Core views

1) Zongshen Xinzhi, the company's shareholding company, will become the largest shareholder of Longxin GM, and is expected to have a synergy effect with the company; 2) The company's general aviation engine business is in line with the direction of low-altitude economic development and accelerated expansion. The holding subsidiary Zongshen Hangfa Company has formed a product line centered on aviation piston engines below 200HP; 3) The main general power machinery business has withstood challenges, and competitiveness is still at the forefront of the domestic industry; actively expanding new business forms, the new energy business is fully laid out ahead of schedule, and the prospects are promising. The high-end parts business is digitally upgraded to broaden the cooperative ecosystem.

occurrences

The company's shareholding company Zongshen Xinzhizao signed a “Reorganization Investment Agreement” with the bankruptcy and restructuring managers of 13 Longxin enterprises. Zongshen Xinzhizao plans to invest 3.346 billion yuan to acquire 504,172, 175 shares of Longxin GM held by Longxin Holdings Co., Ltd. (“Longxin Holdings”), accounting for 24.5513% of Longxin GM's total share capital.

After the transaction is completed, according to the “Reorganization Investment Agreement”, Zongshen Xinzhizao will acquire 504,172,175 shares of Longxin GM. Zongshen Zongshen will become the largest shareholder of Longxin GM. As the shareholder of Loncin GM Holdings, Mr. Zuo Zongshen, the actual controller of the company, will become the actual controller of Longxin GM.

Brief review

The participating company became a shareholder of Loncin General Holdings and is expected to achieve business collaboration:

Longxin GM's main business is motorcycle manufacturing and general machinery manufacturing. It has rich industrial resources and is expected to form a business synergy with the company.

Furthermore, since the shareholders of Zongshen Xinzhizao and their related parties compete with Longxin GM's main business, there is a possibility of business integration between the two parties in the future.

The motorcycle engine business has stable revenue and maintains a leading trend:

The company's motorcycle engine sales volume in 23 years was 2.5204 million units, +12.98% year over year, total operating income was 3.364 billion yuan, +18.72% year over year; net profit was 0.129 billion yuan. Years of technical experience have accumulated to build barriers and maintain industry leadership for many years. At the same time, it is actively exploring intelligent integration, and two intelligent production lines have been remodeled and completed.

General Dynamics machinery business withstands challenges and maintains competitive advantage:

In '23, it achieved sales volume of 3.5202 million units, total revenue of 3.862 billion yuan, net profit of 2.5.8 billion yuan. Sales volume declined year on year, and it is still at the forefront of the domestic industry. Facing market challenges, the company stepped up its innovation efforts and launched products such as 24V DC generators, plant protection drone charging generators, and personalized agricultural machinery. In line with the trend of intelligence and low carbon, it has successively launched new products such as silent inverter generators, electric garden tools, portable energy storage, and household energy storage to consolidate its competitive advantage through innovation.

The aerospace business conforms to the trend of the times, is being promoted collaboratively at home and abroad, and has broad development prospects:

On March 27, 2023, the four departments jointly issued the “Implementation Plan for Innovative Application of General Aviation Equipment (2024-2030)”, proposing to “continue to promote batch delivery of 100-200 horsepower piston engines”. The company's holding subsidiary Zongshen Hangfa has formed a product line based on aviation piston engines below 200HP to meet policy requirements, built five basic product platforms, and launched more than 20 derivative products and propeller products, covering the drone and light navigation aircraft markets, while also implementing engines+propellers+thermal management system+ Integrated design of power generation systems, etc. The low-altitude economy sector is in the early stages of growth, and the market is broad. The company's aerospace business is expected to benefit from the incremental demand brought about by the development of the low-altitude economy industry. On the market side, the company is positioned as “the world's leading integrated service provider for aerodynamics systems”. It is actively developing the domestic market for light aerodynamics and industrial-grade drone power. Overseas sales networks have initially been established and covered mainly in Europe, and market development results have been remarkable.

The new energy business was fully laid out ahead of schedule, and the prospects are promising: the company's main new energy business revenue was 0.133 billion yuan in '23, and the acquisition of 60% of Dongguan Lithium Smart Energy Co., Ltd.'s shares were completed. The two major industrial fields of construction of new energy power systems and energy storage have basically been completed, and the layout of new energy products covering the three major business areas of electric power systems, energy storage and hydrogen energy businesses has been basically completed.

Digitalizing the high-end parts business and broadening the cooperative ecosystem: The company has two major production plants, casting and machining, including the three major production processes of high pressure die casting, low pressure casting and gravity casting. It has an annual production capacity of 0.02 million tons of aluminum alloy castings and 20 million aluminum alloy parts. It is based on production line level and supported by factory-level digital systems to comprehensively promote digital transformation and upgrading, while actively expanding the layout of new energy three-electric products. The new foundry project already has small-batch production capacity.

Investment advice: We expect the company's net profit to be 0.646/0.75/0.884 billion yuan in 2024-2026, corresponding to PE 19.03/16.40/13.91x, covered for the first time and given a “buy” rating.

Risk analysis

1. Risk of fluctuating raw material costs. The company's core products rely on key raw materials such as steel, aluminum, and plastics. Commodity prices may fluctuate due to the instability of the international political and economic environment. Such fluctuations may adversely affect the company's cost structure, operating performance, and gross margin.

2. Risk of exchange rate changes. In view of the high share of the company's export business, changes in the exchange rate of RMB and the currency of the export destination country may have a significant impact on the company's financial situation. Global macroeconomic events, such as regional political conflicts and interest rate adjustments by the Federal Reserve, may cause exchange rate fluctuations, which in turn affects the company's export competitiveness and exchange losses, and increases the company's financial costs.

3. Macroeconomic changes and market risks. Global macroeconomic fluctuations, including regional political conflicts and monetary policy adjustments, may lead to unstable demand in overseas markets and increase companies' production and inventory risks.

4. Sensitivity analysis: Under pessimistic expectations, revenue growth fell short of expectations due to weak overall demand in the motorcycle industry, and gross profit improvement fell short of expectations. Operating revenue for 23-25 was 9.69/11.02/12.66 billion yuan, respectively, and net profit to mother was 0.581/0.673/0.791 billion yuan, corresponding PE was 21.16/18.28/15.54x; under optimistic expectations, overall industry demand growth exceeded expectations, and overseas demand exceeded expectations. It exceeded expectations, and the export growth rate exceeded expectations, leading to an improvement in gross margin. Revenue for 23-25 was 9.8/11.22/12.99 billion yuan, respectively, and net profit to mother was 0.712/0.828/0.98 billion yuan, and the corresponding PE was 17.26/14.84/12.55x.