Main points of investment
On October 27, 2023, China Southern Airlines Company announced the results for the third quarter of 2023.
3Q23 Southern Airlines achieved a net profit of 4.2 billion yuan, route layout in line with the path of recovery led to the release of profit elasticity. If the unit net profit is taken into account, China Southern 3Q23 achieves a net profit of 4.679 million yuan per unit, which is still significantly higher than that of 2.808 million yuan in the same period in 19 years under the background of high oil prices. We judge that the main reason is that the proportion of domestic route capacity of China Southern Airlines has been higher than the industry average for a long time, and the recovery of air travel demand is led by domestic routes. In this context, the profit flexibility of China Southern Airlines is the first to be released.
Volume: the recovery of air travel demand has accelerated, and the gap between the occupancy rate of 23 years and the same period of 19 years has continued to narrow. 1) from a supply point of view, 3Q23's ASK recovered to 97.3% of the same period in 19 years, and the degree of recovery increased 3.8pct compared with the same period in 1919. Among them, the ASK of domestic / regional / international routes is restored to 117.5% of 3Q19, 59.4% and 53.4% of 3Q19, respectively, and the degree of recovery is improved-0.8pct/7.9pct/13.0pct, respectively. 2) from a demand point of view, 3Q23's RPK returned to 93.3% of the same period in 19 years, increasing 6.1pct month-on-month.
Among them, the domestic / regional / international route RPK recovered to 111.5% 3Q19 63.1% 3Q19 53.4%, the recovery degree increased 1.6pct/13.1pct/15.0pct month-on-month, and the recovery speed was faster than the corresponding ASK, driving the domestic / regional / international occupancy rate to 79.5%, 80.1%, 83.6%, respectively. 3) looking forward to 4Q23 and 2024, we think that the domestic capacity of China Southern Airlines has become saturated. At the same time, we expect the number of flights on international routes to return to 70-80% of that in the same period in 19 years by the end of the first quarter of 24, and to 100% in the same period in 19 years by the summer of 24. At that time, China Southern Airlines may redeploy part of its capacity to international routes, and domestic routes may be in short supply, thus driving ticket prices to remain high.
Price: China Southern 3Q23 passenger kilometer revenue is expected to be about 10% higher than 3Q19. According to our calculations, 3Q23's passenger kilometer revenue has increased by about 10% compared with the same period in 1919, and we judge that it is mainly due to the high fares of domestic routes during the summer travel season. Looking forward to 2024, we believe that domestic passenger kilometer revenue will maintain a level of 100-110% for the same period in 19 years, while passenger kilometer revenue for international routes will further decline with the increase in the supply of international routes, and is expected to remain at 110-120% for the same period in 19 years.
High oil prices are a drag on the company's gross sales margin. The unit cost per kilometer of 3Q23 company is 0.44 yuan, up 15.5% from 0.38 yuan in the same period of 19 years. The main reason is that the ex-factory price of 3Q19 aviation kerosene in China remains at the normal level of 4800-5000 yuan / ton, while the average price of 3Q23 aviation kerosene is about 6900 yuan / ton, an increase of about 40%, dragging down the company's sales gross profit margin from 19.7% of 3Q19 to 17.2% of 3Q23.
Profit forecast and investment rating: China Southern Airlines route layout is in line with the current recovery path of aviation demand, fully benefiting from the summer peak season in the context of domestic airline fares to maintain the level of fares. However, taking into account the impact of high oil prices on the cost side of the company, we reduce the company's 2023-2025 return net profit forecast to 8.4 billion yuan, and the current stock price corresponds to the 2023-2025 EV/EBITDA of 10.1 shock 6.4 times 5.7 times. Our target price is 8.8 yuan, maintaining the "buy" rating.
Risk warning: macroeconomic recovery is weaker than expected, international routes recover less than expected, oil prices rise sharply leading to rising aviation fuel costs, RMB depreciation leads to exchange losses.