KGI: AviChina Industry & Technology Co Ltd (2357 HK) – Arms race has begun
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BUY Entry – 4.80 Target – 5.50 Stop Loss – 4.55
AviChina Industry & Technology Company Limited is principally engaged in the research, development, manufacture and sale of civil aviation products. The Company operates its business through two segments. The Aviation Entire Aircraft segment is engaged in the manufacture, assembly, sales and servicing of helicopters, trainers and other aircraft. The Aviation Parts and Components segment is engaged in the manufacture and sale of aviation parts and components.
Invasion marks the start of accelerating expansion of worldwide defence spending. The Russia-Ukraine conflict continued to escalate even though the peace talks ended on Monday night. Previously, Russia had raised nuclear threats by putting its nuclear forces on high alert on Sunday. Subsequently, Germany announced to commit EUR100bn (US$112.7bn) of the 2022 budget for the armed forces. Meanwhile, the EU agreed to give EUR500mn in arms to aid Ukraine. The ripple effect is expected to extend the arms race globally as the Middle East, South, Southeast and Northeast Asia have huge geographical disputes and ideological conflicts. China has been increasing its defence spending consistently. China’s 2021 defence budget was RMB1.35tn, up 6.8% YoY. The world order which was built after WWII is being undermined, China is likely to budget more for 2022 defence expenditure to counter potential external unrest.
Preliminary FY21 earnings. Total operating revenue grew by 25.2% YoY to RMB12.9bn. Gross profits jumped by 34.9% YoY to RMB2.3bn. Net profits attributable to the shareholders excluding non-recurring gains and losses jumped by 38.4% YoY to RMB1.9bn.
The updated market consensus of the EPS growth in FY22/23 is 16.3%/13.5% YoY respectively, which translates to 11.1x/9.8x forward PE. The current PER is 13.4x. Bloomberg consensus average 12-month target price is HK$7.55.
