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.