CEA’s net profit increased 18.3% yoy to RMB3,192 million in 2019,roughly in line with market and our expectations. Revenue grew 5.0%yoy to RMB120,986 million on RPK improvement, which was up by 10.1%yoy. However, ASK growth was faster than RPK. Coupled with pricingpressure, passenger yield was down 3.3% yoy, which dragged revenuegrowth. Operating cost improved, with cost per ASK down by 5.2%. It wasmainly due to lower fuel cost and savings from the civil aviation developmentfund. Operating profit increased as a result. The Company resumed dividendpayout in 2019.
We expect shareholders’ profit to be RMB852 million/ RMB6,153 millionand RMB11,252 million in 2020 to 2022, respectively. We have mainlyadjusted international routes capacity assumptions and oil price assumptions.
　　Since our last report, the international situation has worsened which couldstay weak for a long time. Meanwhile, recovery in domestic routes has beennoticed but has been weak.
CEA’s current valuation is at a very low point, with 12M forward PBR at 0.6x,2 S.D. below its mean. The cheap valuation is reflecting a basket ofuncontrollable factors which largely hinge on the COVID-19 situation.
　　Demand recovery is weak without strong support from the government aspolicies on economic stimulus plans have mainly fallen on key sectors suchas automobiles, household electronics and property. While governmentsupport on aviation is mainly towards carriers, which is not effective in thelong term. Supply is also facing restrictions as to control risks of infection. Weexpect valuation has bottomed but could linger for a period of time. Demandwill resume in a slow manner. We maintain our investment rating as"Neutral", but revise down TP to HK$2.88 on lowered earnings forecastsand valuation. TP represents 0.7x 2020 PBR and 0.6x 2021 PBR.