Event

According to the semi-annual report released by the company on the 31st, the company achieved a total operating income of 929 million yuan in the first half of 2017, down 7.03% from the same period last year, and the net profit belonging to shareholders of listed companies was 27 million, down 12.90% from the same period last year.

Brief comment

Focus on the main aviation industry, the performance has declined.

Focus on the main industry to improve quality and efficiency, performance has declined. In the first half of 2017, the company achieved a total operating income of 929 million yuan, down 7.03% from the same period last year; the net profit attributed to shareholders of listed companies was 27 million, down 12.90% from the same period last year. Among them, the revenue of domestic trade aviation and derivatives reached 227 million yuan, down 5.10% from the same period last year. The main reasons are: in the first half of the year, ① focused on strengthening the scientific research and production of strategic products; ② transformed, upgraded and adjusted its product structure, gradually eliminating derivatives with low added value. The revenue of foreign trade products reached 644 million yuan, a decrease of 3.87%, mainly due to the company's initiative to adjust the product structure.

During the reporting period, the company actively carried out work around the main business of "aero-engine", actively cleaning up projects with unclear market expectations and low benefit contribution, and realizing "business focus, resource focus and energy focus". To further consolidate and improve the company's leading position in the aero-engine field, while actively striving for the world's excellent suppliers of aero-engine parts.

There is a vast space for military aviation, enjoying hundreds of billions of feasts.

The market space of military aircraft aero-engine is huge. At present, the number of military aircraft in China is less than 3000, which is only 5 for the United States. At the same time, China's military aircraft will gradually phase out second-generation aircraft by 2020, and the third-generation aircraft will be transformed into fourth-generation aircraft. Third-generation aircraft, large-scale transport aircraft and other types of aircraft will be delivered in large quantities one after another. According to our estimates, in the next 20 years, it is estimated that in the next 20 years, China will add about 1500 new fighters (the ratio of third-generation planes to fourth-generation planes is about 2:1), about 200 new large transport and special operations aircraft, about 400 new trainers and other types of aircraft, and about 2000 new military helicopters, with a market space of about 150 billion US dollars. Based on 30 per cent of the value of military engines, the market space for military engines is about $45 billion, equivalent to about 300 billion yuan. As one of the few military aero-engine enterprises in China, the company will directly benefit from the overall demand for aero-engines.

With the implementation of the major project of "two aircraft" and the establishment of China Aviation Development, the aero-engine meets the unprecedented development opportunity. During the 13th five-year Plan period, China fully launched the implementation of major aero-engine and gas turbine projects, and the Aviation Development Group was established in 2016. The two events reflect that the country attaches great importance to the cause of aero-engines, and also create unprecedented opportunities for the development of Chinese aero-engines. As a member of the newly established China Aeroengine Group, with the promotion of the aero-engine and gas turbine project, the company will get more development opportunities, and the domestic trade aviation and derivatives sector business will directly benefit.

The potential of the civil market is huge, and the company's performance is an important source.

The demand for foreign trade products has great potential. The company's foreign trade is mainly to contract aviation spare parts, non-aviation spare parts, with the gradual opening of the civil market, the overall market demand will be further expanded. According to the forecast of foreign airlines, there will be an average annual market of about 85 billion US dollars for international civil aero-engines in the next 20 years, and the development of civil aviation industry will provide great opportunities for the company's business expansion.

Foreign trade products will provide new impetus for the company's performance growth. In terms of foreign trade products, the company optimizes and upgrades the product structure, retains the existing high value-added products, and strives for high value-added new products. The annual order volume has reached 200 million US dollars, which ensures the sustained growth of the company's performance. The company's trial production of new foreign trade products continued to make new breakthroughs, and FT4000 completed the acceptance of the first one, marking a new stage of strategic cooperation between the company and PWPS; 260items of parts and components were started, with an on-time completion rate of 95.2% and a risk control rate of 100%. We expect that with the development of the international aviation market and the continuous improvement of the company's technical level, the company will gain more share in the foreign trade market of Hangfa in the future, which will provide a continuous driving force for the company's performance growth.

Profit forecast and investment rating: benefit from the broad market space for the army and the people, rating for the first time, and rating for increasing holdings.

The domestic military aero-engine market will reach 300 billion, and the company has a broad space for military products, and the performance of foreign trade products will continue to grow with the improvement of the company's technical strength and the development of the international aviation market. We are optimistic about the company's future development prospects. It is estimated that the company's net profit from 2017 to 2019 will be 47 million yuan, 53 million yuan and 59 million yuan respectively, an increase of 10.00%, 12.00% and 12.00% respectively over the same period last year. The corresponding EPS for 17 to 19 years will be 0.14,0.16,0.18 yuan respectively, and the corresponding stock price PE will be 186,165,148 times respectively.