Although the domestic aviation industry is gradually recovering from the heavy impact of the epidemic, judging from the recent intensive financing movements of leading airlines, the civil aviation industry's demand for cash flow restoration can be seen.

Intensive financing

Cash flow requirements are obvious

On the evening of November 19, China Southern Airlines (600029) announced that the company plans to publicly issue no more than 15 billion yuan of corporate bonds for a period of no more than 10 years (including 10 years). After deducting issuance fees, the funds raised are intended to be used for legal compliance purposes such as supplementary working capital, investment project construction, and bank loan repayment.

Since October alone, China Southern Airlines has had two major financings. On November 9, China Southern Airlines issued no more than 10 billion yuan of short-term corporate bonds and was registered and approved by the Securities Regulatory Commission. On October 15, China Southern Airlines issued 16 billion yuan of convertible bonds for the purchase and maintenance of aircraft and aviation materials; introduction of backup engine projects; and supplementary working capital. This amount set a new record for the scale of debt conversion financing for domestic airlines. China Southern Airlines Convertible Bonds went public on November 3. The current price is 125.85 yuan. Data shows that since this year, China Southern Airlines has made a total of more than 20 direct loans, including short-term financing and medium-term notes.

As of the end of the third quarter of this year, China Southern Airlines' net cash flow from operating activities was 3,977 billion yuan, compared to 24.776 billion yuan in the same period last year. Mainly affected by the epidemic, passenger revenue declined. Net cash flow from fund-raising activities was $12.119 billion, compared to 19.304 billion yuan in the same period last year, mainly due to an increase in non-public stock issuance, loan acquisition, and issuance of medium-term notes and corporate bonds during the period. According to the latest plan on the 19th, the current types of corporate bonds include general corporate bonds, green corporate bonds, poverty alleviation corporate bonds, and Greater Bay Area special corporate bonds. The period is not more than 10 years (including 10 years). It can be a single term variety or a mixed variety with multiple periods. After deducting the issuance fee, the funds raised in this voucher are intended to be used for legal compliance purposes such as supplementing working capital, investment project construction, and bank loan repayment.

The target of this bond issuance is professional investors. The issuer and bookkeeping manager will distribute the bonds based on the bookkeeping filing results by offline inquiry and placement from professional investors; this time, the bonds will not be placed on priority basis to the company's shareholders. The announcement also mentioned debt repayment guarantee measures. When corporate bonds are issued, the principal and interest of the bonds are not expected to be paid on time, at least the following debt repayment guarantee measures will be taken: (1) not distributing profits to shareholders; (2) suspending the implementation of capital expenditure projects such as major foreign investment, mergers and acquisitions; (3) reducing or suspending the payment of wages and bonuses for company directors and senior management; (4) the main responsible person of the company cannot be transferred.

The three-quarter report reverses losses

The civil aviation industry is recovering steadily

Affected by the COVID-19 pandemic, companies in the global aviation industry chain have all faced severe tests this year.

China Southern Airlines is one of China's top three state-owned air transport groups. In the first three quarters of 2020, China Southern Airlines achieved revenue of 65.350 billion yuan, a year-on-year decrease of 43.98%; net profit loss of 7.463 billion yuan, and profit of 4,078 billion yuan for the same period last year. China Southern Airlines said that in view of the huge losses caused by the pandemic to the air transport industry and the global economy, it is expected that the Group's operating results for the full year of 2020 will be significantly adversely affected.

However, China Southern Airlines turned a loss into a profit in the third quarter, achieving operating income of 26.386 billion yuan and net profit of 711 million yuan during the period. Of the three major airlines, it was the only one to reverse losses in a single quarter. According to the newly released operating data for October, China Southern Airlines performed well. Domestic passenger capacity and passenger turnover both showed year-on-year increases in October. Industry insiders analyzed that China Southern Airlines took the lead in achieving profit in a single quarter among the three major airlines. One of the main favorable factors was the contribution of the cargo business to performance. However, after the mixed reform of Air China and China Eastern Airlines, cargo logistics have already been divested from listed companies' statements.

It is worth mentioning that China Southern Airlines' mixed cargo reform plan has also recently been released. Huamao Logistics (603128) announced on the evening of November 10 that China Southern Airlines Cargo Logistics (Guangzhou) Co., Ltd., a wholly-owned subsidiary of China Southern Airlines, plans to carry out mixed ownership reform, publicly list on the Shanghai Joint Stock Exchange, publicly solicit 1 to 15 strategic investors through capital increases and share expansion, and release no more than 49.5% of shares (including employee shareholding).

Judging from the overall recovery of the industry, with the gradual stabilization of the domestic epidemic control situation, China's civil aviation is showing a steady recovery and development trend. According to data from the Civil Aviation Administration, civil aviation completed a total of 50,323 million passengers in October, recovering to 88.3% of the same period last year; completed cargo and mail traffic volume of 621,000 tons, a decrease of 6.8% over the previous year. A total of 408,000 domestic passenger flights were carried out, an increase of 8.1% over the previous year.

According to Huatai Securities's latest research report, major A-share listed airlines (Air China, China Southern Airlines, China Eastern Airlines, Chunqiu, and Jixiang) continued to increase domestic flight capacity investment in October. Domestic flight supply also increased by 13.6%. However, there was a slight lag in increasing demand, but there was still a 4.5% increase. The passenger occupancy rate for domestic flights was 77.9%, down 6.7%. It is expected that from the fourth quarter to next year's Spring Festival, there will still be room for improvement in domestic aviation demand. The RMB exchange rate against the US dollar will continue to appreciate. Since the fourth quarter, it has appreciated 3.0%, and oil prices have remained low, which may continue to support the recovery of airline net profit. Furthermore, breakthroughs in vaccine development may become an important catalyst for the recovery of international flights, further catalyzing an increase in aviation demand and sector valuations.