HK/China Equity Long-Short

Osbert Tang, CFA

Equity Bottom-Up

<a href="https://www.smartkarma.com/entities/air-china-ltd-h" target="_blank" data-smartkarma-citation="entities:8239:1" rel="noopener">Air China Ltd (H) (753 HK)</a> should see an YoY reduction in loss contribution from the 29.99%-owned associate <a href="https://www.smartkarma.com/entities/cathay-pacific-airways-ltd" target="_blank" data-smartkarma-citation="entities:243:1" rel="noopener">Cathay Pacific Airways (293 HK)</a>, based on CX's latest guidance that losses for 1H21 will be less than both 1H20 and 2H20. If we extrapolate the 1Q21 losses from Air China's associated companies to the full year, we should potentially see as least 30% YoY losses reduction. In our view, this will be of significant help to Air China's bottom-line recovery in FY21.CX's 24.5% MoM passenger traffic rebound in May echoed the sequential improvement of Air China's regional and international traffic. The increase in global vaccination rates and resumption of more long-haul flights suggested an improving outlook for CX's international passenger traffic. This should offer an added support to Air China which, we think as a recovery play, is trading on undemanding 12-month forward P/B multiple of 0.98x - the average level since 2016.

Air China Ltd (H) (753 HK) should see an YoY reduction in loss contribution from the 29.99%-owned associate Cathay Pacific Airways (293 HK), based on CX's latest guidance that losses for 1H21 will be less than both 1H20 and 2H20. If we extrapolate the 1Q21 losses from Air China's associated companies to the full year, we should potentially see as least 30% YoY losses reduction. In our view, this will be of significant help to Air China's bottom-line recovery in FY21.CX's 24.5% MoM passenger traffic rebound in May echoed the sequential improvement of Air China's regional and international traffic. The increase in global vaccination rates and resumption of more long-haul flights suggested an improving outlook for CX's international passenger traffic. This should offer an added support to Air China which, we think as a recovery play, is trading on undemanding 12-month forward P/B multiple of 0.98x - the average level since 2016.   

Air China (753 HK): Positive Implications from CX's May Traffic Announcement

Thematic (Sector/Industry)

A close look on the May traffic for the Chinese airlines will reveal that <a href="https://www.smartkarma.com/entities/air-china-ltd-h" target="_blank" data-smartkarma-citation="entities:8239:1" rel="noopener">Air China Ltd (H) (753 HK)</a> continued to make positive progress to narrow down its gap against <a href="https://www.smartkarma.com/entities/china-southern-airlines-co-ltd" target="_blank" data-smartkarma-citation="entities:1078:1" rel="noopener">China Southern Airlines (1055 HK)</a>. The former's overall passenger traffic YoY growth was 6.7pp better than the latter in the month; and its freight traffic was even at a 25.4% YoY growth, compared with just 5.9% for CSA. We saw that Air China has already stopped its underperformance against CSA starting Apr, with both stocks moving very much in tandem in the last three months. With the recent local COVID-19 case outbreak in Guangdong, particularly Guangzhou which negatively affect scheduled flights into CSA's headquarter hub, we see room for near-term outperformance at Air China. With better pick-up of international traffic going forward, we expect Air China to widen its outperformance into 2H21.

A close look on the May traffic for the Chinese airlines will reveal that Air China Ltd (H) (753 HK) continued to make positive progress to narrow down its gap against China Southern Airlines (1055 HK). The former's overall passenger traffic YoY growth was 6.7pp better than the latter in the month; and its freight traffic was even at a 25.4% YoY growth, compared with just 5.9% for CSA. We saw that Air China has already stopped its underperformance against CSA starting Apr, with both stocks moving very much in tandem in the last three months. With the recent local COVID-19 case outbreak in Guangdong, particularly Guangzhou which negatively affect scheduled flights into CSA's headquarter hub, we see room for near-term outperformance at Air China. With better pick-up of international traffic going forward, we expect Air China to widen its outperformance into 2H21. 

Chinese Airlines: China Southern (1055 HK) Seeing More Pressure than Air China (753 HK)

