the awarding of discounts by TravelSky, which may lower ASP.

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Figure 10: TravelSky – ASP forecast, 2010-2020E

7.50

7.00

6.50

6.00

5.50

5.00

4.50

4.00 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E

Source: Deutsche Bank estimates, company data

Figure 11: TravelSky – our revenue forecasts for ETD, 2014-2020E ETD (RMB million) 2014 2015 2016E 2017E 2018E 2019E 2020E ETD revenue 2,736 3,016 3,339 3,657 3,953 4,258 4,551 YoY 10.0% 10.2% 10.7% 9.5% 8.1% 7.7% 6.9% -Domestic carrier 2,274 2,493 2,755 3,016 3,286 3,564 3,830 YoY 9.4% 9.6% 10.5% 9.5% 9.0% 8.5% 7.5% -Overseas carrier 463 523 584 641 666 693 721 YoY 13.3% 13.1% 11.6% 9.7% 4.0% 4.0% 4.0% Source: Deutsche Bank estimates, company data

Airport passenger processing services (APP) We expect the APP business to post a 39% CAGR in the next five years, driven APP segment growth should by continuous new airport openings or airport expansion. TravelSky’s APP be driven by more new service, including a self-service check-in system, has been launched in 127 airports and airport expansion major domestic and overseas airports, and the on-line check-in service is available at 252 airports at home and abroad.

Deutsche Bank AG/Hong Kong Page 9

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Hotels / Leisure / Gaming TravelSky Tech

Figure 12: TravelSky – APP volume growth, 2008-2020E

700.0 100% 90% 600.0 80% 500.0 70% 60% 400.0 50% 300.0 40%

200.0 30% 20% 100.0 10%

0.0 0%

2008 2009 2010 2011 2012 2013 2014 2015

2016E 2017E 2018E 2019E 2020E

APP volume (LHS million) Growth (RHS %)

Source: Deutsche Bank estimates, company data

Over the past 15 years, China’s airports have grown from 139 to the current CAAC expects China’s total 206 as of 2015. China Aviation Administration of China (CAAC) expects the airports to reach 260 in total number of airports to reach 260 in 2020, as shown in figure 15. We number by 2020 believe TravelSky’s SOE background gives it a first mover advantage as a core service provider to the new airports. In Figure 16, we detail our projections for the APP segment. We expect revenue to record a CAGR 39% in FY16-20.

Figure 13: China’s number of airports – forecasts to 2020E

280 10% 260 260

240 5%

220 0% 200

180 -5% 160

140 -10% 120

100 -15%

Number of airport (LHS) Growth (RHS)

Source: WIND, Deutsche Bank estimates

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Figure 14: TravelSky – APP service revenue forecast, 2014-2020E APP service 2014 2015 2016E 2017E 2018E 2019E 2020E APP revenue (RMB million) 118 119 171 240 335 462 618 YoY 24.7% 0.7% 44.2% 40.1% 39.8% 37.8% 33.7% of AIT 4.1% 3.8% 4.9% 6.2% 7.8% 9.8% 12.0% -APP volume 84.1 123.2 177.62 248.85 347.83 479.21 640.59 YoY 36% 46% 44% 40% 40% 38% 34% -APP ASP (RMB) 1.40 0.96 0.96 0.96 0.96 0.96 0.96 YoY -8.2% -31.2% 0.0% 0.0% 0.0% 0.0% 0.0% Source: Deutsche Bank estimates, company data

Data network

Data networks is the company’s second largest revenue contributor and accounted for 22% of TravelSky’s 1H16 total revenue,. The main sources of revenue are distribution information technology services provided to travel agencies, hotels and commercial airlines, airports and cargo shippers. TravelSky’s major clients include:

 OTAs such as CTRIP or Qunar that have their ticket distribution platform portals directly linked to TravelSky. TravelSky normally charges those OTAs based on traffic.

 Air ticket distributors are normally charged based on the number of terminals they receive from TravelSky.

 Other clients include government, corporate hotels etc.

 In 1H16, revenue growth dropped to only 3% yoy mainly due to the policy of increasing direct sales and decreasing agent sales. In addition, TravelSky was making adjustments to its hotel business.

 In the long term, however, we believe this segment’s growth should be in line with overall tourism growth, as the clients are mostly OTAs/ticket agents/hotels etc. Therefore, we have assigned a 11% CAGR for 2015-2020E.

Figure 15: TravelSky – revenue forecast of data network services, 2014-2020E RMB million 2014 2015 2016E 2017E 2018E 2019E 2020E Data network revenue 1,010 1,201 1,273 1,464 1,654 1,836 2,020 YoY 26.8% 18.9% 6.0% 15.0% 13.0% 11.0% 10.0% -Agents 473 542 575 661 747 829 912 YoY 14.5% 6.0% 15.0% 13.0% 11.0% 10.0% -Others 536 659 698 803 907 1,007 1,108 YoY 22.8% 6.0% 15.0% 13.0% 11.0% 10.0% Source: Deutsche Bank estimates, company data

Accounting, settlement and clearing services (ASC)

We expect ASC to contribute 9% of total revenue to TravelSky in 2016. The company provides accounting, settlement and clearing services to aviation companies through Accounting Center of China Aviation Limited Company (ACCA), a whole-owned subsidiary of the company.

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Hotels / Leisure / Gaming TravelSky Tech

 ACCA is the largest provider of outsourced services and system products in revenue settlement and clearing in the air transportation industry in China.

 We expect the 2015-2020 CAGR to be 9%, in line with general ticket booking growth. System integration services

System integration accounts for roughly 8% of TravelSky’s revenue. The key The system integration driver to growth in this segment is the opening of new airports. As new business is operated as a airports open, TravelSky will approach the airport operator to be the sole contracting business, mainly service provider; it then subcontracts the business to other smaller suppliers. related to the opening of new Services provided by TravelSky include airport information systems to airports, airports airlines and other aviation companies, involved in domestic airport information system construction, air freight logistics information platform, etc.

