China Southern Airlines Company Limited ADRZNH

Morningstar Rating

Stock Research and Analysis

by Jeremy Cohen

China Southern Airlines is one of the three largest airlines in China. The firm operates a highly leveraged business, both financially and operationally, in a cyclical industry. We believe investing in its shares entails very high uncertainty.

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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 growth.

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

The Chinese government tends to award new routes to airlines already operating the route or with a route base at one of the destinations involved. As China's largest airline with 24 route bases, China Southern stands a good chance to win future routes. Read more

Bears Say

Given the high levels of operating and financial leverage China Southern employs, a small change in revenue could lead to a large swing in profits.

The Chinese government controls a number of would-be operating decisions for Chinese airlines, including new route allocation, aircraft purchases, and pricing for domestic routes. As a result, China Southern may not be able to freely make business decisions that could benefit its shareholders. Read more

Strategy

China Southern has committed roughly CNY 88 billion from 2008 to 2012 to acquire new aircraft to replace older, less-efficient models and expand its fleet to more than 440 aircraft, up from 348 at the Read more

Management

China Southern's stewardship model gives us pause. Most of its demerits are a result of the 50.3% ownership stake held by China Southern Air Holding Company (CSAHC), an indirect investment vehicle of the Chinese government. As a result of this large Read more

Profile

China Southern is one of China's largest three airlines (and the ninth-largest airline in the world), handling more than 20% of China's total passenger traffic in 2008. Read more

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