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Morningstar | Sky Really Is the Limit: Second Airport Is Set To Be a Severe Blow to BCIA; FVE Cut to HKD 4.00. See Updated Analyst Note from 09 Jan 2019

We are reducing our fair value estimate for Beijing Capital International Airport (BCIA) from HKD 7.90 to HKD 4.00 after the Civil Aviation Administration of China (CAAC) released more details on its plan to move portions of BCIA’s air traffic to the new Beijing Daxing International Airport (BDIA). While the faster-than-expected traffic relocation makes headlines, we are more concerned with the official passenger throughput forecasts that came below our expectations. Coupled with operating deleveraging, we cut our 2020 and 2021 EPS forecasts by a respective 30% and 46%. We believe the Street is being overly optimistic on air travel in and out of Beijing, as the new airport is projected to handle 72 million passengers annually or 75% of BCIA’s 96 million capacity in 2017.

According to the updated relocation plan released by Civil Aviation Administration, Beijing Capital International Airport’s passenger volume will dip to 66 million in 2021, a staggering 31% reduction from the 96 million posted for fiscal 2017. This is mainly because traffic distribution between the two Beijing airports will not be dictated by the market over the next couple years, as the planning authority is set to help out with traffic ramp-up at the new airport with favorable policies. We now anticipate the opening of Beijing’s new airport will bring about a total of a 16% drop in aeronautical revenue (passenger charges and aircraft movement fees) for the existing airport from 2019 to 2021. Our forecast has taken into consideration BCIA’s management expectation that contribution from higher revenue international routes will go up to 36%-38% after the completion of traffic relocation, up from the current 27%. We expect stabilization post-2022, as the mandated traffic relocation should be completed.

We further expect BCIA’s non-aeronautical (retail, advertising, car park, etc.) business to experience moderate losses in revenue during the transition period, as the success of these businesses is dependent upon the number of passengers passing through terminals. However, we think the adverse effects resulting from a drop in traffic will be partially offset by the rising volume of high-spending international passengers, a new retail profit-sharing scheme, and liberalizing pricing reform for other services provided by the airport. Overall, we expect the company’s non-aeronautical revenue to dip by a total of 14% from 2019 to 2021.

Expected declines in passenger volumes will lead to substantial operating deleveraging for the company. We think the majority of BCIA’s current operating expenses, such as maintenance, security, utilities, are fixed. As a result, we expect the operator’s bottom line to shrink by nearly 50% from 2019 to 2021. We continue to assign a very low possibility to the group's parent (owner of both airports) selling portions of the new airport to BCIA at a large enough discount to have a material impact on BCIA's intrinsic value.