Given that the key driver of revenue in this segment is new airports, its growth profile is more volatile. Revenue from system integration services dropped almost 30% in 1H16.

While 2016 will be tough for TravelSky (we forecast a 29% yoy drop), we believe revenue growth should be modest (5% CAGR over 2017-2020E) given China’s new airport/airport expansion pipeline (details in the appendix)

Page 12 Deutsche Bank AG/Hong Kong

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Hotels / Leisure / Gaming TravelSky Tech

Umetrip – valuable app

Launched in 2012, Umetrip is TravelSky’s self-developed flight check-in mobile platform. It is now the leader in its universe. Travelers use the app to check in, book seats and get flight information updates. Umetrip has yet to be profitable, but we view as a potential catalyst for TravelSky.

Figure 16: Major flight/train check services under APP Chinese Name English Name Active User (m) Using times per month 高铁管家 CRHManager 10 14.6 航班管家 FlightManager 10 9.0 航旅纵横 Umetrip 12 13.7 飞常准 VariFlight 5 21.1 Source: Company data

Figure 17: Umetrip’s product functions

Airport overview/ Next trip Home Travel Statistics page Guess: Delay or not Baggage Allowance The same day user number Airline company

Suggestions Help and Add trip manually Common Questions feedback Travel Statistics Follow Umetrip My flight plan My 2014 My trip Completed trip Route map My account Filter My IDs Share Personal My VIPs Centre CODE Flight lookup Flight History Settings Information Umetrip Subscription Message Input flight info. Seat selection Friends stats Selection record My rank Friends Arrival Flight info. Invite Pick-up Departure Flight info. Share Screen Airport Flight ino. check History Verification Weather, traffic and visibility Mannually Trip verify Pick-up screen Airport Weather report Air Ticket Airport Airport traffic Search Overview Find an Airport

Map Choose an Airport Contact

Source: Deutsche Bank, Company data

Umetrip could be valued at RMB2.6bn Umetrip was launched in 2012 as a platform to provide flight information services. Currently, Umetrip focuses on optimizing the user experience and increasing the number of users. Revenue comes from the sale of the Umetrip pro version (RMB1 at the iOS App Store for users who want to keep track of their trips for more than a year). Over the past few years, there has been almost no profit generated from this app. However, management showed confidence on capitalizing Umetrip this year. We think revenue growth over

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the next year may be driven by newly added flight-related businesses, such as aviation insurance, membership fee and advertising. However, we do not think Umetrip will generate a large amount of revenue/profit compared with TravelSky’s other business.

Using the implied valuation of its closest comparable, FlightManager, we conservatively estimate Umetrip’s valuation at c.RMB2.6bn. This is mainly based on: 1) its competitor’s recent valuation; and 2) the number of active Umetrip users.

 In March 2016, FlightManager (launched in 2011) raised a consideration of RMB933m in its third-round financing, implying a valuation of RMB2.1bn.

 In term of active users, Umetrip has shown strong growth over recent years. FlightManager, Umetrip’s major competitor, announced it had more than 10m active users in early 2016. Despite Umetrip being launched one year later, it has more than 12m active users.

 In terms of promptness of flight information updates, Umetrip has the advantage over FlightManager and VariFlight because of TravelSky’s information support.

Figure 18: Umetrip vs. FlightManager App FlightManager Umetrip Total active user (m) 10 12 Financing (Third-round) RMB 9.33bn NA % of total equity 43% NA Valuation (based on active user) RMB 2.16bn RMB 2.59bn

Source: Deutsche Bank, company data

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Competition not a significant concern

Almost a monopoly in China, supported by the government

TravelSky’s dominant market share in China set to be unchanged While we recognize the risk of increasing foreign competition in the GDS market, we believe TravelSky will continue to enjoy its dominant position in China.

TravelSky has a 95% market share in airline solutions support in China. As per the Civil Aviation Administration policy effective Oct 1, 2012, foreign GDS companies (such as Sabre, Amadeus and Travelport) can provide booking systems and services to foreign airlines’ sales agents in China. As a result, TravelSky is not the only option for foreign airlines in China.

However, TravelSky’s market share remains unchanged due to 1) the dominant cover of domestic airlines and 2) lower pricing compared with foreign GDS companies.

 TravelSky operates AIT business including Inventory Control System (CRS, for seat booking) and Departure Control System (DCS, for boarding process) for all domestic airlines (except Spring Airlines) and airports. TravelSky’s 39% stake is owned by 13 Chinese commercial airlines. The AIT business (57.3% of revenue) is strictly protected from foreign companies.

 Competition is mainly concentrated in the travel distribution business (21.9% of revenue). However, TravelSky has a competitive pricing advantage over foreign GDS companies – TravelSky charged less than USD1 (RMB6.73) per booking for domestic airline carriers and approximately USD4 for international airliners in 1H16. This is 50% lower than the charges of foreign GDS as we show in Figure 24.

Figure 19: TravelSky vs. Sabre Company TravelSky Sabre Founders CAAC; Chinese Airlines American Airlines GDS per booking (USD) 1-4 8-12 GDS coverage 8,000 Travel Agencies 425,000 Travel Agencies Source: Deutsche Bank, company data

In addition, we believe TravelSky’s low penetration rate will enhance its revenue growth potential. TravelSky’s GDS currently covers 8,000 travel agencies, representing c.30% of total travel agencies (c.27,000) in China, as its closest peers Amadeus, Sabre and Travelport cover 90,000, 425,000 and 68,000 travel agencies, respectively.

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Valuation

A stable cash business for the long term

Initiating coverage with Buy, price target HKD21 We initiate coverage of TravelSky with a Buy rating. Our DCF-based target price is HKD21, implying 30% upside potential at current levels. As the only HK-listed stock that is leveraged to the China Outbound Travel theme, we argue that TravelSky should trade at a premium to its regional and global peers. Our FY17 net profit forecast is 11% above Bloomberg consensus (note: TravelSky is not well covered yet, so only a few earnings forecast contributors).

