china airlines sector - credit suisse

DISCLOSURE APPENDIX CONTAINS ANALYST CERTIFICATIONS AND THE STATUS OF NON US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION™

Client-Driven Solutions, Insights, and Access

10 April 2013

Asia Pacific/China

Equity Research

Airlines

China Airlines Sector THEME

Can airlines beat high speed rail?

Figure 1: Accumulated loss in traffic growth 2013-15

6.6%

6.0% 5.9%5.8%

5.2%

5.0%

5.2%

5.4%

5.6%

5.8%

6.0%

6.2%

6.4%

6.6%

6.8%

China Southern HNA Group Sector China Eastern Air China

Source: Company data, Credit Suisse estimates

■ Traffic diversion <6%. While another 5,143 km of high-speed rail track will

be completed between 2013 and 2015, passenger diversion from air to

surface will be most pronounced on routes below 500 km, only 3% of

aviation’s total capacity. Based on our route-by-route analysis, 5.9% of air

traffic should be lost over the next three years, or 1.9% annually. Air China

(CA)—with the highest exposure to the international market—will be least

affected by HSR. MU and CZ will likely experience moderate traffic loss.

■ Impact on pricing or load factors is likely limited, as airlines have

already proven their ability to adjust capacity to retain price tension and

utilisation in HSR-affected markets. Some services have been suspended

even before going head-to-head with HSR. Inconvenient station locations

and their lack of connectivity limit the substitution of HSR for air travel when

compared with Japan, where stations are far more integrated.

■ A potential rail fare cut is a key risk. Experience in other countries

demonstrates that HSR has to be priced at a discount to airfares to maintain

market share. However, we see no immediate pressure to cut rail ticket

prices as they are already, essentially, the lowest in the world. Current fares,

which are priced at an average 36% discount to the airfares, are broadly

accessible when compared with the average income level in China.

■ Our top pick is Air China, followed by China Southern Airlines (CZ): A

rebound in business travel demand, growing outbound markets and the

delivery of new fuel-efficient aircraft are going to be the key earnings drivers

in 2013. We like Air China’s high exposure to the business segment and the

outbound market, as well as its strong execution track record.

Research Analysts

Davin Wu

852 2101 6917

[email protected]

Timothy Ross

65 6212 3337

[email protected]

10 April 2013

China Airlines Sector 2

Focus charts Figure 2: HSR track length to reach 14,985 km by 2015E Figure 3: Airlines sector to lose 5.9% traffic over 2013-15E

4051,037

3,604

5,288

7,364

9,792

10,935

13,109

14,985

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

2007 2008 2009 2010 2011 2012 2013 2014 2015

6.6%

6.0% 5.9%5.8%

5.2%

5.0%

5.2%

5.4%

5.6%

5.8%

6.0%

6.2%

6.4%

6.6%

6.8%

ChinaSouthern

HNA Group Sector ChinaEastern

Air China

Source: Various media reports Source: Company data, Credit Suisse estimates

Figure 4: Diversion less pronounced in China than in

Japan, where HSR is integrated with public transport

Figure 5: Wuhan-Guangzhou route load factor rebounded

sharply in 2011 after capacity adjustments by airlines

-140%

-120%

-100%

-80%

-60%

-40%

-20%

0%

0 500 1000 1500

Distance (km)

Traf

fic

div

ersi

on

to

tra

in China

Japan

80.0%

81.0%

82.0%

83.0%

84.0%

85.0%

86.0%

2009 2010 2011 2012E

Source: Company data, Credit Suisse estimates Source: Credit Suisse estimates

Figure 6: HSR will mainly impact short-haul traffic, but routes under 500 km represent only 3% of total capacity

Estimated Air China China HNA Airline Air China China HNA Airline

Distance (km) Diversion China Eastern Southern Group sector China Eastern Southern Group sector

Domestic 100-200 100% 0.0% 0.0% 0.1% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Domestic 201-300 100% 0.1% 0.2% 0.2% 0.4% 0.2% 0.0% 30.6% 0.0% 0.6% 7.5%

Domestic 301-400 100% 0.2% 0.9% 0.9% 1.0% 0.7% 22.8% 9.2% 3.7% 4.2% 7.7%

Domestic 401-500 100% 1.3% 2.5% 1.9% 3.4% 1.9% 5.1% 5.2% 19.2% 6.0% 8.7%

Domestic 501-600 80% 1.3% 2.4% 2.2% 2.4% 2.1% 49.0% 23.8% 25.6% 6.0% 31.7%

Domestic 601-700 60% 1.8% 2.8% 4.5% 3.8% 3.2% 35.3% 26.8% 33.9% 21.3% 30.3%

Domestic 701-800 50% 0.9% 2.2% 3.4% 3.4% 2.4% 33.3% 11.0% 24.8% 21.7% 22.6%

Domestic 801-900 40% 2.1% 4.5% 4.5% 3.3% 3.7% 21.5% 14.1% 13.4% 17.6% 17.1%

Domestic 901-1000 30% 4.1% 5.5% 4.0% 6.1% 4.7% 30.2% 26.1% 17.6% 20.8% 23.5%

Domestic 1001-1100 25% 6.6% 9.1% 6.1% 8.7% 6.8% 16.2% 14.5% 23.9% 17.0% 18.2%

Domestic 1101-1200 20% 5.2% 5.4% 4.7% 8.5% 5.3% 12.9% 10.4% 10.7% 8.1% 10.4%

Domestic >1200 0% 41.4% 36.3% 45.5% 49.0% 42.5% 0.0% 0.0% 0.0% 0.0% 0.0%

Domestic total 65.0% 72.0% 78.0% 90.0% 73.5% 8.0% 8.1% 8.5% 6.6% 8.1%

International 35.0% 28.0% 22.0% 10.0% 26.5% 0.0% 0.0% 0.0% 0.0% 0.0%

Total 100.0% 100.0% 100.0% 100.0% 100.0% 5.2% 5.8% 6.6% 6.0% 5.9%

Route distribution by distance (based on ASK) Accumulated lost growth (2013-15)

Source: Company data, Credit Suisse estimates *Only HSR routes operational since 2012 are included.

10 April 2013


Can airlines beat high speed rail? Sub-6% traffic loss over 2013-15E

Our regression analysis of the 25 overlapping rail and airline routes in operation show

negligible impact on air traffic for routes >1,200 km: air is just faster here. HSR has a

meaningful impact only on routes below 800 km (travel time of less than three hours).

Traffic diversion is most pronounced on routes below 500 km, where air is no faster and

train fares are 36% lower than like airfare. Only 4% of domestic PRC ASKs are on routes

of less than 500 km and 15% of domestic routes are less than 800 km. The portion of this

market connecting to international or long-haul domestic services should not be affected

by inter-modal competition. Routes with a flight distance of >1,200 km represent 57% of

domestic ASKs. The new HSR lines expected to be operational in the next three years

should cause less than 6% loss in traffic growth or <2% loss in growth pa. We also note

that the diversion from plane to train in China is 15% less than for Japan’s Shinkansen

(“bullet trains”). Poor station location and lack of connectivity with metro rail limits the

substitution of HSR vs Japan and Taiwan where HSR stations are far more integrated.

No sustained impact on airfares or load factors

After more than three years of growing rivalry, airlines have developed strategies to cope

with HSR competition. Our investigation suggests competition with HSR has no sustained

impact on aviation’s pricing or load factors as airlines have been quick adjust capacity to

retain price tension and utilisation. Some airlines have avoided direct competition by pre-

empting overlapping service, as in the case of the Harbin-Dalian line. Airlines’ swift

capacity adjustment and exit from unprofitable short-haul routes are, in our view, a positive

development, with the capacity typically being redeployed into less competitive markets.

HSR fare reduction the key risk

At present, the second class HSR in China running at 300 km/h is priced at Rmb0.43/km,

about a 36% discount to economy airfare. Our traffic diversion estimates assume the

discount will hold for the next three years. We see a potential reduction in HSR fares as

the key risk. So far, we haven’t seen meaningful changes in China’s train fares and we see

no immediate pressure to cut rail prices: they are already the lowest in the world; and fares

as being broadly accessible in local income terms. We also consider that consolidating the

Ministry of Railways into the Ministry of Transportation this year will lead to better

coordination of pricing and competition between the airlines and HSR.

