The company predicts 2023 results. The net profit to the mother is expected to be drastically reduced year on year. China Eastern Airlines released the 2023 performance forecast: the company expects to achieve net loss of 68-8.3 billion yuan (net loss in 2022) in 2023, with a significant year-on-year reduction; net loss after deduction of 75-89 billion yuan; the net loss due to 4Q23 is 4.9-63 billion yuan (4Q22 net loss of 9.2 billion yuan). We think the 4Q23 performance is slightly lower than market expectations. The low degree of international recovery and increased oil exchange pressure are the main factors.
Key points of interest
Factors such as steady improvement in the company's supply and demand, rising oil prices, and pressure on off-season performance may be the main cause of the company's losses. The fourth quarter was a low season for air travel, but the company's supply and demand stabilized: 4Q23 domestic ASK/RPK reached 113%/107% in the same period in 2019, and the overall passenger occupancy rate was 76.4%, which narrowed to 3.9ppt from the same period in 2019. However, the cost of aviation fuel increased in 4Q23. The factory price of aviation kerosene increased 16% compared to 3Q23, and the average annual factory price of aviation kerosene increased 38% compared to 2019. At the same time, ticket price performance in the fourth quarter may also be under pressure. We believe that the supply and demand structure of the industry and the company showed marginal improvement throughout the year, mainly due to low recovery in international flights, increased pressure on oil exchanges, or the company's losses exceeding expectations in 2023.
The recovery of international flights has accelerated, and the pressure on the company's cost side has been relieved to a certain extent. 4Q23's international ASK/RPK in Hong Kong, Macao and Taiwan recovered to 70%/65% in the same period in 2019 (58%/55% in 3Q23). It is worth noting that international supply and demand recovered at an accelerated pace at the end of the year, returning to 79%/73% in the same period in 2019 in December, while ASK/RPK for overseas routes in 2023 only recovered to 45%/40% in 2019. We believe that with international recovery, the utilization rate of wide-body aircraft is expected to increase in 2024 to ease the company's cost pressure.
Domestic supply and demand are expected to continue to improve, and international flights can be expected to resume. Pay attention to volume and price performance during the Spring Festival travel season and the recovery process of international flights. The company is a leading domestic airline, with significant location and route advantages, and the entire industry continued to increase its international flight capacity investment during the post-epidemic recovery period, increasing its share of the international route market. Under the trend of international flight recovery and acceleration throughout the industry, we believe that the company will significantly benefit from the restoration of international passenger flow in the future, and the domestic and international supply and demand structure will be further optimized. Multiple demands for student flows, family visits, and business visits during the Spring Festival travel season are superimposed. We believe this is the first important window for verifying the intensity of demand throughout 2024. It is recommended to continue to pay attention to the company's volume and price performance and international flight recovery process during the Spring Festival travel season.
Profit forecasting and valuation
Due to the fall in volume and price in the off-season, we lowered China Eastern Airlines A/H share's 2023 profit forecast to -75.1 billion yuan and -7.52 billion yuan (original value was -37.4 billion yuan, -37.7 billion yuan), mainly lowering the unit income assumption; due to the decline in earnings levels due to the 2024 supply growth rate exceeding expectations, we lowered China Eastern Airlines A/H share's profit in 2024 by 30.3% and 29.8% to 113.6 billion yuan and 11.46 billion yuan, keeping the 2025 profit forecast unchanged. We lowered the target price of China Eastern Airlines A and H shares by 20.0%, 27.4% to HK$5.44 and HK$3.12. Currently, China Eastern Airlines A and H shares are trading at a price-earnings ratio of 7.1/5.6 times and 3.1/2.5 times in 2024/2025, keeping the company's performance rating unchanged. Currently, China Eastern Airlines' A and H share target prices correspond to the 2024 price-earnings ratio of 10.7/5.2 times, corresponding to 50.7% and 68.6% upward space.
risks
The economic growth rate and the recovery in international passenger flow fell short of expectations; the RMB depreciated sharply; and oil prices rose sharply.