Key points of investment:

Incident: Meilan Airport announced results for the first half of 2024. The company achieved total revenue of RMB 1.152 billion, up 7.82% year on year; net loss attributable to the parent company was RMB 0.248 billion (net loss attributable to the parent company was RMB 0.0506 billion in the same period in 2023), of which non-operating expenses affected by arbitration increased by 0.273 billion yuan, and net profit after deducting net profit of 0.028 billion yuan compared to year 23.

Operating data has been further improved, business volume continues to grow, and capacity utilization has been improved. In the first half of 2024, Meilan Airport achieved a total of 0.0989 million flights, an increase of 15.89% over the previous year. It had 0.0932 million take-offs and landings within China, an increase of 11.13% over the previous year, and 5678 international and regional take-offs and landings, an increase of 289.7% over the previous year. In terms of passenger throughput, Meilan Airport's passenger throughput reached 14.49 million passengers in the first half of 2024, up 20.30% year on year. Its domestic passenger throughput was 13.91 million, up 16.78% year on year, and international and regional passenger throughput was 0.5848 million passengers, up 324.38% year on year. Cargo and mail throughput continued to grow. In the first half of the year, the airport handled 0.116 million tons of cargo and mail, up 25.01% year on year. Among them, it was 0.1069 million tons in China, up 19.13% year on year, and international and regional cargo and mail throughput was 0.0095 million tons, up 182.56% year on year.

The outlying islands duty-free related business is under pressure, and all other businesses have grown. Revenue side: Driven by the growth in business volume, the company's aviation business all achieved year-on-year growth. The aviation business revenue reached 0.604 billion yuan, an increase of 22.09% over the previous year. According to the company's announcement, due to the decline in sales revenue at Haikou Meilan Airport Duty Free Shop and the decline in advertising franchise revenue, the company's franchise revenue fell 27.04% year on year. Other non-aviation businesses all maintained revenue growth. Among them, the VIP room business increased by 136.59% year on year to 0.036 billion yuan. Cost side: With the completion and settlement adjustments of the company's second-phase expansion project assets, the company's depreciation costs decreased by 0.007 billion yuan year on year, maintenance costs decreased by 0.015 billion yuan year on year, and overall fixed costs decreased. With the launch schedule of the second phase and the increase in airport business volume, 24H1's labor costs increased by 0.044 billion yuan over the same period last year.

The settlement of arbitration matters in the first half of the year had a one-time negative impact on performance. 24H1 Company announced that with respect to the dispute arising from Aero InfrastructureHolding Company Limited (its general partner is a HOPU Investments affiliate) over the 19-year subscription agreement, the company received a second-stage arbitration award (which is also the final ruling in this case). The arbitral tribunal determined that the company should pay compensation and related expenses totaling approximately HK$0.2988 billion and interest, corresponding to RMB 0.273 billion in compensation. 24H1 operating expenses. Excluding the impact of arbitration compensation, the company's net profit after deducting compensation was 0.028 billion yuan, turning a loss into a profit over the previous year of 23, and the operating level improved significantly.

Investment analysis: The company's performance in 24 was affected by arbitration matters. At the same time, the performance of the duty-free consumer market after the pandemic was weak, and the customer unit price of airport duty-free shops fell short of expectations, so the 2024E profit forecast was lowered to -0.255 billion yuan (the original forecast was 1.087 billion yuan, adding an assumption of 0.273 billion non-operating expenses for arbitration matters, and the customer unit price growth assumption for airport duty-free shops was reduced from +5% to -10%), and the additional 25-26E profit forecast was 0.348 billions/0.53 billion yuan billion yuan, 25-26E corresponding share price PE is 10x/6x.

As the air travel market gradually normalizes and the recovery in inbound and outbound traffic accelerates, the capacity utilization rate of Haikou Meilan Airport is expected to continue to increase. As Hainan Island customs clearance progresses in '25, the location advantage of Meilan Airport will be further reflected. The company is expected to gradually release profits and maintain a “buy” rating in 25-26.

Risk warning: rapid macroeconomic decline; sluggish travel demand; increased duty-free competition; duty-free spending falls short of expectations.