Jeju Air (089590 KS ) Three key points to watch Airlines 2Q19 preview: Lower load factor and yield to result in operating loss of W23.1bn Company Report For 2Q19, we forecast Jeju Air’s revenue to come in at W293.4bn (+3.6% YoY). In the July 10, 2019 international segment, we estimate traffic expanded 18.5% YoY on the back of increased capacity (+28.2% YoY). However, we believe revenue growth was tempered by a 9.1% YoY decline in yield. We believe traffic (-6.6% YoY) and yield (-3.3% YoY) were also sluggish in the domestic segment. (Maintain) Buy At the operating level, we expect a loss of W23.1bn, which is below the market consensus (breakeven). We believe the biggest drag on earnings was a fall in load Target Price (12M, W) ▼ 40,000 factor (81.9%; -6.7%p YoY) and a resulting decline in yield. We attribute the load factor decline to weakness in international flights out of regional airports (Daegu/Muan), Share Price (07/09/19, W) 29,000 where the airline expanded capacity. Earnings were likely further weighed down by co st pressures from higher oil prices and Expected Return 38% won depreciation. We estimate fuel costs increased 27% YoY and other costs (airport- related costs, maintenance, etc.) also rose nearly 10% YoY. As a result of the operating loss, we expect the carrier to swing to a n et loss of W20.1bn (vs. net profit of W16.8bn OP (19F, Wbn) 99 in 2Q18). Consensus OP (19F, Wbn) 132 Key points to watch: Market share, Japan, and M&A EPS Growth (19F, %) -5.6 1) Market share: Jeju Air’s market share in the short-haul international segment has Market EPS Growth (19F, %) -23.6 recently expanded to 10.8%, nearing the 10.9% record set in March 2019. We expect P/E (19F, x) 11.4 market share gains to continue, helped by new flight and capacity restrictions on a rival Market P/E (19F, x) 12.2 LCC. While Jeju Air’s fleet expansion is currently acting as a drag on earnings, we KOSPI 2,052.03 believe it will help the carrier strengthen its market position in the long term. Market Cap (Wbn) 764 2) Japan routes: There are growing worries that demand on Japan routes will soften Shares Outstanding (mn) 26 amid the recent political row. Any decline in demand in 2H19 is unlikely to be Free Float (%) 33.0 significant, given the low base of comparison related to last year’s n atural disasters (earthquakes and floods). That said, if tensions become protracted, we believe Jeju Air Foreign Ownership (%) 8.6 will need to adjust its routes (diverting routes from Japan to Southeast Asia or China) Beta (12M) 1.23 and improve its fleet efficiency. 52-Week Low 28,800 52-Week High 46,400 3) M&A: The growing likel ihood of AK Group’s participation in the bid for Asiana Airlines (020560 KS/Hold/CP: W6,020) is drawing increasing attention to how the deal (%) 1M 6M 12M could affect Jeju Air. The move could lead to lesser competition and a stronger market Absolute -21.2 -14.7 -31.3 position, but could also rai se financial risks. We believe whether the deal is beneficial Relative -20.4 -14.2 -23.5 will ultimately depend on 1) the acquisition price, 2) ownership structure and restructuring plans, and 3) FSC-LCC synergies. 120 Jeju Air KOSPI 110 Cut TP to W40,000, but maintain Buy 100 We are cutting our target price on Jeju Air from W50,000 to W40,000 in light of sluggish 90 earnings. We maintain our Buy rating, as our target price still implies 38% upside 80 potential. The stock has retreated 31% from its April peak (vs. -9% for the KOSPI) on 70 worries about margins and is now trading at a P/E of 11x. With the carrier likely to 60 expand its market position over the long term, we continue to believe investors should 7.18 11.18 3.19 7.19 overweight the stock. Mirae Asset Daewoo Co., Ltd. [ Transport/Energy ] FY (Dec.) 12/16 12/17 12/18 12/19F 12/20F 12/21F Revenue (Wbn) 748 996 1,259 1,480 1,685 1,883 Jay JH Ryu +822 -3774 -1738 OP (Wbn) 58 101 101 99 123 159 [email protected] OP Margin (%) 7.8 10.1 8.0 6.7 7.3 8.4 NP (Wbn) 53 78 71 67 81 110 EPS (W) 2,038 2,954 2,689 2,537 3,087 4,187 ROE (%) 19.5 25.8 19.9 16.4 17.5 20.2 P/E (x) 12.3 12.0 12.5 11.4 9.4 6.9 P/B (x) 2.4 2.8 2.3 1.8 1.5 1.3 Dividend Yield (%) 2.0 1.7 1.9 1.7 2.6 2.8 Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, Mirae Asset Daewoo Research estimates July 10, 2019 Jeju Air Table 1. 