HK/China Equity Long-Short

Osbert Tang, CFA

Equity Bottom-Up

<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)

Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

<ul>
<li>The New/Better A-H Premium Tracker has tables, charts, measures galore to track A/H premium positioning, southbound and northbound positioning/volatility in pairs over time, etc.</li>
<li>SOUTHBOUND a net buyer every day since the end of Chinese New Year. Still. NORTHBOUND a huge net seller this week, but net buyers in size (RMB +86bn) over 8wks.</li>
<li>For the first time in a while, AH premia among liquid stocks fell convincingly. Narrow AH premia pairs saw Hs outperform more than wide AH premia Hs (vs As).</li>
</ul>


The New/Better A-H Premium Tracker has tables, charts, measures galore to track A/H premium positioning, southbound and northbound positioning/volatility in pairs over time, etc.
SOUTHBOUND a net buyer every day since the end of Chinese New Year. Still. NORTHBOUND a huge net seller this week, but net buyers in size (RMB +86bn) over 8wks.
For the first time in a while, AH premia among liquid stocks fell convincingly. Narrow AH premia pairs saw Hs outperform more than wide AH premia Hs (vs As).


A/H Premium Tracker (To 22 Mar 2024):  Liquid AH Premia Still At Wides

<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. 


Thematic (Sector/Industry)

<ul>
<li>Various statistics suggested that China's tourism and hospitality industry has staged a significant recovery during the 2024 CNY holidays, with traffic surging high double-digit.</li>
<li>While consumers are more cautious about retail product spending, they are willing to spend more on traveling. Such a trend will continue to bode well for the sector.</li>
<li>We like OTAs including <a href="https://www.smartkarma.com/entities/tongcheng-travel-holdings-ltd" target="_blank" data-smartkarma-citation="entities:27363:1" rel="noopener">Tongcheng Travel (780 HK)</a> and <a href="https://www.smartkarma.com/entities/trip-com-group-ltd-23a341d0-4f63-4175-a8c5-ee990906cacd" target="_blank" data-smartkarma-citation="entities:36424:1" rel="noopener">Trip.com (9961 HK)</a> despite their YTD surge in share prices. Meanwhile, <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> stays as the top pick.</li>
</ul>


Various statistics suggested that China's tourism and hospitality industry has staged a significant recovery during the 2024 CNY holidays, with traffic surging high double-digit.
While consumers are more cautious about retail product spending, they are willing to spend more on traveling. Such a trend will continue to bode well for the sector.
We like OTAs including Tongcheng Travel (780 HK) and Trip.com (9961 HK) despite their YTD surge in share prices. Meanwhile, Air China Ltd (H) (753 HK) stays as the top pick.


China Tourism and Hospitality Industry: Roundup of a Solid CNY

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 (A) (601111 CH)

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

A/H Premium Tracker (To 22 Mar 2024): Liquid AH Premia Still At Wides

The Quiddity AH Monitor had a good week outperforming the biases on both long pairs and short pairs. AH Premia remain wide. Too wide. China...

Travis Lundy

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

China Tourism and Hospitality Industry: Roundup of a Solid CNY

China's tourism industry sees a strong recovery during the 2024 CNY holidays, with a high double-digit traffic surge. OTAs like Tongcheng and...

Osbert Tang, CFA

Price Gauge

52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)

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

A/H Premium Tracker (To 22 Mar 2024): Liquid AH Premia Still At Wides

The Quiddity AH Monitor had a good week outperforming the biases on both long pairs and short pairs. AH Premia remain wide. Too wide. China...

Travis Lundy

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

China Tourism and Hospitality Industry: Roundup of a Solid CNY

​China's tourism industry sees a strong recovery during the 2024 CNY holidays, with a high double-digit traffic surge. OTAs like Tongcheng and...

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...

China's tourism industry sees a strong recovery during the 2024 CNY holidays, with a high double-digit traffic surge. OTAs like Tongcheng and...