Incident: The company released its 2023 annual report on March 15, with annual revenue of 84.725 billion yuan, YOY +7.57%; net profit to mother of 2,447 billion yuan, YOY +5.47%, mainly due to the year-on-year increase in revenue from helicopters and avionics products. At the same time, some helicopter products were affected by price adjustment factors, and gross profit increased year on year. The results are in line with market expectations. The company accelerates industrial layout and scale expansion, and strives to build a world-class aviation high-tech industry group.

Complete aviation aircraft and supporting systems have been growing steadily; gross margins have all increased. In 2023, by business:

1) Aviation complete aircraft business: Achieved revenue of 22.255 billion yuan, YOY +9.60%, of which helicopter products achieved revenue of 21.271 billion yuan and YOY +21.61%. Increased helicopter sales and price adjustments for some products were the main reasons for the growth of the Group's aviation engine business. Total aviation revenue accounted for 26.26%, up 0.48ppt year on year; gross margin increased 1.55ppt to 13.02% year on year. 2) Aviation supporting systems and related business: Achieved revenue of 54.792 billion yuan, YOY +9.74%, of which the avionics business achieved revenue of 45.525 billion yuan and YOY +16.16%, which is the main reason for the revenue growth of the Group's aviation supporting systems and related businesses. Aviation supporting systems accounted for 64.67% of revenue, up 1.27ppt year on year; gross margin increased 1.51 ppt to 31.64% year on year.

3) Aeronautical engineering service business: Achieved revenue of 7.681 billion yuan, YOY -9.93%, mainly due to the aviation engineering service business improving its business structure and completing the disposal of new energy and other businesses at the end of 2022. Revenue accounted for 9.07%, down 1.75ppt year on year; gross margin decreased 2.72 ppt to 14.36% year over year.

Increase research and development to strengthen scientific and technological innovation; consolidate and enhance the competitiveness of major sectors. In 2023, the company's expense ratio increased by 1.25ppt to 16.74% year on year: 1) the sales expense ratio increased 0.13ppt to 1.31% year over year; 2) the management expense ratio decreased 0.14ppt to 6.67% year over year; 3) the financial expense ratio was -0.17%, which was -0.11% in the same period last year; 4) the R&D expense ratio increased 1.33ppt to 8.94% year over year. Profitability perspective: The company's gross margin increased 1.28ppt to 25.18% year on year; net margin increased 0.44ppt to 7.89% year over year. Profitability has improved. 2023, 1) Helicopter: The company, China Aviation Research Institute and Zhongzhi Co., Ltd. jointly developed h-eVTOL to accelerate the construction of strategic emerging industries. 2) General aircraft: The product further broadens the international market, and the 12F has obtained a model certificate issued by EASA, making it the only domestic civil aircraft in China that has obtained CAAC, FAA and EASA type certification at the same time. 3) Trainers: First Education 6 civil aircraft obtained AC and officially entered the civil aviation market. Furthermore, the company's aviation support systems and related businesses continue to promote technological innovation.

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. In 2023, the company's subsidiary China Aviation Aircraft completed the share exchange, absorption and merger of China Aviation Electromechanical and successfully raised about 5 billion yuan in supporting capital to vigorously promote the systematic, integrated and intelligent development of the aviation aircraft industry. The helicopter business has been further integrated, and core competitiveness continues to improve. The National Industrial Investment Fund subscribes to the company's domestic shares and becomes a strategic shareholder. We expect the company's net profit from 2024 to 2026 to be 2,937 billion yuan, 3.59 billion yuan, and 4.178 billion yuan, respectively. The current stock price corresponds to 2024-2026 PE of 8x/7x/6x respectively. We maintain the “Recommended” rating, considering the development space of the company's core business and the potential for improving profitability brought about by high-quality development.

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