Futu Securities reported that in 2025, the holidays will be extended by 2 days, which will help boost the demand for air travel and high-speed rail, suggesting investment in the travel sector. Currently, the aviation supply and demand will be optimized, with an anticipated turning point in supply and demand. If demand improves, the optimization of supply and demand will drive ticket price increases. Due to constraints in aircraft manufacturers and upstream component suppliers' production capacity, the future growth rate of the aviation industry's aircraft numbers will slow down. Combined with market-oriented ticket pricing, airline profit margins will be released. The aviation sector's beta is relatively high, with significant outperformance in a bullish market. Key attention is on the undervalued shares of the three major Hong Kong airlines.

Event

On November 12, the 'Decision of the State Council on Amending the Regulations on National Annual Holidays and Commemorative Days' was announced, to be implemented from January 1, 2025. The decision stipulates that all citizens will have an additional 2 days off, namely Lunar New Year's Eve and May 2. For holidays where all citizens are off, proper arrangements for unified holidays and rest days can be made, combined with the implementation of paid annual leave and other systems, effectively creating longer holidays. Except for specific circumstances, the statutory holidays before and after the holidays generally do not exceed 6 consecutive working days. The State Council General Office also issued a notice to the public on the holiday arrangements for 2025. According to the notice, in 2025, there will be an 8-day holiday for Chinese New Year, a 5-day holiday for Labor Day, and 8-day holidays for National Day and Mid-Autumn Festival.

Sinolink Securities' main points are as follows:

In 2025, the holidays will be extended by 2 days, which will help boost the demand for air travel and high-speed rail.

In 2025, all citizens will have an additional 2 days off, namely Lunar New Year's Eve and May 2. With the extension of the holidays, there is hope for stimulating consumers to take mid to long-distance trips, and the demand for air travel and high-speed rail is expected to increase. According to historical experience, the aviation market performs well during peak seasons. Taking the National Day holiday in 2024 as an example, the national civil aviation industry has served nearly 16.1 million passengers, with an average of 2.3 million passengers per day. The daily passenger volume has increased by 22% compared to the National Day holiday in 2019, and by 11% compared to the Mid-Autumn Festival and National Day holiday in 2023, exceeding the annual average growth rate.

The aviation supply and demand will be optimized, and the inflection point in supply and demand can be expected.

On the demand side, from January to September, China's civil aviation passenger traffic increased by 11% compared to 2019. In September, the international civil aviation passenger volume has already recovered to 94% of 2019. The industry has achieved natural growth, and it is expected that the overall civil aviation passenger traffic will maintain high single-digit growth in the future. On the supply side, the main airlines' fleet growth rate has only been 1.6% since 2024. It is expected that by the end of 2024, the number of airline fleets will have increased by only 14% compared to 2019, due to aircraft and engine manufacturers' capacity issues, it is projected that the future aircraft numbers will maintain a low single-digit growth.

Since the end of September, various policies have been introduced to stimulate consumption. The aviation industry, as an optional consumer product, will create travel demand if consumer purchasing power strengthens or confidence is restored. Optimizing supply and demand is expected to accelerate in the future, and there is hope that an inflection point in supply and demand will be reached in 2025.

The optimization of supply and demand combined with cost improvements is expected to significantly boost airline performance.

Referring to history, in 2009-2010 and 2014-2015, when demand growth significantly exceeded supply, airline performance grew significantly, and excess returns were evident. Taking Air China Limited as an example, from the end of 2008 to the end of 2010, its net income (TTM) increased from -9.1 billion yuan to 12.2 billion yuan, with the stock price rising by approximately 433%; from the middle of 2014 to the middle of 2015, the net income (TTM) of Air China Limited rose from 2.7 billion to 7.2 billion, with the stock price rising by approximately 385%. It is expected that by 2025, cumulative demand growth will surpass supply, leading to a substantial increase in profits.

Additionally, cost reduction will also increase profits. Fuel costs account for about three to four percent of airline costs. On November 11th, Brent crude oil futures closed at $71.83 per barrel, down 4% from the previous month. This decrease will lower airlines' fuel costs. A one percent change in oil prices can reduce fuel costs by 0.4-0.5 billion. Falling oil prices will release short-term profits.

Investment advice and valuation

Recommend the aviation sector including Air China Limited (00753), China Southern Airlines (01055), Spring Airlines (601021.SH), Juneyao Airlines (603885.SH), and Beijing-Shanghai High-Speed Railway (601816.SH).

Risk Warning: Risks of significant increase in oil prices, depreciation of the RMB exchange rate, risks of macroeconomic performance falling below expectations.