The Zhitong Finance App learned that UBS released a research report saying that the recent weak stock price of Cathay Pacific (00293) reflects market concerns about fuel costs, but the market underestimated the durability of its return on equity. The bank raised the target price from HK$19.4 to HK$20.1, maintaining a “buy” rating.
According to UBS, Cathay Pacific's return on equity has remained at 19% over the past three years, and its mid-term results for the first half of 2026 also showed that its pricing capacity in passenger and cargo transportation was superior to that of its peers, and its core profit increased 45% year over year in a high oil price environment.
According to the bank, there are at least seven structural drivers supporting Cathay Pacific's more durable and sustainable return on equity, including a shortage of wide-body airliners, a rise in the market share of Hong Kong International Airport from 49% in the first half of 2018 to 65% in the first half of 2026, fuel surcharge relaxation, membership plan reform, investment in high-end products, support from demand factors in Hong Kong, and long-term growth opportunities for the cargo business.
In terms of profit forecasting, UBS lowered Cathay Pacific's earnings forecast per share for FY2026 by 5%, mainly reflecting higher oil price assumptions, but the forecast is still 14% higher than market expectations, and maintains the 2026 net profit forecast of HK$13.3 billion, which is a 22% year-on-year increase. The bank also raised its earnings forecast per share for the 2027-2028 fiscal year by 2% to 11% based on strong yield assumptions. The average return on equity for the 2026-2028 fiscal year is expected to reach 22%, far higher than the average of 4.2% from 2011 to 2019.
The bank believes that Cathay Pacific's capital expenditure plan of HK$150 billion over the next ten years can be supported by strong free cash flow while maintaining a 50% dividend rate. It believes that the risk of equity financing in the short term is limited.