Beijing Capital Airport rated 'sell' - Merrill Lynch

The brokerage has a 4.90 hkd price target on the airport operator.

BCIA's shares closed the morning in Hong Kong down 1.17 pct at 5.09 hkd.

In a research note, Merrill Lynch said that BCIA has significantly outperformed other Chinese regional airport shares over the last 12 months with a 60 pct rise in the stock price, though there remains a lack of visibility over the amount the company will have to pay to its parent for the acquisition of Terminal 3 and a new runway in 2008.

Increasing restraints on capacity will also soon slow traffic growth, the brokerage said, adding that it expects BCIA to achieve year-on-year earnings growth of only eight pct in the second half of 2006 and seven pct in 2007.

BCIA's net income rose 21 pct to 909 mln yuan in 2005 and 39 pct to 555 mln yuan in the first half of 2006.

Merrill Lynch said it expects BCIA to post 2006 and 2007 earnings of 1.11 bln yuan and 1.19 bln yuan, respectively.

"While we like the stable long-term growth story of BCIA, its franchising out of non-aeronautical revenues and its exposure to the 2008 Olympic Games, the valuation does not reflect the capex risk or slowing rate of earnings growth," the brokerage said.

"We see a growing risk that the 2008 capex bill could be larger than the market's expectations, which could trigger a derating," it added.

BCIA's parent, Capital Airport Holding, recently revised up the estimated cost of the acquisition of Terminal 3 and the new runway to 25 bln yuan from 19 bln yuan.

"While the market expects an acquisition cost of 15-20 bln yuan, we are increasingly concerned those estimates could be too low," Merrill Lynch said.

The brokerage added that BCIA is likely to raise more equity in 2007 following its issue of 200 mln new H-shares at 5.10 hkd each in September.

BCIA could issue a maximum of a further 760 mln shares, raising around five bln yuan, while it could also list on the mainland next year, Merrill Lynch said.

"We would prefer management to fund as much of the expansion capex as possible by way of debt so as to lower its WACC (weighted average cost of capital)...however, we believe BCIA is unlikely to be so aggressive and would prefer a mix of debt and equity funds and could well undertake an A-share IPO in 2007," it said.

The brokerage added that the key inhibitor to BCIA's growth is its own capacity.

Passenger throughput in 2006 is seen increasing by 18 pct to 48.2 mln, potentially putting Beijing into the world's top ten busiest airports, but growth is likely to slow to around 12 pct in 2007 as the airport's capacity shortage becomes more acute, Merrill Lynch said.

The airport reported aircraft movements of 341,700 and handled 782,000 tons of freight in 2005. Its passenger throughput of 41 mln ranks it the biggest airport in China and 15th largest globally.

The airport's capacity is set to increase to 79 mln passengers upon the opening of Terminal 3.