2023 results are in line with our expectations
The company announced 2023 results: revenue of 113.7 billion yuan, +146% year-on-year; net loss to mother of 8.17 billion yuan (net loss of 37.39 billion yuan in 2022). 4Q23 revenue was $28.2 billion, +175% year-on-year; net loss to mother was 5.56 billion yuan (4Q22 net loss of 9.28 billion yuan), in line with our expectations.
Domestic volumes and prices have surpassed pre-epidemic levels, and international demand has steadily recovered. In 2023, the company completed passenger turnover of 182.3 billion, 82% for the same period in 2019. Its domestic, international, Hong Kong, Macao and Taiwan turnover recovered to 105% and 41% in 2019; in 2023, the company's domestic passenger kilometer revenue was 0.582 yuan, +8.0% compared to 2019. The rise in oil prices and the depreciation of the exchange rate are dragging down the company's profits. The average factory price of aviation kerosene in 2023 is +38% compared to 2019. We estimate the company's unit fuel cost of 0.17 yuan, +33% compared to 2019; in 2023, the company confirmed an exchange loss of 90 million yuan.
Development trends
A steady improvement in domestic supply and demand, and a continued recovery in international supply are expected to improve the company's unit costs. Since the beginning of the year, as the company increased its capacity, the passenger occupancy rate has improved markedly: in January-January 2024, the company's domestic and international seat turnover in Hong Kong, Macao and Taiwan was 126% and 90% of the same period in 2019, and the passenger occupancy rate reached 81.7% and 77.3%, which is narrower than the decline in the same period in 2019 to 1.1ppt and 4.8ppt. The Civil Aviation Work Conference expects international flights to resume to about 80% by the end of 2024 in the same period in 2019. We expect the company's wide-body aircraft utilization rate to continue to increase, which is expected to improve unit costs.
Issuing perpetual bonds to improve the capital structure and slightly increase the number of aircraft planned to be introduced. In November 2023, the company issued 20 billion yuan of perpetual bonds to the controlling shareholders. By the end of December 2023, the company's balance ratio had dropped to 85.4% (91.9% at the end of June 2023). The company announced a net introduction of 41, 11, and 34 aircraft in 2024-2026, a slight increase from the interim report, but the net growth rate of aircraft is still low.
Focus on off-season demand performance and the progress of the resumption of international flights. Since 2023, industry demand has been stronger during the peak season and less intense in the off-season. We believe that off-season profit is an important factor affecting profit for the full year of 2024. While increasing the company's aircraft utilization rate, the increase in international flight capacity will also improve the domestic supply and demand relationship. Currently, the resumption of international flights is mainly constrained by demand. It is recommended to focus on off-season demand performance and the progress of international flight resumption.
Profit forecasting and valuation
Considering weak economic recovery and weaker off-season demand, we lowered China Eastern Airlines' A/H 2024 profit forecast 33%/34% to 76.0/7.60 billion yuan, and 27% to 2025 profit forecast 27%/27% to 103.9/10.39 billion yuan. We are optimistic about the continuation of the company's profit cycle. China Eastern Airlines A/H target price was slightly lowered by 8%/17% to HK$5.0 /2.6. The current China Eastern Airlines A stock price corresponds to 2024/2025 10.7/7.8 times price-earnings ratio, China Eastern Airlines H share price corresponds to 5.1/3.6 times price-earnings ratio in 2024/2025, and the China Eastern Airlines A/H target price corresponds to 14.7/6.7 times the price-earnings ratio in 2024, corresponding to 37%/32% upward space. Maintain outperforming industry ratings.
risks
Economic recovery fell short of expectations, international flight recovery fell short of expectations, oil prices rose sharply, and exchange rates depreciated sharply.