Incident: The company announced its 2019 three-quarter report. It achieved operating income of 501 million yuan in the first three quarters, a decrease of 11.86% over the previous year; realized net profit of 51 million yuan, a decrease of 38.12% over the previous year; and corresponding earnings per share of 0.08 yuan.

Comment: (1) The company achieved operating income of 501 million yuan in the first three quarters, a year-on-year decrease of 11.86%, and revenue of 191 million yuan in the third quarter, a year-on-year decrease of 13.05%.

Among them, the MEMS business achieved revenue of 385 million yuan in the first three quarters, a rapid increase of 35.67% over the same period of the previous year, mainly benefiting from the high prosperity of downstream biomedical, industrial and scientific, communications, consumer electronics and other application markets; the decline in the scale of the navigation and avionics business led to a decline in the revenue scale of the first three quarters, mainly due to delays in the finalization of some products during the reporting period, the user review progress of some orders fell short of expectations, and production and delivery schedule adjustments for some orders; (2) the company achieved net profit of 0.51 billion yuan in the first three quarters, a year-on-year decrease of 38.12%. Among them, net profit attributable to the mother in the third quarter was 21 million yuan, a year-on-year decrease of 15.51%. The main reasons for the decline in the company's net profit in the first three quarters and the third quarter alone include: a) the decline in the scale of the navigation and avionics business in the first three quarters and the third quarter, which led to a decline in the company's overall performance; b) the rapid increase in management expenses of 28.87%, mainly due to the company's increased investment in personnel recruitment and guaranteed projects in order to expand the market; c) R&D expenses increased sharply by 133.58%, mainly due to increased investment in R&D in the company's three core businesses and newly developed businesses; d) other earnings fell sharply by 76.91% year-on-year, mainly due to a sharp decrease of 76.91% in other earnings received in the current period This is due to a reduction in related government subsidies. (3) Financial expenses fell sharply by 276.91% in the first three quarters, mainly due to a sharp increase in interest income of 256.55%; sales expenses fell slightly by 6.76%, mainly due to the decline in the company's revenue; (4) gross margin for the first three quarters increased 4.43 percentage points over the same period of the previous year to 43.23%, and gross margin for the third quarter increased 14.56 percentage points to 48.00% over the same period of the previous year. The main reason for the increase in gross margin in the first three quarters and the third quarter alone was a decline in the share of total revenue due to large-scale contraction in the navigation and avionics business, and the MEMS business with higher gross margin continued to grow, accounting for an increase in its share of revenue. At the same time, the company prepared business resources in advance for additional MEMS production line capacity and intended to increase process development business with high gross margin; (5) From the asset liability side: a) The company's monetary balance at the end of the reporting period fell 54.09% from the beginning of the year, mainly due to reasons such as capital raised by non-public stock issuances, repayment of loans, and continuous payment of project construction funds during the reporting period Comprehensive results; b) The fixed asset balance at the end of the reporting period increased by 45.87% compared to the beginning of the period, and the balance of construction projects increased 51.88% from the beginning of the period. It was mainly due to the continuous investment in navigation R&D industrial base projects, the Beijing 8-inch MEMS international foundry line construction project, the Swedish MEMS production line upgrade and expansion project, and the third-generation semiconductor material manufacturing project (phase I); (6) from the cash flow side: net cash flow from the company's operating activities during the reporting period increased 342.87% over the same period of the previous year, mainly due to an increase in sales revenue and an increase in government subsidies .

Core technology development capabilities and high-quality customer resources support the development of the navigation and avionics business. In the field of navigation business, the company is one of the few private enterprises with independent R&D and production capacity for inertial navigation systems and core devices, and a relatively complete navigation product chain. The company has a comprehensive grasp of the underlying device technology of inertial sensors or systems, differential positioning technology for satellite navigation, and real-time high-precision calculation technology, etc., and has the ability to develop high, medium and low accuracy inertial, satellite and combined navigation systems. In the field of avionics, the company is one of the few private enterprises with the ability to independently develop avionics systems. Various types of avionics products developed independently have been equipped with certain aeronautical aircraft in batches. The company's navigation and avionics products have been used in the field of defense equipment. Its main customers include special enterprises or institutes belonging to large groups such as China Aviation Industry Corporation, China Shipbuilding Industry Corporation, China Electronics Technology Corporation, China Aerospace Science and Industry Group, other special customers at home and abroad, as well as scientific research and education institutions such as the Chinese Academy of Sciences, National University of Defense Science and Technology, and Tsinghua University. The company is getting new R&D and production tasks one after another, and the navigation and avionics business is expected to develop steadily.

The competitiveness of MEMS foundry is leading the world, and the Internet of Things drives the growth in demand for MEMS chips, which is expected to continue to benefit. The company's wholly-owned subsidiary, Silex, Sweden, is the world's leading pure MEMS OEM. Since its establishment in 2000, it has a mass production history of more than 10 years, has mastered many process technologies and process modules with leading international competitiveness, and also has advanced process development capabilities. According to statistics from Yole Development, since 2012, Silex has been in the top 5 in the global MEMS foundry revenue ranking, and has always been in the top 2 in the MEMS pure foundry field. It continues to compete with manufacturers such as STMicroelectronics (STMicroelectronics), TELEDYNE DALSA, TSMC (TSMC), Sony (SONY), etc., and has remained in the first tier of global MEMS wafer foundry for a long time. Benefiting from the development and implementation of the IoT ecosystem, the widespread application of MEMS terminal devices is driving the growing demand for MEMS chips. Currently, the capacity utilization rate of the company's Swedish production line remains at a high level. With the expansion of production of the Swedish production line and the gradual construction of production capacity of the Beijing production line, the scale of the MEMS business is expected to continue to expand.

Actively lay out the third-generation semiconductor and unmanned systems business, and the potential is promising. The third-generation semiconductor materials manufacturing project (phase I) invested by the holding subsidiary Juneng Jingyuan was officially put into operation on September 10, 2019. It will continue to explore the third-generation semiconductor materials market, and at the same time facilitate the development of the company's GaN power and microwave device design and development business, ultimately enhancing the company's comprehensive competitive strength in the third-generation semiconductor and IoT fields. The unmanned systems business has successfully won bids for a number of special projects and will continue to actively expand the application fields of its products.

Investment advice: We predict that the company's EPS for 2019/20/21 will be 0.13/0.20/0.27 yuan respectively, and the corresponding PE will be 106.06/68.98/50.54 times. The first coverage will give the company an “increase in holdings” rating.

Risk warning: military orders fell short of expectations, and MEMS demand fell short of expectations.