Asia Airlines

Airlines | A S I A P A C I F I C
TR AN S P O R T/ L O G I S TI C S
NOMURA INTERNATIONAL (HK) LIMITED
Jim Wong
+852 2252 2195
jim.wong@nomura.com
RUNNING
THEME
R E P O R T A N C H O R
Visibility better on the upside

After the recent share price consolidation, many Asian airlines are again trading below their historical mid-cycle multiples and are far from their historical peak-cycle multiples, while the operational outlook continues to improve. Yields and volumes for Asian airlines continued to recover into April 2010, especially if we adjust for the volcanic ash cloud disruption. While the base effect wont last forever, our analysts are still looking for average passenger traffic (RPK) growth of 15.2% in 2010F and 8.2% in 2011F; passenger yields to be up 9.5% in 2010F and 3.5% in 2011; cargo traffic (RFTK) to be up 21.2% in 2010F and 7.8% in 2011F; and cargo yields to rise 8.2% in 2010F and 0.7% in 2011F. On the other hand, scheduled fleet expansion in 2010 is only in single digits for most Asian airlines. Given our macro outlook for a continuing global economic recovery, our top BUYs are EVA Airways and Cathay Pacific, which are arguably more geared to recovery in international traffic and/or cargo traffic. However, for investors more cautious on the markets, SIA would be a more defensive option, in our view.
Stocks for action

Stock Cathay Pacific Singapore Airlines Air China China Eastern Air China Southern Air EVA Airways Malaysia Airlines AirAsia Korean Airlines All Nippon Airways Rating BUY BUY NEUTRAL BUY NEUTRAL BUY* BUY NEUTRAL NEUTRAL NEUTRAL Price 15.68 14.28 7.68 3.28 3.23 17.95 1.97 1.26 71,300 273.00 Price target 18.18 16.85 8.21 3.95 3.61 21.50 2.40 1.20 79,000 300.00
Note: Share prices as of 7 June, 2010; local currency; Upgrade, * Initiation
Analysts
Jim Wong +852 2252 2195 jim.wong@nomura.com Makoto Murayama +81 3 5255 1755 m-murayama@frc.nomura.co.jp Shirley Lam +852 2252 2196 shirley.lam@nomura.com Jacinda Loh +60 3 2027 6889 jacinda.loh@nomura.com Justin Lee +82 2 3783 2338 justin.lee@nomura.com
Recent price consolidation may present buying opportunity Demand should outpace supply Currencies and oil hedging are significant swing factors SIA and CX quality plays, while EVA is a geared play
Nomura Anchor Reports examine the key themes and value drivers that underpin our sector views and stock recommendations for the next 6 to 12 months.
Any authors named on this report are research analysts unless otherwise indicated. See the important disclosures and analyst certifications on pages 145 to 148.
Nomura 14 June 2010
Airlines | A S I A P A C I F I C
TR AN S P O R T/ L O G I S TI C S
Jim Wong
+852 2252 2195
jim.wong@nomura.com
RUNNING
THEME
Action
Recent share price consolidation on concerns about an economic slowdown in Europe could be seen as a buying opportunity for Asian airlines, as the major earnings driver of most of them is Asia-based demand. However, different airlines provide different exposure. EVA Air is most geared to a cargo recovery, SIA to an international premium passenger rebound and CSA to sustained domestic revival.
Stocks for action

SIA and CX are seen as the highestquality plays given their solid earnings track record and strong positioning to premium traffic recovery. EVA is seen as most geared to a trade recovery given its high exposure to cargo.
Stock Cathay Pacific Singapore Airlines Air China China Eastern Air China Southern Air EVA Airways Malaysia Airlines AirAsia Korean Airlines All Nippon Airways Rating BUY BUY NEUTRAL BUY NEUTRAL BUY* BUY NEUTRAL NEUTRAL NEUTRAL Price 15.68 14.28 7.68 3.28 3.23 17.95 1.97 1.26 71,300 273.00 Price target 18.18 16.85 8.21 3.95 3.61 21.50 2.40 1.20 79,000 300.00
Catalysts
Recovery in international routes and impending 2Q10 results may be near-term catalysts, while high oil prices will be a negative for unhedged airlines. Anchor themes With Asian economies (led by China) expected to recover at a much faster pace than the US and Europe, airlines with hubs in Asia are expected to see a stronger recovery than their global peers.
Note: Share prices as of 7 June, 2010; local currency; Upgrade, * Initiation
Visibility better on the upside

Recent price consolidation may present buying opportunity
While the earnings recovery for Asian airlines commenced in September 2009, hiccups in the forms of volcanic ash cloud disruptions in Iceland and over much of Europe, concerns about a renewed economic downturn in Europe, and a stronger US dollar have revived doubts over the sustainability of the recovery and may present a buying opportunity for investors. We note that after the recent share price consolidation, many Asian airlines are again trading below their historical mid-cycle multiples and are far from their historical peak-cycle multiples.
Analysts
Jim Wong +852 2252 2195 jim.wong@nomura.com Makoto Murayama +81 3 5255 1755 m-murayama@frc.nomura.co.jp Shirley Lam +852 2252 2196 shirley.lam@nomura.com Jacinda Loh +60 3 2027 6889 jacinda.loh@nomura.com Justin Lee +82 2 3783 2338 justin.lee@nomura.com
Demand should outpace supply

Yields and volumes for Asian airlines continued to recover into April 2010, especially if we adjust for the volcanic ash cloud disruption. April 2010 passenger volumes rose by single digits to teens y-y, cargo volumes by up to 82% y-y, passenger yields by 27% off-trough, and cargo yields by 56% off-trough. On the other hand, scheduled fleet expansion in 2010 is only in single digits for most Asian airlines. The air cargo recovery to date has been stronger than passenger recovery, albeit off a lower base; Taiwanese and Korean carriers have greater exposure to cargo.
Currencies and oil hedging are significant swing factors

Asian airlines have historically been significantly impacted by currency and oil price movements. Our estimates show that a strong local currency, especially versus the US dollar, is positive for Chinese, Japanese, Korean and Malaysian airlines. In contrast, a strong local currency is negative for SIA and CX. As for oil hedging, a low oil price would be most positive for CSA, AirAsia, SIA and KAL, which are minimally hedged for oil.
SIA and CX quality plays, while EVA is a geared play

Given our macro outlook for a global economic recovery, our top buys are EVA (please refer to our initiation report, also published today, Eva Airways Corp: More good news to come, a summary of which is contained herein) and CX, which are arguably more geared to a recovery in international traffic and/or cargo traffic. However, for investors more cautious on the markets, SIA would be a more defensive option, in our view.
Nomura
14 June 2010
Airlines | Asia Pacific
Jim Wong
Contents
Recovery may not be entirely discounted Macro environment continues to recover Taiwanese and Korean airlines most exposed to cargo recovery Fleet age and forward fleet expansion Currency sensitivities differ significantly 3 7 15 16 21
CSA has largest local revenue/greatest foreign debt exposure; SIA the least 25 Chinese and Japanese carriers more focused on domestic routes ANA, MAS and CX most hedged for oil Core earnings strongest for SIA, CX, AC
Valuation methodologies and risks to our investment view
31 35 36
42
Latest company views

AirAsia Berhad Air China All Nippon Airways China Eastern Airlines China Southern Airlines Cathay Pacific EVA Airways Korean Air Lines Malaysian Airlines System Singapore Airlines 45 59 66 78 88 95 106 112 120 133
Nomura
14 June 2010
Jim Wong
Stock recommendations
Recovery may not be entirely discounted

Exhibit 1. Key stock conclusions and recommendations
Company China / Hong Kong Air China 753 HK NEUTRAL HK$8.21 6.9 Air China is the largest beneficiary of the Chinese governments recent positive policies and least affected by the expected slowdown in renminbi appreciation. Nevertheless, with its strong 1Q FY10 results, the capital injection of RMB6.5bn and the acquisition of Shenzhen Airlines, we believe most of the good news has been priced in. NEUTRAL maintained. 20.4 While SIA has ruled out the possibility of investing in CEA, the chairman of CEA continues to target the introduction of a strategic partner within this year. We reiterate our positive view. Upcoming catalysts include renminbi appreciation, Shanghai World Expo and the possible introduction of strategic investors. CEA is also the beneficiary of recent positive government polices. BUY maintained with a new price target of HK$3.95. 11.8 Compared with its peers, CSA would likely suffer the most from the slow renminbi appreciation and benefit the least from the governments recent policies. Possible competition from railways and Air Chinas aggressive expansion into CSAs southern hub are likely to cap CSAs earnings growth beyond 2010F, in our view. While CSAs share price has been consolidated to below our price target, we upgrade to NEUTRAL. 15.9 We have revised upward our profit estimates for Cathay Pacific by 62% for 2010F and 3% for 2011F, on the back of its recently announced HACTL and HACEO stake disposals. With air passenger yield and volume trends continuing strong into 2010, we believe there may still be upside to our revised estimates. As the group still trades below its historical midcycle P/B level of 1.6x, we maintain BUY. 18.0 Although SIA is highly geared to the current recovery in premium air Ticker Rating Implied Price upside/downside (%) Rationale target
China Eastern Airlines
670 HK
BUY
HK$3.95
China Southern Airlines
1055 HK NEUTRAL
HK$3.61
Cathay Pacific
293 HK
BUY HK$18.18
Singapore Singapore Airlines SIA SP BUY S$16.85
passenger traffic, we also expect it to be more resilient than most Asian airlines in any downturn, given its flexible staff cost structure, minimal oil hedging and net cash position. With the overhang of a possible overpriced acquisition having diminished, we now find SIAs existing valuation of just 1.1x FY12F P/B as attractive, especially with the peer group at an average P/B multiple of 1.5x. Upgrade to BUY.
Malaysia Malaysia Airlines MAS MK BUY RM2.40 22 We see MASs turnaround story gaining traction with cost savings continuing to improve FY10F earnings, with a leg up in FY11F as the bulk of its new fleet arrives to drive its yield improvement strategy further. While headwinds remain in the form of competition and a potentially costly hedge, we premise our BUY call on the scope for upside coming from a low base with an added boost from its new fleet. (4.7) Despite trading close to trough-cycle valuations since 2007, AirAsias shares, we believe, will continue to languish near the historical level of 1.2x P/BV. Our NEUTRAL view is premised on its strong earnings (which, in our view, reflect AirAsias established market position), offset by potentially higher-than-expected gearing amid potential large write-offs and continued cashflow stress. 10.8 We believe Korean Airs fundamental recovery is well on its way and expect the company to post all-time high revenue and operating profit in FY10F. However, with high sensitivity to the won/US$ rate and higher oil price, Korean Airs earnings could deteriorate in the longer term. The company is fairly valued at the current level, in our view. 19.8 After suffering substantial losses from oil hedging contracts, traffic slump owing to the financial crisis in 2008-2009 and recent share placement, the worst is over, in our view. We expect EVA to see double-digit growth in traffic and yields in 2010F. Possible further increases in daily direct schedule flights and continued improvement in traffic bode well for EVAs prospects, we think. We have a BUY rating and price target of NT$21.50. 9.9 With profits likely to be low in 11/3 (FY10F), we derive our PT on the basis of an effective dividend yield, assuming that shareholder discount coupons are equivalent to the dividend. We expect ANA to restore a dividend of 1 per share on common stock in 11/3, which, together with shareholder benefits, equivalent to a dividend of 5, gives an effective dividend of 6 per share. We set our target price at 300, derived from a dividend yield of 2%, which is higher than the yield on long-term JGBs.
AirAsia
AIRA MK
NEUTRAL
RM1.20
Korea Korean Airlines 003490 KS NEUTRAL W79,000
Taiwan EVA Airways 2618 TT BUY * NT$21.50
Japan All Nippon Airways 9202 JP NEUTRAL JPY300
Upgrade, * Initiation. Source: Nomura research
Nomura
14 June 2010
Jim Wong
With Asian airlines under our coverage having reported significant earnings recoveries in 2H09 and/or 1Q10 results, the recovery in the Asian airline industry should now be well recognised in the market. However, with hiccups, such as the volcanic ash cloud that effectively shut down Europe-related air traffic for a significant part of April 2010 and concerns over European economic recovery, the strong demand recovery in Asia is as yet unlikely to have been fully discounted in consensus estimates, in our view, arguably leaving room for potential upside surprises as calendar year 1H10 and/or 2Q10 results are announced.
Strong demand recovery in Asia is, as yet, unlikely to have been fully discounted, thus leaving room for upside surprise
Exhibit 2. Revision in reported net profits

Previous reported net profit Company ANA (JPYmn)* MAS (RMmn) CX (HK$mn) EVA (NT$mn) Air China (RMBmn) CEA (RMBmn) KAL (KRWbn)** SIA (S$mn)* AirAsia (RMmn) CSA (RMBmn) 2008 (4,260) 246 (8,558) (16,890) (9,256) (15,269) (1,942) 1,062 (497) (4,823) 2009 (57,387) 493 4,694 (2,844) 4,854 169 (99) 141 506 330 2010F 5,000 503 3,877 3,332 7,443 2,319 504 927 426 2,508 2011F 19,000 593 5,035 4,532 6,331 2,247 602 1,394 492 1,398 2008 (4,260) 246 (8,558) (16,890) (9,256) (15,269) (1,942) 1,062 (497) (4,823) New reported net profit 2009 (57,387) 493 4,694 (2,844) 4,854 169 (99) 216 506 330 2010F 5,000 503 6,299 3,332 7,202 2,089 431 1,259 426 1,722 2011F 19,000 593 5,174 4,532 7,155 2,760 413 1,667 492 1,802 Chg % in revision 2010F 62.5 (3.2) (9.9) (14.5) 35.8 (31.3) 2011F 2.8 13.0 22.9 (31.4) 19.6 28.9
Source: Company data, Nomura estimates, *FY09-12F numbers are used given March year-end, ** Numbers before adjustment of foreign exchange gains were used in previous reported net profit
Exhibit 3. Comparison of trough-peak cycle valuation

Airlines Air China (753 HK) Singapore Airlines (SIA SP)* Cathay Pacific (293 HK) China Southern Air (1055 HK) China Eastern Air (670 HK)# Korean Air (003490 KS) Malaysia Airlines (MAS MK) EVA Airways (2618 TT) AirAsia (AIRA MK) ANA (9202 JP)* Share price (lcc) 14.28 15.68 3.28 1.97 17.95 Rating BUY BUY BUY BUY BUY Current multiple Market cap Trough-cycle Mid-cycle Peak-cycle (US$mn) FY10 P/BV (x) FY11 P/BV (x) (x) (x) (x) 16,000 12,023 7,908 6,170 10,177 4,154 1,984 1,639 1,048 7,503 2.3 1.2 1.4 1.2 2.6 1.5 1.6 1.4 1.0 1.4 1.9 1.1 1.3 1.1 2.0 1.4 1.4 1.2 0.9 1.4 0.5 0.5 0.7 0.2 0.3 0.1 0.8 0.4 1.1 1.1 2.0 1.0 1.6 1.2 1.2 0.5 1.8 1.5 2.9 2.6 6.2 1.9 3.0 6.6 6.6 1.9 4.2 3.1 9.5 5.6
7.68 NEUTRAL
3.23 NEUTRAL 71,300 NEUTRAL
1.26 NEUTRAL 273.00 NEUTRAL
Source: Nomura estimates, ^Bloomberg consensus, #Given negative equity in FY08 and FY09 for CEA, we use CSAs historical mid-cycle and peak cycle as a reference for CEA, * YE-March, hence FY11F-FY12F numbers are used, share prices as of 7 June, 2010
Nomura
14 June 2010
Jim Wong
Exhibit 4. Comparison of impact from different variables

Cargo recovery + + + ++ + + + ++ ++ + Fleet age + + ++ N ++ ++ N N N Domestic currency strength + ++ ++ N -* ++ + + N ++ N Deterioration in Asian economic recovery (apart from its home Oil price moves European countries) economy up in 2010 N N --+ + + ++ ++ + + ++ ++ + + + -N + --na Core earnings track record ++ ++ ++ + ++ + +
Airlines China / Hong Kong Air China China Eastern Airlines China Southern Airlines Cathay Pacific Singapore Singapore Airlines Malaysia Malaysia Airlines AirAsia Korea Korean Airlines Taiwan EVA Airways Japan All Nippon Airways
Source: Nomura estimates, ++ Strong positive impact, + Positive impact, N Neutral, - Negative impact, - - Strong negative impact., *Albeit not against the US$
Exhibit 5. Airlines: Valuation comparison

Traditional airlines Cathay Pacific (293 HK) Air China (753 HK) China Eastern Air (670 HK) China Southern Air (1055 HK) Singapore Airlines (SIA SP)** Malaysia Airlines (MAS MK) AirAsia (AIRA MK) EVA Airways (2618 TT) Korean Air (003490 KS) All Nippon Airways (9202 JP)** Share price lcc 15.68 7.68 3.28 3.23 14.28 1.97 1.26 17.95 71,300 273.00 Nomura Market rating cap (US$mn) BUY NEUTRAL BUY NEUTRAL BUY BUY NEUTRAL BUY NEUTRAL NEUTRAL 7,897 16,000 10,177 6,170 12,019 1,983 1,048 1,791 4,169 7,503 Reported P/E (x) 2008 neg neg neg neg 15.9 17.2 neg neg (2.6) neg 2009 13.1 16.4 162.9 60.1 78.7 8.6 6.1 neg (45.4) neg 2010F 9.8 11.6 15.3 14.2 13.5 32.9 7.3 17.4 11.9 136.5 2011F 11.9 11.6 11.1 15.0 10.2 10.1 6.4 13.9 12.5 35.9 2008 0.2 0.0 0.0 0.0 7.0 0.0 0.0 0.0 0.0 0.4 Div yield (%) 2009 0.6 0.0 0.0 0.0 13.5 0.0 0.0 0.0 0.0 0.0 2010F 3.8 1.7 0.0 0.0 3.2 0.0 0.0 0.0 0.7 0.0 2011F 3.2 1.7 0.0 0.0 4.2 0.0 0.0 0.0 0.8 0.0
Source: Nomura estimates, ** YE-March, share prices as of 7 June 2010. (Note that we include A-shares for calculating market cap of Chinese airlines, while the company sections use only H-share price; ANAs market cap in the company section is in JPY, our number is in US$)
Exhibit 5. Airlines: Valuation comparison (contd)

Traditional airlines Cathay Pacific (293 HK) Air China (753 HK) China Eastern Air (670 HK) China Southern Air (1055 HK) Singapore Airlines (SIA SP)** Malaysia Airlines (MAS MK) AirAsia (AIRA MK) EVA Airways (2618 TT) Korean Air (003490 KS) All Nippon Airways (9202 JP)** Share price lcc 15.68 7.68 3.28 3.23 14.28 1.97 1.26 17.95 71,300 273.00 Nomura Market rating cap (US$mn) BUY NEUTRAL BUY NEUTRAL BUY BUY NEUTRAL BUY NEUTRAL NEUTRAL 7,897 16,000 10,177 6,170 12,019 1,983 1,047 1,791 4,169 7,503 P/BV (x) 2008 1.6 4.1 (1.1) 2.6 1.2 1.0 1.9 1.6 1.8 1.6 2009 1.5 3.4 22.3 2.2 1.3 5.5 1.2 1.7 1.7 1.4 2010F 1.4 2.3 2.6 1.2 1.2 1.6 1.0 1.4 1.5 1.4 2011F 1.3 1.9 2.0 1.1 1.1 1.4 0.9 1.2 1.4 1.3 2008 (19.3) (36.6) na (51.1) 7.3 6.1 (20.6) (48.3) (53.8) (1.0) ROE (%) 2009 11.7 22.1 (2.8) 3.8 1.6 20.2 24.0 (9.8) (3.4) (12.9) 2010F 14.4 23.4 31.2 10.7 9.1 8.5 15.0 8.7 13.2 1.0 2011F 11.2 17.7 20.4 7.6 11.3 15.3 14.9 9.6 11.6 3.8
Source: Nomura estimates, ** YE-March, share prices as of 7 June 2010.
Nomura
14 June 2010
Jim Wong
Exhibit 6. Key assumptions for Asian Airlines

(%) Air China (753 HK; Neutral) RPK Passenger yields RFTK Cargo yields China Eastern Airlines (670 HK; Buy) RPK Passenger yields RFTK Cargo yields China Southern Airlines (1055 HK; Neutral) RPK Passenger yields RFTK Cargo yields EVA Airways (2618 TT; BUY) RPK Passenger yields RFTK Cargo yields Singapore Airlines (SIA SP; BUY)** RPK Passenger yields RFTK Cargo yields Cathay Pacific (293 HK; BUY) RPK Passenger yields RFTK Cargo yields MAS (MAS MK; Buy) RPK Passenger yields RFTK Cargo yields AirAsia (AIRA MK; Neutral) RPK Passenger yields RFTK Cargo yields Korean Airlines (003490 KS; Neutral) RPK Passenger yields RFTK Cargo yields ANA (9202 JP; Neutral)** RPK Passenger yields RFTK Cargo yields
Source: Nomura estimates, **Assumptions for FY11-FY12F
2010F 14.1 13.5 23.4 11.2 45.0 12.7 57.5 7.0 16.5 6.0 17.0 8.0 13.9 14.6 23.1 12.7 5.1 15.4 6.0 11.1 7.0 7.5 14.0 15.0 13.6 9.0 17.4 (5.5) 20.8 2.0 10.0 12.0 18.0 6.0 5.9 2.0 14.8 -
2011F 9.7 3.2 6.7 0.0 9.0 3.1 7.9 0.1 10.5 2.4 19.5 0.0 9.9 1.8 8.9 2.3 7.0 5.0 6.0 1.0 5.0 5.0 7.0 0.0 7.7 4.5 5.0 0.0 17.0 5.3 4.0 3.0 1.0 2.0 2.6 1.3 -
Nomura
14 June 2010
Jim Wong
Recent traffic trend
Macro environment continues to recover

As is evident in their operating statistics and financial results and confirmed by management teams, Asian airlines seem to have put the worst of the global crisis behind them (many started to return to profitability by September 2009) and continue to see sustainable recovery into the foreseeable future (as indicated by advance bookings). Numbers from Taiwanese airlines (that fly regional and international routes) show that both passenger and cargo yields bottomed in mid-2009 and have since recovered by up to 56% from the trough. As shown below, passenger yields for Taiwanese airlines are now up 21-27% from the recent trough.
Operating statistics and financial results show that recovery is underway
Exhibit 7. Taiwanese airlines passenger yield trends

(NT$/km) 2.6 2.4 2.2 2.0 1.8 1.6 1.4 1.2 1.0 Jul-00 Jul-01 Jul-02 Jul-03 Jul-04 Jul-05 Jul-06 Jul-07 Jul-08 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jul-09 Jul-09 Jan-10 7 Jan-10 Eva Air (2618 TT) China Airlines (2610 TT)
Source: Company data
Cargo yields are also up by 43-56% from the recent trough.
Exhibit 8. Taiwanese airlines cargo yield trends

(NT$/km) 11 10 9 8 7 6 5 4 Jul-00 Jul-01 Jul-02 Jul-03 Jul-04 Jul-05 Jul-06 Jul-07 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jul-08 Jan-09 Eva Air (2618 TT) China Airlines (2610 TT)
While the numbers mentioned are only those of Taiwanese airlines (which provide monthly yield numbers), they are representative of the yield recovery seen in the overall Asian airline industry as shown in the exhibits below.
Nomura
14 June 2010
Jim Wong
Exhibit 9. Passenger yield trend for various airlines

Calendar year 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10
CSA ANA (RMB (JPY cents) cents) 56.07 54.90 58.05 61.14 59.26 61.69 60.15 61.03 51.71 55.65 15.88 15.38 16.78 16.31 17.57 16.76 17.99 16.73 15.35 15.04
CEA (RMB cents) 55.68 59.29 57.89 62.99 59.77 63.03 61.86 62.65 50.75 56.58
Air China (RMB AirAsia MAS CX KAL cents) (RM sens) (RM sens) (HK cents) (US cents) 13.81 18.90 7.10 54.99 59.58 56.70 61.49 59.39 64.32 61.35 64.73 53.85 59.01 13.79 13.72 14.75 11.00 12.22 11.24 15.05 18.90 15.74 17.10 19.64 18.03 18.52 19.21 22.07 20.49 16.21 18.22 18.89 19.16 18.50 19.90 20.70 22.60 22.80 25.30 25.70 26.10 25.70 27.10 29.00 28.40 28.70 31.70 32.90 29.50 23.40 22.40 23.10 23.20 48.52 45.00 55.90 55.90 56.18 53.70 48.14 45.80 45.49 47.20 6.90 7.70 7.30 7.60 7.90 8.70 8.30 8.60 8.50 9.40 9.00 9.20 9.10 9.60 8.30 6.99 6.23 6.92 7.40 7.90
EVA Air (NT$ cents) 186.97 176.70 190.22 184.35 189.49 183.68 199.90 189.71 203.04 194.66 206.73 203.55 211.96 211.16 228.90 220.58 207.35 185.05 189.58 192.64 215.00
CAL (NT$ SIA cents) (S$ cents) 173.50 10.50 160.83 178.26 182.50 183.97 179.70 199.25 200.44 197.51 189.06 204.67 204.74 204.47 205.86 230.35 229.34 214.10 176.45 183.95 194.28 215.68 10.30 10.50 10.80 10.60 10.60 10.80 11.00 11.20 11.50 12.00 12.40 12.50 12.40 12.80 12.80 11.80 10.20 9.80 10.50 11.10
Exhibit 10. Cargo yield trend for various airlines

Calendar year 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 164.47 NA 187.00 170.57 161.56 NA 140.82 129.89 196.81 NA 219.65 199.69 198.56 NA 223.03 198.31 183.75 NA 212.62 194.40 191.93 NA 206.45 183.77 198.63 NA 269.03 220.46 188.90 NA 222.88 210.32 167.60 NA 225.81 236.45 CSA ANA (RMB (JPY cents) cents) 184.26 NA CEA (RMB cents 237.19 Air China (RMB AirAsia MAS CX KAL cents (RM sens) (RM sens) (HK cents) (US cents) 75.50 24.70 202.00 75.50 74.50 98.30 95.50 94.50 96.00 94.60 90.60 87.80 90.60 93.60 89.50 87.70 96.20 90.40 68.30 70.10 64.60 83.40 79.50 147.62 120.00 162.00 160.00 164.84 163.00 169.00 169.00 175.00 175.00 24.90 26.00 28.30 26.40 26.00 25.60 26.90 24.20 24.30 25.70 30.00 27.70 30.20 33.30 26.90 18.40 19.09 22.57 30.50 29.80 EVA Air (NT$ cents) 692.42 711.36 753.33 859.74 768.75 777.11 797.10 864.33 762.87 759.46 796.42 880.17 817.31 850.54 963.29 845.59 633.13 569.08 620.17 795.68 736.88 CAL (NT$ SIA cents) (S$ cents) 716.85 36.00 736.70 775.23 871.05 805.79 819.15 846.31 897.72 806.56 795.45 843.24 953.70 902.73 916.77 1,017.51 951.08 738.13 640.51 718.74 860.09 776.69 37.00 38.50 40.60 38.20 38.50 39.10 39.50 36.30 36.00 37.60 40.60 40.50 40.60 42.50 38.30 29.20 27.20 28.70 34.90 34.90
Source: Company data; half-yearly numbers are available for CSA, ANA, CEA, Air China and CX
While 1Q10 passenger yields for some airlines may still be down y-y, 1Q10 passenger yields for all are significantly up q-q and substantially higher than recent troughs.
Nomura
14 June 2010
Jim Wong
Exhibit 11. Passenger yield growth trend for various airlines

Calendar year 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10
CSA (%) 4 11 2 1 2 (1) (14) (9)
ANA (%) 6 6 5 3 2 (0) (15) (10)
CEA Air China (%) (%) 4 6 3 0 3 (1) (18) (10) 3 3 5 5 3 1 (12) (9)
AirAsia (%) (20) (11) (18) 2 72 29 52 30 (5) 18 12 12 14 (12) (5) (14) (6)
MAS (%) 20 23 27 24 15 13 7 13 9 12 17 13 4 (18) (29) (30) (21)
CX (%) (3) 6 17 17 4 (0) (19) (13)
KAL (%) 7 14 13 14 13 8 8 8 7 7 2 (8) (24) (32) (28) (11) 13
EVA Air (%) 1 4 5 3 7 6 3 7 4 8 11 8 (2) (12) (17) (13) 4
CAL (%) 6 12 12 10 7 5 3 2 4 9 13 12 5 (14) (20) (15) 1
SIA (%) 1 3 3 2 6 8 11 13 12 8 7 3 (6) (18) (23) (18) (6)
Exhibit 12. Cargo yield growth trend for various airlines

Calendar year 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10
CSA (%) 3 19 2 (7) 3 7 (19) (16)
ANA (%) -
CEA Air China (%) (%) (6) 19 (7) (21) 8 3 (37) (15) 4 (7) (13) (12) 8 3 (35) (15)
AirAsia (%) -
MAS (%) 26 25 29 (4) (5) (7) (6) (1) (1) (0) 6 (3) (24) (20) (33) (8) 16
CX (%) (3) (3) (4) (2) (2) (2) (25) (9)
KAL (%) 7 4 (2) (5) (8) (7) 0 12 14 24 30 (10) (34) (37) (32) 13 62
EVA Air (%) 11 9 6 1 (1) (2) (0) 2 7 12 21 (4) (23) (33) (36) (6) 16
CAL (%) 12 11 9 3 0 (3) (0) 6 12 15 21 (0) (18) (30) (29) (10) 5
SIA (%) 6 4 2 (3) (5) (6) (4) 3 12 13 13 (6) (28) (33) (32) (9) 20
Similar recovery trends have been seen in volumes and load factors.
Nomura
14 June 2010
Jim Wong
Exhibit 13. Asian airlines: revenue passenger kilometre (RPK) growth rate
(% y-y) Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Air China 1.0 0.3 (6.7) (6.1) (8.4) (16.3) (7.9) 0.5 3.0 2.3 10.4 6.2 4.9 4.8 7.0 5.3 13.8 29.0 11.4 11.3 13.0 14.9 8.6 16.6 20.8 16.5 CSA 6.4 6.6 1.1 (4.3) (4.1) (18.7) (4.8) 7.0 3.7 3.8 11.0 3.3 4.8 2.2 6.5 16.2 13.0 31.4 10.0 11.4 14.3 18.6 10.8 21.5 25.8 20.4 CEA 2.0 0.3 (6.0) (12.2) (13.1) (25.3) (13.4) (5.2) (4.3) (3.7) 6.5 3.0 8.6 8.8 10.8 15.1 18.4 44.3 16.0 13.8 7.9 8.8 36.4 53.9 45.6 36.1 CX 17.2 12.8 19.6 16.4 15.7 7.5 4.5 4.3 1.0 2.4 1.2 (4.9) (4.5) 5.3 (6.7) (14.1) (8.2) 1.9 0.1 (0.2) 2.0 4.0 1.6 10.5 6.6 (4.3)* 10.3 SIA 2.4 4.8 9.0 5.2 6.7 5.3 1.3 3.0 (2.6) (3.5) (6.9) (17.0) (21.8) (17.7) (22.8) (18.2) (13.2) (14.1) (7.9) (6.0) (5.1) (4.3) (1.6) 9.9 13.9 2.9* Qantas 3.4 1.7 4.3 11.2 0.2 (0.9) (2.9) (3.1) (5.2) (4.0) (4.1) (10.1) (6.4) (2.7) (3.9) (7.1) (2.1) (1.4) 2.7 3.2 3.0 1.9 (0.2) 3.9 4.1 -
CAL
(2.0) (6.9) (5.3) (6.5) (7.7) (8.6) (12.5) (9.0) (12.6) (9.6) (7.8) (17.4) (9.8) 0.2 (8.2) (18.0) (6.4) 5.6 6.9 4.7 11.6 15.9 5.3 19.2 8.4 (4.7)* -
EVA (2.9) (1.4) (1.8) (10.7) (6.1) (2.7) (22.2) (6.1) (10.6) (9.0) (4.1) (23.6) (3.5) (7.0) (9.4) (11.4) 10.0 8.7 6.3 2.7 12.7 18.2 11.0 14.4 16.0 5.2* 19.9
Thai 6.2 5.9 4.6 0.9 (6.4) (11.1) (23.1) (18.8) (32.3) (38.0) (20.9) (21.3) (18.8) (17.9) (24.9) (25.7) (12.7) (2.2) 10.6 11.0 27.5 55.0 21.3 18.8 13.1 -
MAS (9.3) (8.7) (3.6) (8.6) (6.7) (10.2) (18.1) (14.6) (19.0) (20.1) (25.2) (32.8) (25.5) (15.6) (16.9) (11.1) (5.3) (2.6) 8.9 8.9 10.6 15.3 25.1 35.7 28.0 -
KAL AirAsia# (1.2) 1.0 3.5 1.3 1.0 4.0 (7.0) (4.1) (8.7) (2.1) (1.1) (5.6) (3.6) (2.4) (9.0) (8.8) 1.0 1.9 9.7 6.8 13.4 13.9 12.0 12.0 17.0 10.0* 17.3 16.1 9.9 23.4 17.4 17.9 26.7 19.7 20.7
ANA (2.2) (0.6) (0.3) (4.3) (2.2) (3.8) (7.6) (5.3) (10.4) (10.5) (10.3) (17.4) (11.2) (11.6) (13.1) (13.5) (4.5) (4.1) 1.1 (4.0) (1.3) 2.5 5.7 10.6 8.0 4.5 -
Source: Company data; * Biased by volcanic ash cloud disruption, #AirAsia (quarterly)
Exhibit 14. Asian airlines: revenue freight tonne kilometre (RFTK) growth rate
(%) Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Air China 1.7 (0.7) (0.7) (7.1) (0.8) (7.2) (14.3) (4.8) (14.3) (22.6) (30.5) (14.4) (15.4) (12.7) (12.8) (8.0) (8.8) 6.5 23.1 13.9 31.2 41.7 66.0 50.0 42.3 26.8 CSA (0.8) 5.9 9.3 (10.2) (14.2) (23.9) (15.2) (11.5) (27.5) (31.5) (42.9) (15.7) (23.6) (26.3) (16.6) (3.2) 5.9 23.2 17.9 15.5 44.5 58.6 121.9 75.1 109.3 82.0 CEA 10.5 (2.4) 11.0 (4.5) 0.5 (10.5) (21.5) (17.2) (24.2) (32.9) (36.8) (16.7) (17.6) (5.2) (3.0) 6.7 (5.8) 5.5 23.0 14.7 28.5 46.5 141.7 90.2 98.9 96.9 CX 6.9 12.9 8.3 3.0 2.2 (4.6) (8.2) (6.7) (11.1) (21.1) (21.9) (16.5) (10.4) (14.7) (14.2) (9.4) (3.7) (6.1) (3.3) (1.9) 3.8 20.8 25.7 16.6 21.2 28.4 38.9 SIA (4.9) (0.5) 3.4 (1.6) (2.1) (1.5) (7.3) (11.3) (12.5) (19.0) (14.4) (15.2) (18.0) (21.6) (20.7) (20.8) (14.6) (17.7) (14.5) (4.2) (3.1) 5.7 3.3 3.4 12.0 5.8 Qantas CAL 6.0 (1.4) (4.3) (15.4) (18.3) (16.2) (24.5) (21.2) (28.4) (47.0) (47.2) (38.4) (41.3) (34.6) (24.7) (18.2) (2.8) (6.9) 8.4 18.6 51.2 104.8 111.5 82.0 88.7 71.9 EVA 2.2 3.4 (9.0) (13.7) (25.8) (18.4) (21.5) (15.6) (29.0) (40.6) (43.4) (41.2) (38.5) (31.4) (18.3) (16.3) (1.2) (0.8) 0.5 10.2 32.2 56.6 67.6 75.7 59.4 60.9 62.2 Thai 0.9 4.3 2.0 4.0 (0.5) (3.0) (7.5) (9.1) (30.9) (49.1) (35.0) (33.0) (24.2) (24.6) (23.4) (24.2) (15.8) (9.2) (4.0) 4.6 46.0 100.4 54.9 59.0 50.0 MAS (2.3) 5.2 4.7 4.7 (11.1) (4.2) (14.2) (18.3) (14.5) (29.4) (26.7) (28.4) (27.7) (35.2) (26.3) (38.9) 2.0 (17.8) (10.3) 6.2 4.7 23.9 21.4 31.2 39.9 KAL 0.0 (1.5) (2.0) (7.5) (7.0) (8.0) (12.5) (10.0) (15.5) (22.5) (24.0) (18.0) (16.0) (18.5) (15.0) (13.0) (8.0) (7.0) 4.8 6.0 16.4 25.2 24.0 18.0 15.0 23.0 AirAsia ANA -
Nomura
10
14 June 2010
Jim Wong
Exhibit 15. Asian airlines: RPK (mn)

Air China Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 5,597 5,594 5,234 5,234 5,601 5,268 5,470 6,056 5,581 5,509 6,122 5,664 5,885 5,924 5,607 5,523 6,372 6,809 6,094 6,740 6,302 6,328 6,649 6,603 7,109 6,903 CSA 6,951 7,303 6,606 5,924 7,380 6,759 6,956 7,702 7,058 6,766 7,530 7,172 7,292 7,471 7,039 6,889 8,344 8,893 7,656 8,577 8,067 8,024 8,340 8,716 9,174 8,999 CEA 4,585 4,813 4,335 3,948 4,678 4,209 4,344 5,003 4,587 4,392 4,747 4,533 4,981 5,234 4,804 4,543 5,537 6,076 5,038 5,696 4,951 4,777 6,476 6,978 7,251 7,123 CX 7,941 7,492 7,595 7,760 8,405 7,747 6,867 7,452 7,131 7,792 7,886 6,652 7,582 7,887 7,085 6,666 7,720 7,894 6,877 7,301 7,275 8,106 8,009 7,353 8,082 7,551* 7,816 SIA 8,016 7,621 7,670 7,900 8,339 8,187 7,578 7,749 7,495 8,053 7,406 5,859 6,271 6,275 5,919 6,461 7,240 7,035 6,979 7,285 7,114 7,710 7,290 6,436 7,141 6,456* Qantas 8,666 8,326 8,004 9,001 8,984 8,396 8,278 8,623 8,049 8,559 8,710 7,310 8,113 8,101 7,693 8,360 8,797 8,279 8,504 8,900 8,289 8,725 8,693 7,592 8,444 CAL 2,860 2,644 2,741 2,797 2,878 2,790 2,348 2,399 2,234 2,415 2,640 2,172 2,578 2,649 2,516 2,293 2,693 2,946 2,510 2,511 2,492 2,798 2,781 2,588 2,795 2,526* EVA 2,020 1,912 1,909 1,832 2,085 2,161 1,705 1,828 1,718 1,768 1,944 1,632 1,834 1,878 1,733 1,692 2,015 2,266 1,813 1,877 1,936 2,090 2,159 1,867 2,128 1,975* 2,077 Thai 5,568 5,249 4,934 4,816 4,967 4,795 3,977 4,275 3,614 3,301 4,478 4,105 4,524 4,308 3,705 3,580 4,336 4,688 4,400 4,744 4,609 5,116 5,431 4,877 5,116 MAS 3,183 2,999 2,982 3,034 3,335 3,246 2,703 2,758 2,592 2,835 2,407 2,007 2,370 2,533 2,479 2,698 3,159 3,160 2,944 3,003 2,866 3,268 3,011 2,724 3,035 KAL 4,150 4,100 4,450 4,550 4,800 5,150 3,920 4,125 3,745 4,209 4,550 3,870 4,000 4,000 4,050 4,150 4,850 5,250 4,300 4,405 4,247 4,792 5,096 4,334 4,680 4,400* 4,090 4,410 3,769 4,056 3,487 3,800 3,429 3,286 AirAsia 2,970 ANA 5,349 4,530 4,867 4,807 5,058 5,607 5,050 5,168 4,726 4,333 4,150 3,911 4,750 4,005 4,231 4,160 4,830 5,378 5,107 4,961 4,663 4,441 4,385 4,326 5,131 4,186 -
Source: Company data; * biased by volcanic ash cloud disruption
Exhibit 16. Asian airlines: RFTK (mn)

Air China Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 327 315 315 300 321 294 275 301 269 246 205 196 276 275 275 276 293 314 339 343 353 348 339 295 393 349 CSA 160 175 161 134 138 137 164 143 130 126 107 97 123 129 134 130 146 169 193 165 188 200 237 169 257 234 CEA 231 215 209 198 213 202 200 206 193 165 135 145 190 203 202 211 200 213 246 237 248 242 327 276 379 401 CX 799 756 751 732 749 735 739 786 748 657 571 549 716 645 645 663 721 690 715 771 777 794 718 640 868 829 894 SIA 683 658 659 648 664 669 658 633 642 544 490 474 560 516 522 513 567 551 563 606 622 575 506 490 627 546 Qantas CAL 549 518 514 481 458 465 426 439 400 274 238 252 322 339 387 393 445 433 462 521 605 561 504 460 608 583 EVA 439 388 352 358 306 313 319 348 301 242 217 200 270 266 287 299 302 310 320 383 397 379 364 352 430 428 466 Thai 213 202 206 208 202 195 198 201 158 112 132 130 161 152 158 158 170 177 190 210 230 224 204 207 242 MAS 225 226 217 224 207 207 197 193 213 167 140 134 163 147 160 137 211 170 177 205 223 207 169 176 227 KAL 860 810 796 750 760 730 790 763 709 618 570 610 740 650 788 786 792 690 750 809 825 774 707 720 851 800 AirAsia ANA -
Nomura
11
14 June 2010
Jim Wong
As shown in the exhibits above, passenger and cargo traffic volumes for most Asian airlines have recovered to positive growth since September 2009 and have been able to sustain solid positive volume growth since. We note that the apparent negative passenger volume growth in April 2010 for some airlines was likely just a blip caused by the temporary disruption from the volcanic ash cloud over Europe during the period. Still, rather than focusing purely on volume growth, many airlines have opted to focus on improving yield and load factors in order to maximise profitability and returns. In terms of passenger load factor, most Asian airlines have been able to recover and maintain loads at very high levels of close to 80%.
Passenger and cargo traffic volume have been able to sustain solid positive volume growth since September 2009
Exhibit 17. Airlines: passenger load factor

(%) Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Air China 76.8 76.8 77.7 76.8 71.3 72.5 73.3 71.1 75.8 78.3 75.6 73.6 77.2 76.8 74.0 75.5 71.2 73.4 78.2 81.6 76.6 81.6 79.3 75.9 77.0 79.0 80.5 80.2 CSA 73.7 73.9 74.5 74.8 69.9 71.4 75.1 71.7 76.2 76.5 74.9 72.1 74.5 78.4 75.6 76.4 71.6 72.7 75.2 77.4 72.2 78.3 77.5 74.1 75.9 78.0 80.3 78.5 CEA 71.6 70.9 72.9 73.0 68.0 70.1 73.0 69.4 71.0 72.1 69.7 67.7 70.2 72.1 70.3 72.6 69.5 70.3 72.3 77.8 70.1 75.3 73.7 70.6 71.8 75.6 77.3 75.5 CX 82.3 77.6 82.1 79.4 77.4 81.3 84.1 78.4 72.3 75.5 75.7 79.0 79.5 76.6 79.1 82.6 75.8 76.8 83.5 84.1 80.2 82.3 82.0 83.9 83.8 84.1 85.7 83.9 81.3 SIA 80.5 76.8 80.8 76.4 74.7 79.2 81.0 79.4 76.9 77.5 78.1 79.9 74.1 69.7 69.4 72.2 66.9 75.7 79.7 78.3 80.9 81.1 81.9 84.3 79.1 79.9 80.8 77.6 Qantas 84.2 80.6 80.3 79.0 74.3 86.5 82.2 77.7 79.8 79.9 78.3 80.2 81.8 78.4 78.3 80.4 77.9 80.0 82.9 80.5 83.7 83.3 82.3 82.4 81.2 79.4 79.5 CAL 78.9 72.9 78.6 75.4 75.3 81.9 82.3 80.9 77.3 73.3 73.4 70.9 74.0 72.2 75.0 76.1 69.8 72.7 78.1 83.4 75.7 75.8 76.4 79.4 80.4 79.9 81.6 80.3 EVA 83.8 78.2 81.1 77.6 76.3 77.6 79.4 82.7 80.9 80.3 80.1 76.3 78.8 74.9 76.9 75.0 68.1 72.2 80.8 86.5 77.2 78.8 78.1 80.5 83.0 79.3 83.7 81.0 79.3 Thai 82.0 81.5 81.1 80.1 73.5 74.7 77.2 75.1 66.8 68.0 68.6 63.8 75.2 77.2 76.8 71.1 62.2 65.1 71.3 76.1 74.4 75.1 74.0 77.0 82.0 82.3 78.8 MAS 68.5 69.7 69.5 67.8 64.9 68.2 71.4 70.2 67.7 66.1 64.1 65.7 55.7 53.7 58.7 65.4 62.6 69.4 77.4 76.9 75.6 75.8 73.2 80.4 74.7 74.5 75.3 KAL 74.2 71.3 69.7 69.8 72.4 74.6 73.8 77.4 69.4 71.4 65.6 68.7 72.2 70.4 65.0 66.7 65.3 68.6 74.0 77.2 69.9 70.9 69.4 74.7 80.9 77.3 76.1 75.0 69.0 75.2 69.2 73.5 67.0 75.9 70.9 72.8 68.1 AirAsia ANA 60.7 67.2 69.9 62.8 64.8 66.0 66.4 72.3 69.3 68.8 67.3 59.4 57.6 61.6 67.1 58.8 59.3 59.1 65.1 71.2 72.2 70.1 69.8 64.1 63.7 69.5 73.4 63.9 -
While cargo load factors vary more widely across different carriers, in general, all airlines have recorded significant improvements from lows seen from mid-2008 to mid2009. In addition to advance booking strength, the sustainability of the current recovery in the Asian airline industry is also reinforced by our macro view of a global economic recovery, especially for most Asian economies. For example, Nomura projects GDP growth of more than 10% in China and Singapore in 2010F.
Nomura
12
14 June 2010
Jim Wong
Exhibit 18. Airlines: cargo load factor

(%) Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Air China 58.0 49.6 60.5 59.3 60.3 61.1 58.9 56.2 54.1 54.0 52.2 51.0 40.7 44.8 51.9 51.6 50.8 55.6 55.3 56.5 61.4 57.1 60.3 59.8 56.6 52.7 62.9 59.5 CSA 51.1 34.8 48.7 46.6 46.2 47.0 41.3 43.1 46.7 38.7 37.4 37.4 30.3 31.5 37.6 38.3 38.6 40.3 38.8 42.1 51.2 42.2 48.8 48.8 49.6 38.6 53.0 49.2 CEA 53.1 47.5 54.3 50.9 50.5 55.2 50.8 52.6 53.0 48.5 45.0 43.5 35.9 42.3 45.5 47.1 48.4 53.2 47.5 49.9 58.8 53.6 61.0 60.3 59.9 51.4 62.3 64.7 CX 63.6 64.6 68.2 67.6 67.0 67.5 66.0 65.9 66.5 65.9 64.5 62.9 59.1 64.7 67.9 65.7 68.2 71.3 72.6 72.0 74.5 76.7 76.8 78.6 74.9 77.1 81.7 79.3 79.1 SIA 58.6 62.2 62.8 61.7 60.7 61.6 60.3 61.0 61.1 59.4 60.3 55.2 54.2 56.7 58.5 58.0 61.2 62.9 63.6 61.9 63.2 65.4 66.4 63.4 60.1 65.6 68.4 64.6 Qantas CAL 68.7 67.5 68.8 69.0 69.6 73.2 71.7 72.4 65.7 65.9 60.4 59.5 56.8 61.4 62.5 64.0 68.2 72.4 74.0 70.4 72.0 73.0 72.1 73.5 73.4 70.9 73.7 71.7 EVA 73.5 74.8 78.1 77.2 76.7 81.8 79.5 79.3 73.5 74.7 75.5 70.6 69.7 74.0 75.5 74.4 77.9 81.4 84.0 84.2 81.3 82.6 81.9 84.6 84.8 81.4 85.1 82.3 84.0 Thai 51.2 55.4 57.2 56.9 56.3 58.2 56.9 55.2 60.2 58.1 54.5 39.6 40.3 44.6 49.8 46.2 47.9 51.7 50.5 52.3 58.8 59.4 61.7 58.3 54.5 60.4 63.9 MAS 61.9 64.1 66.9 68.0 69.4 75.1 70.8 70.5 66.7 65.1 68.3 63.1 60.8 63.7 67.3 66.0 70.2 59.3 82.4 71.5 74.2 74.9 74.8 73.1 72.7 77.8 81.6 KAL 74.0 77.6 76.8 76.4 76.5 78.1 75.2 73.7 80.6 72.3 70.0 66.4 63.3 72.6 75.5 76.5 86.6 91.4 87.0 75.0 76.5 75.8 74.8 76.7 70.7 76.5 77.5 78.0 AirAsia ANA -
As domestic air traffic growth is generally a multiple of domestic GDP growth, our macro view for economic recovery underpins our view for a sustained recovery for the Asian airlines.
Exhibit 19. Real GDP forecasts

(%) China India Vietnam Indonesia Singapore Malaysia Thailand Philippines Taiwan Korea Hong Kong US UK Japan Euro zone
Source: Nomura Global Economics estimates
2008 9.0 7.3 6.2 6.1 1.1 4.6 2.6 3.8 0.1 2.2 2.4 1.1 0.7 (0.7) 0.9
2009 8.7 6.4 5.3 4.5 (2.0) (1.7) (2.3) 0.9 (1.9) 0.2 (2.8) (2.4) (4.9) (5.2) (4.0)
2010F 10.5 8.8 6.5 5.9 10.2 7.0 3.3 5.0 7.9 5.5 5.5 3.3 1.3 3.4 1.1
2011F 9.8 8.3 6.6 6.3 5.3 5.2 4.8 4.5 4.3 4.0 4.0 2.7 2.5 2.0 1.8
Nomura
13
14 June 2010
Jim Wong
We note that projections by Boeing (below) also indicate sustained long-term air traffic demand growth. Again, the intra-Asia (especially South Asia) and China domestic routes are expected to see the strongest passenger traffic growth over the medium to long term, according to Boeings estimates.
Exhibit 20. Passenger traffic growth projections by route (RPK bn)

2000 Africa-S.E Asia S.W Asia-S.W Asia China-China S.E Asia-S.E Asia S.E Asia-S.W Asia Rest of world Africa-N. America Middle East- N. America N. America-S. America N. America-S.E Asia Middle East-S.E Asia S. America-S. America Africa-Africa C. America-S. America Middle East-Middle East Africa-Middle East Europe-S.W. Asia C. America-C. America China-N. America Middle East-S.W Asia China-Oceania N.E Asia-S.E Asia China-Europe China-N.E Asia Europe-S.E Asia N. America-Oceania China-S.E Asia R&CA-R&CA* Europe-Middle East Africa-Europe Europe-S. America Oceania-S.E Asia N.E Asia-Oceania R&CA-International Europe-N. America Europe-N.E Asia Oceania-Oceania N.E Asia-N.E Asia C. America-N. America Europe-Europe C. America-Europe N. America-N.E Asia N. America-N. America World total Source: Boeing 3.2 16.0 76.7 53.7 10.9 15.2 4.4 16.1 47.2 32.1 24.0 53.5 19.4 7.3 27.8 9.8 26.2 24.0 33.2 29.4 12.1 48.5 40.1 19.4 95.8 30.0 29.3 39.4 65.0 99.4 53.2 46.2 24.1 49.2 420.0 63.6 49.2 79.0 90.1 440.1 66.4 140.2 857.5 3,381 2001 3.4 16.6 86.9 57.0 11.6 16.0 4.6 12.0 44.8 29.3 22.9 50.8 19.9 7.2 27.1 10.6 27.5 23.0 36.2 29.9 12.4 47.8 40.2 18.4 95.9 27.6 31.7 43.5 59.8 96.2 52.1 47.6 22.5 48.1 373.8 55.8 50.7 80.2 88.6 449.3 69.8 127.5 812.8 3,290 2002 3.6 17.4 101.5 60.6 12.6 16.9 4.3 10.4 42.7 30.5 24.0 52.7 21.2 7.1 27.5 13.2 27.6 23.4 33.2 31.1 13.2 54.4 42.6 24.5 96.4 26.5 36.9 46.9 58.6 97.2 49.2 46.6 24.5 51.4 346.0 53.3 50.2 85.0 87.7 453.8 68.1 121.2 783.5 3,279 2003 3.7 17.7 106.9 59.4 12.5 18.2 4.4 9.6 37.6 26.8 26.4 47.9 22.5 7.1 28.1 13.9 29.5 24.8 24.9 33.8 10.6 45.7 37.5 20.1 95.0 25.9 27.7 50.2 58.9 99.1 49.5 42.0 22.8 56.4 349.5 48.3 55.5 86.1 92.0 474.7 69.8 103.0 828.3 3,304 2004 3.9 21.3 143.8 73.9 14.9 26.7 3.9 12.6 39.9 33.6 29.2 52.9 24.0 8.3 32.0 13.9 35.7 26.0 34.4 35.6 15.0 61.5 51.2 27.3 104.5 30.1 41.2 54.7 67.7 105.2 57.9 54.6 27.1 63.0 375.5 59.8 58.8 83.6 103.5 521.2 75.7 120.8 927.7 3,754 2005 4.7 25.0 163.8 82.4 17.1 31.9 3.8 14.4 49.9 36.5 33.3 60.8 26.4 10.7 34.0 16.4 44.3 25.2 40.2 38.3 17.1 67.1 60.9 29.0 111.3 31.5 48.9 56.0 74.1 111.3 65.4 60.1 25.7 65.2 390.7 61.0 63.0 83.9 104.9 561.9 80.1 126.2 972.3 4,026 2006 4.8 29.5 182.4 89.2 19.1 38.7 4.8 19.5 59.0 36.5 38.3 72.8 29.7 12.7 36.3 17.9 54.1 26.0 48.5 44.0 19.3 74.3 73.9 30.0 110.3 32.2 48.6 57.3 88.3 115.2 71.7 57.3 24.6 66.6 403.4 61.8 67.8 84.1 107.9 593.3 82.0 122.4 977.4 4,234 2007 5.7 39.1 210.7 96.7 20.0 53.9 8.3 30.1 66.6 42.7 45.1 78.8 33.9 14.9 39.6 19.9 54.3 26.9 56.4 48.8 20.4 79.0 77.4 35.7 108.3 29.5 52.1 57.7 105.2 122.4 78.7 55.7 23.3 74.6 420.6 68.3 72.6 82.0 116.6 634.2 85.4 124.1 1,022.4 4,539 2008 5.6 44.2 227.6 90.0 22.2 64.2 8.5 34.8 59.2 27.4 45.7 80.0 34.6 15.8 41.8 23.0 53.6 27.7 57.2 58.2 22.4 74.1 77.9 33.3 108.9 29.5 50.4 61.4 113.8 126.3 84.9 65.7 20.9 85.7 433.2 68.7 78.2 81.6 119.2 661.8 92.3 122.9 976.0 4,621 2028F 32.2 236.4 1,174.9 424.0 100.9 273.5 35.5 133.1 214.7 136.2 165.0 287.9 118.6 52.2 140.0 75.3 174.6 88.3 182.3 188.1 71.1 234.4 235.1 101.9 327.4 89.3 145.7 177.5 329.8 359.9 241.1 183.3 57.3 232.2 1,055.7 163.1 184.3 167.1 234.8 1,279.5 172.0 229.7 1,583.8 12,090 2000-08 CAGR (%) 7.2 13.5 14.6 6.7 9.3 19.7 8.6 10.1 2.9 (2.0) 8.4 5.2 7.5 10.1 5.2 11.3 9.4 1.8 7.0 8.9 8.0 5.4 8.7 7.0 1.6 (0.2) 7.0 5.7 7.3 3.0 6.0 4.5 (1.8) 7.2 0.4 1.0 6.0 0.4 3.6 5.2 4.2 (1.6) 1.6 4.0 2008-28F CAGR (%) 9.2 8.7 8.6 8.1 7.9 7.5 7.4 6.9 6.7 6.7 6.6 6.6 6.4 6.2 6.2 6.1 6.1 6.0 6.0 6.0 5.9 5.9 5.7 5.7 5.7 5.7 5.5 5.5 5.5 5.4 5.4 5.3 5.2 5.1 4.6 4.4 4.4 3.6 3.5 3.4 3.2 3.2 2.5 4.9
Nomura
14
14 June 2010
Jim Wong
Cargo
Taiwanese and Korean airlines most exposed to cargo recovery

