Matters: The company achieved net profit of 0.25 million yuan due to mother in Q1, deducted from non-net profit of 0.15 million, the first Q1 profit since 2020, and a loss of 280 million yuan in 23Q1. We further analyzed the reason behind the performance exceeding expectations, and believe that the inflection point of the company's sustainable operation has emerged.
1. The Civil Aviation Administration's branch line subsidy policy was adjusted, and the company's other earnings increased dramatically in the first quarter. We expect that as a leading company in the branch market, the company may continue to benefit from this. The Ministry of Finance and the Civil Aviation Administration of China issued the “Notice on Revising the Interim Measures on the Administration of Regional Aviation Subsidies” in December 23, which was implemented in January '24. The main changes are:
1) There may be a significant increase in the amount of the one-hour subsidy.
Under the new method: uniform standards, according to a single hour subsidy. For flights at Plateau and Takaogaogen Airport, the central financial administration grants a subsidy of 12,000 yuan/hour for flights using regional aircraft; for flights using non-regional aircraft, the central financial administration grants a subsidy of 60,000 yuan/hour. For non-plateau and high-plateau airport flight segments, those using regional aircraft will be subsidized at 10,000 yuan/hour, and those using non-regional aircraft will be subsidized at 50,000 yuan/hour.
Under the old method, general branch line allowances are calculated and approved based on the number of passengers, and 9 types of subsidy amounts are divided according to the route area and passenger occupancy rate standards, ranging from 20 yuan/person to 180 yuan/person.
We simulated the hourly subsidy amount for orders placed under the old and new standards: taking the highest value of the three-tier passenger occupancy rate under the old policy, the maximum passenger volume was calculated separately according to the CRJ900 (89 seats) of Huaxia Airlines' main regional aircraft; at the same time, we also took the maximum single-person allowances of 60, 120, and 180 yuan for the first, second and third class subsidized routes, corresponding to the three-tier passenger occupancy rate. The average maximum single-hour subsidy value was 0.41 million per hour. If you use the average subsidy of 40, 80, and 120 yuan per person on subsidy routes under category 1, 2, and 3, the average three-tier single-hour subsidy is calculated to be 0.27 million yuan/hour. The calculation results were significantly lower than the hourly allowance amount under the new method (0.5/10,000 and 0.6/12,000 combined).
2) The new method focuses more on the scope of subsidized routes. The previous regulations stipulated that the scope of the subsidy was for the provincial and regional flight segments at least one end connected to the regional airport and the cross-provincial flight segment with a flight distance of 600 km; the scope of the new scheme was the flight segment connecting regional airports in remote and special regions at one end (with the exception of those connecting to the north to Guangzhou and Shenzhen), and the flight section of regional airports in non-remote and special regions connecting non-regional airports in remote and special regions. However, the new method has also relaxed the flight distance limit across provinces and regions to 900 kilometers.
3) Judging from Q1, the company's subsidy clearly benefited from the increase in the unit price of the subsidy. The company's other revenue reached 250 million yuan in the first quarter, +382.4% year-on-year, while in 2023, it reached a total of 530 million yuan. Other earnings have increased dramatically. The announcement revealed mainly the increase in government subsidies confirmed in this period. Previously, during the 2020-2021 period, the company's other revenue remained around 600 million, while 2024Q1 reached 250 million in a single quarter. Judging from the subsidy method, the utilization rate is still continuing to recover, mainly based on business volume accounting, considering the company's flight volume. Even with the same flight volume as Q1, it is expected to significantly exceed the previous normal level.
2. Operating side: Flight volume continues to recover
According to flight manager statistics, the average daily flight volume of the company in 2023 was 251, +88% compared to 19%; 23Q4 had an average daily flight volume of 284 flights, +166.8% year on year, compared to -11.1% year on year 19; and 301 flights per day in 24Q1, +50.4% year on year, +5.3% over year. This reflects a gradual recovery in the company's aircraft utilization rate.
In addition, the company has increased its efforts to repay accounts receivable. The 24Q1 credit impairment loss was +023 million, which is a provision for bad debts in response to accounts receivable in the current period, and the company's payables may improve.
Investment advice:
1. We continue to be optimistic about the regional aviation market space and the company's unique business model. Regional aviation is a blue ocean market with huge potential, and the company has leading market segmentation advantages: 1) Leading market segment size: covering half of domestic regional destinations, with a high proportion of independent flights. 2) Under normalization: The company has both growth and stability. 3) First-mover advantage, operational advantage, and innovative model jointly build core barriers.
2. Profit forecast: We maintain our 24-26 profit forecast to achieve net profit of 550 million, 9.1 billion, and 1.32 billion yuan, corresponding to 24-26 EPS of 0.44, 0.71, and 1.03 yuan, respectively. 24-26 PE is 15, 10, and 7 times, respectively.
3. Target price: We believe that the core driver behind the company exceeding expectations in the first quarter is sustainable. The inflection point of the company's operations has been shown, and it is currently at the bottom of the valuation. Considering that the company's 24-year flight volume is still recovering, we used the profit forecast for 2025, and based on the company's past PE and annualized growth rate, to give 25 times PE 15 times, with a target market value of 13.6 billion yuan and a target price of 10.7 yuan, 57% over the current space, emphasizing a “strong push” rating.
Risk warning: The economy has declined, the RMB has depreciated sharply, and oil prices have risen sharply.