Air China’s renewed interest in CX may lift its share price, but challenges persist
- Reports of Air China attempting to increase its stake in CX beyond the current 29.99% stake are not new
- However, several obstacles need to be overcome for this transaction to happen, hence we see some uncertainty regarding its feasibility
- While it could provide short-term support to share price, CX needs to deliver on its earnings narrative for a more convincing share price re-rating
Air China is considering raising stake in CX and has been consulting advisers in recent months, according to a Bloomberg article. The last stake increase took place in 2009, where Air China increased its stake in CX from 17.5% to 29.99% at an 11% premium. We anticipate that Air China could achieve bolstered earnings if it raises its stake in CX beyond the current 29.99%, as the latter is likely to see stellar earnings over the next two years, underpinned by traffic recovery and resilient passenger load factors and yields. Potential advantages for CX could include network and resource optimisation, though there could be some reputational risk.
Reports of Air China attempting to increase its stake in CX are not new. Importantly, numerous hurdles need to be addressed, including 1) Swire and Qatar’s willingness to give up their 45% and 10% stakes respectively. Notably, Swire Pacific has explicitly expressed its unwillingness to relinquish control and uncertainty surrounds Qatar Airways’ willingness to sell its stake; 2) Finding potential sellers for the additional stake, especially since purchasing shares from the public seems infeasible given the stock’s low-free float of c.15%; 3) Funding requirements for any sizable increases in stake: While Air China is still very highly levered (net gearing ratio of 6.6x as of Jun-2023), their operating cash flows are expected to improve in the near-term due to business recovery and favourable working capital inflows. Hence, the group could look to rely on debt and internal cash flows, though an equity raise is not off the table. However, given current valuations, they may be reluctant to tap the equity markets; and 4) Overcoming the Hong Kong takeover code, which indicates that if 30% or more of the voting rights of a listed company is acquired, a mandatory offer to acquire the remaining shares of the company at a fair price is required. While an outright takeover of CX by Air China appears unlikely, the airline must find a solution to navigate around the Hong Kong takeover code.
Air China’s renewed interest in CX may lift its share price, but challenges persist. While it could provide short-term support to share price, CX needs to deliver on its earnings narrative for a more convincing share price re-rating.
We currently have BUY calls for both Cathay Pacific (TP HK$11.00) and Air China (TP HK$5.60).