The 1H23 loss narrowed year on year, and a further recovery in traffic is expected to push the company to reverse the loss of 1H23 million and return to capital airport's net loss of 1,041 million yuan, a year-on-year narrowing of 363 million, operating income of 1,985 million yuan, an increase of 80.2% year-on-year. The net loss is in line with the company's profit forecast of 1.01 billion to 1.06 billion yuan. The company's traffic picked up steadily in '23, but due to factors such as the diversion of Daxing Airport, the degree of traffic and profit recovery was lower than that of the industry. We lowered the company's net profit for 2023-2025 to -1,004/9.35/1,473 million, and adjusted our target price based on the DCF valuation method to 6.30 HKD (WACC: 8.3%). Considering that the company's operating leverage is obvious, losses are expected to narrow rapidly, and the company's share of international routes is expected to improve in the long term. As a gateway hub to the capital, traffic monetization has the potential to improve and maintain a “buy” rating.
Traffic is picking up, aviation revenue is picking up rapidly, and the recovery pace of non-aviation business is slightly lagging 1H23 Beijing Airlines' travel demand has begun to pick up. Passenger throughput at Capital Airport is 23.1 million passengers, a sharp increase of 318.3% over the previous year. It has recovered to 47% in 2019, with 175,900 aircraft take-off and landing, an increase of 133.4%, the same increase of 133.4%, or 60% in 2019. Driven by a recovery in traffic, the company's aviation business revenue was 910 million, an increase of 160.9%, and recovered to 45% of 1H19. However, since the recovery of international and regional routes is relatively lagging behind, passenger throughput has only recovered to 17% of 1H19, and the pace of recovery of non-aviation services such as duty-free services has been slow. Non-aviation revenue was 1,075 million, an increase of 42.9%, and recovered to 32% of 1H19. Among them, franchise business revenue recorded 597 million, a 70.2% increase, and recovered to 23% of 1H19. The final revenue of the company was 1,985 million, an increase of 80.2% over the same period, and 37% in 2019.
Costs are rigid, and 1H23 still recorded significant losses
The company's business volume was affected by the diversion of Daxing Airport, making it difficult to return to 2019 levels in the short term. At the same time, due to the rigidity of costs such as depreciation and employees, the company's 1H23 still recorded significant losses. The operating cost of 1H23 was 2,758 million dollars. Although there was a slight decrease of 0.3% from the previous year, it still reached 77% of 1H19. After deducting franchise entrustment management fees, the cost was 2,616 billion yuan, a decrease of 2.6%, but reached 88% of 1H19. As a result of cost rigidity, 1H23's operating loss still reached 844 million, a year-on-year contraction of 855 million. Additionally, in the current period, the company confirmed deferred income tax expenses of 104 million yuan, and 1H22 was a deferred income tax credit of 465 million. In the end, the company's net loss was 1,041 million yuan, a year-on-year contraction of 363 million yuan.
Adjust the target price to HK$6.30 to maintain the “buy” rating
Looking ahead, it is expected that the share of international routes at Capital Airport will improve in the long term, driving an increase in profitability. In the short term, based on the overall traffic recovery pace and non-aviation business conditions such as tax exemption, we expect net profit of 2023-2025 to be -1,004/9.35/1,473 billion (previous value: 0.98/12.08/1,487 billion), and adjust the target price based on the DCF valuation method to HK$6.30 (WACC was 8.3%, previous value was 9.0%; sustainable growth rate 2.0%; pre-target price of HK$8.00) to maintain the “buy” rating.
Risk warning: 1) the recovery in civil aviation demand fell short of expectations; 2) duty-free sales fell short of expectations and terms were revised; 3) the recovery of international routes fell short of expectations; 4) the diversion of Daxing Airport exceeded expectations.