[20081120]Aviation "News Report: CSA & CEA to Receive Rmb3bn Asset
Events:
Sina reported a State plan to give Rmb3bn each to China Eastern Airlines (CEA) and China Southern Airlines (CSA). According to the report, the asset injection has been approved in principle, and the funds should be in place by year end. It is feasible that listcos may issue shares to their respective major shareholders in a follow-on offering, if the money is put into the listcos via their major shareholders. As yet, the two listcos have not publicly confirmed this report.
Our Comments:
Asset injection was approved mainly because of the poor profitability and persistently high leverage ratios of the two airlines. Domestic airlines have faced heavy operating pressure in recent years due to the strong cyclicality and the oil price upswing since 2004 (even in 2007 when the sector’s earnings were greatly improved, operating profits of airlines were not good enough if we exclude RMB FX gains). In fact, airlines applied to the government for asset injection as early as 2006, with no progress made in 2007 following the sector recovery. In 2008, airlines saw huge losses again and the leverage ratio of both CEA and CSA climbed further due to high oil prices and weak demand. This should be the key reason behind the recent approval, in our view.
BPS accretion from the asset injection should be limited to CSA. CEA’s valuation remains high though its net assets may increase substantially. The report said it would be feasible that listcos issue shares to their respective major shareholders in a follow-on offering if the money is moved to listcos via their major shareholders. We assume that the two airlines’ follow-on offerings are based on their A/H free float and at a price to be set by the market at the time of asset injection. As CSA-H is currently trading at 0.6x 08 P/B, CSA’s book will be improved little if we assume the new shares will be issued at the current price level (Table 1). Table 2 also shows that even if the share price goes up by 10%, 20%, or 30%, the book value enhancement would be limited. CEA’s book value will be greatly enhanced thanks to its very low net assets. However, CEA’s valuation is still relatively high even after BPS accretion.
Investors are not advised to chase this momentum. Firstly, valuations of airlines listcos are unlikely to decline very much after the asset injection, as Table 1 and Table 2 indicate; secondly, the sector outlook remains unpromising, in our view. We expect that, amid the global economic slowdown, the sector’s demand will remain soft and airlines will continue to see declines in both passenger load factor and airfares in 2009. With sector business sentiment overcast, a Rmb3bn asset injection is pretty small for airlines. In the worst case, airlines may lose Rmb3bn in a single quarter. Therefore, the asset injection cannot substantially improve airlines’ operations. Finally, airlines (especially CSA) are flexible with regard to the timing of the deal. They can suspend follow-on offerings and wait for a better time if their share prices surge on this news.
 avia_081117be-news report of asset injection plan( (89.49 KB)
|
发表于 2008-11-20 10:31
|