China Eastern Airlines Corporation Limited ADRCEA

Morningstar Rating

Stock Research and Analysis

by Morningstar Equity Analysts

China Eastern Airlines, or China Eastern, is one of the three largest airline companies in China, and it has expanded its foothold through the purchase of Shanghai Airlines in 2009. Still, due to the nature of the airline industry, we view an investment Read more

Bulls Say

China's booming economy is producing an increasing number of people who can afford air travel. This should provide a nice driver for China Eastern's growth.

China Eastern's operation is mainly based in Shanghai, China's largest city and important travel hub.

According to Boeing BA, China is already the world's second-largest aviation market, and it is expected to grow nearly fivefold by 2026 to overtake North America as the largest market in the world.

China is expected to add 44 new airports by 2010, bringing its total to 186 and contributing to an expected increase in the percentage of its population living within 100 kilometers or 1.5 hours' drive of an airport to 72%, up from 61% recently. Read more

Bears Say

China Eastern has recorded only one year of net profit during the last five years. Dramatic financial improvements are required to justify any equity value at all for China Eastern shareholders.

China Eastern's numerous investments in affiliates, joint ventures, and majority-owned firms are difficult to value with the limited disclosure provided, adding another degree of uncertainty to our fair value estimate.

The Chinese government sets a range of acceptable domestic airfares based partly on the average operating expenses of all the airlines operating the route. This puts China Eastern, with its costly operating model, at a disadvantage from a profitability standpoint.

Given the high levels of operating and financial leverage, a small change in revenue could lead to a large fluctuation in profits. Read more

Strategy

China Eastern is embarking on a growth strategy, committing to purchase CNY 49 billion of a variety of aircraft over the coming years on top of its acquisition of Shanghai Airlines. We'd prefer to see Read more

Management

We're unimpressed by the management of China Eastern. Performance has consistently lagged that of its two main competitors. Top executives and directors generally each hold less than CNY 70,000 (about $10,000) worth of stock, and the firm has no bonus, Read more

Profile

After the 2005 combination of China Eastern with Yunnan Airlines and China Northwest Airlines, China Eastern Airlines became one of the three largest airlines in China, Read more

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