Waiting for borders to reopen

  • Domestic traffic in FY2022F could be weaker than expected due to higher frequency of lockdowns
  • International traffic will also take longer to recover as Omicron delays reopening plans
  • We now expect Air China to stay in the red in FY22F; slash FY23F net profit estimate by 57%
  • Maintain BUY but with a lower TP of HK$6.30

Investment Thesis

Longer recovery trajectory compared to domestic peers. It will take longer for Air China’s earnings to reach pre-crisis levels, given its elevated exposure to international flights, protracted drag from Cathay Pacific at the associate level, and stiffer competition at its Beijing Hub with the introduction of more aircraft slots at the new Beijing Daxing Airport.

Air China should still see a return to normality ahead of regional peers. We believe Air China’s passenger volumes should normalise by early to mid-2024, behind airlines in North America and Europe,
but before most peers in APAC.

Undemanding valuation relative to regional peers. Despite its more promising recovery prospects, Air China is still trading at a 30-40% discount to the regional peer median at 0.9x P/BV (FY22F), which is unjustified in our view.

Valuation:

Our H-share TP of HK$6.50 is based on 1.2x FY22/23F book value, which is +1.0 standard deviation (SD) above its five-year average. Our A-share TP is derived by applying 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) further spike in jet fuel prices ahead of recovery in passenger traffic.