Description of the event

On the evening of June 18, the company announced that it would transfer 51% of the shares of Aerospace Electric Group, a wholly-owned subsidiary of the company, to Yichang Chengfa Company for 744 million yuan. The two parties agreed that the proceeds generated from the equity evaluation reference date of this transaction (August 31, 2023) to the share change registration date will be enjoyed by the transferee, Yichang Chengfa Company. The specific delivery time and location will be determined by subsequent negotiations between the two parties.

Incident comments

The company is transforming and upgrading from aerospace electronics to military electronics, divesting “two countries” and “two funds” in an orderly manner, focusing on the two major sectors of aerospace electronics and unmanned equipment. Homogenized competition in the company's civilian cable business is serious, and profits are meager. The net profit of the cable business subsidiary Aerospace Electric recorded a loss of 197 million yuan in 2023, causing the company's net profit to decline throughout the year. After excluding Aerospace Electric Company, the net profit growth rate of the same caliber to mother reached 32.66%, and the actual performance of military products increased. The gross margin of the company's military business has also been rising year by year in the past three years, reaching the highest value of 23.1% since the overall listing in 2023, and the profit inflection point of the core military business has reached.

After divesting 51% of Aerospace Electrician's shares, the company's business will focus on two major industrial sectors: aerospace electronics, unmanned, and high-end intelligent equipment, which will help improve the company's profitability in the medium to long term. According to the company's announcement, the proceeds from this asset transfer from the equity evaluation reference date of the transaction (August 31, 2023) to the share change registration date were enjoyed by the transferee. It is expected that Aerospace Electric Company will no longer be incorporated into the company's consolidated statements in 2024, and the company's apparent non-net profit for the whole year is expected to increase significantly. At the same time, the Aerospace Electric Group involved in this transaction has an assessed fair value of about 1.46 billion yuan and a book value of about 950 million yuan. It is estimated that the transaction will bring the company a one-time investment income of about 510 million yuan in 2024.

The company relies on the Ninth Academy of Aerospace Science and Technology, occupies a core supporting position in the aerospace industry chain and directly undertakes the demand and boom in the aerospace industry. The company announced that related sales volume is expected to increase by more than 90% year-on-year in 2024, and the release of the industrial boom is imminent. The company's actual controller, Aerospace Jiuyuan, as a supporting institution in the field of aerospace electronics under the Group, is the main setter and product supplier for aerospace electronics products. It specializes in providing various types of aerospace grade electronic components and mechatronic components for the General Aerospace Research Institute (Aerospace Academy 1, 5, and 8). In recent years, related sales between the company and the Aerospace Science and Technology Group have remained above 20% of military business revenue. The company announced at the beginning of the year that related sales will increase by more than 91% throughout 2024. The release of industry sentiment is imminent.

The company is a domestic military drone mainframe manufacturer. Its products focus on small and medium-sized drone systems and “suicide drones”, or patrol missile systems. It is the overall development unit for the military's drone model spectrum project, and has a long unmanned equipment industry chain. The company's “Feihong” series drone model plan is complete and the system is highly autonomous. It has now formed a product pattern of “far, medium and close integration”, “complementary high and low speed”, and “fixed-wing rotors”. It has four series of over 30 types of products ranging from 300 grams to 8 tons of ultra-short range, short range, medium range, and cruise combat. The company mainly focuses on small and medium-sized drones. Since small and medium-sized drones require high electronic equipment integration and flight control systems, the company has strong technical and collaborative advantages as a company specializing in electronic equipment.

The company enjoys the dual advantage of OEM+core card supplier. Asset integration and implementation, expendable drone deployment, state-owned enterprise reform expectations, profit inflection points have been determined, and long-term growth certainty has been further enhanced. The company is expected to achieve net profit of 13, 1.2, and 1.5 billion yuan in 2024-2026, a year-on-year increase of 149%, -7%, and 22%, corresponding to PE 19, 20, and 16 times, excluding one-time investment income from asset divestment in 24 years, net profit of 8, 1.2, and 1.5 billion yuan, up 88%, 55%, and 22% year-on-year. As the company's subsequent models are transferred to production and the reform of state-owned enterprises deepens, the possibility of increasing profit forecasts is not ruled out.

Risk warning

1. Uncertainty about the pace and scale of equipment orders placed during and after the 14th Five-Year Plan period; 2. Risk that profit forecasts are unfounded or fall short of expectations due to downstream demand or fluctuations in the company's production and operation.