Barron's Cx Article 31/8
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Barron's Cx Article 31/8
LESS TURBULENCE AHEAD FOR CARRIERS:
With global economies still in recession and concerns about the H1 flu epedemic keeping passengers away, even stellar airline operators have suffered: Hong Kong's Cathay Pacific Airways and Air China, which had Asia's heady growth as a tailwind, have recently been struggling to break even. But now with the global economy mending and China returning to near-double-digit growth rates, the duo is set to dominate again-aided by the link up.
Air China announced on Aug.17 that it was boosting it's stake in Cathay from 17.5% to 29.99%, while Cathay maintains it's 18.1% stake in Air China. The move follows Shanghai-based China Eastern's July merger with smaller Shanghai Airlines (after it aborted it's own link-up with Singapore Airlines). Citigroup's airline analyst Ally Ma calls the deal a 'win-win', because a larger stake in Cathay not only gives Air China a profitable associate and a strategic international ally, but also more synergies on the lucrative Hong Kong-China routes.
Air China got itself a nice bargain by paying a 10.8% premium for Cathay's shares-relatively low compared with recent large, global airline link-ups such as the 42.5% premium in the Air France-KLM deal, notes Kelvin Lau, an analyst for Daiwa Securities. While none of the recent global airline deals has been transformational, he says, the deal with Cathay allows Air China to leapfrog from a little-known Chinese airline to a formidable global player.
Lau likes Air China, the worlds biggest carrier by market value (the market cap is US$12.26Billion), which is trading at just 13.5 times this years earnings. Air China's stock surged after the carrier announced on Aug. 25 that it had more than doubled first-half profits, to $422 million, thanks to fuel-hedging gains-despite a 9.6% drop in total revenues. Fully 46% of Air China's passenger revenues now come from outside China, and the hefty Cathay stake means it will be able to credit 29.99% of the Hong Kong's carriers earnings.
With China's four main airline stocks already up on an average 55% year to date, Citigroups Ma sees up to 10% more upside for Air China, and 44% more upside for China Eastern. China's airlines have relied on a burgeoning domestice market-growing at more than 10% annually-as a cushion during the global downturn. China, the world's fifth-largest-outbound tourism market in revenues, is the fastest-growing of the big maekets.
JPMorgan airline analyst Corrine Png is bullish about Cathay Pacific, which has used the downturn to aggressively cut staff and operational costs. Png has a BUY rating on Cathay: she sees at least 32% upside from current levels, and cites 'gradual pickup in premium traffic, cargo volumes, capacity rationalization, cost cuts AND FUEL HEDGING GAINS' to support her positive outlook. JPMorgan forecasts Cathay's revenues to grow 10.7% next year and 12.2% in 2011, with earnings-per-share growth of 35.4% next year.
With global economies still in recession and concerns about the H1 flu epedemic keeping passengers away, even stellar airline operators have suffered: Hong Kong's Cathay Pacific Airways and Air China, which had Asia's heady growth as a tailwind, have recently been struggling to break even. But now with the global economy mending and China returning to near-double-digit growth rates, the duo is set to dominate again-aided by the link up.
Air China announced on Aug.17 that it was boosting it's stake in Cathay from 17.5% to 29.99%, while Cathay maintains it's 18.1% stake in Air China. The move follows Shanghai-based China Eastern's July merger with smaller Shanghai Airlines (after it aborted it's own link-up with Singapore Airlines). Citigroup's airline analyst Ally Ma calls the deal a 'win-win', because a larger stake in Cathay not only gives Air China a profitable associate and a strategic international ally, but also more synergies on the lucrative Hong Kong-China routes.
Air China got itself a nice bargain by paying a 10.8% premium for Cathay's shares-relatively low compared with recent large, global airline link-ups such as the 42.5% premium in the Air France-KLM deal, notes Kelvin Lau, an analyst for Daiwa Securities. While none of the recent global airline deals has been transformational, he says, the deal with Cathay allows Air China to leapfrog from a little-known Chinese airline to a formidable global player.
Lau likes Air China, the worlds biggest carrier by market value (the market cap is US$12.26Billion), which is trading at just 13.5 times this years earnings. Air China's stock surged after the carrier announced on Aug. 25 that it had more than doubled first-half profits, to $422 million, thanks to fuel-hedging gains-despite a 9.6% drop in total revenues. Fully 46% of Air China's passenger revenues now come from outside China, and the hefty Cathay stake means it will be able to credit 29.99% of the Hong Kong's carriers earnings.
With China's four main airline stocks already up on an average 55% year to date, Citigroups Ma sees up to 10% more upside for Air China, and 44% more upside for China Eastern. China's airlines have relied on a burgeoning domestice market-growing at more than 10% annually-as a cushion during the global downturn. China, the world's fifth-largest-outbound tourism market in revenues, is the fastest-growing of the big maekets.
JPMorgan airline analyst Corrine Png is bullish about Cathay Pacific, which has used the downturn to aggressively cut staff and operational costs. Png has a BUY rating on Cathay: she sees at least 32% upside from current levels, and cites 'gradual pickup in premium traffic, cargo volumes, capacity rationalization, cost cuts AND FUEL HEDGING GAINS' to support her positive outlook. JPMorgan forecasts Cathay's revenues to grow 10.7% next year and 12.2% in 2011, with earnings-per-share growth of 35.4% next year.
