Initiating on five key prime contractors
We are initiating on five of China’s key Aerospace
& Defense contractors and component suppliers
of helicopters, trainer jets, bombers, turboprops,
civil jets and aero engines. We initiate with Buy
ratings on AviChina (AVIC’s flagship H-share
listed platform) and Xian Aero Engine (positioned
as an industry leader; favorable aero-engine subsegment
growth).
Higher defense spending; civil to take time
We see a 14% CAGR for China defense outlays in
2011E-15E on rising government revenue, the
need to replace aging third-generation fighter jets,
and a greater emphasis on national security amid
rising cross-territorial tensions. Meanwhile, we
expect the development of China’s civil aero
industry to take time, and we do not expect it to
meaningfully contribute to the performance of
these companies until after 2020E.
GS SUSTAIN: Returns and industry positioning
We highlight AviChina and Xian Aero Engine as
the most attractive prime contractors under GS
SUSTAIN in terms of returns and positioning.
Buy AviChina: 33% upside potential to TP
We expect AviChina to benefit from: deregulation
of civil low-altitude airspace (helicopters and
general aviation); government orders (trainer jets,
helicopters); and avionics growth. As a result, we
expect a 34% CAGR for AviChina’s EPS in 2012E-
14E. We see potential for further asset injections
of electro-mechanical systems and/or helicopterrelated
assets from its parent, AVIC.
Buy Xian Aero Engine; Sell Xian Aircraft Int’l
Xian Aero Engine (Buy, 31% upside to TP) leads
an aero-engine segment that looks best-placed to
benefit from China’s fighter jet upgrade. A product
cycle gap could hit earnings for Xian Aircraft Int’l
(Sell, 18% downside), making its high valuations
unsustainable. We are Neutral on Hafei Aviation
(focuses on helicopters) as we consider it fairly
valued and Hongdu Aviation (trainer jets) as we
believe its upcoming L-15 trainer jet production
launch is already more than priced in.
Risks to our view
Defense spending, civil program certifications,
asset injections and policy risks.

目录
Table of contents
Executive summary 4
Who does what in China Aerospace & Defense? 8
Key themes in China Aerospace & Defense 14
M&A within the Chinese firms: Recent setbacks but future still bright 22
GS SUSTAIN: Stocks with superior returns and industry positioning 25
Valuing China Aerospace & Defense stocks: Long-term investment opportunity 27
AviChina (2357.HK): Not just civil aero but with gov’t contracts, avionics; Buy 35
Xian Aero Engine (600893.SS): Best positioned with aero-engine exposure; Buy 39
Xian Aircraft Int’l (000768.SZ): Product cycle gap could hurt earnings; Sell 44
Hafei Aviation (600038.SS): Steady business, earnings, but timing is an issue; Neutral 48
Hongdu Aviation (600316.SS): L-15 launch already priced in; Neutral 52
Disclosure Appendix 60