asean airlines 2016 final - dbs bank...industry focus asean airlines page 2 factors in sync for...

www.dbsvickers.com ed: TH / sa: JC

On cloud nine

Exceptional earnings year for ASEAN carriers from trifecta of cheap fuel, better supply-demand dynamics and more stable currencies

Capacity discipline to keep competition healthy but not over-intense, as spotlight swings to burgeoning inbound tourists from China

Valuations to re-rate from strong ROEs with upside potential, top picks are: Asia Aviation, Bankok Airways, Singapore Airlines; initiate Cebu Air with a BUY recommendation

Part 3 of 3 of “The Great Tourism Drive”

Second wind to lift earnings higher. After seeing a year of general earnings recovery in 2015, the trifecta of 1) cheaper jet fuel prices, 2) stabilisation of supply and demand factors, and to a lesser extent, 3) more stable currencies mean that ASEAN airline earnings are due to enter a phase of exceptional profitability in 2016.

While Brent has moved up to around US$50/bbl, it is still within our expectations and we do not expect the price to increase beyond US$60/bbl any time soon. Furthermore, the hedging of jet fuel at lower prices should also help smoothen out costs if fuel prices unexpectedly jump. Healthy load factors and yields should help offset slightly higher fuel costs into 2017. A phase of healthy competition with China traffic up for grabs. While a flourishing operating environment typically comes with the risk of rising competitive forces, ASEAN airlines are set in a sweet spot – as the profitability challenges of previous years have tempered the capacity growth of major players. 2016-2017 should see a period of benign aircraft additions, which should sustain earnings outlook. The focus on attracting China outbound tourists by ASEAN government should also prove rewarding for airlines in the medium term. We also examine the introduction of the Value Alliance - which bodes well for longer-term LCC connectivity but looks unlikely to rock the boat for now. Look for re-rating on rising ROAEs. As earnings growth continues, we favour airlines that not only post record profitability, but have the potential for tourism-led earnings upside like AAV and BA; while SIA is set to benefit from its portfolio strategy (of airlines), backed by a net cash position, which is unique among airline peers.

JCI: 4,876.79 KLCI: 1,650.51 PCOMP: 7,536.65 STI: 2,843.80 SET: 1,435.65

Analysts Marvin KHOR +60 32604 3911 [email protected] Paul YONG CFA +65 6682 3712 [email protected] Singapore Research Team ASEAN Airline stocks at a glance

Price Mkt Target Upside / 9 Jun 16 Cap Price (Downside)

Company LCY US$m LCY Rating % Asia Aviation 5.90 814 7.15 BUY 21 AirAsia X Bhd 0.38 390 0.39 HOLD 3% Air Asia Bhd 2.53 1,740 2.70 BUY 7 Bangkok Airways 24.30 1,452 28.30 BUY 16 Cebu Air 102.10 1,344 118.00 BUY 16 Garuda Indonesia 480.00 935 520.00 BUY 8 Singapore Airlines 10.60 9,119 12.50 BUY 18 Thai Airways 16.90 1,050 16.80 HOLD (1)

Source: DBS Bank, DBS Vickers, AllianceDBS

DBS Group Research . Equity 10 Jun 2016

Regional Industry Focus

ASEAN Airlines

Industry Focus

ASEAN Airlines

Factors in sync for strong earnings year Trifecta of positive drivers. Major ASEAN airlines under our coverage are set to see the continuation of the earnings up-cycle that began in 2015; as 1) jet fuel prices remain low, 2) improved supply-demand dynamics, and 3) more stable currencies push well-positioned airlines into record profits and the last of the stragglers back into the black. The effect is already observable from the series of record 1QCY16 numbers achieved by the airlines under our coverage. Regional Airlines EBIT (2014 to 2017F)

EBIT 2014A 2015A 2016F 2017F

AAV (THB m) 517 2,771 4,365 5,376

AAX (RM m) (298) (118) 295 327

AIRA (RM m) 826 1,583 1,364 1,314

BA (THB m) 496 1,412 3,150 3,725

CEB (PHP m) 1,843 6,769 8,452 8,893

GIAA (US$ m) (359) 83 124 152

SIA (S$ m)* 372 614 887 1,059

THAI (THB m) (17,329) (700) 10,283 10,770

Source: Company, DBS Bank * FYE Mar ’15, '16, '17, '18 respectively Regional Airlines core profit (1QCY16 and prior)

Core profit 1QCY15 4QCY15 1QCY16 y-o-y

AAV (THB m) 601 227 1,010 +68%

AAX (RM m) (32) 2 96 turnaround

AIRA (RM m) 66 79 521 +687%

BA (THB m) 1,070 57 1,553 +45%

CEB (PHP m) 2,044 1,408 3,369 +65%

GIAA (US$ m) (8) 11 9 turnaround

SIA (S$ m)* 51 275 225 +339%

THAI (THB m) 4,387 (1,576) 6,004 +37%

Source: Company, DBS Bank * FYE Mar ’15, '16, '17, '18 respectively

Jet fuel costs remain low Fuel costs to stay benign. Jet fuel prices, tracking crude oil, had declined again in early 2016, and for a period hovered at levels below US$45/bbl. This represents a >30% decline from the average US$65/bbl seen in 2015; which in itself was already >40% below the >US$110/bbl seen over early 2014 and prior. Unsurprisingly, fuel costs as a proportion of total operating expenditure has come down for carriers. Our current assumptions are for spot jet fuel to average US$50/60/bbl in 2016/17; though airlines will typically see different average prices depending on their hedging policies, level of consumption and refuelling sources. Across our coverage, we forecast fuel cost/ASK to fall between 18% and 42% in FY16F - instrumental in bringing about total costs/ASK reductions of up to 8%. For 2017, we’ve assumed that average jet fuel prices move up by US$10/bbl to around US$70/bbl to US$75/bbl for FOB Singapore spot, which although will mean slightly higher total costs per seat capacity, should be offset by marginally higher load factor and/or yields in a stable seat supply growth environment. Jet Fuel Price FOB Singapore (US$ per barrel)

Source: Bloomberg Finance L.P., DBS Bank Regional Airlines fuel cost/ASK change (2014 to 2017F)

Fuel cost/ask chg 2014A 2015A 2016F 2017F

AAV 1% -26% -30% 9%

AAX* 5% -27% -21% 14%

AIRA* -2% -18% -26% 12%

BA -10% -18% -42% 18%

CEB^ 5% -34% -19% 8%

GIAA -6% -35% -25% 4%

SIA* -8% -9% -26% -4%

THAI 2% -21% -38% 13%

Source: Company, DBS Bank * FYE Mar ’14, '15, '16, '17 respectively, ^net of hedging effects

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Spot jet fuel (US$/bbl) Calendar quarter average

Industry Focus

ASEAN Airlines

Regional Airlines total cost/ASK (2014 to 2017F)

Cost/ASK 2014A 2015A 2016F 2017F

AAV (THB) 1.66 1.53 1.41 1.45

AAX (RM sen) 13.0 13.7 12.7 13.3

AIRA (RM sen) 13.8 13.2 12.7 13.4

BA (THB) 2.29 2.12 2.02 2.10

CEB (PHP) 2.45 2.00 1.84 1.88

GIAA (US cts) 8.6 7.2 6.2 6.1

SIA (S cts)* 10.0 9.9 9.2 9.3

THAI (THB) 2.51 2.22 2.05 2.10

Source: Company, DBS Bank * FYE Mar ’14, '15, '16, '17 respectively Hedging at lower fuel prices. While both crude oil and jet fuel prices appear to have moved past their respective bottoming in early 2016, a strong upward movement is still generally deemed unlikely given the supply-demand conditions. Nevertheless, airlines have secured some of their expected consumption increase via hedging policies, with up to 100% of forward-use hedged among our coverage.

Regional Airlines' hedging proportions (2016-17F)

Hedging 2016F 2017F

AAV 70-77% 20-30% (1H)

AAX* 100% c.30% (1H)

AIRA* 70-77% 20-30% (1H)

BA 45-57% 8% (1Q)

CEB 28% 18%

GIAA n.a. n.a.

SIA* 41% 31%

THAI 44% 17%

Source: Company, DBS Bank * FYE Mar '16, '17, respectively; * main unit only Currency issues look unlikely to repeat. Airlines have a high proportion of costs in US$, which limited the fuel-induced margin improvements in 2015 as most ASEAN currencies saw depreciation against the greenback. Besides that, there was also chunky foreign exchange losses on the translation of US$-denominated debt, marring headline earnings.

