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Investment Research Analysis Risk Management China Southern Airline

China Southern Airline

Company Overview

China Southern Airlines Company Limited (CSA), with world headquarters based in Guangzhou, China, is a provider of airline services. The Company’s main businesses consist of passenger transportation, freight transportation, mail transportation and others. The Company operates domestic airlines, airlines among Hong Kong, Macau and Taiwan, as well as international airlines. As of December 31, 2021, the company operated 1,401 routes, of which 1,303 were domestic, 90 were international and 8 were regional (Hong Kong, Macau and Taiwan). Through close cooperation with its global airline partners including American Airlines and Qatar Airways, CSA continues to extend its route network to more destinations around the world.

Based on the statistics of the CAAC, China Southern Airlines is one of the largest Chinese airlines and, as of December 31, 2021, it was ranked first in Asia in terms of number of passengers carried, number of scheduled flights per week, number of hours flown, number of routes and size of aircraft fleet.

In 2020, passenger demand dropped sharply and CSA’s passenger revenue plummeted. Cargo volumes had also fallen, but prices raised, and cargo revenues bucked the trend. In 2021, passenger demand recovered slowly and cargo transport showed a strong demand. Overall, CSA’s operating revenue dropped sharply in 2020 and recovered slowly in 2021.

CSA Revenue

Source investopedia.

Founders

China Southern Airlines was decentralized from CAAC Airlines and was incorporated under the PRC laws on March 25, 1995. It is now indirectly majority owned by the Chinese government. China Southern Air Holding Company Limited (CSAH), an entity wholly-owned by the Chinese government, directly and indirectly held and exercised the rights of ownership of 64.20% of CSA’s equity stake as of April 22, 2022.

Shareholding Structure:

Shareholding Structure

Source Airchina.com

Major Shareholders of CSA:

Major Shareholders of CSA

Source Airchina.com

CSA completed its initial public offering of H Shares on July 30, 1997 and of A Shares on July 25, 2003.

The principal trading market for CSA’s A Shares is the Shanghai Stock Exchange, they are traded in Chinese yuan and are only available for purchase by Mainland China citizens and selected foreign institutions, known as Qualified Foreign Institutional Investors (QFII), that meet certain requirements by China’s State Administration of Foreign Exchange.

The principal trading market for our Company’s H Shares is the Hong Kong Stock Exchange, they are traded in Hong Kong Dollars and are open for trading to all investors.

Shareholders of H Shares and A Shares enjoy the same voting rights with respect to each share. Under the PRC company law, holders of H Shares and ADSs (American depositary shares) generally are required to resolve disputes with the Company, its senior management and holders of its A Shares only through arbitration in Hong Kong or China.

As shown in the graph above, the largest holders of A Shares of CSA are CSAH, China National Aviation Fuel Group Corporation, and Hong Kong Securities Clearing Company Limited, which, as of March 31, 2022, hold 67.87%, 2.79%, and 4.83% of CSA’s A Shares respectively.

The largest holders of H Shares of CSA are CSAH, HKSCC Nominees Limited, and American Airlines Group Inc., which, as of March 31, 2022, hold 40.95%, 53.33%, and 6.33% of CSA’s H Shares respectively.

Board of Directors

Ma Xulun

Chairman of the Board, Executive Director, President

  • He obtained a Master of Engineering degree from Huazhong University of Science and Technology, China
  • In 2016, he served as the Director, the President and the Deputy Party Secretary of China Eastern Air Holding Company, and the Vice Chairman, the President and the Deputy Party Secretary of China Eastern Airlines Corporation Limited
  • Since December 2020, he has served as the President and Chairman of China Southern Air Holding (CSAH)
  • Currently, he also acts as the vice chairman of China Chamber of International Commerce, member of China Council for the Promotion of International Trade and director of the board of International Air Transport Association

Han Wensheng

Executive Director, Vice Chairman of the Board, President

  • He obtained a Master of Engineering degree from Tianjin University, China
  • He served as the Deputy Director General of Cadre Training Center of the China Southern Airlines Limited
  • Since October 2016, he has served as the Vice President and the Party Member of CSAH.
  • Currently, he also acts as the standing committee member of the 12th session of Guangdong Provincial Committee of Chinese People’s Political Consultative Conference.

Liu Changle

Independent Non-Executive Director

  • He graduated from the Communication University of China with a Bachelor’s degree
  • He was conferred an honorary doctoral degree in literature by the City University of Hong Kong and an honorary doctoral degree in management sciences by the University of South China.
  • He founded Phoenix Satellite Television in 1996 and had been the Executive Director, Chairman and Chief Executive Officer of Phoenix Media Investment (Holdings) Limited.
  • He is currently a member of the Thirteenth National Committee of the Chinese People’s Political Consultative Conference

Gu Huizhong

Independent Non-Executive Director

  • He obtained a Master of International Finance degree from Beihang University, China
  • He served as the Deputy Chief and Chief of the General Office of the Financial Division of Aviation Industry Department and the General Manager of Zhongzhen Accounting Consultative Corporation

Guo Wei

Independent Non-Executive Director

  • He obtained a Master of Management degree from the University of Science and Technology of China
  • He served as Executive Director and the Senior Vice President of the Lenovo Group
  • Currently, he is the Executive Director, Chairman of the Board of Directors and Chief Executive Officer of Digital China Holdings Limited, the Chairman of Digital China Group Co., Ltd and the Chairman of Digital China Information Service Co., Ltd

Yan Andrew Y

Independent Non-Executive Director

  • He obtained a Master of International Political Economy from Princeton University
  • From January 1993 to February 1994, he served as the Director of Asia Business Development of US Sprint Corporation
  • From March 1994 to September 2001, he served as the Managing Director and Head of Hong Kong office of Emerging Markets Partnership, the management company of AIG Asian Infrastructure Funds

