9M19 revenue +0.2% YoY. Net profit -2.5% YoY. Adjusted net profit +0.5% YoY. RPK +6.2% YoY. Passenger load factor was 81.4%, up 0.5ppt YoY. For 4Q19, as China and US are marching towards a “phase one” deal, we reiterate our view that we expect domestic demand to release. However, in the context of China-US trade frictions and unrests in Hong Kong, higher proportion of international and regional routes is a double-edged sword. For 4Q19, we remain cautiously optimistic. We factor in our house view of 2019E average Brent crude oil, and raise TP from RMB 9.47 to RMB 10.40, corresponding to 1.5x 2020E P/B. Maintain BUY.
- 9M19 revenue in line. For 9M19, operating revenue increased 0.2% YoY to RMB 103bn, representing 74%/72% of our/consensus original full-year estimates. Net profit decreased 2.5% YoY to RMB 6,762mn, representing 93%/84% of our/consensus original full-year estimates. Net profit in 3Q19 increased 4.4% YoY, benefitting from increase in other income and investment income. Adjusted net profit increased 0.5% YoY to RMB 6,557mn.
- Disappointing operating results. For 9M19, RPK increased 6.2% YoY, lower than major peers (CEA +10.4% YoY, CSA +9.2% YoY). Although third quarter is a traditional peak season for business, student and tourism travel, traffic in 3Q19 increased 5.6% YoY, down 3.8ppt YoY. RPK from international/regional routes in 3Q19 increased 4.4%/0.7% YoY, as compared with 12.7%/7.8% in 3Q18. ASK increased 5.6% YoY, lagging management guidance of 9-10% at the beginning of the year. Passenger load factor was 81.4%, up 0.5ppt YoY.
- Cautiously optimistic 4Q19 outlook. For 4Q19, as China and US are marching towards a “phase one” deal, we reiterate our view that we expect domestic demand to release. However, in the context of China-US trade frictions and unrests in Hong Kong, higher proportion of international and regional routes is a double-edged sword. For 4Q19, we remain cautiously optimistic.
- Valuation. We adjust 2019/20E revenue down 0.7%/1.5% to reflect lower-than-expected traffic growth. After drone attack on two Saudi Aramco’s oil facilities, production resumed faster than expected, our house trimmed 2019E average Brent crude oil to US$64/b. We adjust 2019/20E net profit up by 20.6%/30.7%, and roll over TP to RMB 10.40. Our TP corresponds to 1.5x 2020E P/B. The stock is currently trading at 1.2x 2020E P/B, lower than historical average of 1.7x. Maintain BUY.
