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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 ________________________________________________________________________________________________________________ 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.
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