Morgan Stanley: Lowering target price for three major Chinese aviation stocks, industry uptrend cycle expected to be delayed until 2027.

Morgan Stanley's research report stated that although the energy shock has caused the fundamentals of Chinese airlines to deteriorate, the related negative factors are likely already reflected in the stock prices. The firm estimates that the current increase in ticket prices is not enough to cover the rising costs, suggesting that short-term profit margins will be under pressure and demand will also be affected by the rise in ticket prices. Morgan Stanley believes that fuel prices are the main variable affecting the industry outlook for the next 12 to 18 months. The firm's base case scenario predicts that aviation fuel prices will normalize to $100 to $110 per barrel by the end of 2026, delaying the upturn cycle for the Chinese aviation industry, which is expected to recover by 2027. The firm maintains a constructive view on the Chinese aviation industry for four main reasons: (1) inbound tourism will continue to support the asset utilization of Chinese airlines; (2) with sufficient aviation fuel supply, China can attract more international transit passengers; (3) capacity constraints will continue and may even worsen; (4) most of the negative factors have already been reflected in stock prices, while aviation fuel prices are in the process of adjustment. In terms of individual stocks, Morgan Stanley has lowered the target price of Air China Limited (00753) H shares from HK$10 to HK$7.7, a 23% decrease, and maintains a "overweight" rating. The firm also lowered its target price for Air China's A shares (601111.SH) from RMB 11.1 to RMB 8.3 and removed it from the preferred stock list due to uncertain fuel price outlook. Morgan Stanley expects Air China to incur a loss of RMB 4.7 billion in 2026 and then return to profitability with RMB 4.5 billion in 2027. Morgan Stanley has also lowered the target price of China Eastern Airlines (00670) H shares from HK$8.1 to HK$5.9, a decrease of 27.2%, and maintains a "overweight" rating. The target price of China Eastern Airlines' A shares (600115.SH) has also been lowered from RMB 8.1 to RMB 5.8. The firm stated that China Eastern is actively expanding its international capacity, which will help consolidate Shanghai's position as an international aviation hub, and predicts that China Eastern will incur a loss of RMB 7 billion in 2026. Additionally, the firm has lowered the target price of China Southern Airlines (01055) H shares from HK$8.5 to HK$5.9, a decrease of 30.6%, and maintains a "overweight" rating. The target price of China Southern Airlines' A shares (600029.SH) has also been lowered from RMB 9.71 to RMB 6.7. Morgan Stanley believes that under the global trade tensions, the upside potential of the cargo cycle may be limited, and expects China Southern to incur a loss of RMB 5.9 billion in 2026. Morgan Stanley expects that an increase in direct flights between China and the United States will have a moderately positive impact on Chinese aviation, as flight supply is currently at 30% of pre-pandemic levels, lagging behind demand recovery. On the other hand, if Chinese airlines order aircraft from Boeing, it will have a slight negative impact because capital expenditures may weigh on the valuation of the three major airlines. The firm predicts that there will be no major adjustments to the capacity expansion plans of Chinese airlines before 2028.