USD to ASEAN currencies

Source: Bloomberg Finance L.P. Regional Airlines forex gains/(losses) (2014-15 & 1Q16)

Forex g/(l) 2014A 2015A 1QCY16

AAV (THB m) 126 (205) (2)

AAX (MYR m) (137) (300) 122

AIRA (MYR m)^ (419) (331) 464

BA (THB m) 72 323 61

CEB (PHP m) (127) (2,205) 626

GIAA (US$ m) 9 15 (8)

SIA (S$ m)* (78) 1 (29)

THAI (THB m) 12,623 3,512 (681)

Source: Company, DBS Bank * FYE Mar ’15, '16 respectively, ^inc. translation of associate receivables

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USDSGD USDTHB USDMYR

USDIDR USDPHP

Industry Focus

ASEAN Airlines

Better supply and demand – lessons learnt from painful 2013-14 A temperate approach to supply growth. ASEAN airlines under our coverage, on aggregate, are projected to slow their capacity growth for a second successive year in 2016 to c.4.9% vs. a moderate 8.3% in 2015. Despite most players committing to grow ASKs in FY16, we note positively that this comes on the back of improving fleet productivity – rather than an influx of costly and underutilised jets. Combined ASK Growth (y-o-y): ASEAN Airlines*

Source: DBS Bank, *ex-acquisitions Regional Airlines ASK Growth (2014 to 2017F)

ASK 2014A 2015A 2016F 2017F

AAV 19% 17% 11% 11%

AAX* 31% -8% 20% 5%

AIRA* 4% 8% -1% 1%

BA 39% 4% 10% 12%

CEB 26% 21% 7% 10%

GIAA 16% 3% 15% 8%

SIA* 9% 16% 1% 5%

THAI -3% 1% 2% 2%

Source: Company, DBS Bank * FYE Mar ’15, '16, '17, '18 respectively; * mainline only Regional Airlines Fleet Growth (Net-adds) (2014 to

2017F)

Net fleet change 2014A 2015A 2016F 2017F

AAV +5 +5 +5 +5

AAX^ +3 +1 +2 0

AIRA^ +9 (1) (1) +3

BA +2 +4 +5 +4

CEB +4 +3 +1 +5

GIAA +29 +18 +10 +3

SIA* +6 +4 +3 +10

THAI +2 (7) +2 +1 Source: Company, DBS Bank

* FYE Mar ’15, '16, '17, '18 respectively; *ex-acquisitions; ^mainline only

Getting demand back on track. Air travel demand in ASEAN has picked itself up after a downturn in 2014 following three major airline incidents in the region, while Thailand saw political uncertainty impacting tourist arrivals in the same year. As demand resumes a normal growth path, we expect it to continue being supported by rising urbanisation and the growing middle class of the ASEAN region. Better load factors. As such, load factors look promising going forward – and indeed was the case in 1QCY16. Regional Airlines' Passenger Load Factors (2013 to

2016F)

PLF 2014A 2015A 2016F 2017F

AAV 80.5% 82.1% 81.0% 81.5%

AAX^ 82.0% 75.1% 82.0% 82.0%

AIRA^ 78.8% 80.2% 82.0% 81.0%

BA 65.3% 66.8% 67.4% 67.4%

CEB 79.1% 79.8% 79.8% 80.3%

GIAA 71.8% 77.2% 74.2% 75.2%

SIA* 78.3% 78.5% 79.8% 79.9%

THAI 68.9% 72.9% 75.0% 75.5%

Source: Company, DBS Bank * FYE Mar ’15, '16, '17, '18 respectively; *ex-acquisitions; ^main unit only Expect some yield moderation. The moderation of operating costs is expected to give the airline players more freedom in terms of pricing and promotions to capture more market share, and to stimulate local demand. As such, average yields (fares/RPK) may see some compression. Some of the yield reduction can also be seen as a function of lower fuel costs being passed on to consumers, but airlines should still see some margin improvement as they keep some of the fuel cost reduction for themselves. Nevertheless, the heightening demand is expected to be supportive and we do not expect this to crimp net profit growth. Regional Airlines yield changes (2014 to 2017F)

Yield changes 2014A 2015A 2016F 2017F

AAV (8%) 4% (2%) 3%

AAX^ (9%) 7% 5% 5%

AIRA^ (0%) (5%) (3%) 5%

BA (21%) 3% (2%) 3%

CEB 1% (13%) (7%) 0%

GIAA (5%) (14%) (10%) (1%)

SIA*^ (3%) 1% (5%) (2%)

THAI 0% (8%) (3%) 2%

Source: Company, DBS Bank * FYE Mar ’15, '16, '17, '18 respectively; *ex-acquisitions; ^main unit only

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Industry Focus

ASEAN Airlines

Spotlight on demand from China Outbound tourism a potential bright spot. Regional governments have increased efforts to woo the Chinese tourist, including visa waivers and increased promotions. We also note the currency factor - ASEAN currencies have generally appreciated less over the course of the trailing year relative to the Chinese Yuan compared to the Euro and Dollar, increasing the affordability for holidays in the region for the Chinese. CNY to ASEAN currencies, USD and EUR

Source: Bloomberg Finance L.P. Select airlines rising to the fore. The possibility of higher China-outbound tourists have not been ignored by airline groups, and there is a notable rise in flights between ASEAN countries and China. In particular, we highlight growth in seats per week (relative to end-2015 levels) from AirAsia (+34%), AirAsia X (+37%), Scoot (SIA unit) (+58%), and Garuda Indonesia (+22%). Seats per week on China-to-Indonesia routes

Source: CAPA Source: CAPA

Seats per week on China-to-Thailand routes

Source: CAPA Source: CAPA Seats per week on China-to-Malaysia routes

Source: CAPA

Source: CAPA Seats per week on China-to-Singapore routes

\ Source: CAPA Source: CAPA Seats per week on China-to-Philippine routes

Source: CAPA \

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CNYSGD CNYTHB CNYMYR CNYIDR

CNYPHP CNYUSD CNYEUR

Industry Focus

ASEAN Airlines

Sizing up competition – Value Alliance Value Alliance route map

Source: Value Alliance website Emergence of first Asia-Pac LCC alliance. May 2016 brought news of the creation of ‘Value Alliance’ (VA), made up of eight Asia-Pac LCCs: Cebu Pacific (Philippines), Jeju Air (Korea), Nok Air (Thailand), NokScoot, Scoot, Tigerair Singapore, Tigerair Australia, and Vanilla Air (Japan); which at their core represent five airline groups.

Primarily a distribution network (loose alliance) for now. Underlining the alliance is a piece of technology called the ‘Air Connection Engine’, supplied by Air Black Box, which allows each partner’s customers to book flights from the other’s websites – including the airlines’ respective ancillary products. This is purportedly to support interlining as well as connectivity for the respective airlines’ customers; and the group claims to serve over 160 destinations with 176 aircraft. Nonetheless, we understand more formalised infrastructure such as baggage check-through, fixed codeshares, and loyalty schemes have yet to be planned at this juncture.

Industry Focus

ASEAN Airlines

AirAsia group route map

Source: AirAsia website VA’s connectivity vs the AirAsia group. Comparisons have naturally been made between VA and the AirAsia (AA) group, given the latter’s notable ASEAN presence with LCC units (both long- and short-haul) in multiple countries. In particular, there are parallels with AirAsia’s Fly-Thru product – which encourages customers to book connecting flights (on certain routes) on its network by offering baggage check-through and the bypass of transit processing. From CAPA data, we find that the groups share 53 destinations (airports) of their publicised >160 (VA) and 112 (AA) destinations respectively. Looking deeper, there are currently 43 routes (airport to airport) overlapping between the routes server by the VA and AA groups, or 19% and 17% of their total aggregated routes respectively. Interestingly, seat-share capacity dominance is relatively even between the groups with a 53:47 split. Hence, direct competition looks to be relatively contained with each focusing on their own captive markets. Minimal shockwaves in current form. In present conditions, we see little competitive threat for the AA group – and correspondingly modest upsides for the respective units of the VA partners. The crux of the matter is that LCC customer profiles should be ultimately value centric, and as such aim to

secure the best value proposition for each leg of their travel. As the current VA infrastructure has very minimal value-add in itself, customers are unlikely to forgo a cheaper alternative flight merely for the sake of booking on the same network. And a smaller factor remains that most of the overlapping routes (see diagram below) are largely between those of Thai AirAsia (exposure: AAV) and Nok Air – which we think remains largely unthreatening due to the service quality gap, which has created a chasm between the respective operating statistics and earnings of the two Thai LCCs. Overlapping routes

