Incidents:

The company released the 2020 results announcement:

Operation: The company guaranteed a total of 129,700 aircraft take-off and landing during the reporting period, YOY -21.28%, including 128,500 take-off and landing in China, YOY -16.08%; 0.12,000 international and regional take-offs and landings, YOY -89.33%. The passenger throughput was 16.4902 million, or YOY -31.91%. Its domestic passenger throughput was 16.35 million, YOY -28.34%; international and regional passenger throughput was 142,200, YOY -90%.

Finance: Achieved operating income of 1,370 million yuan, YOY -13.12%, net profit of -1,340 million yuan, net profit of 50 million yuan after deducting non-return mother's net profit, YOY -3.17%. Looking at the breakdown: (1) aviation revenue was 463 million yuan, YOY -34.70%; (2) non-aviation revenue was 907 million yuan, YOY 4.56%. Among them, franchise revenue grew the highest, with a year-on-year increase of 35.35%.

Commentary:

1. The tax exemption logic is being implemented, and the deduction of non-performance is in line with expectations

The company achieved duty-free revenue of 559 million yuan throughout the year, and introduced duty-free sales at a 15% deduction rate of about 3.727 billion yuan, an increase of 61.27% over the previous year. 2020H1 and H2 companies achieved duty-free sales of 861 million yuan and 2,866 million yuan respectively, of which doubled growth in the second half of the year due to the new duty-free policy, slightly exceeding expectations. In addition to this, the company's various operating indicators are normal, excluding performance of 550 million yuan, which is basically in line with expectations.

2. Hainan Airlines was collectively reorganized. The one-time impairment loss was calculated as impairment losses totaling 1,882 billion yuan, including credit impairment losses and impairment losses of long-term equity investments of 501 million yuan and 1,389 million yuan respectively.

Credit impairment losses were calculated because HNA's related parties temporarily lost their solvency. Among them, losses due to bad debts of related parties were 313 million yuan, mainly losses of receivables and monetary funds. Another portion of the joint repayment promise lost 189 million yuan. This part stems from the fact that the company and parent company Haikou Meilan took out a joint loan of 7.8 billion yuan over a period of 20 years to jointly build the second phase of the project. Currently, parent company Haikou Meilan has triggered a breach of mutual loan agreement due to bankruptcy and restructuring. The lender may demand that parent company Haikou Meilan repay the 3.24 billion yuan it has already withdrawn and demand that the company repay the 1.94 billion yuan it has already withdrawn.

Since the parent company Meilan is limited in its ability to repay its debts, the company may be jointly liable for repayment, so the loss of the joint repayment commitment is calculated.

Impairment losses on long-term equity investments are calculated due to the bankruptcy and restructuring of the joint venture company Hainan Airlines Airport Holdings Co., Ltd. This time, due to careful consideration, all long-term equity investments are depreciated, and there is no risk of impairment in the future.

Overall, the company released possible risks in performance by calculating impairment in one go, and the downside was basically exhausted.

3. Considering the key role of airports in the construction of free trade ports, there is no need to worry too much about the short-term liquidity issue that the company currently has overdue short-term loans of 380 million yuan. The total syndicated loans that may be required to be repaid are 5.18 billion yuan, but only 292 million yuan in monetary capital, with total current assets of 671 million yuan. If syndicated lenders request repayment, serious liquidity risks may occur. Considering two aspects: ① The company's operating conditions are good, it has stable and continuously growing cash hematopoietic capacity, and the default incident was not caused by the company's own credit issues; there is no need for syndicated lenders to force collection to make the company's operation difficult; ② The syndicate lenders are composed of China Development Bank, the Hainan branch of the Industrial and Commercial Bank of China, and the Hainan branch of the Agricultural Bank of China. The main purpose of the loan funds is to build the second phase of the airport expansion project. Looking at it from a macro perspective, banks and airports serve the requirements of Hainan Province's 14th Five-Year Plan, which is to actively help Hainan Province develop into a regional aviation gateway hub facing the Pacific Ocean and the Indian Ocean. Based on the above two considerations, there will be broader coordination to ensure the normal operation of Meilan Airport, the core gateway to free trade port construction. There is no need to worry too much about short-term liquidity risks.

Investment suggestions: The company is expected to achieve total operating income of 1,888 million yuan, 2,257 million yuan and 2,621 million yuan respectively in 2021-2023; net profit of 590 million yuan, 861 million yuan and 1,126 million yuan respectively; corresponding PE is 2,023 million, 15.10 million and 11.53 million respectively. Neutral expects the company's duty-free sales to be about 10 billion yuan in 2025, the deduction rate is expected to rise to 25%, and the company's net profit is 2.5 billion yuan. There is still huge room for growth. Maintain a “Highly Recommended” rating.

Risk warning: short-term liquidity risks, tax exemptions falling short of expectations, the second outbreak of the domestic epidemic, the progress of the second phase of the expansion project falling short of expectations, and failure of targeted issuance