The latest report from HSBC analysts expects airlines in Mainland China and in Hong Kong to turn profitable from 2023, despite disruptions to domestic travel as international travel resumes. More losses are forecast losses for this year but double-digit ROE is expected in 2023e, supported by strong passenger yields.
HSBC has downgraded Air China, China Eastern A shares to reduce, and China Southern to hold.
“Don't be confused by the downgrades - we are still bullish, albeit longer term. Our downgrades of the A-shares of the Big 3 Chinese airlines - China Eastern, China Southern and Air China - follow significant outperformance in the past six months both absolutely (up 4-19%) and relative to their H-shares (up 22-42%) and the HSCEI (-9%). Their A-share prices are now between -2% and +2% of their pre-COVID-19 peaks in January 2020, while the H-shares have declined 10-31%. Despite the downgrades, we still like the long-term story and our 2023e estimates for the Big 3 are far above consensus.”
Losses are forecast for 2022e. The recent surge in Omicron cases in cities in mainland China has dented the prospects for a strong air travel season during the Lunar New Year in Jan-Feb 2022. The Winter Olympics in Beijing will further limit air travel in and around Beijing, implying that 1Q22 traffic will disappoint. “We continue to forecast a sharp recovery in domestic travel amid COVID-19 disruptions for much of 2022 but lower our expectations for an international recovery. The Big 3 have each guided for higher losses in 2021e vs 2020. To reflect recent these trends, we now forecast losses for 2022e vs profits previously. While we expect strong cargo yield and an improving passenger yield, higher oil prices and potential depreciation of the RMB could act as near-term headwinds. However, we continue to forecast that the sector's cost of equity will recover in 2023e, driven by a gradual recovery in international travel”.
The analysts stated that the long-term thesis is getting stronger – with one COVID-19 free season - the Labour Day holidays, the summer season, Golden Week holidays or even Lunar New Year 2023 - is “all that is needed for the sector's cost of equity to recover and potentially drive share prices nearly 50% higher from current levels”.