SSI – RESEARCH INSTITUTIONAL RESEARCH & INVESTMENT ADVISORY SSI.COM.VN Visit SSI Research on Bloomberg at SSIV <GO> Page 1 Kim Nguyen [email protected]+84 8 3824 2897 ext. 2140 10 May 2017 INDUSTRIALS – VIETNAM Key figures Market cap (USD mn) 1,826 Market cap (VND bn) 41,459 Outstanding shares (mn) 322.4 52W high/low (VND 1,000) 138.0/108.0 Average 2M volume (share) 366,320 Average 2M value (USD mn) 2.06 Average 2M value (VND bn) 46.68 Foreign ownership (%) 26.12 State ownership (%) 0 Management ownership (%) N.A. Stock performance Source: Bloomberg Company Snapshot VJC is a privately-owned Low Cost Carrier (LCC) airline in Vietnam. It was established on 23rd July 2007, and commenced the first commercial flight on 24th December 2011 with the Ho Chi Minh City - Hanoi route. Total passengers served by VJC reached 14.05 mn pax in 2016 after 4 years of operation. As of 31 Dec 2016, VJC operates a fleet of 41 aircraft, in which 19 aircraft are funded by SLB and 1 aircraft is owned by the company via financial lease. Other aircraft include 15 dry leases and 6 wet leases. VJC achieved a domestic market share of 40.8% as of 31 Dec 2016, an increase from 37.1% as of 31 Dec 2015, according to a report by the Civil Aviation Authority of Vietnam (CAAV) INITIATION REPORT Cost advantage enables competitive pricing Investment case: Thanks to a low fuel input cost, along with declines in other operation costs, VJC has been offering very competitive pricing to passengers in order to tap into Vietnam‟s underserved low cost airline market in recent years. Nevertheless, in line with the global airline industry outlook, VJC‟s core earnings growth appeared to peak in 2016, with previous record high growth rates being challenging to replicate. The peak stemmed from such advantages as a low fuel cost environment, declining ex-fuel Cost Available Seat Kilometers (ex-fuel CASKs), and high passenger volume growing from a low base. Catalysts: Domestic market will rise in 2017-2019 and then experience a slowdown. VJC‟s positive passenger growth mainly comes from seizing market share from its competitors and passengers from other traditional transportation methods. However, the domestic market may gradually saturate in the next 2-3 years when total capacity increases along with expected new players such as Vietstar Airlines and AirAsia, which will push VJC to expand internationally in a more aggressive fashion. Strong capacity expansion in international routes. From 2017, VJC will aggressively open new international routes within a radius of 2,500 nautical miles, with average flight duration of roughly 5-6 hours to destinations such as Korea and Japan. Its strategic markets will be ASEAN and Northeast Asia including Taiwan, Hong Kong, Mainland China, Korea, and Japan. Passenger yields may continue to remain low in order to gain market share. We expect VJC‟s international yield to remain low in 2017 as the initial phase of its aggressive expansion begins. To counteract such low yield figures, VJC aims to aggressively expand to longer international flights, along with targeting a higher income class. Yields are expected to slightly improve from 2018 onwards, corresponding with increasing fuel prices and a stable flight route network. A fuel cost uptrend is the largest risk, but hedging might partly render the risk subdued. Amid the expected pick-up of jet fuel prices in 2017, VJC plans to hedge 30%-35% of the total fuel cost. At the same time, the company will receive a delivery of the A320 NEO aircraft model, the most fuel efficient model in its holdings, which will partly reduce the impact of a fuel price surge. Valuation: Combining the DCF method and the 1 year target P/E of 13x, and adjusted EV/EBITDAR of 7x (premium compared with industry average, attributable to VJC‟s duopoly positioning in the Vietnamese LCC segment and high growth in the initial phase of operation), we arrive at a 1 year target for VJC of VND 140,400/ share (+8%). We recommend to HOLD the stock. Risks: (1) fuel price uptrend; (2) increase in domestic airport fees; (3) overcapacity due to significant capacity expansion; (4) volatility of sales and lease back earnings (5) Financial risk and FX risk HOLD - 1Y Target Price: VND 140,400 Current price: VND 130,500 VietJet Aviation Joint Stock Company (VJC: HOSE)
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SSI – RESEARCH INSTITUTIONAL RESEARCH & INVESTMENT ADVISORY
SSI.COM.VN Visit SSI Research on Bloomberg at SSIV <GO>
SSI – RESEARCH INSTITUTIONAL RESEARCH & INVESTMENT ADVISORY
SSI.COM.VN Visit SSI Research on Bloomberg at SSIV <GO>
Page 2
Table of Contents
1. BACKGROUND INFORMATION ON VJC .............................................................................................................................................. 3
1.1. Company profile........................................................................................................................................................... 3
