| Item | Content |
|---|---|
| Rating | Neutral |
| Target Price | RMB 49.4 – 71.1 (base-case fair value range, 12-18 months) |
| Current Price | RMB 62.88 (2026-10-30 close, 52-week low; 52-week range RMB 62.88-72.18) |
| Margin of Safety | -21.4% (current price above base-case fair value floor of RMB 49.4; no margin of safety) |
| Market Cap / Shares | RMB 168.02 billion / 2.672 billion shares |
| Time Horizon | 12-18 months |
| Core Tension | The halving of 2026 revenue and profit reflects an industry-wide order-switching cycle; leading indicators have already rebounded. However, the current price already pays full price for "profit recovery to FY2025 levels by 2027." Until two verification milestones land (the December 2026 related-party procurement quota and military trade signings in 1H 2027), the odds are nearly symmetric |
AVIC Chengfei is the leading fighter-jet OEM — the sole final assembly line for the J-20 and the exclusive exporter of the J-10CE in military trade. FY2025 (its first full consolidated year) delivered revenue of RMB 75.359 billion, net profit attributable to parent of RMB 3.432 billion, and a weighted ROE of 26.76%, the highest among military OEMs. Revenue for the first three quarters of 2026 fell 51.5% and attributable net profit fell 59.7%, reflecting an industry-wide delivery trough amid "completion of the 14th Five-Year Plan and 15th Five-Year Plan contracts not yet issued in batches" (corroborated by Shenyang Aircraft's 1H 2026 revenue -57.7% and Xi'an Aircraft's -38.4% for the first three quarters). The company's own evidence of production preparation (contract liabilities +74.6% vs. the start of the year, inventory +25.1%) and its military trade pipeline (24 aircraft delivered to Uzbekistan, ~42 to Indonesia / 20 to Bangladesh in transit) constitute the recovery path toward 2027. However, on valuation, the current price of RMB 62.88 implies a market cap of RMB 168 billion ≈ 49x FY2025 attributable net profit and 47x this report's 2027E base-case midpoint of RMB 3.55 billion — the middle of the 40-60x normalized valuation band for military OEMs — while the EPV floor is only about RMB 7.8 per share. Good asset, full price: the probability-weighted fair value of ~RMB 64.8 is only +3.0% above the current price; the bear case midpoint is -53.9% and the bull case midpoint +60.6%, leaving wide, nearly symmetric odds. The negative expectation gap ahead of verification milestones (the sell-side 2026E consensus of ~RMB 3.77 billion implies a Q4 standalone profit of RMB 2.89 billion, 2.29x the actual 2025Q4 figure, and will face concentrated downward revisions around the January 2027 earnings preannouncement) is the most certain event of the coming quarter. Maintain Neutral; await two hard signals — a rebound in the December 2026 related-party procurement quota and formal military trade contract signings — before re-rating.
Key evidence
The company's cumulative gross margin for the first three quarters improved 2.16pp YoY to 10.19%, with contract liabilities and inventory both rising, pointing to a "production preparation first, delivery lagging" bottom-of-order-cycle pattern rather than demand disappearance. Two points of restraint must be emphasized: first, Q3 standalone gross margin was 8.62%, down sequentially from 11.04% in 1H — the improvement trend did not carry through to the quarter; second, upstream leading indicators should be discounted — AECC Aviation Power's +28.4% revenue recovery for the first three quarters was concentrated in 1H (its Q3 standalone revenue was -1.74%), and Shenyang Aircraft's Q3 turnaround reflects its own specifics (J-35 new-model deliveries and production-line issues bottoming); there is no historical lead-lag evidence that "Shenyang leads Chengfei." The true test of the recovery thesis lies in the December 2026 announcement of the 2027 related-party transaction quota and the 2026 annual report; this report does not treat industry signals as company verification.
