COMPANY RESEARCH REPORT ARE DAILY EXPRESS INDUSTRIAL SECURITIES BUY ＃investSuggestionEng＃ ＃dyCompany＃ ＃investSuggestionChangeEng＃ Spring Airlines Maintained ＃dyStockcode＃ ＃ ＃ ( 601021: SH) TransportindustryId ＃titleEng＃ ir Revenue Breakdown Dec 31, 2014 15H1 Earnings Preannouncement Higher than Expected Total Revenue 732,761.35 Operating Revenue 704,073.81 ＃createTimeEng＃ July 21, 2015 Revenue by Product: 1.Air Transport 694,426.60 ****年**月**日 (98.6%) Company Profile 2.Air Freight 9,647.21 Spring Airlines Co. Ltd. (601021: SH) offers air transportation services. The company (1.4%) provides domestic and international routes for passengers and cargoes. Spring Airlines also offers ticket home delivery and electronic ticket services. Analyst＃emailAuthorEng ＃ Zhang Xiaoyun Event [email protected] Spring Airlines (the company) announced that it plans to offer no more than 38.39 million S0190514070002 shares through private placement at a price no lower than CNY 117.2 per share and raise no more than CNY 4.5 billion. In its recently-released 15H1 earnings forecast, the company stated that it would record Translator CNY 623 million-CNY 677 million in net profit, up 130%-150% YoY. PAN Mengchen [email protected] Comment Funds raised via the private placement will be mainly used on purchase of new LI Xing planes and on development of its Internet airline projects. The company plans to [email protected] raise no more than CNY 4.5 billion via private placement. Specifically, CNY 3.7 billion will be spent on the purchase of 21 A320 planes (The total contacted value is CNY 12.45 billion), while the remaining CNY 800 million will be invested on the development of Internet airline projects (including retrofitting of WIFI systems, upgrade of information management systems, and construction of the E-commerce platform). The purchase of the 21 A320 planes is part of Spring Airline’s plan to buy a total of 61 new planes between 2014 and 2018. The launch of the private placement program will greatly improve the company’s financial conditions by bringing down its leverage. Fleet commonality constitutes Spring Airlines’ greatest strengths. The company will be quickly expanding its fleet size. Like most low-cost carriers (LCCs), Spring Airlines strives to keep its cost low by operating fleet consisting of a single aircraft model. The company’s financing capability has been greatly strengthened after becoming listed. Given such, we expect the company to substantially increase its purchase of new aircrafts (At the end of 2014, only twelve of the 46 planes in operation are owned by the company.). Its fleet size will be expanding quickly. In 15H1, Spring Airlines enjoy rapid increase in transportation capacity, with the ASK increasing by 21.54% to 11.3 billion seat kilometers. Particularly, the ASK for international airlines reached 2.69 billion seat kilometers, remarkably up 168.38% YoY. We expect the company to operate 60 aircrafts in 2015 and 100 aircrafts in 2018. The transportation capacity will be growing at 20-25% on a yearly basis in the next few years. Before 1 Research Report Distributed by SinoPac Securities (Europe) Ltd. Prepared by Industrial Securities Co., Ltd Notice: The attached research report and the comments below were written entirely by our China broker partner Industrial Securities Co., Ltd. SinoPac Securities is the distributor. Company Research Report INDUSTRIAL SECURITIES having a fleet consisting of 200 planes, Spring Airlines will be able to maintain its profit margin at relatively high levels given the persistently high passenger load factor and daily usage rate. In light of this, earnings growth of Spring Airlines is closely linked to the aircraft buying process. In the future, the transportation capacity will be mainly allocated to the flights scheduled for the more profitable North-East-Asia market (Japan, South Korea and Taiwan), flights departing from first-tier cities like Shanghai and Shenzhen, as well as flights departing from the some second-tier cities like Zhengzhou, Chongqing and Jinjiang. The Internet airline projects are progressing steadily. The proportion of supplementary revenue to the total will be further raised. The proportion of supplementary revenue is expected to see further rise. The conceptual phase of Internet airline projects has passed. Through facilitation of online direct sales and construction of in-flight WiFi access, budget airlines such as Spring Airline will be able to develop inflight Internet ecosystems that could generate substantial supplementary revenue. Spring Airlines develops its client base by selling low-price air tickets. In order to improve its gross margin, the company needs to provide more value-added services to its clients for higher supplementary