Key points of investment:
Incident: China Southern Airlines announced its 2023 annual results and recorded a net loss of 4.209 billion yuan to the mother, which is close to the performance forecast center and in line with expectations. Domestic aviation demand officially entered the recovery phase after the epidemic in 2023. The company's revenue increased 83.7% year on year to 159.9 billion yuan. Due to factors such as slow recovery of international routes, high oil exchange rates, and poor operation in 23Q1, the company recorded a net loss of 4.209 billion yuan to the mother in '23, and the loss narrowed sharply year on year.
Operating data: According to the company's announcement, the company's overall ASK in 2023 was -8% year on year; overall RPK was -13% year on year 19; China Southern Airlines carried 142.182 million passengers, -6% year on year 19, +127% year on year 22; overall passenger occupancy rate was 77.8%, -5.0 pcts year on year 19. Domestic: Both supply and demand in the domestic market have rebounded in '23. Domestic ASK recovered to 113% in the same period in 2019; domestic RPK recovered to 106% in the same period in '19; domestic passenger traffic recovered to 102% in the same period in '19; and the domestic passenger occupancy rate was 77.9%, compared with -5.1 pcts. International: The company's international routes resumed at an accelerated pace in 2023, but there is still a large gap compared to 2019. China Southern Airlines's international ASK recovered to 45% in the same period in '19; international RPK recovered to 43% in the same period in '19; international passenger traffic recovered to 44% in the same period in '19; and the international passenger occupancy rate reached 77.9%, compared with -4.77pcts in '19.
Revenue and costs: According to the company announcement, China Southern Airlines recorded annual revenue of 159.9 billion yuan, an increase of 83.7% over the previous year, and recorded a net loss of 4.209 billion yuan to mother. Among them, passenger revenue was +126.89% YoY to 136.170 billion yuan, and cargo and mail revenue was -26.86% YoY to 15.275 billion yuan. The company's domestic/ international/ regional passenger kilometer revenue in 2023 was +5%/+54%/-11% compared to 2019, respectively. The average price of Brent crude oil reached 83 US dollars in 2023, which is still much higher than the pre-pandemic level. The company's unit cost +17% compared to 2019 reached 0.455 yuan, and the unit cost of withholding oil was +10% compared to 19 years. The depreciation of the central price of RMB against the US dollar in 2023 caused the company to record an exchange loss of 687 million.
Investment income and income tax: According to the company's announcement, the company increased its capital to Sichuan Airlines in 23Q4 and confirmed an investment loss of 2.34 billion yuan based on the lower of the capital increase amount and unconfirmed investment losses in the previous period, resulting in an increase in losses in the fourth quarter. In terms of income tax, the deductible loss of the company's unconfirmed deferred income tax assets at the end of 2023 was $48.452 billion.
The number of aircraft fleet introduction plans continues to decline, and the proportion of wide-body aircraft is still declining. According to the company's announcement, the company's fleet size is 908 aircraft in 2023, and the total number of aircraft predicted for the end of 2024-2025 is 948/965, respectively (last year the 24-25 fleet was predicted to be 1007/1059), the number of aircraft is expected to be 975 at the end of the 26 period, and the 24-26 fleet growth rate is 4.4%/1.8%/1.0%, respectively. According to the plan, the company's share of wide-body aircraft will drop to 12.2%/11.3%/11.3% in 2024-2026, respectively.
Investment analysis: Affected by the fact that international recovery falls short of expectations and oil sinks are still high, we adjusted the 24-26E oil transfer assumption to 85 US dollars (the original assumption was 80 US dollars), and the international recovery rate was 75%/97%/105% (24-25 original hypothesis was 90%/108%), so the company lowered the 24-25E profit forecast to 69.37/12.378 billion yuan (the original forecast was 156.55/19.401 billion yuan), and added a 2026E profit forecast of 15.533 billion yuan, corresponding to 24-26E PE 15/8/7x
The peak season of the domestic market can be expected in '24. International companies have a large capacity layout in the surrounding markets. Priority is given to the slow recovery in Europe and the US. It is expected that the company will take the lead in recovering among major airlines. Assuming an average valuation of 9x for comparable companies returning to normal in 2025 (selecting domestic listed airlines Air China, China Eastern Airlines, Hainan Airlines Holdings, Juneyao Airlines, and Spring Airlines), the company's 25-year valuation level was lower than the industry average and still maintained an “gain” rating.
Risk warning: sharp rise in oil prices; large exchange rate fluctuations; slowing macroeconomic growth; sudden aviation safety incidents