Key evidence
The direction is real; the timing is uncertain. Three calibrations: ① The Indonesia case's evidence chain contains internal contradictions — in May 2026 the Indonesian Ministry of Defense publicly denied that "the 42-aircraft / USD 9 billion deal was real," and the Finance Minister's October remarks were vague ("can't recall the exact figure"); cost and delivery-term negotiations reportedly have not started, and the USD 9 billion spans two fiscal-year budgets; Indonesia's 2020 abandonment of the Su-35 under US pressure is a reminder that geopolitical variables are real. ② Scope conversion — Bangladesh's draft implies bare airframes at ~67.5% of full-package value; missiles, engines (within the AECC system), training and infrastructure do not flow into Chengfei's revenue; the sum of publicly disclosed unit prices across the three countries is ~USD 13.1 billion (~RMB 93.3 billion); the media's "over RMB 100 billion" is the optimistic upper bound of the full-package scope — Chengfei's confirmable revenue mainly covers bare airframes and final assembly, so the military trade revenue elasticity may be overstated by 30%-50%. ③ The company has never disclosed any military trade contract value (the annual report's "material sales contract performance" section reads "not applicable"), and its investor platform states "no undisclosed information that requires disclosure." Military trade is a 2027-2028 option, not current-period support.
Key evidence
Using this report's 2027E base-case anchor, the multiple is 47.3x (mid-band); using street 2027E, 39.3x (lower band) — street values have not digested the 2026 collapse and are expected to be revised down, so the "full price" judgment relies mainly on our own anchor, with the street anchor as the sensitivity lower bound; the conclusion is "within the reasonable band, insufficient margin of safety" rather than significantly overvalued. The EPV layer of ~RMB 7.8 per share almost coincides with book net assets of RMB 7.89 per share (computed from the Q3 report); ~88% of the current price consists of order-recovery + military trade + scarcity premia — this is the normal structure for order-cycle military OEMs (Shenyang and Xi'an are similarly structured), meaning there is no cash-flow-level downside protection, and value is determined entirely by the scenario distribution: bear-case fair value RMB 24-34 (midpoint RMB 29, -53.9% vs. current), base case RMB 49.4-71.1 (midpoint RMB 60.25, -4.2%), bull case RMB 84-118 (midpoint RMB 101, +60.6%). The PE(TTM) of 78.6x is a distorted trough-earnings figure (TTM attributable net profit only RMB 2.14 billion) and is not a value signal.
Key evidence
The military-products "advance-funded production — milestone-based collection" model combined with the order gap is the structural cause of the large negative cash flows; the similarly sized 2024 outflow (-RMB 12.25 billion) did not trigger a liquidity event, and the central-SOE group's capital pool plus large payables to suppliers (notes and accounts payable totaling ~RMB 58.86 billion) provide a buffer; this report therefore no longer linearly extrapolates a "cash runway" — but if 15th Five-Year Plan orders are still absent in 2027, the company will rely on related-party credit lines and upstream supplier financing to sustain production, and cash pressure would significantly raise discussions of forced financing; the September 2025 investor-meeting minutes' mention of "planning refinancing when appropriate" also suggests financing is an active strategic option, not merely a distress response. On share unlock: AVIC's 2.086 billion restructuring lock-up shares (issue price RMB 8.36, unrealized gain ~652%) mature on 2028-01-23, representing 78.07% of total share capital and ~RMB 131.2 billion at the current price; AVIC-affiliated controlling shareholders have no precedent of stake reduction, and the group still seeks aerospace asset securitization — the substantive impact is a medium-term scarcity discount from free float expanding ~4.6x from 586 million shares, plus sentiment pressure from 2H 2027 onward; the group's lock-up commitments or market-cap management actions should be tracked.
Disclosure-cycle note: The company came into being through AVIC Electro-Mechanical's completion of the 100% equity transfer of Chengfei Group on 2025-01-06 and its ticker/name change on 2025-02-17. Annual reports for FY2024 and earlier reflect the former AVIC Electro-Mechanical (small-scale measurement & control sensor business; FY2024 revenue RMB 1.78 billion / attributable net profit RMB 0.112 billion) and are not directly comparable with the aircraft business; cross-period comparisons use only FY2025 and 2026 periods.
