Cathay will likely see a slight rebound in 2H21 but strict travel restrictions in Hong Kong may still hamper its recovery. However, default risk is still low and investors can consider their bonds.
Tan Chu Ren 26 Oct 2021
- Passenger load increased in 3Q21 but may be temporary due to China’s zero-covid policy.
- Refinancing capabilities and strong shareholder backing are keeping default risks low.
- Credit spreads of airline bonds have compressed and Cathay bonds’ look relatively more valuable.
The travel bubble between Hong Kong (“HK”) and Singapore was supposed to help the two countries’ flag carriers. However, the plan was shelved not once but twice to the detriment of both airlines. In this article, we look at the prospects of HK’s flag carrier and examine their bonds.
1H21 Operating results
For the six months ended 30 June 2021 (“1H21”), Cathay Pacific Airways Limited (“Cathay”) recorded total revenue of HKD 15.85b, a YoY decrease of 42.7% and 17.7% decline over 2H20. Passenger services remained in the doldrums, with a revenue of only HKD 748m. Operating expenses also declined due to restructuring and less operations. Operating loss came in at HKD 4.53b for 1H21, while total loss for the period was at HKD 7.56b. Excluding for restructuring costs and impairment and related charges, adjusted loss before tax for the period was at HKD 7.29b, lower than what we previously forecasted.
Revenue in 2H21 should start to pick up as numbers in August and September have picked up as seen in Figure 1. Passenger capacity increased by 81% MoM in August and load factor reached 46.4%, the highest since March 2020. This was driven by student travel from China to US and UK. Passengers travelling within Asia via HK also boosted flights demand. Furthermore, in their September announcement, the group stated that student traffic to London continued into early October. Thus, 2H21 results should be better than 1H21.
Figure 1: Passenger numbers improved in 3Q21
However, it is unlikely that operations will see a sustained pick-up in numbers soon. China is following a zero-Covid policy where people travelling to the country has to stay in a quarantine facility for two weeks. HK also has similar restrictions with different quarantine periods depending on previous countries visited and vaccination status. A virus advisor to HK’s government also said HK will not consider changing its strategy until the vaccination rate is 80-90%.
Figure 2: Hong Kong’s vaccination numbers
Looking at Figure 2, the rate of change of vaccination rates seemed to have slowed and is unlikely that HK will loosen restrictions by the end of this year. Furthermore, even if vaccination rates were to hit 80-90%, infected cases are unlikely to be low if HK were to open up, based on Singapore’s experience. Thus, while the group saw better numbers in 3Q21, we doubt that they will improve substantially in 4Q21.
Despite all this, Cathay Group should still be able to withstand the storm.
Credit profile
In 1H21, we estimate an adjusted EBITDA of HKD 1.90b for the group while they generated a net operating cash inflow of HKD 1.43b. With a better 3Q21, Cathay should be able to avoid a reduction in their cash balances.
As at 30 June 2021, the group has liquid funds of HKD 23.56b and committed undrawn facilities of HKD 9.41b. The group also privately issued about HKD 189m in RMB bonds in Aug 2021, which is a slight boost for their cash balances. Thus, in total, we estimate available funds of about HKD 36.16b versus current liabilities of HKD 24.80b.
Cathay’s credit ratios worsened a little as they took on more debt with net debt/equity rising by 7 percentage points to 108% compared to FY20. Adjusted net debt/equity ratio which excludes leases without asset transfer components for comparability against group borrowing covenants, was at 82% in 1H21.
Cathay’s majority shareholder (45%) – Swire Pacific Ltd (“Swire”) is still doing quite well and may come in with equity injection if needed. Swire has very low debt ratios with net debt/equity and total debt/total asset at 14.07% and 17.13% respectively as at end June 2021. It also has HKD 24.03b in cash but a quick ratio of 0.64x. Its 2025 3.875% USD note is only at a low G-spread of 105.15 basis points (“bp”).
At the end of August, Cathay also upsized its USD 2.5b Medium Term Note Programme which suggests that the group is ready to issue new tranche of bonds. Thus, while the group has a low quick ratio of 0.68x, Cathay should be able to issue new debt to alleviate their current situation. Furthermore, we are also more concerned with the near-term situation as Cathay’s profits should be able to pick up once China and HK open up.
Relative valuation
Looking at bonds from airline issuers, their credit spreads have decreased after rising dramatically in the midst of the COVID-19 pandemic. Most bonds are also trading at moderate yields of about 4%. It seems that investors are less concerned about the default risk of airlines now that most developed countries’ populations are increasingly vaccinated and there are more travel agreements amongst countries.
Figure 3: Credit spreads are now at less distressed levels
Referring to Figure 3, Cathay bonds are trading at the higher end of the range and may be due to HK and China’s stricter travel restrictions and less domestic travel as compared to other North American airlines. For comparison’s sake, operating losses in 1H21 of American Airlines and United Airlines have improved by 73.1% and 36.7% YoY respectively, while Cathay’s has only improved by 27.7%.
Figure 4: Most airline bonds are no longer trading at distressed levels
For a closer comparison, we look at Cathay and SIA. For the definition of debt, we included both borrowings and leases. While SIA’s credit ratios are not much better than Cathay’s, SIA has stronger government support (owns 55.38%) and the added benefit of more travel agreements. These may be reasons as to why SIA bonds trade at much lower yields than Cathay bonds.
Table 1: Credit ratios of Cathay and SIA
| As of 30 June 2021 | Cathay | SIA |
| Total debt/assets | 48.0% | 82.8% |
| Net debt/equity | 107.5% | 103.6% |
Source: Respective companies’ announcements, iFAST compilations
While Cathay’s operating performance is unlikely to see a sustainable rebound soon, default risk is still low. At a yield-to-maturity (“YTM”) of 4.95%, the CATHAY 4.875% 17Aug2026 Corp (USD) looks attractive. USDSGD is also rather weak and investors who are willing to take on currency risk can invest in the bond. The shorter-term CATHAY 3.375% 22Jan2023 Corp (SGD) is also offering decent yields of 4.03% and is an acceptable alternative.
Figure 5: SIA and Cathay bonds
