1Q24 losses narrowed markedly, and we expect to catalyze profit performance during the peak season; maintaining “buying” China Eastern Airlines 1Q24's revenue of 33.188 billion yuan, an increase of 49.1%. The net loss to mother was 803 million, which was weaker than our previous forecast of net profit to mother of 780 million yuan. 1Q23 was a net loss of 3.03 billion yuan to mother. The 1Q24 company's operations resumed further, driven by the peak season of the Spring Festival travel season, but there was a marked decline from month to month in March, which dragged down 1Q24 profits. Considering that it will take time for the civil aviation supply and demand structure to recover, we adjusted 2024-26 net profit to 36.84/68.39/8.526 billion yuan (previous value: 64.43/88.96/110.36 billion yuan). Since the company's 10-year PB average PB of A/H shares is 2.1x/1.1x. Since the company is expected to achieve a breakthrough in ROE, a premium is given to A/H shares 2.5x/1.3x 2024E PB, and the target price for A/H shares is RMB 4.95 yuan/2.85 HKD, maintain “buy”.

Revenue levels were pressured year-on-year by the high base effect. The peak season is expected to be once again catalyzed by 1Q24's capacity to continue to recover, and demand continues to rise, driven by the Spring Festival travel season. Overall ASK/RPK increased by 52.2%/73.9%, respectively, and recovered to 111%/109% in 1Q19 (97%/92% in 4Q23), with a passenger occupancy rate of 80.7%, and an increase of 10.1 pct. At the same time, in 1Q24, under a high base, we estimate that the revenue per passenger kilometer decreased by about 14% year over year, but it still increased by about 2% compared to 1Q19. The final A-share 1Q24 revenue was $33.189 billion, up 49.1% from the same period, and recovered to 110% of 1Q19. We believe that demand for civil aviation in China is still quite strong during the peak season, and it is expected that with the “May 1st” holiday and the peak summer season, it will once again peak to promote the continuous improvement of the company's operations.

The cost-side control effect was good. The loss in 1Q24 narrowed significantly. In 1Q24, the average factory price of aviation kerosene fell 4% year on year, and thanks to improved utilization and cost control measures, the cost per seat kilometer decreased 13.9% year on year. The company's 1Q24 operating cost recorded 31.682 billion yuan, an increase of 31.0% over the same period, and recorded gross profit of 1,507 billion yuan, an increase of 3.429 billion yuan over the previous year. In addition, other earnings also increased by 428 million to 1,373 million yuan, and the company's net loss to mother narrowed by 3.0 billion to 803 million over the same period last year.

However, compared with 1Q19, gross profit decreased by 2,727 billion dollars, and financial expenses increased by 1.03 billion yuan (1Q19 rose 1.9% against RMB, 1Q24 increased 0.2%). In the end, there is still a certain gap with 1Q19's net profit of 2,006 billion yuan.

Adjust the target price for A shares to RMB 4.95 and H shares to HK$2.85, and maintain “purchases” to consider that the improvement in the civil aviation supply and demand structure was not fully reflected in the off-season. We adjusted net profit for 2024-2026 to RMB 36.84/68.39/8.526 billion yuan (previous value: 64.43/88.96/RMB 11.036 billion) to give A/H shares 2.5x/1.3x 2024E PB. The target price for A/H shares is RMB 4.95/2.85 HKD (previous value RMB 5.30/HK$3.00). The industry is still recovering. Combined with full fare deregulation and the advantages of the company's main base in Shanghai, the company's profit center is expected to increase and maintain “purchases.”

Risk warning: Demand recovery falls short of expectations, fleet introduction exceeds expectations, oil flow fluctuations, safety incidents.