Results Review

1H25 net profit in line with our expectationsJuneyao Airlines announced its 1H25 results: Revenue rose 1% YoY toRmb11.07bn and attributable net profit grew 3.3% YoY to Rmb0.51bn. In2Q25, revenue rose 2.1% YoY to Rmb5.34bn, and attributable net profitgrew 35.5% YoY to Rmb0.16bn. The firm's revenue and attributable netprofit were largely in line with our expectations.

Passenger traffic declined slightly YoY in 1H25, mainly due to theimpact of problems relating to Pratt & Whitney engines. The firm'spassenger traffic fell 0.8% YoY in 1H25, mainly due to the grounding ofsome A320 aircraft due to problems relating to Pratt & Whitney engine. Itsdomestic passenger traffic fell 6.2% YoY in 1H25. In our view, the impactof engine problems will likely continue to weigh on the firm's operations in2H25.

Airfares declined YoY but were higher than the industry average. In1H25, the firm's revenue passenger kilometers (RPK) fell 4.3% YoY toRmb0.45. Data from CADAS shows that industry average airfares fordomestic routes fell 9.2% YoY in 1H25. We believe the firm's airfares werehigher than the industry average.

Expansion of international routes continued to accelerate. The firmintroduced two B787 wide-body aircraft in 1H25 to further accelerate itsexpansion into long-distance intercontinental routes. Available seatkilometers (ASK) of the firm's international routes grew 65.6% YoY in1H25, ensuring an increase in its overall capacity.

Trends to watch

Revenue from international routes to improve steadily. In 2024, thefirm added several long-distance international routes. The returns of newroutes are usually low during the incubation period. As route operationsgradually mature, we believe airfares of international routes will risesteadily, and long-distance routes can effectively dilute fixed costs. Weexpect the firm's operating performance to benefit from its expansion ofinternational routes in the medium and long term.

Efforts to reduce financial expenses gradually paying off. The firmhas been stepping up efforts to reduce or replace high-interest dollarliabilities to lower interest expenses. In 1H25, its interest expenses fell18.4% YoY. We expect its financial expenses to decline further as itcontinues to reduce its US dollar-denominated liabilities.

Financials and valuation

We maintain our 2025 and 2026 earnings forecasts at Rmb1.59bn andRmb2.39bn. The stock is trading at 17.5x 2025e and 11.6x 2026e P/E. Wemaintain an OUTPERFORM rating and our TP of Rmb14.5, implying 19.9x2025e and 13.2x 2026e P/E and offering 14.3% upside.

Risks

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