Key points of investment
A leading enterprise in base station transmission solutions, with the highest market share in China. Junzhi Group is the largest provider of base station transmission ancillary products in China. It mainly serves the three major mobile communication operators and China Tower. Currently, the Group holds 25% of the market share in the field of transmission solutions, has maintained the number one position in the industry for the past nine years, and participated in the formulation of various 5G transmission standards. The company's main products are RF cables, flame retardant flexible cables, optical cables and optoelectronic composite cables, providing a full range of base station transmission solutions and products. The company has industry-leading experts and a professional R&D team of more than 200 people. Relying on platforms such as the National Enterprise Technology Center, the company continues to invest and innovate.
It directly benefits from the construction of new base stations and inventory updates. As a comprehensive base station connection equipment service provider, Junzhi Group plays an important role in the base station equipment supply chain. The products provided are directly correlated with base station construction and stock scale. It is expected that in the next 5 years, the country will build more than 5 million 5G macro base stations, and there will also be more than 4 million 4G base stations to replace the original 2G/3G base stations to further improve the coverage of the 4G network, and the base stations initially built for 4G will also enter the update cycle one after another.
Dongfeng has industry support policies in place, and the company may benefit from the first wave of 5G investment. The commercial use of 5G was officially launched on November 1, 2019, which represents the large-scale development of 5G base station construction, and the 5G investment infrastructure schedule is ahead of the original market expectations, speeding up construction. With more than ten years of technology accumulation and long-term partnerships with the three major operators, Junzhi Group actively participated in the commercial deployment and construction of 5G networks, directly benefiting from the investment driven by 5G construction.
The company's business model is mature and stable, and has been recognized and verified. More than 90% of the company's sales come from the three major mobile operators and Tower Corporation. In the field of mobile transmission solutions, the company's market share has remained number one in China for many years. The gross profit margin of the product is stable, and a cost addition model is adopted to avoid the risk of fluctuations in upstream raw material prices. The company currently has a total of more than 900 employees, a high degree of automation, and an annual output value of over 3.5 million yuan per capita. The gross margin and net profit margin have remained stable at around 20% and 10% throughout the year.
Deploy the Internet of Things to welcome new developments. While deepening its main business, Junzhi Group is actively expanding the industrial chain layout, continuously expanding into the fields of big data and artificial intelligence, and actively laying out 5G upstream devices and related application markets. The sensing and IoT business has been deployed since 2010; in March 2019, it cooperated with China Telecom to establish the Internet of Things and Artificial Intelligence National Innovation Alliance to create an “Internet +” demonstration sample for smart forestry.
Profit forecasts and investment ratings: We expect $4.249 billion, $5.322 billion, and $6.784 billion in 2019-2021, with year-on-year growth rates of 22%, 25%, and 27% respectively. We expect Junzhi Group's EPS to be 0.23 yuan, 0.30 yuan, and 0.41 yuan respectively. The corresponding PE valuations are 5.56 times, 4.30 times, and 3.14 times, respectively. Referring to comparable company valuation levels, the first coverage gives a “buy” rating.
Risk warning: The 5G construction process fell short of expectations; operators' capital expenses fell short of expectations.
