Even before Hong Kong’s political crisis erupted in June, Cathay Pacific Airways had run into a more bumpy ride.

Lower fuel prices helped the territory’s flagship airline to a profit in the first half of the year, but the US-China trade war was having a knock-on effect on its cargo business, as was a fall in electronics exports.

Now, it finds itself caught in the middle of a months-long stand-off between protesters and authorities.

Under pressure from China, Cathay reversed its position that it would not stop staff from joining the pro-democracy protests and by Wednesday, it had fired four employees and suspended a fifth for their alleged involvement.

At the same time, the protesters closed Cathay’s home Hong Kong International Airport for two days at the start of the week forcing it to cancel 272 flights. By the end of Tuesday, the shares had fallen by a total of 7.3 per cent over the two days to their lowest for more than a decade.

Cathay has regained some of that ground since but a decision by two Chinese state-run banks to downgrade its shares has raised concerns that Beijing may be politicising investment bank research to punish companies that fail to voice sufficient support for Hong Kong’s government and police force.

Andrew Sullivan, director of investment company Pearl Bridge Partners, set out Cathay’s dilemma, saying it had to “kowtow to China in order to keep its operating licences to be able to fly into and over China . . . But it risks a backlash from consumers in Hong Kong”.

According to analyst estimates, up to 70 per cent of Cathay’s passenger and cargo flights pass through China’s airspace, and a large portion of travellers are mainland Chinese. Its principal shareholder is Swire Pacific, the Hong Kong-listed arm of the conglomerate Swire Group. Air China, Beijing’s flag carrier, is its second-largest shareholder with a 29.9 per cent stake.

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In response to the pressure from China, including demands from the Civil Aviation Administration of China, the regulator, that it submit crew lists for approval before its planes enter China’s airspace, Cathay and Swire Pacific have repeatedly voiced support for the Hong Kong government and said the airline would comply with its instructions.

Swire “resolutely supports the Hong Kong SAR government” and condemns “all illegal activities”, the company said in a statement on Tuesday. 

Even so, the first Chinese state bank to downgrade Cathay’s stock on Tuesday was the Hong Kong branch of Bank of Communications, which lowered its recommendation from buy to neutral. Then the Industrial and Commercial Bank of China’s Hong Kong branch, published its first ever rating for Cathay — a “strong sell” recommendation with a share price target of HK$6. The stock is currently trading at HK$10.

ICBC focused on a warning from China’s aviation regulator over, among other things, Cathay’s “failure to suspend overly radical air crew” — a reference to one pilot who had participated in protests and was arrested by Hong Kong police. The note said new requirements from the regulator for Cathay to obtain air crew approval would make it impossible for its aircraft to fly over China and “cause irreversible damage to Cathay Pacific’s brand image”.

However, more than two-thirds of analysts tracking Cathay still rate the stock a “buy”, according to Bloomberg, and on Thursday China’s airspace regulator said crew documentation it had requested from Cathay had so far met all its requirements. One analyst who follows the company said the reasoning behind the BOCOM and ICBC downgrades was unclear since, “objectively speaking, we did find the value at that time was at rock bottom”.

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In its report on Cathay published on August 8, DBS, which rated the company’s shares a buy with a price target of HK$13.50, said the airline remained on track to post a substantial improvement in earnings, even if gains were now likely to be less pronounced thanks to headwinds from Hong Kong protests, the US-China trade war and slower global growth.

Paul Yong, senior vice-president of equity research at DBS, was sceptical that a sharp share-price drop was on the cards for Cathay, whose stock he described as “too cheap to ignore”.

“If you look at [Cathay’s] price-to-book valuation, which we think airlines should be valued on, it’s basically trading at a 20-year low,” Mr Yong said.

Cathay’s cargo business returned to profitability last year after losses of HK$1.26bn ($160m) for 2017.

In the first half of this year, Hong Kong merchandise exports and imports contracted, respectively, 3.6 per cent and 4.5 per cent, according to IHS Markit. Cathay’s cargo traffic was down 5.7 per cent in the same period.

In March, it bought low-cost airline HK Express, boosting its share of total Hong Kong passenger traffic to 50 per cent.

Via Financial Times