1H24 results are in line with market expectations

The company announced 1H24 results: 1H24 achieved operating income of 11.478 billion yuan, YoY -17.90%; realized net profit of 0.903 billion yuan, YoY -11.84%; realized net profit after deduction of 0.768 billion yuan, YoY -1.67%. Looking at a single quarter, 2Q24 achieved operating income of 5.835 billion yuan, YoY -24.31%, QoQ +3.41%; realized net profit of 0.449 billion yuan, YoY -34.78%, and QoQ -1.13%. The company's performance is in line with market expectations.

Development trends

The performance is in line with market expectations, and the annual operating goals are expected to be successfully achieved. 1) 1H24's revenue fell 17.90% year on year. We think it was mainly affected by fluctuations in demand for specialty products and order rhythm adjustments falling short of expectations. 2) 1H24's gross margin/net margin was 25.51%/8.58% respectively, a year-on-year decrease of 1.22ppt/0.19ppt. We believe that the decline in profitability was mainly affected by the year-on-year decline in the company's product structure and revenue scale. 3) According to the company's 2023 annual report, the company's annual business target for 2024 was to achieve total revenue and profit of 28.522/2.437 billion yuan, YoY -1.67%/+8.0%, and as of 1H24, the company achieved 40.24%/44.55% of the annual operating target, respectively. We believe that, guided by the concept of high-quality development, the company can still hope to achieve its annual business goals by strengthening market development and continuing to reduce costs and increase efficiency.

The cost ratio was well controlled during the period, and the cash flow from operating activities improved markedly. 1) The cost ratio of 1H24 during the period was 16.08%, a year-on-year decrease of 0.82ppt, and the results of cost reduction and efficiency were remarkable. 2) The net cash flow outflow from 1H24's operating activities was 1.161 billion yuan, a year-on-year narrowing of 1.222 billion yuan. Loan recovery increased and cash flow improved markedly. 3) As of 1H24, the company's contract asset balance was 0.455 billion yuan, an increase of 0.45 billion yuan compared to 5.3439 million yuan at the end of 2023. It is mainly affected by the confirmation of sales contract guarantees as contract assets. We believe or predict that downstream demand is expected to improve.

The construction of fund-raising and production capacity is progressing steadily, and the high-quality development of leading aviation airborne equipment can be expected. 1) According to the company's announcement, the construction of production capacity for aviation gas induction subsystems, hydraulic actuation systems, etc. carried out by the company raised 5 billion yuan in capital is progressing steadily, and various projects are expected to be ready for use in 2024-2026. 2) The company issued the “2024 “Improve Quality, Efficiency, and Heavy Return” Action Plan, which clearly will focus on the needs of next-generation aviation equipment and large aircraft (C919, C929) and further deepen the reform goals of state-owned enterprises. We believe that as the only listing platform for airborne systems under the Aviation Industry Group, the company is expected to further stimulate vitality and improve asset quality and operational efficiency in the context of state-owned enterprise reform.

Profit forecasting and valuation

We maintain our 2024/2025 profit forecast of 2.069/2.381 billion yuan, and the current stock price corresponds to 2024/2025 26.9/23.4x P/E. We maintain our outperforming industry rating and maintain a target price of 14.87 yuan, corresponding to the 2024/2025 34.8/30.2x P/E, with a potential increase of 29.2%.

risks

1) Special product price adjustment risk; 2) Market competition intensifies risk.