Bern 150253

7 November 2019
7 November 2019
Target Price Change
Asia-Pacific Transport & Logistics

Asia 2020: E-Commerce and Beyond - Chinese millennials are
turning 40... and vacationing near you
Cherry Leung During the week beginning December 9, Bernstein will be hosting our Asia Symposium
+852-2918-5756 2020: E-Commerce and Beyond in Paris, London, Edinburgh, Copenhagen and Frankfurt,
cherry.leung@bernstein.com
bringing together a group of our sector analysts covering Asian and European stocks to
David Dai, CFA discuss e-commerce and digitization across Asia, consumption trends on the rise in Asia,
+852-2918-5704 and Chinese consumer brands and technologies breaking through in the U.S. and Europe.
david.dai@bernstein.com Today's report is the first part of our series, where we consider the investment implications
of the Chinese millennial consumer (and tourist) at 40. If you would like to attend the Asia
Melinda Hu Symposium, please contact your Bernstein sales representative or any of us.
+852-2918-5727
melinda.hu@bernstein.com As Millennials hit their 40s, “acquisition” will be matched by “experience” as a discretionary
consumption impulse. As between these two options, we believe high-income Chinese
Rahul Malhotra
+91-22-6842-1431
millennials will choose: Yes. We expect an incremental 10 million international travelers
rahul.malhotra@bernstein.com each year between 2020 and 2025 (an +80% increase from 2018).
Tracy Zhang The new wave of Chinese millennial travelers will not only increase spending in their leisure
+852-2918-5726 travels but will shape industry development in three primary ways. 1. standardized tours will
tracy.zhang@bernstein.com be jettisoned in favor of "experience" travelling. The incremental international traveler from
China is increasingly likely to be a tourist, not a business traveler and will prefer thematic
and customized travels to packaged tours (FITs; free-independent-travelers).
2. “experience” shopping rather than simply chasing recognized brands ex-VAT and import
duties will create tremendous opportunities for travel apps or platforms, duty free shops,
airports, and airlines. 3. travel agencies that rely on traditional physical distribution channels
to sell organized standardized tours will cease to be viable when marketing to a cohort
comfortable making customized, large ticket purchases online.
There are direct investment implications from these three long-term trends. The new travel
economy has already disrupted the traditional travel companies; but it offers more
opportunities to those catering for the millennial travelers. Among traditional travel
companies, responsive ones like China International Travel (601888.CH, not covered) are
making a shift in their business mix to duty free and have gained traction quickly. Some of
the leading airports now have more than half of their revenues from non-aviation operations,
of which the majority are related to duty free consumption (shop rental income), and they
have seen their earnings rise rapidly in recent years. In the airlines space, non-SOE
operators like Spring (not covered, 601021CH) and Juneyao (not covered, 603885.CH)
focus on leisure travel with dynamic pricing and are outgrowing peers.
The Big 3 airlines will continue to benefit from the trend, but they will need to "upgrade" their
service. We maintain Market-Perform rating for Air China and China Eastern. Given flight
restrictions, limited landing rights, oil price exposure and exchange rate volatility, the
Chinese airport group (Shanghai 600009.CH, Beijing 694.HK, Shenzhen 000089.CH,
Guangzhou, 600004.CH - none of which are covered) are the greater direct beneficiaries of
these trends.
Analyst Page Bernstein Events Industry Page Financials Comp Valuation
See Disclosure Appendix of this report for important disclosures and analyst certifications www.bernsteinresearch.com
Cherry Leung +852-2918-5756 cherry.leung@bernstein.com 7 November 2019
TICKER TABLE
5 Nov 2019 TTM EPS Reported EV/EBITDA
Closing Target Rel.
Ticker Rating Price Price Perf. 2018A 2019E 2020E 2018A 2019E 2020E
CEA M USD 26.91 27.42 (26.4)% USD 0.03 0.05 0.04 66.60 47.82 45.68
OLD 28.95 0.03
600115.CH (China
M CNY 5.53 5.20 (7.1)% CNY 0.19 0.37 0.30 9.81 7.04 6.73
Eastern)
OLD 5.50 0.18 0.24
670.HK (China Eastern) M HKD 4.24 4.30 (24.3)% HKD 0.22 0.42 0.35 8.50 6.10 5.83
OLD 4.54 0.21 0.28
AIRYY M USD 19.02 19.57 (5.3)% USD 0.09 0.09 0.12 9.09 6.37 5.92
OLD 0.08 0.11
601111.CH (Air China) M CNY 8.91 9.00 1.5% CNY 0.54 0.53 0.69 9.11 6.38 5.93
OLD 0.48 0.64
753.HK (Air China) M HKD 7.54 7.70 (5.2)% HKD 0.62 0.61 0.80 7.89 6.20 5.81
OLD 7.67 0.55 0.74
MXAPJ 535.42 34.46 34.77 39.21 15.54 15.40 13.66
SPX 3,074.62 159.05 161.30 177.16 19.33 19.06 17.36
TARGET PRICE CHANGE / ESTIMATE CHANGE IN BOLD O - Outperform, M - Market-Perform, U - Underperform, N – Not Rated
INVESTMENT IMPLICATIONS
Air China and China Eastern Airlines will continue to benefit from increased leisure travels by the Chinese millennial travelers.
However, we believe both airlines are more entrenched to the business travel segment, though they are also in the leisure travel
market. In the future, the air travel market will have more leisure passengers who are more price-sensitive and looking for
value-for money services, airlines are no longer just service operators, they need to engage the leisure traveler proactively
through loyalty programs, dynamic pricing and focused sales & marketing. To be able to facilitate passengers a better travel
experience is also important, from seamless ticket reservation to pre-filled passenger information, facial recognition to ease
check-in for passengers, etc. These will continue to boost travel desires yet will also help airlines achieve better cost
efficiencies. We maintain Market-Perform rating for Air China and China Eastern.
ASIA-PACIFIC TRANSPORT & LOGISTICS BERNSTEIN 2

VALUATION COMPS TABLE
EXHIBIT 1: Valuation Table

ROIC ROA
As of Nov 05, 2019 (In US$ bn) P/E P/B EV/EBITDA (%) (%)
Trading Share Market
Company Ticker CCY Price Cap EV 17A 18A 19E 20E 18A 17A 18A 19E T12M T12M
Chinese airlines coverage
Air China-H 753 HK HKD 7.5 16.8 34.5 14.7x 11.2x 11.6x 9.1x 1.1x 6.4x 10.1x 6.6x 5.9% 2.5%
Air China-A 601111 CH CNY 8.9
China Eastern Airlines-H 670 HK HKD 4.2 11.5 31.3 10.7x 20.2x 12.9x 9.3x 0.9x 8.3x 10.6x 8.0x 3.9% 0.8%
China Eastern Airlines-A 600115 CH CNY 5.5
China Southern Airlines-H 1055 HK HKD 5.3 11.0 35.2 11.2x 15.8x 11.0x 8.1x 0.9x 7.1x 10.4x 8.1x 3.9% 0.9%
China Southern Airlines-A 600029 CH CNY 7.2
Hainan Airlines 600221 CH CNY n/a n/a n/a 16.1x n/a n/a n/a 0.6x 9.4x 13.0x 15.6x 0.8% -1.4%
Spring Airlines 601021 CH CNY 44.9 5.8 6.1 23.6x 19.0x 20.4x 16.5x 2.8x n/a 13.6x 11.9x 7.2% 6.3%
Juneyao Airlines 603885 CH CNY 15.2 4.3 5.4 20.7x 18.2x 20.3x 16.5x 2.4x 19.6x 13.7x 13.3x 5.5% 4.0%
Mean 16.2x 16.9x 15.2x 11.9x 1.4x 10.2x 11.9x 10.6x 4.5% 2.2%
Asia pacific airlines (excl Mainland China)
Cathay Pacific 293 HK HKD 10.3 5.2 15.2 n/a 18.7x 16.5x 11.2x 0.8x 10.7x 14.5x 7.4x 3.0% 2.0%
Singapore Air SIA SP HKD 9.4 8.0 13.6 33.0x 9.8x 14.9x 14.8x 1.1x 4.4x 3.7x 4.9x 4.5% 2.4%
Qantas Airlines QAN AU AUD 6.6 7.1 9.3 12.4x 11.3x 11.2x 10.7x 2.8x 2.8x 4.4x 4.1x 10.4% 4.6%
Japan Airlines 9201 JP JPY 3,359.0 10.9 8.8 7.7x 11.2x 9.1x 10.5x 1.3x 4.0x 3.7x 4.3x 12.5% 7.4%
Korean Air 003490 KS KRW 26,250 2.2 15.5 3.9x n.a n/a 29.3x 0.9x 5.9x 6.4x 7.3x 2.3% -1.4%
Indigo Indigo IN INR 1,462.5 8.0 8.1 22.9x 21.5x n/a n/a 10.1x 9.6x 15.0x 13.2x -3.6% -0.5%
Thai Aiways THAI TB THB 7.8 0.6 5.0 n/a n/a n/a n/a 1.2x 8.0x 7.7x 7.0x -4.8% -3.3%
Asiana Air 020560 KS KRW 5,790.0 1.1 5.9 3.7x 299.8x n/a#N/A N/A 0.8x 7.7x 6.7x 7.1x -1.3% -4.2%
Mean 13.9x 62.1x 12.9x 15.3x 2.4x 6.7x 7.8x 6.9x 2.9% 0.9%
Global airlines (selected)
IAG (British Airways) IAG LN GBP 542.4 13.9 19.3 3.7x 299.8x n.a#N/A N/A 2.3x 3.4x 3.8x 3.3x 15.0% 7.3%
Deutsche Lufthansa AG LHA GR EUR 16.0 8.5 15.7 7.7x 4.8x 5.8x 5.4x 1.6x 2.5x 3.8x 2.7x 6.4% 3.4%
Ryanair Holdings Plc RYA ID EUR 10.8 16.4 17.0 6.2x 4.3x 6.2x 4.9x 4.0x 9.5x 8.8x 8.5x 8.9% 6.5%
easyJet plc EZJ LN GBP 1,320.0 6.8 6.9 13.8x 13.2x 15.0x 17.6x 1.7x 5.6x 7.2x 6.0x 6.9% 3.8%
Delta Air DAL US USD 57.5 37.2 51.7 15.7x 14.5x 15.2x 14.2x 3.2x 3.9x 4.8x 5.7x 16.8% 7.7%
American Airlines Group AAL US USD 31.2 13.7 42.9 11.8x 8.8x 8.2x 8.1x n.a 5.2x 4.6x 5.9x 9.3% 3.8%
Southwest Airlines Co LUV US USD 57.9 31.1 31.5 9.9x 7.1x 6.3x 5.9x 3.8x 6.1x 7.9x 6.0x 17.4% 9.2%
United airline UAL US USD 93.1 23.6 38.6 11.6x 11.0x 13.2x 11.7x 2.2x 4.3x 5.0x 5.2x 12.7% 6.4%
Mean 10.0x 45.4x 10.0x 9.7x 2.7x 5.1x 5.7x 5.4x 11.7% 6.0%
Source: Bloomberg, Bernstein analysis
DETAILS
This report is set out in three sections:
1. Chinese travel market keeps gaining elevation, sizeable yet is still growing fast
2. Growth will reflect three trends
 FIT (Free-independent Travelers);
 Experience shopping;
 Customized, large ticket purchases online
3. Investment opportunities in Travel Retail, airports and low-cost-airlines are superior to the Big 3 carriers
THE CHINESE TRAVEL MARKET KEEPS GAINING ELEVATION, SIZEABLE YET IS STILL GROWING FAST
Chinese Millennials (born between 1981 and1996), is about to hit their 40s and will be moving into their prime spending years.
For China, that means an incremental 12 million international travelers each year by 2025 (an ~90% increase from 2018). There

