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Korean Air Buy (003490 KS ) (Upgrade) [Korea] Airlines December 2, 2020 Korean Air Buy (003490 KS ) (Upgrade) The birth of a mega carrier TP: W32,000 ▲ Upside: 21.4% Mirae Asset Daewoo Co., Ltd. Jay JH Ryu [email protected] Upgrade to Buy Upgrade from Hold to Buy and raise TP from W22,000 to W32,000 We derived our target price on Korean Air by applying a P/B of 1.6x (25% discount to the stock’s peak multiple) to our consolidated BPS estimate of W19,589. We view our target P/B of 1.6x as achievable, given the industry’s turnaround potential and the strength of the cargo sector. We revise up our 2021 operating profit forecast by 48% , factoring in the arrival of vaccines and the likely recovery in passenger demand. Hanjin KAL ’s share issuance is Court clears way for Hanjin KAL ’s share issuance to KDB cleared On Dec. 1, a Seoul court rejected a request to stop Hanjin KAL from issuing new shares to Korea Development Bank (KDB). The ruling clears the way for Korean Air to buy shares of Asiana Airlines (W1.5tr) by raising W2.5tr through a share issuance. Korean Air will own a 63.9% stake in Asiana Airlines if the latter’s stock sale is completed as scheduled in Jun. 2021. Watch for synergies Birth of a mega carrier (third largest in Asia ’s passenger market ) The combination of the two carriers would create a mega carrier with a combined fleet of 245 aircraft (up from Korean Air’s current 164). Based on 2019 earnings, the combined company would become the world’s third largest cargo carrier and the world’s 11 th largest (Asia’s third largest) passenger carrier. We could see cost savings through increased buyer power and route efficiencies. Shareholder value to recover Shareholder value to recover on additional asset sales and robust air cargo business In addition to the planned share issuance, Korean Air plans to sell its in-flight meal business, Songhyun-dong land, and ownership in Wangsan Leisure Development. If all of these sales are successful, we expect to see cash inflow of nearly W1.5tr and a rise in net asset value. We expect shareholder value to recover on the back of 1) enhanced liquidity and 2) cash flow generation from the cargo segment. Key data Current price (12/1/20, W) 26,350 Market cap (Wbn) 4,590 140 Korean Air KOSPI OP (20F, Wbn) 63 Shares outstanding (mn) 175 120 Consensus OP (20F, Wbn) 121 Free float (%) 68.0 100 80 EPS growth (20F, %) - Foreign ownership (%) 12.2 60 P/E (20F, x) - Beta (12M) 1.58 40 Market P/E (20F, x) 17.7 52-week low (W) 11,373 11.19 3.20 7.20 11.20 KOSPI 2,634.25 52-week high (W) 26,950 Share performance Earnings and valuation metrics (%) 1M 6M 12M (Dec.) 2017 2018 2019 2020F 2021F 2022F Absolute 32.1 51.1 27.3 Revenue (Wbn) 12,092 13,012 12,683 7,495 7,762 7,959 Relative 13.7 18.5 0.9 OP (Wbn) 940 671 257 63 518 589 OP margin (%) 7.8 5.2 2.0 0.8 6.7 7.4 NP (Wbn) 792 -168 -629 -579 89 153 EPS (W) 7,152 -1,455 -5,432 -4,112 265 439 ROE (%) 29.4 -5.1 -22.1 -19.6 1.9 2.6 P/E (x) 4.0 - - - 99.5 60.0 P/B (x) 0.9 1.1 1.0 1.4 1.6 1.5 Div. yield (%) 0.7 0.7 0.0 0.0 0.0 0.0 Notes: Under consolidated K-IFRS; NP is attributable to owners of the parent Source: Company data, Mirae Asset Daewoo Research estimat es Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including t he US. PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES AND DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT. December 2, 2020 Korean Air figure 1. Ownership structure (29.2%) (60.0%) (63.9%) (44.2%) (100%) Air Seoul Source: Company data, Mirae Asset Daewoo Research Table 1. Expected balance sheet after acquisition of Asiana Airlines (Wbn) (End-2021F) Notes Total assets 40,207 Current assets 7,925 Cash & equivalents 4,525 Non-current assets 32,282 PP&E 27,976 Total liabilities 32,703 Current liabilities 13,207 Short-term financial liabilities 9,215 Non-current liabilities 19,496 Long-term financial liabilities 14,285 Total equity 7,504 Equity attributable to the owners 6,814 63.9% stake Shares (mn) 