VIETNAM AIRLINES COMPANY LIMITED November 4, 2014 PRE-IPO NOTE Vietnam Airlines is offering 49 million shares or 3.475% to the Auction time 8:30 AM November 14, 2014 public auction at an initial price of VND22,300 per share on Number of offering shares 49,009,008 to public auction November 14, 2014. Initial price per share VND22,300 We have concerns that the offer price may be too high: Proposed chartered capital VND14.10tn (USD0.66bn) Market capital VND31.45tn (USD1.48bn) Weak 9M2014 results: The company’s management Planned ownership structure estimated 9M2014 net income of parent company at around State-owned 75% VND100 billion (USD4.7 million). This amount is much less than the company’s whole year target of VND341 billion Strategic investors* 20% (USD16.0 million). Employees, Unions 1.525% Aggressive management targets: The 2014-2018 business Public 3.475% plan for parent company is quite optimistic although the *Strategic investor has not yet been identified. company faces many challenges. For the next five years, 2008-13 2014F 2014-18 CAGR (VNDbn) CAGR management targets net income to grow with a CAGR of Parent company 83.8% although earnings were highly volatile and recorded a Revenues 15.8% 59,008 16.7% CAGR of only 0.8% from 2008 to 2013. Net income 0.8% 341 83.8% Management believes the company will achieve these Consolidation aggressive targets by improving its facilities and equipment, Revenues 12.6% n/a n/a investing in modern wide body aircraft to increase its Net income -28.0% n/a n/a market share in the region and improve efficiency. The Vietnam Peers impact to profits is quite uncertain. 2013 Airlines (median) VN-Index Challenging industry: During the past five years, according P/E 730.7 17.0 12.3 to data compiled by Bloomberg, six of ten initial public P/B 3.1 1.0 1.8 offerings by Asian airlines are trading below their sale EV to EBITDAR 5.2 4.5 n/a prices, due to the overcapacity and unprofitability of the Net margin 0.1% 5.2% 0.3% industry. ROE 0.4% 5.2% 2.2% Peer comparison: At its initial auction price, a share of ROA 0.1% 1.6% 0.3% Vietnam Airlines is relatively higher than the regional peers. Company’s description: In addition, investors have to face liquidity risk since the Vietnam Airlines was established in 1995 and is the company has not yet made any plan for listing its shares. national flag carrier. It has the youngest and most modern air fleet among the region. Key advantages include: 1) support from government, The company also invested in low cost carrier – Jetstar 2) largest scale in Vietnam with good reputation, and 3) good Pacific Airlines to compete in low fare market and contributed 49% of capital of Cambodia Angkor Air- aviation supply chain from associates and subsidiaries Cambodian flag carrier. Key risks include: 1) fluctuation of oil price, 2) depreciation of Main business lines comprise air transport, commerce, and ancillary activities. VND, 3) airport service expense hikes, and 4) fiercer Address: 200 Nguyen Son Street, Long Bien District, Hanoi competition from low cost carriers and Middle Eastern airlines. Telephone: +844 3827 2289 Fax: +844 3872 2375 Website: www.vietnamairlines.com Please see important disclosure information at the end of this report. www.VPBS.com.vn Page | 1 CONTENT OVERVIEW OF VIETNAM AIRLINES INDUSTRY .................................................................................................................... 3 OVERVIEW OF THE COMPANY ............................................................................................................................................... 5 Market share .......................................................................................................................................................................... 6 Subsidiaries and associates.................................................................................................................................................. 6 Route network ........................................................................................................................................................................ 7 Fleet structure ........................................................................................................................................................................ 9 BUSINESS PERFORMANCE ................................................................................................................................................... 10 KEY OPERATIONAL DRIVERS ................................................................................................................................................ 14 EQUITIZATION PLAN .............................................................................................................................................................. 