Baimtec Material is a domestic leader in aerospace materials, primarily engaged in the R&D, production, and sales of aerospace components and advanced materials. Baimtec Material’s main products include titanium alloy castings, rubber and sealing parts, transparent components, and superalloy master alloys. These products are mainly used in aviation, aerospace, shipbuilding, weaponry, electronics, nuclear industry, railways, and bridges. The Company stands as a stable and quality supplier in the industry, with the four main businesses all leading in terms of technologies in China. We expect that Baimtec Material is well-positioned to capitalize on the ramp-up of aviation equipment shipment going forward. Baimtec Material has also been proactively increasing R&D investment to consolidate its core competitiveness. The projects funded via IPO proceeds are focused on capacity expansion, and the asset infusion plan may contribute to the Company’s high-quality growth. We initiate coverage with optimism towards its enhanced comprehensive competitiveness and rapid earnings growth.

Domestic aerospace materials leader fully benefits from the shipment ramp-up of new models.

Standing as the leader in domestic aerospace materials, Baimtec Material mainly engaged in the R&D, production, and sales of aviation and aerospace components and advanced materials. Backed by Aero Engine Corporation of China Beijing Institute of Aeronautical Materials (AECC BIAM), Baimtec Material has four business segments, namely, titanium alloy precision castings, rubber and sealing materials, aircraft cabin transparent parts, and high-temperature alloy castings. The Company has established long-term and sound collaboration with renowned aviation and aerospace companies both at home and abroad. In 2022, Baimtec Material posted operating revenue of Rmb2.335bn (+19.95% YoY) and attributable net profit (ANP) of Rmb442mn (+17.91% YoY). In 1Q23, Baimtec Material recorded operating revenue of Rmb583mn, (+18.49% YoY) and ANP of Rmb121mn (+6.44% YoY). The gross profit margin (GPM) for 2022 dropped by 0.5ppts YoY to 33.79%, while the net profit margin (NPM) decreased by 0.32ppts YoY to 18.95%, resulting in a slight decline in profitability.

Aerospace materials see broad prospects driven by both military and civilian demand.

Titanium alloy castings, rubber and seals, aircraft cockpit transparent parts and the parent alloys of high-temperature alloys are mainly used in aviation engines, aviation aircraft, aviation helicopters, space missiles, etc. With the increase in defense expenditures, the growth headroom created by the shipment ramp-up and upgrading of military aircraft, which, along with the imminent milestones of the 100th anniversary of the founding of the People's Liberation Army of China (PLA) in 2027 and the target of achieving fundamental modernization of national defense and the armed forces by 2035, we see broad prospects for the military aviation manufacturing industry. Based on the projections by qianzhan.com (cited from the Company's prospectus), assuming a compound growth rate of 2%, China's military aircraft industry market size will likely exceed Rmb1.1trn by 2026. Meanwhile, the recovery in civil aviation passenger demand and the trend of import substitution are both favorable for the civil aviation value chain. According to the 2020-2039 Commercial Aircraft Corporation of China (COMAC) Market Forecast (cited from the Company's prospectus), we estimate China's civil aviation market value at US$1.3trn by 2039. The aviation advanced materials sector has formidable entry barriers, with stringent certification requirements, bringing the advantages of leading enterprises to the fore. At present, the titanium alloy casting industry is led by overseas giants, while domestic players have been swiftly catching up. In terms of rubber and sealing materials, we see a high concentration of high-end sectors, benefiting from the integration of products and services. Meanwhile, the positions of world-leading transparent component manufacturers are relatively stable, while domestic companies entered the market relatively late. As for the parent alloys of high-temperature alloys, the gap between domestic and foreign enterprises is relatively small, and companies with an extensive portfolio boast an advantage.

Multiple core logic empowers the Company’s long-term growth.

An aero-engine itself has a consumable attribute. The data from the report that explores the overhaul cycles of aero-engines amid an uncertain environment by Li Xingshan show that an aero-engine needs to carry out an overhaul every 1,000 hours of operation. Additionally, with the increasing utilization of advanced aviation materials in new-generation fighter aircraft, Baimtec Material will continuously benefit from the iteration of aircraft engines.According to the data from World Air Forces 2020 by FlightGlobal, China's fighter jet inventory in 2020 stood at 1,603 units, showing a noticeable gap when compared to the US. Furthermore, there is substantial room for growth in terms of quantity and quality for fourth-generation aircraft given its small proportion, presenting an imminent opportunity for the Company to capitalize on the large-scale induction of advanced fighter aircraft going forward. As a stable and quality player in the industry, Baimtec Material has achieved internationally advanced and domestically leading standards across all four main business segments in terms of technologies. Meanwhile, the Company has been consistently enhancing its technological core competency through R&D, expanding the share of R&D investment of total operating revenue from 6.47% in 2019 to 8.01% in 2022. Its projects funded via IPO proceeds focus on expanding and extending existing operations, while the planned funds injection into Zhenjiang Titanium Alloy Company will likely enhance its titanium alloy casting and processing capabilities, thereby facilitating the Company's pursuit of high-quality development.

Potential risks: Fluctuations in the supply of raw materials; the risk of military pricing; a high customer concentration; the risk of failing to maintain a leading position in technologies; product quality not meeting standards; intensified market competition; inadequate internal control capabilities; a decline in overseas revenue; a higher proportion of relevant transactions; the projects funded via IPO proceeds not up to expectations.

Investment recommendation: As a domestic aerospace materials leader, Baimtec Material mainly benefits from the shipment ramp-up of aviation weaponry. Due to the Company's deep accumulation and strong technical strength, its scarcity is strong and its industrial position is prominent. At the same time, the Company has been actively increasing R&D investment to consolidate the core competitiveness, while projects funded via IPO proceeds, and asset injection programs may bode well for the Company's long-term development. We forecast its 2023E/24E/25E ANP to be Rmb560mn/720mn/930mn, respectively, corresponding to EPS forecasts of Rmb1.25/1.60/2.08, and equivalent to 47x/37x/29x at the current share price. We initiate coverage with optimism towards the Company's enhanced comprehensive competitiveness and rapid growth in earnings.