Below expectations; yields still pressured, cost control is key

EARNINGS REVIEW Sell Below expectations; yields still pressured, cost control is key What surprised us Cathay Pacific reported FY16 revenue of HK$92,751mn (-9% yoy) with a net loss of HK$575mn (-110% yoy). Revenue was in line with GSe/Bloomberg consensus, but the bottom line missed expectations on costs (ex-fuel unit costs +2.9% yoy; unit revenue -10.6% yoy). Highlights: (1) Passenger yields fell 9.2% yoy in FY16: Management noted that premium class (GSe c.30% of passenger revenue) is the most challenged, with corporate demand to London and New York below management expectations. It guided that yields in 2M17 are still experiencing significant pressure. (2) Cargo yields fell 16.3% yoy: Mgmt. noted that the cargo fuel surcharge was restored in early Mar-17 and could help support cargo yields. According to media reports, the EU Competition Commissioner is seeking to re-impose penalties for a cargo cartel lawsuit previously dismissed by the court (Bloomberg, Mar 9); Cathay Pacific was refunded 57mn, or HK$471mn, in 2015. While we do not take a view on the outcome, we think the re-imposition of the fine could adversely impact Cathay Pacific s future cargo contract negotiations. (3) Management shared qualitative details on its Corporate Transformation Programme (Exhibit 3): It aims to reduce ex-fuel unit costs over the next three years and to achieve returns above the cost of capital. (4) Dividends: For the first time since 2008, management did not propose a second interim dividend. What to do with the stock Cathay Pacific operates in a structurally challenging environment and we believe market focus could shift to the company s ability to control costs. However, quantitative details, a key market focus going into earnings, remain limited. We maintain our Sell rating and cut our 2017E-19E EPS by 17-113% on cost pressure. No change to our 2017E EV/GCI vs. CROCI/WACCbased TP at HK$9.80 (cash return multiple 5.36x, unchanged) implying 0.70x P/B (0.6x EV/GCI), a floor valuation from asset support. Key risks: (+) Higher-than-expected yields; better-than-expected cost controls. Cathay Pacific 2016 earnings summary 2H16 2H15 YoY 2016 2015 YoY Revenue 47,068 51,954-9.4% 92,751 102,342-9.4% Net income -928 4,028-123.0% -575 6,000-109.6% Source: Company data. INVESTMENT LIST MEMBERSHIP Asia Pacific Sell List Investment Profile Low Growth Returns * Multiple Volatility Equity Research Percentile 20th 40th 60th 80th 100th Asia Pacific Transportation Peer Group Average High Growth Returns * Multiple Volatility * Returns = Return on Capital For a complete description of the investment profile measures please refer to the disclosure section of this document. Key data Current Price (HK$) 11.44 12 month price target (HK$) 9.80 Market cap (HK$ mn / US$ mn) 45,005.0 / 5,793.5 Foreign ownership (%) -- 12/16 12/17E 12/18E 12/19E EPS (HK$) New (0.15) (0.04) 0.43 0.49 EPS revision (%) NM NM (16.5) (16.5) EPS growth (%) (109.6) 69.6 1,069.0 13.0 EPS (dil) (HK$) New (0.15) (0.04) 0.43 0.49 P/E (X) NM NM 26.5 23.5 P/B (X) 0.8 0.8 0.8 0.8 EV/EBITDA (X) 13.0 12.2 9.5 9.1 Dividend yield (%) 0.0 0.0 1.1 1.3 ROE (%) (1.1) (0.3) 3.0 3.4 CROCI (%) 5.1 