 With domestic capacity now at more than 100% of 2019 levels, focus shifting to improving load factor and then yield  We raise 2H20 sector profit to RMB4.5bn from RMB1.4bn vs RMB26bn loss in 1H20 on stronger RMB vs USD FX rate  Raise TPs to reflect early cycle optimism. Prefer airlines over airports. Golden Week holiday demand to act as a catalyst 

Focus on load factor in 3Q20 and yield in 4Q20: With domestic weekly capacity for the Big-3 Chinese airlines comfortably ahead of that of last year (109% of last year’s level for the week of 7 September 2020), we believe the improvement in load factor (73% in July vs 60% in March) will accelerate. We believe there will be significant pentup demand for travel during the upcoming Golden Week holidays (1-8 October), especially with as much as 13% of total air pax who travelled overseas in 2019 now potentially looking to spend their holiday within China. With a strong domestic recovery likely in the coming weeks, we think airlines will start to focus on improving yield, especially from October. Indeed, CEA expects to reach flattish domestic traffic growth during the national holidays. CSA expects to see ticket prices recover to pre-COVID-19 levels by 2020-end, while Air China expects it by February 2021. Earnings momentum set to turn positive; we reflect new USD-RMB forecast: With most of the revenue for airlines in RMB and part of their debt (24-35% of total debt) and operating expenses (c40% of total expenses – fuel, lease expense, maintenance) in USD, any change in FX has a significant impact on the profitability of the Big-3 Chinese airlines. We raise our 2H20 sector profit to RMB4.5bn from RMB1.4bn as we reflect the HSBC FX team’s revised USD-RMB FX rate assumptions of 6.70 for 2020-end, from 6.95 previously. This would imply an annualised ROE of 4.2% in 2H20 (from 1.3% earlier). Among the Big-3, CSA has the highest value of USD debt, while Air China has the highest ratio of USD debt as a percentage of overall debt. We have a 2H20 profit forecast of RMB4.5bn vs consensus estimates for a loss of RMB4.3bn. Gaining altitude, prefer Big-3 Chinese airlines (H-shares) over airports: We now value the H-shares of the Big-3 airlines based on an average of 1.1x consensus 12month forward PB, 1 SD above the mean (from average previously) since mid-2011 to reflect the early cycle optimism. We prefer the Big-3 Chinese airlines (H-shares; all rated Buy) over airports – BCIA (Hold) and AOT (Reduce). News flow around strong travel demand during the Golden Week holiday could act as a positive catalyst for the sector.