Given management's cautionary statements since October last year, the losswas not really a negative shock to us. The net loss was higher than our netloss forecast of HK$ 103m because maintenance expenditure （+18% y/y） washigher than expected and cargo yield decline of 16.3% y/y was worse than ourforecast. Management commented that passenger yields were under severepressure from overcapacity in the market, a decline in premium class demandand weak foreign currencies.
　　2017 to remain challenging, according to managementManagement continues to expect strong competition to put pressure onpassenger yields. In 2016, there were more direct flights between MainlandChina and international destinations, and low cost carrier competitionintensified too. While the cargo market got off to a good start, managementthinks that overcapacity is expected to persist.
　　Cathay Pacific is planning to increase capacity by 4 – 5% paGiven the challenging outlook and the poor set of 2016 results, we questionwhether this is too much capacity growth. Yields have traditionally done betterwith lower capacity growth or better yet, a capacity reduction.
　　Maintain Sell recommendation; TP based on 0.7x 2017E P/BThe stock appears to have crept up since the start of the year despite thestatements by management pointing to difficult operating conditions. Wecontinue to think investors should Sell the stock. When we researched fares onthe Internet in January 2017, we found a worrying downward trend （see reportdated 17 Jan 2017 ,Cathay Pacific : Yield pressures persist; downgrading toSell）。 At 0.9x 2017E P/B versus forecasted ROEs of under 2% over 2017-2018E,we think valuation remains unattractive.