Incident: On April 26, Tianhe Defense released its report for the first quarter of 2020. From January to March 2020, the company achieved operating income of 285 million yuan, an increase of 72.99% over the previous year; achieved net profit of 25 million yuan, an increase of 10.09% over the previous year; and achieved net profit of 18 million yuan after deduction, a year-on-year decrease of 14.67%.
Order delivery in Q1 2020 was slightly delayed due to the pandemic, but military orders stabilized, communications revenue increased, and operating cash flow increased dramatically. The company achieved net profit of 18 million yuan after deduction in the Q1 quarter, a year-on-year decline of 14.67%. Mainly due to the impact of the COVID-19 epidemic in the short term, the company's scientific research, production and operation have been affected to a certain extent.
The military goods business was affected by the epidemic prevention and control and was delayed from the plan, but the company had sufficient orders: at the end of 2019, Tianwei Electronics, a subsidiary of the company, signed a “Order Contract for a Certain Type of Portable Anti-Aircraft Missile Command System” with a domestic military department, with a contract amount of 110 million. During the reporting period, the company added a scattered number of orders of 494 million yuan, and the amount of unexecuted orders was 389 million yuan.
The communications electronics business achieved revenue of 625 million in 2019, an increase of 245.19%, and accounted for 72% of revenue, which has become a core contribution. The revenue of the communications electronics business grew steadily in Q1 2020, a sharp increase over the same period last year, and the company has become the main supplier to the world's top 6 equipment vendors. Looking at cash flow, the company received 186 million yuan in cash from sales of products and labor services in a single quarter, an increase of 105.81% over the previous year; net operating cash flow was 26 million yuan, an increase of 333.23% over the previous year, reflecting strong growth in the communications electronics industry.
We expect that as military informatization construction and large-scale 5G delivery enter a peak this year, the company's 5G and military business is expected to maintain rapid growth.
5G circulators & isolators and ferrite faucets were shipped steadily in 2019, and operations are on the right track. In 2015, the company acquired Huayang Communications and entered the field of civil mobile communications. In 2016, the company acquired Nanjing Piot to strengthen the ferrite material system. The company focuses on the localized replacement of 5G, focusing on products such as isolators, RF microwave small signal devices, and RF single chips. Key customers began to purchase the company's circulators and isolators in bulk in 2019, and some products have generated continuous and stable order revenue. Furthermore, the company's self-developed switches, LNAs, and small signal amplifiers for 5G applications have already entered the small-batch verification stage. In 2019, Huayangtong, the company's circulator & isolator operator, achieved revenue of 563 million, an increase of 315.54% over the previous year (15.91% the previous year); achieved net profit of 114 million, an increase of 1676.19% over the previous year (39.64% the previous year). Nanjing Biao achieved net profit of 49 million yuan, an increase of 338.21% over the previous year (down 12.29% from the previous year). Furthermore, in 2019, the overall gross margin of the company's electronic components business rose to 40.19%, an increase of 4.8 pcts over the previous year; as 5G entered the large-scale construction stage, the company's communications business operations embarked on a fast track of development.
The wave of localized substitution in the 5G era is unstoppable, and the market share of leading products is expected to increase dramatically. In the 5G era, the usage of massive MIMO circulators and isolators will increase dramatically, and the market space will double. At the same time, in the 5G era, domestic enterprises in the industrial chain will continue to break through further upstream, gradually achieving domestic substitution in more radio frequency communication fields, and the company will become unstoppable as the preferred domestic replacement in related fields. The company is expected to further increase its market share based on its own ferrite material accumulation and leading products such as circulators, isolators, and highly integrated microwave SOC chips.
Investment advice: We expect the company's revenue from 2020 to 2022 to be 1.22 billion yuan (+40.6%), 1,717 billion yuan (+40.8%), 2,232 million yuan (+30%), and net profit attributable to shareholders of listed companies is 297 million yuan (+242.5%), 423 million yuan (+42.2%), and 544 million yuan (+29%), corresponding EPS is 1.24 yuan, 1.76 yuan, 2.26 yuan, and corresponding PE is 34 times, 24 times, 19 times, 19, respectively Double, maintain the “Buy-A” investment rating.
Risk warning: The impact of the global pandemic on downstream demand, and the progress of military order confirmation is uncertain.