Omicron is more than priced in

  • Omicron will likely lead to more outbreaks in China, resulting in more lockdowns
  • International border controls may take longer to loosen than initially expected
  • Project CEA to remain unprofitable in FY22F; slash FY23F net profit estimate by 63%
  • Valuation still too cheap despite factoring Omicron setback; Maintain BUY with lower TP of HK$4.00

Investment Thesis

Domestic market should quickly recover after the pandemic is contained. Recent COVID flare-ups have negatively impacted CEA’s passenger volumes and could occur more frequently due to the highly contagious Omicron variant. However, air travel activity should swiftly rebound to pre-crisis levels when the situation stabilises.

CEA could benefit more from the reopening of borders. CEA has the largest share of key regional routes to countries like South Korea, Japan, and Taiwan, which should normalise to pre-crisis levels at a relatively swifter pace. We expect massive pent-up demand to be unleashed in FY23F as international air travel resumes.

Cheapest recovery play among China’s big three airlines. At 0.8x FY23F P/BV (peer median: 1.2x), CEA is the cheapest among its peers as a recovery play on China’s air travel demand. We believe the airline deserves to be priced at a higher multiple because of its more promising earnings outlook relative to regional peers.

Valuation:

Our TP of HK$4.00 is based on 1.2x (+1.0 standard deviation of 5- year average) FY22F book value. Our A-share TP is derived by applying a 75% valuation premium to its 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, or 4) a further spike in jet fuel prices ahead of recovery in passenger traffic.