12 August 2021 Chinese Airlines Going up – it’s about when, more than if Equities Aviation China Chinese airlines have been hit again by COVID-19 and trade at March 2020 lows, but focus should be on 2H22-23e recovery Near-term losses priced in; there are short and long-term catalysts and the Big 3 are well capitalised to emerge stronger Reiterate Buy on CSA-H; upgrade AC-H, CEA-A/H and CSA-A to Buy; key risk is delays to reopening of international travel Don’t wait to board: The recent outbreak of COVID-19 has sent the Big 3 Chinese airline stocks tumbling by 25-28% from their recent highs. PB valuations are back to near their 2020 trough levels. Having covered industrial cyclicals for more than a decade, though, we can say with confidence that, when they’re trading at these levels, these stocks usually stop reacting to any further negative news. When, more than if: We are turning bullish on the sector with both short-term catalysts and medium- to long-term drivers in sight. Similar to past instances, we expect these cyclical shares to rebound sharply as soon as China manages to contain this COVID-19 wave and domestic traffic recovers (see exhibit 10). Indeed, in April 2021, domestic revenue passenger kilometers (RPK) of the Big 3 Chinese airlines grew to 115% of 2019 levels. In the medium to long term, we continue to argue that the Big 3 are well positioned to gain market share in not only domestic but also international routes. The Big 3 are also well capitalised while a high exposure to domestic routes and cargo business should allow them to remain cash-flow positive. On the other hand, many of their domestic and international peers are struggling to remain afloat and are shrinking their size to adjust to this prolonged downturn. Even assuming an international travel recovery by 2023e of just 50% of 2019 levels, we forecast the Big 3 Chinese airlines to generate double-digit ROE. Look beyond another year of losses in 2021e: Yes, we raise our 2021e loss forecast for the Big 3 to RMB24bn (from a loss of RMB12bn), and this is nearly 3x the RMB8.3bn consensus loss forecast. This reflects our cautious view on a recovery in international travel, lower domestic pax and yield, and cost pressures partially offset by strong cargo. But we believe the market is looking further out to 2023e, when we expect domestic traffic to reach 2019 levels and international traffic to reach 50%. However, to reflect higher expected domestic pax yields, we forecast Big 3’s average EBIT margin of 13% and ROE of 12% in 2023e. Sector upgrade: The H-shares of the Big 3 airlines now trade at 1 SD below consensus average 12-month forward PB since mid-2011. The Big 3 airlines are poised to emerge stronger post COVID-19. To reflect the same, we now value all these stocks above their historical mean 12-month forward PB on 2022e book. We reiterate our Buy rating on CSA-H and upgrade AC-H and CEA-H to Buy (from Hold), CEA-A and CSA-A to Buy (from Reduce), and AC-A to Hold (from Reduce). Downside risks include higher oil prices, further delays in reopening of international travel or disruption to domestic travel from COVID-19, and share price pressure from consensus earnings downgrades that reflect weak near-term traffic outlook. Parash Jain* Head of Shipping & Ports & Asia Transport Research The Hongkong and Shanghai Banking Corporation Limited parashjain@hsbc.com.hk +852 2996 6717 Deepak Maurya* Associate The Hongkong and Shanghai Banking Corporation Limited deepakmaurya@hsbc.com.hk +852 2822 4292 Bruce Chu* Associate The Hongkong and Shanghai Banking Corporation Limited bruce.y.h.chu@hsbc.com.hk +852 2996 6621 Cathy Huang* Associate Guangzhou Click here to enter text. * Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/ qualified pursuant to FINRA regulations Asiamoney Brokers Poll 2021 Voting opens 1st June – 20th August If you value our service and insight Vote now Disclosures & Disclaimer This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it. Issuer of report: The Hongkong and Shanghai Banking Corporation Limited View HSBC Global Research at: https://www.research.hsbc.com Equities ● Aviation 12 August 2021 Exhibit 1. Rating changes and valuation summary 32-64% implied upside on Buy-rated names Mkt cap 3M ADTV Stock Ticker Curr (USDm) (USDm) Air China-H 753 HK HKD 12,761 10.0 Air China-A 601111 CH RMB 12,761 36.7 China Eastern-H 670 HK HKD 9,446 5.9 China Eastern-A 600115 CH RMB 9,446 21.8 China Southern-H 1055 HK HKD 11,348 7.5 China Southern-A 600029 CH RMB 12,686 35.1 ___ Rating ____ __ TP ___ Share New Old New Old price Buy Hold 6.30 5.40 4.79 Hold Reduce 7.30 4.60 6.48 Buy Hold 4.50 4.10 2.75 Buy Reduce 6.40 3.50 4.41 Buy Buy 6.20 6.80 4.03 Buy Reduce 8.00 5.80 5.36 Note: HSBC vs consensus is based on 2021e reported profit/loss estimates; priced at close of 09 August 2021 Source: Bloomberg, Refinitiv Datastream, HSBC estimates Target 2021e HSBC __ 2021e ___ _ Price performance _ Upside PB vs cons PB ROE 2020 trough 1-yr 1-mo 32% 1.06x -211% 0.82x -13.9% 4% -2% -13% 13% 1.45x -211% 1.33x -13.9% 2% -8% -15% 64% 1.15x -114% 0.72x -12.1% 12% -4% -10% 45% 1.90x -114% 1.39x -12.1% 9% -4% -12% 54% 1.18x -290% 0.81x -8.3% 39% 13% -13% 49% 1.80x -290% 1.29x -8.3% 8% -2% -7% Exhibit 2. Big 3 Chinese Airlines: 1H21 results preview: 2Q losses to narrow sharply vs 1Q Air China CEA CSA Big 3 1H21e (7,265) (4,829) (4,949) (17,043) 1H20 (9,440) (8,542) (8,179) (26,161) Source: Company data, HSBC estimates % y-o-y -23% -43% -39% -35% 2H20 (4,964) (3,294) (2,668) (10,926) % h-o-h 46% 47% 85% 56% 2Q21e (1,057) (1,024) (943) (3,024) 2Q20 (4,636) (4,609) (2,912) (12,157) % y-o-y -77% -78% -68% -75% 1Q21 % q-o-q (6,208) -83% (3,805) -73% (4,006) -76% (14,019) -78% 2H21e % y-o-y % h-o-h (3,175) -36% -56% (2,488) -24% -48% (1,016) -62% -79% (6,680) -39% -61% Exhibit 3. Big 3 Chinese Airlines: HSBC reported profit estimates revisions: We double the 2021 loss forecast (RMBm) Air China CEA CSA Big 3 2020a (14,403) (11,836) (10,847) (37,086) __________ New___________ ___________ Old ___________ _____________Change ______ 2021e 2022e 2023e 2021e 2022e 2023e 2021e 2022e 2023e (10,440) 1,778 7,389 (6,686) 3,635 4,356 56% higher loss -51% 70% (7,317) 3,388 8,791 (4,188) 5,157 5,631 75% higher loss -34% 56% (5,966) 4,292 9,990 (990) 6,979 7,688 502% higher loss -38% 30% (23,723) 9,458 26,170 (11,864) 15,771 17,676 100% higher loss -40% 48% Source: Company data, HSBC estimates Exhibit 4. Big 3 Chinese Airlines: HSBC vs consensus estimates of reported profits: Our 2021 loss estimate is nearly 3x of the consensus loss forecast (RMBm) Air China CEA CSA Big 3 __________ HSBC __________ ________Consensus ________ _______ Difference ________ 2020a 2021e 2022e 2023e 2021e 2022e 2023e 2021e 2022e 2023e (14,403) (10,440) 1,778 7,389 (3,362) 5,808 7,138 211% higher loss -69% 4% (11,836) (7,317) 3,388 8,791 (3,416) 4,262 8,182 114% higher loss -20% 7% (10,847) (5,966) 4,292 9,990 (1,529) 5,280 2,988 290% higher loss -19% 234% (37,086) (23,723) 9,458 26,170 (8,308) 15,349 18,308186% higher loss -38% 43% Source: Company data, Bloomberg, HSBC estimates Exhibit 5. Big 3 Airlines: Consensus 12-month forward PB and ROE chart: Book value per share is now 25% less than 2019 while overall fleet is higher 1.8x 19 1.6x 1.4x 14 1.2x 0.70x 9 1.0x 0.8x 4 0.6x 2.9 0.4x -1 Jul-11 Nov-11 Mar-12 Jul-12 Nov-12 Mar-13 Jul-13 Nov-13 Mar-14 Jul-14 Nov-14 Mar-15 Jul-15 Nov-15 Mar-16 Jul-16 Nov-16 Mar-17 Jul-17 Nov-17 Mar-18 Jul-18 Nov-18 Mar-19 Jul-19 Nov-19 Mar-20 Jul-20 Nov-20 Mar-21 Jul-21 12-m forward PB (x) - 1 Std. dev Source: Refinitiv Datastream, HSBC Average 12-m forward PB (x) 12-m forward ROE (%, RH) + 1 Std. dev 2 Equities ● Aviation 12 August 2021 Exhibit 6. Chinese Airlines: Going up – it’s about when, more than if H-share prices have declined from 0% the recent peak -5% 25-28% versus a 14% decline in HSCEI -10% -15% -14% -20% -25% -23% -21% -30% -26% -25% -28% -28% -35% AC-H CEA-H CSA-H AC-A CEA-A CSA-A HSCEI Initially this underperformance was driven by negative earnings momentum amid rising fuel and weakening yield and lately by the COVID-19 outbreak in Nanjing The H-share prices are now largely back to their 2020 trough levels Share price performance from previous peaks During previous outbreaks, Hshare prices declined 8-44% But followed by a sharp recovery 80% 63% 60% 40% 27% 20% 27% 9% 0% -20% -15% -8% -40% -29% -26% -60% -44% 1st wave 2nd wave 3rd wave 4th wave 5th wave Share price - peak to trough Share price - Trough to peak Currently, we are witnessing the fifth wave of COVID-19 infections in mainland China China was able to contain the outbreak in previous occasions and we have seen a remarkable recovery in domestic routes (see Exhibit 10 for more details) Big 3 airlines are well positioned for a potential recovery with CSA the best placed, in our view 100% 82% 80% 75% 78% 60% 40% 33% 36% 23% 20% 0% Overall load factor % share of Int'l pax % share of USD traffic debt 2009 2019 The Big 3 airlines are well positioned with improved load factors, higher share of international pax traffic and reduced FX volatility from lower USD-denominated debt The Big 3 airlines have cumulatively issued equity worth RMB121bn since 2007, nearly 8.7x their combined equity value We believe CSA is best positioned in the absence of international travel in the short term, supported from high exposure to the domestic market and cargo business Projected losses in 2021e of RMB24bn vs consensus loss estimate of RMB8bn 30 26 15% For the Big 3 airlines we forecast a 2021e loss of 20 9 12% 10% nearly 3x the consensus loss forecast of RMB8.3bn 10 5% 5% 0 0% For 1H21e, we forecast a loss of RMB17bn implying a (10) (20) -11% -19% (30) (24) (40) (37) (50) 2020 2021e 2022e -5% 2Q21e loss of RMB3bn vs 1Q21 loss of RMB14bn -10% -15% In 2023e, we expect domestic traffic to reach 2019 levels -20% and international traffic at slightly over 50% of 2019 levels. -25% 2023e However, driven by higher domestic pax yields, we expect PAT to equity holders (RMBbn) ROE a 13% EBIT margin and 12% ROE for the Big 3 airlines Sensitivity analysis 21% Impact on 2022e recurring profits due to 1% decline in pax yield 0% -20% -12% -21% -40% -34% -60% -61% -80% 5% decline in 1% decline in 5% increase in 1% increase of RPK pax yield fuel price interest rate % impact on recurring net profit Our sensitivity analysis shows that 1% decline in pax yield would lead to 21% drop in recurring net profits in 2022e We also assess the impact on recurring net profits by other factors, such as RPK, fuel prices and interest rates Valuation 0.67-0.72x Consensus 12-month forward PB; 1 SD below the mean 2.1x 1.8x 1.5x 1.2x 0.9x 0.6x 0.3x 0.0x AC-H CEA-H CSA-H CX Range since mid-2011 Current SARS trough The H-shares of the Big 3 Chinese airlines are trading at 0.67-0.72x consensus 12-month forward PB, around -0.7 to 1.4 SD below the mean We raise TPs for H- and A-shares of Air China, CEA and CSA by 10-83% (except for CSA-H which is down by 9%) on higher multiple despite higher 2021-22e loss estimates We upgrade CEA-H and AC-H to Buy (from Hold), CEA-A and CSA-A to Buy (from Reduce), and AC-A to Hold (from Reduce); reiterate Buy on CSA-H Note: % share of USD debt is for 2010 vs 2019; Source: Company data, CAPA, Refinitiv Datastream, Bloomberg, CAAC, HSBC estimates 3 Equities ● Aviation 12 August 2021 It’s about when more than if The fifth wave of COVID-19 cases has disrupted the domestic summer peak season travel; share prices are back to March 2020 lows when the first wave hit while losses this year are also tracking 2020 Traffic recovery could be swift given previous domestic waves and reopening of certain international routes. Big 3 Chinese airlines with recapitalised balance sheets are better positioned to gain market share while peers struggle to survive Reiterate Buy on CSA-H; upgrade CEA-H and AC-H to Buy (from Hold), CEA-A and CSA-A to Buy (from Reduce), and AC-A to Hold (from Reduce); key risk is delays to reopening of international travel Freezing summer travel Mainland China saw a new wave of local COVID-19 outbreak driven by the Delta variant since late July 2021. As of 5 August 2021, there are five high-risk areas and 159 medium-risk areas in China and 17 provinces have reported COVID-19 cases. Many local