Executive Team

Qualifications of Executive Vice Presidents included

Zhang Zhengrong

Executive Vice President

  • He obtained an Executive Master of Business Administration (EMBA) degree from Tsinghua University
  • Since April 2014, he has acted as Chief Pilot, COO Flight Safety and Director of Aviation Security Department of CSAH
  • Currently, he also serves as the chairman of Guizhou Airlines Company Limited, and Vice President of the fourth Council of Aircraft Owners and Pilots Association of China

Luo Laijun

Executive Vice President

  • He obtained an Executive Master of Business Administration (EMBA) degree from Tsinghua University
  • He acted as Director of Business Assessment Office of the Company in June 2005; Deputy Director of Commercial Steering Committee and General Manager and Party Member of Financing Plan Department of the Company in November 2005; General Manager and Deputy Party Secretary of Freight Department of the Company in February 2009; the General Manager and the Deputy Party Secretary of Dalian Branch of the Company in July 2012

Wu Yingxiang

Executive Vice President

  •  She graduated from Business Administration Department of Central South University of Technology with a bachelor’s degree, majoring in International Accounting and obtained an Executive Master of Business Administration (EMBA) degree from Tsinghua University
  • She served as the General Manager and Deputy Party Secretary of Shantou Airlines Company Limited in September 2018; the Executive Vice President and Party Member of CSAH as well as the Executive Vice President of CSA in June 2020
  • Currently, she also serves as vice chairman of China National Aviation Corporation (Hong Kong) Limited and the chairman of Shantou Airlines Company Limited

Yao Yong

Executive Vice President, Chief Accountant and Chief Financial Officer

  • He graduated from National Economics and Management College of Sichuan University with a bachelor’s degree of economics, majoring in National Economic Management. He holds a Master of Business Administration degree from University of Electronic Science and Technology of China
  • He has served as the chief accountant and the Party Member of CSAH since March 2021, and the Executive Vice President, chief accountant and Chief Financial Officer of CSA since April 2021
  • Currently, he also serves as Director of China Southern Airlines Overseas (Hong Kong) Co. Ltd. and Chairman of China Southern Airlines Group Finance Company Limited

Cheng Yong

Executive Vice President

  • He graduated from Civil Aviation Flight College of China majoring in Aircraft Piloting and Civil Aviation Flight University of China majoring in Wingmanship, with a bachelor’s degree. He obtained an Executive Master of Business Administration (EMBA) degree from Tsinghua University and is a qualified senior pilot
  • He has been the Deputy Head of Shenyang Chief Flight Corps Team of China Northern Airlines Company, vice president of China Northern Airlines Company Tian’e LLC and president of China Northern Airlines Company Sanya Co.
  • Currently, he also serves as the chairman of Guangzhou Nanland Air Catering Company Limited, Shenzhen Air Catering Co., Ltd., Guangzhou China Southern Airlines China Duty Free Co., Ltd. and Southern Airlines Ka Yuen (Guangzhou) Aviation Supply Company Limited.

Wang Zhixue

Executive Vice President

  • He obtained a degree from Civil Aviation Flight University of China majoring in Wingmanship, and is a qualified senior pilot
  • He acted as the Deputy General Manager of Shantou Airlines Company Limited of CSAH from June 2002, and the General Manager of the Flight Management Division of CSA from October 2004
  • Currently, he also serves as Vice Chairman, President and Legal Representative of Xiamen Airlines Company Limited and a member of the twelfth Committee of the Chinese People’s Political Consultative Conference of Fujian Province

Su Liang

Chief Economist

Chen Weihua

Chief Legal Adviser

Li Shaobin

Chief Training Officer

Xie Bing

Company Secretary, Secretary to the Board

Feng Huanan

COO Flight Safety

Luo Minghao

Chief Pilot

Zhu Hailong

Chief Operation Officer

Wu Rongxin

Chief Engineer

Product Positioning

CSA’s main businesses include passenger transportation and cargo and mail transportation. Other services include but are not limited to aircraft repair and maintenance services and air catering services (operated by branch office only). As shown in the graph below, in 2021, passenger transportation, cargo and mail transportation, and other services accounted for 74%, 20%, and 6% of total revenue respectively.

Business Segment

As the following graph shows, the percentage of cargo and mail revenue has increased since 2020. This was due to the decrease in passenger demand and increase in cargo prices and demand under the influence of the COVID-19 pandemic.

Business Segment 2021

Passenger Transportation

CSA provides commercial airline services throughout Mainland China, Hong Kong, Macau and Taiwan regions, Southeast Asia and other parts of the world. Its operations primarily focus on the Mainland China domestic market. In 2021, CSA operated 1,401 routes, of which 1,303 were domestic, 90 were international and 8 were regional.

Beginning in 2020, due to the COVID-19 pandemic and its negative impact on the air travel demand in domestic and international markets, as well as the various travel restrictions and border control measures implemented by government authorities of China and other countries, CSA had to make certain adjustments to its routes, including temporarily suspending or reducing the number of flights on some routes. CSA’s domestic routes were significantly affected during the first quarter of 2020 and have been gradually recovering since then, while its international routes have been adversely impacted since the second quarter of 2020 and remained affected as of the end of 2021.

As shown in the graph below, in 2021 the revenues generated by domestic, international, and Hong Kong, Macau and Taiwan flights take up 91.07%, 8.63% and 0.3% of total passenger revenue respectively.

Geographic Segment

As the following graph shows, beginning in 2020, the proportion of domestic passenger revenue started to increase and the proportion of international passenger revenue started to decrease.

