China's Priciest Airline Stocks Could Soar Even Higher



They’re trading at their most expensive levels in at least 18 months, but China’s airlines may still have room to fly.

The country’s “Big Three” air carriers -- Air China Ltd., China Eastern Airlines Corp. and China Southern Airlines Co. -- will likely see a bump up in passengers and revenue as the economic recovery gathers pace, say analysts led by Xin Yang at China International Capital Corp. The brokerage, known as the Goldman Sachs of China, upgraded Air China and China Southern stock to buy from hold Monday, saying shares of Guangzhou-based China Southern had the most to gain from a “confirmed” rebound in Asia’s largest economy.

While the Big Three are the biggest gainers in Bloomberg’s Asia Pacific Airlines Index this year, their valuations still trail the average for the gauge and for air carrier stocks globally. Oil prices have steadied since their post-OPEC deal bounce, triggering a 6.4 percent gain in world airline shares this year, and Chinese carriers have benefited from gains in the yuan, which has strengthened in 2017 following its biggest annual retreat versus the dollar in more than 20 years, fueling demand for overseas travel.

“We believe negatives from oil prices, the exchange rate and falling airfares have already been fully priced in,” the CICC analysts said in their note. “We are optimistic about the airlines sector.”

At 10.2 times estimated earnings, Air China’s Hong Kong-traded shares are the most expensive since mid-2015 after rallying 18 percent over the past year. That valuation looks cheap, though, when compared with Singapore Airlines Ltd.’s ratio of 22 and the overall Asia Pacific air carrier index’s 13.2 times projected profit. Air China’s shares jumped 2.3 percent Monday to their highest level since September.

China Southern, Asia’s biggest carrier by passenger numbers, trades at 9.2 times estimated earnings in Hong Kong, the highest level since August 2015, while stock of Shanghai-based China Eastern, has a valuation of 10.3, close to its most expensive point since June 2015, data compiled by Bloomberg show.

An increase in passenger loads could drive up earnings for the three airlines, with China Southern’s profit to benefit the most, rising 17 percent compared with 10 percent for Air China and 9 percent for China Eastern, according to CICC.

— With assistance by Emma O'Brien