\ Source: CAPA, DBS Bank

BFV - DMK TH DMK - KOP TH DMK - UBP TH MFM - MNL PH

BKI - MNL PH DMK - LOE TH DMK - URT TH MNL - PPS PH

CEB - ICN PH DMK - NKG TH DMK - UTH TH MNL - TAC PH

CEB - MNL PH DMK - NNT TH DPS - MEL O MNL - TAG PH

CEI - DMK TH DMK - NST TH DPS - SIN O

CGK - SIN O DMK - PHS TH DVO - MNL PH

CNX - DMK TH DMK - RGN TH HKG - MNL PH

DMK - HAN TH DMK - ROI TH ICN - MNL PH

DMK - HDY TH DMK - SGN TH KBV - SIN TH

DMK - HKT TH DMK - SHE TH KLO - MNL PH

DMK - KBV TH DMK - SIN TH KUL - MNL O

DMK - KIX TH DMK - SNO TH KUL - SIN O

DMK - KKC TH DMK - TST TH LGK - SIN O

TH - Thailand

PH - Philippines

O - Others (inc. overlap with TH, PH)

Industry Focus

ASEAN Airlines

Valuations and Recommendations

Bloomberg Asia Pacific Airlines Index

Source: Bloomberg Finance L.P., DBS Bank Valuations to rise with good results. Share prices of the ASEAN airlines were subdued or declining for the most part of 2015, as initial exuberance on the fuel price declines were disappointed by temporary earnings challenges from currency and yields. This is visible from Bloomberg's Asia Pacific Airlines Index, which climbed to +2SD of its historical average in early 2015 only to revert to its 10-year mean. Now, we see space for further upwards re-rating, justified by the emergence of strong full-year net profit growth and stronger ROAE figures. Indexed share price performance, 2015

\ Source: Bloomberg Finance L.P., DBS Bank

Indexed share price performance, YTD2016

\ Source: Bloomberg Finance L.P., DBS Bank

Our top picks are Asia Aviation, Bangkok Airways and Singapore Airlines. The surging tourism growth for Thailand will benefit Asia Aviation (AAV), which owns 55% of LCC market leader Thai AirAsia; while Bangkok Airways' (BA) dominance on cultural vacation hotspot Koh Samui gives it an edge in sustaining yields. Singapore Airlines (SIA) is set to benefit from improvements in its SilkAir, Scoot and Tigerair brands; while higher dividends are a possibility with its net cash position. We note that all three are also relative laggards in terms of YTD2016 share price performance despite also delivering impressive earnings.

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Industry Focus

ASEAN Airlines

We also have a BUY rating on AirAsia, which is set to benefit from improved performances from its airline associates in Indonesia and Philippines from the cheaper fuel; and a BUY on Garuda Indonesia, which is shifting focus towards more consistent profitability and a heavier weightage of LCC capacity going forward. Initiate Cebu Pacific with BUY rating. We also initiate coverage on the Philippines' LCC leader, Cebu Pacific. Sensible and measured growth plans will maintain its superb profit track record and market share, while the growing Philippines middle class supports it longer-term growth.

Regional airlines FY16F P/BV vs ROAE

\ Source: DBS Bank .

Regional Airline Valuations

Mkt Cap 2-yr EPS Crnt

Company US$m His t Crnt Forw CAGR His t Crnt Forw His t Crnt His t Crnt Yie ld

AirAsia MYR 2.66 1,840 31.1x 10.3x 10.3x 74% 11.8x 8.1x 7.7x 1.7x 1.4x 12.0% 16.9% 2.2%

AirAsia X MYR 0.39 402 nm 8.5x 7.1x nm nm 5.5x 4.2x 2.6x 2.0x -54.4% 26.6% 0.0%

Asia Aviation THB 6.05 835 23.0x 14.9x 12.0x 39% 11.2x 7.4x 6.1x 1.5x 1.4x 5.4% 8.9% 1.7%

Bangkok Airways THB 24.50 1,465 28.6x 17.9x 15.2x 37% 12.3x 9.1x 8.3x 1.7x 1.6x 6.4% 9.1% 2.8%

Cebu Air PHP 100.8 1,331 10.4x 8.6x 8.1x 14% 7.8x 6.2x 6.1x 2.4x 2.0x 18.9% 25.6% 2.4%

Garuda Indonesia IDR 480.0 939 34.5x 17.8x 17.2x 42% 4.3x 4.3x 4.0x 1.0x 1.0x 8.5% 5.5% 0.0%

Singapore Airlines SGD 10.59 9,339 17.9x 14.7x 13.1x 17% 4.0x 3.8x 3.7x 1.0x 0.9x 5.5% 6.5% 4.6%

Thai Airways THB 16.90 1,050 nm 9.8x 8.0x nm 11.2x 6.3x 5.5x 1.1x 1.0x -35.3% 10.8% 0.0%

ASEAN Airl ines Avg 16.6x 12.8x 11.4x 37% nm 6.3x 5.7x 1.6x 1.4x -4.1% 13.7% 1.7%

Las t Px --------- PER ---------- EV/EBITDA Price-to-Book ROAE

Prices as of 8 Jun 2016 Source DBS Bank Forecasts

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ASIAN INSIGHTS VICKERS SECURITIES ed: TH / YM

BUY (Initiating Coverage) Last Traded Price: P100.8 (PCOMP : 7,722.79) Price Target : P118 (17% upside) Potential Catalyst: Upswing in yields from higher demand Analyst Marvin KHOR +60 32604 3911 [email protected] Paul YONG CFA +65 6682 3712 [email protected]

Price Relative

Forecasts and Valuation FY Dec (Pm) 2015A 2016F 2017F 2018F Revenue 56,502 57,556 64,042 71,347 EBITDA 11,916 14,113 15,205 17,065 Pre-tax Profit 3,529 7,532 8,021 8,421 Net Profit 4,387 7,107 7,568 7,946 Net Pft (Pre Ex.) 5,857 7,107 7,568 7,946 EPS (P) 7.24 11.7 12.5 13.1 EPS Pre Ex. (P) 9.67 11.7 12.5 13.1 EPS Gth (%) 414 62 6 5 EPS Gth Pre Ex (%) 80 21 6 5 Diluted EPS (P) 9.67 11.7 12.5 13.1 Net DPS (P) 1.50 2.39 3.87 4.12 BV Per Share (P) 41.2 50.5 59.1 68.1 PE (X) 13.9 8.6 8.1 7.7 PE Pre Ex. (X) 10.4 8.6 8.1 7.7 P/Cash Flow (X) 4.9 4.8 4.1 3.7 EV/EBITDA (X) 7.8 6.2 6.1 6.3 Net Div Yield (%) 1.5 2.4 3.8 4.1 P/Book Value (X) 2.4 2.0 1.7 1.5 Net Debt/Equity (X) 1.3 0.9 0.9 1.1 ROAE (%) 25.2 25.6 22.8 20.6 Other Broker Recs: B: 9 S: 0 H: 4 ICB Industry : Consumer Services ICB Sector: Travel & Leisure Principal Business: Low cost carrier based in the Philippines

Source of all data: Company, AllianceDBS Research, Bloomberg Finance L.P

At A Glance Issued Capital (m shrs) 606 Mkt. Cap (Pm/US$m) 61,080 / 1,331 Major Shareholders (%) JG Summit Holdings, Inc 67.2

Free Float (%) 32.8 3m Avg. Daily Val (US$m) 1.2

DBS Group Research . Equity 10 Jun 2016

Philippines Company Focus

Cebu Air Bloomberg: CEB PM | Reuters: CEB.PS Refer to important disclosures at the end of this report

Leader in a growing market Dominant LCC in Philippines’ domestic aviation sector

Impressive profit track record despite challenging

market

Earnings growth of 21%/6% in FY16/17F to be led by

cheaper fuel and selective capacity expansion

Fair value of P118 based on mean 2x P/BV valuation

with an ASEAN sector leading ROAE of 26%

LCC heavyweight with sensible ambitions. Cebu Air (CEB) is the Philippines’ leading low cost carrier (LCC) operating out of seven hubs across the island nation. Thanks to its heavy market share, comprehensive local network, and strategy of measured growth; CEB had impressively maintained continuous profits across recent years despite the typically-volatile airline industry. International expansion to drive growth. In 2016, CEB will be continuing its cautious international and long-haul expansion to Guam in the US and is targeting Honolulu and Melbourne; plus three regional routes: Manila to Fukuoka, Cebu to Taipei and Davao to Singapore. This supports its strategy of growth and diversification, though a maturity period before breakeven is likely. Meanwhile, earlier commenced long-haul routes to Japan, Hong Kong and Singapore are moving into profitability in 2016. Leveraging on domestic market dominance. CEB commands the lion’s share of domestic air travel market, with the remainder being mainly taken up by PAL (Philippine Airlines and PAL Express) followed by Philippines AirAsia. As such, CEB is well placed to handle any potential pricing pressures from rising competitive forces. As we expect cost/ASK to decline as much as 8% from cheaper fuel, margin improvements are more than ample to boost earnings even with some yield headwinds. Fair value of P118 based on 2x FY17 P/BV. Led by improving margins from lower fuel costs; we project CEB to see core earnings growth of 21.4%/6.5% in FY16/17F. We expect CEB to re-rate to its mean forward P/BV multiple of 2x, as it continues to post outperforming ROAE figures (25.6% in FY16F) as its earnings upswing continues. Dividend yields are another potential upside given its jump in FY15 headline profits, and our 2.4% yield assumption is on the conservative side. Our fair value of P118 is derived from 2x FY17F P/BV, which also implies 10x FY16F PE.

