Event: The company released its report for the third quarter of 2023. The first three quarters of 2023 achieved revenue of 2,795 million yuan, +32.35%; net profit of 423 million yuan, +20.61% of the previous year; net profit attributable to the parent company after deduction was 368 million yuan, +7.92% year-on-year.

First three quarters of 2023: Revenue continued to grow, and aeropec power grew rapidly. On October 30, the company released its report for the third quarter of 2023. The first three quarters achieved revenue of 2,795 million yuan, +32.35%; net profit of 423 million yuan, +20.61% of the previous year; net profit attributable to the parent company was 368 million yuan, +7.92% year-on-year after deduction.

The company's revenue grew rapidly, mainly benefiting from the rapid growth of aviation, petrochemical and power forging businesses. The company's gross profit margin was 25.49%, y-0.42pct; net sales profit margin was 15.15%, y-1.47pct. The expense ratio for the first three quarters was 7.93%, +0.62 pct year on year, while sales/management/R&D/finance expense rates were 1.65%, 2.06%, 4.46%, and -0.24%, respectively, with year-on-year changes of 0.31, 0.1, 0.4, and -0.2 pct, respectively. Among them, the company continued to increase R&D investment. R&D expenses in the first three quarters of 2023 reached 125 million yuan, an increase of 45.39% compared with 85.64 million yuan in the third quarter of 2022. Net cash flow from operating activities was -7.19 million yuan for the first three quarters of 2023 and -190 million yuan for the first three quarters of 2022, mainly due to the company's strengthened receivables management and increased repayments.

2023Q3 single quarter: The pace of delivery in a single quarter slowed, and profit margins were basically stable. The company's Q3 achieved revenue of 814 million yuan, -4.73%, -21.56%; net profit of 125 million yuan, +2.84%, -19.14%; net profit after deduction of 92.81 million yuan, -23.27% year-on-month, and -34.37% month-on-month. The company's revenue pace slowed down in the third quarter alone. We think it is mainly related to downstream mainframe units actively digesting finished ring forging inventory. The company's Q3 sales gross profit margin was 22.50%, y-1.85pct, -4.58pct; net sales profit margin 15.38%, +1.13pct, +0.46pct; Q3 expense ratio 9.34%, +2.75pct, month-on-month +2.59pct, sales/management/development/finance expense ratio was 1.95%, 2.64%, 4.31%, 0.44%, year-on-year, respectively, fluctuated 0.89pct, 0.98pct, 0.45pct, 0.43pct, month-on-month The changes were 0.28 pct, 0.79 pct, -0.02 pct, and 1.54 pct, respectively.

Continuously build core competencies, and the company's competitiveness is expected to improve

In 2023, the company issued convertible bonds, with a total investment of 1,297 billion yuan for the construction of an intelligent production line for aerospace special alloy precision annular forgings to improve the company's own equipment and technology level in the field of aerospace annular forgings and expand its comprehensive competitiveness in the field of high-end forgings. A total investment of 462 million yuan was invested in aerospace component precision processing and construction projects to meet the development needs of downstream customers, extend existing forging production and rough processing business downstream to precision processing, improve industry chain coverage and full product cycle service capabilities, and further enhance the added value and profit level of the company's products. At the same time, 580 million yuan of working capital was added. In 2022, the company targeted additional distribution, with a total investment of 1.5 billion yuan for the construction of an intelligent production line for special alloy structural parts for aerospace, improving the company's development and production support capacity for special alloy structural parts, meeting the market demand for special alloy structural parts in the domestic aerospace and other high-end equipment fields, and further enhancing the company's market competitiveness. We believe that the company has continued to optimize its product business layout over the past two years. On the basis of the ring forging business, the horizontal (die forging, etc.) and vertical (machining, etc.) business has been further expanded. After production capacity is put into production, the corresponding products are expected to follow the development or rapid release of the national defense and military industry and the new energy industry such as wind power and photovoltaics.

Profit forecast and rating: In summary, we believe that as a high-end high-tech enterprise for chain forgings in China's aviation development industry, the company is expected to benefit from the “14th Five-Year Plan” trend of increasing demand in the aero engine industry and the increase in the proportion of OEMs outsourcing under policy guidance.

At the same time, combined with the rapid increase in demand for superimposed missiles and the company's fixed increase in production to achieve business expansion, the company's performance is expected to be rapidly released. Considering that capacity expansion and climbing still require investment and time, we adjusted the company's forecast net profit for 2023-2025 from 623/8.15/1,054 million yuan to 6.11/7.82/983 billion yuan. The corresponding P/E is 16.96/13.26/10.55x, 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.