參考說明案例team

UnitedContinentalHoldings(UAL/Sell)

Upsidelimitedduetorecentrally

InitiateSelland$63.8targetprice

WeinitiateourcoverageonUALwithSellandderivedour12-monthtargetpriceof$63.8,basedon9.0x2017P/Emultiple(10%premiumon3yearaverage)with-9%downsidefromthecurrentshareprice.Althoughtheindustrytrendisveryfavorabletothe

,webelievethatthe doesnotdeserveahighvaluationofmorethan10xP/EandmendSellonthe

UALlosingmarketshareintheindustry

Althoughthenumberofpassengers(marketsize)isgrowing,UALislosingmarketshareto9.9%in2015from10.5%in2012,whereas3otherUSairlines(Southwest,Delta,American)expandeditsmarketshare.Moreover,RevenuePassenger(RPM)ofUALreported-1%yoygrowthintherecentmonths,whileother3USairlinespostedsubstantialyoygrowthfrom2015.

Crudeoilexpectedtogoupgradually

Fuelcostisthemostimportantfactorinairlineindustry.Assupplyisexpectedtodecreasegraduallyinthelongrun,oilpriceislkelytogoup.Themarketconsensussupportsourviewthatcrudeoilpricewillslightlyriseinthenextfewyears.

Dollarexpectedtobeweakened

DollarIndexisclosetothehighestlevelin10yearsandweexpecttofallinthenear-term.CorrelationbetweenUAL’ssharepriceandDollarIndexwas68%,whichwashigherthanthecorrelationbetweenUAL’ssharepriceandcrudeoilprice,41%.Althoughitisnotlikelythatdollarvaluewillbechangedconsiderably,itisanticipatedthatdollarvaluewillmovetounfavorabledirectionfortheindustry.

Chart1.Globalcomparison:P/EandROE

Source:Bloomberg,CEIBSforecast

2016.11.28

Initiation

BrandonKim

kwooseop.m18@

RaghavKansal

kraghav

m18@

WillChoi

cjaehwan.m18@

Sell

TargetPrice

$63.8

(-9%)

Currentprice$70.09

Marketcap $22.59bn

Shares(float) 275mn

52-weekhigh/low $70.18/$37.41Avgdailytrading $279mnvalue(1-year)

One-yearperformance

1M 6M 12MUAL 29.8% 57.5% 23.4%

S&P 3.5% 5.9% 5.9%

CEIBSvsTheStreet

Noofestimates 18

Targetprice $7027mendation 428

UnitedContinentalHoldings|Upsidelimitedduetorecentrally

PAGE

2

UnitedContinentalHoldings

UnitedContinentalHoldings(UAL)providesairtransportationglobally.The transportspeopleandcargothroughitsmainlineandregionaloperations.Asof2015,itoperated1,236aircraft.ItisoneofthelargestUSairlines.ItsmaincompetitorsareAmericanAirlines,DeltaAirLines,andSouthwestAirlines.UAL’sbusinessconsistsoffewsegments.Itsellsfuelandofferscatering,groundhandling,andmaintenanceservicestothirdparties.The changeditsnametoUnitedContinentalHoldingsinOctober2010afterthemergerofUnitedAirlinesandContinentalAirlines.UALhasamodernfleet,whichisthemostfuel-efficientamongU.S.networkcarriers(whenadjustedforcabinsize).WithkeyglobalairrightsinNorthAmerica,Asia-Pacific,Europe,MiddleEast,AfricaandLatinAmerica,UALhastheworld’smostcomprehensiveglobalroutenetwork.UAL,throughUnitedanditsregionalcarriers,operatesaageofnearly5,000flightsadayto342airportsacrosssixcontinentsfromtheshubs.

Amongvariousbusinessitoperates,majorsegmentsarepassengerandregionaldivision.PassengerdivisionprovidesforgeneralpassengersandregionalprovidesregionaljetandturbopropservicebrandedasUnitedExpress.Todothis,thehascontractualrelationshipswithvariousregionalcarriers.Theseregionaloperationsareanextensionofthe

’smainlinenetwork.

