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Morningstar | China Eastern Posted Decent Third-Quarter Results Despite Rising Fuel Cost; HKD 4.25 FVE Unchanged

No-moat China Eastern Airlines reported 2018 third-quarter results that featured solid revenue growth but higher fuel cost and foreign currency headwinds continue to weigh on the bottom line. The carrier’s third-quarter net profit came in at CNY 2.4 billion, tracking slightly ahead of our full-year expectations. We maintain our fair value estimate of HKD 4.25 on China Eastern Airlines and recommend prospective investors seek a wider margin of safety before investing in the name.

On the revenue front, China Eastern recorded 14% year-over-year growth, driven by 7.5% revenue per kilometers growth and improvement in load factor during the third quarter. Available seat kilometers (ASK) or capacity, on the other hand, posted a slight increase of 4.8%. We think limited growth in ASK was the result of the Civil Aviation Administration of China (CAAC)’s push for more efficient use of existing routes. With the capacity expansion, we continue to see passenger load factor posting healthy growth, up more than 2% compared with the same period last year. Going forward, we expect the company to keep its focus on maintaining yield while adding capacity at a slower pace.

On the cost front, we are seeing some pressure on the group’s gross margin, down to 20.4% from 21.9% a year ago. Given the company does not break out different components of operating costs in its third-quarter fillings, we think rising operating cost is most likely due to higher jet fuel cost. Furthermore, with Chinese yuan depreciation, the carrier booked currency loss of CNY 2.2 billion for the first nine months of 2018, versus a translation gain of CNY 1.3 billion the same period last year.