A Unique Oversea Platform of C hina Aerospace & Defense

GT

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国泰

君安

研究

国泰

君安

研究

国泰

君安

研究

国泰

君安

研究

A

viC

hina

中航

科工

(02

357

HK

)

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See the last page for disclaimer Page 1 of 21

Company Report: AviChina (02357 HK) Angus Chan 陈庆

公司报告：中航科工 (02357 HK) +852 2509 2665 [email protected]

27 May 2015

Year End 年结

Turnover 收入

Net Profit 股东净利

EPS 每股净利

EPS 每股净利变动

PER 市盈率

BPS 每股净资产

PBR 市净率

DPS 每股股息

Yield 股息率

ROE 净资产收益率

12/31 (RMB m) (RMB m) (RMB) (△%) (x) (RMB) (x) (RMB) (%) (%)

FY13A 22,193 713 0.131 5.6 60.8 1.855 4.3 0.020 0.2 7.0

FY14A 25,710 781 0.143 9.3 54.8 1.976 4.0 0.021 0.2 7.5

FY15F 31,160 977 0.178 25.0 45.0 2.134 3.8 0.027 0.3 8.7

FY16F 38,026 1,196 0.218 22.4 36.8 2.326 3.5 0.033 0.3 9.8

FY17F 46,131 1,439 0.263 20.4 30.5 2.556 3.1 0.039 0.4 10.8

Shares in issue (m) 总股数 (m) 5,574.4 Major shareholder 大股东 AVIC 54.6% Market cap. (HK$ m) 市值 (HK$ m) 55,620.2 Free float (%) 自由流通比率 (%) 40.2 3 month average vol. 3 个月平均成交股数 (‘000) 29,630.6 FY15 Net gearing (%) 15 年净负债/股东资金 (%) Net cash 52 Weeks high/low (HK$) 52 周高/低 10.400 / 4.125 SOTP (HK$) 分类加总估值法 (HK$) 18.9

Source: the Company, Guotai Junan International.

A Unique Oversea Platform of China Aerospace & Defense Sector, Initiate with “Accumulate” 中国航空航天和国防领域的独特海外平台，首次给予“收集”评级

� We initiate AviChina with an “Accumulate” rating. AviChina is the largest

producer of helicopter and trainer and a leading general aircraft producer in

China, backed by its parent, AVIC, which has dominant position in China

Aviation industry (both civil aircraft and military aircraft); almost all types of

aircrafts made in China are made by AVIC.

� We expect the Company to record a CAGR of 21.5% rev enue growth in

FY14-17F period and we believe the revenue growth i n helicopter and

aero systems & equipments will be the key growth dr iver. We forecast

net profit to record a CAGR of 22.6% in FY14-17F.

� AviChina‘s share price is largely discounted to A-S hare market value of

its four subsidiaries. Our target price of HK$13.50 translates into an implied

FY15F PER of 59.6x. AviChina’s share price is trading at 46.1% discount to

our SOTP valuation. Moreover, AviChina’s FY15F PER is trading at 74.0%

discount to A-share peers and 166.6% premium to global peers. We believe

the premium is mainly due to 1) rich cash position；2) potential assets

injections；3) faster growth of aircraft market in China and 4) mutual market

access between Hong Kong and A-Share market.

� 我们首次覆盖中航科工并给予我们首次覆盖中航科工并给予我们首次覆盖中航科工并给予我们首次覆盖中航科工并给予““““收集收集收集收集””””的投资评级的投资评级的投资评级的投资评级。。。。中航科工是中国直升机和教练机的最

大的生产商和领先的通用飞机制造商，其母公司，中航工业集团在中国航空无论是在民用

飞机和军用飞机制造工业都具有主导地位；几乎所有类型在中国制造的飞机都是由中国航

空工业集团公司生产。

� 在在在在 FY14-17F 期间期间期间期间，，，，我们预计公司收入我们预计公司收入我们预计公司收入我们预计公司收入将录得将录得将录得将录得 21.5%的复合年增长率的复合年增长率的复合年增长率的复合年增长率，我们相信在我们相信在我们相信在我们相信在直升机直升机直升机直升机

和航空系统及设备和航空系统及设备和航空系统及设备和航空系统及设备的收入增长将成为主要增长动力的收入增长将成为主要增长动力的收入增长将成为主要增长动力的收入增长将成为主要增长动力。。。。我们预测 FY14-17F 净利润复合年增

长率为 22.6%。

� 中航科工的股价大中航科工的股价大中航科工的股价大中航科工的股价大幅幅幅幅折让折让折让折让于于于于其四家子公司的其四家子公司的其四家子公司的其四家子公司的 A 股股股股市场价值市场价值市场价值市场价值。。。。我们的目标价 13.50 港元对应

59.6 倍 FY15F 市盈率。目前中航科工的股价 46.1%折让于我们的分类加总估值法的估值。

此外，中航科工的 FY15F 市盈率目前较 A 股同业有 74.0%的折让，而较全球同业有

166.6%的溢价。我们相信，溢价主要是由于 1）丰富的现金状况；2）潜在资产注入；3）

中国较快增长飞机市场和 4）香港和 A 股市场之间的互通。

Rating: Accumulate Initial

评级：收集收集收集收集 (首次研究)

6-18m TP 目标价: HK$13.50 Share price 股价： HK$10.160

Stock performance 股价表现

(20.0)

0.0

20.0

40.0

60.0

80.0

100.0

120.0

May-13 Aug-13 Nov-13 Feb-14 May-14

% of return

HSI AviChina

Change in Share Price 股价变动

1 M 1 个月

3 M 3 个月

1 Y 1 年

Abs. % 绝对变动 %

14.8 82.6 91.9

Rel. % to HS index 相对恒指变动 %

16.1 70.6 72.6

Avg. share price(HK$) 平均股价（港元）

8.4 6.4 5.3

Source: Bloomberg, Guotai Junan Internat ional.

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Table of Content Company Background ........................................................................................................................... 3 Opening Low-altitude Airspace ............................................................................................................. 4 Civil Market Opportunity for Commercial Aircraft .............................................................................. 7 China Defense Spending Uptrend Boost Aero Systems & Equipments Demand ...................... 10 Potential Assets Injections from AVIC ............................................................................................... 11 Financial Analysis & Earnings Forecasts .......................................................................................... 14 Valuation ................................................................................................................................................ 16 Investment Risks .................................................................................................................................. 19

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Company Background

An overseas platform of China’s State-owned aerospa ce & defense company. AviChina was founded in China in 2003

and listed in Hong Kong in the same year. Its parent company used to be AVIC-II, owned by SASAC. In 2008, AVIC-I and AVIC

II merged into AVIC (Aviation Industry Corporation of China). Currently, AviChina’s largest shareholder is AVIC, with a stake of

54.6%. European Aeronautic Defence and Space Company (EADS), the parent of Airbus and Eurocotper, is a strategic

shareholder with a 5.1% stake. Before mid-2008, AviChina mainly operated auto business while the Company has gradually

restructured into an aviation product maker since 2008. AviChina has become the largest producer of helicopter and trainer

and a leading general aircraft producer China, backed by its parent, AVIC which has dominant position in China aviation

industry both in civil aircraft and military aircraft; almost all types of aircrafts made in China are made by AVIC. Through

different assets injection and restructuring, AviChina has controlling holdings in four A-share listed aviation related companies,

namely AVIC Helicopter (35.10% stake, 600038 CH), Hongdu Aviation (43.63%, 600316 CH), AVIC Avionics (43.22% stake,

600372 CH) and Jonhon Optronic (41.57%, 002179 CH). AviChina is also engaged in development and manufacture of

aviation parts and components, avionics and electric connectors. Moreover, AviChina is also the only overseas listed company

of AVIC which is operating aircraft related business.

