Cathay Pacific. Overweight. Key takeaways from management briefing

Transcription

1 Cathay Pacific Key takeaways from management briefing Overweight 0293.HK, 293 HK Price: HK$14.68 Price Target: HK$18.00 Previous: HK$18.30 Operating outlook improving: 2H14 is traditionally stronger than 1H14. Unearned transport revenue rose 17% h/h, 16% y/y as at Jun-14. Significant competition in Cathay s passenger business may continue to impact yields, but there are some signs of improvement. Leisure travel demand during the July- August summer season has been good so far. Based on forward bookings, load factors are high and passenger yields have risen slightly during this summer. It is still early to tell whether the peak season for business travelers from September to November will be strong, but so far, forward bookings do not suggest any cause for concern. Premium economy class segment has been very successful for long-haul flights but less so for shorter-haul flights to Australia. Cargo business was very difficult in Jan-Feb 2014 but started to pick up from March. The market is still suffering from oversupply in 2014 but there are small signs of recovery. Outbound cargo demand to N America and inbound cargo demand to China are performing well. Cathay Pacific s new cargo terminal in HK became fully operational in Oct-13 and expects to handle 1.4MM tons of cargo in 2014 and will need to handle c.1.8mm. to break even. Planned capacity growth will likely be c.6-7% in the next 10 years on our estimates based on existing aircraft orders and retirement plans: Cathay Pacific and Dragonair have a fleet of 156 passenger aircraft and 21 freighters in operation and 5 parked freighters as at end June Going forward, Cathay Pacific is scheduled to take delivery of 8 more aircraft this year, 9 in 2015, 13 in 2016, 10 in 2017, 6 in 2018, 10 in 2019, 10 in 2020 and 21 in 2021 and beyond. 4 more B aircraft will be retired this year, leaving 7 planes used as spare capacity on regional routes till 2016 as all the B s will exit long-haul flights from Sep-14. Cathay Pacific also plans to accelerate the retirement of its 11 A340 aircraft. 4 A340s will be retired in 2015, 4 in 2016 and 3 in This should help sustain Cathay s planned capacity growth at mid to high single digit level in the longer term, depending on market demand conditions. Well-protected against rising fuel prices: Cathay Pacific has recently increased its fuel hedging level to manage the risk of rising fuel prices. It has hedged c.47% of 2H14 fuel consumption at c.us$101/bbl (Brent crude oil), c.44% of 2015 fuel consumption at c.us$101/bbl (Brent) and c.25% of fuel consumption at just under c.us$100/bbl (Brent). Current spot Brent crude oil price is $103/bbl and ytd average level is $107/bbl. (See p.5-6 for details.) Cathay Pacific (Reuters: 0293.HK, Bloomberg: 293 HK) HK$ in mn, year-end Dec FY12A FY13A FY14E FY15E FY16E Revenue (HK$ mn) 99, , , , ,738 Net Profit (HK$ mn) 862 2,620 3,227 4,516 5,780 EPS (HK$) DPS (HK$) Revenue growth (%) 1.0% 1.1% 7.8% 6.0% 6.0% EPS growth (%) (84.3%) 203.9% 23.2% 40.0% 28.0% ROCE 1.1% 2.5% 3.1% 3.8% 4.5% ROE 1.6% 4.4% 5.0% 6.8% 8.3% P/E (x) P/BV (x) EV/EBITDA (x) Dividend Yield 0.5% 1.5% 1.8% 2.6% 3.3% Source: Company data, Bloomberg, J.P. Morgan estimates. Hong Kong Airlines Corrine Png AC Bloomberg JPMA PNG <GO> J.P. Morgan Securities (Asia Pacific) Limited Price Performance 0293.HK share price (HK$) HSI (rebased) YTD 1m 3m 12m Abs -8.9% 5.1% 1.9% 5.7% Rel -14.7% -1.2% -9.0% -5.2% Company Data Shares O/S (mn) 3,934 Market Cap (HK$ mn) 57,751 Market Cap ($ mn) 7,451 Price (HK$) Date Of Price 13 Aug 14 Free Float(%) 34.7% 3M - Avg daily vol (mn) M - Avg daily val (HK$ mn) M - Avg daily val ($ mn) 6.1 HSI 24, Exchange Rate 7.75 Price Target End Date 30-Jun-15 See page 18 for analyst certification and important disclosures, including non-us analyst disclosures. J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision HK$ Aug-13 Nov-13 Feb-14 May-14 Aug-14

2 Key catalysts for the stock price: Upside risks to our view: Downside risks to our view: Improving premium traffic, which drives c.45% of Cathay s passenger revenue, vs c.25% sector average, Cathay has one of the highest exposures among Asian airlines to long-haul routes where travel demand is recovering, gradual recovery in air cargo market, airline sector demand-supply growth balance is expected to improve from 2015 as new aircraft deliveries moderate which will alleviate fare pressure, increased profit contribution from 20.13%-owned Air China from 2014, HK airport s rising congestion and limited slot availability provides barriers to entry during peak hours, delay in the launch of low cost carrier Jetstar Hong Kong. Better-than-expected traffic growth, particularly longhaul and premium traffic, fall in jet fuel prices, betterthan-expected profits from Air China, reduced competition from airlines with ambitious expansion plans (e.g. Hong Kong Airlines, Middle Eastern carriers, low cost carriers), potential Cathay-Air China merger in the long term. Spike in jet fuel prices due to geopolitical issues, Air China s earnings disappoint, intensive competition from Hong Kong Airlines, Middle Eastern carriers, budget airlines, substantial capex and potential rise in funding costs. Key financial metrics FY13A FY14E FY15E FY16E Valuation and price target basis Revenues (HK$ MM) 100, , , ,738 Our Jun-15 price target of HK$18.0 is based on 1.05x P/B, a 15% discount Revenue growth (%) 1.1% 7.8% 6.0% 6.0% to Cathay's historical average valuation since 1998 as we expect its EBITDA (HK$ MM) 11,322 13,375 15,934 18,716 competitive environment to become more challenging in the medium term, EBITDA margin (%) 11.3% 12.3% 13.9% 15.4% with rising long-haul capacity expansion of Chinese airlines and the launch Tax rate (%) 19% 18% 18% 18% of more low cost carriers in the under-penetrated North Asian region. Net profit (HK$ MM) 2,620 3,227 4,516 5,780 EPS (HK$) EPS growth (%) 203.9% 23.2% 40.0% 28.0% P/BV Trading Range Since Listing DPS (HK$) BVPS (HK$) Operating cash flow (HK$ MM) 12,676 12,362 14,747 17,183 Free cash flow (HK$ MM) (9,194) (9,015) (5,253) (2,817) Interest cover (x) Net margin (%) 2.6% 3.0% 3.9% 4.7% Sales/assets (X) Debt/equity (%) 106.4% 111.4% 114.3% 114.0% Net debt/equity (%) 62.5% 75.9% 82.5% 84.6% ROE (%) 4.4% 5.0% 6.8% 8.3% Key model assumptions FY13A FY14E FY15E FY16E Passenger traffic growth 1% 9% 5% 5% Cargo traffic growth -2% 14% 5% 5% Jet fuel price (US$/bbl) Source: Company and J.P. Morgan estimates. Source: Bloomberg, Company and J.P. Morgan estimates. Sensitivity analysis EBITDA EPS JPMe change in estimates Sensitivity to FY14E FY14E EPS (HK$) FY14E FY15E 1ppt chg in pax traffic growth +/-5% +/-16% JPMe old ppt chg in cargo traffic growth +/-2% +/-5% JPMe new % chg in jet fuel price -/+1% -/+ 2% % chg -15.7% -6.8% Source: J.P. Morgan estimates. *Large earnings sensitivity due to small profit base Source: Bloomberg, J.P. Morgan estimates. Comparative metrics CMP Mkt Cap P/E (x) P/BV (x) ROE (%) YTD LC $Mn FY14E FY15E FY14E FY15E FY14E FY15E Stock perf. Singapore Airlines , % 4.1% (3.2%) Cathay Pacific , % 6.8% (8.9%) Sector average % 2.8% (3.2%) Source: Bloomberg, J.P. Morgan estimates. Forecasts for non-covered (NC) stocks are based on consensus estimates to calculate sector average. Note: SIA valuations are for FY15E and FY16E given its March year end. Prices are as of 13 August, Mar x 1.61x 2.00x Gulf war trough: 1.7x Jan-91 US and UK slowdown trough: 1.6x Nov-91 Sep-92 Jul-93 May-94 Mar-95 Jan-96 Nov-96 Cathay Pacific Price/Book (Rolling 12M Fwd) Asian crisis trough: 0.7x Sep-97 Jul-98 May-99 Mar-00 Jan x Nov-01 Acquisition of Dragonair and increased shareholding in Air China 1.21x SARS trough: 0.9x Sep 11 trough: 0.6x Sep-02 Jul-03 May-04 Mar-05 Jan-06 Nov-06 P/BV Average +1 std dev -1 std dev 0.90x Sep-07 GFC trough: 0.6x Jul-08 May-09 Mar-10 Jan-11 Current P/BV: 0.86x Nov-11 Sep-12 Jul-13 May-14 2