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Relative IndexP

Cebu Air (LHS) Relative PCOMP INDEX (RHS)

ASIAN INSIGHTS VICKERS SECURITIES Page 2

Company Focus

Cebu Air

INVESTMENT THESIS

Profile Rationale

CEB wholly owns and operates two LCC carriers in Philippines, namely Cebu Pacific and Cebgo. Cebu Pacific has an extensive domestic network in addition to international services in Asia Pacific and Middle East. Cebgo, formally known as Tigerair Philippines, was acquired in 2014 and is currently operating the group’s turboprop fleet on domestic routes.

Leveraging on domestic market dominance. CEB commands the lion’s share of domestic air travel market (c.60% in 2015), with the remainder mainly taken up by PAL (Philippine Airlines and PAL Express) followed by Philippines AirAsia. As such, CEB is well placed to handle any potential pricing pressures from rising competitive forces. Capturing margin improvements with moderate expansion plans. CEB has been judicious in its capacity expansion, and its mild fleet and capacity growth will allow it to maximise the margin gains from the low fuel price conditions.

Valuation Risks

Fair value of P118 based on 2x FY16 P/BV. We expect CEB to re-rate to its mean forward P/BV multiple of 2x, as it continues to post outperforming ROAE figures (23-26% in FY16-17F), an outperformer among its ASEAN airline peers. This gives a fair value of P118 based on our forecasts, which also implies 10x FY16F P/E.

Sustained rise in jet fuel prices. Fuel costs are a major component of the group’s operating expenditures, at c.38% in FY15. Despite hedging strategies securing c.28%/18% of FY16/17F requirements, a sustained rise in jet fuel prices will risk increasing unit costs. Our current spot jet fuel price assumptions are US$50/60/bbl in FY16/17F. Adverse exposure to a stronger US$. About 58% of CEB’s expenses are US$-denominated (in FY15) – primarily fuel, aircraft leasing and repair & maintenance costs. However, the group’s US$-denominated revenue is at a much lower level. Additionally, all the long-term liabilities of the group are denominated in US$. Further appreciation of the US$ against the Peso may result in cost escalation as well as foreign exchange translation losses.

Source: AllianceDBS Research


Company Focus

Cebu Air

SWOT Analysis

Strengths Weakness

Dominating market position in Philippines' domestic aviation market CEB commands the lion’s share of domestic air travel market, c.60% in 2015. As such, CEB is well placed to handle any potential pricing pressures from rising competitive forces. Extensive domestic network In addition to operating trunk routes, CEB has developed a comprehensive coverage in Philippines, which is advantageous since the country is an archipelago and allows expansion beyond its congested hub at Manila. Flexibility of orderbook CEB’s aircraft orderbook relative to its current fleet size is smaller than its regional LCC peers. This gives CEB the flexibility in determining the size of the fleet, especially through continuing or discontinuing operating leases, so that in adverse market conditions, growth of the fleet can be controlled and vice versa. Young fleet Relatively lower average age of 4.6 years reduces fuel consumption, maintenance and insurance costs, while providing better service/comfort to flyers and relative ease in reselling the aircraft. Low cost base CEB has a competitive cost base comparable with regional peers.

Heavily dependent on economic conditions of Philippines Roughly half the revenues are derived from domestic flights while a significant portion of international flights are also dependent on Philippines as a source market. Exposure to US$ About 58% of CEB’s expenses in FY15 and all the long-term liabilities are US$-denominated, while its US$-denominated revenue portion is quite small. Thus, CEB is vulnerable to US$, as the currency is expected to strengthen. Relatively low amount of hedging A relatively smaller portion of CEB's fuel requirement (c.34% and 30% for 2016 & 2017 respectively) is hedged in the current cheaper fuel price scenario, thus making it vulnerable to an oil price increase.

Opportunities Threats

Growing middle class in an archipelago Since Philippines is an archipelago, as the middle class expands and air travel becomes more affordable, demand for air travel is expected to rise. Accelerating growth in tourism in Philippines Tourist arrivals to Philippines has grown by a CAGR of 8.8% from 2010 to 2015. Tourist arrivals is expected to accelerate with year 2015 showing an 11.7% y-o-y growth and a y-o-y increase of c.12% expected for 2016. ASEAN Open Skies With the initiation of Open Skies, launching routes and operating optimal network across ASEAN is expected to become easier. Value Alliance CEB’s participation in the alliance widens its distribution network to include other partner airlines, passengers should get access to the complete network of the alliance, thus it is likely that more passengers will be attracted.

Increasing competition in domestic market from PAL PAL is expected to increase capacity in the domestic market to seize back some of the market share it lost to CEB. Thus yields and profitability of domestic operations could decrease. Worsening of congestion at Manila hub With the congestion at Manila hub, new slots are difficult to acquire, thus expanding at Manila will be difficult bar up-gauging of the fleet. Increasing competition in international market from capacity additions of PAL, and Gulf Carriers Gulf carriers are expanding in Philippines and especially in secondary airports, with the international expansion of PAL, competition in international market is likely to intensify. Overcapacity in ASEAN region The ASEAN region, recovering from the recent overcapacity situation, could fall back to overcapacity, possibly due to the temptation of lower fuel prices. Sluggish economic growth in Middle East With the sluggish outlook for Middle Eastern countries, some of the Middle Eastern destinations which depend on the Filipino migrant workers could suffer.

Source: AllianceDBS Research


Company Focus

Cebu Air

Company Background

Corporate History. The Cebu Air group (CEB) commenced its aviation services under the low-cost carrier (LCC) model in March 1996, and was listed in the Philippine Stock Exchange in 2010. Presently, operations are run under two brands – Cebu Pacific and Cebgo. The former carries out primary domestic and international services with its narrow- and wide-body fleet; while Cebgo (previously Tigerair Philippines, wholly acquired in 2014) operates its turboprop fleet. As a whole, the group services flights to 64 destinations across 20

countries, utilising its fleet of 56 aircraft. About 75% of the seat capacity is dedicated to domestic operations with revenue being derived roughly equally from domestic and international services. CEB began long-haul international operations in 3Q13, now operating services to multiple Middle Eastern and Asia Pacific destinations. CEB has grown rapidly in the recent years where revenue has grown by a CAGR of 15.9% from 2009 to 2015.

Sales Trend Profitability Trend

Source: Company, AllianceDBS Research Controlled by JG Summit Holdings. CEB is majority owned by JG Summit Holdings and as a result is controlled by the Gokongwei family. Family head John Gokongwei acts as a director while his son and presumed heir Lance Gokongwei is the CEO and president.

Key Management Team

Lance Y. Gokongwei,

President and Chief Executive Officer

Mr Gokongwei joined CEB in 1997, having been in preparation for management within units of

the Gokongwei family empire prior. He is also currently the Chief Operating Officer of JG

Summit Holdings, Inc. (controlling shareholder of CEB) and Robinsons Retail Group.

John L. Gokongwei, Jr.

Director

Mr Gokongwei is the Founder and Chairman of conglomerate JG Summit Holdings, which

through its units is involved in the aviation, food manufacturing, hoteling, petrochemicals,

publishing, property, and telecommunications businesses. He is also the owner of Robinsons

Land Corp, which runs the major Robinsons retail mall chain in the Philippines.

Bach Johann M. Sebastian,

Senior Vice President - Chief Strategist

and Compliance Officer

Mr Sebastian joined CEB in 2002, and assumed his current position in 2012. He also holds the

Chief Strategist & Senior Vice President (SVP) - Corporate Planning post at JG Summit Holdings,

Universal Robina Corp and Robinsons Land Corp.

