Incident: The company released its 2024 semi-annual report. 2024 H1 achieved operating income of 21.625 billion yuan, -6.59% year over year, mainly due to the planned demand for related products not being signed as scheduled; realized net profit to mother was 1.618 billion yuan, +8.39% year over year; net profit not attributable to mother was 1.588 billion yuan, +10.51% year over year. The company achieved revenue of 12.132 billion yuan in a single quarter in the second quarter, -13.19% YoY, +27.79%; net profit to mother 0.902 billion yuan, +5.98% YoY, +25.99% month-on-month; net profit without return to mother of 0.869 billion yuan, +8.82% YoY and +21.04% month-on-month.

We believe that due to industry demand, the growth rate of the company's performance has slowed in the short term, but in the medium to long term, as the company's vertical layout of “research, manufacturing, and repair” continues to deepen and demand for leapfrog development of defense equipment rises, the company's leading position in the industry continues to be consolidated, and performance is expected to continue in the future.

The profit of the main business has been increasing steadily, and research and development continues to reduce costs and increase efficiency

In the first half of 2024, the company's gross margin was 12.53%, +2.1pct year on year; net margin was 7.47%, +1.11pct year on year. On the cost side, the company's cost rate for the period was 3.25%, +0.88pct year on year, and the sales/management/finance/R&D expenses ratio was 0.01%/1.51%/-0.89%/2.63%, respectively. The year-on-year changes were -0.02/-0.1/+0.14/+0.86pct, respectively. We believe that as the leading aviation equipment mainframe in China, the company's profitability is steadily increasing, and at the same time, the results of reducing costs and increasing efficiency are gradually showing. On the balance and liability side, the company's monetary capital in the first half of 2024 was 8.311 billion yuan, compared to the end of the previous year: -46.63%, accounts receivable: 14.097 billion yuan, compared with the end of the previous year, +97.88%, mainly due to non-recovery of payment for some products sold; inventory of 7.221 billion yuan, compared with the end of the previous year, -38.02%, mainly due to product reduction; contract assets increased 1.117 billion yuan from the end of the previous year; contract liabilities were 2.952 billion yuan, compared to the end of the previous year - 55.97 billion yuan %, mainly due to early advance payments and confirmed revenue in the current period due to product sales. We believe that in the first half of 2024, the company's production preparation will be affected by certain downstream demand and will be pressured in the short term. In the future, with the cyclical recovery of the industry and the expansion of the military trade market, the company's performance growth is expected to accelerate.

Improve quality and efficiency, focus on rewards, and develop in harmony at home and abroad

On June 28, 2024, the company issued the “2024 “Improve Quality, Increase Efficiency and Value Return” Action Plan.

According to the plan, the company will focus on accelerating scientific and technological innovation, accelerate the development of new quality productivity, and promote self-reliance in aviation technology; will focus on “primary responsibility, responsibility, and main business” to accelerate the construction of a collaborative development pattern for military and civil aircraft; and will further explore the company's investment value as a “national team” for aviation weapons and equipment construction and the “chain leader” of the aviation defense equipment industry chain, increase investor returns, and share business development results. We believe that as China's leading fighter jet, the company is expected to fully benefit from rising demand for leapfrogging development of defense equipment. Combined with the company's military trade products, it is expected that the company's military trade products will open up the international market in the future, and the company's performance is expected to usher in a new period of growth.

Profit forecast and rating: As a leading fighter in China, the company is expected to fully benefit from the “14th Five-Year Plan” and “15th Five-Year Plan” leapfrog development demand boom. Combined with factors such as the continuous consolidation of the company's leading position in the industry and the continuous advancement of “research, manufacturing, and repair” integrated platform construction, we judge that the company's short performance is improving in the medium to long term. The company's revenue for 2024-2026 is estimated to be 559.6/649. 0.1/75.3 billion yuan, and net profit to mother is estimated to be 3.775/4.491/5.397 billion yuan, corresponding PE is 29.78/25.04/20.83x, maintaining a “buy” rating.

Risk warning: risk of fluctuations in military business, risk of developing new models of equipment falling short of expectations, risk of military pricing mechanism reform falling short of expectations, risk of maintenance business construction falling short of expectations; subjective risk, etc.