Airlines. Tigerair forms another alliance; this time with Cebu Air; +ve for CEB and TGR, but -ve for AirAsia

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1 Airlines Tigerair forms another alliance; this time with Cebu Air; +ve for CEB and TGR, but -ve for AirAsia Tigerair and Cebu Air plan to enter into a strategic alliance: Both airlines will: 1) jointly operate common routes between SIN and PHILS and other markets that may emerge when they expand their networks, 2) jointly sell and market common and non-common routes using codeshare or interline arrangements and 3) cooperate in relation to sales and marketing, distribution, airport operations and ground handling, scheduling, pricing, service policies, innovation, procurement and other matters to improve the overall quality of service offered to passengers and reduce costs. Malaysia, Philippines, Singapore Airlines Corrine Png AC Bloomberg JPMA PNG <GO> J.P. Morgan Securities (Asia Pacific) Limited Tigerair will also divest its 40% stake in SEAir to fully derive the synergistic benefits of combining their resources. As a result, SEAir will be merged into Cebu Air before entering into the alliance agreement. Post the sale, Tigerair will be present in the Philippines market through the interline agreement with Cebu Air. Cebu Air has agreed to pay S$8.9MM for the 40% stake, implying S$22MM for a 100% stake. The transaction is subject to regulatory approval and is expected to be completed before Mar-14. Tigerair will book a loss of S$13.5MM: Apart from the S$8.9MM that Tigerair will receive from Cebu Air, it will also book a translation gain of S$2.0MM. However, Tigerair will remit to Cebu Air in cash the total amount of forward sales and net non-aircraft liabilities amounting to S$24.4MM resulting in a net loss of S$13.5MM. Tigerair will also terminate the two A319 sublease agreements entered with SEAir and plans to sublease the remaining three A320 aircraft to Cebu Air. We view this positively for Tigerair and Cebu Air: The alliance is in line with Tigerair s asset-light strategy and builds upon its other alliances announced recently (click here for more details). This is also positive for Cebu Air as it reduces competition and allows it to consolidate its position in the domestic market and enhance connectivity to the Australia and Indian markets. Based on seats, Cebu Air and Tigerair have a 52% combined market share in the domestic PHILS market (vs 47% and 5% individually), a 23% combined market share in the PHILS-Asia market (vs 20% and 4% individually) and a 14% combined market share in SIN-Asia market (vs 2% and 12% individually) in Based on ASK, Cebu Air and Tigerair have a 51% combined market share in the domestic PHILS market (vs 46% and 5% individually), a 22% combined market share in the PHILS-Asia int'l market (vs 18% and 4% individually) and an 11% combined market share in SIN-Asia market (vs 2% and 9% individually) in Negative for AirAsia: This alliance will make it even more challenging to operate profitably in PHILS. AirAsia PHILS recorded a net loss of M$65MM in 9M13. Equity Ratings and Price Targets Mkt Cap Price Rating Price Target Company Ticker ($ mn) CCY Price Cur Prev Cur Prev AirAsia BHD AIRA MK 1, MYR 2.33 N n/c 2.50 n/c Cebu Air, Inc. CEB PM PHP OW n/c n/c Tigerair TGR SP SGD 0.51 OW n/c 0.75 n/c Source: Company data, Bloomberg, J.P. Morgan estimates. n/c = no change. All prices as of 08 Jan 14. See page 16 for analyst certification and important disclosures, including non-us analyst disclosures. J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

2 Table 1: Domestic Philippines Market Share 2013 (one-way) Airline Based on Seats Based on ASKs Cebu Pacific Air 47.1% 46.0% PAL Express 21.0% 19.6% Zest Airways 14.0% 13.7% Philippine Airlines 12.0% 14.6% Tigerair Philippines 4.9% 4.9% Philippines AirAsia 1.0% 1.2% Total 100.0% 100.0% Source: FlightGlobal. Table 2: Philippines-Asia Market Share 2013 (one-way) Airline Based on Seats Based on ASKs Philippine Airlines 23.5% 23.9% Cebu Pacific Air 19.7% 18.3% Cathay Pacific Airways 7.8% 4.5% Zest Airways 5.3% 6.1% Singapore Airlines 4.1% 4.6% Korean Air 4.0% 5.2% Asiana Airlines 4.0% 5.0% Delta Air Lines 2.6% 3.6% Philippines AirAsia 2.5% 1.8% Malaysia Airlines 2.4% 2.7% Tigerair* 3.8% 3.6% Jetstar Asia 2.1% 2.4% China Airlines 1.8% 0.9% JAL 1.7% 2.5% PAL Express 1.7% 1.6% Thai 1.7% 1.7% China Southern Airlines 1.6% 0.9% Jeju Air 1.5% 2.0% EVA Air 1.0% 0.5% Others 7.2% 8.0% Total 100.0% 100.0% Source: FlightGlobal. *Tigerair includes Tigerair Philippines and Tigerair Singapore. Table 3: Singapore-Asia Market Share 2013 (one-way) Airline Based on Seats Based on ASKs Singapore Airlines 27.2% 36.4% Tigerair* 12.1% 9.1% SilkAir 8.4% 6.0% Jetstar Asia 6.7% 4.5% AirAsia 4.6% 1.0% Cathay Pacific Airways 3.9% 4.5% Indonesia AirAsia 3.6% 1.9% Garuda Indonesia 2.4% 1.1% Lion Airlines 2.3% 1.0% Thai 1.9% 1.2% Malaysia Airlines 1.8% 0.3% Cebu Pacific Air 1.6% 1.7% Thai AirAsia 1.5% 0.9% China Eastern Airlines 1.5% 2.5% Scoot 1.3% 1.8% Valuair 1.2% 0.6% China Airlines 1.1% 1.3% Philippine Airlines 1.1% 1.2% Jet Airways 1.0% 1.8% Others 14.8% 21.2% Total 100.0% 100.0% Source: FlightGlobal. *Tigerair includes Mandala Airlines, Tigerair Philippines and Tigerair Singapore. 2

