AVIC HEAVY MACHINERY(600765)：ACQUISITION PLANNING FOR NANSHAN’S FORGING SUBSIDIARY

　　Core views:
　　AVIC Heavy Machinery announced on Jan 10, that it signed a cooperative framework agreement with Nanshan Aluminum to set a wholly-owned subsidiary (hereinafter referred to as "the forging subsidiary") by the latter, and the assets related to the forging segment under Nanshan Aluminum will be transferred to the forging subsidiary, whose 80% stake will be acquired by AVIC Heavy Machinery later. Considering the Company's business focus, the rise in profit margins after the stripping of low-efficient assets and the elasticity of incremental business, we believe that its development turning point has arrived with a golden opportunity for further growth ahead. We assign 35x 2023E PE to derive a target price of Rmb43 and reiterate the "BUY" rating.
　　Abstract:
　　Acquiring an 80% stake of Nanshan forging subsidiary.
　　On Jan 10, AVIC Heavy Machinery announced that in order to accelerate the resource integrations and promote the smooth circulation of a stable, supplementary and strong aviation value chain, it signed a cooperative framework agreement with Nanshan Aluminum. According to the agreement, Nanshan Aluminum will set up a wholly-owned subsidiary and transfer its current forging business to this subsidiary, while AVIC Heavy Machinery will acquire an 80% stake of the forging subsidiary. Based on the official website of Nanshan Aluminum, its forging segment is among the main suppliers in China's forging market, and its products cover the fields of aviation, shipping, rail transit, energy, petroleum & chemicals and so on. Among them, the forging parts for aircraft and aircraft engines are dominating its aviation products, which include landing gear, support beams, cabin door frames for aircrafts; and mounts, buckets and shafts for the engines. It owns the largest imported 50kt die-forging hydraulic press, which is advanced in technology and used to produce integral forging parts of large passenger aircraft landing gear, support beams and cabin frames.
　　The investment project is progressing smoothly.
　　The Company's private placement projects are mainly related to 1) the transformation and upgrading of aviation precision die-forging segment and 2) the construction of isothermal forging production line for special materials, which will be implemented by AVIC Shaanxi Hongyuan and AVIC Guizhou Anda, respectively. The former will purchase advanced machine for large-/medium-sized forging production needs to meet the demand of precision die-forging parts for domestic military aircrafts and commercial aircrafts at home and abroad, which will promote the transformation from the traditional and small-/medium-sized parts to high-end and large-sized products; The latter will achieve mass production of the existing engine disk products and improve the production level of isothermal forgings after the projects are completed. Upon the commissioning of these projects, the Company will gain higher production capability and more completed product coverage and value chain, and its profitability will likely continue to improve. As of the 3Q22 reporting period, the Company's projects under construction had a scale of Rmb717mn (+132.43% YoY). The completion of some projects in Dec 2022, such as civil aviation rolled ring forging production line construction, national-level key project of hydraulic base parts supporting production capacity construction, and dual-use aviation high-efficiency heat exchanger and integrated production capacity construction, further enhanced the Company's core competitiveness.
　　Development turning point has arrived.
　　The Company is a leading domestic military aviation forging producer, with a product coverage of almost all domestic aircraft and engine types. We believe that the turning point of the Company's development has been established. 1) The turning point of fundamentals: The Company fully benefits from the continuous expansion of the military aviation forgings market brought by the upgrading of aviation equipment and the acceleration of the installation of military aircraft. 2) The turning point of profitability: ① The proportion of products with high gross profit margin continues to increase, further improving the product structure; ② Through stripping low-efficient assets and focusing on the main business of aviation products to improve efficiency, the profitability will continue to trend upwards. ③ Improving operating capability and carrying out equity incentives will enhance the staff enthusiasm and fasten the earnings growth. In addition, the Company continuously arranges new businesses through vertical integration and M&A, and the incremental business will empower the Company's long-term development. The matrix of "large-sized forgings + machining" is likely to fuel new growth space and create a second growth curve.
　　Potential risks: Fewer orders for the new model military aircrafts; disappointing development of core technology R&D; insufficient manufacturing capacity; slower-than-expected progress of the project construction.
　　Investment strategy: AVIC Heavy Machinery is the core manufacturer of China's military aviation forgings, which is likely to fully benefit from the rapid demand ramp-up of China's military aviation equipment and the continuous expansion of civil segment. Considering the Company's business focus, the rise in profit margins after the stripping of low-efficient assets, and the elasticity of incremental business, we believe that its development turning point has arrived. We maintain our 2022E/23E/24E net profit estimates of Rmb1.30bn/1.82bn/2.64bn, corresponding to 34x/24x/17x 2022E/23E/24E PE at the current price. We adopt comps valuation method and select Triangle Defense (300775.SZ), Paike New Materials (605123.SH) and Aviation Technical Development (688239.SH) as the comparable companies, which are trading at averaged 30x 2023E PE per Wind consensus estimates. Coupled with the subsequent operation of forging machines for large-sized parts, the low-efficient asset divestitures and equity incentives, which will further empower the Company's long-term development, we assign 35x 2023E PE to derive a target price of Rmb43 and maintain the "BUY" rating.
【免责声明】本文仅代表第三方观点，不代表和讯网立场。投资者据此操作，风险请自担。

   【免责声明】本文仅代表第三方观点，不代表和讯网立场。投资者据此操作，风险请自担。