CHINESEAIRLINESBACKENDLOADEDERECOVERYINSIGHTTOPPICKSCEAANDCSA0128

1、nora mintop picksbuybuybuydeutsche bankmarkets researchasiachinatransportationairindustrychinese airlinesdate25 january 2013forecast changevincent ha, cfajoe liew, cfaback end-loaded 2013e recovery insight; top picks cea and csawe expect traffic growth to be boosted by business travel demand recover

2、ychinese airlines have registered 20-27% share price appreciation in the pastthree months vs. hsceis 13% increase, probably driven by the improvingchinese macro outlook. to be specific, we think that, besides the continuingsurge in outbound travel demand, the warming up of business activity inchina,

3、 as well as the completion of the government leadership change, couldreignite business travel demand, especially after 1q13e. this, together with thedisciplined capacity growth, lower fuel cost risk and better rmb appreciationoutlook, means we retain our buy on the three chinese airlines with chinae

4、astern (cea) and china southern (csa) as our top picks.traffic growth is still subduedbut easing fuel cost pressure provides reliefin 2012, chinas air passenger traffic (rpk) growth slowed further, to 10%from 2011s 12%, on the back of slowing chinese macroeconomic growth.while there appears to be a

5、small spike in december 2012 rpk yoy growth, at12%, it may be too early to call it a strong 2013e recovery. on the other hand,as: 1) there has been no significant uptrend in the jet fuel price in the past fewmonths, 2) overall passenger utilization remains high at the 75-80% level, and3) there shoul

6、d be fx gain reported in 4q12e, we do not expect muchdownside surprise in fy12e earnings.research analyst research analyst(+852) 2203 6247 (+65) 6423 research associate(+852) 2203 china eastern airlines (0670.hk),hkd3.53china southern airlines(1055.hk),hkd4.59companies featuredair china (0753.hk),hk

7、d6.66 buy2011a 2012e 2013ep/e (x) 15.8 17.7 15.2ev/ebitda (x) 8.6 7.9 7.4price/book (x) 1.3 1.4 1.3china eastern airlines (0670.hk),hkd3.53 buy2011a 2012e 2013efor fy13e, we foresee 8-17% core eps growth on better operating leveragethe three major chinese airlines 2012 rpk went up by less than 8% yo

8、y butwe expect them to register 2013e rpk yoy growth of 10-11%, backed by: 1)p/e (x)ev/ebitda (x)price/book (x)an improvement in chinese macroeconomic growth and completion ofgovernment leadership transition, which should lead to a rebound in businesstravel; 2) further ec

9、onomic development in central and western china, whichchina southern airlines(1055.hk),hkd4.592011a 2012e 2013eshould drive new air passenger traffic opportunities with fewer air spaceconstraints than in the coastal area; and 3) a continuing surge in outboundtourism traffic, which should drive up lo

10、ad factors and improve the profitabilityp/e (x)ev/ebitda (x)price/book (x)of the international passenger business. as deutsche bank expects strongerchinese gdp growth in 2h13, we think the growth acceleration will be backtarget price revisionsend-loaded.companynew tpold

11、 tpupsidestill-attractive p/bv valuation supports our overweight stancewe cut our fy12-13e net profit on a slightly lower demand growthassumption, but raise our fy14e net profit forecast on a lower fuel priceair chinachina easternchina southernhkd7.70 hkd6.70hkd4.30 hkd3.60hkd5.40 hkd4.1515.6%21.8%1

12、7.6%assumption. we raise our p/bv-based target prices as we roll over ourbenchmark from fy12e to fy13e. we reiterate our buy ratings on the threechinese airlines, given that: 1) we remain positive on their long-term outlookand 2) the stocks are still trading below their historical average forward p/

13、bv of1.1-1.8x, while we expect fy13-14e core roes to be above historical averages.we prefer cea and csa over air china considering the ongoing earningsvolatility of air chinas 30%-owned cathay pacific (cx, 0293.hk, sell) and thecargo jv between air china and cx. cea and csa are also our regional air

14、linetop picks given compelling valuation, better sustainable growth prospects andongoing government support with means such as the most recent capitalinjection. key sector downside risks are worse-than-expected traffic growthand a rebound in fuel price.the report changes target prices andestimates f

15、or several companiesunder our coverage. for detailedlisting of the estimate changes, seefigures 13-15 on pages 6-7._deutsche bank ag/hong kongdeutsche bank does and seeks to do business with companies covered in its research reports. thus, investors shouldbe aware that the firm may have a conflict o

