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Andrew ORCHARD
T (852) 2539 1331
E andrew.orchard@cimb.com
China Eastern’s PRC GAAP net profit rose 9% yoy to Rmb2.9bn in 3Q13.
This improvement was in line with our 2H13 HKFRS net profit growth
expectations. Furthermore, the base comparisons are likely to soften in
4Q13 due to the drop in contribution from Japan in 4Q12.
China Eastern’s 3Q13 earnings
growth was partially due to a sharp
drop in net finance expenses in 2Q13.
As such, we raise FY13-15 EPS by
5-8% but raise operating profit
forecasts by only 1-3%. Maintain
Underperform, with the de-rating
catalyst of continued yield erosion.
Due to EPS increases however, our
target price rises to HK$2, based on
6.4x CY15 EV/EBITDAR (its 5-year
average multiple).
Not as strong as it seems
Although 3Q13 net profit in PRC
GAAP terms rose 9% yoy, we believe
that the underlying operations
remain challenging. 3Q13 revenues
increased only 2% yoy despite the
passenger traffic growth of around
9% yoy last quarter, implying
continued yield pressures. Gross
profit fell 11% yoy in 3Q13 as costs
increased. We believe that this may
be related to the company’s capacity
increase in Western China.
Non-aviation revenues
improved
China Eastern’s 3Q13 bottomline was
boosted by the lower net financial
expense. We believe that this mainly
stems from the improved net
exchange gains from the Rmb
appreciation, as well as lower interest
expense. The company also observed
an increase in 3Q13 non-operating
income, which we believe came from
government subsidies.
Valuation trap
China Eastern trades at 0.9x FY14
P/BV. While this appears inexpensive
relative to its historical average of
about 1.6x, we think that the Chinese
airlines are entering a slower growth
phase and recurring ROEs will
remain depressed. In our view, this
will be caused by the stiffer domestic
competition and the costs related to
international expansion.
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