CEA recorded shareholders’ loss of RMB3,933 million in 1Q20 （vs. netprofit of RMB2,006 million in 1Q19）， roughly in line with ourexpectations. During the period, revenue dropped 48.6% yoy to RMB15,454million as RPK was down by 54.4% yoy. Significant operating loss ofRMB5,688 was recorded due to huge sum of fixed costs such as salaryexpense and depreciation on aircrafts. Both operating cost and administrativeexpense decreased much less than revenue. Moreover, the RMBdepreciated in 1Q20, causing exchange loss of RMB585 million in the period.
We have revised downwards our profit forecast in 2020 to 2022, and weexpect CEA to make a loss of RMB2,055 million in 2020. We havemaintained most of our air traffic assumptions unchanged, but reducedpassenger yield forecast. Meanwhile, we have also fine-tuned depreciationassumptions, accounting for updated IFRS 16. Moreover, we also expectstronger depreciation pressure for RMB.
We believe that the 1Q20 results provides some certainty in terms of thevulnerability of the income statement. We believe that recovery in domesticair travel will be a key focus for investors. We think long-term growth outlookfor Chinese aviation will remain unchanged, with current performance asshort-term fluctuation. We expect that the worst times for CEA have passed,and the valuation is attractive at the moment. We upgrade investmentrating to "Accumulate", and revise up TP to HK$3.30. Our TP represents0.8x 2020 PBR and 0.7x 2021 PBR.