3Q25 results missing our expectations

The firm announced its 3Q25 results: Revenue fell 1.9% YoY toRmb6.41bn; net profit attributable to shareholders fell 25.3%YoY to Rmb584mn. The results missed our expectations, mainlydue to disappointing transport capacity growth and falling airfares.

In 3Q25, the firm's transport capacity fell 1.4% YoY, withdomestic transport capacity down 7%. The firm's transportcapacity fell YoY in 3Q25. This was mainly due to aircraftgroundings caused by issues with Pratt & Whitney engines. As aresult, passenger turnover declined.

Ticket prices fell slightly but outperformed the industry. In 3Q25, passenger turnover fell slightly by 0.4% YoY, revenue fell1.9% YoY; airfares fell slightly but significantly outperformed the industry average.

Unit cost excluding fuel increased. The firm's unit operatingcost fell 1.0% YoY in 3Q25, but we expect unit cost excluding fuel to rise, given an 11.2% YoY decline in domestic oil prices.This is possibly due to: 1) higher expenses for aircraft takeoff,landing, parking, and meals due to a higher proportion of international flights; and 2) higher aircraft maintenance expenses.

Trends to watch

We expect the firm's transport capacity to grow by morethan 15% in 2026, resuming its growth trajectory. The firm'stransport capacity declines in 2025, mainly due to the impact ofaircraft groundings. However, the engine issue will likely beresolved in early 2026. Therefore, its transport capacity will likely maintain rapid growth in 2026.

Costs: Reducing foreign currency liabilities and financial expenses is the focus, and we expect these indicators tocontinue improving. In 3Q25, the firm's financial expenses fell16.6% YoY, which we think was mainly achieved by replacing high-interest US dollar liabilities, and there is still room for　　decline.

Financials and valuation

We cut our 2025 and 2026 net profit forecasts 38.3% and 19.4%to Rmb980mn and Rmb1.93bn due to slower-than-expected transport capacity growth and higher non-fuel costs in 2025. Thestock is trading at 28.9x 2025e and 14.7x 2026e P/E. We maintain an OUTPERFORM rating. As the valuation rolls over to2026, we keep our target price Rmb14.5 unchanged, implying32.4x 2025e and 16.5x 2026e P/E, offering 12% upside.

Risks

Sharp rise in oil prices; renminbi depreciation; engine problems linger longer than expected.