CHINA EXPRESS AIRLINES(002928)：1Q24 RESULTS BEAT ON SURGING OTHER INCOME;BUSINESS OPERATION CONTINUES TO IMPROVE STEADILY-格隆汇

机构：中金公司
研究员：Qibin FENG/Qikun WU/Xuejian ZHENG/Xin YANG

2023 results largely in line with market expectations; 1Q24 results beat
China Express Airlines (CEA) announced its 2023 and 1Q24 results. In 2023, revenue rose 95% YoY to Rmb5,151mn, and attributable net profit was -Rmb965mn (vs. -Rmb1974mn in 2022), in line with market expectations. In 1Q24, revenue rose 55% YoY and 24% QoQ to Rmb1,616mn, and attributable net profit was Rmb25mn (vs. -Rmb276mn in 1Q23). 1Q24 results beat market expectations, which we attribute to a sharper-than-expected YoY increase in other income.
Business operations continued recovering in 2023; unit non-fuel cost dropped. The firm's full-year ASK and RPK in 2023 rose 93% and 128% YoY, and PLF rose 11.6ppt YoY to 75.4%, down 5.3ppt from 2019. The firm's revenue from distribution to individuals and institutions rose 101% and 89% YoY, and RPK was Rmb0.44, up 7% from 2019. On the cost side, the firm's unit fuel cost dropped 8% YoY in 2023, and unit non-fuel cost fell 34% YoY but rose 7% from 2019. The firm recognized other income of Rmb528mn in 2023, up 47% YoY.
Earnings turned positive in 1Q24, partly supported by other income and write-back of credit impairment losses. The firm's ASK and RPK in 1Q24 rose 49% and 62% YoY, and PLF rose 6.4ppt YoY to 77.0%. In 1Q24, the firm's revenue per RPK (including revenue from institutional capacity purchase) fell 5% YoY to Rmb0.60. The firm's operating cost per ASK dropped 15% YoY to Rmb0.44. Other income per ASK rose 225% YoY, possibly due to improved operations in Xinjiang, and a change in the recognition period for subsidies from the Civil Aviation Administration of China (CAAC). The firm recognized Rmb23mn write-back for credit impairment losses in 1Q24.
Trends to watch
We suggest paying attention to possible earnings upside surprise in 2Q24, mainly considering: 1) According to the announcement, the firm plans to transfer a 100% stake in China Express Education & Technology at a valuation of Rmb604mn, which may contribute one-off income;2) as business operation continues to improve and the recognition period for subsidies changes, we expect the firm's recognition of subsidies from CAAC for regional airlines to continue or grow rapidly YoY in 2Q24.3) collection of payment by some local governments may lead to write-back of credit impairment losses.
Financials and valuation
We lower our 2024 and 2025 net profit forecasts by 18% and 16% to Rmb411mn and Rmb715mn, mainly because we lower our airfare growth assumption, and raise our full-year Brent oil price assumption (we have not factored in gains from the sale of China Express Education & Technology in 2024). The stock is trading at 17.2x 2024e and 9.9x 2025e P/E. We maintain OUTPERFORM, and cut our target price 8% to Rmb8.0, implying 25x 2024e P/E (considering possible continuous improvement in quarterly earnings and the market’s risk appetite), offering 45% upside.
Risks
Disappointing demand recovery for regional flights; sharp rise in oil prices; disappointing recovery in number of pilots.