Capacity analysis indicate no reprieve from competitive intensity
Passenger yields continue to be under pressure as Chinese airlines and LCCsadd capacity. Chinese airlines have doubled their international capacity overthe last five years as they search for more exciting growth drivers. Despite therecent pickup in cargo traffic, we still expect the company to struggle to breakeven this year as higher jet fuel prices do not help. We have cut our earningsforecasts and expect ROEs to be around 0-1% in 2017-2018. Cost cuttingmeasures are not enough to turn the tide around quickly: maintain Sell.
Capacity analysis indicate competitor capacity rising
Chinese airlines have increased their international capacity at a CAGR of 14.8%over the last five years, and we forecast 18.1% growth pa over the next twoyears. US airlines are buying equity stakes in the Chinese airlines, indicating ahigher chance of cooperation. LCC capacity into HK grew at a CAGR of 13.3%over the last two years. On the important Australian route, capacity is expectedto rise almost 9% this year according to Diio Mi.
Following a poor set of 2016 results, we are cutting 2017-2018E earnings
We have reduced our core net profit forecast for 2018 and 2019 fromHK$361m and HK$ 865m to -HK$ 63m and HK$ 449m, respectively. Netgearing has been gradually nudging upwards and we now forecast it to beover 100% by the end of 2018 because of capex commitments.
TP at low end of historical range; key risks
Our TP continues to be based on 0.7x 2017E P/B because of the low ROEs weexpect the airline to generate. We have raised our TP by 10% to HK$9.8/sharebecause of a reversal of previous fuel hedging provisions. Key upside risk:there have been some recent signs of cargo traffic revival which mightmaterially add to earnings if they strengthen.