3Q23 results slightly missing market consensus

Guangzhou Baiyun International Airport announced its 3Q23 results: In 1-3Q23, revenue rose 39% YoY to Rmb4.61bn, attributable net profit was Rmb274mn (vs. -Rmb627mn in 1-3Q22). In 3Q23, revenue rose 35% YoY or 12% QoQ to Rmb1.72bn, and attributable net profit was Rmb116mn (vs. Rmb113mn in 2Q23 and -Rmb110mn in 3Q22). The firm's results slightly missed market expectations, mainly due to slightly higher- than-expected cost and expense growth.

Operations continue to recover in 3Q23. In 3Q23, aircraft movements and passenger throughput rose 37% and 81% YoY, and domestic and international passenger throughput recovered to 105% and 55% of the levels in the same period of 2019, up 2ppt and 13ppt QoQ. The 3Q23 revenue growth was slower than passenger volume growth, which we attribute to 1) a 14% YoY increase in the volume of cargo transported and 2) the low revenue elasticity of some non-aviation businesses.

3Q23 operating cost and G&A expenses slightly beat expectations. The firm's operating costs rose 11.5% YoY in 3Q23 (vs. down 7% YoY in 1Q23 and 3% YoY in 2Q23). In 3Q23, G&A expense ratio rose 1ppt QoQ to 6.6%. Compared with the rapid recovery of business volume, we believe changes in the firm's operating costs remained relatively stable, but its cost and expense control in 3Q23 was slightly weaker than in 1H23.

Trends to watch

Steady progress in duty-free operation business. We believe the recovery of international customer traffic and per-customer transactions will remain important variables affecting the firm's future earnings. We suggest paying attention to the abundance of goods and the competitiveness of commodity prices at Baiyun Airport’s duty-free stores. The firm is also diversifying its product categories. According to the official Weixin account of Baiyun Airport DFS, it now has boutique brands such as Ferragamo, Chloe, Bally, and Coach.

Financials and valuation

We lower our 2023 and 2024 earnings forecasts 34% and 6% to Rmb453mn and Rmb1.33bn, as we revise down our assumption for passenger volume recovery. The stock is trading at 19.7x 2024e P/E. We cut our target price 6% to Rmb14.3 (25x 2024e P/E), offering 29% upside.

We maintain OUTPERFORM. We suggest keeping an eye on the performance of the firm's duty-free business, operations of duty-paid commercial business, and progress of the Phase III project.

Risks

Disappointing travel demand; fierce competition in duty-free channels; faster-than-expected capex.