Incident: The company released its three-quarter report for 2024. In the first three quarters of 2024, the company achieved total operating income of 102.6 billion yuan, +20% year-on-year, and achieved net profit of -0.138 billion yuan. In the 2024Q3 single quarter, the company achieved total revenue of 38.4 billion yuan, +6.23% YoY, +23.79%, and realized net profit to mother 2.63 billion yuan, -28.18% YoY, and +233.84%.

Comment:

Aviation demand continued to recover, and RPK surpassed 2019 levels. Since 2024, demand for domestic routes has maintained a recovery trend. Demand for overseas routes has recovered strongly. In the first three quarters, the company's RPK increased 40% year on year, up 11% from the same period in 2019. The RPK for domestic routes in China increased 16% year on year and the RPK for international routes increased 198% year on year. The company's RPK level in the first three quarters far exceeded the same period in 2019; the company's RPK increased 26% year on year in Q3 and 17% over the same period in 2019. On the ASK side, the company ASK increased 26% year over year in the first three quarters, and increased 14% year over year in the Q3 single quarter. In terms of occupancy rate, the company's occupancy rate increased 8.7 pct to 82.4% year on year in the first three quarters, and the occupancy rate in Q3 increased 7.9 pct year on year to 84.5% year on year, and the passenger occupancy rate continued to improve.

The decline in seat-kilometer revenue affects performance and strengthens unit cost control. Since 2024, with the introduction of capacity, competition in the aviation market has become fierce. In the first three quarters, the company's seat kilometer revenue was 0.46 yuan/ASK, down 4.5% year on year, and Q3 single quarter seat kilometer revenue was 0.48 yuan/ASK, down 7.0% year on year. Falling ticket prices were the main factor in the year-on-year decline in the company's Q3 performance. In terms of cost, thanks to falling oil prices and the company's excellent cost control, the company seat kilometer cost was 0.43 yuan/ASK in the first three quarters, down 5.5% year on year, and 0.42 yuan/ASK for a single quarter in Q3, down 2.6% year on year.

We are optimistic that aviation supply and demand will continue to recover, and pay attention to the pace of cost improvement. Looking ahead to the future market, demand for civil aviation is still expected to gradually recover under the dual drive at home and abroad. As of September 2024, the company operated a total of 790 aircraft, an increase of 8 compared to the beginning of 2024. The current fleet expansion rate is weaker than the historical cycle, which indicates that supply is still somewhat rigid in the medium term. Considering the recovery in demand for overseas routes and the digestion of new supply, we believe that the supply of listed airlines is still expected to be restrained in the medium term. Affected by sluggish demand for crude oil, the oil price center is expected to decline in 2025, thereby improving the pressure on airline costs. At the same time, the airline's lean control of costs is also expected to reduce unit non-fuel costs. We are closely monitoring the pace of airline cost improvement.

Profit forecast, valuation and ratings: Falling ticket prices put pressure on the company's Q3 performance. Considering the low season in the 24Q4 aviation market, the company may still lose money. We lowered our profit forecast for the company. We estimated the company's net profit to mother for 24-26 to be -22.24 (down 7.2 billion yuan) /50.96 (down 28%) /76.16 billion yuan (16%) billion yuan, respectively. We are still optimistic about the pace of demand recovery in the aviation market and the determination of an improvement in airline profits under rigid supply constraints in the medium term, so we maintain our “gain” rating for the company.

Risk warning: The recovery in aviation demand fell short of expectations, and international oil prices fluctuated greatly.