The vanguard of civil-military integration will help 5G to be replaced by localization. Tianhe Defense is the first private military enterprise listed in China, and it is also the first batch of private enterprises to enter the field of scientific research and production of military equipment system in our country. The company cooperates deeply with military institutes in research and development, and reserves a large number of dual-use technologies. Such as terahertz, millimeter wave chip radar, metamaterial antenna and other "sophisticated" technology. In the process of civilian use of military products after listing, the company has added civil services based on integrated electronics, intelligent security, intelligent coastal defense and communication electronics. In 2015, the company acquired Huayang Communications and entered the field of civil mobile communications; in 2016, the company acquired Nanjing Biao to strengthen the ferrite material system; at present, the company focuses on the domestic replacement of 5G, focusing on isolators, RF microwave small signal devices, RF single chips and other products, key customers have begun to purchase the company's loops and isolators in bulk, and some products have formed sustained and stable order revenue.
With the promotion of the country's "military reform", the military business has come to an extreme. After 2016, the company was affected by the "military reform", the order of the main business of the military industry decreased significantly, and the income of the main business declined continuously. According to KuaiBao's performance, the company achieved a total operating income of 271 million yuan (- 23.60%) in 2018 and a net profit of-153 million yuan (- 318.14%). Mainly due to the delay in customer procurement plans during the "military reform" period, the company's military orders continued to decrease compared with the same period last year. After 2018, with the reform of the military system to a new level, military orders have significantly recovered. On January 23, 2019, the company announced that it signed another contract with a domestic military unit for a certain man-portable air defense missile intelligence command system and spare parts, with a contract amount of 110 million yuan, accounting for 31.48% of the company's revenue in 2017. In addition, the company's military assistance project has formed a definite intention and is following up the signing of the contract.
With the application of 5G Massive MIMO technology, the consumption of circulators and isolators has increased greatly, and the market space will reach several times that of 4G. The requirement of network capacity in 5G era is much higher than that of 4G. Massive MIMO (large scale Antenna) is one of the key technologies to improve network capacity. In order to support this technology, the number of 5G antenna channels will be greatly increased, the number of single sector antenna channels from 4 channels, 8 channels, greatly increased to 64 channels, the increase in the number of channels will double the amount of RF devices. In addition, due to the increase of the working frequency band, the station density of 5G will also be higher than that of 4G. Therefore, in the 5G era, the use of circulators and isolators will increase greatly. According to our estimation, the market space of 5G circulators and isolators is likely to reach 17 times that of 4G, and the total global market space of 5G circulators and isolators is 44.2 billion yuan. according to the law of the construction cycle of 3G and 4G, the global network construction is generally completed in five years. therefore, it is estimated that the annual market space of 5G circulators and isolators is about 8 billion yuan, and the peak year of 5G may reach about 12 billion yuan.
Upstream: ferrite is the key material of the ring, and Nanjing Biao is expected to break the dominant position of the United States, Japan and South Korea. Ferrite is the key raw material of annulators and isolators, and its material properties will determine the performance of the final product. Although China is already the largest producer of ferrite, it is still controlled by TDK, Hitachi, Ssangyong and other American, Japanese and South Korean enterprises in the fields of high permeability, high magnetic flux density, high resistivity and high dimensional precision. At present, Nanjing Biao Company under Tianhe Defense already has the technology and production capacity of the core raw materials (gyromagnetic ferrites) upstream of the ring, and occupies the main production capacity share of domestic gyromagnetic ferrites, which is equivalent to mastering the product pricing power of the domestic industry.
The tide of domestic substitution in the 5G era is irresistible. In the process of development from 2G to 4G, domestic RF devices have been gradually replaced by domestic ones, and the technical barriers have been gradually broken through. During the 5G period, domestic enterprises in the industrial chain will continue to make breakthroughs upstream and gradually realize more domestic alternatives in the field of communication and radio frequency. As the first choice of domestic alternatives in related fields, the company will be unstoppable. Tianhe Defense will usher in the great opportunity to participate in the global 5G construction, which is expected to further increase the market share of circulators, isolators and upstream materials.
Investment suggestion: we expect the company's income from 2018 to 2020 to be 270 million yuan (- 23.6%), 610 million yuan (+ 125.5%) and 914 million yuan (+ 49.8%), respectively. The net profits attributed to shareholders of listed companies are-153 million yuan (- 317.9%), 100 million yuan (- 165.4%) and 303 million yuan (+ 203.1%), respectively. The corresponding EPS is-0.64,0.42,1.26 yuan respectively, and the corresponding PE is-27,41,13 times respectively.
We give Tianhe Defense a 12-month target price of 25.20 yuan, covering it for the first time and giving it a "buy-A" investment rating.
Risk hint: the progress of 5G is not as expected, and there is great uncertainty about the revenue progress of military orders in the short term.