[Value Catalog]: Research Report Center with Views
Spring Airlines started as a travel agency and maintained a low-cost strategic positioning. In 2004, Shanghai Spring International Travel Service was approved to establish an airline, positioning itself as a low-cost airline, and adhered to the business model of "only using A320 series narrow-body aircraft and only setting up economy class" + "high passenger load factor and high aircraft utilization". In the 18 years since its first flight, the company's domestic aviation network has been increasingly improved, and the advantages of Shanghai hub airport's base and cooperation with regional bases have been highlightedThe international air network is dominated by Southeast Asia and Northeast Asia. In 2019, the domestic line contributed 65% of the revenue, and the international + regional line accounted for 35% of the total.
Under the test of the epidemic, the company's cost advantage is more obvious. In 2019 and 2022, the company's unit ASK cost was 030/0.38 yuan, the average value of the three major airlines is 040/0.78 yuan, before and after the epidemic, the difference between the company's unit cost and the three major airlines has increased significantly. The reasons are: 1) The company's fuel efficiency is higher than that of its peers, on the one hand, it benefits from the characteristics of a single cabin and high passenger load factor, and on the other hand, the company has developed a fuel-saving cause model to reduce hourly fuel consumption, and has continued to expand the proportion of fuel-saving models since 2018. 2) Non-fuel cost reduction, dilution of fixed costs such as leasing, depreciation, and maintenance by using a single aircraft type and engine to maintain high aircraft utilization. 
In recent years, the company's market share in the branch line has increased significantly, and the trunk market has achieved a breakthrough. In the six seasons from 2020 to 2022, the company's domestic flight volume market share has increased continuously, and the company's market share in the core business routes trunk and branch lines in the 2022 winter season is 404%/2.71%/4.60%, compared to the 2019 winter season -021/+0.81/+2.16pct。In terms of routes, the market share of core business decreased slightly, mainly due to the impact of the domestic flight of wide-body aircraft of Dahang, and the time resources of super first-tier airports were fiercely competitive in the early stage of the outbreak of the epidemicThe market share of the trunk line has achieved a breakthrough, of which the share of the first line and the second line has increased slightly, and the share of the second line has nearly doubledThe market share of regional lines has increased significantly, especially the growth of routes involving airports below one million is the most obvious. 
Why is the company able to expand against the trend?1) Ability to fly, cost advantage is the fundamental reason. 2) Before the epidemic, the company did base layout and cultivation in the domestic second- and third-tier markets, realized the card position, and seized the opportunity of the sinking of the industry's aviation network during the epidemic. 3) Higher flight rate + base advantage, entering a virtuous circle of time acquisition. 4) Strong cash flow, healthy balance sheet, and continued fleet expansion. 
A new situation has been opened in the changing situation, and the company's domestic supply and demand recovery is ahead of its peers. Since the beginning of the year, the demand for non-rigid travel has been gradually released, and the passenger throughput of non-first-tier airports has generally recovered better than that of first-tier airports, especially in popular tourist cities. Or benefit from the breakthrough in second-tier airports and the sinking of the aviation network during the epidemic, the company's domestic supply and demand recovery is significantly ahead of its peers;The load factor narrowed quarter by quarter compared to the same period in 2019. On the performance side, Q1 company took the lead in turning around losses, and achieved a net profit attributable to the parent company of 18 in Q3 peak season3.9 billion, a record high in single-quarter performance, and close to the level of the whole year of 2019, the profitability elasticity has been verified. 
Review of Southwest Airlines to find the long-term development inspiration of Spring Airlines. 1) Aviation network expansion is the only way to increase market share, for Spring and Autumn, through the cultivation of domestic bases + international destinations, there is still a lot of room for improvement in market share. 2) Southwest Airlines' emphasis on customer experience and brand building can leverage passenger repurchases, which is crucial to long-term development, and Spring Airlines currently leads the domestic LCC in comprehensive brand evaluation, but there is still a gap with full-service airlines. 3) On the basis of increasing the market share of the base + focusing on customer experience, supplemented by building a product matrix, it is an effective means to improve pricing power in a long-term dimension. 4) Refined control of costs is the foundation of LCC's operation, and the renewal and iteration of the fleet will help improve fuel efficiency.
Investment Advice:
In 2023, China's civil aviation industry ushered in a reversal of difficulties, with Spring Airlines taking the lead in turning around losses and leading its peers into the post-epidemic recovery channel, with a single-quarter performance in the Q3 peak season reaching a record high, and its profitability elasticity highlighted. In the medium term, aircraft manufacturers have a backlog of orders, the leasing market is rising, the certainty of supply slowdown is strong, and we are optimistic that the logic of supply and demand will be strengthened, and the optimization of the competitive pattern of the industry will be superimposed, and the performance elasticity will continue to be realizedIn addition, the policy guides the liberalization of entry and exit, and it is expected that the recovery of international flights will accelerate in 2024, wide-body aircraft will return to the international, and the elasticity of domestic fares will continue to be released.
In the long run, the company has the business resilience to go through the cycle and has a strong ability to resist risksAnd the product is more cost-effective, which will fully benefit from the growing demand for mass air travel. We expect that the company's net profit attributable to the parent company in 2023-2025 will be 247/35.4/47.300 million yuan, corresponding to the current stock price PE of 201/14.0/10.5 times. Considering the resilience and long-term growth of Spring Airlines' business model, it is expected to enjoy a valuation premiumDue to the company's positioning as a low-cost airline, there is no fully comparable company among A-share listed airlines, combined with Spring Airlines' historical PE valuation range, the company is given a 20x PE valuation in 2024, with a corresponding target price of 7224 yuan, the first coverage is given a "**a" rating.
This is an abridged excerpt from the report, the original PDF of the report
Spring Airlines (601021) Revisited the Investment Value of China's Leading Low-Cost Airlines - SDIC ** [Sun Yan, Song Shangjie] - 20231217 [Page 54].
Report**: Value Catalog