Spring Airlines Alert:FY16missed on surging costs amid aggressive international expansion

Loss making 4Q16 leading to full-year earnings miss

    Spring reported FY16 revenue growth of 4.1% YoY to RMB8.4bn on the back of 11.7% RPK traffic growth, but partially offset by 6.8% passenger yield decline. Despite a 3.1% YoY drop in fuel cost, it recorded a 46.7% YoY drop in operating profit to RMB626.2m on 20.9% YoY increase in ex-fuel operating cost (vs. 13.1% YoY ASK growth). Together with a 59.5% increase in net finance cost due to 1) 1.1x surge in interest expense (enlarged loan balance for aircraft purchase and prepayment) and 2) FX loss of RMB93.3m (Yen appreciation against RMB), the airline’s FY16 net profit declined by 28.4% YoY to RMB950.5m, which is 21% below our estimate and 25% below consensus. On a quarterly basis, 4Q16 recorded a net loss of RMB219.1m (4Q15: RMB125.5m profit) on 24.3% YoY expansion in operating expenses amid weak international passenger yield.

    Deutsche Bank view - worst is behind us; yield should bottom out in FY17E

    We raise our FY17-18E revenue by 3.5-3.8% to factor in higher revenue growth. However, we trim our FY17-18E net profit by 14.3-14.4% due mainly to higher cost and lower margin assumptions. While we acknowledge near-term share price volatility given FY16 earnings miss, we maintain Buy as we expect the airline’s yield to bottom out in FY17 with fuel price staying low and load factor staying at c.92%. Our new TP is based on 4.0x FY17E P/BV (unchanged), c.20% below Spring’s average P/BV of 5.3x since listing. We believe this is justified vs. sustainable ROE of about 16-17%. Key downside risks: excessive capacity addition; competition from regional LCCs and Chinese airlines; and slower-than-expected demand growth.