Introduction to this report:

Aviation supply and demand are still recovering in 2024. The company's international routes are back to the lead, and the summer fleet turnover and passenger occupancy rate have basically recovered. When supply and demand in the industry recovers, considering the continued marketization of ticket prices and the deceleration in capacity, an increase in the profit center can be expected.

Key points of investment:

Maintain an increase in holdings. With aviation supply and demand recovering in 2012, the company's fleet turnover and passenger occupancy rate have basically recovered, and we look forward to future earnings performance. The company has abundant express line resources, and the aircraft order supplement will not change the deceleration plan. When the industry's supply and demand recover, the profit center can be expected to rise. Taking into account fluctuations in oil prices and demand, the 2024/25 net profit forecast was lowered to 2/47 billion yuan (originally 95/105) billion yuan, and the 2026 net profit forecast was added by 8.8 billion yuan. Referring to the A-share industry valuation, considering sustainability after rising profits, the target price was lowered to 5.94 yuan (originally 6.97) according to 2026 15 times PE.

Supply and demand in the industry are recovering, and losses continued to be reduced in the first half of the year. Supply and demand in China's aviation industry is recovering in 2023-24, and shows obvious demand characteristics during the off-peak season. The company actively increased international flights and took the lead in restoring the turnover of the international shipping fleet. Net profit to mother in the first half of 2024 was 2.8 billion yuan, and losses continued to decrease year-on-year. 1) Lead turnover recovery. The company's fleet size increased by nearly 13% compared to 2019, ASK increased by 10%, and the daily aircraft utilization rate and passenger occupancy rate were close to 2019; 2) Seats were higher than before the pandemic. Domestic ticket prices rose during the peak season of the Spring Festival travel season. International ticket prices fell back but were still higher than before the epidemic. Passenger traffic in the first half of the year increased 3% compared to 2019, and seat sales increased 1%. 3) Off-season supply and demand are under pressure.

The weakening of public and commercial demand compounded the transfer of wide-body aircraft to the domestic market, putting pressure on supply and demand, making it difficult to transfer high oil prices.

Turnaround during the summer season was the first to recover, and we look forward to future earnings performance. Demand for summer travel is still strong in 2024. Air passenger traffic increased by nearly 18% compared to 2019, and increased by more than 12% year over year, reaching another record high. The company seizes the peak season to actively resume international routes, focusing on additional outbound routes such as Japan, South Korea, Southeast Asia, Europe, and Australia. In July-August, international ASK took the lead in recovering positive growth compared to 2019, driving overall ASK to increase 16% compared to 2019, and to basically recover fleet turnover. At the same time, the company's summer passenger occupancy rate surpassed that of 2019 by 1.3 percentage points. Airlines' flexible revenue management accelerates turnover recovery in 2024. Future recovery in industry supply and demand and revenue performance will drive profit recovery.

The airline will supplement the aircraft's on-hand orders and will not change the capacity deceleration plan. Based on the persistence of bottlenecks in China's civil aviation sector for a long time, airlines generally rationally planned the 14th Five-Year Plan to slow down in 2019, and adjusted the 14th Five-Year Plan to further reduce the 14th Five-Year Growth Plan in mid-2023. The company's fleet size has grown at a compound annual rate of only 2% over the past five years. The slowdown in the growth rate of the fleet size will improve the negative drag effect of increasing investment in the third and fourth tier. In 2022/24, the three major airlines signed batch A320 and C919 aircraft purchase agreements one after another.

Considering that there was a serious shortage of orders in hand at the beginning of the 14th Five-Year Plan, the supplementary order was within planning expectations. At the same time, according to past data, the signing of large orders does not affect the airline's established capacity plans.

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