Domestic ex-factory jet fuel price reduced by Rmb280/tonne

Transcription

1 July 29, 2009 Sector Research Transportation Major Event Comment for the Aviation Sector Domestic ex-factory jet fuel price reduced by Rmb280/tonne CSI Research Department Ma Xiaoli Tel: Event: In accordance with the latest changes in international oil price, the NDRC decided to lower the domestic ex-factory price of jet fuel by Rmb280/tonne (or 5.54%), from Rmb5,050/tonne to Rmb4,770/tonne, effective 29 Jul 09. Comment: The timing and extent of the reduction in the domestic ex-factory price of jet fuel both met our expectations. We pointed out in the Jul 09 Tracker for the (Aviation Sector: Expecting a Cyclical Recovery plus a Seasonal Boom) dated July 23 that, according to the latest refined oil price reform plan developed by the NDRC, the domestic price of refined oil products may be adjusted if the moving average price of international crude oil changes more than 4% over 22 consecutive working days. The last adjustment to refined oil prices was launched on 29 Jun 09, 22 working days prior to this adjustment. During the interim, the moving average price of international crude oil in Brent, Dubai and Cinta has dropped by ~5.41%. Therefore, the timing and extent of the reduction in the domestic ex-factory price for jet fuel were broadly in line with our expectations. The domestic ex-factory price of jet fuel is broadly in line with its price on the international market. The timing and extent of the latest two adjustments to the domestic ex-factory price of jet fuel strictly adhered to the latest refined oil price reform plan developed by the NDRC, and maintained the domestic ex-factory price of jet fuel broadly in line with international oil prices. With freight, insurance, VAT and custom duties taken into account, the international average price of jet fuel was US$75/bbl in the 22 days prior to 29 Jun 09, while China s ex-factory price of jet fuel was Rmb5,050/tonne. Additionally, in the 22 days prior to 28 Jul 09, the international price of jet fuel averaged at about US$71/bbl vs. China s ex-factory price of RMB 4,770/tonne. We believe the ex-factory price of jet fuel will continue to adhere to the refined oil price reform plan in the future, and will be kept broadly in line with its international price. Impact of lowering the domestic ex-factory price of jet fuel on airlines 09E earnings Based on our analysis, the reduction of the domestic ex-factory price for jet fuel by Rmb280/tonne will increase the 09E EPS of Air China (601111), China Southern Airlines (600029), China Eastern Airlines (600115), Shanghai Airlines (600591) and Hainan Airlines (600221) by Rmb0.010, Rmb0.031, Rmb0.013, Rmb0.037 and Rmb0.014, respectively. Although declining jet fuel prices are a positive for airline companies, given the small amount of the adjustment we do not expect change to have a significant impact on 09E earnings. Among them, Shanghai Airlines will benefit most due to its large number of domestic routes and the least share capital. China Southern Airlines will also gain a relatively large benefit due to its highest number of domestic routes and the largest volume of jet fuel required to service those routes. Please read the disclaimer at the end of the text