Geographic Segment 2021

Domestic Routes

CSA operates an extensive domestic route network. Its route network covers commercial centers and rapidly developing economic regions in Mainland China. In addition to its core hubs in Guangzhou and Beijing, CSA also maintains route bases located in other 19 major Chinese cities (Zhengzhou, Wuhan, Changsha, Shenzhen, Shenyang, Changchun, Dalian, Harbin, Haikou, Zhuhai, Xiamen, Shanghai, Xi’an, Fuzhou, Nanning, Guilin, Shantou, Guiyang and Sanya), the majority of which are provincial capitals or major commercial centers in the PRC. CSA’s domestic routes network serves substantially all provinces and autonomous regions in China.

In 2021, its most frequent domestic routes were: Shanghai Hongqiao-Shenzhen, Guangzhou-Hangzhou, Guangzhou-Beijing Daxing, Guangzhou-Shanghai Hongqiao, Beijing Daxing-Shenzhen, Shenzhen-Hangzhou, Guangzhou-Chongqing, Guangzhou-Haikou, Guangzhou-Xi’an, Chengdu- Beijing Daxing.

Regional Routes

CSA offers scheduled service between Hong Kong and Beijing, Shenyang, Meixian, Wuhan, Yiwu; and between Taipei and Guangzhou, Zhengzhou, Changchun, Dalian, Zhangjiajie, Changsha, Harbin, Guiyang, Guilin, Nanning, Shanghai, Shenyang, Jieyang, Shenzhen, Wuhan, Shijiazhuang, Yiwu and Urumqi; and between Macau and Chongqing, Changsha, Wuhan.

In 2021, the most frequent regional routes were: Shanghai Pudong-Taipei, Xiamen-Taipei, Hangzhou-Macau, Quanzhou-Macau, Xiamen-Hong Kong, Xiamen-Macau, Fuzhou-Macau, Xiamen-Taipei Songshan, Fuzhou-Hong Kong. Due to CAAC’s requirements in response to the COVID-19 pandemic, as of December 31, 2021, only one route to Taiwan (Shanghai Pudong-Taipei) was retained.

International Routes

CSA’s international operations include scheduled services to cities in Australia, Bangladesh, Cambodia, Canada, Dutch, France, Indonesia, Japan, Kenya, Malaysia, Myanmar, Nepal, New Zealand, Pakistan, Philippines, Singapore, South Korea, Thailand, United States of America (USA), and Vietnam.

CSA’s most popular international routes are its United States routes and European routes. In 2021, its most frequent international routes were: Shanghai Pudong-Los Angeles, Shanghai Pudong – Frankfurt, Guangzhou-Frankfurt, Guangzhou-Los Angeles, Guangzhou-Amsterdam, Shanghai Pudong-Amsterdam, Shanghai Pudong-Anchorage-Chicago, Chicago-Shanghai Pudong, Guangzhou-Anchorage-Los Angeles, and Guangzhou-London.

Cargo and Mail Transportation

CSA also provides air cargo and mail services. A significant portion of these services are combined with passenger flights services. CSA conducts its cargo business primarily through its cargo hubs in Guangzhou and Shanghai. In 2021, CSA had two Boeing 747 freighters and 14 Boeing 777 freighters, mainly servicing 13 international cargo routes, including:

Guangzhou–Chongqing–Amsterdam–Guangzhou, Guangzhou–Amsterdam–Guangzhou, Guangzhou–Frankfurt–London–Guangzhou, Guangzhou–Frankfurt–Guangzhou, Guangzhou–Anchorage–LosAngeles–Guangzhou, Guangzhou–HoChiMinhCity–Hanoi–Guangzhou, ShanghaiPudong–Amsterdam–Chongqing–ShanghaiPudong, ShanghaiPudong–Amsterdam–ShanghaiPudong, ShanghaiPudong–Frankfurt–ShanghaiPudong, ShanghaiPudong–Anchorage–Chicago–ShanghaiPudong, and ShanghaiPudong–LosAngeles–ShanghaiPudong, Shenzhen-Frankfurt-Shenzhen and Shenzhen-Anchorage-Chicago-Shenzhen.

Competitive Analysis

Domestic

CSA faces competition from other Chinese airlines as well as high-speed railways.

In the Chinese aviation industry, the three major airlines are China Southern Airlines, Air China and China Eastern Airlines. In 2021, these three airlines together controlled approximately 55.82% of the commercial aviation market in China as measured by the number of passengers carried. Currently, CSA has over 50% of the market share in Guangzhou, where the Company bases. In 2021, CSA had a market share of 22.4% of passengers carried and 19.7% of cargo and mail carried. The graph below shows CSA’s market share of passengers carried and cargo and mail carried in China over the past five years. While CSA’s market share of passenger transportation has been fluctuating slightly around 23%, there is a gradual decrease in CSA’s market share of cargo and mail transportation in recent years.

CSA Market Share

Source Market Share

On Skytrax, Air China and China Eastern Airlines have overall ratings of 4 and 5 out of 10 respectively. China Southern Airlines has the highest rating of 8 among all three airlines. The graph below shows the three airlines’ specific ratings in terms of food & beverages, inflight entertainment, seat comfort, staff service, and value for money. CSA has the highest ratings in all criteria.

