Category Archives: China Airlines

China Airlines Crash Land

China Eastern, 670 HK, CEA NY,  and China Southern, 1055 HK, ZNH hk posted moderate revenue increases of 4.3% and 10.6% respectively for the quarter but gross margins plummeted.

China Eastern q1 2017.PNG

hk filing

China Southern 1q 2017

hk filing

China Eastern managed to eke out an increase in net profit of 6.6%, but this was primarily thanks to the gain it recorded for transferring ownership of China Eastern Logistics to parent company CEA Holdings.   China Eastern’s capacity year to date increased by 10.8% (RPK), its load factor was at 81.6% for passenger, just 39.3% for cargo and mail. For the month of March, the passenger load factor declined by .76% points with the most profitable international routes down by 2.03% points. The freight load factor increased by .99% points.

China Eastern issued new H shares sold to Delta Airlines, DAL in 2015. Additionally, it issued new A shares to help finance its continuous airline purchases.  Shares issued to Delta totaled  465,910,000 and raised 6.4 Bill $HK at 7.49 $hk per share. China Eastern, 670hk, last  closed in Hong Kong at 4.08 $hk.

China Southern’s net profit declined by 42.4%, despite an increase in non-operating income of 26%.  China Southern’s year to date capacity increased by 12.6% (RPK), its load factor was at 82.6% for passengers, just 49% for cargo and mail.  For the month of March, the passenger load factor increased by 1.93% points with the most profitable international routes down by .11 %points . The freight load factor increased by 4.8% points.

China Southern issued 270,606,272 new H Shares of the Company at the subscription price of HK$1,553.28 million, representing HK$5.74 per share to American Airlines, AAL. China Southern 1055 hk, last closed at 5.18 $hk.

Besides the alarming drop in gross margins, year on year load factors are critical to watch as China and  South Korea tensions escalate over THAAD missile placement in China, which has already reportedly severely dropped Chinese travel to South Korea.


China Airline ADR’s Lag Hong Kong

Airline ADRS

Source: aastocks

As mentioned here, Chinese airlines soared in Hong Kong and Shanghai possibly due to cargo strength.  While the US ADRs subsequently rose, the reaction was less than equal leaving the Hong Kong shares at a premium. CEA, ZNH.


Chinese Airlines Soar on Cargo Capacity Lift

China Eastern Airlines, 60015 SH, 670 HK,  CEA NYX, China Southern,  ZNH NYX,            1055 hk,   60029 sh, Air China, 60111 sh, 753 hk,  all up thanks to in cargo strengthening in the first quarter.  Since cargo load factors are still low, over-exuberant rise.

china airlines

Shanghai Composite and Hang Seng Falter


Major Chinese indexes faltered pending 1st quarter earnings reports, Wednesday’s data on March industrial profits and  April consumer sentiment and mixed signals from regulators.

Commodity Bubble:

Commodity trading raised alarm bells with both Deutshe Bank and Morgan Stanley noting the spike in volume.  Per Bloomberg:

The recent spike in speculative trading in commodities in China has stunned global markets, according to Morgan Stanley, which cited a jump in local activity for steel, iron ore and cotton as well as eggs and garlic.

“Now China’s speculators engage commodities,” analysts including Tom Price and Joel Crane said in an e-mailed note on Monday. “China’s latest speculative spike has stunned global markets.”

To put it in perspective, also per Bloomberg:

“The fact that trading volume for steel rebar contracts was at 223 million tons of rebar last Thursday, more than China’s full-year production of steel rebar, raised concerns about the repeat of boom-bust scenario seen last year in China’s equity market,” analysts at Oversea-Chinese Banking Corp. wrote in a note on Monday.”

Finally, a picture courtesy Zerohedge:

Trading Volumes Commodities

Banks and Property Agencies Under Pressure to Slow Shanghai Skyrocketing Prices

Per Bloomberg,

China’s banking regulator in Shanghai is halting business between commercial banks and six real estate agencies for a month, the latest in a string of measures to contain risks in the housing market.

The suspension, which takes effect Monday, covers agencies including the local arms of Beijing Homelink Real Estate Brokerage Co., Pacific Rehouse Co. and Shanghai Hanyu Property Brokerage Co., according to a statement by the China Banking Regulatory Commission’s Shanghai office on the city’s official Weibo microblog account.

In the same account, branches for two of China’s largest lenders, Industrial and Commercial Bank of China,  1398 hk, and Bank of China, 3988  hk, along with HSBC are suspended from issuing mortgages for the next two months.  The reasoning given eerily echoes the subprime meltdown as:

China’s central bank Governor Zhou Xiaochuan last month told banks to better assess customer creditworthiness in mortgage lending to reduce risks, adding that unauthorized loans by real estate agents increased the chances of bad debts.

While the overall management on residential mortgage loans is “relatively prudent,” some real estate agents advanced the transactions by providing down-payment loans and bridge loans, the statement said. Some commercial banks also violated rules with their practices on mortgage loans, according to the statement.