Figure 20: Our estimates vs. market consensus Our estimates Consensus Difference (RMB m) 2016E 2017E 2016E 2017E 2016E 2017E Revenue 5,951 6,755 5,893 6,629 1.0% 1.9% EBITDA 2,673 3,410 2,641 3,176 1.2% 7.4% EBIT 2,170 2,819 2,057 2,381 5.5% 18.4% Net profit 2,348 2,509 2,142 2,246 9.6% 11.7% EPS 0.80 0.86 0.79 0.80 1.6% 7.2% Adjusted EPS (excl 0.66 0.86 0.73 0.77 -10.0% 11.3% government grant) Source: Deutsche Bank estimates, Bloomberg Finance LP

DCF-based valuation

We derive our target price based on a DCF valuation. TravelSky operations are strong and its free cash flow should continue to increase as the company completes building up its new Beijing information center and its capex should drop significantly from 2018. As a result, we believe DCF is the best way to value TravelSky from a long-term perspective. Our key valuation assumptions include:

 WACC of 9.8%.

 Targeting 100% equity for its capital structure. The company is in a net cash position at the moment, with no interest-bearing debt.

 Cost of equity of 9.8%.

 A risk-free rate of 3.9% and a market risk premium of 5.6% (in line with our in-house estimates).

 A beta of 1.05, the same as the average of our China travel companies

 Cost of debt of 4.5% (our in-house estimate).

 Terminal growth of 3%. This is the same as our terminal growth for our China movie and media companies.

 A tax rate of 25% (for terminal growth).

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Figure 21: TravelSky – our DCF model assumptions WACC and terminal growth Risk-free rate 3.9% Equity risk premium 5.6% Beta (three years average from Bloomberg) 1.05 Cost of equity 9.8% Equity % capital structure 100.0% Cost of debt (pre-tax) 6.0% Tax rate 25.0% Cost of debt (post-tax) 4.5% Long-term debt % capital structure 0.0% WACC 9.8% Terminal growth rate 3.0% Source: Deutsche Bank estimates, Bloomberg Finance LP

Figure 22: TravelSky – DCF based valuation RMB million 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E Revenue 6,755 7,562 8,387 9,203 9,848 10,488 11,117 11,728 12,315 12,807 EBIT 2,819 3,257 3,812 4,380 4,687 4,992 5,291 5,582 5,861 6,096 Tax rate 14.8% 14.8% 14.8% 14.8% 14.8% 14.8% 14.8% 14.8% 14.8% 25.0% NOPAT 2,401 2,774 3,246 3,731 3,992 4,251 4,506 4,754 4,992 4,572 D&A 591 710 736 755 591 629 667 704 739 256 Capex (1,253) (382) (382) (382) (295) (210) (222) (235) (246) (256) Change in W/C 29 23 20 11 (20) (21) (22) (23) (25) (26) FCF 1,768 3,125 3,621 4,115 4,267 4,650 4,929 5,200 5,460 4,546 Discounted FCF 1,599 2,574 2,717 2,811 2,656 2,636 2,545 2,445 2,339 1,774 TV 69,066 DCF firm value 51,910 Net cash (debt) 3,557 Equity value 55,467 No of shares 2,926 outstanding (m) Value per share (RMB) 19.0 Value per share (HKD) 20.9 Source: Deutsche Bank estimates

Figure 23: TravelSky – DCF sensitivity WACC 20.9 7.8% 8.3% 8.8% 9.3% 9.8% 10.3% 10.8% 11.3% 11.8%

Termina 1.5% 24 23 21 20 19 18 17 16 15 2.0% 26 24 22 21 19 18 17 16 15

l growth rate growth l 2.5% 27 25 23 21 20 19 18 17 16 3.0% 29 26 24 22 21 19 18 17 16 3.5% 31 28 26 24 22 20 19 18 17 4.0% 34 30 27 25 23 21 20 18 17

4.5% 38 33 29 27 24 22 21 19 18 Source: Deutsche Bank estimates

Target PER is 24x, implying 1x PEG TravelSky currently is trading at 16.2x our 2017E earnings, which is lower than its global peers. Our target price of HKD21 converts to a target PER of 24x, implying that the company’s PEG is trading at 1x given the CAGR of 23% for 2016-2018E, which we believe is still attractive.

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Tourism peers normally trade far above 1x PEG, especially the A-share listed tourism names. Global GDS companies are trading as follows: Sabre is trading at PEG of 1.3x, Amadeus is trading at PEG of 3.2x, and Travelport is trading at PEG of 0.8x, according to Bloomberg consensus estimates.

