Incident Overview:

According to the company's performance report, the company expects revenue of 23 billion yuan (+44.69% year over year) and net profit to mother of 180 million yuan (+1.15% year over year). Due to the share payment fee of RMB 83.4053 million in '23, net profit attributable to mother was RMB 257 million (+14.50% compared to the same period) after excluding the impact of share payment fees.

Analytical judgment:

The global aviation recovery momentum is strong, and it is expected to usher in a wave of price increases in demand. In terms of demand, the global aviation market recovered markedly in 2023, the annual delivery volume of aircraft manufacturing giants picked up rapidly, and the size of the aviation manufacturing industry continued to grow. Currently, the global market size has exceeded trillion US dollars. According to statistics from the Internet Industry Research Institute of Tsinghua University, more than 1,000 new commercial aircraft were delivered worldwide in 2022, and more than 2,000 new orders were added. Of these, a total of 1,141 Boeing Airbus aircraft were delivered, and orders were added in 2013, with a backlog of 1,1817 orders (4578 Boeing aircraft and 7,239 Airbus aircraft, all of which will take ten years to digest). According to a report released by COMAC, the world will need 4,2428 commercial aircraft worth 6.4 trillion US dollars in the next 20 years. At that time, the global commercial aircraft fleet will reach 4,7531, with an average annual growth rate of 6.56%, and an average annual market size of more than 300 billion US dollars.

On the supply side, the aviation manufacturing supply chain is facing contraction due to companies such as Boeing and Airbus reducing production capacity under the impact of the previous epidemic. According to a new civil aviation think tank, the 2020 Boeing 787 will be downgraded from 14 aircrafts/month to 10 aircrafts/month, and gradually reduced to 7 aircrafts/month by 2022. Production of the 777/777X was reduced to 3 aircrafts/month by 2021; Airbus cut production of narrow-body airliners by one-third to 40 per month; production of wide-body airliners may be reduced by 42%. The upstream manufacturing industry faces serious challenges, and weak enterprises face going out of business and running out of production capacity. Currently, in the context of a recovery in demand, production of A320 series airliners is planned to increase to 65 aircrafts/month in the summer of 2023 and 75 aircrafts/month in 2025, according to First Finance. However, as demand recovers, supply bottlenecks may become the biggest test. In particular, engines, as the most important upstream supplier, can rapidly increase production, and there are variables. In a state where supply is in short supply, we think the supply chain is expected to usher in a wave of price increases.

The company is an important supplier of international aero engine ring forgings. Overseas business is rapidly recovering. The company actively integrates into the global aero engine industry chain, has fully obtained supplier qualifications from mainstream international customers such as General Electric of the United States, Rollo of the United States, Safran of France, Honeywell of the United States and MTU in Germany, and has successively signed long-term agreements for next-generation engine ring forgings for mainstream international wide and narrow passenger aircraft, becoming the main ring forging supplier in the international aero engine sector in the Asia-Pacific region. According to the company's customs investment activity record, the company signed new long-term agreements with aviation customers such as Safran, Pratt & Whitney, and Rollo in 2023. The long-term agreement period is 3-7 years, involving mainstream commercial engine models such as LEAP, and its share has also increased significantly compared to the past.

With the end of the epidemic, the company's overseas business quickly recovered and achieved rapid growth. The overseas business of 2021, 2022 and 23H1 reached 1.95, 3.17, and 246 million yuan respectively, with year-on-year increases of 50.58%, 62.38%, and 90.69% respectively, accounting for about 20% of the main business. According to the company's customs investment activity record table, the company expects overseas revenue to account for 30% in '23, and is expected to increase to 40% in '24. We believe that the current rise in international aviation demand, the supply-side pattern is more concentrated, prices are expected to rise, the company will fully benefit, and overseas business will provide more important support for the company's performance.

The C919 is about to be batched. The company is its main supplier of engine ring forgings for domestic civil aircraft. Currently, the “R&D, manufacturing, certification, and operation” of large C919 airliners has been fully completed, with more than 1,000 intended orders, and the third regular route has officially been opened. We believe that the C919 will soon usher in batch production and delivery, and the company is expected to benefit as its main supplier of engine ring forgings.

According to the company's official WeChat account, the C919 currently uses LEAP series engines, and the company is its main supplier of annular forgings. The C919 engine that will be used in the future, the CJ1000A, was launched and tested in March 23, and the company is also a simultaneous supporting R&D and production unit for domestic Yangtze River series engines and the main supplier of ring forgings for Changjiang series engines.