15 BUSINESS PLAN AFTER EQUITIZATION .............................................................................................................................. 17 PEER COMPARISON ............................................................................................................................................................... 18 CONCLUSION .......................................................................................................................................................................... 19 Consolidated financial statements .................................................................................................................................... 20 www.VPBS.com.vn Page | 2 OVERVIEW OF VIETNAM AIRLINES INDUSTRY Vietnam has a strategic location in the North-South and East-West route among the region, hence, it has a huge potential in developing airline transportation and air cargo. From 2009 to 2013, the compound annual growth rate (CAGR) of air cargo throughput and passengers was 12.5% and 18.4%, respectively. According to IATA, in 2014, Vietnam should become the world’s third-fastest growing market for international passengers and freight and the second-fastest growing market for domestic passengers. The market share of domestic airline corporations in terms of cargo throughput and passengers in 2013 was 28.6% and 47.0%, respectively. There are four airline corporations: Vietnam Airlines Corporation (Vietnam Airlines), Jetstar Pacific Airlines, Vietnam Air Service Company (VASCO) and Vietjet Aviation Joint Stock Company, of which, Vietnam Airlines – the national flag carrier – is the market leader with the broadest air routes. In terms of cargo terminal, the most active one is Tan Son Nhat Airport with two cargo terminals: Tan Son Nhat Cargo Services (TCS) – a joint venture of Vietnam Airlines, Singapore Airport Terminal Services Ltd. and Southern Airports Services Company Ltd. and Saigon Cargo Service Corporation (SCSC) – joint venture of Gemadept Corporation (GMD – HSX), Southern Airport Corporation, Vietnamese Military and Asia Commercial Bank. In Noi Bai Airport, the terminal is also owned by Vietnam Airlines. According to a survey the World Bank conducted with beneficial cargo owners and logistics services providers, the stated-owned terminals are perceived to be inefficient and costly. Additionally, the lack of skillful air cargo operators and the limitations on private enterprises to operate in the air freight market have made the Vietnamese market less attractive than its peer countries. Vietnam air freight market of cargo throughput Vietnam air freight market of passengers thousand Domestics Foreigners Transists million Domestics Foreigners Transists tons 800 50 141 40 600 122 14 121 126 30 12 12 400 128 409 76 11 9 326 272 279 20 5 7 8 8 7 212 255 200 6 5 21 10 17 18 188 195 201 221 15 12 141 118 12 0 0 2009 2010 2011 2012 2013 1H2014 2009 2010 2011 2012 2013 1H2014 Source: CAAV Source: CAAV Geographic advantages The factors that have contributed to the highest growth rate of Vietnam’s airline industries are as follows: Strategic location: Vietnam has a strategic location in the North-South and East- West route among the region. Long distance between two main cities: Hanoi and HCMC (the two main economic centers of Vietnam) are separated by 1,760km, meanwhile, the less developed road and rail infrastructure have pushed up demand for airlines. www.VPBS.com.vn Page | 3 Geographic advantages: Vietnam has many beautiful places, which encourage tourism and attracts a huge number of international tourists. Cheap labor cost and open investment policy: these are among the factors that attract investment from multinational firms such as Intel, Samsung, Honda, etc. Master plan Akin to the ports planning process, there is a government master plan for the development of the aviation industry. The Decision No. 21/QD-TTg, dated January 8, 2009, approved the master plan for aviation transportation to 2020 with an orientation to 2030 with some of the main points as follows: CAGR air cargo throughput: targets to achieve 16% from 2010 to 2015; 18% from 2015 to 2020 and 14% toward 2030. Airstrips: develop cargo fleets for routes to Europe, Japan, America and China before 2015 and develop Chu Lai Airport as an international goods transshipment port during 2010 to 2020. Airports: invest in five new airports and classify them into three regions: northern region (nine airports), central region (seven airports) and southern region (ten airports). Aviation industry: establish joint venture or 100% foreign investors to invest in manufacturing aircraft components. Investment capital: the investment