Andrew L. Huang

Chief Finance Officer

Mr Huang was appointed to his current position in October 2015. His previous experience was in

finance and management-related capacities at Chase Manhattan Bank, BA Finance Corp.,

Philippine Airlines, San Miguel Corporation and Filinvest Development Corporation.

Michael Ivan S. Shau

President and Chief Executive Officer,

Cebgo

Mr Shau joined CEB in 2007, and was appointed to his current post in October 2014. He has

also been with the JG Summit Group since 1999.

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EBITDA Net Profit Core Net Profit

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Company Focus

Cebu Air

Comprehensive domestic route coverage out of Manila hub. Cebu Pacific operates out of Philippines largest airport, the Manila Ninoy Aquino International Airport. Not limiting itself to the trunk routes, the group also maintains a healthy coverage in secondary routes as well. This is especially important due to the slot limitation in Manila hub, which is shared with its primary competitor, the Philippine Airlines group (PAL Holdings). In addition to deploying the jet fleet (A320 family and A330s), the group also uses its turboprop fleet (under the Cebgo label) to access secondary airports which cannot accommodate jets. For example, CEB opened a secondary base in Mactan-Cebu airport about five years ago and has expanded ever since. As a result, although PAL and CEB have roughly similar capacity in Manila, the group has about 63% share in capacity in Cebu while PAL has only around 24%. Furthermore, out of the 22 routes operated by the group out of Cebu, more than half were exclusively served by CEB – though it has been observed that PAL started to enter secondary routes in early 2015.

Domestic destinations

Source: Cebu Pacific website

Domestic destinations

Source: Cebu Pacific website International footprint mostly short-haul for now. CEB’s international destinations are mostly short-haul in nature (i.e. <4-hour flight distance). Its largest markets in revenue terms are Hong Kong, Singapore and Korea; though it also serves routes to China, Japan and has begun serving US (Guam) from March 2016. Its long-haul international routes are a relatively more recent addition, beginning only late-2013 to Dubai before adding Sydney, Kuwait and Riyadh in 2014, and Doha in 2015.

International destinations

Source: Cebu Pacific website


Company Focus

Cebu Air

Competitive Strengths Maintaining market share dominance. CEB had a 59.5% share in the domestic air passenger market in 2015. Through a combination of organic growth and the acquisition of Tigerair Philippines in 2014 (rebranded as Cebgo in 2015), the group dominates the Filipino domestic market. Therefore, the group enjoys market leadership in most of the domestic routes and stands to benefit from a healthy growth rate in Filipino aviation. CEB also prides itself on its maintenance of a competitive index score of >1, i.e. having a greater proportion of passenger share than seat share. This implies that it achieves stronger aggregate load factors than its competitors.

CEB passenger carriage

Source: Company, DBS Bank

Philippines Domestic Passenger Transport by Airline Group

Source: Philippines Civil Aeronautics Board, DBS Bank

CEB historical capacity and load factors


Young fleet. In comparison to the regional LCC peers, CEB has a significantly young fleet with an average age of 4.8 years compared to the peers’ weighted average of 5.0 years. The group has committed itself to maintaining a young fleet. This is advantageous due to factors such as lower fuel consumption, lower maintenance and insurance costs, better service/comfort to flyers, less safety hazards and relative ease in reselling the aircraft. The downside is the relatively higher capital expenditure and depreciation cost.

Average Age of the Fleet

Source: CAPA, DBS Bank Lean cost structure. CEB, as an ardent follower of LCC strategy, has a culture of minimising costs. This is apparent from the group’s middle-of-the-pack standing among its short-haul-focused LCC peers in the region in terms of CASK (Cost per Available Seat Kilometre), excluding fuel costs.

CASK-ex Fuel Costs

Source: Companies, DBS Bank Focus on cautious growth. Unlike other LCC groups in the ASEAN region, CEB has continually adopted a cautious approach to capacity expansion. As a result, CEB has managed to remain in the black for the past six years. This feat is more impressive due to the fact that almost all the other Philippine airlines (PAL, Philippines AirAsia, Tigerair Philippines, etc.) were highly unprofitable in the past few years. We do note a risk of this strategy that in the short run, the group might see some market share erosion if its competitors expand more rapidly – as was the case in 2015 when CEB’s market share of domestic passengers fell to 59.5% from 60.8% in 2014.

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Passengers carried ('000s) Pax growth %

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2009 2010 2011 2012 2013 2014 2015Cebu Pacific Group PAL Group AirAsia Group Others

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11%

74%

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82%

84%

86%

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ASK m (LHS) Load Factor (RHS)

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7.0

7.5

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1.70

1.90

2.10

2.30

2.50

2.70

2.90

3.10

3.30

2011 2012 2013 2014 2015

US$

cts

Cebu Pacific AirAsia Tigerair Thai AirAsia Citilink


Company Focus

Cebu Air

Flexibility in fleet size. CEB’s aircraft orderbook relative to its current fleet size is also smaller than its regional LCC peers. This gives CEB the flexibility in determining the size of the fleet, especially through continuing or discontinuing operating leases, so that in adverse market conditions, growth of the fleet can be controlled and vice versa. At end-FY15, its fleet of 55 consists of 33 A320s, six A330s, eight A319s and eight ATR-72s. Of this, leases on seven of the A320 aircraft are expiring over 2018-2019, which management may opt to extend. On the other hand, its current orderbook of 49 is made up of 30 A321neos, three A320s and 16 ATR-72s. With deliveries spread across 2016-2021, this provides ample coverage for short-haul network growth and fleet refreshment; while giving room to take in more A330s for its long-haul expansion ambitions.

Fleet Size vs Orderbook

Source: CAPA

Growth Strategies Selective international expansion, exploring long-haul. CEB has recently launched a direct Manila-Guam (US) route in early 2016, the first LCC to do so. Other near-term destination ambitions are international, and long-haul in particular as Honolulu and Melbourne are targeted (the group’s second destinations in the US and Australia respectively). We think that the group’s careful long-haul destination addition (five over 2013-15) has helped it in containing the maturity period to achieve profitability – the long-haul segment saw load factors of up to c.74% in 1Q16 from around the 60% level in 2015. The addition of longer-haul routes is also expected to help drive ASK (Available Seat Kilometre) growth of 7% in 2016.

Filipino International Seat Capacity

Source: CAPA, DBS Bank

Controlled fleet expansion. CEB is targeting a very modest net fleet growth of one aircraft in 2016, as new deliveries (A320s and ATR72-600s) will be offset by the progressive sale of its A319 fleet (four to be sold in 2016, remaining four in 2017-18) and retirement of older ATR72-500s. Growth will kick in from 2017 onwards as its orders of A321neos begin delivery, which will serve its short-haul local and international routes. Thus far, the Group has guided that its new planes will be on finance leases (rather than operating leases) though this will be subject to the financial conditions upon delivery.

Fleet growth profile

Source: CAPA, DBS Bank

Upsizing of aircraft due to airport congestion. CEB’s hub airport in Manila is congested with very few new slots being made available. Therefore, the group has ordered 32 aircraft of the larger A321neo in 2011 instead of A320neo. Deliveries of A321neos will occur from 2017 and will help to increase the capacity of routes without additional slots. In addition to these narrow body aircraft, the group is employing up to two wide-body A330s (out of six) in short-haul operations. So, redeployment of these for its long-haul needs will not require immediate leasing of additional wide-body planes, though that avenue remains open to CEB.

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JetstarGroup

IndiGo AirAsiaGroup

CebuPacificGroup

Citilink SpiceJet VietJetAir

Nok Air Tigerair

Fleet size Orderbook

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Others Philippine Airlines Cebu Pacific

PAL Express AirAsia Zest Philippines AirAsia

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2009A 2010A 2011A 2012A 2013A 2014A 2015A 2016F 2017F 2018FLeased - A330 Leased - A320Owned - ATR72-500/600 Owned - A319Owned - A320 Owned - A321 neo


Company Focus

Cebu Air

Current Fleet and Total Orderbook

Source: CAPA *Inner circle -fleet in service, outer circle - orderbook

Participation in Value Alliance. May 2016 saw the creation of Asia-PAC’s first LCC alliance, which included founding airline members Cebu Pacific (and Cebgo), Singapore Airline units Scoot and Tigerair Singapore, Nok Air (from Thailand), NokScoot, Tigerair Australia, Jeju Air (Korea), and Vanilla Air (Japan). Underlining the alliance is a piece of technology called the ‘Air Connection Engine’, supplied by Air Black Box, which allows each partner’s customers to book flights from the other’s websites – including the airlines’ respective ancillary products. While the alliance remains rather rudimentary at this juncture, it does give CEB international exposure via the partners at minimal cost, while having potential over the longer term to widen its revenue-generating network.

