We expect traffic growth to be boosted by business travel demand recovery
________________________________________________________________________________________________________________
Deutsche Bank AG/Hong Kong
Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, 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. DISCLOSURES AND ANALYST
CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MICA(P) 072/04/2012.
Vincent Ha, CFA
Research Analyst
(+852) 2203 6247
vincent.ha@db.com
Joe Liew, CFA
Research Analyst
(+65) 6423 8507
joe.liew@db.com
Nora Min
Research Associate
(+852) 2203 6130
nora.min@db.com
Top picks
China Eastern Airlines (0670.HK),HKD3.53 Buy
China Southern Airlines
(1055.HK),HKD4.59
Buy
Companies Featured
Air China (0753.HK),HKD6.66 Buy
2011A 2012E 2013E
P/E (x) 15.8 17.7 15.2
EV/EBITDA (x) 8.6 7.9 7.4
Price/book (x) 1.3 1.4 1.3
China Eastern Airlines (0670.HK),HKD3.53 Buy
2011A 2012E 2013E
P/E (x) 9.3 10.5 9.8
EV/EBITDA (x) 7.8 7.6 6.7
Price/book (x) 1.3 1.4 1.2
China Southern Airlines
(1055.HK),HKD4.59
Buy
2011A 2012E 2013E
P/E (x) 10.7 17.3 15.6
EV/EBITDA (x) 7.6 8.1 7.4
Price/book (x) 1.0 1.1 1.0
Target price revisions
Company New TP Old TP Upside
Air China HKD7.70 HKD6.70 15.6%
China Eastern HKD4.30 HKD3.60 21.8%
China Southern HKD5.40 HKD4.15 17.6%
Chinese airlines have registered 20-27% share price appreciation in the past
three months vs. HSCEI's 13% increase, probably driven by the improving
Chinese macro outlook. To be specific, we think that, besides the continuing
surge in outbound travel demand, the warming up of business activity in
China, as well as the completion of the government leadership change, could
reignite business travel demand, especially after 1Q13E. This, together with the
disciplined capacity growth, lower fuel cost risk and better RMB appreciation
outlook, means we retain our Buy on the three Chinese airlines with China
Eastern (CEA) and China Southern (CSA) as our top picks.
Traffic growth is still subdued…but easing fuel cost pressure provides relief
In 2012, China’s air passenger traffic (RPK) growth slowed further, to 10%
from 2011’s 12%, on the back of slowing Chinese macroeconomic growth.
While there appears to be a small spike in December 2012 RPK YoY growth, at
12%, it may be too early to call it a strong 2013E recovery. On the other hand,
as: 1) there has been no significant uptrend in the jet fuel price in the past few
months, 2) overall passenger utilization remains high at the 75-80% level, and
3) there should be FX gain reported in 4Q12E, we do not expect much
downside surprise in FY12E earnings.
For FY13E, we foresee 8-17% core EPS growth on better operating leverage
The three major Chinese airlines’ 2012 RPK went up by less than 8% YoY but
we expect them to register 2013E RPK YoY growth of 10-11%, backed by: 1)
an improvement in Chinese macroeconomic growth and completion of
government leadership transition, which should lead to a rebound in business
travel; 2) further economic development in Central and Western China, which
should drive new air passenger traffic opportunities with fewer air space
constraints than in the coastal area; and 3) a continuing surge in outbound
tourism traffic, which should drive up load factors and improve the profitability
of the international passenger business. As Deutsche Bank expects stronger
Chinese GDP growth in 2H13, we think the growth acceleration will be back
end-loaded.
Still-attractive P/BV valuation supports our overweight stance
We cut our FY12-13E net profit on a slightly lower demand growth
assumption, but raise our FY14E net profit forecast on a lower fuel price
assumption. We raise our P/BV-based target prices as we roll over our
benchmark from FY12E to FY13E. We reiterate our Buy ratings on the three
Chinese airlines, given that: 1) we remain positive on their long-term outlook
and 2) the stocks are still trading below their historical average forward P/BV of
1.1-1.8x, while we expect FY13-14E core ROEs to be above historical averages.
We prefer CEA and CSA over Air China considering the ongoing earnings
volatility of Air China’s 30%-owned Cathay Pacific (CX, 0293.HK, Sell) and the
cargo JV between Air China and CX. CEA and CSA are also our regional airline
top picks given compelling valuation, better sustainable growth prospects and
ongoing government support with means such as the most recent capital
injection. Key sector downside risks are worse-than-expected traffic growth
and a rebound in fuel price.