The company leads the industry in cost control and operating capabilities. It is based on high-quality hub airports and actively lays out international routes. It is expected to fully benefit from the recovery of industry supply and demand in the future, with a bottom rise in performance and more room for flexibility.

Focus on building an “optimal cost structure” and lead the industry in cost control. The company focuses on core business and streamlining personnel and asset size through a young fleet and unified models, detailed planning and professional operation (such as adopting standardized system management measures such as rational layout of route networks, flexible allocation of flight times, accurate measurement of aviation fuel loading, real-time arrangement of inbound and outbound seats, etc.), thereby reducing operating costs throughout the process. 2024H1, the company's unit non-fuel cost is only 6% higher than Spring Airlines, and 26% lower than the average of the three major airlines.

The two brands compete differently, and the core market share is rising steadily. According to the 2024 winter and spring season passenger flight plan (including domestic+international+regional flights), the company (Jixiang+Jiuyuan Airlines) has a market share of about 10% in Shanghai, an increase of 0.3 percentage points over the 2019 winter and spring season, and its market position is steadily rising; it has a market share of 12% in Nanjing, an increase of 1.2 percentage points over the winter and spring of '19; and a market share of about 4% in Guangzhou, up 0.9 percentage points from the winter and spring of '19.

Actively lay out international flights, and intercontinental routes are beginning to take shape to achieve effective matching of the fleet and route structure. The 2024 summer and autumn season will add routes from Shanghai Pudong to Athens, Manchester, and Brussels, with 5 European navigation points (Helsinki, Milan, Athens, Manchester, and Brussels, with a total of 19 international destinations); the 2024 winter and spring season plans to add direct intercontinental routes from Shanghai to Sydney and Melbourne to further expand the coverage of long-haul routes. With the gradual deployment of long intercontinental routes, the operating efficiency of the company's wide-body aircraft was greatly improved (the B787 utilization rate reached 11.8 hours in the first half of '24), and optimized matching of the fleet and route structure was achieved.

Juneyao Airlines' historical profitability is significantly higher than that of the industry. Since the pandemic, thanks to leading cost control and operational capabilities, the bottom of the industry's performance is more resilient; looking forward to the future, bottom resilience is expected to shift to flexible performance: 1) As public business travel recovers and industry supply and demand heats up, the company relies on its stable share and differentiated market positioning in high-quality markets such as Shanghai. The middle and high-end business and leisure customer base is relatively high, and is expected to fully benefit from the profit and flexibility of ticket prices brought about by the restoration of industry supply and demand. 2) The company began introducing wide-body aircraft in 2018. Due to significant differences in operation, management, and maintenance between wide-body airliners and narrow-body airliners, the company's costs and stand-alone profits in 2018-2019 were under relative pressure. Since 2023, in the process of continuous recovery in industry demand and international routes, the company's wide-body aircraft operations have been on the right track. The degree of aircraft route matching and utilization rates have improved, and stand-alone profits are expected to release higher elasticity compared to pre-pandemic stand-alone profits. 3) During the pandemic, the company's profit deteriorated and the balance ratio and financial expenses increased dramatically, becoming an important factor dragging down the company's performance. In the future, as operating conditions and cash flow improve, balance sheet repair, and interest rate levels decline, the drag on financial expenses is expected to gradually decrease, accelerate performance growth and release flexibility.

Investment advice. We expect the company's net profit to be 1.2/1.7/2.4 billion yuan in 2024-26, respectively, and the current stock price corresponding to 2024-26 P/E will be 26/18/13 times, respectively. It is recommended to pay attention to the company's flexible performance when the industry boom recovers and maintain the company's “gain” rating.

Risk warning: The macroeconomy falls short of expectations, demand for civil aviation falls short of expectations; capacity introduction falls short of expectations; oil prices have risen sharply, and the RMB has depreciated sharply.