Key points of investment
On October 27, 2023, China Eastern Airlines announced its results for the third quarter of 2023.
In 3Q23, China Eastern Airlines achieved net profit of 3.64 billion yuan, a record high. In the first three quarters of 2023, the company achieved operating income of 85.54 billion yuan, an increase of 138.6% over the previous year; it recorded a net loss of 26.1 billion yuan, a sharp decrease in losses over the previous year. Among them, 3Q23 achieved operating income of 36.11 billion yuan, an increase of 118.9% over the previous year, and net profit of 3.64 billion yuan. Profit in a single quarter reached a record high, and profit elasticity was fully unleashed in the context of the peak summer travel season. If net profit per unit is taken into account, China Eastern Airlines 3Q23 achieved net profit of 4.660 million yuan for stand-alone aircraft, which is still a significant increase from 3.451 million yuan in the same period in '19 against the backdrop of high oil prices.
Volume: Demand for air travel recovered at an accelerated pace, and passenger occupancy rates for domestic/regional/international routes increased by 3.0 pct/8.9pct/9.7 pct month-on-month in 3Q23, respectively. 1) From a supply perspective, the 3Q23 company's ASK recovered to 99.5% of the same period in '19, and the degree of recovery increased by 7.3pct over the same period. Among them, ASK for domestic/regional/international routes recovered to 123.4%/80.7%/56.0% of 3Q19, respectively, and the degree of recovery increased -0.4pct/9.4pct/20.9pct from month to month, respectively. 2) From a demand perspective, 3Q23's RPK recovered to 92.5% in the same period in '19, an increase of 11.5 pct over the same period. Among them, domestic/regional/international route RPK recovered to 113.2%/84.7%/52.8% of 3Q19, respectively, and the degree of recovery was +4.1pct/24.0pct/24.1pct month-on-month respectively. The recovery speed was faster than that of the corresponding route ASK, driving the passenger occupancy rate of domestic/regional/international routes to increase by 3.0 pct/8.9pct/9.7 pct month-on-month, respectively. 3) Looking ahead to 4Q23 and 2024, we believe that China Eastern Airlines' domestic capacity investment is becoming saturated. At the same time, we expect international flight volume to return to 70-80% of the same period in '19 by the end of the first quarter of '24, and return to 100% of the same period in '19 in the summer of '24. At that time, China Eastern Airlines may re-deploy some of its capacity to international routes, and domestic routes may be in short supply, thus driving ticket prices to remain high.
Price: We estimate that China Eastern Airlines' 3Q23 passenger kilometer revenue increased by about 10-15% compared to 3Q19. We judge that it mainly benefited from the high ticket prices of domestic routes during the summer travel season. Looking ahead to 2024, we believe that passenger kilometer revenue on domestic routes will remain at the level of 100-110% in the same period in 2019, while passenger kilometer revenue on international routes will decline further as the supply of international routes increases, and is expected to remain at the level of 110-120% in the same period in 19.
High oil prices are dragging down the company's gross profit margin on sales. The cost per kilometer of the 3Q23 company was 0.43 yuan, an increase of 10.3% from 0.39 yuan in the same period in 2019. Mainly, in 3Q19, the ex-factory price of aviation kerosene in China remained at a normal level of 4,800-5,000 yuan/ton, while the average price of aviation kerosene in 3Q23 was about 6,900 yuan/ton, an increase of about 40%, dragging down the company's gross sales margin from 20.4% in 3Q19 to 16.3% in 3Q23.
Profit forecast and investment rating: Considering the impact of high oil prices on the company's cost side, we lowered the company's net profit forecast for 2023-2025 to 34.8/116.7/14.25 billion yuan. The current stock price corresponding to the 2023-2025 EV/EBITDA is 11.8/6.7/6.0 times, respectively. Our target price is 6.1 yuan, maintaining our “buy” rating.
Risk warning: The macroeconomic recovery is weaker than expected, the recovery of international routes falls short of expectations, the sharp rise in oil prices has led to an increase in aviation fuel costs, and the depreciation of the RMB has led to exchange losses.