Losses have narrowed slightly, and profit recovery still needs to be awaited; maintaining the 2023 operating income of “buying” Meilan Airport was 2,086 million yuan, an increase of 82.7%. The net loss to mother was 136 million yuan, a year-on-year decrease of 12.4%, lower than our previous forecast of net profit of 12 million yuan. The company achieved a breakthrough in traffic in '23, but there is uncertainty about the recovery in unit prices for duty-free customers, and the second phase of production capacity is still in a climbing cycle, hampering performance. We forecast net profit to mother for 2024-2026 of 237/47/636 million (previous value: 5.32/856/100 million). We used the DCF valuation method, with a WACC of 14.9%, a sustainable growth rate of 2.0%, and a target price of HK$9.60 (previously HK$13.00). In the medium to long term, we are still optimistic about the dividends of the free trade port construction. The company makes full use of its channel monetization capabilities, and profits are expected to continue to pick up. Maintain “buy-in.”

Traffic reached a record high, and there is still room for revenue improvement

The company's traffic picked up rapidly in 2023, with passenger throughput of 24.34 million passengers, an increase of 118.1%; 171,600 aircraft took off and landed, an increase of 70.4%. Traffic recovery boosted all of the company's businesses. The airline business combined runway leasing changed from revenue sharing to a fixed rent model, with revenue of 975 million yuan, an increase of 169.9%; non-aeronautical business revenue of 1.11 billion yuan, an increase of 42.4%, of which the franchise business recorded 622 million, an increase of 37.1%, and the rest of the non-aviation business revenue of 489 million, an increase of 49.7%. The company's passenger throughput reached a record high in 2023. We believe there is still room for improvement in the company's traffic and revenue, driven by the dividends of the Hainan Free Trade Port construction and new production capacity.

Cost pressure on putting new production capacity into operation remains, dragging down profit recovery

In 2023, the company's operating costs were 2,047 million yuan, an increase of 82.3%. The increase was similar to revenue. Among them, depreciation and amortization increased by 474 million yuan under the fixed rent model, while employee wages and labor dispatch expenses also increased by 284 million yuan. Due to cost pressure, the company's gross profit increased only slightly by 20 million to 38 million over the same period last year. In the end, the company's net loss to mother in 2023 narrowed slightly by 19 million to 136 million compared to the same period last year. Since the second phase of the expansion project was put into operation in December 2021, when the company achieved a breakthrough in traffic, there was still a clear gap in profit compared to 2019, and profit recovery required a further decline in production capacity.

Adjust the target price to HK$9.60 and maintain the “Buy” rating

Based on the latest operating data and the recovery of the African aviation business, we expect Meilan Airport's net profit for 24-26 to be 2.37/4.77/6.36 (previous value: 5.32/856/100 million). Using the DCF valuation method, WACC is 14.9%, a sustainable growth rate of 2.0%, and a target price of HK$9.60 (previous value of HK$13.00).

With the dividends from the construction of the Hainan Free Trade Port, the company has entered a cycle of climbing production capacity. We believe that traffic and profits are expected to continue to pick up in the medium to long term, maintaining a “buy” rating.

Risk warning: Traffic growth falls short of expectations, duty-free sales fall short of expectations, related policy changes, and operating costs and capital expenses exceed expectations.