| Metric (RMB 100 million) | FY2025 | 2026H1 | 2026Q1-Q3 (latest) |
|---|---|---|---|
| Operating revenue | 753.59 | 151.67 | 234.38 (-51.46%) |
| Net profit attributable to parent | 34.32 | 7.09 | 8.75 (-59.68%) |
| Non-GAAP (recurring) attributable net profit | 33.05 | — | — |
| Gross margin | 8.46% (-2.34pp) | 11.04% | 10.19% (+2.16pp) |
| Net margin | 4.55% | 4.68% | 3.73% |
| Net operating cash flow | -25.42 | -72.44 | -130.99 (-224.90%) |
| Free cash flow (OCF-CapEx) | -43.68 | — | -144.09 |
| Cash and equivalents (end of period) | 217.91 | — | 70.56 (-67.62%) |
| Interest-bearing debt (end of period) | 76.81 | — | 80.49 |
| Debt-to-assets ratio (end of period) | 79.46% | — | 78.86% |
| Contract liabilities (end of period) | 28.0 | 30.00 | 48.81 (+74.55% vs. start of year) |
| Inventory (end of period) | 243.59 | 292.33 | 304.77 (+25.12% vs. start of year) |
| Accounts receivable (end of period) | 222.46 | — | 164.93 (-25.86% vs. start of year) |
| R&D investment | 64.89 (8.61% of revenue) | — | Expensed R&D 4.79 (+42.59%) |
Note: Verified non-GAAP figures for 9M2026 not obtained, left blank; FY2025 non-GAAP YoY of +3391.33% reflects 2024 not being restated on a common-control basis and is not comparable.
Reasons for metric changes (YoY ≥ ±20% excerpts, all per company official disclosures)
Q3 standalone revenue was RMB 8.270 billion (-70.02%) and attributable net profit RMB 0.165 billion (-86.83%), the deepest single quarter of this trough; the quarterly trajectory ran Q1 +79.7% → Q2 -47.0% → Q3 -70.0%, mirroring FY2025's year-end pulse structure of "Q4 standalone accounting for 35.9% of the full year" — military revenue recognition is highly concentrated at acceptance milestones, so extrapolating from single quarters is inadvisable. Three key readings versus the prior year: ① Cumulative gross margin for the first three quarters improved to 10.19% (+2.16pp), but Q3 standalone was 8.62%, down from 11.04% in 1H — product-mix improvement's explanatory power is weakening at low delivery volumes; ② Contract liabilities rebounded to RMB 4.881 billion (+74.55% vs. start of year) and inventory hit a record RMB 30.477 billion — the "advance receipts + production preparation" combination is a typical bottom-of-order-cycle pre-delivery pattern, but customer structure is undisclosed, so alternative explanations such as military trade advances or settlement timing cannot be fully ruled out; ③ Accounts receivable fell 25.86% vs. start of year (~RMB 5.7 billion collected in Q3 standalone) while contract assets rose 65.06% — collections are flowing in but the settlement pool for newly recognized revenue is piling up — "cash received from sales / revenue" was 110.5% for the first three quarters (collecting prior-period receivables), while cash paid for purchases of RMB 31.292 billion exceeded cash received from sales of RMB 25.905 billion; this advance-funding gap is the direct cause of cash flow deterioration. Has the market priced this in: sell-side consensus (3 analysts) has not yet digested the collapse (2026E of ~RMB 3.768 billion implies a Q4 standalone profit of RMB 2.893 billion, 2.29x the actual 2025Q4 RMB 1.263 billion); this report judges concentrated downward revision pressure after the Q3 report and does not declare "the bottom is in" on the market's behalf.
Business model in brief: Asset-heavy, project-based military OEM — produce to order, military pricing review, revenue recognized at delivery milestones. 100% of revenue is fixed-price contracts (FY2025 revenue note: fixed-price contracts RMB 72.927 billion, cost-plus contracts zero); prices follow "customer-approved pricing," with no independent pricing power; the top five customers account for 96.44% of revenue, and military procurement plans directly determine revenue timing; no subscription/recurring revenue; military trade is exported through the state military trade company (CATIC).
Cash content of earnings test — the issue this section must state directly: OCF/attributable net profit was -0.74 for FY2025 and -14.98 for 9M2026; FCF/net profit was -1.27 and -16.48 respectively — book profits persistently fail to convert into cash, as the military receivables cycle (accounts receivable + contract assets totaling RMB 37.37 billion) and advance-funded production absorb all operating cash. The mitigating mechanism lies in the business model itself: military advance payments (contract liabilities) and upstream supplier financing (payables of ~RMB 58.86 billion) form an interest-free working-capital pool; FY2025's weighted ROE of 26.76% derives precisely from this high-turnover structure — that ROE is a function of order continuity and reverses into cash consumption during order gaps. On recurring earnings, FY2025 non-GAAP profit of RMB 3.305 billion differs from attributable net profit by only 3.7% (non-recurring items RMB 0.127 billion) — core earnings are clean; however, note FY2025's net reversal of asset impairments of RMB 0.171 billion (mainly inventory write-down reversals), 4.12% of total pre-tax profit, which the company itself deems non-sustainable.