3 Table 4: Asia Pacific Airlines Calendarized Valuation Comparison Ticker Price P/E (x) P/BV (x) EV/EBITDAR (x) 7-Jan E 2014E 2013E 2014E 2013E 2014E Air Arabia AIRARABI UH AirAsia* AIRA MK AirAsia X AAX MK Air China H* 753 HK Air New Zealand AIR NZ All Nippon Airways 9202 JP 22 nm Asia Aviation AAV TB Asiana KS 4955 nm CAL* 2610 TT nm nm nm nm Cathay* 293 HK Cebu Air* CEB PM nm China East H* 670 HK China Sthn H* 1055 HK EVA* 2618 TT nm nm nm nm Garuda Indonesia GIAA IJ Hainan Airlines CH nm nm Japan Airlines 9201 JP Jet* JETIN IN nm 10.8 nm nm Korean Air* KS nm MAS MAS MK 0.32 nm nm Qantas* QAN AU 1.09 nm nm SIA* SIA SP Skymark Airlines 9204 JP Spice Jet SJET IN nm nm nm nm THAI THAI TB nm Tigerair* TGR SP 0.52 nm nm nm 17.5 Virgin Australia* VAH AU 0.38 nm Sector Average Asia Pacific incumbent airlines Asia Pacific LCCs Global LCCs Source: Bloomberg, J.P. Morgan estimates. Sector average includes consensus estimates for non-covered stocks. nm: not meaningful. *Companies covered by J.P. Morgan. FY2014 and FY2015 March year end for All Nippon, Japan Airlines, Jet, SIA, SpiceJet and Tigerair and June year end for Air New Zealand, Qantas and Virgin Australia. 3

4 AirAsia BHD Company Data Shares O/S (mn) 2,779 Market Cap (M$ mn) 6,475 Market Cap ($ mn) 1,972 Price (M$) 2.33 Date Of Price 08 Jan 14 Free Float(%) 60.8% 3M - Avg daily vol (mn) M - Avg daily val (M$ mn) M - Avg daily val ($ mn) 6.0 FBMKLCI Exchange Rate 3.28 Price Target End Date 31-Dec-14 AirAsia BHD (Reuters: AIRA.KL, Bloomberg: AIRA MK) M$ in mn, year-end Dec FY11A FY12A FY13E FY14E FY15E Revenue (M$ mn) 4,495 4,946 5,166 5,586 6,097 Net Profit (M$ mn) 555 1, Recurring Net Profit (M$ mn) EPS (M$) Recurring EPS (M$) DPS (M$) Revenue growth (%) 13.9% 10.0% 4.4% 8.1% 9.1% Recurring Net Profit growth 12.7% (15.4%) 6.8% (4.3%) 14.5% EPS growth (%) (48.0%) 229.4% (78.2%) 81.4% 14.5% Recurring EPS growth 12.3% (15.5%) 6.8% (4.3%) 14.5% ROCE 7.1% 7.2% 5.6% 6.9% 6.9% ROE 14.5% 36.9% 6.6% 11.3% 11.9% P/E (x) P/BV (x) EV/EBITDA (x) Dividend Yield 0.0% 0.0% 3.1% 3.5% 4.0% Source: Company data, Bloomberg, J.P. Morgan estimates. Investment Thesis, Valuation and Risks AirAsia BHD (Neutral; Price Target: M$2.50) Investment Thesis Although we remain positive on Asia s budget travel market long term and believe AirAsia is well-positioned to leverage this growth, its share price could stay rangebound in the near term as earnings will likely disappoint, hurt by the lower-thanexpected average fares and ancillary income. Valuation Our Dec-14 PT of M$2.50 is based on 8x 12M fwd Adj. EV/EBITDAR, in line with AirAsia's historical average valuation. Risks to Rating and Price Target Key risks: 1) rising fuel prices, 2) substantial aircraft orders and capital commitments, 3) Indo AirAsia s proposed listing fails to materialize or raises less capital, making it challenging to fund its own fleet expansion, 4) a weaker ringgit, 5) longer-than-expected losses in JV start-ups, 6) potential equity-raising, and 7) worse-than-expected impact from Malindo s entry. 4

5 Key catalyst for the stock price: Upside risks to our view: Downside risks to our view: Ancillary revenue growth accelerates, rising earnings contribution from Thai AirAsia, potential listing of Indonesia AirAsia, new JVs in other markets. Rebound in average fare, fall in fuel prices, stronger MYR, better-than-expected profits from JVs, exit of Malindo from Malaysia. Rising fuel prices, substantial aircraft orders and capital commitments, Indo AirAsia s proposed listing fails to materialize or raises less capital, making it challenging to fund its own fleet expansion, weaker ringgit, longer-thanexpected losses in JV start-ups, potential equity-raising, and worse-than-expected impact from Malindo s entry. Key financial metrics 2012A 2013E 2014E 2015E Valuation and price target basis Revenues (M$MM) 4,946 5,166 5,586 6,097 Our Dec-14 PT of M$2.50 is based on 8x 12M fwd Adj. Revenue growth (%) 10.0% 4.4% 8.1% 9.1% EV/EBITDAR, in line with AirAsia's historical average valuation. EBITDA (M$MM) 1,596 1,645 1,848 2,100 EBITDA margin (%) 32.3% 31.9% 33.1% 34.4% Tax rate (%) 8.6% 20.2% 6.0% 6.0% Net profit (M$MM) 1, EPS (S$) EPS growth (%) 229.4% -78.2% 81.4% 14.5% Adj.EV/EBITDAR Trading Range Since Listing DPS (S$) BVPS (S$) AirAsia Adj.EV/EBITDAR (Rolling 12M Fwd) Operating cash flow (M$MM) 1, ,354 1, Free cash flow (M$MM) (581) (303) (1,215) (1,043) Interest cover (X) Net margin (%) 14.3% 14.7% 13.0% 13.6% Sales/assets (X) Debt/equity (%) 143% 137% 149% 155% Net debt/equity (%) 105% 109% 122% 131% ROE (%) 36.9% 6.6% 11.3% 11.9% Key model assumptions 2012A 2013E 2014E 2015E Passenger carried growth 9.4% 10.7% 10.0% 7.0% Adj.EV/EBITDAR Average +1 std dev -1 stde dev +2 std dev -2 std dev Average fare growth 6.3% -9.0% -3.0% -1.0% Jet fuel price (US$/bbl) MYR/USD Source: Bloomberg, Company and J.P. Morgan estimates. March year end. Nov-04 Jan-05 Mar-05 May-05 Jul-05 Sep-05 Nov-05 Jan-06 Mar-06 May-06 Jul-06 Sep-06 Nov-06 Jan-07 Mar-07 May-07 Jul-07 Sep-07 Source: Bloomberg, Company and J.P. Morgan estimates. Nov-07 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Current Adj.EV/EBITDAR:7.89x Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Comparative metrics CMP Mkt Cap P/E P/BV Adj. EV/EBITDAR ROE YTD LC $Mn FY13E FY14E FY13E FY14E FY13E FY14E FY13E FY14E Stock perf. Cebu Air, Inc nm % 6.4% 5.1% AirAsia , % 11.3% 8.6% Tigerair nm nm nm % -23.9% 1.0% Global LCCs average % 0.8% 4.6% Asian airlines average % 7.5% 1.0% Source: Bloomberg, J.P. Morgan estimates. Forecasts for non-covered (NC) stocks are based on consensus estimates to calculate sector average. Note: Tigerair valuations are for FY14E and FY15E given its March year end. Prices are as of 7 Jan,