governments have been advising citizens to avoid unnecessary travel especially between high-risk areas. Specifically, on 5 August 2021, the Ministry of Culture and Tourism has further required all tour groups bound for medium to high-risk areas to be cancelled or altered. Exhibit 7. Mainland China: COVID-19 cases are rising due to the Delta variant 120 18 100 16 14 80 12 60 10 8 40 6 20 4 2 0 0 8-Jan-20 8-Feb-20 8-Mar-20 8-Apr-20 8-May-20 8-Jun-20 8-Jul-20 8-Aug-20 8-Sep-20 8-Oct-20 8-Nov-20 8-Dec-20 8-Jan-21 8-Feb-21 8-Mar-21 8-Apr-21 8-May-21 8-Jun-21 8-Jul-21 8-Aug-21 Average weekly local COVID-19 cases in mainland China Weekly ASK of Big-3 Chinese airlines (bn, RH) Note: Data as of 09 August 2021. We have not shown the COVID-19 cases in Jan-Feb 2020 due to scaling impact. Source: Refinitiv Datastream According to CARNOC, airports in Nanjing, Yangzhou and Zhangjiajie have been completely shut down while other airports have reported around 27-82% cancellation of flights as of 4 August 2021. Specifically, the flight cancellation rate at Beijing Capital International Airport (BCIA, 694 HK, Hold, CMP HKD4.18) is around 49%. Flight Manager, an online flight booking 4 Equities ● Aviation 12 August 2021 app, indicated that only 9,365 flights were executed on 3 August 2021, down 12.6% d-o-d or equivalent to 57.8% of scheduled flights. It also mentioned that total flights executed in July 2021 was around 388k, slightly higher than the same period in 2020 of 326k and still below the 2019 level of 471k. The CAAC announced on 3 August 2021 that travellers are entitled to a free refund of their air tickets for departure scheduled between 4 to 31 August 2021. Qunar, a ticketing platform, mentioned that instant refund application at 8am on 4 August 2021 on its platform skyrocketed to 10-fold of normal time traffic and surpassed the peak recorded during the 2021 Spring travel season (source: CARNOC, 4 August 2021). As per CAPA, domestic capacity of the Big 3 airlines fell 36% w-o-w in the week of 9 August Exhibit 8. Big 3 Chinese airlines: trend of domestic ASK capacity as a percentage of 2019 level – likely overcapacity 140% 120% 100% 80% 60% 40% 20% 0% Exhibit 9. Big 3 Chinese airlines: trend of international ASK capacity as a percentage of 2019 level – still stalled 120% 100% 80% 60% 40% 20% 0% 04-Jan 25-Jan 15-Feb 08-Mar 29-Mar 19-Apr 10-May 31-May 21-Jun 12-Jul 02-Aug 23-Aug 13-Sep 04-Jan 25-Jan 15-Feb 08-Mar 29-Mar 19-Apr 10-May 31-May 21-Jun 12-Jul 02-Aug 23-Aug 13-Sep 2020 as % of 2019 2021 as % of 2019 Note: ASK recovery trend measured in terms of % of the capacity during the same period in 2019. Data based on schedules as of 9 August 2021 Source: CAPA 2020 as % of 2019 2021 as % of 2019 Note: ASK recovery trend measured in terms of % of the capacity during the same period in 2019. Data based on schedules as of 9 August 2021 Source: CAPA While experience in containing the outbreak is positive… This is the fifth outbreak in China since March 2020. However, on all previous occasions, the authorities in mainland China were able to contain the same with more sophisticated and targeted containment efforts and we have seen a remarkable recovery in domestic traffic driven by pent-up demand. Indeed, in April 2021, domestic RPK of Big 3 Chinese airlines grew to 115% of 2019 level (Exhibit 11). While the H-share prices have declined 8-44% from peak to trough levels during the previous COVID-19 outbreaks in mainland China, they were followed by a sharp recovery (see Exhibit 10). Increased vaccination rates will also likely render any future outbreaks less painful than the past. Indeed, mainland China has administered over 1.7bn vaccine doses as of 3 August. HSBC economists estimate that almost 70% of its population has been vaccinated at least one dose, (see Asia COVID-19 & Vaccine Tracker, 6 August 2021). Mainland China is targeting an 80% vaccine coverage ratio by end-2021 vs 40% as of July (source: China News, 29 May 2021). Exhibit 10. Mainland China: Traffic and share price changes during previous waves of COVID-19 Domestic Pax Duration Cumulative ASK vs RPK vs Wave Region From To in days Cases 2019 2019 1st Nationwide 01 Dec 2019 21 May 2020 172 62,492 -67% -76% 2nd Beijing 11 Jun 2020 05 Jul 2020 24 363 -58% -65% 3rd North-eastern China 10 Jan 2021 01 Mar 2021 50 1,882 -58% -68% 4th Guangdong 21 May 2021 21 Jun 2021 31 170 -44% -51% 5th Nanjing 21 Jul 2021 09 Aug 2021 20+ 959+ n/a n/a Share price performance _ _ Change in ___ Avg. Jet Peak to Trough to 12-m 12-m Kerosene Avg. USD- trough next peak Overall Fwd. PB Fwd. ROE (USD) RMB FX -44% 27% -24% -18% -9.6ppt 51.9 7.02 -15% 63% -3% -2% 0.5ppt 42.1 7.08 -29% 27% 10% 13% -0.2ppt 62.5 6.47 -8% 9% -4% -4% 0.6ppt 74.1 6.40 -26% n/a -9% -11% 0.0ppt 76.5 6.47 Source: WIND, Refinitiv Datastream, HSBC 5 Equities ● Aviation 12 August 2021 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20 Oct-20 Nov-20 Dec-20 Jan-21 Feb-21 Mar-21 Apr-21 May-21 Jun-21 Exhibit 11. Big 3 Chinese airlines: Domestic RPK was quick to rebound following each COVID-19 outbreak 140% 120% 115% 100% 80% 60% 40% 20% 0% Big-3 Chinese airlines - domestic RPK as % of 2019 level Source: Company data Exhibit 12. More than 1.7bn doses of vaccines have been administrated 1,800 1,600 1,400 1,200 1,000 800 600 400 200 0 Jan-21 Mar-21 May-21 Jul-21 Total # of vaccines administrated (mn) Note: 03 August 2021 Source: Refinitiv Datastream In 2023e, we expect domestic traffic to reach nearly 100% of 2019 levels; international traffic to only over 50% Recent outbreak in China and elsewhere should further tighten air freight rates …it will further push out reopening of international travel We argue that the reopening of China’s borders will depend not just on its own vaccination levels, but more importantly by how the rest of the world inoculates and contains the spread. The Delta variant continues to spread across Asia with new peaks being reported in Thailand, Japan, Korea, Vietnam and Malaysia while cases have crossed over 100,000 in the US as well. While we argue that mainland China’s domestic air capacity and traffic may recover rather sooner, the authorities have remained hawkish about considering reopening its borders. We therefore expect reopening of international travel only in mid-2022e. Air cargo outlook remains strong Apart from domestic passenger traffic, air cargo might be another earnings driver for 2021 much like it was in 2020. CSA’s logistics business earned an RMB4bn profit during 2020. During the 2020 results briefing, the Big 3 airlines were unanimous about the continued positive outlook for the cargo business. Air freight rates may continue holding well due to limited belly hold capacity following the collapse in international flights and robust demand. The recent outbreak of the COVID-19 Delta variant globally should further push out any meaningful resumption of international travel and thus continue to keep international cargo capacity tight and air freight rates elevated. Exhibit 13: Air cargo freight rates to stay strong amid worldwide vaccine rollout 10.0 7.9 8.0 6.0 4.0 2.9 2.5 2.3 2.8 2.8 2.0 5.2 4.5 4.5 4.4 3.5 0.0 Exhibit 14: Air cargo freight rates to stay strong amid worldwide vaccine rollout 10.0 8.0 8.0 7.0 7.6 7.2 6.1 6.0 5.1 4.0 3.5 3.3 3.2 3.4 3.6 2.0 0.0 TAC - Shanghai to Europe (USD/kg) Note: * 3Q21 as of 2 Aug 2021 Source: TAC Index, Refinitiv Datastream TAC - Shanghai to North America (USD/kg) Note: * 3Q21 as of 2 Aug 2021. Source: TAC Index, Refinitiv Datastream 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20 3Q20 4Q20 1Q21 2Q21 3Q21* 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20 3Q20 4Q20 1Q21 2Q21 3Q21* 6 Equities ● Aviation 12 August 2021 CEA raised the annual caps for its cargo business to RMB9bn (from RMB5bn) More recently on 23 July 2021, CEA raised the annual caps for the exclusive operation of the passenger aircraft cargo business by China Cargo lines for 2021e to RMB9bn from RMB5bn, and for 2022e to RMB8bn (from RMB5.2bn). As per CEA, in the first five months of this year, it has already achieved cargo transactions (revenues) of RMB3.2bn vs the existing cap of RMB5bn, and the increase in annual caps was necessary to accommodate the strong outlook for the rest of the year. Exhibit 15: FTK has been on a steady recovery trajectory…(% vs. 2019) 30% 20% 10% 0% -10% -20% -30% -40% Exhibit 16: Global cargo compared to 2019 levels 40% 32.0% 30% 23.1% 20% 9.4% 10% 9.9% 0% 6.0% 2.7%0.9% 6.7% 24.0% 21.6% 17.1% 13.9% -10% -20% -14.3% -30% -19.9% Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20 Oct-20 Nov-20 Dec-20 Jan-21 Feb-21 Mar-21 Apr-21 May-21 Jun-21 Global Europe Source: IATA Asia Pacific North America Source: IATA May-21 Jun-21 We are cautious about impairments from CEA or Air China Aircraft impairments may resurface this year on delayed international recovery In 2020, CSA took an impairment of RMB4bn towards older aircrafts with declining market values and related equipment in accordance with its fleet disposal plans. Despite facing a similar market situation, we did not see such extent of impairment being taken by Air China or CEA. Therefore, we caution that there might be a possibility for further impairment charges from these two airlines, particularly for Air China which has an older fleet and also a higher share of wide-body aircraft which have become unemployable due to the stalled international market. Aircraft delivery plans indicate looming overcapacity Exhibit 17: Big 3 Chinese airlines impairments in 2020 and fleet age 5,000 7.74 4,000 8 3,961 7.8 7.6 3,000 2,000 7.2 7.4 7.1 7.2 7 1,000 440 184 6.8 0 Air China CEA 6.6 CSA 2020 impairments (RMBm) Avg, age of fleet as of 2020-end (RH) Source: Company data Exhibit 18: Chinese airlines split of aircraft types (2020) 100% 1.1% 0.4% 1.8% 80% 60% 80.6% 40% 86.6% 85.3% 20% 18.2% 0% Air China 13.0% CEA Widebody Source: Company data Narrow Body 12.9% CSA Regional Jet In 2020, most airlines deferred new aircraft deliveries and stepped up aircraft retirements. Hence, the fleet expansion was minimal. However, in 2021e, the Big 3 airlines guided higher new deliveries but lower retirements. The net fleet additions are many times higher than 2020 and point to continued overcapacity in domestic routes. 7 Equities ● Aviation 12 August 2021 Exhibit 19: Chinese Airlines aircrafts additions and retirements for 2021e 80 64 59 60 43 40 20 6 0 Air China Planned additions Source: Company data 9 12 CEA CSA Planned retirements Exhibit 20: Chinese Airlines aircrafts additions and retirements for 2022e 80 65 60 52 40 24 18 20 0 Air China Planned additions Source: Company data 9 0 CEA CSA Planned retirements A recovery is about when, more than if The Big 3 airlines are all SOEs and have increased their capitalisation since the Global Financial Crisis Pre-IFRS 16, leverage ratios improved over the years Recapitalised and here to stay With large parts of the fleet grounded, and international travel resumption delayed by waves of COVID-19 outbreak, the liquidity and balance sheet concerns of airlines have rightly become a key area of focus. However, the Big 3 airlines are all state-owned enterprises (SOE) and are now much better capitalised compared to the time of the Global Financial Crisis (GFC), courtesy of significant equity infusion and improvement in profitability (EBIT margins) with ramp-up of load factors and enhanced cost control. We compare the leverage (net debt to equity) of the Big 3 Chinese airlines with respect to their gearing levels during the previous downturns when traffic or profitability was impacted. For our analysis, we compare the leverage in the fiscal year prior to when the downturn occurred – 2003 (SARS outbreak), 2008 (Global Financial Crisis), 2014 (RMB depreciation and slower China GDP growth), and 2016 (RMB depreciation). Debt levels increased sharply in 2019 due to the introduction of new accounting standard IFRS 16 which required capitalisation of long-term operating leases. However, we note that on a like-for-like basis, gearing levels actually improved across the board, albeit CSA and CEA remain relatively more geared compared to Air China. Net debt to equity ratios deteriorated during 2020 owing to the steep RMB37bn losses following the collapse in air travel due to the COVID-19 pandemic. Exhibit 21. Leverage (net debt to equity) of the Big 3 Chinese airlines prior to previous downturns Air China CEA CSA _________________________Pre-IFRS 16___________________ 2002 2007 2013 2015 2019 NA 1.3x 1.7x 1.5x 0.9x 1.1x 15.8x 2.5x 2.8x 2.1x 1.4x 3.2x 1.9x 2.0x 1.5x _________ Post-IFRS 16 _________ 2018 2019 2020 0.8x 1.4x 1.9x 1.7x 2.7x 3.0x 1.5x 2.2x 2.0x Note: 2002 was the year prior to the SARS outbreak in 2003; 2007 was the year prior to the Global Financial Crisis of 2008-09; 2013 was the year prior to the earnings weakness in 2014 due to RMB depreciation vs USD and slower China GDP growth; 2015 was prior to the earnings weakness in 2016 due to RMB depreciation; 2018 is for comparison on a pre- and post-IFRS 16 accounting norm. Source: Company data, HSBC Equity infusions helped improve leverage ratios and fund the aggressive capacity expansion All three airlines resorted to recapitalisations post the GFC to shore up the equity base. During the GFC, these three airlines have cumulatively eroded 69% of their 2007-end common equity in just 2008 due to massive losses. In fact, CEA’s equity turned negative in 2008 while Air China and CSA eroded 35% and 41% of their 2007-end equity, respectively. However, subsequently and since 2007 to-date, these airlines have cumulatively issued equity worth RMB121bn, nearly 8.7x of their combined equity value as at the end of 2008. 