What's new
China Southern Air （CSA） released September operating data: ASKrose 9.27% YoY, RPK grew 11.44% YoY, and PLF edged up 1.6ppt YoY to82.09%. Over January–September, RPK grew 12.83% YoY, ASK rose12.12% YoY, and PLF rose 0.52ppt YoY to 82.78%.
Comments
CSA’s capacity growth slows in September, but faster than AirChina’s and CEA’s. CSA’s ASK rose 9.27% YoY in September, 4.5pptslower than in August, but its capacity grew faster YoY than AirChina’s and CEA’s. The rise of domestic ASK （up 9.33% YoY） was onpar with that of international ASK （up 8.93% YoY）。
CSA’s PLF rises more YoY than Air China’s and CEA’s, suggesting goodsupply and demand conditions. CSA’s PLF rose 1.6ppt YoY inSeptember, faster than Air China’s and CEA’s. With the winter-springaviation season approaching, we expect deregulation-driven airfarehikes to boost the firm’s earnings.
Private placement completed; Spring Airlines subscribes. CSArecently announced its A- and H-share private offering was completedon September 27. The firm issued around 12.267bn shares, boostingits share capital by 21.6%. Spring Airlines invested 846mn in its ownfunds to subscribe for the A-share placement, accounting for 1.63%of A-share capital post-placement. Both firms should benefit in thelong term if they reach an agreement on channel construction, airroute networks and low-cost airline business models.
Valuation and recommendation
We maintain our 2018 and 2019 earnings forecasts for CSA atRmb5,332mn and Rmb9,236mn and BUY on CSA-A and -H . CSA-H istrading at 4.5x 2019e P/E and 0.6x 2019e P/B. Given the increase inshare capital after the private placement, we lower our 2018 and2019 EPS estimates each by 17.8% to Rmb0.43 and Rmb0.75, and ourA- and H-share target prices 18.1% and 17.4% to Rmb7.80 andHK$6.20, equivalent to 10.4x and 7.3x 2019e P/E and 1.3x and 0.9x2019e P/B and offering 34% and 49% upside.
Risks
Disappointing airfare deregulation; significant rise in oil prices; sharprenminbi depreciation against US dollar