Top China ADR Portal

China ADR stock research


Warning: strtotime(): It is not safe to rely on the system's timezone settings. You are *required* to use the date.timezone setting or the date_default_timezone_set() function. In case you used any of those methods and you are still getting this warning, you most likely misspelled the timezone identifier. We selected the timezone 'UTC' for now, but please set date.timezone to select your timezone. in /home1/chinaves/public_html/libraries/joomla/utilities/date.php on line 56

Warning: date(): It is not safe to rely on the system's timezone settings. You are *required* to use the date.timezone setting or the date_default_timezone_set() function. In case you used any of those methods and you are still getting this warning, you most likely misspelled the timezone identifier. We selected the timezone 'UTC' for now, but please set date.timezone to select your timezone. in /home1/chinaves/public_html/libraries/joomla/utilities/date.php on line 198

Chinavestor Downgrades China Southern Airlines to Hold

E-mail Print PDF

ZNH_09Q3thumbDec. 29, 2009 (Scott Lin) -This report is available in pdf format: click here

Summary
We recommend a HOLD rating on China Southern Airlines Limited (NYSE:ZNH), as we expect recovery in passenger demand and earnings to be gradual and slow in 2010. With government financial intervention to relieve its debt-to-equity ratio, earnings is set to stabilize along with the domestic travel economy. However, the outlook is cautious and more funding is required to shore up more debt relief.

- Company overview

China Southern Airlines (NYSE:ZNH) joined Skyteam alliance in 2007. China Southern Airlines (NYSE:ZNH) is China’s largest airline with 54 international offices, 13 branches, 18 domestic ticket and sales offices in China, 5 holding subsidiaries and 2 bases. It is China’s largest domestic airline with 160 domestic routes. China Southern Airlines flies in 169 cities in 27 countries, however it flies mostly on domestic routes. On 16 July 2008, it achieved a Five-Star Flight Safety Award rating from the General Administration of Civil Aviation (CAAC) – China Southern Airlines (NYSE:ZNH) is the leader in flight safety and international leadership amongst Chinese aviation carriers. Beijing and Guangzhou are China Southern Airlines’ hubs to extend across Asia. It operates 348 aircraft – they comprise of Boeing, Airbus and McDonnell Douglas series aircraft.

-Earnings increase buoyed by higher demand and government subsidy

China Southern Airlines (NYSE:ZNH) recently posted a third quarter profit of $284M RMB, compared to a $830M RMB loss one year earlier.

Key Income Statement Data

1st half 09

2nd half 08

1st half 08

2nd half 07

1st half 07

In Millions of CNY or RMB

Total Operating Revenue

24268

26724

28564

24556

29845

Total Operating Expense

25034

27984

33783

24574

28382

Other income (net)

11

53

(112)

80

50

Operating Income (loss)

(755)

(1207)

(5331)

62

1513

Net non-operating income

983

4216

(2402)

386

918

Net Income Before Taxes

228

905

(5629)

448

2431

Tax / tax credit

(93)

4

(66)

(222)

(625)

Net Income

135

909

(5695)

226

1806

Key Balance Sheet Data

1st half 09

2nd half 08

1st half 08

2nd half 07

1st half 07

In Millions of CNY or RMB

Cash & Equivalents

4726

4649

5139

3824

N/A

Pledged bank deposits /financial asset

--

51

4

2

N/A

Total Receivables, Net

3453

2688

3169

3041

N/A

Total Inventory

1192

1229

1293

1213

N/A

Prepaid expenses

621

620

541

592

N/A

Amounts due from related companies

11

11

100

118

N/A

Total Current Assets

10003

9248

10246

8790

N/A

Property/Plant/Equipment - Net

57169

53237

56662

58441

N/A

Construction in progress

19273

17321

15698

11385

N/A

Other non-current assets

3738

3236

3394

3317

N/A

Total Assets

90183

83042

86000

81933

N/A

Total Current Liabilities

36969

41538

45632

42601

N/A

Total Long Term Liabilities

43288

32025

24747

24620

N/A

Total Liabilities

80257

73563

70379

67221

N/A

Total Equity

9926

9479

15621

14712

N/A

Total Liabilities and Equity

90183

83042

86000

81933

N/A

Market Comparisons

China Southern Airlines

Industry

Sector

S&P500

Current Ratio (MRQ)

