3Q24 earnings slightly miss our and market expectations

Spring Airlines announced its 3Q24 results: Revenue edged up 0.48% YoY to Rmb6.10bn, largely in line with our expectations. Attributable net profit fell 32.4% YoY to Rmb1,244mn, slightly missing our and market expectations due to higher effective tax rate.

YoY decline in RPK widened in 3Q24 compared to 1H24, but was smaller than sector average decline. In 3Q24, passenger turnover rose 10.7% YoY but revenue remained largely flat YoY. We estimate the firm's RPK dropped nearly 10% YoY (vs. -2.5% in 1H24) but was still lower than the industry average decline (industry-wide domestic airfares fell 14.3% YoY in 3Q24 according to CADAS).

Effective tax rate rose notably in 3Q24. The firm's effective tax rate in 3Q24 was 23.4% (roughly close to the pre-pandemic level), up markedly from 9.5% in 1H24 and 6.6% in 3Q23. We expect the firm's effective tax rate to remain the same as or slightly higher than 3Q24 level.

Trends to watch

Sector airfares to stop falling and rebound in 2025; the firm to report above-sector average YoY growth in RPK. As international routes resume, we think more domestic transport capacity may be used for overseas flights, and domestic supply and demand structure may improve. We expect domestic airfares to stop falling and stabilize. In addition, price competition may ease as airlines seek to optimize balance sheet. As a leading low-cost airline in China, we believe the firm may record above- sector average airfare growth thanks to a rising proportion of business travelers and optimized route structure.

We expect the firm's capacity to maintain rapid growth thanks to continued fleet expansion in 2025, and rising aircraft utilization. According to the firm's announcement, the firm has placed few self-owned aircraft orders for 2025, but we expect it to expand its fleet by a net increase of eight in 2025 (+6% YoY) through leasing. Meanwhile, we expect its aircraft utilization rate to rise 10% YoY in 2025. We estimate that its capacity growth to reach 15% in 2025.

Financials and valuation

Given falling sector-wide airfares since the start of 2H24, we cut our 2024 and 2025 revenue forecasts 7.2% and 3.1% to Rmb19.82bn and Rmb23.33bn, cut our 2024 earnings forecast 12.9% to Rmb2.50bn, and maintain our 2025 earnings forecast (oil prices may continue to fall in 2025). The stock is trading at 22x 2024e and 17.1x 2025e P/E. We maintain OUTPERFORM, and cut our target price 5% to Rmb67.9, implying 26.6x 2024e and 20.6x 2025e P/E, and offering 20.7% upside.

Risks

Sharp rise in oil prices; slower-than-expected recovery of international flights; disappointing recovery of pilots.