Yet one stock we’ve been watching for the past few weeks, China Southern Airlines (CSA) (600029.SH) did even better, maxing out with a 10% gain before lunchtime. CSA was not alone. All five listed carriers were big winners, jumping 10%, the highest one-day gains allowed for domestic stocks. According to Bloomberg, investors got all excited over the prospects that restrictions on mainland-Taiwan flights, launched last week, would be eased further.
We’ve been eyeing an airline play for precisely this reason. Mainland tourists are hungry for new travel destinations, and cross-Strait flights are milk runs with steep ticket prices. From an earlier Bloomberg report:
"Nonstop flights between the mainland and Taiwan will be very profitable, if they can be flown direct,” said Li Lei, an analyst at China Securities Co. in Beijing. "The fare for the flights is international, while the distance is domestic.”
Also, last week China’s airlines got approval to bump up fuel surcharges on tickets by up to 50%, another tidy sum for them. And though global fuel prices are hammering the profitability of airlines all over, Beijing’s price controls on fuel – a recent 25% hike notwithstanding – may still put China’s airlines in better shape as they compete with international carriers for flights in and out of the country.
But still, we have cold feet. CSA has dropped 72% in Shanghai since last year’s high, making it the second-worst performer in the CSI 300 Index. We’ll give a copy of July’s CER to the first person who can name the biggest loser (and it’s not Anhui Conch).
But a more troubling issue is trying to choose from among China’s carriers when their shares perform so similarly and they are largely affected by the same market phenomena and regulations. Not helping our decision-making confidence is CSA’s chairman, Liu Shaoyong saying he doesn’t expect a recovery of the global airline industry until the third quarter 2009.
"Chinese airlines shares are very attractive” following the sell-off, said Martin Wang, an analyst at Guotai Junan Securities Co. in Hong Kong. "They are relatively undervalued compared to other international carriers, but the growth potential is there for the next three to five years.”
Quid pro quo.
So, we’re putting CSA on our watch list to see what pans out in the short term with the Taiwan flights. A few more days like yesterday, though, and we find our Roader spine a bit firmer and take action.