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China airline sector CHINA
4 February 2009
Inside
Bracing for a further drop in altitude 2
Valuations – more art than science 6
Key risks 10
Industry restructuring options 11
Demand decline leading to yield
decline 13
Chinese airlines’ operating cost
structures 19
Fuel – an area of operational
improvement 23
High gearing a major drag 28
Restructures timeline 32
China Southern Airlines 33
China Eastern Airlines 41
Air China 5 0
Coverage universe
Co Code Price Rec TP Diff
CSA 1055 HK HK1.21 UP HK$0.82 -32.20%
CEA 670 HK HK$1.04 UP HK$0.62 -40.40%
Air Ch 753 HK HK$1.98 OP HK$2.49 +26.4%
Cathay 293 HK HK$8.50 UP HK$7.43 -12.50%
SIA SIA SP S$11.06 UP S$10.07 -9%
Note: Pricing as of 2 February 2009.
Source: Macquarie Research, February 2009
Analysts
Gary Pinge
852 3922 3557 gary.pinge@macquarie.com
Joy Shen
852 3922 3575 joy.shen@macquarie.com
Bracing for a further drop in altitude
We initiate coverage on the Chinese aviation sector with an Underweight view.
Combining high financial leverage with operating leverage increases the risk of
investing in the sector substantially. While the lower oil price may alleviate some
near-term pressure, the extent of the demand destruction, increasing capacity,
poor industry structure and a lack of transparency still remain the key risks.
CEA and CSA’s demand destruction to continue
We initiate coverage with an Underperform rating on China Southern Airlines
(CSA) and a target price of HK$0.82/sh. Our key concern is CSA’s exposure to
the Pearl River Delta region (an economy highly linked to exports), where we
expect further demand destruction, given the continued weakness in macro
conditions. While CSA may seem conservatively geared on headline numbers,
we note this is understated as it does not include the large number of operating
leases. In addition, we perceive recent management changes at CSA as a
further negative
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