深圳机场(000089)

SACL's pax growth accelerated to 8.8% YoY in Aug-17, from 7.0% in Jul-17. In8M17, aggregate pax volume grew 8.0% YoY, above 4.8% in 8M16.

Aircraft traffic growth improved to 5.9% YoY, following 4.3% in Jul-17, withhigher average daily landings of 945 (vs. 926 in Jul-17), thanks to the increase inpeak hour landings, we think. Average pax per aircraft also climbed, to 136 from134 in Jul-17. YTD, aircraft movement increased 6.9% YoY, up from 3.1% in 8M16.

Cargo/mail volume growth recovered to +0.8% YoY, vs. -0.1% in Jul-17. In 8M17,cargo/mail volume growth was 5.0%, slower than 8.7% in 8M16.

Our price target of Rmb10.99 is derived from our probability weighted average ofscenario values. Our base case value is derived from our DCF valuation. We assume aWACC of 10.1% based on a cost of equity of 11.2%, a cost of debt of 5.5%, and aconsistent target structure of 85% equity and 15% debt. We use a beta of 0.9 on thebasis of its two-year weekly beta from Bloomberg. We assume a terminal growth rate of1.0%.

Our weightings for the bull, base, and bear case scenarios are 20%, 75% and 5%,respectively. We apply the highest probability (75%) to our base case scenario, givenSACL's highly predictable cash flows and earnings outlook. We see a higher probabilityof our bull case playing out than our bear case, in view of sustained traffic growth andincreasing pricing power in the long run.

Key downside risks to achieving our price target: 1) lower-than-expected traffic growthand tariff hikes; 2) higher-than-expected human capital costs; 3) failure to attractadditional international passengers; 4) exogenous risks, such as natural disasters,international conflicts or a severe global recession; 5) reluctance of policymakers toallocate more resources.

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