Opinion on results – Neutral: Net profit increased by 19.5% YoY in 1H16toRmb740mn, 3.6% above our estimate. However, we view the -12.2% and -24.8%YoY weakness in GP and OP, respectively, as disappointing, missing our estimatesby 17.6% and 31.8%. Notably, led by significant challenges in 2Q16, GP and OPplunged by 39.7% and 69.7%, vs. 9.4% and 10.8% growth in 1Q16. Thanks tohigher-than-expected government subsidy income (Rmb531m), net profitincreased slightly, by 2.3% YoY, in 2Q16.
Ancillary revenues / Internet initiatives – Positive: In 1H16, ancillary revenuesincreased by 10% to Rmb330.9mn, driving segment GP up by 13% YoY with highersegment margin at 87% (+2ppt YoY). ASP further improved by 5% to Rmb50.4per passenger. Moreover, the company made more effort in fostering onlinesales that drove online revenues up 38% YoY to over Rmb2bn. As of 1H16, thenumber of online registrations reached 21mn while active online members rose18% YoY. The volume of Spring’s App downloads boomed by 328% YoY to 20mn.
Passenger services – Neutral: Despite limited capacity growth, RPK increased by7.5% YoY as the company reallocated capacity from domestic routes (-8.7% inRPK) to support international growth (+64.2% in RPK). Passenger revenues rosemarginally, by 0.1% YoY to Rmb3.7bn, amid -6.9% yield weakness. Specifically,yield declined on most routes (Domestic: -7.6%, international: -13.7%; regional: -5.9%). Overall PLF slightly fell, by 0.8ppt to 93%, with lower domestic (-0.02ppt)and international PLF (-1.0ppt).
Opinion on margin – Negative: Operating cost rose 3.5% YoY in 1H16, partlydriven by 48% YoY increase in depreciation cost that even offset the low fuelprices. GP fell 12.2% YoY, with -2.6ppt weakness in GP margin to 18.5%. As netfinancial expenses rose 36.2% YoY, OP dropped further, by 24.8% YoY.
Opinion on outlook – Positive: While 1H16results could have been hampered bylimited capacity growth with delayed fleet deliveries, we remain positive on 2H16,as the delivery of a total of 14new aircraft should boost overall growth.Moreover, we see a potential recovery in international yields.
