What's new
Air China’s revenue passenger kilometer （RPK） and available seatkilometer （ASK） rose 5.0% and 4.9% YoY in September, and passengerload factor （PLF） climbed 0.1ppt YoY to 80.6%. RPK and ASK rose 6.2%and 5.6% YoY in 9M19, and PLF grew 0.5ppt to 81.4%.
Comments
Capacity growth further slowed in September due to deceleratinginternational capacity expansion. ASK grew 4.9% YoY in September（vs. 5.6% in August and 6.3% in September 2018）， due to slowergrowth in international capacity expansion. International ASK grew1.9% YoY in September （vs. 2.9% in August and 11.7% in September2018）。 ASK rose 5.4% YoY in 3Q19 （vs. 9.2% in July–September 2018）。
Overall PLF rose slightly YoY, but YoY decline in regional PLFaccelerated MoM. In September, PLF rose 0.1ppt YoY to 80.6%, butregional PLF （Hong Kong, Macao and Taiwan） fell 10.3ppt to 68.6%.
Overall PLF grew 0.4ppt YoY to 82.1% in July–September. DomesticPLF slightly fell 0.2ppt YoY due to weak demand. International PLFrose 1.8ppt YoY thanks to improving demand and supply structure.
Regional PLF declined 7ppt YoY due to softening demand.
We think forex risk may ease and Air China’s valuation is attractive.
CICC’s macro team believes progress has been made in US-Chinatrade negotiations, and the renminbi may appreciate if the two sidessuspend planned new tariffs or even partially remove tariffs imposedin the past. Given operating leasing is now consolidated into AirChina’s financial statements, we estimate a 1% appreciation in therenminbi versus the US dollar would enhance Air China’s full-year netprofit by Rmb480mn （accounting for about 5% of expected 2019 netprofit）。 We think a rebounding renminbi exchange rate would boost4Q19 earnings. Air China A/H’s P/B valuation is close to 1x standarddeviation below its historical average. We expect valuation to recover.
Valuation and recommendation
Air China H-share is trading at 0.9x/0.8x 2019e/2020e P/B. Wemaintain our 2019 and 2020 earnings forecasts at Rmb10.066bn andRmb12.788bn. Maintain OUTPERFORM for Air China A- and H-share,with target prices of Rmb11.10 （1.6x P/B with 31% upside） andHK$9.20 （1.2x P/B with 29% upside）。
Risks
Air travel demand disappoints; renminbi depreciates versus US dollar.