Return on capital: This report estimates FY2025 ROIC at ~11.3% (NOPAT RMB 3.53 billion / invested capital RMB 31.2 billion), only 1-2pp above WACC (9%-10% for military central SOEs) — the monopoly OEM's book returns are mediocre; the excess return is embodied in ROE levered by "interest-free debt + advance receipts."
CapEx quality: FY2025 CapEx of RMB 1.826 billion ≈ D&A of RMB 1.883 billion (ratio 0.97); investment intensity roughly equals replacement cost; the aerospace equipment assembly base started in 2026 (RMB 0.133 billion invested in 1H, construction-in-progress rising to RMB 0.914 billion) points incremental CapEx toward new capacity rather than a maintenance black hole. No maintenance/growth split is disclosed.
Red flags: ① Customer concentration of 96.44% (the largest being a military-system customer); ② related-party procurement at 42.17% (intra-group supply; pricing fairness depends on group mechanisms); ③ three-period divergence between profit and cash (see above); ④ accounts receivable of RMB 20.807 billion from military/related-party counterparties provisioned at only 3.81% for bad debts (balances over 3 years old: RMB 4.665 billion), reliant on sovereign-credit assumptions.
Consistency of words and deeds: Partially fulfilled, weak guidance discipline. ① Restructuring performance commitments (2025-2027): FY2025 committed-asset revenue actually reached RMB 71.508 billion, completion rate 102.20%, fulfilled; ② At the 2026-04-30 earnings briefing, management stated "fully safeguarding model programs and ensuring on-schedule, high-quality delivery of orders in hand," and investors heard "a positive start to 2026" — Q1 revenue +79.71% delivered the strong start, but Q2/Q3 collapsed consecutively with no warning, and the company has never provided quantitative earnings guidance (annual operating targets are only qualitative); the "risk of short-term business scale fluctuations" was indeed flagged in the annual/interim report risk disclosures — in hindsight, this counts as advance disclosure; verdict: partially fulfilled, prefers qualitative statements. ③ Military trade (2026-09-17 investor open day): "J-10CE achieved an export breakthrough with outstanding combat performance, and we strive to expand military trade order scale during the 15th Five-Year Plan" — consistent with Uzbekistan delivery progress, but never quantified.
Shareholder friendliness: Neutral to friendly. FY2025 dividends paid twice totaled RMB 1.702 billion, payout ratio 49.6% (final dividend RMB 3.86 per 10 shares); 2025-08 cancellation of 4.691 million repurchased shares (small amount); no interim dividend for 2026. No dilution history from refinancing (the 2.086 billion shares issued to the Group in 2025 were consideration for asset injection, not financing).
Risk signals: 2026-09-24 resignation of director Xu Dongsheng from the Board and the Audit Committee ("personal work reasons," holds no shares) — a routine change but on the audit line; group-level anti-corruption aftershocks (former Chairman Tan Ruisong sentenced to death with reprieve at first instance in 2026-03; former General Manager/Deputy General Manager removed in the same period) are Group governance events whose impact on the listed company's procurement approval chain cannot be quantified; intensive investor questioning on SZSE Interactive about implementation of market-cap management, with no dedicated market-cap management results yet announced.
| Segment | Revenue share (FY2025) | Gross margin | YoY | Business logic |
|---|---|---|---|---|
| Aviation products (aviation manufacturing) | 97.60% | 7.65% (-2.35pp) | +16.39% | J-20/J-10/JF-17 complete aircraft and parts & accessories, fixed-price contracts sold directly to the military, revenue recognized at delivery milestones |
| Others (test & control sensors, civil aircraft services, etc.) | 2.40% | ~41.2% | -2.79% | Legacy AVIC Electromechanical business + civil aircraft supply, small revenue with high margin |
Profit engine: Aviation products contribute ~96% of operating profit (97.60% × 7.65% vs 2.40% × 41.2%); the company is effectively a single military aircraft OEM asset, with the sensor business merely a restructuring legacy. Gross margin structure gap of 33.5pp: the OEM link is constrained by price-audit anchoring of "priced cost +5% + incentive profit," while market-based components/civil products can be freely priced — this is precisely the industry-chain value distribution (lowest OEM gross margin) mapped within the company. The company does not disclose segment revenue for military trade / civil aircraft / MRO; FY2025 overseas revenue of RMB 1.325 billion (1.76%) is the only export observation window.