348 Post-issuance (W2.5tr) BPS (W) 19,589 Note: Estimates for Asiana Airlines are based on consensus figures. Source: Company data, Mirae Asset Daewoo Research Mirae Asset Daewoo Research 2 December 2, 2020 Korean Air Table 2. Global airline rankings (post-acquisition) Rank (2019) International cargo RTKs International passenger RPKs 1 Qatar Airways 13,024 Emirates 299,496 2 Emirates 12,052 Ryanair 185,405 3 Korean Air + Asiana Airlines 11,922 Qatar Airways 172,591 4 Cathay Pacific 10,930 United Airlines 162,962 5 FedEx 8,851 Lufthansa 160,731 6 Lufthansa 7,223 British Air 151,935 7 Cargolux 7,180 Air France 143,347 8 Turkish Airlines 7,000 Delta Air Lines 141,353 9 UPS 6,228 Turkish Airline 131,106 10 Singapore Air 6,146 American Airlines 126,533 11 Air China 5,651 Korean Air + Asiana Airlines 125,200 12 China Southern 5,482 Cathay Pacific 119,328 13 China Airlines 5,334 KLM 109,476 14 AirBridgeCargo 5,168 Singapore Air 109,462 15 United Airlines 4,231 EasyJet 99,854 Source: IATA , Mirae Asset Daewoo Research Table 3. Fleet overview (Units) (End-3Q20) Model Korean Air Asiana Airlines Total A380 10 6 16 A330 29 15 44 B747-400 2 - 2 B747-8I 10 - 10 Medium/large aircraft B747 - 1 1 B767 - 5 5 A350 - 10 10 B777 43 9 52 B787-9 10 - 10 A320/321 - 21 21 A321neo - 1 1 Small aircraft B737-800/900 27 - 27 A220 (CS300) 10 - 10 Passenger aircraft (total) 141 68 209 B747F 4 11 15 B767F - 1 1 Cargo aircraft A350F - 1 1 B747-8F 7 - 7 B777F 12 - 12 Cargo aircraft (total) 23 13 36 Total 164 81 245 Source: Company data, Mirae Asset Daewoo Research Mirae Asset Daewoo Research 3 December 2, 2020 Korean Air Table 4. 4Q20 preview (Wbn, %, %p) 4Q20F Growth 4Q19 3Q20 Mirae Asset Daewoo Consensus YoY QoQ Revenue 3,041 1,595 1,793 1,878 -41.0 12.4 OP 119 -31 75 93 -37.0 TTB OP margin (%) 3.9 -2.0 4.2 5.0 0.3 6.2 Pretax profit 176 -22 79 290 -55.3 TTB NP 85 -29 59 226 -30.9 TTB Notes: Under consolidated K-IFRS; NP is attributable to owners of the parent Source: Company data, WISEfn, Mirae Asset Daewoo Research Table 5. Earnings forecast revisions (Wbn, W, %) Previous Revised % chg. Notes 20F 21F 20F 21F 20F 21F Revenue 7,595 7,583 7,495 7,762 -1.3 2.4 Upgraded traffic/rate estimates OP 87 351 63 518 -27.4 47.7 Lowered F/X rate estimates Pretax profit -1,227 -179 -694 81 RR TTB Reflected F/X gains/losses NP -1,068 -138 -579 89 RR TTB EPS (W) -7,582 -785 -4,112 265 RR TTB Notes: Under consolidated K-IFRS; NP is attributable to owners of the parent Source: Mirae Asset Daewoo Research Table 6. Quarterly and annual earnings (Wbn, %) 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20 3Q20 4Q20F 2019 2020F 2021F Revenue 3,131 3,122 3,186 3,041 2,427 1,728 1,547 1,793 12,683 7,495 7,762 OP 231 -64 68 119.1 -83 110 -39 75 257 63 518 Pretax profit -132 -464 -373 176 -980 231 -25 79 -734 -694 81 NP -118 -367 -228 85 -732 123 -29 59 -629 -579 89 OP margin (%) 7.4 -2.1 2.1 3.9 -3.4 6.4 -2.5 4.2 2.0 0.8 6.7 Pretax margin (%) -4.2 -14.9 -11.7 5.8 -40.4 13.4 -1.6 4.4 -5.8 -9.3 1.0 Net margin (%) -3.7 -11.7 -7.1 2.9 -30.4 6.8 -2.1 3.6 -5.0 -7.7 1.1 Int’l passenger RPK growth (%, YoY) 1.8 4.2 2.9 5.9 -29.4 -93.6 -92.4 -85.0 3.7 -75.9 -3.1 Int’l passenger L/F (%) 80.3 82.5 83.1 83.6 73.3 39.1 30.1 83.6 82.4 63.3 73.2 Jet fuel price (US$/bbl) 77 81 75 75 65 33 45 52 77 49 52 Notes: Under consolidated K-IFRS; NP is attributable to owners of the parent; as 3Q20 figures were calculated by subtracting 1H data from 3Q YTD figures, slight discrepancies with actual figures may exist Source: Company data, Mirae Asset Daewoo Research Mirae Asset Daewoo Research 4 December 2, 2020 Korean Air Figure 2. Korean Air’s international passenger traffic growth Figure 3. Korean Air’s cargo traffic growth (%, YoY) (%, YoY) 20 20 16 0 12 8 -20 4 -40 0 -4 -60 -8 -12 -80 -16 -100 -20 3Q13 3Q14 3Q15 3Q16 3Q17 3Q18 3Q19 3Q20 3Q13 3Q14 3Q15 3Q16 3Q17 3Q18 3Q19 3Q20 Source: Company data, Mirae Asset Daewoo Research Source: Company data, Mirae Asset Daewoo Research Figure 4.
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