The net profit of homing will grow rapidly in 2020; maintain "buy".
On March 30, AVIC announced its 2020 results: operating income rose 14 per cent year-on-year to 50.1 billion yuan, while net profit rose 48 per cent year-on-year to 1.995 billion yuan (higher than Huatai's previous forecast of 1.626 billion yuan), which we think is strong. The significant increase in net profit in 2020 is mainly due to the increase in sales revenue of helicopter products and the strengthening of cost control in 2020. Thanks to the strong demand for helicopter products and the growth of aviation supporting business, we believe that the return net profit of AVIC is expected to achieve steady growth in 2021-2023. We expect CNAC's EPS for 2021-2023 to be RMB 0.28, 0.30, and 0.33 yuan, maintaining a "buy" rating.
Helicopter products are the main driver of growth in 2020
AVIC has three business divisions: complete aircraft business (mainly helicopters), aviation supporting business and aviation engineering services. Revenue from the whole machine business rose 24 per cent year-on-year to 19.1 billion yuan in 2020, of which 17 billion yuan (up 33 per cent year on year) came from helicopter products. AVIC is the largest manufacturer of military and civil helicopters in China, with a comprehensive product line covering light, medium and heavy helicopters. China's vast territory and diverse terrain have given rise to a strong demand for helicopters. In view of this, we expect AVIC helicopter product revenue to achieve double-digit growth in 2021-2023.
Steady growth of aviation supporting business with high profit margin
In 2020, the operating income of aviation supporting business increased by 19% over the same period last year to 24.9 billion yuan, of which connectors contributed 10.2 billion yuan, an increase of 13% over the same period last year. The connectors produced by AVIC are widely used in aviation, aerospace and other military fields, as well as high-end manufacturing industries such as data transmission and new energy vehicles.
The gross profit margin of aviation supporting business in 2020 is 31.2%, which is the highest among the three divisions (whole machine: 9.2%; aviation engineering: 15.5%).
Raise profit forecasts and target prices; maintain "buy"
In view of the better-than-expected performance in 2020 and the acceleration of demand growth for helicopter products, we mainly raised our revenue forecast by 8% to RMB 21.36 / 2.334 billion in 2021, 2022, and introduced the net profit forecast for 2023 (RMB 2.518 billion). The target price of HK $6.88 (previous value: HK $6.40) is based on the annual PE valuation of 21x2021 (previous value: 22x2020 PE), which is lower than the average PE average of comparable companies in 2021 (as expected by Bloomberg), to reflect the discount on the mixed operation valuation of AVIC. Our previous target price of HK $6.40 is based on the 22x2020 annual PE, and the valuation multiple is basically in line with the company's historical average PE valuation of 22.2x.
Risk tips: 1) weakening demand for helicopters; 2) profit margins are lower than expected.