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Transportation Beginning of Restructuring: Supply Is the Key Variable

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Transportation Beginning of Restructuring: Supply Is the Key Variable 2020 Outlook Transportation Beginning of restructuring: Supply is the key variable Jay JH Ryu +822-3774-1738 [email protected] Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including the U.S. PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES & DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT. Contents [Summary] 3 I. Airlines 4 II. Mobility 17 III. Logistics 32 IV. Shipping 37 [Conclusion] 45 [Top picks] 46 [Summary] Momentum to diverge based on supply management OP vs. P/B: Amid market down cycle, earnings momentum to diverge based on each company’s supply management (Wbn) (x) OP (L) P/B (R) 1,500 2.5 Oil price decline; Air cargo Minimum Global Global High oil prices; greater Oil rebound; wage hike; Slowdown in Inventory housing financial shipping market logistics price LCC growth; economic Chinese stimulus restocking bubble crisis restructuring momentum rebound M&As slowdown 1,000 2.0 500 1.5 0 1.0 -500 0.5 -1,000 0.0 1Q04 1Q05 1Q06 1Q07 1Q08 1Q09 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17 1Q18 1Q19 Source: Datastream, Mirae Asset Daewoo Research 3| 2020 Outlook [Transportation] Mirae Asset Daewoo Research I. Airlines: Weak demand to prompt restructuring Economic slowdown and • Outbound demand on Japan routes has declined, hurt by a slowing economy and the Korea-Japan diplomatic row. bottoming out of Japan • Japan routes appear to be bottoming out; declines in load factor should stabilize in early 2020, supported by supply cuts. route demand Sharp decline in outbound demand on Japan routes Passenger traffic growth on Japan routes ('000 persons) (%) (%, %p) 3,500 Korean outbound travelers (L) YoY (R) 35 20 YoY passenger growth L/F indicator 30 3,000 10 25 0 2,500 20 Week of -10 Chuseok 2,000 15 -20 1,500 10 5 -30 1,000 0 -40 500 -5 -50 0 -10 14 15 16 17 18 19 Source: Bloomberg, KTO, Mirae Asset Daewoo Research Source: Air Portal, Mirae Asset Daewoo Research 4| 2020 Outlook [Transportation] Mirae Asset Daewoo Research I. Airlines: Weak demand to prompt restructuring Industry-wide • Restructuring is likely to occur, as the market is oversupplied due to weak demand and new entrants. restructuring to be driven • Eastar Jet is believed to be in a state of impaired capital. by LCCs • We expect industry-wide restructuring to be driven by LCCs. Of note, four listed LCCs are likely to post full-year operating losses for 2019. Eastar Jet’s earnings and capital impairment ratio Four listed LCCs: Combined revenue, OP, and OP margin (Wbn) (%) (Wbn) (%) 600 Revenue (L) OP (L) Capital impairment ratio (R) 300 4,000 Combined revenue (L) 10 Combined OP (L) 9 3,500 Combined OP margin (R) 500 250 8 3,000 7 400 200 2,500 6 300 150 2,000 5 4 1,500 200 100 3 1,000 2 100 50 500 1 0 0 0 0 2014 2015 2016 2017 2018 2014 2015 2016 2017 2018 Source: Eastar Jet, Mirae Asset Daewoo Research Source: Company data, Mirae Asset Daewoo Research 5| 2020 Outlook [Transportation] Mirae Asset Daewoo Research I. Airlines: Weak demand to prompt restructuring Global airline industry’s • The global airline industry is seeing a decline in margins. falling OP margin • After peaking in 2016-17, industry OP margin has steadily declined. • OP margins at Korean airline companies, which had remained relatively steady, have also come under pressure. Global airline industry’s OP margin is contracting Source: IATA, Mirae Asset Daewoo Research 6| 2020 Outlook [Transportation] Mirae Asset Daewoo Research I. Airlines: Weak demand to prompt restructuring Look for downward • Existing airlines’ supply of small and medium-sized aircraft is set to increase 10-13% YoY. However, YoY growth falls below 5% when restrictions on Jin Air and uncertainties over the B737 MAX are taken into consideration. adjustments to supply of • New LCCs should have a limited impact on supply growth, given delays in new route launches and unfavorable small and medium-sized airport slot assignments. aircraft Domestic airlines’ small and mid-sized aircraft fleet expansion plans 2018 2019F Category Airline Aircraft End-2017 2020ㄹ New aircraft Year-end New aircraft Year-end B737-800/900 35 -3 32 5 37 37 (33) B737 MAX - - - - - 12 Korean Air A220 (CS300) 2 7 9 1 10 10 A321neo - - - - - 4 FSCs A320 - - - - - 6 Total 37 4 41 6 47 69 A320/321 26 -1 25 -1 24 30 Asiana Airlines A321neo 0 0 0 1 1 1 Total 26 -1 25 0 25 31 B737-800 31 8 39 6 45 46 (45) Jeju Air B737 MAX - - - - - 2 (0) Total 31 8 39 6 45 48 B737-800 21 2 23 -1 22 22 Jin Air B777-200ER 4 0 4 0 4 4 Total 25 2 27 -1 26 