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(Editors' Note: This article covers a stock trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.)

Executive summary:

  • United Technologies aims to become a major player in the Chinese aerospace industry.
  • China has the largest aerospace growth potential in the world.

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United Technologies: Time To Sell? (NYSE:UTX) was written a month ago, because its strategy seemed awkward and didn't make sense. The interpretation and conclusion couldn't have been more wrong.

United Technologies Corporation, in fact, has the largest growth potential of all researched US aerospace companies, because it looks like UTC is preparing to become an even bigger player in China. China is the aerospace market with the largest growth potential in the world.

The strategy of UTC is like the uncle we never talk about. Because of past problems with the export of dual-use products and sensitivity with regard to manufacturing abroad, China is only mentioned in the margins.

UNITED TECHNOLOGIES CORPORATION

All financial data used is from financial publications and press releases from UTC. All data with the exception of EPS is x1M.

Corporate201320122011201020092008
Revenue$62,626$57,708$55,664$54,326$52,425$58,681
EBIT$9,209$7,684$7,756$7,186$6,377$7,625
EBIT%14.70%13.32%13.93%13.23%12.16%12.99%
EPS$6.21$5.66$5.49$4.74$4.12$4.90

United Technologies Corporation has the following divisions:

Sikorsky: is the helicopter manufacturing division of UTC for the military and commercial market.

Sikorsky201320122011201020092008
Revenue$6,253$6,791$7,355$6,684$6,287$5,346
EBIT$594$712$840$716$608$478
EBIT%9.50%10.48%11.42%10.71%9.67%8.94%

Pratt & Whitney: designs, produces and services aircraft engines, gas turbines and space propulsion.

Pratt & Whitney201320122011201020092008
Revenue$14,501$13,964$12,711$12,935$12,392$13,849
EBIT$1,876$1,589$1,867$1,987$1,835$2,122
EBIT%12.94%11.38%14.69%15.36%14.81%15.32%

Aerospace Systems: designs, produces and services systems and components for military and commercial aircraft. This division incorporates the Goodrich Corporation.

Aerospace Systems201320122011201020092008
Revenue$13,347$8,334$4,760$5,608$5,560$6,127
EBIT$2,018$944$759$918$857$1,099
EBIT%15.12%11.33%15.95%16.37%15.41%17.94%

Building & Industrial Systems: provides building technologies. Otis Elevators and Carrier heating and air conditioning are among its brands.

B & I Systems201320122011201020092008
Revenue$25,831$29,146$31,301$29,455$28,561$34,147
EBIT$5,180$4,937$5,027$4,351$3,680$4,335
EBIT%20.05%16.94%16.06%14.77%12.88%12.70%

AEROSPACE INDUSTRY IN CHINA

AviChina Industry & Technology Company Limited (OTC:AVIJF) is the public face of AVIC, the Chinese state-controlled aerospace industry. The commercial activities1 of the Chinese aerospace industry are collated in it. Most Chinese aerospace companies are government-owned and don't have a public listing. AviChina is one of the exceptions, but is small (for now!) compared with its mother company AVIC (which has the 212th position in the Fortune Global 500).

(Source: Chart by Confero)

To get an overview of AviChina, view the diagram with the official connections. These connections can be shareholders or joint ventures in separate companies, and the sources are the annual reports AviChina published. Notably absent in the annual reports of AviChina are connections with the U.S. Aerospace Industry.

As mentioned, Textron (NYSE:TXT) started assembling Cessna Caravan aircraft in a JV with CAIGA. CAIGA isn't mentioned in the annual reports either, but the first Cessna Caravan assembled in China is displayed prominently on the homepage (News carousel item 4) of AviChina. CAIGA is formally related to AviChina through AVIC.

(Source: AviChina)

The AviChina website mentions that it is producing Sikorsky 92 parts through Changhe Aviation, but not much more. Sikorsky Helicopters is one of the 3 UTC Aerospace divisions.

Changhe Aviation And Sikorsky

Changhe Aviation is a 100% daughter of AviChina, and has its own website where its products are displayed; 3 (of the 6!) helicopter types mentioned there are from Sikorsky:

Sikorsky 92

''S-92 "Heli-Bus" was developed and manufactured by six risk-sharing cooperative partners including Sikorsky Aircraft Corporation, Jingdezhen Helicopter Group [JHG], Aerospace Industrial Development Corporation [AIDC] of Taiwan, Mitsubishi Heavy Industries [MHI] of Japan, Gamesa Corporation (OTCPK:GCTAF) of Spain, and Embraer Aviation Industries Corporation (NYSE:ERJ) of Brazil. Changhe Aircraft is responsible for development and manufacture of tail rotor pylon and horizontal stabilizer.''

