Results Review

1Q26 results beat market expectations

China Eastern Airlines (CEA) announced its 1Q26 results: Revenue rose 10.9% YoY to Rmb37.06bn; attributable net profit was Rmb1.63bn, a sharp YoY turnaround (vs. attributable net loss of Rmb1.00bn in 1Q25). The firm's 1Q26 results beat market expectations thanks to better-than-expected performance of international routes. However, the results are largely in line with our expectations.

International flights maintained rapid growth; unit yield of intercontinental flights likely improved. Due to the geopolitical situation in the Middle East, demand for direct flights between China and the Europe has increased. The firm's RPK of international routes rose 17.9% YoY in 1Q26, maintaining strong growth, despite a high base in 2025. In particular, the PLF of the firm's international routes rose 9.3ppt YoY in March, showing strong demand for its intercontinental routes despite the slack season.

In 1Q26, overall expense ratio fell 1.6ppt YoY to 9.38%, mainly due to falling financial expenses. CEA’s financial expenses fell 37.51% YoY to Rmb713mn, and financial expense ratio fell 1.49ppt YoY to 1.92%, thanks to optimized debt structure and higher FX gains. The firm's net margin jumped 7.4ppt YoY to 4.4% in 1Q26, driven by expense reduction and revenue growth. Net operating cash flow rose 44.64% YoY to Rmb3.46bn, and cash balance at end-1Q26 increased to Rmb12.09bn (+83.6% YoY). Ample cash flow lays a solid foundation for the firm to purchase new airplanes and cope with market fluctuations.

Trends to watch

We expect the firm's yield to improve notably in 2026. In our view, PLF of international routes may continue to improve notably YoY, and airfares may rise YoY thanks to increasing demand for intercontinental routes. We expect airfares of domestic routes to also grow YoY thanks to factors such as improving supply and demand conditions, "anti-involution" policies, and YoY improvement in business and business travel.

Financials and valuation

We maintain our 2026 and 2027 earnings forecasts at Rmb1.53bn and Rmb7.86bn. As we believe China's airline market may enter a stable state in 2027, we roll over valuation to 2027. CEA-A and CEA-H are trading at 12.2x and 9.7x 2027e P/E. We maintain our TP of Rmb5.9 for CEA-A and HK$4.9 for CEA-H, implying 16.5x and 12.1x 2027e P/E and offering 35.3% and 25.0% upside. The firm's earnings have improved markedly YoY. We maintain OUTPERFORM.

Risks

Sharp rise in international oil prices; slower-than-expected economic growth; renminbi depreciation a gainst the US dollar.