Summary

Benefited from the rising passenger load factor and ticket price led by the booming domestic demand, together with surged exchange gain, CSA's revenue and net profit soar 22.06% and 33.4% to 41.425 billion and 2.762 billion. Fully diluted EPS stood 0.28yuan.

As leaning supply strategy continued, the growth ratio of international routes beat the domestic routes in the passenger turnover, in the first 9 months (+31.32% yoy Vs +5.29% yoy).

As for passenger load factor, driven by the robust market, CSA's domestic routes increased by 3.4 ppts to 83.2%, better than the international routes, which decreased by 1.0 ppt to 74.7%. The overall passenger load reached 81.5%, up 2.4 ppts yoy.

The weak global economies increase the probability of lower oil prices. Thanks to the high load factor and domestic ticket price, CSA is likely to report stronger core earnings growth in 2H2011. We expect 2011 and 2012 the Company's EPS will be 0.757 and 0.833 HKD respectively. Our 12-month TP of HK$ 5.8 is based on 2012E EPS and 7 x P/E. We reiterate buy rating.

Rapid growth for International routes as the leaning capacity expansion strategy

CSA put announced the Strategic Transformation in early 2010 and plan to raise its international business revenue proportion in the total revenue from 13.31% in 2009 to 30% by 2012, which led to an apparently leaning capacity expansion strategy: more aircrafts were shift to international routes. During the first 9 months of 2011, the ASK of domestic routes increased 1% yoy only and international routes surged 33% yoy.

In the passenger turnover, the growth ratio of international routes beat domestic routes in the first 9 months (+31.32% yoy Vs +5.29% yoy).

As for cargo turnover, the international routes grew by 30.19% ( fallen from +219.71% in the same period of 2010) and the domestic routes declined by 3.38% yoy ( also fallen from +21.35% in the same period of 2010).

The passenger load reached 81.5% during the first 9 months, up 2.4 ppts yoy, higher than the historical average of 77.27%. On a closer look, the domestic routes increased by 3.4 ppts to 83.2%, also higher than the historical average of 78.62%. The international routes decreased by 1.0 ppt to 74.7%, still higher than the historical average of 70.55%.

The Company plans to continue the strategic transition of more international routes. By 2011, the Company will introduce 55 new aircrafts, and clean 16 out, representing an increase of 7% in seats, which will increase CSA's frequency to 40 services each week, up 70% yoy. By end of 2015, the Company expected to operate more than 110 round-trip flights in the Australian market, with more than 15 flights per day, also develop an extensive network of 50% share and becomes the largest Chinese airline to Australia.

FY2011H result up 33.4% mainly due to the strong domestic routes and exchange gains

CSA's 2011H revenue and net profit grew by 22.06% and 33.4% to 41.425 billion and 2.762 billion. Fully diluted EPS stood 0.28yuan (0.126 in 1Q and 0.156 in 2Q), without any interim dividend.

The key 2011H Highlight :

- Conservative capacity expansion in 2011H, led to high passenger load

CSA's net increase of aircrafts reported 2 hoh and 21 yoy. The overall ASK increased by 5.79% yoy only while the passenger traffic grew 9.43% yoy. The short supply led to a yoy increase of 2.68 ppts in passenger load factor to 80.6%.

- Passenger: High ticket price and high fuel price

Passenger revenue increased by 21.2% yoy on a basis of 9.43% increase in passenger traffic. The higher growth ratio of income than that of the traffic turnover was mainly benefit from improvements in supply and demand and more monopoly which caused rise in prices. The ticket price grew 14.66% yoy and the yield per RPK increased from 0.58 in 2010H to 0.64 in 2011H. Increase in passenger fares contributed 56% revenue growth.

Due to the rising fuel price and traffic, average fuel costs surged 34.5% yoy and the proportion of fuel cost in total operating expenses reached 41.5%, which has eroded the gross profit brought from the rising ticket prices greatly.

- Cargo: Freight price declined

In first half, the Company's freight revenues increased 13.1% to 2.742 billion, 6.9% of total revenue. As the international air cargo industry remains in the doldrums since late last year, cargo freight went down. CSA's yield per RFTK declined from 1.76 yuan to 1.61 yuan.

- Biggest beneficiary of CNY appreciation

CSA remains the Biggest beneficiary of CNY appreciation among the three carriers. Given the CNY appreciation of 5.6% in 2011H, CSA report 1.239 billion exchange gains, up 350% yoy, contributing 0.1 yuan for its EPS.

Likely to report stronger core earnings growth in 2H2011

We forecast there will still be surprises in 2H2011 net profit, due to:

1） The ticket price of CSA was higher than the peers apparently as it was less affected by High-speed Railways than the peers this year.

2） Given the market view for CNY appreciation of 5% in 2011, the interest-bearing U.S.D debts of about 43 billion yuan by the end of June 30 2011, is expected to bring the corresponding exchange gain of about 800 million.

3） The international oil price was showing some downward trend since the last two months. According to the NDRC, a substantial reduction in domestic fuel price of 115 yuan/ton in domestic jet fuel issued in September. Decline in fuel prices will help the airlines to relieve cost pressures.

Valuation

The main competition CSA faced in the future was the opening of the Beijing-Guangzhou high-speed railway and the Xiamen-Shenzhen high-speed railway. As CSA's network proved to be more evenly on the map, we believe the negative impact on CSA will be smaller than expectations. After 7.23 high-speed railway crash accident in Wenzhou, China's construction of high-speed railway slow down, which further delay the completion of CSA's competitors.

The weak global economies increase the probability of lower oil prices. Thanks to the high load factor and domestic ticket price, CSA is likely to report stronger core earnings growth in 2H2011. We expect 2011 and 2012 the Company's EPS will be 0.757 and 0.833 HKD respectively. Our 12-month TP of HK$ 5.8 is based on 2012E EPS and 7 x P/E. We reiterate buy rating.

Risk

Traffic demand languished for the deterioration of macro-economy;

The depreciation of the RMB against USD would bring exchange loss;

Oil prices rose exceeded forecast.

War, terrorist attacks, SARS and other emergencies;

Irrational inter-industrial price war;

High-speed railway competition.

Financial Forecast

Click Here for PDF format...