Incident: The company released its 2024 three-quarter report on October 30. The first three quarters of 2024 achieved revenue of 25.3 billion yuan, YoY -27.0%; net profit to mother of 1.82 billion yuan, YoY -23.1%; net profit after deducting non-return to mother of 1.79 billion yuan, YoY -22.3%. The company experienced a decline in performance but was in line with market expectations. The main reason is that due to the progress of contract signing, the contract was not signed as scheduled for the established demand for related products. Our comprehensive review is as follows:

The progress of signing contracts affects short-term performance; profitability is rising steadily. Looking at a single quarter, the company achieved revenue of 9.49 billion yuan (YoY +3.5%), 12.13 billion yuan (YoY -13.2%), 3.67 billion yuan (YoY -68.0%), and net profit to mother 0.72 billion yuan (YoY +11.6%), 0.9 billion yuan (YoY +6.0%), and 0.2 billion yuan (YoY -77.1%), respectively. Due to the progress of contract signing, the company's performance fluctuated. However, the company's downstream equipment needs are highly deterministic, and at the same time, it is actively expanding overseas markets. We are optimistic about the company's medium- to long-term development. In terms of profitability, the company's 3Q24 gross margin was 12.2%, up 0.52 ppt year on year; net margin was 5.2%, down 2.31 ppt year on year. The consolidated gross margin for the first three quarters of 2024 was 12.5%, up 1.63ppt year on year; net margin was 7.1%, up 0.39ppt year on year, and profitability increased steadily.

R&D investment continues to increase, and cutting-edge technology in the aviation field is being deployed ahead of schedule. The company's expense ratio for the first three quarters of 2024 was 3.6%, an increase of 1.11ppt over the previous year. Among them: 1) the sales expense ratio was 0.01%, a year-on-year decrease of 0.02ppt, mainly due to the reduction in exhibition fees and disposal of subsidiaries; 2) the management expense ratio was 2.1%, an increase of 0.36ppt; 3) the R&D expense ratio was 2.4%, an increase of 0.78ppt; and R&D expenses were 0.6 billion yuan, an increase of 9.4% year-on-year. The company attaches great importance to R&D investment. R&D expenses increased from 0.288 billion yuan in 2020 to 0.976 billion yuan in 2023, with a compound annual growth rate of 50%. The company continues to focus on technological breakthroughs in key areas and key directions, carry out key core technology research and cutting-edge technology exploration, lay out cutting-edge technology in the aviation field ahead of time, continue to advance research on key core equipment technologies, and develop in the direction of high-tech equipment manufacturing.

Payment recovery improves net cash flow from operating activities. By the end of 3Q24, the company: 1) accounts receivable and notes of $15.54 billion, up 64.9% from the beginning of the year, mainly some sales payments had not been recovered; 2) inventory of $11.49 billion, a decrease of 1.4% from the beginning of the year; 3) contract liabilities of $5.81 billion, a decrease of 13.3% from the beginning of the year, mainly due to the increase in advance project receipts; 4) Advance payments of 4.54 billion yuan, a decrease of 51.1% from the beginning of the year, mainly due to early prepaid supplier payment reports; 5) Taxes payable 0.08 billion yuan, a decrease of 73.3% compared to the same period last year, mainly due to current tax payments; 6) Net cash flow from operating activities was -5.89 billion yuan, compared to -12.43 billion yuan in the same period last year, mainly due to the recovery of payment for some products sold in the previous year at the end of the year.

Investment advice: The company is one of the leading aviation equipment in China. In recent years, the company's aviation defense equipment has accelerated iterative leapfrogging, and the integrated R&D, manufacturing/repair industrial layout has continued to deepen, and lean management has achieved remarkable results. At the same time, the company is speeding up the development of overseas military trade markets and continuously broadening the boundaries of growth. The company has strong determinism in demand and has the potential to continuously improve quality and efficiency. We are firmly optimistic about the company's medium- to long-term development. We estimate that the company's net profit from 2024 to 2026 will be 3.775 billion yuan, 4.665 billion yuan, and 5.683 billion yuan, respectively. The current stock price corresponding to 2024-2026 PE is 34x/28x/23x. Maintain a “Recommended” rating.

Risk warning: contract signing falls short of expectations; supply chain support management risks, etc.