Table1.UnitedContinentalHoldingsrevenuebreakdown

(USDm)

1Q15

2Q15

3Q15

4Q15

1Q16

2Q16

3Q16

Passenger

5,938

6,961

7,254

6,180

5,577

6,525

7,017

Regional

1,482

1,715

1,706

1,549

1,413

1,578

1,586

Cargo/Freight

242

229

235

231

194

208

224

OtherRevenue

946

1,009

1,111

1,076

1,011

1,085

1,086

TotalRevenue

8,608

9,914

10,306

9,036

8,195

9,396

9,913

Source:Bloomberg

Chart2.UnitedContinentalHoldings–Pricetrendandevents

Source:Bloomberg,CEIBS

Investmentidea

UnitedContinentalHoldingssharepriceroseYTD+22.3%in2016inwhichoutperformedthemarket(S&P500:+8.3%).Thisisslightlyhigherthanairlineindexperformance(NYSEARCAAirlineIndex:+22.03%).ThisshowsthatrecentrallyofUALwasmainlydrivenbyindustryfactors,not specificissues.Inthisreport,wewouldliketoyzethefactorscontributedtotherecentrallyandsome specificissuesthatcanaffectthefutureperformance.Webelievethatcurrentfavorablemarkettrendhasbeenalreadyfullypriced-in.Furthermore,ifthedirectionoffavorablemarkettrendchanges,itislikelythatinternalselectionamongcompaniesintheindustrywilloccur.WebelievethatUAL’scurrentpriceisnotveryattractivecomparetopeersconsideringitsvaluationandrecentperformancewithuncertaintyonoilprice&dollarvalue.

UALlosingmarketshareingrowingindustry

AccordingtoNationalBureauofEconomicResearch,numberofpassengersonUSbasedflightsrecorded895.5millionin2015,whichisthehighestfigureinUShistory.Numberofdomesticandinternationalpassengersgrew5%,2.3%respectively.Themainreasonsbehindall-timehighfiguresarestrongUSdollar,lowerfareswithlowoilprice,andbeccesstobudget-friendlymodations.

Chart3.NumberofpassengersonUSbasedflights,domesticandinternational

Source:NationalBureauofEconomicResearch

However,while3otherUSairlines(Southwest,Delta,American)expandeditsmarketsharewithincreasingpassengers,UALisonlyone losingitsmarketshare(Chart4).With60%marketshareofbig4USairlinesin2015,webelievethattherearenotmanyroomsforbig4USairlinesincludingUALtoexpandfurtherintermsofmarketshare.Therefore,webelievethattherewillbeasubstantialriskiftheindustrypeaksoutandUALlosesitsmarketsharecontinuouslyatthesametime.

Moreover,accordingtoBureauofTransportationStatistics,RevenuePassenger(RPM)ofUALshowsnegativeyear-on-yeargrowthinrecentmonths(Chart5).DeltaandSouthwestrecordedslightincrease,andAmericanisreportingsubstantialincreasefromJuly2015.

Chart4.Domesticmarketshare:UALlosingmarketshare Chart5.Big4airlinesRPMgrowthtrend

Source:BureauofTransportaionStaistics,CEIBS Source:BureauofTransportaionStaistics,CEIBS

Crudeoilpriceexpectedtogoupgradually

Themajorfactorcontributedairlinestoincreasecapacityintherecentyearsislowcrudeoilprice.Itisnotablethatglobalavailableseat(ASM)increasedaround6%yearonyearin2015(Chart6).Thisincreasehasbeensupportedbyamatchingincreaseinpassengerdemand,resultinginsimilarloadfactor.Airtravelhasbeengrowingsteadily,witha6.2%capacitygrowthin2015,fromtheprioryearanda39%expansioninavailableseatfromthe2009recession.Thegrowthindemandhasgivenairlinestheconfidencetoinvestinthelongrun,majorlyinthecustomerandoperationalimprovementprojects.Airlineshavebeenstrategicallycapitalizingonthepassengergrowthbyincreasingtheircapacityintherecentyears.

