Airline Stocks Forecast: China’s Priciest Airline Shares to Gain Higher Valuation as Economy Rebounds

| Feb 24, 2017 06:10 AM EST

China Southern Airlines

Although traded at their most expensive levels, the stocks of the country's "Big Three" air carriers--Air China Ltd., China Eastern Airlines Corp. and China Southern Airlines Co.--are expected to gain further valuation with the anticipated rebound of the Chinese economy, according to an analyst.

Xin Yang, an analyst at China International Capital Corp (CICC), made the prediction as he said that China Southern will gain most from the airline stocks trade as the economy recovers.

Bloomberg said in a report that China's big three air carriers are the biggest gainers in its Asia Pacific Airlines index this year, gaining average valuations in the global air carrier stocks.

World airline shares rose 6.4 percent this year at steady oil prices and Chinese carriers, which have the priciest airline stocks, have benefited from the strengthening of the yuan in 2017 and drove the rise in demand for overseas travel.

"We believe negatives from oil prices, the exchange rate and falling airfares have already been fully priced in," the CICC analysts said in their note. "We are optimistic about the airlines sector."

According to the report, Air China's shares, which are traded in Hong Kong, are the most expensive, at 10.2 times its estimated earnings, after am 18 percent rally last year. The valuation, however, is lower compared with Singapore Airlines Ltd's ratio of 22 and the 13.2 projected profit of the overall Asia Pacific carrier index.

On Monday, Feb. 20, the shares of Air China climbed 2.3 percent to their highest level since September, the report said.

Meanwhile, Bloomberg data showed that China Southern shares traded 9.2 times its estimated earnings at the Hong Kong stocks, the highest level since Aug. 2015, while China Eastern stocks closed at a valuation of 10.3, its most expensive level since June 2015.

According to CICC, the earnings for the three airlines will come from the expected rise in the number of passengers as China Southern will gain the most, with 17 percent increase while Air China will get 10 percent and China Eastern, with 9 percent.

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