Tourism Growth - Japan & China

Deutsche Bank Markets Research Asia Transportation Air Industry Regional Airlines Date 8 October 2015 Forecast Change Tourism Growth - Japan & China Top Buys : JAL, ANA, Air China & China Southern. ________________________________________________________________________________________________________________ Deutsche Bank AG/Hong Kong Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 124/04/2015. Joe Liew, CFA Research Analyst (+65) 6423 8507 joe.liew@db.com Vincent Ha, CFA Research Analyst (+852) 2203 6247 vincent.ha@db.com Key Changes Company Target Price Rating 0293.HK 19.00 to 16.35(HKD) - AIRA.KL 2.67 to 1.76(MYR) - 003490.KS 34,140.00 to 28,000.00(KRW) - Source: Deutsche Bank Top picks Air China (0753.HK),HKD6.17 Buy China Southern Airlines (1055.HK),HKD5.50 Buy Japan Airlines (9201.T),¥4,155 Buy ANA Holdings (9202.T),¥335 Buy Source: Deutsche Bank Competitive pressures in the region mean that not all airlines are benefiting equally from low fuel prices. A slowdown in cargo growth since the start of the year has also been a dampener to spirits. Our top buy ideas in the regional airlines are in Japan and China because demand drivers appear intact. Valuations do not look overly stretched, and strong 3Q results are catalysts. In this report, we have cut earnings forecasts for AirAsia, Cathay Pacific and Korean Air. Inbound Japan tourism up 49% YTD Aug 2015 We expect strong inbound tourism to continue, especially from China as forward bookings remain healthy. There appears to be upside to management guidance and consensus expectations. We like ANA for growth and JAL for value. ANA looks better positioned to tap into international tourism because of its dominance at Haneda and more aggressive capacity growth plans. JAL, having net cash on its balance sheet, is well placed to increase shareholder value through higher dividends in our view. In China, Air China and China Southern look the most attractively valued Chinese airline stocks have been down over 30% on average over the last three months on fears of RMB devaluation. P/B valuations are now just over 1x and look compelling relative to regional peers and forecast core ROEs of around 20%. 3Q bookings have been strong, leading us to believe core results will be encouraging too. Fuel requirements are unhedged and hence they should benefit more than hedged regional peers by purchasing lower fuel prices in the spot market. TP cut for Cathay Pacific (CX), AirAsia and Korean Air We are cutting earning forecasts for CX and Korean Air to reflect poor 1H results and the latest management commentary. Both companies are experiencing yield pressure and a slowdown in the cargo business. Korean Air has also seen traffic drop off because of MERS. For AirAsia, the weaker ringgit and write-offs in the Indonesian business has driven a cut in forecasts and TP. While we are keeping our Buy recommendation on AirAsia, we are removing it from our top Buy list in Malaysia and in regional airlines. We maintain our Hold on CX and Sell on Korean Air. See summary of key changes in Figure 2, full details on pages 13-16. Figure 1: Valuation of top picks Company Ticker Curr. Price Rec TP P/B (x) Core ROE(%) Adj. EV/ EBITDAR(x) * Company name 06/10/2015 (List) FY15E FY16E FY15E FY16E FY15E FY16E Air China 0753.HK HKD 6.36 Buy 7.50 1.14 1.05 17.7 16.5 6.1 6.0 China Southern 1055.HK HKD 5.72 Buy 8.00 1.21 1.14 22.0 20.5 6.3 6.2 Japan Airlines 9201.T JPY 4,435 Buy 5,240 1.74 1.69 22.3 20.1 4.6 4.4 ANA 9202.T JPY 351 Buy 415 1.36 1.20 8.7 10.5 4.6 4.0 Source: Deutsche Bank estimates Notes: JAL and ANA are March ended, and thus numbers represent FYMar16-17. * We capitalize operating lease by a factor of 7 to better compare different capital structures. This is reflected in the adjusted EV number in the adjusted EV/EBITDAR calculation. 8 October 2015 Air Regional Airlines Page 2 Deutsche Bank AG/Hong Kong Key earnings forecast and target price changes Figure 2: Summary of Key changes Target price changes Company name Ticker Curr TP (before) TP (after) (BBG) Cathay Pacific 0293.HK HKD 19.00 16.35 AirAsia AIRA.MK MYR 2.67 1.76 Korean Air 003490.KS KRW 34,140 28,000 Net profit forecast changes Company name Ticker Curr Net profit forecast (before) Net profit forecast (after) (BBG) 15E 16E 17E 15E 16E 17E Cathay Pacific 0293.HK HKDmn 7,111 9,059 9,726 5,332 7,184 7,784 AirAsia AIRA.MK MYRmn 703 906 1,128 670 698