China Industrials 20 December 2019
China Aviation
2020: prepare for take-off
Boeing’s 737 MAX should re-enter service in 2020, releasing more capacity and volume growth to the market Announcement of Phase 1 trade deal between the US and China Kelvin Lau should remove near-term share-price overhang (852) 2848 4467 TravelSky is our top sector pick; we also recommend AviChina, [email protected] Cathay Pacific and China Southern Frank Yip
(852) 2773 8842 [email protected]
What's new: We expect market sentiment towards the China Aviation sector to improve in 2020, given the likely return to service of Boeing’s 737 2 0 MAX, a stable CNY assuming China-US relations do not deteriorate further, and steady passenger demand. Hence, we believe now is the time to revisit Key stock calls these cyclicals. New Prev.
TravelSky Technology (696 HK) What's the impact: Return of the MAX. Despite Boeing’s recent Rating Buy Buy announcement of a temporary halt in production of the 737 MAX, we Target 24.00 24.00 expect the US FAA to approve the plane’s return to service as early as Upside p 26.3% 1Q20, with regulators elsewhere – including China – likely to follow suit in AviChina Industry & Technology (2357 HK) 2H20. Given this likely effective capacity expansion, our forecasts call for Rating Buy Buy Target 6.00 5.70 China’s air traffic to expand by 10% YoY for 2020, backed by low-teen YoY Upside p 66.2% growth in international traffic. Cathay Pacific Airways (293 HK) Rating Buy Buy Reduced risk of trade-war escalation. With the US and China having Target 13.10 12.60 announced (but not yet signed) an agreement on Phase 1 of the trade deal, Upside p 15.5% we see limited likelihood of tariff escalation. While we do not expect a final China Southern Airlines (1055 HK) trade deal to be secured any time soon, we believe investment sentiment Rating Buy Hold Target 6.20 5.20 will start recovering, which should herald more stable CNY movement. Upside p 16.5% Beijing Capital International Airport (694 HK) th Final year to catch up on targets. In its 13 Five-Year Plan (2016-20), the Rating Underperform Hold central government set a target for the general aviation sector to have Target 6.40 6.40 5,000 aircraft. While the sector is well below that target currently (1H19: Downside q 18.4% c.2,500 aircraft), we believe that orders and deliveries are likely to Source: Daiwa forecasts accelerate as the end of the period approaches.
What we recommend: After revising earnings forecasts and TPs for much of the sector, our top pick is TravelSky, which we see as well positioned to ride accelerating air traffic growth in 2020 and, longer term, expand overseas. We see bottom-fishing opportunities in Cathay Pacific and China Southern Airlines (CSA). For exposure to rising demand for general aviation production in 2020, we recommend AviChina. We upgrade CSA and China Eastern Airlines to Buy (1), from Hold (3) and Outperform (2), respectively, since we see a declining risk of CNY depreciation. We downgrade BOCA to Hold (3) from Outperform (2) and BCIA to Underperform (4) from Hold (3), as we consider their valuations to be demanding. Risks to the sector include slower-than-expected traffic growth and worse-than-expected US-China trade relations.
How we differ: Relative to the market, we are more upbeat on the sector’s outlook for 2020 and believe cyclicals will return to the spotlight amid limited downside risk.
See important disclosures, including any required research certifications, beginning on page 54
China Aviation: 20 December 2019
Sector stocks: key indicators EPS (local curr.) Share Rating Target price (local curr.) FY1 EPS (local curr.) FY2 Company Name Stock code SharePrice NewRating Prev. TargetNew price (localPrev. curr.)% chg New FY1Prev. % chg New FY2Prev. % chg CompanyAir China Name Stock753 HK code Price7.85 OutperformNew OutperformPrev. New8.30 Prev.7.90 %5.1% chg 0.519New 0.519Prev. %0.0% chg 0.718New 0.700Prev. %2.5% chg AirAviChina China Industry & Technology 7532357 HK HK 7.853.61 OutperformBuy OutperformBuy 8.306.00 7.905.70 5.1%5.3% 0.5190.236 0.5190.236 0.0% 0.7180.284 0.7000.284 2.5%0.0% AviChinaBeijing Capital Industry International & Technology Airport 2357694 HK HK 3.617.84 UnderperformBuy HoldBuy 6.006.40 5.706.40 5.3%0.0% 0.2360.513 0.2360.513 0.0% 0.2840.311 0.2840.311 (0.0%)0.0% BeijingBOC Aviation Capital International Airport 6942588 HK HK 78.957.84 UnderperformHold OutperformHold 75.006.40 75.006.40 0.0% 0.5131.009 0.5131.009 0.0% 0.3111.119 0.3111.119 (0.0%)0.0% BOCCathay Aviation Pacific Airways 2588293 HK HK 78.9511.34 HoldBuy OutperformBuy 75.0013.10 75.0012.60 0.0%4.0% 1.0090.233 1.0090.229 0.0%1.5% 1.1190.972 1.1190.749 29.9%0.0% CathayChina Aircraft Pacific Leasing Airways Group 2931848 HK HK 11.348.55 Buy Buy 13.1010.00 12.6010.00 4.0%0.0% 0.2331.239 0.2291.239 1.5%0.0% 0.9721.271 0.7491.271 29.9%0.0% China AircraftEastern LeasingAirlines Group 1848670 HK HK 8.554.19 Buy OutperformBuy 10.004.90 10.004.40 11.4%0.0% 1.2390.194 1.2390.194 0.0% 1.2710.280 1.2710.223 25.3%0.0% China EasternSouthern Airlines Airlines 6701055 HK HK 4.195.32 Buy OutperformHold 4.906.20 4.405.20 11.4%19.2% 0.1940.360 0.1940.360 0.0% 0.2800.484 0.2230.423 25.3%14.4% ChinaShanghai Southern International Airlines Airport 1055600009 HK CH 78.305.32 Buy HoldBuy 95.006.20 95.005.20 19.2%0.0% 0.3602.804 0.3602.804 0.0% 0.4843.358 0.4233.358 14.4%0.0% ShanghaiTravelSky InternationalTechnology Airport 600009696 HK CH 78.3019.00 Buy Buy 95.0024.00 95.0024.00 0.0% 2.8040.874 2.8040.874 0.0% 3.3580.991 3.3580.991 0.0% Source:TravelSky Bloomberg, Technology Daiwa forecasts 696 HK 19.00 Buy Buy 24.00 24.00 0.0% 0.874 0.874 0.0% 0.991 0.991 0.0% Note: Pricing as of 19 December 2019
Jet fuel price China passenger growth trend 100 25%
90 20%
80 15%
70 10%
60 5%
50 0%
Jul-19 Jul-18 Jul-20
2010 2009 2011 2012 2013 2014 2015 2016 2017 2018
Jan-20 Jan-18 Jan-19
Mar-18 Mar-19 Mar-20
Nov-20 Sep-18 Nov-18 Sep-19 Nov-19 Sep-20
May-18 May-19 May-20 2020E 2019E Source: Bloomberg, Daiwa Source: Bloomberg, Daiwa forecasts
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China Aviation: 20 December 2019
Table of contents
Time for cyclicals ...... 4 Stable outlook for China-US trade in the near term ...... 4 Return of the MAX to release capacity to the market ...... 4 Better volume growth for Chinese airlines in 2020E ...... 8 Order acceleration for general aviation ...... 11 Recent China airspace adjustment neutral to BCIA ...... 12 Recommendations ...... 14 Look for volume players ...... 14 Ride expansion of the general aviation industry in 2020E ...... 14 Go cyclical ...... 14 Valuations attractive overall ...... 14 Risks ...... 20
Company Section TravelSky Technology ...... 21 AviChina Industry & Technology ...... 24 Cathay Pacific Airways ...... 27 China Southern Airlines ...... 30 China Eastern Airlines ...... 34 Air China ...... 38 China Aircraft Leasing Group ...... 41 BOC Aviation ...... 44 Beijing Capital International Airport ...... 48
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China Aviation: 20 December 2019
Time for cyclicals Stable outlook for China-US trade in the near term Stable CNY movements We believe the recent conclusion of phase 1 of the trade agreement between the US and should help improve China will help support investment sentiment towards trade- and CNY-related stocks in the sentiment towards the near term. Although we do not expect a final deal to be struck any time soon, we believe airlines the phase 1 agreement will at least bring an end to the cycle of escalating tariffs while also reducing some of the tariffs imposed earlier. Against this revised backdrop, we believe that concern over CNY depreciation against the USD will ease. Besides, we believe there is the possibility of a short-term boost in trade due to restocking if manufacturers fear that the trade relationship would suddenly sour, as it did in May 2019.
The trade war has been front and centre in investors’ concerns in 2019, and the Big-3 Chinese airlines — Air China (AC), China Southern Airlines (CSA) and China Eastern Airlines (CEA) — have slightly underperformed the market amid concerns over CNY depreciation and lacklustre passenger yields, especially in 3Q19. With US-China trade relations apparently improving, and considering the potential stability in the CNY going forward, we contend that the Chinese airlines will outperform in the near term.
Return of the MAX to release capacity to the market Grounding of Boeing 737 Boeing’s 737 MAX debuted in 2016 but was withdrawn from service globally in March 2019 MAX led to a 2-3% after 2 accidents involving the aircraft in Indonesia and Ethiopia led to the loss of 346 lives. capacity squeeze in As a result, Boeing’s aircraft deliveries have dried up (the MAX accounted for c.80% of its China in 2019, on our total backlog). Between April and September 2019, Boeing delivered 25 aircraft per month estimates on average, down from 50 aircraft during 1Q19. In 9M19, the manufacturer delivered only 302 aircraft, down 47% YoY compared with a decline of 19% YoY for 1Q19. In turn, the delivery schedules of aircraft leasing companies, most notably BOC Aviation (BOCA), have been affected. China alone grounded 96 planes, nearly a quarter of all the MAX aircraft in operation at the time. We estimate that China’s decision to ground the plane led to a capacity squeeze of 2-3% in the country’s aviation market in 2019.
Boeing and Airbus: aircraft fatalities since first flight (unit) 500
400
300
200
100
0 1 2 3 4 5 6 7 8 9 10 (Year) Boeing 737-200 Boeing 747-200 Airbus A320-200 Boeing 737 MAX 8
Source: Aviation Safety Network, Daiwa
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China Aviation: 20 December 2019
Boeing: aircraft deliveries in 2019 Boeing: aircraft backlog 350 10% Model Backlog (as at end of 30 September 2019) 737 4,592 300 0% * 737 MAX *4,543 250 (10%) 787 556 777 433 200 (20%) 747 19 150 (30%) 767 105 Total 5,705
100 (40%)
50 (50%)
0 (60%) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Accumulate YoY (%) (RHS)
Source: Company, Daiwa Source: Company, Daiwa Note: *737 MAX is included in 737
Boeing: 737 MAX order book as at October 2019 Company Order Delivered Unfilled China Southern Airlines 50 34 16 Air China 16 16 - China Eastern Airlines 14 14 - BOCA 87 8 79 CALC 50 - 50
Source: Companies, Daiwa estimates
Liquidity issues may be a factor in 737 MAX production halt On 16 December 2019, Boeing announced that it would suspend production of the 737 MAX in January 2020, subject to the Federal Aviation Administration (FAA) extending the recertification process into 2020. We believe the production halt is more about liquidity than any pessimism on Boeing’s part on the 737 MAX’s return to service.
In the YTD, Boeing has had to park approximately 400 737 MAX planes while waiting for the grounding to be lifted. As we understand it, Boeing receives a 10% downpayment at the time an order is placed and the remaining 90% upon delivery. According to a report in the Wall Street Journal on 10 November 2019, Boeing asked the FAA to allow it to resume deliveries prior to receiving certification. We believe that the 49% YoY drop in aircraft deliveries in 10M19 (no 737 MAX deliveries for more than 7 months), together with a lack of available parking space, has given risen to financial pressures.
Grounding has lasted longer than expected Boeing 737 MAX likely to The market had expected the MAX to be grounded until June 2019, assuming that the US return to service in 1Q20 would clear the way for the aircraft to return to the skies, followed by other regulators globally. However, the FAA has strict criteria for the 737 MAX’s Manoeuvring Characteristics Augmentation System and pilot training. In November, Boeing cleared a series of certification simulator tests with the FAA. However, more time is needed for further pilot training given the extent of public concern. Once the MAX receives FAA approval, Boeing would likely need another 30 days to prepare for the resumption of commercial flights (see potential timeline below). In sum, we believe the MAX is likely to secure FAA approval in 1Q20.
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China Aviation: 20 December 2019
Boeing 737 MAX: potential timeline
November January March April 2019 2020 2020 2020
• Boeing completed one • FAA’s recertification • United Airlines • American Airlines and of the three milestones process excludes 737 Max until Southeast Airlines before the FAA March exclude 737 Max until certification test • EASA’s decision April
• Boeing working on the FAA line pilot evaluation and certification flight test in mid-November
refers to facts
refers to future events
Source: Companies, Daiwa
Preparing for deliveries in 2020 We expect the 737 MAX The FAA recently made a decision to extend the recertification process for the 737 MAX to be delivered in 2020 into 2020, counter to Boeing’s expectation that the MAX would return to service in 2019. Prior to this announcement, Boeing said it intended to boost future production of the 737 series to 57 units per month in 2020 once FAA approval had been secured. Assuming the grounding is lifted by March 2020 and production increases to 57 planes per month, deliveries could total 900 units in full-year 2020, representing 20% of Boeing’s total backlog.
We now believe the time Outside of the US, European regulators had been expected to begin test flights of the MAX lag between approval by in mid-December. Indeed, European Union Aviation Safety Agency Executive (EASA) FAA and other regulators Director Patrick Ky indicated in October that the grounding could be lifted in 1Q20. In could be weeks rather addition, according to Reuters in October, Brazil’s civil aviation secretary, Ronei than months Glanzmann, said the MAX could return to service before end-2019,.
We had expected it to take other countries as long as 6 months after the FAA granted approval before allowing the plane to return to service in their jurisdictions. However, in view of the more optimistic tone being expressed by non-US aviation officials, we believe the time lag between approval by the FAA and other regulators could run to weeks rather than months.
A shorter-than-expected time needed to secure the approval of authorities in other jurisdictions could point to a faster-than-expected return to service globally in 2020, which we would see as positive for aircraft leasing companies such as BOCA.
On the other hand, if the grounding remains in place for longer than we expect, or production stops altogether, Boeing may cut prices for future orders to compensate clients for the extra waiting time and secure its market share amid competition from Airbus’ A320neo series.
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China Aviation: 20 December 2019
Boeing: 737 MAX backlog Airbus: A320neo cumulative deliveries and orders Month Delivery Gross orders Backlog (units) (units) 3M19 46 7 4,636 450 6,100 4M19 57 10 4,625 400 6,000 5M19 57 14 4,621 350 6M19 57 14 4,550 300 5,900 7M19 57 14 4,547 250 8M19 57 14 4,547 5,800 9M19 57 14 4,547 200 10M19 57 14 4,525 150 5,700
100 5,600 50 0 5,500 2M19 3M19 4M19 5M19 6M19 7M19 8M19 9M19 10M19 Deliveries Gross order Blacklog (RHS)
Source: Company, Daiwa Source: Company, Daiwa
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China Aviation: 20 December 2019
Better volume growth for Chinese airlines in 2020E Passenger traffic growth likely to continue despite flight controls Resumption of Boeing’s 737 MAX is key Resumption of Boeing’s For 10M19, passenger volume growth for international routes remained robust at over 10% 737 MAX would help to YoY, while domestic routes saw much slower growth in the mid to high single digits. We increase capacity in the forecast domestic and international passenger volume to rise by 8% YoY and 12% YoY, market respectively, for 2020, assuming Boeing’s 737 MAX resumes operation in China in mid- 2020 and the macro situation in China remains similar to that in 2019. We believe the resumption of the Boeing 737 MAX in 2020 will be key to a passenger volume increase, and expect international routes to grow faster than domestic routes as the flight controls imposed by the Civil Aviation Administration of China (CAAC) are likely to continue in 2020.
China: passenger growth by route 30% 25% 20% 15% 10% 5% 0%
(5%)
Jul-18 Jul-19
Apr-18 Oct-18 Apr-19 Oct-19
Jan-18 Jun-18 Jan-19 Jun-19
Mar-18 Mar-19
Feb-18 Feb-19
Aug-18 Sep-18 Nov-18 Dec-18 Aug-19 Sep-19
May-18 May-19 Domestic route International route
Source: CAAC, Daiwa
China: household disposable income per capita (CNY) 30,000 12%
20,000 10%
10,000 8%
0 6% 2014 2015 2016 2017 2018 6M19 China household disposable income per capita (LHS) YoY (RHS)
Source: NBS, Daiwa
CAAC controls at busy airports to remain in place Busy airports continue We expect the China aviation industry to continue to be under the purview of the CAAC in to face flight restrictions 2020, as it has been since 2017. For the latest winter-spring flight season in 2019 (ie, 27 October 2019 to 28 March 2020), the CAAC has not relaxed limits on the number of flights, especially for large-scale airports which received limited increments in flight slots. The 22 “key coordination airports” face the toughest requirements among China airports, for which the CAAC limits flight slot growth to less than 3% YoY for the 2019 winter-spring season. For non-key airports with annual passenger throughput of 1m to more than 10m, flight slot growth is capped at a less stringent rate of 5-20% YoY for the 2019 winter-spring season.
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China Aviation: 20 December 2019
China: 2019 winter-spring season airport flight slot guidance Airports Maximum growth/maximum aircraft movement 22 key coordination airports 3% Non-key airports with over 10m passenger throughput 5% Airports with 5-10m passenger throughput 10% Airports with 2-5m passenger throughput 15% Airports with 1-2m passenger throughput 20% Airport with less than 1m passenger throughput Less than 4 aircraft movement per hour; less than 1 aircraft movement per 15-min
Source: CAAC, Daiwa
Robust flight schedule According to the CAAC’s pre-flight management system (民用航空预先飞行计划管至系统), YoY growth at Baiyun the large-scale airports in Beijing, Shanghai, Guangzhou and Shenzhen have different and Baoan airports flight schedule increments in the 2019 winter-spring season.
In general, the number of flights at China’s large-scale airports for the 2019 winter-spring season is on track to meet the CAAC’s guidance except for Guangzhou’s Baiyun and Shenzhen’s Baoan airports, which posted the highest YoY growth rates of 6.8% and 5.7%, respectively. We believe the higher-than-guided growth is attributable to airport-specific reasons: Baiyun Airport opened its Terminal 2 in 2018, and Baoan Airport benefited from the central government’s policies on Shenzhen being a pioneer city in China’s economic transition.
Flight growth at Shanghai Pudong airport remains relatively flat YoY for the 2019 winter spring season, the same as in previous flight seasons in 2018, ranging from -0.8% to +0.5%. Given the satellite concourses at Pudong Airport opened in September 2019, we expect the number of flights there to increase over the next few flight seasons. However, Beijing Capital International Airport (BCIA) faces a decline of 4.8% YoY in the number of flights for the 2019 winter-spring season (the CAAC releases the flight schedule ahead of the flight season) due to air traffic diversions to Daxing Airport.
Chinese airports flight schedule Number of flights Shanghai Shanghai BCIA Guangzhou Shenzhen Year Flight season Pudong Hongqiao Baiyun Baoan 2019-2020 Winter Spring 10,567 5,332 11,595 10,185 7,755 2019 Summer Autumn 10,960 5,258 12,367 10,035 7,583 2018-2019 Winter Spring 10,617 5,195 12,180 9,533 7,339 2018 Summer Autumn 10,906 5,256 12,351 9,424 7,178 2017-2018 Winter Spring 10,685 5,184 12,245 9,353 7,147 2017 Summer Autumn 10,896 5,270 12,423 9,263 7,009 2016-2017 Winter Spring 10,505 5,200 12,066 9,068 6,821 2016 Summer Autumn 10,524 5,292 12,246 8,777 6,645 2015-2016 Winter Spring 10,154 5,216 12,075 8,495 6,631
YoY 2019-2020 Winter Spring -0.5% 2.6% -4.8% 6.8% 5.7% 2019 Summer Autumn 0.5% 0.0% 0.1% 6.5% 5.6% 2018-2019 Winter Spring -0.6% 0.2% -0.5% 1.9% 2.7% 2018 Summer Autumn 0.1% -0.3% -0.6% 1.7% 2.4% 2017-2018 Winter Spring 1.7% -0.3% 1.5% 3.1% 4.8% 2017 Summer Autumn 3.5% -0.4% 1.4% 5.5% 5.5% 2016-2017 Winter Spring 3.5% -0.3% -0.1% 6.7% 2.9%
Source: CAAC’s pre-flight management system, Daiwa
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China Aviation: 20 December 2019
Greater increase in international capacity than on domestic routes Greater passenger For the latest flight season, ie, the 2019 winter-spring season, the number of flight slots will capacity growth on grow moderately in terms of the weekly flight schedule. Based on our calculations, the international routes vs. scheduled flight time slots would increase by 5.8% YoY to 116,003 flights per week during domestic routes the 2019 winter-spring season, slower growth than in the same period in 2018, which saw 6.8% growth.
By route, passenger volume for domestic routes will expand by 5% YoY in the 2019 winter- spring season, less than the 6.8% and 8.9% growth rates for the 2018 winter-spring and 2019 summer-autumn season, respectively. However, the number of flights for China airlines’ international and regional routes improved to 16.3% YoY and 7.5% YoY in the 2019 winter-spring season, both better than in the same flight season last year. Note that international routes have been expanded for 4 flight seasons in a row since the 2017 winter-spring season.
CAAC flight schedule by season (in units) # of flights China airlines International airlines Total Year Flight season Domestic International Regional Sub-total 2019-2020 Winter Spring 90,332 13,206 1,806 105,344 10,659 116,003 2019 Summer Autumn 92,474 12,464 1,832 106,770 11,160 117,930 2018-2019 Winter Spring 86,017 11,353 1,680 99,050 10,606 109,656 2018 Summer Autumn 84,926 11,030 1,670 97,626 10,618 108,244 2017-2018 Winter Spring 80,538 10,268 1,614 92,420 10,296 102,716 2017 Summer Autumn 80,481 10,324 1,594 92,399 9,986 102,385 2016-2017 Winter Spring 74,410 9,842 1,558 85,810 9,473 95,283
Source: CAAC’s pre-flight plan management system, Daiwa
CAAC flight schedule by season (YoY growth) YoY China airlines International airlines Total Year Flight season Domestic International Regional Sub-total 2019-2020 Winter Spring 5.0% 16.3% 7.5% 6.4% 0.5% 5.8% 2019 Summer Autumn 8.9% 13.0% 9.7% 9.4% 5.1% 8.9% 2018-2019 Winter Spring 6.8% 10.6% 4.1% 7.2% 3.0% 6.8% 2018 Summer Autumn 5.5% 6.8% 4.8% 5.7% 6.3% 5.7% 2017-2018 Winter Spring 8.2% 4.3% 3.6% 7.7% 8.7% 7.8% 2017 Summer Autumn 8.1% 9.8% -13.7% 7.8% 4.7% 7.5% 2016-2017 Winter Spring 8.7% 6.3% -13.7% 7.9% 11.2% 8.2%
Source: CAAC’s pre-flight plan management system, Daiwa
Passenger yields likely to remain under pressure We expect the macro The Big-3 Chinese airlines posted disappointing 3Q19 results, likely due to weak slowdown to continue to passenger yields during the summer season. Assuming more capacity is released in 2020 put pressure on airlines’ and the macro situation in China remains the same as in 2019, we expect passenger passenger yields yields to remain under the same kind of pressure as in 2019, but not deteriorate much. For 2020, we forecast the Big-3 airlines to see a 2% YoY decline in passenger yields on international routes, and domestic airlines to record a 1-2% YoY increase in passenger yields. In our view, the weaker passenger yield trend on international routes would be due mainly to more capacity being added as compared with domestic routes.
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China Aviation: 20 December 2019
Order acceleration for general aviation But unlikely to meet the 13th Five Year Plan target We expect aircraft Heading into 2020, the final year of the 13th Five Year Plan, we believe the China Aviation orders and deliveries to sector will speed up orders and aircraft deliveries, though it may not be able to reach the speed up in the final targets set out in the plan (see table below). For the general aviation sub-segment (ie, non- year of the 13th FYP military and non-public transportation purposes), China targets robust market expansion with a 5-year CAGR of 28% to 5,000 units by the end of 2020 — more than 3x the number in 2015 (the previous five-year plan).
This ambitious target for expanding the number of aircraft in the general aviation segment may not be achievable, though YoY growth in the number of aircraft has been accelerating since 2019, according to AviChina’s guidance. This is the usual trend in the final year of a FYP period.
