Hong Kong is losing its appeal to Chinese transit travellers
According to the latest UBS Evidence Lab study, middle- to high-income Chinesetravellers continue to prioritise scheduling convenience and direct flights over pricingwhen choosing an airline. What is more interesting in the October 2015 survey is thatHong Kong's share of the transit market has declined, with only 32% of therespondents having flown through Hong Kong in the past six months, down from 41%in our April survey. Korea and Japan's respective shares are up to 11%/6%, from7%/5%. We think being out of favour as a tourist destination is also negativelyaffecting Hong Kong's transit hub positioning.
Half of CX's capacity will likely face new competition
Using the airlines' latest schedule filing, we estimate 34% of Cathay Pacific's (CX) totalcapacity could face direct competition from the Chinese airlines' new routes in the next12-18 months, while another 12% could face indirect competition as a result ofChinese airlines flying directly to secondary long-haul destinations not served by CX atpresent. We think some of the Chinese airlines' new routes are placing a structuralchallenge on CX.
Against consensus, we forecast 2016 profit to fall
Without the strong back-end loading support from Chinese tourists, visiting friends andrelatives, we believe it would be difficult for CX to maintain its high frequency hub-andspokenetwork which appeals to premium-paying corporate travellers. We lower our2016/17E passenger yield assumptions by 2%, given 1) the more direct competitionfrom China, and 2) the risk in CX's ability to sustain a premium yield versus peers overtime.
Valuation: cut price target from HK$16.00 to HK$13.00; downgrade to Sell
We lower our forward P/BV target from 1.1x to 0.9x, assuming a sustainable 6.3% ROE(previously 7.2%) and a 6.7% COE. In our view, CX will start to face a similar structuralchallenge to the one Singapore Airlines has encountered against the Gulf carriers overthe past decade, leading the stock to de-rate towards a P/BV valuation that is -1standard deviation (SD) below the mean.