3Q23 results in line with market expectations
China Express Airlines announced its 3Q23 results. Revenue rose 90% YoY to Rmb3.85bn in 1-3Q23. Net profit attributable to shareholders was - Rmb697mn (vs. -Rmb1.51bn a year earlier), in line with market expectations.
In 3Q23, revenue jumped 111% YoY and 40% QoQ to Rmb1.64bn. Net profit attributable to shareholders was Rmb55mn (vs. -Rmb558mn in 3Q22 and -Rmb476mn in 2Q23). We estimate attributable net profit excluding the impact of forex at Rmb37mn (vs. -Rmb406mn in 3Q22 and - Rmb306mn in 2Q23).
Operating data recovered as the market entered peak season in 3Q23; revenue per RPK remained flat compared with the same period of 2019. In 3Q23, A available seat kilometers (ASK) and revenue passenger kilometers (RPK) recovered to 109% and 106% of the levels in the same period of 2019, up 7ppt and 8ppt QoQ. Passenger load factor (PLF) was 80.1%, down 3ppt from the same period of 2019. In 3Q23, the firm's revenue per RPK (including flight sales to local governments and airports) was Rmb0.63, largely flat from 3Q19, and we project airfares for individual customers may have increased to some extent.
Operating cost per ASK fell sharply. The firm's operating cost per ASK fell 32% YoY and 4% QoQ to Rmb0.45 in 3Q23. Average domestic ex- factory price of aviation kerosene fell 25% YoY but rose 7% QoQ in 3Q23. We think unit non-fuel cost may decline YoY and QoQ as the firm's capacity utilization rate increases.
Trends to watch
We expect China Express Airlines to suffer a loss (excluding the impact of forex) in 4Q23. Our main assumptions include: 1) The firm's ASK will achieve high-single-digit growth compared with 2019; 2) PLF will be slightly lower than the level in the same period of 2019, and yield of individual customers will increase slightly compared with the same period in 2019; 3) according to the view of the CICC commodity team1, we assume Brent oil price will be US$90/bbl in 4Q23, and unit non-fuel cost will increase slightly from 3Q23; 4) According to the subsidizing plan for the civil aviation development fund2 released by the Civil Aviation Administration of China (CAAC), we assume the firm recognizes Rmb145mn in subsidies for feeder carriers this year (vs. Rmb175mn last year).
Financials and valuation
We lower our 2023 and 2024 net profit forecasts to -Rmb831mn and +Rmb631mn (from -Rmb329mn and +Rmb759mn), mainly because we raised our assumption for Brent oil price, and lowered assumptions for CAAC subsidies for feeder carriers and 2024 capacity growth. We maintain OUTPERFORM rating. The stock is trading at 13.3x 2024e P/E. We cut our target price 16% to Rmb8.7, offering 33% upside and implying 18x 2024e P/E. We suggest watching the firm's capacity recovery and aircraft utilization.
Risks
Disappointing capacity recovery; visible RMB depreciation against USD; sharp rise in oil prices.