During the 2021Q4-2022Q1 period, the trend of growth stocks and value stocks is seriously separated. Why did this happen?

In addition to the overvaluation of growth stocks, it is also related to the growing determination to stabilize domestic growth. As soon as it entered 2022, the central bank began to release water in early January, strengthening the logic of funds to speculate on the certainty of earnings expectations of value stocks. Among the many value stocks, the author noticed that the transportation companies have performed well in the near future, among which the stock price of airlines is quite strong.

The strong stock price of airlines is not without reasonable reasons. The central bank releases water to give birth to the vitality of various industries. Once the prosperity of the industry is improved, then the frequency of business travel will increase, and the residents' willingness to spend will increase after the increase in income. So there is the possibility of an outbreak of traffic demand due to the accumulation of the epidemic.

In addition to the short-term stabilization of demand, recent policies that are good for aviation have also surfaced one after another.

On January 7, 2022, the Civil Aviation Administration of China, the National Development and Reform Commission and the Ministry of Transport jointly issued the 14th five-year Plan for Civil Aviation Development, which sets the logical tone for the growth of civil aviation in the next four years, indicating that 2021-2022 is the recovery and accumulation period, and 2023-2025 is the growth period and release period.

On January 20, 2022, the State Council issued the Tourism Development Plan of the 14th five-year Plan, pointing out that the inbound tourism promotion action should be launched in due course.

The implication of the two development plans may be to open the country gradually while continuing the domestic cycle in 2022, and to fully open the door to welcome guests in 2023.

I. domestic Great Circulation

As early as the beginning of 2021, the Civil Aviation Administration of China predicted that passenger traffic would return to 90% before the epidemic in 2021, but the final data fell far short of the forecast.

By the end of 2021, CAAC had completed total transport turnover, passenger traffic and cargo and mail traffic of 85.7 billion ton km, 440 million passenger trips and 7.32 million tons in 2019, returning to 66.3%, 66.8% and 97.2% respectively in 2019.

This year, Feng Zhenglin, director of the Civil Aviation Administration of China, once again predicted that in the civil aviation work, CAAC will strive to complete a total transport turnover of 104 billion ton / km, 570 million passengers and 7.8 million tons of cargo and mail in 2022.Overall, it has recovered to about 85% of the level before the epidemic; if the epidemic does not fluctuate repeatedly, strive to achieve a turnaround and increase profits in the industry as a whole.

Strive to achieve a turnaround and increase profits in the industry as a whole can be understood in this way.

Because of the general losses of domestic airlines in 2020, ten domestic airlines have lost a total of 31.5 billion yuan in the first three quarters of 2021, and the operation in the fourth quarter is not good. It is a foregone conclusion that airlines have made continuous losses from 2020 to 2021, and they will be subjected to ST if they lose another year.

As a result, achieving profitability this year has become a major task at hand.

First, assuming that the epidemic is stable, in order to turn the industry from deficit to profit as a whole, if we rely solely on the domestic cycle, we need both quantity and price to rise.

Looking at the trend of the industry last year, the monthly trend of civil aviation passenger traffic in 2021 was high in front and low in back, which was obviously affected by the epidemic.

March to May, without the impact of the epidemic, was the highest attendance rate of airlines for the whole year. During this period, passenger traffic recovered to more than 90% in the same period in 2019, and the occupancy rate returned to 80%, of which domestic passenger traffic increased by 10.7% in April.

The passenger volume and occupancy rate of Q3 and Q4 affected by the epidemic decreased significantly, and the rebound was also weak.

The trend of airline occupancy rate and new local cases shows that the repeated occurrence of the epidemic has led to a shortage of passengers.

Although demand cannot rise temporarily due to the impact of the epidemic at the beginning of this year, the logic of price rise has come first.

Take China Eastern Airlines Corp Ltd as an example, announced that starting from January 1, 2022, full-price tickets on the Beijing-Shanghai line will be raised to 1960 yuan. If demand picks up, China Eastern Airlines Corp Ltd's profit will improve rapidly.

Based on the price increase, the following assumptions are made for profit improvement.