is no doubt that the Chinese travel market will continue to grow. As the economy in China flourishes, people have a higher
tendency to spend more in travel to enjoy their holidays. This will support a continual shift towards services/leisure categories.
In total travel spending, Chinese spending per capita is only at US$190 in 2018, that is not even at a quarter of the amount in
the US's $800, let alone Japan's over US$1,000 or the UK's $1,700. The Chinese travelers have just started their journeys. We
expect decade-long growth in the future.
Revenue from international routes represents on average 26% of the major airlines in China, compared to 41% in other Asian
airlines, 53% of European airlines and 28% among the major US airlines. There is a simple explanation: China is a big country;
the U.S. is a big country. However, the proximity of tourist markets like Korea, Japan, Thailand and Vietnam to the east coast of
China suggest that the long-term share of international travel from China will more closely reflect Europe than the U.S. China's
commercial aviation probably lags the West by 20-40 years. At the passenger per capita and per urban resident level, China is
at Europe's late 1980's/early 1990's, and is well below the US 1970's level. However, if measured by total market size, China's
total passenger already surpassed the entire Euro area and is at 72% of the US market.
In 2018 China has 233 civilian airports in operation, this number has grown by 2%-7% per year from 2010. More airports will
be built, at a rate of 4.6% CAGR to 2025, according to the plan of government. The Chinese government aims to double the
number of airports from current level to ~500 in 2040. At that point, it will be close to the level of US currently. Airport
infrastructure has been a bottleneck for passenger travel, but this is changing under the current airport construction plan that is
expected to fill the demand gap gradually in the next 20 years.
Currently there are six airport stocks listed in Shanghai/Shenzhen/Hong Kong stock exchanges. Shanghai International Airport
(60009 CH) operates the Shanghai Pudong Airport while the old Hongqiao Airport is operated by the same holding company
(Shanghai Airport Holding Group that has 53% of the Shanghai Airport (600009.CH). Of the two, Pudong airport focus more on
international flights though the old Hongqiao Airport also operates some regional and short-haul international routes. Beijing
Capital International Airport (694 HK) operates the old Beijing Capital Airport. Beijing Daxing International Airport, located on
the border of Beijing and Langfang, Heibei Province, is not included in the listing body yet though they share the same parent
company (by Capital Airport Holding Group; that holds 57% of the old Beijing Airport).
EXHIBIT 2: The Chinese government plans to double the no. of airports in China from now to 2040, reaching the
US's 2016 level
No. of Airports in China

600
Forecast
USA 2016: ~550 522
500
+130 450
400
Government plan
+87 320
300 260
+98 233
200
139 135
100
0
2019E
2021E
2024E
2026E
2028E
2029E
2031E
2033E
2034E
2036E
2038E
2039E
2020E
2022E
2023E
2025E
2027E
2030E
2032E
2035E
2037E
2040E
1996
1999
2001
2004
2006
2009
2011
2014
2016
1995
1997
1998
2000
2002
2003
2005
2007
2008
2010
2012
2013
2015
2017
2018
Note: US had 5,136 airports with paved runways for public use in 2016, but of which only ~550 serve commercial airlines
Source: CAAC, NDRC, US DoT, Bernstein estimates and analysis

EXHIBIT 3: Chinese metropolitan areas have higher population than US and Europe but fewer air seats per capita
China North America Europe
Seats per capita Seats per capita Seats per capita
Metropolis Pop (m) Dom Intl Total Metropolis Pop (m) Dom Intl Total Metropolis Pop (m) Dom Intl Total
1 Shanghai 34.0 1.5 0.6 2.1 New York 20.0 2.8 1.4 4.2 London 13.6 5.5 2.3 7.8
2 Guangzhou 25.0 1.3 0.4 1.7 Greater Los Angeles 17.9 3.0 0.8 3.8 Paris 11.9 3.3 2.1 5.5
3 Beijing 24.9 1.9 0.6 2.5 Chicago 9.5 5.8 0.8 6.6 Madrid 6.4 4.0 1.3 5.4
4 Shenzhen 23.3 1.1 0.1 1.3 Dallas-Fort Worth 7.5 6.1 0.7 6.8 Barcelona 5.4 5.0 0.6 5.7
5 Wuhan 19.0 0.7 0.1 0.8 Houston 7.0 4.0 1.0 4.9 Rührgebiet§ 5.1 4.9 0.4 5.3
6 Chengdu 18.1 1.5 0.1 1.7 Toronto 6.3 3.5 1.6 5.1 Berlin 5.1 4.1 0.2 4.3
7 Chongqing 17.0 1.3 0.1 1.4 Washington 6.2 6.4 0.9 7.3 Milan 4.3 5.9 0.9 6.8
8 Tianjin 15.4 0.8 0.1 0.9 Miami 6.2 4.4 3.0 7.4 Rome 4.2 5.7 1.4 7.1
9 Hangzhou 13.4 1.6 0.1 1.7 Philadelphia 6.1 2.9 0.4 3.3 Athens 4.1 3.2 0.4 3.6
10 Xi’an 12.9 1.9 0.1 2.0 Atlanta 5.9 9.1 1.2 10.3 Warsaw 3.3 3.3 0.4 3.8
11 Changzhou 12.4 0.1 0.0 0.2 Boston 4.9 4.3 0.8 5.1 Hamburg 3.2 3.4 0.1 3.5
12 Shantou 12.0 0.3 0.0 0.4 Phoenix 4.9 5.3 0.2 5.4 Naples 3.1 1.9 0.0 1.9
13 Nanjing 11.7 1.4 0.1 1.5 San Francisco 4.7 9.4 1.8 11.2 Budapest 3.0 2.7 0.3 3.0
14 Jinan 11.0 0.9 0.0 0.9 Detriot 4.3 4.5 0.4 4.9 Brussels 2.9 5.8 1.3 7.1
15 Harbin 10.5 1.1 0.0 1.1 Montréal 4.3 1.8 1.1 2.9 Lisbon 2.8 4.9 1.2 6.1
16 Zhengzhou 9.7 1.7 0.1 1.8 Sea􀆩le 3.9 6.8 0.6 7.4 Katowice 2.8 0.7 0.1 0.8
17 Qingdao 9.6 1.4 0.2 1.6 Minneapolis-St Paul 3.6 5.8 0.3 6.1 München 2.7 9.4 2.0 11.4
18 Shenyang 7.7 1.3 0.1 1.4 San Diego 3.3 4.3 0.1 4.4 Stu􀆩gart 2.7 2.7 0.1 2.8
19 Wenzhou 7.6 0.9 0.0 0.9 Tampa 3.1 4.0 0.1 4.2 Manchester 2.7 4.9 1.3 6.2
20 Nanchang 7.4 1.1 0.0 1.2 Puerto Rico 3.1 1.3 0.3 1.6 Vienna 2.6 5.7 0.9 6.7
Source: Aviationstrategy.aero, Bernstein analysis
China passenger volume has been growing much faster than US

EXHIBIT 4: It took China half the time to grow to US's 1999 passenger level. Infrastructure still catching up
M Km US: Passenger millions km carried

1,600,000 1,511,700
1,400,000
1,200,000 1,044,868
1,000,000
31 years
800,000
600,000
400,000
183,070
200,000
0
65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15 17
1,200,000 M Km
1,070,100.00
1,000,000
14 years
800,000
China grew from ~170 trillion passenger
kilometers to ~1,070 in 14 years only. The US
600,000
used 31 years to grow to this level in 1960s
400,000
178,230
200,000
0
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18
Source: CAAC; Bernstein

Source: analyses,
Bernstein analysis; CAAC INDUSTRY | 46

EXHIBIT 5: China travel is still in its early development stage
Air Penetration 2018 (Passengers Carried/Population)

4.00
Passengers Carried/Population (2018)
3.50
Sw itzerland, 3.39
3.00
UK, 2.49
US, 2.72
2.50
2.00 Canada, 2.41

R² = 0.7502
Spain, 1.73
1.50 EU, 1.56
Germany, 1.32
1.00
Vietnam, 0.49 Israel, 0.83
0.50 China, 0.44 Italy, 0.46
India, 0.12
-
- 10,000.00 20,000.00 30,000.00 40,000.00 50,000.00 60,000.00 70,000.00 80,000.00 90,000.00
GDP per Capita in US$ (2018)
Source: World Bank, Bernstein estimates and analysis
China's passenger travelled distance today is at the level of US in early 2000s (~20 years behind) and it is set to double in the
next 10 years, reaching current US level as early as 2025 in our estimates. In other words, China is likely to close the 20-year
gap, we estimate passenger volume to grow at 8.7% CAGR for the next 5 years.

EXHIBIT 6: The Chinese airlines have fewer international passengers today but are catching up
International pax revenue as % of total pax revenue for main arilines

China Asia Europe US
(ex-China)
100%
80% Avg: 41.3%
60% Avg: 52.6%
40%
Avg: 26.0% Avg: 28.2%
20%
29% 31% 23% 20% 30% 14% 36% 93% 67% 56% 35% 29% 27%
0%
Note (1): Lufthansa data is "intercontinental passenger revenue" as percentage of total passenger revenue, which should be lower than international revenue.
Source: Company disclosure, Bernstein analysis
EXHIBIT 7: We estimate Chinese outbound trips (ex-HK and Macau) to double by 2025
Outbound Trips (ex-HK,MC) Hong Kong Trips

300 Macau Trips Outbound Trips (ex-HK,MC) Y/Y% 30%
250 40 25%
38
36
34
200 64 20%
Trips (millions)
32
30 63
28 61
Y/Y%
60
150 25 15%
22 57 58
20 51 55
20
100 21 10%
43 44
19 46 167
17 47 142 154
41 119 130
50 35 99 109 5%
76 86
62 72
39 48
31
- 0%
2012 2013 2014 2015 2016 2017 2018 2019E 2020E 2021E 2022E 2023E 2024E 2025E
Source: Haver; Bernstein estimates & analysis

EXHIBIT 8:
Top 6 Chinese airlines' outbound passengers grew strongly, outpacing domestic momentum
Top 6 total pax growth, YoY

25%
20% 20%
17%
15% 16% 15% 15%
13%
11% 11% 11%
10%
7% 7% 8% 7% 8%
5%
3% 2%
0%
-5%
-10%
-15%
-20%
Jan & Feb Mar Apr May Jun Jul Aug Sep
Domestic International Regional
Source: Company reports, Bernstein analysis
EXHIBIT 9: We expect a higher mix of travelers to shift EXHIBIT 10: Asia destinations still the top choices
from HK/Macau to int'l destinations
Mix of Chinese reg. and int'l trips Traveler trip # by international

destination country (ex-HK and
120% Macau) (p.a '000)
100% Thailand 10,536

Japan 4,193
80% Korea 4,790
Vietnam 4,967
60% Singapore 3,418
US 3,237
Taiwan 2,696
40%
Malaysia 2,944
62%
53% France 2,200
20% 38% Indonesia 2,137
Germany 1,591
0% Australia 1,432
2012 2018 2025E Philippines 1,255
International destinations Hong Kong & Macau UK 472
Source: Haver, Bernstein estimates & analysis Source: Haver, Bernstein analysis

EXHIBIT 11: China's passport still scored low, the holders' access to other countries are not optimal yet. Potential
to improve in the future
Passport score by country

190 190 188 188 188 184 184 184 182 181 177 168
145 141
71
Canad a
Hong Kon g
Malaysia
Ger ma ny
Sou th Kor ea
UK
US
Macao
New Zeala nd
Taiwan
Austraila
China
Japan
Finland
Sing apore
Rank 1 1 2 2 2 6 6 6 8 9 12 18 31 33 72
Note: As of Oct 1st, 2019. The Henley Passport Index reflects the world’s passports according to the number of destinations their holders can access without a prior
visa. The ranking is based on data from the International Air Transport Association (IATA), and process by the Henley & Partners Research Department
Source: Henley Passport Index (IATA); Bernstein analysis
EXHIBIT 12: Chinese travel expenditure lagged developed EXHIBIT 13: International trips per capita has plenty
countries room to grow
Travel expenditure per capita (2018) Outbound Trips Per Capita (2018)
1800 1.2
1600
1.0
1400
Outbound Trips/Capita
1200 0.8
USD/Capita
1000
0.6
800
600 0.4
400
0.2
200
0 0.0
Source: Euromonitor, Bernstein analysis Source: World Bank, Bernstein estimates and analysis
Note: Expenditure per capita is different from GMV
In the past, applying for a passport was not easy process for Chinese citizens. They need to make multiple trips to the
administration to go through the application process in person. However, since 2018, appointments with the immigration
admiration can be made online. It will also just require a small fee for the immigration administration get you at the front of the
queue, for qualified citizens who need the passport urgently. The Chinese government is keen to meet the increasing demand
for international travel. We have seen the percentage of Chinese citizens to increase significantly from 2.8% in 2012, to above
10% in 2018. The Ctrip CEO, Jane Sun, predicted at the World Economic Forum in 2018 that the number of passports in China
to double from 120 Mn in 2016 to 240 Mn by 2020.