2Q19 preview (Wbn, %, %p) 2Q19F Growth 2Q18 1Q19 Mirae Asset Consensus YoY QoQ Daewoo Revenue 283 393 293 332 3.6 -25.3 Operating profit 12 57 -23 0 TTR TTR OP margin (%) 4.1 14.5 -7.9 0.0 TTR TTR Pretax profit 22 55 -26 -11 TTR TTR Net profit 17 42 -20 -14 TTR TTR Note: Based on consolidated K-IFRS; net profit is attributable to controlling interests Source: WISEfn, company data, Mirae Asset Daewoo Research estimates Table 2. Earnings forecast revisions (Wbn, %) Previous Revised % chg. Notes 19F 20F 19F 20F 19F 20F Revenue 1,543 1,740 1,480 1,685 -4.0 -3.1 L/F and yield forecast downgrades Revenue forecast downgrade s; upward Operating profit 156 172 99 123 -36.9 -28.5 F/X rate forecast revision Pretax profit 127 162 87 106 -31.3 -34.8 OP forecast downgrades Net profit 97 124 67 81 -31.2 -34.6 Notes: Based on consolidated K-IFRS; net profit refers to net profit attributable to controlling interests Source: Mirae Asset Daewoo Research estimates Table 3. Quarterly and annual earnings (Wbn, %) 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19F 3Q19F 4Q19F 2018 2019F 2020F Revenue 309 283 350 317 393 293 411 382 1,259 1,480 1,685 -Domestic 47 63 60 54 49 61 62 56 224 228 229 -International 244 202 264 234 315 212 319 291 943 1,137 1,328 -Other 18 18 27 29 29 21 31 35 92 115 129 Operating profit 46 12 38 5 57 -23 49 16 101 99 123 Pretax profit 48 22 41 -17 55 -26 45 13 93 87 106 Net profit (controlling) 37 17 31 -14 42 -20 35 10 71 67 81 OP margin (%) 15.0 4.1 10.8 1.7 14.5 -7.9 11.8 4.2 8.0 6.7 7.3 Pretax margin (%) 15.5 7.8 11.7 -5.5 14.1 -8.9 10.9 3.5 7.4 5.9 6.3 Net margin (%) 12.0 5.9 8.9 -4.4 10.7 -6.9 8.4 2.7 5.6 4.5 4.8 International RPK (%, YoY) 24.9 32.7 30.8 31.2 30.9 18.5 20.8 19.3 29.9 22.3 18.5 International ASK (%, YoY) 22.9 30.0 35.2 37.2 34.0 28.2 23.3 19.8 31.5 25.9 15.0 International L/F (%, YoY) 90.2 87.6 86.8 84.4 88.2 81.0 85.0 84.0 87.1 84.6 87.1 International yield (%, YoY) 13.4 1.2 10.2 -3.0 -0.2 -9.1 -7.0 -5.0 5.5 -5.1 -3.3 Domestic RPK (%, YoY) 6.8 3.9 -1.2 1.7 3.8 -6.6 -4.1 -3.5 2.6 -2.7 -1.5 Domestic ASK (%, YoY) 8.1 4.3 1.6 3.9 2.3 -1.0 -0.7 -0.7 4.4 -0.1 -1.0 Domestic L/F (%, YoY) 93.7 95.4 93.2 93.6 95.1 90.0 90.0 91.0 94.0 91.5 91.0 Domestic yield (%, YoY) 6.5 6.2 2.4 1.9 3.1 -3.3 -2.0 0.0 4.2 -0.7 0.0 Jet fuel (US$/bbl) 79 85 89 85 77 80 81 81 84 80 81 Notes: Based on consolidated K-IFRS; net profit refers to net profit attributable to controlling interests Source: Company data, Mirae Asset Daewoo Research estimates Mirae Asset Daewoo Research 2 July 10, 2019 Jeju Air Table 4. Valuation: RIM (Wbn) 2018 2019F 2020F 2021F 2022F 2023F 2024F Revenue 1,259 1,480 1,685 1,883 1,883 2,077 2,402 (Growth) 26.4% 17.5% 13.9% 11.7% 0.0% 10.3% 15.6% Net profit 71 115 137 146 170 194 214 (% of revenue) 5.6% 9.7% 10.0% 9.5% 9.5% 9.5% 9.2% Equity (ex-minority interest) 382 421 534 654 801 981 1,202 (Growth) 15.4% 26.9% 27.0% 22.5% 22.5% 22.5% 22.5% ROE forecast 25.8% 30.6% 28.7% 24.6% 23.3% 21.7% 19.6% Cost of equity 8.2% 8.2% 8.2% 8.2% 8.2% 8.2% 8.2% ROE spread 19.9% 8.2% 9.3% 12.1% 9.2% 9.1% 7.8% Residual income 76 36 46 71 62 71 69 Terminal value 502 NPV of FCFF 396 PV of terminal value 229 Current book value 3,871 Equity value 1,050 Shares outstanding 26,357 Target price (W) 40,000 Current price (W) 29,050 Source: Mirae Asset Daewoo Research Figure 1.