By Michael Kitchen
Airlines across the Greater China region should see passenger
traffic and profit rising for the rest of the year, sending their
share prices higher, according to recent analyst reports.
Separate research Thursday from Nomura and Bank of America
Merrill Lynch not only called for strong second-half earnings
across the sector, but also tipped record results in some
metrics.
Part of the basis for the bullish outlook is Asia's outpacing
the West in terms of economic recovery, raising demand.
"With Asian economies having recovered at a much faster pace
than the U.S. and Europe, Asian transport stocks have enjoyed
stronger demand recoveries than their global peers," wrote Jim Wong
for Nomura, citing a 53% rise in first-half passenger traffic
compared to a year earlier.
Also helping the situation, many Chinese airlines still have
relatively tight capacity in the wake of the global financial
crisis.
"A recovery in premium and Asia-based leisure traffic coupled
with a tight industry capacity environment should see seat
utilization at, or near, record highs," the Merrill Lynch analysts
said.
The Merrill Lynch research note said the fewer available seats
"means pricing should trend still higher." Nomura's Wong agreed,
saying that while prices may be lower than those of a year, they
should be higher in the second half than they were in the first,
"especially with [mainland China's recent] liberalization of the
pricing policy on premium classes of domestic routes."
Some Chinese airlines have already raised airfares at the
premium-class level by 15%-33%, Wong said.
In terms of the outlook for cargo, however, the analysts showed
less agreement, with Merrill Lynch slightly more skeptical.
"Cargo is our only major concern. We think year-on-year growth
peaked in May and expect slowing demand and rapid capacity
expansion," the Merrill Lynch note said. "Our numbers assume cargo
yields fall 10% in 2011."
Nomura painted a stronger picture, at least for mainland Chinese
carriers, with Wong tipping "a significant increase" of 89% in
cargo revenue for Air China Ltd., and even larger jumps at China
Southern Airlines Co. and China Eastern Airlines Corp., where
revenue is forecast to double from the previous year's period.
Top picks
While upbeat on the sector in general, both brokerages named
Hong Kong carrier Cathay Pacific Airways Ltd. (CPCAY) as one of
their top picks.
Cathay is one of the major Chinese carriers to have already
reported earnings. The airline posted a more than eightfold rise in
first-half profit last week, on a 34% year-on-year increase in
sales.
Cathay "is well on track to set a new record high profit in the
full year of 2010, especially as [its] management confirms that
[the second half of 2010] should be seasonally stronger than" the
first half, Nomura's Wong said.
"Given that [Cathay's first-half] results were already
substantially above the market consensus estimate ... for the full
year of 2010, the entire market is in need of substantial upward
revision, in our view," Wong wrote, maintaining his buy rating on
the shares.
Merrill Lynch was even more enthusiastic about the carrier,
boasting that its upwardly revised price target of 25 Hong Kong
dollars ($3.22) was "the highest of any broker."
Shares of Cathay Pacific rose 0.6% to HK$18.26 in early Friday
trading in Hong Kong, compared to a 0.1% fall in the benchmark Hang
Seng Index.
Both brokerages said the current valuation on Cathay's shares
offered room for more gains. Nomura figured the stock's Thursday
price-to-book valuation at 1.1 times, while Merrill Lynch put it at
1.5 times. Nomura said the shares have historically traded at 1.6
times its book value at mid-cycle and three times the book value at
the peak of the business cycle, while Merrill Lynch said the
multiple should historically be "at least" two times.
Among mainland Chinese carriers, Nomura's Wong said Air China
would report the strongest first-half net profit for the group,
while China Southern would show the largest year-on-year profit
growth, due in part to a low base for 2009. Air China is slated to
report earnings Aug. 26, while China Southern results are due Aug.
16.
Despite these sunny forecasts, however, Wong had neutral ratings
on both airlines' stocks. In China Southern's case, he cited
overhang from the Chinese yuan's slower-than-hoped appreciation.
And while Air China was likely to be the "least affected by the
expected slowdown in [yuan] appreciation," he said that most the
carrier's good news -- including the acquisition of regional
Shenzhen Airlines -- has already been priced in.
Instead, Nomura called for buys on China Eastern and Taiwanese
carrier Eva Airways Corp., with the former benefitting from travel
related to the Shanghai World Expo and the latter set to see
"double-digit growth in traffic and yields."
Airline shares were mixed in Friday morning trade in Hong Kong,
with Air China (AIRYY) flat, China Eastern (CEA) down 0.2%, and
China Southern (ZNH) up 1.4%. The picture was a little sunnier in
Shanghai, where China Eastern rose 2.9%, China Southern edged up
0.1% and Air China gained 0.2%, even as the benchmark Shanghai
Composite lost 0.1%.
In Taipei, Eva Airways gained 1.3%, outpacing a 0.3% rise in the
Taiex.
In other Asian stock markets, Australia's S&P/ASX 200 rose
0.3%, while South Korea's Kospi and Singapore's Strait Times Index
each added 0.5%. Japanese index ended their morning lower, however,
with the Nikkei Stock Average and Topix each down 0.3%.