Accounting red flags (pattern / severity / evidence):
Cross-period consistency (metric / multiple periods / consistency with management explanation):
Current market data and multiples: Close price RMB 62.88 (2026-10-30, 52-week low), market cap RMB 168.02 billion. PE(TTM) 78.6x — a trough-earnings distorted value (TTM attributable profit RMB 2.14 billion vs FY2025's RMB 3.432 billion), not a cheap/expensive signal; PE (static, FY2025) 48.96x; PB 7.97x (computed); PS(TTM) 3.33x. Percentile disclaimer: the company listed under its new ticker in 2025-02, only ~20 months ago; 3/5-year percentiles are unavailable (the data series mixes in AVIC Electromechanical history, severely distorted); only the trailing 1-year window is computable (PE-TTM 49th percentile, static PE 37%, PB 37%) — percentiles for reference only. Forward basis: at current price, 47.3x this report's 2027E midpoint of RMB 3.55 billion; 39.3x street 2027E of RMB 4.275 billion — both within or near the bottom of the 40-60x OEM band.
Peer benchmarks (valuation anchors independent of the company's current price):
| Company | PE(TTM) | PB | ROE (FY2025) | Note |
|---|---|---|---|---|
| AVIC Shenyang Aircraft | 42.7 | 5.64 | 17.32% | Most direct comparable; trailing 5-year PE range 32.7-83.6x, median 51.0x |
| AVIC Xi'an Aircraft | 76.3 | 2.72 | 5.33% | Lowest-margin OEM platform; market pays PB only for ROE |
| AECC Aviation Power | 145.4 (distorted) | 2.46 | 1.58% | Sole upstream engine maker; trough earnings distort PE |
| AVIC Chengdu Aircraft | 78.6 (distorted) | 7.97 (computed) | 26.76% | No.1 OEM by ROE; the 41.3% PB premium is underpinned by unit ROE |
Market-implied expectations: current price RMB 168.0 billion ÷ exit PE 34/40/48/60x → implied normalized net profit of RMB 4.94/4.20/3.50/2.80 billion. In one sentence: the current price requires 2027 earnings to at least fully return to the FY2025 level (RMB 3.432 billion) plus a 0-20% military-trade increment to hold within the 40-48x central band; if 2027 only recovers to the lower bound of the base range (RMB 3.3 billion), the current price at 50.9x already hugs the top of the band. Reality: TTM annualized is only ~RMB 1.17 billion; recovery evidence currently consists only of leading indicators (contract liabilities, inventory, upstream warming) rather than delivery verification; military trade has the hard fact of Uzbekistan deliveries, but all orders in transit are unsigned. The market has not paid for the bull-case military-trade volume surge (RMB 4.5-5.5 billion profit), nor reserved protection against the bear case (orders delayed to mid/late 2027) — a "paying full price for the base case" pricing structure.
Three-tier value (EPV): asset value ~RMB 7.89/share (net assets attributable to parent, 2026-09-30); zero-growth EPV ~RMB 7.8/share (equity basis: normalized FCFE RMB 0.74/share ÷ 9.5% cost of equity, range RMB 6.11-9.47; cash/debt bridge not shown separately) — normalization uses FY2025 attributable profit of RMB 3.432 billion as the realized base period, because restated historical OCF is negative in all three periods and cannot calibrate cash flows directly; cash conversion rate assumed at 45%-70%, this input is an assumption, not measured; EPV serves only as a floor reference. The asset tier and EPV tier almost coincide (zero-growth cash flow value ≈ book net assets); ~88% of the current price is a "order recovery + military trade + scarcity" premium tier — a high growth-option share is the norm for order-cycle OEMs (peers share the same structure), does not constitute an undervaluation signal of "the market pricing only zero growth," and means no cash-flow-tier downside protection.
