The airline has been rapidly expanding both domestically and internationally in the last several years and today is the world’s fourth-largest airline in passengers carried and largest airline in China.
ZNH’s growth is compelling. Its passenger capacity increased 10.5% year-over-year (YOY), its cargo capacity 8.1% YOY, and its revenue is the fastest growing among the top 3 Chinese airlines.
The stock has been in a downtrend since June 2015 mostly due to a decrease in revenue growth and slower Chinese growth. And the surprise devaluation of the yuan in August 2015 cost ZNH $225 million in currency loses.
Let’s take a look at ZNH’s chart:
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Today, ZNH trades at a discount to its 2015 high, and its moving up.
As the current price is just above ZNH’s lowest low ($25), the downside is pretty minimal. The upside on the other hand, is pretty good.
By taking the two extreme points on our chart above, the June 2015 high and the subsequent low in September 2015, I’ve drawn the 38.2% retracement line at a price of $41, which is where I think ZNH is on its way to.
That gives us upside of just over $12—and an increase of 42%—while our downside is only about $3 if the price goes in the opposite direction, so I’d put that $25 low as my trailing stop. Generally, the ideal risk/reward ratio to look for is 1:3, so at a ratio of 1:4, ZNH looks like a great trading opportunity from a technical perspective.
From a fundamental perspective, its valuation is pretty attractive compared to its peers. Its P/E ratio is 11.3, which is good, and it offers a decent dividend at 2.16%.
However, ZNH does have a significant amount of debt on its balance sheet. While this is a concern, ZNH is optimizing its debt structure from USD-denominated obligations to RMB-denominated obligations, and the company is 40% owned by the Chinese government, so if debt really becomes an issue, I imagine it will be bailed out.
The other potential threat for ZNH in the next year is increasing oil prices. Rising oil prices increase fuel costs which eats into company profits. But while Chinese airlines don’t usually hedge against fuel costs, ZNH did report in August 2016 that while it didn’t expect fuel prices to rise dramatically, they would “carry out hedging operations” if fuel prices reach a certain level.
I’ve only touched on fundamentals here, so do your due diligence before taking a position. While the airline industry may be gruesome and not a great investment, ZNH certainly does look like a good trading opportunity.