Incidents:
On March 29, 2024, the company announced that 2023 revenue ($2,803 million, +20.01%), net profit attributable to mother (576 million yuan, +30.23%), net profit margin (566 million yuan, +27.43%); gross profit margin (31.55%, -2.24pcts), net profit margin (20.56%, +1.61pcts).
Key points of investment:
Steady growth in revenue and further improvement in profitability
In 2023, the company's operating performance continued to improve steadily, exceeding the annual operating target. The company's revenue ($2,803 million, +20.01%), net profit attributable to mother ($576 million, +30.23%), net profit not attributable to mother ($566 million, +27.43%), and revenue and profit grew steadily. Gross profit margin (31.55%, -2.24pcts). The decline in gross margin was mainly due to changes in the military tax exemption policy; net interest rate (20.56%, +1.61pcts). As the size of the company increased, lean management achieved certain results, and the net interest rate further increased.
In 2023, the company's fee rate for the period was (8.93%, -1.93pcts), of which the sales expense ratio (0.53%, -0.04pcts); the management expense ratio (2.92%, 0.00pcts); and the financial expense ratio was (-1.80%, -1.16pcts), mainly due to the company's listing in 2023, the capital raised, and interest income increased. The company's R&D expenditure rate is (7.27%, -0.74pcts), and it still maintains a high level of R&D investment.
The company's revenue can be divided into basic materials, aviation finished parts, non-aviation finished parts, processing services and others. In 2023, the company's basic materials revenue (1,323 billion yuan, +19.79%), accounting for 47.20%; aviation finished parts revenue (1,238 million yuan, +23.87%), accounting for 44.18% of revenue; non-aviation finished parts revenue (124 million yuan, -15.48%), accounting for 4.44% of revenue; processing services revenue (80 million yuan, +27.76%), accounting for 2.87% of revenue; other services account for a relatively small share. In terms of revenue regions, the company is mainly domestic, accounting for more than 90%. During the reporting period, the company's domestic business and overseas performance grew at a year-on-year rate of 18.71% and 31.83%, respectively, and both domestic and foreign businesses achieved rapid growth.
During the reporting period, net cash flow from operating activities was 265 million yuan, compared to 172 million yuan in the same period last year. The increase was mainly due to accelerated repayments and planned payments during the period to improve the company's operating efficiency. At the end of the reporting period, projects under construction (108 million yuan, +347.43%), the company promoted the commencement of construction projects in an orderly manner. The company is expanding production capacity and improving technical standards.
Multiple indicators such as inventory, in-hand orders, and related transactions indicate that downstream demand is clear. Judging from data such as inventory, on-hand orders, and related transactions, the company's downstream demand is relatively clear, and performance is expected to maintain rapid growth. By the end of 2023, the company's inventory (1,244 billion yuan, +4.09%) continued to increase in scale. In order to meet downstream demand, the company made strategic reserves for raw materials. Judging from the inventory composition, compared to the beginning of 2023, the scale of raw materials and products increased significantly, and the scale of products distributed declined.
By the end of 2023, the contract amount for revenue that the company has signed but has not yet been fulfilled was 1,790 million yuan, of which 1,611 million yuan is expected to confirm revenue in 2024, and 179 million yuan will confirm revenue in 2025 and subsequent years.
In terms of related transactions, the company expects to purchase goods, receive labor, and other services from related parties with a total amount of 313 million yuan, an increase of 47.6% compared to the amount actually incurred in 2023; the total amount of goods sold, provided labor, and other services to related parties is 1,054 million yuan, an increase of 23.4% compared to the amount actually incurred in 2023.
Prices of upstream raw materials have been reduced, and production capacity pressure has gradually eased, laying the foundation for improving performance. Judging from raw materials, the raw materials purchased by the company include metal raw materials (titanium sponge, titanium ingots, electrolytic nickel, high temperature alloy return materials, etc.), rubber and sealing raw materials, polyester reinforced acrylic sheets, and aeronautical plexiglass. In 2023, there was a sharp drop in the price of titanium sponge. Since the average production cycle of titanium alloys is 4-5 months, the processing cycle after delivery is 2-3 months, and the average time period from production to final invoice confirmation is more than half a year, the contribution of the drop in titanium sponge prices to the company's profit will gradually be reflected in 2024. As for metallic nickel, although the price of nickel metal has also declined, the company, customers, and suppliers are linked to the price, which has little impact.
At the production capacity level, in order to meet urgent downstream demand and focus on solving the production capacity bottleneck problem, the company is on the one hand carrying out the construction of five fund-raising projects in an orderly manner, and on the other hand, continuing to promote the equity injection of the Aviation Development Premium Materials (Zhenjiang) Titanium Alloy Precision Molding Co., Ltd. to build a new production capacity in Zhenjiang, and continue to promote the conversion certification of the new production capacity of the High Temperature Alloy Casting Division and the aircraft cockpit transparent parts division to increase production capacity as soon as possible. According to the announcement, the management rights of Zhenjiang Titanium Alloy Company, which was built by the Aviation Materials Institute in cooperation with the Zhenjiang New Area Management Committee, are currently managed by the company. The company promised to inject the control of Zhenjiang Titanium Alloy Company into the company within one year after obtaining a controlling interest in Zhenjiang Titanium Alloy Company. According to the Investor Relations Activity Record Form of February 26, 2024, the share transfer is in the approval stage of the state-owned assets supervision department
The only listed aeronautical materials company in the Aviation Development Group. It has stable military support and strong competitiveness. Foreign trade revenue in the civilian goods market is steady, and domestic civil aircraft bring new opportunities for development
The company is currently the only comprehensive listed company for new aviation materials by China Aviation Development. It has a titanium alloy precision casting division, a rubber and sealing materials division, an aircraft cockpit transparent parts division, and a high temperature alloy casting division. Its main products are mainly used in aviation and aerospace, and are also widely used in the fields of ships, weapons, electronics, nuclear industries, railways, bridges, chemicals, bioengineering, etc.
