20170103-三星证券-Airlines__NEUTRAL__Turbulent_skies_await_in_2017_21页_816kb

Sector Update Summary: Airlines

Core Content

This report provides an analysis of the Korean airline sector for January 3, 2017, highlighting the challenges faced by Korean Air, Asiana Airlines, and Jeju Air in the fourth quarter of 2016 and the outlook for 2017. The overall sector performance is downgraded to NEUTRAL due to unfavorable macroeconomic conditions, including a strong dollar, rising oil prices, and higher interest rates. Jeju Air is highlighted as the top pick within the sector, despite a lower target price, due to its financial stability and growth potential in short-haul routes.

Main Points

• 4Q16 Performance:

  • Korean Air, Asiana Airlines, and Jeju Air reported combined sales and operating profit that fell short of consensus estimates.
  • Sales declined by 0.6% y-y to KRW4.4t, while operating profit dropped by 15.5% y-y to KRW183.2b.
  • Jeju Air's sales and operating profit increased by 13% and 28% y-y respectively, but still underperformed expectations.

• Reasons for Decline:

  • Rising oil prices increased fuel costs.
  • A weakening won (KRW) led to higher forex-related costs and losses.
  • The strong dollar and higher interest rates are expected to persist into 2017, further pressuring the sector.
  • China's ban on chartered flights by Korean carriers affected demand.

• 2017 Outlook:

  • The won is forecasted to weaken further to KRW1,300/USD by year-end.
  • Oil prices are expected to rise to an average of USD55/bbl due to output cuts.
  • The sector is expected to face a more challenging environment with declining profitability and increased liquidity risks.

• Jeju Air's Position:

  • Jeju Air is recommended as a BUY despite a lower target price.
  • It benefits from short-haul route demand and has a more stable financial structure compared to its larger competitors.
  • The airline has a lower debt ratio and is less affected by forex fluctuations.

Key Information

• Target Prices:

  • Jeju Air: KRW30,000 (23.2% discount from current price)
  • Korean Air: KRW29,000 (8.4% discount)
  • Asiana Airlines: KRW4,700 (12.6% discount)

• Financial Impact of Forex Movements (2017E):

  • A 10 KRW/USD increase would cut operating profits by KRW18b for Korean Air, KRW7.3b for Asiana, and KRW2.5b for Jeju Air.

• Key Financial Metrics (2015–2018E):

  • Jeju Air's P/B is projected to decline from 2.87 to 1.80.
  • EPS is expected to decrease in 2017 compared to 2016 estimates.

Sector Overview

• Valuation Metrics:

  • Korean Air: P/E of 12.9 in 2017E, P/B of 2.15, EV/EBITDA of 1.5.
  • Asiana Airlines: P/E of 10.4, P/B of 1.0, EV/EBITDA of 1.5.
  • Jeju Air: P/E of 12.9, P/B of 2.15, EV/EBITDA of 1.5.

• Market Share and Performance:

  • Jeju Air has a stronger position in short-haul routes and a more stable financial structure.
  • The airline's load factor and yield have shown mixed performance, with some declines in yield and load factor.

Summary Table

Key Changes

Conclusion

The airline sector faces a challenging environment in 2017, with continued pressure from rising oil prices, a weaker won, and higher interest rates. Jeju Air is positioned as the top recommendation due to its financial stability, growth in short-haul routes, and resilience against macroeconomic headwinds. The overall sector is downgraded to NEUTRAL, reflecting the adverse conditions and expected declines in profitability.