Company Report
China
Aviation
Analyst: Alan Lam
852 25097589
[email protected]
13 April 2005
Higher than expected net profit for 2004 surged 13.9x
Air China
Stock Code: 0753
NEUTRAL
Price: HK$2.800
Air China (0753) announced the first annual results after the listing. Net profit for the year jumped 13.9x
to RMB2.386 billion. Earnings per share were RMB0.36. Profit was ahead of the IPO prospectus forecast
of RMB2.29 billion and 4% higher than our estimate. We believe high fuel costs is a major risk to the
Company. We reduce our profit forecast on the stock for 2005 and 2006 by 12% and 13%. Although we
think the valuation of Air China deserves to trade at a premium compared to China Eastern and China
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Yr End
12/31
2003A
2004F
2005F
2006F
2007F
Turnover
(RMB m)
24,641
33,521
37,320
42,151
45,196
EBITDA
(RMB m)
5,662
7,949
7,567
7,758
8,613
Shares Outstanding (m)
Market Capitals (HK$m)
Free Float (%)
Source: The Company, GTJA (HK)
Net
Profit
(RMB m)
160
2386
1918
1983
2289
EPS
(RMB)
0.025
0.355
0.203
0.210
0.243
Change
(%)
(68.1)
1347.5
(42.8)
3.4
15.4
PER
(x)
120.9
8.4
14.6
14.1
12.2
EV/EBITDA
(x)
10.0
6.6
6.8
7.2
6.7
DPS
(RMB)
0.000
0.000
0.028
0.028
0.028
Yield
(%)
0.0
0.0
0.9
0.9
0.9
9,433.2 NBV per share (HK$)
26,413.0 P/B (x)
24.2 Net gearing (%)
ROE
(%)
2.7
19.7
10.2
9.4
10.0
2.0
1.4
111.4
Net profit surged 13.9x yoy drastically, better than expected. Air China (0753) announced the first annual
results after the listing. Net profit for the period jumped 13.9x to RMB2.386 billion. Earnings per share were
RMB0.36. Realized profit was higher than the IPO prospectus forecast of RMB2.29 billion and 4% higher than
our estimate. Due to the short listing history of the Company, no final dividend was proposed to distribute.
However, the Company promised to maintain 15%-30% dividend yield in future. The management said the profit
of Air China represented for over 50% of total profit from the aviation market.
Revenue of passenger traffic in available seat kilometers (ASK) increased 39% yoy for the year. Average
traffic revenue per passenger rose 4% to RMB0.56/kilometer. Load factor yield increased 2.7% to 63.2%. Total
revenue of Air China was boosted by 36% to RMB33.521 billion. Operating profit margin increased 4.1% yoy to
13.4%.
China Aviation –April 13 2005
See back of report for disclaimer
www.gtjas.com.hk
1
Revenue of international routes increased 31% yoy. Last year, passenger transport capacity in ASKs of
international routes surged 53.8% yoy to 19.6 billion kilometers. It was mainly boosted by the increase of Asian
traffic routes flying to from Japan and Korea. Average revenue of international routes in 2004 increased 8.5%
yoy to RMB0.51 per RPK. It was because the Company started to introduce US$8 to US$14 fuel surcharges on
passengers. The Company disclosed operating profit of international routes accounting for 35% of total revenue.
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international routes (excluding Macau airline) in 2005 are expected to rise 25% yoy. Air China proposed to build
the next traffic hub for international routes in Shanghai in order to develop the international network coverage. In
addition, the Company signed purchase agreements of 20 airbuses and most of them would be put in operations
of international routes to Europe, Australia and Canada countries etc.
