Lubair Aviation Technology is the leading domestic distributor of aviation materials, and is one of the first full-stack suppliers to be certified by the Civil Aviation Administration of China （CAAC）。 As domestic substitution becomes an inevitable trend in the civil aviation sector, the Company has enhanced deployment in aviation material localization and self-research to pursue transformation, taking the opportunity to actively participate in the C919 project. We forecast its 2023E-25E attributable net profit （ANP） to be Rmb98mn/123mn/148mn. Based on the average PE of comparable companies and discounted cashflow （DCF） valuation method, we assign 35x 2024E PE to derive a target price of Rmb54 and initiate coverage with a “BUY” rating.

The aviation material distribution leader poised for earnings recovery.

Lubair's main products include aviation fuels, aviation raw materials, aviation chemicals, and ground support equipment. Due to the low level of domestic production in the aviation materials sector, the Company's aviation materials business is still primarily focused on distribution. It is the first publicly traded company in the domestic and even Asia-Pacific region specializing in aviation material distribution. The prosperity of the aviation materials industry is closely related to the downstream civil aviation market. With the domestic civil aviation industry leading the way in returning to prosperity since 2023, the Company’s performance has emerged from its “darkest moment” and is experiencing a turning point in recovery. In 1H23, its ex-one-off ANP achieved an increase of 40% YoY.

High entry barriers brought by high qualification requirement highlight the industry leader’s advantages.

The aviation industry attaches great importance to safety and airworthiness, hence there are a variety of rigorous certification and qualification barriers, including industry regulatory systems and customer-supplier certification systems in the aviation materials industry. China’s aviation materials industry has a relatively late start, and due to the impact of high qualification barriers, the number of companies nationwide with qualifications for aviation materials businesses is relatively small, with only 178 such companies as of 2021.

Leading companies, such as Lubair, which entered the industry early and have abundant customer-supplier resources, have greatly benefited from the high barriers in the industry, leading to strong customer loyalty and steady expansion of market share and competitive advantages.

Right time for aviation material import substitution, and self-research creates a second growth curve for the Company.

To meet the national strategy of building a country with great civil aviation and with the intensifying policy efforts for import substitution of the civil aviation value chain with domestically-produced large passenger aircraft as the core, the import substitution of aviation material has become an inevitable trend.

Lubair took the opportunity of in-depth participation in the C919 project to start the transformation of aviation materials localization and self-research. Over the past decade, the Company has consistently promoted self-research and　　self-production of aviation materials. In 2022, the proportion of self-researched aviation material revenue and gross profit reached 6.5% and 14.9%, respectively. Looking ahead, as the aviation material domestic production bases in Huizhou, Jiaxing, and Longnan gradually start operation, the Company is poised to quickly translate its accumulated research patents and civil aviation authority-certified self-researched products into sales orders by leveraging its sales channel advantage. We predict that the Company’s self-researched revenue CAGR is likely to reach 86.7% from 2023 to 2025.

Potential risks: Changes in industry’s operating models; depreciation of RMB; concentration of suppliers and customers; construction of new projects falling short of expectations; inability to maintain qualifications and certifications; loss of distribution suppliers due to localization transformation; escalated trade frictions.

Investment strategy: The Company is actively promoting the self-research transformation of aviation material localization in line with the national strategy of building a country with great civil aviation. The self-researched business is likely to experience rapid growth, leading to significant improvements in revenue structure and profitability. We forecast that the Company's ANP to be Rmb98mn/123mn/148mn, respectively, with corresponding EPS of Rmb1.22/1.54/1.85. Taking into account the historical PE valuations of 20x-26x during the past public trading period for the leading US aviation material companies Wesco Aircraft （WAIR.N） and B/E Aerospace （BEAV.O）， and considering the development stage of the Chinese aviation material market, competitive landscape, industry chain structure, and the Company's growth potential, we give a certain valuation premium to the Company and assign 35x 2024E PE to derive a target price of Rmb54, combined with the result of DCF valuation method. We initiate coverage with a “BUY” rating.