HK/China Equity Long-Short

Osbert Tang, CFA

Equity Bottom-Up

China Southern Airlines / Equity Bottom-Up

The sharp rally in share price of <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> seems to be too excessive as fundamentals are still weak and traffic is facing headwind. While outlook for border opening has improved and collection of fuel surcharges has restarted, we see 4Q21 and early-FY22 stay challenging for China's biggest domestic airline. Its return to loss of Rmb1.4bn in 3Q21, vs. profit of Rmb377m a year ago, is a clear demonstration of the tough operating situation in the near term.CSA's number of scheduled flights on China's top five routes has so far averaged at 61 per day for 4Q, down significantly by 34% YoY, and we think this will reflect unfavourably on the 4Q21 result. Market consensus expectation of a profitable 4Q21 looks clearly aggressive given that its loss was Rmb3.3bn in 4Q20. While the latest developments are positive, they are not enough to change the big picture, in our view. Also, <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> is a better play than CSA on China's potential border opening some time in FY22.

The sharp rally in share price of China Southern Airlines (1055 HK) seems to be too excessive as fundamentals are still weak and traffic is facing headwind. While outlook for border opening has improved and collection of fuel surcharges has restarted, we see 4Q21 and early-FY22 stay challenging for China's biggest domestic airline. Its return to loss of Rmb1.4bn in 3Q21, vs. profit of Rmb377m a year ago, is a clear demonstration of the tough operating situation in the near term.CSA's number of scheduled flights on China's top five routes has so far averaged at 61 per day for 4Q, down significantly by 34% YoY, and we think this will reflect unfavourably on the 4Q21 result. Market consensus expectation of a profitable 4Q21 looks clearly aggressive given that its loss was Rmb3.3bn in 4Q20. While the latest developments are positive, they are not enough to change the big picture, in our view. Also, Air China Ltd (H) (753 HK) is a better play than CSA on China's potential border opening some time in FY22. 

China Southern Airlines (1055 HK): Is There More Room to Go?

Shanghai International Airport / Equity Bottom-Up

The 3Q21 result with widened losses at <a href="https://www.smartkarma.com/entities/shanghai-international-airport-co-ltd" target="_blank" data-smartkarma-citation="entities:6511:1" rel="noopener">Shanghai International Airport (600009 CH)</a> clearly looks unexciting, but there are several factors that distorted both the YoY and QoQ comparison. These include a change in lease accounting, first-time interest expenses from super short-term bills issued, higher costs on pandemic control and a low base in jet fuel sales in last year. Excluding these factors, we consider SIAC's result is reasonable, and we believe it will turn better.The potential opening of China's borders, improvement in operating cash flow, removal of distorted bases for comparison and completion of asset acquisitions are just some of the favourable developments over the next 12 months, in our view. Well-controlled costs amid the tough operating environment are also setting a stage for SIAC to benefit from its high operating leverage when traffic returns in FY22. That said, we should not be too bearish on the name, especially as the share price has already gone off by 34% YTD.

The 3Q21 result with widened losses at Shanghai International Airport (600009 CH) clearly looks unexciting, but there are several factors that distorted both the YoY and QoQ comparison. These include a change in lease accounting, first-time interest expenses from super short-term bills issued, higher costs on pandemic control and a low base in jet fuel sales in last year. Excluding these factors, we consider SIAC's result is reasonable, and we believe it will turn better.The potential opening of China's borders, improvement in operating cash flow, removal of distorted bases for comparison and completion of asset acquisitions are just some of the favourable developments over the next 12 months, in our view. Well-controlled costs amid the tough operating environment are also setting a stage for SIAC to benefit from its high operating leverage when traffic returns in FY22. That said, we should not be too bearish on the name, especially as the share price has already gone off by 34% YTD.

Shanghai International Airport (600009 CH): We Shouldn't Be Too Bearish

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. 

China

Air China Limited provides passenger, cargo, and airline-related services in China.  The Company is primarily based in Beijing and a major hub for domestic and international air transportation.  Air China's airline-related services include aircraft maintenance, repair, overhaul service, ground services, and in-flight catering services.

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Air China Ltd (H) (753 HK)

China Southern Airlines (1055 HK): Is There More Room to Go?

Recent rally seems to be more than enough to reflect on the latest news of COVID-19 drug development, collection of fuel surcharges and potential...

Osbert Tang, CFA

Shanghai International Airport (600009 CH): We Shouldn't Be Too Bearish

Distorting factors have made Shanghai International Airport's 3Q21 result weak on YoY and QoQ. However, a deep look showed that it is performing...

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

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