Main points of investment:
Event: Hainan Airlines released its 2016 annual report. The company realized operating income of 40.678 billion yuan, an increase of 15.48% over the same period last year; operating cost of 31.361 billion yuan, an increase of 21.76% over the same period last year; net profit of 3.138 billion yuan, an increase of 4.51% over the same period last year; and the company plans to pay a cash dividend of 0.514 yuan (including tax) for every 10 shares.
Business analysis: the domestic line is growing rapidly and the international line is advancing by leaps and bounds. In 2016, Hainan Airlines' overall, domestic and international RPK increased by 23.50%, 18.15% and 54.84% respectively compared with the same period last year. Due to the rapid growth of aircraft introduction in 2016 and the high growth of industry demand, the company's operating data increased significantly. In that year, Hainan Airlines opened up a total of 42 international routes and increased its fleet to 238 aircraft in order to increase its overseas market capacity and expand its international plate business development.
Financial analysis: RMB depreciation superimposed by low oil prices, government subsidies boost the company's non-operating income. At the end of 2016, the central parity rate of the US dollar against the RMB increased by 6.8% compared with the same period last year, and the affected exchange loss of Hainan Airlines rose to 2.14 billion yuan, an increase of 14.5% over the same period last year, but the financial expenses decreased to 4.52 billion yuan, mainly due to a reduction in interest expenses in the current period. Over the same period, the company's aviation fuel cost rose to 7.86 billion yuan, partly because the average value of aviation kerosene (import CIF) fell 17.0% compared with the same period last year; second, ASK (total) rose 24.04% from the same period last year. In addition, Hainan Airlines received a total of 570 million yuan in government subsidies in 2016, accounting for 53.5 percent of the company's non-operating income. Taken together, the company's 2016 revenue and return net profit still maintained an upward trend.
Outlook: the prosperity of the industry has rebounded, and the company's performance is expected to climb. During the Spring Festival travel season in 2017, air passenger volume rose sharply compared with the previous year, and the company's performance also showed an upward trend. According to the operating data released by Hainan Airlines in February 2017, overall, domestic and international RPK increased by 46.56%, 38.54% and 99.38% year-on-year, respectively. In addition, in order to grasp the current favorable market environment, Hainan Airlines accelerated the market layout, successively increased its capital to the holding subsidiary Yunnan Xiangpeng Aviation Co., Ltd., and acquired 48.21% of Tianjin Airlines with 5.55 billion yuan while increasing its capital by 2.45 billion yuan. In the future, Hainan Airlines will benefit from the continued prosperity and forward-looking layout of the aviation industry, and its performance is expected to further boost.
Investment advice. Benefiting from the "Belt and Road Initiative" and "13th five-year Plan" and other policy support, the future development of the aviation industry will meet a more favorable external environment. In addition, taking into account the internal and external development of Hainan Airlines and promising prospects, the company is expected to have an EPS of 0.23 yuan in 2017, with a "buy" rating of 18 times PE with a target price of 4.14 yuan with reference to the 2017 industry average valuation.
Risk hint. As the RMB exchange rate fluctuates, oil prices may rise.