Airlines Ratings

CSA also faces competition from the increased use of high-speed railways. The “eight horizontal and eight vertical” high-speed railway corridors connecting the major cities in Northern, Central, and Southern China are gradually being developed. Cities with populations of over 500,000 will be connected with high-speed rail lines so as to form the city connections within travel ranges of one, two and three hours respectively. The maximum operating speed of high-speed railways is 350 kilometers per hour. Further improvements are expected in the future. The company has been reporting losses of customers since the Beijing-Shanghai, Beijing-Guangzhou High-Speed Railway commenced operation in 2011 and 2012 respectively. The competition on passengers whose trip distances are from 800 kilometers to 1,000 kilometers is intense, and with increasing speed, high-speed railways may attract passengers who travel longer than 1,000 kilometers. The operating results of the CSA’s routes that overlap with the high-speed rail network will be impacted in the future to a certain extent.

Global

CSA competes with Air China, China Eastern Airlines, as well as other non-Chinese airlines on its international routes. As shown in the table below, among its competitors, CSA is outstanding in terms of its rating, number of employees and fleet size.

Compared to other Chinese airlines, CSA provides better flight experience, as indicated by the ratings. However, Air China and China Eastern Airlines have greater focuses on the international market and generally have greater frequencies of international flights to and from China. Other non-Chinese airlines, as listed in the table below, also have more frequent international flights to and from China. Non-Chinese airlines also have stronger brand recognition than CSA among international passengers.

Airlines Competing Region Ratings on Skytrax Number of Employees (thousand) Fleet Size
China Southern Airlines Domestic, Asia, Europe, US, Australia 8 98.1 878
Air China Domestic, Asia, Europe, US, Australia 4 88.4 475
China Eastern Airlines Domestic, Asia, Europe, US, Australia 5 77.01 600
All Nippon Airways Asia 8 45.8 214
Thai Airways International Asia 7 14.9 43
Singapore Airlines Asia 7 14.4 147
Cathay Pacific Asia, Europe, US 7 21.6 126
Air France Europe 5 84.6 212
Lufthansa Group Europe 6 105.3 285
American Airlines US 2 123.4 913
Delta Air Lines US 4 83 877

Source Market Share

20-F Research

Form 20-F is an annual report filing for non-U.S. and non-Canadian companies that have securities trading in the U.S.. Given China Southern Airline was listed in HongKong and published in the U.S. as American depositary share (ADS), the financial data is collected from 20-F instead of 10K for further research.

In total, we identified all the risk factors from 2003 to 2022 and categorized them into 35 risk factors, including risks related to China Southern Airline business, risks associated with the Chinese common aviation industry, and risks related to Politics.

Overall, the risk factors of China Southern Airlines have increased from 2003(15 types) to 2022 (31 types). The reason for this may also be related to the increasingly comprehensive risk prediction model.

Risk Factor

source investopedia.

As the graph shows above, there are 3 risk likelihoods, improbable, possible and  probable to represent the likelihood of the event happening, and 4 risk severity levels, acceptable, tolerable, undesirable and intolerable to show the risk severity.

The risk factors(some omitted) sorted out from 20-F will be placed in the risk matrix according to their characteristics.Deeper colors in the risk matrix represent higher risk rating, such as Employee Misconduct, the Holding Foreign Companies Accountable Act, COVID-19 pandemic, Data Obligations between US and China.

Risk Factors Occurrence Table

Risk Factors Occurrence Table

Source investopedia.

35 risk factors are classified into three categories: Most Mentioned Risk Factors, Multiple Mentioned Risk Factors, Mentioned at Specific Time Risk Factors,  based on their first occurrence year and end year and  frequency.

Most Mentioned risk factors(20 times) usually caused by the common factors among aviation industry or special market type in China, basically these type of risk factors will not be easily changed by a single company:

Government Effect:China Southern Airlines are indirectly majority owned by the Chinese government, which may exert influence in a manner that may conflict with the interests of holders of ADSs, H Shares and A Shares.

High Leverage and High Fixed Cost: Due to a high degree of operating leverage and high fixed costs, a decrease in our revenue could result in a disproportionately higher decrease in our profit.

Unfavorable Foreign Exchange Rate: The results of operations are also significantly exposed to fluctuations in foreign exchange rates.

Lawsuit for land and building ownership: Lack of adequate documentation for land use rights and ownership of buildings may subject us to challenges and claims by third parties.

Jet Fuel Shortage: The results of operations may be negatively impacted by any jet fuel shortages or any fluctuation in domestic prices for jet fuel.

Chinese Insufficient Aviation Industry: Compared with other countries, China’s overall aviation industry expansion is relatively lagging behind.

Market Competition: Both domestic and international for airline markets, and from alternative means of transportation, especially Chinese rail network.

Limitation on Foreign Ownership:Limitations on foreign ownership of Chinese airlines: may affect our access to funding in the international equity capital markets.

Multiple Mentioned risk factors(9-19 times) are usually raised as the company grows and are expected to continue in future. These risk factors may arise due to complex business environments and improvement of risk models:

Employee Misconduct: Experienced incidents of employee misconduct in the past, and may be unable to prevent similar incidents in the future, which could adversely impact our reputation, our business and the trading price of our securities.

European Emission: The European Emissions Trading Scheme may increase the operational cost of the Group, starting in 2011.

Mentioned at Specific Time risk factors(less than 9) occurred at a specific time or just recently, usually these could cause significant effect on a company in a short period:

COVID-19 Pandemic: The outbreak and global spread of the COVID-19 pandemic have had a material adverse effect on our business. The duration and severity of the pandemic, and similar public health threats or a large-scale natural disaster we may face in the future, could result in additional adverse effects on our business.

Data Obligation between The US and China:Stringent laws and contractual obligations related to data privacy and cybersecurity, and we may be exposed to risks related to our management of personal information and other data.

Timeline of Risk Factors

 

Timeline of Risk Factors

Source investopedia.

