Maintain an increase in holdings. Demand for China's civil aviation recovered rapidly in 2023, and the company led the airline in recovering its fleet turnover. Among them, profits in the 23Q3 high oil price order season reached a record high, and the 23Q4 investment dragged down profit recovery. Aviation demand is expected to remain resilient in 2024, and the company's profit center can be expected to rise. Considering the impact of Sichuan Airlines' strategic investment, the 2023/24 net profit forecast was lowered to 41/81 (previously 2/98) billion yuan, maintaining 10.7 billion yuan in 2025. Strong demand during the 2024 Spring Festival travel season may initially catalyze an improvement in market demand expectations. Maintain the target price of HK$5.97.
China Southern Airlines led the airline in recovering fleet turnover in 2023. China's civil aviation demand recovered rapidly in 2023, and demand for domestic routes surpassed 2019. Due to the relatively slow recovery of international flights, surplus capacity was invested in domestic oversupply, and the ticket price center has risen compared to 2019. 1) Compared with 2019, the company ASK recovered 92% in 2023, leading the airline in recovering fleet turnover, with 113% of its domestic routes and 45% of international routes. 2) Compared with 2019, the company's RPK recovered 87% in 2023, 106% for domestic routes and 43% for international routes. 3) The occupancy rate in 2023 was 78%, down from 83% in 2019. 4) Customer sales are expected to be higher in 2023 than in 2019. The market is due to the airline's active revenue management. We believe the long-term effect of ticket price marketization on the central increase in ticket prices has been underestimated.
Profit flexibility began to emerge during the 23Q3 peak season, and 23Q4 was affected by Sichuan Airlines' strategic investment. The company's performance report estimates net profit to be -3.5 billion to -4.7 billion yuan in 2023. Among them, the net profit for 23Q3 was 4.2 billion yuan, a record high due to high oil prices; 23Q4 was affected by seasonal changes/weather/off-season, etc., compounded by the impact of Sichuan Airlines investment, resulting in losses of 4.8-60 billion yuan in a single quarter. The company holds 39% of Sichuan Airlines's shares, and the net assets of Sichuan Airlines at the end of 23Q3 were RMB 11.2 billion due to losses during the pandemic. At the end of 2023, Sichuan Airlines received a total capital injection of 12 billion yuan from shareholders, of which the company will inject 46.8 billion yuan (4.2) billion yuan in cash in three instalments. It is expected that the company may gradually confirm the investment losses of Sichuan Airlines as capital is injected.
Strong demand for the 2024 Spring Festival travel season is expected to catalyze an improvement in demand expectations. The 2024 Spring Festival travel season was in high demand, presenting a “family visit+travel fever”. Domestic air passenger traffic increased by double digits in the first five days of the Spring Festival travel season compared to 2019, reaching a record high. We estimate that the current domestic pre-sale price of fuel-containing tickets has increased by more than 10% compared to the same period in 2019. Considering that the absorption of surplus international capacity during the 2024 Spring Festival travel season will be significantly better than the 2023 summer travel season, it is expected that the market-based effects of ticket prices will be more fully reflected, and airlines will continue to implement active revenue management. It is expected that the increase in ticket prices for the Spring Festival travel season will be better than the 2023 summer travel season.
Risk warning. Economic fluctuations, oil price exchange rates, industry policies, growth and dilution, safety incidents, etc.