3Q20 results of A-share subsidiaries were robust. In 3Q20, total revenueof AviChina's A-share subsidiaries increased by 22.9% YoY, showing theCompany's strong growth momentum driven by high military demand. Inaddition, the Company’s A-share subsidiaries' weighted average grossmargin and net margin both saw solid improvement.
We have revised up our EPS forecasts for 2020/ 2021/ 2022 by 9.9%/8.6%/ 8.8%, respectively. We have mainly: 1) lifted assumptions for revenueand gross margin for the entire aircraft segment on robust performance ofAVICOPTER in 3Q20; 2) revised up revenue assumptions for the parts andcomponents segment based on stronger-than expected revenue growth ofAVIC Avionics; 3) revised up gross margin assumptions for the parts andcomponents segment based on the higher-than-expected profit margin ofJONHON Optronic; and 4) slightly revised up SG&A expense assumptionsbased on the surge in R&D expenses of AVICOPTER and AVIC Avionics.
Slightly trim TP to HK$5.80 and maintain "Buy". The Communique of 5thplenary session of the 19th CPC Central Committee stressed the significanceof increasing national security capabilities and accelerating the modernizationof national security. We believe that military aircrafts will continue to play akey role in military modernization during the 14th Five-Year Plan period andupgrades to more advanced aircraft models will be accelerated. Our TPrepresents 20.1x/ 17.0x/ 15.1x 2020-2022 PE ratio and 1.5x 2020 PB ratio.