The company turned a loss into a profit in 2023, and the tax exemption performance can be expected to be flexible. Conclusions and suggestions:
The civil aviation industry continued to recover in 2023, and a long-term boom cycle for the industry began. As an international aviation hub in the Yangtze River Delta region, the company successfully turned losses into profits. The recovery of international routes in 2024 is still the main line. Policies such as visa-free access will drive continued growth in international passenger flow, and the company's duty-free business is worth looking forward to. We believe that the company's profits will gradually recover, and the stock price is expected to break out of the bottom zone and give it a “buy” rating.
Comment:
Passenger traffic continued to recover in 2023, and the company's performance turned a loss into a profit: the company is an international aviation hub in the Yangtze River Delta region, fully benefiting from this round of civil aviation recovery. Among them, Pudong Airport had a cumulative total of 433,900 flights and a cumulative passenger throughput of 54 million passengers, which recovered to 84.77% and 71.54% respectively in the same period in 2019. Thanks to the continued recovery in passenger traffic, in 2023, the company achieved total operating income of 11.046 billion yuan, net profit after deduction of 842 million yuan (loss of 3,076 billion yuan in 2022), and revenue and net profit after deduction recovered to 100.92% and 16.89% respectively in 2019.
The policy drives the continued restoration of international routes, and the company's international passenger flow is expected to increase. In 2023, Pudong Airport's domestic flight business volume surpassed pre-pandemic levels, but international flight take-off and passenger volume only recovered to 53.5% and 38.6% in the same period in 2019. Delays in the resumption of international flights were mainly affected by issues such as air rights negotiations and visas. The US Department of Transportation recently announced that from March 31, China Airlines' direct flights between China and the US will increase from 35 per week to 50 per week, and stated that this move is an important step in the normalization of flights between China and the US in 2024. We believe that the resumption of international flights between China and the US is entering a period of acceleration. Furthermore, China has further tested a unilateral visa-free policy for 6 countries, including Switzerland, Ireland, and Hungary. The number of countries with the unilateral visa-free policy has increased to 12, while the number of countries with complete mutual exemption of visas with China has reached 23.
We believe that the recovery of routes between China and the US and the expansion of visa-free coverage will boost demand for international routes. As an international aviation hub in the Yangtze River Delta region, the company's aviation service revenue will be further recovered as international passenger flow is expected to grow.
The resumption of international passenger flow will drive the growth of the company's duty-free business. The duty-free business is an important source of the company's revenue. In 2019, the company's duty-free business achieved revenue of 3.788 billion yuan, accounting for about 35% of total revenue. According to the company's updated announcement in December 2023, the company's duty-free business will return to a higher commission and guarantee model, and the category commission ratio will be adjusted from 42.5% to 18%-36% (value by category). Under the new rules, although the company's duty-free commission ratio has declined, the commission amount can be changed to the guarantee calculation method during the pandemic, which will be accompanied by an increase in passenger traffic and sales. We expect the duty-free business to continue to benefit from the gradual resumption of international routes and increased passenger flow. Furthermore, in April 2023, the company successfully acquired 32% of the issued shares of UNI-Champion and 12.48% of the shares of Nisshang Internet, further building the competitive advantage of “airport+tax exemption”. Overall, the company's airport duty-free business layout is perfect. With the resumption of international passenger flow, we expect the flexibility of the company's duty-free performance to be released in 2024.
Profit forecast and investment advice: Benefiting from the recovery of air travel, the company's business volume has recovered steadily, and performance has picked up markedly. The company is expected to achieve net profit of 946 million yuan, 2.304 billion yuan, and 3.362 billion yuan in 2023, 2024 and 2025, with year-on-year losses, +143.65% and +45.92%, respectively. EPS for 2023, 2024, and 2025 will be 0.38 yuan, 0.93 yuan, and 1.35 yuan respectively. The current A share price corresponds to PE 94.78 times, 38.90 times, and 26.66 times, respectively. We believe that the company's profit will gradually recover, and the stock price is expected to break out of the bottom zone, and give the company a “buy” suggestion for this.
Risk warning: demand recovery falls short of expectations, geopolitical conflict, recovery of duty-free business falls short of expectations