Guangzhou Baiyun International Airport / Equity Bottom-Up

<a href="https://www.smartkarma.com/entities/guangzhou-baiyun-international-airport" target="_blank" data-smartkarma-citation="entities:10819:1" rel="noopener">Guangzhou Baiyun International Airport (600004 CH)</a> (GBIA) posted another month of good traffic performance with aircraft movement and passenger throughput rose by 44.9% YoY and 94.1% YoY, respectively. Thanks to the strength on the domestic routes, we believe it has sustained traffic outperformance against both <a href="https://www.smartkarma.com/entities/shanghai-international-airport-co-ltd" target="_blank" data-smartkarma-citation="entities:6511:1" rel="noopener">Shanghai International Airport (600009 CH)</a> (SIAC) and <a href="https://www.smartkarma.com/entities/beijing-capital-international-airport-bcia" target="_blank" data-smartkarma-citation="entities:10626:1" rel="noopener">Beijing Capital International Airport (BCIA) (694 HK)</a> in May.However, we are concerned that the recent outbreak of local COVID-19 cases in Guangzhou and Guangdong will negatively affect traffic in Jun and Jul as the local health commissions and governments stepped up measures to contain the spread. We have already seen a 69.5% decline in the scheduled Shanghai-Guangzhou flights operated by <a href="https://www.smartkarma.com/entities/china-southern-airlines-co-ltd" target="_blank" data-smartkarma-citation="entities:1078:1" rel="noopener">China Southern Airlines (1055 HK)</a> and <a href="https://www.smartkarma.com/entities/air-china-ltd-h" target="_blank" data-smartkarma-citation="entities:8239:1" rel="noopener">Air China Ltd (H) (753 HK)</a> in a 14-day period since the peak on 27 May. Share price of GBIA outperformed SIAC by 14.9pp YTD and the outbreak in southern China is likely to trigger the former to give back some of its outperformance in the near term until the dust is settled.

Guangzhou Baiyun International Airport (600004 CH) (GBIA) posted another month of good traffic performance with aircraft movement and passenger throughput rose by 44.9% YoY and 94.1% YoY, respectively. Thanks to the strength on the domestic routes, we believe it has sustained traffic outperformance against both Shanghai International Airport (600009 CH) (SIAC) and Beijing Capital International Airport (BCIA) (694 HK) in May.However, we are concerned that the recent outbreak of local COVID-19 cases in Guangzhou and Guangdong will negatively affect traffic in Jun and Jul as the local health commissions and governments stepped up measures to contain the spread. We have already seen a 69.5% decline in the scheduled Shanghai-Guangzhou flights operated by China Southern Airlines (1055 HK) and Air China Ltd (H) (753 HK) in a 14-day period since the peak on 27 May. Share price of GBIA outperformed SIAC by 14.9pp YTD and the outbreak in southern China is likely to trigger the former to give back some of its outperformance in the near term until the dust is settled. 

Guangzhou Baiyun Intl Airport (600004 CH): Facing Challenges in the Near Term

Founder of Antler Capital

Stanley Tsai, CFA

BOC Aviation | BOCAVI <a href="https://www.smartkarma.com/entities/boc-aviation" target="_blank" data-smartkarma-citation="entities:22689:1" rel="noopener">(2588 HK)</a> 
As a follow-up on <a href="https://www.smartkarma.com/profiles/david-blennerhassett" target="_blank" data-smartkarma-citation="accounts:840" rel="noopener">David Blennerhassett</a>'s Smartkarma Original <a href="https://www.smartkarma.com/insights/asia-pac-airports-ups-but-mostly-downs" target="_blank" data-smartkarma-citation="insights:51855" rel="noopener">Asia-Pac Airports: Ups, But Mostly Downs</a>, we take a look at BOCAVI, which, in our view, is a compelling alternative to APAC airport operators and airlines as a post-Covid trade.
BOCAVI is a highly geared play on the resumption of air travel. The stock has gone through periods of significant out/underperformance against the APAC airports and airlines and may continue to give investors high beta in either direction. The geographical exposure is broad, but there is a heavy skew towards short-haul flights, which will see the earliest acceleration in passenger traffic.
Management's countercyclical capex expansion increasingly looks like a shrewd bet. At its core, BOCAVI is in the capital management business. Strong liquidity and BOC's explicit backing have allowed the lessor to grow its purchase-and-leaseback portfolio through the depths of the pandemic. While airlines are still hemorrhaging cash, over 99% of BOCAVI's aircraft remain cash-generating.  
We expect the firm's undiscounted committed revenues to top USD20bn in 2021. By year-end, the value of the portfolio will have doubled since 2014. We estimate the present value of this cashflow stream to be HKD72.80/share. We are essentially getting free growth optionality. 
We are buyers at book value. The stock is trading at 8x P/E and 1.1x P/B on a 12M forward basis. BOCAVI is reasonably liquid, with a market cap of USD6bn and average daily turnover of USD3.5mn. Besides the obvious risk of protracted lockdowns globally, a well-functioning USD bond market and BOC's funding support are critical to our investment case.
Attachment: BOCAVI Financial Summary