2 Table 1: Impact of domestic Rmb280/tonne decline in ex-factory price of jet fuel on listed airlines 09E EPS Company Fuel Uplifted to Domestic (10k tonnes) Reduction of Jet fuel Expense (Rmb m) Increase in Net Profit (Rmb m) Increase in EPS (Rmb) Air China China Southern Airlines China Eastern Airlines Shanghai Airlines Hainan Airlines Source: CSI Note: excl. the time factor, and supposing the above companies pay income tax in 2009, have completed capital injection with EPS being fully diluted; and that the merger between China Eastern Airlines and Shanghai Airlines has not been attained. Table 2: Sensitivity of listed airlines 09E EPS to an Rmb100/tonne reduction in the domestic jet fuel price Company Gross Oil Consumption (10k tonnes) Fuel Uplifted on Domestic (10k tonnes) Impact on Net Profit (Rmb m) Domestic International Total Domestic Impact on EPS (Rmb) International Air China China Southern Airlines China Eastern Airlines Shanghai Airlines Hainan Airlines Source: CSI. Note: excl. the time factor, and supposing the above companies pay income tax in 2009, have completed capital injection with EPS being fully diluted; and that the merger between China Eastern Airlines and Shanghai Airlines has not been attained We see upside potential in China s ex-factory price of jet fuel in 2H09E, and thus maintain our current earnings forecasts for listed airlines. As per our in-house petrochemical analysts, WTI is expected to fluctuate in a range of US$60-70/bbl in 2H09E, with its average 09E price expected to be US$60/bbl. This is equates to an ex-factory jet fuel price of Rmb4,840/tonne in China (average retail price of jet fuel in China of Rmb5,240/tonne). We estimate that the average jet fuel purchase price of China s airline companies was Rmb4,167/tonne in 1H09, and thus reiterate our average purchase price forecast for 09E of Rmb4,800/tonne. Based on the above analysis, we maintain our 09E earnings forecasts for listed airlines. In the future, we expect to see the introduction of a joint working mechanism between the domestic ex-factory price of jet fuel and the fuel surcharge on domestic route services. As per the jet fuel reform plan tailored by the NDRC in 2006, should the sales price of jet fuel affect the costs and expenses of airline companies, the fuel surcharge or the benchmark ticket price on domestic routes should be adjusted to ease the influence. We believe it is unlikely that the benchmark ticket prices will be adjusted in the short-term, while adjustment to domestic route s fuel surcharge will become a major method used by airlines to make up for rising jet fuel costs. As the domestic ex-factory price of jet fuel changes on the heels of international oil prices, we believe the collection of fuel surcharges on domestic routes is likely to be resumed, thus forming a joint working mechanism with international oil prices to respond to changes in airlines jet fuel costs. Reiterate our OUTPERFORM rating for the airlines & airports sector The reduction in the domestic ex-factory price for jet fuel substantially benefits the aviation sector and will help cut airlines costs and raise their gross margin and profit. Due to the upcoming cyclical recovery and the seasonal boom in the aviation sector, traffic volume and ticket prices on domestic routes will strongly rally and international routes will bottom out, leading to notable reduction in cost and strong improvement in core business profit. Therefore, we reiterate our OUTPERFORM rating for the sector and recommend investors closely follow investment opportunities arising from sector movement. Top picks include: Air China (601111), *ST Shanghai Airlines (600591) and ST China Eastern Airlines (600115). Additionally, investors are advised to continue to watch out for China Southern Airlines (600029) and Hainan Airlines (600221). Total Please reader the disclaimer at the end of the text July 29,

3 Risks associated with investing in the sector Sharp rise in international crude oil prices. Fig. 1: WTI and Jet fuel Price in Singapore WTI Jet 新加坡航油 fuel price in Singapore Source: WIND, CSI Fig. 2: Quarterly Average Price of Jet fuel in Singapore Q Q Source: WIND, CSI Quarterly 新加坡航油季度平均价格 average price of jet fuel in Singapore Q Q Q Q Q Q Q Q Q Q Q Q Growth 新加坡航油季度平均价格增速 of quarterly average price of jet fuel in Singapore Q Q Q Q 40% 30% 20% 10% 0% -10% -20% -30% -40% -50% -60% Please reader the disclaimer at the end of the text July 29,

4 Table 3: Previous Adjustments to Domestic Jet fuel Prices Date Adjustment to Ex-factory Price Ex-factory Price Adjustment based on Difference of Blended Purchase Cost Blended Purchase Cost Retail Margin (average) (Rmb/tonne) Source: NDRC, CAAC, CSI Retail Price Please reader the disclaimer at the end of the text July 29,

