Key points of investment:

It is one of the three major domestic airlines and a pioneer in aviation supercarriers. The company has achieved multi-brand operation and a comprehensive fleet layout. With its strong position in the industry and market acumen, China Eastern Airlines merged with China United Airlines in 2010, took the lead in entering the low-cost airline market, and was preparing to build 1, 2, 3 Airlines during the pandemic, becoming the first domestic airline to simultaneously deploy full-service, low-cost, and domestic aircraft. The company's wide-body aircraft account for the smallest of the three major airlines, and the advantage of a young fleet is remarkable. The company is the first domestic airline to operate both the ARJ21 and C919 domestic aircraft at the same time, and is developing along with the domestic fleet.

The main base has significant location advantages, and the “four beams and eight pillars” aviation network supports high-quality resources. The company's main base is located in Shanghai, the core aviation hub in the Yangtze River Delta region, and its share of Shanghai reached more than 40% in both games. Focusing on the construction of the “four beams and eight pillars” domestic route network, China Eastern Airlines' core time resources are stable, and the time volume of major airports is steadily increasing. Commercial airline companies all have a low advantage, and the company's share of popular travel routes to Shanghai also remains high, ensuring full coverage of the domestic aviation network.

The international aviation network is fully covered, and the focus of the global layout is clear. With the cosmopolitan city of Shanghai as its main base, China Eastern Airlines has benefited from a plan to build a “globally competitive air transport supercarrier”, aiming to comprehensively lay out international routes around the world, focusing on the capacity of routes between Japan, South Korea, Southeast Asia, Hong Kong, Macao and Taiwan. The company has leading international and regional revenue levels, accounting for a higher share of international capacity than the industry average, and will fully benefit from the recovery of international routes in the future.

In the short term, it benefits from the main “international+supply” two-wheel drive investment line. 1) International: The overall international recovery will be around 50% in 2023. Visas, international emergencies, labor, etc. will still objectively affect flight resumption; the recovery of international routes in 2024 is mainly an upward marginal change, and overtime on international routes is expected to release excess capacity in the domestic market and support ticket prices. 2) Supply: While manufacturer production capacity is still being restored, aircraft grounded in the current Pratt & Whitney engine incident will continue to affect domestic supply and reduce available domestic capacity.

I am optimistic about the long-term trend of improving the relationship between supply and demand and increasing the profit center after the reshaping of the international flight pattern. The profit levels of major airlines showed strong cyclicality. The company's profitability continued to be under pressure after the pandemic, but after the recovery period, it is expected to enter a new profit cycle, once again achieving growth in the center of profit. As manufacturers face supply chain issues and macro-level fleet introduction and regulation, tightening supply growth will continue to be a future trend in the industry. The company has the potential to increase its share in the international airline market. China Eastern Airlines' share of international market revenue is expected to increase in the future, accelerating the profit growth of international business.

Investment analysis opinion: 2024-2025 is the release period for airline performance. Under a trend where excess capacity is gradually being put into operation on international routes, aircraft utilization increases, and supply and demand in the domestic market tend to balance, the company's performance will improve dramatically, and the potential for profit flexibility is expected to be realized. We forecast the net profit of China Eastern Airlines 2023E-2025E to be 94.6/16.79 billion yuan, respectively, and 9x/5x the corresponding PE for 24-25, respectively. Covered for the first time, a “gain” rating was given.

Risk warning: demand recovery falls short of expectations, macroeconomic decline; oil remittance changes in an unfavorable direction; risk of aviation safety accidents