On March 28, Meilan Airport announced its 2022 results. The company's total revenue in '22 was 1,141 million yuan, a year-on-year decrease of 29%; of these, 22H1 revenue was 638 million yuan/ -29%, and 22H2 revenue was 503 million yuan/ -30%. The company's net profit in '22 was 155 million yuan (+765 million yuan in '21), of which 22H1 lost 12 million yuan and 22H2 lost 143 million yuan.

Revenue side: Throughput was running at a low level. Revenue in '22 fell 29% year on year. The company's aviation business revenue in '22 was 361 million yuan, down 30% year on year, mainly because various transportation data in '22 were affected by the epidemic. Among them, passenger service fees, ground service fees, and aircraft take-off and landing fees decreased by 37%, 26%, and 21%, respectively. The passenger throughput of Meilan Airport in '22 was 11.16 million passers/ -36%, the number of take-off and landing flights was -24% compared to the same period last year, and the cargo and mail throughput was -16% year on year.

The company's non-airline business revenue in '22 was 780 million yuan, a year-on-year decrease of 28%, accounting for 68% of total revenue. It was mainly affected by the decline in duty-free shop sales and the number of travelers. Among them: (1) Franchise revenue was 454 million yuan, -32% year on year. According to Haikou Customs, duty-free sales on Hainan's outlying islands were about 34.8 billion yuan in '22, down 30% from the previous year. We expect offline sales of duty-free shops at Meilan Airport to drop by more than 40% year on year, and airport related rental income will also decline. (2) Rental income was 70 million yuan, +8.5% over the same period last year, mainly due to the fact that the T2 terminal of Meilan Airport was put into operation in December 21, adding some leasing contracts.

Cost side: The US put pressure on the short-term cost and expense side to the second phase of production, causing the company's operating costs, taxes and financial expenses in '22 to increase more than 350 million yuan over the same period last year.

(1) The company's operating cost in '22 was 1.12 billion yuan/ +29%, an increase of 250 million yuan over the previous year, mainly due to the increase in depreciation, rent and operating costs due to the commissioning of the second phase of the expansion project. Among them, depreciation and amortization increased by 176 million yuan year on year, labor costs increased 45 million yuan year on year, and airport and field integrated service fees increased 38 million yuan year on year. In addition, maintenance costs were reduced by $29 million over the same period last year, mainly due to the maintenance and upgrading of equipment and facilities at the T1 terminal in '21.

(2) Financial expenses in '22 were 88 million yuan, an increase of 67 million yuan over the previous year, mainly because interest expenses on related loans stopped being capitalized after the second phase of the project was put into operation. Taxes and surcharges amounted to $71 million in '22, an increase of about $0.4 billion over the previous year.

According to the lease agreement signed between the company and the parent company, starting in '23, the annual rent for assets related to the Meilan Airport Phase I and Phase II runway was 557 million yuan. The relevant revenue went to the listed company. Previously, the rent payment method was 25% of the revenue share of the aviation business.

Outlook: Passenger flow and duty-free sales will resume a normal growth pace in 2023. The performance recovery trend determined that 2022 was dragged down by many factors. The intense recovery in passenger flow and duty-free sales in '23 is expected to continue, and performance recovery can be expected. The number of passengers at Meilan Airport in 23Q1 recovered to over 90% of 2019. Since mid-March, the number of passengers per day has exceeded the same period in '19, leading the recovery trend. According to Haikou Customs, during the 40 days of the Spring Festival travel season in '23, duty-free sales on Hainan's outlying islands were 8.95 billion yuan, and the passenger unit price was 10,000 yuan, showing a strong recovery momentum. It is expected that offline duty-free sales at Meilan Airport will also recover well.

Profit forecasting and valuation

Since the beginning of '23, passenger traffic and duty-free sales in Hainan have clearly recovered. We expect the company's net profit to the mother in 22-24 to be -150, 388, and 770 million yuan respectively. Maintain an “increase in holdings” rating.

Risk warning

Passenger traffic fell short of expectations, and duty-free sales fell short of expectations.