20170607-三星证券-2Q_preview__Strong_results_in_weak_season_21页_781kb

Sector Update Summary

Core Content

This document provides a sector update for Korean airlines, focusing on the performance and outlook of Jeju Air, Korean Air, and Asiana Airlines for the second quarter of 2017 (2Q17E). It also includes a broader industry outlook, valuation metrics, and key financial forecasts.

Main Points

Industry Outlook

• The sector is upgraded to OVERWEIGHT, reflecting a revised forecast for the KRW/USD exchange rate and a favorable external environment.
• Strong results are expected despite a traditionally weak season, with sales and operating profit for the three airlines likely to rise 8.4% and 29.8% y-y, respectively.
• Passenger demand is robust on non-China routes, especially Japan and Southeast Asia, helping to offset the impact of falling demand on China routes.
• Cargo business is showing improvement with volume growth and yield increases, driven by strong IT demand.

Key Drivers

• Cost reduction and economies of scale are contributing to improved margins.
• Oil prices have weakened, with WTI dropping 11.3% ytd to USD47.7/bbl, easing the cost burden.
• The won has appreciated 7.2% ytd against the dollar, improving the forex situation.
• Political tensions with China are easing, with the resumption of visa services and increased flight capacity to Weihai.

Key Information for Each Airline

Jeju Air (089590 KS)

• Target Price: KRW44,000 (up 20.5% from current price)
• Recommendation: BUY
• 2Q17E Sales: KRW208.9b (up 29% y-y)
• 2Q17E Operating Profit: KRW11.0b (up 1,623.8% y-y)
• 2Q17E Net Profit: KRW11.3b (up 145.2% y-y)
• Operating Margin: 5.2% (up from 2.7%)
• Net Margin: 5.4% (up from 2.9%)
• Fleet Expansion: Expected to reach 32 aircraft by year-end, which should improve profitability.
• Earnings Growth: Strong y-y growth expected, aided by the base effect of high maintenance and labor costs in 2016.

Korean Air (003490 KS)

• Target Price: KRW41,000 (up 13.6% from current price)
• Recommendation: BUY
• 2Q17E Sales: KRW2,941.4b (up 4.4% y-y)
• 2Q17E Operating Profit: KRW170.8b (up 7.3% y-y)
• 2Q17E Net Profit: KRW-5.0b (up from KRW-92.0b)
• Operating Margin: 5.8% (up from 4.8%)
• Net Margin: -0.2% (up from -3.2%)

Asiana Airlines (020560 KS)

• Target Price: KRW6,000 (up 13% from current price)
• Recommendation: HOLD
• 2Q17E Sales: KRW1,453.2b (up 14.7% y-y)
• 2Q17E Operating Profit: KRW33.3b (up 465.7% y-y)
• 2Q17E Net Profit: KRW-11.1b (up from KRW-28.8b)
• Operating Margin: 2.3% (up from 1.3%)
• Net Margin: -0.8% (up from -2.0%)

Valuation Overview

Key Financial Assumptions

• Exchange Rate: Revised to KRW1,150/USD from KRW1,200/USD, which should positively impact earnings.
• Jet Fuel Price: Expected to rise to USD59/bbl for 2Q17E, up 9% y-y.
• Fuel Costs: Up 34% y-y due to increased flight numbers and higher jet fuel prices.
• Maintenance Costs: Expected to increase only 3% y-y, thanks to economies of scale and a high base from prior costs.
• Passenger Growth: Strong outbound demand to Japan and Southeast Asia is driving RPK growth and load factor improvement.

Outlook and Recommendations

• Jeju Air is highlighted as the top pick in the sector, with a target price of KRW44,000 and BUY recommendation.
• The external environment is improving, with favorable forex and lower oil prices.
• The sector is expected to benefit from economies of scale, fleet expansion, and strong demand on non-China routes.
• Accumulating Jeju Air is recommended due to robust earnings growth and favorable valuation.