Figure-1: AviChina Organization Chart

AviChina Industry & Technology

Company Limited

JONHON

Optronic

(SZ002179)

AVIC Avionics

(SH600372)

Hongdu Aviation

(SH600316)CAPMC

Tianjin

Aviation

Harbin

Aviation Group

Shenyang

Xinghua

Qianshan

Avionics

Shaanxi

Baocheng

Shanghai

Aviation

Electric

AVIC

Kaitian

Oriental

Instrument

Changfeng

Avionics

AVIC Helicopter

(SH600038)

Xi’an

Forstar

Shaanxi

Huayan

Taiyuan

Instrument

Lanzhou

Aviation

Electric

Helicopter

Tianjin

Changfei

Parts andComponents

AVIC

Lanfei

Keeven

Instrument

Airbus

Composite

Materials

Changhe

Aviation

AVIC

Huiyang

Harbin

Embraer

Jingdezhen

Helicopter

41.57% 43.22% 43.63% 100% 100% 53.63%

62.87% 100% 100% 100% 86.74% 100% 100%

10%

100%100%100%58.18% 100%80%

6.45%

28.65%

13.51%

100% 100%

100% 100%

24.50%24.50%

European Aeronautic

Defence and Space

Company – EADS N.V.

AviChina Others

54.61%5.02% 40.37%

Changhe

Agusta

60%

Source: the Company.

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Figure-2: AviChina Milestone

The company had 334.6 mn

H Shares placement at the

Placing Price of HK$3.40 per H Share and raised 1.038 bn

Initial public offering in

HK Exchange, issued

1,600mn shares at HK$1.21 per share, China

Aviation Industry

Corporation II (61.06%)

the Company acquired

from AVIC 86.74% equity

interest in AVIC Kaitian for RMB 581 mn and 100%

equity interest in AVIC

LANFEI RMB 327 mn

Feb.2012 ,HK share

placement: 342 mn H

Shares at the Placing Price of HK$3.55 per

Placing Share, raised

1.214 bn

2003

2010

2011

2012

20132014

AVIC Avionics accept the

entrustment from AVIC on

managing its equity interest in AVIC Avionics Systems, AviChina

entitled for the full decision

right on the manufacture and

operation of AVIC Avionics

Systems

Subsidiary, Hafei Aviation placed

new A shares to AVIC Helicopter,

AVIC Hafei, and raised RMB1,106 mn

AVIC Avionic, acquired

100% equity interest of

Oriental Instrument for RMB176 mn from

Hanzhong Aviation

The company subscribed 18.6 mn

shares of Jonhon Optronic ’s

new share placement. JO raised a total RMB 807 mn.

The company subscribed 44.6 mn

A shares of ZEMIC for RMB 52.85

mn, equal to 2.28% equity interest

AVIC Avionics acquired

100% equity interest of

Keeven Instrument and Changfeng Avionics for

RMB 1.4 bn from AVIC

Avonics Systems

JONHON OPTRONIC

injected capital into

Shenyang Xinghua in an aggregate amount of

RMB 235 mn2008

2009

The Company disposed of

100% equity interest in Harbin

Automobile Group to AVIC Automobile at the price of

RMB 1 mn The company entered

a joint venture with

AVIC, AVIC Tongfei and Hebei Aviation

Investment and

formed Huabei Aircraft

Asset transfer to Hafei

Aviation: 100% equity

interest of Chang fei, Chang he, Huiyang and

Tian jin corporations.

Capital Injection: the

Company, AVIC

Economy and Technology Institute

and China Aviation

News injected RMB 33

mn into CAPMC

The company issued

183 mn new Domestic

Shares to AMES for the acquisition of Tianjin

Aviation for RMB768

mil.

Disposed all the equity

interest (54.51% ) in

Dongan Motor to AVIC and acquired 43.34%

Jonhon Optronic from

AVIC

Hongdu Aviation had new A

share placement amounting

to RMB2,536 mn

Completed the acquisition of

aviation assets by Changhe

Auto from AVIC and the disposal of automobile

assets .Issued Consideration

Shares to AVIC

The Company entered a joint

venture with Harbin Aircraft

Group, Airbus China, HafeiAviation and Harbin Heli in

producing component s for

Airbus and contributed USD 15

mn. (10% of registered capital)

The central government

merged China's two large

aerospace entities, CVIC I and CVIC II, creating one business

unit with ten aerospace

subsidiary companies. The new

company, which took the name

AVIC and became the controlling shareholder of

AviChina


Figure-3: AviChina Revenue Breakdown in FY14

Helicopter

38.6%

Other entire

aircraft 5.3%

Aero systems &

equipments

56.1%


Opening Low-altitude Airspace

Opening low-altitude airspace will boost general ai rcraft (GA) demand. In China, low-altitude airspace is mainly

controlled by the military. China’s Airspace Control Commission (CACC) issued Low-altitude Airspace Management Reform

Guidance in 2010, the reform guides to progressively open low-altitude airspace of below 4,000m to the country’s major

aviation control areas by 2015. Currently, the experiment areas have been carried out in part of the flight control zone,

including Shenyang, Guangzhou, Hainan, Changchun, Tangshan, Xian, Qingdao, Hangzhou, Ningbo, Kunming and

Chongqing. Most of GA activities are taking place in below 4,000m, including oil services, forest protection, helicopter

business flights, emergency rescue, fire fighting, sports, entertainment and seeding etc. We believe the full opening of

low-altitude airspace will boost the demand of GA, especially helicopters and fixed-wing aircraft which are mostly use in

low-altitude airspace.

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Given very low level of general aircraft ownership level in China, we expect substantial demand upside in coming

years. In China, there were around 1,654 units of GA by 2013, much lower than other developed countries. In USA, there

were around 220,000 units of GA in 2013, and the country’s population was around 0.3 billion. China was lagging behind in

terms of GA on a per-capita basis. In countries like USA, the developed GA sector has significantly contributed to its national

GDP and aviation-related employment opportunities. A healthy GA sector should offer important intangible benefits to the

society, for example, enhanced transportation capabilities, improved rescue and emergency medical care missions, better

agricultural, and better infrastructure development missions etc. At this moment, we see several factors constraining the GA

growth in China, 1) regulatory restrictions; 2) restrictive air space and 3) poor infrastructure. We see opening up of low-altitude

airspace to be the major catalyst to boost GA demand in coming years. Based on our forecast, the opening up of low-altitude

airspace and loosening of controls on air routes could lift up ownership of GA to reach around 5,000 units by 2020,

representing a CAGR of 17.7% in 2013-2020. Moreover, the opening up of low-altitude airspace will also reduce the approval

lead time of GA flights from seven working days to less than three days, and no prior approval is needed if flight plans are

submitted earlier.

Figure-4: Map on Opening Up of Low Altitude

500 km

300 mi

Source: the Company. Guotai Junan International.

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Figure-5: Most General Aviation are Taken Place in t he Low Altitude Source: the Company. Guotai Junan International.

Figure-6: Ownership Units of General Aircraft in Ch ina Figure-7: Sales of New General Aircraft in China

0%

5%

10%

15%

20%

25%

0

1,000

2,000

3,000

4,000

5,000

6,000

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2020F

Unit

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

120%

140%

0

100

200

300

400

500

600

700

800

900

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2020F

Unit

Source: Development Report on China General Aviation 2013, Guotai Junan International.

Source: Development Report on China General Aviation 2013, Guotai Junan International.

3000 m

1000 m

500 m

Commercial airlines, business flights & aero-photography

Oil services, forest protection, helicopter business flights

Emergency rescue, fire fighting, sports, entertainment, seeding

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Table-1: The Gap Between China's and Overseas’ Gene ral Aviation Sector

China USA Canada Australia Brazil

Area (thousand square kilometers) 960 963 1,000 770 851

Population (Billion) 1.3 0.23 0.03 0.02 0.19

Number of GA aircraft 1,654 220,000 31,018 11,117 10,310

GA aircraft in flight hours (Yearly) 600,000 26,000,000 4,500,000 1,695,000 1,500,000

Transport aviation aircraft and aircraft navigation proportion 1:0.67 1:32 1:61 1:34 1:24

Number of general aviation airports 70(Temporary landing point 329) 19,983 1,700 461 2,498

Pilot 2,124 510,000

FBO –Fixed Base Operator 4 3,500

Source: General Aviation Development Report 2013.

