2023 results miss our expectations

Juneyao Airlines announced its 2023 results: Revenue rose 145% YoY to Rmb20.10bn, and net profit attributable to shareholders turned around YoY to Rmb751mn (vs. -Rmb4.15bn in 2022). In 4Q23, revenue rose 145% YoY to Rmb4.22bn and net loss attributable to shareholders was Rmb382mn (vs. a net loss of Rmb1.18bn in 4Q22). The firm’s 2023 results missed our expectations, as renminbi depreciation and rising oil prices weighed on its earnings.

PLF decline narrows; RPK exceeds pre-pandemic levels. In 2023, the firm's passenger load factor (PLF) stood at 82.8%, with the decline narrowing to 2.4ppt compared with the 2019 level. Its revenue passenger kilometers (RPK) increased 5.8%, and revenue per available seat- kilometer (RASK) grew 2.8% compared with the 2019 levels. We believe that high oil prices and renminbi depreciation have weighed on the firm’s earnings. In 2023, the firm's unit fuel cost rose 24% from 2019, and the firm recognized a net FX loss of Rmb135mn in 2023.

Trends to watch

Upbeat on profitability thanks to flexible revenue policies and improved cost control. The firm's revenue per seat exceeded the pre- COVID-19 level in the first year after travel resumed, thanks to its efforts to develop business and leisure travel routes, as well as measures to optimize air ticket prices and PLF. The firm's PLF reached 83.0% in 4Q23, and its PLF in the slack season was only 0.1ppt lower than the pre- pandemic level.

We think this demonstrates the firm's high earnings and flexibility in capacity deployment. In addition, the firm strengthened cost control. Its full-year unit non-fuel cost fell 7.5% from 2019, even though aircraft utilization rate has not recovered to pre-pandemic levels (10.67 hours in 2019 vs. 10.34 hours in 2023). We expect the firm's profitability to exceed the pre-pandemic level in 2024, despite the pressure from rising oil prices.

Resumption of deliveries of 737 Max to boost growth; international flights to grow. The Civil Aviation Administration of China (CAAC) resumed receiving 737 Max aircraft in January 2024, and its wholly-owned subsidiary 9Air plans to introduce four aircraft in 2024. We think this should further boost the firm's fleet growth. Since 2023, the firm has launched new European routes from Shanghai to Manchester, Greece, and Brussels.

Coupled with the gradual maturity of the Helsinki route launched before the COVID-19 pandemic, we think the firm's European routes have entered a stage of large-scale operation and international capacity expansion. We believe this will likely improve the utilization rate and earnings of its twin-aisle aircraft.

Watch improvement in financial expenses and progress in overhaul of P&W’s engines. We think the pressure on the firm’s financial expenses rose due to the inclusion of operating leases in the balance sheet and rising interest-bearing liabilities during the COVID-19 pandemic.

Meanwhile, the firm incurred interest expenses of Rmb1.39bn in 2023 (vs. Rmb383mn in 2019), which we think has weighed on its profits.

In addition, we think the return of Pratt & Whitney’s (P&W) engines to factories for overhaul may weigh on the firm's capacity deployment. However, we expect the impact on the firm's operations to be manageable in 2024, as it started the overhaul process early. We expect the firm’s 2024 results to beat market expectations.

Financials and valuation

Considering the sharper-than-expected rise in oil prices, we lower our 2024 and 2025 earnings forecasts 16.7% and 17.5% to Rmb2.10bn and Rmb2.80bn. The stock is trading at 12.5x 2024e and 9.4x 2025e P/E. We cut our target price 21.4% to Rmb16.9, implying 17.8x 2024e P/E with 42.6% upside. Maintain OUTPERFORM.

Risks

Sharply rising oil prices; sharp renminbi depreciation; large-scale grounding of aircraft fleet due to engine issues.