Incident: The company released its 2020 24 mid-year report. The first half of 2024 achieved revenue of 18.548 billion yuan, a year-on-year increase of 4.35%, and achieved net profit of 0.595 billion yuan to mother, a year-on-year decrease of 17.99%.

Key points of investment

Continuously optimize management efficiency and maintain stable profitability. Aviation Engine's revenue for the first half of 2024 was 18.548 billion yuan, up 4.35% year over year, mainly due to increased customer demand and increased product delivery. The year-on-year decrease in return to motherhood was 17.99%, mainly due to a sharp decrease in investment income. In addition, at the end of the first half of the 2024 period, the company's accounts receivable were $28.447 billion, mainly due to increased product sales and unrecovered payment for some products; inventory was 36.225 billion yuan, up 22.12% from the beginning of the period, mainly due to increased orders and increased product investment; contract liabilities were 7.217 billion yuan, a decrease of 39.23% from the beginning of the period, mainly due to confirmed revenue from product delivery and reduction in contract liabilities. The company continued to actively prepare goods and prepare production to guarantee the completion of tasks throughout the year. The company needs to further improve its profitability and improve its performance.

Continue to develop new products and increase market development efforts. Focus on R&D and innovation, and occupy a leading position in technology. In the first half of 2024, the profitability of the company's subsidiaries remained stable. Among them, Southern Company's profit fell 72.11% year on year, and profitability declined rapidly; Liyang Power's total profit increased by 317.56% year on year, which may mark the arrival of an inflection point in Liyang's performance. By carrying out intellectual property strategy research and patent system layout planning, the company continuously improves the patent technology lineage and patent pool, strongly supports independent technological innovation, key technological breakthroughs and core technology applications, motivates all employees to innovate independently, and enables the continuous development and extension of core technology. In the first half of the year, the company and its subsidiaries applied for 213 invention patents; 154 patents were authorized, including 152 invention patents, which occupied a leading position in technology.

Aero engines are “military and civilian” two-wheel drive to develop new quality productivity. The company is the only domestic enterprise capable of developing a full range of military aviation engines, and enjoys the domestic military aviation development market exclusively. The company actively participates in the development of civil aviation engines and will benefit from the localization of civil aviation engines. The company has strong technical research and development capabilities, established specialized production line clusters, and continues to improve the R&D system to enhance core competitiveness. The company also has advanced supply chain management capabilities and intelligent manufacturing capabilities, and can efficiently organize and produce aero engine products. Furthermore, the company actively promotes the development of new quality productivity, continuously optimizes the industrial layout, improves the technological innovation system, enhances manufacturing capacity, and provides high-quality, high-performance, and low-energy aero engine and gas turbine products for national defense construction and economic construction.

Profit forecast and investment rating: The company's performance is in line with expectations. Considering the high consumption level of aero engines and the company's central position in the industry, and based on the pace of equipment release, we maintain our previous forecast. The company's net profit for 2024-2026 is 1.615/1.998/2.554 billion yuan, respectively, or 59/47/37 times PE, respectively, maintaining a “buy” rating.

Risk warning: 1) macroeconomic development risk; 2) production and operation risk; 3) risk of defense budgets falling short of expectations.