Introduction to this report:
In 2023, the company initially showed profit elasticity, and Sichuan Airlines investment dragged down profit recovery. Aviation demand will remain resilient in 2024, and the profit center can be expected to rise. Strong demand for the 2024 Spring Festival travel season is expected to catalyze an improvement in market demand expectations.
Key points of investment:
Maintain an increase in holdings. In 2010, the company led the airline in fleet turnover recovery. Among them, the 23Q3 summer travel season showed initial profit elasticity, while investment in 23Q4 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 the 2025 forecast of 10.7 billion yuan. The Spring Festival travel season is expected to catalyze an improvement in expectations and maintain the target price of 7.85 yuan.
China Southern Airlines led the airline in recovering fleet turnover in 2023. Demand for domestic routes in China's civil aviation in 2023 surpassed 2019, and the passenger occupancy rate was still lower than before the epidemic due to the return of surplus international capacity. Benefiting from active revenue management and the marketization of ticket prices, ticket prices have risen compared to before the pandemic. In 2023, the company ASK recovered 92% from 2019, with 113% for domestic routes and 45% for international routes; RPK recovered 87% from 2019; and the passenger occupancy rate in 2023 was 78% (83% in 2019), which is expected to be higher than in 2019.
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 yuan to -4.7 billion yuan in 2023. Among them, 23Q3 had a single quarter net profit of 4.2 billion yuan, a record; 23Q4 had a single quarter loss of 4.8-60 billion yuan. In addition to the effects of seasonal changes/weather/off-season, etc., it is mainly the impact of Sichuan Airlines' strategic investment. Sichuan Airlines had net assets of 112 billion yuan at the end of 23Q3, and received an increase of 12 billion yuan in shareholders' capital at the end of 2023. The company holds 39% of the shares of Sichuan Airlines and has invested 4.68 billion yuan in three instalments from the end of 2023. It is expected that the investment loss of Sichuan Airlines may be gradually confirmed as the 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”. Passenger traffic for the 2024 Spring Festival travel season is expected to reach a record high, and the increase in ticket prices compared to 2019 will be better than the 2023 summer travel season. The company's fleet size and network structure are conducive to the flexible performance of volume, price and profit during the peak season. Considering that market expectations may already be too pessimistic, the performance of the Spring Festival travel season is expected to exceed market expectations, or it may catalyze an improvement in market demand expectations.
Risk warning. Economic fluctuations, oil price exchange rates, industry policies, growth and dilution, safety incidents, etc.