China's low-cost airline leader, and profitability continues to increase. The company was successfully listed in 2015 and became the first private aviation stock in China. Looking at the operating situation, before 2019, the company's domestic and international flight turnover maintained steady growth. The domestic passenger occupancy rate remained above 91%, and the international passenger occupancy rate was basically above 85%, and the passenger occupancy rate was stable and high; by the end of 2023, the company's domestic and international passenger turnover reached 372 and 4.7 billion passengers respectively, +43.7% and -62.7% respectively; the domestic passenger occupancy rate rebounded to 90.3%, basically quickly returning to pre-epidemic levels, and the international passenger occupancy rate rose back to 82.2% Line turnover The volume has surpassed 2019, international flights are recovering slowly, and there is still some room for restoration. Judging from the financial situation, the company's revenue and net profit to the mother have recovered significantly. In the first three quarters of 2023, the company achieved operating income of 14.10 billion yuan, +21.9% over the same period in 2019; the corresponding net profit to mother had already reversed losses and recorded 2,677 billion yuan, +55.8% over the same period in 2019. Gross margin and net margin both increased, achieving 21.01% and 18.98% gross profit margin and net margin respectively, and profit indicators were greatly improved.
Industry: Low-cost aviation has broad prospects for development.
1) Industry trend 1: Increased penetration rate of low-cost aviation. The civil aviation industry continues to develop, low-cost carriers have emerged, and the penetration rate has increased rapidly, becoming an important support for civil aviation transportation.
China's civil aviation has great potential for development. In the ten years from 2009 to 2019, China's civil aviation passenger traffic increased from 231 million to 660 million, with an average annual growth rate of 11.1%. According to the “Global Market Forecast (2023-2042)” issued by Airbus, global passenger demand will grow at an average annual rate of 3.6% over the next 20 years, and China's average annual growth rate will reach 5.2%; at the same time, the number of flights per capita in China will increase from 0.5 in 2019 to 1.7 in 2042.
The penetration rate of low-cost carriers around the world and the Asia-Pacific region is increasing rapidly. According to statistics from the Asia Pacific Airlines Center, in the ten years from 2013 to 2022, the global low-cost airline market share increased from 29.8% to 34.3%, and the international route market share increased from 9.5% to 17.9%; the domestic route market share in the Asia-Pacific region rose from 23.7% to 27.3%, and the international route market share increased from 5.3% to 16.5%. Both globally and in the Asia-Pacific region, the market share of low-cost airlines has increased significantly.
There is still plenty of room for improvement in the development of China's low-cost airlines. As of the end of 2022, China's low-cost airlines accounted for only 5.2% of the domestic route market share, which is a big gap with both the Asia-Pacific region and the global market share. With the subsequent increase in the popularity of civil aviation travel in China, low-cost airlines are expected to usher in rapid development with advantages such as affordability and convenience.
2) Industry trend 2: Fare side reforms continue, and unit passenger revenue is expected to increase.
The scope of market-based pricing for civil aviation is gradually expanding. Since 2004, domestic fare control has been liberalized, air freight rates have gradually changed from government-guided prices to market-adjusted prices, and more and more routes have begun to implement market-based pricing. Judging from the implementation of market price adjustments, a total of 365 domestic routes were subject to market price adjustments in December 2014. By November 2020, the number of routes had increased to 1,698, accounting for 13.8% of all domestic routes in that year. Looking at the price situation of specific routes, in 2017-2023, fares for the Beijing-Shanghai route, Beijing-Shenzhen route, and Shanghai-Guangzhou route increased from 1,240 yuan, 2080 yuan, and 1,350 yuan to 2,150 yuan, respectively. The cumulative increases were 73.4%, 75.5%, and 74.1% respectively, all of which exceeded 70%.
Continued marketization of ticket prices is expected to drive a significant increase in the profitability of airlines, and the revenue side of low-cost carriers is also expected to rise. Currently, the number and proportion of domestic routes that have implemented market price adjustments have maintained an upward trend, and the marketization of ticket prices continues to advance. Combined with the effects of rising demand for civil aviation, increased passenger turnover, and price increases driven by market adjustments, airline unit passenger revenue expectations are rising. Future profitability is expected to continue to increase, performance growth can be expected, and low-cost carriers may benefit significantly.
