Summary

As the leading provider of information technology solutions for China aviation industry, TravelSky provides centralized air ticket reservation services to all Chinese airlines except China Spring Airlines.

Benefit from China aviation industry boom, TravelSky's 1H2010 net profit grew 29.8% yoy to 472.7 million with EPS of 0.24 yuan. Recently, the Company is making an attempt to become a “one-stop” service provider. Our 12-monthes target price of 7.8HK$ is based on 12x P/E, 2011EPS, hold rating.

Company description

TravelSky is the leading provider of information technology solutions for aviation and travel industry in PRC. The core businesses of the Company include aviation information technology service, distribution information technology service, clearing and accounting and settlement service for aviation industry, etc, among which, aviation information technology service contributed more than 70% of its total income.

The H shares of the Company were listed on The Stock Exchange of Hong Kong on February 7, 2001. In July, 2008, China TravelSky Holding Company, with TravelSky Technology Limited as its core, completed business and asset restructuring and got listed in Hong Kong.

Monopoly position in China's aviation

TravelSky provides centralized air ticket reservation services to all Chinese airlines except China Spring Airlines through the only GDS (global distribution system) used at mainland airports. All third-party platforms in China aviation ticket reservation market need to be docked in TravelSky's information system and pay the charge.

Now the Company has 58000 ticket sales terminals in 6500 ticket sales agents in China, dominating most of the domestic tickets reservation market and airport departure control system.

2010H Net profit up 30% yoy

In the first half of 2010, benefited from the favorable conditions such as the gradual recovery of the global economy the positive growth of PRC's economy, the bouncing foreign trade market, the opening of Shanghai World Expo as well as the rollback of oil price, the aviation market in PRC has been booming vigorously. With such background, TravelSky reported revenue of 1.45billion for 1H2010, up 21.9% yoy.

Specifically, electronic travel distribution (ETD) system revenue increased by 21.4% yoy to RMB 1.03 billion. Accounting, settlement and clearing services revenue surged by 30.0% yoy to RMB159.8 million due to the increase in international business. Data network revenue and other revenue grew by 19.3% yoy to RMB263.9 million.

The total operating expenses increased by 14.5% yoy, slower than the increase of revenue due to the cost control. 1H2010's net profit surged by 29.8% to 472.7 million with EPS of 0.24 yuan, compared by 1H2009's 0.19yuan.

Enjoying a slice of the China aviation booming cake

According to CAAM, the number of air passenger carried in the first seven months of 2010 grew by 18.2% yoy, surpassing the historical level over the same period. From the demand, load factor and fare level, boom season features the industry significantly, even close to a record historical high. Benefit from the China aviation booming, TravelSky may enjoy a slice of the cake.

In the first half of 2010, the Company's electronic travel distribution (ETD) system has processed approximately 137.6 million flight bookings on domestic and overseas commercial airlines, representing an increase of approximately 19.3% over the same period in 2009. Among which, the processed flight bookings on commercial airlines in China increased by approximately 18.4%, while those on foreign and regional commercial airlines increased by approximately 45.5%.

What's more, the big-3 carriers CSA, CEA and AC not only hold a 39.54% stake in the Company, but also remain the Company's main three clients, contributing 16% , 13% and 12% of its total income respectively. The big-3 carriers` businesses are expected to exceed the Consensus, which will improve TravelSky's performance.

An attempt to strategic change

In recent years, the aviation ticket reservation agent becomes increasingly out of date. World's leading air ticket distribution like SABRE, A-MADEUS and Galileo, have changed their strategy to meet with more direct marketing. TravelSky expects greater challenges ahead with the gradual relaxation in GDS restriction of major aviation markets around the world, as well as the development of new industrial participants.

TravelSky launched in 2008 a one-stop business platform “linkosky”, and began making attempt to change into an “air + hotel + airport” VIP service provider. In the first half of 2010, the Group has distributed 534.9 thousand hotels` room-nights, representing an increase of 69.6% as compared with that in 2009.

Valuation

We expect the Company's EPS in 2010 and 2011 will be HK$ 0.58 and 0.65 yuan.

According to the current situation of industry and the Company's comprehensive, based on 2011 EPS and 12 x P/E, we give the 12-month target price of 7.8 HK$, 11.35% higher than the last close, a hold rating.

Risk

Traffic demand languished for the deterioration of macro-economy;

Terrorist attacks, SARS and other emergencies;

The market opening more rapidly than expectation.

Financial Forecast

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