Noting that the strength of recoveries has differed among passenger operations and cargo operations, we see Taiwanese carriers as being the most exposed to the ongoing stronger cargo recovery. While yields and volumes have shown strong recoveries for both air passenger and cargo operations, the magnitude of such recovery from trough has been much stronger on the cargo front (albeit from a lower base).
Taiwanese carries are the most exposed to the ongoing stronger cargo recovery
Exhibit 21. Cargo operations as percentage of revenue

(%) China Air EVA Air KAL CX SIA CEA Air China MAS ANA CSA AirAsia
Source: Nomura estimates
2008 40.6 39.0 29.6 28.4 18.6 13.0 13.6 10.7 8.9 6.3 2.0
2009 36.7 33.0 28.8 25.8 16.6 10.6 10.5 10.5 8.7 5.3 3.0
Exhibit 22. Passenger operations as percentage of revenue

(%) CSA AirAsia CEA Air China ANA SIA CX EVA Air MAS KAL China Air
2008 91.2 84.0 81.5 81.9 80.6 73.2 67.0 55.2 57.6 58.3 54.7
2009 91.3 76.0 84.1 83.1 77.8 75.0 68.6 60.0 59.7 58.2 58.2
Air cargo demand is more dependent on a recovery in the US and Europe, while air passenger demand is more dependent on a recovery in domestic economies. Therefore, despite the stronger recovery for air cargo vis--vis air passengers, our expectation of a sustained recovery in air passenger demand is still higher than that of a sustained recovery in air cargo demand. Still, a number of players advocate that the strong recovery in air cargo will be sustained for at least six to nine months, for instance Singapore Airlines.
Air passenger recovery slower than cargo but from higher base and higher clarity
Nomura
15
14 June 2010
Jim Wong
The fleet
Fleet age and forward fleet expansion

In light of our view for a sustainable demand recovery, we now look to supply. Here we see that scheduled increases in aircraft capacity within the next two years is relatively limited (most to grow fleet by just single digits), which bodes well for the profitability of the Asian airlines.
Limited supply may spur growth in region, which bodes well for the profitability of Asian airlines
Exhibit 23. Fleet development schedule

Fleet size (# of aircrafts) Air China CSA ANA CEA AirAsia KAL CX SIA MAS EVA Air
Source: Company data, Nomura estimates
Avg fleet age (years) 7.4 6.2 9.8 7.2 2.5 9.0 9.0 6.3 11.6 8.5
Fleet growth (%) 2010F 10.3 9.0 8.6 7.8 4.8 4.8 3.5 3.3 2.9 1.8 2011F 10.4 8.5 9.2 5.8 17.0 12.1 3.4 4.0 7.5 0.0
262 378 210 257 84 126 144 120 104 53
The detailed aircraft fleet breakdowns for the various airlines are as follows:
Exhibit 24. Air China fleet development schedule

Type Passenger aircrafts A319 A320 B737-300/600/700 B737-700 B737-800 B757-200 A330-200 A340-300 B747-400C B747-400P B767-300 B767-300ER B777-200 Subtotal Freighter B747-200F B747-400F Turpolev TU 204F Gulfstream IV BJ/RJ Subtotal Total fleet Total fleet size Fleet growth (%) Average age 7.4 5 4 1 0 2 12 262 262 2 6 27 289 10.3 0 30 319 10.4 2 2 33 33 75 20 44 13 20 6 4 4 1 5 10 250 21 (1) (2) (1) 4 30 (1) (1) 12 (2) 3 10 (1) 5 12 14 FY09 FY10F FY11F
Source: Company data; Fleet doesnt include Air Macau and Shenzhen Airlines; Nomura estimates
Nomura
16
14 June 2010
Jim Wong
Exhibit 25. China Eastern Airlines fleet development schedule

Type A340-600 A340-300 A330-300 A330-200 A320 A319 MD-90 B767-300 B737-800 B737-700 B737-300 B737 NG ERJ145 B747-400 F A300F MD-11F CRJ-200 Total Total fleet size Fleet growth (%) Average age 10 2 3 6 5 257 257 20 277 7.8 16 293 5.8 FY09 5 5 15 5 83 15 9 3 13 39 17 2 4 1 1 14 11 0 3 FY10F FY11F
7.2
Source: Company data, Fleet doesnt include Shanghai Airlines, Nomura estimates
Exhibit 26. China Southern Airlines fleet development schedule

Type B737-300 B737-500 B737-700 B737-800 A330-300 A321-200 A300-600 A320-200 A319-100 B747-400F B777F MD82 MD90 ATR-72 ERJ145 Total Total fleet size Fleet growth (%) Average age
FY09 25 2 46 80 8 40 5 54 44 2 2 3 13 5 6 378 378
FY10F
FY11F
34 412 9.0
35 447 8.5
6.2
Nomura
17
14 June 2010
Jim Wong
Exhibit 27. KAL fleet development schedule

Type A380 A330 A300 B747 B777 B787 B737 Passenger total B747F B777F Cargo total Total Total fleet size Fleet growth (%) Average age
Current 0 19 8 21 25 0 30 103 23 0 23 126 126
FY10F 2
FY11F 5 5
FY12F 1 1
3 2 2 5 1 1 6 132 4.8 14 2 2 16 148 12.1 4 2 8 1 2 3 11 159 7.4
9.0
Exhibit 28. MAS fleet development schedule

Type B747-400 B777-200 A330-300 A330-200 B737-800 B737-400 A380 Freighters ATR Total Total fleet size Fleet growth (%) Average age
Current 10 17 11 3 3 37 0 6 17 104 104
FY10F
FY11F
FY12F
0 3 0
5 3 0
3 8 6
3 107 2.9
8 115 7.5
17 132 14.7
11.6
Exhibit 29. AirAsia fleet development schedule

Type Malaysia AirAsia A320 Thai AirAsia A320 B737 Indonesia AirAsia A320 B737 Total Total fleet size Fleet growth (%) Average age
Current 48 12 8 10 6 84 84
FY10F 4 8 (8) 4 (4) 4 88 4.8
FY11F 6 5
FY12F 6 9
5 (1) 15 103 17.0
9 24 127 23.3
Nomura
18
14 June 2010
Jim Wong
Exhibit 30. EVA airways fleet development schedule

FY09 B747-400 B747-400 Combi B747-400F MD-11 MD-11F MD-90 B757-200 B767-200 B767-300ER B777-300ER A330-200 A320-200 B777-200LR Total Total fleet size Fleet growth (%) Average age
FY10F
FY11F (1) 1
3 4 9 0 8 6 0 0 0 14 11 0 0 55 55 1 56 1.8 8.5 0 56 0.0 1
Exhibit 31. Cathay Pacific fleet development schedule

FY09 CX B747-400 B747-400F B747-400BCF B747-400ERF B747-8F B777-200 B777-300 B777-300ER A330-300 A340-300 Total Dragonair A320-200 A321-200 A330-300 Total Total Total fleet size Fleet growth (%) Average age 9.0 9 6 14 29 144 144* 1 (1) (1) (1) 5 149* 3.5* (2) (2) (2) (6) 5 154* 3.4* 22 6 7 6 0 5 12 14 32 11 115 6 4 1 (1) 11 6 6 1 FY10F FY11F
Source: Company data, Nomura estimates: * Assumes that of the 10 aircraft that are parked and 1 that is leased out, 4 are sold to the Air China cargo JV, 3 will be brought back into operation in 2010 and another 3 back into operation in 2011.
Nomura
19
14 June 2010
Jim Wong
Exhibit 32. Singapore Airlines fleet development schedule

FY09 SIA B747-400 B777-200 B777-200A B777-200ER B777-300 B777-300ER A340-500 A380-800 A330-300 B787-9 A350-900XWB Total SIA Cargo B747-400F Total Total fleet size Fleet growth (%) Average age 6.3 12 120 120* 4 124* 3.3* 5 129* 4.0* 5 13 17 15 12 19 5 11 11 0 0 108 4 5 4 8 4 2 (10) 1 FY10F FY11F
Source: Company data, Nomura estimates: * Assumes that of the 4 surplus aircrafts, 3 are brought back into operation in 2010 and 1 back into operation in 2011
Exhibit 33. ANA fleet development schedule

FY09 Boeing 747-400(International) Boeing 747-400 Boeing 777-300ER Boeing 777-300 Boeing 777-200ER Boeing 777-200 Boeing 787-8 Boeing 767-300ER Boeing 767-300 Boeing 767-300F Boeing 767-300BCF Airbus A320-200(International) Airbus A320-200(Domestic) Boeing 737-800 Boeing 737-700ER Boeing 737-700 Boeing 737-500 Bombardier DHC8/400(Q400) Bombardier DHC8/300(Q300) 3 10 13 7 7 16 0 20 32 4 4 5 24 9 2 16 19 14 5 210 Total fleet size Fleet growth (%) Average age
FY10F (3) 4
FY11F
8 3
12 4
2 (1) 5 2
(1) 1 18 228 8.6 3 21 249 9.2
210
9.8
Nomura
20
14 June 2010
Jim Wong
Forex is a major part of a capital-intensive business
Currency sensitivities differ significantly

In addition to supply and demand, currency movement is another major factor that affects the profitability of the Asian airlines. Given their partial global exposure, the Asian airlines will necessarily be impacted by global currency movements whether directly and/or indirectly. Depending on capital structure and route mix, the impact of domestic currency exchange rate movement will impact different airlines differently. A strong local currency, especially versus the US dollar, is seen as positive for the Chinese, Japanese, Korean and Malaysian airlines. On the other hand, a strong local currency is seen as negative for SIA (albeit not against the US$) and CX (but not the Hong Kong-based players resting on the peg). The Taiwanese airlines are largely seen as currency-impact neutral. The table below sums up the estimated impact of a 1% appreciation in domestic currency to the earnings and the book value of the various Asian airlines.
Strengthening of local currency would be positive for Chinese, Japanese, Korean and Malaysian airlines; negative for SIA and CX
Exhibit 34. Impact of 1% appreciation in local currency

(%) CSA ANA CEA MAS AirAsia Air China KAL EVA Air CX SIA
FY10F earnings +22.5 +20.0 +13.8 +15.0 +5.9 +5.3 +2.1 +1.3 (0.6) (11.6)
FY10 book value +1.7 +0.2 +2.4 +1.0 +3.6 +1.0 +1.7 +0.2 +0.4 (16.1)
The main reason for the net positive domestic currency appreciation impact for the Chinese, Japanese, Korean, and Malaysian airlines is that these airlines tend to have substantial amounts of non-domestic currency-denominated debt and/or costs, combined with significant amounts of domestic currency revenues. The reason for the net negative domestic currency appreciation impact for SIA is that it lacks non-domestic currency-denominated debt (it is net cash) and the group has a relatively low level of domestic currency revenue (it has no domestic routes). As for EVA Air and China Air, they tend to be more neutral to currency movements as a result of neither currency hedges nor relatively balanced revenue and cost exposures to non-domestic currencies. We see from the following exhibits that currency exchange gains or losses have historically been major earnings swing factors for the earnings of the Chinese airlines and the Korean airlines.
Exhibit 35. Trend of exchange gains for Air China

(RMBmn) Reported net profit Exchange gain Exchange gain as % of reported profit RMB/US$ exchange rate (%) FY98 FY99 FY00 FY01 948 872 92 FY02 500 (361) (72) FY03 160 (297) (186) FY04 2,386 (55) (2) FY05 2,406 918 38 FY06 2,688 984 37 FY07 4,046 2,030 50 FY08 (9,256) 1,487 (16) FY09 4,854 110 2 FY10F 7,202 933 13 FY11F 7,155 2,178 30
0.0
0.0
0.0
0.0
0.0
0.0
0.0
2.6
3.3
7.0
7.0
0.0
2.6
5.3
Source: Company data; Nomura estimates
Nomura
21
14 June 2010
Jim Wong
Exhibit 36. Trend of exchange gains for China Eastern Air

(RMBmn) Reported net profit Exchange gain Exchange gain as % of reported profit RMB/US$ exchange rate (%) Source: Company data; Nomura estimates FY98 (481) (132) 27 0.0 FY99 84 (111) (132) 0.0 FY00 176 120 68 0.0 FY01 542 126 23 0.0 FY02 86 (38) (43) 0.0 FY03 (950) (70) 7 0.0 FY04 321 (21) (6) 0.0 FY05 440 (94) 2.6 FY06 971 (29) 3.3 FY07 2,044 540 7.0 FY08 1,971 (13) 7.0 FY09 169 95 56 0.0 FY10F FY11F 2,089 1,099 53 2.6 2,760 2,097 76 5.3 (467) (3,313) 379 (15,269)
Exhibit 37. Trend of exchange gains for China Southern Air

(RMBmn) Reported net profit Exchange gain Exchange gain as % of reported profit RMB/US$ exchange rate (%) Source: Company data; Nomura estimates FY98 (514) (366) 71 0.0 FY99 83 (427) (515) 0.0 FY00 503 319 63 0.0 FY01 340 297 87 0.0 FY02 576 (175) (30) 0.0 FY03 (357) (164) 46 0.0 FY04 (59) 123 0.0 FY05 1,220 (66) 2.6 FY06 188 1,492 794 3.3 FY07 2,832 167 7.0 FY08 2,592 (54) 7.0 FY09 330 93 28 0.0 FY10F FY11F 1,772 1,032 58 2.6 1,802 2,379 132 5.3 (48) (1,848) 1,697 (4,823)
Exhibit 38. Trend of exchange gains for Korean Airlines

(Wbn) Reported net profit Exchange gain Exchange gain as % of reported profit KRW/US$ exchange rate (%) Source: Company data; Nomura estimates FY98 297 167 56 32.9 FY99 259 167 65 5.6 FY00 (463) (289) 62 (9.9) FY01 (713) (257) 36 (3.7) FY02 482 528 110 10.7 FY03 (241) (15) 6 (0.7) FY04 519 767 148 15.3 FY05 200 196 98 2.5 FY06 383 408 107 8.6 FY07 FY08 FY09 (99) 480 485 8.1 FY10F 431 411 95 1.3 FY11F 412 675 164 8.7 13 (1,942) (15) (1,853) (119) (0.6) 95 (25.7)
As for the other Asian airlines, the impact from currency movements tends to come through less obviously, ie, via the revenue line as improved or reduced domestic yields on tickets sold overseas rather than through the booking of exchange gains or losses. Hence, their currency exchange gains or losses tend to be minimal.
Exhibit 39. Trend of exchange gains for Malaysia Airlines

(RMmn) Reported net profit Exchange gain Exchange gain as % of reported profit RM/US$ exchange rate (%) Source: Company data; Nomura estimates 2.0 FY98 FY99 (700) (393)* 56 0.0 FY00 (259) (551)* 213 0.0 FY01 (417) (409)* 98 0.0 FY02 (836) (4) 0 0.0 FY03 337 (119) (35) 0.0 FY04 (28) (6) 0.0 FY05 18 (1) 0.6 FY06 (134) (42) 32 7.0 FY07 853 (65) (8) 6.8 FY08 246 (83) (34) (4.3) FY09 493 27 5 1.5 FY10F 503 28 6 6.6 FY11F 818 105 13 5.7 461 (1,252)
Exhibit 40. Trend of exchange gains for AirAsia

(RMmn) Reported net profit Exchange gain Exchange gain as % of reported profit RM/US$ exchange rate (%) Source: Company data; Nomura estimates 2.0 0.0 0.0 0.0 0.0 0.0 FY98 FY99 FY00 FY01 FY02 FY03 FY04 49 (0) (1) 0.0 FY05 112 (1) (1) 0.6 FY06 88 29 33 7.0 FY07 426 (20) (5) 6.8 FY08 (497) (230) 46 (4.3) FY09 506 91 18 1.5 FY10F 426 170 40 6.6 FY11F 492 0 0 5.7
Exhibit 41. Trend of exchange gains for EVA Air

(NT$mn) Reported net profit Exchange gain Exchange gain as % of reported profit NT$/US$ exchange rate (%) Source: Company data; Nomura estimates FY98 75 0 0 1.1 FY99 1,165 0 0 2.6 FY00 (117) (5) (5.1) FY01 (182) 6 (5.4) FY02 2,637 (252) (10) 0.7 FY03 1,396 113 8 2.1 FY04 3,243 (174) (5) 7.4 FY05 31 2 (3.5) FY06 583 (35) 0.8 FY07 303 (16) 0.4 FY08 (5) 0 (1.2) FY09 (21) 1 2.5 FY10F 3,332 57 2 1.3 FY11F 4,532 328 7 5.1 2,511 (3,175) 1,326 (1,687) (1,872) (16,890) (2,844)
Nomura
22
14 June 2010
Jim Wong
Exhibit 42. Trend of exchange gains for China Air

(NT$mn) Reported net profit Exchange gain Exchange gain as % of reported profit NT$/US$ exchange rate (%) Source: Company data; Nomura estimates FY98 (2,189) 583 (27) 1.1 FY99 2,749 173 6 2.6 FY00 2,934 0 0 (5.1) FY01 1,785 1,122 63 (5.4) FY02 3,119 (271) (9) 0.7 FY03 1,779 (79) (4) 2.1 FY04 4,183 (298) (7) 7.4 FY05 645 483 75 (3.5) FY06 365 49 0.8 FY07 18 (1) 0.4 FY08 (646) 2 (1.2) FY09 (219) (5.8) 2.5 FY10F na na na 1.3 FY11F na na na 5.1 738 (2,519) (32,351) (3,805)
Exhibit 43. Trend of exchange gains for Cathay Pacific

(HK$mn) Reported profit Exchange gain Exchange gain as % of reported profit HK$/US$ exchange rate (%) Source: Company data; Nomura estimates FY98 (542) (88) 16 0.0 FY99 2,176 (41) (2) (0.4) FY00 5,005 (166) (3) (0.3) FY01 657 100 15 0.0 FY02 3,983 179 4 0.0 FY03 1,303 244 19 0.5 FY04 4,417 199 5 (0.1) FY05 3,451 156 5 0.2 FY06 4,254 272 6 (0.3) FY07 490 7 (0.3) FY08 28 0 0.7 FY09 4,694 344 7 (0.1) FY10F 6,299 0 0 0.1 FY11F 5,174 0 0 0.0 7,023 (8,558)
Exhibit 44. Trend of exchange gains for Singapore Airlines

(S$mn) Reported profit* Exchange gain Exchange gain as % of reported profit S$/US$ exchange rate (%) FY98 1,033 76 7 (7.1) FY99 1,164 (80) (7) 1.0 FY00 1,549 (14) (1) (5.4) FY01 632 3 1 (2.1) FY02 1,065 (8) (1) 4.3 FY03 849 (42) (5) 5.0 FY04 1,352 (74) (5) 1.5 FY05 1,241 (163) (13) 2.1 FY06 2,129 (80) (4) 6.1 FY07 2,049 (118) (6) 9.3 FY08 1,062 65 6 (10.7) FY09 216 (72) (33) 8.1 FY10F 1,259 0 0 7.1 FY11F 1,667 0 0 5.4
Source: Company data; Nomura estimates; * FY99 to FY11 numbers used rather than CY98 to CY10 numbers given March year-end
Exhibit 45. Trend of exchange gains for All Nippon Airways

(mn) Reported profit Exchange gain Exchange gain as % of reported profit JPY/US$ exchange rate (%) 14.6 FY98 FY99 (9,254) 61 11.1 FY00 FY01 FY02 FY03 24,756 (8) 10.8 FY04 26,970 1,139 4 4.5 FY05 26,722 1,774 7 (12.8) FY06 32,658 2 (1.1) FY07 FY08 1,126 (26) 23.2 FY09 1,694 (3) (2.4) FY10F 5,000 na na (3.8) FY11F 19,000 na na 4.1 (4,732) (15,201) 40,286 (9,456) (28,256) 2,043 (1,101) 5 (10.4) 12 (13.1) (3) 10.8 64,143 (4,260) (57,387) (3) 6.5
939 (1,900)
746 (1,653)
Source: Company data; Nomura estimates, YE-March
Below are the official currency sensitivities provided by the airlines themselves (however, many do not provide official sensitivities) based on a 1% appreciation of the domestic currency versus all other currencies.
Exhibit 46. Effect of 1% appreciation of HK$ against all other currencies (except US$) for CX
(%) Impact on profit Impact on book value
Source: CX
FY09 (0.6) 0.4
FY07 (0.7) 0.3
Exhibit 47. Effect of 1% appreciation of S$ against all other currencies for SIA
(%) Impact on profit before tax Impact on book value
Source: SIA
FY09 (11.6) (16.1)
FY08 (21.8) (18.1)
Nomura
23
14 June 2010
Jim Wong
Given the differing and sometimes significant magnitude in the currency sensitivities, views on the forward movement of currencies will necessarily be an important factor in the formation of a view on the different airlines. With our house view, shown in Exhibits 47 and 48 below, calling for the appreciation of most domestic Asian currencies (especially against the US dollar), we should arguably be more positive on the Chinese, Japanese, Korean, and Malaysian airlines on this factor in isolation.
Given our house view calling for the appreciation of most domestic Asian currencies, Chinese, Japanese, Korean and Malaysian airlines should benefit the most
Exhibit 48. Nomura currency exchange rate estimates vs US$

1998 RMB SG$* HK$ NT$ W * RM THB 8.278 1.729 7.746 32.200 1,204 3.799 36.657 1999 8.278 1.712 7.774 31.387 1,140 3.799 37.495 2000 8.278 1.804 7.800 33.080 1,265 3.799 43.384 2001 8.278 1.843 7.798 34.953 1,314 3.801 44.209 2002 8.278 1.764 7.800 34.722 1,186 3.799 43.103 2003 8.278 1.676 7.764 34.014 1,194 3.799 39.683 2004 8.278 1.650 7.773 31.682 1,035 3.799 38.904 2005 8.071 1.616 7.754 32.822 1,010 3.776 41.005 2006 7.813 1.517 7.779 32.567 930 3.530 35.500 2007 7.305 1.376 7.801 32.428 936 99.691 3.306 29.750 2008 6.826 1.523 7.750 32.820 1,260 98.971 3.455 34.769 2009 End-10F End-11F 6.826 1.399 7.754 32.005 1,165 93.458 3.406 33.368 6.650 1.380 7.750 31.600 1,150 97.000 3.180 32.000 6.300 1.310 7.750 30.000 950 93.000 3.000 30.200
118.864 102.796 126.310 132.714 118.120 104.264 107.147 117.758 117.827
Source: Nomura Economics team; * Rates are as of March of following year in order to match fiscal year-end of SIA and ANA
Exhibit 49. Estimated appreciation of various currencies vs US$

(%) RMB SG$* HK$ NT$ W * RM THB 1998 0.0 (7.1) 0.0 1.1 32.9 14.6 2.0 28.3 1999 0.0 1.0 (0.4) 2.6 5.6 11.1 0.0 (2.2) 2000 0.0 (5.4) (0.3 (5.1) (9.9 (10.4) 0.0 (13.6) 2001 0.0 (2.1) 0.0 (5.4) (3.7) (13.1) 0.0 (1.9) 2002 0.0 4.3 0.0 0.7 10.7 10.8 0.0 2.6 2003 0.0 5.0 0.5 2.1 (0.7) 10.8 0.0 8.6 2004 0.0 1.5 (0.1) 7.4 15.3 4.5 0.0 2.0 2005 2.6 2.1 0.2 (3.5) 2.5 (12.8) 0.6 (5.1) 2006 3.3 6.1 (0.3) 0.8 8.6 (1.1) 7.0 15.5 2007 7.0 9.3 (0.3) 0.4 (0.6) 6.5 6.8 19.3 2008 7.0 (10.7) 0.7 (1.2) (25.7) 23.2 (4.3) (14.4) 2009 End-10F End-11F 0.0 8.1 (0.1) 2.5 8.1 (2.4) 1.5 4.2 2.6 1.4 0.1 1.3 1.3 (3.8) 6.6 4.1 5.3 5.1 0.0 5.1 8.7 4.1 5.7 5.6
Source: Nomura estimates; * rates are as of March of following year in order to match with fiscal year-end of SIA and ANA
However, we note that our currency appreciation expectations have actually been cut recently, resulting in some earnings and book value estimate changes (details in the company sections).
Exhibit 50. Summary of recent changes in currency exchange rate expectations

New exchange rate projection vs US$ 2009 RM S$* HK$ NT$ W * RM THB 6.826 1.399 7.754 32.005 1,165 93.458 3.406 33.368 End-10F 6.650 1.380 7.750 31.600 1,150 97.000 3.180 32.000 End-11F 6.300 1.310 7.750 30.000 950 93.000 3.000 30.200 Old exchange rate projection vs US$ End-10F 6.450 1.300 7.750 30.500 1,050 97.000 3.150 31.500 End-11F 6.100 1.230 7.750 28.500 950 90.000 3.090 30.000 New appreciation expectation vs US$(%) End-10F 2.6 1.4 0.1 1.3 1.3 (3.8) 6.6 4.1 End-11F 5.3 5.1 0.0 5.1 8.7 4.1 5.7 5.6 Old appreciation expectation vs US$ (%) End-10F 5.5 7.1 0.1 4.7 9.8 (3.8) 7.5 5.6 End-11F 5.4 5.4 0.0 6.6 9.5 7.2 7.3 4.8
Source: Nomura Economics Team
Nomura
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14 June 2010
Jim Wong
Debt and forex
CSA has largest local revenue/greatest foreign debt exposure; SIA the least
As noted in the previous section, airlines with lower exposure to non-domestic revenues tend to be beneficiaries of domestic currency appreciations. whereas airlines with higher exposure to non-domestic revenues tend to be victims of domestic currency appreciation.
Exhibit 51. Exposure to home currency

2008 CSA ANA CEA Air China AirAsia MAS CX KAL EVA Air China Air SIA 90.5 89.9 79.6 75.8 90.0 71.0 51.7 56.2 38.0 38.8 29.8 2009 92.5 90.4 84.5 80.5 90.0 71.0 52.4 45.2 36.9 39.4 31.9*
Source: Nomura estimates; *Based on breakdown derived via origin of sale but actual exposure to S$ provided by SIA is 46%
Hence, we see that indeed SIA, which is a net victim of any local currency appreciation, has close to 70% of its revenue in foreign currencies, whereas CEA, ANA, and CSA have only 16%, 10% and 8% of their respective revenues, respectively, in nondomestic currencies. We note that airlines with a heavier cargo bias, such as the Taiwan-based and Korean airlines, tend to have greater US dollar exposure than the Origin of Sales breakdown may indicate, given that most cargo rates are priced in US dollars.
SIA is a beneficiary of a weak US$ but net victim of local currency appreciation
Exhibit 52. Revenue breakdown for Air China by origin of sale

FY07 Domestic currencies China Non-domestic currencies Europe North America Japan / Korea Asia Pacific, others HK / Macau Overall
Source: Air China; Nomura research
FY08 75.8 8.5 5.4 4.0 3.0 3.4 100.0
FY09 80.5 6.4 4.2 3.5 2.8 2.7 100.0
77.0 7.4 4.6 4.5 2.7 3.9 100.0
Nomura
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14 June 2010
Jim Wong
Exhibit 53. Revenue breakdown for CEA by origin of sale

FY07 Domestic currencies China Non-domestic currencies Japan HK / Macau Other International Overall
Source: CEA; Nomura research
FY08 79.6 4.3 3.0 13.1 100.0
FY09 84.5 3.5 2.5 9.5 100.0
78.4 4.3 3.2 14.2 100.0
Exhibit 54. Revenue breakdown for CSA by origin of sale

FY07 Domestic currencies China Non-domestic currencies HK / Macau Other International Overall
Source: CSA; Nomura research
FY08 90.5 1.0 8.6 100.0
FY09 92.5 1.0 6.6 100.0
89.9 1.1 9.1 100.0
Exhibit 55. Revenue breakdown for KAL by origin of sale

FY07 Domestic currencies Korea Non-domestic currencies Americas Japan China Europe SE Asia Oceania Overall
Source: KAL; Nomura research
FY08 56.2 15.6 10.4 5.0 6.3 4.5 2.0 100.0
FY09 45.2 18.2 16.3 6.3 6.3 5.5 2.3 100.0
64.2 13.8 8.3 4.0 5.0 2.7 2.0 100.0
Exhibit 56. Revenue breakdown for MAS by origin of sale

FY07 Domestic currencies Malaysia Non-domestic currencies America Europe Australia & Japan Overall
Source: MAS; Nomura research
FY08
FY09 71.0 20.0 7.0 2.0
100.0
100.0
100.0
Exhibit 57. Revenue breakdown for AirAsia by origin of sale

FY07 Domestic currencies Malaysia Non-domestic currencies Others Overall
Source: AirAsia; Nomura research
FY08
FY09 90.0 10.0
100.0
100.0
100.0
Nomura
26
14 June 2010
Jim Wong
Exhibit 58. Revenue breakdown for EVA Air by origin of sale

FY07 Domestic currencies Taiwan Non-domestic currencies America Europe Asia Overall
Source: EVA Airways; Nomura research
FY08 38.8 41.6 3.3 55.1 100.0
FY09 38.0 42.2 3.8 54.0 100.0
FY07 36.9 40.6 3.0 56.4 100.0
Exhibit 59. Revenue breakdown for China Air by origin of sale

FY07 Domestic currencies Taiwan (%) America (%) Southeast Asia (%) Northeast Asia (%) Europe (%) Hong Kong (%) Australia (%) Mainland China (%) Overall
Source: China Air; Nomura research
FY08 38.8 21.3 13.6 8.6 12.4 3.7 1.2 0.5 100.0
FY09 39.4 20.3 12.8 8.0 10.7 3.3 1.4 4.0 100.0
39.0 22.7 12.7 8.2 12.3 4.0 1.1 0.0 100.0
Exhibit 60. Revenue breakdown for CX by origin of sale

FY07 Domestic currencies Hong Kong North America Non-domestic currencies Europe SE Asia and Middle East North Asia Australia and South Africa China Overall
Source: CX; Nomura research
FY08 38.2 13.5 12.3 11.5 14.1 7.1 3.3 100.0
FY09 39.8 12.6 11.8 12.8 12.6 7.0 3.3 100.0
40.1 12.8 11.6 10.2 15.0 6.7 3.6 100.0
Exhibit 61. Revenue breakdown for SIA by origin of sale

FY07 Domestic currencies Singapore Non-domestic currencies Europe SW Pacific Other East Asia Americas West Asia and Africa Overall
Source: SIA; Nomura research
FY08 29.8 21.2 18.4 16.0 7.8 6.8 100.0
FY09 31.9 19.8 16.7 17.2 8.0 6.4 100.0
29.8 18.8 17.5 17.3 9.0 7.7 100.0
Nomura
27
14 June 2010
Jim Wong
Exhibit 62. Revenue breakdown for ANA by origin of sale

FY07 Domestic currencies Japan Non-domestic currencies Non Japan Overall
Source: ANA; Nomura estimates
FY08 89.9 10.1 100.0
FY09 90.4 9.6 100.0
100.0
Given the relative currency exposure on both the revenue and debt fronts, a weak euro would be seen as the most negative for SIA whereas a strong US dollar would be seen as the most negative for KAL. Nevertheless, if we assume that the renminbi exchange rate is allowed to freely move against the US dollar, a strong US dollar would then be seen as the most negative for Chinese airlines.
A weak euro would be most negative for SIA, in our view
Exhibit 63. Debt breakdown for Air China

(%) Net debt/equity Debt/(cash) breakdown RMB domestic US$ HK$ (pegged to US$) Euro Yen
Source: Air China; Nomura research
FY08 252 17 73 4 0 5
FY09 253 18 70 10 0 1
Exhibit 64. Debt breakdown for CEA

(%) Net debt/equity Debt/(cash) breakdown RMB domestic US$ Euro Yen
Source: CEA; Nomura research
2008 neg 39 57 0 4
2009 3,481 32 68 0 0
Exhibit 65. Debt breakdown for CSA

(%) Net debt/equity Debt/(cash)breakdown RMB domestic US$ Euro Yen
Source: CSA; Nomura research
2008 717 28 71 0 1
2009 525 90 10 0 0
We note that since 2009, Chinese airlines have increased their US dollar-denominated debt as a percentage of the overall debt mix. Based on company guidance, we have assumed that CSA will have 100% of its gross debt in US dollars by FY11F, that Air China will have 80% and that CEA will have 70%.
Nomura
28
14 June 2010
Jim Wong
Exhibit 66. Debt breakdown for KAL

(%) Net debt/equity Debt breakdown Korean domestic US dollar Yen Euro
Source: KAL; Nomura research
FY08 282 36 58 4 2
FY09 272 46 50 3 1
Exhibit 67. Debt breakdown for MAS

(%) Net debt/equity Debt/(cash)breakdown RM domestic US$ Euro /A$/S$
Source: MAS; Nomura research
FY08 (54) (61) (35) (3) (1)
FY09 (113) (66) (30) (3) (1)
Exhibit 68. Debt breakdown for AirAsia

(%) Net debt/equity Debt/(cash)breakdown MYR domestic US$
Source: AirAsia; Nomura research
FY08 402 10 90
FY09 262 10 90
Exhibit 69. Debt breakdown for EVA

(%) Net debt/equity Debt/(cash)breakdown NT$ domestic US$
Source: EVA; Nomura research
FY08 239 80 20
FY09 209 85 15
Exhibit 70. Debt breakdown for China Air

(%) Net debt/equity Debt breakdown NT$ domestic US$
Source: China Air; Nomura research
FY08 396 70 30
FY09 308 70 30
Exhibit 71. Debt breakdown for Cathay Pacific

FY08 Net debt/equity Debt breakdown US$ domestic HK$ domestic JPY Euro S$ Others
FY09 62 52.4 19.0 11.9 6.0 4.8 6.0
66 53.4 19.1 7.1 7.6 5.1 7.6
Nomura
29
14 June 2010
Jim Wong
Exhibit 72. Debt breakdown for SIA

(%) Net debt/equity Debt/(cash)breakdown Singapore domestic US$ Euro JPY
FY08 Net cash (76.8) (21.2) (1.5) (0.5)
FY09 Net cash
Exhibit 73. Debt breakdown for ANA

(%) Net debt/equity Debt/(cash)breakdown JPY domestic
Source: ANA; Nomura research
FY08 343 100.0
FY09 249 100.0
Nomura
30
14 June 2010
Jim Wong
Local carrier model
Chinese and Japanese carriers more focused on domestic routes

As for exposure to various routes, the Chinese airlines, Japanese airlines and AirAsia are the most domestically focused deriving more than 50% of revenue from local routes. SIA, CX, the Taiwanese airlines and MAS, on the other hand, are overseasfocused generating more than 85% of revenue from regional and international routes. Based on macro GDP projections as well as studies done by Boeing (outlined in the section titled Macro environment continues to recover), the intra-Asia (especially South Asia) as well as the China domestic routes are expected to see the strongest passenger traffic growth over the medium to long term. Not surprisingly, the Chinese airlines have the greatest exposure to China domestic routes.
Chinese and Japanese airlines, and AirAsia are the most domestically focused
Exhibit 74. Local route exposure, 2009

Airline (%) CSA ANA CEA Air China AirAsia MAS KAL CAL EVA CX SIA
Source: Company data; Nomura research
Exposure (%) 85.0 74.7 69.0 61.0 40.0 20.0 8.5 None None None None
SIA has the greatest exposure to European routes (ie, Europe-SE Asia), while EVA and KAL have the largest exposures to North American routes (ie, N. America-NE Asia).
Exhibit 75. Route exposure to Europe in 2009

Airline (%) SIA CX MAS KAL CAL EVA Air China ANA CEA CSA AirAsia
Source: Company data; Nomura research
Exposure (%) 21.0 19.4 16.0 15.8 15.5 15.0 12.7 6.8 Single digits Single digits na
Nomura
31
14 June 2010
Jim Wong
Exhibit 76. Route exposure to North America, 2009

Airline (%) EVA CAL KAL CX SIA ANA Air China MAS CEA CSA AirAsia
Source: Company data, Nomura research
Exposure (%) 47.8 36.8 33.7 24.6 20.0 8.7 8.3 Single digits Single digits Single digits na
As for the intra-Asia routes, which have recently seen the strongest recoveries, CX, SIA, KAL, and the Taiwanese airlines have the largest exposure.
Exhibit 77. Route exposure to Asian routes in 2009

Airline (%) CAL KAL CX SIA EVA Air China MAS CEA CSA ANA AirAsia
Exposure 47.7 42.0 39.7 38.3 37.2 18.0 15.9 12.0 5.0 na na
The detailed route breakdowns for the various Asian airlines are shown below.
Exhibit 78. Route breakdown for Air China (as a percentage of overall airline revenue)
1998 China domestic Europe North America Japan / Korea Asia Pacific, others HK/Macau Overall
Source: Company data; FY10F are Nomura estimates
1999
FY00
FY01 51.1 11.0 6.6 13.3 9.3 8.8 100.0
FY02 47.5 14.0 9.0 12.3 9.1 8.1 100.0
FY03 52.5 14.4 9.5 9.3 8.0 6.4 100.0
FY04 55.1 12.6 7.4 11.5 8.2 5.2 100.0
FY05 53.5 13.3 7.7 11.1 8.4 5.9 100.0
FY06 53.1 13.8 8.5 9.5 9.0 6.2 100.0
FY07 53.9 14.8 9.1 9.0 5.4 7.7 100.0
FY08 51.5 17.0 10.8 7.9 6.0 6.7 100.0
FY09 61.0 12.7 8.3 7.0 5.6 5.4 100.0
FY10F 58.6 12.6 8.7 8.7 6.8 4.6 100.0
Exhibit 79. Route breakdown for China Eastern Air (as a percentage of overall airline revenue)
1998 China domestic Japan HK/Macau Other International Overall
Source: Company data; FY10F are Nomura estimates
1999
FY00 41.3 14.1 18.8 25.8 100.0
FY01 44.7 13.0 17.7 24.6 100.0
FY02 41.9 14.0 16.6 27.6 100.0
FY03 46.6 11.0 14.2 28.1 100.0
FY04 46.3 10.1 13.3 30.2 100.0
FY05 48.7 9.6 11.5 30.2 100.0
FY06 55.7 9.5 8.6 26.2 100.0
FY07 56.7 8.6 6.3 28.4 100.0
FY08 59.2 8.6 6.0 26.2 100.0
FY09 69.0 7.0* 5.0 19.0* 100.0
FY10F 67.7 6.4 5.9 20.1 100.0
Nomura
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14 June 2010
Jim Wong
Exhibit 80. Route breakdown for China Southern Air (as a percentage of overall airline revenue)
China domestic HK/Macau Other international Overall 1998 79.1 10.1 10.8 100.0 1999 80.8 9.3 9.9 100.0 FY00 77.9 8.1 13.9 100.0 FY01 78.5 7.2 14.3 100.0 FY02 75.5 6.4 18.1 100.0 FY03 77.1 4.8 18.1 100.0 FY04 76.0 5.1 18.9 100.0 FY05 78.9 3.5 17.6 100.0 FY06 79.2 2.9 17.9 100.0 FY07 79.8 2.1 18.1 100.0 FY08 80.9 1.9 17.2 100.0 FY09 85.0 1.9 13.1 100.0 FY10F 84.0 1.1 14.9 100.0
Exhibit 81. Route breakdown for Korean Air (as a percentage of overall airline revenue)
1998 America Europe SE Asia Japan China Korea Domestic Oceania Overall
1999
FY00
FY01
FY02
FY03
FY04
FY05
100.0
100.0
100.0
100.0
100.0
100.0
FY06 30.0 16.0 13.0 13.0 9.0 13.0 6.0 100.0
FY07 30.0 17.0 13.0 13.0 10.0 11.0 6.0 100.0
FY08 30.0 17.0 13.0 14.0 10.0 10.0 6.0 100.0
FY09 33.7 15.8 12.4 14.5 9.2 8.5 6.0 100.0
FY10F 33.3 18.0 11.7 14.6 9.3 7.7 5.4 100.0
Exhibit 82. Route breakdown for MAS (as a percentage of overall airline revenue)
1998 Europe & Middle East Orient & N America Malaysia Domestic Asia Australia & New Zealand Africa & S America Overall
1999
FY00
FY01
FY02
FY03
FY04
FY05
100.0
100.0
100.0
100.0
100.0
100.0
FY06 26.4 5.3 16.4 16.1 33.2 2.7 100.0
FY07 29.9 23.7 12.0 16.5 15.7 2.2 100.0
FY08 30.4 21.9 13.4 15.9 15.9 2.4 100.0
FY09 27.7 20.2 20.0 16.0 13.9 2.2 100.0
FY10F 27.0 21.0 21.0 17.0 13.0 1.0 100.0
Exhibit 83. Route breakdown for AirAsia (as a percentage of overall airline revenue)
1998 Malaysia Domestic International Overall
1999
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
FY09 40.0 60.0 100.0
FY10F 37.0 63.0 100.0
Exhibit 84. Route breakdown for EVA Air (as a percentage of overall airline revenues)
1998 America Europe Asia Oceania Total
Source: Company data; *Nomura estimates
1999
FY00 47.7 17.7 31.9 2.7 100.0
FY01 43.8 18.9 34.7 2.6 100.0
FY02 46.0 18.6 33.3 2.1 100.0
FY03 46.3 20.9 30.6 2.1 100.0
FY04 48.2 19.5 30.3 2.0 100.0
FY05 48.4 17.5 31.7 2.4 100.0
FY06 49.2 17.1 31.6 2.0 100.0
FY07 49.0 16.6 32.6 1.9 100.0
FY08 49.7 15.3 33.5 1.5 100.0
FY09 47.8 15.0 36.2* 1.0* 100.0
FY10F 50.1 13.4 36.5 0.6 100.0
Exhibit 85. Route breakdown for China Air (as a percentage of overall airline revenue)
1998 America South-East Asia North-East Asia Europe Hong Kong Mainland China Australia Taiwan Domestic Overall
1999
FY00
FY01
FY02 39.1 20.9 12.1 15.9 10.7 0.9 0.4 100.0
FY03 38.6 21.1 10.9 18.9 8.7 1.4 0.4 100.0
FY04 40.1 19.7 11.7 17.7 8.9 1.6 0.4 100.0
FY05 40.7 18.7 12.8 17.2 9.1 1.5 100.0
FY06 40.9 19.3 12.6 17.0 8.8 1.4 100.0
FY07 39.7 19.1 12.4 18.4 8.4 1.7 0.3 100.0
FY08 37.4 20.4 12.9 18.7 7.7 0.8 1.9 0.3 100.0
FY09 36.8 18.6 12.5 15.5 8.1 6.2 2.2 100.0
FY10F na na na na na na na na na
Nomura
33
14 June 2010
Jim Wong
Exhibit 86. Route breakdown for Cathay Pacific (as a percentage of overall RPK)
1998 North America SE Asia & Middle East Europe Australia & S Africa North Asia China Overall 24.1 18.3 25.4 16.1 16.0 0.0 100.0 1999 24.4 19.2 25.0 16.2 15.3 0.0 100.0 FY00 24.5 18.6 25.0 16.3 15.6 0.0 100.0 FY01 22.3 19.4 24.2 18.3 15.8 0.0 100.0 FY02 23.7 20.6 23.4 16.8 15.6 0.0 100.0 FY03 25.9 20.2 23.2 17.2 13.5 0.0 100.0 FY04 27.2 20.4 22.2 15.7 14.4 0.0 100.0 FY05 27.3 19.7 21.7 17.1 14.2 0.0 100.0 FY06 28.0 19.7 22.3 16.0 14.0 0.0 100.0 FY07 25.8 18.7 20.1 14.6 13.8 7.1 100.0 FY08 28.0 19.2 18.6 15.0 12.7 6.6 100.0 FY09 24.6 21.3 19.4 16.3 11.7 6.7 100.0 FY10F 26.0 20.0 20.0 15.0 12.0 7.0 100.0
Exhibit 87. Route breakdown for SIA* (as a percentage of overall airline revenue)
1998 East Asia Europe SW Pacific & Australia Americas W Asia & Africa Overall 1999 30.9 21.1 13.7 24.0 10.4 100.0 FY00 33.4 18.7 14.6 22.5 10.8 100.0 FY01 33.6 20.1 15.6 20.5 10.2 100.0 FY02 32.2 20.1 16.3 21.3 10.0 100.0 FY03 29.4 19.8 18.7 20.9 11.3 100.0 FY04 29.6 21.1 17.9 20.3 11.1 100.0 FY05 29.3 20.7 18.3 20.4 11.3 100.0 FY06 29.2 21.5 18.1 19.7 11.6 100.0 FY07 28.9 21.8 18.3 18.7 12.3 100.0 FY08 26.7 24.8 19.0 17.8 11.6 100.0 FY09F 29.0 21.0 18.0 20.0 12.0 100.0 FY10F 29.0 21.0 18.0 20.0 12.0 100.0
Source: Company data; Nomura estimates; * FY99 to FY11 numbers used rather than CY98 to CY10 numbers given March YE
Exhibit 88. Route breakdown for All Nippon Airways (as a percentage of overall airline revenue)
1998 Japan domestic N America China Europe Other Asia Resorts Overall 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Source: Company data; Nomura estimates; * FY99 to FY11 numbers used rather than CY98 to CY10 numbers given March YE
1999
FY00 76.4
FY01 79.6
FY02 77.7
FY03 78.5
FY04 75.8
FY05 74.9
FY06 72.3
FY07 70.4 8.3 8.0 6.7 5.5 1.1 100.0
FY08 70.6 8.7 7.4 6.8 5.5 0.9 100.0
FY09 74.7 7.4 6.6 5.6 5.0 0.8 100.0
FY10F Na na na na na na na
Nomura
34
14 June 2010
Jim Wong
Now a look at jet kerosene
ANA, MAS and CX most hedged for oil

Other than currency exposure and route focuses, oil hedging is another important area where many of the airlines differ, as some are completely unhedged for oil price movements whereas others have hedged up to 80% of their estimated 2010F oil consumption.
Exhibit 89. Comparative oil hedging magnitudes

ANA MAS CX CAL EVA Air China CEA KAL SIA AirAsia CSA
Source: Company data; *Nomura estimate
% of 2010 consumption hedged 80 60 50 40-50 40 30 25 12 10 7 0
Average price (crude equivalent) U$85/barrel jet kerosene* US$96/barrel crude oil & US$108/barrel jet kerosene US$80/barrel crude oil na US$80-90/barrel crude oil Average US$80/barrel crude oil Average US$80/barrel crude oil US$77/barrel crude oil US$120/barrel jet kerosene US$82/barrel jet kerosene Nil
Hence, for investors expecting oil prices to rise, ANA, MAS and CX (given their more significant hedging positions) may be the better plays; investors who see oil prices in retreat may find CSA, KAL and SIA better suited to the portfolio. We note that even for airlines with hedging contracts for oil, they are only protected within a certain price range and, if oil price moves beyond that range, coverage would deteriorate rapidly. A sense of the magnitude of oil hedging losses/gains can be seen in the oil hedging losses/gains in 2008 and 2009, when crude oil prices swung from US$95.98/barrel at end-2007 to US$44.60/barrel at end-2008 and back to US$79.40/barrel at end-2009 (or from US$101.58/barrel at end-2007 to US$49.66/barrel at end-2008 and back to US$83.76/barrel at end-2009 for those with March year-ends).
ANA, MAS and CX may be better plays for oil prices to rise, whereas CSA, KAL and SIA may be better plays for oil prices to retreat
Exhibit 90. Earnings from oil hedging vs reported net profit

Oil hedging gains /(loss) ANA (JPYmn)* MAS (RMmn) CX (HK$mn) CAL (NT$mn) EVA (NT$mn) Air China (RMBmn) CEA (RMBmn) KAL (KRWbn) SIA (S$mn)* AirAsia (RMmn) CSA (RMBmn)
Source: Company data, *YE-March
Reported net profit 2011F na 120 250 na 367 0 0 (110) 0 0 0 2008 (4,260) 246 (8,558) (32,351) (16,890) (9,256) (15,269) (1,942) 1,062 (497) (4,823) 2009 (57,387) 493 4,694 (3,805) (2,844) 4,854 169 (99) 216 506 330 2010F 500 503 6,299 na 3,332 7,202 2,089 431 1,259 426 1,722 2011F 19,00 818 5,174 na 4,532 7,155 2,760 413 1,667 492 1,802
2008 na 0 (7,878) (22,595) (6,947) (8,155) (6,401) 124 (348) 0 (124)
2009 na 1,163 2,758 2,527 638 2,758 3,775 (240) (557) 0 45
2010F na 292 400 na 184 2,132 1,052 45 0 40 0
In the absence of oil hedging, the sensitivity to oil price movements to the overall costs of the various airlines are seen as largely similar since oil prices generally account for a similar proportion of overall costs for the various airlines. Perhaps the only major difference is in whether oil that the airline buys is subject to price controls or not. Here, we note that oil prices in China are subject to such controls; thus, the Chinese airlines see a slightly more muted impact from oil price movements on a non-hedged level.
Nomura
35
14 June 2010
Jim Wong
Core earnings
Core earnings strongest for SIA, CX, AC

Having discussed the significant impact of currency exchange rate gains/losses, as well as oil hedging gains/losses to earnings in the previous section, it should not surprise us that Asian airlines earnings have historically differed substantially from reported earnings. Here we note that the track records of core earnings profitability for the Asian airlines are somewhat mixed. SIA, CX, Air China, and AirAsia have the best track records of being able to generate core profits every (or almost every) single year since listing. KAL, CSA, and CEA have the worst track records by having reported numerous consecutive years of core losses.
SIA, CX, Air China and AirAsia have the best track records for being able to generate core profits
Exhibit 91. Trend of core earnings for Air China

(RMBmn) Reported net profit Less: Disposals/provisions Oil hedging Exchange gain Equals: Core earnings 181 669 287 1,990 1,266 (2) 1,780 (3,065) 1,156 4,138 4,976
1998 -
1999 -
FY00 -
FY01 948 0 (105) 872
FY02 500 106 85 (361)
FY03 160 0 170 (297)
FY04 2,386 410 41 (55)
FY05 2,406 0 222 918
FY06 2,688 1,593 113 984
FY07 4,046 0 236 2,030
FY08 (9,256) 478 (8,155) 1,487
FY09 4,854 830 2,758 110
FY10F 7,202 2,132 933
FY11F 7,155 2,178
Exhibit 92. Trend of core earnings for China Eastern Air

(RMBmn) Reported net profit Less: Disposals/provisions Oil hedging Exchange gain Equals: Core earnings (550) 2 (56) 414 296 (879) 211 (930) (3,184) (1,522) (8,129) (4,423) (62) 664
1998 (481) 201 0 (132)
1999 84 193 0 (111)
2000 176 112 0 120
2001 542 2 0 126
2002 86 (172) 0 (38)
2003 (950) 0 0 (70)
2004 321 130 0 (21)
2005 (467) (4) 27 440
2006 (3,313) (1,035) (65) 971
2007
2008
2009 169 722 3,775 95
2010F 2,089 1,052 1,099
2011F 2,760 2,097
379 (15,269) (227) 84 2,044 (2,710) (6,401) 1,971
Exhibit 93. Trend of core earnings for China Southern Air

(RMBmn) Reported net profit Less: Disposals/provisions Oil hedging Exchange gain Equals: Core earnings (331) 511 (188) 99 580 (171) 12 (3,036) (1,620) (1,339) (5,587) (1,760) (366) (577)
1998 (514) 183 0 (366)
1999 83 (2) 0 (427)
2000 503 373 0 319
2001 340 (56) 0 297
2002 576 171 0 (175)
2003 (357) (22) 0 (164)
2004 (48) (1) 0 (59)
2005 (1,848) (32) 0 1,220
2006 188 335 (19) 1,492
2007 1,697 114 90 2,832
2008 (4,823) (1,704) (124) 2,592
2009 330 1,952 45 93
2010F 1,772 1,106 1,032
2011F 1,802 2,379
Exhibit 94. Trend of core earnings for Korean Airlines

(Wbn) Reported net profit Less: Disposals/provisions Oil hedging Exchange gain Equals: Core earnings (322) (32) (98) (637) 59 (151) (198) (17) (5) (136) (48) (197) 52 89
1998 297 432 16 167
1999 259 115 (60) 167
2000 (463) (159) 88 (289)
2001 (713) (49) 231 (257)
2002 482 (98) (7) 528
2003 (241) (116) 43 (15)
2004 519 (63) 14 767
2005 200 (28) 42 196
2006 383 (15) 53 408
2007 13 87 76 (15)
2008 (1,942) (165) 124 (1,853)
2009 (99) (142) (240) 480
2010F 431 (77) 45 411
2011F 412 (242) (110) 675
Nomura
36
14 June 2010
Jim Wong
Exhibit 95. Trend of core earnings for Malaysia Airlines