AviChina is expected to benefit the most from growi ng GA demand. AviChina’s parent, AVIC, is the largest aviation

industry group in China. AVIC made almost all types of domestic-made aircraft both civil and military. Through different assets

injections, AviChina is the major contractor in the GA sector. AviChina’s helicopter business, which is accounting for around

40% of FY14F revenue, is expected to see notable growth after the opening up of low-altitude airspace. Its helicopter business

will be benefit the most given their vertical takeoff and landing ability. Currently, over 90% of AviChina’s helicopter orders come

from government, and the gross margin is very low (below 10%). We think there is upside for its helicopter margin given that

opening up of low-altitude airspace could boost demand from private sector, and the margin is higher for private sector.

Compared with foreign leading GA producers, AviChina’s GA offers similar quality and lower prices. Moreover, on the back of

AVIC, AviChina can offer better maintenance services and strong support.

Civil Market Opportunity for Commercial Aircraft

Commercial aircraft market has huge upside in the l ong run. AviChina’s aero systems and equipment business is likely to

benefit from growing commercial aircraft market. The PRC Government decided to enter the commercial aircraft market in

2008, and Commercial Aircraft Corporation of China (COMAC) was formed for this purpose. COMAC will build C919

commercial aircraft which is an around 170 seat narrow-body airliner and it will be the largest commercial airliner designed

and built in China. The C919 commercial aircraft is China’s long term goal to compete with Airbus and Boeing’s duopoly, and

the aircraft is intended to compete against narrow-body airliners like Airbus A320 and Boeing 737. As for long term plan,

twin-engine C929 and C939 are proposed, offering 300-400 seats. At the end of 2014, there were 430 outstanding C919

orders, mostly from the PRC airlines and aircraft-leasing companies. The C919‘s first flight is expected to take place in 2015,

and first deliveries are scheduled for late 2018.

AviChina is one of the major suppliers of C919 and we see growth of commercial aircraft is likely to c ontinue over the

next 10-20 years. AVIC is the major shareholder of COMAC, therefore AVIC is a guaranteed supplier of C919. As one of the

major subsidiaries of AVIC, AviChina will supply back sections, doors, lighting systems, cockpits, and E-E cabin equipment

racks and etc to C919. The orders of C919 are believed to be high enough to ensure stable order growth for AviChina aero

systems and equipment business. Moreover, AviChina could also benefit from solid growth of commercial aircraft in China.

Boeing has projected that China will be the major growth driver of commercial aircraft given that passenger traffic is expected

to increase 6.9% and air cargo traffic is expected to increase 6.7% annually over the next 20 years. The majority of the growth,

around 65%, will be within China. About 16% of the growth will be international traffic to destinations with the Asia Pacific

region. The remaining 19% will be long-haul international. Boeing estimates that China will need 6,020 new airplanes valued

at USD870 billion. In our view, the growing demand of commercial aircrafts should offer huge opportunities for subcontracting

activity for Chinese aircraft manufacturers from both Boeing and Airbus. China is one of the major subcontractors of aircraft

parts (cabin door, tailpieces, wing ribs, access doors, flaps etc), we see AviChina is one of the major beneficiaries of growing

demand of commercial aircraft given that its parent AVIC is the biggest Chinese state-owned aerospace and defense

company.

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Figure-8: C919 Project

A. AVIC Avionics: Air data and inertial reference B. Hongdu: Fwd fuselage, Mid-aft fuselage E. Jonhon. Optical and electrical connectors F. Hafei. Fuselage-to-wing fairing; Vertical stabilizer; Nose & Main landing gear door C. Changhe: Leading and trailing flap edge D. Tianjin. Fire detection system Source: the Company. Guotai Junan International.

Table-2: C919 Orders

C919 Order Order Number

CDB Leasing 10 ICBC Leasing 45 Bank of Communications Financial Leasing 30 BOC Aviation 20 ABC Financial Leasing 45 China Aircraft Leasing 20 CCB Leasing 50 Industrial Bank Financial Leasing 20 CMB Financial Leasing 30 China Eastern Airlines 20 China Southern Airlines 20 Air China 20 Hainan Airlines 20 Hebei Airlines 20 Joy Air 20 GECAS (General Electric Capital Aviation Services) 20 Sichuan Airlines 20 Total 430 Source: AVIC.

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Table-3: Major Civil Aircraft in China Type Model Main Contractor Notes D/T/P

Commercial MA60/MA600 Xi'an Aircraft Industrial Corporation

Operate in rugged conditionswith limited ground support andhas short take-off and landingcapability.

P

MA700 Xi'an Aircraft Industrial Corporation

Conventional configuration, witha non-swept tapered wingmounted high on the mid-fuselage

D

ARJ21AVIC I Commercial Aircraft Company (ACAC) andAntonov

Twin-engine regional jet T

C919 Commercial Aircraft Corporation of ChinaNarrow-body jet airliner, thelargest commercial airlinerdesigned and built in China

D

Helicopter AC310 AVIC Helicopter CompanyCivilian helicopter, an updateddesign based on the earlierHarbin Z-8

P

AC301 AVIC Helicopter CompanyCivilian helicopter, an updateddesign based on the earlier Z-11

P

AC311 AVIC Helicopter CompanyCivilian helicopter, an updateddesign based on the earlier Z-11

P

AC312 Harbin Aircraft Manufacturing CorporationCivilian helicopter, an updateddesign based on the earlier Z-9

P

Z-9/H425 Harbin Aircraft Manufacturing CorporationMultirole, based on Z-9, currentlymost advanced civilianhelicopter

P

HC120Harbin Aircraft Industry Corporation and EuropeHelicopter Corporation

Same with Eurocopter EU120, 5seat light helicopter

P

Z-11Changhe Aircraft Industries Corporation and ChinaHelicopter Design and Research Institute

Multirole helicopter based onFrench AS350

P

AC352 AVIC Helicopter CompanyMedium sized, currently mostsafe, comfortable, easy-drivingpremium civilian helicopter.

T

AC313 AVIC Helicopter CompanyUpdated design based onHarbin Z-8

P

Source: AVIC , Guotai Junan International. Note: D=Development stage, T=Testing stage and P=Production stage.

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China Defense Spending Uptrend Boost Aero Systems & Equipments Demand

China‘s defense spending has large room to grow, an d defense spending as a percentage of GDP is still lagging

behind in terms of world average. China’s official defense spending accounted for only around 1.3% of GDP in 2014

(around 2.0% SIPPI estimate), much lower than developed counties. USA’s was around 3.9% and Russia’s was around 3.5%,

while the world average was around 2.9% in 2014. China announced a defense budget of USD141 million for 2015, an

increase of 10.1% YoY. We believe the defense spending is likely to post double-digit increase in the next ten years given that

the sovereignty disputes in the near seas which are the Yellow, East China and South China Seas. We see tensions between

China and Japan in Diaoyu Island and East China Sea matters remain the major factor for China defense spending to continue

to grow, with potential upside in the next ten years. Moreover, the maritime disputes with the Philippines and Vietnam concerns

are growing. Against such backdrop, China is eager to flex its military muscle. It is true that AviChina does not produce military

aircraft, but some of its aero systems & equipments’ products are ultimately supplied to military aircraft manufacturing.

