Industrials / China 2357 HK Industrials / China 12 June 2014
AviChina Industry & Technology
AviChina Industry & Technology Target (HKD): 5.20 5.00 Upside: 14.9% 2357 HK 12 Jun price (HKD): 4.35
Poised for earnings-growth acceleration in 2015 1 Buy (unchanged) 2 Outperform • Likely upcoming policy reforms would improve AviChina’s 3 Hold margins and encourage more asset injections from its parent 4 Underperform • We expect AviChina to win more orders for its existing and new 5 Sell models, which should drive stronger earnings growth in 2015 • Lowering target price slightly to HKD5.00; reiterating Buy (1) call; catalysts from policy reforms and order-book growth
How do we justify our view?
new aircraft models this year, disposal gains. Our 2015E EPS is 8% including the Y12F and Z15. For above the consensus as we factor in existing models, we expect the L15 the parent’s planned asset injections. trainer to obtain more orders in
2014, and deliveries of its Legacy Forecast revisions (%) Kelvin Lau 650 business jet to start in 2H14. Year to 31 Dec 14E 15E 16E (852) 2848 4467 Revenue change 10.6 8.9 n.a. [email protected] We raise our 2014-15E revenue by 9- Net profit change (17.4) (17.9) n.a. Core EPS (FD) change (17.4) (17.9) n.a. 11% for new model orders and assets Carrie Yeung injected since 2013. We cut our 2014- Source: Daiwa forecasts (852) 2773 8243 15E EPS by 17-18%, as we reduce our [email protected] Share price performance earnings for subsidiary AVIC Avionics (2014E) and exclude disposal gains (HKD) (%) (2014-15E), but include the parent’s 5.5 135 ■ What's new 5.0 123 We believe AviChina stands to planned asset injections (2015E). Still, 4.5 110 benefit from policy reforms that we we forecast a strong EPS growth pick- 3.9 98 expect the government to announce up to 31% YoY for 2015 and see robust 3.4 85 this year for China’s aerospace and earnings growth continuing in 2016. Jun-13 Sep-13 Dec-13 Mar-14 defence industries, and foresee a Avichina (LHS) Relative to HSI (RHS) boost to orders for its existing and ■ What we recommend new aircraft models, which should We lower our SOTP-based 6-month 12-month range 3.53-5.09 drive higher earnings growth in 2015. target price mildly to HKD5.00 Market cap (USDbn) 3.02 (from HKD5.20), due to a lower 3m avg daily turnover (USDm) 6.80 earnings contribution from AVIC Shares outstanding (m) 5,373 ■ What's the impact Major shareholder AVIC (56.7%) We believe the government will aim Avionics, and a 35% discount to attract more private capital into (formerly 30%) to our SOTP value Financial summary (CNY) China’s national defence and derived from 2015E PERs assigned Year to 31 Dec 14E 15E 16E aerospace-manufacturing sectors, to AviChina’s A-share subsidiaries Revenue (m) 26,148 30,367 35,338 thereby allowing more assets to be and affiliates (formerly 2014E Operating profit (m) 1,947 2,224 2,650 PBRs). We reaffirm our Buy (1) Net profit (m) 723 944 1,145 injected into listed companies, Core EPS (fully-diluted) 0.132 0.172 0.209 including AviChina and its rating, based on strong order-book EPS change (%) 13.9 30.6 21.3 subsidiaries and affiliates. We also growth and positive policy reform. Daiwa vs Cons. EPS (%) (7.7) 7.7 (0.4) expect a reform of industry pricing, The main risk is lower-than- PER (x) 26.5 20.3 16.7 which would help improve expected order-book growth. Dividend yield (%) 0.6 0.8 1.0 DPS 0.022 0.028 0.034 AviChina’s gross-profit margins. PBR (x) 1.8 1.6 1.5 ■ How we differ EV/EBITDA (x) 9.3 9.0 7.6 Meanwhile, we expect AviChina to Our 2014E EPS is 8% below the ROE (%) 6.9 8.4 9.4 obtain licences to sell more of its Bloomberg consensus as we exclude Source: FactSet, Daiwa forecasts
See important disclosures, including any required research certifications, beginning on page 21 Industrials / China 2357 HK 12 June 2014
Contents
Potential private capital boost from reforms ...... 6 More private capital expected to enter AviChina’s sector ...... 6 Potential change of pricing system ...... 7 Diplomatic considerations ...... 7 2014: contrasting outlook for subsidiaries ...... 8 Hafei Aviation, Jonhon Optronic: optimistic on earnings ...... 8 Concerns about AVIC Avionics and Hongdu ...... 10 Other product highlights ...... 11 Forecasts, valuation and recommendation ...... 12 Earnings-forecast revisions ...... 12 Valuation: new SOTP-based target price of HKD5.00 ...... 12 Major risks ...... 13 Appendix ...... 15
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1 Buy (unchanged) How do we justify our view? 2 Outperform
3 Hold Growth outlook
4 Underperform Valuation 5 Sell Earnings revisions
Growth outlook AviChina: net profit and net profit growth (2011-16E) We expect AviChina to resume double-digit 14% YoY net (CNYm) (YoY%) profit growth in 2014, despite reducing our net profit 1,400 40% forecast, as we see strong drivers from its helicopter and 1,200 20% optronics businesses. The profitability of its 44.5%-owned 1,000 subsidiary AVIC Avionics remains a concern as we expect 0% 800 higher R&D and interest expenses than previously for (20%) 600 2014. We forecast AviChina to see strong 31% YoY net (40%) profit growth for 2015, as from that year we now include 400 higher profits from the parent’s planned asset injections 200 (60%) into one of AviChina’s affiliates, Sichuan Chengfei 0 (80%) Integration Technology (CITC). If we exclude the one-off 2011 2012 2013 2014E 2015E 2016E impact from these injections, our 2015E net profit growth Total net profit (LHS) Growth (RHS) would still be solid at 20% YoY, similar to 21% YoY growth Source: Company, Daiwa forecasts we forecast for 2016.
Valuation AviChina: 1-year forward PER (2011-present) AviChina is trading at a 2015E PER of 20.3x (on our EPS (PER, x) forecast), below its past-3-year average of 24.3x. We 45 believe its share-price weakness year-to-date reflects 40 35 1 Std concerns in the market about its 2014 profitability 30 (especially from AVIC Avionics), which we think is now 25 average fully priced in. We remain positive on AviChina’s earnings 20 outlook for 2015 and beyond as we expect it to benefit 15 1 Std 10 directly from orders for several new models it plans to 5 launch this year and China’s opening-up of low-altitude 0 airspace potentially from 2015. We expect investor Jul-13 Apr-12 Jun-11 Feb-13 Nov-11 Dec-13 Sep-12 sentiment towards the stock to recover during the next 6 May-14 months, driving a re-rating, as investors are likely to start PER upper lower average focusing more on 2015E earnings. Source: Thomson Reuters, Daiwa forecasts
Earnings revisions AviChina: consensus EPS-forecast revisions (2014-15E)
Year-to-date, the Bloomberg consensus has revised (HKD) down its 2014 EPS forecast, which we believe reflects 0.22 concerns about a lower earnings contribution from 0.21 AVIC Avionics. As our earnings forecasts exclude disposal gains (whereas the consensus includes them), 0.20 our 2014E EPS is 8% lower than that of the consensus, 0.19 though the consensus still comprises only a few 0.18 analysts. Our 2014E EPS would be in line with that of the consensus if we included disposal gains. Our 2015E 0.17 EPS is 8% above that of the consensus as we include the 0.16 impact from the planned asset injections by AviChina’s Jan-14 Apr-14 parent into affiliate CITC, and we expect the consensus 2014E 2015E to raise its 2015 forecast to factor this in. Our 2015E Source: Bloomberg EPS would be 15% above that of the consensus if we also included disposal gains.
