Traffic is strong, but net loss to return to destination increased year on year. To reverse losses, we still need to wait for Meilan Airport's 1H23 net loss to be 51 million dollars (1H22 is a net loss of 112 million dollars), which is lower than our previous expectation of net profit of 225 million dollars, mainly due to poor recovery in non-aviation services such as tax exemptions. Revenue was 1,066 million, up 71.2% year over year. The company's traffic entered the repair stage in '23, but the recovery of non-aviation businesses such as tax exemptions fell short of previous expectations, and the recovery still needs to be waited for. We predict net profit of 0.12/532/856 million from 2023-2025 (previous value: 414/872/1,209 million). We used the DCF valuation method, with a WACC of 9.7%, a sustainable growth rate of 2.0%, and a target price of HK$13.00 (previously HK$31.00). However, in the medium to long term, we are still optimistic that the company will use the dividends from the construction of a free trade port to make full use of the airport channel's monetization capabilities, and profits are expected to continue to pick up. Maintain a “buy” rating.

Traffic has recovered rapidly, but non-aviation monetization capacity has yet to be further recovered. 1H23's traffic has recovered rapidly. Passenger throughput was 1.05 million passengers, an increase of 161.9%, or 96% of the same period in '19; 88,800 aircraft take-off and landing, an increase of 99.3%, or 102% of the same period in '19.

Traffic recovery has boosted all of the company's businesses. The superimposed runway leasing was changed from revenue sharing to fixed rent, with aviation business revenue of 494 million, an increase of 132.5%; non-aviation business revenue of 572 million, an increase of 39.4%. Among them, franchise business revenue recorded 325 million, an increase of 41.2%, and the rest of non-aviation business revenue was 246 million, an increase of 37.2%. However, the increase in non-aviation revenue was clearly less than the increase in traffic, and the company's ability to monetize non-aviation traffic still needs to be further recovered.

There is some pressure on costs and expenses. The net loss to return to 1H23 slightly increased the company's operating costs by 972 million dollars over the same period last year, an increase of 87.4%. The increase was higher than revenue. The main reason was that under the fixed rent model, depreciation and amortization also increased by 239 million yuan. Additionally, the company began to be responsible for the overall operation of the airport in '23, and labor costs increased by 157 million. Cost pressure reduced the company's gross margin by 7.9 pct to 8.8%. In addition, 1H23's financial expenses also increased by 27 million yuan, and HNA Group's debt restructuring revenue, which was not obtained by 1H23 in the current period, was 23 million yuan. In the end, the company's 1H23 net loss increased by 39 million to 51 million over the same period last year.

Adjust the target price to HK$13.00 to maintain the “buy” rating

Based on the latest operating data and the recovery of the African airline business, we expect Meilan Airport's net profit to be 0.12/5.32/856 million in 23-25 (previous value: 414/8.72/1,299 million). Using the DCF valuation method, WACC is 9.7%, the sustainable growth rate is 2.0%, and the target price is HK$13.00 (previous value: HK$31.00). On August 21, the Hainan Provincial Department of Transportation issued the “Action Plan for Building a Regional Gateway Hub for Haikou Meilan International Airport to Liangyang Airlines (2023-2025)”. The goal is to achieve a passenger throughput of 30 million passengers and airport duty-free shop sales of 4.5 billion dollars by the end of 2025. We believe the company's profit is expected to continue to pick up in the medium to long term and maintain the “buy” rating.

Risk warning: Traffic growth falling short of expectations, duty-free sales falling short of expectations, related policy changes, operating costs and capital expenses exceeding expectations, loss of arbitration, and other events affecting the company's continued operation.