20181109-中国银河国际证券-中航科工-02357.HK-Riding_on_military_industry_reform,_re-rating_just_started_8页_969kb

AviChina Industry & Technology Co Ltd Summary

Core Content Overview

AviChina Industry & Technology Co Ltd (2357.HK; HK$5.50; NOT RATED) is a key player in China's military industry reform, benefiting from increased military spending and government support for military-civilian integration. The company has been a focus of positive analysis since Q1 2018, with its share price outperforming the broader market.

Key Points

Company Background

• Founded in 2003 as part of a reorganization of China Aviation Industry Corporation II (AVIC II).
• In 2008, AVIC II merged with AVIC I to form the current AVIC.
• Listed on the Hong Kong Stock Exchange in 2003; AVIC holds a 58.7% equity stake as of 1H18.
• Focuses on three main business lines: entire aircraft, aviation parts and components, and aviation engineering services.
• Operates two investment funds: one for military-civilian integration and another for overseas M&A in the aviation sector.

Recent Developments

• Completed full-circulation reforms in June 2018.
• Acquired 100% equity interest in AVIC Helicopter from AVIC and Tianjin Free Trade Investment in October 2018.
• Expected to receive more asset injections from AVIC's five unlisted avionics institutes, as regulatory hurdles have been removed.

Financial Performance (1H18)

• Revenue: Rose 3.6% YoY to RMB14,450m.
• Gross Profit (GP): Increased by 8.1% YoY to RMB3,204m.
• Gross Profit Margin (GPM): Expanded by 0.9ppt to 22.2%.
• SG&A costs: Increased as a percentage of total sales due to higher R&D spending.
• Net Profit: Grew 8.2% YoY to RMB1,097m.
• Net Profit Margin (NPM): Increased slightly to 7.6%.
• Earnings Per Share (EPS): Rose to RMB0.10 from RMB0.09.

Subsidiary Performance (9M18)

• Avicopter (600038 CH): Attributable earnings rose 13.6% YoY to RMB61% of AviChina's total earnings in 2017.
• AVIC Avionics (600372 CH): Revenue increased by 14.0% YoY to RMB4,601m; GP rose by 8.7% YoY to RMB1,384m.
• Hongdu Aviation (600316 CH): Revenue grew by 28.3% YoY to RMB5,775m; GP increased by 12.7% YoY to RMB1,828m.
• JONHON Optronic (002179 CH): Revenue rose by 4.9% YoY to RMB823m; GP declined by 45.0% YoY to RMB52m.

Growth Outlook

• 2018E: Guided for steady revenue and earnings growth, driven by both military and civilian aviation.
• 2019E: Expected to see further acceleration in revenue and earnings growth.
• Valuation: Current 2019E PER is 19.2x, which is considered not excessive compared to the historical average of 22.5x.

Military Spending Trends

• 2018E military budget set at RMB1.11trn, representing an 8.1% YoY increase.
• This is higher than the previous years' growth of 6-7%.
• The central government is promoting a fairer market environment and competitive procurement to enhance military industry development.
• The US military budget for 2019 is expected to increase by over 15%, potentially triggering an arms race.

Share Price Performance

• Share price rose 30.0% CYTD, outperforming the HSI Index, which declined by 14.1%.
• The outperformance is attributed to rising military spending and government support for military-civilian integration.

Main Views and Investment Implications

• Positive Earnings Growth: Expected to continue through 2018-2019E, driven by both military and civilian aviation sectors.
• Valuation: The current PER is viewed as reasonable, with potential for continued re-rating as more corporate actions are expected.
• Asset Injections: The full-circulation reform and regulatory changes are seen as positive signals for future asset injections.
• Strategic Position: AviChina is considered a crucial overseas platform for AVIC's capital operations and M&A activities.
• Investment Recommendation: The stock is suggested to be on investors' radar due to its strong growth potential and favorable valuation.

Key Information Summary

• Market Cap: US$4,223m.
• Free Float: 36.7%.
• Share Price: HK$5.50.
• Current PER (2019E): 19.2x.
• Historical Average PER: 22.5x.
• Expected Revenue Growth (2018E): 10.9%.
• Expected Revenue Growth (2019E): 12.8%.
• Expected Gross Profit Growth (2018E): 23.3%.
• Expected Gross Profit Growth (2019E): 23.8%.
• Expected Net Profit Growth (2018E): 3.6%.
• Expected Net Profit Growth (2019E): 3.6%.

Conclusion

AviChina is positioned to benefit from ongoing military industry reforms and increased government support for military-civilian integration. With a history of strong performance, asset injections, and a favorable valuation, the company is expected to continue its growth trajectory in the coming years. Investors are advised to monitor further corporate actions and developments in the military sector for potential opportunities.