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After the issuance of 5G license, the bidding for the construction of operators will gradually begin, and we will continue to track the latest progress of the base station filter industry. The leaders of Dafu Technology Company are invited to give detailed answers on the industry demand of 4G and 5G as well as the company's product supply capacity. The following is the full text of the summary.

Comments:

Upgrade the rating to "Buy", taking into account the 5G license issuance and the development opportunities of the company's filter business.

The company has achieved good results in business development in the field of communications. It is Huawei's long-term partner, has won the gold medal core supplier for 6 years in a row, and occupies a good share in the filter market in the 3G 4G era. The product strength and word-of-mouth are among the best. 5G products have passed customer certification, and it is expected that they will have the opportunity to continue to obtain a better supply share in the 5G era. At the same time, the company's filter product line suppliers in Ericsson and Nokia have also made continuous breakthroughs. In the 5G era, the base station radio frequency filter products have the trend of miniaturization and integration, and the company may usher in a good opportunity to strengthen its technology reserve, such as miniaturized metal filter, dielectric waveguide filter and so on. Taking into account the opportunity for the development of 5G license issuance and the company's filter business, we raise our profit forecast. We estimate that the company's net profit in 2019, 2020, and 2021 will be 2.54 million 3.65 / 509 million yuan, respectively. Taking into account the earmarked funds raised by the company, after deducting nearly 2.5 billion of the cash market value, we will upgrade the rating to "buy" corresponding to 2019, 2020, which is PE on 36-25-18, 2021.

5G demand continues to rise, dielectric waveguide filters may be in large quantities in the third quarter of the supply industry, 4G global demand is steadily rising, 5G demand continues to climb. In terms of 4G demand, since the beginning of this year, apart from domestic China Unicom's procurement of 416000 L900 and L1800 base stations, L1800 integration and software functions, construction demand from overseas developing countries is still relatively strong. such as Saudi Arabia in the Middle East, the United Arab Emirates, the Philippines, Thailand, India and Brazil in South America, 4G demand for the whole year is expected to maintain single-digit growth. In terms of 5G demand, the United States, South Korea and other countries have brought 5G demand climbing ahead of time. After China officially issued the 5G commercial license on June 6, the operator equipment bidding work will be launched one after another. At present, China Mobile Limited has signed the first round of 5G network equipment contracts with equipment manufacturers, mainly related to the upgrading of core network equipment for NSA 5G.

At the company level, the competitive advantages of Dafu are the full range of product supply capacity, the vertical integration of the whole process design and production and the ability of quality assurance, and equipment automation. Recently, the demand for 5G from customers continues to rise, and dielectric waveguide filters are expected to be supplied to customers in large quantities in the third quarter.

The production capacity of the whole process is reflected in that the company's dielectric waveguide filter capabilities cover the initial simulation product design, powder formulation, powder production, product pressing, sintering, metallization, and finally automatic debugging. In addition, the company has been working in the field of filters for nearly 20 years and has a deep understanding of filter radio frequency and structure design and production process.

The ability of equipment automation is reflected in the support of professional teams in machine tools, robots, automation equipment, etc., which have created the company's advantages in automatic debugging and other key automation equipment. At the same time, the key manufacturing equipment, dry press and sintering furnace, which affect the size and yield of 5G dielectric filter, can be designed and produced independently, which will play a key role in the control of key process and the guarantee of production capacity.

The supply capacity of the dielectric waveguide filter is reflected in that the company began to prepare the related technology of the dielectric filter in 2007, and set up a postdoctoral workstation to study the dielectric powder, and then gradually started the research and development of the resonant rod and the dielectric waveguide filter. The company began to ship dielectric resonant rods to customers in 2012, and Nanjing Ethernet Communication Technology Co., Ltd. was established in September 2018, further strengthening its capacity in key manufacturing links such as dielectric molding and sintering.

Judging from the latest progress, the company's dielectric waveguide filter products have passed customer sample certification in the fourth quarter of last year, do small batch verification in the first quarter of this year (with a long reliability verification cycle), and are preparing for climbing before mass delivery. it is expected that the third quarter will enter the stage of mass supply.