Air China is least affected by HSR

Air China, which deploys c35% of its capacity in international markets, is least affected by

HSR. Long-haul routes (>1,200 km) represent 65% of its domestic capacity, with short-

haul domestic services (<500 km) accounting for only 1.7% of total capacity and primarily

connected to second tier cities in Western China, where HSR is underbuilt. We expect the

traffic loss over the next three years to be only 5.2%, or 1.7% pa. MU (China Eastern) and

CZ (China Southern) will likely experience moderate traffic loss.

Figure 7: Chinese airline valuation comparison Company IATA Reuters Share price Last Close Mkt Cap Rating Target Upside FY13E

Name Code Ticker curncy Price (US$ mn) Price /Downside (%) P/E EV / EBITDAR EV / CFMV ROIC

Air China CA 0753.HK HKD 6.25 10,505 OUTPERFORM 7.50 20% 9.7 7.2 163% 13%

China Southern CZ 1055.HK HKD 4.01 5,367 OUTPERFORM 4.80 20% 8.2 7.1 131% 10%

China Eastern MU 0670.HK HKD 3.18 5,239 UNDERPERFORM 2.90 -9% 10.5 7.1 152% 12% Source: Company data, Bloomberg, Credit Suisse estimates: priced as at 10 April 2013

Less than 6% traffic loss

over 2013-15E and the

impact should be mostly

pronounced for routes below

500 km

The traffic diversion in

Japan is less pronounced

than Japan, where HSR

stations are far more

integrated with other public

transportation systems

Swift capacity adjustment,

ideally before the launch of

new HSR, is the key

strategy of airlines

HSR has to price their

service at a discount to

airfares to keep their market

share. We see no

immediate pressure to cut

train fares

Air China with higher

exposure to the international

market is least affected by

HSR

10 April 2013


Sub-6% traffic loss over 2013-15E HSR lines planned for 2013-15

China began serious investment in High-Speed Rail (HSR) in 2003 to relieve the extreme

capacity shortage that characterised both passenger and cargo transport. Although the

deadly train collision in Wenzhou in July 2011 resulted in a restructured Ministry of

Railways and slowed the pace of railway construction, China’s initiative to refocus on

economic growth in 2012 helped re-start the railway projects previously suspended. We

expect that the “four horizontal, four vertical” HSR trunk lines will be largely completed by

2015, as set out in China’s 12th Five Year Plan.

Figure 8: China’s High Speed Rail Plan


China is on target to expand its HSR track length by 57% to 15,000 by 2015 from 9,792

km today, covering the most populous metropolitan areas in the country. In 2013 and

2014, 1,143 km and 2,175 km of newly completed HSR will become operational,

respectively. Based on our route-by-route analysis, we estimate that the airline sector will

experience an aggregate loss in domestic traffic growth of 8.1% or 5.8% loss of overall

traffic growth over 2013-15, as a result of the new HSR lines.

Suspended HSR

construction projects have

re-started

10 April 2013


Figure 9: China’s new HSR track length completion Figure 10: China HSR’s total operational track length

632

2,567

1,684

2,076

2,428

1,143

2,175

1,875

0

500

1,000

1,500

2,000

2,500

3,000

2008 2009 2010 2011 2012 2013 2014 2015

4051,037

3,604

5,288

7,364

9,792

10,935

13,109

14,985

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

2007 2008 2009 2010 2011 2012 2013 2014 2015

Source: Various media reports Source: Various media reports

Traffic loss regression based on 25 routes

The airlines started facing serious competition from HSR in 2009, when the line

connecting Guangzhou and Wuhan began operation. Due to HSR's advantages of lower

fare, comfortable journey and timeliness, rail has and should continue to have a

substantial impact on short-haul airlines routes, given that the differential in total travel

time is insignificant. The shorter the distance, the greater the impact on airline traffic.

We sampled 25 routes facing direct competition with HSR in order to assess the loss in

traffic. We acknowledge that our study is not perfect, because of the limited availability of

data and our inability to separate the impact of HSR from other factors, such as the state

of local economies and special events (such as party congresses), which impact changes

in traffic. Our key assumptions are:

■ The loss in traffic is equal to the difference between the 12-month sum of air traffic

before and after the launch of HSR;

■ HSR routes that indirectly compete (i.e., train interchange is needed) with air transport

are not included; and

■ 2H11 traffic was excluded from the analysis because of the deadly train collision in

Wenzhou in July, which had a short-term impact on rail demand.

Traffic loss most pronounced for air routes <500 km and for journeys <4 hours

Our study on 25 overlapping routes operational since 2009 leads us to conclude that HSR

is most competitive in short-haul markets with a flight distance of less than 500 km and

total travel time (including transit and waiting times) of less than four hours. The diversion

ranges from 80% to 15% for routes between 500 km and 1,100 km. The impact on traffic

for routes with distance greater than 1,200 km is negligible, on the basis of our analysis.

We argue that HSR will only attract origin and destination (O&D) passengers, with online

connecting air traffic via key hubs in markets under 500 km unaffected.

Lower fares, comfort and

timeliness are the main

advantages of HSR

Transit passengers are

unlikely to be affected by

HSR

10 April 2013


Figure 11: Traffic diversion vs flight distance* Figure 12: Estimated traffic diversion by distance*

-120%

-100%

-80%

-60%

-40%

-20%

0%

- 500 1,000

Flight distance (km)

Traf

fic

div

ersi

on

to

HSR

-120.0%

-100.0%

-80.0%

-60.0%

-40.0%

-20.0%

0.0%

- 1.0 2.0 3.0 4.0

HSR's excess travel time over air (hours)

Tra

ffic

lo

ss t

o H

SR

Source: Credit Suisse estimates* based on 25 overlapping routes in

China

Source: Company data, Credit Suisse estimates * based on 13

overlapping routes

The time and cost advantage of different transport modes

Time and cost are the two major quantifiable factors that influence travellers’ decisions

with regards to what transportation mode they use. Comfort and safety are secondary

factors (although safety becomes elevated following accidents suffered by any one

operator or any one mode). The biggest advantage of air transportation is speed. HSR is

designed to have a speed of 250-350 km/hour, which is a viable alternative to short-haul

air routes where the total time of traveling (including transit time to the airport) is similar to

each other. HSR is on average 36% cheaper than air transport. We believe that rail is

more attractive to the time-rich, price-sensitive customers than business travellers. Our

study of the difference in total travel time between HSR and air transport for 13 routes

shows that the defection to HSR is most pronounced for routes where the excess travel

time relative to air (including airport travel) is less than one hour. Airlines generally prevail

when HSR’s excess travel time is greater than three hours.

Figure 13: HSR and air transport comparison on selected overlapping routes

HSR Flight price HSR Price HSR's price Excess travel Estimated

Commencement Flight Rail Economy Second class discount Air total HSR total time of HSR Traffic

Route Date Distance (km) Distance (km) RMB RMB relative to air Travel time Travel time over air (hr) Loss

1 Beijing-Changzhou 30-Jun-2011 977 1,153 660 494 -25% 4.0 5.6 1.6 -49.4%

2 Beijing-Nanjin 30-Jun-2011 917 1,023 890 444 -50% 4.5 5.3 0.8 -32.0%

3 Beijing-Shanghai 30-Jun-2011 1,085 1,318 630 555 -12% 4.5 5.8 1.3 -0.1%

4 Guangzhou-Changsha 26-Dec-2009 563 707 621 314 -49% 3.3 3.5 0.2 -55.0%

5 Guangzhou-Wuhan 26-Dec-2009 835 1,069 550 464 -16% 4.3 5.0 0.7 -20.5%

6 Hangzhou-Jinan 30-Jun-2011 766 1,081 1,030 476 -54% 4.0 6.1 2.1 -29.5%

7 Shanghai-Jinan 30-Jun-2011 735 912 507 399 -21% 4.3 4.6 0.3 -54.5%

8 Shanghai-Qingdao 30-Jun-2011 552 1,308 571 518 -9% 3.7 7.2 3.5 0.0%

9 Shanghai-Wenzhou 1-Oct-2010 367 603 730 178 -76% 3.3 5.7 2.5 -24.0%

10 Shenzhen-Changsha 26-Dec-2009 632 809 560 390 -30% 3.3 4.5 1.2 -49.8%

11 Tianjin-Shanghai 30-Jun-2011 951 1,213 622 515 -17% 3.6 6.0 2.4 -13.7%

12 Jinan-Qingdao 23-Dec-2008 471 393 372 119 -68% 3.2 3.6 0.4 -100.0%

13 Zhengzhou-Xian 6-Feb-2010 457 523 366 229 -37% 3.1 2.7 (0.4) -100.0%

Average -36% 3.8 5.0 1.3 -40.7% Source: Ctrip.com, Credit Suisse estimates, huoche.com

HSR most attractive to time-

rich, price-sensitive

customers than business

travellers

10 April 2013


Traffic diversion smaller than Japan’s Shinkansen

Japan’s Shinkansen is the most comparable HSR network outside China. Japan is a

densely populated nation where the low-cost carriers have little significant presence in the

domestic market. While HSR in both countries are similarly competitive for routes below

500 km, we see 15% less diversion in China for routes between 500 km and 1,100 km.