revenue. In addition to onboard products sales, overweight luggage transportation, check-in express and insurance agent services, Spring Airlines looks to further expand its service portfolio. The E-commerce business unit Spring Airline established in 2014 has been focusing on meeting clients’ additional needs through integration of the airline travel ecosystem. In 15H1, Spring Airline has taken multiple measures to increase its supplementary revenue, such as selling travel packages including both air tickets and insurances to Economy Class travelers, developing in-flight e-commerce by setting up WiFi connections, and partnering with Tencent on Internet businesses. There is much room for Spring Airlines to improve its supplementary revenue going forward. In 2014, Spring Airlines received supplementary revenue that accounts for 5.66% of total revenue. (The figure for Ryan Airline and Asian Airline were 22% and 39% respectively.) Between 2012 and 2014, Spring Airlines’ revenue from direct ticket sales accounts for 81.62% of the total on average. In the past decade, Spring Airlines has seen its online registered members to break 12 million and the direct sales customer resource to exceed 22 million person-hours. We believe that both the high direct ticket sales and the extensive client base will turn into the company’s profits in the future. Benefitting from improving industry supply and demand, international oil price drops and explosive growth of international airlines, Spring Airlines registered remarkable earnings growth in 15H1. The RPK saw rapid growth in 15H1, reaching 10.64 billion passenger kilometers, up 22.92% YoY; the passenger load factor (PLF) reached 93.75%, up 1.06 percentage points YoY. In 15H1, Spring Airlines saw the number of its international travelers surge by 193.41% YoY to 1.09 million; the RPK of international flights increased 189.62% YoY to 2.43 billion passenger kilometers, while the PLF rose 6.64 percentage points to 90.57%. Benefitting from improving industry supply and demand, international oil price drops and explosive growth of international airlines, Spring Airlines registered remarkable earnings growth in 15H1. We forecast that the net profits attributable to shareholders in 15H1 would reach CNY 623 million - CNY 677 million, up 130% - 150% YoY. Looking ahead, we expect the deepening of the ‘Going Global’ strategy and further reduction on the number of crew members per flight 2 Company Research Report INDUSTRIAL SECURITIES will pave foundation for further gross margin increases. We think that the coming of the busy season (the summer vacation) in 15Q3 and the opening of Shanghai Disney Resort next year will provide strong boosts to the company’s growth. Spring Airlines enjoys strong first-mover advantage in the budget airline industry, with potent prospects to become the domestic market leader. A study of overseas experience tells us that in a relatively mature airline market there will be only one dominant LLC operator. With accurate market positioning, strong management and effective cost control, Spring Airlines presents potent prospects to become a domestically-leading LCC operator. Riding on the tailwind of the LCC boom, Spring Airlines enjoys potent prospects to become a domestically-leading LCC operator. At 2014 end, Spring Airlines operated a fleet of 46 planes, and its net profit reached CNY 880 million. Compared with its overseas budget counterparts (Southwest Airline: 680 planes in operation/profit of CNY 6.8 billion; Ryan Air: 305 planes in operation/profit of CNY 4.2 billion), the company still has large potential to grow. In China, travelling by air is becoming increasingly popular among the public. In February 2014, the Civil Aviation Administration of China released a guideline to promote the development of budget airlines. These indicate that the budget airline industry is embracing a golden era for development. In China, budget airlines only account for 8% of the total market, while the global average is 27% (31% in North America, 38% in Europe, and 26% in Asia). This suggests that the budget airline market in China has great potential to grow. As one of the very few players in the domestic budget airline industry, Spring Airlines is expected to draw significant benefits from the budget airline boom. Earnings Forecast and Investment Recommendations: As the only listed budget airline company on the A-share market, Spring Airlines is quickly expanding its fleet, with the aim of operating 60 planes in 2015 and 100 planes in 2018. In view of the fast-rising demand for private travels by air, we show strong optimism towards the growth prospects of China’s budget airline industry. With terminals at both Shanghai Pudong International Airport and Shanghai Hongqiao