Record earnings ahead
- CSA could benefit from domestic passenger yields strengthening in the near term as capacity is deployed to international routes
- Poised to expand capacity quicker than peers given largest orderbook and minimal impact from P&W GTF engine issues
- Trim FY24F EBITDA forecast on more gradual resumption of international passenger capacity, partially offset by higher yields
- Maintain BUY with revised TP of HK$4.50
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).
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. 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.
We maintain BUY for CSA, as we roll over our valuation base to FY24F and adjust our valuation peg due to the multiple contractions in the airline sector. Our new TP of HK$4.50 is based on 6.7x EV/EBITDA (FY24F), which is close to 1SD above its five-year pre-pandemic average. CSA’s share price has corrected almost 25% over the past year and we believe that its valuations are attractive at this juncture, for it has a clear path to normalisation and bright earnings prospects.
