ASIA MARKETS: Chinese Airlines Suffering From 'Yuan Let-down'
By V. Phani Kumar
Chinese airline stocks continued to shed some of their recent gains Friday
in Hong Kong, due in part to disappointment that Beijing hasn't given any clear
public signal it may change its currency policy.
The airlines rank among those Chinese companies that stand to benefit the most
from a renewed appreciation of the yuan, as a strong currency would make
aviation turbine fuel cheaper and ease repayment of their foreign-currency
loans.
Shares of mainland China's three main airlines -- Air China Ltd., China
Eastern Airlines Corp. and China Southern Airlines Co. -- have outperformed the
Hang Seng Index over the last month, with speculation about yuan appreciation
contributing to their performance.
The sector also benefited as China allowed them to reintroduce fuel
surcharges, with effect from Nov. 14, under a new pricing mechanism.
But even as passenger traffic on the mainland seems to be improving in line
with the nation's economic recovery, at least one brokerage house sees signs
that airlines may have to cut fares and is advising investors to book profits.
In a report released Friday, HSBC Global Research analysts Eric Lin and Mark
Webb wrote that speculation that the yuan would be allowed to rise during
President Barack Obama's recent China visit proved to be false, and cautioned
that the airline sector might be hurt if the yuan doesn't appreciate while oil
prices are high.
The brokerage downgraded Air China to neutral while retaining its underweight
rating on China Eastern.
"We estimate every 1% appreciation of the renminbi [yuan] versus the U.S.
dollar will increase our estimate of Air China's end-2010 book value by 1%, [and
that of] China Eastern and China Southern by 8% and 4%, respectively," they
said.
"If renminbi appreciation doesn't occur while oil prices stay high, we argue
the airlines could disappoint like what they did prior to 2007," they said.
In the aftermath of the global financial crisis, Beijing has kept the yuan's
exchange rate against the U.S. dollar steady -- with the unit hovering around
6.83 yuan to the dollar for more than a year -- to protect the country's
exporters and the jobs they provide.
HSBC analysts also said that, although the resumption of fuel surcharges would
provide a buffer to the airlines against rising oil prices, a rise in fares
could put off some travel demand.
"With seasonally weak demand in [the fourth quarter], there are signs that
airlines have to cut basic air fare, which offsets part of the additional
revenue from the surcharge resumption," they said.
Friday in Hong Kong, shares of China Eastern (CEA) fell 2.7%, while Air China
(AIRYY) dropped 1.1%, taking losses into a third straight session. China
Southern (ZNH) was up 0.4%, reversing early losses after the stock dropped in
the previous three sessions.
Over in Shanghai, shares of Air China and China Southern fell 2.2% and 0.3%,
respectively, while China Eastern rose 0.2%.
In wider market action, the Hang Seng Index fell 0.7% and the Hang Seng China
Enterprises Index gave up 0.8%, while the Shanghai Composite dropped 0.4%.
Elsewhere in the region, Japan's Nikkei 225 Average fell 1%, South Korea's
Kospi was flat, Australia's S&P/ASX 200 shed 1.3%, and Taiwan's Taiex declined
1.1%.
(END) Dow Jones Newswires
11-20-090013ET
Copyright (c) 2009 Dow Jones & Company, Inc.
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