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China's reopening to international travellers to 'inject new momentum' to aviation sector's recovery: UOB Kay Hian

Felicia Tan
Felicia Tan1/7/2023 01:28 AM GMT+08  • 6 min read
China's reopening to international travellers to 'inject new momentum' to aviation sector's recovery: UOB Kay Hian
Singapore Airlines (SIA) is seen as a “key beneficiary” by UOB Kay Hian's Roy Chen due to the recovery of flight activities between Singapore and China. Photo: Bloomberg
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UOB Kay Hian analyst Roy Chen is keeping his “market weight” rating on the Singapore aviation sector even after China’s reopening to international travellers look set to “inject new momentum” into the recovery of the sector.

From Jan 8, inbound travellers to China will no longer need to serve any quarantine period. Inbound travellers are also no longer required to take a Covid-19 test upon arrival; they will only have to submit a negative polymerase chain reaction (PCR) test within 48 hours of travelling.

Singapore is also said to be among the top 10 tourism destinations for mainland Chinese, according to travel site, Trip.com. The top tourism destinations were selected based on search volume. Other top destinations include Japan, South Korea, Thailand, Malaysia, the US, the UK, Australia, Hong Kong and Macau.

Singapore does not have any additional restrictions imposed on Chinese travellers as well.

In his report dated Jan 6, Chen sees the reopening as a boost for the recovery of the sector. Before the Covid-19 pandemic, air travel between Singapore to China was the second largest contributor to passenger volumes at Singapore’s Changi Airport. Air travel between these two countries formed 10.9% of the total throughput in 2019, second only to Indonesia’s 12.2%.

However, the air travel volume between Singapore and China was reduced to 4.6% of its pre-pandemic levels as at October 2022 due to China’s restrictive international travel policy before.

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The volume has significantly lagged behind the air travel recovery between Singapore and other regions which have reached 72.6% in October 2022, Chen notes.

“Given China’s faster-than-expected reopening and Singapore’s accommodative entry policies, we now expect a steeper recovery trajectory of the Singapore aviation sector than we have previously projected,” he writes.

Among the stocks in the aviation sector, Chen has kept his “buy” recommendations on SIA Engineering Company (SIAEC) and Sats, as well as “hold” on Singapore Airlines (SIA). The analyst has named SIAEC as his top pick.

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Chen has, however, raised his target price estimates for all three companies. SIAEC’s target price has been lifted to $2.70 from $2.60; Sats’ target price is now at $3.10 from $3.08 before; SIA’s target price has been raised to $5.40 from $5.35 previously.

SIAEC liked for market leadership in line maintenance business at Changi Airport

“As the leading line maintenance and maintenance, repair and overhaul (MRO) services provider at Changi Airport, SIAEC stands to benefit from increasing landing/taking-off activities and engineering service demand of flights connecting Singapore and China,” says Chen.

“To reflect a faster business volume recovery in FY2024, we have raised our FY2024 earnings forecast for SIAEC by 5.0% while keeping the FY2023 and FY2025 earnings forecasts,” he adds.

Furthermore, the analyst likes that the company is the market leader in the line maintenance business at Changi Airport, at around 80% of the airport’s line maintenance service volume.

The analyst also likes that SIAEC has good cash generating capability thanks to its asset-light business model and benign valuation. The company’s current share price as at Chen’s report implies an FY2025 P/E of 15.6x or 12.0x excluding net cash.

“SIAEC has been proactively conducting share buyback in the recent months. Since July 2022, it has bought back over 1.6 million shares from the open market at a price range of $2.12-$2.47, with the most recent purchase on Jan 4 at $2.40,” Chen notes.

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Sats set to benefit from return of Chinese travellers

As a leading inflight catering and gateway service provider in Asia, Sats looks set to benefit from the return of Chinese travellers, says Chen. The company has a presence in Japan, Hong Kong, Malaysia, Indonesia, as well as other places where Chinese travellers are looking to travel to on the back of their newly relaxed rules.

“Based on our rough estimate, the total direct and indirect revenue exposure to China could be in the range of 15%-20% before the pandemic. To reflect a faster business volume recovery in FY2024, we have raised our FY2024 earnings for Sats by 4.0%, while keeping our FY2023 and FY2025 earnings forecasts,” says Chen.

While Sats’ existing business looks to be riding on the recovery trend, the analyst expects its share price to remain “subdued” in the near-term. This is due to the market’s concern over Sats’ large-sized acquisition of Worldwide Flight Services (WFS). Sats, on Sept 28, 2022, announced its plans to acquire WFS for EUR1.19 billion ($1.64 billion) in cash.

The acquisition will make Sats the world’s largest cargo handler upon its completion.

However, Chen notes that investors in Sats may need to adopt a medium- to long-term view as global air cargo volume is estimated to decline by 4% y-o-y in 2023, according to the International Air Transport Association (IATA).

SIA ‘key beneficiary’ from recovery of flight activities

SIA is seen as a “key beneficiary” by Chen due to the recovery of flight activities between Singapore and China.

“While the supply of pax capacity is likely a limiting factor of the air travel volume recovery in the remaining FY2023 (as it may take time for airlines to liaise with the Chinese authorities for approval to raise the flight frequencies and for SIA to train up its newly-recruited cabin crew), we expect the influx of fresh demand travelling from/to China should to bolster SIA’s airfare and sustain high load factors of its prescheduled flights,” he says.

“FY2024 should be the year when SIA see more meaningful recovery of air travel volume from/to China as flight frequencies continue to increase. To reflect these expectations, we have raised our FY2023 and FY2024 earnings forecasts for SIA by 1.3% and 4.6% respectively while keeping FY2025 forecast intact,” he adds.

That said, Chen notes that the airline’s current valuation is “slightly stretched” at 1.3 standard deviation (s.d.) above its historical mean.

His new target price is based on an FY2024 P/B of 1.06x, equivalent to 1 s.d. above SIA’s historical mean P/B of 0.97x.

“We believe consensus’ FY2023 earnings forecast of $1.67 billion (28% lower than our forecast of $2.33 billion) is conservative and due for positive surprises in the upcoming 3QFY2023 result release,” he says.

Shares in SIAEC, Sats and SIA closed at $2.41, $2.84 and $5.53 respectively on Jan 6.

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