Share price misaligned with fundamentals
- Omicron could severely constrain CX’s turnaround if Hong Kong sticks to a zero-COVID strategy
- Passenger traffic will take longer than expected to recover; cargo operations will also be hit by restrictions
- Relatively slower vaccine uptake in Hong Kong could also impede CX’s recovery
- Downgrade CX to Fully Valued with a lower TP of HK$5.50
Investment Thesis
Return to normalcy is still quite far away. CX’s passenger traffic will recover at a slower pace compared to regional peers, due to its lack of a domestic market, Hong Kong’s zero-COVID strategy, and considerable exposure to long-haul flights and business travellers.
Consequently, we believe CX’s operations will remain loss making until 1H23. Despite CX’s robust cargo operations, which is expected to perform strongly, a slow turnaround in passenger volumes coupled with elevated crude oil and jet fuel prices will keep the airline in the red in the short run.
Risk-to-reward set-up is unfavourable We view the group’s valuation at 1.1x FY23F P/BV as rich, as it has run ahead of its fundamentals.
Valuation:
Our TP of HK$5.50 is based on 0.9x blended FY22/23F book value, +1.0 standard deviation (SD) above its five-year mean.
Where we differ:
Our FY22/23F earnings are considerably lower than consensus as we have factored in a slower pace of recovery for Cathay’s passenger volumes.
Key Risks to Our View:
Key risks to our negative view include: 1) faster-than anticipated normalisation of CX’s passenger volumes; and 2) passenger and cargo yields holding up better than expected.