Event: the company released its semi-annual report on August 25, with 2021H1 operating income of 295 million (+ 30.81%), net profit of 75 million (+ 128.16%), net profit of 65 million (+ 56.35%), gross profit of 40.87% (+ 1.53pcts) and net profit of 27.31% (+ 10.07pcts).
Main points of investment:
The transformation of the military industry is firm and the development is on the right track.
Ganhua Science and Technology Industry, formerly known as Guangdong Ganhua, was founded, its main business was engaged in LED industry, biochemical industry and sugar paper trade business. The company began a firm transformation in 2018, gradually focusing on military industry, new materials, and high-end manufacturing. At present, the revenue share of sugar products, prefabricated fragments, power supplies and related products is 38.50%, 24.59%, 36.10%, respectively.
① has acquired 90% of Shenyang Hanneng three times: the company acquired 45% of Shenyang Hanneng Metal Materials Co., Ltd. at a price of 184 million on September 13, 2018, 102 million on March 7, 2019, 68 million on August 10, 2021, and held a 90% stake in Shenyang Hanneng after the acquisition.
Shenyang Hanneng mainly undertakes the research, development and manufacture of various specifications of tungsten alloy prefabricated fragments, and the products are mainly used in the field of national defense science and technology, and can be used for projectiles and arrows equipped by sea, land, air, rockets, strategic support and other multi-force equipment. it has a relatively stable competitive position in the field of tungsten alloy prefabricated fragments, and is the only or main supplier of prefabricated fragments for some conventional shells and new shells. The prefabricated fragment business income of Ganghua Science and Technology Industry is contributed by Shenyang Energy. 2021H1 Shenyang Energy has a revenue of 73 million (+ 34.90%), a net profit of 19 million (- 7.86%) and a gross profit margin of 37.92% (- 15.31pcts).
② acquires Sichuan sublimation Power supply: the company priced 660 million of Sichuan sublimation Power Technology Co., Ltd. on December 6, 2018, sublimation Power supply uses two categories of products: modular power system and custom power system, serving airborne, shipborne, missile-borne and other weapon platforms, the main customers include domestic well-known military enterprises, military research institutes, military factories, July 2021. Sublimation Power supply was selected into the third batch of specialized new "Little Giant" enterprise list. The military power income of Ganhua science and technology industry is contributed by sublimation power supply. The revenue of 2021H1 sublimation power supply is 106 million (+ 54.28%), the net profit is 61 million (+ 45.24%), and the gross profit is 85.31% (+ 1.52pcts).
Strategic investment in ③ Semiconductor: in September and October 2020, after acquiring and increasing its equity with its own funds, the company holds a total of 20.06% of Semiconductor, which has a strong R & D team and rich industrial resources in the field of power semiconductors and analog integrated circuit design. The developed SiC power devices have been successfully industrialized, the market scale of the company is large, and the development trend continues to improve in the future. Through the implementation of strategic investment in Deweit, it is expected to have a positive synergistic effect on the technology, R & D work of the company's power supply plate, accelerate the pace of localization of the company's core components, and effectively enhance the competitiveness of products. 2021H1 Covite Semiconductor has revenue of 111 million (+ 150.00%) and net profit of 16 million (year-on-year turnround), including 3.217 million investment income of Ganhua Science and Technology Industry.
Overall expenses basically maintained growth. From the point of view of increasing R & D investment in the military industry, the company's overall 2021H1 expenses maintained growth, including administrative expenses of 22 million (+ 29.32%), sales expenses of 10 million (+ 661.80%), and financial expenses of-3 million (- 154.23%). The company invested 15 million in R & D (+ 43.20%). According to the company announcement, the number of R & D personnel in 2020 was 90, accounting for 32.61%, significantly higher than 68 in 2019. The increase in R & D investment is mainly due to the increase in staff salaries. We believe that sublimation Power has been committed to the research, development, production and sales of high-efficiency, high-reliability and high-power density power products. At present, the high-end power supply market (module power supply and custom power supply) is mainly occupied by power products such as VICOR and Interpoint in the United States, which is widely used in the military field. Under the background of military industry informatization and localization, if Chinese power supply enterprises can provide high-quality power products to replace foreign products, it will reduce the dependence of China's military products on foreign manufacturers and enhance the profitability of military enterprises while ensuring national defense security. In the first half of 2021, the company firmly transformed the military industry in order to seize the opportunity of the military industry market and consolidate and enhance the level of R & D technology.
Accounts receivable increased, operating cash flow negatively related to sugar trade payments and excess rewards affected assets and liabilities. The company's 2021H1 receivables + notes receivable totaled 267 million, which was 64.81 percent higher than at the end of 2020. We believe that the larger increase in accounts receivable is mainly due to the increase in downstream customers' purchases of military power supply (module power supply + customized power supply) and prefabricated fragments. It is verified that the downstream airborne, shipborne, missile-borne and other fields are in a high economic cycle.
On the cash flow side, the cash flow of the company's operating activities is-56 million (- 238.18%), mainly due to the increase in sugar trade prepayments and the payment of excess performance awards in the current period.
