Meilan Airport will be responsible for the increase of passenger flow to the island in the next five years, and the new capacity will open the bottleneck. It is estimated that the passenger throughput CAGR15%, will be the main driving force for the growth of aviation and duty-free income by 2025. Meilan Airport is expected to have tax-free sales of 11 billion yuan in 2025, and CAGR35.1% will grow at a high level in the next five years. Due to the impact of tax-free and high growth ironing capacity cycle, tax exemption on outlying islands resonates with capacity climbing. It is expected to grow at a compound growth rate of 39% in 2021-25, with a reasonable PE (ttm) of 20 times, and is optimistic about the company's market capitalization of HK $40 billion in mid-2025.

Meilan Airport is the first airport in China to have duty-free shops on outlying islands. The second phase of production has opened the bottleneck of production capacity, and the passenger throughput is expected to double by 2025. Meilan Airport aims to build a gateway airport in southern China to the world, with a throughput of 24.22 million passengers in 2019, with the domestic airport ranking 17th. 2020H1 Meilan Airport has opened 243departure routes, 139 navigable cities, and 53 aviation departments are in operation. The second phase of the project will be put into operation before the summer transportation in 2021, considering that the company will undertake the increase in passenger throughput or double in 2025. The new production capacity will be put into operation to welcome the policy dividend. From July to December 2020, the company's tax-free sales increased by 87.4%. The duty-free area increased to 34,000 square meters after the launch of the tax-free T2, and the largest airport duty-free shop in the country is expected to enjoy the policy dividend. It is expected that the company will be included in the Hong Kong Stock Connect in 2021, and the liquidity bottleneck is expected to be resolved.

The policy dividend continues to be released, and it is expected that the tax-free sales of Meilan Airport will reach 11 billion in 2025, and CAGR35% will see a high growth. The new tax-free policy for outlying islands will be implemented on July 1, and it is expected that tax-free sales on outlying islands will account for nearly 60% of the domestic tax-free market in 2020. The categories and popularity of duty-free goods on outlying islands have increased significantly, with per capita sales increasing by 71.4% in 2020, and duty-free sales on outlying islands are expected to double again in mid-2021. The airport has natural screening passenger flow, the maintenance cost is zero, and it is more convenient and quick to pick up goods. In April 2020, Meilan Airport and Haihai signed a new duty-free operation agreement, the term is "5-5" mode, the commission ratio is expected to remain in the range of 10-15%. It is estimated that the tax-free sales of Meilan Airport will be 11 billion in 2025, corresponding to 1.64 billion of the tax-free income, and CAGR35.1% will increase rapidly in the next five years.

The cost increment brought by the second phase of operation may be 730 million, the airport capacity upward cycle is coming, and the net profit of Meilan Airport is expected to be CAGR39% from 2021 to 2025. In 2019, aircraft takeoffs and landings and passenger throughput at Meilan Airport were-0.1% and 0.4% respectively compared with the same period last year, and the capacity bottleneck effect was highlighted. Capacity bottleneck and high demand to the island formed a mismatch, the second phase of the project is expected to resolve the pain point and usher in another growth. The total investment in the second phase of the airport project is 14.83 billion yuan (the company is expected to undertake 7.65 billion yuan). The company is expected to achieve more than 45 million passenger throughput in 2025, and aviation revenue is expected to grow by about 26% in the next five years. The cost increment brought about by the second phase of operation is 790 million, and the impact of tax-free high growth ironing production cycle is expected to increase by 39.3% in 2021-2025.

The tax exemption on outlying islands resonates with the production cycle and is expected to be reasonably valued at about 20 times. The company announced that it intends to acquire a runway and related assets at the price of domestic shares, with an estimated value of 1.52 billion, which is expected to be completed in 2021. If the acquisition of a runway and related assets is completed, it is expected to increase depreciation by 59 million on an annual basis, but aviation revenue is expected to increase by about 170 million. At present, the fixed increase plan is subject to the approval of the CSRC, and if the acquisition is completed, it is expected to improve the asset integrity of listed companies and reduce financial costs. The high boom of duty-free on outlying islands has brought about a revaluation of Meilan Airport, and the emergence of the epidemic has advanced the performance of the airport, so that the company will welcome the profit growth cycle of more than five years since 2020, taking into account the resonance between the tax exemption on outlying islands and the airport capacity cycle, and is expected to value PE (ttm) about 20 times.

Risk factors: the recovery of civil aviation demand is weaker than expected; the growth of airport tax exemption is not as expected; the first runway injection, landing and arbitration are not as expected.

Investment suggestion: Meilan Airport is the largest airport hub in Hainan Province. Under the background of limited capacity of Sanya Phoenix Airport, it is expected to undertake the increase of passenger flow to the island. The new capacity has opened the bottleneck, and it is expected that the passenger throughput CAGR15%, in the next five years will be the main driving force for the growth of aviation and duty-free income. Meilan Airport is expected to have tax-free sales of 11 billion yuan in 2025, and CAGR39.3% will grow at a high level in the next five years. The company is expected to have an annual EPS0.73/1.47/1.80 of RMB 1.64 billion in 2020-21-22 and is expected to make a profit of 1.64 billion in 2025, giving it about 20 times PE (ttm) and a target market capitalization of HK $40 billion in mid-2025. For the first time, coverage gives a "buy" rating.