Leading regional airline with broad prospects for medium- to long-term development

Huaxia Airlines focuses on the regional airline market and is far ahead of most regional airlines in terms of passenger turnover, etc. The regional blue ocean market has broad scope for the future. The accessibility of the airline network has improved, and regional aviation is developing rapidly.

With the rapid economic growth of the central and western regions and the continuous implementation of favorable policies for regional line development, the prospects for the medium- to long-term development of regional aviation are broad. In the future, as the economy recovers and demand for regional airlines is released, Huaxia Airlines' revenue and profits are expected to pick up.

The predicament is reversed, and profitability is expected to pick up

On the one hand, Huaxia Airlines has strengthened risk management and control to overcome the “safety accident” dilemma. Corrective measures have been implemented accordingly. Huaxia Airlines' operating capacity continues to recover and improve, and profitability is expected to pick up. On the other hand, the operating capacity of Huaxia Airlines has increased, and it has overcome the “high dependence on government subsidies” dilemma. China Airlines cleverly mitigates the profit risks caused by uncertain government subsidies through flexible scheduling of the airline network structure and increasing the share of transit operations and economies of scale. Its operating capacity continues to improve, and profitability is expected to pick up.

The adjustment of the branch line subsidy policy boosted Q1 performance to exceed expectations. Sustainable management may be at an inflection point or the current economic recovery, with a slight increase in volume and a slight drop in prices. In 2023, Huaxia Airlines' passenger kilometer revenue reached 0.56 yuan/passenger kilometer, a year-on-year decrease of 13%, or about 94% of 2019. As of Q1 2024, Huaxia Airlines' passenger occupancy rate was 77%, an increase of 2% over the previous month, and is close to 2019 levels.

In 2018-2023, Huaxia Airlines' share of institutional capacity purchase revenue fell from 36% to 19%.

The net profit of 2024Q1 Huaxia Airlines reached 25 million yuan, turning a loss into a profit. It was mainly due to an increase in other revenue brought about by the Civil Aviation Administration's branch line subsidy policy adjustments. In the future, as China's regional airline subsidy policy continues to be updated and improved, we believe that Huaxia Airlines' government subsidies are expected to increase further, profitability will pick up, and an inflection point for sustainable management may appear.

Adjust profit forecasts

Taking into account factors such as regional passenger traffic still recovering after the epidemic, the 2024 forecast net profit to mother was lowered to 300 million yuan (the original forecast was 490 million yuan), the net profit forecast for 2025 was lowered to 910 million yuan (the original forecast was 980 million yuan), and the 2026 forecast net profit to mother was introduced. Considering that the stock price performance of aviation stocks was relatively good during the upward phase of the inventory cycle in history, it was raised to a “buy” rating.

Risk warning: The epidemic is repeated, the economy continues to be sluggish, the cost of fuel oil exceeds expectations, the risk of interest rate changes, the risk of exchange rate fluctuations, and flight safety risks.