3Q19 profit (excluding FX) in line with our forecast
In 1–3Q19, revenue rose 6.3% YoY to Rmb93.4bn, attributable netprofit fell 2.7% YoY to Rmb4.37bn (Rmb0.29/sh) and recurringattributable net profit rose 8% YoY to Rmb3.89bn. In 3Q19, revenueand attributable net profit grew 3.5% and 9.8% YoY. Excluding FX, weestimate 3Q19 net profit rose 5% YoY to Rmb3.4bn, largely in linewith our expectation.
3Q19 revenue significantly lagged passenger throughput. In 3Q19,passenger throughput rose 10% YoY vs. 3.5% growth in revenue. Weattribute this to YoY decline in RPK yield amid slowingmacroeconomic growth.
Airlines halved their contribution to civil aviation development fundfrom 2H19. Excluding this, we estimate 3Q19 non-fuel cost fell 4-5%YoY due possible change in accounting method for operating leases.
Trends to watch
Beijing and Shanghai airports to drive growth; valuations attractive.
CEA completed private placements in the A/H-share markets in 3Q19.
Eastern Airlines Industry Investment has completed an equityinvestment in Juneyao Airlines, deepening cooperation between thetwo airline groups; this bodes well for maintaining market order inthe Shanghai airline market. Daxing Airport began operation onSeptember 25. CEA maintains the Beijing-Shanghai flights at BeijingCapital International Airport, while rescheduling other Beijing-relatedflights to Daxing Airport. This enables CEA to share more time slots inBeijing and benefit from having two bases in Beijing and Shanghai.
CEA’s A and H shares are trading at 1.2x and 0.7x 2020e P/B, around1x standard deviation below its historical average and quiteattractive.
Financials and valuation
Maintain 2019–2020 earnings forecasts at Rmb6.693bn andRmb8.491bn. CEA A-share is trading at 1.8x and 1.6x 2019e–2020eP/B, and H-share is trading at 0.8x and 0.7x P/B. MaintainOUTPERFORM on CEA A-share and H-share with TP at Rmb7.00 (1.8xand 1.6x 2019e–2020e P/B with 33.1% upside) and HK$5.50 (1.3x and1.1x 2019/20e P/B with 40.7% upside).
Risks
Disappointing air travel demand; sharp depreciation in RMB againstUSD; sharp rise in oil prices.