Fuelcostisthemostimportantfactorforairlines.In2013and2014,fuelrepresentedUAL’ssinglelargestoperatingcostat32-33%oftotaloperatingexpenses.However,fuelcostdeclinedsignificantlyto23%asthe postedhistoricallyhigh$7.34bnnetprofitin2015from

$1.1bnin2014.(Chart7)Asthefuelpricegetsdirectlyinfluencedbytheoilpriceintheglobalcommoditymarket,the’searningsandsharepricearevulnerabletotheoilprice.

Source:WorldBank,InternaionalAirTransportAssociaion,CEIBS

Source:

annualreport,CEIBS

Chart6.HistoricalASMgrowth:Turnaroundin2015 Chart7.UAL’soperatingcost-Fuelcost:2014(32%)vs2015(23%)

Forecastingtheoilprice–Gradualincrease

Webelievethattheoilpricewouldriseupslightlyfromthecurrentoilpricealthoughtherewouldbeuncertaintyexists.

Signsfromthesupplyside–Althoughinventorylevelareatthehighestlevelof490millionbarrelalongwithincreasingproduction,productionhasslightlyfellto8,500recently.Inaddition,USBakerHughgCountfellsignificantlyfromthepeaklevelof1,609inOctober2014.Webelievethereistoomuchsupplytoabsorbfromthedemandsidefortheoilpricetoincreaseandgobeyondrangeboundary(Chart8,Chart9).AfterthecrudeoilpricedroppedtothelowestlevelinJanuary,itgraduallyroseto$45level.

Chart8.Productionisdecreasing Chart9.Rigcountpulledbackto2010level

Source:EIA,CEIBS Source:EIA,CEIBS

AccordingtoBloomberg,consensusforcrudeoilis$49.72(per/barrel)asofend-2017,

$51.45in2018,$52.42in2019.Mostofthecommodityystsareforecastingslightincreaseinoilprice.

Table2.Oilpriceforecasts

(USD,%)

11/26/2016

End-2017

End-2018

End-2019

End-2020

OilPrice

46.06

49.72

51.45

52.42

53.48

Growth

7.9%

3.5%

1.9%

2.0%

Source:Bloomberg

Highcorrelationwithdollar–Dollarexpectedtobeweakened

AnotherimportantfactoristhevalueofUSdollar.DollarIndexisclosetothehighestlevelin10years.

Consensusshowsthatdollarwouldweakenedforthenextfewyears.ItipectedthatDollarIndexwillbe99.3atof2017,98.3in2018,and93.2in2019.Althoughitisnotlikelythatdollarvaluewillchangeconsiderably,itisanticipatedthatdollarvaluewillmovetounfavorabledirectionfortheindustry.

Table3.DXYindexforecasts

(USD,%)

11/26/2016

End-2017

End-2018

End-2019

End-2020

DXYIndex

101.50

99.30

98.30

93.20

92.70

Growth

(2.2%)

(1.0%)

(5.2%)

(0.5%)

Source:Bloomberg

WeyzedtheimpactcrudeoilpriceanddollarvalueonUALstockpriceusingcorrelation.Interestingly,dollarvaluehashighercorrelationthantheoilpricewith68%ofcorrelationinthesame10yearperiod.(Chart10,11)

1)+68%ofcorrelationbetweenUAL’ssharepriceanddollarindex

AccordingtoBloomberg,ystpectthatdollarvaluewillonlydecline2-3%untilendof2018sowebelievethatdollarwillnotimpacttheshareprice.

2)-41%ofcorrelationbetweenUAL’sshareandtheoilprice

UAL’ssharepriceanlpricehas-41%ofcorrelationin10yearperiodfromthedateofthelisting(Feb2006)untilnow(Nov2016).

