Key points of investment
Incident: The company released the 2023 annual report and the 2024 quarterly report. Net profit for the full year of 2023 was 2,412 million yuan, net profit to mother was 303 million yuan, -24.50%; net profit after deducting non-return to mother was 280 million yuan, +22.89% year on year; 24Q1 achieved revenue of 662 million yuan, +9.07% year on year, net profit of 0.91 billion yuan year on year, +29.05% year on year. Net cash flow from operating activities in '23 was $234 million.
High-end precision casting leaders aim to be the “flower of industry” and promote the extension of the value chain+industrial chain. The company, formerly known as Anhui Huoshan Yingliu Foundry Co., Ltd., was established in August 2000. The company's products are positioned as high-end components for special equipment. It has a complete industrial chain integrating casting, processing and assembly welding. It has a high level of process technology, leading domestic equipment level, and a high share of overseas revenue. It is an important supplier for many large international and domestic enterprises. At the beginning of its establishment, it successively established cooperative relationships with leading global customers such as Emerson, Caterpillar, and Tyco to supply products such as oil and gas valve parts and mechanical equipment components; entered the nuclear power field in 2009 and became one of the first companies in the industry to obtain the “Civil Nuclear Safety Equipment Manufacturing License” issued by the National Nuclear Safety Administration; it was listed on the Shanghai Stock Exchange motherboard in 2014, and initially raised funds for heat treatment (thermal isostatic pressing) technology transformation projects for superalloys and high-performance components, continuously promoting high-end castings. The company continues to promote the extension and development of the industrial chain and value chain, and has achieved remarkable results in the two advanced industrial fields of two engines (gas turbines, aero engine parts manufacturing) and new nuclear energy materials. In recent years, the traditional business in the mechanical oil and gas sector has remained stable, and the revenue share of the “two aircraft plus nuclear energy” business segments has continued to increase (from 18% to 48% in 2018-23), and gradually entered the harvest period. The overall gross margin of the product remains at a considerable level of 35% to 40%. With the release of high-value-added products, profitability is expected to increase further. In terms of extending the industrial chain, it acquired German SBM in 2016, completed the introduction of two turboshaft engine technologies, and established Yingliu Aviation, extending from the field of “two-plane” hot-end components to the field of complete aero engines and supporting helicopters and drones; in 2018, it acquired 60% of Tianjin Hangyu's shares, adding production capacity for high-end aluminum alloy castings to meet the needs of high-end lightweight aerospace parts. In addition, Jin'an A1 General Airport is an important supporting facility for Yingliu Aviation Industrial Park. It is expected to complete the inspection and certification process and commence operation in the first half of '24. The company has built a complete chain in the low-altitude field, from generators and complete machines to airport operations. Under the current trend of China's low-altitude economy taking off, this business is expected to blossom.
The two-aircraft business continues to expand, and military and civilian customers are steadily expanding. According to “World Air Forces 2022” released by Flight Global, as of the end of 2021, the number of US military aircraft was 13,246, ranking first in the world. There is a big gap between the number of military aircraft in China and the US. In the context of building a strategic air force, military aircraft have been upgraded to drive the rapid development of the aviation materials market for military aircraft. The country has launched a “two-plane special project”, listing aero engines and gas turbines as one of the key development directions for strategic emerging industries, and the aero engine-related industry has entered a period of rapid development. On the civil side, according to the “Current Civil Aviation Market Outlook” released by Boeing in September 23, driven by economic development far above the global average and growth in domestic air travel, the size of China's civil aviation fleet will more than double by 2042. The aircraft received in the next 20 years will account for one-fifth of global deliveries. At the same time, the continued development of e-commerce and express delivery industries will also drive demand for freighters. Domestic civil aircraft such as the C919 and ARJ21 have been mass-produced one after another. Due to the urgent need for independent innovation and reduction of manufacturing and maintenance costs, civil aviation materials will gradually be domesticated and replaced in the next few years. In 2023, the company's new aerospace materials and components business achieved revenue of 788 million yuan, +25.82% year-on-year. Various models in the gas turbine business have achieved key breakthroughs, with new orders exceeding 600 million yuan. Among them, it was the first to pass the inspection and batch delivery of new products with Class 1, 2, and 3 directional hollow turbine blades from the national “Two Engine Project”, providing a strong guarantee for the smooth launch of 300MW heavy gas turbines; strategic agreements were signed with international gas engine leaders, and the order amount broke through a new high. A certain type of aero engine chassis supplied to Company G accounts for more than 50% of the global market share, and orders rolled over until 2026; continued to deliver domestic aero engine blades in batches for a group, while developing and delivering the first set of blades; and also delivered chassis, blades, etc. for large domestic commercial aircraft engines. Over the years, the advantages of the entire industry chain have been gradually built. The superalloy category covers isometric crystals, directional crystals, and single crystals, which basically meet current master alloy grade requirements; the construction of a “two-machine” hot end component processing line and a thermal barrier coating production line has progressed smoothly, and it is expected that the first phase of the project will be put into operation in '24.
