Taiwan airlines to report strong 4Q17 results; positive read-through for Cathay

EVA Airways (2618:TT) Fair Value: NT$17.0
EVA Airways (2618:TT) Rating: In-Line

China Airlines (2610:TT) Fair Value: NT$13.5
China Airlines (2610:TT) Rating: In-Line

11 January 2018, Taiwan – We expect EVA Airways and China Airlines to report strong 4Q17 results in March 2018. Their surging cargo yields in Dec 2017 is also a positive read-through for Cathay Pacific and Korean Air’s financial results. On the passenger side, Mainland Chinese traffic to Taiwan is rebounding but downside risks remain if the recent airspace dispute escalates.

WE EXPECT TAIWAN AIRLINES TO REPORT STRONG 4Q17 FINANCIAL RESULTS 

EVA Airways (2618:TT) and China Airlines (2610:TT) just reported their Dec-17 operating performance. In summary, EVA Airways and China Airlines grew total revenue by 10% and 13% y/y respectively in Dec 2017 and 9% and 10% y/y in full year 2017.

We expect both carriers to report strong 4Q17 financial results in late March, mainly driven by the significantly larger profit contribution from their cargo business segment and growing passenger traffic and improving passenger yields.

Chart: Taiwan airline sector operating performance (2017)

Chart: Taiwan airline sector operating performance (2017)

 

AIR CARGO YIELDS SURGED FURTHER IN DEC 2017 => POSITIVE READ-THROUGH FOR CATHAY PACIFIC, KOREAN AIR

EVA Airways and China Airlines’ air cargo yields surged 19% and 16% y/y respectively in December 2017. Thison supports our bullish view on the global air cargo market in 2018. See our report for more details:

Air Cargo to surge in 2018, benefitting Asian airlines most

Chart: Taiwan airline sector cargo yield trends (2017)

Chart: Taiwan airline sector cargo yield trends (2017)

This is a positive read-through for airlines with larger cargo revenue exposure and we expect their cargo profits to grow significantly. Key beneficiaries of strong air cargo market among the listed Asian airlines:

China Airlines (2610:TT) which derives 31% of its total revenue from cargo.

Cathay Pacific (293:HK) which derives 23% of its total revenue from cargo.

Korean Air (003490:KS) which derives 22% of its total revenue from cargo

EVA Airways (2618:TT) which derives 20% of its total revenue from cargo.

 

CROSS-STRAITS CHINESE INBOUND TRAFFIC TO TAIWAN IS REBOUNDING BUT OUTLOOK  STILL PRECARIOUS GIVEN RECENT AIRSPACE DISPUTE

Following their sharp decline for 15 months, the number of Mainland Chinese visitors to Taiwan is rebounding. In October and November 2017, Mainland Chinese cross-straits inbound traffic to Taiwan rebounded 21% y/y – a highly positive earnings driver for the Taiwanese carriers as cross-straits flights used to contribute around 15% of their passenger revenue.

However, the recovery risks being short-lived if the recent airspace dispute results in escalating cross-straits tensions again. The Civil Aviation Administration of China (CAAC)’s announcement of the opening of four flight routes last week to help ease air traffic congestion has driven concerns in Taiwan due to the flight routes’ proximity to Taiwan’s airspace.

Chart: Mainland Chinese visitor arrivals to Taiwan (2015 to 2017)

Chart: Mainland Chinese visitor arrivals to Taiwan (2015 to 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.

 

Related Reports:

Research Report: EVA Airways (2618:TT) & China Airlines (2610:TT) valuations to remain rangebound until China-Taiwan relations thaw

 

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