HSBC analysts this week have upgraded Hong Kong carrier to a “buy”, citing a “surprise profit” in the second half of 2021. In the bank’s report, analysts said the carrier on 24 January 2022 reported that it expects a loss (before preference dividends) “of HKD5.60-6.10bn for FY21 which implies a profit of HKD1.5-2.0bn in 2H21e vs our and consensus expectations for a rather significant loss. This is despite the fact that it handled less than 5 percent of passengers (RPK) vs 2H19 courtesy of relatively strong cargo (84 percent of 2H19). This not only reflects a strong yield performance but also CX’s efforts towards rebasing its cost base. We take a lot of comfort on its 2022-23e outlook from its 2H21 performance.”
The bank went on to say:
“As strict as it gets: Cathay is operating at a level (20 percent of its pre-pandemic capacity and passenger flights have reduced to around 2 percent of their pre-pandemic capacity) which is even weaker than April-June 2020 when international travel was almost entirely shut. While it is difficult to say how and when will these restrictions will be lifted even partially, assuming the current trend continues, CX management expects these capacity levels to result in an operating cash burn of HKD1.0-1.5bn per month from February 2022, similar to the level seen in 2H20. Given its recapitalisation in 2021, CX can sustain a prolonged downturn without need for further capital, in our view.
Only way is up. We now forecast CX to return to profit in 2022 and generate double-digit ROE in 2023e. This is on the back of international RPK returning to 15 percent of 2019 level and 60 percent in 2022e and 2023e, respectively. On the cargo front, we are more optimistic and expect it to handle 69 percent and 90 percent, respectively. While it’s difficult to pinpoint the timing of the reopening of international travel, there is little doubt about the trajectory especially from next year, as restrictions would have been in place for three years in a row, fuelling a very strong pent-up demand. Therefore, we firmly believe yields on both cargo and pax compared to pre-COVID-19 levels will be significantly higher. It is important to note that CX’s hedging strategy would yield them gains given the current level of jet fuel (cUSD100/barrel) while it managed to rebase its cost structure in the past few years which sets the stage for a sharp recovery. We also illustrate a scenario where higher pax traffic recovery in 2023 (85% of 2019) could lift CX’s earnings by 49 perceny and ROE by 6ppt.
“Upgrade to Buy (from Hold) with a higher target price of HKD8.00 (from HKD7.00): We now value CX based on a slightly higher multiple of 1.1x 2022e PB which is 1.5 SD above the mean consensus 12-month forward PB since mid-2011. Key risks: Further escalation of the COVID-19 virus outbreak could delay international travel recovery, sharp erosion in cargo yields and shortage of pilots could limit capacity expansion.”
Mainland China to be bumpy in 2022, better in 2023
HSBC also issued a new report that took a look at Mainland China and Hong Kong overall and said despite a few downgrades, it remained “bullish, albeit longer term”.
The bank said:
“Our downgrades of the A-shares of the Big 3 Chinese airlines – China Eastern, China Southern and Air China – follow significant outperformance in the past six months both absolutely (up 4-19 percent) and relative to their H-shares (up 22-42 percent) and the HSCEI (-9 percent). Their A-share prices are now between -2 percent and +2 percent of their pre-COVID-19 peaks in January 2020, while the H-shares have declined 10-31 percent. Despite the downgrades, we still like the long-term story and our 2023e estimates for the Big 3 are far above consensus.
“We now forecast losses for 2022e. The recent surge in Omicron cases in cities in mainland China has dented the prospects for a strong air travel season during the Lunar New Year in Jan-Feb 2022. The Winter Olympics in Beijing will further limit air travel in and around Beijing, implying that 1Q22 traffic will disappoint. We continue to forecast a sharp recovery in domestic travel amid COVID-19 disruptions for much of 2022 but lower our expectations for an international recovery. The Big 3 have each guided for higher losses in 2021e vs 2020. To reflect recent these trends, we now forecast losses for 2022e vs profits previously. While we expect strong cargo yield and an improving passenger yield, higher oil prices and potential depreciation of the RMB could act as near-term headwinds. However, we continue to forecast that the sector’s cost of equity will recover in 2023e, driven by a gradual recovery in international travel.
But the long-term thesis is getting stronger. Simply put, we think one COVID-19 free season – the Labour Day holidays, the summer season, Golden Week holidays or even Lunar New Year 2023 – is all that is needed for the sector’s cost of equity to recover and potentially drive share prices nearly 50 percent higher from current levels. We continue to argue that the Big 3 are better positioned to benefit from the post COVID-19 recovery, driven by pent-up demand amid tight airline capacity, stronger balance sheets, and positive operating leverage in the early part of the cycle (2023-25). We also still argue that airports’ business model will remain disrupted, especially BCIA which faces growing competition from Daxing Airport.
“Reiterate Buys on CEA-H, CSA-H; downgrade AC-H to Hold and BCIA to Reduce. After the recent recovery the H-shares of the Big 3 are trading at 0.96x, close to the average consensus 12-month forward PB since mid-2011 (but note that 2022e BVPS is 25-39 percent lower vs 2019). We downgrade BCIA to Reduce (from Hold) as we see further delay in an international recovery, while migration to Daxing Airport continues and the duty free business remains in hibernation.”
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