We believe the major reasons for the smaller impact are: (1) safety concern following the

deadly train collision in July 2011, (2) a relatively underdeveloped transit network

connecting to HSR stations compared with airports, (3) the remote locations of HSR

stations and their lack of connectivity with metro rail systems, and (4) greater proportion of

business travellers in China. The impact of factors (1), (2) and (4) should gradually

disappear, but it will take some time before the area surrounding HSR stations are

absorbed into city centres, as the country continues to urbanise. In contrast, the

Shinkansen stations in Japan are centrally located in major cities and usually connected to

metro stations and bus lines.

Figure 14: Traffic diversion to HSR vs distance in China and Japan

-100%

-90%

-80%

-70%

-60%

-50%

-40%

-30%

-20%

-10%

0%

0 200 400 600 800 1000 1200 1400

Distance (km)

Traf

fic

div

ersi

on

to

China

Japan

Source: Credit Suisse estimates* based on 25 overlapping routes in China

Safety issues, lack of

integration with other

transportation modes and

remote location of the

station limit HSR as a

substitution for air services

in China

10 April 2013


Assessing traffic loss to HSR

Traffic losses vary depending on distance. To quantify the potential traffic diversion, we

applied a ratio of potential traffic loss inferred from our regression analysis based on 25

sampled routes to the available seat kilometre data for all overlapping routes. We use

capacity as measured by available seat kilometre as a proxy for traffic, as detailed route-

by-route traffic and load factors are not available. We think this make sense: the higher the

flight frequency, the higher the traffic growth.

Figure 15: Accumulated loss in traffic growth 2013-15E

6.6%

6.0% 5.9%5.8%

5.2%

5.0%

5.2%

5.4%

5.6%

5.8%

6.0%

6.2%

6.4%

6.6%

6.8%

China Southern HNA Group Sector China Eastern Air China


Moderate traffic loss

Our study shows that domestic market as a whole will see a 8.1% loss in traffic growth

over 2013 to 2015 as a direct result of the new HSRs, or about 2.7% domestic traffic loss

a year. The impact on each airlines business differs according to its exposure to short-haul

routes overlapping with HSR and its exposure to the international markets that are not

affected by HSR. Taking the outbound markets into account, the traffic loss for the overall

sector is 5.8% for the next three years, or 1.9% per annum.

Air China is least affected

Air China, which has c35% of its capacity deployed in international markets and 65% of its

domestic capacity focused on long-haul routes >1,200, is least affected by HSR, in our

view. The short-haul domestic routes <500 km, which represent only 3.3% of Air China’s

domestic capacity, are primarily services to second-tier cities in Western China, where the

HSR network is underbuilt. We expect the overall traffic loss over the next three years to

be only 5.2%, or 1.7% per annum. China Southern Airlines deploys 78% of its capacity in

the domestic market and is expected to see the greatest loss in traffic growth at 6.6%. We

consider this manageable.

Figure 16: Routes distribution and accumulated loss in traffic growth over 2013-15E*

Estimated Air China China HNA Airline Air China China HNA Airline

Distance (km) Diversion China Eastern Southern Group sector China Eastern Southern Group sector

Domestic 100-200 100% 0.0% 0.0% 0.1% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Domestic 201-300 100% 0.1% 0.2% 0.2% 0.4% 0.2% 0.0% 30.6% 0.0% 0.6% 7.5%

Domestic 301-400 100% 0.2% 0.9% 0.9% 1.0% 0.7% 22.8% 9.2% 3.7% 4.2% 7.7%

Domestic 401-500 100% 1.3% 2.5% 1.9% 3.4% 1.9% 5.1% 5.2% 19.2% 6.0% 8.7%

Domestic 501-600 80% 1.3% 2.4% 2.2% 2.4% 2.1% 49.0% 23.8% 25.6% 6.0% 31.7%

Domestic 601-700 60% 1.8% 2.8% 4.5% 3.8% 3.2% 35.3% 26.8% 33.9% 21.3% 30.3%

Domestic 701-800 50% 0.9% 2.2% 3.4% 3.4% 2.4% 33.3% 11.0% 24.8% 21.7% 22.6%

Domestic 801-900 40% 2.1% 4.5% 4.5% 3.3% 3.7% 21.5% 14.1% 13.4% 17.6% 17.1%

Domestic 901-1000 30% 4.1% 5.5% 4.0% 6.1% 4.7% 30.2% 26.1% 17.6% 20.8% 23.5%

Domestic 1001-1100 25% 6.6% 9.1% 6.1% 8.7% 6.8% 16.2% 14.5% 23.9% 17.0% 18.2%

Domestic 1101-1200 20% 5.2% 5.4% 4.7% 8.5% 5.3% 12.9% 10.4% 10.7% 8.1% 10.4%

Domestic >1200 0% 41.4% 36.3% 45.5% 49.0% 42.5% 0.0% 0.0% 0.0% 0.0% 0.0%

Domestic total 65.0% 72.0% 78.0% 90.0% 73.5% 8.0% 8.1% 8.5% 6.6% 8.1%

International 35.0% 28.0% 22.0% 10.0% 26.5% 0.0% 0.0% 0.0% 0.0% 0.0%

Total 100.0% 100.0% 100.0% 100.0% 100.0% 5.2% 5.8% 6.6% 6.0% 5.9%

Route distribution by distance (based on ASK) Accumulated lost growth (2013-15)

Source: Company data, Credit Suisse estimates *Only HSR routes operational since 2012 are included.

Domestic routes under 500

km represent only 3.3% of

CA’s capacity. It mainly

serves western China,

where HSR is underbuilt

10 April 2013


No sustained HSR impact on airline profitability Yields and load factors are the key elements of airlines’ profitability. In a competitive market,

higher yields are usually associated with higher load factors. The major concern of the

market is that the airlines will cut airfare to protect their market shares and load factors could

be substantially lower than the levels before the launch of HSR. After more than three years’

experience with HSR, the airlines have learnt how to cope with the competition, in our view.

Our study of more than 25 overlapping routes suggests that competition with HSR will result

in capacity reductions, but it has no sustained impact on route profitability and load factors.

Airlines have become adept at adjusting capacity or exiting short-haul markets where they

are not competitive. While rail will remain a major competitor in the domestic market, its

impact has largely been reflected in airline fleet planning strategies. We illustrate the effects

of competition with HSR in the following cases:

Case 1: Wuhan-Guangzhou (835 km)—short-term impact on load factor and yield

The Wuhan-Guangzhou HSR line was launched in December 2009. This was the first

meaningful battle between the airlines and HSR. The airlines initially responded by cutting

airfare by 55-70%, but they were unable to attract enough customers, due to an insignificant

difference in total travel time and travel costs. As a result, load factors dropped to 50% right

after HSR launch. Subsequently, airlines kept cutting capacity for six months until fares and

load factors returned to a profitable level. The battle with HSR resulted in a 23% capacity cut

and a 2% drop in load factors in 2010, but these rebounded sharply (by 5% to 85%) in 2011.

The negative impact on yields and load factors was not sustained: excess capacity was

readily redeployed to other profitable routes. The experience on the Wuhan-Guangzhou line

helped airlines assess their ability to compete with HSR and take swifter action in capacity

adjustment when the market was not in their favour.

