HK/China Equity Long-Short

Osbert Tang, CFA

Equity Bottom-Up

Cathay Pacific Airways / Equity Bottom-Up

<ul>
<li>With more foreign countries being granted visa-free visits to China, <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> will benefit from more transfer traffic via Hong Kong.</li>
<li>Recovery is decent with passenger traffic rising 37.5% in 5M24. CX's capacity already returned to 80% of pre-pandemic in 2Q24, and this will reach 100% in 1Q25. </li>
<li>YTD, CX is still a laggard relative to many global airlines. Its P/B valuation is not stretched at 0.8x, given ROE of 11% over the next 3 years.  </li>
</ul>


With more foreign countries being granted visa-free visits to China, Cathay Pacific Airways (293 HK) will benefit from more transfer traffic via Hong Kong.
Recovery is decent with passenger traffic rising 37.5% in 5M24. CX's capacity already returned to 80% of pre-pandemic in 2Q24, and this will reach 100% in 1Q25. 
YTD, CX is still a laggard relative to many global airlines. Its P/B valuation is not stretched at 0.8x, given ROE of 11% over the next 3 years.  


Cathay Pacific (293 HK): Multiple Positive Developments

Founder & Managing Director, AIR Control Tower, AIR Control Tower

Neil Glynn

Founder & Managing Director, AIR Control Tower

AIR Control Tower

AIR Control Tower is an independent research and analysis platform. Its mission is to provide impactful insight and analysis across the global airline industry at a company and market level via detailed financial models to aid decision making for key stake holders at a time when risks have seldom, if ever, been higher and the global sector grapples with the imperative of funding de-carbonisation. Unique analysis forecasting global carrier-level earnings/cash flows, and restructuring/de-leveraging prospects, is designed to dynamically assess the health of the industry, predict surprises and identify potential requirements for third party support.

Insights on the global airline industry

<ul>
<li>JAL finishing FY24 strongly with another guidance upgrade – upgraded FY26 targets more logical in light of existing ANA targets</li>
<li>​Demand momentum particularly helpful as wages rise across Japan and ​cost control to remain impressive over FY25-FY26 as LCC growth set to dilute FSC inflation</li>
<li>​Detailed analysis of JAL’s widening margin gap to ANA suggests revenue solution required – momentum helpful and needs to be watched carefully</li>
</ul>


JAL finishing FY24 strongly with another guidance upgrade – upgraded FY26 targets more logical in light of existing ANA targets
​Demand momentum particularly helpful as wages rise across Japan and ​cost control to remain impressive over FY25-FY26 as LCC growth set to dilute FSC inflation
​Detailed analysis of JAL’s widening margin gap to ANA suggests revenue solution required – momentum helpful and needs to be watched carefully


Japan Airlines – Encouraging Lifting of Medium Term Expectations to Narrow Recovery Gap to ANA

Expert on Japan Retail and Consumer Markets, JapanConsuming

Michael Causton

Expert on Japan Retail and Consumer Markets

Real Insight on Japanese Consumer Markets

JapanConsuming

JapanConsuming is a specialist research firm producing intelligence on Japanese retail and consumer markets. Founded in 2000, JapanConsuming has become the leading provider of insights on Japanese retailers and consumer trends to retailers, brands, government agencies and investors. As well as a highly regarded monthly report on the market, JapanConsuming produces in-depth reports on retail sectors, seminars on key trends and telephone consulting to investors on trends and retailers.

JapanConsuming was founded by Michael Causton and Roy Larke. 

<ul>
<li>Amidst intense competition in online mall retailing, JAL and ANA both launched their own e-commerce malls last year to replace once popular catalogues.</li>
<li>Although a tough market to enter given the competition from the big 3 (Amazon, Rakuten and Yahoo), airlines have distinct advantages over other small malls.</li>
<li>In particular, they have data on millions of consumers and access to premium customers willing to spend ¥1 million on a case of wine.</li>
</ul>


Amidst intense competition in online mall retailing, JAL and ANA both launched their own e-commerce malls last year to replace once popular catalogues.
Although a tough market to enter given the competition from the big 3 (Amazon, Rakuten and Yahoo), airlines have distinct advantages over other small malls.
In particular, they have data on millions of consumers and access to premium customers willing to spend ¥1 million on a case of wine.