5.7 6.5 6.4 Price performance chart 14.0 13.5 13.0 12.5 12.0 11.5 11.0 10.5 10.0 Mar-16 Jun-16 Sep-16 Dec-16 Cathay Pacific (L) Hang Seng Index (R) 27,000 26,000 25,000 24,000 23,000 22,000 21,000 20,000 19,000 Share price performance (%) 3 month 6 month 12 month Absolute 13.0 2.5 (16.5) Rel. to Hang Seng Index 4.8 0.5 (28.8) Source: Company data, Goldman Sachs Research estimates, FactSet. Price as of 3/15/2017 close. Coverage View: Neutral Kenya Moriuchi Goldman Sachs does and seeks to do business with companies +852-2978-1255 kenya.moriuchi@gs.com Goldman Sachs (Asia) L.L.C. Vincent Lim +852-2978-6958 vincent.lim@gs.com Goldman Sachs (Asia) L.L.C. Ben Hartwright, CFA +852-2978-0953 ben.hartwright@gs.com Goldman Sachs (Asia) L.L.C. Jess Chen +852-2978-1558 jess.chen@gs.com Goldman Sachs (Asia) L.L.C. 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. For Reg AC certification and other important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html. Analysts employed by non- US affiliates are not registered/qualified as research analysts with FINRA in the U.S. The Goldman Sachs Group, Inc. Global Investment Research

Cathay Pacific: Summary Financials Profit model (HK$ mn) 12/16 12/17E 12/18E 12/19E Balance sheet (HK$ mn) 12/16 12/17E 12/18E 12/19E Total revenue 92,751.0 96,279.1 99,206.7 102,334.3 Cash & equivalents 7,082.4 3,790.1 3,053.1 5,426.3 Cost of goods sold (84,317.0) (86,795.9) (86,499.6) (88,830.0) Accounts receivable 9,557.0 9,496.0 9,784.8 10,093.2 SG&A 0.0 0.0 0.0 0.0 Inventory 1,514.0 1,426.8 1,421.9 1,460.2 R&D 0.0 0.0 0.0 0.0 Other current assets 13,238.6 13,238.6 13,238.6 13,238.6 Other operating profit/(expense) 0.0 0.0 0.0 0.0 Total current assets 31,392.0 27,951.5 27,498.4 30,218.3 EBITDA 8,434.0 9,483.3 12,707.1 13,504.3 Net PP&E 106,456.0 112,911.6 117,959.3 121,741.6 Depreciation & amortization (8,550.0) (9,476.2) (10,286.8) (11,103.2) Net intangibles 10,934.0 10,395.6 9,811.2 9,180.4 EBIT (116.0) 7.1 2,420.3 2,401.1 Total investments 4,604.0 5,909.3 7,168.8 8,751.0 Interest income 260.0 247.9 132.7 106.9 Other long-term assets 24,035.0 24,035.0 24,035.0 24,035.0 Interest expense (1,561.0) (1,684.1) (1,779.9) (1,871.9) Total assets 177,421.0 181,203.1 186,472.7 193,926.3 Income/(loss) from uncons. subs. 2,049.0 1,516.8 1,502.5 1,897.1 Others (385.0) 0.0 0.0 0.0 Accounts payable 19,104.0 21,401.7 21,328.7 21,903.3 Pretax profits 247.0 87.7 2,275.6 2,533.1 Short-term debt 11,263.0 11,263.0 11,263.0 11,263.0 Income tax (497.0) (12.7) (330.0) (367.3) Other current liabilities 13,725.0 11,389.7 11,711.7 12,055.8 Minorities (301.0) (250.0) (250.0) (250.0) Total current liabilities 44,092.0 44,054.4 44,303.4 45,222.1 Long-term debt 58,906.0 62,900.6 66,734.4 71,928.3 Net income pre-preferred dividends (551.0) (175.0) 1,695.6 1,915.8 Other long-term liabilities 18,897.0 18,897.0 18,897.0 18,897.0 Preferred dividends 0.0 0.0 0.0 0.0 Total long-term liabilities 77,803.0 81,797.6 85,631.4 90,825.3 Net income (pre-exceptionals) (551.0) (175.0) 1,695.6 1,915.8 Total liabilities 121,895.0 125,852.0 129,934.8 136,047.3 Post-tax exceptionals (24.0) 0.0 0.0 0.0 Net income (575.0) (175.0) 1,695.6 1,915.8 Preferred shares 0.0 0.0 0.0 0.0 Total common equity 