Taiwan Airlines
Recapitalized Equity, Direct
Link Flights & Global
Recovery Are New Catalysts
Investment Conclusion: We upgrade EVA Airways
(EVA: NT$12.66) to Overweight from Equal-weight as
we believe the recapitalized equity base will provide a
strong equity platform for the carrier to benefit from the
increased direct link flights between Taiwan and China,
and the global economic recovery next year. More
importantly, with the new equity raised, we believe fears
of a potential share overhang will subside substantially.
What's New: We update our proprietary direct-link
simulation analysis for potential revenue upside using
various scenarios, particularly on the air cargo analysis.
Moreover, recent capital raisings by global airlines
indicate investors are receptive to airlines that have
recapitalized their balance sheets, as share prices for
airlines outside the US have risen 10-60% since the
capital raisings.
Where We Differ: Both EVA and China Airlines (CAL:
NT$11.18) shares have substantially trailed the local
market despite volatile trading sessions over the past
year. We were negative on the Taiwan airlines in
September 2008, turned neutral in July 2009, and we
are turning positive on EVA now, as we believe the
recent equity recapitalization has provided a strong
capital platform for the carrier to benefit from the direct
link flights.
Prefer EVA over CAL for Direct Link Play: On a
risk-reward analysis, we believe EVA is a better play
than CAL for two key reasons: (a) higher incremental
earnings from increased direct link flights; and (b) EVA
shares trade at a 5% discount to CAL on 2010e P/BV.
Relative to its historical P/BV trading range, EVA is
marginally below its mean, and we think the valuation
does not fully reflect the direct link benefits.