Company profile:

China Airlines Xifei is the only large and medium-sized military and civilian aircraft development and production base in China. Its products include military aircraft, aircraft parts, and aviation services. Deeply involved in the aviation manufacturing industry for more than 60 years, the company has gone through many major asset restructuring. The business gradually transitioned from parts processing to complete aircraft R&D and manufacturing. Benefiting from strategic air force construction, the company's performance grew steadily from 2016 to 2023:

Revenue increased from 26.1 billion to 40.3 billion, and CAGR was 6.4%; net profit to mother increased from 0.413 billion to 0.861 billion, and CAGR was 11.1%.

Investment logic:

The only platform for large and medium-sized military aircraft. Long-term capital expenditure investment is expected to enter the harvest period:

1) Large and medium-sized aircraft are the key to building a strategic air force: using the US military aircraft configuration as a reference, the C-5, C-17, and C-130 transport aircraft are produced and equipped with 131, 275, and 2,699 respectively. The US military plans to purchase at least 100 B-21 strategic bombers to replace the B-52 and B-1.

2) The company's transport aircraft and bomber products are expected to enter the release stage, and the company's performance growth is expected to enter the fast track: with the launch of the Yun-20 and the development of the new China Transport and Bomb 20, the capital expenses invested by the company in the early stages are expected to gradually enter the harvest period. 3) Platform-based modification lays the advantage of single-product economies of scale: Most special aircraft are modified from transport aircraft. The Air Police 200/500 was modified by the company's 8/9 series. The company's new models also have potential for modification, which is conducive to continuous improvement in profitability. 4) Military trade is expected to raise the company's market ceiling:

In September 2024, Yun-20 appeared at the Egyptian and South African air shows. Future military trade is expected to become a new engine for the company's performance growth.

Core suppliers for most segments of civil aircraft are expected to fully benefit from the boom in civil aviation manufacturing:

1) Strong demand in the civil aircraft market: COMAC predicts that China is expected to receive 9284 jets in 2022 to 2041, with a market space of 1.46 trillion US dollars. 2) C919 aircraft core suppliers, or benefit from domestic civil aircraft production capacity climbing: bear 50% of the C919 airframe structure workload and 60% of the ARJ21 airframe architecture workload. 3) Deeply participate in Airbus's foreign trade subcontracting, or benefit from the expansion of production at Airbus's Tianjin Assembly Plant: The company is the sole supplier of its wings and participates in A320 series airframe assembly. Airbus plans to achieve the goal of producing 75 A320 series aircraft per month by 2026, of which the Tianjin plant accounts for 20%. 4) Referring to the majority of mature aircraft manufacturers in the US, the gross margin was 15% under the ideal operating conditions in 2018. We believe that as the share of the civil aircraft business increases, the company's overall profitability is expected to continue to increase in the future.

Long-term military assets are expected to enter a harvest period, and equity incentives promote efficiency improvement: 1) The company launched the first restricted stock incentive plan in 2022. It plans to grant 16.395 million restricted shares (0.5922%) to 261 incentive recipients, demonstrating confidence in long-term development. 2) The restricted stock incentive plan puts forward clear requirements for operating performance: the compound growth rate of 2023-2025 deducted non-net profit is not less than 15%, and the return on net assets (EOE) is not less than 11.5%, 12%, and 12.5%, respectively. The above two indicators are not lower than the industry average or the 75th quartile value of the target company; at the same time, △ EVA is greater than 0.

Profit forecasts, valuations, and ratings

We predict that in 2024/2025/2026, the company will achieve operating income of 45.455 billion/51.882 billion/59.258 billion yuan, +12.79%/+14.22% YoY, net profit of 1.002/1.177/1.392 billion yuan, +16.39%/+17.47%/+18.26%, corresponding EPS of 0.36/0.42/0.50, corresponding PE 80/68/57 times Referring to the OEM's 2024 PE valuation, considering the company's scarcity and equipment model genealogy integrity in the field of aviation equipment construction in China, 90 XPE was given in 2025, with a target price of 38.08 yuan. For the first time, coverage was given a “buy” rating.

Risk warning

There is a risk that military spending will fall short of expectations, and that mass production of large domestic aircraft will not be as fast as expected.