中国航空业：准备起飞.docx

17 January 2019THIS CONTENT MAY NOT BE DISTRIBUTED TO THE PEOPLES REPUBLIC OF CHINA (THE “PRC”) (EXCLUDING SPECIAL ADMINISTRATIVE REGIONS OF HONG KONG AND MACAO)Chinese AirlinesEQUITIESAIRLINESChinaParash Jain*Head of Transport Research, Asia-PacificThe Hongkong and Shanghai Banking Corporation Limited parashjainhsbc .hk +852 2996 6717Deepak Maurya*AssociateThe Hongkong and Shanghai Banking Corporation Limited deepakmauryahsbc .hk +852 2822 4292Prasenjit BhuiyaAssociateBangalore* Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA regulations.Ready for take offWe turn positive on the sector entering 2019 as we see more positives (oil, FX, yield) than negatives (cargo, IFRS 16) We forecast profit to almost double y-o-y in 2019 as sector ROE increases to 8.4% from 4.5% in 2018 (low since 2009)Raise TPs to reflect higher earnings on mid-cycle valuation; upgrade CEA-H and Air China-H to Buy, maintain Buy on CXWe are turning positive. Recall, we were negative on the sector for much of 2018. Peak valuation, weak RMB vs. USD (-5.4%), a higher oil price (up 31%), and fears of a US-China trade war led to sector under-performance in 2018. As these risks subside and valuations (0.85x PB) remain at the bottom-end of the range (12-m forward PB range: 0.8x-1.5x), entering 2019, we turn more positive on the sector.as we see more upside. We forecast stable passenger growth (10%), yield (up 1%) and largely stable load-factors driven by capacity discipline at major airports. Importantly, falling fuel prices (down avg.10% y-o-y) and modest RMB decline (-1% in 2019 vs. -6% in 2018) would add c.RMB15bn to the sector's bottom line. This is significant given that the three majors' would have made only RMB8bn in 2018e (ROE of 4.5%, lowest since 2009). Similarly, we forecast CX to realise a lower fuel hedging loss of HKD181 m in 2019e vs. a loss of HKD1.6bn in2018e.than downside. However, slowing air cargo growth, the adoption of IFRS 16 (capitalisation of operating lease), and pressure on international yields (perhaps in 2020), would put downside pressure on the recovery. Our analysis suggests a 5-22% decline in Chinese airlines, 2019e profit (CSA most vulnerable). Although, we argue that given lower cargo exposure, a smaller percentage of aircraft on operating leases, and the managed release of slots mean that these factors would be unable to derail the recovery.Profit to double in 2019e. Reflecting HSBC's new oil and FX forecasts we raise 2018- 20e profits substantially. We forecast profit for Chinese airlines (sector ROE to rise to 8.4% in 2019e from 4.5% in 2018e) to almost double y-o-y in 2019e but remain 12-36% below consensus and expect consensus profit downgrades in the upcoming results.Rating changes. The China airline sector is trading at 0.85x 12-month forward PB (almost -1 sd) vs. average of 1x PB since 2011. Driven by ROE rebound, we now value the Chinese airlines at an average PB (vs. -1sd earlier), we upgrade Air China (H) and CEA (H) to Buy from Reduce and maintain Buy on CX (on trough valuation). We raise CSA (H), CEA (A), and Air China (A) to Hold from Reduce; maintain Reduce on CSA (A). Stable monthly passenger growth data should act as a catalyst to the share prices.Exhibit 1. Chinese and Hong Kong airlines: Ratings and valuation summaryMkt cap 6M ADTV 14-Jan_Target price Upside/ Rating 2019e reported_2019e multiplesShare price _Company Ticker Curr (USDm) (USDm) priceNew Old % Chg. (downside)NewOld profit vs. consPE(x) PB(x)ROE(%)2018 YTDNotes: Prices as of 14 January 2019. ADTV is average daily traded value. Source: Bloomberg, HSBC estimatesAir China-H753 HKHKD4,24314.5 7.038.705.6055%23.8%Buy Reduce-16%9.5x0.9x9.4%-28% 3.1%Air China-A601111 CHRMB 11,98760.1 7.957.805.0056%-1.9%Hold Reduce-16%12.5x1.1x9.4%-38% 4.1%Cathay Pacific 293 HKHKD5,8413.511.4614.0014.000%22.2%Buy Buy1%11.5x0.7x5.8%-8% 2.9%CEA-H670 HKHKD2,7637.2 4.555.403.7046%18.7%Buy Reduce-12%9.2x0.9x10.3%-23% 4.4%CEA-A600115 CHRMB7,38433.4 5.014.803.3045%-4.2%Hold Reduce-12%11.7x1.2x10.3%-42% 5.5%CSA-H1055 HKHKD2,51115.3 5.255.703.6058%8.6%Hold Reduce-36%12.7x0.8x6.5%-40% 8.2%CSA-A600029 CHRMB9,36872.3 7.175.103.2059%-28.9%Reduce Reduce-36%20.2x1.3x6.5%-44% 8.0%Exhibit 15. Big-3 Chinese airlines: 2019e capacity outlook (ASK % y-o-y)Air China_ 2018eCEACSA2019eBig-32019e2018e2019e2018e2018e2019eDomestic8.3%9.0%8.9%8.5%11.2%10.4%9.6%9.4%International14.0%10.0%6.8%8.0%13.9%20.0%11.7%12.7%Regional9.9%10.0%7.3%3.5%14.0%14.0%9.9%8.8%Total ASK10.5%9.4%8.1%8.2%12.0%13.3%10.3%10.5%Source: Company data and guidance, HSBC estimatesWith passenger traffic growth softening in 2H18 and rising concerns over China and global economic growth, we expect load factors to come under pressure in 