- Cathay finds its brand hurt among all-important Chinese travellers
- Overall, analysts are bullish on Hong Kong flagship carrier's future
After turning its first annual profit in three years just four months ago, Cathay Pacific Airways suddenly finds itself trying to navigate through fierce turbulence.
Protests that have rocked Hong Kong turned into a menacing storm for Cathay.
Halfway through a three-year plan to revive its stalling business, Cathay has been buffeted by political turbulence as Hong Kong's hometown carrier found itself between China's aviation regulator and its unionised crew. It's turbulence that claimed the career of Rupert Hogg, just 27 months into his job as the Hong Kong carrier's chief executive officer.
It's also turbulence that sent Cathay's share price into a nosedive, hurt its brand among all-important mainland Chinese travellers and set off a warning buzzer about its ability to juggle its loyalty to its democracy-loving customers and employees and the demands of the Chinese government.
"Cathay Pacific is kind of tossed into the middle of it. It's kind of dragged into a very turbulent period. And it's somewhat outside what the company can do," said Luya You, transportation analyst at Bocom International.
On the high-stakes flight with Cathay are its shareholders. After many of them parachuted out of the stock when Cathay's initial handling of pilots and other employees who supported the protests drew the ire of Beijing, investors have scrambled back on board.
Last week, the swings of the stock were breathtaking: It fell 4.9 per cent to HK$9.80 a share on August 12, the day a crush of protesters overtook the Hong Kong International Airport, and another 2.6 per cent to HK$9.55 the following day. The next three days, the share price surged 2.8 per cent, then up another 5.7 per cent and finally up 2.1 per cent to end the rollercoaster week at HK$10.6. Its high for the year is HK$13.92, reached on April 16. Friday's close was 24 per cent below that high mark.
Overall, analysts, frequent fliers on bumpy flights, remain bullish on Cathay's future, though some have lowered the price they expect the shares to reach within the next 12 months and a number of analysts advise investors to sit tight for awhile. Meanwhile, a couple with ties to Chinese state-owned banks " like ICBC International " have downgraded it.
ICBC International branded Cathay Pacific a "strong sell" on August 13 with a 12-month target price of HK$6.
Bocom International, owned by China's Bank of Communication, cut its rating to "neutral" on August 12 with a target price of HK$11.17. JPMorgan lowered its target price to HK$13.9 from the previous HK$14.5, though maintained it as an "overweight."
"Investors should hold off a little bit right now and maintain a neutral standpoint, because the situation is evolving and we are getting an incredible amount of information every single day," analyst You said.
A Bloomberg poll of 19 analysts covering the stock shows 13 with "buy" ratings, five suggesting to "hold," and just one calling it a "sell".
The sole "sell" call, in this case a "strong sell", was made by ICBC Research, the research arm of China's state owned Industrial & Commercial Bank of China. The remainder of the "buy" and "hold" recommendations were mostly by research teams at non-Chinese banks and brokers. The ICBC analyst made the recommendation on August 13, the second day of last week's flight disruptions at the Hong Kong airport.
One of the key reasons for the generally widespread confidence is Cathay's cheap valuation. The airline trades at around a 0.6 times price-to-book (P/B) ratio, a measurement of a company's market price in comparison to its net asset value. A lower figure suggests the stock price is a good deal for would-be buyers. And for Cathay, this P/B figure has dropped to its lowest level since the global financial crisis.
"You won't be able to see P/B ratios like this even if you look at every other airline around the world. So there's no doubt that Cathay will rise above the current price in the future when things are resolved," said Alan Li, portfolio manager at Hong Kong-based wealth management firm Atta Capital.
Kenny Wen, wealth management strategist at Hong Kong brokerage Everbright Sun Hung Kai, agrees the stock will be attractive over the long haul--though he expects it will likely fall in the short term.
"I'm relatively positive that it can weather the storm," Wen said. "The airport protests may have a limited impact on its business on a long-term basis."
Cathay was tossed into Hong Kong's political storm just when many watchers thought the worst was over for the airline.
The company in 2017 embarked on a three-year turnaround plan under CEO Hogg's leadership to cut at least HK$4 billion in costs and boost efficiency. The plan was unveiled after it suffered the first back-to-back annual losses since its founding in 1946. The company recorded a loss of HK$575 million for the financial year of 2016 and HK$1.25 billion for 2017.
The poor performances were a result of a series of operational missteps, including a massive fuel hedging misjudgment, as well as increasing competition from Chinese and international airlines.
As part of the turnaround plan, Cathay in 2017 laid off 600 employees based in Hong Kong " with 190 of them in management positions " and added more economy class seats to some of its Boeing aircraft. It also grew its network outside Hong Kong and changed its fuel hedging policy.
Cathay Pacific Airways' handover of crew details 'satisfies mainland Chinese regulator'
To fill a gap in the low-cost segment, Cathay in March acquired budget airline Hong Kong Express Airways for HK$4.93 billion from Chinese conglomerate HNA Group.
These efforts appear to have started to pay off: Cathay posted a net profit of HK$2.35 billion for last year.
"We remain confident in the ability of our transformation programme to enable us to deliver sustainable long-term performance," chairman John Slosar said in Cathay's annual report in March.
Li of Atta Capital said, "If not for the protests, Cathay would definitely see a marked turnaround in its full-year profit for this year," adding that its July and August passenger traffic will be hurt.
Li said he is not too worried about the survival of the transformation plan, as much of the internal restructuring has already been completed.
"If protests end before October, as expected, Cathay's stock price and valuation will probably recover gradually in the rest of this year," he said.
Beyond cost saving, however, Cathay now faces the bigger challenge of winning back the favour of mainland Chinese authorities and customers.
Already, the company's initial reluctance to discipline employees over the protests has touched a raw nerve in China, where nationalistic sentiment is running high.
Backtracking on its chairman's remark that he respects employees' political views, Cathay voiced firm support for the Hong Kong government after it received an unprecedented warning from China's aviation regulator. It also sacked two pilots and two ground employees. And, of course, CEO Hogg and another top Cathay official have stepped down.
It is not clear whether these actions are sufficient in the view of Beijing.
"From what we've seen, a big portion of mainland tourists are boycotting, or talking of boycotting, Cathay Pacific," said You of Bocom International.
While flights to China only make up around a fifth of Cathay's overall flights, its vast aviation market " set to overtake the US to become the world's largest in the next couple of years " is "absolutely essential" to its future expansion, according to You.
For now, a search of "Cathay Pacific" on Weibo, China's Twitter-like social media platform, leads to overwhelmingly negative comments from users, many of whom also complain that flight attendants are disrespectful toward Mandarin-speaking passengers.
"Any brand that doesn't respect China should be firmly boycotted! I will never buy or board Cathay flights from now on," a Weibo user wrote.
Additional reporting by Deb Price
Copyright (c) 2019. South China Morning Post Publishers Ltd. All rights reserved.
