SSI – RESEARCH INSTITUTIONAL RESEARCH & INVESTMENT ADVISORY

Airport Corporation of Vietnam (ACV: UPCOM)

BUY – 1Y Target Price: VND 61,300
Current price: VND 50,500

Kim Nguyen EARNINGS UPDATE

kimntt@ssi.com.vn
+84 8 3824 2897 ext. 2140 Potential domestic fee hikes

04 July 2017  ACV’s 1Q 2017 passenger load grew by 18.7% YoY, continuing to exhibit a pattern of
consistent positive growth
INDUSTRIALS - VIETNAM
 Expectation of incoming domestic aviation fee hikes, to be implemented around year’s
end
Key figures
 Delayed HOSE listing plan as various regulation details have not been finalized by the
Market cap (USD mn) 4,868 MOT
Market cap (VND bn) 110,600
 ACV remains as our top pick, 1 year target price: 61,300/share, upside 21%, BUY
Outstanding shares (mn) 2,177
52W high/low (VND 1,000) 56.0/35.0
1Q 2017 business results review: Continued growth
Average 3M volume (share) 209,957
Average 3M value (USD mn) 0.17
momentum
Average 3M value (VND bn) 3.86
According to the IPO plan, ACV divested its 6.6% stake in Saigon Ground
Foreign ownership (%) 3.48
Services JSC (SGN: UPCOM) (from 54.6% to 48%) in November 2016, and a 3%
State ownership (%) 95.4
stake in Southern Airports Services JSC (SAS: UPCOM) (from 51% to 48%) in
Source: SSI Bloomberg March 2017. SGN’s FS was not consolidated into ACV’s FS at the end of 2016.
SAS also stopped consolidating into ACV in March 2017. As such, we use the
Stock performance
parent company’s results for comparability.

(1) Net revenue: Including landing charge revenue. the parent company
reported 1Q 2017 revenue of VND 3,905 bn, up 19.5% YoY and 13.3% QoQ.
If we were to exclude landing charge revenue in 1Q 2017, ACV would have
completed 26% of 2017 revenue target. Total aeronautical revenue, non-
aeronautical revenue, and retail revenue reported 20% YoY, 24% YoY and
12% YoY in growths, respectively.
Source: Bloomberg
Company Snapshot ACV’s revenue breakdown on quarterly basis
The parent company of Airports Corporation of 3,500 1Q16 2Q16 3Q16 4Q16 1Q17
Vietnam’s (ACV) predecessor was initially
founded in 1976 under the direct management
3,000
and operation of the Civil Aviation Administration
of Vietnam (CAAV) as Northern, Central and
2,500
Southern Regional Airport Authority. ACV was
incorporated following a merger of the Northern,
Central and Southern Airport Corporation in 2012 2,000
by the Minister of Transport. It IPO-ed in
November 2015 and was listed on UPCOM on 1,500
21st November 2016. Currently, ACV operates
under a parent-subsidiary model and involves in 1,000
managing and operating 22 civil airports in
Vietnam. 500
From 2015-2019, ACV plans to expanding
capacity of existing airports from 71.1 mn pax -
per year in 2015 to roughly 115 mn pax per year Aeronautical revenue Non-aeronautical revenue Retails
in 2019 in order to capture growing air travel
demand in Vietnam. Source: ACV

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1Q 1Q 4Q Completion of Margin
(bn VND) YoY QoQ
2017 2016 2016 2017 target 1Q 2017 1Q 2016 4Q 2016 2016
Net sales 3,905 3,268 19.5% 3,446 13.3% 29.4%
Gross profit 1,539 1,624 -5.2% 509 202.4% 39.4% 49.7% 14.8% 12.2%
Operating profit 814 728 11.9% 164 395.3% 20.9% 22.3% 4.8% 6.0%
EBIT 845 2,149 -60.7% 2,648 -68.1% 21.6% 65.8% 76.8% 6.6%
EBITDA 2,004 5,531 -63.8% 3,557 -43.7% 51.3% 169.3% 103.2% 8.6%
Pretax profit 814 4,631 -82.4% 2,285 -64.4% 20.8% 141.7% 66.3% 6.0%
Net income 651 5,574 -88.3% 3,032 -78.5% 16.7% 170.6% 88.0% 4.9%
NI attributable to
651 3,688 -82.4% 2,082 -68.7% 16.7% 112.9% 60.4% 5.0%
shareholders

Source: ACV parent company

(2) Passenger volume: Sustained growth in passenger volume, flights, and cargo volume were
the key drivers for ACV’s top line growth as passenger fees are fixed. Specifically, ACV reported
passenger growth of 18.7% YoY (International passengers: +25% YoY, domestic passengers:
+16% YoY) while total flights rose by 12.5% YoY and cargo volume recovered with strong
growth at 31.5% YoY. 1Q 2017 saw international tourists to Vietnam growing at 29% YoY, and
tourists traveling by air grew at 33% YoY. As such, ACV’s international passenger volume
enjoyed much stronger growth than that of domestic passengers.

