Asian Equities Analyst, Logistics & Transport, Tracking Traffic

Daniel Hellberg

Asian Equities Analyst, Logistics & Transport

Tracking Traffic

Focusing on Asian logistics, transportation, and travel companies

Equity Bottom-Up

<section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/174/124/original/BANNER-TOURISM.png?1606332998" class="editor-image img-responsive" data-smartkarma-image-id="174124"></figure></section>Chinese outbound travel activity remained moribund in October, even after another increase in trips to Macau, which eased some travel restrictions in July. Macau's slow recovery suggests it will take many months for outbound activity to normalize once regional restrictions are lifted. China's 'Golden Week' holiday period was a day longer this year, but by most measures domestic air activity in October remained weak versus 2019. Sequential improvement in RPKs and passenger counts in October was just +5% MoM, roughly in-line with normal seasonality, and travelers are still opting for shorter trips. We believe the pace of recovery in domestic travel is moderating. Can the 2021 Lunar New Year holiday rescue China's travel service providers? Without a relaxation of restrictions in key regional markets, another major holiday travel period could be 'lost', in our opinion. We do not believe improving domestic activity can offset 'lost' outbound travel in Q121.We remain negative on Chinese travel demand. We believe the normalization of domestic and especially outbound activitity will take longer than expected -- no 'snap back' scenario, in other words. Furthermore, we believe underlying demand growth was slowing even before Covid19 hit, and it's become clear that domestic travel activity is unlikely to fully offset 'lost' outbound trips.

Chinese outbound travel activity remained moribund in October, even after another increase in trips to Macau, which eased some travel restrictions in July. Macau's slow recovery suggests it will take many months for outbound activity to normalize once regional restrictions are lifted. China's 'Golden Week' holiday period was a day longer this year, but by most measures domestic air activity in October remained weak versus 2019. Sequential improvement in RPKs and passenger counts in October was just +5% MoM, roughly in-line with normal seasonality, and travelers are still opting for shorter trips. We believe the pace of recovery in domestic travel is moderating. Can the 2021 Lunar New Year holiday rescue China's travel service providers? Without a relaxation of restrictions in key regional markets, another major holiday travel period could be 'lost', in our opinion. We do not believe improving domestic activity can offset 'lost' outbound travel in Q121.We remain negative on Chinese travel demand. We believe the normalization of domestic and especially outbound activitity will take longer than expected -- no 'snap back' scenario, in other words. Furthermore, we believe underlying demand growth was slowing even before Covid19 hit, and it's become clear that domestic travel activity is unlikely to fully offset 'lost' outbound trips. 

TRACKING TRAFFIC/Chinese Tourism: Macau's Slog | Golden Week Fails to Shine | LNY 2021 At Risk?

HK/China Equity Long-Short

Osbert Tang, CFA

In 2020, we made a good call of "Long <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>, short <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>". Going into 2021, we believe a reversal of such trade, i.e. "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>" will generate more attractive return instead. With CSA outperformed 10.8pp YTD, we see it still not too late to enter into this trade.Our strategy is building on four major rationales: 1.) rebound in international traffic, 2.) low comparison base for Air China, 3.) lesser burden from <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>, and 4.) less significant impact of Rmb appreciation. Alternatively, "Long <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>, 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>" is also a viable trade, but a significantly riskier one.

In 2020, we made a good call of "Long China Southern Airlines (1055 HK), short Air China Ltd (H) (753 HK)". Going into 2021, we believe a reversal of such trade, i.e. "Long Air China Ltd (H) (753 HK), short China Southern Airlines (1055 HK)" will generate more attractive return instead. With CSA outperformed 10.8pp YTD, we see it still not too late to enter into this trade.Our strategy is building on four major rationales: 1.) rebound in international traffic, 2.) low comparison base for Air China, 3.) lesser burden from Cathay Pacific Airways (293 HK), and 4.) less significant impact of Rmb appreciation. Alternatively, "Long Cathay Pacific Airways (293 HK), short China Southern Airlines (1055 HK)" is also a viable trade, but a significantly riskier one.  

2021 High Conviction: Pair Trade - Long Air China (753 HK), Short China Southern (1055 HK)

Chinese online travel agency (OTA) <a href="https://www.smartkarma.com/entities/tongcheng-elong-holdings-ltd" target="_blank" data-smartkarma-citation="entities:27363:1" rel="noopener">Tongcheng-Elong Holdings Ltd (780 HK)</a> released Q3 results on Monday evening in HK. Revenue and adjusted EBITDA were still below year-ago levels, but both metrics were significantly improved from Q2 levels. Notably, purchasing users in Q3 were flat YoY.
Market leading OTA <a href="https://www.smartkarma.com/entities/trip-com-group-ltd" target="_blank" data-smartkarma-citation="entities:180:1" rel="noopener">Trip.com (TCOM US)</a> will report its Q3 results on Tuesday, December 1st after the US close. We expect Trip.com to report a sequential improvement, but we believe Q3 results will show its recovery lags Tongcheng-ELong's, mainly due to Trip.com's international exposure.
The expected availability of Covid19 vaccines in 2021 should eventually open up cross-border travel for Chinese tourists next year, but Trip.com and other travel service providers may still be facing a difficult start to 2021, including the long Lunar New Year holiday in February.
As such, we retain a negative view of Chinese tourism demand in the medium-term, anticipating that even a return to the modest demand growth seen pre-Covid19 will require another few quarters, at least.

