Introduction to this report:

Industry supply and demand are still recovering in the first half of 2024, excluding capital increases affecting the company's main business losses. Pending the recovery of supply and demand, and the construction of the Beijing Daxing hub, the profit center can be expected to rise. Remind that airlines have options for falling oil prices.

Key points of investment:

Maintain an increase in holdings. The company leads the way in turnover and profit recovery, and the profit center can be expected to rise when supply and demand resume. The company has sufficient profit flexibility, and has options for falling oil prices. Taking into account fluctuations in oil prices and demand, the 2024/25 net profit forecast was lowered to 15/50 billion yuan (originally 81/107) billion yuan, and the 2026 net profit forecast was added by 9.4 billion yuan. Referring to the A-share industry valuation, considering sustainability after rising profits, the target price was lowered to 7.74 (originally 7.85) yuan in accordance with 15 times PE in 2026.

Excluding the impact of the capital increase of Sichuan Airlines, losses continued to be reduced in the first half of the year. The company's net profit for the first half of 2024 was 1.23 billion yuan. Considering that Q2 increased the capital of Sichuan Airlines by nearly 1.4 billion yuan and confirmed investment losses, it is estimated that the main business continued to reduce losses year-on-year. 1) The turnover recovery industry is in the lead. Compared to the same period in 2019, the company's fleet size increased 6.7% in the first half of 2024, and ASK increased 6%. 2) In the off-season, price is exchanged for quantity. Q2 Supply and demand were under pressure during the off-season. The airline traded price for volume, and the company achieved a 6 percentage point increase in passenger occupancy rate over the same period last year, higher than in 2019. Seats in the first half of the year were 4% higher than in 2019, leading the airline, but it is still difficult to transfer pressure on oil prices. 3) Increase in freight profits. The company took advantage of cross-border e-commerce opportunities and actively invested more than 30% in international routes in the first half of the year. China Southern Logistics's profit increased by 0.45 billion yuan to 1.7 billion yuan over the same period last year.

It suggests that airlines have options for falling oil prices, profit flexibility during the peak season, or catalyze optimistic expectations. Airlines account for nearly 40% of fuel costs. According to static estimates in the 2024 mid-year report, if the average price of aviation fuel purchases falls by 10%, it is estimated that the annualization of China Southern Airlines/Air China/China Eastern Airlines/Jixiang/Chunqiu will increase net profit by 42/41/3.5/0.53/0.47 billion yuan respectively. It is important to note that the impact of oil prices on airline profits is not simply calculated based on static estimates, but depends on supply and demand. The oil price center recently declined, and traditional off-season fuel costs were reduced or retention was limited in the fourth quarter; considering the good recovery in supply and demand during the peak season, it is expected that the ability to retain some fuel will be reduced to profit. The company is the airline's leader in profit flexibility, which suggests that profits during the peak season in the coming year are expected to exceed expectations and may catalyze optimistic market expectations.

Beijing Daxing hub construction to expand long-term development space. The construction of the Guangzhou and Beijing dual hubs is a major strategy of China Southern Airlines. China Southern Airlines, as the largest main base airline at Beijing Daxing Airport, will allocate the new policy for benefiting times. In the past few years, the company has obtained batch trunk time, but the fleet size has grown limited, and the aviation network structure has been optimized. Recently, the Civil Aviation Administration and the Development and Reform Commission jointly issued the “Guiding Opinions on Promoting the Construction of International Aviation Hubs”, which also further helped the company build an international hub and enhance its international competitiveness. As supply and demand in the industry recovers, the profit center of domestic routes is expected to rise, and the long-term profitability of international routes is also expected to improve.

Risk warning. Economic fluctuations, oil prices and exchange rates, industry policies, growth and dilution, safety incidents.