16、f interest that could affect the objectivity of this report. investors shouldconsider this report as only a single factor in making their investment decision. disclosures and analystcertifications are located in appendix 1. mica(p) 072/04/2012.jan-08jan-09jan-10jan-12jul-08jul-09jul-10jan-11jul-12ju

17、l-11jan-11jan-08jan-09jan-10jul-11jan-12jul-08jul-09jul-10jul-12jan-11jan-08jan-09jan-10jul-11jan-12jul-08jul-09jul-10jul-12jan-11jan-08jan-09jan-10jul-11jan-12jul-08jul-09jul-10jul-12jan-08apr-08jul-08oct-08jan-09apr-09jul-09oct-09jan-10apr-10jul-10oct-10jan-11apr-11jul-11oct-11jan-12apr-12jul-12oc

18、t-12jan-08apr-08jul-08oct-08jan-09apr-09jul-09oct-09jan-10apr-10jul-10oct-10jan-11apr-11jul-11oct-11jan-12apr-12jul-12oct-1225 january 2013airchinese airlinesa lukewarm 20122012 traffic growth slows on macroeconomic slowdownfigure 1: chinese airlines monthlydomestic rpk growth trendfigure 2: chinese

19、 airlines monthlyinternational rpk growth trend2012 chinese air passengertraffic growth is characterized(rpk yoy%)70%60%50%40%30%20%10%0%air chinaceacsa(rpk yoy%)100%80%60%40%20%0%air chinaceacsaby: 1) a growth slowdown indomestic routes with weakbusiness travel demand andan air space bottleneck in

20、thecoastal regions, and 2)resilience in international-10%-20%-30%source: company data-20%-40%source: company datatraffic demand on the back ofrising outbound tourisminterestnote: ceas above peers increase in 2010 is partially attributable to theabsorption of shanghai airlines.disciplined capacity ma

21、nagement helps to sustain high utilizationfigure 3: chinese airlines monthly rpkfigure 4: chinese airlines monthlynotwithstandingongoinggrowth minus ask growthpassenger load factor trenddelivery of new aircraft, the25%air chinaceacsa90%air chinaceacsachinese airlines managed to20%15%10%5%0%-5%-10%-1

22、5%-20%source: company data, deutsche bank85%80%75%70%65%source: company datacontain capacity growth by:1) optimizing flight hours and2) retiring old aircraft.therefore, overall load factorsremained at a satisfactorylevel in 2012.stable high load factor also implies ticket price resiliencefigure 5: c

23、hina domestic air ticket pricefigure 6: china international air ticketwithslowereconomicindexprice indexgrowth and weak corporateindex(jan04=100)index yoy%index(jan04=100)index yoy%traveldemand,chinese1401301201101009080706040%30%20%10%0%-10%-20%-30%19018017016015014013012011010050%40%30%20%10%0%-10

24、%-20%-30%airlines have not recordedvery strong yieldimprovement in the past twoyears. nevertheless, the highutilization of these airlines hasprevented ticket prices fromfalling much.source: ceicpage 2source: ceicdeutsche bank ag/hong kong1q001q011q021q031q041q051q061q071q081q091q101q111q121h13e1988

25、1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012air864225 january 2013airchinese airlinesdemand pickup in reachbetter macroeconomic outlook to drive back end-loaded growthnotwithstanding the slow domestic air passenger traffic growth in 2012, there was animprovement in growth rate in dece

26、mber 2012 as shown in figure 1, when the airlinessaw a brief recovery of domestic air travel demand. while the airlines are still hesitantto label that as sustainable, it appears that chinese gdp growth re-accelerationprovides a backdrop for improvement in air passenger traffic demand. going forward

27、,our house macroeconomic view is that chinese gdp growth will accelerate to 8.5% in2h13e from 8.0% in 1h13e and 7.8% in 2012, and may accelerate further to 8.9% in2014e. the main drivers for growth recovery include corporate and infrastructureinvestment, as well as a rebound in export growth in 2h13

28、e. together with thecompletion of the government leadership transition, we think that more corporate andgovernment official travel activities will resurface starting 2q13e, boosting airpassenger traffic demand. moreover, as business travel tends to be less seasonal innature, it can help the airlines

29、 to smooth air passenger traffic demand through the year.with improving wealth sentiment, supported by a domestic stock market rebound anda property price uptrend, a strengthening of the rmb vs. foreign currencies and greaterease in obtaining foreign country tourist visas for the mainland chinese, w

