Analyst briefing (Q&A)

Jun 9, 2020

Slides

And with that, we'll take your questions. Thank you, Martin. I will now hand over to our moderators to begin the Q and A session. Okay. The first question comes from Andrew Lee of the Jefferies. There are a few parts of the question. The first part is when does the preference shares expire? Well, the preference shares are perpetual. So the preference here is don't expire until we've redeemed them. Obviously, it has a step up. So as we said, the 1st 3 years are at 3% 5%, 7%, 9%. We can defer that coupon as well in terms of preserving cash. But obviously, the, as the government mentioned today, they're not expected to be a long term investor. So we certainly would be expecting to repay that over a 3 to 5 year period. Okay. 2nd part, for the bridging loan, are prongs used as collateral? We have some unsecured there's some security, partial security in the bridging loan, over our unencumbered current unencumbered aircraft, which has provided security for that loan. Okay. The 3rd part, the total of the 3 proposals is 1,000,000,000 which is higher than the announced $39,000,000,000. What's the difference? It was $5,000,000,000 it at 7.8%. So it depends what exchange rate you've used at. Yes. So is that a 40.9% compared to 39%. I think that's the warrants, right? And there's immediate value on the warrant. Right. Okay. The final part of his question, sorry. Yes, it must be the value. They must have allocated the value to the warrant. Final part of this question. 20, 20,700,000,000 short term for this year. Will this all be paid this year? Sorry. Can you repeat your question? 20.7 Hong Kong Dollars. At 20,700,000,000 Hong Kong Dollars term for this year. Will this all be paid this year? Short term loan. Right? You're talking about, I believe they're talking about, refinancing for for 2020. For yes, for I mean, the, again, the, the, in our annual report, it talks about our our GBP 20,000,000,000 or so refinancing in 2020. And that certainly will we'll use some of that liquidity to repay that and also we'll be somebody financing. Okay. Next question comes from Ben Hartwright of the Goldman Sachs. He has got a few questions. So the first part is what will likely determine whether the government exercise is warrant Well, obviously, the share price itself, so they can exercise those warrants anytime in over the 5 year period. So, again, there's a determination depending on the share price at the time. Okay. 2nd part also from Ben, about the Hong Kong government, the tour observer seats, what do you expect will be, the impact on management and the decisions you can with regards to such observers? I think that was well documented in both the financial sectors and our Cathay Pacific press statement in that there is no intent from the Hong Kong government interfere with either the operations or management of the business, but it does give them full visibility of their investment, full documentation of that and a right to comment. On the investment. So the next question also from ban is what is your current assumption for the time it will take to recover back to the demand levels in the first half of twenty nineteen. Sure. But currently the situation is still very fluid. So it is very difficult to predict. But according to IATA, their forecast is that it's only by 2023 traffic demand will be soon to pre COVID-nineteen level. Currently for Cathay, we'll spend the next few months to gather more information. Before we take a view on the pace of the recovery and the medium term outlook. So at the moment, we don't have any accurate outlook that we can share. Okay. Thank you. Next question comes from Kelvin Lau of Daiwa Capital to pass. The first part is why do you prefer to have government's involvement in this restructure plan and the benefits as compared to the support from your major shareholder? As we mentioned, we're grateful for support of both government and our major shareholders. I think it's a vote of confidence in Hong Kong as an aviation hub, from all, in terms of why we saw government support. Again, that was well. Documented and said at both press conferences in terms of what's happened on the impact of COVID-nineteen around the region. The uncertainty of the future for the aviation sector and how governments around the world have had to step in and support what is a key set sector, to, to overall industry. 2nd part of the question from Kelvin, if the Popreg right issue is not fully subscribed. Would the major shareholders take on pro rata basis? We have, we have the major stakeholders that have all irrevocable undertaking to sign up. So it's a 15% free float, which has been underwritten by 4 strong relationship banks. Okay. Final part from Kelvin. What is the interest cost now or was how is it compared to the raise offer on the preferential shares? What is our yes? Well, again, it's it's they're all different instruments. The instruments have all been done on a commercial basis. And so, if we take TransC in terms of the loan, hybrid plus 1.5% for 18 months is certainly a level that we would have had pre COVID-nineteen, if not lower. And so that's very much on commercial base for that length of tenure. In terms of our perpetual bond, I think the coupon rate is fair. In terms of the step up there. And in terms of the warrant, then we strive to have a return on capital invested ROCE of 7.5%. And I hope to achieve that. Okay. Thank you. The next question comes from Rebecca Law of Credit Suisse. 