1H24 results are in line with our expectations

The company announced 1H24 results: revenue of 11 billion yuan, +17% year on year; net profit to mother of 0.49 billion yuan, +509% year over year; of these, 2Q24 revenue was 5.2 billion yuan, +7% year on year, and net profit to mother was 0.12 billion yuan, reversing losses year on year (mainly due to a sharp decrease in exchange losses), which is in line with our expectations.

The year-on-year decline in profit before tax is mainly related to the fall in industry ticket prices. Exchange losses narrowed in 2Q24, and the company's profit before tax was 0.167 billion yuan (0.313 billion yuan in 2Q23), which was related to the fall in ticket prices, 2Q24 passenger kilometer revenue fell 8%; the cost side benefited from a year-on-year recovery in the daily utilization rate of aircraft, and the overall daily utilization rate of 1H24 aircraft reached 11.5 hours (1H19/1H23, respectively, 11.2/9.6 hours).

Increase the dividend ratio, and the company plans to cancel the repurchased shares to boost investor confidence. The company announced an interim dividend of 0.197 billion yuan (tax included), increasing the dividend ratio to around 40%. In addition, the company plans to cancel 15 million shares used by employees to repurchase shares, which we believe will help boost investor confidence.

Development trends

The company's performance continues to be resilient, and it benefits from flexible revenue policies in an environment of declining ticket prices. The company takes into account business and leisure needs. In an environment where industry fares are declining year on year, passenger occupancy rates increased to hedge ticket price declines. The overall passenger occupancy rate in 2Q24 was +2.2ppt year on year, and 2Q24 seat-kilometer revenue was -6% year over year, which is lower than the decline in passenger traffic. The company has strengthened cost control to improve profit resilience. The aircraft utilization rate is close to pre-epidemic levels. The unit non-fuel cost is 13% lower than 1H19. We expect the company's profit level to continue to benefit from cost reduction results.

Jiuyuan Airlines made a record profit, and receiving 737Max one after another strengthened the company's growth. Nine yuan returned net profit of 0.21 billion yuan in the first half of the year (previously the best profit was 0.26 billion yuan in 2023), and 1H24 nine yuan received 2 737 Max aircraft. The company expects to deliver 2 more 737 Max aircraft in the second half of the year.

Pay attention to financial cost improvements and progress in sending Pratt & Whitney engines for repair. Operating lease statements and interest-bearing debt have increased since the pandemic, and pressure on the company's financial expenses has increased. 1H24's interest expenses were 0.7 billion yuan, which is basically the same as the previous month. We recommend continuing to pay attention to the debt-side improvement process. Planespotters shows that all of the company's aircraft will be in operation during the 2024 summer travel season. Considering the limited number of engine cycles involved in maintenance, we expect Pratt & Whitney engines to be returned to the factory for repair will partially affect the company's capacity investment in the fourth quarter, but considering that the fourth quarter is a traditional low season, we think the impact on the company's operations in 2024 is manageable.

Profit forecasting and valuation

Fares across the industry have declined year-on-year since 2024. We lowered 2024/2025 revenue by 9.1%/9.4% to 23.75/25.86 billion yuan, and reduced 2024/2025 net profit by 21.3%/10.1% to 1.65/2.51 billion yuan. We mainly lowered the domestic passenger kilometer revenue assumption. The current stock price corresponds to 15.0/9.9 times the price-earnings ratio in 2024 and 2025, and lowered the target price by 14.2% to 14.5 yuan, corresponding to 2024 Annual price-earnings ratio of 19.4 times, corresponding to 29.5% upside. Maintain outperforming industry ratings.

risks

Demand was weaker than expected, oil prices rose, the yuan depreciated, and engine failures led to large-scale grounding of aircraft fleets.