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Broker's take: Jefferies raises target price on Cathay Pacific, upgrades to 'buy'

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Cargo remains the cash generator for Cathay, with year-to-date air cargo yields 47 per cent higher on the Hong Kong-Europe route, and up 40 per cent on the Hong Kong-US route.

JEFFERIES Equity Research has upgraded its rating on Cathay Pacific Airways to "buy" from "hold", while raising its target price to HK$8.70 from HK$6.30 previously.

As at 3.15pm on Thursday, the stock was trading at HK$7.39, up HK$0.37 or 5.3 per cent.

"Earnings wise, Cathay remains loss-making, albeit smaller post-restructuring, but we believe we are close to the inflection point," wrote Jefferies' analyst Andrew Lee in a research note on Wednesday.

He noted that key upcoming drivers include the start of the Hong Kong air travel bubble; cargo demand and yields rebounding and benefiting from global vaccines next year; as well as easing Hong Kong government quarantine policies.

Cathay's monthly passenger traffic has declined 97-99 per cent year on year (y-o-y) since April 2020 and Jefferies expect limited near-term impact from the Hong Kong-Singapore air travel bubble, given that there will only be one daily 200 pax flight from Nov 22 and twice daily flights from Dec 7.

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"What's more important is that we expect this to lead to air travel bubbles extended to potentially 10 other countries next year," the research team said, adding that it believes the Hong Kong government is actively focusing on reopening the borders.

In addition, Jefferies believes that passenger capacity is close to bottoming. Cathay's management estimates pax capacity in H1 2021 to be a quarter of H1 2019, which would only be 27 per cent lower than the first half this year, and an improvement from a 92 per cent y-o-y drop in October 2020, said Mr Lee. "Looking at 2001-2004, share prices rebound after capacity bottoms," he added.

Meanwhile, cargo remains the cash generator, with year-to-date air cargo yields 47 per cent higher on the Hong Kong-Europe route, and up 40 per cent on Hong Kong-US route, Jefferies noted.

The fourth quarter is the traditional peak season with yields on these routes already increasing since end-September.

Furthermore, the global air cargo market will benefit from global vaccine distribution, though global air cargo capacity was 25 per cent lower y-o-y in September, Jefferies said, citing data from the International Air Transport Association.

On the currency front, Cathay is positively impacted by the weakening US dollar (USD) due to USD loans and overseas revenue, while a strengthening yuan bodes well for Air China earnings.

Separately, higher oil prices is slightly positive for Cathay given smaller oil hedging losses as management estimates that a US$5 per barrel difference to spot Brent translates to US$7 million per month hedging loss, Jefferies said.

"Our earnings are the same as consensus for 2020, but we estimate a smaller loss in 2021 on slow pax recovery and only small decline in cargo yields," the research team added.

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