Aerospace forging supplier, the performance is growing steadily. The company's main products cover all kinds of metal forgings such as rolled annular forgings, free forgings, precision die forgings, etc., which can be used in various industries such as aviation, aerospace, electricity, petrochemicals and other types of machinery. It has now become one of the few high-tech enterprises in China that can supply annular forgings in high-end fields such as aviation, aerospace, ships, etc. In the first three quarters of 2023, the company achieved operating income of 2.79 billion yuan, an increase of 32.3% year on year; net profit to mother was 423 million yuan, an increase of 20.6% year on year. Aerospace forgings are the company's largest business segment, accounting for more than 60% of gross profit since 2021.

Global demand for civil aviation is growing steadily, and the domestic aerospace industry is developing at an accelerated pace. Global demand for civil air travel has continued to recover since 2023, old aircraft in service have gradually withdrawn from the market, and civil aircraft deliveries are expected to maintain a steady upward trend. China's “14th Five-Year Plan” will clearly focus on promoting the demonstration operation of domestic C919 large airliners and the serial development of ARJ21 regional airliners, and the domestic civil aviation manufacturing industry will usher in opportunities for booming development. In 2024, China Aerospace is expected to carry out about 100 launch missions throughout the year, and the number of launches increased by 49% over the same period last year. Domestic aerospace parts companies have gradually developed into high-end market segments through independent research and development and introduction of advanced equipment. While continuously seeking overseas orders, they have achieved improved performance by following the batch delivery of large domestic aircraft.

The electric forging market has broad prospects. With the development of renewable energy, the global demand for forgings for power generation equipment is steadily increasing. We expect the global land wind capacity to stabilize at over 110 GW each year and steadily grow to around 140 GW in 2027; offshore wind power will rapidly grow from 16 GW in 2024 to more than 38 GW in 2027. In terms of thermal power, it is expected that 246 GW of coal power will be added during the “14th Five-Year Plan” period, and the installed capacity will grow rapidly in stages; natural gas power generation is an important source of system flexibility, and the localization and replacement of new installed equipment will gradually advance in the future. During the “14th Five-Year Plan” and “15th Five-Year Plan” period, the national demand for hydropower equipment reached 72 GW and 108 GW, respectively.

The company's fund-raising projects are progressing steadily. The company's future growth mainly comes from an increase in aerospace production capacity and sales volume. With the gradual commissioning of the company's “Hot End Special Alloy Materials and Components Construction Project for Aero Engines and Gas Turbines” at the end of 2023, and the gradual implementation of the “Aerospace Special Alloy Structural Parts Intelligent Production Line Construction Project” and aerospace precision processing capacity in 2025, we expect the company's production in the aerospace field to increase significantly in the next few years, gradually increasing from 3,000 tons in 2022 to 4,000 tons in 2024 and 5,100 tons in 2025.

Profit forecast and valuation: We expect the company to achieve operating income of 35.95/37.68/3,966/ 4.486 billion yuan in 2023-2026, up 29%/5%/13% year on year; net profit to mother of 5.09/5.39/5.60/681 million yuan, up 5%/6%/4%/22% year on year. The current stock price corresponding PE is 16.6/15.7/15.1/12.4 times, respectively. Taking into account the FCFE valuation and relative valuation, we believe that the reasonable valuation range for the company's stock price is 84.3-89.0 yuan, corresponding to the 2024 dynamic PE range of 19.0-20.0 times, which has 21%-28% premium space compared to the company's current stock price. Covered for the first time, a “gain” rating was given.

Risk warning: the risk that demand in the aviation market falls short of expectations; the risk of fluctuating raw material prices.