EXHIBIT 14: Passport penetration in China rose rapidly EXHIBIT 15: More visa exemptions will facilitate future
but still low outbound travels
% of citizens with passports Chinese passport holders visa

exemptions
80% 76%
80
70% 66%
70
60%
60
29
50%
42% 50
21 26
40% 40 16
16
30% 30
17.0% 20 43
20% 34 36
8 28 32
10.7% 9
8.7% 10
10%
2.8% 10 9
0
0% 2012 2013 2014 2015 2016 2017 2018
2012 2016 2018E 2020E 2016 2016 2016
China US Canada UK Visa on arrival Visa Exemption
Source: Forbes; Bernstein estimates & analysis Source: Bernstein estimates & analysis
Beyond a higher passport penetration, Chinese travelers have also increased their consumption spend dramatically in the past
decade. The increasing affluence of the Chinese population facilitates more overseas vacations. A process of consumption
upgrade is also happening. Travelers now go beyond just shopping: they opt for wine-tasting or football matches in Europe,
skiing in Japan, massage in Thailand, etc. We have seen consumption spend per pax increase by 8.5% CAGR from 2014-2017.
The upward trend is likely to continue in the next few years.

EXHIBIT 16: Chinese tourists are spending more per trip EXHIBIT 17: Combined with a growing number of
outbound tourists, total tourist consumptions went up
fast
Outbound tourist personal Outbound tourist total consumption,

consumption, USD USD Bn
2000 300
1,806
1800 258
250
1600
1,413
1400
200
1200 165
1000 150
800 740
100
600
400
50
200
3.7
0 0
1995 2014 2017 1995 2014 2017
Source: NBS; Bernstein analysis Source: NBS; Bernstein analysis
GROWTH WILL REFLECT IN THREE TRENDS: FIT; EXPERIENCE SHOPPING; CUSTOMIZED, LARGE TICKET
PURCHASES ONLINE
Standardized tours will be jettisoned in favor of "experience" travelling. Tourists prefer thematic and customized
travels
In 2018, over 70% of air travel was for leisure and private reasons, flipping the ratio of 17 years ago, when business travel was
the mainstream. Business air travel is growing rapidly, but simply not as fast as leisure. A significant reason being more
Millennial Chinese are spending their holidays visiting cities out of their hometowns, and they tend to increase the distance
travelled as they become more experienced in travel from the surrounding areas, to other provinces in China to outside of China.
EXHIBIT 18: Increasing air travels are for leisure/family
Mix of Business and Lesiure Travel Busine ss Leisure an d o the rs
64% 57% 50% 49% 45%

28%
200 1 200 4 200 5 200 6 200 7 201 8
Source: Variflight, CAAC, Bernstein estimates & analysis

In the past, when thinking about travelling for leisure, people always relate it to package tours – a tour guide raise up a little flag
high (such that the tourists can see him/her clearly far away at the end the crowd), and each tour member wears the same shirt,
jacket or cap for easy recognition. Tour members get morning calls from the tour leader - 5 or 6 or 7am - gathering at the
breakfast place and the tourists all get on to the tour bus right afterwards. Apart from waiting for the indiscipline travelers who
are late for the bus (there are always a few troublesome members in each tour), the bus will usually depart on time to catch the
maximized number of sight-seeing spots, where the tourists can normally only stay 30 minutes, or at maximum 1 hour, before
the group is herded to another tourist attraction point.
EXHIBIT 19: Standard packaged tours are losing EXHIBIT 20: Travel agencies faced a hard time to grow
attractiveness to the Millennial travelers profit
Net profit of travel agencies in China

(RMB Mn)
3,000
2,635
2,543 2,478
2,500
2,000 1,860
1,500
1,000
500
-
2013 2014 2015 2016
Source: Wiki-commons; Bernstein analysis Note: The gov't no longer published profit data of travel agencies after 2016
Source: NBS, CEIC; Bernstein analysis
The new millennial travelers no longer favor organized tours and standardized travels. More FITs (free-independent-travelers)
prefer thematic and customized travels to packaged tours. They like “experienced” shopping rather than purely chasing for
recognized brands only. These will create tremendous opportunities for travel apps or platforms, duty free shops, airports, and
airlines but at the same time also disrupt the traditional sector like travel agencies that rely on traditional physical distribution
channels and organized standardized tours.
Chinese travelers continue to shop more, shifting from luxury brands to experience shopping
The UN World Tourism Organization estimates that China accounts for more than 20% of outbound tourists total spend in the
world. We will not be surprised to see this to increase to one-third or even more given more Chinese citizens will get passports
and the millennial travelers to spend more on leisure travels. Today, most of their international travels are still confined to short-
haul trips in Asia. This pattern has not changed in the last 5 years. In 2013, 69% of outbound seats are within Asia, which
increased slightly to 71% in 2018. As the millennial travelers continue to grow and travel more frequently for holidays, they may
still tend to explore new destinations in Asia rather than long-haul trips that are more tiring. We believe the pattern between
short and long-haul will not change significantly, with long haul trips to increase gradually over time together with short hauls.
A recent travel report by McKinsey highlighted that China is already the largest outbound tourism market by visitor spending and
they are the top spenders in most of the destinations they visit. Their shopping patterns are also shifting from luxurious
expensive handbags to experience local shopping, though female travelers are still very into cosmetics and/or apparels that
they can get better deals or latest products in the international markets.
Tracing back the international travel seats data by cities to 2004 (the earliest that we can get) in SRS, we note that Asia is
always the most popular international destination, with 14 out of top 30 visiting cities in 2004 and 2014. This number grew to

18 in 2019. Europe used to be the second popular choice for Chinese travelers for luxury shopping but was surpassed by
America in 2010 when there was a surge of Chinese students studying in the US. The trend reversed again in 2019. Top 10
popular cities included eight Asian cities. Among all, Japan, South Korea, Thailand and Malaysia benefited most from China's
travel upticks.
EXHIBIT 21: Europe was the 2nd EXHIBIT 22: … but America overtaken EXHIBIT 23: Experienced travel in
popular destination for Chinese in Europe in 2010 Asia widened the gap with other
2004… continents
Top 30 int'l destination in 2004 Top 30 int'l destination in 2010 Top 30 int'l destination in 2019
20 20 20
18 18 18
16 16 16
14 14 14
12 12 12
10 10 10
8 8 8
6 6 6
4 4 4
2 2 2
0 0 0
Note: By seats Note: By seat Note; By seat

Source: SRS, Bernstein analysis Source: SRS, Bernstein analysis Source: SRS, Bernstein analysis
EXHIBIT 24: 8 Asian countries ranked EXHIBIT 25: US was the most popular EXHIBIT 26: Today 10 Asian countries
Top 30 by travel seat in 2004 in 2010 are on the list, with South Korea
ranked No. 1
2004 2010 2019
Japan 4 United States 5 South Korea 3
United States 3 Japan 4 United States 3
South Korea 3 South Korea 2 Thailand 3
Russian Federation 2 Canada 2 Japan 3
Germany 2 Germany 2 Cambodia 2
Vietnam 2 Vietnam 2
Vietnam 2
Indonesia 1 Malaysia 2
Australia 2
France 1 Australia 2
France 1
United Arab Emirates 1 United Kingdom 1
Indonesia 1
Malaysia 1 Canada 1
United Kingdom 1 Singapore 1 Germany 1
Denmark 1 India 1 Philippines 1
Singapore 1 Thailand 1 United Arab Emirates 1
Canada 1 Australia 1 Russian Federation 1
Thailand 1 United Kingdom 1 France 1
Netherlands 1 Qatar 1 Singapore 1
Croatia 1 Russian Federation 1 Indonesia 1
Philippines 1 Netherlands 1 Netherlands 1
Finland 1 Philippines 1 Grand Total 30
Malaysia 1 Grand Total 30
Grand Total 30
Note: By seats Note: By seats Note: By seats

Source: SRS, Bernstein analysis Source: SRS, Bernstein analysis Source: SRS, Bernstein analysis

EXHIBIT 27: Low-tier cities travelers prefer to travel in EXHIBIT 28: China is the largest outbound tourism
group according to Ctrip's travel research 2018 market by visitor spending since 2014
Mix of group tour vs. independent 2016 Top 10 outbound consumption,

travel USD Bn
100% 250
90%
30%
80% 200
50%
70% 58%
60% 150
50%
40% 100
70%
30%
50% 50
20% 42%
10%
0
0%
2010 2016 2018
Group tour Independent travel
Source: Ctrip, government news, Bernstein analysis Source: Beyond Summits, World Tourism Organization (UNWTO), Bernstein
analysis
Traveling with group tour has been an important choice for Chinese people, especially for outbound trips due to language
problems, cultural differences etc. Chinese used to travel with a big group of strangers and had a passing glance at various
spots. In recent years increasing Chinese travelers are turning into smaller-size or independent tours with more personalized
and deeper travel experience, especially for the travelers with couple and families who care about their space and privacy. More
younger travelers choose to travel overseas in a group, with travelers aged <30 making up 34% of the total in 1H2019 vs 29%
last year.

EXHIBIT 29: Families prefer independent tours due to EXHIBIT 30: But young tourists choose to travel with
privacy and high degree of freedoms group at their age
Choice of tour type by group in 2018 Outbound group tour mix by age
60% 35%
53%
50% 30%
41% 25%
40%
31% 20%
30% 24%
22% 15%
20%
20% 10%
10% 6% 5%
3%
0%
0%
60s 50s 40s 30s 20s 10s
Solo traveler Couple Friend Family
1H2019 1H2018
Group tour Independent tour
Source: China Tourism Academy, Ctrip, Bernstein analysis Source: China Tourism Academy, Ctrip, Bernstein analysis
Nearly 60% of outbound travelers make personal income more than RMB 10K per month, higher than the average in Tier 1 & 2
cities. 37% of outbound travelers earn the average level of RMB 5-10K per month. Travelers from Tier 2 and lower tier cities
possess stronger growth momentum in outbound group travels, accounting for 74.9% of total group travelers in 2018 vs
73.4% in 2017.
EXHIBIT 31: 56% travelers in Tier 1 & 2 cities earn more EXHIBIT 32: Nearly 80% of outbound travelers visit
than average income overseas at least once a year
Outbound travelers individual Outbound travel frequency

monthly income in 2018 (RMB)
50%
40% 44.2%
37.1%
40%
34.7%
30% 28.5%
30%
20% 16.9% 20%

12.1%
10.8%
10% 10% 5.5%
6.7%
2.9%
0%
0% Only once Once in 3-Once in 2- Once a Multiple in
< 5k 5k-10k 10k-20k 20k-30k > 30k ever 5 years 3 years year a year
Source: World Tourism Offices Federation, Bernstein analysis Source: World Tourism Offices Federation, Bernstein analysis

EXHIBIT 33: Chinese travelers lined up for luxury EXHIBIT 34: …and in Paris…
shopping in Hong Kong…
Source: Wiki-commons, Bernstein analysis Source: Wiki-commons, Bernstein analysis
EXHIBIT 35: ...But this has changed in recent years. EXHIBIT 36: and in Japan
Korea is now one of the top shopping spots for Chinese
travelers, especially for cosmetics
Asia Pacific duty-free continues to grow fast. The region now makes up 45% of the global duty-free market. Asia Pacific's
duty-free sales rose 14.2% YoY to USD 35 Bn in 2018, outgrowing global's12.9% slightly. Korea, Bangkok and China are the
main contributors in Asia. China's duty-free sales accounted for 8.3% of the global market in 2017, but its presence will
continue to rise with more millennial travelers and positive duty-free policies. Fragrances and cosmetics are the most pursued
categories for shoppers, contributing close to half of total duty-free sales, followed by wines and spirits that account for 17%.
Fashion and food play stronger roles in the world market than in China.

