High-tech industrialization platform for aviation equipment, continuous professional integration to build an industry flagship

The company is an important listing platform for the aviation equipment high-tech industry under the Aviation Industry Group in Hong Kong. The actual controller is the State Council's State-owned Assets Administration Commission. The company's main business has formed a complete aviation industry chain, including complete aviation equipment, aviation supporting systems and related services, engineering services, and aviation-related investments. The four A-share listed companies controlled by Zhongzhi, Hongdu Airlines, China Aviation Optoelectronics, and China Aviation Aircraft have formed core competitiveness in the middle and downstream businesses of the aviation industry chain. The company continues to carry out specialized integration. The subsidiary China Aviation Electronics merged with AVIC Mechatronics in 2022 to achieve business integration of avionics systems and mechatronic systems, and become a comprehensive avionics system solution provider; the subsidiary Zhongzhi Co., Ltd. acquired 100% of the shares of Hafei Group and Changfei Group in 2023 to achieve complete helicopter business integration. In 2018-2023, the company's overall operation was stable, and operating income and net profit grew steadily. Among them, the share of revenue from aviation supporting systems and related businesses showed an upward trend. The gross margin of the company's complete aircraft business increased significantly, and the comprehensive gross margin increased steadily.

There is still a gap between helicopters and trainers compared to international standards. It is expected that the total number of armed helicopters in China is far lower than that of the United States. The genealogy coverage is not complete enough, there is a shortage of 10-ton armed helicopters and above, and there is still plenty of room for optimization in the number and structure of helicopters. The company's subsidiary Zhongzhi Co., Ltd. is the only listing platform in the aviation industry helicopter sector. The product is showing genealogical development and is expected to benefit from accelerated helicopter installation demand. From a global perspective, the ratio of China's trainers to fighter jets is clearly unbalanced, and there is still plenty of room to make up for it. The company's subsidiary, Hongdu Airlines, has a complete lineup of junior, middle and advanced trainers and is expected to benefit from extensive pilot training needs. The current marginal change in the industry is the formation of a unified airspace control system in China. The low-altitude economy is expected to accelerate industrialization. The company's helicopters are heavy and have strong hovering capacity, and play an important role in low-altitude emergency rescue missions. The company's junior trainers are expected to benefit from the boom demand for low-altitude sports flight training, and the company is expected to fully enjoy the dividends of the rapid development of the low-altitude economy.

Supporting systems and services are deployed in the military and civilian market, and infrastructure construction is promising. Closing the gap in China's aviation equipment is expected to drive demand for avionics systems and mechatronic systems to continue to be high. The company's subsidiary China Aviation Airborne has achieved airworthiness certification for some C919 airborne systems. The results are expected to be transformed into other civil aircraft to consolidate the capabilities of civilian aircraft supporting systems, and profitability is expected to continue to improve after asset integration. China Aviation Optoelectronics, a subsidiary of the company, has achieved a higher level of support through vertical integration in the defense field. The horizontal layout of intelligent connectivity, communications, and civilian aircraft has blossomed in the civilian sector. Military and civilian expansion may raise the company's growth ceiling. At the same time, it will continue to promote the application of new materials, new technology and new processes, and further promote cost management throughout the value chain. Profitability is expected to increase.

In the next 20 years, China's commercial aircraft may increase by 9284 new aircraft. The commercial operation of the C919 is expected to accelerate mass production of large domestic aircraft. The number of general airports in the country will increase by 12.5% year on year in 2023. Demand for general airport construction may grow rapidly in the context of the country's vigorous development of the low-altitude economy. China Aviation Planning, a subsidiary of the company, is expected to fully benefit from infrastructure construction in China's civil aviation and general aviation sectors.

Company profit model forecasting, investment ratings, and valuations

The company is expected to achieve net profit of 30.68/36.89/4.338 billion yuan in 2024-2026, up 25%/20%/18% year-on-year, corresponding EPS of 0.38/0.46/0.54 yuan. According to the market value on June 13, 2024, PE is 10/8/7 times, based on the company's historical valuation center since 2019, and a “buy” rating based on 14 times the company's historical valuation center since 2019.

Risk warning

1. Risk of product development or key supporting process development falling short of expectations; 2. Risk that equipment procurement plans or downstream demand release falls short of expectations; 3. Risk that assumptions involved in profit forecasting are untrue or fall short of expectations.