Key points of investment

The fourth largest aviation group, a first-mover barrier with resource endowments

The company is the fourth largest aviation group in China, with a share of 8.1% during the 2024 summer season; the share of the top 20 airports in the country is 8.6%, of which 9 airports are in the top three, and have a first-mover barrier for scarce resources. As of August 2024, the company's fleet size was 345, accounting for about 8.0% of the industry's fleet, of which wide-body aircraft accounted for 20.6%, far higher than other airlines. The Hainan Airlines Group, where the company is located, has a rich layout in the aviation industry chain such as passenger transportation, cargo transportation, general aviation, maintenance, and aviation schools. The company shares resources and cooperates closely with unlisted companies within the group, and has strong synergy effects.

Operational efficiency improved and made up for shortcomings, and production capacity utilization surpassed 2019

Before 2020, the company had a high passenger occupancy rate, low aircraft utilization, and lower ticket prices than the “Big Three Airlines”; since 2023, the company has improved its strengths and weaknesses, and its operating efficiency and revenue quality have improved markedly. From January to August 2024, the company's passenger volume was 46.246 million, +12.78%, market share 9.4%, higher than current fleet share; the passenger occupancy rate in August reached 87.9%, exceeding the same period in 2019, 1 pcts higher than the industry average, ranking 3rd among listed airlines; in 2023, 8.5 hours of daily use of aircraft, higher than the industry average for the first time in 7 years; 2024H1, the company's passenger revenue per unit reached 0.55 yuan/person kilometer, compared with 2019 The annual increase is 11%, close to the level of the three major airlines.

Reorganize and change hands and set sail again, and reprice the old alternately

From its establishment in 2017, the company expanded rapidly and used leverage in exchange for resources. At the end of 2017, it revealed a liquidity crisis. In 2021, it went bankrupt and restructured and transferred control to Liaoning Fangda Group. Under the corporate culture of new shareholders focusing on operating efficiency, the business layout accumulated for historical reasons is expected to not only benefit from the industry cycle of continuous growth in air travel, but also to exert flexibility from other airlines: the company has a significantly higher share of operating and leasing fleets than its peers, corresponding to high exchange flexibility; investing in multiple industry chain companies. As the overall aviation industry improves, investment income growth is expected to increase profits; companies with location advantages are expected to benefit from the development dividends of the Hainan Free Trade Port.

Profit Forecasts, Valuations, and Ratings

We expect the company's total revenue in 2024-2026 to be 67.49/78.55/88.94 billion yuan, with year-on-year growth rates of +15.09%/+16.38%/+13.22%, respectively. Net profit attributable to mother was 1.11/3.35/4.81 billion yuan, with year-on-year growth rates of +255.5%/+203.4%/+43.55%, respectively, and a 3-year CAGR of 149%. EPS was 0.03/0.08/0.11 yuan respectively. Given that the company is currently in the early stages of the reversal of the industry and its own difficulties, there is strong certainty about future fundamental restoration. The company has an outstanding first-mover advantage in the aviation industry. It is expected to benefit from strong growth in air passenger flow, drive profit growth, cover for the first time, and give it a “buy” rating.

Risk warning: Air travel falls short of expectations, fuel prices rise, RMB exchange rate fluctuates, and debt expands.