2Q23 results in line with market expectations

China Express Airlines announced its 1H23 results: Revenue increased 77% YoY to about Rmb2.22bn, and net profit attributable to shareholders equaled -Rmb752mn (vs. -Rmb951mn in 1H22). We estimate that attributable net loss excluding the impact of forex was Rmb625mn (vs. a loss of Rmb837mn in 1H22), in line with market expectations.

In 2Q23, revenue climbed 80% YoY and 12% QoQ to about Rmb1.17bn, and net profit attributable to shareholders was -Rmb476mn (vs. losses of Rmb497mn in 2Q22 and Rmb276mn in 1Q23).

Operating data recovered in 2Q23; revenue per RPK fell slightly. In 2Q23, the firm's available seat kilometers (ASK) grew 67% YoY and 2% QoQ, recovering to 102% of the level in 2Q19. Revenue passenger kilometers (RPK) rose 96% YoY and 11% QoQ, recovering to 98% of the level in 2Q19. Passenger load factor (PLF) equaled 74.8% (up 11% YoY, but down 3% compared with 2Q19). The firm's revenue per RPK (including flight sales to local governments and airports) equaled Rmb0.57, down 8% YoY, 9% QoQ, and 2% from the 2Q19 level.

Operating cost per ASK fell markedly. In 2Q23, the firm's operating cost per ASK fell to Rmb0.47, down 20% YoY and 9% QoQ. Considering that average domestic ex-factory price of aviation kerosene fell 23% YoY and 13% QoQ in 2Q23, we estimate that unit aviation fuel costs may have declined YoY and QoQ. In addition, with the recovery of captain resources and capacity, we expect the capacity utilization rate to increase, resulting in a decline in unit non-fuel costs.

Progress of airline network construction slightly recovered; continues to consolidate responsibility for production safety. As of late 1H23, the firm's airline network covered 38% of destinations nationwide (up 6% YoY, down 1% from end-2021) and had 150 in-flight routes (up 40 YoY and 7 from end-2021). China Express Airlines has implemented safe operations by improving work styles, pilot management, operating environment, and risk management.

Trends to watch

We expect China Express Airlines (excluding the impact of forex) to be slightly profitable in 3Q23 based on the following assumptions: 1) The firm's ASK will grow about 10% compared with 2019; 2) revenue per ASK stays largely flat with the same period in 2019; 3) oil price is about Rmb6,100 per tonne; and 4) a slight decline in unit non-fuel costs compared with 2Q23.

Financials and valuation

We cut our earnings forecasts to -Rmb329mn from Rmb217mn for 2023 and to Rmb759mn from Rmb921mn for 2024, as the firm's recovery of ASK is slightly slower than we expected. We maintain an OUTPERFORM rating, but we cut our target price by 28% to Rmb10.4, implying 18x 2024e P/E with 39.6% upside due to the speed of its capacity ramp-up may be slower than we expected.

Risks

Disappointing capacity recovery; visible renminbi depreciation against US dollar; sharp rise in oil prices.