02/17/97 IS THIS CHINESE AIRLINE SAFE FOR INVESTORS? (int'l edition)

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IS THIS CHINESE AIRLINE SAFE FOR INVESTORS? (int'l edition)
The first-ever Chinese airline IPO overseas may stall out
Matt Miller, a Shanghai correspondent for Thailand's Asia Times, recently bought a last-minute ticket on a China Eastern Airlines flight to Los Angeles. Stuck in the smoking section for 10 hours, he expected relief when the No Smoking light finally appeared off California. But as the plane made its approach, smokers kept puffing away. Other passengers milled about the aisles--just as they do on flights in China--removing luggage from overhead compartments and talking on cellular phones. ''It was crazy,'' says Miller. ''The crew had lost control of the cabin.''
Shanghai's China Eastern has a long way to go before it meets international airline standards. But that didn't bother investors who lined up to buy $252 million worth of stock in the initial public offering in New York and Hong Kong on Feb. 4. With CEO Wang Lian watching the listing of the airline's American depositary receipts on the New York Stock Exchange, traders gave the carrier a warm reception. After opening at $18 apiece, the ADRs--the first issue of stock overseas by a Chinese carrier--jumped to $20.75 by the close.
Over the long haul, however, investors may face a bumpy ride. Chinese air travel is expected to grow dramatically, but so far, profits are not following the same path. Despite some of the lowest labor costs in Asian aviation, China Eastern's earnings are expected to fall to $66 million for 1996, $10 million less than in 1995. This year's profits aren't likely to be more than $73 million. What's more, China Eastern remains state-controlled, with plenty of questions about predictability of its results, transparency of its reporting, and efficiency of its operations. ''This isn't an airline play,'' says Jim Eckes, chairman of Indoswiss Aviation Ltd., an aircraft-leasing company. ''It's a bet on Shanghai.''
Judged as a Shanghai play, however, China Eastern does have some things in its favor. Shanghai is the capital of the fastest-growing region in China. Shanghai has also begun work on a new international airport, where China Eastern, with 64 planes and 114 routes, will be top dog. Morgan Stanley & Co., the lead underwriter for China Eastern, had intended to take the company public two years ago, but was stymied by a weak stock market in Hong Kong and unresolved regulatory issues in China. With Hong Kong and Wall Street booming again, Morgan Stanley figured it would have better luck now.
Still, even a bull market can't overcome the ambiguous role of the Civil Aviation Administration of China, the regulator and primary competitor for China Eastern. The CAAC governs routes, landing rights, fares, and aircraft-purchase plans. But its China National Aviation Co. (CNAC) unit is the major shareholder in Dragonair, the Hong Kong carrier that business travelers prefer to China Eastern on the profitable Hong Kong-Shanghai route. Meanwhile, CAAC also owns Beijing's international carrier, Air China, which stands to grab any future Shanghai-Taiwan or transpacific routes.
ABYSMAL. Morgan Stanley and China Eastern say that CAAC promises to give the Shanghai carrier equal treatment. But with one-third of the company foreign-owned following the IPO, China Eastern may find itself at a bureaucratic disadvantage in competing with domestic companies. China Eastern's balance sheet may also limit the carrier's expansion plans and profits. It has a 3-to-1 debt-equity ratio, higher than any other listed Asian airline and twice the global industry average. And its aircraft utilization is abysmal: Most planes fly only 7 hours a day, compared with an industry average of 12 to 14. A spokeswoman for China Eastern declined to comment.
Given such concerns, some investors who got in early may unload their China Eastern shares soon. ''I'm pretty relaxed about the short term, but I wouldn't hold China Eastern shares for long,'' says
Haddon Zia of Prudential Portfolio Managers (Asia) ''Besides, there are more attractive airline issues coming, like China Southern [Airlines Corp.] and CNAC itself, which have much better balance sheets than China Eastern.'' China Eastern may soon find itself in a tough fight--not only in the air for passengers but also on trading floors for investors' dollars.
By Dave Lindorff in Hong Kong