Figure 17: Wuhan-Guangzhou available seats Figure 18: Wuhan-Guangzhou passenger load factor

-60.0%

-40.0%

-20.0%

0.0%

20.0%

40.0%

60.0%

80.0%

60,000

70,000

80,000

90,000

100,000

110,000

120,000

130,000

140,000

150,000

160,000

Jan-

09

May

-09

Sep

-09

Jan-

10

May

-10

Sep

-10

Jan-

11

May

-11

Sep

-11

Jan-

12

May

-12

Sep

-12

Jan-

13

Seats YoY

80.0%

81.0%

82.0%

83.0%

84.0%

85.0%

86.0%

2009 2010 2011 2012E

Source: Diio Mi Source: 2012 statistics data on Civil Aviation of China

Case 2: Shanghai-Beijing (1073 km)—competition with HSR and capacity

constraints

The Shanghai-Beijing HSR line launched in June 2011 overlaps with about 10 airlines

routes. The launch of the service line has caused the airlines to completely exit some

short-haul routes, such as Nanjin-Jinan (534 km). However, we only saw a modest

average decline of 0.5 pp in load factors in 2011. The safety concern about HSR after a

deadly train collision in Wenzhou in July 2012 likely slowed the deflection to train from air

transport. With that memory fading, demand for HSR has been picking up. A survey

Load factors on Wuhan-

Guangzhou route

rebounded in 2012 after

capacity adjustment

Fading memories of the

deadly collision in Wenzhou

helping demand recover in

Shanghai-Beijing HSR route

10 April 2013


conducted by our Credit Suisse Chinese Whispers Team in August 2012 showed that the

average load factor of the Shanghai-Beijing line was 71.88%, up from 50.03% in 2011.

China Eastern Airlines, a major carrier in this market, said several short-haul routes are

likely to see further capacity cut in response to falling demand. We see this swift capacity

adjustment, instead of cutting their airfares and profit, as good sign that airlines can be

nimble in competing with HSR.

Figure 19: Load factors by airlines routes on BJ Figure 20: The load factor of BJ-SH trains by class*

70.0%

72.0%

74.0%

76.0%

78.0%

80.0%

82.0%

84.0%

86.0%

88.0%

2009 2010 2011 2012E

Shanghai - Beijing Beijing - Nanjin

Beijing - Changzhou Shanghai - Jinan

50.03%

12.29%

20.01%

58.04%

71.88%

45.28%

56.05%

78.93%

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

80.00%

90.00%

Overall Business class First class Second class

2011 2012

Source: Company data, Credit Suisse estimates Source: China Railway Customer Service Centre, Chinese Whispers

Survey Team * Survey done in August 2012 and August 2011

For the Shanghai-Beijing trunk air route (1,073 km, two hours flight), the busiest route that

captures significant attention, the load factor has been hovering at around 87% since 2010

and we saw almost no growth in capacity. Instead of being affected by the launch of HSR,

we argue that the capacity constraints at Beijing (PEK), Pudong (PVG) and Hongqiao

(SHA) airports, as well as airspace congestion, are the key reasons limiting growth in this

route. Both Beijing and Shanghai Pudong airports are operating near their designed

capacity. The capacity constraints are unlikely to be resolved until a new airport in Beijing

is built in 2018 and a new terminal becomes operational in Pudong in 2015.

Figure 21: Beijing-Shanghai seats Figure 22: Airport capacity utilisation

-15.00%

-10.00%

-5.00%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

650,000

670,000

690,000

710,000

730,000

750,000

770,000

790,000

810,000

830,000

Mar

-11

May

-11

Jul-1

1

Sep

-11

Nov

-11

Jan-

12

Mar

-12

May

-12

Jul-1

2

Sep

-12

Nov

-12

Jan-

13

SH-BJ seats YoY

0

10

20

30

40

50

60

70

80

90

Beijing Shanghai Pudong Shanghai Hongqiao

Annual capacity (mn pax) Actual no of pax (mn)

Utilization = 107%

Utilization = 107%

Utilization=85%

Source: Diio Mi Source: Company data, Credit Suisse estimates

10 April 2013


Case 3: Harbin–Dalian (887 km): If you know you couldn’t beat them, leave them

The Harbin-Dalian HSR line is the latest trunk line to join the competition with the airlines.

The line overlaps with several short-haul routes with less than 600 km flight distance and

less than three hours flight duration. Instead of cutting airfare to protect their market shares,

the airlines exited the markets before the competition ever begins. Realising that the chance

of success over HSR was slim on short-haul routes, Shenzhen Airlines and China Southern

Airlines suspended the service of Changchun-Dalian (630 km) and Shenyang-Dalian (340

km) right before the scheduled launch date of HSR. Planning their fleet deployment ahead of

time to avoid a price war is a good practice for airlines, in our view. We expect the airlines to

use a similar strategy to cope with competition going forward.

Figure 23: Shenzhen Airlines’ Changchun-Dalian seats Figure 24: China Southern Airlines’ Shenyang-Dalian seat

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

Jan-

12

Feb

-12

Mar

-12

Apr

-12

May

-12

Jun-

12

Jul-1

2

Aug

-12

Sep

-12

Oct

-12

Nov

-12

Dec

-12

Jan-

13

Feb

-13

ZH suspended all flights before the launch of HSR in December 2012

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

May

-11

Jun-

11

Jul-1

1

Aug

-11

Sep

-11

Oct

-11

Nov

-11

Dec

-11

Jan-

12

Feb

-12

Mar

-12

Apr

-12

May

-12

CZ suspended all flights before the launch of HSR in December 2012

Source: Diio Mi Source: Diio Mi

Airlines exited the

unprofitable short-haul

markets before they went

head-to-head with HSR

10 April 2013


HSR fare reduction the key risk The second class HSR in China running at 300 km/h is priced at Rmb0.43/km, about a

36% discount to airfare. Our traffic diversion estimates are based on an assumption the

price discount will hold for the next three years. We see the potential fare cuts in HSR as

the key risk to our thesis. The elasticity in demand to pricing is difficult to observe.

However, the experience in Taiwan, Japan and Europe tells us HSR will have to be priced

at a discount to air services to maintain its market share. In Taiwan, HSR had to be priced

at least 30% less than the air route (248 km) to capture the market shares of airlines. In

Japan, the airlines only started regaining market shares after the new LLCs entrants had

priced their service 55% below HSR. Spanish airlines, including two low-cost carriers,

compete directly with HSR and have priced their services at a 20% discount to HSR,

retaining a high (50%) market share on the Madrid-Barcelona route.

Taiwan experience: Cutting train fare expedites the demise of domestic air routes

Before the launch of HSR in 2007, airlines, national railway (slow train) and highway were

the major modes of transportation in West Taiwan. The convenient location of HSR station

and the high capacity of HSR significantly reduced the market shares of airlines. The

airlines cut 43.5% of their capacity for Taipei-Kaohsiung route within one year. During the

first year, we estimate that the average free seat train fare was priced at 15-32% discount

to the economy airfare, to compensate for an hour extra journey time. To protect their

market shares and eliminate the price differentials, the airlines on average cut their airfare

by about 36%. However, the counter-reaction by HSR cutting their fare by about 20% in

March 2008 essentially offset the price cut by the airlines. By November 2008, all airlines

exited the market except Mandarin, which maintained a minimal level of service of 8-12

flights a week before completely exiting in August 2012.

However, air and train fare represent an even greater proportion of the disposable income

of travellers in China than other markets we surveyed. A reduction in HSR fare in China

means that the deflection to HSR could be much higher than our current estimates.

Figure 25: No of pax for Songshen (Taipei) – Kaohsiung Figure 26: Taiwan - Average HSR fare and train pax

-40%

-35%

-30%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

0

50

100

150

200

250

300

350

400

Aug

-03

Feb

-04

Aug

-04

Feb

-05

Aug

-05

Feb

-06

Aug

-06

Feb

-07

Aug

-07

Feb

-08

Aug

-08

Feb

-09

Aug

-09

Feb

-10

Aug

-10

Feb

-11

Aug

-11

Feb

-12

Aug

-12

Songshen-Kaoshiung pax (000) Train fare discount to airfare (right)

Airlines cut its fare by 31% in September 2007.

400

500

600

700

800

900

1,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

4,000,000

4,500,000

Jan-

07

Jun-

07

Nov

-07

Apr

-08

Sep

-08

Feb-

09

Jul-0

9

Dec

-09

May

-10

Oct

-10

Mar

-11

Aug

-11

Jan-

12

Jun-

12

Nov

-12

HSR pax no Avg ticket price (NT$) (Right)

Source: Diio Mi Source: Taiwan High Speed Rail, various media reports

Domestic airlines routes

were unable to survive after

HSR operator cut their train

fare by 20% in March 2008.

10 April 2013


Japan’s experience: LCCs eliminate HSR cost advantage

Before the arrival of the low-cost carriers, air held some 90% market share for the Tokyo-

Fukuoka route (939 km). The route is mature with nil growth between 2003 and 2011.

Jetstar Japan and AirAsia, the new LCCs in Japan, have commenced their services from

Narita in July 2012, offering airfare that is 70% lower than full service carriers and 55%

lower than the Nozomi HSR.