30、e continue toexpect healthy growth in outbound air passenger traffic.all in all, we think that, in 2013e, air passenger traffic growth for the three majorchinese airlines of about 10-11% will be characterized by: 1) an improvement indomestic traffic growth, especially in the central and western regi

31、ons, given lower airspace constraints, 2) a continuation of strong international traffic growth, and 3) lessobvious seasonality.figure 7: china quarterly air passengerfigure 8: china rpv growth/gdpweexpectchinesetraffic vs. gdp trendgrowthpassenger traffic growth to(yoy%)30%25%20%15%10%5%0%-5%-10%rp

32、kgdp0-2china average = 1.5pick up through the year,based on our house view thatgdp yoy growth will pick upsequentially, and the generalobservation that air passengertraffic growth usuallyoutpaces gdp growth-4source: ceic, deutsche banksource: ceic, deutsche bankhigh-speed railway and island dispute

33、unlikely to affect air trafficmuchin the past few years, there have always been market concerns over whether the rolloutof chinas high-speed railway network would significantly affect the chinese airlinespassenger traffic. in our fitt report china aviation no de-railing air traffic growthpublished m

34、arch 2010, we claimed that the railway network was unlikely to hamperdeutsche bank ag/hong kongpage 31996199719981999200020012002200320042005200620072008200920102011201225 january 2013airchinese airlinesairlines growth, given the under-penetrated nature of chinese air travel demand. as themajor high

35、-speed railways horizontal and vertical trunk lines are now in place, it is timeto re-visit the situation.in our discussions with the chinese airlines, they highlight that the shorter-haul high-speed railway routes with a distance of less than 1,000km, e.g. the wuhan-guangzhouroute, have affected th

36、eir related flight services. however, by cutting capacity, theairlines have managed to stabilize the load factor and ticket pricing on such routes.together with continuing demand growth on other routes, airlines have not found muchdifficulty in maintaining overall traffic growth and utilization. ind

37、eed, airlines such ascea also leverage the high-speed railway to bring in additional outbound passengers totheir shanghai hub from nearby cities. to conclude, the current situation reflects ourview that airlines will mitigate the competitive pressure from high-speed railways bydeveloping more non-co

38、mpeting routes, e.g. international destinations.similarly, there are near-term market concerns on whether the tension between thechinese and japanese governments could lead to depressed demand for the highlyprofitable japan flight services and eventually hurt the chinese airlines profitability. thea

39、irlines explain that while the capacity to japan has been cut back due to the dispute,load factor and pricing for the remaining flights remains resilient. what is more, theairlines are also deploying services to other popular and highly profitable routes such askorea and taiwan.last but not least, r

40、ecently, the chinese airlines have also mentioned that as moremainland chinese are flying to the us, given the easier travel visa application, loadfactors for us routes are increasing, leading to better profitability than in the past. in anutshell, as long as chinese air traffic demand remains under

41、-penetrated, we would notbe too concerned about growth sustainability.figure 9: air passenger volume/population for china, the us and japansincethechineseair350%300%250%200%150%100%50%china1996-2001 no. ofpassengercarried cagr:us - 1.5%japan - 3.0%china - 6.3%us2001-06 no. ofpassengercarried cagr:us

42、 - 3.6%japan - 0.4%china - 16.2%japan2006-11 no. ofpassengercarried cagr:us - -0.4%japan - -4.6%china - 12.9%passenger market is stillsignificantly under-penetratedcompared to developedcountries, we argue thatfaster-than-gdp growthshould be sustainable,notwithstanding thedevelopment of the high-0%sp

43、eed railway system andshort-term shocks such as thesino-japanese island disputesource: ceic, deutsche bankfuel price and fx rate outlook also favorable to chinese airlinesafter a few years of price volatility, our global commodity team expects the jet fuelprice to be range-bound at usd125-130/bbl in

44、 2013-14. even though that implieshigher unit fuel costs vs. previous years, a relatively stable fuel price should enable theairlines to prepare and optimize their cost structure accordingly.moreover, the rmb has apparently resumed its appreciation pace alongside chinasmacroeconomic growth pickup. a

45、t the moment, our house view points to 2.6% and3.0% rmb appreciation against the usd in 2013e and 2014e, respectively. besidespage 4deutsche bank ag/hong kongoct-11oct-12oct-11jan-11jan-12jan-13jan-11jan-12oct-12apr-11apr-12jan-13jul-11apr-11apr-12jul-12jul-11jul-1225 january 2013airchinese airlines

