HK/China Equity Long-Short

Osbert Tang, CFA

Equity Bottom-Up

We think that share price of <a href="https://www.smartkarma.com/entities/air-china-ltd-h" target="_blank" data-smartkarma-citation="entities:8239:1" rel="noopener">Air China Ltd (H) (753 HK)</a> has yet to reflect the prospects of recovering international passenger traffic in FY22, despite its 15pp outperformance against the HSCEI YTD. There are news lately on plans to reopen borders by many overseas countries including the US and Australia. It is also speculated that China will do so as well in early 2022 after its vaccination rate hit 85%, vs. 78% currently.Its passenger traffic in Sep has recovered MoM when compared with the local case impacted Aug. Meanwhile, cargo stayed resilient and it will also benefit from the strength in airfreight rate. We think Air China should be appreciated for its capacity management as it has not aggressively expanded capacity despite YoY traffic rebound. This is evidenced by a flat passenger load factor and a 2.7pp expansion in cargo load factor for 9M21.

We think that share price of Air China Ltd (H) (753 HK) has yet to reflect the prospects of recovering international passenger traffic in FY22, despite its 15pp outperformance against the HSCEI YTD. There are news lately on plans to reopen borders by many overseas countries including the US and Australia. It is also speculated that China will do so as well in early 2022 after its vaccination rate hit 85%, vs. 78% currently.Its passenger traffic in Sep has recovered MoM when compared with the local case impacted Aug. Meanwhile, cargo stayed resilient and it will also benefit from the strength in airfreight rate. We think Air China should be appreciated for its capacity management as it has not aggressively expanded capacity despite YoY traffic rebound. This is evidenced by a flat passenger load factor and a 2.7pp expansion in cargo load factor for 9M21.  

Thematic (Sector/Industry)

Chinese airlines are expected to face sustained turbulence given the adverse impact of scattered outbreak of local COVID-19 cases, with the most recent ones being Fujian. We see risks for this round of spread to negatively affect the cross-province travel appetite during the mid-Autumn mini-break and potentially the all-important National Day Golden Week in Oct. With poor Aug traffic figures out (over 50% YoY drop in domestic passenger traffic for both <a href="https://www.smartkarma.com/entities/china-southern-airlines-co-ltd" target="_blank" data-smartkarma-citation="entities:1078:1" rel="noopener">China Southern Airlines (1055 HK)</a> and <a href="https://www.smartkarma.com/entities/air-china-ltd-h" target="_blank" data-smartkarma-citation="entities:8239:1" rel="noopener">Air China Ltd (H) (753 HK)</a>), Sep is also unlikely to be an easy month.We expect 3Q21 results to be under pressure, and we maintain that a long <a href="https://www.smartkarma.com/entities/air-china-ltd-h" target="_blank" data-smartkarma-citation="entities:8239:1" rel="noopener">Air China Ltd (H) (753 HK)</a>, short <a href="https://www.smartkarma.com/entities/china-southern-airlines-co-ltd" target="_blank" data-smartkarma-citation="entities:1078:1" rel="noopener">China Southern Airlines (1055 HK)</a> trade can position well amid the current environment. We see too much positive expectations have been built in CSA; meanwhile, Air China will have an easier base for comparison in 4Q21 and the reduction in losses at <a href="https://www.smartkarma.com/entities/cathay-pacific-airways-ltd" target="_blank" data-smartkarma-citation="entities:243:1" rel="noopener">Cathay Pacific Airways (293 HK)</a> will continue to help its bottom line in 2H21.

Chinese airlines are expected to face sustained turbulence given the adverse impact of scattered outbreak of local COVID-19 cases, with the most recent ones being Fujian. We see risks for this round of spread to negatively affect the cross-province travel appetite during the mid-Autumn mini-break and potentially the all-important National Day Golden Week in Oct. With poor Aug traffic figures out (over 50% YoY drop in domestic passenger traffic for both China Southern Airlines (1055 HK) and Air China Ltd (H) (753 HK)), Sep is also unlikely to be an easy month.We expect 3Q21 results to be under pressure, and we maintain that a long Air China Ltd (H) (753 HK), short China Southern Airlines (1055 HK) trade can position well amid the current environment. We see too much positive expectations have been built in CSA; meanwhile, Air China will have an easier base for comparison in 4Q21 and the reduction in losses at Cathay Pacific Airways (293 HK) will continue to help its bottom line in 2H21.

