AviChina's 1H2021 results beat our expectations. Top line was up by 33.1% YoY to RMB27,893 million,15.1% higher than our expectation. Overall gross margin was up by 1.0 ppts to 21.3%, in line with our expectation. Bottom line was up by 39.8% YoY to RMB1,199 million,8.1% YoY higher than our expectation. Entire aircraft revenue grew by 20.0% YoY mainly on increased sales volume of helicopters and advanced trainers. Revenue from ancillarysystem and related business surged by 47.8% YoY mainly on strong growth in sales of avionics. Revenue from engineering services increased by 20.1% YoY thanks to cooperation with Airbus and good progress of other engineering projects. Despite rebound in social security fee and business travelling expenses, SG&A expense ratiodropped by 0.5 ppts YoY to 12.2%, beter than our expectation. Effective tax rate was up by 0.7 ppts YoY to 12.2%, higher than our expectation.
We maintain our positive outlook on the Company's robust revenue growth and profitability improvement.
We believe that the recent initiative issued by the equipment division of PLA Ground Force regarding cost control on equipment procurement will not have material impact on the Company's profitability, given the high technological barriers of the Company's aviation products and a lack of altemative suppliers. Despite the negative impact on theCompany's valuation from the termination of its A-share listing plan, we maintain our positive view on the Company based on its solid growth prospects during the 14h Five-Year Plan period. Our current investment rating for the Company is "Buy"with a target price of HKS6.90. We will revise up our earmings forecasts and review our target price and investment rating accordingly in our next Company Report.