Cathay Pacific. Neutral. Pax performance beat SIA's; end Oct cargo pick-up is positive for CX and KAL which are the world's #2 and #3 largest

Transcription

1 Cathay Pacific Pax performance beat SIA's; end cargo pick-up is positive for CX and KAL which are the world's #2 and #3 largest Neutral 0293.HK, 293 HK Price: HK$15.30 Price Target: HK$14.30 performance beat SIA s: Pax traffic growth accelerated in, 6% higher y/y (highest y/y growth since May, 20) and ahead of SIA s 1% growth and its steady level ytd and 2% growth in 20. On a m/m* basis (daily number in vs Sep 2013 to adjust for the longer month in ), traffic rose 1% and was in line with seasonality. Cathay s daily traffic has historically been 1% higher m/m* in the past 24 years. Pax load factor rose 3ppts y/y and was steady m/m at 82%. In comparison, SIA s loads rose 1ppt y/y but fell 1ppt m/m to 79%. Utilization improved in all major route regions: Pax load factor rose on all routes, with NE Asia routes showing the largest improvement (+ppts y/y to 80%), followed by the 3ppts y/y rise on SW Pacific & S Africa/India Subcont & Middle East/SE Asia routes to 83%/74%/79%. Loads also rose 1ppt y/y each on Europe/China routes to 85%/71% but were steady y/y on China-N America routes at 87%. Mgmt said "premium traffic continued to pick up in ober as (Cathay) entered the peak season for corporate travel, and business was spurred by the start of Canton Fair in Guangzhou. Demand out of (CX s) home markets, HK and the Pearl River Delta, was robust in ober and (CX) saw good loads across the network, particularly in Economy Class on long-haul routes. Capacity began to rise for the first time this year as (CX) raised frequencies on some routes and added 2 new destinations Male, Siem Reap. Cargo demand held steady y/y but picked up on US routes in end, which is a positive read-through for Korean Air: Traffic was flat y/y in, better than its 4% decline in Sep, 3% decline ytd and 7% drop in full year 20 and SIA s 3% y/y fall. On a m/m* basis, cargo traffic rose 5%, in line with seasonality. CX s traffic has historically been 5% higher m/m* in past 24 years. Cargo LF fell 3ppts y/y but rose 2ppts m/m to 62%. In comparison, SIA s loads were steady y/y and rose 1ppt m/m to 64%. Mgmt said the expected airfreight peak was late in arriving but by end (CX) began to see a significant climb in tonnages being shipped out of the key manufacturing centres in Mainland China and Asia, driven by consumer IT products. (CX) began to ramp up freighter capacity on N American lanes and mounted extra sectors and charters, but demand to/from Europe remained softer than hoped. Capacity was boosted by CX s latest freighter destination, Guadalajara, on 19". Cathay Pacific (Reuters: 0293.HK, Bloomberg: 293 HK) HK$ in mn, year-end Dec FYA FYA FY13E FY14E FY15E Revenue (HK$ mn) 98,406 99,376 99, ,988 0,671 Net Profit (HK$ mn) 5, ,276 2,636 3,495 EPS (HK$) DPS (HK$) Revenue growth (%) 9.9% 1.0% 0.1% 5.5% 5.4% EPS growth (%) (60.8%) (83.3%) 39.3% 106.6% 32.5% ROCE 5.0% 1.2% 1.9% 2.8% 3.1% ROE 10.0% 1.6% 2.2% 4.5% 5.7% P/E (x) P/BV (x) EV/EBITDA (x) Dividend Yield 3.4% 0.5% 0.7% 1.5% 2.0% Source: Company data, Bloomberg, J.P. Morgan estimates. Hong Kong Airlines Corrine Png AC Bloomberg JPMA PNG <GO> J.P. Morgan Securities (Asia Pacific) Limited Price Performance HK$ Nov- Feb-13 May-13 Aug-13 Nov HK share price (HK$) HSI (rebased) YTD 1m 3m m Abs 0.3% 6.1% -0.3%.2% Rel 0.8% 0.2% 1.7% -1.0% Company Data Shares O/S (mn) 3,934 Market Cap (HK$ mn) 60,190 Market Cap ($ mn) 7,763 Price (HK$) Date Of Price 18 Nov 13 Free Float(%) 34.7% 3M - Avg daily volume (mn) M - Avg daily value (HK$ mn) 3M - Avg daily value ($ mn) 6.1 HSI 2, Exchange Rate 7.75 Fiscal Year End Dec See page 6 for analyst certification and important disclosures, including non-us analyst disclosures. J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

