Covid-19 vaccine hope brings tailwind to Chinese airlines as CICC predicts a doubling in stock valuation

Zhang Shidong
·4-min read

The promising outlook for a Covid-19 vaccine has powered a rally in Chinese airlines and airport operators, prompting stock analysts to make bold predictions about the pandemic-stricken air travel industry.

Shares of the nation’s biggest players including Air China and Shanghai International Airport jumped by as much as 13 per cent last week, after Pfizer and BioNTech said their vaccine candidate was more than 90 per cent effective in preventing infections during trials. That has also helped global stocks, make a third attempt at erasing the 34 per cent plunge induced by the viral outbreak in March.

China International Capital Corp (CICC) said major airlines will probably double as valuation rebounds over the next two years. Essence Securities and Changjiang Securities said the worst is over and an inflection point in corporate earnings is already under way.

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“The key is to keep an eye on the recovery in international travel,” said Ming Xing, an analyst in Shenzhen at Essence Securities. “With the progress on the vaccine trials, there’s huge room for improvement and a resumption of international flights will be accelerated.”

The latest forecasts will put a floor under 66 billion yuan (US$10 billion) of destruction in the sector’s market value this year since the coronavirus outbreak in January. Globally, the air travel industry is seen incurring US$84.3 billion of losses this year, according to the International Air Transport Association. Lost revenue is estimated at US$419 billion.

With vaccine news buoying risk appetite, stock valuations can reverse a year of decline to near record lows, according to Zhao Xinyue, an analyst at CICC, China’s biggest investment bank.

Mainland-traded shares of Air China and China Eastern will be able to command a 15 times earnings multiple in the next two years, from the current seven times. In Hong Kong, their multiple could double to 10 times. That implies at least 85 per cent upside in stock prices from current levels.

While the big three carriers have declined by 12 to 26 per cent on a year-to-date basis, most analysts who track the stocks are still bullish, with 19 buys and two holds for Air China and China Southern, according to Bloomberg data. China Eastern has 19 buy recommendations, one hold and two sell ratings.

Shanghai Airport would be worth twice as much, according to CICC, as a revival in outbound travel is likely to give duty-free shopping a significant boost, according to Hu Shimin, an analyst at Citic Securities. This should help spur a valuation upgrade, Hu added.

The MSCI World Index rallied 2.4 per cent last week after Pfizer and BioNTech reported the results of their mRNA-based global phase-three trials of more than 43,500 participants that began in July. The drug makers aim to supply up to 50 million doses this year and manufacture 1.3 billion in 2021.

While demand for domestic travel in China remains robust following the early containment of the viral outbreak, the recovery in the aviation industry has been slow so far. Beijing still imposed a limit on the number of international flights, which in October amounted to only a tenth of the total a year ago.

Owning airline and airport stocks should be for the long haul, with bumpy rides assured. Chinese carriers have remained a laggard this year, with shares of major airlines slumping by as much as 17 per cent, against an 8.5 per cent gain on the benchmark Shanghai Composite Index.

Some 43 commercial carriers have ceased or suspended operations since the start of the year, according to Cirium, a London-based travel analytics consultancy. Cathay Pacific is trimming 8,500 jobs in its biggest lay-off in decades. Before the Pfizer news, Cirium had predicted that a full recovery would not materialise until 2024.

Supply of the Covid-19 vaccine could be slower than expected because of a multitude of factors, according to investors including UBS Asset Management. Logistical challenges related to production, storage, and distribution are manifold, it added.

For Changjiang Securities, the darkest moment is already behind the aviation industry as policy relaxation looms, said analyst Han Yichao. Current stock prices have reflected the pessimistic market expectations, he added.

“With the launch of the vaccine, the restrictions on inbound and outbound travel are expected to be loosened,” Han said. “A recovery in the number of foreign visitors is expected to take place faster than expected. For sure, we will see a turning point in [industry and stock] fundamentals.”

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