Incident: The company and related parties jointly invested in Xi'an Aisheng Technology Group Co., Ltd.? Incident details: The company plans to increase capital by RMB 0.18 billion. The company holding 4.27% of Aisheng Drone shares will jointly increase the capital to Xi'an Aisheng Technology Group Co., Ltd. with related parties Zhongbing Investment Management Co., Ltd., China North Industrial Co., Ltd., and other unaffiliated investors. Among them, the company plans to invest 0.184 billion yuan with its own capital. After the capital increase is completed, the company will hold 4.27% of the shares in the target company.

Aisheng Group: A leading military drone enterprise, with broad prospects for civil-military integration, Aisheng Group was founded in 1992. It is one of the earliest units in China to develop and produce drone systems. It has developed 4 major series and more than 70 drone systems, forming a relatively sound product lineage. At the end of October 2024, we achieved operating income of 1.237 billion yuan, a year-on-year increase of 216.37%, and net profit of 0.114 billion yuan, an increase of 212.87% over the previous year. The transaction can promote the deep integration of ground equipment and drones, provide technical support for the development of civil-military integration products, and can be expected to develop well.

Domestic demand: Modern warfare poses new challenges to the Army. China's new-generation tanks and other equipment require continuous replacement. Modern warfare places new demands on the Army's air defense and system combat capabilities. China's third-generation main battle tank, represented by the Type 99, has been in development for more than 20 years since it was developed in the 1990s. New technologies such as drones continued to emerge during this period. In the future, China's new generation of main battle tanks, infantry fighting vehicles and other new equipment will require continuous replacement.

Foreign trade: China's tank exports have reached a new milestone and are expected to continue to benefit from the Russian-Ukrainian conflict, Belt and Road 1) According to SIPRI data, China ordered 679 VT-4 tanks from Pakistan in 2019-2022. Referring to the fact that in 2016, China's VT-4 tanks were first exported to Thailand. The contract amount for 58 tanks and their supporting equipment was 0.3 billion US dollars. The China-Pakistan VT-4 project has set a milestone in the number and amount of tanks exported by China.

2) Referring to VT-4 orders from Pakistan and Thailand, which account for 1/5 to 1/10 of their tank holdings, we conservatively expect that potential customer tank demand from Egypt, Morocco, Algeria, Saudi Arabia, etc. is expected to reach 60 billion yuan.

Sales of related transactions are expected to increase dramatically in 2024, which is expected to boost the company's performance repair company's estimated sales to the Weapons Group and its subsidiaries in the second half of the year to 4.6 billion yuan in 2024, an increase of 58% compared with the actual amount generated in 2023. Affected by factors such as the pace of product delivery, the actual amount of 2024H1 was only 0.94 billion yuan. The company's main business revenue budget for 2024 is 10 billion yuan, and revenue of 4.8 billion yuan was achieved in the first half of the year. Following the completion of contracts for related products in the second half of the year, it is expected to boost the company's performance recovery.

High dividends and undervaluation: As one of the defense mainframes with the lowest PE valuation, the company is expected to continue to benefit 1) High dividends: 2024H1 plans to pay a cash dividend of 0.08 yuan per share to all shareholders, with a total total amount of 0.131 billion yuan. The dividend ratio is 50%, and the dividend rate (TTM) is 3.03%.

2) Undervaluation: The company's valuation level is lower than that of defense machinery companies. The 2024 PE valuation is only 1/5 of the average of the four major defense equipment manufacturers (aircraft engine, China Airlines Xifei, China Airlines Shenfei, and Hongdu Airlines); PB is also the lowest.

Inner Mongolia First Unit: Net profit to mother is expected to be 0.58, 0.71, and 0.85 billion yuan respectively in 2024-2026, and is expected to be 0.58, 0.71, and 0.85 billion yuan, respectively, with year-on-year growth of -32%, 23%, and 20%, corresponding PE is 26/21/18 times; the corresponding 24-year PB is 1.3 times, maintaining a “buy” rating.

Risk warning: 1) The pace of military trade delivery is lower than expected; 2) orders for existing domestic demand models are lower than expected.