Rating: BUY (Initiation) 

Share price (17 Aug): RMB32.88 

Market Cap (RMBm): 13,275.1 

We initiate coverage with a BUY call. From its foundational roots in the 1960s, Jianghang emerged in a major organizational restructure in 2007 to develop and produce aviation oxygen supply and auxiliary fuel tanks. It became a joint-stock company in 2019 and is now one of China’s key R&D-driven manufacturing platforms for aviation oxygen and fuel tank inertia systems. It is the largest Chinese aircraft auxiliary fuel tank producer and a leading special refrigeration military equipment manufacturer. It holds multiple qualifications in military R&D with production confidentiality. 

China’s commercial platform for aviation oxygen and fuel tank inerting systems  

Under its two major businesses of aviation equipment and special refrigeration, Jianghang’s products cover aviation oxygen systems, airborne fuel tank inerting systems, aircraft auxiliary fuel tanks and other support supplies for military aircraft in R&D and services. It also caters to civilian aircraft with similar equipment requirements. Its special refrigeration military equipment is used by the air force, army, navy and rocket military.  

It has won a National Science and Technology Progress Special Award and its R&D platform is well regarded. Several of Jianghang’s core technologies have attained international and national leadership, including world-leading oxygen regulation technology and globally advanced airborne molecular sieve oxygen generation technology, which broke through foreign tech dominance. 

Aviation business is improving significantly  

Jianghang’s downstream military aircraft installations are gathering speed as aviation development accelerates, significantly boosting its profitability. 2020 revenue was RMB831m, increasing 23.20% yoy, and net profit was RMB194m, up 71.31%yoy. 1Q21 revenue came to RMB189m, up 78.83% yoy, with net profit at RMB44m, up 71.53% yoy. 1Q gross profit margin in sales was 47.72%, up 3.41ppt yoy. Its aviation products underwent a revamp and GPM increased with new fighter planes in the downstream market. Structural adjustments to its aviation oxygen systems also added incremental value, significantly improving the company’s profitability. 

Optimizing management and operations, increasing investment into R&D  

The company’s expense ratio in 2020 was 16.13%, a significant yoy improvement of 3.6ppt. In 2020, per capita revenue arrived at RMB618,700 and the compound growth rate from 2016 to 2020 was 12.16%, while per capita net profit came to RMB144,400 in 2020, a yoy increase of 50.73%. R&D expenses in 2020 came to RMB51m, a yoy increase of 104%. A refocus to its core business reduced the number of management personnel by increasing competition for posts, improving the incentive mechanism, reducing the number of functional posts, reducing operating cost, and upgrading management and operational levels. By increasing R&D investment and consolidating its R&D capabilities, we believe the company would be able to sustain its increased profitability. 

One of China’s first pilots in military-industrial reforms  

The company is one of the first batch of pilot projects in a mixed military-industrial reforms. As one of the pioneers in mixed-SOE reforms under AVIC, the group implemented core personnel shareholding. In 2018, a total of 146 people had their shares paid in, with a total of 5% of the shares held by Jianghang in the aviation industry. We believe core personnel shareholding as a long-term incentive mechanism helps to retain core talent and sustains long-term company development, enhancing profitability significantly. 

Valuation and risks 

With a higher number of military aircraft under China’s 14th Five-Year Plan and accelerated installation of advanced fighter aircraft, represented by fourth-generation aircraft, the value and number of top-performing products in aviation oxygen systems and fuel tank inerting systems would increase rapidly. Increased training would also drive a significant increase in maintenance demand. Jianghang’s core business should continue to benefit. In terms of civil aircraft, we expect its products to achieve localized substitution in key civil aircraft models and enter a fast-growth production cycle.  

Under this assumption, we expect revenue to grow 47.41%/42.42%/34.98% in 2021/22/23E, with corresponding revenue at RMB1.23bn/1.75bn/2.36bn and net profit at RMB276/407/578m. We see EPS at RMB0.68/1.01/1.43 and current PE at 49.83/33.82/23.80x. We assign a PE of 40-45x in 2022E, which derives a target price range of RMB40.4-45.45. Risks include: customer over-concentration; competitive risks; military product business fluctuations; and raw material supply risks. 

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