Spring Airlines:3Q17beat with encouraging yield and int'l load factor recovery

48% profit growth amid improvement in passenger yield.

    Spring reported 3Q17 gross revenue growth of 28.9% YoY to RMB3.6bn on theback of 15.0% passenger traffic (RPK) YoY growth and passenger yield recovery,in our opinion. Meanwhile, operating expenses increased at a slower pace of27.0% YoY due mainly to an increase in capacity (ASK), higher fuel cost andtake-off/landing fees post CAAC price reform in April, according to the company.

    Together with 1) 22bps drop in SG&A to revenue ratio; 2) flattish net finance costand 3) limited investment loss (3Q16: RMB23.2m investment loss), the airlinerecorded a 36.6% YoY increase in operating profit to RMB696.9m. Helped byRMB195.0m non-operating income (+22.6% YoY) mainly from local airports routesubsidies, the airline’s 3Q17 net profit grew by 47.6% YoY to RMB633.9m. Ona 9M17 basis, Spring's unaudited reported net profit increased by 1.6% YoY toRMB1.2bn.

    Deutsche Bank view – yield recovery on track; maintain Buy.

    As Spring’s 9M17 profit accounted for 117% of our full-year earnings estimate and107% of consensus, we consider the results beat our expectation. Even though4Q is usually a slow season for Chinese airlines, we see upside risk to our fullyear forecast, due to a decent yield trend and recovery in the international loadfactor. In September, Spring recorded 10.3% YoY passenger traffic (RPK) growth,driven by 18.2% YoY growth in domestic passenger traffic but 3.0% YoY declinein international traffic. Passenger load factor improved 0.4ppt YoY to 89.6% inSeptember with international load factor recording YoY improvement (+2.9ppt to85.2%) for the first time since February.

    We maintain Buy as we expect the airline’s yield to bottom in FY17 with the loadfactor staying at c.92%. Our TP is based on 3.5x average FY18E P/BV, c.30%below Spring’s average P/BV of 5.0x since listing. We believe this is justifiedvs. sustainable ROE of about 15-16%. Key downside risks: excessive capacityaddition; competition from regional LCCs and Chinese airlines; and slower-thanexpecteddemand growth.