CEA’s net profit decreased 14.8% yoy to RMB1,941 million in 1H19,below expectation. Revenue grew by 8.0% to RMB58,859 million aspassenger revenue was up by 9.2% yoy to RMB53,581 million. Passengertraffic outperformed the big three carriers in 1H19, in which RPK increased10.6% yoy in 1H19. ASK was up 10.4% yoy and overall PLF was up 0.2 pptsyoy, but domestic route PLF dropped 0.2 ppts. As a result, passenger yielddropped 1.3% yoy as dragged by decrease of 2.6% yoy from domesticroutes. Operating profit decreased 5.3% yoy as key expenses increasedslightly faster than revenue, such as jet fuel cost, aircraft maintenance andtake-off and landing charges.
We have revised down our profit forecasts by 40.9%/ 30.5%/ 33.0% in2019 to 2021, respectively. We have revised downwards on assumptions ofpassenger yield and oil price. Meanwhile, we also expect larger depreciationof RMB in 2019.
We believe that the RMB trend will continue be the key dominating factor thatdrives investment sentiment for aviation stocks. This is in spite of strongbenefits from the lowered oil price environment. We believe the currentenvironment could linger for awhile as the trade war between the US andChina is becoming more uncertain. At the same time, the decrease inpassenger yield and fast increase in other key expenses will hurt profitability.
We downgrade our investment rating to "Accumulate", and revise downour TP to HK$4.30 on lowered earnings forecast. Our TP represents 0.9x2019 PBR and 0.8x 2020 PBR. Valuation is very low across the sector withCEA 12M forward PBR currently trading at 0.8x, the furthest away from thelong-term mean among the big three carriers.