To The Moon

$AIR CHINA(00753)$ $Air China Limited(601111)$ $HSI(HSI)$ 

On the path to recovery

Global air travel staged a strong rebound in 2022, boosted by robust domestic and international demand. According to the International Air Transport Association (IATA), global passenger traffic measured by revenue passenger kilometres (RPK) grew 64.4% year-on-year (YoY), recovering to 68.5% of pre-Covid levels. Domestic RPKs rose 10.9% YoY, reaching 79.6% of pre-pandemic passenger traffic in 2022 while international RPK recovered strongly in 2022, increasing 152.7% YoY, recovering to 62.2% of 2019 levels.

2023 got off to a good start with the easing of Covid-19 measures in China. This immediately gave a much-needed booster shot for market sentiment. This optimism is understandable, especially in view of the doldrums in the regional tourism industry has languished in the past two years since the onset of the pandemic. We see the reopening of China as a key catalyst to global tourism. Domestic travel is likely to lead the recovery in China starting from short haul to long haul trips. A material rebound in international travel may take place in 2Q23 or 2H23, given airlines’ capacity constraints, and lead time for visa applications and renewals of passports.

Across the Chinese airlines, we believe Air China is well-positioned to benefit from China’s reopening. The domestic market made up about 65% of Air China’s total passenger revenue in 2019, with the remaining 35% from international travel. Consolidating Air China’s shares in Cathay Pacific, its total international revenue exposure is estimated to be 44%. We would prefer to add exposure tactically upon pullbacks.

Currently, we have not seen signs of deteriorating travel demand based on forward bookings, but with a still-weak macro outlook, elevated inflation and dissipation of pent-up demand, this could temper consumer spending and curb some corporate budgets in 2023. We remain hopeful that the substantial pent-up demand from China should help to replace some of the loss of travel demand from other markets.

There are still some downside risks at the moment due to stickier than expected inflation figures. This will likely dampen stock prices further so I am a little cautious. You may try dollar cost averaging :)

@TigerStars 

DYODD