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Financial summary
Key assumptions Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E Revenue growth from helicopters (%) (5.4) 8.3 22.0 160.6 30.0 21.6 20.0 20.0 Revenue growth from trainers (%) (0.6) 8.5 6.3 (51.7) (35.8) 25.0 26.5 26.5 Revenue growth from aviation parts 0.0 117.2 17.7 50.3 18.8 16.4 12.4 12.6 and components (%)
Profit and loss (CNYm) Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E Aircraft revenue 3,028 5,268 6,555 8,273 10,198 12,187 14,670 17,662 Aviation components and other revenu 2,627 5,705 5,518 10,095 11,995 13,962 15,698 17,676 Other Revenue 238 949 1,199 0 0000 Total Revenue 5,893 11,922 13,271 18,368 22,193 26,148 30,367 35,338 Other income 118 136 132 159 251 195 195 195 COGS (4,285) (8,097) (10,160) (13,803) (17,150) (20,616) (24,182) (28,252) SG&A (786) (1,498) (1,806) (2,533) (2,801) (2,941) (3,238) (3,502) Other op.expenses (182) (390) (459) (641) (735) (839) (918) (1,129) Operating profit 757 2,074 979 1,549 1,758 1,947 2,224 2,650 Net-interest inc./(exp.) (68) (53) (19) (66) (74) (149) (142) (177) Assoc/forex/extraord./others 33 32 92 57 77 100 217 272 Pre-tax profit 722 2,053 1,052 1,540 1,761 1,898 2,300 2,744 Tax (61) (145) (143) (235) (250) (267) (309) (367) Min. int./pref. div./others (185) (74) (410) (641) (798) (853) (987) (1,172) Net profit (reported) 476 1,834 499 664 713 779 1,004 1,205 Net profit (adjusted) 231 488 421 629 634 723 944 1,145 EPS (reported)(CNY) 0.102 0.375 0.101 0.124 0.130 0.142 0.183 0.220 EPS (adjusted)(CNY) 0.050 0.100 0.085 0.117 0.116 0.132 0.172 0.209 EPS (adjusted fully-diluted)(CNY) 0.050 0.100 0.085 0.117 0.116 0.132 0.172 0.209 DPS (CNY) 0.000 0.010 0.011 0.020 0.020 0.022 0.028 0.034 EBIT 757 2,074 979 1,549 1,758 1,947 2,224 2,650 EBITDA 939 2,464 1,438 2,190 2,493 2,786 3,142 3,779
Cash flow (CNYm) Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E Profit before tax 722 2,053 1,052 1,540 1,761 1,898 2,300 2,744 Depreciation and amortisation 182 390 459 641 735 839 918 1,129 Tax paid (66) (126) (178) (233) (222) (267) (309) (367) Change in working capital 571 1,211 (960) (2,606) (1,436) (303) (451) (542) Other operational CF items (98) (103) (126) (40) (245) (197) (315) (369) Cash flow from operations 1,310 3,424 248 (698) 593 1,970 2,142 2,596 Capex (250) (941) (699) (1,067) (2,687) (1,000) (2,700) (1,000) Net (acquisitions)/disposals 90 217 198 (132) (742) (742) (742) (742) Other investing CF items (1,108) (1,830) (81) (1,534) 20 177 177 177 Cash flow from investing (1,268) (2,555) (582) (2,733) (3,409) (1,565) (3,265) (1,565) Change in debt 2,061 1,712 2,365 4,011 6,237 3,500 3,500 3,500 Net share issues/(repurchases) 0 894 0 970 0000 Dividends paid (102) (96) (192) (109) (223) (219) (239) (308) Other financing CF items (1,909) 493 (2,355) (2,680) (2,038) (4,207) (3,255) (3,255) Cash flow from financing 50 3,004 (182) 2,191 3,976 (926) 6 (63) Forex effect/others 00000000 Change in cash 93 3,873 (516) (1,240) 1,160 (521) (1,117) 968 Free cash flow 1,061 2,483 (452) (1,765) (2,094) 970 (558) 1,596 Source: FactSet, Daiwa forecasts
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Financial summary continued …
Balance sheet (CNYm) As at 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E Cash & short-term investment 3,637 9,110 8,651 9,000 10,104 9,584 8,466 9,434 Inventory 3,414 5,679 8,197 11,757 14,780 17,415 20,225 23,535 Accounts receivable 2,445 3,569 4,388 7,136 8,958 10,555 12,258 14,265 Other current assets 8,931 9,273 2,831 2,826 3,716 4,769 5,965 7,291 Total current assets 18,427 27,632 24,067 30,719 37,559 42,323 46,914 54,524 Fixed assets 2,166 4,004 4,483 7,134 9,243 9,440 11,258 11,164 Goodwill & intangibles 225 247 53 64 112 112 112 112 Other non-current assets 1,253 2,153 2,370 3,748 4,014 4,014 4,014 4,014 Total assets 22,071 34,035 30,973 41,665 50,928 55,888 62,298 69,815 Short-term debt 1,458 2,073 1,887 3,825 4,207 3,255 3,255 3,255 Accounts payable 3,222 5,490 6,914 10,796 14,032 16,833 19,692 23,051 Other current liabilities 6,401 8,408 6,620 6,578 8,189 9,533 10,967 12,656 Total current liabilities 11,081 15,971 15,421 21,199 26,428 29,621 33,914 38,963 Long-term debt 1,152 957 1,171 772 1,911 2,156 2,401 2,645 Other non-current liabilities 231 339 263 486 783 783 783 783 Total liabilities 12,464 17,267 16,855 22,457 29,121 32,559 37,098 42,391 Share capital 4,644 4,949 4,949 5,474 5,474 5,474 5,474 5,474 Reserves/R.E./others 720 3,467 2,596 4,682 4,648 5,318 6,202 7,253 Shareholders' equity 5,363 8,416 7,545 10,156 10,123 10,792 11,676 12,727 Minority interests 4,244 8,353 6,573 9,052 11,684 12,537 13,524 14,696 Total equity & liabilities 22,071 34,035 30,973 41,665 50,928 55,888 62,298 69,815 EV 21,577 20,202 18,705 22,312 25,382 26,049 28,398 28,847 Net debt/(cash) (1,028) (6,080) (5,593) (4,403) (3,986) (4,173) (2,811) (3,534) BVPS (CNY) 1.155 1.721 1.525 1.890 1.849 1.971 2.133 2.325
Key ratios (%) Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E Sales (YoY) 18.3 102.3 11.3 38.4 20.8 17.8 16.1 16.4 EBITDA (YoY) 88.3 162.4 (41.6) 52.3 13.8 11.7 12.8 20.3 Operating profit (YoY) 108.1 174.0 (52.8) 58.2 13.5 10.8 14.2 19.1 Net profit (YoY) 77.7 110.9 (13.8) 49.6 0.8 13.9 30.6 21.3 Core EPS (fully-diluted) (YoY) 77.7 100.2 (14.3) 37.0 (1.0) 13.9 30.6 21.3 Gross-profit margin 27.3 32.1 23.4 24.9 22.7 21.2 20.4 20.1 EBITDA margin 15.9 20.7 10.8 11.9 11.2 10.7 10.3 10.7 Operating-profit margin 12.8 17.4 7.4 8.4 7.9 7.4 7.3 7.5 Net profit margin 3.9 4.1 3.2 3.4 2.9 2.8 3.1 3.2 ROAE 5.8 7.1 5.3 7.1 6.3 6.9 8.4 9.4 ROAA 1.0 1.7 1.3 1.7 1.4 1.4 1.6 1.7 ROCE 6.1 13.0 5.3 7.6 6.8 6.9 7.5 8.3 ROIC 7.9 20.0 8.8 11.3 9.2 9.1 9.3 9.9 Net debt to equity net cash net cash net cash net cash net cash net cash net cash net cash Effective tax rate 8.4 7.1 13.6 15.2 14.2 14.0 13.4 13.4 Accounts receivable (days) 196.8 92.0 109.4 114.5 132.4 136.2 137.1 137.0 Current ratio (x) 1.7 1.7 1.6 1.4 1.4 1.4 1.4 1.4 Net interest cover (x) 11.1 39.2 52.4 23.6 23.8 13.1 15.6 15.0 Net dividend payout 0.0 2.7 11.0 16.5 15.4 15.4 15.4 15.4 Free cash flow yield 5.6 13.2 n.a. n.a. n.a. 5.2 n.a. 8.5 Source: FactSet, Daiwa forecasts
Company profile AviChina Industry & Technology is mainly engaged in the development, manufacture, sale, and upgrading of aviation equipment and related products. The major shareholder of the company's H shares is Aviation Industry Corporation of China, with a 56.7% stake.
