What's new
　　TravelSky Technology announced its Phase III share appreciation rights scheme. According to corporate filings, the board of directors plans to grant a total of 55.47mn share appreciation rights (representing 1.9% of the total share capital) to about 567 incentive recipients after performance- based granting conditions are met.
　　The share appreciation rights being granted to each incentive recipient will take effect by the end of the second anniversary (24 months), third anniversary (36 months), and fourth anniversary (48 months) from the date of grant in three instalments. The equity incentive plan is subject to the approval of the State-owned Assets Supervision and Administration Commission of the State Council (SASAC) and the extraordinary general meeting (EGM).
　　Comments Equity incentive coverage expanded; we suggest watching the conditions for the incentives to take effect. Due to the impact of theCOVID-19 pandemic, the firm's Phase II share appreciation rights scheme, which took effect in early 2020, was suspended at end-2021. The firm has expanded coverage of the Phase III share appreciation rights scheme compared with the previous one (the Phase II share appreciation rights scheme granted 35.96mn share appreciation rights to 502 incentive recipients, representing 1.23% of the total share capital).
　　We believe the share appreciation rights scheme will likely improve the loyalty of key employees. According to the relevant requirements of the performance appraisal system for equity incentives of state-owned enterprises, we expect the share appreciation rights to take effect when the firm’s earnings improve compared with the level at the time of grant and the performance of peers.
　　We expect the firm's operating results to continue recovering in2H23. For aviation information technology (AIT) services, we expect the processed volume in 2H23 to see a low single-digit increase compared with the 2H19 level. The processed volume for international routes of domestic airlines and international routes of foreign airlines recovered to　about 55% and 46% of the 2H19 levels. The combined unit price of the business may decline slightly from the 2H19 level.
　　For system integration services, we expect full-year revenue to decline in 2023, mainly considering the sharp decline in project settlement revenue in 1H23 and the decline in fixed asset investment in civil aviation in 2023.
　　We expect revenue from settlement and clearing services, data network services, and other businesses to grow YoY as business volume recovers.
　　However, we think the revenue growth may be slower than business volume growth.
　　Financials and valuation
　　We lower our 2023 and 2024 revenue forecasts 8% and 10% to Rmb7.7bn and Rmb8.9bn, as the recovery of business volume in the aviation sector slightly missed expectations in 4Q23. We keep our 2023 and 2024 earnings forecasts unchanged at Rmb2.23bn and Rmb2.67bn, as we lower our assumptions for operating costs due to the firm's effective cost control. We introduce our 2025 earnings forecast of Rmb3.09bn, assuming that the processed volume for its AIT business is likely to grow by low double digits in 2025 compared with 2019.
　　The stock is trading at 14.8x 2023e, 11.9x 2024e, and 10.0x 2025e P/E.
　　We cut our target price 11% to HK$16.8, implying 16x 2024e P/E with 35% upside (slightly lower than the historical average of 17.6x, considering that the aviation industry's long-term growth may slightly decelerate compared with the pre-pandemic level). Maintain OUTPERFORM.
　　Risks
　　Implementation of equity incentives disappoints; recovery of aviation industry and/or new business expansion disappoint.