2H23 Outlook
The author is an analyst for NH Investment & Securities. He can be reached at ys.jung@nhqv.com -- Ed.
With the transport price upsurge induced by consumption growth and supply chain bottlenecks amid the Covid-19 crisis coming to an end, transport companies are likely to see profits decline. While there are expectations for trade volume growth in 2H23, investors remain skeptical amid worries over a global economic slump. International passenger yield expansion stemming from higher travel demand should also stabilize down from 1Q23.
With uncertainties over demand (trade volume) lingering, supply-side changes are needed to bring share-price rallies. Supply factors include: 1) ship demolition in the shipping sector, in the run-up to new environmental regulations; and 2) reshaping of the competitive landscape for the air transport sector via KAL’s takeover of Asiana and integration of their LCCs.
We maintain our Neutral stance towards the transport sector, as a decline in freight rates looks inevitable. A conservative approach is recommended until freight rate growth becomes possible based on changes in supply conditions. We present KAL as our sector top pick for 2H23. Once its takeover of Asiana is confirmed, KAL should be able to boost its earnings-generating capabilities on mid/long-haul route expansion and demand for premium class seats. Although the air transport sector is being pestered by concerns over passenger demand peak-out in 2023, KAL has plenty of room to bolster its fundamentals through: 1) fleet and route expansion; 2) financials improvement; 3) engine business growth; 4) economies of scale via the acquisition of Asiana; and 5) fuel cost savings via new fleet introduction.