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companies, such as Boeing (the US), L-3 Communications (the US), and Singapore Technologies Engineering (all unrated). For example, 60% of the US defence budget was funded by private companies in 2013.
Potential private capital Given this backdrop, if China’s national defence area is opened up to private capital, we expect this to result in boost from reforms more asset injections of national defence and aerospace-related assets from AviChina’s parent (AVIC We believe likely upcoming policy reforms Group) into both AviChina directly and the latter’s A- share subsidiaries and sister companies. In our view, will aim to set up a platform to attract this would help to attract private capital into these more private capital into China’s national entities, given that AVIC is state-owned. Indeed, we defence and aerospace industries as well have already seen a positive breakthrough on this front, as we discuss below. as enhance their profitability, and see AviChina as a beneficiary. Recent breakthrough with national defence asset injections into an AviChina affiliate More private capital expected to On 16 May, AviChina’s parent, AVIC Group, announced plans to inject later this year some of its national enter AviChina’s sector defence-related assets – comprising Shenyang Aircraft Group, Chengdu Aircraft Group and Hongdu Potential for further asset injections Technology – into Sichuan Chengfei Integration Based on our industry research, along with indications Technology (CITC) (unrated), an affiliate of AviChina, given by the China Government earlier this year, we which owns an 8.45% stake. The companies to be believe the government aims is to carry out policy injected into CITC are involved in the manufacture of reforms in order to attract and involve more private fighter aircraft and missiles, as described in the investments into China’s national defence and following table. aerospace industries, including for the purposes of R&D and maintenance services. We expect the government Overview of AviChina’s affiliate CITC and planned asset to announce policy reforms on this front in the coming injections from AVIC Net profit YoY months. Assets descriptions 2013 (CNYm) (%) Shenyang Shenfei Aircraft Group is a 94.15% owned subsidiary of 290 -21% In our view, such reforms are likely to include Aircraft Group AVIC Group as at the date of the announcement. It is (Shengfei) mainly engaged in the research and bulk production of permitting direct private-capital investments into the fighter aircraft of various types and models, and parts national defence and aerospace industries, and thus and components of fighter aircraft. Chengdu Chengdu Aircraft Group is a wholly-owned subsidiary of 375 49% allowing more assets to be injected into the industry’s Aircraft Group AVIC Group. It is mainly engaged in the research, companies (including into AviChina, its subsidiaries manufacture and export of fighter aircraft, and the and affiliates and those of its parent), that are currently manufacture of parts and components for civil aircraft. Hongdu Hongdu Technology is an indirect subsidiary of AVIC 30 102% listed on the A-share and H-share markets. Technology Group. It is mainly engaged in the research and manufacture of air-to-ground missiles, and the Such direct investments by means of private capital production of aviation parts and components. Sichuan CITC is a joint stock company with limited liability listed 45 -17% would help to lower the burden on the government on Chengfei on the Shenzhen Stock Exchange, with registered financing the country’s national defence and aerospace Integration capital of CNY345m. It is principally engaged in the Technology development and research, manufacture and sales of industries and enhance the industries’ transparency. (CITC) the products that include automotive panel dies, parts The current lack of transparency is often criticised by and components for auto body, and lithium batteries. Western countries. Also, if the companies that are CITC is 51.33% owned by AVIC. involved in the defence and aerospace industries are Total net profit 740 8% Source: Company monitored by private-capital investors, we believe this could bring about improvements in efficiency and a More joint ventures possible, but SOEs still greater focus on profitability at these companies. likely to dominate in national defence Private-capital involvement in national defence is We believe another way in which the government could common in developed countries, where many national attract private capital into China’s national defence and defence and aerospace-related assets are listed aerospace industries would be to allow more joint - 6 - Industrials / China 2357 HK 12 June 2014
ventures as well as private investors to invest directly in Major aviation manufacturers globally: comparison of gross- the companies concerned, and not just by means of profit margins (2013) asset injections into the listed companies within the 2 Aircraft manufacturing AviChina (China) 8% industries. The current boom in China’s general Airbus (France) 14% aviation market and rise in spending on its military Boeing (US) 15% defence could draw more private capital in the form of Embraer (Brazil) 23% joint ventures. However, we expect the direct Parts & components manufacturing AviChina (China) 29% ownership of companies that are involved in national Rockwell Collins (US) 30% defence to remain dominated by state-owned entities ITT Corporation (US) 32% (SOE) rather than draw high levels of direct ownership Precision Castparts Corporation (US) 35% by joint ventures. Transdigm Group Incorporation (US) 52% Source: Companies, Bloomberg In view of the above considerations, we believe it could take a long time for private-capital involvement in the national and aerospace industries to become Diplomatic considerations significant. Signs of different diplomatic policy China’s current leadership appears to be taking a firmer Potential change of pricing stance on handling territorial disputes involving system countries such as Japan, Vietnam and the Philippines. Also, under the direction given by President Xi Jinping Market-driven product pricing would help during the National People’s Congress (NPC) and China People’s Political Consultative Conference (CPPCC) in improve profit margins March this year, China plans to carry out reforms of its Another important area of policy reform relating to army in order to strengthen its military power. As such, AviChina that we believe is on the agenda is a change we expect a continuous increase in the country’s (that we expect to be announced this year and maybe military spending and forecast it to rise at a 10-15% implemented in 2015) in the pricing system for China’s CAGR over 2014-16. national defence and aerospace-related products. We expect to see a shift away from the current cost-plus In light of this, it is becoming more important for the mechanism (whereby prices are set by the government government to implement policies to attract private and companies like AviChina earn a fixed profit margin capital to help finance its military spending growth, in on top of the cost incurred) to a more market-driven our view. Given that close to 30% of AviChina’s annual pricing mechanism, under which we believe the revenue comes from the military sector, we expect a government departments and manufacturers would be continuous increase in military spending to be positive allowed to negotiate prices freely. for the company’s long-term earnings growth. It could also prompt the company’s parent, AVIC, to inject more The gross-profit margins that AviChina earned in 2013 national-defence assets into AviChina and its affiliates through China’s current cost-plus pricing mechanism in the coming years. were lower than those of its global peers for both its aircraft and parts manufacturing businesses (as the China: annual military spending (2001-14E) next table shows), even though the margins are at a (CNYm) guaranteed level. We believe a shift to a more market- 900,000 25% driven pricing system, which is enjoyed by all of 800,000 AviChina’s peers globally, would help improve the 700,000 20% 600,000 15% company’s gross-profit margins. A more flexible and 500,000 open pricing mechanism is also important to attract 400,000 10% private investment into China’s defence and aerospace 300,000 industries, in our view. 200,000 5% 100,000 0 0% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014E Military spending (LHS) Growth YoY (%) (RHS)
Source: CEIC, government’s forecast for 2014 Note: a government forecast is only available for 2014
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As for Hafei’s other new helicopter models planned for launch this year, it has said that the Z15 is likely to perform its maiden flight in 2014 and obtain a sales licence in 2015. For the Z15’s European version (EC175), AviChina’s parent, AVIC Group, has signed an agreement with Airbus Helicopters of France to support 2014: contrasting the latter’s production of 1,000 helicopters. Hafei will be one of the component suppliers for the EC175. We outlook for subsidiaries expect a small revenue contribution from the EC175 for Hafei as it will only be a component supplier, but We expect divergent earnings believe that strong orders received already for the EC175 are a good indicator of the sales potential in performances from AviChina’s businesses China for the Z15. for 2014, with strong earnings at Hafei Aviation and Jonhon Optronic but Hafei’s new Z-9 helicopter weakness at AVIC Avionics and Hongdu Aviation.
