Recommended logic: 1) In 2023, the company's aviation passenger revenue increased sharply by 126.9%, passenger occupancy rate 78.09% (+11.74pp), aircraft utilization rate was 8.93 hours (+3.89 hours) per day. The indicators were superior to the industry average, and gross margin was corrected; net profit to mother for the first quarter of 2024 was 0.756 billion yuan, turning a loss into a profit. 2) By the end of March '24, the company had a fleet of 917 aircraft and a passenger turnover of 246.947 billion passenger kilometers in 2023, continuing to maintain its leading position in the industry. 3) Since this year, the number of inbound tourists has been growing steadily, up 209% from the same period last year and 61% higher than the same period in 2019. Considering the company's route layout along the “Belt and Road”, it is expected to fully benefit from the recovery of inbound tourism.

The airline with the largest annual passenger volume in China. China Southern Airlines is the airline with the most developed route network and the largest annual passenger volume in China. In 2023, the company's passenger traffic and cargo and mail traffic respectively accounted for 22.95% and 21.55% of the total traffic volume in China's civil aviation market. By the end of March 2024, the company operated a total of 917 aircraft, and the company's fleet size is still among the highest in the country.

China's civil aviation industry: from restorative growth to natural growth. In 2024, with the full liberalization of travel policies and the gradual return to normalization of domestic economic activity, China's civil aviation industry continued to recover. In January-March, it completed a total transportation turnover of 34.93 billion tonkilometers, exceeding the same period in 2019 by 12.93%. The passenger occupancy rate and load rate for flights from January to March 2024 were 82.10% and 69.30%, respectively, 98.09% and 97.33% of the full year level of 2019, respectively. The industry's transportation production and transportation efficiency have basically returned to 2019 levels.

Improve the quality of operations and focus on strengthening the main business. In 2023, with the gradual resumption of production and operation, China Southern Airlines' passenger turnover increased sharply year on year. The significant increase in air passenger revenue led to an 83.70% year-on-year increase in the company's total revenue. However, due to investment losses and erosion of period expenses, profits were still losing money. Net profit to mother of 0.756 billion yuan was achieved from January to January 2024, turning a loss into a profit.

Profit forecast and investment suggestions: The company's revenue for 2024/25/26 is estimated to be 193.78, 205.06, and 214.07 billion yuan, respectively; net profit to mother is 6.11, 9.24, and 11.31 billion yuan, respectively; EPS is 0.34, 0.51, and 0.62 yuan, respectively, and the corresponding PE is 17, 11, and 9 times, respectively. Considering the company's operating model and market positioning, the closer Air China, China Eastern Airlines, and HNA Holdings were selected as targets, which is 3.5 times the average PB value of the company in 24 years. We gave the company 3 times PB in 2024, corresponding to a target price of 7.2 yuan, maintaining a “buy” rating.

Risk warning: macroeconomic cycle fluctuation risk, aviation industry policy change risk, aviation fuel price fluctuation risk, exchange rate fluctuation risk, etc.