20170406-三星证券-Solid_demand_to_have_spurred_1Q_improvements_22页_831kb

Sector Update Summary

Core Content

This document provides an analysis of the Korean airline sector, focusing on three major carriers: Jeju Air, Asiana Airlines, and Korean Air (KAL). It outlines the performance of these airlines in the first quarter of 2017, their financial forecasts, and the analyst's recommendations based on various factors such as fuel costs, forex rates, and international demand.

Main Points

1. 1Q 2017 Performance

• Combined Sales: Up 2% y-y to KRW4.613 trillion.
• Combined Operating Profit: Down 43% y-y to KRW230.8 billion due to a 50% y-y increase in jet fuel costs.
• Margin Decline: Operating margin fell 3.9% pts y-y to 5%, pre-tax margin down 1.9% pts y-y to 4.5%, and net margin down 1.5% pts y-y to 3.5%.

2. Key Drivers of Performance

• Flag Carriers: Benefited from cargo volume increases and yield improvements.
• LCCs (Low-Cost Carriers): Jeju Air saw international passenger revenue growth due to strong outbound demand to Japan and Southeast Asia.
• Domestic Carriers: Eased competition by raising in-country airfares.

3. China Risk

• China increased restrictions on Korean firms, including travel bans.
• Despite this, passenger demand remained robust, especially on Japan and Southeast Asia routes.
• Outbound Chinese traffic to Japan and Taiwan declined by 25% and 16% respectively after political spats with China.
• THAAD-related concerns are expected to impact inbound traffic, but outbound demand remains solid.

4. Target Price Revisions

• Jeju Air: Target price revised up to KRW35,000 (up 14.6%).
• Asiana Airlines: Target price revised up to KRW5,000 (up 9.9%).
• Korean Air: Target price revised up to KRW36,000 (up 16.3%).

Key Financials and Forecasts

1. Jeju Air

• 1Q Sales: KRW216.6 billion (up 25.1% y-y).
• 1Q Operating Profit: KRW21.1 billion (up 35.5% y-y).
• EPS (2017E): KRW2,660 (up 44.2% y-y).
• Recommendation: BUY, with a 12-month target price of KRW35,000.
• Reasons for Buy Recommendation:
  • Strong international passenger growth.
  • Favorable industry conditions.
  • Fleet expansion expected to increase market share and achieve economies of scale.
  • Less exposure to China flights compared to full-service carriers.

2. Asiana Airlines

• 1Q Sales: KRW1,439.6 billion (down 2.5% y-y).
• 1Q Operating Profit: KRW19.4 billion (down 69.4% y-y).
• EPS (2017E): KRW1,021 (up 129.7% y-y).
• Recommendation: HOLD.
• Target Price: KRW5,000.

3. Korean Air (KAL)

• 1Q Sales: KRW2,957.2 billion (up 3.1% y-y).
• 1Q Operating Profit: KRW190.3 billion (down 41.1% y-y).
• EPS (2017E): KRW94.1 (up 153.8% y-y).
• Recommendation: HOLD.
• Target Price: KRW36,000.

Sector Outlook

• Sector Rating: NEUTRAL.
• Full-Year Expectations:
  • Inbound traffic growth will be impacted by MERS and THAAD-related issues.
  • Outbound demand is expected to remain solid due to favorable conditions.
  • Oil price hikes are anticipated due to base effect, despite recent stability.

Valuation Metrics

Key Assumptions and Forecasts

• Jet Fuel Prices: Increased 50.4% y-y to USD64.7/bbl.
• Forex Rate: Avg KRW1,152/USD, slightly better than expected.
• Outbound Passenger Growth: Expected to continue, with strong performance on Japan and Southeast Asia routes.
• Load Factor: Improved for Jeju Air, expected to rise further in low seasons.
• Fleet Expansion: Jeju Air plans to add six aircraft, aiding market share and economies of scale.

Summary of Key Information

• Jeju Air is the top pick with a BUY recommendation and a revised target price.
• Asiana Airlines and Korean Air are rated HOLD.
• Fuel costs and forex rate fluctuations are key factors affecting profitability.
• Outbound demand remains strong, especially to Japan and Southeast Asia.
• THAAD-related concerns and MERS impact are expected to affect inbound traffic.
• Valuation metrics show mixed performance, with Jeju Air being more attractive.

Charts and Data Sources

• Forex Rate Movement: Source: Bloomberg.
• Oil Prices: Source: Bloomberg.
• Outbound Chinese Traffic: Source: CEIC.
• International Passenger Growth: Source: IIA, KAC.
• Data Tables: Source: Company data and Samsung Securities estimates.