On the cost side, WTI crude oil futures were trading at $86.50 a barrel as of January 19, 2022, up about 10-15 per cent from 2018. Recently, the RMB exchange rate has strengthened a lot compared with 2018, and the exchange rate can hedge against the negative effects of the rising cost of oil prices.

So assume that the 2022 cost base is consistent with 2018.

In terms of profitability, China Eastern Airlines made a profit of 1.25 billion yuan on the Beijing-Shanghai line in 2018, corresponding to a full-ticket price of 1360 yuan. If the occupancy rate is the same as that in 2018, the full-fare price is 1960 yuan, and the increase in full-fare price increases the average fare by 10%. The annual profit of the Beijing-Shanghai line rose to 1.5 billion yuan, an increase of about 20%.

In addition, if demand really rises as desired this year, what about supply?

In terms of capacity supply, there is absolutely no problem, because in the past, as international flights have been suppressed, many airlines' international flight capacity has been transferred to China, and domestic capacity has greatly increased. Once domestic demand breaks out, air capacity can be completed.

To sum up, if there is no recurrent epidemic in 2022, with reference to the fact that the occupancy rate and passenger volume of Q2 airlines in 2021 basically return to the 2019 level and the actions of air ticket price increases, as long as the demand picks up, the domestic big cycle logic will work in theory.

Second, liberalize the expectations of the country.

After talking about the domestic big cycle logic, look a little further, the medium-term dimension of the opening of the door is expected to be realized in the second half of 2022-2023.

Once the virus let people all over the world live under masks, although the vaccination rate has increased and the progress in the research and development of specific drugs has been accelerated, the operations of overseas governments have basically been at a flat pace, that is, the epidemic has become epidemic.

In terms of international flights, the volume of international passenger traffic in 2019 is about 100 million, accounting for 20% of the total passenger traffic. After the outbreak of the epidemic, the "five ones" policy and the strict epidemic prevention policy were implemented in China. By the end of September 2021, the number of flights and passenger traffic in China were about 5% and 2-3% of the normal period, respectively.

Today, such limited freedom has lasted for more than two years, and the domestic policy on international aviation has not been substantially relaxed so far.

From January 1 to 13, 2022, China implemented circuit breakers 74 times and 198 flights. Omicron mutant strain spread rapidly overseas, the number of imported cases increased, and the number of flight breakers increased.

If the restrictions on international flights are gradually relaxed from 2022 to 2023, which is really good for Air China, China Southern Airlines and China Eastern Airlines, these three companies account for about 30% of their international operating income, and the excess capacity is put back into international flights. It is very likely to make a profit.

Finally, it is implemented in the selection of individual stocks.

If investors intervene in aviation stocks based on the expectation of opening the door, the options are Air China, China Southern Airlines and China Eastern Airlines, these three airlines have high capacity and performance flexibility will be much higher than that of Spring Airlines and auspicious Airlines.

If investors intervene in aviation stocks based on the logic of domestic circulation, the options are Spring Airlines and auspicious Airlines.Comparing the occupancy rates of the five companies, Spring Airlines and auspicious Airlines are higher than China Southern Airlines, Air China Airlines and China Eastern Airlines, which profit from low fares and cost reduction strategies, and consumers are more sensitive to prices when the economy is not ideal.

In addition, these two airlines basically have no overseas flight business, and their business focus has always been on the domestic market. The problem of excess capacity is less than that of the three major airlines, so they are less affected by depreciation and amortization.

Concluding remarks

The compound annual growth rate of passenger traffic from 2019 to 2025 is expected to be only 5.9%, lower than the compound growth rate of 10.7% from 2015 to 2019.

Although airlines have dual recovery logic and high certainty of the recovery trend in the next two years, the expected growth rate of capacity and passenger volume in the medium and long term is slow, the logic of short-term domestic circulation is flawed, and there are many domestic uncertainties. If there is no policy to protect the short-term demand of aviation, it is difficult to be optimistic about short-term demand. By contrast, it is a matter of time to liberalize the expectation of the country, so if you get involved in aviation stocks, you need to be prepared to hold the middle line.