2023 results in line with market expectations
　　TravelSky Technology announced its 2023 results: Revenue increased 34% YoY to Rmb6.98bn and net profit attributable to shareholders grew 123% YoY to Rmb1.40bn, in line with market expectations. In 2H23, revenue rose 25% YoY and 11% QoQ to Rmb3.68bn, and net profit grew 8% YoY and fell 83% HoH to Rmb199mn.The board of directors proposed a dividend of Rmb0.16/sh, implying a payout ratio of 33% (vs. 25% in 2022).
　　AIT business recovered steadily along with the airline industry in 2H23, but system integration and technical services weighed on growth. In 2H23, revenue from the airline information technology (AIT) business rose 163% YoY to Rmb1.96bn, recovering to 85% of the 2019 level. Specifically, total bookings rose 154% YoY, recovering to 96% of 2019 level; ASP rose 4% YoY to Rmb5.8 (vs. Rmb6.6 in 2019), which we attribute to the slow recovery of higher-ASP international flights. In 2H23, system integration revenue fell 39% YoY due to fewer projects completed and accepted; revenue of other businesses declined 22% YoY, due to a 41% YoY drop in technical services.
　　Operating cost rose 7% YoY in 2H23; provision for credit impairment put pressure on earnings. The firm’s cost increase in 2H23 was mainly driven by higher labor costs, which rose 15% YoY in 2H23 and 14% YoY in 2023 due to the increase in employee salaries and social insurance.
　　Headcount remained largely stable at end-2023. In 2H23, the firm made provisions for credit impairment losses of Rmb421mn.
　　Trends to watch
　　Bookings of AIT business continues to recover steadily. According to corporate filings, the firm’s bookings for domestic and international flights of Chinese airlines recovered in February 2024 to 120% and 77% of the levels in 2019, and bookings for international flights of overseas airlines rebounded to 55% of the level in 2019. These figures rose 21ppt, 8ppt and 11ppt from December 2023.
　　Watch progress of share appreciation rights. The firm issued a proposal on December 28, 2023 to adopt the Phase III share appreciation rights plan. However, the plan was not submitted for approval at the extraordinary general meeting on January 25, 2024 as some preconditions were not met. We suggest keeping an eye on the progress.
　　Financials and valuation
　　As the firm’s business volume recovery in early 2024 is slightly better than we had expected, we slightly raise our 2024 and 2025 net profit forecasts 7.5% and 4.3% to Rmb1.941bn and Rmb2.348bn. The stock is trading at 12.0x 2024e P/E and 9.5x 2025e P/E. We maintain OUTPERFORM, and raise our target price 4% to HK$11.3, implying 15x 2024e P/E and offering 26% upside.
　　Risks
　　Disappointing air travel demand; higher-than-expected cost growth; large impairment provisions.