0.24

0.94

1.76

1.09

Total Debt / Equity (MRQ)

469.06

260.59

91.20

185.50

Asset Turnover (TTM)

0.61

0.46

0.25

0.49

ROA (TTM)

-4.83

1.97

0.23

4.02

ROI (TTM)

-9.35

2.44

0.28

5.51

ROE (TTM)

-40.18

9.40

0.46

9.66

Gross Margin (TTM)

6.31

20.08

9.16

29.55

Operating Margin (TTM)

-10.95

4.20

1.41

--

Pre-tax Margin (TTM)

-7.29

2.81

0.99

8.41

Net Profit Margin (TTM)

-7.89

2.29

0.65

6.61

In the first nine months (three quarters) of 2009, Chinese domestic travelers rose 20% due to government stimulus. Overall, China’s GDP rose 8.9%, causing a rise in domestic travel.

China Southern Airlines (NYSE:ZNH) earned Net Profit of $322M RMB in the first three quarters of 2009, compared to a loss of $21M RMB year-on-year. Sales rose 9.5% to $15.95B RMB due to overall expansion in the third quarter.

According to China Southern Airlines (NYSE:ZNH) sources, the large increase in profits is due to a reduction in operating costs and financial aid of $1.57B RMB subsidy payments from the Chinese government. This boosts one-off gains by $1.30B RMB. China Southern Airlines (NYSE:ZNH) is still, however, highly levered and are still in need for additional debt finance relief.

Chairman Si Xianmin says that China Southern Airlines is set to expand in overseas markets, because of intense competition in domestic travel – air and rail. Currently, China Southern Airlines’ international portfolio comprises 17% of its total travel. In the next 3-5 years, it will rise to over 20%.

ZNH_09Q31

China Southern Airlines (NYSE:ZNH) said that its large losses in 2008 were a combination of factors. These included weaker passenger demand, cost pressure resulting from higher oil prices and impairment of fixed assets.

- Government financial aid props up Earnings-Per-Share performance measure

ZNH_09Q32

The June 2009 earnings-per-share figure does not appear as rosy as the above chart depicts. Financial aid from the Chinese government has propped up overall net profit for June 2009, totaling $1.5B RMB for China Southern Airlines (NYSE:ZNH).


- Cash and cash equivalents remain relatively unchanged

ZNH_09Q33

Cash has changed relatively little in light of the government subsidy payment. This implies that operating costs have only decreased marginally, and the large increase in net profit is due mostly to government intervention.

- Industry Analysis

Domestic aviation industry

A high speed rail network, set to be completed in 2020, will compete directly with China’s domestic airline industry. China Southern Airlines (NYSE:ZNH) operates 160 domestic routes, of which 38 will compete directly with the new high-speed rail network. Train tickets are expected to be 40% cheaper than plane tickets when the new high-speed rail network opens in 2020.

Note, however, that 2020 is still some time away, and there are more important short-term issues to resolve. The industry pressures at the moment reside mostly in waning passenger demand and rivalry with competitors. Financing is also a major issue within the aviation industry. The issue is whether the airline has enough liquidity to pay off its long-term debt. China Southern Airlines (NYSE:ZNH) has a Long-term Debt-to-Equity ratio of 276.57. Overall, the industry’s figure is also high at 220.08.

International aviation industry

Air China will expand domestically and internationally, with four new domestic routes and two new international routes. International Air Transport Association (IATA) claimed that the lull in the airline industry has reached a bottom, however warned that a ‘recovery was still a long way off.’

According to Singapore Airline’s Q2 release, the industry outlook suggests that air travel demand had stopped declining, as evidenced by the volume of pre-bookings. Current market conditions allow for a reduction of promotional pricing, but yields are unlikely to recover to pre-crisis levels within the next six months.

Japan Airlines’ recent press release of its consolidated results shows that industry conditions remain extremely difficult, with waning air travel demand. Japan Airlines has responded by discontinuing unprofitable routes, downsized flight frequencies, reduced plane sizes and other cost cutting measures to ensure an increased load factor. Both airlines are responding to industry pressures by horizontal diversification through strategic alliances with other airlines.

ZNH_09Q3JAL

Source: http://press.jal.co.jp/en/release/200911/001374.html

The load factor increase demonstrates Japan Airlines’ response to tight industry conditions by being more efficient with its capacity to demand management.

