China Southern Airlines Provides Mixed Guidance

China Southern Airlines’ 600029 record loss in the fourth quarter of 2022 is well expected, but we are slightly disappointed with management’s mixed guidance. While the outlook for domestic travel is ahead of our expectation, the international travel outlook is sluggish. We raise our 2023 domestic capacity forecast to about 110% of the 2019 level, but cut our international capacity forecast to 36% of 2019′s level, from 85% and 65%, respectively. We now estimate CNY 7.8 billion in net income in 2023, up from CNY 0.4 billion in losses in our prior estimate, primarily due to a higher domestic passenger yield assumption. Our fair value estimate remains HKD 4.92. The H-share price is currently 11% above our fair value estimate. We think Tongcheng Travel is a better pick if investors would like exposure to the domestic travel recovery in China.

Although China Southern’s international seat capacity rebounded to 21% of the 2019 level in February, it only targets 30% of the 2019 level for this summer/autumn flight season. Management cited regulatory approval, travel visa, and ground service capacity as the main reasons for a slow recovery. In terms of regions/countries, Southeast Asia, Japan, South Korea and the Middle East would lead the recovery, whereas Europe and the U.S. would lag. We note that the number of flights between U.S. and China was only 6% of the 2019 level in the week of March 13 to March 19.