1H24 results slightly beat our expectation
　　TravelSky Technology announced its 1H24 results: Revenue rose 22% YoY to Rmb4.04bn and net profit attributable to shareholders grew 14% YoY to Rmb1.37bn. The firm’s results slightly beat our expectations, as revenue from system integration was slightly better than we expected and expenses such as commissions and marketing expenses, as well as depreciation and amortization were slightly lower than we expected.
　　AIT business recovered steadily along with passenger traffic; system integration achieved high growth. The firm’s revenue from the AIT business grew 20% YoY in 1H24. According to the company’s operating data announcement, the firm’s bookings of Chinese airlines rose 24% YoY in 1H24 and 7% compared with 1H19 (domestic and international flights recovered to 112% and 76% of the 1H19 levels). Bookings of foreign and regional airlines rose 27% YoY, recovering to 49% of the level in 1H19. Revenue growth of AIT business was slightly slower than that of bookings, which we attribute to the pricing principle of domestic airlines.
　　In 1H24, revenue from the system integration business rose 112% YoY, mainly due to YoY growth in the scale and number of projects that meet the conditions for completion and acceptance. Revenues from the settlement and clearing business, data network, and other businesses grew 50%, grew 7%, and fell 15% YoY.
　　Overall operating cost beat expectations. Operating cost rose 16% YoY in 1H24, with depreciation and amortization up 14% YoY, as some independent R&D projects were carried over into intangible assets in 2023; and commissions and marketing expenses grew 4% YoY, slower than passenger traffic growth. The firm’s labor costs rose 32% YoY, beating our expectation, mainly due to YoY decline in R&D expense capitalization, rising social insurance expenses, and optimization of the pace of payment of some salaries in 1H24.
　　Trends to watch
　　We expect the firm’s earnings to continue benefiting from the steady recovery of air passenger traffic, but suggest watching the progress of international flights of overseas airlines. In July 2024, the firm’s　bookings for domestic and international flights of Chinese airlines recovered to 119% and 85% of the levels in July 2019, and bookings for international flights of overseas airlines rebounded to 48% of the level in July 2019. We believe domestic airlines are recovering, but the recovery of foreign airlines remains to be seen due to supply shortages, longer routes and slow recovery of passenger traffic.
　　Financials and valuation
　　We keep our 2024 earnings forecast unchanged at Rmb1.94bn, but cut our 2025 earnings forecast 7% to Rmb2.18bn as the recovery of foreign airlines continues to miss our expectations. The stock is trading at 11.3x 2024e and 9.8x 2025e P/E. We maintain an OUTPERFORM rating and TP at HK$11.3, implying 15x 2024e P/E, offering 36% upside. We suggest keeping an eye on the firm’s equity incentives.
　　Risks
　　Disappointing recovery in passenger traffic; higher-than-expected operating costs.