3 1H14 Results Review Results weaker than expectations, slightly weaker than SIA; 2H14 outlook better Cathay Pacific s profitability improved in 1H14 with a net profit of HK$347MM, vs HK$24MM in 1H13 but markedly weaker than its HK$2.6B net profit in the seasonally stronger 2H13. 1H14 key highlights Top line rose 5% y/y but fell 2% h/h during this seasonally weaker half: Revenue rose 5% y/y as passenger revenue rose 4% while cargo revenue rose 3%. Specifically, passenger and cargo traffic rose 8% and 12% y/y respectively but this was partially offset by the 3% and 7% declines in passenger and cargo yields respectively. Catering, recoveries and other services revenue improved 14% y/y. 1H14 results deteriorated from 2H13, partly due to seasonality: On a h/h basis, revenue fell 2% in this seasonally weaker period, driven by the 1% and 6% h/h drop in passenger and cargo revenue. Passenger traffic rose 1% y/y and cargo traffic held steady. However, passenger and cargo yields deteriorated by 2% and 6% h/h. Catering, recoveries and other services revenue were steady h/h. Operating efficiency improved, helped by lower unit costs from Cathay s ongoing fleet renewal programme: Operating costs rose 4% y/y and were steady h/h, mainly driven by higher fuel costs (+1% y/y but 3% lower h/h), inflight and passenger expenses (+9% y/y and steady h/h) and higher aircraft depreciation and operating lease expenses (+11% y/y and 2% h/h) and higher staff costs (+6% y/y and 4% h/h). Operating costs ex-fuel rose 5% y/y and 2% h/h. Cathay realized higher fuel hedging gains of HK$1,024 vs HK$300MM in 1H13. Unit cost per ATK fell 3% y/y while unit cost ex-fuel fell 1% y/y. Profitability improved: Operating profit was HK$1.58B, +52% y/y but 42% lower h/h in 1H14. Operating profit margin rose 1ppt y/y but fell 2ppts h/h to 3.1%. Notably, share of losses from associates widened 71% y/y to HK$265MM vs HK$993MM profit in 2H13, mainly driven by Air China due to substantial F/X losses with the weaker Rmb). Annualized ROE was 1.1% vs 4.4% in 2013 and 10-year average of 8.6%. Financial leverage rose; generous DPS declared: 1H14 DPS rose 67% y/y to HK$0.10, implying a 114% payout which suggests that full year DPS will likely match or exceed 2013 s level of HK$0.22. Cathay Pacific s historical average payout ratio is c.35%. We believe this suggests management s confidence of delivering profits that are at least similar to last year's full year profit level of HK$2.6B (or EPS of HK$0.67). Net borrowings rose 5% y/y and net debt-equity rose 6ppts h/h to 68%. 63% of borrowings are at fixed rates after taking into account derivative transactions). June-14 BV/shr fell 3% h/h to HK$15.5/shr. 3

4 Overall profitability slightly weaker than SIA s: 1H14 net profit margin was 0.7%, EBITDAR margin was 14.1% and annualized ROE was 1.1%. Cathay s results were slightly weaker than SIA s. SIA s net profit margin was 0.8%, EBITDAR margin was 15.1% and annualized ROE of 0.9% (due to SIA s inefficient capital structure) during the same period. Cathay s net debt-equity was 68% while SIA has large net cash position. Both airlines are trading at 0.9x P/B, close to their historical trough valuations. The weak 1H14 results were primarily driven by 1) weaker passenger yields (down 3.5% y/y) which fell across all major route regions except for European flights (+2.5% y/y) due to fare pressure and weaker revenue currencies in some markets, 2) persistent industry overcapacity in the air cargo market which resulted in lower cargo yields (down 7% y/y), 3) higher staff costs (+6% y/y), 4) higher fuel costs (+1% y/y), 5) rise in net finance charges (+15% y/y) and 6) widening share of losses from associates (+71% y/y to HK$265MM, mainly driven by Air China due to substantial F/X losses with the weaker Rmb). Cathay Pacific s deteriorating on-time performance, down 7ppts y/y to 70.7% is a concern. Key positives in the 1H14 results: 1) Improved aircraft utilization, +3.4% y/y to 12 hours per day. 2) Passenger and cargo load factors both improved, +2ppts y/y to 83.6% and +0.8ppts y/y to 63.2%. Southwest Pacific & South Africa and North Asian markets saw the strongest improvement in passenger load factors, rising 6ppts y/y to 85% and 4ppts y/y to 78% respectively. 3) Unit cost ex-fuel fell 1.3% y/y and unit cost fell 3.3% y/y, helped by Cathay s ongoing fleet renewal program. Improving outlook in 2H14: Although the operating environment for Cathay and the industry remains challenging which will continue to result in pressure on both passenger and cargo yields, management expects 2H outlook to be better as it strengthens its passenger network and its new freighter fleet and cargo terminal will benefit its cargo business. Unearned transport revenue rose 17% h/h, 16% y/y as at June US and Europe demand remained strong, Japan/Korea/Taiwan demand were healthy, mainland China faced strong competition, political unrest affected travel to Southeast Asia, Australia market highly competitive, alliance with Air NZ helped the NZ market: Business traffic was generally in line with expectations, though the impact of the Canton Fair in April was not as strong as expected. US and London flight travel demand was strong in all classes. Mainland China routes' demand was below expectations due to stronger competition from increased number of airlines while Japan (benefitting from weaker yen), Korea (benefitting from the popularity of a Korean TV drama series) and Taiwan (strong demand for travel between Taiwan and Japan and Korea) flights are performing well. Political unrest affected demand on Southeast Asian routes but yields continue to remain under pressure due to low cost carrier competition. Strategic agreement with Air NZ helped traffic on NZ routes while Australian market remained competitive but benefitted from increased traffic between Australia and Mainland China. Demand on India routes was hurt by the weaker local currency and strong competition from local carriers. The weaker South African currency dampened travel demand on these routes. 4