Tensions between Russia and other western countries could raise China’s A&D related products export. We think the

EU and USA clash with Russia regarding the Ukraine issue could ultimately benefit China. Russia ranked the third in terms of

defense spending in the world, and a lot of parts and components are imported from other western countries. The tensions

between Russia and other western countries could shift the purchase to China. Assuming that Russia is to look for alternative

complex technological equipment and China is definitely its top choice.

Figure-9: China Defense Spending & CAGR Growth

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

19

90

19

92

19

94

19

96

19

98

20

00

20

02

20

04

20

06

20

08

20

10

20

12

20

14

20

16

F

20

18

F

20

20

F

20

22

F

20

24

F

RMB mn Defense Spending

Source: National Bureau of Statistics of China, Guotai Junan International.

Figure-10: China Defense Spending, % of GDP

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

19

52

19

56

19

60

19

64

19

68

19

72

19

76

19

80

19

84

19

88

19

92

19

96

20

00

20

04

20

08

20

12

RMB bnGDP Defense Spending to GDP Ratio SIPRI Estimated Ratio

Source: National Bureau of Statistics of China, SIPRI, Guotai Junan International.

90-00 15.2% 00-10 16.0% 10-15F10.7% 15F-20F 15.2% 20F-25F 12.4%

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Figure-11: World Top 15 Defense Spending, % of GDP F igure-12: World Top 15 Defense Spending

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

Sau

di A

rab

ia

UA

E

USA

Ru

ssia

Ind

ia

Tu

rke

y

Fran

ce

So

uth

Ko

rea

UK

Ch

ina

Ital

y

Au

stra

lia

Bra

zil

Ge

rma

ny

Jap

an

0

100

200

300

400

500

600

700

USA

Ch

ina

Ru

ssia

Sau

di A

rab

ia

Fran

ce

UK

Ge

rma

ny

Jap

an

Ind

ia

So

uth

Ko

rea

Ital

y

Bra

zil

Au

stra

lia

Tu

rke

y

UA

E

U SD bnU SD bnU SD bnU SD bn

Source: SIPRI, Guotai Junan International. Note: China defense spending is based on SIPRI estimation.

Source: SIPRI, Guotai Junan International. Note: China defense spending is based on SIPRI estimation.

Potential Assets Injections from AVIC

Assets injections and restructuring is likely to co ntinue in China’s defense industry. China’ defense industry has been

viewed as important opportunities for investment. The market believes asset injections and restructuring is likely to continue in

the China’s defense industry. China’s top ten defense companies’ total assets were around RMB2,700 billion, and

securitization rate was around 30% in 2013. AVIC ranked the first in terms of total assets of around RMB600 billion, with

securitization rate of over 50% in 2013. AviChina’s parent, AVIC, is the sole largest defense-aerospace group. The Group

manufactures China‘s major fighters. Its major subsidiaries, namely Shenyang Aircraft (J-8, J-11, J15 and J-31 fighters),

Changhe/AVIC Helicopter (Z-8, Z-9, Z-11 helicopters), Chengdu Aircraft Industry (J-10, J-20 fighters), Hongdu Aviation

Industry (K-8, L-15 trainers and Xi’an Aircraft (H-6, JH-7 bombers) are important assets in China’s airspace and defense

industry. We see opportunity that AVIC is to speed up asset injections and restructuring given that the recent events in China’s

defense industry.

China’s marine military has started to inject defen se assets into listed company, which should speed u p the process

of other military manufacturers to inject defense a ssets into listed company. In early 2014, China Shipbuilding Industry

Corporation (CSIC) (601989 CH) acquired four shipbuilding companies through private placement, at a consideration of

RMB17.46 billion. After the asset injection, CSIC become the first A-Share listed company with marine warship equipment

manufacturing. Moreover, Guangzhou Shipyard International (GSI) (00317 HK, 600685 CH) acquired its parent China

Shipbuilding Corporation (CSSC)’s Huangpu Wenchong Shipbuilding Company, and related shipbuilding assets held by

Yangzhou Kejin. GSI is the only overseas capital operation platform of CSSC. After the acquisition, GSI become the first

military industry-related company with dual-listing status in Hong Kong and Shanghai. As to improve overall profitability and

industry efficiency, the government started asset injection plans in its defense industry. AviChina is the major overseas capital

platform of AVIC, we think there are great potential that its parent could inject military/ aero-space related assets into AviChina.

The termination of the proposed Chengfei Integratio n (002190 CH) injection could open for other option s of assets

injection/restructuring in the future. In May 2014, AviChina’s parent, AVIC, announced an RMB 16 billion asset

restructuring plan which involved injection of China’s major fighter jet assets into A-Share listed Chengfei Integration. In this

deal, AviChina and its subs AVIC Avionics (600372 CH) was involved. Upon completion of this deal, AviChina will be the only

overseas listed company involving in military asset injection. However, the proposal was terminated, as the proposal did not

receive approval from the State Security Regulator, State Administration for Science, Technology and Industry for National

Defense (SASTOMD), due to monopoly concerns. In our view, we see the termination of the proposal does not have

significant impact on AviChina’s fundamentals, but we see opportunity for other AVIC-listed companies to involve in assets

injection/restructuring in the future. We believe AviChina is likely to engage in AVIC’s alternative proposals in the future given

that the Company is the only overseas capital platform of aerospace related company. Moreover, AviChina entrusts AVIC

Avionics to manage its equity interests in AVIC Avionics Systems. Currently, AviChina has the right to manage the

manufacture and operation of the entrusted AVIC Avionic Systems which include the five profitable research institutes. We see

potential assets injection of Avionic related research institutes into AviChina in the future.

Average 2.9%

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Table-4: China Major Fighters Type Model Main Contractor Notes D/T/P

Fighters J-7Shenyang, Chengdu andGuizhou Aircraft Corporation

Third-generation fighterbased on the Russian MiG-21

P

J-8 Shenyang Aircraft Corporation Second-generation fighter P

FC-1 Chengdu Aircraft Corporation,CATIC

Multirole fighter,all-weather P

J-10Chengdu Aircraft Design andResearch Insitute

Third-generation lightfighter,supersonicspeed,all-weather,Multirole

P

J-11/Su-27Shenyang Aircraft Corporationand SUKHOI

Multirole figthter based onthe RussianSu-27SK

P

J-15 Chengdu Aircraft Corporation Carrier based fighter T

J-20Chengdu Aircraft Design andResearch Insitute

Double heavy stealthfighter

T

J-31 Shenyang Aircraft CorporationFifth-generation fighter,similar to USA F-35Lightning II

T

Bombers H-6Xian Aircraft IndustryCorporation

Based on the Russian Tu-16, twin engine jet bomber

P

JH-7Xian Aircraft IndustryCorporation

Self-developed, supersonicspeed, sea and groundattack

P

Helicopters Z-8Changhe Aircraft IndustryCorporation

Based on French SA321Super Hornet, mid-sizedwith strong carrying ability

P

Z-9Harbin Aircraft IndustryCorporation

Based on French SA365,multirole

P

Z-10Changhe Aircraft IndustriesCorporation

Attack helicopter with anti-tank and air-to-air capability

P

Z-11

Changhe Aircraft IndustriesCorporation and ChinaHelicopter Design andResearch Institute

Multirole helicopter basedon French AS350

P

Z-15Harbin Aircraft IndustryCorporation and EuropeHelicopter Corporation

same as EurocopterEC175, Medium utilityhelicopter

P

Z-19Harbin Aircraft ManufacturingCorporation

Chinesereconnaissance/attackhelicopter, improved variantof Z-9

P

Trainers K-8Hongdu Aviation IndustryCorporation

two-seat intermediate jettrainer and light attackaircraft designed

P

L-15Hongdu Aviation IndustryCorporation

Supersonic training andlight attack aircraft

P

Specialpurpose

Y-8/Y-9 Shaanxi Aircraft CompanyMedium size mediumrange transport aircraft

P

Y-20Xi'an Aircraft IndustrialCorporation

Large military transportaircraft

D

Source: AVIC , Guotai Junan International. Note: D=Development stage, T=Testing stage and P=Production stage.

