Company Reports

Cathay Pacific’s 2023 earnings surprised positively as both passenger and cargo yields were more resilient than anticipated in the second half. Cathay has pushed back its capacity recovery, and we think the slower pace should support yields in 2024. After lifting our yield assumptions, we raise our 2024 net income forecast to HKD 5.6 billion from HKD 3.9 billion. Our net income estimates are largely unchanged for 2025 and beyond. As a result, we marginally raise our fair value estimate to HKD 10 from HKD 9.70. The shares closed 8% below our revised fair value estimate on March 13, but we prefer a higher margin of safety before buying.

As the flagship airline in Hong Kong, Cathay Pacific operates an extensive global route network leveraging its dominance in the international aviation hub. The absence of a domestic market means Cathay must rely entirely on international markets. Before the pandemic, the North American market accounted for about 26% of Cathay's passenger capacity, followed by Europe and North Asia (including China), each representing about 20% of capacity.

Cathay Pacific’s flight cancellation and schedule cut reveal a shortage of staff, especially that of experienced pilots. We think Cathay is unlikely to resolve the challenge in the near term after reviewing its pilot counts. As such, we reduce our passenger capacity assumption by 9% in 2024 and by 6% in 2025. We now assume passenger capacity will reach 82% of 2019's level in 2024 and 98% in 2025. Accordingly, we cut our 2024 earnings estimate to HKD 3.9 billion from HKD 6.3 billion; and for 2025, to HKD 4.7 billion from HKD 6.5 billion. Our estimates for 2026 and beyond are unchanged as we anticipate the staff shortage would have been resolved by then. Our fair value estimate remains HKD 9.70. Despite the capacity constraint, we continue to prefer Cathay over its mainland Chinese peers for a better supply/demand dynamic, a healthier balance sheet, and lower currency depreciation risk.

We view Air China’s proposed private placement of new A- and H-shares positively. Based on our estimate, the implied average issuance price will be about 8% above our current fair value estimate. Therefore, we think the placement is value-accretive. The up to CNY 6 billion and HKD 2 billion raised should help Air China manage its strained balance sheet while meeting capital expenditure needs. We keep our fair value estimates at HKD 6.40 per H-share and CNY 5.90 per A-share. Air China’s H-share price is 27% below our fair value estimate, but we prefer Cathay Pacific presently. We think Cathay is less exposed to slowing business travel in China and a depreciating Chinese yuan.

As the flagship airline in Hong Kong, Cathay Pacific operates an extensive global route network leveraging its dominance in the international aviation hub. The absence of a domestic market means Cathay must rely entirely on international markets. Before the pandemic, the North American market accounted for about 26% of Cathay's passenger capacity, followed by Europe and North Asia (including China), each representing about 20% of capacity.

As expected, Cathay Pacific turned profitable in the first half thanks to improving passenger traffic. Seat capacity reached 51% of 2019 level in June, but management kept 70% guidance by December 2023. As such, we reduce our seat capacity forecast to 53% of 2019 level for 2023 and 90% for 2024, down from 60% and 92%. But this is more than offset by our higher load factor and passenger yield assumptions. As a result, we increase our earnings estimates to HKD 7.5 billion in 2023 and HKD 6.3 billion in 2024 from HKD 6.7 billion and HKD 3.3 billion, respectively. We raise our fair value estimate to HKD 9.70 from HKD 8.90. The shares currently trade 9% below our fair value estimate, but we would prefer a higher margin of safety. We also change our Morningstar Uncertainty Rating to Medium from High to reflect lower uncertainty as the COVID-19 pandemic subsides.

No-moat Cathay Pacific’s turnaround in the first half is expected, but the plan to fully redeem the HKD 19.5 billion preference shares over the next 12 months is ahead of our forecast for a full redemption by 2025. The preliminary net income guidance ranges from HKD 4 billion to HKD 4.5 billion, translating to HKD 2.1 billion-HKD 2.6 billion in recurring net income after excluding an HKD 1.9 billion one-off disposal gain. We keep our full-year net income forecast at HKD 6.7 billion ahead of its interim results release in August. Our fair value estimate remains HKD 8.90. The shares closed 4% below our fair value estimate on July 14 and we think the shares are fairly valued.

No-moat Cathay Pacific’s full-year losses of HKD 7.2 billion translate into HKD 1.9 billion losses in the second half of 2022, in line with our expectation. The significant sequential improvement was driven by higher passenger revenue, which jumped six times to HKD 12.2 billion in the second half from merely HKD 2.1 billion in the first half. The strong rebound is set to continue in 2023 as Cathay embraces the postpandemic world. We marginally increase our 2023 earnings estimate to HKD 6.7 billion from HKD 6.4 billion. Our fair value estimate remains HKD 8.90. The shares closed with 12% discount to our fair value estimate as of March 8. Given the high uncertainty inherent in airlines, we would prefer a higher margin of safety before buying.

