20151217-大和证券-中国民航信息网络-00696.HK-Time_to_take_a_breather_16页_1mb

TravelSky Technology (696 HK) Summary

Core Content

TravelSky Technology is a leading provider of aviation information technology services in China. The company's share price is currently at HKD13.58, with a slight downside of -0.5% from the previous day. The target price is set at HKD13.50, and the rating has been downgraded from Buy (1) to Hold (3). This downgrade is based on the belief that the stock is fairly valued at the current level, following a 32% rally in the past 3 months.

Main Points

Valuation

• The stock is currently trading at a 2016E PER of 21x, which is in line with global peers such as Amadeus and Sabre.
• The PER is above the company's past 3-year average of 13x.
• While there is potential for a premium due to margin improvement in 2015, the company's net profit growth and ROE are lower than its peers, justifying the current valuation.

Growth Outlook

• The company forecasts net profit growth of 13-16% YoY for 2015-17E, driven by growth in China aviation and improved EBIT margins.
• The EBIT margin is expected to widen from 24% in 2014 to 27% in 2017E, due to the planned launch of its next-generation system.
• Staff expenses are expected to rise by 6-8% YoY for 2015-17E, significantly lower than the 14-26% YoY increase over the past 3 years.

Earnings Revisions

• Daiwa's forecasts for 2015-16E EPS are below the Bloomberg consensus, as they exclude one-off government subsidies.
• The company is expected to see a 15% CAGR in earnings for 2015-17E, which is better than the consensus for Amadeus (10%) but lower than Sabre's 42%.

Financial Summary

Key Assumptions

• Passenger booking growth for 2015-17E is forecasted at 11.0-11.0% YoY.
• Domestic passenger booking growth is 10.0% YoY.
• International passenger booking growth is 16.1-14.5% YoY.
• The company's gross-profit margin is expected to improve to 49.8% in 2017E.

Key Information

Investment Recommendations

• The downgrade to Hold is due to the current share price being close to the DCF-based target price of HKD13.50.
• No imminent share-price catalysts are expected.
• Key risks include lower or higher-than-expected booking growth.

Strategic Opportunities

• The next-generation system is expected to improve user experience and reduce staff expense increases.
• The company may expand the system to overseas airlines, giving it a technological edge over competitors like Sabre and Travelport.
• Umetrip, the mobile app, has over 10 million registered users and could provide additional revenue streams through monetisation or strategic investment.

SOE Reforms

• SOE reforms in China are expected to improve management incentives, focusing more on profitability.
• These reforms could lead to better pricing strategies, monetisation of data, and expansion opportunities for TravelSky.

Outlook for the Aviation Sector

• China's air traffic volume is forecasted to grow at a CAGR of 10% for 2016-2020.
• International traffic into and out of China is expected to grow at 15% YoY in 2016 and 2017, slowing to 12% YoY by 2020.
• LCCs may still rely on TravelSky's IT platform due to their integration with full-service carriers.

Summary

TravelSky Technology is a dominant player in China's aviation IT sector, with a strong market position and growth potential. The recent share price rally and current valuation at 21x PER suggest it is fairly valued. While the company has a positive long-term outlook with potential for margin improvement and expansion, the downgrade to Hold reflects the current lack of immediate catalysts. The next-generation system and Umetrip app are key growth drivers, and SOE reforms are expected to enhance the company's commercial value.