EUR 850.00 For Business Accounts Only

Morningstar | Strong Revenue for China Eastern Weighed Down by Fuel Cost in 1H, Maintaining FVE at HKD 4.25

No-moat China Eastern Airlines reported first-half results that featured solid revenue growth, but higher fuel cost (around 26% year-over-year increase) weighed on profitability. First-half profit, further dragged down by currency losses, came in at CNY 2.5 billion, slightly behind our estimate. The group's passenger ticket yield posted a 1.9% increase amid capacity expansion, and we think the steady demand for air travel in China warrants solid top-line growth ahead for the carrier. We retain our fair value of HKD 4.25 per share on the carrier and think shares are overvalued at the current level.

On the passenger side, the carrier posted solid revenue growth for all three of its major operating regions. Strong growth was primarily driven by 9.5% overall capacity expansion, namely introduction of new routes and increased frequencies on existing routes. Despite added routes, passenger load factor increased by more than 110 basis points to 82.4%, demonstrating the carrier's ability to fill new seats. Going forward, the company's focus for its passenger operation will be to add some capacity while maintaining yield.

On the cost side, we still see cost-cutting efforts bearing fruit. Although a surging Brent oil price drove fuel cost up by 26%, the group's operating costs per revenue tonne kilometers excluding fuel dropped by 2.8% year over year. While we are optimistic in the carrier's devotion to cut costs, the impact on the bottom line will be somewhat muted, as some of the cost savings will inevitably be passed onto the end consumers, given that the airline operates in an industry that is highly exposed to low switching costs and price transparency.