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Table-5: Top Ten China’s Defense Company Name Product Range Number of Listed

Companies Aviation Industry Corp of China (AVIC) Aerospace 28 China Aerospace Science & Technology Corp (CASC) Aerospace 9 China Aerospace Science & Industry Corp (CASIC) Aerospace 6 China North Industries Group Corp Armored vehicles and weapon systems 12 China South Industries Group Corp Vehicles and electro-optic systems 11 China Electronics Technology Group Corp Hi-tech and IT systems 7 China Shipbuilding Industry Corp (CSIC) Shipbuilding 3 China State Shipbuilding Corp (CSSC) Shipbuilding 3 China National Nuclear Corp Nuclear weapons 2 China Nuclear Engineering Group Military engineering , nuclear engineering 0 Source: Companies web sites, Guotai Junan International. Table-6: AVIC's Research Institutes (Related to Avio nics in Bold)

AVIC's Research Institutes

301 所中国航空综合技术研究所（北京）

303 所北京航空精密机械技术研究所（北京）

304 所北京长城计量测试技术研究所（北京）

601 所沈阳飞机设计研究所（沈阳）

602 所中国直升机设计研究所（景德镇）

603 所中航工业第一飞机设计研究院（原西安飞机研究所）（西安）

605 所中国特种飞行器研究所（荆门）

606 所沈阳航空发动机研究所（沈阳）

607 所所所所中航雷达与电子设备研究院中航雷达与电子设备研究院中航雷达与电子设备研究院中航雷达与电子设备研究院（（（（原雷华电子技术研究所原雷华电子技术研究所原雷华电子技术研究所原雷华电子技术研究所）（）（）（）（苏州苏州苏州苏州））））

608 所中国航空动力机械研究所（株洲）

611 所成都飞机设计研究所（成都）

612 所中国空空导弹研究院（洛阳）

613 所所所所洛阳电光设备研究所洛阳电光设备研究所洛阳电光设备研究所洛阳电光设备研究所（（（（洛阳洛阳洛阳洛阳））））

614 所中国航空动力控制系统研究所（无锡）

615 所所所所中国航空无线电电子研究所中国航空无线电电子研究所中国航空无线电电子研究所中国航空无线电电子研究所（（（（上海上海上海上海））））

618 所所所所西安飞行自动控制研究所西安飞行自动控制研究所西安飞行自动控制研究所西安飞行自动控制研究所（（（（西安西安西安西安））））

621 所北京航空材料研究院（北京）

623 所中国飞机强度研究所（西安）

624 所中国燃气涡轮研究院（绵阳/成都）

625 所中国航空工业制造工程研究所（北京）

626 所沈阳空气动力研究所（并入中国航空工业空气动力研究院）（沈阳）

630 所中国飞行试验研究院（西安）

631 所所所所中国航空计算技术研究所中国航空计算技术研究所中国航空计算技术研究所中国航空计算技术研究所（（（（西安西安西安西安））））

633 所上海航空测控技术研究所（上海）

634 所北京长城航空测控技术研究所（北京）

637 所济南特种结构研究所（济南）

648 所贵州飞机设计所（贵阳）

原国防部第六研究院中国航空研究院

中国航空工业经济技术研究院

中国航空工业第三设计研究院

中国航空工业规划设计研究院

中航勘察设计研究院

中航工业技术基础研究院 Source: AVIC , Guotai Junan International.

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Financial Analysis & Earnings Forecasts

AviChina experienced a fast growth phase from FY09 to FY14. Revenue grew from RMB5,654 million for FY09 to

RMB25,710 million for FY14, representing a CAGR of 35.4%. The strong revenue growth was mainly due to a series of assets

injection and restructuring during that period, and the Company became a leading civil aircraft and aviation tools and

aero-parts manufacturer. The revenue growth is expected to slow down amid stable government orders but remains at a

relatively high double digit growth rate driven by helicopter sales growth and aero systems & equipments demand. We

forecast a three year CAGR of 21.5% from FY14-17F for the revenue growth. The Company was able to take advantage of its

parent: AVIC’s dominated position in China’s aerospace & defense industry. After assets injections and restructuring,

Helicopter contributed about 40% revenue of in FY14, and aero systems and equipments contributed for about 56% of

revenue in FY14, respectively. We forecast a three year CAGR of 10.0% from FY14-17F for the Company’s helicopter

business and expect the business segment to account for about 30% of total revenue in FY17F. Moreover, we believe aero

systems & equipments to continue to experience solid growth in the future given that we believe China’s defense spending

would keep at high level with potential upside which should eventually increase the demand of aero systems & equipments.

Moreover, in the civil market, we see significant demand to come from commercial aircraft orders from subcontracting and

domestic commercial aircraft projects (C919 etc) in the mid to long run. We forecast a three year CAGR of 22.5% of aero

systems & equipments revenue growth from FY14-17F.

Figure-13: AviChina Total Revenue Breakdown in

FY12-17F (Amount)

Figure-14: AviChina Total Revenue Breakdown in

FY12-17F (%)

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

2012A 2013A 2014A 2015F 2016F 2017F

RMB mn

Aero systems & equipments Other entire aircraft Helicopter

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2012A 2013A 2014A 2015F 2016F 2017F

Aero systems & equipments Other entire aircraft Helicopter

Source: the Company, Guotai Junan International. Source: the Company, Guotai Junan International.

Figure-15: AviChina Total Revenue Breakdown in FY15F

Helicopter

35.0%

Other entire

aircraft 7.2%

Aero systems &

equipments

57.8%

Source: Guotai Junan International.

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Gross margin is expected to be stable and trend upw ard slightly in the coming years. AviChina showed stable gross

margin of around 20% in last three years. AviChina has relatively stable gross margin is mainly due to existing cost-plus

pricing mechanism for government orders (price their products at cost, plus 5% margin) and stable orders from its aero

systems & equipments. AviChina’s entire aircraft gross margin was only around 7-8% in the last three years, and we expect

the gross margin for its entire aircraft to remain at similar level in FY15-17F due to the existing costs-plus mechanism.

AviChina’s aero systems & equipments enjoyed a higher gross margin in the past, and we also expect its gross margin to

remain at similar level in FY15-17F. We forecast blended gross margin will largely flat of 19.1% in FY15F and reach 19.3% in

FY16F as we believe growth of aero systems and equipments to outpace entire aircraft growth in FY15-17F. Higher growth in

revenue of aero systems & equipments will slightly increase blended gross margin.

Figure-16: AviChina Revenue of Entire Aircraft & GM in

FY12-17F

Figure-17: AviChina Revenue of Aero Systems &

Equipments & GM in FY12-17F

6.4%

6.6%

6.8%

7.0%

7.2%

7.4%

7.6%

7.8%

8.0%

8.2%

0

200

400

600

800

1,000

1,200

1,400

1,600

2012A 2013A 2014A 2015F 2016F 2017F

RMB mn Entire aircraft GPM

20.0%

22.0%

24.0%

26.0%

28.0%

30.0%

32.0%

34.0%

36.0%

38.0%

40.0%

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

2012A 2013A 2014A 2015F 2016F 2017F

RMB mn Aero systems & equipments GPM

Source: the Company, Guotai Junan International. Source: the Company, Guotai Junan International.

Operating margin will bottom out in FY15F and see s light uptrend in FY15-16F. We forecast AviChina’s operating margin

will bottom out in FY15F, and will gradually recover to 8.0% and 8.0% in FY16-17F due to economies of scale. China’s

aerospace and defense industry intends to improve efficiency and deliver solid growth. As one of the key overseas capital

platforms of AVIC, AviChina is believed to deliver solid earnings growth by effective costs control.

