CEA to benefit from improvement and internationalization of Shanghai Airport. We argue that CEA, having a dominating market position in both Shanghai airports, will benefit from improving efficiency (Pudong) upon the opening of the new satellite terminal, and the demand to accommodate more international flights (Hongqiao)。 Air traffic in the coming CNY period is expected to set another record, with CAAC looking at 8.4% yoy growth. In particular, Shanghai Pudong will handle the most international flights compared to other hubs.
We have adjusted our earnings forecasts downwards by 7.1%/ 12.8%/ 13.1% in 2019 to 2021, respectively. We have mainly adjusted 2019 ASK assumption, accounting for the current run rate. However, with faster ASK growth, we believe that competition will squeeze passenger yield further in 4Q. In 2020 onwards, we keep our capacity assumptions unchanged in which we have not included 737 Max capacity, consistent to United Airlines which scheduled 737 Max to not be in service until Jun. 2020. We also predict tougher yield environment for CEA due to faster expansion.
We maintain our investment rating as "Accumulate", but revise up our TP to HK$4.79 on upgraded valuation. Our TP represents 1.0x 2020 PBR and 0.9x 2021 PBR. We have upgraded our valuation due to expected positive sentiment towards the aviation industry as led by the stabilizing RMB environment and the coming strong air travel for CNY. We view the Company’s valuation as attractive which is still below the long-term average.Valuation is very low across the sector with CEA’s 12M forward PBR currently trading at 0.8x.