1H24 results are in line with market expectations

The company announced 1H24 results: 1H24 achieved operating income of 18.548 billion yuan, YoY +4.35%; realized net profit of 0.595 billion yuan, YoY -17.99%; realized net profit of 0.546 billion yuan after deduction, YoY -0.97%. Looking at a single quarter, 2Q24 achieved operating income of 12.276 billion yuan, YoY +5.60%, QoQ +95.71%; realized net profit of 0.44 billion yuan, YoY -30.97%, and QoQ +184.06%. The company's performance is in line with market expectations.

Development trends

Stable domestic delivery is compounded by improved international business development, and the main aero engine industry is growing steadily. 1) 1H24's aero engine and derivatives achieved revenue of 17.16 billion yuan, YoY +4.02%, gross margin of 10.

38%, product delivery increased, and the main aero engine business grew steadily. The foreign trade subcontract business achieved operating income of 1.004 billion yuan, YoY +11.02%, and gross profit margin of 16.31%. The foreign trade subcontract business is developing well against the backdrop of continued recovery in the international commercial aviation market. 2) The parent company and its three major wholly-owned subsidiaries Liming, Nanfang, and Liyang achieved operating income of 72.31/11.755/2.114/1.38 billion yuan, YoY +17.15%/+4.98%/-16.80%/3.01%, all of which achieved varying degrees of growth except for Southern Company.

The level of profit declined slightly, and production tasks continued to be full while maintaining high inventories. 1) 1H24's gross margin/net margin decreased by 0.63/0.81ppt to 11.27%/3.56%, respectively. We believe that due to cyclical adjustments in downstream demand, price fluctuations in aero engine products led to a slight decline in profitability. 2) The 1H24 company's expense ratio decreased by 0.19ppt to 7.11% year-on-year, and expenses were well controlled during the period. 3) As of 1H24, the company's inventory increased by 22.12% from the beginning of the year to 36.225 billion yuan, of which the products and inventory products were 235.65 billion yuan and 2,937 billion yuan respectively, indicating that the company's production tasks continue to be full. We believe it is expected that delivery will be completed gradually as the pace of downstream demand recovers.

Aero engines are leading the long slope and heavy snow track, and high-quality development of “small core, big collaboration” can be expected. 1) The aero engine track is long and snowy. During the “14th Five-Year Plan” period, incremental demand for new models and replacement demand for mature models resonated to drive the continuous expansion of the industry. We predict that the average annual domestic special aviation market size will reach 100 billion yuan from 2022 to 2035, with a CAGR of about 15%. We believe that the company is a leading domestic aero engine company and is expected to fully enjoy industry dividends. As special aviation batch models gradually mature and models under development continue to be converted to batch production, the company's performance is expected to achieve steady growth. 2) In August 2024, the company announced an action plan to improve quality and efficiency. We believe that as a leader in the domestic aviation development industry chain, under the leadership of “small core and big collaboration”, the company is expected to fully enjoy the dividends of the growing domestic aviation development demand industry and drive high-quality development upstream and downstream of the domestic aviation development industry chain.

Profit forecasting and valuation

We maintain our 2024/2025 profit forecast of 1.59/1.871 billion yuan, and the current stock price corresponds to 50.6x P/E in 2025. We maintain our outperforming industry rating and maintain a target price of 42.11 yuan, corresponding to 60xp/E in 2025, with a potential increase of 18.6%.

risks

1) Macroenvironmental and policy risks; 2) Risks that orders and deliveries fall short of expectations.