No need to own this stock; downgrading recommendation to Sell from HoldWe have gone through the painstaking process of researching CX's fares fromlate October 2016 to early January 2017 using Expedia as our primary source.
　　The data extracted indicate continued downward fare pressure over the earlypart of 2017, confirming management's recent cautious comments. Adversecurrency movements also hurt yield. We cut forecasts on a more negative yieldoutlook and higher landing/parking fees in HK. Our forecasts are nowmaterially below the street. We also reduce the target price by 10% and believethat earnings could come in below consensus estimates. Sell.
　　Our sample check of fares on Internet indicate a worrying downward trendWe have tracked the direction of fares for travel in 1H 2017 over the past threemonths. Our sample indicates that fares are flat to down for most routes. Thissubstantiates the CEO’s comments that we may be in a structurallychallenging environment for Cathay Pacific. A strong dollar hurts yields too.
　　We cut our earnings forecasts for 2017-2018 by 63%/40%The earnings cut is the result of a lower 2017 yield assumption and higherlanding and parking fees in HK. We take this opportunity to cut target price to0.7x 2017E P/B, from 0.8x previously. Net gearing level is expected to moveover 100% at the end of 2017, which is the highest in 20 years.
　　15% downside to TP; key upside risks
　　Our TP is lower than others we cover because ROEs of c.1% are the lowest inthe sector. We would Sell the stock. The full service airline we like in Asia isJapan Airlines, mainly because of its capital management angle. We wouldpair trade JAL versus Cathay Pacific （Buy, last price:JPY3,620）。 Key risks to ourSell call on Cathay: （1） a quick recovery in the cargo business, （2） strongerthan-expected turnaround in the premium business, and （3） a weaker dollarand lower fuel prices.