Incident: On October 28, the company released its 2024 three-quarter report. From 1 to 3Q24, revenue was 4.21 billion yuan, YOY +2.7%; net profit to mother was 0.629 billion yuan, YOY +5.5%; after deducting non-net profit of 0.611 billion yuan, YOY +6.4%. The performance was in line with market expectations. Orders and deliveries of mass-produced products and international cooperation for aviation engines and gas turbine control systems have increased, and the company's performance has grown steadily. Our comprehensive review is as follows:

3Q24 results grew steadily; profitability remained stable. 1) Single quarter perspective: The company achieved revenue of 1.404 billion yuan, YOY +2.8%; net profit to mother of 0.159 billion yuan, YOY +8.6%; deducted non-net profit of 0.154 billion yuan, YOY +15.4%. 2) In terms of profit margin: The overall profit margin of the company remained stable. From 1 to 3q24, gross margin increased 0.4 ppt to 29.7% year on year; net margin increased 0.4 ppt to 15.0% year on year. 3Q24 gross margin increased 0.5ppt to 26.9% year over year; net margin increased 0.7ppt to 11.4% year over year. 3) Performance review: From 2019 to 2023, the company's revenue CAGR = 14.5%; net profit to mother CAGR = 26.8%. The company's reform and development tasks continue to be deepened, and overall profitability is improving.

The rate of expenses for the period decreased; provision for accruing bad debts increased. In the first three quarters of 2024, the company's expense ratio decreased by 0.7ppt to 10.6% year on year. See: 1) the sales expense ratio increased by 0.3ppt to 1.0% year over year, mainly due to the company strengthening service guarantee and improving customer satisfaction; 2) the management fee ratio decreased by 0.4ppt to 7.8% year on year; 3) the financial expense ratio was -0.8%, compared to -0.7% in the same period last year; 4) the R&D expenses decreased by 0.5ppt to 2.7% year on year; R&D expenses decreased 13.7% to 0.112 billion yuan year on year. In the first three quarters of 2024, the company: 1) Asset impairment losses: accrued 12.4598 million yuan, YOY +4.6%; 2) Credit impairment losses:

Accrued 47.7236 million yuan, YOY +34.4%, mainly due to increased preparation for bad debts.

Increased procurement affects operating cash flow; increases in receivables affect customer repayments. In the first three quarters of 2024, the company: 1) Net cash flow from operating activities was -0.083 billion yuan, compared to 0.193 billion yuan in the same period last year, mainly due to increased operating expenses such as procurement and taxes; 2) Net cash flow from investment activities was -0.095 billion yuan, or -0.071 billion yuan in the same period last year, mainly due to increased expenditure on purchasing and construction of fixed assets; 3) Net cash flow from financing activities was -0.182 billion yuan, compared to -0.138 billion yuan in the same period last year Yuan, mainly due to a decrease in the amount of special funding received. As of the end of 3Q24, the company: 1) accounts receivable and notes were $5.26 billion, up 15.0% from the end of 2Q24, mainly due to the impact of customer repayment rhythm; 2) prepayment of 0.076 billion yuan, an increase of 2.0% over the end of 2Q24; 3) inventory of 1.474 billion yuan, up 2.8% from the end of 2Q24; 4) contract debt of $0.346 billion, a decrease of 6.3% from the end of 2Q24.

Investment proposal: The company is mainly engaged in three major businesses: aero engine and gas turbine control systems, international cooperation business, and control system technology derivatives. It is in an industry leading position in the aero engine control system segment. The company will continue to benefit from batch production of downstream models and steady growth in the post-maintenance market. We estimate that the company's net profit from 2024 to 2026 will be 0.839 billion, 1.019 billion, and 1.226 billion yuan, respectively, and the corresponding PE will be 38x/31x/26x, respectively. We maintain a “recommended” rating considering the company's leading position in the field of aviation development control and the development potential of state-owned enterprise reforms.

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