Cathay Pacific acquires express delivery

Cathay Pacific (00293), the leading airline in Hong Kong, has suffered huge losses in the wake of fuel hedging in recent years. It has to launch a series of measures to rectify business and improve efficiency to improve profitability.

Cathay Pacific announced its results earlier. As expected by the market, earnings will gradually recover year by year. On the same day, the announcement was actively discussing the acquisition of Hong Kong Express (HK Express). As of March 27 last week, Cathay Pacific officially announced that it has entered into a share purchase agreement with Hainan Airlines. Cathay Pacific will acquire the low-cost carrier Hong Kong Express, a subsidiary of Hainan Airlines, for HK$4.93 billion. The transaction is expected to be completed by the end of 2019.

Lianhang has developed rapidly in recent years, and Cathay’s management has been arrogant in the past, thus missing the opportunity to allow Hong Kong Express and other opponents to take advantage of it. On the day of the announcement, Cathay’s share price rose first and then fell, perhaps reflecting the market’s fear that the transaction may not be completed (mainly one of the shareholders of Express Express against the acquisition); or the market believes that the price is too high, the transaction amount is about 4 times the net assets, Far higher than Cathay’s own valuation.

Although the management of Cathay Pacific has always been serious, but this time I voted for the acquisition and considered that the high bid is a monopoly premium. Because once the acquisition is completed, Cathay Pacific’s market share in Hong Kong will increase to 84%, and the leading monopoly position will be further consolidated. At present, the Hong Kong aviation industry is showing oligopolistic competition. The airlines headed by Cathay Pacific and Dragonair already have a market share of 76%, Hong Kong Airlines accounts for 16%, and Hong Kong Express accounts for 8%.

In addition, Hong Kong Express currently operates 23 routes, 8 of which are exclusive, including those of Hong Kong, such as Hiroshima, Okinawa, Kagoshima and Nagasaki. These new routes will complement Cathay’s network coverage. As for the model, as of the early 2018 public information, Hong Kong Express has a total of 24 A320/A321 series aircraft, while Cathay Pacific and Dragonair’s fleet, wide-body passenger aircraft accounted for nearly 80%, but suitable for short-distance narrow-body aircraft only It is a minority, and the inclusion of Hong Kong Express will complement the capacity of medium and short-haul routes.

In addition to the acquisition, we certainly need to look back at Cathay’s own business. First, Cathay Pacific has been deeply affected by fuel hedging in the past, but this is a thing of the past. In 2019, the proportion of fuel hedging will drop to only 16%, while the exercise price is only $75. I believe there should be no substantial loss. There are even opportunities to make a profit. Second, Cathay’s reform plan for the past year has brought more or less benefits. I rely mainly on the friends who are working at Cathay, including the pilots and other logistics staff. They all pointed out that Cathay has a lot of internal staff, and various departments have previously cut or adjusted their actions.

Asia Miles value is undervalued

Third, the value of Asia Miles is huge. In recent years, the more popular credit cards among friends have mainly focused on Standard Chartered’s Asia Miles or DBS black cards, both of which have discounts on the consumption of Miles. I think the business value of the Asia Miles program is extremely high. According to the annual report, Cathay Pacific Asia Miles has more than 9 million members and more than 700 partners, including 25 airlines, more than 150 hotel brands, restaurants and retail stores. Although Cathay did not announce the actual profit of this part (we only know that it will increase year by year), I am convinced that the profit contribution of this segment will only increase with time.

Overall, Cathay Pacific’s PB is now only 0.86 times, far lower than the long-term average. I don’t expect Cathay’s share price to rise explosively, but I think that in the middle line, it will be safe to hold, at least look up space is bigger than downward.