EXHIBIT 37: Fragrances and cosmetics support global EXHIBIT 38: Asia duty-free is already close to half of
duty-free growth global market
Global duty free and retail sales Global duty free and retail sales by
growth by catergory in 2018 region in 2013-2017
25.0% 1.2
20.0% 1
11% 11% 11% 10% 10%
15.0% 17% 16%
0.8 19% 18% 18%
USD Bn
10.0%
0.6 30% 29%
34% 32% 30%
5.0%
0.4
0.0%
0.2 39% 41% 43% 45%
37%
0
2013 2014 2015 2016 2017
Asia Pacific Europe

Americas Meddile East & Africa
Source: Generation Research; Bernstein analysis Source: Generation Research; Bernstein analysis
EXHIBIT 39: Fragrances and cosmetics are the biggest EXHIBIT 40: …especially in China and Asia Pacific,
piece of cake in the duty-free market… followed by wine and spirits
Duty free and travel retail sales by Duty free and travel retail sales mix
category in 2017 by catergory in 2017
100% 4% 5%
30.0 7% Electronics, gifts
5% 4%
90% 7% 7% and other
25.0 8%
80% 8% 8%
20.0 14% Confectionary and
15.0 70% 10% 14% fine food
8%
10.0 60% 17% 11% Watches, jewellery
12% and fine writing
5.0 50%
0.0 16%
40% Fashion and
accessories
30%
49% 49% Tobacco goods
20% 36%
10%
Wines and spirits
0%
Fragrances and
China Asia Pacific Worldwide cosmetics
Source: Generation Research, Statista, Bernstein analysis Source: Generation Research, Statista, Bernstein analysis

EXHIBIT 41: Cosmetics and fragrances are popular EXHIBIT 42: Majority duty-free consumption is still at
the airports
1H2018 Global Duty free by product 2017 Global Duty Free & Travel
Electronics, Retail Sales by Sales Channel
Gifts & Airlines, Ferries,
Confectionery & 3.4% 2.6%
Other,
Fine foods, 7.1%
7.1%
Watches,
Jew elery
& Fine Fragrance
Writing, s&
8.7% Cosmetics Other
, 38.1% shops &
Tabacco sales,
Airport
goods, 38.6%
shops,
9.7% 55.4%
Fashion &
Accessori Wines &
es, 13.9% Spirits,
15.4%
Source: Generation Research: Bernstein analysis Source: : Generation Research: Bernstein analysis
EXHIBIT 43: EXHIBIT 44:

Beijing Capital Airport duty-free shop Shanghai Pudong Airport duty-free shop

EXHIBIT 45: Hainan Sanya duty free shop EXHIBIT 46: Shenzhen Airport duty free shop
Customized, large ticket purchases online will be pursued by customers

Travel agencies operate physical stores to sell organized standardized tours. This model is disrupted by OTAs who offer a
convenient option for travelers to make customized, large ticket purchases easily from their mobile phones. Millennials travelers
tend to book the ticket online to allow more freedom over time schedule and customized service. Online platforms will benefit
from the trend.
EXHIBIT 47: Airlines are increasing direct sales EXHIBIT 48: China is catching up on travel booking
online
Air ticket sales channel mix Online Penetration by Region

60%
100%
90%
50%
80%
70%
40%
60%
50%
30%
40%
30%
51% 20%
20% 35% 38%
10% 20% 24% 26%
10%
0%
2012 2013 2014 2015 2016 2017
(CEA) 0%
Other distributors 2015 2016 2017 2018 2019E 2020E
OTA
Direct channels (online/others) China Europe US APAC
Source: Mckinsey; iResearch; China Eastern Airlines (CEA) report; Bernstein Source: iResearch, Phocuswright and Bernstein analysis
analysis Note: Europe 2018 is estimated; Germany data is as of 2017
The Chinese duty-free shops are also turning to the online channel to stimulate shoppers' consumption. Apart from purchasing
directly from duty free shops in airports, travelers taking international flight can place duty-free orders 5 to 30 days prior to
departures. The shopping process is seamless for Chinese WeChat users. Sunrise Duty Free operates an account in WeChat,

where users can register, browse and add their items to the shopping cart easily, just like in Tmall or Taobao. The only benefit
for shopper is that they don’t have to pay immediately. They can take the time to compare prices, add or delete the selected
items, only to finalize the order when they pick up the products in the airport duty free shops. Payment is the very last step of
this process. Customers usually pick up their orders in the airport upon arrivals (after they return from their overseas trips).
EXHIBIT 49: Register in WeChat EXHIBIT 50: Place the order 5-30 days EXHIBIT 51: Screening the items -
account- Sunrise Beijing prior to flight Skin care, Cosmetics, Perfume…
5-30 days prior to

flight
make the
ordering
here
Source: WeChat, Bernstein photo Source: WeChat, Bernstein photo Source: WeChat, Bernstein photo

EXHIBIT 52: Add the items to cart EXHIBIT 53: Select the date to pickup EXHIBIT 54: Enter personal
information
Name
Phone number
Select the date
to pickup Passport number
Flight number
Source: WeChat, Bernstein photo Source: WeChat, Bernstein photo Source: WeChat, Bernstein photo
The winning and losing sectors

The significant growth of travel demand in China continues to shape the development of the sectors. However, though we see
more travel orders made in the online platforms (as in retail where we see more eCommerce rather than in the brick-and-mortar
stores), the travel sector still sees tremendous opportunities as the online platforms can only provide a sales window, with some
tour plan (e.g. itinerary service). Bulk part of the travel cannot happen without the actual services provided by the operators (e.g.
flights, discounted items and enjoyable shopping at the duty-free shops and airports, etc.). These sectors are going to benefit
from the rising travel demand of the millennials.

EXHIBIT 55: Airports, duty-free and leisure airlines benefit the most from the Millennial travel boost in China
3-year CAGR (%) Market cap (US$ Millennial travel
key Stocks Ticker Revenue EBIT Market cap Mn) impact
Anhui Jiuhuash (九华旅游) 603199 CH Equity 6% 4% -17% 383 Negative
Yunnan Tourism (云南旅游) 002059 CH Equity 16% -26% -8% 775
Lijiang Yulong (丽江旅游) 002033 CH Equity -5% -9% -23% 443
Btg Hotels Gro (首旅酒店) 600258 CH Equity 86% 104% 40% 2,320
Zhangjiajie To (张家界) 000430 CH Equity -12% -39% -20% 302
Emei Shan Tour (峨眉山Ａ) 000888 CH Equity 0% 11% -25% 437
Huangshan Tour (黄山旅游) 600054 CH Equity -1% 2% -20% 857
China Cyts (中青旅) 600138 CH Equity 3% 25% -18% 1,224
Guilin Tourism (桂林旅游) 000978 CH Equity 4% 14% -24% 262
Tibet Tourism (西藏旅游) 600749 CH Equity 5% -170% -21% 327
Xi'An Tourism (西安旅游) 000610 CH Equity 3% -8% -16% 327
Beijing Jingxi Culture and Tourism (北京文化) 000802 CH Equity 49% -300% -24% 952
Caissa (凯撒旅游) 000796 CH Equity 17% 8% -28% 822
Average 13% -30% -16% 726
Air China 753 HK Equity 8% -7% 7% 15,165 Slightly positive
China Eastern 670 HK Equity 5% -11% -2% 10,634
China Southern 1055 HK Equity 7% -8% 4% 10,199
Average 7% -9% 3% 11,999
JuneYao Airlines 603885 CH Equity 19% 2% -9% 3,760 Positive
Spring Airlines 601021 CH Equity 16% 17% 0% 5,457
Average 17% 10% -4% 4,608
Shanghai International Airport 600009 CH Equity 13% 20% 40% 21,506 Positive
Guangzhou Baiyun International Airport 600004 CH Equity 10% -2% 40% 6,499
Beijing Capital International Airport 694 HK Equity 8% 11% -9% 3,696
Shenzhen Airport 000089 CH Equity 5% 3% 5% 3,159
Xiamen International Airport 600897 CH Equity 6% 10% -3% 880
Regal International Airport Group 357 HK Equity 15% 14% -18% 295
Average 9% 9% 9% 6,006
China International Travel Service Corp 601888 CH Equity 29% 34% 57% 25,418 Positive
Beijing Capital International Airport Company 694 HK Equity 8% 11% -9% 3,696
Average 18% 22% 24% 14,557
Source: Bloomberg; Bernstein analysis
EXHIBIT 56: The Chinese airports and duty-free sectors outperformed peer sectors thus far
Trailing twelve months
Change (YoY) Stock performance
China transport subsectors EPS Revenue 19E P/E TTM return
Travel agencies -62.1% -4.0% 23.15 -9.2%
Airlines - SOE -43.1% -0.8% 10.36 -12.8%
Airlines - leisure -13.4% 9.0% 18.08 6.4%
Airports -9.0% 2.5% 22.64 10.9%
Duty Free -8.0% 17.3% 25.45 0.8%
SHCOMP Index -6.0% 11.51 -1.1%
SZCOMP Index -31.0% 18.66 6.3%
Hang Seng Index -1.8% 10.30 -6.3%
The high penetration of handhelds among the millennials accelerated the development OTAs (Online Travel Agencies). They
continue to disrupt and take market share from the traditional travel agencies. At the same, leisure carriers like Spring or
Juneyao Airlines offer more dynamic ticket prices also offer travelers more choices. The Chinese airlines, including the Big 3,
are shifting ticket sales to online, either through OTAs or from their company websites. This also cut away a noticeable revenue
source for the travel agencies that used to distribute air-tickets in the old days. China Eastern Airlines, for example, said in its
2017 annual report that the company increased direct sales to 51%; at the same time reduced agency sales during the year, by
strengthening its online sales channels on its official website and mobile user terminals. Airlines strengthened collaborations
with OTAs, and they continued to enhance its ability in direct sales. Air China (the only flag-carrier in China) also said in its 2018
annual report that revenue from the mobile platform increase by 50% YoY.