55,365.0 55,190.0 56,376.9 57,718.0 EPS (basic, pre-except) (HK$) (0.14) (0.04) 0.43 0.49 Minority interest 161.0 161.0 161.0 161.0 EPS (basic, post-except) (HK$) (0.15) (0.04) 0.43 0.49 EPS (diluted, post-except) (HK$) (0.15) (0.04) 0.43 0.49 Total liabilities & equity 177,421.0 181,203.1 186,472.7 193,926.3 DPS (HK$) 0.00 0.00 0.13 0.15 Dividend payout ratio (%) (0.3) 0.0 30.0 30.0 BVPS (HK$) 14.07 14.03 14.33 14.67 Free cash flow yield (%) (18.9) (17.3) (10.3) (6.4) Growth & margins (%) 12/16 12/17E 12/18E 12/19E Ratios 12/16 12/17E 12/18E 12/19E Sales growth (9.4) 3.8 3.0 3.2 CROCI (%) 5.1 5.7 6.5 6.4 EBITDA growth (44.5) 12.4 34.0 6.3 ROE (%) (1.1) (0.3) 3.0 3.4 EBIT growth (101.8) 106.1 NM (0.8) ROA (%) (0.3) (0.1) 0.9 1.0 Net income growth (109.6) 69.6 NM 13.0 ROACE (%) (0.2) 2.9 4.1 4.2 EPS growth (109.6) 69.6 1,069.0 13.0 Inventory days 6.2 6.2 6.0 5.9 Gross margin 9.1 9.8 12.8 13.2 Receivables days 37.9 36.1 35.5 35.4 EBITDA margin 9.1 9.8 12.8 13.2 Payable days 91.2 85.2 90.2 88.8 EBIT margin (0.1) 0.0 2.4 2.3 Net debt/equity (%) 113.6 127.1 132.6 134.4 Interest cover - EBIT (X) NM 0.0 1.5 1.4 Cash flow statement (HK$ mn) 12/16 12/17E 12/18E 12/19E Valuation 12/16 12/17E 12/18E 12/19E Net income pre-preferred dividends (551.0) (175.0) 1,695.6 1,915.8 D&A add-back 8,550.0 9,476.2 10,286.8 11,103.2 P/E (analyst) (X) NM NM 26.5 23.5 Minorities interests add-back 301.0 250.0 250.0 250.0 P/B (X) 0.8 0.8 0.8 0.8 Net (inc)/dec working capital (3,997.0) 110.6 (34.9) 571.9 EV/EBITDA (X) 13.0 12.2 9.5 9.1 Other operating cash flow 1,829.0 (1,516.8) (1,502.5) (1,897.1) EV/GCI (X) 0.7 0.6 0.6 0.6 Cash flow from operations 6,108.0 8,145.0 10,695.0 11,943.8 Dividend yield (%) 0.0 0.0 1.1 1.3 Capital expenditures (14,886.0) (15,978.5) (15,335.1) (14,839.7) Acquisitions 0.0 0.0 0.0 0.0 Divestitures 2,148.0 585.0 585.0 585.0 Others 7.0 211.6 243.0 314.9 Cash flow from investments (12,731.0) (15,181.9) (14,507.1) (13,939.8) Dividends paid (common & pref) (1,447.0) 0.0 (508.7) (574.7) Inc/(dec) in debt 6,800.0 3,994.6 3,833.8 5,193.9 Common stock issuance (repurchase) 0.0 0.0 0.0 0.0 Other financing cash flows 1,145.4 (250.0) (250.0) (250.0) Cash flow from financing 6,498.4 3,744.6 3,075.1 4,369.2 Total cash flow (124.6) (3,292.3) (737.0) 2,373.2 Note: Last actual year may include reported and estimated data. Source: Company data, Goldman Sachs Research estimates. Analyst Contributors Kenya Moriuchi kenya.moriuchi@gs.com Jess Chen jess.chen@gs.com Vincent Lim vincent.lim@gs.com Ben Hartwright, CFA ben.hartwright@gs.com Goldman Sachs Global Investment Research 2

Exhibit 1: Cathay Pacific reported revenue of HK$92,751mn (-9.4% yoy) and net loss of HK$575mn (-109.6% yoy) in 2016 2H16 2H15 YoY 1H16 HoH 2016 2015 YoY Revenue (HK$ mn) 47,068 51,954-9.4% 45,683 3.0% 92,751 102,342-9.4% Passenger services 33,513 36,821-9.0% 33,413 0.3% 66,926 73,047-8.4% Cargo services 10,648 11,746-9.3% 9,415 13.1% 20,063 23,122-13.2% Catering, recoveries and other services 2,907 3,387-14.2% 2,855 1.8% 5,762 6,173-6.7% Operating profit (HK$ mn) -641 3,838-116.7% 664-196.5% -116 6,343-101.8% Net income (HK$ mn) -928 4,028-123.0% 353-362.9% -575 6,000-109.6% Operating profit margin (%) -1.4% 7.4% -875 bps 1.5% -2 