Chinese Airline Sector: Valuation Method and Risk Statement

Research evidence excerpt

Chinese Airline Sector: Valuation Method and Risk Statement

Valuation Method and Risk Statement

We believe airlines face the following downside risks: systemic market risks, rising

international oil prices, the economy suffering a hard landing, business volume growth

continuing to undershoot our expectations, an irrational price war, the substitution effect of

high-speed rail exceeding our expectations, and emergencies such as wars, pandemic

outbreaks and terrorist attacks, among others. All these risks combine to make our estimates

statistically unreliable, but we have factored them in to the best of our ability. Upside risks to

China’s airline sector include a stronger-than-expected yield hike, which could be driven by

more favourable supply-demand dynamics, and traffic growth from capacity expansion

overwhelming yield pressure.

CEA: Our price target is based a P/BV methodology.

Over the long term, a diversified portfolio of airline stocks has reliably underperformed the

broader market averages. Our estimates for CEA – which form the basis of our valuations and

price target – are subject to a very high degree of error and may be materially inaccurate. This

forecast error is primarily driven by revenue volatility, a function of unpredictable business

travel spending combined with significant operating and financial leverage. Other sources of

error include, but are not limited to, jet fuel price volatility, labour disruptions, discount carrier

growth, bankruptcy risk and significant event risk associated primarily with terrorist actions.

CSA: Our price target is based on P/BV methodology.

Upside risks include a better-than-expected yield hike, which could be driven by more

favourable supply-demand dynamics, and traffic growth from capacity expansion