Cutting first-class seats won't help China Southern take off

Passengers riding in luxury on China Southern Airlines (ZHN.NYSE, 1055.HKG, 600029.SHE) this year might feel a bit cramped. That’s not because the company is reducing the size of first-class seats. Rather, it’s cutting a large chunk out of the section itself. Early this week, China Southern Chairman Si Xianmin said the company would restructure its cabin space, lowering the number of first-class seats and increasing premium-economy space. The move comes in the wake of an austerity drive engineered by leaders in Beijing. President Xi Jinping has cracked down on conspicuous consumption among party officials. China Southern, the mainland’s largest air fleet, reported a 24.2% drop in net profit to US$320 million last year. How much the company lost from high-rolling cadres who snuggled into economy seats instead of drinking champagne at the front of the plane is unclear but analysts say it probably wasn’t much. This year could be the same. “My sense is that the impact isn’t going to be huge,” Andrew Orchard, an analyst at CIMB in Hong Kong, said on Thursday. “That’s because they don’t do a lot of first-class anyway, particularly on international routes.” Investors shouldn’t expect this reaction to the austerity drive to pick the company off the ground. CIMB’s rating on China Southern is “reduce,” meaning that it’s time to get rid of some of those shares.

The Chinese wear Prada, but corruption inspectors wouldn’t know it

The corruption crackdown by China’s government has spread investor panic to any companies selling goods that remotely advertise ill-gotten wealth. Italian handbag maker Prada (1913.HKG) is the latest casualty. On Wednesday it announced full-year results for 2013 that missed analysts’ estimates and forecast single-digit sales growth this year. Its shares ended Friday down 4.4% from Thursday on the news and mounting investor concern over the anti-graft drive in China on its figures for 2014. But some analysts are urging the market not to overreact to the China issue. Unlike watches and spirits, handbags or fashion items are not part of the gift-giving culture that marks Chinese officialdom and culture, CLSA analyst Mariana Kou said on the phone from Hong Kong on Friday. No surprises there, given that gifting clothes in both East and West is fraught with tension and fear of making an unintended faux pas. Prada is an outperformer relative to its peers, Kou noted, saying the luxury fashion house saw mainland sales grow 20% last year and has ambitious plans to open more retail outlets in China. Prada has also benefited from its inconspicuous and logo-light design; recent trends show more “sophisticated” Chinese luxury brand consumers “don’t want to be out there” and are ignoring more flashy luxury brands like Louis Vuitton. Kou said that she “wouldn’t be worried too much” about the deceleration in the company’s earnings. CLSA issued a “buy” rating on the stock.

Investment train keeps on rolling for railway builders

We’ve been here before, many times before in fact, so let’s keep it short and to the point. On Wednesday the government announced a mini-stimulus. Leaders are concerned by the economic slowdown and want to make sure GDP growth is on a steady track from the start of the year to avoid blips in the middle, like the one in July 2013. It is a continuation of a similar measure enacted last year that brings forward already approved infrastructure spending. The market expects railway builders to get the biggest short-term boost from the announcement. Following the news on Wednesday, China Railway Construction Corporation (1186.HKG, 601186.HKG) gained 7% in Hong Kong and 2.5% in Shanghai while CSR Corporation (1766.HKG, 601766.HKG) jumped 3.3% in Hong Kong and 1.1% in Shanghai. Both are major state-owned builders of railway lines. Analysts are optimistic on their prospects given that new rail lines are being planned for central and western areas of the country that lack solid transport networks. There should be sizeable expansion in these regions as they are seen as new centers of economic development and the main beneficiaries of the latest round of urbanization announced recently by the central government. Serious debts at the railway ministry had previously raised concerns over the financial support for new projects, something Beijing is now addressing by raising financing through bonds and appealing to the private sector for support.

IPO watch

BAIHOO Family Interactive (2100.HKG), a children’s online game operator, isn’t just for kids. Adults too can give the company a play next Thursday when it lists in Hong Kong. Analysts have pointed out that the IPO could be the biggest mainland internet firm to list in Hong Kong this year. Of course the big boys will likely hold out for Alibaba Group, which snubbed Hong Kong for a New York listing possibly later this month.