Research Report: Chinese Airports (694:HK, 600009:CH) may see near-term price correction

Beijing Capital International Airport (694:HK) Fair value: HK$11
Beijing Capital International Airport (694:HK) Rating: Underperform

Shanghai International Airport (600009:CH) Fair value: CNY34.0
Shanghai International Airport (600009:CH) Rating: Underperform

Guangzhou Baiyun International Airport (600004:CH) Fair value: CNY13.0
Guangzhou Baiyun International Airport (600004:CH) Rating: In-line

19 October 2017, China – Following the Chinese airports’ share price rally of 40% ytd on the back of expectations of strong profits driven by record high traffic volumes, airport tariff hikes and higher concession rates, we see a rising risk of share price correction near term. Based on our analysis of the airlines’ planned flights schedules for 4Q17, we expect the total number of flights and seat capacity handled at Shanghai International Airport (600009:CH) to decline in 4Q17 while Beijing Capital International Airport (694:HK) will see limited capacity growth. Even Guangzhou Baiyun International Airport (600004:CH)‘s aircraft movements and seat capacity growth are expected to slow in 4Q17.

Although we like these Chinese airports’ high profit margins, strong balance sheets as well as limited/no direct exposure to forex and fuel price risks, the airlines’ capacity scale-back which are necessary to ease congestion and improve the on-time performance of flights could cause the Chinese airports’ 4Q17 earnings to disappoint, driving a share price correction in the sector.

The Big 3 Chinese airports will have to improve their traffic mix with more international flights and more widebody aircraft, rely on further airport tariff hikes and increase their non-aeronautical revenue (such as new concessions) to lift their profit margins further. We believe the market consensus’ bullish profit estimates have already priced these favourable factors in as they have been well-flagged by the market in the past year. In addition, these airports’ mix of widebody aircraft and international flights will not change materially enough in 4Q17 to significantly improve earnings.

Our fair values for Beijing Capital International Airport and Shanghai International Airport are HK$11.0 and CNY34 which imply Underperform ratings for both stocks while our fair value for Guangzhou Baiyun International Airport is CNY13.0 which implies an In-line rating. 

 

SHANGHAI INTERNATIONAL AIRPORT WILL SUFFER THE LARGEST SEAT CAPACITY DECLINE Y/Y IN 4Q17 WHILE BEIJING CAPITAL INTERNATIONAL AIRPORT’S TOTAL SEAT CAPACITY GROWTH WILL ALSO REMAIN LIMITED

Shanghai International Airport (600009:CH) is expected to suffer a 3% and 2% y/y decline in total scheduled passenger flights and seat capacity in 4Q17, a marked contrast from its y/y growth in 9M17.

Growth remains limited at Beijing Capital International Airport (694:HK). Its total scheduled passenger flights and seat capacity are expected to fall 0.3% y/y and rise 0.8% y/y respectively in 4Q17.

Only Guangzhou Baiyun International Airport (600004:CH) is expected to handle more scheduled passenger flights (+5% y/y) and seat capacity is expected to rise 4% y/y in 4Q17 among the Big 3 Chinese airports. Even then, this is a slowdown from its nearly 7% growth in 9M17.

Chart: Chinese airports scheduled total seat capacity growth y/y (4Q17 versus 9M17)

Chart: Chinese airports scheduled total seat capacity growth y/y (4Q17 versus 9M17)

 

SHANGHAI INTERNATIONAL AIRPORT’S VALUATIONS ARE THE MOST EXPENSIVE AND RISK BEING DE-RATED AS AIRCRAFT MOVEMENTS FALL IN 4Q17

Shanghai International Airport is trading at 23x P/E and 3.1x P/B, a 27% premium to the Chinese airports sector’s average valuation, and risks being de-rated as aircraft movements are likely to fall in 4Q17 based on the current flight schedules.

Chart: Price/Earnings valuations versus EPS growth comparison (2017)

Chart: Price/Earnings valuations versus EPS growth comparison (2017)

Chart: Price/Book valuations versus Return on Equity comparison (2017)

Chart: Price/Book valuations versus ROE comparison (2017)

Chart: Chinese airports share price performance year-to-date

Chart: Chinese airports share price performance year-to-date

 

DOMESTIC FLIGHTS ARE BEING CUT BACK IN 4Q17 AT THE BIG 3 CHINESE AIRPORTS

The number of domestic flights and seat capacity has been cut back in 4Q17 at all three airports. Shanghai International Airport will experience the sharpest y/y decline in domestic flights handled and seats (flights -7%, seats -5%), followed by Beijing Capital International Airport (flights -2%, seats -1%) in 4Q17. Guangzhou Baiyun International Airport’s domestic flights handled will still grow (flights +2%, seats +2%) but this is a marked slowdown from 9M17 (flights +4%, seats +5%).