Hafei Aviation, Jonhon Optronic: optimistic on earnings
Hafei Aviation: strong earnings growth, driven by new product launches Hafei Aviation (Hafei), which is wholly owned by Source: Company AviChina, had a flat helicopter order book on a YoY European EC175 version of the new Z15 helicopter basis as at the end of 2013. However, we expect the company’s revenue and earnings growth to remain strong in 2014, as its order backlog year-to-date includes more new models that should generate higher revenue and profit contributions than its older models.
Hafei reported strong net-profit growth of 19% YoY for 1Q14. We forecast 2014 net-profit growth of 22% YoY on an organic basis, and 33% YoY including the full- year impact of its asset restructuring carried out in late- 2013 (with the related costs booked in 4Q13). The major new model that Hafei plans to launch this year is Source: Wikipedia the Z9 helicopter, while it already obtained (on 25 April this year) the licence to sell domestically another Comparison of major helicopters in China similar type of helicopter, the AC312A. Both these new Flying Max Number of Price distance MTOW altitude Speed operations models are for civil purposes, and Hafei’s management Helicopter (CNYm) Capacity (km) (kg) (m) (km/h) Manufacturer (2012) has said it is seeing increasing demand from China for Z9 40 14 895 3999 n.a. 314 Hafei 11 helicopters for civil use. S76C++ 90 12 838 5311 3911 277 Sirkorsky 19 CA109 50 8 976 2852 n.a. 288 Agusta Westland 7 Z11 13 6 1202 1021 1623 449 Changhe (now 1 AviChina’s A-share listed subsidiaries: 1Q14 results under Hafei) YoY changes (%) EC120B 15 5 758 1716 n.a. 229 Eurocopter 5 Net Net Net profit Bell 206B 14 5 675 1452 n.a. 218 Bell 13 Net profit margin profit margin R44II 4 4 499 1089 4312 216 Robinson 37 (CNYm) Revenue (adj.) (adj., %) Revenue (adj.) (adj.) (pp) 269C/S300C 3 3 421 930 n.a. 175 Schweizer 22 Hafei Aviation 2,497.4 52.8 2.1 21.0 18.6 4.3 (acquired by Sirkorsky) Hongdu Aviation 371.1 2.3 0.6 23.8 49.6 -10.9 R22 2 2 314 621 n.a. 190 Robinson 25 AVIC Avionics 1,139.3 58.2 5.1 1.1 -5.3 34.3 S300CBi 3 2 421 930 n.a. 175 Schweizer 22 Jonhon Optronic 706.5 45.0 6.4 42.3 33.9 40.0 (acquired by Total 4,714.4 158.3 3.4 18.2 12.2 18.1 Sirkorsky) Source: Companies Source: Development report on China General Aviation Note: * MTOW – Maximum Take-off Weight
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Good potential for Hafei’s new Y12F Hafei’s new Y12F general aeroplane Another major model that Hafei plans to launch this year is the Y12F, which is a new type of general-aviation aircraft for civil and military uses (pictured a little further on). The specific features that the Y12F will have are increases in the maximum take-off weight (MTOW) to 8.4 tonnes (from 7.7 tonnes for its predecessor Y12 version), in its carrying capacity to 3 tonnes (from 2.7 tonnes for the Y12), and in its maximum cruising speed to 482km/hour (compared to 450km/hour for the Y12).
Management believes the Y12F is likely to obtain a licence for the aircraft to be sold in the US and China Source: Company and to be ready for export to the US and other countries in 2014. Many of the other Y12 series produced by Hafei Jonhon Optronic: we expect steady have already obtained licences from the US Federal Aviation Administration (FAA), so we believe it will not earnings growth with new business be difficult for the Y12F to obtain the relevant licence. opportunities Our research indicates that the Y12F should have AviChina’s 43.4%-owned subsidiary Jonhon Optronic superior technology and efficiency to a similar aircraft, (unrated) saw its 1Q14 net profit increase by 34% YoY. the C-212, produced currently in Spain by a joint We expect AviChina’s optronics segment to continue to venture between EADS and Construcciones deliver strong earnings growth in 2014 on steady Aeronáuticas (CASA). Also, Hafei’s management sees demand growth and growth in orders for its new good potential for the Y12F to replace the C-212, which telecommunication equipment business. currently has more than 500 aircraft in operation. The optronics industry in China is still an oligopoly. C212 and Y12F general aircraft: comparison of features Among those players, Jonhon Optronic has a C212 Y12F competitive edge in aerospace and military-related Usage Civil and military Civil and military optronics products, according to the company. The Two, Garrett AiResearch TPE-331-10R- No. of engines 513C turboprop engines Two, PT6A-65B engines China Government’s increase in military spending over Maximum the past decade, which we expect to continue in the Speed 370km/hour 450km/hour next few years, should help support Jonhon Optronic’ Rate of climb 1,630ft/min, ceiling 26,000ft 1,770ft/min 19 passengers, wingspan 19.1 growth in orders over 2014-16. 28 passengers, 16.2 metres long, metres, 15.2 metres long, 6.3 Size wingspan 20.28 metres, 6.3 metres high metres high Jonhon Optronic plans to expand its business into the Cost USD5.2m USD4.5m non-military sector, such as telecommunications Range 1,811 km N/A Avionics N/A Honeywell Apex equipment. Its current customers include Huawei, ZTE Construcciones Aeronáuticas SA and and Motorola. Manufacturer EADS Haifei Aviation Year of 2011 for Y12 predecessor, 2014 for introduction 1974 Y12F Though we expect Jonhon Optronic’s earnings-growth Source: Company, Airbus momentum to moderate during the rest of this year, we still forecast robust net-profit growth of 25% YoY for The C212 Aviocar aircraft currently produced by EADS-CASA 2014.
Source: Wikipedia
- 9 - Industrials / China 2357 HK 12 June 2014
L15 vs. T50 trainer aircraft Concerns about AVIC Avionics L15 T50 No. of Single, General Electric F404-102 turbo-fan and Hongdu engines Two, FADEC turbo-fan engines engine Maximum Speed 1,576km/h 1,837 km/h AVIC Avionics: weaker 2014 profit likely, Rate of due to R&D and interest expenses climb >39,370 ft/min, ceiling 52,500ft 39,000 ft/min, ceiling 48,000 ft Two pilot seats, wingspan 9.48 Two pilot seats, 13.14 metres long, wing span According to the management of AviChina’s 44.5%- Size metres, 12.27metres long 9.45 metres, 4.94 metres high owned subsidiary, AVIC Avionics (Not rated), the Cost USD14.6m USD21m company’s profitability is likely to weaken in 2014 due Range 3,100km 1,851km Fuel tank to higher R&D expenses on a YoY basis for new product capacity N/A 4,365 litres development (an additional CNY100m guided for 2014 Range of compared with 2013) and interest expenses for the weapons Air-to-air, air-to-ground 1 gun, 7 hard points, rockets, air-to-air, bombs financing of a previous asset acquisition (an additional Avionics N/A Lockheed Martin Advance Avoincs Manufactur Hongdu Aviation Industry CNY80m guided for 2014 compared with 2013). er Corporation Korea Aerospace Industries Year of Taking these one-off expenses into account, in March Introduction 2008 2005 Source: Company, Korean Aerospace this year management guided for a 15% YoY decline in net profit for 2014. Excluding the above items, however, T50 trainer aircraft AVIC Avionics’ management expects a 9% YoY net profit increase for 2014. Yet following our recent discussion with management, we believe its guidance for a 15% YoY net profit decline is too conservative, and we forecast a flat YoY net profit for 2014.