46、helping the chinese airlines to record fx gains and save on their borrowing costs, astrong rmb could also help to alleviate the usd-based fuel cost pressure and improvethe spending power of the mainland chinese, thus stimulating more outbound tourismdemand.figure 10: singapore jet fuel price trendfi

47、gure 11: rmb/usd exchange rate(usd/barrel)150140130dbe 2013/14 jet fuel price(rmb/usd)6.4dbe yearend 2013rmb/usd rate120110100source: bloomberg finance lp, deutsche bank6.0source: bloomberg finance lp, deutsche bankcapital injection to enhance the debt structurein 2012, all three m

48、ajor chinese airlines announced that they will receive a capitalinjection by issuing new shares to their parents for lowering the debt ratio. in brief, airchina, cea and csa will get rmb1.05bn, rmb3.6bn and rmb2.0bn, respectively. weexpect the injection to be completed by the end of 1q13, which will

49、 help to lower thegearing of the airlines. as the fy13e net gearing level for the chinese airlines isexpected to be healthier at 1.4-2.0 x after incorporating the addition capital in ourfinancial models, we do not envision extra capital injection in the near term.new policies to attract transit pass

50、engersstarting this year, any transit passenger from 45 countries holding visas and planetickets to another country (i.e. other than china and their home country) can apply for a72-hour transit without visa at the airports in beijing and shanghai. foreign visitors arenot permitted to leave the arriv

51、al city, may it be beijing or shanghai, to other chinesecities during the stay and have to depart from the same city. according to xinhuanews, a deputy manager in beijing airport estimates that the policy would help bringingin 600,000 to 800,000 transit passengers to china in 2013. while we do not t

52、hink thatthe aforementioned policy would significant boost air passenger traffic considering thefact that china carried more than 300m air passengers in 2012, the new policy furthershowcases the governments ongoing support for the aviation sector.deutsche bank ag/hong kongpage 525 january 2013airchi

53、nese airlinesstock implicationssome downward fy12-13e earnings revisions but remainingupbeatwe slightly trim our fy12-14e revenue for air china and cea by 1.4-3.1% on slower-than-expected growth momentum for fy12-13 and more prudent yield in fy14, butraise csas fy12-14e revenue by 0.0-0.9% on faster

54、-than-expected growth momentum.at the bottom-line level, we cut our fy12-13 reported net profit estimates for theairlines by 1.9-20.5%, in light of higher fuel-cost expectations. despite the higher fuelcost assumptions, we raise our fy14 reported net profit forecast by 7.0-24.7%, onfaster rmb apprec

55、iation assumptions.figure 12: chinese airlines summary of assumption changes for revenue driversair chinachina eastern airlineschina southern airlinesfy12efy13efy14efy12efy13efy14efy12efy13efy14erpk growth (%)old rpk growth (%)passenger yield (rmb)old passenger yield (rmb)rftk growth (%)old rftk gro

56、wth (%)cargo yield (rmb)old cargo yield (rmb)5.0%8.7%0.680.683.7%6.4%1.801.809.9%10.2%0.670.6711.4%12.2%1.781.7710.2%9.9%0.670.6811.7%10.8%1.771.797.9%9.2%0.680.686.7%10.0%1.841.849.9%10.5%0.680.6711.0%12.5%1.821.8210.1%10.2%0.670.6811.2%10.9%1.821.8310.8%10.2%0.670.6715.6%10.4%1.601.6010.7%10.5%0.6

57、60.6612.6%12.5%1.581.5810.6%10.3%0.660.6711.3%11.2%1.581.60source: deutsche bankfigure 13: air china major operating and financial assumptionsfy10fy11fy12efy13efy14eask growth (%)rpk growth (%)passenger load factor (%)passenger yield growth (%)aftk growth (%)rftk growth (%)cargo load factor (%)cargo

58、 yield growth (%)international jet fuel cost (us$/barrel)revenue (rmbm)old revenue forecast (rmbm)change (%)reported net profit (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.14.816.80.159.3-3.2125.798,410n.a.n.a.7,082

59、n.a.n.a.6.15.03.759.40.3126.9103,796107,136-3.14,3234,903-80.7-1.010.011.460.2-0.9127.5113,157116,833-3.16,0307,582-20.59.810.281.0-0.310.011.761.2-0.3127.5124,440129,751-4.17,8747,3567.0source: company data, deutsche bankpage 6deutsche bank ag/hong kong25 january 2013airchinese

60、airlinesfigure 14: 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 (rmbm)old revenue forecast (rmbm)c