20141030-申万宏源研究_香港_-中国东方航空股份-00670.HK-弱油价和强汇率的受益者_11页_799kb

Summary of China Eastern Airline (670.HK) Investment Highlights

Core Content

This report provides an analysis of China Eastern Airline's financial performance and investment potential for the period 2014-2016. It outlines key benefits that the company is expected to derive from external factors and highlights the analyst's upgraded investment rating.

Main Points

• Financial Performance in 3Q14:
  China Eastern reported a revenue of Rmb26.14bn for the third quarter of 2014, showing a 2% year-over-year (YoY) increase. However, operating costs rose by 6.57% YoY to Rmb24.83bn, leading to a 43.25% drop in operating profit to Rmb1.35bn. Net profit also declined by 26.69% YoY to Rmb2.04bn.

• Benefits from Weak Fuel Prices:
  Jet fuel consumption is the largest cost item for domestic airlines, accounting for 30-40% of operating costs. Fuel prices are closely correlated with oil prices (R² = 0.90). A weak fuel price environment is expected to reduce operating costs and improve profitability for domestic airlines.

• Benefits from Strong RMB:
  The Chinese currency has appreciated against the US dollar since mid-2005. A reversal in 1H14 led to significant exchange losses and depressed stock valuations. SWS Macro expects the RMB to appreciate by ~2% against the USD from mid-2014 to 2015, which could boost domestic airline stocks.

• Benefits from China Disneyland:
  Shanghai Disneyland, the first in mainland China, is scheduled to open at the end of 2015 and is projected to attract 10-20 million visitors annually. China Eastern, with over 40% share of routes in or out of Shanghai airports, is expected to benefit significantly from the increased tourism and related demand for air travel.

• Benefits from Stock Connect:
  China Eastern's H-shares trade at a 35% discount to A-shares, the largest in the sector. The opening of the Shanghai-Hong Kong Stock Connect is expected to narrow this discount, improving investor confidence and stock valuation.

• Investment Rating Upgrade:
  The analyst has upgraded the rating from "Outperform" to "Trading BUY." The revised target price of HK$3.48 represents a 24% upside, based on a 1.2x 2014 price-to-book (PB) ratio.

Key Financial Information

• EPS Forecasts:

  • 2014E: Rmb0.09
  • 2015E: Rmb0.17
  • 2016E: Rmb0.23

• Valuation Ratios:

  • P/B: 0.96 (2014E), 0.89 (2015E), 0.82 (2016E)
  • EV/EBITDA: 72.34 (2014E), 12.42 (2015E), 9.45 (2016E)

• Operating Metrics:

  • EBITDA margin: 1.28% (2014E), 6.92% (2015E), 8.18% (2016E)
  • ROE: 3.84% (2014E), 6.78% (2015E), 8.28% (2016E)

Conclusion

Despite facing challenges such as economic slowdown, high-speed rail competition, and weak demand, China Eastern is positioned to benefit from weak fuel prices, a strong RMB, the opening of Shanghai Disneyland, and the implementation of the Stock Connect mechanism. These factors are expected to improve the company's profitability and stock valuation. The analyst's upgrade to "Trading BUY" reflects a positive outlook on the company's future performance, with a target price offering 24% upside potential.

Investment Rating Definitions

• Trading BUY: Expected to generate more than 20% upside over a 6-month period.
• BUY: Expected to generate more than 20% upside over a 12-month period.
• Outperform: Expected to generate between 10-20% upside over a 12-month period.
• Hold: Expected to generate between 10% downside to 10% upside over a 12-month period.
• Underperform: Expected to generate between 10-20% downside over a 12-month period.
• SELL: Expected to generate more than 20% downside over a 12-month period.

Disclaimer

This report is intended solely for the use of SWS Research Co., Ltd's clients. It is not an invitation to buy or sell securities and does not guarantee accuracy or completeness. The views expressed are the personal opinions of the analyst and not an official recommendation. Investors are advised to consult independent financial advisors and consider their own financial situations before making investment decisions.