Figure 24: TravelSky – valuation comparison with China tourism companies and global GDS peers Market cap 2016E 2017E DB Ticker English name Current price (USD m) ROE (%) P/B 2016E PER 2017E PER EV/EBITDA EV/EBITDA Recomm. 696 HK Equity TRAVELSKY TECH-H 15.64 6 18.4 3.0x 21.1x 16.2x 12.9x 9.8x BUY China Tourism 2016 2016 2016 2016 2017 2016 2017 308 HK Equity CHINA TRAVEL HK 2.22 1,577 3.2 0.8x 25.0x 22.7x 6.7x 6.5x Hold 601888 CH Equity CHINA INTERNAT-A 43.69 6,193 15.1 3.4x 24.1x 21.6x 13.2x 11.5x Buy 300144 CH Equity SONGCHENG PERF-A 22.33 4,709 15.3 5.1x 35.2x 27.8x 22.4x 17.7x Buy 600138 CH Equity CHINA CYTS-A 22.55 2,368 11.2 3.2x 35.9x 29.2x 15.5x 14.0x Buy 002033 CH Equity LIJIANG YULONG-A 15.11 927 10.5 2.8x 28.0x 24.5x 12.5x 10.9x Buy 600054 CH Equity HUANGSHAN TOUR-A 16.40 1,781 12.2 3.8x 32.9x 29.0x 16.5x 14.6x Buy 000888 CH Equity EMEI SHAN TOUR-A 13.16 1,007 12.5 3.3x 27.6x 23.7x 14.0x 12.3x Hold 2006 HK Equity SHANGHAI JIN J-H 2.19 1,572 5.6 1.2x 49.0x 25.1x 9.4x 7.9x Buy 600754 CH Equity SHANGHAI JINJI-A 30.28 3,539 6.9 2.1x 36.7x 31.8x 14.0x 11.5x Hold 002707 CH Equity UTOUR GROUP CO-A 18.16 1,476 16.3 8.3x 54.7x 39.6x 19.8x 13.4x Hold 000796 CH Equity HNA-CAISSA TR-A 16.72 1,359 13.7 7.2x 55.8x 33.1x 19.5x 11.5x Buy Average 3.7x 36.8x 28.0x 14.9x 12.0x Global GDS peers 2016 2016 2016 2016 2017 2016 2017 AMS SM Equity AMADEUS IT GROUP 41.82 19,759 31.6 6.8x 20.8x 19.7x 12.2x 11.4x NR SABR US Equity SABRE CORP 25.29 7,158 59.8 8.9x 18.7x 16.3x 9.7x 8.7x Buy TVPT US Equity TRAVELPORT WORLD 13.41 1,654 NM NM 11.1x 9.6x 6.7x 6.1x Buy Average 6.7x 16.9x 15.2x 10.8x 9.7x Average of tourism/GDS 27x 22x

Source: Deutsche Bank estimates for rated companies; Bloomberg Finance LP estimates for non-rated companies

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Financials

Consolidated income statement

Summary We expect TravelSky’s core earnings to expand at yoy growth rates of 30.5% in 2017 and 15.1% in 2018 to hit RMB2,889m from RMB1,922m in 2016, driven by its: 1) high growth from booking volume of domestic carrier; and 2) high growth of travel agents distribution and data service.

Figure 25: Summary RMB m 2014 2015 2016E 2017E 2018E 2019E 2020E Revenue 5,336 5,472 5,951 6,755 7,562 8,387 9,203 SG&A 3,236 2,897 2,938 2,986 3,216 3,440 3,647 EBITDA 1,702 2,251 2,673 3,410 3,967 4,548 5,135 EBIT 1,255 1,748 2,170 2,819 3,257 3,812 4,380 Pre-tax profit 1,905 2,317 2,843 3,037 3,497 4,159 4,756 Net profit 1,653 1,914 2,348 2,509 2,889 3,436 3,929 Core net profit 1,209 1,565 1,922 2,509 2,889 3,436 3,929 EPS (RMB) 0.56 0.65 0.80 0.86 0.99 1.17 1.34 Core EPS (RMB) 0.41 0.53 0.66 0.86 0.99 1.17 1.34 Margins (%) SG&A as % of sales 60.6% 52.9% 49.4% 44.2% 42.5% 41.0% 39.6% EBITDA margin 31.9% 41.1% 44.9% 50.5% 52.5% 54.2% 55.8% EBIT margin 23.5% 31.9% 36.5% 41.7% 43.1% 45.4% 47.6% Net margin 31.0% 35.0% 39.5% 37.1% 38.2% 41.0% 42.7% Core net margin 22.6% 28.6% 32.3% 37.1% 38.2% 41.0% 42.7% YoY (%) Revenue 18.3% 2.5% 8.8% 13.5% 11.9% 10.9% 9.7% SG&A 27.5% -10.5% 1.4% 1.6% 7.7% 7.0% 6.0% EBITDA 5.4% 32.3% 18.7% 27.6% 16.3% 14.7% 12.9% EBIT 1.7% 39.2% 24.1% 29.9% 15.5% 17.0% 14.9% Pre-tax profit 45.1% 21.6% 22.7% 6.8% 15.1% 18.9% 14.4% Net profit 37.1% 15.8% 22.7% 6.8% 15.1% 18.9% 14.4% Core net profit 0.2% 29.5% 22.8% 30.5% 15.1% 18.9% 14.4% Source: Deutsche Bank estimates, company data

Cost assumptions We believe TravelSky’s margins will expand as we expect operating expenses to decline. Staff costs are the main part of operating expenses (34% of total costs in 2015). We expect the growth in staff costs to slow mainly due to the development of the new system. We expect operating expenses to achieve a CAGR of 6.2% between 2015 and 2018, compared to our estimated revenue CAGR of 11.5% during the same period, thus resulting in higher earnings.

