Incident: The company released its 2023 performance report on March 28. In 2023, the company achieved revenue of 2.09 billion yuan, +82.7% year-on-year. Achieved a net loss of 136 million yuan/12.4% year-on-year decrease. Among them, 2023H2 achieved revenue of 1.02 billion yuan/year on year +96.5%, and achieved loss of 85 million yuan/year on year increase of 128.2%. During the reporting period, the company's passenger flow and revenue recovered, and operating costs and depreciation increased.

Passenger flow supports a recovery in business revenue, and traffic is expected to continue to rise. Passenger flow rebounded sharply during the reporting period. In 2023, the company's passenger throughput reached 24.34 million passengers/+118.1% year over year, the highest in history. The total number of aircraft take-off and landing times reached 172,000/+63.2% year over year. The restoration of passenger flow clearly supported the growth of all businesses: 1) Non-aviation business: achieved revenue of 1.11 billion yuan/year on year +42.4%. Among them, franchise revenue was 620 million yuan/+37.1% year over year. In the context of the outlying islands duty-free crackdown on package purchasing, unit prices for duty-free customers disrupted the decline in the short term. All other businesses showed significant recovery. Hotel revenue/freight and packaging revenue/rental revenue were +53.3%/33.1%/9.1% year over year (both recovered to around 2019), lounge revenue +21.1% year over year; 2) Aviation business: achieved revenue of 970 million yuan/year on year +169.9%. Among them, passenger service fees achieved revenue of 450 million yuan/year on year +182.5%, single passenger service fees increased by 4.2 yuan to 18.4 yuan/person, and ground service fees/aircraft take-off and landing and related charges achieved revenue of 34/190 million yuan, +175.5%/136.4% year over year.

Costs continue to be pressured, and profits are on track to repair. 1) The total operating costs, sales expenses and management expenses of the company in 2023 were 2.17 billion yuan/year over year +79.67%. Among them: ① depreciation and amortization increased by 474 million yuan, representing the company leasing part of the parent company's assets; ② the increase in labor costs by 284 million yuan represents an increase in traffic flow and an increase of employment demand; ③ operating costs also increased by 198 million yuan. 2) Financial expenses reached 136 million yuan/same increase of 48 million yuan, representing interest expenses on new lease liabilities this year. Due to short-term cost pressure brought about by the second phase of production capacity expansion, the company's net loss to mother was 136 million yuan/narrowing by 12.4% year on year. Looking forward to the release of subsequent new production capacity, profits are expected to be on the right track of recovery.

Investment suggestions: The company's past PE valuation was less than 10 times lower. Later, the high duty-free boom in the outlying islands brought about a revaluation of Meilan Airport. The low level of the company's performance has passed; with the resumption of passenger flow in 2024 and the development of the duty-free business, it is expected to enter a performance growth cycle; the future is expected to benefit from free trade port dividends and the release of new production capacity, and the business has expanded. Considering the increase in the company's operating costs and depreciation, we adjusted the company's 2024-2026 operating income to 24.32/28.66/3230 billion yuan, and net profit to mother to 0.88/2.18/432 million yuan. The corresponding valuation of the current stock price is 35.7x/14.2x/7.2xPE, respectively, maintaining a “buy” rating.

Risk warning: 1) The increase in passenger traffic in Hainan seriously fell short of expectations; 2) the competitive pattern among duty-free stores deteriorated; 3) The calculation assumptions were insufficient and the actual calculation results were biased.