EXHIBIT 57: Duty free and Airports stocks recorded highest return in past 3 years, while travel agencies stocks
underperformed market index
Stock price performance

2.50
2.00
1.50
1.00
0.50
0.00
Travel Agencies Airlines - SOE Airlines - Leisure

Airports Duty Free Benchmark Index
Note: Benchmark index refers to average of stock performance of SHCOMP, SZCOMP and HSI Index
The new travel economy has already disrupted the traditional travel companies; but it offers more opportunities to those
catering for the new needs of the millennial travelers. Among traditional travel companies, responsive ones like China Travels
(601888.CH, not covered) making a shift in their business mix to duty free and have gained traction in this new wave of travel
boost. Some of the leading airports now have more than half of their revenues from non-aviation operations, most of which are
from duty free consumptions (shop rental income). To attract customers and stimulate more impulse shopping, airports
expanded and upgraded their shopping facilities to enhance consumer shopping experience. These airports have also seen
their earnings rise in recent years. In the airlines space, non-SOE operators like Spring (not covered, 601021CH) and Juneyao
(not covered, 603885.CH) that focus on leisure air tickets with more dynamic pricing outgrew airline peers by passenger
volume and revenue.
Duty-free
The Chinese travelers are becoming more sophisticated - shopping is still top of travelers’ mind but they do not just purchase
luxury brands as in the past. Now they are attracted to unique experience shopping that forms part of the journey pleasure.
Duty-free shopping is always a popular activity among tourists, everywhere in the world as tourists are usually in an active
shopping mood on holidays and they treasure the bargain deals that they can get from duty-free shops that are exempted from
local or national taxes and duty payments; in Europe, for example, the savings can be 5-25%, and tourists may find more
favorable deals if the currency difference play to their benefits. There are usually three types of duty-free retails:
1. At the ports: Traveler will oftentimes see a lot of duty-free shops after they passed the security check points if they are at the
international travel terminals, no matter they are travelling internationally via airports, trains or ships. Shoppers can purchase
items at the shops without paying for the taxes or duties, by showing their boarding passes as a proof of travelling out of the
country. The most popular categories include liquor, tobacco, perfume, cosmetics and luxury brands.
2. Outside the ports/in the cities: In some countries like Japan and Korea, where the local brands attract lots of tourists, they
operate duty-free shops in city centers that are away from airports or ports. Korea's Lotte Duty Free is a good example. You will

also be able to get tax exemption by showing your passports to the store-keepers, with a purchase below a certain amount and
agreed that the items will not be consumed in the country.
3. Tax reimbursement program: In some countries, shops may participate in a reimbursement program (e.g. Global Blue, Premier
Tax Free) if tourists present the goods purchased at the customs, they can get back tax paid by cash or to their credit card upon
leaving the country.
EXHIBIT 58: Listed airport companies from Mainland China
Ticker Operating Airport

600009 CH Equity Shanghai Pudong Airport
600004 CH Equity Guangzhou Baiyun Airport
694 HK Equity Beijing Capital Airport
000089 CH Equity Shenzhen Bao'an Airport
600897 CH Equity Xiamen Gaoqi Airport
357 HK Equity Haikou Meilan Airport
Source: Bloomberg, company reports, Bernstein analysis
EXHIBIT 59: China airport revenues have outgrown global peers…
Revenue 5-year CAGR comparison

18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
-2%
-4%
TAV Havalimanlari
Aeroports de Paris
Japan Airport Terminal
Regal International Airport
Flughafen Zurich
South Korea Airports
International Airport
Shenzhen Airport
Xiamen International
Malaysia Airports
Shanghai International
Copenhagen Airports
Airports of Thailand Public
Malta International Airport
Flughafen Wien
Toscana Aeroporti
Aena SME, SAB
Guangzhou Baiyun
Beijing Capital
Airport
Airport
Company
Asia (ex-China) China Europe

EXHIBIT 60: … same for net profit margin
Net margin comparison, 2018

50%
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
TAV Havalimanlari
Aeroports de Paris
Japan Airport Terminal
Regal International Airport
Flughafen Zurich
Shenzhen Airport
Xiamen International
Malaysia Airports
Shanghai International
Copenhagen Airports
Airports of Thailand Public
Malta International Airport
Flughafen Wien
Toscana Aeroporti
Aena SME, SAB
Guangzhou Baiyun
Beijing Capital
Airport
Airport
Company
Asia (ex-China) China Europe
EXHIBIT 61: Non-aviation revenue mix in Beijing and Shanghai Airports continue to rise, SZ Airport lagged the
others due to low international routes
BJ Airport SH Airport SZ Airport

60% 60% 60%
50% 50% 50%
40% 40% 40%
30% 30% 30%
20% 20% 20%
10% 10% 10%
0% 0% 0%
2015 2016 2017 2018 2015 2016 2017 2018 2015 2016 2017 2018
Source: Bloomberg, company reports, Bernstein analysis

EXHIBIT 62: China duty-free continues to grow fast EXHIBIT 63: China has a higher proportion of duty-free
sales at airports
China duty-free sales (RMB Bn) China duty-free sales by channel

45 30% 100%
40 90%
25%
35 80%
70%
30 20%
60%
25
15% 50%
20
40%
73.2%
15 10%
30%
10 20%
5% 38%
5 10%
0 0% 0%
2015 2016 2017 2018 China Korea
Bn YoY Airports Ferries Cities
Source: Gelonghui, Company reports; Bernstein analysis Source: Gelonghui, Bernstein analysis
EXHIBIT 64: CITS, almost monopolize the duty-free market in China through China Duty Free
Company Major coverage Est. market share

China Duty Free (CITS) Duty free shops in major airports/ferry ports/terminals (e.g. ~75%
Beijing, Shanghai, Hainan). Duty free service for diplomats
Sunrise Duty Free (CITS) Duty free shops in Shanghai, Beijing Capital Airport ~5%
Hainan Duty Free Hainan ferries (outports) duty free ~5%
Zhuhai Duty Free Duty free shops in Zhuhai ~5%
Shenzhen Duty Free Duty free shops in SZ International Airport and outbound ports ~5%
CSDF Arrival duty free operations for outbound Chinese tourists ~4-5%
Source: Gelonghui; Company reports; Bernstein anlaysis
China International Travel Service Corp (CITS, 601888.CH) will continue to benefit from the duty-free boom
Originally the company was in travel agency business. It has established itself a leading travel service company, connecting with
over 1,400 travel agents across the globe. CITS is the parent company of China Duty Free Group Corporate, which was
established in 1984. Since then, CITS continues to increase its expansion to the duty-free space. By 2017, its revenue from
duty-free exceeded travel agency service for the first time and the mix continue to increase until early 2019, it completely
abandoned its travel agency business by announcing a plan to sell off its travel agency arm to its major shareholders CITS
Group. After that, the company focuses on the high-growth duty-free retail business. CITS is now the leading duty-free
operator in China, with about 80% of market share after the acquisition of Sunrise Duty Free Group.

EXHIBIT 65: CITS recorded double-digit revenue growth EXHIBIT 66: … net income grew at CAGR 39% in past 2
in recent years years with strategic business adjustments to duty-free
CITS total revenue and YoY CITS net profit and YoY
3.5 80%
50.0 70%
45.0 3.0 70%
60%
40.0 60%
2.5
35.0 50%
50%
RMB, Bn
2.0
RMB Bn
30.0 40%
25.0 40%
30% 1.5
20.0 30%
15.0 20% 1.0
20%
10.0
10% 0.5 10%
5.0
0.0 0% 0.0 0%
Total Revenue YoY Profit for the year YoY
Source: Company disclosure, Bernstein analysis Source: Company disclosure, Bernstein analysis:

EXHIBIT 67: China International Travels (CITS) acquired Sunrise Duty Free in 2018
Mar 2018: acquisition of Sunrise Duty Free (Shanghai)

Pre-transaction shareholding
Base Rich Investment Shanghai Wenyuzhai
99% 1%
Sunrise Duty Free

(Shanghai)
Post-transaction shareholding
CITS (601888.CH)
100%
Sunrise Duty Free Base Rich Investment

China Duty Free Group
Group 49%
51% 51%
49% Sunrise Duty Free Sunrise Duty Free 49%
(China) (Shanghai)
Source: Company reports; Bernstein analysis

EXHIBIT 68: CITS is now mainly in duty-free, after EXHIBIT 69: Profit margin went back up in 1H2019
acquiring Sunrise and selling off its travel agency
business
Revenue Mix by product CITS net profit margin

100% 12.0%
90%
80% 10.0%
70%
8.0%
60%
50% 6.0%
40%
30% 4.0%
20%
10% 2.0%
0%
2009 2014 2018 1H2019 0.0%
Travel services Goods sales Other business
Note: CITS transferred 100% of China Travel Services in Jan 2019, which used Note: 2019C refers to Bloomberg Consensus
to be a subsidiary of CITS with businesses in travel services Source: Company disclosure, Bernstein analysis
Source: Company disclosure, Bernstein analysis
EXHIBIT 70: CITS owned various duty-free shops under EXHIBIT 71: Airport shop is the main channel with larger
its subsidiaries average shop scale compared to other types
CITS Duty-free shop mix by category

Railw ay
No. of station
Shop category Main locations
shops 3%
China Duty Free
Guangzhou, Hong Kong, Hangzhou, Wuhan,
Airport 28 Xi'an, Changsha, Tianjin, Urumqi, Taiyuan Airport
Border Inner city

Inner city 2 Sanya (Hainan), Beijing
41% Airport Border
Border 30 Guangdong, Heilongjiang, Xinjiang, Yunnan 53%
Railway station
Railway station 2 Guangdong
Sunrise
Airport 10 Beijing, Shanghai Inner city
3%
Source: Company website, Bernstein analysis Source: Company website, Bernstein analysis

EXHIBIT 72: China Travel (CITS, 601888 CH) beat the market index significantly is past 3 years
CITS stock price change

400%
350%
300%
250%
200%
150%
100%
50%
0%
-50%
May-18
May-17
May-19
Jan-18
Jan-17
Jun-17
Jun-18
Jan-19
Jun-19
Mar-17
Mar-18
Mar-19
Feb-18
Feb-17
Feb-19
Jul-17
Jul-19
Apr-18
Jul-18
Oct-18
Apr-17
Oct-17
Apr-19
Oct-19
Aug-17
Sep-17
Aug-19
Aug-18
Sep-18
Sep-19
Dec-17
Nov-18
Nov-17
Dec-18
CITS Benchmark Index
Note: Benchmark index refers to average of stock price change of SHCOMP and SZCOMP
EXHIBIT 73: CITS (601888.CH) TSR change exceeded global peers significantly
DFS stocks total shareholder return (TSR), LTM

60%
50%
40%
30%
20%
10%
0%
-10%
-20%
-30%
China Travel Hotel Shilla Jordan Duty Bahrain Duty Misr Duty Free Duty Free Dufry
Free Free Shops International
China Asia (ex-China) Europe
Note: 2018/10/9-2019/10/9

Airports
In the world's global travels, we are already seeing close to 40% involving Asia in 2018, and this percentage will continue to
grow, with increasing millennial Chinese contributing to global travels.
EXHIBIT 74: The Chinese millennials will continue to bring up Asia's presence in international travels
Source: IATA (2018); Bernstein analysis
China's Beijing Capital Airport and Shanghai Pudong Airport are already ranked the Top 10 busiest airports in the world, with
Beijing Capital Airport reached passenger throughout of over 100 Mn in 2018, and Shanghai Pudong also at 74 Mn, which will
likely exceed Hong Kong by 2019, perhaps surpassing Tokyo Haneda and London's Heathrow soon.