6 Cebu Air, Inc. Company Data Shares O/S (mn) 606 Market Cap (Php mn) 30,873 Market Cap ($ mn) 689 Price (Php) Date Of Price 08 Jan 14 Free Float(%) 32.9% 3M - Avg daily vol (mn) M - Avg daily val (Php mn) M - Avg daily val ($ mn) 0.2 PSE Exchange Rate Price Target End Date 31-Dec-14 Cebu Air, Inc. (Reuters: CEB.PS, Bloomberg: CEB PM) Php in mn, year-end Dec FY11A FY12A FY13E FY14E FY15E Revenue (Php mn) 33,935 37,904 39,653 47,342 53,970 Net Profit (Php mn) 3,624 3,569 (322) 1,545 2,220 Recurring Net Income (Php 3,241 2,100 1,207 1,545 2,220 mn) EPS (Php) (0.53) Recurring EPS (Php) DPS (Php) Revenue growth (%) 16.7% 11.7% 4.6% 19.4% 14.0% EPS growth (%) (49.6%) (0.7%) (109.0%) (579.4%) 43.7% ROCE 8.5% 5.8% 4.4% 3.9% 4.8% ROE 19.6% 17.3% (1.4%) 6.4% 8.5% P/E (x) NM P/BV (x) EV/EBITDA (x) Dividend Yield 0.0% 0.0% 0.0% 0.0% 0.0% Source: Company data, Bloomberg, J.P. Morgan estimates. Investment Thesis, Valuation and Risks Cebu Air, Inc. (Overweight; Price Target: Php77.00) Investment Thesis We remain OW given our bullish view on the budget travel market and believe Cebu Air is well-positioned given its cost efficiency and strong balance sheet. Valuation Our Dec 2014 TP of PHP77 is based on 10x adj. EV/EBITDAR, in line with Cebu Air's average valuation since listing, as we expect Cebu Air's profitability to rebound from Risks to Rating and Price Target Key risks: 1) rising fuel prices, 2) peso depreciation, 3) irrational pricing behavior by competitors, 4) unfavorable financing terms for new aircraft deliveries, and 5) JG Summit Group-related risks. 6

7 Key catalyst for the stock price: Upside risks to our view: Downside risks to our view: Better-than-expected international route expansion and profitability, PAL decides to rationalize its route network which will likely lift Cebu Air, Inc.'s market share, ancillary revenue growth accelerates More aggressive business expansion plans given strong cash flows, benign industry supply growth, differentiation from regional LCC competitors, fuel prices recede, peso strengthens further. Uncertainties regarding int l route expansion, rising fuel prices, inability to secure financing for aircraft deliveries at attractive interest rates, weaker peso, rising LCC competition. Key financial metrics 2012A 2013E 2014E 2015E Valuation and price target basis Revenues (PHPMM) 37,904 39,653 47,342 53,970 Our Dec 2014 TP of PHP77 is based on 10x adj. EV/EBITDAR, in Revenue growth (%) 11.7% 4.6% 19.4% 14.0% line with Cebu Air's average valuation since listing as we expect EBITDA (PHPMM) 5,427 4,885 6,641 8,077 Cebu Air's profitability to rebound from EBITDA margin (%) 14.3% 12.3% 14.0% 15.0% Tax rate (%) 7.7% -50.0% 8.0% 8.0% Net profit (PHPMM) 3,569 (322) 1,545 2,220 EPS (S$) 5.89 (0.53) EPS growth (%) -0.7% nm nm 43.7% Adj.EV/EBITDAR Trading Range Since Listing DPS (S$) BVPS (S$) Operating cash flow (PHPMM) 6,161 5,136 8,082 9,056 Free cash flow (PHPMM) 1,887 (9,188) (3,680) (664) Interest cover (X) Net margin (%) 5.5% 3.0% 3.3% 4.1% Sales/assets (X) Debt/equity (%) 104% 95% 83% 60% Net debt/equity (%) 55% 92% 101% 95% ROE (%) 17.3% -1.4% 6.4% 8.5% Key model assumptions 2012A 2013E 2014E 2015E Passenger carried growth 11.4% 9.3% 15.4% 11.2% Average fare growth -2.1% -6.3% 5.4% 2.2% Jet fuel price (US$/bbl) PHP/USD Source: Bloomberg, Company and J.P. Morgan estimates. March year end Cebu Air: Adj.EV/EBITDAR Trading Range Since Listing Nov-10 4-Dec Dec Jan-11 2-Feb Feb Mar-11 3-Apr Apr May-11 2-Jun Jun Jul-11 1-Aug Aug Sep Sep Nov Nov Dec-11 8-Jan Jan Feb-12 8-Mar Mar Apr-12 7-May May Jun-12 6-Jul Jul Aug-12 4-Sep Sep Nov Nov Dec-12 2-Jan Jan Feb-13 3-Mar Mar Apr-13 2-May May Jun-13 1-Jul Jul Aug Aug Sep Nov-13 8-Dec Dec-13 Source: Bloomberg, Company and J.P. Morgan estimates Adj. EV/EBITDAR Average +1 Stdev -1 Stdev 8.70 Current Adj.EV/EBITDAR: 8.01x Comparative metrics CMP Mkt Cap P/E P/BV Adj. EV/EBITDAR ROE YTD LC $Mn FY13E FY14E FY13E FY14E FY13E FY14E FY13E FY14E Stock perf. Cebu Air, Inc nm % 6.4% 5.1% AirAsia , % 11.3% 8.6% Tigerair nm nm nm % -23.9% 1.0% Global LCCs average % 0.8% 4.6% Asian airlines average % 7.5% 1.0% Source: Bloomberg, J.P. Morgan estimates. Forecasts for non-covered (NC) stocks are based on consensus estimates to calculate sector average. Note: Tigerair valuations are for FY14E and FY15E given its March year end. Prices are as of 7 Jan,

