by winston » Mon Oct 13, 2014 9:05 pm
There’s never been a better time to invest in China’s military by Lars Henriksson
Starting in 2015 regulations are set to relax for low-altitude flying (below 1,000m) in a handful of provinces, followed by further reforms and improved infrastructure between 2016-20. The aim is to support growth in China’s general aviation markets.
At the end of last year, China’s total fleet size for civil helicopters and fixed-wing aircraft was 385 and 1,239 – equivalent to 4% and 1% of the US levels.
But these relaxed regulations are set to accelerate demand for both helicopters and fixed-wing aircrafts.
Our answer is have a look at AviChina Industry & Technology (2357 HK), China’s largest contract supplier of helicopters and avionics system.
As investors pour in, prices will soar
AviChina acts as the international platform for financing and acquisition of its parent group, Aviation Industry Corporation of China (AVIC) which holds a 54.6% stake (and interestingly Airbus Group NV (AIR FP), the Franco-German group, is a strategic partner and holds 5.0%).
We acknowledge that we are not the first to realise the potential. This year the stock has gained 35% and is trading at a PE of 28.4x FY15.
But there is an alternate way to value the stock.
AviChina controls four A-share listed subsidiaries which offers direct access to helicopter manufacturing and avionics: Hafei (600038.SS), Hongdu (600316.SS), Avionics (600372.SS) and CAOT (002179.SZ).
Based on a marked-to-market valuation of these A-share assets, the stock is trading at a discount to its sum-of-the-parts valuation. In mid-September, it was estimated to exceed HK9.00 – equivalent to a 45% discount according to Morgan Stanley.
The valuation gap is too wide. It should mean that this entry ticket to China’s defence boom can get even more pricey...
Source: The New World
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