HK/China Equity Long-Short

Osbert Tang, CFA

Equity Bottom-Up

China Southern Airlines / Equity Bottom-Up

<ul>
<li>While China Southern Airlines (1055 HK) saw passenger traffic up 17.3% in Jan, this is at the expense of higher capacity, leading to a 1.8pp YoY passenger load contraction. </li>
<li>Its cargo traffic underperformed both CEA and Air China with a YoY decline; and this is disappointing in a period of time where airfreight rate is at record-breaking level.  </li>
<li>We see reduced local travel demand, higher operating costs, weaker cargo business, pressure on yield and higher base of comparison key challenges in 2022, and prefer Air China Ltd (753 HK). </li>
</ul>


While China Southern Airlines (1055 HK) saw passenger traffic up 17.3% in Jan, this is at the expense of higher capacity, leading to a 1.8pp YoY passenger load contraction. 
Its cargo traffic underperformed both CEA and Air China with a YoY decline; and this is disappointing in a period of time where airfreight rate is at record-breaking level.  
We see reduced local travel demand, higher operating costs, weaker cargo business, pressure on yield and higher base of comparison key challenges in 2022, and prefer Air China Ltd (753 HK). 


China Southern Airlines (1055 HK): A Tough Start

Thematic (Sector/Industry)

<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 (753 HK)</a>, <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/china-eastern-airlines-co-h" target="_blank" data-smartkarma-citation="entities:1079:1" rel="noopener">China Eastern Airlines (670 HK) </a>issued profit warnings for FY21, guiding for Rmb36.8-43.3bn aggregate losses, worse than FY20. </li>
<li>On QoQ basis, CSA's bottom line is significantly weaker as losses enlarged 3.1x in 4Q21, versus 38.4% for CEA and 54% for Air China, based on the mid-point of guidances.</li>
<li>We expect Air China to outperform CSA (YTD: 1.6pp), backed by more international traffic, border opening of China, favourable cargo demand and pricing, and improvement at <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>. </li>
</ul>



Air China Ltd (753 HK), China Southern Airlines (1055 HK) and China Eastern Airlines (670 HK) issued profit warnings for FY21, guiding for Rmb36.8-43.3bn aggregate losses, worse than FY20. 
On QoQ basis, CSA's bottom line is significantly weaker as losses enlarged 3.1x in 4Q21, versus 38.4% for CEA and 54% for Air China, based on the mid-point of guidances.
We expect Air China to outperform CSA (YTD: 1.6pp), backed by more international traffic, border opening of China, favourable cargo demand and pricing, and improvement at Cathay Pacific (293 HK). 


Chinese Airlines: A Tale of Three Loss-Making, but Outperforming, Companies

<ul>
<li>State Council's announcement of China 14th 5-year Tourism Industry Development Plan recently should see positive policies and supportive measures to be rolled out over the medium term. </li>
<li>
<a href="https://www.smartkarma.com/entities/fosun-tourism-group" target="_blank" data-smartkarma-citation="entities:27439:1" rel="noopener">Fosun Tourism (1992 HK)</a>, <a href="https://www.smartkarma.com/entities/china-tourism-group-duty-free-corp-ltd" target="_blank" data-smartkarma-citation="entities:12278:1" rel="noopener">China Tourism Group Duty Free Corp Ltd (601888 CH)</a>, <a href="https://www.smartkarma.com/entities/china-travel-international-investment-hong-kong" target="_blank" data-smartkarma-citation="entities:3879:1" rel="noopener">China Travel International Investment (308 HK)</a> and <a href="https://www.smartkarma.com/entities/haichang-ocean-park-holdings-ltd" target="_blank" data-smartkarma-citation="entities:11396:1" rel="noopener">Haichang Ocean Park (2255 HK)</a> are some key beneficiaries.</li>
<li>We believe <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> will benefit from the recovery of international air passenger as the Plan highlights the importance of promoting inbound/outbound tourism after the pandemic.</li>
</ul>


State Council's announcement of China 14th 5-year Tourism Industry Development Plan recently should see positive policies and supportive measures to be rolled out over the medium term. 

Fosun Tourism (1992 HK), China Tourism Group Duty Free Corp Ltd (601888 CH), China Travel International Investment (308 HK) and Haichang Ocean Park (2255 HK) are some key beneficiaries.
We believe Air China Ltd (H) (753 HK) will benefit from the recovery of international air passenger as the Plan highlights the importance of promoting inbound/outbound tourism after the pandemic.


Beneficiaries of China's 14th 5-Year Tourism Industry Development Plan

Pan-Asia Catalysts/Events, Quiddity Advisors

David Blennerhassett

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

<ul>
<li>
<strong><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></strong> dangles bonuses for pilots and first officers amid Hong Kong's stringent crew quarantine requirements. </li>
<li>Preceding my comments on Cathay - and <strong><a href="https://www.smartkarma.com/entities/swire-pacific-ltd-cl-a" target="_blank" data-smartkarma-citation="entities:10433:1" rel="noopener">Swire Pacific (A) (19 HK)</a></strong>- are the current setup/unwind tables for Asia-Pacific Holdcos. </li>
<li>These relationships trade with a minimum liquidity of US$1mn, and a % market capitalisation &gt;20%.</li>
</ul>



Cathay Pacific Airways (293 HK) dangles bonuses for pilots and first officers amid Hong Kong's stringent crew quarantine requirements. 
Preceding my comments on Cathay - and Swire Pacific (A) (19 HK)- are the current setup/unwind tables for Asia-Pacific Holdcos. 
These relationships trade with a minimum liquidity of US$1mn, and a % market capitalisation &gt;20%.


StubWorld: Cathay Pacific - Still Grounded

<ul>
<li>Passenger traffic momentum 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 picked up in Dec and it also narrowed down it gap against <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>. </li>
<li>The resurgence of international traffic over the next two years with more border openings will provide significant benefits to Air China, helping it to recover its depressed load factors.</li>
<li>Air China outperformed HSCEI by 3.6pp YTD, but we still consider its P/B of 1.0x, or around historical average, not stretched. Strength of Rmb is also a potential positive factor.</li>
</ul>


Passenger traffic momentum of Air China Ltd (H) (753 HK) has picked up in Dec and it also narrowed down it gap against China Southern Airlines (1055 HK). 
The resurgence of international traffic over the next two years with more border openings will provide significant benefits to Air China, helping it to recover its depressed load factors.
Air China outperformed HSCEI by 3.6pp YTD, but we still consider its P/B of 1.0x, or around historical average, not stretched. Strength of Rmb is also a potential positive factor.


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): A Tough Start

CSA has a tough start for 2022 as reflected in weak Jan load and cargo performance. We see many challenges brewing in this year and expect the...

Osbert Tang, CFA

Chinese Airlines: A Tale of Three Loss-Making, but Outperforming, Companies

Chinese airlines have issued profit warnings for FY21 with record losses in the year, and CSA looks to have the weakest QoQ performance in 4Q21. We...

Osbert Tang, CFA

Beneficiaries of China's 14th 5-Year Tourism Industry Development Plan

China's 14th 5-year Tourism Development Plan are positive to many players in the tourism industry. We expect more favourable policies and...

Osbert Tang, CFA

StubWorld: Cathay Pacific - Still Grounded

I can't get excited with Cathay. I tilt bullish on Swire Pac. Around a 50% discount is wide given its tendency to historically trade in the low-to...

David Blennerhassett

Air China (753 HK): Down but Not Out

Air China managed to pick up sequentially on passenger traffic and narrowed down its gap against China Southern in Dec. More international traffic...

Osbert Tang, CFA

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