CHINESEAVIATIONSECTORPREFERAIRLINESTOBCIAON2H12EEARNINGSRECOVERY0817

1、top picksbuybuybuybuyhold2831deutsche bankmarkets researchasiachinatransportationairindustrychinese aviationsectordate15 august 2012recommendationchangenora minvincent ha, cfaprefer airlines to bcia on 2h12eearnings recoveryweak 1h12e results well expected for airlines; buy for a strong 2h12esubdued

2、 passenger demand growth, a higher fuel cost and rmb depreciationaffected chinese airlines 1h12e earnings, but this was well-known to themarket. going into 2h12e, we expect the aforementioned factors to improve,especially with the strong demand push by leisure travellers in 3q12e, the peakseason. th

3、us we are still upbeat about the airlines share price performance,but we downgrade beijing capital intl airport (bcia) to hold on the back ofreduced earnings upside potential due to capacity bottlenecks.1h12e preview: 60% yoy earnings decline; 13% eps growth for bciawe expect the three chinese airli

4、nes that we cover to report 60-65% yoydeclines in net profit on a slower-than-expected 2-11% yoy revenue passengerkilometres (rpk) increase, a c.1% yoy rise in the unit fuel cost and 1% year-to-june rmb depreciation. we forecast a bigger decline than the others for airchina on weaker growth due to b

5、eijing airports capacity constraints and theresearch analyst research associate(+852) 2203 6247 (+852) 2203 joe liew, cfaresearch analyst(+852) 2203 china southern airlines(1055.hk),hkd3.85china eastern airlines (0670.hk),hkd2.66companies featuredair china (0753.hk),hkd5.452011a 2012e 2013eshare of

6、loss for 30%-owned cathay pacific. for bcia, we estimate 1h12price/book (x)1.31.21.0earnings growth of 13%, driven by a 4% yoy rise in aircraftmovements/passenger throughput and continued positive operating leverage.rigorous 2h12e earnings recovery likely, with negative factors turning positivechina

7、 southern airlines(1055.hk),hkd3.852011a 2012e 2013ein july, the airlines in general reported slightly better rpk growth than inprice/book (x)1.00.90.81h12, possibly due to a strong increase in tourism traffic. we expect this trendto continue through to the 3q12 peak season, probably with a further

8、boostfrom business travel amid macro loosening. on the cost front, we forecast thefuel price to remain soft in 2h12. on fx, our china economists do not expectrmb to depreciate further. these factors should lead to a more significant hohearnings improvement for the chinese airlines vs. bcia, whose gr

9、owth isconstrained by the airports tight capacity.china eastern airlines (0670.hk),hkd2.66 buy2011a 2012e 2013eprice/book (x) 1.3 1.0 0.9beijing cap intl airport(0694.hk),hkd5.312011a 2012e 2013etop buys: csa and cea; downgrading bcia after ytd outperformanceprice/book (x)1.01.21.1we cut our fy12-14

10、e net profit on slower demand growth expectations and alower fx gain estimate (for the airlines). we also remain positive on themajor changes to stocks under coveragechinese airlines long-term prospects considering their demand-supplybalance. with their p/bv valuations still well below the historica

11、l average, werecommend a buy on all three. china southern (csa) and china eastern (cea)are our top picks because the former benefits from the rapid expansion ofinternational traffic, backed by increasing outbound travel demand in china,while the latter benefits from the integrated hongqiao transport

12、ation hub andcontinual cost synergies following the merger. on the other hand, bcia hasnew rating old rating new tpair china buy buy hkd6.7csa buy buy hkd4.7cea buy buy hkd3.6bcia hold buy hkd5.4change in net profit forecast fy12eair china -12.1%csa -16.2%old tp upsidehkd6.8 22.9%hkd4.8 22.1%hkd3.7

