DBS has revised its rating for CHINA SOUTH AIR (01055) from 'Sell' to 'Hold', while keeping its H-share target price unchanged at HK$3.40. The upgrade primarily reflects the stock's significant decline of approximately 40% since the outbreak of the Middle East conflict, suggesting that the market's pessimistic outlook for the sector has largely been priced in.

Continued Sectoral Caution

However, the bank maintains a cautious stance on China's three major airlines overall. It anticipates the industry is entering a new cycle of profit pressure, with the outlook remaining challenging. Key headwinds include persistently high aviation fuel prices.

Underlying Profit Pressures

The report highlights several structural issues for Chinese carriers, including limited fuel hedging, weak pricing power, intense competition, and price-sensitive consumers. These factors constrain their ability to pass on higher costs, which is expected to intensify profit pressures over the coming quarters.

Financial Projections

DBS currently forecasts that China Southern Airlines will record a net loss of 3.106 billion yuan for the 2026 fiscal year. A return to profitability is projected for the 2027 fiscal year, with an estimated profit of 1.65 billion yuan. While the risk-reward profile is now seen as more balanced, the bank cautions that the stock price could face further downside if the operating environment deteriorates significantly.