3Q24 earnings slightly miss our and market expectations

Juneyao Airlines announced its 3Q24 results: Revenue fell 0.2% YoY to Rmb6.54bn, and net profit attributable to shareholders fell 27.0% YoY to Rmb782mn, slightly missing our and market expectations, mainly due to YoY decline in airfares and QoQ increase in non-fuel costs.

Falling airfares weighed on operating performance in 3Q24. In 3Q24, the firm's available seat kilometers (ASK) increased 13% YoY, with that of domestic routes falling 2% YoY and that of international and regional routes rising 117% YoY. In 3Q24, the firm's revenue per ASK fell 12% YoY to Rmb0.44. Data from VariFlight shows that all-in airfares of domestic flights fell 14.3% YoY in 3Q24, and we believe falling airfares offset incremental capacity and weighed on business operations.

Non-fuel cost per ASK rose QoQ in 3Q24. In 3Q24, the firm's cost per ASK rose 5.6% QoQ to Rmb0.35. Considering the ex-factory price of aviation kerosene fell QoQ in 3Q24 and non-fuel cost per ASK increased QoQ, weighing on 3Q24 results. We attribute this to the grounding of some engines for maintenance in September.

Trends to watch

Supply and demand conditions continued to improve; we expect airfares to stabilize and recover, boosting the firm's earnings. Data from VariFlight shows that all-in airfares of domestic flights fell 17% YoY in October, and airfares have been under pressure YTD, reflecting the impact of the economic downturn on people's willingness to travel. We expect airfares to gradually rebound on improving industry supply and demand conditions and economic recovery, boosting the firm's earnings.

New international routes should improve the firm's profitability in the medium and long term. Since 2023, the firm has added a number of long-distance international routes, which we believe will help the firm absorb the capacity of wide-body aircraft in the slack season, and the high airfares of international routes. Coupled with subsidy income and freight income, this should enhance the profitability of international flights. We expect the new long-distance routes should boost the firm’s operating earnings in the medium and long term.

Repair of Pratt & Whitney engines led to the grounding of some aircrafts, but we think the impact is manageable. According to corporate filings, the firm's ASK of domestic flights fell 1.0% YoY in September 2024, and we attribute the decline to the suspension of some aircrafts (engines sent for repair) in the slack season. The grounding in the slack season should have limited impact on the firm's business operation, and we expect related engines to be returned before the 2025 Chinese New Year holiday. The impact on the firm’s business operations is manageable.

Financials and valuation

Given falling sector-wide airfares since the start of 2H24, we cut our 2024 and 2025 revenue forecasts 3.2% and 1.5% to Rmb22.99bn and Rmb25.47bn, and cut our 2024 and 2025 earnings forecasts 31.0% and 10.9% to Rmb1.14bn and Rmb2.24bn. The stock is trading at 25.5x 2024e and 13.0x 2025e P/E. Considering the improvement of medium-to-long- term profitability amid economic recovery, we maintain OUTPERFORM, and keep our TP unchanged at 28.2x 2024e and 14.4x 2025e P/E, offering 10.6% upside.

Risks

Sharp rise in oil prices; sharp renminbi depreciation against US dollar; delay in engine repair.