Hongdu Aviation: affected by factory relocation AviChina’s 43.5%-owned subsidiary Hongdu Aviation (unrated) plans to relocate some of its factories to rural areas in China during 2H14, which may have a negative effect on its productivity and profitability this year. Source: Wikipedia Though its 1Q14 net profit increased by 50% YoY, we expect slower net-profit growth for rest of the year. L15 trainer aircraft Also, 1Q14 net profit is not significant for the full year given the generally low seasonality of the first quarter. As such, we forecast net profit growth of 15% YoY for 2014. With respect to Hongdu Aviation’s L15 trainer aircraft, the net profit from 11 of the existing 12 orders was already recognised in 2013. Management expects the company to win more orders in 2014 and is confident that the L15 will be a better model and more reasonably priced than similar aircraft offered by its competitors, such as the T50 produced by Korea Aerospace Industries (unrated). As such, we expect Hongdu to secure more orders in 2014, which should lead to net profit growth of 15-20% YoY for 2015-16 on our forecasts. Source: Company
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Other product highlights
Business jet should start deliveries in 2014 There are currently 10 orders for the Legacy 650 business jet, which is produced by a joint venture between AviChina’s subsidiary Hafei and Embraer (unrated). AviChina’s management expects 1-2 deliveries of this jet in 2014, which should reduce the losses incurred by this joint venture for 2014. Overall, we expect the business jet market in China to remain buoyant over the next 10 years.
Legacy 650 business jet
Source: Company
AviChina’s A-share listed subsidiaries: net profits (2014-16E) (CNYm) 2014E 2015E 2016E YoY growth (%) 2014E 2015E 2016E AVIC Avionics 271 312 359 AVIC Avionics 0% 15% 15% Hafei Aviation 136 170 212 Hafei Aviation 33% 25% 25% Jonhon Optronic 127 153 183 Jonhon Optronic 25% 20% 20% Hongdu Aviation 46 52 63 Hongdu Aviation 15% 15% 20% CITC 0 98 122 CITC 25% 25%25% Tianjin Aviation 142 156 172 Tianjin Aviation 10% 10% 10% Others 57 63 95 Others (implied) -17% 10% 50% Total (reported) 779 1004 1205 Total (non-adjusted) Adjustments -56 -60 -60 Total (adjusted) 723 944 1145 Source: Company, Daiwa forecasts
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We would highlight that we are raising our revenue forecasts for AviChina by 11% for 2014 and 9% for 2015, reflecting a boost from orders for new models we expect from this year onwards, and the full-year impact of assets injected by the parent into AviChina’s subsidiaries since 2013. Forecasts, valuation Inclusion of more earnings from CITC from and recommendation 2015E As the earnings of affiliate CITC should be boosted We cut our 2014-15E earnings due in part significantly in 2015 by the planned asset injections to a weaker outlook for AVIC Avionics, from AviChina’s parent AVIC Group, we include the but reiterate our Buy (1) rating with near- earnings impact on AviChina from 2015 even though AviChina’s stake in CITC would remain at 8.45% after term share-price catalysts from upcoming the asset injections. AVIC Group plans to complete policy reforms and order-book growth. these asset injections later this year.
As a result of the asset injections, we forecast a 10% Earnings-forecast revisions positive impact for AviChina’s 2015 reported net profit. We forecast CITC to post net profit growth of 25% YoY Weaker contribution from AVIC Avionics for each of 2014, 2015 and 2016, driven by the China in 2014E and exclusion of disposal gains Government’s increases in military spending.
We are revising down our 2014-15 EPS forecasts for Our 2016 forecasts, published for the first time with AviChina by 17-18%, due to lower earnings that we now this report, call for solid net profit growth of 21% YoY, expect from subsidiary AVIC Avionics for 2014, but also as we expect orders for the company’s new and existing partly as we now exclude disposal gains for both years. products to remain robust that year. Gains on asset disposals had been an important driver of the company’s earnings in 2013. Valuation: new SOTP-based target Disposal gains of CNY193m booked by AviChina in 2013 were derived from disposals of investment price of HKD5.00 properties (CNY84m, mainly from the disposal of a property of an undisclosed type by AVIC Avionics), Trading currently below its past-3-year divestments of various stakes in associates (CNY45m, average PER multiple chiefly from the disposal of Hongdu Xinfu by subsidiary AviChina’s current share price is trading at a 2014E Hongdu), and some disposals of some available-for-sale PER of 20.3x (based on our revised EPS forecast), financial assets (CNY56m). The remaining CNY8m which is below its past 3-year average PER of 24x. We related to minor asset sales. believe its share-price weakness year-to-date has been due to the company’s weak 2013 results and concerns in The total disposal gains of CNY193m booked in 2013 the market about a lower 2014 earnings contribution were much larger than gains of less than CNY100m that from AVIC Avionics. AviChina had booked for each of the previous 5 years. However, we believe AviChina’s current share price Therefore, in order to better assess the earnings growth already reflects the negatives for its 2014E earnings and outlook for AviChina’s fundamental business, we expect sentiment towards the stock to recover over the exclude any disposal gains from our forecasts for the next 6 months as investors start focusing on 2015 company’s adjusted net profit and thus from our EPS earnings. As discussed above, AviChina’s earnings for calculations. If we were to add back disposal gains, our 2015 should include a new earnings contribution from downward EPS revisions for 2014E and 2015E would the assets the company’s parent plans to inject into be 11% and 13%, respectively, still reflecting our affiliate CITC (described earlier in this report) and expectation of a weaker earnings contribution from should include more orders from its existing and new AVIC Avionics in 2014. models, such as the Z15, AC312A/H425, Y12F, L15 and Legacy 650.
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AviChina: 1-year-forward PER (2011-present) Reaffirming Buy rating PBR (x) We reiterate our Buy (1) rating on AviChina, as we look 45 40 for it to benefit in the near term from expected policy 35 reforms and from more orders for both its existing and 1 Std 30 new products. 25 average 20 15 1 Std Moreover, we believe AviChina is still the only company 10 on the overall H-share market that stands to benefit 5 from the long-term development of the general aviation 0 market and a continuous rise in military expenditure in Jul-13 Apr-12 Jun-11 Feb-13 Nov-11 Dec-13 Sep-12
May-14 China. PER upper lower average AviChina: SOTP valuation Source: Thomson Reuters, Daiwa Target 2015E Company Bloomberg code PER (x) Value per share (HKD) Share price trading at a substantial Jiangxi Hongdu Aviation 600316 CH 109x 1.2 Hafei Aviation Industry 600038 CH 34x 1.4 discount to A-share subsidiaries China AVIC Avionics 600372 CH 45x 3.1 We have a new 6-month target price for AviChina of Jonhon Optronic 002179 CH 10x 0.4 HKD5.00 (lowered slightly from HKD5.20). Our target Others 0.7 Total no. of shares of AviChina (m) 5.34 price continues to be based on an SOTP valuation of Total attributable SOTP value 6.8 AviChina’s A-share listed subsidiaries and other Net debt (cash) per share from A- businesses. Within our SOTP valuation, to derive our share subsidiaries 1.0 values for the A-share listed subsidiaries we now apply SOTP value incl. net debt/cash 7.7 Target price (post 35% discount) 5.0 target PERs for 2015E, as we explain below. Source: Bloomberg, Daiwa
We previously valued the A-share listed subsidiaries using 2014E PBRs (based on their past-5-year median Major risks PBRs) but now consider PER multiples as more appropriate, as the restructuring of Hafei was Lower-than expected order-book growth completed in 2013 and we do not expect further major restructuring to occur that would affect earnings This constitutes the main risk to our positive significantly for the A-share listed subsidiaries in 2015. investment view on AviChina. We derive our target 2015E PERs for the subsidiaries by using their past-3-year median PERs, as their and Our earnings forecasts for 2014-16 are driven partly by AviChina’s share prices were less volatile over the past 3 order-book growth for the company’s existing and new years following the M&A activity that AviChina had models of helicopters (Z9, AC312A and Z15), trainer engaged in from 2009-10. (L15) and also its other general aviation aircraft (Y12F and Legacy 650). We see risk to our earnings forecasts We then add back the net debt from the A-share listed if the orders for these new and existing products are subsidiaries and apply a 35% discount (formerly 30%) lower compared with our current expectations. to our SOTP to derive our new 6-month target price of HKD5.00 for AviChina. The greater discount we now Uncertainty about asset injections apply to our SOTP value is based on the stock’s past-3- According to AviChina’s management, there should be year average trading discount to our SOTP value more asset injections from the parent (AVIC Group) (compared to its past-5-year average discount we used into AviChina or its A-share listed subsidiaries in the before). future. These assets should be related to general aviation and national defence. No detailed schedule has been announced.