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Figure 26: Assumptions RMB m 2014 2015 2016E 2017E 2018E 2018E 2018E Business taxes and levies 21 21 23 26 29 32 35 Percentage to total rev. 0.4% 0.4% 0.4% 0.4% 0.4% 0.4% 0.4% Staff costs 1,173 1,268 1,285 1,259 1,284 1,310 1,336 yoy% 20.2% 8.1% 1.3% -2.0% 2.0% 2.0% 2.0% Percentage to total rev. 22.0% 23.2% 21.6% 18.6% 17.0% 15.6% 14.5% Percentage to total costs 28.9% 34.2% 34.2% 32.2% 30.0% 28.8% 27.9% No. of employee 6,214 6,631 6,399 6,271 6,271 6,271 6,271 Changed % 4.8% 6.7% -3.5% -2.0% 0.0% 0.0% 0.0% Salary per employee 188,732 191,251 200,814 200,814 204,830 208,927 213,105 Changed % 14.7% 1.3% 5.0% 0.0% 2.0% 2.0% 2.0% Revenue per employee (RMB th) 859 825 930 1,077 1,206 1,337 1,468 Network usage 47 65 64 68 76 84 92 Changed % -28.4% 38.7% -0.5% 5.2% 11.9% 10.9% 9.7% Percentage to total rev. 0.9% 1.2% 1.1% 1.0% 1.0% 1.0% 1.0% Percentage to total costs 1.1% 1.7% 1.7% 1.7% 1.8% 1.8% 1.9% Technical support and maintenance 470 432 469 499 551 603 652 Changed % 43.9% -8.2% 8.8% 6.3% 10.4% 9.4% 8.2% Percentage to total rev. 8.8% 7.9% 7.9% 7.4% 7.3% 7.2% 7.1% Percentage to total costs 11.6% 11.7% 12.5% 12.8% 12.9% 13.3% 13.6% Operating lease rental 159 154 154 62 65 68 71 Changed % 7.7% -3.2% 0.0% -60.0% 5.0% 5.0% 5.0% Percentage to total rev. 3.0% 2.8% 2.6% 0.9% 0.9% 0.8% 0.8% Percentage to total costs 3.9% 4.2% 4.1% 1.6% 1.5% 1.5% 1.5% Commission and promotion expenses 574 567 607 676 756 839 920 Changed % 24.5% -1.2% 7.1% 11.3% 11.9% 10.9% 9.7% Percentage to total rev. 10.8% 10.4% 10.2% 10.0% 10.0% 10.0% 10.0% Percentage to total costs 14.1% 15.3% 16.1% 17.3% 17.7% 18.5% 19.2% Costs of software and hardware sold 813 412 358 423 484 536 574 Changed % 45.0% -49.4% -13.0% 18.0% 14.4% 10.8% 7.2% Percentage to total rev. 15.2% 7.5% 6.0% 6.3% 6.4% 6.4% 6.2% Percentage to total costs 20.0% 11.1% 9.5% 10.8% 11.3% 11.8% 12.0% Other costs 377 302 318 333 350 368 386 Changed % 15.4% -19.9% 5.0% 5.0% 5.0% 5.0% 5.0% Percentage to total rev. 7.1% 5.5% 67.7% 66.8% 63.5% 61.0% 59.2% Percentage to total costs 9.3% 8.2% 8.4% 8.5% 8.2% 8.1% 8.1% Costs of software and hardware sold 1,191 714 676 756 834 904 960 + Other costs Finance income, net 131 137 146 186 202 302 322 Interest income 128 129 130 160 160 260 280 Effective interest rate 7.6% 7.5% 6.7% 7.0% 5.2% 6.1% 5.0% Interest expense 5 42 42 42 42 42 42 Effective interest rate Exchange gain (2) (33) (26) (16) 0 0 0 USD vs. RMB (year end) 6.12 6.49 6.80 7.00 7.00 7.00 7.00 Change % 0.36% 6.12% 4.72% 2.94% 0.00% 0.00% 0.00%

Source: Deutsche Bank estimates, company data

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Figure 27: P&L statement RMB m 2014 2015 2016E 2017E 2018E 2019E 2020E Total revenue 5,336 5,472 5,951 6,755 7,562 8,387 9,203 Business taxes and levies 21 21 23 26 29 32 35 Net revenue 5,315 5,451 5,928 6,729 7,533 8,355 9,168 Total operating costs 4,060 3,703 3,759 3,910 4,276 4,544 4,788 Depreciation & amortization 447 504 503 591 710 736 755 Staff costs 1,173 1,268 1,285 1,259 1,284 1,310 1,336 Network usage 47 65 64 68 76 84 92 Technical support and maintenance 470 432 469 499 551 603 652 Operating lease rental 159 154 154 62 65 68 71 Commission and promotion expenses 574 567 607 676 756 839 920 Costs of software and hardware sold 813 412 358 423 484 536 574 Other costs 377 302 318 333 350 368 386 EBITDA 1,702 2,251 2,673 3,410 3,967 4,548 5,135 Operating profit (EBIT) 1,255 1,748 2,170 2,819 3,257 3,812 4,380 Finance income, net 131 137 146 186 202 302 322 Interest income 128 129 130 160 160 260 280 Interest expense 5 42 42 42 42 42 42 Exchange gain (2) (33) (26) (16) 0 0 0 Share of results of associates 19 23 27 32 38 45 54 Government grant and other expenses 500 410 500 Profit before taxation 1,905 2,317 2,843 3,037 3,497 4,159 4,756 Taxation 213 344 422 451 519 617 706 Profit after taxation 1,692 1,974 2,421 2,586 2,978 3,542 4,050 Minority interests 39 59 73 78 89 106 122 Net profit to parents 1,653 1,914 2,348 2,509 2,889 3,436 3,929 Non-recurring gain/(loss) 444 349 426 0 0 0 0 Adjusted net income to parents 1,209 1,565 1,922 2,509 2,889 3,436 3,929

Dividend 389 486 939 1,004 1,155 1,374 1,572 dividend payout ratio 24% 25% 40% 40% 40% 40% 40%

EPS - basic 0.56 0.65 0.80 0.86 0.99 1.17 1.34 Adjusted EPS – basic 0.41 0.53 0.66 0.86 0.99 1.17 1.34 Source: Deutsche Bank estimates, company data

Balance sheet seems strong with abundant cash TravelSky had a cash balance of RMB2.24bn at the end of 2015. The travel business is generally a high cash yield business. The company discloses it will use its cash for 1) capex and 2) future strategic acquisitions.

 Capex is more than RMB1bn for 2014-2017 because of its new operation centre in Beijing. Management disclosed that the centre is still under construction, with part of its buildings already being used. The whole centre is to be completed by the end of 2017 or early 2018.

 OpenJaw tech, an Irish aviation e-commerce company, was acquired by TravelSky in early 2016 for HKD305.6m. As per management disclosure, TravelSky may do M&A in the future according to its business expansion plans.

