China’s tourism market is growing steadily. According to a report released by the China Tourism Academy, the number of domestic travelers have reached over 2.8 billion in the first half of 2018, up 11.4 percent year-on-year. The total number of inbound and outbound tourists also reached 141 million, up 6.9 percent year-on-year. Meanwhile, according to Chinese carriers’ data, the growth of monthly mainland passenger traffic remains solid. On the other hand, the U.S. recorded a $100.5 billion budget deficit in October, an increase of about 60 percent from a year earlier, mainly due to the major tax cut approved by Congress last year and the significant increase of government spending by the Trump administration. As the Republican Party lost control of the House in the midterm election, coupled with a huge budget deficit, we believe Donald Trump is unlikely to offer a tax cut as an economic stimulus again. Furthermore, the Federal Reserve is considering slowing down in future rate hikes. Therefore, the dollar strength may not be able to sustain which will lower the interest rate expense of Chinese airlines with a high ratio of foreign debt. Additionally, the ongoing airfare pricing reformation allows airlines to adjust fares according to market demand for domestic flights, along with the fact that oil price is recently consolidating at a relatively low level, the profitability of Chinese airlines is anticipated to further improve. As a consequence, we remain medium/long term bullish on China aviation industry.

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