Hainan provincial capital city trunk airport, capacity expansion "step up." Meilan Airport is located in Haikou City. Relying on the advantages of population base, commerce and convenient transportation in the provincial capital city, the company's production has increased steadily since the opening of navigation. From 2009 to 2019, the compound growth rate of aircraft takeoffs and landings and passenger throughput reached 9.1% and 11.2% respectively. We believe that the company's second phase of the project is expected to be officially put into production in mid-2021, with the addition of a runway and a 296,000 square meter terminal, doubling its production capacity, helping it to carry the main passenger flow increment in Hainan Province in the next five years, and further promoting the development of non-aviation business. We expect the passenger flow to reach 38.69 million in 2025. According to the latest 14th five-year Plan issued by the Hainan Provincial people's Government, Meilan Airport will be expanded in three phases in the future to meet the demand of 60 million passengers and 1 million tons of cargo and mail in 2035, which may become the largest civil aviation airport in Hainan Province.

The medium-term benefit Hainan Island "outlying island tax exemption" and "free trade port" construction policy is good. On June 1, 2020, the CPC Central Committee and the State Council issued the General Plan for the Construction of Hainan Free Trade Port, formally promoting the construction of Hainan Free Trade Port in an all-round way, and we believe that Meilan Airport is expected to benefit in the long term. In 2020, the tax-free policy on outlying islands was continuously liberalized, the amount of duty-free shopping per person per year was increased to 100000 yuan, and six new duty-free shops on outlying islands were opened at the end of the year. Benefiting from the return of international tourism demand to China under the epidemic, the number of tourists on Hainan Island rebounded rapidly, and the total sales of duty-free shops on outlying islands reached 32.7 billion (including tax) in 2020, an increase of 127% over the same period last year. Shen Xiaoming, secretary of the Hainan Provincial CPC Committee, said Hainan aims to achieve 7000-800 billion yuan of tax exemption on outlying islands by 2030. As the forerunner of the duty-free industry on the outlying islands of Hainan Island, Meilan Airport, relying on the advantage of natural flow, will also fully benefit from the dividend of the tax-free policy on the outlying islands, and the duty-free business is expected to grow at a high speed.

The government took over the airport and the debt crisis was resolved to some extent. On February 29, 2020, the Hainan Provincial people's Government led the establishment of the "Hainan HNA Group Joint working Group", which was formally stationed in HNA to defuse the risks. Haikou Meilan Airport and other major airports under the HNA Airport Group were taken over by the local government, alleviating the parent company's debt crisis to a certain extent.

Profit forecast and investment advice. Taking into account the factors such as the growth of the company's production capacity, the tax-free policy on outlying islands and the commissioning of the second phase of the project, 2021E/22E/23E revenue is expected to be RMB 100 million in 21-26-30, an increase of 54%, 21% and 16% respectively over the same period last year, and costs of RMB 100 million in 12-16-17, an increase of 65% and 35% respectively over the same period last year. The net profit was RMB 6.86, 7.81, 1.08 billion respectively, an increase of 57%, 14% and 42% respectively over the same period last year. As the company is expected to be included in the Shanghai-Hong Kong Stock Connect in 2021, the liquidity is increased and the valuation is expected to rise further. The comprehensive comparable company valuation is given a premium of 25-30X 2021E PE, resulting in a reasonable value range of HK $43.32-51.98. The company announced that it will issue additional shares in 2021, and we expect to dilute EPS by about 30% after the additional offering. We use DCF to estimate that the reasonable market capitalization of Meilan Airport is HK $33.3 billion, corresponding to HK $70.32 per share, and HK $54.09 per share after considering additional dilution. To sum up, we conclude that the reasonable value range is HK $43.32-51.98. For the first time, the coverage gives it a rating of "better than the market".

Risk hint. The recovery of production is not as fast as expected, the growth rate of tax-free income on outlying islands is not as expected, the debt liquidity risk of the parent company, the risk of transactions related to HNA enterprises, the recurrence of the epidemic, and so on.