Although the location of the Narita airport is far less convenient than the train station and

Haneda airport, the LCC fare makes the journey cheaper and faster than HSR even when

flying out of the Narita airport. The number of seats increased 6.7% YoY between the two

airports in Tokyo and Fukuoka over the nine month period following the launch of LCC

service. We argue that most of the new demand for air service comes from the deflection

from HSR, as the LCC eliminated all of the cost advantages of HSR over air service.

Figure 27: Tokyo Narita – Fukuoka seats Figure 28: Airfare vs train fare on Tokyo-Fukuoka routes

-15%

-10%

-5%

0%

5%

10%

15%

20%

800,000

850,000

900,000

950,000

1,000,000

1,050,000

1,100,000

1,150,000

Jan-

11

Mar

-11

May

-11

Jul-1

1

Sep-

11

Nov

-11

Jan-

12

Mar

-12

May

-12

Jul-1

2

Sep-

12

Nov

-12

Jan-

13

Mar

-13

Tokyo-Fukuoka seats YoY

Market entry of LCCs

Airlines Fare Travel time

Haneda-Fukuoka

(Full service economy one-way) ¥30,300-38,400 2 hr

Narita-Fukuoka

(Full service economy one-way) ¥30,300-38,400 2 hr

Narita-Fukuoka

(Low cost carriers) ¥5,000-14,990 2 hr

Train Fare Travel time

Tokyo-Hakata

(Nozomi) ¥22,000 4hr 50min Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

European experience – can HSR beat LCCs?

Europe has among the world’s most developed HSR networks, with a total existing track

length of 6,600 km. Unlike China or Japan, most direct routes are below 500 km. We also

note the HSR market share is lower than China and Japan at every flight distance. We

argue that a relatively low market share of rail in Europe is primarily due to a large number

of HSR routes overlapping with those served by LCCs, which typically price their service at

a discount to HSR. On average, HSR is only 16% cheaper than airfares offered by airlines,

including a large number of low-cost carriers.

The airlines gained market

shares from HSR only after

the entry of LCCs, which

had priced their service at a

discount to train fares

The prevalence of LCCs in

Europe has preserved a

higher market share for

airlines, when compared to

North Asia, where the LCCs

are less dominant

10 April 2013


Figure 29: Est. market share of HSR by flight distance Figure 30: Europe – HSR planned and in operation

-100%

-95%

-90%

-85%

-80%

-75%

-70%

-65%

-60%

-55%

-50%

100 200 300 400 500 600

Flight distance (km)

Esti

mat

ed m

arke

t sh

are

of

the

HSR

Europe

China

Japan

-

1,000

2,000

3,000

4,000

5,000

6,000

Spa

in

Fra

nce

Ger

man

y

Italy

Por

ttuga

l

Sw

eden

Pol

and

UK

Bel

gium

Sw

itzer

land

In operation Planned

Km

Source: Credit Suisse estimates Source: Credit Suisse estimates

Spain has the largest HSR network in the EU. However, airlines still play an important role in

the domestic market. Despite a short flying distance of only 500 km, half of the travellers on

the Madrid-Barcelona route fly. This is in contrast to only airline’s 20% market share in the

Tokyo-Osaka route (515 km) and 38% in the Guangzhou-Changsha route (550 km).

Stripping out the 25% of the market that LCCs represent (i.e., Air Europa and Vueling),

airline market share would be close to 75%, similar to routes of the same distance in Japan.

The most convenient way to travel from London to Paris (322 km) is the Eurostar high

speed train service, which takes only two hours and fifteen minutes. The prevalence of

low-cost carriers in Europe has attracted the most price-sensitive segment of the market.

LCCs, together with short-haul flights provided by the full service carriers connecting

passengers to long-haul international routes via Heathrow and Charles De Gaulle, have

preserved 25% market share. In contrast, full-service airlines in Asia were unable to

compete with HSR in a short-haul route like this and completely exited the market.

Figure 31: Pricing differential between air and rail for major HSR routes in Europe

Air Train

Fare Fare

Flying Railway Economy Standard Market

Distance Distance One-way One-way Train fare share

km km EUR EUR vs. airfare of HSR

Madrid - Barcelona 505 630 81 102 25.9% 50.0%

Paris - London 322 444 120 104 -13.3% 75.0%

Rome - Milan 476 585 82 85 3.7% 56.0%

Paris - Brussels 246 310 98 66 -32.7% 95.0%

Madrid - Seville 392 471 109 54 -50.5% 83.0%

Paris - Lyon 392 425 124 78 -37.1% 72.0%

London - Brussels 320 320 105 100 -4.3% 80.0%

Paris - Marseille 661 750 111 85 -23.4% 56.0%

Average 414 492 104 84 -16.5% 70.9%


10 April 2013


Will rail fares come down?

The pricing mechanism of HSR in China remains confidential to the state. The fare

inflexible: it does not change in response to seasonal demand or market conditions.

However, we believe the current pricing has taken into account the investment costs,

income level of the passengers and the prices of other transportation modes. China’s HSR

fare is the lowest among all countries running HSR, and 71% lower than the global

average. Given that the income level of Chinese passengers are much lower than other

countries with HSR, we have to local at fares vs local income. Based on the national

average salary of Rmb4,134/month, the monthly income of an average worker can

purchase up to 24 tickets for a 400 km journey. This is lower than 27.7 tickets for Taiwan,

but higher than the global average of 23 tickets. Although HSR fare is much higher than

that the slow trains, which are heavily subsidised, HSR is not very expensive relative to

the average income level. An average discount of 36% relative to flights offered by full

service airlines is similar to our observation in Japan. We do not see any immediate

pressure for the operators to cut HSR fare.

Figure 32: Second class HSR fare by country* Figure 33: Affordability - Salary/ticket price (400 km) *

0.00

0.50

1.00

1.50

2.00

2.50

Germany Italy France Japan Spain Average Taiwan China

RMB/km

15.00

17.00

19.00

21.00

23.00

25.00

27.00

29.00

Taiwan France China Spain Average Japan Germany Italy

No of 400km trip

Affordability = Monthly salary / HSR ticket price for a 400km journey.

Source: Credit Suisse estimates, HSR operators * HSR running at

300km/h

Source: Credit Suisse estimates, HSR operators *Affordability index =

Monthly salary / ticket price for a second class train ticket for 400 km

Improving network coordination at a policy level and international expansion

Intense competition between the airlines and HSR that results in heavy losses for both

sectors is not a desirable scenario for the government, in our view. Alongside the market,

we expect the next step in railway reform in China will be the consolidation of the Ministry

of Railway into the Ministry of Transportation and the pricing reform. The consolidation,

which will put the regulation of aviation, shipping, toll road and railway under the same

umbrella, should lead to better coordination of competition between the high speed rail

and the airlines, as well as the promotion of intermodal connectivity between the two

transportation modes. The arguments on the overpricing of HSR service are made only in

comparison to the slow train, which is 50% cheaper than HSR and widely perceived as

below market price. The reform in pricing mechanism is targeted at the slow trains. A

potential hike in fare for the slow train should make HSR less expensive, relieving HSR of

the pressure to cut fares.

No immediate pressure to

cut rail ticket prices; they are

already the lowest in the

world and we view fares as

broadly accessible in local

income terms

The restructuring of Ministry

of Transportation should

lead to better coordination of

competition between rail

and airlines.

10 April 2013


At present, the railway system in China is run as a social service. Private investment is

negligible. While we believe the government will eventually transform HSR assets into

profit-driven companies with a commercial mind-set to compete with the airlines, the

reform is likely to be a very long process which could take many years. The further

expansion of HSR is likely to increase pressure on the regulators to ensure carriers and

airports gain new and expanded access to key regional and long-haul markets. China’s

international travel market is still in its infancy. The rise of HSR should also prompt the

airlines to accelerate their international expansion, which only accounts for about 28% of

the sector total capacity.

Figure 34: Airline ASK by market, 2012* Figure 35: The proposed railway reforms

65%72%

78%90%

35%28%

22%10%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Air China China Eastern China Southern HNA Group

Domestic International

Area of reform Detail

Consolidation Railway, highway, aviation and marine will be

under the management of Ministry of

Transportation

Private Investment Railway lines designated as social service will see

more investments from the government. Lines

that are designated as profit-seeking should

attract more private capital.

Separation of regulator

and railway company

Several new railway companies will be formed to

operate the railway assets

Pricing Mechanism Train pricing will move towards market

mechanism

Source: Company data *HNA Group data also includes the airlines

outside the listed company, but under the private HNA Group.


