Boeing: China Deliveries Hostage to Trade Negotiation, but This Too Shall Pass

Key Morningstar Metrics for Boeing

• Fair Value Estimate: $200.00
• Morningstar Rating: ★★★★
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: High

Chinese authorities instructed domestic airlines to stop taking delivery of aircraft from Boeing BA, as part of a widening and complex trade negotiation prompted by escalating tariffs announced on US and Chinese trade. Boeing has around 25 737 MAX jets ready to deliver to China, with more in the works.

Big picture: China’s operators could account for 20% of aircraft deliveries over the next 20 years, as even its domestic air travel market is quite large. Since 2016, Chinese airlines took delivery of 14% of the 4,450 jets Boeing delivered and 14.5% of the 6,600 planes Airbus delivered.

• In the context of the trade war between the United States and China, we think holding aircraft deliveries by the US’ single largest exporter hostage makes sense, especially as it prevents payment of tariffs recently declared by China on those very imports.
• In September 2022, before Chinese authorities recertified the 737 MAX as airworthy, Boeing threatened to sell back-ordered planes to non-Chinese airlines. We believe this tactic remains available, as the planes are in high demand and other governments have waived tariffs.

Key stats: When an airline takes delivery of a jet, it usually has already made deposit and progress payments to the manufacturer for up to half the value of the plane, depending on its financial preference and demand for the craft.

• We thus think delayed delivery, especially of the 25 jets sold to Chinese operators that are already behind schedule, will have a muted impact on Boeing’s bottom line, although together these planes represent approximately $625 million of cash flow that Boeing could use.

The bottom line: We do not believe suspended deliveries to Chinese airlines will become permanent, and we have not altered our forecast or fair value estimate for Boeing.

• Boeing shares are trading around 22% below our fair value estimate. With our High Uncertainty Rating, the shares would trade at 5 stars below $120, or a 40% discount.