Figure-18: AviChina Margins in FY12-17F

0%

5%

10%

15%

20%

25%

2012A 2013A 2014A 2015F 2016F 2017F

Goss margin Operating margin Net margin


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Net profit is expected to see growth of 21.2%, 22.4 % and 20.4% over FY15-17F. The Company’s net profit reported a

significant growth of 33.1% for FY12, which is attributable to the assets injection/restructuring. The net profit growth of FY13

slowed down to 7.3% YoY and the net profit growth was 9.6% YoY in FY14. We expect the net profit for FY15-17F to grow by

25.0%, 22.4% and 20.4%, respectively. Net profit margin is expected to reach from 3.0% in FY14 to 3.1% in FY15F to factor in

effective expenses control. Our EPS forecasts for FY15/16/17 are RMB0.179/0.219/0.264, respectively. The earnings growth

drivers in FY15-17F would come from 1) decent aircraft backlogs, 2) solid government orders outlook and 3) robust aero

systems & equipments demand.

Figure-19: AviChina Net Profit in FY12-17F

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

0

200

400

600

800

1,000

1,200

1,400

1,600

2012A 2013A 2014A 2015F 2016F 2017F

RMB mn Net profit YoY


The Company is in a strong liquidity position to pa rticipate in any potential assets injection/restruc turing. The

Company was in a net cash position as of end of FY14. We forecast operating cash flow of RMB2,092 million in FY15F. We

believe AviChina’s CAPEX to remain at similar level in FY15-17F. For entire aircraft segment, there is no significant increase

in CAPEX over FY15-17F. The CAPEX is expected to spend more on aero systems & equipments of which will be used in

commercial aircraft projects (C919 etc), including airborne sensor, precision control component and control devices etc.

Moreover, we forecast dividend payout to remain at around 15% in FY15-17F. The Company is likely to retain more cash for

potential assets injections/restructuring purpose. The Company’s net gearing ratios are expected to maintain at net cash

position in FY15-17F, which we think to be in a strong liquidity position to support potential assets injection or restructuring.

Valuation

AviChina‘s share price largely discount to market v alue of its four subsidiaries. Our target price is HK$13.50. Our target

price translates into an implied FY15F PER of 59.6x. In H-share market, there are basically no comparable firms. The only

listed firm has China’s military industry-related business is Guangzhou Shipyard Int’l (00317 HK), while the Company was

injected marine defense assets in late 2014. As such, we think AviChina is a unique company with dominant position in civil

and military aircraft listed in Hong Kong. As AviChina’s main profit contributors come from its four subsidiaries, we believe that

SOTP valuation could justify the share price is undemanding. AviChina’s share price is trading at 46.1% discount to our SOTP

valuation and the discount was around 20% in 2009. Our target price is 28.4% discount to SOTP valuation. Therefore we think

the stock’s current valuation is undemanding. Moreover, we also pick global players as comparable companies for AviChina.

Our comparable companies including global names which manufacture civil aircraft, military aircraft and aerospace related

parts and components. AviChina’s FY15F PER of 45.0x is trading at 74.0% discount to A-share peers and 166.6% premium to

global peers. We believe the premium is mainly due to 1) rich cash position and 2) potential assets injection and 3) much

faster growth of aircraft market in China and 4) mutual market access between Hong Kong and A-Share market.

Initiating with “Accumulate”. AviChina is the only overseas listed company of China’s aerospace and defense that holds

four A-share subsidiaries, namely AVIC Helicopter, Hongdu, AVIC Avionics and Jonhon Optronic, and these four subsidiaries

basically cover the full value chain of helicopter manufacturing. Since the A-share defense sector is trading at around weighted

average of 173.3x FY15F PER valuation, we think AviChina is a good investment to ride on China’s fast growing defense

sector given that its 46.1% discount to the market value of AviChina’s shareholdings of its four A-share subsidiaries. We

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believe AviChina is also the major beneficiary of military spending, as around 80% of AviChina’s revenue comes from

government orders. AviChina should benefit from China’s upgrading of fighters and military use helicopter. On the civil market,

we see opportunity from commercial aircraft development in China. C919 project is just the first millstone of China’s

commercial aircraft development, and AviChina is the one of the major beneficiaries of growing demand of commercial aircraft

given that its parent AVIC is the biggest Chinese state-owned aerospace and defense company. Moreover, AviChina being the

major overseas platform of AVIC, we see opportunity of further assets injection potential. AviChina has a long history of

participation in assets injection & restructuring. We believe AviChina could acquire quality assets from AVIC to enhance its

assets quality and to add value to its shareholders.

Table-11: SOTP Valuation of AviChina SOTP Valuation

RMB/HKD

0.79

AviChina share outstanding 5,474.4

Listed Subsidiaries Stock code Market Value (Rmb mn) Avichina Stake Market value to AviChina (HKD mn) Per share value

AVIC Helicopter 600038 CH 50,695 35.10% 22,524 4.11

Hongdu Aviation 600316 CH 35,834 43.63% 19,790 3.62

AVIC Avionics 600372 CH 82,645 43.22% 45,214 8.26

JONHON Optronic 002179 CH 25,486 41.57% 13,411 2.45

Sum 100,939 18.44

Unlisted Assets FY15F earnings 232

PE(X) 10.0

Valuation of unlisted HKD mn 2,320 0.42

SOTP Value of AviChina 18.86


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Table-12: Peers Comparison Table

Company

Stock Code Currency Last price

PE (fiscal year) PB (fiscal year) ROE(%)

14A 15F 16F 17F 14A 15F 16F 17F

15F

HK - Listed defense corporation

Avichina Industry & Tech-H 2357 HK HKD 10.160

56.4 49.6 41.3 34.4

4.1 3.9 3.6 3.4

8.1

Cssc Offshore And Marine Eng 317 HK HKD 39.150

211.6 111.9 45.4 36.9

5.7 4.1 3.8 3.5

n.a.

Simple Average 134.0 80.7 43.4 35.7 4.9 4.0 3.7 3.4 8.1

Weighted Average 154.5 88.9 43.9 36.0 5.1 4.0 3.7 3.5 8.1

China Listed defense corporation

Avic Aircraft Co Ltd-A 000768 CH CNY 43.600

328.8 214.8 155.7 109.0

9.7 8.9 8.5 7.9

4.4

Avic Aviation Engine Corp-A 600893 CH CNY 77.960

155.9 141.7 113.0 84.7

10.7 9.7 8.9 8.2

7.2

China Avionics Systems Co -A 600372 CH CNY 46.980

138.2 106.8 87.3 70.9

16.0 14.2 12.5 10.7

15.1

China Spacesat Co Ltd -A 600118 CH CNY 78.040

260.1 221.7 198.1 180.2

21.4 19.8 18.3 16.8

8.8

Avic Helicopter Co Ltd-A 600038 CH CNY 86.000

152.8 116.2 91.4 78.5

8.2 7.8 7.3 6.9

6.7

Jiangxi Hongdu Aviation-A 600316 CH CNY 49.970

363.2 318.3 208.2 199.9

7.3 7.1 7.0 6.8

2.4

Xi'An Tian He Defense Tech-A 300397 CH CNY 121.420

157.7 105.6 117.9 92.7

11.3 10.3 9.6 8.9

n.a.

Changchun Up Optotech Co-A 002338 CH CNY 92.900

189.6 83.7 n.a. n.a.

15.7 n.a. n.a. n.a.

n.a.

Cssc Offshore And Marine E-A 600685 CH CNY 70.420

479.0 348.6 135.4 117.4

12.9 12.4 11.5 9.1

4.7

China Aviation Optical -A 002179 CH CNY 53.380

73.1 51.4 39.0 28.9

8.6 7.5 6.5 5.4

15.0

China Shipbuilding Industr-A 601989 CH CNY 18.800

144.6 88.3 83.6 64.8

5.7 6.0 5.9 7.7

5.3

Avic Aero-Engine Controls-A 000738 CH CNY 42.500

263.2 n.a. n.a. n.a.

