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Lone analyst who cut Cathay to sell says he faces huge pressure

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The analyst who issued a report warning investors to dump shares of embattled Cathay Pacific Airways Ltd before they tumble to their lowest levels since 1998, is getting a lot of blowback after his controversial call.

[SHANGHAI] The analyst who issued a report warning investors to dump shares of embattled Cathay Pacific Airways Ltd before they tumble to their lowest levels since 1998, is getting a lot of blowback after his controversial call.

"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."

Mr Zhao, who's head of equity research at the investment-banking arm of state-run giant Industrial & Commercial Bank of China Ltd, issued his report as Cathay was under fire from China and facing boycotts from government-run businesses because the carrier's employees joined the anti-Beijing protests in Hong Kong. No other analyst is advising investors to sell Cathay and Mr Zhao's HK$6 target price is more than 40 per cent below the stock's current price.

"We have one of China's biggest state banks issuing an especially bearish and unusual sell recommendation on a private company in HK that is already the target of the Chinese state," said George Magnus, a former UBS Group 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."

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Since Mr Zhao's report, which preceded the abrupt resignation of Cathay's chief executive officer, shares of Hong Kong's flag carrier have rebounded 6.1 per cent, making it the fifth-best-performer among 64 listed global airlines tracked by Bloomberg.

Meanwhile, Mr Zhao has been facing pressure to cancel or delay interviews, change his rating or target price, and refrain from issuing research updates on Cathay since his Aug 13 report, he said. "A lot of people" tried to persuade him to "go easy" on the company, Mr Zhao said.

Still, nobody influenced the report or its timing, and he stands by the call, Mr Zhao said. He said that his research was independent and that people shouldn't unfairly single out Chinese banks for having state ties because so do lenders in places like the UK and Singapore.

In his report, entitled "Less Deserved to Fly," Mr 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.

Mr 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 US-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, Mr Zhao said.

So what's Mr Zhao's advice for Cathay now?

"Be a better company," he said.

Cathay Pacific declined to comment.

Mr Zhao, who typically focuses on raw materials research, runs a team of 21 equity analysts covering 8 sectors at Hong Kong-based ICBC International.

His primary expertise lies away from airlines, with the analyst voted number one for China energy research by Institutional Investor this year, according to ICBC. He started covering Cathay for ICBC International only in March, though he said he has kept a close watch on industries such as transportation.

In 2006, when he first started out in a mutual fund, Mr Zhao said he covered airlines for about three months. "To me, the airlines sector has never been a stranger," he said.

Yet Mr 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. "Only a significant deterioration in the situation in Hong Kong would make it go significantly lower from here."

Asked why Mr 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, Mr 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."

BLOOMBERG