13、35.3%hkd5.4 1.7%fy13e fy14e-6.7% -5.9%-10.4% -10.7%outperformed the hscei by 38% ytd, on expectations of an improvingrevenue mix and a possible increase in the landing tariff. although we have aceabcia-14.0%-0.6%-5.9% -6.4%-1.1% -1.0%positive outlook for airport growth, we expect limited upside pote

14、ntial to ourdcf-derived target prices. capacity constraint is another concern. therefore,we are downgrading bcia to hold. key sector upside risk: surge in air trafficexpected 1h12 results reporting datedemand, triggered by macro loosening. key sector downside risks: prolongedweakness in air traffic

15、growth on weak macro; resurgence in the fuel price.this report changes ratings, target prices and estimates for several companiesunder our coverage. for a detailed listing of these changes, refer to the table onbciaair chinachina southernchina easternaugustaugustaugustaugust2328the front page._deuts

16、che bank ag/hong kongall prices are those current at the end of the previous trading session unless otherwise indicated. prices are sourcedfrom local exchanges via reuters, bloomberg and other vendors. data is sourced from deutsche bank and subjectcompanies. deutsche bank does and seeks to do busine

17、ss 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 andanalyst c

18、ertifications are located in appendix 1. mica(p) 072/04/2012.jan-08jan-09jan-10jan-12jan-11jul-08jul-09jul-10jul-12jul-11jan-08jan-09jan-10jul-11jan-12jul-08jul-09jul-10jan-11jul-12jul-08jul-09jul-10jan-11jan-08jan-09jan-10jan-12jul-12jul-11jan-08jan-09jan-10jan-12jul-08jul-09jul-10jan-11jul-12jul-1

19、1jan-08jan-09jan-10jan-11jan-08jan-09jan-10jan-11jan-12jan-12jul-08jul-09jul-10jul-08jul-09jul-10jul-11jul-11100%in15 august 2012airchinese aviation sectorsnapshots of status quochinese airlines are seeing a pick-up in demandin1h12,domesticairpassenger traffic appeared tofigure 1: chinese airlines m

20、onthlydomestic rpk growth trendfigure 2: chinese airlines monthlyinternational rpk growth trendbe negatively affected by theweak macro backdrop and(rpk yoy%)70%60%50%air chinaceacsa(rpkyoy%)80%air chinaceacsarecorded 0.8% yoy decline to7.5% yoy growth. however,international traffic demand40%30%20%10

21、%0%-10%-20%-30%note: ceas above peers increase in 2010 is partially attributable to theabsorption of shanghai airlines.60%40%20%0%-20%-40%source: company datawas surprisingly resilient with6.8%-27.2% yoy growthdriven by increasingoutbound tourism demand.for 2h12e, we expectcontinually strong tourism

22、demand, combined with apick-upinbusinesstrafficsource: company datademandduetomacrowhile load factors slip, demand and supply are still balancedloosening, to drive up growthrate.figure 3: chinese airlines monthly rpkfigure 4: chinese airlines monthlywhile air passenger trafficgrowth minus ask growth

23、passenger load factor trendgrowthgenerallags30%20%10%0%-10%air chinaceacsa90%85%80%75%70%65%air chinaceacsacapacity (ask) growth ytd,the gap in demand-supplygrowth is limited and loadfactors are still holding up.this implies that the chineseairlines are still operating athealthy efficiency despite-2

24、0%source: deutsche bank, company datasource: deutsche bank, company datamacro weakness.prices are picking up again as we enter the peak seasonwhats more, air ticket priceshave been resilient ytd (on afigure 5: china domestic air ticket priceindexfigure 6: china international air ticketprice indexyoy

25、 basis) due to high loadfactors. therefore, in view of1401201008060index (jan 04 = 100)index yoy%40%30%20%10%0%-10%-20%-30%19017015013011090index (jan 04 = 100)index yoy%50%40%30%20%10%0%-10%-20%-30%easing fuel costs in 2h12eand a diminishing risk offurther rmb depreciation, weexpect profitability t

