1H19 results slightly below expectation; net profit excl. FX in line
CSA’s 1H19 revenue rose 8% YoY to Rmb72.94bn, while attributablenet profit fell 19.7% to Rmb1.68bn or Rmb0.14/sh. Excluding FXimpact, net profit fell 23% YoY, in line with our expectation. 2Q19revenue rose 5.5% YoY, while attributable net profit fell 135.6% YoY.
Excluding FX impact, we estimate 2Q19 net profit fell 92% YoY.
Under new accounting method for leasing, CSA’s interest-bearingUSD-denominated liabilities grew significantly and net profitbecame more sensitive to FX changes. As of end-1H19, USD IBLbalance reached Rmb77.74bn vs. Rmb33.677bn at end-2018. A 1%appreciation in RMB against USD would increase net profit byRmb517mn vs. Rmb195mn at end-2018. FX sensitivity increased 2.7x.
1H19 RPK yields fell 1.65ppt YoY with domestic and internationalyields down 1.52ppt and 0.79ppt. We attribute the decline to weakdomestic demand and rapid capacity expansion for low-yieldinternational flights （1H19 international ASK up 12.9% YoY vs. overallASK growth of 10.1%）。
Cost control effective and 1H19 cost per ASK down 2.7ppt YoY. 1H19unit fuel cost fell 3.4% and non-fuel cost declined 2.3% YoY. Weestimate that improved cabin layout diluted unit cost.
Trends to watch
Valuation at historical lows; multiple positives in 2H19. CSA’s12-month forward P/E and P/B are close to 1x standard deviationbelow the historical average. We expect oil price to decline YoY in3Q19, boosting earnings. In addition, halving payment to civil aviationdevelopment fund should lower non-fuel cost and we estimatefull-year earnings impact at Rmb550mn.
Financials and valuation
CSA H-share is trading at 0.7x/0.6x 2019e/2020e P/B. Given lowerthan expected 1H19 earnings, we trim 2019/2020 earnings forecast9.3%/6.1% to Rmb6,496mn/9,075mn. Maintain OUTPERFORM onCSA A-share and H-share with TP at Rmb9.1 （1.4x 2020e P/B with33.4% upside） and HK$6.5 （0.9x 2020e P/B with 42.2% upside）。
Risks
Disappointing air travel demand; sharp renminbi depreciation and/oroil price rises.