(RMmn) Reported net profit Less: Disposals/provisions Oil hedging Exchange gain Equals: Core earnings (419) (691) (159) (675) 128 380 (995) (225) 853 231* (705) 183 593
Source: Company data; Nomura estimates; * Unlike most airlines, MAS oil hedging is not marked-to-market prior to 2009
1998
1999 (700) 111 0 (393)
FY00 (259) 984 0 (551)
FY01 (417) 151 0 (409)
FY02 (836) (156) 0 (4)
FY03 337 328 0 (119)
FY04 461 109 0 (28)
FY05 (1,252) (275) 0 18
FY06 (134) 134 0 (42)
FY07 853 65 0 (65)
FY08 246 98 0 (83)
FY09 493 8 1,163 27
FY10F 503 0 292 28
FY11F 818 0 120 105
Exhibit 96. Trend of core earnings for AirAsia

(RMmn) Reported net profit Less: Disposals/provisions Oil hedging Exchange gain Equals: Core earnings 52 114 61 270 553 362 545 867
1998 -
1999 -
FY00 -
FY01 -
FY02 -
FY03 -
FY04 49 (3) 0 (0)
FY05 112 (1) 0 (1)
FY06 88 (2) 0 29
FY07 426 2 0 154
FY08 (497) (820) 0 (230)
FY09 506 53 0 91
FY10F 426 (329) 40 170
FY11F 492 (829) 0 454
Exhibit 97. Trend of core earnings for EVA Air

(NT$mn) Reported net profit Less: Disposals/provisions Oil hedging Exchange gain Equals: Core earnings 75 1,165 2,628 (2,993) 2,889 1,283 3,403 425 (3,276) (3,480) (10,109) (3,519) 3,091 3,837
1998 75 0 0 0
1999 1,165 0 0 0
FY00 2,511 0 0 (117)
FY01 (3,175) 0 0 (182)
FY02 2,637 0 0 (252)
FY03 1,396 0 0 113
FY04 3,243 14 0 (174)
FY05 1,326 870 0 31
FY06 (1,687) 1,011 (5) 583
FY07
FY08
FY09 (2,844) 58 638 (21)
FY10F 3,332 184 57
FY11F 4,532 367 328
(1,872) (16,890) 69 1,235 303 170 (6,947) (5)
Exhibit 98. Trend of core earnings for China Air

(NT$mn) Reported net profit Less: Disposals/provisions Oil hedging Exchange gain Equals: Core earnings (3,601) 2,431 2,802 470 3,213 1,401 3,656 (72) 357 (3,169) (9,664) (6,116) na na
1998 (2,189) 830 0 583
1999 2,749 145 0 173
FY00 2,934 132 0 0
FY01 1,785 194 0 1,122
FY02 3,119 178 0 (271)
FY03 1,779 458 0 (79)
FY04 4,183 825 0 (298)
FY05 645 233 0 483
FY06 738 31 (14) 365
FY07
FY08
FY09 (3,805) 4 2,527 (219)
FY10F na
FY11F na
(2,519) (32,351) (691) 18 553 (646)
1,324 (22,595)
Exhibit 99. Trend of core earnings for Cathay Pacific

(HK$mn) Reported net profit Less: Disposals/provisions Oil hedging Exchange gain Equals: Core earnings 415 1,735 5,171 105 3,804 864 4,218 3,295 3,704 5,923 (567) 508 3,390 4,924
1998 (542) (869) 0 (88)
1999 2,176 482 0 (41)
FY00 5,005 0 0 (166)
FY01 657 452 0 100
FY02 3,983 0 0 179
FY03 1,303 195 0 244
FY04 4,417 0 0 199
FY05 3,451 0 0 156
FY06 4,254 0 278 272
FY07 7,023 0 610 490
FY08 (8,558) (141) (7,878) 28
FY09 4,694 1,084 2,758 344
FY10F 6,299 2,509 400 -
FY11F 5,174 250 -
Nomura
37
14 June 2010
Jim Wong
Exhibit 100. Trend of core earnings for Singapore Airlines

(S$mn) Reported net profit Less: Disposals/provisions Oil hedging Exchange gain Equals: Core earnings 1,056 958 1,038 751 1,024 875 1,074 1,237 1,907 1,935 1,386 846 1,259 1,667
Source: Company data; Nomura estimates, YE-March, FY1999-FY2012F numbers are used
1998 1,033 33 (132) 76
1999 1,164 220 66 (80)
2000 1,549 401 124 (14)
2001 632 (34) (88) 3
2002 1,065 1 48 (8)
2003 849 (31) 47 (42)
2004 1,352 50 303 (74)
2005 1,241 0 167 (163)
2006 2,129 420 (119) (80)
2007 2,049 0 232 (118)
2008 1,062 (41) (348) 65
2009 216 0 (558) (72)
2010F 1,259 0 0 0
2011F 1,667 0 0 0
Exhibit 101. Trend of core earnings for ANA

(mn) Reported net profit Less: Disposals/provisions Oil hedging Exchange gain Equals: Core earnings (899) 34,010 (2,396) (14,335) 39,380 46,041 14,063 38,317 68,724 (12,517) (46,123) 5,000 19,000
Source: Company data; Nomura estimates, YE-March
1998
1999
2000 40,286 4,233 na 2,043
2001
2002
2003 24,756
2004 26,970
2005 26,722 10,885 na 1,774
2006 32,658 (6,405) na 746
2007 64,143 (2,928) na (1,653)
2008
2009
2010F 5,000 na na na
2011F 19,000 na na na
(4,732) (15,201) 9,166 na (5,048) na (9,254)
(9,456) (28,256)
(4,260) (57,387) 7,131 (12,958) na 1,126 na 1,694
(5,959) (14,860) (12,724) (20,210) na (1,101) na 939 na (1,900) na 1,139
Irrespective of the past track record, we are projecting that most Asian airlines will be able to return to core profitability this year.
Nomura
38
14 June 2010
Jim Wong
Valuation comparison
Exhibit 102. Cathay Pacific P/BV and ROE

(x) 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Jun-93 Jun-00 Jan-90 Dec-96 Dec-03 Jun-07 Dec-10 Min=0.7x Mean=1.6x Max=3.0x P/BV (LHS) ROE (RHS) (%) 40 30 20 10 0 (10) (20) (30) (40) (50)
Exhibit 103. Singapore Airlines P/BV and ROE

(x) 2.0 1.8 1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2 0.0 P/BV (LHS) ROE (RHS) (%) 18 16 14 12 10 8 Mean=1.0 x x Min=0.5x Mar-04 Mar-97 Sep-00 Sep-93 Sep-07 Mar-90 Mar-11
Jul-11
Max=1.9 x
6 4 2 0
Exhibit 104. Air China P/BV and ROE

(x) 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 Oct-07 Feb-09 Jul-10 Dec-11 May-06 Dec-04 Mean=2.0x Min=0.5x P/BV (LHS) ROE (RHS) Max=6.2x (%) 30 20 10 0 (10) (20) (30) (40)
Exhibit 105. China Southern Airlines P/BV and ROE

(x) 7 6 5 4 3 2 1 0 Mar-03 May-00 Dec-05 Oct-08 Jul-97 Min=0.2x Mean=1.2 x P/BV (LHS) ROE (RHS) Max=6.6x (%) 40 30 20 10 0 (10) (20) (30) (40) (50)
Exhibit 106. China Eastern Airlines P/BV and ROE

(x) 7 6 5 4 3 2 1 0 Nov-99 Feb-97 Apr-08 Sep-02 Feb-11 Jun-05 Mean=1.2x Min=0.3x P/BV (LHS) ROE (%) (RHS) (RHS) Max=6.6x (%) 40 30 20 10 0 (10) (20) (30) (40) (50)
Exhibit 107. EVA Airways P/BV and ROE

(x) 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Oct-99 Oct-06 Apr-03 Min=0.4x Apr-10 (5) (10) 5 Mean=1.5x 0 P/BV (LHS) Max=3.1x ROE (RHS) (%) (RHS) (%) 15 10
Nomura
39
14 June 2010
Jim Wong
Exhibit 108. Malaysia Airlines P/BV and ROE

(x) 4 3 2 Mean = 1.8 1 Min = 0.4 0 Mar-99 Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 -1SD = 1.1 Max = 4.2 +1SD = 2.5 (%) 30 20 10 0 (10) (20) (30) (40) (50) (60)
Exhibit 109. AirAsia P/BV and ROE

(x) 10 9 8 7 6 5 4 3 2 1 0 Nov-04 Nov-05 Nov-06 Nov-07 Nov-08 Nov-09 Min = 1.1 Mean = 2.9 Max = 9.5 (%) 35 25 15 5 (5) (15) (25) (35)
Exhibit 110. Korean Airlines P/BV and ROE

(x) 2.5 Max=2.1x 2.0 1.5 1.0 0.5 Min=0.1x 0.0 Dec-99 Dec-06 Jun-10 Jul-03 Mean=0.7x 15 10 5 0 (5) (10) P/BV (LHS) ROE (RHS) (%) 20
Exhibit 111. All Nippon Airways P/BV and ROE

6 5 4 3 2 Min=1.1x 1 0 Oct-02 Oct-05 Nov-01 Sep-06 Aug-07 Jul-08 Dec-00 Jan-00 Jun-11 Sep-03 Aug-04 Jun-09 Jun-10 Jan-12 Mean=2.6x P/BV (LHS) ROE (RHS) Max=5.6x 25 20 15 10 5 0 (5) (10) (15) (20) (25)
Source: Company data, Nomura estimates (The data is on weekly basis)
Nomura
40
14 June 2010
Jim Wong
Exhibit 112. Airlines: valuation comparison

Traditional airlines Cathay Pacific (293 HK) Air China (753 HK) China Eastern Air (670 HK) China Southern Air (1055 HK) Singapore Airlines (SIA SP)** Malaysia Airlines (MAS MK) EVA Airways (2618 TT) Korean Air (003490 KS) All Nippon Airways (9202 JP) Thai Airways (THAI TB)^ British Airways (BAY LN)^ China Airlines (2610 TT)^ Qantas Airlines (Qan AU)^ Air New Zealand (AIR NZ) ^ Asiana Airlines (020560 KS)^ Sub-sector average Low cost carriers AirAsia (AIRA MK) EasyJet PL (EZJ LN)^ Ryanair Holdings plc (RYA LN)^ Virgin Blue Holdings (VBA AU)^ Westjet Airlines Ltd (WJA CN)^ Tiger Airways (TGR SP)^ Sub-sector average Share price lcc Nomura Market rating cap (US$mn) 7,897 16,000 10,177 6,170 12,019 1,983 1,791 4,169 7,503 1,238 2,748 2,086 4,565 834 1,010 P/E (x) 2008 neg neg neg neg 15.9 17.2 neg neg neg neg 3.2 neg 5.0 5.5 (5.5) 5.6 2009 2010F 2011F 13.1 9.8 11.9 16.4 11.6 11.6 162.9 15.3 11.1 60.1 14.2 15.0 78.3 13.4 10.1 8.6 32.9 10.1 neg 17.4 13.9 neg 11.9 12.5 neg 136.5 35.9 5.5 5.4 4.8 neg 130.93 10.2 14.4 13.8 11.0 43.9 20.5 10.2 58.0 13.8 9.9 6.7 5.9 5.0 35.3 30.3 12.3 2008 0.2 0.0 0.0 0.0 7.0 0.0 0.0 0.0 0.4 0.0 2.5 0.0 14.2 7.8 0.0 2.1 Div yield (%) 2009 0.6 0.0 0.0 0.0 13.5 0.0 0.0 0.0 0.0 0.0 0.0 0.4 2.4 5.6 2.1 1.6 2010F 3.8 1.7 0.0 0.0 3.2 0.0 0.0 0.7 0.0 4.7 0.0 1.1 1.3 5.4 2.7 1.7 2011F 3.2 1.7 0.0 0.0 4.2 0.0 0.0 0.8 0.0 5.8 0.4 na 5.0 5.1 na 2.2
15.68 BUY 7.68 NEUTRAL 3.28 BUY 3.23 NEUTRAL 14.28 BUY 1.97 BUY 17.95 BUY 71,300.00 NEUTRAL 273.00 NEUTRAL 23.80 NEUTRAL@ 196.40 BUY@@ 14.80 Not rated 2.46 Not rated 1.16 Not rated 7,120.00 Not rated
1.26 407 3.56 0.3 12.09 1.72
NEUTRAL BUY@@ BUY@@ Not rated Not rated Not rated
1,047 2,119 6,330 543 1,655 648
neg 21.4 13.7 3.8 8.8 57.3 21.0
6.1 24.1 17.2 neg 16.3 neg 15.9
7.3 15.7 14.8 21.4 12.8 24.6 16.1
6.4 9.5 10.8 8.1 9.8 12.5 9.5
0.0 0.0 0.0 6.7 0.0 0.0 1.1
0.0 0.0 0.0 0.0 0.0 0.0 0.0
0.0 0.0 1.6 0.3 na 0.0 0.4
0.0 0.0 0.0 2.0 na 0.0 0.4
Source: Nomura estimates, ^ Bloomberg consensus, @ Covered by Capital Nomura Securities, @@ Covered by Nomura European Transport, ** YE-March, Share prices as of 7 June 2010
Exhibit 112. Airlines: Valuation comparison (contd)

Traditional airlines Cathay Pacific (293 HK) Air China (753 HK) China Eastern Air (670 HK) China Southern Air (1055 HK) Singapore Airlines (SIA SP)** Malaysia Airlines (MAS MK) EVA Airways (2618 TT) Korean Air (003490 KS) All Nippon Airways (9202 JP) Thai Airways (THAI TB)^ British Airways (BAY LN)^ China Airlines (2610 TT)^ Qantas Airlines (Qan AU)^ Air New Zealand (AIR NZ) ^ Asiana Airlines (020560 KS)^ Sub-sector average Low cost carriers AirAsia (AIRA MK) EasyJet PL (EZJ LN)^ Ryanair Holdings plc (RYA LN)^ Virgin Blue Holdings (VBA AU)^ Westjet Airlines Ltd (WJA CN)^ Tiger Airways (TGR SP)^ Sub-sector average Share price lcc Nomura Market rating cap (US$mn) 7,897 16,000 10,177 6,170 12,019 1,983 1,791 4,169 7,503 1,238 2,748 2,086 4,565 834 1,010 P/BV (x) 2008 1.6 4.1 (1.1) 2.6 1.2 1.0 1.6 1.8 1.6 0.9 0.7 1.5 0.8 0.8 1.6 1.4 2009 1.5 3.4 22.3 2.2 1.3 5.5 1.7 1.7 1.4 0.6 1.2 1.5 1.0 0.8 1.3 3.2 2010F 1.4 2.3 2.6 1.2 1.2 1.6 1.4 1.5 1.4 0.7 1.2 1.3 0.9 0.8 1.1 1.4 2011F 2008 1.3 (19.3) 1.9 (36.6) 2.0 na 1.1 (51.1) 1.1 7.3 1.4 6.1 1.2 (48.3) 1.4 (53.8) 1.4 (1.0) 0.6 (46.9) na 22.9 1.2 (107.1) na 16.2 na 14.1 0.8 (28.9) 1.3 (23.3) ROE (%) 2009 11.7 22.1 (2.8) 3.8 1.6 20.2 (9.8) (3.4) (12.9) 11.5 (23.2) 10.5 2.2 1.4 19.6 3.5 2010F 14.4 23.4 31.2 10.7 9.1 8.5 8.7 13.2 1.0 12.6 0.9 9.7 4.6 5.7 18.3 11.6 2011F 11.2 17.7 20.4 7.6 11.3 15.3 9.6 11.6 3.8 13.2 na 10.8 na na 16.2 12.8
15.68 BUY 7.68 NEUTRAL 3.28 BUY 3.23 NEUTRAL 14.28 BUY 1.97 BUY 17.95 BUY 71,300.00 NEUTRAL 273.00 NEUTRAL 23.80 NEUTRAL@ 196.40 BUY@@ 14.80 Not rated 2.46 Not rated 1.16 Not rated 7,120.00 Not rated
1.26 407.00 3.56 0.30 12.09 1.72
NEUTRAL BUY@@ BUY@@ Not rated Not rated Not rated
1,047 2,119 6,330 543 1,655 648
1.9 1.3 2.1 0.4 1.4 (1.1) 1.0
1.2 1.3 1.9 0.7 1.2 (0.4) 1.0
1.0 1.3 1.8 0.8 1.1 6.1 2.0
0.9 1.1 1.6 0.7 1.0 4.2 1.6
(20.6) 6.3 15.5 10.7 16.3 (1.9) 4.4
24.0 5.4 10.9 (30.9) 7.6 3.1 3.4
15.0 8.1 12.3 3.6 8.9 24.8 12.1
14.9 11.6 14.3 8.7 10.2 33.4 15.5
Source: Nomura estimates, ^ Bloomberg consensus, @ Covered by Capital Nomura Securities, @@ Covered by Nomura European Transport, ** YE-March, share price as of 7 June 2010
Nomura
41
14 June 2010
Jim Wong
Valuation methodologies and risks to our investment view

Valuation methodologies
We have used P/BV to value all Asian airlines, except All Nippon Airlines (ANA), which is valued on the basis of dividend yield, as ANA is the only airline to offer benefits to shareholders by giving free tickets to shareholders each year. AirAsia: We value the company based on adjusted FY11F BV (tangible BV less receivable amount due from Thai AirAsia and Indonesia AirAsia) of RM1.00, applied to its recent historical levels of 1.2x P/BV. Our PT is RM1.20. All Nippon Airlines: With profits likely to be low in 11/3 calendar year, we derive our price target on the basis of effective dividend yield, assuming that shareholder discount coupons are equivalent to the dividend. We expect ANA to restore a dividend of 1 per share on common stock in 11/3, which, together with shareholder benefits (of one free-ticket per annum for each shareholder), equivalent to a dividend of 5, gives an effective dividend of 6 per share. We set our target price at 300, based on a dividend yield of 2%, which is higher than the yield on long-term JGBs. Air China: Our new price target of HK$8.21 (down from HK$8.35) is based on a midcycle valuation of 2.0x FY11F P/BV (methodology unchanged). Please refer to company notes for more details on assumption changes. Cathay Pacific: Our PT of HK$18.18 is based on the groups historical mid-cycle P/B of 1.55x. This is benchmarked off the groups estimated FY11F book value of HK$11.95/sh. We note that our PT may arguably understate CXs true value as the groups book value does not fully reflect the market value of its stake in Air China. China Eastern Airlines: We now value CEA at HK$3.95 (from HK$5.00) based on 1.7x FY11F P/BV, after assuming that strategic investors would take a 25% stake in CEA at HK$3.80/share. Please refer to company notes for more details on assumption changes. China Southern Airlines: Our revised price target of HK$3.61 (from HK$3.78) is based on 1.2x FY11F P/BV mid-cycle valuation (methodology unchanged). Please refer to company notes for more details on assumption changes. EVA Airways: We value EVA Airways at NT$21.50/share based on 1.5x FY10F P/BV (which is the mid-cycle valuation of 1.5x P/BV over 2008-10F or post the commencement of direct air links). While we note that the historical mid-cycle valuation since EVA Airways listing in 1999 has been 1.1x, we believe it is justified to use the mid-cycle valuation post the commencement of direct air links as the business operating environment has changed in favour of EVA Airways, compared with the period before the commencement of direct air links. Korean Airlines: Our price target of W79,000 is based on a target P/BV of 1.6x (midpoint of historical average and peak) applied to our FY11F BVPS estimate (methodology unchanged, we only shift from FY10F to FY11F BVPS). Malaysia Airlines: We value MAS by pegging FY11F BVPS to its historical mid-cycle P/BV of 1.8x to arrive at our price target of RM2.40. Our mid-cycle valuation for MAS is based on our view that the turnaround in costs is likely to improve its cost competitiveness and that its fleet rejuvenation will drive revenues, as the airline moves away from five to six years of being under the weather, so to speak. We see room for recovery owing to the turnaround in costs and the rebound in passenger numbers in FY10F, with its fleet rejuvenation driving more savings as new aircraft come into service in FY11F. Singapore Airlines: Our price target of S$16.85 is based on an FY12F P/B of 1.3x. While this is higher than the groups historical mid-cycle P/B of 1.0x, we would argue that this is justifiable given that SIAs home base of Singapore is expected to see impressive economic growth over the next few years (among the strongest economic growth in the world according to our economic teams forecasts).
Nomura
42
14 June 2010
Jim Wong
Investment risks
The main risks to our price targets for Asian airlines would be if passenger throughput growth, passenger yield growth and/or oil prices vary significantly from our estimates. Currency movements also play a significant role in an airlines profitability and, hence, a significant variation in currency exchange rates from our macro assumptions also poses a risk. AirAsia Berhad: Upside risks to our call include: 1) AirAsia successfully managing to list its associates in their respective countries of operation, ie, Thailand and Indonesia, in the coming months; 2) undertaking a recapitalisation; and 3) better-than-expected performance from associates. Downside risks include: 1) extreme movements in the US dollar appreciation, and 2) a sharp sustained uptrend in fuel costs. All Nippon Airways: Upside risk: With profits likely to be low in 11/3, ANAs share price is determined on the basis of an effective dividend yield, not on earnings and thus, upside risk is limited, in our view. Downside risk: Demand on international routes could be affected in the event of rapid changes in the global economy, terrorist activities, natural disasters, or the spread of disease. Any life-threatening accident on either domestic or international routes could lead customers to avoid either the particular airline responsible or air transportation in general. Meanwhile, if system glitches cause disturbances to scheduled flights, there could be an impact over the medium term as customers increasingly shift toward more reliable bullet train or other railway services. Air China: The main risks we see to our price target for Air China are passenger throughput growth, passenger yield growth, currency movements and/or oil prices differing from our estimates. Cathay Pacific: The main risks include passenger throughput growth, passenger yield growth and/or oil prices differing substantially from our estimates. Currency movements play a significant part in an airlines profitability and, hence, FX rates differing significantly from our macro assumptions would also pose a risk. China Eastern Airlines: The main risks we see to our price target for CEA are passenger throughput growth, passenger yield growth, currency movements and oil prices differing from our estimates. China Southern Airlines: The main risks we see to our price target for CSA are passenger throughput growth, passenger yield growth, currency movements and oil prices differing from our estimates. EVA Airways: The main risks to our price target for EVA would be if passenger and cargo throughput growth, passenger and cargo yield growth, and/or oil prices differ substantially from our estimates. Currency movements play a significant part in an airlines profitability; hence, exchange rates that differ significantly from our macro assumptions are also risks. Korea Air Lines: Risks to our KAL price target include volatility of the won, oil prices and increasing leverage. Malaysia Airlines: Risks to our view are, if passenger growth rebounds at a faster pace than our assumptions of 5% for domestic passengers and 7% for international passengers in FY10F, and better-than-expected yield improvements take place earlier than expected. Key downside risks to our view include further delays of MASs fleet deliveries. Current sentiment on the uncertainty of the strength of the economic rebound, political and environmental (ie, the Eyjafjallajokull volcanic eruption in Iceland) headwinds, as well as oil price uncertainty could persist for the next few quarters, dampening possible performance further. Also, in a worst-case scenario, assuming zero hedging (as hedging policy varies), we highlight a potential 15% earnings impact from each 1% movement in the US dollar.
Nomura
43
14 June 2010
Jim Wong
Singapore Airlines: Investment risks to our price target include higher- or lower-thanexpected jet fuel prices which would impact our price target, as would higher-thanexpected achieved passenger or cargo yields and loads. Also, capacity cuts both in passenger and cargo divisions would also impact earnings.
Nomura
44
14 June 2010
AirAsia Berhad A I R A M K
AI R L I N E S | M AL AY S I A
Maintained
NOMURA SECURITIES MALAYSIA SDN BHD
Jacinda Loh Wai Kee Choong
+60 3 2027 6889 +60 3 2027 6893
jacinda.loh@nomura.com waikee.choong@nomura.com
NEUTRAL
Action
Despite trading close to trough-cycle valuations since 2007, AirAsias shares, we believe, will continue to languish near the historical level of 1.2x P/BV. Our NEUTRAL view is premised on its strong earnings (which, in our view, reflects AirAsias established market position) offset by potentially higher-thanexpected gearing amid potential large write-offs and continued cashflow stress.
Closing price on 7 Jun Price target Upside/downside Difference from consensus FY11F net profit (RMmn) Difference from consensus
Source: Nomura
RM1.26
RM1.20
(set on 31 May 10)
-4.7% -25.8% 492.3 -13.8%
Catalysts
Positive re-rating catalysts are: 1) balance sheet recapitalisation, and 2) betterthan-expected performance from associates (ThaiAirAsia and Indonesia AirAsia). Anchor themes Asia-Pacific airlines have rebounded faster than expected on growing penetration in the world's largest aviation market. But we see headwinds in 2010F for Malaysian airlines, with a preference for players with robust balance sheets and turnaround potential.
Nomura vs consensus
We are below consensus as we see AirAsias modest earnings upside being capped by rising interest costs, competition and possible write-offs of its ballooning receivables.
Balance sheet headwinds

AirAsias Asian advantage buffeted by headwinds
In contrast to five years ago, AirAsia faces increasingly viable competition in the regional low-cost-carrier (LCC) space from recently listed Tiger Airways and Jetstar, making it challenging for the company to maintain its historical passenger CAGR of 35%. In our view, yields (revenue/RPK) are likely to trend flat between RM0.19 and RM0.20 from FY10-12F given AirAsias load-focused strategy, while its FY10F target to double ancillary income per head may only be achieved in FY11F, as its pipeline of new product launches requires lead time to gain traction.
Key financials & valuations

31 Dec (RMmn)
Revenue Reported net profit Normali sed net profit Normali sed EPS (RM) Norm. EPS growth (%) Norm. P/E (x) EV/EBIT DA (x) Price/book (x) Dividend yield (%) ROE (%) Net debt/equity (%) Earnings revisions Previous norm. net profit Change from previous (%) Previous norm. EPS (RM)
Source: Company, Nomura estimates
FY09 FY10F FY11F FY12F

3,133 507 507 0.21 (8.8) 6.1 8.4 1.2 0.0 24.0 261.8 3,802 426 545 0.22 6.4 5.7 7.8 1.0 0.0 15.0 252.9 545 0.22 4,635 492 867 0.35 59.1 3.6 6.5 0.9 0.0 14.9 252.0 867 0.35 5,570 690 1,055 0.42 21.7 3.0 6.2 0.7 0.0 17.8 252.2 1,055 0.42
Balance sheet, earnings quality concerns cap growth

On our reading, free cashflow is expected to remain negative in FY1012F on account of the 106 new aircraft it acquired for its own and associates operations. As a result, gearing is expected to increase further to 2.5-2.6x during FY10-12F, as AirAsia bears all the associated financing costs. Potential delays in recovering sub-lease income receivable due from its associates (or even a write-off in a worst-case scenario) and a write-off of deferred tax assets (totalling 14% of FY09 book value) could continue to cap any earnings upside that its operations may generate, we believe.
Share price relative to MSCI Malaysia

(RM) 1.6 1.5 1.4 1.3 1.2 1.1 1.0 Oct09 Jul09 Mar10 Aug09 Sep09 May10 3m (11.9) (10.7) (10.6) Nov09 Dec09 Jan10 Feb10 Jun09 Apr10
Pri ce Rel MSCI Malaysia
120 110 100 90 80 70
Reiterating our NEUTRAL call and PT of RM1.20

At current levels, valuations appear attractive at an adjusted FY11F 1.15x P/BV (at the trough of the cycle), where the market appears to be factoring in the worst-case scenario for the company. We reaffirm our NEUTRAL call and price target of RM1.20 for AirAsia, using a current multiple of 1.2x P/BV to value the company at FY11F adjusted BVPS of RM1.00, premised on the justification that P/E multiples may not reflect increasing balance sheet concerns that we think remain an overhang on the brand.
1m Absolute (RM) Absolute (US$) Relative to Index Market cap (US$m n) Estimated free float (%) 52-week range (RM) 3-m th avg daily turnover (U S$mn) Stock borrowability Major shareholders (%) Tune Ai r Em ployees Provident Fund
6m (1.6) 0.8 (2.0) 1,047 60.0 1.54/1.10 2.20 Hard 26.4 6.7
(2.3) (3.8) 1.3
Nomura
45
14 June 2010
AirAsia Berhad
Jacinda Loh
Drilling down
AirAsias Asian advantage faces headwinds

AirAsia is still the dominant LCC in the Southeast Asian (ASEAN) region, with two 49%-owned associates operating in Thailand (Thai AirAsia) and Indonesia (Indonesia AirAsia). Passenger growth for AirAsia has been driven by its success in capturing domestic market share from Malaysian Airlines (MAS), and its aggressive strategy of capturing market share in the markets it initially enters through rock-bottom fares and headline-grabbing promotional campaigns. The companys business model has been successful in unlocking additional demand from developing markets and its dominant position in one of the fastest-growing aviation markets is expected to ensure a 25% EPS CAGR for FY10-12F, on our estimates. However, we flag that growing competition from other entrants into the LCC space, as well as what appears to be a moderating growth profile, could ensure current valuations will persist, implying a de-rating from historical levels. Its loadfocused business model also implies minimal room to increase yields, while we note cost/ASK ex-fuel has been inching upwards each quarter. This forms the basis for our yield growth forecasts of between 2% and 5.3% amid a 5-11% forecast rise in unit costs in FY10-12F (a rise in non-fuel unit costs of circa 2%). In our view and on our numbers, it appears that management will need to execute seamlessly over the coming year in managing its costs, driving revenue amid potentially faltering Thai growth, and grappling with spiralling gearing in FY10F.
AirAsia still dominating, but viable competitors are emerging
Growing viable competition from other LCCs

Moving forward into FY10F and beyond, the challenge is to sustain its seven-year passenger CAGR of 34.9% on a much larger base amid slowly growing competition from upcoming LCCs such as recently listed Tiger Airways and Jetstar.
Challenge is to sustain the historical 35% passenger CAGR amid competition from Tiger Airways and Jetstar
Exhibit 113. First-mover premium that AirAsia commands is on the wane

(%) 140 120 100 80 60 40 20 0 FY04 FY05 FY06 FY07 FY08 FY09 18.6x 19.2x 12.6x 10.8x 8.2x Passenger growth (LHS) EV/EBITDA (RHS) 25.2x Passenger growth largely sustained during crisis but appears to be stabilizing (x) 30 25 20 15 10 5 0
Source: Bloomberg, company data, Nomura research
Passenger growth remained robust and was largely sustained during the 2009 slowdown due to AirAsias aggressive load-focused strategy, charting 20% levels in an ASEAN airline industry that is forecast to grow 8% a year for the next 20 years1. However, taking into account that competitors are aggressively entering the LCC market with a business model that is more or less similar to AirAsias (low fares driven by low costs to stimulate demand), we forecast a three-year passenger CAGR for AirAsia of 17%. The fact that Jetstar and Tiger have chosen to operate out of Singapore is likely to provide them access to a larger passenger base and connecting traffic, which might prove detrimental to AirAsia in the long run, in our view.
1
Source: Finance Asia, 19 May, 2010
Nomura
46
14 June 2010
AirAsia Berhad
Jacinda Loh
Exhibit 114. Competition in ASEAN markets leaves little room for yield management
AirAsia Current fleet size Operating base Expansion plans 84 Kuala Lumpur/Thai/ Indonesia Increase fleet to 175 by 2015 65 EPF / Tune Air AIRA MK Tiger Airways 19 Singapore/Australia Increase fleet to 68 by 2015 Jetstar 61 Singapore Starting long-haul, low-cost operations at Changi from Singapore to Australia/North Asia/Europe from late 2010 57 Qantas Qantas and a Singaporean shareholder
Current destinations Main / Strategic shareholders Ticker
36 Temasek/Ryanasia (of the Ryanair family)/SIA TGR SP
Besides accounting for competition from other LCCs and flagging growth from a mature domestic market, we have based our forecast passenger number of 26mn (group figure) in FY10F (vs managements target of 27mn) on Thai AirAsia charting a lower full-year FY10F load factor of 65% (versus an historical average of 75%) in view of the current unrest in Bangkok as well as steady performance by Indo AirAsia. Thai AirAsia has historically been a positive growth driver for AirAsias overall passenger numbers, charting a passenger CAGR of 33% from FY06-09. Of particular note is that besides being affected by the drop in inbound/outbound traffic to Thailand, Thai AirAsia may be affected by any drop in domestic Thailand travel as about half of its routes are within Thailand. This is compounded further by AirAsia taking delivery of about six planes for its Thailand associate this year. However, management is not cancelling any flights at the moment
Thailand underperformance could derail managements target of 27mn passengers this year
We see the forecast drop in passenger traffic to be compounded by Thai AirAsia receiving six planes this year from AirAsia
Exhibit 115. Thai AirAsia may not deliver passenger growth numbers in FY10F
Passengers Carried (mn) 30 25 20 15 10 5 0 2006 2007 2008 2009 2010F Thai AirAsia (LHS) Indonesia AirAsia (LHS) M'sia AirAsia (LHS) Thai Passenger Growth (RHS) (%) 50 45 40 35 30 25 20 15 10 5
Cost control is key to profitability in a flattish yield environment

As growing competition in the LCC space leaves little room to raise yields and in light of managements clearly articulated commitment to low fares, we see yields trending sideways in FY11-12F after inching back up to pre-crisis levels. In our view, y-y yield growth in FY10-12F will stay capped at between 2% and 5% on the back of continued aggressive pricing strategies in an environment of growing competition. In addition, AirAsias increasing stage length due to its continuous route network expansion in FY10-12F is likely to place a ceiling on yields, we believe. While FY09 yields declined 10% as AirAsia continued to aggressively sustain load factors at circa 70% levels, yields appeared to have reversed their declining trend in 3Q09 as Malaysias economic recovery took hold during a seasonally busy travel period.
Nomura
47
14 June 2010
AirAsia Berhad
Jacinda Loh
Exhibit 116. Yields fell in FY09 as AirAsia aggressively maintained load factors
Load factor (LHS) 85 80 75 70 65 60 55 50 2006 2007 2008 2009 2010F 2011F 2012F 0.10 0.05 0.20 0.15 Revenue / RPK (RHS) (RM sen) 0.30 0.25
Exhibit 117. Quarterly yields improving but we see a cap given impending competition
(RM) 260 240 220 200 180 160 140 120 100 80 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 0.05 0.25 0.20 0.15 0.10 Average Fare (LHS) Revenue / RPK (RHS) (RM sen) 0.30
Source: Company data for 2007, Nomura estimates
Source: Company data, Nomura-adjusted figure for 2006 to reclassify admin and insurance surcharges to ancillary income, Nomura estimates
For an LCC airline that is committed to maintaining low fares and driving profitability through continuous cost reductions, one of the key profitability indicators remains the cost/ASK trend. Since 2006, cost/ASKs for Malaysian operations have been inching upward q-q. Our FY10-12F forecasts see a roughly 2% increase in cost/ASK ex-fuel in light of growing marketing expenditure in support of its route expansions and bid to increase ancillary revenue (as discussed below). As such, we have a NEUTRAL outlook on AirAsia as we see cost/ASK ex fuel growing in tandem with our forecast yield improvements of 2-5%, while we highlight the potential for yields to stay capped moving forward should competition intensify. While AirAsia does not disclose the cost base for its 49%-owned operations due to the smaller scale of Thai AirAsia and Indonesia AirAsias operations, it is likely that the companys cost competitiveness is weaker, in our view. We note, however, that cost competitiveness may improve as the two associates build up operational scale.
Exhibit 118. RPK growth to rebound somewhat on six proposed additional routes in FY10F
Capacity (mn) 30,000 25,000 20,000 15,000 10,000 5,000 0 FY6/03 FY6/04 FY6/05 FY6/06 FY6/07 FY10F FY11F FY12F FY07 FY08 FY09
Revenue Passenger Kilometres (LHS) Available Seat Kilometres (LHS) RPK Growth rate (RHS)
Exhibit 119. But cost/ASKs (ex-fuel) are seen inching up amid stabilising passenger growth
(%) Passenger Growth rate (LHS) CASK ex fuel (RHS) (RM sen) 7.0 6.5 6.0 5.5 5.0 4.5 4.0 3.5 3.0 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 80 70 60 50 40 30 20 10 0
90 80 70 60 50 40 30 20 10 0
Nomura
48
14 June 2010
AirAsia Berhad
Jacinda Loh
Fuel costs expected to trend up in FY10-12F

Fuel costs have historically comprised 40-56% of AirAsias costs, with the lowest proportion being seen in FY09, when the average crude oil price fell from its 2008 average high of US$100 to an average of US$62 in 2009. Applying Nomuras recently revised oil forecasts for 2012-12F (US$85 for 2010F, US$95 for 2011F and US$110 for 2012F) to our forecast numbers, we see fuel costs trending upward by between 23% and 25% in FY10-12F vis--vis FY09. Managements approach to hedging, however, appears to reflect its expectations of oil costs going on a downward trend, hedging jet kerosene on a short-term basis at US$82 (7% for about three months) and the crack until the end of the year (at slightly below US$8) for about 30% of its total fuel consumption of roughly 4mn barrels for 2010F. We believe 2011F fuel needs remain unhedged at the moment, while AirAsias management explores the future possibility of entering into oil supply contracts to fix its oil costs up to six months in advance once it sees current oil prices moving further downwards.
Exhibit 120. AirAsias fuel is 30% hedged for FY10F, unhedged for FY11F
Fuel costs (LHS) Average crude oil price (RHS)
AirAsia has hedged circa 30% of its FY10F needs, zero for FY11F
Exhibit 121. Fuel costs to increase in FY10-12F, cost/ASK to trend upwards

(%)
Maintenance (LHS) Leasing costs (LHS) Depreciation (LHS) Cost/ASK incl fuel (RHS) Staff (LHS) Others (LHS) Fuel costs (LHS)
(RM sen) 16 14 12 10 8 6 4 2 0
Fuel costs (%) 60 50 40 30 20 10 0
(US$) 120 100 80 60 40 20 0

%
100 90 80 70 60 50 40 30 20 10 0
2005 2006 2007 2008 2009 2010F 2011F 2012F

2005 2006 2007 2008 2009 2010F 2011F 2012F

Running a sensitivity to oil price fluctuations, we see oil costs moving by RM9.5mn for every 1% change in oil prices. That translates to a circa 1.5% impact on FY10F earnings. Should full-year prices for oil come in at US$80, vs Nomuras estimate of US$85 for FY10F, however, we flag a positive 9% impact on earnings.
Exhibit 122. FY10F fuel cost sensitivity to changes in oil prices

(RMmn) 1,360 1,340 1,320 1,300 1,280 1,260 1,240 1,220 1,200 1,180 1,160 1,140 1,120 1,100 (%) Fuel costs (LHS) % change in fuel costs (RHS) (%) 5 4 3 2 1 0 (1) (2) (3) (4) (5) 5 1 0 (1) (5)
Exhibit 123. FY10F EPS sensitivity to changes in fuel costs

(RM sen) 0.25 0.24 0.23 0.22 0.21 0.20 0.19 0.18 0.17 0.16 0.15 (%) 5 1 0 (1) (5) EPS (LHS) % change in EPS (RHS) (%) 10 8 6 4 2 0 (2) (4) (6) (8) (10)
Nomura
49
14 June 2010
AirAsia Berhad
Jacinda Loh
Impact of foreign currency movements

We understand from AirAsia that its exposure to euro is negligible and that it does not disclose its revenue breakdown in terms of currencies/origin of sale mainly because it is mostly in RM. Expenses are about 50% US dollar denominated, according to management estimates. From that number, our current estimates peg an earnings impact of about 5.9% for every 1% movement in the RM. On the liabilities side, however, we note that about 90% of its borrowings are US dollar-denominated, which may compound the overall negative currency impact on interest costs should the RM depreciate. Management recently noted that it has hedged 40-45% of its US dollar borrowings against the RM at this point. The firms entire currency forward contracts also remain in the money, despite the recent sharp appreciation of the RM. Air Asia also booked a RM165mn forex gain in 1Q10 arising from the its 90% borrowing exposure to the US dollar. With the implementation of Financial Reporting Standard 139 (FRS 139) for Malaysian companies beginning 1 January, 2010 (the rule requires companies to disclose gains/losses on settlement of derivatives and fair value changes on outstanding positions in its financial statements as opposed to off balance sheet previously, only in notes to the accounts), AirAsia disclosed a hedging loss of RM21mn for 1Q10 under the new standard. However, we flag that this could lead to potentially more fluctuations in reported earnings as AirAsia has a fair amount of hedging interest rate swaps hedged close to 100%, in addition to 40-45% borrowings as well as fuel.
Revenues mostly in RM; circa 50% cost are US$ denominated
90% of borrowings in US$; hedged at 40-45%, contracts currently mostly in the money
Target to double ancillary income may only be hit in FY11F

From RM30/pax currently, representing 13% of total revenue, management has announced a target to double ancillary income to RM60/pax by the end of this year, emphasising its strategy to drive non-fuel-related revenue in a bid to mitigate the impact of any steepening of fuel costs. We believe AirAsias track record does show a historical ability to double its ancillary income, when it imposed check-in baggage charges (from zero; passengers paid only on excess baggage previously) in April 2008. This was achieved as check-in baggage is largely viewed as a non-optional portion of leisure passengers travelling needs.
Exhibit 124. Baggage fees still largest contributor at 32% of total ancillary income; cargo showing good growth
(%) 100 90 80 70 60 50 40 30 20 10 % 0
Others Insurance Excess baggage SnackAttack - F&B Go Holiday Cargo and Redbox
Exhibit 125. AirAsia doubled ancillary income before from imposition of check-in baggage fees
(mn) 450 400 350 300 250 200 150 100 50 0 (%)
Ancillary Income (LHS) Growth (RHS)
Ancillary income doubled in 2008 due to imposition of check in baggage charges
120 100 80 60 40 20 0 (20) (40)
2007
2009
2006
2007
2008
2009
Source: Company data for 2007, Nomura estimate for 2009 as management no longer discloses breakdown from 2007 onwards
Source: Company data, Nomura-adjusted figure for 2006 to reclassify admin and insurance surcharges to ancillary income
Moving forward from 2008, ancillary income charted growth of circa 50% in 2009 y-y. While still on a robust growth trajectory, this was nowhere near the level achieved in 2008.
Nomura
50
14 June 2010
AirAsia Berhad
Jacinda Loh
For the next three years, we still see further scope for expanding ancillary revenue, given momentum in continuous product launches such as Redbox (courier service), Redtix (entertainment ticketing site) and Red Megastore (online merchandise store). Still, we believe the lead time and marketing costs needed to generate market awareness may result in this RM60/pax target only being achieved by FY11F. While we note managements expansion foray into non-fuel-related revenue, product launches such as Redtix and Red Megastore in 2010 appear to have a tenuous link to its core airline business we do not see any synergistic benefits arising at the moment. Our ancillary income forecasts are based on circa 26% three-year CAGR, driven by baggage charges as well as from its cargo and Redbox segment. AirAsia in 2009 teamed up with DHL to launch Redbox, which management expects will contribute revenue of RM30mn in FY10F. However, given the growing base effect, we expect growth to taper off towards FY12F, as expected ancillary income hits 22% of FY12F revenue, in line with about 20% levels currently at LCCs such as Ryanair (RYA LN3.5625, BUY).
Exhibit 126. Ancillary income growth envisaged to taper off in FY12F as it hits an estimated 22% of revenue
Ancillary income / pax (LHS) 70 60 50 40 30.2 30 20 10 0 FY08 FY09 FY10F FY11F FY12F 5 19.9 10 15 43.1 20 % of revenue (RHS) 66.6 60.5 (%) 25
Nomura
51
14 June 2010
AirAsia Berhad
Jacinda Loh
Earnings need to grow fast
Pressure to grow earnings is building

Aggressive expansion over the years has ensured AirAsias dominance in the region; however, expansion-fuelled growth has come at the expense of negative free cashflow since AirAsias listing.
The challenge now is to ensure earnings grow fast enough to mitigate cashflow stress and balance sheet concerns
Rising cashflow stress from expansions

Given a firm order of 106 airplanes scheduled for delivery between 2010 and 2015, we expect depreciation and financing costs to increase by 12-38% in FY10-12F. This, we envisage, will continue to be borne by AirAsia alone during this period as the Thai and Indonesian associates may not have the capacity to generate the necessary cashflows to help its parent AirAsia cover the hefty financing cost.
Exhibit 127. Free cashflow to stay negative as interest and depreciation could wipe out up to 55% of EBITDA
0 (500) (1,000) (1,500) (2,000) (2,500) (3,000) (3,018.0) (3,500) FY05 FY06 FY07 FY08 FY09 FY10F FY11F FY12F Free cashflow (LHS) Group fleet size (RHS) 30 0 (335.0) (966.8) (1,276.8) (993.8) (1,297.4) (1,537.3) 60 (1,037.8) 150 120 90
AirAsia has borne all associated financing costs for its and its associates fleets since the start-up of Thai AirAsia (in 2004) and Indonesia AirAsia (in 2005). This is evidenced by its consistently negative free cashflow position as the cashflows generated by the Malaysian operations were channelled for servicing of the interest cost as well as loan repayments due. AirAsia management has sub-leased new aircraft to Thai AirAsia and Indonesia AirAsia since their inception; however, as both operations were unprofitable during these years (despite management targeting profitability by 2006 and 2007), receivables in the form of sub-lease income due from these two entities continued to build up (totalling RM823mn at FY09, 7.3% of book value), with zero net cashflow received by AirAsia. We note that AirAsias 4Q09 management accounts classified roughly 86% of those amounts owed as current receivables. However, the FY09 audited accounts revealed a subsequent reclassification to non-current receivables, of which the non-current portion now totals 52% of total receivables (versus circa 14% previously). This forms the basis for our assumption that AirAsias (ie, the Malaysian operations) cashflows alone will continue to service the associated costs for FY10-12F, as any positive cashflows from Thai AirAsia and Indonesia AirAsia during this period are likely to be applied towards repaying not only the receivables/amounts owed but any aircraft lease rentals due in the current period, as well as the 6% owed on inter-company balances that AirAsia now charges at the request of its shareholders (at an EGM in August 2009 called to procure shareholders ratification for the provision of financial assistance to Thai AirAsia and Indonesia AirAsia). The statement to the stock exchange on that EGM also acknowledged the potentially EPS-dilutive effect should write-offs occur in the future.
Free cashflow expected to remain in negative territory as delivery of 106 airplanes occurs between 2010 and 2015
With reference to the sums owed by associates parked as receivables on its balance sheet, it is likely any cashflows from Thai and Indonesia AirAsia between FY10F and FY12F will have to go towards repaying these amounts before AirAsia sees any positive contribution
Nomura
52
14 June 2010
AirAsia Berhad
Jacinda Loh
Gearing to stay high amid declining ROEs

On the back of high capex needs of roughly RM2-3bn for FY10-12F, we see gearing moving back up to FY09 levels on our estimates as AirAsia continues to take on all the debt on its balance sheet while its associates remain relatively gearing-free. Note that management had in 4Q09 undertaken a cash call of RM500mn to bring its gearing down to 2.6x (from well over 3x) in FY09. Our assumption for AirAsia continuing to take on the debt of its associates is premised on the fact that 1) its Thai associate only booked a core operating profit of RM40mn in 1Q10; and 2) its Indonesian operation is unprofitable on a core operating basis. Any such debt restructuring may likely be possible upon a recapitalisation of the associates, in our view.
Exhibit 128. Net gearing to remain high amid declining ROEs

(%) 50 40 30 20 10 0 (10) (20) (30) FY06 FY07 FY08 FY09 FY10F FY11F FY12F 0.60 1.6 2.6 2.53 2.52 2.52 4.0 Net gearing (RHS) ROE (LHS) (x) 5 4 3 2 1 0 (1) (2) (3)
Forecasts of higher crude oil prices are likely to contribute to a muted earnings outlook (Nomura forecasts US$85 in 2010F and US$95 in 2011F), in addition to moderating passenger growth and rising interest expense. AirAsias recent announcement on the possible deferment of its aircraft deliveries (from 24 per year from 2012 onwards to 10-14 per year) may cap growth for a company whose business model has been to increase profitability through higher frequencies and number of routes. This comes at a time when other LCCs are building their fleets in anticipation of opportunities offered by potential ASEAN open skies liberalisation. If this materialises, it could potentially be a game-changer in terms of growth strategy, as other LCCs build capacity, increase flight frequencies and step up the competition. We apply the Altman-Z score to test AirAsias solvency strength and compare it with the Altman-Z scores of other airlines as highlighted in our Good, Bad and Ugly Spring 2010 report. The result: based on a strict comparison of just Altman-Z scores, we see AirAsia charting a score of 0.9.
ROEs are likely to decline due to costlier crude oil in FY10F, easing passenger growth, rising interest expense and depreciation
Nomura
53
14 June 2010
AirAsia Berhad
Jacinda Loh
Exhibit 129. What Altman-Z says
Exhibit 130. Most airlines fall into the Ugly category given deep cyclicality, AirAsia among the lowest
Good credit health Uncertain health Very poor health Singapore Airlines Cathay Pacific Malaysia Airlines AirAsia Air China Thai Airways Korean Air EVA Airways China Southern Asiana Airlines Altman Z score 2.6 1.6 1.1 0.9 0.9 0.8 0.8 0.5 0.5 0.4
2.8 or more 1.8 - 2.8 Less than 1.8

Source: Nomura research
Source: Nomura research; Good, Bad and Ugly Spring 2010 reports by Paul Schulte, dated 17, 26 and 30 March 2010
Nomura
54
14 June 2010
AirAsia Berhad
Jacinda Loh
Maintaining our call
Reiterating NEUTRAL, PT of RM1.20

AirAsia has been trading at trough-cycle valuations since 2007, largely due to uncertainty surrounding the increasing likelihood of a write-off of its ballooning sublease income receivables and continued cashflow stress amid a moderating growth market. In our view, the overhang on the name will likely persist in the medium term as gearing is expected to trend back upward despite its cash call in 4Q09 and as the company works towards addressing going-concern issues surrounding the business. We value the company based on an adjusted FY11F BV figure (tangible BV less receivable amounts due from Thai AirAsia and Indonesia AirAsia) of RM1.00, applied to its recent historical levels of 1.2x P/BV.
NEUTRAL call premised on increasing cashflow stress and earnings quality concerns amid gearing concerns and ballooning sub-lease receivables from associates, which may cap anticipated earnings growth
Exhibit 131. AirAsia historical P/BV band

(RM) 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Max = 9.5 Mean = 2.9 Min = 1.1
Exhibit 132. AirAsia historical P/BV chart

(x) 10 9 2.5x 2.0x 1.5x 1.0x 0.5x 8 7 6 5 4 3 2 1 0 Nov-04 Nov-05 Nov-06 Nov-07 Nov-08 Nov-09 Min = 1.1 Mean = 2.9
Narrowing our historical observation period to 0610 would yield a mean level of 2.2x
Max = 9.5
Nov-04
Nov-05
Nov-06
Nov-07
Nov-08
Source: Bloomberg, Nomura research
Nov-09
At these levels, AirAsia is trading at 1.17x FY11F adjusted P/BV, and looks attractive from a valuation perspective on almost all metrics. Its current valuations also seem to imply that the market has largely discounted all its gearing and operational issues. However, on an EV/EBITDA basis, this implies an FY11F EV/EBITDA of 6x, a premium to one of Europes most established LCCs, Ryanair (at 5.6x, based on Nomura UK estimates). Also, we argue that given what appears to be a moderating growth profile and as gearing is expected to exert pressure on AirAsias balance sheet going forward, we believe the overhang on the brand is likely to remain unless indications point to a resolution of the issues we have highlighted in this report.
Risks to our investment view

Upside risks to our call include: 1) AirAsia successfully managing to list its associates in their respective countries of operation, ie, Thailand and Indonesia, in the coming months; 2) undertaking a recapitalisation; and 3) better-than-expected performance from associates. Downside risks include: 1) extreme movements in the US dollar appreciation, and 2) a sharp sustained uptrend in fuel costs.
Nomura
55
14 June 2010
AirAsia Berhad
Jacinda Loh
Exhibit 133. Key model assumptions

2009 Fleet assumptions AirAsia Berhad - Fleet size at year-end - Average fleet Thai AirAsia - Fleet size at year-end - Average fleet Indonesia AirAsia - Fleet size at year-end - Average fleet Financing cost (%) Revenue assumptions AirAsia Berhad Load factor (%) Passengers carried (mn) Thai AirAsia Load factor (%) Passengers carried (mn) Indonesia AirAsia Load factor (%) Passengers carried (mn) Seats per A320 Average stage length (km) RPK (mn) ASK (mn) Ancillary income/pax (RM) Cost assumptions Crude oil prices (US$) Fuel consumption (mn barrels) Cost/ASK ex fuel (RM sen) Cost/ASK (RM sen) Other macro assumptions RM/US$
2010F
2011F
2012F
52 50
58 55
64 61
20 20
25 23
33 29
16 16 6.0
20 18 6.0
28 24 6.0
70 14.3
77 15.5
82 17.1
83 18.8
76 5.0
65 6.0
71 7.3
75 10.0
74 3.5 180 1,162 15,432 21,977 19.9
71 4.5 180 1,200 18,643 24,175 30.2
73 5.2 180 1,280 21,875 26,834 43.1
76 7.2 180 1,350 25,378 30,725 60.5
85 4.2 6.45 10.67 6.58 11.85
95 4.6 6.44 12.29
110 5.1 6.48 12.86
3.18
3.00
2.92
Nomura
56
14 June 2010
AirAsia Berhad
Jacinda Loh
Financial statements
Income statement (RMmn) Year-end 31 Dec Revenue Cost of goods sold Gross profit SG&A Employee share expense Operating profit EBITDA Depreciation Amortisation EBIT Net interest expense Associates & JCEs Other income Earnings before tax Income tax Net profit after tax Minority interests Other items Preferred dividends Normalised NPAT Extraordinary items Reported NPAT Dividends Transfer to reserves Valuation and ratio analysis FD normalised P/E (x) FD normalised P/E at price target (x) Reported P/E (x) Dividend yield (%) Price/cashflow (x) Price/book (x) EV/EBITDA (x) EV/EBIT (x) Gross margin (%) EBITDA margin (%) EBIT margin (%) Net margin (%) Effective tax rate (%) Dividend payout (%) Capex to sales (%) Capex to depreciation (x) ROE (%) ROA (pretax %) Growth (%) Revenue EBITDA EBIT Normalised EPS Normalised FDEPS Per share Reported EPS (RM) Norm EPS (RM) Fully diluted norm EPS (RM) Book value per share (RM) DPS (RM)
FY08 2,855 (2,477) 378
FY09 3,133 (2,345) 788
FY10F 3,802 (2,864) 938
FY11F 4,635 (3,298) 1,337
FY12F 5,570 (3,952) 1,618
378 725 (347) 378 (283) 66 162 373 534 534 (876) (342) (342)
788 1,236 (448) 788 (290) 125 623 (116) 507
938 1,442 (504) 938 (426) 50 562 (136) 426 119
1,337 1,893 (556) 1,337 (504) 80 913 (420) 492 375 867 (375) 492 492
1,618 2,275 (657) 1,618 (588) 80 1,110 (420) 690 365 1,055 (365) 690 690
Rising interest and depreciation costs to wipe out up to 55% of EBITDA
507 507 507
545 (119) 426 426
No positive contribution expected at the moment as receivables from associates are ballooning and any cashflow may likely go towards settling those amounts
5.6 5.3 na na 1.9 13.7 26.3 13.2 25.4 13.2 (12.0) (230.7) na 91.9 7.6 na 8.2
6.1 5.8 6.1 3.9 1.2 8.4 13.1 25.1 39.4 25.1 16.2 18.6 62.2 4.4 24.0 7.9
5.7 5.5 7.3 2.5 1.0 7.8 11.9 24.7 37.9 24.7 11.2 24.2 66.9 5.1 15.0 8.2
3.6 3.4 6.4 2.3 0.9 6.5 9.3 28.8 40.8 28.8 10.6 46.1 51.8 4.3 14.9 10.2
3.0 2.8 4.5 1.9 0.7 6.2 8.7 29.0 40.8 29.0 12.4 37.9 57.7 4.9 17.8 10.5
48.5 29.6 12.5 28.8 28.8
9.7 70.4 108.4 (8.8) (8.8)
21.4 16.7 19.1 6.4 6.4
21.9 31.3 42.5 59.1 59.1
20.2 20.2 21.1 21.7 21.7
(0.14) 0.23 0.23 0.68 -
0.21 0.21 0.21 1.07 -
0.17 0.22 0.22 1.24 -
0.20 0.35 0.35 1.44 -
0.28 0.42 0.42 1.72 -
Nomura
57
14 June 2010
AirAsia Berhad
Jacinda Loh
Cashflow (RMmn) Year-end 31 Dec EBITDA Change in working capital Other operating cashflow Cashflow from operations Capital expenditure Free cashflow Reduction in investments Net acquisitions Reduction in other LT assets Addition in other LT liabilities Adjustments Cashflow after investing acts Cash dividends Equity issue Debt issue Convertible debt issue Others Cashflow from financial acts Net cashflow Beginning cash Ending cash Ending net debt
FY08 725 (548) (593) (416) (2,623) (3,039) (27) (24) 0 196 (2,894) 3 3,045
FY09 1,236 243 (695) 784 (1,948) (1,164) 0 (424) (0) 1 (1,587) 509 1,670 2,180 592 154 746 6,862
FY10F 1,442 383 (578) 1,247 (2,544) (1,297) (1,297) 1,272
FY11F 1,893 87 (618) 1,362 (2,400) (1,038) (1,038) 1,144
FY12F 2,275 119 (719) 1,675 (3,212) (1,537) (1,537) 1,591
Free cashflow to remain negative as AirAsia has to fund its associates
3,047 153 153 6,453
1,272 (26) 746 720 7,705
1,144 107 721 827 8,919
1,591 54 827 881 10,665
Balance sheet (RMmn) As at 31 Dec Cash & equivalents Marketable securities Accounts receivable Inventories Other current assets Total current assets LT investments Fixed assets Goodwill Other intangible assets Other LT assets Total assets Short-term debt Accounts payable Other current liabilities Total current liabilities Long-term debt Convertible debt Other LT liabilities Total liabilities Minority interest Preferred stock Common stock Retained earnings Proposed dividends Other equity and reserves Total shareholders' equity Total equity & liabilities Liquidity (x) Current ratio Interest cover Leverage Net debt/EBITDA (x) Net debt/equity (%) Activity (days) Days receivable Days inventory Days payable Cash cycle
FY08 154 689 21 1,032 1,896 27 6,594 9 856 24 9,406 539 1,030 164 1,733 6,068 0 7,800 237 632 736 1,606 9,406
FY09 746 721 21 733 2,221 27 7,942 9 751 449 11,398 540 1,156 13 1,710 7,068 0 8,777 276 1,138 1,207 2,621 11,398
FY10F 721 625 25 688 2,059 27 10,045 9 300 449 12,888 600 1,412 3 2,015 7,826 0 9,841 276 1,565 1,207 3,047 12,888
FY11F 827 825 29 610 2,292 27 11,889 9 250 449 14,915 769 1,626 3 2,399 8,977 0 11,376 276 2,057 1,207 3,539 14,915
FY12F 881 1,068 35 565 2,550 27 14,444 9 250 449 17,728 929 1,949 3 2,882 10,617 0 13,499 276 2,747 1,207 4,229 17,728
Potential for a write-off for these amounts could bring about further downside as the outlook for its associates, especially Thai AirAsia, is expected to be bleak this year
1.09 1.3
1.30 2.7
1.02 2.2
0.96 2.7
0.88 2.8
8.90 401.9
5.55 261.8
5.34 252.9
4.71 252.0
4.69 252.2
44.2 1.5 76.1 (30.4)
82.2 3.2 170.1 (84.7)
64.6 3.0 163.7 (96.1)
57.1 3.0 168.2 (108.0)
62.2 3.0 165.6 (100.4)
Nomura
58
14 June 2010
Air China 7 5 3 H K
TR AN S P O R T/ L O G I S TI C S | C H I N A
Maintained
Jim Wong Shirley Lam
+852 2252 2195 +852 2252 2196
jim.wong@nomura.com shirley.lam@nomura.com
NEUTRAL
Action
Among Chinas airlines, we believe Air China will be the biggest beneficiary of recent government policies and least affected by slower-than-expected renminbi appreciation. Most of the good news is priced in following strong 1QFY10 results, capital injection of RMB6.5bn and acquisition of Shenzhen Airlines. We reiterate NEUTRAL; price target reduced to HK$8.21.
Closing price on 7 Jun Price target Upside/downside Difference from consensus FY10F net profit (RMBmn) Difference from consensus
Source: Nomura
HK$7.68
HK$8.21
(from HK$8.35)
6.9% -8.5% 7,202 8.5%
Catalysts
Possible positive catalysts include: renminbi appreciation and strong recovery of traffic are largely discounted. Anchor themes We see reforms as net positive. Reforms are expected on shareholding structure, airport charges, domestic route operating rights, airport infrastructure levy, jet fuel price, customs tax on aircraft purchases and ticket pricing.
Nomura vs consensus
Our earnings estimates are slightly higher than market consensus after factoring in the recent positive government policies.
Positives priced in
Largest beneficiary of the recent government policies
We revised down our forecast for Air Chinas 2010 net profit by 3.2%, but revised up 2011F net profit by 13.0% to reflect the slower-thanexpected renminbi appreciation in 2010F and possible benefits from: 1) the cancellation of business tax on international routes and regional routes starting from January 2010; and 2) the easing of restrictions on premium-class fares starting from 1 June 2010. We expect Air China to be the least affected by the slower renminbi appreciation and to be the largest beneficiary of the two new policies.

