Cirrus Aircraft Buffeted By Headwinds From US-China Tensions

Key Takeaways:

• Cirrus Aircraft reported its half-year revenues rose nearly 12% and profits jumped almost 24% but the share price felt little benefit
• The company is trading at a discount to U.S. counterparts as investors worry about repercussions from Chinese military links through its major shareholder

By Fai Pui

Just two months after leaving the IPO runway, private jet maker Cirrus Aircraft Ltd. CRRSF is struggling to pull out of a stock-price dive.

The U.S.-based maker of small aircraft, which went public in Hong Kong in July, has posted buoyant half-year earnings in its first profit report as a listed company. But even with a good report card, Cirrus has been unable to escape market turbulence from U.S. sanctions against corporate China.

While investors worry Cirrus could get caught in a widening U.S. sanctions net, aviation demand from wealthy U.S. and European customers has been brisk.

Despite uncertainties in the global economy, Cirrus revenues rose 11.6% to $475 million in the first half of the year compared with the same period of 2023, while profits jumped 23.6% to $35.6 million, lifted by a growing order book and higher asking prices, according to the earnings release on Aug. 27.  

The company delivered 20 more aircraft in the first six months of 2024 than in the year-earlier period and charged more for them. The cost of aircraft in the SR2X Series, the company’s main product line, rose around 5% to $1.04 million and its Vision jets went up 8% to $3.33 million.

Meanwhile, Cirrus added about $8 million more in revenue from a growing business in after-sales services, aircraft parts and pilot training. 

The earnings gave the share price an initial uplift towards HK$20, but the stock lost altitude afterwards. Last Friday it closed at HK$18.68, more than 30% below its listing price of HK$27.50.

Cirrus specializes in two types of small aircraft designed to carry around four to seven people: the SR2X series of single-engine piston planes for retail customers and the Vision Jet, which is also aimed at small-scale operators of charter flights. The U.S.-based business has become a global market leader in personal aviation, often with the owner in the cockpit as pilot. Cirrus revenues have been growing at a compound annual growth rate (CAGR) of 20.3% over the past three years, with profits gliding up 12.2%.

On paper, this should add up to an attractive proposition for investors. In that case, why is the Cirrus share price under pressure? The root of the problem lies in the ownership structure, not business performance.

In 2011, the U.S. founders of Cirrus Aircraft sold the business to an aviation subsidiary of a Chinese state-owned aerospace and defense conglomerate, the Aviation Industry Corporation of China (AVIC). After the IPO, the AVIC affiliate, China Aviation Industry General Aircraft, retained an 85% stake in Cirrus.

Those links could put Cirrus in the U.S. crosshairs, even though the company has not been named as a target so far and insists that it does not make aircraft or technology for the military.

The U.S. sanctioned AVIC and some of its other affiliates as early as 2021, banning Americans from buying or selling securities of targeted companies without government permission. Last year, the administration of President Joe Biden proposed new measures to screen outbound U.S. investment in China, Hong Kong and Macao that could be regarded as posing a risk to national security.

Concern About Military Connections

Cirrus was not singled out as a focus, but the company felt the need to refer to the policy in its IPO paperwork, saying its business would not be adversely affected by the move. After the listing ceremony, Cirrus CEO Zean Nielsen also sought to allay concerns, saying the company supplies private aircraft that are too small to carry weapons and are not put to military use.

The AVIC group has also played down the connections. Wang Hui, an executive at AVIC General and vice-chairman of Cirrus, said the light aircraft maker attaches great importance to compliance and operates independently of AVIC, which was described as just an investor in the business.

Market investors remain troubled, nervous about the risk of policy escalation as the U.S. heads into a presidential election. Cirrus is already being cited as a potential security threat in some quarters.

William Kim, a researcher at the Rand think tank, has said Cirrus technology could be used for military drones. George Ferguson, a senior aerospace and defense analyst at Bloomberg, also argued that customers could see a military use in Cirrus technology, even though its products are different from AVIC drones.

Clearly, a company that operates mainly in Western markets but is majority-owned by a group linked to the Chinese military was bound to come under scrutiny. As geopolitical tensions and corporate rivalries intensify, who knows where sanctions will go next. With the U.S. as its biggest market, Cirrus could be seriously affected if it finds itself in the frame. The unpredictable outlook could be a major factor behind the company’s weak share price.

But risks aside, there is good news on the business front. In April this year U.S. regulators granted a production license for the company’s SR10 aircraft, designed specifically for flight training. Meanwhile, combined net orders for the SR2X and Vision Jet have increased by 107 units. And the Cirrus G7, the latest model in the SR2X series, has been sold in more than 36 countries since its launch in the first half of the year. The product is not facing any bans or market restrictions for the time being.

In its results, Cirrus also outlined plans to leverage its customer base by expanding aircraft-related services and flight training, while increasing its production capacity and global market reach.

Cirrus trades at a hefty discount to its peers, reflecting worries about the policy risks. Textron TXT, a small aircraft maker listed in New York, enjoys a price-to-earnings (P/E) ratio of about 20 times, nearly double the 11 times for Cirrus, based on earnings per share of $0.11 in the first half of 2024 and assuming a similar figure in the second half.

This article is from an unpaid external contributor. It does not represent Benzinga's reporting and has not been edited for content or accuracy.