Incident: The company released its 2022 annual report and the first quarter report of 2023. It achieved revenue of 8.369 billion yuan for the full year of 2022, a year-on-year decrease of 2,499 billion yuan (-22.92%); realized net profit of 3,036 billion yuan, a decrease of 3,075 billion yuan over the previous year; and achieved net profit of 3.196 billion yuan after deducting non-return mother's net profit of 3.196 billion yuan, a year-on-year decrease of 3,086 billion yuan. In the first quarter of 2023, operating income was 3.863 billion yuan, +63.69% year on year, +118.99% month on month, +6.13% compared to 2019; net profit returned to mother was 356 million yuan, an increase of 793 million yuan over the same period last year, an increase of 1,655 million yuan over the same period in 2019, a decrease of 119 million yuan over the same period in 2019.

Both supply and demand sides of air transport were suppressed in 2022. Oil prices and exchange rates rose, and operating income and gross profit declined. The average passenger occupancy rate for the full year of 2022 was 74.7%, down 8.2 percentage points from the previous year. Passenger kilometer revenue increased 16.8% over last year, and passenger kilometer revenue on domestic routes in China increased 14.9% over last year.

The operating cost in 2022 was 11,590 million yuan, an increase of 259 million yuan over the previous year (+2.29% over the same period), and the unit cost was 0.382 yuan, an increase of 39.8% over last year. The increase in unit costs was mainly due to the record high price of aviation fuel, which caused the company's unit aviation fuel cost to rise by 60.3%.

The winter of '22 has passed, and losses were reversed in the first quarter of '23. Operating data showed a recovery in performance, and Spring Airlines showed profit resilience as an outstanding domestic low-cost airline. At the beginning of 2023, China's civil aviation industry ushered in an inflection point of recovery, and domestic backlog demand was released relatively well. Domestic passenger kilometer revenue in the first quarter increased nearly double-digit compared to the same period in '19. International and regional routes have also benefited from the rapid recovery in the Asia-Pacific market, and the recovery process has been better than expected. In March 2023, Spring Airlines' available seat kilometers on international and regional routes had recovered to nearly 40% of the same period in 2019. The passenger occupancy rate once returned to the same level as the same period in 2019, and at the same time, ticket prices continued to rise at a high level. Benefiting from a recovery in the aviation market, Spring Airlines turned a loss into a profit in the first quarter.

Investment advice: With the increase in the number of domestic and international routes, the aviation industry has recovered rapidly, and volume and prices have risen sharply. On the revenue side, Spring Airlines is based in Shanghai, and its base layout covers all major regions of the country. International routes focus on the Southeast Asian market and expand the Northeast Asian market; on the cost side, comprehensive cost optimization is achieved through refined cost management. We expect net profit to the mother for 2023-2025 to be 21.1/34.2/4.27 billion. Based on the latest closing price, PE is 26.1/16.1/12.9. Maintain the company's “buy” rating.

Risk warning: risk of macroeconomic fluctuations; risk caused by market competition; risk of policy change; risk of air transport industry competition; risk of fluctuations in aviation fuel prices.