2020H1's net profit increased by 25.5% compared with the same period in 2019, and is expected to benefit mainly from tax-free franchise revenue by 87%. Meilan Airport will be responsible for the increase of passenger flow to the island in the next 5 years, and the operation of the second phase of the project will open up room for growth. It is expected that the second phase of the project will bring an annualized cost increase of 730 million, and the airport production cycle may lead to the bottom of the company's performance in 2022. Consider that the offline sales of duty-free stores at Metro Airport in 2025 may achieve 10 billion yuan, and the company's performance will grow at a compound growth rate of about 30% in 2022-2025, if realized, it will open up room for growth.

2021H1's net profit increased by 25.5% compared with the same period in 2019, and is expected to benefit mainly from tax-free franchise revenue by 87%. 2021H1's revenue increased by 46.8% to 894 million yuan, an increase of 9.8% over the same period in 2019. Compared with the same period in 2019, net profit increased by 25.5 per cent to 345 million, while gross profit margin fell slightly to 54.6 per cent. At the end of 2020, the company recorded a loss of 1.37 billion on the long-term equity investment of HNA Airport Holdings, and it is inferred that the relevant impairment has been fully provided for. As co-borrowers, the company and the group obtained a 20-year bank loan of 7.8 billion yuan for the construction of the second phase of the project. as of June 30, 2021, the bank issued a total of 5.18 billion loans, of which the company obtained 1.94 billion yuan (after June 30, 2022) to non-current liabilities due within one year. With regard to the 3.24 billion joint and several liability of the group, the company and the group, HNA restructuring managers and bank lenders applied to the court for exemption from prepayment and continued performance of the loan contract.

From January to July in 2021, the company's aircraft takeoffs and landings and passenger throughput are-9.6% and-18.2% higher than those in the same period in 2019. It is expected that offline sales at the airport for the whole year are expected to exceed 4 billion, and tax-free dividends continue to be released. From January to July of 2021, the company achieved a passenger throughput of 11.806 million passengers,-18.2% compared with the same period in 2019; and 87200 takeoffs and landings, compared with the same period in 2019. We expect that in the future, we will continue to benefit from the high tax-free consumption on outlying islands and the transfer of outbound travel demand to China. The passenger throughput of Meilan Airport may be reduced to-5% and 15% in 2021 compared with 2019.

2021H1's aviation revenue fell 23.4% to 285 million compared with the same period in 2019, of which passenger service charges, aircraft take-offs and landings and related charges narrowed to 21.1% and 23.9% respectively. Benefiting from the domestic epidemic prevention and control and the tax-free policy on outlying islands, the offline sales of the duty-free shop at 2021H1 Meilan Airport also increased by 152.7% to 2.19 billion, and the annual sales are expected to exceed 4 billion. The high tax-free boom on outlying islands boosted 2021H1 franchise revenue by 59.9% year-on-year to 374 million, and tax-free dividends continued to be released.

The decrease in operating costs of 2021H1 is lower than that of income 23.7pcts. During the epidemic, staff rotation and the cancellation of some regional closures have led to an increase in costs, and the acquisition of a runway and related assets is expected to increase profits. 2021H1's operating costs also increased by 23.1% to 399 million (lower than revenue growth 23.7pcts), an increase of 11.4% over the same period in 2019.

Among them, labor costs increased by 40.56 million over the same period last year, mainly abolishing the employee rotation system affected by the epidemic last year, and normal payment of wages and benefits. Last year, due to the normal use of the area closed by the epidemic, airport and field integrated service charges increased by 6.24 million, while water and electricity charges increased by 4.91 million. The three-rate rate of 2021H1 increased by 0.1pct to 7.6% year-on-year compared with 2020H1, of which financial expenses increased by 12.85 million year-on-year, mainly due to the decline in capitalized interest. The company announced that it intends to acquire a runway and related assets with an estimated value of 1.52 billion yuan. We expect that the annualized depreciation expense will increase by 59 million, but it may bring an increase of 170 million yuan in aviation revenue.

The second phase of the project is expected to be put into operation within 2021, and the company's performance will grow at a compound rate of about 30% from 2022 to 2025. The high tax-free consumption on the outlying islands resonates with the airport capacity cycle. Up to now, the Meilan Airport Phase II expansion project, in addition to the supporting projects such as the new tower, the West Tunnel and the railway-related projects, has not yet been completed, the main works, comprehensive transportation supporting projects, oil supply projects and air traffic control projects have all been completed and passed the acceptance check. The company strives to be officially put into operation within 2021. Meilan Airport will be responsible for the increase of passenger flow to the island in the next five years, and the operation of the second phase of the project is expected to open up room for growth. The second phase of the project is expected to bring an annualized cost increase of 730 million, and the airport production cycle may lead to the bottom of the company's performance in 2022. Considering that the offline sales of the duty-free shop at Meilan Airport in 2025 may reach 10 billion yuan, and the company's performance will grow at a compound growth rate of about 30% from 2022 to 2025, it is expected that the high tax-free consumption on outlying islands will resonate with the airport production cycle.

Risk factors: the recovery of civil aviation demand is weaker than expected; the growth of airport tax exemption is not as expected; the first runway injection, fixed increase landing and arbitration results are not as expected.

Profit forecast, valuation and investment rating. From January to July in 2021, the company's aircraft takeoffs and landings and passenger throughput are-9.6% and-18.2% higher than those in 2019. We expect the offline sales of Meilan Airport to exceed 4 billion for the whole year, and the tax-free dividend will continue to be released. Meilan Airport will be responsible for the increase of passenger flow to the island in the next five years, and the operation of the second phase of the project is expected to open up room for growth. The second phase of the project is expected to be put into operation in 2021. Since the implementation of the new tax-free policy on outlying islands in July 2020, the tax-free sales of Hainan outlying islands and shopping tourists have increased by 226% and 102%. In the medium term, the doubling of Meilan airport passenger throughput is expected to accelerate the release of tax-free dividends. Considering that the airport capacity cycle may lead to a bottom in 2022, we adjust our EPS forecast for 2021-22-23 to 1.55 yuan 1.18 yuan 1.77 yuan (the original forecast 1.45 yuan 1.88 yuan 2.41 yuan). The company's performance will grow at a compound growth rate of about 30 per cent in 2022-2025 and net profit in 2025 or around 1.3 billion. Taking into account the average valuation of the comparable company, the company will be given 22 times PE in 2025, corresponding to a target market capitalization of HK $35 billion and an one-year target price of HK $45. Maintain a "buy" rating.