In the 12th Five Year Plan (ie, 2011-15), the number of aircraft expanded by 22% YoY in 2015, the final year of the plan, from 8% and 20% in 2014 and 2013, respectively. In order to meet the target, YoY growth in 2020 will have to be higher than the 16% growth recorded in 2018 and 1H19.
China Aviation: 13th Five Year Plan 2020 Target Annual average growth Material and fatal accidents ratio <0.15 per million hours NA Volume of passengers carried 720 million 10.8% Market share of passengers carried among transportation methods 28% NA Cargo volume carried 8.5 million tonnes 6.2% Total transportation volume (passenger + cargo) 142 billion tonnes km 10.4% Number of airports approximately 260 NA Annual aircraft movement capacity 13 million NA Flight on-time rate 80% NA Energy consumption per tonne km and CO2 emission NA >-4%
Source: CAAC, Daiwa
China Aviation – general aviation: 13th Five Year Plan 2020 Target 2018 Number of general aviation aerodrome 500 202 Annual general aviation flight time 2 million hours 0.9 million hours General aviation aircraft 5000 2,095
Source: CAAC, Daiwa
China: number of general aviation aircraft 3,000 25%
2,500 20%
2,000 15% 1,500 10% 1,000
500 5%
0 0% 2013 2014 2015 2016 2017 2018 1H2019 units (LHS) YoY (RHS)
Source: CAAC, Daiwa
China: scenario analysis for general aviation aircraft Year units YoY 2018 2,095 16% 2019E 2,425 16%* 2020E Best case (based on 23% unattainable ratio) 3,850 59% Base case (based on no less than 16% YoY growth) 2,910 20%
Source: CAAC, Daiwa estimate Note: * assumes 2H19 growth rate to be the same as in 1H19
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China Aviation: 20 December 2019
Recent China airspace adjustment neutral to BCIA Recent airspace Since 2015, the CAAC has been working to redesign airspace flight routes in China to adjustments were due to unify the 5 airspace control areas in northern, southern, midwest, northeast and northwest route optimisation and China. The airspace reform aims to optimise and balance the existing flight network to the opening of Daxing reduce congestion and promote efficiency. After a 4-year effort, the airspace restructuring Airport was completed in October 2019, while the new Beijing Daxing Airport was opened in September 2019.
The adjustment in airspace covers the area from the border between China and Mongolia to the Guilin restricted area (from north to south), as well as from the Dalian restricted area to the west of Inner Mongolia (from east to west). The scope of the adjustment involved over 200 airways and more than 4,000 flight routes, affecting c.5,300 flights and 29 civil aviation airports. After the reform, an additional 4,700km of flight mileage was generated and over 100 way points were added.
China: covered airspace adjustment area
Source: CAAC, Daiwa
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China Aviation: 20 December 2019
Beijing-Guangzhou flight route reform
Source: Google, Daiwa
For the Beijing-Guangzhou route, one of the most important flight routes in China, one-way traffic restructuring of the route has been partially completed for the north segment from Beijing to Wuhan (red shaded area in map above). The CAAC expects the south segment reform (ie, Wuhan to Guangzhou; green shaded area) to be completed in 2020.
To incorporate the new Daxing Airport, airspace above Beijing has been restructured so that its control area has increased to 31 units from 27 previously and its control area size has been doubled to 34,500 sq km. In 2021, Beijing airspace will be the busiest airspace area in China, with 2,900 aircraft movements per day, according to the CAAC.
We believe the recent airspace reform was mainly to rearrange flight routes to optimise operations amid increasing aircraft movements in China. Daxing Airport began operating in September 2019, but it became clear that the original route plan would be unable to digest the likely increase in aircraft movements in Beijing’s airspace in the future. This is the reason the CAAC rolled out the new airspace scheme after Daxing Airport commenced operations, in our view.
Flight route reform is In our view, the increase in airspace traffic in Beijing is positive for air traffic in the area in neutral for BCIA’s flight the long term, as regional authorities have greater autonomy on route arrangements within increase plans the enlarged control area. Note that the reform covers the regional level of air traffic, while the 2 airports in Beijing (BCIA and Daxing Airport) have re-designed their flight routes. Although the reform was due partly to the launch of Daxing Airport, we do not expect any change to BCIA’s flight increase plans during the traffic transition period till 2022.
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China Aviation: 20 December 2019
Recommendations Look for volume players We see TravelSky We expect the volume players to benefit in 2020 assuming the Boeing 737 MAX resumes benefiting more on operations in China. In our view, the release of more capacity in 2020 would help boost air volume growth traffic volume and benefit companies like TravelSky Technology. The resumption of Boeing 737 MAX deliveries would also remove the overhang on BOCA, even though we do not expect a sharp acceleration in deliveries in 2020. Therefore, we see BOCA remaining a stable USD asset play with decent earnings growth and dividend yield, while TravelSky is likely to see more upside in terms of volume and long-term development from its overseas penetration through the New Distribution Capability (NDC) scheme. The company’s recent announcement of a Share Appreciation Rights (SAR) issuance should also incentivise management to drive profitability. Airports such as BCIA may not benefit too much from the return to service of 737 MAX as its capacity increase would likely be tightly controlled by the CAAC.
Ride expansion of the general aviation industry in 2020E We expect all of We expect deliveries for the general aviation industry to accelerate in the final year of the AviChina’s subsidiaries 13th FYP, and see this development as positive for AviChina. Its subsidiary, AVIC Planning, to record positive YoY should also record positive revenue growth due to an acceleration of aviation infrastructure revenue growth over projects. We look for 2019-20 to be the period when all of AviChina’s subsidiaries record 2019-20 positive earnings, traffic, and revenue growth YoY. Besides, its recent asset swap with Hongdu Group should help Hongdu Aviation turn profitable in 2020, after it posted approximately CNY80m in net losses for 1-3Q19.
Go cyclical An improving trade We believe the first-phase trade agreement between China and the US would help relationship would alleviate concerns about a further deterioration in the trade relationship between the 2 benefit the Chinese countries, and thus mitigate the macro slowdown in China. In turn, this should help restore airlines; our top pick is confidence in trade-related stocks and avoid further depreciation of the CNY against the China Southern USD.
The share prices of Chinese airlines declined sharply in the middle of the year, on the back of CNY depreciation, which was in turn due to the downturn in the US-China trade relationship. With this trade relationship seeming to stabilise somewhat, we believe investors’ appetite for Chinese airlines will return in 2020. Therefore, we recommend that investors accumulate our top pick, China Southern Airlines.
For bottom-fishing, we We do not expect the situation in Hong Kong to worsen, even though the protests may not recommend Cathay end soon. We believe the disruptions to flights and airport operations have been minimal Pacific over the past few months, though travel sentiment, especially for tourists visiting Hong Kong, remains weak. Nonetheless, market expectations for good numbers for the Hong Kong travel market in 2019 are very low. As such, we believe the sector’s historical low valuation offers a bottom-fishing opportunity in Cathay Pacific.
Valuations attractive overall In the year to 19 December 2019, TravelSky and AviChina underperformed the market by over 10% and 30%, respectively. The 2 stocks are trading below their past-3-year PER averages, respectively. We expect the coming earnings season to be a rerating catalyst for both stocks. In addition, the positive long-term outlook for TravelSky would be an attractive long-term rerating factor.
14
China Aviation: 20 December 2019
TravelSky: PER (x) (PER) 26 24 22 20 18 16 14 12
10
Jul-19 Jul-17 Jul-18
Apr-17 Oct-17 Apr-18 Oct-18 Apr-19 Oct-19
Jan-17 Jun-17 Jan-18 Jun-18 Jan-19 Jun-19
Feb-17 Mar-17 Feb-18 Mar-18 Feb-19 Mar-19
Nov-17 Nov-16 Dec-16 Aug-17 Sep-17 Dec-17 Aug-18 Sep-18 Nov-18 Dec-18 Aug-19 Sep-19 Nov-19
May-17 May-18 May-19 PER +1 SD 3-year Average PER -1 SD
Source: Bloomberg, Daiwa forecasts
AviChina: PER (x) (PER) 24 22 20 18 16 14 12 10
8
Jul-17 Jul-18 Jul-19
Apr-17 Oct-17 Apr-18 Oct-18 Apr-19 Oct-19
Jan-18 Jan-17 Jun-17 Jun-18 Jan-19 Jun-19
Mar-18 Feb-17 Mar-17 Feb-18 Feb-19 Mar-19
Nov-16 Dec-16 Aug-17 Sep-17 Nov-17 Dec-17 Aug-18 Sep-18 Nov-18 Dec-18 Aug-19 Sep-19 Nov-19
May-17 May-18 May-19 PER +1 SD 3-yr average PER -1 SD -2 SD
Source: Bloomberg, Daiwa forecasts
Expectations for Cathay Although inbound and outbound traffic to Hong Kong has fallen sharply in the past few Pacific shares are low months, Cathay Pacific’s share price has been quite resilient, remaining in a range of HKD9-10 after a sharp decline in July 2019. We expect Hong Kong passenger traffic to remain weak in the near term, and believe market expectations are low as well. Any improvement in policy, traffic numbers or sentiment would likely help rerate the stock.
Cathay Pacific: PBR (x) (PBR) 1.0
0.9
0.8
0.7
0.6
0.5
Jul-17 Jul-18 Jul-19
Apr-17 Oct-17 Apr-18 Oct-18 Apr-19 Oct-19
Jun-17 Jan-18 Jun-18 Jan-19 Jun-19
Mar-17 Feb-18 Mar-18 Feb-19 Mar-19
Aug-17 Sep-17 Nov-17 Dec-17 Aug-18 Sep-18 Nov-18 Dec-18 Aug-19 Sep-19 Nov-19 Dec-19
May-17 May-18 May-19 PBR +1 SD 3-year Average PBR -1 SD -2 SD
Source: Bloomberg, Daiwa forecasts
We recommend CSA due During the weak 3Q19, CSA outperformed its peers with 26% YoY adjusted net profit to its appealing growth (vs. low single-digit growth for CEA and Air China). Although management shared valuation its relatively cautious view on capacity deployment versus its 2 peers, we believe CSA has the greatest flexibility over capacity adjustments; it also outperformed its peers in 3Q19 earnings. Among the Big-3 airlines, CSA has the greatest sensitivity to CNY movements. Therefore, if we assume the CNY stabilises, CSA would likely benefit the most among the Chinese airlines we cover.
15
China Aviation: 20 December 2019
China: airlines’ CNY sensitivity AC CSA CEA
Assumes 1% increase in CNY vs. the USD, 2019E net profit would change by (%) 9% 29% 12%
Source: Daiwa estimates
CSA: PBR (x) (PBR) 1.7 1.5 1.3 1.1 0.9 0.7
0.5
Jul-17 Jul-18 Jul-19
Apr-19 Apr-17 Oct-17 Apr-18 Oct-18 Oct-19
Jan-17 Jun-17 Jan-18 Jun-18 Jan-19 Jun-19
Feb-17 Mar-17 Feb-18 Mar-18 Feb-19 Mar-19
Dec-17 Aug-18 Nov-19 Nov-16 Dec-16 Aug-17 Sep-17 Nov-17 Sep-18 Nov-18 Dec-18 Aug-19 Sep-19
May-17 May-18 May-19 PBR +1 SD 3-yr average -1 SD
Source: Bloomberg, Daiwa forecasts
16
China Aviation: 20 December 2019
Global airlines peers: valuation comparison Name Bloomberg Trading Share price Rating PBR (x) EV/EBITDA (x) ROE (%) Code Currency 19-Dec-19 FY19E FY20E FY19E FY20E FY19E FY20E China Air China Ltd-H * 753 HK HKD 7.85 Outperform 1.0 1.0 4.6 3.7 7.5 9.7 China Eastern Airlines Co-H * 670 HK HKD 4.19 Buy 0.9 0.9 8.3 7.3 4.7 6.5 China Southern Airlines Co-H * 1055 HK HKD 5.32 Buy 0.9 0.8 6.0 5.2 6.6 8.4 Air China Ltd-A 601111 CH CNY 9.09 NR 1.3 1.2 n.a. 7.2 8.3 9.6 China Eastern Airlines Co-A 600115 CH CNY 5.50 NR 1.3 1.2 7.6 6.7 7.5 9.9 China Southern Airlines Co-A 600029 CH CNY 6.94 NR 1.3 1.2 10.2 9.2 7.4 9.3 Hainan Airlines Co-A 600221 CH CNY 3.25 NR n.a. 1.0 n.a. n.a. n.a. n.a. Asia Cathay Pacific Airways * 293 HK HKD 11.34 Buy 0.7 0.7 4.4 3.3 1.4 5.9 Singapore Airlines Ltd ** SIA SP SGD 9.05 Outperform 0.8 0.8 5.6 5.8 6.2 6.6 China Airlines Ltd 2610 TT TWD 9.15 NR 0.8 0.9 4.0 3.9 0.6 2.6 Eva Airways Corp 2618 TT TWD 13.80 NR 0.9 0.9 4.7 n.a. 8.9 10.7 Ana Holdings Inc ** 9202 JP JPY 3,642.0 Hold 1.1 1.1 5.3 5.8 11.1 8.1 Japan Airlines Co Ltd ** 9201 JP JPY 3,382.0 Buy 1.0 1.0 3.1 3.1 12.3 9.2 Qantas Airways Ltd *** QAN AU AUD 7.40 NR 3.4 n.a. 4.4 4.4 25.5 25.8 Air New Zealand Ltd *** AIR NZ NZD 2.96 NR 1.6 1.6 5.3 4.6 11.8 14.1 Thai Airways International THAI TB THB 7.00 NR n.a. 2.0 12.4 7.3 n.a n.a Asiana Airlines 020560 KS KRW 5,290 NR 1.3 1.5 12.0 8.4 n.a n.a International Alaska Air Group Inc ALK US USD 69.20 NR 1.9 n.a. 6.6 n.a. 19.3 19.4 United Continental Holdings UAL US USD 89.22 NR 1.8 1.4 5.5 5.3 28.3 24.6 Delta Air Lines Inc DAL US USD 59.14 NR 2.5 2.1 5.8 5.8 30.9 26.8 Deutsche Lufthansa-Reg LHA GR EUR 16.66 NR 0.8 0.7 3.0 2.8 13.2 14.8 Air France-Klm AF FP EUR 9.96 NR 2.0 1.6 2.7 2.6 21.0 26.4 Aeroflot-Russian Airlines AFLT RM RUB 104.48 NR n.a. n.a. 4.0 4.3 n.a 39.1 LCC Spring Airlines 601021 CH CNY 43.07 NR 2.7 n.a. 14.2 11.3 n.a. 13.5 Nok Airlines Pcl NOK TB THB 2.00 NR n.a. n.a. n.a. n.a. n.a. n.a. Easyjet Plc **** EZJ LN GBp 14.30 NR 1.7 1.8 6.3 5.8 10.4 11.8 Ryanair Holdings Plc ** RYA ID EUR 14.60 NR 3.4 n.a. 9.0 9.6 21.0 15.9 Gol Linhas Aereas Intel-Adr GOL US USD 17.80 NR n.a. n.a. 6.3 6.1 n.a n.a Southwest Airlines Co LUV US USD 54.08 NR 2.4 2.1 6.7 6.3 n.a. 23.4 Virgin Australia Holdings Lt *** VAH AU AUD 0.15 NR 1.4 29.0 5.4 4.3 n.a n.a Cebu Air Inc CEB PM PHP 90.70 NR 1.2 1.0 4.8 4.2 21.0 21.0 Total Weighted average 1.6 1.7 6.3 5.9 16.0 15.7 High 3.4 29.0 14.2 11.3 30.9 26.8 Low 0.7 0.7 2.7 2.6 0.6 2.6 Median 1.2 1.0 5.6 5.8 11.1 11.8
Source: Bloomberg, *Daiwa forecasts Note: **Year ended 31 Mar, ***Year ended 30 Jun, ****Year ended 30 Sept
17
China Aviation: 20 December 2019
Global aviation manufacturing peers: valuation comparison Name Bloomberg Trading Share price Rating PER (x) PBR (x) EV/EBITDA (x) Div yield (%) ROE (%) Code Currency 19-Dec-19 FY19E FY20E FY19E FY20E FY19E FY20E FY19E FY20E FY19E FY20E PRC Avichina Industry & Technology * 2357 HK HKD 3.61 Buy 13.8 11.4 1.1 1.0 8.4 7.5 1.1 1.3 8.4 9.3 Jiangxi Hongdu Aviation Indust 600316 CH CNY 13.43 NR 58.4 49.7 1.9 1.9 32.2 30.0 0.4 0.4 3.3 3.7 Avic Helicopter Co Ltd 600038 CH CNY 47.99 NR 44.1 36.3 3.5 3.2 28.7 24.4 0.6 0.8 7.9 8.9 China Avic Electronics Co Ltd 600372 CH CNY 14.51 NR 44.6 37.7 3.2 3.0 25.5 22.9 0.4 0.4 7.1 7.9 China Aviation Optical-Electri 002179 CH CNY 39.79 NR 34.6 27.8 5.6 4.7 27.4 22.4 0.3 0.4 16.5 17.4 Avic Aircraft Co Ltd 000768 CH CNY 16.45 NR 68.3 56.3 2.8 2.7 38.0 33.5 0.7 0.9 3.9 4.5 Avic Aviation Engine Corp Plc 600893 CH CNY 20.65 NR 38.7 31.8 1.7 1.6 20.5 18.4 0.8 0.9 4.3 5.0 Avic Heavy Machinery Co Ltd 600765 CH CNY 10.29 NR 23.4 20.8 1.8 1.6 12.5 11.1 n.a n.a 7.5 7.8 China Spacesat Co Ltd 600118 CH CNY 21.17 NR 51.4 44.9 4.3 4.1 31.3 28.5 0.6 0.7 8.0 8.5 Citic Offshore Helicopter Co L 000099 CH CNY 7.46 NR 26.6 25.7 1.4 1.3 9.1 8.8 0.4 0.4 5.3 5.3 Sichuan Haite High-Tech Co Ltd 002023 CH CNY 11.95 NR 91.9 85.4 2.5 2.5 37.1 33.7 n.a n.a 2.3 2.6 Asia Singapore Technologies Enginee STE SP SGD 3.90 Hold 21.2 18.8 5.2 4.9 14.5 12.8 3.9 4.1 25.0 26.9 Korea Aerospace Industries Ltd * 047810 KS KRW 34,100 Outperform 14.6 16.3 2.7 2.4 10.9 10.5 1.5 1.5 19.9 15.4 Europe Bae Systems Plc BA/ LN GBp 5.69 NR 12.6 12.0 3.0 2.7 9.1 8.6 4.1 4.2 24.1 22.1 Qinetiq Group Plc ** QQ/ LN GBp 3.52 NR 19.4 18.3 2.8 3.5 12.0 11.0 1.9 2.0 12.6 13.3 Ultra Electronics Holdings Plc ULE LN GBp 21.16 NR 18.3 17.1 3.4 3.3 12.2 11.6 2.5 2.6 19.2 20.0 Meggitt Plc MGGT LN GBp 6.38 NR 17.7 16.2 2.0 1.9 12.4 11.6 2.7 2.9 10.4 11.3 Rolls-Royce Holdings Plc RR/ ln GBp 6.96 NR 41.7 23.8 n.a. n.a. 9.3 7.9 1.8 2.1 n.a n.a Cobham Plc COB LN GBp 1.64 NR 24.5 21.9 3.0 2.7 13.2 11.9 0.7 1.1 11.6 12.6 Dassault Aviation Sa AM FP EUR 1160.00 NR 13.6 13.5 2.0 1.8 10.4 11.5 1.9 1.9 14.8 13.6 Leonardo-Finmeccanica Spa LDO IM EUR 10.63 NR 9.8 8.5 1.2 1.1 6.5 6.0 1.4 1.7 13.9 13.3 Safran Sa SAF FP EUR 139.85 NR 22.7 19.7 4.6 4.1 14.0 12.6 1.6 1.9 20.9 22.0 Mtu Aero Engines Ag MTX GR EUR 252.50 NR 25.0 22.4 5.5 4.8 n.a. n.a. 1.3 1.6 22.6 22.5 Saab Ab SAABB SS SEK 314.70 NR 20.4 16.7 2.0 1.9 11.3 9.8 1.6 1.9 10.4 11.5 North America Heico Corp ****** HEI US USD 115.62 NR 49.6 43.0 9.3 6.4 26.2 24.3 0.2 0.1 20.7 20.4 Boeing Co/The BA US USD 333.50 NR 450.1 17.9 n.a. n.a. 53.5 12.3 2.4 2.5 n.a n.a United Technologies Corp UTX US USD 148.71 Outperform 18.2 17.0 3.1 2.9 12.2 11.4 2.0 2.1 16.5 16.3 Textron Inc TXT US USD 44.67 NR 12.1 11.8 1.8 1.6 8.0 7.7 0.2 0.2 15.8 14.3 Spirit Aerosystems Holdings In SPR US USD 75.32 NR 11.7 10.3 4.4 4.4 7.3 6.6 0.7 0.7 43.8 44.5 Triumph Group Inc ** TGI US USD 26.27 NR 14.3 9.9 3.5 n.a. 16.1 8.8 0.6 0.5 45.8 n.a Kaman Corp KAMN US USD 67.28 NR 42.2 27.4 n.a. n.a. 15.6 12.0 1.2 1.2 6.4 9.5 Lockheed Martin Corp LMT US USD 383.15 NR 17.7 15.7 25.1 14.4 12.7 11.9 2.3 2.5 222.2 125.9 Bombardier Inc BBD/B CN CAD 1.95 NR n.a. 53.0 n.a. n.a. 10.3 8.3 0.1 n.a 2.0 n.a Aerovironment Inc *** AVAV US USD 64.03 NR 37.6 39.5 3.0 3.0 23.9 22.2 n.a n.a 9.3 7.8 Northrop Grumman Corp NOC US USD 342.21 NR 16.8 14.9 5.7 5.0 14.5 13.4 1.5 1.6 38.4 36.8 Transdigm Group Inc ***** TDG US USD 574.96 NR 31.8 27.4 n.a. n.a. 19.4 16.4 n.a n.a n.a n.a Booz Allen Hamilton Holding Co ** BAH US USD 70.86 NR 25.4 22.6 11.8 12.9 17.0 15.3 1.1 1.5 64.0 65.3 Hexcel Corp HXL US USD 73.80 NR 20.9 19.2 4.5 4.0 12.7 11.9 0.9 0.9 21.9 22.0 Mantech International Corp/Va MANT US USD 79.08 NR 32.6 30.3 2.1 2.0 17.4 16.1 1.4 1.4 6.8 7.2 Curtiss-Wright Corp CW US USD 140.84 NR 19.6 18.4 3.5 3.4 12.9 12.2 0.5 0.5 19.0 18.0 Raytheon Co RTN US USD 216.11 NR 18.2 16.6 4.7 4.1 12.2 11.3 1.7 1.9 27.3 27.1 Moog Inc ***** MOG/A US USD 87.03 NR 17.1 15.7 2.2 2.1 10.0 9.4 0.6 1.1 13.7 14.0 Weighted average 109.3 18.7 5.6 4.1 21.8 12.4 1.8 2.0 40.9 29.3 High 450.1 85.4 25.1 14.4 53.5 33.7 4.1 4.2 222.2 125.9 Low 9.8 8.5 1.1 1.0 6.5 5.6 0.1 0.1 2.0 2.6 Median 22.0 19.5 3.0 2.9 13.2 11.9 1.2 1.5 14.3 13.5
Source: Bloomberg, *Daiwa forecasts Note: **Year ended Mar, ***Year ended Apr, ****Year ended Aug, *****Year ended Sept, ******Year ended Oct
18
China Aviation: 20 December 2019
Global airport peers: valuation comparison Name Bloomberg Trading Share price Rating PER (x) PBR (x) EV/EBITDA (x) Div yield (%) ROE (%) Code Currency 19-Dec-19 FY19E FY20E FY19E FY20E FY19E FY20E FY19E FY20E FY19E FY20E China Beijing Capital Intl Airpo-H * 694 HK HKD 7.84 Underperform 13.7 22.7 1.2 1.2 6.8 9.0 3.3 2.0 9.1 5.3 Guangzhou Baiyun Internati-A 600004 CH CNY 18.15 NR 42.5 30.5 2.3 2.2 13.7 11.5 0.7 1.0 5.3 7.1 Shanghai International Air-A 600009 CH CNY 78.30 - 28.8 26.3 4.7 4.1 21.0 18.4 1.0 1.1 16.8 16.2 Xiamen International Air-A 600897 CH CNY 22.32 NR 13.0 12.5 1.8 1.6 7.2 7.1 2.9 2.9 13.7 13.3 Shenzhen Airport Co-A 000089 CH CNY 10.00 NR 29.7 24.8 1.7 1.6 13.9 12.1 0.9 1.0 5.7 6.5 Asia Airports Of Thailand Pcl **, ****** AOT TB THB 75.00 BUY 41.3 38.7 6.9 6.4 26.3 24.6 1.4 1.5 17.3 17.3 Malaysia Airports Hldgs Bhd *** MAHB MK MYR 7.62 HOLD 21.8 19.0 1.4 1.4 7.9 7.5 2.5 2.9 7.0 7.8 Auckland Intl Airport Ltd ***** AIA NZ NZD 8.99 NR 39.4 39.8 1.9 1.8 23.7 23.2 2.5 2.5 4.8 4.5 Japan Airport Terminal Co **** 9706 JP JPY 6,140 Hold 15.2 62.5 3.1 2.8 14.7 15.9 0.7 0.7 22.1 4.9 Europe Flughafen Wien Ag FLU AV EUR 37.85 NR 19.4 18.6 2.4 2.3 9.1 8.9 3.0 3.2 13.6 13.2 Fraport Ag Frankfurt Airport FRA GR EUR 74.88 NR 15.9 14.8 1.5 1.4 9.7 9.2 2.7 2.8 10.0 10.4 Adp ADP FP EUR 173.70 NR 28.8 26.2 3.3 3.1 13.0 12.4 2.1 2.4 11.9 12.6 Flughafen Zuerich Ag-Reg FHZN SW CHF 175.20 NR 18.0 17.5 2.2 2.1 9.6 9.2 4.1 3.2 12.3 12.3 Latin America Grupo Aeroport Del Pacific-B GAPB MM MXN 231.24 NR 23.7 19.6 7.1 6.0 13.9 11.8 3.8 4.2 27.0 32.0 Grupo Aeroport Del Sureste-B ASURB MM MXN 354.92 NR 19.6 17.9 3.1 2.9 11.8 10.9 2.5 2.6 18.5 18.1 Grupo Aeroportuario Del Cent OMAB MM MXN 143.65 NR 17.4 15.5 5.8 5.1 10.9 10.0 3.0 3.8 35.6 34.2 Travel-related IT Travelsky Technology Ltd-H * 696 HK HKD 19.00 Buy 19.5 17.2 2.7 2.4 12.8 11.1 1.7 2.0 14.3 14.6 Sabre Corp SABR US USD 22.71 NR 22.6 18.3 7.1 6.7 9.5 9.0 2.5 2.5 26.9 38.9
