Description of the event

The company released its 2024 semi-annual report. 24H1 achieved revenue of 18.548 billion, a year-on-year increase of 4.35%; net profit to mother 0.595 billion, a year-on-year decrease of 17.99%; net profit after deducting non-return to mother 0.546 billion, a decrease of 0.97% year-on-year. Among them, 24Q2 achieved revenue of 12.276 billion, up 5.6% year on year, up 95.71% month on month; net profit to mother of 0.44 billion, down 30.97% year on year, up 184.06% month on month; net profit after deducting non-return to mother of 0.441 billion, a decrease of 24.38% year on year, up 315.74% month on month.

Incident comments

In the context of last year's high base, the company's revenue still achieved positive growth, demonstrating its comparative advantage in the post-cycle period. By business, aero engines and derivatives achieved revenue of 17.16 billion yuan, up 4.02% year on year; foreign trade export subcontracting business achieved revenue of 1 billion yuan, up 11.02% year on year; non-aviation products and other businesses achieved revenue of 0.1 billion yuan, a year-on-year decrease of 11.87%.

Looking at subsidiary companies, 24H1's headquarters revenue is 7.231 billion yuan (YOY +17%), Liming's revenue is 11.755 billion yuan (YOY +5%), Southern Company's revenue is 2.114 billion yuan (YOY -17%), and Liyang Power's revenue is 1.38 billion yuan (YOY +3%). 23H1 obtained 0.26 billion in investment income by transferring shares in aviation development control. Considering that this portion of the profit was a one-time income, 24H1's actual performance growth rate was higher than apparent.

The company's gross margin remains stable, and overall profitability is expected to continue to improve based on continuous improvement of industrial chain support and increased maturity of main models. 24H1 gross sales margin was 11.27%, down 0.63 pcts year on year; the period expense ratio was 7.11%, down 0.19 pcts year on year; net sales margin was 3.56%, down 0.81 pcts year on year. Among them, 24Q2 gross sales margin was 11.09%, down 0.77 pcts year on year and 0.55 pcts month on month; the period cost ratio was 5.97%, up 0.62 pcts year on year and 3.39 pcts month on month; net sales margin was 3.86%, down 1.9 pcts year on year and 0.9 pcts month on month.

Looking at subsidiary companies, 24H1's headquarters profit margin was 6.6% (-1.3pcts), Liming's profit margin was 3.2% (+0.02pcts), Southern Company's profit margin was 2% (-4.0pcts), and Liyang Power's profit margin was 3.1% (+2.3pcts).

Under continuous product delivery, contract liabilities are rapidly absorbed to meet a new round of demand release. Maintaining a high level of raw materials and continuous capital expenditure in core capacity building reflects the company's active preparation for production. The company's 24H1 contract debt balance at the end of the period was 7.22 billion yuan, a decrease of 4.66 billion yuan compared to the contract debt balance at the beginning of the year. The book value of the company's inventory at the end of the 24H1 period was 36.23 billion yuan, of which the book value of raw materials/in-stock goods/shipped goods was 88.7/23.56/2.94/0.61 billion yuan respectively, an increase of 20%/24%/22%/2% compared with the beginning of the period. 24H1's construction amount was 2.911 billion yuan, an increase of 18.9% over the beginning of the year. Continued capital investment helped improve the company's core delivery capacity. At the end of 24H1, the company had 17 important projects under construction, including the company headquarters engine development guarantee construction project, the production capacity building project, the Liming Company special aero engine condition construction project, the Liyang Power Project Phase I, and the base construction project, which are expected to enhance the company's overall delivery capacity after the transformation.

We expect the company to achieve net profit of 1.72/2.2/2.8 billion yuan in 2024-2026, with a year-on-year growth rate of 21%/26%/28%, corresponding PE of 55/44/34X.

Risk warning

1. There is a risk that the company's gross margin will continue to decline due to the production and finalization of new aero engine models and the beginning of mass delivery; 2. The Aviation Development Group is leading the uncertain progress of the “small core, big collaboration” organizational structure change in the aero engine industry.