bps -0.1% 6.2% -632 bps Net income margin (%) -2.0% 7.8% -972 bps 0.8% -4 bps -0.6% 5.9% -648 bps Passenger operating statistics ASK (mn km) 73,439 72,991 0.6% 72,647 1.1% 146,085 142,681 2.4% Mainland China 5,814 5,748 1.2% 5,731 1.5% 11,545 11,360 1.6% Northeast Asia 9,596 9,531 0.7% 9,661-0.7% 19,258 18,906 1.9% Southeast Asia 10,489 10,421 0.7% 10,661-1.6% 21,150 20,641 2.5% India, Middle East, Pakistan & Sri Lanka 4,492 5,169-13.1% 4,679-4.0% 9,172 10,127-9.4% Southwest Pacific & South Africa 9,791 9,758 0.3% 9,911-1.2% 19,702 19,350 1.8% North America 19,645 19,791-0.7% 19,656-0.1% 39,301 38,326 2.5% Europe 13,611 12,574 8.2% 12,347 10.2% 25,958 23,969 8.3% RPK (mn km) 62,110 62,495-0.6% 61,368 1.2% 123,478 122,330 0.9% Mainland China 4,429 4,579-3.3% 4,518-2.0% 8,948 8,997-0.5% Northeast Asia 7,855 7,740 1.5% 7,679 2.3% 15,535 15,406 0.8% Southeast Asia 8,740 8,685 0.6% 9,070-3.6% 17,810 17,180 3.7% India, Middle East, Pakistan & Sri Lanka 3,496 4,250-17.7% 3,774-7.4% 7,270 8,398-13.4% Southwest Pacific & South Africa 8,558 8,758-2.3% 8,744-2.1% 17,302 17,278 0.1% North America 17,173 17,308-0.8% 16,953 1.3% 34,126 33,863 0.8% Europe 11,858 11,174 6.1% 10,629 11.6% 22,487 21,208 6.0% Passenger load factor (%) 84.6% 85.6% -105 bps 84.5% 10 bps 84.5% 85.7% -121 bps Mainland China 76.2% 79.7% -349 bps 78.8% -267 bps 77.5% 79.2% -169 bps Northeast Asia 81.9% 81.2% 65 bps 79.5% 238 bps 80.7% 81.5% -82 bps Southeast Asia 83.3% 83.3% -2 bps 85.1% -175 bps 84.2% 83.2% 98 bps India, Middle East, Pakistan & Sri Lanka 77.8% 82.2% -440 bps 80.6% -283 bps 79.3% 82.9% -366 bps Southwest Pacific & South Africa 87.4% 89.7% -234 bps 88.2% -82 bps 87.8% 89.3% -147 bps North America 87.4% 87.5% -4 bps 86.2% 117 bps 86.8% 88.4% -152 bps Europe 87.1% 88.9% -175 bps 86.1% 103 bps 86.6% 88.5% -185 bps Passenger yields (HK$ cent / km) 54.0 58.9-8.4% 54.3-0.6% 54.2 59.7-9.2% Cargo operating statistics AFTK (mn km) 8,551 8,510 0.5% 8,021 6.6% 16,572 16,481 0.6% RFTK (mn km) 5,686 5,480 3.8% 4,990 13.9% 10,675 10,586 0.8% Cargo load factor (%) 66.5% 64.4% 210 bps 62.2% 428 bps 64.4% 64.2% 19 bps Cargo yield (HK$ / km) 1.59 1.87-15.1% 1.59 0.0% 1.59 1.90-16.3% Source: Company data. Exhibit 2: Cathay Pacific trades at 0.82x forward P/B Cathay Pacific - Forward Price-to-book (x) 3.0 P/B Avg -1 SD +1 SD 2.5 2.0 1.5 +1 SD, 1.5 1.0 Avg, 1.2-1 SD, 0.9 0.82 0.5 0.70x valuation floor Note: Avg and ± 1 SD calculations exclude outlying forward Price-to-book datapoints (>2x median) 0.0 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Source: Datastream, Goldman Sachs Global Investment Research. Goldman Sachs Global Investment Research 3

Exhibit 3: Cathay Pacific Corporate Transformation Programme Customer Centric - Improving customer experience Customer Insights Team - New centralised function from mid-2017 - Will provide actionable business insights Project Zenith - Dine-on-demand service for Business Class customers - First trials this year A350-900s - 11 currently in service - 10 more in 2017-11% points increase in seat comfort scores in 2016 Operational Excellence - Delivering to an exacting schedule Crew Management Programme - Improved crew satisfaction - Increased airline productivity Improved