There is uncertainty about whether acquisitions by AviChina of further assets from its parent will be undertaken at attractive prices, and also uncertainty surrounding the quality of such assets.
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Competition from overseas players The opening-up of low-altitude airspace in China planned in 2015 is likely to provide new opportunities for China’s for general aviation manufacturers and operators. However, we believe overseas competitors – such as Airbus Helicopter, Bell, Sikorsky, and Agusta Westland – are all interested in entering the market as well. Although orders from the government are secure for AviChina, there is a possibility that orders from the private sector could go mainly to overseas competitors due to their generally better brand perception.
Delay in opening-up of low-altitude airspace If the government decides to postpone opening up China’s low-altitude airspace beyond 2015, this would be a big disappointment for shareholders, in our view, as AviChina’s current high 2015E PER of 20.3x is largely supported by the market’s expectation of a considerable increase in the company’s earnings following the opening-up of low-altitude airspace.
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Appendix
AviChina: business and product mix (2014E)
Source: Company
Helicopters operating in China by model type (2012) General aviation aircraft operating in China (fixed-wing) by model type (2012)
Others 31% Y5 DA40D AS 350B2 CESSNA 172R 10% 7% Y5B(D) 2% AS 332L1 16% Bell 407 6% 2% 2% EC 255LP DA40D S-76C 2% Y11 Mi-171 3% 2% 4% R44 Haiyan 650 3% DA42 12% 2% EC 155B1 4% Y12IV Bell 206L-4 3% PA-44-180 2% 3% R22 Beta SR20 Y12II 3% S-76 (Arriel 2S2) 8% 2% 2% Xiaoying 500 4% Bell 206B 269C 2% 4% 7% TB-200 CESSNA 208B AS 350B3 269C-1 2% 2% 7% Others 6% 31% Source: Development Report on China General Aviation Source: Development Report on China General Aviation
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AviChina: revenue breakdown (2013) AviChina: gross-profit margin breakdown (2013) Other entire aircraft 3.7% Other Aero-parts Avionics 19.4% Aircraft 34.6% 18.7%
Aviation components and others 81.3%
Helicopters 42.3% Source: Company Source: Company
Avichina: organisational chart (4Q13) AviChina (2357.HK) Jingde Helicopter R&D Center
43.63%100% 100% 44.49% 43.34% 100%
Hongdu Aviation Changhe Aviation Harbin AVIC Avionics JONHON Optronic Tianjin Aviation Aviation Group
50.5% 24.5% 51% 60% 100% 100%86.74% 100%80% 100% 100% 100% HafeiAviation 10% 24.5% Electric AVIC Kaitian Electric A VIC Lanfei Lanfei VIC A Shaanxi Huayan Shaanxi Lanzhou Aviation Lanzhou Chang he Agusta Chang Shanghai Aviation Shanghai Qianshan Avionics Qianshan Shaanxi Baocheng Shaanxi Taiyuan Instrument Taiyuan Xinghua Shenyang Materials Materials Harbin Embrear Harbin Airbus Composite Composite Airbus
10% Source: Company
Aircraft comparison (C919, A320, B737) C919 family A320 family B737 family Usage Civil Civil Civil No. of engines CFM International LEAP Two, IAE V2500 series Two, CFM International LEAP Maximum speed 961 km/h 871 km/h 876 km/h Maximum altitude 12,100 metres 12,000 metres 10,700-12,500 metres Narrow body, 156-174 seats, 38.9 metres long, Narrow body, 180-220 passenger, 37.57- 44.51 metres long, wing Narrow body, 124- 215 seats, 28.7-42 metres long, wing span Size wing span 35.8 metres, 12 metres high span 34.1metres, 11.76 metres high 28-36 metres, 11-13 metres high Cost N/A USD93.9 million USD32m- USD89.6m Range 4,075-5,555 km 3,100-12,000 km 2,850-10,200 km Manufacturer Commercial Aircraft Corporation of China Airbus Boeing Year of Introduction 2018 1988 1968 Source: Commercial Aircraft Corporation of China, Airbus, Boeing
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Suppliers of C919 aircraft Components Supplier Country AviChina (2357.HK) Aircraft body - back section AVIC Hongdu (600316.CH) China Aircraft body - lighting systems, door, cockpit AVIC Avionics (600372.CH) China LDCLS and door Lanzhou Electric China E-E cabin equipment rack China Aviation Optical - Electrical Technology Co. (002179.CH) China China & joint cooperation Avionics core processing, display, on-board maintenance and flight records system AVIC System China General Electric Co. US Radome Research Institute for Special Structures of Aeronautical Composite (RISAC) China Aircraft body - tail AVIC Shenyang Aircraft Industry China Aircraft body - middle section (incl. wing flaps) AVIC Xi'an Aircraft Industry (000768.CH) China Landing-gear system AVIC Landing Gear Advanced Manufacturing Corp. China Liebherr Group Germany Aircraft body - nose cones AVIC Chengdu Aircraft Industry China Cabin core system AVIC SAMRI China Rockwell Collines US Hydraulic and fuel system AVIC Electromechanical Systems Co. Ltd China Parker Aerospace US Air-management system AVIC Electromechanical Systems Co. Ltd China Liebherr Aerospace Toulouse SAS France Power system AVIC Electromechanical Systems Co. Ltd China HSIS US Aircraft body - nose cones AVIC Chengdu Aircraft Industry China Fly-by-wire flight control system AVIC Electronics Group China Honeywell Aerospace US APU Harbin Dong'an Motor China Honeywell Aerospace US Integrated surveillance system China Leiha Electronic Technology Research Institute China Rockwell Collines US Water and waste system Wuhan Hangda Aero Science & Tech. Development Co. Ltd China Zodia Aerospace Group France Cockpit panel assemblies Shanghai Aviation Electric Co. China Eaton (ETN.US, Not rated) US Dimming control system Shanghai Aviation Electric Co. China Eaton (ETN.US, Not rated) US Inflight entertainment system (IFE) Shanghai Aero Measurement-Controlling Research Institute China Rockwell Collines US Communication and navigation system China Electronics Technology Avionics China Rockwell Collines US External lighting systems Jiangsu Tongming Auto Lamp China Goodrich US Wheels, tires and brakes Hunan Boyun New Materials Co. Ltd China Changsha Xinhang Wheel & Brake Co. Ltd. China Honeywell Aerospace US Foreign Aircraft engine (turbine engine blades) CFM International US & France Electronic systems General Electric Co. US Engine nacelle, thrust reverser Nexcelle US Engine exhaust system Nexcelle US Electric power generation and distribution system Hamilton Sundstrand US Flight control actuation system Parker Aerospace US Horizontal-stabiliser trim and motor control Parker Aerospace US Hydraulic oil delivery system Eaton (ETN.US, Not rated) US Integrated fire and overheat protection systems Kidde Aerospace & Defense US Source: Companies, various media (including Xinhua, People News)
