Incident: China Southern Airlines released its 2023 annual report: The company achieved annual revenue of 159.929 billion yuan, +83.70% year-on-year, net profit to mother of 4.209 billion yuan, and basic earnings per share of -0.23 yuan/share.
Total revenue returned to 2019 levels, and the decline in gross margin compared to 2019 led to losses. 1) The company achieved annual revenue of 159.929 billion yuan, +83.70% year-on-year, and +3.63% over the same period in 2019. 2) The company's gross margin in 2023 was 7.72%, a significant recovery from the 2022 gross profit margin of -21.60%. The gross margin was still 4.37pct different from 2019. Mainly affected by various factors such as slow recovery of international routes, imbalance between domestic and foreign supply and demand, and high oil prices, the company experienced a loss in annual performance.
As the epidemic recovered, passenger turnover increased, and passenger revenue increased dramatically. 1) In 2023, passenger revenue was 139.334 billion yuan, +122.86% YoY; freight revenue was 15.275 billion yuan, -26.86% YoY. 2) The sharp increase in passenger revenue stemmed from a sharp increase in passenger turnover due to the recovery of the epidemic. In 2023, the company's passenger turnover increased by 141.92% year-on-year.
Affected by aviation fuel prices, the company's unit fuel costs increased by 32.28% compared to 2019. 1) In 2023, the company achieved operating costs of 147.582 billion yuan, +39.41% year-on-year, and +8.78% compared with the same period in 2019. 2) The operating cost per ASK unit in 2023 was 0.47 yuan, an increase of 18.36% over 0.39 yuan in the same period in 2019. Among them, the unit ASK fuel cost was +32.28% compared to the same period in 2019.
It is proposed to split the subsidiary China Southern Airlines Logistics and go public to raise the company's overall profit level in the future. In March 2023, the company announced its intention to split its subsidiary China Southern Airlines Logistics and list it on the main board of the Shanghai Stock Exchange. After the spin-off was completed, China Southern Airlines Group was still the controlling shareholder of the listed company, and the State Council's State-owned Assets Administration Commission was still the actual controller of the listed company. There is a possibility that the net profit of China Southern Airlines Logistics, which the company enjoys in the short term in terms of equity, will be diluted, but in the medium to long term, China Southern Logistics can enhance its capital strength and enhance its ability to develop its business through this spin-off, which in turn will benefit the company's overall profit level in the future.
A fixed increase is expected to optimize the balance sheet. 1) On May 31, 2023, the company issued a non-public offering plan. The total amount of capital raised to issue A-shares does not exceed RMB 17.5 billion, and the total amount of capital raised to issue H-shares does not exceed HK$2.9 billion. 2) As of December 31, 2023, the company's balance ratio was 83.18%, and the financial leverage is relatively high. It is expected to help improve the company's balance sheet after issuance. 3) At present, the fixed increase plan has been approved by China Southern Airlines Group and the company's shareholders' meeting. It still needs to be reviewed and approved by the Shanghai Stock Exchange and registered by the China Securities Regulatory Commission before it can be implemented.
Optimistic about the long-term demand of China's civil aviation and the company's route resource advantages, the first coverage gave it a “buy” rating: we expect the company's earnings per share from 2024 to 2026 to be 0.35/0.58/0.68, respectively, corresponding to a PE of 15.8/9.6/8.2 times. We are optimistic about the long-term demand of China's civil aviation and the company's route resource advantages. Referring to comparable companies' PB estimates, we gave China Southern Airlines 3.19 times PB in 2024, with a target price of 7.60 yuan. For the first time, we covered it 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, the risk of exchange rate fluctuations, and the spin-off listing falling short of expectations.