1.3. Sales and lease back business model adoption ....................................................................................................... 4
1.4. Company structure ...................................................................................................................................................... 4
1.5. Charter capital increase ............................................................................................................................................... 5
2.1. Financial: impressive growths and margins ............................................................................................................. 8
2.2. Operation: Strong cost-focus advantage but low yields ....................................................................................... 11
3. INDUSTRY OVERVIEW ........................................................................................................................................................................ 13
3.1. Global Airlines Industry ............................................................................................................................................ 13
3.2. Vietnam Aviation Industry ........................................................................................................................................ 15
3.3. VJC’s growth Outlook ............................................................................................................................................... 18
CONTACT INFORMATION .......................................................................................................................................................................... 27
SSI – RESEARCH INSTITUTIONAL RESEARCH & INVESTMENT ADVISORY
SSI.COM.VN Visit SSI Research on Bloomberg at SSIV <GO>
Page 3
1. BACKGROUND INFORMATION ON VJC
1.1. Company profile
VJC is one of two low cost carriers (LCCs) and the only private-owned carrier in Vietnam. The
company was established on 23rd July 2007, and commenced the first commercial flight on 24th
December 2011 with the Ho Chi Minh City - Hanoi route. Total passengers served by VJC
reached 14.05 mn pax in 2016 after 4 years of operation, representing a CAGR of 64.51% since
2013.
As of 31 Dec 2016, VJC operates a fleet of 41 aircraft, in which 19 aircraft are funded by SLB
and 1 aircraft is owned by the company via financial lease. Other aircraft include 15 dry leases
and 6 wet leases. The airline owns an intensive network, with 37 domestic routes and 23
international routes.
VJC achieved a domestic market share of 40.8% in 2016, an increase from 37.1% in 2015, with
the metric based on total passengers boarding domestically via Vietnam-based airlines,
according to Civil Aviation Authority of Vietnam (CAAV)‟s report.
1.2. VJC’s milestones
2007: Founded as Vietnam‟s first privately-owned airline
2011: Commenced the first commercial flight from HCMC to Hanoi on Christmas Day 2011
2012: Fleet grew to 5 aircraft operating across 10 domestic routes
2013: Launched first international flight from HCMC to Bangkok, Thailand
2014: Opened new operating hub in Danang City and signed a purchasing contract for 100
aircraft from Airbus, bringing a total of 19 aircraft in VJC's fleet, with the rest to be delivered at a
later date. Passenger volume accounted for a 29.6% share of domestic air transportation.
2016: Signed a purchase contract with Boeing for 100 B737 MAX 200 aircraft in May 2016, and
another contract with Airbus for 20 A320 CEO and NEO aircraft in September 2016. VJC
officially became an IATA member in August 2016
2017: Listing on HOSE on 28th Feb 2017, officially became the International Air Transport
Association (IATA) full member on 18th Feb 2017
SSI – RESEARCH INSTITUTIONAL RESEARCH & INVESTMENT ADVISORY
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Page 4
1.3. Sales and lease back business model adoption
VJC pursues the sale and leaseback model, which is rather popular among global LCCs such
as Indigo, Virgin Australia, Lion Air, SpiceJet, and Norwegian. It purchases new aircraft in large
orders at steep discounts in order to sell the units to leasing companies at more favorable prices
and then in turn leases those aircraft back. Leasing fees and term commitments are fixed over
the leasing period of 6-12 years and non-cancellable. Gains recognized from these transactions
accounted for 40-60% of VJC‟s PBT in 2015 and 2016. In the coming year, the gains will be
dependent upon a timely aircraft delivery schedule. VJC‟s reputable lessors or lease managers
include GE Capital Aviation Services, AWAS Aviation Capital, CIT Aerospace International,
VJC‟s GPM expanded substantially from 7.4% in 2013 to 14.2% in 2016 mainly thanks to (1)
the increase in GPM of aircraft sales of SLB (increased from 3% in 2014 to 13% in 2016), (2)
low fuel price in 2015 and 2016. Accordingly, VJC‟s fuel CASK declined to 3.9 U.S cents in
2016 (vs. 4.14 U.S. cents in 2015) from 5.3 U.S. cents in 2013.
