Incident: In 2023, the company achieved revenue of 20.62 billion yuan, a year-on-year decrease of 12.1%, and net profit to mother of 2.49 billion yuan, a year-on-year decrease of 31.6%. 24Q1 achieved revenue of 5.22 billion yuan, a year-on-year increase of 14.2%, and net profit to mother of 590 million yuan, a year-on-year decrease of 22.6%. The decline in profit in '23 and 24Q1 was mainly due to a significant year-on-year decline in spot freight rates.

The decline in spot freight rates is mainly due to the decline in air express business profits: in '23, the company steadily added and optimized capacity to improve the daily utilization rate of aircraft. The daily utilization rate of all freighters was 12.56 hours, an increase of 12.85% over the previous year, and the total turnover of cargo and mail transportation increased 18.8% year on year. However, due to the sharp decline in spot market freight rates, the revenue of the air express sector decreased by 31.4% year on year, and gross margin fell 10.4 pcts year on year to 24.6% year on year, achieving gross profit of 2.24 billion yuan, a significant decrease from 4.65 billion yuan in '22. The situation was similar in 24Q1. Due to the year-on-year decline in freight rates, the gross margin of the air express business fell 14.6 pct to 15.6%.

The boom in cross-border e-commerce has driven high revenue growth for integrated logistics solutions: the supply and demand structure of the aviation logistics industry changed profoundly in '23. Demand for traditional air cargo, represented by high-tech products, mechanical and electrical products, etc., declined sharply, but demand for cross-border e-commerce goods represented by consumer goods, clothing, etc. increased markedly, injecting new development impetus into the aviation logistics market.

The company's integrated logistics solutions achieved revenue of 9.13 billion yuan in 23 years, an increase of 16.7% over the previous year. Among them, the sharp increase in cross-border e-commerce and direct delivery to production (fresh cold chain) business was the main reason. In '23, the company's cross-border e-commerce solutions achieved revenue of 4.698 billion yuan, an increase of 71.7% over the previous year; the direct production area business achieved revenue of 1.91 billion yuan, an increase of 66.5% over the previous year. The 24Q1 integrated logistics solution continued to maintain high growth, achieving revenue of 2.62 billion yuan, an increase of 64.0% year over year. However, due to the decline in industry freight rates, the gross margin of the integrated logistics business declined accordingly. Among them, the gross margin for 23 was 13.5%, a year-on-year decrease of 4.5 pcts, and 24Q1 gross margin was 10.7%, a year-on-year decrease of 6.4 pcts.

The ground service sector contributes to stable profits: The ground comprehensive service business is a stable source of profit for the company. The company's cargo and mail processing volume in '23 was 2.403 million tons, up 9.0% year on year. The gross margin increased from 18.5% in 2022 to 40.5% in 2023. The sharp increase in gross margin was mainly due to the severe impact of the epidemic in '22 and returning to normal levels in '23. The 24Q1 ground service sector's revenue increased 6.8% year over year, and the gross profit margin was 39.5%, and continued to stabilize at around 40%.

The fleet structure has been adjusted. Currently, it is the entire B777 fleet: in 2023, the company introduced 3 B777 freighters through financial leasing, completed the cancellation of 2 B777 freighters, and carried out external disposal of 2 B747 freighters. By the end of 2023, the company was operating 14 B777 freighters, with an average age of only 3.5 years. Young aircraft age is conducive to improving operational safety factors and reducing operating costs. Uniform models help reduce personnel training and aircraft maintenance costs.

Company profit forecast and investment rating: We expect that the boom in cross-border e-commerce business will bring continuous growth momentum to the industry. Although industry freight rates are under pressure at this stage, judging from the TAC index, there is limited room for freight rates to continue to fall, and upward flexibility is greater. The increase in demand for cross-border e-commerce is expected to drive a steady recovery in freight rates. We expect the company's net profit for 2024-2026 to be 292, 35.9 billion yuan, and 4.20 billion yuan, respectively, with corresponding EPS of 1.84, 2.26 and 2.65 yuan, respectively. The current stock price is 10.3, 8.4, and 7.2 times the 2024-2026 PE value, respectively, maintaining the company's “recommended” rating.

Risk warning: Freight prices fell more than expected, implementation of industry policies fell short of expectations, large fluctuations in oil prices, macroeconomic downturn, and safety risks.