The rise of HSR should also

prompt the airlines to

accelerate their international

expansion

10 April 2013


Air China is least affected by HSR Air China (CA): Least affected by HSR

CA is least affected by the new of HSR, in our view. We estimate that less than 10% of

CA’s revenue is generated from domestic routes under 1,000 km. The existing short-haul

routes below 500 km are primarily serving the Western and North regions, where the

impact from HSR is limited. The new HSR is going to take away 5.2% traffic growth over

2013-15, or 1.7% per annum. At present, about 35% of Air China’s existing capacity is

deployed to international markets. The US, Europe, Taiwan, Korea and Thailand are likely

to be the key focus of CA’s international expansion. Air China remains our top pick in

Chinese airlines sector. A rebound in business travel demand and the continual expansion

into profitable international routes are key to driving a 34% YoY growth in net profit in 2013.

Key catalysts: (1) a rebound in business travel in April; (2) the announcement of new visa

policy by foreign governments; (3) the potential sale of new shares at a premium to book

value and H-share price; (4) earnings improvement of its 30%-owned associate Cathay

Pacific and (5) any support policies from the government.

Figure 36: Air China profit estimates 2006-14E Figure 37: Air China’s capacity by distance

-15,000

-10,000

-5,000

0

5,000

10,000

15,000

2006

2007

2008

2009

2010

2011

2012

2013

E

2014

E

2015

E

International, 36%

Domestic >1000km,

53%

Domestic 500-

1000km, 9%

Domestic <500km, 2%

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

China Eastern Airlines (MU): Dragged down by Japan

MU is expected to see a moderate impact on traffic growth. Short-haul domestic routes

(below 500 km) only represent 4% of its total capacity. We estimate that the new HSR is

going to take away 5.8% traffic growth over 2013-15 or 1.9% per annum. A sustained

underperformance of its Japanese routes means that the profitability of the airlines will no

longer return to 2011 level, when Japan contributed roughly a quarter of its operating profit.

The pre-booking activities from both Japan and China remain very weak for 1Q13 and we

could reasonably expect a small quarterly loss. Our base case is flat profit growth for FY13,

because the capacity from Japan has been redeployed to routes that are significantly less

profitable. We believe the performance of the upcoming Sakura season in April-May (the

cherry blossom season), the peak season for Japanese routes, will be key to determining

a sustainable recovery in this market. We reiterate our UNDERPERFORM rating for China

Eastern Airlines.

Key catalysts: (1) pre-booking activities for the Sakura season; (2) announcement of new

visa policy by foreign governments; and (3) any support policies from the government.

Least impact on CA given its

higher exposure to the

international market

Demand for Japanese

routes is stabilising, but we

see no sign of recovery yet

10 April 2013


Figure 38: China Eastern—net profit, 2006-2015E Figure 39: China Eastern—routes by distance

(6,000)

(4,000)

(2,000)

-

2,000

4,000

6,000

2006

2007

2008

2009

2010

2011

2012

2013

E

2014

E

2015

E

International, 30%

Domestic >1000km,

50%

Domestic 500-1000km,

17%

Domestic <500km, 4%


China Southern Airlines (CZ): Moderate impact from HSR

China Southern Airlines will be most affected by the launch of new high speed rail

services, most notably the Guangzhou-Beijing line, in our view. After several years of

competition, CZ has gained valuable experience in competing with HSR. We think CZ will

be quick to withdraw capacity from routes that are not competitive. Despite an expected

loss of 6.6% growth over 2013-15, CZ is expected to experience faster growth over this

period, as the routes in and out of its high-growth western hubs in Urumqi and Chongqing,

as well as their international expansion to the US, Europe and Australia, will keep CZ’s

capacity growth at around 9% a year over 2013-15E. Faster growth in Western China and

a 0.7% rise in overall passenger yield in 2013 should drive profit growth of 50%.

Key catalysts: (1) a rebound in business travel in April; (2) the announcement of new visa

policy by Australia; (3) positive change in currency expectation; (4) any support policies

from the government and (5) potential tie-up with Air China to operate A380s out of Beijing.

Figure 40: China Southern—net profit, 2006-2015 Figure 41: China Southern—routes by distance

(6,000)

(4,000)

(2,000)

-

2,000

4,000

6,000

8,000

2006

2007

2008

2009

2010

2011

2012

2013

E

2014

E

2015

E

International, 36%

Domestic >1000km,

53%

Domestic 500-1000km,

9%

Domestic <500km, 2%


Visa policy change in the

Australia market and any

resolution for its A380s to fly

out of Beijing could provide

upside surprises

10 April 2013


Appendix Figure 42: China’s high speed rail plan

Estimated

Length completion Designed

Affliated passenger lines km Date Speed Status

Four horizontal passenger lines

徐郑客运专线 Xuzhou - Zhengzhou 362.4 Jan-15 350 km Under construction

郑西客运专线 Zhengzhou - Xian 456.6 Feb-10 350 km In operation. Seriously underutilized

西宝客运专线 Xian - Baoji 138.0 Jun-13 250 km Under construction

宝兰客运专线 Baoji - Lanzhou 400.0 Jan-17 250 km Under construction

沪杭客运专线 Shanghai - Hangzhou 158.5 January 2010 350 km In operation

杭长客运专线 Hangzhou - Changsha 927.0 Jan-14 350 km Under construction

长昆客运专线 Changsha - Kunming 1,167.8 March 2015 350 km Under construction

胶济客运专线 Qingdao - Jinan 362.5 December 2008 250 km In operation

石济客运专线 Shijiazhuang - Jinan 319.0 Dec-15 250 km Under construction

石太客运专线 Shijiazhuang - Taiyuan 189.0 January 2009 250 km In operation

宁沪城际铁路 Ningbo - Shanghai 300.0 July 2010 350 km In operation

合宁客运专线 Hefei - Ningbo 156.0 April 2008 250 km In operation

合武客运专线 Hefei - Wuhan 357.0 April 2009 250 km In operation

汉宜客运专线 Hankou - Yibin 291.8 July 2012 250 km In operation

宜万客运专线 Yibin - Wanzhou 377.0 December 2010 200 km In operation

渝利客运专线 Chongqing - Lichun 259.5 Jan 2014 200 km Under construction

遂渝客运专线 Suining - Chongqing 131.2 Jan 2014 200 km Under construction

达成客运专线 Dazhou - Chengdu 386.0 July 2009 200 km In operation

Four vertical passenger lines

Beijing - Shanghai 京沪客运专线 Beijing - Shanghai 1,318.0 June 2011 350 km In operation

京石客运专线 Beijing - Shijiazhuang 281.0 Dec-12 350 km In operation

石武客运专线 Shijiazhuang - Wuhan 840.7 Dec-12 350 km In operation

武广客运专线 Wuhan - Guangzhou 1,068.8 December 2009 350 km In operation

广深港专线广深段 Guangzhou - Shenzhen 105.0 August 2011 350 km In operation

广深港专线香港段 Shenzhen - Hong Kong 26.0 Jan-15 350 km Under construction

京津城际铁路 Beijing - Tianjin 113.5 August 2008 In operation

津秦客运专线 Tianjin - Qinghuangdao 261.0 Jul-13 350 km Under construction

秦沈客运专线 Qinghuangdao - Shenyang 405.0 July 2003 200 km In operation

哈大客运专线 Harbin - Dalian 904.0 December 2012 350 km In operation

盘营客运专线 Panjin - Yingkou 89.4 October 2013 350 km Under construction

长吉城际铁路 Changchun - Jilin 96.3 January 2011 250 km In operation

宁杭客运专线 Nanjin - Hangzhou 248.9 December 2011 350 km In operation

杭甬客运专线 Hangzhou - Ningbo 152.0 May 2013 350 km In operation

甬台温客运专线 Ningbo - Wenzhou 268.0 September 2009 250 km In operation

温福客运专线 Wenzhou - Fuzhou 298.4 July 2009 250 km In operation

福厦客运专线 Fuzhou - Xiamen 260.4 March 2010 250 km In operation

厦深客运专线 Xiamen - Shenzhen 502.4 October 2013 250 km Under construction

Other railways

海南东环铁路 Hainan East Ring 308.1 March 2011 250 km In operation

昌九城际铁路 Nanchang - Jiujiang 131.3 September 2010 250 km In operation

合蚌客运专线 Hefei - Pangfou 110.0 October 2012 350 km In operation

贵广铁路 Guiyang - Guangzhou 857.0 October 2014 250 km In operation

兰州乌鲁木齐 Lanzhou Urumqi 1,776.0 Jan-16 200 km Under construction

西安至成都客运专线 Xian - Chengdu 643.0 Jan-16 250 km Under construction

Xuzhou - Lanzhou

Shanghai - Kunming

Qingdao - Taiyuan

Shanghai - Chengdu

Others

Beijing - Hong Kong

Beijing - Harbin

Hangzhou - Fuzhou

Source: Various media

10 April 2013


Companies Mentioned (Price as of 10-Apr-2013)

Air China (0753.HK, HK$6.25, OUTPERFORM, TP HK$7.5) Cathay Pacific (0293.HK, HK$12.72) China Eastern Airlines (0670.HK, HK$3.18, UNDERPERFORM[V], TP HK$2.9) China Southern Airlines (1055.HK, HK$4.01, OUTPERFORM, TP HK$4.8) Vueling Airlines (VULG.MC, €9.26)

Disclosure Appendix

Important Global Disclosures

Davin Wu and Timothy Ross, each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.

