Air China’s net profit decreased 12.7% yoy to RMB6,420 million in 2019,below market expectation but better than our expectation by 8%.
Revenue roughly stayed flat at RMB140,240 million, in which air passengerrevenue provided support, which grew by 3.4% yoy to RMB124,545 million,however, will be dragged by air cargo revenue as this year was without air itsfreight arm - Air China Cargo. Operating cost improved mainly due to savingsfrom jet fuel cost as oil price was lower in 2019 and a 50% reduction of civilaviation development fund contribution in 2H19.
Domestic routes are recovering slowly but international routes aresuffering the most. Domestic capacity is increasing week by week sincemid-Feb. 2020, but we expect capacity to increase only gradually as time isneeded for recovery and traffic control by CAAC. In contrast, internationalroutes are expected to hit bottom in March and remained low due toworsened situation of infected cases, especially in the US and Europe.
We have further cut earnings for this year as we expect recovery will beslower than expected and international routes could stay weak until3Q20. Despite a more conservative 2020, we expect air traffic in 2021 tolargely return to the level in 2019 and maintain steady growth in 2022. Wehave also reduced oil price assumptions, but the Company could only benefitmore when flights return to normal in 2021.
Under these uncertainties, we maintain investment rating as "Neutral",and cut TP to HK$5.06 on weaker valuation and reduced earningsforecast. Our TP represents 0.70x 2020 PBR and 0.65x 2021 PBR.