中国国航(601111)

Yield: With prudent yield management, Air China recorded 4-5% YoYpassenger yield growth in 3Q17 on strong growth in certain internationalroutes (e.g. Europe and Africa), partially offset by marginal decline indomestic yield (mainly due to severe weather and competition from highspeedrailway). The airline expects the healthy yield trend to continue.

Capacity: In 3Q17, Air China recorded 7.7% passenger capacity (ASK) YoYgrowth with 1.9ppt YoY contraction in load factor. For 4Q17E, the airlineplans to expand ASK by 9-10%, with domestic ASK likely to increaseby 5-6% and international ASK to increase by 15%. Air China also doesnot see much impact by the regulator’s (CAAC) new policy to controloverall flight slot increase in some congested airports on the airline’s ASKplanning.

Cargo business: Air China’s cargo business recorded an excellent yieldin 3Q17. The airline managed to raise price significantly in Europe andAmerica routes while maintaining traffic growth. Air China plans to addmore capacity by transferring staff from the passenger business to thecargo business and they still see room for yield improvement.

Investment income: Management confirmed that the YoY slump in3Q17 JV/associate earnings contribution (down 54.7% YoY) was mainlyattributable to losses at Cathay Pacific (0293.HK, HKD11.62, Sell).Nonetheless, as Cathay Pacific has started a cost control program in 2017to save c. HKD4bn in 3 years, and also has an extra plan to trim humanresource expenses, Air China believes that Cathay Pacific should be on itsway to an earnings recovery.

USD debt: Air China recorded FX gain of RMB2.2bn in 9M17 vs. FX loss ofRMB2.2bn in 9M16 due to RMB appreciation against USD year-to-date.The airline has reduced its USD debt ratio to 40% at the end of September2017 from 49% at the end of 2016 by replacing USD debt with RMB debtand repaying USD debt in advance.

Deutsche Bank’s view – solid core business partially offset by Cathay weakness

We think that Air China’s 3Q17 results, with decent yield growth and controlledcost increases, well demonstrate its fundamental strength vs. local peers. Thatbeing said, we remain concerned that the airline’s earnings upside will likely becapped by Cathay Pacific’s weakness in the near future. Therefore, we maintaina Hold on Air China H shares. Meanwhile, we have a Sell rating on its A shares,given their significant valuation premium over the H-shares.Page