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Regional airlines and shipping: Operating losses and book value erosion
will be the recurring theme in the upcoming results season and transport
stocks could suffer a near term correction given their poor economics and
that valuations are some way above historical troughs. However, we see this
as a good opportunity for investors to start adding these early cyclicals
which tend to price in earnings recovery 12 months or more. Although
leading economic indicators still show little conviction of a V-shaped
recovery, they do suggest that things are bottoming out and we should have
smaller y/y contractions going forward. With the quality of the recovery still
in question and capital-raising risks on the rise, transport stocks could trade
range-bound near term. However, they should deliver substantial absolute
and relative outperformance in a cyclical upturn 12 months from now.
• Land transport (Singapore): The Singapore land transport sector went
through a rather uneventful 1H 2009 as sentiment was dented by the higherthan-
expected 4.6% reduction in fares which led us to cut our earnings
estimates for the two land transport operators by 2.3-6.6%. The tight credit
situation has put major M&A activities on hold, with no deals announced by
the two operators YTD, although both management teams continue to be on
the look-out for potential targets. We believe 2H 2009 would be more
eventful. Apart from M&As, the bid for the 33-station Downtown Line
(DTL) will be in focus again.
• Logistics & freight (India): We anticipate better times ahead for the
logistics industry in India given expectations of an economic recovery. The
easing of the global credit crisis, the impact of the fiscal stimulus measures
and the expected supportive government policies and reforms (post the
majority victory by the Congress-led alliance) are likely to lead to a
2HFY10E recovery in India. The revival of the domestic investment cycle
will likely be stronger such that GDP growth in FY10 could be c.6.2%,
(higher than J.P. Morgan economist’s earlier projection of 5.2%).
• Stock picks: We are more bullish on the airline sector than on shipping as
the former does not face structural overcapacity issues in a cyclical upturn
and upgrade Cathay, SIA, CAL, EVA to OW and KAL to N. We downgrade
CSA to Neutral while maintaining Air China (OW) as our top pick among
the Chinese carriers. We see more value in the Handysize segment in dry
bulk and upgrade Pacific Basin Shipping to OW while China COSCO
(upgrade to N) is already fairly valued. We remain cautious on the container
shipping sector and maintain our selective OW ratings on OOIL and CSCL.
In the land transport space, we continue to favor ComfortDelgro (OW) as
our preferred pick for the DTL bid as well as its overseas exposure where
bus operating concessions do not come with ridership risks and have cost
pass-through mechanism (in UK and Australia).
Table of Contents
Regional Airlines ......................................................................3
Upcoming reporting season likely to be ugly…...........................................................3
...which could drive a share price correction ...............................................................3
Why are we turning more positive now? .....................................................................5
Australian Transport Sector ..................................................13
Regional Shipping..................................................................15
Singapore land transport.......................................................24
Look out for a more eventful 2H 2009 ......................................................................24
Companies
Air China ..................................................................................................................28
Cathay Pacific ...........................................................................................................30
China Airlines ...........................................................................................................32
China Cosco Holdings, Ltd. ......................................................................................34
China Shipping Container Lines ................................................................................37
China Southern Airlines ............................................................................................40
EVA Airways ............................................................................................................42
Korean Air ................................................................................................................44
Neptune Orient Lines ................................................................................................47
Orient Overseas Int'l Ltd ...........................................................................................50
Pacific Basin Shipping ..............................................................................................53
Qantas Airways..........................................................................................................56
Singapore Airlines ....................................................................................................58
SMRT ........................................................................................................................60
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