China Eastern Airlines:3Q16post-result conference call takeaways

JoeResearch(+65joe.

    FocusChinaPriceChinaSellSource:China Eastern Airlines (CEA) hosted a post-3Q16-results conference call on 28October. Key takeaways are as follows:- 4Q16-2017E outlook: Management remains optimistic on passenger traffic in4Q16-2017E and foresees a healthy demand-supply balance for the airlinesindustry in China in the next few years. Meanwhile, management sees goodYoY trend in 4Q16 forward booking.

    - Yield and ticket pricing: CEA recorded about 5% YoY decline in passengeryield (include fuel surcharge) in 3Q16 with 0.5% YoY and 12% YoY drop indomestic and international flight yield, respectively. Key reasons for the softyield are 1) a lower flight utilization hours in 3Q16 due to the weather conditionand the flight slot restriction at Eastern China airports (e.g. in Shanghai,Nanjing and Hangzhou); and 2) bigger yield drop rate on Europe and Australiaroutes in 3Q16 vs. 1H16. Going forward, CEA thinks domestic yield would stayflat since price liberalization for certain short haul routes can offset yieldpressure due to competition. For international yield, the airline foresee lessdownward pressure considering a potential slowdown in industry capacitygrowth.

    - Direct sales: CEA’s overall direct sales increased by 40% YoY in 3Q16,accounted for 50% of total ticket sales.

    - Capacity: CEA recorded 11.4% passenger capacity (ASK) addition in 3Q16and will expand at a slower pace of about 9-10% YoY in 4Q16E, with 8%growth for domestic routes and about 25% for international routes. Goingforward, CEA maintains its target to expand the ASK at low-teen rate in 2017E.

    - Fleet size: CEA expects to expand the total fleet size at a speed of 9-10% YoYeach year, and to reach about 820 units by 2020, among which 80-100 unitsare expected to be added to China United Airlines (CUA).

    - New Guangzhou branch: CEA recently established a Guangzhou branch tofurther penetrate into the Southern China market. The airline thinks the branchcan provide better customer service in the region while Guangzhou is a goodhub for Oceania and Southeast Asia routes.

    - Low cost carriers (LCC): The LCC transformation of the 100%-owned CUAhas made steady progression in 3Q16, with 7ppt improvement in load factorand a high direct sales ratio of 64% in 3Q16. CUA’s net profit also increased54% in 3Q16 to about RMB220m.

    - USD debt level and FX loss. CEA has maintained its USD to total debt ratio at44% as at the end of 9M16 (41% as at the end of 1H16). Meanwhile, CEArecorded a FX loss of about RMB410m in 3Q16 vs. RMB3.2bn in 3Q15.

    Deutsche Bank view – yield management key to future core profit growthGoing forward, we think that the airline’s passenger traffic outlook remainspromising given strong tourism demand. Meanwhile, we think that future coreprofit trajectory will highly depend on the airline’s capability to manage yieldand control unit cost, and we are optimistic since CEA manages to maintain ahigh passenger load factor. Therefore, we maintain Buy on CEA-H, but Sell onCEA-A due to the excessive A-share FY16E P/BV valuation.