After US$2 billion losses, Chinese airlines are among top picks again at CICC, Citic as valuation trigger emerges
- CICC and Citic Securities recommend airline stocks, citing a return in travel demand and plunging jet fuel costs
- Air China, China Eastern and China Southern are trading below or near their book values, a key turning point in past stock prices
The stocks – among the worst hit by the coronavirus pandemic – are due for a massive rebound after dipping below their book values, a level that historically marked a key turnaround in market prices, according to China International Capital Corp (CICC) and Citic Securities.
“The worst for the airlines is over,” said Zhao Xinyue, an analyst in Shanghai at CICC said in a report, adding that the lowering of public health warning will give some traction to the rebound in domestic travel. “We expect an improvement in second-quarter profits.”
The slump in air travel this year has pushed mainland-listed Air China, China Eastern Airlines and China Southern Airlines below their asset values. The last time this happened, the stocks surged at least four folds in the following 12 months.
Air China, China Southern and China Eastern reported combined losses of 14 billion yuan (US$2 billion) last quarter, as Covid-19 lockdown measures forced local and foreign carriers to slash their capacities by more than 90 per cent.
China Southern’s price-to-book ratio is the lowest among the three at 0.99 times, while the multiple for Air China and China Easter is around 1.1 times after dipping below parity in March.
Air China has a 12-month price target of 7.86 yuan, implying a 13 per cent gain, according to the consensus of analysts compiled by Bloomberg. The upside potential is 17 per cent for China Eastern and 12 per cent for China Southern.
Economy seats sell out for business-class fares as travellers flee pandemic
Investors were given a taste of pent-up travel demand over the Labour Day holiday from May 1 to 5. Flight bookings in Beijing jumped by 15 folds on April 29, with airfares from Beijing to Hangzhou surging more than 700 per cent, according to Trip.com, China’s largest online booking platform.
“Pent-up travelling demand will probably come back in the third quarter and the acceleration may extend into 2021,” said Liu Zheng, an analyst at Citic Securities. “With strained supply and low oil prices, the three major airlines are expected to operate in high profit margins in 2021.”