HK/China Equity Long-Short

Osbert Tang, CFA

Equity Bottom-Up

While the Mar traffic figures continued to show that <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 still lagging behind <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> in many areas, there is no doubt that such underperformance is reducing sequentially. The latest figures show that Air China is narrowing its gap on passenger load factor, seeing rebound in international passenger traffic, registering better cargo and mail strengths and catching up on freight and overall load factors.We believe many of these attributes fit well into our arguments for a reversal of CSA's outperformance against Air China in this year as we written in <a href="https://www.smartkarma.com/insights/2021-high-conviction-pair-trade-long-air-china-753-hk-short-china-southern-1055-hk" target="_blank" data-smartkarma-citation="insights:45584" rel="noopener">2021 High Conviction: Pair Trade - Long Air China (753 HK), Short China Southern (1055 HK)</a>. The relative valuation also suggests CSA is richly valued against Air China. For details, please refer to our attached update presentation file on the trade.

While the Mar traffic figures continued to show that Air China Ltd (H) (753 HK) is still lagging behind China Southern Airlines (1055 HK) in many areas, there is no doubt that such underperformance is reducing sequentially. The latest figures show that Air China is narrowing its gap on passenger load factor, seeing rebound in international passenger traffic, registering better cargo and mail strengths and catching up on freight and overall load factors.We believe many of these attributes fit well into our arguments for a reversal of CSA's outperformance against Air China in this year as we written in 2021 High Conviction: Pair Trade - Long Air China (753 HK), Short China Southern (1055 HK). The relative valuation also suggests CSA is richly valued against Air China. For details, please refer to our attached update presentation file on the trade. 

Air China (753 HK): Further Evidences of Improving Against China Southern (1055 HK)

Thematic (Sector/Industry)

While <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> sustained its outperformance against <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> in its traffic in Feb, we have already seen some signs of positive factors for Air China emerging, leading us to believe that the unfavourable performance of our advocated <a href="https://www.smartkarma.com/insights/2021-high-conviction-pair-trade-long-air-china-753-hk-short-china-southern-1055-hk" target="_blank" data-smartkarma-citation="insights:45584" rel="noopener">2021 High Conviction: Pair Trade - Long Air China (753 HK), Short China Southern (1055 HK)</a> YTD will soon come to an inflection point.<a href="https://www.smartkarma.com/insights/smartkarma-webinar-pair-trade-long-air-china-short-china-southern-still-an-opportunity" target="_blank" data-smartkarma-citation="insights:47857" rel="noopener"></a>The positive signs that we saw are: 1.) stronger passenger load MoM and cargo traffic YoY in Feb at Air China; 2.) now that the Rmb/USD has weakened; 3.) rise in jet fuel more negative to CSA; and 4.) pick-up in Air China's fare after CNY. In valuation terms, CSA's sharp rally has returned it to 1.16x P/B, more than 1SD above historical average, and back to the level in early-2019 before the outbreak - which is not cheap anymore.

While China Southern Airlines (1055 HK) sustained its outperformance against Air China Ltd (H) (753 HK) in its traffic in Feb, we have already seen some signs of positive factors for Air China emerging, leading us to believe that the unfavourable performance of our advocated 2021 High Conviction: Pair Trade - Long Air China (753 HK), Short China Southern (1055 HK) YTD will soon come to an inflection point.The positive signs that we saw are: 1.) stronger passenger load MoM and cargo traffic YoY in Feb at Air China; 2.) now that the Rmb/USD has weakened; 3.) rise in jet fuel more negative to CSA; and 4.) pick-up in Air China's fare after CNY. In valuation terms, CSA's sharp rally has returned it to 1.16x P/B, more than 1SD above historical average, and back to the level in early-2019 before the outbreak - which is not cheap anymore.

2021 High Conviction Update: Chinese Airlines Pair Trade - Almost Getting to the Inflection Point

Guangzhou Baiyun International Airport / Equity Bottom-Up

The sharp YoY rebound of the Feb domestic traffic (aircraft movement +81.8% and passenger traffic +139.5%) 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> is largely on the back of COVID-19 impacted low base in last Feb. When compared the 2M21 figures with the 'normal' 2M19 figures, it still indicated a 16.1% and 38.9% decline, suggesting that they are yet to fully resumed but are not too far away. We see positive signs for stronger pace in domestic traffic after the CNY starting Mar, and this should be good for GBIA given its heavy domestic exposure. Meanwhile, the increase in vaccination rates both domestically and internationally will bode well for air travel appetite, underpinning further traffic recovery. We continue to prefer GBIA to both <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> and <a href="https://www.smartkarma.com/entities/beijing-capital-international-airport-bcia" target="_blank" data-smartkarma-citation="entities:10626:1" rel="noopener">Beijing Capital International Airport (BCIA) (694 HK)</a>.

The sharp YoY rebound of the Feb domestic traffic (aircraft movement +81.8% and passenger traffic +139.5%) at Guangzhou Baiyun International Airport (600004 CH) is largely on the back of COVID-19 impacted low base in last Feb. When compared the 2M21 figures with the 'normal' 2M19 figures, it still indicated a 16.1% and 38.9% decline, suggesting that they are yet to fully resumed but are not too far away. We see positive signs for stronger pace in domestic traffic after the CNY starting Mar, and this should be good for GBIA given its heavy domestic exposure. Meanwhile, the increase in vaccination rates both domestically and internationally will bode well for air travel appetite, underpinning further traffic recovery. We continue to prefer GBIA to both Shanghai International Airport (600009 CH) and Beijing Capital International Airport (BCIA) (694 HK). 