Amadeus It Holding Sa-A Shs AMS SM EUR 72.48 NR 26.2 24.4 8.2 7.1 15.4 14.4 1.8 1.9 31.9 29.3 Mean 22.8 20.0 6.0 5.4 12.6 11.5 2.0 2.1 24.4 27.6 Median 22.6 18.3 7.1 6.7 12.8 11.1 1.8 2.0 26.9 29.3 Total Weighted average 28.4 27.4 5.0 4.5 16.7 15.5 1.9 2.0 18.5 18.1 High 42.5 62.5 8.2 7.1 26.3 24.6 4.1 4.2 35.6 38.9 Low 13.0 12.5 1.2 1.2 6.8 7.1 0.7 0.7 4.8 4.5 Median 21.8 19.6 2.7 2.4 12.8 11.1 2.5 2.5 14.0 13.2
Source: Bloomberg, *Daiwa forecasts, **Covered by Thanachart, ***Covered by Affin Note: ****Year ended 31 Mar, *****Year ended 30 Jun, ******Year eneded 30 Sept
Global aircraft leasing peers: valuation comparison Name Bloomberg Trading Share price Rating PER (x) PBR (x) EV/EBITDA (x) Div yield (%) ROE (%) Code Currency 19-Dec-19 FY19E FY20E FY19E FY20E FY19E FY20E FY19E FY20E FY19E FY20E Aircraft leasing China Aircraft Leasing Group * 1848 HK HKD 8.55 Buy 6.9 6.7 1.4 1.3 6.2 7.2 8.0 8.2 21.1 19.7 BOC Aviation Ltd * 2588 HK HKD 78.95 Hold 10.0 9.0 1.5 1.3 10.8 10.2 3.5 3.9 15.7 15.7 Aircastle Ltd AYR US USD 32.03 NR 14.6 12.5 1.1 1.0 9.3 8.7 3.7 3.9 7.5 10.2 Aercap Holdings Nv AER US USD 61.46 NR 7.7 8.0 0.9 0.8 8.6 8.9 n.a. n.a. 12.1 10.4 Air Lease Corp AL US USD 47.85 NR 9.3 7.4 1.0 0.9 10.1 8.1 1.0 1.1 13.2 12.3 Fly Leasing Ltd-Adr FLY US USD 20.13 NR 3.3 6.3 0.8 0.7 5.6 6.8 n.a. n.a. 26.4 12.1 Willis Lease Finance Corp WLFC US USD 59.42 NR n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Doric Nimrod Air Two Ltd DNA2 LN GBp 138.00 NR n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Doric Nimrod Air Three Ltd DNA3 LN GBp 70.00 NR n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Weighted average 9.0 8.2 1.1 1.0 9.2 8.7 1.8 1.9 13.1 12.2 High 14.6 12.5 1.5 1.3 10.8 10.2 8.0 8.2 26.4 19.7 Low 3.3 6.3 0.8 0.7 5.6 6.8 1.0 1.1 7.5 10.2 Median 8.5 7.7 1.0 1.0 9.0 8.4 3.6 3.9 14.5 12.2 Other leasing(including ship, machinery, etc.) Aerocentury Corp ACY US USD 4.49 NR n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Global Ship Lease Inc-Cl A GSL US USD 8.78 NR 5.3 4.3 0.7 0.6 6.3 5.7 n.a. 4.6 11.5 15.0 Cai International Inc CAI US USD 28.74 NR 10.2 8.8 0.8 0.7 9.5 9.8 n.a. n.a. 7.7 9.1 First Ship Lease Trust FSLT SP SGD 0.06 NR n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Grenkeleasing Ag GLJ GR EUR 91.75 NR 31.5 27.0 3.8 3.4 n.a. n.a. 0.9 1.1 12.8 13.3 Chailease Holding Co Ltd * 5871 TT TWD 138.50 Outperform 12.1 10.7 2.6 2.3 21.7 19.1 3.5 4.0 22.9 22.6 Fuyo General Lease Co Ltd 8424 JP JPY 7,370 NR 9.4 7.9 n.a. 0.8 n.a. n.a. 2.1 2.7 n.a. 10.3 Group Lease Public Co Ltd GL TB THB 4.34 NR n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Marubeni Constr Mat Lease 9763 JP JPY 1,787 NR n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Mitsubishi Ufj Lease & Finan 8593 JP JPY 721.00 NR 9.8 9.0 0.9 0.8 n.a. n.a. 2.8 3.5 8.9 9.2 Tokai Lease Co Ltd 9761 JP JPY 1,655 NR n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Total Weighted average 15.4 13.4 2.0 1.9 6.9 6.1 2.4 2.8 13.0 14.3 High 31.5 27.0 3.8 3.4 21.7 19.1 3.5 4.6 22.9 22.6 Low 5.3 4.3 0.7 0.6 6.3 5.7 0.9 1.1 7.7 9.1 Median 10.0 8.9 0.9 0.8 9.5 9.8 2.5 3.5 11.5 13.3
Source: Bloomberg, *Daiwa forecasts
19
China Aviation: 20 December 2019
Risks US-China trade war conflict re-intensifies Currently, the US and China are working to resolve their trade dispute and have reached (though not yet signed) a phase-one trade agreement. Trade negotiations between the US and China go back and forth many times, and the outcome is highly unpredictable. In addition, the global free trade environment faces new threats from the rise of national welfare protection and localism, not only the US and China. In our view, the trade-war risk is the primary risk to the China Aviation sector and can impact passenger demand as well as the CNY exchange rate.
Lower-than-expected air traffic demand for passenger We see the secondary risk as lower-than-expected air traffic demand, given our view that China’s cargo business will continue to be under pressure. Such a scenario could be triggered by a macro slowdown in China or the global economy, which would further affect business and leisure travel demand in and out of China.
Higher-than-expected fuel-price increase and CNY depreciation Fuel prices were down 20% YoY in the year to November, and we see a risk of fuel prices rebounding once the trade war overhang dissipates. If fuel prices rise beyond our current assumption (USD75 by end-2020), the airlines’ earnings would be negatively affected. On the other hand, if the CNY depreciates further, this would negatively affect sentiment towards the airlines, even though we exclude any exchange gains or losses from our recurring net profit forecasts.
20
China Information Technology 20 December 2019
(696 HK) TravelSky Technology Travel Sky T echnol ogy
Target price: HKD24.00 (from HKD24.00) Share price (19 Dec): HKD19.00 | Up/downside: +26.3%
China aviation clients increase technology investment Kelvin Lau (852) 2848 4467 Strong incentive for Chinese airlines and airports to improve IT capacity [email protected] Expanding its revenue sources from passenger tickets Frank Yip (852) 2773 8842 Reiterating our Buy (1) rating and TP of HKD24.00 [email protected]
What's new: Chinese airlines and airports are increasingly focusing on Forecast revisions (%) technological advancement. According to the SITA 2019 China IT insights Year to 31 Dec 19E 20E 21E report, around 90% of Chinese airlines and airports plan major investments Revenue change - - - Net profit change - - - in technology by 2022, which we believe bodes well for Travelsky. Core EPS (FD) change - - - Source: Daiwa forecasts What's the impact: China aviation players willing to upgrade their systems to better serve passengers. Nearly all Chinese airlines and Share price performance airports have decided to invest in passenger-end mobile services to better (HKD) (%) connect with new consumer behaviour, especially by using virtual agents 24 110 and AI-driven chatbots. For hardware facilities, the adoption rate of self- 21 99 18 88 boarding gates that use biometrics in Chinese airports will increase to 66% 15 76 by 2022 (vs. 27% currently), according to SITA’s estimate. Also, over 50% 12 65 of Chinese airports plan to adopt a single biometric token system for all Dec-18 Mar-19 Jun-19 Sep-19 Dec-19 touch points by 2022. Travelsky (LHS) Relative to HSI (RHS)
Riding on the China aviation technology upgrade trend. Technology is 12-month range 13.94-23.75 reshaping the industry, such as the New Distribution Capability (NDC) Market cap (USDbn) 7.13 programme proposed by the IATA and development and market adoption of 3m avg daily turnover (USDm) 5.88 Shares outstanding (m) 2,926 a new, XML-based data transmission standard (NDC Standard). While Major shareholder China TravelSky Hldg Co (29.3%) there are risks to new entrants, we are positive on TravelSky’s market positioning given its competitive pricing and established client partnerships. Financial summary (CNY) Its face recognition security check gates are now in operation at Chongqing Year to 31 Dec 19E 20E 21E Jiangbei Airport and Daxing Airport, and the technology is likely to be Revenue (m) 8,125 8,964 9,808 installed in more airports in the future, in our view. Operating profit (m) 2,628 2,982 3,281 Net profit (m) 2,557 2,901 3,245 Core EPS (fully-diluted) 0.874 0.991 1.109 Possibility of more contracts from new airports in 2020. Approaching EPS change (%) 8.8 13.5 11.9 the last year of the 13th Five Year Plan, we believe the overall aviation Daiwa vs Cons. EPS (%) 0.5 (0.2) 0.2 PER (x) 19.5 17.2 15.4 business environment will improve from 2020. Note that the total number of Dividend yield (%) 1.7 2.0 2.2 civil transportation and general aviation airports was 238 and 240 as at the DPS 0.295 0.335 0.375 end of June 2019, respectively, (vs. targets of 260 and 500 airports by end- PBR (x) 2.7 2.4 2.2 2020 respectively), providing growth potential for TravelSky’s airport EV/EBITDA (x) 12.8 11.1 9.7 ROE (%) 14.3 14.6 14.8 system integration projects. Source: FactSet, Daiwa forecasts
What we recommend: We reiterate our Buy (1) rating and DCF-based 12- month TP of HKD24 for TravelSky, and see near-term share-price drivers in an earnings recovery in 2H19E and rising airport revenue in 2020. The recent launch of share appreciation rights, higher NDC transactions and tech investment are longer-term drivers, in our view. Downside risks: lower- than-expected booking growth/higher-than-expected operating expenses.
How we differ: Our 2019-21E EPS are largely in line with the Bloomberg consensus, but we see more long-term revenue growth opportunities that the market has likely not factored in.
See important disclosures, including any required research certifications, beginning on page 54
TravelSky Technology (696 HK): 20 December 2019
Financial summary Key assumptions Year to 31 Dec 2014 2015 2016 2017 2018 2019E 2020E 2021E
Overall passenger booking growth (%) 10.7 10.9 11.3 11.8 9.8 7.9 10.0 10.0
Domestic passenger booking growth 9.7 9.8 10.5 13.1 9.7 7.0 10.0 10.0 (%) Int'l passenger booking growth (%) 16.2 16.3 15.4 6.2 10.4 12.4 10.0 10.1 Foreign airlines passenger booking 11.3 10.9 2.3 3.0 1.7 10.0 2.0 3.8 growth (%) PRC airlines' int'l passenger booking 18.2 18.3 20.1 7.1 12.9 13.0 12.0 12.9 growth (%)
Profit and loss (CNYm) Year to 31 Dec 2014 2015 2016 2017 2018 2019E 2020E 2021E Aviation information technology 2,854 3,135 3,496 3,879 4,160 4,468 4,865 5,299 services Accounting, settlement and clearing 432 493 518 555 579 597 623 652 Other Revenue 2,029 1,823 2,176 2,265 2,662 3,061 3,475 3,856 Total Revenue 5,315 5,451 6,190 6,698 7,401 8,125 8,964 9,808 Other income 0 0 0 0 0 0 0 0 COGS (3,039) (2,633) (2,996) (3,120) (3,662) (3,861) (4,252) (4,656) SG&A (574) (567) (538) (528) (723) (781) (859) (945) Other op.expenses (447) (504) (479) (577) (696) (855) (872) (926) Operating profit 1,255 1,748 2,177 2,473 2,319 2,628 2,982 3,281 Net-interest inc./(exp.) 131 137 164 123 220 224 260 343 Assoc/forex/extraord./others 519 433 529 35 111 74 82 91 Pre-tax profit 1,905 2,317 2,870 2,632 2,650 2,925 3,324 3,716 Tax (213) (344) (384) (313) (269) (306) (352) (391) Min. int./pref. div./others (39) (59) (64) (70) (57) (62) (71) (79) Net profit (reported) 1,653 1,914 2,421 2,249 2,325 2,557 2,901 3,245 Net profit (adjusted) 1,202 1,562 1,996 2,270 2,350 2,557 2,901 3,245 EPS (reported)(CNY) 0.565 0.654 0.827 0.768 0.795 0.874 0.991 1.109 EPS (adjusted)(CNY) 0.411 0.534 0.682 0.776 0.803 0.874 0.991 1.109 EPS (adjusted fully-diluted)(CNY) 0.411 0.534 0.682 0.776 0.803 0.874 0.991 1.109 DPS (CNY) 0.133 0.166 0.222 0.253 0.268 0.295 0.335 0.375 EBIT 1,255 1,748 2,177 2,473 2,319 2,628 2,982 3,281 EBITDA 1,702 2,251 2,656 3,050 3,016 3,483 3,854 4,207
Cash flow (CNYm) Year to 31 Dec 2014 2015 2016 2017 2018 2019E 2020E 2021E Profit before tax 1,905 2,317 2,870 2,632 2,650 2,925 3,324 3,716 Depreciation and amortisation 394 451 427 524 643 803 819 873 Tax paid (149) (258) (317) (361) (269) (306) (352) (391) Change in working capital (233) (89) 722 388 211 182 213 0 Other operational CF items (39) (38) (58) (120) (1,095) (277) (268) (361) Cash flow from operations 1,878 2,383 3,643 3,063 2,141 3,327 3,736 3,837 Capex (964) (989) (1,134) (928) (1,472) (1,500) (1,200) (1,200) Net (acquisitions)/disposals (130) (91) (420) 1,090 1,512 1,512 1,512 1,512 Other investing CF items (720) (658) (500) (2,329) (639) (1,280) (1,243) (1,161) Cash flow from investing (1,814) (1,737) (2,055) (2,167) (599) (1,268) (931) (849) Change in debt 0 0 0 0 0 0 0 0 Net share issues/(repurchases) 0 0 0 0 0 0 0 0 Dividends paid (418) (400) (501) (665) (764) (809) (887) (1,003) Other financing CF items 0 4 0 0 0 0 0 0 Cash flow from financing (418) (396) (501) (665) (764) (809) (887) (1,003) Forex effect/others (1,511) (1,299) (1,362) (1,581) (636) (1) (1) (1) Change in cash (1,865) (1,050) (275) (1,350) 142 1,249 1,916 1,984 Free cash flow 914 1,394 2,509 2,134 669 1,828 2,537 2,638 Source: FactSet, Daiwa forecasts
22
TravelSky Technology (696 HK): 20 December 2019
Financial summary continued … Balance sheet (CNYm) Year to 31 Dec 2014 2015 2016 2017 2018 2019E 2020E 2021E Cash & short-term investment 3,258 3,591 4,914 4,204 4,346 5,593 7,509 9,493 Inventory 15 34 37 37 48 48 48 48 Accounts receivable 3,021 3,326 3,646 3,647 4,763 4,908 5,076 5,076 Other current assets 1,791 2,400 1,913 2,906 3,598 3,755 3,850 3,937 Total current assets 8,086 9,351 10,510 10,795 12,755 14,304 16,482 18,553 Fixed assets 1,988 2,742 3,401 4,186 4,386 4,998 5,309 5,582 Goodwill & intangibles 432 249 424 276 506 506 506 506 Other non-current assets 2,224 2,529 3,796 5,337 4,466 4,466 4,466 4,466 Total assets 12,730 14,871 18,131 20,593 22,113 24,274 26,763 29,107 Short-term debt 0 0 0 0 0 0 0 0 Accounts payable 2,096 2,506 3,640 4,161 4,456 4,782 5,163 5,163 Other current liabilities 34 155 281 385 88 88 88 88 Total current liabilities 2,130 2,662 3,921 4,545 4,544 4,870 5,251 5,251 Long-term debt 0 0 0 0 0 0 0 0 Other non-current liabilities 23 28 45 187 142 142 142 142 Total liabilities 2,153 2,690 3,966 4,733 4,686 5,012 5,393 5,393 Share capital 2,926 2,926 2,926 2,926 2,926 2,926 2,926 2,926 Reserves/R.E./others 7,392 8,924 10,859 12,499 14,084 15,856 17,893 20,159 Shareholders' equity 10,319 11,850 13,785 15,426 17,011 18,782 20,820 23,085 Minority interests 258 331 380 435 417 479 550 629 Total equity & liabilities 12,730 14,871 18,131 20,593 22,113 24,274 26,763 29,107 EV 46,802 46,522 45,237 45,975 45,735 44,551 42,706 40,801 Net debt/(cash) (3,258) (3,591) (4,914) (4,204) (4,346) (5,593) (7,509) (9,493) BVPS (CNY) 3.526 4.050 4.711 5.272 5.813 6.421 7.118 7.892
Key ratios (%) Year to 31 Dec 2014 2015 2016 2017 2018 2019E 2020E 2021E Sales (YoY) 18.7 2.5 13.6 8.2 10.5 9.8 10.3 9.4 EBITDA (YoY) 5.4 32.3 18.0 14.8 (1.1) 15.5 10.6 9.2 Operating profit (YoY) 1.7 39.2 24.6 13.6 (6.2) 13.3 13.5 10.1 Net profit (YoY) 6.6 30.0 27.8 13.7 3.5 8.8 13.5 11.9 Core EPS (fully-diluted) (YoY) 6.6 30.0 27.8 13.7 3.5 8.8 13.5 11.9 Gross-profit margin 42.8 51.7 51.6 53.4 50.5 52.5 52.6 52.5 EBITDA margin 32.0 41.3 42.9 45.5 40.7 42.9 43.0 42.9 Operating-profit margin 23.6 32.1 35.2 36.9 31.3 32.3 33.3 33.5 Net profit margin 22.6 28.7 32.2 33.9 31.8 31.5 32.4 33.1 ROAE 12.4 14.1 15.6 15.5 14.5 14.3 14.6 14.8 ROAA 10.1 11.3 12.1 11.7 11.0 11.0 11.4 11.6 ROCE 12.6 15.4 16.5 16.5 13.9 14.3 14.7 14.6 ROIC 17.0 18.7 21.1 20.8 16.9 17.6 19.4 20.9 Net debt to equity n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Effective tax rate 11.2 14.8 13.4 11.9 10.1 10.5 10.6 10.5 Accounts receivable (days) 194.4 212.5 205.6 198.7 207.4 217.2 203.3 188.9 Current ratio (x) 3.8 3.5 2.7 2.4 2.8 2.9 3.1 3.5 Net interest cover (x) n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Net dividend payout 23.6 25.4 26.8 32.9 33.8 33.8 33.8 33.8 Free cash flow yield 1.8 2.8 5.0 4.3 1.3 3.7 5.1 5.3 Source: FactSet, Daiwa forecasts
Company profile
TravelSky Technology is the dominant service provider of aviation information technology in China. For 2018, the total number of bookings processed by the company was 644m. The China TravelSky Holding Company has a 29.3% stake in the company.
23
China Industrials 20 December 2019
(2357 HK) AviChina Industry & Technology AviChi na Industr y & Technol og y
Target price: HKD6.00 (from HKD5.70) Share price (19 Dec): HKD3.61 | Up/downside: +66.2%
Deep value investment Kelvin Lau th (852) 2848 4467 Final year of 13 FYP to see uptick in general aviation aircraft orders [email protected] Asset restructuring initiatives expected to improve profitability Frank Yip (852) 2773 8842 Reiterating our Buy (1) rating; lifting our SOTP-based TP by 5% [email protected]
What's new: AviChina has underperformed the market by 30%-plus YTD, Forecast revisions (%) but we see an attractive risk-return ratio given likely solid earnings in Year to 31 Dec 19E 20E 21E 2H19E and positive government policies for general aviation in 2020E. Revenue change - - - Net profit change - - -
Core EPS (FD) change - - - What's the impact: Real potential for China’s general aviation sector Source: Daiwa forecasts to grow. In 1H19, there were 2,562 general aviation aircraft operating in th China, just 1% of the fleet size in the US. Under the 13 Five-Year Plan Share price performance
(FYP) (2016-20), China’s fleet is slated to increase to 5,000 by 2020, (HKD) (%) implying a 54% CAGR over 2019-20 (or 95% growth vs. 1H19). As China’s 6.0 105 leading general aviation aircraft, parts and components manufacturer, 5.3 95 4.5 85 AviChina stands to ride on this trend, in our view. 3.8 75
3.0 65 1H19 revenue momentum likely to continue in 2H19E. AviChina’s Dec-18 Mar-19 Jun-19 Sep-19 Dec-19 revenue rose by 24% YoY for 1H19 on the back of 41% YoY and 22% YoY Avichina (LHS) Relative to HSI (RHS) growth in its aircraft and parts & components segments, respectively. Management sees this growth momentum as having continued in 2H19, 12-month range 3.47-5.57 given its strong sales volumes of helicopters and trainer aircraft, as well as Market cap (USDbn) 2.76 components. As such, we forecast its adjusted net profit to expand by 30% 3m avg daily turnover (USDm) 3.93 Shares outstanding (m) 5,966 YoY for 2H19. Major shareholder AVIC (52.8%)
2020 is the final year to catch up with the central government’s target. Financial summary (CNY) As discussed in the accompanying sector report (page 11), we believe the Year to 31 Dec 19E 20E 21E target of 5,000 is unlikely to be achieved in 2020E given the huge gap to fill Revenue (m) 42,231 47,667 52,700 (2,562 in 1H19). However, we note that aircraft orders accelerated in the Operating profit (m) 3,809 4,554 5,228 th Net profit (m) 1,477 1,775 2,066 final year (2015) of the 12 FYP, and we expect this to happen again in Core EPS (fully-diluted) 0.236 0.284 0.330 2020. Based on our scenario analysis, we estimate the order growth rate EPS change (%) 20.1 20.2 16.4 will be in the range of 16-59% YoY, which would support our 2020 revenue Daiwa vs Cons. EPS (%) (3.2) (1.4) (1.7) PER (x) 13.8 11.4 9.8 forecast for AviChina. Dividend yield (%) 1.1 1.3 1.6 DPS 0.037 0.044 0.050 Likely improvement in profitability due to asset optimisation. PBR (x) 1.1 1.0 0.9 AviChina’s asset swap with Hongdu Group has been approved by the EV/EBITDA (x) 8.4 7.5 6.8 ROE (%) 8.4 9.3 10.0 relevant authorities, based on its November announcement. In addition, Source: FactSet, Daiwa forecasts AviChina plans to acquire helicopter assets from its parent for a total consideration of CNY5.69bn through a share issuance. We expect these 2 asset-restructuring initiatives to be completed by the end of 2020 and benefit AviChina’s profitability, despite their limited immediate EPS impact.
