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Cathay Pacific (293 HK) Summary

Core Content and Key Information

Cathay Pacific (293 HK) is an airline based in Hong Kong, currently trading at HKD15.60 with a target price of HKD13.30, reflecting a -15% discount. The company's market capitalization is HKD61.1B, and its average daily traffic value (ADTV) is USD7.3M. The stock is currently rated as SELL with no change in recommendation.

Main Points

Management Outlook

• Management claims the passenger business and associates are improving, but cargo remains weak.
• Cathay is adding 10 aircraft in 2014, a fivefold increase from 2013, which is seen as excessive and potentially detrimental to load factors and yields.

Share Price Performance

• The share price has surged since November 2013 but is expected to correct following the 2H13 results on March 14, 2014.
• The stock has been trading beyond its historic valuation band on both a PER and adjusted EV/EBITDAR basis relative to Asia Pacific airline peers.

Operating Statistics

• Passenger load factor increased by 2.1ppt YoY to 82.2% in 2013, but this was achieved through a 1.8% reduction in capacity (ASK), indicating a shift to maintaining load rather than growing.
• Cargo load factor declined by 2.4ppt YoY to 61.8%, the worst performance since 2001, signaling a secular decline in the cargo market.

Yield Outlook

• Passenger yields have shown steady growth since 2010, but are expected to rise only slightly in 2014.
• Cargo yields are expected to decline by 1-2% in 2014, and the cargo market constitutes 23-25% of Cathay's revenue, which will act as a drag on earnings.

Unit Cost and Capacity

• Cathay's unit cost is forecasted to decline slightly in 2014 due to fleet rejuvenation and fuel price assumptions of USD125/bbl.
• The company is expected to experience a 6.3% capacity growth in 2014, which is considered aggressive and may lead to reduced load factors.

Valuation

• The fair value is set at HKD13.30, based on a 14.9x FY14F PER, in line with Asia Pacific airline peers.
• Cathay is overvalued compared to its historical norms and peers, with a 15% potential downside.

Earnings Forecasts

• Cathay's FY13 core net profit is estimated at HKD2,455m, a +168% YoY growth.
• FY14 core net profit is forecasted at HKD3,507m, a +42.9% YoY growth, which is 23% below the earlier forecast.
• The company's earnings are highly sensitive to yield changes, with a 1% yield increase leading to a 52.3% EPS growth.

Financial Highlights

• Revenue: Expected to grow from HKD99,376m in 2012A to HKD108,845m in 2014F.
• EBITDAR: Projected to increase from HKD12,099m in 2012A to HKD15,399m in 2014F.
• Net Profit: Expected to rise from HKD916m in 2012A to HKD3,507m in 2014F.
• Core EPS: Projected to increase from HKD0.23 in 2012A to HKD0.89 in 2014F.
• Dividend Yield: Expected to rise from 0.5% in 2012A to 2.2% in 2014F.

Balance Sheet and Cash Flow

• Total Assets: Expected to increase from HKD155,010m in 2012A to HKD178,192m in 2015F.
• Net Debt/Cash: Projected to decrease from HKD19,005m in 2013F to HKD14,475.8m in 2015F.
• Free Cash Flow: Expected to turn positive in 2015F at HKD8,037.1m.

Ratios and Metrics

• ROE: Expected to rise from 1.6% in 2012A to 9.4% in 2015F.
• ROA: Projected to increase from 0.6% in 2012A to 3.4% in 2015F.
• Debt/EBITDA: Expected to decrease from 4.9x in 2012A to 4.0x in 2015F.
• Net Gearing: Projected to decrease from 0.7 in 2013F to 0.5 in 2015F.

Conclusion

Despite management's optimistic outlook, Cathay Pacific is viewed as overvalued due to its aggressive capacity expansion and weak cargo performance. The stock is expected to correct post-2H13 results, and the fair value is set at HKD13.30, implying a 15% potential downside. The company's earnings are highly sensitive to yield changes and are expected to recover slowly, with limited visibility due to the volatile nature of the airline industry.