Regional Aviation - UOB Kay Hian 2015-12-07: Takeaways From Regional Aviation Marketing Trip

SIA ENGINEERING CO LTD S59.SI SATS LTD S58.SI

Aviation – Regional: Takeaways From Regional Aviation Marketing Trip

We marketed regional airlines, regional airports and aviation support services to fund managers in Hong Kong.
While most appreciated the attractive valuations of Chinese carriers, their high US dollar-debts and weak yields were pushbacks.
Clients appreciated the defensive nature of airports but had mixed views on AOT, BCIA and MAHB.

Most clients acknowledged the relatively strong traffic growth of Chinese carriers but noted that international yields remained weak and opined that this could curb earnings growth. We pointed out that the decline in international yields is a reflection of:
1. reduction in fuel surcharges,
2. currency weakness in emerging markets, and
3. lower fuel costs.
We highlighted that even taking the lower yields into account, Chinese airlines have seen record 9M operating and net profits despite a 4% devaluation in the renminbi.

Chinese airlines had retraced over the past three weeks and the peak and the subsequent declines tracked the weakness in the renminbi over the same period, suggesting that the move was more speculative in nature.
While, Chinese airlines will be impacted by the weaker renminbi, we believe the market has already factored that in as 12M non-deliverable forwards are assuming a 3.6% depreciation for 2016.
We have however assumed a 4% decline in the renminbi against the US dollar for 2015 and a 5% decline for 2016. Even taking that into account, Chinese airlines’ gearing is expected to decline from an average of 2.6x to 1.2x by 2016, due to strong earnings and A- share cash infusion.

We highlighted that much of the overcapacity was within Southeast Asia and that airlines are not recklessly adding capacity.
We pointed out that Chinese carriers manage loads very effectively with little variation over the past three years.
We also highlighted that Chinese airlines have reduced capacity in several regions, notably to North America.

SATS drew investor interest on the back of consistent improvement in margins and strong cash generation.
We also highlighted SIA Engineering’s (SIAEC’s) operational challenges, pertaining to expanding maintenance centres, maintenance cycles becoming longer and SIAEC’s loss of the Centre of Asia Pacific Excellence for Rolls Royce Trent engine overhaul.

A persistent theme was the relative attraction valuation of A-share listed Shanghai International Airport, vs Beijing International airport and AOT.
While clients believed that the Shanghai Disneyland will draw in visitors, they believed that earnings will only rise meaningfully if international pax throughput improves, due to higher PSC.
We also highlighted that AOT’s traffic throughput had weakened since. There was little interest in MAHB as clients were concerned about a potential tourist shortfall in Turkey, given the recent Russia-Turkey spat. Russian tourists account for the largest share of tourist arrivals to Turkey and MAHB’s Turkish operations.

Chinese airlines are our preferred picks within the airline sector. Gearing is expected to fall sharply, even after we take into account renminbi depreciation. The airlines face little competition on domestic routes and on regional routes they are dominant players. Other Asia-Pacific carriers under our coverage face greater competition and trade at lower PE and P/B multiples.
Within the aviation support services sector, SATS and MAHB are our top buys, while SIAEC is our top sell.

K Ajith UOB Kay Hian | Sophie Leong UOB Kay Hian | http://research.uobkayhian.com/ 2015-12-07

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