Chart: Chinese airports scheduled domestic seat capacity growth y/y (4Q17 versus 9M17)

Chart: Chinese airports scheduled domestic seat capacity growth y/y (4Q17 versus 9M17)

 

BIG 3 CHINESE AIRPORTS WILL HANDLE MORE INTERNATIONAL FLIGHTS IN 4Q17

The y/y growth in the number of international flights and seats at Beijing Capital International Airport (flights +5%, seats +6% y/y) and Shanghai International Airport (flights +5%, seats +4%) will accelerate in 4Q17 versus 9M17 which is positive for margins.

Although Guangzhou Baiyun International Airport will see a deceleration (flights +13%, seats +11%), its y/y growth in international flights and seats remain much higher than Beijing and Shanghai.

Chart: Chinese airports scheduled international seat capacity growth y/y (4Q17 versus 9M17)

Chart: Chinese airports scheduled international seat capacity growth y/y (4Q17 versus 9M17)

 

HOWEVER, THE CHANGE IN INTERNATIONAL-DOMESTIC MIX OF FLIGHTS IS STILL MARGINAL AND INSUFFICIENT TO BOOST EARNINGS AND PROFIT MARGINS SIGNIFICANTLY

Among the Big 3 Chinese airports, Shanghai International Airport has the largest share of international flights. International seat capacity is expected to account for 37% of its total seat capacity in 4Q17, +2ppts y/y.

This is well ahead of Beijing Capital International Airport’s 28% (+1ppt y/y) and Guangzhou International Airport’s 25% (+1ppt y/y).

However, this 1ppt-2ppts y/y increase in the share of international flights and seat capacity is not enough to boost the Chinese airports’ earnings and profit margins significantly near term.

Chart: Chinese airports – International seat capacity as a % of total (4Q17 versus 4Q16)

Chart: Chinese airports – International seat capacity as a % of total (4Q17 versus 4Q16)

 

THE PROPORTION OF WIDEBODY AIRCRAFT IS INCREASING SLIGHTLY FOR SHANGHAI INTERNATIONAL AIRPORT BUT REMAINS UNCHANGED FOR BEIJING CAPITAL INTERNATIONAL AIRPORT AND GUANGZHOU BAIYUN INTERNATIONAL AIRPORT

Contrary to common market perception that the Chinese airlines are switching to larger aircraft to mitigate the slot constraints and air traffic congestion issues at these airports, the overall mix of scheduled widebody versus narrowbody aircraft remains unchanged in 4Q17 compared to a year ago for Beijing Capital International Airport and Guangzhou Baiyun International Airport.

Only Shanghai International Airport’s share of scheduled widebody aircraft movements is expected to rise 2ppts y/y to 22% in 4Q17. Even then, this has failed to offset the 5% y/y decline in narrowbody aircraft movements in 4Q17. This is expected to lead to a 3% y/y drop in Shanghai International Airport’s overall aircraft movements in 4Q17 which will have a negative impact on its aeronautical revenue.

BEIJING CAPITAL INTERNATIONAL AIRPORT STILL HAS THE LARGEST SHARE OF WIDEBODY AIRCRAFT MOVEMENTS

Beijing Capital International Airport has the largest share of widebody aircraft movements among the Big 3 Chinese airports. Scheduled widebody aircraft movements will contribute 31% of its total aircraft movements versus 22% for Shanghai International Airport and only 15% for Guangzhou Baiyun International Airport.

However, Beijing Capital International Airport’s widebody aircraft movements will rise only 0.1% y/y while Guangzhou Baiyun International Airport’s widebody aircraft movements are expected to fall 2% y/y in 4Q17.

Chart: Beijing Capital International Airport – Mix of scheduled widebody versus narrowbody aircraft movements (4Q17)

Chart: Beijing Capital International Airport – Mix of scheduled widebody versus narrowbody aircraft movements (4Q17)

Chart: Shanghai International Airport – Mix of scheduled widebody versus narrowbody aircraft movements (4Q17)

Chart: Shanghai International Airport – Mix of scheduled widebody versus narrowbody aircraft movements (4Q17)

Chart: Guangzhou Baiyun International Airport – Mix of scheduled widebody versus narrowbody aircraft movements (4Q17)

Chart: Guangzhou Baiyun International Airport – Mix of scheduled widebody versus narrowbody aircraft movements (4Q17)

 

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.

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