HK/China Equity Long-Short

Osbert Tang, CFA

Equity Bottom-Up

<ul>
<li>Speculations on <a href="https://www.smartkarma.com/entities/air-china-ltd-h" target="_blank" data-smartkarma-citation="entities:8239:1" rel="noopener">Air China Ltd (753 HK)</a> seeking control of <a href="https://www.smartkarma.com/entities/cathay-pacific-airways-ltd" target="_blank" data-smartkarma-citation="entities:243:1" rel="noopener">Cathay Pacific (293 HK)</a> reappeared recently. We think a change in CX's ownership is just a matter of time.</li>
<li>CX has been a more important profit contributor to Air China after the pandemic, and depends on pricing, Air China is expected to benefit from such acquisition.</li>
<li>Both are trading on 0.5SD below their 5-year P/B average and we prefer CX in the short term, but Air China looks to be a better long-term choice. </li>
</ul>


Speculations on Air China Ltd (753 HK) seeking control of Cathay Pacific (293 HK) reappeared recently. We think a change in CX's ownership is just a matter of time.
CX has been a more important profit contributor to Air China after the pandemic, and depends on pricing, Air China is expected to benefit from such acquisition.
Both are trading on 0.5SD below their 5-year P/B average and we prefer CX in the short term, but Air China looks to be a better long-term choice. 


<ul>
<li>Losses at <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> narrowed by 42.8% YoY to Rmb1.67bn in 1Q24. If not for the exchange losses, it will be reduced to below Rmb1bn.</li>
<li>Higher jet fuel prices have dragged result despite record 1Q revenue. However, an 8.3pp YoY margin expansion and a 4% decline in unit costs indicated profitability is climbing. </li>
<li>Valuations are too depressed as the share price is still lacklustre but quarterly losses and gross margin have already trimmed from the troughs of Rmb10.5bn and -98%, respectively.</li>
</ul>


Losses at Air China Ltd (H) (753 HK) narrowed by 42.8% YoY to Rmb1.67bn in 1Q24. If not for the exchange losses, it will be reduced to below Rmb1bn.
Higher jet fuel prices have dragged result despite record 1Q revenue. However, an 8.3pp YoY margin expansion and a 4% decline in unit costs indicated profitability is climbing. 
Valuations are too depressed as the share price is still lacklustre but quarterly losses and gross margin have already trimmed from the troughs of Rmb10.5bn and -98%, respectively.


Air China (753 HK): Steering Back to the Right Lane

<ul>
<li>
<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> had 15.4% interest-bearing debt denominated in USD, vs. 21.3% for <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>, making it less exposed to Rmb depreciation. </li>
<li>Recovery of international traffic and routes will help to lower unit costs. Air China's unit costs for FY23 were Rmb4.0445, whereas CSA's were only Rmb3.2000.</li>
<li>There is more upside for Air China's load factor which was down 7.8pp YoY in FY23, compared with -4.7pp for CSA. </li>
</ul>



Air China Ltd (H) (753 HK) had 15.4% interest-bearing debt denominated in USD, vs. 21.3% for China Southern Airlines (1055 HK), making it less exposed to Rmb depreciation. 
Recovery of international traffic and routes will help to lower unit costs. Air China's unit costs for FY23 were Rmb4.0445, whereas CSA's were only Rmb3.2000.
There is more upside for Air China's load factor which was down 7.8pp YoY in FY23, compared with -4.7pp for CSA. 


China Pair Trade Idea: Long Air China (753 HK), Short CSA (1055 HK)

Thematic (Sector/Industry)

<ul>
<li>Our positive calls on <a href="https://www.smartkarma.com/entities/fu-shou-yuan-international" target="_blank" data-smartkarma-citation="entities:18168:1" rel="noopener">Fu Shou Yuan (1448 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 (753 HK)</a> and negative call on <a href="https://www.smartkarma.com/entities/china-conch-environment-protection-holdings-ltd" target="_blank" data-smartkarma-citation="entities:4827:1" rel="noopener">Conch Environment (587 HK)</a> have generated the best wins in 2022.</li>
<li>These calls achieved returns of 56.8%, 34.2% and 43.5%, respectively, which we think are remarkable given the losses of 16.3% for HSI and 19.3% for HSCEI YTD.</li>
<li>In 2023, we expect Fu Shou Yuan <a href="https://www.smartkarma.com/entities/fu-shou-yuan-international" target="_blank" data-smartkarma-citation="entities:18168:1" rel="noopener"></a>continue to do well and Conch Environment to remain under pressure. It may be prudent to take some profit on Air China. <a href="https://www.smartkarma.com/entities/air-china-ltd-h" target="_blank" data-smartkarma-citation="entities:8239:1" rel="noopener"></a> </li>
</ul>


Our positive calls on Fu Shou Yuan (1448 HK) and Air China Ltd (753 HK) and negative call on Conch Environment (587 HK) have generated the best wins in 2022.
These calls achieved returns of 56.8%, 34.2% and 43.5%, respectively, which we think are remarkable given the losses of 16.3% for HSI and 19.3% for HSCEI YTD.
In 2023, we expect Fu Shou Yuan continue to do well and Conch Environment to remain under pressure. It may be prudent to take some profit on Air China.  


Our Three Best Calls in 2022: Review and Outlook for 2023

<p>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.</p><p>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.  </p>

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.  

China

China Southern Airlines Company Limited provides commercial airline services throughout China, Southeast Asia and other parts of the world.  The Company also provides other airline related services including aircraft maintenance and air catering.

China Eastern Airlines Corporation Limited, together with its subsidiaries, operates in the civil aviation industry. It offers passenger, cargo, mail delivery, ground, cargo handling, and other extended transportation services.

