August passenger volumes and load factors hit recordlevels; cargo remains soft ahead of September peak
Performance as anticipated; a minor positive was a slightlymore upbeat cargo outlook relative to other operators
Maintain Buy at an unchanged target price of HKD22.0
Record August passenger loads, but cargo softens. August’s passenger load factorwas 88.6%, up 1.4ppts y-o-y (vs +1.4ppt y-o-y in July). Passenger traffic (RPK) grew 8%y-o-y (vs 8% y-o-y in July). August’s cargo load factor was 60.6%, down 1.9ppts y-o-y(vs -2.9ppts y-o-y in July); cargo traffic (FTK) was flat y-o-y (vs +1% y-o-y in July).
Cathay’s commentary on passenger: “…flights were very busy in August…[with] a newrecord for passenger traffic [and] a new… high for load factor. We saw strong demand forleisure …and also very high load factors on our long-haul routes, particularly Europe,Africa and North America. Demand to Korea began to pick up …traffic to Bangkokshowed a sharp fall off…Premium traffic remained below expectations on key long-haulroutes, putting continued pressure on yield.” And on cargo: “Looking ahead we expect tosee a traditional winter peak. In those markets where we face stronger competition andcapacity growth, we have the ability to leverage strong network feed over our hub tomaintain good loads on our long-haul trunk routes at a sustained yield.”
Y-t-d in line with expectations, with passenger slightly better and cargo worse.Passenger volumes remained robust. Y-t-d, passenger volumes are up 9% y-o-y, slightlybelow our 2015 forecast of +9.5%; the passenger load factor is up 2.1ppts y-o-y,
versusour model assumption of +1.2ppts y-o-y. In contrast, cargo performance remains weak. Yt-d, cargo volumes are up 8% y-o-y compared to our assumption of +11%; and the cargoload factor is flat, versus our +1.2ppts estimate. However, Cathay’s commentary about thepeak season is, relatively, more positive than other cargo operators.
Maintain Buy with TP of HKD22.0. Since 2000, Cathay Pacific has traded at an averageone-year forward book value of 1.25x. Given our forecast of normalising ROE, we believeCathay’s PB level should return to this average; and if we apply this to our one-yearforward EPS, we get our target price of HKD22.0. After the recent share price decline, ourtarget price implies upside of 55.8%. We argue that Cathay Pacific’s strong home base,which we believe is the best positioned gateway into Southern China, and its greaterexposure to North America mean that the carrier has a stronger medium-term outlook thanits Asian full service rivals. Any indications of a decent peak season for both premiumpassengers and cargo are likely to be key share price drivers.