Chart10.+60%ofcorrelationbetweenUALanddollarvalue

Chart11.-41%ofcorrelationbetweenUALan lprice

Source:Bloomberg,CEIBS Source:Bloomberg,CEIBS

Valuation

WeinitiateourcoverageonUALwithSellandderivedthe12-monthtargetpriceof$63.8,basedon9.0x2017P/Emultiple(USpeeraverage)with-9%downsidefromthecurrentshareprice.Weareapplying9.0xP/Emultipletoour2017EPSforecast,whichis10%premiumvalueof3yearaverageconsideringfavorablecurrentmarkettrendaslowoilpriceandhighDXYindexisanticipatedtolastintheshortrun.Althoughtheindustrytrendisveryfavorabletothe,webelievethatthe doesnotdeservehighvaluationofmorethan10xP/E.Mainreasonforthisisthatthe islosingmarketshareandRPMwithcompetitorsaggressivelyexpandingtheirbusiness.

WeexpectUSD37.7brevenue(+4.5%yoy)andUSD4.5b(+6.1%yoy)operatingein2017(Table5).AlthoughQ(numberofpassengers)willincreasefurtherwithmorepassengersontheflight,upsideforP(Yield)islimitedduetoremainingcompetitionwithLCC(LowCostCarrier).

Assumingfavorablevaluationmultipleandearningsforecasts,itisnotablethatcurrentstockpriceisstillslightlyovervaluedthanthereasonableprice.

Table4.UALtargetpricecalculation

(USD,x)

UAL

Note

EPS

TargetP/E

7.08

9.0

10%premiumof3yearaverage

TargetPrice

63.76

CurrentPrice

70.09

Upside

-9.03%

Source:Bloomberg,CEIBS

Table5.UALrevenuehistoryandforecasts

(USDm)

1Q15

2Q15

3Q15

4Q15

2015A

1Q16

2Q16

3Q16

4Q16

2016E

2017E

2018E

Revenue

8,608

9,914

10,306

9,036

37,864

8,195

9,396

9,913

8,563

36,067

37,705

39,424

Passenger

5,938

6,961

7,254

6,180

26,333

5,577

6,525

7,017

5,871

24,990

26,240

27,551

Regional

1,482

1,715

1,706

1,549

6,452

1,413

1,578

1,586

1,472

6,049

6,351

6,669

Cargo/Freight

242

229

235

231

937

194

208

224

220

846

931

1,024

OtherRevenue

946

1,009

1,111

1,076

4,142

1,011

1,085

1,086

1,000

4,182

4,184

4,180

Totaloperatingexpenses

7,867

8,469

8,407

7,955

32,698

7,546

8,336

8,289

7,658

31,829

33,209

34,242

Operating e

741

1,445

1,899

1,081

5,166

649

1,060

1,624

904

4,237

4,496

5,182

Net e

508

1,193

4,816

823

7,340

313

588

965

452

2,318

2,248

2,719

RevenueGrowth(%,YoY)

(1.0)

(40)

(2.4)

(3.0)

(2.7)

(4.8)

(5.2)

(3.8)

(5.2)

(4.7)

4.5

5.4

OPmargin

8.6

14.6

18.4

12.0

13.6

7.9

11.3

16.4

10.6

11.7

11.9

13.7

NetProfitMargin

5.9

12.0

46.7

9.1

19.4

3.8

6.3

9.7

5.3

6.4

6.0

6.8

EPS

1.5

3.3

4.5

2.5

11.9

1.2

2.6

3.1

1.0

7.3

7.1

8.6

Source:filings,CEIBS

Globalvaluation

ConsideringP/EmultipleandROEexpectedin2017,UALisnotveryattractiveamongglobalpeersaswell.UAL’sprice-to-earnings(x)andreturnonequity(%)valuationisslightlyoverestimatedcomparetoglobalpeers(Chart12).Withexpected2017EPSofUSD7.08pershareandcurrentstockpriceUSD70.09,UAL’s2017EP/Estandsat9.9xiswellabovemanyglobalyersincludingDeltaof7.7xandAmericanof9.0x.WebelieveUALhaslimitedupsidepotentialintermsofglobalcomparisonusingthemultiplesandprofitability.