EXHIBIT 75: Beijing Capital Airport ranked 2nd globally by pax throughput, handling over 100 Mn pax
No. of Passengers 2018 (Mn)

120 101.0 107.4
100 87.5 83.3 Ave 82.4 80.1 Ave 70.2
74.0 69.7 Ave 69.4 69.1 72.2 71.1 69.5
80 64.5
53.0 57.9
60 49.3
40
20
0
London Heathrow
Chicago O'Hare
Los Angeles Int'l
Guangzhou Baiyun
Chengdu Shuangliu
Dallas Ft Worth
Frankfurt Main
Beijing Capital
Amsterdam Schiphol
Shenzhen Bao'an
Denver Int'l
Paris de Gaulle
Shanghai Pudong
Atlanta Int'l
Madrid Barajas
China USA Europe
Note: 2018 numbers are calculated by Bernstein based on preliminary passenger growth rate from ACI
Source: Airports Council International, Bernstein analysis
EXHIBIT 76: Beijing and Shanghai Airports are both getting sizeable but still growing fast
70% Global airports net income vs. 2-year CAGR
60%
50%
40%
2-year CAGR
BJ Capital Airport
30%
20%
Shanghai Airport
10%
0%
-10%
-20%
- 200 400 600 800 1,000 1,200 1,400 1,600 1,800
Net incom e (USD Mn)

EXHIBIT 77: BJ Capital Airport handles the most pax in EXHIBIT 78: … but it is under pax growth containment
China…
Top 10 airports in China 2018 Top 10 airports in China

(Pax, Mn) (Pax CAGR, 2013-2018)
0 20 40 60 80 100 120 0% 5% 10% 15%
BJ BJ
SH PD SH PD
GZ GZ
CD CD
SZ SZ
HM HM
XA XA
SH HQ SH HQ
CQ CQ
HZ HZ
Source: CAAC; Bernstein analysis Source: CAAC; Bernstein analysis
The new Beijing Daxing Airport just inaugurated right before the October National Holiday is a highlight of China this year, it is
going to serve 40% of passenger throughput for the greater Beijing area eventually and is projected to become one of the
world's busiest airport ultimately, operating both domestic and international flights together with the old Beijing Capital Airport,
to share the overcrowded situation of the current aviation hub. What is worth to note is that the new airport will be high-tech,
and it leverages the next-generation 5G mobile technology to facilitate seamless travel experience for travelers. The 5G
technology, that offers must higher data speed (100 times faster than existing 4G), will reduce latency and lower
communication costs, the new airport has installed 400 self-check-in kiosks with face recognition features. Passengers can
also check in their luggage, pass through security gates and get to the flights through face recognition easily.
EXHIBIT 79: New BJ Daxing Airport: AGV (Automated EXHIBIT 80: New BJ Daxing Airport: Face recognition
Guided Vehicles) to help passengers park their cars check-in kiosks

EXHIBIT 81: New BJ Daxing Airport: Luggage EXHIBIT 82: New BJ Daxing Airport: Self-luggage
automatically checked-in security checks
Without a doubt the Chinese airports benefit from surging travels led by the mounting demand of millennial passengers, we
have seen more Chinese taking international trips during holidays. Other than seeing more aviation fee from increased flights
(e.g. takeoffs, landing fees, etc.), they are also tipped on the overall tourism boom. The listed Chinese airports have seen their
revenue to go up by 10.2% CAGR between 2014-2018, of which 64% is contributed by non-aviation business. This makes the
Chinese airports grow their top-line faster than peers in Asia and Europe.
EXHIBIT 83: Major Chinese airports see higher mix of EXHIBIT 84: Non-aviation will continue to boost airport
revenue from non-aviation revenue
Mix of revenue, aviation vs. non- Aviation vs. non-aviation growth

aviation
30.0%
100%
25.0%
90%
80% 20.0% 19.9%
70%
15.0%
60% 11.6%
10.0%
50%
40% 5.0%
30%
0.0%
20%
-5.0%
10%
0% -10.0%
FY 2014 FY 2018 FY 2015 FY 2016 FY 2017 FY 2018
Aviation Non-aviation Aviation Non-aviation
Source: Bloomberg, Bernstein analysis Source: Bloomberg, Bernstein analysis

EXHIBIT 85: Selected major listed airports

Key airport stocks
Continent Country Ticker Company Name
Asia (ex-China) Thailand AOT TB Equity Airports of Thailand Public Company LtdAB Th CV
Japan 9706 JP Equity Japan Airport Terminal Co., Ltd.
Malaysia MAHB MK Equity Malaysia Airports Holdings Berhad
Turkey TAVHL TI Equity TAV Havalimanlari Holding AS
Malta MIA MV Equity Malta International Airport PLC
South Korea 005430 KS Equity South Korea Airports Holdings Berhad
China China 600009 CH Equity Shanghai International Airport Co., Ltd.
600004 CH Equity Guangzhou Baiyun International Airport Co., Ltd.
694 HK Equity Beijing Capital International Airport Co., Ltd.
000089 CH Equity Shenzhen Airport Co., Ltd.
600897 CH Equity Xiamen International Airport Co., Ltd.
357 HK Equity Regal International Airport Group Co Ltd
Europe Spain AENA SM Equity Aena SME, SAB S. CV
France ADP FP Equity Aeroports de Paris
Denmark KBHL DC Equity Copenhagen Airports A/S
Switzerland FHZN SW Equity Flughafen Zurich AG
Austria FLU AV Equity Flughafen Wien AG
Italy TYA IM Equity Toscana Aeroporti S.p.A.
North America Mexico GAPB MM Equity Grupo Aeroportuario del Pacifico SAB de CV
ASURB MM Equity Grupo Aeroportuario del Sureste SAB de CV
OMAB MM Equity Grupo Aeroportuario del Centro Norte, SAB de CV
Oceania Australia SYD AU Equity Sydney Airport
New Zealand AIA NZ Equity New Zealand Airports Holdings Berhad
South America Argentina CAAP US Equity Corporation America Airports
Airports' revenue mainly comprises of commercial activities (non-aviation) and aviation. We usually see around 40% of airport
total revenue to come from commercials (non-aviation), and the rest 60% from aviation activities in developed market like
Europe. In Asia, the percentage turned to 50:50 in recent years, as most of the leading international airports in countries like
Japan, Malaysia and Thailand are prime shopping targets for travelers, where they even go airports (and check-in) much earlier
than departure time for shopping. Retail is becoming an increasingly important revenue and profit stream. Revenues from
shopping will likely continue to undergo fast growth as we see more leisure travels in China, where the more outbound
passengers go out for leisure trips and tend to shop more in relaxing holiday moods. As passengers need to catch a flight,
airports are motivated to minimize passengers' queuing time such that they can stay in the shops longer. We have seen the
major airports in China upgraded their check-in and security infrastructures and utilize technology to shorten passenger waiting
time. Beyond that, airports also renovated and upgraded their shopping facilities for impulse purchase. The recent renovation
of Shanghai Hongqiao Airport expanded the floor space for duty free retail by four times, to cultivate shopping atmosphere, with
40+ new international brands introduced and more restaurants.

EXHIBIT 86: Chinese airport companies achieved better EXHIBIT 87: Asia countries airports have higher non-
financial performance than global peers in last 5 years aviation revenue mix increase - popular destinations of
Chinese shoppers
5-year revenue CAGR Average mix of aviation vs. non-

aviation revenue
10.0%
100%
9.0%
90%
8.0% 80% 37% 38% 39%
50%
7.0% 70%
60%
6.0%
50%
5.0% 40%
30% 63% 62% 61%
4.0% 50%
20%
3.0%
10%
2.0% 0%
2013 2018 2013 2018
1.0%
EU Asia ex-China
0.0%
Asia (ex-China) China Europe Aviation Non-aviation
Source: Bloomberg; Bernstein analysis Source: Bloomberg; Bernstein analysis
EXHIBIT 88: Prior to renovation, SH HQ Airport has EXHIBIT 89: Shanghai HQ Airport crafted out more retail
limited space for retail shopping space with two floors after recent renovation

EXHIBIT 90: Shanghai and Guangzhou airport significantly beat their peers and index, especially in past 6 months
Tier one cities airport stock performance

120%
100%
80%
60%
40%
20%
0%
-20%
-40%
-60%
SH Airport GZ Airport BJ Airport SZ Airport Benchmark Index
Note: Benchmark index refers to average of stock performance of SHCOMP, SZCOMP and HSI Index
EXHIBIT 91: Major airports in China, Asia ex-China and Europe TSR growth significantly higher than global peers
Total shareholder return (TSR), LTM

120%
100%
80%
Avg: 25.7%
60%
40% Avg: 7.8%
Avg: 6.7%
20%
0%
-20%
-40%
Shanghai Intl Airport
Toscana Aeroporti
Flughafen Wien
Aena SME
Beijing Intl Airport
Xiamen Intl Airport

Guangzhou Intl Airport
Copenhagen Airports
Aeroports de Paris
TAV Havalimanlari
Malta International
Japan Airport
Malaysia Airports
Shenzhen Airport
Regal Intl Airport
Airports of Thailand
Flughafen Zurich
China Asia (ex-China) Europe
Chinese airlines

EXHIBIT 92: China passenger growth remained strong in the last few years, consistently at the low-teen levels
Number of Passengers Carried YoY%

25%
20%
15%
10%
5%
0%
01/15
02/15
03/15
04/15
05/15
06/15
07/15
08/15
09/15
10/15
11/15
12/15
01/16
02/16
03/16
04/16
05/16
06/16
07/16
08/16
09/16
10/16
11/16
12/16
01/17
02/17
03/17
04/17
05/17
06/17
07/17
08/17
09/17
10/17
11/17
12/17
01/18
02/18
03/18
04/18
05/18
06/18
07/18
08/18
09/18
10/18
11/18
12/18
01/19
02/19
03/19
04/19
05/19
06/19
07/19
Note: Line refers to moving average of 2 months
Source: CAAC, Bernstein analysis
EXHIBIT 93: We estimate the air passengers will be at high single digit growth till 2025
Air passengers, Mn and YoY

1,200 14%
12%
1,000
10%
800
Pax (m illions)
8%
600
6%
400
4%
200
2%
- 0%
2012 2013 2014 2015 2016 2017 2018 2019E 2020E 2021E 2022E 2023E 2024E 2025E
Source: CAAC, Bernstein estimates and analysis

EXHIBIT 94: We estimate China will reach the low-end of developed countries' air travel per capita by 2040
Air Travels Per Capita

3.50
3.02
3.00
2.61
2.50 2.30
2.00
1.63
1.37 1.41
1.50
0.96 0.98 1.02

1.00
0.53
0.50 0.40
-
2017 2020E 2030E 2040E Japan France Germany S. Korea UK USA Australia
China Developed Countries - 2017
Source: World Bank, Bernstein estimates and analysis
As China's travel market continues to grow, the network carriers (Big 3 – Air China, China Eastern Airlines - CEA and China
Southern Airlines - CSA) and LCC (low-cost carriers) are both going to benefit. Among all, Spring Airlines (LCC) and Juneyao
Airlines (operated by non-government enterprises) that focus on leisure travel with more dynamic pricings for travelers see
stronger growths than the others.
EXHIBIT 95: Juneyao and Spring offer cheaper tickers EXHIBIT 96: The price gap is bigger with stopovers
than the Big 4 operators
Shanghai to Tokyo, 2019/12/20, RMB Shenzhen to Tokyo, 2019/12/20, RMB

3500 4000 3,794
3,074
3500 3,333 Big 4 Avg:
3000
Big 4 Avg: 3,064 RMB
2,340 2,465 RMB 3000
2500 2,318 2,601
2,129 2,529
2500
2000 1,963
2000
1500
1500 1,350
1,062
1000 870
1000
500 500
0 0
Source: Ctrip, Bernstein analysis Source: Ctrip, Bernstein analysis

EXHIBIT 97: Spring Airlines get non-flight revenue from additional service; e.g. luggage, meals and seat selection
Pricing model Spring (870 RMB) Junyao (1062 RMB) Hainan Airline (2340 RMB)
Luggage Free One Handbag < 7kg One Handbag One Handbag<10KG
Two luggage, each<23KG One luggage<23KG
Charge 300 RMB for <10KG 1.5% of full-price economy For extra pieces, 800 RMB per
500 RMB for >10KG ticket for overweight fine piece of luggage
Food Free Not included Included Included

Charge 35-40 RMB per meal set Not included Not included
Seat selection Charge 10-150 RMB per seat Not included 10-600 RMB
Source: Ctrip, Company website, Bernstein analysis
EXHIBIT 98: Spring and Juneyao's market share increased from 3.9% in 2012 to 5.9% in 2018, still significant room
to climb up further
Passenger share by major players

