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China Southern Airlines （CSA） released statistics about its businessoperations in February 2019: its ASK rose 10.51% YoY, RPK grew12.77% YoY, and PLF rose 1.71ppt YoY to 85.21%. Over January–February 2019, its ASK rose 13.27% YoY, RPK grew 14.60% YoY, andPLF rose 0.96ppt YoY to 82.75%.
Comments
YoY capacity growth rate in February was lower than in January. InFebruary 2019, CSA’s ASK grew about 10.5% YoY and the growth rateof its ASK was 5.5ppt lower than in January 2019. Specifically, thegrowth rate of its domestic ASK fell 5.4ppt to 10.1% and the growthrate of its international ASK fell 5.6ppt to 11.7%. We attribute this tobase effect （its ASK grew 13.3% YoY in February 2018） and theretirement of airplanes （CSA bought five airplanes in February 2019but six of its airplanes were retired from service）。
Domestic PLF rose YoY in February. CSA’s PLF rose 1.7ppt YoY toabout 85.2% in February 2019, a monthly high since August 2018. PLFof its domestic flights rose 2.2ppt YoY and 6.3ppt MoM to 85.6%.
Domestic demand remained robust over the 2019 Chinese New Yearholiday. Meanwhile, the YoY growth of CSA’s capacity slowed. Assuch, its PLF rose sharply. PLF of CSA’s international flights roseslightly, up 0.4ppt YoY to 84.8%.
Orders for B737-8 account for a relatively large share; ASK growthmay be affected in the near term. According to data from CAPA onMarch 11, CSA group now has 34 B737-8 airplanes （the airplaneshave been grounded）， accounting for about 4% of its capacity（measured by seats）。 Meanwhile, CSA has orders for 64 B737-8airplanes, equivalent to about 34% of the capacity of its total orders（measured by seats）。 If the grounding of B737-8 airplanescontinues, we believe CSA’s ASK growth may slow in the near term.
Valuation and recommendation
Stock is trading at 9.5x 2019e P/E and 1.0x 2019e P/B . We leave2018/19/20 earnings forecasts at Rmb2,832/6,887/8,997mn.
Maintain BUY ratings for CSA-A and CSA-H, and TPs of Rmb9.47 andHK$7.45 （11.8x 2019e P/E and 1.2x 2019e P/B, offering 23% upside）。
Risks
Soaring oil prices; renminbi depreciating sharply against US dollar.