(3) Net profit: 1Q 2017 net profit declined by 89% YoY. 2 key reasons behind a sluggish
bottom line were:

 Gross profit having declined 5%YoY, due to higher depreciation and maintenance expenses
in 1Q 2017 than in 1Q 2016.

 In 1Q 2016, ACV recorded VND 1,444 bn by revaluing financial investments and VND 2,489
bn from a reversal of advance booking for maintenance expenses (from 2012-2015) and
land rental expenses (as of 31 March 2016)

If we were to exclude extraordinary income in 1Q 2016, ACV’s 1Q 2017 PBT would increase by
17% YoY.

2017 Annual General Meeting (AGM): HOSE listing plan is still delayed
th
ACV held an AGM on 28 June 2017, with key takeaways from the meeting as below:

2016 business results:

ACV delivered an encouraging year with below results:

Volume 2016 YoY growth

Passenger volume (mn pax) 81 28%
International 24 25%
Domestic 57 30%
Cargo and Parcel (mn tons) 1.12 15%
Aircraft movement (flights) 557K 24%
Consoliated revenue (VND bn)* 10,646 -
Net profit (VND bn)* 2,718 -

(*) Excluding revenue and profit of aircraft landing activities Source: ACV

2017 business plan: ACV targets to achieve 10% YoY topline growth, achieving VND 13,293
bn based on the following assumptions: (1) passenger volume growth: +13% YoY, (2) cargo
growth: +5% YoY and (3) aircraft movements growth: +11% YoY. PBT is expected to achieve

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VND 3,669 bn (-4% YoY if excluding extraordinary income in 2016). All business targets
excluded revenue and profit from aircraft landings.

We think that ACV’s passenger growth target is conservative, because Vietnam is expected to
experience stronger international tourism growth of more than 25% YoY in 2017 (vs 30% YoY
growth in 1H17). As such ACV could very well surprise to the upside with posted data in future
quarters beyond its official conservative target.

For 1H2017, ACV estimates parent company revenue and PBT to achieve VND 7,286 bn and
VND 2,298 bn, and completing 55% and 63% of 2017 targets respectively (excluding earnings
from landing charges).

Other discussions:

 The strategic stake sale to ADP already failed because both sides could not reach a final
agreement. ACV continues to wait for further guidance from the Ministry of Transportation
(MOT) on the strategic partner deal.

 Regulations regarding the ownership of maneuvering assets have still not been finalized by
the MOT. ACV will not be able to move from UPCOM to HOSE until this regulation is
finalized.

 In 2015, the National Congress approved to construct the Long Thanh Airport megaproject.
During the AGM, the deputy minister of the Ministry of Transportation said that the project
may conduct land compensation from the end of 2017, and to commence construction in
2019. In the best case scenario, phase 1 of the airport may commence operation in 2025.
See more details on the Long Thanh International Airport plan (here). The new international
airport is expected to ease the current bottleneck situation at Tan Son Nhat International
Airport, and further help boost international passenger growth.

Possible hike on various domestic airport fees, to commence around the

end of the year

We recently met with ACV’s management. ACV informed regarding its proposal on increasing
domestic passenger fees to be officially approved by the MOT and the Ministry of Finance
st
(MOF) possibly next month. The increases may be officially implemented either from 1 October
st
2017 or 1 Jan 2018. Accordingly, domestic aviation fees will be raised gradually, with the fee
schedule hike completed by 30th June or September 2018. Overall, ACV will significantly benefit
from 3 main types of fee hikes:

 Domestic landing charges: up 15%. Landing charges account for 27% of ACV’s total
revenue in 2016. From all landing charges imposed, domestic flight volumes accounted for
70% of total flights.

 Domestic passenger service charges: Group A (~ 82% of total domestic passengers): up

43%, Group B (~17% of total passengers): up 33%, Group C (1% of total domestic
passengers): VND 60,000 (no group C previously). Currently, international passenger fees
are 2x higher compared with domestic pax at group A.