Capacity and category expansion and collaboration, intelligent production lines reduce costs and increase efficiency

The company currently has three major industrial park plans. One is an IPO fundraising project, investing 600 million yuan to build the “Precision Manufacturing Industrial Park Project for Special Alloy Ring Rolling Forgings for Aero Engines and Gas Turbines” in Deyang, the second is to invest 1.2 billion yuan to build the “Precision Manufacturing Industrial Park Project for Aero Engine Gas Turbines” in Guiyang, and the third is a convertible bond raising project. It plans to invest 691 million yuan to build a “large-scale precision manufacturing industry project for aviation and aerospace rings and forgings” in Deyang. The first two are an expansion of production capacity for small and medium-sized ring rolling forgings. The latter is an expansion in the large ring forging category, effectively collaborating and deepening the main business. The overall planned production capacity is 1,1260 tons.

In terms of production capacity, according to company announcements, official website, and customs activity records, the IPO project was basically completed in '22. In July '23, Delan Aerospace successfully passed the NADCAP MMM (forging) and HT (heat treatment) certification reviews, marking that it has reached a leading position in the industry. From January to September 2023, the actual capacity utilization rate of the production line reached 63%. On the premise that orders are sufficient, production will reach production in the first half of this year. As of the end of the third quarter of 2023, the number of orders in hand was 2,314 billion yuan, with plenty of orders.

In terms of intelligence, the company actively promotes automated, digital and lean production. The intelligent manufacturing line for precision ring forgings was put into operation in April 23. This production line is a lean intelligent manufacturing production line with “equipment+big data+intelligent manufacturing” and the first fully automatic control production line for aviation ring forging in China. It consists of a fully automatic unloading line, a flexible forging line, a fully automatic heat treatment line and an intelligent storage line to provide high-quality, low-cost, and short-process precision ring forging system solutions. While greatly increasing production capacity and green development, it has also further met the requirements of high reliability and consistency of aviation products in terms of product quality assurance. According to the company's official WeChat account, the company was selected as the 2023 Intelligent Manufacturing Demonstration Factory by the Ministry of Industry and Information Technology, and the level of intelligence and digitalization was affirmed.

Demand, prices, costs, and expenses have improved across the board, and the company's performance is expected to return to high growth combined with the above factors. We believe that the company's performance is expected to resume high growth this year. The main reasons include:

On the demand side, demand in the international civil aviation market is growing rapidly, and domestic military products are expected to recover.

On the price side, in the context of short supply in the global aviation market, the supply chain is expected to usher in a wave of price increases.

On the cost side, the Deyang production line is expected to reach production, and costs are expected to decrease under the lean production model. Due to the higher automation of the Deyang production line, on the one hand, labor costs are reduced, and on the other hand, as product quality and accuracy are improved, the pass rate of the company's products at one time inspection has increased, thereby reducing material consumption.

On the fee side, the impact of share payment fees has weakened. According to the company's announcement, it is expected that share payment fees of 37.6022 million yuan, 11.4253 million yuan, and 325,800 yuan will be confirmed in 24, 25, and 26, respectively. This year's expenses will be reduced by about 45 million yuan compared to last year. Specifically, in the first quarter, the company's 23Q1 net profit was 505.697 million yuan (-2.53% year over year), and share payment expenses were 26.428,800 yuan, up 41.27% year on year after exclusion. If calculated simply according to the corresponding ratio, the share payment fee for the first quarter of this year is expected to be about 12 million yuan. Assuming that even if this year's Q1 results remain the same as last year, the net profit for 24Q1 is expected to be over 65 million yuan, with a year-on-year growth rate of about 30%.

Investment advice

The company is a core supplier of aero engine annular forgings in China. It is mainly engaged in the development and production of domestic military aero engines and global commercial aero engine chassis and annular forgings. With the rapid recovery of the global aviation market and the commissioning of the company's intelligent production line, demand, prices, costs and expenses are improving across the board, and performance is expected to resume high growth. Taking into account the release of new production capacity and the recovery of downstream demand, etc., we adjusted the company's profit forecast for 2023 and 2024, and increased the profit forecast for 2025. The company's revenue for 2023-2025 is 21.04/29.15/3.795 billion yuan, respectively (17.83 billion yuan and 2,351 million yuan for the previous 23 and 24 years, respectively), and net profit of 1.85/3.46/ 473 million yuan (previously $307 and 420 million yuan, respectively) and EPS 1.26/ 2.34/3.20 yuan (2.20 and 3.00 yuan for the previous 23 and 24 years, respectively). Corresponding to the closing price of 36.41 yuan/share on March 11, 2024, PE was 29/16/11 times, respectively, maintaining a “buy” rating.

Risk warning

There is a risk that the military recovery process will fall short of expectations, and the risk that the company's equity will be relatively scattered.