2 Company Description P&L Sensitivity Metrics EBITDA EPS 2013E impact (%) impact (%) Provides passenger and cargo transportation services. Passenger traffic assumption +1% +1% Owns 20.13% of Air China Impact of each 1ppt increase +6% +37% Positive drivers: 1) global traffic growth accelerates, Cargo traffic assumption -2% -2% 2) good catchment area given its proximity to China, Impact of each 1ppt increase +2% +% 3) more synergies from tie-up with Air China, 4) management s aim to reduce unit costs longer term, Jet fuel price assumption 5 5 5) weaker US dollar. Impact of each $1/bbl increase -1% -9% Negative drivers: 1) rising fuel prices, 2) overly aggressive capacity expansion, 3) weaker-thanexpected profits from Air China, 4) rising competition from airlines with ambitious expansion plans (e.g. Hong Kong Airlines, Middle Eastern carriers, budget airlines), 5) greater diversion of China-Taiwan traffic via HK to direct cross-straits flights. 1H13 Revenue Breakdown Source: J.P. Morgan estimates. *Large earnings sensitivity due to small profit base. Price Target & Valuation Analysis Our Jun-14 PT of HK$14.3 is based on 1.0x P/B, a 25% discount to Cathay's historical average valuation since 1998 as we expect its profitability to remain weak near term (2013E ROE 2% vs historical average of 8.5%) due to the industry oversupply and rising competition risks from the Chinese airlines and low cost carriers. PB Table Average Standard Deviation Standard Deviation 0.9 Source: Company reports, Bloomberg, J.P. Morgan estimates. Figure 1: P/BV Trading Range Since 1990 Source: Company data EPS: J.P. Morgan vs Consensus HK$ J. P. Morgan Consensus FY13E FY14E FY15E Source: Bloomberg, JPM estimates. Peer Group Valuation Comparison Table Source: Company data, Bloomberg, J.P. Morgan estimates. Key upside risks: 1) better-than-expected traffic growth, 2) sharp fall in jet fuel prices, 3) better-than-expected profits from Air China, 4) reduced competition from airlines with ambitious expansion plans (e.g. Hong Kong Airlines, Middle Eastern carriers, budget airlines), 5) less than expected diversion of China-Taiwan traffic via HK to direct cross-straits flights, 6) potential Cathay-Air China merger in long term. Key downside risks: 1) sharp rise in jet fuel prices, 2) weaker-thanexpected contribution from Air China, 3) intensive competition from Hong Kong Airlines, Middle Eastern carriers, budget airlines, 4) substantial capex and potential rise in funding costs given higher financial leverage. Price P/E P/BV (x) ROE Stock 15-Nov E 2014E 2013E 2014E 2013E 2014E Rec Code (LC) (X) (X) (X) (X) (%) (%) Cathay Pacific N 293 HK % 4.5% Singapore Airlines OW SIA SP % 7.5% Sector Average % 7.7% Source: Bloomberg, annual reports, J.P. Morgan estimates. Consensus forecasts for non-covered (NC) stocks to calculate sector average. 2014E and 2015E March year end for SIA. 2

