Incident: Air China released its 2023 annual report: The company achieved annual revenue of 141.1 billion yuan, +166.74% year-on-year, net profit to mother of -1,046 billion yuan, and basic earnings per share of -0.07 yuan/share.
Net profit due to a sharp decrease in net profit compared to 2022, and gross margin declined compared to 2019, resulting in still a loss. 1) The net profit of Air China returned to its mother in 2022 was -38.619 billion yuan, and losses were drastically reduced in 2023. 2) The company's gross margin was 5.02% in 2023, down 11.82 percentage points from the gross profit margin of 16.84% in 2019, which is the main reason for the continued loss in 2023.
The recovery of the epidemic was compounded by investment in capacity, and passenger revenue increased dramatically. 1) In 2023, passenger revenue was 13.517 billion yuan, +240.81% year-on-year; freight revenue was 4.165 billion yuan, or -58.70% year-on-year. 2) Passenger revenue increased by 92.220 billion yuan year-on-year in 2023. Among them, revenue increased by 78.135 billion yuan due to increased capacity investment, increased revenue by 19.465 billion yuan due to increased passenger occupancy rates, and decreased revenue by 5.380 billion yuan due to declining revenue levels.
The merger and acquisition of Shanhang is the main reason for the increase in capacity. By the end of 2023, the company's fleet size was 905, an increase of 143 aircraft compared to +18.77% compared to the same period in '22. Among them, the acquisition of Shandong Airlines' capacity was a major contributor to the increase in the number of aircraft (Air China announced plans to acquire Shandong Airlines on May 30, 2022, and completed the transfer on April 26, 2023). Referring to the annual report, Shandong Airlines had 132 aircraft in 2022; excluding the number of aircraft acquired by Shandong Airlines, the number of aircraft the company increased to 11 in 2023.
The decline in passenger occupancy rate and daily utilization rate compared to 2019 was the main reason for the decline in gross margin. 1) The company's occupancy rate and number of hours of daily use in 2023 were 73.22% and 8.14 hours respectively, down 7.80pct and 1.58 hours respectively from 2019. 2) The 2023 fare index passenger kilometer revenue was 0.6094 yuan, an increase of 14.12% over 2019. 3) Judging from the increase in ticket prices compared to 2019, the decline in passenger occupancy rate and daily utilization rate compared to 2019 was the main factor in the decline in gross margin.
The Civil Aviation Administration gave an optimistic guideline for 2024: According to the Civil Aviation Administration's forecast, it is estimated that in 2024, the entire industry will complete passenger and cargo traffic of 690 million passengers and 7.6 million tons, with year-on-year increases of 11.3% and 3.3%, respectively.
Optimistic about the long-term demand of China's civil aviation and the company's high-quality route layout. The first coverage gave it a “buy” rating: we expect the company's earnings per share from 2024 to 2026 to be 0.49/0.93/1.06, respectively, corresponding to a PE of 15.2/8.0/7.1 times. We are optimistic about the long-term demand of China's civil aviation and the company's high-quality route layout, and believe that the company can enjoy a certain valuation premium. Referring to comparable companies' PB estimates, we gave Air China 3.3 times PB in 2024, with a target price of 9.11 yuan. It covered for the first time, and gave it a “buy” rating.
Risk warning: the risk of macroeconomic fluctuations, the risk of upward fluctuations in aviation fuel prices, and the risk of exchange rate fluctuations.