Incidents: On October 30, the company released its report for the third quarter of 2023. The company achieved total operating income of 1,711 billion yuan, +72.75% of the same period; net profit of 167 million yuan, +24.47% of the previous year; net profit after deducting 154 million yuan, +25.85% year-on-year in the first three quarters.

First three quarters of 2023: The subsidiary Delan Aerospace was fully put into operation, and revenue increased rapidly. On October 30, the company released its report for the third quarter of 2023. The company achieved a total revenue of 1,711 billion yuan in the first three quarters, +72.75% over the same period last year. Mainly, the company actively explores the market, promotes technological innovation and enhances the competitive advantage of products, is fully recognized by customers, and has achieved an increase in sales orders. At the same time, with the full commissioning of the subsidiary Delan Aerospace and the gradual release of production capacity, the company's overall production capacity has been steadily increased, achieving an increase in product sales volume. Net profit of the mother was 167 million yuan, +24.47% year-on-year; net profit after deducting non-return net profit was 154 million yuan, +25.85% year-on-year. The company achieved a gross profit margin of 27.56%, -6.31pcts year-on-year, and a net sales profit margin of 9.75%, -3.80pcts year-on-year. The cost rate for the period was 12.65%, -2.13pct year on year; the sales/management/R&D/finance expense ratio was 1.55%, 6.37%, 3.59%, and 1.14%, respectively, with year-on-year changes of -0.21, +0.16, -1.86, and -0.22pct, respectively.

2023Q3 Single quarter: The pace of the single quarter slowed, and profit margins declined. The company achieved revenue of 529 million yuan, +43.95%, -15.07%; net profit of 51 million yuan, +26.26%, -21.36%; net profit after deduction of 43 million yuan, +17.77% year-on-year, -29.86% month-on-month. Gross profit margin of 23.95%, y-8.88pct, -4.90pct; net sales profit margin 9.66%, y-1.40pct, month-on-month -0.82pct; period expense ratio 12.34%, y-3.23pct, month-on-month +0.10pct; sales/management/R&D/finance expense ratio was 1.60%, 6.15%, 3.18%, 1.41%, year-on-year changes -0.39, -1.21, -1.54, -0.09pct, -0.09pct, month-on-month change +0.13,+ 0.03, -1.00, +0.94pct. We believe that at present, the company's Deyang production line has been fully put into operation, but due to recent changes in the pace of downstream demand, production has slowed in a single quarter, production capacity utilization may have declined, depreciation and amortization have put pressure on the cost side. At the same time, there may also be certain changes in product structure, and many factors have combined to cause a decline in gross margin. On the cost side, the impact of the company's equity incentive fee calculation is significant, leading to a slight slowdown in profit growth. In the future, as demand picks up, capacity utilization increases, and the impact of equity incentive expenses decreases, the company's profitability is expected to improve.

Promote Dongfeng through aero-engine outsourcing and build a vertical platform enterprise. In July 2023, the company and related parties established a new Guizhou Juhang subsidiary to enter the surface treatment business. The company held 51% of the shares; in March 2023, the company announced that it had obtained 5.84% of Liyang International's shares in the auction, with a transaction price of 356.339 million yuan. Liyang International has mechanical processing capabilities, mainly engaged in the manufacture of aero-engine parts for high-end equipment at home and abroad, and is also one of the earliest domestic enterprises to subcontract the production of foreign trade aviation parts; in 2022, the company invested in the construction of a precision manufacturing industrial park for aero-engine gas turbines rings (including 2 heat treatment production lines and 2 machining production lines) and participated in the construction of titanium alloy business by Longbai Group.

We believe that the company is accelerating the expansion of business from forgings to downstream machining leaders and upstream raw materials in aviation development OEMs, thereby building integrated upstream and downstream expansion of the industrial chain, reducing the overall cost of products, and continuously improving the position and comprehensive competitive strength of the industry.

The second phase of the equity incentive plan has been launched and implemented. Releasing stability in performance allows the company to complete two consecutive phases of equity incentives in 2022, while the chairman of the board completes targeted increases in holdings. On July 27, 2022, the second phase of the company's equity incentive plan was implemented. The plan is to grant no more than 3.3567 million shares (after revision) to the company's directors, executives and core executives, accounting for about 2.3976% of the total share capital at the time of announcement, and the grant price is 35.00 yuan/share. We believe that continuous equity incentives show the company's management's confidence in the continued growth of performance, and can also establish a long-term restraint mechanism for the company's management to continuously promote the improvement of the company's management level. The chairman's targeted increase in holdings can supplement the company's working capital, increase risk resilience, and further demonstrate the company's management's confidence in the company's continued rapid development in the future.

Profit forecast and rating: We believe that 2023 may be the first year of the launch volume of new engines represented by medium thrust engines. At the same time, midstream companies continue to benefit from accelerated outsourcing of aviation engine units, and the company is expected to benefit the core. Affected by the pace of demand and depreciation and amortization of new production lines, we slightly revised the company's forecast net profit for 2023-2025 from 2.95/505/752 million yuan to 2.52/4.55/722 million yuan, corresponding P/E of 29.01/16.07/10.12x, maintaining the “buy” rating.

Risk warning: the risk of fluctuations in the military goods business, the risk that the development of new models of equipment does not meet expectations, the risk that the progress of fund-raising projects and earnings will not meet expectations, and the risk that the business conditions and profitability of subsequent target enterprises will not meet expectations, etc.