3Q24 results slightly miss our expectation

Shanghai International Airport announced its 3Q24 results: Revenue rose 2% YoY and 3% QoQ to Rmb3.13bn, and net profit attributable to shareholders grew 6% YoY and fell 10% QoQ to Rmb387mn, slightly missing our expectations due to lower-than-expectation revenue and higher-than-expectation expense.

3Q24 operating data solid; duty-free business still under pressure. In 3Q24, passenger throughput of the two airports in Shanghai rose 19% YoY and 9% QoQ, recovering to 106% of the level in 3Q19; passenger throughput on domestic and international routes rose 9% and 52% YoY, recovering to 116% and 88% of the levels in 3Q19. We believe the firm's aviation-related businesses continued to benefit from recovering business volume. In 3Q24, the firm recognized Rmb267mn in rental income from duty-free contracts, down 50% YoY and 11% QoQ. It may take time for duty-free consumption at ports to turn around, in our view.

Costs and expenses increased slightly. In 3Q24, the firm's operating costs edged up 2% both YoY and QoQ amid solid cost control. The firm's financial expenses grew 12% YoY and 45% QoQ in 3Q24, partially weighing on its profit.

Trends to watch

Continue to advance equity incentives. According to corporate filings, in October 2024, the firm granted the first batch of shares included in its A- share restricted stock incentive plan, granting 8.29mn restricted shares (0.3% of total share capital) to 290 eligible participants at a price of Rmb18.21966/sh.

Compensation for expropriation of property may boost earnings. According to the company's announcement, the People's Government of Pudong New Area, Shanghai has decided to expropriate part of the firm's property located at No.2 Haitian 5th Road, Pudong New Area and take back the state-owned land use rights with compensation of Rmb689mn. The deal is yet to be submitted to the general meeting of shareholders for approval, and if completed, we expect the deal to have a positive impact　on the firm's earnings.

Financials and valuation

We lower our 2024 and 2025 net profit forecasts 6% and 8% to Rmb1,782mn and Rmb2,488mn, mainly due to lowered assumptions for duty-free shopping sales. The stock is trading at 49.2x 2024e P/E and 35.3x 2025e P/E.

We maintain an OUTPERFORM rating and our target price of Rmb38, implying 38x 2025e P/E (we raise our target P/E to 38x considering the recent improvement in market risk appetite towards the consumer sector), offering 8% upside.

Risks

Disappointing travel demand; fierce competition in the duty-free business; higher-than-expected capex.