Value Alliance route map

Source: Value Alliance website

Financial Outlook

Margin improvements to drive bottom-line growth. On the whole, FY16 is expected to see minimal top-line growth, as 1) planned capacity growth is slower, and 2) yields will see further moderation. However, margin improvements from cheaper fuel are expected to more than compensate, and we expect full-year core earnings to grow 21%/6% in FY16/17F.

Milder ASK, RPK growth. For FY16, management guides for slower single-digit ASK growth, which is a shift from the strong double-digit growth in years before. We view the group’s characteristic cautiousness as a positive amidst expectations of stronger, cheaper-fuel-led competition, against a backdrop of demand tempered by regional economic uncertainty. We impute 7%/10% growth in FY16/17F ASKs, which comes largely from its increase in longer-haul routes and general utilisation time improvements. In reference to potential growth in competition, we also assume flat passenger load factors of 79.8% in FY16 and a marginal 0.5-ppt increase in FY17F. Resultantly, our RPK growth assumptions are 7%/10.7% in FY16/17F.

ASK and RPK forecasts


Ready to absorb lower yields. Yields or passenger fares/RPK declined 13% in FY15 (corresponding to a 3% fall in fare/passenger) as fuel surcharges were fully removed in the advent of lower fuel prices (a move also carried out by PAL), plus some impact of competition on its domestic routes. As such, in FY16 we expect more of the cheaper-fuel gains to be retained by the airlines, though the issue of competition does remain. We assume a 7% decline for full-year FY16's average yields (levels seen in 1QFY16), which in addition to the milder RPK growth, result in very moderate revenue growth.

ASK and RPK forecasts


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16A319-100

A320-200

ATR 72-500

A330-300E

A321-200neo

ATR 72-600

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85.5%

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ASKs (m) RPKs (m) Passenger load factor (%)

2.58 2.56 2.45 2.48

2.15 2.00 2.00 2.00

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Fare / RPK (PHP) Fare/RPK growth % Revenue growth %


Company Focus

Cebu Air

Fuel makes up majority of operating costs. Jet fuel has consistently made up more than 47% of the operating costs over 2011-2014. The downward trend in both absolute costs and total cost percentage of fuel from 2014 was due to the drop in crude oil prices in the latter half of 2014. With the continuing low crude oil prices, fuel costs contributed to a lower 37.7% of operating costs in 2015 as the group consumed around 5m barrels for its operations. Going forward we expect a further decline in 2016, before picking back up from 2017 onwards.

Operating Cost Composition


Unit costs to fall, even accounting for hedges. CEB typically hedges up to a third of its expected jet fuel requirements with swaps to reduce volatility in costing, which will be reflected in its profit statements as hedging gains or losses. However, the group also utilises zero-cost collars to further lock in prices. Its current swap exposure is as follows: 28%/18% for FY16/17F at US$73/bbl jet fuel/US$65/bbl brent crude. With the collars, about 6%/12%/11% are secured between US$35-52/bbl brent crude. Overall, we expect the group to notch hedging losses in FY16/17F as our spot jet fuel price assumptions are US$50/60/bbl. Nonetheless, even factoring that in, our forecasted total unit costs still fall 8% in FY16F.

Cost/ASK with hedging impact


Chance of bumper dividends? CEB typically declares its dividend payout near the middle of the calendar year. As such, the amount tends to be subject to the previous financial year’s performance – and we find that the payout ratio in 2014-15 exceeded 100% of FY13-14’s headline profits. Given the sharp upturn in FY15, we expect a stronger DPU, but to be conservative, peg the payout ratio to 2013 levels, which are more reflective of “normal profits”. Using a 33% payout ratio of previous year headline earnings, our FY16F dividend forecast is P1.45bn or c.P2.4 per share, translating to a 2.4% yield. That said, we do not rule out a higher payout by the group to reward its shareholders, as its cashflow looks to be supportive.

Key Risks

Sustained rise in jet fuel prices. Fuel costs are a major component of the group’s operating expenditures, at c.38% in FY15. Despite hedging strategies securing c.28%/18% of FY16/17F requirements, a sustained rise in jet fuel prices will risk increasing unit costs. Our current spot jet fuel price assumptions are US$50/60/bbl for FY16/17F.

Jet fuel price FOB Singapore (US$ per barrel)

Source: Bloomberg Finance L.P., DBS Bank

Adverse exposure to a stronger US$. About 58% of CEB’s expenses are US$-denominated (in FY15) – primarily fuel, aircraft leasing and repair & maintenance costs. However, the group’s US$-denominated revenue is at a much lower level. Additionally, all of the group's long-term liabilities are denominated in US$. Further appreciation of the US$ against the Peso may result in cost escalations as well as foreign exchange translation losses.

Fare competition. Airlines are susceptible to increased competition from other existing players or new market entrants. Besides the potential dilution of passenger demand, defensive measures in the form of lower fares may be employed, which will lower unit margins. Macroeconomic risks. Air travel is susceptible to demand-side risks in the event of aviation incidents, civil unrest, economic downturns and political uncertainty.

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PHP

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Fuel Cost DepreciationRepair and maintenance Aircraft and Traffic ServicingOther Operating Cost % of fuel cost (RHS)

2.44 2.47

2.362.45

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1.80

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Cost/ASK w/ hedging gain/losses Cost/ASK

% change in CASK w/hedges

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Spot jet fuel (US$/bbl) Calendar quarter average


Company Focus

Cebu Air

Key Assumptions

FY Dec 2013A 2014A 2015A 2016F 2017F 2018F ASK growth (%) 14.4 26.5 21.5 7.00 10.0 11.1

Load Factor (%) 79.8 79.1 79.8 79.8 80.3 80.3

Fare / RPK (PHP) 2.45 2.48 2.15 2.00 2.00 2.00 Ancillary income / pax (PHP)

651 700 752 767 783 790

Cost / ASK (PHP) 2.38 2.33 1.88 1.76 1.85 1.90 Income Statement (Pm)

FY Dec 2013A 2014A 2015A 2016F 2017F 2018F Revenue 41,004 52,000 56,502 57,556 64,042 71,347

Other Opng (Exp)/Inc (38,309) (50,157) (49,733) (49,104) (55,148) (61,768)

Operating Profit 2,695 1,843 6,769 8,452 8,893 9,578

Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 0.0

Associates & JV Inc 119 96.3 35.4 83.7 83.7 83.7

Net Interest (Exp)/Inc (646) (933) (990) (1,004) (957) (1,241)

Exceptional Gain/(Loss) (2,063) (127) (2,286) 0.0 0.0 0.0

Pre-tax Profit 105 879 3,529 7,532 8,021 8,421

Tax 407 (25.1) 858 (425) (452) (475)

Minority Interest 0.0 0.0 0.0 0.0 0.0 0.0

Preference Dividend 0.0 0.0 0.0 0.0 0.0 0.0

Net Profit 512 854 4,387 7,107 7,568 7,946

Net Profit before Except. 1,935 3,262 5,857 7,107 7,568 7,946

EBITDA 6,269 6,221 11,916 14,113 15,205 17,065

Growth

Revenue Gth (%) 8.2 26.8 8.7 1.9 11.3 11.4

EBITDA Gth (%) 9.1 (0.8) 91.5 18.4 7.7 12.2

Opg Profit Gth (%) (7.8) (31.6) 267.3 24.9 5.2 7.7 Net Profit Gth (Pre-ex) (%)

(16.8) 68.6 79.5 21.4 6.5 5.0

Margins & Ratio

Opg Profit Margin (%) 6.6 3.5 12.0 14.7 13.9 13.4

Net Profit Margin (%) 1.2 1.6 7.8 12.3 11.8 11.1

ROAE (%) 9.0 15.3 25.2 25.6 22.8 20.6

ROA (%) 3.0 4.5 7.3 8.1 7.9 7.1

ROCE (%) 5.4 3.3 11.2 N/A 11.4 10.3

Div Payout Ratio (%) 236.7 71.0 20.7 20.4 31.0 31.4

Net Interest Cover (x) 4.2 2.0 6.8 8.4 9.3 7.7 Source: Company, AllianceDBS Research

Margins Trend

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2014A 2015A 2016F 2017F 2018F

Operating Margin % Net Income Margin %


Company Focus

Cebu Air

Quarterly / Interim Income Statement (Pm)

FY Dec 4Q2014 1Q2015 2Q2015 3Q2015 4Q2015 1Q2016 Revenue 13,555 14,198 15,308 12,753 14,243 16,106

Other Oper. (Exp)/Inc (14,417) (11,728) (11,714) (13,336) (12,955) (11,967)