Financials Since IPO

The china southern airline historical data was downloaded from the airline websites, the return for the airline can be found in different period but for our case end year financial statements will be our area of concerns and the period of this analysis shall be from 2017 to 2021.We can find the airline P/E ratio for the three years where the airline stock price in 2017-09-30 was at 33.52 and EPS for the year was $4.59.hence the Airlines P/E is 7.30.in 2018-03-31 stock price was 51.33 and EPS $4.50 the P/E for the year was 11.41,in 2019-09-30 the stock price stood at 30.05,the EPS at $6.57 the years P/E ratio is 4.57.In 2020-09-30 the stock price stood at 27.19,the EPS at $0.48the years P/E ratio is 56.65.Lastly 2021 the stock price was 27.83,the EPS $-4.73 ,therefore the P/E was 0.

Financials Since IPO

Source investopedia.

From this analysis it can be noted that the P/E ratio for the airline is positive apart from 2020 which had a zero P/E as a result of negative EPS. This also indicates the airline’s current operating conditions are at  profit. Thus, we need to analyze the cash flow statement and profit statements to find the reasons for its profit.

From China Southern Airline income statement, it is evident that the total operating revenue for the period in 2021 was $101,644,2020 $ 92,561,2019 $ 154,322,2018 $143,623 and in 2017 it was $127,806. And the operating cost for the airline in 2021 was 116,340 2020 109,111, in 2019 was 148,608,2018 was 140,242and in 2017 was 123,098. in 2021 the operating costs exceeded the revenue generated with -14696 a loss of 14%, whoever’s comparing 2017 operating costs with 2021 costs it shows that, the airline has decreased operating costs by 6758, representing 5.5 % decrease. It is evident that the airline is trying to change its current financial situation of losses as soon as possible, the current losses are as a result of the effects of COVID-19, as the pandemic decreases the business will pick up due to lifting of travel restrictions experienced in many countries. Since the beginning of 2020 the effect of Covid 19 on the market has resulted in plummets of the entire stock market. But from the second quarter the airline performance is increasing.

 Operating Cash Flow Analysis

Operating Activities
item 2021 2020 2019 2018 2017
Net income before extraordinary (16,764) (17,075) 4,598 5,169 10,232
Net Income Growth 1.82% -471.34% -11.05% -49.48%
Depreciation, Depletion & Amortization 29,216 27,559 27,841 16,546 14,947
Depreciation and Depletion 28,591 27,310 27,545 16,546 14,947
Amortization of Intangible Assets 624 248 296
Funds from Operations 11176 10578 30428 21278 19914
Changes in Working Capital -1585 -7146 5243 -2722 789
Other Funds -1225 -94 -2012 -437 -5266
Receivables -1920 1582 1336 -3564 -1760
Accounts Payable 699 -1569 2472 218 256
Inventories 130 149 -203 -91 -39
Other Accruals 370 257
Other Assets/Liabilities -494 -7301 1639 346 2074
Net Operating Cash Flow 9591 3433 35671 18556 20703
Net Operating Cash Flow Growth 179.31% -90.38% -92.24% -10.37%
Net Operating Cash Flow / Sales 7.83% 3.30% 20.38% 10.96% 14.05%

airline operating cash flows

Source Yahoofinance

The airline operating cash flows is always fluctuating from up and down /The net operating cash flows decreased in 2017 from 20703 million to 18556 Million in 2018 in 20219 the operating cash flow increased to 35671 million representing 47.98% increase.The cash flow then declined in 2020 to 3433 million and increased slightly in 2021 to 9591million.The cash flow trends shows that net operating cash flow will decrease for a given period of time.The ratio that compares the net operating cash flows of the airline  had declined in the first quarter of 2021.The net operating ratio depicts that in 2017 the ratio was at 7.83% but declined in 2018 to 3.30% ,however in 2019 the ratio increased to 20.38 am increase of about 17.08 %.Despite that increase in 2020 than net cash flow from sales decreased to 10.96% while in 2021 there was an increase of about 3.09%.

On depreciation, depletion and amortization the amount increased yearly from 14947 million to 16546 million in the year 2017 and 2018 respectively. Amortization done on intangible assets showed that there was a gradual increase in this from 296 million in 2019 to 248 million in 2020 to 624 million in 2021. The funds from operation were all positive each year, this created an increase in net income each year. Changes in working capital had a negative figure except 2019 and 2017 which depicted a positive figure. Account payable decreased in the year 2017 from 256million to 218 in 2018, there was also an increase in account payable in 2019 at 2472 million. However in 2020 the account payable was negative with a sharp increase in 2021.Lastly the inventories had a negative figure in 2017 and 2018 but in 2019 to 2021 it has a positive figure.

Capitalization Analysis

2021 2020 2019 2018 2017
Total Capitalization 104, 417,000 82, 476,000 78, 905,000 72, 714,000 104, 331,000
Common Stock Equity 10 088 173 12 267 172 12 267 172 15 329 302 16 948 417
Total Debt 94,328,827 70,208,828 66,637,828 57,384,698 87,382,583

The total capitalization of china southern airline has been increasing relatively from 2017 to 2021.commons stock declined from 12,267,172 in 2020, to 10,088,173. Total debts increased from 2018 to 2021.

Cash Holding 

Year 2018 2019 2020 2021(YTD)
Cash Holding Valuation $6928 $1849 $25419 $21450
  • China Southern airline cash on hand for 2018 was $6928. In 2019 it reported cash in hand of $1849, a decrease of 73.31%.
  • China Southern airline cash in hand for 2019 was $1849, in 2020 it increased to $25419 an increase of 92.72%
  • China Southern airline cash in hand for 2020 was $25419, in 2021 it reported cash in hand of $21450 a decrease of 15.61%.

