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AviChina Industry & Technology (2357 HK) Summary

Core Content

AviChina Industry & Technology is a company primarily engaged in the development, manufacture, sale, and upgrading of aviation equipment and related products. It is majority-owned by AVIC Group, holding a 56.7% stake. The company is expected to benefit from anticipated policy reforms in China's aerospace and defence sectors, which aim to attract more private capital and improve profitability through changes in pricing mechanisms and increased asset injections.

Main Points

• Policy Reforms: Upcoming reforms are expected to improve AviChina's gross profit margins and encourage asset injections from its parent company, AVIC Group.
• Order Growth: The company is projected to win more orders for its existing and new aircraft models, which should lead to stronger earnings growth in 2015.
• Earnings Forecast:
  • Revenue for 2014-15E is expected to grow by 9-11% due to new model orders and asset injections.
  • Net profit for 2014E is forecasted to be CNY779m, with a 31% YoY increase for 2015E to CNY1,004m.
  • Core EPS (fully-diluted) is forecasted to rise by 30.6% in 2015E to CNY0.172, and by 21.3% in 2016E to CNY0.209.
• Valuation:
  • The target price is lowered slightly to HKD5.00 from HKD5.20.
  • The 2015E PER is 20.3x, below the past 3-year average of 24.3x.
  • The company's valuation is based on SOTP (Sum of the Parts) methodology, which includes the impact of asset injections.
• Recommendation:
  • Maintain a "Buy (1)" rating due to positive policy reforms and order growth.
  • The main risk is lower-than-expected order growth.

Key Information

• 2014E vs 2015E EPS:
  • 2014E: CNY0.132 (8% below Bloomberg consensus)
  • 2015E: CNY0.172 (8% above Bloomberg consensus)
• EPS Growth:
  • 31% YoY growth in 2015E
  • 21.3% YoY growth in 2016E
• Dividend Yield:
  • 0.6% in 2014E
  • 0.8% in 2015E
  • 1.0% in 2016E
• Share Price Performance:
  • 12-month range: 3.53-5.09
  • Market cap: USD3.02bn
  • 3m avg daily turnover: USD6.80m
  • Shares outstanding: 5,373m
  • Major shareholder: AVIC (56.7%)

Asset Injections

• Planned Asset Injections: AVIC Group plans to inject its national defence-related assets into AviChina's affiliate, Sichuan Chengfei Integration Technology (CITC), which is 51.33% owned by AVIC.
• Assets Involved:
  • Shenyang Aircraft Group (Shengfei): 94.15% owned by AVIC, involved in fighter aircraft and parts
  • Chengdu Aircraft Group: 100% owned by AVIC, engaged in fighter aircraft and civil aircraft parts
  • Hongdu Technology: Indirect subsidiary of AVIC, involved in air-to-ground missiles and aviation parts
• CITC's Role: CITC is a joint stock company listed on the Shenzhen Stock Exchange, primarily engaged in automotive panel dies and lithium batteries.

Pricing System Reform

• Expected Change: A shift from the current cost-plus pricing mechanism to a more market-driven pricing system, which could improve AviChina's gross profit margins.
• Current Margins:
  • Aircraft manufacturing: 8%
  • Parts & components manufacturing: 29%
• Global Comparison:
  • Airbus: 14%
  • Boeing: 15%
  • Embraer: 23%
  • Rockwell Collins: 30%
  • ITT Corporation: 32%
  • Precision Castparts Corporation: 35%
  • Transdigm Group: 52%

Financial Summary (CNYm)

Risks

• Main Risk: Lower-than-expected order-book growth.
• Other Considerations:
  • Concerns about the profitability of AVIC Avionics, a 44.5% owned subsidiary.
  • The potential for private capital to play a more significant role in the future, though SOEs are likely to remain dominant in national defence.

Conclusion

AviChina is positioned to benefit from upcoming policy reforms and order growth in the aerospace and defence sectors. The company's earnings are expected to improve significantly in 2015 and 2016, supported by asset injections and a potential shift to a more market-driven pricing system. Despite current share price weakness, the outlook remains positive, and the "Buy (1)" rating is reaffirmed.