- Competitor Analysis

Competition in the Chinese domestic travel industry is increasingly fierce; Southern China Airline (NYSE:ZNH) plans to expand in overseas markets to diversify its revenue stream. Southern China Airlines’ main competitors are Air China and China Eastern Airlines Corporation Limited. China Eastern Airlines is set to merge with Shanghai airlines by year’s end. China Eastern Airlines is also seeking to horizontally diversify through joining an alliance.

Due to fierce competition, cost efficiency and liquidity are key issues to consider. Cost efficiency includes operating costs, load factors, RPK and ASK. Liquidity includes cash and cash equivalents.

- Competitor comparable RPK, ASK and load factor analysis

China Southern Airlines (NYSE:ZNH)

Central hub: Guangzhou and Beijing

China Southern Airlines (NYSE:ZNH) is China’s largest airline. It plans to double its services to Australia due to demand growth. It has enjoyed 11% passenger growth y-o-y to 5.49M, but load factor in domestic flights fell. Domestic passenger growth of 10% made up most of the increase (5.06M), regional up 17% to 104000, international travel up 12% to 326000. Despite passenger growth, overall load factor fell 4% to 72.2%.


Air China (HKG:0753)

Central hub: Hong Kong and Macau

Air China (HKG:0753) is China’s second largest airline. China posted 11% increase in passenger traffic in October, 2009 – strong growth in domestic and regional markets. Air China’s domestic RPK was up 11% y-o-y, international RPK was up 5% y-o-y and regional RPK was up 14% y-o-y. Total passenger numbers increased: domestic was up 16% to 3.1M, international was up 4% to 484000, regional was up 25% to 116900.

Capacity also increased. Domestic ASKs were up 12%, regional ASKs were up 20%, and international ASKs were down slightly 2%. Overall ASKs were up 7%.

Overall Load factor increased 3.3% to 82%. Domestic was up 2.7% to 82%, international load factor was up 4.9% to 82%, and regional load factor was down 3.5% to 72%.


China Eastern Airlines (NYSE:CEA)

Central hub: Shanghai

China Eastern Airlines (NYSE:CEA) is China’s third most valuable airline.

Passenger traffic in September rose 16%: domestic was up 22% to 3.17M, international numbers rose 9% to 349000, and regional fell 8% to 137000.

Domestic RPK were up 20% y-o-y, regional RPK were down 13% y-o-y, and international RPK was up 11% y-o-y. Overall RPK was up 16%.

Capacity: in response to decreased regional RPK, ASKs were decreased by 6%, domestic ASKs were up 24%, and international ASKs were up 5%. Overall ASK increased by 17%.

Load factor: domestic factor fell 2.5% to 71.3%, regional load factor fell 4.9% to 60.9%, international load factor rose 3.3% to 68.2%. Overall load factor fell 0.8% to 70.1%.


- Competitor comparable revenue and earnings analysis

Air China (KHG:0753)

ZNH_09Q34

Air China was able to turn a profit in interim 2009 by decreasing operating expenses by 20.86% y-o-y.


China Eastern Airlines (NYSE:CEA)

ZNH_09Q35

The revenue and net profit chart of Air China  (HKG:0753) and China Eastern Airlines (NYSE:CEA) is similar. Air China ( HKG:0753) appears to have faired better for net profit over the comparative period. Air China (HKG:07530 also did not suffer as large decrease in its revenues.


- Comparable Debt Coverage Ratio analysis

ZNH_09Q36

Japan Airlines’ figures are expressed in ‘000 000 yen.

Note:

Total debt service includes: current borrowings, operating leases and net finance costs. Non-current borrowings are not included and non-current operating leases are not included in calculations.

Both China Southern Airlines (NYSE:ZNH) and Japan Airlines have a negative Debt Coverage Ratio for interim 2009. This means that both airlines have negative cash flow to cover its debt. China Eastern Airlines’ Debt Coverage Ratio of 0.071 shows that there is also not enough cash flow to cover its debt. This could pose serious liquidity problems in the short to medium term.



