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28-Mar-2007 9:37 AM

Air China kept a 'buy' on positive 2007 prospects - Citigroup

Analysis

Beijing (XFN-ASIA) - Citigroup said it is keeping its 'buy'

rating on Air China given the firm's strong prospects this year, driven by margin

expansion, an upswing in load factors, the onset of synergy gains with Cathay

Pacific, the upcoming Beijing Olympics and appreciation of the yuan.

Air China has said it expects 15 pct growth in traffic this year, outpacing its planned 12 pct capacity increase. It also sees a 10 percentage point rise in load factor for its premium classes, backed by burgeoning business travel in China and the pre-Olympics effect.

Citigroup said synergies with Cathay might contribute around 600 mln yuan in revenue.

Passenger yields in the first two months of 2007 rose 6 pct year-on-year.

However Citigroup said it has reservations about predictions for a cargo turnaround for the airline.

"We think slowing demand, overcapacity and diversion to shipping suggest a bleaker outlook for cargo," it said

Cargo contributed 9 pct of Air China's revenue in 2006, Citigroup said.

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