The three Chinese airlines—Air China, China Southern Airlines, and China Eastern Airlines—are set for a strong recovery in 2023 as China reopens its border. The move to end international travel restrictions came two quarters ahead of our expectations. As such, we have raised our international capacity forecast to about 65% of 2019 levels in 2023 from about 35% in our original forecast. We think Cathay Pacific should also benefit from a faster resumption of flights with the mainland, and hence we increase our 2023 seat capacity forecasts to 60% of 2019 levels from 55%. We expect the three Chinese airlines to remain in the negative, with losses ranging from CNY 0.4 billion to CNY 3.7 billion in 2023, but we expect Cathay to turn around with HKD 6.4 billion net income.

As the flagship airline in Hong Kong, Cathay Pacific operates an extensive global route network leveraging its dominance in the international aviation hub. The absence of a domestic market means Cathay must rely entirely on international markets. Before the pandemic, the North American market accounted for about 26% of Cathay's passenger capacity, followed by Europe and North Asia (including China), each representing about 20% of capacity.

Cathay Pacific’s first-half loss of HKD 5.3 billion was expected given passenger capacity was only 2% of 2019 levels from January to April. Nonetheless, passenger load factor rebounded sharply to 59.2% from 36.8% in the second half of 2021, and passenger yield further climbed to a record high, suggesting strong passenger demand. As the Hong Kong government further eases COVID-19 restrictions, we expect a meaningful increase in passenger capacity and traffic in the second half.

As the flagship airline in Hong Kong, Cathay Pacific operates an extensive global route network leveraging its dominance in the international aviation hub. The absence of a domestic market means Cathay must rely entirely on international markets. Before the pandemic, the North American market accounted for about 26% of Cathay's passenger capacity, followed by Europe and North Asia (including China), each representing about 20% of capacity.

Cathay Pacific’s full-year losses of HKD 6.1 billion translates into HKD 1.7 billion profit in the second-half 2021, beating our expectation of HKD 1.3 billion losses. This was helped by exceptionally strong performance in cargo service and lower staff costs after restructuring. We think the positive uplift is unlikely to continue in 2022 given COVID-19 restrictions in Hong Kong and the high fuel price. We increase our loss estimate to HKD 8.6 billion from HKD 3.8 billion for 2022 to account for the reduced capacity and high fuel cost. We expect Cathay to remain in loss of HKD 2.2 billion in 2023, and breakeven in 2024 compared with a turnaround in 2023 in our previous estimates.

The grant of license to Greater Bay Airlines is set to introduce more competition to the Hong Kong air travel market, but we expect limited impact to Cathay Pacific. In the near term, with Cathay operating at 2% of its seat capacity, its performance is largely at the mercy of the pandemic and thus, competition is not an immediate issue. In the long run, we expect Cathay to retain an overwhelming advantage over its Hong Kong-registered competitors in terms of capacity and flight routes. We keep our assumptions unchanged and maintain our HKD 7 per share fair value estimate.

We have reduced our 2022 earnings estimate for Cathay Pacific following the announced passenger and cargo capacity reduction until January end. While the current capacity reduction plan is temporary, we think chances are high that capacity recovery will be delayed. As such, we have reduced our 2022 capacity assumptions for both passenger and cargo. Our capacity estimate for 2023 and beyond is unchanged. After factoring in a higher in-house jet fuel cost forecast for 2022 and 2023, we now expect Cathay to see a HKD 3.8 billion loss in 2022 and HKD 0.4 billion profit in 2023, down from HKD 1.5 billion and HKD 4.1 billion profit in our original estimate, respectively. We are keeping our fair value estimate at HKD 7 per share as our long-term view is unchanged. The shares are trading at about a 9% discount to our fair value estimate, but we suggest investors wait for a more attractive entry point.

We think Cathay Pacific will be the major beneficiary of this rule change--benefiting from more transit passengers traveling from the mainland to the U.S. Chinese airlines, however, are unlikely to reap benefits from the rule change due to capacity limits put in by the government. U.S.’ border easing represents potential upsides to near-term earnings but does not change our long-term assumptions. Therefore, we maintain our fair value estimates on airlines.

Cathay Pacific’s, or Cathay’s, first-half loss of HKD 7.9 billion is well expected, given depressed international air passenger traffic. After adjusting our model, we keep our 2021 net loss forecast unchanged at HKD 13.2 billion, but reduce our 2022 net profit assumption to HKD 1.4 billion from HKD 3.4 billion, after factoring in a slower recovery in 2022. Our view that Cathay is in a sound liquidity position remains unchanged. We keep our fair value estimate at HKD 7 per share. The shares are trading at about an 8% discount to our fair value estimate, and we consider the shares fairly valued given our high uncertainty rating.

Cathay Pacific Airways is a premium legacy carrier with above-average historical passenger load factors, but facing rising pricing wars and near-term uncertainties.

Following its investor day, we keep our long-term view for Cathay Pacific’s recovery unchanged. The company is sitting on the strongest liquidity position since the coronavirus pandemic, and our expectation for a pickup in second-half passenger traffic will mark the beginning of a long-awaited recovery for Hong Kong’s flagship carrier. However, we have increased our 2021 loss estimates following adjustments to a slower-than-expected recovery in first-half 2021. Our profit forecast assumes a rebound to profit in 2022. Our fair value estimate remains HKD 7 per share. We think the shares are fairly valued.

Cathay Pacific Airways is a premium legacy carrier with above-average historical passenger load factors, but facing rising pricing wars and near-term uncertainties.