Key points of investment

Incident: Aviation Power releases its 2023 annual report and 2024 quarterly report.

1) Full year of 2023: The company achieved revenue of 43.7 billion yuan, up 17.89% year on year; net profit to mother of 1.42 billion yuan, up 12.17% year on year; net profit after deducting non-return to mother of 1.22 billion yuan, an increase of 45.85% year on year. Net profit to mother completed 104.64% of the budget, and the performance was in line with expectations.

2) Quarterly results: 2023Q4 achieved revenue of 17.4 billion yuan, up 18.67% year on year, net profit up 30.66% year on year; 2024Q1 achieved revenue of 6.3 billion yuan, up 1.98% year on year, and net profit to mother of 160 million yuan, up 76.04% year on year, setting a record high of quarterly results.

The aviation development and export subcontracting business grew steadily in 2023, and Liyang Power's revenue surged 1) From a business perspective: aero engines and derivatives achieved revenue of 40.893 billion yuan, up 18.17% year on year; foreign trade export subcontracting business achieved revenue of 1,948 billion yuan, up 18.04% year on year; non-aviation products and other businesses achieved revenue of 262 million yuan, a decrease of 16.90% year on year.

2) Looking at branches: Liming's revenue was 26.235 billion yuan, up 19.16% year on year, and total profit was 688 million yuan, down 13.61% year on year; Western Airlines revenue was 12.974 billion yuan, up 21.12% year on year, total profit was 654 million yuan, up 14.67% year on year; China Southern Company's revenue was 7.775 billion yuan, down 0.86% year on year, total profit of 448 million yuan, up 13.48% year on year; Li Yang Power's revenue was 4.908 billion yuan, up 45.07% year on year, total profit- 0.69 billion yuan, a year-on-year decrease of 189.37%.

The overall gross margin increased to 11.08% in 2023. The cost ratio decreased by 0.31 pct year on year to 6.50%. The gross profit margin in 2023 was 11.08%, up 0.26 pct year on year. The increase in gross margin was mainly due to an increase in sales volume and a slight decrease in unit fixed cost. Net profit margin for the full year of 2023 was 3.47%, down 0.17pct year over year. In 2023, the company's expense ratio was 6.50%, down 0.31pct year-on-year.

Revenue and net profit targets were exceeded in 2023, and the 2024 revenue target continued to grow steadily 1) In 2023, the company achieved 103.48% of the revenue target at the beginning of the year and 104.64% of the net profit target at the beginning of the year, exceeding the budget. The target for 2024 is to achieve revenue of 49.8 billion yuan, an increase of 14% over the actual amount in 2023.

2) As of the end of 2023, the company's contractual liabilities were $11.9 billion. The number of in-hand orders remained stable.

China's leading aero engine, the “Military+Civilian” two-wheel drive company is the only domestic enterprise capable of developing a full spectrum of military aviation engines, and enjoys the domestic military aviation development market exclusively. The company actively participates in the development of civil aviation engines and will benefit from the localization of civil aviation engines.

Investment recommendations and profit forecasts:

In 2024-2026, the company's net profit is expected to be 16.5, 19.8, and 2.35 billion, up 16%, 20%, and 19% year-on-year, PE is 57, 47, 40 times, and PS is 1.8, 1.6, and 1.4 times, maintaining a “buy” rating.

Risk warning: Delivery of military orders falls short of expectations; model development progress falls short of expectations.