DBS Group has issued a research report upgrading its rating on CHINA SOUTH AIR (ASX: 01055) from 'Sell' to 'Hold', while maintaining its H-share target price at HK$3.40. The bank believes that the market's pessimistic outlook for the sector's prospects has largely been factored in.

Maintaining a Cautious Sector View

However, the bank retains a cautious stance towards China's three major airlines, anticipating the industry will enter a new cycle of profit pressure, with challenges ahead including persistently high aviation fuel prices. The report notes that Chinese airlines have limited fuel hedging, coupled with weak pricing power, intense competition, and price-sensitive consumers, which restricts their ability to pass on costs. It is projected that profit pressures will intensify over the coming quarters.

Earnings Forecast and Risk Assessment

DBS currently forecasts that China Southern Airlines will record a net loss of RMB 3.106 billion for the 2026 fiscal year, with a return to profitability expected in FY2027, recording a profit of RMB 1.65 billion. While the risk-reward profile is now seen as balanced, the share price could still face further downside if the operating environment deteriorates significantly.