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 Free cash flow yield looks set to increase significantly in 2018. TravelSky’s cash flow is strong. However, as the company is in the process of building its new operation center in Beijing, we expect capex to be RMB1.7bn and RMB1.2bn in 2016 and 2017. Once the new center starts operations, free cash flow should surge: we are expecting the cash yield to surge to 7.3% in 2018 from 2.3% in 2016E.

Figure 28: TravelSky – cash flow yield forecast, 2016-2020E

12.0%

9.5% 10.0% 8.4%

8.0% 7.3%

6.0% 4.1% 4.0% 2.3%

2.0%

0.0% 2016E 2017E 2018E 2019E 2020E

Free cash flow yield

Source: Deutsche Bank estimates

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Figure 29: Balance sheet RMBm 2014 2015 2016E 2017E 2018E 2019E 2020E Cash and cash equivalents 1,995 2,243 2,735 3,557 5,677 8,217 11,039 Short-term bank deposits 1,263 1,349 1,416 1,487 1,561 1,639 1,721 Short-term investments/held to maturity 1,210 1,690 1,775 1,863 1,956 2,054 2,157 Accounts receivable, net 755 817 889 1,009 1,130 1,253 1,375 Inventories 15 34 37 42 47 52 57 Prepayments and other current assets 468 540 587 666 746 827 908 Due from related parties 2,239 2,492 2,617 2,747 2,885 3,029 3,180 Due from associated companies 28 17 17 17 17 17 17 Income tax receivable 7 0 0 0 0 0 0 Restricted bank deposits 106 170 170 170 170 170 170 Total current assets 8,086 9,351 10,242 11,559 14,189 17,259 20,624 Property, plant and equipment, net 1,988 2,742 3,892 4,522 4,196 3,863 3,525 Lease prepayment for land use right, net 1,861 1,809 1,756 1,703 1,650 1,598 1,545 Intangible assets 432 249 387 472 523 554 572 Goodwill 4 4 4 4 4 4 4 Investment in associated companies 178 198 225 257 295 341 395 Deferred tax assets 41 79 79 79 79 79 79 Other long-term assets 27 309 309 309 309 309 309 Due from an associated company – LT ------Restricted bank deposits – LT 112 130 130 130 130 130 130 Non-current assets 4,644 5,520 6,782 7,476 7,187 6,878 6,559 Total assets 12,730 14,871 17,024 19,035 21,376 24,137 27,183 Short-term loan ------Account payable and accrued liabilities 2,003 2,355 2,561 2,907 3,254 3,609 3,961 Dividend payable ------Due to related parties 93 151 151 151 151 151 151 Tax payable 14 127 138 156 175 194 213 Deferred revenue 20 29 29 29 29 29 29 Total current liabilities 2,130 2,662 2,879 3,244 3,609 3,984 4,354 Deferred income tax liabilities 19 24 24 24 24 24 24 Deferred revenue 4 5 5 5 5 5 5 Total Non-current liabilities 23 28 28 28 28 28 28 Total liabilities 2,153 2,690 2,907 3,272 3,638 4,012 4,382 Share capital 2,926 2,926 2,926 2,926 2,926 2,926 2,926 Reserves 7,392 8,924 10,787 12,356 14,241 16,521 19,076 Shareholders' equity 10,319 11,850 13,713 15,282 17,168 19,448 22,002 Minority 258 331 403 481 570 677 798 Total equity 10,576 12,181 14,116 15,763 17,738 20,124 22,801 Total liabilities and equity 12,730 14,871 17,024 19,035 21,376 24,137 27,183 Source: Deutsche Bank estimates, company data

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Figure 30: Cash flow statement RMBm 2014 2015 2016E 2017E 2018E 2019E 2020E Net profit 1,653 1,914 2,348 2,509 2,889 3,436 3,929 Minority interest 39 59 73 78 89 106 122 Depreciation and amortization 447 504 503 591 710 736 755 Investment income (19) (23) (27) (32) (38) (45) (54) Interest income (131) (137) (146) (186) (202) (302) (322) Working capital change (150) 85 (29) 29 23 20 11 Others 39 (19) 0 0 0 0 0 Net cash used in operating activities 1,878 2,383 2,722 2,989 3,471 3,952 4,441 Capex (1,157) (1,044) (1,738) (1,253) (382) (382) (382) Change of short-term bank deposits (131) (85) (67) (71) (74) (78) (82) Interest income 133 170 172 202 202 302 322 Increase in held-to-maturity financial assets (800) (480) (85) (89) (93) (98) (103) Others 140 (298) 0 0 0 0 0 Net cash used in investing activities (1,814) (1,737) (1,718) (1,211) (348) (256) (245) Dividend paid (410) (389) (486) (939) (1,004) (1,155) (1,374) Others (8) (7) 0 0 0 0 0 Net cash provided by financing activities (418) (396) (486) (939) (1,004) (1,155) (1,374) Exchange gain/(loss) 0 (2) (26) (16) 0 0 0 Net increase (decrease) in cash and cash (354) 250 518 838 2,120 2,540 2,822 equivalents Cash and cash equivalents, beginning of year 2,349 1,995 2,243 2,735 3,557 5,677 8,217 Cash and cash equivalents, end of year 1,995 2,243 2,735 3,557 5,677 8,217 11,039 Free cash flow 721 1,339 984 1,736 3,089 3,570 4,059 Source: Deutsche Bank estimates, company data

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Risks

 Data privacy. Since the company holds many passengers’ private information for buying airline tickets, it is critical for TravelSky to protect the confidentiality of all passengers’ private information against leakage to the public.

 Weak ticket bookings. Air ticket booking volume could be affected by various factors including political instability, declining economic conditions, more restrictive visa policies of destination countries, bad weather, lower- than-expected new airport openings and new aviation companies, etc.

