Introduction to this report:

The impact of Feifar maintenance in the first half of 2024 was limited, and the company's fleet turnover and profit recovery continued to lead the industry. When supply and demand in the industry recover, the company's high-quality aviation network will show an upward and continuous profit center that exceeds expectations, and a reverse layout.

Key points of investment:

Maintain an increase in holdings. While industry supply and demand were recovering in 2012, the company's performance in the first half of the year increased significantly year-on-year, and the profit recovery industry ranked first. When supply and demand recover, the company's high-quality aviation network will show an increase in profit center that exceeds expectations. Considering that oil prices exceeded previous assumptions, the 2024/25 net profit forecast was lowered to 14.22 billion yuan (originally 26/31) billion yuan, and the 2026 forecast was added by 2.9 billion yuan. Maintain the target price of $22.00.

Earnings in the first half of the year increased significantly year-on-year, and continued to be profitable in the Q2 off-season. The company's net profit for the first half of 2024 was 0.49 billion yuan, a year-on-year increase of more than fivefold, recovering 84% from the same period in 2019. Among them, supply and demand pressure in the Q2 off-season industry were compounded by many thunderstorms, and the company still made a profit of 0.12 billion yuan. Compared to 2019 in the first half of the year, 1) revenue: fleet size increased by 34%, RPK increased 36%, passenger occupancy rate and passenger revenue increased 36%; 2) Costs: Benefiting from the structural increase of the new fuel-saving A320NEO narrowbody aircraft and the B787 wide-body aircraft, fuel consumption per estimated seat kilometer fell by 10%, partly hedging the impact of high oil prices. Considering the impact of the 2021 leased aircraft registration statement accounting and lease compliance adjustments, operating costs+financial expenses increased by 42% compared to the first half of 2019.

Fleet turnover continues to recover, and the impact of flight maintenance is limited. Over the past year, the market continued to worry that Pratt & Whitney engine maintenance would significantly affect the company's fleet turnover and profit recovery. In fact, according to observations, the actual impact was limited. The daily utilization rate of the company's available aircraft in the first half of 2024 surpassed 2019, and the daily utilization rate of registered aircraft was close to 2019. On the one hand, reducing the impact of low line schedules during the off-season will absorb the impact, and ensure full investment increases during the peak season. On the other hand, Pratt & Whitney's engine maintenance capacity improvement cycle was shortened and economic compensation was grounded. It is expected that the company will deliver repairs one after another during the off-season after the summer travel season. It is expected that the impact of the 2025 Spring Festival travel season will be limited, and all repairs will be completed by September 2025.

Once again, an airline's core profit asset is not an aircraft, but a quality moment. The binary structure determines that the airline will have enough space to optimize the aviation network, and it will not affect the profit trend of quality time.

When the industry's supply and demand recover, the high-quality aviation network will show an upward profit center that exceeds expectations. The company has a deep understanding of the value of time, and has long focused on “good wharves” to build a high-quality aviation network. In the past five years, the high-quality market has been expanded to match the growth of the fleet. The proportion of main coordination times has increased, and the quality of the aviation network continues to be optimized, and it has more profitability than expected. At the same time, the long-term prospects of the company's international strategy for wide-body aircraft are optimistic. The nine-yuan low-cost airline strategy is showing initial profit flexibility. It operated 25 aircraft in the first half of the year, achieving a net profit of over 0.2 billion yuan. The company's profit center will rise and continue to exceed expectations as future demand growth and international flight increases drive the recovery of supply and demand, and considering the marketization of ticket prices and the slowdown in the industry's fleet growth rate.

Risk warning: economy, oil price exchange rate, policy, increased distribution and dilution, safety incidents, etc.