Net loss of HK$2.05bn in 1H 2017
Net loss was worse than market expectations. Bloomberg consensus net lossexpectation for 2017 is HK$1.2 billion. Net loss was worse than the HK$353mnet profit achieved in 1H 2016 and the HK$928m loss in 2H 2016.
Key reasons for poor results
(1) Passenger yield declined 5.2% y/y due to intense competition from otherairlines,
(2) 12.7% y/y rise in total fuel costs (increase in gross fuel cost but a decreasein fuel hedging losses), and
(3) higher aircraft maintenance cost, which was up 7% y/y
These were partly offset by a strong performance at the cargo division, whererevenue rose 13.3% y/y. With the loss, net debt/equity moved up to 103% from90% at the end of 2016.
Cathay does not expect a materially better 2H
Management believes that the passenger business will continue to be affectedby strong competition and higher fuel prices. However, it expects the cargobusiness to continue doing well, and benefits of the transformation program tostart showing through in 2H.
Maintaining Sell
Given the significant loss and cautious guidance, we believe consensusforecasts for the stock will decline. Our net loss forecast of HK$63m for the fullyear looks optimistic when compared to the 1H results. The stock is trading ataround 0.85x book value, which is not attractive relative to the challengingearnings outlook.