AviChina reported a strong set of interim earnings growth, with sales and net profit up 22% and 26.8% YoY. The strong sales growth was mainly driven by the consolidation of the acquired Avic Electromechanical (20.7% YoY in 1H23) and the high growth (56.3% YoY) of helicopter demand recovery. In 2H23, the two segments would likely to deliver the strong growth. With high base, the growth outlook in 2024 would turn normalised unless there will be further new acquisition. We raise the sales and net profit estimate in 2H23. We also raise the target multiple from the previous 13.9x23E P/E to 15.0x23E P/E, still conservative compared to historical average trading multiple of 18.7x P/E. New TP implies 59% upside, retain BUY rating.

Key Factors for Rating

Sales and net profit rose by 22% and 26.8% YoY in 1H23, beating consensus and our estimate. The surprise mainly comes from the strong sales rebound of helicopter and good growth of the acquired Avic Electromechanical. 56.3% YoY sales growth in helicopter on low base represented the procurement recovery of local government and central government. AviChina consolidates the acquired Avic Electromechanical in 2023 and restated 2022. The combined sales of Avionics and Electromechanical grew by 20.7% YoY in 1H23.

Blended gross margin slightly declined by 23.8% in 1H23 from 24.1% in 1H22, due to the product mix. But SG&A cost rose at only 17.7% YoY, lower than top- line growth. Financial cost remained flat YoY. Thus operating profit and net profit rose at 21.2% and 26.8% YoY in 1H23, a strong earnings growth.

Such good growth momentum may retain in 2H23, driven by the contribution of acquisition and sales rebound in helicopter. In 2024, we expect the growth rate will revert to normalised organic growth of around 10%.

Key Risks for Rating

Local government needs a long time to recover the land sale and fiscal budget to support the helicopter procurement.

Valuation

We raise the sales and net profit estimate in 2H23, and retain the growth estimate in 2024E. AviChina will likely deliver more acquisitions, which could be the catalyst. We also raise the target multiple to 15.0x23E P/E, from previous 13.9x, to reflect the better growth outlook. New TP implies 59% upside, retain BUY rating.