26、osignificantly improve hoh.source: ceicpage2source: ceicdeutsche bank ag/hong kongfeb-08feb-09feb-10feb-12aug-07nov-07feb-08may-08aug-08nov-08feb-09may-09aug-09nov-09feb-10may-10aug-10nov-10feb-11may-11aug-11nov-11feb-12may-12aug-12oct-07oct-08oct-09oct-10feb-11jun-07jun-08jun-09jun-10jun-11oct-11ju

27、n-1215 august 2012airchinese aviation sectorweak 1h12e well expectedreasons for declines in airlines 1h12e earnings: fuel and thermbin 1h12, average international jet fuel price increased by about 1% yoy, while domesticjet fuel price rose by about 14% yoy. although the increase seems to be small inp

28、ercentage terms, we believe that each usd1/bbl increase in jet fuel price would leadto 4-6ppt earnings decline for the chinese airlines. therefore, we estimate that theincrease in jet fuel price could attribute to approximately 30ppt of the airlines earningsdecline.from the non-operating cost perspe

29、ctive, in 1h12, the rmb depreciated by about 1%against the usd (vs. about 2% rmb appreciation in 1h11). as the chinese airlines arestill highly geared with usd-denominated debts, we expect them to report fx losses in1h12 vs. fx gains in 1h11. that would probably explain the reason for another 40ppt

30、ofyoy earnings decline.figure 7: chinese domestic jet fuel pricevs. singapore kerosene jet fuel pricefigure 8: rmb/usd exchange rate trendincrease in jet fuel price andrmb appreciation were thesingapore kerosene(rmb per tonne)12,00010,000chinese domestic jet fuel(rmb/usd)7.67.2two key reasons for th

31、edeclines in chinese airlines1h12e earnings8,0006,0004,0002,0000source: bloomberg finance lp, company data, deutsche bank6.86.4db 2012e forecast6.0source: bloomberg finance lp, deutsche banktogether with slightly lower operating efficiency due to a decline in plane utilization ingeneral, we expect t

32、he chinese airlines to report 60.2-64.6% yoy drop in 1h12 reportednet profit despite growth in revenue. we also expect air china to deliver the biggestdecline due to the 1h12 losses recorded by cathay pacific and increasing loss in airchina cargo, as disclosed in cathay pacifics 1h12 results.nonethe

33、less, what is worthwhile noticing is that since the chinese airlines had alreadyreported 73.7%-85.7% yoy reported net profit decline in 1q12. therefore, we havebeen expecting the decline in 2q12e earnings to narrow mainly due to easing fuelprices and a pick-up in demand in june.figure 9: major chine

34、se airlines recap of 1q12 reported net profit (in prc gaap)(rmbm)air chinachina southern airlineschina eastern airlines1q122393192671q111,6711,2361,013yoy%-85.7%-74.2%-73.7%source: company datadeutsche bank ag/hong kongpage3jan-08jan-09jan-10jan-11jan-12jul-08jul-09jul-10jul-111h08 2h08 1h09 2h09 1h

35、10 2h10 1h11 2h11 1h12trend30%15 august 2012airchinese aviation sectorfigure 10: chinese airlines half-year reported net profit trend and preview(rmbm)air chinachina southern airlineschina eastern airlines1h092,878259852h091,976305(816)1h104,6132,0711,7612h107,3923,7213,1971h114,0562,7622,2792h113,0

36、272,3482,2961h12e1,4341,0979072h12e3,4692,6722,551yoy% (1h12e vs. 1h11)-64.6%-60.3%-60.2%yoy% (2h12e vs. 2h11)14.6%13.8%11.1%source: company data, deutsche bank etimatesbcia earnings growth on meager traffic growth and positiveoperating leveragedue to the bottleneck in aircraft handling capability,

