Mainland airline stocks tumble
Shares of mainland airlines tumbled by up to 11 per cent yesterday amid expectations of a softening in yuan appreciation.
Air China dropped 8.73 per cent to HK$5.96 while China Eastern Airlines Corp closed 11.11 per cent lower at HK$2.64. China Southern Airlines fell 10.24 per cent to HK$3.77.
An unexpected strengthening recently of the US dollar against Asian currencies, including the yuan, has sent mainland carriers into a tailspin.
The airlines are traded as a proxy for yuan appreciation because they stand to make exchange gains when the yuan rises against the dollar by saving on dollar-denominated debt. As a result, stock prices of Chinese carriers are strongly correlated to expectations regarding the yuan.
The current 12-month forward yuan per dollar has been rising over the past month, indicating the market is expecting yuan appreciation to slow.
Slowing traffic has also contributed to the drop in stock prices. China Southern saw its overall passenger traffic grow 6 per cent year on year last month, compared with 10.8 per cent in July and 10.8 per cent in the second quarter.
Traffic growth for Air China and China Eastern also slowed to single digits last month.
Analyst believe air traffic on the mainland continued to be weak in the first half of this month.
'We believe year-on-year traffic growth may recover in October due to a lower base in the same period last year. However, if such recovery is not seen, it may be a red flag for traffic growth into 2012,' said a Nomura report this week.
Cathay Pacific Airways fell 3.97 per cent to close at HK$12.58 yesterday. The stock has lost 21 per cent this month.
'Cathay has been returning to the trough in 2008 in terms of price-book value,' said Jim Wong, a transport analyst at Nomura. 'It is at a very low level, as its mainland peers are still trading well above the trough.'
The current price-book ratio for Cathay is 0.87. It was 0.81 at the height of the financial crisis in 2008.
In the short term, Cathay's share price might continue to be affected by the market environment in the United States and Europe, as the airline was one of the biggest cargo carriers in Asia, with about 30 per cent of its revenue generated from cargo traffic, Wong said.
'Still, for investors with a more medium-term time horizon, we would recommend buying Cathay.'