20140624-高盛-When_1_billion_Chinese_fly,_volume_IV__June_2014_GS_China_Aviation_trip_takeaways_43页_911kb

Summary of "When 1 Billion Chinese Fly, Volume IV; June 2014 GS China Aviation Trip Takeaways"

Core Content

China's air traffic growth remains robust, with a year-over-year increase of +13% in 2014. Despite a slower macroeconomic environment, air traffic growth has outpaced GDP growth, maintaining a multiple of 1.7X, similar to that seen in developed markets during comparable GDP levels. The growth trajectory suggests China will become a 1 billion passenger market by 2023, one year later than previously forecasted.

Main Points

• Air Traffic Growth:

  • China's domestic and international air traffic growth has remained strong, slightly exceeding the 12% estimate.
  • Load factors have stayed above 80% since 2009, driven by supply discipline and industry consolidation.
  • The top three Chinese carriers control 73% of the market, with a focus on coastal trunk routes.

• Western OEM Demand:

  • Western OEMs like Airbus and Boeing continue to benefit from China's demand, delivering 266 aircraft in 2013, which was 21% of their total production.
  • The backlog for China's aircraft orders is shrinking, and the 13th Five Year Plan in 2016 may drive renewed order activity.
  • Airbus and Boeing are expected to maintain a strong position in the wide-body and narrow-body segments, with the A330 regional variant showing promise in the Chinese market.

• Business Jet and Helicopter Market:

  • Private aviation in China is underpenetrated, with a private jet to billionaire ratio of 1.5X versus 22.1X in the US.
  • Helicopter demand is expected to rise with the opening of low-altitude airspace by 2015.

• Infrastructure Development:

  • China is expanding its airport network, increasing from 193 in 2013 to 230 by 2015.
  • Low-altitude airspace (<1,000m) is set to open nationwide by 2015, which is positive for helicopter operations.

• Indigenous Aerospace Manufacturing:

  • China is investing heavily in building its own aerospace industry, with projects like the ARJ21 regional jet and C919 narrow-body aircraft.
  • These projects face delays and certification challenges, with the wide-body and engine development still far off.
  • Supply chain capabilities are improving, but full Western general aviation experience is expected to take 5+ years.

Key Information

• Top Picks in Global Aerospace & Defense:

  • Precision Castparts (PCP): CL-Buy, Target Price: $317, Upside: 19%
  • BE Aerospace (BEAV): Buy, Target Price: $111, Upside: 17%
  • TransDigm (TDG): Buy, Target Price: $211, Upside: 22%
  • Hexcel Corp. (HXL): Buy, Target Price: $52, Upside: 26%
  • United Technologies (UTX): Buy, Target Price: $138, Upside: 17%
  • MTU Aero Engines (MTXGn.DE): CL-Buy, Target Price: €86, Upside: 25%
  • Safran (SAF.PA): CL-Buy, Target Price: €66, Upside: 34%
  • China Eastern Airlines (H) (0670.HK): CL-Buy, Target Price: HK$3.6, Upside: 49%
  • China Southern (H) (1055.HK): Buy, Target Price: HK$3.8, Upside: 62%
  • AirAsia Berhad (AIR.AKL): Buy, Target Price: $3.5, Upside: 52%
  • AviChina (2357.HK): Buy, Target Price: HK$4.24, Upside: 13%
  • Hafei Aviation (600038.SS): Buy, Target Price: ¥32.2, Upside: 25%
  • Xian Aero-Engine (600893.SS): Buy, Target Price: ¥22, Upside: -4%

• New Airline Approvals:

  • The Civil Aviation Administration of China (CAAC) has relaxed restrictions, allowing 15 new passenger airline applications.
  • Most of these new airlines are either owned by or related to the big four carriers, with only three being entirely private.
  • Most new airlines are targeting tier-2 cities, which may not significantly impact yield rates due to the focus of top carriers on coastal trunk routes.

• Aircraft Order Trends:

  • China has a large backlog for narrow-body aircraft (A320, B737) and the C919, with 151 A320s, 112 B737s, and 235 C919s on order.
  • Wide-body aircraft (Boeing 777, Airbus A330) are still in demand for both domestic and international routes.
  • The absence of regional jets has supported continued demand for A320 and B737, with Chinese airlines favoring domestic alternatives like the ARJ21.

• Fleet Composition:

  • China's current fleet includes a larger number of narrow-body aircraft compared to the US and Europe.
  • The A320 and B737 are the dominant narrow-body aircraft, with the A330 and B777 playing a significant role in wide-body operations.
  • The A380 has not been widely adopted in China, unlike in other parts of Southeast Asia.

Conclusion

China's aviation sector is expected to continue growing, driven by domestic demand, infrastructure improvements, and the expansion of low-altitude airspace. Western OEMs remain key players, with strong order backlogs and a continued focus on narrow-body and wide-body aircraft. The development of China's indigenous aerospace industry is ongoing, but will take several years to mature. The market for business jets and helicopters is also expected to grow as private aviation becomes more accessible.