2018 results in line with previous preannouncement
China Southern Airlines （CSA） announced 2018 results: revenue rose12.4% YoY to Rmb143.623bn; net profit fell 51.4% to Rmb2.895bn, inline with previous preannouncement. Eliminating impact of FX loss,net profit in 2018 dropped 12.3% YoY. In 4Q18, revenue rose 10.8%YoY to Rmb34.734bn and net profit dipped 4.8% YoY to -Rmb1.192bn（net loss narrowed 16% YoY excluding FX loss）。
2018 RPK yield largely flat. RPK yield of domestic and int’l flights rose1.9% and 5.4% YoY, and RPK yield of regional flights slipped 5.1% YoY.
Sharpest decline in non-fuel cost per ASK among Big-3 airlines.Non-fuel cost per ASK in 2018 fell nearly 4.1% YoY （Air China/CEA:-3.4%/-2.6% YoY） thanks to passenger cabin renovation which led to aRmb270mn increase in annual revenue.
Rising oil prices and FX loss weighed on overall results. Brent oilprices in 2018 rallied 31% YoY, driving up fuel cost by 35% YoY. TheRMB depreciated 5% against the US dollar （6% appreciation in 2017），and FX gain fell from Rmb1.79bn in 2017 to a loss of Rmb1.74bn in2018, leading to a Rmb3.5bn YoY decrease in pretax profit.
Trends to watch
We expect 1Q19 net profit to grow nearly 30% YoY （or 40% YoYexcluding FX loss）， assuming PLF rises 1% YoY, RPK yield edges down0.5% YoY, oil prices slip 4% YoY, the renminbi appreciates 2% againstthe US dollar and non-fuel cost drops 0.5%.
Earnings forecast
Given continued airfare liberalization and changes in our FXassumption, we raise 2019e and 2020e earnings by 6.9% and 1.2% toRmb7,361mn and Rmb9,105mn.
Valuation and recommendation
The stock is trading at 10.3x 2019e P/E and 1.1x P/B. Maintain BUY onCSA-A/-H. Considering potentially high earnings growth in 1Q19 andpossible valuation increase, we lift our CSA-A/-H TP by 9.8% and14.1% to Rmb10.4 （17x 2019e P/E, 22% upside ） and HK$8.5 （12.5xP/E, 21% upside）。 Risks: Disappointing aviation demand; surging oilprices; RMB depreciation.