Air China downgraded to Sell by Daiwa amid profitability concerns

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Daiwa downgraded Air China to Sell from Underperform after 2017 results disappointed.

It noted that 2017 net profit rose 6 percent on-year to 7.2 billion yuan, partly due to a 2.9 billion yuan foreign exchange gain; excluding the foreign-exchange gain and other one-offs, the adjusted net profit fell 44 percent on-year to around 54 billion yuan, missing Daiwa’s estimate of a 26 percent fall on higher jet fuel cost, aircraft maintenance costs and SG&A expenses.

“We expect SG&A expenses to continue to rise in 2018 on aggressive marketing activities for route expansion,” Daiwa said in a note last week. “We are concerned about weak yields and rising cost pressure.”

It raised its target price to HK$7.70 from HK$6.00, after adjusting the valuation basis to 1.0 times price-to-book ratio, which is the five-year rolling average, from 0.8 times previously.

However, it also cut its 2018-19 earnings per share forecasts by 24-35 percent to factor in lower estimates for passenger yield, higher operating expenditure and a higher jet fuel price assumption.

The stock ended Thursday up 5.37 percent at HK10.00; The Hong Kong stock market was closed on Friday and Monday for a holiday.