Chinese Airlines: Improving Earnings Outlook on Strong Domestic Traffic and Yield

Although Air China, China Southern Airlines, and China Eastern Airlines continued to record losses in the second quarter, Air China and China Southern would have turned a profit if foreign exchange losses were excluded. With the busiest ever summer travel season in China just over, we think the three Chinese airlines will make strong profits in the third quarter. After revising our passenger traffic and yield estimates, we raise Air China's 2023 net income estimate by CNY 6.8 billion to CNY 3.4 billion. We keep China Southern's 2023 net income forecast at CNY 7.8 billion. We expect China Eastern to break even in 2023 compared with our original estimate of CNY 1.9 billion losses. Nonetheless, our fair value estimates remain HKD 6.50 for Air China, HKD 4.92 for China Southern and HKD 2.70 for China Eastern after factoring in higher fuel price assumptions for 2024-25. We think the H shares of China Southern are attractive at about a 15% discount to our fair value estimate. We suggest investors wait for better entry points for Air China and China Eastern.