Event: on October 23, the company released its quarterly report for 2023, with realized income (3.623 billion yuan, + 7.69%) and net profit (844 million yuan, + 25.84%).

The performance in the first three quarters increased steadily, and the growth rate of the new materials business in the third quarter was significant in the first three quarters of 2023. The company persisted in focusing on the main business, optimizing the product structure, and steadily improving the quality and efficiency of production and operation. Among them

1) New materials business: benefiting from the growth in sales of aviation composite raw materials and brake products, the new materials business achieved revenue (3.552 billion yuan, + 6.97%) and home net profit (862 million yuan, + 21.49%). In addition, after the completion of the industrial and commercial change on July 14, 2023, Jinghang Biological will no longer be included in the company's consolidated statement, and its investment income will increase by 29.6282 million yuan during the reporting period.

From quarter to quarter, the revenue of Q1-Q3 new materials business is 12.43 (+ 9.56%) / 11.30 (- 0.39%) / 11.79 (+ 12.10) billion yuan respectively, and the net profit is 3.48 (+ 12.60%) / 2.26 (+ 14.75%) / 2.88 (+ 41.5) billion yuan respectively. It is expected to be mainly due to the rapid growth of aviation compound materials due to the acceleration of delivery and the outstanding effectiveness of cost control. The net interest rate of new materials business in the first three quarters was 28%, 20%, 24.42%, respectively, with reference to 27.25%, 17.36%, 19.35% in the same period last year, or related to changes in product delivery rhythm and delivery structure between quarters. During the 14th five-year Plan period, the volume of key models in the aviation field accelerated, the proportion of superimposed new models increased significantly, and the company's product prepreg was located in the key link of composite preparation and occupied a dominant position, and the new materials business is expected to benefit from the core and maintain steady growth.

2) Machine tool equipment business: benefited from the year-on-year growth of special equipment and aviation parts processing business, realized income (43.4507 million yuan, + 17.50%); realized home net profit of-19.7296 million yuan, reducing losses by 9.8603 million yuan compared with the same period last year, mainly due to the improvement of business structure, the increase of comprehensive gross profit, the reduction of superimposed redundant personnel and the decrease of labor costs.

According to the 2022 annual report, the company's annual operating goal in 2023 is to achieve an operating income of 4.9 billion yuan (+ 10.21%) and a total profit of 1.176 billion yuan (+ 31.54%). In the first three quarters of 2023, the revenue side of the company achieved 73.94% of the annual operating target, and the total profit achieved the target of 84.52%. In order to successfully complete the annual report performance guidelines, Q4 needs to achieve an income of 1.277 billion yuan (+ 18.02%) and a total profit of 182 million yuan (+ 75%). According to 15% income tax, Q4 needs to achieve a net profit of 155 million yuan, a year-on-year growth rate of 56.91%. It is expected to continue the accelerated growth trend, in line with the view that the company is expected to start rapid growth in the second half of the year in our semi-annual report review. In addition, the revenue of the aviation new materials business plan in 2023 was 4.862 billion yuan (+ 11.56%), and 73.06% of the target was completed in the first three quarters of 23. The total planned profit is 1.296 billion yuan (+ 35.71%), 23H1 has achieved 52.01% of the annual target, and the second half of the year still needs to achieve a total profit of 622 million yuan (+ 71.35%). According to 15% income tax, the net profit of new materials business in the second half of the year is 529 million yuan (+ 104.13%), and the growth rate of 23H2 new materials business is expected to increase significantly.

In 2023, the company will continue to focus on new aviation materials and high-end equipment. We believe that as the company continues to strengthen the advantages of the new aviation materials industry and optimize the industrial structure of high-end equipment, its annual performance is expected to maintain steady growth. Profitability is expected to be greatly improved.

Profitability continues to improve and investment in research and development continues to increase. In the first three quarters of 2023, the company's gross profit margin was 37.44%, an increase of 4.46pcts over the same period last year, mainly because the company strengthened cost control and management during the reporting period, leading to a year-on-year increase in comprehensive gross profit margin. The company's net interest rate was 23.43%, an increase of 3.54pcts over the same period last year, and the increase of net profit rate was less than that of gross profit margin. The increase in expense rate during the period was mainly due to the increase of 1.24pcts to 10.29% over the same period last year, of which the increase in R & D rate of 0.65pcts was mainly due to the increase of 30.15 million yuan in R & D investment of subsidiary aviation industry over the same period last year; and the increase in management fee was mainly due to the increase of 36.77 million yuan in management expenses. As the company continues to optimize the allocation of resources and strengthen lean production management, the company's profitability is expected to be further enhanced.

Forward-looking indicators on the balance sheet are outstanding, and cash flow has improved. During the reporting period, the company's accounts payable increased by 896.67 million yuan over the beginning of the year (+ 110.50% compared with the beginning of the period), mainly due to the non-payment period for the purchase of aviation industry compound materials by subsidiaries, indicating that the company is actively preparing goods and organizing production. In addition, the project under construction increased by 46.12 million yuan over the beginning of the year (+ 30.46% compared with the beginning of the period), mainly due to the increase in expenditure on the production plant of advanced prepreg for the construction of aviation industry composite materials by subsidiaries, and the company continues to strengthen its production capacity expansion, which is expected to further strengthen the company's production and delivery capacity. At the same time, the company's accounts receivable increased by 1.40286 billion yuan over the beginning of the year (+ 82.56% compared with the beginning of the period), mainly because the subsidiary aviation industry compound materials income account was recovered at the end of the year, indicating that the company's current order delivery is smooth, and the recovery is expected to further improve the cash flow situation. The net cash flow of the company's operating activities in the first three quarters of 2023 was 368 million yuan, an increase of 131.88% over the same period last year, mainly due to the increase in sales due in the current period.

The subsidiary aviation composite material is in the key link of the prepreg in the middle reaches of the aviation composite industry chain, and occupies the leading position, relying on the design of the composite material, years of resin system accumulation and group channel relationship to build a deep barrier, its profit compound growth rate of 40.39% from 2018 to 2022. At present, the new models represented by Jmur20, ZMur20 and Ymur20 are gradually in mass production, and their composite materials account for a larger increase compared with the original models, which is bound to lead to an increase in the demand for composite materials, and the added value of the new models is higher, so it is expected that with the mass production and delivery of the new models in the next 2-3 years, the demand and value of composite materials will be greatly increased, with outstanding growth.

Investment suggestion: the company is in a leading position in the key link of the composite industry chain, directly benefiting from the volume of the new aircraft represented by 20, with outstanding growth, and the aviation industry, the controlling shareholder, pays attention to the follow-up changes as a pilot project of state-owned investment reform. The company's 2023-2025 net profit is expected to be 10.4,13.8 and 1.72 billion yuan respectively, with a 23-year 40 times pe, corresponding to a 6-month target price of 30 yuan, maintaining a "buy-A" rating.

Risk hint: military orders are lower than expected; civilian products expansion is not as expected.