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China Eastern Airlines Burning Cash

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burning_cash(Sept. 23, 2009 - Jiajun Yang) China Eastern Airlines (NYSE:CEA), the dominant Chinese carrier off Shanghai, ran up 125% YTD with a strong 15% advance in September. While the latest run is explained by strong passenger numbers from China and easing of financing for American airliners, it is wise to take a closer look at China Eastern Airlines (NYSE:CEA). As the following study reveals, China Eastern is among those Chinese carriers that benefited from government cash injection earlier this year, but now it's time for the company to show that is is run efficiently and can generate enough cash to stay solvent.

 


  • Deterioration of Net Change in cash
China Eastern Airlines Corporation Limited (CEA.N) suffered 3.9% sales decline during the year 2008 and reported its worse-than-expected sales figure for the quarter ending June 2009, representing 15.98% decrease from last year. Accordingly, net change in cash deteriorated in the first half of 2009. CEA burned through RMB 1136.2 million ($166.4 million) (net) in the first quarter. Thought RMB 4665.4 million ($683.5 million) cash inflow is required form loan agreements with its parent company--CEA Holding Company in the second quarter, net cash increase is still only 11.68% of that in the same quarter last year.

 

In Millions of RMB

2008 Q2

2008 Q3

2008 Q4

2009 Q1

2009 Q2

Net Change in Cash

2,962.60

1,661.20

1,795.80

(1,136.20)

346.00

 

Cash inflows from operating activities dented in the first half of 2009, as decreasing sales revenue squeezed the cash receipt.

 

In Millions of RMB

2008 Q2

2008 Q3

2008 Q4

2009 Q1

2009 Q2

Total Revenue

10178.20

10806.80

10204.40

8946.20

8551.60

Cash Receipts

20686.80

31510.10

42704.60

8400.20

17296.50

Cash from Operating Activities

987.40

1657.90

1382.70

574.60

1329.30

 

 

Capital expenditure is reduced on average in 2009, compared with huge expenditure in June and September quarters in 2008. Consequently, the level of cash outflow from investing activities is relatively lower than that in 2008.

 

In Millions of RMB

2008 Q2

2008 Q3

2008 Q4

2009 Q1

2009 Q2

Capital Expenditures

(4439.70)

(6442.70)

(2524.00)

(1162.70)

(2683.60)

Cash from Investing Activities

(2950.90)

(4996.10)

(1719.60)

(1145.60)

(3160.10)

 

Cash from financing activities went red in the first quarter of 2009. The trend is reversed in the second quarter by cash inflows from loans.

 

In Millions of RMB

2008 Q2

2008 Q3

2008 Q4

2009 Q1

2009 Q2

Financing Cash Flow Items

(2855.70)

(3323.60)

(4066.30)

(1428.20)

4665.40

Cash from Financing Activities

4960.80

5054.20

2175.80

(554.00)

2173.20

 

Reported EPS for the most recent quarter deviates from the estimated positive result, ending up at -0.31 yuan per share. The effect of China’s huge governmental stimulus package against the recession is still unclear and so does the recovery of confidence for the civil aviation market. In addition, CEA’s quick ratio is far below the industry and sector average, raising additional concern about its liquidity besides the cash burning. Whether CEA could reverse its tumbling sales in the rest of the year is questionable, and its cash burning may remain an issue for investors.

 

CEA

Industry

Sector

S&P 500

Quick Ratio (MRQ)

0.22

0.78

1.55

0.78

 

 

  • Government Cash Injection

All three major airline carriers in China benefited from the cash injections from the Chinese government in line with the government’s stimulus policy in response to the recession in the domestic market. CEA received RMB 3 billion ($439. million) capital injection in 2008 and a further RMB 6 billion ($880 million) since. However, the recent report by State-owned Assets Supervision and Administration Commission (SASAC) implicitly denied further cash injection to major airline companies in the second half of 2009, implying the cash source of government stimulus package will probably dry up and CEA has to tap on other sources to improve its cash position in following periods.


  • Internal Cost Control

Although volume of cargo and passenger traffic is likely to increase in the third quarter of 2009, according to the forecast of Liu Shaoyong----board chairman of CEA, the sign of market recovery is still blurred. Quarterly revenue has been on a decline in 2009, ending up in 8,551.6 million yuan for the June quarter, representing only 84.02% of that in the same quarter in 2008. Fortunately, the first half of 2009 saw the stop of huge net loss in a row in 2008. 40.1 million yuan and 1133.4 million yuan profits of the first two quarters in 2009 is mainly the result of CEA’s cost control measures. Total operating expense in June quarter ended up with 7,722.3 million yuan, representing 21.17% reduction from the last quarter and 28.29 reduction from the same quarter last year. It seems that China Eastern Airlines (NYSE:CEA) has to rely on its own effort to reverse the loss and improve its cash position. More measures of cost controlling may roll out in the rest of 2009 , when the release of CEA’s mid term meeting states that ‘256 measures have been taken to contain economic losses and 113 million yuan of controllable costs have been saved.

 

In Millions of RMB

2008 Q2

2008 Q3

2008 Q4

2009 Q1

2009 Q2

Total Revenue

10178.20

10806.80

10204.40

8946.20

8551.60

Total Operating Expense

10769.30

13188.20

22258.40

9796.50

7722.30

Net Income

(209.50)

(2333.90)

(11635.40)

40.10

1133.40

 

CEA_cash_JJ

Talking a step back and examining current stocks price of $34.57 for China Eastern Airlines (NYSE:CEA) from a historical point of view, it looks that upside is limited for the rest of the year.



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