 Security charges (both domestic and international): International passengers: +33%,

domestic passengers: +120% (from VND 9,090/pax to VND 20,000/pax).

Currently, domestic sales contribute a substantial proportion to ACV’s total sales volume, but
revenue generation remains low due to low fees. As such, if the proposal is approved soon,
ACV’s revenue and profit will make significant advances.

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Earnings forecasts

For 2017: We estimate that ACV’s consolidated revenue will reach VND 15,716 bn (+17% YoY)
(excluding SGN and SAS’s revenue in 2016). PBT may reach VND 4,576 bn (-41% YoY). EPS
may reach VND 1,461. We trimmed 2017 EPS by 20% compared with our previous report due
to adjustments in total passenger volume growth and higher maintenance expenses.

 Total passenger growth is adjusted at 16% YoY (vs. 23% YoY previously). We have
excluded 1.3 mn passengers from Danang International Airport, as the new international
terminal commenced operations in May 2017 (see our previous report). As such, ACV’s
international passenger volume may grow at 15% YoY, with domestic growth reaching
+14% YoY in 2017.

 GPM may achieve 29.7% (vs 35.5% in 2016) due to higher maintenance and depreciation
expenses. In 2017, ACV plans to record around VND 700 bn (+40% YoY) in regular
maintenance (excluding miscellaneous other maintenance expenses)

 We assume that ACV will incur no FX losses in 2017, due to a weak JPY and stronger USD

 We take into account landing charge revenue and profit in our estimates.

For 2018: As the timeline is still uncertain, we assume the MOT and the MOF will accept
ACV’s proposal for a domestic passenger fee hike, implemented from 1Q18 onwards. According
to our estimate, ACV may increase roughly VND 1,200bn in PBT in 2018 thanks to the fee
hikes.

Overall, we estimate ACV’s total revenue to achieve VND 18,308 bn (+16.5% YoY). PBT is
expected to record VND 6,148 bn (+34% YoY). EPS accordingly will be VND 1,993 (+34%
YoY). We assume that ACV’s total passenger numbers, available flights, and cargo volume may
grow at 10% YoY, 14% YoY and 17% YoY respectively. We assume that ACV will not incur FX
losses in 2018.

Valuation: 1Y TP VND 61,300/share, BUY

In our view, ACV holds significant potential business in Vietnam. However, ACV’s organic
growth can be heavily impacted by the Government’s policies which make it impossible for a
long-term projection on the company outlook. Therefore, we apply the EV/EBITDA valuation
method instead of combining with DCF valuation as in our previous report.

Organic growth of ACV comes from following sources:

 In the aviation business, ACV is the largest beneficiary from Vietnam’s robust tourism
growth in the coming years ahead. We estimate that in the next five years, the annual
growth rate of international tourist volume to Vietnam should increase to about 12%, from
the average of 9.48% during the last five years. The recent government initiative to boost
the tourism sector is a primary driver for increased passenger volumes. Higher passenger
volumes will in turn improve the GPM.

Possible increase in fees for domestic passengers either from 4Q 2017 or 1Q 2018 will be
an important catalyst.

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 Regarding non-aviation business. Non-aviation revenue growth through concession

revenues (revenue sharing with retail operators in the airports) will be supported by the
expansion of airports, which will enlarge the commercial area utilized for such concessions.

Please note that ACV’s current GPM is roughly 39%, significantly lower than that of the Airport
of Thailand Plc. at more than 60%.

At the current price of VND 51,000/share, ACV is being traded at 2017 and 2018 P/E of 35x and
26x; 2016 and 2017 P/B of 4.2x and 3.8x respectively, and with a 2018 EV/EBIDA of 9.9x.
Given the leading position of ACV in Vietnam, we apply a target EV/EBITDA for ACV at 12x,
equal to regional peers and in expectation with charging fees hikes in 2018. As a result, the
2018 year end target price for ACV arrives at VND 61,300/share, 21% higher than the
current price. We recommend to BUY ACV.

Risks

(1) Policy risk regarding privatizing airports, which if implemented would remove ACV’s
monopoly status in Vietnam, and as a result potentially reduce earnings upside. Additionally,
the government’s strict airline regulations will also be a constraint upon potential growth of
the aviation industry.

(2) Substantial foreign exchange loss due to heavy dependence on Japanese ODA loans.