31 Dec (RMBmn)
Revenue Reported net profit Normalised net profit Normalised EPS (RMB) Norm. EPS growth (%) Norm. P/E (x) EV/EBITDA (x) Price/book (x) Dividend yield (%) ROE (%) Net debt/equity (%) Earnings revisions Previous norm. net profit Change from previous (%) Previous norm. EPS (RMB)
FY08
52,908 (9,256) (9,734) (0.82) (340.6) na 41.9 4.1 0.0 (36.6) 251.9
FY09 FY10F FY11F

51,393 4,854 4,854 0.41 na 16.4 13.7 3.4 0.0 22.1 253.4 4,854 0.41 66,256 7,202 7,202 0.57 39.5 11.6 9.3 2.3 1.7 23.4 151.8 7,443 (3.2) 0.59 74,364 7,155 7,155 0.55 (3.5) 11.6 8.8 1.9 1.7 17.7 150.3 6,331 13.0 0.49
Possible positive catalysts are likely discounted

With Air Chinas 1QFY10 results, the recent capital injection of RMB6.5bn, as well as the acquisition of Shenzhen Airlines and the recent two positive government policies already behind it, the only remaining significant catalyst that we see for the company would be the appreciation of the renminbi (but now expectations on renminbi appreciation have been reduced) and possible upside surprise on traffic recovery and yields. We note that Air China is actually the least geared among the Chinese airlines for appreciation in terms of percentage change in book value and EPS. Nevertheless, we believe that consensus, like us, has already modelled in renminbi appreciation of approximately 3-5% in FY10F and has revised up traffic assumptions on the back of strong 1Q10 traffic; hence, these catalysts are arguably already largely discounted by the market.
Share price relative to MSCI China

(HK$) 9.9 8.9 7.9 6.9 5.9 4.9 3.9 2.9 Jun09 Aug09
Price Rel MSCI China
220 200 180 160 140 120 100 80 Feb10 Apr10 1m 3.1 2.8 5.5 3m 13.4 12.8 20.0
Dec09
Oct09
Valuation already at mid-cycle. Reiterate NEUTRAL.

NEUTRAL maintained with a reduced price target of HK$8.21 (down from HK$8.35) based on 2x 2011F P/BV (mid-cycle valuation).
Absolute (HK$) Absolute (US$) Relative to Index Market cap (US$mn) Estimated free float (%) 52-week range (HK$) 3-mth avg daily turnover (US$mn) Stock borrowability Major shareholders (%) CNAHC CNAC(Group)
6m 21.7 20.9 34.6 12,056 30.2 8.79/3.45 22.45 Hard 40.4 11.3
Nomura
59
14 June 2010
Air China
Jim Wong
Drilling down
Earnings revised down in 2010, but up in 2011

Nomuras economics team recently revised down expectations for renminbi appreciation against the US dollar in 2010 and 2011 from the former expectation of a 5.5% gain in 2010 and 5.4% in 2011, to the current forecast of a 2.6% appreciation in 2010 and a gain of 5.3% in 2011.
Exhibit 134. Change in exchange rate projections vs the US$

2009 Old RMB New RMB
Renminbi appreciation rate revised down for 2010 and 2011

2011F 6.10 6.3
2010F 6.45 6.65
6.83 6.83
Exhibit 135. Change in appreciation expectations vs the US$

2010 Old RMB forecast appreciation rate (%) New RMB forecast appreciation rate (%)
2011 5.40 5.30
5.50 2.60
As a result of this forecast change, we revise down our anticipated FX gains for Air China. Nevertheless, we expect the decline in FX gains to be partly mitigated by improvement in traffic revenues in 2010 following the two recent positive government policies, or fully mitigated in 2011 earnings. According to the announcement made by the Ministry of Finance on 5 May 2010, the Notice Concerning Exemption of Business Tax on the Provision of International Transport Services (Cai Shui [2010] No. 8) was jointly issued by the Ministry of Finance and the State Administration of Taxation (the Notice). Pursuant to the Notice, it is provided that since 1 January 2010, entities or individuals within the Peoples Republic of China providing international transport services shall be exempt from the business tax. Prior to the announcement, all Chinese airlines needed to pay business tax of approximately 3% for all traffic revenues (including domestic, regional and international routes). Given that the exemption of business tax is applicable to international routes and regional routes traffic revenues, Air Chinas high exposure to these segments means that it is likely to be the largest beneficiary. Air China announced on 5 May 2010 that the company would benefit from a reduction of business tax and additional expenses of approximately RMB549mn in 2009 should the policy take effect in 2009. We estimate that Air China can save tax of RMB742mn; this compares to China Southern Airlines (1055 HK; NEUTRAL) possible tax saving of RMB262mn and CEAs (670 HK; BUY) RMB566mn. On 22 May 2010, the National Development and Reform Commission (NDRC) announced that Chinese airlines will be able to set their own premium-class fares on domestic routes effective 1 June 2010. Currently, first-class fares are set at 150% of the economy class fare, and business class fares are set at 130% of the economy class fare. Again, we see Air China as the largest beneficiary as it has a higher proportion of revenue coming from premium-class fares (estimated at 8% compared to 5-6% for its peers). We have checked with the management of Air China and the company is considering increasing its first-class fares by 33% to 200% of the economy class fare and business by 15% to 150% of the economy class fare following the new pricing policy.
The negative impact from the cut of renminbi appreciation rate will be mitigated by revenue hike
Exemption of business tax on international routes and regional routes
Easing of restriction on premiumclass fares pricing
Nomura
60
14 June 2010
Air China
Jim Wong
By assuming 8% of total domestic revenue comes from premium class and an average fare hike of 24%, we estimate that Air China could gain additional revenue of RMB301mn (or net profit of RMB238mn) in 2010. After incorporating the aforementioned changes, we revise down our 2010 net profit forecast by 3.3% but revise up our forecast for 2011 net profit by 13.0%.
Exhibit 136. Change in earnings forecasts

(RMBmn) Old net profit forecast Add saving from exemption of business tax Add additional revenue from fares adjustment Cut foreign exchange gain New net profit forecast
2010F 7,443 586 238 (1,065) 7,202
2011F 6,331 634 533 (343) 7,155
Possible positive catalysts are likely discounted

Air Chinas 1QFY10 reported net profit come in at RMB2,172mn, up 121% y-y, driven by the oil hedging write-back of RMB938mn as well as the top-line growth of 31% y-y. While Air Chinas 1QFY10 profit is inclusive of oil hedging and other exceptional gains of RMB754mn, even adjusted, the group's 1QFY10 core profit would have still come in at RMB1,418mn, which is double the core profit of RMB726mn achieved in 2H09 (or 3QFY09 and 4QFY09 together). We are currently looking for Air China to report core profit of RMB4,138mn in FY2010F.
Core earnings continued to improve into 1Q2010
Exhibit 137. Breakdown of net profits

(RMBmn) Reported net profit Exchange (losses)/gain Disposal gain/one-off gains Oil hedging Core earnings
2,008 (9,256) 1,487 478 (8,155) (3,065)
2,009 4,854 110 830 2,758 1,156
2010F 7,202 933 2,132 4,138
2011F 7,155 2,178 4,976
With 1QFY10 results, a capital injection of RMB6.5bn from the central government, as well as the acquisition of Shenzhen Airlines behind it, the only remaining significant catalyst that we see for Air China would be the appreciation of the renminbi and possible upside surprise on traffic recovery and yields. On renminbi appreciation Nomuras economics team has just revised down its forecast for the 2010 renminbi appreciation rate to just 2.6% from 5.6%. We believe that investors will now focus less on the impact of renminbi appreciation on the sector. Even if the appreciation theme finds favour with investors again, Air China is actually the least geared for such an appreciation in terms of percentage change in book value and EPS, in our view. We estimate that for every 1% renminbi appreciation, Air Chinas book value would increase by 1.0% and EPS by 5.3% (or a net profit increase of RMB380mn), CSAs book may gain 1.7% (post capital injection of RMB10.75bn) and EPS by 22.5% (or net profit increase of RMB399mn), while CEAs book value may increase by 2.4% and EPS by 13.8% (or net profit increase of RMB287mn). On the traffic statistics international and regional traffic statistics have continued to record positive growth since July 2009, and we expect that international routes may see higher growth in 1H10 compared to domestic routes traffic, from a lower base; however, such a high growth rate recorded in 1H2010 could slow down in 2H10 when the base effect worsens. We are currently looking for overall RPK to grow by 14% y-y in 2010 and passenger yields to be up by 10% on international and regional routes, and up 3% on domestic routes in 2010.
Market generally expects RMB to appreciate by 3-5%; we believe that analysts have already modeled in the appreciation
Nomura
61
14 June 2010
Air China
Jim Wong
Exhibit 138. Comparison of traffic trends on different routes

Domestic routes CSA Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 CY2009 Jan & Feb-10 Mar-10 Apr-10 16.6 9.7 9.3 5.9 11.8 21.9 15.1 33.3 8.5 10.2 13.3 17.4 14.3 12.5 22.6 17.5 Air China 22.4 18.5 16.0 16.0 20.1 19.4 22.9 42.5 11.4 15.7 16.3 12.5 19.3 9.4 18.3 16.4 CEA 20.3 26.8 25.9 24.5 31.2 34.2 29.4 57.5 19.9 19.6 12.2 9.7 25.5 46.9 44.5 34.5 International + regional CSA (14.8) (27.6) (17.3) (15.5) (19.5) (14.0) (0.7) 20.8 20.7 19.2 20.9 25.4 (1.7) 40.5 45.6 38.8 Air China (3.1) (9.5) (8.3) (6.8) (8.1) (11.0) 1.5 12.4 11.4 5.1 8.4 18.1 0.7 17.1 24.6 16.7 CEA (14.0) (33.3) (22.2) (18.4) (24.8) (20.6) (5.0) 17.9 6.7 0.6 (2.1) 6.9 (10.1) 40.2 48.5 40.1 CSA 11.0 3.3 4.8 2.2 6.5 16.2 13.0 31.4 10.0 11.4 14.3 18.6 11.8 16.0 25.6 20.4 Overall Air China 10.4 6.2 4.9 4.8 7.0 5.3 13.8 29.0 11.4 11.3 13.0 14.9 11.1 12.4 20.8 16.5 CEA 6.5 3.0 8.6 8.8 10.8 15.1 18.4 44.4 16.0 13.8 7.9 8.8 13.3 45.0 45.6 36.1
Note: CEA consolidated with Shanghai Airlines from January, 2010. Source: Company data, Nomura research
Exhibit 139. China air ticket price trend (excluding fuel surcharge)
Index Domestic 1/2009 2/2009 3/2009 4/2009 5/2009 6/2009 7/2009 8/2009 9/2009 10/2009 11/2009 12/2009 1/2010 2/2010 3/2010 4/2010 96.700 88.200 94.700 101.000 78.700 89.200 110.900 108.400 101.500 98.700 98.100 92.100 99.100 99.700 103.200 112.300 Regional International 101.900 86.500 88.800 89.200 88.200 86.200 84.600 85.500 99.800 89.700 96.900 97.100 101.700 103.900 101.600 104.400 115.400 102.600 99.500 111.100 106.500 107.700 113.100 131.600 140.300 133.800 127.200 128.500 125.200 129.200 127.000 154.600 Domestic (4.3) (12.8) 2.6 3.2 (12.3) 10.8 15.9 28.0 9.6 2.5 21.0 17.3 2.5 13.0 9.0 11.2 y-y chg % Regional International (6.1) (19.9) (15.4) (13.6) (13.4) (15.7) (21.2) (13.4) (9.4) (10.7) (3.5) (3.0) (0.2) 20.1 14.4 17.0 (4.5) (17.1) (18.1) (10.9) (17.1) (13.8) (11.4) 2.0 4.9 9.4 9.3 18.0 8.5 25.9 27.6 39.2
Source: CEIC, Nomura research
Nomura
62
14 June 2010
Air China
Jim Wong
Valuation already at mid-cycle, maintain NEUTRAL

Air China is currently trading on a P/B of 2.3x 2010F and P/B of 1.9x 2011F.
Valuation already at mid-cycle
Exhibit 140. Comparative P/BV

2009F Air China CSA CEA
2010F 2.3 1.2 2.6
2011F 1.9 1.1 2.0
3.4 2.2 22.3
Although Air Chinas existing P/B may look more expensive than the likes of CSA, based on the historical levels, both are in fact trading at slightly below their historical mid-cycle levels on 2011F. As shown in the table below, the historical mid-cycle level for Air China is 2.0x P/B and for CSA is 1.2x P/B.
Exhibit 141. Historical P/B levels at different stages of earnings cycle (x)
Trough Air China CSA CEA
* Due to negative equity in 2008. Source: Nomura estimates
Mid 2.0 1.2 1.2
Peak 6.2 6.6 na*
0.7 0.2 0.3
Our new price target for Air China of HK$8.21 (down from HK$8.35) is based on a midcycle valuation of 2.0x 2011F P/BV (methodology unchanged). We reiterate our NEUTRAL rating.
Price target at HK$8.21

The main risks we see to our price target for Air China are passenger throughput growth, passenger yield growth, currency movements and/or oil prices differing from our estimates.
Nomura
63
14 June 2010
Air China
Jim Wong
Income statement (RMBmn) Year-end 31 Dec Revenue Cost of goods sold Gross profit SG&A Employee share expense Operating profit EBITDA Depreciation Amortisation EBIT Net interest expense Associates & JCEs Other income Earnings before tax Income tax Net profit after tax Minority interests Other items Preferred dividends Norm alised NPAT Extraordinary items Reported NPAT Dividends Transfer to reserves Valuation and ratio analysis FD normalised P/E (x) FD normalised P/E at price target (x) Reported P/E (x) Dividend yield (%) Price/cashflow (x) Price/book (x) EV/EBITDA (x) EV/EBIT (x) Gross margin (%) EBITDA margin (%) EBIT margin (%) Net margin (% ) Effective tax rate (%) Dividend payout (%) Capex to sales (%) Capex to depreciation (x) ROE (% ) ROA (pretax %) Growth (%) Revenue EBITDA EBIT Normalised EPS Normalised FD EPS Per share Reported EPS (RMB) Norm EPS (RMB) Fully diluted norm EPS (RMB) Book value per share (RMB) DPS (RMB)
FY07 51,082 (46,454) 4,628 (951) 3,676 9,231 (5,554) 3,676 (1,859) 1,365 2,267 5,448 (1,513) 3,936 111 4,046 4,046 (838) 3,208
FY08 52,908 (53,726) (818) (1,089) (1,908) 4,458 (6,365) (1,908) (1,696) (1,184) (6,668) (11,455) 1,611 (9,845) 111 (9,734) 478 (9,256) (9,256)
FY09 51,393 (47,634) 3,759 (1,016) 2,743 9,794 (7,051) 2,743 (1,173) 624 2,872 5,066 (263) 4,803 51 4,854 4,854 4,854
FY10F 66,256 (59,521) 6,734 (1,127) 5,607 13,408 (7,801) 5,607 (1,410) 1,542 3,308 9,047 (1,876) 7,170 32 7,202 7,202 (1,440) 5,762
FY11F 74,364 (67,123) 7,240 (1,205) 6,035 14,536 (8,501) 6,035 (1,851) 1,945 2,706 8,835 (1,723) 7,113 42 7,155 7,155 (1,431) 5,724
Contribution from oil hedging gain write-back and FX gains
22.0 23.5 22.0 0.9 12.2 2.9 12.5 26.3 9.1 18.1 7.2 7.9 27.8 20.7 15.1 1.4 13.4 6.0
na na na 16.3 4.1 41.9 na (1.5) 8.4 (3.6) (17.5) na na 15.4 1.3 (36.6) (3.3)
16.4 17.6 16.4 14.6 3.4 13.7 42.5 7.3 19.1 5.3 9.4 5.2 14.1 1.0 22.1 3.3
11.6 12.4 11.6 1.7 6.6 2.3 9.3 19.5 10.2 20.2 8.5 10.9 20.7 20.0 22.6 1.9 23.4 6.4
11.6 12.4 11.6 1.7 6.5 1.9 8.8 18.2 9.7 19.5 8.1 9.6 19.5 20.0 18.8 1.6 17.7 6.4
13.7 18.5 46.0 219.0 219.0
3.6 (51.7) (151.9) (340.6) (340.6)
(2.9) 119.7 na na na
28.9 36.9 104.4 39.5 39.5
12.2 8.4 7.6 (3.5) (3.5)
0.34 0.34 0.34 2.50 0.07
(0.78) (0.82) (0.82) 1.63 -
0.41 0.41 0.41 1.95 -
0.57 0.57 0.57 2.90 0.11
0.55 0.55 0.55 3.33 0.11
Nomura
64
14 June 2010
Air China
Jim Wong
Cashflow (RMBmn) Year-end 31 Dec EBITDA Change in working capital Other operating cashflow Cashflow from operations Capital expenditure Free cashflow Reduction in investments Net acquisitions Reduction in other LT assets Addition in other LT liabilities Adjustments Cashflow after investing acts Cash dividends Equity issue Debt issue Convertible debt issue Others Cashflow from financial acts Net cashflow Beginning cash Ending cash Ending net debt
FY07 9,231 977 (2,906) 7,302 (7,696) (394) 93 (2,750) (771) 660 251 (2,911) (604) 2,443 (181) 1,658 (1,252) 5,159 3,907 39,232
FY08 4,458 8,160 (7,557) 5,060 (8,173) (3,113) (247) 181 1,616 (103) (542) (2,208) (838) 3,708 (1,581) 1,289 (919) 3,907 2,987 50,231
FY09 9,794 (5,414) 1,085 5,465 (7,259) (1,794) 253 (5,751) (6,161) 683 5,568 (7,202) 6,948 (27) 6,921 (281) 2,987 2,707 60,595
FY10F 13,408 538 (1,229) 12,717 (15,000) (2,283) (2,537) 553 801 (3,465) 6,500 (2,322) (11) 4,167 701 2,707 3,408 57,117
FY11F 14,536 785 (2,647) 12,675 (14,000) (1,325) (2,304) 368 (4,004) (7,265) (1,440) 7,703 6,262 (1,002) 3,408 2,406 65,111
Acquisition of additional 12.5% stake in Cathay Pacific
Capital injection by parent company and other A-share strategic investors
Balance sheet (RMBmn) As at 31 Dec Cash & equivalents Marketable securities Accounts receivable Inventories Other current assets Total current assets LT investments Fixed assets Goodwill Other intangible assets Other LT assets Total assets Short-term debt Accounts payable Other current liabilities Total current liabilities Long-term debt Convertible debt Other LT liabilities Total liabilities Minority interest Preferred stock Common stock Retained earnings Proposed dividends Other equity and reserves Total shareholders' equity Total equity & liabilities Liquidity (x) Current ratio Interest cover Leverage Net debt/EBITDA (x) Net debt/equity (%) Activity (days) Days receivable Days inventory Days payable Cash cycle
FY07 3,907 6 2,796 1,142 1,979 9,830 61,692 19,778 91,300 13,196 5,931 7,980 27,106 29,943 3,498 60,548 138 12,251 5,210 838 12,314 30,614 91,300
FY08 2,987 253 1,852 1,243 4,082 10,418 71,821 18,163 100,401 19,395 8,344 14,986 42,725 33,824 3,396 79,945 514 12,251 (4,623) 12,314 19,943 100,401
FY09 2,707 2,057 1,385 2,403 8,551 75,045 24,323 107,919 20,615 6,809 9,775 37,199 42,688 4,078 83,965 39 12,251 (650) 12,314 23,916 107,919
FY10F 3,408 2,652 1,726 2,758 10,544 83,823 26,860 121,227 6,352 8,488 9,925 24,765 54,173 4,632 83,570 39 12,993 5,112 1,440 18,072 37,618 121,227
FY11F 2,406 2,976 1,945 2,953 10,279 96,380 29,164 135,823 8,809 9,563 10,373 28,745 58,708 5,000 92,452 39 12,993 10,836 1,431 18,072 43,332 135,823
0.36 2.0
0.24 (1.1)
0.23 2.3
0.43 4.0
0.36 3.3
4.25 128.2
11.27 251.9
6.19 253.4
4.26 151.8
4.48 150.3
20.1 8.5 46.4 (17.8)
16.1 8.1 48.6 (24.4)
13.9 10.1 58.1 (34.1)
13.0 9.5 46.9 (24.4)
13.8 10.0 49.1 (25.3)
Nomura
65
14 June 2010
All Nippon Airways 9 2 0 2 J P

TR AN S P O R T/ L O G I S TI C S | J AP AN
Maintained
NOMURA SECURITIES CO LTD
Makoto Murayama
+81 3 5255 1755
m-murayama@frc.nomura.co.jp
NEUTRAL
Action
Our price target for All Nippon Airways of 300 assumes 11/3 (FY10F) DPS of 1. We might factor in dividend hikes from 12/3 and take a more bullish stance on the stock if the company posts profits for 2Q 11/3 and earnings forecasts at that time indicate probable earnings growth in future. For the time being, our focus will be on monthly data and quarterly results. We remain NEUTRAL.
Closing price on 7 June Price target Upside/downside Difference from consensus FY10F net profit (bn) Difference from consensus
Source: Nomura
273.0
300
9.9% na 5.0 na
Catalysts
If the company maintains earnings and dividend forecasts for 11/3 when it releases 2Q results, investors will likely factor in earnings growth in 12/3. Anchor themes We look for earnings recovery in 11/3 as the number of business travellers picks up along with economic recovery. We continue to focus on dividends, because in our view, an effective dividend, including shareholder benefits, is a key factor in share price formation for major Japanese airlines.
Nomura vs consensus
We forecast dividend hikes in 12/3. We might take a more bullish stance if the companys monthly figures or quarterly results indicate that such a hike is highly likely.
Focusing on quarterly earnings trends for now

Valuation
With profits likely to be low in 11/3, we derive our price target on the basis of an effective dividend yield, assuming that shareholder discount coupons are equivalent to the dividend. We expect ANA to restore a dividend of 1 per share on common stock in 11/3, which, together with shareholder benefits, equivalent to a dividend of 5, gives an effective dividend of 6 per share. Our price target of 300 is derived from a dividend yield of 2%, which is higher than the yield on long-term Japanese government bonds.

(bn)
Revenue Reported net profit Normalised net profit Normalised EPS () Norm. EPS growth (%) Norm. P/E (x) EV/EBITDA (x) Price/book (x) Dividend yield (%) RO E (%) Net debt/equity (%) Earnings revisions Previous norm. net profit Change from previous (%) Previous norm. EPS ()

1,228 (57.4) (57.4) (24.70) 25.8 1.4 (12.9) 2.0 1,360 5.0 5.0 2.00 136.5 9.0 1.4 0.0 1.0 1.9 5.0 na 2.00 1,446 19.0 19.0 7.60 280.0 35.9 7.4 1.3 0.0 3.8 1.9 19.0 na 7.60 1,492 42.0 42.0 16.80 121.0 16.3 6.2 1.3 0.0 8.0 1.7 42.0 na 16.80
Return to profitability in 2Q 11/3

We forecast operating profit of 42.0bn for the full-year 11/3, with a return to profitability, on a quarterly basis, in 2Q. We look for a y-y recovery in passenger revenue in 1Q, mainly on international routes, as a reaction to the impact of the H1N1 influenza in the prior-year period. However, we believe it will be difficult for the company to return to operating profit in the quarter because passenger revenue remains lower than in 1Q 09/3 and because many of the cost reduction measures being implemented by the company likely wont not have an impact until 2H 11/3 or later. We expect a return to operating profit from 2Q, the companys busiest period.
Share price relative to MSCI Japan

() 360 340 320 300 280 260 240 220 200 Aug09 Jun09 Jul09 Sep09
Price Rel MSCI J apan
110 100 90 80 70 60 Mar10 May10 3m 0.7 (2.1) 6.8
Nov09
Dec09
Jan10
Oct09
Feb10
Business growth expected in 11/3 H2

Sales and profits at ANA tend to be greater in 1H than in 2H, as the former includes 2Q. In 11/3, however, we expect sales and profits to be greater in 2H as a result of business growth on the opening of the new terminal at Haneda Airport in October 2010, and an increase in international air freight business centred on the Okinawa freight hub.
Absolute () Absolute (US$) Relative to Index Market c ap (mn) Estimated free float (%) 52-week range () 3-mth avg daily turnover (mn) Stock borrowability Major shareholders (%) Japan Trustee Serv ices Bank T. Nagoya Railroad
1m (2.2) (1.5) 5.9
Apr10
6m 7.1 4.8 11.7
689,314 43.1 362.0/218.0 3,860 na 3.1 2.8
Nomura
66
14 June 2010
All Nippon Airways
Makoto Murayama

Upside risk: With profits likely to be low in 11/3, ANAs share price is determined on the basis of an effective dividend yield, not on earnings and thus, upside risk is limited, in our view. Downside risk: Demand on international routes could be affected in the event of rapid changes in the global economy, terrorist activities, natural disasters, or the spread of disease. Any life-threatening accident on either domestic or international routes could lead customers to avoid either the particular airline responsible or air transportation in general. Meanwhile, if system glitches cause disturbances to scheduled flights, there could be an impact over the medium term as customers increasingly shift toward more reliable bullet train or other railway services.
Nomura
67
14 June 2010
All Nippon Airways
Makoto Murayama
All Nippon Airways [9202]: Quarterly results at the air transportation segment
(bn, except where noted) Domestic routes Available seat kilometers (RPK, '000) % y-y Revenue passenger kilometers (ASK, '000) % y-y Passenger load factor (%) Yield (/RPK) % y-y Passenger revenues (bn) % y-y Domestic freight Freight transportation weight (t) % y-y Freight transportation volume (t/) % y-y Freight revenues (bn) % y-y International routes Available seat kilometers (RPK, '000) % y-y Revenue passenger kilometers (ASK, '000) % y-y Passenger load factor (%) Yield (/RPK) % y-y Passenger revenues (bn) % y-y Domestic freight Freight transportation weight (t) % y-y Freight transportation volume (t/) % y-y Freight revenues (bn) % y-y Q1 7,948,983 (12.5) 14,318,364 (4.1) 55.5 17.4 (4.8) 138.6 (16.7) 109,255 (3.6) 69.9 (1.8) 7.6 (5.3) 4,446,788 (13.2) 6,669,089 (5.9) 66.7 9.9 (35.7) 43.9 (44.1) 86,944 (10.9) 118.4 (41.3) 10.3 (47.7) 10/3 Q2 10,011,321 (4.3) 15,241,114 (1.9) 65.7 18.6 (5.8) 185.8 (9.9) 120,560 (1.4) 68.3 (1.0) 8.2 (2.4) 5,303,905 0.9 6,806,082 (4.7) 77.9 10.8 (35.0) 57.1 (34.4) 99,970 (0.1) 125.8 (42.1) 12.6 (42.2) Q3 8,799,219 (8.4) 14,029,559 (5.1) 62.7 17.7 (3.6) 156.1 (11.7) 122,994 (6.0) 62.7 (9.5) 7.7 (15.0) 5,266,029 14.1 6,655,866 (5.3) 79.1 10.5 (33.9) 55.5 (24.6) 116,520 33.0 138.5 (31.8) 16.1 (9.3) Q4 8,638,083 2.3 13,515,532 (3.3) 63.9 17.4 (2.0) 150.4 0.3 105,925 (2.4) 70.1 1.2 7.4 (1.2) 5,204,182 19.1 6,592,733 (0.9) 78.9 11.1 (6.6) 57.6 11.2 119,015 72.6 140.6 (1.4) 16.7 70.2 Q1 7,964,881 0.2 13,645,401 (4.7) 58.4 17.3 (1.0) 137.5 (0.8) 104,229.3 (4.6) 70.6 1.0 7.4 (3.6) 4,935,935 11.0 6,715,773 0.7 73.5 11.7 19.0 58.0 32.1 121,895.5 40.2 153.9 30.0 18.8 82.3 11/3F Q2 9,971,276 (0.4) 14,570,505 (4.4) 68.4 18.6 0.0 185.0 (0.4) 114,049.8 (5.4) 69.7 2.0 7.9 (3.5) 5,378,160 1.4 7,194,029 5.7 74.8 13.2 23.0 71.2 24.7 134,259.7 34.3 162.3 29.0 21.8 73.2 Q3 Q4 8,905,864 3.1 13,920,998 3.0 64.0 18.5 6.0 164.4 9.3 97,874.7 (7.6) 72.2 3.0 7.1 (4.8) 5,901,542 13.4 8,372,771 27.0 70.5 12.1 9.0 71.2 23.6 124,846.7 4.9 177.2 26.0 22.1 32.2
9,186,385 4.4 14,268,062 1.7 64.4 18.3 3.0 167.9 7.5 113,892.4 (7.4) 64.0 2.0 7.3 (5.5) 5,739,972 9.0 7,787,363 17.0 73.7 12.6 19.0 72.1 29.7 140,989.2 21.0 169.0 22.0 23.8 47.6
Nomura
68
14 June 2010
All Nippon Airways
Makoto Murayama
All Nippon Airways [9202]: Quarterly results at the air transportation segment (continued)
(bn, except where noted) Air transportation sales by segment Domestic routes Passenger revenues Freight revenues Mail revenues Hand luggage revenues Subtotal International routes Passenger revenues Freight revenues Mail revenues Hand luggage revenues Subtotal Air transportation total Other Air transportation sales, total Y-y % y-y Air transportation segment operating expenses Fuel and fuel taxes As % of operating revenue Landing fees As % of operating revenue Aircraft leasing As % of operating revenue Depreciation As % of operating revenue Repair, parts, outsourcing As % of operating revenue Personnel As % of operating revenue Sales commissions As % of operating revenue Contracting costs As % of operating revenue Other As % of operating revenue Total As % of operating revenue Segment operating profits As % of operating revenue Y-y % y-y Q1 10/3 Q2 Q3 Q4 Q1 11/3F Q2 Q3 Q4
138.6 7.6 0.9 0.1 147.3 43.9 10.3 0.9 0.1 55.2 202.5 34.3 236.8 (70.6) (23.0) 58.4 24.7 23.5 9.9 14.2 6.0 26.9 11.4 14.7 6.2 58.2 24.6 15.9 6.7 19.1 8.1 47.4 20.0 278.3 117.5 (41.5) (17.5) (55.9) -
185.8 8.2 0.8 0.1 194.9 57.1 12.6 0.7 0.1 70.5 265.5 37.8 303.3 (56.1) (15.6) 67.0 22.1 24.3 8.0 14.9 4.9 27.5 9.1 13.1 4.3 57.0 18.8 20.3 6.7 20.1 6.6 46.3 15.3 290.5 95.8 12.8 4.2 (21.0) (62.2)
156.1 7.7 1.0 0.1 164.9 55.5 16.1 0.9 0.1 72.7 237.6 37.9 275.5 (36.0) (11.5) 63.4 23.0 22.5 8.2 15.6 5.7 27.9 10.1 13.8 5.0 57.2 20.8 20.1 7.3 19.7 7.2 47.3 17.2 287.5 104.4 (12.0) (4.4) (1.6) -
150.4 7.4 0.9 0.1 158.9 57.6 16.7 0.8 0.1 75.2 234.1 37.4 271.5 20.2 8.0 61.1 22.5 22.1 8.1 15.6 5.7 29.0 10.7 14.7 5.4 57.1 21.0 20.3 7.5 21.4 7.9 47.4 17.5 289.1 106.5 (17.6) (6.5) 15.3 -
137.5 7.4 0.8 0.1 145.8 58.0 18.8 0.9 0.1 77.7 223.5 42.0 265.5 28.7 12.1 61.1 23.0 22.4 8.4 17.5 6.6 29.0 10.9 15.5 5.8 56.0 21.1 13.0 4.9 19.8 7.5 50.7 19.1 285.0 107.3 (19.5) (7.3) 22.0 -
185.0 7.9 1.0 0.1 194.1 71.2 21.8 1.0 0.1 94.1 288.2 41.8 330.0 26.8 8.8 65.3 19.8 23.9 7.2 17.5 5.3 29.0 8.8 15.5 4.7 56.0 17.0 16.5 5.0 20.0 6.1 50.8 15.4 294.5 89.2 35.5 10.8 22.7 178.3
167.9 7.3 0.9 0.1 176.2 72.1 23.8 0.9 0.1 96.9 273.1 41.9 315.0 39.5 14.3 66.2 21.0 24.2 7.7 19.5 6.2 30.0 9.5 15.5 4.9 57.0 18.1 15.0 4.8 21.9 7.0 50.7 16.1 300.0 95.3 15.0 4.7 27.0 -
164.4 7.1 0.9 0.1 172.5 71.2 22.1 0.7 0.1 94.1 266.6 41.9 308.5 37.0 13.6 66.9 21.7 24.5 7.9 19.5 6.3 31.0 10.0 15.5 5.0 57.0 18.5 15.0 4.9 21.3 6.9 50.3 16.3 301.0 97.6 7.5 2.4 25.1 -
Nomura
69
14 June 2010
All Nippon Airways
Makoto Murayama
All Nippon Airways [9202]: Consolidated by-segment profits/losses on quarterly basis

10/3 (bn, except where noted) By consolidated segment Air transportation Sales Freight revenues Operating profits Margin (%) Travel agencies Sales Operating expenses Freight revenues Margin (%) Other Sales Operating expenses Operating profits Margin (%) Total Sales Operating expenses Operating profits Margin (%) Eliminations/companywide Sales Operating expenses Operating profits Consolidated Sales Operating expenses Operating profits Margin (%)
11/3F Q3 Q4 Q1 Q2 Q3 Q4
Q1
Q2
236.8 278.3 (41.5) (17.5) 33.6 34.8 (1.2) (3.6) 33.9 33.7 0.1 0.4 304.3 346.9 (42.6) (14.0) (34.4) (34.6) 0.2 269.9 312.3 (42.4) (15.7)
303.3 290.5 12.8 4.2 54.0 53.4 0.6 1.1 35.2 34.5 0.7 2.1 392.4 378.4 14.1 3.6 (50.5) (50.6) 0.1 341.9 327.8 14.1 4.1
276.3 287.5 (11.2) (4.1) 39.4 38.9 0.4 1.1 34.2 32.9 1.3 3.9 349.9 359.4 (9.5) (2.7) (37.9) (37.9) (0.1) 311.9 321.5 (9.5) (3.1)
271.5 289.1 (17.6) (6.5) 40.0 39.9 0.2 0.5 34.4 33.6 0.9 2.5 346.0 362.6 (16.6) (4.8) (41.4) (41.5) 0.1 304.6 321.0 (16.4) (5.4)
265.5 285.0 (19.5) (7.3) 37.0 37.2 (0.2) (0.5) 32.0 31.8 0.2 0.6 334.5 354.0 (19.5) (5.8) (35.5) (35.5) 0.0 299.0 318.5 (19.5) (6.5)
330.0 294.5 35.5 10.8 55.0 54.0 1.0 1.8 35.0 34.0 1.0 2.9 420.0 382.5 37.5 8.9 (51.5) (51.5) 0.0 368.5 331.0 37.5 10.2
315.0 300.0 15.0 4.7 40.0 39.8 0.2 0.5 35.0 33.7 1.3 3.7 390.0 373.5 16.5 4.2 (38.0) (38.0) 0.0 352.0 335.5 16.5 4.7
308.5 301.0 7.5 2.4 40.0 40.0 0.0 0.0 32.0 32.0 0.0 0.0 380.5 373.0 7.5 2.0 (40.1) (40.1) 0.0 340.4 332.9 7.5 2.2
Nomura
70
14 June 2010
All Nippon Airways
Makoto Murayama
All Nippon Airways [9202]: Consolidated by-segment profits/losses on half yearly basis
09/3 (bn, except where noted) By consolidated segment Air transportation Sales Freight revenues Operating profits Margin (%) Travel agencies Sales Operating expenses Freight revenues Margin (%) Other Sales Operating expenses Operating profits Margin (%) Total Sales Operating expenses Operating profits Margin (%) Eliminations/companywide Sales Operating expenses Operating profits Consolidated Sales Operating expenses Operating profits Margin (%)
10/3 H2 H1 H2 H1
11/3F H2
H1
666.9 618.7 48.2 7.2 102.5 102.2 0.3 0.3 74.9 73.7 1.1 1.5 844.2 794.6 49.6 5.9 (90.9) (91.1) 0.2 753.3 703.5 49.8 6.6
562.6 568.8 (43.4) (7.7) 86.3 87.2 (0.9) (1.1) 73.3 71.1 2.2 3.0 722.3 727.2 (42.1) (5.8) (83.0) (82.9) (0.1) 639.3 644.3 (42.2) (6.6)
540.1 568.8 (28.7) (5.3) 87.6 88.2 (0.6) (0.7) 69.1 68.2 0.9 1.3 696.8 725.3 (28.5) (4.1) (84.9) (85.2) 0.2 611.8 640.1 (28.3) (4.6)
547.8 576.6 (28.9) (5.3) 79.4 78.8 0.6 0.8 68.7 66.5 2.2 3.2 695.8 721.8 (26.0) (3.7) (79.3) (79.4) 0.1 616.5 642.4 (25.9) (4.2)
595.5 579.5 16.0 2.7 92.0 91.2 0.8 0.9 67.0 65.8 1.2 1.8 754.5 736.5 18.0 2.4 (87.0) (87.0) 0.0 667.5 649.5 18.0 2.7
623.5 601.0 22.5 3.6 80.0 79.8 0.2 0.3 67.0 65.7 1.3 1.9 770.5 746.5 24.0 3.1 (78.0) (78.0) 0.0 692.5 668.5 24.0 3.5
Nomura
71
14 June 2010
All Nippon Airways
Makoto Murayama
All Nippon Airways [9202]: transportation volume, revenues, and unit price
08/3 Transportation volume Domestic routes No. of revenue passengers % y-y Freight revenues % y-y Revenue passenger kilometers (RPK, '000) % y-y Passenger load factor (%) Effective freight ('000tkm) Fr % y-y Freight transportation weight (t) % y-y Freight transportation volume (tkm, 000) % y-y Mail transportation weight (t) % y-y Mail transportation volume (tkm, 000) % y-y Freight capacity utilization ratio (freight & mail, %) Freight capacity utilization ratio (freight only, %) International routes No. of revenue passengers % y-y Available seat kilometers (ASK, '000) % y-y Revenue passenger kilometers (RPK, '000) % y-y Passenger load factor (%) Effective freight ('000tkm) % y-y Freight transportation weight (t) % y-y Freight transportation volume (tkm, 000) % y-y Mail transportation weight (t) % y-y Mail transportation volume (tkm, 000) % y-y Freight capacity utilization ratio (freight & mail, %) Freight capacity utilization ratio (freight only, %) Total No. of revenue passengers % y-y Available seat kilometers (ASK, '000) % y-y Revenue passenger kilometers (RPK, '000) % y-y Passenger load factor (%) Effective freight ('000tkm) % y-y Freight transportation weight (t) % y-y Freight transportation volume (tkm, 000) % y-y Mail transportation weight (t) % y-y Mail transportation volume (tkm, 000) % y-y Freight capacity utilization ratio (freight & mail, %) Freight capacity utilization ratio (freight only, %) 09/3 10/3 11/3F 12/3F 13/3F 14/3F 15/3F 16/3F
45,556,807 (2.0) 62,650,757 0.4 39,927,533 (1.6) 63.7
42,753,008 (6.2) 59,222,096 (5.5) 37,596,329 (5.8) 63.5
462,569 1.0 443,998 0.4 88,649 (2.6) 92,027 (5.1)
475,014 2.7 463,712 4.4 37,997 (57.1) 37,035 (59.8)
39,894,927 (6.7) 57,104,569 (3.6) 35,397,606 (5.8) 62.0 1,893,226 458,734 (3.4) 453,640 (2.2) 32,859 (13.5) 33,421 25.7 24.0 4,666,704 5.3 26,723,770 (4.2) 20,220,904 4.4 75.7 2,687,955 422,449 19.3 1,717,270 3.9 20,570 9.6 105,221 +4.3 67.8 63.9 44,561,631 (5.6) 83,828,339 (3.8) 55,618,510 (2.4) 66.3 4,581,181 881,183 6.3 2,170,910 2.6 53,429 (5.9) 138,642 0.5 50.4 47.4
41,251,355 3.4 56,419,314 (1.2) 36,034,763 1.8 63.9 430,292 (6.2) 426,875 (5.9) 5,259,375 12.7 29,850,451 11.7 21,939,681 8.5 73.5 522,147 23.6 1,981,730 15.4 46,510,730 4.4 86,269,765 2.9 57,974,444 4.2 67.2 952,439 8.1 2,408,605 10.9 -
41,292,606 0.1 57,096,346 1.2 36,142,867 0.3 63.3 431,153 0.2 427,729 0.2 5,943,094 13.0 36,178,747 21.2 25,230,633 15.0 69.7 562,352 7.7 2,336,459 17.9 47,235,700 1.6 93,275,093 8.1 61,373,500 5.9 65.8 993,505 4.3 2,764,188 14.8 -
41,705,532 1.0 57,381,828 0.5 36,504,296 1.0 63.6 435,465 1.0 6,180,818 4.0 37,625,897 4.0 26,492,165 5.0 70.4 607,340 8.0 47,886,350 1.4 95,007,724 1.9 62,996,460 2.6 66.3 1,042,805 5.0 -
42,122,587 1.0 57,668,737 0.5 36,869,339 1.0 63.9 439,819 1.0 6,428,051 4.0 39,130,932 4.0 27,816,773 5.0 71.1 655,928 8.0 48,550,638 1.4 96,799,669 1.9 64,686,112 2.7 66.8 1,095,747 5.1 -
42,543,813 1.0 57,957,080 0.5 37,238,032 1.0 64.3 444,217 1.0 6,685,173 4.0 40,696,170 4.0 29,207,611 5.0 71.8 708,402 8.0 49,228,986 1.4 98,653,250 1.9 66,445,644 2.7 67.4 1,152,619 5.2 -
42,969,251 1.0 58,246,866 0.5 37,610,413 1.0 64.6 448,660 1.0 6,952,580 4.0 42,324,017 4.0 30,667,992 5.0 72.5 765,074 8.0 49,921,831 1.4 100,570,882 1.9 68,278,405 2.8 67.9 1,213,734 5.3 -
4,826,520 6.0 28,285,311 6.3 21,290,692 5.7 75.3
4,432,148 (8.2) 27,905,056 (1.3) 19,360,691 (9.1) 69.4
332,507 19.8 1,644,900 29.4 15,330 (0.4) 75,383 12.0
354,251 6.5 1,652,872 0.5 18,772 22.5 100,929 33.9
50,383,327 (1.3) 90,936,068 2.2 61,218,225 0.8 67.3
47,185,156 (6.3) 87,127,152 (4.2) 56,957,020 (7.0) 65.4
795,076 8.1 2,088,898 21.9 103,979 (2.2) 167,410 1.9
829,265 4.3 2,116,584 1.3 56,769 (45.4) 137,964 (17.6)
Nomura
72
14 June 2010
All Nippon Airways
Makoto Murayama
All Nippon Airways [9202]: transportation volume, revenues, and unit price (continued)
08/3 Transportation revenues, unit prices, etc Domestic routes Passenger revenues (bn) % y-y Freight revenues % y-y Yield (/RPK) % y-y Revenues per passenger () % y-y Freight revenues % y-y Freight unit price per tonne () % y-y International routes Passenger revenues (bn) % y-y Unit revenues (/ASK) % y-y Yield (/RPK) % y-y Revenues per passenger () % y-y Freight revenues (bn) % y-y Freight unit price () % y-y 09/3 10/3 11/3F 12/3F 13/3F 14/3F 15/3F 16/3F
739.5 1.9 11.8 1.5 18.5 3.5 16,233 3.9 30.6 (0.0) 66,079 (1.0) 311.6 11.9 11.0 5.2 14.6 5.9 64,555 5.5 72.2 16.1 217,114 (3.1)
699.4 (5.4) 11.8 0.0 18.6 0.4 16,359 0.8 33.1 8.3 69,676 5.4 291.1 (6.6) 10.4 (5.3) 15.0 2.7 65,674 1.7 69.1 (4.3) 194,972 (10.2)
631.0 (9.8) 11.0 (6.4) 17.8 (4.2) 15,816 (3.3) 31.8 (3.8) 69,384 (0.4) 214.1 (26.4) 8.0 (23.2) 10.6 (29.6) 45,883 (30.1) 55.8 (19.3) 131,969 (32.3)
655.2 3.8 11.6 5.1 18.2 2.0 15,879 0.4 30.4 (4.4) 70,703 1.9 272.5 27.3 9.1 13.9 12.4 17.3 51,848 13.0 86.5 55.1 165,621 25.5
676.2 3.2 11.8 2.0 18.7 2.9 16,371 3.1 30.4 (0.0) 70,561 (0.2) 325.9 19.6 9.9 8.0 12.9 4.0 57,603 11.1 100.6 16.3 178,870 8.0
693.2 2.5 11.8 0.0 19.0 1.5 16,617 1.5 30.7 1.0 70,561 0.0 349.1 7.1 10.2 3.0 13.2 2.0 59,907 4.0 109.7 9.1 180,659 1.0
710.6 2.5 11.8 0.0 19.3 1.5 16,866 1.5 31.0 1.0 70,561 0.0 373.9 7.1 10.4 2.0 13.4 2.0 62,304 4.0 119.7 9.1 182,466 1.0
728.5 2.5 11.8 0.0 19.6 1.5 17,119 1.5 31.3 1.0 70,561 0.0 400.4 7.1 10.6 2.0 13.7 2.0 64,796 4.0 130.6 9.1 184,290 1.0
746.8 2.5 11.8 0.0 19.9 1.5 17,376 1.5 31.7 1.0 70,561 0.0 428.8 7.1 10.8 2.0 14.0 2.0 67,388 4.0 142.4 9.1 186,133 1.0
Note: Passenger revenues = yield RPK 1,000,000. Passenger revenues = unit revenues ASK 1,000,000. Source: Company data, Nomura estimates
All Nippon Airways [9202]: earnings forecast assumptions

Forex sensitivity (impact on profits in the absence of hedging) (bn) 1 rise in US$/ rate $1 rise in price of crude oil Earnings forecast assumptions 10/3 All Nippon Airways [9202] Exchange rate ($/) Dubai crude oil ($/bbl) Singapore kerosene ($/bbl) Hedging situation Forex related to fuel (%, as of 10/3) Fuel oil (%, as of 10/3) Our estimates Exchange rate ($/) CIF price ($/bbl)
(1.8) (1.9)
11/3F 95 75 85 60 80 90.0 85.0
12/3F 95 80 90 40 55 90.0 85.0
13/3F
14/3F
15/3F
16/3F
93 70 77 80 90 92.9 70.7
30 20 90.0 85.0
20
10
110
90.0 85.0
90.0 85.0
90.0 85.0
All Nippon Airways [9202]: air transportation sales breakdown

(bn) Air transportation sales by segment Domestic routes Passenger revenues Freight revenues Mail revenues Hand luggage revenues Subtotal International routes Passenger revenues Freight revenues Mail revenues Hand luggage revenues Subtotal Air transportation total Other Air transportation sales, total
08/3
09/3
10/3
11/3F
12/3F
13/3F
14/3F
15/3F
16/3F
739.5 30.6 8.0 0.3 778.4 311.6 72.2 3.6 0.5 387.9 1,166.2 135.4 1,301.6
699.4 33.1 3.9 0.3 736.7 291.1 69.1 3.7 0.5 364.3 1,101.1 128.4 1,229.5
631.0 31.8 3.5 0.4 666.8 214.1 55.8 3.3 0.5 273.6 940.4 147.5 1,087.9
655.2 30.4 4.0 0.3 689.9 272.5 86.5 3.5 0.5 363.0 1,052.9 166.1 1,219.0
676.2 30.4 4.0 0.3 710.9 325.9 100.6 3.5 0.5 430.5 1,141.4 163.4 1,304.8
693.2 30.7 4.0 0.3 728.2 349.1 109.7 3.5 0.5 462.8 1,191.0 159.8 1,350.8
710.6 31.0 4.0 0.3 746.0 373.9 119.7 3.5 0.5 497.5 1,243.5 161.3 1,404.8
728.5 31.3 4.0 0.3 764.2 400.4 130.6 3.5 0.5 535.0 1,299.1 162.7 1,461.8
746.8 31.7 4.1 0.4 783.0 428.8 142.4 3.6 0.6 575.4 1,358.4 162.8 1,521.2
Nomura
73
14 June 2010
All Nippon Airways
Makoto Murayama
All Nippon Airways [9202]: consolidated financial data

