Main points of investment

Event

Hainan Airlines released its 2016 annual report: in 2016, the company realized operating income of 40.678 billion yuan, an increase of 15.48% over the same period last year; net profit attributed to shareholders of listed companies was 3.138 billion yuan, up 4.51% over the same period last year; and basic earnings per share was 0.21 yuan, down 14.63% from the same period last year.

2016 dividend plan: the company's board of directors plans to pay a cash dividend of 0.514 yuan (including tax) for every 10 shares to all shareholders, and a total of 864 million yuan for 16.806 billion issued shares.

Comment

Low oil prices have driven companies to continue to expand, and real oversupply has led to a significant decline in earnings. The average price of wti in 2016 was 43.47 US dollars per barrel, down 10.8 percent from the same period last year. The good prospect of low oil prices and industry demand growth contributed to the continued expansion of the company's capacity. In 2016, the company invested 94.442 billion km of passenger transport capacity, an increase of 25.73 percent over the same period last year. Under the rapid expansion of the operating scale, the company's annual fuel cost was 7.859 billion yuan, an increase of only 5.46 percent. The passenger traffic volume reached 47.02 million in 2016, an increase of 21.83% over the same period last year. The passenger turnover reached 82.95 billion passenger kilometers, an increase of 25.23% over the same period last year, and the average occupancy rate reached 87.83%, a slight decrease in 0.36pts compared with the same period last year, but the annual seat kilometer income was 0.39 yuan, down 8.1% from the same period last year, and 0.035 yuan per kilometer less than in 2015. this effect was particularly significant in the fourth quarter, with revenue per seat kilometer falling to 0.38 yuan per quarter. The year-on-year decline of nearly 9% (at the same time, due to the 17% year-on-year increase in international oil prices and the 31% increase in Q4 operating costs, Q4's net profit fell sharply by 152% due to the increase in financial expenses after the devaluation of the RMB). The decline in revenue level has lowered the gross profit margin of the company's passenger transport business, which fell 4.47 percentage points to 19.71% in 16 years.

With the rapid expansion of the company's international business, the construction of Beijing hub is beginning to take shape. In 16 years, the company opened 42 new international routes and doubled the number of international routes. Throughout the year, 20 new long-range intercontinental routes and 22 short-and medium-range routes to neighboring countries have been opened. among them, the new long-range intercontinental routes are Beijing to Tel Aviv / Manchester / Calgary / Las Vegas, Changsha to Los Angeles / Sydney / Melbourne, Xi'an to Sydney / Melbourne and Shenzhen to Auckland. Beijing = Tel Aviv is the first Chinese airline to open a route to Israel, and the Beijing-Manchester route is the first route between China and the UK to fly to a city outside London. The opening of the above routes has further improved the company's international route network with Beijing as the core hub, strengthened the network layout in Xi'an and Changsha, and added Shenzhen as a long-distance international navigation city.

The expansion of operation scale leads to a sharp increase in operating costs. In 2016, the company's operating costs totaled 31.36 billion yuan, an increase of 21.76 percent over the same period last year. Among them, rental fees increased by 62.34% over the same period last year, depreciation leasing fees increased by 18.20% over the same period last year, and the two fees increased by 39% in real terms. Affected by factors such as the increase in the cost of wide-body imported units and the increase in rental costs in the depreciation of RMB, the increase exceeded the growth of transport capacity. In addition, the cost of maintenance and aviation materials consumption increased by 24.45% to 3.989 billion yuan over the same period last year, and the salary of employees increased by 30.59% to 2.882 billion yuan compared with the same period last year. Overall, the operating cost of excluding fuel for rear seat kilometers was 0.249 yuan, an increase of 0.05 yuan over the same period last year and 2.1 percent year-on-year. In the expense part, the decline in air ticket agency fees caused the company's sales expenses to drop by 10.33% to 1.782 billion yuan compared with the same period last year; the increase in the salary of managers made the company's management expenses increase by 10.24% to 927 million yuan compared with the same period last year; at the same time, due to the repayment of some debts after the company raised funds, and the reduction in interest expenses this year, the company's financial expenses decreased by 2.64% to 4.522 billion yuan compared with the same period last year.

The operating profit for the whole year was roughly flat, and subsidies contributed to the increase in performance. In 16 years, the company realized operating profit of 3.004 billion yuan, roughly the same as that of 15 years, but non-operating income reached 1.061 billion yuan, an increase of 20.02% over the same period last year, of which subsidy income was 865 million yuan, an increase of 109 million yuan over the previous year.

Investment suggestion: the company raised 16.4 billion yuan through a non-public offering in 2016. after the completion of the fixed increase, the company has transferred 8.21% of Tianjin Airlines to 5.55 billion yuan. According to the fixed increase plan, the company is expected to continue to expand the size of the fleet in the future. the rapid growth of the company's capacity will continue in the next few years. At the same time, the company's investment mergers and acquisitions around the upstream and downstream of the industry will continue to be carried out. Looking to the future, we believe that Hainan Airlines has differentiated route layout, benefited from the rapid growth of private consumption, excellent management and young fleet to create a strong cost advantage, internal and external continuous integration of resources, the company's future differentiation development is worth looking forward to. Forecast company from 2017 to 2018 EPS is 0.24,0.27 yuan, corresponding to PE14X, 13x, maintain the overweight rating.

Risk hint: uncertain events such as economic downturn, air crash, etc.