China's Airline Industry: Robust Growth, But Risky Investing

 |  Includes: CEA, ZNH
by: Steven Towns

Excerpt from our Wall Street Breakfast, a one-page summary of this morning's key market-moving and stock-moving stories:

Scrutinizing Chinese Airline Stocks [Wall Street Journal]

Summary: China's Big 3 airlines include China Eastern Airlines, China Southern Airlines and Air China. The first two are listed on the NYSE, but analysts warn of their high leverage, negative cash flows and inability to hedge fuel costs due to government regulation. In comparison, Air China is profitable and has a strategic partnership with "best-in-class" Cathay Pacific Airways. Analysts, however, think its shares may have all positive factors priced in and instead suggest its two rival's shares could have more potential. All three airlines will face challenges as the industry is opened to foreign competition. Meanwhile, China's airline industry itself has been growing handsomely since 2000, with annualized growth of 16% and having carried 138 million passengers last year. China Southern is the nation's largest carrier by passengers carried, but is most subject to risks of rising fuel costs and price wars, since 90% of its business is domestic flights. It is in the midst of an aggressive expansion, and on Tuesday announced a purchase of 12 new Boeing aircraft. Merrill Lynch rates it a "Sell" because of 'pinched passenger yields and mounting debts.' Both Citigroup and BNP Paribas rate it a "Buy."
Related links: US airlines battle for last China-US route [China Daily] • Lower Oil Helping AirlinesChina Eastern and China Southern [Wikipedia]
Potentially impacted stocks and ETFs: China Eastern Airlines (NYSE:CEA), China Southern Airlines (NYSE:ZNH), Cathay Pacific Airways (OTCPK:CPCAY), Boeing (NYSE:BA)

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