Key points of investment:
Tongda shares disclosed its 2023 annual report. In 2023, the company achieved total revenue of 5.573 billion yuan, up 1.26% year on year; net profit to mother was 82.6367 million yuan, down 32.37% year on year.
In the first quarter of 2024, the company achieved operating income of 1,057 billion yuan, a year-on-year decrease of 12.07%; net profit attributable to shareholders of listed companies was 145.332 million yuan, a year-on-year decrease of 58.06%.
Focusing on the steady growth of the main cable business, the military sector was affected by a decline in demand. In 2023, the company achieved total operating income of 5.573 billion yuan, up 1.26% year on year; net profit to mother was 82.667 million yuan, down 32.37% year on year; after deducting non-net profit of 77.327 million yuan, down 17.28% year on year.
Look at it by business:
1) Wire and cable revenue of 2,811 million yuan, up 7.55% year on year, accounting for 50.43%; operating profit of 409 million, up 25.09% year on year, accounting for 79.69% of total operating profit; 2) Aviation parts processing revenue of 155 million, down 11.72% year on year, accounting for 2.78% of revenue; operating profit of 50 million yuan, accounting for 9.77% of total operating profit; 3) aluminum strip revenue of 4.55% year on year, accounting for 46.14% of revenue $45 million, accounting for 8.75% of total operating profit.
Since the company acquired Chengdu Hangfei in 2016 and entered the aviation parts processing business, it has successively invested a large amount of resources to cultivate the rapid growth of Chengdu Hangfei. In 2021, the company began to gradually increase the development of its main cable business, restructured the sales department and set up five major divisions to increase marketing efforts, and the wire and cable business began to grow significantly. The cable business achieved revenue of 2,811 billion yuan in 2023, a year-on-year increase of 7.55%. Compared with 2020 revenue growth of 61.95%, a 3-year compound growth rate of 17.43%, a significant increase over the compound revenue growth rate of the cable business from 2016 to 2020 (+2.62%).
The aviation parts business is affected by OEM order demand and the decline in military prices. There has been a clear decline in recent years. The company's revenue in 2023 was 157 million yuan, down 11.72% year on year, and net profit of 24.17 million, down 57.19% year on year. As a result, the company's 2023 annual report has already calculated goodwill impairment of 79.36 million yuan, and the remaining goodwill risk was further released after calculation. After deducting the effects of impairment of goodwill, the company's actual net profit in 2023 was about 160 million, a significant increase compared to last year.
The gross margin of wire and cable increased steadily. The gross margin of aviation parts processing declined markedly in 2023 to 9.2%, up 1.21 percentage points from the previous year; the net interest rate was 1.62%, down 0.13 percentage points from the previous year; after deducting the non-net interest rate, 1.39%, down 0.27 percentage points from the previous year.
By business: gross profit margin of wire and cable was 14.54%, up 2.03 percentage points year on year; gross profit margin of aviation parts processing was 32.39%, a sharp decrease of 14.55 percentage points year on year; gross profit margin of aluminum plate strip was 1.75%, up 0.66 percentage points year on year.
After the company refocused on the wire and cable business, the gross margin of the business showed a steady upward trend, from a low of 7.14% in 2021 to 12.51% in 2022 and 14.54% in 2023. The steady rise in wire and cable gross margin played a very important role in the company's net profit growth.
The aviation parts processing business is affected by demand from military OEMs and military price reforms. Processing costs have been clearly reduced, leading to a sharp decline in gross margin. However, judging from the final gross margin level, the gross margin of the military goods business is expected to bottom out and stabilize, and the downward space has been adjusted.
Demand for 2024Q1 was good. Due to poor financial reporting due to the pace of delivery, the company achieved operating income of 1,057 billion yuan, a year-on-year decrease of 12.07%; net profit attributable to shareholders of listed companies was 145.332 million yuan, a year-on-year decrease of 58.06%.
The company's 2024Q1 gross profit margin and net margin were 8.73% and 1.62% respectively, down from the 2023 annual report. The main reason is that the number of new orders signed in the company's wire and cable business hit a new high in the same period since listing, but due to the pace of demand from downstream customers, shipments declined year-on-year; the aircraft parts precision processing and assembly sector was affected by industry policies, various aviation mainframe manufacturing units under China Aviation Industry showed a decrease in demand, production orders fluctuated, and procurement prices for batch products were adjusted, and new product R&D took up more production capacity and increased R&D expenses. As a result, the main business revenue scale and product gross margin of the company's wholly-owned subsidiary Chengdu Hangfei declined significantly.