Operating Profit (862) 2,470 3,594 (583) 1,288 4,139

Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 0.0

Associates & JV Inc 8.13 (17.0) 5.35 10.6 36.5 55.6

Net Interest (Exp)/Inc (246) (249) (221) (252) (269) (274)

Exceptional Gain/(Loss) 65.7 (9.2) (357) (1,444) (476) 460

Pre-tax Profit (1,035) 2,195 3,022 (2,268) 580 4,381

Tax (191) 30.0 (46.1) 623 252 (344)

Minority Interest 0.0 0.0 0.0 0.0 0.0 0.0

Net Profit (1,226) 2,225 2,975 (1,645) 832 4,037

Net profit bef Except. (1,292) 2,044 2,517 (112) 1,408 3,369

EBITDA 290 3,668 4,854 715 2,679 5,673

Growth

Revenue Gth (%) 15.6 4.8 7.8 (16.7) 11.7 13.1

EBITDA Gth (%) (64.1) 1,166.6 32.3 (85.3) 274.8 111.7

Opg Profit Gth (%) (195.4) nm 45.5 nm nm 221.3 Net Profit Gth (Pre-ex) (%)

(588.5) nm 23.1 nm nm 139.3

Margins

Opg Profit Margins (%) (6.4) 17.4 23.5 (4.6) 9.0 25.7

Net Profit Margins (%) (9.0) 15.7 19.4 (12.9) 5.8 25.1

Revenue Trend

Source: Company, AllianceDBS Research

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-20%

-10%

0%

10%

20%

30%

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

4Q

2013

1Q

2014

2Q

2014

3Q

2014

4Q

2014

1Q

2015

2Q

2015

3Q

2015

4Q

2015

1Q

2016

Revenue Revenue Growth % (QoQ)


Company Focus

Cebu Air

Balance Sheet (Pm)

FY Dec 2013A 2014A 2015A 2016F 2017F 2018F Net Fixed Assets 56,412 65,227 72,076 72,976 83,251 105,138

Invts in Associates & JVs 579 591 526 609 693 777

Other LT Assets 503 1,717 2,464 2,464 2,464 2,464

Cash & ST Invts 6,056 3,964 4,706 9,528 8,776 8,086

Inventory 711 679 919 966 1,114 1,269

Debtors 944 1,302 1,398 1,419 1,579 1,759

Other Current Assets 2,321 2,581 2,739 2,739 2,739 2,739

Total Assets 67,527 76,062 84,829 90,701 100,617 122,233

ST Debt

3,755 4,712 5,424 5,424 5,424 5,424

Creditor 4,314 3,984 3,773 3,862 4,455 5,077

Other Current Liab 10,270 15,364 17,303 17,427 18,227 19,127

LT Debt 25,651 29,137 31,165 31,165 34,466 49,111

Other LT Liabilities 2,456 1,325 2,208 2,208 2,208 2,208

Shareholder’s Equity 21,082 21,539 24,955 30,615 35,838 41,286

Minority Interests 0.0 0.0 0.0 0.0 0.0 0.0

Total Cap. & Liab. 67,527 76,062 84,829 90,701 100,617 122,233

Non-Cash Wkg. Capital (10,606) (14,786) (16,020) (16,165) (17,250) (18,437)

Net Cash/(Debt) (23,350) (29,886) (31,883) (27,061) (31,114) (46,449)

Debtors Turn (avg days) 7.5 7.9 8.7 N/A 8.5 8.5

Creditors Turn (avg days) (358.8) (353.7) (277.0) N/A (243.7) (235.0)

Inventory Turn (avg days) (60.9) (59.3) (57.1) N/A (60.9) (58.7)

Asset Turnover (x) 0.6 0.7 0.7 NM 0.7 0.6

Current Ratio (x) 0.5 0.4 0.4 0.5 0.5 0.5

Quick Ratio (x) 0.4 0.2 0.2 0.4 0.4 0.3

Net Debt/Equity (X) 1.1 1.4 1.3 0.9 0.9 1.1

Net Debt/Equity ex MI (X) 1.1 1.4 1.3 0.9 0.9 1.1

Capex to Debt (%) 41.4 39.3 32.9 17.7 41.4 53.7 Source: Company, AllianceDBS Research

Asset Breakdown

Net Fixed Assets -85.4%

Assocs'/JVs -0.7%

Bank, Cash and Liquid

Assets -11.1%

Inventory -1.1%

Debtors -1.7%


Company Focus

Cebu Air

Cash Flow Statement (Pm)

FY Dec 2013A 2014A 2015A 2016F 2017F 2018F Pre-Tax Profit 105 879 3,529 7,532 8,021 8,421

Dep. & Amort. 3,455 4,282 5,112 5,577 6,228 7,403

Tax Paid (34.6) (45.0) (60.8) (425) (452) (475)

Assoc. & JV Inc/(loss) (119) (96.3) (35.4) (83.7) (83.7) (83.7)

Chg in Wkg.Cap. (1,042) 901 1,001 146 1,084 1,187

Other Operating CF 1,850 1,628 2,840 0.0 0.0 0.0

Net Operating CF 4,216 7,575 12,395 12,747 14,797 16,452

Capital Exp.(net) (12,180) (13,316) (12,035) (6,477) (16,504) (29,290)

Other Invts.(net) 0.0 (489) 0.0 0.0 0.0 0.0

Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0 0.0

Div from Assoc & JV 52.3 83.8 101 0.0 0.0 0.0

Other Investing CF (168) 116 129 0.0 0.0 0.0

Net Investing CF (12,296) (13,605) (11,805) (6,477) (16,504) (29,290)

Div Paid (1,212) (606) (909) (1,448) (2,345) (2,497)

Chg in Gross Debt 4,414 4,301 949 0.0 3,301 14,645

Capital Issues 0.0 0.0 0.0 0.0 0.0 0.0

Other Financing CF 0.0 0.0 0.0 0.0 0.0 0.0

Net Financing CF 3,203 3,695 39.7 (1,448) 955 12,147

Currency Adjustments 205 (14.4) 113 0.0 0.0 0.0

Chg in Cash (4,672) (2,349) 742 4,822 (752) (690)

Opg CFPS (P) 8.68 11.0 18.8 20.8 22.6 25.2

Free CFPS (P) (13.1) (9.5) 0.59 10.3 (2.8) (21.2) Source: Company, AllianceDBS Research

Capital Expenditure

0.0

5,000.0

10,000.0

15,000.0

20,000.0

25,000.0

30,000.0

35,000.0

2014A 2015A 2016F 2017F 2018F

Capital Expenditure (-)

Pm


Company Focus

Cebu Air

Valuation Fair value to reflect outperforming ROAE. CEB is currently still trading below its historical average forward PE and P/BV. Given CEB’s 1) position as the market-leading proxy to Philippines' air travel growth, and 2) achievement of ASEAN-airline leading ROAE of 23-26% in FY16/17F (peer average 12%), we believe the stock should re-rate towards its average forward P/BV of 2x. As such, we derive our TP of P118 based on 2x FY17F P/BV. Outlook for long-term earnings is bright. CEB, aided by its dominant market share, is expected to do well in the expanding aviation market in Philippines which is driven by the expanding middle class and growing tourism. Combined with the low fuel price environment, the group is likely to shrug-off moderate competition and continue delivering strong earnings.

Historical 12-month forward PB Value (x)


Historical 12-month forward PE Ratio(x)


Regional Airline Valuations

Source DBS Bank Forecasts

1.0

1.4

1.8

2.2

2.6

3.0

Jun-

11

Dec

-11

Jun-

12

Dec

-12

Jun-

13

Dec

-13

Jun-

14

Dec

-14

Jun-

15

Dec

-15

Jun-

16

(x)

+1 sd

+2 sd

-1 sd

-2 sd

Avg: 2.0x

0

5

10

15

20

25

Jun-

11

Dec

-11

Jun-

12

Dec

-12

Jun-

13

Dec

-13

Jun-

14

Dec

-14

Jun-

15

Dec

-15

Jun-

16

(x)

+1 sd

+2 sd

-1 sd

-2 sd

Avg: 13.2x

Mkt Cap 2-yr EPS Crnt

Company US$m His t Crnt Forw CAGR His t Crnt Forw His t Crnt His t Crnt Yie ld

AirAsia MYR 2.60 1,785 30.4x 10.1x 10.1x 74% 11.7x 8.0x 7.7x 1.6x 1.4x 12.0% 16.9% 2.2%

AirAsia X MYR 0.40 404 nm 8.6x 7.2x nm nm 5.6x 4.2x 2.6x 2.0x -54.4% 26.6% 0.0%

Asia Aviation THB 6.05 833 23.0x 14.9x 12.0x 39% 11.2x 7.4x 6.1x 1.5x 1.4x 5.4% 8.9% 1.7%