Positioning as a low-cost airline, reducing costs and increasing operational resilience.
1) Revenue side: The company positions itself as a low-cost airline and actively lays out domestic and foreign route networks. In terms of domestic routes, the company relies on its differentiated competitive advantages to actively build regional bases across the country. While focusing on the development of first-tier cities, the company strengthens the penetration of second-tier to fourth-tier markets to meet market demand. The customer group is clearly positioned and in line with the direction of route network construction. Positioned as a low-cost airline business model, it can attract a large number of price-sensitive self-funded travelers and business travelers seeking high cost performance with its price advantage. In terms of international flights, the focus is on Southeast Asia, Japan, and South Korea, with Bangkok in Thailand, Osaka in Japan, and Jeju in South Korea as the main overseas overnight terminals.
2) Cost and expense side: The “two orders, two highs, two lows” operating model creates a low cost advantage.
Using a single model and cabin facilitates procurement management while effectively reducing fuel consumption and depreciation and amortization costs. By the end of 2023, the company's fleet had reached 121 aircraft, all of which were Airbus 320 series aircraft and economy class layouts. The average number of seats in each aircraft is 10%-15% higher than that of other domestic airline models; compared with each airline's unit ASK fuel and unit rental depreciation costs, the company has a significant cost advantage and is basically kept at a minimum level.
High occupancy rates and utilization rates reduce costs and increase efficiency, and dilute fixed unit costs. Before 2019, the company's passenger occupancy rate remained above 90%. Basically, it was ahead of other airlines, and its operational efficiency ranked among the highest. At the same time, the company maintained a high aircraft utilization rate. Before 2019, the aircraft utilization rate was basically around 11 hours, diluting the fixed cost per unit to the greatest extent. The utilization rate in 2019 was nearly two hours higher than the industry average. Looking back at the company's past ASK non-oil cost situation, before 2019, the company's unit non-oil cost was basically less than 0.2 yuan, which has a clear cost advantage over other airlines.
Independent research and development of core operation management systems to reduce sales expenses with the advantages of information technology.
The company independently developed the first domestic distribution, reservation, settlement and departure system independent of the China Aviation Communications System, and gradually built and promoted its own e-commerce direct sales platform, which is at the forefront of development in the industry. In the first half of 2023, e-commerce direct sales (including OTA flagship stores) accounted for 97.2% of the company's sales channels other than the charter flight charter business. While customer stickiness has been effectively enhanced, the company's channel control and operational efficiency have been improved, the financial settlement cycle has been effectively shortened, a large amount of sales expenses has been saved, and cost budget management optimization has been facilitated. Before 2019, the company's unit ASK sales expenses were basically on a downward trend. By 2019, it had been reduced to 0.0060 yuan. Compared with the unit sales cost in 2015, it dropped sharply by 38.8%, and the average annual decline reached 11.6%. Compared with other airlines, the company's unit sales costs have remained at the lowest level, and the gap has gradually widened.
Profit forecast and investment rating: We expect the company to achieve net profit of 21.64, 30.21, and 4.012 billion yuan in 2023-2025, +171.3%, +39.6%, and +32.8% year-on-year respectively. The corresponding earnings per share are 2.21, 3.09, and 4.10 yuan, respectively. The corresponding PE price is 26.45, 18.95, and 14.27 times, respectively. Considering that the company is a leading domestic low-cost airline, the company's growth is still highly elastic, and performance recovery is accelerating in the context of industry boosting. Considering the comprehensive historical valuation situation, we gave the company a “buy” rating for the first time.
Stock price catalyst: The supply and demand situation of the industry improved markedly, the annual report performance exceeded expectations, the company's monthly operating data exceeded expectations, etc.
Risk factors: The recovery in travel demand fell short of expectations, the recovery of international routes fell short of expectations, the risk of a sharp rise in oil prices, and the risk of a sharp devaluation of the RMB.