3Q19 results in line with our forecast
Air China reported 1–3Q19 revenue rose 0.2% YoY to Rmb103.08bn,attributable net profit fell 2.5% YoY to Rmb6.76bn （Rmb0.49 pershare）， and recurring net profit grew 0.5% YoY to Rmb6.56bn. In3Q19, revenue declined 2.3% YoY to Rmb37.76bn and attributablenet profit increased 4.4% YoY to Rmb3.62bn. Excluding FX gains &losses, we estimate that net profit gained about 9% YoY to Rmb5.3bnin 3Q19, in line with our expectations.
Revenue passenger kilometer （RPK） yields fell YoY in 3Q19. RPK rose5.9% YoY while revenue dipped 2.3% YoY in 3Q19, as Air China Cargowas not consolidated into Air China’s financial statements. We thinksuppressed business travel demand weighed on RPK yields in 3Q19.
Excluding impact of Civil Aviation Development Fund, we estimateunit cost （operating cost/available seat kilometer） fell 8.5% YoY in3Q19. Excluding the impact of the Civil Aviation Development Fund,we estimate unit non-oil costs declined about 7% YoY in 3Q19 givenstabilizing aircraft movement fees, disposal of equity stake in AirChina Cargo and changing accounting method for operating leases.
Unit fuel costs likely fell in 3Q19 due to a YoY decline in oil prices.
Trends to watch
Daxing International Airport has begun operation, but Air Chinastays at Beijing Capital International Airport, supporting airfares.
Daxing Airport started operation at end-September. Air China remainsat the Capital Airport, which is closer to the city center and conduciveto building a better Beijing hub and improving profitability andoperating efficiency, in our view. Meanwhile, Air China Group hasobtained a 10% incremental time slot at Daxing Airport, and maybenefit from its passenger traffic. Air China is trading at 1x standarddeviation below the historical average, quite attractive in our opinion.
Financials and valuation
Considering air travel demand may be weaker than expected andinvestment income may be dragged by Cathay Pacific in 4Q19, wetrim 2019/2020 earnings forecast 12.1% to Rmb8.847bn and 10.9%to Rmb11.39bn. Air China A-shares and H-shares trade at 1.1/0.8x2020e P/B. We maintain OUTPERFORM, with target prices for theA-shares at Rmb11.1 （1.5x 2020e P/B, 34.7% upside）， and H-sharesat HK$9.2 （1.1x 2020e P/B, 31.8% upside）。 Risks: Disappointing airtravel demand; RMB depreciation; surging oil prices.