Chinese Airlines: Cruising Within Sustained Turbulence

Guangzhou Baiyun International Airport / Equity Bottom-Up

There is a good recovery at <a href="https://www.smartkarma.com/entities/guangzhou-baiyun-international-airport" target="_blank" data-smartkarma-citation="entities:10819:1" rel="noopener">Guangzhou Baiyun International Airport (600004 CH)</a> (GBIA) in Jul, with the rate of decline in overall aircraft movement and passenger traffic has moderated to -6.3% and -11.7% in Jul, versus -57.3% and -71% for Jun, respectively. Cargo momentum is also strong as overall throughput rose 7.3% in Jul and 21.8% in 7M21.Outlook for GBIA, however, still weighted on negatively by the resurgence of local COVID-19 cases in China due to the highly infectious Delta variant. With daily new local cases maintaining at over 60 in the last 5 days, many local governments have recommended no-cross-province travels for residents. We have also seen the daily Shanghai-Guangzhou flights being cut by 45.5% from the peak, and this will be negative to GBIA's Aug figures and pace of traffic recovery.

There is a good recovery at Guangzhou Baiyun International Airport (600004 CH) (GBIA) in Jul, with the rate of decline in overall aircraft movement and passenger traffic has moderated to -6.3% and -11.7% in Jul, versus -57.3% and -71% for Jun, respectively. Cargo momentum is also strong as overall throughput rose 7.3% in Jul and 21.8% in 7M21.Outlook for GBIA, however, still weighted on negatively by the resurgence of local COVID-19 cases in China due to the highly infectious Delta variant. With daily new local cases maintaining at over 60 in the last 5 days, many local governments have recommended no-cross-province travels for residents. We have also seen the daily Shanghai-Guangzhou flights being cut by 45.5% from the peak, and this will be negative to GBIA's Aug figures and pace of traffic recovery.

Guangzhou Baiyun Intl Airport (600004 CH): Still Uneasy Time

Asian Insight Provider - Actionable ideas, CrossASEAN Research

Henry Soediarko

Asian Insight Provider - Actionable ideas

CrossASEAN Research

At CrossASEAN Research we strive to produce unbiased and differentiated on the ground insights on companies across South East Asia. Our Research is produced for the most part after face to face meetings and conversations with company management to dig deep into the long term vision and strategy of the companies we cover. We seek to deliver investable and actionable themes on sectors and markets across SE Asia, often in collaboration with other Insight Providers across the region, pooling the vast experience of the analysts within the Smartkarma Ecosystem. We also offer bespoke work and tailor made trips for our clients. 

Insights across South East Asia

Travelsky Technology Ltd H / Equity Bottom-Up

H1 2021 number of flights processed in China has shown signs of healthy recovery but due to the recent Delta Variant spread in China, <a href="https://www.smartkarma.com/entities/travelsky-technology-ltd-h" target="_blank" data-smartkarma-citation="entities:19829:1" rel="noopener">Travelsky Technology Ltd H (696 HK)</a> share price alongside the other travel-related names have been sold off. Furthermore, excerpts from an Instagram update provides some colour of the current state of air travel situation in the Chinese airport. 
The short-term recommendation is to stay away from <a href="https://www.smartkarma.com/entities/travelsky-technology-ltd-h" target="_blank" data-smartkarma-citation="entities:19829:1" rel="noopener">Travelsky Technology Ltd H (696 HK)</a> as the Delta variant has caused the negative sentiment on airline-related stocks to soar again as shown in the chart below.
Taking into account a more optimistic view that the higher vaccination rates in China and that it is working effectively against the current and future variant, therefore, air travel volume should recover, sooner rather than later, the company should benefit from the recovery thus for long-term investors, this is a stock that you can and should average down.
For investors who are to have exposure to <a href="https://www.smartkarma.com/entities/travelsky-technology-ltd-h" target="_blank" data-smartkarma-citation="entities:19829:1" rel="noopener">Travelsky Technology Ltd H (696 HK)</a> , this is probably the right time to start building exposure.