To compete with China Eastern Airlines and Shanghai Airlines through setting up a traffic hub in
Shanghai. Passenger transport capacity in ASKs of domestic routes increased 30.5% yoy to 25.487 billion
kilometers. Passenger load factor yield increased 6.2% to 67.4%. Passenger yield from domestic routes increased
5.3% to RMB0.57 per RPK. Total revenue of domestic routes in 2004 surged 43% to RMB18.48 billion,
accounting for 55% of total revenue. Looking forward to the future, the Company believes air transportation
demand in the coming three years may grow 13-15% annually. The Company also stated it obtained an approval
from the CAAC on 26 March to establish a traffic hub in Shanghai and it currently has five routes flying to from
Shanghai. Air China targets to expand the market coverage on Shanghai to 15% within two years. The expansion
may pressure other competitors based in Shanghai such as China Eastern Airlines and Shanghai Airlines.
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will face the same competition pressure from other peers. Despite the Company strengthening the operation in
Beijing by increasing the number of aircrafts flying to from Beijing to 110 aircrafts from 92, we expect the
domestic routes yield to fall further i
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rise 4% in 2005.
Cargo transportation becomes a major profit driver to the Company. On the cargo transportation side, cargo
transport capacity of Air China in 2004 rose 17.0% yoy to 2.58 billion tonnes kilometers. Load factor of cargo
operations fell 1.5% to 53.3%. Cargo yield soared 6.5% to RMB1.99 for each yield tonne kilometer. The
Company disposed of 49% stakes in the cargo operation to the third party last year for an exchange of RMB330
million exceptional gains. Due to the change of shareholding in the cargo operation and Air China changing
accounting standards to book in the cargo revenue, revenue of cargo operations in 2004 dropped 27.8% yoy to
RMB3.17 billion. Nevertheless, other operating revenue increased 120.4% yoy due to the income of RMB1.38
billion generated from leasing bellyhold of passenger aircraft to Air China Cargo Co. Ltd. We believe the
significant surge of profit in last year was mainly attributed to the drastic increase of leasing revenue and
exceptional gains. Furthermore, Air China enjoys a higher operating profit margin compared to other airline
companies. We will observe the revenue of leasing operation closely and further discuss it with the management.
China Aviation –April 13 2005
See back of report for disclaimer
www.gtjas.com.hk
2
Operating performance of Air China in 2004 till now
Available seat yield (%, left)
Annual growth of ASK (%, right)
Cargo transport capacity yield (%, left)
Annual growth of cargo in RPK (%, right)
Source: The Company, GTJA (HK)
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. During the period under review,
operating cost of Air China increased 29.9% yoy to RMB29.036 billion. Jet fuel costs rose the highest, or 54%,
to RMB8.354 billion, accounting for 29% of total operating expenses. Nevertheless, Air China explained to the
oil price volatility during the past few months. It caused the Company without making any fuel hedges against
the risk of significant increase of jet fuel price (the Company obtained RMB41 million gains from derivative
instruments from jet fuel). In view of the rising fuel costs in China, it is expected the future oil price to remain
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cost of jet fuel to RMB3,960 and RMB4,000 per tonne for 2005 and 2006 respectively. As a result, operating
expenses may increase by 4.8% and 8.0%. Although the Company stated that jet fuel surcharges income to reach
RMB850-900 billion, the surcharge income is not adequate to offset the impact from rising oil price.
Proposed to expand the aircraft team. The Company signed a purchase agreement of twenty A330 passenger
aircrafts which would be delivered before the opening of the 2008 Olympic Games in Beijing. The first A330
passenger aircraft will be delivered on scheduled during April to May in 2006. Another six aircrafts will be
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Capital expenditures in 2005 are expected to climb to RMB7.5 billion. In view of 1.4x net gearing ratio at the
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the lowest out of three HK-listed airliners. Excluding the factor of issuing A shares, we anticipate the net gearing
ratio of the Company for 2005 and 2006 to be 1.2x and 1.3x respectively. The Company is going to prepare for
the issuance of A new shares. We believe the share issue can help the Company to reduce gearing ratio. It is
expected Air China will become an airliner with the lowest gearing ratio.
Reducing the profit forecast for 2005-2006 by 12% and 13% respectively. In light of the soon delivery of
new aircrafts, we raise our projected turnover of the airliner for 2005 and 2006 by 3.1% and 6.1% respectively.