8 Equities ● Aviation 12 August 2021 Within that, CEA has raised the most at RMB58.4bn including RMB10.8bn raised this year, and this helped it bridge the gap with CSA which raised RMB43.5bn including RMB16bn in 2020. Air China raised the least amount of RMB18.8bn. 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Exhibit 22. Big 3 airlines: Common equity evolution since 2007 100,000 80,000 60,000 40,000 20,000 (20,000) Air China CEA CSA Exhibit 23. Big 3 airlines: Common equity issuance since 2007 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 58,403 43,488 18,761 CEA CSA Air China Cumulative equity issuance since 2007 (RMBm) Source: Company data Source: Company data Potential for consolidation Following the downturn during the Asian Financial Crisis and then the events of 11 September 2001, under the CAAC’s consolidation plan, the nine airlines under its direct control merged into three groups and are referred to as the Big 3 airlines (Air China, CEA and CSA Group). Over the years since then, these airlines have continued to acquire other domestic airlines. Since 2007 and until 2019, traffic (RPK) of the Big 3 Chinese airlines has grown by 2.5x. However, their market shares in terms of RPK declined to 63% in 2019 from 77% in 2011, likely due to the emergence of smaller players including low-cost carriers. During 2020, the Big 3 airlines largely retained their market shares. Exhibit 24. Mainland China: Market share by overall RPK in 2020 Others CSA 24% 24% Exhibit 25. Mainland China: Market share by domestic RPK in 2020 CSA Others 24% 25% Spring 5% Juneyao 4% Hainan 9% CEA 17% Source: Company data, CAAC, HSBC Air China 17% Spring 5% Juneyao 4% Hainan 9% CEA 16% Source: Company data, Bloomberg, CAAC, HSBC Air China 17% International RPK of the Big 3 Chinese airlines grew at 15% CAGR during 2009-19 vs 7% CAGR for international throughput of key airports Having said that, we note that the Big 3 airlines have acquired smaller players and helped to consolidate the sector. Air China acquired an initial 10% stake in Cathay Pacific in 2006, which was subsequently raised to 30% in 2009. Air China also acquired a 22.8% stake in Shandong Airlines in 2004 and a 48% stake in Shandong Aviation Group, the parent of Shandong Airlines. Previously in 2001, Air China acquired a 100% stake in Zhejiang Airlines and merged it. CEA acquired a 100% stake in Nanjing Airlines in 1996. CSA acquired a 100% stake in Zhongyuan Airlines in 2002, and Xinjiang Airlines and China Northern Airlines in 2004. Consequently, while the international passenger throughput of five key international airports in mainland China 9 Equities ● Aviation 12 August 2021 (BCIA, Shanghai, Shenzhen, Guangzhou and Xiamen) grew at a 7% CAGR during 2009-19, the international RPK of the Big 3 Chinese airlines grew at a 15% CAGR during this period. With the unprecedented challenges that the global airlines sector is currently facing, we do not rule out the possibility of further consolidation. We remain optimistic that during this downturn, the Big 3 airlines will lead any potential consolidation in the domestic market. In international routes, too, we think the Big 3 would be better placed following their recapitalisation while peers will likely struggle to fix their balance sheets. In an event when international travel eventually resumes, we think the Big 3 will be able to gain market share with redeployment of fleet from domestic to international routes. As per Cirium, the average daily utilisation is down 20% for both single-aisle and twinaisle aircraft vs January 2020 Effective capacity may be lower than expected due to structurally lower utilisation levels Furthermore, with additional health screenings for passengers and flight crews, and intensive disinfection required for aircrafts due to COVID-19, the average turnaround time for passenger aircrafts has increased, resulting in lower utilisation levels. As per Cirium, the average daily utilisation is down 20% for both single-aisle and twin-aisle aircraft vs January 2020. This lower utilisation levels, coupled with a slower growth in aircraft fleet, courtesy of accelerated retirements of aging aircraft and reduced ability of airlines with stressed balance sheets to secure new aircraft orders, would mean that when international traffic resumes sometime in 2H22e, airlines with fleet intact such as the Big 3 Chinese airlines (three-year fleet CAGR of 4.8% during 2020-23e) should be well positioned to take market share from peers who are struggling. Exhibit 26. Average aircraft utilisation has declined 20% vs Jan 2020 and even more vs 2019 levels 14 13 12 11 10 9 8 7 6 5 4 Jan-20 Source: Cirium Mar-20 May-20 Jul-20 Single-Aisle Sep-20 Nov-20 Jan-21 Mar-21 Twin-Aisle May-21 FX and fuel – neither headwinds nor tailwinds from current level FX losses in 2021e vs gains in 2020 As argued previously, with most of the revenue for airlines in RMB and part of their debt (2131% of total debt) and operating expenses (c.40% of total expenses – fuel, lease expense, maintenance) in USD, any change in FX has a significant impact on the profitability of the Big 3 Chinese airlines (see Strong tailwinds from RMB appreciation, 2 September 2020). The correlation was 0.63 for these airlines, especially since 2017, albeit the correlation weakened in 2H20 (see Gaining altitude, 9 September 2020). In 1Q21, the RMB depreciated by 0.4% against the USD vs end-2020. During 2Q21, the RMB appreciated by 1.5%, implying an overall gain of 1.1% during 1H21. We therefore forecast an 10 Equities ● Aviation 12 August 2021 Exhibit 27. Big 3 Chinese airlines’ share price versus USD-RMB FX rate: Correlation of 0.63 300 6.00 1.12x 6.27 250 RMB: -10% Big-3: -53% 200 6.65 150 RMB vs USD: +6% Big-3 sh. price: +94% 0.87x 100 12-m fwd PB 50 RMB: +4% Big-3: +73% 6.98 0.80x 1.11x 6.69 RMB: -7% Big-3: -40% 7.18 0.75x 6.20 0.70x 6.39 6.47 6.40 0.76x RMB: +11% 6.60 Big-3: +13% 6.86 RMB: -4% 6.80 Big-3: -42% 7.00 RMB: +5% 7.17 Big-3: +23% 0.62x 7.20 Sep-17 Nov-17 Jan-18 Mar-18 May-18 Jul-18 Sep-18 Nov-18 Jan-19 Mar-19 May-19 Jul-19 Sep-19 Nov-19 Jan-20 Mar-20 May-20 Jul-20 Sep-20 Nov-20 Jan-21 Mar-21 May-21 Jul-21 Big-3 Chinese airlines share price USD-RMB (Values in reverse) Note: Big 3 Chinese airlines share price includes Air China-H, CEA-H and CSA-H and has been indexed to the end of 3Q17; The changes in share price are from the respective peak and trough around the time the RMB peaked and troughed Source: Refinitiv Datastream, HSBC Swing of RMB11bn: FX loss of RMB1.5bn in 2021e vs FX gain of RMB9.6bn in 2020 FX gain of RMB1.5bn for the Big 3 airlines in 1H21e vs. RMB2.9bn in 1H20 when the RMB depreciated 1.4%. However, HSBC’s FX team forecasts USD-RMB of 6.60 for end-2021e, implying a depreciation of 1.1% for 2021e. As a result, we estimate the Big 3 Chinese airlines will see FX losses (pre-tax) of RMB1.5bn in 2021e versus FX gains of RMB9.6bn in 2020. For 2H21e, our FX team’s forecasts imply a 2.2% depreciation in the RMB while our estimates imply an FX loss of RMB2.9bn, more than offsetting the gains from 1H21e. For end-2022e, HSBC’s FX team forecasts USD-RMB of 6.60, implying no change and also no FX impact for the Big 3 airlines, we estimate. Singapore jet fuel price up 36% YTD in 2021 Exhibit 28. RMB appreciated 0.7% against USD in 2021 year-to-date 7.40 Weaker RMB 7.20 7.00 Stronger RMB 6.80 6.60 6.40 6.20 Exhibit 29. HSBC’s FX team expects the RMB to weaken against the USD by 1.1% in 2021e vs a 6.7% appreciation in 2020 7.4 6% 7.2 4% 7.0 2% 6.8 6.6 6.53 6.60 0% 6.4 -2% 6.2 -4% 6.0 -6% Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 Apr-19 Jul-19 Oct-19 Jan-20 Apr-20 Jul-20 Oct-20 Jan-21 Apr-21 Jul-21 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20 3Q20 4Q20 1Q21 2Q21 3Q21e 4Q21e Note: Data as of 6 August 2021 Source: Refinitiv Datastream USD-CNY (period end) Source: Refinitiv Datastream, HSBC estimates Qtr End % q-o-q Higher fuel prices y-o-y would also increase cost pressure Despite the negative sentiment around traffic growth during 2020, airlines had a reprieve in the form of rock-bottom fuel prices. Average jet kerosene USD-denominated prices in Singapore fell by 42% y-o-y in 2020 driven by a 35% decline in Brent crude prices over this period. 11 Equities ● Aviation 12 August 2021 While fuel prices should stay below the past decade’s peak levels, they are set to rise in 2021e. HSBC’s oil and gas team expects Brent crude to rise from USD43.3/b in 2020 to USD65.0-67.6/b in 2021-22e (see Oil markets: OPEC+ agreement under pressure as talks fail, 5 July 2021). In 2021 so far, the Singapore jet fuel price is up 36% while the Brent price is up 39%. With weaker yield on the horizon, higher fuel prices are likely to further impair airlines’ profitability. That being said, any potential escalation in COVID-19 cases could cloud the economic outlook and put further pressure on fuel prices, posing an upside risk to our assumptions. Exhibit 30. Jet fuel prices have risen from the trough of 2020 and almost back to the levels at the start of 2020 160 140 120 100 80 60 40 20 0 Exhibit 31. HSBC Brent crude price assumptions imply a 56% y-o-y increase in 2021e 120 111 112 109 99 100 80 71 64 68 65 66 60 52 54 44 43 40 20 0 Jet Kerosene FOB Singapore USD/bbl Note: Data as of 6 August 2021 Source: Refinitiv Datastream, HSBC Brent Crude (USD/bbl) Source: Refinitiv Datastream, HSBC estimates Dec-09 Jul-10 Feb-11 Sep-11 Apr-12 Nov-12 Jun-13 Jan-14 Aug-14 Mar-15 Oct-15 May-16 Dec-16 Jul-17 Feb-18 Sep-18 Apr-19 Nov-19 Jun-20 Jan-21 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021e 2022e 2023e Earnings forecasts We raise our 2021e loss forecast for the Big 3 airlines to RMB24bn (from RMB12bn), which is nearly 3x of the RMB8.3bn consensus loss forecast, reflecting our cautious view on a recovery in international travel, lower domestic pax and yield and cost pressures, partially offset by strong cargo. For 1H21e, we forecast a cumulative loss of RMB17bn, which implies a 2Q21e loss of RMB3bn vs 1Q21 loss based on Chinese GAAP of RMB14bn. In 2023e, we expect domestic traffic to reach 2019 levels and international traffic to reach slightly over 50% of 2019 levels. However, driven by higher domestic pax yields, we forecast EBIT margin of 13% and ROE of 12%. Stock calls We continue to value the Big 3 airlines based on a price-to-book approach based on their respective historical trading range. We roll forward our valuation and now base it on 2022e BVPS (from 2021e BVPS previously). While the recent outbreak in mainland China has dented the summer peak travel season, we remain optimistic that the Big 3 airlines will emerge stronger given their well-capitalised balance sheet, strong operating cash flows supported by strong domestic market and weakening positioning of peers particularly in the international routes. To reflect the same, we reiterate our Buy on CSA-H, while also upgrading AC-H and CEA-H to Buy (from Hold), and CEA-A and CSA-A to Buy (from Reduce). We also upgrade AC-A to Hold (from Reduce). 