Annual Income Statement

China Southern Airlines

In Millions of CNY

2008

2007

2006

2005

2004

Traffic revenue

53913

53196

45087

37419

23344

Other operating revenue

1375

1205

1132

874

630

Revenues

55288

54401

46219

38293

23974

Operating expenses

Flight operations

34982

29082

25022

19394

10418

Maintenance

4890

4643

3999

4589

3459

Aircraft and traffic servicing

8476

8160

7063

5759

3503

Promotion andsales

3491

3421

2811

2780

1940

General and administrative

2041

1874

1941

2457

1323

Impairment on property, plant, equipment

1884

109

--

--

--

Depreciation and amortisation

5746

5554

4971

4440

2413

Others

257

113

100

179

9

Other (loss)/income, net

(59)

130

333

--

--

Profit from Operating Activities

(6538)

1575

645

(1305)

909

Interest Income

103

73

41

55

22

Interest expense

(1987)

(2291)

(2070)

(1616)

(691)

Share of associates’ results

(12)

57

5

(285)

10

Share of jointly controlled entities’ results

170

123

115

36

(16)

(Loss)/gain on derivatives, net

(124)

90

(19)

--

--

Exchange gain, net

2592

2832

1492

1220

(59)

Gain on sale of other investments

--

107

--

(32)

(1)

Gain on sale of jointly controlled entity

143

--

--

--

--

Gain on sale of subsidiary equity interest

37

7

--

--

--

Others, net

892

306

148

74

46

Profit before tax

(4274)

2879

357

(1846)

220

Tax

(62)

(847)

(153)

7

(65)

Net Income

(4786)

2032

204

(1846)

155

Basic net income (loss) per share

(0.74)

0.28

0.04

(0.42)

(0.01)

Diluted net income (loss) per share

N/A

N/A

0.04

(0.42)

N/A

Annual Balance Sheet

China Southern Airlines

In Millions of CNY

2008

2007

2006

2005

2004

Cash and cash equivalents

4649

3824

2264

2901

3083

Pledged bank deposits

51

--

--

--

--

Financial assets

--

2

--

--

683

Inventory

1229

1213

1315

1382

1302

Trade receivables

1317

1966

1512

1518

1203

Other receivables

1371

1075

879

956

616

Prepaid expenses and other current asset

620

592

585

380

378

Amounts due from related companies

11

118

128

84

--

Total Current Assets

9248

8790

6683

7221

7265

Property/Plant/Equipment - Net

53237

58441

56347

54266

46841

Construction in progress

17321

11385

951

674

565

Lease prepayments

531

556

441

333

346

Interest in associates

235

219

149

142

429

Interest in jointly controlled entities

1048

873

870

805

782

Other investments in equity securities

166

168

330

320

272

Lease deposits

563

659

9458

7265

5397

Available for sale equity securities

114

362

--

--

--

Deferred tax assets

167

84

95

74

316

Other assets

412

469

260

302

15

Total Assets

83042

82006

75585

71402

62228

Financial liabilities

116

5

26

--

--

Bank and other loans

22178

24948

23822

16223

11518

Short-term financing bills

2000

--

--

--

--

Obligations under finance leases

1781

2877

3091

3373

2144

Trade and bills payables

1353

1844

1909

3929

1690

Sales in advance of carriage

2244

1891

1436

1413

874

Deferred revenue

261

168

--

--

--

Taxes payable

120

500

126

28

39

Amounts due to related companies

102

194

254

116

2330

Accrued expenses

8420

7290

4942

4250

4551

Other liabilities

2963

2994

3257

3796

2974

Total Current Liabilities

41538

42711

38863

33128

26120

Long Term Bank Loans

17429

90974

10018

12740

11935

Obligations under finance leases

11157

12858

12307

12459

9599

Deferred revenue

445

422

--

--

--

Provision for major overhauls

945

683

805

301

284

Provision for early retirement benefits

179

230

306

--

--

Deferred benefits and gains

1109

1027

792

496

100

Deferred tax liabilities

761

691

372

342

287

Total Liabilities

73563

67696

63464

59466

22205

Share capital

6561

4374

4374

4374

11848

Reserves

460

7489

5814

5626

--

Minority interests

2458

2447

1933

1936

2055

Total Equity

9479

14310

12121

11936

13903

Total Liabilities& Shareholders’ Equity

83042

82006

755585

71402

62228

Annual Cash Flow Statement

China Southern Airlines

In Millions of CNY

2008

2007

2006

2005

2004

Cash generated from Operations

4256

9698

4719

5419

4555

Interest received

103

73

41

55

22

Interest paid

(2805)

