Asian airlines:Buying Chinese tourism
Sector ROEs forecasted to improve from 15.1% in 2015 to 16.5% in 2016E
Lower fuel prices have not only lowered overall costs but have helped airlines, especially the LCCs, drop ticket prices to stimulate additional demand. Recent weakening of USD is beneficial as about half of operating costs, capex and debt is in USD. The growth of outbound Chinese travelers continues to reach record levels, and we would look for ways to play this theme. We would buy airlines whose P/B looks attractive relative to ROE forecasts, or where growth is not fully priced in. Top buys are Air China, China Southern, AirAsia and AAV.
ROEs are three times higher than historical average ….
… while P/Bs for most stocks are below historical average. Lower fuel price and weaker USD are helping the sector on the cost front. On the demand side, lower ticket prices (as airlines pass some of the benefits of lower fuel prices to the customer) has helped stimulate demand. We see sector-wide average ASK growth of 7.7% in 2016E being surpassed by RPK growth of 8.1%. Despite growing 215% over the last 10 years, air travel penetration in China is still below developed countries around the world (eg it’s only one-eighth that of the US). Chinese international air travel has grown 243% over that same period.
Adjusting earnings forecasts and TP; for details refer to pages 10 - 16
We are incorporating latest results and management commentary into our forecasts and have hence changed forecasts and TP in this report.
We like Air China, China Southern, AirAsia and AAV
We like the Chinese airlines especially now than RMB depreciation fears have subsided. Underlying traffic and yield trends look strong, and we expect a good set of 1Q results. China Eastern Air had a positive profit warning. We like AirAsia because of the potential increase in Chinese tourists following Malaysia’s more relaxed visa requirements for Chinese visitors. The appreciating ringgit and better performance at associates should also help. Similarly, Chinese tourists are expected to continue driving growth for AAV. 2-year EBITDAR growth of 18% is one of the highest in the sector. While we still have positive recommendations on the Japanese airlines, they are not on our top Buy list as we worry about the impact of a stronger yen on tourist arrivals.
P/B versus ROE and adjusted EV/EBITDAR are the key valuation
Air China, China Southern and AirAsia are attractive when placed on a P/B versus ROE scatter plot. Valuations which are at book value but ROEs at least in the high teens look attractive. For AAV, we like its earnings growth momentum and believe that will drive share price.