100% 2% 2% 2% 2% 3% 3% 3%
2% 3% 3% 3% 3% 3% 3%
90%
24% 18% 18% 19% 21% 20% 20%
80%
70%
60%
50%
40% 78% 77% 76%
72% 74% 74% 74%
30%
20%
10%
0%
2012 2013 2014 2015 2016 2017 2018
Big 4 Others Spring Juneyao
Source: Wind, Company reports, Bernstein analysis

EXHIBIT 99: The two leisure airlines grew revenue faster EXHIBIT 100: Their net income also increased faster
than Big 3 in the past
Revenue growth CAGR Net income growth comparison

25% 30%
22% 20.4%
20%
20% 18% 19%
18% 10% 6.6%
16%
15%
14% 0%
15%
-10%
-10.4%
10% -20% -16.0%
7% -18.8%
5% -30%
5%
-40%
-37.8%
0% -50%
1 year 3 year 5 year Spring Juneyao Big 3 avg
Spring Juneyao Big 3 avg 2018 1H19
Note: Last 3 (2016-2018) and 5 years (2014-2018) Source: Bloomberg, Bernstein analysis
Leisure travel is growing fast in China. An increasing proportion of air travel is for leisure/family reasons rather than for work.
We estimate that in 2018, over 70% of air travel was for leisure and private reasons, flipping the ratio of 17 years ago, when
business travel was the mainstream. This trend will also facilitate the growth of LCCs, which are still at a starting point in China,
with 11% market share of domestic routes compared to 29% in Asia. We see a high chance that China's airline market may
follow a similar pattern, except that network carriers should also continue to grow as travel demand continue to increase and
Big 3 airlines are largely protected. To catch the potential, CEA entered the LCC market through China United Airlines in
2013/2014; but ACG and CSA do not yet hold LCCs.
EXHIBIT 101: China's leisure market is still mainly served by network carriers
Key LCC (Low Cost Carriers)
US Southwest, Spirit, EasySky
Europe Ryanair, EasyJet , Flybe, Blue Air
Asia IndiGo, Jetstar Japan, Lion Air, Air Seoul, Airblue
China (mainland) Spring
9 Air (Juneyao), Beijing Capital Airline (HNA), Lucky Airline (HNA), Urumqi Airline (HNA), West Air
(HNA), China United (CEA)
Colorful Guizhou, Jiangxi, Ruili
(10 in total, but most of them are sub-scale, except for Spring)
Source: Bernstein analysis

EXHIBIT 102: China LCC domestic route market share EXHIBIT 103: China LCC international route market share
doubled in last decade but is still low expanded also
Note: China LCC including Spring, 9Air, China United, Beijing Capital, Colorful Note: China LCC including Spring, 9Air, China United, Beijing Capital, Colorful
Guizhou, Jiangxi, Lucky, Ruili, Urumqi, West Air for 10 in total. Only Spring is a Guizhou, Jiangxi, Lucky, Ruili, Urumqi, West Air for 10 in total. Only Spring is a
public firm. public firm.
Source: SRS, company reports, Bernstein analysis Source: SRS, company reports, Bernstein analysis
EXHIBIT 104: Only Spring significantly beat the benchmark index in past two years
Stock price performance

1.40
1.20
1.00
0.80
0.60
0.40
0.20
0.00
Air China China East Air China Southern Hainan Airline

Spring Juneyao Benchmark Index
Note: Benchmark index refers to average of stock price change of SHCOMP, SZCOMP and HSI Index

EXHIBIT 105: Major airlines, Asia ex-China, US and Europe TSR change TTM – airline companies stuck in low return
globally
Airline stocks total shareholder return (TSR), LTM

30%
20%
10%
0%
-10%
-20%
-30%
-40%
-50%
UA
Juneyao Airlines
CSA
CEA
Japan Airlines
Cathay Pacific
Korean Air
Qantas Airlines
Delta
Air China
AA
Deutsche Lufthansa
Spring Airlines
Asiana Air
IAG (British Airways)

Singapore Air
Thai Aiways
Hainan Airlines
easyJet
Ryanair Holdings
Southwest Airlines
Mainland China Asia ex-Mainland China Europe US
Note: Asia ex-Mainland China group exclude Indigo (Indigo IN), which is the outliers (TSR=142%)
APPENDIX - FINANCIAL FORECASTS
EXHIBIT 106: Air China Income Statement

Air China Income Statement
(in RMB million unless otherwise stated) 2017 2018 2019E 2020E 2021E 2022E 2023E
Gross revenues 124,026 140,883 143,660 153,015 164,240 178,029 193,570
Operating expense (112,270) (126,537) (127,936) (137,191) (146,014) (157,557) (169,806)
Operating profit 11,756 14,346 15,724 15,824 18,226 20,473 23,764
Finance cost 107 (5,118) (6,523) (3,693) (4,031) (3,698) (3,299)
Net others (376) 749 1,022 1,088 1,168 1,266 1,377
Profit before tax 11,486 9,977 10,224 13,219 15,363 18,041 21,842
Income taxes (2,845) (1,762) (2,149) (2,644) (3,073) (3,608) (4,368)
Profit after tax 8,641 8,215 8,075 10,575 12,291 14,433 17,474
Attributable to:
Non-controlling interests 1,397 864 814 1,066 1,238 1,454 1,761
Shareholders of the company 7,244 7,351 7,261 9,510 11,052 12,979 15,713
Basic EPS (RMB) 0.54 0.54 0.53 0.69 0.80 0.94 1.14
Basic EPS (HKD) 0.62 0.62 0.61 0.80 0.93 1.09 1.32
EBITDA 27,905 27,076 34,455 36,737 39,256 41,817 45,427
Source: Company reports, Bernstein estimates and analysis

EXHIBIT 107: Air China Balance Sheet

Air China Balance Sheet
(in RMB million, unless otherwise stated) 2017 2018 2019E 2020E 2021E 2022E 2023E
Cash and cash equivalents 5,563 6,763 6,233 8,079 13,069 11,522 10,531
Accounts receivable 3,490 5,374 5,783 6,183 6,526 6,977 7,385
Prepayments & other receivables 5,123 4,220 4,220 4,220 4,220 4,220 4,220
Inventories 1,536 1,877 1,971 2,190 2,364 2,632 2,924
Others 5,048 5,491 5,491 5,491 5,491 5,491 5,491
Total current assets 20,760 23,726 23,698 26,163 31,670 30,842 30,551
Fixed assets 168,612 171,700 215,384 216,619 216,120 218,475 220,730
Investments 16,114 17,332 17,332 17,332 17,332 17,332 17,332
Other non-current assets 30,158 30,900 30,900 30,900 30,900 30,900 30,900
Total non-current assets 214,885 219,931 263,616 264,850 264,352 266,707 268,961
Total Assets 235,645 243,657 287,314 291,013 296,022 297,549 299,512
Short term debt (loans, bonds and other borrowings) 29,146 27,195 25,662 21,817 17,359 10,394 2,035
Accounts payable 13,254 14,726 14,726 14,726 14,726 14,726 14,726
Other payable 14,563 11,857 11,857 11,857 11,857 11,857 11,857
Other current liabilities 15,169 18,761 18,892 19,023 19,270 19,339 19,423
Total current liabilities 72,132 72,540 71,138 67,425 63,213 56,317 48,042
Long term debt 22,108 15,585 14,707 12,504 9,949 5,957 1,166
Financial lease 37,799 45,848 85,090 85,937 87,522 87,970 88,510
Other non-current liabilities 8,747 9,186 9,186 9,186 9,186 9,186 9,186
Total non-current liabilities 68,654 70,619 108,982 107,626 106,656 103,112 98,862
Total liabilities 140,786 143,159 180,120 175,051 169,869 159,429 146,904
Issued capital 14,525 14,525 14,525 14,525 14,525 14,525 14,525

Treasury shares (3,048) (3,048) (3,048) (3,048) (3,048) (3,048) (3,048)
Reserves 74,570 81,680 87,562 95,265 104,217 114,730 127,457
Minority interests 8,811 7,341 8,154 9,220 10,458 11,913 13,673
Total equity 94,859 100,498 107,193 115,962 126,153 138,120 152,608
Total equity and liabilities 235,645 243,657 287,314 291,013 296,022 297,549 299,512
EXHIBIT 108: Air China Cash Flow Statement

Air China Cash Flow Statement
Net cash flow from operating activities 22,837 28,683 27,367 29,864 31,635 33,792 37,059
Net purchase of fixed assets (10,206) (9,139) (24,107) (20,162) (17,532) (21,915) (21,915)
Net cash flow from investing activities (14,653) (8,950) (24,107) (20,162) (17,532) (21,915) (21,915)
Net cash flow from financial activities (9,302) (18,647) (3,790) (7,856) (9,113) (13,424) (16,135)
Net change in cash and cash equivalents (1,117) 1,086 (530) 1,846 4,990 (1,547) (991)
Effect of exchange rate changes on cash (168) 114 - - - - -
Cash and cash equivalents at beginning of period 6,848 5,563 6,763 6,233 8,079 13,069 11,522
Cash and cash equivalents at end of period 5,563 6,763 6,233 8,079 13,069 11,522 10,531
FCF 14,841 16,839 9,263 11,880 14,769 11,668 12,678

EXHIBIT 109: CEA Income Statement

(in RMB million unless otherwise stated) 2017 2018 2019E 2020E 2021E 2022E 2023E
Air passenger revenue 91,564 104,309 114,169 123,092 134,292 146,852 161,045
Air cargo and mail revenue 3,623 3,627 3,679 3,679 3,679 3,827 3,981
Other Revenue 14,769 13,934 14,420 15,512 16,882 18,623 18,336
Operating expense (100,525) (112,561) (120,737) (132,848) (141,401) (152,564) (164,214)
Operating profit 9,431 9,309 11,531 9,435 13,452 16,739 19,149
Finance cost (1,072) (5,657) (6,254) (5,150) (7,183) (8,100) (8,669)
Net others 251 204 332 331 331 330 329
Profit before tax 8,610 3,856 5,609 4,616 6,599 8,968 10,809
Income taxes (1,800) (926) 4 3 5 7 8
Profit after tax 6,810 2,930 5,613 4,620 6,604 8,975 10,817
Attributable to:
Non-controlling interests 468 232 261 214 307 417 502
Shareholders of the company 6,342 2,698 5,353 4,405 6,298 8,558 10,315
Basic EPS (RMB) 0.44 0.19 0.37 0.30 0.44 0.59 0.71
Basic EPS (HKD) 0.23 0.22 0.42 0.35 0.50 0.68 0.82
Total shares outstanding (mm) 14,468 14,468 14,468 14,468 14,468 14,468 14,468
EBITDA 25,595 22,717 31,641 33,123 36,637 39,276 40,502
EXHIBIT 110: CEA Balance Sheet

China Eastern Airlines Balance Sheet
Cash and cash equivalents 4,605 646 (2,018) (2,582) 21,437 24,656 32,992
Accounts receivable 2,124 1,436 1,559 1,677 1,825 1,995 2,161
Prepayments & other receivables 9,314 11,776 11,776 11,776 11,776 11,776 11,776
Inventory 2,185 1,950 2,109 2,256 2,410 2,663 2,898
Others 65 124 124 124 124 124 124
Total current assets 18,293 15,932 13,550 13,250 37,571 41,214 49,951
Fixed assets 178,452 191,713 246,048 269,057 258,468 253,255 246,229
Other non-current assets 32,982 31,372 31,372 31,372 31,372 31,372 31,372
Total non-current assets 211,434 223,085 277,420 300,429 289,840 284,627 277,601
Total Assets 229,727 239,017 290,970 313,679 327,411 325,840 327,552
Note payable 39,090 29,259 32,254 30,952 30,844 29,624 28,675