What we recommend: We reaffirm our Buy (1) call and lift our SOTP- based 12-month TP to HKD6.0, from HKD5.7, using the latest share prices of its subsidiaries. Key downside risk: fewer-than-expected deliveries.
How we differ: Our 2019-21E EPS are 1-3% below the consensus, likely as we are slightly more conservative on the company’s gross margin.
See important disclosures, including any required research certifications, beginning on page 54
AviChina Industry & Technology (2357 HK): 20 December 2019
Financial summary Key assumptions Year to 31 Dec 2014 2015 2016 2017 2018 2019E 2020E 2021E Revenue growth from helicopters (%) 15.0 (15.0) (6.2) (9.9) 14.5 33.0 15.0 10.0 Revenue growth from trainers (%) 20.6 (77.9) 29.7 45.3 (48.9) 33.0 15.0 10.0 Revenue growth from aero-parts (%) 20.3 1.1 16.9 (0.5) 9.2 17.1 12.8 11.6 Revenue growth from aviation n.a. n.a. 4.4 (39.5) 7.4 5.0 8.0 8.0 engineering (%)
Profit and loss (CNYm) Year to 31 Dec 2014 2015 2016 2017 2018 2019E 2020E 2021E Aviation entire aircraft 11,275 11,573 11,149 10,405 11,011 14,635 16,827 18,508 Aviation parts and components 14,436 14,596 17,068 16,980 18,547 21,720 24,494 27,338 Other Revenue 0 8,254 8,617 5,212 5,596 5,876 6,346 6,853 Total Revenue 25,710 34,424 36,834 32,597 35,153 42,231 47,667 52,700 Other income 316 404 429 473 692 425 425 425 COGS (19,992) (26,818) (28,821) (24,241) (26,202) (32,038) (36,197) (39,980) SG&A (3,220) (4,268) (4,565) (4,931) (5,329) (5,723) (6,145) (6,600) Other op.expenses (820) (999) (1,048) (985) (1,215) (1,086) (1,196) (1,317) Operating profit 1,995 2,743 2,828 2,913 3,099 3,809 4,554 5,228 Net-interest inc./(exp.) (136) (246) (303) (330) (408) (466) (522) (531) Assoc/forex/extraord./others 144 148 127 175 213 234 257 283 Pre-tax profit 2,003 2,646 2,652 2,758 2,903 3,577 4,289 4,980 Tax (267) (428) (352) (341) (323) (414) (499) (581) Min. int./pref. div./others (954) (1,075) (1,140) (1,194) (1,293) (1,599) (1,929) (2,247) Net profit (reported) 781 1,143 1,160 1,222 1,288 1,564 1,861 2,152 Net profit (adjusted) 755 1,174 1,200 1,232 1,175 1,477 1,775 2,066 EPS (reported)(CNY) 0.143 0.192 0.194 0.205 0.215 0.250 0.297 0.344 EPS (adjusted)(CNY) 0.138 0.197 0.201 0.206 0.196 0.236 0.284 0.330 EPS (adjusted fully-diluted)(CNY) 0.138 0.197 0.201 0.206 0.196 0.236 0.284 0.330 DPS (CNY) 0.020 0.018 0.020 0.030 0.032 0.037 0.044 0.050 EBIT 1,995 2,743 2,828 2,913 3,099 3,809 4,554 5,228 EBITDA 2,815 3,661 3,803 3,826 4,274 4,895 5,749 6,545
Cash flow (CNYm) Year to 31 Dec 2014 2015 2016 2017 2018 2019E 2020E 2021E Profit before tax 2,003 2,646 2,652 2,758 2,903 3,577 4,289 4,980 Depreciation and amortisation 820 957 1,073 1,135 1,175 1,086 1,196 1,317 Tax paid (269) (347) (398) (386) (323) (414) (499) (581) Change in working capital (2,696) (1,750) (4,399) (1,825) (3,413) (4,062) (2,856) (2,698) Other operational CF items (232) 28 207 (44) (348) (252) (276) (301) Cash flow from operations (375) 1,535 (865) 1,639 (6) (66) 1,854 2,716 Capex (1,632) (2,223) (1,152) (1,714) (2,115) (2,327) (2,560) (2,816) Net (acquisitions)/disposals 134 593 246 438 542 547 547 547 Other investing CF items 29 2,555 155 (567) 28 27 27 27 Cash flow from investing (1,470) 925 (751) (1,843) (1,546) (1,754) (1,987) (2,243) Change in debt 6,794 6,780 7,980 8,029 8,391 11,082 10,174 9,357 Net share issues/(repurchases) 0 0 0 0 0 0 0 0 Dividends paid (387) (275) (360) (253) (189) (229) (273) (315) Other financing CF items (5,499) (6,496) (6,708) (5,333) (7,200) (9,891) (8,983) (8,164) Cash flow from financing 907 9 912 2,443 1,003 962 919 877 Forex effect/others 0 0 0 0 0 0 0 0 Change in cash (937) 2,469 (704) 2,239 (549) (857) 786 1,351 Free cash flow (2,008) (688) (2,017) (75) (2,121) (2,393) (706) (100) Source: FactSet, Daiwa forecasts
25
AviChina Industry & Technology (2357 HK): 20 December 2019
Financial summary continued … Balance sheet (CNYm) Year to 31 Dec 2014 2015 2016 2017 2018 2019E 2020E 2021E Cash & short-term investment 8,660 10,387 9,598 12,371 13,517 11,052 11,838 13,189 Inventory 16,593 19,908 21,655 23,220 23,150 28,861 32,576 36,015 Accounts receivable 10,974 15,293 16,224 17,541 21,273 26,520 29,934 33,094 Other current assets 3,807 4,361 4,512 5,174 6,561 6,956 6,410 5,936 Total current assets 40,035 49,949 51,988 58,306 64,501 73,389 80,758 88,234 Fixed assets 10,441 11,549 13,549 14,527 15,753 17,090 18,550 20,145 Goodwill & intangibles 219 208 759 689 645 618 591 564 Other non-current assets 4,027 5,406 5,331 5,411 5,821 6,560 6,508 6,456 Total assets 54,722 67,112 71,628 78,933 86,720 97,656 106,406 115,399 Short-term debt 5,633 4,668 4,473 5,391 9,082 8,174 7,357 6,621 Accounts payable 15,050 21,418 24,157 24,085 25,325 31,938 36,055 39,818 Other current liabilities 8,038 9,883 6,582 9,638 10,932 11,903 12,508 13,061 Total current liabilities 28,721 35,969 35,213 39,114 45,339 52,015 55,919 59,500 Long-term debt 1,785 3,233 5,444 6,948 4,699 5,984 7,269 8,554 Other non-current liabilities 915 1,490 2,008 1,711 1,710 1,710 1,710 1,710 Total liabilities 31,420 40,692 42,665 47,773 51,748 59,709 64,898 69,764 Share capital 5,474 5,474 5,966 5,966 6,245 6,245 6,245 6,245 Reserves/R.E./others 5,341 7,185 7,835 8,743 10,559 11,935 13,567 15,447 Shareholders' equity 10,815 12,660 13,802 14,709 16,804 18,180 19,812 21,692 Minority interests 12,486 13,760 15,161 16,450 18,168 19,767 21,696 23,943 Total equity & liabilities 54,722 67,112 71,628 78,933 86,720 97,656 106,406 115,399 EV 29,729 29,723 33,908 34,730 36,681 41,254 42,996 44,574 Net debt/(cash) (1,242) (2,485) 319 (31) 264 3,106 2,788 1,987 BVPS (CNY) 1.976 2.123 2.313 2.465 2.691 2.911 3.172 3.473
Key ratios (%) Year to 31 Dec 2014 2015 2016 2017 2018 2019E 2020E 2021E Sales (YoY) 15.9 33.9 7.0 (11.5) 7.8 20.1 12.9 10.6 EBITDA (YoY) 12.9 30.1 3.9 0.6 11.7 14.5 17.4 13.8 Operating profit (YoY) 13.5 37.5 3.1 3.0 6.4 22.9 19.5 14.8 Net profit (YoY) 17.8 55.5 2.2 2.7 (4.6) 25.7 20.2 16.4 Core EPS (fully-diluted) (YoY) 17.5 42.3 2.1 2.7 (4.8) 20.1 20.2 16.4 Gross-profit margin 22.2 22.1 21.8 25.6 25.5 24.1 24.1 24.1 EBITDA margin 10.9 10.6 10.3 11.7 12.2 11.6 12.1 12.4 Operating-profit margin 7.8 8.0 7.7 8.9 8.8 9.0 9.6 9.9 Net profit margin 2.9 3.4 3.3 3.8 3.3 3.5 3.7 3.9 ROAE 7.2 10.0 9.1 8.6 7.5 8.4 9.3 10.0 ROAA 1.4 1.9 1.7 1.6 1.4 1.6 1.7 1.9 ROCE 6.8 8.4 7.7 7.1 6.7 7.6 8.4 8.9 ROIC 8.7 10.0 9.2 8.5 8.3 8.8 9.4 10.0 Net debt to equity n.a. n.a. 2.3 n.a. 1.6 17.1 14.1 9.2 Effective tax rate 13.3 16.2 13.3 12.4 11.1 11.6 11.6 11.7 Accounts receivable (days) 141.5 139.3 156.2 189.0 201.5 206.5 216.1 218.3 Current ratio (x) 1.4 1.4 1.5 1.5 1.4 1.4 1.4 1.5 Net interest cover (x) 14.7 11.2 9.3 8.8 7.6 8.2 8.7 9.8 Net dividend payout 14.0 9.6 10.3 14.6 14.6 14.6 14.6 14.6 Free cash flow yield n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Source: FactSet, Daiwa forecasts
Company profile
AviChina Industry & Technology is mainly engaged in the development, manufacture, sale, and upgrading of aviation equipment and related products. The major shareholder of the company's H shares is Aviation Industry Corporation of China, with a 52.8% stake.
26
Hong Kong Industrials 20 December 2019
(293 HK) Cathay Pacific Airways Cathay Pacific Air ways
Target price: HKD13.10 (from HKD12.60) Share price (19 Dec): HKD11.34 | Up/downside: +15.5%
Opportunities amid the storm Kelvin Lau (852) 2848 4467 Share price has been resilient despite HK protests [email protected] Possibility of more supportive measurements from HKIA Frank Yip (852) 2773 8842 Reiterating Buy (1) rating with a higher TP of HKD13.10 [email protected]
What's new: We revisit our assumptions on Cathay Pacific (CX) after recent Forecast revisions (%) supportive financial measures from Hong Kong International Airport (HKIA) on Year to 31 Dec 19E 20E 21E its cargo business, the capacity plan for 2020, and the latest developments in Revenue change (0.2) (1.1) (1.7) Net profit change 1.5 29.9 10.2 the social unrest in Hong Kong. We reiterate our Buy (1) rating on CX, where Core EPS (FD) change 1.5 29.9 10.2 we see limited downside risk for its share price backed by its currently low Source: Daiwa forecasts valuation. Share price performance
What's the impact: Worst-case scenario looks priced in and the impact of (HKD) (%) the social unrest is fading. CX’s share price has underperformed the HSI by 14.0 115 6% YTD, dragged down by the social unrest in Hong Kong. Although the 12.9 108 11.8 100 protests have intensified in the past few months, they have had no material 10.6 93 impact on CX’s share price in the past 2-3 months. 9.5 85 Dec-18 Mar-19 Jun-19 Sep-19 Dec-19 Look for more government support. On 11 December, HKIA announced Cathay Pac (LHS) Relative to HSI (RHS) plans for a 20% concession on airlines’ export cargo charges, starting from 1 April 2020, to support airlines amid a significant decrease in passenger 12-month range 9.54-13.92 numbers. The Board of Airline Representatives of Hong Kong had proposed to Market cap (USDbn) 5.72 cut airport fees in September, especially landing and parking fees. The recent 3m avg daily turnover (USDm) 3.30 Shares outstanding (m) 3,934 cargo concession means that the Hong Kong government is listening to Major shareholder Swire Pacific (44.0%) industry concerns and is likely to increase its support to airlines. HKIA could offer similar relief packages to those in 2013, which offered up to a 50% Financial summary (HKD) discount on aircraft landing fees, in our view. Year to 31 Dec 19E 20E 21E Revenue (m) 106,117 106,997 111,409 Benefiting from Hong Kong Airlines’ issues to expand market share by Operating profit (m) 1,436 4,521 5,053 Net profit (m) 915 3,825 4,769 enhancing consumer experience. CX will focus on the consumer experience Core EPS (fully-diluted) 0.233 0.972 1.212 to differentiate itself and attract more customers amid the weak market. Given EPS change (%) (77.6) 317.9 24.7 Hong Kong Airlines’ (HKA) recent financial issues, we believe CX is in a better Daiwa vs Cons. EPS (%) (54.7) 12.8 28.4 PER (x) 48.7 11.7 9.4 position, with both full-service and low-cost-carrier arms, to gain market share Dividend yield (%) 0.6 2.6 3.2 from HKA, which currently holds 10% of the Hong Kong market. DPS 0.064 0.293 0.367 PBR (x) 0.7 0.7 0.6 Prudent capacity expansion ahead. CX expected to cut the ASK by 6-7% in EV/EBITDA (x) 4.4 3.3 2.7 ROE (%) 1.4 5.9 6.9 November-December, given the uncertainty in Hong Kong. With 4 aircraft Source: FactSet, Daiwa forecasts deliveries to be deferred and 2 aircraft to be retired, CX targets to cut its capacity by 1.4% YoY in 2020E — its first cut in 5 years.
What we recommend: We raise our 2019-21E EPS by 2-30% to factor in the latest cargo concession cost-saving and ASK cut in 2020E, and reiterate our Buy (1) call. On our earnings revisions, we fine-tune up our 12-month TP to HKD13.10 (from HKD12.60), based on an unchanged PBR of 0.8x applied to our 2020E BVPS. Key downside risk: lower-than-expected passenger demand.
How we differ: Our 2020-21E EPS are 13-28% higher than the consensus, as we include the cost savings from the cargo concession and the ASK cut.
See important disclosures, including any required research certifications, beginning on page 54
Cathay Pacific Airways (293 HK): 20 December 2019
Financial summary Key assumptions Year to 31 Dec 2014 2015 2016 2017 2018 2019E 2020E 2021E Overall RPK growth (%) 7.3 9.0 0.9 2.6 3.1 2.2 0.6 0.0 Overall RFTK growth (%) 14.8 5.4 0.8 9.0 5.0 (7.0) 0.0 0.0 Overall ASK growth (%) 5.9 5.9 2.4 2.8 3.5 6.9 (1.2) 0.0 Overall AFTK growth (%) 10.4 5.4 0.6 3.6 5.0 0.0 0.0 0.0 Overall PLF (%) 83.3 85.7 84.5 84.4 84.1 80.4 81.8 0.0 Overall CLF (%) 64.3 64.2 64.4 67.8 69.3 64.5 64.5 0.0 Overall passenger yield growth (%) (1.8) (11.4) (9.2) (3.3) 5.7 (3.5) 0.0 0.0 Cargo Yield growth (%) (5.6) (13.2) (16.3) 11.3 14.7 (7.0) 0.0 0.0 Int'l jet-fuel price (USD/bbl) 113.0 65.4 52.9 64.5 83.0 76.0 76.0 76.0
Profit and loss (HKDm) Year to 31 Dec 2014 2015 2016 2017 2018 2019E 2020E 2021E Passenger Revenues 75,734 73,047 66,926 66,408 73,119 72,097 72,501 75,423 Cargo Revenues 25,400 23,122 20,063 23,903 28,316 24,491 24,491 24,980 Other Revenue 4,857 6,173 5,762 6,973 9,625 9,529 10,005 11,006 Total Revenue 105,991 102,342 92,751 97,284 111,060 106,117 106,997 111,409 Other income 0 0 0 0 0 0 0 0 COGS (87,388) (74,710) (72,300) (79,811) (90,606) (84,385) (81,761) (84,321) SG&A (799) (798) (700) (681) (862) (931) (726) (726) Other op.expenses (11,529) (11,372) (11,490) (12,637) (14,114) (19,364) (19,988) (21,309) Operating profit 6,275 15,462 8,261 4,155 5,478 1,436 4,521 5,053 Net-interest inc./(exp.) (1,158) (1,164) (1,301) (1,761) (2,114) (2,702) (2,766) (2,556) Assoc/forex/extraord./others (1,068) (6,833) (6,737) (2,974) (121) 1,842 2,576 2,975 Pre-tax profit 4,049 7,465 223 (580) 3,243 576 4,332 5,472 Tax (599) (1,157) (497) (308) (466) 220 (288) (412) Min. int./pref. div./others (300) (308) (301) (371) (432) 40 (197) (247) Net profit (reported) 3,150 6,000 (575) (1,259) 2,345 836 3,846 4,813 Net profit (adjusted) 4,654 13,341 7,436 4,215 4,079 915 3,825 4,769 EPS (reported)(HKD) 0.801 1.525 (0.146) (0.320) 0.596 0.213 0.978 1.224 EPS (adjusted)(HKD) 1.183 3.391 1.890 1.072 1.037 0.233 0.972 1.212 EPS (adjusted fully-diluted)(HKD) 1.183 3.391 1.890 1.071 1.037 0.233 0.972 1.212 DPS (HKD) 0.360 0.530 0.050 0.050 0.300 0.064 0.293 0.367 EBIT 6,275 15,462 8,261 4,155 5,478 1,436 4,521 5,053 EBITDA 18,802 28,655 21,269 18,795 21,072 16,499 20,663 22,273
Cash flow (HKDm) Year to 31 Dec 2014 2015 2016 2017 2018 2019E 2020E 2021E Profit before tax 4,049 7,465 223 (580) 3,243 576 4,332 5,472 Depreciation and amortisation 8,339 8,859 8,550 9,354 9,802 14,837 15,913 16,990 Tax paid (1,395) (469) (750) (783) (1,504) 220 (288) (412) Change in working capital (1,517) (6,022) (7,854) (7,261) 2,457 2,389 1,496 2,218 Other operational CF items 196 6,158 5,915 3,592 527 (1,842) (2,576) (2,974) Cash flow from operations 9,672 15,991 6,084 4,322 14,525 16,180 18,877 21,294 Capex (14,818) (13,179) (14,886) (16,926) (15,991) (15,991) (15,991) (15,990) Net (acquisitions)/disposals (1,143) 275 1,831 645 1,061 0 0 0 Other investing CF items 6,573 (1,672) 3,353 645 5,177 1,842 2,576 2,975 Cash flow from investing (9,388) (14,576) (9,702) (15,636) (9,753) (14,149) (13,415) (13,015) Change in debt (108) (1,782) 7,694 8,744 (3,932) (1,894) (3,820) (6,131) Net share issues/(repurchases) 0 0 0 0 0 0 0 0 Dividends paid (1,314) (2,329) (1,447) (453) (1,154) (1,680) (357) (1,643) Other financing CF items (42) (44) (23) 0 (36) 0 0 0 Cash flow from financing (1,464) (4,155) 6,224 8,291 (5,122) (3,574) (4,177) (7,774) Forex effect/others (204) (191) (66) 158 (32) 0 0 0 Change in cash (1,384) (2,931) 2,540 (2,865) (382) (1,543) 1,285 505 Free cash flow (5,146) 2,812 (8,802) (12,604) (1,466) 189 2,886 5,304 Source: FactSet, Daiwa forecasts
28
Cathay Pacific Airways (293 HK): 20 December 2019
Financial summary continued … Balance sheet (HKDm) Year to 31 Dec 2014 2015 2016 2017 2018 2019E 2020E 2021E Cash & short-term investment 22,687 22,013 21,804 20,609 17,143 15,600 16,885 17,390 Inventory 0 0 0 0 0 0 0 0 Accounts receivable 10,591 9,715 9,557 11,361 12,475 11,920 12,019 12,514 Other current assets 189 1,497 31 865 0 0 0 0 Total current assets 33,467 33,225 31,392 32,835 29,618 27,520 28,904 29,905 Fixed assets 98,471 100,552 106,456 112,640 119,382 121,089 121,720 121,273 Goodwill & intangibles 10,318 10,606 10,934 11,221 11,174 10,621 10,068 9,515 Other non-current assets 29,718 28,444 28,639 31,682 30,120 49,378 49,378 49,378 Total assets 171,974 172,827 177,421 188,378 190,294 208,608 210,070 210,071 Short-term debt 9,781 13,238 11,263 8,888 13,694 15,620 17,931 20,704 Accounts payable 34,696 36,037 32,030 31,018 33,438 33,272 32,867 33,580 Other current liabilities 199 502 799 1,372 1,213 1,193 1,193 1,193 Total current liabilities 44,676 49,777 44,092 41,278 48,345 50,085 51,991 55,477 Long-term debt 55,315 49,867 58,906 69,506 60,183 56,363 50,232 41,329 Other non-current liabilities 20,130 25,116 18,897 16,322 17,827 39,105 41,105 43,106 Total liabilities 120,121 124,760 121,895 127,106 126,355 145,553 143,328 139,912 Share capital 787 787 787 787 787 787 787 787 Reserves/R.E./others 50,935 47,140 54,578 60,314 63,149 62,805 66,401 70,060 Shareholders' equity 51,722 47,927 55,365 61,101 63,936 63,592 67,188 70,847 Minority interests 131 140 161 171 3 (537) (446) (688) Total equity & liabilities 171,974 172,827 177,421 188,378 190,294 208,608 210,070 210,071 EV 64,232 62,964 69,838 74,422 73,777 72,886 67,872 60,994 Net debt/(cash) 42,409 41,092 48,365 57,785 56,734 56,383 51,278 44,642 BVPS (HKD) 13.148 12.183 14.074 15.532 16.253 16.165 17.079 18.010
Key ratios (%) Year to 31 Dec 2014 2015 2016 2017 2018 2019E 2020E 2021E Sales (YoY) 5.5 (3.4) (9.4) 4.9 14.2 (4.5) 0.8 4.1 EBITDA (YoY) 28.5 52.4 (25.8) (11.6) 12.1 (21.7) 25.2 7.8 Operating profit (YoY) 98.0 146.4 (46.6) (49.7) 31.8 (73.8) 214.8 11.8 Net profit (YoY) 52.1 186.7 (44.3) (43.3) (3.2) (77.6) 317.9 24.7 Core EPS (fully-diluted) (YoY) 52.1 186.7 (44.3) (43.3) (3.2) (77.6) 317.9 24.7 Gross-profit margin 17.6 27.0 22.0 18.0 18.4 20.5 23.6 24.3 EBITDA margin 17.7 28.0 22.9 19.3 19.0 15.5 19.3 20.0 Operating-profit margin 5.9 15.1 8.9 4.3 4.9 1.4 4.2 4.5 Net profit margin 4.4 13.0 8.0 4.3 3.7 0.9 3.6 4.3 ROAE 8.1 26.8 14.4 7.2 6.5 1.4 5.9 6.9 ROAA 2.7 7.7 4.2 2.3 2.2 0.5 1.8 2.3 ROCE 5.1 13.6 7.0 3.1 3.9 1.1 3.3 3.8 ROIC 5.5 14.2 (10.5) 3.7 3.9 1.2 3.6 4.0 Net debt to equity 82.0 85.7 87.4 94.6 88.7 88.7 76.3 63.0 Effective tax rate 14.8 15.5 222.9 0.0 14.4 0.0 6.6 7.5 Accounts receivable (days) 35.2 36.2 37.9 39.2 39.2 42.0 40.8 40.2 Current ratio (x) 0.7 0.7 0.7 0.8 0.6 0.5 0.6 0.5 Net interest cover (x) 5.4 13.3 6.3 2.4 2.6 0.5 1.6 2.0 Net dividend payout 45.0 34.7 n.a. n.a. 50.3 30.0 30.0 30.0 Free cash flow yield n.a. 6.3 n.a. n.a. n.a. 0.4 6.5 11.9 Source: FactSet, Daiwa forecasts
Company profile
Cathay Pacific Airways is an international airline based in Hong Kong. As at 31 December 2018, together with Dragonair and Air Hong Kong, the company operated 202 aircraft. It also provides related services, including airline catering, aircraft handling, and engineering.
