CEA - China Eastern Airlines: Bullish But Delisting Nears

Summary

• Chinese air travel demand is surging.
• Chinese airline stocks intend to de-list from NYSE amidst audit control access.
• Investors have to look for other ways to capitalize on Chinese air travel demand surge.

I have not been following China Eastern Airlines for a long time, but in my report initiating coverage, I marked shares a hold, albeit not an attractive one as China's zero-covid policy led to rapid openings and closings impacting airline performance. I dubbed China Eastern Airlines like any other Chinese airline a pandemic yo-yo. In November, I updated my thesis. Shares were still a hold in my book, but I saw faster capacity recovery after re-openings which was a positive at the time also because international flight capacity to and from China was set to double. We are now several months later and I would say that the hold ratings have paid off with returns of 24 to 30 percent. Would a buy rating have been more fitting? Maybe, but I believe that the significant risks for China Eastern Airlines did not warrant a buy rating. It wouldn't be prudent to issue a buy rating with the environment that Chinese airlines were in months ago.

China Grew COVID Tired

On the 21st of November, I marked the opportunity in shares of China Eastern Airlines. What I could not have known at the time was that days later protests that we are not used to seeing in China would erupt marking the start of the end of China's zero-covid policy. This obviously brings one boost and one risk. The boost is that air travel demand or better said the airline's ability to supply would increase dramatically and the risk is that COVID-19 infection numbers would most likely go through the roof. That is a result of the Chinese government to lock citizens for most of the past two years, preventing any form of immunity to build. The protests paved the way to turn bullish on Chinese airlines, including China Eastern Airlines.

China Eastern Airlines Stock: Still A Hold

So, while buy signals seem to be flashing, I am still maintaining my hold rating. The reason is that China Eastern Airlines and China Southern Airlines have expressed their intent to delist from the New York Stock Exchange. Limited volume as well as the fact that the NYSE was never used for follow-on financing were cited . The timing, however, is peculiar. As Chinese air travel rebounds, we see investment opportunities disappear. It almost looks as if this is somewhat politically motivated, barring a big group of investors from benefiting from the better days for Chinese air travel.

Chinese stocks for some time were at risk of being delisted due to tensions between China and the US which sparked interest from the US to audit Chinese companies with a listing at a US stock exchange. It makes a lot of sense but was heavily resisted by China until December. With the deal in place now, we see Chinese airlines which are state-controlled giving up their listing on the NYSE. Most likely to dodge audits from the Public Company Accounting Oversight Board.

When Will China Eastern Airlines Stock Be Delisted?

China Eastern Airlines expects to file a form to delist around the 23rd of January, with the final trading day at the NYSE around the 2nd of February.

How Can You Benefit From China Air Travel Demand Surge?

With no Chinese airlines stocks available for purchase on the NYSE anymore, you might wonder what options you still have to benefit from the surge in air travel demand in China. Basically, any other trade airline name with exposure to China provides an opportunity, but for US airlines, it remains to be seen to what extent they are given access. Chinese airline stocks can still be traded OTC and purchased at the stock exchanges of Shanghai and Hong Kong. I recently covered Cathay Pacific and Singapore Airlines which have significant exposure to China. Singapore Airlines in my view is the lower risk opportunity, while Cathay Pacific, without doubt, is the higher risk opportunity but potentially also more rewarding.

Conclusion: Benefiting From China Air Travel Surge Becomes More Difficult

That the last two remaining Chinese airlines, which are state-controlled, are delisting is somewhat unfortunate as it takes away an easy opportunity for many investors to capitalize on the Chinese air travel surge. I don't think the delisting is to bar foreign investors from benefiting from the air travel boom, but it is more related to dodging audit access from the US regulator.

Whatever the reason is, the consequence is the same: Chinese airline names will de-list slightly over two weeks from now and investors have to find other ways to either get shares of Chinese airlines or find other exposures to benefit from the surge in Chinese air travel demand.

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