Company report

Vietnam Airlines

Content 4 About the IPO

4 The airline industry outlook

4 Vietnam Airlines

4 Financial Analysis

4 Operating forecast and Valuation

About Vietnam Airlines IPO

Par value 10,000 VND

Number of shares 49,009,008 shares

Offering price 22,300 VND per share

Offering proportion 3.475% of total charter capital

� The State

� IPO

� Strategic investors

� Employees

� Company Union75%

3.475%

20%

1.475% 0.05%

The Airline industry outlook

4Signs of recovery

4Vietnam’s advantageous location in a dynamic airline market

4Fast-paced growth of investments and tourism

4 Improved living standards in Vietnam

Signs of recovery Revenues growth and profit margins of the global airline industry

-6%

-4%

-2%

0%

2%

4%

0

200

400

600

800

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Doanh thu Biên lợi nhuận gộp � Revenue (billion USD) � Profit margin Source: IATA

Take off, again: The global airlines industry saw growth after the economic downturn

Growth rates of world air transport markets

2%

11%

7%

4%

8%

7%

1%

13%

10%

5%

6%

8%

0% 2% 4% 6% 8% 10% 12% 14%

Bắc Mỹ

Trung Đông

Châu Mỹ

Châu Âu

Châu Á Thái Bình Dương

Châu Phi

Source: IATA � 2012 � 2013

Signs of recoveryAfrica

Asia-Pacific

Europe

America

Middle East

North America

Locational advantage: Vietnam is located in Asia Pacific, the 2nd fastest growing air transportation market

Dominant: Vietnam Airlines holds the largest market share of international on international routes, leading by a wide margin.

Vietnam Airlines’ positionMarket share of Vietnam Airlines’ international passenger operations

40.6%

59.4%

� Vietnam Airlines � Other

Revenue structure of Vietnam Airlines’ international transportation

12.10%

46.35%

21.94%

5.00%

14.61%

� Europe � North East Asia � South East Asia

� Australia � CLMV

Source: CAPA Source: Vietnam Airlines

Domestic market 4Accelerated growth in the tourism industry

4Large population and improving income per capita

4Stable growth of FDI capital

Vietnam Airlines 4The National Carrier of Vietnam

4A dominating market share of 51.8%

4Carried 15 million passengers and 184,606 tons of cargo, operating on 39 domestic routes and 52 international routes in 2013

An integrated value chain

Vietnam Airlines

Airline serVices Airline-relAted businessesAirlines

Investment highlights 4Valuable tangible and intangible assets

42014-2018 business plan with an emphasis on effi ciency

4Robust subsidiaries and affi liates

Operating Performance

Market sharePassenger operations

4 Revenue reached VND45,407 billion in 2013 (+5% yoy), accounting for 86% of Total revenue.

4 Vietnam Airlines dominates 51.8% of the total market share (63.2% of the domestic flights and 40.6% of the international flights).

Passenger revenue and volume

19 1827

3443 45

4

8

12

16

15

30

45

60

2008 2009 2010 2011 2012 2013

� Revenue (in thousand billion VND � Passenger volume (in million)

Market shareCargo operations

4 Revenue slightly rose to VND 4,377 billion in 2013, 8% of Total revenue.

4 Total market penetration was 29% (75% domestic and 7% international market). .

Cargo revenue and volume

2.21.5

2.6 2.8

4.4 4.4

50

100

150

200

250

1

2

3

4

5

2008 2009 2010 2011 2012 2013

� Revenues (million VND) � Cargo Volume (Thousand ton)

Nguồn: Vietnam Airlines

Valuable assets

4 Young fleet: As of 31 December 2013, Vietnam Airlines owned 83 aircrafts with an average age of 5.34 years, which are significantly younger than regional airlines.

4 Fast depreciation scheme: Vietnam Airlines’ accounting policy allows assets to be depreciated for a period of 12-15 years while the industry average was over 15 years.