- 17 - Industrials / China 2357 HK 12 June 2014
Peers valuation Share Share 6M Total Dividend yield Bloomberg price price target market cap PER (x) PBR (x) (%) EV/EBITDA (x) ROE (%) Company code currency 12-Jun-14 Rating price (USDm) FY14E FY15E FY14E FY15E FY14E FY15E FY14E FY15E FY14E FY15E PRC Avichina Industry & Technology* 2357 HK HKD 4.35 Buy 5.0 3,072 26.5 20.3 1.8 1.6 0.6 0.8 9.3 9.0 6.9 8.4 Jiangxi Hongdu Aviation Indust 600316 CH CNY 15.5 NR NR 1,791 24.3 25.5 n.a. n.a. 1.0 1.2 23.8 19.1 n.a. n.a. Hafei Aviation Industry Co Ltd 600038 CH CNY 25.5 NR NR 2,417 31.7 30.5 2.3 2.2 1.0 1.3 16.0 15.7 6.8 5.5 China Avic Electronics Co Ltd 600372 CH CNY 19.9 NR NR 5,641 41.5 37.6 n.a. n.a. 0.4 0.4 24.4 23.1 14.1 13.1 China Aviation Optical-Electri 002179 CH CNY 15.9 NR NR 1,181 18.2 14.7 2.3 2.0 n.a n.a 12.3 9.8 12.5 13.5 Avic Aircraft Co Ltd 000768 CH CNY 9.0 NR NR 3,849 36.5 31.1 1.9 n.a. 0.3 0.3 16.3 15.1 5.5 n.a. Xi' An Aero-Engine Plc 600893 CH CNY 23.3 NR NR 4,089 43.4 44.5 n.a. n.a. 0.4 0.4 26.8 25.8 10.0 9.0 Avic Electromechanical Co Ltd 002013 CH CNY 14.0 NR NR 1,607 18.6 19.1 1.9 1.8 n.a n.a 13.3 12.1 8.7 9.1 China Spacesat Co Ltd 600118 CH CNY 17.4 NR NR 3,305 43.0 28.5 n.a. 3.8 n.a n.a 32.9 27.9 10.0 10.8 Citic Offshore Helicopter Co L 000099 CH CNY 8.1 NR NR 741 16.5 n.a. 1.6 n.a. n.a n.a n.a. n.a. 9.9 n.a. Sichuan Haite High-Tech Co Ltd 002023 CH CNY 18.0 NR NR 974 25.8 18.2 3.1 2.6 n.a. n.a. 16.8 13.0 12.5 14.5 Wisesoft Co Ltd 002253 CH CNY 23.7 NR NR 532 27.0 23.0 3.2 2.8 0.0 n.a. n.a. n.a. 12.0 12.4 Mean 29.4 26.6 2.3 2.4 0.5 0.7 19.2 17.1 9.9 10.7 Median 26.8 25.5 2.1 2.2 0.4 0.6 16.6 15.4 10.0 10.8 Asia Singapore Technologies Enginee STE SP SGD 3.9 NR NR 9,735 18.2 17.1 n.a. n.a. 4.3 4.6 12.3 11.6 27.9 27.8 Korea Aerospace Industries Ltd 047810 KS KRW 30,900.0 NR NR 2,962 19.7 14.7 2.5 2.2 0.7 0.9 10.6 8.3 14.1 16.7 Mean 19.0 15.9 2.5 2.2 2.5 2.7 11.5 9.9 21.0 22.3 Median 19.0 15.9 2.5 2.2 2.5 2.7 11.5 9.9 21.0 22.3 Europe Bba Aviation Plc BBA LN GBP 309.9 NR NR 2,476 16.1 16.1 2.2 2.2 0.1 0.1 9.9 9.1 15.3 15.8 Bae Systems Plc BA/ LN GBP 423.5 NR NR 22,528 10.4 9.9 3.4 3.2 0.1 0.1 6.5 6.4 29.4 32.4 Qinetiq Group Plc QQ/ LN GBP 210.9 NR NR 2,334 13.2 13.2 2.2 2.2 0.0 0.0 8.9 9.1 24.7 22.6 Ultra Electronics Holdings Plc ULE LN GBP 1,876.0 NR NR 2,204 13.9 13.9 3.3 3.3 0.0 0.0 9.0 8.5 23.9 n.a. Meggitt Plc MGGT LN GBP 524.0 NR NR 7,102 12.8 12.8 1.8 1.8 0.0 0.0 9.1 8.5 12.2 12.7 Rolls-Royce Holdings Plc RR/ ln GBP 1,020.0 NR NR 32,372 14.0 12.9 2.4 2.2 0.0 0.0 6.8 6.3 19.3 18.7 Cobham Plc COB LN GBP 324.7 NR NR 6,220 14.6 14.1 3.0 2.8 0.0 0.0 9.2 8.7 18.3 20.7 Dassault Aviation Sa AM FP EUR 1,015.0 NR NR 13,901 20.3 17.1 1.7 1.6 1.1 1.1 13.6 11.1 8.0 n.a. Finmeccanica Spa FNC IM EUR 6.5 NR NR 5,051 9.8 9.1 1.0 0.9 1.9 2.5 5.5 5.2 8.3 8.9 Safran Sa SAF FP EUR 49.8 NR NR 28,064 14.8 13.3 2.4 2.3 2.7 2.9 7.5 6.6 18.0 17.4 Zodiac Aerospace ZC FP EUR 26.5 NR NR 10,343 16.6 15.3 2.5 2.2 1.5 1.6 11.4 10.7 15.9 15.2 Mtu Aero Engines Ag MTX GR EUR 68.2 NR NR 4,799 14.8 13.9 2.3 2.2 2.3 2.6 7.6 7.2 15.9 16.0 Saab Ab SAABB SS SEK 204.1 NR NR 3,325 14.7 12.7 1.6 1.5 2.8 3.4 7.0 6.5 11.1 12.1 Mean 14.3 13.4 2.3 2.2 1.1 1.2 8.4 7.8 17.2 17.5 Median 14.3 13.2 2.4 2.2 0.6 0.6 8.3 7.8 17.0 16.7 North America Heico Corp HEI US USD 52.5 NR NR 3,003 26.5 22.4 3.9 3.7 0.2 0.3 12.3 11.3 13.8 n.a. Boeing Co/The BA US USD 134.1 NR NR 97,789 16.3 15.1 n.a. n.a. 2.4 2.6 9.1 8.6 38.1 46.8 United Technologies Corp UTX US USD 118.3 NR NR 108,449 15.5 14.2 2.8 2.6 2.2 2.3 9.8 9.1 18.9 19.5 Textron Inc TXT US USD 40.2 NR NR 11,219 15.3 13.2 2.0 1.8 0.3 0.4 9.1 8.2 14.3 15.6 B/E Aerospace Inc BEAV US USD 93.5 NR NR 9,842 17.9 15.5 2.8 2.4 0.0 0.0 11.3 10.0 16.6 16.4 Spirit Aerosystems Holdings In SPR US USD 33.3 NR NR 4,616 11.0 10.6 2.2 1.9 0.0 0.0 6.1 5.9 19.9 17.2 Triumph Group Inc TGI US USD 70.2 NR NR 3,658 10.7 9.9 1.3 1.2 0.2 0.2 7.2 7.0 13.1 13.1 Kaman Corp KAMN US USD 43.4 NR NR 1,189 14.5 12.8 n.a. n.a. 1.5 n.a. 8.5 n.a. 13.7 n.a. Rockwell Collins Inc COL US USD 79.6 NR NR 10,790 15.8 14.2 n.a. n.a. 1.7 1.9 10.4 9.7 30.1 28.3 Precision Castparts Corp PCP US USD 268.5 NR NR 38,872 16.7 14.9 2.5 2.3 0.0 0.0 11.1 10.1 16.3 15.1 Northrop Grumman Corp NOC US USD 122.2 NR NR 26,176 12.4 11.0 2.6 2.4 2.3 2.6 7.7 7.5 19.5 23.7 Lockheed Martin Corp LMT US USD 164.5 NR NR 52,218 14.2 12.8 n.a. n.a. 3.7 4.2 8.2 7.6 59.7 66.5 Bombardier Inc BBD/B CN CAD 3.8 NR NR 6,228 9.2 10.6 2.1 1.8 2.6 2.4 7.1 7.0 24.7 18.4 Aerovironment Inc AVAV US USD 34.8 NR NR 792 58.6 42.3 n.a. n.a. n.a. n.a. 21.0 17.2 n.a. n.a. Alliant Techsystems Inc ATK US USD 138.1 NR NR 4,398 11.1 10.5 1.9 1.7 1.0 1.1 7.4 7.1 16.5 15.1 Northrop Grumman Corp NOC US USD 122.2 NR NR 26,176 12.4 11.0 2.6 2.4 2.3 2.6 7.7 7.5 19.5 23.7 L-3 Communications Holdings In LLL US USD 125.8 NR NR 10,850 14.1 12.6 1.7 1.5 1.9 2.0 9.5 9.1 12.4 12.0 Transdigm Group Inc TDG US USD 195.2 NR NR 10,333 22.7 20.0 n.a. n.a. 0.0 0.0 13.4 12.2 52.6 3.8 Booz Allen Hamilton Holding Co BAH US USD 21.7 NR NR 3,243 13.7 