5 Overcapacity continued to put pressure on cargo yields: Overcapacity in the industry remains a major concern and has made it difficult to increase rates. Cathay continues to manage capacity in line with demand. Higher B ER aircraft resulted in 50:50 split (for the first time) between the volume of cargo carried in freighter aircraft and bellies of passenger aircraft. Fleet renewal continued: Cathay took delivery of two B ERs, two A s and one A (for Dragonair) and retired two B passenger aircraft in 1H14. Six B F freighters will leave the fleet by Cathay has also planned the accelerated retirement of 11 A s with 4 of these aircraft will be retired by the end of 2015 and the remaining 7 will be retired by the end of Fleet update: Cathay Pacific Group (including Dragonair and Air Hong Kong)'s fleet comprises 193 aircraft (up from 192 aircraft in end Dec 2013), including 79 owned, 58 on finance leases and 56 on operating leases as at June The average aircraft utilization rose 3% y/y to 12.0 hours per day which is positive but the on-time performance fell 7ppts y/y to 70.7% in 1H14. Cathay is scheduled to take delivery of 11 planes in 2H14, 9 in 2015 and 70 from 2016 onwards. 2, 4, 4 aircraft on operating leases will expire in 2014, 2015, 2016 and 46 from 2017 onwards. Key takeaways from management briefing Operating outlook improving: 2H14 is traditionally stronger than 1H14 as it includes the seasonal peak periods for passenger and cargo demand. Significant competition in Cathay s passenger business may continue to impact yields but there are some signs of improvement. Leisure travel demand during the July-August summer season has been good so far. Based on forward bookings, load factors are high and passenger yields have risen slightly during this summer. It is still early to tell whether the peak season for business travelers from September to November will be strong but so far, forward bookings do not suggest any cause for concern. Premium economy class segment has been very successful for long-haul flights but less so for shorter-haul flights to Australia. Cathay Pacific will continue to enhance its products and services to strengthen its competitive edge. The cargo business was very difficult in Jan-Feb 2014 but started to pick up from March. The market is still expected to suffer from industry oversupply in 2014 but there are small signs of recovery. Outbound cargo demand to North America and inbound cargo demand to China are performing well. Cathay Pacific s bellyhold and freighter capacity split is around 50:50. Cathay Pacific s new cargo terminal in Hong Kong became fully operational in Oct-13 and expects to handle 1.4MM tons of cargo in It began handling cargo for airlines outside the Cathay Pacific Group in May. The HK$5.9B facility will need to handle c.1.8mm tons of cargo to break even based on initial estimates. 5

6 London improving, Australia challenging: London flights are performing well, driving the bulk of the recovery on European routes. Cathay has a strong competitive advantage on HK-London route, operating 5 daily flights which is well ahead of competitor airlines which helps to secure more highyielding passengers. Cathay stopped flying over Ukraine in Mar-14 and no longer flies over Iraq. Southwest Pacific routes face strong competition from Middle Eastern and Asian carriers, putting pressure on yields. The fall in SW Pacific & South Africa passenger yield was also attributed to the weaker South African Rand. No plans to launch separate low cost carrier: Cathay Pacific still does not plan to launch a separate low cost carrier subsidiary and believes that its spare economy class seats via its fanfares programme provide a competitive option for price-sensitive travelers to more destinations out of Hong Kong than a LCC could provide at little additional fixed cost. Still bullish on North America; overall planned passenger capacity growth will be marginally higher in 2H14: Cathay Pacific plans to increase passenger capacity (ASK) by c.6.8% y/y in 2H14, slightly ahead of its 5.3% y/y capacity growth in 1H14. This is mainly driven by increased flight frequencies to Los Angeles (from 3x to 4x daily from June-14) and Chicago (from 7x to 10x weekly starting from Aug-14). Cathay Pacific will also launch a 4x weekly service to Manchester in the United Kingdom from Dec-14. Regionally, Dragonair plans to increase frequencies on the Yangon route to 7x per week from Sep-14. Long-term planned capacity growth will likely be sustained at c.6-7% in the next 10 years on our estimates based on existing aircraft orders and retirement plans: Cathay Pacific and Dragonair have a fleet of 156 passenger aircraft and 21 freighters in operation and 5 parked freighters as at end June Going forward, Cathay Pacific is scheduled to take delivery of 8 more aircraft this year, 9 in 2015, 13 in 2016, 10 in 2017, 6 in 2018, 10 in 2019, 10 in 2020 and 21 in 2021 and beyond. 4 more B aircraft will be retired this year, leaving 7 planes used as spare capacity on regional routes till 2016 as all the B s will exit long-haul flights from Sep-14. Cathay Pacific also plans to accelerate the retirement of its eleven A340 aircraft. 4 A340s will be retired in 2015, 4 in 2016 and 3 in This should help sustain Cathay s planned capacity growth at mid to high single digit level in the longer term, depending on market demand conditions. Well-protected against rising fuel prices: Cathay Pacific recently increased its fuel hedging level to manage the risk of rising fuel prices. It has hedged c.47% of 2H14 fuel consumption at c.us$101/bbl (Brent crude oil), c.44% of 2015 fuel consumption at c.us$101/bbl (Brent) and c.25% of fuel consumption at just under c.us$100/bbl (Brent). The current spot Brent crude oil price is $103/bbl and ytd average level is $107/bbl. Financial management update: Cathay Pacific s overall cost of debt remains low averaging 2.3%. Margins have compressed during the year. Cathay strategically lowered liquid funds balance and increased its loan repayments by 73% y/y in 1H14 as the improving market conditions have reduced the need to hold so much cash. Cathay has also taken advantage of the low fixed rates to lock in aircraft financing. 63% of borrowings are at fixed rates after taking into account derivative transactions. 6