Fuel 22%
Cost of aircraft SLB
43%
Employee 7%
Depretiation and
amortisation 3%
Outsourcing 25%
Others 0%
0%
2%
4%
6%
8%
10%
12%
14%
16%
FY13 FY14 FY15 FY16
GPM GPM ex. SLB
PBT margin EBITDA margin
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Average Jet fuel and VJC’s GPM ex. SLB from 2013-2016
Source: VJC, IATA
If we were to exclude profit from SLB, VJC‟s GPM would achieve 14.9% in 2016, significantly
expanding from 7.4% in 2013. VJC‟s fuel cost accounts for 22% of COGS (excluding SLB‟s
aircraft cost, fuel should have contributed 39% of COGS in 2016). The global oil price staged a
decline from its yearly peak of roughly USD 112 per barrel in 2012, and began trending
downwards from 2013-2016 at a CAGR of -26% Consequently, jet fuel costs also fell from its
highest level of USD 124.5/barrel in 2012 to USD 52.1/barrel (~ CAGR of -25%) in 2016. The
low oil price in recent years has encouraged LLCs like VJC to reduce air fares and encourage
air travel. Given that the Vietnamese market is highly price sensitive with limited premium
demand, the low oil price environment provides an opportunity for VJC to lower fares and
increase market share.
In line with sales growth and cost reductions, VJC‟s PBT and EBITDA margins improved to
9.8% and 10.7% in 2016 vs 0.04% and 0.5% in 2013. VJC manages to continually maintain a
passenger load at 88% (domestic routes: 89%; international routes: 84%) in recent years. High
passenger loads enable the company to maintain a healthy RASK/CASK spread, which
improved to 0.46 US cents in 2016 from 0.09 U.S cents in 2013 (but slightly declined compared
with 0.59 U.S cents in 2015).
124.5
114.8
66.7
52.1
7.4%
11.9%
14.4% 13.7%
0%
2%
4%
6%
8%
10%
12%
14%
16%
0
20
40
60
80
100
120
140
2013 2014 2015 2016
Jet fuel price (USD/barrel) GPM ex. SLB
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SSI.COM.VN Visit SSI Research on Bloomberg at SSIV <GO>
Page 11
2.2. Operation: Strong cost-focus advantage but low yields
VJC’s historical operation data
Operating data FY13 FY14 FY15 FY16
ASK1s (m) 3,341 6,019 11,055 16,498
YoY 80% 84% 49%
RPK2s (m) 2,945 5,322 9,690 14,451
YoY 81% 82% 49%
Passenger load factor (%) 88.2 88.6 88.1 88.2
CASK3s (U.S. cents) 5.30 5.04 4.14 3.9
YoY -5% -18% -5.8%
Ex-fuel CASK 2.57 2.48 2.42 2.43
YoY -3.5% -2.4% 0.4%
Yield4 (U.S. cents) 5.1 5.1 3.9 3.6
YoY - -23.5% -7.7%
Source: VJC
Stringent cost and expense management are crucial to keep fares low: VJC possesses an
absolute competitive advantage over other Vietnamese carriers thanks to a very low CASK ex-
fuel. Total CASK declined steadily with a CAGR of -10% from 2013-2016. The improvement in
cost efficiency was mainly thanks to (1) a declining jet fuel cost over the past 3 years, declining
from an average of USD 125/barrel in 2013 to USD 44/barrel in 2016. Fuel cost accounts for
the largest proportion of VJC‟s total CASK, with 50% in 2013 and decreasing to 38% in 2016 as
a result of declining oil prices. (2) Economies of scale thanks to fast expansion of fleet and a
stringent cost saving system, keeping CASK ex-fuel low. As a result, these and a stringent cost
control system enable VJC to maintain its competitive pricing. In comparison with other LCCs in
the world, VJC was among the lowest of global LCCs with CASK ex-fuel of 2.43 U.S. cents in
2016, similar to Cebu Pacific, Thai AirAsia, Indigo and Jet Blue, but still higher than Air Asia
group.