2019-20e. In 2019e, we expect domestic capacity growth of 9.4% (similar vs. 2018e) but compared with slightly slower passenger traffic growth (RPK) of 9.1% (also slower vs. 2018e at 9.8%) will lead to a 0.3ppt decline in load factors.Exhibit 16. Big-3 Chinese airlines: We expect ASK growth to remain elevated in 2019e in the run up to new airport openingsExhibit 17. Big-3 A decade high load factor likely to remain stable2017201720182019eNote: Includes CEA, CSA, and Air China. Source: Company data, HSBC estimatesDomestic ASK (% y-o-y)Domestic RPK (% y-o-y)Note: Includes CEA, CSA, and Air China. Source: Company data, HSBC estimatesBeijing Daxing Airport opening - Changing competitive landscapeCAAC announced Beijing's new airport operational planThe new Beijing Daxing airport will become operational before 30 September 2019. The new airport aims to handle 45m pax volumes by 2021 e and 72m by 2025e, while Beijing Capital International Airport, (BCIA, 694 HK, Not Rated) is expected to handle 82m pax by 2025e starting from 2020e.Contrary to market expectations, CAAC has frozen the number of slots available in Beijing until 2021 despite the opening of the new airportAccording to the plan announced by the Civil Aviation Administration of China (CAAC) on 3 January 2019, of the big-3airlines, CEA and CSA will move to the new Airport while Air China will remain at BCIA. In Exhibit 18, we layout the slot arrangements for the other airlines. For international airlines, they can choose to operate in both airports or choose one of the airport to operate in. In order to encourage airlines to move to the new airport, the plan also provides rewards such as discounts on take-off fees, landing costs, etc. to those airlines that move quickly. However, we note that moving to the new airport could actually increase the operating costs for airlines as they would need to re-establish their network arrangements.Exhibit 18. Beijing: CAAC's plan for airline operations at the old and upcoming newairportsRemain at BCIARemain at BCIAMove to new Daxing Airport Choose either BCIA or Daxing Operate at both or eitherAirlines Air China Hainan Airline and its associate Grand China AirAirlines Air China Hainan Airline and its associate Grand China Air CEA CSA Beijing Capital Airline Spring Airlines* Juneyao Airlines* China Post Airline All other domestic airlines All international airlinesNote: *Airlines which voluntary chose the airport Source: CAACCapacity controlled as additional slots to be released only after 2020: Based on CAAC's plan, all existing slots in BCIA for both CSA and CEA will move to the new airport first, then both airports will start to optimise their current slots. New slots will only be released to both airports after 2020. This is in contrast to our expectation that CSA and other airlines would be able to gain additional slots by moving to the new airport. It now appears that any increase in the number of available slots will only materialise after 2020. Note that BCIA accounted for 13% of China's ASKs for the week commencing 14 January 2019 as per data from CAPA.Exhibit 19. Implications of CAAC's slot arrangements for the new airport in BeijingOperatorAir ChinaOperatorAir ChinaSentiment RemarksCEACSACathay Pacific Over the very near term (until 2020), Air China will take over the slots of CEA and CSA in BCIA However, over the longer term, BCIA's capacity will be limited while the Daxing airport could expand capacity from 45m pax to 72m pax in 2025. The Beijing-Shanghai route is one of the most profitable domestic routes and CEA accounted for c.60% market share in this route As the new airport is further away from the city centre (46 kms), business passengers may find it convenient and opt to fly from BCIA (30 kms from the city centre) In the near term, CSA will only be able to get the same slots at the new airport as it has in BCIA Similar to CEA, CSA will find its Beijing-Guangzhou route impacted due to the distance of the new airport. However, on the positive side, it will be able to gain market share in the Beijing-Shanghai route and as more slots are released in the future, it may be able to gain market share on other domestic destinations from Beijing. Air China and Cathay Pacific have invested in each other and so they have cross holdings and also operational code shares. With Air China moving to the new airport, it will be imperative for Cathay Pacific to also move to the new airport to ease transit times for connecting flights. If Cathay Pacific choses to remain at BCIA it might incur additional operational costs due to duplication of assets and servicesSource: HSBC estimatesAfter the 2020 summer/autumn season, the new airport can start to add slots gradually. Once