Three scenarios and odds (12-18 month fair range, price anchor RMB 62.88):
| Scenario | Probability | Fair range (RMB) | vs current price | Decisive factor |
|---|---|---|---|---|
| Bear | 22% | 24 – 34 (midpoint 29) | Midpoint -53.9% | 15th Five-Year contracts delayed to after 2027H2 plus neither Indonesia nor Bangladesh signing within 2027; FY2026 attributable profit RMB 1.2-1.5 billion, FY2027 only RMB 1.5-2.0 billion; priced at trough 40-45x 2027E (market cap RMB 64-90 billion) |
| Base | 50% | 49.4 – 71.1 (midpoint 60.25) | Midpoint -4.2% | First 15th Five-Year contracts land 2026Q4-2027H1; FY2026 attributable profit RMB 1.9-2.3 billion, FY2027 back to RMB 3.3-3.8 billion; 1-2 military trade deals progressing; priced at 40-50x 2027E (anchor: Shenyang Aircraft 5-year median 51x / OEM 40-60x band) |
| Bull | 28% | 84 – 118 (midpoint 101) | Midpoint +60.6% | Both Indonesia (42 jets) and Bangladesh (20 jets) formally signed with deliveries starting + 15th Five-Year volume ramp + military-trade gross margin delivery; 2027E attributable profit RMB 4.5-5.5 billion × 50-58x (premium for a military-trade growth OEM; external optimistic marker: Sinolink Securities 2025-02 target price RMB 89.41 was on a 2025E 60x basis, its earnings forecast since proven ~14% too high — upper-bound reference only) |
Probability-weighted fair value ~RMB 64.78, +3.0% vs current price; current price sits at the 62nd percentile of the base range. Odds framing: upside to base midpoint -4.2%, to bull midpoint +60.6%; downside to bear midpoint -53.9% — an extremely wide, broadly symmetric distribution slightly skewed optimistic. Conclusions are sensitive to probability assumptions: bear probability above 35% flips the verdict to overvalued; bull probability (dual military-trade signings) above 45% flips it to undervalued. External pessimistic markers: no stock-specific bearish target price (coverage of only 3 "Overweight" ratings, no consensus target); the available weak marker is "street 2026E implies an unachievable Q4 of RMB 2.893 billion, likely concentrated downward revisions after the profit warning"; the bear-case range sits ~32%-52% below the post-listing low of RMB 50.40 — a tail scenario of deeply delayed order cycles, and the monopoly SOE platform + 78% shareholder lock-up makes extreme liquidation prices hard to reach — this report has accordingly raised the bear-case lower bound from its first draft.
This report's forecast vs management guidance vs sell-side expectations, side by side:
| Basis | FY2026 revenue / attributable profit | FY2027 revenue / attributable profit |
|---|---|---|
| This report (base) | RMB 42-50 billion / RMB 1.9-2.3 billion | RMB 62-72 billion / RMB 3.3-3.8 billion |
| Management guidance | No quantitative guidance ("ensure on-schedule, high-quality delivery of orders in hand") | None |
| Sell-side consensus (3 brokers, 2026-10-30) | ~RMB 3.768 billion (implies Q4 single-quarter RMB 2.893 billion, unachievable; downward revision expected) | ~RMB 4.275 billion |
This report's forecast is 38%-50% below street 2026E and 11%-23% below street 2027E — this is the anchor for the next earnings reconciliation.
Verdict: Fair, target range RMB 49.4-71.1 (= base-case fair value). Assess quality (sole J-20 final assembly + ROE 26.76% + military-trade endorsement) separately from price (within the band, zero margin of safety): a good asset at a full price; not a left-side buying point before validation.
Industry size: The underlying driver of demand is the defense budget—2026 national defense spending budget of RMB 1,909.561 billion (+7.0%), 2025 at RMB 1,784.751 billion (+7.2%), an 11th consecutive year of single-digit growth (official Two Sessions figures); extrapolating from the ~41% equipment procurement share in the 2017 defense white paper, 2026 equipment spending would be roughly RMB 780-790 billion (estimate, not officially disclosed). Military aircraft market: West China Securities (2023-07) estimates a domestic military aircraft shortfall of ~2,750 aircraft, corresponding to a market space of ~RMB 1,233.4 billion; benchmarking against a world-class military by 2035 implies combat aircraft CAGR of ~11.9% and an annualized market space of ~RMB 94.9 billion. Military trade market: 2024 global arms trade sales of ~USD 111.6 billion (US 37.92% share, China ~5.42%); Founder Securities (2025-10) estimates Middle East military aircraft trade space of ~USD 78 billion and South Asia + Southeast Asia ~USD 30.3 billion over the 15th Five-Year Plan, with China's total military trade exports projected at ~USD 104.4 billion. Industry growth structure: steady 7% budget growth on the spending side, while revenue growth outpaces the budget via "generational equipment replacement (4th-gen aircraft unit value 2-3x that of 3rd-gen) + military trade volume ramp-up."
