Net profit to the mother increased by 112% in '23. Maintaining the “buy” rating, Cathay Pacific Group published an annual report. In 2023, it achieved revenue of 2,541 million yuan (yoy +18.05%) and net profit of 305 million yuan (yoy +112.00%). Among them, Q4 achieved revenue of 730 million yuan (yoy +21.98%, qoq +9.80%) and net profit of 789.03 million yuan (yoy +238.37%, qoq -19.02%). We expect the company's 2024-2026 EPS to be 0.60, 0.70, and 0.79 yuan respectively (previous value 2024-2025 0.60 and 0.69 yuan). Comparable to the 24-year Wind, the average PE value was 17 times. Considering that the company is upgrading and iterating bombing products and expanding into non-explosive fields to build a collaborative development layout for the civilian explosives integration+rail transit automation and information+new military materials industry, the subsidiary Yongning Technology's product volume and price continued to improve, giving the company 25 times PE in 24 years, with a target price of 15.00 yuan (previous value of 12.6 yuan), maintaining a “buy” rating.

The civilian explosion business continues to improve, and the overall gross margin is relatively stable

In '23, the company's integrated explosion business achieved revenue of 1,745 billion yuan, up 19.71% year on year. The increase was mainly due to the increase in industrial explosives production and sales and electronic detonators completely replacing ordinary detonators; the military new materials business achieved revenue of 173 million yuan, a year-on-year decrease of 3.99%; rail transit automation and information technology business achieved revenue of 243 million yuan, down 7.30% year on year; and other business revenue of 380 million yuan, an increase of 50.56%, mainly due to a sharp rise in the volume and price of potassium perchlorate products of the holding subsidiary Yongning Technology. In terms of gross margin, the company's overall gross margin level was 35.88%, up 0.5 pct from '22; of these, the gross profit margin of the civilian explosion integrated business was 35.77%, down 0.26pct from '22; the gross profit margin of the military new materials business was 19.36%, up 0.35pct; and the gross margin of the rail transit automation and information technology business was 39.48%, down 10.37% from '22.

The expense ratio declined. Net profit increased significantly due to no impairment of goodwill, and the expense ratio for the 23-year period of the company was 19.63%, down 0.78 pct from '22. Among them, the sales expense ratio was 3.98%, an increase of 2.66 pct, mainly because the company increased its business development efforts; the management expense ratio was 10.44%, a decrease of 0.12 pct; and the R&D expense ratio was 5.44%, an increase of 0.01 pct. Furthermore, the company calculated a goodwill impairment of 120 million yuan in 22 years, and there was no impairment of goodwill in 23 years, so net profit increased significantly.

The company's net operating cash flow in '23 was 372 million yuan, an increase of 28.26%.

Deeply involved in scientific research and production in the military industry, which has potential for future growth, the company was formerly an enterprise under the Jiangxi National Defense Science, Technology and Engineering Office. It 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 military industry business, 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.