7 Stay OW, PT HK$18.0 We have trimmed our FY14-16E earnings forecasts by 9% on average, mainly to factor in more conservative passenger and cargo yield assumptions and a lower profit contribution from Air China. Consequently, we have trimmed our Jun-15 price target to HK$18.0 which is based on 1.05x P/B, a 15% discount to Cathay's historical average valuation since 1998 as we expect its competitive environment to become more challenging in the medium term, with rising long-haul capacity expansion of Chinese airlines and the launch of more low cost carriers in the under-penetrated North Asian region. We maintain our Overweight rating on Cathay Pacific. The stock is attractively valued at 0.85x P/B and provides a 45% potential upside to its historical average mid-cycle valuation and 85% potential upside to peak. We believe Cathay s improving profitability will drive its re-rating. Key positive drivers: 1) Premium traffic, which drives c.45% of Cathay s passenger revenue, versus c.25% sector average, is improving. 2) Cathay has one of the highest exposures among the Asian airlines to long-haul routes where travel demand is recovering. N America/Europe flights drive 26%/18% of its passenger traffic. 3) Air cargo market (which drives 24% of Cathay s total revenue) has finally bottomed out and will gradually recover. 4) Airline sector demand-supply growth balance is expected to improve from 2H14 as new aircraft deliveries moderate which will alleviate fare pressure. 5) Increased profit contribution from 20.13%-owned Air China from 2014 after an expected dismal 2013 result. 6) HK airport s rising congestion and limited slot availability provides barriers to entry during peak hours. 7) Delay in the launch of low cost carrier Jetstar Hong Kong. We remain concerned about increased competition risks from Hong Kong Airlines and low cost carriers in the North Asian markets longer term which may cap Cathay Pacific s valuations in a cyclical recovery like what happened to Singapore Airlines in This underpins why we have applied a 15% discount to Cathay s historical average valuation for our price target multiple. Our top picks among the Asian airlines are Air China, Cathay Pacific and Singapore Airlines. Our top pick among the low cost carriers is Cebu Air. Key upside risks: 1) better-than-expected traffic growth, particularly long-haul and premium traffic, 2) weak air cargo market deteriorates further, 3) fall in jet fuel prices, 4) better-than-expected profits from Air China, 5) reduced competition from airlines with ambitious expansion plans (e.g. Hong Kong Airlines, Middle Eastern carriers, low cost carriers), 6) potential Cathay-Air China merger in the long term. Key downside risks: 1) spike in jet fuel prices due to geopolitical issues, 2) Air China s earnings disappoint, 3) intensive competition from Hong Kong Airlines, Middle Eastern carriers, budget airlines, 4) substantial capex and potential rise in funding costs. 7

8 Table 1: Cathay Pacific: 1H14 Results At A Glance HK$m 1H14 1H13 Y/Y Chg 2H13 H/H Chg Passenger 36,520 34,978 4% 36,848-1% Cargo 11,663 11,278 3% 12,385-6% Catering, recoveries and other services 2,657 2,328 14% 2,667 0% Total revenue 50,840 48,584 5% 51,900-2% Staff 8,899 8,432 6% 8,595 4% Inflight service and passenger expenses 2,162 1,986 9% 2,152 0% Landing, parking and route expenses 6,944 6,668 4% 6,863 1% Fuel 18,930 18,674 1% 19,458-3% Aircraft maintenance 3,664 3,861-5% 3,681 0% Aircraft depreciation and operating leases 5,049 4,565 11% 4,972 2% Other depreciation and operating leases 1, % 1,037 0% Commissions % 389 3% Others 2,176 2,088 4% 2,028 7% Total operating costs 49,264 47,549 4% 49,175 0% Operating costs ex-fuel 30,334 28,875 5% 29,717 2% Operating profit (loss) 1,576 1,035 52% 2,725-42% Operating profit margin 3.1% 2.1% 1.0ppt 5.3% -2.2ppt EBITDAR 7,664 6,489 18% 8,734-12% EBITDAR margin 15.1% 13.4% 1.7ppt 16.8% -1.8ppt Finance charges (896) (658) 36% (712) 26% Finance income % % Share of profits of associates (265) (155) 71% 993 nm Profit (loss) before tax % 3,241-79% Taxation (196) (173) 13% (502) -61% Effective tax rate -28.4% -51.2% 22.8ppt -15.5% -12.9ppt Minority interests % 143 3% Net profit (loss) % 2,596-87% Net profit (loss) margin 0.7% 0.0% 0.6ppt 5.0% -4.3ppt DPS (cents) % % Basic EPS (cents) % % Diluted EPS (cents) % % Source: Company reports. 8