Company leaders introduce the development trend of 4G and 5G industry

4G: since its deployment in 2014, market demand has declined gently after the peak, but it is still strong. Since the beginning of this year, there has been a strong demand for 4G in Saudi Arabia in the Middle East, the United Arab Emirates, the Philippines in South Asia, Thailand, India and Brazil in South America. The overall demand for 4G this year is expected to increase compared with last year. The price and profit margin of 4G RF filters bottomed out in 2016 and 2017. At present, the gross profit margin is relatively stable. Demand for 4G is expected to remain stable until next year, even if it falls slightly. From the point of view of the company's own market share, the customers in the filter field before 2017 are mainly Huawei and Compaq, while since 2018 the company has successfully entered the filter product line of Nokia and Ericsson. At present, it has become the supplier of RF filters and structural components for Huawei, Ericsson, Nokia and Compass, the largest communications equipment manufacturer in the United States.

5G: gradually climbing, shipments climbing significantly in the second half of 2018, is expected to climb rapidly in the second half of 2019, 2020 entered the first year of the peak, at least 3 years of peak. Sales of 5G products accounted for 5% in 2018 and more than 10% in the second half of the year. It reached 18% in the first quarter of 2019 and will continue to climb in the second half of the year. Considering the demand for 5G products downstream, the forecast for the first quarter of this year is higher than that in the second half of last year. After the recent issuance of 5G licenses, the demand forecast is further optimistic. Although the extent of the increase is difficult to predict accurately, it is certain that the overall demand for 5G this year will be higher than last year's forecast.

Filters have different forms, and customers also choose different paths. The three filter forms of metal cavity + metal resonant rod and metal cavity + dielectric resonant rod dielectric waveguide are all adopted by customers. The company's supply capacity, three kinds of 5G filter can provide. Among them, 5G filters for metal cavities have been supplied in large quantities since last year, and dielectric waveguide filters have passed sample certification since last year, and small batch verification has been done in the first quarter of this year (with a long period of reliability verification). It is expected that the third quarter will enter the stage of mass supply.

At present, the 5G filters of Sub-6GHz are mainly in 2.6GHz and 3.5GHz and 2.6GHz dielectric waveguide filters, so it is mainly metal cavities, and it is difficult to supply them in the overall market. Demand is expected to double or higher in 2020 than in 2019.

The text of the minutes of the conference call

What is the need for QRV 4G?

The overall market demand of A 4G has climbed 5% Mur10% compared with last year, but the company's share has increased significantly (including the increase in sales share of existing customers and the growth of new customers from scratch). It is now hoped that Ericsson and Nokia will strive to increase their filter market share from 0 to more than 10%.

What is the demand for QRV 5G?

At present, the first-quarter sales of A 5G exceeded 100 million, accounting for 18.33% of the revenue. For the whole of 2019, the share of 5G in revenue depends on the climbing of shipments of dielectric waveguide filters in the second half of the year. If dielectric waveguide filters are shipped in large quantities, 5G is expected to account for more than 20% of revenue.

In terms of 5G demand, based on industry information, we estimate that the global demand for 5G sites may exceed 500000 in 2019 and 1.5 million in 2020. According to the calculation of 3 modules in a single station with an average of 60 channels per module, the demand for 5G filters in 2019 and 2020 may reach 90 million / 270 million.

Q: suppliers of Ericsson and Nokia?

A: since Dafu Technology acquired the assets of Compaq and Baldwin in China in 2012, it is equivalent to acquiring seven established European and American filter suppliers in one fell swoop, and the global filter supply chain has been basically transferred to China. At present, the suppliers of filters also include Vangu, Dongshan Precision, Hong Aisi, Chinese Communications and so on.

Q: will there be any changes in the orders from big customers every month recently?

A: we expect the pace of demand to be relatively more stable in the future. Overall, there is no significant change in demand expectations for the whole year.

In the 5G field, domestic demand is released. Commercial license issuance accelerates demand in 5G. The customer's demand forecast for 5G is optimistic.

Q: what is the productivity of dielectric waveguide filters?

In 2012, the company began to ship dielectric resonant rods to customers. In recent years, after defining the general direction of dielectric waveguide filter as one of the mainstream 5G filter forms, the company has further expanded and improved the capability of dielectric waveguide filter. In addition to the initial RF design and mold design and manufacturing capabilities, as well as the powder's own formula and production capacity, the introduction of independent production equipment for dry pressing and sintering (which plays a key role in the leading manufacturing process), the back-end metallization and SMT process also has unique advantages, with long-term technology accumulation and vertically integrated production capacity in the early stage of the automatic commissioning process.

In terms of capacity reserves, the first phase has been completed, which can fully meet the needs of downstream customers.

Q: what are the main barriers to dielectric waveguide filters? What is the company's competitive advantage?

