Cirrus sets course for IPO as China’s aviation ambitions soar

The U.S.-based maker of small aircraft is hoping to get an uplift from China’s aviation boom as it seeks to list on the Hong Kong Stock Exchange

Key takeaways:

• Cirrus Aircraft’s revenue and profit have been rising over the past three years, but the company slightly lags its peers on profit margin
• Battling high costs, the company is seeking funds to improve production capacity and efficiency

By Ken Lo

China celebrated an aviation milestone last month when its first domestically produced passenger airliner made a maiden commercial flight from Shanghai to Beijing. Riding along in the slipstream is a state-backed maker of smaller planes that is looking to land on the Hong Kong Stock Exchange.

Cirrus Aircraft Ltd is hoping market interest in aviation stocks will take flight after the much-trumpeted debut of the C919 airliner, produced by state-owned Comac, as China bids to become a world-class maker of large commercial jets. Cirrus, which makes small jets and light planes for the global market, is aiming for a milestone of its own as the first aircraft stock on the Hong Kong bourse, but it is not clear whether the IPO will have a smooth ride with investors.

Cirrus Aircraft is headquartered in the U.S. but is under the ownership of a Chinese state enterprise, the Aviation Industry Corporation of China (AVIC).

China Aviation Industry General Aircraft Zhejiang Institute, which is 70% owned by AVIC, acquired Minnesota-based Cirrus Aircraft in 2011. The remaining shares are held by Guangdong Utrust Investment Holding with 14%, Guangdong Hengjian Investment with 10%, and Zhuhai Gree Aviation Investment, which has 6%.

Cirrus Aircraft is the world’s second-largest manufacturer of small general aircraft after market leader Cessna, which was acquired by Textron (TXT.US) in 2014. It is the largest producer of piston-powered general-purpose aircraft in the world, according to the IPO application, with its two product lines – the SR2X series and the Vision Jet – certified in more than 60 countries.

According to the preliminary prospectus filed in early June, Cirrus Aircraft’s revenues have risen steadily over the past three years from $586 million to $894 million, while net profit grew from $36.12 million to $80.08 million. The annual profit margins in the three-year period were 6.2%, 9.8% and 9.9%.

But the company’s main rival, Cessna, once boasted of a 15% profit margin, which would put Cirrus Aircraft in the shade.

Low margin for aviation services

Cirrus Aircraft’s revenue is divided into three streams: the SR2X aircraft series, the Vision Jet product line, and aviation services and other business. Over the past three years, the two aircraft product lines have accounted for around 83% to 85% of total revenue. The SR2X series is the mainstay product, accounting for 50% or more of overall sales. The company’s first aircraft series, it is now in its sixth generation and marked the 9,000^th plane delivery this year. The newer Vision Jet was first delivered in 2016 and more than 400 of the aircraft have since been sold.

The third business segment, established in 2018, covers flight training, aircraft maintenance and financing solutions for private aircraft owners and operators. This part of the business was hit harder than aircraft manufacturing during the Covid pandemic, managing only about 19.2% to 29.7% in gross margin in the past three years, lower than the 33.7% to 35.4% for aircraft manufacturing. But the services segment should pick up this year as economic activity resumed after the easing of Covid restrictions.

The market for small aircraft in Europe and the U.S. has strong potential. Cirrus Aircraft has sold its planes in 36 countries. The prices of its two aircraft lines range from $500,000 to $3.3 million, and 2,400 aircraft orders were received over the last three years. The SR2X series has been the best-selling single-engine piston model for the past 21 years, while the Vision Jet has been the best-selling jet under $7 million for five consecutive years, according to data from the General Aviation Manufacturers Association cited in the prospectus.

The company expects total deliveries to reach 3,525 by 2027 from 2,818 last year, anticipating growing demand for aircraft as a luxury purchase.

Soaring cost of raw materials

Although Cirrus Aircraft has accelerated its revenues over the past three years, it has battled headwinds in the form of raw material costs and compliance issues. Aluminum, titanium and carbon fiber composites, all used in aircraft manufacturing, have become more expensive to buy.

In particular, carbon fiber prices have been volatile and trending upwards since 2018. Labor costs in the U.S. are also rising. Last year the total cost of sales rose around 20% to $596 million from the previous year. And over the past three years, raw materials have made up more than 70% of the total cost of sales.

Therefore, cost management is high on the agenda for Cirrus Aircraft. The company is also looking for ways to optimize its supply chain, drive product innovation and improve production efficiency, to make its aircraft more competitive and meet customer demand. The IPO proceeds will be put towards those goals.

Meanwhile, as a global aviation company, Cirrus Aircraft must comply with laws in the U.S. and in other countries where it operates. That means if the company wants to export aircraft outside of the U.S., it must obtain licenses and authorizations from multiple U.S. government agencies, but the relevant laws and rules are getting more numerous and complex all the time.

With no IPO details disclosed as yet, investors can refer to data from aviation peers to estimate the potential market value of the listing. The price-to-earnings (P/E) ratio of small aircraft manufacturer Textron (TXT.US) stands at about 16 times. Using that as a guide, the post-listing valuation of Cirrus Aircraft could reach $1.41 billion, based 88.08 million yuan in profit last year.  In yuan terms, that would make the Chinese small aircraft manufacturer worth just over 10 billion yuan.

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