Cathay Pacific: Qatar Air raises stake; stronger traffic in August plus HKA’s lower capacity growth favourable for this 0.68x P/B stock

Cathay Pacific company logo

Cathay Pacific Airways Ltd (293:HK)

Price Target: HK$14.00 | Rating: Buy

19 Sep 2018, Hong Kong – Cathay Pacific’s passenger and cargo traffic growth accelerated in August which is positive. The improved passenger traffic mix, plus Hong Kong Airlines’ decision to halve its aggressive capacity expansion from 4Q18, will be favourable for Cathay’s yields, in our view. The key drag is the stronger US dollar which will dampen Cathay’s foreign currency translated revenue. Cathay’s current valuation has fallen to 0.68x Price/Book, close to its historical trough of 0.6x P/B during the Global Financial Crisis in 2008 and 911 Attacks back in 2001; its improving profitability in 2019 could present a buying opportunity for longer term investors as much of the negative drivers have already been priced in. We have a Buy rating on the stock and price target of HK$14.0.

Qatar Airways now owns nearly 10% of Cathay Pacific

Meanwhile, Qatar Airways has raised its equity stake in Cathay Pacific to 9.99% currently from 9.94% (at the end of June 2018). Cathay Pacific’s effective free float is too low, in our view, and needs to be addressed. Excluding Swire Pacific, Air China and Qatar Airways’ strategic stakes in Cathay Pacific, the remaining publicly traded float is only 15.02% of Cathay Pacific’s total shares outstanding effectively. This is much smaller than Singapore Airlines’ public float of 44% and could result in lower daily trading liquidity for the stock.

See our previous report on Qatar Airways' acquisition of Cathay's shares:

Why Qatar Airways bought a 9.61% stake in Cathay Pacific (293:HK)?

Chart: Cathay Pacific Shareholding Structure (2018)

Cathay Pacific Shareholding Structure (2018)

Rival Hong Kong Airlines to halve its aggressive capacity expansion from 4Q18

Hong Kong Airlines (HKA), which has an 8% market share at its hub in Hong Kong International Airport and is a keen competitor to Cathay Pacific on Japan, Mainland China, New Zealand routes and has ambitions to expand its long-haul operations aggressively, is planning to scale back on its capacity growth to 19% y/y from 4Q18. This is much lower than Hong Kong Airlines’ 37% capacity growth in Jan-Sep 2018 and will help ease competitive pressure on Cathay Pacific, in our view.

See our previous report for more details:

Airline capacity growth to moderate from 4Q18, benefitting Asia Pacific airline yields but hurting airport growth


Separately, here are our key takeaways on Cathay Pacific’s just released operating statistics for August 2018:

#1 Passenger traffic growth accelerated in all markets except for North America

Cathay Pacific’s passenger traffic grew 5.9% y/y in August, well ahead of its 3.0% growth y/y year-to-date. Passenger traffic growth was particularly strong on its Europe (+15.4% y/y), North East Asia (+9.5%) and Mainland China (+8.8%) route regions for August. Only North America routes experienced a decline in passenger traffic (-0.7% y/y). Management commented that demand was consistently strong in its premium cabins and yields improved in the back end of the cabin due to better traffic mix.

Chart: Cathay Pacific Passenger Traffic Growth/Decline (August 2018)

Cathay Pacific Passenger Traffic Growth:Decline (August 2018)

#2 Overall passenger load factor improved slightly y/y

Cathay Pacific’s passenger load factor increased 0.8ppt y/y to a high of 87.1%. Cathay experienced the strongest y/y load factor improvement on Europe (+2.9ppts y/y to 91%), Mainland China (+2.6ppts to 89%) and India/Middle East/Pakistan/Sri Lanka (+2.5ppts to 83%) in August, based on our estimates.

This was partially offset by load factor declines on South West Pacific/South Africa (down 2.0ppts y/y), South East Asia (down 1.3ppts) and North East Asia (down 0.9ppts) routes, based on our estimates.

Cathay’s overall passenger traffic and load factor improvement was, however, smaller than SIA Group’s. See our report below on SIA Group’s performance published yesterday:

Singapore Airlines: Attractive Buy at Near-Trough Valuation of 0.8x P/B & 31% Discount to Liquidation Value


#3 Cargo business strengthened further

Cathay Pacific’s cargo traffic growth accelerated to 7.4% y/y in August, ahead of its 6.6% y/y growth year-to-date. This was mainly driven by increased pharmaceutical and perishable shipments. Transhipment volumes were strong across Cathay’s network. Consequently, Cathay’s cargo load factor improved 2.9ppts y/y to 68.4%, much better than SIA Cargo’s performance in August.


#4 September performance to be hurt by natural calamities

Cathay Pacific’s traffic growth momentum is expected to slow in September due to the typhoons and earthquake that hit Hong Kong, Mainland China, Japan and Philippines.


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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