Main points of investment

Continuously optimize the aviation equipment industry chain: in recent years, through many capital operations, the company has established a trinity business system of aviation equipment, aviation parts and aviation engineering services. As of December 31, 2020, the company holds 50.8% of China Direct shares, 43.77% of Hongdu Airlines, 38.62% of AVIC Optoelectronics and 39.43% of AVIC A-share listed companies, as well as high-quality industrial resources such as AVIC planning. In 2020, the company achieved operating income of 50.117 billion yuan, an increase of 18.28% over the same period last year. The net profit of returning to the mother was 1.995 billion, an increase of 48.08% over the same period last year.

Net income continues the rebound that has been seen since 2017.

Helicopter plate: Zhongzhi shares are the well-deserved leader of helicopter equipment in China. In 2020, the company achieved revenue of 19.655 billion yuan, an increase of 24.44% over the same period last year, and a net profit of 758 million yuan, an increase of 28.81% over the same period last year.

Both recorded the highest growth rate in nearly five years. From the perspective of military helicopters, whether in terms of quantity or quality, there is a huge room for growth. In terms of number, according to Global Military Helicopter Market Report data in 2020, the number of helicopters in service in the United States is 5733, that in Russia is 1532, and that in China is 1019.

The number of helicopters in China is 17.77% of that of the United States and 66.51% of that of Russia. In terms of quality, Global Military Helicopter Market Report revealed that most of the helicopters in service in China are AS365, Mi-8, Mi17, Ka-31 and other old models, so upgrading is imminent. We believe that after the military reform, the army's combat strategy requires "functional operations, three-dimensional attack and defense," and the air force's combat strategy is "integration of air and space, and both attack and defense." The establishment of land brigades and air assault brigades and the increase of the shipborne helicopter fleet will greatly increase the number of helicopters and upgrade them. The situation that China's military helicopters are subject to the gap between quantity and quality will be quickly made up. As a leader in the industry, the company will fully benefit. From the perspective of civil helicopters, in the industry, domestic brands of civil helicopters in China account for less than 4%, and there is a huge import substitution space. At the company level, the 2020 Annual report disclosed that the company shows its determination to increase the expansion of civil helicopters from the aspects of investment plan, industry judgment and 2021 business plan, and the sustained growth of the company's civil helicopter business is worth looking forward to. Benefiting from the expansion of military helicopters and civil helicopters, we expect the company's helicopter business revenue to grow at a compound rate of 22% in the next three years.

Trainer aircraft and defense assets plate: Hongdu Aviation, a subsidiary, is the leading enterprise of trainer aircraft in China. In 2019, the related aviation parts business and some liabilities were spun off, and the missile assets business was introduced. The company has a wide range of trainer products, especially the advanced trainer L15 benefits from the gradual installation of fourth-generation fighters such as the J-20. At the same time, the L15's life span of more than 10,000 hours makes its training cost-effective ratio dominant, which is also suitable for the training of the third generation fighter pilots. L15 is expected to become the platform model of the future trainer. The variety of the company's missile assets is in the process of continuous expansion. With the improvement of the intensity of daily military training and the use of missiles of advanced military equipment, the use of missiles as expendable weapons will usher in a rapid growth. The missile business provides the company with sufficient performance flexibility. In 2020, Hongdu Airlines achieved a revenue of 5.069 billion yuan, an increase of 14.68 percent over the same period last year, and a net profit of 133 million yuan, an increase of 60.03 percent over the same period last year. Although the company's overall profitability is limited, but after the replacement of defense assets, profitability is improving, and there is a lot of room for improvement. Due to the small base, the prosperity of the industry and the high value of high-end trainers, we expect the company's trainer business to grow at a compound rate of 42% in the next three years.

Connector plate: AVIC Optoelectronics is a leading domestic military connector enterprise, a model of military-civilian integration. In 2020, the company's revenue reached 10.305 billion yuan, an increase of 12.52% over the same period last year. The net profit was 1.439 billion yuan, an increase of 34.36% over the same period last year. The growth rate of net profit far exceeds the growth rate of income, reflecting the scale advantage of the company's leading enterprises. By 2020, the company's revenue and net profit have grown at a ten-year compound growth rate of 20.91% and 24.65% respectively.