Chinese online travel agency (OTA) Tongcheng-Elong Holdings Ltd (780 HK) released Q3 results on Monday evening in HK. Revenue and adjusted EBITDA were still below year-ago levels, but both metrics were significantly improved from Q2 levels. Notably, purchasing users in Q3 were flat YoY.
Market leading OTA Trip.com (TCOM US) will report its Q3 results on Tuesday, December 1st after the US close. We expect Trip.com to report a sequential improvement, but we believe Q3 results will show its recovery lags Tongcheng-ELong's, mainly due to Trip.com's international exposure.
The expected availability of Covid19 vaccines in 2021 should eventually open up cross-border travel for Chinese tourists next year, but Trip.com and other travel service providers may still be facing a difficult start to 2021, including the long Lunar New Year holiday in February.
As such, we retain a negative view of Chinese tourism demand in the medium-term, anticipating that even a return to the modest demand growth seen pre-Covid19 will require another few quarters, at least. 

Tough Times (Still) In Chinese Tourism | Trip.com Q3 Preview | TongCheng-ELong Q3 Review

China Southern Airlines / Equity Bottom-Up

<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> blew away its peers <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 Co (H) (670 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> in Oct with its impressive traffic and load performance, thanks to the encouraging demand during the "Double Festivals" Golden Week. Meanwhile, its freight traffic is also the strongest among the Big 3s, logging just a 2.1% decline but both regional and international routes are back in the positive zone.CSA has given back 2-3pp of its outperformance against Air China in last week due to the expectation of international traffic recovery, but it has still outperformed the latter by 13.6pp. We believe such recovery will be very gradual, and CSA will stay benefiting from the resilient domestic traffic and the strength of Rmb against USD.

China Southern Airlines (1055 HK) blew away its peers China Eastern Airlines Co (H) (670 HK) and Air China Ltd (H) (753 HK) in Oct with its impressive traffic and load performance, thanks to the encouraging demand during the "Double Festivals" Golden Week. Meanwhile, its freight traffic is also the strongest among the Big 3s, logging just a 2.1% decline but both regional and international routes are back in the positive zone.CSA has given back 2-3pp of its outperformance against Air China in last week due to the expectation of international traffic recovery, but it has still outperformed the latter by 13.6pp. We believe such recovery will be very gradual, and CSA will stay benefiting from the resilient domestic traffic and the strength of Rmb against USD.

China Southern Airlines (1055 HK): Domestic Strength Stays on Course

Shanghai International Airport / Equity Bottom-Up

<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> extended its good traffic performance to Oct with impressive 23.9% YoY surge in domestic aircraft movement and 17.5% YoY growth in domestic passenger throughput. It also achieved the best growth in cargo and mail traffic in last month when compared with <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> 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>.We believe international traffic and cargo volume will be the increasingly important drivers for SIAC over the next 12 months, with the key reasons being: 1.)  positive news of COVID-19 vaccine development; 2.) more accommodative China policies of the US; 3.) RCEP's boost to regional airfreight market; and 4.) added confidence in business meetings in Shanghai.

Shanghai International Airport (600009 CH) extended its good traffic performance to Oct with impressive 23.9% YoY surge in domestic aircraft movement and 17.5% YoY growth in domestic passenger throughput. It also achieved the best growth in cargo and mail traffic in last month when compared with Guangzhou Baiyun International Airport (600004 CH) and Beijing Capital International Airport (BCIA) (694 HK).We believe international traffic and cargo volume will be the increasingly important drivers for SIAC over the next 12 months, with the key reasons being: 1.)  positive news of COVID-19 vaccine development; 2.) more accommodative China policies of the US; 3.) RCEP's boost to regional airfreight market; and 4.) added confidence in business meetings in Shanghai.

Shanghai International Airport (600009 CH): Extending Traffic Outperformance to Oct

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.

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China Southern Airlines (1055 HK)

TRACKING TRAFFIC/Chinese Tourism: Macau's Slog | Golden Week Fails to Shine | LNY 2021 At Risk?

Chinese travel demand remained weak in October, which included the long Golden Week holiday. Poor outbound travel demand is not a surprise at this...

Tracking Traffic

2021 High Conviction: Pair Trade - Long Air China (753 HK), Short China Southern (1055 HK)

Supported by 1.) international traffic rebound, 2.) low comparison base, 3.) lesser burden from CX, and 4.) smaller Rmb appreciation impact, we...

Osbert Tang, CFA

Tough Times (Still) In Chinese Tourism | Trip.com Q3 Preview | TongCheng-ELong Q3 Review

In Q3, TongCheng-ELong showed growth versus Q2, though revenue and earnings remain lower than a year ago. We expect Trip.com's Q3 results to be far...

Tracking Traffic