Bangkok Airways THB 24.50 1,460 28.6x 17.9x 15.2x 37% 12.3x 9.1x 8.3x 1.7x 1.6x 6.4% 9.1% 2.8%

Cebu Air PHP 99.0 1,304 10.2x 8.4x 7.9x 14% 7.7x 6.2x 6.0x 2.4x 2.0x 18.9% 25.6% 2.4%

Garuda Indonesia IDR 480.0 930 34.2x 17.6x 17.0x 42% 4.3x 4.3x 4.0x 1.0x 0.9x 8.5% 5.5% 0.0%

Singapore Airlines SGD 10.57 9,293 17.9x 14.7x 13.1x 17% 4.0x 3.8x 3.7x 1.0x 0.9x 5.5% 6.5% 4.6%

Thai Airways THB 17.40 1,078 nm 10.1x 8.2x nm 11.3x 6.3x 5.5x 1.2x 1.0x -35.3% 10.8% 0.0%

ASEAN Airl ines Avg 16.4x 12.8x 11.3x 37% nm 6.3x 5.7x 1.6x 1.4x -4.1% 13.7% 1.7%

ASEAN Airl ines Avg (ex-CEB) 17.3x 13.4x 11.8x 42% 9.1x 6.4x 5.6x 1.5x 1.3x -7.4% 12.0% 1.6%

Las t Px --------- PER ---------- EV/EBITDA Price -to-Book ROAE

Industry Focus

ASEAN Airlines

Page 10

DBS Bank recommendations are based an Absolute Total Return* Rating system, defined as follows:

STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)

BUY (>15% total return over the next 12 months for small caps, >10% for large caps)

HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)

FULLY VALUED (negative total return i.e. > -10% over the next 12 months)

SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)

Share price appreciation + dividends

GENERAL DISCLOSURE/DISCLAIMER This report is prepared by DBS Bank Ltd. This report is solely intended for the clients of DBS Bank Ltd and DBS Vickers Securities (Singapore) Pte Ltd, its respective connected and associated corporations and affiliates (collectively, the “DBS Vickers Group”) only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBS Bank Ltd

The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS Bank Ltd., its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively, the “DBS Group”)) do not make any representation or warranty as to its accuracy, completeness or correctness. Opinions expressed are subject to change without notice. This document is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate independent legal or financial advice. The DBS Group accepts no liability whatsoever for any direct, indirect and/or consequential loss (including any claims for loss of profit) arising from any use of and/or reliance upon this document and/or further communication given in relation to this document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. The DBS Group, along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this document. The DBS Group may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies.

Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments. The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed and it may not contain all material information concerning the company (or companies) referred to in this report.

The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and assumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates on which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly from actual results. Therefore, the inclusion of the valuations, opinions, estimates, forecasts, ratings or risk assessments described herein IS NOT TO BE RELIED UPON as a representation and/or warranty by the DBS Group (and/or any persons associated with the aforesaid entities), that:

(a) such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and

(b) there is any assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk

assessments stated therein.

Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies) mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the commodity referred to in this report.

DBS Vickers Securities (USA) Inc ("DBSVUSA")"), a U.S.-registered broker-dealer, does not have its own investment banking or research

department, has not participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction

in the past twelve months and does not engage in market-making.

ANALYST CERTIFICATION The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst(s) also certifies that no part of his/her compensation was, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in this report. As of 10 Jun 2016, the analyst(s) and his/her spouse and/or relatives who are financially dependent on the analyst(s), do not hold interests in the securities recommended in this report (“interest” includes direct or indirect ownership of securities).

Industry Focus

ASEAN Airlines

Page 11

COMPANY-SPECIFIC / REGULATORY DISCLOSURES

1. DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates have proprietary position in

Singapore Airlines, Thai Airways recommended in this report as of 30 Apr 2016

2. DBS Bank Ltd does not market make in equity securities of the issuer(s) or company(ies) mentioned in this Research Report.

3. Compensation for investment banking services:

DBS Bank Ltd., DBSVS, their subsidiaries and/or other affiliates of DBSVUSA have received compensation, within the past 12 months for

investment banking services from Singapore Airlines as of 30 Apr 2016

DBSVUSA does not have its own investment banking or research department, nor has it participated in any public offering of securities as a

manager or co-manager or in any other investment banking transaction in the past twelve months. Any US persons wishing to obtain

further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this

document should contact DBSVUSA exclusively.

4. Directorship/trustee interests

Peter Seah Lim Huat, Chairman of DBS Group Holdings, is a Deputy Chairman of Singapore Airlines as of 29 Feb 2016.

RESTRICTIONS ON DISTRIBUTION

General This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation.

Australia This report is being distributed in Australia by DBS Bank Ltd. (“DBS”) or DBS Vickers Securities (Singapore) Pte Ltd (“DBSVS”), both of which are exempted from the requirement to hold an Australian Financial Services Licence under the Corporation Act 2001 (“CA”) in respect of financial services provided to the recipients. Both DBS and DBSVS are regulated by the Monetary Authority of Singapore under the laws of Singapore, which differ from Australian laws. Distribution of this report is intended only for “wholesale investors” within the meaning of the CA.

Hong Kong This report is being distributed in Hong Kong by DBS Vickers (Hong Kong) Limited which is licensed and regulated by the Hong Kong Securities and Futures Commission.

Indonesia This report is being distributed in Indonesia by PT DBS Vickers Securities Indonesia.

Malaysia This report is distributed in Malaysia by AllianceDBS Research Sdn Bhd ("ADBSR"). Recipients of this report, received from ADBSR are to contact the undersigned at 603-2604 3333 in respect of any matters arising from or in connection with this report. In addition to the General Disclosure/Disclaimer found at the preceding page, recipients of this report are advised that ADBSR (the preparer of this report), its holding company Alliance Investment Bank Berhad, their respective connected and associated corporations, affiliates, their directors, officers, employees, agents and parties related or associated with any of them may have positions in, and may effect transactions in the securities mentioned herein and may also perform or seek to perform broking, investment banking/corporate advisory and other services for the subject companies. They may also have received compensation and/or seek to obtain compensation for broking, investment banking/corporate advisory and other services from the subject companies.

Wong Ming Tek, Executive Director, ADBSR

Singapore This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) or DBSVS (Company Regn No. 198600294G), both of which are Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd and/or DBSVS, may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, DBS Bank Ltd accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact DBS Bank Ltd at 6327 2288 for matters arising from, or in connection with the report.

Thailand This report is being distributed in Thailand by DBS Vickers Securities (Thailand) Co Ltd. Research reports distributed are only intended for institutional clients only and no other person may act upon it.

Industry Focus

ASEAN Airlines

Page 12

United Kingdom This report is being distributed in the UK by DBS Vickers Securities (UK) Ltd, who is an authorised person in the meaning of

the Financial Services and Markets Act and is regulated by The Financial Conduct Authority. Research distributed in the UK is intended only for institutional clients.

Dubai

This research report is being distributed in The Dubai International Financial Centre (“DIFC”) by DBS Bank Ltd., (DIFC Branch) having its office at PO Box 506538, 3rd Floor, Building 3, East Wing, Gate Precinct, Dubai International Financial Centre (DIFC), Dubai, United Arab Emirates. DBS Bank Ltd., (DIFC Branch) is regulated by The Dubai Financial Services Authority. This research report is intended only for professional clients (as defined in the DFSA rulebook) and no other person may act upon it.

United States This report was prepared by DBS Bank Ltd. DBSVUSA did not participate in its preparation. The research analyst(s) named on this report are not registered as research analysts with FINRA and are not associated persons of DBSVUSA. The research analyst(s) are not subject to FINRA Rule 2241 restrictions on analyst compensation, communications with a subject company, public appearances and trading securities held by a research analyst. This report is being distributed in the United States by DBSVUSA, which accepts responsibility for its contents. This report may only be distributed to Major U.S. Institutional Investors (as defined in SEC Rule 15a-6) and to such other institutional investors and qualified persons as DBSVUSA may authorize. Any U.S. person receiving this report who wishes to effect transactions in any securities referred to herein should contact DBSVUSA directly and not its affiliate.

Other jurisdictions In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is intended only for qualified, professional, institutional or sophisticated investors as defined in the laws and regulations of such jurisdictions.

DBS Bank Ltd

12 Marina Boulevard, Marina Bay Financial Centre Tower 3 Singapore 018982 Tel. 65-6878 8888

Company Regn. No. 196800306E

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