"For airlines, overall solid passenger volumes are now being boosted by a pick-up in premium travel," analysts at HSBC led by Mark Webb, regional head of conglomerate and transport research at the bank's Hong Kong office, said in a note on Asian transport companies.
The analysts' top airline pick is Cathay Pacific, the international flag carrier of Hong Kong, because "it has greater leverage than Singapore Airlines to the stronger North American market, faces less competition and has been better able to control unit costs."
They have a target price of 18.25 Hong Kong dollars (HKD) for the stock, from the current level of around 14.66 HKD.
The risks include higher fuel prices, slower-than-expected growth in the global economy and a negative impact from a stronger US dollar, as Cathay Pacific is "effectively an exporter and short the USD."
The HSBC strategists' favorite pick in China is China Southern Airlines, because "it has the strongest leverage to domestic growth and RMB [reminbi] appreciation."
Their target price is 4.8 Hong Kong dollars (HKD) compared with the current 3.92. The company's exposure to the Chinese yuan is also its key weakness, as a bigger than expected depreciation in the Chinese currency will likely have "the largest negative impact" on China Southern Airlines, the analysts said.
Kuala Lumpur- listed Air Asia, the leading low-cost carrier in the region, is also among their favorites, with a price target of 3.7 Malaysian ringgit (MYR) from the current 3.24.
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The HSCB strategists pointed to the fact that the company's earnings are supported by a "large Malaysian domestic duopoly business" and that it has access to other high-growth markets through joint ventures as positives.
They cited a rise in competition, higher fuel prices, demand slowdown and the negative impact of a strengthening US dollar among the main risks.
Cebu Pacific is also a stock on which the HSBC analysts have an "overweight" rating, with a price target of 100 Philippines pesos (PHP) from the current 80.
Their other overweight airline stocks in Asia are: China Airlines, with a price target of 14.6 HKD from the current 11.9, China Eastern Airlines, with a price target of 3.80 from the current 2.86, Korean Air, with a target price of 67,000 South Korean won (KRW) from the current 37,000, and Tiger Airways, with a target price of 0.80 Singapore dollars (SGD) from 0.66 currently.- Some of the companies mentioned in this article are HSBC clients
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