Products such as engine titanium alloy intermediate cases, compressor cases, and engine components produced by the Titanium Alloy Precision Casting Division cover the vast majority of domestic aero engines under development and production. Furthermore, the company cooperated with China Aviation Development Corporation to develop and produce titanium alloy intermediate chassis and engine kits for the two types of engines. In terms of titanium alloy castings for international aviation, the company is also the only domestic company that can manufacture intermediary cases for next-generation LEAP engines.
The Rubber and Sealants Division has developed sealants and supporting materials for various purposes for most domestic aircraft. The developed civil aircraft sealant products have entered COMAC's qualified materials list and are used for general sealing of fuel tanks and airframes of large domestic aircraft. In addition, the department also achieved the first batch installation application of structural materials for domestic aircraft sealing, and took the lead in developing elastic components for helicopter rotors domestically, filling the domestic gap.
The aircraft cockpit transparent parts division has great advantages in the field of aeronautical plexiglass transparent parts and inorganic glass transparent parts manufacturing and transparent material performance analysis and application research. The company has become a leading enterprise in this field in China. Currently, the company's product market accounts for the vast majority of advanced domestic aircraft and helicopters. It is a domestic unit with fully independent intellectual property rights to design and manufacture transparent parts throughout the process. It is also the only domestic unit with the ability to develop transparent parts with equal thickness, variable thickness, and multi-layer composite structures.
The Superalloy Casting Division is the only batch production unit for high temperature master alloys for aero engines under China Aviation Development. It undertakes the tasks of developing high-temperature master alloys for the turbofan, turbojet, turbo-slurry series of engines in service in China. The high-temperature alloy master alloy products produced by the company are used in batches for almost all high-voltage and low-pressure working blades, guide blades, structural parts, turbine discs, etc. of aircraft engines in service and under development, and have a strong competitive advantage in the industry.
In the military field, the company is developing advanced aviation materials and components that have been mass-produced, covering most models of domestic military aircraft and engines, and is one of the important suppliers for aviation industry groups, China Aviation Development and other customers.
In the field of civil goods, the company's products have also been used by well-known domestic and foreign aviation industry companies such as COMAC, Airbus, Safran, Rollo, GE Airlines, and Honeywell. In 2023, the company's revenue for Fannevale and Safran was 164 million yuan and 105 million yuan respectively. In the field of domestic civil aircraft, the company's sealant products have been used in the overall fuel tank and fuselage of the C919 domestic aircraft, and the titanium alloy casting for the intermediary case also supports the C919 LEAP engine. At the same time, one of the company's fund-raising projects, the large-scale aircraft windshield project targets the C919 market demand, and many of the company's businesses are expected to benefit from accelerated batch production of large domestic aircraft.
Employee shareholding binds the risks and interests of employees and the company to ensure the long-term sustainable development of the company
By the end of 2023, a total of 276 employees owned shares in the company, accounting for 29.58% of the company's total number of employees; the number of employees holding shares was 21.2692 million, accounting for 4.73% of the total share capital. Employee shareholding will form a community of risk and interests between capital owners and workers, establish an effective mechanism for risk sharing and benefit sharing, effectively attract, motivate and stabilize key talents needed for the company's development, and ensure the company's long-term sustainable development.
Investment advice:
In 2023, the company's revenue and net profit both achieved rapid growth. Gross margin declined somewhat due to changes in military tax exemption policies, but net interest rates bucked the trend, and the overall development momentum remained unabated. Regarding the future development of the company, we have the following views:
1. Judging from its market position, the company is the only listed supplier of new aviation materials within the Aviation Development Group. The four major business segments and the product coverage of downstream aviation and aviation development OEMs are extensive and have a strong competitive advantage.
2. From the demand side, military products have stable support and strong competitiveness; foreign trade revenue in the civilian goods market is steady, domestic civil aircraft bring new opportunities for development, the company's many businesses participate in the large aircraft industry, and has a high market share, and the future of the company's performance is highly certain.
3. From the supply-side perspective, the company has taken a number of parallel initiatives to focus on solving production capacity bottlenecks to seize market share. In the future, with production capacity and demand moving in both directions, the company's performance growth is worth looking forward to.
Based on the above view, we estimate that the company's revenue for 2024-2026 will be $3,331 billion, $3,932 billion and $4.609 billion, with net profit due to mother of $693 million, $799 million and $919 million respectively, and EPS of 1.54 yuan, respectively. The initial coverage is based on a “buy” rating and a target price of 69.30 yuan, corresponding to 45 times, 39 times and 34 times PE from 2024 to 2026, respectively.
Risk warning: military product pricing risk; military product research and development risk; downstream demand falls short of expectations; project construction falls short of expectations; market expansion falls short of expected risk, etc.