Event: The company released its 2023 annual report and 2024 quarterly report. The company achieved operating income of 6.43 billion yuan in 23, an increase of 62% over the previous year; achieved net profit of 410 million yuan, reversing losses from the previous year; and realized net profit without deduction of 380 million yuan, reversing the loss from the previous year. The company's revenue for the first quarter of '24 was about 1.66 billion yuan, up 22.3% year on year; net profit to mother was about 190 million yuan, up 319% year on year; net profit without return to mother was about 190 million yuan, up 387% year on year. The company plans to pay a cash dividend of 0.0747 yuan/share (tax included), with a cash dividend ratio of about 40%.

Demand for aviation has recovered, and revenue from aviation services has increased. Baiyun Airport had about 456,000 aircraft take-off and landing in 2023, up 71% year-on-year, to 93% in the same period in 2019. Its domestic, international, and regional take-off and landing numbers recovered to 105%, 56%, and 85% in the same period in 2019; passenger throughput was about 63.17 million, up 142% year on year, to 86% in the same period in 2019, and its passenger throughput in China, international, and regional passenger throughput recovered to 101%, 43%, and 63% of the same period in 2019; cargo and mail throughput was about 7.203 million tons. From January to January 2024, passenger throughput at Baiyun Airport recovered to 108% of the same period in 2019, while domestic, international, and regional passenger throughput in China recovered to 121%, 78%, and 69% of the same period in 2019, respectively.

In 2023, the company achieved aviation service revenue of 6.43 billion yuan, a year-on-year increase of 62%, and recovered to 96% in the same period in 2019. Among them, the company achieved aviation revenue of 2.49 billion yuan, an increase of 102% over the previous year.

Focus on comprehensively deepening reforms and improving the efficiency of business management. The company has stepped up efforts to increase the company's non-aviation revenue, and the number of international first-tier brand direct stores continues to increase, improving both commercial quality and economic efficiency. In 2023, the company achieved non-aviation revenue of 3.94 billion yuan, an increase of 44% over the previous year, of which comprehensive revenue from leasing and licensing achieved revenue of 1.34 billion yuan, an increase of 23.9% over the previous year.

Continuously promote cost reduction and efficiency, and gross margin increased rapidly. In 2023, the company's operating costs were about 5.07 billion yuan, up only 2.9%, mainly because the company deepened “two reductions and one control”, implemented lean cost management, and continued efforts to reduce costs and create efficiency. Affected by this, the gross margin of the company's aviation services industry was 21.1% in 2023, changing from negative to positive over the same period in 2022 (-24.1%), and an increase of 3.51 pct over the same period in 2019.

It is unlikely that the current tax exemption agreement will be adjusted again. The company signed a supplementary agreement for duty-free business with China's China Exemption subsidiary (Guangzhou Xinwan) in June '22. According to the agreement, Baiyun Airport's operating rights transfer fee (duty-free rental income) collection model has not changed. It is still calculated according to the actual commission/guarantee amount, but the calculation method for the guaranteed amount has been changed accordingly due to the pandemic, and the period of the T2 inbound duty-free shop project has been extended by 2 years to 2029. In the current context where demand for cross-border air travel is gradually recovering, the probability that the company will make concessions again is low.

Investment suggestions: Demand for air passenger transportation continues to recover, and the company's profitability is gradually recovering; overseas routes are recovering slowly, but the trend is clear; the company's current tax exemption agreement is unlikely to be adjusted again, and the company's previous duty-free business base is low, and there is great potential for future growth. Looking forward to the future, although the duty-free deduction rate is facing a decline under the new regulations, it will still lead to an increase in sales and achieve quantitative price compensation. Based on the relatively slow recovery in overseas passenger traffic, we lowered the 24-25 net profit forecast of 27%/35% to 1.10 billion yuan and 1.43 billion yuan respectively, and added the 26-year net profit forecast of 1.50 billion yuan; considering that the company's operating low point has passed, we maintained the “increase in holdings” rating.

Risk warning: The macroeconomic downturn affects the decline in aviation demand; the hourly capacity of airports is increasing slowly; passenger throughput on overseas routes is growing slowly; the deduction rate for tax exemption agreements falls or other adjustments.