3 Table 1: Cathay Pacific: Detailed Passenger Route Analysis Y/Y Chg M/M* Chg YTD-13 YTD- Y/Y Chg Passenger Traffic (RPKm) 8,857 8,348 6% 1% 86,797 86,971 0% China % -2% 6,951 6,645 5% NE Asia 1, % 8%,0 10,140 9% SE Asia 1,187 1,197-1% 5%,070,707 3% India, Middle East, Pakistan and Sri Lanka % 4% 6,693 6,957-4% Europe 1,554 1,519 2% -10% 15,896 15,554 2% SW Pacific & S Africa 1,205 1,166 3% 3%,586,656-1% N America 2,384 2,9 % 5% 22,589 24,342-7% Passenger Capacity (ASKm) 10,866 10,664 2% 1% 105, ,540-3% China % 2% 9,594 9,137 5% NE Asia 1,451 1,457 0% 6% 14,093 14,079 0% SE Asia 1,503 1,567-4% 3% 15,083 14,860 2% India, Middle East, Pakistan and Sri Lanka % 3% 8,827 9,185-4% Europe 1,824 1,813 1% -7% 18,029 18,175-1% SW Pacific & S Africa 1,459 1,469-1% 3% 14,485 15,263-5% N America 2,746 2,452 % 2% 25,389 27,839-9% Passenger Load Factor (%) 81.5% 78.3% 3.2ppt 0.1ppt 82.3% 80.1% 2.1ppt China 70.8% 70.0% 0.8ppt -2.7ppt 72.4% 72.7% -0.3ppt NE Asia 80.3% 68.2%.1ppt 2.1ppt 78.1% 72.0% 6.1ppt SE Asia 79.0% 76.3% 2.6ppt 1.4ppt 80.0% 78.8% 1.2ppt India, Middle East, Pakistan and Sri Lanka 74.1% 71.0% 3.1ppt 0.5ppt 75.8% 75.7% 0.1ppt Europe 85.2% 83.8% 1.4ppt -3.5ppt 88.2% 85.6% 2.6ppt SW Pacific & S Africa 82.6% 79.4% 3.2ppt -0.1ppt 80.0% 76.4% 3.6ppt N America 86.8% 86.8% 0.0ppt 2.3ppt 89.0% 87.4% 1.5ppt Source: Company reports. *M/M change refers to the daily number in, 2013 vs Sep, 2013 to adjust for the longer month in. Table 2: Cathay Pacific vs Singapore Airlines ober 2013 Summary Operating Statistics Cathay Pacific SIA -13 Y/Y Chg M/M* Chg YTD-13 Y/Y Chg -13 Y/Y Chg M/M* Chg YTD-13 Y/Y Chg Traffic Passenger (RPKm) 8,857 6% 1% 86,797 0% 7,908 1% -5% 79,374 3% Cargo (FTKm) 781 0% 5% 7,054-3% 545-3% -2% 5,383-5% Overall (RTKm) 1,623 3% 3% 15,300-2% 1,325-1% -3% 13,219-1% Capacity Passenger (ASKm) 10,866 2% 1% 105,502-3% 10,069 0% -3% 100,249 3% Cargo (AFTKm) 1,269 4% 1%,490 1% 857-3% -3% 8,594-6% Overall (ATKm) 2,302 3% 1% 21,523-1% 1,914-2% -3% 19,098-2% Load factor Passenger (%) 82% 3.2ppt 0.1ppt 82% 2.1ppt 79% 0.7ppt -1.4ppt 79% 0.3ppt Cargo (%) 62% -2.5ppt 2.3ppt 61% -2.5ppt 64% -0.3ppt 0.6ppt 63% 0.1ppt Overall (%) 70% 0.0ppt 1.3ppt 71% -0.4ppt 69% 0.1ppt -0.5ppt 69% 1.0ppt Source: Company reports. *M/M change refers to the daily number in, 2013 vs Sep, 2013 to adjust for the longer month in. 3

4 Figure 2: Cathay Pacific: P/BV Trading Range Since Listing Source: Bloomberg, Company reports, J.P. Morgan estimates. Figure 3: Singapore Airlines: P/BV Trading Range Since 1990 Source: Bloomberg, Company reports, J.P. Morgan estimates. 4

