Guotai Haitong released a research report maintaining a "BUY" rating on Air China (00753). The company was the first among major airlines to turn profitable in Q2 2025. If the recovery in business and commercial demand proves sustainable, the profit center is expected to rise over the next two years. Considering short-term demand fluctuations, the firm lowered its 2025-26 net profit attributable to shareholders forecast to RMB 1/6 billion, and added a 2027 forecast of RMB 15.1 billion, corresponding to 2025-27 EPS of RMB 0.06/0.35/0.86. The firm assigns a 10x PE multiple for 2027, corresponding to a target price of HK$9.45 (1 HKD = 0.91 RMB).

Guotai Haitong's main views are as follows:

**Q2 2025 Achieved Turnaround in Off-Season, Expected Full-Year Profitability** 1) First half: The company recorded a net loss attributable to shareholders of RMB 1.8 billion, a year-over-year improvement of nearly RMB 1 billion. In Q2, benefiting from year-over-year recovery growth in business and commercial demand, the firm estimates the company's yield per seat turned positive year-over-year. During the off-season, significant fuel cost reductions were largely retained, enabling the company to achieve profitability of RMB 238 million, a substantial year-over-year improvement of RMB 1.35 billion, in line with the firm's performance outlook.

2) Q3: Summer travel business and commercial demand unexpectedly weakened, leading to year-over-year ticket price declines. Considering that falling oil prices and declining ticket prices should offset each other, and business and commercial demand was released with a lag in September with ticket prices turning positive, the firm expects Q3 to still achieve substantial profits. Notably, this initially demonstrates profit resilience and future potential.

3) Q4: National Day holiday travel demand was robust, and the new aviation season will continue strict slot growth control. Anti-involution measures may help manage off-season low pricing. The firm expects Q4 to continue significant year-over-year loss reduction, with full-year 2025 turning profitable.

**Shenzhen Airlines Plans RMB 16 Billion Equity Financing, Company to Maintain Controlling Stake** Shenzhen Airlines (51% controlled by the company) plans to raise RMB 16 billion in equity financing through two phases. The company will contribute no more than RMB 8.16 billion according to its shareholding ratio, with RMB 2.082 billion in cash for the first phase. The first phase investment will include RMB 2 billion in cash from new investors. After financing, the company's shareholding ratio remains unchanged, still controlling Shenzhen Airlines.

Shenzhen Airlines operates 234 aircraft, accounting for 25% of the company's fleet size. In the first half of 2025, it recorded a net loss attributable to shareholders of RMB 800 million and negative net assets of RMB 14.2 billion. For Shenzhen Airlines, this will effectively reduce debt burden and lower funding costs, helping restore profitability. For the company, the financial impact may be limited, ensuring continued control of Shenzhen Airlines, which has strategic significance for consolidating the company's four-corner diamond high-quality route network.

**Company's Route Network Customer Base Significantly Optimized, Profit Center Rise Expected to Begin** The firm believes that slots are airlines' core profit-generating assets. Before 2019, Air China already possessed the industry's highest-quality route network customer base, with profitability leading major airlines long-term. After 2019, Beijing launched a two-airport system, and Air China seized the strategic opportunity to remain at Capital Airport, further significantly optimizing its route network customer base.

China's civil aviation ticket prices have become largely market-oriented, supply has entered a low-growth era. If business and commercial recovery proves sustainable, the company's profit center rise will begin, with high-quality route networks ensuring the most considerable profit upside potential.

**Risk Warnings** Economic fluctuations, oil price and exchange rate changes, industry policies, dilution from additional issuance, safety incidents