Guangzhou Baiyun Intl Airport (600004 CH): Further Narrowing the Gap

Jan traffic for <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> does not look encouraging due to the local COVID-19 cases in China induced softening in domestic air travel demand. Aircraft movement and passenger throughput was down 23.6% and 43.8% YoY, respectively, reflecting various local governments' no cross-province travel recommendation and the distortion from a later Chinese New Year than 2020. Cargo throughput, however, holds up well.We believe GBIA will fare better than its peers in Jan-Feb traffic, as southern China has not reported any local COVID-19 case. GBIA's share price has been hit by the spillover effect of the unfavourable duty free agreement signed by <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> which we think is unwarranted. On a cheaper 1.5x P/B, we see GBIA outperform SIAC in the near term given its more stable earnings mix and better profitability.<a href="https://www.smartkarma.com/entities/thai-airways-international" target="_blank" data-smartkarma-citation="entities:18317:1" rel="noopener"></a>

Jan traffic for Guangzhou Baiyun International Airport (600004 CH) does not look encouraging due to the local COVID-19 cases in China induced softening in domestic air travel demand. Aircraft movement and passenger throughput was down 23.6% and 43.8% YoY, respectively, reflecting various local governments' no cross-province travel recommendation and the distortion from a later Chinese New Year than 2020. Cargo throughput, however, holds up well.We believe GBIA will fare better than its peers in Jan-Feb traffic, as southern China has not reported any local COVID-19 case. GBIA's share price has been hit by the spillover effect of the unfavourable duty free agreement signed by Shanghai International Airport (600009 CH) which we think is unwarranted. On a cheaper 1.5x P/B, we see GBIA outperform SIAC in the near term given its more stable earnings mix and better profitability.

Guangzhou Baiyun Intl Airport (600004 CH): On a Better Playing Field

Shanghai International Airport / Equity Bottom-Up

The announcement by <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> of a loss of between Rmb1.2-1.3bn for FY20 will disappoint the market due to the significant QoQ deterioration, in our view. While weaker domestic traffic and limited recovery of international traffic are reasons, the less favourable duty free agreement reached with Sunrise duty free, a subsidiary of <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>, has further added to the loss in last year.Based on the current pace of international traffic recovery, we believe SIAC will be difficult to achieve the required traffic for the minimum guarantee rental in the next two years, and this will have a negative effect on its bottom line. Since 2020, share price of SIAC has outperformed <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> by over 20pp. With SIAC's new agreement and GBIA's stronger FY20 result, we believe there is room for SIAC to give back some of such outperformance in the near term.

The announcement by Shanghai International Airport (600009 CH) of a loss of between Rmb1.2-1.3bn for FY20 will disappoint the market due to the significant QoQ deterioration, in our view. While weaker domestic traffic and limited recovery of international traffic are reasons, the less favourable duty free agreement reached with Sunrise duty free, a subsidiary of China Tourism Group Duty Free Corp Ltd (601888 CH), has further added to the loss in last year.Based on the current pace of international traffic recovery, we believe SIAC will be difficult to achieve the required traffic for the minimum guarantee rental in the next two years, and this will have a negative effect on its bottom line. Since 2020, share price of SIAC has outperformed Guangzhou Baiyun International Airport (600004 CH) by over 20pp. With SIAC's new agreement and GBIA's stronger FY20 result, we believe there is room for SIAC to give back some of such outperformance in the near term.

Shanghai International Airport (600009 CH): Dragged by Unfavourable Duty Free Agreement

China

Beijing Capital International Airport Company Limited operates both aeronautical and non-aeronautical business in the Beijing airport.  The Company provides aircraft movement and passenger service facilities, safety and security services, fire-fighting services, and ground handling services.  In addition, Beijing Capital operates duty free and other retail shops and leases properties.

Beijing Capital International Airport (BCIA) (694 HK)

Beijing Capital International Airport (BCIA)

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Beijing Capital International Airport (BCIA) (694 HK)

Air China (753 HK): Further Evidences of Improving Against China Southern (1055 HK)

Air China looks to have reduced its gap against China Southern in many operating metrics in Mar, supporting our argument for reversal of share...

Osbert Tang, CFA

2021 High Conviction Update: Chinese Airlines Pair Trade - Almost Getting to the Inflection Point

Feb traffic is not too bad at CSA but we see some positive signs emerging at Air China, supporting a potential reversal of its underperformance...

Osbert Tang, CFA

Guangzhou Baiyun Intl Airport (600004 CH): Further Narrowing the Gap

GBIA's 2M21 traffic indicated it has significantly narrowed the gap with "normal" traffic in 2M19, largely on the back of good domestic routes. We...

Osbert Tang, CFA

Guangzhou Baiyun Intl Airport (600004 CH): On a Better Playing Field

Weak Jan traffic reflected poor domestic air travel appetite but GBIA should fare better than SIAC and BCIA. It has less exposure to duty free and...

Osbert Tang, CFA

Shanghai International Airport (600009 CH): Dragged by Unfavourable Duty Free Agreement

We see SIAC's FY20 unencouraging, mostly due to the unfavourable duty free agreement reached which will erode its profitability. It is possibly...

Osbert Tang, CFA

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