Hainan Meilan: Hainan airport operator breezes through lockdown
Hong-Kong listed Hainan Meilan International Airport (HMA), previously known as Regal International Airport Group, operates the Meilan Airport located in the Hainan province of China. To recap, the two main business segments of HMA are its aeronautical (terminal facilities, ground handling and passenger services) and non-aeronautical (leasing of commercial and retail spaces, franchising of airport related business, advertising, car parking, cargo handling and sales of consumable goods) business. HMA was the top performer among our top 10 stock picks, with a 109.5% return in six months, significantly outperforming the other two benchmark indices, the Hang Seng and MSCI Hong Kong which lost 10.6% and 10.1% respectively.
HMA, as an airport operator and part of the tourism industry, has been adversely affected by Covid-19. The pandemic caused various controlling measures to be implemented by China, specifically on crowd movement and transportation, and as a result the airline industry have also been severely affected. For the two months ended Feb 29, HMA’s revenue from the aviation business and non-aviation business recorded a decrease of 40% and 22% respectively compared with the same period of FY2019. HMA has responded to this by taking supportive measures such as a preferential scheme for the take-off and landing fees of airlines and a reduction of rents for commercial tenants to mitigate the operational pressure on both these parties. China was the first to impose lockdowns but was also the first to ease. In March, the routes of Meilan Airport were mostly restarted, and HMA recorded a gradual recovery in passenger throughput, cargo throughput and aircraft take-off and landing.
Results for HMA’s FY2019 ended Dec 31, 2019, were decent as the pandemic only materially affected its business post-January. Passenger throughput, aircraft take-off and landing times, and cargo throughput which collectively represent HMA’s airport aviation traffic increased 22.0%, 24.7% and 27.3% respectively from the previous year. Compared to FY2018, revenue declined 7.5% while EPS fell 6.9%. However, the liquidity of the company improved for the period as current ratio increased from 0.13 times to 0.4 times. The company’s debt-to-equity ratio of 55.0% is also at a decent level. HMA trades at discount for its PE and P/B, at 64% and 54% respectively compared to its regional peers.
Moving forward, HMA has put together a long-term growth plan for the business, primarily focused on creating value for the Meilan airport. Some initiatives include collaborating with relevant Hainan provincial government departments and participating in domestic and foreign route development conferences to enhance exposure of Meilan Airport to the international market. Also, the Phase Two expansion project of the airport is expected to be completed by end-2020 and will integrate various modes of transportation such as aviation, railway and road once completed which will bring in more revenue for HMA. Investors have also looked past HMA’s previous association with Hainan Airlines Group. Management did not recommend a dividend for FY2019 due to large capital outlays mainly for the Phase Two expansion project, along with the projected decline in profits caused by the pandemic.
HMA has minimal coverage from analysts, and has a target price of HK$9.10 ($1.63), which is well below its current share price of HK$ 12.32. We think HMA’s upcoming 1HFY2020 results will be significantly affected by the pandemic, and as such believe the valuation for the company over the next six months should be at a discount to its tangible book value — with a fair value of HK$9.50. E