8 Tigerair Company Data Shares O/S (mn) 986 Market Cap (S$ mn) 503 Market Cap ($ mn) 395 Price (S$) 0.51 Date Of Price 08 Jan 14 Free Float(%) 54.9% 3M - Avg daily vol (mn) M - Avg daily val (S$ mn) M - Avg daily val ($ mn) 0.3 FTSTI Exchange Rate 1.27 Price Target End Date 31-Dec-14 Price Target (S$) 0.75 Tigerair (Reuters: TAHL.SI, Bloomberg: TGR SP) S$ in mn, year-end Mar FY12A FY13A FY14E FY15E FY16E Revenue (S$ mn) Net Profit (S$ mn) (104) (45) (136) (76) 8 EPS (S$) (0.13) (0.06) (0.14) (0.08) 0.01 DPS (S$) Revenue growth (%) (0.6%) 40.1% (21.1%) 20.4% 17.2% EPS growth (%) NM NM 150.1% NM NM ROCE (11.0%) 1.2% (13.4%) (5.4%) 1.2% ROE (47.1%) (20.3%) (49.1%) (23.9%) 2.8% P/E (x) NM NM NM NM 62.8 P/BV (x) EV/EBITDA (x) NM 20.3 NM NM 18.2 Dividend Yield 0.0% 0.0% 0.0% 0.0% 0.0% Source: Company data, Bloomberg, J.P. Morgan estimates. Investment Thesis, Valuation and Risks Tigerair (Overweight; Price Target: S$0.75) Investment Thesis The worst is over for Tigerair, in our view. Its expanding network, increased frequencies and improved on-time performance (at 92% in Sept which ranked it among the top five airlines globally) will likely attract more passengers. However, management expects load factor and fares to remain under pressure in the near term as it will take time for the excess capacity to be absorbed. We prefer SIA in the Singapore transport sector and our top regional LCC pick is Cebu Air. Valuation Our Dec-14 price target of S$0.75 is based on 15x Adj. EV/EBITDAR, a 40% discount to Tigerair s historical average valuation and supported by the recovery of Tiger s EBITDAR margin to 14% by FY16E, in line with sector peers. Risks to Rating and Price Target Key risks are 1) rising fuel prices, 2) Tigerair Australia s recovery stalls, 3) weaker S$, 4) execution risks in Tigerair Philippines and Tigerair Mandala JVs, and 5) potential equity-raising to fund aircraft capex if sale & leaseback options become unattractive. 8

9 Key catalyst for the stock price: Upside risks to our view: Downside risks to our view: Ancillary revenue growth accelerates, improved utilization after last year s capacity indigestion, traffic feed from other airlines following move to Changi Airport Terminal 2, tie-up with Scoot and potential takeover by Singapore Airlines. Lower fuel prices, better-than-expected traffic and yield growth, higher-than-expected ancillary revenue, higher-than-expected contribution from its associate airlines. Aggressive fleet expansion plans, rising fuel prices, high financial leverage and potential challenges in securing financing for aircraft deliveries at attractive interest rates, rising LCC competition, further equity raising if sale & leaseback structures become unattractive/losses persist. Key financial metrics FY13A FY14E FY15E FY16E Valuation and price target basis Revenues (S$MM) Our Dec-14 price target of S$0.75 is based on 15x Adj. Revenue growth (%) 40.1% -21.1% 20.4% 17.2% EV/EBITDAR, a 40% discount to Tigerair s historical average EBITDA (S$MM) 41 (64) (5) 54 valuation and supported by the recovery of Tiger s EBITDAR margin EBITDA margin (%) 4.8% -9.4% -0.6% 5.6% to 14% by FY16E, in line with sector peers. Tax rate (%) -29.6% -4.0% -16.0% 16.0% Net profit (S$MM) (45) (136) (76) 8 EPS (S$) (0.06) (0.14) (0.08) 0.01 EPS growth (%) -56.5% 150.1% -44.2% % Adj.EV/EBITDAR Trading Range Since Listing DPS (S$) BVPS (S$) Operating cash flow (S$MM) 91 (156) (2) 89 Free cash flow (S$MM) 37 (116) (125) (40) Interest cover (X) 6.02 (20.42) (4.10) Net margin (%) -5.2% -19.9% -9.2% 0.8% Sales/assets (X) Debt/equity (%) 259% 122% 215% 227% Net debt/equity (%) 191% 58% 136% 146% ROE (%) -20.3% -49.1% -23.9% 2.8% Key model assumptions FY13A FY14E FY15E FY16E Passenger carried growth 25.3% -23.1% 15.8% 12.7% Average fare growth 9.5% -3.0% 3.0% 3.0% Jet fuel price (US$/bbl) SGD/USD Source: Bloomberg, Company and J.P. Morgan estimates. March year end Jan-10 Feb-10 Mar Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Tigerair: Adj.EV/EBITDAR Trading Range Since Listing Source: Bloomberg, Company and J.P. Morgan estimates Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep Nov-13 Dec-13 Adj. EV/EBITDAR Average +1 Stdev -1 Stdev +2 Stdev -2 Stdev Current Adj.EV/EBITDAR: 22.24x Comparative metrics CMP Mkt Cap P/E P/BV Adj. EV/EBITDAR ROE YTD LC $Mn FY13E FY14E FY13E FY14E FY13E FY14E FY13E FY14E Stock perf. Cebu Air, Inc nm % 6.4% 5.1% AirAsia , % 11.3% 8.6% Tigerair nm nm nm % -23.9% 1.0% Global LCCs average % 0.8% 4.6% Asian airlines average % 7.5% 1.0% Source: Bloomberg, J.P. Morgan estimates. Forecasts for non-covered (NC) stocks are based on consensus estimates to calculate sector average. Note: Tigerair valuations are for FY14E and FY15E given its March year end. Prices are as of 7 Jan,