On-Time Performance - On-the-dot departures for Cathay Pacific and Cathay Dragon rose 12% points yoy in the first 2 months of 2017 AA Collaborative Decision Making - Stakeholder information sharing - Optimising aircraft movement & departure Productivity and Value Focused - Continuous productivity gains Enterprise Portfolio Management Office - Improving timeliness, value and efficiency of all projects Shared Services - Driving out wasteful and duplicative functions Category Management - Procurement category planning via Ariba system to drive efficiency and savings High Performance Culture - Getting the best from our people Employee Experience Review - End-to-end employee experience review Performance Management System - Effective tracking and feedback - New recognition and reward framework Revamping Internal Communications - New communication channels - People oriented communications Source: Company data. Goldman Sachs Global Investment Research 4

Disclosure Appendix Reg AC We, Kenya Moriuchi, Vincent Lim, Ben Hartwright, CFA and Jess Chen, hereby certify that all of the views expressed in this report accurately reflect our personal views about the subject company or companies and its or their securities. We also certify that no part of our compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. Unless otherwise stated, the individuals listed on the cover page of this report are analysts in Goldman Sachs' Global Investment Research division. Investment Profile The Goldman Sachs Investment Profile provides investment context for a security by comparing key attributes of that security to its peer group and market. The four key attributes depicted are: growth, returns, multiple and volatility. Growth, returns and multiple are indexed based on composites of several methodologies to determine the stocks percentile ranking within the region's coverage universe. The precise calculation of each metric may vary depending on the fiscal year, industry and region but the standard approach is as follows: Growth is a composite of next year's estimate over current year's estimate, e.g. EPS, EBITDA, Revenue. Return is a year one prospective aggregate of various return on capital measures, e.g. CROCI, ROACE, and ROE. Multiple is a composite of one-year forward valuation ratios, e.g. P/E, dividend yield, EV/FCF, EV/EBITDA, EV/DACF, Price/Book. Volatility is measured as trailing twelve-month volatility adjusted for dividends. Quantum Quantum is Goldman Sachs' proprietary database providing access to detailed financial statement histories, forecasts and ratios. It can be used for in-depth analysis of a single company, or to make comparisons between companies in different sectors and markets. GS SUSTAIN GS SUSTAIN is a global investment strategy aimed at long-term, long-only performance with a low turnover of ideas. The GS SUSTAIN focus list includes leaders our analysis shows to be well positioned to deliver long term outperformance through sustained competitive advantage and superior returns on capital relative to their global industry peers. Leaders are identified based on quantifiable analysis of three aspects of corporate performance: cash return on cash invested, industry positioning and