(bn, except where noted) Air transportation segment operating expenses Fuel and fuel taxes As % of operating revenue Landing fees As % of operating revenue Aircraft leasing As % of operating revenue Depreciation As % of operating revenue Repair, parts, outsourcing As % of operating revenue Personnel As % of operating revenue Sales commissions As % of operating revenue Contracting costs As % of operating revenue Other As % of operating revenue Total As % of operating revenue Segment operating profits As % of operating revenue
08/3 266.1 20.4 106.0 8.1 63.3 4.9 112.8 8.7 61.8 4.7 241.3 18.5 95.3 7.3 82.4 6.3 194.7 15.0 1,223.7 94.0 77.9 6.0
09/3 303.4 24.7 101.1 8.2 59.9 4.9 110.0 8.9 63.3 5.1 232.5 18.9 92.7 7.5 79.9 6.5 181.9 14.8 1,224.7 99.6 4.8 0.4
10/3 249.9 23.0 92.4 8.5 60.3 5.5 111.3 10.2 56.3 5.2 229.5 21.1 76.6 7.0 80.3 7.4 188.4 17.3 1,145.4 105.3 (57.5) (5.3)
11/3F 259.5 21.3 95.0 7.8 74.0 6.1 119.0 9.8 62.0 5.1 226.0 18.5 59.5 4.9 83.0 6.8 202.5 16.6 1,180.5 96.8 38.5 3.2
12/3F 274.0 21.0 99.0 7.6 75.0 5.7 129.0 9.9 67.0 5.1 230.0 17.6 67.5 5.2 92.5 7.1 200.8 15.4 1,234.8 94.6 70.0 5.4
13/3F 275.0 20.4 95.5 7.1 77.0 5.7 135.0 10.0 68.5 5.1 240.0 17.8 70.0 5.2 95.0 7.0 200.8 14.9 1,256.8 93.0 94.0 7.0
14/3F 285.0 20.3 98.5 7.0 80.0 5.7 140.0 10.0 70.0 5.0 250.0 17.8 72.5 5.2 100.0 7.1 204.8 14.6 1,300.8 92.6 104.0 7.4
15/3F 295.0 20.2 102.5 7.0 83.0 5.7 145.0 9.9 74.0 5.1 260.0 17.8 74.0 5.1 104.0 7.1 215.3 14.7 1,352.8 92.5 109.0 7.5
16/3F 305.0 20.0 106.0 7.0 84.5 5.6 150.0 9.9 75.0 4.9 265.0 17.4 75.0 4.9 105.0 6.9 219.7 14.4 1,385.2 91.1 136.0 8.9

(bn, except where noted) By consolidated segment Air transportation Sales Operating expenses Operating profits Margin (%) Travel agencies Sales Operating expenses Operating profits Margin (%) Other Sales Operating expenses Operating profits Margin (%) Total Sales Operating expenses Operating profits Margin (%) Eliminations/companywide Sales Operating expenses Operating profits Consolidated Sales Operating expenses Operating profits Margin (%)
08/3
09/3
10/3
11/3F
12/3F
13/3F
14/3F
15/3F
16/3F
1,301.6 1,223.7 77.9 6.0 215.4 214.3 1.1 0.5 199.0 193.8 5.2 2.6 1,716.0 1,631.8 84.2 4.9 (228.2) (228.4) 0.2 1,487.8 1,403.4 84.4 5.7
1,229.5 1,224.7 4.8 0.4 188.8 189.4 (0.6) (0.3) 148.2 144.9 3.3 2.3 1,566.5 1,559.0 7.5 0.5 (173.9) (174.0) 0.0 1,392.6 1,385.0 7.5 0.5
1,087.9 1,145.4 (57.5) (5.3) 167.0 167.0 (0.0) 0.0 137.8 134.7 3.1 2.2 1,392.6 1,447.1 (54.5) (3.9) (164.3) (164.6) 0.3 1,228.4 1,282.5 (54.2) (4.4)
1,219.0 1,180.5 38.5 3.2 172.0 171.0 1.0 0.6 134.0 131.5 2.5 1.9 1,525.0 1,483.0 42.0 2.8 (165.0) (165.0) 0.0 1,360.0 1,318.0 42.0 3.1
1,304.8 1,234.8 70.0 5.4 175.0 174.0 1.0 0.6 135.0 132.5 2.5 1.9 1,614.8 1,541.3 73.5 4.6 (168.8) (168.8) 0.0 1,446.0 1,372.5 73.5 5.1
1,350.8 1,256.8 94.0 7.0 175.0 174.0 1.0 0.6 135.0 132.5 2.5 1.9 1,660.8 1,563.3 97.5 5.9 (168.8) (168.8) 0.0 1,492.0 1,394.5 97.5 6.5
1,404.8 1,300.8 104.0 7.4 175.0 174.0 1.0 0.6 135.0 132.5 2.5 1.9 1,714.8 1,607.3 107.5 6.3 (168.8) (168.8) 0.0 1,546.0 1,438.5 107.5 7.0
1,461.8 1,352.8 109.0 7.5 175.0 174.0 1.0 0.6 135.0 132.5 2.5 1.9 1,771.8 1,659.3 112.5 6.4 (168.8) (168.8) 0.0 1,603.0 1,490.5 112.5 7.0
1,521.2 1,385.2 136.0 8.9 175.0 174.0 1.0 0.6 135.0 132.5 2.5 1.9 1,831.2 1,691.7 139.5 7.6 (168.7) (168.7) 0.0 1,662.5 1,523.0 139.5 8.4
Nomura
74
14 June 2010
All Nippon Airways
Makoto Murayama

(bn, except where noted) Income statement Sales Operating expenses Operating profits Margin (%) % y-y Nonoperating income Interest received Dividends received Equipment-related incentives Other Nonoperating expenses Interest paid Other Recurring profits % y-y Extraordinary gains Extraordinary losses Pretax profits Corporation tax, etc Effective tax rate (%) Minority interests Net profits Shares out (FY-end, mn) Shares out (FY-average, mn) EPS () Cash flow per share (note) () Interim dividend per share () FY-end dividend per share () Annual dividend total Payout ratio (%)
Note: Cash flow = net profits + depreciation. Source: Company data, Nomura estimates"
08/3 1,487.8 1,403.4 84.4 5.7 -8.5 12.6 3.2 1.4 8.0 40.5 15.0 25.4 56.5 -9.7 139.8 81.1 115.2 50.2 44 0.9 64.1 1,948 32.9 92.9 0.00 5.00 9.7 15
09/3 1,392.6 1,385.0 7.6 0.5 -91.0 25.5 1.6 1.3 22.6 33.0 14.8 18.1 0.1 -99.8 4.1 8.7 (4.4) 0.1 (0.2) (4.3) 1,933 (2.2) 56.2 0.00 1.00 1.9 -
10/3 1,228.4 1,282.5 (54.2) (4.4) 11.3 1.1 1.5 8.6 43.3 18.2 25.2 (86.3) 2.3 11.6 (95.5) (38.0) 40 (0.2) (57.4) 2,506 2,327 (24.7) 24.3 0.00 0.00 0.0 -
11/3F 1,360.0 1,318.0 42.0 3.1 9.0 3.0 1.0 5.0 38.0 19.0 19.0 13.0 5.0 10.0 8.0 3.0 38 0.0 5.0 2,506 2,506 2.0 50.7 0.00 1.00 2.5 50
12/3F 1,446.0 1,372.5 73.5 5.1 75.0 8.5 2.5 1.0 5.0 51.5 19.0 32.5 30.5 135.0 5.0 5.0 30.5 11.5 38 0.0 19.0 2,506 2,506 7.6 60.3 0.00 3.00 7.5 39
13/3F 1,492.0 1,394.5 97.5 6.5 32.7 8.5 2.5 1.0 5.0 38.0 18.0 20.0 68.0 122.7 5.0 5.0 68.0 26.0 38 0.0 42.0 2,506 2,506 16.8 72.2 0.00 5.00 12.5 30
14/3F 1,546.0 1,438.5 107.5 7.0 10.2 8.0 2.0 1.0 5.0 38.0 18.0 20.0 77.5 13.9 5.0 5.0 77.5 29.5 38 0.0 48.0 2,506 2,506 19.2 76.6 0.00 5.00 12.5 26
15/3F 1,603.0 1,490.5 112.5 7.0 4.6 8.0 2.0 1.0 5.0 38.0 18.0 20.0 82.5 6.4 5.0 5.0 82.5 31.5 38 0.0 51.0 2,506 2,506 20.4 79.8 0.00 5.00 12.5 25
16/3F 1,662.5 1,523.0 139.5 8.4 24.0 8.0 2.0 1.0 5.0 38.0 18.0 20.0 109.5 32.7 5.0 5.0 109.5 41.5 38 0.0 68.0 2,506 2,506 27.1 88.6 1.00 6.00 17.5 26

(bn) 08/3 Cash flow Pretax profits 115.2 Depreciation 116.8 Working capital (22.9) Other (43.4) Operating cash flow (1) 165.8 Acquisition of PPE (337.2) Gains on sale of long-term assets 45.2 Expenditure on acquiring marketable securities Income from sale of investment securities Other 222.2 Investment cash flow (2) (69.8) Free cash flow (3) = (1) + (2) 95.9 Short-term borrowings (0.9) Commercial paper Long-term borrowings 104.0 (142.5) Repayment of long-term borrowings Bond issuance 29.8 Bond redemptions (45.0) Repayment of leasing debt (22.9) Equities Treasury stock (0.2) Dividends (5.8) Other (3.9) Financial cash flow (4) (87.3) Foreign currency translation difference in cash & equivalen (0.9) Total cash flow (5) = (3) + (4) 7.7
09/3 (4.4) 112.9 (5.3) (142.9) (39.8) (116.4) 42.6
10/3 (95.5) 113.8 (5.3) 70.1 83.0 (186.2) 10.0 (116.0) 71.0 (30.7) (251.9) (168.9) (17.5) 194.3 (94.1) (30.0) (12.3) 141.8 (1.1) (1.9) (5.5) 173.8 (0.1) 4.8
11/3F 8.0 122.0 (0.3) 21.2 150.9 (226.0)
12/3F 30.5 132.0 (0.2) 1.5 163.9 (240.0)
13/3F 68.0 139.0 (0.1) (9.1) 197.8 (150.0)
14/3F 77.5 144.0 (0.1) (23.2) 198.2 (150.0)
15/3F 82.5 149.0 (0.1) (26.5) 204.9 (150.0)
16/3F 109.5 154.0 (0.1) (28.4) 235.0 (149.9)
(37.3) (111.1) (150.9) 44.0 205.7 (75.3) 19.9 (50.0) (16.1) (5.5) (9.7) 1.6 114.5 (0.1) (36.5)
82.0 (144.0) 6.9
49.0 (191.0) (27.1)
1.0 (149.0) 48.8
1.0 (149.0) 49.2
1.0 (149.0) 55.9
1.0 (148.9) 86.1
110.0 (82.0) 20.0 (40.0) (11.4)
110.0 (82.6) 30.0 (20.0) (9.6)
40.0 (66.5) 0.0 (9.0)
40.0 (57.3) (20.0)
10.0 (60.0) 0.0 0.0
10.1 (60.0) 0.0 0.0
0.0 (3.3) 3.6
(2.5) 25.2 (1.9)
(7.5) (43.0) 5.8
(12.5) (49.9) (0.7)
(12.5) (62.5) (6.7)
(15.0) (64.9) 21.2
Nomura
75
14 June 2010
All Nippon Airways
Makoto Murayama

(bn) Balance sheet Current assets Cash & deposits Marketable securities Accounts receivable Inventory assets Other Long-term assets Property, plant & equipment Intangible long-term assets Investments, other assets Deferred assets Total assets Current liabilities Accounts payable Short-term borrowings Current portion of long-term borrowings Bonds due within one year Leasing debt Accrued corporate tax, etc Other Long-term liabilities Corporate bonds Long-term borrowings Leasing debt Other Total liabilities Owners' equity Accumulated other comprehensive income Shareholders' equity Minority interests Net assets Total liabilities & net assets
08/3 473.5 51.4 129.3 118.2 52.9 121.7 1,309.8 1,099.1 47.1 163.6 0.1 1,783.4 547.0 183.3 2.6 68.0 50.0 15.8 81.3 145.9 780.5 145.0 429.6 56.9 149.0 1,327.4 422.7 30.3 453.0 3.0 455.9 1,783.4
09/3 446.7 59.7 84.5 89.2 57.1 156.2 1,314.2 1,080.3 62.9 171.0 0.2 1,761.1 503.1 148.9 46.6 81.1 30.0 11.8 1.3 183.4 932.1 135.0 547.0 45.8 204.4 1,435.3 403.2 (81.3) 321.9 3.9 325.8 1,761.1
10/3 421.5 13.2 180.6 96.8 56.9 74.0 1,436.8 1,152.4 70.6 213.8 0.8 1,859.1 472.6 151.0 29.1 99.8 40.0 11.9 2.7 138.2 906.4 95.0 628.6 37.3 145.5 1,379.0 485.5 (12.0) 473.6 6.5 480.1 1,859.1
11/3F 483.9 51.2 180.6 107.2 63.0 81.9 1,404.9 1,169.4 70.6 165.0 0.5 1,889.3 474.9 167.2 29.1 82.6 20.0 15.0 3.0 158.0 922.4 95.0 656.0 26.0 145.5 1,397.3 490.5 (5.0) 485.5 6.5 492.0 1,889.3
12/3F 497.9 49.3 180.6 114.0 67.0 87.1 1,463.9 1,228.4 70.6 165.0 0.5 1,962.4 462.5 177.8 29.1 66.5 0.0 15.0 11.5 162.6 986.3 125.0 699.5 16.3 145.5 1,448.8 507.0 0.0 507.0 6.5 513.6 1,962.4
13/3F 512.3 55.1 180.6 117.6 69.1 89.8 1,473.9 1,238.4 70.6 165.0 0.5 1,986.7 498.7 183.4 29.1 57.3 20.0 15.0 26.0 167.8 939.9 105.0 682.2 7.3 145.5 1,438.6 541.6 0.0 541.6 6.5 548.1 1,986.7
14/3F 521.6 54.5 180.6 121.9 71.6 93.1 1,478.9 1,243.4 70.6 165.0 0.5 2,001.0 497.5 190.1 29.1 60.0 0.0 15.0 29.5 173.9 919.9 105.0 662.2 7.3 145.5 1,417.5 577.0 0.0 577.0 6.5 583.6 2,001.0
15/3F 525.5 47.8 180.6 126.4 74.3 96.5 1,478.9 1,243.4 70.6 165.0 0.5 2,004.9 513.0 197.1 29.1 60.0 0.0 15.0 31.5 180.3 869.9 105.0 612.2 7.3 145.5 1,382.9 615.5 0.0 615.5 6.5 622.1 2,004.9
16/3F 557.9 68.9 180.6 131.1 77.0 100.4 1,473.9 1,238.3 70.6 165.1 0.6 2,032.4 477.1 204.4 29.1 0.0 0.0 15.1 41.5 187.0 880.0 105.0 622.3 7.3 145.5 1,357.1 668.5 0.3 668.8 6.5 675.3 2,032.4

(bn) Interest-bearing debt Cash & deposits Interest-bearing debt total (on balance sheet) Net interest-bearing debt total (on balance sheet) Off-balance-sheet leasing debt Unrecognized retirement benefit obligations Adjusted interest-bearing debt total Net adjusted interest-bearing debt 08/3 51.4 767.9 716.5 229.4 44.5 1,041.8 990.4 09/3 59.7 897.2 837.6 196.6 70.0 1,163.8 1,104.2 10/3 13.2 941.7 928.4 183.6 65.0 1,190.3 1,177.0 11/3F 51.2 923.7 872.4 170.2 60.0 1,153.9 1,102.6 12/3F 49.3 951.4 902.1 155.1 55.0 1,161.5 1,112.2 13/3F 55.1 915.9 860.8 150.0 50.0 1,115.9 1,060.8 14/3F 54.5 878.5 824.1 150.0 45.0 1,073.5 1,019.1 15/3F 47.8 828.5 780.8 150.0 40.0 1,018.5 970.8 16/3F 68.9 778.7 709.9 150.0 35.0 963.7 894.9
Note: (1) Adjusted interest-bearing debt total = interest-bearing debt total (on balance sheet) + off-balance-sheet leasing debt + unrecognized retirement benefit obligations. (2) Net adjusted interest-bearing debt = adjusted interest-bearing debt total cash & deposits. Source: Company data, Nomura estimates
Nomura
76
14 June 2010
All Nippon Airways
Makoto Murayama

(bn, except where noted) Financial indicators Shareholders' equity BPS () EBITDA Interest-bearing D/E ratio (x) Adjusted interest-bearing D/E ratio (x) Net adjusted interest-bearing D/E ratio (x) Adjusted interest-bearing debt/EBITDA (x) Net adjusted interest-bearing debt/EBITDA (x) Shareholders' equity to total assets (%) Shareholders' equity/capitalization ratio (%) Operating margin (%) EBITDA margin (%) ROA (FY-avg, %) ROE (FY-avg, %) Interest rate on interest-bearing debt (FY-avg, %) Cash & deposits yield (FY-avg, %)
08/3 453.0 232.6 201.2 1.70 2.30 2.19 5.18 4.92 25.4 30.3 5.7 13.5 5.3 16.3 2.0 2.8
09/3 321.9 166.5 120.5 2.79 3.62 3.43 9.66 9.16 18.3 21.7 0.5 8.7 0.6 (1.0) 1.8 2.8
10/3 473.6 188.9 59.6 1.99 2.51 2.49 19.97 19.74 25.5 28.5 (4.4) 4.9 (2.8) (12.9) 2.0 3.1
11/3F 485.5 193.7 164.0 1.90 2.38 2.27 7.04 6.72 25.7 29.6 3.1 12.1 2.5 1.0 2.0 9.3
12/3F 507.0 202.3 205.5 1.88 2.29 2.19 5.65 5.41 25.8 30.4 5.1 14.2 4.0 3.8 2.0 5.0
13/3F 541.6 216.1 236.5 1.69 2.06 1.96 4.72 4.48 27.3 32.7 6.5 15.9 5.1 8.0 1.9 4.8
14/3F 577.0 230.2 251.5 1.52 1.86 1.77 4.27 4.05 28.8 35.0 7.0 16.3 5.5 8.6 2.0 3.7
15/3F 615.5 245.6 261.5 1.35 1.65 1.58 3.89 3.71 30.7 37.7 7.0 16.3 5.8 8.6 2.1 3.9
16/3F 668.8 266.8 293.5 1.16 1.44 1.34 3.28 3.05 32.9 41.0 8.4 17.7 7.1 10.6 2.2 3.4
Note: (1) ROA = (operating profits + interest & dividend receipts) total assets. (2) EBITDA = operating profits + depreciation.
Nomura
77
14 June 2010
China Eastern Airlines 6 7 0 H K

Maintained
+852 2252 2195 +852 2252 2196
BUY
Source: Nomura
Action
While Singapore Airlines (SIA) has ruled out investing in China Eastern Airlines (CEA), the chairman of CEA continues to look for a strategic partner to come on board within the year. We reiterate our positive view on the shares. CEA is also a beneficiary of recent positive regulatory policies. We reiterate our BUY rating with a lower price target of HK$3.95.
HK$3.28
HK$3.95
(from HK$5.00)
20.4% 7.0% 2,089 12.3%
Catalysts
Possible introduction of strategic partners, Shanghai World Expo. The stock remains positively sensitive to any renminbi appreciation. Anchor themes We see reforms as net positive. Reforms are expected on shareholding structure, airport charges, domestic route operating rights, airport infrastructure levy, jet fuel price, customs tax on aircraft purchases and ticket pricing.
Nomura vs consensus
We are above consensus, mainly on our being more positive on the company as a beneficiary from the Shanghai World Expo.
Lift still coming

Beneficiary of recent government policy moves
CEA is among the beneficiaries of two recent positive government policies: 1) the cancellation of business tax on international routes and regional routes from January 2010 and 2) the easing of restrictions on premium-class fares from 1 June 2010. We estimate these two measures may boost revenue by RMB755mn or net profit by RMB596mn in FY10F. However, we have trimmed our FY10F net profit forecast by 9.9% following a cut in anticipated foreign exchange gains after our economists downward revision of the forecast renminbi appreciation rate to just 2.6% for 2010F from 5.5% previously.

31 Dec (RMBmn)
Revenue Reported net profit Normalised net profit Normalised EPS (RMB) Norm. EPS growth (% ) Norm. P/E (x) EV/EBITDA (x) Price/book (x) Dividend yield (% ) RO E (%) Net debt/equity (% ) Earnings revisions Previous norm. net profit Change from previous (%) Previous norm. EPS (RMB)
FY08
41,073 (15,269) (12,292) (2.53) na na na na 0.0 284.4 -400.5
FY09 FY10F FY11F

38,990 169 278 0.03 na 98.9 9.9 22.3 0.0 (2.8) 3480.6 278 0.03 65,349 2,089 2,089 0.19 537.9 15.3 8.5 2.6 0.0 31.2 455.1 2,319 (9.9) 0.21 72,842 2,760 2,760 0.24 32.1 11.1 8.4 2.0 0.0 20.4 386.5 2,247 22.9 0.20
Strategic investors still pending

Despite SIA essentially ruling out an investment in CEA, the latter companys chairman continues to look to bring in strategic partners this year. Hence, we do not rule out the possibility of other airlines being brought in as strategic partners. Other upcoming positive catalysts are renminbi appreciation and the Shanghai World Expo. We believe CEA will be the largest overall beneficiary of renminbi appreciation on a relative basis. We think the World Expo will lift CEAs passenger volume by 11.8-17.1% this year.

(HK$) 4.9 4.4 3.9 3.4 2.9 2.4 1.9 1.4 Jun09 Aug09
Price Rel MSCI China
240 220 200 180 160 140 120 100 80 Feb10 Apr10 3m 5.8 5.2 12.4
Oct09
Dec 09
PT lowered to HK$3.95 on 1.7x FY11F P/BV, post

strategic investors
We value CEA at HK$3.95 based on 1.7x FY11F P/BV, assuming strategic investors take a 25% stake in CEA at HK$3.80/share. We reiterate our BUY recommendation on: 1) possible reintroduction of foreign strategic partners; 2) anticipated gains from the World Expo; 3) CEA being the largest beneficiary of renminbi appreciation.
Absolute (HK $) Absolute (US $) Relative to Index Market cap (US$mn) Estimated free float (% ) 52-week range (HK$) 3-mth avg daily turnover (US$mn) Stock borrowability Major shareholders (% ) China Eastern Air Holding Co Shanghai Lianhe Investment
1m (13.7) (14.0) (11.2)
6m 8.6 7.9 21.6 4,027 29.5 4.43/1.74 9.39 Hard 59.9 4.5
Nomura
78
14 June 2010
Jim Wong
Drilling down
Beneficiary of recent government policies

Exhibit 142. Change in exchange rate projections vs US$

Renminbi appreciation rate revised down for 2010F and 2011F

2011F 6.10 6.3
2010F 6.45 6.65
6.83 6.83
Exhibit 143. Change in appreciation expectations vs US$

2010F Old RMB forecast appreciation rate (%) New RMB forecast appreciation rate (%)
2011F 5.40 5.30
5.50 2.60
As a result of this forecast change, we revise down our anticipated FX gains for Air China. Nevertheless, we expect the decline in FX gains to be partly mitigated in FY10F by the rise in revenue following the introduction of the two positive policy measures, and will be fully mitigated in FY11F earnings. According to the announcement made by the Ministry of Finance on 5 May 2010, the Notice Concerning Exemption of Business Tax on the Provision of International Transport Services (Cai Shui [2010] No. 8) was jointly issued by the Ministry of Finance and the State Administration of Taxation (the Notice). Pursuant to the Notice, it is provided that since 1 January 2010, entities or individuals within the Peoples Republic of China providing international transport services shall be exempt from the business tax. Recall: prior to the announcement, all Chinese airlines needed to pay business tax of approximately 3% for all traffic revenue (including domestic, regional and international routes). As the exemption from business tax applies to international routes and regional routes traffic revenue, Air China should be the largest beneficiary for its leading exposure to these two regions, while China Southern Airlines would be the lagging beneficiary, and CEA would be in the middle, in our opinion. On 7 May, 2010, China Eastern Airlines announced that the company (CEA only) would benefit from a reduction in business tax and additional expenses of about RMB171mn in FY09 should the policy take effect in 2009. We estimate that CEA can pay RMB566mn less in taxes; this compares with Air Chinas estimated tax saving of RMB742mn, and China Southern Airlines possible tax savings of RMB262mn. Furthermore, on 22 May 2010, the National Development and Reform Commission (NDRC) announced that Chinese airlines will be able to set their own premium-class fares on domestic routes effective 1 June 2010. Currently, first-class fares are set at 150% of the economy class fare, and business class fares are set at 130% of the economy class fare. Again, we see Air China as the largest beneficiary as it has a higher proportion of revenue coming from premium-class fares, at an estimated 8%, vs an estimated 5-6% for China Southern and China Eastern. Management of CEA has yet to decide if it will increase ticket prices. However, if we assume 6% of total domestic revenue comes from premium class and an average fare hike of 20%, we estimate CEA can fetch additional revenue of RMB189mn (or net profit of RMB149mn) in 2H10.
The negative impact from the slide in renminbi appreciation rate will be mitigated by revenue rise
Exemption of business tax on international and regional routes
Easing premium-class fares of restriction on premiumpricing restriction class fare pricing
Nomura
79
14 June 2010
Jim Wong
Combining the two positive policies and renminbi appreciation rate changes, we revise down our FY10 net profit forecast by 9.9%, but revise up FY11F net profit by 22.9%.
We cut our FY10F net profit, but increase FY11F net profit

(RMBmn) Old net profit forecast Add saving from exemption of business tax Add additional revenue from fares adjustment Change in RMB appreciation rate New net profit forecast
FY10F 2,319 447 149 (826) 2,089
FY11F 2,247 496 337 (320) 2,760
Strategic investors still on horizon

We note that SIA said during its recent analyst meeting on 24 May 2010, that investment in China Eastern Airlines is now unlikely since CEA chose to join Skyteam while Singapore Airlines is a member of Star Alliance. Nevertheless, we note that on the same day as SIAs comments, the chairman of CEA reiterated the company is seeking strategic investors within the year (source: Sing Tao Daily, 24 May 2010). So, we do not rule out the possibility that CEA will introduce other airlines as strategic partners. Recall: management at CEA reaffirmed at its analysts meeting (on 21 April 2010) that the company is looking to bring in as a strategic investor an airline with good brand name recognition and one that is strong in long-haul routes and can help CEA develop its own long-haul routes. If SIA is not interested, CEA does not rule out the possibility of another airline coming in. Given what SIA has said, we believe Skyteam members may have a better chance of coming in as partners. We note that within the Skyteam members, Aeroflot and Air France have the most financial strength, with net gearing ratio below 130% as of their latest financial reports.
Not partnering with SIA, but still looking for a partner
Exhibit 145. Comparison of net gearing ratios

Airlines Aeroflot (AFLT RX) Air France (AF FP) Kenya Airways (KNAL LN) China Southern Airlines (1055 HK) Korean Air (003490 KS) Continental Airlines (CAL US) Delta Airlines (DAL US) Alitalia (Unlisted) CSA Czech Airlines (Unlisted) KLM (Unlisted) Northwest Airlines (Unlisted) Air Europa (Unlisted)
* Nomura estimates post capital injection. Source: Bloomberg, Nomura research
Net gearing (%) 112 (as Dec 2008) 127 (as Mar 2010) 173 (as Mar 2009) 210* (as Dec 2010) 356 (as Dec 2009) 578 (as Dec 2009) 5,110 (as Dec 2009) Unlisted Unlisted Merged with Air France Acquired by Delta Air Unlisted
Nomura
80
14 June 2010
Jim Wong
Assuming that a strategic investor takes a 25% stake in CEA via new shares, CEAs parent and Shanghai government entities would still hold a 52.9% stake in CEA.
Exhibit 146. CEAs shareholding structure post acquisition of Shanghai Airlines

% of total shares CEA (Group) A-shares CEA (Group) H-shares Shanghai Lianhe Investment Bank of China (Group) Investment Jinjiang International Shanghai Foreign Economic Relations and Trade Shanghai Textile (Group) Shanghai Light Industry Co for Foreign Economic Public A-shares Public H-shares Air Chinas parent co H-shares Total
Chinese governments stake in CEA would drop to 52.9% if a strategic investor takes a 25% stake
42.8 17.1 4.5 1.7 3.6 0.5 0.2 0.2 15.6 12.1 1.7 100.0
We note that while previously Air China voted down the CEA-Singapore Airlines deal in 2007 with its 12.1% H-share holding, this time around we see that Air Chinas stake in CEA has been diluted to only 1.7% of total shares, or 5.4% of H-shares. Hence, Air Chinas say in a CEA deal is now substantially diluted and its support for such a deal is no longer a prerequisite. We note, however, that a strategic stake in CEA may not come cheap. As CEAs issued shares have now expanded to 11,277mn shares (after issuing shares to the government for capital injections), from 4,867mn previously, assuming that the strategic shareholder pays HK$3.80/share (SIAs bid price in CEA in 2007) for a 25% stake in CEA consisting of new shares, the strategic investor would need to pay HK$12.54bn (or US$1.61bn). This would be 75% higher than the HK$7.18bn (or US$0.92bn) that SIA and Temasek were to have paid for their 24% stake at HK$3.80 per CEA share back in 2007.
Exhibit 147. Sensitivity analysis of CEAs book value and price target to the pricing of strategic investors stake
Total proceeds from strategic investors (HK$mn) 6,600 8,250 9,900 12,540 13,200 14,850 16,500 Book value post strategic investors (RMB/shr) 1.43 1.54 1.65 1.83 1.87 1.98 2.09 Price target (HK$/shr) 3.10 3.33 3.57 3.95 4.04 4.28 4.52
Selling price (HK$/shr) 2.0 2.5 3.0 3.8 4.0 4.5 5.0
Nomura
81
14 June 2010
Jim Wong
As for CEA, should a strategic investor inject capital at HK$3.80/share (a 25% stake), we estimate the airlines book value would rise an estimated 52% to RMB1.64/share from RMB1.08/share in FY10F, or by 39% to RMB1.83/share from RMB1.32/share in FY11F. Some investors may be concerned that another airline coming in may be less likely given the rejection of SIA. Nevertheless, we note that the chairman of CEA indicated that financial investors are welcome (source: Sing Tao Daily, 24 May 2010); hence, we also dont rule out the possibility that CEA may finally place A-share shares to A-share financial investors to relieve financial pressure. Should this be the case, the price on the new shares would be higher than our current assumption of HK$3.80/share, since CEAs A-shares are trading at RMB7.72/share. Other positive catalysts include: 1) Possible beneficiary from renminbi appreciation. We estimate that for every 1% renminbi appreciation, CEAs book value would increase 2.4% and its EPS, by 13.8% (or net profit up RMB287mn), China Southern Airs book may gain 1.7% (after a capital injection of RMB10.75bn) and EPS by 22.5% (or a net profit enhancement of RMB399mn), and Air Chinas book would rise 1.0% and EPS, by 5.3% (or a net profit enhancement of RMB380mn). 2) the World Expo may boost CEAs passenger volume by 11.8-17.1% in 2010.
Shanghai World Expo may add passenger volume by up to 17%

According to management estimates, 11-16mn visitors will fly to Shanghai during the World Expo. CEA has increased its fleet in Shanghai by more than 20 aircraft this year, taking the total planes based in Shanghai to 108. The total number of weekly flights has increased by 300, which should boost passenger throughput by 5mn pa (management estimates). Management expects the Shanghai World Expo to contribute not less than RMB4bn in total revenue to the group this year. This would add an estimated 10% to CEAs FY09 total revenue. Nevertheless, we think the estimate of a positive passenger contribution should assuage investor concerns on traffic restrictions during the World Expo. We note that some investors have been concerned that the government may put in place traffic restrictions during the World Expo similar to those for the Beijing Olympic Games in 2008, which caused a traffic decline, not a boost. We believe that, this time around, the traffic restrictions will be more lenient, as the Shanghai World Expo lasts longer (from 1 May to 31 October, 2010) compared with the Olympics, which ran for less than a month (8 August to 24 August, 2008). Also, the Olympic Games are generally seen as more political and the World Expo more commercial, which, again, may result in more lenient traffic restrictions. On the basis of managements estimate of 11-16mn passengers for the World Expo, and CEAs market share of 47% (inclusive of Shanghai Airlines), the World Expo could add 5.17mn-7.52mn passengers to CEA in FY10F. We estimate this could translate to a rise of 11.8-17.1% in CEAs passenger volume in FY10F. Given the uncertainty over the impact of security measures, we have factored into our model a 3.6% rise in passenger volume from the World Expo. We are currently looking for overall RPK to be up by 45% y-y in FY10F (partly due to the consolidation effect from Shanghai Airlines).
Traffic restrictions may well be more lenient for the World Expo compared with the Olympics
Possible passenger volume boost of up to 17%
1Q10 higher, operating statistics continue to see solid growth

The 1Q10 results (based on PRC accounting standards) came in at net profit of RMB770mn, up 18x from the same period last year. Stripping out oil hedging write-backs and other disposal gains, we estimate core earnings to be net profit of RMB299mn in 1Q10, a significant turnaround from net losses of RMB1,209mn in 1Q09, likely due to the strong traffic growth as well as ticket price increases, which drove the surge in revenue.
Core earnings swing back to profit of RMB299mn in 1Q10
Nomura
82
14 June 2010
Jim Wong
Exhibit 148. Financial summary

(RMBbn) Revenue from main operations Main operation cost Business taxes and additional Profit from main operations Operating expenses General & admin expenses Financial expenses Profit from operation Investment income Asset revaluation Non-operating income Non-operating expenses Profit before taxation Tax MI Net profit Core earnings
Note: Based on PRC accounting standard. Source: Company data, Nomura research
1Q09 8,946 (8,423) (219) 304 (595) (305) (684) (1,281) 14 417 877 (3) 24 (13) 29 40 (1209)
1Q10 15,569 (12,962) (377) 2,230 (1,074) (471) (389) 297 1 455 63 (4) 812 (25) (17) 770 299
y-y chg (%) 74 53.9 72.1 633.6 80.5 54.4 (43.1) na (92.9) 9.1 (92.8) 33.3 3,283.3 92.3 na 1,825.0 na
Furthermore, recent traffic operating statistics and yields continue to see solid growth.

Domestic routes CSA Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 2009 Jan&Feb-10 Mar-10 Apr-10 16.6 9.7 9.3 5.9 11.8 21.9 15.1 33.3 8.5 10.2 13.3 17.4 14.3 12.5 22.6 17.5 Air China 22.4 18.5 16.0 16.0 20.1 19.4 22.9 42.5 11.4 15.7 16.3 12.5 19.3 9.4 18.3 16.4 CEA 20.3 26.8 25.9 24.5 31.2 34.2 29.4 57.5 19.9 19.6 12.2 9.7 25.5 46.9 44.5 34.5 International + regional CSA (14.8) (27.6) (17.3) (15.5) (19.5) (14.0) (0.7) 20.8 20.7 19.2 20.9 25.4 (1.7) 40.5 45.6 38.8 Air China (3.1) (9.5) (8.3) (6.8) (8.1) (11.0) 1.5 12.4 11.4 5.1 8.4 18.1 0.7 17.1 24.6 16.7 CEA (14.0) (33.3) (22.2) (18.4) (24.8) (20.6) (5.0) 17.9 6.7 0.6 (2.1) 6.9 (10.1) 40.2 48.5 40.1 CSA 11.0 3.3 4.8 2.2 6.5 16.2 13.0 31.4 10.0 11.4 14.3 18.6 11.8 16.0 25.6 20.4 Overall Air China 10.4 6.2 4.9 4.8 7.0 5.3 13.8 29.0 11.4 11.3 13.0 14.9 11.1 12.4 20.8 16.5 CEA 6.5 3.0 8.6 8.8 10.8 15.1 18.4 44.4 16.0 13.8 7.9 8.8 13.3 45.0 45.6 36.1
Note: CEA consolidated with Shanghai Airlines from January 2010. Source: Company data, Nomura research
Nomura
83
14 June 2010
Jim Wong
Index Domestic 1/2009 2/2009 3/2009 4/2009 5/2009 6/2009 7/2009 8/2009 9/2009 10/2009 11/2009 12/2009 1/2010 2/2010 3/2010 4/2010 96.700 88.200 94.700 101.000 78.700 89.200 110.900 108.400 101.500 98.700 98.100 92.100 99.100 99.700 103.200 112.300 Regional International 101.900 86.500 88.800 89.200 88.200 86.200 84.600 85.500 99.800 89.700 96.900 97.100 101.700 103.900 101.600 104.400 115.400 102.600 99.500 111.100 106.500 107.700 113.100 131.600 140.300 133.800 127.200 128.500 125.200 129.200 127.000 154.600 Domestic (4.3) (12.8) 2.6 3.2 (12.3) 10.8 15.9 28.0 9.6 2.5 21.0 17.3 2.5 13.0 9.0 11.2 y-y chg (%) Regional International (6.1) (19.9) (15.4) (13.6) (13.4) (15.7) (21.2) (13.4) (9.4) (10.7) (3.5) (3.0) (0.2) 20.1 14.4 17.0 (4.5) (17.1) (18.1) (10.9) (17.1) (13.8) (11.4) 2.0 4.9 9.4 9.3 18.0 8.5 25.9 27.6 39.2
Exhibit 151. Breakdown of net profit

FY07 Reported net profit Disposal/exceptional Foreign exchange gains Oil hedging Core earnings 379 (227) 2,044 84 (1,522) FY08 (15,269) (2,710) 1,971 (6,401) (8,129) FY09 169 722 95 3,775 (4,423) FY10F 2,089 0 1,099 1,052 (62) FY11F 2,760 0 2,097 0 664
Price target of HK$3.95 based on 1.7x FY11F P/BV, post strategic investors
Given the reduced possibility that SIA will invest in CEA, we cut our price target to HK$3.95 from HK$5.00 after lowering our two assumptions on valuation: 1) Lowering valuation multiple to 1.7x (average of Air China and China Southern Airlines mid-cycle valuation) from 2.0x (on par with Air Chinas mid-cycle valuation), as investors may not be willing to pay 2.0x after realising that SIA will not become a strategic investor. Lowering selling price of CEA to new potential strategic investors to HK$3.80/share from HK$4.30/share given recent share price consolidation and the reduced likelihood of another airline paying more than SIAs intended price in 2007.
Fair value at HK$3.95 based on 1.7x FY11F P/BV, post strategic investors
2)
We value CEA at HK$3.95 based on 1.7x FY11F P/BV, after assuming strategic investors would take a 25% stake in CEA at HK$3.80/share. Our previous price target of HK$5.00 was based on 2.0x FY11F P/BV, after assuming strategic investors would take a 25% stake in CEA at HK$4.30/share. Nevertheless, we note that the chairman of CEA told the Sing Tao Daily on 24 May that financial investors are also welcome. Hence, CEA may issue A-shares to domestic financial investors. In this case the selling price could be much higher than our assumption of HK$3.80. Note that the A-shares are trading at RMB7.72.
Nomura
84
14 June 2010
Jim Wong
Goodwill of Shanghai Airlines acquisition a swing factor to book value, more on upside risks
We note that as per CEAs 1Q10 report, the book value of CEA as at end-1Q10 was just RMB0.19/share, far below our expectation of full-year of RMB1.08/share. The discrepancy was mainly due to the lack of Shanghai Airlines acquisition goodwill in 1Q10. Management of CEA stated in its 1Q10 report that the company was still studying the goodwill of Shanghai Airlines acquisition, and that the amount will be disclosed in the interim report. Here, note that the amount of goodwill could change CEAs book value significantly, depending on how management calculates the consideration of Shanghai Airlines acquisition price. Recall that CEA announced it would acquire Shanghai Airlines through a share swap with a ratio of one Shanghai Airlines share for 1.3 CEA shares. Hence, the total number of shares issued for acquiring Shanghai Airlines will be 1,695mn. If shareholders do not want to own new CEA shares, they can choose to accept a cash payment at RMB5.50/share for Shanghai Airlines shareholders, RMB5.28/share for old CEA A-shareholders, and HK$1.56/share for old CEA Hshareholders. Depending on the date of the share price of CEA and which type of shares (A- or H-shares) are used for calculation, the consideration for Shanghai Airlines acquisition will be very different. Given that the shares issued to Shanghai Airlines shareholders were CEAs A-shares, we believe it is more appropriate to use CEAs A-share share price for calculation. If we use RMB5.28/share (the cash offer price), the total consideration will be RMB8,950mn. If we use RMB5.33/share (last trading price before announcement of the acquisition) for the calculation, the total consideration will be RMB9,034mn. If we use a share price of RMB6.52 (as at 28 January 2010, the completion date of acquisition of Shanghai Airlines), the total consideration will be RMB11,051mn. We have modelled in a consideration of RMB8,950mn. We believe the risk to our book value could be on the upside.
Goodwill for acquisition of Shanghai Airlines has yet to be determined by management
Exhibit 152. Book value sensitivity to Shanghai Airlines goodwill

Share price (RMB) 5.28 5.33 6.52
Consideration of acquisition (RMBmn) 8,950 9,034 11,051
Book value (RMB/shr) 1.08 1.09 1.26
% to our base case Base case 0.9 16.7
Risk to our book value could be on the upside

The main risks we see to our price target for CEA are passenger throughput growth, passenger yield growth, currency movements and oil prices differing from our estimates.
Nomura
85
14 June 2010
Jim Wong
FY07 42,534 (38,487) 4,047 (3,692) 355 5,075 (4,720) 355 (1,941) 88 2,103 605 (24) 582 24 606 (227) 379 379
FY08 41,073 (49,256) (8,183) (3,923) (12,107) (7,325) (4,782) (12,107) (2,248) 94 1,981 (12,279) (74) (12,353) 61 (12,292) (2,977) (15,269) (15,269)
FY09 38,990 (33,307) 5,683 (3,752) 1,931 7,134 (5,203) 1,931 (1,645) (23) 95 359 (53) 306 (28) 278 (109) 169 169
FY10F 65,349 (56,902) 8,448 (5,072) 3,376 9,843 (6,466) 3,376 (2,305) (15) 1,393 2,449 (313) 2,136 (47) 2,089 2,089 2,089
FY11F 72,842 (64,230) 8,611 (5,345) 3,267 10,202 (6,935) 3,267 (2,597) (20) 2,657 3,308 (473) 2,835 (75) 2,760 2,760 2,760
Assuming consolidation of Shanghai Airlines starting from FY10F
Resumption of renminbi appreciation
25.5 30.8 40.9 18.4 6.3 14.9 173.1 9.5 11.9 0.8 0.9 3.9 5.3 0.5 14.6 0.7
na na na 127.3 na na na (19.9) (17.8) (29.5) (37.2) na na 6.0 0.5 284.4 (17.7)
98.9 119.1 162.9 21.7 22.3 9.9 36.9 14.6 18.3 5.0 0.4 14.6 19.5 1.5 (2.8) 2.7
15.3 18.4 15.3 5.3 2.6 8.5 24.8 12.9 15.1 5.2 3.2 12.8 13.8 1.4 31.2 3.9
11.1 13.4 11.1 3.8 2.0 8.4 26.3 11.8 14.0 4.5 3.8 14.3 12.4 1.3 20.4 3.1
13.0 92.2 na na na
(3.4) (244.3) (3,509.4) (2,128.3) (2,128.3)
(5.1) na na na na
67.6 38.0 74.9 537.9 537.9
11.5 3.7 (3.2) 32.1 32.1
0.08 0.12 0.12 0.49 -
(3.14) (2.53) (2.53) (2.69) -
0.02 0.03 0.03 0.13 -
0.19 0.19 0.19 1.08 -
0.24 0.24 0.24 1.32 -
Nomura
86
14 June 2010
Jim Wong
FY07 5,075 (1,070) (3,165) 840 (2,265) (1,425) (199) (92) 1,529 723 (1,452) (917) (46) (132) 763 585 (332) 1,987 1,655 44,661
FY08 (7,325) 11,766 (4,327) 114 (2,471) (2,357) (405) (437) 31 711 1,646 (811) (53) 2,283 377 2,607 1,796 1,655 3,451 52,459
FY09 7,134 (2,552) (3,314) 1,268 (7,613) (6,344) 247 1,346 62 (1,278) (5,968) (44) 14,056 (11,113) 1,353 4,252 (1,716) 3,451 1,735 42,970
FY10F 9,843 2,788 (6,590) 6,040 (9,000) (2,960) (207) (4,004) 1,616 645 (4,910) (1,603) 6,619 5,015 105 1,735 1,840 55,338
FY11F 10,202 1,937 (4,080) 8,059 (9,000) (941) (134) (975) 505 (1,347) (2,891) 5,842 (1,059) 4,784 1,892 1,840 3,733 57,670
Capital injection from parent
FY07 1,655 2,096 1,125 4,916 9,792 938 47,270 1,245 8,496 67,741 21,040 3,138 11,712 35,890 25,276 3,642 64,809 572 4,867 (2,935) 429 2,361 67,741
FY08 3,451 1,147 871 4,931 10,400 1,343 52,678 165 8,466 73,052 28,430 5,145 20,283 53,858 27,480 4,353 85,691 458 4,867 (18,204) 239 (13,097) 73,052
FY09 1,735 1,371 932 2,825 6,863 1,096 56,704 70 7,119 71,851 14,456 6,480 14,575 35,511 30,250 4,415 70,175 442 9,582 (18,035) 9,688 1,235 71,851
FY10F 1,840 2,428 1,480 4,174 9,922 1,303 71,763 8,609 11,123 102,720 21,051 8,923 17,874 47,847 36,128 6,031 90,006 554 11,277 (15,946) 16,830 12,160 102,720
FY11F 3,733 2,706 1,632 4,659 12,729 1,437 78,683 8,177 12,098 113,124 23,392 9,873 19,775 53,040 38,010 6,536 97,586 617 11,277 (13,186) 16,830 14,921 113,124
Goodwill from acquisition of Shanghai Airlines
Book value turns positive in FY10F
0.27 0.2
0.19 (5.4)
0.19 1.2
0.21 1.5
0.24 1.3
8.80 1,891.9
na (400.5)
6.02 3,480.6
5.62 455.1
5.65 386.5
17.6 11.0 38.7 (10.1)
14.4 7.4 30.8 (8.9)
11.8 9.9 63.7 (42.0)
10.6 7.7 49.4 (31.1)
12.9 8.8 53.4 (31.7)
Nomura
87
14 June 2010
China Southern Airlines 1 0 5 5 H K

From Reduce
+852 2252 2195 +852 2252 2196
NEUTRAL
Action
Compared to its peers, China Southern Airlines (CSA) has felt the greatest impact of the slow pace of renminbi appreciation and is likely to benefit least from recent government policies. Possible competition from railways and Air Chinas aggressive expansion into CSAs southern hub are likely to cap earnings growth beyond 2010. Given the share price has consolidated below our PT, we upgrade to NEUTRAL.
Source: Nomura
HK$3.23
HK$3.61
(from HK$3.78)
11.8% -13.4% 1,772 -10.9%
Catalysts
We believe that the share price may resume momentum should renminbi appreciation expectations return. Anchor themes We see reforms as net positive. Reforms are expected on shareholding structure, airport charges, domestic route operating rights, airport infrastructure levy, jet fuel price, customs tax on aircraft purchases and ticket pricing.
Nomura vs consensus
We are below consensus mainly on our lower RMB appreciation rate assumptions. We factor in a 2.6% rise in 2010F compared to market consensus of 3-5%.
Greatest impact from slower RMB appreciation

Greatest impact from RMB; benefits least from recent
positive policies
Compared to its peers, CSA has felt the greatest impact of the slow pace of renminbi appreciation and is likely to benefit least from recent government policies: 1) cancellation of business tax on international routes and regional routes from January 2010; and 2) the easing of restrictions on premium-class fares from 1 June 2010. We revise down our net profit estimates significantly for 2010 by 52.5%, but revise up 2011F net profit by 28.9% after factoring in a lower renminbi appreciation rate and the impact from recent government policies.

31 Dec (RMBmn)
Revenue Reported net profit Normalised net profit Normalised EPS (RMB) Norm. EPS growth (%) Norm. P/E (x) EV/EBITDA (x) Price/book (x) Dividend yield (%) ROE (%) Net debt/equity (%) Earnings revisions Previous norm. net profit Change from previous (%) Previous norm. EPS (RMB)
FY08
55,288 (4,823) (5,003) (0.76) (416.0) na na 2.6 0.0 (51.1) 710.7
FY09 FY10F FY11F

54,802 330 330 0.05 na 60.1 13.4 2.2 0.0 3.8 524.6 330 0.047 67,783 1,772 666 0.07 58.2 37.9 9.2 1.2 0.0 10.7 220.0 1,402 (52.5) 0.155 76,934 1,802 1,802 0.18 142.5 15.0 9.4 1.1 0.0 7.6 234.7 1,398 28.9 0.139
1Q back to black, management bullish on 2Q-3Q

CSAs 1Q 2010 results came in at a net profit of RMB1,419mn, up 539% y-y, driven mainly by a one-off disposal gain of RMB1,106mn. We estimate core earnings net profit of RMB300mn, from net losses in the past five years. Management is also bullish on 2Q and 3Q 2010.