29
China Industrials 20 December 2019
(1055 HK) China Southern Airlines China Southern Airlines
Target price: HKD6.20 (from HKD5.20) Share price (19 Dec): HKD5.32 | Up/downside: +16.5%
Upgrading: valuation appeals; top Chinese airline pick Kelvin Lau (852) 2848 4467 Lowest valuation among the top-3 Chinese airlines [email protected] Best positioned to ride a recovery in passenger demand Frank Yip (852) 2773 8842 Upgrading to Buy (1) from Hold (3); raising our TP to HKD6.20 [email protected]
What's new: We revisit our forecasts for China Southern Airlines (CSA) after Forecast revisions (%) the completion of the phase one trade agreement between the US and Year to 31 Dec 19E 20E 21E China. We now expect passenger demand to improve in 2020 on the back of Revenue change - 0.7 0.7 Net profit change - 14.4 12.6 a less pessimistic economic outlook as well as improving prospects for the Core EPS (FD) change - 14.4 12.6 CNY exchange rate. We upgrade CSA to Buy (1) from Hold (3); it is our top Source: Daiwa forecasts pick among the Big-3 Chinese airlines. Share price performance
What's the impact: Diminishing trade-war risks likely to improve the (HKD) (%) macro environment. While their initial trade agreement is limited in scope, 8.0 130 we believe the US and China will continue to discuss other aspects of their 7.0 119 6.0 108 trade relationship, which should assuage concerns over a further economic 5.0 96 slowdown in China. We believe leisure and business passenger demand will 4.0 85 pick up in 2020 given the likely easing of trade tensions. Dec-18 Mar-19 Jun-19 Sep-19 Dec-19 Ch South (LHS) Relative to HSI (RHS)
Biggest beneficiary of Boeing 737 MAX’s return. CSA has the largest 737 MAX fleet in China, with 34 aircraft in its portfolio (vs. AC’s 16 and CEA’s 14) 12-month range 4.39-7.73 and an additional 16 aircraft still to be delivered. Despite the further delay in Market cap (USDbn) 8.37 the 737 MAX returning to service, we believe CSA has the highest potential 3m avg daily turnover (USDm) 7.64 Shares outstanding (m) 12,267 among the top-3 airlines to expand its capacity to ride the recovering Major shareholder CSA Holding (53.4%) passenger demand in 2020E once the grounding is lifted. Financial summary (CNY) Most sensitive to foreign-exchange impact among peers. In 2018, CSA Year to 31 Dec 19E 20E 21E was our least preferred airline because it is the most sensitive of the Chinese Revenue (m) 153,054 167,998 183,723 airlines to foreign-exchange volatility and passenger yields. With the delay in Operating profit (m) 5,119 7,151 9,058 Net profit (m) 4,411 5,935 7,258 proposed new tariffs on Chinese goods worth USD160bn, and the initial Core EPS (fully-diluted) 0.360 0.484 0.592 trade agreement, we now see CNY depreciation risk decreasing. EPS change (%) 13.6 34.5 22.3 Daiwa vs Cons. EPS (%) (16.6) (15.6) (9.8) PER (x) 13.3 9.9 8.1 Better balance in yields and earnings. In 3Q19, CSA was the only airline Dividend yield (%) 1.2 2.0 2.5 among the Big-3 Chinese airlines to record positive growth in adjusted net DPS 0.060 0.097 0.118 profit despite decreasing passenger yields. With its better fleet PBR (x) 0.9 0.8 0.7 responsiveness and flexibility in its fleet capacity arrangements, we believe EV/EBITDA (x) 6.0 5.2 4.5 ROE (%) 6.6 8.4 9.5 CSA’s yield should stop declining in 2020. Source: FactSet, Daiwa forecasts
What we recommend: We raise our 2020-21E EPS by 13-14% on the expected passenger demand recovery. We boost our 12-month TP to HKD6.20 (from HKD5.20), based on a 2020E PBR of 0.93x (from 0.84x). We upgrade CSA to Buy (1) from Hold (3) as it has the lowest PBR among the top-3 airlines and on its potential capacity expansion. Downside risks: longer- than-expected grounding of the 737 MAX, lower-than-expected passenger yield growth and higher-than-expected CNY depreciation.
How we differ: Our 2019-21E EPS are 10-17% below the consensus, likely as we are more conservative on CSA’s passenger yields.
See important disclosures, including any required research certifications, beginning on page 54
China Southern Airlines (1055 HK): 20 December 2019
How do we justify our view? Growth outlook Valuation Earnings revisions
Growth outlook CSA: adjusted net profit and YoY growth We believe the phase one trade agreement between the (CNYm) US and China suggests that the trade conflict is now less 8,000 500% 7,000 likely to deteriorate further. Indeed, we expect CSA’s 400% 6,000 passenger demand to be buoyed by the improving trade 300% situation, resulting in net profit growth due to high operating 5,000 leverage. In addition, the continual trade negotiations and 4,000 200% 3,000 possible upcoming trade agreements suggest a stable 100% 2,000 CNY exchange rate ahead, implying a potential foreign- 0% 1,000 exchange gain for CSA in 2020, on our estimates. 0 (100%) 2014 2015 2016 2017 2018 2019E 2020E 2021E Net profit (LHS) YoY Growth (RHS)
Source: Company, Daiwa forecasts
Valuation CSA: 12-month forward PBR CSA is currently trading at a 12-month forward PBR of (PBR) 0.8x, nearly 1SD below its past-3-year forward PBR 1.7 average of 0.93x. With likely less CNY depreciation 1.5 pressure in 2020, we raise our target valuation multiple by 1.3 10% to the stock’s past-3-year average of 0.93x 1.1 (previously 0.84x) and apply it to our 2020E BVPS. As 0.9 such, we derive our new 12-month TP of HKD6.20 0.7 (previously HKD5.20). Among the Big-3 Chinese airlines, CSA has the lowest valuation, suggesting the greatest 0.5
upside potential for its share price.
Apr-17 Oct-17 Apr-18 Oct-18 Apr-19 Oct-19
Jun-17 Jun-18 Jun-19
Feb-17 Feb-18 Feb-19
Dec-16 Aug-17 Dec-17 Aug-18 Dec-18 Aug-19 Dec-19 PBR +1 SD 3-yr average -1 SD
Source: Bloomberg, Daiwa forecasts
Earnings revisions CSA: Bloomberg-consensus EPS forecast revisions After CSA announced its 3Q19 results on 29 October, the (CNY) 2019-20 Bloomberg-consensus earnings forecasts were 0.90 revised up by 2% (vs. severe earnings forecast cuts of over 0.80 10% in August due to the lower-than-expected 1H19 0.70 results). The 2019-20 EPS consensus forecasts for CSA 0.60 have been revised down by 11% and 13% YTD, 0.50 respectively. Our 2019-21E EPS are 10-17% below the 0.40 consensus, likely as we are more conservative than the 0.30
market on CSA’s passenger yields.
Jul-19
Apr-19 Oct-19
Jan-19 Jun-19
Mar-19
Feb-19
Aug-19 Sep-19 Nov-19 Dec-19 May-19 2019E 2020E
Source: Bloomberg
31
China Southern Airlines (1055 HK): 20 December 2019
Financial summary Key assumptions Year to 31 Dec 2014 2015 2016 2017 2018 2019E 2020E 2021E Overall RPK growth (%) 12.3 13.8 8.7 11.9 12.4 7.5 9.8 8.8 Overall RFTK growth (%) 16.8 12.0 9.9 12.7 7.5 2.3 11.1 11.1 Overall ASK growth (%) 12.3 12.3 8.6 9.6 12.0 6.5 10.7 9.8 Overall AFTK growth (%) 17.6 14.9 8.6 9.4 10.4 7.0 9.2 9.2 Overall PLF (%) 79.4 80.5 80.5 82.2 82.4 83.2 82.5 81.8 Overall CLF (%) 52.8 51.5 52.1 53.6 52.2 49.9 50.8 51.7 Overall passenger yield growth (%) (1.2) (9.3) (5.9) (1.7) 1.0 (0.4) 0.0 0.5 Cargo Yield growth (%) (4.1) (14.8) (4.1) 12.1 2.3 0.0 0.0 0.0 Int'l jet-fuel price (USD/bbl) 113.0 65.0 52.9 64.5 83.0 75.0 78.0 78.0
Profit and loss (CNYm) Year to 31 Dec 2014 2015 2016 2017 2018 2019E 2020E 2021E Passenger revenue 97,145 100,238 102,502 112,791 128,038 137,048 150,537 164,679 Cargo revenue 7,183 6,861 7,191 9,082 10,026 10,252 11,391 12,659 Other Revenue 4,256 4,553 5,288 5,933 5,559 5,755 6,071 6,385 Total Revenue 108,584 111,652 114,981 127,806 143,623 153,054 167,998 183,723 Other income 0 0 0 0 0 0 0 0 COGS (84,805) (80,117) (84,395) (99,340) (115,128) (120,570) (131,619) (143,741) SG&A (10,393) (9,530) (9,190) (10,596) (10,806) (11,375) (12,091) (12,822) Other op.expenses (10,828) (11,845) (12,619) (13,162) (14,308) (15,990) (17,137) (18,101) Operating profit 2,558 10,160 8,777 4,708 3,381 5,119 7,151 9,058 Net-interest inc./(exp.) (1,817) (1,935) (2,376) (2,658) (3,077) (3,503) (3,407) (3,544) Assoc/forex/extraord./others 2,325 (2,107) 1,260 6,824 4,060 3,919 5,340 5,624 Pre-tax profit 3,066 6,118 7,661 8,874 4,364 5,535 9,085 11,138 Tax (668) (1,300) (1,763) (1,976) (1,000) (1,290) (2,189) (2,704) Min. int./pref. div./others (621) (1,082) (854) (937) (469) (592) (961) (1,176) Net profit (reported) 1,777 3,736 5,044 5,961 2,895 3,653 5,935 7,258 Net profit (adjusted) 1,662 6,793 6,485 3,799 3,393 4,411 5,935 7,258 EPS (reported)(CNY) 0.181 0.381 0.514 0.601 0.270 0.298 0.484 0.592 EPS (adjusted)(CNY) 0.169 0.692 0.661 0.383 0.317 0.360 0.484 0.592 EPS (adjusted fully-diluted)(CNY) 0.169 0.692 0.661 0.383 0.317 0.360 0.484 0.592 DPS (CNY) 0.040 0.080 0.100 0.100 0.050 0.060 0.097 0.118 EBIT 2,558 10,160 8,777 4,708 3,381 5,119 7,151 9,058 EBITDA 18,769 28,158 28,726 25,892 26,415 30,271 33,908 37,261
Cash flow (CNYm) Year to 31 Dec 2014 2015 2016 2017 2018 2019E 2020E 2021E Profit before tax 3,066 6,118 7,661 8,874 4,364 5,535 9,085 11,138 Depreciation and amortisation 10,828 11,845 12,619 13,162 14,308 15,259 16,149 17,040 Tax paid (625) (2,162) (1,406) (2,107) (1,662) (1,290) (2,189) (2,704) Change in working capital 315 3,246 2,858 684 (2,748) 987 1,487 1,562 Other operational CF items (14) 4,687 2,032 (2,881) 678 629 (565) (609) Cash flow from operations 13,570 23,734 23,764 17,732 14,940 21,120 23,968 26,428 Capex (8,649) (12,139) (18,967) (13,846) (24,033) (15,000) (15,000) (15,000) Net (acquisitions)/disposals 1,611 3,156 3,113 5,247 3,116 3,550 3,550 3,550 Other investing CF items (2,722) 2,052 104 363 400 307 307 307 Cash flow from investing (9,760) (6,931) (15,750) (8,236) (20,517) (11,143) (11,143) (11,143) Change in debt 290 (28,251) (7,475) (7,278) (4,653) (8,296) 445 445 Net share issues/(repurchases) 0 0 0 1,321 10,908 0 0 0 Dividends paid (521) (416) (459) (1,243) (1,107) (613) (731) (1,187) Other financing CF items 100 972 (525) 404 72 72 72 72 Cash flow from financing (131) (27,695) (8,459) (6,796) 5,220 (8,837) (214) (670) Forex effect/others 0 0 0 0 0 0 0 0 Change in cash 3,679 (10,892) (445) 2,700 (357) 1,139 12,611 14,615 Free cash flow 4,921 11,595 4,797 3,886 (9,093) 6,120 8,968 11,428 Source: FactSet, Daiwa forecasts
32
China Southern Airlines (1055 HK): 20 December 2019
Financial summary continued … Balance sheet (CNYm) Year to 31 Dec 2014 2015 2016 2017 2018 2019E 2020E 2021E Cash & short-term investment 15,852 4,683 4,287 6,826 6,928 8,067 20,678 35,293 Inventory 1,647 1,661 1,606 1,588 1,622 1,699 1,699 1,699 Accounts receivable 8,547 6,300 6,376 7,907 10,916 11,633 12,769 13,964 Other current assets 1,495 1,469 1,495 1,563 4,606 4,529 4,529 4,529 Total current assets 27,541 14,113 13,764 17,884 24,072 25,928 39,675 55,485 Fixed assets 153,800 162,303 175,656 189,159 208,483 211,821 214,275 215,846 Goodwill & intangibles 0 0 0 0 0 0 0 0 Other non-current assets 8,347 9,573 11,022 11,675 14,394 14,394 14,394 14,394 Total assets 189,688 185,989 200,442 218,718 246,949 252,143 268,344 285,725 Short-term debt 26,971 36,418 35,441 35,909 48,296 39,555 39,555 39,555 Accounts payable 8,918 10,660 11,622 11,480 12,596 13,551 14,906 16,304 Other current liabilities 18,197 18,457 20,869 22,188 22,795 23,655 25,099 26,644 Total current liabilities 54,086 65,535 67,932 69,577 83,687 76,761 79,560 82,503 Long-term debt 85,985 65,292 72,285 80,302 78,342 83,787 89,232 94,677 Other non-current liabilities 5,124 5,538 5,249 6,296 6,451 9,494 11,286 13,032 Total liabilities 145,195 136,365 145,466 156,175 168,480 170,043 180,078 190,211 Share capital 9,818 9,818 9,818 10,088 12,267 12,267 12,267 12,267 Reserves/R.E./others 25,930 29,227 33,638 39,848 52,990 56,030 61,234 67,305 Shareholders' equity 35,748 39,045 43,456 49,936 65,257 68,297 73,501 79,572 Minority interests 8,745 10,579 11,520 12,607 13,212 13,804 14,765 15,941 Total equity & liabilities 189,688 185,989 200,442 218,718 246,949 252,143 268,344 285,725 EV 161,596 162,839 169,515 176,614 185,597 181,753 175,549 167,555 Net debt/(cash) 97,104 97,027 103,439 109,385 119,710 115,275 108,109 98,939 BVPS (CNY) 3.641 3.977 4.426 4.950 5.320 5.567 5.992 6.487
Key ratios (%) Year to 31 Dec 2014 2015 2016 2017 2018 2019E 2020E 2021E Sales (YoY) 10.2 2.8 3.0 11.2 12.4 6.6 9.8 9.4 EBITDA (YoY) 30.5 50.0 2.0 (9.9) 2.0 14.6 12.0 9.9 Operating profit (YoY) 858.1 297.2 (13.6) (46.4) (28.2) 51.4 39.7 26.7 Net profit (YoY) 426.8 308.7 (4.5) (41.4) (10.7) 30.0 34.5 22.3 Core EPS (fully-diluted) (YoY) 426.8 308.7 (4.5) (42.0) (17.3) 13.6 34.5 22.3 Gross-profit margin 21.9 28.2 26.6 22.3 19.8 21.2 21.7 21.8 EBITDA margin 17.3 25.2 25.0 20.3 18.4 19.8 20.2 20.3 Operating-profit margin 2.4 9.1 7.6 3.7 2.4 3.3 4.3 4.9 Net profit margin 1.5 6.1 5.6 3.0 2.4 2.9 3.5 4.0 ROAE 4.7 18.2 15.7 8.1 5.9 6.6 8.4 9.5 ROAA 0.9 3.6 3.4 1.8 1.5 1.8 2.3 2.6 ROCE 1.7 6.6 5.6 2.8 1.8 2.5 3.4 4.1 ROIC 1.5 5.6 4.4 2.2 1.4 2.0 2.8 3.5 Net debt to equity 271.6 248.5 238.0 219.1 183.4 168.8 147.1 124.3 Effective tax rate 21.8 21.2 23.0 22.3 22.9 23.3 24.1 24.3 Accounts receivable (days) 23.8 24.3 20.1 20.4 23.9 26.9 26.5 26.6 Current ratio (x) 0.5 0.2 0.2 0.3 0.3 0.3 0.5 0.7 Net interest cover (x) 1.4 5.3 3.7 1.8 1.1 1.5 2.1 2.6 Net dividend payout 22.1 21.0 19.5 16.6 18.5 20.0 20.0 20.0 Free cash flow yield 8.4 19.8 8.2 6.6 n.a. 10.4 15.3 19.5 Source: FactSet, Daiwa forecasts
Company profile
As at the end of December 2018, China Southern Airlines was the largest commercial airline in China, based on fleet size, and operated 840 aircraft. China Southern Air Holding has a 53% stake in China Southern Airlines.
33
China Industrials 20 December 2019
(670 HK) China Eastern Airlines China Easter n Airlines
Target price: HKD4.90 (from HKD4.40) Share price (19 Dec): HKD4.19 | Up/downside: +16.9%
Upgrading: riding the positives from the trade deal Kelvin Lau (852) 2848 4467 Market sentiment improving after Phase 1 China-US trade deal [email protected] We expect passenger yield recovery, albeit with slower ASK growth Frank Yip (852) 2773 8842 Upgrading to Buy (1) from Outperform (2); lifting TP to HKD4.9 [email protected]
What's new: We revisit our forecasts for CEA’s passenger demand Forecast revisions (%) following news of the initial China-US trade agreement. We look for Year to 31 Dec 19E 20E 21E passenger demand to pick up in 2020, together with less pressure from the Revenue change - 0.9 0.9 Net profit change - 25.3 21.2 CNY rate and passenger yields. Hence, we upgrade our rating to Buy (1). Core EPS (FD) change - 25.3 21.2 Source: Daiwa forecasts What's the impact: Diminishing trade-war risks set to improve macro picture. While their initial agreement is limited in scope, we believe the two Share price performance countries will continue to discuss other significant aspects of their trade (HKD) (%) relationship, which should go some way to assuaging concerns over a 6.5 120 further economic slowdown in China. Indeed, we believe passenger 5.8 110 5.0 100 demand for both leisure and business will pick up in 2020 given the likely 4.3 90 easing of trade tensions. 3.5 80 Dec-18 Mar-19 Jun-19 Sep-19 Dec-19 Improving passenger yields, along with reduced capacity increase, China East (LHS) Relative to HSI (RHS) likely in 2020. Management expects ASK to increase by 8-9% YoY in 2020, with those on domestic routes growing by 7-7.5% YoY and 12-month range 3.65-6.25 international routes by 10-12% YoY (no addition on regional routes). With Market cap (USDbn) 7.78 passenger demand set to rise in 2020, domestic passenger yields should 3m avg daily turnover (USDm) 4.32 Shares outstanding (m) 14,468 meet CEA’s target for single-digit growth, according to management. Major shareholder CEA Holding (64.4%)
Rise in flights at Pudong’s new satellite concourses, possibly slower Financial summary (CNY) transition to Daxing Airport. CEA expects to increase its number of flights Year to 31 Dec 19E 20E 21E at Pudong’s new satellite concourses, for which 3 phases are due to open Revenue (m) 122,616 133,221 144,677 gradually. The first opened in September 2019 with 175 flights per day, and Operating profit (m) 1,516 2,831 3,820 Net profit (m) 2,804 4,050 5,222 the figure is expected to rise to 320 flights per day in the third phase by Core EPS (fully-diluted) 0.194 0.280 0.361 end-2020. Besides, we see its transition schedule to Daxing Airport as EPS change (%) (15.1) 44.4 28.9 likely to be deferred and to be 50% of its entire transition schedule during Daiwa vs Cons. EPS (%) (36.0) (28.6) (23.0) PER (x) 19.4 13.5 10.4 the 2020 summer-autumn flight season (vs. 60% previously planned). Dividend yield (%) 0.6 1.1 1.5 DPS 0.023 0.043 0.055 SOE reform ongoing. CEA’s parent company, China Eastern Airline PBR (x) 0.9 0.9 0.8 Holdings, signed a shareholding reform cooperation agreement with China EV/EBITDA (x) 8.3 7.3 6.6 ROE (%) 4.7 6.5 7.9 Reform Holdings in late-November to accelerate SOE reforms to optimise Source: FactSet, Daiwa forecasts its equity structure.
What we recommend: We lift our 2020-21E EPS by 21-25% given our view of improving passenger demand. As such, we upgrade CSA to Buy (1) from Outperform (2) and raise our 12-month TP to HKD4.9 (from HKD4.4), based on a new target PBR of 0.98x (previously 0.90x), applied to our 2020E BVPS. Key risks: lower-than-expected traffic and yield gains.
How we differ: Our 2019-21E EPS are 23-36% below the Bloomberg consensus, likely as we have factored in the weak 3Q19 results and are more conservative on CEA’s passenger yield recovery.
See important disclosures, including any required research certifications, beginning on page 54
China Eastern Airlines (670 HK): 20 December 2019
How do we justify our view? Growth outlook Valuation Earnings revisions
Growth outlook CEA: adjusted net profit and YoY growth We expect the key growth area for CEA to be a recovery in (CNYm) passenger demand as trade-war risks recede in 2020. We 8,000 60% are cautious on CEA’s passenger yield for 2020 and 40% 6,000 forecast 0.5% YoY growth, given continued pressure from 20% international and regional (Hong Kong, Taiwan, and 0% 4,000 Macau) routes, which we see being partly offset by a mild (20%) recovery in the yield on domestic routes. 2,000 (40%) (60%) 0 (80%) 2016 2017 2018 2019E 2020E 2021E Net profit (LHS) YoY Growth (RHS)
Source: Company, Daiwa forecasts
Valuation CEA: 12-month forward PBR CEA is currently trading at 0.85x 12-month forward PBR, (PBR) c.1SD below its past-3-year PBR average of 0.96x. We 1.4 raise our 12-month TP to HKD4.9 from HKD4.4 as we use 1.2 a higher target valuation multiple of 0.98x (vs. 0.90x 1.0 previously) to factor in the valuation recovery potential in 2020, led by the likelihood of a more stable CNY exchange 0.8 rate. While CSA is our preferred China airline, we prefer 0.6 CEA over Air China in terms of valuation, as the latter is trading at 0.97x 12-month PBR, in line with its past-3-year 0.4
average.
Oct-17 Apr-18 Apr-17 Oct-18 Apr-19 Oct-19
Jun-17 Jun-18 Jun-19
Feb-17 Feb-18 Feb-19
Dec-16 Aug-17 Dec-17 Aug-18 Dec-18 Aug-19 Dec-19 PBR +1 SD 3-year Average PBR -1 SD
Source: Bloomberg, Daiwa forecasts
Earnings revisions CEA: Bloomberg-consensus EPS forecast revisions The 2019-20 Bloomberg-consensus earnings forecasts for (CNY) CEA have been revised down by 28% and 23% YTD, 0.70 0.65 respectively, given longer-than-expected passenger yield 0.60 pressure and slower-than-expected passenger revenue 0.55 0.50 growth. Our 2019-21E EPS are 23-36% below the 0.45 consensus, likely on our less upbeat view on the pace of 0.40 0.35 recovery in CEA’s passenger yield. However, we see 0.30 scope for a rerating given the prospect of a more stable 0.25 0.20
CNY.
