Sohn Conference | 29th November 2018

Current price: HK$18.90*| 1 Year Target Price: HK$27.00 (+43%)

* as of 11th November 2018

Wei Ren Quak

R3 Asset Management
Quak.weiren@r3asset.com
Introduction Wei Ren Quak
Investment thesis Quak.weiren@r3asset.com

• This is not an idea where near-term earnings trajectory differs from

existing investors. Differentiation is primarily in its long-term
growth /out-year earnings power

• Investors fundamentally misunderstand TravelSky’s business model

and overstates the impact of the roll-out of the HSR
TravelSky Technology Financials (HK$, M)
Share price (11/11/2018) 18.96
• Detailed analysis suggests that TravelSky’s earnings growth will be
Market capitalization 55,480
stronger-for-longer, translating to 24% 3-year IRR and 43% one- Enterprise value 47,003
year upside Revenue 8,520
EBITDA 3,792
EBITDA margin 45%
• Market will converge to my view as the company continues to pose EPS 0.98
robust growth NTM - EV/EBITDA 10.3x
NTM - P/E 16.9x
NTM - P/E ex-cash 14.3x
Business description Wei Ren Quak
How does TravelSky make money? Quak.weiren@r3asset.com

• TravelSky operates as a toll-booth that sits in the middle of the

vast air travel industry, collecting a fee for each flight in China
(effectively 100% market share)

Travel Travel
• Solutions include Electronic Travel Distribution System, Providers Sellers
Departure Control System, and Flight Connecting Service
System, making TravelSky much like an ERP software business
with network effects – mission-critical, high switching cost, and Consumers
priced below willingness to pay (think Microsoft Office)
o Requires high data fidelity due to operational and regulatory needs
o Embedded in a vast sprawl of IT processes, creating significant migration
risk
o Low cost – <1% of ticket price …User Stickiness is big for TravelSky because
the system is technical and professional, and
• Exposure to China’s air travel industry + almost-insurmountable the switching cost is high…
switching costs enables multi-decade growth compounding Primary research findings – GLG network
China travel industry Wei Ren Quak
Multi-decade passenger growth Quak.weiren@r3asset.com

• # of China airline passengers should grow at low teens pace for

the multiple decades as middle-class disposable income increases,
people seeking better quality of life, and business travel

• Growth is supported by multiple approaches - historical growth,

growth relative to GDP growth, and other countries

• This point is well understood by the investing community and is

not contrarian
China passenger growth
19.7%
• Yet, the company trades at 14x NTM P/E x-cash. Why? 16.3% 16.1%
13.7%
11.8%
10.8% 10.7%
9.5% 8.9%

3.6%

FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16
Investment thesis #1 Wei Ren Quak
Market misconception Quak.weiren@r3asset.com
• Market believes that TravelSky is a Global Distribution System much like Amadeus, Sabre, and Travelport

• Network replication risk is being attributed to TravelSky and the market is pricing in decaying growth rates and
unit economics in the out-years as it loses share to direct connect and sees pressure from OTAs
GDS flight passengers growth
7.3%
Passenger growth rate

5.3%
4.7% average growth 4.7%
4.1%

2.0%

FY13 FY14 FY16 FY17 FY18

• I believe this is false

Investment thesis #1 Wei Ren Quak
Market misconception Quak.weiren@r3asset.com
• TravelSky is not a GDS but rather more akin an enterprise software business with network effects

GDS TravelSky Technology

Business model Sits between airlines and travel Sits between all parties
agencies
Revenue model Paid on flights which it connects Paid on every flight

Growth impact Direct connect risk No direct connect risk

Unit economics impact OTAs hold bargaining power Non-dependent on OTAs

…no matter whether airlines do direct sales or are
doing sales through distributors, all the data will be
handled by our system...our revenue growth won’t be
affected…
-Company representative, 1H12 earnings call
…direct connectivity of airlines has no impact on TravelSky
and it is the level of industry prosperity that affects the
performance of TravelSky…
Primary research findings – GLG network
Investment thesis #2 Wei Ren Quak
High speed rail competition overstated Quak.weiren@r3asset.com
• There are concerns that China’s HSR will capture volume from air travel as it is cheaper, affecting passenger
growth rate in the out years

• Detailed user behavior, however, and cost analysis suggests HSR growth primarily displaces traditional rail and
would only marginally impact air travel
o HSR is capturing share from air travel in the <400km space
o Large part of recent HSR growth is from cannibalization of traditional rail

Travel Distance <400km >400km … high speed train has big impact on airlines for
journeys that are within the distance of 400km… in the
HSR versus plane 2x slower 5x slower
long run, they are actually reciprocal relationship…
HSR price versus 70% cheaper 20% cheaper
Air ticket price Primary research findings – GLG network
Investment thesis #3 Wei Ren Quak
Margins are artificially depressed Quak.weiren@r3asset.com
• Market is pricing in flat margins. This is too conservative as TravelSky has many levers that it can pull

• System integration business has razor-razorblade like-characteristics, depressing near-term margins

o TravelSky likely loses money on each dollar of system integration revenue
o TravelSky obtains an annuity of future cash flow and becomes more integrated in the system
o Business segment will taper off in the future

• High margin IT solutions that generates significant value to involved parties are being rolled out
o Airport Message Broker, Logistic Information Service Platform, Passenger Self Check-in System
o Sabre’s IT solutions (55% EBIT margin); Amadeus IT solutions (68% EBIT margin)

• High fixed cost nature drives natural margin expansion through cost leveraging
Investment thesis #3 Wei Ren Quak
Margins are artificially depressed Quak.weiren@r3asset.com
52.0%
Margin bridge

1.5% 50.5%

50.0%
1.5%

48.0%
1.5%
EBITDA margin

46.0%
46.0%

44.0%

42.0%

40.0%
FY18 EBITDA margin System integration taper Software roll-out Cost leverage FY21 EBITDA margin
Investment thesis Wei Ren Quak
IRR Quak.weiren@r3asset.com
• EPS algorithm: Revenue growth + margin expansion + cash generation = cap-structure neutral EPS growth
• Price algorithm: Cap-structure neutral EPS growth + multiple expansion = IRR
3-year IRR Bridge
5% 24%

5% 19%

3% 14%
11%

Revenue growth: EBITDA margin EPS growth 3-year cash generation Cap-structure neutral P/E revaluation: 14.3x 3-year IRR
industry growth expansion EPS growth to 17x

• Discounted back to a one-year target price of ~HK$27.00 / share

 Thank you
Lucy Macdonald Jake O’hear
Neamul Mohsin Dean Tenerelli
Paul Tucker
The Sohn Conference Foundation
GLG
Wei Chi Loh
Ah Young Jo
 Sohn Conference | 29th November 2018

Current price: HK$18.90*| 1 Year Target Price: HK$27.00 (+43%)

* as of 11th November 2018

Wei Ren Quak

R3 Asset Management
Quak.weiren@r3asset.com