1. Incidents
Recently, the company's creditors changed from Xingcheng Investment to Western Airlines Investment, and this is part of advancing the “debt-for-equity swaps” process. Recently, the company signed related military contracts of about 13.61 million yuan.
2. Our analysis and judgment
(1) The implementation of debt-for-equity swaps may significantly improve the quality of company statements
According to the latest announcement, the company's creditor was changed to China Western Airlines Investment, that is, the debt of 776 million yuan and corresponding interest owed by Xingcheng Investment was converted to a debt owed to China Western Airlines Investment. This debt transfer is part of the “debt-for-equity swaps” that the company is advancing. We believe that if the company's debt-for-equity swaps proceed smoothly, it is expected that financial expenses of about 50 million yuan will be saved every year, and the quality of statements will improve markedly.
(2) With the execution of military goods contracts, it can be expected that the military industry business will accumulate and grow
The company recently received two military contract orders, with a total amount of about 13.61 million yuan, indicating that the subsidiary Chengdu aerospace military goods business may be maturing and is expected to continue to flourish. Chengdu Aerospace is a potentially important private supplier of domestic aero engines and blades. It has a strong talent pool, high technical barriers and development potential. We believe that with the acquisition of equipment contract qualifications in the later stages of the company, it can be expected that the military goods business will expand and help the company grow rapidly.
(3) Merger and acquisition of Gardner and NAL to accelerate the layout of the aviation industry chain
The company completed mergers and acquisitions of 100% of Gardner's and NAL's shares in June 2017 and July 2018, respectively. The former is a large-scale multinational enterprise that produces advanced aerospace components and integrates systems in Europe. It is a first-level supporting supplier for Airbus and Rollo; the latter is mainly engaged in the manufacture of wing structural parts and is a key strategic supplier for Airbus. According to the announcement, Airbus promised that within 5 years after the NAL merger and acquisition was completed (before 2023), new orders with a total value of not less than 400 million pounds would be given on top of the original order. The company's market competitiveness and profitability are expected to be greatly improved, and the risk of goodwill impairment will be significantly reduced.
Gardner is expected to contribute about 200 million yuan to the parent's net profit in 2019. With large-scale commercialization of large domestic aircraft, Gardner and NAL, as traditional advantageous aircraft supporting suppliers, will help the company take a lead in future industry development.
Furthermore, according to the announcement, the AT200 cargo drone of the participating subsidiary Longxing Drone has entered the cargo transportation route trial operation stage. As a cargo drone user, SF Holdings promises to purchase no less than 50 AT200 cargo drones on the premise that the design needs and the aircraft itself is safe and reliable. Therefore, we believe that orders for this type of drone are expected to land in 2019 and contribute about 40 million yuan to the mother's net profit.
3. Investment advice
It is estimated that the company's net profit from 2018 to 2020 will be 0.08 billion yuan, 182 million yuan and 294 million yuan respectively, EPS will be 0.01 yuan, 0.27 yuan and 0.44 yuan respectively. The PE corresponding to current stock prices is 1008x, 44x and 27x. The company is highly scarce, has benefited from the great development of the domestic aviation industry, and has broad prospects. First coverage, giving a “Cautious Recommendation” rating.
Risk warning: Gardner's performance falls short of expectations and risk of impairment of goodwill.