10 AirAsia BHD: Summary of Financials Income Statement Cash flow statement M$ in millions, year end Dec FY11 FY12 FY13E FY14E FY15E M$ in millions, year end Dec FY11 FY12 FY13E FY14E FY15E Revenues 4,495 4,946 5,166 5,586 6,097 EBIT 1,163 1,029 1,020 1,145 1,290 % change Y/Y 13.9% 10.0% 4.4% 8.1% 9.1% Depr. & amortization EBITDA 1,733 1,596 1,645 1,848 2,100 Change in working capital % change Y/Y 9.2% (7.9%) 3.1% 12.3% 13.6% Taxes (22) (11) (30) (46) (53) EBIT 1,163 1,029 1,020 1,145 1,290 Cash flow from operations 1,404 1, ,354 1,526 % change Y/Y 9.0% (11.5%) (0.9%) 12.3% 12.7% EBIT Margin 25.9% 20.8% 19.7% 20.5% 21.2% Capex (612) (1,773) (1,569) (2,569) (2,569) Net Interest (392) (183) (675) (487) (569) Disposal/(purchase) Earnings before tax 777 2, Net Interest (392) (183) (675) (487) (569) % change Y/Y (29.3%) 157.9% (75.0%) 54.1% 14.5% Other (107) (161) Tax (222) (173) (101) (46) (53) Free cash flow 916 (581) (303) (1,215) (1,043) as % of EBT 28.5% 8.6% 20.2% 6.0% 6.0% Net income (reported) 555 1, Equity raised/(repaid) % change Y/Y (47.7%) 229.8% (78.2%) 81.4% 14.5% Debt raised/(repaid) (38) ,500 1,300 Recurring Net income Other (201) % change Y/Y 12.7% (15.4%) 6.8% (4.3%) 14.5% Dividends paid (77) (139) (204) (229) (258) Shares outstanding 2,776 2,779 2,781 2,781 2,781 Beginning cash 1,505 2,105 2,233 1,726 1,782 EPS (reported) Ending cash 2,105 2,233 1,726 1,782 1,781 % change Y/Y (48.0%) 229.4% (78.2%) 81.4% 14.5% DPS Recurring EPS % change Y/Y 12.3% (15.5%) 6.8% (4.3%) 14.5% Balance sheet Ratio Analysis M$ in millions, year end Dec FY11 FY12 FY13E FY14E FY15E M$ in millions, year end Dec FY11 FY12 FY13E FY14E FY15E Cash and cash equivalents 2,105 2,233 1,726 1,782 1,781 EBITDA margin 38.6% 32.3% 31.9% 33.1% 34.4% Accounts receivable 1,110 1,357 1,417 1,533 1,673 Operating margin 25.9% 20.8% 19.7% 20.5% 21.2% Inventories Net margin 18.7% 14.3% 14.7% 13.0% 13.6% Others Current assets 3,538 3,957 3,512 3,685 3,826 Sales per share growth 13.3% 9.9% 4.4% 8.1% 9.1% LT investments Sales growth 13.9% 10.0% 4.4% 8.1% 9.1% Net fixed assets 8,586 9,786 10,502 12,368 14,127 Net profit growth (47.7%) 229.8% (78.2%) 81.4% 14.5% Total Assets 13,906 16,745 17,094 19,246 21,309 EPS growth (48.0%) 229.4% (78.2%) 81.4% 14.5% Liabilities Interest coverage (x) Short-term loans 632 1,162 1,162 1,162 1,162 Payables 1,137 1,295 1,353 1,463 1,596 Net debt to equity 141.6% 105.3% 108.9% 122.5% 130.8% Others Sales/assets Total current liabilities 2,194 3,050 3,131 3,288 3,478 Assets/equity 353.6% 308.4% 280.3% 283.2% 291.7% Long-term debt 7,187 7,283 7,283 8,783 10,083 ROE 14.5% 36.9% 6.6% 11.3% 11.9% Other liabilities ROCE 7.1% 7.2% 5.6% 6.9% 6.9% Total Liabilities 9,869 10,843 10,925 12,581 14,071 Shareholder's equity 4,036 5,902 6,169 6,665 7,238 BVPS (M$) Source: Company reports and J.P. Morgan estimates. 10

