Spring Airlines Alert:December traffic suggesting a sequential recovery

4Q16 international traffic remaining weak; but sequential recovery in sight

    Spring Airlines recorded 17.8% YoY growth (17.7% MoM) in passenger traffic(RPK) in December. While domestic RPK registered a growth rate of 29.9%YoY (10.7% MoM), international RPK declined 1.4% YoY (but up 38.5% YoY)mainly due to weakness in Thailand and Korea routes, in our view. However,with controlled passenger capacity expansion (ASK up 17.8% YoY), overallpassenger load factor was maintained flattish YoY (improved by 0.6ppt MoM)to 89.4% in December. Domestic passenger load factor decreased 0.7ppt YoY(0.2ppt MoM) to 91.8% and international load factor was down 0.1ppt YoY(but up 3.6ppt MoM) to 84.2% despite 1.3% YoY cut (32.6% MoM expansion)in international ASK during the month.

    For 4Q16, Spring’s overall RPK grew 12.1% YoY and passenger load factorreached 88.5% (down 1.4ppt YoY) on 13.8% expansion in ASK. For domesticroutes, RPK increased 20.8% YoY and passenger load factor dipped 1.8ppt YoYto 91.8%. For international routes, RPK decreased 3.6% YoY and passengerload factor dipped 2.1ppt YoY to 81.1%.

    Deutsche Bank view: worst is over; yield to bottom out in FY17E

    We reduce our FY16-18 revenue estimates by 1.5-2.2%, mainly due to loweryield assumptions and partly lower international traffic assumptions. As aresult, we trim our FY16-18 net profit forecasts by 9.2-9.7% as we factor in theslower revenue growth and less operating leverage.

    While we acknowledge near-term share price volatility as our FY16 reportednet profit estimate is about 16% below Bloomberg consensus, we maintainBuy rating on Spring given China’s low penetration of low-cost carrier. Weexpect the airline’s load factor to stay at c.92% with yield bottoming out inFY17E. Our target price of RMB44.6 is based on 4.0x FY17E P/BV (from 4.2xFY17E P/BV), c.20% below Spring’s average P/BV of 5.3x since listing. Webelieve this is justified, given a sustainable ROE of about 18-19% in FY17-18E.Key downside risks: excessive capacity addition; fiercer-than-expectedcompetition from regional LCCs and Chinese airlines; and slower-thanexpecteddemand growth.