Benefiting from the continuous repair of flight capacity and the high demand during the peak season, the company's 2023Q3 recorded a net profit of 50 million yuan, turning a loss into a profit. In the third quarter, the company's RPK increased by 5.7% compared with the same period in 2019, and the utilization rate of the summer fleet returned to more than 70%. At the same time, the unit fuel deduction cost was well managed and controlled, which was basically the same as in the same period in 2019 under the background of the utilization gap. Benefiting from the growth in demand in the regional market and the company's expansion of all-round products, we expect the company's domestic naked ticket price to increase by 15% to 18% over the same period in 2019.

With the gradual resolution of supply-side bottlenecks, we expect that the company's customer revenue and cost management capabilities may release greater profit flexibility, operational improvement and strict receivables management will also lead to the improvement of capital efficiency. The company received an annual subsidy of 150 million yuan from the Civil Aviation Administration, a decrease of 30 million yuan compared with the same period last year, or related to the decline in the number of flights. The company Singapore Airlines quarterly weekly domestic flight volume increased by 12.2% compared with the same period last year, the market segment leader returned to growth, the current valuation is attractive, it is recommended to pay attention to the layout timing.

The company returned to its mother in the third quarter with a net profit of 60 million yuan, achieving a turnaround from losses to profits, the gradual resolution of supply-side bottlenecks, and the ability to manage customer revenue and costs or release greater profit flexibility. In the first three quarters of 2023, the company achieved an operating income of 3.85 billion yuan, an increase of 90.0% over the same period last year, and a net profit loss of 700 million yuan, of which 2023Q3 achieved an operating income of 1.64 billion yuan, a month-on-month increase of 110.8% and 39.7%, and a non-net profit of 0.55 million yuan. The significant improvement in the company's performance is mainly due to the continuous repair of flight capacity and the high demand of the industry during the peak season, followed by the gradual resolution of supply-side bottlenecks, the company's customer revenue and cost management capacity or release greater profit flexibility. According to Pre-flight, the recovery rate of planned flights on the international line in the new season has risen to more than 70%, and the domestic line pattern has been optimized, which may fully benefit from being the leader of the market segment.

In the third quarter, the company's RPK increased by 5.7% compared with the same period in 2019, the decrease in occupancy rate narrowed to 2.7pcts, and the utilization rate of the summer fleet returned to more than 70%. Benefiting from the strong demand in the industry and the repair of the company's flight capacity, 2023Q3's RPK/ASK increased by 137.0% and 16.5% compared with the same period last year, and returned to 105.7% of 2019Q3's 109.2%, and the occupancy rate was 80.1%. Compared with the same period in 2019, it increased 11.2/5.3pcts and decreased 2.7pcts. According to the flight housekeeper, the utilization rate of the company's fleet returned to more than 70% in the summer, and the company's flight volume entered the off-season month-on-month pullback in the past two weeks, with a daily average of 270-280 flights, about 85% of the same period in 2019. We estimate that the company's 2023Q3 passenger kilometer revenue is 0.63 yuan, which is basically the same as the same period in 2019, in which we expect the company's summer domestic naked ticket price to increase by 15% to 18% compared with the same period in 2019, or mainly due to the growth of regional market demand and the company's expansion of all-way products, the company's ticket revenue accounts for about 80%, which is expected to continue to rise in the revenue price center.

We estimate that the company's unit deduction cost in the third quarter is basically the same as that in the same period in 2019, with excellent cost control and strict accounts receivable management measures, resulting in a decline in turnover days. 2023Q3's operating cost was 1.46 billion yuan, an increase of 39.2% / 12.3% compared with the same period last year, corresponding to a gross profit margin of 11.1%, and a substantial increase in 45.9/21.9pcts. The average ex-factory price of aviation kerosene fell 25.3% in the third quarter compared with the same period last year, alleviating the company's cost pressure. We estimate that the company's unit ASK fuel deduction cost is basically the same as in the same period in 2019, and the company's cost control is excellent in the context of utilization gap. The faster recovery of the A320 fleet also contributes to the reduction of unit costs. With the continuous expansion of the random team, we expect that by the end of 2023, the utilization rate of the company's fleet will be more than 80%, and the unit cost will continue to be optimized. The financial expenses of 2023Q3 Company decreased by 240 million yuan from the previous month, which is mainly due to the exchange gain of about 30 million yuan (Q2 is the exchange loss of about 200 million yuan). By the end of 2023Q3, the company's accounts receivable turnover days had dropped to 54.7 days, down 17.2 days from the previous month, which was basically the same as that of 2019Q3. The company disperses the risk, the delivery route is more uniform, and takes more stringent receivables management measures such as collecting margin and requiring monthly repayment for potential high-risk customers.

The company received 150 million yuan in regional subsidies from the Civil Aviation Administration, Singapore Airlines quarterly weekly domestic flight volume increased by 12.2% compared with the same period last year, and the market leader returned to growth. The Civil Aviation Administration issued the "announcement on the Budget Plan of subsidies related to the Civil Aviation Development Fund in 2024". A total of 49 regional aviation companies received subsidies of 1.41 billion yuan, of which Huaxia Airlines received subsidies of 150 million yuan (we expect to be recorded in Q4 revenue). A decrease of 30 million yuan compared with 2023, we expect to be related to the corresponding decline in the number of flights of the company. According to the Pre-flight,2023 winter and spring flight season, the company's domestic weekly flight volume increased by 12.2% compared with the same period last year, and the utilization rate continued to be repaired. 2023Q3 introduced an A320, and the company expects to introduce two aircraft in the fourth quarter, rising to 70 by the end of the year. From 2018 to 2020, the company's route renewal rate is about 70% (the number of flights in 2021 is limited, the renewal rate is distorted, and statistics are not available here). Institutional customers have a high willingness to pay for aviation accessibility requirements, and the company is a market segment leader. Solo routes account for more than 90%, which is expected to sustain the development of regional aviation.

Risk factors: macroeconomic pressure; oil sinks fluctuated more than expected; subsidies reduced more than expected; ticket prices rose less than expected; capacity repair was less than expected; high-speed rail competition exceeded expectations.

Investment advice: considering that the oil price fluctuates more than expected, and the company's flight volume and passenger kilometer revenue are lower than previously expected, we downgrade the company's 2023/24/25EPS forecast to-0.58x0.51 (the original forecast is 0.07x0.72), referring to the comparable companies Spring Airlines and auspicious Airlines, the average PE (ttm) in the three years before the epidemic is 20.6x and 25.8x. We give the company 20 times PE valuation in 2024, corresponding to the target price of 10 yuan, the current valuation is attractive, it is recommended to pay attention to the layout timing and maintain the "buy" rating.