11 Cebu Air, Inc.: Summary of Financials Income Statement Cash flow statement Php in millions, year end Dec FY11 FY12 FY13E FY14E FY15E Php in millions, year end Dec FY11 FY12 FY13E FY14E FY15E Revenues 33,935 37,904 39,653 47,342 53,970 EBIT 3,336 2,660 1,403 2,336 3,137 % change Y/Y 16.7% 11.7% 4.6% 19.4% 14.0% Depr. & amortization 2,824 3,345 3,482 4,305 4,940 EBITDA 5,651 5,427 4,885 6,641 8,077 Change in working capital 1, ,325 2,004 % change Y/Y (30.6%) (4.0%) (10.0%) 35.9% 21.6% Taxes EBIT 3,336 2,660 1,403 2,336 3,137 Cash flow from operations 7,995 6,161 5,136 8,082 9,056 % change Y/Y (46.9%) (20.3%) (47.2%) 66.5% 34.3% EBIT Margin 9.8% 7.0% 3.5% 4.9% 5.8% Capex (4,230) (4,396) (14,324) (11,761) (9,720) Net Interest (15) (317) (600) (750) (832) Disposal/(purchase) Earnings before tax 3,747 3,867 (645) 1,679 2,413 Net Interest (15) (317) (600) (750) (832) % change Y/Y (46.0%) 3.2% (116.7%) (360.5%) 43.7% Other (61) Tax (123) (297) 322 (134) (193) Free cash flow 3,705 1,887 (9,188) (3,680) (664) as % of EBT 3.3% 7.7% (50.0%) 8.0% 8.0% Net income (reported) 3,624 3,569 (322) 1,545 2,220 Equity raised/(repaid) % change Y/Y (47.6%) (1.5%) (109.0%) (579.4%) 43.7% Debt raised/(repaid) 2,439 2,052 5,000 5,000 2,000 Recurring Net Income 3,241 2,100 1,207 1,545 2,220 Other (5,116) (1,563) Shares outstanding Dividends paid (1,834) (606) EPS (reported) (0.53) Beginning cash 9,763 8,958 10,728 6,540 7,861 % change Y/Y (49.6%) (0.7%) (109.0%) (579.4%) 43.7% Ending cash 8,958 10,728 6,540 7,861 9,196 Recurring EPS DPS Balance sheet Ratio Analysis Php in millions, year end Dec FY11 FY12 FY13E FY14E FY15E Php in millions, year end Dec FY11 FY12 FY13E FY14E FY15E Cash and cash equivalents 8,958 10,728 6,540 7,861 9,196 EBITDA margin 16.7% 14.3% 12.3% 14.0% 15.0% Accounts receivable ,034 1,235 1,408 Operating margin 9.8% 7.0% 3.5% 4.9% 5.8% Inventories Net margin 9.5% 5.5% 3.0% 3.3% 4.1% Others 3, ,026 1,205 1,359 Current assets 13,732 13,120 9,037 10,822 12,558 Sales per share growth 12.2% 12.6% 4.6% 19.4% 14.0% LT investments Sales growth 16.7% 11.7% 4.6% 19.4% 14.0% Net fixed assets 39,863 47,484 58,326 65,782 70,563 Net profit growth (47.6%) (1.5%) (109.0%) (579.4%) 43.7% Total Assets 54,506 61,336 68,177 77,512 84,136 EPS growth (49.6%) (0.7%) (109.0%) (579.4%) 43.7% Liabilities Interest coverage (x) Short-term loans 2,467 2,769 2,769 2,769 2,769 Payables 6,711 7,769 8,127 9,703 11,061 Net debt to equity 62.2% 55.1% 91.6% 100.7% 94.9% Others 5,351 6,027 6,303 7,516 8,562 Sales/assets Total current liabilities 14,529 16,565 17,199 19,989 22,393 Assets/equity 281.7% 280.5% 284.8% 302.1% 310.9% Long-term debt 18,404 20,155 25,155 30,155 32,155 ROE 19.6% 17.3% (1.4%) 6.4% 8.5% Other liabilities 2,408 2,482 2,482 2,482 2,482 ROCE 8.5% 5.8% 4.4% 3.9% 4.8% Total Liabilities 35,341 39,202 44,836 52,625 57,029 Shareholder's equity 19,166 22,135 23,342 24,887 27,107 BVPS (Php) Source: Company reports and J.P. Morgan estimates. 11

12 Tigerair: Summary of Financials Income Statement Cash flow statement S$ in millions, year end Mar FY12 FY13 FY14E FY15E FY16E S$ in millions, year end Mar FY12 FY13 FY14E FY15E FY16E Revenues EBIT (83) 7 (97) (39) 13 % change Y/Y (0.6%) 40.1% (21.1%) 20.4% 17.2% Depr. & amortization EBITDA (52) 41 (64) (5) 54 Change in working capital (42) 55 (52) % change Y/Y NM NM NM NM NM Taxes (1) (3) 6 15 (2) EBIT (83) 7 (97) (39) 13 Cash flow from operations (93) 91 (156) (2) 89 % change Y/Y NM NM NM NM NM EBIT Margin (13.5%) 0.8% (14.1%) (4.8%) 1.3% Capex (468) (531) (491) (430) (430) Net Interest (8) (7) (3) (1) (3) Disposal/(purchase) Earnings before tax (101) (35) (142) (91) 10 Net Interest (8) (7) (3) (1) (3) % change Y/Y NM NM 305.5% NM NM Other (2) (0) Tax (4) (10) 6 15 (2) Free cash flow (221) 37 (116) (125) (40) as % of EBT (3.6%) (29.6%) (4.0%) (16.0%) 16.0% Net income (reported) (104) (45) (136) (76) 8 Equity raised/(repaid) % change Y/Y NM NM 200.4% NM NM Debt raised/(repaid) 43 (69) (80) Shares outstanding Other (11) 7 70 (50) 0 EPS (reported) (0.13) (0.06) (0.14) (0.08) 0.01 Dividends paid % change Y/Y NM NM 150.1% NM NM Beginning cash Ending cash DPS Balance sheet Ratio Analysis S$ in millions, year end Mar FY12 FY13 FY14E FY15E FY16E S$ in millions, year end Mar FY12 FY13 FY14E FY15E FY16E Cash and cash equivalents EBITDA margin (8.4%) 4.8% (9.4%) (0.6%) 5.6% Accounts receivable Operating margin (13.5%) 0.8% (14.1%) (4.8%) 1.3% Inventories Net margin (16.9%) (5.2%) (19.9%) (9.2%) 0.8% Others Current assets Sales per share growth (34.7%) 40.1% (34.3%) 20.4% 17.2% LT investments Sales growth (0.6%) 40.1% (21.1%) 20.4% 17.2% Net fixed assets Net profit growth NM NM 200.4% NM NM Total Assets 1,072 1,049 1,067 1,201 1,301 EPS growth NM NM 150.1% NM NM. Liabilities Interest coverage (x) NM 6.0 NM NM 16.7 Short-term loans Payables Net debt to equity 170.0% 190.6% 57.8% 135.8% 146.0% Others Sales/assets Total current liabilities Assets/equity 467.7% 474.3% 380.8% 355.7% 439.3%. ROE (47.1%) (20.3%) (49.1%) (23.9%) 2.8% Long-term debt ROCE (11.0%) 1.2% (13.4%) (5.4%) 1.2% Other liabilities Total Liabilities ,012 Shareholder's equity BVPS (S$) Source: Company reports and J.P. Morgan estimates. 12

