China Eastern Airlines:1H16results in line with expectation;Buy on robust traffic growth

Robust traffic growth and lower unit costs offsetting yield pressure

    China Eastern Airlines (CEA) reported 5.3% 1H16 total income YoY growth toRMB49.1bn, driven by 15.5% YoY passenger traffic (RPK) growth and partiallyoffset by passenger yield decline, especially for international routes. With a20.8% YoY drop in fuel cost on lower fuel price and just a mild 10.7% YoYincrease in ex-fuel operating cost (vs. 12.7% YoY total capacity (ATK) growth,thanks to discipline cost control such as 13.6% lower selling expense YoY), theairline recorded a 25.0% YoY increase in 1H16 operating profit to RMB7.2bn.

    However, with 1.4-time YoY jump in finance cost (due to FX loss in 1H16 amidRMB depreciation), CEA’s 1H16 reported net profit declined 9.3% YoY toRMB3.2bn. If stripping out the FX impact, CEA’s 1H16 core net profit indeedimproved by 26.7% YoY to RMB4.6bn.

    Deutsche Bank view – robust traffic growth likely to continue

    CEA’s 1H16 core net profit accounts for 50% of our FY16 earnings forecast,and we consider the results as in line with our expectations. In July, CEAregister a sound 11.8% YoY RPK growth heading into peak summer season,with a strong 34.6% international RPK growth. We remain upbeat on theairlines’ business operation. Going forward, we still expect the opening ofShanghai Disneyland to bring incremental air passenger traffic to CEA’sShanghai hub. Together with stringent cost control, e.g. via increasing directsales, we foresee further improvement in CEA’s earnings outlook. Hence, wemaintain our Buy rating on CEA-H, but a Sell rating on CEA-A due to theexcessive A-share FY16E P/BV valuation. We will provide more details after thecompany’s telephone conference on 31 August.