(HK$) 4.7 4.2 3.7 3.2 2.7 2.2 1.7 Jun09 Aug09 Dec09 Feb10 Oct09 Apr10
Price R el MSCI China
180 160 140 120 100 80
RMB catalyst may come later

With recent confirmation of the capital injection in CSA by the central government and other A-share investors, the remaining positive catalyst on the counter will likely be appreciation of the renminbi. However, with our reduced appreciation expectations, we believe this catalyst may come later. We expect CSAs core earnings to be impacted by high-speed railways as well as competition from Air China following Air Chinas acquisition of Shenzhen Airlines. CSAs share price has moved below our price target, therefore, we upgrade the counter to NEUTRAL with a revised price target of HK$3.61 based on mid-cycle valuation of 1.2x P/BV.
Absolute (HK$) Absolute (US$) Relative to Index Market cap (US$mn) Estimated free float (%) 52-week range (HK$) 3-mth avg daily turnover (US$mn) Stock borrowability Major shareholders (%) China Southern Air Holding Company
1m (12.7) (13.0) (10.3)
3m 8.4 7.8 15.0
6m 19.2 18.4 32.1 3,312 40.7 4.09/1.96 12.35 Hard 59.3
Nomura
88
14 June 2010
Shirley Lam
Drilling down
Greatest impact from RMB; benefits least from recent positive policies
Exhibit 153. Change in exchange rate projections vs US$

2010F 6.45 6.65
2011F 6.10 6.3
RMB appreciation rate revised down for 2010F and 2011F
6.83 6.83
Exhibit 154. Change in appreciation expectations vs US$

2010F Old RMB forecast appreciation rate (%) New RMB forecast appreciation rate (%)
2011F 5.40 5.30
5.50 2.60
As a result of this forecast change, we revise down our anticipated FX gains for CSA substantially. Nevertheless, we expect the decline in FX gains to be partly mitigated by improvement in traffic revenues following the introduction of the two positive policy measures, and will be fully mitigated in FY11F earnings According to the announcement made by the Ministry of Finance on 5 May 2010, the Notice Concerning Exemption of Business Tax on the Provision of International Transport Services (Cai Shui [2010] No. 8) was jointly issued by the Ministry of Finance and the State Administration of Taxation (the Notice). Pursuant to the Notice, it is provided that since 1 January 2010, entities or individuals within the Peoples Republic of China providing international transport services shall be exempt from business tax. Recall, prior to the announcement, all Chinese airlines were subject to business tax of approximately 3% for all traffic revenues (including domestic, regional and international routes). As the exemption from business tax applies to international routes and regional routes traffic revenues, CSA is likely to see the least benefit since it has the lowest exposure among its peers to such routes. CSA announced on 7 May 2010 that the company would benefit from a reduction of business tax and additional expenses of approximately RMB113mn in 2009 should the policy take effect in 2009. We estimate CSA can save tax of RMB262mn in 2010, and this compares to Air Chinas possible tax saving of RMB742mn, and CEAs RMB566mn, according to our estimates. Furthermore, on 22 May 2010, the National Development and Reform Commission (NDRC) announced that Chinese airlines will be able to set their own premium-class fares on domestic routes effective 1 June 2010. Currently, first-class fares are set at 150% of the economy class fare, and business class fares are set at 130% of the economy class fare. While we have checked with management of CSA, the company told us it has yet to decide whether it will change the fares. Nevertheless, we note that revenue from premium class accounts for only 5-6% of total domestic revenue for CSA; hence the impact of a substantial increase in premium-class fares would not have much impact on CSAs bottom line. Assuming a 20% increase (lower than Air Chinas average 24% hike) on premium-class fares, we estimate CSA would likely generate additional revenue of RMB259mn (or net profit of RMB205mn) in 2010.
The negative impact from the slide in renminbi appreciation rate will be mitigated by revenue rise
Exemption of business tax on international and regional routes
Easing of restriction on premiumclass fare pricing
Nomura
89
14 June 2010
Shirley Lam
After incorporating the aforesaid changes, we revise down 2010F reported net profit by 29.3%, but revised up our 2011 net profit forecast by 28.9%.
We cut our FY10F net profit, but increase FY11F net profit

(RMBmn) Old net profit forecast Add saving from exemption of business tax Add additional revenue from fares adjustment Change in RMB appreciation rate New net profit forecast
2010F 2,508 207 205 (1,148) 1,772
2011F 1,398 246 441 (260) 1,802
1Q back to black, management bullish on 2Q-3Q

CSAs 1Q10 results came in at net profit of RMB1,419mn, up 539% y-y, driven mainly by a one-off disposal gain of RMB1,106mn from the stake sale of its Zhuhai maintenance unit to its parent company. Stripping out the disposal gain and changes in the fair value of financial instruments (RMB13mn in 1Q10), core earnings were estimated to be at net profit of RMB300mn, up significantly from net losses of RMB868mn in 1Q09, due mainly to the high growth rate in revenue from main operations, which recorded a jump of 31% y-y on the back of substantial air traffic recovery. We note that overall RPK was up 19.3% y-y in 1Q10, while the passenger load factor improved by 2.0ppt to 78%.
1Q10 net profit driven by disposal gain of RMB1,106mn

(RMBmn) Revenue from main operations Business taxes and additional Main operation cost Profit from main operations Operating expenses General and administration expenses Financial expenses Profit from operation Investment income Change in fair value of financial instruments Non-operating income Non-operating expenses Profit before taxation Tax MI Net profit Core earnings
Note: Based on PRC accounting standard. Source: Company data, Nomura research
1Q10 16,877 (451) (14,163) 2,263 (1,148) (451) (300) 364 1,106 13 221 (3) 1,701 (216) (66) 1,419 300
1Q09 12,932 (358) (11,548) 1,026 (976) (416) (408) (774) 8 74 1,072 (2) 378 (60) (96) 222 (868)
Chg (%) 31 26 23 121 18 8 (26) na 13,725 (82) (79) 50 350 260 (31) 539 (135)
Management believes 2Q-3Q will be even better, especially with the help of the Shanghai World Expo, which will last from 1 May to 30 October 2010. Traffic may continue to outperform demand. We have already modelled in overall RPK growth of 16.5% and an increase of 2.3ppt on passenger load factor to 77.6% in FY2010F.
Nomura
90
14 June 2010
Shirley Lam

Domestic routes CSA Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 CY2009 Jan & Feb-10 Mar-10 Apr-10 16.6 9.7 9.3 5.9 11.8 21.9 15.1 33.3 8.5 10.2 13.3 17.4 14.3 12.5 22.6 17.5 Air China 22.4 18.5 16.0 16.0 20.1 19.4 22.9 42.5 11.4 15.7 16.3 12.5 19.3 9.4 18.3 16.4 CEA 20.3 26.8 25.9 24.5 31.2 34.2 29.4 57.5 19.9 19.6 12.2 9.7 25.5 46.9 44.5 34.5 International + regional CSA (14.8) (27.6) (17.3) (15.5) (19.5) (14.0) (0.7) 20.8 20.7 19.2 20.9 25.4 (1.7) 40.5 45.6 38.8 Air China (3.1) (9.5) (8.3) (6.8) (8.1) (11.0) 1.5 12.4 11.4 5.1 8.4 18.1 0.7 17.1 24.6 16.7 CEA (14.0) (33.3) (22.2) (18.4) (24.8) (20.6) (5.0) 17.9 6.7 0.6 (2.1) 6.9 (10.1) 40.2 48.5 40.1 CSA 11.0 3.3 4.8 2.2 6.5 16.2 13.0 31.4 10.0 11.4 14.3 18.6 11.8 16.0 25.6 20.4 Overall Air China 10.4 6.2 4.9 4.8 7.0 5.3 13.8 29.0 11.4 11.3 13.0 14.9 11.1 12.4 20.8 16.5 CEA 6.5 3.0 8.6 8.8 10.8 15.1 18.4 44.4 16.0 13.8 7.9 8.8 13.3 45.0 45.6 36.1
Note: CEA consolidated with Shanghai Airlines starting from January 2010. Source: Company data, Nomura research
Management also indicated that both net passenger yields and cargo yields have registered double-digit growth y-y in 1Q10, and management expects that yields in 2010 may not be too bad. We therefore revise up international routes net passenger yield to a 10% rise from previously flat.
Net yields were up by double digits in 1Q10
Index Domestic 1/2009 2/2009 3/2009 4/2009 5/2009 6/2009 7/2009 8/2009 9/2009 10/2009 11/2009 12/2009 1/2010 2/2010 3/2010 4/2010 96.700 88.200 94.700 101.000 78.700 89.200 110.900 108.400 101.500 98.700 98.100 92.100 99.100 99.700 103.200 112.300 Regional 101.900 86.500 88.800 89.200 88.200 86.200 84.600 85.500 99.800 89.700 96.900 97.100 101.700 103.900 101.600 104.400 International 115.400 102.600 99.500 111.100 106.500 107.700 113.100 131.600 140.300 133.800 127.200 128.500 125.200 129.200 127.000 154.600 Domestic (4.3) (12.8) 2.6 3.2 (12.3) 10.8 15.9 28.0 9.6 2.5 21.0 17.3 2.5 13.0 9.0 11.2 y-y chg % Regional (6.1) (19.9) (15.4) (13.6) (13.4) (15.7) (21.2) (13.4) (9.4) (10.7) (3.5) (3.0) (0.2) 20.1 14.4 17.0 International (4.5) (17.1) (18.1) (10.9) (17.1) (13.8) (11.4) 2.0 4.9 9.4 9.3 18.0 8.5 25.9 27.6 39.2
Nevertheless, we are cautious on 4Q10 (which is traditionally the weak quarter); we expect that the strong traffic growth could slowdown in the second half when the base gets harder.
Nomura
91
14 June 2010
Shirley Lam
Exhibit 159. Detailed breakdown of earnings

Reported net profit Disposal & others Oil hedging Exchange gains/losses Core earnings 2007 1,697 114 90 2,832 (1,339) 2008 (4,823) (1,704) (124) 2,592 (5,587) 2009 330 1,952 45 93 (1,760) 2010F 1,772 1,106 0 1,032 (366) 2011F 1,802 0 0 2,379 (577)
Core earnings are expected to remain as net losses in FY10F and FY11F
RMB catalyst may come later

With the recent confirmation of the capital injection of RMB10.75bn into CSA by the central government and other A-share investors, the remaining positive catalyst on the counter, in our view, is likely to be appreciation in the renminbi. However, with reduced appreciation expectations, based on our economics teams research, we believe that positive catalysts from RMB appreciation may come later. On the other hand, competition from railways, as well as Air Chinas aggressive expansion into CSAs main hub of southern China may cap CSAs earnings growth beyond 2010. To combat competition from high-speed railways, management plans to shift more capacity to international routes, Hainan province and the western part of China (i.e., Xinjiang). Management targets to have the contribution from international routes increase to 30%, from currently less than 20%, within two to three years. Furthermore, CSA has no exposure to oil hedging; hence, it is more sensitive to the movement of oil prices than its peers
Lack of near-term positive catalysts
Exhibit 160. Sensitivity analysis for every US$1/bbl crude oil price hike
EPS (%) Air China CSA CEA
BVPS (%) 0.2 (0.2) 0.4
Net profit (RMBmn) 92 (44) 47
1.3 (2.5) 2.2
Valuation methodology
We upgrade our rating on CSA to NEUTRAL from Reduce with a revised price target of HK$3.61 (from HK$3.78) based on 1.2x 2011F P/BV (mid-cycle valuation).
Price target at HK$3.61

The main risks we see to our price target for CSA are passenger throughput growth, passenger yield growth, currency movements and oil prices differing from our estimates.
Nomura
92
14 June 2010
Shirley Lam
FY07 54,401 (47,439) 6,962 (5,517) 1,445 6,999 (5,554) 1,445 (2,218) 180 3,228 2,635 (858) 1,777 (194) 1,583 114 1,697 1,697
FY08 55,288 (54,094) 1,194 (7,673) (6,479) (733) (5,746) (6,479) (1,884) 158 3,301 (4,904) (62) (4,966) (37) (5,003) 180 (4,823) (4,823)
FY09 54,802 (48,882) 5,920 (6,469) (549) 5,422 (5,971) (549) (1,429) 283 2,127 432 95 527 (197) 330 330 330
FY10F 67,783 (59,281) 8,502 (7,377) 1,125 7,846 (6,721) 1,125 (1,553) 148 1,423 1,144 (495) 649 18 666 1,106 1,772 1,772
FY11F 76,934 (67,728) 9,206 (8,201) 1,005 8,476 (7,471) 1,005 (2,040) 159 3,163 2,287 (503) 1,784 18 1,802 1,802 1,802
Mainly from FX gainexchange foreign contribution gains contribution
Gain from disposal of Zhuhai maintenance unit
13.0 14.5 12.1 3.0 1.7 10.1 44.7 12.8 12.9 2.7 3.1 32.6 10.0 1.0 15.4 2.1
na na na 16.6 2.6 na na 2.2 (1.3) (11.7) (8.7) na na 15.1 1.5 (51.1) (8.1)
60.1 67.2 60.1 2.2 2.2 13.4 na 10.8 9.9 (1.0) 0.6 (22.0) 27.3 2.5 3.8 (0.3)
37.9 42.3 14.2 4.7 1.2 9.2 57.6 12.5 11.6 1.7 2.6 43.3 22.2 2.2 10.7 1.3
15.0 16.8 15.0 4.7 1.1 9.4 69.6 12.0 11.0 1.3 2.3 22.0 19.5 2.0 7.6 1.1
17.7 32.5 363.1 na na
1.6 (110.5) (548.4) (416.0) (416.0)
(0.9) na na na na
23.7 44.7 na 58.2 58.2
13.5 8.0 (10.7) 142.5 142.5
0.26 0.24 0.24 1.81 -
(0.74) (0.76) (0.76) 1.07 -
0.05 0.05 0.05 1.29 -
0.20 0.07 0.07 2.27 -
0.18 0.18 0.18 2.45 -
Nomura
93
14 June 2010
Shirley Lam
FY07 6,999 2,391 (2,521) 6,869 (5,423) 1,446 18 (68) (431) 778 282 2,025 (8) (697) 240 (465) 1,560 2,264 3,824 45,933
FY08 (733) 1,109 779 1,155 (8,361) (7,206) (238) (29) 343 386 109 (6,635) (28) 7,332 156 7,460 825 3,824 4,649 49,896
FY09 5,422 3,399 138 8,959 (14,958) (5,999) (180) (12) (423) 189 906 (5,519) (10) 2,980 2,000 243 5,213 (306) 4,649 4,343 54,302
FY10F 7,846 (507) (2,023) 5,316 (15,017) (9,701) (92) (17) 79 1,638 (8,093) 10,750 (3,002) 7,748 (345) 4,343 3,998 50,322
FY11F 8,476 (200) (2,572) 5,703 (15,017) (9,314) (103) (17) 81 39 (9,314) 6,879 6,879 (2,435) 3,998 1,563 57,909
Capital injection from government
FY07 3,824 2 1,966 1,213 1,785 8,790 1,260 69,826 2,130 82,006 27,825 1,844 13,042 42,711 21,932 3,053 67,696 2,447 6,561 1,514 3,788 11,863 82,006
FY08 4,649 51 1,317 1,229 2,002 9,248 1,449 70,558 1,787 83,042 25,959 1,353 14,226 41,538 28,586 3,439 73,563 2,458 6,561 (3,309) 3,769 7,021 83,042
FY09 4,343 529 1,359 1,256 2,170 9,657 1,151 81,732 2,210 94,750 18,883 4,992 14,223 38,098 39,762 3,628 81,488 2,911 8,003 (2,979) 5,327 10,351 94,750
FY10F 3,998 529 1,681 1,513 2,672 10,393 1,243 89,720 0 0 2,227 103,583 18,661 5,142 14,647 38,450 35,659 0 3,707 77,816 2,893 0 10,082 (1,207) 13,998 22,873 103,582
FY11F 1,563 529 1,908 1,723 3,026 8,749 1,346 98,852 0 0 2,244 111,191 14,571 5,296 15,084 34,951 44,901 0 3,788 83,640 2,875 0 10,082 595 13,998 24,675 111,191
0.21 0.7
0.22 (3.4)
0.25 (0.4)
0.27 0.7
0.25 0.5
6.56 387.2
na 710.7
10.02 524.6
6.41 220.0
6.83 234.7
11.7 9.7 14.4 7.0
10.9 8.3 10.8 8.3
8.9 9.3 23.7 (5.5)
8.2 8.5 31.2 (14.5)
8.5 8.7 28.1 (10.9)
Nomura
94
14 June 2010
Cathay Pacific Airways 2 9 3 H K

TR AN S P O R T/ L O G I S TI C S | H O N G K O N G
Maintained
+852 2252 2195 +852 2252 2196
BUY
Closing price on 7 Jun Price target Upside/downside Difference from consensus FY10F net profit (HK$mn) Difference from consensus
Source: Nomura
Action
We raise our profit estimates for Cathay Pacific by 62% in 2010 and 3% in 2011 on its recently announced HACTL and HAECO stake disposals. With air passenger yield and volume trends likely to remain strong into 2010, we believe there may be upside to even our revised estimates. As the group still trades below its historical mid-cycle P/B level of 1.6x, we reiterate our BUY rating.
HK$15.68
HK$18.18
(s et on 17 Mar 10)
15.9% 3.0% 6,299 66.7%
Catalysts
Confirmation of a sustained improvement in passenger mix and revenue should be a positive catalyst for price upside. Anchor themes With Asian economies (led by China) expected to recover at a much faster pace than the US and Europe, airlines with hubs in Asia are expected to see an earlier recovery than their global peers.
Nomura vs consensus
Our earnings estimates are significantly above market as we have incorporated gains from recent disposals. Ex-disposals, we are likely still above market on higher yields.
Still upside to mid-cycle

Management increasingly upbeat
From its previous outlook statement While we welcomed the improvement in business in the latter part of 2009, we remain cautious about the prospects for 2010 Cathay Pacific (CX) recently changed its view to: The improved cargo and premium passenger revenues which became apparent in the last quarter of 2009 have continued into this year. This means that we expect strong financial results for the first half of 2010 and, if present trends continue, for the second half also.

31 Dec (HK $mn)
Revenue Reported net profit Normalised net profit Normalised EPS (HK$) Norm. EPS growth (%) Norm. P/E (x) EV/EBITDA (x) Price/book (x) Dividend yield (%) ROE (%) Net debt/equity (%) Earnings revisions Previous norm. net profit Change from previous (%) Previous norm. EPS (HK$)
FY08
86,578 (8,568) (8,100) (2.06) (215.3) na na 1.6 0.2 (19.3) 67.2
FY09 FY10F FY11F

66,978 4,694 3,440 0.87 na 17.9 8.0 1.5 0.6 11.7 64.4 3,440 0.87 83,273 6,299 3,790 0.96 10.2 16.3 6.4 1.4 3.8 14.4 57.0 3,500 8.3 0.89 92,219 5,174 5,174 1.31 36.5 11.9 5.6 1.3 3.2 11.2 49.1 5,035 2.8 1.28
Yields and volumes continue to strengthen into 2010

CXs passenger yields (up 7.8% h-h in 2H09), cargo yields (up 23.0% h-h) and passenger load factor (up 4% pts h-h) continued to show sustained strength into 2010 with CX achieving a near-record passenger load factor of 83.9% in April 2010 despite the volcanic ash cloud disruptions.
Share price relative to MSCI HK

(HK$) 19 17 15 13 11 9 May10 3m 6.1 5.5 13.6 Aug09 Nov09 Dec09 Sep09 Feb10 Jun09 Mar10 Apr10 Jul09 Jan10 Oct09
Price Rel MSC I HK
Beneficiary of recent deals with Air China

CX has benefited significantly from recent deals with Air China. On a recent cargo venture, CX got a 49% stake in exchange for providing four previously idled freighters. Air Chinas recent capital injection reaffirms the value of CXs 17% stake in Air China. Based on Air Chinas market value, CXs net asset value would be enhanced by 22%. CX will also generate significant proceeds and disposal gains from its disposal of minority stakes in HACTL and HAECO.
160 150 140 130 120 110 100 90
Mid-cycle valuation yet to be reached

While CXs share price has already performed well, valuations are still attractive for the group. On an estimated P/B of 1.37x 2010F and 1.31x 2011F, the group is still trading well below its historic mid-cycle level of 1.6x. We raise FY10 and FY11 estimates on its recently announced HACTL and HAECO stake disposals. However, our price target remains unchanged.
Absolute (HK$) Absolute (US$) Relative to Index Market cap (US$mn) Estimated free float (%) 52-week range (HK$) 3-mth avg daily turnover (US$mn) Stock borrowability Major shareholders (%) Swire Pacific Air China
1m 3.4 3.1 7.1
6m 8.7 8.0 18.2
7,897 25.0 16.82/9.77 11.44 Easy 42.0 30.0
Nomura
95
14 June 2010
Cathay Pacific Airways
Jim Wong
Drilling down
Management increasingly upbeat

Cathay Pacific surprised the market significantly on the upside in its 2009 results. CX management seems to be hinting that it may be able to surprise the market on the upside even further when the company announces its 1H10 results. We note that in mid-May 2010, CX issued an official statement that provided an even more positive outlook than was implied after its strong 2H09 results. From its previous outlook statement of: While we welcomed the improvement in business in the latter part of 2009, we remain cautious about the prospects for 2010. Revenues and yields remain below levels experienced prior to the recent downturn and there has not yet been a sustained improvement in premium passenger demand which accounts for a high proportion of total revenues. CX changed its outlook statement to: The improved cargo and premium passenger revenues which became apparent in the last quarter of 2009 have continued into this year. This means that, despite higher fuel prices, we expect strong financial results for the first half of 2010 and, if present trends continue, for the second half also. This improved outlook follows a surprisingly strong set of 2009 results. CX reported 2009 net profit of HK$4,694mn (or EPS of HK$1.193) up from restated net losses of HK$8,696mn in 2008. This was substantially higher than our initial estimate of HK$2,794mn and market consensus of HK$2,040mn. In fact, CXs 2009 results beat nearly all the 19 estimates in the market (source: Bloomberg).
CXs 2009 results beat market estimates by over 100%

(HK$mn) Passengers Cargo Catering and others Turnover Costs Staff Route Fuel Maintenance Depreciation Commissions Others Total op costs Operating profit Disposal & exceptional Net finance charges Associates Pretax profit Taxation Minority interests Net profit EPS (HK$) DPS (HK$)
2009 45,920 17,255 3,803 66,978
2008 (Re-stated) 57,964 24,623 3,976 86,563
Chg (%) (20.8) (29.9) (4.4) (22.6)
(12,618) (13,373) (17,349) (6,567) (9,081) (571) (2,940) (62,499) 4,479 1,254 (847) 261 5,147 (283) (170) 4,694 1.193 0.100
(12,428) (14,159) (47,317) (7,643) (8,271) (851) (3,455) (94,124) (7,561) (468) (1,012) (764) (9,805) 1,333 (224) (8,696) (2.210) 0.030
1.5 (5.6) (63.3) (14.1) 9.8 (32.9) (14.9) (33.6) n.a. n.a. (16.3) n.a. n.a. n.a. (24.1) n.a. n.a. 233.3
Nomura
96
14 June 2010
Jim Wong
CX also declared a final DPS of HK$0.10 for 2009, up from HK$0.03 in 2008 and again above our estimate of HK$0.03. In our view, the significant up-tick in DPS signals that CX management believes its balance sheet is no longer a concern. The net debt-to-equity ratio for CX was 64% in 2009, down slightly from 67% in 2008. Among routes, Southeast Asia and the Middle East saw the strongest demand (up 8.6% y-y in revenue passenger km terms) in 2009, while North America saw the weakest demand (down 14.1% y-y). Although demand for North America routes did not pick up even in 2H09, demand seems to have improved subsequently as CX has reinstated services on its Los Angeles and Toronto routes since March 2010.
SE Asia and Middle East routes saw the strongest volumes
Exhibit 162. Operational summary

2009 Revenue passenger km (RPK) breakdown by routes (mn) SW Pacific, S Africa Europe North Asia SE Asia, Middle East North America Overall RPK RFTK (mn) ATK (mn) ASK (mn) AFTK (mn) Passenger load (%) Cargo load (%)
2008 13,621 16,894 17,540 17,437 25,503 90,995 8,847 24,410 115,478 13,425 78.8 65.9
Chg (%) 6.5 2.1 (3.9) 8.6 (14.1) (1.7) (13.1) (8.9) (3.7) (13.1) 1.7pts 0.0pts
14,511 17,249 16,854 18,944 21,902 89,460 7,688 22,249 111,167 11,666 80.5 65.9
Exhibit 163. Traffic breakdown, half-yearly

2H09 RPK breakdown by routes (mn) SW Pacific, S Africa Europe North Asia SE Asia, Middle East North America Overall RFTK (mn)
1H09 7,242 8,684 7,791 9,101 10,940 43,758 3,791
2H08 7,046 8,414 8,820 9,018 12,114 45,412 4,421
1H08 6,575 8,480 8,720 8,419 13,389 45,583 4,426
7,269 8,565 9,063 9,843 10,962 45,702 4,469
CX has also been adding capacity to Seoul, Hanoi, Nanjing, Chengdu, Changsha, Chongqing, Phnom Penh, Fuzhou, and new services to Milan and Moscow since the beginning of this year. Overall capacity growth in 2010 is still expected to be in the single digits. While CXs strong 2009 earnings included oil hedging gains and disposal gains on HAECO, more fundamental gains from cost savings (unpaid leave scheme and shorter flight routes) and recovery in premium air traffic demand (since September 2009) underpinned core earnings. For example, shorter flight paths over the Pearl River Delta into Hong Kong were introduced effective 22 October 2009 by the Hong Kong Civil Aviation Department (HKCAD).
Recovery in premium air passenger traffic and cost savings main reasons for stronger earnings
Nomura
97
14 June 2010
Jim Wong
Exhibit 164. Core earnings breakdown

(HK$mn) Reported net profit Adjusted for: Disposal, etc Oil hedging Others Equals: Core earnings
2009 4,694 1,254 2,758 (170) 852
2008 (Re-stated) (8,696) (468) (7,970) 1,476 (1,734)
Stripping out gains of HK$1,254mn from the HAECO disposal and oil hedging gains of HK$2,758mn, as well as miscellaneous exceptionals, CXs core earnings in 2009 still recovered to HK$852mn from core losses of HK$1,734mn in 2008. The recovery in CXs core earnings was even more obvious on a half-yearly basis. CXs core earnings recovered to HK$1,446mn in 2H09 from a loss of HK$594mn in 1H09 and core losses of HK$861mn and HK$873mn in 2H08 and 1H08.
HK$1,446mn core profit largely from just 4Q09
Exhibit 165. Half-yearly core earnings breakdown

(HK$mn) Reported net profit Adjusted for: Disposal, etc Oil hedging Others Equals: Core earnings 1,446 (594) (861) (873)
2H09 3,882 1,254 324 858
1H09 812 0 2,434 (1,028)
2H08 (7,936) 0 (8,534) 1,459
1H08 (760) (468) 564 17
With premium air passenger traffic and air cargo traffic recoveries continuing (forward bookings continue to show strength even into 2H10), 2010 earnings prospects look good for CX.
Yields and volumes continue to strengthen

On the yield front, we note that although real passenger yield for CX was still down 13.2% y-y in 2H09, it was up 7.8% h-h. Similarly, while real cargo yield was still down 8.9% y-y in 2H09, it was up 23.0% h-h. Although CX does not release monthly or quarterly yield data, general guidance is for passenger yields to continue to firm up going into 2H 2010. Although the transparency on cargo yields is now clouded by concerns on European recovery, as CX is still mainly a passenger airline, a recovery in passenger traffic is arguably more important for the group. There have been no signs, yet, of a demand slowdown in air cargo traffic even on the groups European routes.
Passenger yields continue to move up sequentially
Nomura
98
14 June 2010
Jim Wong
Exhibit 166. Cathay Pacifics passenger and cargo yield trend

Passenger yield trend ex-fuel surcharge (HK$) 1H04 2H04 1H05 2H05 1H06 2H06 1H07 2H07 1H08 2H08 1H09 2H09
Cargo yield trend ex-fuel surcharge (HK$) 1.720 1.796 1.750 1.750 1.690 1.690 1.630 1.648 1.600 1.620 1.200 1.476
0.457 0.459 0.472 0.455 0.458 0.481 0.537 0.562 0.559 0.559 0.450 0.485
Passenger yield numbers for Taiwanese airlines such as EVA Air, shown in the exhibit below, reaffirm CX and Singapore Airlines statements that passenger yields have continued to move up into 2Q10.
Exhibit 167. EVA Airways (2618 TT): passenger and cargo yield a) Passenger yield trend
(NT$/km) 2.4 2.2 2.0 1.8 1.6 1.4 1.2 1.0 Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Eva Airlines (2618 TT)
b) Cargo yield trend

(NT$/km) 11.0 10.0 9.0 8.0 7.0 6.0 5.0 4.0 Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10
Eva Airlines (2618 TT)
As for volumes, CX has continued to achieve record passenger load factors of over 80% with its April 2010 passenger load factor of 83.9% being the highest among regional airlines that have announced such numbers. CXs passenger volumes, as measured by revenue passenger kms, also continued its recovery trend, up 6.6% y-y in March 2010 (April 2010 was biased by the volcanic ash cloud disruption). Given CXs high load factors, it has now moved on to trying to further raise yields rather than focusing on pure volumes alone.
Passenger loads now at record high levels of 84%
Nomura
99
14 June 2010
Jim Wong
Exhibit 168. Asian airlines: passenger load factor

(%) Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 Air China 77.7 76.8 71.3 72.5 73.3 71.1 75.8 78.3 75.6 73.6 77.2 76.8 74.0 75.5 71.2 73.4 78.2 81.6 76.6 81.6 79.3 75.9 77.0 79.0 80.5 80.2 CSA 74.5 74.8 69.9 71.4 75.1 71.7 76.2 76.5 74.9 72.1 74.5 78.4 75.6 76.4 71.6 72.7 75.2 77.4 72.2 78.3 77.5 74.1 75.9 78.0 80.3 78.5 CEA 72.9 73.0 68.0 70.1 73.0 69.4 71.0 72.1 69.7 67.7 70.2 72.1 70.3 72.6 69.5 70.3 72.3 77.8 70.1 75.3 73.7 70.6 71.8 75.6 77.3 75.5 CX 82.1 79.4 77.4 81.3 84.1 78.4 72.3 75.5 75.7 79.0 79.5 76.6 79.1 82.6 75.8 76.8 83.5 84.1 80.2 82.3 82.0 83.9 83.8 84.1 85.7 83.9 SIA 80.8 76.4 74.7 79.2 81.0 79.4 76.9 77.5 78.1 79.9 74.1 69.7 69.4 72.2 66.9 75.7 79.7 78.3 80.9 81.1 81.9 84.3 79.1 79.9 80.8 77.6 Qantas 80.3 79.0 74.3 86.5 82.2 77.7 79.8 79.9 78.3 80.2 81.8 78.4 78.3 80.4 77.9 80.0 82.9 80.5 83.7 83.3 82.3 82.4 81.2 79.4 79.5 CAL 78.6 75.4 75.3 81.9 82.3 80.9 77.3 73.3 73.4 70.9 74.0 72.2 75.0 76.1 69.8 72.7 78.1 83.4 75.7 75.8 76.4 79.4 80.4 79.9 81.6 80.3 EVA 81.1 77.6 76.3 77.6 79.4 82.7 80.9 80.3 80.1 76.3 78.8 74.9 76.9 75.0 68.1 72.2 80.8 86.5 77.2 78.8 78.1 80.5 83.0 79.3 83.7 81.0 Thai 81.1 80.1 73.5 74.7 77.2 75.1 66.8 68.0 68.6 63.8 75.2 77.2 76.8 71.1 62.2 65.1 71.3 76.1 74.4 75.1 74.0 77.0 82.0 82.3 78.8 MAS 69.5 67.8 64.9 68.2 71.4 70.2 67.7 66.1 64.1 65.7 55.7 53.7 58.7 65.4 62.6 69.4 77.4 76.9 75.6 75.8 73.2 80.4 74.7 74.5 75.3 KAL 69.7 69.8 72.4 74.6 73.8 77.4 69.4 71.4 65.6 68.7 72.2 70.4 65.0 66.7 65.3 68.6 74.0 77.2 69.9 70.9 69.4 74.7 80.9 77.3 76.1 75.0
Exhibit 169. Asian airlines: RPK growth rate

(% y-y) Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 Air China 1.0 0.3 (6.7) (6.1) (8.4) (16.3) (7.9) 0.5 3.0 2.3 10.4 6.2 4.9 4.8 7.0 5.3 13.8 29.0 11.4 11.3 13.0 14.9 8.6 16.6 20.8 16.5 CSA 6.4 6.6 1.1 (4.3) (4.1) (18.7) (4.8) 7.0 3.7 3.8 11.0 3.3 4.8 2.2 6.5 16.2 13.0 31.4 10.0 11.4 14.3 18.6 10.8 21.5 25.8 20.4 CEA 2.0 0.3 (6.0) (12.2) (13.1) (25.3) (13.4) (5.2) (4.3) (3.7) 6.5 3.0 8.6 8.8 10.8 15.1 18.4 44.3 16.0 13.8 7.9 8.8 36.4 53.9 45.6 36.1 CX 17.2 12.8 19.6 16.4 15.7 7.5 4.5 4.3 1.0 2.4 1.2 (4.9) (4.5) 5.3 (6.7) (14.1) (8.2) 1.9 0.1 (0.2) 2.0 4.0 1.6 10.5 6.6 (4.3)* SIA 2.4 4.8 9.0 5.2 6.7 5.3 1.3 3.0 (2.6) (3.5) (6.9) (17.0) (21.8) (17.7) (22.8) (18.2) (13.2) (14.1) (7.9) (6.0) (5.1) (4.3) (1.6) 9.9 13.9 2.9* Qantas 3.4 1.7 4.3 11.2 0.2 (0.9) (2.9) (3.1) (5.2) (4.0) (4.1) (10.1) (6.4) (2.7) (3.9) (7.1) (2.1) (1.4) 2.7 3.2 3.0 1.9 (0.2) 3.9 4.1 CAL (2.0) (6.9) (5.3) (6.5) (7.7) (8.6) (12.5) (9.0) (12.6) (9.6) (7.8) (17.4) (9.8) 0.2 (8.2) (18.0) (6.4) 5.6 6.9 4.7 11.6 15.9 5.3 19.2 8.4 (4.7)* EVA (2.9) (1.4) (1.8) (10.7) (6.1) (2.7) (22.2) (6.1) (10.6) (9.0) (4.1) (23.6) (3.5) (7.0) (9.4) (11.4) 10.0 8.7 6.3 2.7 12.7 18.2 11.0 14.4 16.0 5.2* Thai 6.2 5.9 4.6 0.9 (6.4) (11.1) (23.1) (18.8) (32.3) (38.0) (20.9) (21.3) (18.8) (17.9) (24.9) (25.7) (12.7) (2.2) 10.6 11.0 27.5 55.0 21.3 18.8 13.1 MAS (9.3) (8.7) (3.6) (8.6) (6.7) (10.2) (18.1) (14.6) (19.0) (20.1) (25.2) (32.8) (25.5) (15.6) (16.9) (11.1) (5.3) (2.6) 8.9 8.9 10.6 15.3 25.1 35.7 28.0 KAL (1.2) 1.0 3.5 1.3 1.0 4.0 (7.0) (4.1) (8.7) (2.1) (1.1) (5.6) (3.6) (2.4) (9.0) (8.8) 1.0 1.9 9.7 6.8 13.4 13.9 12.0 12.0 17.0 10.0*
* Biased by volcanic ash cloud disruption. Source: Company data, Nomura research
Nomura
100
14 June 2010
Jim Wong
Beneficiary of recent deals

On top of a macro air passenger recovery in Asia, CX has also benefited from company-specific events, such as its recently finalised cargo venture with 17% held Air China, third-party capital injection at its associate, the sale of its 10% stake in HACTL ahead of the opening of its wholly held air cargo terminal, and the more recent sale of the groups remaining 15% stake in HAECO. We consider all this beneficial to CX. CXs cargo joint venture with Air China was announced on 25 February 2010. CX essentially gets a 49% stake in the joint venture in exchange for providing four previously idled B747-400BCFs into the venture. In addition, CX is expected to be able to book a disposal gain of RMB332mn (or HK$377mn) on completion of the deal, likely in 2010. The new cargo JV with Air China, named Air China Cargo (ACC), had been operating as a 100%-held subsidiary of Air China and is the largest all-cargo airline in China with a traditional dominance in the Yangtze River Delta. After CXs entry into ACC, the JV will have a total of 11 freighters compared to the 17 freighters for the merged China Eastern Airlines and Shanghai Airlines entity, China Southern Airlines two freighters, and CXs own 25 freighters. As for Air Chinas RMB6.5bn capital injection announced on 11 March 2010, other than to Air Chinas parent company, new A-shares were issued to third parties at RMB9.58/share. As new shares were sold at a 328% premium to Air Chinas net asset value, Air Chinas book value was estimated to be enhanced by 16.6% to RMB2.62/shr by the capital injection. While Air Chinas capital injection results in a slight drop in CXs stake in Air China to 17.1% from 18.1%, the deal shows that the hidden value of Air China in CXs book is substantial. CXs cost for its stake in Air China was an estimated HK$8,111mn (at an average price of HK$3.66/shr) over the past few years. As Air Chinas share price following the capital injection is now around HK$7.68 (as of 7 June 2010), CXs stake in Air China is now worth around HK$17,020mn at market value an increase of approximately HK$8,909mn in value. With CXs book value at HK$42,238mn in 2009, the additional HK$8,909mn of value would increase CXs book value by 21.1% to around HK$51,147mn or HK$13.00 per share in 2009. Hence, while CX is trading at an unadjusted 2010F P/B of 1.4x, should we adjust CXs book value to reflect the market value of Air China, CX would be trading at a P/B of just 1.1x in 2010F compared to its historical mid-cycle of 1.6x. On 25 May 2010, CX announced the sale of its 10% stake in HACTL, the incumbent air cargo terminal operator in Hong Kong. Given that CXs carrying cost for the stake was HK$311mn, CX will book a disposal gain of HK$329mn on the sale. CXs stake disposal was in conjunction with Swire Pacific and CITIC Pacific who also sold their respective stakes of 20% and 10%. The buyers were the remaining shareholders of HACTL including Jardine Pacific, Wharf, Hutchison and Air Chinas parent. Before this transaction, HACTL ownership was: Jardine Pacific 25%, Swire Pacific 20%, Wharf 12.5%, Hutchison 12.5%, CX 10%, Air Chinas parent 10% and CITIC Pacific 10%. CXs sale of its 10% stake in HACTL did not come as a surprise to investors. At the time of being awarded the franchise for the new cargo terminal in Hong Kong, CX had, in an undertaking to the government, agreed to dispose its stake in HACTL before the opening of the terminal.
Book value of CX 22% higher if adjusted for market value of Air China stake 49% stake in cargo JV in exchange for 4 idled freighters
Nomura
101
14 June 2010
Jim Wong
Exhibit 170. Shareholding structure of HACTL

(%) Jardine Pacific Swire Pacific Wharf Hutchison Cathay Pacific CNAC CITIC Pacific
Before 25.0 20.0 12.5 12.5 10.0 10.0 10.0
After 41.7 20.8 20.8 16.7 -
CX is investing HK$5.5bn in its new air cargo terminal in Hong Kong. Phase 1 of the terminal is expected to be operational by 2013 with a capacity of 2.6mn tonnes of cargo. CX had carried 1.53mn tonnes of cargo in 2009 and HACTL had handled 2.3mn tonnes of cargo over the same period. With CX processing full ownership of its new air cargo terminal, there was no reason to hold on to its minority stake in HACTL. CX announced the sale of its remaining 15% stake in HAECO (44 HK, not rated) on 7 June 2010. This was also not unexpected given that CX had already sold a 12.45% stake in 2H09. The price tag of the most recent disposal (at HK$105 per HAECO share) is in fact a premium of over 14% on the price transacted in 2H09 (at HK$91.83 per HAECO share). As a result of the sale, CX will generate HK$2,620mn in proceeds (which should further reduce any residual concerns over the need for fund raising at CX) and should be able to book disposal gains of HK$1,829mn in 2010.
Direct link impact limited

Although the Hong Kong-Taiwan route was once a golden route for CX, the routes contribution to group revenues is now just in single digits and, hence, further expansion of the already implemented China-Taiwan direct air link is likely to have only limited incremental impact on CX. This can be seen by CXs increase in flights to Taipei at the same time as the Chinese and Taiwanese governments announcement of an incremental addition of 100 direct flights/week to a total of 370 flights/week between China and Taiwan effective 14 June 2010. In May 2010, CX announced that it would be adding two more daily flights to Taipei the first being introduced on 11 June and the second on 1 July to make a total of 94 flights a week. In addition, CX is also looking to resume operations to Haneda Airport in Tokyo in October 2010 with a twice-daily service as well as increase the number of flights to Jakarta from 14 to 18 a week in September 2010.
CX adding services to Taiwan despite expanded direct air links
Mid-cycle valuation yet to be reached

While CXs share price has already performed well, valuations are still attractive for the group. On an estimated P/B of 1.37x for 2010F and 1.31x for 2011F, the group is still trading well below its historic mid-cycle level of 1.6x, whereas most other airlines in the region are largely trading either on higher absolute valuation multiples and/or above historical mid-cycle multiples. Although critics would rightly point to the fact that CXs P/B appears to have de-rated post-1997 on diminished prospects as a British-backed national airline of Hong Kong when Hong Kong was handed back to China by the United Kingdom, we would point to the fact that between 1997 and now, CX has also undergone positive changes.
CX still has upside before reaching historical mid-cycle of 1.6x P/B
Nomura
102
14 June 2010
Jim Wong
Exhibit 171. Comparative historical P/B trends

Existing (2010) CX SIA Air China CEA CSA
* due to negative equity in 2008. Source: Nomura estimates
Trough 0.7 0.5 0.7 0.3 0.2
Mid 1.6 1.0 2.0 1.2 1.2
Peak 3.0 1.9 6.2 na* 6.6
1.4 1.3 2.3 2.6 1.2
Exhibit 172. CXs P/BV band chart

(x) 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Jan-90 Min=0.7x (10) Jun-93 Dec-96 Jun-00 Dec-03 Jun-07 Dec-10 Mean=1.6x 10 Max=3.0x 20 P/BV (LHS) ROE (%) (RHS) (%) 30
Source: Thomson Reuters Datastream, Nomura estimates
Over the past few years, CX has eliminated home-turf competition and expanded back into China at one stroke via the acquisition of Dragonair. Recently, CX also restructured its shareholding, with Air China increasing its holding in CX to 30.0% and Swire Pacific cutting its stake to 42.0%.
Exhibit 173. Shareholding structure of CX (%)

2005 Swire Pacific Air China CITIC Pacific Public Total
Current 42.0 30.0 3.0 25.0 100.0
46.3 0.0 25.4 28.3 100.0
Given the improved competitive environment post-1997 and a more politically correct shareholding structure, we would argue that CXs valuation multiples are now closer to those of pre-1997 levels rather then that just post-1997 highs. In fact, while unlikely in the short-term, we would not entirely rule out that in the long run Swire Pacific could sell down its stake in CX to willing buyers such as Air China.
Price target maintained at HK$18.18

Our price target of HK$18.18 is based on the groups historical mid-cycle P/B of 1.55x. This is benchmarked off the groups estimated 2011 book value of HK$11.95/shr. Again we note that our price target may arguably understate CXs true value as the groups book value does not fully reflect the market value of its stake in Air China. Risks to our investment view. The main risks include passenger throughput growth, passenger yield growth and/or oil prices differing substantially from our estimates. Currency movements play a significant part in an airlines profitability and, hence, FX rates differing significantly from our macro assumptions would also pose a risk.
Price target of HK$18.18/shr based on mid-cycle P/B multiple
Nomura
103
14 June 2010
Jim Wong
Income statement (HK$mn) Year-end 31 Dec Revenue Cost of goods sold Gross profit SG&A Employee share expense Operating profit EBITDA Depreciation Amortisation EBIT Net interest expense Associates & JCEs Other income Earnings before tax Income tax Net profit after tax Minority interests Other items Preferred dividends Norm alised NPAT Extraordinary items Reported NPAT Dividends Transfer to reserves Valuation and ratio analysis FD normalised P/E (x) FD normalised P/E at price target (x) Reported P/E (x) Dividend yield (%) Price/cashflow (x) Price/book (x) EV/EBITDA (x) EV/EBIT (x) Gross margin (%) EBITDA margin (%) EBIT margin (%) Net margin (% ) Effective tax rate (%) Dividend payout (%) Capex to sales (%) Capex to depreciation (x) ROE (% ) ROA (pretax %) Growth (%) Revenue EBITDA EBIT Normalised EPS Normalised FD EPS Per share Reported EPS (HK$) Norm EPS (HK$) Fully diluted norm EPS (HK$) Book value per share (HK$) DPS (HK$)
FY07 75,358 (67,619) 7,739 7,739 12,850 (5,111) 7,739 (787) 1,057 8,009 (799) 7,210 (187) 7,023 7,023 (3,310) 3,713
FY08 86,578 (94,049) (7,471) (7,471) (1,518) (5,953) (7,471) (1,012) (730) (9,213) 1,337 (7,876) (224) (8,100) (468) (8,568) (118) (8,686)
FY09 66,978 (62,499) 4,479 4,479 10,880 (6,401) 4,479 (847) 261 3,893 (283) 3,610 (170) 3,440 1,254 4,694 (393) 4,301
FY10F 83,273 (79,179) 4,094 4,094 12,011 (7,917) 4,094 (1,321) 1,565 4,338 (376) 3,961 (172) 3,790 2,509 6,299 (2,375) 3,924
FY11F 92,219 (87,419) 4,800 4,800 12,965 (8,165) 4,800 (1,220) 2,080 5,659 (311) 5,348 (173) 5,174 5,174 (1,951) 3,223
Gain from sale of HAECO
8.8 10.2 8.8 5.4 4.7 1.2 5.5 8.7 10.3 17.1 10.3 9.3 10.0 47.1 13.0 1.9 14.6 9.6
na na na 0.2 39.8 1.6 na na (8.6) (1.8) (8.6) (9.9) na na 10.7 1.6 (19.3) (8.4)
17.9 20.8 13.1 0.6 32.6 1.5 8.0 18.7 6.7 16.2 6.7 7.0 7.3 8.4 10.1 1.1 11.7 4.8
16.3 18.9 9.8 3.8 13.1 1.4 6.4 15.4 4.9 14.4 4.9 7.6 8.7 37.7 4.9 0.5 14.4 5.8
11.9 13.8 11.9 3.2 5.8 1.3 5.6 12.3 5.2 14.1 5.2 5.6 5.5 37.7 7.8 0.9 11.2 7.0
24.0 36.6 43.7 47.2 47.2
14.9 (111.8) (196.5) (215.3) (215.3)
(22.6) na na na na
24.3 10.4 (8.6) 10.2 10.2
10.7 7.9 17.2 36.5 36.5
1.79 1.79 1.79 12.86 0.84
(2.18) (2.06) (2.06) 9.74 0.03
1.19 0.87 0.87 10.73 0.10
1.60 0.96 0.96 11.45 0.60
1.31 1.31 1.31 11.97 0.50
Nomura
104
14 June 2010
Jim Wong
Cashflow (HK$mn) Year-end 31 Dec EBITDA Change in working capital Other operating cashflow Cashflow from operations Capital expenditure Free cashflow Reduction in investments Net acquisitions Reduction in other LT assets Addition in other LT liabilities Adjustments Cashflow after investing acts Cash dividends Equity issue Debt issue Convertible debt issue Others Cashflow from financial acts Net cashflow Beginning cash Ending cash Ending net debt
FY07 12,850 2,173 (2,016) 13,007 (9,801) 3,206 (2,107) 171 1,801 3,071 (2,245) 3,396 1,803 2,954 6,025 15,624 21,649 14,999
FY08 (1,518) 6,277 (3,211) 1,548 (9,228) (7,680) 432 (1,794) 990 (8,052) (2,438) 2,746 1,183 1,491 (6,561) 21,649 15,088 25,736
FY09 10,880 (4,659) (4,329) 1,892 (6,776) (4,884) (2,288) 278 5,313 (1,581) 1,690 1,325 3,015 1,434 15,088 16,522 27,190
FY10F 12,011 (9,898) 2,585 4,699 (4,064) 634 (3) 6,250 (5,148) 1,733 (1,100) 2,101 1,150 2,152 3,885 16,522 20,407 25,665
FY11F 12,965 (3,005) 726 10,686 (7,224) 3,462 (3) (141) 141 3,458 (2,249) (1,393) 150 (3,492) (33) 20,406 20,373 23,151
Capex pressure reduced by sale and leaseback programme
Balance sheet (HK$mn) As at 31 Dec Cash & equivalents Marketable securities Accounts receivable Inventories Other current assets Total current assets LT investments Fixed assets Goodwill Other intangible assets Other LT assets Total assets Short-term debt Accounts payable Other current liabilities Total current liabilities Long-term debt Convertible debt Other LT liabilities Total liabilities Minority interest Preferred stock Common stock Retained earnings Proposed dividends Other equity and reserves Total shareholders' equity Total equity & liabilities Liquidity (x) Current ratio Interest cover Leverage Net debt/EBITDA (x) Net debt/equity (%) Activity (days) Days receivable Days inventory Days payable Cash cycle
FY07 21,649 11,313 882 63 33,907 62,388 10,054 11,301 117,650 3,890 14,432 9,072 27,394 32,758 6,771 66,923 178 788 30,527 2,244 16,990 50,549 117,650
FY08 15,088 12,000 960 10 28,058 66,039 9,773 10,869 114,739 4,518 22,277 8,216 35,011 36,306 4,977 76,294 120 787 18,116 2,443 16,979 38,325 114,739
FY09 16,522 8,148 947 13 25,630 65,495 9,042 13,157 113,324 7,839 12,686 9,286 29,811 35,873 5,255 70,939 147 787 24,483 16,968 42,238 113,324
FY10F 20,406 12,491 1,083 10 33,990 63,200 9,135 13,160 119,485 8,184 8,880 7,669 24,733 37,888 11,505 74,126 308 787 26,207 1,100 16,957 45,051 119,485
FY11F 20,373 13,833 1,199 10 35,415 58,147 10,750 13,163 117,475 8,755 6,660 8,342 23,758 34,769 11,364 69,891 470 787 27,133 2,249 16,946 47,114 117,475
1.24 9.8
0.80 (7.4)
0.86 5.3
1.37 3.1
1.49 3.9
1.17 29.7
na 67.2
2.50 64.4
2.14 57.0
1.79 49.1
48.5 4.5 68.0 (14.9)
49.3 3.6 71.4 (18.6)
50.4 5.1 93.7 (38.2)
45.2 4.7 49.7 0.2
52.1 4.8 32.4 24.4
Nomura
105
14 June 2010
Eva Airways Corp 2 6 1 8 T T

TR AN S P O R T/ L O G I S TI C S | T AI W AN
Initiating
+852 2252 2195 +852 2252 2196
BUY
Closing price on 7 Jun Price target Upside/downside Difference from consensus FY10F net profit (NT$mn) Difference from consensus
Source: Nomura
Action
After suffering substantial losses from oil hedging contracts, a traffic slump amid the financial crisis in 2008-09 and recent share placements, we believe the worst is over and expect an economic turnaround in 2010F. Possible further increases in daily direct flights and continual improvements in traffic bode well for EVAs prospects. We initiate coverage with a BUY rating and a price target of NT$21.50.
NT$17.95
NT$21.50
19.8% 14.7% 3,332 3.9%
Catalysts
Further increases in daily scheduled flights, liberalisation of mainland tourist quotas and concrete signs of improvement in the macro outlook are near-term catalysts. Anchor themes With the Asian economies (led by China) expected to recover at a much faster pace than the US and Europe, we expect airlines with hubs in Asia to see an earlier recovery than their global peers.
Nomura vs consensus
Our valuation is higher than market consensus, as we expect benefits from direct air links will be sustainable and will continue to grow.
More good news to come

Uptick in passenger and cargo volumes
With signs of stabilisation in the passenger business and a stronger rebound in cargo yields and traffic, we believe the worst is behind EVA. We look for double-digit growth in traffic and yields in 2010, especially with the help of: 1) a rise in the number of direct flights this June and likely further increases as early as end-October 2010; and 2) the largest exposure to a potentially faster recovery of the US market.