13 JPM Q-Profile AirAsia Bhd. (MALAYSIA / Industrials) As Of: 03-Jan-2014 Quant_Strategy@jpmorgan.com Local Share Price Current: Mth Forward EPS Current: Earnings Yield (& local bond Yield) Current: 12% Implied Value Of Growth* Current: % 20% 12Mth fwd EY Malaysia BY Proxy 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% PE (1Yr Forward) Current: 8.4x Price/Book Value Current: 1.5x 30.0x 12.0x PBV hist PBV Forward 25.0x 10.0x 20.0x 15.0x 10.0x 8.0x 6.0x 4.0x 2.0x 5.0x 0.0x 0.0x -2.0x ROE (Trailing) Current: Dividend Yield (Trailing) Current: Summary AirAsia Bhd As Of: 3-Jan-14 MALAYSIA SEDOL B03J9L7 Local Price: 2.51 Industrials Airlines EPS: 0.30 Latest Min Max Median Average 2 S.D.+ 2 S.D. - % to Min % to Max % to Med % to Avg 12mth Forward PE 8.36x % 235% 23% 51% P/BV (Trailing) 1.52x % 587% 31% 53% Dividend Yield (Trailing) % 5% -100% -78% ROE (Trailing) % 288% 135% 122% Implied Value of Growth -37.8% % 257% 75% 89% Source: Bloomberg, Reuters Global Fundamentals, IBES CONSENSUS, J.P. Morgan Calcs * Implied Value Of Growth = (1 - EY/Cost of equity) where cost of equity =Bond Yield + 5.0% (ERP) 13

14 JPM Q-Profile Cebu Air Inc. (PHILIPPINES / Industrials) As Of: 03-Jan-2014 Quant_Strategy@jpmorgan.com Local Share Price Current: Mth Forward EPS Current: Earnings Yield (& local bond Yield) Current: 8% Implied Value Of Growth* Current: 27.48% 25% 20% 15% 10% 12Mth fwd EY Philippines BY Proxy % 0% PE (1Yr Forward) Current: 12.8x Price/Book Value Current: 1.3x 18.0x 7.0x PBV hist PBV Forward 16.0x 14.0x 12.0x 10.0x 6.0x 5.0x 4.0x 8.0x 6.0x 4.0x 2.0x 3.0x 2.0x 1.0x 0.0x 0.0x ROE (Trailing) Current: Dividend Yield (Trailing) Current: Summary Cebu Air Inc As Of: 3-Jan-14 PHILIPPINES SEDOL B2NRDY6 Local Price: Industrials Airlines EPS: 4.08 Latest Min Max Median Average 2 S.D.+ 2 S.D. - % to Min % to Max % to Med % to Avg 12mth Forward PE 12.81x % 22% -28% -24% P/BV (Trailing) 1.35x % 349% 54% 75% Dividend Yield (Trailing) % 51% -16% -27% ROE (Trailing) % 242% 48% 22% Implied Value of Growth 27.5% % 47% -63% -59% Source: Bloomberg, Reuters Global Fundamentals, IBES CONSENSUS, J.P. Morgan Calcs * Implied Value Of Growth = (1 - EY/Cost of equity) where cost of equity =Bond Yield + 5.0% (ERP) 14

15 JPM Q-Profile Tiger Airways Holdings Limited (SINGAPORE / Industrials) As Of: 03-Jan-2014 Quant_Strategy@jpmorgan.com Local Share Price Current: Mth Forward EPS Current: Earnings Yield (& local bond Yield) Current: 0% Implied Value Of Growth* Current: 97.04% 12% 10% 8% 6% 4% 2% 0% 12Mth fwd EY Singapore BY Proxy % PE (1Yr Forward) Current: 75.0x Price/Book Value Current: 1.0x 80.0x 8.0x PBV hist PBV Forward 60.0x 7.0x 6.0x 40.0x 5.0x 20.0x 4.0x 3.0x 0.0x 2.0x -20.0x -40.0x 1.0x 0.0x -1.0x ROE (Trailing) Current: Dividend Yield (Trailing) Current: Summary Tiger Airways Holdings Limited As Of: 3-Jan-14 SINGAPORE SEDOL B3MVRX3 Local Price: 0.51 Industrials Airlines EPS: Latest Min Max Median Average 2 S.D.+ 2 S.D. - % to Min % to Max % to Med % to Avg 12mth Forward PE 75.00x % 0% -82% -72% P/BV (Trailing) 1.00x % 583% 184% 236% Dividend Yield (Trailing) ROE (Trailing) % 902% -196% 62% Implied Value of Growth 97.0% % 15% -97% -82% Source: Bloomberg, Reuters Global Fundamentals, IBES CONSENSUS, J.P. Morgan Calcs * Implied Value Of Growth = (1 - EY/Cost of equity) where cost of equity =Bond Yield + 5.0% (ERP) 15

