Incident: The company released its 2023 annual report and 2024 quarterly report. In 2023, the company achieved operating income of 2,412 billion yuan, a year-on-year increase of 9.75%; realized net profit of 305 million yuan, a year-on-year decrease of 24.50%; and realized net profit deducted from non-return to mother of 280 million yuan, an increase of 22.89% over the previous year. In the first quarter of 2024, we achieved operating income of 662 million yuan, an increase of 9.07% year on year; realized net profit of 91 million yuan, an increase of 11.12% year on year; realized net profit without deduction of 90 million yuan, an increase of 29.05% year on year.

The two-engine business volume & nuclear energy and nuclear power business have increased steadily, and the value chain extension has achieved remarkable results. 1) On the revenue and profit side, in 2023, the company achieved operating income of 2,412 billion yuan, an increase of 9.75% over the previous year, mainly benefiting from the continuous expansion of the two-aircraft business; net profit to the mother was 303 million yuan, a year-on-year decrease of 24.50%. Mainly due to projects such as land storage in Hefei and Huoshan “leaving the city and entering the park” in 2022, the company's asset disposal revenue of 441,800 yuan, and the company's net profit after deducting non-return to mother increased 22.89% year on year in 2023. In the first quarter of 2024, we achieved operating income of 662 million yuan, an increase of 9.07% year on year, and realized net profit of 91 million yuan, an increase of 11.12% year on year, and steady growth in performance. 2) By business, in 2023 ① the two-aircraft business continued to expand, and the upstream and downstream extension of the value chain achieved remarkable results. The aerospace new materials and components segment achieved revenue of 788 million yuan, an increase of 25.82% over the previous year. During the reporting period, in terms of gas turbines, the amount of new orders exceeded 600 million yuan. Among them, it was the first to pass the inspection and batch delivery of new F-class heavy gas engine class 1, 2, and 3 directional hollow turbine blade products, which provided a strong guarantee for the smooth launch of 300MW class heavy gas turbines; the company also signed strategic agreements with leading international gas engines, and the order amount broke through a new high; in terms of aero engines, the company accounted for more than 50% of the global market share of a certain type of aero engine chassis supplied to Company G, and the orders rolled over to 2026; for a group of aviation companies to continue batch delivery engine Blades, while developing other types of blades and achieving the first set of deliveries; the company also delivered casings, blades, etc. for domestic commercial aircraft engines; in terms of materials and processing, the high temperature alloy categories cover isometric crystals, directional crystals and single crystals, which basically meet current parent alloy grade requirements; localization of ceramic cores helps improve quality and speed up the development of key models; the construction of a “two-plane” hot-end component processing line and thermal barrier coating production line is progressing smoothly. It is expected that the first phase of the project will be put into operation in 2024. ② Nuclear power orders are sufficient, and the nuclear energy business continues to break through. The nuclear energy new materials and components segment achieved operating revenue of 380 million yuan, an increase of 16.66% over the previous year. During the reporting period, benefiting from the expansion of downstream demand for nuclear power, the company had sufficient orders; rigid and flexible shielding materials began to grow one after another, contributing new increases; the company actively expanded the application field of nuclear energy materials, successfully developed three key core components and extreme environmental functional materials high boron steel and tungsten and boron steel, and began gradually industrialization. ③ The product structure of the traditional casting sector continues to be optimized. The high-end equipment parts segment achieved revenue of 1,171 billion yuan, an increase of 1.10% over the previous year. The gross margin of the business increased by 0.09pct to 30.76%, the conventional product structure was optimized, and the average price increased. 3) In terms of profitability, the company's gross sales margin in 2023 was 36.17%, a year-on-year decrease of 0.55pct; the net sales margin was 11.54%, a year-on-year decrease of 6.14pct. 2024Q1's gross sales margin was 34.31%, a year-on-year decrease of 2.92pct; the net sales margin was 12.90%, an increase of 0.70pct year-on-year.

Key R&D projects have achieved remarkable results, and the proportion of three fees has declined markedly. 1) At the R&D level, as of the 2023 annual report, the company has focused on 8 development projects, including high-precision heavy-duty steam turbine nickel-based superalloy blade preparation projects, domestic high-thrust aero engine superalloy thin-walled chassis, single-crystal and directional blade shell making system projects have reached 100%, and formed independent intellectual property rights or proprietary technology; localized F class gas engine directional crystal casting verification development project progress 85%; aerospace engine complex structure guide overall precision casting project, large aircraft engine complex cavity thin-walled engine case project, and small turbine turbine engine power Hair The application project is expected to be completed in 2024-2025. 2) In terms of expenses, the company's three expenses in 2023 accounted for 13.79%, a year-on-year decrease of 1.30pct, of which R&D expenses were 293 million yuan, an increase of 15.03%; sales expenses were 34 million yuan, a year-on-year decrease of 5.83%; financial expenses were 107 million yuan, a year-on-year decrease of 4.24%; and management expenses were 192 million yuan, an increase of 4.26% year on year.

Focus on low-altitude and low-carbon fields, and extend the industrial chain to open up room for growth. 1) Low altitude: Actively lay out the field of complete aero engines and supporting helicopters and drones. The company acquired German SBM in 2016, completed the introduction of two turboshaft engine technologies, and established Active Flow Aviation to further develop 100KW-300KW turboshaft engines and hybrid packs below 400KW, while also 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 2024; 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. 2) Low carbon: Forward-looking layout in the field of nuclear fusion. On the basis of maintaining market leadership in neutron absorption materials and shielding materials, the company forwardly lays out nuclear fusion applications. In January 2024, the company and the Hefei Energy Institute established new energy concentration materials to engage in research and development of fusion reactor materials and components.

Investment suggestions: Considering some products or being affected by the pace of delivery, we lowered our 2024-2025 revenue to RMB 29,03/3195 million yuan (original value of RMB 31.53/RMB 3.452 billion), adding 2026 revenue of RMB 3,535 million; net profit to the mother in 2024-2025 was RMB 409/507 million (original value: RMB 560/693 million yuan), and added net profit of RMB 642 million for 2026, corresponding EPS of RMB 0.60, RMB 0.74, and RMB 0.94, respectively. Corresponding PE is 25X, 20X, and 16X respectively. The company's two-engine business has benefited from the promotion of localization. The new nuclear materials and components business has benefited from accelerated nuclear power construction, steady operation of traditional businesses, active implementation of value chain extension+industrial chain strategies, and maintained a “buy” rating.

Risk warning: military orders fall short of expectations; traditional casting and nuclear power business development falls short of expectations; gas turbine localization progress falls short of expectations; new business progress falls short of expectations; performance forecasts and valuation judgments fall short of expectations.