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1、Nora Min,Top picks,Buy,Buy,Buy,Deutsche BankMarkets Research,AsiaChinaTransportationAir,IndustryChinese Airlines,Date25 January 2013Forecast ChangeVincent Ha,CFAJoe Liew,CFA,Back end-loaded 2013E recovery insight;top picks CEA and CSAWe expect traffic growth to be boosted by business travel demand r
2、ecoveryChinese 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,as
3、 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 ChinaEastern(CE
4、A)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 small spike in Dec
5、ember 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 should be FX gain reported in 4Q1
6、2E,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),HKD6.66 Buy2011A 2012E 2013EP/E(x)15
7、.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 2013E,For FY13E,we foresee 8-17%core EPS growth on better operating leverageThe three major Chinese airlines 2012 RPK went up by less than 8%YoY butwe expect them to register 2013E RPK Y
8、oY growth of 10-11%,backed by:1),P/E(x)EV/EBITDA(x)Price/book(x),9.37.81.3,10.57.61.4,9.86.71.2,an improvement in Chinese macroeconomic growth and completion ofgovernment leadership transition,which should lead to a rebound in businesstravel;2)further economic development in Central and Western Chin
9、a,which,China Southern Airlines(1055.HK),HKD4.59,2011A 2012E 2013E,should 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 load factors and improve the profitability,P/E(x)
10、EV/EBITDA(x)Price/book(x),10.77.61.0,17.38.11.1,15.67.41.0,of the international passenger business.As Deutsche Bank expects strongerChinese GDP growth in 2H13,we think the growth acceleration will be back,Target price revisions,end-loaded.,Company,New TP,Old TP,Upside,Still-attractive P/BV valuation
11、 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 price,Air ChinaChina EasternChina Southern,HKD7.70 HKD6.70HKD4.30 HKD3.60HKD5.40 HKD4.15,15.6%21.8%17.6%,assumption.We raise our P/BV-base
12、d 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/BV of1.1-1.8x,while we expect FY13-14E core
13、 ROEs to be above historical averages.We prefer CEA and CSA over Air China considering the ongoing earnings,volatility 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 airlinetop picks given compelling valuation,better
14、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 for several companiesunder our coverage.For detail
15、edlisting 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 of interest that could affect the objectivity of this
16、 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-08,Jan-09,Jan-10,Jan-12,Jul-08,Jul-09,Jul-10,Jan-11,Jul-12,Jul-11,Jan-11,Jan-08,Jan-09,Jan-10,Jul-11,Jan-12
17、,Jul-08,Jul-09,Jul-10,Jul-12,Jan-11,Jan-08,Jan-09,Jan-10,Jul-11,Jan-12,Jul-08,Jul-09,Jul-10,Jul-12,Jan-11,Jan-08,Jan-09,Jan-10,Jul-11,Jan-12,Jul-08,Jul-09,Jul-10,Jul-12,Jan-08,Apr-08,Jul-08,Oct-08,Jan-09,Apr-09,Jul-09,Oct-09,Jan-10,Apr-10,Jul-10,Oct-10,Jan-11,Apr-11,Jul-11,Oct-11,Jan-12,Apr-12,Jul-1
18、2,Oct-12,Jan-08,Apr-08,Jul-08,Oct-08,Jan-09,Apr-09,Jul-09,Oct-09,Jan-10,Apr-10,Jul-10,Oct-10,Jan-11,Apr-11,Jul-11,Oct-11,Jan-12,Apr-12,Jul-12,Oct-12,25 January 2013AirChinese AirlinesA lukewarm 20122012 traffic growth slows on macroeconomic slowdown,Figure 1:Chinese airlines monthlydomestic RPK grow
19、th trend,Figure 2:Chinese airlines monthlyinternational RPK growth trend,2012 Chinese air passengertraffic growth is characterized,(RPK YoY%)70%60%50%40%30%20%10%0%,Air China,CEA,CSA,(RPK YoY%)100%80%60%40%20%0%,Air China,CEA,CSA,by:1)a growth slowdown indomestic routes with weakbusiness travel dema
20、nd andan air space bottleneck in thecoastal regions,and 2)resilience in international,-10%-20%-30%Source:Company data,-20%-40%Source:Company data,traffic demand on the back ofrising outbound tourisminterest,Note:CEAs above peers increase in 2010 is partially attributable to theabsorption of Shanghai
21、 Airlines.Disciplined capacity management helps to sustain high utilization,Figure 3:Chinese airlines monthly RPK,Figure 4:Chinese airlines monthly,Notwithstanding,ongoing,growth minus ASK growth,passenger load factor trend,delivery of new aircraft,the,25%,Air China,CEA,CSA,90%,Air China,CEA,CSA,Chi
22、nese airlines managed to,20%15%10%5%0%-5%-10%-15%-20%Source:Company data,Deutsche Bank,85%80%75%70%65%Source:Company data,contain capacity growth by:1)optimizing flight hours and2)retiring old aircraft.Therefore,overall load factorsremained at a satisfactorylevel in 2012.,Stable high load factor als
23、o implies ticket price resilience,Figure 5:China domestic air ticket price,Figure 6:China international air ticket,With,slower,economic,index,price index,growth and weak corporate,Index(Jan04=100),Index YoY%,Index(Jan04=100),Index YoY%,travel,demand,Chinese,14013012011010090807060,40%30%20%10%0%-10%
