Leading in scale, outstanding operational resilience. Net profit returned to mother in the first three quarters to reverse losses. The company's history is rich. It is one of the largest domestic airlines and controls many local airlines. In the first three quarters of 2023, the company achieved operating income of 119.5 billion yuan, +2.4% over the same period in 2019, and basically recovered to the same period in 2019; net profit to mother reversed losses and recorded a corresponding loss of 1,320 billion yuan, an increase of 107.5% over the same period in 2019. In terms of net profit deduction, considering only the US dollar situation and deducting the impact of exchange losses, we expect the company's 23H1 net profit to be about -18.1 billion yuan, and 23Q2 net profit to mother about 486 million yuan, an increase of 150.7% over 19Q2. Profit deducted from foreign exchange was achieved in the second quarter.
The recovery of international routes continues, and the industry ushered in multiple benefits
1) Supply and demand side: With the recovery of international routes, domestic and foreign supply and demand are improving at an accelerated pace. In the short term, supply and demand in the industry have rebounded, capacity has recovered faster than demand, and passenger occupancy rates have continued to recover. The passenger volume and flight volume of civil aviation in October were -1.7% and -4.0% compared to the same period in 2019, respectively; capacity ASK and turnover RPK in October were -1.8% and -5.0% year-on-year compared to the same period in 2019, respectively, and the passenger occupancy gap narrowed to 2.7 pct compared to 2019. In the medium to long term, demand is rising, supply growth is slowing down, and the industry's profit can be expected to rise.
2) Fare side: The operating revenue of the airline unit RPK exceeded the same period in 2019. In 23Q3, the RPK revenue of China Southern Airlines, China Eastern Airlines, Chunqiu, and Jixiang units was 0.67, 0.71, 0.67, 0.49, and 0.58 yuan respectively, up 16.8%, 13.8%, 15.8%, 15.8%, and 7.8% from the same period in 2019.
3) Oil Remittance: The recent decline in oil prices and the strengthening of the RMB exchange rate. In terms of oil prices, oil prices fell first and then rose since 2023. Ex-factory prices of aviation kerosene rose rapidly in the third quarter and have declined recently. The overall fluctuation in oil prices has decreased compared to 2022, but the average price is still higher than in 2019. In terms of exchange rates, in the first half of 2023, the median dollar exchange rate against the RMB rose a lot. Recently, the RMB exchange rate strengthened, the exchange rate declined somewhat, and the fluctuation rate slowed down.
Dual hub network airline to reduce costs and create efficiency to guarantee performance
1) Aviation network layout: The Beijing-Guangzhou hub echoes the north and south, and the route network is dense. The company has continuously strengthened its hub network strategy with Guangzhou and Beijing as the core, forming a developed route network. From 2016 to 2022, China Southern Airlines always ranked first in the RPK share in the industry. In the first 11 months of 2023, China Southern Airlines' RPK ratio was 23.9%, making it the airline's share.
Domestic flights: The total number of flight schedules is high, and the market share of high-profit routes is high. During the 2023 winter and spring season, the company's weekly domestic passenger flight schedule reached 16,508, leading the rest of the airlines in total; in terms of route resources, first-tier cities accounted for 22.3% of the interflight hours. Among the top 20 intercity routes by flight volume, the company has 10 with the highest market share ratio and 5 that rank second. Basically, they are all routes rich in resources for business travelers.
International flights: Southeast Asia and Australia and New Zealand have the highest market share among airlines. In 2014-2019, China Southern's international flight capacity investment grew at an average annual rate of 18.4%, higher than the average annual growth rate of 12.4% of Air China and the 15.7% annual growth rate of China Eastern Airlines; the corresponding passenger occupancy rate increased from 79.5% to 82.7%, which has always ranked among the leading airlines. Looking at the specific regions of international routes, China Southern Airlines had the highest number of flights in Southeast Asia, Japan, South Korea, and Australia and New Zealand during the 2023 winter and spring season, accounting for 45.3%, 31.7%, and 9.2% respectively; among domestic airlines, the market share ratio was 18.9%, 12.6%, and 37.6%, respectively, leading the market share.
2) Costs and expenses: Excellent control capabilities, and the cost per ASK unit declined steadily until 2019. On the fuel cost side per unit ASK, the basic trend is the same for all airlines. China Southern Airlines has relatively strong cost control after 2020, and fuel costs per unit ASK have remained the lowest from 2020 to 2022. On the ASK non-fuel cost side of the unit **** Southern Airlines and Air China's ASK non-fuel cost level was basically the same before 2019, both lower than China Eastern Airlines; after 2019, China Southern Airlines' cost control capabilities were prominent and remained at the lowest level among airlines. By 2022, China Southern's ASK non-fuel cost reached 0.4758 yuan, significantly lower than Air China's 0.6241 yuan and China Eastern Airlines' 0.5443 yuan. In terms of period costs, during the 2013-2022 period, China Southern Airlines maintained the lowest cost rate among the three major airlines.
3) Operational performance: Operational resilience is prominent, with the fastest recovery in the airline industry. On the ASK side, from the beginning of 2023 to the end of November, China Southern's capacity recovery rate increased from 74.9% to 91.5% compared to 2019, and the recovery rate has always been ahead of the rest of the airlines. On the RPK side, passenger turnover is slightly slower than capacity recovery, and China Southern's recovery is significantly better than that of other airlines. By the end of November, the company's cumulative revenue in passenger kilometers had recovered to 86.0% in the same period in 2019, significantly higher than Air China's 80.2% and China Eastern Airlines' 81.2%. In terms of passenger occupancy rate, by the end of November, the company had reduced the gap to 5.0 pct compared to the same period in 2019, and the cumulative passenger occupancy rate gap of Air China and China Eastern Airlines was still 8.6 or 7.9 pcts compared to 2019.
4) Future highlights: China Southern Airlines Logistics will be spun off and listed, focusing on the main business and is expected to benefit from freight transformation in the long term.
The company plans to split China Southern Airlines Logistics, a subsidiary in the freight sector, and go public to help focus on the main business. After the spin-off was completed, China Southern Airlines Logistics was still a listed company and consolidated subsidiary, and the company held 55% of its shares. Looking at the medium to long term, after the completion of this spin-off listing, China Southern Airlines Co., Ltd. and China Southern Logistics will both be able to focus more on the main businesses of both parties, enhance their business development capabilities, and thereby increase the company's overall profit level in the future.
Profit forecast and investment rating: We expect the company to achieve net profit of 5.09, 90.26, and 13.288 billion yuan in 2023-2025, +101.56%, +1673.92%, and +47.22% year-on-year respectively. The corresponding earnings per share are 0.03, 0.50, and 0.73 yuan, respectively. The PE corresponding to the current price is 195.88, 11.04, and 7.50 times, respectively. Currently, the company's domestic and international routes have resumed, the relationship between supply and demand is improving at an accelerated pace, and the company's performance is expected to improve. Based on the above valuation considerations, we gave the company a “buy” rating for the first time.
Stock price catalyst: Annual report performance exceeds expectations, company monthly operating data exceeds expectations, etc.
Risk factors: The recovery in travel demand falls short of expectations, the recovery of international routes falls short of expectations, the risk of a sharp rise in oil prices, and the risk of a sharp depreciation of the RMB.