The company fell into losses again in '22 and is optimistic about a full recovery in '23; maintain “buying”

Meilan Airport's net loss to the mother in 2022 was 155 million (net profit of 765 million in 2021), which is in line with the company's performance warning that the loss did not exceed 280 million yuan. Revenue was 1,141 million, down 28.9% year over year. The company's traffic was clearly suppressed in '22, and the second phase of production capacity increased costs. However, demand for civil aviation is expected to enter the repair stage in '23, and the company's profit may rise markedly. We forecast net profit of 4.14/872/1,209 million in 2023-2025 (value before 2023/2024:442 million/908 million). We use the DCF valuation method. WACC is 10.7%, the sustainable growth rate is 2.0%, and the target price is HK$31.00 (previous value of 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. Maintain a “buy” rating.

Sluggish traffic is dragging down the company's various revenues

Company traffic was impacted in 2022, with passenger throughput of 11.16 million passengers, down 36.3% from the same period, only 46% in '19; there were 105,700 flights taking off and landing, down 23.9% from the same period, only 64% in '19.

Sluggish traffic was a drag on all of the company's businesses. Airline business revenue was 361 million, a decrease of 30.4%; non-aviation business revenue was 780 million, a decrease of 28.2%. Among them, franchise business revenue recorded 454 million, a decrease of 32.0%, and the rest of the non-aviation business revenue was 326 million, a decrease of 22.1%.

Looking at half a year's time, 2H22 was even more severely hampered. The company's passenger throughput was 4.6 million, a decrease of 29.9% over the previous month, causing 2H22 to record revenue of 518 million, a decrease of 104 million (-16.7%) over the previous month.

Demand for civil aviation is expected to pick up in 2023, and the company's revenue may recover rapidly.

The cost of putting new production capacity into operation is under pressure, and the company is once again at a loss

Since the second phase of the company's expansion project was put into operation in December 2021, the company's operating costs+management and sales expenses in 2022 reached 1,208 million, an increase of 21.8% (216 million), of which wages and labor increased 45 million, and depreciation and amortization increased 176 million. At the same time, the company's financial expenses increased by 67 million yuan in 2022, resulting in a net loss of 155 million yuan to the mother, and net profit of 765 million in 2021. On a semi-annual basis, 2H22's operating costs plus management and sales expenses were 651 million, an increase of 95 million over the previous month, resulting in a net loss of 144 million yuan to the mother of 2H22, an increase of 132 million over the previous month.

Adjust the target price to HK$31.00 to maintain the “buy” rating

We expect the net profit of Meilan Airport to be 414/872/1,209 million for 23-25 (value before 2023/2024:442 million/908 million), corresponding to 23-25 PE of 19/9/7 times, respectively. We use the DCF valuation method. WACC is 10.7%, the sustainable growth rate is 2.0%, and the target price is HK$31.00 (previous value of HK$31.60) to maintain the “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.