Business demand for wires, cables, and aluminum strips is growing steadily, and wire and cable is one of the largest supporting industries in the national economy. It ranks second among the segments of China's machinery industry. The scale of the industry exceeds trillion dollars, second only to the automobile and parts manufacturing industry. The company's main wire and cable customers are large state-owned enterprises such as China Grid, China Southern Power Grid, China Railway Group, SDIC, Power Construction, and Energy Construction, mainly power grid customers. The “14th Five-Year Plan” outline mentioned optimizing the domestic energy structure, increasing the proportion of new energy sources, and building smart grids and ultra-long-distance power transmission networks. Overall demand for wires and cables is growing steadily. During the “14th Five-Year Plan” period, the State Grid plans to invest 2.4 trillion yuan in the power grid, and China Southern Power Grid plans to invest 670 billion yuan in the power grid. The State Grid estimates that the total investment in grid construction will exceed 500 billion yuan in 2024.
The number of enterprises in China's wire and cable industry is large, and the industrial concentration is low. The top ten wire and cable companies still account for less than 12% of the domestic market share. Industrial concentration is relatively high against developed European and American countries. Among them, the top five French wire and cable companies account for more than 90% of their domestic market share, the top seven Japanese wire and cable companies account for more than 65% of their domestic market share, and the top ten US wire and cable companies account for more than 70% of their domestic market share, all of which have entered the oligopoly competition stage. With the development of China's wire and cable industry and the continuous increase in demand for wires and cables, the trend of industry concentration will become higher and higher, and the company is expected to fully benefit in the medium to long term as a leading enterprise in the industry.
The aluminum strip business is a new business that the company has expanded in recent years. Starting in 2022, the company quickly achieved a revenue scale of 2.6 billion dollars. The aluminum strip business pays back quickly, and the turnover rate is very high, bringing stable profits to the company. The company will continue to further increase the added value of its products in the next phase, which is expected to become another cash cow business.
Military demand released in the second half of the 14th Five-Year Plan +C919, and the company's military business is expected to restart high growth
As the aviation industry's “small core, big collaboration” development strategy continues to deepen, China's defense science and technology industry management and weapons equipment procurement system continues to improve, the entry system for aircraft parts, large structural parts and aviation parts assembly research and production business is gradually improving, private parts processing enterprises expand downstream of the industrial chain, and the task level of private enterprises undertaking aircraft parts and large-scale structural parts production and R&D operations and aircraft parts assembly tasks has increased markedly.
The subsidiary Chengdu Hangfei is mainly engaged in high-end precision machining and component assembly services for aircraft structural parts and large-scale key structural parts. Its products include CNC machined parts such as titanium alloy, aluminum alloy frames, beams, ribs, and joints, sheet metal molding molds, composite molding molds, and aircraft component products, covering a variety of major military models as well as commercial aircraft such as the COMAC C919 and C929.
The company is the first private enterprise in the domestic aircraft parts industry to introduce the most advanced flexible processing production line for German DST intelligent aircraft parts in the world. After completion, the project will fundamentally change the current traditional model of single-person single-player, high-personnel, and inefficient domestic aircraft parts processing, thereby realizing intelligent and efficient digital, unmanned, intensive, and efficient production. Within the industry, Chengdu Hangfei has developed overall advantages such as high technical level, short R&D cycle, optimized process path, and advanced equipment. In particular, it has industry-leading technical advantages in large-scale complex structural component process research and development.
In 2024, the 14th Five-Year Plan will enter the final stage of the second half, and the release of military demand is expected to accelerate and drive the military support industry to reverse to the bottom. Also, the large domestic aircraft C919 has entered the release stage. According to the “2020-2039 Civil Aircraft Market Forecast Annual Report” issued by COMAC, China's passenger aircraft market will receive more than 9,000 airliners with 50 seats in the next 20 years, amounting to 1.4 trillion US dollars, equivalent to about 10 trillion yuan. According to the proportion, the civil aircraft parts and processing market will reach 1.2 trillion yuan. In the context of the current imbalance between supply and demand in the global single-aisle mainline passenger aircraft market, the C919 will usher in a major historical opportunity. As a high-quality supplier in the C919 aviation parts processing industry chain, the company will benefit in the medium to long term.
Profit forecasting and valuation
The company is a core supplier of domestic wires and cables. Demand for power grids, high-speed rail and other industries is steady, industry concentration continues to rise, and there is room for medium- to long-term growth. The aviation parts business is expected to benefit from the 14th to the final stage, and the release of military demand ushered in an inflection point in performance. The foreign-made C919 aircraft has entered the release stage, and the company's aviation parts military business is expected to fully benefit. We forecast that the company's revenue from 2024 to 2026 will be 6.421 billion, 7.365 billion, and 8.267 billion, respectively, and net profit to mother will be 194 million, 241 million, and 296 million, respectively. The corresponding PE is 17.2X, 13.81X, and 11.27X, respectively. Considering the reasonable valuation of the company, the stock price was fully adjusted, and the first coverage gave the company a “buy” rating.
Risk Warning: 1: Domestic grid fixed asset investment and demand falls short of expectations; 2: Product delivery falls short of expectations; 3: Industry competition intensifies and gross margin falls; 4: Fluctuations in raw material prices; 5: Military demand falls short of expectations; 6: C919 mass production progress falls short of expectations.