26 T’way Air B737-800 19 5 24 5 29 28 Existing Air Seoul A321-200 6 1 7 0 7 7 LCCs A320-200 8 0 8 8 Air Busan A321-200 17 1 18 15 A321neo - - - - - 4 Total 23 25 1 26 27 B737 19 1 20 2 22 22 Eastar Jet B737-MAX 8 - 2 2 0 2 2 Total 19 3 22 2 24 24 260 (14% YoY) Total FCCs + existing LCCs 210 (13% YoY) 229 (9% YoY) 253 (10% YoY) Aero K A320 11 4 New LCCs Fly Gangwon B737-800 22 9 Source: Company data, CAPA, Mirae Asset Daewoo Research 7| 2020 Outlook [Transportation] Mirae Asset Daewoo Research I. Airlines: Direction of restructuring Asiana Airlines’ Chung Mong-gyu & affiliates shareholder structure (post-acquisition) 33.7% HDC 29.0% W700bn (012630 KS) 1.8% (to be resolved by May 15, 2020) W1.3tr 33.0% 95.2% W140bn 48.3% 56.6% 87.1% 87.9% 28.9% HDC Hyundai HDC Hyundai HDC I-Controls Development HDC I&Cons HDC I-Service Hyundai I’Park Mall HDC Youngchang Engineering Plastics (039570 KS) (294870 KS) (089470 KS) 3.4% W200bn (to be resolved 50.0% by Apr. 16, 3.8% (to be resolved by Sep. 21, 2020) 6.4% (to be resolved by May 15, 2020) 2021) 50.0% 75.0% 100% HDC Shilla Duty HDC Hyundai PCE Ilsan REITs Real Estate 114 Free 25.0% (to be resolved by Apr. 16, 2021) 3.8% (to be resolved by Apr. 16, 2021) 64.5% 100% Hotel HDC Mirae BI 16.0% +60%? Asiana Airlines 40.0% W2.5tr Kumho T&I (020560 KS) 24.0% 100% 100% 80.0% Kumho Tour Bus Lines [Seoul] W60bn Air Seoul Asiana Sabre W8bn Notes: Figures for unlisted 100% 14.6% Asiana 100% 26.6% companies are based on book value W50bn Asiana Airport W40bn Development Kumho Resort (assuming 100% ownership); 48.8% figures for listed companies are Air Busan 44.2% 76.2% Asiana IDT based on market cap (issued shares, W400bn W300bn 10.0% (298690 KS) (267850 KS) including treasury shares) except 100% for Asiana Airlines (acquisition price) Songnisan Buslines 8| 2020 Outlook [Transportation] Mirae Asset Daewoo Research I. Airlines: Direction of restructuring • Shares of Japan Airlines (JAL; 9201 JP/CP: JPY3,320) were delisted in February 2010. The government appointed Case study: Restructuring Kazuo Inamori the new CEO of JAL, granting the company greater autonomy in management. of JAL • Under its business normalization plan, JAL commenced restructuring in November 2010. JAL shares were relisted in September 2012, three years after the delisting, marking an end to the corporate rehabilitation process. JAL’s management normalization Time line Details Apr. Japan’s MLIT ordered JAL to improve management. Jun. JAL set the direction for management improvement. Aug. Expert meetings were held on JAL’s management improvement. Sep. A task force focusing on JAL’s rehabilitation was created under the minister of MLIT. 2009 A corporate rehabilitation organization was founded. Oct. The task force submitted a report on JAL’s rehabilitation. JAL reported interim results (net loss of JPY131.2bn). Nov. DBJ extended JPY100bn in syndicate loans to JAL. Jan. JAL filed for bankruptcy protection under the Corporate Rehabilitation Law . Kazuo Inamori was named the new CEO. Feb. JAL announced a stronger partnership with American Airlines. Mar. JAL discontinued freight service flights. Apr. JAL reduced international and domestic passenger capacity by 40% and 30% YoY, respectively. 2010 Aug. JAL submitted its reorganization plan to the Tokyo District Court. Nov. The Tokyo District Court approved the reorganization plan. Rights of shareholders and bondholders were adjusted; JAL conducted a 100% capital reduction (JPY251bn). The corporate rehabilitation organization made an equity investment of JPY350bn in JAL (175mn shares, JPY2,000 per share). Dec. Banks waived JPY521.5bn in loans (equivalent to 87.5% of JAL’s loans). Early retirement program followed by layoffs JAL raised funding from 11 financial institutions to pay off JPY255bn. Mar. The Tokyo District Court ended JAL’s rehabilitation program. 2011 May JAL opened a Narita-Boston route Aug. JAL founded Jetstar Japan with Qantas Group. Kazuo Inamori became honorary chairman; JAL Group announced its management plan for 2012-16. 2012 Feb. JAL opened the Narita-San Diego and Narita-Helsinki routes and expanded its fleet, adding 45 B787 aircraft. JAL was relisted on the Tokyo Stock Exchange in September; the corporate rehabilitation organization divested its entire stake (JPY663.3bn). 9| 2020 Outlook [Transportation] Source: JAL, MLIT, Mirae Asset Daewoo Research Mirae Asset Daewoo Research I. Airlines: Direction of restructuring Case study: JAL focused on • JAL’s restructuring focused on scaling back its business, reducing costs, and improving operating efficiency. increasing management • Earnings improved on the back of better fleet efficiency and route restructuring.
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