UBS: Raises CATHAY PAC AIR (00293) target price to HK$20.1, expects ROE to remain at a high level

UBS issued a research report stating that CATHAY PAC AIR's (00293) recent share price weakness reflects market concerns over fuel costs, but the market underestimates the durability of its return on equity. The bank raised its target price from HK$19.4 to HK$20.1 and maintained its "Buy" rating. UBS noted that CATHAY PAC AIR's return on equity has consistently remained at 19% over the past three years, and its interim results for the first half of 2026 also showed that its pricing power in both passenger and cargo segments is superior to peers, with core profit growing 45% year-on-year amid a high oil price environment. The bank believes that at least seven structural drivers support CATHAY PAC AIR's more durable and sustainable return on equity, including the shortage of wide-body aircraft limiting supply, Hong Kong International Airport's market share rising from 49% in the first half of 2018 to 65% in the first half of 2026, relaxation of fuel surcharges, loyalty program reform, investment in premium products, support from local demand factors, and long-term growth opportunities in the cargo business. On earnings forecasts, UBS cut CATHAY PAC AIR's earnings per share forecast for fiscal 2026 by 5%, mainly reflecting higher oil price assumptions, but the forecast remains 14% above market expectations, and it maintained its fiscal 2026 net profit forecast of HK$13.3 billion, representing 22% year-on-year growth. The bank also raised its earnings per share forecasts for fiscal 2027 to 2028 by 2% to 11% based on stronger yield assumptions, and expects return on equity to average 22% over fiscal 2026 to 2028, far above the 4.2% average from 2011 to 2019. The bank believes that CATHAY PAC AIR's HK$150 billion capital expenditure plan over the next decade can be supported by strong free cash flow while maintaining a 50% dividend payout ratio, and it believes the risk of equity financing in the near term is limited.