For the first time, we covered the only aviation high-tech industry group in the Hong Kong stock market: China Aviation Technology (2357.HK), and gave it a “recommended” rating. The main reasons are as follows:

Deeply cultivate the main aviation industry; continue to promote specialized integration. 1) Development history: The company was founded in 2003 and listed on the Hong Kong Stock Exchange in the same year. It is the only aviation high-tech military and civilian general product flagship company in the Hong Kong capital market.

The company is backed by the Aviation Industry Group. The actual controller is the State Assets Administration Commission, which has important subsidiaries such as Zhongzhi Co., Ltd., Hongdu Airlines, China Aviation Aircraft, and China Aviation Optoelectronics. Since the divestment of the automobile business in 2009, the company has gradually grown into an aviation high-tech enterprise focusing on aircraft components, aviation parts, and aeronautical engineering services. From 2022 to 2023, the company will continue to promote major asset restructuring. The subsidiary China Aviation Electronics will exchange shares to absorb and merge China Aviation Electromechanical; the subsidiary Zhongzhi Co., Ltd. plans to acquire 100% of the shares of Hafei and Changfei. 2) Operating conditions: From 2018 to 2022, the company's revenue increased year by year, CAGR = 15.7%; from 2017 to 2021, the company's net profit to mother increased year by year, CAGR = 18.0%. The company's full-industry chain layout model has led to a steady trend of growth in performance.

The aviation machine business is in a period of opportunity for both equipment upgrades and low-altitude economic development. 1) Zhongzhi Co., Ltd.: It is the main force in the domestic helicopter manufacturing industry with the largest scale, the highest output value, and the most complete product range. It is proposed to issue shares to purchase 100% of Hafei and Changfei's shares from Aviation Industry Group and China Aviation Technology. The aim is to expand the range of helicopter products, which may accelerate development in the next few years. 2) Hongdu Airlines: It is the only domestic enterprise that also has the ability to develop, manufacture and manufacture a full range of junior, middle, and advanced trainer aircraft. It has focused on the field of trainers for decades, independently developing and manufacturing various types of trainers such as the CJ6, K8, and L15. In December 2023, the Central Economic Work Conference proposed “building a number of strategic emerging industries such as commercial aerospace and low-altitude economy”. The forward-looking strategic layout of Hongdu Airlines. The opening of the blue ocean of the low-altitude economy will inject new growth impetus into its future development.

The aviation ancillary business has the potential to grow into “world-class”. 1) China Aviation Airborne: It is a comprehensive avionics system solution provider. The major asset restructuring of the stock exchange, absorption and merger of AVIC has been successfully completed. The business covers aviation mechatronic systems and avionics systems, and the leading aviation airborne systems have entered a new stage of high-quality development. 2) China Aviation Optoelectronics: It is a core supplier of high-end optical, electrical and fluid connection technology and products. It is a leading domestic connector provider. It is firmly moving towards a “world-class” interconnection solution supplier, continuously optimizing the industrial layout, and forming a new pattern of domestic and foreign development. From 2017 to 2022, AVIC Optoelectronics's revenue and net profit CAGR were 20.0% and 26.9% respectively, improving quality and efficiency to create high-quality development.

Investment suggestions: The company has gradually grown into an aviation high-tech enterprise with aviation components, parts, engineering services, etc. as the main business, achieving the layout of the entire aviation industry chain, which is scarce. At the same time, the company is also a testing ground for aviation industry group reforms. In 2023, it carried out restructuring of the airborne sector and helicopter sector, etc., and introduced the National Industrial Investment Fund as a strategic shareholder to firmly establish strategic goals and help high-quality development. We expect the company's net profit from 2023 to 2025 to be 2,513 billion yuan, 3,064 billion yuan, and 3,697 billion yuan respectively. The current stock price corresponding to 2023-2025 PE is 9x/7x/6x, respectively. Considering the development space of the company's core business and the potential for improving profitability brought about by high-quality development, we covered it for the first time and gave it a “recommended” rating.

Risk warning: Product development falls short of expectations; downstream demand falls short of expectations, etc.