the new airport can handle pax volumes of 45m or after the 2021 winter/spring season, BCIA can also start to add more slots. In effect, CAAC's slot arrangements imply that the opening of the new airport will have no bearing on the overall slots available in Beijing, at least over the near term.Exhibit 20. BCIA: Market share by seat capacity in the week commencing 7Jan 2019 Air China, 42% Air China, 42% CEA, 14%Note: Market share includes the volumes of subsidiary airlines. Source: CAPATravelSky Price Index points to weaker domestic pricingThe TravelSky Price Index points to a steep decline in domestic ticket prices in 4Q18-2Q19The TravelSky Price Index for China predicts future domestic ticket prices with a correlation of 0.93 from 2016 to-date. The price index trended down in 2018 from growth of 2.0% y-o-y in 1Q18 to a decline of 1.3% y-o-y in 4Q18, which is the seasonally weak period for Chinese airlines. The price index forecasts a steeper 4.7% y-o-y and 3.2% y-o-y decline in 1Q19e and 2Q19e, respectively. However, we caution that the long-dated forecasts (2Q19e in this case) tend to change with time.As per the TravelSky Volume Index, domestic passenger volumes slowed down from a growth rate of 12.6% y-o-y in 1Q18 to a growth rate of 8.0% y-o-y in 4Q18. The volume index forecasts 11.0% growth in 1H19, while this is higher sequentially it is a bit slower when compared with the 13% growth achieved in 1H18.Exhibit 21. As per TravelSky domestic fares were down marginally in 4Q18 and itexpects further decline in 2019Exhibit 22. TravelSky domestic passenger volume forecasts imply slower traffic growth in 4Q18 with a recovery starting from 1Q19-4.7%-4.7%-6%-5.0%ZZZZOO88866T T TT T T T Taaaaaaaaaa t-ZCO 寸 t- OJCO b t- CM8y01608 Actual y-o-y changeForecast y-o-y changeNote: The 3Q19TD index was starting from the beginning of the quarter to 28 July 2019, y-o-y growth of 3Q19TD was compared to 3Q18.Source: TravelSky01666Note: The 3Q19TD index was starting from the beginning of the quarter to 28 July 2019, y-o-y growth of 3Q19TD was compared to 3Q18.Source: TravelSkyCargo growth to soften after a strong two-year runSlowdown in Cargo demand growth to coincide with continued capacity additionsExhibit 23. Air cargo (RFTK) growth continued to slow after peaking in mid 2017 (% y-o-y)30% -iExhibit 24. Freight load factor hasremained range bound since 201470%1MJ8vn8J:d<8VUCZL'm9 二 so9vn9VUC9 二 009vn£4gvucss寸T_nb7d<wcc1 8v_n- 8k8* 5S Z工n ZEdv'ZLce 978 9v_n 91- 9VUC ss'97d4 9 Tug ss，寸Ed4Total marketEuropeSource: IATA, HSBCAsia PacificNorth AmericaTotal marketEuropeSource: IATA, HSBCAsia PacificNorth AmericaAir freight accounted for only 3-8% of 1H18 revenues for the big-3 Chinese airlines but it is more significant for Cathay Pacific where it accounted for 24% of revenues. After a solid rebound since early 2016, air freight growth peaked around mid-2017 and continued to slow in 2018. At the same time, while cargo accounted for only 8% of Air China's 1H18 revenues, its exposure is higher given its 30% ownership in Cathay Pacific, which is more exposed to cargo volumes.While the rebound in 2016-1H17 was led by inventory restocking, we attribute the recent weakness in momentum to the headwinds from the slowing global economy. Recent PMI data have been lacklustre and point to a cautious outlook for demand in 2019 (see Shipping Freight Weekly: Tread wih caution, 7 January 2019). Global manufacturing PMI declined in December to 51.5, a 27-month low while the global new export orders PMI has contracted for a fourth consecutive month. HSBC economists argue that the weaker print of PMIs is not just because of the escalation in trade tensions but points to a cyclical and global slowdown and could remain challenging over the near term (see Synchronizing down - What the latest PMIs mean for Asia、 3 January 2019).IATA expects industry-wide RFTKs to grow 3.7% in 2019e supported in part by e-commerce growth. This compares with 3.9% growth in the first 11 months of 2018 (IATA estimate of 4.1% in 2018e) and follows from 9% in 2017 and 3.8% in 2016. The weaker freight growth and lower fuel prices mean cargo yields may be hard to defend. Consequently, we lower our cargo volume and yield growth assumptions for Cathay Pacific in 2019e, albeit these are more than offset by the lower fuel price assumptions.Exhibit 25. Cargo is more important for Cathay Pacific while Chinese airlines have% Share of cargo in revenues (1H18)Source: Company dataExhibit 26. New export orders of key Asian exporters are contracting except for Vietnam, India, and Thailand56 54 -roqoo =_爰)sn UBMrolS8N ss UBde ux一(SBUNO qseuopu- qsAecuw eaioy 篦一dd=£ pue=£l qpu_WBUO>roqoo =_爰)sn UBMrolS8N ss UBde ux一(SBUNO qseuopu- qs