Jul-19
Apr-19 Oct-19
Jan-19 Jun-19
Mar-19
Feb-19
Aug-19 Sep-19 Nov-19 Dec-19 May-19 2019E 2020E
Source: Bloomberg
35
China Eastern Airlines (670 HK): 20 December 2019
Financial summary Key assumptions Year to 31 Dec 2014 2015 2016 2017 2018 2019E 2020E 2021E Overall RPK growth (%) 6.1 14.6 14.5 9.3 10.0 7.9 8.7 8.8 Overall RFTK growth (%) (1.1) 1.3 0.2 6.7 (2.8) 2.0 2.0 2.0 Overall ASK growth (%) 5.6 13.2 13.5 9.6 8.3 10.2 9.3 8.8 Overall AFTK growth (%) 0.7 9.3 6.8 8.0 12.0 2.0 2.0 2.0 Overall PLF (%) 79.2 79.2 79.6 80.5 81.2 81.1 82.3 80.6 Overall CLF (%) 60.5 60.5 59.4 55.0 51.6 37.7 32.8 32.8 Overall passenger yield growth (%) (7.5) (8.4) (7.2) 4.4 3.6 (4.7) 0.5 0.3 Cargo Yield growth (%) (8.31) (13.66) (6.30) 9.04 2.79 0.00 (0.20) 0.00 Int'l jet-fuel price (USD/bbl) 113.000 65.000 52.850 65.000 83.000 83.000 83.000 83.000
Profit and loss (CNYm) Year to 31 Dec 2014 2015 2016 2017 2018 2019E 2020E 2021E Passenger revenue 75,261 78,585 83,577 91,564 104,309 111,964 122,315 133,490 Cargo revenue 7,328 6,491 5,977 3,623 3,627 3,144 3,200 3,264 Other Revenue 7,596 8,893 9,350 7,288 7,342 7,508 7,705 7,923 Total Revenue 90,185 93,969 98,904 102,475 115,278 122,616 133,221 144,677 Other income 0 0 0 0 0 0 0 0 COGS (74,520) (72,497) (76,602) (83,262) (93,441) (100,736) (108,125) (116,653) SG&A (4,120) (3,651) (3,133) (3,294) (3,807) (4,109) (4,466) (4,860) Other op.expenses (9,183) (10,471) (12,154) (13,969) (15,313) (16,255) (17,799) (19,343) Operating profit 2,362 7,350 7,015 1,950 2,717 1,516 2,831 3,820 Net-interest inc./(exp.) (1,869) (2,123) (2,603) (3,073) (3,617) (3,630) (3,573) (3,416) Assoc/forex/extraord./others 3,620 440 2,085 9,733 4,756 5,393 6,779 7,377 Pre-tax profit 4,113 5,667 6,497 8,610 3,856 3,279 6,037 7,781 Tax (573) (624) (1,542) (1,800) (926) (776) (1,471) (1,908) Min. int./pref. div./others (130) (506) (454) (468) (232) (249) (455) (585) Net profit (reported) 3,410 4,537 4,501 6,342 2,698 2,254 4,112 5,289 Net profit (adjusted) 3,506 7,928 6,445 2,725 3,302 2,804 4,050 5,222 EPS (reported)(CNY) 0.269 0.354 0.326 0.438 0.186 0.156 0.284 0.366 EPS (adjusted)(CNY) 0.277 0.618 0.467 0.188 0.228 0.194 0.280 0.361 EPS (adjusted fully-diluted)(CNY) 0.277 0.618 0.467 0.188 0.228 0.194 0.280 0.361 DPS (CNY) 0.000 0.000 0.105 0.051 0.000 0.023 0.043 0.055 EBIT 2,362 7,350 7,015 1,950 2,717 1,516 2,831 3,820 EBITDA 16,684 22,887 24,816 21,073 23,264 23,267 26,400 29,222
Cash flow (CNYm) Year to 31 Dec 2014 2015 2016 2017 2018 2019E 2020E 2021E Profit before tax 4,113 5,667 6,497 8,610 3,856 3,279 6,037 7,781 Depreciation and amortisation 9,183 10,855 12,537 13,968 15,235 16,255 17,799 19,343 Tax paid (471) (1,210) (1,261) (1,536) (1,709) (776) (1,471) (1,908) Change in working capital 102 1,915 2,630 (168) (593) 1,063 1,386 1,517 Other operational CF items (631) 7,094 4,490 (1,302) 5,549 861 (164) (455) Cash flow from operations 12,296 24,321 24,893 19,572 22,338 20,683 23,587 26,278 Capex (25,707) (33,381) (38,715) (24,689) (26,194) (25,000) (25,000) (25,000) Net (acquisitions)/disposals 1,862 5,013 1,276 2,897 5,466 0 0 0 Other investing CF items (188) 568 259 480 7,948 282 481 766 Cash flow from investing (24,033) (27,800) (37,180) (21,312) (12,780) (24,718) (24,519) (24,234) Change in debt 11,129 8,266 96 9,183 (8,012) 8,785 8,044 8,044 Net share issues/(repurchases) 0 2,855 8,540 0 0 0 0 0 Dividends paid (20) (38) (796) (769) (795) 0 (338) (617) Other financing CF items 3 0 (3,206) (3,706) (4,751) 0 0 0 Cash flow from financing 11,112 11,083 4,634 4,708 (13,558) 8,785 7,706 7,427 Forex effect/others (15) 121 268 (47) (47) (47) (47) (47) Change in cash (640) 7,725 (7,385) 2,921 (4,047) 4,703 6,727 9,424 Free cash flow (13,411) (9,060) (13,822) (5,117) (3,856) (4,317) (1,413) 1,278 Source: FactSet, Daiwa forecasts
36
China Eastern Airlines (670 HK): 20 December 2019
Financial summary continued … Balance sheet (CNYm) Year to 31 Dec 2014 2015 2016 2017 2018 2019E 2020E 2021E Cash & short-term investment 1,393 9,115 1,738 4,656 662 5,365 12,092 21,516 Inventory 0 0 0 0 0 0 0 0 Accounts receivable 10,256 11,313 11,891 11,438 13,212 14,252 15,333 16,462 Other current assets 6,594 2,650 2,259 2,199 2,058 2,058 2,058 2,058 Total current assets 18,243 23,078 15,888 18,293 15,932 21,675 29,483 40,036 Fixed assets 109,439 133,242 153,180 166,856 180,119 189,450 197,252 203,510 Goodwill & intangibles 0 0 0 0 0 0 0 0 Other non-current assets 38,147 41,672 43,256 44,578 42,981 42,981 42,981 42,981 Total assets 165,829 197,992 212,324 229,727 239,032 254,105 269,716 286,526 Short-term debt 33,272 44,323 35,289 48,331 38,623 39,364 39,364 39,364 Accounts payable 26,362 28,610 31,303 30,091 33,994 35,815 38,000 40,352 Other current liabilities 1,496 1,454 1,490 1,906 447 447 447 447 Total current liabilities 61,130 74,387 68,082 80,328 73,064 75,626 77,811 80,163 Long-term debt 64,612 74,788 82,484 82,338 93,930 101,974 110,018 118,062 Other non-current liabilities 8,316 8,886 9,392 8,283 10,422 12,396 13,545 14,706 Total liabilities 134,058 158,061 159,958 170,949 177,416 189,995 201,373 212,931 Share capital 12,674 13,140 14,467 14,467 14,467 14,467 14,467 14,467 Reserves/R.E./others 17,300 24,271 34,983 40,893 43,541 45,795 49,569 54,241 Shareholders' equity 29,974 37,411 49,450 55,360 58,008 60,262 64,036 68,708 Minority interests 1,797 2,520 2,916 3,418 3,593 3,842 4,297 4,882 Total equity & liabilities 165,829 197,992 212,324 229,727 239,017 254,100 269,706 286,520 EV 151,192 164,950 171,386 181,715 187,706 192,038 193,809 193,014 Net debt/(cash) 96,491 109,996 116,035 126,013 131,891 135,973 137,290 135,910 BVPS (CNY) 2.365 2.847 3.418 3.826 4.010 4.165 4.426 4.749
Key ratios (%) Year to 31 Dec 2014 2015 2016 2017 2018 2019E 2020E 2021E Sales (YoY) 2.2 4.2 5.3 3.6 12.5 6.4 8.6 8.6 EBITDA (YoY) 35.0 37.2 8.4 (15.1) 10.4 0.0 13.5 10.7 Operating profit (YoY) n.a. 211.2 (4.6) (72.2) 39.3 (44.2) 86.7 35.0 Net profit (YoY) 1,940.9 126.1 (18.7) (57.7) 21.2 (15.1) 44.4 28.9 Core EPS (fully-diluted) (YoY) 1,847.1 123.6 (24.5) (59.7) 21.2 (15.1) 44.4 28.9 Gross-profit margin 17.4 22.9 22.5 18.7 18.9 17.8 18.8 19.4 EBITDA margin 18.5 24.4 25.1 20.6 20.2 19.0 19.8 20.2 Operating-profit margin 2.6 7.8 7.1 1.9 2.4 1.2 2.1 2.6 Net profit margin 3.9 8.4 6.5 2.7 2.9 2.3 3.0 3.6 ROAE 12.3 23.5 14.8 5.2 5.8 4.7 6.5 7.9 ROAA 2.3 4.4 3.1 1.2 1.4 1.1 1.5 1.9 ROCE 2.0 5.1 4.3 1.1 1.4 0.8 1.3 1.7 ROIC 1.8 4.7 3.4 0.9 1.1 0.6 1.1 1.4 Net debt to equity 321.9 294.0 234.7 227.6 227.4 225.6 214.4 197.8 Effective tax rate 13.9 11.0 23.7 20.9 24.0 23.7 24.4 24.5 Accounts receivable (days) 36.1 41.9 42.8 41.5 39.0 40.9 40.5 40.1 Current ratio (x) 0.3 0.3 0.2 0.2 0.2 0.3 0.4 0.5 Net interest cover (x) 1.3 3.5 2.7 0.6 0.8 0.4 0.8 1.1 Net dividend payout 0.0 0.0 32.1 11.7 0.0 15.0 15.0 15.0 Free cash flow yield n.a. n.a. n.a. n.a. n.a. n.a. n.a. 2.3 Source: FactSet, Daiwa forecasts
Company profile
As at the end of 2018, China Eastern Airlines (CEA) was the largest Shanghai-based airline in China, with 692 planes. China Eastern Air Holding Company has a 64% stake in CEA.
37
China Industrials 20 December 2019
Air China (753 HK)
Air Chi na
Target price: HKD8.30 (from HKD7.90) Share price (19 Dec): HKD7.85 | Up/downside: +5.7%
Better macro environment expected in 2020 Kelvin Lau (852) 2848 4467 Phase I trade deal positive for passenger demand and CNY [email protected] Concerns on passenger yield likely to alleviate Frank Yip (852) 2773 8842 Reiterating our Outperform (2) rating; lifting TP to HKD8.30 [email protected]
What's new: We revisit our forecasts for Air China (AC) to reflect decreasing Forecast revisions (%) risks associated with the US-China trade conflict following news of the phase Year to 31 Dec 19E 20E 21E 1 trade agreement. We expect AC to report better results in 4Q19 as well as Revenue change - 0.3 0.2 Net profit change - 2.5 2.3 2020, on the back of less pressure from the CNY exchange rate and Core EPS (FD) change - 2.5 2.3 recovering passenger demand from a macro recovery. Source: Daiwa forecasts
What's the impact: Diminishing trade war risks likely to help macro Share price performance environment. The US and China have reached a preliminary trade (HKD) (%) agreement. With the limited scale of the first deal, we believe the two 10.5 125 countries will keep working on a new deal with much greater scope, and see 9.4 115 8.3 105 passenger demand in both leisure and business picking up in 2020E given 7.1 95 the receding trade-war impact. 6.0 85 Dec-18 Mar-19 Jun-19 Sep-19 Dec-19 Better 4Q19E results led by passenger demand recovery. To protect its Air China (LHS) Relative to HSI (RHS) passenger yields, AC has cautiously increased the ASK in 4Q19, which is likely to lead to a YoY improvement in passenger loads. We expect domestic 12-month range 6.24-10.32 traffic to improve in 4Q19 on the back of recovering business travel. The Market cap (USDbn) 13.18 CNY has appreciated against the USD since September (largely flat on a 3m avg daily turnover (USDm) 11.03 Shares outstanding (m) 13,085 YoY basis). With improving passenger demand and less foreign- exchange Major shareholder CNAHC (53.4%) impact, we see better 4Q19E results for AC relative to 3Q19. Financial summary (CNY) Passenger yields expected to grow in 2020E. In 3Q19, passenger yields Year to 31 Dec 19E 20E 21E on domestic and international routes were down YoY. Domestic passenger Revenue (m) 138,047 148,639 159,147 traffic growth was still weak at 4.3% YoY in October, according to the CAAC. Operating profit (m) 12,139 15,976 18,287 Net profit (m) 7,126 9,859 11,769 However, we are positive on the domestic passenger yield and see a Core EPS (fully-diluted) 0.519 0.718 0.857 recovery in 2020E, but remain cautious on the international yield. EPS change (%) (12.3) 38.4 19.4 Daiwa vs Cons. EPS (%) (7.2) (1.3) 4.2 PER (x) 13.6 9.8 8.2 Less concerns about investment income. We expect AC’s investment Dividend yield (%) 1.4 2.2 2.6 income from Cathay Pacific (293 HK, HKD11.34, Buy [1]) to improve in 2020. DPS 0.101 0.154 0.184 Given recent issues with Hong Kong Airlines, and Hong Kong International PBR (x) 1.0 1.0 0.9 Airport concessions, we believe CX now has a stronger position in the Hong EV/EBITDA (x) 4.6 3.7 3.1 ROE (%) 7.5 9.7 10.6 Kong market despite the challenging environment. Hence, we believe the Source: FactSet, Daiwa forecasts worst is over for CX and see its business recovering steadily.
What we recommend: We revise up our 2020-21E EPS by 2-3% to reflect improving passenger demand. We reaffirm our Outperform (2) rating and lift our 12-month TP to HKD8.30 (from HKD7.90), based on 1x 2020E PBR (previously 0.90x 2020E PBR). Key downside risks: lower-than-expected passenger demand and yields.
How we differ: Our 2019-20E EPS are 1-7% below the consensus, but our 2021E EPS is 4% higher given the longer time required for passenger yield improvement to flow through to the income statement.
See important disclosures, including any required research certifications, beginning on page 54
Air China (753 HK): 20 December 2019
Financial summary Key assumptions Year to 31 Dec 2014 2015 2016 2017 2018 2019E 2020E 2021E Overall RPK growth (%) 9.0 11.0 9.6 6.9 9.7 3.4 8.0 7.4 Overall RFTK growth (%) 13.5 15.2 6.6 8.0 5.5 0.0 5.1 5.2 Overall ASK growth (%) 10.2 10.9 8.5 6.3 10.4 4.6 7.5 7.6 Overall AFTK growth (%) 17.1 18.1 6.3 4.5 6.9 4.0 4.1 5.0 Overall PLF (%) 79.9 79.9 80.7 81.1 80.6 79.6 80.0 79.8 Overall CLF (%) 56.1 54.7 54.9 56.7 56.0 53.8 54.3 54.4 Overall passenger yield growth (%) (2.0) (6.7) (4.6) (0.4) 2.9 (2.4) 0.1 (0.0) Cargo Yield growth (%) (1.9) (16.4) (7.8) 14.4 5.4 1.0 0.0 0.0 Int'l jet-fuel price (USD/bbl) 113.0 65.0 52.9 64.5 83.0 75.0 75.0 75.0
Profit and loss (CNYm) Year to 31 Dec 2014 2015 2016 2017 2018 2019E 2020E 2021E Passenger revenue 92,599 95,921 100,280 106,744 120,430 121,520 131,343 141,024 Cargo revenue 8,786 8,447 8,305 10,255 11,406 11,520 12,112 12,738 Other Revenue 4,580 5,689 6,560 4,365 4,939 5,007 5,184 5,385 Total Revenue 105,965 110,057 115,145 121,363 136,774 138,047 148,639 159,147 Other income (6,483) (5,974) (5,295) (3,744) (2,510) (2,689) (3,147) (3,592) COGS (80,832) (75,521) (78,843) (92,451) (106,389) (108,350) (114,437) (121,707) SG&A 0 0 0 0 0 0 0 0 Other op.expenses (11,393) (13,011) (13,474) (13,596) (14,504) (14,869) (15,079) (15,561) Operating profit 7,257 15,552 17,533 11,572 13,372 12,139 15,976 18,287 Net-interest inc./(exp.) (2,632) (2,661) (3,108) (2,831) (2,742) (2,747) (2,457) (1,960) Assoc/forex/extraord./others 510 (3,536) (4,211) 2,746 (653) (205) 732 732 Pre-tax profit 5,135 9,355 10,213 11,486 9,977 9,188 14,251 17,059 Tax (801) (1,846) (2,454) (2,845) (1,762) (2,006) (3,242) (3,915) Min. int./pref. div./others (482) (446) (950) (1,397) (864) (756) (1,150) (1,375) Net profit (reported) 3,852 7,063 6,809 7,244 7,351 6,426 9,859 11,769 Net profit (adjusted) 4,088 10,749 9,633 5,339 8,124 7,126 9,859 11,769 EPS (reported)(CNY) 0.313 0.574 0.554 0.538 0.535 0.468 0.718 0.857 EPS (adjusted)(CNY) 0.333 0.874 0.783 0.396 0.591 0.519 0.718 0.857 EPS (adjusted fully-diluted)(CNY) 0.333 0.874 0.783 0.396 0.591 0.519 0.718 0.857 DPS (CNY) 0.052 0.107 0.108 0.108 0.115 0.101 0.154 0.184 EBIT 7,257 15,552 17,533 11,572 13,372 12,139 15,976 18,287 EBITDA 24,131 34,726 38,262 33,557 36,158 35,691 40,374 43,781
Cash flow (CNYm) Year to 31 Dec 2014 2015 2016 2017 2018 2019E 2020E 2021E Profit before tax 5,135 9,355 10,213 11,486 9,977 9,188 14,251 17,059 Depreciation and amortisation 11,327 12,911 13,340 13,453 14,358 14,723 14,933 15,415 Tax paid (550) (1,395) (2,103) (3,552) (2,736) (2,006) (3,242) (3,915) Change in working capital (1,158) 4,319 1,539 3,156 6,748 909 1,785 299 Other operational CF items (1,191) 3,381 4,378 (1,706) 337 68 (773) (1,001) Cash flow from operations 13,562 28,572 27,366 22,837 28,683 22,883 26,954 27,856 Capex (13,404) (7,153) (20,428) (17,628) (12,308) (12,308) (12,308) (12,308) Net (acquisitions)/disposals 20 (177) 56 1,617 2,514 349 349 349 Other investing CF items 2,849 541 1,359 1,358 844 829 733 962 Cash flow from investing (10,535) (6,788) (19,013) (14,653) (8,950) (11,130) (11,225) (10,997) Change in debt (5,309) (22,542) 4,906 (7,560) (16,424) (12,320) (9,000) (9,000) Net share issues/(repurchases) 0 0 0 11,201 0 0 0 0 Dividends paid (760) (795) (1,588) (1,747) (1,873) (1,670) (1,381) (2,118) Other financing CF items (1,866) (43) (12,100) (11,196) (350) 0 0 0 Cash flow from financing (7,936) (23,381) (8,781) (9,302) (18,647) (13,990) (10,381) (11,118) Forex effect/others 7 96 138 (168) 114 0 0 0 Change in cash (4,902) (1,502) (290) (1,285) 1,200 (2,237) 5,349 5,742 Free cash flow 158 21,419 6,939 5,209 16,375 10,575 14,647 15,549 Source: FactSet, Daiwa forecasts
39
Air China (753 HK): 20 December 2019
Financial summary continued … Balance sheet (CNYm) Year to 31 Dec 2014 2015 2016 2017 2018 2019E 2020E 2021E Cash & short-term investment 8,640 7,138 6,848 5,563 6,763 4,526 9,874 15,616 Inventory 1,100 1,731 1,681 1,536 1,877 1,877 1,877 1,877 Accounts receivable 2,834 3,252 3,286 3,490 5,374 5,589 5,812 5,812 Other current assets 10,349 8,090 8,172 10,171 9,711 9,880 10,056 10,056 Total current assets 22,923 20,211 19,986 20,760 23,726 21,872 27,620 33,362 Fixed assets 148,193 155,991 158,013 168,536 171,663 165,377 158,882 151,904 Goodwill & intangibles 1,137 1,136 1,213 1,176 1,137 1,137 1,137 1,137 Other non-current assets 39,418 36,293 44,838 45,172 47,131 50,659 54,326 57,420 Total assets 211,670 213,631 224,051 235,645 243,657 239,046 241,964 243,823 Short-term debt 32,519 17,254 32,075 34,892 34,320 31,000 31,000 31,000 Accounts payable 9,789 9,253 10,832 13,254 14,726 15,034 15,844 15,844 Other current liabilities 20,118 24,040 21,273 23,986 23,493 24,098 25,278 25,278 Total current liabilities 62,426 50,547 64,180 72,132 72,540 70,132 72,121 72,121 Long-term debt 80,263 86,791 74,129 59,907 61,434 52,434 43,434 34,434 Other non-current liabilities 9,102 9,770 9,345 8,747 9,186 10,470 10,770 10,603 Total liabilities 151,792 147,108 147,655 140,786 143,159 133,035 126,325 117,158 Share capital 13,085 13,085 13,085 14,525 14,525 14,525 14,525 14,525 Reserves/R.E./others 41,189 46,663 55,715 71,523 78,633 83,389 91,868 101,518 Shareholders' equity 54,274 59,748 68,799 86,048 93,157 97,914 106,392 116,043 Minority interests 5,604 6,775 7,597 8,811 7,341 8,096 9,246 10,621 Total equity & liabilities 211,670 213,631 224,051 235,645 243,657 239,046 241,964 243,823 EV 188,983 183,429 183,982 174,946 171,989 162,661 149,463 136,096 Net debt/(cash) 104,143 96,907 99,356 89,236 88,991 78,908 64,559 49,818 BVPS (CNY) 4.148 4.566 4.737 5.924 6.414 6.741 7.325 7.989
Key ratios (%) Year to 31 Dec 2014 2015 2016 2017 2018 2019E 2020E 2021E Sales (YoY) 7.9 3.9 4.6 5.4 12.7 0.9 7.7 7.1 EBITDA (YoY) 20.8 43.9 10.2 (12.3) 7.8 (1.3) 13.1 8.4 Operating profit (YoY) 76.2 114.3 12.7 (34.0) 15.6 (9.2) 31.6 14.5 Net profit (YoY) 111.7 162.9 (10.4) (44.6) 52.2 (12.3) 38.4 19.4 Core EPS (fully-diluted) (YoY) 111.7 162.9 (10.4) (49.4) 49.2 (12.3) 38.4 19.4 Gross-profit margin 23.7 31.4 31.5 23.8 22.2 21.5 23.0 23.5 EBITDA margin 22.8 31.6 33.2 27.6 26.4 25.9 27.2 27.5 Operating-profit margin 6.8 14.1 15.2 9.5 9.8 8.8 10.7 11.5 Net profit margin 3.9 9.8 8.4 4.4 5.9 5.2 6.6 7.4 ROAE 7.6 18.9 15.0 6.9 9.1 7.5 9.7 10.6 ROAA 2.0 5.1 4.4 2.3 3.4 3.0 4.1 4.8 ROCE 4.2 9.1 9.9 6.2 6.9 6.3 8.4 9.6 ROIC 3.8 7.6 7.9 4.8 5.9 5.1 6.8 7.9 Net debt to equity 191.9 162.2 144.4 103.7 95.5 80.6 60.7 42.9 Effective tax rate 15.6 19.7 24.0 24.8 17.7 21.8 22.7 23.0 Accounts receivable (days) 9.8 10.1 10.4 10.2 11.8 14.5 14.0 13.3 Current ratio (x) 0.4 0.4 0.3 0.3 0.3 0.3 0.4 0.5 Net interest cover (x) 2.8 5.8 5.6 4.1 4.9 4.4 6.5 9.3 Net dividend payout 16.7 18.6 19.4 20.0 21.5 21.5 21.5 21.5 Free cash flow yield 0.2 23.2 7.5 5.6 17.7 11.5 15.9 16.8 Source: FactSet, Daiwa forecasts
Company profile
As at the end of December 2018, Air China was the largest commercial airline in China, based on market capitalisation. The company operated 684 aircraft by the end of 2018. CNAHC has a 53.4% stake in Air China.