 A slowdown in the tourism industry. Declining economic growth, natural disasters, terrorist attacks, extreme weather and many other external factors could affect the overall tourism industry.

 Slower-than-expected development of civil airports and commercial airlines. The development of airports and aviation companies could be impacted by the policies and regulations from the Chinese government.

 Investments in insurance. The recent investments in insurance could be less profitable than expected and may incur credit insurance charges.

 Delays in completion of the Beijing data center. The new data center in Beijing may be delayed due to factors such as shortage of cash in hand, lower-expected demand and construction issues.

 Lower-than expected government grant. The amounts of government grant may be diminished or cut down by government in future.

 Foreign exchange fluctuation risks. Revenue in other currencies from overseas markets may be at high risk since the RMB could further depreciate against other currencies such as the USD.

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Company background

SOE-based civil information company

TravelSky Technology Limited, was jointly founded in October 2000 by the Civil Aviation Computer Information (CACI) Center and all domestic Chinese airlines, and is a State-owned Enterprise (SOE) administrated by State-owned Assets Supervision and Administration Commission of the State Council. TravelSky was listed in Hong Kong in 2001. Its largest shareholder is TravelSky Holding Company with 29.29% of the company’s shares. 13 Chinese commercial airlines (including China Southern Air Holding Company, China Eastern Air Holding Company, Air China, and China National Aviation Holding Company) together hold a 38.84% stake. The company mainly operates four business segments: aviation information technology services (AIT), accounting, settlement and clearing services (ASC), system integration services and data network.

Figure 31: 2015 revenue breakdown by segment Figure 32: 1H16 revenue breakdown by segment

Data network Data network and others and others Aviation 22% System 22% information System integration Aviation technology integration services information services services 7% technology 57% 12% services Accounting, 62% Accounting, settlement and settlement and clearing clearing services services 9% 9%

Source: Deutsche Bank, company data Source: Deutsche Bank, company data

Figure 33: Shareholder structure of TravelSky

China TravelSky Holding Comany Shareholders of H shares

29.29% 31.87%

China Southern Air China Eastern Air China National Other Airlines Holding Company Holding Company Aviation Holding

11.94% 11.22% 9.17% 6.51%

TravelSky Technology Limited 00696.HK

Source: Company data

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Airport pipeline in China

Airport expansion in China over the next few years

Figure 34: China’s airport expansion plan 省份 机场名称 English Name Year to start operation Investment amount (RMBm)

北京市 首都第二国际机场 Beijing Daxing International 2019 79,980 Airport

河北省 承德机场 Chengde Airport 2016

邢台褡裢机场 Xintai Airport

山西省 晋城机场 Jincheng Airport 朔州安太堡机场 Shuozhou Airport 790 内蒙古自治区 呼和浩特盛乐国际机场 Hohhot-Shengle International 24,239 Airport

东乌珠穆沁旗机场 Dongwuzhumuqin Airport 800

霍林郭勒机场 Huolinguole Airport 427

乌兰察布集宁机场 Wulanchabujining Airport 517 扎兰屯成吉思汗机场 Zhalantun Airport 467

正蓝旗机场 Zhenglanqi Airport

辽宁省 大连金州湾国际机场 Dalian Gulf of Jinzhou 2018 26,300 International Airport

吉林省 白城长安机场 Baicheng ChangAn Airport 2016 480

松原查干湖机场 Songyuan Chaganhu Airport 2016 720

黑龙江省 虎林机场 Hulin Airport 1,000 建三江湿地机场] Jiansanjiang Airport 557 绥芬河机场 Suifenhe Airport 2018 944

五大连池德都机场 Wudalianchidedu Airport 2016 685

江苏省 南京马鞍国际机场 Nanjing MaAn International Airport 浙江省 嘉兴机场 Jiaxing Airport 1,240

丽水机场 Lishui Airport 2,640 安徽省 安庆怀宁机场 Anqing Huaining Airport 1,000

蚌埠机场 Bengbu Airport 亳州机场 Haozhou Airport 1,000 宿州机场 Suzhou Airport 1,000 芜湖宣城机场 Wuhu Xuancheng Airport 2,250

福建省 平潭县机场 Pingtan Airport 莆田机场 Putian Airport 850 泉州大港湾国际机场 Quanzhou Dagangwan International Airport

厦门翔安国际机场 Xiamen XiangAn International 2020 59,740 Airport

江西省 抚州机场 Wuzhou Airport

瑞金机场 Ruijin Airport 1,850 上饶三清山机场 Shangrao Sanqingshan Airport 2016 618

山东省 滨州机场 Binzhou Airport

德州机场 Dezhou Airport

菏泽机场 Heze Airport 1,719

聊城机场 Liaocheng Airport Source: Deutsche Bank, CAAC

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Figure 35: China’s airport expansion plan (Continued)

青岛胶东国际机场 Qingdao Jiaodong Airport 2019 38,175

泰安机场 TaiAn Airport

枣庄机场 Zaozhuang Airport

淄博机场 Zibo Airport

河南省 安阳豫东北机场 Anyang Yudongbei Airport 1,176

登封嵩山机场 Dengfeng Songshan Airport

平顶山尧山机场 Pingdingshan Yaoshan Airport

濮阳翔龙机场 Puyang Xianglong Airport 2020

三门峡机场 Sanmenxia Airport

商丘机场 Shangqiu Airport 454

信阳明港机场 Xinyang Minggang Airport 390

信阳潢川机场 Xinyang Guangshan Airport

周口机场 Zhoukou Airport 湖北省 鄂州机场 Ezhou Airport 2020 20,000 荆州机场 Jinzhou Airport 1,298 湖南省 郴州北湖机场 Chenzhou Beihu Airport 1,827 邵阳邵东机场 Shaoyang Shaodong Airport 2016 280 邵阳武冈机场 Shaoyang Wugang Airport 2016 986

