Overview of events

Chongqing Zongshen Aeroengine Manufacturing Co., Ltd. (referred to as "Zongshen Hangfa"), a holding subsidiary of the company, plans to introduce six strategic investors, including Shaanxi Airsky Yunhai Venture Capital Partnership (Limited Partnership), to increase capital by 125 million yuan. After the capital increase is completed, the company's shareholding in Zongshen Hangfa decreased from 97.67% to 78.07%.

Analysis and judgment:

Hangfa business is further funded to further enhance the market competitiveness of Zongshen Hangfa. The price of this round of capital increase is 1.66 yuan per share. After the completion of the capital increase, the total share capital of Zongshen Hangfa has increased to 375 million shares, with a valuation of 623 million yuan after the corresponding investment, which is 107.7% higher than after the completion of the last round of capital increase. Hangfa business is an important direction of the company's strategic transformation and upgrading. Science and Technology Innovation Board Hangfa is in line with Zongshen Hangfa's policy positioning. According to the company's plan, Zongshen Hangfa strives to meet the reporting conditions for spin-off and listing by 2021; according to this round of capital increase supplementary agreement, if Zongshen Hangfa fails to submit listing materials by the end of 2022 and is accepted, or fails to be listed before the end of 2023, this round of investors have the right to require the company to buy back its shares. If the current round of capital increase is successfully completed, it means that Zongshen Hangfa has received further financial support in new product research and development, market development and scientific research experiments, which is conducive to the steady progress of the spin-off and listing of the aviation development business.

Aviation power products to achieve medium-and long-term growth space to open the company's traditional main business motorcycle engine business downstream demand continues to shrink, in order to maintain long-term business growth, the company has increased the expansion of emerging business, among which the aero-engine business is the focus of the company. The aviation development company was established in 2016, the aviation development company won the military industrial secrecy qualification in 2017, more than one type of aero-engine products were mass-produced in 2019, and the aviation development business gradually entered the cash stage. The business scale of the post-natal aviation development company increased rapidly in 2018, with a revenue of 20.4 million yuan and a gross profit margin of 50.87% in 2019, which is much higher than that of the company's traditional business. Hangfa has abundant orders on hand, good business growth and high profit margin. With the rapid expansion of business scale, it is expected to become an important performance growth point of the company.

In the process of Mofa's transformation, the machine with large displacement is deeply ploughing overseas core customers.

Thanks to the continuous development of external customers and the improvement of medium and large displacement engine sales, the company's motorcycle engine sales performance is relatively stable, and the overall market share is on the rise. In recent years, the company has increased the expansion of the business of medium and large displacement motorcycle engines. On the one hand, it supports Zongshen Sekron and Zongshenbiacho within the Zongshen system, and on the other hand, it actively opens up external customers. drive the average unit price and profit level of motorcycle engine products to rise synchronously. We judge that there is still room for a tenfold increase in the sales of medium and large displacement motorcycles in China, and the company's motorcycle engine business is expected to continue to benefit from the general trend of consumer upgrading.

The company cut into the field of ventilation with General Power, and completed the acquisition of Dajiang Power, a manufacturer of general machine terminal products, in 2018. At present, its products have fully covered three major categories: general power, general machine terminal products and small agricultural machinery. The company's largest customer of General Dynamics products, BGG (BGG), the core supplier of American garden machinery supplier MTD, is in trouble, and we expect that MTD is expected to transfer most of its orders to Zongshen Power, which will lead to the further expansion of the company's General Dynamics export business and become an important source of performance increment.

Investment suggestion

The overall market share of the company's motorcycle engine is upward, the leading position is constantly strengthened, and the increase in the proportion of medium and large displacement motorcycle engine sales leads to the increase of product average price and profit. MTD, the largest customer of General Dynamics, is expected to improve the proportion of the company and contribute to the core increment of the general machine business. The aviation development business has both growth and high profits, and the spin-off and listing is moving forward steadily, opening up long-term growth space for the company.

Keeping the profit forecast unchanged, the company's homing net profit for 2020-22 is expected to be 792, 1019 million yuan, corresponding to EPS 0.57, 0.69, 0.89, and current share price corresponding to 17.0, 13.9, and 10.8 times of PE. With reference to the company's historical valuation range, and taking into account the growth of aviation development business, the company is valued at 25 times PE in 2021, maintaining the target price of 17.25 yuan. Maintain a "buy" rating.

Risk hint

The scale of motorcycle production and sales has further shrunk; the progress of business development of medium and large displacement motorcycle engines is lower than expected; the proportion of overseas customers of General Dynamics is lower than expected; and the development progress of Hangfa business is lower than expected.