Operating payables 5,082 4,487 4,487 4,487 4,487 4,487 4,487
PPE-related payable 9,241 9,364 10,060 12,911 14,118 13,563 13,289
Others 26,915 29,954 29,954 29,954 29,954 29,954 29,954
Total current liabilities 80,328 73,064 76,755 78,304 79,403 77,628 76,405
Long term debt 24,711 25,867 24,332 23,350 23,268 22,348 21,632
Financial lease 57,627 68,063 113,911 134,635 143,411 139,372 137,383
Other non-current liabilities 8,283 10,422 10,422 10,422 10,422 10,422 10,422
Total non-current liabilities 90,621 104,352 148,665 168,407 177,101 172,142 169,437
Total liabilities 170,949 177,416 225,419 246,711 256,504 249,769 245,842
Total equity 58,778 61,601 65,551 66,968 70,907 76,071 81,710
Total equity and liabilities 229,727 239,017 290,970 313,679 327,411 325,840 327,552
EXHIBIT 111: CEA Cash Flow Statement

China Eastern Airlines Cash Flow Statement
Net cash flow from operating activities 19,572 22,338 26,727 27,752 28,778 30,574 31,827
Net purchase of fixed assets (7,796) (10,653) (29,187) (22,831) (1,903) (21,404) (16,647)
Net cash flow from investing activities (21,312) (12,780) (29,187) (22,831) (1,903) (21,404) (16,647)
Net cash flow from financial activities 4,708 (13,558) (204) (5,486) (2,856) (5,951) (6,843)
Net change in cash and cash equivalents 2,968 (4,000) (2,664) (564) 24,019 3,219 8,336
Effect of exchange rate changes on cash (47) 30 - - - - -
Cash and cash equivalents at end of period 4,616 646 (2,018) (2,582) 21,437 24,656 32,992
FCF 13,747 12,974 3,744 10,004 34,030 17,364 23,921

DISCLOSURE APPENDIX
VALUATION METHODOLOGY
For the airlines in our coverage we apply a consistent framework of EV/EBITDA backed by conservative discounted cash flow
analysis (DCF). We use MSCI ACWI Airlines Index as our benchmark and apply a premium based on historical trend.
We maintain dual A- and H-share rating when stocks have both categories of shares listed on the relevant exchanges. For
airlines listed on multiple exchanges of Hong Kong and China, we derive our A-share target prices by translating the H-share
target prices from HKD to RMB, and apply a trading value difference based on historical trend.
We value the Chinese express delivery companies using discounted 2022 forward price-to-earnings (P/E) and next-twelve-
month P/E multiple backed by conservative discounted cash flow analysis (DCF).
Valuation based on future earnings reflects our view that the value creation of this group is mainly driven by future growth
potential, which cannot be adequately captured with near term earnings, or is reflected in the P/E of the same industry
companies from other regions.
Asia Internet
We value our companies mainly based on a combination of values given by sum-of-the-parts (SOTP) methodologies, discounted
cash flow (DCF) calculations, and target next-twelve-months price-to-earnings (NTM P/E) multiples.
China Consumer
We value our companies in China Consumer sector based on target next-twelve-month price-to-earnings (NTM P/E) multiples.
We select the target NTM P/E based on company's profit growth and return on invested capital (ROIC). We believe that stocks
with higher long-term growth rates and higher ROIC deserve higher multiples and so we apply incremental company premiums
or discounts to individual stocks to reflect their outlook for growth and returns.
We use a blended forward EPS estimates of FY2020 and FY2021 to set our 1-year target prices.
India Technology Services

The India technology services business has multiple coverage companies with different characteristics. Large sized players with
a complete portfolio. Mid-sized players with focus on certain segments like engineering services. We also include media and
internet companies in this sector. To arrive at our price targets, we use a combination of discounted cash flow and price to
earnings multiples and benchmark P/E to historical averages.
RISKS
ASIA-PACIFIC TRANSPORTATION & LOGISTICS
The Asia Pacific Transportation and Logistics companies that we cover are subject to macroeconomic risks, including exposure
to overall economy growth, trade volume, interest rates, foreign exchange rates, etc.; as well as competitive landscape changes,
brought by new entrants and new technology that may disrupt the market game.

CHINESE AIRLINES INDUSTY

The airline industry is highly regulated and is subject to the risks of changes in government regulations or policies. Fuel prices
are critical to the profitability of airlines, especially to the covered companies that do not have any oil price hedge programs.
Airlines' earnings are also sensitive to foreign exchange fluctuations, apart from a rather significant amount of debt dominated
in foreign currency from the purchase of aircrafts and other fixed assets, passenger travel sentiments and fuel costs are also
subject to RMB exchange rate against foreign currency.
China Eastern Airlines Corp Ltd

Upside risks to price target
 RMB do not depreciate against the USD as fast as forecasted (by Bloomberg), or even appreciate in the coming
quarters. That can be due to softening trade tension with the US or the Chinese government decide to take put RMB
depreciation to a slower path
 Economy recovers quicker than expected, with more business travels and better uptake in premium seats
 Due to softened flight controls or other reasons, CEA can deploy more domestic routes to high-demand high-price
routes (e.g. Golden routes), supporting domestic ticket yields
 Demand for the new Daxing airport ramped up faster than expected, with more passengers willing to shift to new
Beijing Daxing Airport from the old Beijing Capital Airport, allowing CEA to offer less discounts to passengers flying into
our out of Daxing; therefore, protecting ticket yields.
Downside risks to price target

 Japan and Korea markets rebound slower or weaker than expected due to political tensions
 Yunnan tourism rebound weaker or slower than expected
 The pace of price increase on high demand routes pace slower after price reform in December 2017
 Slower growth of ancillary revenue than forecast
 Cost control initiatives less effective than expected
 Further tariffs implemented on imports of aircraft the US, increasing maintenance costs of airlines
Air China Ltd

Downside risks to price target
 The pace of price increase on high demand routes pace slower after price reform in December 2017
 Lower investment return or higher investment loss from Cathay Pacific that Air China holds ~30%
 Cost control initiatives less effective than expected
 Further tariffs implemented on imports of aircraft the US, increasing maintenance costs of airlines
Upside risks to price target
 ASK and yield improvement from the freed-up capacities Beijing International Airport after 2019
 Yield per RPK increases faster than our forecast due to growth of first- and business-class revenue

Asia Internet
The Asian Internet sector is exposed to general macroeconomic risks which ultimately influence end-market demand and can
positively or negatively affect the sector. The sector is also known for its intense competition, and a willingness to invest heavily
and take upfront losses to acquire users through low pricing or various subsidies. Additionally, there are extreme network
effects within this space that eventually lead to what essentially are "winner take-all" scenarios, where the dominant player
eventually gains an almost insurmountable lead at the expense of competitors, and can use its market power to fend off new
challengers using anti-competitive behavior. There is also significant regulatory risk in this sector, particularly for those
companies involved in the online media and entertainment space, where regulators can deem content to be inappropriate,
censor content, and can delay, withhold, or revoke approvals leading to products that cannot be monetized or being banned
outright. There is also the key risk of being supplanted by a new competitor, as the sector is fast-changing, users can be fickle,
and introduction of new products, services, and business models can cause users to be less engaged and shift time and/or
money away from existing ones. There is also execution risk for companies that are unsuccessful in making the transition from
one business model to another when the competitive landscape for the sector changes, as it often does.
India Technology Services
The downside risks to India Technology Services sector include any macroeconomic downturn that could impact demand
environment. Currency headwinds from rupee appreciation could impact margins. Immigration related issues or protectionist
measures in US or Europe could significantly increase operational complexities.

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Ltd, AIRYY / Air China Ltd, 601111.CH / Air China Ltd, 753.HK / Air China Ltd.
12-Month Rating History as of 11/05/2019

Ticker Rating Changes
600115.CH M (RC) 09/11/19 O (IC) 05/17/18
601111.CH M (IC) 05/17/18
670.HK M (RC) 09/11/19 O (IC) 05/17/18
753.HK M (IC) 05/17/18
AIRYY M (IC) 05/17/18
CEA M (RC) 09/11/19 O (IC) 05/17/18
Rating Guide: O - Outperform, M - Market-Perform, U - Underperform, N - Not Rated

Rating Actions: IC - Initiated Coverage, DC - Dropped Coverage, RC - Rating Change
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7 November 2019

Asia-Pacific Transport & Logistics

Analyst Page Bernstein Events Industry Page Financials Comp Valuation

ASIA-PACIFIC TRANSPORT & LOGISTICS BERNSTEIN 2

VALUATION COMPS TABLE

EXHIBIT 1: Valuation Table

Source: Bloomberg, Bernstein analysis

ASIA-PACIFIC TRANSPORT & LOGISTICS BERNSTEIN 3

No. of Airports in China

ASIA-PACIFIC TRANSPORT & LOGISTICS BERNSTEIN 4

Source: Aviationstrategy.aero, Bernstein analysis

China passenger volume has been growing much faster than US

M Km US: Passenger millions km carried

Source: CAAC; Bernstein

ASIA-PACIFIC TRANSPORT & LOGISTICS BERNSTEIN 5

EXHIBIT 5: China travel is still in its early development stage

Air Penetration 2018 (Passengers Carried/Population)

2.00 Canada, 2.41

Source: World Bank, Bernstein estimates and analysis

ASIA-PACIFIC TRANSPORT & LOGISTICS BERNSTEIN 6

International pax revenue as % of total pax revenue for main arilines

80% Avg: 41.3%

60% Avg: 52.6%

Outbound Trips (ex-HK,MC) Hong Kong Trips

Source: Haver; Bernstein estimates & analysis

ASIA-PACIFIC TRANSPORT & LOGISTICS BERNSTEIN 7

Top 6 total pax growth, YoY

Domestic International Regional

Source: Company reports, Bernstein analysis

Mix of Chinese reg. and int'l trips Traveler trip # by international

100% Thailand 10,536

ASIA-PACIFIC TRANSPORT & LOGISTICS BERNSTEIN 8

Passport score by country

ASIA-PACIFIC TRANSPORT & LOGISTICS BERNSTEIN 9

% of citizens with passports Chinese passport holders visa

ASIA-PACIFIC TRANSPORT & LOGISTICS BERNSTEIN 10

Outbound tourist personal Outbound tourist total consumption,

Source: NBS; Bernstein analysis Source: NBS; Bernstein analysis

EXHIBIT 18: Increasing air travels are for leisure/family

Mix of Business and Lesiure Travel Busine ss Leisure an d o the rs

64% 57% 50% 49% 45%

200 1 200 4 200 5 200 6 200 7 201 8

Source: Variflight, CAAC, Bernstein estimates & analysis

ASIA-PACIFIC TRANSPORT & LOGISTICS BERNSTEIN 11

Net profit of travel agencies in China

ASIA-PACIFIC TRANSPORT & LOGISTICS BERNSTEIN 12

Note: By seats Note: By seat Note; By seat

Note: By seats Note: By seats Note: By seats

ASIA-PACIFIC TRANSPORT & LOGISTICS BERNSTEIN 13

Mix of group tour vs. independent 2016 Top 10 outbound consumption,

Group tour Independent travel

ASIA-PACIFIC TRANSPORT & LOGISTICS BERNSTEIN 14

Outbound travelers individual Outbound travel frequency

20% 16.9% 20%

ASIA-PACIFIC TRANSPORT & LOGISTICS BERNSTEIN 15

Source: Wiki-commons, Bernstein analysis Source: Wiki-commons, Bernstein analysis

Source: Wiki-commons, Bernstein analysis Source: Wiki-commons, Bernstein analysis

ASIA-PACIFIC TRANSPORT & LOGISTICS BERNSTEIN 16

Asia Pacific Europe

ASIA-PACIFIC TRANSPORT & LOGISTICS BERNSTEIN 17

EXHIBIT 43: EXHIBIT 44:

Source: Wiki-commons, Bernstein analysis Source: Wiki-commons, Bernstein analysis

ASIA-PACIFIC TRANSPORT & LOGISTICS BERNSTEIN 18