Southern airline total assets, total liabilities, cash and cash equivalent, account payable, account receivables and shareholders’ equity

We can find the total assets, total liabilities, cash and cash equivalent, account payable, account receivable and shareholder equity for the period of 2017 to 2021 obtained from the company’s financial statements.

Breakdown 2017 2018 2019 2020 2021
Total assets 17,884 24,072 16,738 38,985 37,866
Total liabilities 86,598 84,793 134,109 145,571 127,713
Total equity 62,543 78,469 77,329 85,131 84,508

Total Asset

Source Yahoofinance

I can simply analyze southern airline assets in that, in 2017 the total assets were $17,884 and in 2018, $24072 an increase of $6188 representing 25.71% increase. In 2019 the airline assets decreased to $ 16738, representing a decrease of $1146 representing a decrease of 6.84%. Total assets increased in 2020 but declined in 2021 by $1,119. On liabilities, the company has had a gradual increase in liabilities from  $86598 to $127,713. From investors point of view, the total equity for China Southern Airlines has increased making it a good investment decision for them. In 2017 the airline had a total equity fund of $ 62,543, in 2018 equity stood at 78469, in 2019 at 77,329,2020 was 85,131 and 84,508. We can see the percentage increase of the airline equity appreciating gradually from 25.46% from 2017-2018, an increase of 1.47% while in 2020 and 2021 had a decrease of 0.73%.

Comparing Companies Using P/E

We can find the airline P/E ratio for the three years where the airline stock price in 2017-09-30 was at 33.52 and EPS for the year was $4.59.hence the Airlines P/E is 7.30.in 2018-03-31 stock price was 51.33 and EPS $4.50 the P/E for the year was 11.41,making an increase of 4.11 representing 56.30%.In 2019-09-30 the stock price stood at 30.05,the EPS at $6.57 the years P/E ratio is 4.57 ,this denotes a decrease of 6.84 representing a decrease of 59.94%.In 2020-09-30 the stock price stood at 27.19,the EPS at $0.48the years P/E ratio is 56.65.Lastly 2021 the stock price was 27.83,the EPS $-4.73 ,therefore the P/E was 0.00.The last year indicated zero P/E which denotes that the china southern airline current operating condition is at a loss and this will necessitate a check on the cash flows and profit statements to assess the main reasons for this loss.

2021 2020 2019 2018 2017
Working Capital 84,508 85,131 77,329 78,469 62,543
Operating Revenue 101,644 92,561 154,322 143,623 127,806
Operating Expense 116,340 109,111 148,608 140,242 123,098

From China Southern airline, we can see that the operating revenue in 2021 stood at $101,644 million. In 2020 total revenue decreased $92,561M, making a loss of $9083M a decrease of 8.94%. The revenue increased in 2019 to $154,322M meaning an increase of $61,761. The revenue in 2018 stood at $143,623M a decrease of about $10709M making a decrease of 6.94%. The company hasn’t reported on the amount invested in research and development which might be one of the contributors to decrease in revenue annually.

Break-even Analysis

The Breakeven Load Factor (BLF), which is the average percentage of seats (or tons) that must be filled on an average flight at current average fares for the airline’s revenue to break even with its operating expenses. The formula used to calculate BLF is Unit Cost/Yield per RTK, where ATK stands for Available Tons kilometers and RTK stands for Revenue Tons Kilometers

As the graph below shows, since 2020, CSA’s BLF has increased and its actual load factor has decreased. In 2020 and 2021, the BLF is higher than the actual load factor, which indicates that there were operating losses. The decrease in the actual load factor in 2020 is primarily due to Covid restrictions on the load factors of flights. In 2020, fewer passengers were allowed on planes. This decrease in the actual load factor has resulted in a lower yield per RTK of 4.45 in 2020, which caused BLF to increase from 67.66% in 2019 to 72.36% in 2020. In 2021, although the yield per RTK has returned to the pre-pandemic level, the rising jet fuel expenses and high fixed costs have resulted in a higher unit cost of 3.471 in 2021, which caused BLF to remain high at 72.43%.

Break-even Analysis

Source yahoofinance

Year Unit Cost Yield per RTK BLF Actual LF
2021 3.471 4.79 72.43% 63.30%
2020 3.219 4.45 72.36% 61.40%
2019 3.200 4.73 67.66% 70.30%
2018 3.282 4.73 69.32% 71.00%
2017 3.211 4.68 68.65% 71.30%

Cash Flow Projections

2021 2022P 2023P 2024P 2025P 2026P
Unlevered free cash flows (UFCF) (7,031) (5,118) (2,789) (53) 3,159 6,909
Discount rate (r) 10% 10% 10% 10% 10%
PV of UFCFs (4,653) (2,305) (40) 2,158 4,290
Sum of present values (551) in RMB Millions  (82.17) in USD Million

The unlevered free cash flow in 2021 is -7031 millions in RMB. The annual revenue growth rate from 2020 to 2021 is 9.8%, if we assume a future annual revenue growth rate of 9.8% in the following five years, the projected unlevered free cash flows (UFCF) is presented as in the table above. UFCFs will be increasing and in 2026, it is expected to be 6,909 millions in RMB. If we assume the discount rate to be 10%, the present value of the projected UFCF in 2026 would be 4,290 million. The sum of all present values of future UFCFs five years from now is -551 millions in RMB and 82.17 million in US dollars.

