The company released its 2020 semi-annual report. 2020H1 achieved revenue of 3.499 million yuan, +29.11% year on year, net profit of 336 million yuan, +56.34% year on year, net profit of non-return mother of 301 million yuan, +49.98% year on year. Among them, 2020Q2 achieved revenue of 2,096 million yuan, +51.09% year on year, and Guimo's net profit of 237 million yuan, +67.09% year on year, after deducting Fatemo's net profit of 218 million yuan, +53.94% year on year.
Analytical judgment:
Simultaneous improvement in revenue and profit at the same time in line with product upgrade trends
The 2020H1 company sold 1,177,500 motorcycle engines, -12.13% year on year, mainly due to shrinking downstream demand. According to data from the China Automobile Association, 2020H1 produced 7.142,700 motorcycles in China, -8.55% year on year. However, thanks to improved product structure, 2020H1's motorcycle engine business achieved revenue of 1,259 million yuan, +1.78% year on year, and net profit of 84 million yuan, +6.07% year on year. In recent years, the company has increased the expansion of its medium to large displacement motorcycle engine business. On the one hand, Zongshen Sai Colon and Zongshen Piaggio are supported within the Zongshen system, and on the other hand, they are actively developing external customers, driving simultaneous improvements in the average unit price and profit level of motorcycle engine products. We judge that there is still room for sales of medium to large displacement motorcycles in China to increase tenfold, and the company's motorcycle engine business is expected to continue to benefit from the major trend of product upgrades.
Tongji is deeply involved in key overseas customers and contributed to the increase in core performance
The total sales volume of 2020H1's general mobility and terminal products was 2,342 million units, +67.65% over the same period last year. The sharp increase in sales of general aviation products led to revenue of +70.02% year-on-year to 1,897 million yuan, and net profit of +110.34% to 183 million yuan over the same period last year, which is the source of the increase in the core performance of the 2020H1 company. The company entered the field of general aviation power and completed the acquisition of Dajiang Power, a manufacturer of general aviation terminal products, in 2018. Currently, its products have fully covered the three categories of general power, general engine terminal products, and small agricultural machinery. The company's largest customer, American garden machinery supplier MTD, is in trouble operating in overseas core supplier Bailitong (BGG). We expect MTD to transfer most of its orders to Zongshen Dynamics, which will drive the scale of the company's General Dynamics export business to further expand and continue to contribute to increased performance.
The aviation development business received further financial support and mass production support progressed in an orderly manner
Downstream demand for the company's traditional motorcycle engine business continues to shrink. In order to maintain long-term business growth, the company has stepped up its expansion efforts into emerging businesses. Among them, the aero engine business is the focus of the company's efforts. In August 2020, the company announced Zong Shenhang's second round of capital increase plans to introduce six strategic investors including the Shaanxi Sky Cloud Sea Venture Capital Fund Partnership (Limited Partnership) to increase capital by 125 million yuan. After the capital increase was completed, the company's shareholding ratio in Zong Shenhang dropped from 97.67% to 78.07%.
Since 2019, Zongshenhang has launched several products that have been mass-produced. Among them, sales of the core product C115 piston engine have been growing steadily, and the C145HT piston engine mounted on the AR500C plateau unmanned helicopter successfully flew for the first time. If the capital increase is successfully completed, it means that Zong Shenhangfa will receive 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.
Investment advice
The company's leading position in motorcycle engines continues to strengthen, and the increase in sales of medium to large displacement motorcycle engines has led to an increase in the average price and profit of products. MTD, the largest customer of General Aviation Dynamics, is expected to increase the company's support ratio and contribute core growth to the general aviation business.
The aviation development business combines growth and high profitability, and spin-offs and listings are progressing steadily, opening up room for long-term growth for the company.
Keeping the profit forecast unchanged, the company's net profit for 2020-22 is estimated to be 648/7.92/1,019 billion yuan, the corresponding EPS is 0.57/0.69/0.89 yuan, and the current stock price corresponding to PE is 15.9/13.0/10.1 times. Referring to the company's historical valuation range and considering the growth of the aviation shipping business, the company was given a PE valuation of 25 times in 2021, maintaining the target price of 17.25 yuan, and maintaining the “buy” rating.
Risk warning
The scale of motorcycle production and sales has shrunk further; the expansion progress of the medium to large displacement motorcycle engine business has fallen short of expectations; General Dynamics's overseas customer support ratio has fallen short of expectations; and the development progress of aviation development business has fallen short of expectations.
