Conference call takeaways
China Eastern Airlines (CEA) hosted a post-1H17 results conference call on 30August. Key takeaways are as follows:
Yield: CEA recorded a 0.2% YoY passenger yield decline in 1H17 with3.9% YoY drop in international flight yield, partially offset by 1.5% YoYgrowth of domestic yield, mainly due to the aggressive launch of longhaulinternational routes in the past few years, which led to yield pressure,in our view. Going forward, management expects better yield trends amidbetter demand-supply balance on international routes. Based on August'sforward booking, the overall international yield decline narrowed YoYwhile domestic yield remained stable.
Capacity: CEA aims to further optimize its capacity with 9.6% 2H17passenger capacity (ASK) expansion, comprising 8.8% growth fordomestic routes and 12.8% growth for international routes. Goingforward, the airline will further add domestic capacity on routes withhigher demand and better yield by switching to wide-body aircrafts. Forinternational routes, CEA will likely focus on increasing frequency andimproving passenger yield. Meanwhile, the airline plans to further reducecapacity for the Korean market due to low demand.Our price target is based on a target1.2x FY18E P/BV. A key downside risk isexcessive new capacity on domestic routes.Key upside risks are stronger-than-expectedgrowth in ticket price and yield and thereverse of the aforementioned point.
Low cost carrier (LCC): CEA’s LCC unit, China United Airlines (CUA)recorded net profit of RMB359m in 1H17 (+c.50% YoY) on a c.30%YoY increase in revenue with direct sales proportion increased to 75%.According to management, CUA's passenger traffic increased 15% YoYwith load factor improving 1.1ppt. It currently owns 35 aircrafts.
Direct sales: CEA’s revenue from direct sales increased 29% YoY in 1H17to RMB21.5bn, accounting for 49% of total passenger traffic.
FX gain: CEA recorded RMB674m FX gain in 1H17 vs. RMB1.4bn FX lossin 1H16 due to RMB appreciation against USD during the period. CEAhas reduced its USD to total debt ratio to 34% in 1H17, 11ppt lower thanthe year-start level.