Value chain and value distribution: Raw materials (titanium alloys/composites) → subsystems (AVIC Aviation Engines as sole engine supplier, AVIC Airborne avionics) → final assembly (CAC/SAC/XAC/Hongdu) → the military (sole end customer)/military trade customers (via CATIC). CAC holds the "chain leader" position in final assembly but the value distribution is unfavorable: final assembly margins are the lowest (CAC 8.46%, XAC 6.78%, AVIC Aviation Engines 9.1%), with the bulk of gross profit retained by upstream/midstream players permitted higher markups; toward upstream suppliers it has essentially no bargaining power (related-party procurement ~33% of revenue, largely in-group planned purchasing), and toward downstream (the military) it has no pricing power due to price audit constraints. Only in military trade—backed by combat-proven performance—has bargaining power marginally strengthened, with export prices generally commanding premiums of 50%+ over domestic prices (Founder Securities estimate). There are only two paths to profit improvement: cost-sharing under incentive-based pricing and high-priced military trade orders.
Supply-demand and competitive landscape: On the demand side, 2026 sits in a transition gap of "14th FYP contracts fully delivered, 15th FYP contracts not yet issued in batches"—CAC's 2026 related-party procurement budget of RMB 16.284 billion, down 34.2% from 2025 actual of RMB 24.732 billion, is the most direct annual-report leading evidence of this revenue decline. But leading signals have emerged: SAC mid-2025 contract liabilities of RMB 7.532 billion (+113.5% from the start of the year), AVIC Aviation Engines RMB 7.01 billion at end-2026Q1 (+27.5%), concentrated military trade order releases; the industry is judged to return to tight supply-demand balance from 2027. On the supply side, fighter final assembly is a duopoly of CAC/SAC (no possibility of new entrants); CAC's 2025 revenue of RMB 75.359 billion surpassed SAC's RMB 44.656 billion, making it the largest aviation defense OEM. Competition manifests as a model-ranking race (CAC's J-20/J-36 vs. SAC's J-35 series) and military trade benchmarking (against Rafale at ~USD 120 million per unit, F-16V, FA-50; the J-10CE bare airframe at ~USD 62.70 million delivers cost-performance pressure). Entry barriers are extremely high and rigid: weapons equipment R&D and production licenses + security clearances, model development cycles (J-20 took ~20 years), lifetime designated-supplier binding with the military, and state-level approval required for OEM asset listings.
Quantified chain of the military trade demand inflection (direction real, timing uncertain): the driver is the May 2025 India-Pakistan air combat combat validation (J-10CE results confirmed at Pakistani government and defense ministry levels) → penetration ramp-up via customer base expansion: Pakistan (two squadrons) → Uzbekistan 24 aircraft (signed 2025-07, first 6 delivered 2026-08) → Bangladesh 20 aircraft (draft under review, ~USD 2.302 billion) → Indonesia ~42 aircraft (~USD 9 billion budget framework, unsigned) → Azerbaijan/Egypt (intent level). The three countries' publicly disclosed pipeline totals ~86 aircraft, full packages worth ~RMB 93.3-100 billion, of which what accrues to the listed CAC entity is mainly the bare airframe and final assembly (per the Bangladesh draft, bare airframe ~67.5% share). Scale judgment: the "per-aircraft usage multiplication" logic does not apply to the military aircraft industry; the relevant variables are generational jumps in per-unit value and customer base expansion—if Indonesia + Bangladesh close in 2027-2028, military trade could contribute ~RMB 8-15 billion in annual revenue (equivalent to 11%-20% of FY2025 revenue), the core ramp assumption of the bull case; if all are delayed, the military trade narrative downgrades to "individual deliveries."
Cycle and regulation: This equipment procurement cycle saw volume expansion in 2021-2025 (CAC revenue 2025 +15.84%); the 2026 transition downturn stems from the叠加 of three factors—"new contracts not issued in batches + model transition + tightened procurement approvals during in-group anti-corruption governance," with order factors dominant. Leading indicators: contract liability step changes (+74.55% at Q3 end), next-year related-party procurement budgets, upstream AVIC Aviation Engines contract liabilities and inventory. Regulation and policy: ① Military products pricing reform (2019 Rules on Military Products Pricing and Negotiation) shifting from cost-plus to incentive-based pricing—long-term positive for OEMs with strong cost reduction, short-term margin volatility from concentrated price audits (CAC FY2025 -2.34pp unexplained, recovery in 2026); ② Stable defense budget system + rising equipment spending share as an underlying positive; ③ In-group anti-corruption (Tan Ruisong case first trial 2026-03) dragging procurement approval pace short-term while cleansing the ecosystem long-term; ④ Under SASAC's "dual improvement of quality and returns" requirement, the company issued an action plan in 2026-04.
