1Q24 results are in line with our expectations

The company announced 1Q24 results: achieved revenue of 33.19 billion yuan, +49% year over month, and net loss to mother of 80 billion yuan (net loss of 38.0 million yuan and 5.56 billion yuan in 1Q23 and 4Q23), a sharp year-on-year reduction in losses, in line with our expectations.

In the first quarter, the company increased its capacity investment. Revenue mainly benefited from an increase in traffic volume and a slight improvement in revenue from month to month.

According to the company announcement, 1Q24 completed seat-kilometer investment of 73.2 billion, +52% YoY, +10%; overall passenger occupancy rate 80.7%, +10.1ppt, and 4.2ppt month-on-month; passenger kilometer revenue was 0.53 yuan, -13% YoY and +4% month-on-month, which is a year-on-year decline compared to the low supply period in the same period last year, but there was a marked improvement over 4Q23. We believe that the decline in the overall fare level of the entire industry in March dragged down 1Q24's overall revenue.

Development trends

Oil prices fell month-on-month but were still high. Increased capacity investment and aircraft utilization led to a decrease in unit costs. The unit cost of the 1Q24 company was 0.43 yuan, down 14% year on year and 9% month on month, but there was still a 10% increase compared to 1Q19. We think it is related to lower oil prices and increased capacity investment to dilute fixed costs. The average factory price of domestic aviation kerosene in 1Q24 was 6,664 yuan/ton, down 12% from the previous month and 4% from the previous year, but there was still about a 40% increase compared to 1Q19, and oil prices fell month-on-month. We expect the pressure on oil prices to drop year on year in 2024, but it is still a major drag on the company's performance that is difficult to return to 2019 levels.

Focus on the performance of public business and off-season demand, as well as the progress of the resumption of international flights. We continue our previous opinion in the company's annual performance review. Judging from the 1Q24 performance, the industry's profit level depends not only on how much the industry's volume and revenue improved during the peak season, but more importantly, whether off-season demand stabilizes. We believe that off-season profit is an important factor affecting profit throughout 2024. We believe that international capacity investment is a highlight of the company's operations. 1Q24 International and China's capacity investment in Hong Kong, Macao and Taiwan returned to 90% of the same period in 2019, which is higher than the industry average. We expect that higher international capacity investment will help improve the company's cost pressure. Furthermore, the core business route is the company's basic market. As the economy recovers and the recovery of international flights causes domestic business line capacity to shrink, we believe that the profit level of commercial routes may improve markedly.

Profit forecasting and valuation

As demand performance in the March off-season was weaker than expected and combined oil prices were still high, we lowered China Eastern Airlines' A/H 2024 profit forecast by 38%/38% to 47.5/4.75 billion yuan, and lowered the 2025 profit forecast by 20%/21% to 83.1/8.25 billion yuan. We are optimistic that the medium- to long-term supply slowdown will bring about an improvement in supply and demand, and keep China Eastern Airlines' A/H share target price unchanged. The current China Eastern Airlines A target price corresponds to the 2024/2025 23.4/13.4 times price-earnings ratio, and the latest closing price corresponds to the 2024/2025 18.0/10.3 times price-earnings ratio; China Eastern Airlines H target price corresponds to the 2024/2025 10.7/5.9 times price-earnings ratio, and the latest closing price corresponds to 8.4/4.6 times the 2024/2025 price-earnings ratio. Upside space. Maintain an outperforming industry rating.

risks

Off-season demand fell short of expectations, international flight recovery fell short of expectations, oil prices rose sharply, and exchange rates depreciated sharply.