China Eastern Stalls Again

Despite the news that CTRIP, CTRP NYEX, is stepping up to invest about 3Billion rmb’s into China Eastern, 670 hk, the stock swooned ovef 5% today while China Southern, 1055 HK, dropped 1.2%, and Air China, 753, hk  dropped 2.5%.  The air pocket could be due partly to the following:

  • The 3Billion rmb is just a small portion of the 15 Billion China Eastern announced it would raise with a new, private A-share offering.   Approved by the CSRC in January of 2016 with this investment being the first actual investment since then. The bulk of the money is needed to buy 23 new planes.
  • China Eastern faced headwinds when it tried to buyback  3.3 Billion yuan notes due March 2017, 4.8%, guaranteed.  After offering to buy via a dutch Auction with a minimum price under par, the company got no quorum and amended the offer to par + accrued interest and extended the offer to 4/27/2016.  (The bonds were issued in March, 2014, to professional investors).
  • The company has been issuing super-short term notes to finance working capital while it waits for  the proposed shares to be bought to finance its expansion. In April alone it issues 4 separate tranches totalling 12 billion rmb.  Since the beginning of 2016, it has issued 19.5 Billion in super short term notes, generally refinancing existing debt.


China Indexes Rise On Oil and Output


With oil prices currently up thanks to a Kuwaiti strike, production surging in steel mills, and gains in residential prices in top tier cities, indexes rose in China.  All sectors benefited despite a lack of major, company-specific news with the exception of Telecom: China Telecom, HK 728 down 1.418%; China Unicom, HK 762, down 1.913% & China Mobile, HK 941, down .5%.  China Unicom took the sector down as it expected first quarter profit to tumble 85% yearly to RMB480 million. It blamed the loss on higher selling and costs.  The three telecoms transferred their tower assets to a separate entity, state-owned China Tower, in October of 2015 with lease-back costs still under negotiation. Ownership after the October transfer was split:

27.90% China Telecom
28.10% China Unicom
38.00% China Mobile
6.00% China Reform Corp*

*China Reform Corp. is a full subsidiary of State Owned Assets and Supervisory Committe and Administrations, SASAC

(Per Bloomberg, China Tower would then be pushing a private placement  IPO in 2017 potentially worth $10 Billion US. )

China Eastern Airlines, HK 670, down 2.48% in Hong Kong, announced that its controlling shareholder would not sell the 700M shares following its  lock-up expiration. “In view of the optimism on the long-term prospect of the company’s investment value, CEA Holding has undertaken that it will not dispose of their unlocked shares of the company within 24 months from 18 April 2016.” This would be better than the market perception, with the stock losing 21.5% in Hong Kong, 16.03% in Shanghai, SH 600115 over the last 12 months.

China Eastern chart

(China Eastern HK 670 Orange; SH 600115 Blue)

Steel News Irony – Conflicting Reports of Production Inside China & Out

Today’s report by the China Iron and Steel Association, CISA, showed that first quarter Chinese production of steel smashed all previous records.  Maintaining the 70.65 million tons produced in March, would result in an annual production of 834 million tons.  (Total China steel production for 2015 was reported at 803.8 million tons).  This would mean about a 3.4% production increase annually.

Meanwhile, in an interview with the National Bureau of Statistics, NBS commissioner Ning Jizhe said the changes in China’s economic trend in the first quarter of 2016 had shown its reform efficiency. As to trimming capacity, he said iron and steel and coal showed negative growth, with crude steel production dropping 3.2% yearly, while crude coal production dropped 5.3%.

Regardless of whether overall Chinese steel production has increased or decreased, the CISA reports show that steel exports have definitely increased, despite China’s recent disparagement through PRC mouthpiece Xinhua, of Western threats as a lame and lazy excuse for protectionism.  (Not content with deriding the West, the same edition chastised India for promoting anti-dumping and urged it to honor WTO rules .) While Xinhua stated that steel production declined by 90 million tons over the past 3 years, the CISA reported that China’s steel exports jumped 30 percent to 9.98 million tonnes in March from a year ago despite a slew of anti-dumping measures globally.

The over-capacity and export growth was noted in the annual report by steel giant Arcelor Mittal, MT NYX, which stated that for 2015, China exported 112 million tons of steel, up 18 million tons from the year before. It indicated that the exports were done to offset the 4.5% decline in Chinese consumption.  Despite the increase, Arcelor reported that the CISA assumed that the exports were being sold below cost, as large and medium sized mills lost RMB 53 billion ($8.6 billion) from January through November 2015), negatively impacting prices and therefore margins in many regions.




Hang Seng Up While Shanghai Comp Drops



Airlines stall. On the heels of an April Sell rating for China Southern, HK 01055;  Daiwa downgraded China Eastern, HK 00670 to  underperform, with a target price of 4 hkd from 3.8.  The research firm considered its expansion capacity for 2016 as too aggressive and the positive reaction to Shanghai Disney’s, DIS, opening in June, 2016, to be overly optimistic.

China Shenhua, HK  01088 , rose over 4% as it contemplated a spin-off of wind power assets. Shenhua Group appointed CICC, Goldman Sachs and UBS to reconstruct its wind power assets, Reuters’ IFR reported. IFR had reported in July 2015 that Shenhua Group plans to spin-off the wind power assets for listing in Hong Kong, raising about HK$6.24-7.8 billion. (Shenhua is a component of both the H.S.I, up .31%. and the H.S.E.I., up .4%).

BYD, hk  01211, auto company was up 2.94% following news of new model SUV’S.  This occurred a day after Bank of America trimmed its target price to   61.77 HKD, (last close: 42), but kept it at buy.

A day after signing an infrastructure agreement with Henan provincial government, China Railway, HK 00390, rose 3.37%.  (On April 1st, 2016, Citi rated it a buy, target price of 7.8hkd vs. last close of 6.14).

As analyzed here, Chow Tai Fook, HK 1929 , reported a whopping 26% drop in same store sales for the group in the 1st quarter of 2016.  This $7 Billion market cap company performance is a negative sign for Chinese discretionary and luxury stocks.