(3) Territorial disputes and viral diseases (such as South China Sea dispute, SARS and bird flu)
may hinder international passenger movement through international airports and impact
passenger loads.

(4) Significant depreciation expenses for expansion projects and the Long Thanh International
Airport megaproject will impact ACV’s GPM and bottom line from 2025 onwards. Long
Thanh International Airport will be mainly funded by ODA loans after 2018. ACV’s debt ratio
will accordingly experience a significant increase (ACV may own 51% stake in Long Thanh
Airport). We have not yet factored this megaproject into our model.

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APPENDIX: ANNUAL FINANCIAL STATEMENTS

VND Billion 2015 2016 2017F 2018F VND Billion 2015 2016 2017F 2018F
Balance Sheet Income Statement
+ Cash 4,466 3,166 10,018 11,226 Net Sales 13,173 13,408 15,717 18,308
+ Short-term investments 12,864 13,640 14,106 14,106 COGS -9,656 -8,650 -11,047 -11,660
+ Account receivables 3,478 3,549 4,795 5,586 Gross Profit 3,517 4,759 4,670 6,648
+ Inventories 712 721 773 816 Financial Income 960 2,722 806 776
+ Other current assets 295 376 352 405 Financial Expense -811 -988 -144 -144
Total Current Assets 21,815 21,452 30,045 32,140 Income from associates 0 0 0 0
+ LT Receivables 179 259 157 183 Selling Expense -428 -227 -157 -183
+ Net Fixed Assets 20,661 21,708 20,809 18,863 Admin Expense -1,203 -965 -912 -1,100
+ Investment properties 32 32 32 32 Income from business operation 2,055 5,301 4,466 6,200
+ LT Assets in progress 1,054 738 943 1,098 Net Other Income 223 2,461 110 -52
+ LT Investments 642 1,240 1,256 1,256 Profit Before Tax 2,277 7,762 4,576 6,148
+ Other LT Assets 467 1,358 308 328 Net Income 1,753 9,317 3,571 4,805
Total Long-Term Assets 23,036 25,335 23,505 21,761 NI attributable to shareholders 1,712 9,317 3,348 4,568
Total Assets 44,852 46,787 53,413 53,468 Minority interest 41 0 223 237
+ Current Liabilities 8,151 7,160 8,390 8,098
In which: ST debt 308 263 221 233 Basic EPS (VND) 0 0 1,461 1,993
+ Non-current Liabilities 16,086 14,573 17,871 14,949 BVPS (VND) 11,601 11,159 12,020 13,413
In which: LT debt 13,119 13,964 14,914 14,914 Dividend (VND/share) 0 0 600 600
Total Liabilities 24,237 21,733 26,262 23,047 EBIT 2,367 7,860 4,682 6,254
+ Contributed capital 17,093 21,772 21,772 21,772 EBITDA 5,979 12,223 9,214 11,466
+ Share premium 0 15 15 15
+ Retained earnings 1,807 2,058 3,933 6,966 Growth
+ Other capital/fund 1,714 1,209 1,432 1,669 Sales 24.8% 1.8% 17.2% 16.5%
Shareholders' Equity 20,615 25,054 27,151 30,421 EBITDA 6.7% 104.4% -24.6% 24.4%
Total Liabilities & Equity 44,852 46,787 53,413 53,468 EBIT -31.9% 232.0% -40.4% 33.6%
NI -33.4% 431.5% -61.7% 34.5%
Cash Flow Equity 0.6% 21.5% 8.4% 12.0%
CF from operating activities 4,213 3,430 10,233 5,003 Chartered Capital 5.0% 27.4% 0.0% 0.0%
CF from investing activities -2,814 -1,037 -2,982 -2,500 Total assets 2.5% 4.3% 14.5% 0.7%
CF from financing activities -833 -1,708 -399 -1,294
Net increase in cash 566 685 6,852 1,208 Valuation
Beginning cash 3,897 -7,401 3,166 10,018 P/E N.a N.a 35.6 26.1
Ending cash 4,466 -6,701 10,018 11,226 P/B 0.0 0.0 4.3 3.9
P/Sales N.a N.a 7.2 6.2
Liquidity Ratios Dividend yield N.a N.a 1.2% 1.2%
Current ratio 2.68 3.00 3.58 3.97 EV/EBITDA -0.7 -0.2 N.a N.a
Acid-test ratio 2.55 2.84 3.45 3.82 EV/Sales -0.3 -0.2 N.a N.a
Cash ratio 2.13 2.35 2.88 3.13
Net debt / EBITDA 1.47 0.82 0.88 0.39 Profitability Ratios
Interest coverage 26.34 79.93 44.19 58.98 Gross Margin 26.7% 35.5% 29.7% 36.3%
Days of receivables 36.5 44.3 41.6 40.7 Operating Margin 9.5% 34.4% 25.5% 31.7%
Days of payables 56.5 54.2 45.3 46.2 Net Margin 13.3% 69.5% 22.7% 26.2%
Days of inventory 23.7 30.2 24.7 24.9 Selling exp./Net sales 3.3% 1.7% 1.0% 1.0%
Admin exp./Net sales 9.1% 7.2% 5.8% 6.0%
Capital Structure ROE 8.5% 40.8% 13.7% 16.7%
Equity/Total asset 0.46 0.54 0.51 0.57 ROA 4.0% 20.3% 7.1% 8.9%
Liabilities/Total Assets 0.54 0.46 0.49 0.43 ROIC 5.4% 25.7% 9.0% 11.1%
Liabilities/Equity 1.18 0.87 0.97 0.76
Debt/Equity 0.65 0.57 0.56 0.50
ST Debt/Equity 0.01 0.01 0.01 0.01

