Key points of investment
The core logic of Zhongzhi Co., Ltd.
1. One-sentence logic
The core target of the low-altitude economy, after the integration of helicopter assembly assets, benefits from “military products+civilian products” and “domestic demand+foreign trade”, and the company's business scale and profitability are expected to both increase.
2. Logic that exceeds expectations
1) Market expectations: Future demand for civilian helicopters may be replaced by eVTOL. We believe that civil helicopters and eVTOL complement each other, and the company has technical capabilities and forward-looking layout in the eVTOL field.
Judgment basis: The low-altitude economy uses various types of low-altitude aircraft as carriers. Civilian helicopters have the advantages of fast speed, long range, and large payload, and are complementary to eVTOL in low-altitude application scenarios. In terms of eVTOL layout: In 2023, the company signed an agreement with the China Aviation Research Institute and China Aviation Science and Industry to jointly develop a high-speed electric vertical take-off and landing vehicle (h-eVTOL).
2) Market expectations: The company's profitability is weak. We believe that the company's profitability is expected to gradually increase.
Judgment basis: The company's performance was repaired in 2023; net profit to the mother was $23.3 billion, up 20% year on year; net profit to mother was 404 million, up 14% year on year; net profit after deducting non-return to mother was 40 million, up 17% year on year; and net interest rate was 1.49%. From the perspective of revenue and net profit growth rate, 2023 both showed an inflection point upward trend, reflecting to a certain extent that the company gradually escaped the impact of product restructuring. In addition, the Harbin division's revenue in 2023 was 16.924 billion yuan, a year-on-year growth rate of 23%, which is higher than the company's overall revenue growth rate. We believe that under the dual effects of product release and asset restructuring management optimization in the Harbin Division, the company's profitability has gradually increased. In terms of asset restructuring, according to the latest public data estimates, the net interest rate for exam preparation increased by 0.59pct to 3.27% from January to August 2023, and asset restructuring is expected to improve the company's profitability.
3. Inspection and catalysis
(1) Inspection indicators: disclosure of contract liabilities, disclosure of model development progress, disclosure of asset restructuring progress.
(2) Possible catalysts: new orders for civil helicopters, airworthiness certification progress, and new product launches.
4. The value of research
A different perception: The market is worried that the helicopter market space is small. We believe that China's military helicopters have a lot of room for development; civilian helicopters are one of the core carriers of the low-altitude economy, and the localization of civilian helicopters will bring new momentum to the company's development.
Judgment basis:
1) Military helicopters: According to World Air Forces 2023 statistics, the total number of US military helicopters is 5,584, and China has a total of 913 military helicopters, which is about 1/6 of the US. The 10-ton military helicopter is the most equipped military helicopter in the world. The US has 2,908 10-ton Black Hawk helicopters, and there is a gap of at least 2,000 models of the same class in China.
2) Civil helicopters: According to aviation industry statistics, as of the end of 2022, China's civil helicopter fleet was 1,037. Currently, the number of domesticated helicopters is less than 5%. According to aviation industry forecasts, in anticipation of the liberalization of low-altitude airspace, China's total demand for civil helicopters is expected to exceed 500 in 2023-2027. Based on an average unit price of 50-60 million/unit, we expect the market size to reach 25-30 billion yuan. Currently, the company has orders and deliveries for the AC313, AC312, and AC311 series of civilian helicopters. The AC352 has obtained the Civil Aviation Administration's model certification and is actively expanding the market. The AC332 is expected to obtain type certification in 2025.
3) In terms of foreign trade: The 2024 Singapore Air Show direct-10ME aircraft was shown overseas for the first time. Future military trade exports are expected to open up a second growth curve for the military business.
A different understanding than before: In the 2015-2021 period, the company's net interest rate level was between 3.49% and 4.19%. In 2022, due to product restructuring and order reduction, the net interest rate began to decline to 1.99%. There was an inflection point in the company's revenue and profit growth in 2023, and we think the impact of product restructuring has basically come to an end.
5. Profit prediction and valuation:
The company's net profit for 2024-2026 is expected to be $7.2, 9.0, and 1.08 billion, up 64%, 24%, and 20% year-on-year, and PE is 43, 35, and 29 times, maintaining a “buy” rating.
6. Risk warning:
Risks such as risk of progress in raising supporting capital and downstream demand falling short of expectations.