China Eastern Airlines:Adjusting model due to private A-share placement completion
RMB8.5bn raised from four non-related investors including Ctrip.
On 4 July after market close, China Eastern Airlines (CEA) made anannouncement regarding the completion of its A-share private placement. Toelaborate, CEA issued a total of 1.3bn new A-shares (subject to a 12-monthlock-up period) at RMB6.44/share to four domestic non-related investors forRMB8.5bn equity capital (Figure 1).
Among the four investors, Ctrip (CTRP.OQ, USD41.13, Buy) through ShanghaiLicheng subscribed to 465.8m new shares for a total consideration ofRMB3.0bn for 3.2% stake in CEA post the placement, which is consistent withthe strategic cooperation framework agreement signed between the twocompanies in April. Besides, CEA parent's stake in the listco is lowered to56.4% after the placement from 62.1% previously.
Deutsche Bank view – adjusting TP post placement; maintaining Buy on CEA-H.
With 1.3bn new shares issuance, we estimate that CEA's FY16E net gearingwill be reduced from 2.6x to 2.1x. We keep our FY16-18 revenue forecastsunchanged but lift our FY16-18 net profit forecasts by 1.5-3.1%, as we factor inless interest expenses due to reduced debt level. With 10.1% increase innumber of outstanding shares, FY16E EPS dilution would be about 2% whileFY16E BVPS enhancement would be about 9%.
We base our target price of HKD5.30 (RMB4.60) on 1.3x FY16E P/BV (from1.5x), which is on par with its historical average forward P/BV valuation of1.3x. We believe this is justified, given a sustainable core ROE of about 16-17%. Our new target price implies 6.4x FY16E EV/EBITDA, which is also fair, inour view.
While there is adverse EPS dilution impact to CEA due to the capital injection,we still think that this action is mildly positive to CEA given the enhancementin capital structure and book value. We therefore reiterate our positive stanceand Buy recommendation for CEA-H. We however have a Sell rating on CEA-Agiven hefty premium to H-shares. Key downside risks to CEA are a weakerthan expected traffic growth recovery and a resurgence in fuel price. Keyupside risk is the reverse.