- 1H23 results for the Chinese carriers were disappointing in contrast to CX’s stellar performance
- Consensus estimates for the three Chinese carriers are still too optimistic and there are also potential share dilution risks
- CX’s outperformance expected to sustain on elevated passenger yields despite slower capacity restoration
- CX is our top pick at this juncture due to its undemanding valuation and potential to deliver positive earnings surprises in the near-term
Chinese carriers underperformed expectations in 1H23, but CX trounced the street’s estimates. Profit warnings from the three Chinese airlines indicate that they still incurred substantial losses in 2QFY23 despite the domestic market being back in full-force along with the return of international flights. Contrarily, CX’s positive profit alert suggests that the airline saw a dramatic improvement in its core net profit (after preferred dividends) to HK$1.8-2.3bn, above its net profit in 1H19.
Maintain our neutral stance on Chinese carriers as consensus estimates are still too aggressive, and there could be more share dilution ahead. We slashed our earnings estimates for the three Chinese carriers as their poor performance in 1H23 dashed hopes for a rapid return to profitability. The street has been and still is overly sanguine on the sector’s recovery prospects, and we expect negative earnings revisions to weigh on sentiment. CSA’s unexpected share issuance proposal in early June caught the market off guard, raising concerns that Air China and CEA might also pursue a similar path due to their highly leveraged balance sheets and bold fleet expansion plans. Accordingly, we have lowered our target prices on all three counters to reflect our negative earnings revisions and share dilution risks.
CX is our top pick in the sector; raise earnings estimates/TP on the counter.
Following its strong showing in 1H23, we lift our earnings estimates for CX, premised on higher passenger load factors and yields amid favourable supply-demand dynamics and a more premium-heavy passenger mix. We raise our TP to HK$12.0 to reflect our positive earnings revision. CX is currently our preferred choice, as we expect the airline to continue delivering positive earnings surprises in the short-term. An imminent resumption of dividends in FY24F following the redemption of all its preference shares should also drive a re-rating, in our view.
