Company background. AviChina (2357 HK, NR) is mainly engaged in the development, manufacture, sales and upgrade of defense and civil aviation products such as helicopters, trainer aircrafts, general-purpose aircrafts and regional jets for domestic and overseas customers. Aviation Industry Corporation of China (AVIC), wholly-owned by SASAC, is the controlling shareholder of AviChina. Airbus Group (AIR FP) is the second largest shareholder of AviChina with a stake of 5%. AviChina currently owned four A-share listed companies, namely JONHON Optronic (002179 CH), AVIC Avionics (600372 CH), Hongdu Aviation (600316 CH) and AVICOPTER (600038 CH). These four companies contribute majority of AviChina’s earnings.
Source of opportunity:
- A significant rebound of share price since the start of buyback. AviChina announced on 22 May that it will repurchase a maximum of 624.5mn shares, representing 10% of the total outstanding shares. Immediately after that, AviChina repurchased shares in the market every trading day, driving a 20% increase in share price, which was a meaningful rebound as the share price had declined 40% since early 2019. As at 11 Jun, the total amount spent was HK$75.5mn for 19.7mn shares (average price of HK$3.83). Most notably is that the amount spent over the past four days significantly increased to a total of HK$59mn (Figure 1).
- Repurchase likely to continue in the near term. The repurchased shares so far accounted for only 3.2% of the maximum shares to be repurchased (624.5mn). We expect the share buyback will continue in the near term. As at end-2019, AviChina had net cash of ~RMB2.2bn (consolidated).
- Acquisition of helicopter businesses should be completed in the near term. In Nov 2019, AviChina announced three major acquisitions: (1) to acquire all the interest in AVIC Helicopter from AVIC and Tianjin Free Trade Zone Investment; (2) to acquire 10.21% interest in Harbin Aircraft from AVIC; and (3) 47.96% interest in Changhe Aircraft from AVIC. The total consideration of RMB5.69bn will be settled by issuing 1.5bn new shares to AVIC. The acquisition price of HK$4.19 per share is slightly higher than the current share price of HK$4.0. The transaction was approved by shareholders in the EGM in Feb 2020. The acquisition of AVIC Helicopter will enrich AviChina’s helicopter products and help the Company to further expand its defense equipment product line.
- Expect more asset injections from the parent company. AVIC has conducted a series of asset restructuring for the subsidiaries over the past few years. We expect more corporate actions to follow. To recap, AviChina is one of the two companies that participated in H-share full circulation pilot project in 2018.
- Valuation. Stock is trading at 14x/12.7x 2020E/21E consensus P/E. Besides, the market cap of AviChina represents a 41% discount to the attributable market cap of the four listed subsidiaries (Figure 2).
