20140326-CIMB_SECURITIES_SNG_-More_disappointment_12页_521kb

Air China Summary

Core Content

Air China, listed as 753HK/0753.HK, reported FY13 results that fell short of expectations. The core net profit for FY13 was HK$1.71bn, a 64% decline compared to the previous year. The company's stock is currently trading at HK$4.78, with a target price of HK$4.70, reflecting a 1.7% downside. The free float is 32.0%, with 13,085 million shares outstanding.

Main Points

• Poor Revenue Performance:

  • Air China's FY13 core net profit fell by 64% to HK$1.71bn.
  • Revenue declined due to several factors:
    • The shift from business tax to VAT reduced top-line growth by 2%.
    • Ticket prices remained soft due to intense competition, with domestic and international yields down 8% and 7% year-over-year (YoY) in 2H13, respectively.
    • A 55% YoY drop in government subsidies.
    • Continued cargo market volatility, which led to a 7% YoY decline in cargo yields.

• Operating Costs and Efficiency:

  • Operating costs increased by 3% YoY in FY13, which was lower than the 9% increase in ASK (Available Seat Kilometers).
  • Fuel costs declined by 5% YoY, and maintenance and catering charges dropped despite increased flight and passenger numbers.

• Currency Weakness:

  • The depreciation of the RMB against the USD could significantly impact profitability in FY14.
  • A 1% decline in the RMB against the USD would reduce FY14 earnings estimates by 14%, and FY15 estimates by 6%.

• EPS Estimates and Target Price:

  • The analyst lowered FY14-15 EPS estimates by 10-12% due to further pricing pressure.
  • The target price was adjusted to HK$4.70 from HK$5.40, based on a 6x CY15 EV/EBITDAR multiple.

• Market Valuation:

  • Air China is trading at 0.8x FY14 P/BV, which is considered low.
  • The analyst is cautious about the stock's valuation, noting that there is no immediate catalyst for a re-rating.

Key Financial Metrics

Financial Summary

Earnings Revisions

• The analyst lowered their FY14-15 EPS estimates by 10-12% due to further pricing pressure.
• The target price for Air China was revised to HK$4.70 from HK$5.40.
• The company's core EPS for FY13 was 0.14 Rmb, down from 0.39 Rmb in FY12, a 64.1% decrease.

Revenue Drivers

• Passenger Revenue:
  • FY13 Actual: Rmb 83,510m
  • FY13 Forecast: Rmb 98,410m
  • YoY Change: -35%
• Cargo Revenue:
  • FY13 Actual: Rmb 9,833m
  • FY13 Forecast: Rmb 101,822m
  • YoY Change: -30%
• Others:
  • FY13 Actual: Rmb 5,066m
  • FY13 Forecast: Rmb 21,789m
  • YoY Change: -50%

Valuation Analysis

• EV/EBITDAR Valuation:
  • EBITDAR for CY15: Rmb 24,281m
  • EV at 6x EBITDAR: HK$146,462m
  • Proposed market cap before CX and CNAC: HK$21,733m
  • Inclusive of CX and CNAC: HK$45,070m
  • Fair value (HK$): 4.70

Sector Comparison

Conclusion

Air China's FY13 results were disappointing, with a significant drop in core net profit and revenue. The main factors contributing to this decline include the shift to VAT, weak ticket prices, reduced government subsidies, and cargo market volatility. Despite controlled operating costs, the company faces ongoing challenges due to intense competition. The analyst maintains a Hold rating, but has lowered their EPS estimates and target price, indicating continued concerns about the company's profitability. The current valuation appears low, but the analyst is not convinced there is an immediate catalyst for a re-rating.