2020 performance is in line with our expectations

The company announced its 2020 results: revenue was 1.558 billion yuan, down 0.6% from the same period last year; net profit was 218 million yuan, up 3% from the same period last year; net profit after deducting non-recurring profits and losses was 202 million yuan, an increase of 11% over the same period last year, basically in line with our expectations. In the fourth quarter, revenue was 477 million yuan, up 13% from the same period last year, and net profit was 78 million yuan, up 44% from the same period last year. The board of directors plans to pay a cash dividend of 0.75 yuan for every 10 shares, an increase of 6.5 percentage points to 21% compared with the same period last year.

The annual income in 2020 was basically the same, of which the income of navigation and transportation, navigation maintenance and financial leasing business reached 1.498 billion yuan, 36 million yuan and 25 million yuan respectively, up 2%, down 29% and 46% respectively over the same period last year. Although the combined number of flight hours fell 5.5 per cent from a year earlier, revenue from the navigable transport business still grew slightly, with revenue per flight hour up about 7.7 per cent year-on-year.

The gross profit margin improved and the financial expense rate declined, and the deduction of non-net interest rate improved slightly compared with the same period last year. The company's net profit margin after deduction for the whole year increased by 1.4 percentage points to 13.0% compared with the same period last year, mainly due to 1) the gross profit margin increased by 3 percentage points year-on-year to 29%. In 2020, the proportion of labor, aviation materials and fuel consumption in revenue decreased by 1% and 4% to 20% and 12%, respectively. 2) the financial expense rate fell 2.4 percentage points year-on-year to 2.9%, which we estimate is mainly due to a reduction in interest expenses (the company's annual average interest-bearing liabilities fell by 24% year-on-year) and exchange gains (RMB rose 7% against the US dollar in 2020).

Non-recurring income fell sharply compared with the same period last year. The company's non-recurrent profit and loss in 2020 was 15.95 million yuan, down 46% from the same period last year, mainly due to a decrease in income from the disposal of fixed assets and non-operating income such as compensation income from the suspension of air straight H225.

Trend of development

We think that the rising oil price may be good for the company's offshore oil business. Since the beginning of 2021, the average price of Brent crude oil has been 60.8 US dollars per barrel, up 17% from the same period last year. According to the CICC Group, the momentum of oil demand growth will shift from China to global engineering recovery this year, with oil distribution prices expected to reach $63 a barrel by the end of the year, from which we believe the offshore oil business may benefit. We expect the company's net profit in 2021 to increase by 14% year-on-year to 248 million yuan.

Steady progress has been made in the fixed increase project. The company's non-public share offering project has been approved by the CSRC on January 6, 2021: the company will issue shares (that is, 170 million shares) not exceeding 28% of the company's total share capital before the non-public offering to CITIC Investment Holdings and other issues. the total amount of funds raised shall not exceed 1.36 billion yuan (inclusive), and the funds raised will be used for the purchase of light helicopters, aircraft materials, aircraft maintenance, supplementary liquidity and other projects. We expect that the completion of the fixed increase will help improve the company's balance sheet structure and enhance the competitiveness of the core business.

Profit forecast and valuation

We maintain the company's net profit of 248 million yuan in 2021 and introduce a net profit of 273 million yuan for the first time. The company's current share price trades at 16.5 times 2021 earnings. Maintain a neutral rating and a target price of 6.90 yuan, corresponding to 16.9 times 2021 price-to-earnings ratio and 15.3 times 2022 price-to-earnings ratio, which has 2.4% upward space compared with the current stock price.

Risk

Offshore oil demand was lower than expected; the renminbi depreciated sharply against the dollar; and subsidies fell sharply.