Air China recorded shareholders’ loss of RMB4,805 million in 1Q20 (vs.net profit of RMB2,723 million in 1Q19). During the period, revenuedropped 47.0% yoy to RMB17,256 million as RPK decreased 51.8% yoy.Total operating cost only decreased by 19.5% yoy as fixed cost is significantbut doesn't fluctuate much, such as depreciation and salary expense. Also,AC recorded exchange loss as the RMB depreciated.
Weak fundamentals could stay for a while. The huge amount of fixed costhas been a serious barrier for airlines to return to profit. Breakeven load factorspiked in 1Q20. The return to normal days could be hard as ticket pricepressure on weak demand and social distancing restrictions will increasecost.
Air China was strong in domestic routes but was dragged byinternational routes. The easing of lockdown in Beijing will benefit AC themost. However, international routes will hurt AC more as the Company is thelargest Chinese carrier in the US and Europe. Moreover, Cathay Pacificweakness would also drag AC further.
We have revised our profit forecasts downwards in 2020 and we expectAC to make a loss of RMB1,991 million in 2020.
Nonetheless, we expect the worst times for AC have passed, and wecontinue to believe the impact from the pandemic to be short term. Long termgrowth still intact. The valuation is attractive at the moment. We upgradeinvestment rating to "Accumulate", and revise up TP to HK$5.60. Our TPrepresents 0.8x 2020 PBR and 0.7x 2021 PBR.