26-Oct-2010 12:11 PM

Asian airline shares up strongly in 2010; rally expected to continue

Analysis

Shares in Asian carriers traded mostly higher on Monday with analysts believing stocks in the carriers will continue their rally boosted by increased passenger demand and strong quarterly earnings which have helped their shares post impressive gains in the year to date.

Summary

Asian carriers' stocks are expected to continue rallying due to increased passenger demand and strong quarterly earnings.
Credit Suisse initiates coverage of Korean Airlines and Asiana, giving an overweight rating and an "outperform" rating for both carriers.
EVA Airways reports a surge in revenues and returns to profitability, but is downgraded by JP Morgan due to strong outperformance.
Chinese carriers, particularly China Eastern, experience gains in share prices.
AirAsia is expected to report a record forex gain in the third quarter of 2010.
Singapore Airlines is expected to show significant passenger yield growth, but faces challenges from Gulf airlines and low-cost carriers. Virgin Blue is downgraded by Macquarie Group Ltd.

In Seoul, shares of Asiana Airlines gained 2.2% with the stock more than doubling so far in 2010 and Korean Air shares 0.4% weaker yesterday but up 30% on a year-to-date basis.

Credit Suisse initiates coverage of Korean Airlines and Asiana

Credit Suisse stated that despite "significant outperformance" in the carriers' shares in the past 12 months, "we think it is too early to turn negative" as solid demand growth is expected to continue especially in international markets. Credit Suisse analysts initiated coverage on the Korean airlines sector last week with an overweight rating and an "outperform" rating for Asiana and Korean Airlines.

Among the Korean airlines, Credit Suisse stated it prefers Asiana over Korean Air partly because of Asiana's larger exposure to China, tighter load factor and yield outlook and higher focus on balance-sheet improvement. Positive economic growth, along with appreciation of the Korean won, should be a "key positive catalyst for strong international passenger demand for both the Korean carriers".

EVA Air reports profit; downgraded by JP Morgan

Also in North Asia, EVA Airways Corp gained 7.0% yesterday after more than doubling in value since the end of Dec-2010. The carrier yesterday reported a 54% surge in revenues to USD2,576 million in the nine months ended 30-Sep-2010 outpacing a 24.2% increase in operating costs. The carrier returned to profitability posting an operating profit of USD363.2 million, compared with a loss of USD122.2 million in the previous corresponding period, and a net profit of USD361.6 million compared with a loss of USD127.7 million in the previous period.

Despite the results, JP Morgan downgraded EVA's stock from "overweight" to "neutral" due to its strong outperformance compared with the broader airline sector. JP Morgan stated: "Although we do not expect significant downside risks from here, unless there are unexpected industry shocks, we believe EVA's risk-reward has become less attractive, and its share price could remain range-bound in the near term."

Meanwhile, Chinese shares climbed to a six-month high on Monday with the benchmark Shanghai Composite Index surging 2.57%. The biggest gain among Chinese carriers was China Eastern which reported gains of 5.8% in Shanghai and 2.2% in Hong Kong trading.

AirAsia likely to report record forex gain in 3Q2010

In Southeast Asia, AirAsia shares slipped 1.2% yesterday. Kenanga Research stated it expects AirAsia to record MYR85 million in forex gains in 3Q2010. In a research note, Kenanga stated AirAsia's debt is mostly denominated in US dollars with 61% hedged using long-term forward contracts. Kenanga added that it expects a 12% increase in passenger volumes in 3Q2010, with ancillary revenues expected to outperform its forecast of MYR298 million (USD96 million) in FY2010.

Yield increases expected for Singapore Airlines

Shares in Singapore Airlines gained 1.7% yesterday and have gained nearly 6% on a year-to-date basis. The carrier is scheduled to report its financial results on 09-Nov-2010.

Royal Bank of Scotland expects passenger yield growth of 20% for the carrier with revenues forecast at USD2.9 billion and earnings per share of SGD 25 cents, against a loss of SGD 13 cents in the previous corresponding period.

RBS stated: "Although most analysts should have already factored in a large improvement in yields due to the weak base-year comparison, we believe the market will still take the big swing in bottom line very positively. However, we remain unconvinced that [Singapore Airlines] will be able to shrug off the challenges from Gulf airlines and low-cost carriers." RBS has a "hold" rating on the carrier.

Virgin Blue downgraded

Virgin Blue shares lost 1.1% to AUD 44.5 cents yesterday as the carrier was downgraded to "neutral" from "outperform" by analysts at Macquarie Group Ltd.

Asia Pacific selected airlines daily share price movements (% change): 25-Oct-2010