Introduction to this report:
The slow resumption of international flights in 2023 put pressure on domestic supply and demand. Aviation demand will remain resilient in 2024, and international flight increases will improve supply and demand. The company rationally plans to slow down capacity, and the airline network is optimized, and the profit center can be expected to rise.
Summary:
Maintain the increase in holdings. Domestic airline demand recovered rapidly in 2003, and slow international recovery led to oversupply at home. Aviation demand is expected to remain resilient in 2024, and the profit center can be expected to rise.
Considering the fall in volume and price in 23Q4, the 2023 net profit forecast was lowered to -75 (originally -3.5) billion yuan, maintaining the 2024/25 net profit forecast of 95/10.5 billion yuan. The 2024 Spring Festival travel performance is expected to catalyze an improvement in market expectations and maintain the target price of HK$5.00.
International recovery was slow in 2023, putting pressure on domestic supply and demand. Demand for civil aviation recovered rapidly in 2023. Demand for domestic routes in China surpassed 2019, while the recovery of international flights was relatively slow, and surplus capacity was returned to the country, resulting in oversupply. Benefiting from the airline's active revenue management and initial reflection of the market-based effects of ticket prices, the fare center increased compared to 2019. 1) In 2023, the company ASK recovered 91% from 2019, with 116% of domestic routes and 44% of international routes. 2) The 2023 RPK recovered 82% from 2019, with 105% for domestic routes and 39% for international routes. 3) The occupancy rate in 2023 was 74%, down from 83% in 2019. 4) Customer sales are expected to be higher in 2023 than in 2019.
The 23Q4 off-season heightened demand concerns, and the 2024 Spring Festival travel season may catalyze an improvement in expectations. The company's performance report estimates net profit to be -68 billion to -8.3 billion yuan in 2023. Among them, the net profit for the 23Q3 high oil price order season exceeded 3.6 billion yuan, a record high; 23Q4 caused significant losses due to seasonal changes/weather/off-season, etc., and market expectations were quite adequate. We believe that China's aviation consumption is still in its infancy. The three characteristics of low penetration, low frequency, and high public commerce determine good resilience. Current demand expectations may be too pessimistic. Aviation demand resumed growth in the first half of January 2024, and the recent pre-sale trend for the Spring Festival travel season was good. Passenger traffic during the 2024 Spring Festival travel season is expected to reach a record high, and the increase in ticket prices compared to 2019 is expected to surpass the 2023 summer travel season, which is expected to catalyze an improvement in market demand expectations.
Airspace bottlenecks will continue for a long time, and fleet planning has rationally slowed down. Based on the persistence of bottlenecks in China's civil aviation sector for a long time, airlines generally planned to slow down the 14-5 fleet in 2019, and adjusted in mid-2023 to further reduce the 14-year compound growth plan. The company's fleet size at the end of 2023 grew at a compound annual rate of 2% compared to the end of 2019. The company signed a purchase agreement with COMAC in September 2023 for 100 C919 aircraft, which are scheduled to be delivered in batches in 2024-31. The airline has placed orders one after another since 2022, which is an expected supplement to ongoing orders, and does not change China's airspace bottlenecks and fleet deceleration plans. At the same time, the resumption of the introduction of the 737MAX is also within the planned expectations. We believe that it will not affect the airline's capacity planning, and the airline is expected to continue to rationally maintain its fleet growth at a low rate in the future.
Risk warning. Economic fluctuations, oil price exchange rates, industry policies, growth and dilution, safety incidents, etc.