16 Other Companies Discussed in This Report (all prices in this report as of market close on ) Singapore Airlines (SIAL.SI/S$10.23/Overweight) Analyst Certification: The research analyst(s) denoted by an AC on the cover of this report certifies (or, where multiple research analysts are primarily responsible for this report, the research analyst denoted by an AC on the cover or within the document individually certifies, with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of any of the research analyst's compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report. For all Korea-based research analysts listed on the front cover, they also certify, as per KOFIA requirements, that their analysis was made in good faith and that the views reflect their own opinion, without undue influence or intervention. Important Disclosures Client: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients: AirAsia BHD, Cebu Air, Inc., Tigerair, Singapore Airlines. Client/Investment Banking: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as investment banking clients: AirAsia BHD, Tigerair. Client/Non-Investment Banking, Securities-Related: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients, and the services provided were non-investment-banking, securities-related: AirAsia BHD, Cebu Air, Inc., Singapore Airlines. Client/Non-Securities-Related: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients, and the services provided were non-securities-related: AirAsia BHD, Cebu Air, Inc.. Investment Banking (past 12 months): J.P. Morgan received in the past 12 months compensation from investment banking AirAsia BHD, Tigerair. Investment Banking (next 3 months): J.P. Morgan expects to receive, or intends to seek, compensation for investment banking services in the next three months from AirAsia BHD, Tigerair. Non-Investment Banking Compensation: J.P. Morgan has received compensation in the past 12 months for products or services other than investment banking from AirAsia BHD, Cebu Air, Inc., Singapore Airlines. Company-Specific Disclosures: Important disclosures, including price charts, are available for compendium reports and all J.P. Morgan covered companies by visiting calling , or ing research.disclosure.inquiries@jpmorgan.com with your request. J.P. Morgan s Strategy, Technical, and Quantitative Research teams may screen companies not covered by J.P. Morgan. For important disclosures for these companies, please call or research.disclosure.inquiries@jpmorgan.com. AirAsia BHD (AIRA.KL, AIRA MK) Price Chart 7 6 N M$ Price(M$) UW OW M$4.3 OW M$4 N M$3 Date Rating Share Price (M$) 19-Jul-07 UW Apr-12 OW Aug-12 OW Aug-13 N Nov-13 N Price Target (M$) 0 06 Apr Apr Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends. Break in coverage Jul 19, Apr 10,

17 Cebu Air, Inc. (CEB.PS, CEB PM) Price Chart Price(Php) OW Php127 OW Php90 OW Php145 OW Php110 OW Php95 OW Php77 Date Rating Share Price (Php) Price Target (Php) 18-Nov-10 OW Mar-11 OW Aug-11 OW Nov-11 OW May-13 OW Nov-13 OW Jan 11 Apr 11 Jul Jan 12 Apr 12 Jul Jan 13 Apr 13 Jul Jan 14 Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends. Initiated coverage Nov 18, Tigerair (TAHL.SI, TGR SP) Price Chart 3 OW S$0.8 Price(S$) 2 1 OW S$0.9 OW S$0.9 OW S$0.75 Date Rating Share Price (S$) 10-Apr-12 OW May-12 OW OW OW Price Target (S$) 0 Jan Jul 11 Apr 12 Jan Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends. Initiated coverage Apr 10,

18 Singapore Airlines (SIAL.SI, SIA SP) Price Chart Price(S$) N S$17.5 OW S$17.5 N S$18.5 N S$13.1N S$9.4 OW S$17 OW S$14 W S$16.5 N S$16.5 N S$15N S$10OW S$14 OW S$16 OW S$20 OW S$19 OW S$15.5OW S$13 Apr 08 Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends. Initiated coverage 29, Apr Date Rating Share Price (S$) OW Feb-07 OW Feb-07 N Apr-07 N May-07 N Jun-08 N Jul-08 N Dec-08 N Feb-09 N Jul-09 OW Nov-09 OW Feb-10 OW Nov-10 OW May-11 OW Nov-11 OW Feb-12 OW Jul-12 OW Price Target (S$) The chart(s) show J.P. Morgan's continuing coverage of the stocks; the current analysts may or may not have covered it over the entire period. J.P. Morgan ratings or designations: OW = Overweight, N= Neutral, UW = Underweight, NR = Not Rated Explanation of Equity Research Ratings, Designations and Analyst(s) Coverage Universe: J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the average total return of the stocks in the analyst s (or the analyst s team s) coverage universe.] Neutral [Over the next six to twelve months, we expect this stock will perform in line with the average total return of the stocks in the analyst s (or the analyst s team s) coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of the stocks in the analyst s (or the analyst s team s) coverage universe.] Not Rated (NR): J.P. Morgan has removed the rating and, if applicable, the price target, for this stock because of either a lack of a sufficient fundamental basis or for legal, regulatory or policy reasons. The previous rating and, if applicable, the price target, no longer should be relied upon. An NR designation is not a recommendation or a rating. In our Asia (ex-australia) and U.K. small- and mid-cap equity research, each stock s expected total return is compared to the expected total return of a benchmark country market index, not to those analysts coverage universe. If it does not appear in the Important Disclosures section of this report, the certifying analyst s coverage universe can be found on J.P. Morgan s research website, Coverage Universe: Png, Corrine: Air China H (0753.HK), AirAsia BHD (AIRA.KL), Cathay Pacific (0293.HK), Cebu Air, Inc. (CEB.PS), China Airlines (2610.TW), China Cosco Holdings, Ltd. - H (1919.HK), China Eastern Airlines - H (0670.HK), China Shipping Container Lines - H (2866.HK), China Southern Airlines - H (1055.HK), EVA Airways (2618.TW), Hanjin Shipping Co Ltd ( KS), Korean Air ( KS), Neptune Orient Lines (NOL) (NEPS.SI), Orient Overseas Int'l Ltd (0316.HK), Pacific Basin Shipping (2343.HK), Precious Shipping (PSL.BK), SIA Engineering Company (SIAE.SI), ST Engineering (STEG.SI), Singapore Airlines (SIAL.SI), Tigerair (TAHL.SI) J.P. Morgan Equity Research Ratings Distribution, as of January 1, 2014 Overweight (buy) Neutral (hold) Underweight (sell) J.P. Morgan Global Equity Research Coverage 43% 45% 12% IB clients* 57% 49% 36% JPMS Equity Research Coverage 43% 50% 7% IB clients* 75% 66% 59% *Percentage of investment banking clients in each rating category. For purposes only of FINRA/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold rating category; and our Underweight rating falls into a sell rating category. Please note that stocks with an NR designation are not included in the table above. 18

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