Event: In March 2024, Aerospace Electronics released its 2023 annual report. In 2023, the company achieved operating income of 18.727 billion yuan, an increase of 7.16% over the previous year; achieved net profit of 525 million yuan, an increase of -14.35% over the previous year; realized net profit without deduction of 413 million yuan, an increase of -24.15% over the previous year. The main reason for the increase in the company's revenue scale and the decline in net profit to mother during the reporting period was due to Aerospace Electrician's loss of 197 million yuan. Aerospace electricians are mainly engaged in R&D and production of wire and cable products. Affected by factors such as fluctuations in raw material prices and changes in the external environment, aerospace electrician revenue has declined. In addition, in view of the downturn in the real estate industry in 2023, where concentrated defaults continued, Aerospace Electric carried out centralized clean-up of relevant assets involving the real estate industry, carried out detailed analysis of the solvency of relevant customers, prepared 26.9263 million yuan for asset impairment in the relevant inventory, and calculated a total credit asset loss of 151.1955 million yuan for high-risk receivables that may be difficult to recover. The above factors caused Aerospace Electric to lose 197 million yuan during the reporting period. Excluding aerospace electricians, the company achieved a revenue scale of 14.675 billion yuan, an increase of 15.81% over the previous year, net profit of the same caliber of 723 million yuan, an increase of 32.66% over the previous year, and net profit to mother after excluding investment income was 657 million yuan, an increase of 22.64% over the previous year.

Steady improvement, and strive to create a new situation of high-quality development. Commercial aerospace in 2024 was included in the government work report, which means that the company will usher in new development opportunities. The company's aerospace electronics product revenue has been rising steadily. About 70% of the company's revenue comes from this product field. Due to the relatively high gross margin of the product, it is the main source of the company's net profit. During the reporting period, the company closely focused on annual work goals, solidly promoted technological innovation, continued to strengthen the fine management of scientific research and production, and strictly controlled product quality. It successfully completed many major space model support missions represented by the application and development of space stations such as the “Shenzhou 16”, “Shenzhou 17”, and “Tianzhou 6” cargo spacecraft, and maintained a steady increase in the company's economic efficiency. On the basis of a comprehensive pilot implementation of scientific research and production process reengineering, the company makes every effort to promote the transformation and upgrading of scientific research and production models such as low-cost sustainable development projects, digital equipment construction, and long-term power supply reliability improvement projects; actively carries out the implementation of action plans to improve full-level sub-supplier management, and promotes the deep integration of reusable knowledge management with key businesses on the basis of improving the organizational structure of the reusable knowledge management system.

The implementation of a series of measures has fully released the risk of delivery of supporting products for major projects, greatly improving compliance capacity, reaching a record high in delivery volume, maintaining a good development trend in scientific research and production, and component products such as complete machinery products, electrical connectors, and relays.

Adhere to the innovation drive, accelerate transformation and upgrading, and promote the continued development of unmanned system equipment. The country is vigorously developing a “low-altitude economy,” and the market for unmanned system equipment is constantly expanding. During the reporting period, the company's unmanned systems equipment field closely followed user needs, continuously expanded new markets, accelerated the pace of development of Aerospace Feihong Company into a core original technology source for unmanned systems and a “chain leader” unit in the unmanned systems industry chain, and strived to strengthen, improve, and expand the company's unmanned systems industry. During the reporting period, several unmanned systems of Aerospace Feihong Company successfully won the bid, filled the gaps in model equipment in the composite wing field, further consolidated its leading position in the field of domestic combat and tactical unmanned equipment, and enriched the company's unmanned system equipment spectrum. In addition, new breakthroughs have also been made in overseas markets in the field of unmanned systems. Aerospace Feihong's medium-range multi-purpose drone systems and small-diameter guided munitions have received international business orders, and the international market has maintained a good development trend. The company has deep technical reserves and product development experience in the field of unmanned system equipment. Unmanned systems cover many fields in the industry, and have drone development and production qualifications issued by relevant authorities. It is a modern industrial chain leader unit built by China Aerospace Science and Technology Group Co., Ltd. in key areas of the aerospace technology application industry. It is the overall development unit for the entire military drone type spectrum project and a list of qualified suppliers for centralized procurement of drone systems; the “Feiteng” series precision guidance products are the only overall unit of the Aerospace Science and Technology Group. The product has miniaturization, high accuracy, complex models, low cost and intelligence It has obvious advantages of modularity and serialization, and already has a certain degree of international popularity.

Raise capital, invest in projects, and promote enterprise development. During the reporting period, the company steadily promoted the non-public offering of shares. It successfully completed the non-public offering on July 31, 2023, with a total net capital raised of 4.115 billion yuan. On August 14, 2023, considering the need to use capital in fund-raising investment projects, in order to maximize the company's benefits, the company plans to use no more than RMB 3.235 billion of idle raised capital to temporarily supplement working capital for a period of no more than 12 months.

In the next 12 months, according to the funding requirements of the fund-raising project, the company will use sales repayments, financial institution loans, etc. to promptly return the raised funds at any time to ensure the smooth progress of the fund-raising project construction. The company's use of some of the idle funds raised by issuing A-shares to specific targets to temporarily supplement working capital has not changed the use of capital raised in disguise, and will not affect the normal execution of the fund-raising investment plan. It will be limited to business activities related to the company's main business, and will not be used for new stock placement, subscription, or transactions such as stocks, derivatives, or convertible corporate bonds through direct or indirect arrangements. Major projects include intelligent unmanned system equipment industrialization projects, intelligent electronics and satellite communication products industrialization projects, and inertial navigation system equipment industrialization projects.

Investment proposal: The main business of aerospace electronics is R&D, production and sales of aerospace electronic information, unmanned system equipment, wires and cables. It is a high-tech listed company under the China Aerospace Science and Technology Corporation specializing in aerospace electronic measurement and control, aerospace electronic countermeasures, space guidance, and aerospace electronic components. In 2024, “commercial aerospace” and “low-altitude economy” were all included in the government work report, which means that market demand will grow. Aerospace electronics are expected to benefit. According to model estimates, the company's net profit from 2024 to 2026 is expected to be 696/8.06/1,060 million yuan, EPS is 0.21/0.24/0.32, respectively, and the corresponding P/E is 31.5/27.2/20.7 times, respectively. Give it an “gain” rating.

Risk warning: R&D falls short of expectations; risks of orders falling short of expectations; raw material price and supply risks, government subsidies falling short of expectations; macroeconomic instability.