AECC AERO-ENGINE CONTROL(000738)INITIATION(TAKEAWAY)：AERO-ENGINE CONTROL LEADER BENEFITING FROM THE INDUSTRY BOOM

AECC Aero-Engine Control is a primary domestic developer and producer of aero-engine control systems, mainly focusing on the three business lines of aero-engine control systems & derivative products, international cooperation and non-aeronautical products & others. After years of accumulation, it has secured significant competitive advantages and a leading position in the industry. Under the goal of strengthening the country’s military power, the aero-engine industry is developing rapidly.
We estimate the control system, the core component of aero engines, has a total addressable market of nearly Rmb360bn by 2024. The Company is a scarce target in aero-engine systems and has a leading market share in mechanical hydraulics given its synergy with the ACEE Aero-Engine Control System Institute under the Aero Engine Corporation of China (AECC). At the same time, AECC also provides access to stable customer resources. Considering the Company’s leading position in aviation control systems, we initiate coverage with a “BUY” rating and a target price of Rmb31 on 60x 2022E PE.
A leader in military aero-engine control systems: The Company is mainly engaged in the three business lines of aero-engine control systems & derivative products, international cooperation and non-aeronautical products & others. As a core supplier of domestic aviation control systems, it has four main subsidiaries of Xi'an Aero-engine Controls Technology, AECC Guizhou Honglin Aero-engine Control Technology, AECC Beijing Hangke Engine Control System Science & Technology and Changchun Aviation Hydraulic Pressure Control. After years of accumulation, the Company has secured a leading position in the industry and outstanding competitive advantages. The Company’s revenue and net profit have been growing rapidly in recent years. Revenue increased from Rmb2,504mn in 2016 to Rmb3,515mn in 2020, with a CAGR of 8.72%, while attributable net profit (ANP) grew from Rmb209mn in 2016 to Rmb368mn in 2020, with a CAGR of 15.19%. Both revenue and earnings growth picked up the pace in 2021, with revenue at Rmb4,157mn, a YoY increase of 18.25%, and ANP at Rmb488mn, a YoY increase of 30.67%.
Control systems warrant a ~Rmb360bn market as the core engine part.
With the gradual elimination of institutional, financial and technical constraints, China’s aero-engine industry has developed rapidly. We estimate that China’s military aero-engine market will reach about Rmb2.2trn in the long run. The control system is the core component of aero engines, accounting for about 18% of the value of the engine, while mechanical hydraulics account for about 2/3 of the value of the control system. Based on this forecast, we estimate the domestic aero-engine control system market will approximate Rmb360bn by 2040, of which mechanical hydraulics will be nearly Rmb240bn. With the improvement of manufacturing technology and the enhanced difficulty of the control system, the market space of the control system is likely to continue to increase in the future. The global engine control system market is largely dominated by a few countries such as the US, the UK and France. In the domestic market, main participants include AECC Aero-Engine Control and the ACEE Aero-Engine Control System Institute.
Entering a golden period of development backed by triple drivers: As the leader of domestic military aero-engine control systems, the Company has ushered in a golden development period by fully benefiting from the rapid release of downstream demand, as 1) the fundamentals continue to improve: China’s fighter jets still show a sizable gap compared to the US in terms of quantity and quality. The accelerated deployment of military aircraft and the continuously rising localization rate of aero engines will provide strong support for the demand expansion of aero-engine control systems. At the same time, engines are consumables, and actual combat exercises will accelerate the wear and tear of engines; 2) the Company boasts scarce assets and a strong industrial status: The aero-engine control system requires a long R&D cycle with a relatively high entry barrier. As the current leader of domestic aero-engine control systems, the Company has a solid market position. In addition, the Company has built a wide moat relying on AECC, which further guarantees its ability to obtain orders; 3) an inflection point in profitability has emerged: In recent years, the Company has been recalibrating to focus on its main business by divesting inefficient assets, which has improved its profitability. Considering the Company’s continuous improvement in quality and efficiency, we believe its net profit margin (NPM) still presents notable elasticity with meaningful upside ahead.
Potential risks The deployment of new military aircraft models disappoints; the orders of military products miss expectations; product development falls short of expectations.
Investment recommendation As the only listed company in the aero-engine control system industry, AECC Aero-Engine Control is a scarce play well-positioned to benefit from the high prosperity of the aero-engine sector. We forecast 2022E/23E/24E ANP of Rmb0.68bn/0.92bn/1.24bn, respectively, corresponding to EPS forecasts of Rmb0.52/0.70/0.95 and 43x/32x/24x 2022E/23E/24E PE at the current price.
We select AECC Aviation Power, AECC Aero Science and Technology and AVIC Shenyang Aircraft, which are trading at 65x 2022E PE on average, as comparable peers. Considering the valuation of comparable peers and the Company’s scarcity value & development potential, we assign 60x 2022E PE to derive a reasonable market cap of about Rmb41bn and initiate coverage with a “BUY” rating and a target price of Rmb31.
【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。