Expect 2023 net profit attributable to turn positive YoY

Spring Airlines preannounced its 2023 results, estimating that its net profit attributable to shareholders reached Rmb2.1-2.4bn in 2023 (vs. -Rmb3.04bn in 2022), turning positive YoY; net loss attributable to shareholders excluding non-recurring gains and losses was Rmb2.0- 2.35bn; and 4Q23 attributable net loss was Rmb280-580mn (vs. -Rmb1.30bn in 4Q22). The preannounced 4Q23 results were in line with market expectations.

Trends to watch

Business maintained solid growth; attributable net profit hit a record high despite headwinds. In 2023, the firm's earnings hit a record high (net profit attributable was Rmb1.84bn in 2019) despite rising oil prices and incomplete recovery of international demand, which we attribute to four factors: 1) The firm continued to add new aircraft during the COVID- 19 pandemic, and the number of aircraft at end-2023 rose 30.1% compared with end-2019, with growth much faster than the industry average; 2) the firm expanded its business during the pandemic and acquired high-quality routes and slot resources, laying a foundation for high-quality capacity expansion. Domestic available seat kilometer (ASK) in 2023 was 147% of that in 2019, and domestic passenger load factor (PLF) was only 2ppt lower than that in 2019, implying solid PLF despite robust capacity expansion; 3) cost control was effective; and 4) earnings benefited from easing price competition in the industry.

We expect the firm's earnings to further unleash growth potential as international flights increase and aircraft utilization rate increases. Two factors constrained the firm's capacity expansion in 2023. First, the number of pilots was still recovering, making it difficult to match the size of the firm's fleet. Second, for international routes, the firm mainly focuses on short-haul routes to Japan, South Korea, and Southeast Asia, and the capacity of its international flights was limited in 2023 as visas, travel demand, and airport ground support were still recovering. The full-year ASK of overseas routes was only 42% of the 2019 level, accounting for 16% of total ASK (vs. 34% in 2019). As the number of pilots increases and multiple overseas countries waive visa requirements for Chinese travelers, we expect the firm's capacity to improve further in 2024, unleashing growth potential for its earnings.

High visibility for earnings to hit a new high in 2024; watch demand during the CNY holiday and recovery of the firm's transport capacity. In 2024, we believe the firm's earnings may hit a new high driven by its enhanced operational capabilities, recovery of international flights, and improvement in domestic supply and demand conditions in the industry. We believe the Chinese New Year (CNY) travel rush is an important period to verify demand, given various demand from students, family visits, and business visits. We suggest watching sales volume and prices during the CNY travel period, progress in the resumption of international flights, and the firm's capacity recovery (i.e., increase in aircraft utilization rate).

Financials and valuation

We maintain our earnings forecasts for 2023-2025. The stock is trading at 14.3x 2024e and 12.4x 2025e P/E. We keep our target price unchanged at Rmb84.2, implying 22.6x 2024e P/E with 58% upside. Maintain OUTPERFORM rating.

Risks

Disappointing recovery of economic growth and international passenger traffic; sharp renminbi depreciation; sharp rise in oil prices.