AviChina:Big boy of China’s aviation beast

Direct play on China’s aerospace and defence potential.

The offshore-listed platform of aviation monopoly AVIC Group,AviChina makes helicopter, other aircraft and aero-parts &components which, according to management, will collectivelydrive a 3yr revenue Cagr of 15-20%. A key beneficiary of the Madein China 2025 plan, AviChina has a dominant industry position andasset injection potential, which may explain its valuation premiumto peers (30x fwd PE and 9% ROE, based on consensus estimates).

Offshore-listed arm of monopoly in China’s aviation space.

Backed by parent AVIC Group, the SOE monopoly in China’s aviation space(except large passenger aircraft), AviChina holds dominant positions inmanufacturing of helicopters, trainer aircraft and other aircraft plus aeropartsand components, and offers design/consultancy services.

Key policy beneficiary in a heavily regulated industry.

Both aircraft/aero-parts and components manufacturing are heavilyregulated in terms of sales (mainly to gov’t) and margins (cost-plus).

Despite demand being related to the gov’t budget, given its monopolisticposition, AviChina is a key beneficiary of aviation being one of the focusindustries in the Made in China 2025 plan, and it has stable profitability.

Asset injection on the way.

With AVIC’s total NAV of over Rmb600bn vs AviChina’s Rmb50bn, AviChinamanagement expects asset injection, even after recent acquisition of AVICPlanning and stakes in fighter-jet companies. Assets likely to be injectedinclude raw materials business, R&D centres and other national defenceassets. Acquisition of A-share listed assets may also happen but would besubject to regulatory risk.

Policy-driven organic + inorganic growth story.

Management guides a 15-20% 3yr revenue Cagr fuelled by 20%+ growthfor Optronic, stable 10% growth for Avionics, and 15-20% growth in 2017-18 for helicopters, with stable margin. The 30x forward PE with ROE of 9%is at a premium to peers (based on consensus estimates), possibly due toAviChina’s dominance, policy support and asset-injection potential. Notethat the market cap of its stakes in 4 major A-share subsidiaries is c.71%more than AviChina’s current market cap.