VJC‟s successful cost saving system is made possible by the following factors:
Operating within the A320 aircraft model guarantees predictable cost budgeting. VJC
owns 30 182-seat A320 models and 11 230-seat A321 models as of the end of 2016. The
single aircraft model of A320 family simplifies cost budgeting such as simplifying
maintenance and reducing spare parts inventory requirements. Gradually, VJC targets to
increase number of 230-seat A321 models (56 aircraft by the end of 2019), as this aircraft
has more seats than the A320 model, and thus helps to reduce CASK further.
A low average fleet age helps minimize maintenance costs. As of 2016, VJC‟s fleet age
is quite low at 3.03, aiding in lower input costs and providing for an overall better customer
experience. It also aids in fuel cost savings, keeping maintenance expenses low. Similar to
Air Asia and some other LCCs, VJC employs a “maintenance-by-the–hour” program for
engine maintenance, in which the airline pays a fixed hourly rate to the contractor based on
the number of flight hours of each aircraft. Newer aircraft render lower maintenance
expenses, as less overall flight hours are required less rates of maintenance. Such
1 ASK: Available Seat Kilometers, which is the total number of seats available on scheduled flights multiplied by the
number of kilometers those seats were flown 2 RPK: Revenue Passenger Kilometers, which is the total number of paying passengers carried on scheduled flights
multiplied by the number of kilometers those passengers were flown 3 CASK: Total Cost per ASK (excluding costs of aircraft sales)
4 Yield: Revenue from passenger transportation per RPK (excluding revenue from chartered flights)
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Page 12
maintenance includes daily maintenance, A-checks (every 600 hours of operation), B-
Checks (every 160-180 flight hours), C-Checks (every 6,000 flight hours), and heavy
maintenance D-checks (every 6 years). In addition, this program will also enable budgeting
to be more predictable and simplified. Therefore, VJC keeps retiring old aircraft with more
than 6 year leasing term contracts (including dry leased and wet leased aircraft) and
replacing with new ones in order to maintain a relatively low average fleet age.
Increased block hours drives CASK to decline as aircraft is well utilized. VJC‟s
average aircraft utilization rate improved on a yearly basis, from 11.9, 12.4, and 13.3 block
hours per day in 2013, 2014 and 2015 respectively. 2016 maintained 13.1 block hours of
last year. The airline targets to maintain high block hours per day in the near future by
increasing the frequency of night flights for domestic routes as well as number of
international flights. VJC‟s block hours per day is the highest among global LCCs (vs. block
hours per day of Air Asia: 12.4, Indigo: 11.4, Easy Jet: 11.1, Ryan Air: 9). Hence, it helps
the company to maintain a competitive CASK amid aggressive capacity expansion.
Low sales and marketing costs via the internet and mobile application bookings. VJC
focuses on developing their internet distribution channel through their website and mobile
platform. 23% of ticket sales were conducted through website and the mobile application in
2016. It helped VJC significantly reduce distribution costs in comparison with traditional
channels such as booking agencies, booking offices and others. However, all of these
agencies and booking offices ultimately direct customer orders to either the website or the
mobile application to book ticket. Therefore, to eliminate redundancy, VJC distributes their
tickets via online channel more than 90% of the time. Every year, the sales expense per
ASK was 0.13 U.S. cents- 0.14 U.S. cents, or 4% of the total CASK, which is quite low.
Low yield: Due to competitive pricing and short distance flights, VJC‟s passenger yields
have been declining from 2013 to 2016, achieving 51 U.S. cents in 2013 and decreasing to
35 U.S. cents in 2016 (equivalent to -12% CAGR). Declining in yield was mainly driven by
aggressive promotion, stimulated by a sustained low fuel price in 2015 and 2016, as well as
expanded capacity. Other drivers include VJC's focus on the domestic market,
concentrating on lower-yield but higher frequency short distance flights.