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Chinese Equity Analyst Says He Faced "Heavy Pressure" To Cut Rating On Cathay Pacific

More than any other company, Cathay Pacific Airlines has gotten caught up in anti-extradition bill protests that have rocked Hong Kong all summer, with the company's CEO leaving last week under pressure from Beijing.

And now, one equity analyst at a Chinese banking giant admitted to Bloomberg that he faced "heavy pressure" to cut his rating of Cathay to a "strong sell" - making him the only analyst tracked by Bloomberg who has a 'sell' rating on Cathay.

Zhao Dongchen

Zhao Dongchen, one of the top equity analysts at ICBC, advised clients to dump shares of Hong Kong-traded Cathay before they hit their lowest levels since the late 1990s. But he says never before in his career did he face such intense pressure to cut a rating on a stock.

"Never before in my 12 years of investment analyst career have I received this much pressure on a particular stock rating," Zhao Dongchen, who last week issued his inaugural report on Cathay with a "strong sell," said in an emailed response to Bloomberg queries. "Never before in my 36 years of life am I under such heavy pressure."

Another analyst and former UBS banker said it's hardly surprising that the "interests of Chinese state banks...and the government are closely aligned."

"We have one of China’s biggest state banks issuing an especially bearish and unusual sell recommendation on a private company in H.K. that is already the target of the Chinese state," said George Magnus, a former UBS Group AG chief economist and author of "Red Flags: Why Xi’s China Is in Jeopardy." "You don’t have to try hard to conclude that the interests of Chinese state banking institutions and the government are closely aligned."

Zhao, who forecast that Cathay's shares would tumble to just HK$6, more than 40% below their current price, based most of his criticism on the "irreversible damage" to the company's brand caused by its employees involvement in the protests.

In his report, entitled "Less Deserved to Fly," Zhao criticized the Hong Kong carrier for potentially causing "irreversible damage" to the company’s brand because of "poor crisis management" in relation to the protests. The report said that a large-scale management reshuffle would be an "upside risk" for the company.

"My strong sell rating is based on the difference between Cathay’s stock price and our target price," he said. "Simple as that." He said he won’t shy away from a “shock rating” as he believes contrarian reports to be more helpful to investors.

Though Cathay currently trades at a premium to other Asian airlines, Zhao said in his report that this would "evaporate" because of the unrest in HK and the company's management team (the report was issued before Cathay's now-former CEO left the company a week ago).

Zhao said Cathay currently trades at a premium to other airlines in Asia, which he believes will "evaporate" because of factors ranging from the unrest in Hong Kong to the effects of the U.S.-China trade war on global commerce.

Also, the airline’s management team has shown a "severe lack of composure" in dealing with crises, including a recent data breach and problems with the Chinese regulator, Zhao said.

Another analyst said he sees no justification for a 'strong sell' rating on Cathay at this time. But when BBG asked Zhao why he only seems to give sell ratings to foreign companies, he argued that Cathay isn't a foreign company because it's incorporated in Hong Kong.

Yet Zhao stands alone among his peers in his bearish view of Cathay. Of the 19 analysts tracked by Bloomberg, 13 have the equivalent of a buy rating and 5 have holds.

"Strong sell is the wrong rating on the stock at the moment," said Mark Webb, an analyst at GMT Research in London who previously covered the stock for 18 years at HSBC Holdings Plc. "Only a significant deterioration in the situation in Hong Kong would make it go significantly lower from here."

Asked why Zhao appears to only assign his harshest ratings to foreign companies such as Rio Tinto Plc, Vale SA and BHP Group Ltd, while only giving buy ratings for Chinese companies such as Shandong Gold Mining Co., Zhao said:

"I did just issue a strong sell rating on Cathay Pacific, didn’t I? That’s a Hong Kong-incorporated company, not a foreign one."

Well, sure - but that's kind of missing the point.