Incident: The company announced its 2017 annual report. The company's annual revenue was 1,624 million yuan, a decrease of 17.99% over the previous year, and achieved net profit of 187 million yuan to the mother, a decrease of 39.58% over the previous year, corresponding to earnings of 0.16 yuan per share.
Comment: Competition in the set-top box business is becoming increasingly fierce and raw material prices are rising. As a result, the company's performance has declined sharply. The performance is in line with expectations, and attention is being paid to the transformation of military industry and new energy. The company is a key R&D enterprise for digital TV terminals. The domestic market share is nearly 10%, accounting for about 50% of the company's revenue. The overall digital set-top box market in 2017 showed that traditional set-top box shipments continued to decline. Competition for smart set-top boxes became increasingly fierce. The company's set-top box revenue fell sharply by 23.74% to 766 million yuan. At the same time, due to rising prices of raw materials (mainly DDR memory, FLASH flash memory, PCB circuit boards, and steel plates), the gross margin of the company's set-top box business fell sharply from 23.89% to 14.14%. The company's next step is to accelerate the pace of transformation into the military special equipment industry and new energy vehicles. Despite adverse factors in the industry, such as military reform and the adjustment of new energy subsidy policies, it has achieved relatively stable sales revenue. The company is expected to fully benefit from the rapid development of defense mechanization, information technology construction and new energy industries.
Intelligent mechanical and electrical products have been extended to many military branches, and the development prospects are broad. The company's current intelligent electromechanical products are mainly used in various types of military special vehicles such as tanks, armored vehicles, self-propelled artillery, communication vehicles, reconnaissance vehicles, etc., and is developing other types of military informatization and intelligent intelligent equipment. Customers mainly include research institutes and assembly plants for various types of special vehicles. At present, China's army is in a period of remedial refurbishment. In order to complete the dual historical tasks of mechanization and informatization construction, China's military will carry out strategic development while also bringing huge ground weapons replacement market space. According to estimates of 500,000 to 1 million yuan for a comprehensive mechanical and electrical management system, the current domestic market demand for tank armored vehicles alone has reached 88-176 billion yuan. The company has established stable long-term cooperative relationships with relevant military industry units. The market base is good. Under the steady growth of its original product business, it continues to expand around in-vehicle mechatronics products, new R&D and new customized products are constantly increasing. Many new products such as automotive black boxes and training simulators have been sold in bulk. New military customers and military system projects and model projects have gradually increased, and its business field has also expanded from Army support to Air Force, Rocket Force, etc., and has broad prospects for development in the context of the mechanization and information technology construction of the entire military.
The new subsidy policy regulates the development of the industry, and the development of the new energy business can be expected. In 2017, due to the adjustment of the NEV industry's subsidy policy and increased competition in the industry, the company's revenue from key NEV components was 157 million yuan, a year-on-year decrease of 29.25%, and gross margin fell 14.29 percentage points to 29.23%. On February 13, 2018, the four ministries and commissions jointly issued the “Notice on Adjusting and Improving Financial Subsidy Policies for the Promotion and Application of New Energy Vehicles”. The new standard raised the subsidy threshold and set a transition period of 4 months from February 11 to the old and new standards. The establishment of a transition period is conducive to the centralized release of demand in the first half of this year, while strict subsidy collection is conducive to orderly competition in the NEV industry. The company is actively developing new products, focusing on research and development of on-board chargers and power supplies. Related products have now been successfully tested by several OEMs, laying a solid foundation for the development of the electric vehicle automotive parts business. At the same time, after two years of mass production in 2016 and 2017, the performance and reliability of the company's existing electric vehicle scroll compressor products have been proven to be the foundation for large-scale marketing. The rapid and orderly development of the new energy industry will provide the company with new development opportunities, and the development of the company's new energy business can be expected.
Profit forecast and rating: Considering that the adverse effects of the military industry and the new energy industry have subsided, our 2018/19/20 EPS forecast was 0.21/0.26/0.33 yuan respectively. Corresponding to 2018/19/20 PE was 31/26/20 times, giving the company a “recommendation”
ratings.
Risk warning: The set-top box business continues to decline, and the development of smart mechatronics business and new energy business markets falls short of expectations.