Beijing Upper-Case Missive Of The Alphabet International Airport: Gear Upwardly For Take-Off

Over the past times few months, I direct hold accumulated a 70bp seat inwards Beijing Capital International Airport (694 HK) at an average cost of HK$7.50, as well as maintain to nibble at the seat on weakness. Given the correct opportunities to add, I tin run across this growing into a meat portfolio asset inwards time. I believe the stock to live attractive, trading at a FCF yield of 8-9% as well as a forrard FY17E PE multiple (on conservative assumptions) of 15x. Here is why.

BCIA operates the world’s 2nd busiest airport, alongside annual rider throughput of some 90m people. Airports are mostly bully tollgate-type businesses that direct hold delivered outstanding risk-adjusted returns for long-term shareholders. One postulate human face no farther than the long term portion cost charts of the likes of Sydney Airport, Auckland International Airport, or Airports of Thailand or Malaysia for evidence of that. Multiples of 30-40x are non uncommon, every bit investors direct hold come upward to appreciate the high value of these assets.

It is non hard to sympathise why. While airlines direct hold historically slogged it out as well as cutting each others throats alongside aggressive cost competition, as well as roundly failed to capture whatsoever value for shareholders from the multi-decade secular tendency towards ascent air travel, airports direct hold kept on clipping the ticket as well as producing reliable, growing cash flows. Indeed, airports direct hold been passive beneficiaries of deflating ticket prices triggered past times the emergence of low-cost carriers as well as to a greater extent than fuel-efficient planes. Customers tin store about online for inexpensive air tickets, but they seldom store about for a meliorate airdrome deal. Airport stocks infrequently human face optically cheap, but the robust operating leverage built into their work organisation models, which tin convert depression unmarried digit rider growth into much to a greater extent than rapid bottom-line earnings as well as FCF growth (as involvement costs, D&A, as well as operating costs examine relatively fixed), direct hold often made them rewarding long term investments.

Airports (and infrastructure assets to a greater extent than generally) are potentially less skilful businesses inwards China, however, because the Chinese regime likes to build infrastructure. It’s good, later all, for gross domestic product growth. And so sometimes to a greater extent than infrastructure ends upward getting build than is realistically needed (or at to the lowest degree is built out far ahead of acquaint twenty-four threescore minutes menses requirements). That’s less than ideal if you’re an infrastructure owner, as well as some of those fears may live beingness reflected inwards BCIA’s valuation, which is depression on a comparative EV-per-passenger, P/BV, EV/EBITDA, or P/E reason vs. international peers (or whatsoever other way 1 wishes to piece as well as die it).

More pointedly, a 2nd Beijing airdrome is currently nether construction (which is non beingness built past times BCIA), which is slated for commissioning inwards 2019. It is also a large airdrome alongside targeted capacity of 70m people – non likewise far from BCIA’s 90m. Fears this volition impairment BCIA’s growth as well as profitability are weighing on the stock. In addition, the airdrome is capacity constrained at acquaint (contradicting the generalization that infrastructure inwards Cathay is ever as well as everywhere overbuilt), as well as inwards the eyes of many, lacks as well as mightiness to deliver meaningful earnings growth from here. And lastly, the investment community (including myself) is far from bullish on the medium term outlook for the Chinese economic scheme (and yuan), as well as a lot of Chinese/HK listed stocks are thence inexpensive at present.

I recollect these fears are overdone. Firstly, at that spot is something of an inconsistency betwixt worrying close capacity constraints as well as the touching on of a competing airport. The existence of capacity constraints agency that BCIA is non inwards a seat to fully capture hereafter demand growth anyway. When the novel airdrome opens, carriers representing only about 30% of BCIA’s electrical current revenues volition transfer to the novel airport, but this is targeted to live phased-in over 4 years, rather than absorbed inwards a unmarried hit. Meanwhile, the remaining carriers representing 70% of BCIA's electrical current book volition direct hold additional 'runway' to expand.

In addition, BCIA derives much to a greater extent than value from international flights than domestic flights, as well as an mightiness to divert a portion of lower-value domestic flights to an choice airdrome should let it to improve its aircraft motility mix. International flights are typically larger planes that comport to a greater extent than passengers per aircraft (the choke betoken for BCIA is allowable landing/takeoff fourth dimension slots), as well as international passengers also direct hold longer 'dwell times' at airports, as well as hence deliver much higher per-passenger non-aeronautical revenue (F&B, retail concession, etc). BCIA also has an mightiness to maintain to incrementally add together capacity over fourth dimension via pocket-size add together on investments, including an upcoming forth runway. 

Low unmarried digit rider book growth should thence live sustainable for quite some time, which combined alongside an improved aircraft motility mix, ought to final result inwards tendency revenue growth approaching the mid-single-digits. That volition live to a greater extent than than enough to back upward robust earnings growth off an operationally-leveraged fixed cost base. The exception volition live during 2019-23 when Beijing's novel airdrome ramps up, but my expectation is that earnings volition tendency relatively apartment during during this period, rather than fall. I also believe earnings should grow some 20% betwixt so as well as now. Lastly, patch an economical downturn remains a run a endangerment to this base of operations case, in the long term it is highly in all probability that a growing see storey volition underpin a continuation of enterprise rider throughput growth. 

Crucially, at that spot is a rattling of import silverish lining to BCIA from evolution of the competing airdrome – namely a important spend upward inwards capex requirements. High ongoing expansionary capex – often good ahead of present-day demand requirements – is something that has kept a lid on the valuations of a number Chinese airdrome companies (see for e.g. 600004 CH), but that is fast becoming a non-issue for BCIA. Indeed, inwards its recent debenture prospectus, BCIA disclosed that its aggregate 2016-20 capex budget is RMB 4.4bn, which translates into an average of RMB 0.9bn per year. By comparison, D&A is running at close RMB 1.6bn pa at present. Consequently, FCF to equity holders over the adjacent 5 years should average RMB 0.7bn higher than NPAT. Furthermore, a lot of itemized capex projects are truly incrementally expansionary inwards nature, rather than purely maintenance, as well as thence should back upward incrementally higher revenues as well as earnings over time.

With NPAT expected to come upward inwards at close RMB 1.8bn inwards financial 2016, that equates to gratuitous cash flow to equity holders of RMB 2.5bn. In 2017, I anticipate earnings as well as FCF growing farther to RMB 2.0bn as well as RMB 2.7bn respectively. By comparison, BCIA’s marketplace seat capitalization is currently exclusively RMB 30bn (HKD 33bn), which implies that the stock is trading on a 8.3% FY16E as well as 9.0% FY17E equity FCF yield. For a relatively depression run a endangerment cash flow current that is also in all probability to grow over time, as well as inwards a reason alongside depression involvement rates, that appears rattling attractive.

In the intermediate term, a lot of that FCF volition in all probability live dedicated to paying downwards debt (which is close 2x EBITDA). However, later a menses of deleveraging, BCIA volition direct hold the capacity as well as in all probability willingness to heighten its dividend payout ratio from its electrical current relatively-low 40%. This could good human activeness every bit an eventual catalyst for the stock to re-rate to closer to 20x earnings.

BCIA is past times no agency the cheapest stock I direct hold ever seen, but is a enterprise suggestion inwards my view.

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