Sustained optimism on CX
- Passenger yields and load factors have been surprising on the upside; we expect to see higher-for-longer passenger yields
- Manpower shortage has remained a challenge for CX since the pandemic, though aggressive hiring plans are in place
- Trim our FY24F EBITDA forecast on more gradual resumption of international passenger capacity, partially offset by higher yields
- Maintain BUY with revised TP of HK$11.00
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 the 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).
We anticipate stellar earnings over the next two years for CX, following record operating profits in FY23, as passenger load factors and yields remain resilient for the group on the back of favourable supply-demand dynamics. While the manpower shortage has been a key issue at CX, resulting in operational challenges and slower-than-expected capacity reinstatement, the group has a significant presence in the North Asian region and remains a key beneficiary of the sluggish restoration of international capacity by the Chinese airlines. Hence, we maintain our optimistic view on CX, despite prevailing doubts about its capacity restoration plan, as we anticipate any passenger traffic deficits could be offset by robust passenger yields, fuelled by still-strong pent-up travel demand. In addition, at the associate level, Air China had a remarkable showing in 3Q23 and should see a turnaround in profitability in FY24, which will be positive for CX’s bottom line.
Maintain BUY with revised TP of HK$11.00 as we roll over our valuations, with an unchanged valuation peg of 5.4x (c.0.5SD below its five-year pre-pandemic average) FY24F EBITDA (previously: Blended FY23F/24F EBITDA).
