Tai Fook Securities: Grant Cathay to buy ratings

Tai Fook Securities Caofoda mainly by the earlier Easter holidays during the increase in the excellent loafe, Cathay in April, the number of passengers kilometer jumped 5.3%, compared to March year-on-year decline 4.5%. In fact, Cathay in the first 4 months of this year to reduce fares by 1% kilometers, visible air traffic flow in the second half of 08, the beginning of the weakness has continued. With the decrease in the demand of the expensive cabin and the customers of the enterprise, and the devaluation of the currency, the low yield of Cathay and Thailand has kept the income growth under pressure. The company's cargo business performance was worse, with a year-on-year decline of 15% and 16% in April and the first 4 months of this year respectively.　　Cathay's earnings outlook remains dependent on the global economic environment. Cathay has controlled its patronage growth to only 0.3% per cent year-on-year, so the company's passenger delivery rate in the first 4 months of this year fell only modestly, by 0.9 percentage points to 79.5% per cent year-on-year. In the face of deteriorating business conditions, Cathay has reduced its passenger and freight capacity by 8% and 11% respectively to cut costs since May.　　The company implemented a 1-4-week unpaid leave plan for its staff for the 12-month period up to April 2010, and most of its staff agreed, which would also reduce the company's staff costs. Fortunately, the fall in fuel costs could save Cathay a lot of money. If the fuel hedging losses caused by the fall in oil prices in the second half of 08, the fuel cost accounted for 50% of Cathay's total operating expenses in 08, the company's largest cost project. Spot prices for aviation fuel, which fell 65% from the peak last July, are now 48% lower than the average price in 2008. Cathay recorded a 7.9 billion yuan loss in fuel hedging contracts for its fuel hedging contract in 08, and its fuel hedging contract expires in 2011 and will achieve a break-even rate at the price of Brent crude at $75 per barrel.　　On the whole, as Brent's average crude oil price is at $75 a barrel this year, we estimate that Cathay's 09-year fuel costs will fall by about half. As Cathay recorded a negative operating cash flow last year, its net liabilities increased sharply by 71% per cent to 25.2 billion yuan in late 08, with a net debt ratio of 66%. Cathay had planned to sell 7.5% of the Hong Kong Aircraft Engineering (0044.HK,$91.20) 0019.hk,$67.90 to Swire, the parent company, to raise about $1.1 billion. The Hong Kong Aircraft Project is a listed consortium with 27.5% interests and Swire currently owns 33.5% of the Hong Kong aircraft project.　　As the SFC dismissed Swire's comprehensive bid exemption application, Cathay Pacific has also shelved its plans to sell the consortium. Although air traffic demand remained weak in 09, Cathay Pacific could turn into a deficit in 09, despite a significant year-on-year decrease in fuel prices and other cost savings. Assuming that Cathay's revenue will fall moderately by 15% and its operating costs will be reduced by 25%, we expect the company to have a net profit of $1.57 billion in 09, much better than 8.558 billion yuan for its 08-year major loss. We will adjust Cathay's target price to 12 yuan, equivalent to 09 corporate value and deduct profitEarnings before interest, tax, depreciation and amortization are 8.8 times times the ratio and 1.2 times times the market rate.