Incidents: The company released its three-quarter report for 2023 on October 30. From 1 to 3Q23, it achieved revenue of 2.79 billion yuan, YoY +32.4%; net profit of 4.2 billion yuan, YoY +20.6%; net profit of 4.2 billion yuan, YoY +20.6%; net profit after deduction of 3.7 billion yuan, YoY +7.9%. Performance is generally in line with market expectations. Revenue growth is mainly due to growth in aviation, petrochemical and power forging businesses. Our comprehensive review is as follows:
3Q23 performance increased slightly; profitability remained relatively stable. Looking at a single quarter, 3Q23 had revenue of 810 million yuan, YoY -4.7%; net profit of 125 million yuan, YoY +2.8%; net profit of net income after deduction of 93 million yuan, YoY -23.3%. In terms of profitability, gross margin for the first three quarters decreased by 0.4ppt to 25.5% year on year; net profit margin decreased by 1.5ppt to 15.2% year on year. In 3Q23, gross margin decreased by 1.8ppt to 22.5% year on year; net profit margin increased by 1.1ppt to 15.4% year on year, and profitability remained basically stable. The increase in net interest rate in 3Q23 was mainly an increase in other earnings and a reduction in credit impairment losses. In 3Q23, other earnings increased by 23.75 million yuan to 39.73 million yuan over the same period last year, and credit impairment losses decreased by 17.88 million yuan to 7.38 million yuan compared to the same period last year. The two together had a positive impact on total profit of 41.63 million yuan.
Convertible bonds plan to raise 1.95 billion yuan, with the aim of enhancing the ability to forge a ring and extending downstream of the industrial chain. On August 17, 2023, the company disclosed the revised draft of the 2023 convertible bonds and responses to the inquiry letter. The convertible bonds plan to raise 1.95 billion yuan to enhance aerospace ring forging capabilities (invest 1.3 billion yuan), while actively expanding into the downstream machining sector (investing 4.6 billion yuan). 1) The ring forging project plans to purchase core ring forging equipment such as a 2000mm automatic ring production line, a 1500 ton/5 meter ring mill, a 12,000-ton press, and a 7,000-ton expander, which can meet the needs of downstream customers for large-scale ring parts and increase aerospace ring forging production capacity by 5,500 tons after delivery; 2) The precision processing project plans to purchase production equipment (79 sets) and auxiliary equipment (24 sets) in total to 103 units, increasing the finishing capacity of 41,700 pieces of aerospace structural parts and aviation equipment large-scale mold tooling after delivery. The precision machining project will improve the company's full product cycle service capabilities and increase product added value and profit levels.
Investment in R&D continues to increase; cash flow from operating activities has improved. The cost rate for the first three quarters increased by 0.6ppt to 7.9% year on year. Among them: sales expenses increased by 0.3ppt to 1.7% year on year; management expenses increased by 0.1ppt to 2.1% year on year; R&D expenses increased by 0.4ppt to 4.5% year on year; and R&D expenses for the first three quarters increased by 45.4% year on year to 125 million yuan. As of the end of 3Q23, the company: 1) accounts receivable and notes were $1.86 billion, up 8.4% from the end of 2Q23; 2) inventory of $960 million, which was basically the same as at the end of 2Q23; and 3) advance payments of $120 million, down 21.4% from the end of 2Q23. 4) Net cash flow from operating activities in the first three quarters was -7.19 million yuan, compared to -190 million yuan for the same period last year, mainly due to strengthened receivables management and increased repayments.
Investment suggestion: The company is one of the leaders in the aerospace industry segment in China. With the advancement of fund-raising projects and the release of production capacity, the “14th Five-Year Plan” period will continue to benefit from the boom in various fields of aerospace and new energy. According to the three-quarter report, we adjusted net profit from 2023 to 2025 to 600 million, 8.0 billion, and 1.04 billion yuan, corresponding PE to 17x/12x/10x. Taking into account the long-term prosperity of the downstream sector and the leading position of the company in segmentation, we gave it 20 times PE in 2023, corresponding to the target price of 98.6 yuan, to maintain the “recommended” rating.
Risk warning: downstream demand falls short of expectations; business development falls short of expectations; raw material price fluctuations, etc.