20160419-三星证券-Unforeseen_headwinds_13页_577kb

Sector Update Summary: Airlines (2016.4.19)

Core Content Overview

This document provides a detailed analysis of the performance and outlook for major Korean airlines—Korean Air (KAL), Asiana Airlines, and Jeju Air—along with valuation insights for other airlines in the Asia-Pacific and global markets. The report highlights the challenges and opportunities in the sector, with a focus on financial performance, market dynamics, and future projections.

Main Points

Korean Air (KAL)

• 1Q 2016 Performance:

  • Sales decreased by 0.5% year-over-year (y-y) to KRW2.86t.
  • Operating profit increased by 40% y-y to KRW266.6b, resulting in an operating margin of 9.3% (up 2.7% pts y-y).
  • The cargo business continued to struggle, with FTK down 5% y-y and dollar-denominated yield declining 15% y-y.
  • Outbound passenger numbers rose 20% y-y, contributing to a 5% y-y increase in RPK.
  • Yield in USD fell by 10% y-y, indicating a strategic shift to less-competitive routes.

• Forecast Revisions (2016):

  • Sales are expected to grow by 3% to KRW11.91t.
  • Operating profit is projected to increase by 13% to KRW996.1b, with an operating margin of 8.4% (up 0.8% pts y-y).
  • Target price is set at KRW30,000, reflecting a 30% discount to the global peer average P/B of 1.7x.

• Hold Recommendation:

  • Short-term earnings uncertainty due to the impact of the Japanese earthquakes.
  • Uncertain growth potential as oil prices are unlikely to fall further.
  • Lingering risk from its subsidiary, Hanjin Shipping.

Asiana Airlines

• 1Q 2016 Performance:

  • Sales increased by 4% y-y to KRW1.47t, but operating profit dropped by 9% y-y to KRW69.7b, with a margin of 4.7% (down 0.8% pts y-y).
  • Outbound demand increased by 20% y-y, leading to a 7% y-y rise in RPK.
  • Dollar-denominated yield fell by 12% y-y due to high exposure to short-haul routes.
  • Cargo sales declined by 11% y-y, with FTK flat and dollar-denominated yield down 17% y-y.

• Forecast Revisions (2016):

  • Sales are expected to grow by 3% to KRW5.95t.
  • Operating profit is forecasted to increase by 47% y-y to KRW144.8b, with an operating margin of 2.4% (up 0.7% pts y-y).
  • Target price is set at KRW4,900, based on a 1.2x 2016 P/B.

• Hold Recommendation:

  • Japanese quakes cast uncertainty on earnings.
  • Valuation is considered demanding.

Jeju Air

• Not rated in the report.
• Target price is n/a.

Key Information

• Outbound Passenger Growth:

  • Outbound numbers rose 20% y-y in 1Q16, contributing to revenue growth.
  • However, the cargo business continued to face challenges, with FTK declining and yield falling significantly.

• Oil Price Impact:

  • Both KAL and Asiana revised their oil price assumptions downward, leading to revised profit forecasts.
  • KAL's operating profit forecast was lifted by 51% due to lower oil prices.
  • Asiana's operating profit forecast was raised by 24%.

• Valuation Insights:

  • KAL's P/B is at 1.2x, compared to the global average of 1.7x, reflecting financial-structure and subsidiary risks.
  • Asiana's P/B is at 1.2x, and the report considers its valuation demanding.

• Market Shares and Route Performance:

  • International passenger market shares are discussed, with a focus on KAL and Asiana.
  • Outbound demand is analyzed by route, showing non-Japan routes outperforming Japan routes in terms of growth.

Summary Table

Conclusion

The airline sector in Korea faces unforeseen headwinds, particularly in the cargo business, while passenger demand continues to grow. Both KAL and Asiana are expected to see improved profitability in 2016 due to lower oil prices and reduced competition. However, short-term risks and valuation concerns are cited as reasons for maintaining a HOLD recommendation. The report emphasizes the importance of load factor management and cost control for long-term sustainability.