We expect 2024 earnings to grow 31% YoY
　　We estimate that TravelSky Technology's earnings may reach Rmb1,836mn in 2024, down 5% from our previous forecast, as we lower our assumptions for the recovery in bookings for international flights at overseas airlines and adjust some cost assumptions.
　　Trends to watch
　　Business volume continues to recover steadily, but recovery in bookings for international flights at overseas airlines slightly misses our expectation. Over 11M24, the firm’s bookings for flights provided by domestic airlines and by overseas airlines grew 19% and 17% YoY, recovering to 109% and 49% of the level in the same period of 2019. In November 2024, the firm’s bookings for flights provided by domestic airlines and by overseas airlines grew 16% and 7% YoY, recovering to 105% and 46% of the level in the same period in 2019.
　　We believe the firm's domestic airline business is showing a trend of sound recovery, but the recovery of its overseas airline business is sluggish, possibly due to factors such as limited flight routes, tight supply- demand conditions at overseas airlines, and relatively slow recovery in demand from overseas travelers.
　　We suggest watching cost differences in 1H24 and 2H24, and keeping an eye on impairment. Due to factors such as the progress of cost settlement, the company's operating costs in the second half of a year are often notably higher than in the first half. For example, operating costs in 2H23 were about 43% higher than those in 1H23, mainly due to differences in labor costs, technical support and maintenance fees, and commissions and promotion expenses.
　　We suggest keeping an eye on the changes in earnings between 1H24 and 2H24 caused by seasonal differences in costs. The firm made Rmb305mn of provisions for credit impairment losses in 2023, mainly for bad debt losses of accounts receivable. We suggest monitoring the firm's accounts receivable from major clients in 2024.
　　We suggest watching progress of equity incentive plan. The firm proposed its Phase III share appreciation rights plan on December 28,　2023, which was not submitted to the extraordinary general meeting held on January 25, 2024. Subsequently, the firm has continued to make progress in its new equity incentive plan. Considering Hong Kong Stock Exchange's restrictions on the time window for granting equity incentives, we suggest watching the progress in the implementation of its new equity incentive plan.
　　Financials and valuation
　　We trim our 2024 and 2025 earnings forecasts 5% and 3% to Rmb1,836mn and Rmb2,102mn as we lower our assumptions for the recovery in bookings for international flights at overseas airlines and adjust some cost assumptions. We introduce our 2026 earnings forecast of Rmb2,370mn, assuming that business volume of the firm’s aviation information technology services will grow 7% YoY.
　　We roll over valuation to 2025 and maintain our target price of HK$11.30 based on 15x 2025e target P/E, offering 18.4% upside. Given the high business volume and weak prices in the airline industry, we believe the firm's stable price system will help it achieve better-than-industry-average recovery in earnings. We maintain an OUTPERFORM rating.
　　Risks
　　Disappointing growth in air passenger traffic; sharper-than-expected rise in costs; disappointing progress in implementation of equity incentive plan.