Investment Thesis

Considering the Company riding on the new round of stable growth period, we increase the Company's EBITDA per share in 2018 and introduce 2019E EBITDA per share. The target price is increased to RMB 63, with the estimation of a 18.3/16.6x multiple respectively during the two years, and the "Accumulate" rating is maintained. (Closing price as at 7 June)

Results momentum continued

The revenue of Shanghai Airport in 2017 was RMB8.06 billion, increasing by 15.9% yoy; the net profit attributable to its parent company reached RMB3.68 billion, up 31.3% yoy; its basic EPS was RMB1.91, which was in line with our expectations and was slightly higher at around 3%. The dividend per share was RMB0.58, with a dividend payout ratio of 30%. The weighted return on equity rose by 2.6 ppts to 15.5%.

The first quarter financial report for 2018 showed that the results of the Company continued to grow strongly. In the Q1 of 2018, the revenue reached RMB2.281 billion, up by 20.35% yoy; the net profit attributable to its parent company was RMB1.018 billion, rising by 28.62% yoy; and its basic EPS was RMB0.53.

The Gross Profit Margin Was Soaring and the Profitability Was on the "Fast Track"

2017：In 2017, the traffic in Shanghai Airport was controlled. Aeronautical business volume recorded only single-digit increase (the takeoffs and landings increased by 3.5%, while the passenger throughput by 6%), and aeronautical revenue only rose by 6% yoy to RMB3.724 billion. Although aeronautical business was restricted, the Company's non-aeronautical business recorded rapid growth. Non-aeronautical business revenue increased significantly by 26% yoy to RMB4.34 billion, of which commercial leasing revenue rose by 43% yoy.

On the other hand, the operating costs remained stable and only increased by 6.1%. In 2017, gross profit margin increased by 4.7 ppts yoy to 49.82%. In addition, benefiting from the satisfactory performance of its subsidiaries (oil companies and advertising companies), its investment income increased by 34% yoy to RMB975 million.

2018：In 2018, the air traffic of Shanghai Airport continued to be controlled. Its takeoffs and landings rose by only 2.7%, and its passenger throughput by only 5.5%. It is estimated that the aeronautical revenue will remain low. International routes continued to record higher than the overall growth rate, and the route structure was further optimized.

It is worth mentioning that, due to the re-tendering of some commercial contracts and other reasons, the non-aeronautical business continued to maintain a high growth rate. Coupled with other factors such as the increase in airport charges, the growth of overall revenue was led to reach a record high in recent eight years, a yoy increase of more than 20%. The improvement of both the airline structure and the revenue structure boosted the gross margin in the first quarter of the year to increase by 5.3 ppts yoy to 50.68%, a record high in nine years.

According to the financial report, in the first quarter of 2018, the three expense ratios decreased by 1.2%. Owing to the yoy decrease in operating costs of subsidiaries and the changes in expense accounting standards, sales expenses decreased by 93% yoy, while financial expenses dropped by 155% yoy because no bond interest needed to be expended in the current period due to the expiration of corporate bonds. In total, the net profit margin increased by 2.7 ppts to 46.4%.

The Implementation of Duty Free Bidding Is Expected to Increase Valuation

The Company's airport duty-free business contract expired at the end of March. A new round of tendering is underway and will begin to contribute to the result in the H2 of 2018. The new percentage of commission is likely to increase from the original 25% to not less than 40%. After the S1/S2 satellite hall was completed and put into operation in 2019, the total floor area of the airport terminal building will increase by 69%, and the passenger throughput will exceed 80 million. The resulting expansion of commercial area and increase in the number of consumers will not only lay a solid foundation for the Company's next round of development but also be expected to develop a new business operating model and to fully release the valuation premium of the Company as a leading hub airport.

Financials

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