Cathay Pacific:Is that all?

Strategy review: Not delivering a punchAlmost an anti-climax to the great strategy review day build-up of CathayPacific, media reports suggest some broad measures were announcedencompassing a reorganisation, some back-office job cuts and a brandledstrategy. We think the review may have missed a great opportunity toannounce steps to reposition the business for the materially changedlandscape. Expecting far more drastic measures than those announced,we remain SELLers at a slightly increased target of HK$8 (from HK$7.5).

Holistic structure, simpler, leanerMedia reports (SCMP, Bloomberg) suggest Cathay Pacific has announced thatits strategic review will involve a reorganisation on seven key areas(customer, operational, commercial, people, cargo, finance and strategy andIT) to evolve into a simpler, leaner structure. Reorganisation will start at thetop and also involve some redundancies in back-office functions; some newjobs and roles will also be created. Key changes will be implemented by midyear.

Cargo will remain a significant part of business. There will be four pillarsto anchor the new brand-led strategy: customer focus, operationalexcellence, productivity and high performance culture. There was no stockexchangefiling with more details at the time of publication of this report.

Missing the pointCathay’s problems are far too many but the biggest of all, in our view, is thereduced visitations from China to Hong Kong, both from an end destinationperspective as well as from a transit/transfer perspective. Compounding thisproblem has been Cathay’s heavily loss-making fuel hedges, a weak cargomarket and unsupportive premium demand. To overcome these challenges,far more drastic steps than those suggested by media reports of Cathay’sstrategic review are warranted. Cathay needs to cut back capacity in marketsegments that no longer make commercial sense, namely some long-haulmarkets & cargo. We think it needs to lower costs by increasing the density ofits economy class and cutting down the size of its business and first class.

Underwhelmed for nowIn the absence of more details, we feel Cathay’s strategy review may havemissed an opportunity to reposition it for the new reality of materiallyincreased Chinese competition. We adjust our earnings forecast to reflectsome cost cuts and FX, move valuation forward by a quarter and retain SELLat HK$8 target (vs HK$7.5 earlier) based on 0.6x forward book value.