Supported by traffic and driven by duty-free, the free trade port gateway airport has entered a new era of development. Meilan Airport is the gateway airport of Hainan Island. After the restructuring, the Hainan State-owned Assets Administration Commission's shares were clear. During the construction of the Hainan Free Trade Port, we believe that Meilan Airport coincided with the second phase of production capacity being put into operation. It is expected to become the primary channel for the increase in personnel traffic, supporting the rapid growth of company traffic. At the same time, Meilan Airport still has a high duty-free channel value. Supported by port traffic endowments and outlying island duty-free policies, Meilan Airport's duty-free sales may continue to increase, unleashing profit flexibility. We expect the company's net profit to be -2.60/442/908 million yuan in 2022-2024, respectively. We use the DCF valuation method. WACC is 10.7%, the sustainable growth rate is 2.0%, and the target price is HK$31.60. First coverage, giving a “buy” rating.
Surplus production capacity has brought in increased traffic from Hainan to fully enjoy the dividends of the construction of a free trade port. The Hainan Free Trade Port has been promoted as an important national strategy. The goal is to become a new highland for China's open economy. In its development process, it is inseparable from more personnel exchanges to provide impetus for the growth of passenger traffic on Hainan Island. Meilan Airport's T2 terminal and second runway were put into operation in a timely manner in December 2021. Surplus production capacity has an advantage on the island, and it is expected that the free trade port construction dividends will be fully enjoyed during the production capacity climbing cycle. At the same time, the construction of a free trade port will also benefit the proportion of international flights at Meilan Airport, and the company's aviation revenue volume and profitability may all benefit. The company's passenger throughput is expected to reach 35 million passengers in 2025, a compound growth rate of 6.3% in 2020-2025, and plans to reach 60 million passengers by 2035.
The duty-free potential of outlying islands continues to be unleashed, and the value of Meilan's channel must not be underestimated. The duty-free business is the key to the company's ability to monetize non-air traffic. Driven by multiple rounds of policy increases, we believe that even after customs clearance and operation in 2025, the outlying islands are still expected to flourish. Multiple duty-free operators and channels have entered the market one after another to expand the size of the outlying islands duty-free industry. Although Meilan Airport's duty-free sales market share declined after 2017, the value of its duty-free channels cannot be underestimated. With the support of natural port traffic advantages and leading duty-free areas at domestic hubs, we believe that Meilan Airport is still a rare channel resource for operators. Cooperation between duty-free operators and Meilan will continue to deepen, improve the efficiency of duty-free operations, and ultimately achieve a win-win situation. We believe that duty-free sales at Meilan Airport will continue to grow rapidly. We predict that the company's duty-free sales will reach about 9 billion yuan in '24, with a compound growth rate of more than 30% in 20-24.
For the first time, the “buy” rating was covered. The target price of HK$31.60 benefited from increased traffic and duty-free sales growth. We expect the net profit of Meilan Airport to be -2.60/4.42/908 million yuan for 2022-2024, respectively, and EPS to be -0.55/0.93/1.92 yuan respectively. We use the DCF valuation method. WACC is 10.7%, the sustainable growth rate is 2.0%, and the target price is HK$31.60. We are optimistic that the company will use the dividends of the free trade port construction to make full use of the outstanding monetization capabilities of the airport channel and achieve a profit breakthrough. First coverage, giving a “buy” rating.
Risk warning: Traffic growth fell short of expectations, duty-free sales fell short of expectations, relevant policy changes, operating costs and capital expenses exceeded expectations.