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In January, Air China’s revenue passenger kilometer （RPK） fell 2.9%, available seat kilometer （ASK） rose 1.2%, and passenger load factor （PLF） dropped 3.3ppt YoY to 76.6%.
Comments
YoY capacity growth decelerating to slowest among the Big-3 in January amid novel coronavirus pneumonia （NCP）。 Air China’s ASK rose 1.2% YoY in January （vs. +4.6% in December 2019 and +9.4% in January 2019）， the slowest among the Big-3 airlines. Air China’s domestic and international capacity saw YoY growth of 1.7% and 1.3% （vs. +5.7% and +4.2% in December）， while its regional capacity （i.e. Hong Kong SAR, Macao SAR and Taiwan） fell 7.9% YoY.
PLF decline smallest among the Big-3 in January; short-term demand still pressured. Air China’s January PLF fell 3.3ppt YoY to 76.6%, the lowest since December 2015 but the YoY decline was the slowest among the Big-3. Domestic, international and regional PLF all declined. Notably, regional PLF recorded the sharpest drop of 11.4ppt YoY to 70.5%, continuing the downtrend since June 2019.
We foresee heavier pressure from NCP in February data, given high base in February 2019 from Chinese New Year travel season. Data from the Civil Aviation Administration of China shows sector daily passenger volume has declined over 75% YoY since February 1 （based on the lunar calendar）。 However, we believe headwinds from the NCP are short-term, considering the experience from the SARS outbreak in 2003. We think valuation is low and suggest bottom-fishing for long-term investors. Air China A-share is trading at 1.2x and 1.1x 2019e and 2020e P/B, and H-share at 0.9x and 0.8x P/B （not considering NCP’s impact on earnings for 2020 BPS）。
Valuation and recommendation
Air China A/H are trading at 1.1x/0.8x 2020e P/B. Given the ongoing NCP outbreak, we maintain our 2019, 2020, and 2021 earnings forecasts at Rmb7.738bn, Rmb9.733bn, and Rmb9.427bn. We maintain OUTPERFORM on Air China A-/H-share with a TP at Rmb11.10 （1.5x/1.4x 2020e/2021e P/B, 38.6% upside） and HK$9.20 （1.1x/1.0x 2020e/2021e P/B, 35.5% upside）。
Risks
Disappointing air travel demand; unexpected spread of NCP; renminbi depreciation against US dollar; rising oil prices.