31 Dec (NT$m n)
Revenue Reported net profit Normalised net profit Normalised EPS (NT$) Norm. EPS growth (%) Norm. P/E (x) EV/EBITDA (x) Price/book (x) Dividend yield (%) ROE (%) Net debt/equity (%) Earnings revisions Previous norm. net profit Change from previous (%) Previous norm. EPS (NT$)
FY08
90,656 (16,890) (17,060) (7.54) na na na 1.6 0.0 (48.3) 285.5
FY09 FY10F FY11F

73,280 (2,844) (2,902) (1.19) na na 23.9 1.7 0.0 (9.8) 254.2 na na na 97,773 109,185 3,332 4,532 3,332 4,532 1.03 1.29 na 17.4 9.2 1.4 0.0 8.7 144.7 na na na 25.4 13.9 7.9 1.2 0.0 9.6 104.5 na na na
Largest beneficiary of direct air links

With Taiwan president Ma Ying-jeous promise of realising direct air links being implemented progressively, we believe Taiwan airlines are the largest beneficiaries at the expense of Cathay Pacific and Air China. We look for up to a 16.3% increase in EVA Airways passenger volume, which may represent a net profit contribution of NT$1,104mn pa. We currently factor in a net profit contribution of NT$487mn in FY10F and NT$734mn in FY11F.
Share price relative to MSCI Taiwan

(NT$) 21 19 17 15 13 11 9 7 Aug09 Jun09
Price Rel MSCI Taiwan
Further equity financing less likely

With the completion of a NT$7.42bn equity financing in October 2009, an expected NT$8.8bn to come soon, and our expectation of a gradual improvement in the US economic situation, further equityraising from capital markets looks less likely. We believe investors are likely to pay more attention to the benefits of direct air links, which will have more impact on EVAs forward earnings.
200 180 160 140 120 100 80 60 Feb10 Apr10 1m 11.5 8.9 17.0 3m 37.5 35.3 44.4
Dec09
Oct09
Valuation
Our price target of NT$21.50 is based on 1.5x FY10F P/BV (mid-cycle valuation). Risks: 1) if passenger and cargo throughput growth, passenger and cargo yield growth, oil prices and/or exchange rates differ substantially from our estimates.
Absolute (NT$) Absolute (US$) Relative to Index Market cap (US$mn) Estimated free float (%) 52-week range (NT$) 3-mth avg daily turnover (US$mn) Stock borrowability Major shareholders (%) Evergreen Marine Evergreen International
6m 39.1 38.4 48.5
1,791 68.0 18.00/7.56 9.32 Easy 19.3 12.7
This is a summary of our full initiation report on EVA Airways, published on 14 June, 2010.
Nomura
106
14 June 2010
Eva Airways Corp
Jim Wong
Drilling down
More good news to come

Having the largest exposure to cargo business compared with other international carriers and being highly geared to international routes compared with Chinese airlines, EVA Airways had been deemed to be hardest hit by the financial crisis that began in 4Q08. The situation worsened as EVAs capital base thinned and as it took substantial losses from oil hedging contracts in 2008. Amid such a situation, EVA announced it would raise capital from the market by issuing shares to its existing shareholders and new shareholders in 2009 and 2010. In comparison, the central government in China injected capital into mainland airlines including Air China, China Southern Airlines and China Eastern Airlines to alleviate the carriers financial pressure. Thus, Eva Airway shares underperformed its peers over 2008-09 despite the positive impact of direct air links between Taiwan and the mainland that commenced in July 2008. Nevertheless, with signs of a recovery in both passenger and cargo operations emerging recently, and with such recovery likely to continue into 2011, especially on an expected significant turnaround in the US market where Eva Airways derives 40% of its total passenger revenue and 62% of its total cargo revenue, the carrier is likely to outperform peers, in our view. Furthermore, another round of capital financing on the equity market is less likely in the near term, we believe, after the carrier raised nearly NT$16,220mn recently. Overall, we believe the worst is behind EVA, and any further increase in the number of daily scheduled flights or the liberalisation of daily mainland China tourist quotas, as well as concrete signs of improvement in the macro outlook would be near-term catalysts for EVAs share price, in our view.
Underperformed peers owing to largest exposure to cargo and international routes, as well as share placement
but things are turning around and getting better
Uptick in passenger and cargo volumes

With recent signs of stabilisation in the passenger business and a stronger rebound in cargo yields and traffic, we believe the worst is behind EVA. We believe the stabilisation of passenger yields and traffic could be sustained into 2011, especially with the help of scheduled Taiwan-China direct flights commencing. We are looking for double-digit growth in passenger and cargo traffic and yields in 2010 and high singledigit increases for EVA in 2011.
Recent signs of stabilisation in passenger and cargo traffic decline
Exhibit 174. EVA Air: RPK and RFTK trend

(mn) 2,501 2,001 1,501 1,001 501 1 May-01 Mar-99 Nov-07 Feb-98 Apr-00 Jan-97 Jun-02 Jul-03 Aug-04 Sep-05 Oct-06 Dec-08 Jan-10 (mn) 605 505 405 305 205 105 5
Exhibit 175. EVA Air: passenger and cargo yield trend

(NT$) 2.4 2.2 2.0 1.8 1.6 1.4 1.2 1.0 May-01 Mar-99 Aug-04 Sep-05 Nov-07 Feb-98 Jan-97 Apr-00 Jun-02 Jul-03 Oct-06 Dec-08 Jan-10 Pax yield (LHS) Cargo yield (RHS) (NT$) 11 10 9 8 7 6 5
RPK (LHS)
RFTK (RHS)
Nomura
107
14 June 2010
Eva Airways Corp
Jim Wong
Largest exposure to faster recovery in US market

With 40% of EVAs total passenger revenue and 62% of total cargo revenue coming from America, apart from Taiwans GDP, which may affect EVAs passenger traffic, GDP growth in the US will likely be a key driver of EVAs passenger and cargo traffic. We note that our economists are looking for a substantial GDP growth recovery in the US and in Taiwan in 2010F. For the US, our economists are looking for 3.3% growth in 2010, from negative 2.4% in 2009, compared with Taiwan, where GDP is expected to climb 7.9% in 2010 from negative 1.9% in 2009 and remain at a high level in 2011F. Hence, we expect that EVA will see positive organic growth in 2010 and 2011F, compared with negative growth in 2009.
We expect positive organic traffic growth in 2010F and 2011F
Cargo business a big slice of revenue

Taiwanese airlines derive nearly 40% of revenue from cargo business compared with less than 20% for other airlines in the region. The financial crisis in 2008, outward movement of factories from Taiwan and competition from container shipping have put Taiwanese airlines earnings under pressure. We note that two negative factors (the outward movement of factories from Taiwan and competition from container shipping) may have been stabilised, so we see more potential upside surprise from here, especially with the help of direct (Taiwan-China) cargo flights. (Hence, EVA is likely to regain customers who have moved their factories to mainland China at much cheaper costs.) The uncertainty of future demand will likely also prompt customers to order goods when they consume, hence, air transport will be the preferred mode rather than shipping, given it is less time-consuming and likely lower order amounts are needed.
EVA is highly geared to cargo business compared to other Asian airlines
China-Taiwan air links boost, 88% potential upside from here

With Ma Ying-jeou becoming the new president of Taiwan following the election in March 2008 and his promise of realising direct air links progressively being implemented, we believe Taiwanese airlines are the largest beneficiaries at the expense of Cathay Pacific and Air China. In a best-case scenario, with the daily quota of 10,000 mainland visitors being fully utilised and all passengers using direct air links to travel between China and Taiwan, and assuming an average flight capacity of 250 passengers and a 90% load factor, we believe the number of direct flights could increase to 697 a week (or up 88%), compared with the currently scheduled flights of 370 per week. We estimate that EVA could fetch net profit of up to NT$1,104mn p.a. from the direct air links. Positive news flow regarding direct air links include a possible increase in the number of direct flights as early as end-October 2010, likely liberalisation of the mainlands daily tourist quota to 10,000 from 3,000 currently, and a possible easing of the visitor format to allow individual tourists to visit Taiwan, compared with only group tours allowed now.
Number of direct flights could increase by 88%
Plenty positive news in the pipeline
Further equity raising is less likely

With the NT$7.42bn equity financing completed in October 2009 and NT$8.8bn expected to come soon, according to a company announcement and our estimates, along with our expectation of a gradual improvement in the economic situation (hence better traffic), we believe further equity-raising from the capital market is less likely. Hence, as concerns about capital-raising and another economic downturn are largely relieved, investors may pay more attention to the benefits of direct air links that will have more impact on EVAs FY10F and FY11F results. Any further upward movement in the number of daily scheduled flights or liberalisation of daily mainland Chinese tourist quotas, as well as concrete signs of an improvement in the US outlook, would be near-term share-price catalysts EVA Airways, in our view.
Need for further capital raising less likely
Nomura
108
14 June 2010
Eva Airways Corp
Jim Wong
Price target at NT$21.50

We have set our price target of NT$21.50 for EVA Airways, based on 1.5x FY10F P/BV, which is mid-cycle valuation post direct air links. Despite the uncertainty in European markets, we initiate coverage of EVA Airways with a BUY rating on our view that the company should benefit from being geared most to the potential recovery of the US market, which we believe should offset the potential negative impact of its limited exposure to the European market. We believe EVA Airways is likely to see a significant recovery in both its passenger and cargo businesses. The less likely further equity financing in the near term and a more likely further increase in the number of direct air flights are all near-term catalysts.
NT$21.50 price target based on 1.5x FY10F P/BV

The main risks to our price target for EVA would be if passenger and cargo throughput growth, passenger and cargo yield growth, and/or oil prices differ substantially from our estimates. Currency movements play a significant part in an airlines profitability; hence, exchange rates that differ significantly from our macro assumptions are also risks.
Nomura
109
14 June 2010
Eva Airways Corp
Jim Wong
Income statement (NT$mn) Year-end 31 Dec Revenue Cost of goods sold Gross profit SG&A Employee share expense Operating profit EBITDA Depreciation Amortisation EBIT Net interest expense Associates & JCEs Other income Earnings before tax Income tax Net profit after tax Minority interests Other items Preferred dividends Norm alised NPAT Extraordinary items Reported NPAT Dividends Transfer to reserves Valuation and ratio analysis FD normalised P/E (x) FD normalised P/E at price target (x) Reported P/E (x) Dividend yield (%) Price/cashflow (x) Price/book (x) EV/EBITDA (x) EV/EBIT (x) Gross margin (%) EBITDA margin (%) EBIT margin (%) Net margin (% ) Effective tax rate (%) Dividend payout (%) Capex to sales (%) Capex to depreciation (x) ROE (% ) ROA (pretax %) Growth (%) Revenue EBITDA EBIT Normalised EPS Normalised FD EPS Per share Reported EPS (NT$) Norm EPS (NT$) Fully diluted norm EPS (NT$) Book value per share (NT$) DPS (NT$)
FY07 93,103 (95,378) (2,274) (2,274) 5,364 (7,639) (2,274) (2,026) 342 1,930 (2,027) 86 (1,941) (1,941) 69 (1,872) (1,872)
FY08 90,656 (99,262) (8,607) (8,607) (774) (7,833) (8,607) (2,601) 192 (6,545) (17,561) 501 (17,060) (17,060) 170 (16,890) (16,890)
FY09 73,280 (76,100) (2,820) (2,820) 5,551 (8,371) (2,820) (1,942) 278 701 (3,783) 881 (2,902) (2,902) 58 (2,844) (2,844)
FY10F 97,773 (93,583) 4,190 4,190 12,728 (8,538) 4,190 (1,720) 531 329 3,330 2 3,332 3,332 3,332 3,332
FY11F 109,185 (104,494) 4,691 4,691 13,395 (8,704) 4,691 (1,604) 696 788 4,571 (40) 4,532 4,532 4,532 4,532
Mainly on oil hedging losses
na na na 5.4 0.9 21.6 na (2.4) 5.8 (2.4) (2.0) na na 27.2 3.3 (4.1) (1.4)
na na na na 1.6 na na (9.5) (0.9) (9.5) (18.6) na na 17.8 2.1 (48.3) (5.9)
na na na na 1.7 23.9 na (3.8) 7.6 (3.8) (3.9) na na 19.3 1.7 (9.8) (1.8)
17.4 20.9 17.4 4.8 1.4 9.2 25.9 4.3 13.0 4.3 3.4 (0.1) 2.6 0.3 8.7 3.3
13.9 16.7 13.9 4.2 1.2 7.9 20.6 4.3 12.3 4.3 4.2 0.9 2.3 0.3 9.6 3.8
(0.9) 74.7 na na na
(2.6) (114.4) na na na
(19.2) na na na na
33.4 129.3 na na na
11.7 5.2 12.0 25.4 25.4
(0.84) (0.87) (0.87) 19.87 -
(7.46) (7.54) (7.54) 11.38 -
(1.17) (1.19) (1.19) 10.81 -
1.03 1.03 1.03 12.59 -
1.29 1.29 1.29 14.36 -
Nomura
110
14 June 2010
Eva Airways Corp
Jim Wong
Cashflow (NT$m n) Year-end 31 Dec EBITDA Change in working capital Other operating cashflow Cashflow from operations Capital expenditure Free cashflow Reduction in investments Net acquisitions Reduction in other LT assets Addition in other LT liabilities Adjustments Cashflow after investing acts Cash dividends Equity issue Debt issue Convertible debt issue Others Cashflow from financial acts Net cashflow Beginning cash Ending cash Ending net debt
FY07 5,364 1,692 309 7,366 (25,312) (17,947) 2,399 (89) 27 (2,629) 17,652 (587) 5,308 (4,762) 546 (41) 2,997 2,957 65,062
FY08 (774) 6,360 (8,261) (2,675) (16,123) (18,798) 4,362 (429) 27 437 7,402 (6,999) 10,997 (3,727) 7,270 271 2,957 3,228 73,496
FY09 5,551 (5,047) (1,093) (590) (14,167) (14,757) (3,959) (254) (156) (3,424) 6,425 (16,125) 7,420 11,530 (1,835) 17,115 991 3,228 4,219 81,410
FY10F 12,728 (1,317) 606 12,016 (2,500) 9,516 (459) (450) 76 383 9,066 8,800 (20,563) (11,763) (2,697) 4,219 1,522 63,981
FY11F 13,395 (1,200) 2,856 15,051 (2,500) 12,551 (831) (696) 79 617 11,720 (7,769) (7,769) 3,951 1,522 5,472 52,711
Share placement to existing shareholders and new shareholders
Balance sheet (NT$mn) As at 31 Dec Cash & equivalents Marketable securities Accounts receivable Inventories Other current assets Total current assets LT investments Fixed assets Goodwill Other intangible assets Other LT assets Total assets Short-term debt Accounts payable Other current liabilities Total current liabilities Long-term debt Convertible debt Other LT liabilities Total liabilities Minority interest Preferred stock Common stock Retained earnings Proposed dividends Other equity and reserves Total shareholders' equity Total equity & liabilities Liquidity (x) Current ratio Interest cover Leverage Net debt/EBITDA (x) Net debt/equity (%) Activity (days) Days receivable Days inventory Days payable Cash cycle
FY07 2,957 5,179 8,404 9,528 1,632 27,700 10,944 94,867 15,518 109 149,138 9,353 2,580 19,553 31,486 58,666 14,798 104,950 21,950 (841) 23,080 44,188 149,138
FY08 3,228 1,560 5,969 8,631 2,026 21,413 10,201 97,874 13,685 82 143,255 15,674 1,667 23,887 41,229 61,050 15,235 117,513 22,627 (16,890) 20,005 25,742 143,255
FY09 4,219 4,509 6,968 8,690 1,202 25,588 11,211 102,607 10,565 238 150,209 16,991 2,247 18,496 37,733 68,638 11,811 118,182 29,627 (2,915) 5,315 32,027 150,209
FY10F 1,522 4,509 9,243 10,687 1,355 27,316 11,670 96,200 10,043 238 145,467 16,447 2,547 21,302 40,297 49,055 11,887 101,239 35,127 417 8,684 44,228 145,467
FY11F 5,472 4,644 10,303 11,933 1,476 33,828 12,366 89,708 9,536 238 145,677 16,897 2,748 22,328 41,974 41,286 11,966 95,226 35,127 4,948 10,376 50,451 145,676
0.88 (1.1)
0.52 (3.3)
0.68 (1.5)
0.68 2.4
0.81 2.9
Net gearing ratio is expected to reduce
12.13 147.2
na 285.5
14.67 254.2
5.03 144.7
3.94 104.5
32.8 34.9 9.6 58.1
29.0 33.5 7.8 54.7
32.2 41.5 9.4 64.4
30.3 37.8 9.3 58.7
32.7 39.5 9.2 62.9
Nomura
111
14 June 2010
Korean Air Lines 0 0 3 4 9 0 K S

TR AN S P O R T/ L O G I S TI C S | S O U TH K O R E A
Maintained
NOMURA FINANCIAL INVESTMENT (KOREA) CO LTD
Justin Lee
+82 2 3783 2338
justin.lee@nomura.com
NEUTRAL
Action
We believe Korean Airs fundamental recovery is well on its way and expect it to post an all-time high revenue and operating profit in 2010. However, with high sensitivity to the W/US$ exchange rate and higher oil prices, Korean Airs earnings could deteriorate longer term. The company seems fairly valued at the current level. We prefer SIA and CX, given their strong earnings track record. NEUTRAL.
Closing price on 7 Jun Price target Upside/downside Difference from consensus FY11F net profit (Wbn) Difference from consensus
Source: Nomura
W71,300
W79,000
(set on 31 May 10)
10.8% -0.8% 411.9 -9.7%
Catalysts
Continued strong y-y improvements in monthly operating statistics could be a positive catalyst for the companys share price. Anchor themes With Asian economies (led by China) expected to recover at a much faster pace than the US and Europe, airlines with hubs in Asia are expected to see a stronger recovery than their global peers.
Nomura vs consensus
We believe our oil price assumptions are higher than the Street and the market has yet to reflect the impact of recent won depreciation against the US dollar.
Recovery priced in
Continued traffic recovery
We see continuing growth in Korea outbound passenger traffic (+30% YTD) and expect the trend to continue with the peak season approaching. As yields from Korea outbound passengers are highest for Korean Air Lines (KAL), we believe this trend will reflect positively on KALs operating profit.

31 Dec (Wbn)
Revenue Reported net profit Normalised net profit Normalised EPS (W) Norm. EPS growth (%) Norm. P/E (x) EV/EBITDA (x) Price/book (x) Dividend yield (%) ROE (%) Net debt/equity (%) Earnings revisions Previous norm. net profit Change from previous (%) Previous norm. EPS (W)

9,394 (98.9) (98.9) (1,374) na na 17.3 1.7 0.0 (3.4) 271.8 11,293 431.0 431.0 5,988 na 11.9 8.4 1.5 0.7 13.2 255.2 411.9 4.6 5,723 11,881 411.9 411.9 5,723 (4.4) 12.5 8.9 1.4 0.8 11.6 258.6 392.3 5.0 5,451 12,505 298.6 298.6 4,149 (27.5) 17.2 9.0 1.3 0.8 8.0 250.6 278.4 7.3 3,868
Record-high load factors lead to record operating profit

KALs international passenger and cargo load factors improved to 77% in 1Q10. Strong IT product exports should support solid cargo revenue. With an increase in transit passengers and limited additional capacity, the passenger load factor should exceed 80% in 3Q10F, in our view. We expect KAL to post W794bn FY10F operating profit.
Share price relative to MSCI Korea

(W) 89,000 79,000 69,000 59,000 49,000 39,000 29,000 Jul09 Aug09 Sep09 Jun09
Price Rel MSCI Korea
FX fluctuations and rising oil prices are concerns

KALs operation and profitability are very sensitive to FX movements. Nomura expects won appreciation to slow over the rest of the year (W1,150:US$1 in 2010F). Also, as Nomura forecasts that the oil price will rise to US$85/bbl in 2010, we expect fuel cost to account for 36% of FY10F total expenses. While strong top-line growth and traffic demand should offset negative impacts somewhat in FY10F, we expect KALs OM to drop to 5.4% FY11F from 7.0% in FY10F.
180 160 140 120 100 80 May10 6m 32.3 24.0 30.3 4,169 74.0 77,000/34,100 35.88 Hard 11.0 9.9 3m 17.5 8.8 15.4 Feb10 Mar10 1m 7.4 0.4 7.3
Oct09
Nov09
NEUTRAL maintained; fairly valued

Our price target is based on a target P/BV of 1.6x (mid-point of historical average and peak) applied to our FY11F BVPS estimate. We have fine-tuned our non-operating income estimates but our price target and methodology are unchanged. KAL is trading at 1.5x FY10F P/BV, which we believe is fairly valued, compared with regional peers. Risks include volatility of the won, oil prices and increasing leverage.
Absolute (W) Absolute (US$) Relative to Index Market cap (US$mn) Estimated free float (%) 52-week range (W) 3-mth avg daily turnover (US$mn) Stock borrowability Major shareholders (%) Chairman Cho Hanjin Transporation
Nomura
112
Dec09
14 June 2010
Jan10
Apr10
Korean Air Lines
Justin Lee
Drilling down
Continued traffic recovery

Since the turnaround in November last year, Korea outbound passenger traffic has exhibited positive y-y growth for every month in 2010 YTD. According to the Korea Tourism Organization, Korea outbound passenger traffic improved 30% y-y in JanuaryApril 2010. We expect the number of outbound passengers to show y-y growth for every month of this year.
Continued strong Korea outbound passenger traffic
Exhibit 176. Korea: outbound passengers

(Person) 1,400,000 1,300,000 1,200,000 1,100,000 1,000,000 900,000 800,000 700,000 600,000 500,000 Jan-06 Mar-06 May-06 Jul-06 Sep-06 Nov-06 Jan-07 Mar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10
Source: Korea Tourism Organization, Nomura research
Korea outbound passengers (LHS) y-y growth (RHS)
(%) 50 40 30 20 10 0 (10) (20) (30) (40) (50)
As we expect a stronger rebound from Korea outbound passenger traffic (+20% y-y), which has the highest yield, we estimate KALs international passenger yield in 2010F will grow by 12% y-y. Also, an increasing share of inbound and transit traffic would boost the overall load factor for the passenger business to 76.7% in 2010F, in our view. According to IIA data, total departures on US routes increased by 23% y-y in May. Given that KAL offers the most routes to US destinations among Asian airlines, we believe the company should benefit from increased demand for US routes. According to Hana Tour (039130 KS, Not rated), Koreas largest tour agency, the companys advance booking rates for June and July rose 116% and 160% y-y, respectively. Given KALs 39% market share in the international passenger business in Korea (as of 2009), we expect the company to post strong passenger revenue in 2Q10F and 3Q10F.
Exhibit 177. KAL: international passenger trend

(Person) 1,200,000 1,100,000 1,000,000 900,000 800,000 700,000 600,000 500,000 Jul-07 Jul-08 Jul-09 Apr-07 Oct-07 Apr-08 Oct-08 Apr-09 Oct-09 Apr-10 Jan-07 Jan-08 Jan-09 Jan-10 International passengers (LHS) y-y growth (RHS) (%) 25 20 15 10 5 0 (5) (10) (15)
Exhibit 178. KAL: cargo traffic trend

(Tonne) 130,000 120,000 110,000 100,000 90,000 80,000 70,000 60,000 Jul-07 Jul-08 Apr-07 Oct-07 Apr-08 Oct-08 Apr-09 Jul-09 Oct-09 Jan-07 Jan-08 Jan-09 Jan-10 Apr-10 Cargo traffic (LHS) y-y growth (RHS) (%) 40 30 20 10 0 (10) (20) (30)
Source: Incheon International Airport, Nomura research
Source: Incheon International Airport, Nomura research
Nomura
113
14 June 2010
Korean Air Lines
Justin Lee
Exhibit 179. KAL: passenger ASK, RPK trend

(mn) 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 Dec-07 Dec-08 Dec-09 Aug-08 Aug-09 Feb-08 Feb-09 Feb-10 Oct-07 Oct-08 Oct-09 Apr-08 Apr-09 Jun-08 Jun-09 Apr-10 ASK (LHS) RPK (LHS) RPK y-y growth (%) (RHS) (%) 25 20 15 10 5 0 (5) (10) (15)
Exhibit 180. KAL: cargo AFTK, FTK trend

(mn) 1,400 1,200 1,000 800 600 400 200 0 Dec-07 Dec-08 Dec-09 Jun-08 Aug-08 Jun-09 Aug-09 Feb-08 Apr-08 Feb-09 Apr-09 Feb-10 Oct-07 Oct-08 Oct-09 Apr-10 (%) 100 80 60 40 20 0 (20) (40) (60) Jul-08 Apr-08 Oct-08 Apr-09 Jul-09 Oct-09 Jan-08 Jan-09 Jan-10 Apr-10 AFTK (LHS) FTK (LHS) FTK y-y growth (%) (RHS) (%) 30 20 10 0 (10) (20) (30)
KALs international passenger revenue per kilometre (RPK) has rebounded starting from 3Q09. May marked the tenth consecutive month of positive y-y growth for passengers carried (nine consecutive months of y-y growth for cargo). We expect KALs international RPK to improve 10% y-y in 2010F. KALs cargo throughput rebounded steadily from 3Q09. The company indicated that the cargo business turned to profit from October 2009. We expect the companys freight tonne kilometre (FTK) to rise 18% y-y in 2010F. With growth in exports likely, we expect cargo demand to remain solid, which would enable KAL to maintain a high yield and load factor for the cargo business. We expect the overall cargo yield to improve by 6% y-y, with the load factor improving to 78.7%.
Exhibit 181. KAL: passenger revenue by region trend

(%) % 100 Americas % 80 % 60 % 40 % 20 % 0 2007 2008 2009 2010F Oceania SE Asia China Japan Domestic Europe
Exhibit 182. Korea: IT export trend

(US$mn) 11,000 10,000 9,000 8,000 7,000 6,000 5,000 4,000 IT export (LHS) % y-y (RHS)
Source: Korea International Trade Association (KITA), Nomura research
Nomura
114
14 June 2010
Korean Air Lines
Justin Lee
Exhibit 183. KAL: earnings trends and forecasts

y-y growth (%) (Wbn) Sales Domestic passengers International passengers Cargo Others Operating profit OPM (%) Fuel expenses Other expenses Pretax profit Net profit
2007 8,812 585 4,632 2,533 1,062 637 7.2 2,606 5,596 94 13
2008 10,213 602 5,352 3,027 1,232 (99) (1.0) 4,195 6,143 (2,451) (1,942)
2009 9,394 490 4,973 2,705 1,226 133 1.4 2,939 6,322 (125) (99)
2010F 11,293 509 6,127 3,383 1,274 794 7.0 3,778 6,720 553 431
2011F 11,881 519 6,563 3,485 1,314 647 5.4 4,134 7,100 528 412
2008 15.9 2.7 15.5 19.5 16.1 nm 61.0 9.8 nm nm
2009 (8.0) (18.6) (7.1) (10.6) (0.5) nm (30.0) 3.3 nm nm
2010F 20.2 4.0 23.2 25.1 3.9 495.1 28.6 6.5 nm nm
2011F 5.2 2.0 7.1 3.0 3.2 (18.4) 9.4 5.6 (4.4) (4.4)
Exhibit 184. KAL: revenue factor assumptions

y-y growth (%) (Wbn) International passengers ASK (mn km) RPK (mn km) L/F (%) Yield (W) Cargo ATK (mn km) FTK (mn km) L/F (%) Yield (W)
2007 71,208 51,865 72.8 89.3 12,992 9,678 74.5 261.7
2008 72,246 51,761 71.6 103.4 12,132 9,005 74.2 336.1
2009 74,525 52,450 70.4 94.8 11,285 8,427 74.7 320.9
2010F 75,270 57,695 76.7 106.2 12,639 9,944 78.7 340.2
2011F 79,786 60,003 75.2 109.4 12,892 10,043 77.9 347.0
2008 1.5 (0.2) -1.2pp 15.8 (6.6) (7.0) -0.3pp 28.4
2009 3.2 1.3 -1.3pp (8.3) (7.0) (6.4) 0.4pp (4.5)
2010F 1.0 10.0 6.3pp 12.0 12.0 18.0 4.0pp 6.0
2011F 6.0 4.0 -1.4pp 3.0 2.0 1.0 -0.8pp 2.0
Record-high load factors lead to record operating profit

In 1Q10, KALs international passenger load factor improved to 77% (vs 68.4% in 1Q09 and 70.4% in FY09). As we expect limited capacity additions from KAL and its competitors for this year, the passenger load factor could rise to over 80% in 3Q10, which is the peak quarter, in our view. Continued demand from transit passengers (around 27% of total passengers in 1Q10) contributes to KALs high load factor. The cargo load factor also jumped to 77% in 1Q10 for KAL (vs 70.6% in 1Q09 and 70.4% in FY09), and we expect this high load factor level to be maintained for the next few quarters.
Load factors at record-high levels
Exhibit 185. KAL: international passenger load factor

(%) 85 80 75 70 65 60 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10F
Exhibit 186. KAL: cargo load factor

(%) 80 78 76 74 72 70 68 66 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10F
Nomura
115
14 June 2010
Korean Air Lines
Justin Lee
FX fluctuations and rising oil prices are concerns

Foreign exchange rate influences all areas of airline operations, including operating and non-operating income. In terms of revenue, the number of passengers increases as Korean tourists overall travelling costs are reduced when the won strengthens in relation to the currency of the countries being visited. Korean airlines costs are vulnerable to currency rate volatility. The companies have to pay fuel cost, lease cost, airport usage charges, interest expenses (partially) and labour cost (partially) in dollars. Therefore, the W/US$ rate has a direct influence on the companys overall operating margin, and profitability greatly improves with the won strengthening. Nomuras economics team expects the Korean won to strengthen to W1,150:US$1 level by 2010F-end and W1,050:US$1 in 2011F (vs W1,167:US$1 in 2009). This would imply a 1.5% won appreciation for 2010F and an 8.7% appreciation for 2011F.
Slowing won appreciation rate would have negative impact on the companys earnings
Exhibit 187. W/US$ forecast

(W) W:US$1 1Q10 1,131 2Q10F 1,200 3Q10F 1,180 4Q10F 1,150 1Q11F 1,120 2Q11F 1,100 2011F 1,050
Note: End of period figures/forecasts Source: Nomura Global Economics
In 1Q10, KAL realised a net FX-related gain of W128bn (vs net FX-related loss of W567bn in 1Q09) as the won strengthened significantly against the US dollar (W1,131:US$1 in 1Q10 vs W1,377:US$1 in 1Q09). In FY10F, we expect the company to record net FX-related gain of W411bn. As indicated in the exhibit below, KALs share price has exhibited a high negative correlation with the W/US$ rate. A slowing rate of won appreciation would suggest limited upside for KALs share price, in our view.
Exhibit 188. KAL: share price vs forex rate trend

(W) 100,000 80,000 60,000 40,000 20,000 0 Jan-07 Mar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10
KAL share price (LHS) KRW/US$ (RHS)
(W) 1,800 1,600 1,400 1,200 1,000 800
Nomura forecasts that the price of oil will rise to US$85/bbl in 2010F and US$95/bbl in 2011F, and we expect fuel costs to account for 36%/37% of total expenses in FY10F/FY11F (vs 32% in FY09). If oil prices rise above our forecast, the companys operating margin would deteriorate further.
Nomura
116
14 June 2010
Korean Air Lines
Justin Lee
Valuation
NEUTRAL maintained; fairly valued

We have reflected recent currency movements in our estimates, which have caused our net income forecast to increase by 4.6%/5.0% for FY10F/FY11F. This increase does not impact our price target as our valuation methodology is based on P/BV. Our price target is based on a target P/BV of 1.6x (mid-point of historical average and peak) applied to our FY11F BVPS estimate. KAL is currently trading at 1.5x FY10F P/BV, which we believe is fairly valued, compared with other regional peers. Among regional airlines, we prefer Cathay Pacific and Singapore Airlines as they have a stronger earnings track record and flexible cost structure. Also, they stand to benefit from the recovery in premium air traffic demand. In addition, Chinese airlines should benefit from the Chinese governments positive policies.
We prefer Chinese airlines as they benefit from friendly government policies

Risks to our KAL price target include volatility of the won, oil prices and increasing leverage.
Exhibit 189. KAL: operating profit vs share price trend

(W) 100,000 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 KAL operating profit (RHS) KAL share price (LHS) (Wbn) 1,000 800 600 400 200 0 (200)
Exhibit 190. KAL: one-year forward P/BV trend

Price (W) 120,000 100,000 80,000 60,000 40,000 20,000 0 Jan-04 Jun-04 Nov-04 Apr-05 Sep-05 Feb-06 Jul-06 Dec-06 May-07 Oct-07 Mar-08 Aug-08 Jan-09 Jun-09 Nov-09 Apr-10
1.9x 1.6x 1.3x 1.0x 0.7x 0.4x
Note: 2010F and 2011F operating profits are estimates Source: Bloomberg, company data, Nomura estimates
Nomura
117
14 June 2010
Korean Air Lines
Justin Lee
Income statement (Wbn) Year-end 31 Dec Revenue Cost of goods sold Gross profit SG&A Employee share expense Operating profit EBITDA Depreciation Amortisation EBIT Net interest expense Associates & JCEs Other income Earnings before tax Income tax Net profit after tax Minority interests Other items Preferred dividends Normalised NPAT Extraordinary items Reported NPAT Dividends Transfer to reserves Valuation and ratio analysis FD normalised P/E (x) FD normalised P/E at price target (x) Reported P/E (x) Dividend yield (%) Price/cashflow (x) Price/book (x) EV/EBITDA (x) EV/EBIT (x) Gross margin (%) EBITDA margin (%) EBIT margin (%) Net margin (%) Effective tax rate (%) Dividend payout (%) Capex to sales (%) Capex to depreciation (x) ROE (%) ROA (pretax %) Growth (%) Revenue EBITDA EBIT Normalised EPS Normalised FDEPS Per share Reported EPS (W) Norm EPS (W) Fully diluted norm EPS (W) Book value per share (W) DPS (W)
Source: No mura estimates
FY08 10,213 (8,821) 1,391 (1,491) (99) 659 (758) (99) (440) (6) (1,906) (2,451) 508 (1,942)
FY09 9,394 (7,980) 1,414 (1,280) 133 919 (786) 133 (515) (142) 399 (125) 26 (99)
FY10F 11,293 (9,180) 2,113 (1,319) 794 1,642 (848) 794 (566) 26 299 553 (122) 431
FY11F 11,881 (9,876) 2,006 (1,358) 647 1,619 (972) 647 (598) 15 463 528 (116) 412
FY12F 12,505 (10,575) 1,930 (1,399) 531 1,634 (1,103) 531 (620) 13 459 383 (84) 299
Record high-operating profit in FY10F
(1,942) (1,942) (1,942)
(99) (99) (99)
431 431 (36) 395
412 412 (43) 369
299 299 (43) 255
na na na na 1.8 20.0 na 13.6 6.5 (1.0) (19.0) na na 5.6 0.8 (53.8) (0.7)
na na na 10.5 1.7 17.3 (1,512.0) 15.0 9.8 1.4 (1.1) na na 17.4 2.1 (3.4) (0.1)
11.9 13.2 11.9 0.7 5.3 1.5 8.4 17.0 18.7 14.5 7.0 3.8 22.0 8.3 8.9 1.2 13.2 4.9
12.5 13.8 12.5 0.8 3.7 1.4 8.9 21.9 16.9 13.6 5.4 3.5 22.0 10.5 9.6 1.2 11.6 3.8
17.2 19.0 17.2 0.8 4.2 1.3 9.0 27.3 15.4 13.1 4.2 2.4 22.0 14.5 11.2 1.3 8.0 3.0
15.9 (51.8) (115.6) (15,132.4) (15,132.4)
(8.0) 39.5 na na na
20.2 78.6 495.1 na na
5.2 (1.4) (18.4) (4.4) (4.4)
5.2 0.9 (18.0) (27.5) (27.5)
(26,989) (26,989) (26,989) 39,229 -
(1,374) (1,374) (1,374) 42,476 -
5,988 5,988 5,988 47,964 500
5,723 5,723 5,723 50,308 600
4,149 4,149 4,149 53,857 600
Nomura
118
14 June 2010
Korean Air Lines
Justin Lee
Cashflow (Wbn) Year-end 31 Dec EBITDA Change in working capital Other operating cashflow Cashflow from operations Capital expenditure Free cashflow Reduction in investments Net acquisitions Reduction in other LT assets Addition in other LT liabilities Adjustments Cashflow after investing acts Cash dividends Equity issue Debt issue Convertible debt issue Others Cashflow from financial acts Net cashflow Beginning cash Ending cash Ending net debt
FY08 659 195 (972) (118) (570) (689) 155 (486) (47) (1,484) (2,551) 2,357
FY09 919 4 (433) 490 (1,637) (1,147) 22 (75) (68) 399 (869) 1,090
FY10F 1,642 (359) (317) 965 (1,005) (40) 532 (8) (1,099) (614) (36) 722
FY11F 1,619 82 (313) 1,389 (1,142) 247 200 300 (173) (1,232) (658) (43) 740
FY12F 1,634 137 (557) 1,215 (1,401) (186) (53) (225) (464) (43) 549
2,357 (194) 688 494 7,948
1,090 221 494 716 8,309
686 71 716 787 8,809
697 40 788 827 9,363
506 42 827 869 9,715
Balance sheet (Wbn) As at 31 Dec Cash & equivalents Marketable securities Accounts receivable Inventories Other current assets Total current assets LT investments Fixed assets Goodwill Other intangible assets Other LT assets Total assets Short-term debt Accounts payable Other current liabilities Total current liabilities Long-term debt Convertible debt Other LT liabilities Total liabilities Minority interest Preferred stock Common stock Retained earnings Proposed dividends Other equity and reserves Total shareholders' equity Total equity & liabilities Liquidity (x) Current ratio Interest cover Leverage Net debt/EBITDA (x) Net debt/equity (%) Activity (days) Days receivable Days inventory Days payable Cash cycle
FY08 494 675 251 555 1,976 1,590 11,285 216 801 15,868 788 96 3,404 4,289 7,654 1,102 13,044
FY09 716 870 320 590 2,496 1,568 11,682 297 876 16,919 812 158 3,645 4,615 8,213 1,034 13,862
FY10F 788 1,046 385 540 2,758 1,036 12,734 306 876 17,710 903 190 3,445 4,538 8,694 1,026 14,258
FY11F 827 1,101 405 490 2,822 836 13,857 315 576 18,406 978 200 3,542 4,720 9,212 854 14,786
FY12F 868 1,158 426 440 2,893 836 14,539 324 576 19,168 987 211 3,698 4,895 9,596 801 15,292
360 (916) 3,379 2,823 15,868
360 (115) 2,812 3,057 16,919
360 280 2,812 3,452 17,710
360 649 2,612 3,621 18,406
360 904 2,612 3,876 19,168
0.46 (0.2)
0.54 0.3
0.61 1.4
0.60 1.1
0.59 0.9
12.06 281.5
9.04 271.8
5.37 255.2
5.78 258.6
5.94 250.6
Net gearing to stay at high levels
24.5 11.0 6.1 29.5
30.0 13.1 5.8 37.3
31.0 14.0 6.9 38.1
33.0 14.6 7.2 40.4
33.1 14.4 7.1 40.3
Nomura
119
14 June 2010
Malaysian Airline System M A S M K

AI R L I N E S | M AL AY S I A
Maintained
NOMURA SECURITIES MALAYSIA SDN BHD
Jacinda Loh Wai Kee Choong
+60 3 2027 6889 +60 3 2027 6893
jacinda.loh@nomura.com waikee.choong@nomura.com
BUY
Closing price on 7 Jun Price target Upside/downside Difference from consensus FY11F net profit (RMmn) Difference from consensus
Source: Nomura
Action
We see MASs turnaround story gaining traction with cost savings continuing to improve FY10F earnings, with a leg up in FY11F as the bulk of its new fleet arrives to drive its yield improvement strategy further. While headwinds remain in the form of competition and a potentially costly hedge, we premise our BUY call on the scope for upside coming from a low base with an added boost from its new fleet.
RM1.97
RM2.40
(set on 31 May 10)
22.0% 11.8% 593 55.4%
Catalysts
Catalysts for the stock are a better-than-expected rebound in passenger numbers and yield improvements occurring earlier. Anchor themes Asia-Pacific airlines have rebounded faster than expected on growing penetration in the worlds largest aviation market. We see competitive headwinds in FY10F for Malaysian airlines and prefer players with robust balance sheets and turnaround potential.
Nomura vs consensus
Consensus is generally negative; our earnings forecasts are higher as we expect the cost-driven turnaround to gather momentum with fleet renewal to give yields a leg up.
MAS fly
Gathering momentum with 5-7% cost savings to come
Since its operational restructuring implemented in 2006, MAS management has committed itself to driving cost reductions. We see MASs gradual shift from an asset-light balance sheet to a minimum 33%-owned fleet bringing down leasing costs by up to 30% by FY12F. In our view, this cost-driven turnaround will gather momentum in FY10-12F as its fleet renewal increases fuel efficiencies, resulting in an overall fall in cost/ASK by 5-7%.

31 Dec (RMmn)
Revenue Reported net profit Normali sed net profit Normali sed EPS (RM) Norm. EPS growth (%) Norm. P/E (x) EV/EBIT DA (x) Price/book (x) Dividend yield (%) ROE (%) Net debt/equity (%) Earnings revisions Previous norm. net profit Change from previous (%) Previous norm. EPS (RM)

11,574 496 (667) (0.31) (370.1) na na 5.5 0.0 13,417 183 183 0.06 na 32.9 9.6 1.6 0.0 15,196 593 593 0.19 224.6 10.1 6.7 1.4 0.0 15.3 89.7 593 0.19 17,285 661 661 0.22 11.4 9.1 4.9 1.2 0.0 14.7 105.8 661 0.22
20.2 8.5 net cash net cash 183 0.06
Fleet renewal benefits to accrue in FY11-12F

Given its fleet renewal kicks off from 4Q10F with five firm deliveries of new B738s, we expect further cost savings to meaningfully kick in by 2011. Similarly, its bid to improve yields is likely to take firm hold by then as it replaces its ageing fleet. Headwinds also remain in the form of high fuel hedging costs averaging US$100/barrel for 60% of its needs should crude oil prices continue trending flat. However, we believe those concerns have largely been priced in, as MAS will still benefit from buying 40% of its fuel needs at a lower oil price vs our assumption of US$85 for 2010F.
Share price relative to MSCI Malaysia

(RM) 2.9 2.7 2.5 2.3 2.1 1.9 1.7 Oct09 Jul09 Mar10 Aug09 Sep09 May10 3m (9.2) (8.0) (7.9) Nov09 Dec09 Jan10 Feb10 Jun09 Apr10
Price Rel MSCI Malaysia
110 100 90 80 70 60 50
Balance sheet robust post RM2.67bn rights issue

With its rights issue completed in March 2010, MAS is now well placed to gear up for its firm deliveries of 56 aircraft until 2016. We see gearing in FY12F at >1x, as MAS takes delivery of A380s.
1m Absolute (RM) Absolute (US$) Relative to Index Market cap (US$m n) Estimated free float (%) 52-week range (RM) 3-m th avg daily turnover (U S$mn) Stock borrowability Major shareholders (%) Khazanah N asional Em ployees Provident Fund
6m (19.8) (17.9) (20.7) 1,983 14.0 2.67/1.80 1.87 Hard 69.0 13.0
(4.8) (6.2) (1.2)
BUY rating and price target of RM2.40 maintained

We initiated coverage of MAS on 31 May 2010 with a BUY call, given MASs yield improvement and cost reductions driven by its fleet renewal strategy, yielding substantive improvements by FY11F. We have arrived at our PT by pegging it at 1.8x FY11F P/BV, at the midcycle of its historical valuations. At these levels, FY12F P/BV falls to 1.2x, narrowing the valuation gap between MAS and its peers.
Nomura
120
14 June 2010
Malaysian Airline System
Jacinda Loh
Turnaround gathering momentum
Turnaround gaining traction; other divisions to pull own weight

Since 2002, when MAS unbundled its entire fleet of 73 aircraft off its balance sheet and adopted a full lease structure, and from 2006, when it underwent an even larger operational restructuring in the face of further losses, management has remained focused on extracting cost savings through a combination of staff and procurement cost reductions, route restructuring and selling off of non-core assets. The 2002 widespread asset unbundling is now generally understood to be a financial restructuring that has solved its gearing issues but not its operational issues the exercise has left MAS with an uncompetitive cost structure due to high lease payments, with leasing costs rising to 17% of its cost base in 2005, from 10% in 2001.
MAS turnaround gathering momentum as it enters its fifth year
Exhibit 191. MASs cost turnaround fleet renewal to drive growth for first time in years
2005 2006 2007 2008 2009 2010F 2011F
2012F
MAS operational restructuring officially under way Idris Jala, appointed as CEO in December 2005, says MAS was running out of cash in 4 months. He says MAS will not expand until it gets its house in order Reduced domestic routes by 99; reduced international by 24 routes. Cut workforce by 16%
MAS cuts routes, slows fleet growth Reviews revenue enhancement, minimises overbooking, pushes sales online. Eliminates costly procurement - eg the RM100 nasi lemak Freezes recruitment, cuts budget by 7%, works on more code share deals
Fleet renewal to provide leg up for cost turnaround MAS's fleet renewal to drive cost turnaround. Increasing frequencies, introducing new routes
Savings of RM665mn
Savings of RM738mn
Savings of RM936mn
Savings of RM225mn
Pushing more sales online, reconnecting with customer base, more housekeeping
However, we expect to see the results from the operational restructuring undertaken from 2006 bearing fruit in the next few years as MAS emerges with a relatively leaner cost base. Leasing costs have been reduced from their peak by 28%, and we see further reductions of 20-30% in FY10-12F as MAS moves towards owning more of its fleet. (Management aims to ultimately own 33-67% of its fleet.) Post Idris Jalas (ex-CEO) departure in August 2009, the continuation of its operational turnaround falls on the new CEO, Tengku Azmil. Investors looking for a seamless handover and continuation of MASs turnaround story will likely be comforted by the fact that the new CEO was part of Idris Jalas team during the initial turnaround years (as CFO).
Non-fuel cost cutting across the board, with more to come, in our view
New CEO to ensure turnaround continues
Nomura
121
14 June 2010
Jacinda Loh
Exhibit 192. Staff cut by 16%, downtrend in leasing costs to continue with increasing fleet ownership
('000) 23,000 22,000 21,000 20,000 19,000 18,000 FY05
Exhibit 193. Non-fuel costs on a downtrend via revenue and procurement management
(RMmn) 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 FY06 2006^
Staff size (LHS) Leasing costs (RHS)
(RMmn) 2,600 2,400 2,200 2,000 1,800 1,600 1,400 1,200 1,000
Staff Commissions
Leasing costs Handling and Landing
FY06
FY07
FY08
FY09
FY07 2007^
FY08 2008^
FY09 2009^
We expect this trend of falling costs to continue in FY10-12F given ongoing costreduction efforts, resulting in a 4-10% y-y fall in cost/ASKs (ex-fuel) and a 5-7% y-y fall in cost/ASKs. To note, our assumption of a 7% fall in cost/ASK by FY12F is more or less in line with the companys target to reduce cost/ASK by 15% in 2015. Commission costs are expected to fall further as MAS has eliminated commissions for its travel agents while pushing its online e-ticketing system in a bid to reduce ticketing costs. We also see its fleet renewal strategy serving up cost reductions in the form of effective fuel burn.
Cost/ASKs to fall 5-7% while fleet renewal to drive improvement in yield over the next three years, in our view
Exhibit 194. More room for cost/ASK to trend down closer to peer levels of 20-22 sen
(RM sen) 0.30 Cost / ASK Cost ex fuel / ASK
Exhibit 195. More cost reductions to kick in by FY11F as MAS continues housekeeping in FY10F
0.25
0.20
0.15
0.10 FY06 FY07 FY08 FY09 FY10F FY11F FY12F

Moving out of the 2009 crisis, the continued rebound in GDP growth and its flowthrough effects on international trade movements are likely to positively impact MASs other divisions, namely its cargo division (MASKargo contributes circa 10-11% of revenue) and its MRO unit. After a 33% drop in revenue in 2009, MASKargo recorded a 53% rise in its 1Q10 top line (y-y) amidst improving load factors (78% at 1Q10 versus 64% in 1Q09). In FY10F, MASKargo is likely to continue its positive contribution to MAS on a rebound from 2009 lows but also via its proactive pursuing of additional revenue opportunities, a key one being its strategic cooperation with Hainan Air Group (HNA Group, Chinas fourthlargest airline group) to improve its connectivity to domestic China destinations and give it the opportunity to have another hub in Pudong, Shanghai.
Improving contribution from other divisions to help drive MASs topline too
Nomura
122
14 June 2010
Jacinda Loh
Its continuation of its alliance and partnership with DHL Global Forwarding and DB Schenker (MAS is on both the organisations preferred carrier list) is likely to contribute to sustained performance of its cargo division arm, as well. (Overall, Nomura estimates are looking for a moderate 10% rebound y-y on cargo top line for FY10F as its new freighters are delivered around 4Q10.) As for its MRO unit (which fell 40% in FY09 as many airlines grounded their planes), we expect the contribution to recover to just under pre-crisis levels, fuelled by MASs new MRO contracts into Indias MRO sector as evidenced by its new three-year contract with SpiceJet (an Indian LCC) and its 10-year contract with Jet Airways.
Exhibit 196. Geographical distribution of revenue

MRO / airport handling 2% Others 4% Charter 2%
Surcharges and admin fees 22% Passenger 59% Cargo 11%

Source: Company data 2009
Fleet renewal benefits to accrue in FY11-12F

With MASs cost turnaround envisaged to generate tangible results in the next few years, management is now turning its attention to its fleet renewal strategy, which forms the crux of its bid to improve its lower-than-peer yields and drive top-line growth.
With its cost turnaround gaining momentum, focus turns to yield improvement
Exhibit 197. Comparison of MAS with SIA yields during 2000

(RM sen) 22 20 18 16 14 12 10 MAS
Exhibit 198. Yield difference has narrowed, with fleet renewal likely to close the gap further
(RM sen) 30
20
10
0 SIA MAS
SIA
Thai Airways Cathay Pacific
The companys ageing B747s are expected to be phased out and replaced with new 777-800s, with new blended winglets to improve aerodynamics and auxiliary power units (APUs) with lower fuel consumption. Management also expects its new A330s to yield up to RM300mn in cost savings from fuel and operating efficiencies.
Nomura
123
14 June 2010
Jacinda Loh
On the other hand, its six firmed A380 aircraft are envisaged to serve higher-density routes such as Kuala Lumpur-London and Kuala Lumpur-Sydney, given their highest seat count (510 seats) among MASs fleet.
Exhibit 199. MAS fleet delivery schedule

2010F B737-800 A330-300 A380
2011F 3 5 0
2012F 8 3 6
2013F 12 3 0
2014F 9 5 0
2015F 0 5 0
2016F 0 4 0
Total 35 25^ 6
3 0 0
^ 10 options, 15 firmed. Delivery of five A380s originally scheduled for 2011 has since been delayed to 2012.
As such, we expect a positive twofold impact on MAS arising from its fleet enhancement programme. First, a new fleet is expected to strengthen the airlines bid to tackle its yields an undertaking that was largely unsuccessful in the past as it was constrained by an ageing fleet. MAS is also, for the first time in years, increasing frequencies on more routes from Kuala Lumpur to cities such as Paris, Auckland, Perth and Ho Chi Minh. New routes are coming online as the company moves into its next phase of network realignment since its drastic route cut in 2006, when it eliminated nearly half of its existing routes (mostly domestic that were undertaken for national service, ie, routes that made no commercial sense). After a contracted period of growth as MAS stepped back to harness its controllable cost base, we see the new fleet and network enhancement strengthening its bid to take its yields further above historical levels as it closes the gap separating it from peers. The consequences of operating unprofitable routes in the past also appear to have left MAS with a heightened sensitivity to the importance of immediate responses in terms of route management. This is evidenced by the recent cancellation of 13 flights to Thailand in the wake of the riots there. MAS also suspended its Kuala Lumpur-New York flights on low demand in July 2009, but it maintains an office in New York to offer services via its partner airlines such as KLM.
Impact of fleet renewal is twofold: driving yield improvement and improving fuel efficiency
Increasing frequencies, adding new routes for the first time in five years after shedding nearly half of its routes in 2006
Awareness of the consequences of operating unprofitable routes appears to have grown
Exhibit 200. Increased frequencies and new routes to boost RPK

Increased weekly services to 7x Paris 5x Auckland 10x Perth 19x Ho Chi Minh
New routes to 2x Dammam 2x Brisbane 2x Johannesburg 7x Male 5x Colombo
While overall load factors are likely to dip below 70% in FY11-12F as new capacity comes up for the first time in the past five years, we see the buoyant Malaysian economic recovery in FY10F driving an improvement in average fares by 11% (for domestic) and 12% (for international). This rebound should largely return the domestic average fare to pre-crisis levels, given a relatively protected and stable domestic market. Its new Subang Skypark terminal, launched by the Prime Minister in 2009 and home to MASs low-cost carrier Firefly, is close to the city centre (as it is located in the old Subang Airport area), which is likely to appeal to corporate travellers pushed to fly low-cost during the downturn. However, we see international average fares in FY10F regaining slightly less than half the 30% drop they made during the 2009 crisis, as MAS slowly builds traction in a competitive market with new routes and additional frequencies, and as political and environmental headwinds persist throughout the year.
A buoyant Malaysian recovery to return average domestic fares to pre-crisis levels, in our view
Nomura
124
14 June 2010
Jacinda Loh
Exhibit 201. Domestic average fare to recoup 2009s fall given a protected and mature market
(%) 0.15 0.12 0.09 0.06 0.03 0.00 (0.03) (0.06) (0.09) (0.12) (0.15) FY08 FY09 FY10F FY11F FY12F Growth in domestic fares (LHS) Average domestic fare (RHS) (RM) 360 340 320 300 280 260 240 220 200
Exhibit 202. But international average fares should recover over the next two years
(%) 15 10 5 0 (5) (10) (15) (20) (25) (30) (35) (40) FY08 Growth in int'l fares (%) (LHS) Average int'l fare (RHS) (RM) 1,400 1,300 1,200 1,100 1,000 900 800 700 FY09 FY10F FY11F FY12F
Exhibit 203. Passenger growth rebound driving RPK growth

('000) 2,000 1,500 1,000 500 0
May-08 Nov-05 Sep-06 Feb-07 Dec-07 Mar-09 Jul-07 Jan-05 Jun-05 Oct-08 Apr-06 Aug-09 Jan-10
Exhibit 204. Overall, yield improvements of up to 9% likely over the next three years
(RM/RPK) 0.30 0.25 8 0.20 0.15 0.10 4 0.05 0.00 FY09 FY10F FY11F FY12F 2 6 Yield (LHS) Growth (RHS) (%) 10
Passengers carried (LHS) RPK growth (RHS)
(%) 30 25 20 15 10 5 0 (5) (10)
Overall, we see yield improvements of 5-9% over the next three years, with the strongest yields expected to come in FY11F. The premise for our BUY call on the company is the fact that its yield growth strategy, which hinges on its fleet renewal programme, will see the largest yield improvements in FY11F as delivery of the bulk of its new aircraft starts. We have assumed conservative yield growth for FY12F, given management has yet to provide colour on plans for that year. The second impact of its fleet renewal strategy is that we see fuel efficiencies accruing from flying a new fleet, measured by our estimated 2-10% fall in the number of barrels of fuel consumed/ATK from FY10-12F (versus news reports estimating 7-19% savings arising from the use of new blended winglets1). This is key, as fuel remains the largest cost driver for MAS, accounting for about 30% of its cost base. However, note that such efficiency gains may be overshadowed by what appears to be a costly fuel hedging policy at the moment. MAS hedged 60% of its 2010 fuel requirements (comprising an undisclosed proportion of crude and jet kerosene) for an average cost of US$100/barrel. Our FY10F fuel cost is calculated based on a 15mn barrel consumption, taking into account the hedge and the remaining 40% bought at an assumed full-year jet kerosene price of US$102. (Nomuras FY10F crude forecast of US$85 plus assumption of a 20% crack spread.)
1 Source: Centre for Asia Pacific Aviation, 14 Oct 2009
Largest yield improvements in FY11F as bulk deliveries of aircraft start coming in then
Nomura
125
14 June 2010
Jacinda Loh
Exhibit 205. Fuel still the single-largest cost driver

Others 7% Depreciation 3% Maintenance 12% Handling & landing 14%
Exhibit 206. Fuel cost sensitivity

(RMmn) 5,000 4,900 4,800 4,700 4,600 4,500 5%
Fuel costs (LHS) % change in fuel costs (RHS)
(%) 2.5 2.0 1.5 1.0 0.5 0.0 (0.5) (1.0) (1.5) (2.0) (2.5)
Fuel costs 29%
Commissions 3% Finance charges 1%

Staff 17% Leasing costs 14%
1%
0%
-1%
-5%
Should oil prices move sideways at current levels for the rest of FY10F, however, we believe MAS would be exposed to what could be a costly hedge, at 60%, compared with its competitors, such as AirAsia, which has hedged a smaller proportion of its fuel supply at a cheaper price and thus has the ability to buy more fuel at spot prices. Still, we think current prices have largely discounted the implications of a costly hedge, as we flag that there will be fuel cost savings accruing from the unhedged portion should oil prices trend sideways (versus our built-in assumptions of US$85 for FY10F per Nomura forecasts). Sensitivity-wise, we see fuel costs moving by RM19mn should crude oil prices swing 1%. This translates into a 9% fall in earnings should crude oil prices rise 1%. However, this is the worst-case scenario, assuming MAS is not passing on costs via fuel surcharges.
Balance sheet robust after RM2.67bn rights issue

The timely equity raising in March 2010 has left MAS largely prepared to gear up for its fleet deliveries over the next three years, in our view. We expect gearing to pick up to > 1x by FY12F as delivery payments are made. In that respect, finance costs are expected to double to RM248mn by FY11F, eating up about 16% of FY11F EBITDA. On our numbers, finance and depreciation costs as a percentage of EBITDA are likely to take up nearly 60-70% of EBITDA for the next three years if the fleet delivery proceeds as planned. This is similar to what we forecast for AirAsia, with a key difference MASs expected gearing is lower than our estimates for AirAsia and considerably below the > 3x gearing levels it saw in the late 1990s. Also, we note that besides finance costs and depreciation, there is no other major cost item given MAS enjoys a very low effective tax rate because of its capital allowance, but largely due in part to a special tax exemption granted by the Ministry of Finance that frees it from paying tax on all chargeable income in respect of all sources of income until 2015.
Nomura
126
14 June 2010
Jacinda Loh
Exhibit 207. We see finance and depreciation costs hitting 60-70% of EBITDA
(RMmn) 2,600 2,400 2,200 2,000 1,800 1,600 1,400 1,200 1,000 800 600 400 200 0 FY08 Fin + Dep EBITDA
FY10F
FY11F
FY12F
Note: 2009 not used as EBITDA was negative. Data shown from 2008 as MAS announced its plan to start owning its fleet in 2008. Source: Company data, Nomura estimates
Exhibit 208. Gearing vs FCF

(%) 2.0 1.5 1.0 0.5 0.0 (0.5) (1.0) (1.5) (2.0) FY06 FY07 FY08 FY09 FY10F FY11F FY12F (0.3) (0.9) (0.0) (0.5) (1.1) 0.9 Net gearing (LHS) FCF (RHS) 1.1 (RM) 2,000 1,500 1,000 500 0 (500) (1,000) (1,500) (2,000) (2,500) (3,000) (3,500)
No euro impact, has partial natural hedge to US dollar

Similar to AirAsia, MASs cost base is about 50% US dollar-denominated, depending on where fuel prices are at the moment. The difference from AirAsia is that MAS has 10-20% US dollar-denominated revenue, which can provide a partial hedge, with management hedging the rest depending on market conditions. Despite deriving close to 30% of its route revenue from the Middle East and Europe, MASs currency exposure to the euro is small both in terms of revenue and costs, according to management, with it forming a natural hedge. The company also has no borrowings in euro.
Nomura
127
14 June 2010
Jacinda Loh
Exhibit 209. Geographical distribution of revenue

Africa & South America 2%
Orient & North America 20%
Asia 36%
Australia & New Zealand 14%

Note: Company data
Europe & Middle East 28%
BUY rating and price target of RM2.40 maintained

We value MAS by pegging FY11F BVPS to its historical mid-cycle P/BV of 1.8x to arrive at our price target of RM2.40. Our mid-cycle valuation for MAS is premised on our view that its cost turnaround is likely to improve its cost competitiveness and that its fleet rejuvenation will drive revenue forward as the airline moves away from 5-6 years of being under the weather, so to speak. We expect room for recovery owing to its cost turnaround and the rebound in passenger numbers in FY10F, with its fleet rejuvenation driving more savings as new aircraft come into service in FY11F. Hence, the stock is currently trading at ~1.5x FY11F P/BV (17% below mid-cycle), which, in our view, does not appear to be justified given we see improving operating cashflow and a robust balance sheet relative to its own history. Besides the accruing benefits of reduced leasing costs, as management estimates the net present value (NPV) savings of fleet ownership to potentially go into hundreds of millions of ringgit, a growing book value also implies to us that this is likely to make MAS cheaper at 1.2x FY12F, thus narrowing the valuation gap with its peers by 2012. Versus its peers, MAS has historically traded at a premium P/BV level due to a function of its own history, as well as the relatively more expensive Malaysian market. However, we see its historical premium of 13-15% narrowing to 5-6% by 2012F as its fleet ownership strategy boosts its book value. As it stands, the historical premium has narrowed between MAS and Cathay Pacific recently.
Exhibit 210. MAS P/BV comparison