Peer benchmarking:
| Company | FY2025 Revenue | FY2025 Growth | 9M2026 | Gross Margin | ROE | Positioning Difference |
|---|---|---|---|---|---|---|
| AVIC Chengdu Aircraft | RMB 75.359 bn | +15.84% | -51.46% | 8.46% | 26.76% | Sole J-20 final assembly + J-10CE exports, first in both scale and ROE |
| AVIC Shenyang Aircraft | RMB 44.656 bn | +4.25% | -34.19% (Q3 single-quarter +23.3%) | ~12% | 17.32% | Carrier-based/heavy fighters (J-35A dual domestic-export engine), higher margins, first to recover |
| AVIC Xi'an Aircraft | RMB 41.014 bn | -5.10% | -38.44% | 6.78% | 5.33% | Sole transport/bomber platform + C919 major components |
| AVIC Aviation Engines | RMB 46.330 bn | -3.2% | +28.38% | 9.10% | 1.58% | Sole engine supplier, upstream recovering first |
| Hongdu Aviation | RMB 7.449 bn | +41.83% | H1 +79.97% | 2.95% | 0.74% | Trainers + light aircraft exports, strongest 2026 military trade ramp but marginal profitability |
Company positioning in the industry: Absolute leader and scarcest asset—sole J-20 final assembly (no competitor), sole exporter of J-10CE/JF-17, leading in 6th-gen J-36 development (5th prototype flight-tested 2026-10; foreign media assess progress ahead of the US F-47, possibly achieving combat readiness around 2031). Share trend is upward (revenue growth faster than SAC, military trade increments essentially captured by CAC). Moat sources: model exclusivity, licensing and development barriers, lifetime military binding, and the integrated research-production system with the 611 Institute. Note on disclosure scope: the company's claim of "gradually rising military trade revenue share" comes from earnings call commentary, whereas the financial statements show FY2025 overseas revenue at only 1.76% of total, down 6.04% YoY—the former includes inferred amounts settled via CATIC but not separately disclosed; the two are not directly interchangeable.
The valuation battleground for military aircraft OEMs lies not in the current income statement but in three "hidden statements" of orders and cash collection, which generic frameworks systematically miss:
Overall rating: Neutral, confidence 0.55, time horizon 12-18 months. Separate quality from price: asset scarcity (sole J-20 final assembly, ROE 26.76%, combat-validated military trade) is A-grade, but the price sits in the middle of the OEM normalized valuation band with no margin of safety (baseline fair-value floor of RMB 49.4 is -21.4% vs. current price; probability-weighted fair value of RMB 64.78 is only +3.0%). Strategic implication: before validation, this is neither a left-side buying opportunity nor a short candidate—cash flow is backstopped by the central SOE group's capital pool, 78% of shares are locked, and military trade and the J-36 constitute event-driven upside options. Wait for two hard signals before stepping up: ① The 2027 related-party procurement quota in 2026-12 ≥ RMB 20 bn; ② Formal signing by Indonesia or Bangladesh. If both materialize, the baseline scenario migrates toward the bull case, at which point the current price corresponds to 2027E floor valuation; if both fail, the concentrated guidance cuts in the January 2027 earnings preannouncement, combined with the order gap, will push the valuation anchor toward the bear case.
Key risks: 15th FYP orders still not issued by 2027 (industry-level, largest impact); military trade signings falling short (Indonesia has a precedent of repeated official denials); retroactive price-audit margin impact; persistently large negative operating cash flow combined with related-party exposure to the group finance company; lock-up expiration expectations building from 2027H2; short-term event risk of concentrated sell-side FY2026E downgrades.
Tracking calendar and validation points (next 6-18 months):
Data and price anchors: closing price 2026-10-30 at RMB 62.88 (frozen anchor); financial data as of the 2026 Q3 report (2026-09-30); military trade events are all based on media and official statements—formal contracts subject to CATIC/official announcements. This report does not constitute investment advice.