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Guangzhou Baiyun International Airport:Business Growth Picking up,Airport Capacity Gradually Expanding

Company Profile.

Guangzhou Baiyun International Airport Co., Ltd. operates the Guangzhou Baiyun International Airportand provides related transportation services, including ground, passenger, storage, airplanemaintenance and repair, and other services. The Company also provides food, space rental, andadvertising services. (Source: Bloomberg)Investment Highlights.

Events: Baiyun International Airport reported revenue at CNY 2.98 billion, up 7.60% YoY. The net profitattributable to shareholders stood at CNY 695 million, up 12.42% YoY. EPS was CNY 0.6, up 11.11% YoY.

The operation of the third airstrip expanded Baiyun’s capacity, pushing business up. Baiyun’s third airstripwas put into operation in February last year, which temporarily tackled the long‐standing capacityobstacle. Since CAAC approved an increase in peak‐hour aircraft movement from 65 flights/hour to 71flights/hour (currently 68 flights/hour) in March 2016, 2Q has witnessed a notable rise in aircraftmovements and passenger volume growth. In 1H16, Baiyun’s aircraft movements/ passengervolume/cargo throughput rose 4.65%/5.6%/5.9% YoY to 0.21/28.82/0.77 million metric tonsrespectively. Especially in 2Q, its aircraft movements/ passenger volume/cargo throughput rose6.8%/8.5%/6.6% YoY to 0.11 /14.34/0.41 million metric tons respectively. Driven by the acceleratedgrowth of aviation business, Baiyun reported 1H16 revenue at CNY 2.98 billion, up 7.60% YoY and 2Qrevenue at CNY 1.54 billion, up 11.38% YoY. Lacking airstrip is a major constraint of the airport’s capacity.

Thus the new airstrip will gradually increase production capacity of Baiyun Airport before Terminal 2 isput in use in 2016 ‐2017.

The position of an international hub further consolidated with increasing overseas passengers. In 1H16,Baiyun added/resumed 11 international air routes and increased flights of 5 international air routes.

Volume of overseas passengers rose 20.55% YoY to 6.56 million, accounting for 22.8% in the total. Asnew flights to US and Europe can hardly be added due to traffic rights and busy schedule, Baiyun Airportwill play more important roles in the market as an international air hub operating a wide‐spreadingnetwork connecting Australia, New Zealand and South Asia.

Operating cost was under firm control. A drop in interest income led to a rise in financial expense. Thecompany’s 2H16 operating cost totaled CNY 1.82 billion, up 8.83% YoY and 2Q operating cost came inat CNY 948 million, up 14.15% YoY. A fall in cash flow resulted in fewer interest income, further pushingup the financial expense to CNY ‐16 million, a 36.82% YoY growth from CNY ‐26 million a year earlier.

Investment returns soared while loss of ground service subsidiary dragged down aggregate profit. Thecompany’s returns on investment grew at a respectable 1057% YoY to CNY 13 million, mainly attributedto the earnings rebound of its joint venture, Guangzhou Baiyun International Logistics Co., Ltd ( BaiyunInternational Airport holds 29% stake in it.). The logistics company turned from loss to profit, yieldingnet profit of CNY 32 million in 1H16. Nonetheless, another subsidiary Guangzhou Baiyun InternationalAirport Ground Service Co., Ltd which the parent company holds 51% stake, suffered a loss of CNY 14million, having a negative impact on the company’s aggregate profit.

Investment Recommendations: the company’s valuation enjoys a high margin of safety. 1) In the shortterm, Baiyun International Airport’s schedule and capacity expansion look almost certain. The operationof Terminal 2 in 2018 will not add much to the cost growth, due to a high base in 2017, the negativeeffect on earnings will below our expectations. 2) In the long term, as one of the three internationalhubs in China, Baiyun International Airport’s notably low valuation will not last long. 3) The approachingof Baiyun Convertible Bond’s exchange time will be a good catalyst for the stock price. In September 152016, Baiyun Convertible Bond, with a total scale of CNY 3.5 billion, will enter the exchange phase. Thebond will be in exchange for shares of common stock at CNY12.56 per share, and at CNY 16.33 per sharein involuntary exchange. As the best pick of airport asset, Baiyun’s stock price will be in resilientrecovery. We made EPS forecast for the company at CNY 1.24 in 2016 and CNY 1.37 in 2017, implying 11X 16PE and 10X17PE.

Potential Risks: macroeconomic downturn, outbreak of war, diseases, disasters and force majeure.

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