Chart12.Globalcomparison:P/EandROE

Source:Bloomberg,CEIBS

9

UnitedContinentalHoldings|Upsidelimitedduetorecentrally

GlobalValuation

US

Europe

Japan

OtherAsia

Year

United

Continential

Southwest

Airline

Delta

Airline

American

Airline

Deutsche

Lufhansa

Air

France

ICAG

Cahay

Japan

Airline

ANA

Korean

Air

Asiana

Airline

Singapore

Airline

Air

Asia

Pacific

Eastern

Southern

Ticker

UALUS

LUVUS

DALUS

AALUS

LHAGR

AFFP

IAGLN

293HK

753HK

670HK

1055HK

9201JP

9202JP

003490KS

020560KS

SIASP

AIRAMK

Marketcap($mn)

22,598

26,230

31,050

21,031

5,703

1,753

10,418

5,314

12,662

12,056

9,313

10,534

9,340

2,022

806

8,703

1,870

Revenue($mn)

2015

37,864

19,820

40,704

40,990

35,034

28,483

24,981

13,191

15,474

13,932

16,554

12,936

16,483

10,173

5,106

11,186

1,506

2016E

36,067

20,452

39,449

39,897

34,442

27,165

24,927

12,063

17,022

15,084

17,198

12,859

17,231

10,427

5,175

10,944

1,579

2017E

37,705

21,158

40,108

40,908

34,846

26,955

24,744

12,675

18,600

16,713

19,039

12,590

17,196

10,995

5,393

10,659

1,650

OPmargin(%)

2015

13.6

20.8

19.2

15.1

5.1

4.3

10.3

6.3

149

13.4

11.8

13.4

5.3

7.6

1.7

3.3

30.9

2016E

11.7

19.5

17.7

14.4

5.3

4.0

11.5

3.1

14.3

13.3

10.8

15.7

7.6

9.0

4.4

5.2

27.8

2017E

11.9

18.1

15.5

11.1

4.7

3.5

11.5

3.2

12.1

10.7

8.8

14.9

8.2

8.6

4.2

5.3

23.9

ROE

2015

79.2

31.0

37.7

163.8

349

N/A

34.3

12.0

12.4

13.5

10.0

20.3

5.1

-25.1

-14.1

2.9

12.0

2016E

27.1

30.9

33.8

63.5

190

98.0

30.0

3.6

142

16.7

16.4

21.5

9.8

-15.0

8.1

6.4

26.1

2017E

22.2

24.9

24.9

460

17.5

51.1

24.4

4.4

12.7

13.5

14.1

20.2

100

13.6

3.1

5.5

17.2

P/E

2015

4.6

12.8

9.0

4.4

3.1

13.4

6.1

6.9

79

9.3

10.5

7.3

24.6

-4.1

-6.5

32.6

14.5

2016E

9.6

11.2

7.4

7.4

4.8

3.9

5.3

23.2

6.3

6.1

6.0

6.3

12.3

-7.0

13.4

14.9

6.6

2017E

9.9

11.0

7.7

90

52

3.4

5.4

20.1

6.5

6.8

6.2

5.8

11.8

7.7

30.9

16.8

7.3

P/B

2015

2.3

3.7

3.1

49

09

7.1

1.7

0.9

10

1.1

1.0

1.4

1.2

1.1

1.4

1.0

1.8

2016E

2.6

2.9

2.3

4.6

09

5.1

1.5

0.8

09

0.9

0.9

1.3

1.2

1.3

1.0

0.9

1.4

2017E

2.2

2.4

1.8

3.7

0.8

1.9

1.2

0.8

0.8

0.8

0.8

1.1

1.1

1.1

0.9

0.9

1.2

EV/EBITDA

2015

5.0

5.2

5.7

69

2.5

2.2

3.1

5.5

6.8

8.7

6.7

3.1

6.6

5.8

5.5

4.1

6.7

2016E

5.1

5.0

4.3

5.5

2.5

2.1

2.6

7.6

6.3

7.9

6.6

2.6

4.9

5.4

3.7

3.7

6.5

2017E

5.7

5.0

4.5

6.8

2.5

2.2

2.6

7.8

62

7.9

6.5

2.6

4.8

5.2

3.4

4.2

6.7

Note:AsofNov26,2016

Source:Bloomberg