H1 2021 number of flights processed in China has shown signs of healthy recovery but due to the recent Delta Variant spread in China, Travelsky Technology Ltd H (696 HK) share price alongside the other travel-related names have been sold off. Furthermore, excerpts from an Instagram update provides some colour of the current state of air travel situation in the Chinese airport. 
The short-term recommendation is to stay away from Travelsky Technology Ltd H (696 HK) as the Delta variant has caused the negative sentiment on airline-related stocks to soar again as shown in the chart below.
Taking into account a more optimistic view that the higher vaccination rates in China and that it is working effectively against the current and future variant, therefore, air travel volume should recover, sooner rather than later, the company should benefit from the recovery thus for long-term investors, this is a stock that you can and should average down.
For investors who are to have exposure to Travelsky Technology Ltd H (696 HK) , this is probably the right time to start building exposure. 

<a href="https://www.smartkarma.com/entities/air-china-ltd-h" target="_blank" data-smartkarma-citation="entities:8239:1" rel="noopener">Air China Ltd (H) (753 HK)</a> should see an YoY reduction in loss contribution from the 29.99%-owned associate <a href="https://www.smartkarma.com/entities/cathay-pacific-airways-ltd" target="_blank" data-smartkarma-citation="entities:243:1" rel="noopener">Cathay Pacific Airways (293 HK)</a>, based on CX's latest guidance that losses for 1H21 will be less than both 1H20 and 2H20. If we extrapolate the 1Q21 losses from Air China's associated companies to the full year, we should potentially see as least 30% YoY losses reduction. In our view, this will be of significant help to Air China's bottom-line recovery in FY21.CX's 24.5% MoM passenger traffic rebound in May echoed the sequential improvement of Air China's regional and international traffic. The increase in global vaccination rates and resumption of more long-haul flights suggested an improving outlook for CX's international passenger traffic. This should offer an added support to Air China which, we think as a recovery play, is trading on undemanding 12-month forward P/B multiple of 0.98x - the average level since 2016.

Air China Ltd (H) (753 HK) should see an YoY reduction in loss contribution from the 29.99%-owned associate Cathay Pacific Airways (293 HK), based on CX's latest guidance that losses for 1H21 will be less than both 1H20 and 2H20. If we extrapolate the 1Q21 losses from Air China's associated companies to the full year, we should potentially see as least 30% YoY losses reduction. In our view, this will be of significant help to Air China's bottom-line recovery in FY21.CX's 24.5% MoM passenger traffic rebound in May echoed the sequential improvement of Air China's regional and international traffic. The increase in global vaccination rates and resumption of more long-haul flights suggested an improving outlook for CX's international passenger traffic. This should offer an added support to Air China which, we think as a recovery play, is trading on undemanding 12-month forward P/B multiple of 0.98x - the average level since 2016.   

Air China (753 HK): Positive Implications from CX's May Traffic Announcement

China

Shanghai International Airport Co., Ltd. operates Pudong Airport and Hongquiao airport in Shanghai.   The Company provides a full range of services including air traffic control, terminal management, cargo handling, advertising, space rental, and other related services.

Shanghai International Airport (600009 CH)

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Shanghai International Airport (600009 CH)

Air China (753 HK): Come Fly with Me

Air China is well positioned to gain from increase in overseas border openings. Also, China's possible removal of quarantine requirements for...

Osbert Tang, CFA

Chinese Airlines: Cruising Within Sustained Turbulence

After a devastating Aug, Sep will still be clouded by recent cases in Fujian. We think Long Air China, short CSA strategy should capture CSA's...

Osbert Tang, CFA

Guangzhou Baiyun Intl Airport (600004 CH): Still Uneasy Time

GBIA's traffic recovery will stay uneasy given the high daily local new COVID-19 cases. We have seen scheduled Shanghai-Guangzhou flights being cut...

Osbert Tang, CFA

Travelsky (696): Maintain Positive Stand

An optimistic view that with the higher vaccination rates in China and is working effectively against the current and future variant, air travel...

Henry Soediarko

Air China (753 HK): Positive Implications from CX's May Traffic Announcement

CX's guidance of triming of losses in 1H21, vs. 1H20 and 2H20, is a positive note to Air China. The 24.5% MoM in passenger traffic echoed Air...

Osbert Tang, CFA

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