Analysts point to Hong Kong-traded Air China as a leading candidate for a turnaround among China’s struggling airlines. China has been much slower than the United States to recover from the shock of the 2020-2023 pandemic as the world’s second-largest economy faces its own unique challenges. But among several analysts, from DBS to Citigroup, Beijing-based Air China is the top pick for sustained growth in Chinese travel at home and abroad. Air China, part of United Airlines’ Star Alliance group, “is the only Chinese network carrier serving all six continents worldwide, with a particularly strong presence on the lucrative China-Europe and China-North America routes.” DBS analysts Jason Sum and Paul Yong said in a report on Thursday. DBS maintained a buy rating with a target price of HK$5.60 (72 cents), suggesting an upside of 13% from Air China’s close on Friday. Air China’s 753-HK 5Y line is 60% below its peak. While Hong Kong’s Hang Seng Index is up nearly 18% in 2024, Air China posted more muted, low-single-digit growth, leaving it trading more than 60% below its 2018 record. high. That gives Air China a “significantly more attractive” valuation, close to its five-year pre-pandemic average, DBS analysts said. “Better-than-expected cash flows will enable the group to quickly deleverage and repair its battered balance sheet.” The upcoming Lunar New Year, which runs from late January to early February, could provide a boost. Chinese booking site Trip.com noted that interest in international travel has surged during the holidays. Demand for travel tickets from mainland China to parts of Europe is up about 50% from last year, while inbound demand has tripled, with travelers coming from both neighboring Japan and as far away as the United States, Trip said in its forecast. com on Tuesday. Expanding visa-free travel Authorities in China have in recent months expanded their visa-free travel policy for travelers from several countries, including parts of Europe and Japan in particular. Citi analysts in early December reiterated their buy rating on Air China shares, calling it a top pick for travel stocks among Chinese airlines. They expect the government’s economic policies to support consumption next year. JPMorgan analysts expressed similar optimism in late November, citing Air China’s larger exposure to international travel than rivals and its roughly 30% stake in Hong Kong-based Cathay Pacific. Analysts upgraded Air China from neutral to outperform, reversing a downgrade made in early October, according to FactSet. JPM analysts also raised their target price to HKD5.90 based on expectations of significant earnings improvement over the next two years. JPM analysts also expect airlines to benefit from lower fuel costs if President-elect Donald Trump follows through on his promises to lower energy prices further. US airline stocks have outperformed the S&P 500 since early October, JPMorgan analysts say. Back in early November, Goldman Sachs analysts had already named Air China as a “major beneficiary” of the increase in business travel and the resumption of long-haul flights. Goldman expects domestic air travel to grow 11% in 2024, above 2019 levels, and grow another 6% in 2025. Analysts expect international traffic to recover to levels slightly above 2019 levels next year. However, Air China has a long way to go to catch up with its peer United, which closed at a new record in early December and soared 135% in 2024, its biggest annual gain ever. Chicago-based United, which flies more international routes than any U.S. airline, has benefited from lower jet fuel costs and a continued recovery in travel demand from the pandemic. — CNBC’s Michael Bloom and Sean Conlon contributed to this report.