40
China Industrials 20 December 2019
(1848 HK) China Aircraft Leasing Group China Aircraft Leasing Group
Target price: HKD10.00 (from HKD10.00) Share price (19 Dec): HKD8.55 | Up/downside: +17.0%
Laggard aircraft lessor Kelvin Lau (852) 2848 4467 Low valuation with attractive dividend yield [email protected] Moderate earnings growth with limited downside risks Frank Yip (852) 2773 8842 Reaffirming our Buy (1) rating and TP of HKD10.00 [email protected]
What's new: CALC’s share price has outperformed the HSI slightly by a Forecast revisions (%) single-digit percentage YTD. In comparison, BOC Aviation (2588 HK, Year to 31 Dec 19E 20E 21E HKD78.95, Hold [3]) has delivered an over-30% return YTD with a c.4% Revenue change - - - Net profit change - - - 2020E dividend yield. Thus, we recommend investors look at CALC, which Core EPS (FD) change - - - is trading at a near 5-year low valuation with an over-8% dividend yield. Source: Daiwa forecasts
What's the impact: Stable earnings with potential to beat guidance. Share price performance We expect CALC to book low-single-digit earnings growth for 2019, which (HKD) (%) will likely extend into 2020E, on the back of its ongoing aircraft disposals 9.5 105 resulting in a stable fleet size. Given our relatively conservative estimates 9.0 101 for CALC’s aircraft deliveries for 2019, we see the possibility of an earnings 8.6 98 surprise in 2019 if the company’s aircraft deliveries accelerate and aircraft 8.1 94 7.6 90 monetisation increases. Dec-18 Mar-19 Jun-19 Sep-19 Dec-19
Ch A'craft (LHS) Relative to HSI (RHS) CALC plans to take delivery of 20-30 aircraft and dispose of a similar number in 2020. We expect the 737 MAX to return to service in 2020 and 12-month range 7.76-9.45 the c.400 warehoused MAX aircraft to be delivered shortly after the Market cap (USDbn) 0.74 grounding is lifted. As such, we see a possibility for CALC to beat its 2020 3m avg daily turnover (USDm) 0.41 delivery goal. Shares outstanding (m) 678 CE Aerospace (32.3%) Major shareholder Aircraft demand rising steadily in China. According to AviChina’s (2357 HK, HKD3.61, Buy [1]) 2019-2038 China civil aviation market outlook Financial summary (HKD) Year to 31 Dec 19E 20E 21E report, RPKs in China will increase by a 6.1% CAGR over 2019-38 and Revenue (m) 3,403 3,432 3,656 passenger throughput will triple by 2038. Airlines are required to add 7,630 Operating profit (m) 2,329 2,316 2,421 new aircraft to fulfil the increase in demand and replace obsolete planes, Net profit (m) 839 862 922 which would result in a fleet size of 9,401 aircraft in 2038 (about 2.6x more Core EPS (fully-diluted) 1.239 1.271 1.361 EPS change (%) 3.8 2.6 7.0 than for 2018). With Chinese airlines making up nearly 70% of its fleet size, Daiwa vs Cons. EPS (%) (3.2) (20.5) (31.6) CALC stands to benefit from this trend, in our view. PER (x) 6.9 6.7 6.3 Dividend yield (%) 8.0 8.2 8.8 Differentiated business model. CALC differentiates itself by having DPS 0.684 0.702 0.752 PBR (x) 1.4 1.3 1.2 branched out into the full aviation value chain with its associate, Aircraft EV/EBITDA (x) 6.2 7.2 8.6 Recycling International Limited, which is responsible for disassembling ROE (%) 21.1 19.7 19.3 aircraft (albeit it remains loss-making). In addition, CALC pursues an asset- Source: FactSet, Daiwa forecasts light business model to actively monetise its aircraft and has set a target for a fleet size of 500 in the long term.
What we recommend: We reiterate our Buy (1) rating on CALC for its 8%- plus dividend yield for 2020E, despite moderate earnings growth for 2019- 20E. We see limited downside risk for the share price. Downside risks include slower-than-expected aircraft deliveries and aircraft dispositions.
How we differ: Our 2019E EPS is 3% lower than the Bloomberg consensus. However, those for 2020-21E are 21-32% below the consensus, likely due to our lower fleet-size assumptions.
See important disclosures, including any required research certifications, beginning on page 54
China Aircraft Leasing Group (1848 HK): 20 December 2019
Financial summary Key assumptions Year to 31 Dec 2014 2015 2016 2017 2018 2019E 2020E 2021E Total fleet size (no.) 44 63 81 107 133 129 129 139 No. of realisation transaction (no.) 4 2 14 21 21 18 20 20 Ad hoc orders (no.) 8.0 2.0 0.0 0.0 (3.0) 0.0 0.0 0.0
Profit and loss (HKDm) Year to 31 Dec 2014 2015 2016 2017 2018 2019E 2020E 2021E Finance lease income 715 1,015 1,163 1,017 792 668 423 423 Operting lease income 182 224 416 829 1,542 1,601 1,749 1,897 Other Revenue 248 310 869 1,045 1,007 1,134 1,260 1,335 Total Revenue 1,145 1,549 2,448 2,892 3,342 3,403 3,432 3,656 Other income 0 0 0 0 0 0 0 0 COGS 0 0 0 0 0 0 0 0 SG&A 0 0 0 0 0 0 0 0 Other op.expenses (271) (315) (563) (678) (1,003) (1,074) (1,116) (1,235) Operating profit 874 1,235 1,885 2,213 2,339 2,329 2,316 2,421 Net-interest inc./(exp.) (521) (754) (1,029) (1,241) (1,423) (1,460) (1,476) (1,545) Assoc/forex/extraord./others 27 (1) 37 40 71 135 180 212 Pre-tax profit 381 480 892 1,012 987 1,003 1,020 1,087 Tax (78) (100) (254) (278) (178) (164) (159) (165) Min. int./pref. div./others 0 (0) 0 0 0 0 0 0 Net profit (reported) 303 380 638 735 809 839 862 922 Net profit (adjusted) 322 380 638 735 809 839 862 922 EPS (reported)(HKD) 0.577 0.636 1.009 1.088 1.194 1.239 1.271 1.361 EPS (adjusted)(HKD) 0.614 0.635 1.009 1.088 1.194 1.239 1.271 1.361 EPS (adjusted fully-diluted)(HKD) 0.580 0.570 0.913 1.084 1.194 1.239 1.271 1.361 DPS (HKD) 0.162 0.224 0.530 0.600 0.660 0.684 0.702 0.752 EBIT 874 1,235 1,885 2,213 2,339 2,329 2,316 2,421 EBITDA 945 1,326 2,049 2,540 2,924 3,007 3,036 3,259
Cash flow (HKDm) Year to 31 Dec 2014 2015 2016 2017 2018 2019E 2020E 2021E Profit before tax 381 480 892 1,012 987 1,003 1,020 1,087 Depreciation and amortisation 71 91 164 327 586 678 720 838 Tax paid (78) (100) (254) (278) (178) (164) (159) (165) Change in working capital (3,732) (4,553) 2,318 3,277 343 3,339 2,839 (2,456) Other operational CF items 519 774 972 1,111 1,258 1,446 1,417 1,467 Cash flow from operations (2,839) (3,308) 4,092 5,450 2,996 6,303 5,837 772 Capex (1,473) (504) (3,588) (7,356) (13,004) (1,409) (3,449) (3,449) Net (acquisitions)/disposals 0 0 (147) (357) 6,704 2,450 0 0 Other investing CF items 1 (194) 15 28 (471) 95 140 172 Cash flow from investing (1,472) (698) (3,720) (7,684) (6,771) 1,135 (3,309) (3,277) Change in debt 4,458 4,885 5,571 5,232 2,713 (3,729) (2,749) 1,137 Net share issues/(repurchases) 621 31 391 22 0 0 0 0 Dividends paid (69) (119) (204) (386) (434) (453) (468) (487) Other financing CF items (631) (811) (1,644) (1,545) (1,501) (1,440) (1,462) (1,524) Cash flow from financing 4,378 3,986 4,113 3,322 778 (5,621) (4,680) (874) Forex effect/others 0 0 0 0 0 0 0 0 Change in cash 68 (20) 4,486 1,087 (2,997) 1,817 (2,151) (3,380) Free cash flow (4,439) (3,989) 243 (2,145) (10,158) 4,516 2,008 (3,083) Source: FactSet, Daiwa forecasts
42
China Aircraft Leasing Group (1848 HK): 20 December 2019
Financial summary continued … Balance sheet (HKDm) Year to 31 Dec 2014 2015 2016 2017 2018 2019E 2020E 2021E Cash & short-term investment 1,426 1,389 5,841 7,023 3,990 5,773 3,588 175 Inventory 0 0 0 0 0 0 0 0 Accounts receivable 3,503 3,444 3,063 4,022 6,772 9,894 13,753 15,506 Other current assets 234 228 752 1,334 1,758 1,815 1,833 1,893 Total current assets 5,163 5,061 9,655 12,379 12,520 17,482 19,174 17,573 Fixed assets 1,707 2,413 6,214 13,059 18,886 17,168 19,897 22,508 Goodwill & intangibles 0 0 0 0 0 0 0 0 Other non-current assets 11,443 16,473 15,031 12,556 10,021 6,681 3,897 6,681 Total assets 18,313 23,947 30,900 37,994 41,427 41,330 42,968 46,762 Short-term debt 4,690 3,412 4,423 5,307 5,507 3,915 3,025 3,915 Accounts payable 0 0 0 0 0 0 0 0 Other current liabilities 447 818 1,683 2,744 3,034 3,090 3,151 3,539 Total current liabilities 5,137 4,230 6,106 8,051 8,541 7,006 6,176 7,454 Long-term debt 10,653 15,364 13,412 11,152 13,660 14,645 16,645 18,645 Other non-current liabilities 743 2,146 8,339 15,364 15,446 15,513 15,587 15,668 Total liabilities 16,532 21,739 27,857 34,567 37,647 37,163 38,408 41,767 Share capital 59 61 67 68 68 68 68 68 Reserves/R.E./others 1,703 2,128 2,976 3,359 3,712 4,099 4,493 4,927 Shareholders' equity 1,761 2,189 3,043 3,427 3,780 4,167 4,560 4,995 Minority interests 19 19 0 0 0 0 0 0 Total equity & liabilities 18,313 23,947 30,900 37,994 41,427 41,330 42,968 46,762 EV 19,731 23,200 17,789 15,230 20,971 18,581 21,876 28,180 Net debt/(cash) 13,917 17,386 11,994 9,435 15,177 12,787 16,081 22,385 BVPS (HKD) 3.007 3.612 4.543 5.055 5.577 6.148 6.729 7.371
Key ratios (%) Year to 31 Dec 2014 2015 2016 2017 2018 2019E 2020E 2021E Sales (YoY) 66.7 35.3 58.0 18.1 15.6 1.8 0.9 6.5 EBITDA (YoY) 58.4 40.3 54.5 24.0 15.1 2.8 1.0 7.4 Operating profit (YoY) 61.1 41.3 52.6 17.4 5.7 (0.4) (0.5) 4.5 Net profit (YoY) 73.6 17.9 68.2 15.1 10.1 3.8 2.6 7.0 Core EPS (fully-diluted) (YoY) 43.5 (1.7) 60.2 18.7 10.2 3.8 2.6 7.0 Gross-profit margin 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 EBITDA margin 82.5 85.6 83.7 87.9 87.5 88.4 88.5 89.2 Operating-profit margin 76.3 79.7 77.0 76.5 70.0 68.4 67.5 66.2 Net profit margin 28.1 24.5 26.1 25.4 24.2 24.7 25.1 25.2 ROAE 23.8 19.2 24.4 22.7 22.4 21.1 19.7 19.3 ROAA 2.1 1.8 2.3 2.1 2.0 2.0 2.0 2.1 ROCE 5.9 6.5 9.0 10.9 10.9 10.2 9.9 9.3 ROIC 5.2 5.5 7.8 11.5 12.0 10.8 10.4 8.6 Net debt to equity 790.2 794.4 394.1 275.3 401.5 306.9 352.6 448.1 Effective tax rate 20.5 20.8 28.4 27.4 18.0 16.3 15.6 15.2 Accounts receivable (days) 906.4 818.4 485.1 447.1 589.5 893.8 1,257.3 1,460.7 Current ratio (x) 1.0 1.2 1.6 1.5 1.5 2.5 3.1 2.4 Net interest cover (x) 1.7 1.6 1.8 1.8 1.6 1.6 1.6 1.6 Net dividend payout 28.0 35.1 55.6 55.4 55.3 55.3 55.3 55.3 Free cash flow yield n.a. n.a. 4.2 n.a. n.a. 77.9 34.6 n.a. Source: FactSet, Daiwa forecasts
Company profile
China Aircraft Leasing Group (CALC) is the largest independent aircraft lessor in China, managing a fleet of 133 aircraft as at the end of 2018. Listed on the Hong Kong Stock Exchange in July 2014, the company is not only engaged in aircraft leasing business, but also entered the aircraft disassembly business recently. The company aims to further expand its fleet and develop into a full value-chain aircraft solutions provider going forward.
43
China Industrials 20 December 2019
(2588 HK) BOC Aviation BOC Aviation
Target price: HKD75.00 (from HKD75.00) Share price (19 Dec): HKD78.95 | Up/downside: -5.0%
Downgrading: rich valuation, wait for better entry point Kelvin Lau (852) 2848 4467 Boeing 737 MAX could be back in service as soon as 1Q20 [email protected] On-track aircraft deliveries and disposals Frank Yip (852) 2773 8842 Downgrading our rating to Hold (3) given currently rich valuation [email protected]
What's new: The FAA has extended the Boeing 737 MAX recertification Forecast revisions (%) process into 2020. In addition, Boeing will temporally suspend production of the Year to 31 Dec 19E 20E 21E 737 MAX in January 2020, which we think will have minimal impact on BOCA. Revenue change - - - Net profit change - - -
Core EPS (FD) change - - - What's the impact: 737 MAX production halt has no impact on its return Source: Daiwa forecasts to service. We believe the production suspension is mainly attributable to Boeing’s financial pressure, rather than a pessimistic outlook for the return to Share price performance service of the 737 MAX. For 10M19, Boeing’s total deliveries were down 49% (HKD) (%) YoY as deliveries of its best-selling 737 MAX have been halted since March. 85 130 Given that nearly 90% of Boeing’s aircraft value is in the delivery stage, 78 119 70 108 inventory of around 400 aircraft in its warehouse has caused a serious liquidity 63 96 problem for Boeing. 55 85 Dec-18 Mar-19 Jun-19 Sep-19 Dec-19 US airlines expect the 737 MAX to be back in service by around 1Q20. BOC Avia (LHS) Relative to HSI (RHS)
American Airlines and Southeast Airlines recently updated their flight schedules, effectively delaying the return of the 737 MAX to their fleets until 7 12-month range 56.75-81.05 April and 14 April 2020, respectively. United Airlines made no changes to its Market cap (USDbn) 7.03 plan to exclude the aircraft from its flight schedule until 4 March 2020. Given 3m avg daily turnover (USDm) 5.91 Shares outstanding (m) 694 these developments, we believe Boeing will receive FAA approval shortly and Major shareholder Sky Splendor Limited (70.0%) the 737 MAX will return to service as early as 1Q20, and gradually thereafter in other countries. In addition, we believe the production rate to likely to Financial summary (USD) accelerate to its planned 57 planes a month after the lifting of the grounding Year to 31 Dec 19E 20E 21E order. Revenue (m) 1,979 2,237 2,465 Operating profit (m) 1,242 1,403 1,529 Net profit (m) 700 777 854 Likely to meet our full-year estimates. For the past 3 quarters, BOCA has Core EPS (fully-diluted) 1.009 1.119 1.230 delivered 34 aircraft in total (vs. our full-year expectation of 39). Cumulative EPS change (%) 12.9 10.9 9.9 aircraft disposals reached 22 units in 3Q19 and the disposal of an additional 17 Daiwa vs Cons. EPS (%) 4.2 3.1 4.2 PER (x) 10.0 9.0 8.2 aircraft will be completed in 2H19. We are confident that BOCA will meet our Dividend yield (%) 3.5 3.9 4.3 13% YoY net profit growth forecast for 2019. DPS 0.353 0.392 0.431 PBR (x) 1.5 1.3 1.2 Wider aircraft sales channels through the ABS market. BOCA has started EV/EBITDA (x) 10.8 10.2 9.6 ROE (%) 15.7 15.7 15.5 to use the asset-backed-securities (ABS) market to monetise its aircraft. We Source: FactSet, Daiwa forecasts believe aircraft securitisation should speed up BOCA’s monetisation progress and provide more opportunities amid the expanding aircraft ABS market.
What we recommend: Trading at 1.3x 2020E PBR, which we see as demanding, BOCA is downgraded to Hold (3) from Outperform (2). We maintain our DCF-based 12-month TP at HKD75.0, implying a 2020E PBR of 1.28x. However, we are positive on BOCA’s business prospects in 2020. Key risks: faster-/slower-than-expected service resumption of the 737 MAX.
How we differ: Our 2019-21E EPS are 3-4% higher than the Bloomberg consensus as we are more positive on 737 MAX deliveries.
See important disclosures, including any required research certifications, beginning on page 54
BOC Aviation (2588 HK): 20 December 2019
How do we justify our view? Growth outlook Valuation Earnings revisions
Growth outlook BOCA: net profit We forecast EPS to grow by 10-13% YoY over 2019-20E (USDm) (YoY %) on the back of increasing aircraft deliveries and disposals. 900 25% 800 20% As we expect the 737 MAX to be back in service as early 18% 18% 20% as 1Q20, 737 MAX aircraft deliveries should boost 700 600 earnings growth in 2020. On the back of steady growth in 13% 15% 500 aircraft demand in the long term, we like BOCA’s high 11% 400 visibility business model and consistent dividend payout 8% 10% 300 policy. 200 5% 100 412 487 576 620 700 777 0 0% 2016 2017 2018 2019E 2020E 2021E Net profit (LHS) YoY Growth (RHS) Source: Company, Daiwa forecasts
Valuation BOCA: forward PBR (x) BOCA is trading at a 12-month forward PBR of 1.3x, +2SD (PBR) 1.5 above its historical average (limited listing history). BOCA 1.4 has outperformed the HSI by over 30% YTD, backed by its 1.3 highly visible earnings, USD-denominated assets, and 1.2 1.1 moderate dividend yield. Even if we use the 2019E PBR to 1.0 calculate the recent average, the current 1.41x forward 0.9 0.8 PBR is still +2SD above the YTD average PBR of 1.23x 0.7
(vs. an average of 1.05x since listing in 2016). Therefore,
Jul-18 Jul-16 Jul-17 Jul-19
Jan-19 Jan-17 Jan-18
Mar-17 Mar-18 Mar-19
Nov-17 Sep-16 Nov-16 Sep-17 Sep-18 Nov-18 Sep-19 Nov-19
May-18 May-19 we see the current valuation as demanding, despite the May-17 long-term growth opportunities. PBR +1 SD Average PBR -1 SD -2 SD +2 SD
Source: Bloomberg, Daiwa forecasts
Earnings revisions BOCA: EPS estimates Our 2019-21E EPS are higher than the market consensus (HKD) by 3-4%. We expect the 737 MAX to return to service as 1.15 early as 1Q20 and BOCA to receive part of the 79 units of 1.10 its undelivered 737 MAX orders. As a result, the 23 1.05 delayed 737 MAX deliveries in 2019 should be shipped in 2020, in our view. 1.00
0.95
0.90
Jul-19
Apr-19 Oct-19
Jan-19 Jun-19
Feb-19 Mar-19
Aug-19 Sep-19 Nov-19 Dec-19 May-19 2019E 2020E Source: Bloomberg
45
BOC Aviation (2588 HK): 20 December 2019
Financial summary Key assumptions Year to 31 Dec 2014 2015 2016 2017 2018 2019E 2020E 2021E Aircraft deliveries (units) 57 50 67 71 50 44 67 55 Aircraft sold (units) 33 43 37 30 34 30 32 30 Managed aircraft (units) 20 43 38 31 25 30 30 30 Fleet size (units) 250 270 284 318 328 347 382 407
Profit and loss (USDm) Year to 31 Dec 2014 2015 2016 2017 2018 2019E 2020E 2021E Lease rental income 937 975 1,048 1,284 1,543 1,723 1,960 2,196 Net gain on sales of aircraft 30 70 91 78 91 122 130 122 Other Revenue 21 45 54 39 92 135 147 147 Total Revenue 988 1,091 1,193 1,401 1,726 1,979 2,237 2,465 Other income (10) (12) (22) (20) (24) (26) (27) (30) COGS 0 0 0 0 0 0 0 0 SG&A (56) (64) (80) (77) (97) (83) (98) (108) Other op.expenses (396) (400) (397) (482) (566) (629) (708) (798) Operating profit 527 614 694 821 1,038 1,242 1,403 1,529 Net-interest inc./(exp.) (151) (169) (216) (260) (353) (460) (542) (582) Assoc/forex/extraord./others (23) (44) (5) (11) 0 (8) (4) (4) Pre-tax profit 353 401 474 551 685 773 858 943 Tax (44) (58) (56) 36 (65) (73) (81) (89) Min. int./pref. div./others 0 0 0 0 0 0 0 0 Net profit (reported) 309 343 418 587 620 700 777 854 Net profit (adjusted) 309 343 418 496 620 700 777 854 EPS (reported)(USD) 0.523 0.582 0.642 0.845 0.894 1.009 1.119 1.230 EPS (adjusted)(USD) 0.523 0.582 0.642 0.714 0.894 1.009 1.119 1.230 EPS (adjusted fully-diluted)(USD) 0.523 0.582 0.642 0.714 0.894 1.009 1.119 1.230 DPS (USD) 0.236 0.000 0.192 0.296 0.313 0.353 0.392 0.431 EBIT 527 614 694 821 1,038 1,242 1,403 1,529 EBITDA 923 1,015 1,091 1,303 1,604 1,870 2,112 2,327
Cash flow (USDm) Year to 31 Dec 2014 2015 2016 2017 2018 2019E 2020E 2021E Profit before tax 353 401 474 551 685 773 858 943 Depreciation and amortisation 396 400 397 482 566 629 708 798 Tax paid (0) (0) (1) (1) (56) (73) (81) (89) Change in working capital 55 161 84 29 207 15 15 14 Other operational CF items 158 150 152 210 320 460 542 582 Cash flow from operations 962 1,112 1,106 1,271 1,723 1,804 2,042 2,247 Capex (3,143) (3,410) (2,895) (4,433) (4,143) (2,959) (3,416) (2,826) Net (acquisitions)/disposals 1,316 2,092 1,695 1,239 1,422 730 771 730 Other investing CF items 0 0 0 0 0 0 0 0 Cash flow from investing (1,827) (1,318) (1,200) (3,194) (2,722) (2,228) (2,645) (2,095) Change in debt 998 536 100 1,308 893 2,500 2,300 1,100 Net share issues/(repurchases) 0 0 0 0 0 0 0 0 Dividends paid (139) 0 (42) (155) (222) (198) (253) (280) Other financing CF items (263) (192) 59 618 310 (485) (569) (609) Cash flow from financing 596 344 117 1,771 980 1,817 1,478 211 Forex effect/others 0 0 0 0 0 0 0 0 Change in cash (269) 139 22 (152) (19) 1,392 875 363 Free cash flow (915) (231) (107) (1,809) (1,008) (461) (651) 101 Source: FactSet, Daiwa forecasts
46
BOC Aviation (2588 HK): 20 December 2019
Financial summary continued … Balance sheet (USDm) Year to 31 Dec 2014 2015 2016 2017 2018 2019E 2020E 2021E Cash & short-term investment 232 371 558 242 223 1,615 2,490 2,853 Inventory 0 0 0 0 0 0 0 0 Accounts receivable 5 0 0 11 7 8 9 10 Other current assets 149 382 261 319 27 28 28 29 Total current assets 386 754 820 572 257 1,650 2,527 2,892 Fixed assets 11,015 11,717 12,605 15,434 17,973 19,599 21,563 22,887 Goodwill & intangibles 0 0 0 0 0 0 0 0 Other non-current assets 2 3 20 34 26 26 26 26 Total assets 11,403 12,474 13,445 16,040 18,256 21,275 24,116 25,805 Short-term debt 889 963 902 1,419 1,438 1,938 2,238 2,338 Accounts payable 68 106 119 137 157 157 157 157 Other current liabilities 87 146 168 168 113 130 147 162 Total current liabilities 1,044 1,215 1,190 1,724 1,709 2,225 2,542 2,657 Long-term debt 7,272 7,649 7,542 9,263 10,840 12,840 14,840 15,840 Other non-current liabilities 990 1,170 1,331 1,234 1,508 1,508 1,508 1,508 Total liabilities 9,307 10,034 10,062 12,221 14,057 16,574 18,891 20,006 Share capital 608 608 1,158 1,158 1,158 1,158 1,158 1,158 Reserves/R.E./others 1,489 1,832 2,224 2,661 3,041 3,543 4,067 4,642 Shareholders' equity 2,096 2,440 3,382 3,819 4,199 4,701 5,225 5,799 Minority interests 0 0 0 0 0 0 0 0 Total equity & liabilities 11,403 12,474 13,445 16,040 18,256 21,275 24,116 25,805 EV 14,958 15,269 14,915 17,469 19,085 20,193 21,618 22,354 Net debt/(cash) 7,929 8,240 7,886 10,440 12,056 13,164 14,589 15,326 BVPS (USD) 3.554 4.136 4.873 5.502 6.050 6.774 7.529 8.356
Key ratios (%) Year to 31 Dec 2014 2015 2016 2017 2018 2019E 2020E 2021E Sales (YoY) 7.6 10.3 9.4 17.4 23.2 14.7 13.0 10.2 EBITDA (YoY) 9.1 10.0 7.6 19.4 23.1 16.6 12.9 10.2 Operating profit (YoY) 6.6 16.6 13.1 18.3 26.4 19.6 13.0 8.9 Net profit (YoY) 11.4 11.3 21.8 18.6 25.2 12.9 10.9 9.9 Core EPS (fully-diluted) (YoY) 11.4 11.3 10.4 11.2 25.2 12.9 10.9 9.9 Gross-profit margin 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 EBITDA margin 93.3 93.0 91.5 93.0 93.0 94.5 94.4 94.4 Operating-profit margin 53.3 56.3 58.2 58.6 60.2 62.7 62.7 62.0 Net profit margin 31.2 31.5 35.0 35.4 36.0 35.4 34.7 34.6 ROAE 15.3 15.1 14.4 13.8 15.5 15.7 15.7 15.5 ROAA 2.9 2.9 3.2 3.4 3.6 3.5 3.4 3.4 ROCE 5.4 5.8 6.1 6.2 6.7 6.9 6.7 6.6 ROIC 4.9 5.1 5.6 6.4 6.2 6.6 6.7 6.8 Net debt to equity 378.2 337.8 233.2 273.4 287.1 280.0 279.2 264.3 Effective tax rate 12.5 14.5 11.8 0.0 9.5 9.5 9.5 9.5 Accounts receivable (days) 0.9 0.9 0.1 1.4 1.9 1.4 1.4 1.4 Current ratio (x) 0.4 0.6 0.7 0.3 0.2 0.7 1.0 1.1 Net interest cover (x) 3.5 3.6 3.2 3.2 2.9 2.7 2.6 2.6 Net dividend payout 45.0 0.0 29.9 35.0 35.0 35.0 35.0 35.0 Free cash flow yield n.a. n.a. n.a. n.a. n.a. n.a. n.a. 1.4 Source: FactSet, Daiwa forecasts
Company profile
Founded in 1993, BOC Aviation is principally engaged in aircraft leasing and associated businesses, such as the sale of used aircraft. Based in Singapore, the company started its business by acquiring its first aircraft in 1995. BOC Aviation was acquired by Bank of China back in 2006, and became the bank’s 100% owned subsidiary. With the support of its parent company, and efforts made by management, the company had developed a fleet of 511 owned and managed aircraft by the end of 2018, with 183 aircraft on order, emerging as a top global aircraft lessor.
