Investment Summary

Sound demand rebound and mild cost growth make Cathay's 2018H1 loss shrinking by near 90% yoy. We believe that the Company's H2 result prospects are mixed with recovery of demand continually and the moderate cost growth. The positive factor is the gradually fading fuel hedging losses, and the negative factor is the shrink of share of profit from Air China due to the exchange losses. We temporarily maintain the financial forecast and target price unchanged at HK$14.3 for the Company, reaffirming the accumulate rating. (Closing price as at 22 August 2018)

Nearly 90% reduction of Losses in 2018H, Recovering Distributing the Interim Dividends

Cathay recently announced interim results, and the total revenue rose 15.7% to HK$53.08 billion yoy in the first half of 2018, recording a loss of HK$263 million, HK$1.788 billion less yoy, a loss of 6.7 cents EPS, and an interim dividend of 10 cents.

Fuel Costs Increased, But Fuel Hedging Losses Decreased Sharply

Fuel costs increased by 7.4% during the period as the gasoline price went up by 28% and the fuel consumption by 2.1%. But some of the increase was offset by an 80% reduction in fuel hedging losses. In addition, the Company invested more and more fuel-efficient new models to reduce fuel consumption per revenue ton kilometre by 2.5%.

Operating Profits Turn Positive

Since 2016H2, the Company has recorded three consecutive six-month operating losses. In 2018H1, driven by a 15.7% yoy increase in total revenue and an 8% increase in operating expenses, the operating profit turned from negative to positive again, reaching HK$697 million. However, the net financial expenditure overspent nearly HK$200 million or 24% yoy to HK$1 billion, and profit that should account for the affiliated company decreased by HK$0.84 billion. Finally, profit of the shareholders still recorded a small loss.

Passenger Yield Improves

During the period, the increase of passenger capacity (+3.2%) was faster than that of the number of passengers (+1.9%). The P L/F decreased gently by 0.5ppts to 84.2% yoy. However, due to the improvement of revenue management, the increase of fuel surcharges, and strong demand for first class and business class, the yield of passenger transport rose 7.6% to 55.4 cents yoy, and overall revenue of passenger increased by 10.4% to HK$35.45 billion.

Freight Keeps a Strong Momentum

Increased demand for specific cargo shipment and the movement of higher value goods to and from Asia led to a sharp rise in freight yields of 16.3% yoy to HK$1.93. And overall freight revenue increased sharply by 23.4% yoy to HK$12.97billion. The growth of cargo tonnage (+7.5%) continued to be stronger than cargo capacity investment (+4.1%) and the cargo L/F increased by 2.1 ppts yoy to 68.3%.

The Tree-year Transformation Program Has Passed a Half

The three-year enterprise transformation plan has passed a half. During the period, the Company restructured the team structure of its headquarters, appointed a new management and leadership team to implement a series of cost control measures, and achieved some results. The basic cost per ton kilometer (except fuel) increased by only 3.3%, from HK$2.13 to HK$2.20. The management said the Company also plans to move toward simpler, more efficient and other directions, but it will also make investment expenditure for future development, such as hiring more staff and enhancing cabin services to improve customer experience.

Operating Data Maintain Good, Keeping the Target Price Unchanged

Cathay's operating data for the first seven months of 2018 showed that the P L /F of Chinese mainland and North American routes still kept increasing, improving by 1.4 and 2.7 ppts, respectively. The P L /F of other routines decreased by 1.0-3.1 ppts. The Company is adding more capacity to Europe, to grasp the revival of demand of Europe. Freight business has maintained a relatively high boom, and P L /F has increased by 2 ppts to 68.6%.

We believe that the Company's H2 result prospects are mixed with recovery of demand continually and the moderate cost growth. The positive factor is the gradually fading fuel hedging losses, and the negative factor is the shrink of share of profit from Air China due to the exchange losses. We temporarily maintain the financial forecast and target price unchanged at HK$14.3 for the Company, reaffirming the accumulate rating.

Risk

Surging oil price

RMB depreciation

Demand affected by economy

Transformation program failed

Financials

Click Here for PDF format...