HONG KONG, Aug 29 — The bloodbath among Asia's airlines has continued this week. On Wednesday, Air China announced its first-half profits fell 20 per cent compared with last year. Meanwhile, China Eastern Airlines booked a loss.
Like airlines worldwide, Chinese mainland carriers have been hammered by higher fuel bills but with the added blows of sharply rising wage costs and a slump in traffic before the Olympic Games. Passengers, it seems, chose to remain earth-bound rather than comply with the cumbrous security measures introduced for the games.
Still, airlines elsewhere have performed little better. Yesterday Taiwan's Eva Airways announced a hefty second quarter loss while Malaysian budget carrier Air Asia said its profits had fallen 95 per cent.
Not surprisingly, stock prices have suffered. Air China's H shares are down 66 per cent this year. China Eastern is down a wrenching 80 per cent.
Yet any bargain hunters encouraged to buy in by low valuations, the prospect of a post-Olympic pick-up in passenger numbers and the 24 per cent fall in the price of kerosene over the past two months might do well to think again. According to industry analysts at HSBC, Asian airline stocks still could have a lot further to fall.
They note that because aircraft are priced in US dollars and the US dollar has declined recently against Asian currencies, especially the yuan, the replacement values of the fleets owned by many regional airlines have fallen far below the level at which they are valued on the companies' books.
Not everyone is affected. For Cathay Pacific, with its modern aircraft and US dollar-linked reporting currency, the fleet valuation looks reasonable.
Book values for Chinese airlines, however, are among the most overstated of all. HSBC's analysts estimate that the value of Air China's fleet is about 40 per cent of its book value while China Southern Airlines' fleet is worth 70 per cent less. China Eastern's fleet, meanwhile, actually has a negative value, which means, they argue, "it would be cheaper to start an airline from scratch".
For many Asian carriers, this leaves the value of their fleets languishing at a deep discount to their current market. As a result, warn HSBC's analysts, if the outlook for the business darkens any more, share prices will have a lot further to fall before they receive any support from the value of airlines' assets. Investors should remain cautious.
While Chinese A shares continue to bump along close to their lowest level since the end of 2006, mainland authorities are quietly preparing a series of measures intended to deepen and strengthen the market.
Among the latest proposals are rules to make share buy-backs easier and a new dividend policy which would force companies that want to issue new stock to pay out at least 30 per cent of their profits and exempt dividends from tax.
At the same time regulators are considering introducing individual pension plans and raising the proportion of assets under management institutional investors such as insurance companies are allowed to allocate to stocks.
Most interesting are proposals to allow the holders of previously non-tradable shares to offload them via sales of convertible bonds or through secondary offerings underwritten by brokers. Both could reduce fears that large blocks of stock could get dumped on the market, further depressing prices.
By themselves, these proposed measures are unlikely to reverse the long slide in A share prices which has seen the Shanghai Composite Index fall 61 per cent since October last year. But they may just contribute to supporting prices at current levels, helping to prime the market for an eventual recovery as further reforms are enacted. — South China Morning Post
Show/Hide comments
Show/Hide comment form