湘西里耶机场 Xiangxi Liye Airport 1,686 岳阳三荷机场 Yueyang Sanhe Airport 2017 1,239

广东省 韶关桂头机场 Shaoguan Guitou Airport 粤西国际机场 Yuexi International Airport

广西壮族自治区 贺州机场 Hezhou Airport 梧州西江机场 Wuzhou Xijiang Airport 玉林机场 Yulin Airport 1,430 海南省 儋州机场 Danzhou Airport 2019 1,500 三亚红塘湾机场 Sanya Hongtanwan Airport 2020 95,220 三沙永兴机场 Sansha Yongxing Airport 2016 三沙永暑机场 Sansha Yongshu Airport 美济机场 Meiji Airport 渚碧机场 Chubi Airport 重庆市 武隆仙女山机场 Wulong Xiannvshan Airport 2017 1,333 巫山神女峰机场 Wushan Nvshenfeng Airport 2017

四川省 成都天府国际机场 Chengdu Tianfu International 2019 71,920 Airport 巴中恩阳机场 Bazhong Enyang Airport 2020 1,520 达州百节机场 Dazhou Baijie Airport 2018 1,687 甘孜格萨尔机场 Ganzigesaer Airport 2018 2,134

乐山机场 Leshan Airport 泸州云龙机场 Luzhou Yunlong Airport 2017 2,727

遂宁安居机场 Suining Anju Airport 1,720

宜宾五粮液机场 Yibin Wulianye Airport 2020 2,359

贵州省 德江黔北机场 Dejiang Qinbei Airport

罗甸机场 Luodian Airport

威宁草海机场 Weining Jihai Airport 1,850

遵义茅台机场 Zunyi Maotai Airport 2017 2,437

云南省 沧源佤山机场 Cangyuan Washan Airport 2016 1,200 Source: Deutsche Bank, CAAC

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Figure 36: China’s airport expansion plan (Continued) 楚雄机场 Chuxiong Airport 1,250

广南机场 Guangnan Airport 哈尼梯田机场 Hani Titian Airport 2,235

红河蒙自机场 Honghe Mengzi Airport 2017 1,575

景东机场 Jingdong Airport

澜沧机场 Lancang Airport 1,137 怒江机场 Nujiang Airport 1,543

丘北机场 Qiubei Airport

宣威机场 Xuanwei Airport 昭通花鹿坪机场 Shaotong Hualuping Airport

西藏自治区 那曲达仁机场 Naqu Daren Airport 1,800

陕西省 安康富强机场 Ankang Fuqiang Airport 2019 1,450

宝鸡机场 Baoji Airport 720 定边机场 Dingbian Airport 2,000 府谷机场 Fugu Airport 1,280 延安南泥湾机场 YanAn Nanniwan Airport 2018 1,697 甘肃省 陇南成州机场 Longnan Chengzhou Airport 2016 1,010 平凉机场 Pingliang Airport

天水中梁机场 Tianshui Zhongliang Airport 青海省 久治年保机场 Jiuzhi Nianbao Airport 祁连机场 Qilian Airport 1,298 青海湖机场 Qinghaihu Airport 1,000

宁夏回族自治区 石嘴山沙湖机场 Shizuishan Shahu Airport 1,000

新疆维吾尔自治区 奎屯机场 Guitun Airport 轮台塔中机场 Luntai Tazhong Airport 440 若羌楼兰机场 Ruoqiang Loulan Airport 2016 520 莎车机场 Shache Airport 2017 塔什库尔干帕米尔机场 Tashikuergan Airport 图木舒克机场 Tumushuke Airport 2017 542 昭苏机场 Shaosu Airport Source: Deutsche Bank, CAAC

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Appendix 1

Important Disclosures

*Other information available upon request

Disclosure checklist Company Ticker Recent price* Disclosure TravelSky Tech 0696.HK 15.46 (HKD) 7 Dec 16 NA Prices are current as of the end of the previous trading session unless otherwise indicated and are sourced from local exchanges via Reuters, Bloomberg and other vendors . Other information is sourced from Deutsche Bank, subject companies, and other sources. For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr. Aside from within this report, important conflict disclosures can also be found at https://gm.db.com/equities under the "Disclosures Lookup" and "Legal" tabs. Investors are strongly encouraged to review this information before investing.

For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/Disclosure.eqsr?ricCode=0696.HK

Analyst Certification The views expressed in this report accurately reflect the personal views of the undersigned lead analyst(s) about the subject issuer and the securities of the issuer. In addition, the undersigned lead analyst(s) has not and will not receive any compensation for providing a specific recommendation or view in this report. Tallan Zhou

Historical recommendations and target price: TravelSky Tech (0696.HK) (as of 12/7/2016)

20.00 Previous Recommendations

18.00 Strong Buy Buy 16.00 Market Perform Underperform 14.00 Not Rated Suspended Rating 12.00 Current Recommendations 10.00 Buy 8.00 Hold Security PriceSecurity Sell 6.00 Not Rated Suspended Rating 4.00 *New Recommendation Structure as of September 9,2002 2.00 **Analyst is no longer at Deutsche 0.00 Bank

Dec 14 Mar 15 Jun 15 Sep 15 Dec 15 Mar 16 Jun 16 Sep 16 Date

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Equity rating key Equity rating dispersion and banking relationships Buy: Based on a current 12- month view of total 500 53 % share-holder return (TSR = percentage change in 450 share price from current price to projected target price 400 350 37 % plus pro-jected dividend yield ) , we recommend that 300 investors buy the stock. 250 200 Sell: Based on a current 12-month view of total share- 150 19 % 10 % 100 18 % 23 % holder return, we recommend that investors sell the 50 stock 0 Buy Hold Sell Hold: We take a neutral view on the stock 12-months out and, based on this time horizon, do not Companies Covered Cos. w/ Banking Relationship recommend either a Buy or Sell. Asia-Pacific Universe Newly issued research recommendations and target

prices supersede previously published research.

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