2018 earnings guided to drop 47%–56% YoY
China Southern Airlines （CSA） has announced an estimated decreasein 2018 earnings. It estimates net profit attributable to shareholdersdropped Rmb2,774mn–Rmb3,297mn YoY in 2018 （down 47%–56%YoY）， and recurring net profit fell Rmb2,763–Rmb3,171mn YoY in2018 （down 53%–61% YoY）， in line with our forecasts and marketconsensus estimates.
Trends to watch
We expect 4Q18 loss to have stayed flat YoY or be slightly higherthan a year ago. Based on preannounced results, we estimate thecompany lost Rmb1,035mn–1,558mn in 4Q18, flat with or slightlyhigher than a year ago. We think a YoY rise in 4Q18 Brent oil pricesand a YoY drop in 4Q18 renminbi-USD FX gains were mainly to blame.
We believe oil prices and FX losses weighed on 2018 earnings.
Corporate filings show that renminbi-USD FX losses caused a roughlyRmb2,550mn YoY drop in its net profit. Excluding FX losses, weestimate its net profit declined only Rmb274mn–Rmb797mn YoY.
Increased Brent oil prices are also a drag. The company faced greatercost pressure in 2018, as the average Brent oil rose to US$72/barrel,vs. US$55/barrel in 2017.
We expect earnings to grow strongly in 2019, given that 1） oil priceand FX risks may become muted. We assume the average Brent oilprice will stay flat YoY at US$72/barrel, and RMB depreciates slightlyless against USD than in 2018. 2） ASK growth may remain strong. Weexpect the ASK to rise 12%–13%. 3） Passenger cabin renovationshould continue, and the unit non-oil cost may keep dropping.
Valuation and recommendation
The stock is trading at 9x 2019e P/E and 0.9x P/B. We trim our 2018/2019/2020 net profit forecasts by 16%/8% /7% toRmb2,832mn/6,887mn/8,997mn, as the upper end of thepreannounced net profit range misses our estimate. We maintainBUY ratings for CSA-A/-H, and TP of Rmb8.50/HK$6.60, given visibleearnings growth in 2019. Our target prices imply 15.2x/10.8x 2019eP/E, and 1.6x/1.1x 2019e P/B, and offer 18%/19% upside.
Risks
Aviation demand or fare deregulation reform disappointing; soaringoil prices; renminbi depreciating sharply against US dollar