12 Equities ● Aviation 12 August 2021 Exhibit 32. Rating changes and valuation summary Stock Air China-H Air China-A China Eastern-H China Eastern-A China Southern-H China Southern-A Mkt cap 3M ADTV Ticker Curr (USDm) (USDm) 753 HK HKD 12,761 10.0 601111 CH RMB 12,761 36.7 670 HK HKD 9,446 5.9 600115 CH RMB 9,446 21.8 1055 HK HKD 11,348 7.5 600029 CH RMB 12,686 35.1 __ Rating __ New Old Buy Hold Hold Reduce Buy Hold Buy Reduce Buy Buy Buy Reduce __ TP ___ Share Upside/ Target New Old price downside PB 6.30 5.40 4.79 32% 1.06x 7.30 4.60 6.48 13% 1.45x 4.50 4.10 2.75 64% 1.15x 6.40 3.50 4.41 45% 1.90x 6.20 6.80 4.03 54% 1.18x 8.00 5.80 5.36 49% 1.80x Note: HSBC vs consensus is based on 2021e reported profit/loss estimates; priced at close of 09 August 2021 Source: Bloomberg, Refinitiv Datastream, HSBC estimates 2021e HSBC vs cons -211% -211% -114% -114% -290% -290% __ 2021e ___ _ Price performance 2020 PB ROE trough 1-yr 1-mo 0.82x -13.9% 4% -2% -13% 1.33x -13.9% 2% -8% -15% 0.72x -12.1% 12% -4% -10% 1.39x -12.1% 9% -4% -12% 0.81x -8.3% 39% 13% -13% 1.29x -8.3% 8% -2% -7% We change our valuation methodology for A-shares Changes in target PB multiples For Air China-H, following the stronger domestic traffic momentum we now value the stock at a PB multiple of 0.5 SD above the historical average consensus 12-month forward PB since mid-2011 (vs 0.5 SD below the historical average previously). For CEA-H, we now apply a target PB multiple of 1 SD above the historical average of consensus 12-month forward PB since mid-2011 to value the stock (vs multiple of 0.5 SD above the historical average previously). For CSA-H, we now apply a PB multiple of 1.5 SD above the historical average of consensus 12-month forward PB since mid-2011 (vs 2.0 SD above average previously) to reflect the near-term impact on domestic pax traffic given its relatively higher exposure to this segment vs its peers. For the A-shares of AC, CEA and CSA, we change our methodology to better reflect the wide historical gap between the valuations of the H- and the A-shares. We now apply a premium of 37-65% to our H-share target PB multiples, similar to the average of the premium since mid-2011. Previously our A-share target prices were based on a simple currency conversion. Subsequently, despite higher loss estimates in 2021e and lower profit forecasts in 2022e, we raise our target prices for H- and A-shares of Air China, CEA and CSA by 10-83% on higher target multiples (except for CSA-H, where we lower the TP by 9% due to a lower target multiple used to reflect the near-term impact on domestic traffic from the recent COVID-19 outbreak). Currently, the Big 3 airlines are trading at 0.70x 12-month forward PB vs their historical average since mid-2011 of 0.92x with expected 2.7% forward ROE. The Big 3 airlines are poised to emerge stronger after COVID-19. Exhibit 33. Big 3 Airlines: Consensus 12-month forward PB and ROE chart 1.8x 1.6x 1.4x 1.2x 1.0x 0.8x 0.6x 0.4x 19 14 0.70x 9 4 2.7 -1 Jul-11 Nov-11 Mar-12 Jul-12 Nov-12 Mar-13 Jul-13 Nov-13 Mar-14 Jul-14 Nov-14 Mar-15 Jul-15 Nov-15 Mar-16 Jul-16 Nov-16 Mar-17 Jul-17 Nov-17 Mar-18 Jul-18 Nov-18 Mar-19 Jul-19 Nov-19 Mar-20 Jul-20 Nov-20 Mar-21 Jul-21 12-m forward PB (x) - 1 Std. dev Source: Refinitiv Datastream, HSBC Average 12-m forward PB (x) 12-m forward ROE (%, RH) + 1 Std. dev 13 Equities ● Aviation 12 August 2021 Exhibit 34. Mainland China and Hong Kong airlines: PB trading range 1.8x 1.5x 1.2x 0.9x 0.6x 0.3x AC-H Range since mid-2011 Source: Refinitiv Datastream, HSBC CEA-H CSA-H CX Current SARS trough Air China (753 HK/ 601111 CH, Buy/ Hold, CMP HKD4.79/ RMB6.48 TP HKD6.30/ RMB7.30) Changes to our financial forecasts For 2021e, we lower the RPK and ASK growth estimates by 42.7ppt and 36.9ppt mainly reflecting weaker domestic and international traffic, but raise our passenger yield growth assumption by 3.0ppt, reflecting higher international pax yields. In 2022e, we decrease our capacity and traffic forecasts to reflect further weakening in sequential traffic growth but increase our assumption on passenger yield by 6.7ppt. In 2023e, where we expect international air traffic to start to recover, we increase our traffic and capacity growth forecasts. Our higher yield growth assumptions in 2022e reflect the tightening of domestic yields as airlines divert capacity from domestic routes to international routes. In 2023e, we forecast international pax yields to weaken sharply as more capacity gets added in international routes. We forecast a loss of RMB10.4bn in 2021e vs the loss of RMB14.4bn in 2020 Exhibit 35. Air China: Changes in key assumptions (2021-23e) RPK (% y-o-y) ASK (% y-o-y) Load factor (ppt y-o-y) Pax yield (% y-o-y) Source: HSBC estimates _________ New __________ 2021e 2022e 2023e 5% 22% 30% 6% 20% 26% -0.7ppt 1.1ppt 1.9ppt 0.5% 13.4% -4.9% __________Old___________ 2021e 2022e 2023e 48% 25% 14% 43% 23% 10% 2.5ppt 0.8ppt 2.6ppt -2.4% 6.7% -0.8% _______Difference ________ 2021e 2022e 2023e -42.7 ppt -2.9 ppt 16.0 ppt -36.6 ppt -3.4 ppt 16.4 ppt -3.2ppt 0.3ppt -0.7ppt 3.0 ppt 6.7 ppt -4.1 ppt We widen our reported loss forecast in 2021e to RMB10.4bn (vs RMB6.7bn loss previously); we now forecast a profit of RMB1.8bn in 2022e (vs our profit estimate of RMB3.6bn, previously). 14 Equities ● Aviation 12 August 2021 Exhibit 36. AC: Earnings forecast revisions (2021-23e) ___________ New __________ ___________ Old_________ (RMBm) 2021e 2022e 2023e 2021e 2022e 2023e Revenues 81,273 103,085 122,442 99,649 125,850 139,069 EBITDA 12,855 26,623 35,189 18,389 29,722 30,184 EBIT (7,863) 5,643 13,536 (2,330) 8,742 8,530 Reported profit (10,440) 1,778 7,389 (6,686) 3,635 4,356 HSBC recurring net profit (10,047) 1,778 7,389 (6,293) 3,988 4,356 ________ Difference ________ 2021e 2022e 2023e -18% -18% -12% -30% -10% 17% -238% -35% 59% -56% -51% 70% -60% -55% 70% Ratios Reported EPS (RMB) HSBC EPS (RMB) Reported ROE HSBC Recurring ROE EBITDA margin EBIT margin Source: HSBC estimates (0.76) (0.73) -14.4% -13.9% 15.8% -9.7% 0.13 0.13 2.6% 2.6% 25.8% 5.5% 0.54 0.54 10.2% 10.2% 28.7% 11.1% (0.49) (0.46) -9.0% -8.5% 18.5% -2.3% 0.26 0.29 5.0% 5.5% 23.6% 6.9% 0.32 0.32 5.7% 5.7% 21.7% 6.1% -56% -60% -5.4 ppt -5.4 ppt -2.6 ppt -7.3 ppt -51% 70% -55% 70% -2.4 ppt 4.5 ppt -2.9 ppt 4.5 ppt 2.2 ppt 7.0 ppt -1.5 ppt 4.9 ppt HSBC vs consensus We forecast reported loss of RMB10.4bn for Air China in 2021e vs the latest consensus estimates for a reported loss of RMB3.4bn. In 2022e, we forecast a profit of RMB1.8bn at the reported profit level, which is 69% lower than the consensus forecast of RMB5.8bn reported profit. Exhibit 37. AC: HSBC versus consensus 2021e 2022e 2023e _________ EBIT (RMBm)_________ ____Reported net profit (RMBm) __ ___Recurring net profit (RMBm)___ HSBC Consensus Difference HSBC Consensus Difference HSBC Consensus Difference (7,863) 829 L vs P (10,440) (3,362) -211% (10,047) (4,362) -130% 5,643 13,096 -57% 1,778 5,808 -69% 1,778 3,774 -53% 13,536 14,592 -7% 7,389 7,138 4% 7,389 5,933 25% Source: Bloomberg consensus, HSBC estimates Upgrade AC-H to Buy with higher TP of HKD6.30 (from Hold and TP of HKD5.40) Upgrade AC-H to Hold with higher TP of RMB7.30 (from Reduce and TP of RMB4.60) Valuation and risks Air China’s H-shares are now trading at 0.72x consensus 12-month forward PB. As highlighted in the exhibit below, the stock has traded at an average consensus 12-month forward PB of 1.28x, with an average ROE of 10.9% since mid-2011. The current consensus 2021e ROE is 8.2% vs our ROE estimates of -13.9% for 2021e. Now, we value AC’s H-shares based on a higher target PB multiple of 1.06x, which is equal to 0.5 SD above the average consensus 12-month forward PB since mid-2011 (from 0.88x, which was equal to 0.5 SD below the average consensus 12-month forward PB since mid-2011). Our higher target multiple reflects the stronger domestic traffic momentum. We also roll forward our valuation and base it on 2022e BVPS (from 2021e BVPS previously). We apply our target PB of 1.06x to the 2022e BVPS of RMB5.01 (from 2021e BVPS of RMB5.16) and use our FX team’s unchanged end-2021e forecast for RMB-HKD of 1.18. Based on this approach, we arrive at a higher target price of HKD6.30 (from HKD5.40) for AC’s H-shares, rounded to a single decimal place. Our H-share target price implies 31.5% upside from the recent market price and according we upgrade our rating on AC’s H-shares to Buy (from Hold). To value the A-shares, we change our methodology to better reflect the wide historical gap between the valuations of the H- and the A-shares. Since mid-2011, the A-shares have traded at an average premium of 37% vs the H-shares based on 12-month forward PB. To derive our A-share target price, we apply the premium of 37% to our H-share target PB multiple to arrive at a PB multiple of 1.45x. Previously, our A-share target price was based on a simple currency conversion. We apply our target PB of 1.45x to the 2022e BVPS of RMB5.01 to derive our Ashare target price of RMB7.30 (from RMB4.60). Our A-share target price implies 12.7% upside from the recent market price. We upgrade our rating on AC’s A-shares to Hold (from Reduce). 15 Equities ● Aviation 12 August 2021 We believe that AC is poised to emerge stronger post COVID-19, but expect headwinds to nearterm earnings outlook. Upside risks for A-shares: A faster-than-expected recovery from the COVID-19 pandemic globally; better-than-expected traffic growth with strong international travel demand; earlier containment of the COVID-19 pandemic; further reduction in USD-denominated debt causing lower FX volatility; RMB appreciation versus the USD; lower oil prices; and lower-than-expected addition of new capacity in the industry. Downside risks for H- and A-shares: A prolonged COVID-19 pandemic globally; weaker-thanexpected economic growth in China; higher-than-expected increase in fuel prices; RMB depreciation versus the USD; and escalation in global trade tensions. Exhibit 38. Air China-H: Consensus 12-month forward PB and ROE chart 1.6x 1.4x 1.2x 1.0x 0.8x 0.6x 0.4x 20 15 0.72x 10 5 2.4 0 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 Apr-19 Jul-19 Oct-19 Jan-20 Apr-20 Jul-20 Oct-20 Jan-21 Apr-21 Jul-21 12-m forward PB (x) -1 Std. dev Source: Refinitiv Datastream, HSBC Average PB (x) 12-m forward ROE (%, RH) +1 Std. dev Exhibit 39. AC: Consensus 2021e EBIT estimate revisions 9.0 20,000 8.0 15,000 7.0 10,000 6.0 5.0 5,000 4.0 0 Exhibit 40. AC: Consensus 2021e reported profit estimate revisions 9.0 15,000 8.0 10,000 7.0 5,000 6.0 5.0 0 4.0 (5,000) Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20 Oct-20 Nov-20 Dec-20 Jan-21 Feb-21 Mar-21 Apr-21 May-21 Jun-21 Jul-21 Aug-21 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20 Oct-20 Nov-20 Dec-20 Jan-21 Feb-21 Mar-21 Apr-21 May-21 Jun-21 Jul-21 Aug-21 AC Share Price (HKD) Consensus 2021e EBIT (RMBm, RH) Source: Bloomberg AC Share Price (HKD) Consensus 2021e Reported Profit (RMBm) Source: Bloomberg China Eastern Airlines (670 HK / 600115 CH, Buy / Buy, CMP HKD2.75 / RMB4.41, TP HKD4.50 / RMB6.40) Change in earnings estimates In 2021e, we decrease our capacity and traffic forecasts to reflect the recent outbreak of COVID-19 in China, while the international traffic outlook remains weak. However, our higher yield growth assumptions in 2022e reflect the tightening of domestic yields as airlines divert capacity from domestic routes to international routes. In 2023e, we forecast international pax yields to weaken sharply as more capacity gets added in international routes. 