Average fleet age of full-service carriers in Asia

0 2 4 6 8 10 12

China Southern

Air China

China Eastern

Cathay Pacific

Malaysia Airlines

Garuda Indonesia

Singapore Airlines

Thai Airways

Vietnam Airlines

Philippine Airlines

China Airlines

4 A network of 52 international routes and 39 domestic routes accompanied by over 400 landing & take-off slots at international airports are invaluable intangible assets for Vietnam Airlines

4 Prestigious brand name, strong repuation in the international airline industry

4 Young and professional workforce

Valuable assetsNumber of routes operated by airlines in Vietnam (as of 31 December 2013)

39

15 14

52

3 2

0

20

40

60

80

100

VietnamAirlines

Vietjet Air Jetstar

� Domestic � International

2014-2018 business plan: A focus on efficiency

4 Replacing the existing wide-body aircrafts by innovative A350 & A787 in order to expand the fleet to 116 aircrafts by 2018

4 Increasing flight frequency of efficient routes (in both domestic and international market)

4 Upgrading the service quality to 4-star standard in 2015-2016 and improving customer structure

Projected operating flight hours (hour/day/airplane)

9.08

9.05

8.63

9.12

9.80

10.14

10.41

10.56

2011

2012

2013

2014F

2015F

2016F

2017F

2018F

4 Enhancing the affiliation with theSkyteam members and other airlines

4 Considerable cost saving from increased proportion of Vietnamese pilots

2014-2018 business plan: A focus on efficiency

Projected pilot structure

0

200

400

600

800

1000

1200

2014 2015 2016 2017 2018

� Vietnamese � Foreign

Source: Vietnam Airlines

Tình hình tài chínhFinancial Analysis

The parent company 4 The average annual rate of revenue growth from 2008 to 2013 was 15.8%.

4 Revenues comes from four main sources

4 Vietnam Airlines’ profit margins improved significantly, up from 7.7% (2011) to 8.41% (2012) and reached 10.58% (2013).

23.20

35.60

44.87

49.58

52.83

0 10 20 30 40 50 60

2009

2010

2011

2012

2013

Revenues Profit margins

12.80%

13.79%

7.70%

8.41%

10.58%

0.00% 5.00% 10.00% 15.00%

2009

2010

2011

2012

2013

Assets

4 The total value of aircraft/ aircraft engines amounted to VND44,575 billion and accounted for 75.12% of total assets.

Capital Structure

4 The financial leverage is high, with an average Liabilities/Equity ratio of 4.92 in the last 3 years.

The parent companyAsset & Net Revenues

23.1

35.3 44

.5 49.1 52

.5

32.1 38

.5 48.5 55

.5 59.3

10

20

30

40

50

60

70

2009 2010 2011 2012 2013

� Net Revenues � Total Assets

Asset structure

84%

76%

82%

87%

85%

16%

24%

18%

13%

15%

0% 50% 100%

2009

2010

2011

2012

2013

�Long-term assets �Short-term assets

Source: Vietnam Airlines

Source: Vietnam Airlines

Operation and Liquidity Ratios

4 Vietnam Airlines owns an excellent cash conversion cycle with low level of Days in Inventory and Days Sales Outstanding. On the contrary, its number of Days Payable Outstanding has been at high level.

The parent company

2010 2011 2012 2013Days in Inventories 5.84 3.99 3.05 2.69

Days Sales Outstanding 18.99 18.32 16.72 15.02Days Payable Outstanding

46.99 47.13 50.00 57.52

Cost structure

The parent company

2009 2010 2011 2012 2013

Value % of total cost Value % of total

cost Value % of total cost Value % of total

cost Value % of total cost

Raw material 36.89% 13,492 39.01% 17,716 39.34% 19,597 40.10% 20,351 39.68%

Compensation 8.97% 2,720 7.86% 3,843 8.53% 3,892 7.96% 3,849 7.50%

Depreciation 6.90% 1,791 5.18% 2,171 4.82% 2,796 5.72% 3,419 6.67%

Outsourced expense 45.88% 16,177 46.77% 20,573 45.69% 21,559 44.12% 23,108 45.05%

Other operational expenses 1.35% 406 1.17% 726 1.61% 1,023 2.09% 567 1.11%

Total 22,601 100.00 34,587 100.00 45,028 100.00 48,867 100.00 51,294 100.00

4 Current assets: (1) VND2,112 billion of bank deposits of Vinapco; (2) VND3,188 billion of the inventory of Vinapco

4 Long-term debts: the subsidiary with the highest value of long-term debt of VND190.14 billion was Vietnam Airlines Engineering Company (VAECO) to finance its Hangar A76 factory.

