China Airlines: Why Jefferies Is Bearish

Jefferies remains bearish on Chinese airline stocks despite revising up its earnings forecasts for the sector to reflect lower oil prices and potential foreign exchange gains.

The broker now forecasts the big three Chinese airlines - Air China (753.HK), China Eastern Airlines (670.HK) and China Southern Airlines (1055.HK) - to post a combined FX gain in 2017 of CNY 3.9 billion, up from the original forecast of a CNY 4.5 billion loss. This has prompted the broker to raise its 2017 earnings forecasts by up to 32% on the three airlines.

However, lower oil prices and FX gains will fail to offset higher operating costs which will see margins of the big airlines squeezed:

Jefferies has underperform ratings on Air China, China Eastern and China Southern. With an outperform rating, Cathay Pacific (293.HK) is its favorite pick, despite posting worse-than-expected losses of USD2.1 bill in the first half of this year. Jefferies believes losses have bottomed, while passenger yield and cargo demand should rebound in the second half of this year.

Cathay Pacific shares are up 15% this year, while Air China has soared 38%, China Eastern is up 17.5% and China Southern has gained 47%.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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