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Morningstar | Beijing Capital Int'l Airport's Disappointing Second-Half Results Least of Its Worries; FVE Intact

We are not as worried about no-moat Beijing Capital International Airport’s muted second-half results as we are about the opening of a second airport in the Chinese capital. Investors anxiously await to see what happens when Beijing Daxing International Airport starts its operations on Sept. 30. We reiterate our 1-star rating on Beijing Capital with a fair value estimate of HKD 4.

During the second half of 2018, Beijing Capital International Airport recorded higher-than-expected non-aeronautical performance, driven primarily by 83% growth in the retail segment. Such a jump was the result of a renegotiated revenue-sharing deals that lifted the revenue-sharing ratio from around 25% to 45%. Such a boost to the top line, however, was partially offset by a management service contract the airport has with its parent, which requires the listed entity to pass a fixed 22% of its retail income upstream. Going forward, the airport’s retail income and expenses should rise and fall on similar rates. At the same time, we also saw rental costs surging more than 150%, as a result of the transitional leasing agreement signed between Beijing Capital International Airport and its parent. We expect this line item returns to around CNY 100 million starting in 2019, as the previously leased asset has been acquired by the airport from its parent. It is said that the commercialization of the acquired Grand Traffic Center will be finished by 2019, but we think revenue contribution from this will be negligible.

When it comes to the elephant in the room, management provided little that we don’t already know. With the new airport set to run for a quarter of 2019, we expect Beijing Capital International Airport to experience a 3% decline in passenger throughput, above management’s guidance of 2%. It appears that we are currently too early of a stage to talk about the possibility of Beijing Capital International Airport acquiring stakes in the new airport. We maintain our view that even if the acquisition is approved, the amount of money paid will be a tremendous uncertainty to the shareholder value of Beijing Capital International Airport.

Underlying our valuation for Beijing Capital International Airport is the expectation for a total of 21% drop in its aeronautical revenue from 2019 to 2021. Our forecast has taken into consideration management's expectation that the contribution from higher-revenue international routes will increase after the completion of traffic relocation. We expect stabilization in 2022 as the mandated traffic relocation is completed.