On the other hand, we also enhance the projection of jet fuel cost for the coming two years. As a result, profit
forecasts for 2005 and 2006 will be reduced by 11.9% and 12.6% to RMB1.918 billion and RMB1.983 billion,
equivalent to 0.203 yuan and 0.210 yuan respectively.
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d.In sum, the Company currently trades at 14.6x and
14.1x forward PEs for 2005 and 2006. P/BV for 2005 is 1.39x. Although the net P/BV ratio is higher than the
average, Air China is a flag carrier to China. In addition, the Company may speed up the ties-up with Cathay
China Aviation –April 13 2005
See back of report for disclaimer
www.gtjas.com.hk
3
Pacific (293.HK) and Dragonair in order to increase profit contributions from international and Hong Kong and
Macau routes. We think the stock deserves to trade at a premium compared to China Eastern Airlines and China
Southern Airlines. However, we downgrade the 12M target price to HK$3.0 from HK$3.10 (equivalent to 1.50x
P/BV for 2005). In view of the stock price having small potential to rise shortly as well as the risk of rising oil
prices (average oil price increases every 1%, profit of Air China may reduce 3.3% in 2005), we would like
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,
CNAC (1110), may have a higher investment value compared to other related aviation stocks (please refer to our
report dated 24 March).
Year end 31 Dec (RMB mn)
Turnover
EBITDA
Operating profit
Share from associates and subsidiaries
Net finance cost/ income
Exceptional gains
Profit before tax
Taxation
Profit after tax
Minority interests
Profit attributable to shareholders
EPS (yuan)
Change (%)
Source: The Company, GTJA (HK)
2002
24,984
6,536
3,284
426
(2,777)
106
1,040
(369)
671
(171)
500
0.077
(46.8)
2003
24,641
5,662
2,284
243
(2,349)
0
178
(90)
88
71
160
0.025
(68.1)
2004
33,521
7,949
4,485
561
(1,800)
410
3,657
(1,108)
2,549
(163)
2,386
0.355
1347.5
2005E
37,320
7,567
3,838
629
(1,368)
0
3,099
(1,001)
2,097
(179)
1,918
0.203
(42.8)
2006E
42,151
7,758
3,698
693
(1,459)
0
2,933
(752)
2,180
(197)
1,983
0.210
3.4
2007E
45,033
8,457
4,083
708
(1,532)
0
3,259
(858)
2,400
(217)
2,184
0.232
10.1
Rating Definition
The Benchmark: Hong Kong Hang Seng Index
Rating
Buy
Accumulate
Neutral
Reduce
Sell
Time Horizon: 6 to 18 months
Relative Performance
>15%
5% to 15%
-5% to 5%
-5% to –15%
<-15%
Editor: Christine Yim
Research Report Disclaimers
This report is only subject to GTJAS (HK) Ltd. Co. be circulated to specified clients and other
professionals for reference information. Neither the information nor any opinions contained in this
report constitutes a solicitation or offer by the Group to buy or sell. The GTJAS (HK) Ltd. Co.,
fellow subsidiaries, associates or other affiliates (the "Group") may become placing agent, lead
manger, sponsor or underwriter or invest on any specific stock. This report may not be reproduced,
distributed or circulated to other specified viewership, otherwise, it may violate certain of
Securities Ordinances.
Please also note that in relation to information provided, by GTJAS (HK) Ltd. Co. (GTJAS), we
endeavour to ensure the accuracy and reliability of the information provided but do not guarantee
its accuracy or reliability and accept no liability (whether in tort or contract or otherwise) for
any loss or damage arising from any inaccuracies or omissions. The report may contain some
subjective and prospective assumptions and judgements on future politics and economy without
certainties. Investors should thoroughly understand the purposes and risks of equities and
derivatives investment therein. Before making the investment, if necessary, investors should
consult the professionals and then make a prudential investment decision.
China Aviation –April 13 2005
See back of report for disclaimer
www.gtjas.com.hk
4