Source: Company, SSI forecasts

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1. ANALYST CERTIFICATION

The research analyst(s) on this report certifies that (1) the views expressed in this research report accurately reflect
his/her/our own personal views about the securities and/or the issuers and (2) no part of the research analyst(s)’
compensation was, is, or will be directly or indirectly related to the specific recommendation or views contained in this
research report.

2. RATING

Within 12-month horizon, SSIResearch rates stocks as either BUY, HOLD or SELL determined by the stock’s expected
return relative to the market required rate of return, which is 18% (*). A BUY rating is given when the security is expected to
deliver absolute returns of 18% or greater. A SELL rating is given when the security is expected to deliver returns below or
equal to -9%, while a HOLD rating implies returns between -9% and 18%.

Besides, SSIResearch also provides Short-term rating where stock price is expected to rise/reduce within three months
because of a stock catalyst or event. Short-term rating may be different from 12-month rating.

Industry Rating: We provide the analyst’ industry rating as follows:

 Overweight: The analyst expects the performance of the industry over the next 6-12 months to be attractive vs. the
relevant broad market

 Neutral: The analyst expects the performance of the industry over the next 6-12 months to be in line with the relevant
broad market

 Underweight: The analyst expects the performance of the industry over the next 6-12 months with caution vs. the
relevant broad market.

*The market required rate of return is calculated based on 5-year Vietnam government bond yield and market risk premium derived from using
Relative Equity Market Standard Deviations method. Our rating bands are subject to changes at the time of any significant changes in the above
two constituents.

3. DISCLAIMER

The information, statements, forecasts and projections contained herein, including any expression of opinion, are based
upon sources believed to be reliable but their accuracy completeness or correctness are not guaranteed. Expressions of
opinion herein were arrived at after due and careful consideration and they were based upon the best information then
known to us, and in our opinion are fair and reasonable in the circumstances prevailing at the time, and no unpublished price
sensitive information would be included in the report. Expressions of opinion contained herein are subject to change without
notice. This document is not, and should not be construed as, an offer or the solicitation of an offer to buy or sell any
securities. SSI and other companies in the SSI and/or their officers, directors and employees may have positions and may
affect transactions in securities of companies mentioned herein and may also perform or seek to perform investment banking
services for these companies.

This document is for private circulation only and is not for publication in the press or elsewhere. SSI accepts no liability
whatsoever for any direct or consequential loss arising from any use of this document or its content. The use of any
information, statements forecasts and projections contained herein shall be at the sole discretion and risk of the user.

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4. CONTACT INFORMATION

Institutional Research & Investment Advisory

Kim Nguyen
Analyst, Industrials
 Tel: (84-28) 3824 2897 ext. 2140
kimntt@ssi.com.vn

Phuong Hoang Hung Pham Giang Nguyen, ACCA

Deputy Managing Director, Associate Director Associate Director
Head of Institutional Research & Investment Advisory hungpl@ssi.com.vn giangntt@ssi.com.vn
phuonghv@ssi.com.vn

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Commission
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Tel: (84-28) 3824 2897 Email: info@ssi.com.vn
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