Huachuang Securities: From Technological Barriers to High Valuations, Suggest Paying Attention to Three Clues in the Domestic Industry Chain.

Huachuang Securities released a research report stating that aircraft engines are called the "crown jewel" of modern industry. In terms of value distribution, engines account for about 25% of commercial aircraft, representing the largest proportion. China's civil aviation aircraft engines are still in the initial stage, with the marketization rate of domestic engines being less than 1%. The firm focuses on the commercial engine industry chain and suggests paying attention to three clues in the domestic commercial engine industry chain: core supporting businesses, suppliers of basic components such as high-temperature alloys, and raw material suppliers. Huachuang Securities' main points are as follows: Analysis of commercial aircraft engines: structure, value, and maintenance 1) Weighting the core links: Civil aviation mainstream large bypass ratio turbofan engines cover modules such as fans, compressors, combustors, turbines, etc., with the hot end being the core for manufacturing and replacement, and FADEC control systems being mainstream. 2) Value breakdown: Blades account for 26%, short casings account for 25%, other parts account for 21%, and control systems account for 14%. 3) Maintenance: Dominated by major manufacturers, with high value throughout the lifecycle. According to Rolls-Royce, aftermarket revenue can reach up to four times the initial selling price. Major manufacturers dominate the aftermarket market, which is a profitable source of profits and cash flow that cannot be ignored in the commercial engine market. Discussion on the commercial aircraft engine industry chain business model 1) Main manufacturers: Profit flywheel of "super knife rack + long-term blades". The global market is dominated by a few leaders (CFM International, Pratt & Whitney, Rolls-Royce, GE), with high technical, financial, and cyclical barriers to entry. Front-end large catalog price discounts grab market share, while the back-end locks in customers through bundled services like TotalCare, forming a profit flywheel of "short-term profit concession for market, long-term service profit". By leveraging core technology, specialized equipment, and maintenance manuals to build barriers, major manufacturers dominate the maintenance market with a market share exceeding 60%. 2) Suppliers: High barriers to entry for "shovel sellers", the cradle of hidden champions in the industry chain. The commercial engine industry chain operates in a "main manufacturer-supplier" cooperative model with extremely high entry barriers, requiring 6-10 years of international certification and simultaneous participation in pre-research and type approval domestically to create a first-mover advantage. Products have cross-customer, cross-platform adaptability (covering aircraft engines and gas turbines), benefiting from new aircraft matching and maintenance replacement, which can diversify risks. Their profitability is stable, avoiding the complex integration challenges of whole machine manufacturing, making them the cradle of hidden champions in the industry chain. Valuation of the commercial chain supply chain from a global perspective 1) Main manufacturers: Stable valuation centering on long-term growth potential. a) Order + aftermarket market growth, strong financial performance of overseas leaders. b) The average PE ratio of mainstream main manufacturers worldwide is 30.2 times (GE Aerospace 42 times, Safran 31 times, Rolls-Royce 18 times). The core of valuation focuses on the thickness of order backlog and the efficiency of aftermarket profit realization. With a full lifecycle service layout and oligopoly position in the industry, profits have a sustainable basis for realization, and valuation levels match the industry's growth attributes, higher than general high-end manufacturing industries. 2) Suppliers: Valuation premium comes from scarcity and high certainty. The average PE ratio of core overseas suppliers is 68.5 times (Howmet 62 times, HKEx Aviation 70 times, Hershey 96 times), significantly higher than main manufacturers. The core logic of the valuation premium includes strong technological scarcity, sufficient demand rigidity (covering both new aircraft support and maintenance replacement scenarios), stable profitability, cross-customer, cross-platform adaptability, risk diversification, and gross margin fluctuations much smaller than main manufacturers, which have been recognized in the market for long-term valuation. Potential of China's commercial aircraft engine market 1) The Yangtze series of commercial aircraft engines: Breaking the "neck", creating the "China heart" of domestic large aircraft. The C919 currently relies on imported LEAP-1C engines, and China's Aero Engine Corporation was established in 2009. The development of the Yangtze series (CJ1000A for narrow-body aircraft, CJ2000 for wide-body aircraft) is crucial in breaking the "neck". 2) China's market fosters tremendous development potential. a) China is a major civil aviation country, laying the foundation for the development of the aviation industry. According to the "COMAC Market Forecast Annual Report (2025-2044)," China's aviation market is expected to have 10,175 passenger planes by 2044, with a compound annual growth rate of 4.4% from 2024-2044. b) Based on COMAC's forecasts, the firm estimates that the total scale of China's commercial aircraft engine market will exceed 2.6 trillion yuan in the next 20 years, with a simple annualized scale exceeding 130 billion; and the aftermarket market will further open up the market, with an estimated size of about hundreds of billions per year; the combination of both will reach 240 billion per year. Risks: Global supply chain instability, research and development progress falling short of expectations, uncertain airworthiness certification timelines.