【英文】招银国际报告：China Airlines：Positive oil ＆ FX outlook（63P）

 In 2018, due to high jet fuel prices and foreign exchange loss, net profit slightly increased  only 1.5% YoY to RMB 7,351mn, and ROE was 8.2%. The Company declared cash  dividend of RMB 1,500mn, representing a payout ratio of 20.4%. Because of positive jet  fuel and foreign exchange outlook, we forecast in 2019/20E, net profit will increase  56.1%/6.3% YoY to RMB 11,474/12,198mn, representing ROE of 11.7%/11.4%, and  payout ratio will remain stable at 20%.

The Company is headquartered in Beijing, with three increasingly important international  hubs in Chengdu, Shanghai and Shenzhen. With Star Alliance, its network covered 1,317  destinations in 193 countries as of YE18. The Company operates 669 passenger aircraft  (including business jets), and has the largest wide-body aircraft fleet in China. Total number  of “Phoenix Miles” members amounted to over 56 million as of YE18.  In 2018, the Company also held direct or indirect interests in the following airlines: Air China  Cargo Co., Ltd., Shenzhen Airlines Company Limited (including Kunming Airlines Company  Limited), Air Macau Company Limited, Beijing Airlines Company Limited, Dalian Airlines  Company Limited, Air China Inner Mongolia Co., Ltd., Cathay Pacific Airways Limited,  Shandong Airlines Co., Ltd., and Tibet Airlines Company Limited. Air China holds 29.99% of Cathay Pacific’s equity interest, and Cathay Pacific holds 18.13%  of equity interest in the Company.

SUMMARY. The Company has the most extensive route network. We expect the  Company will maintain higher yield, driving traffic revenue to increase 6.3%/4.0% YoY to  RMB 140.2/145.9bn in 2019/20E. Given positive jet fuel and foreign exchange outlook,  we forecast in 2019/20E, net profit will increase 56.1%/6.3% YoY to RMB  11,474/12,198mn. Initiate with BUY, TP RMB 10.57.