Singapore Airlines: Resuming Talks with China Eastern?

A Bloomberg report said Singapore Airlines (SIA) and China Eastern Airlines Corp. may start talking again after an investment from the Singapore carrier failed last year, citing the South China Morning Post which quoted Singapore Minister Mentor Lee Kuan Yew. However, SIA Chief Executive Officer Chew Choon Seng, speaking at the same gathering, said the comments were Lee's ``personal view'. He also added the company is only keen on acquisitions in China in the longer term, when the regulatory environment is proper.

A quick recap. In 2007, SIA, along with majority shareholder Temasek, offered US$920m (SG$1.34bn) for a combined 24% stake in China Eastern, but the Chinese carrier's shareholders rejected the bid, which also faced strong opposition from rival Air China.

Not likely at this juncture. Putting aside the CEO’s comments, our first impression of the talks at this stage is that these are highly unlikely to have taken place given the fact that shares in China Eastern Airlines and its smaller rival, Shanghai Airlines, were suspended this week after media reports said the two loss-making carriers were close to a merger deal. The combination of the two China carriers would potentially give the new group a 50% market share in Shanghai. Given the challenging environment, we think the enlarged group may take a while to realise any merger synergies before looking at other possibilities.

More on longer term plan. While not upbeat on the possible revival of talk between SIA and China Eastern, we believe the company is still keen on acquisitions in China and India in the longer run. Especially with Singapore Minister Mentor, Lee Kuan Yew expressed its bullishness of both countries particular that China likely to achieve a GDP growth above 6% during the Special Session organised by International Air Transport Association (IATA).

Reiterate SELL. With IATA having recently revised its 2009 forecast for industry losses to US$9bn from the March 2009 estimate of US$4.7bn, industry players also mostly expecting more turbulence ahead and the latest news do not have any fundamental impact on SIA. Thus we maintain our SELL recommendation on the company. Our fair value of SG$8.80 is derived from 0.68x FY10 book, or a -2 standard deviation from its historical trading band plus the SATS share entitlement.

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