2010F 1.5 1.33 1.32 2011F 1.4 1.26 1.28 2012F* 1.2 1.17 1.12 MAS premium @ 2010F (%) 6 14 MAS premium @ 2012F(%) 6 5
MAS Cathay Pacific SIA
* 2012F numbers are Bloomberg consensus estimates for SIA and Cathay Pacific as Nomura numbers for those stocks are up to 2011F currently. Reference date used at 7 June
At our price target, MAS would trade at 5x FY11F EV/EBITDA, a 22% discount to SIAs EV/EBITDA of 6.4x.
Nomura
128
14 June 2010
Jacinda Loh
Exhibit 211. MAS P/BV chart

(RM) 11 10 9 8 7 6 5 4 3 2 1 0 Max = 4.2 Mean = 1.8 Min = 0.4 2.5x 2.0x 1.5x 1.0x 0.5x
Mar-91 Mar-92 Mar-93 Mar-94 Mar-95 Mar-96 Mar-97 Mar-98 Mar-99 Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09
Exhibit 212. MAS P/BV band

(x) 4 3 2 1 0 Min = 0.4
Mar-91 Mar-92 Mar-93 Mar-94 Mar-95 Mar-96 Mar-97 Mar-98 Mar-99 Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10
Source: Bloomberg, company data
Max = 4.2
Min = 1.8
Source: Bloomberg, company data
With 17% free float, MAS may see liquidity pose a barrier; however, recent developments on the government-linked companies (GLC) transformation drive spearheaded by the government may be a potential catalyst, in our view. Being 69%owned by Khazanah, the Malaysian governments investment arm, MAS was one of the organisations placed in the GLC Transformation Programme in 2004 in a bid to produce regional champions spearheading the countrys growth by 2015.
We see MAS slowly moving out of phase 2 of transformation, where early fruits of sustainable developments are seen
Exhibit 213. MAS Organisation to watch in the GLC transformation agenda
Source: Nomura research
Besides entailing operational restructuring to boost cost competitiveness, the next step also involves the government subsequently reducing its stake in selected GLCs in a bid to boost liquidity and foreign interest in the Malaysian capital markets. At the same time, the aviation sector is likely to be a focus of government improvement efforts as the tourism sector was named a National Key Economic Area within the recently announced New Economic Model. However, in our view, it is unlikely that Khazanahs stake will be substantially reduced given the strategic importance of the aviation sector to national interests.
Potential timely GLC stake reduction by Khazanah may give a leg up to liquidity
Nomura
129
14 June 2010
Jacinda Loh
Exhibit 214. Key model assumptions

FY09 Fleet assumptions % of fleet leased % of fleet owned Fleet size Revenue assumptions RPK (mn) ASK (mn) Passenger load factor (%) Passenger yield (RM sen) Cargo RTK (mn) Cargo ATK (mn) Cargo load factor (%) Cargo yield (RM sen) Cost assumptions Crude oil prices (US$) Fuel consumption (mn barrels) Cost / ASK (RM sen) Cost / ASK ex-fuel (RM sen) Other macro assumptions RM/US$
FY10F 80 20 92 37,383 51,196 73 0.22 2,433 3,598 68 68
FY11F 73 27 100 40,250 58,613 69 0.23 2,555 3,598 71 68
FY12F 64 36 113 44,897 71,074 63 0.25 2,632 3,706 71 69
87 13 88 32,894 47,838 69 0.20 2,072 2,949 70 72
15.5 26 18
85 14.8 26 16
95 15.9 24 16
110 16.5 23 15
3.18
3.0
2.92

Further upside risks to our view are, if passenger growth rebounds at a faster pace than our assumptions of 5% for domestic passengers and 7% for international passengers in FY10F, and better-than-expected yield improvements take place earlier than expected. Key downside risks to our view include further delays of MASs fleet deliveries. Current sentiment on the uncertainty of the strength of the economic rebound, political and environmental (ie, the Eyjafjallajokull volcanic eruption in Iceland) headwinds, as well as oil price uncertainty could persist for the next few quarters, dampening possible performance further. Also, in a worst-case scenario, assuming zero hedging (as hedging policy varies), we highlight a potential 15% earnings impact from each 1% movement in the US dollar.
Upside risks: better-thanexpected passenger and yield growth; downside risks: more from overhang on macro uncertainty than fundamentals, in our view
Nomura
130
14 June 2010
Jacinda Loh
Income statement (RMmn) Year-end 31 Dec Revenue Cost of goods sold Gross profit SG&A Employee share expense Operating profit EBITDA Depreciation Amortisation EBIT Net interest expense Associates & JCEs Other income Earnings before tax Income tax Net profit after tax Minority interests Other items Preferred dividends Normalised NPAT Extraordinary items Reported NPAT Dividends Transfer to reserves Valuation and ratio analysis FD normalised P/E (x) FD normalised P/E at price target (x) Reported P/E (x) Dividend yield (%) Price/cashflow (x) Price/book (x) EV/EBITDA (x) EV/EBIT (x) Gross margin (%) EBITDA margin (%) EBIT margin (%) Net margin (%) Effective tax rate (%) Dividend payout (%) Capex to sales (%) Capex to depreciation (x) ROE (%) ROA (pretax %) Growth (%) Revenue EBITDA EBIT Normalised EPS Normalised FDEPS Per share Reported EPS (RM) Norm EPS (RM) Fully diluted norm EPS (RM) Book value per share (RM) DPS (RM)
FY08 15,504 (13,026) 2,477 (2,172) 305 633 (328) 305 (61) 20 265 (19) 246 1 247 247 247
FY09 11,574 (10,135) 1,440 (2,068) (628) (312) (316) (628) (85) 12 (701) 31 (670) 3 (667) 1,163 496 496
FY10F 13,417 (10,976) 2,442 (2,150) 292 666 (374) 292 (106) 12 197 (12) 186 (3) 183 183 183
FY11F 15,196 (12,056) 3,140 (2,277) 863 1,533 (670) 863 (247) 12 627 (31) 596 (3) 593 593 593
FY12F 17,285 (13,657) 3,627 (2,530) 1,097 2,391 (1,294) 1,097 (411) 12 698 (35) 663 (3) 661 661 661
Cost cutting to continue in FY10-12F, resulting in costs rising at a slower pace, while the top-line rebounds on improved yields
MAS has special exemption from the government which exempts it from paying tax on all sources of income until 2015; only pays minimal tax for overseas subsidiaries
17.2 21.0 17.2 na 1.0 6.6 13.2 16.0 4.1 2.0 1.6 7.2 4.9 2.3 6.1 5.4
na na 8.6 na 5.5 na na 12.4 (2.7) (5.4) 4.3 na 7.9 2.9 20.2 (10.0)
32.9 40.2 32.9 7.1 1.6 9.6 21.4 18.2 5.0 2.2 1.4 6.0 15.9 5.7 8.5 4.2
10.1 12.4 10.1 3.0 1.4 6.7 11.8 20.7 10.1 5.7 3.9 5.0 30.7 7.0 15.3 8.1
9.1 11.1 9.1 2.3 1.2 4.9 10.5 21.0 13.8 6.3 3.8 5.0 18.0 2.4 14.7 7.7
1.8 (48.1) (65.1) (69.6) (69.6)
(25.3) (149.3) (305.7) (370.1) (370.1)
15.9 na na na na
13.3 130.1 195.6 224.6 224.6
13.7 56.0 27.2 11.4 11.4
0.11 0.11 0.11 2.04 -
0.23 (0.31) (0.31) 0.36 -
0.06 0.06 0.06 1.23 -
0.19 0.19 0.19 1.43 -
0.22 0.22 0.22 1.66 -
Nomura
131
14 June 2010
Jacinda Loh
Cashflow (RMmn) Year-end 31 Dec EBITDA Change in working capital Other operating cashflow Cashflow from operations Capital expenditure Free cashflow Reduction in investments Net acquisitions Reduction in other LT assets Addition in other LT liabilities Adjustments Cashflow after investing acts Cash dividends Equity issue Debt issue Convertible debt issue Others Cashflow from financial acts Net cashflow Beginning cash Ending cash Ending net debt
FY08 633 (1,328) 71 (624) (764) (1,387) (15) 81 114 (200) (1,408) 0 546
FY09 (312) 1,822 (3,158) (1,648) (914) (2,561) (8) 195 613 (12) (1,772) 865
FY10F 666 (922) 1,101 845 (2,127) (1,283) (120) (727) (2,130) 1,671 1,927
FY11F 1,533 (433) 872 1,972 (4,662) (2,689) (2,689) 2,639
FY12F 2,391 (216) 492 2,667 (3,108) (441) (441) 1,317
546 (862) 4,434 3,572 (2,273)
865 (907) 3,572 2,665 (832)
3,598 1,468 2,665 4,133 (87)
2,639 (50) 4,133 4,083 3,744
1,317 876 4,083 4,959 5,114
Balance sheet (RMmn) As at 31 Dec Cash & equivalents Marketable securities Accounts receivable Inventories Other current assets Total current assets LT investments Fixed assets Goodwill Other intangible assets Other LT assets Total assets Short-term debt Accounts payable Other current liabilities Total current liabilities Long-term debt Convertible debt Other LT liabilities Total liabilities Minority interest Preferred stock Common stock Retained earnings Proposed dividends Other equity and reserves Total shareholders' equity Total equity & liabilities Liquidity (x) Current ratio Interest cover Leverage Net debt/EBITDA (x) Net debt/equity (%) Activity (days) Days receivable Days inventory Days payable Cash cycle
FY08 3,572 2,020 380 795 6,767 73 2,465 106 1 659 10,072 425 2,409 2,054 4,887 873 114 5,875 11 1,671 (2,129) 4,643 4,186 10,072
FY09 2,665 1,447 385 287 4,785 81 3,044 110 34 464 8,518 288 2,236 2,973 5,497 1,545 727 7,770 12 1,671 (5,590) 4,655 736 8,518
FY10F 4,133 1,969 525 287 6,914 81 4,865 110 34 584 12,588 414 2,596 2,354 5,363 3,632 8,995 12 3,342 (5,408) 5,647 3,582 12,588
FY11F 4,083 2,236 1,043 287 7,649 81 8,856 110 34 584 17,315 629 2,947 2,354 5,930 7,198 13,128 12 3,342 (4,815) 5,647 4,175 17,315
FY12F 4,958 2,549 1,359 287 9,154 81 10,670 110 34 584 20,634 497 3,360 2,354 6,211 9,575 15,786 12 3,342 (4,154) 5,647 4,835 20,634
1.38 5.0
0.87 (7.4)
1.29 2.8
1.29 3.5
1.47 2.7
Gearing to hit above 1x in FY12F as its A380s are delivered
net cash net cash
na net cash
net cash net cash
2.44 89.7
2.14 105.8
45.2 10.5 76.1 (20.4)
54.7 13.8 83.6 (15.2)
46.5 15.1 80.3 (18.7)
50.5 23.7 83.9 (9.7)
50.7 32.2 84.5 (1.7)
Nomura
132
14 June 2010
Singapore Airlines S I A S P
TR AN S P O R T/ L O G I S TI C S | S I N G AP O R E
From Neutral
+852 2252 2195 +852 2252 2196
BUY
Closing price on 7 Jun Price target Upside/downside Difference from consensus FY11F net profit (S$mn) Difference from consensus
Source: Nomura
Action
Although SIA is highly geared to the current recovery in premium air passenger traffic, we believe it will be more resilient than most regional airlines in any downturn given its flexible staff cost structure, minimal oil hedging and net cash position. With the overhang of a possible overpriced acquisition diminished, we now find SIAs existing valuation of just 1.1x FY12F P/B attractive, especially as the peer group is averaging a P/B multiple of 1.5x. Upgrade to BUY.
S$14.28
S$16.85
(from S$13.27)
18.0% -3.0% 1,259 2.4%
Catalysts
Stronger or weaker numbers from the upcoming 1QFY11 results could provide a stronger conviction on sustainability of recovery, possibly impacting share price. Anchor themes With the Asian economies (led by China) expected to recover at a much faster pace than the US and Europe, airlines with hubs in Asia are expected to see an earlier recovery than their global peers.
Nomura vs consensus
While we are in line with the market on both price target and earnings estimates, we believe there is room for upside should Europe concerns diminish.
Well positioned
Acquisition overhang reduced
With Singapore Airlines (SIA) recent statement that it was unlikely to become a strategic shareholder in China Eastern Airlines (CEA), any risk of SIA potentially over-paying for overseas assets has significantly declined. We note that following the recent substantial capital injection by the Chinese government into CEA, should SIA consider buying a stake in CEA at HK$3.28/shr (below its bid price of HK$3.80/shr in 2008), it would still need to pay 47% more to acquire the same percentage stake.

31 Mar (S$mn)
Revenue Reported net profit Normalised net profit Normalised EPS (S$) Norm. EPS growth (%) Norm. P/E (x) EV/EBITDA (x) Price/book (x) Dividend yield (%) ROE (%) Net debt/equity (%) Earnings revisions Previous norm. net profit Change from previous (%) Previous norm. EPS (S$)

15,996 1,062 1,062 0.90 12,707 216 216 0.18 14,606 1,259 1,259 1.06 15,999 1,667 1,667 1.41
(46.8) (79.6) 483.5 32.4 16.0 78.7 13.5 10.2 5.4 7.1 4.1 3.3 1.2 1.3 1.2 1.1 7.0 13.5 3.2 4.2 7.3 1.6 9.1 11.3 net cash net cash net cash net cash 141 52.6 0.12 927 35.8 0.78 1,394 19.6 1.18
Recovery confirmed by recent results

SIA's 4QFY10 results continued to show improving passenger yields (at S$11.1cts/RPK in 4QFY10 from S$9.8cts/RPK in 2QFY10) and declining passenger breakeven load factors. Furthermore, SIA managed to show an RPK gain of 2.9% y-y in April 2010 even in the face of the volcanic ash cloud disruption.
Share price relative to MSCI Singapore

(S$) 17 16 15 14 13 12 11 10 Jun09 Aug09 Sep09 Jul09
Price Rel MSCI Singapore
More defensive structure

With a more flexible staff cost structure (which historically accounted for over 35% of overall costs), minimal oil hedging strategy and net cash on its balance sheet, SIA is arguably one of the most defensive plays among regional airlines, in our view.
125 120 115 110 105 100 95 90 May10 3m (10.2) (11.3) (7.1) Feb10 Mar10 1m (0.1) (1.7) 2.8 Apr10
Nov09
Dec09
Jan10
Oct09
Valuations undemanding; upgrade to BUY, PT S$16.85

Trading at an estimated FY11F P/B of 1.2x and FY12F P/B of 1.1x, we view SIAs existing valuations as undemanding, especially given that its strong brand name, young fleet and superior product offering (in the A380s) arguably position it best to take advantage of the projected sustained premium traffic recovery. We note that its peer group is trading at FY11F P/B of between 1.1x and 2.0x.
Absolute (S$) Absolute (US$) Relative to Index Market cap (US$mn) Estimated free float (%) 52-week range (S$) 3-mth avg daily turnover (US$mn) Stock borrowability Major shareholders (%) Temasek Holdings
6m 5.6 3.8 9.3
12,019 44.0 15.94/10.60 20.82 Easy 54.5
Nomura
133
14 June 2010
Singapore Airlines
Jim Wong
Well-positioned for a take off
Acquisition overhang reduced

While often seen as one of the best managed airlines in the region, SIAs overseas forays have historically not been very successful: these include its 25% stake purchase in Air New Zealand (AIR NZ; not rated) in 2000, its purchase of a 49% stake in Virgin Atlantic Airways also in 2000 and its near purchase of a 16% stake in China Eastern Airlines in 2008. SIAs investment in Air New Zealand was substantially diluted to just 4.5% in 2001 following Air New Zealands near bankruptcy and bail-out by the New Zealand government. SIA sold out its remaining stake at a significant loss in 2004. As for Virgin Atlantic, following SIAs acquisition of a 49% stake in the company in March 2000 for S$1682mn, Virgin Atlantics earnings are yet to reach a level of profitability seen prior to the acquisition. While Virgin Atlantic most recently announced a pre-tax profit of GBP68mn in FY09 (almost double the profit seen in FY08), as Virgin is not an independently listed company the profit was not calculated under International Accounting Standards (IAS). Adjusting for IAS, Virgin Atlantics contribution to SIAs FY09 profits was just S$0.4mn.
Overseas acquisitions have historically met with little success at SIA
Exhibit 215. Virgin Atlantics profit trend

YE (GBPmn) Apr-98 Apr-99 Apr-00 Apr-01 Apr-02 Apr-03 Feb04 (10 mths) Feb-05 Feb-06 Feb-07 Feb-08 Feb-09 Mar-09 (S$mn)
Turnover 942 1,067 1,268 1,518 1,500 1,401 1,272 1,630 1,912 2,141 2,380 2,579 -
Pre-tax profit 91 99 4 46 (93) 16 21 68 45 7 35 68 0.4
SIAs proposed move to acquire a 15.7% stake in CEA at HK$3.80/shr (CEAs share price subsequently fell to a low of HK$0.74/shr in October 08 and is now HK$3.28/shr) was a narrowly avoided disaster for SIA in February 08, in our view. If not for the intervention of Air China, which persuaded minority investors to reject the acquisition, SIA could have ended up paying HK$4693mn (or S$853mn) for the right to book an incremental attributable RMB2,413mn (or S$496mn) in losses for CY2008 and, as with its Air New Zealand stake, see its stake in CEA substantially diluted post the bail-out of CEA by the Chinese government following announcements of unprecedented losses by CEA.. Hence, SIAs assertion that it was no longer interested in acquiring a strategic stake in CEA should remove what may have been seen as a potential overhang for many investors. Recall that in its FY10 results briefing, replying to a question regarding SIAs intention to become a strategic investor in CEA, SIAs CEO said, Well China Eastern has decided to join the SkyTeam Alliance. We are a member of Star Alliance, so that would make it hard to envisage how we could tie in with them commercially.
denial of interest in taking a stake in CEA hence may be seen as positive for SIA
Nomura
134
14 June 2010
Singapore Airlines
Jim Wong
We note that post the RMB14bn bailout of CEA by the Chinese government, SIA would have had to pay HK$6880mn or 47% more for the same 15.7% stake in CEA, even based on the current lower share price of HK$3.28/share given that CEAs number of shares have since increased substantially. Following a string of not-so-impressive acquisitions, SIA now rather than acquiring assets is divesting and/or spinning off assets. In August 2009, SIA divested its holding in SATS via the distribution of the groups entire 80% stake in SATS to shareholders in the form of dividends. Based on SATS share price of S$2.45/shr at the time of the stock distribution, SIA shareholders would have received S$1.80/shr in value. In January 2010, SIA spun-off 31.7% of its stake in Tiger Airways (TGR SP; not rated) to the public, thereby effectively reducing its stake in Tiger to 33.0% post listing from 49.0% pre-listing. The spin-off (which valued SIAs stake in Tiger at S$269mn) not only enabled Tiger to expand going forward without depleting the resources of SIA itself, it also enabled the market to independently assign a market value to Tiger, thereby unlocking value which may have been previously hidden within the SIA group structure. Speculation is rife that SIAs 49% stake in Virgin Atlantic could be the next divestment by the group (source: Wall Street Journal, SIA may sell Virgin Atlantic stake, 26 May 2010). As SIA had previously and publicly expressed its interest to sell the groups 49% stake Virgin Atlantic, SIA should be a willing seller should a willing buyer be found. Recall that while SIA initially paid S$1645mn for its 49% stake in Virgin Atlantic in FY2000 (investment further increased to S$1682mn or S$1.42/shr in FY03), of the investment amount, S$1589mn in goodwill has since been written off. SIA should therefore be carrying its 49% stake in Virgin Atlantic at around S$93mn. Hence, any sales proceeds on top of S$93mn are likely to be booked as profits. Furthermore, should a sale result in significant disposal gains, it is also highly possible that SIA may distribute some of such gains back to shareholders in the form of special dividends, in our view.
A success sale of Virgin Atlantic should enhance value SIA has been divesting rather than acquiring assets
Recovery confirmed by recent results

SIAs most recent set of quarterly results have reaffirmed that the worst is behind it and the group is well on its way to a recovery, in our view. Recall that SIA reported 4QFY10 net profit of S$278mn, a large positive swing from losses seen in 1QFY10 and 2QFY10. This was significantly higher than our previous estimate for S$203mn.
All divisions have returned to profitability
Exhibit 216. SIAs EBIT trend (S$mn)

Passenger 3QFY08 4QFY08 1QFY09 2QFY09 3QFY09 4QFY09 1QFY10 2QFY10 3QFY10 4QFY10
Cargo 73 40 5 (81) (46) (123) (104) (90) 40 8
SATS 47 33 38 44 43 46 44 27 0 0
SIA Eng 19 21 16 41 29 27 12 35 22 41
Others Group EBIT 23 24 19 207 17 (201) 0 3 30 16 675 468 343 232 357 (28) (319) (181) 323 241
Net profit 590 528 359 324 337 42 (307) (159) 404 278
513 350 265 21 314 223 (271) (157) 231 175
While 4QFY10 (or 1QCY10) earnings were below those of 3QFY10, this is only due to seasonality as 3QFY10 is traditionally the strongest quarter of the year given that the Christmas holidays fall within the quarter.
Nomura
135
14 June 2010
Singapore Airlines
Jim Wong
We note that SIA's 4QFY10 results continued to show improving passenger yields (at S$11.1cts/RPK in 4QFY10 from S$9.8cts/RPK in 2QFY10) and declining passenger breakeven load factors.
Yields moving up across the board
Exhibit 217. SIAs passenger trend

RPK (mn) 3QFY08 4QFY08 1QFY09 2QFY09 3QFY09 4QFY09 1QFY10 2QFY10 3QFY10 4QFY10
Px load factor (%) 81.3 79.4 76.7 79.1 78.5 71.2 71.6 79.6 82.4 80.0
23,568 23,034 23,191 24,104 23,297 19,536 18,655 21,253 22,108 20,867
Exhibit 218. SIAs passenger yields and costs

Px yield (cts/RPK) 3QFY08 4QFY08 1QFY09 2QFY09 3QFY09 4QFY09 1QFY10 2QFY10 3QFY10 4QFY10
Px unit cost (cts/ASK) 8.4 8.9 8.7 9.5 9.3 9.1 8.6 8.7 8.3 8.6
Px breakeven load factor (%) 67.7 71.2 70.2 74.2 72.7 77.1 84.3 88.8 79.0 77.5
12.4 12.5 12.4 12.8 12.8 11.8 10.2 9.8 10.5 11.1
Similarly cargo yields and loads have remained firm.
Exhibit 219. SIAs cargo trend

RFTK (mn) 3QFY08 4QFY08 1QFY09 2QFY09 3QFY09 4QFY09 1QFY10 2QFY10 3QFY10 4QFY10
Cargo load factor (%) 62.9 61.2 61.3 60.8 58.4 56.5 58.5 62.9 65.1 64.8
2,120 1,814 1,965 1,991 1,820 1,524 1,552 1,680 1,803 1,624
Nomura
136
14 June 2010
Singapore Airlines
Jim Wong
Exhibit 220. SIAs cargo yields and costs

Cargo yield (cts/RFPK) 3QFY08 4QFY08 1QFY09 2QFY09 3QFY09 4QFY09 1QFY10 2QFY10 3QFY10 4QFY10
Cargo unit cost (cts/ATK) 23.5 23.8 24.8 28 24.3 21.9 21.1 21.7 21.3 22.4
Cargo breakeven load factor (%) 57.9 58.8 61.1 65.9 63.4 75.0 77.6 76.0 61.0 64.2
40.6 40.5 40.6 42.5 38.3 29.2 27.2 28.7 34.9 34.9
In terms of oil hedging, SIA's oil hedging losses fell to S$19mn in 4QFY10, versus a loss of S$198mn in 2QFY10 and loss of S$287mn in 1QFY10, as shown below:
Exhibit 221. Crude oil price and SIA's oil hedging trend
Oil price (US$/bbl) 3QFY08 4QFY08 1QFY09 2QFY09 3QFY09 4QFY09 1QFY10 2QFY10 3QFY10 4QFY10 Spot
Source: Bloomberg, Company data
SIA's hedging gain/(loss) (S$mn) 115 134 347 186 (341) (540) (287) (198) (53) (19) -
91 98 124 118 59 43 60 68 76 79 72
SIA budgets for capital expenditure of S$1.45bn in FY11F, S$2.2bn in FY12F and S$1.4bn in FY13F as it will be only adding just one passenger aircraft in FY11 on a net-net basis to its already existing fleet of 109 passenger aircraft. While SIA will be taking delivery of four A380-800s and 8 A330-300s in FY11 (most are expected to be leased rather than owned), it will also be leasing out six B777s, sell four B777s and returning to lessor one B744 in FY11. Hence, the group will only be expanding its passenger or cargo capacity slowly and is looking to focus on improving yields rather than volumes. Any capacity expansion is expected to be more into regional routes and less in international routes. Despite a relatively slow capacity expansion, SIA has in fact being seeing a system wide improvement in mix, with a pronounced recovery in business class and expects this recovery to be sustained. In the Outlook section of its results, SIA states that "Advance bookings for travel in the year ahead are encouraging, especially in Business Class." and that "Yields should keep pace with the growth in demand".
Going forward, focus will be on improving yields rather than volumes
Nomura
137
14 June 2010
Singapore Airlines
Jim Wong
More defensive structure

Among regional airline peers, SIA is generally seen as one of the most defensive. To its credit, SIA has a more flexible staff cost structure that helps it to weather the bad times better than most peers. Around 10% of SIAs staff costs are paid in the form of Monthly Variable Components (MVC). Under the MVC conditions, SIA is entitled to cut 25% of the MVC if the group incurs an operating loss of S$50mn or more in any given quarter and up to 100% of the MVC can be cut if the group incurs an operating loss of S$200mn or more. This built-in MVC allows SIA to trim its staff costs more effectively than its peers in any given downturn.
Arguably most defensive among airlines
Exhibit 222. Comparative staff costs

Jan09-Jun09 SIA (S$mn) CX (HK$mn) Qantas (A$mn)
Jan08-Jun08 (1,476) (6,284) (1,814)
Chg (% y-y) (19.6) (3.3) (3.7)
(1,188) (6,075) (1,746)
Similarly SIAs new strategy of minimal oil hedging (the group is planning to hedge only 20% of expected consumption in FY11) should also reduce hedging losses in any given downturn. The theory is that in an economic downturn, oil prices should fall. Hence a lower hedging ratio should result in reduced oil hedging losses, thereby enabling SIA to be more resilient than peers in terms of earnings in any downturn. We note that the way most airlines structure their hedging, hedging gains are made when oil prices move up and hedging losses are made when oil prices move down. The groups strong balance sheet (it is net cash) also adds to SIAs defensive nature. With an abundance of cash, the group should be able to weather any downturn longer than its peers.
Well positioned
While the Asian aviation recovery is a macro one, SIA is arguably better positioned to take advantage of the recovery than most. As previously noted, a pronounced improvement in business class traffic has been one of the factors driving the current recovery. SIA, with one of the youngest and highest quality aircraft fleet in the region, should be able to attract a higher proportion of premium traffic than its peers.
SIA has one of the youngest fleet in the world
Exhibit 223. Fleet development schedule

Fleet size (# of aircraft) Air Asia CSA SIA CEA Air China EVA Air ANA KAL CX MAS
Avg fleet age (years) 2.5 6.2 6.3 7.2 7.4 8.5 9.8 9.0 9.0 11.6
Fleet growth (%) 2010F 4.8 9.0 3.3 7.8 10.3 1.8 8.6 4.8 3.5 2.9 2011F 17.0 8.5 4.0 5.8 10.4 0.0 na 12.1 3.4 7.5
84 378 120 257 262 53 210 126 144 104
Nomura
138
14 June 2010
Singapore Airlines
Jim Wong
Although SIA is very much an international carrier, given its home base of Singapore, it is also very well positioned in the ASEAN region. Given that the ASEAN member countries are looking to grow their respective economies via increased connectivity, an open-skies policy among ASEAN countries is on the cards over the medium tern, in our view. With SIA being the dominant carrier in Singapore (which is already a very open market) and a dominant carrier in Indonesia (a much more protected market), an open-skies policy could provide the group with increased opportunities that should outweigh any increased challenges, in our view.
Valuations undemanding
Trading at an estimated FY11F P/E of 13.5x, FY11F P/B of 1.19x and FY12F P/B of 1.10x, we view SIAs existing valuations as undemanding. Following our upgrade of SIAs FY11F and FY12F net profit estimates by 35.8% and 19.6% respectively (on the back of a stronger-than-expected yield recovery), we raise our price target on the stock to S$16.85/shr from S$13.27/shr previously.
New price target of HK$16.85/shr
Exhibit 224. SIAs historical P/B trend

(x) 2.0 1.8 1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2 0.0 Mar-90
Source: Bloomberg
P/BV (LHS)
ROE (%) (RHS) Max=1.9x
(%) 18 16 14 12 10 8 6 4 2 0
Mean=1.0x
Min=0.5x
Sep-93
Mar-97
Sep-00
Mar-04
Sep-07
Mar-11
Our price target of S$16.85/shr for SIA is based a FY12F P/B of 1.3x (upgraded from 1.2x on the back of reduced acquisition risk). While this is higher than the groups historical mid-cycle P/B of 1.0x, we believe this is reasonable given SIAs home base of Singapore is expected to see exceptionally high economic growth over the next few years (among the strongest economic growths in the world).
Exhibit 225. Real GDP forecasts

(%) China India Vietnam Indonesia Singapore Malaysia Thailand Philippines Taiwan Korea Hong Kong US UK Japan Euro zone
Source: Nomura Global Economics estimates
2008 9.0 7.3 6.2 6.1 1.1 4.6 2.6 3.8 0.1 2.2 2.4 1.1 0.7 (0.7) 0.9
2009F 8.7 6.4 5.3 4.5 (2.0) (1.7) (2.3) 0.9 (1.9) 0.2 (2.8) (2.4) (4.9) (5.2) (4.0)
2010F 10.5 8.8 6.5 5.9 10.2 7.0 3.3 5.0 7.9 5.5 5.5 3.3 1.3 3.4 1.1
2011F 9.8 8.3 6.6 6.3 5.3 5.2 4.8 4.5 4.3 4.0 4.0 2.7 2.5 2.0 1.8
Nomura
139
14 June 2010
Singapore Airlines
Jim Wong
Further given SIAs strong brand name, young fleet and superior product offering (in the A380s), it is arguably best positioned to take advantage of the projected sustained premium traffic recovery. Hence, we would argue that SIA should at least trade at similar, if not higher, P/B than other full service airlines in the region.
Exhibit 226. Comparison of 2011F P/BV of regional airlines

Airlines Singapore Airlines Air China Cathay Pacific China Southern Airlines China Eastern Airlines Korean Air Malaysia Airlines Eva Airways
Source: Nomura estimates; FY12 number used given Mar Year-end
2011 P/BV (x) 1.1* 1.9 1.3 1.1 2.0 1.4 1.4 1.2

Investment risks to our price target include higher- or lower-than-expected jet fuel prices which would impact our price target, as would higher-than-expected achieved passenger or cargo yields and loads. Also, capacity cuts both in passenger and cargo divisions would also impact earnings.
Nomura
140
14 June 2010
Singapore Airlines
Jim Wong
Income statement (S$mn) Year-end 31 Mar Revenue Cost of goods sold Gross profit SG&A Employee share expense Operating profit EBITDA Depreciation Amortisation EBIT Net interest expense Associates & JCEs Other income Earnings before tax Income tax Net profit after tax Minority interests Other items Preferred dividends Norm alised NPAT Extraordinary items Reported NPAT Dividends Transfer to reserves Valuation and ratio analysis FD normalised P/E (x) FD normalised P/E at price target (x) Reported P/E (x) Dividend yield (%) Price/cashflow (x) Price/book (x) EV/EBITDA (x) EV/EBIT (x) Gross margin (%) EBITDA margin (%) EBIT margin (%) Net margin (% ) Effective tax rate (%) Dividend payout (%) Capex to sales (%) Capex to depreciation (x) ROE (% ) ROA (pretax %) Growth (%) Revenue EBITDA EBIT Normalised EPS Normalised FD EPS Per share Reported EPS (S$) Norm EPS (S$) Fully diluted norm EPS (S$) Book value per share (S$) DPS (S$)
FY08 15,973 (13,848) 2,125 2,125 3,656 (1,531) 2,125 81 161 181 2,547 (410) 2,137 (88) 2,049 2,049 (1,277) 773
FY09 15,996 (15,093) 904 904 2,599 (1,695) 904 6 175 114 1,199 (52) 1,147 (85) 1,062 1,062 (1,185) (123)
FY10F 12,707 (12,644) 63 63 1,820 (1,757) 63 (19) 149 93 286 (6) 280 (64) 216 216 (2,273) (2,058)
FY11F 14,606 (13,239) 1,367 1,367 3,159 (1,792) 1,367 (33) 164 110 1,608 (289) 1,318 (59) 1,259 1,259 (532) 727
FY12F 15,999 (14,143) 1,856 1,856 3,619 (1,762) 1,856 (33) 180 100 2,104 (379) 1,726 (58) 1,667 1,667 (710) 958
A recovery in revenues largely from yield improvement
8.6 10.1 8.5 7.4 4.1 1.1 3.6 5.9 13.3 22.9 13.3 12.8 16.1 62.3 13.1 1.4 13.6 10.8
16.0 18.9 15.9 7.0 11.7 1.2 5.4 13.9 5.6 16.2 5.6 6.6 4.3 111.6 12.7 1.2 7.3 5.1
78.7 92.9 78.3 13.5 8.6 1.3 7.1 66.2 0.5 14.3 0.5 1.7 2.1 1,053.5 12.3 0.9 1.6 1.1
13.5 15.9 13.4 3.2 5.6 1.2 4.1 9.0 9.4 21.6 9.4 8.6 18.0 42.3 17.8 1.5 9.1 8.6
10.2 12.0 10.1 4.2 4.8 1.1 3.3 6.1 11.6 22.6 11.6 10.4 18.0 42.6 15.0 1.4 11.3 10.9
10.2 38.8 61.6 26.1 24.6
0.1 (28.9) (57.5) (46.8) (46.4)
(20.6) (30.0) (93.0) (79.6) (79.7)
14.9 73.6 2,062.8 483.5 483.5
9.5 14.6 35.8 32.4 32.4
1.69 1.69 1.66 12.44 1.05
0.90 0.90 0.89 11.76 1.00
0.18 0.18 0.18 11.39 1.92
1.06 1.06 1.06 12.00 0.45
1.41 1.41 1.40 12.93 0.60
Nomura
141
14 June 2010
Singapore Airlines
Jim Wong
Cashflow (S$mn) Year-end 31 Mar EBITDA Change in working capital Other operating cashflow Cashflow from operations Capital expenditure Free cashflow Reduction in investments Net acquisitions Reduction in other LT assets Addition in other LT liabilities Adjustments Cashflow after investing acts Cash dividends Equity issue Debt issue Convertible debt issue Others Cashflow from financial acts Net cashflow Beginning cash Ending cash Ending net debt
FY08 3,656 675 (126) 4,206 (2,089) 2,117 (64) 538 (232) (55) 351 2,654 (1,370) (1,284) (2,653) 1 5,118 5,119 (3,461)
FY09 2,599 (119) (1,034) 1,445 (2,031) (586) (495) 555 233 (398) 660 (30) (1,260) 20 (1,241) (1,271) 5,119 3,848 (2,025)
FY10F 1,820 (245) 391 1,966 (1,560) 406 776 211 342 (118) (768) 849 (286) 62 (225) 624 3,848 4,472 (2,967)
FY11F 3,159 (746) 610 3,022 (2,600) 422 350 (164) 10 154 772 (319) (136) (455) 317 4,472 4,789 (3,278)
FY12F 3,619 1,702 (1,808) 3,513 (2,400) 1,113 650 (180) 47 134 1,763 (532) 22 (510) 1,252 4,789 6,042 (4,508)
Balance sheet (S$mn) As at 31 Mar Cash & equivalents Marketable securities Accounts receivable Inventories Other current assets Total current assets LT investments Fixed assets Goodwill Other intangible assets Other LT assets Total assets Short-term debt Accounts payable Other current liabilities Total current liabilities Long-term debt Convertible debt Other LT liabilities Total liabilities Minority interest Preferred stock Common stock Retained earnings Proposed dividends Other equity and reserves Total shareholders' equity Total equity & liabilities Liquidity (x) Current ratio Interest cover Leverage Net debt/EBITDA (x) Net debt/equity (%) Activity (days) Days receivable Days inventory Days payable Cash cycle
FY08 5,119 2,044 508 643 8,313 512 16,474 1,216 26,515 59 3,368 2,531 5,958 1,599 3,329 10,886 504 1,682 13,443 15,125 26,515
FY09 3,848 1,486 503 1,000 6,837 1,007 15,992 983 24,819 310 3,582 1,992 5,883 1,514 2,931 10,328 560 1,685 12,246 13,931 24,819
FY10F 4,472 1,348 430 300 6,549 231 15,064 641 22,484 67 2,499 1,919 4,484 1,438 2,813 8,735 280 1,751 11,718 13,469 22,484
FY11F 4,789 1,280 494 302 6,866 231 14,580 805 22,482 73 1,511 2,160 3,745 1,438 2,823 8,006 280 1,751 12,445 14,196 22,482
FY12F 6,041 1,506 568 306 8,421 231 16,018 986 25,655 80 3,539 2,137 5,757 1,452 2,870 10,079 280 1,751 13,545 15,295 25,655
Net assets reduced on disposal of SATS
1.40 na
1.16 na
1.46 3.3
1.83 41.4
1.46 57.1
net cash net cash
net cash net cash
net cash net cash
net cash net cash
net cash net cash
43.3 13.8 85.0 (27.9)
40.3 12.2 84.0 (31.5)
40.7 13.5 87.8 (33.6)
32.8 12.7 55.3 (9.7)
31.9 13.7 65.4 (19.7)
Nomura
142
14 June 2010
Jim Wong
Nomura
143
14 June 2010
Jim Wong
Nomura
144
14 June 2010
Jim Wong
ANALYST CERTIFICATIONS
Each of the research analysts referenced on the cover page or in connection with the section of this research report for which he or she is responsible hereby certifies that all of the views expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers discussed herein. In addition, each of the research analysts referenced on the cover page or in connection with the section of this research report for which he or she is responsible hereby certifies that no part of his or her compensation was, is, or will be, directly or indirectly related to the specific recommendations or views that he or she has expressed in this research report, nor is it tied to any specific investment banking transactions performed by Nomura Securities International, Inc., Nomura International plc or by any other Nomura Group company or affiliates thereof.
ISSUER SPECIFIC REGULATORY DISCLOSURES

W ('000) 90 80 70 60 50 40 30 20 10 0 1 Old rating 2 3 4 5 New rating B N R Jun-07 Oct-07 Feb-08 Jun-08 Oct-08 Feb-09 Jun-09 Oct-09 Feb-10 Jun-10 Coverage initiated by Justin Lee on 8 Mar, 10 Rating system revised on 29 Oct, 2008 Price Price target Korean Air Lines
Conflict-of-interest disclosures
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Nomura Japanese Equity Research is available electronically for clients in the US on NOMURA.COM, REUTERS, BLOOMBERG and THOMSON ONE ANALYTICS. For clients in Europe, Japan and elsewhere in Asia it is available on NOMURA.COM, REUTERS and BLOOMBERG. Important disclosures may be accessed through the left hand side of the Nomura Disclosure web page http://www.nomura.com/research or requested from Nomura Securities International, Inc., on 1-877-865-5752. If you have any difficulties with the website, please email grpsupport@nomura.com for technical assistance. The analysts responsible for preparing this report have received compensation based upon various factors including the firm's total revenues, a portion of which is generated by Investment Banking activities.
Distribution of Ratings:
Nomura Global Equity Research has 1,884 companies under coverage. 48% have been assigned a Buy rating which, for purposes of mandatory disclosures, are classified as a Buy rating; 34% of companies with this rating are investment banking clients of the Nomura Group*. 36% have been assigned a Neutral rating which, for purposes of mandatory disclosures, is classified as a Hold rating; 46% of companies with this rating are investment banking clients of the Nomura Group*. 14% have been assigned a Reduce rating which, for purposes of mandatory disclosures, are classified as a Sell rating; 8% of companies with this rating are investment banking clients of the Nomura Group*. As at 31 March 2010. *The Nomura Group as defined in the Disclaimer section at the end of this report.
Nomura
145
14 June 2010
Jim Wong
Explanation of Nomura's equity research rating system in Europe, Middle East and Africa, US and Latin America for ratings published from 27 October 2008:
The rating system is a relative system indicating expected performance against a specific benchmark identified for each individual stock. Analysts may also indicate absolute upside to price target defined as (fair value - current price)/current price, subject to limited management discretion. In most cases, the fair value will equal the analyst's assessment of the current intrinsic fair value of the stock using an appropriate valuation methodology such as discounted cash flow or multiple analysis, etc. Stocks: A rating of "1", or "Buy", indicates that the analyst expects the stock to outperform the Benchmark over the next 12 months. A rating of "2", or "Neutral", indicates that the analyst expects the stock to perform in line with the Benchmark over the next 12 months. A rating of "3", or "Reduce", indicates that the analyst expects the stock to underperform the Benchmark over the next 12 months. A rating of "RS-Rating Suspended", indicates that the rating and target price have been suspended temporarily to comply with applicable regulations and/or firm policies in certain circumstances including when Nomura is acting in an advisory capacity in a merger or strategic transaction involving the company. Benchmarks are as follows: United States/Europe: Please see valuation methodologies for explanations of relevant benchmarks for stocks (accessible through the left hand side of the Nomura Disclosure web page: http://www.nomura.com/research); Global Emerging Markets (exAsia): MSCI Emerging Markets ex-Asia, unless otherwise stated in the valuation methodology. Sectors: A "Bullish" stance, indicates that the analyst expects the sector to outperform the Benchmark during the next 12 months. A "Neutral" stance, indicates that the analyst expects the sector to perform in line with the Benchmark during the next 12 months. A "Bearish" stance, indicates that the analyst expects the sector to underperform the Benchmark during the next 12 months. Benchmarks are as follows: United States: S&P 500; Europe: Dow Jones STOXX 600; Global Emerging Markets (ex-Asia): MSCI Emerging Markets ex-Asia.
Explanation of Nomuras equity research rating system for Asian companies under coverage ex Japan published from 30 October 2008 and in Japan from 6 January 2009:
Stocks: Stock recommendations are based on absolute valuation upside (downside), which is defined as (Price Target Current Price) / Current Price, subject to limited management discretion. In most cases, the Price Target will equal the analysts 12-month intrinsic valuation of the stock, based on an appropriate valuation methodology such as discounted cash flow, multiple analysis, etc. A "Buy" recommendation indicates that potential upside is 15% or more. A "Neutral" recommendation indicates that potential upside is less than 15% or downside is less than 5%. A "Reduce" recommendation indicates that potential downside is 5% or more. A rating of "RS" or "Rating Suspended" indicates that the rating and target price have been suspended temporarily to comply with applicable regulations and/or firm policies in certain circumstances including when Nomura is acting in an advisory capacity in a merger or strategic transaction involving the subject company. Stocks labelled as "Not rated" or shown as "No rating" are not in Nomura's regular research coverage. Sectors: A "Bullish" rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a positive absolute recommendation. A "Neutral" rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a neutral absolute recommendation. A "Bearish" rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a negative absolute recommendation.
Explanation of Nomura's equity research rating system in Japan published prior to 6 January 2009 (and ratings in Europe, Middle East and Africa, US and Latin America published prior to 27 October 2008):
Stocks: A rating of "1", or "Strong buy", indicates that the analyst expects the stock to outperform the Benchmark by 15% or more over the next six months. A rating of "2", or "Buy", indicates that the analyst expects the stock to outperform the Benchmark by 5% or more but less than 15% over the next six months. A rating of "3", or "Neutral", indicates that the analyst expects the stock to either outperform or underperform the Benchmark by less than 5% over the next six months. A rating of "4", or "Reduce", indicates that the analyst expects the stock to underperform the Benchmark by 5% or more but less than 15% over the next six months. A rating of "5", or "Sell", indicates that the analyst expects the stock to underperform the Benchmark by 15% or more over the next six months. Stocks labeled "Not rated" or shown as "No rating" are not in Nomura's regular research coverage. Nomura might not publish additional research reports concerning this company, and it undertakes no obligation to update the analysis, estimates, projections, conclusions or other information contained herein. Sectors: A "Bullish" stance, indicates that the analyst expects the sector to outperform the Benchmark during the next six months. A "Neutral" stance, indicates that the analyst expects the sector to perform in line with the Benchmark during the next six months. A "Bearish" stance, indicates that the analyst expects the sector to underperform the Benchmark during the next six months. Benchmarks are as follows: Japan: TOPIX; United States: S&P 500, MSCI World Technology Hardware & Equipment; Europe, by sector Hardware/Semiconductors: FTSE W Europe IT Hardware; Telecoms: FTSE W Europe Business Services; Business Services: FTSE W Europe; Auto & Components: FTSE W Europe Auto & Parts; Communications equipment: FTSE W Europe IT Hardware; Ecology Focus: Bloomberg World Energy Alternate Sources; Global Emerging Markets: MSCI Emerging Markets ex-Asia.
Nomura
146
14 June 2010
Jim Wong
Explanation of Nomura's equity research rating system for Asian companies under coverage ex Japan published prior to 30 October 2008:
Stocks: Stock recommendations are based on absolute valuation upside (downside), which is defined as (Fair Value - Current Price)/Current Price, subject to limited management discretion. In most cases, the Fair Value will equal the analyst's assessment of the current intrinsic fair value of the stock using an appropriate valuation methodology such as Discounted Cash Flow or Multiple analysis etc. However, if the analyst doesn't think the market will revalue the stock over the specified time horizon due to a lack of events or catalysts, then the fair value may differ from the intrinsic fair value. In most cases, therefore, our recommendation is an assessment of the difference between current market price and our estimate of current intrinsic fair value. Recommendations are set with a 6-12 month horizon unless specified otherwise. Accordingly, within this horizon, price volatility may cause the actual upside or downside based on the prevailing market price to differ from the upside or downside implied by the recommendation. A "Strong buy" recommendation indicates that upside is more than 20%. A "Buy" recommendation indicates that upside is between 10% and 20%. A "Neutral" recommendation indicates that upside or downside is less than 10%. A "Reduce" recommendation indicates that downside is between 10% and 20%. A "Sell" recommendation indicates that downside is more than 20%. Sectors: A "Bullish" rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a positive absolute recommendation. A "Neutral" rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a neutral absolute recommendation. A "Bearish" rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a negative absolute recommendation.
Price targets
Price targets, if discussed, reflect in part the analyst's estimates for the company's earnings. The achievement of any price target may be impeded by general market and macroeconomic trends, and by other risks related to the company or the market, and may not occur if the company's earnings differ from estimates.
DISCLAIMERS
This publication contains material that has been prepared by the Nomura entity identified on the banner at the top or the bottom of page 1 herein and, if applicable, with the contributions of one or more Nomura entities whose employees and their respective affiliations are specified on page 1 herein or elsewhere identified in the publication. Affiliates and subsidiaries of Nomura Holdings, Inc. (collectively, the "Nomura Group"), include: Nomura Securities Co., Ltd. ("NSC") Tokyo, Japan; Nomura International plc, United Kingdom; Nomura Securities International, Inc. ("NSI"), New York, NY; Nomura International (Hong Kong) Ltd., Hong Kong; Nomura Financial Investment (Korea) Co., Ltd., Korea; Nomura Singapore Ltd., Singapore (Registration number 197201440E, regulated by the Monetary Authority of Singapore); Nomura Australia Ltd., Australia (ABN 48 003 032 513), regulated by the Australian Securities and Investment Commission and holder of an Australian financial services licence number 246412; P.T. Nomura Indonesia, Indonesia; Nomura Securities Malaysia Sdn. Bhd., Malaysia; Nomura International (Hong Kong) Ltd., Taipei Branch, Taiwan; Nomura Financial Advisory and Securities (India) Private Limited, Mumbai, India (Registered Address: Ceejay House, Level 11, Plot F, Shivsagar Estate, Dr. Annie Besant Road, Worli, Mumbai- 400 018, India; SEBI Registration No: BSE INB011299030, NSE INB231299034, INF231299034, INE 231299034). This material is: (i) for your private information, and we are not soliciting any action based upon it; (ii) not to be construed as an offer to sell or a solicitation of an offer to buy any security in any jurisdiction where such offer or solicitation would be illegal; and (iii) based upon information that we consider reliable. NOMURA GROUP DOES NOT WARRANT OR REPRESENT THAT THE PUBLICATION IS ACCURATE, COMPLETE, RELIABLE, FIT FOR ANY PARTICULAR PURPOSE OR MERCHANTABLE AND DOES NOT ACCEPT LIABILITY FOR ANY ACT (OR DECISION NOT TO ACT) RESULTING FROM USE OF THIS PUBLICATION AND RELATED DATA. TO THE MAXIMUM EXTENT PERMISSIBLE ALL WARRANTIES AND OTHER ASSURANCES BY NOMURA GROUP ARE HEREBY EXCLUDED AND NOMURA GROUP SHALL HAVE NO LIABILITY FOR THE USE, MISUSE, OR DISTRIBUTION OF THIS INFORMATION. Opinions expressed are current opinions as of the original publication date appearing on this material only and the information, including the opinions contained herein, are subject to change without notice. Nomura is under no duty to update this publication. If and as applicable, NSI's investment banking relationships, investment banking and non-investment banking compensation and securities ownership (identified in this report as "Disclosures Required in the United States"), if any, are specified in disclaimers and related disclosures in this report. In addition, other members of the Nomura Group may from time to time perform investment banking or other services (including acting as advisor, manager or lender) for, or solicit investment banking or other business from, companies mentioned herein. Further, the Nomura Group, and/or its officers, directors and employees, including persons, without limitation, involved in the preparation or issuance of this material may, to the extent permitted by applicable law and/or regulation, have long or short positions in, and buy or sell, the securities (including ownership by NSI, referenced above), or derivatives (including options) thereof, of companies mentioned herein, or related securities or derivatives. In addition, the Nomura Group, excluding NSI, may act as a market maker and principal, willing to buy and sell certain of the securities of companies mentioned herein. Further, the Nomura Group may buy and sell certain of the securities of companies mentioned herein, as agent for its clients. Investors should consider this report as only a single factor in making their investment decision and, as such, the report should not be viewed as identifying or suggesting all risks, direct or indirect, that may be associated with any investment decision. Please see the further disclaimers in the disclosure information on companies covered by Nomura analysts available at www.nomura.com/research under the "Disclosure" tab. Nomura Group produces a number of different types of research product including, amongst others, fundamental analysis, quantitative analysis and short term trading ideas; recommendations contained in one type of research product may differ from recommendations contained in other types of research product, whether as a result of differing time horizons, methodologies or otherwise; it is possible that individual employees of Nomura may have different perspectives to this publication.
Nomura
147
14 June 2010
Jim Wong
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14 June 2010
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Airlines | A S I A P A C I F I C

+852 2252 2195

Visibility better on the upside

Stocks for action

Note: Share prices as of 7 June, 2010; local currency; Upgrade, * Initiation

+852 2252 2195

Stocks for action

Note: Share prices as of 7 June, 2010; local currency; Upgrade, * Initiation

Visibility better on the upside

Demand should outpace supply

Currencies and oil hedging are significant swing factors

SIA and CX quality plays, while EVA is a geared play

Airlines | Asia Pacific

Latest company views

Airlines | Asia Pacific

Recovery may not be entirely discounted

China Eastern Airlines

China Southern Airlines

Singapore Singapore Airlines SIA SP BUY S$16.85

Korea Korean Airlines 003490 KS NEUTRAL W79,000

Taiwan EVA Airways 2618 TT BUY * NT$21.50

Japan All Nippon Airways 9202 JP NEUTRAL JPY300

Upgrade, * Initiation. Source: Nomura research

Airlines | Asia Pacific

Exhibit 2. Revision in reported net profits

Exhibit 3. Comparison of trough-peak cycle valuation

3.23 NEUTRAL 71,300 NEUTRAL

1.26 NEUTRAL 273.00 NEUTRAL

Airlines | Asia Pacific

Exhibit 4. Comparison of impact from different variables

Exhibit 5. Airlines: Valuation comparison

Exhibit 5. Airlines: Valuation comparison (contd)

Source: Nomura estimates, ** YE-March, share prices as of 7 June 2010.

Airlines | Asia Pacific

Exhibit 6. Key assumptions for Asian Airlines

Airlines | Asia Pacific

Recent traffic trend

Macro environment continues to recover

Exhibit 7. Taiwanese airlines passenger yield trends

Source: Company data

Cargo yields are also up by 43-56% from the recent trough.

Exhibit 8. Taiwanese airlines cargo yield trends

Source: Company data

Airlines | Asia Pacific

Exhibit 9. Passenger yield trend for various airlines

Exhibit 10. Cargo yield trend for various airlines

Airlines | Asia Pacific

Exhibit 11. Passenger yield growth trend for various airlines

CSA (%) 4 11 2 1 2 (1) (14) (9)

ANA (%) 6 6 5 3 2 (0) (15) (10)

MAS (%) 20 23 27 24 15 13 7 13 9 12 17 13 4 (18) (29) (30) (21)

CX (%) (3) 6 17 17 4 (0) (19) (13)

KAL (%) 7 14 13 14 13 8 8 8 7 7 2 (8) (24) (32) (28) (11) 13

EVA Air (%) 1 4 5 3 7 6 3 7 4 8 11 8 (2) (12) (17) (13) 4

CAL (%) 6 12 12 10 7 5 3 2 4 9 13 12 5 (14) (20) (15) 1

SIA (%) 1 3 3 2 6 8 11 13 12 8 7 3 (6) (18) (23) (18) (6)

Exhibit 12. Cargo yield growth trend for various airlines

CSA (%) 3 19 2 (7) 3 7 (19) (16)

CX (%) (3) (3) (4) (2) (2) (2) (25) (9)

CAL (%) 12 11 9 3 0 (3) (0) 6 12 15 21 (0) (18) (30) (29) (10) 5

Airlines | Asia Pacific

Source: Company data

Airlines | Asia Pacific