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Shanghai Disneyland could send China’s airline shares into lift-off mode, says Citi

Airline shares could be about to celebrate a golden era of Chinese tourism

PUBLISHED : Thursday, 03 December, 2015, 4:24pm
UPDATED : Thursday, 03 December, 2015, 4:24pm

It may be time to jump aboard Chinese airline stocks.

Analysts at Citi are forecasting better conditions ahead for the sector, citing the debut of Shanghai Disneyland, plummeting fuel prices and the awakening of the travel bug among millions of newly -affluent Chinese as positive factors that are beginning to line up in its favour.

The rosier outlook, however, contrasts with what’s been for much of its recent history a hazardous flight path for the sector. The stock prices of major Chinese airlines are prone to sudden drops that can then take years to recover, reflecting the sector’s vulnerability to shocks, from surging fuel prices, security concerns in the wake of global terror attacks, or public health scares such as Sars.

Even Citi analysts labelled the sector “high risk” underscoring their own view that the sector’s fortunes tend to be buffeted by all sorts of problems. All too often, the outcome has been weak or sideways-moving share prices that are seemingly out of touch with the upbeat fundamentals of China’s domestic tourism.

Still, the tendency for airline shares to underperform the general stock index of Chinese companies over time could be about to change.

The nation’s big three airlines – China Eastern Airlines, Air China and China Southern Airlines – are poised to see higher profits and valuations. Industry supply is estimated to increase by approximately 9.5 per cent, while demand is slated to rise by about 13 per cent as international traffic remains strong, according to Citi.

China Eastern Airlines, the carrier based in Shanghai, is a case in point. Revenue next year could jump by 1 to 1.5 billion yuan thanks to an expected surge in tourist visits following the debut of the Shanghai Disneyland, the US$5.4 billion theme park and resort set to open next spring. Citi said passenger growth, expected to balloon by up to 1.5 million, should help the airline to sell more tickets and improve yields.

“We are positive on the 2016 outlook for China’s aviation industry given continuously improving supply-demand conditions,” Citi said. “Given its home carrier advantage, we expect (China Eastern Airlines) will be a key beneficiary upon the opening of Shanghai Disneyland.”

Air China, which derives 32 per cent of passenger revenue from non-China regions, is forecast to increase its capacity by 8.5 per cent next year as it expands its fleet - while growth in China Southern Airlines has started to decline.

“With the lowest operating margin in the sector, CSA’s earnings are most sensitive to an industry recovery,” Citi said.

Risks to the sector include higher fuel prices, a slowing global economy, and a faster-than-expected depreciation of the yuan. Another concern is the growing competition poised by China’s high-speed rail network as an alternative to air travel, Citi said.

Meanwhile, China’s tourism industry is expected to continue to see growth next year. Increases in disposable income and relaxation of overseas visa policies will help offset the impact of yuan devaluation, Deutsche Bank analysts said.

“We believe that now is a good entry point to China tourism and leisure stocks with good fundamentals,” Deutsche Bank analysts said.

China’s domestic travel market grew on year 14.5 per cent to $1.65 trillion yuan for the period ending first half 2015, according to government data. The total number of Chinese tourists topped 2 billion, an increase of 10 per cent over the prior year, the report said.

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