Key points of investment
24Q1 successfully reversed losses, inflection point reached
China Airlines is the only large-scale independent regional airline in China. Capacity is continuing to recover. Under the new regional airline subsidy policy, the company's subsidy scale may exceed expectations, and net profit is expected to exceed market expectations after recovering utilization rates in the future. In 24Q1, the company achieved net profit of 0.25 million yuan and net profit of non-return to mother of 0.15 million yuan, reversing losses year-on-year, making it the first profitable quarter since 2020.
The 2024-2025 performance recovery is supported: 1) Continued recovery in utilization rates, which is conducive to expanding revenue scale and diluting fixed costs; 2) The new “Interim Measures on Regional Aviation Subsidy Management” will be implemented in 2024. On the one hand, we expect that the civil aviation regional aviation subsidy corresponding to the second half of 2023 will be included in the 2024 report. On the other hand, the new version of the policy focuses more on the sinking market. The company is a regional airline leader, with 99% of regional routes accounting for 99%, and solo flights accounting for 89%, which will benefit even more; 3) Summer peak season The tourism market is expected to continue to be booming, and regional airlines will fully benefit; 4) In February 2024, the company announced that it plans to sell 100% of its wholly-owned subsidiary Huaxia Education for about 604 million yuan. After the transaction is completed, it will add an additional value of about 149 million yuan, corresponding to an increase in performance of about 110 million yuan.
The fleet utilization rate continues to climb and is expected to return to normal levels in 2025. According to the company's announcement, Huaxia Airlines' fleet utilization rate in 2023 is about 6 hours, which is still a certain distance from 2019 (8.5 hours in a special environment in 2020). We believe it is mainly limited by a shortage of pilots. Therefore, ASK's non-oil cost per unit in 2023 is 0.314 yuan, +7% compared to 2019. At the end of 2023, the company had 70 aircraft, an increase of about 43% from 49 at the end of 2019. In 24Q1, the company's ASK increased by 48.5% compared to 19Q1. Through external introduction and independent training, pilot restrictions will continue to be eased. We expect that the number of the company's pilots and fleet size will be well matched in 2025, and the utilization rate is expected to return to 2019 levels, which will effectively dilute fixed costs and help release performance.
The new version of the regional aviation subsidy policy focuses more on the sinking market. The company unit subsidy level is expected to be raised. The “Interim Measures on the Administration of Regional Aviation Subsidies (2023 Revision)” will be officially implemented on January 1, 2024. The policy orientation is more clear, the scope of subsidies is more focused on the sinking market, and the scale of corporate unit subsidies is expected to increase. 24Q1 companies will obtain 250 million yuan in other revenue (mainly route subsidies), which is 1 billion yuan per annum (without considering the continuous recovery of utilization rate), which is basically double that of 550 million yuan in 2019.
Compared with the old version of the policy, the scope of subsidies in the new version of the policy is more accurate and focuses on remote and special regions. The subsidy method has been optimized from calculating subsidies based on headcount to approval based on flight hours, increasing support for regional aircraft. Take the CRJ900 aircraft as an example. Under the new policy, the subsidy standard for plateau and high plateau airport segments is 12,000 yuan/hour, and the subsidy standard for non-plateau and high plateau airport segments is 10,000 yuan/hour; under the old policy, 30%, 60%, and 90% passenger occupancy rates correspond to average subsidies of about 0.3, 0.4, and 30,000 yuan/hour, respectively, all of which are far below the new policy subsidy standards.
Local government finances have improved, and the scale of institutional capacity purchases is expected to recover. Accounts receivable repayments or improved institutional capacity purchases are a special business model in the regional aviation market. Institutional capacity purchases accounted for about 19% of revenue in 2023, down from 31.5% in 2020. As the financial pressure on local governments eases, on the one hand, the scale of institutional capacity purchases will recover. On the other hand, the accounts receivable repayment situation is expected to improve. The company's credit impairment losses in 2022 to 2023 were -150 million yuan and -0.9 billion yuan, respectively, formed by bad debt preparation for withdrawing receivables, while 24Q1 credit impairment loss recovery was 0.2 billion yuan, which is offset in response to bad debt payments.
Profit forecasting and valuation
The company's net profit for 2024-2026 is estimated to be 4.5, 9.4, and 1.25 billion yuan respectively. The current price is 20, 10, and 7 times PE in 24-26, respectively. The growth rate of the company's fleet size expansion is expected to be higher than the industry average, the pace of capacity growth will gradually return to normal, and the performance is expected to exceed expectations after utilization is restored, maintaining a “buy” rating.
Risk warning
Demand fell short of expectations, capacity recovery fell short of expectations, risk of large fluctuations in oil prices and exchange rates, and risk of accounts receivable.