Meilan Airport's net profit surged 333.8% year-on-year to 345 million in the first half of the year; mainly due to the rapid recovery of air passenger traffic in Hainan Province in the first half of the year, which led to significant improvements in the company's revenue side such as aviation and duty-free sales, combined with proper cost control. Meilan Airport released its 2021 semi-annual report. The first half of the year achieved revenue of 894 million yuan/ +46.9% yoy (+9.9% compared to the same period in 2019), with net profit of 345 million yuan/+333.8% yoy (+25.4% compared to the same period in 2019). We believe that even though the Spring Festival travel season was held locally, the overall passenger traffic on Hainan Island recovered rapidly, and the sharp increase in production in the first half of the year led aviation revenue to 285 million million/ +51.5%. We believe that the dividend of the outlying islands tax exemption policy was further released, driving the company's franchise revenue to 374 million yuan/+59.85% yoy.
Under the pandemic, corporate costs were properly managed and controlled (up only 23.4% year over year), causing gross profit margin and net interest rates in the first half of the year to increase 8.5/25.5 percentage points each year over year to 55.4%/38.6%. Although the company was unable to be selected for the “Shanghai-Hong Kong Stock Connect” in September, we are still optimistic about the long-term investment value of the core airport of the free trade port.
The company's production volume in the second quarter basically recovered to the same period in 2019, and aviation revenue increased sharply year-on-year in the first half of the year.
In the first half of the year, the company completed 7,4940 flight take-offs and landed, with a passenger throughput of 9.969,900 people, up 47.4%/64.9% from the previous year (down only 9.9%/20.3% from 2019), resulting in a sharp increase of 51.5% to 285 million in aviation revenue over the same period last year. Looking at the first quarter, the first quarter was affected by the local New Year policy for the Spring Festival travel season. Despite the rapid recovery in March, the company's production data declined sharply. Q1 take-off and landing flights and passenger throughput fell 19.1%/34.2% respectively compared to the same period in 2019. The Guangzhou-Shenzhen epidemic at the end of the second quarter was disrupted, but we think the overall epidemic prevention and control was relatively proper. The holidays intensively released the backlog of tourism demand in the first quarter. The company achieved 3,7256 flight take-offs and passenger throughput of 5,2293 million people, which basically recovered to the same period in 2019.
The dividends of the outlying islands duty-free policy have been further released, and long-term corporate duty-free market share may decline as competition intensifies, but we anticipate that duty-free sales will continue to grow appreciably. In the first half of the year, airport offline stores achieved duty-free sales revenue of 2,186 million yuan/ +152.7% yoy. The number of tax-free passengers per capita (with passenger throughput as the denominator) was 439 yuan/person. We believe that home delivery services generally have little impact on the sales diversion of offline airport stores. The main advantage of airport duty-free shops is that they divert their customer base free of charge. The variety of sales categories, prices, and shopping guide services are the key.
Despite the increase in duty-free competitors on the island, we analyzed that the company's duty-free sales market share may decline, but benefiting from the rapid growth of the island-wide duty-free market, steady growth in the number of visitors, and the long-term effects of the duty-free return policy, we expect the company's duty-free sales in 2021/22/23 to increase 63%/43%/24% year-on-year respectively to 46/65/81 billion yuan.
Profit forecasts and investment recommendations. Considering that recent epidemics in many parts of the country have repeatedly dragged down production recovery in the second half of the year, we lowered production volume and reduced net profit of 21/22/23E to 482/624/1,003 million, respectively. Based on the valuations of comparable companies, considering that production has not yet returned to normal this year, we gave 20X-25X 202E PE and arrived at a reasonable value range of 31.62-39.53 Hong Kong dollars. Using DCF, we calculated that the reasonable market value of Meilan Airport was 25.83 billion yuan, and the corresponding value per share was HK$65.43 (HKD/RMB exchange rate of 0.8343).
The company previously announced that it will be issued more in 2021, and we expect EPS to be diluted by about 30% after the increase. Maintain a “better than the market” rating.
Risk warning: The impact of the epidemic continues to exceed expectations, large capital expenses, tax exemption policy changes, entry into the Shanghai-Hong Kong Stock Connect fell short of expectations, debt repayment liquidity risks due to parent companies' joint loans exceeded expectations, etc.