Summary of the report:

This report mainly analyzes the scarcity value and application space of self-controllable CPU and memory chip of Xuanyu Space, Kantuo infrared subsidiary.

Aerospace chips will be replaced by domestic ones, which will add 20,000 pieces of annual production capacity.

Xuanyu Space was founded in 2011, mainly engaged in intelligent test and simulation systems. In 2017, it began to increase the business of micro-systems and control department components, including SoC2008 (system-on-chip for aerospace applications), quad-core SoC2012 (multi-core system-on-chip for orbiting applications) and SiP2115 on-board computer module (intelligent microsystem products for orbiting applications) and so on. The company's aerospace chips have completely independent intellectual property rights and have achieved domestic substitution for mass use in all kinds of satellite systems. The company's fund-raising project will build a new chip product packaging production and processing line to form the annual production capacity of 20,000 pieces of intelligent equipment micro-system modules. In terms of memory, the company has recently successfully finalized XY8R1M40 1m × 40bit static memory (SRAM) and XY6664RH 8K × 8bit programmable read-only memory (PROM). With the space station, moon and Mars exploration, Beidou navigation and other major aerospace projects, the demand for aerospace chips will continue to rise.

In addition, the rise of edge computing will give rise to explosive opportunities for chip CPU.

Weapons and equipment chips are the focus of development.

At present, Xuanyu Space is developing a new generation of high-performance single-core system-on-chip for aerospace and weapon equipment applications and very low-power microsystem chips for industrial control applications. The company's current defense products are: 1) infrared guidance seeker, used in small tactical missile terminal guidance; 2) missile-borne integrated electronic module, used to provide complete technical solutions for small and micro precision guided weapons; 3) missile-borne IMU module, used in small short-range missile navigation and guidance control system; 4) missile-borne computer module, used in small short-range missile computer. The company has exhibited defense products such as missile-borne computers for small short-range tactical missiles and IMU assemblies. In September last year, the company's first infrared missile seeker also successfully tested. Weapons and equipment chip is the focus of the company's development after aerospace products, and it has a broad space.

Promotion of autonomous controllable chips to core industries

In August, 2019, Xuanyu Space officially accepted the national major high-tech achievements industrialization project-- based on independent controllable intelligent microsystem chip research and development and industrialization project. The applicant country has allocated 30 million yuan to support the project, with an implementation cycle of three years (2018.1-2020.12), with an estimated total investment of 113 million yuan and an estimated direct sales income of 450 million yuan. The project will launch a new generation of high-performance MCU products with 1000+MIPS processing performance, and build packaging production and intelligent testing platforms to promote the large-scale promotion and application of smart chip products in weapons and equipment, the State Grid, industrial control and other fields.

Xuanyu Space in 502 Shunyi Industrial Park will use nearly 200 mu of land to build chip production lines and related production capacity, ready to expand to the power grid, industrial control and other industries, and has begun to contact customers. Under the background of "safe and controllable", key industries such as power grid tend to use chip products with the background of aerospace national team.

Profit forecast and rating

Thanks to the monopoly position of 502 in the field of spacecraft GNC development, especially considering the development needs of blowout commercial satellites and the integration and interaction with the material resources department of the fifth institute, Xuanyu space is expected to have an average annual compound growth rate of at least 30 per cent in the next three years. If weapons and equipment chip products achieve a breakthrough in mass production, Xuanyu space can not be ruled out to get a higher growth rate. Based on existing orders, profits of listed companies are expected to nearly double in 2019, with an average growth rate of no less than 40% over the next two years. It is estimated that the net profit of the company from 2019 to 2021 is 1.45,2.05 and 285 million yuan respectively, and the corresponding EPS is 0.20,0.28,0.40 yuan respectively according to the 720 million shares after the completion of the additional offering. The current stock price corresponds to the PE of 53X, 38X and 27X from 2019 to 2021. Maintain the "highly recommended" rating.

Risk Tip: the orders of Xuanyu and Xuanyu are not as expected.