Introduction to this report:
While industry supply and demand are recovering in 2024, the company reduced its losses year on year in the first half of the year. Aviation demand is expected to remain resilient, and supply and demand will continue to recover. When supply and demand recover, the company's high-quality aviation network will show an increase in profit center that exceeds expectations.
Key points of investment:
Maintain an increase in holdings rating. Air China's high-quality aviation network continues to be optimized. Short-term pressure will not change long-term value. When supply and demand resume, the profit center will rise beyond expectations. Taking into account fluctuations in oil prices and demand, the 2024/25 net profit forecast was lowered to 8/61 billion yuan (originally 152/203) billion yuan, and the 2026 net profit forecast was added by 15 billion yuan. Referring to the A-share industry valuation and considering sustainability after rising profits, the target price was lowered to 13.52 yuan (originally 14.53) according to 2026 15 times PE.
Supply and demand are recovering in 2024, and off-season supply and demand are still under pressure. Industry supply and demand are still recovering in 2024. In the first half of 2024, the company's net profit to mother was 2.8 billion yuan, and losses continued to decrease year-on-year. The company's profit recovery is slower than turnover recovery due to: 1) pressure on wide-body machines. Considering the merger of Mountain Airlines, the company's fleet size increased by 14% compared to 2019, and ASK increased by 5%. The return to North America was only 20%, so the recovery in wide-body aircraft turnover was relatively slow. The transfer of surplus wide-body machines to the domestic market not only increased domestic supply pressure, but also led to high unit costs. 2) Off-season supply and demand are under pressure. The low demand season in 2024 was obvious. Demand for travel was strong during the peak season, while supply and demand were still under pressure during the off-season. The company is firmly promoting a price stabilization strategy. Since public business demand was affected by travel expenses control, domestic passenger revenue in the first half of the year was nearly 6% lower than in 2019, and overall seat revenue was only 1% higher, making it still difficult to transfer pressure on high oil prices.
Demand for aviation is resilient, and supply and demand will continue to recover. We think aviation still has a long logic. Before 2019, the passenger occupancy rate was high and the profitability was significantly lower than that of overseas airlines. The reason was that ticket prices were not marketable and the fleet was growing too fast. However, in the past few years, ticket prices have basically been marketed, and the growth rate of the fleet has also slowed significantly. It can be expected that supply and demand resume the profit center to rise. The market is concerned about aviation demand and the recovery in supply and demand. We believe that China's aviation consumption is still in its infancy. The characteristics of low frequency and low penetration determine that the long-term space is huge, and the impact of economic fluctuations may be relatively limited. At the same time, international class increases will continue to absorb excess capacity from the supply side, driving the industry's supply and demand to continue to recover beyond expectations.
Under the supercarrier strategy, aviation network optimization enhances long-term value. Moments are an airline's core profit asset. Air China has the highest quality airline network and passenger source, and has long led the airline in profitability.
Holding Shanhang's rear fleet size is the largest in Asia. The supercarrier strategy will help the airline network continue to optimize its passenger base. In recent years, it has gradually obtained batches of high-quality moments such as Beijing and Chengdu, and long-term value will increase.
It is expected that future international class increases and demand growth will continue to drive supply and demand recovery and cost reduction.
When supply and demand recover, the company's high-quality airline network and passenger sources will show an increase in profits that exceed expectations. It suggests that airlines have options for falling oil prices, and that fuel cost reductions during peak seasons remain or catalyze optimistic expectations.
Risk warning. Economic fluctuations, oil prices and exchange rates, industry policies, growth and dilution, safety incidents.