24、-20%-30%,190180170160150140130120110100,50%40%30%20%10%0%-10%-20%-30%,airlines have not recordedvery strong yieldimprovement in the past twoyears.Nevertheless,the highutilization of these airlines hasprevented ticket prices from,falling much.,Source:CEICPage 2,Source:CEIC,Deutsche Bank AG/Hong Kong,
25、1Q00,1Q01,1Q02,1Q03,1Q04,1Q05,1Q06,1Q07,1Q08,1Q09,1Q10,1Q11,1Q12,1H13E,1988,1990,1992,1994,1996,1998,2000,2002,2004,2006,2008,2010,2012,air,8,6,4,2,25 January 2013AirChinese AirlinesDemand pickup in reachBetter macroeconomic outlook to drive back end-loaded growthNotwithstanding the slow domestic ai
26、r passenger traffic growth in 2012,there was animprovement in growth rate in December 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-accelerationprov
27、ides a backdrop for improvement in air passenger traffic demand.Going forward,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
28、infrastructureinvestment,as well as a rebound in export growth in 2H13E.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 tr
29、avel tends to be less seasonal innature,it can help the airlines 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 obtain
30、ing foreign country tourist visas for the mainland Chinese,we 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 traf
31、fic growth,especially in the Central and Western regions,given lower airspace constraints,2)a continuation of strong international traffic growth,and 3)lessobvious seasonality.,Figure 7:China quarterly air passenger,Figure 8:China RPV growth/GDP,We,expect,Chinese,traffic vs.GDP trend,growth,passenge
32、r traffic growth to,(YoY%)30%25%20%15%10%5%0%-5%-10%,RPK,GDP,0-2,China Average=1.5,pick 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,-4,Source:CEIC,Deutsche Bank,Source:C
33、EIC,Deutsche Bank,High-speed railway and island dispute 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 Chin
34、a aviation no de-railing air traffic growthpublished March 2010,we claimed that the railway network was unlikely to hamper,Deutsche Bank AG/Hong Kong,Page 3,1996,1997,1998,1999,2000,2001,2002,2003,2004,2005,2006,2007,2008,2009,2010,2011,2012,25 January 2013AirChinese Airlinesairlines growth,given th
35、e under-penetrated nature of Chinese air travel demand.As themajor high-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
36、of less than 1,000km,e.g.the Wuhan-Guangzhouroute,have affected their 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 muchdifficu
37、lty in maintaining overall traffic growth and utilization.Indeed,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
38、pressure from high-speed railways bydeveloping more non-competing 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 e
39、ventually hurt the Chinese airlines profitability.Theairlines 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
40、routes such asKorea and Taiwan.Last but not least,recently,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 lon
41、g as Chinese air traffic demand remains under-penetrated,we would notbe too concerned about growth sustainability.,Figure 9:Air passenger volume/population for China,the US and Japan,Since,the,Chinese,air,350%300%250%200%150%100%50%,China1996-2001 No.ofpassengercarried CAGR:US-1.5%Japan-3.0%China-6.
42、3%,US2001-06 No.ofpassengercarried CAGR:US-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 the
43、development of the high-,0%,speed railway system and,short-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 rang
44、e-bound at USD125-130/bbl in 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 Chinasmacroe
45、conomic growth pickup.At the moment,our house view points to 2.6%and3.0%RMB appreciation against the USD in 2013E and 2014E,respectively.Besides,Page 4,Deutsche Bank AG/Hong Kong,Oct-11,Oct-12,Oct-11,Jan-11,Jan-12,Jan-13,Jan-11,Jan-12,Oct-12,Apr-11,Apr-12,Jan-13,Jul-11,Apr-11,Apr-12,Jul-12,Jul-11,Ju
46、l-12,25 January 2013AirChinese Airlineshelping 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.,Figur
47、e 10:Singapore jet fuel price trend,Figure 11:RMB/USD exchange rate,(USD/barrel)150140130,DBe 2013/14 jet fuel price,(RMB/USD)6.76.66.56.4,DBe yearend 2013RMB/USD rate,120110100Source:Bloomberg Finance LP,Deutsche Bank,6.36.26.16.0Source:Bloomberg Finance LP,Deutsche Bank,Capital injection to enhanc
48、e the debt structureIn 2012,all three major 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 complet
49、ed by the end of 1Q13,which will 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 po
50、licies to attract transit passengersStarting 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 per