In the military field, the company is the absolute leader in the industry. In the field of civilian products, the company has successfully expanded new energy vehicle connectors and communication connectors. The company entered this field at the early stage of the development of new energy vehicles and will fully benefit from the growth of the industry.

The main application scenarios of communication connectors are communication base station construction and data processing center. 5G construction will lead to the continuous growth of the company's communication connectors. In 2021, the company prepares to build a South China industrial base project, which is mainly used for the production of 5G, data centers and other related connector products. The expansion of production capacity also reflects the company's firm confidence in the civilian connector market. We believe that military informatization is far from over, and the company, as the absolute leader of military connectors, will still maintain steady growth. The market for civil connectors is vast. According to the record form of the company's investor relations activities, the company's civil products business has grown from scratch to about 50% at this stage, reflecting the company's strong competitiveness in civil products connectors. With the production capacity of civilian connectors reaching production, it will gain a larger market share. Taken together, we expect the connector business to grow at a compound rate of 21% over the next three years.

Avionics plate: AVIC is the leader of military avionics system and an important participant in the civilian market. From the perspective of military avionics system, first of all, the number of military aircraft in China will increase greatly. The China Industry Information Network predicts that China's military aircraft will reach 5000 in 2029, an increase of 135.4% over 2019. Secondly, the proportion of avionics systems of advanced fighters will also be significantly improved, and the accelerated upgrading of military aircraft will lead to the rapid growth of avionics systems. From the perspective of civil avionics system, according to the research report released by Comac, the 160-seat aircraft (C919) is the main demand model in China, North America and Europe from 2019 to 2039. In 2019, the number of 160-seat aircraft delivered by the three countries was 6175. In 2039, the delivery volume of 160-seat aircraft from the three countries was 13345, an increase of 116.11 percent. China delivered 2249 160-seat aircraft in 2019 and is expected to deliver 4984 in 2039, an increase of 121.6 per cent over the same period last year.

C919 brings a broad market space for civil avionics system. As the leader of domestic avionics system, the company will fully benefit from the release of domestic large aircraft C919. With the continued release of military aircraft and the gradual commissioning of the C919, we expect the company to gradually shake off the sluggish performance growth of recent years. Income is expected to grow at a compound rate of more than 15% in the next three years.

Investment suggestion: we expect the company to achieve revenue of 606.35 yuan, 718.53 yuan and 84.993 billion yuan from 2021 to 2023, and the net profit of returning mother is 24.45,29.50 and 3.436 billion yuan respectively, and the corresponding EPS is 0.32,0.38,0.45 yuan. The average weekly PE of AVIC has been 26.57 times over the past decade, and now the PE has fallen below 1 times the standard deviation, which is greatly underestimated. At 26.57 times, we expect the company to have a target price of HK $10.12 over the next 12 months. From another perspective, compared with China International Marine Containers, which is also a platform holding company, the average premium rate of AH shares from 2015 to the first quarter of 2021 is 1.55. the value of the platform company whose work is the core asset of China's military industry is far from being reflected. With the gradual improvement of the company's management, the value of the company will be gradually recognized by the market. In the medium and long term, the valuation will be closer to China International Marine Containers, with a target price of HK $9.69. Based on the above analysis, we give the company a "buy-A" investment rating with a target price of HK $9.69.

Risk tips: 1, the risk of market development of civilian products. All sectors of the company's business are actively expanding the civilian products market, because there are many competitors in the civilian products market, and there are some differences between the business model and the military industry, there is a risk of market development. 2. the risk of new product research and development. The company is a high-tech enterprise with high technology content, and its subsidiaries are working on a large number of products, and there is a risk that the progress of research and development is lower than expected and the time to market of new products is lower than expected. 3. Secondary market risk. Although the company is a sound high-tech leading enterprise, but β is larger, the fluctuation of the secondary market will bring certain risks.