DBS: Upgrade rating of CHINA SOUTH AIR (01055) to "hold", expecting industry prospects to remain challenging.

DBS released a research report stating that the rating of CHINA SOUTH AIR (01055) has been upgraded from "sell" to "hold", with the H-share target price remaining unchanged at 3.4 Hong Kong dollars. This decision is mainly due to the stock price having fallen by around 40% since the eruption of the Middle East conflict, as the market is believed to have largely reflected pessimistic expectations for the industry's outlook. However, the bank still maintains a cautious view on the three major Chinese airlines, expecting the industry to enter a new cycle of profit pressure, facing challenges including the persistently high aviation fuel prices. The report points out that Chinese airlines have limited fuel hedging ratios, coupled with weak pricing power, intense competition, and price-sensitive consumers, limiting their ability to pass on costs, leading to increased profit pressure in the coming quarters. DBS currently predicts that China Southern Airlines will incur a net loss of 31.06 billion yuan in the 2026 fiscal year, but is expected to return to profit in the 2027 fiscal year, recording a profit of 16.5 billion yuan. Although the risk-return balance is currently approaching equilibrium, there is still a possibility of further stock price declines if the operating environment significantly deteriorates.