Report summary

Incidents:

The company announced on October 31 that in the first three quarters of 2024, it achieved operating income (25.956 billion yuan, -1.33%), net profit to mother (0.726 billion yuan, -29.56%), net profit margin (0.682 billion yuan, -19.62%); gross profit margin (12.04%, -0.06pcts), net profit margin (3.15%, -1.09pcts), and ROE (diluted) (1.82%, -0.82pcts). In Q3 2024, the company achieved operating income (7.409 billion yuan, -13.18%) and net profit to mother (0.131 billion yuan, -57.01%).

Key points of investment:

The operating scale remained stable, and net profit to mother was under pressure in the short term. Judging from the profit table, the first three quarters of 2024 achieved operating income (25.956 billion yuan, -1.33%), net profit to mother (0.726 billion yuan, -29.56%), net profit not to mother (0.682 billion yuan, -19.62%).

The overall revenue scale remained stable, and net profit to mother declined significantly, mainly due to three reasons. First, investment income decreased by 0.256 billion yuan year on year, second, financial expenses increased by 0.166 billion yuan year on year. Third, sales expenses increased by 69 million yuan year on year due to increased after-sales support tasks.

Gross profit margin (12.04%, -0.06pcts), net interest rate (3.15%, -1.09pcts), gross margin declined slightly, and net interest rate fluctuated significantly, mainly due to a decrease in investment income and a sharp increase in financial expenses. In terms of expenses, sales expenses (0.439 billion yuan, +18.62%), administrative expenses (1.046 billion yuan, -3.86%), R&D expenses (0.336 billion yuan, -16.49%), financial expenses (0.299 billion yuan, +125.36%), and financial expenses have increased significantly, mainly due to two factors. One is the increase in the size of interest-bearing debt and the increase in interest expenses; the other is a decrease in exchange earnings. Net income from investment (0.119 billion yuan, -68.32%) decreased significantly over the previous year. It was mainly due to the transfer of stocks and the purchase of structured deposits in the previous period to obtain investment income. There were no such matters in the current period.

On the balance sheet side, monetary capital (3.67 billion yuan, -56.22%) declined significantly year-on-year, mainly due to increased production and operating expenses. Accounts receivable ($30.312 billion, +44.76%) increased significantly over the previous year, mainly due to some amounts not being paid. Inventory (40.227 billion yuan, +35.61%) reached the highest level in history, mainly due to increased orders and increased product investment.

In terms of the cash flow statement, the net cash flow from operating activities (-17.276 billion yuan, 29.06%) is mainly due to a decrease in advance payments received from customers and an increase in procurement expenses.

The net cash flow from investing activities (-2.05 billion yuan, -25.18%) is mainly due to the sale of stocks and receipt of structured deposits in the previous period. There were no such matters in the current period. Net cash flow from financing activities ($14.62 billion, +27.34%) was mainly due to increased working capital borrowing. The company's cash and cash equivalents decreased by 4.706 billion yuan during the reporting period.

With 2024Q3, the company achieved operating income (7.409 billion yuan, -13.18%), a decrease of 39.65% month-on-month, and net profit to mother (0.131 billion yuan, -57.01%), a year-on-month decrease of 70.12%. Operating income, net profit to mother declined significantly in the single quarter. It is mainly due to three factors. One is an increase in financial expenses, the second is an increase in taxes, and the third is an increase in after-sales support tasks and an increase in sales expenses.

According to the company's 2024 semi-annual report, the company's main business is divided into three categories: aero engine and derivatives business, foreign trade export subcontracting business, non-aviation products and other businesses. The main products and services include aero engine and gas turbine components, maintenance support services, and export subcontracting of aero engine parts. The company's products are used to power aircraft and ships.

In terms of business share, aero engines, including derivative products, are the company's absolute main business, accounting for close to 94%. The aero engine and derivatives business achieved revenue (17.16 billion yuan, +4.02%), a slight increase over the previous year, mainly due to increased customer demand and increased product delivery; the foreign trade subcontract production business realized revenue (1.004 billion yuan, +11.02%), non-aviation products and others (0.1 billion yuan, 11.87%).

Parent company Western Airlines 2024H1 achieved revenue (7.331 billion yuan, +17.14%) and total profit (0.479 billion yuan, -2.64%). Revenue grew steadily, and total profit remained stable. As of the end of the 2024 semi-annual reporting period, the parent company has signed a contract, and the amount of revenue that has not been fulfilled or has not been fulfilled is 14.975 billion yuan. Of this, the 10.65 billion yuan order is expected to recognize revenue in the second half of 2024, and the rest will recognize revenue in subsequent years.

