Boeing, Embraer May Have No Reason to Fear China’s Weak Rival AVIC

BEIJING (TheStreet) -- China's state-run aviation conglomerate posted a weak, first-half financial report this week that's got stock analysts buzzing about potential delays for the Chinese jetliners designed to rival Boeing (BA) , Airbus (EADSF) , Bombardier (BDRBF) and Embraer (ERJ) aircraft.

Manufacturers under the Aviation Industry Corporation of China umbrella have fallen behind on military as well as commercial projects, according to a Friday report by Shanghai Securities, whose analysts crunched the 2014 first half figures released Tuesday. AVIC stock trades in Hong Kong.

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AVIC said it lost 85 million yuan in the period, as revenues fell 10.7% from 7.03 billion yuan in the same period a year earlier. Revenues reached only 36% of the government's full-year target, the company said, adding that it expects sales to jump in the second half on higher customer deliveries.

The securities firm report blamed "financial bottlenecks" for the company's performance and gave an "underweight" stock investment recommendation.

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AVIC's key commercial projects include two in the pipeline at its affiliate Commercial Aircraft Corporation of China or Comac: the under-development Comac C919, billed as a future challenger to the Boeing 737 and Airbus A320, and the Comac ARJ21 regional jetliner, China's reply to aircraft built by Bombardier and Embraer.

A slow pace of development for the C919 has fueled "big uncertainty" over whether Comac can hit its current October 2015, target for the jet's first test flight, the securities firm said. Missing that target would throw off plans to deliver the first customer model in 2018.

The company is not famous for meeting schedules. For example, Comac plans to deliver its first ARJ21 by the end of this year, nearly eight years later than originally planned for the jet's commercial roll-out and 13 years after the jet's development began. The client, China's Chengdu Airlines, is buying two jetliners.

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A separate AVIC affiliate builds the MA60 turboprop, which has been sold domestically and abroad, most recently to a carrier in Nepal. The plane has had safety problems, though, including two non-injury mishaps earlier this year in China involving landing gear problems during fully loaded passenger flights.

The securities firm report said the MA60's overseas markets in Asia, Africa and South America have recently withered due to a "crisis of confidence" over safety. Meanwhile, the company is working on a replacement turboprop called the MA700, which could be ready for test flights by 2019.

The securities report also said AVIC's "military aircraft delivery schedule was behind schedule" in the first half.

The best news for AVIC so far this year is that its plants are making money and meeting production targets for passenger jet parts manufactured under contracts with Boeing, Airbus and Bombardier.

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TheStreet Ratings team rates BOEING CO as a Buy with a ratings score of A. TheStreet Ratings Team has this to say about their recommendation:

"We rate BOEING CO (BA) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its solid stock price performance, impressive record of earnings per share growth, compelling growth in net income, revenue growth and notable return on equity. We feel these strengths outweigh the fact that the company shows low profit margins."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • Compared to where it was a year ago today, the stock is now trading at a higher level, reflecting both the market's overall trend during that period and the fact that the company's earnings growth has been robust. Looking ahead, unless broad bear market conditions prevail, we still see more upside potential for this stock, despite the fact that it has already risen over the past year.
  • BOEING CO reported significant earnings per share improvement in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. During the past fiscal year, BOEING CO increased its bottom line by earning $5.97 versus $5.12 in the prior year. This year, the market expects an improvement in earnings ($8.20 versus $5.97).
  • The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the Aerospace & Defense industry. The net income increased by 51.9% when compared to the same quarter one year prior, rising from $1,088.00 million to $1,653.00 million.
  • Despite its growing revenue, the company underperformed as compared with the industry average of 1.3%. Since the same quarter one year prior, revenues slightly increased by 1.1%. Growth in the company's revenue appears to have helped boost the earnings per share.
  • Return on equity has greatly decreased when compared to its ROE from the same quarter one year prior. This is a signal of major weakness within the corporation. When compared to other companies in the Aerospace & Defense industry and the overall market, BOEING CO's return on equity exceeds that of the industry average and significantly exceeds that of the S&P 500.
At the time of publication, the author held no positions in any of the stocks mentioned. This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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