16 Equities ● Aviation 12 August 2021 Exhibit 41. CEA: Changes in key assumptions (2020-23e) (RMBm) RPK ASK Load factor Pax yield Source: HSBC estimates _________ New __________ 2021e 2022e 2023e 13% 19% 25% 14% 17% 21% -0.5 ppt 1.7 ppt 2.4 ppt 1.9% 13.4% -2.5% __________Old___________ 2021e 2022e 2023e 51% 22% 13% 43% 21% 9% 3.7 ppt 1.0 ppt 2.6 ppt 1.3% 9.6% -0.1% _______Difference ________ 2021e 2022e 2023e -37.3 ppt -3.1 ppt 12.7 ppt -28.9 ppt -4.2 ppt 12.4 ppt -4.3 ppt 0.6 ppt -0.2 ppt 0.6 ppt 3.7 ppt -2.4 ppt We now forecast higher loss at RMB7.3bn (vs RMB4.2bn loss previously) in 2021e We increase our reported loss forecast in 2021e to RMB7.3bn (vs RMB4.2bn loss previously), and we lower our profit forecasts for 2022e by 34% to RMB3.4bn (vs RMB5.2bn previously) on lower domestic and international traffic assumptions partially offset by continued strong cargo business. Exhibit 42. CEA: Earnings forecast revisions (2020-23e) ___________ New __________ ___________ Old___________ _________Difference ________ (RMBm) 2021e 2022e 2023e 2021e 2022e 2023e 2021e 2022e 2023e Revenues 80,025 101,062 118,248 92,566 119,756 132,129 -14% -16% -11% EBITDA 16,613 32,369 41,037 21,020 34,794 36,104 -21% -7% 14% EBIT (5,619) 9,233 16,650 (885) 12,117 12,187 -535% -24% 37% Reported profit (7,317) 3,388 8,791 (4,188) 5,157 5,631 -75% -34% 56% HSBC recurring net profit (7,027) 3,388 8,791 (3,898) 5,417 5,631 -80% -37% 56% Ratios Reported EPS (RMB) HSBC EPS (RMB) Reported ROE HSBC Recurring ROE EBITDA margin EBIT margin Source: HSBC estimates (0.42) (0.40) -12.6% -12.1% 20.8% -7.0% 0.18 0.18 5.5% 5.5% 32.0% 9.1% 0.47 0.47 13.1% 13.1% 34.7% 14.1% (0.24) (0.22) -7.0% -6.5% 22.7% -1.0% 0.27 0.29 7.9% 8.3% 29.1% 10.1% 0.30 0.30 8.0% 8.0% 27.3% 9.2% -75% -80% -5.6 ppt -5.6 ppt -1.9 ppt -6.1 ppt -34% -37% -2.4 ppt -2.8 ppt 3.0 ppt -1.0 ppt 56% 56% 5.1 ppt 5.1 ppt 7.4 ppt 4.9 ppt HSBC vs consensus We forecast reported loss of RMB7.3bn in 2021e vs the latest consensus estimates for a reported loss of RMB3.4bn. In 2022e, we forecast a profit of RMB3.4bn at the reported profit level, which is 20% lower than the consensus forecast of RMB4.3bn reported profit. Exhibit 43. CEA: HSBC vs consensus estimates 2021e 2022e 2023e _________ EBIT (RMBm)_________ ______Reported PAT (RMBm) ____ HSBC Consensus Difference HSBC Consensus Difference (5,619) (4,646) -21% (7,317) (3,416) -114% 9,233 10,601 -13% 3,388 4,262 -20% 16,650 15,693 6% 8,791 8,182 7% Source: Bloomberg consensus, HSBC estimates ___Recurring net profit (RMBm)___ HSBC Consensus Difference (7,027) (6,182) -14% 3,388 2,882 18% 8,791 6,304 0% Valuation and risks CEA’s H-shares are now trading at 0.67x consensus 12-month forward PB, close to 0.2 SD below the average since mid-2011. As highlighted in the following exhibit, the stock has traded at an average consensus 12-month forward PB of 1.29x with an average ROE of 9.68% since mid-2011. The current consensus 2021/2022e ROE is -9.2%/5.7% vs our forecasted ROE of -21.8%/12.1% for 2021e and 2022e, respectively. We now value CEA’s H-shares based on a higher target PB multiple of 1.15x, which is equal to 1 SD above the consensus 12-month forward PB since mid-2011 (from 1.05x, which is equal to 0.5 SD above the consensus 12-month forward PB since mid-2011). We also roll forward our valuation and base it on 2022e BVPS (from 2021e BVPS previously). 17 Equities ● Aviation 12 August 2021 Upgrade CEA-H to Buy from Hold with a higher target price of HKD4.50 (from HKD4.10) Upgrade CEA-A to Buy from Reduce with higher TP of RMB6.40 (from RMB3.50) We apply our target PB of 1.15x to the 2022e BVPS of RMB3.35 (from 2021e BVPS RMB3.33) and use our FX team’s unchanged end-2021e forecast for RMB-HKD of 1.18. Based on this approach, we arrive at a higher target price of HKD4.50 (from HKD4.10) for CEA’s H-shares, rounded to a single decimal place. Our H-share target price implies 63.6% upside from the current market price; we upgrade our rating on CEA’s H-shares to Buy (from Hold). To value the A-shares, we change our methodology to better reflect the wide historical gap between the valuations of the H- and the A-shares. Since mid-2011, the A-shares have traded at an average premium of 65% vs H-shares based on 12-month forward PB. To derive our A-share target price, we apply the premium of 65% to our H-share target PB multiple to arrive at a PB multiple of 1.90x. Previously, our A-share target price was based on a simple currency conversion. We apply our target PB of 1.90x to the 2022e BVPS of RMB3.35 to derive our Ashare target price of RMB6.20 (from RMB3.50 previously), which implies 45.1% upside from the current market price. We therefore upgrade our rating on CEA’s A-shares to Buy (from Reduce). Exhibit 44. CEA-H: Consensus 12-month forward PB and ROE chart 1.4x 0.9x 0.4x 30 20 10 1.95 0 0.67x -10 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 Apr-19 Jul-19 Oct-19 Jan-20 Apr-20 Jul-20 Oct-20 Jan-21 Apr-21 Jul-21 12-m forward PB (x) -1 Std. dev Source: Refinitiv Datastream, HSBC Average PB (x) 12-m forward ROE (%, RH) +1 Std. dev Downside risks for H- and A-shares: Consensus downgrades over the near term reflecting weaker y-o-y results in 1Q21e; higher-than-expected fuel prices; and lower-than-expected passenger traffic growth due to slower global and China economic growth. Exhibit 45. CEA: Consensus 2021e EBIT estimate revisions 7.0 20,000 6.0 15,000 5.0 10,000 5,000 4.0 0 3.0 -5,000 2.0 -10,000 Exhibit 46. CEA: Consensus 2021e reported profit estimate revisions 7.0 6.0 5.0 4.0 3.0 2.0 15,000 10,000 5,000 0 -5,000 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20 Oct-20 Nov-20 Dec-20 Jan-21 Feb-21 Mar-21 Apr-21 May-21 Jun-21 Jul-21 Aug-21 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20 Oct-20 Nov-20 Dec-20 Jan-21 Feb-21 Mar-21 Apr-21 May-21 Jun-21 Jul-21 Aug-21 CEA Share Price (HKD) Consensus 2021e EBIT (RMBm, RH) Source: Bloomberg CEA Share Price (HKD) Consensus 2021e Reported Profit (RMBm) Source: Bloomberg 18 Equities ● Aviation 12 August 2021 CSA (1055 HK / 600029 CH, Buy/ Buy, CMP HKD4.03 / RMB5.36, TP HKD6.20 / RMB8.00) Changes to our financial forecasts For 2021e, we lower our capacity and traffic growth forecasts by 37ppt and 43ppt, respectively, to reflect the recent outbreak of COVID-19 in China, while international traffic outlook remains weak. For 2022e, we also reduce our capacity and traffic growth forecasts by 1-3ppt, but for 2023e, when we expect international air traffic to start to recover, we raise our capacity and traffic growth forecast by 13-15ppt. However, our higher yield growth assumptions in 2022e reflect the tightening of domestic yields as airlines divert capacity from domestic routes to international routes. In 2023e, we forecast international pax yields to weaken sharply as more capacity gets added in international routes. Exhibit 47. CSA: Changes in key assumptions (2020-23e) RPK (% y-o-y) ASK (% y-o-y) Load factor (ppt y-o-y) Pax yield (% y-o-y) Source: HSBC estimates _________ New __________ 2021e 2022e 2023e 10% 19% 26% 8% 15% 21% 1.3ppt 2.3ppt 3.6ppt 1.6% 10.4% -3.3% __________Old___________ 2021e 2022e 2023e 53% 20% 0.1 45% 18% 0.1 4.0ppt 1.1ppt 2.5 -2.9% 10.3% 0 _______Difference ________ 2021e 2022e 2023e -42.9 ppt -1.0 ppt 15.1 ppt -36.9 ppt -2.9 ppt 12.8 ppt -2.6 ppt 1.2 ppt 1.1 ppt 4.5 ppt 0.2 ppt -4.1 ppt We now forecast higher reported loss in 2021e of RMB6.0bn (vs RMB0.9bn loss previously) We now forecast a higher reported loss in 2021e of RMB6.0bn (vs RMB0.9bn loss previously). For 2022e, we lower our profit forecast by 38% to RMB4.3bn (vs RMB7.0bn previously). Exhibit 48. CSA: Earnings forecast revisions (2021-23e) (RMBm) Revenues EBITDA EBIT Reported profit HSBC recurring net profit ___________ New _________ ___________ Old __________ ________ Difference ________ 2021e 2022e 2023e 2021e 2022e 2023e 2021e 2022e 2023e 106,933 128,596 148,247 128,301 160,357 175,132 -17% -20% -15% 20,655 35,389 44,127 28,369 39,885 40,336 -27% -11% 9% (3,363) 11,500 19,917 4,350 15,996 16,125 n/m -28% 24% (5,966) 4,292 9,990 (990) 6,979 7,688 -502% -38% 30% (5,547) 4,292 9,990 (572) 7,355 7,688 -870% -42% 30% Ratios Reported EPS (RMB) HSBC EPS (RMB) Reported ROE HSBC Recurring ROE EBITDA margin EBIT margin (0.39) (0.36) -9.0% -8.3% 19.3% -3.1% 0.28 0.28 6.5% 6.5% 27.5% 8.9% 0.65 0.65 13.8% 13.8% 29.8% 13.4% (0.06) (0.04) -1.4% -0.8% 22.1% 3.4% 0.46 0.48 9.7% 10.2% 24.9% 10.0% Note: Adj. EBITDA and Adj. EBIT are adjusted for capitalisation of operating leases. Source: HSBC estimates 0.50 0.50 9.8% 9.8% 23.0% 9.2% -502% -38% -870% -42% -7.5 ppt -3.2 ppt -7.5 ppt -3.7 ppt -2.8 ppt 2.6 ppt -6.5 ppt -1.0 ppt 30% 30% 4.0 ppt 4.0 ppt 6.7 ppt 4.2 ppt HSBC vs Consensus We forecast reported loss of RMB6.0bn in 2021e vs the latest consensus estimates for a reported loss of RMB1.5bn. In 2022e, we forecast a profit of RMB4.3bn for reported profit, which is 4% lower than the consensus forecast of RMB4.5bn reported profit. Exhibit 49. CSA: HSBC versus consensus 2021e 2022e 2023e ________ EBIT (RMBm) _________ HSBC Consensus Difference (3,363) (488) -589% 11,500 10,687 8% 19,917 10,698 86% Source: Bloomberg consensus, HSBC estimates _ Reported net profit (RMBm) __ HSBC Consensus Difference (5,966) (1,529) -290% 4,292 5,280 -19% 9,990 2,988 234% __Recurring net profit (RMBm) ___ HSBC Consensus Difference (5,547) (2,161) -157% 4,292 4,488 -4% 9,990 5,224 91% 19 Equities ● Aviation 12 August 2021 Maintain Buy on CSA-H but reduce TP to HKD6.20 (from HKD6.80 previously) Upgrade CSA-A to Buy (from Reduce) and raise TP to RMB8.00 (from RMB5.80) Valuation and risks CSA’s H-shares now trade at 0.71x consensus 12-month forward PB. The stock has traded at an average consensus 12-month forward PB of 1.0x with an average ROE of 7.81% since mid-2011. We now value CSA’s H-shares based on a lower target PB multiple of 1.18x, which is equal to 1.5 SD above the consensus 12-month forward PB since mid-2011 (from 1.29x previously, which is equal to 2 SD above the consensus 12-month forward PB since mid-2011). We lower our target PB multiple to reflect the near-term impact on domestic pax traffic given its relatively higher exposure to this segment vs its peers. We also roll forward our valuation and base it on 2022e BVPS (from 2021e BVPS previously). We apply our target PB multiple of 1.18x to our 2022e BVPS of RMB4.43 (from 2021e BVPS of RMB4.47) and use our FX team’s unchanged end-2021e forecast for RMB-HKD of 1.18. Based on this approach, we arrive at a lower target price of HKD6.20 (vs HKD6.80 previously), rounded to a single decimal place. Our H-share target price implies 53.8% upside from the current market price. We maintain our Buy rating on CSA’s H-shares. To value the A-shares, we change our methodology to better reflect the wide historical gap between the valuations of the H- and the A-shares. Since mid-2011, the A-shares have traded at an average premium of 53% vs H-shares based on 12-month forward PB. To derive our A-share target price, we apply the premium of 53% to our H-share target PB multiple to arrive at a PB multiple of 1.80x. Previously, our A-share target price was based on a simple currency conversion. We apply our target multiple of 1.80x to our 2022e BPVS of RMB4.43 to arrive at a higher target price of RMB8.00 (vs RMB5.80). Our A-share target price implies 49.3% upside from the current market price and accordingly we upgrade CSA’s A-shares to Buy (from Reduce). Downside risks for H- and A-shares: A prolonged COVID-19 pandemic globally; weaker-thanexpected economic growth in China; higher-than-expected increase in fuel prices; RMB depreciation versus the USD; and escalation in global trade tensions. Exhibit 50. CSA-H: Consensus 12-month forward PB and ROE chart 1.7x 1.2x 0.7x 0.2x 20 15 10 0.71x 5 3.7 0 -5 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 Apr-19 Jul-19 Oct-19 Jan-20 Apr-20 Jul-20 Oct-20 Jan-21 Apr-21 Jul-21 12-m forward PB (x) -1 Std. dev Source: Refinitiv Datastream, HSBC Average PB (x) 12-m forward ROE (%, RH) +1 Std. dev Exhibit 51. CSA: Consensus 2021e EBIT estimate revisions 8.0 20,000 15,000 6.0 10,000 4.0 5,000 0 2.0 -5,000 Exhibit 52. CSA: Consensus 2021e reported profit estimate revisions 8.0 6.0 4.0 2.0 8,000 6,000 4,000 2,000 0 -2,000 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20 Oct-20 Nov-20 Dec-20 Jan-21 Feb-21 Mar-21 Apr-21 May-21 Jun-21 Jul-21 Aug-21 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20 Oct-20 Nov-20 Dec-20 Jan-21 Feb-21 Mar-21 Apr-21 May-21 Jun-21 Jul-21 Aug-21 CSA Share Price (HKD) Consensus 2021e EBIT (RMBm, RH) Source: Bloomberg CSA Share Price (HKD) Consensus 2021e Reported Profit (RMBm) Source: Bloomberg 20 Equities ● Aviation 12 August 2021 Exhibit 53. Big 3 Chinese airlines: Sensitivity analysis for passenger yield, fuel price, interest rate and exchange rate on