China Southern Airlines (H):To issue 270.6mn new H-shares to American Airlines subject to regulatory approval

China Southern has disclosed that it has agreed to issue 270.6mn new H-shares toAmerican Airlines for a consideration of HK$1,553.28mn, amounting to HK$5.74 pershare (a premium of 4.6% from last close of HK$5.49) or 1.1x of last disclosed bookvalue per share (above historical average forward P/B of 0.99x). Per disclosures,China Southern will utilize the proceeds to supplement working capital needs. Thetransaction is subject to government approval. American Airlines’ investment willamount to a 2.68% stake in the total outstanding shares of China Southern and it issubject to a lock-up period of 3 years.

We do not expect significant operational or financial implications to China Southern.

We maintain our estimates and Sell rating, with a 12-month target price of HK$4.00based on 2017E EV/GCI vs. CROCI/WACC. Risks: (+) Announcement of SOE reform,lower fuel prices, and better-than-expected domestic/international air fares.