47
China Industrials 20 December 2019
(694 HK) Beijing Capital International Airport Beijing C apital Inter national Air port
Target price: HKD6.40 (from HKD6.40) Share price (19 Dec): HKD7.84 | Up/downside: -18.4%
Downgrade: unattractive valuation, declining earnings Kelvin Lau (852) 2848 4467 Increase in dividend payout unlikely to help the share price [email protected] Likely fall in earnings and high capital expenditure until 2022 Frank Yip (852) 2773 8842 Downgrading our rating by one notch to Underperform (4) [email protected]
What's new: BCIA’s share price recovered in August-October on the back Forecast revisions (%) of upbeat 1H19 results and its defensive nature amid the escalating China- Year to 31 Dec 19E 20E 21E US trade war, resulting in its YTD performance narrowing to -6%. However, Revenue change - - - we see the stock’s prevailing valuation as unattractive, and hence Net profit change - - (0.1) Core EPS (FD) change - - (0.1) downgrade our rating to Underperform (4) from Hold (3). Source: Daiwa forecasts
What's the impact: Profit decline pressure outweighs increased Share price performance dividend payout. Per an announcement made on 3 December, BCIA has (HKD) (%) increased its dividend payout ratio to not less than 45% and guaranteed a 8.5 105 CNY700m dividend for 2020-22, implying a c.2% forward dividend yield in 7.8 95 2020E. But with a profit down-cycle and higher capital expenditure ahead, 7.0 85 we believe the low single-digit dividend yield cannot support the share price 6.3 75 5.5 65 after a 36% rally from the 14 August 2019 low. Dec-18 Mar-19 Jun-19 Sep-19 Dec-19
B'Jing Cap (LHS) Relative to HSI (RHS) Non-substitutable growth in 2H19E earnings. BCIA posted a better- than-expected decline of 12% YoY in adjusted net profit in 1H19, on the 12-month range 5.76-8.31 back of 66% YoY growth in retail sales revenue from a low base, which is Market cap (USDbn) 4.36 not sustainable, in our view. Along with the aeronautical revenue drop due 3m avg daily turnover (USDm) 7.83 to the abolition of the Civil Aviation Development Fund, we expect adjusted Shares outstanding (m) 4,331 Major shareholder Capital Airport Holding Co (56.6%) net profit to drop at a higher rate of 30% in 2H19 (vs. -12% in 1H19).
Financial summary (CNY) Airline transition is largely on track. The Big-3 Chinese airlines are Year to 31 Dec 19E 20E 21E sticking to the original plan to transfer capacity to the new Daxing Airport, Revenue (m) 10,874 9,568 8,470 according to their 3Q19 results conference calls. CEA will complete the Operating profit (m) 3,079 1,853 957 majority of its flight transitions (except for the Beijing-Shanghai route in Net profit (m) 2,222 1,345 684 Core EPS (fully-diluted) 0.513 0.311 0.158 2020E) in the summer-spring season. CSA also emphasised plans to EPS change (%) (24.0) (39.5) (49.1) speed up infrastructure construction to improve the accessibility of Daxing Daiwa vs Cons. EPS (%) (1.9) (20.0) (50.3) Airport and open more international routes in the coming flight seasons. PER (x) 13.7 22.7 44.6 Dividend yield (%) 3.3 2.0 1.0 DPS 0.231 0.140 0.071 Negative growth in 2019-20 winter-spring flight numbers. Unlike other PBR (x) 1.2 1.2 1.2 tier-1 Chinese airports, BCIA recorded a YoY decline of 4.8% in the number EV/EBITDA (x) 6.8 9.0 11.8 of flights (effective 27 October 2019 to 28 March 2020; CAAC releases the ROE (%) 9.1 5.3 2.6 flight schedule ahead of the flight season). We believe the decline is mainly Source: FactSet, Daiwa forecasts attributable to the loss of passengers to Daxing Airport and is likely to continue until the transition is completed in 2022.
What we recommend: We downgrade BCIA to Underperform (4) from Hold (3) with an unchanged DCF-based TP of HKD6.40. BCIA’s 22.7x 2020E PER (more than 2SD above its past-3-year average forward PER) is not justified given likely declining profits, in our view. The key upside risk to our call would be a lower-than-expected passenger loss to Daxing Airport.
How we differ: Our EPS for 2020-21E are 20-50% lower than the consensus, likely as we are more pessimistic on BCIA’s traffic loss.
See important disclosures, including any required research certifications, beginning on page 54
Beijing Capital International Airport (694 HK): 20 December 2019
How do we justify our view? Growth outlook Valuation Earnings revisions
Growth outlook BCIA: net profit We expect BCIA to face a net profit down-cycle, with 24- (CNYm) 49% YoY declines for 2019-21E, as passenger loss 3,500 60% accelerates as the airlines transition flights to the new 3,000 40% 2,500 Daxing Airport through 2022. Longer term, we see 20% passenger throughput likely remaining under pressure. 2,000 0% According to management, passenger throughput will 1,500 (20%) decrease to 82m in 2025 (-3% CAGR for 2019-25) and 1,000 recover to 100m in 2030 (4% CAGR for 2026-30). With the 500 (40%) anticipated passenger decline in the short and medium 0 (60%) term, we are not upbeat on the earnings outlook. 2014 2015E 2016E 2017E 2018E 2019E 2020E 2021E Net profit (LHS) YoY Growth (RHS)
Source: Company, Daiwa forecasts
Valuation BCIA: forward PER YTD, BCIA’s share price has underperformed the HSI, (PER) though it outperformed in August to October 2019. The 20 outperformance was mainly attributable to its better-than- 18 expected 1H19 results, as retail sales surged by 66% YoY 16 from a low base. Besides, as a defensive play, BCIA also 14 benefited from the 15% tariff introduced by the US in 12 September. Shares of BCIA are currently trading at a forward PER of 22.7x, or more than 2SD above their past- 10
3-year average forward PER. Despite a less pessimistic
Jun-19 Jun-16 Jun-17 Jun-18
Mar-18 Mar-16 Mar-17 Mar-19
Dec-15 Dec-16 Dec-17 Dec-18 Dec-19
Sep-15 Sep-16 Sep-17 Sep-18 Sep-19 outlook on the China-US trade war, and the stock’s PER +1 SD Average PER defensive nature, we believe the stock’s relatively high -1 SD +2 SD valuation is not sustainable. Source: Bloomberg, Daiwa forecasts
Earnings revisions BCIA: EPS estimates Compared with the Bloomberg consensus, our 2019E EPS (CNY) is lower by 2%, while our 2020-21E EPS are 20-50% 2.00 1.90 below. The major discrepancy likely comes from our more 1.80 cautious outlook on the loss of passengers from the 1.70 1.60 transition to Daxing Airport through 2022. Although BCIA 1.50 will increase capital investments during the transition 1.40 1.30 period, the operational improvement should have only a 1.20 limited impact in alleviating an operating-margin decline, 1.10 1.00
given the likely significant drop in passenger and aircraft
Jul-19
Apr-19 Oct-19 Jun-19
volume, in our view. Jan-19
Mar-19
Feb-19
Aug-19 Sep-19 Nov-19 May-19 2019E 2020E
Source: Bloomberg
49
Beijing Capital International Airport (694 HK): 20 December 2019
Financial summary Key assumptions Year to 31 Dec 2014 2015 2016 2017 2018 2019E 2020E 2021E
Passenger throughput (Int'l) growth (%) 4.6 8.9 10.1 3.2 6.7 (1.0) (8.0) (12.0)
Passenger throughput (Domestic) 2.3 3.0 3.7 0.4 5.0 (4.0) (12.0) (20.0) growth (%) Total pax throughput growth (%) 2.9 4.4 5.3 1.1 5.4 (3.2) (10.9) (17.7) Aircraft movement (Int'l) growth (%) 1.8 5.4 5.6 3.8 3.8 (1.0) (12.0) (12.0) Aircraft movement (Domestic) growth 2.7 0.3 1.9 (3.0) 2.5 (2.0) (20.0) (20.0) (%) Total aircraft movement growth (%) 2.5 1.4 2.7 (1.5) 2.8 (1.8) (18.0) (17.9)
Profit and loss (CNYm) Year to 31 Dec 2014 2015 2016 2017 2018 2019E 2020E 2021E Aeronautical revenue 4,360 4,586 4,829 5,101 5,309 3,999 3,441 2,733 Non-aeronautical revenue 3,196 3,801 3,849 4,474 5,953 6,875 6,127 5,738 Other Revenue 0 0 0 0 0 0 0 0 Total Revenue 7,557 8,387 8,678 9,575 11,263 10,874 9,568 8,470 Other income 0 0 0 0 0 0 0 0 COGS (3,717) (4,010) (4,237) (4,566) (5,854) (6,322) (6,190) (5,935) SG&A 0 0 0 0 0 0 0 0 Other op.expenses (1,454) (1,593) (1,550) (1,404) (1,369) (1,473) (1,526) (1,578) Operating profit 2,385 2,784 2,891 3,604 4,039 3,079 1,853 957 Net-interest inc./(exp.) (541) (494) (396) (298) (140) (140) (80) (56) Assoc/forex/extraord./others 15 (97) (119) 164 (71) 23 20 11 Pre-tax profit 1,859 2,193 2,377 3,470 3,829 2,961 1,793 912 Tax (468) (551) (596) (870) (957) (740) (448) (228) Min. int./pref. div./others 0 0 0 0 0 0 0 0 Net profit (reported) 1,391 1,642 1,781 2,600 2,872 2,222 1,345 684 Net profit (adjusted) 1,393 1,762 1,951 2,592 2,923 2,222 1,345 684 EPS (reported)(CNY) 0.321 0.379 0.411 0.600 0.663 0.513 0.311 0.158 EPS (adjusted)(CNY) 0.322 0.407 0.450 0.598 0.675 0.513 0.311 0.158 EPS (adjusted fully-diluted)(CNY) 0.322 0.407 0.450 0.598 0.675 0.513 0.311 0.158 DPS (CNY) 0.129 0.152 0.165 0.240 0.265 0.231 0.140 0.071 EBIT 2,385 2,784 2,891 3,604 4,039 3,079 1,853 957 EBITDA 4,224 4,490 4,553 5,131 5,717 4,695 3,525 2,685
Cash flow (CNYm) Year to 31 Dec 2014 2015 2016 2017 2018 2019E 2020E 2021E Profit before tax 1,859 2,193 2,377 3,470 3,829 2,961 1,793 912 Depreciation and amortisation 1,424 1,541 1,501 1,352 1,296 1,400 1,453 1,505 Tax paid (460) (555) (623) (739) (957) (740) (448) (228) Change in working capital (154) 280 714 (10) 2,157 567 110 (15) Other operational CF items 596 698 642 198 (1,635) 177 119 105 Cash flow from operations 3,265 4,157 4,610 4,271 4,690 4,366 3,027 2,280 Capex (565) (2,441) (187) (667) (3,289) (1,500) (1,500) (1,500) Net (acquisitions)/disposals (17) (43) (27) 45 0 0 0 0 Other investing CF items 17 43 27 (45) 0 0 0 0 Cash flow from investing (565) (2,441) (187) (667) (3,289) (1,500) (1,500) (1,500) Change in debt (1,663) (670) (1,034) (5,677) (321) (2,315) (1,320) (319) Net share issues/(repurchases) 0 0 0 0 0 0 0 0 Dividends paid (533) (602) (680) (820) (1,107) (1,053) (862) (501) Other financing CF items (395) (555) (338) (144) 194 (140) (80) (56) Cash flow from financing (2,591) (1,827) (2,052) (6,642) (1,234) (3,508) (2,261) (876) Forex effect/others 1 4 (1) (0) (13) 0 0 0 Change in cash 109 (107) 2,370 (3,038) 154 (643) (735) (96) Free cash flow 2,699 1,716 4,424 3,604 1,401 2,866 1,527 780 Source: FactSet, Daiwa forecasts
50
Beijing Capital International Airport (694 HK): 20 December 2019
Financial summary continued … Balance sheet (CNYm) Year to 31 Dec 2014 2015 2016 2017 2018 2019E 2020E 2021E Cash & short-term investment 2,184 2,113 4,530 1,615 1,806 1,164 429 332 Inventory 118 126 123 118 154 116 100 79 Accounts receivable 1,392 1,266 1,139 1,296 1,386 1,339 1,178 1,043 Other current assets 0 0 27 129 786 786 786 786 Total current assets 3,694 3,504 5,819 3,159 4,132 3,404 2,492 2,240 Fixed assets 27,299 27,750 26,629 26,051 26,973 27,072 27,120 27,114 Goodwill & intangibles 39 48 65 83 78 48 17 (14) Other non-current assets 879 1,389 1,391 1,345 3,515 4,380 4,531 4,673 Total assets 31,911 32,691 33,904 30,637 34,698 34,904 34,160 34,014 Short-term debt 2,410 4,645 171 161 3,147 1,160 160 161 Accounts payable 1,927 2,216 3,149 3,652 6,083 6,565 6,498 6,327 Other current liabilities 2,343 391 5,887 401 103 103 103 104 Total current liabilities 6,680 7,252 9,206 4,213 9,334 7,828 6,761 6,592 Long-term debt 7,902 7,038 5,133 4,838 1,759 1,599 1,439 1,279 Other non-current liabilities 127 132 187 156 192 192 192 192 Total liabilities 14,709 14,422 14,526 9,207 11,285 9,619 8,392 8,063 Share capital 4,331 4,331 4,331 4,331 4,331 4,331 4,331 4,331 Reserves/R.E./others 12,871 13,938 15,047 17,099 19,082 20,954 21,437 21,620 Shareholders' equity 17,202 18,269 19,378 21,430 23,413 25,285 25,768 25,951 Minority interests 0 0 0 0 0 0 0 0 Total equity & liabilities 31,911 32,691 33,904 30,637 34,698 34,904 34,160 34,014 EV 38,652 40,094 31,297 33,908 33,624 32,119 31,694 31,631 Net debt/(cash) 8,128 9,570 773 3,384 3,100 1,595 1,170 1,107 BVPS (CNY) 3.972 4.218 4.474 4.948 5.406 5.838 5.950 5.992
Key ratios (%) Year to 31 Dec 2014 2015 2016 2017 2018 2019E 2020E 2021E Sales (YoY) 6.0 11.0 3.5 10.3 17.6 (3.4) (12.0) (11.5) EBITDA (YoY) 4.3 6.3 1.4 12.7 11.4 (17.9) (24.9) (23.8) Operating profit (YoY) 4.5 16.7 3.9 24.7 12.1 (23.8) (39.8) (48.3) Net profit (YoY) 9.8 26.5 10.7 32.8 12.8 (24.0) (39.5) (49.1) Core EPS (fully-diluted) (YoY) 9.8 26.5 10.7 32.8 12.8 (24.0) (39.5) (49.1) Gross-profit margin 50.8 52.2 51.2 52.3 48.0 41.9 35.3 29.9 EBITDA margin 55.9 53.5 52.5 53.6 50.8 43.2 36.8 31.7 Operating-profit margin 31.6 33.2 33.3 37.6 35.9 28.3 19.4 11.3 Net profit margin 18.4 21.0 22.5 27.1 26.0 20.4 14.1 8.1 ROAE 8.3 9.9 10.4 12.7 13.0 9.1 5.3 2.6 ROAA 4.3 5.5 5.9 8.0 8.9 6.4 3.9 2.0 ROCE 8.3 9.7 10.6 14.1 14.8 10.9 6.7 3.5 ROIC 6.7 7.8 9.0 12.0 11.8 8.7 5.2 2.7 Net debt to equity 47.3 52.4 4.0 15.8 13.2 6.3 4.5 4.3 Effective tax rate 25.2 25.1 25.1 25.1 25.0 25.0 25.0 25.0 Accounts receivable (days) 61.8 57.8 50.6 46.4 43.5 45.7 48.0 47.8 Current ratio (x) 0.6 0.5 0.6 0.7 0.4 0.4 0.4 0.3 Net interest cover (x) 4.4 5.6 7.3 12.1 28.9 21.9 23.2 17.2 Net dividend payout 40.0 40.0 40.0 40.0 40.0 45.0 45.0 45.0 Free cash flow yield 8.8 5.6 14.5 11.8 4.6 9.4 5.0 2.6 Source: FactSet, Daiwa forecasts
Company profile
Beijing Capital International Airport (BCIA) is engaged mainly in aeronautical and non-aeronautical businesses at Beijing Airport. For 2018, aircraft movements and passenger throughput at Beijing Airport were 614,022 and 101m, respectively. The Capital Airport Holding Company has a 56.6% stake in BCIA.
51
China Aviation: 20 December 2019
Daiwa’s Asia Pacific Research Directory
HONG KONG SOUTH KOREA Takashi FUJIKURA (852) 2848 4051 [email protected] Sung Yop CHUNG (82) 2 787 9157 [email protected] Regional Research Head Pan-Asia Co-head/Regional Head of Automobiles and Components; Automobiles; Jiro IOKIBE (852) 2773 8702 [email protected] Shipbuilding; Machinery Co-head of Asia Pacific Research Mike OH (82) 2 787 9179 [email protected] John HETHERINGTON (852) 2773 8787 [email protected] Banking; Capital Goods (Construction and Defence); Utilities; Steel Co-head of Asia Pacific Research Josh RHEE (82) 2 787 9124 [email protected] Craig CORK (852) 2848 4463 [email protected] Chemicals Regional Head of Asia Pacific Product Management JH LEE (82) 2 787 9838 [email protected] Paul M. KITNEY (852) 2848 4947 [email protected] Consumer/Retail – Cosmetics Chief Strategist for Asia Pacific; Strategy (Regional) Thomas Y KWON (82) 2 787 9181 [email protected] Kevin LAI (852) 2848 4926 [email protected] Pan-Asia Head of Internet & Telecommunications; Software – Internet/On-line Games Chief Economist for Asia ex-Japan; Macro Economics (Regional) SK KIM (82) 2 787 9173 [email protected] Kelvin LAU (852) 2848 4467 [email protected] IT/Electronics – Semiconductor/Display and Tech Hardware Head of Automobiles; Transportation and Industrials (Hong Kong/China) Henny JUNG (82) 2 787 9182 [email protected] Fiona LIANG (852) 2532 4341 [email protected] IT/Electronics – Semiconductor/Display and Tech Hardware (Small/Mid Cap) Industrials (Hong Kong/China) Minjoo KANG (82) 2 787 9176 [email protected] Jay LU (852) 2848 4970 [email protected] Media Automobiles and Components (Hong Kong/China) Leon QI (852) 2532 4381 [email protected] TAIWAN Rick HSU (886) 2 8758 6261 [email protected] Regional Head of Financials; Banking; Diversified financials; Insurance (Hong Kong/China) Head of Regional Technology; Head of Taiwan Research; Semiconductor/IC Design Kevin JIANG (852) 2532 4383 [email protected] (Regional) Nora HOU (886) 2 8758 6249 [email protected] Banking (China) Anson CHAN (852) 2532 4350 [email protected] Banking; Diversified financials; Insurance; Strategy Consumer (Hong Kong/China) Steven TSENG (886) 2 8758 6252 [email protected] Adrian CHAN (852) 2848 4427 [email protected] IT/Technology Hardware (Automation & PC Hardware) Consumer (Hong Kong/China) Kylie HUANG (886) 2 8758 6248 [email protected] Jonathan HO (852) 2848 4056 [email protected] IT/Technology Hardware (Handsets and Components) Consumer (Hong Kong/China) Helen CHIEN (886) 2 8758 6254 [email protected] Andrew CHUNG (852) 2773 8529 [email protected] Small/Mid Cap Head of Gaming (Hong Kong/China) John CHOI (852) 2773 8730 [email protected] INDIA Punit SRIVASTAVA (91) 22 6622 1013 [email protected] Head of Hong Kong and China Internet; Regional Head of Small/Mid Cap Head of India Research; Strategy; Banking/Finance Carlton LAI (852) 2532 4349 [email protected] Saurabh MEHTA (91) 22 6622 1009 [email protected] Small/Mid Cap (Hong Kong/China) Capital Goods; Utilities Dennis IP (852) 2848 4068 [email protected]
Regional Head of Power, Utilities, Renewable and Environment (PURE); PURE (Hong Kong/China) SINGAPORE Anna LU (852) 2848 4465 [email protected] Ramakrishna MARUVADA (65) 6228 6742 [email protected] Power, Utilities, Renewable and Environment (PURE) – IPP, Wind & Nuclear (China) Head of Singapore Research; Telecommunications (China/ASEAN/India) Tony WU (852) 2848 4469 [email protected] David LUM (65) 6228 6740 [email protected] Power, Utilities, Renewable and Environment (PURE) – Utilities (Hong Kong), Banking; Property and REITs EV materials, Gas (China) Jame OSMAN (65) 6228 6744 [email protected] Jonas KAN (852) 2848 4439 [email protected] Transportation – Road and Rail; Pharmaceuticals and Healthcare; Consumer Head of Hong Kong and China Property Cynthia CHAN (852) 2773 8243 [email protected] JAPAN Property (China) Yukino YAMADA (81) 3 5555 7295 [email protected] Selwyn CHENG (852) 2773 8716 [email protected] Strategy (Regional)
Custom Products Group Jack CHAN (852) 2773 8731 [email protected] Custom Products Group
PHILIPPINES Renzo CANDANO (63) 2 737 3022 [email protected] Consumer Micaela ABAQUITA (63) 2 737 3021 [email protected] Property Gregg ILAG (63) 2 737 3023 [email protected] Utilities; Energy
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conflict of interest that may affect the objectivity of this research.
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Research Analyst Conflicts For updates on “Research Analyst Conflicts” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The principal research analysts who prepared this report have no financial interest in securities of the issuers covered in the report, are not (nor are any members of their household) an officer, director or advisory board member of the issuer(s) covered in the report, and are not aware of any material relevant conflict of interest involving the analyst or DCMA, and did not receive any compensation from the issuer during the past 12 months except as noted: no exceptions.
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The following explains the rating system in the report as compared to relevant local indices, unless otherwise stated, based on the beliefs of the author of the report. "1": the security could outperform the local index by more than 15% over the next 12 months. "2": the security is expected to outperform the local index by 5-15% over the next 12 months. "3": the security is expected to perform within 5% of the local index (better or worse) over the next 12 months. "4": the security is expected to underperform the local index by 5-15% over the next 12 months. "5": the security could underperform the local index by more than 15% over the next 12 months.
Disclosure of investment ratings Rating Percentage of total Buy* 69.11% Hold** 23.76% Sell*** 7.13% Source: Daiwa Notes: data is for single-branded Daiwa research in Asia (ex Japan) and correct as of 30 September 2019. * comprised of Daiwa’s Buy and Outperform ratings. ** comprised of Daiwa’s Hold ratings. *** comprised of Daiwa’s Underperform and Sell ratings.
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When making an actual transaction, please be sure to carefully read the materials presented to you prior to the execution of agreement, and to take responsibility for your own decisions regarding the signing of the agreement with us. Corporate Name: Daiwa Securities Co. Ltd. Financial instruments firm: chief of Kanto Local Finance Bureau (Kin-sho) No.108 Memberships: Japan Securities Dealers Association, The Financial Futures Association of Japan Japan Securities Investment Advisers Association Type II Financial Instruments Firms Association
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