Cathay Pacific well-placed in growth markets, but at risk from US-China trade war

Update as of 10 April: Both commercially and, according to several industry rankings and customer surveys, in terms of its product, Cathay Pacific is up there with the top carriers in international air travel. Only Singapore Airlines, the region's other leading carrier, matches Cathay's remarkable margins and earnings strength. Its debt-to-equity ratio, too, is among the lowest of the big global airlines.

With its Hongkong base, the legacy carrier boasts a prime position in one the leading growth markets in air transport, both of passengers and cargo: Southeast Asia is full of fast-growing, developing economies with huge potential, particularly for airlines when it comes to provide connectivity for the region's island-heavy geography.

Yet what loomed already large over Cathay currently becomes uglier by the week, that is the veritable trade war between the US and China. Cathay is unusually dependent on its cargo business: A full quarter of its revenues is brought up by that segment, making the carrier particularly sensitive to developments in the business cycles of its core markets. Even though many of these have won some temporary respite from Donald Trump's pausing his "reciprocal" tariffs up until mid-July, the region's economy stands to take a massive hit from US protectionist measures.

Cathay, on the other hand, would still stand to profit from the ever-expanding regional reach of its home country China: Especially in the face of an antagonistic US administration, the Middle Kingdom is determined to grow its own, Yuan-based economic sphere of influence throughout East Asia, regardless of what Western countries might do vis-à-vis its overseas trade. But this is going to take time while the effects of the trade war will be felt much more short-term, which leads me to lower my projection for revenue growth from 7 to 5.5 per cent.

Taken together, this is why after its recent run, any future upside for the share price is purely down to valuation aspects, while margins and revenues stand to stagnate even in as best-case scenario. It is only when investors will be ready to award the carrier higher multiples in the near to mid-term that the share might be able to fly any higher; and for the reasons stated above, that is increasingly unlikely, reflected in my lowered projection of a future PE ratio of 8 (formerly 9). If, however, multiples should compress from here, the shares will go down no matter how well Cathay will manage to hold up its business in the eye of the hurricane.

Disclaimer: For the reasons stated here, I've sold my stake effective 27 March.