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Shanghai International Airport has announced a draft for its restrictedshare incentive plan, proposing to grant up to 10.51mn restrictedA-shares (0.42% of the firm’s current total shares) to no more than 300employees (e.g., board directors, senior executives, and other keyemployees) at a price of Rmb18.44 per share in the initial stage.

The restricted shares of the equity incentive plan will be “unlocked” inphases. In the 24–36 months, the 36–48 months, and the 48–60 monthsafter the completion of the registration for granting the restricted shares,40%, 30%, and 30% of the restricted shares will be unlocked. To unlockthe restricted shares, the firm must meet certain financial performancetargets. For example, the firm’s EPS should be no less than Rmb0.71 in2024, Rmb0.84 in 2025, and Rmb0.98 in 2026 (and not lower thanindustry average), its net profit attributable to shareholders in 2024, 2025,and 2026 should grow at least 90%, 125%, and 160% compared with thatin 2023 (and not lower than industry average), and its gross margin in2024, 2025, and 2026 should be no less than 19%, 22.5%, and 26%.

The plan still awaits approval from the State-owned Assets Supervisionand Administration department of the Shanghai municipal government andthe shareholders meeting of Shanghai International Airport.

Comments

Equity incentive to align the interests of the firm’s management withits long-term growth. We calculate that the firm’s financial performancetargets for unlocking the restricted shares (the firm’s net profit attributableto shareholders should grow at least 90% in 2024 and 125% in 2025compared with that in 2023) imply a net profit of Rmb1.77bn for 2024 anda net profit of Rmb2.1bn for 2025, 34% and 39% lower than our earningsestimates for the firm, and 36% and 48% lower than Wind consensusestimates. We expect the industry-wide average earnings growth rates tobe similar to the absolute growth rates provided by the firm.

Based on our estimates, earnings of Baiyun International Airport in 2024and 2025 are likely to grow 172% and 181% compared with those in 2023,earnings of Shenzhen Airport in 2024 and 2025 are likely to grow 9% and60% compared with those in 2023, and earnings of Xiamen InternationalAirport in 2024 and 2025 are likely to grow 40% and 47% compared with 　　those in 2023. Beijing Capital International Airport still suffered a loss in2023. According to the draft for its restricted share incentive plan,Shanghai International Airport expects the equity incentive to effectivelymotivate its management team, improve its operational efficiency, andalign the interests of its management team with the firm’s long-termgrowth.

Equity incentive may result in additional G&A expenses. Based on thedraft, if 8.41mn restricted shares are granted to employees in the initialstage on May 14, 2024, it may result in total costs of about Rmb154.69mn,implying an amortized cost of Rmb36.71mn for 2024 and an amortizedcost of Rmb58mn for 2025.

Financials and valuation

We lower our 2024 and 2025 earnings forecasts by 19% and 23% toRmb2,676mn and Rmb3,439mn, as we revise down our estimates for percustomersales of the duty-free shopping business based on recentoperations of the business. The stock is trading at 34.3x 2024e and 26.7x2025e P/E. We cut our target price by 5% to Rmb38, implying 35x 2024eP/E (our previous target price implies 30x 2024e P/E, mainly because wetake into consideration the improving risk appetite for the firm amid thecontinuous recovery of international flights), offering 3% upside. Wemaintain OUTPERFORM rating.

Risks

Disappointing tourist traffic recovery and/or sales of duty-free shoppingbusiness; higher-than-expected capex.