Incident: On February 6, 2024, the company issued the “Notice Concerning the Implementation of Daily Related Transactions in 2023 and the Forecast Status of Daily Related Transactions in 2024" 1) The actual amount of daily related transactions that occurred by the company in 2023 was $55.485 billion, an increase of 15.84% over the actual amount incurred in 2022. 2) The estimated total amount of related transactions in 2024 is 61,063 billion yuan, which is basically the same as the previous year's estimated amount of 60.494 billion yuan, an increase of 0.94% over the previous year. Among them, the estimated amount of raw materials, fuel, power, etc. purchased from related parties totaled 24.623 billion yuan, an increase of 12.30% over the actual amount of 21.927 billion yuan incurred in 2023, mainly due to an increase in procurement volume. We believe that the company faces end customers downstream as an OEM, so the associated purchase amount in the 2024 expected related transaction amount is somewhat predictive for future operations.
The company expects related procurement amounts to continue to grow in 2024. The company has achieved a year-on-year increase in related procurement amounts for three consecutive years (20-23) during the “14th Five-Year Plan” period. Demand for the company's defense products is still strong. Currently, the company has implemented phase II equity incentives and continues to promote low-cost sustainable development, so the fighter leader can be expected in the future.
Build an integrated platform for “research, manufacture and repair”
In 2022, the company acquired shares in Jilin Airlines and increased its capital. Its main business is aviation defense equipment maintenance, and it has the ability to repair certain J-type aircraft. At the same time, Jihang may rapidly improve production and operation standards and aviation equipment maintenance capabilities by absorbing the manufacturing capabilities and experience of China Airlines Shenfei's complete aircraft (in 2022, the net profit margin of Jihang reached 4.4%, +1.97 pcts year on year). In January 2023, the company announced that it plans to increase its capital to invest in the Yangzhou Collaborative Innovation Research Institute of the Shenyang Aircraft Design Research Institute to promote the system integration of design, R&D, manufacturing, and maintenance service resources. In December 2023, the company decided to raise capital (planned to be no more than 4.2 billion yuan) to further enhance the company's aviation maintenance service guarantee capabilities and build a solid foundation; at the same time, complete the company's partial relocation and construction, and capacity building for composite and titanium production lines. We believe that through the acquisition of Ji Airlines, the investment in research institutes and fixed capital raising construction projects, the company is conducive to improving batch repair capabilities and the ability to guarantee scientific research and production tasks. The company is expected to establish a full-life cycle maintenance system for aviation equipment, complete the vertical extension of the industrial chain, open up a broad back-end maintenance market space, bring new valuation increases, become an integrated platform for “research, manufacturing and repair”, and further strengthen its leading position in the industry.
Leading suppliers of complete fighter aircraft are expected to fully benefit from mass production/model research and demand companies that mainly manufacture aviation defense equipment products. The current model products cover three- and fourth-generation air force fighters/carrier-based aircraft. We believe that the demand for leapfrog development of defense equipment continues to rise in the 14th Five-Year Plan. The company's main aviation defense equipment products meet the construction needs of China's strategic air force. The development progress of its mass production demand is expected to further increase and accelerate, and the company's performance is expected to improve rapidly.
Profit prediction and rating: As a leading fighter enterprise in China, we comprehensively consider multiple factors such as the company's current product fleet volume, future model pipeline, back-end maintenance market incremental space, and military pricing mechanism reform to drive performance release, and believe that the company's short, medium- and long-term development trend is positive. The company implemented the second phase of the equity incentive plan on November 28, 2022, and stable performance can be expected. We expect the company's projected net profit for 2023-2025 to be 30.08/38.50/5.050 billion yuan, corresponding to a PE of 33.23/25.96/19.79x, maintaining a “buy” rating.
Risk warning: risk of fluctuations in military business; risk of developing new models of equipment falling short of expectations; risk of product price; risk of business conditions and profitability falling short of expectations.