1Q24 losses narrowed year on year, and we expect to take advantage of the peak season to pick up further; maintain “buying”
Air China's 1Q24 revenue was 40.066 billion yuan, up 59.8% from the same period. The net loss to mother was 1,674 billion yuan, which was significantly lower than our expected net profit of 1,342 billion yuan. 1Q23 had a net loss of 2,926 billion yuan.
Driven by the peak season of the Spring Festival travel season, the company's operations resumed further. However, the March operating data declined markedly, making 1Q24's net profit to mother lower than expected, and there is still a gap between 1Q19's net profit of 2,723 billion yuan. Considering that the recovery of the supply and demand structure is slower than expected, we adjusted 2024-26 net profit to 52.83/95.83/11.535 billion yuan (previous value: 103.41/154.12/18.539 billion yuan), and the 24-year BPS is 2.82 yuan, giving 24E PB A/H shares 3.5/2.0x (PB average A/H shares during the recovery period from 2010 to 2011 after the financial crisis, and considering that profitability indicators such as ROE are expected to achieve breakthroughs and give valuation premiums), target price A shares are RMB 9.90; H shares are HK$6.20, maintaining a “buy”.
The characteristics of the peak demand season are obvious. Driven by the peak spring travel season, the overall ASK/RPK of Air China increased 45.3%/62.7% in 1Q24, respectively, and the passenger occupancy rate increased by 79.5%, and 8.5pct, recovering to 124%/121% of 1Q19 (108%/102% in 4Q23). At the same time, we estimate that the revenue per passenger kilometer increased by about 3% compared to 1Q19, due to a year-on-year decrease of about 2% due to the high base. The final A-share 1Q24 revenue was $40.066 billion, an increase of 59.8% over the same period, and an increase of 23.1% over 1Q19. China's demand for civil aviation picked up month-on-month in April. We believe that during the “May 1st” holiday and peak summer season, demand is expected to peak again.
Losses narrowed year on year, but cost and cost pressure dragged down. There was a gap compared to 1Q19, the average price of aviation kerosene fell 4% year on year, but due to the need for further collaboration after the acquisition of Shanhang, the cost per seat kilometer increased slightly by 1.3% year on year, causing the company's 1Q24 operating cost to be 38.729 billion yuan, an increase of 47.1% year on year, and recorded gross profit of 1.337 billion yuan, an increase of 2,589 billion yuan compared to 1Q19. In addition, the company recorded investment income of 621 million in 1Q23, or mainly from Cathay Pacific contributions. Financial expenses increased 60.9% year over year to 1.705 billion, or due to a 0.2% appreciation of the value of US dollar against RMB in 1Q24 (1Q23, 1.3% appreciation of RMB against the US dollar), the company's net loss to mother narrowed month-on-month to $1,674 billion, but there is still a certain gap with 1Q19's net profit of 2,723 billion yuan.
Adjust the target price for A shares to RMB 9.90 and the target price for H shares to HK$6.20. We believe that with the steady recovery of international flights and the improvement of the domestic supply and demand structure, the company's profit during the peak season is expected to make further breakthroughs, and usher in a profit cycle in the medium to long term with the advantage of time and other resources. We will leave the 2024 PB A/H shares unchanged at 3.5x/2.0x. We expect BPS to be $2.82 in '24, and the target price is RMB9.90 for A shares/HK$6.20 for H shares (previous value was RMB11.00/HK$6.90 for H shares).
The quality of the company's routes is high quality. We continue to be optimistic about the improvement in industry supply and demand and the increase in overall ticket prices, which will drive the company's profits. The profit center is expected to increase and maintain “buying”.
Risk warning: Demand recovery fell short of expectations, fleet introduction exceeded expectations, economic downturn exceeded expectations, Cathay Pacific's return on investment fell sharply, oil remittance risks, and safety incidents.