9 Table 2: Cathay Pacific and Singapore Airlines: Jan-Jun 2014 Results Comparison Cathay Pacific SIA (translated to HK$) HK$m Jan-Jun Jan-Jun Y/Y Chg Jul-Dec H/H Chg Jan-Jun Jan-Jun Y/Y Chg Jul-Dec H/H Chg Passenger 36,520 34,978 4% 36,848-1% 31,193 32,293-3% 33,546-7% Cargo 11,663 11,278 3% 12,385-6% 6,226 6,577-5% 6,613-6% Other 2,657 2,328 14% 2,667 0% 7,561 7,988-5% 7,739-2% Total revenue 50,840 48,584 5% 51,900-2% 44,979 46,858-4% 47,898-6% Staff costs 8,899 8,432 6% 8,595 4% 7,107 7,454-5% 7,203-1% Fuel costs 18,930 18,674 1% 19,458-3% 16,960 17,989-6% 17,726-4% Depreciation 4,065 3,541 15% 3,811 7% 4,727 5,180-9% 5,032-6% Maintenance 3,664 3,861-5% 3,681 0% 1,971 1,924 2% 1,944 1% Commissions % 389 3% 1,004 1,077-7% 1,104-9% Landing & parking 6,944 6,668 4% 6,863 1% 2,216 2,153 3% 2,226 0% Handling ,167 3,092 2% 3,271-3% Aircraft lease rentals 1,509 1,471 3% 1,668-10% 2,173 1,798 21% 2,005 8% Materials % 659 4% Inflight meals 2,162 1,986 9% 2,152 0% 1,688 1,696 0% 1,711-1% Advertising & sales % 744 6% Other costs 2,690 2,530 6% 2,558 5% 2,622 2,853-8% 2,810-7% Total operating costs 49,264 47,549 4% 49,175 0% 45,107 46,624-3% 46,433-3% Operating costs ex-fuel 30,334 28,875 5% 29,717 2% 28,147 28,635-2% 28,707-2% EBIT 1,576 1,035 52% 2,725-42% (128) % 1,466 nm EBIT margin 3.1% 2.1% 1.0ppt 5.3% -2.2ppt -0.3% 0.5% -0.8ppt 3.1% -3.3ppt EBITDAR 7,150 6,047 18% 8,204-13% 6,772 7,211-6% 8,502-20% EBITDAR margin 14.1% 12.4% 1.6ppt 15.8% -1.7ppt 15.1% 15.4% -0.3ppt 17.7% -2.7ppt Net interest income (expense) (621) (542) 15% (477) 30% % 75-7% Associates/JVs (265) (155) 71% 993 nm (88) 436 nm 254 nm Gains from disposal % % Other % 82-13% Profit before tax & exceptionals % 3,241-79% 79 1,219-94% 2,013-96% Exceptional items % (471) nm Profit before tax % 3,241-79% 202 1,334-85% 1,541-87% Taxation (196) (173) 13% (502) -61% % (46) nm Effective tax rate -28.4% -51.2% 22.8ppt -15.5% -12.9ppt 179.0% 4.3% 174.8ppt -3.0% 182.0ppt Minority interests (147) (141) 4% (143) 3% (185) (204) -10% (197) -6% Net profit % 2,596-87% 380 1,187-68% 1,298-71% Net profit margin 0.7% 0.0% 0.6ppt 5.0% -4.3ppt 0.8% 2.5% -1.7ppt 2.7% -1.9ppt Source: Company reports. Table 3: Cathay Pacific: 1H14 Operating Statistics Summary 1H14 1H13 Y/Y Chg 2H13 H/H Chg Traffic Passenger (RPKm) 54,736 50,558 8% 54,012 1% Cargo (FTKm) 4,625 4,123 12% 4,627 0% Capacity Passenger (ASKm) 65,474 62,187 5% 65,028 1% Cargo (AFTKm) 7,318 6,607 11% 7,555-3% Overall (ATKm) 13,545 12,520 8% 13,739-1% Load factor Passenger (%) 83.6% 81.3% 2.3ppt 83.1% 0.5ppt Cargo (%) 63.2% 62.4% 0.8ppt 61.2% 2.0ppt Yields Passenger (HK$/RPK) % % Cargo (HK$/FTK) % % Costs Unit cost (HK$/ATK) % % Unit cost ex-fuel (HK$/ATK) % % Breakeven overall load factor 75.4% 74.0% 1.4ppt 71.6% 3.9ppt Actual vs Breakeven load factor -2.9ppt -2.7ppt -0.2ppt -0.6ppt -2.4ppt Source: Company reports. 9

10 Table 4: Cathay Pacific & Singapore Airlines: Jan-Jun 2014 Operating Statistics Comparison Jan-Jun 2014 Jan-Jun 2013 Cathay Pacific Y/Y Chg Jul-Dec 2013 H/H Chg Jan-Jun 2014 Jan-Jun 2013 SIA Y/Y Chg Traffic Passenger (RPKm) 54,736 50,558 8% 54,012 1% 46,098 46,401-1% 49,068-6% Cargo (FTKm) 4,625 4,123 12% 4,627 0% 3,085 3,208-4% 3,278-6% Overall (RTKm) 9,825 8,926 10% 9,758 1% 7,620 7,816-3% 8,087-6% Capacity Passenger (ASKm) 65,474 62,187 5% 65,028 1% 59,619 59,270 1% 61,138-2% Cargo (AFTKm) 7,318 6,607 11% 7,555-3% 4,939 5,086-3% 5,245-6% Overall (ATKm) 13,545 12,520 8% 13,739-1% 11,163 11,299-1% 11,654-4% Load factor Passenger (%) 83.6% 81.3% 2.3ppt 83.1% 0.5ppt 77.3% 78.3% -1.0ppt 80.3% -2.9ppt Cargo (%) 63.2% 62.4% 0.8ppt 61.2% 2.0ppt 62.5% 63.1% -0.6ppt 62.5% 0.0ppt Overall (%) 72.5% 71.3% 1.2ppt 71.0% 1.5ppt 68.3% 69.2% -0.9ppt 69.4% -1.1ppt Yields Passenger (HK$/RPK) % % % % Cargo (HK$/FTK) % % % % Overall (HK$/RTK) % % % % Unit Costs Passenger (HK$/ASK) % % Cargo (HK$/AFTK) % % Overall (HK$/ATK) % % % % Breakeven load factors Passenger (%) % 82.9% -1.6ppt 81.1% 0.2ppt Cargo (%) % 69.1% -2.8ppt 65.6% 0.7ppt Overall (%) 75.4% 74.0% 1.4ppt 71.6% 3.9ppt 68.5% 68.8% -0.4ppt 67.3% 1.2ppt Actual vs Breakeven load factor spread Passenger ppt -4.7ppt 0.6ppt -0.8ppt -3.2ppt Cargo ppt -6.0ppt 2.2ppt -3.1ppt -0.7ppt Overall -2.9ppt -2.7ppt -0.2ppt -0.6ppt -2.4ppt -0.2ppt 0.3ppt -0.5ppt 2.1ppt -2.3ppt Source: Company reports. Figure 1: 1H14 Passenger Capacity Breakdown By Route Region Jul-Dec 2013 H/H Chg North America 26% North Asia 22% India, Middle East, Pakistan and Sri Lanka 8% Europe 16% Southeast Asia 14% Southwest Pacific and South Africa 14% Source: Company reports. 10

11 Table 5: Revenue Breakdown by Geography Based on Origin of Sale 1H14 (HK$m) Y/Y Chg % Contribution North Asia 29, % 58% Hong Kong and Mainland China 24, % 48% Japan, Korea and Taiwan 5, % 10% India, Middle East, Pakistan and Sri Lanka 2, % 5% Southeast Asia 4, % 8% Southwest Pacific and South Africa 3, % 6% Europe 4, % 9% North America 7, % 14% Total 50, % 100% Source: Company reports. Table 6: Cathay Pacific & Dragonair Operating Data Breakdown By Region Capacity (ASK/ATK* in mn) Load Factor Yield 1H14 1H13 Y/Y Chg 1H14 1H13 Y/Y Chg Y/Y Chg Passenger Services India, Middle East, Pakistan and Sri Lanka 5,512 5, % 78.2% 75.5% 2.7ppt -7.0% Southeast Asia 8,849 8, % 84.8% 78.5% 6.3ppt -6.7% Southwest Pacific and South Africa 8,973 9, % 80.4% 79.5% 0.9ppt -3.9% Europe 10,423 10, % 87.4% 86.8% 0.6ppt 2.5% North Asia 14,431 13, % 77.9% 73.9% 4.0ppt -3.4% North America 17,286 14, % 88.7% 89.3% -0.6ppt -4.4% Overall 65,474 62, % 83.6% 81.3% 2.3ppt -3.5% Cargo Services 7,318 6, % 63.2% 62.4% 0.8ppt -6.9% Source: Company reports. *Capacity is measured in Available Seat Kilometers (ASK) for passenger services and Available Tonne Kilometers (ATK) for cargo services. Table 7: Cathay Pacific Fleet Profile End of June, 2014 Leased Owned Finance Operating Total Cathay Pacific A A A A F BCF ERF F F ER X Total Dragonair A A A Total Air Hong Kong A F BCF Total Grand Total Source: Company reports and J.P. Morgan. 11