10.7 n.a. n.a. n.a.

n.a.

Avic Heavy Machinery Co Lt-A 600765 CH CNY 30.760

153.8 61.5 41.0 n.a.

6.8 n.a. n.a. n.a.

n.a.

Avic Electromechanical Sy-A 002013 CH CNY 47.280

89.2 80.1 69.5 n.a.

7.3 n.a. n.a. n.a.

n.a.

Aerospace Hi-Tech Holdings-A 000901 CH CNY 78.550

654.6 n.a. n.a. n.a.

19.0 n.a. n.a. n.a.

n.a.

Guizhou Space Appliance Co-A 002025 CH CNY 43.500

70.2 70.2 61.3 n.a.

8.0 n.a. n.a. n.a.

n.a.

China Aerospace Times Elec-A 600879 CH CNY 24.500

103.4 69.4 48.0 n.a.

4.9 n.a. n.a. n.a.

n.a.

Simple Average 242.4 178.3 134.3 96.9 10.2 9.3 8.7 8.1 5.8

Weighted Average 230.7 173.3 131.5 95.2 10.2 9.4 8.7 8.1 6.0

Gobal Listed defense corporation

United Technologies Corp UTX US USD 116.870

16.9 16.7 15.3 14.1

3.4 3.2 3.0 2.8

20.1

Boeing Co/The BA US USD 142.800

19.1 16.7 15.4 14.0

11.6 12.4 13.7 16.9

64.6

Honeywell International Inc HON US USD 104.840

19.4 17.2 15.7 14.1

4.6 4.1 3.7 3.4

25.4

Lockheed Martin Corp LMT US USD 190.510

16.7 17.1 15.3 13.8

17.6 17.1 14.4 15.1

95.4

General Dynamics Corp GD US USD 137.990

18.3 16.1 14.9 14.0

3.9 3.9 3.8 3.5

23.8

Airbus Group Nv AIR FP EUR 63.540

21.3 18.9 18.3 14.2

7.1 5.6 4.8 4.1

30.9

Northrop Grumman Corp NOC US USD 158.470

16.0 16.5 14.9 13.1

4.4 5.1 4.9 4.1

27.5

Raytheon Company RTN US USD 105.520

14.7 15.5 14.8 13.4

3.4 3.2 2.9 3.0

21.3

Safran Sa SAF FP EUR 66.210

n.a. 19.3 17.7 16.2

4.4 3.8 3.4 3.1

20.9

Rolls-Royce Holdings Plc RR/ LN GBp 1,010.000

274.5 16.9 15.6 14.3

3.0 2.9 2.6 2.3

17.1

Bae Systems Plc BA/ LN GBp 518.000

22.1 13.3 12.6 11.9

8.9 6.8 5.9 5.9

51.4

Textron Inc TXT US USD 45.700

21.3 18.3 15.4 13.8

3.0 2.6 2.3 2.1

15.4

Thales Sa HO FP EUR 56.800

16.3 16.1 14.4 13.3

3.1 2.8 2.5 2.2

17.4

L-3 Communications Holdings LLL US USD 117.730

15.1 15.8 14.1 12.8

1.8 1.9 1.9 1.9

11.5

Finmeccanica Spa FNC IM EUR 11.630

n.a. 17.7 15.2 12.5

1.9 1.8 1.7 1.5

9.9

Huntington Ingalls Industrie HII US USD 122.330

17.7 14.3 13.2 12.7

4.3 3.8 3.4 3.1

28.5

Exelis Inc XLS US USD 24.690

18.7 19.1 18.1 16.7

3.7 3.3 2.9 2.5

19.2

Booz Allen Hamilton Holdings BAH US USD 24.450

15.1 15.5 14.8 13.8

21.3 19.5 9.5 6.7

129.9

General Electric Co GE US USD 27.520

18.2 19.2 16.8 15.1

2.2 2.3 2.3 2.8

11.4

Oshkosh Corp OSK US USD 53.870

14.7 13.4 12.0 11.5

2.2 2.1 1.8 1.6

15.5

Computer Sciences Corp CSC US USD 67.480

14.8 n.a. 13.8 12.7

2.5 3.2 3.2 2.8

(0.2)

Babcock Intl Group Plc BAB LN GBp 1,120.000

22.4 21.2 14.6 13.1

4.0 2.6 2.4 2.2

16.3

Saab Ab-B SAABB SS SEK 220.500

20.3 18.2 14.9 13.4

2.1 2.0 1.8 1.7

10.3

Rheinmetall Ag RHM GR EUR 48.970

104.2 14.1 11.2 9.5

1.7 1.4 1.3 1.3

10.8

Caci International Inc -Cl A CACI US USD 85.640

14.8 16.5 15.4 14.6

1.5 1.4 1.3 1.2

9.0

Mitsubishi Heavy Industries 7011 JT JPY 789.600

16.5 24.0 17.1 15.0

1.7 1.5 1.4 1.3

6.6

Harris Corp HRS US USD 79.090

15.7 15.6 15.5 12.5

4.6 263.6 5.4 4.0

44.0

Embraer Sa EMBR3 BZ BRL 24.410

22.5 18.2 13.7 12.8

1.8 1.5 1.4 1.3

8.8

Bombardier Inc-B BBD/B CN CAD 2.460

n.a. 8.8 12.3 14.8

(12.1) 5.3 3.9 3.3

111.1

Mtu Aero Engines Ag MTX GR EUR 86.550

22.5 16.5 15.3 13.2

3.7 3.0 2.7 2.5

19.0

Eaton Corp Plc ETN US USD 72.010

19.1 15.1 13.7 12.8

2.2 2.1 1.9 1.8

13.4

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Rockwell Collins Inc COL US USD 96.700

21.6 18.5 16.9 15.5

7.0 6.4 5.0 4.3

35.5

Cae Inc CAE CN CAD 15.170

20.8 20.0 17.5 15.7

2.8 2.5 2.3 2.1

13.2

Cobham Plc COB LN GBp 298.300

114.7 14.2 13.0 12.3

3.1 3.0 3.0 2.7

17.3

Ultra Electronics Hldgs Plc ULE LN GBp 1,825.000

61.2 15.1 14.5 13.7

4.0 3.8 3.5 3.3

24.1

Simple Average 37.8 16.7 15.3 13.8 5.7 5.4 5.0 5.0 31.6

Weighted Average

30.6 16.9 15.5 13.9

6.8 6.6 6.2 6.6

37.5

Source: Bloomberg, Guotai Junan International.

Investment Risks

Delay in full opening of low-altitude airspace. The market is expecting a full opening of low-altitude airspace in 2015;

therefore any further delays could lower the demand of civil aircraft.

Lower than expected government orders. AviChina heavily relies on the government orders, and around 80% of its orders

come from government purchase. Any slowdown in government orders will reduce AviChina’s earnings significantly.

Disclosure is limited. Disclosure is limited on AviChina orders and military related products mainly due to its sensitiveness.

Operational size is still very small. AviChina is the largest helicopter manufacturer in China. However, its size is still very

small compared to global peers namely, Airbus Helicopters, Sikorsky and Bell etc, in terms of revenue and size.

