3 biggest threats to Cathay's growth in 2013

Its cargo market is nearing a zombie state.

According to Maybank Kim Eng, Cathay is facing a challenging 2013 due to: 1) a bloodbath yield environment for the full service carriers (FSC) with declines of 3%-5% seen in 1Q13; 2) a near zombie state cargo markets; and 3) mounting cost pressures from higher staff cost and airport charges.

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Furthermore, the traditional second tier airlines have upped their game and are a genuine threat to Cathay. We maintain our HOLD rating, as the stock is close to our target price of HKD12.50/share, based on 7.1x 2013 adjusted EV/EBITDAR, which is a 10% premium to regional peers to factor in its strong brand and balance sheet.

Load factors holding up, but at the expense of yields. Cathay’s 5M13’s passenger load factor was up by 1.0ppt YoY to 80.6% and cargo load factor
declined by 1.4ppt YoY to 62.6%.

The load factor held up only because Cathay shrunk its passenger capacity by 5.4% YoY and its cargo by 4.0% YoY. This is a clear indicator that the underlying demand is weak, and Cathay was likely to suffer from yield declines.

The forward yield indicator is negative for all the Asian FSCs in 1Q13, and the management has forewarned that yields are under pressure.

Breakeven in 1H13? Our preliminary estimation for Cathay’s 1H13 financial results is a net profit of HKD159m (1H13: -HKD935m). This is based on the first 5M13 data available, the Jun 2013 operating data is scheduled to be released around 15-17 July 2013. We will revise our 1H13 estimate accordingly, ahead of the Company’s 1H13 financial results scheduled to be released on 8 Aug 2013.

Long-haul facing tough times, and unlikely to change soon. The industry demand is fragile and everyone is focused on capturing markets and to fill up their aircraft.

Pricing power is nonexistent, and unlikely to reverse soon based on the forward sales of airlines in 1Q13 and our observation of published ticket prices.