Sikorsky S76C++

''S-76C++ is modified and derived from S76 helicopter designed in the late 1970s through continuous design and manufacture for almost thirty years by Sikorsky Aircraft Corporation.

(...)

Compared with the last generation of S-76C+, the S-76C++ features two Arriel 2S2 engines with more additional power, delivering improved performance in hot or high conditions, and adding 158-203 kilogram payload.''

The Arriel engines used in the S-76C++ are from Safran (OTCPK:SAFRY), which is a French aerospace engine manufacturer.

S300C

"S300C is modified and derived from 269 series helicopter in the 1960s through 30 years' continuous design and manufacture by Schweizer Aircraft Corporation, a subsidiary of Sikorsky Aircraft Corporation of United States."

UNITED TECHNOLOGIES CORPORATION AND CHINA

From the above can be concluded that the relation between AviChina and UTC is more than just producing parts cheaper in another country.

The website or annual reports of UTC do not indicate that China is important for (the aerospace divisions of) UTC.

In the 2012 annual report with Otis is stated that China accounts for half of the world's elevators, and is still growing.

References to aerospace refers to the export of dual-use electronic engine control software to China (after exporting it first to Canada) for the Chinese Z-10 attack helicopter from the Changhe Aviation Company mentioned above. This might also be the reason why the Sikorsky 76C++ has French engines.

This is probably also the reason why UTC is reluctant to mention its Chinese involvement. Dual-use technology is a sensitive issue.

UTC is making a lot of effort to restrict the cooperation to commercial aerospace. There is no indication at all that UTC is actively involved in the Chinese military aerospace industry.

The corporate UTC website and annual reports do mention China, but not very prominently. The divisional websites of UTC give more information. The same applies to AviChina.

Currently, UTC has 2 major aerospace links with China:

  1. Helicopter production (and parts such as S-76D cabins) with Changhe Aviation. Sikorsky and AviChina [AVIC] are partners in JV Shanghai Sikorsky.
  2. Aerospace engine production with Pratt & Whitney through the following joint ventures:
  • Chengdu Aerotech Manufacturing
  • Xian Airfoil Technology
  • South Pratt & Whitney Aero-Engine Co.

GROWTH IN CHINA

The 5-year plan of aviation development indicates China's focus on aviation and the aviation industry. Part of this is developing and producing its own aircraft types, such as the ARJ21 and future C919 (although this is probably more of a prestige object).

Compared with the markets in the United States and Europe, the growth potential in China is huge. In the weekend of the Chinese New Year alone, there are 3.6 billion travel movements. UTC will benefit from the growth of (general and commercial) aviation.

The acquisition of PZL Mielec (the fixed-wing manufacturer) by Sikorsky makes more sense, when the acquisition of PZL Swidnik (the helicopter manufacturer) seemed a better fit.

Sikorsky already knows how to make helicopters and Pratt & Whitney knows how to make aerospace engines, but building fixed-wing aircraft is something different.

PZL Mielec has a lot of experience with it, as well as working with Russian-developed aircraft (on whom a lot of Chinese-produced aircraft are based) with integrated Western parts and electronics. Acquiring PZL Mielec is quite a smart move with regard to the Chinese market.

China also is an important market for the Building & Industrial Systems division. The only division without a lot of activities in China is UTC Aerospace Systems. With the acquisition of Goodrich, it has become one of the largest global aerospace suppliers (parts and services). Its products (and production) will also find their way to China.

UTC has built up a good strategic position in China, and this will be reflected in future revenue growth.

Footnotes

1. In China, the borders between civil and military are fluid. On the AviChina website and in the annual reports, there are references to military aircraft that are not being exported and are for use in China only. The picture below (taken from the AviChina website) shows a KJ-2000 AEW aircraft, which is based on a Russian Ilyushin 76 airframe. The CEO also talks about deployment of Chinese Navy helicopters in the anti-piracy missions off the coast of Somalia.

(click to enlarge)

(Source: AviChina)

Source: United Technologies And China: Time To Buy?