37、especially for domestic flights,bcia recorded only 4.1%/4.0% yoy increase in aircraft movements/passengerthroughput, respectively, in 1h12. on the positive end, traffic mix improved with moreinternational flights handled and international passenger throughput. together with theconcurrent benefits of

38、 potentially higher spending by the international passengers andpositive operating leverage, we expect bcias 1h12 earnings to increase 12.6% yoy.figure 11: bcia traffic volume growthfigure 12: bcia percentage of trafficfrom international flightswhile bcias traffic growthprospects have been capped40%

39、30%20%10%0%aircraft movements yoy%passenger throughput yoy%25%20%15%aircraft movementspassenger throughputby capacity constraints, wethink that its earnings growthwould be supported by abetter traffic mix and positiveoperating leverage due tohigh airport utilization-10%-20%source: company datasource

40、: company datafigure 13: beijing capital international airport half-year reported net profit trend and preview(rmbm)1h092h091h102h101h112h111h12e2h12eyoy% (1h12e vs. 1h11) yoy% (2h12e vs. 2h11)beijing capital intl airport10519119939651460057971612.6%19.4%source: company data, deutsche bankpage4deuts

41、che bank ag/hong kong2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 201115 august 2012airchinese aviation sectorbetter 2h12e in sighttourism to support growth in 3q12e peak seasonwe think that the weak air passenger traffic growth for the three major chinese airlinesin 1h12 is attributable to a w

42、eak macro environment that deters business travel. on theother hand, leisure tourism demand (both domestic and international) remains resilientwith strong growth in recent years. for instance, during chinas spring festival in 2012,the number of travelling tourists still increased 15.0% yoy, implying

43、 that tourismstrength will continue in 2012. we believe this phenomenon is due to a shift in chineseconsumption pattern of more regular leisure travel from time to time.given the summer season is a historically high season of leisure travel, we think that airpassenger traffic growth driven by touris

44、m would be more visible in 3q12e. accordingto the data from civil aviation administration of china (caac), a good prelude is thegradual pick-up in air passenger traffic in june-july and the resulting 10% yoy netprofit growth for the aviation industry.figure 14: china growth in domestic and internati

45、onal tourism volumewe think that strong growthdomestic tourist(000 person-time yoy%)60%50%resident departure - private purposein tourism demand issupporting air passengertraffic despite a weakmacroeconomic backdrop40%30%20%10%0%-10%source: ceicmore macro loosening should also revive business travela

46、s rounds of macro loosening policies including promotion of bank lending, interestrate cuts and encouragement in infrastructure project have started, the chinesecorporate segment will hopefully have more flexibility in doing business travels, thusproviding extra push into the air passenger traffic d

47、emand in 2h12e.deutsche bank ag/hong kongpage515 august 2012airchinese aviation sectorrecap of operating andfinancial forecastsearnings downgrade across the board on slower growth ytdfor the three chinese airlines and bcia, we slightly reduce our revenue forecasts forfy12-14 on lower traffic demand

48、estimates. we trimmed our fy12-14e net profit moreaggressively for the airlines because of much lower fx gain expectations, partiallyoffset by lower fuel price assumptions. for bcia, downward earnings revisions are lessapparent since we also lowered our depreciation expense estimate on later-than-ex

49、pected acquisition of sub-terminal 3d (t3d).figure 15: bcia major operating and financial assumptionsfy10fy11fy12efy13efy14eaircraft movements (000)yoy%passenger throughput (m)yoy%operating revenue forecast (rmbm)old operating revenue forecast (rmbm)change (%)net profit forecast (rmbm)old net profit

50、 forecast (rmbm)change (%)517.66.073.913.15,540n.a.n.a.595n.a.n.a.533.33.078.76.46,215n.a.n.a.1,114n.a.n.a.556.84.483.15.66,7206,785-1.01,2961,304-0.6581.44.489.47.67,4237,485-0.81,6141,632-1.1605.54.195.87.28,1158,161-0.62,0212,041-1.0source: company data, deutsche bankfigure 16: air china major op

