Aerospace Electronics released a three-quarter report: Q3 achieved revenue of 1.522 billion yuan (yoy -54.14%, qoq -60.95%) and net profit of 0.312 billion yuan (yoy +149.41%, qoq +193.44%). Q1-Q3 2024 achieved revenue of 9.234 billion yuan (yoy -28.74%), net profit of 0.562 billion yuan (yoy +9.39%), deducting non-net profit of 0.201 billion yuan (yoy -57.40%). Aerospace products are due to insufficient demand from users to adjust the pace of procurement, and the company's net profit from deductions has declined. However, considering that the military industry's “14th Five-Year Plan” equipment construction plans are strong, and personnel adjustments are gradually being put in place, industry demand and orders are expected to reach an inflection point. The company's performance may have a lot of room for improvement next year, so we maintain a “buy” rating.

Investment benefits improved the apparent net profit level. The increase in gross margin level clearly showed that the company's revenue and net profit from deductions declined in the first three quarters. It was mainly due to adjustments in settlement plans for aerospace product users. Demand and orders were insufficient, and at the same time, the divestment of cable assets at the end of July was affected by factors such as the divestment of cable assets.

The company generated investment income from the transfer of electrical engineering shares, which effectively raised the net profit level of the mother. The business structure was also more focused on the aerospace and military sector. The overall profitability improved markedly. The company's gross margin level in the first three quarters was 22.80%, up 3.12 pcts from the same period last year.

Focusing on the main aerospace industry, aerospace electronics and unmanned systems are booming, and after divesting from aerospace electricians, the company's main business can be subdivided into two major directions: traditional aerospace electronics and unmanned systems. Among them, traditional aerospace electronics products are widely supported with various types of spacecraft, rockets, and missiles. Among them, satellite and rocket support is showing a booming trend, driven by commercial space. Although demand for the missile support business is weak this year, considering that the 14th Five-Year Plan is coming to an end, there may be a lot of room for improvement starting next year. Core products such as cruisers and aerial bombs in the company's unmanned systems business are in line with the current equipment construction direction. Demand and orders are expected to be on the eve of an explosion, and their contribution to the company's performance is expected to continue to grow.

The low-altitude economy has a rich heritage, and the first-mover advantage of large-scale drone transportation systems is obvious. According to the “Space Era Feipeng Co., Ltd. Asset Assessment Report”, the comprehensive strength of the company's large-scale unmanned transportation systems is at least 3-5 years ahead of its peers. Of these, the FP-98 has sold 6, and completed 107 flights in 2023 alone, with a mileage of more than 0.026 millionkm; the launch of the FP-985 and FP-981C-BE will further improve the company's product lineage. We believe that the company is expected to fully enjoy the industry dividends brought by low-altitude economic development.

Profit forecasting and valuation

We estimate that the company's net profit for 24-26 will be 0.698/0.884/1.051 billion yuan (previous value 0.731/0.915/1.093 billion yuan). The reason for the adjustment is that demand for the company's traditional arms support business is weak, corresponding to EPS of 0.21, 0.27, and 0.32 yuan. Comparable to the company's 25-year iFind's unanimous expectation, 54 times the 25-year PE valuation, the corresponding target price was 14.58 yuan (previous value was 11.88 yuan, corresponding 54 times PE in 24 years).

Risk warning: New product market expansion falls short of expectations; risk of falling gross margin due to product price cuts.