EBIT and net profits for 2022e RMBm Traffic sensitivity Base case RPK (m) Revised RPK assuming a 5% decline from base case Base case pax yield (RMB) 5% decline in RPK: impact on revenues Operating costs Change in costs assuming 37% costs are variable Net impact on EBIT Tax rate Post tax impact of RPK decline Air China 140,491 133,466 0.58 (4,062) (97,442) 1,803 (2,260) 25% (1,695) CEA 144,976 137,727 0.57 (4,128) (91,829) 1,699 (2,430) 25% (1,822) CSA 200,550 190,523 0.52 (5,174) (117,096) 2,166 (3,008) 25% (2,256) Base case EBIT % impact on EBIT 5,643 -40% 9,233 -26% 11,500 -26% Base case recurring net profit % impact on recurring net profit 1,778 -95% 3,388 -54% 4,292 -53% Passenger yield sensitivity Base case pax yield (RMB) Revised yield assuming 1% decline in pax yield (RMB) RPK (m) 1% decline of pax yield: impact on revenues Tax rate Post tax increase in pax revenue 0.578 0.573 140,491 (812) 25% (609) 0.570 0.564 144,976 (826) 25% (619) 0.516 0.511 200,550 (1,035) 25% (776) Base case EBIT % impact on EBIT 5,643 -14% 9,233 -9% 11,500 -9% Base case recurring net profit % impact on recurring net profit 1,778 -34% 3,388 -18% 4,292 -18% Fuel price sensitivity Base case fuel cost 5% increase in fuel price Tax rate Post tax increase in fuel cost (26,400) (1,320) 25% (990) (27,886) (1,394) 25% (1,046) (31,893) (1,595) 25% (1,196) Base case EBIT % impact on EBIT 5,643 -23% 9,233 -15% 11,500 -14% Base case recurring net profit % impact on recurring net profit 1,778 -56% 3,388 -31% 4,292 -28% Interest rate sensitivity Average interest bearing debt % of interest bearing debt floating 162,742 17% 171,646 33% 177,530 35% Base case interest expense 100bps increase of interest rate: impact on interest expense % increase in interest expenses (4,867) (281) 6% (5,007) (570) 11% (5,946) (620) 10% Tax rate Post tax increase in interest expenses 25% 25% 25% (211) (427) (465) Base case recurring net profit % impact on recurring net profit 1,778 -12% 3,388 -17% 4,292 -11% FX sensitivity USD Debt (RMBm) 44,827 33,069 47,708 Base case RMB (HSBC FX forecasts) Further 5% depreciation in RMB Revised RMB Impact on profits (RMBm) Tax rate Post tax FX impact (RMBm) 6.60 6.95 -5% (2,241) 25% (1,681) 6.60 6.95 -5% (1,653) 25% (1,240) 6.60 6.95 -5% (2,385) 25% (1,789) Base case reported profit (RMBm) % impact on reported net profit 1,778 -95% 3,388 -37% Note: We use reported profit for FX sensitivity as we do not include FX gains in our recurring profit estimates. Source: HSBC estimates (5,966) -30% 21 Equities ● Aviation 12 August 2021 22 Exhibit 54. HSBC Asian aviation sector valuation summary Company Ticker Chinese and HK Airlines Air China 753 HK Air China-A 601111 CH Cathay Pacific 293 HK China Eastern Airlines 670 HK China Eastern Airlines-A 600115 CH China Southern Airlines 1055 HK China Southern Airlines-A 600029 CH HSBC Share HSBC Mkt cap Turnover Curr rating price target (USDm) (USDm) HKD Buy 4.79 6.30 12,761 10.0 RMB Hold 6.48 7.30 12,761 36.7 HKD Hold 6.20 7.00 5,129 4.8 HKD Buy 2.75 4.50 9,446 5.9 RMB Buy 4.41 6.40 9,446 21.8 HKD Buy 4.03 6.20 11,348 7.5 RMB Buy 5.36 8.00 12,686 35.1 Free ___ PB (x)__ _ EV/EBITDA (x) ____ ROE __ ____ PE (x) __ ____ Yield___ Net debt to _________ Share price ________ Float 2021e 2022e 2021e 2022e 2021e 2022e 2021e 2022e 2021e 2022e equity (x) 2020 1M 6M 1Y YTD 37% 0.8 0.8 18.3 17% 1.3 1.3 18.3 15% 0.9 0.9 10.9 29% 0.7 0.7 13.8 22% 1.4 1.3 13.8 36% 0.8 0.8 12.8 20% 1.3 1.2 12.8 8.7 -13.9% 2.6% 8.7 -13.9% 2.6% 3.6 -14.8% 4.7% 6.9 -12.1% 5.5% 6.9 -12.1% 5.5% 7.3 -8.3% 6.5% 7.3 -8.3% 6.5% nm 30.8 nm 50.1 nm 13.3 nm 12.8 nm 24.6 nm 12.0 nm 16.4 0.0% 0.3% 0.0% 0.2% 0.0% 3.6% 0.0% 1.2% 0.0% 0.6% 0.0% 1.4% 0.0% 0.9% 1.9x -13% -20% -2% -21% 1.9x -15% -17% -8% -13% 1.0x -7% -5% 18% -14% 3.0x -10% -19% -4% -18% 3.0x -12% -7% -4% -6% 2.0x -13% -18% 13% -13% 2.0x -7% -13% -2% -10% Chinese Airports BCIA 0694.HK HKD Hold 4.18 4.80 3,489 6.5 100% 0.74 0.7 34.0 13.4 -2.7% 1.1% n/m 66.1 0.0% 0.7% 0.2x -15% -23% -22% -35% ASEAN Airports Airport of Thailand AOT TB THB Reduce 58.25 41.00 24,871 44.5 38% 6.72 6.8 n/m 86.3 -12.3% -0.9% Malaysia Airports Holding MAHB MK MYR Reduce 6.00 4.90 2,355 2.3 49% 1.5 1.5 24.7 13.8 -4.0% 2.5% Note: Turnover is based on average over past three months; For AOT, the fiscal year ends in September. Priced as of 9 August 2021. Source: HSBC estimates, Refinitiv Datastream n/m n/m 0.3% 0.0% n/m 58.3 0.0% 0.9% -0.2x -4% -9% 19% -6% 1.2x 3% 10% 20% 1% Equities ● Aviation 12 August 2021 Financials & valuation: Air China Financial statements Year to 12/2020a Profit & loss summary (CNYm) Revenue EBITDA Depreciation & amortisation Operating profit/EBIT Net interest PBT HSBC PBT Taxation Net profit HSBC net profit Cash flow summary (CNYm) 73,821 9,547 -20,408 -10,861 -4,908 -18,466 -21,762 2,650 -14,403 -16,999 Cash flow from operations Capex Cash flow from investment Dividends Change in net debt FCF equity Balance sheet summary (CNYm) -4,017 -12,038 -15,865 -740 24,312 -15,922 Intangible fixed assets Tangible fixed assets Current assets Cash & others Total assets Operating liabilities Gross debt Net debt Shareholders' funds Invested capital 1,137 241,394 19,736 5,838 284,030 38,930 160,992 155,154 77,541 217,499 12/2021e 81,273 12,855 -20,718 -7,863 -4,888 -15,319 -14,795 3,319 -10,440 -10,047 11,645 -15,000 -14,516 0 2,871 -3,355 1,137 235,676 19,715 5,801 275,897 39,964 163,825 158,024 67,101 210,762 12/2022e 103,085 26,623 -20,980 5,643 -4,751 2,267 2,267 -223 1,778 1,778 21,841 -20,000 -19,534 -169 -2,128 1,841 1,136 234,696 21,408 5,764 277,634 41,823 161,659 155,896 68,879 209,653 12/2023e 122,442 35,189 -21,654 13,536 -4,526 10,745 10,745 -2,252 7,389 7,389 29,114 -20,000 -19,535 -179 -8,658 9,114 1,136 233,042 23,184 6,256 279,143 43,184 153,493 147,237 76,089 207,923 Ratio, growth and per share analysis Year to 12/2020a 12/2021e Y-o-y % change Revenue EBITDA Operating profit PBT HSBC EPS Ratios (%) -47.3 10.1 -73.4 34.6 -174.3 -302.5 -331.2 Revenue/IC (x) ROIC ROE ROA EBITDA margin Operating profit margin EBITDA/net interest (x) Net debt/equity Net debt/EBITDA (x) CF from operations/net debt Per share data (CNY) 0.3 -4.0 -19.9 -4.1 12.9 -14.7 1.9 185.2 16.3 0.4 -2.8 -13.9 -2.9 15.8 -9.7 2.6 220.2 12.3 7.4 EPS Rep (diluted) HSBC EPS (diluted) DPS Book value -1.05 -0.76 -1.24 -0.73 0.00 0.00 5.65 4.89 12/2022e 26.8 107.1 0.5 2.0 2.6 2.1 25.8 5.5 5.6 211.2 5.9 14.0 0.13 0.13 0.01 5.01 12/2023e 18.8 32.2 139.9 374.0 315.6 0.6 4.9 10.2 4.3 28.7 11.1 7.8 179.3 4.2 19.8 0.54 0.54 0.05 5.54 Valuation data Year to EV/sales EV/EBITDA EV/IC PE* PB FCF yield (%) Dividend yield (%) * Based on HSBC EPS (diluted) 12/2020a 3.1 24.3 1.1 nm 0.7 -19.2 0.0 12/2021e 2.9 18.3 1.1 nm 0.8 -4.1 0.0 12/2022e 2.3 8.7 1.1 30.8 0.8 2.2 0.3 Buy 12/2023e 1.8 6.4 1.1 7.4 0.7 11.0 1.3 ESG metrics Environmental Indicators 12/2019a Governance Indicators 12/2020a GHG emission intensity* Energy intensity* CO2 reduction policy Social Indicators 1,145.9 No. of board members 9 4,328.7 Average board tenure (years) n/a Yes Female board members (%) 0 12/2019a Board members independence (%) 44.4 Employee costs as % of revenues 18.2 Employee turnover (%) 3.5 Diversity policy Yes Source: Company data, HSBC * GHG intensity and energy intensity are measured in kg and kWh respectively against revenue in USD ‘000s Issuer information Share price (HKD) Target price (HKD) RIC (Equity) Bloomberg (Equity) Market cap (USDm) 4.79 6.30 0753.HK 753 HK 12,761 Free float Sector Country/Region Analyst Contact 37% Airlines China Parash Jain +852 2996 6717 Price relative 11.80 10.80 9.80 8.80 7.80 6.80 5.80 4.80 3.80 2019 2020 Air China Source: HSBC Note: Priced at close of 09 Aug 2021 2021 Rel to HSCEI 11.80 10.80 9.80 8.80 7.80 6.80 5.80 4.80 3.80 23 Equities ● Aviation 12 August 2021 Financials & valuation: Air China A Financial statements Year to 12/2020a Profit & loss summary (CNYm) Revenue EBITDA Depreciation & amortisation Operating profit/EBIT Net interest PBT HSBC PBT Taxation Net profit HSBC net profit Cash flow summary (CNYm) 73,821 9,547 -20,408 -10,861 -4,908 -18,466 -21,762 2,650 -14,403 -16,999 Cash flow from operations Capex Cash flow from investment Dividends Change in net debt FCF equity Balance sheet summary (CNYm) -4,017 -12,038 -15,865 -740 24,312 -15,922 Intangible fixed assets Tangible fixed assets Current assets Cash & others Total assets Operating liabilities Gross debt Net debt Shareholders' funds Invested capital 1,137 241,394 19,736 5,838 284,030 38,930 160,992 155,154 77,541 217,499 12/2021e 81,273 12,855 -20,718 -7,863 -4,888 -15,319 -14,795 3,319 -10,440 -10,047 11,645 -15,000 -14,516 0 2,871 -3,355 1,137 235,676 19,715 5,801 275,897 39,964 163,825 158,024 67,101 210,762 12/2022e 103,085 26,623 -20,980 5,643 -4,751 2,267 2,267 -223 1,778 1,778 21,841 -20,000 -19,534 -169 -2,128 1,841 1,136 234,696 21,408 5,764 277,634 41,823 161,659 155,896 68,879 209,653 12/2023e 122,442 35,189 -21,654 13,536 -4,526 10,745 10,745 -2,252 7,389 7,389 29,114 -20,000 -19,535 -179 -8,658 9,114 1,136 233,042 23,184 6,256 279,143 43,184 153,493 147,237 76,089 207,923 Ratio, growth and per share analysis Year to 12/2020a 12/2021e Y-o-y % change Revenue EBITDA Operating profit PBT HSBC EPS Ratios (%) -47.3 10.1 -73.4 34.6 -174.3 -302.5 -331.2 Revenue/IC (x) ROIC ROE ROA EBITDA margin Operating profit margin EBITDA/net interest (x) Net debt/equity Net debt/EBITDA (x) CF from operations/net debt Per share data (CNY) 0.3 -4.0 -19.9 -4.1 12.9 -14.7 1.9 185.2 16.3 0.4 -2.8 -13.9 -2.9 15.8 -9.7 2.6 220.2 12.3 7.4 EPS Rep (diluted) HSBC EPS (diluted) DPS Book value -1.05 -0.76 -1.24 -0.73 0.00 0.00 5.65 4.89 12/2022e 26.8 107.1 0.5 2.0 2.6 2.1 25.8 5.5 5.6 211.2 5.9 14.0 0.13 0.13 0.01 5.01 12/2023e 18.8 32.2 139.9 374.0 315.6 0.6 4.9 10.2 4.3 28.7 11.1 7.8 179.3 4.2 19.8 0.54 0.54 0.05 5.54 Valuation data Year to EV/sales EV/EBITDA EV/IC PE* PB FCF yield (%) Dividend yield (%) * Based on HSBC EPS (diluted) 12/2020a 3.1 24.3 1.1 nm 1.1 -19.2 0.0 12/2021e 2.9 18.3 1.1 nm 1.3 -4.1 0.0 Hold 12/2022e 2.3 8.7 1.1 50.1 1.3 2.2 0.2 12/2023e 1.8 6.4 1.1 12.0 1.2 11.0 0.8 ESG metrics Environmental Indicators 12/2019a Governance Indicators 12/2020a GHG emission intensity* Energy intensity* CO2 reduction policy Social Indicators 1,145.9 No. of board members 9 4,328.7 Average board tenure (years) n/a Yes Female board members (%) 0 12/2019a Board members independence (%) 44.4 Employee costs as % of revenues 18.2 Employee turnover (%) 3.5 Diversity policy Yes Source: Company data, HSBC * GHG intensity and energy intensity are measured in kg and kWh respectively against revenue in USD ‘000s Issuer information Share price (CNY) Target price (CNY) RIC (Equity) Bloomberg (Equity) Market cap (USDm) 6.48 7.30 601111.SS 601111 CH 12,761 Free float Sector Country/Region Analyst Contact 17% Airlines China Parash Jain +852 2996 6717 Price relative 12.70 10.70 8.70 6.70 4.70 2.70 2019 2020 Air China A Source: HSBC Note: Priced at close of 09 Aug 2021 2021 Rel to CSI 300 Index 12.70 10.70 8.70 6.70 4.70 2.70 24 Equities ● Aviation 12 August 2021 Financials & valuation: China Eastern Airlines Buy Financial statements Year to 12/2020a Profit & loss summary (CNYm) Revenue EBITDA Depreciation & amortisation Operating profit/EBIT Net interest PBT HSBC PBT Taxation Net profit HSBC net profit Cash flow summary (CNYm) 64,075 8,307 -22,255 -13,948 -5,047 -16,488 -18,860 3,927 -11,836 -13,640 Cash flow from operations Capex Cash flow from investment Dividends Change in net debt FCF equity Balance sheet summary (CNYm) 1,211 -6,348 -6,283 0 15,733 -5,137 Intangible fixed assets Tangible fixed assets Current assets Cash & others Total assets Operating liabilities Gross debt Net debt Shareholders' funds Invested capital 28,958 230,807 22,498 7,651 284,650 41,350 184,146 176,495 56,249 233,262 12/2021e 80,025 16,613 -22,232 -5,619 -4,977 -10,633 -10,247 2,680 -7,317 -7,027 13,989 -17,000 -16,736 0 -8,081 -3,011 29,502 225,030 22,181 6,666 279,100 41,991 175,080 168,414 59,760 228,056 12/2022e 101,062 32,369 -23,136 9,233 -4,807 4,865 4,865 -1,182 3,388 3,388 26,469 -20,914 -20,612 508 -5,857 5,555 30,380 221,931 21,349 5,654 276,047 42,125 168,211 162,557 63,148 225,881 12/2023e 118,248 41,037 -24,387 16,650 -4,438 12,695 12,695 -3,140 8,791 8,791 34,169 -20,598 -20,251 1,319 -13,410 13,572 31,798 216,724 21,881 6,476 272,790 42,408 155,623 149,147 71,431 221,519 Ratio, growth and per share analysis Year to 12/2020a 12/2021e Y-o-y % change Revenue EBITDA Operating profit PBT HSBC EPS Ratios (%) -49.7 -73.4 -251.6 -483.5 -448.0 24.9 100.0 Revenue/IC (x) ROIC ROE ROA EBITDA margin Operating profit margin EBITDA/net interest (x) Net debt/equity Net debt/EBITDA (x) CF from operations/net debt Per share data (CNY) 0.3 -4.6 -21.8 -4.4 13.0 -21.8 1.6 298.4 21.2 0.7 0.3 -1.8 -12.1 -2.8 20.8 -7.0 3.3 271.5 10.1 8.3 EPS Rep (diluted) HSBC EPS (diluted) DPS Book value -0.72 -0.42 -0.83 -0.40 0.00 0.00 3.43 3.17 12/2022e 26.3 94.8 0.4 3.1 5.5 1.3 32.0 9.1 6.7 247.4 5.0 16.3 0.18 0.18 0.03 3.35 12/2023e 17.0 26.8 80.3 161.0 159.5 0.5 5.6 13.1 3.5 34.7 14.1 9.2 199.5 3.6 22.9 0.47 0.47 0.07 3.78 Valuation data Year to EV/sales EV/EBITDA EV/IC PE* PB FCF yield (%) Dividend yield (%) * Based on HSBC EPS (diluted) 12/2020a 3.7 28.7 1.0 nm 0.7 -8.4 0.0 12/2021e 2.9 13.8 1.0 nm 0.7 -4.9 0.0 12/2022e 2.2 6.9 1.0 12.8 0.7 9.1 1.2 12/2023e 1.8 5.2 1.0 4.9 0.6 22.1 3.0 ESG metrics Environmental Indicators 12/2020a Governance Indicators 12/2020a GHG emission intensity* Energy intensity* CO2 reduction policy Social Indicators 1,502.3 No. of board members 7 5,817.9 Average board tenure (years) 6.6 Yes Female board members (%) 0 12/2020a Board members independence (%) 42.9 Employee costs as % of revenues 18.7 Employee turnover (%) 2 Diversity policy Yes Source: Company data, HSBC * GHG intensity and energy intensity are measured in kg and kWh respectively against revenue in USD ‘000s Issuer information Share price (HKD) Target price (HKD) RIC (Equity) Bloomberg (Equity) Market cap (USDm) 2.75 4.50 0670.HK 670 HK 9,446 Free float Sector Country/Region Analyst Contact 29% Airlines China Parash Jain +852 2996 6717 Price relative 5.90 5.90 4.90 4.90 3.90 3.90 2.90 2.90 1.90 1.90 2019 2020 2021 China Eastern Airlines Rel to HSCEI Source: HSBC Note: Priced at close of 09 Aug 2021 25 Equities ● Aviation 12 August 2021 Financials & valuation: China Eastern Airlines A Buy Financial statements Year to 12/2020a Profit & loss summary (CNYm) Revenue EBITDA Depreciation & amortisation Operating profit/EBIT Net interest PBT HSBC PBT Taxation Net profit HSBC net profit Cash flow summary (CNYm) 64,075 8,307 -22,255 -13,948 -5,047 -16,488 -18,860 3,927 -11,836 -13,640 Cash flow from operations Capex Cash flow from investment Dividends Change in net debt FCF equity Balance sheet summary (CNYm) 1,211 -6,348 -6,283 0 15,733 -5,137 Intangible fixed assets Tangible fixed assets Current assets Cash & others Total assets Operating liabilities Gross debt Net debt Shareholders' funds Invested capital 28,958 230,807 22,498 7,651 284,650 41,350 184,146 176,495 56,249 233,262 12/2021e 80,025 16,613 -22,232 -5,619 -4,977 -10,633 -10,247 2,680 -7,317 -7,027 13,989 -17,000 -16,736 0 -8,081 -3,011 29,502 225,030 22,181 6,666 279,100 41,991 175,080 168,414 59,760 228,056 12/2022e 101,062 32,369 -23,136 9,233 -4,807 4,865 4,865 -1,182 3,388 3,388 26,469 -20,914 -20,612 508 -5,857 5,555 30,380 221,931 21,349 5,654 276,047 42,125 168,211 162,557 63,148 225,881 12/2023e 118,248 41,037 -24,387 16,650 -4,438 12,695 12,695 -3,140 8,791 8,791 34,169 -20,598 -20,251 1,319 -13,410 13,572 31,798 216,724 21,881 6,476 272,790 42,408 155,623 149,147 71,431 221,519 Ratio, growth and per share analysis Year to 12/2020a 12/2021e Y-o-y % change Revenue EBITDA Operating profit PBT HSBC EPS Ratios (%) -49.7 -73.4 -251.6 -483.5 -448.0 24.9 100.0 Revenue/IC (x) ROIC ROE ROA EBITDA margin Operating profit margin EBITDA/net interest (x) Net debt/equity Net debt/EBITDA (x) CF from operations/net debt Per share data (CNY) 0.3 -4.6 -21.8 -4.4 13.0 -21.8 1.6 298.4 21.2 0.7 0.3 -1.8 -12.1 -2.8 20.8 -7.0 3.3 271.5 10.1 8.3 EPS Rep (diluted) HSBC EPS (diluted) DPS Book value -0.72 -0.42 -0.83 -0.40 0.00 0.00 3.43 3.17 12/2022e 26.3 94.8 0.4 3.1 5.5 1.3 32.0 9.1 6.7 247.4 5.0 16.3 0.18 0.18 0.03 3.35 12/2023e 17.0 26.8 80.3 161.0 159.5 0.5 5.6 13.1 3.5 34.7 14.1 9.2 199.5 3.6 22.9 0.47 0.47 0.07 3.78 Valuation data Year to EV/sales EV/EBITDA EV/IC PE* PB FCF yield (%) Dividend yield (%) * Based on HSBC EPS (diluted) 12/2020a 3.7 28.7 1.0 nm 1.3 -8.4 0.0 12/2021e 2.9 13.8 1.0 nm 1.4 -4.9 0.0 12/2022e 2.2 6.9 1.0 24.6 1.3 9.1 0.6 12/2023e 1.8 5.2 1.0 9.5 1.2 22.1 1.6 ESG metrics Environmental Indicators 12/2020a Governance Indicators 12/2020a GHG emission intensity* Energy intensity* CO2 reduction policy Social Indicators 1,502.3 No. of board members 7 5,817.9 Average board tenure (years) 6.6 Yes Female board members (%) 0 12/2020a Board members independence (%) 42.9 Employee costs as % of revenues 18.7 Employee turnover (%) 2 Diversity policy Yes Source: Company data, HSBC * GHG intensity and energy intensity are measured in kg and kWh respectively against revenue in USD ‘000s Issuer information Share price (CNY) Target price (CNY) RIC (Equity) Bloomberg (Equity) Market cap (USDm) 4.41 6.40 600115.SS 600115 CH 9,446 Free float Sector Country/Region Analyst Contact 22% Airlines China Parash Jain +852 2996 6717 Price relative 8.60 8.60 7.60 7.60 6.60 6.60 5.60 5.60 4.60 4.60 3.60 3.60 2.60 2.60 1.60 1.60 2019 2020 2021 China Eastern Airlines A Rel to CSI 300 Index Source: HSBC Note: Priced at close of 09 Aug 2021 26 Equities ● Aviation 12 August 2021 Financials & valuation: China Southern Airlines Buy Financial statements Year to 12/2020a Profit & loss summary (CNYm) Revenue EBITDA Depreciation & amortisation Operating profit/EBIT Net interest PBT HSBC PBT Taxation Net profit HSBC net profit Cash flow summary (CNYm) 92,561 16,630 -24,590 -7,960 -6,394 -15,195 -14,907 3,368 -10,847 -10,559 Cash flow from operations Capex Cash flow from investment Dividends Change in net debt FCF equity Balance sheet summary (CNYm) -5,331 -8,213 -8,049 -32 -9,378 -13,544 Intangible fixed assets Tangible fixed assets Current assets Cash & others Total assets Operating liabilities Gross debt Net debt Shareholders' funds Invested capital 0 269,618 38,985 25,419 326,383 41,806 199,446 174,027 69,584 241,378 12/2021e 106,933 20,655 -24,018 -3,363 -6,279 -9,487 -9,068 2,550 -5,966 -5,547 12,451 -17,173 -17,173 0 435 -4,722 0 262,773 19,198 6,373 300,464 41,435 180,835 174,462 63,618 234,163 12/2022e 128,596 35,389 -23,889 11,500 -5,882 6,396 6,396 -1,405 4,292 4,292 20,303 -22,173 -22,173 -735 -5,417 -1,870 0 261,056 17,388 5,179 297,715 40,306 174,224 169,045 67,911 232,960 12/2023e 148,247 44,127 -24,211 19,917 -5,484 15,225 15,225 -3,608 9,990 9,990 25,349 -22,173 -22,173 -858 -11,409 3,176 0 259,019 17,105 5,977 296,187 38,630 163,613 157,636 77,043 231,517 Ratio, growth and per share analysis Year to 12/2020a 12/2021e Y-o-y % change Revenue EBITDA Operating profit PBT HSBC EPS Ratios (%) -40.0 15.5 -52.9 24.2 -174.3 -474.7 -367.3 Revenue/IC (x) ROIC ROE ROA EBITDA margin Operating profit margin EBITDA/net interest (x) Net debt/equity Net debt/EBITDA (x) CF from operations/net debt Per share data (CNY) 0.4 -2.5 -15.8 -3.7 18.0 -8.6 2.6 204.4 10.5 0.4 -1.1 -8.3 -2.2 19.3 -3.1 3.3 223.1 8.4 7.1 EPS Rep (diluted) HSBC EPS (diluted) DPS Book value -0.77 -0.39 -0.75 -0.36 0.00 0.00 4.54 4.15 12/2022e 20.3 71.3 0.6 3.7 6.5 1.7 27.5 8.9 6.0 203.2 4.8 12.0 0.28 0.28 0.05 4.43 12/2023e 15.3 24.7 73.2 138.1 132.8 0.6 6.4 13.8 3.9 29.8 13.4 8.0 167.8 3.6 16.1 0.65 0.65 0.11 5.03 Valuation data Year to EV/sales EV/EBITDA EV/IC PE* PB FCF yield (%) Dividend yield (%) * Based on HSBC EPS (diluted) 12/2020a 2.8 16.0 1.1 nm 0.7 -18.4 0.0 12/2021e 2.4 12.8 1.1 nm 0.8 -6.4 0.0 12/2022e 2.0 7.3 1.1 12.0 0.8 -2.5 1.4 12/2023e 1.6 5.6 1.0 5.2 0.7 4.3 3.3 ESG metrics Environmental Indicators 12/2020a Governance Indicators 12/2020a GHG emission intensity* Energy intensity* CO2 reduction policy Social Indicators 1,440.4 No. of board members 7 5,618.5 Average board tenure (years) 3.9 Yes Female board members (%) 0 12/2020a Board members independence (%) 57.1 Employee costs as % of revenues 26.8 Employee turnover (%) [n/a] Diversity policy Yes Source: Company data, HSBC * GHG intensity and energy intensity are measured in kg and kWh respectively against revenue in USD ‘000s Issuer information Share price (HKD) Target price (HKD) RIC (Equity) Bloomberg (Equity) Market cap (USDm) 4.03 6.20 1055.HK 1055 HK 11,348 Free float Sector Country/Region Analyst Contact 36% Airlines China Parash Jain +852 2996 6717 Price relative 8.20 8.20 7.20 7.20 6.20 6.20 5.20 5.20 4.20 4.20 3.20 3.20 2.20 2.20 2019 2020 2021 China Southern Airlines Rel to HSCEI Source: HSBC Note: Priced at close of 09 Aug 2021 27 Equities ● Aviation 12 August 2021 Financials & valuation: China Southern Airlines A Buy Financial statements Year to 12/2020a Profit & loss summary (CNYm) Revenue EBITDA Depreciation & amortisation Operating profit/EBIT Net interest PBT HSBC PBT Taxation Net profit HSBC net profit Cash flow summary (CNYm) 92,561 16,630 -24,590 -7,960 -6,394 -15,195 -14,907 3,368 -10,847 -10,559 Cash flow from operations Capex Cash flow from investment Dividends Change in net debt FCF equity Balance sheet summary (CNYm) -5,331 -8,213 -8,049 -32 -9,378 -13,544 Intangible fixed assets Tangible fixed assets Current assets Cash & others Total assets Operating liabilities Gross debt Net debt Shareholders' funds Invested capital 0 269,618 38,985 25,419 326,383 41,806 199,446 174,027 69,584 241,378 12/2021e 106,933 20,655 -24,018 -3,363 -6,279 -9,487 -9,068 2,550 -5,966 -5,547 12,451 -17,173 -17,173 0 435 -4,722 0 262,773 19,198 6,373 300,464 41,435 180,835 174,462 63,618 234,163 12/2022e 128,596 35,389 -23,889 11,500 -5,882 6,396 6,396 -1,405 4,292 4,292 20,303 -22,173 -22,173 -735 -5,417 -1,870 0 261,056 17,388 5,179 297,715 40,306 174,224 169,045 67,911 232,960 12/2023e 148,247 44,127 -24,211 19,917 -5,484 15,225 15,225 -3,608 9,990 9,990 25,349 -22,173 -22,173 -858 -11,409 3,176 0 259,019 17,105 5,977 296,187 38,630 163,613 157,636 77,043 231,517 Ratio, growth and per share analysis Year to 12/2020a 12/2021e Y-o-y % change Revenue EBITDA Operating profit PBT HSBC EPS Ratios (%) -40.0 15.5 -52.9 24.2 -174.3 -474.7 -367.3 Revenue/IC (x) ROIC ROE ROA EBITDA margin Operating profit margin EBITDA/net interest (x) Net debt/equity Net debt/EBITDA (x) CF from operations/net debt Per share data (CNY) 0.4 -2.5 -15.8 -3.7 18.0 -8.6 2.6 204.4 10.5 0.4 -1.1 -8.3 -2.2 19.3 -3.1 3.3 223.1 8.4 7.1 EPS Rep (diluted) HSBC EPS (diluted) DPS Book value -0.77 -0.39 -0.75 -0.36 0.00 0.00 4.54 4.15 12/2022e 20.3 71.3 0.6 3.7 6.5 1.7 27.5 8.9 6.0 203.2 4.8 12.0 0.28 0.28 0.05 4.43 12/2023e 15.3 24.7 73.2 138.1 132.8 0.6 6.4 13.8 3.9 29.8 13.4 8.0 167.8 3.6 16.1 0.65 0.65 0.11 5.03 Valuation data Year to EV/sales EV/EBITDA EV/IC PE* PB FCF yield (%) Dividend yield (%) * Based on HSBC EPS (diluted) 12/2020a 2.9 16.0 1.1 nm 1.2 -16.5 0.0 12/2021e 2.5 12.8 1.1 nm 1.3 -5.7 0.0 12/2022e 2.0 7.3 1.1 19.1 1.2 -2.3 0.9 12/2023e 1.7 5.6 1.1 8.2 1.1 3.9 2.1 ESG metrics Environmental Indicators 12/2020a Governance Indicators 12/2020a GHG emission intensity* Energy intensity* CO2 reduction policy Social Indicators 1,440.4 No. of board members 7 5,618.5 Average board tenure (years) 3.9 Yes Female board members (%) 0 12/2020a Board members independence (%) 57.1 Employee costs as % of revenues 26.8 Employee turnover (%) [n/a] Diversity policy Yes Source: Company data, HSBC * GHG intensity and energy intensity are measured in kg and kWh respectively against revenue in USD ‘000s Issuer information Share price (CNY) Target price (CNY) RIC (Equity) Bloomberg (Equity) Market cap (USDm) 5.36 8.00 600029.SS 600029 CH 12,686 Free float Sector Country/Region Analyst Contact 20% Airlines China Parash Jain +852 2996 6717 Price relative 10.10 9.10 8.10 7.10 6.10 5.10 4.10 3.10 2.10 2019 2020 China Southern Airlines A Source: HSBC Note: Priced at close of 09 Aug 2021 2021 Rel to CSI 300 Index 10.10 9.10 8.10 7.10 6.10 5.10 4.10 3.10 2.10 28 Equities ● Aviation 12 August 2021 Disclosure appendix Analyst Certification The following analyst(s), economist(s), or strategist(s) who is(are) primarily responsible for this report, including any analyst(s) whose name(s) appear(s) as author of an individual section or sections of the report and any analyst(s) named as