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Shanghai carriers caution investors
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15:29, July 17, 2009

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 China Eastern Airlines announces detailed merger plan with Shanghai Airlines
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SHANGHAI: Shares of China Eastern Airlines and Shanghai Airlines hit their fourth consecutive daily limits of 5 percent yesterday after a one-hour trading suspension, indicating the favorable market response to the merger, stock analysts said.

In an apparent effort to cool the market frenzy, the carriers issued statements on Wednesday indicating there was no further information (about the proposed merger) to be disclosed, nor did they have any further plans on asset restructuring, acquisition or share issuance for the next two weeks.

China Eastern airplanes at the Kunming airport. Shares of China Eastern and Shanghai Airlines rose by their 5 percent daily limit in four consecutive days after their merger announcement. CFP

The two Shanghai-based carriers also warned investors on the potential risks in the rising share prices. Shanghai Stock Exchange (SSE) regulations stipulate that share price increases that hit the daily limit for three consecutive days are termed "abnormal" and require company clarification.

Shares of China Eastern jumped to 6.48 yuan while Shanghai Airlines touched 7.20 yuan yesterday in Shanghai. The shares of China Eastern in Hong Kong made a gain of 3.96 percent to HK$2.10 per share.

Li Lei, industrial analyst with CITIC China Securities, said the price surge indicated market confidence and the benefits that the two airlines can derive from the proposed merger. What's more, the price increase of the two airlines is seen as a catching up with the market upsurge during their suspension last month.

"Apparently, the market expects the bright side from the merger, but the sentiment needs support from the strengthened performance after the new China Eastern Airlines completes the assets restructuring, or it cannot last long," said Ji Lijun, analyst, Shanghai Securities.

However, Li said China Eastern's share price was less grounded as it had surpassed the share price of China Southern Airlines, the nation's largest carrier by fleet size. "Shanghai Airlines seems to have more growth space thanks to the favorable share swap ratio of 1:1.3 with China Eastern," he said.

Although the two airlines have not disclosed their mid-year forecast, analysts expect China Eastern to show improvements in the first half, as it has already factored in the potential losses from fuel hedging bets made last year.

In addition, China Eastern also reported yesterday that since global oil prices rose 56.70 percent between Dec 31, 2008 and June 30, 2009, the carrier's loss in fuel hedging contracts would be alleviated by 2.74 billion yuan for the first half as of June 30.

Just a day earlier, Air China, another fuel hedging victim, said it expects first half profits to go up by more than 50 percent over 2008, gaining largely from the oil price volatility. The Beijing-based airline made a net profit of 1.282 billion yuan last year, with earnings per share (EPS) reached 0.11 yuan.

In the note confirming the merger last Sunday, China Eastern also revealed it will raise new capital by selling up to 1.35 billion of new A shares to 10 select institutions, including its parent, and as many as 490 million new H shares to its parent company in Hong Kong.

"Of the nearly 7 billion yuan to be raised, the parent China Eastern Air Holding Company will buy 3 billion, and another 4 billion yuan will go to other shareholders," said Li.

Source:China Daily

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