5 Cathay Pacific: Summary of Financials Income Statement Cash flow statement HK$ in millions, year end Dec FY FY FY13E FY14E FY15E HK$ in millions, year end Dec FY FY FY13E FY14E FY15E Revenues 98,406 99,376 99, ,988 0,671 EBIT 5,500 1,788 2,594 4,004 4,9 % change Y/Y 9.9% 1.0% 0.1% 5.5% 5.4% Depr. & amortization 6,209 6,861 8,137 9,6 10,366 EBITDA,709 8,649 10,732 13,0 15,277 Change in working capital 4, (482) % change Y/Y (32.9%) (26.1%) 24.1% 22.2% 16.4% Taxes EBIT 5,500 1,788 2,594 4,004 4,9 Cash flow from operations 13,563 7,440 8,915,226 14,035 % change Y/Y (50.2%) (67.5%) 45.1% 54.3% 22.7% EBIT Margin 5.6% 1.8% 2.6% 3.8% 4.4% Capex (17,610) (20,975) (,431) (20,000) (20,000) Net Interest (744) (884) (1,5) (1,324) (1,571) Disposal/(purchase) 2,288 1, Earnings before tax 6,473 1,545 1,748 3,337 4,423 Net Interest (744) (884) (1,5) (1,324) (1,571) % change Y/Y (58.8%) (76.1%) 13.2% 90.9% 32.5% Other 2,261 (90) Tax (803) (417) (210) (400) (531) Free cash flow 502 (,923) (3,516) (7,774) (5,965) as % of EBT.4% 27.0%.0%.0%.0% Net income (reported) 5, ,276 2,636 3,495 Equity raised/(repaid) % change Y/Y (60.8%) (83.3%) 39.3% 106.6% 32.5% Debt raised/(repaid) 3,706 16,2 4,000 10,000 9,000 Shares outstanding 3,934 3,934 3,934 3,934 3,934 Other (8,620) EPS (reported) Dividends paid (189) (227) (438) (905) (1,199) % change Y/Y (60.8%) (83.3%) 39.3% 106.6% 32.5% Beginning cash 24,198 19,597 24,182 24,228 25,549 Ending cash 19,597 24,182 24,228 25,549 27,384 DPS Balance sheet Ratio Analysis HK$ in millions, year end Dec FY FY FY13E FY14E FY15E HK$ in millions, year end Dec FY FY FY13E FY14E FY15E Cash and cash equivalents 19,597 24,182 24,228 25,549 27,384 EBITDA margin.9% 8.7% 10.8%.5% 13.8% Accounts receivable 10,605 10,833 10,846,445,064 Operating margin 5.6% 1.8% 2.6% 3.8% 4.4% Inventories 1,155 1,194 1,195 1,261 1,330 Net margin 5.6% 0.9% 1.3% 2.5% 3.2% Others Current assets 31,357 36,209 36,269 38,255 40,778. Sales per share growth 9.9% 1.0% 0.1% 5.5% 5.4% LT investments Sales growth 9.9% 1.0% 0.1% 5.5% 5.4% Net fixed assets 73,498 84,278 88,663 99, ,365 Net profit growth (60.8%) (83.3%) 39.3% 106.6% 32.5% Total Assets 137, , , , ,410 EPS growth (60.8%) (83.3%) 39.3% 106.6% 32.5%. Liabilities Interest coverage (x) Short-term loans 8,562 8,157 8,157 8,157 8,157 Payables 17,464 17,470 16,991 17,957 18,956 Net debt to equity 42.5% 61.8% 67.8% 80.3% 88.9% Others 10,981 10,268 10,279 10,809,357 Sales/assets Total current liabilities 37,007 35,895 35,427 36,923 38,470 Assets/equity 240.9% 258.5% 273.1% 282.6% 295.2%. ROE 10.0% 1.6% 2.2% 4.5% 5.7% Long-term debt 34,773 51,389 55,389 65,389 74,389 ROCE 5.0% 1.2% 1.9% 2.8% 3.1% Other liabilities 9,409 10,420 10,420 10,420 10,420 Total Liabilities 81,189 97, ,236 1,732 3,279 Shareholder's equity 55,944 57,306 58,406 60,438 63,132 BVPS (HK$) Source: Company reports and J.P. Morgan estimates. 5

6 Other Companies Discussed in This Report (all prices in this report as of market close on, unless otherwise indicated) Korean Air ( KS/W29,050/Overweight), Singapore Airlines (SIAL.SI/S$10.33[15 November 2013]/Overweight) Analyst Certification: The research analyst(s) denoted by an AC on the cover of this report certifies (or, where multiple research analysts are primarily responsible for this report, the research analyst denoted by an AC on the cover or within the document individually certifies, with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of any of the research analyst's compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report. Important Disclosures Client: J.P. Morgan currently has, or had within the past months, the following company(ies) as clients: Cathay Pacific, Singapore Airlines, Korean Air. Client/Investment Banking: J.P. Morgan currently has, or had within the past months, the following company(ies) as investment banking clients: Cathay Pacific. Client/Non-Investment Banking, Securities-Related: J.P. Morgan currently has, or had within the past months, the following company(ies) as clients, and the services provided were non-investment-banking, securities-related: Cathay Pacific, Singapore Airlines, Korean Air. Investment Banking (past months): J.P. Morgan received in the past months compensation from investment banking Cathay Pacific. Investment Banking (next 3 months): J.P. Morgan expects to receive, or intends to seek, compensation for investment banking services in the next three months from Cathay Pacific. Non-Investment Banking Compensation: J.P. Morgan has received compensation in the past months for products or services other than investment banking from Cathay Pacific, Singapore Airlines, Korean Air. Company-Specific Disclosures: Important disclosures, including price charts, are available for compendium reports and all J.P. Morgan covered companies by visiting calling , or ing research.disclosure.inquiries@jpmorgan.com with your request. J.P. Morgan s Strategy, Technical, and Quantitative Research teams may screen companies not covered by J.P. Morgan. For important disclosures for these companies, please call or research.disclosure.inquiries@jpmorgan.com. Cathay Pacific (0293.HK, 293 HK) Price Chart Price(HK$) UW HK$17 UW HK$.7 UW HK$7OW HK$15 UW HK$13.7 UW HK$7.3 OW HK$13OW HK$18 OW HK$22 OW HK$23 UW HK$14 Apr 08 Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends. Initiated coverage Mar 07, Apr N HK$ UW HK$N HK$14.3 Date Rating Share Price (HK$) 07-Mar-07 UW Jun-08 UW Jul-08 UW Nov-08 UW Dec-08 UW Jul-09 OW Aug-09 OW Mar-10 OW Aug-10 OW Mar- OW Aug- UW Jul- UW Aug- N Mar-13 N Price Target (HK$) 6