the covering analyst(s) of a subsidiary company in a sum-of-the-parts valuation certifies(y) that the opinion(s) on the subject security(ies) or issuer(s), any views or forecasts expressed in the section(s) of which such individual(s) is(are) named as author(s), and any other views or forecasts expressed herein, including any views expressed on the back page of the research report, accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Parash Jain, Deepak Maurya and Bruce Chu Important disclosures Equities: Stock ratings and basis for financial analysis HSBC and its affiliates, including the issuer of this report (“HSBC”) believes an investor's decision to buy or sell a stock should depend on individual circumstances such as the investor's existing holdings, risk tolerance and other considerations and that investors utilise various disciplines and investment horizons when making investment decisions. Ratings should not be used or relied on in isolation as investment advice. Different securities firms use a variety of ratings terms as well as different rating systems to describe their recommendations and therefore investors should carefully read the definitions of the ratings used in each research report. Further, investors should carefully read the entire research report and not infer its contents from the rating because research reports contain more complete information concerning the analysts' views and the basis for the rating. From 23rd March 2015 HSBC has assigned ratings on the following basis: The target price is based on the analyst’s assessment of the stock’s actual current value, although we expect it to take six to 12 months for the market price to reflect this. When the target price is more than 20% above the current share price, the stock will be classified as a Buy; when it is between 5% and 20% above the current share price, the stock may be classified as a Buy or a Hold; when it is between 5% below and 5% above the current share price, the stock will be classified as a Hold; when it is between 5% and 20% below the current share price, the stock may be classified as a Hold or a Reduce; and when it is more than 20% below the current share price, the stock will be classified as a Reduce. Our ratings are re-calibrated against these bands at the time of any 'material change' (initiation or resumption of coverage, change in target price or estimates). Upside/Downside is the percentage difference between the target price and the share price. Prior to this date, HSBC’s rating structure was applied on the following basis: For each stock we set a required rate of return calculated from the cost of equity for that stock’s domestic or, as appropriate, regional market established by our strategy team. The target price for a stock represented the value the analyst expected the stock to reach over our performance horizon. The performance horizon was 12 months. For a stock to be classified as Overweight, the potential return, which equals the percentage difference between the current share price and the target price, including the forecast dividend yield when indicated, had to exceed the required return by at least 5 percentage points over the succeeding 12 months (or 10 percentage points for a stock classified as Volatile*). For a stock to be classified as Underweight, the stock was expected to underperform its required return by at least 5 percentage points over the succeeding 12 months (or 10 percentage points for a stock classified as Volatile*). Stocks between these bands were classified as Neutral. *A stock was classified as volatile if its historical volatility had exceeded 40%, if the stock had been listed for less than 12 months (unless it was in an industry or sector where volatility is low) or if the analyst expected significant volatility. However, stocks which we did not consider volatile may in fact also have behaved in such a way. Historical volatility was defined as the past month's average of the daily 365-day moving average volatilities. In order to avoid misleadingly frequent changes in rating, however, volatility had to move 2.5 percentage points past the 40% benchmark in either direction for a stock's status to change. 29 Equities ● Aviation 12 August 2021 Rating distribution for long-term investment opportunities As of 11 August 2021, the distribution of all independent ratings published by HSBC is as follows: Buy 58% ( 30% of these provided with Investment Banking Services ) Hold 35% ( 29% of these provided with Investment Banking Services ) Sell 7% ( 27% of these provided with Investment Banking Services ) For the purposes of the distribution above the following mapping structure is used during the transition from the previous to current rating models: under our previous model, Overweight = Buy, Neutral = Hold and Underweight = Sell; under our current model Buy = Buy, Hold = Hold and Reduce = Sell. For rating definitions under both models, please see “Stock ratings and basis for financial analysis” above. For the distribution of non-independent ratings published by HSBC, please see the disclosure page available at http://www.hsbcnet.com/gbm/financial-regulation/investment-recommendations-disclosures. To view a list of all the independent fundamental ratings disseminated by HSBC during the preceding 12-month period, please use the following links to access the disclosure page: Clients of Global Research and Global Banking and Markets: www.research.hsbc.com/A/Disclosures Clients of HSBC Private Banking: www.research.privatebank.hsbc.com/Disclosures HSBC & Analyst disclosures Disclosure checklist Company AIR CHINA AIR CHINA A CHINA EASTERN AIRLINES CHINA EASTERN AIRLINES A CHINA SOUTHERN AIRLINES CHINA SOUTHERN AIRLINES A Source: HSBC Ticker 0753.HK 601111.SS 0670.HK 600115.SS 1055.HK 600029.SS Recent price 4.85 6.50 2.77 4.41 4.06 5.37 Price date 10 Aug 2021 10 Aug 2021 10 Aug 2021 10 Aug 2021 10 Aug 2021 10 Aug 2021 Disclosure 4, 6, 7 4, 6, 7 2, 6, 7 2, 6, 7 6, 7 6, 7 1 HSBC has managed or co-managed a public offering of securities for this company within the past 12 months. 2 HSBC expects to receive or intends to seek compensation for investment banking services from this company in the next 3 months. 3 At the time of publication of this report, HSBC Securities (USA) Inc. is a Market Maker in securities issued by this company. 4 As of 31 July 2021, HSBC beneficially owned 1% or more of a class of common equity securities of this company. 5 As of 30 June 2021, this company was a client of HSBC or had during the preceding 12 month period been a client of and/or paid compensation to HSBC in respect of investment banking services. 6 As of 30 June 2021, this company was a client of HSBC or had during the preceding 12 month period been a client of and/or paid compensation to HSBC in respect of non-investment banking securities-related services. 7 As of 30 June 2021, this company was a client of HSBC or had during the preceding 12 month period been a client of and/or paid compensation to HSBC in respect of non-securities services. 8 A covering analyst/s has received compensation from this company in the past 12 months. 9 A covering analyst/s or a member of his/her household has a financial interest in the securities of this company, as detailed below. 10 A covering analyst/s or a member of his/her household is an officer, director or supervisory board member of this company, as detailed below. 11 At the time of publication of this report, HSBC is a non-US Market Maker in securities issued by this company and/or in securities in respect of this company 12 As of 05 Aug 2021, HSBC beneficially held a net long position of more than 0.5% of this company’s total issued share capital, calculated according to the SSR methodology. 13 As of 05 Aug 2021, HSBC beneficially held a net short position of more than 0.5% of this company’s total issued share capital, calculated according to the SSR methodology. 30 Equities ● Aviation 12 August 2021 HSBC and its affiliates will from time to time sell to and buy from customers the securities/instruments, both equity and debt (including derivatives) of companies covered in HSBC Research on a principal or agency basis or act as a market maker or liquidity provider in the securities/instruments mentioned in this report. Analysts, economists, and strategists are paid in part by reference to the profitability of HSBC which includes investment banking, sales & trading, and principal trading revenues. Whether, or in what time frame, an update of this analysis will be published is not determined in advance. Non-U.S. analysts may not be associated persons of HSBC Securities (USA) Inc, and therefore may not be subject to FINRA Rule 2241 or FINRA Rule 2242 restrictions on communications with the subject company, public appearances and trading securities held by the analysts. Economic sanctions imposed by the EU, the UK, the USA and certain other jurisdictions generally prohibit transacting or dealing in any debt or equity issued by Russian SSI entities on or after 16 July 2014 (Restricted SSI Securities). 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MCI (P) 028/02/2021, MCI (P) 087/10/2020 [1176357] 32 Global Industrials Research Team Industrials Analyst Paul Choi paulchoi@kr.hsbc.com +822 3706 8758 Analyst Anup Kataria, CFA anup.g.kataria@hsbc.co.in +91 80 6737 2218 Analyst Puneet Gulati, CFA puneetgulati@hsbc.co.in +91 22 2268 1235 Analyst Yushin Park yushin.park@kr.hsbc.com +822 3706 8756 Head of Industrials Research, Asia Pacific Helen Fang +852 2996 6942 helen.c.fang@hsbc.com.hk EMEA Head of Industrials Research Sean McLoughlin +44 20 7991 3464 sean.mcloughlin@hsbcib.com Analyst Jonathan Day jonathan.day@hsbc.com +44 20 7359 1217 Analyst Shrinidhi Karlekar +91 22 6164 0689 shrinidhi.karlekar@hsbc.co.in Analyst Puneet Garg puneet.garg@hsbc.co.in +91 80 4555 2756 Analyst, Industrials Amy Tyler +44 7960 608663 amy.frances.tyler@hsbc.com Head of Equity Research, South Africa Nick Webster +27 11 676 4537 nick.webster@za.hsbc.com Analyst Christian Korth christian.korth@hsbc.de +49 211 910 1397 Analyst Richard Schramm richard.schramm@hsbc.de +49 211 910 2837 Associate Kenneth Chin +852 2822 9425 kenneth.t.k.chin@hsbc.com.hk Autos Head of Research, India Yogesh Aggarwal +91 22 2268 1246 yogeshaggarwal@hsbc.co.in Analyst Henning Cosman +44 207 991 0369 henning.cosman@hsbc.com Analyst, Automotive Research Edoardo Spina, CFA +44 203 35 92239 edoardo.spina@hsbc.com Analyst Tracy Li tracy.s.w.li@hsbc.com.hk +852 2996 6751 Analyst Vivek Gedda vivekgedda@hsbc.co.in +91 22 6164 0693 Analyst Kushan Parikh kushan.parikh@hsbc.co.in +91 22 2268 1239 Analyst Prateek Maheshwari +91 98 1937 0718 prateek.maheshwari@hsbc.co.in Analyst Pushkar Tendolkar +91 80 4555 2752 pushkarnarendratendolkar@hsbc.co.in Analyst Jeremy Chen +8862 6631 2866 jeremy.cm.chen@hsbc.com.tw Analyst Yushin Park yushin.park@kr.hsbc.com +822 3706 8756 Transportation Analyst Andrew Lobbenberg +44 20 7991 6816 andrew.lobbenberg@hsbcib.com Analyst Parash Jain parashjain@hsbc.com.hk +852 2996 6717 Analyst Achal Kumar achalkumar@hsbc.co.in +91 80 4555 2751 Analyst Joseph Thomas joe.thomas@hsbcib.com +44 20 7992 3618 Analyst Santhosh Seshadri, CFA +91 80 4555 2758 santhosh.seshadri@hsbc.co.in Associate Bruce Chu bruce.y.h.chu@hsbc.com.hk +852 2996 6621 Associate Deepak Maurya +852 2822 4292 deepakmaurya@hsbc.com.hk Construction & Engineering Analyst Jonathan Brandt, CFA +1 212 525 4499 jonathan.l.brandt@us.hsbc.com Global Equity Head of Building Materials John Fraser-Andrews +44 20 7991 6732 john.fraser-andrews@hsbcib.com Analyst Lesley Liu lesleylliu@hsbc.com.hk +852 2822 4524 Analyst Brijesh Siya +91 80 4555 2716 brijeshkumarsiya@hsbc.co.in Analyst Prateek Maheshwari +91 98 1937 0718 prateek.maheshwari@hsbc.co.in Analyst Nicholas Paton, CFA nicholas.paton@hsbc.com +971 4 423 6923 Analyst Howard Lau, CFA +852 2996 6625 howard.h.b.lau@hsbc.com.hk Analyst Vivek Gedda vivekgedda@hsbc.co.in +91 22 6164 0693 Specialist Sales Rod Turnbull rod.turnbull@hsbcib.com +44 20 7991 5363 Oliver Magis oliver.magis@hsbc.de +49 21 1910 4402 Billal Ismail billal.ismail@hsbcib.com +44 20 7991 5362 Jean Gael Tabet +44 20 7991 5342 jeangael.tabet@hsbcib.com
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