Beijing Capital International Airport (694:HK) rating: Sell
Beijing Capital International Airport (694:HK) price target: HK$7.10
Guangzhou Baiyun International Airport (600004:CH) rating: Sell
Guangzhou Baiyun International Airport (600004:CH) price target: Rmb12.30
19 June 2018, China– The State Council of China has just approved the abolition of the policy of recognizing refunds from the Civil Aviation Development Fund (CADF) to three listed airports – Beijing Capital International Airport, Guangzhou Baiyun International Airport and HNA Infrastructure Company which will significantly hurt their financial results, especially from 2019.
We have been negative on the Chinese airports since we initiated research coverage on the stocks on 19th October 2017 and maintain our contrarian views.
We cut our financial forecasts and price targets for Beijing Capital International Airport and Guangzhou Baiyun International Airport to take into account this revenue drop. See our in-depth company profile pages below for the details:
Maintain our contrarian Sell rating on Beijing Capital International Airport, price target HK$7.10 – we forecast BCIA’s net profit to fall 36% in 2019 and dividend cut
This abolition of the Civil Aviation Development Fund (CADF) refund, plus the eventual exodus of China Eastern Airlines and China Southern Airlines as they move their operations from BCIA to the new Beijing airport over time, will significantly dampen BCIA’s financial results from 2019 onwards. Growing non-aeronautical revenue will not be able to sufficiently offset this loss of earnings.
We forecast Beijing Capital International Airport’s net profit to fall by 36% y/y and ROE to drop to 7.3% in 2019. This will drive BCIA to cut its dividend per share to Rmb0.17 in 2019 assuming that it maintains its 40% historical payout ratio.
We have therefore cut our price target to HK$7.10 from HK$11.0. We remain contrarian and are one of only two analysts with Sell ratings on BCIA on the Street currently among a total of 19 analysts who cover the stock. In fact, we were the only analyst on the Street with a Sell rating on BCIA when we initiated research coverage on the stock on 19th October 2017.
Downgrade our rating of Guangzhou Baiyun International Airport from Hold to Sell, price target Rmb12.30 – we forecast GBIA’s net profit to fall 25% in 2019 and dividend cut
We forecast Guangzhou Baiyun International Airport’s net profit to fall by 25% y/y and ROE to drop to 7.2% in 2019. This will drive GBIA to cut its dividend per share to Rmb0.18 assuming 30% payout ratio.
We therefore downgrade our rating of Guangzhou Baiyun International Airport from Hold to Sell, price target Rmb12.30 (from Rmb13.00).We are also contrarian here, being one of only three analysts with Sell ratings on GBIA on the Street among a total of 13 analysts who cover the stock.
Sharp earnings decline from 2019
There will be a 6-month transition period from 29th May 2018 to 29th November 2018 during which the CADF refunded to these airports will continue to be recognized as revenue. After this period, these Beijing Capital, Guangzhou Baiyun and HNA Infrastructure will implement the same CADF refund policy as the other domestic airports in China. Shanghai International Airport (600009:CH) is not affected by this policy change.
Therefore, significant earnings impact will be felt from 2019 onwards. We expect HNA Infrastructure to suffer the largest negative earnings impact, followed by Beijing Capital International Airport and Guangzhou Baiyun International Airport. Specifically:
- The CADF refund contributed 17.75% of HNA Infrastructure (357:HK)’s total revenue in 2017.
- The CADF refund contributed 12.75% of Beijing Capital International Airport (694:HK)’s total revenue in 2017 based on our estimates. BCIA expects the CADF refund revenue to drop no more than Rmb120 million in 2018, helped by the 6-month transition period which ends on 29th November 2018.
- The CADF refund contributed 12.38% of Guangzhou Baiyun International Airport (600004:CH)’s total revenue in 2017. Guangzhou Baiyun expects the CADF refund revenue to amount to Rmb800 million to Rmb850 million in 2018, helped by the 6-month transition period which ends on 29th November 2018.
Chart: Civil Aviation Development Fund’s contribution to the 3 Chinese airports’ total revenue (2017)
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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