Price and Rating History for Air China (0753.HK)

0753.HK Closing Price Target Price

Date (HK$) (HK$) Rating

22-Jun-10 8.44 7.20 N *

16-Aug-10 8.78 8.00

31-Jan-12 6.19 5.91

15-Jun-12 4.50 7.15 O *

22-Aug-12 5.07 6.70

28-Aug-12 4.84 6.90

16-Oct-12 5.13 7.50

* Asterisk signifies initiation or assumption of coverage.

N EU T RA L

O U T PERFO RM

Price and Rating History for China Eastern Airlines (0670.HK)



22-Jun-10 3.69 1.80 U *

16-Aug-10 4.33 2.20

15-Aug-11 3.85 3.72 N

31-Jan-12 2.76 3.41

15-Jun-12 2.42 3.50 O *

22-Aug-12 2.51 3.20

31-Aug-12 2.36 3.30

16-Oct-12 2.60 3.50

05-Nov-12 2.92 2.90 U


U N D ERPERFO RM

N EU T RA L

O U T PERFO RM

10 April 2013


Price and Rating History for China Southern Airlines (1055.HK)



22-Jun-10 3.65 2.68 U *

16-Aug-10 3.85 3.00

30-Mar-11 3.40 2.99

28-Apr-11 4.02 3.30

15-Aug-11 5.27 6.20 O

16-Jan-12 3.95 5.67

15-Jun-12 3.38 3.90 U *

22-Aug-12 3.63 3.40

16-Oct-12 3.72 3.60

29-Oct-12 3.66 3.80

05-Nov-12 3.77 4.50 O

26-Mar-13 4.29 4.80


U N D ERPERFO RM

O U T PERFO RM

The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities

As of December 10, 2012 Analysts’ stock rating are defined as follows:

Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark*over the next 12 months.

Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months.

Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months.

*Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractiv e, Neutrals the less attractive, and Underperforms the least attractive investment opportunit ies. As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin Ame rican and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return o f the relevant country or regional benchmark; Australia, New Zealand are, and prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, 12 -month rolling yield is incorporated in the absolute total return calculation and a 15% and a 7.5% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholds replace the +10-15% and -10-15% levels in the Neutral stock rating definition, respectively. Prior to 10th December 2012, Japanese ratings were based on a stock’s total return relative to the average total return of the relevant country or regional benchmark.

Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances.

Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.

Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation:

Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months.

Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months.

Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months.

*An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors.

Credit Suisse's distribution of stock ratings (and banking clients) is:

Global Ratings Distribution

Rating Versus universe (%) Of which banking clients (%)

Outperform/Buy* 43% (54% banking clients)

Neutral/Hold* 39% (47% banking clients)

Underperform/Sell* 16% (40% banking clients)

Restricted 3%

*For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors.

10 April 2013


Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein.

Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research and analytics/disclaimer/managing_conflicts_disclaimer.html

Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties.

Price Target: (12 months) for China Southern Airlines (1055.HK)

Method: Our 12-month target price of HK$4.80 is based on a target EV/CFMV multiple of 145% based on an average ROIC of 9.6% over 2012-13E

Risk: Risks to our 12-month target price of HK$4.80 are: Airlines are generally exposed to risks from rising fuel prices, competition, uncertain demand and their combined impact on fares, as well as labour unrest and interest rate exposure. Given a lack of experience in international market, we perceive CZ's greatest unique risks lying in executing its international expansion plan and the efficient deployment their A380s to transcontinental routes.

Price Target: (12 months) for Air China (0753.HK)

Method: Our 12-month target price of HK$7.50 for Air China is based on 1.7x target EV/CFMV multiple based on an average ROIC of 11.5% over 2011-13E.

Risk: Risks to our 12-month target price of HK$7.50 are: Airlines are generally exposed to risks from rising fuel prices, competition, uncertain demand and their combined impact on fares, as well as labor unrest and interest rate exposure. CA is rapidly expanding their international passenger routes and Air Cargo business through its JV with Cathay Pacific. We perceive CA's greatest unique risks lying in the intense competition in transpacific passenger routes and international air cargo markets, in which they do not have obvious advantages over their foreign competitors.

Price Target: (12 months) for China Eastern Airlines (0670.HK)

Method: Our 12-month target price of HK$2.90 for China Eastern Airlines is based on a target EV/CFMV multiple of 1.6x based on an average ROIC of 10.3% over 2012-13E.

Risk: Risks to our 12-month target price of HK$2.90 for China Eastern Airlines include: Airlines are generally exposed to risks from rising fuel prices, competition, uncertain demand and their combined impact on fares, as well as labour unrest and interest rate exposure. MU has undergone a series of reorganization and management changes in the past few years. We perceive MU's greatest unique risks lying in the recovery of Japanese routes.

Please refer to the firm's disclosure website at www.credit-suisse.com/researchdisclosures for the definitions of abbreviations typically used in the target price method and risk sections.

See the Companies Mentioned section for full company names

The subject company (0753.HK) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse.

Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (0753.HK) within the next 3 months.

Important Regional Disclosures

Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report.

The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (1055.HK, 0753.HK, 0670.HK) within the past 12 months

Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares.

Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report.

For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit http://www.csfb.com/legal_terms/canada_research_policy.shtml.

As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report.

Principal is not guaranteed in the case of equities because equity prices are variable.

10 April 2013


Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that.

Taiwanese Disclosures: This research report is for reference only. Investors should carefully consider their own investment risk. Investment results are the responsibility of the individual investor. Reports may not be reprinted without permission of CS. Reports written by Taiwan based analysts on non-Taiwan listed companies are not considered recommendations to buy or sell securities under Taiwan Stock Exchange Operational Regulations Governing Securities Firms Recommending Trades in Securities to Customers.

To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.

Credit Suisse (Hong Kong) Limited ........................................................................................................................................................... Davin Wu

Credit Suisse AG, Singapore Branch .................................................................................................................................................. Timothy Ross

For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at www.credit-suisse.com/researchdisclosures or call +1 (877) 291-2683.

