Domestic training aircraft development base to form diversified development of trainers, missiles, and drones
The company has professional aviation R&D and manufacturing capabilities with complete aircraft and missile development and production capabilities, and has the characteristics of “integrated factory, integrated aircraft and ammunition, and integrated combat training”. Since the construction of the factory, it has successively developed and produced 5 series of more than 20 types of aircraft, delivered more than 5,000 aircraft, and successfully exported them. The main products of trainers include CJ6 junior trainers, K8 basic trainers, and L15 advanced trainers. Missile-related products include YJ-9E and TL series products (TL-20, TL-7, TL-17, TL-30, etc.), covering various types of products such as anti-ship missiles, missile-making drugs, air-to-ground missiles, and cruisers.
In 2023, due to changes in the company's supply chain conditions and the company's improvements and modifications to some products, delivery was delayed, leading to a sharp decline in performance. However, according to the mid-year report of '24, as of the end of the interim reporting period, the amount of revenue corresponding to the company's performance obligations that have signed a contract but has not yet been fulfilled or not fulfilled reached 4.397 billion yuan, and revenue is expected to be confirmed in 2024. According to this estimate, the company's annual revenue for 2024 will be at least 5.76 billion yuan, with a year-on-year growth rate of at least 50%. At the same time, we determine that the company's delivery is picking up, or that some product improvements and modifications have been completed. In addition, the company's overseas revenue has grown rapidly in recent years. Overseas revenue for 2022, 2023, and 2024H1 was 0.008, 0.204, and 0.402 billion yuan respectively. We expect that foreign trade payments for L15 higher education aircraft may have also begun.
The training aircraft production cycle is approaching. Domestic trade and overseas demand for L15 trainers are the core of the aircraft training system. The equipment scale accounts for about 20% to 30% of the Air Force's aviation equipment, and demand is huge. Our military currently has a large training aircraft gap, and there is an urgent need to make up and reinforce it. According to “World Air Forces 2024,” China has the third-largest trainer fleet in the world, after the United States and Russia. However, in terms of proportion, US trainers (including instructors) account for 20.07% of the total military aircraft, while our military trainers (including instructors) only account for 12.1% of the total size. Judging from the ratio of fighter jets to trainers, the US military maintains an excellent ratio of close to 1:1, while our military's ratio is only 3. 94:1. In other words, only about 4 fighter jets are equipped with 1 trainer. As can be seen, since China's fighter jets have entered the batch deployment stage in recent years, the speed of training aircraft deployment has not kept up.
The L15 is a new-generation twin-engine supersonic advanced trainer developed by Hongdu. It has now been equipped with China's air and navy forces one after another. It combines the mobility of an advanced fighter with the safe maneuverability of a trainer at low speed, and has developed various models such as the L15A, L15AW, L15B, and the Teaching 10. According to CCTV's “Military Industry Tour” on March 4, 2024, the aviation industry successfully tested a domestic L15 advanced trainer with a modified engine. The report said, “The modified L15 “Falcon” has a stronger Warhawk heart. We believe that after the L15 is modified, it will meet the needs of personal use and export, and even have the ability to replace light fighter jets to perform missions, and is inexpensive, and demand is about to explode.
Expand product lines for missiles and drones to achieve diversified development
The company has the ability to “combine mechatronics”. The company's YJ-9E anti-ship missiles and TL-20 small-diameter guided bombs can all be launched via L15 mounts. According to the company's official WeChat account, in September 2018, Hongdu carried out target flight tests on an L15 higher education aircraft carrying two types of foreign trade products, YJ9E and TL20. The aircraft launched at three different altitudes. The missiles were launched normally, and the munitions were separated normally. After launch, all missile systems worked normally, the flight was normal, and the missile directly hit the bullseye. Since Hongdu Corporation fully exploited the advantages of excavator ammunition and enhanced overall research and development capabilities, the L15 high education aircraft has been equipped with a Type 3 self-developed missile and successfully tested. The successful loading of the Type 3 product has enriched the strike capability of the L15 high education aircraft and improved the overall competitiveness.
From a group perspective, the Hongdu Group is a key research and production base for drones in China. As mentioned in the company's 2019 announcement “Hongdu Group Asset Replacement Assessment Report”, the Group is deeply focusing on the three product lineages of trainers, missiles, and drones with strong core competitiveness, and is focusing on building a Chinese trainer aircraft base, an aviation industry airborne missile base, an aviation industry attack system base, and a well-known first-class supplier of airframe segments at home and abroad. At present, a mature demand spectrum for drones has been established in China, and the J-20 loyal wingman concept has taken shape. We think it will enter the demand release stage, and we may be able to see orders being executed frequently.
The participating company Hondo COMAC is the sole supplier for both parts of the C919 airframe. The value of a single aircraft may reach 40 million yuan
According to reports from the company's official WeChat, CCTV Finance, and Surge News, the participating company Jiangxi Hongdu Commercial Aircraft Co., Ltd. (25.5% share) is the sole supplier of the two major structural components for the C919 front fuselage and the middle and rear fuselage, accounting for about 25% of the C919 airframe structure share. The C919 aircraft has entered mass production and delivery. The planned production capacity will reach 150 aircraft within 5 years, and the number of orders has already exceeded 1,200. According to our estimates, COMAC's C919 is worth nearly 40 million yuan, and revenue from the C919 project is expected to reach more than 50 billion yuan. With large-scale mass production of the C919, it will provide greater performance support for listed companies.
Investment advice
Hongdu Airlines is the only aircraft+missile assembly platform in China. It has achieved diversified and deepened development from a single trainer to a combination of trainers, drones, and missile products. With the mass production and installation of the company's L15 advanced trainers, the finalization and release of demand for defense products, and the release of demand for drones and civil aircraft, the company's performance is about to rebound and enter a period of rapid growth. It is estimated that 2024-2026 will achieve operating income of 5.899/8.91/11.253 billion yuan, net profit of 0.102/0.193/0.29 billion yuan, year-on-year growth rate +214.9%/88.8%/49.9%, and EPS 0.14/0.27/0.40 yuan, corresponding to the closing price of 20.72 yuan/share on September 2, 2024, PE is 148/77/51 times, respectively. First coverage, giving a “buy” rating.
Risk warning
The risk that the downstream volume pace falls short of expectations, the risk of increased competition in the military trade market, the risk of R&D technology, etc.