Incident: On March 30, the company released its 2023 annual report. In 2023, it achieved operating income of 46.248 billion yuan, an increase of 11.18% over the previous year; net profit to mother of 3.07 billion yuan, an increase of 30.47% over the previous year; net profit after deducting non-return to mother was 2,910 billion yuan, an increase of 32.78% year on year.

Profitability reached a new high, and R&D investment continued to increase. 1) On the revenue side, 2023Q4 achieved revenue of 11.616 billion yuan, an increase of 2.63% over the same period, and a steady increase in product delivery. During the reporting period, the aviation manufacturing business achieved revenue of 45.953 billion yuan, an increase of 11.39%; a gross profit margin of 10.99%, an increase of 1.01 pct. 2) On the profit side, 2023Q4 achieved net profit of 643 million yuan to mother, an increase of 13.87% over the same period. 3) In terms of profitability, in 2023, the company achieved a gross profit margin of 10.95%, an increase of 1.00pct; a net sales margin of 6.51%, an increase of 0.95pct, a record high. The quality and efficiency of the company's operations continued to be optimized during the reporting period to achieve steady growth in business performance. 4) On the cost side, the company's three fees in 2023 accounted for 1.58%, up 0.09pct year on year, of which sales expenses were 0.13 million yuan, down 26.5% year on year, mainly due to reduced exhibition fees; financial expenses were -285 million yuan, mainly due to a decrease in net exchange income; and management expenses were 1.05 billion yuan, an increase of 10.48% year on year, mainly due to increased expenses such as management consulting and equity incentives. R&D expenses were 976 million yuan, an increase of 31.8% over the previous year. As new equipment development accelerates and R&D investment continues to increase, core competitiveness is expected to further improve.

The industrial chain has been extended vertically, and the chain leader position has been further stabilized. 1) Maintenance: In April 2022, the company acquired 60% of the shares of Jilin Airlines and increased its capital to become its controlling shareholder, further consolidating aviation maintenance and spare parts manufacturing business, which is expected to lead to revenue expansion. In 2023, Jihang achieved revenue of 970 million yuan (yoy +11.5%), and the company actively built a maintenance guarantee system, which is expected to open up future market space; 2) R&D: In January 2023, the company announced that it plans to increase capital and invest in the Yangzhou Collaborative Innovation Research Institute of Shenyang Aircraft Design Institute to smooth the engineering application process of new technologies, continue to advance breakthroughs in core key technologies, and lay out emerging technologies and products ahead of schedule. 3) Fixed increase: In December 2023, the company announced that it plans to raise no more than 4.2 billion dollars for Shenfei's relocation, capacity building for composite production lines and titanium alloy production lines, and to enhance the maintenance capacity of Ji Airlines. In 2023, Shen Fei achieved revenue of 45.34 billion yuan (yoy +11.4%) and net profit of 2.96 billion yuan (yoy +32.5%), giving full play to the role of chain length and continuously optimizing the efficiency and quality of supply chain support.

Volume and efficiency are improved, and performance is expected to continue to be realized. 1) The company's cross-generational products have deep lineage hierarchies, and the growth in delivery of new models drives continuous improvement in performance. Under the urgent need to “replenish” and “improve the quality” of China's military aircraft in the 14th Five-Year Plan, the company, as a leading domestic fighter/carrier-based aircraft, has a deep lineage of products across generations, which is expected to drive continued revenue expansion along with the increase in delivery of new models. 2) Improving quality and efficiency is combined with economies of scale and scope, and profitability is expected to continue to increase. Equity incentives drive the desire to release internal profits. The company became the first aircraft manufacturer with a net interest rate to break through the 5% bottleneck. In the future, the superimposed product structure continues to be optimized and multiple batches of products drive economies of scale/scope, and the company's profit level is expected to increase further. 3) Focus on the core competencies of R&D, manufacturing and maintenance, and promote the continuous upgrading of “big collaboration” through strategic cooperation. “Small core and big collaboration” promotes companies to focus on core capacity building, promote vertical transformation and upgrading of the industrial chain, and improve supply chain management mechanisms.

Investment suggestions: Considering the adjustment of the value-added tax policy while the company is actively improving quality and efficiency, we are adjusting the company's profit forecast. The company's revenue for 2024-25 is 52,681 billion yuan and 60.558 billion yuan (previous value was 61,189 billion yuan and 72,889 billion yuan), respectively, adding revenue of 68.77 billion yuan in 2026; net profit to mother in 2024-25 was 3.708 billion yuan and 4.520 billion yuan (previous value was 3.456 billion yuan and 4.229 billion yuan), respectively. 5.480 billion yuan, corresponding EPS is 1.35 yuan, 1.64 yuan, and 1.99 yuan respectively, and corresponding PE is 27X, 22X, and 18X respectively. As one of the leading domestic fighter companies, it will fully benefit from military aircraft release and maintain a “buy” rating.

Risk warning: Military aircraft installation progress falls short of expectations; new product development falls short of expectations; tax reform policies fall short of expectations; risk of performance forecasts and valuation judgments falling short of expectations; risk of untimely updates of research information.