13.2 n.a. 3.8 2.1 2.2 8.6 8.4 53.5 38.3 Esterline Technologies Corp ESL US USD 114.3 NR NR 3,654 17.9 15.3 1.7 1.4 n.a. n.a. 10.0 9.0 9.4 n.a. Hexcel Corp HXL US USD 41.6 NR NR 4,072 17.0 15.0 2.9 2.6 n.a. n.a. 9.7 9.0 18.5 17.8 Mantech International Corp/Va MANT US USD 29.2 NR NR 1,088 17.8 17.1 0.9 0.9 2.9 0.0 7.5 7.8 5.4 5.3 Curtiss-Wright Corp CW US USD 66.8 NR NR 3,221 16.5 13.4 2.3 n.a. 0.7 n.a 8.9 n.a. 13.8 n.a. Lmi Aerospace Inc LMIA US USD 13.8 NR NR 179 12.1 n.a. 0.9 n.a. n.a. n.a. 7.5 n.a. n.a. n.a. Raytheon Co RTN US USD 96.5 NR NR 30,184 12.4 10.3 2.4 2.1 2.7 3.0 7.5 6.7 18.7 19.6 Moog Inc MOG/A US USD 72.5 NR NR 3,295 15.9 14.0 1.8 1.7 n.a. n.a. 9.0 9.0 12.5 12.4 Mean 16.9 14.9 2.2 2.1 1.5 1.5 9.4 8.9 22.1 21.4 Median 15.4 13.4 2.2 2.0 1.7 1.9 8.9 8.6 17.5 17.5 Sourth America Embraer Sa EMBR3 BZ BRL 20.9 NR NR 6,924 14.2 14.5 1.6 1.5 0.0 0.0 6.9 6.8 11.7 11.0 Total Weighted average 14.6 13.3 1.6 1.5 1.6 1.7 8.8 8.1 22.9 23.9 High 58.6 44.5 3.9 3.8 4.3 4.6 32.9 27.9 59.7 66.5 Low 9.2 9.1 0.9 0.9 0.0 0.0 5.5 5.2 5.4 3.8 Median 15.9 14.2 2.3 2.2 1.0 1.0 9.1 9.0 14.8 15.7 Source: Bloomberg, *Daiwa forecasts
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Daiwa’s Asia Pacific Research Directory
HONG KONG SOUTH KOREA Hiroaki KATO (852) 2532 4121 [email protected] Chang H LEE (82) 2 787 9177 [email protected] Regional Research Head Head of Korea Research; Strategy; Banking John HETHERINGTON (852) 2773 8787 [email protected] Sung Yop CHUNG (82) 2 787 9157 [email protected] Regional Deputy Head of Asia Pacific Research Pan-Asia Co-head/Regional Head of Automobiles and Components; Automobiles; Rohan DALZIELL (852) 2848 4938 [email protected] Shipbuilding; Steel Regional Head of Product Management Jun Yong BANG (82) 2 787 9168 [email protected] Kevin LAI (852) 2848 4926 [email protected] Tyres; Chemicals Deputy Head of Regional Economics; Macro Economics (Regional) Mike OH (82) 2 787 9179 [email protected] Christie CHIEN (852) 2848 4482 [email protected] Capital Goods (Construction and Machinery) Macro Economics (Taiwan) Sang Hee PARK (82) 2 787 9165 [email protected] Jonas KAN (852) 2848 4439 [email protected] Consumer/Retail Head of Hong Kong Research; Head of Hong Kong and China Property Thomas Y KWON (82) 2 787 9181 [email protected] Jerry YANG (852) 2773 8842 [email protected] Pan-Asia Head of Internet & Telecommunications; Software (Korea) – Internet/On-line Game Banking (Taiwan); Insurance (Taiwan and China) Leon QI (852) 2532 4381 [email protected] TAIWAN Banking (Hong Kong, China); Broker (China) Mark CHANG (886) 2 8758 6245 [email protected] Alison LAW (852) 2532 4308 [email protected] Head of Taiwan Research Head of Regional Consumer; Consumer (Hong Kong/China); Gaming and Leisure Steven TSENG (886) 2 8758 6252 [email protected] (Hong Kong, China) IT/Technology Hardware (PC Hardware) Jamie SOO (852) 2773 8529 [email protected] Christine WANG (886) 2 8758 6249 [email protected] Consumer (Hong Kong/China) IT/Technology Hardware (Automation); Cement; Consumer Anson CHAN (852) 2532 4350 [email protected] Kylie HUANG (886) 2 8758 6248 [email protected] Consumer (Hong Kong/China) IT/Technology Hardware (Handsets and Components) Eric CHEN (852) 2773 8702 [email protected] Pan-Asia/Regional Head of IT/Electronics; Semiconductor/IC Design (Regional) INDIA Lynn CHENG (852) 2773 8822 [email protected] Punit SRIVASTAVA (91) 22 6622 1013 [email protected] IT/Electronics (Semiconductor) Head of India Research; Strategy; Banking/Finance Felix LAM (852) 2532 4341 [email protected] Saurabh MEHTA (91) 22 6622 1009 [email protected] Head of Materials (Hong Kong, China); Cement and Building Materials (China, Capital Goods; Utilities Taiwan); Property (China) Dennis IP (852) 2848 4068 [email protected] SINGAPORE Power; Utilities; Renewables and Environment (Hong Kong/China) Adrian LOH (65) 6499 6548 [email protected] John CHOI (852) 2773 8730 [email protected] Head of Singapore Research, Regional Head of Oil and Gas; Oil and Gas (ASEAN and Regional Head of Small/Mid Cap; Small/Mid Cap (Regional); Internet (China) China); Capital Goods (Singapore) Jackson YU (852) 2848 4976 [email protected] Benjamin LIM (65) 6321 3086 [email protected] Small/Mid Cap (Regional) Oil and Gas (ASEAN and China); Capital Goods (Singapore) Joey CHEN (852) 2848 4483 [email protected] Angeline LOH (65) 6499 6570 [email protected] Steel (China) Banking/Finance, Consumer/Retail Kelvin LAU (852) 2848 4467 [email protected] David LUM (65) 6329 2102 [email protected] Head of Transportation (Hong Kong, China); Transportation (Regional) Property and REITs Jibo MA (852) 2848 4489 [email protected] Evon TAN (65) 6499 6546 [email protected] Head of Custom Products Group; Custom Products Group Property and REITs Thomas HO (852) 2773 8716 [email protected] Ramakrishna MARUVADA (65) 6499 6543 [email protected] Custom Products Group Head of ASEAN & India Telecommunications; Telecommunications (China, ASEAN & India) Jame OSMAN (65) 6321 3092 [email protected] Telecom (ASEAN & India); Pharmaceuticals and Healthcare (Singapore)
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The following explains the rating system in the report as compared to relevant local indices, based on the beliefs of the author of the report. "1": the security could outperform the local index by more than 15% over the next six months. "2": the security is expected to outperform the local index by 5-15% over the next six months. "3": the security is expected to perform within 5% of the local index (better or worse) over the next six months. "4": the security is expected to underperform the local index by 5-15% over the next six months. "5": the security could underperform the local index by more than 15% over the next six months.
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