Recommended logic: 1) The regional aviation subsidy method was revised, and the subsidy method was optimized. 2024Q1's other revenue was about 246 million yuan, which is much higher than the same period in history; 2) The company's capacity investment increased steadily, and the passenger occupancy rate continued to rise. 2024Q1's net profit was 24.67 million yuan, an increase of 108.9% year on year, turning a loss into a profit; 3) According to the Civil Aviation Administration's plan, the number of flights per capita will double by 2035 compared to 2019. The company continues to iterate the business model and is expected to benefit from China's regional aviation development in the long term.
China Airlines: A leading private airline focusing on regional routes. As of 2024Q1, the company had a fleet size of 72 aircraft, with an average age of 5.85 years. It positions the regional aviation market's business model and clear first-mover advantage, and has accumulated valuable time resources through the feeder network established by transit and Huanfly. Cooperating with mainline carriers to operate transit products through reverse capacity procurement is a harvest of long-tail demand for air travel and a Pareto improvement in the operating efficiency of the entire industry. We are optimistic about the company's sustainable growth in Tongcheng products.
Business model: The certainty of regional aviation growth. The CPA model is widely used in the US, enabling regional flight connections for large key airlines, eliminating the risk of operating regional routes, and bringing greater flexibility to airline operations. China Airlines signed CPA agreements with government and airport customers to ensure that profits can be achieved at high unit costs, and profit margins continue to be higher than the industry average. In addition, the networked operation model for the Huaxia Airlines regional market is gradually maturing, and the network operation model using regional hubs to develop the branch market has been increasingly verified. Typical examples include the Xingyi model, Bijie model, and Korla model.
Utilization rates continued to recover, subsidies increased year-on-year, and 2024Q1 reversed losses. 2024Q1's ASK and RPK increased 48.6% and 62% year over year respectively, passenger occupancy rate was 77%, up 6.4pp year on year, and the current gross margin recovered to 3.9%; at the same time, the new branch subsidy policy favoured the company, and the company's other revenue increased by 195 million to 246 million yuan year on year; in addition, credit impairment losses in the current period achieved revenue of 0.23 million yuan, mainly due to the impact of bad debt preparation for previous accounts receivable. In summary, 2024Q1 reversed the year-on-year loss from net loss of 276 million yuan to mother of 25 million yuan.
Profit forecast and investment advice: The company's revenue for 2024/25/26 is estimated to be 73.7, 91.6, and 10.14 billion yuan, respectively, with net profit attributable to mother of 3.8 billion yuan, 8.7 billion yuan, and 1.26 billion yuan for BPS, respectively. The corresponding PB is 2.3, 1.9, and 1.5 times, respectively. Referring to comparable company valuations, we gave the company 2.8 times PB in 2024, corresponding to the target price of 8.01 yuan, covered for the first time, and gave it a “buy” rating.
Risk warning: macroeconomic cycle fluctuation risk, aviation industry policy change risk, aviation fuel price fluctuation risk, exchange rate fluctuation risk, etc.