Source: Dow Jones Newswires Author: Rose Yu, Jeffrey Ng 07/15/2009
Subject Concerned: Airlines Aviation Fuel
On Jul. 15, shares of Chinese flag carrier Air China Ltd. surged as much as 7% in Hong Kong after the company said it expects to report a more than 50% jump in its first-half net profit.
Analysts said the news is positive for the Beijing-based carrier, but warned that rising fuel prices and intense domestic competition may stunt investor interest in the stock in the near term.
At the midday break, Air China's Hong Kong-listed H shares were up 6.1% at HK$4.20, outperforming a 1.6% gain in the benchmark Hang Seng Index.
Air China said in a statement on Jul. 14 that the expected growth in its net profit was aided by lower fuel costs from a year earlier, steady growth in domestic travel demand and China's economic stimulus package.
The carrier didn't disclose a figure for its first-half profit, which it will issue on Aug. 25, but it said net profit for the same period of last year was 1.282 billion yuan (US$188 million).
Citigroup said in a report on Jul. 15 that it expects Air China's first-half net profit to be between 2.5 billion yuan and 3 billion yuan, with 500 million yuan coming from the operating level and the rest from fuel hedging gains.
The airline, which posted a 7 billion yuan fair value loss for fuel-hedging contracts last year, said a 56.7% surge in oil prices in the first half reduced paper losses on hedging contracts and helped boost its earnings.
Chinese airlines sought to fend off soaring fuel costs in the past few years by entering into contracts to lock in future prices, but many lost money when global oil prices plunged below US$50 a barrel at the end of last year from about US$150 a barrel in July.
But oil prices have begun rising since the beginning of the year, with strong demand from emerging markets such as China. Light, sweet crude for August delivery settled at US$59.52 a barrel on the New York Mercantile Exchange on Jul. 14.
UBS said in a note on Jul. 15 that it considers higher oil prices a "fundamental negative" for airlines, with domestic fuel prices recently being increased by 20%, even as domestic passenger fuel surcharges haven't been reintroduced.
UBS also said it believes the market is underestimating the impact of pricing pressure on Air China. As such, it believes the stock remains fundamentally overvalued at current levels.
"The distortions to the market last year make year-on-year comparisons difficult but our impression is that underlying fares remain weak," the investment bank said.
Air China operates a hub in Beijing, which connects its extensive international network with its mainland China destinations. The airline also operates a significant number of flights out of Chengdu, Shanghai and Guangzhou.