Incidents:

On April 29, 2024, China Eastern Airlines Logistics released its 2024 quarterly report:

In Q1 2024, the company achieved operating income of 5.224 billion yuan, a year-on-year increase of 14.17%, completed net profit of 589 million yuan, a year-on-year decrease of 22.64%, and completed deducted net profit of 527 million yuan, a year-on-year decrease of 19.83%.

By business, in Q1 2024, Air Express achieved revenue of 2,004 billion yuan, a year-on-year decrease of 17.05%; integrated ground services achieved revenue of 590 million yuan, an increase of 6.83% over the previous year; and integrated logistics solutions achieved revenue of 2,627 billion yuan, an increase of 63.95% over the previous year.

Investment highlights:

Low freight rate agreements dragged down Q1 performance and air express revenue growth, and integrated logistics solutions achieved high year-on-year revenue growth, driving total revenue growth

In Q1 2023, since the company is still in the process of implementing the previous high BSA tariff agreement, the company's gross margin and net interest rate levels were high. However, the freight rate agreement corresponding to Q1 of 2024 declined somewhat. At the same time, the freight rate in the spot market was lower than the same period last year, causing the company's gross margin of Air Express to drop 14.55 pcts to 15.57% year on year, and the gross margin of integrated logistics solutions fell 6.35 pct to 10.66% year on year. In the end, the company's air express revenue fell 17.05% year on year, net profit to mother fell 22.64% year on year, and net profit after deducting non-return to mother decreased 19.83% year on year.

Although the freight rate agreement implemented in Q1 2024 was lower than the same period last year, and the number of available shelves decreased by 1 year on year, the company seized the opportunity of rapid growth in cross-border e-commerce demand and continued to deepen the layout of the fresh cold chain sector, which enabled the integrated logistics solution to achieve revenue of 2,627 billion yuan, an increase of 63.95% over the previous year. The rapid development of integrated logistics solutions led the company to achieve revenue of 5.224 billion yuan in Q1 2024, an increase of 14.17% over the previous year.

The new tariff agreement cycle has begun, and the freight rate center is expected to continue to rise, driving performance growth. Due to the boom in the air cargo market in Q4 2023, airlines are raising contract prices for 2024 one after another. We expect China Eastern Airlines Logistics will begin implementing a new round of higher freight rate agreements starting in Q2 2024. Meanwhile, according to TAC data, the Shanghai Pudong Outbound Air Cargo Index (BAI80) averaged 4506.2 points in April 2024, up 4.03% year-on-year and 11.56% month-on-month. Against the backdrop of rapid growth in cross-border e-commerce demand, spot freight prices are also expected to continue to rise, driving the company's air express revenue and the company's performance growth.

Seizing the growth opportunities of cross-border e-commerce logistics, the sharp rise in volume and price is expected to increase performance flexibility. In recent years, cross-border e-commerce has become a new growth pole for China's aviation logistics development. The company actively grasps the growth opportunities of cross-border e-commerce logistics and has established business partnerships with leading cross-border e-commerce platforms and cross-border e-commerce logistics companies. Demand for cross-border e-commerce goods is expected to continue to grow at a high rate.

Against the backdrop of rising freight rates, the company is expected to achieve a sharp rise in volume and price, and performance may usher in significant growth.

Profit forecast and investment rating According to the company's 2023 annual report and 2024 quarterly report, we introduced the 2026 profit forecast. China Eastern Airlines Logistics's 2024-2026 revenue is estimated to be 25.441 billion yuan, 28.074 billion yuan and 30.604 billion yuan, respectively, and net profit to mother of 3,014 billion yuan, 3.491 billion yuan and 3.837 billion yuan, respectively. The corresponding PE for 2024-2026 is 9.64 times, 8.32 times and 7.57 times, respectively. Under the dividends of cross-border e-commerce, demand for air cargo has clearly changed marginally, and rising freight rates have increased the company's performance flexibility and maintained a “buy” rating.

Risks indicate the risk of macroeconomic fluctuations; risk of cross-border e-commerce falling short of expectations; risk of international trade friction; risk of European and American passenger flights exceeding expectations; risk of fuel price fluctuations; risk of exchange rate fluctuations; risk of compliance with overseas business operations; aviation safety risks; “new players” competing to enter the cross-border air cargo market; the risk of insufficient informatization, intelligent construction and innovation capabilities; and other force majeure and unforeseen risks.