Events:

The company released its semi-annual report for 2021: during the reporting period, the company achieved operating income of 407 million yuan, an increase of 41.48% over the same period last year, a net profit of 20.2446 million yuan, a decrease of 31.93% over the same period last year, and a net profit of 9.6267 million yuan after deduction, down 64.22% from the same period last year. In this regard, our comments are as follows:

Main points of investment:

Revenue increased by 41.48%, raw material prices rose and exchange losses affected profitability. In the first half of 2021, the company achieved revenue of 407 million yuan, a year-on-year increase of 41.48%, mainly due to the contribution of overseas business (revenue of 387 million yuan, an increase of 42.95% over the same period last year). In terms of business, the revenue of the front-end business reached 265 million yuan, an increase of 71.46% over the same period last year, and the revenue of the back-end business was 112 million yuan, an increase of 48.08% over the same period last year. The company's overall gross profit margin was 27.32%, down 11.05pct from the same period last year, on the one hand, because the price of upstream raw materials such as chips increased obviously, and on the other hand, driven by high gross profit margin products such as infrared thermometers in the same period last year, the gross margin base was higher. The net profit attributable to 20.2446 million yuan was 20.2446 million yuan, down 31.93% from 29.7394 million yuan in the same period last year. In addition to the impact of the decline in gross profit margin, the exchange loss of 3.584 million yuan in the first half of the year (20-year exchange gain of 2.3643 million yuan) was also the main factor affecting net profit. Inventory in the first half of the year was 244 million yuan, an increase of 53.46% over the same period last year, mainly in response to chip shortage companies to increase procurement efforts to ensure a stable supply of customers.

The continuous verification of transfer orders in the US market is expected to bring greater performance flexibility. In 2019, the US Department of Commerce listed 28 Chinese companies as a "physical list", including 8 domestic artificial intelligence companies, with continuous trade frictions between China and the United States in recent years. In June 2021, the Federal Communications Commission (FCC) tentatively approved a proposal banning five companies (Huawei, ZTE, Haikangwei, Dahua and Hyunda) from selling specific telecommunications and monitoring equipment to the United States. In August 2021, the U.S. Senate Commerce, Science and Transportation Committee passed the 2021 Safety equipment Act, which restricts suppliers from using private or non-federal government funds to buy equipment from Chinese enterprises. FCC banned US communications providers from using federal subsidy funds to buy equipment from Huawei and ZTE last year, and if passed, will restrict US companies from purchasing equipment from these companies. The US market business of domestic security leading enterprises will be affected to a certain extent.

Tongwei shares are mainly produced and sold in ODM OEM mode, and the products are mainly sold to Asia, Europe, North America and other regions. In recent years, overseas revenue accounts for more than 90%. In the context of Sino-US trade frictions, the company is expected to benefit from the transfer of orders in the US market. Revenue in the US region grew by 38% in the first three quarters of 2020, exceeding the overall revenue growth rate of 16.69%, verifying the trend of order transfer in the US market. 2020H1 did not disclose detailed data for the United States, but revenue from overseas markets grew by 42.95%, exceeding the overall revenue growth rate by 41.48%. To some extent, it can also verify the logic of the transfer order. In 2020, the top two leading security companies in China have overseas revenue of 28.184 billion yuan. We assume that the US market accounts for 10% of the overseas business, corresponding to the market size of 2.818 billion yuan (because the impact is unknown, it does not mean that the company will lose all the US market). The company's revenue in 2020 is only 788 million yuan, and the transfer order in the US market will bring greater performance flexibility for the company.

Continue to increase R & D investment, focus on AI technology to enhance core competitiveness companies attach great importance to R & D investment. From 2018 to 2020, R & D expenditure was 8810 yuan, 10611 yuan and 125.56 million yuan respectively, reaching a new high year by year. The R & D expenditure rates were 14.45%, 16.68% and 15.93% respectively in the first half of 2021, an increase of 18.81% over the same period last year, and the R & D expenditure rate was 15.49%. It is rare for such a small-scale enterprise to invest so much in R & D.

The research and development in the first half of 2021 is mainly focused on the following aspects: 1) increase the research and development of AI intelligent algorithms and products, and strengthen the application capability of AI projects in domestic and overseas SMB small and medium-sized project markets; 2) build an AI hardware ecosystem, open AI algorithms and business application interfaces, meet the unique needs of various industries, and speed up the landing application of AI algorithms in various industries; 3) in the face of complex international environment, develop backup chip platform 4) continuous investment includes key technologies in various dimensions, such as cloud platform and big data, network security and privacy. Under the high R & D investment, the competitiveness of the company's products has been improved.

Profit forecast and investment rating: maintain the "overweight" rating. It is estimated that the company's 2021-2023 EPS is 0.44,0.68,0.89 yuan respectively, and the corresponding share price PE is 23,14,11 times, maintaining the company's "overweight" rating.

Risk tips: 1) the risk that product research and development and promotion are not as expected; 2) the risk of intensified market competition; 3) the risk of falling market demand and gross profit margin; 4) the risk of trade friction between China and the United States; 5) the risk of lower-than-expected transfer of orders in the US market; 6) the risk of exchange rate fluctuations; 7) the risk of rising prices of raw materials; 8) the downside risk of macroeconomic.