10 April 2013


References in this report to Credit Suisse include all of the subsidiaries and affiliates of Credit Suisse operating under its investment banking division. For more information on our structure, please use the following link: https://www.credit-suisse.com/who_we_are/en/.This report may contain material that 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 or which would subject Credit Suisse AG or its affiliates ("CS") to any registration or licensing requirement within such jurisdiction. All material presented in this report, unless specifically indicated otherwise, is under copyright to CS. None of the material, nor its content, nor any copy of it, may be altered in any way, transmitted to, copied or distributed to any other party, without the prior express written permission of CS. All trademarks, service marks and logos used in this report are trademarks or service marks or registered trademarks or service marks of CS or its affiliates. The information, tools and material presented in this report are provided to you for information purposes only and are not to be used or considered as an offer or the solicitation of an offer to sell or to buy or subscribe for securities or other financial instruments. CS may not have taken any steps to ensure that the securities referred to in this report are suitable for any particular investor. CS will not treat recipients of this report as its customers by virtue of their receiving this report. The investments and services contained or referred to in this report may not be suitable for you and it is recommended that you consult an independent investment advisor if you are in doubt about such investments or investment services. Nothing in this report constitutes investment, legal, accounting or tax advice, or a representation that any investment or strategy is suitable or appropriate to your individual circumstances, or otherwise constitutes a personal recommendation to you. CS does not advise on the tax consequences of investments and you are advised to contact an independent tax adviser. Please note in particular that the bases and levels of taxation may change. Information and opinions presented in this report have been obtained or derived from sources believed by CS to be reliable, but CS makes no representation as to their accuracy or completeness. CS accepts no liability for loss arising from the use of the material presented in this report, except that this exclusion of liability does not apply to the extent that such liability arises under specific statutes or regulations applicable to CS. This report is not to be relied upon in substitution for the exercise of independent judgment. CS may have issued, and may in the future issue, other communications that are inconsistent with, and reach different conclusions from, the information presented in this report. Those communications reflect the different assumptions, views and analytical methods of the analysts who prepared them and CS is under no obligation to ensure that such other communications are brought to the attention of any recipient of this report. CS may, to the extent permitted by law, participate or invest in financing transactions with the issuer(s) of the securities referred to in this report, perform services for or solicit business from such issuers, and/or have a position or holding, or other material interest, or effect transactions, in such securities or options thereon, or other investments related thereto. In addition, it may make markets in the securities mentioned in the material presented in this report. CS may have, within the last three years, served as manager or co-manager of a public offering of securities for, or currently may make a primary market in issues of, any or all of the entities mentioned in this report or may be providing, or have provided within the previous 12 months, significant advice or investment services in relation to the investment concerned or a related investment. Additional information is, subject to duties of confidentiality, available on request. Some investments referred to in this report will be offered solely by a single entity and in the case of some investments solely by CS, or an associate of CS or CS may be the only market maker in such investments. Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. Information, opinions and estimates contained in this report reflect a judgment at its original date of publication by CS and are subject to change without notice. The price, value of and income from any of the securities or financial instruments mentioned in this report can fall as well as rise. The value of securities and financial instruments is subject to exchange rate fluctuation that may have a positive or adverse effect on the price or income of such securities or financial instruments. Investors in securities such as ADR's, the values of which are influenced by currency volatility, effectively assume this risk. Structured securities are complex instruments, typically involve a high degree of risk and are intended for sale only to sophisticated investors who are capable of understanding and assuming the risks involved. The market value of any structured security may be affected by changes in economic, financial and political factors (including, but not limited to, spot and forward interest and exchange rates), time to maturity, market conditions and volatility, and the credit quality of any issuer or reference issuer. Any investor interested in purchasing a structured product should conduct their own investigation and analysis of the product and consult with their own professional advisers as to the risks involved in making such a purchase. Some investments discussed in this report may have a high level of volatility. High volatility investments may experience sudden and large falls in their value causing losses when that investment is realised. Those losses may equal your original investment. Indeed, in the case of some investments the potential losses may exceed the amount of initial investment and, in such circumstances, you may be required to pay more money to support those losses. Income yields from investments may fluctuate and, in consequence, initial capital paid to make the investment may be used as part of that income yield. Some investments may not be readily realisable and it may be difficult to sell or realise those investments, similarly it may prove difficult for you to obtain reliable information about the value, or risks, to which such an investment is exposed. This report may provide the addresses of, or contain hyperlinks to, websites. Except to the extent to which the report refers to website material of CS, CS has not reviewed any such site and takes no responsibility for the content contained therein. Such address or hyperlink (including addresses or hyperlinks to CS's own website material) is provided solely for your convenience and information and the content of any such website does not in any way form part of this document. Accessing such website or following such link through this report or CS's website shall be at your own risk. This report is issued and distributed in Europe (except Switzerland) by Credit Suisse Securities (Europe) Limited, One Cabot Square, London E14 4QJ, England, which is regulated in the United Kingdom by The Financial Services Authority ("FSA"). This report is being distributed in Germany by Credit Suisse Securities (Europe) This report is being distributed in the United States and Canada by Credit Suisse Securities (USA) LLC; in Switzerland by Credit Suisse AG; in Brazil by Banco de Investimentos Credit Suisse (Brasil) S.A or its affiliates; in Mexico by Banco Credit Suisse (México), S.A. (transactions related to the securities mentioned in this report will only be effected in compliance with applicable regulation); in Japan by Credit Suisse Securities (Japan) Limited, Financial Instruments Firm, Director-General of Kanto Local Finance Bureau (Kinsho) No. 66, a member of Japan Securities Dealers Association, The Financial Futures Association of Japan, Japan Investment Advisers Association, Type II Financial Instruments Firms Association; elsewhere in Asia/ Pacific by whichever of the following is the appropriately authorised entity in the relevant jurisdiction: Credit Suisse (Hong Kong) Limited, Credit Suisse Equities (Australia) Limited, Credit Suisse Securities (Thailand) Limited, Credit Suisse Securities (Malaysia) Sdn Bhd, Credit Suisse AG, Singapore Branch, Credit Suisse Securities (India) Private Limited regulated by the Securities and Exchange Board of India (registration Nos. INB230970637; INF230970637; INB010970631; INF010970631), having registered address at 9th Floor, Ceejay House, Dr.A.B. Road, Worli, Mumbai - 18, India, T- +91-22 6777 3777, Credit Suisse Securities (Europe) Limited, Seoul Branch, Credit Suisse AG, Taipei Securities Branch, PT Credit Suisse Securities Indonesia, Credit Suisse Securities (Philippines ) Inc., and elsewhere in the world by the relevant authorised affiliate of the above. Research on Taiwanese securities produced by Credit Suisse AG, Taipei Securities Branch has been prepared by a registered Senior Business Person. Research provided to residents of Malaysia is authorised by the Head of Research for Credit Suisse Securities (Malaysia) Sdn Bhd, to whom they should direct any queries on +603 2723 2020. This research may not conform to Canadian disclosure requirements. In jurisdictions where CS is not already registered or licensed to trade in securities, transactions will only be effected in accordance with applicable securities legislation, which will vary from jurisdiction to jurisdiction and may require that the trade be made in accordance with applicable exemptions from registration or licensing requirements. Non-U.S. customers wishing to effect a transaction should contact a CS entity in their local jurisdiction unless governing law permits otherwise. U.S. customers wishing to effect a transaction should do so only by contacting a representative at Credit Suisse Securities (USA) LLC in the U.S. Please note that this research was originally prepared and issued by CS for distribution to their market professional and institutional investor customers. Recipients who are not market professional or institutional investor customers of CS should seek the advice of their independent financial advisor prior to taking any investment decision based on this report or for any necessary explanation of its contents. This research may relate to investments or services of a person outside of the UK or to other matters which are not regulated by the FSA or in respect of which the protections of the FSA for private customers and/or the UK compensation scheme may not be available, and further details as to where this may be the case are available upon request in respect of this report. CS may provide various services to US municipal entities or obligated persons ("municipalities"), including suggesting individual transactions or trades and entering into such transactions. Any services CS provides to municipalities are not viewed as "advice" within the meaning of Section 975 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. CS is providing any such services and related information solely on an arm's length basis and not as an advisor or fiduciary to the municipality. In connection with the provision of the any such services, there is no agreement, direct or indirect, between any municipality (including the officials, management, employees or agents thereof) and CS for CS to provide advice to the municipality. Municipalities should consult with their financial, accounting and legal advisors regarding any such services provided by CS. In addition, CS is not acting for direct or indirect compensation to solicit the municipality on behalf of an unaffiliated broker, dealer, municipal securities dealer, municipal advisor, or investment adviser for the purpose of obtaining or retaining an engagement by the municipality for or in connection with Municipal Financial Products, the issuance of municipal securities, or of an investment adviser to provide investment advisory services to or on behalf of the municipality. If this report is being distributed by a financial institution other than Credit Suisse AG, or its affiliates, that financial institution is solely responsible for distribution. Clients of that institution should contact that institution to effect a transaction in the securities mentioned in this report or require further information. This report does not constitute investment advice by Credit Suisse to the clients of the distributing financial institution, and neither Credit Suisse AG, its affiliates, and their respective officers, directors and employees accept any liability whatsoever for any direct or consequential loss arising from their use of this report or its content. Principal is not guaranteed. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that.

Copyright © 2013 CREDIT SUISSE AG and/or its affiliates. All rights reserved.

Investment principal on bonds can be eroded depending on sale price or market price. In addition, there are bonds on which investment principal can be eroded due to changes in redemption amounts. Care is required when investing in such instruments.

When you purchase non-listed Japanese fixed income securities (Japanese government bonds, Japanese municipal bonds, Japanese government guaranteed bonds, Japanese corporate bonds) from CS as a seller, you will be requested to pay the purchase price only.

TS0296

https://www.credit-suisse.com/who_we_are/en/

china airlines sector - credit suisse

Documents