12 Table 8: Cathay Pacific: E Earnings Estimates Revision Old New % chg 2014E 2015E 2016E 2014E 2015E 2016E 2014E 2015E 2016E Net profit (HK$m) 3,828 4,848 6,077 3,227 4,516 5, % -6.8% -4.9% EPS (HK$) % -6.8% -4.9% Source: J.P. Morgan estimates. Figure 2: Cathay vs SIA PB Valuation Comparison Source: Bloomberg, Company reports, J.P. Morgan estimates. Figure 3: Cathay P/B Valuation Premium/(Discount) to SIA 160% 120% 80% 40% 0% -40% -80% Jan-90 Jul-90 Jan-91 Jul-91 Jan-92 Jul-92 Jan-93 Jul-93 Jan-94 Jul-94 Jan-95 Jul-95 Jan-96 Jul-96 Jan-97 Jul-97 Jan-98 Jul-98 Jan-99 Jul-99 Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 SIA Jan-90 Jul-90 Jan-91 Jul-91 Jan-92 Jul-92 Jan-93 Jul-93 Jan-94 Jul-94 Jan-95 Jul-95 Jan-96 Jul-96 Jan-97 Jul-97 Jan-98 Jul-98 Jan-99 Jul-99 Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Cathay Cathay Valuation Premium/(Discount) to SIA Average Current Valuation Discount: 1.5% 16.4% Source: Bloomberg, Company reports, J.P. Morgan estimates. 12

13 Figure 4: Cathay Pacific: P/BV Trading Range Since x Cathay Pacific Price/Book (Rolling 12M Fwd) Acquisition of Dragonair and increased shareholding in Air China Current P/BV: 0.86x x 2.00x US and UK slowdown trough: 1.6x 1.52x 1.21x Gulf war trough: 1.7x Asian crisis trough: 0.7x SARS trough: 0.9x Sep 11 trough: 0.6x 0.90x GFC trough: 0.6x 0.00 Mar-90 Jan-91 Nov-91 Sep-92 Jul-93 May-94 Mar-95 Jan-96 Nov-96 Sep-97 Jul-98 May-99 Mar-00 Jan-01 Nov-01 Sep-02 Jul-03 May-04 Mar-05 Jan-06 Nov-06 Sep-07 Jul-08 May-09 Mar-10 Jan-11 Nov-11 Sep-12 Jul-13 May-14 P/BV Average +1 std dev -1 std dev Source: Bloomberg, Company reports, J.P. Morgan estimates. Figure 5: SIA: P/BV Trading Range Since x Gulf war trough: 1.0x 1.8x 1.6x SIA Price-Book (Rolling 12M Fwd) Jan-90 Jun-90 Nov-90 Apr-91 Sep-91 Feb-92 Jul-92 Dec-92 May-93 Oct-93 Mar-94 Aug-94 Jan-95 Jun-95 Nov-95 Apr-96 Sep-96 Feb-97 Jul-97 Dec-97 May-98 Oct-98 Mar-99 Aug-99 Jan-00 Jun-00 Nov-00 Apr-01 Sep-01 Feb-02 Jul-02 Dec-02 May-03 Oct-03 Mar-04 Aug-04 Jan-05 Jun-05 Nov-05 Apr-06 Sep-06 Feb-07 Jul-07 Dec-07 May-08 Oct-08 Mar-09 Aug-09 Jan-10 Jun-10 Nov-10 Apr-11 Sep-11 Feb-12 Jul-12 Dec-12 May-13 Oct-13 Mar-14 Aug x 1.3x P/BV Average +1 std dev -1 std dev Following the entry of low cost carriers in late 2003, SIA de-rated to a lower trading range around P/BV due to market fears of rising competition even though LCCs could potentially contest only 10% of SIA's network US and UK economic slowdown trough: 1.1x Asian crisis trough: 0.7x Sept 11 trough: 0.9x SARS trough: 0.9x 0.9x Expectations of capital management GFC trough: 0.7x Current P/BV: 0.88x Source: Company data, Bloomberg, JPMorgan estimates. 13

14 Table 9: Asia Pacific Airlines Calendarized Valuation Comparison Ticker Price P/E (x) P/BV (x) EV/EBITDAR (x) 13-Aug E 2015E 2014E 2015E 2014E 2015E Air Arabia AIRARABI UH AirAsia* AIRA MK AirAsia X AAX MK 0.88 nm Air China H* 753 HK Air New Zealand AIR NZ All Nippon Airways 9202 JP Asia Aviation AAV TB Asiana KS CAL* 2610 TT nm Cathay* 293 HK Cebu Air* CEB PM China East H* 670 HK China Sthn H* 1055 HK EVA* 2618 TT Garuda Indonesia GIAA IJ nm Hainan Airlines CH nm nm Japan Airlines 9201 JP Jet* JETIN IN nm 16.9 nm nm Korean Air* KS nm MAS MAS MK 0.26 nm nm Qantas* QAN AU 1.29 nm nm SIA* SIA SP Skymark Airlines 9204 JP nm nm Spice Jet SJET IN nm nm nm nm THAI THAI TB nm Tigerair* TGR SP 0.41 nm nm nm 26.8 Virgin Australia* VAH AU 0.40 nm nm Sector Average Asia Pacific incumbent airlines Asia Pacific LCCs Global LCCs Source: Bloomberg, J.P. Morgan estimates. Sector average includes consensus estimates for non-covered stocks. nm: not meaningful. *Companies covered by J.P. Morgan. FY2015 and FY2016 March year end for All Nippon, Japan Airlines, Jet, SIA, SpiceJet and Tigerair and June year end for Air New Zealand, Qantas and Virgin Australia. 14