<ul>
<li>We refresh estimates for ANA and JAL, and highlight we think the strength of FY24 makes it difficult for ANA to avoid an earnings decline in FY25.</li>
<li>However, ANA's superior recovery to JAL poses bigger questions for JAL as it revisits its medium term plan on 21 March</li>
<li>Our deep dive on margin management at each carrier suggests a revenue problem rather than a cost problem at JAL; but without revenue improvements, it will have to cut costs</li>
</ul>


We refresh estimates for ANA and JAL, and highlight we think the strength of FY24 makes it difficult for ANA to avoid an earnings decline in FY25.
However, ANA's superior recovery to JAL poses bigger questions for JAL as it revisits its medium term plan on 21 March
Our deep dive on margin management at each carrier suggests a revenue problem rather than a cost problem at JAL; but without revenue improvements, it will have to cut costs


Japanese Airlines – ANA’s Margin Outperformance Poses Big Questions for JAL

<ul>
<li>ANA has revised its FY24 to March 2024 profit guidance upward on higher revenues; EBIT up from ¥120bn to ¥190bn in line with consensus (AIRCT ¥182bn).</li>
<li>Air Transportation naturally drives the upgrade, with its EBIT guide up ¥60bn as higher revenues outweigh higher costs.</li>
<li>This upgrade also has major relevance for JAL, where expect a FY24 EBIT guidance upgrade. We are at ¥177bn versus consensus of ¥142bn/guidance of ¥130bn.</li>
</ul>


ANA has revised its FY24 to March 2024 profit guidance upward on higher revenues; EBIT up from ¥120bn to ¥190bn in line with consensus (AIRCT ¥182bn).
Air Transportation naturally drives the upgrade, with its EBIT guide up ¥60bn as higher revenues outweigh higher costs.
This upgrade also has major relevance for JAL, where expect a FY24 EBIT guidance upgrade. We are at ¥177bn versus consensus of ¥142bn/guidance of ¥130bn.


ANA Holdings -Big Upgrade with Big Read Across for JAL

Japan

ANA Holdings Inc provides a variety of air transportation-related services. The Company offers scheduled & unscheduled air passenger services and air courier services. ANA sells aircraft parts and provides travel arrangement & reservation services as well.

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Ana Holdings (9202 JP)

Cathay Pacific (293 HK): Multiple Positive Developments

As more countries gain visa-free access to China, CX will benefit from increased transfer traffic. CX's recovery is on track with passenger...

Osbert Tang, CFA

Japan Airlines – Encouraging Lifting of Medium Term Expectations to Narrow Recovery Gap to ANA

Detailed analysis of JAL's medium term plan update, FY24-FY26 earnings prospects, and widening margin gap to principal competitor All Nippon Airways

Neil Glynn

JAL Mall: Gold from 30m Mileage Members

JAL and ANA enter online retail market with e-commerce malls, leveraging customer data and premium clientele to compete with big players like...

Michael Causton

Japanese Airlines – ANA’s Margin Outperformance Poses Big Questions for JAL

A deep dive on ANA and JAL analysing the drivers of ANA's superior financial recover to JAL and the implications for JAL's medium term strategy...

Neil Glynn

ANA Holdings -Big Upgrade with Big Read Across for JAL

ANA upgrades FY24 EBIT guidance by 58% after 3Q as higher revenues outweigh higher costs. Read across for JAL, where we expect a big upgrade; we...

Neil Glynn

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Cathay Pacific (293 HK): Multiple Positive Developments

​As more countries gain visa-free access to China, CX will benefit from increased transfer traffic. CX's recovery is on track with passenger...

Osbert Tang, CFA

Japan Airlines – Encouraging Lifting of Medium Term Expectations to Narrow Recovery Gap to ANA

Detailed analysis of JAL's medium term plan update, FY24-FY26 earnings prospects, and widening margin gap to principal competitor All Nippon Airways

Neil Glynn

JAL Mall: Gold from 30m Mileage Members

​JAL and ANA enter online retail market with e-commerce malls, leveraging customer data and premium clientele to compete with big players like...

Michael Causton

Japanese Airlines – ANA’s Margin Outperformance Poses Big Questions for JAL

A deep dive on ANA and JAL analysing the drivers of ANA's superior financial recover to JAL and the implications for JAL's medium term strategy...

Neil Glynn

ANA Holdings -Big Upgrade with Big Read Across for JAL

ANA upgrades FY24 EBIT guidance by 58% after 3Q as higher revenues outweigh higher costs. Read across for JAL, where we expect a big upgrade; we...

Neil Glynn

As more countries gain visa-free access to China, CX will benefit from increased transfer traffic. CX's recovery is on track with passenger...

JAL and ANA enter online retail market with e-commerce malls, leveraging customer data and premium clientele to compete with big players like...