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Financial statements & ratios Income Statement Balance Sheet

Year end Dec (RMB m) 2013A 2014A 2015F 2016F 2017F Year end Dec (RMB m) 2013A 2014A 2015F 2016F 2017F

Entire aircraft 10,198 11,275 13,164 15,744 19,565 Fixed assets 10,803 12,150 12,710 13,150 13,445

Aero systems & equipments 11,995 14,435 17,996 22,282 26,565 Interests in asso/JV 1,093 876 1,003 1,148 1,314

Available-for-sale financial assets 1,152 1,238 1,362 1,498 1,648

Total revenue 22,193 25,710 31,160 38,026 46,131 Others 321 422 464 510 561

Cost of sales (17,885) (20,812) (25,200) (30,685) (37,243) Non-current assets 13,369 14,687 15,539 16,306 16,969

Gross profit 4,308 4,899 5,960 7,341 8,888 Inventories 14,780 16,593 17,950 21,437 24,999

Other revenue 58 113 93 114 138 Trade and other receivables 8,958 10,974 11,098 13,543 16,430

Other net income 193 203 280 342 415 Other receivables 1,183 1,772 1,949 2,144 2,358

Selling expenses (415) (470) (561) (684) (830) Deposits 4,692 3,849 3,878 3,908 3,938

Administrative expenses (2,386) (2,750) (3,334) (4,069) (4,936) Cash at bank and in hand 6,726 5,798 6,597 6,721 6,652

Others 1,220 1,050 1,154 1,270 1,397

Operating profit 1,758 1,995 2,439 3,044 3,675 Current assets 37,559 40,035 42,627 49,024 55,774

Net financial cost (74) (136) (85) (124) (137)

Share of profits of asso/JV 77 144 141 151 160 Total Assets 50,928 54,722 58,165 65,329 72,743

Profit before tax 1,761 2,003 2,496 3,072 3,698 Bank loans and overdrafts 4,207 5,633 5,915 6,211 6,521

Taxation (250) (267) (324) (415) (499) Trade and bill payables 14,032 15,050 15,189 18,495 21,428

Other payables 3,740 3,810 4,191 4,611 5,072

Profit for the year 1,511 1,736 2,171 2,657 3,199 Others 4,449 4,227 4,627 5,065 5,547

Minority interest (798) (954) (1,194) (1,461) (1,759) Current liabilities 26,428 28,721 29,922 34,382 38,567

Net profit 713 781 977 1,196 1,439 Bank loans 1,911 1,785 1,874 1,968 2,066

Others 783 915 1,006 1,107 1,217

EPS (RMB) 0.131 0.143 0.178 0.218 0.263 Non-current liabilities 2,693 2,699 2,880 3,074 3,283

DPS (RMB) 0.020 0.021 0.027 0.033 0.039

Total Liabilities 29,121 31,420 32,802 37,456 41,850

Minority interest 11,684 12,486 13,680 15,141 16,901

Shareholders' equity 10,123 10,815 11,683 12,732 13,992

Total Liabilities and Equity 50,928 54,722 58,165 65,329 72,743

Cash flow Statement BPS (RMB) 1.855 1.976 2.134 2.326 2.556

Year end Dec (RMB m) 2013A 2014A 2015F 2016F 2017F Financial Ratios

Profit before tax 1,761 2,003 2,496 3,072 3,698 Year end Dec (RMB m) 2013A 2014A 2015F 2016F 2017F

Depreciation & amortisation 735 820 857 926 991

Net finance cost 53 119 85 124 137 Growth (%):

Other items (266) (249) (141) (151) (160) Revenue 20.8 15.9 21.2 22.0 21.3

Working capital change (1,436) (2,696) (876) (2,114) (2,953) Gross profit 9.8 13.7 21.7 23.2 21.1

Interest & Tax paid (275) (388) (329) (450) (539) Operating profit 13.5 13.5 22.3 24.8 20.7

Cash flow from operation 572 (392) 2,092 1,406 1,173 Net profit 7.3 9.6 25.0 22.4 20.4

CAPEX (2,862) (1,831) (1,729) (1,702) (1,647) Profitability (%):

Others (546) 362 174 178 175 Gross margin 19.4 19.1 19.1 19.3 19.3

Cash flow from investing (3,409) (1,470) (1,554) (1,524) (1,472) Operating margin 7.9 7.8 7.8 8.0 8.0

Net margin 3.2 3.0 3.1 3.1 3.1

Increase in bank loans 1,506 1,274 371 389 409 ROA 1.4 1.4 1.7 1.8 2.0

Dividends paid (223) (387) (109) (147) (179) ROE 7.0 7.5 8.7 9.8 10.8

Others 2,693 21 0 0 0

Cash flow from financing 3,976 907 261 243 230 Liquidity & Solvency

Current Ratio (x) 1.4 1.4 1.4 1.4 1.4

Cash balance change 1,140 (954) 799 125 (69) Quick Ratio (x) 0.4 0.3 0.4 0.3 0.3

Cash balances at year begin 5,606 6,726 5,798 6,597 6,721 Net gearing (%) net cash net cash net cash net cash net cash

Effect of FX changes (20) 27 0 0 0 Interest coverage (x) 5.9 5.4 6.9 8.3 9.5

Cash balances at year end 6,726 5,798 6,597 6,721 6,652 Dividend payout ratio (%) 15.4 15.0 15.0 15.0 15.0


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Company Rating Definition

The Benchmark: Hong Kong Hang Seng Index

Time Horizon: 6 to 18 months

Rating Definition

Buy Relative Performance >15%; or the fundamental outlook of the company or sector is favorable.

Accumulate Relative Performance is 5% to 15%; or the fundamental outlook of the company or sector is favorable.

Neutral Relative Performance is -5% to 5%; or the fundamental outlook of the company or sector is neutral.

Reduce Relative Performance is -5% to -15%; or the fundamental outlook of the company or sector is unfavorable.

Sell Relative Performance <-15%; or the fundamental outlook of the company or sector is unfavorable.

Sector Rating Definition

The Benchmark: Hong Kong Hang Seng Index

Time Horizon: 6 to 18 months Rating Definition Outperform Relative Performance >5%;

or the fundamental outlook of the sector is favorable.

Neutral Relative Performance is -5% to 5%; or the fundamental outlook of the sector is neutral.

Underperform Relative Performance <-5%; or the fundamental outlook of the sector is unfavorable.

DISCLOSURE OF INTERESTS

(1) The Analysts and their associates do not serve as an officer of the issuer mentioned in this Research Report. (2) The Analysts and their associates do not have any financial interests in relation to the issuer mentioned in this Research Report. (3) Except for China All Access (Holdings) Limited (00633), Guangshen Railway Company Limited-H shares (00525), Guotai Junan

International Holdings Limited (01788) and Binhai Investment Company Limited (02886), Guotai Junan and its group companies do not hold equal to or more than 1% of the issued share capital of the new listing applicant mentioned in this Research Report.

(4) Guotai Junan and its group companies have not had investment banking relationships with the issuer mentioned in this Research Report within the preceding 12 months.

DISCLAIMER This Research Report does not constitute an invitation or offer to acquire, purchase or subscribe for securities by Guotai Junan Securities (Hong Kong) Limited ("Guotai Junan"). Guotai Junan and its group companies may do business that relates to companies covered in research reports, including investment banking, investment services and etc. (for example, the placing agent, lead manager, sponsor, underwriter or invest proprietarily). Any opinions expressed in this report may differ or be contrary to opinions or investment strategies expressed orally or in written form by sales persons, dealers and other professional executives of Guotai Junan group of companies. Any opinions expressed in this report may differ or be contrary to opinions or investment decisions made by the asset management and investment banking groups of Guotai Junan. Though best effort has been made to ensure the accuracy of the information and data contained in this Research Report, Guotai Junan does not guarantee the accuracy and completeness of the information and data herein. This Research Report may contain some forward-looking estimates and forecasts derived from the assumptions of the future political and economic conditions with inherently unpredictable and mutable situation, so uncertainty may contain. Investors should understand and comprehend the investment objectives and its related risks, and where necessary consult their own financial advisers prior to any investment decision. This Research Report is not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation or which would subject Guotai Junan and its group companies to any registration or licensing requirement within such jurisdiction. © 2015 Guotai Junan Securities (Hong Kong) Limited. All Rights Reserved. 27/F., Low Block, Grand Millennium Plaza, 181 Queen’s Road Central, Hong Kong. Tel.: (852) 2509-9118 Fax: (852) 2509-7793 Website: www.gtja.com.hk

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