Yield bottomed out in 2Q17; 25% 1H17profit decline due to increase in cost    Spring reported 1H17gross revenue growth of 28.1% YoY to RMB5.1bn on theback of 29.1% passenger traffic (RPK) growth, while passenger yield remainflattish. However, operating expenses increased 42.4% YoY mainly due to 1)higher fuel cost amid rising fuel price; 2) increasing marketing and advertisingexpenses; and 3) higher staff wages, according to the company. Together with1) RMB1.1m investment income (vs. investment loss in 1H16) and 2)RMB655.1m non-operating income (+8.6% YoY) mainly from route subsidies,the airline’s 1H17net profit declined by 25.2% YoY to RMB554.0m.    On a quarterly basis, 2Q17gross revenue grew 33.8% YoY to RMB2.5bn on32.0% YoY RPK increase and with encouraging sign of yield recovery of c.1%YoY during the quarter. However, with 42.8% YoY jump in operating expensesand 15.2% YoY decline in non-operating income, 2Q17net profit dropped32.9% YoY to RMB250.7m.    Deutsche Bank view – worst is behind; pax yield to pick up in 3Q17E    As Spring’s 1H17profit accounted for 55% of our full-year earnings estimateand 48% of consensus, we consider the results in-line. We maintain Buy as weexpect the airline’s yield to bottom out in 3Q17with load factor staying atc.90%. We believe Spring Airlines will be a key beneficiary of China’s LCCdevelopment, which is still in its infancy stage at the moment with only 9%penetration. Our target price is set at a target 3.5x FY18E P/BV (unchanged).We believe this is justified vs. sustainable ROE of about 15-16%. Downsiderisks include 1) excessive new capacity on international routes, 2) slower-thanexpecteddemand growth in the North Asia and ASEAN routes, and 3)competition in domestic and regional routes.

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