The aviation industry is expected to usher in a cyclical recovery

The aviation cycle is highly correlated with the inventory cycle. The inventory cycle is expected to pick up in 2024: first, the inventory removal period is nearly 2 years, which is expected to end; second, the forward-looking index PPI, which has been picking up since July 2023 and fluctuated at a low level; third, the inventory growth rate has fallen to near zero, a historical low, and has rebounded slightly since January 2024. Once the inventory cycle recovers, it is expected to continue for about 2 years, and the growth rate of aviation revenue and gross margin are expected to pick up, which will usher in a cyclical recovery. In the upward phase of the inventory cycle, airline stock prices often rise.

China Eastern Airlines has high profit flexibility and a low stand-alone market value

In the two rounds of the 2006-2007 and 2014-2015 bull markets, the biggest increases in stock prices of the three major airline A shares were as high as 9-13 times and 4-6 times. Among them, China Eastern Airlines led the increase, which may be related to greater profit flexibility. Among the major listed airlines, China Eastern Airlines' gross margin and deducted non-net interest rates from 2010 to 2019 are more flexible. Considering the potential demand for aviation and the continued increase in the number of aircraft, we chose to use “market capitalization/number of aircraft” for valuation. As of mid-May 2024, China Eastern Airlines' stand-alone market value was only 98 million yuan/aircraft, far lower than most peers. In the future, as the economy recovers, China Eastern Airlines' profits are highly elastic, and the stand-alone market value is expected to recover.

Prices have risen slightly, volume has risen, and China Eastern Airlines' profitability has increased

The economy has recovered, China Eastern Airlines prices have risen, and profitability has increased. The passenger kilometer revenue of China Eastern Airlines domestic routes reached 0.56 yuan/passenger kilometer in 2023, an increase of 10% over 2019. In Q1 2024, China Eastern Airlines' passenger occupancy rate reached 81%, an increase of 7% over the previous month. China Eastern Airlines' gross margin reached 5% in Q1 2024, and the trend has picked up since June 2022. In the future, with economic recovery, aviation demand is expected to be fully released, and we are optimistic about the future release of profit flexibility brought about by the recovery in passenger occupancy rates and ticket prices.

Adjust profit forecasts

Considering the impact of factors such as passenger traffic still recovering after the epidemic and slow recovery of international flights, the 2024 forecast net profit to mother was lowered to 5.44 billion yuan (the original forecast was 9.22 billion yuan), the net profit forecast for 2025 was lowered to 8.24 billion yuan (the original forecast was 20.99 billion yuan), and the 2026 forecast net profit to mother was introduced. Considering the relatively good stock price performance of aviation stocks during the upward phase of the inventory cycle in history, they maintained a “buy” rating.

Risk warning: The epidemic is repeated, the economy continues to be sluggish, fuel oil costs have risen above expectations, and the introduction of aircraft has accelerated.