Industry Average Valuation Multiples

The industry average valuation multiples are calculated using financials of 25 public airlines operating in mainly US, Asia, and Europe. The adjusted industry average has also been calculated to exclude outliers. As the table below shows, the adjusted industry average of EV / LTM Revenue is 1.9. The adjusted average of EV / LTM EBIT is -10.6, which shows that airlines around the world generally have negative EBIT. For EV/LTM EBITDA, the adjusted industry average is 6.2. The adjusted average of P/E ratio is -2.1, suggesting that the airlines around the world generally have negative earnings per share. The Price/Book ratio has an adjusted average of 2.1, which is greater than 1 and may suggest that the airlines are overvalued.

EV / LTM Revenue EV / LTM EBIT EV / LTM EBITDA P/E Ratio Price / Book
Industry Avg 1.956 -10.612 15.034 -0.601 32.021
Max 4.72 76.12 291.03 69.05 756.32
Min 0.55 -96.74 -57.93 -36.47 -4.85
Adjusted avg 1.9 -10.6 6.2 -2.1 2.1

Stock Price Analysis

IPO Price:

Stock Price Analysis

From July to August 1997, the company issued 1,173,178,000 (1.173 Billion) shares in Hong Kong Stock. At 7/30/1997 the ZNH stock open price was 20.67, close at 21.00, volume 4,703,100. At the 1997, the total capital of company: 3,374,178,000 shares, owned by State Share: 2,200,000,000 (65.2%), H Share: 1,174,178,000 (34.8%), A Share: 0 (0%)

On July 10, 2003, the company issued 1,000,000,000 (1 Billion) ordinary shares with a par value of RMB 1.00 per share through all placements to secondary market investors at a price of RMB 2.70 per share. In 2003, the total capital of the company: 4,374,178,000 shares, State Share: 2,200,000,000 (50.2%), H Share: 1,174,178,000 (26.84%), A Share: 1,000,000,000 (22.86%).

Stock Price since IPO:

Source Yahoofinance

CSA.HK * USD/HKD have a slight difference with CSA.US, which means that there exists risk free arbitrage possibility, for example, the buyer could make profit by selling the CSA US share and buy CSA HK share at the same time with specific rate to earn the risk-free profit. One possible explanation for that is China has a strict foreign investment limitation and currency regulation, which could lead to a temporary insufficient market.

In the easy monetary policy years (2007, 2014, 2017), CSA annual price returns have extremely large volatility and we can easily identify there are three jumps over the years where:

First Jump: +798.41%, 6.28, 08/14/2006 – 56.42, 09/20/2007

Second Jump: +293.47%, 15.01, 10/24/2014 – 59.06, 06/24/2015

Third Jump: +179.29%, 24.63, 12/30/2016 – 68.78, 02/26/2018

Return since 1997: 28.74%

Highest Price (02/26/2018) : 68.78

Maximum Drawdown(MDD): -88.74%

56.42, 9/20/2007 – 6.35, 3/2/2009, during the Subprime crisis.

The COVID-19 pandemic has had a huge impact on the China and world economy, especially for their transportation industry. Since January 13, 2010, China has taken many measures trying to stop the virus transition such as cities locking-down, large-scale self-quarantined, pausing the aviation industry, and curfews, these measures lead to a significant effect on China Southern Airline stock price. Comparing the stock price with COVID timeline, the stock price is sensitive to domestic COVID policy and China daily reported COVID case.

Source Yahoofinance

The first wave maximum drawdown is 43.40% from 01/13/2020 to 01/31/2020.

Second wave drawdown is 33.51% from 03/01/2022 to 08/09/2022(most recent date).

On January 13, 2022, Wuhan city lockdown and next day other 13 cities lock down, China Southern Airline stock dropped 43% within two months, until March 18,2020 when the official announced the new cases in Wahan has returned into zero for the first time and unblocked the Wuhan city. After that, the stock price increased from 20.07 on March 18, 2020  to 36.18 on March 12,2021 with approximately 80% increase. On March 11, 2021, the national daily reported case was 588, and next day March 12, 2021 the reported case increased to 1938, most of the new cases happened in China’s northern region, since then China’s second wave of COVID outbreaks and the CSA stock price dropped from 39.51 on March 16, 2021 to 26.42 on August 9, 2022.

Linear Association between CSA Price with Other Factors

Source Yahoofinance

China Southern Airline(CSA) has a strong correlation with China Eastern Airlines (0.94) and Air China Limited(0.89), which implies Chinese airline industries could share common risk factors. However, the stock price for CSA in Hong Kong market and Shanghai Market could have different influential factors, given the correlation is 0.85 with CSA.SH, and 0.79 with CSA.SH * USD/CNY(stock price with currency rate). In addition, China Southern Airline(CSA) has less correlation with US airline companies, for example, 0.65 with Delta, 0.35 with American Airline Group. China Southern Airline(CSA) has negative association with Brent Crude Oil Price (-0.31), USD/CNH exchange rate (-0.56) and strong negative association with US Treasury Yield rate( -0.58 for 5 year, -0.66 for 10 years and -0.7 for 30 years) .

Index Analysis:

Source Investopedia

First, the domestic competitors index. The chart above comes from the stock price history of 3 airline companies from 2017-2022. The blue line is China Southern Airlines. The other two companies are the domestic competitors for China Southern Airlines( Grey-, Orange- China EasternAirlines). They have very similar trends. The Chinese Government holds majority ownership of the Groups, and china southern airlines while has a portion of shares.

Earlier, China’s three major domestic airlines (Air China, China Eastern Airlines, China Southern Airlines) released the first half of the 2022 earnings loss announcement. It shows in the first half of the year, the three major airlines are expected to lose a total of 45.7 billion yuan to 52.6 billion yuan, more than last year’s total losses. It shows the large amount of China’s current airline industry losses, The main reason is due to the lack of overall passenger traffic on China domestic routes, and many international routes have not yet recovered, so the utilization rate of wide-body aircraft is less than 30% of the original, so expenses such as rent and depreciation costs intensify their costs pressure. However, because China loosened the restriction on international flight meltdown policy that’s made in June and August, international routes will gradually recover, and revenue and stock price will rise.

Source spglobal

Then, the global airlines industry index. The green line is China Southern airline. Generally, all airlines industry stock prices decrease from 2017 to now because of the pandemic.

We can also see that airlines like Qantas airways and Cathay airways haven’t fallen much. It is probably because the companies have fewer international air routes and the impact of the outbreak is relatively small.

Recently, we can see there is a general and possible increasing trend for the airline industry.

Source spglobal

Then, for Comparative Index Analysis S&P 500, I changed the hong kong dollar to united states dollar, but the difference between S&P 500(S&P 500’s price is much larger than China Southern Airlines’ price) is huge so I compare the percentage changes data for China southern airline and S&P 500.

We can see they have different patterns, and The percentage change of S&P 500 is smaller than china southern airline

The big changes of the S & P 500 happened around 2020. around March 2020, and March 2022), China southern airlines had relatively big changes.

Source marketindex

Then Hong Kong Exchange index. Hang Seng Index is used to record and monitor daily changes of the largest companies of the Hong Kong stock market and is the main indicator of the overall market performance in Hong Kong. This chart is for the historical data of Hang Seng index for the past five years. We can see there is an obvious decreasing trend, so it also might be a potential risk because it means the overall market performance in Hong Kong might be decreasing further. It decreased 29.00% over the past 5 years, and it decreased -20.43% last year.

So in conclusion for the index analysis, I think there is potential for an upside in the stock price of China Southern Airlines, because the overall airline industry has an upward trend globally in 2022. Also, because of the change and relaxation of China Southern’s international flight policy, with the recovery of the international market and the increase of the utilization of wide-body aircraft, expenses such as rent and depreciation costs will be decreased. But at the same time, because China’s policy for COVID-19 is still changing, it is necessary to pay attention to the relevant policy and its impact.

Market Research

SWOT analysis:

The SWOT analysis method requires an objective and comprehensive analysis from four aspects: internal and external, favorable and unfavorable conditions. We sort the keypoint from China Southern Airlines Annual Report, and categories them based on these four rules.

For strength, China Southern Airline has well-rounded scale and network advantages, keeping constantly improved control and resources interoperability of integrated operation, striving for the world’s first-class brand service and all-rounded leading position of information system.

The weakness means the unfavorable internal problems, these may come from company management, financial risks.

The Opportunities stands for future favorable condition, for example, new round of global aviation industry restructuring, The bright long-term prospects of the aviation industry are bright.

The threat shows the future external unfavorable conditions, these may come from fluctuation in macro economy & macro policies, pandemics and natural disaster, fluctuation in foreign currency, fluctuation in Jet Fuel price, fluctuation in interest rate.

Mergers and Acquisitions

Date Companies Importance
End of the 1990s several smaller non-profitable domestic carriers
  • highlight its expansion plans in an effort to raise funds
  • among the deals was the purchase of 60% shares of Guizhou Airlines
2000 Zhongyuan Airlines
  • Zhongyuan Airlines was established in 1986, with routes including Zhengzhou to Beijing, Shanghai, Guangzhou, and more than 30 domestic cities in China.
  • In 1998, it suffered a loss in the development process of market-oriented operation.
  • It was acquired by China Southern Airlines on August 4th, 2000
  • After the merger, the combined group will command 60 percent of the transportation market at Zhengzhou Airport. Zhengzhou Airport currently handles flights from 40 destinations throughout China and more than 23,000 flights annually.
2002 China Northern Airlines
  • Established in 1990, the company is headquartered in Shenyang, Liaoning Province. The fleet once had 85 aircraft of various types and more than 150 routes.
  • In 2002, China Northern Airlines merged with China Southern Airlines
2002 Xinjiang Airlines
  • In 1985, Xinjiang Airlines was established.
  • In October 2002, Xinjiang Airlines merged with China Southern Airlines Group Company

In July 2000, the administrative body announced that the ten airlines under its direct management will be merged into three airline groups, revolving around Air China, China Eastern Airlines and China Southern itself. China Southern’s acquisition of their US$2 billion’s worth of assets (as well as $1.8 billion of debt) in November 2004. Consequently, China Southern’s fleet expanded from some 140 aircraft to over 210. The takeovers meant that the carrier became the main airline at Shenyang and Urumqi, with passenger numbers’ jumping from 28.2 million in 2004 to 44.1 million in 2005. As a result, China Southern Airlines became one of the “Big Three” carriers (China Southern Airlines, China Eastern Airlines, and Air China) in the country. Since then, it has successively taken over shareholding stocks and joined the equity in numerous Chinese carriers. The airline is the major shareholder of Xiamen Airlines (55%) and Chongqing Airlines (60%); it also invests in Sichuan Airlines (39%).

Joint Ventures

Date Companies Importance
17 Dec 2019 British Airways
  • As of Jan. 2, 2020, both airlines are codesharing on all 31 flights between London and Beijing, Shanghai, Guangzhou and so on, which expanded to further routes and reciprocal frequent flyer benefits in January 2019.
  • After The joint venture, they codeshare on all direct flights on routes between London and Beijing, Shanghai, Guangzhou and so on, a total of 31 flights a week.

This will expand to both airlines’ domestic networks.

2010 Air France KLM
  • France formed a partnership with China Southern Airlines to also create a joint venture on the Paris-Guangzhou route.
  • These agreements are currently combined to form a single joint venture between Europe and China.

Source Investopedia

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