management quality (the effectiveness of companies' management of the environmental, social and governance issues facing their industry). Disclosures Coverage group(s) of stocks by primary analyst(s) Kenya Moriuchi: Asia Pacific Airlines, Japan-Railroads, Japan-Transportation. Ben Hartwright, CFA: A-share Transportation, Asia Pacific Airlines. A-share Transportation: Daqin Railway, Guangshen Railway (A). Asia Pacific Airlines: Air China (H), AirAsia Bhd, Airports of Thailand PCL, Beijing Capital Intl Airport, BOC Aviation Ltd., Cathay Pacific, Cebu Air Inc., China Eastern Airlines (H), China Southern Airlines (H), Guangshen Railway (H), Malaysia Airports Holdings Bhd, Shanghai Intl Airport, Shenzhen Airport Co., Singapore Airlines. Japan-Railroads: Central Japan Railway, East Japan Railway, Kyushu Railway Company, West Japan Railway. Japan-Transportation: ANA Holdings, Japan Airlines Co., Japan Airport Terminal Co., Japan Post Holdings, Yamato Holdings. Company-specific regulatory disclosures The following disclosures relate to relationships between The Goldman Sachs Group, Inc. (with its affiliates, "Goldman Sachs") and companies covered by the Global Investment Research Division of Goldman Sachs and referred to in this research. Goldman Sachs expects to receive or intends to seek compensation for investment banking services in the next 3 months: Cathay Pacific (HK$11.44) Goldman Sachs had an investment banking services client relationship during the past 12 months with: Cathay Pacific (HK$11.44) Goldman Sachs had a non-investment banking securities-related services client relationship during the past 12 months with: Cathay Pacific (HK$11.44) Goldman Sachs had a non-securities services client relationship during the past 12 months with: Cathay Pacific (HK$11.44) Goldman Sachs makes a market in the securities or derivatives thereof: Cathay Pacific (HK$11.44) Distribution of ratings/investment banking relationships Goldman Sachs Investment Research global Equity coverage universe Rating Distribution Investment Banking Relationships Buy Hold Sell Buy Hold Sell Global 32% 54% 14% 64% 60% 51% As of January 1, 2017, Goldman Sachs Global Investment Research had investment ratings on 2,902 equity securities. 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Price target and rating history chart(s) Stock Price Currency : Hong Kong Dollar Goldman Sachs rating and stock price target history 25.00 23.00 29,000 21.00 13.6 10.3 27,000 19.00 12.5 11.2 9.8 25,000 17.00 12.3 15.00 23,000 13.00 21,000 11.00 19,000 9.00 7.00 17,000 5.00 15,000 Nov 16 Apr 6 S N S F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D 2014 2015 2016 Source: Goldman Sachs Investment Research for ratings and price targets; FactSet closing prices as of 12/31/2016. Rating Covered by Kenya Moriuchi, Price target as of Apr 6, 2016 Stock Price Index Price Price target at removal Not covered by current analyst Hang Seng Index The price targets show n should be considered in the context of all prior published Goldman Sachs research, which may or may not have included price targets, as well as developments relating to the company, its industry and financial markets. 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