SIA - Better Luck Next Time?

The Asian Wall Street Journal yesterday quoted MM Lee as saying “talk may resume between SIA and China Eastern (CEA)”. SIA’s CEO Chew Choon Seng (CCS) was quoted by BT as saying “in the longer tem, we are still interested in any industry consolidation and in any investment opportunity in China, India or any growth market”. (MM Lee and CCS were in Kl attending a IATA function.)

Looking at SIA’s price movement yesterday (up 56 cents to $13.34 on a down day), it is clear investors liked the story of SIA going after CEA, and why not?

CEA was an eager bride 2 years ago, until Air China killed the deal with support from Cathay Pacific. Under that deal, SIA and Temasek were to acquire a combined 24% stake at HK$3.80 per CEA share. The surge in CEA’s share price to HK$10.50 in September of that year had also made it difficult to cement the alliance. The deal was called off in Jan ’08, as it failed to secure shareholders approval at an EGM.

With CEA last at HK$1.74 before trading halt (for the merger with Shanghai Airlines, which will give the combined group a 50% share of the Shanghai aviation market), another attempt to get together will likely be even more welcomed by investors. Shanghai will hold the World Expo next year.

SIA first confirmed interest in CEA in May ’07, when its stock was at $17.70; it hit $20.20 in October of that year. And when CEA’s EGM failed to approve the deal, SIA had fallen to $16.90.

SIA’s resilience amidst all the caution or more aptly, bearishness surrounding the airline sector (IATA hasraised the estimated loss this year for the global airline industry to US$9 bln from US$4.7 mln made in March this year), suggests that our Neutral stance merits re-consideration. A correction of the general market that many believe is now in progress, will likely provide such an opportunity.

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