What happened: the company released its quarterly report of 2022 on October 28, with revenue of 1.47 billion yuan and YoY + 11.6% in the first three quarters; net profit of-51 million yuan, compared with-34 million yuan in the same period last year; and deducting non-net profit of-82 million yuan, compared with-73 million in the same period last year. The performance was slightly lower than the market expected. The decline in business orders of Bo Wei Changan, a wholly-owned subsidiary of the company, such as radar machines and mobile support equipment, is the main reason for the decline in the company's performance.

3Q22 performance has declined; quarterly results are volatile. 1) in a single quarter, the company's 3Q22 achieved revenue of 600 million yuan, YoY-3.6%, net profit of-6.5 million yuan, compared with 23.12 million yuan in the same period last year, and non-net profit of-21.54 million yuan, compared with 17.41 million yuan in the same period last year. Historically, the company's quarterly performance fluctuated greatly, and 1Q22~3Q22 realized net profit of-79 million yuan, 35 million yuan and-6 million yuan respectively.

2) profitability: 3Q22 gross profit margin is 13.9%, down 6.5 ppt from the same period last year; net profit margin is-1.0%, compared with 3.9% in the same period last year. 1~3Q22 gross margin fell 2.3ppt to 17.7 per cent year-on-year; net margin fell 0.9ppt to-3.3 per cent year-on-year.

The ability of cost control is improved; the net cash flow of operation is improved. During the 1~3Q22 period, the expense rate was 22.7%, which was reduced by 3.0ppt compared with the same period last year, and all four expenses were improved. Specifically, 1) the sales expense rate was 6.2%, which was 0.4 ppt% lower than the same period last year. 2) the management expense rate was 11.8%, 1.1% lower than the same period last year. 3) the financial expense rate was 3.6%, 0.9% lower than the same period last year. 4) the R & D expense rate was 1.1% lower than the same period last year, and 0.6ppt decreased year-on-year. The 1~3Q22 credit impairment loss was 1.64 million yuan, compared with 2.29 million yuan in the same period last year, and the asset impairment loss was 3.64 million yuan, compared with 680000 yuan in the same period last year. By the end of 3Q22, the company: 1) accounts receivable and bills 2.2 billion yuan, an increase of 9.0% over the beginning of the year; 2) prepayments of 80 million yuan, an increase of 54.4% over the beginning of the year; 3) inventory of 2.05 billion yuan, an increase of 19.4% over the beginning of the year; 4) contract liabilities of 480 million yuan, an increase of 104.7% over the beginning of the year. The net cash flow of 1~3Q22 's operating activities was-430 million yuan, compared with-820 million yuan in the same period last year. The company strengthened the management of accounts receivable, increased sales rebates, reduced purchase payments, and improved net cash flow from operating activities.

Shrinking non-core businesses in 2019; profit margins are on the rise. Since shrinking some of its uncompetitive businesses in 2019, the company's net profit has increased year by year, from 110 million yuan in 2019 to 180 million yuan in 2021. The net interest rate has continued to rise in 2019 and reached 5.1% in 2021, a six-year high. Huayao Electronics, a subsidiary of Huayao Electronics, is committed to becoming a leading supplier of high-performance power modules and power conversion equipment, and its business trend is improving; Bowei Changan is mainly engaged in the information transformation of warning radar equipment, mobile support equipment and grain warehousing, and completed the research and development of two types of low-altitude surveillance radar position transformation project in 2021 and successfully passed the appraisal.

Investment suggestion: based on the three major sectors of electronic equipment, industrial foundation and network information system, the company will implement equity incentives in June 2022, demonstrating its firm confidence in future development. We estimate that the company's net profit from 2022 to 2024 will be 223 million yuan, 276 million yuan and 354 million yuan respectively, and the current stock price corresponds to the 27x/22x17x of PE from 2022 to 2024. Taking into account the company's sound product line and equity incentives brought about by governance changes, we give 2023 25 times PE,2023 annual EPS of 1.30 yuan / share, corresponding to the target price of 32.50 yuan. Maintain the recommended rating.

Risk tips: new product research and development is lower than expected, product production and delivery is not as expected, etc.