Industry and Competitiveness Analysis
① military power supply business: benefiting from the increase in the types of weapon systems such as aviation, warships, radar, missiles, etc., the product structures of the two major business areas are divided into two categories: ① module power supply (general module power supply, special application module power supply, high power module power supply) and ② custom power supply system (AD-DC power supply, DC-DC power supply, power supply system). The products are mainly used in aircraft, missiles, ships and other weapons and equipment, the product features "small batch, customized, multi-batch". The application of power industry in aviation, aerospace and military industry is in the stage of rapid development, the requirements for power products in aerospace and military industry are more stringent, and the technical content and added value of the products are higher than those in other industries, therefore, it has attracted many foreign power suppliers. At present, the high-end market is mainly occupied by power products such as VICOR and Interpoint in the United States, which are widely used in the military field. According to the report on asset purchase issued by Ganhua Science and Industry, the market competitiveness of domestic power supply enterprises in the aviation, aerospace and military fields continues to increase. The main domestic competitors are 43 and 24 companies of Electric Science, Changfeng Chaoyang Power supply of Aerospace, New Leineng, and so on. We believe that under the background of military informatization and localization, if Chinese power supply enterprises can provide high-quality power products to replace foreign products, it will reduce the dependence of China's military products on foreign manufacturers and enhance the profitability of military enterprises while ensuring national defense security. We believe that sublimation Power has been committed to the R & D, production and sales of high-efficiency, high-reliability and high-power-density power products. It has built a power product line with high reliability, stable quality, advanced technology, wide range of applications, complete specifications, high efficiency, wide range and multi-output, and has a certain import substitution ability.
② ammunition parts business (tungsten alloy prefabricated fragments): missile "consumption" attribute, the industrial chain enters the business cycle Shenyang can mainly undertake the research, development and manufacture of various specifications of tungsten alloy prefabricated fragments, the product series covers tungsten columns, tungsten rings, tungsten balls, etc., characterized by high density, high tensile strength, high elastic modulus, low thermal expansion coefficient and good thermal conductivity, electrical conductivity, etc., mainly used in the field of national defense science and technology. For sea, land, air, rockets, strategic support and other multi-force equipment of artillery, rocket and missile products. From the point of view of demand: specific to China's missile market, its demand is mainly affected by the demand for national defense and the export demand of military trade. in terms of national defense demand, under the background of comprehensively strengthening military training and preparation and increasing actual combat exercises, missiles are indispensable consumptive weapons and equipment in the modern army, and their demand is expected to maintain a steady and sustained growth along with the steady growth of equipment costs in our country. In terms of export demand for arms trade, missile weapons have always been an important part of the international arms trade market because of their outstanding characteristics different from general offensive weapons, including high power, long range and high accuracy. with the increase of uncertainties in the international situation, transactions in the global arms trade market will be further improved and consolidated in the future, and the popularity of the global missile trading market is expected to recover again. We believe that the products have good performance and have been recognized by the military. we have established a good cooperative relationship with a number of arsenals, and we are the only or major supplier of prefabricated fragments for some conventional shells and new shells. The company's ammunition parts benefit from the army's preparation for war, and a large number of missiles and shells are consumed, showing a rise in prosperity.
Investment advice:
We believe that since 2018, the company has made a firm transformation around the military industry, new materials and high-end manufacturing fields. at present, the logic of the company's industrial development is relatively clear, and the proportion of military business income continues to rise. military power (benefiting from the improvement of the localization rate of our weapons and equipment models), ammunition parts (benefiting from military training and preparation, shells, missiles "consumables" attribute drive). At the same time, the company issued a restricted stock incentive plan on March 15, 2021. The number of restricted shares to be granted under this incentive plan is 4.428613 million shares, accounting for about 1% of the company's total share capital of 443 million shares at the time of the announcement of this incentive plan. The price for the first grant of restricted shares is 5.43 yuan per share. For the first time, this incentive plan will not award more than 58 people, including the company's directors, senior managers, middle managers and core backbone. According to the conditions of the equity incentive unlocking sales restriction period, the company will be assessed once a year in the three fiscal years from 2021 to 2023. Based on the main business income in 2020, the growth rate of main business income in 2021 will not be less than 10%. Based on the main business income in 2020, the growth rate of main business income in 2022 will be no less than 25%. Taking the main business income in 2020 as the base, and the growth rate of main business income in 2023 is not less than 50%, we believe that the implementation of equity incentive is based on confidence in the steady development of the company's business in the next few years, on the other hand, we can further establish and improve the company's long-term incentive mechanism, attract and retain talents, and fully mobilize the enthusiasm of the company's directors, senior managers, middle managers and core backbone. Effectively bind the interests of shareholders, the interests of the company and the personal interests of the core team to seek long-term development.
Based on the above point of view, we estimate that the operating income of the company from 2021 to 2023 is 613 million, 735 million and 884 million respectively, the net profit is 200 million, 277 million and 370 million respectively, and the EPS is 0.45,0.62,0.83 yuan respectively. The closing price of the company on August 25 is 14.77 yuan, corresponding to the PE of 32.66,23.65 and 17.69 times in 2021-2023. Based on the company's position in the industry and the future development prospects of the products, we give a "buy" rating with a target price of 20.54 yuan, corresponding to a PE of 45.64,33.13,24.75 times from 2021 to 2023, respectively.
Risk hint: the company's downstream shell, missile customer orders are not as expected, the substitution of military power supply is not as expected, and the risk of high customer concentration downstream of the company.