Pioneer in the localization of nuclear power, completing a multi-product layout. In the context of energy insurance and green transformation, the advantages of nuclear power as a baseload power source have been demonstrated. In 22 and 23, 10 units were approved for 2 consecutive years, and the boom increased. Currently, nuclear power accounts for only 4.86% of China's power generation (as of the end of 2023), and there is a lot of room for improvement compared to the global average of 10.1% of nuclear power (WNA data for '21). According to the Nuclear Energy Industry Association, the share of China's nuclear power generation is expected to rise to 10% and 18% by 2035 and 2060. Furthermore, the three-step route of China's nuclear power “hot reactor - fast reactor - fusion reactor” is clear. In December '23, the world's first fourth-generation nuclear power plant, the Huaneng Shidao Bay high-temperature air-cooled nuclear power plant commercial demonstration project was put into operation. “Hualong 1” has successfully landed in Pakistan, and has formed nuclear power project cooperation intentions with more than 20 countries and regions including Saudi Arabia, Argentina, and Brazil. Yingliu is the first domestic company to successfully develop CAP1000, CAP1400, and Hualong No. 1 main pump cases, with a high market share. In 2023, benefiting from the expansion of downstream demand for nuclear power, the company had sufficient orders, and the new nuclear energy materials and components business achieved operating revenue of 380 million yuan, +16.66% over the same period last year. It successfully completed technological breakthroughs in neutron absorption materials and composite shielding materials. Through national industry assessments led by academicians, some key indicators surpassed Europe and America. Rigid and flexible shielding materials began to gain strength one after another, contributing to the increase in volume. In addition, it actively expanded the application field of nuclear energy materials, successfully developed three key core components and extremely environmental functional materials, high boron steel and tungsten boron steel, and established a joint venture in the first quarter of '24 to gradually achieve industrialization.
The low-altitude economic layout was heavily invested early on, the industrial chain is complete, and the location advantage is remarkable. The company is currently a scarce target in the low-altitude economy, from aircraft engines to machine manufacturing to airport operations. According to the “Implementation Plan for Innovative Application of General Aviation Equipment (2024-2030)”, “hybrid, turboshaft & turboprop products” are an important component of the general aviation equipment product lineage. At the end of the reporting period, Yingliu Aviation had built 8 high-standard plants, R&D centers and supporting facilities; built an engine test center, 4 test benches were put into use; and built engine assembly lines and drone assembly lines.
Yingliu Aviation has thoroughly developed 100KW-300KW turboshaft engines and hybrid packs below 400KW, taking into account pre-research on high-horsepower turboshaft engines. At present, the YLWZ-130/190 has completed localized development and small-batch production; the first YLWZ-300 was delivered in the first quarter of '24; the 120KW and 275KW hybrid packs target the drone freight, extended-range electric truck, and emergency rescue markets, and have been recognized by target customers. The company has completed the development of unmanned helicopters with a take-off weight of 270 kg and a take-off weight of 1000 kg. In 2024, it will focus on completing the development and product certification of drones with a take-off weight of 600 kg. It is worth emphasizing that the company's geographical advantage is remarkable. Anhui is China's third pilot province for global low-altitude airspace management reform. The low-altitude economy surpassed 40 billion yuan in 23 years, and has gathered more than 300 companies such as Yihang Intelligence, Modern Technology, Response Aviation, and Zero Gravity. The recently issued “Anhui Province Implementation Plan to Accelerate the Cultivation and Development of the Low-Altitude Economy (2024-2027) and Certain Measures” indicates that the scale of the low-altitude economy will reach 80 billion yuan by 2027. The Yingliu aviation industry has a complete chain and layout for many years, and is expected to grow into a leading enterprise in the low-altitude economy and ecology of Anhui.
Investment advice: In the ten years since its listing, the company has worked hard on internal skills, high operating leverage, and built a high moat. In recent years, downstream products such as two machines and nuclear power have ushered in a boom. New products have entered the release cycle, and with the increase in capacity utilization, they are optimistic about the gradual development of the company's profit flexibility; the company's entire industry chain and regional advantages have been highlighted under intensive policy impetus. The business is expected to replicate the two-engine business growth path and become a new growth pole.
We are optimistic about the company's future development prospects. We predict that the company's net profit for 2024-26 will be 4.22, 5.41, and 672 million yuan, respectively, corresponding EPS of 0.62, 0.79, and 0.98 yuan, and PE of 26, 20, and 16 times. For the first time, coverage was given, giving it a “buy-A” rating.
Risk warning: 1. New product development falls short of expectations; 2. Raw material prices fluctuate greatly; 3. Risk of exchange rate changes.