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Reopening beneficiary at attractive value

Investment Thesis

Domestic market to return to full force soon. While the recent resurgence of COVID-19 cases will dampen domestic air traffic in August-September, we expect the situation to normalise by early October.

CEA could benefit more from the reopening of borders. CEA has the largest share of key regional routes to countries like South Korea, Japan, and Taiwan, which should normalise to pre-crisis levels at a relatively swifter pace. Massive pent-up demand should be unleashed in FY22F with China achieving herd immunity in early 2022 and driving a significant increase in international passenger volumes.

Cheapest recovery play among China’s big three airlines. At a 0.9x FY22F P/BV (peer median: 1.4x), CEA is the cheapest among its peers as a recovery play on China’s air travel demand. We believe the airline deserves to be priced at a higher multiple because of its more promising earnings outlook.

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Valuation

Our TP of HK$4.40 is based on 1.2x (+1.0 standard deviation of 5- year average) FY22F book value. Our A-share TP is derived by applying a 50% valuation premium to its H shares.

Where we Differ

Our FY21/22F net earnings projections are below consensus, as we expect international travel activity to improve at a more gradual pace.

Key Risks to Our View

1) Resurgence of a COVID-19 wave in China, 2) a slower-thananticipated vaccine rollout, 3) substantial depreciation of the RMB, or 4) a further spike in jet fuel prices ahead of recovery in passenger traffic.