15 Investment Thesis, Valuation and Risks Cathay Pacific (Overweight; Price Target: HK$18.00) Investment Thesis We believe Cathay s improving profitability will drive its re-rating. Key positive drivers: 1) Premium traffic, which drives c.45% of Cathay s passenger revenue, versus c.25% sector average, is improving. 2) Cathay has one of the highest exposures among the Asian airlines to long-haul routes where travel demand is recovering. N America/Europe flights drive 26%/18% of its passenger traffic. 3) Air cargo market (which drives 24% of Cathay s total revenue) has finally bottomed out and should gradually recover. 4) Airline sector demand-supply growth balance is expected to improve from 2H14 as new aircraft deliveries moderate which should alleviate fare pressure. 5) Increased profit contribution from 20.13%-owned Air China from 2014 after an expected very poor 2013 result. 6) HK airport s rising congestion and limited slot availability provides barriers to entry during peak hours. 7) Delay in the launch of low cost carrier Jetstar Hong Kong. We remain concerned about increased competition risks from Hong Kong Airlines and low cost carriers in the North Asian markets longer term which may cap Cathay Pacific s valuations in a cyclical recovery like what happened to Singapore Airlines in This underpins why we have applied a 15% discount to Cathay s historical average valuation for our price target multiple. Valuation Our Jun-15 price target of HK$18.0 is based on 1.05x P/B, a 15% discount to Cathay's historical average valuation since 1998 as we expect its competitive environment to become more challenging in the medium term, with rising long-haul capacity expansion of Chinese airlines and the launch of more low cost carriers in the under-penetrated North Asian region. Risks to Rating and Price Target Key upside risks: 1) better-than-expected traffic growth, particularly long-haul and premium traffic, 2) weak air cargo market deteriorates further, 3) fall in jet fuel prices, 4) better-than-expected profits from Air China, 5) reduced competition from airlines with ambitious expansion plans (e.g. Hong Kong Airlines, Middle Eastern carriers, low cost carriers), 6) potential Cathay-Air China merger in the long term. Key downside risks: 1) spike in jet fuel prices due to geopolitical issues, 2) Air China s earnings disappoint, 3) intensive competition from Hong Kong Airlines, Middle Eastern carriers, budget airlines, 4) substantial capex and potential rise in funding costs. 15

16 Cathay Pacific: Summary of Financials Income Statement Cash flow statement HK$ in millions, year end Dec FY12 FY13 FY14E FY15E FY16E HK$ in millions, year end Dec FY12 FY13 FY14E FY15E FY16E Revenues 99, , , , ,738 EBIT 1,613 3,760 5,046 6,574 8,324 % change Y/Y 1.0% 1.1% 7.8% 6.0% 6.0% Depr. & amortization 6,861 7,562 8,329 9,361 10,392 EBITDA 8,474 11,322 13,375 15,934 18,716 Change in working capital 685 3, ,164 1,234 % change Y/Y (27.6%) 33.6% 18.1% 19.1% 17.5% Taxes EBIT 1,613 3,760 5,046 6,574 8,324 Cash flow from operations 7,440 12,676 12,362 14,747 17,183 % change Y/Y (70.7%) 133.1% 34.2% 30.3% 26.6% EBIT Margin 1.6% 3.7% 4.7% 5.7% 6.8% Capex (20,975) (20,534) (20,000) (20,000) (20,000) Net Interest (884) (1,019) (1,126) (1,237) (1,342) Disposal/(purchase) 1,702 2, Earnings before tax 1,483 3,579 4,420 6,186 7,917 Net Interest (884) (1,019) (1,126) (1,237) (1,342) % change Y/Y (77.1%) 141.3% 23.5% 40.0% 28.0% Other (1,013) (3,366) (1,377) 0 0 Tax (409) (675) (796) (1,114) (1,425) Free cash flow (12,846) (9,194) (9,015) (5,253) (2,817) as % of EBT 27.6% 18.9% 18.0% 18.0% 18.0% Net income (reported) 862 2,620 3,227 4,516 5,780 Equity raised/(repaid) % change Y/Y (84.3%) 203.9% 23.2% 40.0% 28.0% Debt raised/(repaid) 16,211 7,506 6,000 6,000 5,000 Shares outstanding 3,934 3,934 3,934 3,934 3,934 Other 1,447 5, EPS (reported) Dividends paid (227) (278) (1,066) (1,492) (1,909) % change Y/Y (84.3%) 203.9% 23.2% 40.0% 28.0% Beginning cash 19,597 24,182 27,736 23,655 22,910 Ending cash 24,182 27,736 23,655 22,910 23,184 DPS Balance sheet Ratio Analysis HK$ in millions, year end Dec FY12 FY13 FY14E FY15E FY16E HK$ in millions, year end Dec FY12 FY13 FY14E FY15E FY16E Cash and cash equivalents 24,182 27,736 23,655 22,910 23,184 EBITDA margin 8.5% 11.3% 12.3% 13.9% 15.4% Accounts receivable 10,833 9,938 10,716 11,359 12,040 Operating margin 1.6% 3.7% 4.7% 5.7% 6.8% Inventories 1,194 1,511 1,629 1,727 1,831 Net margin 0.9% 2.6% 3.0% 3.9% 4.7% Others Current assets 36,209 39,185 36,000 35,996 37,055. Sales per share growth 1.0% 1.1% 7.8% 6.0% 6.0% LT investments Sales growth 1.0% 1.1% 7.8% 6.0% 6.0% Net fixed assets 84,278 94, , , ,545 Net profit growth (84.3%) 203.9% 23.2% 40.0% 28.0% Total Assets 154, , , , ,025 EPS growth (84.3%) 203.9% 23.2% 40.0% 28.0%. Liabilities Interest coverage (x) Short-term loans 8,157 10,218 10,218 10,218 10,218 Payables 17,470 18,206 19,131 20,309 21,557 Net debt to equity 63.1% 62.5% 75.9% 82.5% 84.6% Others 10,268 12,353 13,233 13,959 14,730 Sales/assets Total current liabilities 35,895 40,777 42,582 44,486 46,505 Assets/equity 263.6% 274.5% 276.3% 282.0% 284.6%. ROE 1.6% 4.4% 5.0% 6.8% 8.3% Long-term debt 51,389 56,834 62,834 68,834 73,834 ROCE 1.1% 2.5% 3.1% 3.8% 4.5% Other liabilities 11,361 10,951 10,951 10,951 10,951 Total Liabilities 98, , , , ,290 Shareholder's equity 56,138 63,013 65,571 69,153 73,736 BVPS (HK$) Source: Company reports and J.P. Morgan estimates. 16

