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SINGAPORE (Jan 15): Singapore’s aviation services-related stocks have been weighed down by a slowdown in Chinese visitor arrivals in 4Q18.

However, Maybank KimEng says market worries are somewhat overblown.

“We remain bullish on the sector for the secular longer-term trends of global fleet and regional passenger and cargo traffic growth,” says analyst Neel Sinha in a Monday report.

Maybank has a “buy” for ST Engineering, SATS, SIA Engineering, in declining order of preference.

China visitor arrivals dropped 10% y-o-y in November after posting growth for the first 10 months of 2018 from a slowing economy, a weaker RMB and falling consumer confidence.

Greater China currently accounts for 24% of inbound tourists to Singapore with mainland visitors making up 19%.

However, over the longer term, Chinese inbound arrivals hold significant growth potential given low passport penetration estimated at just c9%.

IATA estimates China will be the fastest growing market globally over the next two decades, growing 1 billion passengers to 1.6 billion, surpassing the US as the world’s largest passenger aviation market.

Despite newer generation aircraft having longer maintenance cycles, broader industry drivers remain positive for the aviation services sector in the region.

Estimates by IATA, industry consultant and major OEMs like Airbus and Boeing point to global commercial aircraft fleets growing at 4.5-5% CAGR for Asia Pacific over the next two decades with the MRO market growth tracking similar levels with Asia Pacific, and accounting for the highest growth and largest share of cumulative industry revenues globally over this period.

Putting the US-China trade war aside, cargo growth in Asean should also see low to mid-teens growth levels over the next few years given the sub-10% online-line retail penetration in these markets.

Of the three aviation services companies, Maybank believes ST Engineering is best positioned in 2019 as its aerospace operations have limited exposure to Singapore flight frequency and visitor arrivals dynamics.

SATS is its next pick as its geographic and business line diversification mitigates the exposure to a single market like China.

As at 3.08pm, shares in ST Engineering, SATS, SIA Engineering are trading at $3.61 or 15.7x FY19E earnings, $4.88 or 20.1x FY19E and $2.50 or 16.7x FY19E respectively.