Incidents:

The company released its 2022 annual report, achieving operating income of 7.251 billion yuan, an increase of 0.50% over the previous year; achieving net profit of 141 million yuan, down 6.96% from the previous year; and achieving net profit of 18 million yuan after deducting non-return to the mother, a decrease of 57.04% over the previous year. The sharp decline in net profit after deducting non-return to the mother compared to 2021 was mainly due to the company's 2022 inventory price reduction preparations of RMB 21.63 million.

The “trainer+missile” dual main business developed collaboratively. The company is the only enterprise in China that also has the ability to develop junior, middle and high grade trainers. The company's Product Coach 10 is the most advanced trainer aircraft in China. It is expected to fully benefit from the implementation of the “two-aircraft, three-level” coaching system and the accelerated installation of third-generation and above fighters. With the advancement of the Belt and Road strategy, the deepening of the comprehensive strategic partnership between China and Saudi Arabia, and the resumption of diplomatic relations between Saudi Arabia and Iran, China's military trade ushered in a new period of development. In February 2023, China and the UAE successfully signed a contract to export L15 “Falcon” trainer aircraft to Afghanistan. As one of the two missile research institutes within the Aviation Industry Group, the Hongdu 660 has been undertaking the task of developing airborne missiles in China for a long time. Among them, the development of the KD-88 air-to-ground missile successfully filled the technical gap in China's air force's ground attack. With the batch installation of China's advanced fighter jets, demand for airborne missiles is strong.

The reform of aviation industry groups is speeding up, and the reform of state-owned enterprises welcomes new opportunities. The company is a main aircraft manufacturer within the Aviation Industry Group that has not yet achieved an overall listing and implemented equity incentives, and there is great potential for reform. Following the recent injection of Cheng Fei into China Aviation Electric Test, AVIC Shen Fei, and AVIC Xifei have released equity incentive plans one after another, and the aviation industry group's overall reform has accelerated. The company is expected to benefit from a new round of state-owned enterprise reform and development opportunities, achieve improvements in efficiency and asset quality, and usher in value revaluation opportunities under a valuation system with Chinese characteristics.

Hongdu Group participated in the development of a new generation stealth unmanned attack aircraft 11 to achieve collaboration with the company's existing business. China's first stealth drone sword (Attack 11) was designed by Shenyang Aircraft Design Research Institute, manufactured by Hongdu, and completed its first flight in 2013. Attack 11 has advanced stealth features, and its unique airframe design can effectively reduce detection by radar and infrared sensors. In addition to using reconnaissance and surveillance, interference and seduction, and ground attacks, stealth drones can also fight jointly with existing fighter jets. Loyal wingmen are an important hot topic in the drone field in recent years, and they are also an important part of future unmanned combat systems. Attack 11 may be a potential loyal wingman for a new generation of stealth fighters.

Investment suggestions: The company is expected to achieve revenue of 84.26/103.88/12.811 billion yuan in 2023-2025, achieve net profit of 144/194/241 million yuan, and maintain the “buy” rating.

Risk warning: falling orders, geopolitical risks, performance and valuation judgments falling short of expectations