5 Disclaimer This research report is for information purposes only and should not be construed as an offer to sell or the solicitation of an offer to buy or sell any securities in any jurisdiction. The securities referred to in this report may not be eligible for sale in some jurisdictions. The information contained in this report has been compiled by CITIC Securities Brokerage (HK) Limited (formerly known as CITIC Capital Securities Limited) ("CSBHK") from sources that it believes to be reliable and (subject to the next paragraph) the opinions, analysis, forecasts, projections and expectations contained in this report are based on such information and are expressions of belief only and no representation, warranty or guarantee is made or given by CSBHK or any other person as to its accuracy or completeness. All opinions and estimates expressed in this report are (unless otherwise indicated) entirely those of CSBHK as of the date of this report only and are subject to change without notice. Neither CSBHK nor its parent and affiliates accept any liability whatsoever for any direct or consequential loss arising from any use of material contained in this report or otherwise arising in connection therewith. The research analyst(s) primarily responsible for the preparation of this research report confirms that (i) all of the views expressed in this research report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (ii) that no part of his or her recommendation was, is or will be, directly or indirectly, related to the specific recommendations or views he or she expressed in this report. Any investment referred to herein may involve significant risk, may be illiquid and may not be suitable for all investor. The value of or income from any investment referred to herein may fluctuate and be affected by changes in exchange rate. Past performance is not indicative of futures results. This report does not take into account the investment objectives, financial situation or particular needs of any particular person. Investors are expected to make their own investment decision without relying on this publication. Before acting on any advice or recommendation in this report, clients are recommended to consider seeking professional advice. CSBHK, its parent and/or affiliates and their respective officers, directors and employees, including persons involved in the preparation or issuance of this report, may from time to time (1) have a consulting, investment banking or broking relationship with any company referred to in this report; and (2) have provided significant advice or investment services to the companies referred to in this report. One or more directors, officers and/or employees of CSBHK, its parent and/or its affiliates may be a director of the issuers of the securities mentioned in this report. If this report is being distributed by a financial institution other than CSBHK or its affiliates, that financial institution is solely responsible for distribution. Clients of that institution should contact that institution to effect a transaction in the securities mentioned in this report or require further information. This report does not constitute investment advice by CSBHK to the clients of the distributing financial institution, and neither CSBHK, its parent, its affiliates, and their respective officers, directors and employees accept any liability whatsoever for any direct or consequential loss arising from their use of this report or its content. This research report is strictly confidential to the recipient and is not intended for persons in places where the distribution or publication of this report is not permitted under the applicable laws or regulations of such places. This research report may not be reproduced, distributed or published by any person for any purpose without the prior consent of CSBHK. All rights are reserved. Regulatory disclosures No part of the analyst compensation was, is or will be directly related to the specific recommendations or views contained in this research report. relation to securities have no disclosable financial interests in the stocks reviewed in this research report. relation to securities have not received compensation from or mandated for investment banking services in the past 12 months to listed corporations whose stocks are being reviewed by CSBHK in this research report CSBHK and each its group companies that carry on a business in Hong Kong in investment banking, proprietary trading or agency broking in relation to securities do not have an individual employed by or associated with them serving as an officer of the listed corporation whose stocks are being reviewed by CSBHK in this research report relation to securities are not market makers in the stocks reviewed by CSBHK in this research report. Further information on the securities discussed in this report is available upon request. Investment rating system Performance of stock or sector relative to MSCI-China over next 6 months after research publications Rating Remark Buy Relative performance over MSCI-China Index >20% Overweight Relative performance over MSCI-China Index 5% ~ 20% Stock rating Hold Relative performance over MSCI-China Index -10% ~ 5% Sell Relative performance over MSCI-China Index > -10% Sector rating NR Not rated Outperform Relative performance over MSCI-China Index >10% Neutral Relative performance over MSCI-China Index -10% ~10% Underperform Relative performance over MSCI-China Index > -10% 地址 : 香港中环 Address: 26/F CITIC Tower 添美道 1 号 1 Tim Mei Avenue 中信大厦 26 楼 Central, Hong Kong 电话 : (852) Tel: (852) 传真 : (852) Fax: (852) 电邮 : hkresearch@citics.com.hk hkresearch@citics.com.hk 网址 : Web: