Cathay Pacific Reports In-Line 2023 Results

No-moat Cathay Pacific’s 00293 full-year losses of HKD 7.2 billion translate into HKD 1.9 billion losses in the second half of 2022, in line with our expectation. The significant sequential improvement was driven by higher passenger revenue, which jumped six times to HKD 12.2 billion in the second half from merely HKD 2.1 billion in the first half. The strong rebound is set to continue in 2023 as Cathay embraces the postpandemic world. We marginally increase our 2023 earnings estimate to HKD 6.7 billion from HKD 6.4 billion. Our fair value estimate remains HKD 8.90. The shares closed with 12% discount to our fair value estimate as of March 8. Given the high uncertainty inherent in airlines, we would prefer a higher margin of safety before buying.

Cathay keeps its passenger capacity target at 70% of the 2019 level by year-end 2023, although passenger capacity already hit 50% in early March. Management cites staff shortage as the main constraint for further capacity upside. We keep our full-year seat capacity forecast at 60% of 2019′s level for 2023, lagging our estimated 65% international seat capacity forecast for its mainland peers. We expect seat capacity to fully recover by the end of 2024, leading to 92% of 2019 seat capacity for the year. Passenger yield declined by 21.5% sequentially. We expect the trend to continue as seat capacity returns. We forecast passenger yield to decline by 31% year on year in 2023 but to still be 19% higher than 2019 passenger yield. As a result, we forecast passenger revenue to jump four times year on year, contributing 61% of total revenue in 2023.