A: the ability of vertical integration of the whole process and the ability of mass supply are relatively important. The competitive advantage in the field of 4G filters is a prerequisite for leading the mass supply of 5G dielectric waveguide filters. Because of the greater demand of the latter and stricter quality control, dozens of filters have to be installed in an AAU, any failure of which will affect the performance of the AAU.

The first advantage of the company is the front-end RF design, mold manufacturing to the back of the whole process production capacity, some manufacturers need to outsource in some links, in the mass supply stage, it is difficult to ensure stable supply capacity and quality control. The second advantage is whether the final size of the dielectric waveguide filter, as a RF device composed of ceramic structures, can meet the size and tolerance requirements of the drawings, and whether it can stably maintain the above requirements in the stage of mass supply. it is the key to whether the supplier can supply stably with high yield, high quality and low cost, and the two links of pressing and sintering are the most important elements of size guarantee. The company has unique advantages in these two links.

Q: is it difficult to expand production capacity? How to expand production capacity quickly?

A: the climbing ability of mass production is one of the company's competitive advantages. In the 4G era, for example, the company could climb its daily production capacity from 5000 to 10000 in a short period of time.

The company's super mass production climbing ability is inseparable from the company's vertical integration strategy and strength. with the ownership of each core link from design to manufacturing, the company has the ability to mobilize resources of each link rapidly when the market demand climbs vertically. achieve synchronous improvement, and can ensure the quality control of each link. From the perspective of dielectric waveguide products, capacity climbing involves several aspects, hard equipment, pressing, sintering equipment is the company's own, can be rapidly increased, SMT equipment, metallization equipment, such as a high degree of standardization, outsourcing is very easy, while the commissioning of some instruments and 4G filter capacity is multiplexed, when needed can be quickly adjusted. A considerable part of the reserve of workers and technicians used in the dielectric waveguide manufacturing process can also be shared with 4G, and the company has sufficient reserves.

Q: what is the possible proportion of 5G dielectric waveguide filters in the future?

A: it is difficult to judge at this stage. It may take another three or four months to make the judgment clearer. 2.6GHz is also the main frequency band in the United States and China. At present, there are still some difficulties to be overcome in the mass supply of 2.6GHz dielectric waveguide filters.

Q: does the company think that the stable market demand for 4G filters throughout the year is based on the optimism of the trade war negotiations?

A: judging from the current situation, we believe that the downstream customer demand for 4G products will remain stable from a year-round perspective.

Q: does the superposition of new and old capacity put pressure on the company's cash flow?

A: the company's debt ratio is only 20%, and its cash reserve is more than 2 billion yuan, so it has excellent investment ability. In terms of 4G products, the current capacity utilization rate is good, but it will not lead to insufficient production capacity and need further investment. Even if demand is high, companies do not necessarily expand capacity through their own investment, but may do so through leasing and other means. 5G emerging investment is small, the company can afford, this aspect is more inclined to automatic and rapid production capacity.

Q: what was the situation in the second quarter?

A: the company is more confident about the second quarter. Compared with the first quarter, the disturbance of February Spring Festival is eliminated, and the proportion of fixed amortization is increased due to weak production capacity, including fixed amortization of production costs and fixed amortization of period expenses. In addition, the investment and assets that are not related to the main business of communications in the early stage have also formed a considerable drag on the performance.

Since the fourth quarter of last year, revenue has increased significantly, resulting in a decline in the proportion of fixed amortization and the rate of expenses during the period to a relatively good level, and profitability is gradually recovering. The company is expected to continue to divest companies and assets that are not related to its main business, and is full of confidence in its future development.

Risk hint

1. The demand of 5G is lower than expected. At present, the 5G license has been issued, but the overall investment pace and Huawei's own supply are still uncertain, and the company, as the core supplier of Huawei base station filters, is directly affected.

2. The progress of mass production of dielectric waveguide filter is not as expected. The company expects the dielectric waveguide filter to enter the stage of mass supply in the third quarter of this year, and the final landing depends on the final test and verification link, which still has some uncertainty.

3. The competition in the industry is intensified. After years of supply in the 4G base station filter industry, some new entrants already have the capacity of production and supply, and there are relatively many competitors, so the possibility of intensified competition can not be ruled out. 5G dielectric waveguide filter has achieved technological innovation, and the threshold is higher. If competitors achieve mass production on a large scale earlier or more competitors conquer the technology, the pressure of competition in the industry will be intensified.