Upswing in earnings ahead
- Upgrade to BUY from HOLD with revised TP of HK$5.60
- Solid earnings momentum to sustain over next two years on capacity growth and wider margins from a low base
- Trim FY24F EBITDA forecast on more gradual resumption of international passenger capacity, partially offset by higher yields
- Valuations attractive at close to five-year pre-pandemic average, following >35% correction in share price the past year
Our 2024 outlook report for the airline sector highlights that macroeconomic indicators still largely favour the sector, though we expect to see a diverging earnings outlook across regions and business segments. This underpins our expectation of global passenger traffic hitting 105%-110%/115%-120% of 2019’s level in 4Q24/4Q25. Across the three major regions, we are most positive about airlines in Asia Pacific, as we expect them to demonstrate stronger earnings momentum, underpinned by relatively higher capacity growth and wider margins, with the Chinese airlines likely to see the biggest upswing in earnings. While valuation multiples for Asian airlines might appear high, they are commensurate with the region’s stronger earnings potential. Our top picks are Cathay Pacific (CX) and China Southern Airlines (CSA).
However, we lowered our FY24F net profit estimates by 10-20% for the three Chinese airlines, reflecting a more moderate resumption of international passenger capacity and a more gradual improvement in unit costs owing to slower capacity growth. Nonetheless, we expect the Chinese airlines to deliver strong earnings growth ahead. Following a stellar performance in 3Q23, marking their first profitable quarter since the pandemic, the Chinese airlines are poised to sustain and amplify this upswing, potentially leading the sector in earnings growth, in our view.
Air China’s share price has corrected more than 35% over the past year, the most among the three Chinese flag carriers, and we believe that its valuations are attractive, at close to its five-year pre-pandemic average, particularly with the expectation of unmatched earnings growth over the next two years. Therefore we upgrade Air China to BUY. As we roll over our valuation base to FY24F and adjust our valuation peg due to the multiple contractions in the airline sector, we set our new TP at HK$5.60, based on 6.8x EV/EBITDA (FY24F), which is 0.5SD above its five-year pre-pandemic average.
