CHINA EXPRESS AIRLINES(002928)：2022 RESULTS IN LINE WITH MARKET EXPECTATIONS;CAPACITY LARGELY RECOVERS IN 1Q23

　　2022 results in line with market expectations; 1Q23 loss narrows
　　China Express Airlines announced its 2022 and 1Q23 results: In 2022, revenue fell 33% YoY to Rmb2.64bn, and net profit attributable to shareholders equaled -Rmb1.97bn (vs. -Rmb113mn in 2021), in line with market expectations. We estimate attributable net profit (excl. impact of FX) at -Rmb1.69bn in 2022 and -Rmb172mn in 2021.
　　In 1Q23, revenue rose 74% YoY to Rmb1.04bn, and net profit attributable to shareholders was -Rmb276mn (vs. -Rmb454mn in 1Q22). We estimate attributable net profit (excl. impact of FX) at -Rmb324mn in 1Q23 and-Rmb466mn in 1Q22.
　　In 2022, operating data fell sharply YoY due to the impact of COVID-19, but revenue per RPK remained solid; unit non-fuel costs rose sharply amid low utilization rate. China Express Airlines’ available seat kilometers (ASK) and revenue passenger kilometers (RPK) fell 30% and 38% YoY in 2022. The passenger load factor (PLF) fell 8.6ppt YoY to 63.7%, which we attribute to regional resurgences of COVID-19 and the firm's efforts to optimize safety operations. Revenue per RPK rose 25% YoY to Rmb0.50, which we attribute to high oil prices in 2022, a large proportion of flights driven by fixed travel demand, and a high proportion of exclusive routes.
　　On the cost side, China Express Airlines’ unit fuel costs climbed 67% YoY in 2022, mainly due to the sharp rise in oil prices. Unit non-fuel costs (incl. interest expenses) rose 44% YoY, which we attribute to the low utilization rate of airplanes. The firm recognized other income of Rmb355mn in 2022, down 39% YoY, mainly due to falling subsidies for regional airlines.
　　Operations improved notably in 1Q23. Amid the optimization of the COVID-19 response, China Express Airlines’ ASK and RPK increased 54% and 61% YoY in 1Q23, recovering to 100% and 87% of 1Q19 levels; the firm’s PLF rose 3ppt YoY to 70.6%. In 1Q23, revenue per RPK (incl. flight sales to local governments and airports) equaled Rmb0.62, up 8% YoY and down 4% from 1Q19. Operating cost per ASK fell 12% YoY to Rmb0.52. We estimate that unit fuel costs continued to rise along with rising renminbi-denominated oil prices, while unit non-fuel costs declined.
　　Trends to watch
　　Watch for recovery of transport capacity. According to CAPA, China Express Airlines’ ASK has been recovering since April, and its ASK at end-April posted high single-digit growth compared with the same period in 2019. We believe the firm is still building its route network and focusing on expanding capacity. We suggest paying close attention to the firm's future capacity expansion.
　　Financials and valuation
　　We cut our 2023 earnings forecast 48% to Rmb217mn, as the recovery of the firm's flight volume is slightly slower than we expected. We keep our 2024 earnings forecast at Rmb921mn. As the firm issued new shares at end-2022 (the number of the newly issued shares accounted for 26% of the original equity base), we adjust our EPS forecasts to Rmb0.17 for 2023 and Rmb0.72 for 2024. The stock is trading at 63.8x 2023e and 15.0x 2024e P/E. We maintain an OUTPERFORM rating and raise our target price by 18% to Rmb14.40 (excl. impact of the issuance of new shares), implying 20x 2024e P/E with 33% upside, given improving market sentiment toward the air transport sector amid recovering travel demand.
　　Risks
　　Sluggish travel demand; rising oil prices; renminbi depreciation against the US dollar; safety inspections disappoint.
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   【免责声明】本文仅代表第三方观点，不代表和讯网立场。投资者据此操作，风险请自担。