Aviation Sector – Welcome international flows

• Industry outlook will improve following the recovery rate of int’l inflows.
• It’s a good time to accumulate aviation stocks given attractive valuation and visible earnings growth profiles.
• Our top picks are ACV and AST for their best representatives of each segment with strong growth and catalysts in endemic.

International air travel to soar again in 2023

Most of countries have removed the restriction for tourists which will urge both outbound and inbound travel demand. Int’l pax throughput jumped 35 times yoy in 3Q22, recovering to 49.8% of pre-pandemic level. In base case scenario, we expect China will gradually relax the travel restriction since 2Q23F. Thus, the int’l inflow recovery rate might reach 84% in 2Q23F and 100% in 4Q23 to bring total int’l pax volume to grow 195% yoy in 2023F. Additionally, domestic pax throughput is forecasted to bounce 231% yoy in 2022 (+30.9% higher 2019 level) and grow stably at 8.9% CAGR over 2023-25F.

The growth opportunities are not equal for everyone

Having high revenue exposure to int’l air travel, airport retailers will be the most beneficiaries of the recovery of int’l arrivals. We pretty like the business model of airport retailer due to its high entry barrier and its ability to pass through increasing input cost to buyers. For airport, the growth is crystal clear but might be dented since 2024 onwards due to the capacity constraints. The recovery prospect of airlines is overshadowed by high fuel price, exchange rate volatility and rising interest rates. However, we prefer low-cost-carrier than full-servicecarrier due to its less sensitivity to economic recession and fuel price hike.

Why aviation stocks now?

We believe robust earnings growths over 3Q22 – FY23F across almost aviation segments (port, airlines, retailers) is relatively visible following the recovery of int’l flows. The recent market correction has brought the valuation most of aviation stocks down close to pandemic level (Mar-2020). Thus, we believe it’s a good time to accumulate aviation stocks at attractive valuation and clear earnings growth profiles.

Key downside risks threaten to thwart the industry recovery

(1) Higher-than-expected fuel price leading to higher operating cost of the airlines, which may lift up ticket price and dent air travel demand, (2) bilateral tourism between Vietnam and China hardly recover to the pre-pandemic level due to the zero-covid policy, and (3) higher-than-expected USD/VND exchange rate and rising USD interest rates may also affect aviation infrastructure investment borrowing in USD in the coming periods.

Please follow this link for the full report