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　　机构：摩根士丹利

　　Positive 2H17 results: Cathay's 2H17 results returned to profit of HK$792mn, after a significant net loss of HK$2bn in 1H17. This was mainly driven by a 19% surge in cargo revenues, which saw an 11.3% YoY recovery in yield, and robust cargo volumes . In addition, thanks to management's execution of its business transformation programme, unit costs remained flat.

　　Raising 2018-19e earnings: Given better-than-expected earnings performance in 2H17, we raise our 2018-19 net profit forecasts by 10% and 2% to HK$1.28bn and HK$4.08bn, and introduce a 2019e net profit of HK$4bn, suPPorted by: 1) further recovery in passenger and cargo yields, 2) less fuel hedging losses amid increasing crude oil prices and 3) more contributions from Air China .

　　Remain EW: We raise our price target to HK$15.34 from HK$13.95, to reflect our increased earnings forecasts, but we remain EW given limited 10% upside potential from the current share price. Cathay's stock price has rallied 14% YTD . We believe the market has factored in the business turnaround potential, while uncertainties remain on the outlook for export demand growth. More importantly, we are still concerned about: 1) Cathay's strategic position as a Hong Kong-based transit-driven carrier facing intense competition from other countries/regions, and 2) potential traffic diversions after the launch of Guangzhou-Shenzhen-Hong Kong Express Rail Link in 3Q18.

　　Potential risks: Upside: 1) Stronger-than-expected profit turnaround; 2) Recovery in premium travel and potential stabilization or recovery in cargo demand; Downside: 1) Sustained yield pressure led by market competitions; 2) Exogenous events.

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