Liming is mainly engaged in aero engines, gas turbines, etc., and its main production of medium and large thrust aero engines is equipped with a wide range of high-performance military aircraft in China. 2024H1 achieved operating revenue (11.756 billion yuan, +4.98%), achieved total profit (0.376 billion yuan, 5.62%), and maintained a slight increase in total revenue and profit. In terms of revenue structure, the aero engine and derivatives business achieved revenue (11.326 billion yuan, +4.72%); revenue from foreign trade export subcontracting business (0.233 billion yuan, +36.77%); revenue from non-aviation products and other businesses (0.003 billion yuan, +51.46%). Southern Company's main products are turboshaft engines and piston engines, etc., which are widely used in various types of helicopters. 2024H1 Southern Company's revenue (2.114 billion yuan, - 16.80%), total profit (0.043 billion yuan, -71.90%), total profit decreased significantly. Looking at the revenue structure, the aero engine and derivatives business achieved revenue (2.007 billion yuan, -17.08%), and the non-aviation products and other business achieved revenue (0.008 billion yuan, -34.40%), and the overall operating situation was under pressure in the short term. Liyang's main products are third-generation medium-thrust aero engines and other products. 2024H1 Liyang achieved revenue (1.38 billion yuan, +3.01%), maintained a stable revenue scale, total profit (0.043 billion yuan, +330.00%), and total profit increased threefold year-on-year. Looking at the revenue structure, the engine and derivatives business achieved revenue (1.325 billion yuan, +2.54%), accounting for almost all revenue sources of Liyang Company. The scale of revenue remained stable, and profitability was gradually reflected. Overall, in terms of revenue, all four major OEMs, with the exception of Southern Company, maintained a steady increase in revenue. In terms of total profit, Nanfang Company declined sharply year on year, and Liyang Company's profitability increased dramatically. The business situation of Southern Company is under pressure in the short term, and Liyang Company's profitability is expected to increase further in the future. Leading aero engine companies focus on development opportunities for military and civil aviation engines and gas turbines. Accelerating to catch up and surpass aero engine technology is a reflection of the status of a major power and comprehensive national strength. It is a strategic high point of modern aviation technology, an essential part of modern national defense, and an important support for economic and social development. Currently, the aero engine industry is in a stage of rapid development where a new round of scientific and technological revolution, industrial revolution, and military revolution are intertwined. The world's aviation powers have stepped up their layout and advanced research on cutting-edge aerodynamics technology, and have formed a first-mover advantage. Surrounding the world's aviation powers, the US adaptive variable cycle engine has completed the development of a verification machine, and the United Kingdom has released a zero-emission strategy for aviation. The application of new concepts, new technologies, and new materials such as unmanned, digitalization, electrification, hydrogen energy, additive manufacturing, and composites is rapidly accumulating quantitative changes.

The company focuses on the main business of military and civil aviation engines and gas turbines, accelerates catch-up and surpasses, and continuously improves the level of R&D and manufacturing of aero engines and gas turbines. In terms of military aero engines, it is developing in the direction of adaptive circulation, turbo-based combined hypersonic power, and all-electric propulsion systems. In terms of civil aviation engines, according to the COMAC market forecast annual report (2022 - 2041), the domestic aero engine market value will reach 3,50.2 billion US dollars by 2041. As the core supplier of commercial aircraft power in China, the company will accelerate airworthiness certification and achieve commercial success for large domestic airliners and regional airliners, and will promote domestic civil aviation engines to become the company's pillar industry. In terms of gas turbines, the international environment and surrounding trends are changing. At the same time, the country has proposed a “dual carbon” strategic goal, and demand for gas turbines will also increase, and the company will usher in a new period of historical opportunity.

As the only domestic enterprise that can develop full-spectrum military aviation engines such as turbojets, turbofans, turboprops, and pistons, the company is the only platform for the overall marketing of aerodynamics under China Aviation Development, and will benefit deeply from the development cycle of China's aerodynamics.

Investment advice:

In the first three quarters of 2024, operating income remained stable, and net profit due to the increase in expenses during the period fluctuated. Among them, there was a clear month-on-month decline in a single quarter. The company's inventory size reached a record high or indicated sufficient demand for downstream orders, and the company's future business performance is expected to improve.

The operating conditions of its OEMs have evolved in a differentiated manner. With the exception of the Southern OEMs, which are under short-term pressure on their operating performance, all three other OEMs have maintained steady development. Among them, Liyang's profitability has increased markedly. With the batch production volume of various engine models under development in the future, the company's performance is expected to further improve. As a leading aero engine company, the company is also the only domestic company that can develop full-spectrum military aviation engines such as turbojets, turbofans, turboprops, and pistons. It will benefit deeply from the golden cycle of domestic aero engine industry development. Driven by the “dual track” demand of the military and civil aviation markets, the future is expected to benefit for a long time.

We expect the company's revenue for 2024-2026 to be 45.964 billion yuan, 53.353 billion yuan, and 62.925 billion yuan, respectively; net profit to mother will be 1.07 billion yuan, 1.385 billion yuan and 1.795 billion yuan, respectively. EPS will be 0.40 yuan, 0.52 yuan, and 0.67 yuan respectively. We maintain our purchase rating, and the target price is 60.00 yuan, which corresponds to 150 times the EPS forecast for 2024-2026 , 115 times, and 90 times PE. Risk warning: Risk of falling gross margin due to fluctuations in raw materials; declining market demand due to fluctuations in the macro environment, etc., product delivery falls short of expectations, etc.