(2814)

(2419)

(1616)

(754)

Income taxes paid

(399)

(88)

(46)

(23)

(227)

Net Cash from Operations

1155

6869

2295

3835

3596

Proceeds from sale of property, plant and equipment

312

288

492

238

47

Proceeds from sale of jointly controlled entity

210

--

--

--

--

Proceeds from sale of equity interest in subsidiaries

61

--

--

--

--

Proceeds from sale of other investments

--

127

--

689

--

Net cash settlement of derivative financial instruments

(11)

67

7

--

--

Increase in deferred credits

--

--

--

57

--

Dividends received from associates

--

--

33

2

12

Dividends received from jointly controlled entities

14

79

50

39

5

Dividends received from other non-current investments

14

12

7

4

13

Decrease in other non-current assets

--

--

16

4

(9)

Payment for acquisition of China Northern and Xinjiang Airline

--

--

--

(1959)

398

Payment of acquisition equity interest of minority shareholders

--

--

(12)

(118)

(72)

Payment of lease and equipment deposits

--

(86)

(5464)

(6649)

(3151)

Refund of lease and equipment deposits

54

165

2031

4619

1253

Capital expenditures

(8364)

(5502)

(2644)

(4935)

(6631)

Increase in pledged bank deposits

(51)

--

--

--

--

Payment for the investment in an associate

(29)

(10)

(31)

--

(689)

Payment for Nan Lung Freight and Air Catering

--

(58)

--

--

--

Proceeds from disposal of GZ Aviation Hotel

--

74

--

--

--

Through acquisition of CHAHC Hainan

--

--

33

--

--

Net cash used in Investing

(7790)

(4844)

(5482)

(8009)

(8824)

Proceeds from bank loans

41450

30984

24983

18238

14555

Proceeds from issue of short-term financing bills

2000

--

--

--

--

Repayment of bank loans

(33783)

(28660)

(19113)

(12193)

(7108)

Repayment of principal under finance lease obligations

(2335)

(3021)

(3313)

(2050)

(1272)

Capital contribution received from minority shareholders

--

240

--

17

71

Dividends paid to minority shareholders

(28)

(8)

(7)

(20)

(15)

Net Cash used in Financing

7460

(465)

2550

3992

6231

Net Change in Cash and Cash equivalents

825

1560

(637)

(182)

1003

Net Cash - Begin Balance

3824

2264

2901

3083

2080

Effect of foreign exchange rate changes, net

--

--

--

--

--

Net Cash and Cash equivalents - End Balance

4649

3824

2264

2901

3083

Analyst Certification

I, Scott Lin, hereby certify that the views expressed in this research report accurately reflect my personal views about the subject securities and issuers. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or view expressed in this research report.

Other Important Disclosures

The analyst(s) responsible for covering the securities in this report receive compensation based upon, among other factors, the overall profitability of Chinavestor.com.

Copyright, user agreement and other general information related to this report:

Copyright 2007 Chinavestor.com. All rights reserved. This research report is prepared for the use of Chinavestor.com clients and may not be redistributed, retransmitted or disclosed, in whole or in part, or in any form or manner, without the express written consent of Chinavestor.com.

This research report provides general information only. It is not intended to provide personal investment advice and it does not take into account the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. Investors should seek financial advice. Past performance is not necessarily a guide to future performance.

Fundamental equity reports are produced on a regular basis as necessary to keep the investment recommendation current.

This report © is published by Chinavestor.com. The information herein was obtained from source which Chinavestor believes reliable. However we do not guarantee its accuracy. Neither the information, not any opinion expressed, constitutes a recommendation to buy or to sell any securities or commodities.



If you like us, spread the word to the fellow investors on your favorite Social Bookmarking websites
Reddit! Del.icio.us! Mixx! Free and Open Source Software News Google! Live! Facebook! StumbleUpon! TwitThis Joomla Free PHP
 

!!! CHINAVESTOR.COM is for SALE !!!

BUY this domain with all its credentials. Chinavestor.com has been added to Google News and Finance since 2008! Huge web traffic upside potential! Website is optimized for Chinese stocks but can easily be tweaked. Contact Seller Here

sale1
G_news
Check out The Benefits of Getting into Google News!

Free weekly newsletter

Get hot China stock news every Monday