As a leading low-cost airline, Spring Airlines has obvious differentiation advantages and is ahead of its peers in recovery progress. The rapid recovery of domestic demand and the rise in ticket prices during peak season combined with excellent cost control have shown the company's profit elasticity. The medium to long term is expected to benefit from the vast incremental market for civil aviation in China.

Low-cost aviation leader, “two orders, two high, two low” cost management model. Since its establishment, Spring Airlines has strictly adhered to the business strategy of low-cost airlines, adhered to fine management, and implemented the “two orders,” “two highs,” and “two lows” business models. In terms of unit costs, the average unit cost of Spring Airlines before the pandemic was 27% lower than that of the three major airlines and 12% lower than Juneyao Airlines. Judging from stand-alone profit, under the low-cost airline model, Spring Airlines's stand-alone profit before the pandemic averaged about 18.98 million yuan/year, which was significantly higher than that of its peers.

The recovery progress is ahead of peers, and the advantages of differentiation are evident. The company has Shanghai as its main base and is actively expanding its share in second- and third-tier cities. Judging from passenger turnover data, the company's market share in the country increased from 3.4% in 2019 to 5.8% in 2022, achieving contrarian expansion. Since this year, benefiting from a high share of the domestic market and flexible capacity arrangements, the company's passenger occupancy rate has recovered to the forefront of the industry. Judging from the profit situation, the company's Q3 performance exceeded expectations, benefiting significantly from the high prosperity of the domestic market and its own excellent cost control. Under the trend of generally rising fares in the industry, the company's differentiation advantage as a low-cost airline is showing. In the vast incremental Chinese civil aviation market, the company's appeal to travelers traveling for personal reasons is expected to increase.

Maintain a “Highly Recommended” investment rating. We updated our profit forecast based on the introduction of domestic, international and company capacity. The company's net profit for 2023-25 is estimated to be 28.40/54 billion yuan, respectively. We believe that Spring Airlines's advantage in the domestic market will allow it to fully benefit from the increase in ticket prices. After the market is fully restored, the company's stand-alone net profit is expected to reach nearly 30 million yuan/year. Compared with the average level before the pandemic, the company's performance elasticity is expected to be fully demonstrated. The company's catalysts are fully: 1) fully benefiting from the restoration of the domestic aviation market, leading the recovery process, and focusing on the domestic market during the Spring Festival travel season in the short term; 2) As a leading low-cost airline, the company has shown resilience since 2020, while steadily introducing capacity and expanding the domestic market; 3) In the context of a general rise in industry ticket prices, the company, as a leading low-cost airline, has a differentiated competitive advantage and is expected to benefit from increased aviation demand in low-tier cities, with broad development space. Maintain the company's “Highly Recommended” rating.

Risk warning: Macroeconomic downturn risks; demand falls short of expectations; oil prices have risen sharply; RMB has depreciated sharply.