Preannounced 2023 earnings miss market expectations
TravelSky Technology preannounced its 2023 earnings, estimating its 2023 net profit at Rmb1.25-1.45bn (vs. Rmb679mn in 2022) and 2H23 net profit at Rmb42-242mn (vs. Rmb1.21bn in 1H23 and Rmb223mn in 2H22). We think the firm’s 2H23 earnings missed market expectations, possibly due to weaker-than-expected performance of some revenue- and cost-related financial data.
Trends to watch We think the firm's 2H23 earnings missed market expectations, possibly due to multiple factors related to revenue and cost. First, we think the firm’s revenues from the system integration service business and some other businesses were lower than expected, and revenue growth of these businesses may decline as the main revenue growth driver for these businesses is not air passenger volume. Second, we think the firm’s labor costs increased considerably, and its per-capita salary rose to some extent amid YoY improvement in business operations and profits. Third, we think the firm’s technical support and maintenance expenses were higher than expected due to increased R&D spending. Fourth, we think the firm’s possibly lower-than-expected earnings could also be attributed to one-off factors such as accounts receivable impairment loss provisions.
Aviation information technology (AIT) business recovering. In 2023, the processing volume of the firm’s systems for domestic routes of domestic airlines, international routes of domestic airlines, and international routes of foreign airlines recovered to 92%, 41%, and 42% of their levels in 2019.
Keep an eye on the progress of the firm’s equity incentive scheme.
On December 28, 2023, the firm announced the proposed adoption of phase III of its share appreciation rights (SARs) scheme, which still needs approval from the State-owned Assets Supervision and Administration Commission (SASAC) and from shareholders at the firm’s extraordinary general meeting scheduled to be held on January 25, 2024.
According to a company announcement, the exercise price of the SAR scheme shall be the highest of the following: 1) The closing price of the firm’s H-shares as at the date of grant; 2) the average closing price of the firm’s H-shares during five consecutive trading days prior to the date of grant; and 3) the par value of the firm’s H-shares. The SARs are scheduled to take effect in three phases, and the firm’s board of directors will set performance requirements for each batch of the SARs.
Financials and valuation
Given possibly lower-than-expected revenues from some businesses and rapid growth in some costs in 2023, we lower our 2023 and 2024 earnings forecasts by 42% and 32% to Rmb1,288mn and Rmb1,806mn. We introduce our 2025 earnings forecast at Rmb2,251mn and we assume that processing volume of the firm’s AIT business will grow 15% from 2019.
The stock is trading at 16.7x 2023e, 11.5x 2024e, and 9.0x 2025e P/E. We cut our target price by 35% to HK$10.9 based on 15x 2024e P/E, offering 34% upside. We maintain an OUTPERFORM rating.
Risks
Aviation demand and/or performance of system integration service business disappoint; heavy asset impairment losses; sharper-than- expected growth in costs.