Stock Analysis

Why China Southern Airlines Company Limited (HKG:1055) Could Be Worth Watching

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SEHK:1055
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Today we're going to take a look at the well-established China Southern Airlines Company Limited (HKG:1055). The company's stock saw significant share price movement during recent months on the SEHK, rising to highs of HK$6.20 and falling to the lows of HK$4.82. Some share price movements can give investors a better opportunity to enter into the stock, and potentially buy at a lower price. A question to answer is whether China Southern Airlines' current trading price of HK$5.18 reflective of the actual value of the large-cap? Or is it currently undervalued, providing us with the opportunity to buy? Let’s take a look at China Southern Airlines’s outlook and value based on the most recent financial data to see if there are any catalysts for a price change.

See our latest analysis for China Southern Airlines

What's the opportunity in China Southern Airlines?

The stock seems fairly valued at the moment according to my valuation model. It’s trading around 14% below my intrinsic value, which means if you buy China Southern Airlines today, you’d be paying a fair price for it. And if you believe that the stock is really worth HK$6.05, then there’s not much of an upside to gain from mispricing. So, is there another chance to buy low in the future? Given that China Southern Airlines’s share is fairly volatile (i.e. its price movements are magnified relative to the rest of the market) this could mean the price can sink lower, giving us an opportunity to buy later on. This is based on its high beta, which is a good indicator for share price volatility.

What kind of growth will China Southern Airlines generate?

earnings-and-revenue-growth
SEHK:1055 Earnings and Revenue Growth May 17th 2021

Investors looking for growth in their portfolio may want to consider the prospects of a company before buying its shares. Buying a great company with a robust outlook at a cheap price is always a good investment, so let’s also take a look at the company's future expectations. In China Southern Airlines' case, its revenues over the next few years are expected to grow by 99%, indicating a highly optimistic future ahead. If expense does not increase by the same rate, or higher, this top line growth should lead to stronger cash flows, feeding into a higher share value.

What this means for you:

Are you a shareholder? 1055’s optimistic future growth appears to have been factored into the current share price, with shares trading around its fair value. However, there are also other important factors which we haven’t considered today, such as the financial strength of the company. Have these factors changed since the last time you looked at the stock? Will you have enough conviction to buy should the price fluctuates below the true value?

Are you a potential investor? If you’ve been keeping an eye on 1055, now may not be the most advantageous time to buy, given it is trading around its fair value. However, the positive outlook is encouraging for the company, which means it’s worth diving deeper into other factors such as the strength of its balance sheet, in order to take advantage of the next price drop.

So while earnings quality is important, it's equally important to consider the risks facing China Southern Airlines at this point in time. For example, China Southern Airlines has 2 warning signs (and 1 which is concerning) we think you should know about.

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