Incident: The company announced on August 20 that revenue for the first half of 2021 was 170 million yuan (+47.51%), net profit of 22 million yuan (+40.30%), net profit of the mother after deduction of 20 million yuan (+54.61%); gross profit margin 29.73% (-4.19pcts), net interest rate 13.25% (+2.14pcts).

Key points of investment:

Revenue and profit growth was impressive, investment in R&D was increased, and the company's core competitiveness was enhanced: during the reporting period, the company achieved operating income of 170 million yuan, an increase of 47.51% over the previous year (+40.54 pct); it achieved net profit of 102 million yuan, an increase of 40.30% over the previous year (-5.64pct). The revenue growth rate hit a new high for the same period in the past five years, mainly due to the impact of the epidemic on the company's business in the same period last year and the resilient growth of the company's business during the reporting period; Fumo's net profit increased sharply compared to the same period last year, mainly due to the rapid increase in revenue during the reporting period and the sharp increase in other income (6.8492 million yuan, +76.72%) due to the sharp decline in the company's net profit from value-added tax rebates and government subsidies in the current period. The growth rate was slightly lower than the same period last year, mainly due to the low base effect of the sharp decline in the company's net profit to the mother in the first half of 2019.

By sector, aviation and air traffic control products and services achieved revenue of 85 million yuan (+68.56%), accounting for 50.09% of revenue (+ 6.26pcts), and gross margin was 31.76% (-15.56pcts). Overall, revenue from aviation and air traffic control products and services increased dramatically, mainly due to the good recovery of military aviation combat training business during the reporting period, which generated revenue; there was a certain decline in gross margin, mainly due to an increase in operating income and corresponding increases in material costs, outsourced engineering and technical service costs.

During the reporting period, artificial intelligence products and services achieved revenue of 72 million yuan (+35.49%), accounting for 42.55% of revenue (-3.78pcts), and gross margin of 23.58% (-0.80pcts). Revenue from artificial intelligence products and services increased dramatically during the reporting period, but the share of revenue declined slightly. This was mainly due to a higher increase in the company's aviation and air traffic control product revenue than AI products and services during the reporting period, which led to changes in the company's revenue structure; gross margin was basically the same as the same period last year.

In terms of expenses, the reporting period was accompanied by an increase in the scale of the company's operating income, and period expenses (316.7765 million yuan, + 8.24%) continued to increase, but the cost rate for the period (18.63%, -6.76pcts) declined compared to the same period last year. Looking at the cost breakdown, the company's R&D expenses (155.795 million yuan, + 15.49%) and management expenses (100.079 million yuan, +9.65%) increased further compared to the same period last year, due to the continuous increase in the company's R&D efforts and the corresponding increase in material costs during the reporting period, as well as employee remuneration adjustments.

In terms of cash flow and other financial data, during the reporting period, net cash from the company's operating activities (-7,0884 million yuan, +88.99%) increased dramatically, mainly due to delays in implementation of some of the contracts already signed during the same period of the previous year affected by the epidemic, and repayment for the current period returned to normal. Net cash from investment activities (-69.076 million yuan, -236.55%) declined sharply from the same period last year, mainly due to continued investment in research and development in the current phase and the combined impact of payment for flight simulator equipment. This is reflected in development expenses (+52.0527 million yuan, +31.01%), as the company continues to increase its investment in military and civil aviation control and artificial intelligence projects and 3D products and related software products and iterative software, further confirming the company's deep expansion in the fields of graphics, artificial intelligence and air traffic control In Dian, its core competitiveness is expected to further improve; the net cash amount generated from fund-raising activities (-22.594 million yuan, -1840.48%) declined sharply from the previous year due to the company completing the payment of 2020 cash dividends of 27.0751 million yuan during the reporting period.

The restart of the military aviation business is expected to usher in a new round of rapid development: as a well-known enterprise with the largest market share in the field of military air traffic control automation system products, the military air traffic control business contributed the most to the company's performance growth before 2013, but most of the company's military air traffic control projects were suspended due to objective reasons such as military air traffic control business structure reform. Later, the company's performance was mainly supported by the civil aviation business and flight simulator training business for airline pilots. With the completion of the 2020 military air traffic control system reform, the company participated in and won the bid in the National Air Traffic Control Commission Office in 2013” The “Next Generation XX Control Center System” project is expected to resume as soon as possible along with the implementation of military air traffic control business system reform. Furthermore, during the reporting period, the company's military aviation combat training business achieved main business revenue of 22.2712 million yuan. Overall, military training and preparation demand, including military air traffic control, military aviation simulation training, etc. expanded further during the 14th Five-Year Plan period. Currently, two-thirds of the air traffic control equipment for military aviation is expected to gradually return to a rapid growth trajectory, and its performance contribution during the “14th Five-Year Plan” period may exceed the civil aviation management business .

The competitive advantage of artificial intelligence is gradually showing, and we are collaborating with Huawei to expand and speed up the layout of face recognition products: the company's artificial intelligence business mainly covers a series of products such as high-precision 3D face cameras, high-performance face recognition products, voice recognition for ground-air calls, and air traffic control and security monitoring. The company continues to step up research and development efforts for high-precision 3D face recognition products. The depth and accuracy of this series of products can reach 0.036mm and 0.038mm respectively, and recognition accuracy is at the forefront of the country and even globally. During the reporting period, as one of the first 15 ecological partners of Huawei, the company has already settled in the “Huawei.Chengdu Intelligent Computing Center” and completed the migration and adaptation work on Shengteng and Kunpeng servers. The Chengdu Intelligent Computing Center will strengthen application demonstrations in scenarios such as intelligent air traffic control and smart medical care based on the construction of Huawei's Shengteng full-stack infrastructure software and hardware. Through continued deepening cooperation between the two parties in the future, the company is expected to gradually increase product penetration, opening up a new round of growth space. In terms of manual orders, the company signed the general price with China Electric Smart City Research Co., Ltd. in 2018 The 99,0482 million yuan “Traffic Violation and Accident Inspection Project - High-speed Highway Package Purchase Contract” project has completed the final inspection work and is being completed and settled, which will have a positive effect on the company's performance in 2021. The air traffic control command and safety automatic monitoring system, which automatically recognizes ground-to-air calls, has completed the world's leading automatic recognition of mixed Chinese and English terrestrial calls. During the reporting period, air traffic control systems have been promoted in southwest, northeast and other regions, and sales have been achieved. Product promotion will be further increased nationwide in the future.

Investment advice:

We believe that as a well-known enterprise with the largest market share in the field of military air traffic control automation system products, the company is expected to fully benefit from increased demand for military training and preparation during the 14th Five-Year Plan period and achieve rapid growth in military air traffic control business. Furthermore, based on its own independent innovation mechanism based on deep integration of industry, education and research, and decades of deep accumulation of technology and product innovation in the fields of image graphics and artificial intelligence, its core competitiveness is increasingly evident.

Based on the above views, we expect the company's revenue for 2021-2023 to be 537 million yuan, 699 million yuan and 902 million yuan respectively, net profit of 106 million yuan, 136 million yuan, 172 million yuan respectively, and EPS is 0.47 yuan, 0.60 yuan, and 0.76 yuan respectively. Referring to listed companies in the same industry, the company was given 52 times PE valuation in 2021, corresponding to the target price of 24.34 yuan, maintaining the “buy” rating, corresponding to the predicted earnings for 2021-2023, respectively 52 times, 40 times and 32 times PE.

Risk warning: Product project development progress falls short of expectations, and the macro environment is sluggish.