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.

Hainan Airlines Co., Ltd. provides passenger and freight air transportation. The Company also provides charter flight services. 

Spring Airlines Co., Ltd. offers air transportation services. The Company provides domestic air transportation, international air transportation, cargo transportation, and other services. Spring Airlines also offers ticket home delivery, insurance transaction, and other services.

Juneyao Airlines Co. Ltd. supplies air transportation services. The Company provides domestic and international routes for passengers and cargoes. Juneyao Airlines also offers ticket home delivery and electronic ticketing services.

China Express Airlines Co., Ltd. provides air transportation services. The Company offers passenger and freight air transportation, aviation equipment maintenance and aircraft leasing, ticket and hotel booking, consulting, and other services. China Express Airlines serves customers worldwide.

China Express Airlines Co Ltd (002928 CH)

COSCO SHIPPING Holdings Co., Ltd offers marine freight transportation services.  The Company offers container shipping, dry bulk shipping, logistics services, freight forwarding, and terminal and container leasing services internationally.  COSCO SHIPPING Holdings Co., Ltd operates container ships and terminals, and manufactures shipping containers.

S.F. Holding Co., Ltd operates as a holding company. The Company, through its subsidiaries, provides logistics, order tracking, supply chain management, and warehousing services. S.F. Holding operates worldwide.

Daqin Railway Co., Ltd. mainly provides coal transportation service in Northern China. It also operates passenger transportation business.

Singapore Airlines Limited provides air transportation, engineering, pilot training, air charter, and tour wholesaling services. The Company's airline operation covers Asia, Europe, the Americas, South West Pacific, and Africa.

ANA Holdings Inc provides a variety of air transportation-related services. The Company offers scheduled & unscheduled air passenger services and air courier services. ANA sells aircraft parts and provides travel arrangement & reservation services as well.

United Airlines Holdings Inc is an airline holding company.  The Company owns and operates airlines that transports persons, property and mail throughout the United States and abroad.

Southwest Airlines Co. is a domestic airline that provides primarily short-haul, high-frequency, point-to-point service.  The Company offers flights throughout the United States.

International Consolidated Airlines Group S.A. provides transportation services. The Company offers international and domestic air passenger and cargo transportation services. International Consolidated Airlines Group serves customers worldwide.

International Consolidated Airlines Group (IAG LN)

International Consolidated Airlines Group

LATAM Airlines Group S.A. is an airline that provides both domestic and international flight services.  The Company provides passenger and cargo services to destinations in Chile, South America, the Caribbean, Europe, North America, and the Pacific.  LATAM Airlines operates passenger aircraft and cargo freighters.

InterGlobe Aviation Limited provides passenger airlines services. The Company offers ground management, air transportation, terminal maintenance, and other services. InterGlobe Aviation conducts its business globally.

Turk Hava Yollari Anonim Ortakligi (THY), also known as Turkish Airlines, provides passenger and cargo air transportation services. The Company serves all domestic destinations as well as the Middle East, North America, Europe, Asia, North Africa and South Africa.

Cathay Pacific Airways Limited operates scheduled airline services. The Company also provides related services, including airline catering, aircraft handling, and engineering.

Qantas Airways Limited provides transportation of passengers through two airlines including Qantas (full service carrier) and Jetstar (low cost carrier), operating international, domestic and regional services. The Company also includes Qantas Frequent Flyer and Qantas Freight which generates diverse revenue streams and adds value for customers and investors.

Price Gauge
52-week Range	0.00 - 0.00
Market Cap (USDm)	0.00
P/E	0.00
Dividend (Yield)	0.00

Air China Ltd (A) (601111 CH)

Air China (753 HK): Up Stakes in CX?

With the significant improvement in profit at Cathay Pacific in FY23 and the sustained recovery in international traffic, Air China has an even...

Osbert Tang, CFA

Air China (753 HK): Steering Back to the Right Lane

Exchange losses, lower load, and higher jet fuel prices dragged 1Q24 despite record revenue. However, an 8.3pp YoY margin expansion and a 4% unit...

Osbert Tang, CFA

China Pair Trade Idea: Long Air China (753 HK), Short CSA (1055 HK)

Air China has lower USD debt than CSA, making it less exposed to Rmb depreciation. Recovery of international traffic will lower unit costs and...

Osbert Tang, CFA

Our Three Best Calls in 2022: Review and Outlook for 2023

In 2023, we expect share prices of Fu Shou Yuan to continue to do well and Conch Environment to remain under pressure. For Air China, given rich...

Osbert Tang, CFA

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

Price Gauge

52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)

Air China (753 HK): Up Stakes in CX?

With the significant improvement in profit at Cathay Pacific in FY23 and the sustained recovery in international traffic, Air China has an even...

Osbert Tang, CFA

Air China (753 HK): Steering Back to the Right Lane

Exchange losses, lower load, and higher jet fuel prices dragged 1Q24 despite record revenue. However, an 8.3pp YoY margin expansion and a 4% unit...

Osbert Tang, CFA

China Pair Trade Idea: Long Air China (753 HK), Short CSA (1055 HK)

​Air China has lower USD debt than CSA, making it less exposed to Rmb depreciation. Recovery of international traffic will lower unit costs and...

Osbert Tang, CFA

Our Three Best Calls in 2022: Review and Outlook for 2023

In 2023, we expect share prices of Fu Shou Yuan to continue to do well and Conch Environment to remain under pressure. For Air China, given rich...

Osbert Tang, CFA

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

Air China has lower USD debt than CSA, making it less exposed to Rmb depreciation. Recovery of international traffic will lower unit costs and...