Which Asian transport stocks are more resilient in a China-US trade war?

21 June 2018, Asia Pacific – As the transport sector is largely trade-driven and often global in nature, the conventional wisdom would be to de-risk and offload all investment holdings in this sector. Is there any place to hide for equity investors in the transport sector as trade tensions escalate between the United States and China? We highlight the more resilient stocks for those who wish to stay invested in the Asian transport sector below:

#1 Airlines with large domestic or regional revenue base, especially low-cost carriers

The major listed low-cost carriers in Asia have a large proportion of domestic route revenue which tends to be more stable and less cyclical in nature. They also have zero or very limited direct revenue exposure to US routes and are therefore insulated from a potential drop-off in air travel and cargo demand to/from the United States.

These include AirAsia Group (AAGB:MK), Asia Aviation (AAV:TB), Cebu Air (CEB:PM), IndiGo (INDIGO:IN), Spring Airlines (601021:CH) and VietJet (VJC:VN).

Chart: 12 months forward P/E valuations of major low-cost carriers in Asia that are more immune to escalating China-US trade tensions (2018)

12 months forward P/E valuations of major low-cost carriers in Asia that are more immune to escalating China-US trade tensions (2018)

#2 Airports and railway companies with no/limited direct exposure to the US

Malaysia Airports Holdings (MAHB:MK) and Airports of Thailand (AOT:TB) do not handle direct flights to the United States and have fairly limited exposure to connecting flights to the US.

Sydney Airport (SYD:AU)’s exposure to direct US flights is also relatively small at 2.6% of its total flights handled based on our estimates. Moreover, the United States recorded a US$5.0 Billion trade surplus with Australia in Jan-April 2018.

Japanese railway companies such as JR East (9020:JP), which is trading at 13.2x P/E, are also defensive plays given their largely domestic earnings base.

Chart: 12 months forward P/E valuations of major airports and railway companies in Asia Pacific that are more immune to escalating China-US trade tensions (2018)

12 months forward P/E valuations of major airports and railway companies in Asia Pacific that are more immune to escalating China-US trade tensions (2018)

#3 Aircraft MRO companies and Airline service providers

ST Engineering (STE:SP) derives 37% of its total revenue from defense contracts which tend to be counter-cyclical. ST Engineering and SIA Engineering (SIE:SP) are also beneficiaries of a stronger US dollar. 

SATS (SATS:SP) is also a defensive play with less than 1% revenue exposure to US flights based on our estimates. Moreover, the United States recorded a US$2.6 Billion trade surplus with Singapore in Jan-April 2018.

Chart: 12 months forward P/E valuations of major aviation & transport companies in Singapore that are more immune to escalating China-US trade tensions (2018)

12 months forward P/E valuations of major aviation & transport companies in Singapore that are more immune to escalating China-US trade tensions (2018)

Note: Stocks with upside of more than 10% based on our fair value are assigned an Outperform rating. Stocks with downside of more than 10% based on our fair value are assigned an Underperform rating. Stocks with upside or downside of less than 10% based on our fair value are assigned an In-line rating. These are Crucial Perspective’s proprietary rating classifications and by no means serve as investment recommendations.

Independent Research Declaration: Crucial Perspective does not own any position in the equities featured in this report nor have we received any compensation for writing this report. 

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