2024 earnings miss our forecast

Juneyao Airlines announced its 2024 results: Revenue rose 9.9% YoY to Rmb22.09bn, and net profit attributable to shareholders grew 21.7% YoY to Rmb914mn, both missing our expectations due to lower-than- expected airfares.

The firm’s airfares declined notably in 2024, largely in line with industry trend. In 2024, revenue passenger kilometers (RPK) of the firm's A320, B787, and B737 models dropped 8.1%, 14.1%, and 6.8% YoY, largely in line with the trend of industry average airfare.

Expansion of international routes accelerated; new intercontinental routes increased capacity utilization of wide-body aircrafts. In 2024, the company added five intercontinental destinations (e.g., Athens, Brussels, Manchester, Sydney, and Melbourne), which further increased capacity utilization of its B787 aircrafts. In addition, passenger and cargo transport on European routes is more lucrative. In 2024, the firm's available seat kilometers (ASK) of international routes grew 141.1% YoY, and the proportion of international routes in total capacity increased to 21.8%.

Cost control improved. In 2024, the firm's operating cost per ASK fell 5.6% YoY to Rmb0.34, and its operating cost (excluding oil) per ASK declined 8.7% YoY to Rmb0.21. We believe this is largely due to cost dilution following accelerated expansion of international routes.

Dividend payouts and share buybacks continued. The firm's cash dividend ratio reached 45.3% in 2024 (the second highest in history). Cash dividends and the value of shares that were repurchased with cash and cancelled totaled Rmb590m, accounting for 64.7% of the firm's net profit attributable to shareholders in 2024, showing that the firm attaches great importance to shareholder returns.

Trends to watch

Revenue from international routes to improve steadily. In 2024, the company added a number of international routes, and profitability of new routes is usually low. As route operations gradually mature, we believe airfares of international routes will rise steadily, and long-distance flights can effectively dilute fixed costs. We expect the firm's operating earnings to benefit from increased international routes in the medium and long term.

Repair of Pratt & Whitney engines led to grounding of some aircraft, and may continue affecting business operations in 2025.We think the repair of Pratt & Whitney engines will remain an impact on the company’s business operations in 2025. However, we think the impact can be minimized through capacity allocation in slack and peak seasons.

Financials and valuation

We cut our 2025 revenue forecast 8.7% to Rmb23.23bn and cut our 2025 earnings forecast 29.1% to Rmb1.59bn due to weak industry airfares in 1Q25.We introduce our 2026 earnings forecast of Rmb2.39bn. The stock is trading at 18x 2025e and 12x 2026e P/E. We maintain OUTPERFORM and target price (considering the firm's potential earnings growth in 2026), implying 20.0x 2025e and 13.3x 2026e P/E, offering 14.2% upside.

Risks

Sharp rise in oil prices; sharp renminbi depreciation against the US dollar; recurring engine problems; lower-than-expected airfares.