China Securities Co., Ltd.: Value reconstruction of the large aircraft industry chain opens up a trillion-yuan market space through breakthroughs in localization.

China Securities Co., Ltd. released a research report stating that the value composition of large aircraft conforms to the smile curve, with the overall design process having high added value. The core subsystems such as avionics and engine systems are next in value, while the upstream links in the industry chain such as component processing, segmented manufacturing, electronic components, and materials have relatively low technical barriers. The firm believes that China's commercial aviation industry has achieved a breakthrough from zero to one in the production of large aircraft, and as the market for civil large aircraft gradually opens up and product quality improves, it is expected to bring broad market space for China's aviation industry. With the gradual breakthrough in technologies such as avionics systems and engine systems, China's aviation industry chain will grasp core competitiveness, opening up profit space in the industry chain. Key points from China Securities Co., Ltd. include: Aircraft can be divided into the structure of the fuselage, avionics systems, power systems, and others. The fuselage structure can be divided into front and rear fuselages, mid-fuselage, aircraft nose, wings, tail, etc. Avionics systems include navigation systems, electro-mechanical systems, landing gear, etc. In terms of weight breakdown, the empty weight of a typical narrow-body aircraft accounts for around 53-60% of the maximum takeoff weight, followed by power systems at 13-15%, avionics systems, operational items, and interiors each account for 13%, 9%, and 7% of the aircraft weight, respectively. The value composition of the fuselage accounts for approximately 30-35% of aircraft manufacturing costs, engines account for approximately 25-35%, and avionics equipment and others account for approximately 35-45%. The value composition of large aircraft conforms to the smile curve, with the overall design process having high added value. The core subsystems such as avionics and engine systems are next in value, with relatively low technical barriers in the upstream links of the industry chain such as component processing, segmented manufacturing, electronic components, and materials. Most of the overall company and important subsystems are controlled by European and American companies. In recent years, there has been a trend of transferring the global large aircraft industry chain from European and American countries to other regions. The first value-linked processes to transfer are mainly the manufacturing of components and materials with relatively low technical barriers. With the gradual maturity of China's large aircraft industry, it is expected to drive the localization rate of core subsystems such as avionics and electrical systems. Investment recommendations The firm believes that China's commercial aviation industry has achieved a breakthrough in the production of large aircraft from zero to one, and as the market for civil large aircraft gradually opens up, product quality improves, it is expected to bring broad market space for China's aviation industry. With the gradual breakthrough in technologies such as avionics systems and engine systems, China's aviation industry chain will grasp core competitiveness, opening up profit space in the industry chain. The firm recommends focusing on the following targets: for the fuselage, suggest focusing on Avic Xi'An Aircraft Industry Group (000768.SZ), Avic Aviation High-Technology (600862.SH), Weihai Guangwei Composites (300699.SZ), Baimtec Material (688563.SH), Guanglian Aviation Industry (300900.SZ), Hunan Aerospace Huanyu Communication Technology (688523.SH); in terms of aviation engines, recommend focusing on AECC Aviation Power (600893.SH). Risk Analysis 1. C919 entry into operation falls short of expectations. 2. Related targets' performance falls short of expectations. 3. Supply chain risks. 4. Risks of intensified industry competition. 5. Risks from changes in the international political and economic environment.