4 Short-term loans: Vinapco contributed VND5,226.79 billion of short-term loans.

Financial Analysis | ConsolidatedConsolidated Revenues and As-sets Growth

32.6

1 46.3

5

56.4

7

64.8

6

68.8

6

35.4

3

43.0

6 56.3

8

64.7

2

69.6

4

10

20

30

40

50

60

70

80

2009 2010 2011 2012 2013

Doanh thu thuần Tổng tài sản

Cosolidated Assets struc-ture

25%

34%

30%

25%

25%

75%

66%

70%

75%

75%

0% 20% 40% 60% 80% 100%

2009

2010

2011

2012

2013

Tổng tài sản Tài sản dài hạn � Short-term assets � Long-term assets � Net revenues � Total Assets

SWOTtrength SWOThreatsSWOTeakness SWOTpportunities

4 Unique location

4 Rapid growth of tourism industry

4 Ranking 11th among top investment destinations in 2012

4 Population of 88.7 million people with improving income per capita

4 Forecast GDP growth rate of 5% per annum

4 Arrivals/departures to/from Vietnam continues to rise at a rate of 10%/year

4 The Skyteam membership

4 Political instabilities in the destination countries

4 Macroeconomic risks such as high infl ation, local currency depreciation and soaring fuel cost

4 Fierce competition with established international full-service and low-cost carriers in the domestic, regional and European market

4 Insuffi cient infrastructure to keep up with the rapid growth of the industry: limited landing spaces at HAN and SGN

4 Scarce professionals specializing in airline industry, especially pilots and technicians.

4 The prestige brand name as Vietnam national airlines with a strong position in domestic market as well as in CLMV regions

4 The only full service carrier in Vietnam, accompanied by differentiated domestic products such as Class C and GLP program

4 Diverse input system to reduce the dependence on suppliers

4 The leader in direct fl ight from Vietnam to Europe, Vietnam to CLM and within the country

4 Pioneer in regional technology and enhanced competitive advantages from the innovated fl eet with the acquisition of A350-900 and B787-9 aircraft since 2015

4 Tình hình kinh tế chính trị tại các quốc gia là điểm đến của Vietnam Airlines còn nhiều biến động;

4 Low revenue from international fl ights for small proportion of high income customers

4 Poor service quality compared to major regional airlines

4 Relatively low competitive advantage in the global stage

4 High fi xed cost

4 Limited fi nancial capacity

SWOT Analysis

Forecasting and valuation

MethodologyRevenue forecast

4Passenger and baggage transportation

4Cargo and parcel transportation

4Other services

4Financial investment

Expenses

4Direct cost

4 Indirect cost

4Depreciation and amortization

4Financial expenses

Operating forecast

Income statement 2014 2015 2016Net revenues (bil. VND) 57,357 65,423 78,752Gross profi t (bil. VND) 49,319 55,918 66,031

Financial expenses (bil. VND) 8,038 9,505 12,722

Profi t after tax (bil. VND) 754 1,382 2,666 ROE 269 615 2,084

EPS (VND) 1.82% 4.06% 9.95%

Dividends 190 436 1,118

The forecast of major accounts for the period 2014-2016

Ballance sheet 2014 2015 2016

Current assets (bil. VND) 14,583 16,108 23,148Non-current assets (bil. VND) 55,499 72,688 90,023

Total assets (bil. VND) 70,082 88,796 113,171

Current liabilities (bil.VND) 19,735 24,369 29,963Long term liabilities (bil.VND) 35,562 49,274 62,264

Equity (bil. VND) 14,784 15,153 20,944

Book value (VND) 10,359 10,631 11,142

4 The Adj. EV/EBITDAR multiple applied for Vietnam Airlines’ valuation is 8.19x, which is the average of EV/EBITDAR multiples of similar Asian airlines.

4 Multiple of rent is the factor of the average of fleets and the cost of flying. The most common multiply used in calculating the market value of leased aircraft is 7x

EBIT-DAR

12,101

Adj EV/EBITDAR

8.19

Short term debt 7,516

Long term debt

35,233

Cash 6,769

Operat-ing lease

6,129

Multiple of Rent 7

Adjusted firm value

99,107

Net debt 35,980 Capitalized operat-

ing lease 42,900

The parent company value 20,227

Sơ đồ định giá Công ty mẹ (tỷ đồng)

Parent company valuation

4 P/E: The P/E of VN-Index (15.3x) is discounted to reflect their unlisted condition. The calculated P/E (12x) is then multiplied by PAT and the ownership percentage of Vietnam Airlines as of 31 December 2013.

4 P/B: Book value of the remaining companies is assumed to remain unchanged. Hence, P/B is estimated at 1x (discounted from P/B of VN index of 2x).

Subsidiaries & Affiliates valuation

ResultSum of the parts

The value of Vietnam Airlines Billion VND 24,760

The value of the parent company Billion VND 20,227The incremental value of Vietnam Airlines’ ownership in its subsidiaries and affiliates Billion VND 4,533

Number of shares Million shares 1,058

The stock price of Vietnam Airlines VND per share 23,412

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Tran Thang Long Head of Research longtt@bsc.com.vn (+84) 43935 2722 ext. 118