The company released the “2023 Annual Report”. During the period, it achieved operating income of 29.07 billion yuan, an increase of 4.63% year on year; realized net profit of 1,886 billion yuan, an increase of 39.62% year on year; realized net profit without return to mother of 1,464 billion yuan, an increase of 110.19% year on year.

Our performance has been growing steadily for 23 years, and we have continued to promote high-quality development for 24 years. In 2023, the company achieved revenue ($29.07 billion, +4.63% YoY); realized net profit ($1,886 million, +39.62% YoY), mainly because the consolidated accounts for the same period of the previous year were restated after the merger was completed; and net profit withheld from non-return to mother ($1,464 billion, +110.19% YoY). By product, aviation products achieved revenue in 2023 ($24.738 billion, +8.63% year over year), gross margin increased 0.18 pct to 30.37% year on year; defense product realized revenue (1.05 billion, +10.57% year over year), gross margin decreased 1.34 pct to 29.37% year on year; modern industry and other realized revenue ($3.194 billion, -19.68% year on year), gross margin increased 4.70 pct to 24.94% year on year. 2024 business plan: Revenue is expected to be achieved (28.522 billion yuan, -1.67% year over year). Among them, defense business revenue declined due to factors such as industry policies, market environment, and insufficient order contract adjustments; other business revenue continued to grow. Profit side: The company adheres to the concept of high-quality development, continues to reduce costs and expenses, continuously improve economic efficiency, and is expected to achieve total profit in 2024 ($2,437 billion, +8.0% year over year).

Profitability has improved, and the three expense ratios are well controlled. In terms of profitability, the company's gross sales margin was 29.73%, up 0.95pct from the same period last year after the year-on-year review. In terms of period expenses, the company incurred sales expenses during the period ($273 million, +2.68% year over year); management expenses ($2,452 million, -0.42% year over year); and financial expenses ($99 million, +41.77% year over year), mainly due to a decrease in exchange earnings. The fee rate for the three items was 9.74%, down 0.35% from the same period last year. The company's R&D expenses ($3.489 billion, +27.09% year-on-year) are mainly due to increased R&D investment and increased R&D expenses. The company's credit impairment losses (-59 million, -321 million after recalculation for the same period last year) were mainly due to a reduction in bad debt losses; asset impairment losses (-166 million, -348 million after restatement for the same period last year) were mainly due to a decrease in asset impairment losses. The company's net profit margin on sales in 2023 was 7.41%, an increase of 0.95pct over the same period last year.

Related transactions are expected to continue growing in 2024. Judging from the related transaction announcements issued by the company, the company expects to sell 22 billion dollars of products to related parties within the Aviation Industry Group in 2024, an increase of 2.33% over the expected amount generated in 23, and an increase of 23.94% compared to the actual amount generated in 23, maintaining the growth trend.

The estimated deposit limit is $13 billion, up 7.44% from the estimated amount in '23, and 19.78% higher than the actual amount accrued in '23. We believe that there is a strong demand for aviation equipment upgrades. Among them, airborne systems are a core key area for aviation equipment upgrades, and it is expected to maintain a growing trend.

The launch of the flagship platform for the airborne industry has been completed to create a world-class supplier of aircraft airborne systems. On March 17, 2023, China Aviation Electromechanical terminated its listing; on April 13, 2023, the share exchange, absorption and merger implementation of this transaction was completed. Meanwhile, on June 26, 2023, the 5 billion yuan raised from this merger was collected to be used for the construction of 10 projects, including projects to increase the production capacity of airborne products such as aviation gas intake subsystems, and to supplement the company's working capital after the merger. After the merger of AVIC Electronics and AVIC Electronics, it will be the main platform for airborne systems, which will facilitate internal coordination and integration of airborne systems and promote performance improvement. Airborne products account for more than 40% of the total machine value, and the market space is huge. Furthermore, in this financing plan, Shen Fei and Cheng Fei each subscribed for 180 million yuan to strengthen ties with the main airborne product platform at the capital level. We believe that the merger plan for listed companies is the first step in integrating resources and achieving high-quality development in airborne systems. As the restructuring of research institutes continues to advance, there is still room for asset securitization in the future, and we are optimistic about the development of the company after the merger.

Profit forecast: The company's net profit for 2024/2025/2026 is expected to be 21.04/23.10/2,515 billion yuan, corresponding to 28, 25, and 23 times the valuation, maintaining the “Highly Recommended” rating.

Risk warning: Product orders fell short of expectations, and reform progress was lower than expected.