17 12Mth fwd EY Hong Kong BY Proxy PBV hist PBV Forward Corrine Png JPM Q-Profile Cathay Pacific Airways Limited (HONG KONG / Industrials) As Of: 08-Aug-2014 Quant_Strategy@jpmorgan.com Local Share Price Current: Mth Forward EPS Current: Jul/99 Feb/00 Sep/00 Apr/01 Nov/01 Jun/02 Jan/03 Aug/03 Mar/04 Oct/04 May/05 Dec/05 Jul/06 Feb/07 Sep/07 Apr/08 Nov/08 Jun/09 Jan/10 Aug/10 Mar/11 Oct/11 May/12 Dec/12 Jul/13 Feb/ Jul/99 Feb/00 Sep/00 Apr/01 Nov/01 Jun/02 Jan/03 Aug/03 Mar/04 Oct/04 May/05 Dec/05 Jul/06 Feb/07 Sep/07 Apr/08 Nov/08 Jun/09 Jan/10 Aug/10 Mar/11 Oct/11 May/12 Dec/12 Jul/13 Feb/14 Earnings Yield (& local bond Yield) Current: 8% Implied Value Of Growth* Current: % 16% 14% 12% 10% 8% 6% 4% 2% 0% -2% Jul/99 Feb/00 Sep/00 Apr/01 Nov/01 Jun/02 Jan/03 Aug/03 Mar/04 Oct/04 May/05 Dec/05 Jul/06 Feb/07 Sep/07 Apr/08 Nov/08 Jun/09 Jan/10 Aug/10 Mar/11 Oct/11 May/12 Dec/12 Jul/13 Feb/ Jul/99 Feb/00 Sep/00 Apr/01 Nov/01 Jun/02 Jan/03 Aug/03 Mar/04 Oct/04 May/05 Dec/05 Jul/06 Feb/07 Sep/07 Apr/08 Nov/08 Jun/09 Jan/10 Aug/10 Mar/11 Oct/11 May/12 Dec/12 Jul/13 Feb/14 PE (1Yr Forward) Current: 11.8x Price/Book Value Current: 0.9x 80.0x 2.5x 60.0x 2.0x 40.0x 20.0x 1.5x 0.0x 1.0x -20.0x 0.5x -40.0x 0.0x Jul/99 Feb/00 Sep/00 Apr/01 Nov/01 Jun/02 Jan/03 Aug/03 Mar/04 Oct/04 May/05 Dec/05 Jul/06 Feb/07 Sep/07 Apr/08 Nov/08 Jun/09 Jan/10 Aug/10 Mar/11 Oct/11 May/12 Dec/12 Jul/13 Feb/14 Jul/99 Feb/00 Sep/00 Apr/01 Nov/01 Jun/02 Jan/03 Aug/03 Mar/04 Oct/04 May/05 Dec/05 Jul/06 Feb/07 Sep/07 Apr/08 Nov/08 Jun/09 Jan/10 Aug/10 Mar/11 Oct/11 May/12 Dec/12 Jul/13 Feb/14 ROE (Trailing) Current: 4.41 Dividend Yield (Trailing) Current: Jul/99 Feb/00 Summary Sep/00 Apr/01 Nov/01 Jun/02 Jan/03 Aug/03 Mar/04 Oct/04 May/05 Dec/05 Cathay Pacific Airways Limited As Of: 8-Aug-14 HONG KONG SEDOL Local Price: Industrials Airlines EPS: 1.24 Latest Min Max Median Average 2 S.D.+ 2 S.D. - % to Min % to Max % to Med % to Avg 12mth Forward PE 11.81x % 535% 5% 24% P/BV (Trailing) 0.91x % 127% 43% 43% Dividend Yield (Trailing) % 474% 97% 111% ROE (Trailing) % 561% 113% 99% Implied Value of Growth -33.8% % 424% 138% 146% Source: Bloomberg, Reuters Global Fundamentals, IBES CONSENSUS, J.P. Morgan Calcs Jul/06 Feb/07 Sep/07 Apr/08 Nov/08 Jun/09 Jan/10 Aug/10 Mar/11 Oct/11 May/12 Dec/12 Jul/13 Feb/ Jul/99 Feb/00 Sep/00 Apr/01 Nov/01 Jun/02 Jan/03 Aug/03 Mar/04 Oct/04 * Implied Value Of Growth = (1 - EY/Cost of equity) where cost of equity =Bond Yield + 5.0% (ERP) May/05 Dec/05 Jul/06 Feb/07 Sep/07 Apr/08 Nov/08 Jun/09 Jan/10 Aug/10 Mar/11 Oct/11 May/12 Dec/12 Jul/13 Feb/14 17

18 Other Companies Discussed in This Report (all prices in this report as of market close on ) Air China H (0753.HK/HK$4.98/Overweight), Cebu Air, Inc. (CEB.PS/Php58.65/Overweight), Singapore Airlines (SIAL.SI/S$9.83/Overweight) Analyst Certification: The research analyst(s) denoted by an AC on the cover of this report certifies (or, where multiple research analysts are primarily responsible for this report, the research analyst denoted by an AC on the cover or within the document individually certifies, with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of any of the research analyst's compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report. For all Korea-based research analysts listed on the front cover, they also certify, as per KOFIA requirements, that their analysis was made in good faith and that the views reflect their own opinion, without undue influence or intervention. Important Disclosures Client: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients: Cathay Pacific, Air China H, Singapore Airlines, Cebu Air, Inc.. Client/Investment Banking: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as investment banking clients: Cathay Pacific. Client/Non-Investment Banking, Securities-Related: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients, and the services provided were non-investment-banking, securities-related: Cathay Pacific, Air China H, Singapore Airlines, Cebu Air, Inc.. Client/Non-Securities-Related: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients, and the services provided were non-securities-related: Air China H. Investment Banking (past 12 months): J.P. Morgan received in the past 12 months compensation from investment banking Cathay Pacific. Investment Banking (next 3 months): J.P. Morgan expects to receive, or intends to seek, compensation for investment banking services in the next three months from Cathay Pacific. Non-Investment Banking Compensation: J.P. Morgan has received compensation in the past 12 months for products or services other than investment banking from Cathay Pacific, Air China H, Singapore Airlines, Cebu Air, Inc.. Company-Specific Disclosures: Important disclosures, including price charts, are available for compendium reports and all J.P. Morgan covered companies by visiting calling , or ing research.disclosure.inquiries@jpmorgan.com with your request. J.P. Morgan s Strategy, Technical, and Quantitative Research teams may screen companies not covered by J.P. Morgan. For important disclosures for these companies, please call or research.disclosure.inquiries@jpmorgan.com. 18

19 Cathay Pacific (0293.HK, 293 HK) Price Chart Price(HK$) UW HK$17 Oct 06 UW HK$11.7 UW HK$7 OW HK$15 Apr 08 Oct 09 Apr 11 N HK$12 UW HK$13.7 UW HK$7.3 OW HK$13 OW HK$18 OW HK$22 OW HK$23 UW HK$14 UW HK$12 N HK$14.3 OW HK$18.3 Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends. Initiated coverage Mar 07, Oct 12 Apr 14 Date Rating Share Price (HK$) 07-Mar-07 UW Jun-08 UW Jul-08 UW Nov-08 UW Dec-08 UW Jul-09 OW Aug-09 OW Mar-10 OW Aug-10 OW Mar-11 OW Aug-11 UW Jul-12 UW Aug-12 N Mar-13 N Mar-14 OW Price Target (HK$) Air China H (0753.HK, 753 HK) Price Chart Price(HK$) Oct 06 Apr 08 OW HK$3.8 OW HK$5.5 OW HK$6.6 OW HK$3.5 OW HK$4.5OW HK$7.8 OW HK$12OW HK$10.5 OW HK$8.5 OW HK$7 OW HK$8OW HK$7 OW HK$6 Oct 09 Apr 11 Oct 12 Apr 14 Date Rating Share Price (HK$) 09-Jun-08 OW Aug-08 OW Oct-08 OW Dec-08 OW Jul-09 OW May-10 OW Oct-10 OW Aug-11 OW Mar-12 OW Aug-12 OW Jan-13 OW Aug-13 OW Mar-14 OW Price Target (HK$) Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends. Initiated coverage Jun 09,