3 parts. The first part is the company is taking more passenger flights for cargo. What is the revenue and earnings distribution for the cargo segment now? Well, with the passenger revenue falling to only 1% to the normal level, basically majority of revenue predominantly comes from cargo nowadays. And we have done a lot to improve our cargo revenue apart from running the freighters with higher utilization. We have mounted many passenger flights to carry cargo only. For example, in the month of May, we have mounted close to 900 pairs of passenger flights to carry cargo only. Right. The second part of the question is, We understand the hedging loss will be US7 million dollars for every $5 dropped in oil price. Could you remind us any updates on hedging loss now? That was that was well remembered. And it doesn't change. And so, so that overseeing data is for the hedging losses. Are it's all very public. So our hedging position, we've hedged it for the rest of the year at US65 dollars. You have to work out what your own view of what the future is going to be in terms of the Brent price. If you assume $40, then for every $7 for every $5 decrease, that difference would be $25, then, with $7,000,000 per month for every $5 you're talking about, just over 250,000,000 Hong Kong dollars per month hedging losses. And obviously at the moment while we're not flying, we don't get the more than offsetting benefit of the cheap fuel. Final part of the question from Rebecca. Given the right shares issuance price is at 4.68 Hong Kong dollars, which is 35% discount to PGRP. How do you think about short term market performance? Well, obviously, as as Ronald mentioned, the immediate short term is very uncertain. So we do we don't know when international travel restrictions will lift Ronald also mentioned what the IATA outlook was. And so we are expecting a difficult 2021 stage. We will come back to the board in the fourth quarter in terms of what we think the optimal size of the group should be at that time. But again, the the target remains to get our return of investment back up above our hurdle rate of 7 point 5% and we're very bullish, remains very bullish about the medium term outlook for Hong Kong as an aviation hub Okay. The next question comes from COM Achieve of UOB. Will the preference shares be treated as equity or debt? Yes. I mean, whilst it's like a perpetual bond in structure, the preference, the beauty of the preference is shares, it is treated as equity. So 80 percent of the recapitalization is treated as equity, and that's what brings our gearing levels down And that's what opens the capital markets up for further equity and debt lending. Okay. The second part of There's another question from Com of UOB, and also a few similar questions from other analysts about freight. So the question is, has CAFE managed to defer deliveries in 2020? Would you be able to quantify the back the deliveries for 2020? Well, our original budget plan, has planned for 7 aircraft to be delivered in 2020. And some aircraft has already been delivered earlier this year. For the remainder of them, we are working with the aircraft manufacturer to try to delay them as much as possible. And some of them into 2021, at least. But given that some of the aircraft are already manufactured, So I think we are still talking to the aircraft manufacturer to see what degree of deferral we can manage to agree on. For the rest of 2020. So we're still working on it. Okay. Next question comes from Eric Lynn of the UBS. Aircraft delivery parts has been answered and future hedging has been answered. The third part of the question is, have your cash flow in May June improve or did period rate versus the 1st 4 months of the year? Well, we're operating a skeleton crew. So cash flow is starting to stabilizes. So the of the billion that we've seen since February, and the big part of that is is salaries. A big part of that is the financing of the aircraft and then maintenance of the aircraft. You can add to that that what we just talked about in terms of the hedging losses. Then there's a big chunk of working capital movement, which is the refunds that we've had to pay, in the 1st period. So we do expect the cash burn to come down in the second half, if we maintain a skeleton crew just because the refunds have been repaid. Okay. I think we will have time for 2 more questions. Actually follow-up questions from Ben of Goldman Sachs. Ethical questions on the EGM vote. Can Air China vote for the rights issue? Yes. Yes. Okay. The second one, contingency do you see any risk to completing the transactions laid out here? Any of the conditions precedent that might be uncertain? No. We've had irrevocable undertaking from all the stakeholders and the government support has got new conditions attached. So we've got Okay. I think that's most of the other questions, are repeating, so you have answered already. Thank you very much for your questions. Kindly note that the slides from today's presentation will also be made available to download on our investor relations website later this evening. If have any further questions, please write to us at ir@cathepacific.com, and we'll endeavor to respond to them as soon as call. This concludes today's analyst webcast. Thank you for joining us. Thank you.