Incident: Recently, the company released its 2022 annual report, achieving operating income of 7.251 billion yuan, a decrease of 0.50% over the previous year; achieving net profit of 141 million yuan, a year-on-year decrease of 6.96%.

Delivery of trainers accelerated in the second half of the year, and overall gross margin declined slightly. 2022H1's trainer business revenue was 478 million yuan, a year-on-year decrease of 60.60%. Delivery of trainer products accelerated in the second half of the year, achieving annual revenue of 2,517 billion yuan, an increase of 5.89% over the previous year, and gross margin of 1.73%, a decrease of 0.70 pct over the previous year. Other aviation products achieved annual revenue of 4.687 billion yuan, a year-on-year decrease of 0.03%, and a gross profit margin of 2.91%, an increase of 0.36pct over the previous year. The company's overall gross profit margin was 2.69%, a year-on-year decrease of 0.04 pct, mainly dragged down by the decline in gross margin of trainers.

Investment in R&D expenses increased, and inventories increased compared to the beginning of the period. In 2022, the company's period expenses rate was 2.31%, a decrease of 0.17pct over the previous year. Among them, the sales cost/management cost/financial cost/R&D expense ratio was 0.23%/0.84%/1.35%/-0.11%, respectively, compared to +0.02pct/-0.03pct/+0.18pct/+0.01 pct, respectively. The company's inventory was 3.466 billion yuan, an increase of 15.09% over the beginning of the period. Contractual liabilities amounted to $5,521 million, a decrease of 19.38% from the beginning of the period.

The development of the trainer model progressed steadily, and the foreign trade business received many orders. Chujiao 6 has obtained TC/PC certification. According to market demand, the company is modifying and improving it to enhance its ability to adapt to the civilian market and enhance its competitiveness. The development of a new basic education system is underway to seize the screening and basic trainer market. At present, the company has made breakthroughs in the development of several of its trainer products, injecting new momentum into the company's subsequent development. The L15 Higher Education Machine stood out and received new orders from overseas, and the first order for the Chujiao Liucin aircraft model was signed. In 2022, the company formed a new pattern of foreign trade sales for the joint export of junior, middle and advanced training aircraft.

Investment suggestions: The company is a major domestic trainer R&D and production base. Currently, its main products are CJ6 junior trainers, K8 basic trainers, L15 advanced trainers, and defense products.

China wants to “build a weapons and equipment system with fourth-generation equipment as the backbone and third-generation equipment as the main body”. With the accelerated deployment of third-generation and fourth-generation aircraft, related flight training missions will improve markedly, and the company's trainer business is expected to achieve steady growth. Furthermore, the market demand for the company's defense products is strong, and growth is expected to resume in the future. The company expects to sell 7.853 billion yuan of products to related parties in 2023, an increase of 10.88% over the actual amount incurred in 2022, or indicates a resumption of growth in the company's product orders in 2023. We forecast the company's net profit from 2023 to 2025 is 174/2.15/265 million yuan respectively, and the corresponding PE is 109.8/88.7/72.0 respectively. Maintain an “increase in holdings” rating.

Risk warning: The pace of aviation equipment delivery has slowed down, and product prices have dropped sharply.