7 Singapore Airlines (SIAL.SI, SIA SP) Price Chart Price(S$) N S$17.5 OW S$17.5 N S$18.5 N S$13.1N S$9.4 OW S$17 OW S$14 W S$16.5 N S$16.5 N S$15N S$10OW S$14 OW S$16 OW S$20OW S$19 OW S$15.5OW S$13 Apr 08 Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends. Initiated coverage 29, Apr Date Rating Share Price (S$) OW Feb-07 OW Feb-07 N Apr-07 N May-07 N Jun-08 N Jul-08 N Dec-08 N Feb-09 N Jul-09 OW Nov-09 OW Feb-10 OW Nov-10 OW May- OW Nov- OW Feb- OW Jul- OW Price Target (S$) Korean Air ( KS, KS) Price Chart Price(W) 154, ,162 0,135 88,108 66,081 44,054 22,027 0 Sep 10 Dec 10 Mar Jun N W41, N W47, OW W45, OW W40,00 W47, N W44,297 OW W42, OW W41, OW W33, Sep Dec Mar Jun Sep Dec Mar 13 Jun 13 Sep 13 Date Rating Share Price (W) Price Target (W) N Jul- N Aug- N N May- OW Jul- OW Feb-13 OW Aug-13 OW OW Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends. Initiated coverage 27, The chart(s) show J.P. Morgan's continuing coverage of the stocks; the current analysts may or may not have covered it over the entire period. J.P. Morgan ratings or designations: OW = Overweight, N= Neutral, UW = Underweight, NR = Not Rated Explanation of Equity Research Ratings, Designations and Analyst(s) Coverage Universe: J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the average total return of the stocks in the analyst s (or the analyst s team s) coverage universe.] Neutral [Over the next six to twelve months, we expect this stock will perform in line with the average total return of the stocks in the analyst s (or the analyst s team s) coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of the stocks in the analyst s (or the analyst s team s) coverage universe.] Not Rated (NR): J.P. Morgan has removed the rating and, if applicable, the price target, for this stock because of either a lack of a sufficient fundamental basis or for legal, regulatory or policy reasons. The previous rating and, if applicable, the price target, no longer should be relied upon. An NR designation is not a recommendation or a rating. In our Asia (ex-australia) and U.K. small- and mid-cap equity research, each stock s expected total return is compared to the expected total return of a benchmark country market index, not to those analysts coverage universe. If it does not appear in the Important Disclosures section of this report, the certifying analyst s coverage universe can be found on J.P. Morgan s research website, 7

8 Coverage Universe: Png, Corrine: Air China H (0753.HK), AirAsia BHD (AIRA.KL), Cathay Pacific (0293.HK), Cebu Air, Inc. (CEB.PS), China Airlines (2610.TW), China Cosco Holdings, Ltd. - H (1919.HK), China Eastern Airlines - H (0670.HK), China Shipping Container Lines - H (2866.HK), China Southern Airlines - H (1055.HK), EVA Airways (2618.TW), Hanjin Shipping Co Ltd (7930.KS), Korean Air ( KS), Neptune Orient Lines (NOL) (NEPS.SI), Orient Overseas Int'l Ltd (0316.HK), Pacific Basin Shipping (2343.HK), Precious Shipping (PSL.BK), SIA Engineering Company (SIAE.SI), ST Engineering (STEG.SI), Singapore Airlines (SIAL.SI), Tigerair (TAHL.SI) J.P. Morgan Equity Research Ratings Distribution, as of September 30, 2013 Overweight (buy) Neutral (hold) Underweight (sell) J.P. Morgan Global Equity Research Coverage 43% 44% % IB clients* 57% 49% 39% JPMS Equity Research Coverage 42% 50% 8% IB clients* 76% 65% 57% *Percentage of investment banking clients in each rating category. 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