More resilient against Omicron

  • Omicron will likely lead to more domestic lockdowns as China sticks to its COVID-zero strategy
  • International travel may only resume towards the end of 2022 or 2023
  • We now project CSA to remain unprofitable in FY22F; cut FY23F net profit estimate by 63%.
  • Maintain BUY but with a lower TP of HK$5.70

Investment Thesis

Shorter recovery time frame compared to peers. China Southern Airline (CSA)’s earnings are set to normalise before its peers given its leading position in the domestic market, stronger cost control, and larger freighter operations.

International travel to restart from late-2022 and stage a significant rebound in FY23F. We anticipate a meaningful turnaround in CSA’s international passenger volumes in FY23F, as China should reopen its international borders sometime in late 2022 to 2023. CSA’s total air passenger volumes should reach pre-COVID-19 levels by early-2024.

Attractively priced relative to peers. Despite its more favourable recovery profile, CSA is only priced at 0.9x P/BV (FY23F), which is considerably below the peer median of 1.2x.

Valuation:

Our TP of HK$5.70 is based on 1.2x (+1.0 standard deviation of 5-year average) FY22/23F book value. Our Ashare TP is based on a 75% valuation premium to the H shares.

Where we differ:

Our FY22/23F 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 COVID-19 in China, 2) prolonged reopening of international borders, 3) substantial depreciation of the RMB, 4) a further spike in jet fuel prices ahead of recovery in passenger traffic.