The collaborative development of “one, two wings” covered the first “buy” rating. Cathay Pacific Group has now formed a business pattern with integrated development of civilian explosives as the core and supported by civil-military integration and rail transit and information technology industries. We expect the company to achieve net profit of 3.00/3.76/431 million yuan in 23-25, corresponding to PE 22/17/15X, respectively. Comparable to the 2024 Wind, the average PE value is 17 times. Considering that the company is upgrading and iterating bombing products and expanding into non-explosive fields, building a collaborative development layout for the civilian explosion integration+rail transit automation and information+new military materials industry, the company was given a target PE of 22X in 24, corresponding to a target price of 13.20 yuan, and the first coverage gave it a “buy” rating.

Civilian explosion+rail transport+civil-military integration has blossomed in many places, and the company's performance continues to grow steadily. The company's three major sectors are civilian explosion integration, rail transit automation, informatization, and civil-military integration: 1) Civilian explosion integration sector, the company's main products are integrated railway power supply systems, power supply production scheduling and command systems, etc.; 3) Civil-military integration industry sector. The company's products include tungsten-based alloy materials, railway tantalum metallurgy products, potassium perchlorate, military simulation platforms, etc. On the revenue side, the company's CAGR for 19-22 was 25.48%. After excluding the influence of 120 million yuan depreciation of the subsidiary Taige Era in '22, the net profit CAGR for 19-22 was 39.36%. Recently, the company's performance has maintained steady growth. 23Q1-Q3 achieved revenue of 1,811 million yuan, +16.54% year over year, and realized net profit of 226 million yuan, or +12.41% year over year.

The development of the explosives industry has ushered in policy dividends. The electronic detonator market has vast space, and the main application scenarios for explosives are mining and infrastructure construction, etc., and the industry has licensing barriers and regional characteristics. The “14th Five-Year Plan” industry plan proposes development goals to increase industrial concentration and reduce the number of enterprises, and establishes a specific schedule for stopping the production and sale of industrial detonators other than electronic detonators. If the domestic demand for detonators stabilizes at around 800 million rounds after the replacement is completed, the average annual market space is about 11.2 billion yuan. As penetration rates increase and safety license production capacity climbs, electronic detonators are expected to show a pattern of tight supply.

Deeply involved in the field of civil-military integration, future growth potential can be expected

The company, formerly known as an enterprise under the Jiangxi National Defense Science, Technology and Engineering Office, was deeply involved in the field of civil-military integration with the advantage of civilian explosion qualifications. The total number of provincial civil-military integration enterprises under the company reached 7. The wholly-owned subsidiary Xinyu Cathay Pacific is the largest manufacturer of military unmanned target aircraft rocket boosters in China; Yongning Technology is the leading manufacturer of potassium perchlorate; Tuohong New Materials and Mitsuishi Nonferrous Metals's main products are tantalum-niobium compounds, with an annual production capacity of 1,500 tons after full production in 2024; the holding subsidiary Aoke Xincai has second-level confidentiality qualifications for weapons equipment research and production units, and the products are used in special ammunition. Based on the further development of the company's existing business in the military industry, the performance of the civil-military integration sector during the “14th Five-Year Plan” period is expected to be further released.

Risk warning: raw material price fluctuation risk; production safety risk; policy change risk.