The company announced 2023 results: 1) Main business revenue reached 2.09 billion yuan, +83% year over year; of which, AFAC revenue was 1.11 billion yuan, +42% year over year, accounting for 53%; aviation revenue was 970 million yuan, +170% year over year, accounting for 47%. 2) The gross profit margin was 1.8%, +0.2 pts year-on-year, mainly because the Meilan Airport Phase II expansion project is still in the process of climbing capacity, and cost pressure is dragging down gross profit performance. 3) Net profit loss to mother was 136 million yuan, a decrease of about 19 million yuan compared to the loss in the same period last year.

Aviation business: 1) Rapid restoration of annual business volume: In 2023, aircraft take-off and landing, passenger throughput, and cargo and mail throughput achieved 172,000 flights, 24.34 million passengers, and 175,000 tons. The year-on-year figures were +63%, +118%, and +41%, respectively, reaching 105%, 101%, and 54% in the same period in 2019. 2) Changes in the lease contract: A new version of the lease agreement was implemented on January 1, 2023. The previous revenue sharing was changed to a fixed rent model, contributing a certain amount of increase to aviation revenue.

Non-aviation business: 1) Franchise business: Revenue reached 620 million yuan, +37% year over year, mainly benefiting from passenger flow to the islands and the recovery of duty-free sales on the outlying islands; see duty-free sales of 43.76 billion yuan on the outlying islands of Hainan in 2023, +25% over the same period last year. 2) Other businesses have recovered significantly, with hotel, freight, lounge and rental revenue +53%, +33%, +21%, and +9%, respectively.

Production capacity is climbing, and costs are under short-term pressure: in 2023, the company's operating costs were 2.05 billion yuan, +82% year over year, mainly due to the restoration of airport business volume and the commissioning of the second phase of the expansion project, and related expenses increased. Among them, depreciation expenses and amortization of intangible assets increased by 410 million yuan under the fixed rent model, in addition, labor costs increased by 280 million yuan and operating costs increased by 200 million yuan. In addition, the company's financial expenses were 140 million yuan, +54% year-on-year, mainly due to additional interest expenses on leasing liabilities of 52 million yuan.

The core hub of a free trade port, with broad scope for long-term development: After the second phase of the project was put into operation, Meilan Airport officially entered a new era of “double terminals and double runways”. According to the “Action Plan to Build Haikou Meilan International Airport Regional Gateway Hub for Two Oceans (2023-2025)” issued by the Hainan Provincial Transportation Department, Meilan Airport's passenger throughput is expected to reach 30 million passengers in 2025, contributing to the main increase in the island's air passenger flow and further consolidating the position of Hainan Province as a gateway hub. In June 2023, the peak hourly capacity of Meilan Airport increased from 30 to 40 flights, helping to continue to release additional production capacity. In the short term, due to factors such as the crackdown on package purchases and the fact that travelers' spending capacity has yet to be restored, the unit price for duty-free customers on Hainan's outlying islands has declined; in the medium to long term, as the construction of the Hainan Free Trade Port continues to advance and the outlying islands duty-free dividends continue to be released, there is plenty of room for the company's future growth and development.

Investment suggestions: 1) Profit forecast: Considering the cost increase brought about by T2 after the start of production and signing a new lease contract with the parent company, we adjusted the company's 2024-2025 net profit to be 180 million yuan and 4.4 billion yuan respectively, and added the 2026 forecast net profit of 550 million yuan. The corresponding EPS was 0.37, 0.92, and 1.19 yuan, respectively, and the corresponding PE was 22, 9, and 7 times, respectively. 2) Investment advice: Referring to airports where the non-aviation business accounts for a relatively high share, we are giving the company 12 times PE in 2025, which corresponds to a market value of 5.2 billion RMB, with an expected 32% space compared to the current price. The target price for a one-year period is equivalent to HK$12 HK$12, maintaining a “recommended” rating.

Risk warning: The economy has declined sharply, and consumption falls short of expectations.