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Air China kept at buy on chairmans move to regulator - Citigroup

3-Jan-2008

Beijing (XFN-ASIA) - Citigroup maintained its "buy"

rating on Air China following the announcement that the carrier's chairman Li

Jiaxiang has been appointed as the new head of the country's aviation regulator.

In a note, Citigroup analyst Ally Ma predicted Li will continue to push for consolidation in the Chinese aviation market, and that the bid by Singapore Airlines and Temasek for a 24 pct stake in China Eastern will be rejected at an EGM on Jan 8.

"His promotion reflects the senior government's support of Li's strategy to enhance Chinese airlines' competitiveness through industry consolidation. Although Li's successor hasn't been announced, we think this news is positive for Air China," Ma said.

"We believe Singapore Airlines' and Temasek's proposal to buy a 24 pct stake in China Eastern at 3.80 hkd will be rejected at the Jan 8 EGM," she said.

The analyst noted that Li's predecessor as director of the General Administration of Civil Aviation, Yang Yuanyuan, has said publicly that he does not agree with consolidation of China's "big three" airlines. The other major Chinese carrier is China Southern.

There had been rumours that Li would face serious consequences for criticizing the decision by Chinese officials to sell part of China Eastern to Singapore Airlines and Temasek.

"Li's promotion shows the government doesn't regard the Singapore Airlines proposal as the only solution to save China Eastern from bankruptcy," Ma said.

She said Air China and its strategic investor, Cathay Pacific of Hong Kong, will likely outbid the 3.80 hkd per share proposal by Singapore Airlines and Temasek. This would create much better synergies between the carriers, Ma said.

"If China Eastern starts a full stake and operation cooperation with Air China and Cathay, the three carriers would see an optimal alliance in China's three super air hubs - Beijing, Shanghai and Hong Kong," she said.

Citigroup has a 10.2 hkd price target on Air China.

The airline's Hong Kong shares closed this afternoon down 0.69 pct at 11.54 hkd.


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