51、erating and financial assumptionsfy10fy11fy12efy13efy14eask growth (%)rpk growth (%)passenger load factor (%)passenger yield growth (%)aftk growth (%)rftk growth (%)cargo load factor (%)cargo yield growth (%)intl fuel cost (us$/barrel)revenue forecast (rmbm)old revenue forecast (rmbm)change (%)repor

52、ted net profit forecast (rmbm)old reported net profit forecast (rmbm)change (%)33.940.080.012.320.537.261.720.991.082,488n.a.n.a.12,005n.a.n.a.14.816.881.56.34.20.159.3-3.2125.798,410n.a.n.a.7,082n.a.n.a.9.98.780.50.28.36.458.30.3122.5107,136108,938-1.74,9035,575-12.19.810.280.8-1.310.012.259.4-1.21

53、20.0116,833120,993-3.47,5828,125-6.79.69.981.11.09.810.859.91.0125.0129,751135,338-4.17,3567,816-5.9source: company data, deutsche bankpage6deutsche bank ag/hong kong15 august 2012airchinese aviation sectorfigure 17: china southern airlines major operating and financial assumptionsfy10fy11fy12efy13e

54、fy14eask growth (%)rpk growth (%)passenger load factor (%)passenger yield growth (%)aftk growth (%)rftk growth (%)cargo load factor (%)cargo yield growth (%)revenue forecast (rmbm)old revenue forecast (rmbm)change (%)reported net profit forecast (rmbm)old reported net profit forecast (rmbm)change (%

55、)13.819.779.215.448.878.748.14.676,495n.a.n.a.5,792n.a.n.a.7.59.981.07.310.811.848.6-5.290,395n.a.n.a.5,110n.a.n.a.11.010.280.40.410.510.448.50.599,642100,464-0.83,7704,501-16.210.310.580.6-1.110.212.549.5-1.0109,071111,657-2.35,4696,105-10.49.610.381.11.010.011.250.11.1121,548125,126-2.94,7765,349-

56、10.7source: company data, deutsche bankfigure 18: china eastern airlines major operating and financial assumptionsfy10fy11fy12efy13efy14eask growth (%)rpk growth (%)passenger load factor (%)passenger yield growth (%)aftk growth (%)rftk growth (%)cargo load factor (%)cargo yield growth (%)revenue for

57、ecast (rmbm)old revenue forecast (rmbm)change (%)reported net profit forecast (rmbm)old reported net profit forecast (rmbm)change (%)41.452.978.016.745.574.160.416.874,462n.a.n.a.4,958n.a.n.a.7.18.378.97.90.22.661.8-6.283,465n.a.n.a.4,576n.a.n.a.9.89.278.40.49.810.061.90.491,58892,579-1.13,4584,020-

58、14.09.510.579.2-1.110.012.563.3-1.0100,278102,934-2.65,2025,527-5.99.310.279.80.99.810.964.01.0111,596115,252-3.24,4074,708-6.4source: company data, deutsche bankfigure 19: deutsche banks fy11-12 net profit estimates vs. consensuswe are already more prudent(rmb m)db fy12e reported net profitconsensu

59、s fy12e reported net profitair china4,9035,266china eastern3,4584,576china southern3,7703,071bcia1,2961,275in our expectations for theairlines fy12e earnings ingeneral, but are more upbeatdifference-7%-24%23%2%onfy13eearningsgivenbetter recovery and lower fueldb fy13e reported net profit7,5825,2025,

60、4691,614price expectations. for csa,consensus fy13e reported net profit6,4234,4633,8921,592wearemoreupbeatondifference18%17%41%1%account of its profitability insource: bloomberg finance lp, deutsche bankdeutsche bank ag/hong kongthe international business.page7jan-05jan-06jan-07jan-08jan-09jan-10jan