BOC Aviation | BOCAVI (2588 HK) 
As a follow-up on David Blennerhassett's Smartkarma Original Asia-Pac Airports: Ups, But Mostly Downs, we take a look at BOCAVI, which, in our view, is a compelling alternative to APAC airport operators and airlines as a post-Covid trade.
BOCAVI is a highly geared play on the resumption of air travel. The stock has gone through periods of significant out/underperformance against the APAC airports and airlines and may continue to give investors high beta in either direction. The geographical exposure is broad, but there is a heavy skew towards short-haul flights, which will see the earliest acceleration in passenger traffic.
Management's countercyclical capex expansion increasingly looks like a shrewd bet. At its core, BOCAVI is in the capital management business. Strong liquidity and BOC's explicit backing have allowed the lessor to grow its purchase-and-leaseback portfolio through the depths of the pandemic. While airlines are still hemorrhaging cash, over 99% of BOCAVI's aircraft remain cash-generating.  
We expect the firm's undiscounted committed revenues to top USD20bn in 2021. By year-end, the value of the portfolio will have doubled since 2014. We estimate the present value of this cashflow stream to be HKD72.80/share. We are essentially getting free growth optionality. 
We are buyers at book value. The stock is trading at 8x P/E and 1.1x P/B on a 12M forward basis. BOCAVI is reasonably liquid, with a market cap of USD6bn and average daily turnover of USD3.5mn. Besides the obvious risk of protracted lockdowns globally, a well-functioning USD bond market and BOC's funding support are critical to our investment case.
Attachment: BOCAVI Financial Summary

BOC Aviation (2588 HK): The Stars Don't Look Bigger, but They Do Look Brighter

Asian Insight Provider - Actionable ideas, CrossASEAN Research

Henry Soediarko

Asian Insight Provider - Actionable ideas

CrossASEAN Research

At CrossASEAN Research we strive to produce unbiased and differentiated on the ground insights on companies across South East Asia. Our Research is produced for the most part after face to face meetings and conversations with company management to dig deep into the long term vision and strategy of the companies we cover. We seek to deliver investable and actionable themes on sectors and markets across SE Asia, often in collaboration with other Insight Providers across the region, pooling the vast experience of the analysts within the Smartkarma Ecosystem. We also offer bespoke work and tailor made trips for our clients. 

Insights across South East Asia

Travelsky Technology Ltd H / Equity Bottom-Up

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March 2021 was the first time in the past pandemic-stricken year that air travel volume has climbed back to the 2019 level pre-COVID-19 era. Volume recovery is the main thesis for Travelsky but somehow its share price has not received the same attention from investors to trade on par with the airlines that are still loss-making and naturally saddled with a higher debt to equity ratio. 
Bullish on <a href="https://www.smartkarma.com/entities/travelsky-technology-ltd-h" target="_blank" data-smartkarma-citation="entities:19829:1" rel="noopener">Travelsky Technology Ltd H (696 HK)</a> . 
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March 2021 was the first time in the past pandemic-stricken year that air travel volume has climbed back to the 2019 level pre-COVID-19 era. Volume recovery is the main thesis for Travelsky but somehow its share price has not received the same attention from investors to trade on par with the airlines that are still loss-making and naturally saddled with a higher debt to equity ratio. 
Bullish on Travelsky Technology Ltd H (696 HK) . 


Travelsky (696): Recovery and Undervalued Vs Airlines

China

China Southern Airlines Company Limited provides commercial airline services throughout China, Southeast Asia and other parts of the world.  The Company also provides other airline related services including aircraft maintenance and air catering.

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China Southern Airlines (1055 HK)

Air China (753 HK): Positive Implications from CX's May Traffic Announcement

CX's guidance of triming of losses in 1H21, vs. 1H20 and 2H20, is a positive note to Air China. The 24.5% MoM in passenger traffic echoed Air...

Osbert Tang, CFA

Chinese Airlines: China Southern (1055 HK) Seeing More Pressure than Air China (753 HK)

May traffic revealed that Air China sustaining its trend of narrowing down operational gap against CSA. Local COVID-19 cases in Guangzhou means a...

Osbert Tang, CFA

Guangzhou Baiyun Intl Airport (600004 CH): Facing Challenges in the Near Term

We see risk of GBIA underperforming its peers in the near term on the back of the increase in domestic COVID-19 cases in Guangzhou and Guangdong,...

Osbert Tang, CFA

BOC Aviation (2588 HK): The Stars Don't Look Bigger, but They Do Look Brighter

As downstream players continue to hemorrhage cash, over 99% of BOCAVI’s aircraft are still cash-generating. Valuation is undemanding for a high...

Stanley Tsai, CFA

Travelsky (696): Recovery and Undervalued Vs Airlines

Volume recovery is the main thesis for Travelsky but its share price has not received the same attention from investors and u/perform the airlines...

Henry Soediarko

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