Cathay Gains as Optimism Worst Is Over Spurs Stock Upgrade

Updated on
  • Analysts see likely improvement in earnings, passenger yields
  • On right track to achieve strong performance, Cathay says

Corrine Png, chief executive officer and founder of Crucial Perspective, discusses Cathay Pacific's earnings and her outlook for the airlines future. She speaks on 'Bloomberg Daybreak: Asia.' (Source: Bloomberg)

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Cathay Pacific Airways Ltd. advanced as optimism the worst may be over for Asia’s biggest international airline prompted some brokerages to upgrade the stock.

Shares rose 0.9 percent to HK$11.80 in Hong Kong Thursday, after rallying as much as 6.2 percent earlier. Cathay reported its biggest half-yearly loss in at least two decades Wednesday amid a business revamp aimed at fending off competition from the region’s budget carriers and mainland Chinese rivals.

Bank of America Merrill Lynch, Daiwa Securities and Credit Suisse Group AG were among brokerages that upgraded the stock, citing likely improvement in earnings. While Cathay said Wednesday that it doesn’t expect the operating environment to change for the better materially in the second half, the three-year corporate transformation program it has undertaken will start paying off in that period, accelerating in 2018.

Although the second half will remain loss-making, “we believe losses have bottomed out as management forecasts passenger and cargo yields to sequentially improve,” Jefferies analyst Andrew Lee said in a research note after the earnings.

Buffeted by budget carriers and deep-pocketed competitors on the mainland, Cathay is at the crossroads. It risks being eclipsed by Chinese airlines that offer cheaper, direct long-haul flights from cities like Shanghai, Guangzhou and Shenzhen, bypassing Hong Kong, whose prominence as a hub has declined relative to the burgeoning wealth of the surrounding cities in southern China.

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The pressure has forced Cathay to offer seasonal discounts for its front seats after saying last year that premium travel was slumping, causing passenger yields -- the money earned from carrying a passenger for one kilometer -- to decline.

The marquee airline Wednesday reported a net loss of HK$2.05 billion ($262 million) for the six months through June, potentially putting it on course for the first back-to-back annual losses in its 70-year history. The loss exceeded the median HK$1.2 billion loss forecast in a Bloomberg survey of three analysts.

Passenger yields continued to decline in the first half of the year, led by its services to North America and Europe, as discounts to help fill seats took a toll on the key metric of profitability. The measure declined 5.2 percent to 51.5 Hong Kong cents, hovering around the lowest level since 2009, Cathay said in a statement Wednesday.

Not Convinced

Some analysts weren’t convinced by the day’s rally.

“It’s false optimism,” said Mohshin Aziz, an analyst at Maybank Investment Bank Bhd. in Kuala Lumpur. “Traditionally, second-half yields and load factor are better, but that’s under normal circumstances.”

Cathay has reported losses only for three years since it was founded in 1946 -- once in 1998 in the aftermath of the Asian financial crisis; again, in 2008 as the global credit crisis unfolded; and, last year as a result of fuel-hedging bets gone wrong and intensifying competition.

The stock is potentially facing removal from Hong Kong’s benchmark Hang Seng Index, according to a report by Societe Generale SA. Shares of Cathay have risen 16 percent this year, compared with a 24 percent gain in the HSI.

“We are confident that we are on the right track to achieve strong and sustainable long-term performance, with a leaner, more competitive business,” Cathay Chairman John Slosar said in a statement Wednesday.

— With assistance by Kyunghee Park, and Dong Lyu

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