CEA Poised to Leverage China Growth Story

China Eastern Airlines (CEA) recorded a profit in 2007 and in the first quarter of 2008, mainly due to strong passenger demand in China and the Chinese currency appreciating versus the US dollar. The company is well-positioned to leverage the growth potential of China' s aviation industry. An appreciating Chinese currency should also support its stock price. We think its current price fairly reflects most of these factors. Therefore, we are maintaining Hold recommendation.

According to Boeing's estimates, growth in total revenue passenger kilometers in China will hold at 7.2% annually over the next 20 years, compared with growth of 4.7% in the rest of the world. China's domestic air passenger traffic is growing 8.8% annually and international air passenger traffic is growing 5.9% over the same period. China Eastern is aggressively expanding to international markets and is expanding its market share in the domestic market.

China Eastern has around 70% of its debt in foreign currency, which is mainly US currency. As the Chinese currency continues to appreciate over the US dollar, the company's financial costs decline significantly.

However, domestic jet fuel prices are regulated by the Chinese government. So China Eastern faces great price risk of fuel because 70% of its fuel consumption is for domestic consumption. Compared with its global peers such as Cathay Pacific Airlines and Singapore Airlines and local peers such as Air China, China Eastern has lower operating efficiency and brand recognition in global market. Finally, China Eastern may lose RMB 405 million yuan ($58 million) in sales in 2008 because two flight routes will be halted by the government due to misbehavior of the company's pilots.

ALDN Stays a Hold

Aladdin Knowledge Systems, Ltd. (ALDN) reported results for the first quarter of 2008, including revenues that were in-line with our estimates but earnings below expectations, primarily due to consolidation of Athena's financials. The company maintained previous annual revenue guidance for 2008, although the earnings guidance was lower than our previous estimate due to lower gross margins stemming from Athena and negative currency expenses.

Based on these results, we have projected full-year 2008 estimates that call for 18.5% revenue growth in 2008 over 2007 with EPS growth in 2008 projected at 10.0% compared to 2007 EPS. We are encouraged by the slew of new product launches, such as the HASP SRM V 3.1, eToken NG-FLASH 72Kand eSafe6, a comprehensive platform for spyware control in the recent past that could help boost growth.

The newly launched HASP SRM V 3.1 and eSafe 6 increases the company's capabilities to deliver functionalities ahead of its competition. We are optimistic that the company is targeting DRM revenue growth of more than 12% in 2008 compared to 2007.