Meilan Airport is a domestic main airport and the gateway to Hainan. Meilan Airport is positioned as a free trade port international hub, so you can enjoy the advantages of card slots. The civil aviation market in Hainan Province is in a period of rapid development. After returning to state-owned management, Meilan Airport is expected to benefit more from preferential policies and achieve stable operation under the management of state-owned assets. In 2022, Meilan Airport had a passenger throughput of 11.1622 million passengers, ranking 15th among domestic airports in passenger throughput. The company achieved revenue of 1,141 million yuan in 2022, -28.91% year-on-year. Among them, non-aviation business contributed 780 million yuan in revenue, and aviation business contributed 361 million yuan in revenue.

In the short term, the number of visitors to Hainan is recovering and tax exemptions are expanding; in the long run, Hainan's strategic position continues to be prominent. 1) Short-term visitor flow in Hainan has resumed. Over the past few years, the number of visitors received by Hainan has steadily increased. In 2019, the number of visitors received by Hainan reached 831.12 million. Although the passenger flow in Hainan has been disrupted over the past few years, its overall performance is superior to that of the national market.

In 2020-2022, the number of visitors received by Hainan was -22.33%/+25.49%/-25.88%, respectively (the number of domestic visitors received during the same period was -52.06%/+12.89%/-22.10%, respectively). After the external environment improved, passenger flow in Hainan recovered well. It is a popular domestic destination, and the recovery trend is expected to continue in the future. 2) Tax exemptions continue to expand. There is a lot of room for development in the duty-free market due to the return of consumption. It is estimated that the size of the duty-free market will reach 177.2 billion yuan in 2025. Among them, the outlying islands duty-free market reached about 140 billion yuan, accounting for about 80% of the market size. Currently, the outlying islands duty-free market has a clear pattern, and the advantages of local stores and airport stores complement each other. 3) Looking at the longer term, Hainan's seventh air traffic rights have been liberalized, construction of a free trade port continues to advance, and a new stage of strategic development has ushered in.

The second phase of the project was put into operation, and the aviation and duty-free business space was expanded simultaneously. On December 2, 2021, Meilan Airport Phase II was officially put into operation. Meilan Airport officially entered the “dual terminal, double runway” operation era. Passenger throughput is expected to reach 35 million people by 2025.

1) Aviation business: Previously, Sanya Phoenix Airport entered a production bottleneck period. After the short-term release of production capacity at Meilan Airport, it is expected to handle the increase in passenger flow after the epidemic. Revenue from the airline business is expected to grow at the same time as passenger traffic recovers and grows.

2) Non-aviation business: Affected by partial passenger flow in 2022, the passenger flow dividend brought about by the commencement of phase II has not yet been shown. Passenger flow has gradually recovered. With the expansion of duty-free business area, continuous brand introduction, and optimization of the shopping experience, the passenger conversion rate and passenger unit price of duty-free shops at Meilan Airport are expected to continue to increase, and the contribution revenue of duty-free franchises is expected to continue to increase, driving the growth of non-aviation business.

Investment suggestions: The company's past PE valuation was less than 10 times. Later, the high duty-free boom on the outlying islands led to a revaluation center at Meilan Airport. The impact on passenger flow, combined with the second phase of production capacity investment, may be the bottom of the company's performance in 2022. As a result, along with the recovery of passenger flow and the development of duty-free business, it is expected to enter a cycle of performance growth and valuation improvement. We expect the company to achieve net profit of 4.02/617/785 million yuan from 2023-2025, respectively +359.10%/+53.27%/+27.22% over the same period. Referring to major domestic airport valuation centers, “buy” ratings were covered for the first time.

Risk warning: 1) The recovery in travel demand fell short of expectations; 2) the competition pattern among duty-free stores worsened; 3) the impact of the resumption of outbound travel on the company's passenger flow. 4) Insufficient calculation assumptions and deviations in actual measurement results.