Incident: The company released its 2024 mid-year report on August 30. 1H24 achieved revenue of 18.55 billion yuan, YoY +4.3%; net profit due to mother of 0.59 billion yuan, YoY -18.0%; net profit after deducting non-return to mother of 0.55 billion yuan, which is basically the same as the same period last year. The company's performance is in line with market expectations. The increase in product delivery of 1H24 contributed to steady revenue growth. The decline in profit was mainly due to a decrease of 0.24 billion yuan in investment income over the same period last year. Our comprehensive review is as follows:

2Q24 Revenue grew steadily; return on investment affected apparent profit. 1) Looking at a single quarter: 2Q24 achieved revenue of 12.28 billion yuan, YoY +5.6%; net profit to mother of 0.44 billion yuan, YoY -31.0%; after deducting non-net profit of 0.44 billion yuan, YoY -24.4%. 2Q24 gross margin decreased by 0.8ppt to 11.1% yoy; net margin decreased 1.9ppt to 3.9% yoy. 2) Looking at the first half of the year: 1H24 gross margin decreased by 0.6ppt to 11.3% yoy; net margin decreased by 0.8ppt to 3.6% yoy. The company 1H23 obtained more investment income (0.32 billion yuan) through the transfer of shares and the purchase of structured deposits, and 1H24 investment income decreased by 0.24 billion yuan year-on-year, affecting apparent profit.

The main aviation development business is developing steadily; Western Airlines' revenue is growing rapidly. By business, the first half of the year: 1) revenue from aviation and derivatives was 17.16 billion yuan, YoY +4.0%; gross margin decreased by 0.2ppt to 10.4% year on year; 2) revenue from foreign trade subcontracting business was 1 billion yuan, YoY +11.0%; gross margin increased 1.9ppt to 16.3% year over year; 3) revenue from non-aviation products was 0.36 billion yuan, YoY +1.1%; gross margin increased 18.9ppt to 38.6% year over year.

Looking at OEMs, 1H24:1) Western Airlines' revenue was 7.23 billion yuan, YoY +17.1%; total profit was 0.48 billion yuan, YoY -2.6%. 2) Liming's revenue was 11.76 billion yuan, YoY +5.0%; total profit was 0.38 billion yuan, YoY +5.6%. 3) Southern Company's revenue was 2.11 billion yuan, YoY -16.8%; total profit was 0.04 billion yuan, YoY -72.0%. 4) Liyang Power's revenue was 1.38 billion yuan, YoY +3.0%; total profit was 0.04 billion yuan, compared to 0.01 billion yuan in the same period last year. In summary, 1H24's foreign trade export business is growing rapidly. Among OEMs, Western Airlines' revenue is growing relatively fast, and Liyang Power's profitability has increased.

The cost rate was stable during the period; related purchases reflected an increase in the Group's internal support. In terms of expenses, the cost rate decreased by 0.2ppt to 7.1% year-on-year during the 1H24 period, of which: 1) Sales expenses increased 15.6% year-on-year to 0.29 billion yuan, mainly due to an increase in after-sales support tasks. 2) Financial expenses increased 190% year over year to 0.15 billion yuan, mainly due to an increase in phased financing, an increase in interest expenses, and a decrease in exchange earnings. R&D cost rates and management fees declined year over year. In terms of related transactions, 1) related sales decreased by 31.2% year over year to 0.52 billion yuan; 2) related purchases increased 9.0% year over year to 4.98 billion yuan. 3) Linked loans increased 64.3 to 48.57 billion yuan year over year; 4) Interest on linked loans increased 82.0% year over year to 0.137 billion yuan. By the end of 1H24, the company's inventory was 36.2 billion yuan, up 22.1% from the beginning of the year, mainly due to increased orders and increased product investment; contract debt was 7.22 billion yuan, down 39.2% from the beginning of the year, mainly confirmed revenue from continuous product delivery.

Investment advice: The company is a leading enterprise covering the full spectrum of aero engine production and research capabilities in China, and will fully benefit from China's booming two-aircraft market. We expect the company's net profit from 2024 to 2026 to be 1.51 billion, 1.91 billion, and 2.38 billion yuan, respectively, corresponding to the 2024-2026 PE of 63x/50x/40x. Considering the company's dominant position in the aviation development industry chain and the long-term prosperity of the industry, it maintains a “recommended” rating.

Risk warning: downstream demand falls short of expectations; model batch production progress falls short of expectations; product price reduction, etc.