Domestic re-acceleration going into LNY
Domestic Chinese air traffic growth has staged a
healthy rebound from a low of 6% yoy in May to
10% in November 2012, despite significant
headwinds from a number of HSR line starts. With
no new HSR line starts between now and the Lunar
New Year (LNY), we expect to see a pick up in the
pace of growth to 12% yoy for 1Q13. In our view,
HSR traffic diversion risk has peaked in 2012,
reducing net air traffic growth by 3.7%. Looking
ahead, we expect a sequentially smaller impact from
HSR, taking away 2.9% of 2013 air traffic growth.
Ample room for international traffic expansion
International traffic remained strong, growing 14%
yoy in the first eleven months of 2012, despite
significant slowdown in China/Japan travel. We
note that the decline appears to have bottomed
out. In addition, we have been positively surprised
by the ability of Chinese airlines to find demand on
other routes, which affirms our view on significant
pent-up demand for international travel, which
could underpin 14%-15% CAGR traffic growth over
the next five years.
Demand growth remains intact
In our view, structural demand growth remains
intact, supported by low travel intensities relative
to developed and many developing markets. We
expect domestic traffic to resume its growth trend
by 2014, as the HSR impact continues to ease.
Meanwhile, international traffic growth,
particularly long-haul routes, should continue to
fuel growth in the interim. From an infrastructure
perspective, we believe carriers will increasingly
rely on secondary hubs to access domestic and
international markets. Supporting this view, all of
the new destinations (to Urumqi, Hohot and
Yinchuan) for the LNY in 2013 between China and
Taiwan (the cross-straits route) are in Northwest
and Northern regions, according to China Daily.
Maintain CL-Buy on CEA (H), CSA (A)
Buy-rated (on CL) CEA (H) is trading at 0.74X 2013E
EV/GCI vs. mid-cycle level of 0.86X. Our 12-m TP of
HK$4.40 is based on a target EV/GCI of 0.79X. Buyrated
(on CL) CSA (A) is trading at 0.71X EV/GCI vs.
mid-cycle level of 1.02X. Our 12-m TP of Rmb5.80 is
derived from a target EV/GCI multiple of 0.81X.